Sun Pharmaceuticals Industries Ltd., Vadodara V. The Deputy Commissioner of Income Tax, Circle-2(1)(1), Vadodara

MA 143/AHD/2021

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 5296 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 month(s) 5 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 26-01-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 21-10-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S.S. SHUKLA
• Keywords: Principle of natural justice; Rule of consistency; Revenue expenditure
• Section: 37(1); 13

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ D’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms MADHUMITA ROY, JUDICIAL MEMBER M.A No.143/Ahd/2021 In आयकर अपील सं./ITA No.360/AHD/2017 िनधाᭅरण वषᭅ/Asstt. Year: 2012-2013 Sun Pharmaceutical Industries Ltd., (Erstwhile Ranbaxy Laboratories Limited, (RLL) Now merged with Sun Pharmaceutical Industries Limited) SPARC, Tandalja, Vadodara-390020. PAN: AADCS3124K (Pan of erstwhile RLL-AAACR0127N) Vs. Deputy Commissioner of Income Tax, Central Circle-2(1)(1), Vadodara. (Applicant) (Respondent) Assessee by : Shri S.N. Soparkar, Sr. Advocate with Shri Parin Shah, A.R Revenue by : Shri S.S. Shukla, Sr.D.R सुनवाई कᳱ तारीख/Date of Hearing : 07/01/2022 घोषणा कᳱ तारीख /Date of Pronouncement: 27/01/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The assessee by way of this Miscellaneous Application is seeking to rectify the mistake crept in the order of the ITAT in ITA No. 360/Ahd/2017 dated 03/09/2021 which is apparent from the record. M.A No.143/Ahd/2021 in ITA no.360/AHD/2017 Asstt. Year 2012-13 2 2. The Ld. AR for the assessee submitted that the assesse in ground No. 13 of its appeal in ITA No. 360/AHD/2017 for the AY 2012-13 has challenged the addition of Rs.667,29,40,000/- representing the disallowance of mark to market loss. However, the Tribunal in paragraph 86 at page no. 127 of the order has recorded the amount at Rs. 3,331.61 crores inadvertently. Thus the Ld. A.R submitted that there is an apparent mistake in the order of the ITAT as far as amount of mark to market loss is concern and accordingly prayed to rectify the same. 3. With respect to second grievance of the assessee, the Ld. AR submitted that there is no dispute to the fact that the ground no. 13 was not pressed before the ITAT which was correctly so held in the order. However, there was a detailed submission filed by the assessee with respect to mark to market loss on the direction of the Tribunal. At the time of hearing it was requested to the tribunal to incorporate the submission filed by the assessee in the order for which the ITAT was agreed to incorporate. However, ITAT in its order dated 03/09/2021 omitted to incorporate the submission filed by the assessee inadvertently. Accordingly the Ld. AR prayed to incorporate the submission filed by the assessee qua to mark to market loss by rectifying the order. 4. On the contrary the Ld. DR could not controvert the argument of the Ld. Counsel for the assessee. 5. We have heard the rival contentions of both the parties and perused the materials available on record. The provision of section 254 of the Act provides the authority to the ITAT to rectify the mistake which are apparent from the record. On perusal of the ground No. 13 raised by the assessee, we note that the amount challenged by the assessee was at Rs. 667,29,40,000 whereas the ITAT inadvertently has recorded in its order vide paragraph No. 86 at Rs. 3331.61 crores. Thus, in our view an apparent mistake has been crept in the order of the ITAT. M.A No.143/Ahd/2021 in ITA no.360/AHD/2017 Asstt. Year 2012-13 3 Hence, we rectify the paragraph 86 of the order of the ITAT which shall be read as under: “The issue raised by the assessee in the ground No. 13 is that the Ld. DRP erred in disallowing the mark to market loss of Rs. 667,29,40,000/- suffered by the assessee for protection of currency fluctuation” 5.1 With respect to the second grievance of the assessee we note that there was a detailed note filed by the assessee with respect to disallowance of mark to market loss of Rs. 667,29,40,000/- which is available on record. However, the ITAT inadvertently failed to incorporate the same in its order. Accordingly, we incorporate the submission filed by the assessee immediately after paragraph No. 86 of the order which reads as under : 3. Position adopted by the Appellant Company while filing its return of income: 3.1. During AY 2009-10, the Appellant Company had suffered MTM loss on the said underlying hedge and forward contracts amounting to Rs.33,316.1 million. In the return of income, the aforesaid loss suffered in the ordinary course of business was claimed as allowable deduction by the Appellant Company under normal provisions of the Act. In support of its claim, reliance was placed by the Appellant Company on the decision rendered by the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312ITR 254 (SC). 