DCIT Vs East West Pipeline Private Limited (ITAT Mumbai)
ITAT Mumbai held that initiation of reassessment proceedings on account of change of opinion formed on re-appraisal of the facts already on record and examined during the regular assessment proceedings is liable to be quashed.
Facts- The Assessee is a private limited company engaged in the business of transportation of natural gas through cross country pipeline network.
The case of the Assessee for A.Y. 2015-15 was selected for regular scrutiny and the Assessing Officer completed the assessment u/s. 143(3) of the Act vide order, dated 23/12/2016. Subsequently, after the lapse of 4 years from the end of A.Y. 2014-15, reassessment proceedings were initiated u/s. 147 of the Act by issuance of notice dated 30/03/2021. AO vide order dated 29/03/2022 made addition of INR 602,95,70,778/- disallowing loss pertaining to Cross Currency Swap Contracts (CCS) debited to Profit & Loss Account by the Assessee during the relevant previous year.
CIT(A) quashed the assessment order. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that on the basis of the primary facts disclosed by the Assessee, AO drew inference in favour of the Assessee and accepted Assessee’s claim. Subsequently, reassessment proceedings were initiated on account of change of opinion formed on re-appraisal of the facts already on record and examined during the regular assessment proceedings which was contrary to the judgment of Hon’ble Supreme Court in the case of CIT Vs. Kelvinator India Ltd.: [2010] 320 ITR 561 (SC).
Held that there was no failure on the part of the Assessee to disclose the primary facts and therefore, in view of the provisions contained in First Proviso to Section 147 of the Act re-assessment proceedings could not have been initiated in the case of the Assessee after the expiry of 4 years for the end of relevant assessment years.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. By way of the present appeal the Revenue has challenged the order, dated 30/03/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2014-15, whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 29/03/2022, passed under Section 147 read with Section 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
2. The Revenue has raised the following grounds of appeal:
“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in law in quashing the reassessment proceedings u/s 147 of the Income Tax Act, 1961 holding reopening of assessment as change of opinion when on the issue of a loss of Rs.6,04,35,06,392/- claimed by assessee company towards foreign exchange loss on transaction and translation the AO did not pass his opinion either during the original assessment proceedings or while passing the assessment order u/s 143(3) of the Act?
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in law in quashing the reassessment proceedings u/s 147 of the Income Tax Act, 1961 on the above ground without appreciating the ratio of Supreme Court in the case of M/s. Phool Chand Bajrang Lal [1993] 203 ITR 456 (SC), wherein it has been held that the Assessing Officer would have jurisdiction to reopen concluded assessment when the impugned transaction which led to reopening is not as per law and that mere disclosure of that transaction at the time of original assessment proceedings is not a true and full disclosure?
3. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in law in quashing the reassessment proceedings u/s 147 of the Income Tax Act, 1961 without appreciating the ratio of the Bombay High Court in the case of M/s. Consolidated Photo &Finvest Ltd. Vs. ACIT (2006) 151 Taxman 41 (Delhi) wherein it is held that action under section 147 was permissible even where the AO gathered his reasons to believe from the very same record as had been the subject matter of completed assessment proceeding?
4. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in law in quashing the reassessment proceedings u/s 147 of the Income Tax Act, 1961 without appreciating that the Hon’ble Apex Court has held in ALA Firm [1991] 55 Taxman 497 (SC)) and Hon’ble Gujarat High Court in PrafulChunilal Patel [1999] 236 ITR 832 (Guj.) have upheld the legal proposition that where mistake in assessment is caused by either an erroneous construction of transaction or due to its non-consideration, or caused by a mistake of law applicable, reopening would not amount to being on account of change of opinion and ought to be treated as valid even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based?
5. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in deleting disallowance of the currency swap loss incurred on transactions under the Cross Currency swap (CCS) contracts amounting to Rs. 602,95,70,7781-without appreciating that transactions entered into by the assesse company under these contracts are speculative in nature which do not fall under the exceptions mentioned in proviso under 43(5) of the Act and therefore the AO had correctly denied adjustment of this speculation loss against the normal business income as per the provisions of section 73(1) of the Income Tax Act, 1961?
6. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in deleting disallowance of the currency swap loss of Rs. 602,95,70,778/- without appreciating the fact that the underlying rupee loans availed by the assessee were towards financing pipeline project and the conversion of rupee loan into foreign currency loans through CCS deals resulted in a loss which is on capital account and hence the same should have been held as capital loss?
7. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in deleting disallowance of the currency swap loss of Rs. 602,95,70,778/-without appreciating the fact that the impugned CCS deals were not executed to reduce the financial cost burden post commissioning of operations but they are principally aimed at reducing the principal loan burden and hence capital in nature?
8. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in deleting disallowance of MTM losses of Rs. 394,29,70,479/- also which are part of the above Currency swap loss by relying on the decision of Hon’ble Supreme Court in the case of ONGC and Woodward governor without appreciating that this loss is not on account of restatement of revenue items such as current liabilities and current assets! stocks etc. whereas this loss incurred by the assessee is on capital account‖
3. The relevant facts in brief are that the Assessee is a private limited company engaged in the business of transportation of natural gas through cross country pipeline network. The Assessee filed its original return of income for the Assessment Year 2014-15 on 28/11/2014. The case of the Assessee was selected for regular scrutiny and the Assessing Officer completed the assessment under Section 143(3) of the Act vide order, dated 23/12/2016. Subsequently, after the lapse of 4 years from the end of the Assessment Year 2014-15, reassessment proceedings were initiated under Section 147 of the Act by issuance of notice dated 30/03/2021. In response, the Assessee filed return of income on 26/04/2021. Thereafter, on obtaining a copy of the reasons recorded for reopening assessment, the Assessee filed objections against initiation of reassessment proceedings which were rejected by the Assessing Officer, vide order dated 08/03/2022. The Assessing Officer, thereafter, proceeded to frame assessment under Section 147 read with Section 144B of the Act and vide order dated 29/03/2022 made addition of INR 602,95,70,778/- disallowing loss pertaining to Cross Currency Swap Contracts (for short ‘CCS’) debited to Profit & Loss Account by the Assessee during the relevant previous year.
4. Being aggrieved, the Assessee preferred appeal before the CIT(A) against the Assessment Order, dated 29/03/2022, passed under Section 147 read with Section 144B of the Act challenging the validity of the re-assessment proceedings and the also challenging the addition made by the Assessing Officer on merits. Agreeing with the Assessee, the CIT(A), vide order dated 30/03/2023, quashed the assessment order, dated 29/03/2022, passed under Section 147 read with Section 144B of the Act holding that the reassessment proceedings were initiated without satisfying the requirements of Section 147 of the Act. Despite holding as aforesaid, the CIT(A) proceeded decided the issue on merits in favour of the Assessee holding that the Assessee was entitled to claim deduction for loss of INR 604,35,06,392/- pertaining to CCS under Section 37(1) of the Act as the same was a revenue loss. The Assessing Officer further held that the aforesaid loss was not speculative in nature, and therefore, fell outside in the ambit of the provisions contained in Section 43(5) read with Section 73 of the Act.
5. Being aggrieved by the above relief granted by the CIT(A), the Revenue is in appeal before this Tribunal on the grounds reproduced in paragraph 2 above which are taken up hereinafter in seriatim.
Ground No. 1 to 4
6. Ground No. 1 to 4 raised by the Revenue are directed against the order of the CIT(A) quashing the Assessment Order, dated 29/03/2022, passed under Section 147 read with Section 144B of the Act.
7. The facts relevant to adjudication of Ground No. 1 to 4 as emanating from the perusal of record are as follows. The Assessee was engaged, inter alia, in the business of setting up and operating cross country pipeline for transportation of natural gas from Kakindada in Andhra Pradesh to Bharuch in Gujarat. The Assessee had outstanding borrowings in the form of Indian Rupee loan and debentures aggregating to around INR 8,055/- Crores. The Assessee entered into CCS with authorised banks as counterparties in accordance with the guidelines issued by the Reserve Bank of India which permitted a domestic non-retail corporate entity to convert its Indian Rupee (INR) loan/liability (having comparatively higher interest rate) to foreign currency liability (having comparatively lower interest rate linked to LIBOR but having attached foreign exchange fluctuation risk) for the purpose of reducing the finance cost burden. The net effect of CCS entered into by the Assessee with the counterparty-banks was that on one hand, the Assessee granted Indian Rupee loan to the counterparties (earning interest income to service Indian Rupee loan liability) while on the other hand, the Assessee borrowed USD equivalent of the aforesaid INR loan granted by the Assessee to the counterparties at a comparatively lower interest rates linked to LIBOR and in the process reduced the effective interest cost. Thus, the aforesaid transaction resulted in contractual assumption of rights and obligations by the Assessee and the counterparties without there being actual exchange of money representing the loan amount granted/taken. During the relevant previous year, the USD/INR movement was adverse to the Assessee and therefore, the Assessee debited loss of INR 602,95,70,778/- to the Profit & Loss Account which consisted of loss of INR 208,66,00,299/- incurred and paid by the Assessee upon settlement of CCS during the relevant previous year and loss of INR 394,29,70,479/- being mark to market loss booked in relation to CCS of INR 4,500/- Crores (equivalent to USD 864.82 Million) outstanding as on 31/03/2014.
8. In the original return of income the Assessee had claimed deduction for ‘Other Expenses’ of INR 906.45 Crores debited to the Profit & Loss Account. Note No. 23 forming part of Notes on Financial Statements provided break-up of ‘Other Expenses’ into two subheads – ‘Operation and Maintenance Expenses’ and ‘Administration Expenses’. The break-up of Administration Expenses of INR 726.56 Crores included ‘Net Loss/(Gain) on Foreign Currency’ of INR 604.35 Crores.
9. When the case of the Assessee was selected for regular scrutiny, notice dated 14/07/2016, was issued to the Assessee under Section 142(1) of the Act and in response thereto, the Assessee filed reply to letter, dated 17/08/2016, stating that the long term provisions represented mark to market provisions for derivative transactions and furnished a statement showing details of ‘Net Loss/(Gain) on Foreign Currency transaction and translation’ which read as under:
