TaxTMI 
TaxTMI 
2023 (1) TMI 203
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....he AO has issued notices calling for specific queries which, inter-alia, included the issues that are the subjectmatter ofnotice issued under section 263 of the Act.The Learned PCIT in the SCN has also accepted to the examination of the said fact by the AO. 3. TheLearned Principal Commissioner of Income Tax, Chennai-3 erred in law stating that the assessment order passed by the AO is prejudicial to Interest of Revenue. 4. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate that the twin conditions of Section 263 should be satisfied in order to invoke Section 263. 5. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate that there is no tax effect liability in order to invoke section 263 6. The Learned Principal Commissioner of Income Tax, Chennai -3 failed to appreciate that Hon'ble AAR has not provided any ruling whether the treatment adopted by the appellant is correct or not. 7. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate the fact that notional adjustments do not have bearing under the Act. 8. Without prejudice to the above grounds, the purpose of invoking the 263 proce....
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.... this writ petition is disposed of. No costs. Consequently, connected miscellaneous petition is closed. Accordingly, the appeal has been placed before us for hearing and disposal in a time-bound manner as directed by Hon'ble Court. Arguments before us 3. The Ld. AR, assailed the revision, inter-alia, on the ground that issue as flagged in the revisional order was extensively examined and verified by Ld. AO during the course of regular assessment proceedings and it was not the case that no enquiries were made by lower authorities. The Ld. AO had already adopted a view which was perfectly valid / justified and therefore, the revision was bad-in-law. Another argument raised by Ld. AR is that the issue for which show-cause notice was issued by revisional authority was ultimately withdrawn whereas other issue was taken up without affording any opportunity of hearing to the assessee which is contrary to statutory mandate of Section 263. To support the arguments, reliance has been placed on various judicial pronouncements, the copies of which have been placed on records. The Ld. AR also filed copies of computation of income etc. The Ld. Sr. DR, on the other hand, justified the revis....
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....erating financial asset The Company has entered into a Power Purchase Agreement ('PPA') with Tamil Nadu Generation and Distribution Corporation (TANGEDCO), formerly known as Tamil Nadu Electricity Board for generation and sale of power. During the subject AY, the Company has adopted Indian-Accounting Standards ('Ind-AS') for preparation and presentation of Financial statements. Pursuant to adoption of Ind-AS, the arrangement of the Company has been regarded to be in the nature of Service Concession Agreement. Consequently, the Company has derecognized its entire infrastructure in the nature of fixed asset and recognized a financial asset to the extent it has an unconditional right to receive consideration in return for the construction of the infrastructure and an intangible right in relation to the residual interest in the infrastructure on expiry of the PPA. The aforesaid de-recognition of fixed assets, recognition of OFA and recording notional foreign fluctuation difference in respect of OFA, as per books of accounts, is only for the purpose of presentation of financial statements. Given the same, such adjustments do not any bearing on the computation....
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....me under the provisions of the Act. In this regard, the Company wishes to highlight the relevant accounting principles basis which the aforesaid accounting treatment has been undertaken as under- 1.1 Accounting principles basis which arrangement of the Company has been regarded to be in the nature of the Service Concession Agreement Background SCA are arrangements between a public sector entity (grantor) and a private sector company (operator) for construction of infrastructure assets, in which the grantor controls or regulates the services provided with the infrastructure, their price, and any significant residual interest in the infrastructure. This public-to-private model is a popular model especially in the context of developing toll roads, bridges, airports and power generation, amongst others. Accounting Principles Initial Recognition Under the erstwhile Accounting Standards * Under the erstwhile Accounting Standards, there is no specific guidance for treatment of arrangements in the nature of SCA, Given the same, the Company has recognized its entire power plant infrastructure as Fixed Assets in the books of accounts and depreciation at the applicable ra....
