M/s. Aban Offshore Limited, CHENNAI V. DCIT, CHENNAI

ITA 1159/CHNY/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96675 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 26-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-05-2012
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Residential status; Double taxation relief; Opportunity of being heard; Principle of natural justice; Bonafide belief; Transactions in derivatives; Earning of tax free income; Deemed to accrue or arise in india; Speculation loss; Revised return; Revenue expenditure; Capital expenditure
• Section: 14A; 43(5); 28; 90

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI , ! ' . #$ , & '( ) [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ] ./ I.T.A.NO.1159/MDS/2012 / ASSESSMENT YEAR : 2008-09 M/S ABAN OFFSHORE LTD 113, PANTHEON ROAD EGMORE, JANPRIYA CHEST, CHENNAI 600008 VS. THE DY. COMMISSI ONER OF INCOME-TAX COMPANY RANGE I CHENNAI [PAN AAACA 3012 H ] ( *+ / APPELLANT) ( ,-*+ /RESPONDENT) ./ I.T.A.NO.1343/MDS/2012 / ASSESSMENT YEAR : 2008-09 THE ASST. COMMISSIONER OF INCOME-TAX COMPANY RANGE I CHENNAI VS. M/S ABAN OFFSHORE LTD 113, PANTHEON ROAD EGMORE, JANPRIYA CHEST, CHENNAI 600008 ( *+ / APPELLANT) ( ,-*+ /RESPONDENT) ASSESSEE BY : SHRI VIKRAM VIJAYARAGHAVAN, ADVOCATE DEPARTMENT : DR MILIND M ADHUKAR BHUSARI, CIT / DATE OF HEARING : 26 - 11 - 2015 / DATE OF PRONOUNCEMENT : 31 - 1 2 - 2015 ITA NO.1159 & 1343/12 :- 2 -: . / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, CHENNAI, 28.3.2012, FOR ASSESSMENT Y EAR 2008-09. 2. FIRST WE TAKE UP ASSESSEES APPEAL I.T.A.NO.1159/M DS/2012. 3. THE ONLY GROUND IN ASSESSEES APPEAL IS THAT THE CI T(A) ERRED IN RESTRICTING THE ASSESSEES CLAIM OF RELIEF U/S 90 OF THE ACT OF ` 224,67,411/- TO THE EXTENT OF TAX PAYABLE IN INDIA ON NET INCOME OF ` 516,93,732/- I.E DIFFERENCE BETWEEN INTEREST EARNED FROM M/S AHPL AND INTEREST PAID ON BORROWINGS MADE FOR ADVANCING THE LOANS TO M/S AHPL. 4. THE FACTS OF THE ISSUE ARE THAT IN THE COURSE OF AS SESSMENT, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS CLAIMED CREDIT FOR AN AMOUNT OF ` 2,24,67,411/- TOWARDS WHITHHOLDING TAX DEDUCTED BY THE SINGAPORE TAX AUTHORITIES. THE ASSESSEE HAS E ARNED INTEREST INCOME OF ` 22,47,07,167/- FROM ABAN HOLDINGS PTE LTD(AHPL), A COMPANY REGISTERED IN SINGAPORE. M/S AHPL HAS DEDU CTED TAX OF SGD EQUIVALENT TO INDIAN ` 2,24,67,411/- UNDER SINGAPORE INCOME TAX ACT. THE ASSESSING OFFICER OBSERVED THAT THERE WAS NO DI SPUTE REGARDING THE RECEIPT OF INTEREST INCOME AND THE QUANTUM OF W ITHHOLDING TAX ITA NO.1159 & 1343/12 :- 3 -: DEDUCTED IN SINGAPORE AS PER DTAA. THE ASSESSING O FFICER STATED THAT THE ASSESSEE HAS NOT SHOWN THAT IT HAD RECEIVED FR OM AHPL IN EXCESS THE INTEREST EXPENDITURE CLAIMED IN ITS PROFIT & LO SS ACCOUNT, AFTER TAKING INTO ACCOUNT FOREIGN EXCHANGE LOSSES, EXPENS ES ON FCCBS. IT HAS ALSO NOT SHOWN THE TAX PAID ON THE INTEREST IN SINGAPORE IS SUBSUMED IN THE COMPUTATION CHARGING INTEREST FROM AHPL. SHE FURTHER STATED THAT THE RELIEF U/S 90 COULD BE PRO VIDED ONLY IF REAL INCOME IS SHOWN AS PART OF THE TAXABLE INCOME IN IN DIA WHICH THE ASSESSEE HAS FAILED TO SHOW. AS PER ARTICLE 25, TH E RELIEF TO BE PROVIDED TO THE ASSESSEE CANNOT EXCEED THAT PART O F THE TAX WHICH IS ATTRIBUTABLE TO THE INCOME OFFERED IN INDIA WHICH M AY BE TAXED IN SINGAPORE. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE PAID INTEREST OF ` 17,30,13,435/- TO THE BANKS ON THE LOANS BORROWED FOR THE PURPOSE OF ADVANCING IT TO AHPL WHEREAS IT EARNED I NTEREST OF ` 22,47,07,167/- FROM AHPL. THE DIFFERENCE BETWEEN T HE TWO AMOUNTING TO ` 5,16,93,732/- IS THE AMOUNT LIABLE TO BE TAXED IN INDIA IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME-TAX ACT, 1961. HE DIRECTED THE ASSESSING OFFICER TO COMPUTE THE TAX L IABILITY ON THE INCOME OF ` 5,16,93,732/- AT THE NORMAL RATES AND ALLOW RELIEF U/S 90 EQUIVALENT TO THE TAX DETERMINED THEREON. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.1159 & 1343/12 :- 4 -: 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE PROVISIONS OF SEC. 90 OF THE ACT AND CLAUSES OF DTAA BETWEEN INDIA AND SI NGAPORE CLARIFY THAT TAX CREDIT TO THE EXTENT OF INCOME DERIVED IN SINGAPORE AND OFFERED TO TAX IN INDIA SHOULD BE GRANTED. RELIEF FROM DOUBLE TAXATION IS PROVIDED BY ABATEMENT ON THE BASIS OF MUTUAL AGR EEMENT BETWEEN THE TWO STATES CONCERNED WHEREBY THE ASSESSEE IS G IVEN RELIEF BY CREDIT IN A PARTICULAR MANNER EVEN THOUGH HE IS TAX ED IN BOTH THE COUNTRIES. RELIEF CAN BE IN THE FORM OF CREDIT FOR TAX PAYABLE IN ANOTHER COUNTRY OR BY CHARGING TAX AT LOWER RATE. THE PROCEDURE TO BE ADOPTED BY THE ASSESSING OFFICER FOR GRANTING RELIE F IS TO DETERMINE IN THE FIRST PLACE, THE TOTAL INCOME OF THE PERSON LI ABLE TO TAX IN INDIA IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, AND THEN ALLOW RELIEF AS PER THE TERMS OF THE TAX TREATY ENTERED WITH THE OTHER CONTRACTING COUNTRY WHERE THE INCOME HAS SUFFERED DOUBLE TAXATION. ART ICLE 25 OF THE DTAA BETWEEN INDIA AND SINGAPORE DEALS WITH RELIEF TO BE GRANTED IN RESPECT OF DOUBLE TAXED INCOME. THE SAID ARTICLE R ESTRICTS THE ALLOWABILITY OF CREDIT TO AN AMOUNT NOT EXCEEDING T HE TAX PAYABLE IN INDIA IN RESPECT OF SUCH INCOME FROM SINGAPORE. IN SIMILAR CIRCUMSTANCES, THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JCIT VS DIGITAL EQUIPMENTS INDIA LTD, 94 ITD 340, HAS OB SERVED THAT CREDIT ITA NO.1159 & 1343/12 :- 5 -: OF TAX PAID IN USA CANNOT EXCEED THE INCOME TAX LIA BILITY PAYABLE IN INDIA IN VIEW OF CLAUSE 25(2)(A) OF DTAA BETWEEN I NDIA AND USA. 6. FURTHER, THE MUMBAI BENCH OF THE TRIBUNAL IN THE CA SE OF BANK OF BARODA VS CIT IN I.T.A.NO. 2927/MDS/2011 DA TED 25.7.2014, OBSERVED AS UNDER: 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE DECISIONS RELIED UPON BY BOTH THE PARTIES. THE ISSUE OF INTER PRETATION OF PHRASE 'MAY BE TAXED IN OTHER CONTRACTING STATES', AS USED IN DIFFERENT ARTICLES INCLUDING ARTICLE-7 IN THE DTAA HAS BEEN DISCUSSED IN DETAIL BY THE TRIBUNAL IN ESSAR OIL LTD. (SUPRA) AFTER TAK ING INTO CONSIDERATION VARIOUS DECISIONS OF THE HIGH COURT, SUPREME COURT, AFFECT OF AMENDMENT IN SECTION 90(3) AND NOTIFICATION DATED 28TH AUGUST 2008, ISSUED BY THE CENTRAL GOVERNMENT. THE CONCLUSION ARRIVED BY THE TRIBUNAL AFTER DISCUSSING VARIOUS ASPECTS ARE AS UNDER:- 'I) THE RATIO OF ALL THE JUDGMENTS RENDERED BY THE HON'BLE HIGH COURTS, AS DISCUSSED HEREIN ABOVE AND CONFIRMED BY THE HON' BLE SUPREME COURT SPECIFICALLY IN THE CASE OF TURQUOISE INVESTM ENT, ON THE INTERPRETATION OF THE EXPRESSION 'MAY BE TAXED', TH AT ONCE THE TAX IS PAYABLE OR BANK OF BARODA PAID IN THE COUNTRY OF SO URCE, THEN COUNTRY OF RESIDENCE IS DENIED OF THE RIGHT TO LEVY TAX AN SUCH INCOME OR THE SAID INCOME CANNOT BE INCLUDED IN RETURN OF INCOME FILED IN INDIA, WOULD NO LONGER APPLY AFTER THE INSERTION OF PROVIS ION OF SUB-SECTION (3) OF SECTION 90 W.E.F. 1 ST APRIL, 2004, I.E. ASSESSMENT YEAR 2004 -05. THE SAID PROVISION AS CONFERRED UPON THE CENTRAL GO VERNMENT A POWER TO ISSUE NOTIFICATION, ASSIGNING MEANING TO T HE TERMS USED IN THE DTAA, WHICH HAS NEITHER BEEN DEFINED UNDER THE ACT