2023 (3) TMI 34 - AT - Income Tax

Tribunal allows swap contract & mark-to-market losses for AY 2015-16 & AY 2016-17. Consistent practices upheld.

The Tribunal upheld the CIT(A)'s decision to delete the disallowances of swap contract and mark-to-market losses for AY 2015-16 and AY 2016-17. The ... Disallowance of swap contract loss - assessee during the year under consideration to refinance its project availed external commercial borrowing at the rate of LIBOR + 4.4% - AO held that mark to market loss on the derivative instrument held by the assessee as on balance sheet is not real but a notional loss for the reason that there was no actual transaction carried out by the assessee - assessee to hedge itself from the fluctuation interest rate entered into derivative contract in the nature of interest rate swap with Standard Chartered Bank on which assessee incurred loss - HELD THAT:- We note that identical issue came up before this tribunal in case of sister concern of the assessee namely Adani Petronet (Dahej) Port Pvt. Ltd for A.Y. 2011-12 [2022 (6) TMI 121 - ITAT AHMEDABAD] as relying on M/s. Adani Hazira Port Pvt. Ltd, [2022 (4) TMI 850 - ITAT AHMEDABAD] where the issue has been decided in favour of the assessee and against the Revenue as relying 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. 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 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 of the Revenue’s appeal. Issues Involved:1. Disallowance of swap contract loss for AY 2015-16.2. Disallowance of mark-to-market loss for AY 2016-17.Detailed Analysis:Disallowance of Swap Contract Loss for AY 2015-16:Background: The assessee, a private company engaged in energy and power generation, availed external commercial borrowing (ECB) at LIBOR + 4.4% and entered into an interest rate swap contract to hedge against interest rate fluctuations. The assessee incurred a loss of Rs. 91.91 crores, which included a realized loss of Rs. 40.62 crores and a mark-to-market (MTM) loss of Rs. 51.30 crores.Assessment Officer's (AO) Position: The AO disallowed the MTM loss of Rs. 91.91 crores, considering it notional and not allowable under business and profession income, citing CBDT Instruction No. 03/2010.CIT(A)'s Decision: The CIT(A) deleted the disallowance, distinguishing between realized and unrealized losses. The CIT(A) referenced previous decisions, including those of the jurisdictional ITAT and High Court, and noted that similar disallowances had been deleted in prior assessments of the assessee and its group entities. The CIT(A) concluded that:- Realized loss of Rs. 40.62 crores is not notional and thus not subject to CBDT Instruction 3/2010.- Unrealized MTM loss of Rs. 51.30 crores was allowable based on consistent accounting practices and judicial precedents.Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, referencing similar cases, including Adani Petronet (Dahej) Port Pvt. Ltd and Adani Hazira Port Pvt. Ltd, where MTM losses on swap contracts were allowed. The Tribunal found no distinguishing features or contrary judicial pronouncements to support the Revenue's case.Disallowance of Mark-to-Market Loss for AY 2016-17:Background: The issue for AY 2016-17 was identical to that of AY 2015-16, involving the disallowance of MTM loss of Rs. 25.45 crores.Tribunal's Decision: The Tribunal applied the findings from AY 2015-16 to AY 2016-17, dismissing the Revenue's appeal. Both parties agreed that the findings for AY 2015-16 would apply to AY 2016-17.Conclusion:The Tribunal dismissed both appeals by the Revenue for AY 2015-16 and AY 2016-17, upholding the CIT(A)'s decisions to delete the disallowances of swap contract and MTM losses. The judgments were based on consistent accounting practices, judicial precedents, and the differentiation between realized and notional losses.