Mark-2-Market loss on foreign exchange derivative allowed

Adani Petronet (Dahej) Port Pvt. Ltd Vs DCIT (ITAT Ahmedabad)

Held that M2M loss on SWAP contract was allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognized on account of foreign exchange fluctuation as per notified Accounting Standard 11 was an accrued and subsisting liability and not merely a contingent or hypothetical liability.

Facts- The assessee, is a company which is engaged in the business of development, operation and maintenance of a solid cargo terminal at Dahej. The ROI filed declaring a loss of (-) Rs.94,55,91,217/- which was subsequently revised to (-) Rs.94,24,26,666/-. AO noticed that the assessee has continued to invest Rs.10 crores, the income of which were exempt from tax. No disallowance on account of expenses incurred about the investment was offered by the assessee as required by the provisions of Section 14A of the Act read with Rule 8D. AO made disallowance of Rs.29,03,478/- u/s 14A of the Act on account of expenses incurred about the investment of Rs.10 crores by applying Rule 8D.

The disallowance was challenged by the assessee in an appeal before CIT(A). CIT(A) deleted the said disallowance. Revenue preferred the appeal before Tribunal on the following ground –

1. Deletion of disallowance u/s 14A read with rule 8D;

2. Deletion of addition u/s 14 while computing book profit of the assessee u/s 115JB;

3. Deletion of addition on account of Mark to Market Exchange loss on Foreign exchange derivatives.

Conclusion- It is observed that no income exempt under tax was actually earned by the assessee during the year under consideration and there was thus no exemption claimed by the assessee in respect of any income in the return of income filed for the year under consideration. This being the undisputed position, we find that this issue is squarely covered in favour of the assessee by the decision of Hon’ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd. (supra) wherein it was held that no disallowance under Section 14A of the Act could be made when no exemption in respect of any income was actually claimed by the assessee. The learned CIT(A), in our opinion, was fully justified in deleting the disallowance made by the Assessing Officer under Section 14A r.w. Rule 8D.

Held that as submitted by the assessee the book profit u/s 115JB of the Act as computed by the AO being negative, the MAT provision was held to be not applicable in the case of the assessee for the year under consideration. This ground raised by the Revenue thus is infructuous.

The issue under consideration is squarely covered in favour of the assessee, in addition to the judicial pronouncements referred to and relied upon by the learned CIT(A) in his impugned order, by the latest decision of the Co­ordinate Bench of this Tribunal rendered in other group case of M/s. Adani Hazira Port Pvt. Ltd, vide its order dated 06.04.2022 in ITA No.1131/Ahd/2019, wherein it is held that M2M loss on SWAP contract was allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognized on account of foreign exchange fluctuation as per notified Accounting Standard 11 was an accrued and subsisting liability and not merely a contingent or hypothetical liability.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

ITA Nos. 1398/Ahd/2018 and 1470/Ahd/2018 are cross appeals filed by the assessee and Revenue respectively against the order of the learned CIT(A)-1, Ahmedabad dated 28.03.2018 for Assessment Year 2012-13. ITA Nos. 1792/Ahd/2018 & 2045/Ahd/2018 are the appeals filed by the Revenue and CO Nos. 89/Ahd/2019 & 88/Ahd/2019 are the cross-objections thereof filed by the assessee against the separate orders of the learned CIT(A)-5, Ahmedabad dated 30.05.2018 and CIT(A)-1, Ahmedabad dated 26.07.2018 for Assessment Years 2013-14 and 2014-15 respectively. Since these appeals/COs involve common issues, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience.

2. First we take up the Revenue’s appeal for AY 2012-13 being ITA No.1470/Ahd/2018 which is directed against the order of learned CIT(A)-1, Ahmedabad dated 28.03.2018.

3. The issue raised in ground No.1 of this appeal relates to the deletion by the learned CIT(A) of the addition of Rs.29,03,478/- made by the Assessing Officer on account of disallowance under Section 14A of the Income-tax Act, 1961 (“the Act” in short) read with Rule 8D of Income-tax Rules, 1962 (“Rule” in short).

4. The assessee, in the present case, is a company which is engaged in the business of development, operation and maintenance of solid cargo terminal at Dahej. The return of income for the year under consideration was originally filed by the assessee on 29.09.2012 declaring a loss of (-) Rs.94,55,91,217/- which was subsequently revised to (-) Rs.94,24,26,666/- in the return filed on 27.09.2013. The return filed by the assessee was selected for scrutiny and during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has continued to make an investment of Rs.10 crores in the year under consideration, the income of which was exempt from tax. No disallowance on account of expenses incurred in relation to the said investment, however, was offered by the assessee as required by the provisions of Section 14A of the Act read with Rule 8D. In this regard, the explanation offered by the assessee that there being no exempt income actually earned during the year under consideration on the investment in question, the disallowance under Section 14A of the Act is not warranted was not found acceptable by the Assessing Officer and by relying inter alia on the decision of the Delhi Special Bench of ITAT in the case of Cheminvest Ltd vs. ITO (ITA No. 87/Del/2008) as well as CBDT Circular No.5/2014 dated 11.02.2014, he proceeded to make a disallowance of Rs.29,03,478/- under Section 14A of the Act on account of expenses incurred in relation to the investment of Rs.10 crores by applying Rule 8D.

5. The disallowance of Rs.29,03,478/- made by the Assessing Officer under Section 14A r.w. Rule 8D was challenged by the assessee in an appeal filed before the learned CIT(A) and after considering the submissions made on behalf of the assessee as well as the material available on record, the learned CIT(A) deleted the said disallowance by relying inter alia on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Corrtech Energy Pvt. Ltd., reported in (2014) 272 CTR 262 (Guj.), wherein it was held that no disallowance could be made under Section 14A of the Act where the assessee had not made any claim for exemption of any income.

6. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that no income exempt under tax was actually earned by the assessee during the year under consideration and there was thus no exemption claimed by the assessee in respect of any income in the return of income filed for the year under consideration. This being the undisputed position, we find that this issue is squarely covered in favour of the assessee by the decision of Hon’ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd. (supra) wherein it was held that no disallowance under Section 14A of the Act could be made when no exemption in respect of any income was actually claimed by the assessee. The learned CIT(A), in our opinion, was fully justified in deleting the disallowance made by the Assessing Officer under Section 14A r.w. Rule 8D by relying on the decision of Hon’ble jurisdictional High Court in the case of Corrtech Energy Pvt. Ltd. (supra) and upholding his impugned order giving relief to the assessee on this issue, we dismiss Ground No.1 of the Revenue’s appeal.

7. As regards the issue involved in Ground No.2 of the Revenue’s appeal relating to the deletion by the learned CIT(A) of the addition of Rs.29,03,478/- made by the Assessing Officer on account of disallowance under Section 14A while computing the book profit of the assessee-company under Section 115JB of the Act, the learned Counsel for the assessee has pointed out that the book profit under Section 115JB of the Act as computed by the Assessing Officer being negative, the MAT provision was held to be not applicable in the case of the assessee for the year under consideration. This ground raised by the Revenue thus is infructuous and even the learned DR has not disputed this position. The same is accordingly dismissed as infructuous.

8. In Ground No.3, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs.32,50,27,494/- made by the Assessing Officer on account of Mark to Market Exchange Loss on Foreign Exchange Derivatives.

8.1 In the Profit & Loss account filed along with the return of income, a sum of Rs.32,50,27,494/- was debited by the assessee being loss on account of derivative transactions for conversion of foreign currency loan on port. During the course of assessment proceedings, the assessee-company was called upon by the Assessing Officer to explain the nature of the said Mark-to-Market Exchange Losses and to furnish the relevant details relating to loss on derivatives / swap contracts. In reply, the following submission was made by the assessee:-

“1.1 In this regard, we would like to submit that the assessee has taken a rupee term loan of Rs. 500 Crores with an effective rate of interest @ 11.75% as is clearly evident from Schedule-5, “Long Term Borrowing” of Financial statements. We are herewith attaching a copy of sanction letter dated 12.07.2010 enclosed herewith vide Annexure-1. With a view to reduce the rate of interest on the said rupee term loan, the assessee company entered into Principal Only Swap (POS) contract with ICICI Bank Ltd and Axis Bank Ltd to convert the said Rupee Term Loan into Dollar Loan as per the copy of contract entered into with those banks. The sample copies of the contracts/deal confirmation are attached herewith vide Annexure-2.

