M/s. Gujarat Narmada Valley Fertilizers & Chemicals Ltd., Bharuch V. The Add.CIT.,Bharuch Circle, Bharuch

ITA 1323/AHD/2013

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 2099 (ITAT-SURAT)
• Duration Of Justice: 4 year(s) 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 19-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 08-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Keywords: Business income; Depreciation; Business expenditure; Additional depreciation; Cost of acquisition; Bad and doubtful debts; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure; TDS
• Section: 37; 28; 40(a)(ia); 32(1)(iia); 37(1); 80G; 250

Judgement Text

M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 1 OF 38 , , IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT . . , . . , BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER . . ./ I.T.A NO.1323/AHD/2013/SRT / A.Y.:2009-10 M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD. (EARLIER KNOWN AS GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD.) P.O.NARMADANAGAR 392 015. BHARUCH DISTRICT. PAN: AAACG 8372Q V S . THE ADDL. COMMISSIONER OF INCOME TAX, BHARUCH RANGE, BHARUCH. APPELLANT /RESPONDENT . . ./ I.T.ANO.1363/AHD/2013/SRT / A.Y.:2009-10 THE ASST. COMMISSIONER OF INCOME TAX, BHARUCH CIRCLE, BHARUCH. VS. M/S.GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD. (EARLIER KNOWN AS GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD.) P.O.NARMADANAGAR 392 015. BHARUCH DISTRICT. PAN: AAACG 8372Q APPELLANT /RESPONDENT /ASSESSEE BY SHRI SANJAY R. SHAH, CA /REVENUE BY SHRI O. P. SINGH, CIT - DR. / DATE OF HEARING: 25 .04 .2018 /PRONOUNCEMENT ON 17 .05 .2018 M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 2 OF 38 /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AS WELL THE REVENUE, WHICH ARE DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VI, BARODA (IN SHORT CIT (A)) DATED 27.02.2013 FOR THE ASSESSMENT YEAR 2009-10. ITA NO.1323/AHD/2013; (BY ASSESSEE): 2. GROUND NO.1 & 2 OF THE ASSESSEE RELATES TO UPHOLDING THE TAXABILITY OF CARBON CREDIT AMOUNTING TO RS.5,10,73,986/- AS REVENUE INCOME ON ACCOUNT OF CARBON CREDIT WAS A NOTIONAL INCOME. IT IS SUBMITTED THAT THERE IS NEITHER ANY ACCRUAL NOR REALISATION DURING THE YEAR FROM CARBON CREDIT AND FURTHER THE INCOME FROM CARBON CREDIT IS CAPITAL RECEIPT AND THEREFORE, IT CANNOT BE BROUGHT TO TAX. 3. SUCCINCT FACTS ARE THAT THE ASSESSING OFFICER (AO) NOTICED THAT THE ASSESSEE HAS DEDUCTED RS.5,10,73,986/- IN THE COMPUTATION OF INCOME ON ACCOUNT OF CARBON CREDIT INCOME BEING CAPITAL RECEIPTS. THEREFORE, THE ASSESSEE WAS ASKED TO JUSTIFY THE CLAIM. IT WAS SUBMITTED THAT THERE IS ENHANCED AWARENESS AND CONCERN GLOBALLY IN RESPECT OF INCREASING LEVEL POLLUTION. THIS DISCUSSION AMONG WITH M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 3 OF 38 COUNTRIES OF UNO CULMINATED INTO AN AGREEMENT KNOWN AS KYOTO- PROTOCOL WHICH CAME INTO FORCE ON 15.02.2005. THE PROTOCOL REQUIRES A 5.2% CUT IN GREEN HOUSE GAS EMISSIONS IN THE WORLD AS A WHOLE BY 2012. THE PROTOCOL REQUIRES 36 COUNTRIES FALLING IN THE CATEGORY OF HIGH PRODUCERS OF GAS DUE TO INTENSE INDUSTRIALIZATION, IN SUCH COUNTRIES TO REDUCE GAS EMISSION. THE REDUCTION TARGETS SET FOR THE COUNTRIES IN THE SAID CATEGORY CAN BE ACHIEVED BY EITHER REDUCING EMISSIONS OR BY PAYING TO COUNTRIES WHICH DO NOT FALL IN THE SAID CATEGORY WHICH ARE HAVING CREDITS OF LOW PRODUCTION OF GREEN HOUSE GAS EMISSIONS. INDIA ALONG WITH CHINA AND BRAZIL HAS EMERGED AS ONE OF ITS LARGEST BENEFICIARIES IN TERMS OF NEW SOURCE OF REVENUE, IT IS DUE TO CLEAN DEVELOPMENT MECHANISM (CDM) CARBON CREDIT HAPPENS IN THE FORM OF CERS OR CERTIFIED EMISSIONS REDUCTIONS. THE COMPANY HAD GONE FOR REGISTRATION WITH EXECUTIVE BOARD OF UNITED NATIONS FRAMEWORK CONVENTION OF CLIMATE CHANGE, (UNFCC) CDM REGISTRY ADMINISTRATOR COMPANYS PROJECT WAS REMAINED TO BE APPROVED BY UNFCC IN A.Y. 2008-08 AND THE COMPANY HAD NOT SOLD ANY CERS IN A.Y 2009-10 AND THUS NOTHING HAS ACCRUED OR REALIZED TOWARDS CARBON CREDIT. WITHOUT PREJUDICE, IT WAS FURTHER CONTENDED THAT NOTHING HAS ACCRUED OR REALIZED DURING THE YEAR FROM CARBON CREDIT, INCOME FROM CARBON CREDIT IS CAPITAL RECEIPT HENCE NOT LIABLE TO TAX AT ALL. SALE OF CERS ARE MERELY M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 4 OF 38 MEANS TO ACHIEVE THE BENEVOLENT, SOCIAL OBJECTIVE OF PREVENTING UNDESIRABLE CLIMATIC CHANGE SO AS TO ALLOW ECO SYSTEM ADOPT NATURALLY TO CLIMATE CHANGE, ENSURES SUFFICIENT FOOD PRODUCTION AND THUS THEN SUSTAINABLE DEVELOPMENT. AS SAID, THE INCOME FROM CERS RANKS AT PAR WITH SUBSIDIES/GRANTS GIVEN BY THE GOVERNMENT FOR ACHIEVING SOCIO ECONOMIC OBJECTIVE IN THE INTEREST OF PUBLIC AT LARGE. THE COMPANY HAS ACCOUNTED THE VER (VERIFIED EMISSION REDUCTIONS) OF RS.5.10 CRORES AS INCOME IN ITS BOOKS OF ACCOUNTS ON ACCRUAL BASIS IN A.Y. 2009-10 AS THE SAME IS OF CAPITAL NATURE, IT WAS NOT OFFERED TO TAX WHILE COMPUTING BUSINESS INCOME. 4. HOWEVER, THE CONTENTION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE ON THE GROUND THAT THE ASSESSEE ITSELF HAS CREDITED CARBON CREDIT IN THE PROFIT AND LOSS ACCOUNT AND REDUCED FROM THE COMPUTATION CLAIMED TO BE CAPITAL RECEIPTS. FURTHER, IF A MANUFACTURER ADOPTS A PROCESS TO PRODUCE THINGS AND THE PROCESS IS SUCH THAT IT LEADS TO LOWER GREEN HOUSE GAS EMISSION THEN THAT MANUFACTURER WILL BE ENTITLED TO CARBON CREDIT AND CAN BE SOLD TO OTHER ORGANISATIONS WHO ADOPTS A PROCESS WHICH LEADS TO HIGHER GREEN HOUSE GAS EMISSIONS. FOR GREEN HOUSE AND CLEANER TECHNOLOGY ONE HAS TO INSTALL COSTLY MACHINES FOR WHICH ASSESSEE WOULD CLAIM HIGHER DEPRECIATION AND OTHER EXPENSES AS ALLOWABLE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 5 OF 38 REVENUE EXPENDITURE. THE BYPRODUCT OF ACTIVITY WOULD BE ENTITLEMENT OF CARBON CREDIT WHICH HAS TO BE TREATED AS A REVENUE RECEIPT. THE AMOUNT OF CARBON CREDIT TO A PERSON WOULD BE DIRECTLY PROPORTIONAL TO THE AMOUNT OF PRODUCTION WITH GREENER TECHNOLOGY AND PROCESS. CARBON CREDIT WILL BE AVAILABLE TO AN ASSESSEE YEAR AFTER YEAR AS LONG AS IT LOWERS GREEN HOUSE GAS EMISSIONS, THUS, IT WILL BE RECEIVED REGULARITY AND EXPECTED TO REGULARLY AND RECEIVED FROM THIS SOURCE BEING THE GREENER TECHNOLOGY AND PROCESS THUS, ALL THE INGREDIENTS OF IT BEING REVENUE RECEIPTS ARE SATISFIED, THEREFORE IT IS NOTHING BUT REVENUE RECEIPT. 5. WITH REGARD TO ARGUMENT OF ASSESSEE REGARDING CONSEQUENT EFFECT IN SUBSEQUENT YEARS, THE AO OBSERVED THAT THE ASSESSEE IS FREE TO MAKE SUCH CLAIM DURING THE ASSESSMENT PROCEEDINGS OF NEXT YEAR. ACCORDINGLY, THE AO DISALLOWED THE CLAIM OF DEDUCTION OF RS.5,10,73,986/- IN COMPUTATION OF INCOME. 6. BEING AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). HOWEVER, THE CIT(A) HELD THAT CARBON CREDIT IS NOT RESULT OF ITS PRODUCTION FOR MANUFACTURING ACTIVITY. CARBON CREDIT IS IN FACT A RESULT OF CHANGED WORK ENVIRONMENTAL CONCERN AND DUE TO THAT APPELLANT GETS A PRIVILEGE IN NATURE OF TRANSFERABLE CARBON CREDIT. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 6 OF 38 IN SUCH CASES, THE APPELLANT DOES NOT INCUR ANY COST OF ACQUISITION OR COST OF PRODUCTION TO GET ENTITLEMENT OF CARBON CREDIT. THUS, AMOUNT RECEIVED FOR CARBON CREDIT HAS NO ELEMENT OF PROFIT OR GAIN. IT CANNOT BE SUBJECTED TO INCOME IN ANY MANNER UNDER ANY HEAD OF INCOME. HOWEVER, THE APPELLANT HAS CREDITED THE IMPUGNED INCOME INTO ITS PROFIT AND LOSS ACCOUNT. THEY ARE NOW CONTENDING THAT NO INCOME HAS ARISEN ON ACCOUNT OF CARBON CREDIT. THEREFORE, THE CIT(A) OPINED THAT IT IS INCONCEIVABLE TO TREAT INCOME ON ACCOUNT OF VERS AS CAPITAL RECEIPTS. THE LD.AR COULD NOT JUSTIFY THE CLAIM OF CAPITAL RECEIPT. IN FACT, WHAT HAS HAPPENED IS THAT THE APPELLANT HAS BEEN CAUGHT ON WRONG FOOTING. TO BEGIN WITH, THE APPELLANT HAS SUO-MOTO OFFERED THE INCOME WHEN THEY WANTED TO GET IT VERIFIED BY UNFCC DESIGNATED AGENCY, THE COST WAS VERY HIGH. IN FACT, COST OF VERIFICATION WAS MORE THAN THE INCOME FROM VERS AS PER THE DETAILS FILED BY THE APPELLANT. MOREOVER, CARBON CREDIT ALSO TUMBLED DOWN FOR $2 TO 2 CENTS DURING THE INTERVENING PERIOD. THIS CHANGE OF EVENTS HAS FORCED THE APPELLANT TO CHANGE ITS STAND BACK AND FORTH, ACCORDINGLY THIS GROUND WAS DISMISSED. 7. BEING AGGRIEVED, THE ASSESSEE PREFERRED THIS APPEAL BEFORE THIS TRIBUNAL. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 7 OF 38 COMPANY HAD GONE FOR REGISTRATION WITH EXECUTIVE BOARD OF UNFCC REGISTRY ADMINISTRATOR. THE COMPANIES CDM PROJECT WAS REMAINED TO BE APPROVED BY UNFCC IN A.Y. 2008-09 AND COMPANY HAD NOT SOLD ANY VERS IN A.Y. 2009-10 AND THUS NOTHING HAS ACCRUED REALIZED TOWARDS CARBON CREDIT. FURTHER, INCOME FROM CARBON CREDIT IS CAPITAL RECEIPT NOT LIABLE TO TAX AS SELLING VERS ARE MERELY MEANS TO ACHIEVE THE BENEVOLENT, SOCIAL OBJECTIVE OF THE PREVENTING UNDESIRABLE CLIMATIC CHANGE SO AS TO ALLOW ECO SYSTEM TO ADOPT NATURALLY TO CLIMATE CHANGE, ENSURE SUFFICIENT FOOD PRODUCTION THUS ACHIEVE SUSTAINABLE DEVELOPMENT. FURTHER, THE ASSESSEE HAS ACCOUNTED OF RS.5.10 CRORES IS BEING CREDITED IN PROFIT AND LOSS ACCOUNT WHICH WAS DEBITED IN A.Y.2010-11, THEREFORE, CREDIT OF THE SAME WOULD BE ALLOWABLE IF THE ADDITION IS SUSTAINED FOR THIS YEAR. THE LD.COUNSEL FURTHER CONTENDED THAT THE ISSUE IS COVERED BY THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SUBHASH KABINI POWER CORPORATION LTD. [2016] 69 TAXMANN.COM 394 (KARN) WHEREIN THE ISSUE WAS DEALT AT LENGTH AND RELIED ON VARIOUS JUDICIAL PRONOUNCEMENTS, HOLDING INCOME RECEIVED FROM REALISATION CARBON CREDIT AS CAPITAL IN NATURE. THE LD.COUNSEL FURTHER PLACED RELIANCE ON THE DECISION OF HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. MY HOMES POWER LTD. [2014] 46 TAXMANN.COM 314 (ANDHRA PRADESH) WHEREIN IT WAS HELD THAT WHERE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 8 OF 38 THE ASSESSEE ENGAGED IN THE BUSINESS OF POWER GENERATION, RECEIVED CARBON CREDITS FOR PROJECT ACTIVITY OF SWITCHING OF FOSSIL FUEL FROM NAPTHA AND DIESEL TO BIOMASS CARBON CREDIT NOT BEING LINKED WITH POWER GENERATION, AMOUNT RECEIVED ON THEIR TRANSFER DID NOT HAVE ELEMENT OF PROFIT AND GAIN AND IT WAS NOT TAXABLE. THE LD.COUNSEL FURTHER PLACED RELIANCE ON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF PR. CIT VS. KALPATHARU POWER TRANSACTION LTD. (TAX APPEAL NO141/2017 DATED 02.03.2017) WHEREIN AFTER DISCUSSING VARIOUS DECISIONS INCLUDING THE DECISION OF CIT VS. EXCEL INDUSTRIES LTD. [2013] 358 ITR 295 (SC) OF HON'BLE SUPREME COURT IT WAS HELD THAT APPLYING THE AFORESAID LAW LAID DOWN BY THE HON'BLE (SC) TO FACTS OF THE CASE ON HAND, IT CANNOT BE SAID THAT THE LD.CIT(A) AS WELL AS LD.TRIBUNAL HAVE COMMITTED ANY ERROR IN DELETING THE ADDITION OF RS.5,78,28,058/- HOLDING THAT AS NEITHER THE CARBON RECEIPTS WERE SOLD/TRANSFERRED IN FAVOUR OF FOREIGN COMPANIES IN THE YEAR UNDER CONSIDERATION, THE SAME CANNOT BE INCLUDED AS RECEIPTS/INCOME IN THE YEAR UNDER CONSIDERATION. UNDER THE CIRCUMSTANCES WE SEE NO REASON TO INTERFERE WITH THE IMPUGNED JUDGMENT AND ORDER PASSED BY THE LD.TRIBUNAL. NO SUSTENTATIVE QUESTION AROSE IN THE PRESENT APPEAL. THE LD.COUNSEL ALSO PLACED RELIANCE ON THE DECISION OF ALEMBIC LIMITED VS. DCIT IN ITA NO.1912/AHD/2012 DATED 09.12.2016 OF AHMEDABAD TRIBUNAL M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 9 OF 38 WHEREIN ALLOWING RATIO LAID DOWN BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF SUBHASH KABINI POWER CORPORATION AND HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF MY HOMES POWER LTD. IT WAS HELD THAT CARBON CREDIT REALISATION IS CAPITAL IN NATURE. 8. PER CONTRA, THE LD.CIT-DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE FACTS AND MATERIAL ON RECORD. WE HAVE GONE THROUGH CASE LAWS RELIED ON BY THE LD.COUNSEL AND ARE OF THE VIEW THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY DECISION OF HON'BLE JURISDICTIONAL HIGH COURT OF GUJARAT IN THE CASE OF PR.CIT VS. KALPATARU POWER TRANSMISSION LTD. (TAX APPEAL NO.141/2017 DATED 02.03.2017) WHEREIN THE HON'BLE GUJARAT HIGH COURT HAS OBSERVED UNDER : [30] FEELING AGGRIEVED AND DISSATISFIED WITH THE ADDITION MADE BY THE AO OF RS.5,78,28,058/-, THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED CIT(A). THAT BY DETAILED REASONED JUDGMENT AND ORDER THE LEARNED CIT(A) DIRECTED TO DELETE THE AFORESAID ADDITION OF RS.5,78,28,058/- BY OBSERVING THAT AS THERE WAS NO TRANSFER/SALE OF THE CARBON RECEIPTS DURING THE YEAR UNDER CONSIDERATION AND THEREFORE, THE SAME CANNOT BE INCLUDED IN THE YEAR CONSIDERATION. THE LEARNED TRIBUNAL IN AN APPEAL PREFERRED BY THE REVENUE HAS CONFIRMED THE SAID ORDER PASSED BY LEARNED CIT(A) BY SPECIFICALLY OBSERVING THAT AS THE CARBON RECEIPTS WERE NEITHER SOLD/TRANSFERRED DURING THE YEAR UNDER CONSIDERATION AND THEREFORE, THE SAME CANNOT BE INCLUDED IN THE INCOME OF THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. 10. IN THE LIGHT OF THE ABOVE, WE FIND THAT THE ASSESSEE HAS NEITHER RECEIVED THE CARBON CREDIT DURING THE YEAR AND NOR M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 10 OF 38 ACCOUNTED FOR ON THE BASIS OF ACCRUAL, HOWEVER, THE SAME IS IN THE NATURE OF CAPITAL RECEIPTS, THEREFORE, RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE ABOVE DECISION BY HON'BLE JURISDICTIONAL HIGH COURT, THE ADDITION MADE BY THE AO OF RS.5,10,73,986/- IS DELETED. ACCORDINGLY, THIS GROUND APPEAL IS ALLOWED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. CROSS APPEAL NO. 1363/AHD/2013 BY REVENUE: 12. GROUND NO.1.(I) RELATES TO DELETING THE DISALLOWANCE OF RS.2,55,82,153/- CLAIMED AS REVENUE EXPENDITURE. 13. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE INCURRED EXPENSES OF CONSUMPTION AND REPLACEMENT OF STORES AND SPARES OF RS.9,548.68 LAKHS AND CLAIMED THE SAME AS REVENUE EXPENDITURE. HOWEVER, OUT OF THAT, THE ASSESSING OFFICER (AO) HAS DISALLOWED RS.3,00,96,651/-TREATING IT AS CAPITAL EXPENDITURE AFTER ALLOWING THE DEPRECIATION OF RS.45,14,498/- THEREON. THE AO HAS MADE DISALLOWANCE OF NET AMOUNT RS.2,55,82,153/- ON THE GROUND THAT THE ITEMS ARE IN THE NATURE OF INDEPENDENT MACHINE AND AVERAGE LIFE SPAN IS 5 YEARS OR MORE AND IN ONE ITEM LIFE SPAN IS 20 YEARS WHICH SUGGESTS THAT THESE ITEMS CAN BE USED INDEPENDENTLY. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 11 OF 38 14. THE ASSESSEE WENT IN TO APPEAL BEFORE THE CIT(A). THE CIT(A) AFTER EXAMINING THE FACTS OF THE CASE AND ITEMS OF MACHINERY TO REPLACE COMPONENT AND RELYING ON VARIOUS CASE LAWS EXAMINED THE EXPLANATION OF THE ASSESSEE AND ON THE BASIS OF EXPLANATION FURNISHED BY THE ASSESSEE, DELETED THE ADDITIONS DISALLOWANCE MADE BY THE AO. 15. BEING AGGRIEVED, THE REVENUE HAS FILED THIS APPEAL BEFORE US. THE LD.CIT-DR STRONGLY RELIED ON THE ORDERS OF THE AO. 16. ON THE OTHER HAND, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS COVERED BY EARLIER YEARS ORDER OF ITAT IN ASSESSEES OWN CASE FOR A.Y. 2008-09. FURTHER IN THE PAST A.Y. 2000-01, 2002- 03 WHEN THE MATTER RESTORED TO AO IT WAS ACCEPTED AS REVENUE EXPENDITURE BY AO IN SET-ASIDE PROCEEDINGS (PAGE 8 OF CIT(A) ORDER) AND THE AUTHORISED REPRESENTATIVE (AR) HAS PLACED RELIANCE ON THE DECISION AS RELIED ON BY THE CIT(A) IN PARA 4.3 OF HIS ORDER. 17. WE HAVE CONSIDERED THE FACTS AND PERUSED MATERIAL AVAILABLE ON RECORD AND FOUND THAT THE AO HAS ACCEPTED THIS ISSUE IN ITS SET- ASIDE ASSESSMENT ORDER FOR A.Y. 1999-2000 PASSED U/S.143(3) READ WITH SECTION 250 OF THE ACT DATED 29.12.2009 (PAPER BOOK, PAGE 630 PARA 4.5 OF THE ORDER). SINCE, THE REVENUE HAS ACCEPTED THIS M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 12 OF 38 ISSUE IN THE SET-ASIDE ASSESSMENT PROCEEDINGS, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A). ACCORDINGLY, THIS GROUND OF REVENUE IS DISMISSED. 18. GROUND NO.1.(II) RELATES TO DELETING THE DISALLOWANCE OF RS.2,15,030/- ON ACCOUNT OF DEPRECIATION CLAIMED ON ASSETS GIVEN ON LEASE UNDER MERE FINANCIAL ARRANGEMENT BY ASSESSEE WHO WAS NOT ENGAGED IN THE LEASING BUSINESS. 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND FIND THAT THIS ISSUE IS CONTINUED FROM THE EARLIER ASSESSMENT YEARS AND COVERED IN FAVOUR OF THE ASSESSEE IN HIS OWN CASE BY ITAT FOR A.Y. 2008-09 AND THE DECISION OF ITAT HAS ALSO BEEN CONFIRMED BY THE HON'BLE GUJARAT HIGH COURT. IN VIEW OF THESE FACTS AND ON THE BASIS OF FINDING OF ITAT, WE HELD THAT IT IS AN OPERATIVE LEASE AND NOT A FINANCIAL LEASE, HENCE THE DISALLOWANCE BASED ON THE SAME LEASE AGREEMENT, ARE ALLOWABLE AS DEDUCTION. FURTHER THE AO HAS ALLOWED THE DEPRECIATION CLAIMED BY THE ASSESSEE. HENCE, FOLLOWING THE DECISION OF ITAT FOR A.Y 2008-09, THE ORDER OF THE CIT(A) IS UPHELD, ACCORDINGLY THIS GROUND OF REVENUE IS DISMISSED. 20. GROUND NO.1.(III) RELATES TO DELETING DISALLOWANCE OF RS.10,94,76,489/- ON ACCOUNT OF ADDITIONAL DEPRECIATION CLAIM U/S.32(1)(IIA) ON WIND MILL. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 13 OF 38 21. BRIEF FACTS OF THE CASE ARE THAT DURING THE YEAR, THE ASSESSEE HAS INSTALLED 12MW WIND MILL POWER TURBINES AT A COST OF RS.72,98,43,626/- AND GENERATION OF ELECTRICITY HAS STARTED DURING THE YEAR. DEPRECIATION OF RS.43,79,05,958/- U/S.32 AND ADDITIONAL DEPRECIATION OF RS.10,94,76,489/- U/S.32(1)(IIA) HAD BEEN CLAIMED ON THE COST OF WIND MILL. HOWEVER, THE AO HAS DISALLOWED THE ADDITIONAL DEPRECIATION ON THE GROUND THAT THE WIND MILL DOES NOT PRODUCE ARTICLE OR THING, BUT GENERATE ELECTRICITY, THEREFORE, THE REQUIREMENT FOR CLAIMING DEDUCTION U/S. 32(1)(IIA) ARE NOT MET, HENCE, DEPRECIATION IS NOT ALLOWABLE. 22. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE CIT(A). THE CIT(A) OBSERVED THAT THE ADDITIONAL DEPRECIATION SECTION REQUIRES FULFILLMENT OF TWO CONDITIONS (I) ANY MACHINERY OR PLANT WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER 31.03.2005; (II) BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE/PRODUCTION OF ANY ARTICLE OR THING. THE ASSESSEE COMPANY HAS FULFILLED BOTH THE CONDITIONS, THERE IS NO DISPUTE AS FAR AS FIRST CONDITION IS CONCERNED. HOWEVER, AS PER THE SECOND CONDITION THE ASSESSEE SHOULD ENGAGED IN THE BUSINESS OF MANUFACTURE OF ANY ARTICLE OR THING. THE AR RELIED ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. VTM LTD. [2010] 187 TAXMANN.COM 319 (MAD) AND DECISION BY M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 14 OF 38 HON'BLE GUJARAT HIGH COURT IN THE CASE OF DIAMINES AND CHEMICALS LTD [2014] 42 TAXMANN.COM 193 GUJARAT AND ALSO RELYING ON THE DECISION OF CST MADHYA PRADESH, INDORE VS. MADHYA PRADESH ELECTRICITY BOARD, JABALPUR [1969] 1 SCC 200 (SC) WHEREIN ELECTRICITY WAS CONSIDERED AS GOODS FOR THE PURPOSE OF SALES TAX, ACCORDINGLY, THE CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE. 23. BEING AGGRIEVED THE REVENUE FILED THIS APPEAL BEFORE US. THE LD.CIT-DR RELYING ON THE ORDER OF AO SUBMITTED THAT THE ASSESSEE IS IN THE BUSINESS OF FERTILIZERS AND CHEMICALS AND NOT IN THE PRODUCTION OF ELECTRICITY AND ARTICLE OR THINGS, THEREFORE, THE AO WAS CORRECT IN MAKING DISALLOWANCES. 24. PER CONTRA, THE LD.COUNSEL RELIED ON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF DIAMINES CHEMICALS LTD 42 TAXMANN.COM 193 AND ALSO MADRAS HIGH COURT IN THE CASE OF CIT VS. VTM 313 ITR 336 (MADRAS) HELD THAT THE ISSUE HAS BEEN ALLOWED IN FAVOUR OF THE ASSESSEE. 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE AO HAS DISALLOWED THE CLAIM OF THE ADDITIONAL DEPRECIATION ON THE GROUND THAT WIND MILL DOES NOT PRODUCE ARTICLE OR THING BUT GENERATES ELECTRICITY WHEREAS THE PROVISIONS OF SECTION M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 15 OF 38 32 (1)(IIA) REQUIRES THAT THE ASSESSEE SHOULD PRODUCE ARTICLE OR THING. WE NOW REFER TO THE PROVISIONS OF SECTION 32(1)(II)(A) OF THE ACT WHICH READS AS UNDER: (IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT) WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31ST DAY OF MARCH, 2005 BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING OR IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRIBUTION OF POWER, A FURTHER SUM EQUAL TO TWENTY PER CENT OF THE ACTUAL COST OF SUCH MACHINERY OR PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE (II). 26. A READING OF THE ABOVE PROVISIONS MAKES IT CLEAR THAT THE ADDITIONAL DEPRECIATION @20% OF THE ACTUAL COST OF MACHINERY & PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE (II). IN OTHER WORDS, OVER AND ABOVE THE DEPRECIATION CLAIMED AND ALLOWED U/S 32(1)(II) OF THE ACT, THE ASSESSEE SHALL BE ELIGIBLE FOR AN ADDITIONAL DEPRECIATION OF 20% OF THE ACTUAL COST OF SUCH MACHINERY AND PLANT. IT FURTHER PROVIDES THAT A MACHINERY OF PLANT SHOULD BE A NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT) WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31ST DAY OF MARCH, 2005. IT FURTHER PROVIDES THAT THE ADDITIONAL DEPRECIATION IN NEW MACHINERY OR PLANT SHALL BE ALLOWED IN THE HANDS OF THE ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING OR IN THE BUSINESS OF GENERATION OR GENERATION & DISTRIBUTION OF POWER. IN THE INSTANT CASE, IT IS NOT IN DISPUTE THAT NEW MACHINERY OR PLANT HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31ST MARCH 2005. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS CLAIMED DEPRECIATION M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 16 OF 38 U/S 32(1)(II) OF THE ACT. ONCE THE AO HAS ACCEPTED THE ASSESSEES CLAIM U/S 32(1)(II) OF THE ACT, WE DO NOT SEE A REASON WHY THE ASSESSEE SHOULD BE DENIED THE CLAIM OF ADDITIONAL DEPRECIATION ON THE SAME ASSETS U/S 32(1)(IIA) OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE IN THE CASE OF CIT VS. DIAMINES & CHEMICALS LTD. (2014) 109 DTR 62 (GUJ.) (HC): WHEREIN THE FACTS WERE THAT THE ASSESSEE ALREADY IN THE BUSINESS OF MANUFACTURE OF CHEMICALS, IS ELIGIBLE FOR ADDITIONAL DEPRECIATION U/S 32(1)(IIA) IN RESPECT OF WINDMILL ELECTRICITY GENERATING MACHINERY ACQUIRED BY IT. 27. FURTHER IN THE CASE OF JCIT VS. MINERAL ENTERPRISES LTD. (2013) 144 ITD 680 (BANG.)