NOR IN THE AGREEMENT PROVIDED THAT SUCH A MEANING SHOULD NOT B E INCONSISTENT WITH THE PROVISIONS OF THE ACT OR AGREEMENT. IN PUR SUANCE OF SUCH A STATUTORY EMPOWERMENT, CENTRAL GOVT. HAS ISSUED A N OTIFICATION ON 28TH AUGUST, 2008, CLEARLY SPECIFYING THAT WHERE TH E DTAA ENTERED INTO BY THE CENTRAL GOVT. WITH THE GOVT. OF ANY OTH ER COUNTRY PROVIDES THAT ANY INCOME OF A RESIDENT OF INDIA 'MAY BE TAXE D' IN THE OTHER COUNTRY, SUCH INCOME SHALL BE INCLUDED IN HIS TOTAL INCOME CHARGEABLE TO TAX IN INDIA IN ACCORDANCE WITH THE PROVISIONS O F THE INCOME TAX ACT , 1961 AND RELIEF SHALL BE GRANTED IN ACCORDANCE WI TH THE METHOD FOR ELIMINATION OR AVOIDANCE OF DOUBLE TAXATION PRO VIDED IN SUCH AGREEMENT. THIS MEANING ASSIGNED TO THE TERM 'MAY B E TAXED' HAS CHANGED ITS COMPLEXION; II) THE NOTIFICATION DATED 28TH AUGUST 2008, REFLEC TS A PARTICULAR INTENT AND OBJECTIVE OF THE GOVERNMENT OF INDIA, AS UNDERS TOOD DURING THE ITA NO.1159 & 1343/12 :- 6 -: COURSE OF NEGOTIATIONS LEADING TO FORMALIZATION OF TREATY. THEREFORE, SUCH A NOTIFICATION HAS TO BE RECKONED AS CLARIFICA TORY IN NATURE AND HENCE INTERPRETATION GIVEN BY GOVT. OF INDIA THROUG H THIS NOTIFICATION WILL BE EFFECTIVE FROM 1ST APRIL 2004, I.E., FROM T HE DATE WHEN PROVISION OF SECTION 90(3) WAS BROUGHT IN THE STATUTE, GIVING A LEGAL FRAME W ORK FOR CLARIFYING THE INTENT OF ONE OF THE NEGOTIATING PARTIES; III) THE PHRASE 'MAY BE TAXED' IS NOT APPEARING IN THE STATUTE, BUT IT IS APPEARING IN THE AGREEMENT AND THEREFORE, THE INTER PRETATION AS UNDERSTOOD AND INTENDED BY THE NEGOTIATING PARTIES SHOULD BE ADOPTED. HERE ONE OF THE PARTIES I.E., GOVERNMENT O F INDIA HAS CLEARLY SPECIFIED THE INTENT AND THE OBJECT OF THIS PHRASE. IF PHRASE IS USED IN A STATUTE, THEN 'ANY INTERPRETATION GIVEN BY THE HIGH COURT OR THE SUPREME COURT IS BINDING ON ALL THE SUBORDINATE COU RTS AND HAS TO BE RECKONED AS LAW OF THE LAND. HOWEVER, THE MEANING A SSIGNED BY GOVERNMENT OF INDIA FOR A PHRASE OR TERM USED IN TH E AGREEMENT THROUGH NOTIFICATION WILL PREVAIL AT LEAST FROM THE ASSESSMENT YEAR 2004- 05. BECAUSE, WHILE INTERPRETING THE TREATY, T HE INTENTION OF THE PARTIES TO THE AGREEMENT HAS TO BE BANK OF BARODA G IVEN PRIMACY AND HAS TO BE UNDERSTOOD IN THAT MANNER ONLY. THEREFORE , THE NOTIFICATION IS NOT CONTRARY TO THE PROVISIONS OF THE ACT. CONSE QUENTLY, THE EARLIER JUDGMENTS RENDERED IN ASSESSEE'S CASE PRIOR TO ASSE SSMENT YEAR 2004-05, WILL NOT HAVE BINDING PRECEDENCE IN THIS Y EAR OR SUBSEQUENT YEAR;' 27. IN VIEW OF THE AFORESAID FINDINGS / CONCLUSION, WE HOLD THAT THE INCOME OF THE BRANCHES OF THE ASSESSEE SHALL ALSO T AXABLE IN INDIA I.E., IT WOULD BE INCLUDED IN THE RETURN OF INCOME FILED BY THE ASSESSEE IN INDIA AND WHATEVER TAXES HAVE BEEN PAID BY THE BRANCHES IN THE OTHER CONTRACTING STATES I.E., THE SOURCE COUNTRY, CREDIT OF SUCH TAXES SHALL BE GIVEN. ACCORDINGLY, T HE GROUND NO.3, AS RAISED BY THE ASSESSEE IN THE ASSESSMENT YEAR 20 05-06 AND 2006- 07, IS TREATED AS DISMISSED, WHEREAS, GROUND NO.1, AS RAISED BY THE DEPARTMENT IN ITA NO.60 18/MUM./20 11, FOR THE ASSE SSMENT YEAR 2007 -08, IS TREATED AS ALLOWED. 7. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA (SUPRA), WE REMIT THIS ISSUE IN DISP UTE TO THE FILE OF THE ASSESSING OFFICER FOR RECONSIDERATION. 8. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FO R STATISTICAL PURPOSES. ITA NO.1159 & 1343/12 :- 7 -: 9. NOW COMING TO REVENUES APPEAL I.T.A.NO.1343/MDS/20 12, THE FIRST ISSUE IS WITH REGARD TO DELETION OF ADDIT ION TOWARDS LOSS ON FOREIGN EXCHANGE DERIVATIVES TRANSACTIONS. 10. THE FACTS OF THIS ISSUE ARE THAT THE ASSESSING OFFI CER FOUND FROM SCHEDULE 21 OF TH E FINANCIALS THAT AN AMOUNT OF ` 6.96 CRORES IN THE PROFIT AND LOSS ACCOUNT WAS A LOSS IN RESPECT O F DERIVATIVE CONTRACTS OUTSTANDING AS AT 31.3.2008. THE ASSESSEE HAD FOLLO WED PRINCIPLE OF 'MARKED TO MARKET' IN BOOKING THESE LOSSES. THE ASS ESSING OFFICER STATED THAT THE DIFFERENCE BETWEEN THE PURCHASE PRI CE AND THE VALUE AS ON THE VALUATION DATE (31.3.2008) IN THE P ROFIT AND LOSS ACCOUNT IS A NOTIONAL LOSS AS NO SALE/ CONCLUSION/ HEDGING/ SETTLEMENT OF CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY AS ON 31.3.2008. IT WAS NOT DEFINITE THAT THE ASSESSEE WOULD HAVE TO INCUR SUCH NOTIONAL EXPENDITURE FOR S URE IN THE FUTURE, AS THE VALUE OF FOREIGN EXCHANGE COULD GO HIGHER SU BSEQUENT TO THE VALUATION DATE AND EVEN GIVE PROFIT TO THE ASSESSEE AS AGAINST THE LOSS BOOKED. SHE FURTHER STATED THAT THE NOTIONAL LOSS A RISING ALL ACCOUNT OF OUTSTANDING FORWARD CONTRACTS ARE NEITHER IN THE NA TURE OF EXPENDITURE NOR ACCRUED LIABILITY AS THE SAID CONTRACTS WERE NO T CONCLUDED AS ON 31.3.2008. FURTHER, THE ASSESSEE HAS ALSO OPTION TO HEDGE THE SAID CONTRACTS SUBSEQUENTLY. THE ASSESSING OFFICER MADE THE ADDITION BY OBSERVING THAT THE LOSS OF ` 6,96,00,000/- BEING NOTIONAL IN NATURE IS ITA NO.1159 & 1343/12 :- 8 -: DISALLOWED AND CANNOT BE ALLOWED TO BE SET OFF AGAI NST REAL INCOME OF THE ASSESSEE. THE ASSESSEE CAN CLAIM ANY LOSS FOR ALLOWANCE AT THE CONCLUSION OF RESPECTIVE FORWARD CONTRACT. HOWEVER , THE CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. SIMILAR ISSUE CAME UP FOR CON SIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF DCIT VS ASVINI FISHE RIES P. LTD IN I.T.A.NO. 2246/MDS/2014 AND THE TRIBUNAL VIDE ITS ORDER DATED 18.12.2015 HAS OBSERVED AS UNDER: 4 . WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. SIMILAR ISSUE WAS CONSIDERED BY THIS TR IBUNAL WHERE ONE OF THE MEMBERS IS A PARTY, IN THE CASE OF M/S MAJESTIC EXPORTS VS THE JOINT CIT IN I.T.A.NOS.1336 AND 3072/MDS/2014, DATED 24.7.2015, WHEREIN IT HAS BEEN HELD AS UNDER: 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GARMENTS. DURING THE COURSE OF EXPORT, THE ASSESSEE ENTERED INTO DERIVATIVE CONTRACT. THE ASSESSEE INCURRED LOSS IN THIS TRANSACTION. THE ASSESSEE CLAIMED IT AS BUSINESS LOSS. ACCORDING TO THE ASSESSING OFFICER THIS LOSS WAS NOT BUSINESS LOSS A ND IT IS A SPECULATIVE LOSS AND THIS TRANSACTION IS SPECULATIVE IN NATURE AS SUCH THE LOSS INCURRED ON THIS TRANSACTION CANNOT BE SET OFF AGAINST BUSINESS INCO ME OF THE ASSESSEE. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE, THE DERIVATIVE TRANSACTION CANNOT FALL UNDER SEC.73. EXPLANATION TO SEC.73 CREATES A DEEMING FICTION BY WHICH AMONG THE ASSESSEE, WHO IS A COMPANY, AS INDICATED IN THE SAI D EXPLANATION DEALING WITH THE TRANSACTION OF SHARE AN D ITA NO.1159 & 1343/12 :- 9 -: SUFFER LOSS, SUCH LOSS SHOULD BE TREATED TO BE SPECULATIVE TRANSACTION WITHIN THE MEANING OF SEC.73 OF THE ACT, NOTWITHSTANDING THE FACT THAT THE DEFINITION OF SPECULATIVE TRANSACTION MENTIONED IN SEC.43(5) OF THE ACT, THE TRANSACTION IS NOT OF THAT NATURE AS THERE HAS BEEN ACTUAL DELIVERY OF THE SCRIPS OF SHARE. AS PER THE DEFINITION OF SEC.43(5), TRADING OF SHARES WHICH IS DONE BY TAKING DELIVERY DOES NOT COME UNDER THE PURVIEW OF THE SAID SECTION. SIMILARLY, AS PER CLAUSE (D) OF SEC.43(5), DERIVATIVE TRANSACTION IN SHARES IS ALSO NOT SPECULATION TRANSACTION AS DEFINED IN THE SAID SECTION. THEREFORE, BOTH PROFIT/LOSS FROM ALL THE SHARE DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS A RE HAVING THE SAME MEANING, SO FAR AS SEC.43(5) OF THE ACT IS CONCERNED. AGAIN, IN VIEW OF THE FACT THAT BOTH DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE NON-SPECULATIVE AS FAR AS SEC.43(5) IS CONCERNED, IT FOLLOWS THAT BOTH WILL HAVE THE SAME TREATMENT AS FAR AS APPLICATION OF EXPLANATION TO SEC.73 IS CONCERNED. THEREFORE, AGGREGATION OF THE SHARE TRADING PROFIT AND LOSS FROM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE EXPLANATION TO SEC.73 IS APPLIED. THE ABOVE VIEW HAS BEEN TAKEN BY SPECIAL BENCH OF THIS TRIBUNAL, MUMBAI BENCH, IN THE CASE OF CIT V. CONCORD COMMERCIAL PVT. LTD. (2005) 95 ITD 117 (MUM)(SB). IN THIS CASE, THE SPECIAL BENCH HELD THAT : BEFORE CONSIDERING WHETHER THE ASSESSEES CASE IS HIT BY THE DEEMING PROVISION OF EXPLANATION TO SEC. 73 OF THE ACT, THE AGGREGATE OF THE BUSINESS PROFIT / LOSS HAS TO BE WORKED OUT BASED ON THE NON-SPECULATIVE PROFITS; EITHER IT IS FROM SHARE DELIVERY OR FROM SHARE DERIVATIVE . 