1.2 By entering into this swap transaction, the assessee company has reduced its interest liability by Rs. 3,89,91,215 during the current year under assessment as can be seen from ledger account enclosed herewith vide Annexure-3. We are herewith attaching a chart showing the decrease in rate of interest on loan due to this swap deals vide Annexure-4. As is clearly evident from the chart the effective rate of interest has been reduced from 11.75% to 6.67 – 9.85%. Accordingly, it could be noted that a substantial reduction in the rate of interest could be achieved by entering into such swap deals by the assessee company. It is worthwhile to note that the assessee company has entered into swap contracts for the underlying being Indian Rupee denominated loans taken for the purpose of acquiring the fixed assets of the assessee company. The assets for which such loan was taken are already put to use as is evident on perusal Note No 36 of the schedule of CWIP which shows that the entire amount has been capitalized to the respective fixed assets and the interest on the said loans after capitalizing the said assets is debited to the Profit and Loss Account. Further, it is submitted that the said accounting treatment has been followed by the company consistently on year to year basis. It may be appreciated from the chart enclosed herewith vide Annexure-5 that the said kind of transactions are also done in the subsequent years. Your good self will find that the assessee has benefited from the swap transactions as and when the value of rupee increases more particularly in the F.Y. 2014-15. In this regard, AS-1-Disclosure of Accounting Policies issued by ICA! is worth noting, the relevant para of the same is reproduced herein under:

17. For this purpose, the major considerations governing the selection and application of accounting policies are:—

a. Prudence

In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.

Accordingly, we submit that the assessee company has, in view of principle of conservatism also known as prudence being fundamental factor governing selection of accounting policy, recognised M2M loss as at the end of year on outstanding SWAP contracts to give true and fair view of the financial affairs of the year under consideration.

1.3 Your good self’s attention is invited to Note No 37 of the Audited Financial statements wherein the information regarding INR-foreign currency derivative principal only swap (POS) to hedge loan and interest liabilities is provided. Your good self’s attention is further drawn to Note No 2(i) on significant accounting policy in respect of foreign currency transaction wherein accounting policy on initial recognition, conversion and exchange differences in respect of foreign currency transactions is disclosed. Further, we would like to point out that the said provision for marked to market loss has been made so as to comply with the requirement of Accounting Standard-11 on “the Effects of Changes in Foreign Exchange Rates” and accordingly, your good self’s observation that said marked to market loss is in the nature of notional loss and not a real toss is not correct in view of the decision of Hon’ble Supreme Court of India in the case of CIT Vs Woodward Governor India Pvt Ltd reported in (2009) 312 1TR 254 (SC), the head note of the said decision reads as under-

Section 37(1), read with section 145, of the Income-tax Act, 1961 -Business expenditure – Allowability of – Assessment year 1998-99 – Whether expression ‘expenditure’ as used in section 37 may, in circumstances of a particular case, cover an amount which is really a ‘loss’, even though said amount has not gone out from pocket of assessee – Held, yes – Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under sect/on 37(1) – Held, yes – Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits – Held, yes -Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period – Held, yes.”

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1.4 In view of above discussion, it is abundantly clear that the assesses company has recognized marked to market loss on principal only swap transactions with a view to comply with requirement of Accounting Standard 11 to arrive and true and fair commercial profit for the year under consideration. Further, on perusal of details submitted herein above, it is evident that the assessee company has been consistently following the said method of accounting. To put things into perspective, we submit that rate of interest on Rupee terms loans is very high as compared to Foreign currency denominated loan on account lower rate of interest prevailing in globally compared to India. As mentioned in para 1.2 hereinabove, the assessee company has reduced the interest cost by Rs 3.89 Crores in the year under consideration, Rs 8.39 Crores in F.Y.12-13 and Rs 9.74 Crores in F.Y.13-14 as can be seen from perusal of Annexure-4 of this submission and thereby, saved huge amount of money by swapping rupee loans with foreign currency loans. Further, we submit that since, the entire amount of interest expense pertaining to assets which have capitalized is charged to P&L account, marked to market foreign exchange loss on loans taken for said assets is also charged to P&L account as for the assessee company interest cost on foreign currency loan comprises of lower interest expense on foreign currency loan plus foreign exchange fluctuation on said loan. Had the assessee company not converted rupee term loans into foreign currency loan, the P&L account would have been hit by higher interest expenditure. Therefore, we submit that the Swap transaction should not be seen isolation but its impact on interest expenditure i.e. rate of interest plus cost of forex loss/gain should be considered to determine the nature of loss. Additionally, as noted by the Hon’ble Apex Court in Woodward Governor (Supra) discussed herein above, marked to market foreign currency loss is not in the nature of notional loss but a business expenditure u/s 37(1) of the IT Act as the expression expenditure covers an amount which is really a ‘loss’, even though said amount has not gone out from pocket of assessee.

1.5 Accordingly, the assessee company humbly submits that the market to market loss as claimed by the assesse shall be allowed for deduction u/s 37 of the IT Act.”

8.2 The Assessing Officer did not find merit in the submission filed by the assessee for the following reasons given in his order:-

“The assessee in its submission has pointed out that the said losses have been occurred on account of entering into swap contract for the underlying being Indian rupee denominated loans taken for the purpose of acquiring the fixed assets of the assessee company. It has also stated that the assets in respect of which said loans were taken has already been capitalized and the interest on the said loans after capitalizing the said assets debited to the Profit & Loss account The assessee company has also contended that the said provision for marked to market loss has been made so as to comply with the requirement of accounting standard 11. The assessee company has further contended that the said M2M loss is not in the nature of notional loss. The assessee company has relied upon the decision of the Hon’ble Supreme Court in the case of CIT V/s. Woodward Governor India Pvt. Ltd. The above submission of the assessee company has been duly gone through. The contentions of the assessee company are not tenable. It has not explained with supporting evidences whether the loss on account of forex derivatives (M2M toss on currency swap) is on principle amount or interest amount. Therefore, the assessee has not explained the exact nature of said losses. Further, on legal ground also, the claim of the assessee company is not allowable. Under Indian Income tax Act, there is no special provision or treatment for M2M method of accounting. It is governed by general principles of taxation based upon various judicial decisions. Loss or gain arises only when something goes out of one’s pocket or something goes into one’s pocket. There is no actual loss on account of dealing in forex derivatives (currency swap) until their final values are known. Therefore, the assessee’s claim of M2M losses amounting to Rs.32.50 crores is not allowable. Though the assessee is at liberty to report of such notional losses to adhere or comply with the accounting guidelines, however, the same does not make it (M2M losses) deductible for income tax purposes. The provisions of Income tax Act. 1961 do not allow any such deduction of notional loss for which the liability has not crystallized. Therefore, M2M losses on account of revaluation of forex derivative (swap contract) are only notional and cannot be deductible as business losses under Income tax provisions. It is very well for the assessee company to comply with the relevant Accounting Standard to finalize its Balance sheet as on 31/03/2012 and to account for its liability, however, since the assessee has not actually suffered such losses or has not actually paid such liability, and therefore, the losses are remained notional, uncrystallized, and therefore, not allowable and deductible. The assessee has also contended that the said loans were taken for the purpose of acquiring the fixed assets and the M2M losses are thus required to be allowed. The notional losses arisen out on account of interest (or principle) liability as at the end of the year without actual payment may be accounted for in the respective assets as per the provisions of Income tax Act, but the same cannot be claimed in the Profit & Loss account The assessee company may capitalize such losses of gain in the respective assets as per the provision of the Income tax Act, however, the depreciation as per I.T. Act will be allowed only on actual basis. Thus, the amount debited is a notional loss and definitely not an ascertained one. Said losses are contingent in nature as they arise out of the past swap contracts entered into by the assessee-company and whether they will actually occur or not cannot be reliable estimated until the occurrence of future uncertain events which is beyond the control of the assessee-company. As to whether the assessee will incur the loss or not is contingent and unascertainable. Moreover, the important fact based on which the Hon’ble Supreme Court in the case of Woodward Governor decked the issue in favour of the assessee-company was that the department taxed the accrued foreign exchange gains, however, denied the foreign exchange losses as on the balance sheet date.

Further, the assessee has no liability to pay the difference amount arisen out on date of balance sheet. The Instruction No.03/2010 dated 23/03/2010 of CBDT does not allow such notional losses. The assessee company itself has admitted that it has recognized M2M loss on principle only swap transactions with a view to comply with requirement of accounting standard 11, which clearly shows that, it has actually not suffered the said losses.

The assessee has cited AS-11 in his support which advises that all foreign currency monetary transactions are to be reported based on the closing exchange rate at the end of this accounting period. The said standard may be valuable for enforcing prudent disclosure norm. However, it is well settled that a good accounting standard need not be a good law and the former cannot be override the later as it lacks statutory force, unless notified under section 145(2) of the Act. Thus, while the assessee is at liberty to follow it in its books, for Income Tax purposes it ought to have added back the contingent liability to its taxable profit and therefore the notional loss is liable to be disallowed.”

For the reasons given above, the Assessing Officer held that the foreign exchange derivative losses amounting to Rs.32,50,27,494/- claimed by the assessee were notional losses and same could not be allowed as deduction being contingent in nature.