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....ing the total income. 1.2 Treatment adopted under the provisions of the Act The Company submits that the entire items of Fixed assets capitalized under the requirement of the erstwhile Accounting Standards since inception has been considered as depreciable Asset forming part of the 'Block of Assets' and thus being eligible, depreciation is claimed thereon as per the applicable rates under Section 32 of the Act. In other words, the same treatment as has being given for tax purposes before adoption of Ind AS has been continued to be given even post Ind AS. 2. Fair value gain on financial instruments at fair value through profit and loss * As mentioned above, the Company has adopted Ind AS for preparation and presentation of financial statements. Under the Ind AS 109 accounting methodology, investments in mutual funds is considered as 'Financial Asset' and the same is required to be presented at fair value in the financial statements with the difference adjusted to P&L. * Accordingly, notional difference arising on fair valuation amounting to INR 5,419,955 credited to the P&L has been excluded for computing the taxable income of the Company under the ....
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....19 had rejected the application filed by the assessee company as not maintainable. In this context, it is seen from the assessment records that the contractual revenue attributed to the 'OFA' and the notional retranslation difference were reduced from the 'P&L' but considered for computing book profits under MAT by the assessee company for A.Ys. 2016-17 as under: - A.Y. Adjustments reduced from P&L Amount reduced from P&L (in Rs.) 2016-17 1) Forex gain on financial assets. 39,58,49,416/- 2) Fair Value gain on 'financial instruments at fair value through profit or loss. 54,19,955/- 4. It is noticed that the during the scrutiny proceedings for A.Y.2016-17, the accounting treatment of difference on account of fair value measurement of the OFA and Fair value gain on financial instruments at fair value through profit and loss had been examined. This aspect of reducing the difference on account of fair value measurement of the OFA and fair value gain on financial instruments at fair value through profit and loss while computing the company's taxable income under the normal provisions of the Act but offering to tax the difference on account of fair value ....
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.... an asset used to provide public services in a SCA that is either- -provided by the operator (construct / develop / acquire or existing asset) -provided by the grantor (existing asset or update) * Under Appendix A of Ind-AS 11 - Construction Contracts (presently Appendix C of Ind-AS 115 - Revenue from Contracts with Customers), following are the conditions for application of a public-toprivate SCA- -The grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and -The grantor controls through ownership, beneficial entitlement or otherwise, any significant -residential interest in the infrastructure at the end of the term of the arrangement. * Given that the aforesaid conditions are satisfied in the Company's case, for accounting purposes under the Ind-AS, the Company has assumed the role of the Operator while TANGEDCO has assumed the role of the Grantor in relation to the subject PPA. * B. Accounting treatment adopted * In light of above and further as per the requirement of the applicable Ind-AS, the Company has, inter-alia, effected the following adjustments for preparing it....
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....the transaction under consideration is not taxable and accordingly proposed to not make any adjustment to the return of income filed by the Company. * Thus, in the instant case, the learned AO had perused all the relevant information/ documents submitted during the proceedings and had accordingly accepted the returned income of the Company. In other words, no adjustment was undertaken to the returned income. D. Proceedings before the Authority for Advance Rulings ('AAR') * As you goodself would appreciate from examination of the scrutiny assessment proceedings records, the subject transaction has been reduced for computing the taxable income in normal provisions of the Act. However, with respect to MAT provisions, the Company has not made any adjustments to the book profits. * Given the above, post completion of scrutiny assessment proceedings of the subject AY, in order to obtain clarity on the taxability of transaction under consideration under the MAT provisions and also to obtain certainty to the tax position adopted for normal provisions, the Company had approached the Hon'ble AAR for determination of the tax liability. * However, the Hon'ble AAR vid....
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....hy the transaction under consideration should not be taxed under section 43AA of the Act. * The Company in this connection objects to your goodself's action of initiating revisionary proceedings based on the submissions on legal aspects as well on merits in the ensuing paragraphs In the said background, the assessee assailed the revision of the order on the ground that once Assessing Officer exercising his quasi-judicial function has completed the assessment proceedings, the power of revision u/s 263 is to be used with utmost precaution after examining the issues from all angles subject to the satisfaction of the primary twin conditions that the order was erroneous as well as prejudicial to the interest of the revenue. In the present case, Ld. AO had called for requisite details during the course of assessment proceedings which were duly responded to by the assessee and accepted by Ld. AO with due application of mind. It could not be said that the assessment was framed without making enquiries or verification which should have been made. In fact, it was the findings of Hon'ble ARR that the issue had already been deliberated, discussed and concluded before the tax authorities. Ac....