8. FROM THE ABOVE, IT IS CONCLUDED THAT BOTH TRADING OF SHARES AND DERIVATIVE TRANSACTIONS ARE N OT COMING UNDER THE PURVIEW OF SECTION 43(5) OF THE ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTI ON EXCLUSIVELY FOR PURPOSES OF SECTION 28 TO 41 OF THE ITA NO.1159 & 1343/12 :- 10 -: ACT. AGAIN, THE FACT THAT BOTH DELIVERY BASED TRANSACTION IN SHARES AND DERIVATIVE TRANSACTIONS A RE NON-SPECULATIVE AS FAR AS SECTION 43(5) IS CONCERNED GOES TO CONFIRM THAT BOTH WILL HAVE SAME TREATMENT AS REGARDS APPLICATION OF THE EXPLANATION TO SECTION 73 IS CONCERNED, WHICH CREATES A DEEMING FICTION. NOW, BEFORE APPLICATION OF THE SAID EXPLANATION, AGGREGATION OF THE BUSINESS PROFIT/LOSS IS TO BE WORKED OUT IRRESPECTIVE OF THE FACT, WHETHER IT IS FROM SHARE DELIVERY TRANSACTION OR DERIVATIVE TRANSACTION. 8.1 NOW, THIS VIEW HAS BEEN TAKEN BY CO-ORDINATE, CHENNAI IN THE CASE M/S. AISHWARYA & CO P. LTD IN ITA NO.860/MDS/2014, DATED 29.05.2015 , WHEREIN THEY FOLLOWED THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF M/S. BALJIT SECURITIES PVT. LTD. (88 CCH 313 ) WHEREIN HELD AS UNDER:- CLAUSE (D) OF SECTION 43(5) BECAME EFFECTIVE WITH EFFECT FROM 1ST APRIL, 2006. THEREFORE, PRIOR TO 1ST APRIL, 2006 ANY TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES WAS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIP WAS A SPECULATIVE TRANSACTION. SUB- SECTION 1 OF SECTION 73 PROVIDES AS FOLLOWS: (1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SHALL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHER SPECULATION BUSINESS. THE RESULTANT EFFECT WAS THAT ANY LOSS ARISING OUT OF SPECULATIVE TRANSACTION COULD ONLY HAVE BEEN SET OF F AGAINST PROFITS ARISING OUT OF SPECULATIVE TRANSACTION. IN THE PRESENT CASE, THE ASSESSEE, AS ALREADY INDICATED, HAS BEEN DEALING IN SHARES WHERE DELIVERY WAS IN FACT TAKEN AND ALSO IN SHARES WHERE DELIVERY WAS NOT ULTIMATELY TAKEN. IN OTHER WORDS, ITA NO.1159 & 1343/12 :- 11 -: THE ASSESSEE HAS BEEN DEALING IN ACTUAL SELLING AND BUYING OF SHARES AS ALSO DEALING IN SHARES ONLY FOR THE PURPOSE OF SETTLING THE TRANSACTION OTHERWISE THAN BY ACTUAL DELIVERY. THE QUESTION ARISE WHETHER THE LOSSES ARISING OUT OF THE DEALINGS AND TRANSACTION IN WHICH THE ASSESSEE DID NOT ULTIMATEL Y TAKE DELIVERY OF THE SHARES OR GIVE DELIVERY OF THE SHARES COULD BE SET OFF AGAINST THE INCOME ARISING OUT OF THE DEALINGS AND TRANSACTIONS IN ACTUAL BUYI NG AND SELLING OF SHARES. AN ANSWER TO THIS QUESTION I S TO BE FOUND IN THE EXPLANATION APPENDED TO SECTION 73 WHICH READS AS FOLLOWS: EXPLANATION: WHERE ANY PART OF THE BUSINESS OF A C OMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSI STS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD S INTEREST ON SECURITIES, OR A COMPANY THE PRINCIPA L BUSINESS OF WHICH IS THE BU9SINESS OF BANKING OR TH E GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PUR CHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE C ARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH TH E BUSINESS CONSISTS OF THE PURCHASE. IN ORDER TO RES OLVE THE ISSUE BEFORE US, THE SECTION HAS TO BE READ IN THE MANNER AS FOLLOWS: EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY ( . . . .. .. .. .. .. .. .. . .. .. . ) CONSIS T IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF S UCH SHARES. IT WOULD, THUS, APPEAR THAT WHERE AN ASSESSEE, BEIN G THE COMPANY, BESIDES DEALING IN OTHER THINGS ALSO DEALS IN PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON A SPECULATION BUS INESS. THE ASSESSEE, IN THE PRESENT CASE, PRINCIPALLY IS A SHA RE BROKER, AS ALREADY INDICATED. THE ASSESSEE IS ALSO IN THE BUSI NESS OF BUYING AND SELLING OF SHARES FOR SELF WHERE ACTUAL DELIVERY IS TAKEN AND GIVEN AND ALSO IN BUYING AND SELLING OF S HARES WHERE ACTUAL DELIVERY WAS NOT INTENDED TO BE TAKEN OR GIV EN. THEREFORE, THE ENTIRE TRANSACTION CARRIED OUT BY TH E ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UMBRELLA OF SPECULA TIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISING OUT OF DERIVATIVES FROM THE INCOME ARISING OUT OF BUYING ITA NO.1159 & 1343/12 :- 12 -: AND SELLING OF SHARES. THIS IS WHAT THE LEARNED TRI BUNAL HAS DONE. 9. FROM THE ABOVE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF BALJIT SECURITIES PVT. LTD . CITED SUPRA, THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT TOTAL TRANSACTION CONSIDERED FOR DETERMINING T HIS BUSINESS LOSS FROM DERIVATIVE TRANSACTIONS CANNOT B E MORE THAN THE TOTAL EXPORT TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF THE DERI VATIVE TRANSACTION IS IN EXCESS OF EXPORT TURNOVER, THEN TH AT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS TRANS ACTIONS TO BE CONSIDERED AS SPECULATIVE LOSS ONLY AS THAT EXCES S DERIVATIVE TRANSACTION HAS NO PROXIMITY WITH EXPORT T URNOVER AND THE ASSESSING OFFICER IS DIRECTED TO COMPUTE AC CORDINGLY. THIS GROUND IS ALLOWED AS INDICATED ABOVE . 5. FURTHER, THE MUMBAI BENCH OF ITAT IN THE CASE OF ARASKA DIAMOND P. LTD VS ACIT, 152 ITD 203, HAS HELD AS U NDER: TOTAL SALES DURING THE YEAR AMOUNTED TO ` 27.78 CRORES, THAT THE AO AND THE FAA HAD HELD SUCH TRANSACTION WERE SPECULATIVE IN NATURE AND HAD DISALLOWED THE CLAIM MADE BY THE ASSESSEE, THAT THE ASSESSEE WAS OF THE OPINION THA T TRANSACTIONS ENTERED INTO BY IT WERE NOT SPECULATIV E TRANSACTIONS. ITAT FOUND THAT THE AMOUNT INVOLVED IN THE FORWARD CONTRACT (FC) WAS MORE THAN 100% OF THE TURNOVER OF THE ASSESSEE, THAT FC WERE NOT RELATABL E TO SPECIFIC BILLS, THAT THE ASSESSEE HAD NOT RELATED A NY SINGLE BILL TO ANY OF THE CONTRACT AND HAD NOT PROV IDED ANY PURCHASE ORDER DURING THE ASSESSMENT OR APPELLA TE PROCEEDINGS. ITAT FOUND THAT IN THE CASE UNDER CONSIDERATION ASSESSEE WAS NOT DEALING IN FOREIGN EXCHANGE, THEREFORE TRANSACTIONS ENTERED INTO BY IT IN FOREIGN EXCHANGE CANNOT BE HELD TO BE HEDGING TRANSACTIONS. AS THE ASSESSEE WAS DEALING IN DIAMON DS AND FC ENTERED INTO ONLY FOR DIAMONDS WOULD HAVE BE EN COVERED BY THE PROVISO (A) TO THE SECTION 43(5)OF T HE ACT. AS HELD BY THE HON'BLE HIGH COURT OF CALCUTTA IN THE MATTER OF GOUREPORE CO. LTD ,ONUS WAS ON THE ITA NO.1159 & 1343/12 :- 13 -: ASSESSEE TO PROVE THAT THE TRANSACTIONS