(TRIB.): THE ASSESSEE WAS ENGAGED IN MANUFACTURE OF ARTICLE OR THING. BY EXERCISING THE OPTION PROVIDED UNDER SECOND PROVISO TO RULE 5(1A), IT CLAIMED ADDITIONAL DEPRECIATION ON WIND MILL. THE AO DISALLOWED THE CLAIM OF ADDITIONAL DEPRECIATION ON WIND MILL ON THE GROUND THAT PROVISIONS OF THE ACT ALLOWED DEPRECIATION ONLY IN CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT) AND NOT FOR WIND MILL, WHICH WAS ENGAGED IN POWER GENERATION. IT WAS HELD THAT IN VIEW OF THE DECISION OF MADRAS HIGH COURT RENDERED IN CASE OF CIT VS. VTM LTD. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 17 OF 38 [2009] 319 ITR 336, ASSESSEE WAS ENTITLED TO ADDITIONAL DEPRECIATION ON THE WIND MILL. 28. WE FIND THAT HON`BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. VTM LTD. (2009) 319 ITR 336 (MAD.)(HC): IN THIS CASE, ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF TEXTILE GOODS. IT SET UP A WINDMILL FOR GENERATION OF POWER AND CLAIMED ADDITIONAL DEPRECIATION U/S 32(1)(IIA). AO HELD THAT SETTING UP OF A WINDMILL HAS ABSOLUTELY NO CONNECTION WITH THE MANUFACTURING OF TEXTILE GOODS AND THUS ASSESSEE IS NOT ENTITLED TO CLAIM ADDITIONAL DEPRECIATION U/S 32(1)(IIA). IT WAS HELD THAT TO CLAIM ADDITIONAL DEPRECIATION U/S 32(1)(IIA), WHAT IS REQUIRED TO BE SATISFIED IS THAT SETTING UP OF A NEW MACHINERY OR PLANT SHOULD HAVE BEEN ACQUIRED AND INSTALLED AFTER 31ST MARCH, 2002 BY AN ASSESSEE, WHO WAS ALREADY ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. THE SAID PROVISION DOES NOT STATE THAT THE SETTING UP OF A NEW MACHINERY OR PLANT, WHICH WAS ACQUIRED AND INSTALLED UPTO 31ST MARCH, 2002 SHOULD HAVE ANY OPERATIONAL CONNECTIVITY TO THE ARTICLE OR THING THAT WAS ALREADY BEING MANUFACTURED BY THE ASSESSEE. THEREFORE, THE CONTENTION THAT SETTING UP OF A WINDMILL HAS NOTHING TO DO WITH THE POWER INDUSTRY, NAMELY, MANUFACTURE OF TEXTILE GOODS IS TOTALLY NOT GERMANE TO THE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 18 OF 38 SPECIFIC PROVISION CONTAINED IN S.32(1)(IIA) OF THE ACT. ACCORDINGLY, ADDITIONAL DEPRECIATION ON WINDMILL AS ALLOWED BY CIT(A)/ITAT WAS UPHELD. THIS VIEW WAS ALSO FOLLOWED IN CASE OF CIT VS. HI TECH ARAI LTD. 321 ITR 477 (MAD.)(HC) AND CIT VS. TEXMO PRECISION CASTINGS 321 ITR 481 (MAD.)(HC). 29. IT IS NOW A SETTLED POSITION AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CST MADHYA PRADESH INDORE VS. MADHYA PRADESH ELECTRICITY BOARD JABALPUR (1969) 1 SCC 200 (SC) AND HON'BLE GUJARAT HIGH COURT IN THE CASE OF DIAMINES AND CHEMICALS LTD.(SUPRA) THAT THE PROCESS OF GENERATION OF ELECTRICITY IS AKIN TO MANUFACTURE OF AN ARTICLE OR THING, THE ASSESSEE IN THE INSTANT CASE SATISFY THE REQUIREMENT THAT IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THING. IN LIGHT OF ABOVE, THE ASSESSEE IS HELD ENTITLED TO THE ADDITIONAL CLAIM OF DEPRECIATION ON THE POWER PLANT AND THE WINDMILL INSTALLED DURING THE YEAR. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A), HENCE THIS GROUND OF THE REVENUE IS DISMISSED. 30. GROUND NO.1.(IV) RELATES TO DELETING DISALLOWANCE OF RS.39,00,000/- ON ACCOUNT OF EXPENDITURE CLAIMED TOWARDS DONATION ON THE GROUND OF CORPORATE SOCIAL RESPONSIBILITY IN CONTRAVENTION TO SECTION 37(1) OF THE ACT BEING EXPENDITURE NOT EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 19 OF 38 31. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CONTRIBUTED 4000 KITS FOR THE VALUE AMOUNTING TO RS.39,00,000/- FOR PEOPLE OF BIHAR WHO WERE AFFECTED BY UNPRECEDENTED FLOODS. THE GOVERNMENT OF GUJARAT HAD ORGANIZED KITS CONTAINING VARIOUS RELIEF MATERIAL LIKE FOOD ITEMS, KEROSENE, BLANKETS ETC. TO THE FLOOD AFFECTED PEOPLE OF BIHAR. HOWEVER, THE AO DISALLOWED THE CLAIM ON THE GROUND THAT EXPENDITURE WOULD BE ALLOWABLE U/S.37(1) ONLY IF IT IS WHOLLY AND EXCLUSIVELY INCURRED THE PURPOSE OF BUSINESS. ONLY BRAND IMAGE OF GOVERNMENT OF GUJARAT HAS INCREASED BY SUCH INITIATIVE AND NOT OF THE ASSESSEE COMPANY WHO HAD CONTRIBUTED THE KITS. GOVERNMENT BEING MAJORITY SHAREHOLDER OF THE COMPANY MAY DIRECT IT MAKE SUCH PAYMENT, BUT IT DOES NOT AUTOMATICALLY BECOME AN ALLOWABLE DEDUCTION UNDER THE ACT. ANY DONATION PAID OTHERWISE THAN IN CONFORMITY WITH SECTION 80G WOULD NOT BE AN ALLOWABLE DEDUCTION. 32. BEING AGGRIEVED, THE ASSESSEE FILE APPEAL BEFORE CIT(A), WHEREIN IT WAS CLAIMED THAT THE HON'BLE GUJARAT HIGH COURT IN THE TAX APPEAL NO.78/208 ACCEPTED THE DECISION OF TRIBUNAL THAT THE DEDUCTION OF AMOUNT PAID TO FAMILY OF KARGIL WAR MARTYRS AS ALLOWABLE AND ALLOWED THE CONTRIBUTION MADE TO THE CHIEF MINISTERS RELIEF FUND AS BUSINESS EXPENDITURE BY ACCEPTING THE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 20 OF 38 CONTENTION OF THE APPELLANT COMPANY. THEREFORE, THE CIT(A) OBSERVED THAT THE ASSESSEE COMPANY BEING A JOINT SECTOR LARGE SCALE INDUSTRY IS CONSCIOUS OF ITS CORPORATE SOCIAL RESPONSIBILITY AND MADE ITS CONTRIBUTION IN THE ORDINARY COURSE OF ITS BUSINESS TOWARDS SOCIALLY USEFUL ACTIVITIES AND IN VIEW OF ITS VERY NATURE, ARE ALLOWABLE DEDUCTION ION COMPUTATION OF BUSINESS INCOME. THE CIT(A) OBSERVED THAT THERE WAS A SIMILAR CASE A.Y. 2001-02 WHERE THE APPELLANT COMPANY MADE PAYMENT TO FAMILY OF KARGIL WAR MARTYRS . THE ITAT HAS ALLOWED THE EXPENDITURE ON THE GROUND THAT THE EXPENDITURE IS INCURRED BY THE ASSESSEE COMPANY TO CREATE A BRAND IMAGE OF THE COMPANY IN THE MINDS OF CONSUMERS OF FERTILIZER I.E. FARMERS THAT THE COMPANY IS TAKING CARE OF THEIR CUSTOMERS IN THE CASE OF THEIR DISTRESS AND HAS COME TO THEIR RESCUE AND CARE. ACCORDINGLY, THE DISALLOWANCE SO MADE WAS DELETED. 33. BEING AGGRIEVED, THE ASSESSEE HAS COME UP IN APPEAL BEFORE THIS TRIBUNAL. THE LD.CIT-DR VEHEMENTLY SUPPORTED THE ORDER OF THE AO. 34. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE EXPENDITURE IS INCURRED ON BEHEST OF THE STATE GOVERNMENT AS THE ASSESSEE IS A STATE GOVERNMENT UNDERTAKING THE CONTRAVENTION WERE MADE FOR FLOOD RELIEF IN THE STATE OF BIHAR, THEREFORE, THE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 21 OF 38 EXPENDITURE WAS INCURRED OUT OF COMMERCIAL EXPEDIENCY AND HENCE DEDUCTIBLE U/S.37(1) OF THE ACT IN SUPPORT OF HIS CONTENTION THE LD.COUNSEL HAS PLACED RELIANCE IN THE CASE OF CIT VS. MADRAS REFINERIES LTD. 266 ITR 170 MADRAS, SHRI VENKATA SATYANARAYANA RICE MILLS CONTRACTORS CO. VS. CIT 223 ITR 101 (SC), MUMBAI ITAT HINDUSTAN PETROLEUM CORPORATION LTD. 96 ITD 186 AND IN APPELLANTS OWN CASE SUCH EXPENDITURE WAS ALLOWED BY HON'BLE ITAT IN ASSESSMENT YEAR 1994-95, 1995-96 AND 2001-02. 35. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE AVAILABLE MATERIAL ON RECORD. WE FIND THAT THE EXPENDITURE HAS BEEN INCURRED ON ACCOUNT OF VARIOUS RELIEF MATERIALS LIKE FOOD ITEMS, KEROSENE, BLANKETS ETC. TO THE FLOOD AFFECTED PEOPLE OF BIHAR. THEREFORE, THIS EXPENDITURE HAS BEEN INCURRED ON BEHEST OF THE STATE GOVERNMENT OF GUJARAT AS THE ASSESSEE IS A PUBLIC UNDERTAKING OF GUJARAT GOVERNMENT. THE ASSESSEE IS CONSCIOUS OF ITS CORPORATE SOCIAL RESPONSIBILITY AND MAKES CONTRIBUTIONS IN THE ORDINARY COURSE OF ITS BUSINESS TOWARDS SOCIALLY USEFUL ACTIVITIES AND IN VIEW OF VERY NATURE THE EXPENDITURE INCURRED FOR CORPORATE SOCIAL RESPONSIBILITY IS ALLOWABLE AS BUSINESS EXPENDITURE AS IT WAS INCURRED FOR MAKING THE IMAGE OF THE COMPANY AND TOWARDS ITS SOCIAL RESPONSIBILITY RELIANCE PLACED ON THE DECISION OF APEX COURT M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 22 OF 38 IN THE CASE OF SHRI VENKATA SATYANARAYANA RICE MILLS CONTRACTORS CO. VS. CIT 223 ITR 101 (SC) WHEREIN CONTRIBUTION TO THE PUBLIC WELFARE FUND AT THE INSTANCE OF THE GOVERNMENT AUTHORITIES WAS ALLOWED AS THE DEDUCTION ON THE GROUND THAT IT WAS MOTIVATED BY COMMERCIAL CONTRIBUTION. SIMILARLY, THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSESSEE IN TAX APPEAL NO.770/1999 WITH TAX APPEAL NO.77 & 78 / 2008 DATED 06.05.2011 HAS UPHELD THE ORDER OF TRIBUNAL WHEREIN THE TRIBUNAL HAS UPHELD THE CONTRIBUTION MADE TO THE CHIEF MINISTER EARTH QUAKE RELIEF FUND AND CONTRIBUTION TO THE STATE GOVERNMENT AS BUSINESS EXPENDITURE FOR A.Y. 1994-95 AND 1995-96 BY TREATING THE CASE WHERE IN THE NATURE OF COMMERCIAL EXPEDIENCY AS ALLOWABLE AS A REVENUE EXPENDITURE. 36. IN THE LIGHT OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A), ACCORDINGLY SAME IS UPHOLD, THEREFORE, THIS GROUND OF APPEAL IS DISMISSED. 37. GROUND NO.1.(V) RELATES TO DISALLOWANCE OF RS.22,39,77,922/- CLAIMED ON ACCOUNT OF LOSS ON FERTILIZER BONDS BEING RECEIVED IN LIEU OF SUBSIDY WHICH WAS INVESTED BY ASSESSEE TO EARN INTEREST INCOME. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 23 OF 38 38. BRIEF FACTS OF THE CASE ARE THAT THE GOVERNMENT OF INDIA WITH A VIEW TO MAKE FERTILIZER AVAILABLE TO FARMERS AT SPECIFIED RATE AND AT THE SAME TIME TO ENSURE ADEQUATE RETURN ON INVESTMENT TO THE FERTILIZER COMPANIES INTRODUCED THE RETENTION PRICE CUM SUBSIDY SCHEME (RPS) IN 1997. IN ACCORDANCE WITH THE MODIFIED SCHEME, THE ASSESSEE RECEIVED GOVERNMENT OF INDIA SPECIAL BONDS OF RS.194.376 CRORES AND RS.318.619 CRORES RESPECTFULLY WITH COUPON RATES VARYING FROM 8.30% TO 6.20% AND MATURITY OF 2022, 2023 AND 2026 DURING THE FINANCIAL YEAR ENDING 31.03.2008 AND 31.03.2009. DURING THE YEAR IN COMPUTATION OF INCOME THE ASSESSEE HAS CLAIMED RS.18,62,04,574/- AS LOSS ON ALLOTMENT OF FERTILIZER BONDS AND RS.3,77,73,348/- AS LOSS ON SALE OF FERTILIZER BONDS. HOWEVER, THE PROVISION FOR DIMINUTION IN VALUE OF BONDS AT THE YEAR END TO THE EXTENT OF DIFFERENCE BETWEEN TO THE BOOK VALUE AND MARKET RATE ON 31.03.2009 MADE IN THE BOOKS OF ACCOUNTS ADDED BACK IN THE COMPUTATION OF INCOME AS THE SAME IS NOT ADMISSIBLE UNDER INCOME TAX ACT. HOWEVER, THE AO DISALLOWED THIS LOSS ON THE GROUND THAT THE ASSESSEE HAS RECEIVED BONDS. THE VALUE OF WHICH HAS BEEN REFLECTED IN SALES. SUBSEQUENT ACTION OF THE ASSESSEE WOULD DETERMINED WHETHER THE BONDS WERE INVESTMENT OR NOT. IF THE INTENTION OF THE ASSESSEE WAS TO RECEIVE CASH ON SALE PROCEEDS THEN IMMEDIATELY ON ALLOTMENT OF BONDS, THE ASSESSEE WOULD HAVE SOLD IT M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 24 OF 38 IN THE MARKET, SINCE IT WAS TRADABLE. IF THE ASSESSEE DOES NOT SELL THE BONDS, BUT HOLDS IT THEN IT WOULD IMPLY THAT THE ASSESSEE HAS MADE INVESTMENT IN BONDS. BY NOT SELLING THE BONDS OF ALLOTMENT THE ASSESSEE HAS DECIDED TO INVEST THE SALE PROCEEDS RECEIVED IN THE BONDS INTO INVESTMENT WHICH ARE REGULAR TO THE ASSESSEE CAPITAL GAIN IN CASE OF PAYABLE INTEREST RATE CYCLE. 39. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). THE CIT(A) CONSIDERED THE FACTS AND HAS GIVEN ITS FINDING AS UNDER: 10.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, FINDING OF THE AO AND WRITTEN SUBMISSION OF THE APPELLANT. THE AO HAS DISALLOWED THE LOSS ON SALE OF BONDS ON THE GROUNDS THAT THE NATURE OF IS CAPITAL AS IT HAS ARISEN ON SALE OF INVESTMENTS. HOWEVER, IT IS OVER SIMPLIFICATION OF THE MATTER. THE AO HAS DISALLOWED RS. 18,62,04,574 ON THE MISCONCEPTION OF FACTS AND TRUE NATURE. THE LOSS ON ALLOTMENT OF FERTILIZER BONDS CANNOT BE TERMED AS A NOTIONAL LOSS BUT IN FACT THE LOSS OF RS. 18,62,04,574/- IS REAL BECAUSE IT IS ACTUAL DIFFERENCE BETWEEN MARKET VALUE AS ON THE DATE OF ALLOTMENT AND FACE VALUE OF THE BOND. THE EFFECTIVE RECEIPT OF SUBSIDY IS NOT THE AMOUNT OF FACE VALUE OF BONDS BUT THE MARKET VALUE OF BONDS ON THE DATE OF ALLOTMENT / RECEIPT OF SUBSIDY IN THE FORM OF BONDS. IN OTHER WORDS, IT IS PARTIAL REVERSAL OF INITIAL ACCOUNTING OF SUBSIDY AT FACE VALUE TO THE EXTENT OF DIFFERENCE BETWEEN FACE VALUE & MARKET VALUE ON THE DATE OF ALLOTMENT. IN A.Y. 2008-09, THE AO HAS ALREADY ALLOWED THE LOSS OF RS.7,71,16,280 INCURRED ON ALLOTMENT OF 8.30% & 7.95% BONDS AS BUSINESS LOSS OR REVENUE LOSS THE BONDS ARE NOT INVESTMENTS IN THE HANDS OF THE APPELLANT BECAUSE IT WAS NOT A VOLUNTARY ACTION OF 'INVESTING'. THE APPELLANT COMPANY RECEIVED BONDS IN LIEU OF SUBSIDY AND THEREFORE A CURRENT ASSET. AS FAR AS LOSS RS. 3,77,73,348/- IS CONCERNED, THE BONDS ARE RECEIVED IN LIEU OF SUBSIDY WHICH WAS THE ADDITIONAL SALE PRICE RECEIVABLE FROM GOI. THE APPELLANT COMPANY HAD OFFERED TO TAX THE SUBSIDY RECEIVABLE AS PART OF THE SALES PRICE. THE REALIZATION OF ADDITIONAL SALE PRICE BY WAY OF SUBSIDY IN THE FORM OF FERTILIZER BOND DOES NOT MAKE BONDS AN INVESTMENT BECAUSE THE BONDS WERE NEVER ACQUIRED BY THE APPELLANT COMPANY AS INVESTMENT OR CAPITAL BUT AS DEBT AND ALSO SHOWN AS CURRENT ASSETS. ACCORDINGLY THE LOSS SUFFERED ON ALLOTMENT OF BONDS & ACTUAL SALE OF THE BONDS CANNOT BE CONSIDERED AS CAPITAL LOSS BUT HAS TO BE ALLOWED AS BUSINESS LOSS U/S. 28 OR 37. IT SATISFIES ALL THE CONDITIONS LAID DOWN IN SECTION 28 OR 37. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 25 OF 38 FURTHER RS. 3, RS.3,77,73,348/- IS CONCERNED IT IS DIFFERENCE BETWEEN THE SALES PRICE AND MARKET VALUE AS ON THE DATE OF ALLOTMENT OF THE BONDS. THE MAIN CONTENTION OF THE AO IS THAT AFTER ALLOTMENT THE COMPANY CONTINUED TO HOLD BONDS AND THEREFORE IT TAKES CHARACTERISTIC OF INVESTMENT. HOWEVER, HOLDING PERIOD DOES NOT DECIDE NATURE OF BONDS AS INVESTMENT. AS STATED THE BACKGROUND OF FACTS OF GETTING BONDS CLEARLY INDICATE THAT THE BONDS WERE NOT ACQUIRED AS INVESTMENTS. IT FURTHER EVIDENT FROM MATERIAL PLACED ON RECORD THAT THE BONDS WERE NOT HELD BY THE APPELLANT COMPANY FOR A VERY LONG TIME. THIS IS ALSO TO BE REVIEWED FROM THE FACT THAT BONDS MAY NOT HAVE DAY TO DAY MARKET. LOWER REALIZATION FOR BONDS IS NOTHING BUT LOWER REALIZATION OF SUBSIDY. ACTUAL SUBSIDY RECEIVED BY THE APPELLANT IS THE ACTUAL REALIZATION ON SALE OF BONDS AND THEREFORE THE LOSS IS A REVENUE LOSS. THE FOLLOWING DECISIONS SUPPORT THE CASE OF THE APPELLANT. THE SUPREME COURT OF INDIA IN CASE OF PATNAIK & CO. LTD. V. COMMISSIONER OF INCOME- TAX 27 TAXMAN 287 HELD THAT WHERE THE GOVERNMENT BONDS OR SECURITIES WERE PURCHASED BY THE ASSESSEE WITH A VIEW TO INCREASING HIS BUSINESS WITH THE GOVERNMENT OR WITH THE OBJECT OF RETAINING THE GOODWILL OF THE AUTHORITIES FOR THE PURPOSE OF HIS BUSINESS, THE LOSS INCURRED ON THE SALE OF SUCH BONDS OR SECURITIES WAS ALLOWABLE AS A BUSINESS LOSS. EVEN CALCUTTA HIGH COURT IN CASE OF COMMISSIONER OF INCOME-TAX V, SHALIMAR