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2025 Supreme(Online)(ITAT) 11745
INCOME TAX APPELLATE TRIBUNAL (CHENNAI BENCH)
Manu Kumar Giri, Judicial Member, Amitabh Shukla, Accountant Member
IL & FS Tamil Nadu Power Company Limited – Appellant
Versus
Deputy Commissioner of Income Tax – Respondent
ITA No.1332/Chny/2024, Assessment Years: 2018-19 | ITA No.1694/Chny/2024, Assessment Years: 2018-19
For the Appellants/Petitioners: Shri.Ashwin, CA, Shri Shivanand K Kalakeri, CIT
For the Respondents: Shri.Ashwin, CA, Shri Shivanand K Kalakeri, CIT
Forex gain on forward exchange contract hedging capital foreign loan is taxable as independent revenue receipt, not capital, per ICDS and accounting treatment; no section 14A disallowance absent exempt income.
Headnote:(A) Income Tax Act, 1961 - Sections 14A, 43AA, 28(iv), Income Computation and Disclosure Standards (ICDS VI, IX) - Forex gain on forward exchange contract to hedge foreign currency loan to subsidiary - Gain held taxable as revenue receipt despite assessee's claim of capital nature, as contract independent of underlying loan transaction; recognised as revenue in financial statements; ICDS VI mandates recognition as income; Sec.43AA treats forex fluctuations as income. (Paras 5-9)
(B) Income Tax Act, 1961 - Section 14A r.w. Rule 8D - Disallowance of expenses relatable to exempt income - No disallowance where no exempt income earned during year. (Paras 18-21)
(C) Income Tax Act, 1961 - IND AS adjustments - Finance costs, notional gains on derecognition of financial liabilities, closing stock valuation - Remitted for fresh adjudication due to inadequate facts and non-compliance by assessee. (Paras 10-16, 27)
Facts of the case:
Assessee, in electricity generation business, claimed forex gain of Rs.19.90 crore on forward contract hedging USD 60 million loan to foreign subsidiary as capital receipt; disputed additions on finance costs (Rs.80.85 crore), derecognition gain (Rs.38.04 crore), section 14A disallowance (Rs.225.21 crore), liquidated damages (Rs.42 crore), closing stock (Rs.362.47 crore).
Findings of Court:
Forex gain upheld as taxable revenue; section 14A disallowance deleted; other issues remitted to lower authorities for verification with complete details.
Issues: (1) Taxability of forex gain on forward contract linked to capital loan; (2) Applicability of section 14A absent exempt income; (3) Allowability of IND AS-based finance costs, derecognition gains, stock valuation.
Ratio Decidendi: Forex forward contract gain is independent revenue transaction, not inheriting capital character of hedged loan; assessee's accounting recognition as revenue and ICDS provisions confirmatory; no section 14A disallowance without exempt income; incomplete facts warrant remand.
Result: Assessee's appeal partly allowed; Revenue's appeal partly allowed for statistical purposes.
ORDER
PER AMITABH SHUKLA, A.M :
The below mentioned appeals have been filed by the appellant assessee and Revenue for AY-2018-19 contesting the order of Ld. First Appellate Authority indicated in Column-E, herein below:-
Both the appeals filed by the assessee and Revenue are concerning same assessment year and hence for the purposes of convenience were heard together and are being adjudicated together.
ITA No.1332/Chny/2024, Assessment Years - 2018-19
2.0 The first issue raised by the assessee through its grounds of appeal is regarding the violation of principles of natural justice stating that proper opportunity of being heard was not given. The Ld. Counsel for the assessee submitted that emails were sent on the email address of former employee and hence the non-compliance to the Ld. AO’s notices was justified.
3.0 The Ld. DR placed reliance on the order of lower authorities.
4.0 We have heard rival submissions in the light of material available on records. The argument put forth by the assessee is not in conformity with facts on records. Apparently a case is made out that the show cause notices sent by the Ld.AO were inaccessible having been sent on the email Ids of ex-employees. At the outset, the argument per se is flawed because revenue is only bound to send notices to taxpayers on details provided by it. In the instant case, the assessee has voluntarily chosen to give email Id of its employee and therefore no blame can be attached on revenue for sending its communication to the said email Id. Further, in case the employee had exited the appellant company, then it was for the appellant assessee to have informed the Ld.AO of the changes by giving an alternate email Id. Consequently, the blame fastened by the assessee on revenue’s shoulders do not survive. We have also noted that contest of the assessee suffers from another incorrect fact. The Ld.AO on page 2 of his order recorded that “…In response to notices, assessee had made return submissions on the ITBA Portal. During the relevant year, the assessee derived income from the heads profit and gains from business or profession….”. It goes on to indicate the assessee had filed its submissions through the ITBA Portal and was in touch with the communication mode thereof. Accordingly, we do not find any merit in the arguments of the assessee. The grounds of appeal raised by the assessee regarding violation of principles of natural justice are therefore dismissed.
5.0 The next issue raised by the assessee through its grounds of appeal is regarding the addition of Rs.19,90,79,300/- made by the Ld.AO on account of foreign exchange forward contracts and its confirmation by the Ld. First Appellate Authority. The Ld. Counsel for the assessee submitted that the appellant had entered into foreign currency forward contract on 29 March 2017 to hedge the risk on repayment of loan of USD 60 million given to its subsidiary Company, IL&FS Maritime Offshore Pte Ltd (Singapore Entity). Since, the forex gain on the above contract was in connection to hedge the loan given to subsidiary company, it was treated as capital in nature and deducted while computing taxable income. It was argued that the Appellant is not in the business of providing loans but in the business of generation and distribution of electricity. Loan extended is on capital account. It is the case of the assessee that repayment of the principal portion of the loan provided by the appellant would constitute a capital receipt. To protect the foreign currency exposure, the appellant is required to enter into forward exchange contracts. In support of its contentions the Ld. Counsel placed reliance upon the decision of the Hon’ble Apex Court in the case of Sutlej Cotton Company Limited 116 ITR 1 and Tata Locomotive and Engineering Company Limited 60 ITR 405.
6.0 The Ld. DR vehemently argued in favour of order of the Ld.AO and the action of Ld. CIT(A) in affirming it.
7.0 We have heard rival submissions in the light of material available on r