IN QUESTION WERE NOT OF A SPECULATIVE NATURE. ITAT WAS OF THE OPINIO N THAT IT HAD FAILED TO DISCHARGE THE ONUS CAST UPON HIM BY THE STATUTE. IT WAS ALSO NOT ABLE TO CONTRADICT THE FINDING OF FACT THAT BOOKING AND CANCELLATION OF FC OF FOREIGN EXCHANGE WERE NOT IN RESPECT OF SPECIFIED EXPORT OR IMPORT. BESIDES, FINDING OF FACT GIVEN BY THE REVENUE AUTHORITIES REMAINED UN-CONTRAVENED THAT LO SS IN QUESTION, SHOWN BY IT PERTAINED TO THOSE FC TRANSACTIONS, AGAINST WHICH NO ACTUAL DELIVERY OF F OREIGN EXCHANGE WAS MADE. ON APPRECIATION OF THE FACTS SURROUNDING THE TRANSACTION ITAT HAD REACHED AT THE CONCLUSION THAT TRANSACTIONS ENTERED IN TO BY THE ASSESSEE WERE SPECULATIVE IN NATURE AND THE CASE OF THE ASSESSEE IS NOT COVERED BY PROVISO(A) OF THE SECTIO N 43(5) OF THE ACT. DISPUTED TRANSACTIONS WERE SPECULATIVE AND NOT HEDG ING TRANSACTION, THAT THE ASSESSEE COULD NOT RELATE ANY SINGLE BILL TO ANY OF THE CONTRACT AND IT HAD NOT P ROVIDED DETAIL OF ANY PURCHASE ORDER RELATABLE TO SPECIFIC TRANSACTION, DURING THE ASSESSMENT OR APPELLATE PROCEEDINGS. THUS, THE TRANSACTIONS UNDERTAKEN BY I T HAVE TO BE TAKEN AS TRANSACTIONS RELATABLE TO FOREI GN EXCHANGE. ITAT WAS OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY. THEREFORE, CONSIDERING THE PECULIAR FACT S AND CIRCUMSTANCES OF THE CASE, ITAT CONFIRMED HIS ORDER FAA AND DECIDE EFFECTIVE GROUND AGAINST THE ASSESSE E. 6. IN VIEW OF THE ABOVE ORDERS OF THE TRIBUNAL, WE ARE OF THE OPINION THAT THE ASSESSING OFFICER HAS TO CONSIDER THE FOREIGN EXCHANGE DERIVATIVE IN PROPORTION TO EXPORT TURNOVE R AS REGULAR BUSINESS TRANSACTION OF THE ASSESSEE. IF THE DERIVATIVE TRANSACTION UNDERTAKEN BY THE ASSESSEE IS IN EXCESS OF EXPORT TURNOVER THEN THAT LOSS SUFFERED I N RESPECT OF THAT PORTION OF EXCESS TRANSACTION HAS TO BE CON SIDERED AS SPECULATIVE LOSS ONLY AND THAT EXCESS DERIVATIVE T RANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER AND THE ASSES SING OFFICER IS DIRECTED TO COMPUTE ACCORDINGLY. FURTHE R, THE ASSESSING OFFICER HAS TO SEE WHETHER THERE IS ANY P REMATURE ITA NO.1159 & 1343/12 :- 14 -: CANCELLATION OF FORWARD CONTRACT OF FOREIGN EXCHANG E AND THAT TRANSACTION SHOULD BE TAKEN OUT FOR THE PURPOSE OF CONSIDERING THE BUSINESS LOSS AND ONLY THE TRANSCTI ONS WHICH ARE COMPLETED TO BE CONSIDERED FOR THE PURPOSE OF DETERMINING THE BUSINESS LOSS FROM THESE FOREIGN E XCHANGE FORWARD CONTRACT. WITH THIS OBSERVATION, WE REMAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRES H CONSIDERATION. 7. BEFORE US, THE LD. REPRESENTATIVE RELIED ON TH E JUDGMENT OF GUJARAT HIGH COURT IN CIT VS FRIENDS AND FRIENDS SHIPPING P. LTD, [2013] 217 TAXMAN 267, FOR THE PROPOSITION THAT IF THE ASSESSEE FAILED TO TAKE DELIVERY WITHIN THE PERIOD INDICATED IN CONTRACT AND THE ASSESSEE HAD GIVEN I NSTRUCTIONS TO BANK FOR CANCELLATION OF CONTRACT ON PAYMENT OF AGREED CHARGES TO THE BANK THESE TRANSACTIONS CANNOT BE CO NSIDERED AS SPECULATIVE TRANSACTION. HOWEVER, THERE IS NO F INDING IN THIS JUDGMENT TOWARDS THIS EFFECT AND THE RELIANCE PLACED BY THE ASSESSEE IS MISPLACED. MORE SO, THIS ISSUE WA S CONSIDERED BY THE MUMBAI TRIBUNAL WHILE DELIVERING THE DECISION IN THE CASE OF ARASKA DIAMOND P. LTD, 152 ITD 203, AND AFTER FOLLOWING THE JUDGMENTS OF CALCUTTA HIGH COURT IN THE CASE OF BENGAL & ASSAM CO. LTD VS CIT 227 CTR 3 99, AND BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT V S BADRIDAS GAURIDU P. LTD 261 ITR 256, THE TRIBUNAL C AME TO THE CONCLUSION THAT THE TRANSACTIONS, WHICH WERE PR EMATURELY CANCELLED, CANNOT BE CONSIDERED AS BUSINESS TRANSAC TION AND IT IS TO BE CONSIDERED AS SPECULATIVE TRANSACTION. 12. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE REMI T THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER. T HE ASSESSING OFFICER SHALL RECONSIDER THE ISSUE AFRESH IN THE LIGHT OF T HE ABOVE ORDER OF THIS TRIBUNAL AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE. 13. THE NEXT GROUND OF APPEAL IS THAT THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW RELIEF U/ S 90 EQUAL TO THE TAX LIABILITY ON THE INCOME OF ` 5,16,93,732/- AT NORMAL RATES. ITA NO.1159 & 1343/12 :- 15 -: 14. IN ASSESSEES APPEAL WHILE DEALING WITH THIS ISSUE , WE HAVE REMITTED THIS ISSUE BACK TO THE FILE OF THE ASSESSI NG OFFICER FOR DECIDING AFRESH IN CONFORMITY WITH THE DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA (SUPRA). TH EREFORE, THIS GROUND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 15. THE NEXT GROUND IS WITH REGARD TO DELETION OF DISAL LOWANCE OF INTEREST U/S 14A R.W RULE 8D(2)(II). 16. THE FACTS OF THIS ISSUE ARE THAT THE ASSESSING OFFI CER STATED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCO ME OF ` 12,53,16,214/- ON INVESTMENTS IN SHARES AND MUT UAL FUNDS BUT CLAIMED THE ENTIRE AMOUNT AS EXEMPT U/S 10(34)/10(3 5) OF THE ACT. THE ASSESSEE HAS ONLY MADE A TOKEN DISALLOWANCE OF ` 2,17,015/- U/S 14A WHICH WORKED OUT TO ONLY 0.17% OF THE DIVIDEND INCOME EARNED. THE VALUE OF INVESTMENT INCREASED FROM ` 898.30 CRORES TO ` 978.50 CRORES, AN INCREASE OF ABOUT ` 80.20 CRORES. OUT OF ` 978.50 CRORES, TRADE INVESTMENT WAS ` 751.86 CRORES AND ` 226.64 WAS TOWARDS INVESTMENT IN EQUITY SHARES AND MUTUAL FUND S. THIS INCREASE IN INVESTMENT DURING THE YEAR WAS DIRECTLY RELATED TO THE INVESTMENT LIKE MUTUAL FUNDS. SHE STATED THAT NET INTEREST DEBITED WAS ` 47 CRORES. THE MANAGERIAL STAFF AND DIRECTORS OF THE COMPANY A RE INVOLVED IN DECISION MAKING PROCESS ON INVESTMENT MADE BY THE A PPELLANT. ITA NO.1159 & 1343/12 :- 16 -: THEREFORE, PART OF THE EXPENDITURE ON ESTABLISHMENT AND ADMINISTRATION CAN BE ATTRIBUTED TO THE ACTIVITY OF EARNING DIVIDE ND. THE AMOUNT DISALLOWED BY THE ASSESSING OFFICER WAS FOUND TO BE VERY LOW. ON BEING CONFRONTED REGARDING DISALLOWANCE U/S 14A, THE ASSESSEE STATED THAT IT HAD INVESTED IN SHARES, MUTUAL FUNDS IN COURSE OF CARRYING ON ITS BUSINESS FROM ITS SURPLUS FUND WHIC H WERE NOT REQUIRED IMMEDIATELY ON A DAY TO DAY BASIS. IN ORDER TO LIQU IDATE THESE FUNDS THEY WERE KEPT IN THE SCHEME OF LIQUID FUNDS AND MU TUAL FUNDS. THE APPELLANT STATED THAT THE DISALLOWANCE MADE BY IT S UO MOTO WAS REASONABLE. IT STATED THAT THE INVESTMENT MADE BY T HE ASSESSEE WAS NOT OUT OF BORROWED FUNDS BUT FROM INTEREST-FREE FU NDS AVAILABLE TO IT. IT STATED THAT OUT OF TOTAL INVESTMENT OF ` 978.50 CRORES, A SUM OF ` 737.23 CRORES WAS TOWARDS INVESTMENT IN ABAN HOLDIN GS PTE LTD., SINGAPORE. THE INCOME FROM THIS INVESTMENT WILL NOT YIELD EXEMPT INCOME. THE REMAINING INVESTMENT HAS BEEN TAKEN CAR E BY SHARE CAPITAL AND RESERVE & SURPLUS AVAILABLE WITH THE CO MPANY. THE ASSESSING OFFICER DID NOT ACCEPT THE ABOVE CONTENT ION OF THE APPELLANT. SHE STATED THAT THE CUMULATIVE INVESTMEN T OF THE YEAR WAS ` 4222 CRORES. THOUGH SHE WAS ACCEPTED THAT CUMULATIV E INVESTMENTS INCLUDES RE-INVESTMENT OF THE SAME AMOU NT AGAIN AND AGAIN BUT LARGE SCALE TRANSACTIONS NUMBERING ABOUT 485 IN MUTUAL FUNDS ALONE AND THROUGHOUT THE YEAR REQUIRED AVAILA BILITY OF FUNDS ITA NO.1159 & 1343/12 :- 17 -: THROUGHOUT THE YEAR. THE APPELLANT HAD NOT FURNISHE D EVIDENCE TO PROVE THIS. THE AO HAS RELIED ON THE DECISIONS IN T HE CASES OF CIT V. DAGA CAPITAL MANAGEMENT P.LTD (ITA NO. 1372/DEL/200 5), MAXOPP INVESTMENTS LTD V. ACIT (ITA NO.183/DEL/2005) AND C HEMINVEST V. DCIT (ITA NO.2048/DEL/2005) AND APPLIED RULE 8D TO MAKE THE DISALLOWANCE. THE INTEREST EXPENSES NOT DIRECTLY AT TRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IS TAKEN AT ` 1,11,59,568/- AND % OF VALUE OF INVESTMENT IS TAKEN AT ` 1,00,58,278/-. THE ASSESSING OFFICER COMPUTED THE AMOUNT OF DISALLOWANCE U/S 14 A R.W.RULE 8D AT ` 2, 12, 17,846/-. SHE ALLOWED CREDIT OF ` 2,17,015/- BEING THE AMOUNT DISALLOWED BY THE ASSESSEE AND DISALLOWED THE BALA NCE AMOUNT OF ` 2, 1 0,00,831/- ( ` 2, 12, 17,846 ` 2, 17,015). 