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....t as per Ind-AS and recognized certain income in the financial statements. From the terms of Power Purchase Agreement (PPA), it was clear that the assessee was entitled to calculate fixed capacity charges comprising value of approved capital cost, RoE etc. in terms of USD to safeguard its investment and charge the purchaser i.e., TANGEDCO accordingly, Thus, it is clear that the component of forex gain is related to fixed cost (which is taken into account while billing) and therefore it is primarily a revenue item. Accordingly, the assessee has considered the same as revenue in its Profit & Loss Account. Further, the assessee was entitled for return of 16% calculated in USD and therefore, the bills raised in INR would not impact its revenue which is recognized on the basis of USD as per Power Purchase Agreement (PPA). 6.6 Further the assessee was charging depreciation on the power plant as per AS-6 but switched over to revised AS-10 as AS-6 was withdrawn by the ICAI. Therefore, the plea that derecognition of asset would not have effect on income under normal provisions would have no relevance. The issue under consideration was recognition of revenue and not the claim of depreciatio....
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....do the assessment with following directions: - 8. In the light of the finding that the order of assessment is erroneous so far as it is prejudicial to the interest of revenue at paragraphs 6 & 7 above, the order of assessment dated 19.12.2018 is hereby set-aside to the file of the Assessing Officer for the limited purpose of examining the issue of the foreign exchange gain on OFA as mentioned in para 3 of the show cause notice and the deduction claimed in the computation of income under the head, "income from Business or Profession". The assessing officer is directed to pass appropriate order after giving reasonable opportunity to the assessee. The AO is further directed to look into the claim of the assessee that in the subsequent years it has reversed the forex losses. Aggrieved as aforesaid the assessee is in further appeal before us. Our findings and Adjudication 7. Upon perusal of assessee's computation of income as placed on record (page nos. 37 to 41), it could be seen that assessee's Profit as per financial statements is Rs.4515.36 Lacs. While computing income under normal provisions, the assessee has added back an amount of Rs.57.63 Lacs as 'amortization of financia....
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....but the same should have been subjected to further enquiries since it would significantly impact the revenue recognition for the assessee under the contracts. We find that this element of enquiry is missing in the present case. Upon perusal of assessee's replies as made during the course of assessment proceedings, we arrive at a conclusion that though the initial query was raised by the Ld. AO and elaborate replies were furnished by the assessee, however, the element of application of mind by Ld. AO, on the issue, is missing. 9. Another argument of Ld. AR is that in the show-cause notice, the provisions of Sec.43AA were invoked by Ld. Pr. CIT but the same was ultimately held to be not applicable. In such a case, Ld. Pr. CIT was obligated to issue fresh notice before proceedings further in the matter. However, this plea does not impress us in view of the fact that invocation of Sec.43AA was only one of the facets of the issue and the sole issue leading to revision of order was forex gain / losses as adjusted in the normal income. The Ld. Pr. CIT, in para-5, has merely deleted the reference to Sec.43AA in the show-cause notice but has remained confined to this issue only. Therefore,....
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....on 263 that confers suo-motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under one provision cannot trench upon the powers available under another provision of the Act. In this regard, it must be specifically noticed that against an order of assessment, so far as the revenue is concerned, the power conferred under the Act is to reopen the concluded assessment under section 147 and/or to revise the assessment order under section 263. The scope of the power/jurisdiction under the different provisions of the Act would naturally be different. The power and jurisdiction of the revenue to deal with a concluded assessment, therefore, must be understood in the context of the provisions of the relevant sections. While doing so, it must also be borne in mind that the legislature had not vested in the revenue any specific power to question an order of assessment by means of an appeal. Regarding applicability of Section 263, what has to be seen is that a satisfaction that an order passed by the Authority under the Act is err....