INDUSTRIES (P.) LTD. 78 TAXMAN 521 HELD THAT 'THE SHARES WERE RECEIVED AS CONSIDERATION FOR THE SERVICES RENDERED UNDER A TECHNICAL COLLABORATION AGREEMENT. SUCH RECEIPT MUST BE ON REVENUE ACCOUNT. THAT IT WAS SHOWN IN THE BALANCE SHEET AS INVESTMENT DID NOT MEAN THAT THE ASSESSEE HAD ACQUIRED SHARES ON CAPITAL ACCOUNT. THE ASSESSEE WAS NOT A DEALER IN SHARES AND THE SHARES COULD NOT HAVE BEEN SHOWN AS STOCKS-IN- TRADE OF THE ASSESSEE. THE MANNER IN WHICH THE SHARES HAD BEEN SHOWN IN THE BALANCE SHEET, HOWEVER, WAS NOT CONCLUSIVE. FROM THE SURROUNDING CIRCUMSTANCES AND FACTS, IT HAD TO BE ASCERTAINED WHETHER THE SHARES FORMED PART OF THE CAPITAL OF THE COMPANY. THE TRIBUNAL HAD TAKEN A CORRECT VIEW OF THE MATTER. WHETHER THE LOSS INCURRED IN A TRANSACTION IS A REVENUE LOSS OR CAPITAL LOSS IS BASICALLY A QUESTION OF FACT. THERE WERE SUFFICIENT MATERIALS ON THE BASIS OF WHICH THE TRIBUNAL HAD COME TO A CORRECT CONCLUSION AND IT HAD NOT TAKEN INTO CONSIDERATION ANY IRRELEVANT MATERIAL AND ALL THE FACTS PLACED BEFORE IT HAD BEEN CONSIDERED THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE SAID LOSS SHOULD BE TREATED AS REVENUE LOSS.' IN VIEW OF THE ABOVE FACTS, I AM INCLINED TO HOLD THAT THE BONDS WERE RECEIVED BY THE COMPANY IN LIEU OF SUBSIDY WHICH IS OFFERED TO TAX AS REVENUE INCOME. THEREFORE ANY LOSS ARISING OUT OF IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE. ACCORDINGLY THE AO IS DIRECTED TO ALLOW THE LOSS OF RS.18,62,04,574 AND RS. 3,77,73,348/- AS BUSINESS LOSS. THIS GROUND IS ALLOWED. 40. BEING AGGRIEVED WITH CIT(A), THE REVENUE FILED THIS APPEAL BEFORE US. THE LD.CIT-DR SUBMITTED THAT THIS IS A NOTIONAL LOSS AND NOT ACTUAL LOSS AS COULD BE SEEN FROM THE FINDING OF THE AO THAT THE BONDS HAVE BEEN RECEIVED FROM THE GOVERNMENT. SINCE THE SALE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 26 OF 38 PROCEEDS WAS DETERMINED BY GOVERNMENT AND A PART OF THE SAME WAS CHARGED FROM THE CUSTOMERS AND REMAINING WAS GIVEN BY THE GOVERNMENT AS SUBSIDY. THE ENTIRE AMOUNT OF SALE PRICE INCLUDING AMOUNT RECEIVED FROM THE CUSTOMERS AND THE SUBSIDY RECEIVED FROM THE GOVERNMENT HAVE BEEN REFLECTED AS SALES IN THE PROFIT AND LOSS ACCOUNT, IT HAS BEEN FURTHER SUBMITTED THAT INSTEAD OF CASH SUBSIDY THE GOVERNMENT HAS GIVEN SUBSIDY IN THE FORM OF BONDS AND THE LOSS ON ALLOTMENT AND SALE OF BOND IS NOTHING BUT LOWER REALISATION OF THE SALE PRICE. THEREFORE, THE LOSS AS CLAIMED ON ALLOTMENT OF FERTILIZERS BONDS IS A NOTIONAL LOSS ON ACCOUNT OF FALL OF VALUE OF INVESTMENT ON THE CLOSING DATE OF THE FINANCIAL YEAR WHICH IS NOT ALLOWABLE AND BEING CHARGED AS SHORT TERM CAPITAL LOSS WHICH IS ALLOWED AND LEVIABLE FOR CARRY FORWARD. 41. PER CONTRA, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THE BREAK-UP OF LOSS THAT THE LOSS OF ALLOTMENT OF FERTILIZERS BONDS IS WORKED AT RS.18,62,04,574/- WHEREAS LOSS ON SALE OF FERTILIZER BONDS IS CALCULATED AT RS.3,77,73,348/-. IT WAS SUBMITTED THAT THE BONDS ARE RECEIVED IN LIEU OF SUBSIDY TO WHICH ASSESSEE IS ENTITLED. HOWEVER, SINCE THE GOVERNMENT DOES NOT HAVE FUNDS THEY HAVE ALLOTTED BONDS TO FERTILIZER COMPANIES, THUS BONDS ARE BUSINESS ASSETS. THE SUBSIDY IS OFFERED AS INCOME BY ASSESSEE AND IS M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 27 OF 38 ASSESSED ACCORDINGLY. THEREFORE, LOSS ON ACCOUNT OF SUCH RECEIPTS OF FERTILIZER BONDS WHICH YIELD LOWER VALUE IN MARKET AS COMPARED TO THEIR FACE VALUE IS A BUSINESS LOSS ALLOWABLE UNDER SECTION 28 READ WITH SECTION 37 OF THE ACT. IT WAS FURTHER CLAIMED AS ALTERNATIVE MEASURES THAT THE SALE REALISATION IS LESSER THAN THE FACE VALUE AND IS A REDUCTION TOWARDS THE CLAIM AGAINST DEBTOR, THE AMOUNT ALLOWABLE ALSO U/S.36(1)(VII) AS BAD DEBTS. THE LD.COUNSEL FURTHER PLACED RELIANCE IN ITAT IN ITA NO.319 & 339/AHD/2012 FOR THE A.Y. 2008-09 AND 2009-10 IN THE CASE OF GUJARAT STATE FERTILIZERS AND CHEMICALS LTD VS. DCIT, CIRCLE-1(1), VADODARA WHEREIN SUCH LOSS IS ALLOWED AS BUSINESS LOSS. 42. FURTHER RELIANCE WAS ALSO PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES LTD. [2013] 358 ITR 295 (SC). 43. WE HAVE CONSIDERED THE FACTS AND MATERIAL AVAILABLE ON RECORD AND HEARD THE RIVAL SUBMISSIONS, WE FIND THAT THE LOSS ON ALLOTMENT OF FERTILIZERS BOND AS INCURRED ON ACCOUNT OF DIFFERENCE BETWEEN MARKET VALUE AS ON THE DATE OF ALLOTMENT AND FACE VALUE OF THE BOND. THEREFORE, THE ASSESSEE IN FACT HAS RECEIVED SUBSIDY AMOUNT OF FACE VALUE OF BONDS BUT THE MARKET VALUE OF BONDS ON THE DATE OF ALLOTMENT/RECEIPT OF SUBSIDY IN THE FORM OF BOND. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 28 OF 38 HENCE, THE CONTENTION OF THE AO THAT IT IS NOTIONAL LOSS IS NOT CORRECT. FURTHER, WE FIND THAT IN A.Y. 2008-09, THE AO HAS ALREADY ALLOWED THE LOSS OF RS.7,71,16,280/- INCURRED ON ALLOTMENT OF 8.30% AND 7.95% BOND AS BUSINESS LOSS OR REVENUE LOSS. THEREFORE, THE ACTUAL LOSS OF RS.18,62,04,574/- IS ALLOWABLE AS BUSINESS LOSS. WITH REGARD TO LOSS OF RS.37,77,73,348/- IS CONCERNED, THE BONDS ARE RECEIVED IN LIEU OF SUBSIDY WHICH WAS THE ADDITIONAL SALE PRICE RECEIVED FROM GOVERNMENT OF INDIA. THE APPELLANT COMPANY HAD OFFERED TO TAX THE SUBSIDY ACCORDINGLY AS PART OF THE SALE PRICE, THEREFORE, THE REALISATION TO ADDITIONAL SALE PRICE BY WAY OF SUBSIDY IN THE FORM OF FERTILIZER BONDS DOES NOT MAKE BOND AN INVESTMENT, BECAUSE THE BONDS WERE NEVER ACQUIRED BY THE ASSESSEE AS INVESTMENT FOR CAPITAL BUT AS DEBT AND ALSO SHOWN AS CURRENT ASSETS. ACCORDINGLY, THE LOSS OFFERED ON ALLOTMENT OF BONDS AND ACTUAL SALE OF THE BONDS CANNOT BE CONSIDERED AS CAPITAL LOSS BUT HAS TO BE ALLOWED AS BUSINESS LOSS U/S. 28 READ WITH SECTION 37 OF THE ACT. THE LD.COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF HON'BLE COORDINATE BENCH, AHMEDABAD IN THE CASE OF GUJARAT STATE FERTILIZER AND CHEMICALS LTD. IN ITA NO.319 & 339/AHD/2012 FOR A.YS 2008-09 & 2009-10 DATED 29.11.2017 WHEREIN PARA 35 THE COORDINATE BENCH HAS OBSERVED AS UNDER : M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 29 OF 38 35. REVERTING BACK TO THE FACT OF THE INSTANT ISSUE OF LOSS CLAIMED ON SALE OF FERTILIZER BOND, IN LIGHT OF THE ABOVE JUDGMENTS, WE OBSERVE THAT ASSESSEE HAS NOT OPTED TO GET THE FERTILIZER BONDS FROM THE GOVERNMENT. SUBSIDY GIVEN BY THE GOVERNMENT HAS BEEN SHOW AS INCOME. HOWEVER, PRUDENT BUSINESSMAN WOULD LIKE TO RECEIVE CASH/CHEQUE AGAINST THE SUBSIDY RECEIVABLE WHICH THE ASSESSEE WAS RECEIVING IN NORMAL COURSE. IT WAS BY FORCE THAT ASSESSEE HAD TO ACCEPT THE FERTILIZER BONDS IN LIEU OF SUBSIDY AS THE GOVERNMENT WAS FACING A CASH CRUNCH AT THAT POINT OF TIME. EVEN THOUGH THE ALLEGED BONDS HAVE BEEN SHOWN AS INVESTMENT IN THE BALANCE SHEET, THE VERY NEXUS OF THESE BONDS BEING OF REVENUE NATURE CANNOT BE DISREGARDED. WE ARE THEREFORE OF THE VIEW THAT LOSS INCURRED ON SALE FERTILIZER BONDS AT RS.91,45,000/- IS PURELY A BUSINESS LOSS INCURRED IN THE NORMAL COURSE OF BUSINESS AND THE BOTH THE LOWER AUTHORITIES ERRED IN TREATING IT AS A CAPITAL. WE THEREFORE ALLOW GROUND NO.4 OF THE ASSESSEE FOR A.Y. 2008-09. 44. THEREFORE, IN THE LIGHT OF ABOVE DECISION AND FACTS OF THE CASE, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A), ACCORDINGLY, SAME IS SUSTAINED. CONSEQUENTLY, THIS GROUND OF REVENUE IS DISMISSED. 