8.3 The disallowance of Rs.32,50,27,494/- made by the Assessing Officer on account of its claim for deduction for Mark-to-Market Exchange Loss in respect of Foreign Exchange Derivatives was challenged by the assessee in an appeal filed before the learned CIT(A) and during the course of appellate proceedings before the learned CIT(A), the assessee in addition to reiterating the submissions made before the Assessing Officer also made the following submissions in writing:-

1. During the course of appellate proceedings your good honor has asked the appellant to submit the details of mark to market losses currency derivative contract. The appellant herein submits that as per the accounting policies of the company provides for mark to market losses arising on Derivatives/Swsp Contracts. Similarly, in the event when the appellant company earns gain on such contracts, the same is offered to tax following the accounting policies on the consistent basis. The appellant herein submits the details of provision made for mark to market loss during the A.Y. 2012­13, 2013-14 and 2014-15:

Particular	Swap loss (Unrealized)
A.Y. 2012-13	36,40,18,709
A.Y. 2013-14	19,79,88,775
A.Y. 2014-15	38,18,27,303
Total	94,38,34,787

2. The appellant submits that during the aforesaid period the appellant company has provided for mark to market loss amounting to Rs.94,38,34,787/- and claimed the same while filing Return of Income. However the Ld. Assessing Officer has disallowed the same relying on the Instruction No.03/2010 dated 23/03/2010 issued by CBDT. It is further submitted that during A.Y. 2015-16, 2016-17 and 2017-18, the appellant company has earned gain on account of such Derivatives/Swap Contracts which has been duly offered to tax while filing Return of Income. The details of the gain earned by the appellant company during the aforesaid period are tabulated as under:

Particular	Swap gain (Unrealized)
A.Y. 2015-16	12,80,97,872
A.Y. 2016-17	77,02,19,913
A.Y. 2017-18	4,54,27,261
Total	94,37,45,046

3. Thus on perusal of the above tabular chart it can be observed that income amounting to Rs. 94.38 crores has been offered to tax being gain on swap contracts entered into by the appellant company. The appellant further submits that the sole purpose for entering into the derivative contracts in question was to effectuate reduction in the higher rate of interest of 11.75% on rupee loan of Rs.500 crores obtained by the appellant for the acquisition of fixed assets. To substantiate the said contention the appellant submits the details of reduction in interest costs due to swap contract during the period commencing from A.Y. 2012-13 to A.Y. 2017-18:

Particulars	Reduction in interest liability
A.Y. 2012-13	3,89,91,215
A.Y. 2013-14	8,39,57,936
A.Y. 2014-15	9,73,66,902
A.Y. 2015-16	11,36,68,981
A.Y. 2016-17	6,47,92,330
A.Y. 2017-18	21,51,98,327
Total	61,39,75,691

4. It is apparent from the above details that the appellant company has reduced the interest liability to the extent of Rs. 61,39,75,691/- by entering into the swap contract. Thus, it is evident that the swap contracts were entered solely for the purpose of business with a view to reduce the appellant’s interest expenditure on the rupee term loan and therefore loss pursuant to such contract is allowable u/s 37 of the Act. As stated supra, the Ld. Assessing Officer while making the disallowance has majorly relied on the Instruction No.03/2010 dated 23/03/2010 issued by CBDT. The appellant would herein like to draw your honor’s attention to the fact that the jurisdictional authority cannot simply rely on the Instruction issued by CBDT and proceed to make disallowance on account of foreign exchange fluctuation without considering the legal and factual position. Even if CBDT has issued Instruction, the appellate authorities cannot blindly proceed to make disallowance simply by placing reliance on such Instruction.”

8.4 In support of its contention on this issue, reliance was placed on behalf of the assessee-company on the various judicial pronouncements and after considering and discussing the same in the light of relevant facts of the case as involved in assessee’s case, the learned CIT(A) deleted the disallowance made by the Assessing Officer on this issue vide paragraph nos. 4.4 to 4.7 of his impugned order which read as under:-

“4.4. I have carefully considered the Assessment Order and submission filed by the Appellant. The brief facts of the case are that appellant has talon a rupee term loan of Rs 500 crores with effective interest rate @11.75% and appellant has claimed that to reduce interest cost, it has entered into Principal Only Swap contract with ICICI Bank Limited and Axis Bank Limited to covert Rupee Term Loan into Dollar Loan. The appellant has provided copies of contract note along with confirmations of bank during assessment year. The appellant company has provided Marked to Market Loss (M2M) loss on such Swap transactions and claimed loss of Rs 32.50 crore in Profit & loss account. The appellant has claimed before assessing officer, that it has claimed such loss on the basis of settled accounting policies and method of accounting which includes “Prudence” as well as such method of accounting is as per AS 11 issued by ICAI. The appellant has relied upon various legal decisions in support of its claim including decision of Hon’ble Supreme Court in the case of CIT v/s Woodward Governor India Pvt Limited (supra). However, such loss is disallowed b/ AO on the ground that such loss is notional loss and not realized loss. The AO has claimed that appellant can account for such loss in Profit & loss account to comply with Accounting Standard and accounting guidelines but such loss being contingent loss and unascertainable loss hence cannot be allowed as revenue loss in current assessment year. The AO has also relied upon Instruction No.03/2010 dated 23/03/2010 wherein CBDT has considered such loss as notional loss. The AO has held that decision of CIT v/s Woodward Governor India Pvt Limited is not applicable because in said case, department taxed accrued foreign exchange gain but denied foreign exchange loss on Balance Sheet date. Thus, he made disallowance of Rs 32,50,27,494 treating it as contingent liability.

During the course of appellate hearing, ARs of the appellant has mainly relied upon submission as filed before AO and contended that transactions have been carried out to reduce interest saving over a period and also submitted tabular chart showing that appellant company has reduced its interest cost by making Swap Transactions. The appellant has a/so drawn attention to the fact that it has consistently followed same accounting policy to provide M2M losses/gain in subsequent financial years and even M2M gains have been offered to tax. The ARs of the appellant has also argued that treatment given by it to provide for M2M loss is as per AS 1 as well as AS 11. The ARs of the appellant has contended that in view of decision of Hon’ble Supreme Court in the case of CIT v/s Woodward Governor India Pvt Limited (supra), OH & Natural Gas Corporation Limited (SC)(Supra), losses are not contingent and allowable revenue expenditure u/s 37(1) of the Act. The ARs of the appellant have also argued that when issue has already been settled by decision of Hon’ble Supreme Court, board circular / instruction cannot over ride it for which reliance is placed on decision of Hon’ble Ahmedabad ITAT in the case of DCIT Vs Elitecore Technologies Pvt Limited (supra), Delhi High court in the case of Munjal Shows Limited (supra). The ARs of the appellant have also submitted various decisions in Paper book filed by him support of its claimed that above referred M2M loss is allowable revenue loss and cannot be held as contingent loss. .

4.5. On careful consideration of entire facts, it is observed that appellant has made Swap transactions by converting Rupee Term loan into Dollar loan for reducing its interest liability and such facts are apparent from note 37 of Audited Annual accounts. The ARs of the appellant has submitted tabular chart(supra) showing saving in interest liability from AY 2012-13 to 2017­18 to the tune of Rs 61.39 crore which support the claim of appellant that Swap transactions are for reducing interest liability. The AO has not disputed the fact that foreign exchange loss arising from such transactions are not in revenue nature but M2M losses have been disallowed treating it as contingent and unascertained losses. However, Hon’ble Supreme court in the case of CIT v. Woodward Governor India P. Ltd. (312 ITR 254) has treated such M2M losses as actual loss and not contingent loss. The Hon’ble Supreme Court has held as under:

From the Head Notes:

“BUSINESS EXPENDITURE—MERCANTILE SYSTEM OF ACCOUNTING — LOAN TAKEN FOR REVENUE PURPOSES — ADDITIONAL LIABILITY ARISING OUT OF FLUCTUATION IN RATE OF EXCHANGE — ALLOWABLE IN YEAR OF INCREASE IN RATE—INCOME-TAX ACT, 1961, SS. 28, 29, 37, 145. :

DEPRECIATION — ACTUAL COST —- IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY — FLUCTUATION IN RATE OF EXCHANGE -ADJUSTMENT CAN BE MADE AT EACH DATE OF

BALANCE-SHEET PENDING ACTUAL PAYMENT — INCOME-TAX ACT, 1961, SS. 32, 43, 43A (BEFORE SUBSTITUTION W.E.F. 2003).

MERCANTILE SYSTEM OF ACCOUNTING — WHAT IS DUE BROUGHT INTO CREDIT BEFORE ACTUAL RECEIPT — LIABILITY INCURRED BROUGHT INTO DEBIT BEFORE ACTUALLY DISBURSED.

METHOD OF ACCOUNTING – FOLLOWED BY ASSESSEE CONTINUOUSLY — BINDING ON ASSESSING OFFICER — UNLESS ASSESSING OFFICER FINDS THAT SYSTEM FOLLOWED DOES NOT REFLECT TRUE PROFITS.

STOCK-IN-TRADE – NATURE OF — IS AN ASSET CLOSING STOCK – VALUATION.

WORDS AND PHRASES – “ANY EXPENDITURE”, “PROFITS”, MEANINGS OF.

“Loss” suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet IS AN ITEM OF EXPENDITURE under section 37(1) of the Income-tax Act, 1961.

Decision of the Delhi High Court in CIT v. Woodward Governor India P. Ltd. [2007] 294 ITR 451 affirmed.

For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/losses embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower.