3.2. Subsequently, during AY 2010-11 and AY2011-12, the Appellant Company had recognized MTM gain of Rs. 19,691.2 million and Rs.1,706.33 million, respectively. Consistent with the stand adopted in AY 2009-10, the said gain was duly offered to tax. 3.3. Thus, consistent to position adopted in preceding years, the Appellant Company claimed MTM loss of Rs.6,672.94 million incurred on hedge and forward contracts as deduction while filing return of income for the year under consideration. 3.4. During the course of assessment proceedings for AY 2009-10 and AY 2012-13, wherein the assesses had incurred the MTM loss and had claimed it as allowable expenditure, the Assessing Officer disallowed the said MTM loss, considering the same as contingent loss. Further, while finalizing the assessment proceedings for A Y 2010-11 and AY 2011-12, wherein the Assessee had offered the MTM gain, the AO held that though the Assessee has requested for the exclusion of the MTM gain M.A No.143/Ahd/2021 in ITA no.360/AHD/2017 Asstt. Year 2012-13 4 from taxable income in view of the disallowance of MTM loss made by the Assessing Officer in AY 2009-10, the contention of the Assessee was not accepted as the Assessee had not accepted the said disallowance of MTM loss and had filed an appeal against the same for AY 2009-10. Therefore, in the assessment of AY 2010- 11 and AY 2011-12, the Assessing Officer rejected the Assessee's contention and did not allow the exclusion of MTM gain. 3.5. In light o! above, for the year under consideration i.e. AY 2012-13, the Assessing Officer disallowed the entire loss of Rs.6,672.94 million as claimed by the Appellant Company in its return of income. Aggrieved by the disallowance carried out by the Assessing Officer, which was also sustained by the DRP, the Appellant Company preferred an appeal before this Hon'ble Tribunal. 4. Submission on merits of the Issue: 4.1, The Assessing Officer had disallowed the losses primarily on the ground that as the underlying contracts on which such MTM loss is arising are open as on the Balance Sheet date, the same are in nature of contingent liabilities and therefore cannot be allowed as deduction under section 37(1) of the Act. 4.2. However, it is submitted that in a foreign exchange forward contract, there is a binding obligation to buy or sell a certain amount of foreign currency at a pre- agreed rate of exchange, on a certain future date. In essence, it is an agreement to exchange different currencies at a forward rate. Due to binding nature of agreement, the liability of the assesses accrues as soon as it enters into foreign exchange forward contract with banks in order to hedge risk of foreign currency fluctuations. 4.3. Further, it is humbly submitted that it is mandatory for the Appellant Company to measure the MTM losses on the unexpired foreign exchange forward contracts at the end of the year in accordance with the method of accounting consistently followed by it with respect to the effects of changes in foreign exchange rates. It is also submitted that the MTM losses have been measured based upon the fair value as informed by the bank on the Balance Sheet date, which is indicative of best and reasonable estimate of liability of the Appellant Company on that date. 4.4. Thus, the Appellant Company wishes to submit that MTM losses are an ascertained liability. An ascertained liability coupled with present obligation, the quantification of which may vary depending upon future events (though it is capable of being estimated with reasonable certainty), can be said to have crystallized on the balance sheet date and is thus allowable on accrual basis under the Act. 4.5. Furthermore, it shall be pertinent to note that the underlying hedging and forward contracts are In respect of export receivables and other items forming part of the circulating capital. Thus, the resultant MTM loss arising on reinstatement is undoubtedly in nature of revenue expenditure. 