45. GROUND NO.1(VI) RELATES TO DELETING DISALLOWANCE OF RS.2,37,51,371/- ON ACCOUNT OF DEPRECIATION OF GOODWILL BY WRONGLY APPLYING APEX COURTS DECISION WHEN IN FACT NO GOODWILL WAS CREATED ON ACCOUNT OF MERGER OF NCPA. 46. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED DEPRECIATION OF RS.2,37,51,371/- OF GOODWILL. HOWEVER, THE AO HAS DISALLOWED DEPRECIATION OF GOODWILL OF RS.2,37,51,371/- MAINLY ON THE GROUND THAT GOODWILL HAS ARISEN BECAUSE OF CANCELLATION OF INVESTMENT OF RS.6955 LAKHS MADE BY APPELLANT COMPANY IN SHARES OF NCPL BEING PROMOTER COMPANY. IF THEY WOULD NOT HAVE CANCELLED INVESTMENT, THE SAME WOULD HAVE RESULTED IN M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 30 OF 38 AMALGAMATION RESERVE OF RS.5,266.01 LAKHS INSTEAD OF GOODWILL OF RS.1688.99 HAS CLAIMED BY THE ASSESSEE. 47. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE CIT(A). THE CIT(A) OBSERVED THAT THE AO HAS MISPERCEIVED THAT GOODWILL AROSE BECAUSE OF CANCELLATION OF INVESTMENT MADE BY THE APPELLANT COMPANY, THE GOODWILL CANCELLATION OF INVESTMENT ARE UNRELATED MATTERS. AS A SHAREHOLDER OF THE AMALGAMATED COMPANY LIKE OTHER SHAREHOLDERS TO APPELLANT WAS ELIGIBLE TO RECEIVE ITS OWN SHARES AGAINST SHAREHOLDING OF NCPL. THEREFORE, IT IS PAST MERGER BALANCE SHEET WOULD HAVE SHOWN SHARE CAPITAL ON ONE SIDE OF THE BALANCE SHEET IN RESPECT OF SHARES ISSUED TO ERSTWHILE SHAREHOLDERS OF THE NCPL AND INVESTMENT ON THE OTHER SIDE OF THE BALANCE SHEET IN RESPECT OF SHARES ALLOTTED TO THE APPELLANT UNDER THE MERGER SCHEME. IN OTHER WORDS, THERE WOULD HAVE BEEN CONTRA ENTRIES ON BOTH SIDES OF THE BALANCE SHEET. MOREOVER, UNDER THE COMPANIES ACT A COMPANY CAN NOT OWN/HOLD ITS OWN SHARES. THEREFORE, THE INVESTMENT IN SHARES NCPL ARE REQUIRED TO BE CANCELLED AGAINST ITS OWN SHARES. IT HAS NO IMPLICATION WHATSOEVER ON THE FACT THAT THE APPELLANT COMPANY THE DIFFERENCE BETWEEN VALUE OF NET ASSETS AND ACTUAL CONSIDERATION PAID UNDER THE SCHEME REPRESENTS CONSIDERATION FOR IDENTIFIABLE COMMERCIAL ADVANTAGES. IN VIEW OF THE ABOVE FACTUAL MATRIX AND IN VIEW OF THE SUPREME COURTS DECISION IN THE CASE OF SMIFS SECURITIES LTD ON IDENTICAL FACTS WHEREIN THE HON'BLE COURT HELD THAT EXPLANATION 3 TO S. 32 STATES THAT THE EXPRESSION ASSET SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW-HOW, PATENTS COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. THE WORDS ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOOD WILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 31 OF 38 EXPLANATION 3(B). CONSEQUENTLY, GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO S. 32(1) & ELIGIBLE FOR DEPRECIATION. THOUGH THE AO HELD THAT THE ASSESSEE HAD NOT PAID ANYTHING FOR THE GOODWILL, THIS CANNOT BE ACCEPTED BECAUSE (A) THE CIT(A) & TRIBUNAL (CORRECTLY) HELD THAT THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID IN THE PROCESS OF AMALGAMATION CONSTITUTED GOODWILL, I HOLD THAT THE DIFFERENCE OF CONSIDERATION OVER THE NET VALUE OF ASSETS IS GOODWILL AND THAT THE SAME IS ELIGIBLE FOR DEPRECIATION. THIS GROUND IS ALLOWED. 48. BEING AGGRIEVED, THE REVENUE FILED APPEAL BEFORE THIS TRIBUNAL. THE LD.CIT-DR SUBMITTED THAT THE DECISION OF CIT(A) IS NOT ACCEPTABLE AS THE AO HAS RIGHTLY POINTED OUT THE GOODWILL HAS ARISEN BECAUSE OF CANCELLATION OF INVESTMENT MADE BY IT AND INVESTMENT MADE IN A COMPANY IS NOT AN ASSET ON WHICH DEPRECIATION ALLOWABLE. THE ASSESSEE SHOULD HAVE ALLOTTED SHARES IN PROPORTION OF SHAREHOLDING IN NCPL HAS BEEN DONE FOR THE OTHER SHAREHOLDERS OF NCPL. THESE SHARES SO ALLOTTED COULD HAVE BEEN KEPT BY THE ASSESSEE HAS TREASURY STOCK WHICH COULD HAVE BEEN SOLD OUT BY THE ASSESSEE WHENEVER DEEMED FIT. THEN WHILE SELLING THE SHARES THE ASSESSEE WOULD HAVE PAID CAPITAL GAIN TAX OR CAPITAL GAIN LOSS, BUT THE ASSESSEE HAS REDUCED THE VALUE OF INVESTMENT IN NCPL JUST TO CREATE GOODWILL AND CLAIMED THE DEPRECIATION THEREON. HAD THE ASSESSEE NOT RESORTED TO THIS, THE SAME WOULD HAVE RESULTED IN AMALGAMATION RESERVES OF RS.5266.01 LAKHS INSTEAD OF GOODWILL OF RS.1688.99 LAKHS AS CLAIMED BY THE ASSESSEE. 49. ON THE OTHER HAND, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE GOODWILL HAS ARISEN BECAUSE OF MERGER OF ERSTWHILE M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 32 OF 38 NARMADA CHEMATUR PETRO CHEMICALS LTD. WITH THE ASSESSEE BY APPROVAL OF HON'BLE GUJARAT HIGH COURT. THE MERGER WAS BASED ON TO TAKE BUSINESS ADVANTAGE IN FOLLOWING TERMS (A) HIGH PRODUCTION EFFICIENCY; (B) LEADERSHIP POSITION IN THE MARKET; (C) QUALITY MANAGEMENT SYSTEM AND (D) CERTAIN CONTRACTS AND RIGHTS OWNED BY MARKETING COMPANY. THEREFORE, THE GOODWILL OF RS.16.89 CRORES REPRESENTS THE DIFFERENCE BETWEEN ASSET AND LIABILITY TAKEN OVER. THE LD.COUNSEL FURTHER SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON'BLE SUPREME COURT IN CIT VS. SMIFS SECURITIES LTD., CIVIL APPEAL NO.5961/2012 DATED 22.08.2012 WHEREIN TWO COMPANIES WERE AMALGAMATED ON THE ORDERS OF THE HIGH COURT, AND THAT ASSET AND LIABILITIES OF M/S.YSN SHARES AND SECURITIES PRIVATE LTD. WERE TRANSFERRED OF SMIFS SECURITIES LTD. FOR A CONSIDERATION THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTED GOODWILL. THE ASSESSEE COMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE ASSESSEE COMPANY STOOD INCREASED. THE FINDING HAS ALSO BEEN UPHELD BY THE ITAT, WE SEE NO REASON TO INTERFERE WITH THE FACT FINDING. FURTHER, IN EARLIER YEARS FOR A.Y. 2008-09 THE ITAT HAS RESTORED THIS ISSUE TO THE FILE OF THE CIT(A) TO EXAMINE IN THE LIGHT OF SUPREME COURT DECISION IN THE CASE OF SMIFS SECURITIES LTD. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 33 OF 38 50. WE HAVE CONSIDERED THE FACTS AND HEARD THE RIVAL SUBMISSIONS WE FIND THAT THIS ISSUE REGARDING DEPRECIATION OF GOODWILL WAS CLAIMED TO HAVE BEEN COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2007-08. HOWEVER, THE SAME BY WAY OF ADDITIONAL GROUND WHICH WAS ADMITTED AND THE ISSUE WAS RESTORED TO THE FILE OF THE CIT(A). SIMILARLY, THIS GROUND WAS ALSO RESTORED TO THE FILE OF THE CIT(A) IN ASSESSEES OWN CASE IN ITA NO.2921 & 2930/AHD/2013 FOR A.Y. 2008-09 DATED VIDE ORDER 19.05.2017. THEREFORE, FOLLOWING THE REASONING GIVEN THEREIN, WE RESTORED THIS ISSUE TO THE FILE OF THE CIT(A) TO EXAMINE THE ISSUE IN THE LIGHT OF SUPREME COURT IN THE DECISION OF SMIFS SECURITIES LTD. THIS GROUND IS THEREFORE SET-ASIDE FOR STATISTICAL PURPOSES. 51. GROUND NO.1.