Decision of the Delhi High Court affirmed.

The expression “any expenditure” has been used in section 37 of the Income-tax Act, 1961, to cover both “expenses incurred” as well as an amount which is really a “loss” EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE.

Profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. On general principles of commercial accounting, the value of the stock-in-trade at the beginning and at the end of the accounting year should be entered in the profit and loss account at cost or market price, whichever is lower-the market value being ascertained on the last date of the accounting year, not at any intermediate date. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word “profits” implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset: it is a trading asset. Therefore, the concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account.

Under the mercantile system of accounting, what is due is bought into credit before it is actually received: it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed.

UNITED COMMERCIAL BANK v. CIT [1999] 240 ITR 355 (SC) followed.

The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits.”

It is observed that in above decision, Hon’ble Supreme Court has held that appellant should follow same accounting policies for providing for M2M losses/gain and such losses are not notional loss. During the course of assessment proceedings, appellant has claimed that from AY 2015-16, it has M2M gain on similar transactions which are offered to tax. During the course of appellate hearing, ARs of the appellant has submitted tabular chart(supra) in its written submission which show that from AY 2015-16 to 2017-18, appellant has earned M2M gain for Rs 94.37 crore and such gain has been offered to tax.

4.6 It is observed that Hon’ble Ahmedabad ITAT in the case of Adani Enterprises Limited 55 Taxmann.com 375(2015), group case of appellant has held that “Where assessee company has entered into currency swap contracts for working capital loans which was pre-requisite for its business of export and import of commodities, loss incurred in said contract being in respect of circulating/working capital is allowable business loss”. It is also observed that on this very issue, Hon’ble Ahmedabad ITAT in the case of Heavy Metal and Tubes Limited in ITA No 1951/Ahd/2011 dated 30/06/2014 decided the issue in favour of assessee. In the said case, farts are that Assessee has claimed loss on account of foreign exchange derivative amounting to Rs. 5,89,29,812/-. It was assessee’s submission that it had availed foreign currency loan for importing raw materials and it had shifted its loan liability in dollar to Swiss Franc and the loss resulted due to fall in the value of Swiss Franc vis-a-vis dollar on the Balance sheet date was undertaken to minimize the risk of foreign exchange fluctuation. The AO disallowed such loss in assessment order on the ground that “Assessee company has claimed loss on account of re-statement of loans/credit liability existing as’ on the date of balance sheet by swapping the loan from Dollar to Swiss Franc to reduce its Forex exposer risk and therefore the loss claimed by the Assessee was not of Revenue in nature but was an unascertained and notional loss. He was of the view that the loss claimed by the Assessee was speculative in nature.” In above case, CIT (A) has held as under:

“8.1. I have carefully considered the observations and findings of the A.O. as well as submissions of the appellant. The appellant company is engaged in the manufacturing of Tubes & Pipes. It purchases the required raw materials mainly from import source. During the previous year relevant to assessment year under consideration, approx. 90% of the value of materials consumed is from import purchase. There are export sales also, requires dealing in foreign exchange in normal course of business and to safeguard the future losses against foreign exchange rate fluctuation it enters in to hedging transaction. It has availed the fund based and non fund based financial facilities from its bankers in the form of Letter of Credit, Buyer’s Credit, Cash Credit limits in foreign currency for purchase of raw materials & payment to overseas suppliers, against stock of raw materials & collection of book debts. It is submitted that since the appellant company uses the fund and non fund based facilities in foreign currency, the bankers have advised the company to cover up the foreign exchange payment liabilities against the risk of fluctuation in rate of foreign exchange. There is always an inherent risk of fluctuation in the rates of foreign exchange, i.e. the rates of foreign exchange changes between the time of purchase of raw materials and actual payment to suppliers or bank, which depends on the demand and supply position of the foreign exchange in the international market. 8.1 During the previous year, the appellant company has swap its working capital bank liability against purchase of raw-materials in Dollar Currency to Swiss Frank currency by entering into derivative contracts with bank. The stated logic for such swap from Dollar to Swiss Frank currency was that the Swiss Frank is considered as one of the most stable currency as compared to Dollar and accordingly, the loss, if any on account of foreign exchange fluctuation can be minimized. However, there was fall in the value of Swiss Frank vis-a-vis Dollar and on the balance sheet date i.e. 31-03-2008, the appellant company booked the loss of Rs. 5,89,29,812/-. This facts have not been disputed by the A. O.

8.2 It is further submitted by the authorized representative of the appellant company that as per the consistent prudent practice and requirements of Accounting Standards issued by the ICAI, it follows accounting of transactions for purchase & Sales in foreign currency at the prevailing foreign exchange rate at the time of executing transactions and difference if any between the amount of purchase/sales and amount at which the transactions is actually settled by the payment to/from suppliers/debtors is accounted as “Loss/Gain on foreign exchange fluctuation”. In the Trading & Profit & Loss Account, the Purchase and sales are disclosed after set off on account of the Loss or Gain due to fluctuation in rates of foreign exchange on account of transactions of import purchase and export sales in foreign exchange. Such gain or loss in foreign exchange transactions settled during the year is part of the cost of import purchase or value of export sales. It is further submitted that at times, it happens that the forward contract to buy/sell foreign exchange remains outstanding at the last date of Balance Sheet. As per the prudent accounting policy of mercantile/accrual system of accounting and Accounting Standards issued by the ICAI, the unsettled outstanding foreign exchange forward contracts have to be evaluated at an exchange rate prevailing fin the date of Balance Sheet and loss, if any, on evaluation of such unsettled forward contracts have to be accounted in the books. As such there is no difference between the loss on account of evaluation of unsettled outstanding foreign exchange forward contracts and loss on account of settled foreign exchange forward contracts during the year. Loss, under both the situations, i.e. settled and unsettled forward contracts in foreign exchange, is revenue loss incurred in the normal course of business to hedge the risk of fluctuations in foreign exchange rates. Further, it is also submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI’s guidelines, the companies are required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealer’s Association of India (FEDAI).

8.3 During the previous year relevant to assessment year under consideration, there were 2 unsettled forward contracts aggregating to US $ 76.00 lacs as on the last date of Balance Sheet i.e. 31-03- 2008 to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period. The loss is incurred by the appellant company on account of evaluation of these unsettled outstanding forward foreign exchange contracts on the last date of the accounting period i.e. before the date of maturity of the forward contracts. It was further submitted by the authorized representative that the gain/loss in forward contract for foreign exchange transactions backed by liability in foreign exchange on account of purchase/sales of goods are business losses covered by Section 28 of the Act and not losses in the nature of ‘speculation’ as defined in section 43(5) of the Act.

8.4 It has been further submitted that in the subsequent year i.e. Financial Year 2008-09 relevant to A.Y.2009-10 on settlement of the said 2 forward contracts, there was a gain of Rs. 1,96,26,2847- which is credited to the Profit & Loss A/c and shown as business income in the financial year relevant to A.Y.2009-10. Hence, the net foreign currency derivative loss is of Rs.3,93,03,528/- (Rs.5,89,29,812/- Less Rs.1,96,26,284/-).

8.5 The appellant company made the transactions of import purchase of raw materials and export sales of manufactured goods in the normal course of business. The liability for payment to suppliers for import purchase in foreign exchange is subject to risk of losses on account of fluctuation in exchange rate of foreign currency. To safe guard against such losses and to hedge against the unforeseen future loss due to fluctuation in rate of foreign exchange transactions of purchase & sales company makes the forward contract in the normal course of business to buy/sell the foreign exchange as per the market condition and advice of the bank. Thus, losses incurred in forward contracts for foreign exchange in the normal course of business are not speculative transactions and similar the said transactions not regarded as speculative transaction as per the proviso (a) below the Section 43(5) of the Act and is a business loss covered by section 28 of the Act.

It is submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI’s guidelines, the companies were required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealer’s Association of India (FEDAI). Accordingly, on the balance sheet date, based on the exchange rate on that date, provision of profit/loss substitutes the figures booked at the time of contract. Thus, revalued loss/profit is debited to the profit and toss account. Further, this treatment is as per principles of accounting which required the current assets to be marked to the market rate.

8.6 The ratio laid down in the decision of Income-tax Appellate Tribunal, Mumbai Bench-“C” Special Bench, Mumbai in the case of DCIT vs. M/s. Bank of Bahrain & Kuwait (ITA No.4404 & 1883/Mum/2004) is squarely applicable to the appellant company.

8.7 The loss incurred by the appellant company on account of evaluation of contract on the last day of accounting year i.e. before the date of maturity of forward contract be allowed as business loss for the following reasons :

8.8 Considering all the above facts together, I am inclined to agree with the contention of the appellant company that the loss incurred by the appellant company on account of foreign exchange hedging transactions in forward contracts which is backed by the trading liability of the appellant company on account of import purchases, is a business revenue loss and not speculative loss as held by the A.O. The case of the appellant company squarely falls under proviso (a) to Sec. 43(5) of the Act and accordingly, the transactions entered into by the appellant company in respect of hedging of the probable loss on account of fluctuation in the rate of foreign exchange in forward contract are not speculative transactions. The A.O. has failed to bring on record any cogent material evidence is support of his finding that the toss suffered by the appellant company is speculative loss. Therefore, the action of the A.O to disallow the same as speculative loss is unjustified on the facts of the case and accordingly, the disallowance made by him is deleted. The appellant, accordingly, gets the relief of Rs. 5,89,29,812/-.”