17. AFTER HEARING BOTH PARTIES, WE ARE OF THE OPINION THAT THE ASSESSMENT YEAR INVOLVED IS 2008-09 AND RULE 8D CAN NOT BE APPLIED. BEING SO, IT IS APPROPRIATE TO DISALLOW ONLY 5% OF THE EXEMPT INCOME AS EXPENDITURE TOWARDS EARNING THE EXEMPTED INCOME IN VIEW OF THE EARLIER ORDER OF THE TRIBUNAL IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2007-08 IN I.T.A.NO.90/MDS/2012 WHEREIN HELD A S UNDER: 16. ON HEARING BOTH THE PARTIES AND ON PERUSAL O F PARA 11.2.4 OF THE CIT(A)S ORDER, FOR COMPLETENESS OF T HE ORDER, WE FIND IT RELEVANT TO REPRODUCE THE SAME AS UNDER: ITA NO.1159 & 1343/12 :- 18 -: 11.2.4 IT IS THUS CLEAR FROM THE DISCUSSION MADE ABOVE THAT INVESTMENT IN FOREIGN SUBSIDIARY HAS TO BE EXCLUDED FOR MAKING DISALLOWANCE U/S 14A. FURTHER, NO INTEREST CAN ALSO BE DISALLOWED FOR THE REASONS GIV EN IN PARA 11.2.2. HOWEVER, AS STATED EARLIER, THE HON'BL E BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA) HAS HELD THAT EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE AO HAD TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SEC TION 14A. THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE ON A REASONABLE BASIS CONSISTENT WITH A LL RELEVANT FACTS AND CIRCUMSTANCES OF THE CAS E. THE APPELLANT HAS EARNED DIVINED INCOME OF RS.6,80,76,4 74/- . THE APPELLANT IS REQUIRED TO INCUR ROUTINE ADMINISTRATIVE AND COMMON EXPENDITURE TO MAINTAIN I TS ESTABLISHMENT AND ADMINISTRATION. A PORTION OF SUCH EXPENSES CAN CERTAINLY BE ATTRIBUTABLE TO THE ACTIV ITY OF EARNING DIVIDEND. THE MANAGERIAL STAFF, TREASURY DEPARTMENT AND DIRECTORS ARE INVOLVED IN TAKING DEC ISION AS REGARDS THE INVESTMENTS TO BE MADE BY THE COMPAN Y. THEY HAVE TO MONITOR AND TRACK THE INVESTMENT, ENCA SH THE DIVIDEND, SWITCH OVER THE INVESTMENT FROM ONE SHARE TO ANOTHER SHARE OR MF DEPENDING ON THE MARKE T SITUATION ETC. THESE REQUIRE INVOLVEMENT OF MANPOWE R AND VARIOUS OTHER RELATED AND INCIDENTAL EXPENSES. THEREFORE, IT WOULD BE REASONABLE TO HOLD THAT SOME EXPENDITURE ARE ATTRIBUTABLE TO THESE ACTIVITIES. I N MY OPINION, IT WOULD BE REASONABLE IF 5% OF THE EXEMPT INCOME IS CONSIDERED AS EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCOME. ACCORDINGLY, THE AO IS DIRECTED TO RESTRICT THE DISALLOWANCE U/S 14A TO RS34,03,825/- THE GROUND IS PARTLY ALLOWED. 17. CONSIDERING THE ABOVE, WE ARE OF THE OPINION TH AT THE REVENUE HAS BROUGHT NOTHING ON RECORD TO SAY THAT T HE PROVISIONS OF RULE 8D ARE APPLICABLE TO THE YEAR UN DER CONSIDERATION AND THE SAID DISALLOWANCE OF 5% OF TH E EXEMPT INCOME IS ON THE LOWER SIDE. FURTHER, THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AGROVET IN TAX CAS E APPEAL NO.934 OF 2011 DATED 8.1.2013 HAS APPROVED 2% DISALLOWANCE OF THE EXEMPT INCOME FOR THE YEARS PRI OR TO ITA NO.1159 & 1343/12 :- 19 -: ASSESSMENT YEAR 2008-09. THEREFORE, THE FINDINGS O F THE CIT(A) IS FAIR AND REASONABLE AND DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, THE GROUND RAISED BY TH E REVENUE IS DISMISSED. HOWEVER, WE MAKE IT CLEAR THAT IF THE ASSESSEE HAS ALREADY DISALLOWED MORE THAN 5% OF THE EXEMPTED INCOME, THE SAME HAS T O BE SUSTAINED. ORDERED ACCORDINGLY. THIS GROUND OF APP EAL IS PARTLY ALLOWED. 18. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN DELETIN G THE DISALLOWANCE OF DEPRECIATION OF ` 3,74,198/- U/S 32 OF THE ACT. 19. FACTS OF THIS ISSUE ARE THAT THE ASSESSING OFFICER STATED THAT THE ASSESSEE HAD CLAIMED DEPRECIATION ON WINDM ILLS OF ` 3,74,198/- @80% ON THE OPENING WDV AS ON 1.4.2007 O F ` 4,67,748/-. THIS CLAIM OF DEPRECIATION MADE BY THE ASSESSEE WAS RELATED TO THE WINDMILLS USED BY THEM FOR ITS BUSIN ESS PURPOSES THROUGH LEASE AND LATER PURCHASED BY TERMINATING LE ASE AT A FIXED VALUE. THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE CIT(A) BY FOLLOWING THE ORDER OF THE TRIBUNAL IN AS SESSEES OWN CASE FOR ASSESSMENT YEARS 2003-04 TO 2006-07. 20. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED IN F AVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR ITA NO.1159 & 1343/12 :- 20 -: ASSESSMENT YEAR 2007-08 IN I.T.A.NO.90/MDS/20212 DA TED 26.6.2015 WHICH WAS DECIDED IN CONFORMITY WITH THE ORDER OF T HE TRIBUNAL FOR ASSESSMENT YEARS 2003-04, 2005-06 AND 2006-07. IN PARA 4 AND 5 OF ITS ORDER, THE TRIBUNAL HAS HELD AS UNDER: 4. THE FIRST ISSUE RELATES TO DISALLOWANCE OF DE PRECIATION ON WINDMILLS. THE SAID ISSUE WAS ADJUDICATED BY THE C IT(A) IN FAVOUR OF THE ASSESSEE FOLLOWING THE TRIBUNALS OR DER IN I.T.A.NO.1964/MDS/2006 FOR THE ASSESSMENT YEAR 20 03-04 AND 1542 AND 1543/MDS/2010 FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07. PARA 4 OF THE CIT(A)S ORDER IS RELEVANT AND THE SAME READS AS UNDER: 4. THE FIRST ISSUE PERTAINS TO DISALLOWANCE OF DEPRECIATION ON WINDMILL AMOUNTING TO ` 18,70,991/-. THIS IS A RECURRING ISSUE WHICH HAS ALREADY BEEN DECIDED BY THE HON'BLE ITAT, CHENNAI IN FAVOUR OF THE APPELLANT VIDE ITS ORDER IN I.T.A.NO. 1964/MDS/06 DATED 26.3.2008 FOR A.Y 2003-04. FOLLOWING THE ABOVE ORDER, THE HON'BLE ITAT AGAIN DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT FOR A. Y 2005-06 IN I.T.A.NO. 1542/MDS/10 DATED 15.7.2011. SINCE THE FACTS ARE SIMILAR, RESPECTFULLY FOLLOWING THE ABOVE DECISION, THE GROUND IS ALLOWED. 5. CONSIDERING THE ABOVE COVERED NATURE OF THE IS SUE, WE CONFIRM THE ORDER OF THE CIT(A). ACCORDINGLY, THE FIRST ISSUE RAISED BY THE REVENUE STANDS DISMISSED. ACCORDINGLY, THIS GROUND IS DISMISSED. 21. THE NEXT ISSUE IS THAT THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION U/S 35D IN RES PECT OF TOTAL EXPENDITURE INCURRED TOWARDS SHARE ISSUE. ITA NO.1159 & 1343/12 :- 21 -: 22. THE FACTS OF THE CASE ARE THAT ON PERUSAL OF THE DETAILS OF OTHER EXPENSES OF ` 6,76,03,748/-, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD CLAIMED ` 3,74,53,336/- AS PREFERENCE SHARE ISSUE EXPENSES. SHE STATED THAT SINCE EXPENDITURE RELATED TO SHARE CAPITAL WAS CAPITAL IN NATURE, THE SAME WAS NOT ALLOWABLE A S REVENUE EXPENDITURE. THE ASSESSEE SUBMITTED THAT THE EXPEN DITURE INCURRED ON PREFERENCE SHARE ISSUE WAS CAPITAL IN NATURE BUT HAS TAKEN THE PLEA THAT THE SAID EXPENSES SHOULD BE ALLOWED U/S 35D WH ICH DEALS WITH AMORTIZATION OF CERTAIN PRELIMINARY EXPENDITURE. TH E ASSESSING OFFICER HELD THAT THE ASSESSEE HAS NOT COMPLIED WITH THE PR OVISIONS OF SEC 35D AND THEREFORE SHE HAS NOT GRANTED DEDUCTION U/S 35D . MOREOVER, SHE STATED THAT THE CIT(A) IN THE APPEAL ORDER FOR A.Y. 2007-08 HAS SEPARATELY HELD THAT THE CAPITALIZATION OF RIG ABAN VII WAS INCORRECT AND CONFIRMED THE ORDER OF THE ASSESSING OFFICER TREATING THE SURPLUS ON ITS SALE AS BUSINESS PROFITS. THE ASSESS EE COMPANY HAS ALSO NOT SHOWN THAT THE PREFERENCE SHARE EXPENSES HAS BE EN INCLUDED AS PART OF THE COST OF ABAN RIG VII ON SALE TO M/S ABA N 7 PTE LTD., SINGAPORE AND THE AMOUNT HAS BEEN RECOVERED FROM TH EM. THE ASSESSING OFFICER DISALLOWED THE PREFERENCE SHARE I SSUE EXPENSES OF ` 3,74,53,336/-. SHE RELIED ON THE DECISIONS OF THE H ON'BLE SUPREME COURT IN THE CASES OF BROOKE BOND INDIA LIMITED V. CIT (225 ITR 798) AND PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD VS CIT, 225 ITA NO.1159 & 1343/12 :- 22 -: ITR 792. ON APPEAL, THE CIT(A) HAS DECIDED THE IS SUE IN FAVOUR OF THE ASSESSEE AGAINST WHICH THE REVENUE IS IN APPEAL BEF ORE US. 