2021 (4) TMI 481 - AT - Income Tax

Appeal Dismissed: ITAT Upholds Deletions on SWAP Loss & Gratuity Provision.

D.C.I.T., Cir. 1 (1) (1), Ahmedabad. Versus Adani Power Maharashtra Ltd.

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of additions related to SWAP loss and provision for gratuity. The ITAT emphasized ... Disallowance of SWAP loss under section 37(1) - CIT-A deleted the addition - HELD THAT:- This ITAT involving identical facts and circumstances in the case of DCIT vs. Elitecore Technology Pvt Ltd [2017 (4) TMI 394 - ITAT AHMEDABAD] has decided the issue in favour of the assessee stating that 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 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. No nfirmity in the order of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed. Disallowance of provision of gratuity - CIT-A deleted the addition - HELD THAT:- As the provision for the gratuity in the year under consideration stands at ₹ 2,98,71,626/- which can be verified from note 26 of the audited balance sheet placed on page 22 of the paper book. As such the sum of ₹ 15,74,957/- represents the amount paid during the year towards the opening balance of gratuity provision which not claimed as expenditure in the year under consideration. However, the auditor inadvertently in his tax audit report has recorded the amount of disallowance at ₹ 3,14,46,585/- only. Accordingly we hold that there cannot be any question of disallowing the payment towards the opening balance represented under the provision for gratuity. At the time of hearing, the learned DR has not brought anything on record contrary to the finding of the learned CIT (A). Accordingly, we do not find any infirmity in the order of learned CIT (A) - Decided against revenue. Issues Involved:1. Deletion of addition relating to disallowance of SWAP loss under section 37(1) of the Income Tax Act.2. Deletion of addition made on account of disallowance of provision for gratuity.Issue-wise Detailed Analysis:1. Deletion of Addition Relating to Disallowance of SWAP Loss under Section 37(1) of the Income Tax Act:The Revenue challenged the deletion of an addition of Rs. 20,68,00,000/- made by the Assessing Officer (AO) concerning the loss on interest rate swap contracts. The assessee, engaged in energy and power generation, had taken foreign currency loans subject to LIBOR +4.40% interest. To mitigate the risk of fluctuating LIBOR rates, the assessee entered into an interest rate swap contract with Standard Chartered Bank, converting the floating rate to a fixed rate. The assessee incurred a loss of Rs. 20.68 crores, of which Rs. 11.26 crores was realized and Rs. 9.41 crores was marked to market (M2M) valuation.The AO treated the M2M loss as notional, citing CBDT Circular No. 3/2010, and disallowed the entire loss. However, the CIT(A) deleted the addition, observing that the Rs. 11.26 crores was a realized loss and not notional. The CIT(A) further noted that the M2M losses were actual losses as per the Supreme Court ruling in CIT v. Woodward Governor India P. Ltd. and consistently followed accounting standards.The ITAT upheld the CIT(A)'s order, referencing the Supreme Court's decision and the consistent accounting treatment by the assessee. The ITAT noted that similar issues in other cases, such as Adani Enterprises Limited and Heavy Metal and Tubes Limited, were decided in favor of the assessee. The ITAT also emphasized that CBDT instructions cannot override Supreme Court decisions, as reaffirmed by the Gujarat High Court in the case of Elitecore Technologies Pvt. Ltd.2. Deletion of Addition Made on Account of Disallowance of Provision for Gratuity:The Revenue contested the deletion of an addition of Rs. 15,74,957/- made by the AO concerning the provision for gratuity. The AO noted a discrepancy in the tax audit report, which disallowed Rs. 3,14,46,585/- under section 40A(7) of the Act, but the assessee disallowed only Rs. 2,98,71,626/- in the income computation, leaving a shortfall of Rs. 15,74,957/-.The CIT(A) deleted the addition, clarifying that the Rs. 15,74,957/- represented the payment towards the opening balance of gratuity provision and was not claimed as an expense in the current year. The CIT(A) referenced the audited accounts and ledger details to support this conclusion.The ITAT upheld the CIT(A)'s decision, noting that the provision for gratuity in the year under consideration was Rs. 2,98,71,626/- and the Rs. 15,74,957/- was related to the opening balance, not claimed as an expense. The ITAT found no contrary evidence presented by the Revenue and directed the AO to delete the addition.Conclusion:The ITAT dismissed the appeal filed by the Revenue, upholding the CIT(A)'s deletions of the additions related to the SWAP loss and the provision for gratuity. The ITAT emphasized adherence to consistent accounting practices and judicial precedents, including Supreme Court rulings, over CBDT instructions. The order was pronounced on 17/03/2021 at Ahmedabad.