The Hon’ble Ahmedabad ITAT relying on decision of CIT(A) referred supra has held as under-

“11. We have heard the rival submissions and perused the material on record. It is an undisputed fact, that the Assessee is engaged in the business of manufacturing Tubes and Pipes. From the copy of the balance sheet placed on record it is seen that the approximately 90% of the material consumed is from import purchases. It is also a fact that Assessee has availed financial facilities from its bankers for purchase of raw material. We find that CIT(A) while allowing the appeal of we Assessee has given a finding that the dealing of Assessee in foreign exchange was in the normal course of business and to safeguard the future losses against foreign exchange rate fluctuations it had entered into hedging transaction. He has further noted that the loss incurred by the Assessee on account of foreign exchange hedging transactions in forward contracts was backed by the trading liability on account of import purchases and therefore the loss was revenue in nature and was not a speculative loss. He is further given a finding that the loss falls under proviso (a) to Section 43(5) of the Act and therefore the loss on account of fluctuation in the rate of foreign exchange in forward contract was not speculative transaction but is a business loss covered by Section 28 of the Act CIT(A) has further noted that the A. O has failed to bring any material evidence on record to support its stand that the loss suffered by the Assessee was speculative loss. We further find that in the case of CIT vs. Woodward Governor the head notes of the decision of Hon’ble Apex Court reads as under:-

“Business expenditure-Year of allowability-Additional liability due to exchange rate fluctuation-Expression “expenditure” as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a “loss” even though the said amount has not gone out from the pocket of the assessee—Word “paid” in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29-Sec. 37(1) has to be read with ss. 28, 29 and 145(1)–There is no finding of the AO on the correctness or completeness of the accounts of the assessee or that the assessee has not complied with the Accounting Standards-Therefore, loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1) – Under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11-An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange-Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period.”

12. Before us, Revenue has not brought any material on record to controvert the findings of CIT(A). In view of the aforesaid facts and relying on the decision of Apex Court in the case of Woodward Governor (supra) we find no reason to; interfere with the order of CIT(A) and thus this ground of Revenue is dismissed.

The Hon’ble Ahmedabad ITAT has thus decided similar issue of Swap transactions in favour of appellant and held that M2M loss is not contingent in nature for which reliance was placed on decision of Hon’ble Supreme Court in the case of Woodward Governor.

4.7. It is also observed that Hon’ble Ahmedabad ITAT in the case of DCIT Vs Elitecore Technologies Pvt Limited In ITA No 197 and 508/Ahd/2016 dated 31/03/2017 considered Instruction No 3/2010 relied upon by AC and held as under:-

“22. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has shown foreign exchange difference income of Rs 1,12,55,515 under the head “Other Income” but when he probed the matter further, he found that this amount of Rs 1,12,55,515 has been worked cut after allowing a set off of foreign exchange difference loss of Rs.71,22,045. It was explained by the assessee that all the forward contracts are with respect to exports, that these contracts are entered into on the basis of soot rates plus premium element, that, in terms of the requirements of AS-11, the exposure to such contracts is required to be evaluated on the basis of difference in the foreign exchange rates at the year ending vis-a-vis foreign exchange rates committed under the contracts, and that, it is a result of this exercise that the loss of Rs 71,22,045 has been quantified. The Assessing Officer was, however, of the view that such a treatment is incorrect since loss has not fructified till the end of the year and it is still a notional loss which is contingent upon the events in future. He also relied upon the CBDT instruction no. 3 of 2010, dated 23rd March 2010, which holds that such losses, being purely notional, are not deductible in computation of business income. Accordingly, the Assessing Officer proceeded to disallow this loss, which is termed as ‘marked to market loss’ in commercial parlance, amounting to Rs 71,22,045. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) did take note of Hon’ble Supreme Court’s judgment in the case of CIT Vs Woodward Governor India Pvt Ltd [(2009) 357 ITR 673 (SC)J though did not deal with it any further at all, accepted that the accounting treatment given by the assessee is in accordance with AS-11 which is binding on the assessee but declined the deduction for this loss nevertheless, as, according to the CIT(A), the views of the assessee “are not acceptable in view of the view expressed by the CBDT vide instruction no. 3 of 2010 dated 23/03/2010″. The assessee is aggrieved and is in further appeal before us.

23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

24. It is with some amount of anguish that we have taken note of the fact that the CIT(A) was so much overawed with the CBDT instruction no. 3 (supra) on the subject that rather than even dealing with a Supreme Court judgment cited before him, he simply followed the CBDT instructions. lt is only elementary that the CBDT instructions do not bind the appellate authorities and the appellate authorities are, therefore, required to take their independent calls in accordance with the law and binding judicial precedents. That has not been done. Be that as it may, in the case of Woodward Governor (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon’ble Supreme Court. Their Lordships, dealing with this issue and holding that such a loss will be deductible in computation of business profits, observed as follows:

25. In the present case also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the Assessing Officer has not even raised any issues with respect to the above. His case is confined to the loss being notional in nature and contrary to the CBDT guidelines, but then, in the same breath, he taxes the gains on foreign exchange which are computed on the same basis. If losses are held to be notional, even the gains must be held notional too. However, this aspect of the matter is conveniently ignored. As a matter of fact, it was somewhat similar situation in the case before Hon’ble Supreme Court and Their Lordships could not-help remarking that “it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department.” In the present case, the facts are even more glaring in as much as the gains on foreign exchange contracts in the same year have been taxed as ‘other income’, the losses on foreign exchange contracts have not been allowed as deduction. Such an approach cannot meet any judicial scrutiny. As we say so, we must make it clear that since the assessee succeeds on merits, in the light of Hon’ble Supreme Court’s direct judgment on the issue in the case of Woodward Governor (supra), such considerations of equity are rather peripheral issues. The assessee has succeeded on merits. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee….”

The above decision is further confirmed by Hon’ble Gujarat High court in Tax Appeal No 139 of 2018 dated 20/02/2018 in the case of Elitecore Technologies Pvt Limited. The Hon’ble Ahmedabad ITAT has held that instruction cannot over rule Hon’ble Supreme Court decisions. It is held that when appellant is consistently following method of accounting for recognizing income/loss of M2M, such loss cannot be disallowed treating it as notional loss. As held in preceding paras, appellant has been consistently following same method of accounting and had recognized significant M2M gain in subsequent assessment years (as submitted by the appellant and seen from the records) and has been offered for the tax, hence ratio of above referred decisions squarely applies to present case. The Hon’ble Delhi High court in the case of Munjal Showa Limited Vs DCIT (supra) has also held that “CBDT Instruction No 3 of 2010 cannot possible override the existing decisions of Supreme Court/High court on similar issue”. It is also observed that in following decisions, courts have held that M2M losses cannot be considered as notional or unascertained losses even after instruction no. 3 of 2010.

(i) Decision of Hon’ble Hyderabad ITAT in case of VST Industries Ltd vs Addl. CIT vide ITA No.647/Hyd/2012 dated 23/08/2013

(ii) Decision of Hon’ble Bangalore ITAT in case of Subex Ltd vs DCIT (68 taxmann.com 233) dated 18/03/2016

(iii) Decision of Hon’ble Bangalore ITAT in case of Quality Engineering & Software Technologies (P.) Ltd. vs DCIT (52 taxmann.com 515) dated

(iv) Decision of Hon’ble Mumbai ITAT in case of Reliance Industries Limited vs CIT (40 taxmann.com 431) dated 20/1 1/2013

Considering the facts discussed herein above and relying upon the decisions referred supra including decisions of Hon’ble Jurisdictional ITAT and High court, disallowance of loss of Rs 32,50,27,494/- made by AO is deleted. This ground of appeal is allowed.”