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE JUDG MENT OF THE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD VS CIT, 225 ITR 798, WHEREIN IT WAS HELD THAT THE EXPENSES WHICH IN CREASE THE SHARE CAPITAL OF THE ASSESSEE-COMPANY AND IT BRINGS ENDUR ING BENEFIT HAS TO BE CONSIDERED AS CAPITAL EXPENDITURE. REGARDING DED UCTION U/S 35D, THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 IN I.T.A.NO. 1382/MDS/2010, DATED 15.7.2011, WHEREIN THE TRIBUNA L HELD AS UNDER: 50. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT A SUM OF ` 4,13,25,000/- WAS EXPENSES RELATED TO ISSUE OF PREFERENCE SHARE C APITAL OF ` 150 CRORES. THERE IS NO DISPUTE THAT THE SAID AMOUN T WAS UTILIZED FOR PURCHASE OF AN OIL RIG. THERE IS NO DI SPUTE THAT THE SAID RIG WAS NOT PUT TO USE DURING THE RELEVANT PRE VIOUS YEAR, BUT WAS SHOWN BY THE ASSESSEE AS 'CAPITAL WORK IN P ROGRESS'. ASSESSEE HAD NEVER MADE A CLAIM FOR AMORTIZATION OF PREFERENCE SHARE ISSUE EXPENSES IN ITS RETURN OF IN COME, BUT HAD CHOSEN TO MAKE SUCH A CLAIM WHEN PUT ON NOTICE THAT THE SAID AMOUNT COULD NOT BE ALLOWED AS R EXPENDITURE. IN SO FAR AS CONTENTION OF LEARNED D.R. THAT ASSESSEE COULD NOT PREFER SUCH A CLAIM, BUT THROUGH A REVISED RETURN, NO DOUBT, IN T HE CASE OF GOETZE (INDIA) LTD. (SUPRA), HON'BLE APEX COURT HEL D THAT AN A.O. COULD NOT ENTERTAIN A CLAIM MADE OTHERWISE THAN BY WAY OF REVISED RETURN. HOWEVER, HERE THE ASSESSEE HAD CLAIMED THE WHOLE OF THE AMOUNT AS REVENUE EXPENDITURE. THE LETTER FILED BY THE ASSESSEE WAS ONLY AN ALTERNATIVE CLAIM THAT AMOUNT IF NOT AL LOWED IN ONE GO, IT SHOULD BE CONSIDERED AMORTIZATION UNDER SECTION 35D OF THE ACT. ASSESSEE MIGHT HAVE MADE A CLAIM UNDER A PARTICULAR SECTION, BUT IF THE CLAIM THOUGH NOT ALLOWABLE UNDER THAT SECTIO N, BUT WAS ALLOWABLE UNDER ANOTHER SECTION, THEN IT CANNOT BE CONSIDERED AS A FRESH CLAIM, THOUGH THE ALLOWANCE UNDER THE LATTER SECTION COULD BE GIVEN ONLY IN A GRADATED MANNER. THE CLAIM, NEVE RTHELESS, WAS ITA NO.1159 & 1343/12 :- 23 -: ALWAYS THERE AND WE CANNOT CONSIDER IT AS CLAIM OF ALLOWANCE MADE FOR THE FIRST TIME. IN ANY CASE, ASSESSING OFF ICER HIMSELF HAD CONSIDERED THE CLAIM OF THE ASSESSEE UNDER SECTION 35D OF THE ACT. HE DID NOT ALLOW THE CLAIM FOR TWO REASONS. P RIMARY REASON WAS THAT ASSESSEE, ACCORDING TO HIM, WAS NOT AN IND USTRIAL UNDERTAKING AND SECOND REASON WAS THAT ASSESSEE HAD NOT COMPLETED EXTENSION OF ITS INDUSTRIAL UNDERTAKING B Y PURCHASE OF RIG. ASSESSING OFFICER NEVER DECLINED TO CONSIDER THE CLAIM FOR A REASON IT WAS MADE OTHERWISE THAN THROUGH A REVISED RETURN. ASSESSING OFFICER HAD REFUSED TO CONSIDER THE CLAIM UNDER SECTION 35D FOR DIFFERENT REASONS. 51. NOW COMING TO MERITS, REVENUE HAS NOT ASSAILED THE FINDING OF ID. CIT(APPEALS) THAT ASSESSEE WAS AN INDUSTRIAL UN DERTAKING. THIS LEAVES ONLY WITH QUESTION WHETHER THE PURCHASE OF A RIG COULD BE CONSIDERED AS SUFFICIENT TO SATISFY THE CONDITIO N PRESCRIBED UNDER SECTION 35D OF THE ACT. SUB-SECTION (1) THERE OF WHICH ALLOWS AMORTIZATION OF EXPENSES RELATED TO ISSUE OF SHARE CAPITAL, AS IT STOOD AT THE RELEVANT POINT OF TIME IS REPRODUCED H EREUNDER:- 35D. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON. (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA INCURS, AFTER THE 31 ST DAY OF MARCH, 1970, ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2), - (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS, IN CONNECTION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR EACH 0F THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH TH E BUSINESS COMMENCES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING IS COMPLETED OR THE NEW UNIT COMMENCES PRODUCTION OR OPERATION: [PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 3 1 ST DAY OF MARCH, 1998, ANY EXPENDITURE SPECIFIED IN SU B- SECTION (2), THE PROVISIONS OF THIS SUB-SECTION SHA LL HAVE EFFECTS AS IF FOR THE WORDS 'AN AMOUNT EQUAL TO ONE -TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS', THE WORDS 'AN AMOUNT EQUAL TO ONE- FIFTH ITA NO.1159 & 1343/12 :- 24 -: OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS' HAD BEEN SUBSTITUTED.] THE PURCHASE OF A RIG MIGHT RESULT IN EXTENSION OF ITS INDUSTRIAL UNDERTAKING. BUT, THE DEDUCTION UNDER SE CTION 35D OF THE ACT WOULD BE ALLOWABLE FOR TEN SUCCESSIVE YE ARS BEGINNING WITH THE YEAR IN WHICH EXTENSION OF INDUS TRIAL UNDERTAKING IS COMPLETE. CAN WE SAY THAT BY PURCHAS E A RIG, THE EXTENSION OF INDUSTRIAL UNDERTAKING IS COMPLETE ? . IT IS AN ADMITTED POSITION THAT THE RIG WAS UNDER REFURBISHM ENT AND WAS NOT PUT TO USE. IT IS ALSO AN ADMITTED POSITION THAT ASSESSEE ITSELF HAD SHOWN IT AS A PART OF CAPITAL W ORK IN PROGRESS. NO ARTICLE CLASSIFIED AS WORK-IN-PROGRESS CAN BE CONSIDERED AS A COMPLETED ITEM. BE IT A RIG OR BE I T ANY OTHER THING. HENCE, EXTENSION OF THE INDUSTRIAL UNDERTAKI NG CANNOT BE CONSIDERED AS COMPLETE IN THE RELEVANT PREVIOUS YEAR. LD. CIT(APPEALS) WAS JUSTIFIED IN DENYING ASSESSEE CLAI M UNDER SECTION 35D OF THE ACT FOR THE IMPUGNED ASSESSMENT YEAR. WE DO NOT FIND ANY REASON TO INTERFERE. GROUND NO. 3 OF THE ASSESSEE STANDS DISMISSED. 24. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS GR OUND OF APPEAL OF THE REVENUE IS ALLOWED. 25. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN DELETIN G THE DISALLOWANCE OF ` 6,67,070/- U/S 40(A)(IA) OF THE ACT ON PAYMENT OF CATERING CHARGES TO CATERING CONTRACTOR. 26. THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE AS SESSEE BY THE DECISION OF SPECIAL BENCH IN THE CASE OF MERIL YN SHIPPING AND TRANSPORTS VS ADDL. CIT, 20 TAXMANN.COM 244 (VIZAG) (SB), WHEREIN IT WAS HELD THAT ONLY THE AMOUNT OUTSTANDING AT THE CL OSE OF THE FINANCIAL YEAR HAS TO BE DISALLOWED U/S 40(A)(IA) OF THE ACT . BEING SO, IN OUR OPINION, THE ASSESSING OFFICER HAS TO SEE WHETHER A NY AMOUNT IS ITA NO.1159 & 1343/12 :- 25 -: OUTSTANDING AT THE CLOSE OF THE FINANCIAL YEAR AND THAT PORTION IS TO BE DISALLOWED. ACCORDINGLY, THIS ISSUE IS REMITTED BA CK TO THE FILE OF THE ASSESSING OFFICER WITH THE ABOVE DIRECTION. 27. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN DELETIN G THE DISALLOWANCE OF ` 52,23,98,481/- MADE U/S 40(A)(I) IN RESPECT OF PAYMENTS MADE TO NON-RESIDENTS IN RESPECT OF WHICH TAX DEDUCTION HAS BEEN MADE AT LOWER RATES WITHOUT OBTAINING A CERTIF ICATE U/S 195(2) OF THE ACT. 28. THE FACTS OF THIS ISSUE ARE THAT ON PERUSAL OF THE DETAILS OF PAYMENTS MADE TO NON-RESIDENTS, THE ASSESSING OFFIC ER FOUND THAT THE ASSESSEE COMPANY HAD DEDUCTED TDS APPLYING THE PR OVISIONS OF SEC 44BB IN MANY CASES AND IN RESPECT OF CERTAIN AMOUNT S, IT HAD NOT DEDUCTED TDS AT ALL. THE ASSESSING OFFICER STATED THAT AS PER SEC 195, TDS ON PAYMENTS TO NON-RESIDENTS WAS DEDUCTIBLE @ 40%. IF THE NON- RESIDENTS ARE RESIDENTS OF A PARTICULAR COUNTRY AND IF THERE IS A DTAA BETWEEN INDIA AND THAT COUNTRY, THEN THE TDS IS DED UCTIBLE AT THE RATE PRESCRIBED UNDER THE SAID AGREEMENT. HOWEVER, THE A SSESSEE HAD DEDUCTED TDS U/S 195 ONLY @ 4% AS AGAINST THE PRESC RIBED RATE OF 40% IN MANY CASES. FURTHER, IT HAD NOT DEDUCTED ANY TDS IN RELATION TO CERTAIN PAYMENTS MADE TO NON-RESIDENTS CLAIMING THAT THE PAYMENTS WERE MADE FROM THEIR DUBAI BRANCH. THE ASSESSEE SUO MOTU ITA NO.1159 & 1343/12 :- 26 -: DETERMINED THE RATE OF 4% BY ITSELF APPLYING SEC 44 BB ON THE PAYEE WITHOUT MAKING APPLICATION TO THE AO U/S 195(2). TH E ASSESSING OFFICER DISALLOWED RS.52,23,98,481/- U/S 40(A)(I). SHE RELI ED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TRANSMISSI ON CORPORATION OF AP LTD V. CIT (239 ITR 587), DECISION OF THE DELHI ITAT IN THE CASE OF VAN OORD ACZ INDIA (P) LTD V. ADDL.CIT (112 ITD 79) (DEL), AND DECISION OF THE CHENNAI ITAT IN THE CASE OF FRONTIE R OFFSHORE EXPLORATION (INDIA) LTD (FORMERLY KNOWN AS FRONTIER ABAN DRILLING (INDIA) LTD) V. DCIT IN ITA NO.2037/MDS/2006 FOR A. Y.2003-04 DATED 28.2.2007. ON APPEAL, THE CIT(A) DELETED THE DISA LLOWANCE BY FOLLOWING HIS ORDER FOR ASSESSMENT YEAR 2007-08 IN I.T.A.NO.905/10- 11/A.III DATED 27.10.2011 AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE US. 29. AFTER HEARING BOTH PARTIES, WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF T HIS TRIBUNAL IN I.T.A.NOS.1542 & 1543/MDS/2010, DATED 15.7.2011. I N FACT, THE TRIBUNAL HAS OBSERVED IN PARA 24 & 25 OF ITS ORDER AS UNDER: 24. WE HAVE PERUSED THE ORDERS AND HEARD THE RIV AL CONTENTIONS. THE PAYMENTS WERE MADE BY THE ASSESSEE TO NON-RESID ENTS. THE PAYMENT MADE TO INTERNATIONAL TUBULAR F2E WAS FOR R ENTAL AND REPAIRS TO MACHINERY AND PAYMENT MADE TO INTERNATIO NAL OFFSHORE MANAGEMENT WAS FOR DRILLING SERVICES. THIS HAS BEE N MENTIONED BY THE ASSESSING OFFICER AT PARA 6 OF HIS ASSESSMEN T ORDER. HOWEVER, AS PER THE ASSESSING OFFICER, IT WAS NOT F OR THE ASSESSEE TO DECIDE WHETHER SECTION 44BB COULD BE APPLIED TO SUCH NON- RESIDENT ENTITIES. ASSESSING OFFICER RELIED ON THE DECISION OF FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. V. OCIT (118 ITD 495) ITA NO.1159 & 1343/12 :- 27 -: WHICH WAS FOR ASSESSMENT YEAR 2003-04 FOR MAKING THE DISALLOWANCE FOR' SHORT DEDUCTION OF TAX AT SOURCE. ASSESSEE ADMITTEDLY WAS ENGAGED IN EXPLORATION OF OIL ON OFF SHORE BASINS AND DRILLING WAS UNDERTAKEN ON CONTRACTS RECEIVED F ROM ENTITIES LIKE ONGC. SUCH OFFSHORE DRILLING WAS FOR CRUDE OIL AND CRUDE OIL IS DEFINITELY A MINERAL OIL. THEREFORE, SERVICES RENDE RED BY A NON- RESIDENT ENTITY FOR RENTAL AND REPAIRS TO MACHINERY USED IN OFFSHORE DRILLING AND ALSO FOR DRILLING SERVICES CAN ONLY BE CONSIDERED AS SERVICES OR FACILITIES IN CONNECTION WITH PROSPECTI NG FOR, OR EXTRACTION OR PRODUCTION OF MINERAL OIL. HENCE ASSE SSEE HAD SUFFICIENT REASON TO HAVE A BONAFIDE BELIEF THAT SE CTION 44BB OF THE ACT WOULD APPLY TO M/S INTERNATIONAL TUBULAR F2 E AND M/S INTERNATIONAL OFFSHORE MANAGEMENT. SUBSEQUENT TO TH E DECISION IN THE CASE OF FRONTIER OFFSHORE EXPLORATION (INDIA) L TD. V. DCIT ( 118 ITD 495) FOR ASSESSMENT YEAR 2003-04, WHICH HAS BEE N HEAVILY RELIED ON BY THE A.O. FOR MAKING THE DISALLOWANCE, THERE WAS A DECISION BY ANOTHER CO-ORDINATE BENCH IN I.T.A.NO.2 00/MDS/2009 FOR ASSESSMENT YEAR 2004-05 WHERE ALSO ONE OF THE PARTY WAS SAME FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. A V ERY SIMILAR ISSUE WAS INVOLVED IN THAT CASE. TRIBUNAL EXAMINED THE ASPECT OF DEDUCTION OF TAX AT SOURCE ON PAYMENTS MADE TO A NON- RESIDENT, FALLING UNDER SECTION 44 BB OF THE ACT AND WHETHER AN ASSESSEE COULD MAKE DEDUCTION AT LOWER RATE TAKING 10% AS THE INCOME OF SUCH NON-RESIDENT ENTITY. AFTER CONSIDERI NG ITS EARLIER DECISION FOR ASSESSMENT YEAR 2003-04, IT WAS HELD A T PARAS 6 AND 7 OF THE ORDER DATED 4 TH FEBRUARY, 2011, AS UNDER:- ' 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT THE OUTSET .. WE ARE PRIMARILY TO DECIDE AS TO WHETHER TO FOLLOW THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSES SEE'S OWN CASE FOR THE ASSESSMENT YEAR 2003-04, SUPRA, OR TO DIFFER FROM THE SAME. AFTER A PERUSAL OF THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE: OF GE INDIA TECHNOLOGY C ENTRE (P) LTD. AS ALSO TAKING INTO CONSIDERATION THE VIEWS EX PRESSED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE O F HI TECH ARAI REPORTED IN 321 ITR 477 (MAD) WE ARE OF THE VIEW TH AT THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2003-04 3 WOULD NO MORE CONSTITUTE GOOD LAW. TO ERR IS HUMAN. TO CO NTINUE THE ERROR IS NOT BRAVERY. IF WE ARE TO ACCEPT THE CONTENTION OF THE REVENUE THAT THE PROVISIONS OF SEC. 44BB IS RELATIN G ONLY TO THE NON-RESIDENT FOR THE PURPOSE OF HIS ASSESSMENT, THE N ONE SHOULD ALSO KEEP IN MIND THAT THE NON-RESIDENT'S AS SESSMENT COMES INTO PLAY WHEN HE FILES HIS RETURN. THE NON-R ESIDENT WOULD FILE HIS RETURN ONLY WHEN THE ASSESSEE HAS MA DE THE PAYMENT AND IF THE ASSESSEE HAS MADE THE PAYMENT T O THE NON-RESIDENT, WHERE IS THE . QUESTION THAT THE ASSE SSEE IS TO DEDUCT TDS AT A LOWER RATE AFTER THE ASSESSMENT HAS BEEN DONE ON THE NON-RESIDENT? SECTION 44BB IS A SPECIAL PROV ISION AS IT IS MENTIONED IN THE CAUSE TITLE TO THE SAID PROVISION ITSELF. AS PER ITA NO.1159 & 1343/12 :- 28 -: THE PROVISIONS OF SEC. 44BB(1) A SUM EQUAL TO 10% O F THE AGGREGATE OF THE AMOUNT SPECIFIED IN SUB-SECTION (2 ) IS DEEMED TO BE THE PROFITS AND GAINS OF SUCH BUSINESS CHARGE ABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS BUSINESS OR PROFESSION'. IT IS BECAUSE THE PROVISION OF SEC.44B B HAS QUANTIFIED THE DEEMED INCOME OF THE NON-RESIDENT AS SESSEE AT 10%, IT HAS OPENED WITH THE CLAUSE 'NOTWITHSTANDING ANYTHING TO THE CONTRARY' CONTAINED IN SECTIONS 28 TO 41 AND SECTIONS 43 AND 43A. THE AGGREGATE AMOUNTS ARE QUANTIFIED IN SU B-SECTION (2) OF SEC. 44BB TO BE THE AMOUNT PAID OR PAYABLE, RECEIVED OR DEEMED TO BE RECEIVED ETC. AS PER THE SUB-SECTION ( 3) OF SEC. 44BB THE NON-RESIDENT CAN CLAIM A LOWER PROFIT. IT IS FOR THE PURPOSE OF CLAIMING LOWER PROFITS THAT THE NON-RESI DENT MUST FILE A RETURN AND PROVE THE SAME WITH SUPPORT OF HIS REG ULAR BOOKS OF ACCOUNTS AND OTHER DOCUMENTS AND BY COMPLYING WITH OTHER CONDITIONS SPECIFIED THEREIN. IF NO RETURN IS FILED , SECTION 44BB(1) DEEMS THAT THE PROFITS AND GAINS OF THE BUSINESS OF THE NON- RESIDENT AT 10% OF THE GROSS RECEIPTS. A PERUSAL OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDI A TECHNOLOGY CENTRE (P) LTD., REFERRED TO SUPRA, CLEA RLY SHOWS THAT THE HON'BLE SUPREME COURT HAS CATEGORICALLY H ELD THAT THE OBLIGATION TO DEDUCT TDS IS LIMITED TO THE APPROPRI ATE PORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUMS OF MONEY PAYABLE TO THE NON-RESIDENT. THE