(VII) RELATES TO DELETING DISALLOWANCE OF RS.2,95,09,335/- OF DEALERS SALES MADE TO THEM. HOWEVER, THE AO HAS TREATED THE DISCOUNT AS COMMISSION WHICH OUGHT TO HAVE BEEN SUBJECTED TO TDS AND THEREFORE DISALLOWED U/S.40(A)(IA) OF THE ACT. 52. BEING AGGRIEVED, THE ASSESSEE WENT INTO APPEAL BEFORE CIT(A). THE CIT(A) OBSERVED THAT WHETHER THE TRANSACTION WITH DEALERS ARE ON PRINCIPLE TO PRINCIPLE BASIS OR WHETHER THE DEALER IS AN AGENT M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 34 OF 38 WHICH IN TURN WOULD SETTLE THE ISSUE WHETHER THE PAYMENT MADE BY THE APPELLANT TO ITS DEALERS IS IN THE NATURE OF DISCOUNT OR COMMERCIAL. THE CIT(A) OBSERVED THAT THE SALIENT FEATURE OF THIS TRANSACTION OF SALE TO DEALERS AND METHODOLOGY OF EXECUTING TRANSACTIONS AND ACCOUNTING THEREON THAT THE DEALINGS WITH THE DEALERS ON PRINCIPLE TO PRINCIPLE BASIS AND THEREFORE DISCOUNT GIVEN TO DEALERS IS NOT IN THE NATURE OF COMMISSION AND THEREFORE DOES NOT SUBJECTED TO TAX DEDUCTION U/S.194H. THE MAIN THRUST OF THE AO ON DEALER NOT HAVING ANY CONTROL OVER THE ASSESSEE AT WHICH THE PRODUCT WOULD BE SOLD TO CONSUMERS AND THEREFORE IT IS ACTING LIKE COMMISSION AGENT IS MISCONCEPTION OF THE MANNER IN WHICH THE BUSINESS IS CONDUCTED. THERE ARE LARGE NUMBER OF CASES IN PUBLIC DOMAIN WHERE ONE CAN OBSERVE THAT MRP TO ULTIMATE CUSTOMER IS PREFIXED BY THE MANUFACTURERS. THEREFORE, PRICE FIXATION BY THE APPELLANT IS NOT A CLINCHING FACTOR. ON IN DEPTH EVOLUTION OF FACT RELATING TO THE TRANSACTION AND LEGAL RELATIONSHIP EMERGING THEREFROM, THE CIT(A) HELD THAT THE RELATION BETWEEN THE APPELLANT COMPANY MAKES SALES OF THE GOODS TO THE DEALER. THE APPELLANT COMPANY AND DEALER ARE MUTUALLY LIABLE FOR ALL THE TERMS AND CONDITIONS OF THE SALES. THE PROPERTY IN THE GOODS PASSED TO THE DEALER ALONG WITH THE DELIVERY OF GOODS. AND, THEREFORE, DISCOUNT GIVEN BY THE APPELLANT COMPANY TO DEALER IS NOT COMMISSION. M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 35 OF 38 ACCORDINGLY, THE ADDITION OF RS.2,95,09,335/- ON ACCOUNT OF DISALLOWANCE OF DISCOUNT TREATED COMMISSION WAS DIRECTED TO BE DELETED. 53. BEING AGGRIEVED, THE REVENUE FILED APPEAL BEFORE THIS TRIBUNAL. THE LD.CIT(A) VEHEMENTLY SUPPORTED THE ORDER OF THE AO. 54. ON THE OTHER HAND, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PAYMENTS MADE ARE DISCOUNT AND NOT COMMISSION PAID TO DEALERS. THE SALES BETWEEN THE ASSESSEE AND DEALERS IS ON PRINCIPLE TO PRINCIPLE BASIS. BILLS ARE RAISED IN SUCH CASES ON DEALERS AND PAYMENTS ARE RECEIVED. WHENEVER THERE IS TRIPARTITE AGREEMENTS INVOLVING THERE PARTY CONSUMERS, THE INVOICES ARE RAISED ON THE CONSUMERS AND PAYMENTS ARE ALSO RECEIVED FROM THE CONSUMERS. IN SUCH CASE, ASSESSEE IS PAYING COMMISSION TO DEALERS IN RESPECT OF SALE MADE TO DEALER AND REQUIRED TDS IS MADE. THUS, THERE IS NO DEFAULT U/S.40(A)(IA) OF THE ACT. IN SUPPORT OF HIS CONTENTION, THE LD.COUNSEL HAS PLACED RELIANCE ON THE CASE OF HON'BLE GUJARAT IN THE CASE OF AHMEDABAD STAMP VENDORS ASSOCIATION VS. UNION OF INDIA [2002] 257 ITR 202 GUJ/124 TAXMANN.COM 628 (GUJ) WHEREIN THE HEAD-NOTE READS AS FOLLOWS : WHETHER WHERE LICENSED STAMP VENDORS TAKE DELIVERY OF STAMP PAPERS ON PAYMENT OF FULL PRICE LESS DISCOUNT AND THEY SALES SUCH STAMPS PAPER TO RETAIL M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 36 OF 38 CUSTOMER, NEITHER OF THE TWO ACTIVITIES OF (BUYING FROM GOVERNMENT AND SELLING TO CUSTOMERS) CAN BE TERMED AS SERVICE IN COURSE OF BUYING OR SELLING OF GOODS-HELD-YES -- WHETHER, THEREFORE, DISCOUNT MADE AVAILABLE TO LICENSED STAMP VENDORS UNDER PROVISIONS OF GUJARAT STAMP SUPPLY AND SALES RULES, 1987 IS OUTSIDE EXPRESSION COMMISSION OR BROKERAGE UNDER SECTION 194H AND AS SUCH, NO DEDUCTION OF TAX AT SOURCE IS REQUIRED TO BE MADE FROM DISCOUNT- HELD YES . THE LD.COUNSEL FURTHER, WITHOUT PREJUDICE SUBMITTED THAT THE ASSESSEE IS NOT DECLARED ASSESSEE IN DEFAULT AND SINCE THE PAYEES ARE REGULAR INCOME TAX PAYERS BENEFIT TO SECTION PROVISO TO SECTION 40(A)(IA) IS ALSO AVAILABLE TO THE ASSESSEE WHICH IS HELD TO BE RETROSPECTIVE BY SEVERAL DECISIONS ON THAT GROUND ALSO ADDITION MADE MAY BE DELETED. IN SUPPORT OF THIS CONTENTION, THE LD.COUNSEL HAS PLACED RELIANCE IN THE CASE OF ACCME URAVASHI PUMPS ENGINEERING PRIVATE LTD. VS. JCIT 90 TAXMANN.COM 198 (JAIPUR) AND PUNJAB GOODS TRANSPORT (P) LTD. VS. ITO 77 TAXMANN.COM 37 (KOL). 55. WE HAVE CONSIDERED THE FACTS AND ARGUMENTS OF THE PARTIES, WE HAVE OBSERVED THAT THE SALE TRANSACTIONS ARE REGULARLY TAKING PLACE BETWEEN THE ASSESSEE AND THE DEALERS ON PRINCIPLE TO PRINCIPLE BASIS. THE ASSESSEE MAKES SALES TO DEALERS AND DEALERS M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 37 OF 38 MAKES PURCHASES FROM THE ASSESSEE. BOTH THE ASSESSEE AS WELL AS THE DEALER CONSISTENTLY CAPTURE THE TRANSACTION ACCORDINGLY IN THE BOOKS OF ACCOUNTS. IT IS THE DEALER WHO MAKES THE PAYMENT TO ASSESSEE I.E. GNF. CREDIT NOTE AND DEBIT NOTE IF ANY FOR THE AGREED TERMS ARE ISSUED BY THE ASSESSEE IN FAVOUR OF DEALERS ONLY. THUS, FOR ALL THE PURPOSE DEALER IS A DEBTOR OF THE COMPANY, SIMILARLY IN CASE OF DEALERS FOR ALL THE PURPOSE, THE ASSESSEE IS A CREDITOR, THEREFORE, THE TRANSACTIONS OF SALES AND PURCHASES BETWEEN THE TWO PRINCIPLES I.E. ASSESSEE AND THE DEALERS WERE ON AGREED TERMS. THIS IS EVIDENT FROM THE COPY OF SAMPLE SALES REGISTER (PLACED ON PAPER BOOK, PAGE NO.250 TO 267). SIMILARLY, THE COPY OF PURCHASE REGISTER FROM THE BOOKS IS ALSO PLACED, THUS THE CONSISTENT METHOD OF CONDUCTING TRANSACTION AND ACCOUNTING THEREOF ESTABLISHED THAT THE SALES AND PURCHASE TRANSACTIONS ARE BETWEEN THE ASSESSEE COMPANY AND DEALER IS ON PRINCIPLE TO PRINCIPLE BASIS. THIS IS THE TRADE OF THE ASSESSEE COMPANY WHICH THEY FOLLOW FROM SO MANY YEARS, THEREFORE, THE SALES ARE MADE TO DEALERS IS OF PRINCIPLE TO PRINCIPLE BASIS. HENCE, GOODS IS TRANSFERRED TO DEALERS UPON ITS SALES AND DEALER IS THE DEBTOR OF THE COMPANY FOR ALL PRACTICAL PURPOSES DEALER IS LIABLE TO PAY SALE CONSIDERATION TO THE ASSESSEE IRRESPECTIVE OF HE RECEIVES PAYMENT FROM CUSTOMERS OR NOT. THEREFORE, THE CIT(A) HAS RIGHTLY HELD THAT M/S. GUJARAT NARMADA VALLEY FERTILIZERS & CHEMICALS LTD 1323/AHD/2013/SRT /A.Y.:2009-10 PAGE 38 OF 38 THE THIS IS NOT A COMMISSION PAYMENT TO THE DEALERS WHICH IS ALSO SUPPORTED BY THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF AHMEDABAD STAMP VENDORS ASSOCIATION VS. UNION OF INDIA [2002] 257 ITR 202 WHERE IT WAS OBSERVED AS UNDER : IT WAS ALSO NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE REVENUE THAT THE DEFINITION OF COMMISSION OR BROKERAGE AS CONTAINED IN EXPLANATION TO SECTION 194H IS SO WIDE THAT IT WOULD INCLUDE ANY PAYMENT RECEIVABLE, DIRECTLY OR INDIRECTLY, FOR SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS AND THAT, THEREFORE, THE DISCOUNT AVAILED OF BY THE STAMP VENDORS CONSTITUTES COMMISSION OR BROKERAGE WITHIN THE MEANING OF SECTION 194H. TO FALL WITHIN THE EXPLANATION, THE PAYMENT RECEIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, IS BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON (I) FOR SERVICES RENDERED (NOT BEING PROFESSIONAL SERVICES), OR (II) FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS, OR (III) IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING. THE ELEMENT OF AGENCY IS TO BE THERE IN CASE OF ALL SERVICES OR TRANSACTIONS CONTEMPLATED BY EXPLANATION (I) TO SECTION 194H. 56. IN THE LIGHT OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A), ACCORDINGLY SAME IS UPHELD. 57. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED AND APPEAL OF THE REVENUE IS PARTLY ALLOWED. 58. ORDER PRONOUNCED IN THE OPEN COURT ON 17-05-2018. SD/- SD/- ( . . /C.M. GARG) ( . . / O.P.MEENA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / SURAT, DATED: 17 TH MAY, 2018 S.GANGADHARA RAO COPY OF ORDER SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A)/ ITAT (DR)/GUARD FILE OF ITAT. BY ORDER / / TRUE COPY / / / / TRUE COPY / / / / ASSISTANT REGISTRAR, SURAT