8.5 We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The learned DR in support of the Revenue’s case on this issue has mainly relied on the order of the Assessing Officer. The learned Counsel for the assessee, on the other hand, has contended that this issue is squarely covered in favour of the assessee by the various judicial pronouncements which have been referred to and discussed in details by the learned CIT(A) in his impugned order while giving relief to the assessee. As submitted by him, the assessee-company had taken rupee term loan and with a view to reduce effective rate of interest from 11.75% to 6.67%, it entered into Principal Only Swap (POS) contract with ICICI Bank Ltd and Axis Bank Ltd to convert the Rupee Loans to US Dollar Loans. He has submitted that the assessee-company by this way saved interest cost of Rs.61.39 crore during the Assessment Years 2012-13 to 2017-18. He has contended that the assessee-company by following the Principle of Prudence recognized M2M loss as at the end of the year on outstanding SWAP contract as per Accounting Standard-11 and this method was consistently followed by the assessee regarding Forex loss/gain from M2M. He has pointed out that there were substantial gains earned by the assessee in AYs 2015-16 and 2016-17 amounting to Rs.94.37 crores and the same were duly offered to tax which was accepted by the Department. We find merit in the contention raised by the learned Counsel for the assessee on this issue. Moreover, as pointed out by him, the issue under consideration is squarely covered in favour of the assessee, in addition to the judicial pronouncements referred to and relied upon by the learned CIT(A) in his impugned order, by the latest decision of the Co­ordinate Bench of this Tribunal rendered in other group case of M/s. Adani Hazira Port Pvt. Ltd, vide its order dated 06.04.2022 in ITA No.1131/Ahd/2019, wherein it is held that M2M loss on SWAP contract was allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognized on account of foreign exchange fluctuation as per notified Accounting Standard 11 was an accrued and subsisting liability and not merely a contingent or hypothetical liability. The learned DR, on the other hand, has not been able to cite any judicial pronouncement in support of the Revenue’s case on this issue. We, therefore, find no infirmity in the impugned order of the learned CIT(A) allowing the claim of the assessee for deduction on account of Mark-to-Market Exchange Loss in respect of Foreign Currency Derivatives Contracts and upholding the same, we dismiss Ground No.3 of the Revenue’s appeal.

9. Next issue raised in Ground No.4 relates to the deletion by the learned CIT(A) of the addition of Rs.3,23,926/- made by the Assessing Officer on account of excess depreciation allegedly claimed by the assessee on office equipment.

9.1 As noted by the Assessing Officer from the depreciation chart furnished by the assessee, depreciation at the rate of 15% was claimed by the assessee on office equipment. Since the office equipment was eligible for depreciation at the rate of 10%, the assessee-company was called upon by the Assessing Officer to offer its explanation in the matter. In reply, it was explained by the assessee that all the relevant equipment such as CCTV, EPBAX, water cooler, air conditioners etc. were installed at site and the same being an integral part of the plant and machinery, depreciation @ 15% was claimed. In support of its contention, reliance inter alia was placed by the assessee on the decision of the Ahmedabad Bench of ITAT in the case of Madhu Industries Vs. ITO, [2010] 132 TTJ 233 (Ahd.) wherein it was held that electrical installation being an integral part of plant and machinery was eligible for higher rate of depreciation under the block of plant and machinery. The submission made by the assessee was not found favour with the Assessing Officer who proceeded to restrict the claim of the assessee for depreciation on these assets at the rate of 10% as against 15% claimed by the assessee as applicable to the block “Furniture & Fittings including office equipments”. On appeal, learned CIT(A) allowed the claim of the assessee for depreciation @ 15% by relying on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Park Devis (India) Ltd, reported in 214 ITR 587, wherein it was held that fans installed in the administrative office of the assessee were entitled for depreciation at the rate applicable to plant and machinery since the “plant” would mean and include apparatus used by a businessman for carrying on his business.

9.2 We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As pointed out by the learned Counsel for the assessee, besides the decision of Hon’ble Bombay High Court in the case of Park Devis (India) Ltd (supra) relied upon by the learned CIT(A) in his impugned order to give relief to the assessee on this issue, the decision of Hon’ble Gujarat High Court in the case of CIT vs. Tarun Commercial Mills Ltd. , reported in [1985] 151 ITR 75 (Guj) is also in favour of the assessee wherein it was held that the air-conditioners and electric fans installed in the office premises are entitled to depreciation at the same rate as applicable to plant and machinery. Respectfully following the decision of Hon’ble jurisdictional High Court, we uphold the impugned order of learned CIT(A) allowing the claim of the assessee for deprecation at a higher rate of 15% on office equipments which were installed at site and formed integral part of plant and machinery. Ground No.4 of the Revenue’s appeal is accordingly dismissed.

10. Next issue raised in Ground No.5 relates to the deletion by the learned CIT(A) of the addition of Rs.3,55,446/- made by the Assessing Officer on account of excess depreciation allegedly claimed by the assessee on computer software.

10.1 As per the depreciation chart, the assessee-company had claimed depreciation @ 60% on computer software. In this regard, reliance was placed by the assessee-company on New Appendix-I to the Income-Tax Rules, 1962, wherein the rate of depreciation for computer including computer software was prescribed at 60% and the “computer software” was defined to mean any computer program recorded on any disc, tape, perforated media or other information storage device. The Assessing Officer did not find this explanation of the assessee to be acceptable. According to him, the rate of depreciation on intangible assets and licences was prescribed at 25% with effect from 01.04.1999 as per Section 32 of the Act as amended by the Finance Act, 1998 and the assessee-company, therefore, was entitled to depreciation only @ 25% on computer software. He accordingly restricted the claim of the assessee for depreciation @ 25% and disallowed the excess depreciation of Rs.3,55,446/- allegedly claimed by the assessee. On appeal, the learned CIT(A) deleted the addition made by the Assessing Officer on this issue and allowed the claim of the assessee for depreciation @ 60% on computer software for the following reasons given in paragraph Nos. 7.3 & 7.4 of his impugned order:-

“7.3 I have carefully considered the Assessment Order and the submissions made by the Appellant. The Assessing Officer has observed that Appellant has claimed depreciation on computer software @ 60%. He observed that license to run software and computer software is an intangible asset and hence depreciation u/s 32 of the Act is allowable @ 25% and thus he disallowed excess claim of depreciation of Rs.3,55,446/-. On the other hand, the Appellant argued that Appendix-I of the Income Tax Rules,1962 expressly provided for depreciation @ 60% on Computer including Computer Software and thus it has correctly claimed depreciation @ 60%. The Appellant argued that there is a specific provision in law which provides that depreciation on computer software is to be allowed @ 60% and hence general provisions cannot be made applicable in the present case. During the course of appellate proceedings the Appellant has relied upon following judicial pronouncements:

(i) Decision of Ahmedabad ITAT in the case of M/s. Voltamp Transformers Limited in ITA No.1676/Ahd/2012.

(ii) Decision of Ahmedabad ITAT in the case of ACIT vs. Zydus Infrastructure (P) Ltd. (72 taxmann.com 199)

7.4 On careful consideration of the entire facts, it is observed that AO has considered software licenses as part of intangible assets and allowed depreciation @ 25%. However, Income Tax Rule 1962 specifically provides depreciation on computer software @ 60% and explanation to such Rules clearly states that Computer Software means “any computer program recorded on any disc, tape, perforated media or other information storage device” which means that any computer software being system software or application software or any licenses are eligible for higher depreciation @ 60%. The issue is elaborately discussed by Hon’ble Ahmedabad ITAT in the case of M/s. Voltamp Transformers Limited in ITA No.1676/Ahd/2012 wherein it is held as under :-

“The Income Tax Act does not make any difference between the system software and the application software. The schedule only provides the depreciation @ 60% on the computer software and the term ‘computer software’ has also been defined in the Appendix-1. The classification made by the Accounting Standards cannot overwrite the definition given in the Income Tax. Accordingly, the Appellant is entitled to depreciation @ 60%. The grounds of appeal are accordingly allowed.”

Further, Hon’ble Ahmedabad ITAT in the case of ACIT v/s Zydus Infrastructure (P.) Ltd. (72 taxmann.com 199) has held as under :-

“1. Section 32 of the Income Tax Act, 1961 – Depreciation – Allowance/Rate of (Computer Software) – Assessment Year 2009-10 – Whether expenditure incurred on software licence valid for long term was a part and parcel of computer system and , thus, it was eligible for depreciation at higher rate of 60 per cent – Held, yes [para 15] [In favour of assessee]”

Considering the facts discussed herein above and relying upon decisions referred supra, disallowance made by AO for Rs.3,55,446/- is deleted. This ground of appeal is allowed.”

10.2 We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the claim of the assessee for depreciation @ 60% on computer software has been allowed by the CIT(A) vide his impugned order by relying on the decisions of Co-ordinate Bench of this Tribunal in the cases of M/s. Voltamp Transformers Ltd (supra) and Zydus Infrastructure (P) Ltd (supra), wherein a similar issue has been decided by the Tribunal in favour of the assessee. At the time of hearing, learned DR has not cited any case law which is in favour of the Revenue on this issue. We, therefore, respectfully follow the decisions of Co-ordinate Bench of this Tribunal in the cases of M/s. Voltamp Transformers Ltd (supra) and Zydus Infrastructure (P) Ltd (supra) and uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for depreciation @ 60% on computer software. Ground No.5 of the Revenue’s appeal is accordingly dismissed.

11. Now we take up the assessee’s appeal for AY 2012-13 being ITA No.1398/Ahd/2018, Ground No.1 of which relates to the issue of addition of Rs.1,71,60,343/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of loss arising from difference in rates of Forex.