HON' BLE SUPREME COURT WHILE DECIDING THE ISSUE HAD CATEGORI CALLY RECOGNIZED THAT AS PER THE PROVISIONS OF SEC. 195 T HE WORDS USED WERE 'ANY OTHER SUMS CHARGEABLE UNDER THE PROV ISIONS OF THIS ACT' AS AGAINST THE TERM 'ANY SUM' USED IN THE OTHER PROVISIONS FALLING IN CHAPTER XVII OF THE INCOME TA X ACT, 1961. OBVIOUSLY, WHAT THE ASSESSING OFFICER IS DEMANDING IS THAT TDS IS LIABLE TO BE MADE UNDER THE PROVISIONS OF SECTIO N 195 OF THE ACT. IF THE PROVISIONS OF SEC. 195 ARE TO BE INVOKE D, IT IS ONLY SUCH SUM WHICH IS CHARGEABLE TO TAX UNDER THE INCOM E-TAX ACT, 1961 ON WHICH TDS CAN BE MADE. A QUESTION NOW. ARIS ES AS TO HOW MUCH OF THE AMOUNTS PAID BY THE ASSESSEE TO THE NON- RESIDENT IS THE INCOME CHARGEABLE TO TAX UNDER THE INCOME TAX ACT, 1961 FOR THE PURPOSE OF SECTION 195. IT IS TRU E THAT THE ASSESSEE CANNOT QUANTIFY THE INCOME OF THE NON-RESI DENT. THIS IS WHERE THE SPECIAL PROVISION OF SEC. 44BB COMES I NTO PLAY. WHERE THE STATUTE HAS PROVIDED A SPECIAL PROVISION FOR DEALING WITH A SPECIAL TYPE OF INCOME SUCH A PROVISION WOULD EXCLUDE A GENERAL PROVISION DEALING WITH THE INCOME ACCRUING OR ARISING OUT OF ANY BUSINESS CONNECTION. THIS VIEW OF OURS F INDS SUPPORT FROM THE DECISION OF THE HON' BLE JURISDICTIONAL HI GH COURT IN THE CASE OF COPES VULCAN INC., REFERRED TO SUPRA. SECTI ON 44BB IS A SPECIAL PROVISION TO THE EXCLUSION OF ALL THE CONTR ARY PROVISIONS PROVIDED IN SECTIONS 28 TO 41 AND 43 AND 43A OF THE ACT. ONCE THE PROVISIONS OF SECTIONS 28 TO 41 AND SECTIONS 43 & 43A STAND EXCLUDED, THE METHOD OF COMPUTING THE BUSINESS INCO ME OF THE NON-RESIDENT ON THE BASIS OF THE BOOKS OF ACCOUNTS GOES OUT OF ITA NO.1159 & 1343/12 :- 29 -: THE PICTURE. THEN IT IS ONLY THE PROVISIONS OF SECT ION 44AD, 44AE & 44AF WHICH COULD BE APPLIED AND THE SAME OBVIOUSL Y DO NOT APPLY TO THE INCOME OF THE NON-RESIDENT COMPANIES. THE HON'BLE SUPREME COURT WHILE DEALING WITH ITS OWN DECISION I N THE CASE OF TRANSMISSION CORPORATION OF A.P. LTD., REFERRED TO SUPRA, HAS CATEGORICALLY EXPLAINED THAT THE TAX WAS LIABLE TO BE DEDUCTED BY THE PAYER OF THE GROSS AMOUNT IF SUCH PAYMENT INCLU DED IN IT AN AMOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. THIS IS NOT SO IN THE PRESENT CASE. HERE ON ACCOUNT OF THE SPECIAL PROVIS IONS OF SEC. 44BB, 10% OF THE GROSS AMOUNT PAYABLE 'TO THE NON- RESIDENTS DEEMED AS THE INCOME CHARGEABLE TO TAX IN INDIA. IN THE PRESENT CASE IT IS NOTICED THAT THE ASSESSEE HAS DEDUCTED T AX AT THE SPECIFIED RATE ON THE 10% OF THE BARE BOAT CHARGES PAID TO THE NORWAY COMPANY WHO IS THE NON-RESIDENT, COMPUTED AS PER THE PROVISIONS OF SEC. 44BB. IN THE CIRCUMSTANCES, WE A RE OF THE VIEW THAT THERE IS NO VIOLATION OF THE PROVISIONS O F SECTION 195 IN THE ASSESSEE'S CASE WHICH CELLS FOR A DISALLOWANCE BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. IN T HE CIRCUMSTANCES, THE FINDING OF THE LEARNED CIT(A) AN D THAT OF THE ASSESSING OFFICER STANDS REVERSED. 7. WE MAY ALSO MENTION HERE THAT WE ARE NOT IN AGRE EMENT WITH THE SUBMISSION OF THE LEARNED AUTHORISED REPRE SENTATIVE THAT THE PROVISIONS OF SEC. 40(A)(I) POSTULATES AN ABSOLUTE FAILURE AND NOT SHORT DEDUCTION. THIS IS BECAUSE A READING OF SECTION 201 CLEARLY SHOWS THAT THE PORTION 'THE WHOLE OR AN Y PART OF THE TAX' IS IN CONNECTION WITH THE WORDS 'AFTER SO DEDU CTING FAILS TO PAY'. IT IS NOT IN CONNECTION WITH THE WORDS DOES NOT DEDUCT. 25. WE ARE, THEREFORE, OF THE VIEW THAT ASSESSEE W AS RIGHT IN EFFECTING DEDUCTION OF TAX AT SOURCE CONSIDERING SE 44BB OF THE ACT. THE DISALLOWANCE WAS RIGHTLY DELETED BY THE L D. CIT (APPEALS). NO INTERFERENCE IS CALLED FOR. GROUND NO.5 OF THE REVENUE STANDS DISMISSED. 30. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE AND ACCORDINGLY, THE SAME IS CONFIRMED. ITA NO.1159 & 1343/12 :- 30 -: 31. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN DELETIN G THE DISALLOWANCE U/S 40(A)(I) IN RESPECT OF PAYMENTS MA DE TO NON- RESIDENTS FROM DUBAI BRANCH WITHOUT DEDUCTION OF TD S. 32. AS DISCUSSED IN THE EARLIER PARAGRAPHS, THIS ISSUE IS COVERED BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CA SE IN I.T.A.NO.90/MDS/2012, DATED 26.6.2015 FOR ASSESSMEN T YEAR 2007-08 WHEREIN THE ISSUE WAS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION BY OBSERVING AS FOLLOWS: 25. ON HEARING BOTH PARTIES, AS DISCUSSED IN THE OPEN C OURT, WE ARE OF THE OPINION THAT THIS MATTER NEEDS TO BE REM ANDED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION OF THE FACTS OF THE ASSESSEES CASE IN THE LIGHT OF THE HON'BLE BOMBAY HIGH COURT JUDGMENT CITED (SUPRA). THE ASSESSING OFFICER IS D IRECTED TO PASS A SPEAKING ORDER ON THIS ISSUE AFTER CONSIDERING TH E ABOVE DECISION AND AFTER GRANTING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AS PER THE PRINCIPLES OF NATURAL JUSTICE. ACCORDINGLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 33. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE REMI T THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING AFRESH. 34. THE LAST GROUND IS WITH REGARD TO DELETING THE DISA LLOWANCE U/S 40(A)(I) IN RESPECT OF DRY-DOCKING CHARGES PAID TO FAIR MOUNT MARINE BV NETHERLANDS. 35. THE FACTS OF THIS ISSUE ARE THAT IN RESPECT OF DRY DOCKING CONTRACT CHARGES PAID TO FAIRMOUNT MARINE BV NETHER LANDS, THE ITA NO.1159 & 1343/12 :- 31 -: ASSESSEE HAS DEDUCTED 1% WITHHOLDING TAX WITH APPLI CABLE SURCHARGE. THE ASSESSING OFFICER STATED THAT THE PAYMENT SHOUL D BE MADE AFTER WITHHOLDING 41.20% TAX AND THEREFORE, DISALLOWED TH E EXPENDITURE CORRESPONDING TO THE SHORT DEDUCTION. ON APPEAL, TH E CIT(A) FOUND THAT IN THIS CONTRACT, A LARGE BARGE IS PUT TO USE BY FAIRMOUNT MARINE BV TO DRY DOCK THE RIG AT THE PLACE OF OPERATION OF THE RIG TO UNDERTAKE THE REPAIRS INSTEAD OF DRY DOCKING THE RIG AT A NEA RBY PORT. THE SERVICE PROVIDED IS GENERAL IN NATURE AND THE OPERATIONS BY THE DUTCH ENTITY IS MERE SHIPPING SERVICES AND DOES NOT FALL UNDER THE CATEGORY OF SERVICES DEFINED U/S 44B. HE FURTHER FOUND THAT THE SERVICES ARE COVERED UNDER ARTICLE 8A OF INDIA NETHERLANDS DTAA AND ACCORDINGL Y, HE DELETED THE ADDITION AGAINST WHICH THE REVENUE IS IN APPEAL. 36. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THE ASSESSEE TOOK THE PLEA FOR THE FIRST TIME THAT THE SAID SERVICE WAS COVERED UNDER ARTICLE 8A OF DT AA BEFORE THE CIT(A) AND THERE WAS NO SUCH CLAIM MADE BEFORE THE ASSESSING OFFICER. IN OUR OPINION, THE ASSESSING OFFICER HAS TO EXAMINE THE ISSUE WHETHER ARTICLE 8A OF INDIA-NETHERLANDS DTAA IS APP LICABLE TO THE ASSESSEE'S CASE OR NOT. ACCORDINGLY, THIS ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATI ON. ITA NO.1159 & 1343/12 :- 32 -: 37. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. 38. TO SUMMARIZE, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES WHEREAS THE APPEAL OF THE REVE NUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2015, AT CHENNAI. SD/- SD/- ( ! ' . #$ ) ( DUVVURU RL REDDY ) & / JUDICIAL MEMBER ( ) ( CHANDRA POOJARI ) / ACCOUNTANT MEMBER / CHENNAI / DATED: 31 ST DECEMBER, 2015 RD ' #$ %$ / COPY TO: 1 . &' / APPELLANT 4. ( / CIT 2. ')&' / RESPONDENT 5. $*+ ' , / DR 3. ( () / CIT(A) 6. +/ 0 / GF