4.6. Also, the case of the Appellant Company is squarely covered by the judicial precedents rendered by the Hon'ble Supreme Court as well as by the jurisdictional Hon'ble GujaratHigh Court: M.A No.143/Ahd/2021 in ITA no.360/AHD/2017 Asstt. Year 2012-13 5 • CIT v. Woodward Governor India (P.) Ltd, (supra) - Supreme Court • Sutlej Cotton Mills Limited v. CIT[1979] 116ITR 1 - Supreme Court • PCIT v. Elitecore Technologies Pvt. Ltd. [Tax Appeal No. 139 of 2018] - Gujarat High Court 4.7. Thus, based on the afore-stated judicial precedents, the Appellant Company believes that MTM loss claimed by it in respect of hedge and forward contracts ought to be allowed as deduction under section 37(1) of the Act. 5.Outcome of the agpef/afe proceedings before this Hon'ble Tribunal in preceding years i.e. AY 2009-10-AY 2011-12: 5.1. The MTM loss suffered during AY 2009-10 was ultimately reversed (gain) in subsequent years i.e. AY 2010-11 and AY 2011-12. Further, in view of the fact that, even if such gain/ loss is not allowed for computing the taxable income of the Assessee in the year of the restatement of the underlying hedge and forward contracts, the right of the Assessee to claim the said loss in the year of its actual realization remains unaffected. Thus, as the said issue was tax neutral from point of view of the assesses, it did not press the said ground before the Tribunal for A.Y. 2009-10 in order to buy peace with the department and to avoid further litigation. But, at the same, it was requested that, as a result of the Assessee not pressing the ground for A Y 2009-10, in that case, considering the principle of consistency and of natural justice, the Assessing Officer should be directed to exclude the MTM gain credited to the profit and loss while computing the taxable income under normal provisions of the Act. 5.2. Consequently, as the ground was not pressed by the Appellant during AY 2009- 10, the Hon'ble Tribunal sustained the disallowance of MTM loss which was made by the Assessing Officer. However, accepting the plea of the Appellant Company, the Hon'ble Tribunal directed the Assessing Officer to exclude the MTM gains included in the income computed for the subsequent years i.e. AY 2010-11 and AY 2011-12. Copies of the relevant extract from the orders passed by the Hon'ble Tribunal for AY 2009-10 to AY 2011 -12 are enclosed herewith as Annexure -1. 6. Prayer for the year under consideration: 6.1. As explained above, the case of the Appellant Company Is principally covered in its favours by various rulings including the decision of the jurisdictional Hon'ble Gujarat High Court in the case of Elite Core Technologies Pvt Ltd. (supra). However, considering the principles of consistency, it is submitted that the disallowance TM loss of Rs.6,672.94 million may be sustained by this Hon'ble Tribunal. 6.2. Further, it may be pertinent to note that the Appellant Company agrees to disallowance owing to principles of consistency, to buy peace and to avoid litigation and consequent penalty proceedings. Although; the penalty proceedings are distinct and independent from quantum proceedings, we pray before this Hon'ble Tribunal to issue suitable directions to the Assessing Officer that no penalty proceedings M.A No.143/Ahd/2021 in ITA no.360/AHD/2017 Asstt. Year 2012-13 6 should be initiated against the Appellant Company in respect of said disallowance of MTM loss. _ We request your Honours to kindly take the above on record and acknowledge." The Appellant therefore submits that amount of disallowance of Rs. 3,331.61 crores has been inadvertently stated by the Hon'ble bench in the order whereas the correct amount of disallowance should be Rs. 667,29,40,000/- ( strictly adhering to the principles of consistency). Further it may also be noted that the same amount has been disallowed by the Assessing officer while passing Assessment order, confirmed by Hon'ble Dispute Resolution Panel and submissions made by us during the course of hearing before Hon'ble ITAT. 6. Thus the order of the ITAT is modified to the extent of above. Hence, the Miscellaneous Application filed by the assessee is allowed. Order pronounced in the Court on 27/01/2022 at Ahmedabad. Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 27/01/2022 Manish