11.1 In the Profit and Loss account filed along with return of income, a sum of Rs.171.60 lacs was debited by the assessee on account of exchange difference. Although the assessee during the course of assessment proceedings tried to explain its stand to justify the deduction claimed on account of exchange difference, the Assessing Officer did not accept the same and disallowed the claim of the assessee for exchange difference for the following reasons given in his order:-

“The above submission of the assessee company has duly been gone through. The assessee company has submitted the extract of notes regarding foreign currency transaction and has stated that it has already capitalized an amount of Rs.24,85,19,390/- as per Note No.11 of Fixed Assets and the remaining amount of Rs.1,71,60,343/- has been debited to P&L account being revenue in nature. The above submission of the assessee company has not explained the nature of the transactions. As the Ld. AR itself has stated that it has already capitalized Rs.24.85 crores in respect of fixed assets and the balance amount has been treated as revenue. On perusal of Annexure 8 being ledger account of exchange rate difference (net) shows that, it contains various capital items as well as amounts being difference of exchange rates settlement. Most of the entries against the amounts have been made as 2 step price valuation, but the same does not explain the correct nature of transactions. The assessee was specifically asked to submit the supporting to explain the nature of transactions. However, the same was not filed till date. The Ld. AR of the assessee company was also asked to explain as to why the amount of Rs.1.71 crores should not be disallowed, as it has failed to submit any material on record to ascertain the nature of said transactions. Further, it is also not clear, as for what these payments were made. In the given circumstances, the amount of Rs.1,71,60,343/- being exchange rate difference (net) is liable to be disallowed in the want of proper supporting and explanation.”

11.2 On appeal, the learned CIT(A) confirmed the disallowance made by the Assessing Officer for the following reasons given in paragraph No.5.5 of his order:-

“On careful consideration of entire facts, it is observed that in notes forming part of Audited Annual Accounts accounting policy related to Foreign Currency Translation, which has been consistently followed by the Appellant is mentioned. Further, the Appellant has submitted that as per the accounting policy, foreign exchange difference relating to capital asset for Rs.2485.20 lacs is capitalized under cost of fixed assets in books of accounts during the year (though for claiming depreciation as per Income Tax, only realized loss of Rs.68,34,130/- is considered which is evident from Annexure 2 of Tax Audit Report) and balance exchange difference for Rs.171.60 lacs is recognized in P&L Account. The appellant has claimed that such exchange difference is not relating to any fixed assets or had arisen after assets were put to use hence same is charged to Profit & Loss Account. However, during the course of assessment proceedings, appellant has only submitted ledger account of such loss but has not explained nature of the transactions with supporting evidences. The loss cannot be held as allowable revenue loss only on theoretical basis which is not supported by evidences. In absence of any corroborative evidences, deduction for loss of Rs.1,71,60,343/- being foreign exchange difference loss as revenue loss cannot be allowed. Thus, disallowance made by AO for Rs.1,71,60,343/- is confirmed. This ground of appeal is dismissed.”

11.3 We have heard the arguments of both sides on this issue and also perused the relevant material available on record. It is observed that loss of Rs.171.60 lacs in question on account of difference in rate of Forex was claimed by the assessee as a revenue loss on the ground that the same was not related to any fixed asset and had arisen after assets were put to use. However, the relevant details and documents to support and substantiate this explanation were not furnished by the assessee either before the Assessing Officer during the course of assessment proceedings or even before the learned CIT(A) during the course of appellate proceedings. In the absence of the same, the nature of the relevant transactions could not be ascertained by the authorities below and the claim of the assessee for the loss in question as a revenue loss was disallowed by them. Even before the Tribunal the assesse has not been able to produce the relevant details and documents to explain the exact nature of relevant transactions and to establish that the loss in question is in the nature of revenue loss. The learned Counsel for the assessee, however, has made an alternative claim that the loss in question having been held to be capital in nature, the same may be added to the cost of relevant fixed asset and depreciation thereon may be allowed. We are inclined to accept this alternative contention of the learned Counsel for the assessee and since the learned DR has not raised any objection in this regard, we direct the Assessing Officer to allow the alternative claim of the assessee for depreciation after necessary verification. Ground No. 1 of the assessee’s appeal is accordingly treated as partly allowed.

12. At the time of hearing before us, the learned Counsel for the assessee has not pressed Ground No.2 raised in the appeal of the assessee relating to disallowance of Rs.34,940/- made by the Assessing Officer and confirmed by the learned CIT(A) under Section 35D of the Act. The same is accordingly dismissed as not pressed.

13. In the result, the appeal of the Revenue for AY 2012-13 is dismissed while the appeal of the assessee for AY 2012-13 is treated as partly allowed.

14. Now we take up the appeal of the Revenue for AY 2013-14 being ITA No.1792/Ahd/2018, along with Cross Objection filed by the assessee being CO No. 89/Ahd/2019, which is directed against the order of learned CIT(A)-5, Ahmedabad dated 30.05.2018.

15. Ground No.1.1 of the Revenue’s appeal for Assessment Year 2013-14 and Ground No.1 of the assessee’s Cross Objection for Assessment Year 2013-14 relates to the disallowance of Rs.73,46,940/- made by the Assessing Officer under Section 14A r.w. Rule 8D while computing the total income of the assessee under the normal provisions of the Act which is sustained by the learned CIT(A) to the extent of Rs.6,83,250/-.

15.1 We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Although this issue is similar to the one involved in Revenue’s appeal for AY 2012-13, the relevant facts as involved in the year under consideration i.e. AY 2013-14 are different from AY 2012-13 inasmuch as the assessee has earned dividend income of Rs.43,26,603/- in AY 2013-14 which is claimed to be exempt from tax. Since no disallowance under Section 14A r.w. Rule 8D was offered by the assessee, the Assessing Officer made a disallowance of Rs.73,46,940/-under Section 14A of the Act by applying Rule 8D on account of interest as well as common administrative expenses. Insofar as the disallowance made by the Assessing Officer on account of interest is concerned, the learned CIT(A) found from the relevant financial statement of the assessee-company that the assessee had sufficient own funds at the relevant time to make the corresponding investments. At the time of hearing before us, the learned DR has not been able to bring anything on record to dispute this finding of facts recorded by the learned CIT(A). We, therefore, find no justifiable reason to interfere with the impugned order of the learned CIT(A) deleting the disallowance made by the Assessing Officer on account of interest under Section 14A r.w. Rule 8D.

15.2 As regards the disallowance made on account of common administrative expenses under Section 14A r.w. Rule 8D(2)(iii), the limited relief sought by the assessee by way of Ground No.1 of the Cross Objection by relying on various judicial pronouncements is that the disallowance on account of common administrative expenses by applying Rule 8D(2)(iii) should be worked out by taking into consideration only those investments which actually fetched dividend income to the assessee in the year under consideration. Since this issue is covered in favour of the assessee by various judicial pronouncements cited by the learned Counsel for the assessee, we modify the impugned order of the learned CIT(A) on this issue and direct the Assessing Officer to re-compute the disallowance on account of common administrative expenses as per Rule 8D(2)(iii) by taking into consideration only those investments from which dividend income was actually earned by the assessee in the year under consideration. Ground No.1.1 of the Revenue’s appeal for AY 2013-14 is accordingly dismissed while Ground No.1 of the Cross Objection of the assessee for AY 2013-14 is partly allowed.

16. As regards the issue involved in Ground No.1.2 of the Revenue’s appeal for AY 2013-14 relating to the deletion by the learned CIT(A) of the addition of Rs.73,46,940/- made by the Assessing Officer on account of disallowance under Section 14A while computing the book profit under Section 115JB of the Act, it is observed that the disallowance made by the Assessing Officer under Section 14A while computing the book profit of the assessee-company under Section 115JB was deleted by the learned CIT(A) by relying on various judicial pronouncements cited on behalf of the assessee. In this regard, it is noted that a similar issue is decided by the Co­ordinate bench of this Tribunal in the case of M/s. Mazda Limited Vs. DCIT vide its order dated 15.07.2019 passed in ITA Nos. 3075 and 3338/Ahd/2015 vide paragraph Nos. 11 to 11.5 as under:-

“11.1 We also note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A of the Act r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below:

“In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”

11.2 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the present facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be applied while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.

11.3 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently. The judgment of Hon’ble Gujarat High Court relied on by the Ld AR in the case of Alembic Ltd. (supra), does not restrict the disallowance provided under clause (f) u/s 115JB of the Act.

11.4 Thus it is clear that the disallowance needs to be made in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw our support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:-

“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal.

We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”

Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the income tax Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).

11.5 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/determine the disallowance. Therefore in the given facts &circumstances, we feel that adhoc disallowance will service the justice to the Revenue and assessee. We, therefore, are directing for the ad-hoc disallowance to avoid the multiple proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance at 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also find to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.”

16.1 As the issue involved in the present case as well as all the material facts relevant thereto are similar to the case of M/s. Mazda Limited (supra), we respectfully follow the decision rendered by the Co-ordinate Bench in the said case and sustain the disallowance made by the Assessing Officer on account of expenses incurred in relation to the exempt income while computing the book profit under Section 115JB of the Act to the extend of Rs.43,266/- being 1% of the exempt income actually received by the assessee in the year under consideration. Ground No.1.2 of the Revenue’s appeal is thus partly allowed.

17. As regards the issue involved in Ground No.2 of the Revenue’s appeal for AY 2013-14 relating to the deletion by the learned CIT(A) of the addition of Rs.11,40,31,000/- made by the Assessing Officer on account of Mark to Market Exchange Loss on Foreign Exchange Derivatives, it is observed that the same is similar to Ground No.3 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) deleting the addition of Rs.11,40,31,000/- made by the Assessing Officer on account of Mark to Market Exchange Loss on Foreign Exchange Derivatives and dismiss Ground No.2 of the Revenue’s appeal for AY 2013-14.

18. As regards the issue involved in Ground No.3 of the Revenue’s appeal for AY 2013-14 relating to the deletion by the learned CIT(A) of the addition of Rs.3,74,061/- made by the Assessing Officer on account of excess claim of depreciation on office equipment, it is observed that the same is similar to Ground No.4 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for deprecation at a higher rate of 15% on office equipment and dismiss Ground No.3 of the Revenue’s appeal for AY 2013-14.

19. As regards the issue involved in Ground No.4 of the Revenue’s appeal for AY 2013-14 relating to the deletion by the learned CIT(A) of the addition of Rs.6,98,675/- made by the Assessing Officer on account of excess claim of depreciation on computer software, it is observed that the same is similar to Ground No.5 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for depreciation @ 60% on computer software and dismiss Ground No.4 of the Revenue’s appeal for AY 2013-14.

20. As regards the issue involved in Ground No.5 of the Revenue’s appeal for AY 2013-14 relating to the deletion by the learned CIT(A) of the addition of Rs.7,93,042/- made by the Assessing Officer on account of penalty paid by the assessee to the Ministry of Railways as compensation for overloading of cargo in railway racks, it is observed that this issue is squarely covered in favour of the assessee by the decision of Bombay Bench of this Tribunal in the case of M/s. Taurian Iron & Steel Co. Pvt. Ltd. Vs. ACIT, rendered vide its order dated 14.12.2011 in ITA Nos. 847 and 1613/Mum/2010 wherein it was held that punitive charges paid to Railways for overloading of the wagons is compensatory in nature and the same therefore cannot be disallowed by invoking Explanation to Section 37(1) of the Act. Since the issue involved in the present case as well as all the material facts relevant thereto are similar to M/s Taurian Iron & Steel Co. Pvt. Ltd. (supra) decided by Bombay Bench of this Tribunal, we respectfully follow the decision of the Tribunal rendered in the said case and uphold the impugned order of the learned CIT(A) deleting the addition of Rs.7,93,042/- made by the Assessing Officer on account of punitive charges paid by the assessee to the Ministry of Railways as compensation for overloading of cargo. Ground No.5 of the Revenue’s appeal for AY 2013-14 is accordingly dismissed.

21. Insofar as the Ground No.2 raised by the assessee in its Cross Objection for AY 2013-14 relating to the disallowance of Rs.34,940/- made by the Assessing Officer under Section 35D of the Act and confirmed by the learned CIT(A) is concerned, the learned Counsel for the assessee has not pressed the same at the time of hearing. Accordingly, Ground No.2 of the CO is dismissed as not pressed.

22. As regards the issue raised by the assessee in Ground No.3 of its Cross Objection for AY 2013-14 relating to the disallowance made on account of depreciation on staff quarters, it is observed that the claim of the assessee for depreciation @ 10% on staff quarters was restricted by the Assessing Officer at 5% treating the same as “building”. On appeal, learned CIT(A) upheld the action of the Assessing Officer on this issue observing that the depreciation allowed by the Assessing Officer on staff quarters being building was as per the prescribed rate given in the relevant rules. At the time of hearing before the Tribunal, the learned Counsel for the assessee has not raised any material contention to challenge the impugned order of the learned CIT(A) on this issue. We, therefore, find no justifiable reason to interfere with the impugned order of the learned CIT(A) on this issue whereby depreciation @ 5% was allowed on staff quarters as per the prescribed rate applicable to the building. Ground No.3 of the assessee’s Cross Objection for AY 2013-14 is accordingly dismissed.

23. In the result, the appeal of the Revenue for AY 2013-14 and CO of the assessee for AY 2013-14 are treated as partly allowed.

24. Now we take up the appeal of the Revenue for AY 2014-15 being ITA No.2045/Ahd/2018, along with Cross Objection filed by the assessee being CO No. 88/Ahd/2019, which is directed against the order of learned CIT(A)-1, Ahmedabad dated 26.07.2018.

25. As regards the issue involved in Ground No.1 of the Revenue’s appeal for AY 2014-15 relating to disallowance of Rs.94,04,070/- made by the Assessing Officer under Section 14A r.w. Rule 8D while computing the total income of the assessee under the normal provisions of the Act which is sustained by the learned CIT(A) to the extent of Rs.8,66,500/-, it is observed that the same is similar to Ground No.1.1 of the Revenue’s appeal for AY 2013-14 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2013-14, we uphold the impugned order of the learned CIT(A) deleting the disallowance made by the Assessing Officer on account of interest under Section 14A r.w. Rule 8D. Ground No.1 of the Revenue’s appeal for 2014-15 is accordingly dismissed.

26. So far as Ground No.1 of the Cross-Objection raised by the assessee for AY 2014-15 regarding the disallowance made by Assessing Officer under Section 14A r.s. Rule 8D(2)(iii) is concerned, we have already dealt with this issue in the foregoing portion of this order while dealing with assessee’s Cross Objection for AY 2012-13. We accordingly direct the Assessing Officer to re-compute the disallowance on account of common administrative expenses as per Rule 8D(2)(iii) by taking into consideration only those investments from which dividend income was actually earned by the assessee in the year under consideration. Ground No.1 of the Cross Objection of the assessee for AY 2014-15 is thus partly allowed.

27. Insofar as the Ground Nos. 2 & 3 of the Revenue’s appeal for AY 2014-15 relating to the deletion by the learned CIT(A) of the addition of Rs.94,04,070/- made by the Assessing Officer on account of disallowance under Section 14A r.w. Rule 8D while computing the book profit under Section 115JB of the Act is concerned, it is observed that the same is similar to Ground No.1.2 of the Revenue’s appeal for AY 2013-14 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2013-14, we sustain the disallowance made by the Assessing Officer on account of expenses incurred in relation to the exempt income while computing the book profit under Section 115JB of the Act to the extent of 1% of the exempt income actually received by the assessee in the year under consideration. Ground Nos. 2 & 3 of the Revenue’s appeal for 2014-15 are accordingly partly allowed.

28. As regards the issue involved in Ground No.4 of the Revenue’s appeal for AY 2014-15 relating to the deletion by the learned CIT(A) of the addition of Rs.28,44,60,000/- made by the Assessing Officer on account of foreign exchange derivatives loss being a contingent notional loss, it is observed that the same is similar to Ground No.3 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) deleting the addition of Rs.28,44,60,000/- made by the Assessing Officer on account of foreign exchange derivative loss. Ground No.4 of the Revenue’s appeal for AY 2014-15 is dismissed.

29. As regards the issue involved in Ground No.5 of the Revenue’s appeal for AY 2014-15 relating to the deletion by the learned CIT(A) of the addition of Rs.4,37,235/- made by the Assessing Officer on account of excess claim of depreciation on office equipment, it is observed that the same is similar to Ground No.4 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for deprecation at a higher rate of 15% on office equipment and dismiss Ground No.5 of the Revenue’s appeal for AY 2014-15.

30. With regard to the issue raised in Ground No.6 of the Revenue’s appeal for AY 2014-15 relating to the deletion by the learned CIT(A) of the addition of Rs.10,21,114/- made by the Assessing Officer on account of excess claim of depreciation on computer software, it is observed that the same is similar to Ground No.5 of the Revenue’s appeal for AY 2012-13 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2012-13, we uphold the impugned order of the learned CIT(A) allowing the claim of the assessee for depreciation @ 60% on computer software and dismiss Ground No.6 of the Revenue’s appeal for AY 2014-15.

31. Insofar as the ground No.2 raised by the assessee in its Cross Objection for Assessment Year 2014-15 relating to the disallowance made on account of depreciation on staff quarters is concerned, it is observed that the same is similar to Ground No.3 of assessee’s Cross Objection for AY 2013-14 which has been already decided by us in the foregoing portion of this order. Following our conclusion drawn on the similar issue for AY 2013-14, we uphold the impugned order of the learned CIT(A) allowing depreciation @ 5% on staff quarters as per the prescribed rate applicable to the building. Ground No.2 of assessee’s CO for AY 2014-15 is accordingly dismissed.

32. In the result, the appeal of the Revenue for AY 2014-15 and CO of the assessee for AY 2013-14 are treated as partly allowed.

33. In the combined result, Revenue’s appeal for AY 2012-13 is dismissed whereas assessee’s appeal for AY 2012-13 is partly allowed; and, Revenue’s appeals and assessee’s Cross-objections for AYs 2013-14 & 2014-15 are partly allowed.

Order pronounced in the open Court on 31st May, 2022 at Ahmedabad.