M/s KBD Sugars & Distilleries Ltd., Bangalore V. ACIT, Bangalore

ITA 1362/BANG/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68351 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 12-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 28-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SADANDA SONBARSA
• Assessee Lawyers: CHANDRASEKHAR
• Keywords: Depreciation; Business expenditure; Commercial expediency; Unabsorbed depreciation; Capital expenditure
• Section: 133A; 234B; 131

Judgement Text

ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 1 OF 45 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE ABENCH, BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS.1362 & 1363/BANG/2011 (ASSESSMENT YEARS: 2006-07 & 2007-08) M/S. KBD SUGARS & DISTILLERIES LTD (FORMERLY KARNATAKA BREWERIES & DISTILLERIES PVT. LTD) NO.17 SANKEY ROAD, BANGALORE 560020 PAN: AAACK 5851 A VS. ASSTT. COMMISSIONER OF INCOME-TAX, CIRCLE 11(5) BANGALORE (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI CHANDRASEKHAR, ADV. DEPARTMENT BY: SHRI SADANDA SONBARSA, DR DATE OF HEARING: 30/10/2013 DATE OF PRONOUNCEMENT: 22/11/2013 O R D E R PER BENCH: THESE TWO APPEALS, INSTITUTED AT THE INSTANCE OF TH E ASSESSEE COMPANY, ARE DIRECTED AGAINST THE ORDERS O F THE CIT (A)- I, BANGALORE, DATED 4.11.2011 AND 3.11.2011 FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08 RESPECTIVELY. I. ITA NO.1362/B/2011 A Y 2006-07: 2. THE ASSESSEE COMPANY HAS, IN ITS MEMORANDUM OF APPEAL, RAISED EIGHT GROUNDS, IN WHICH, GROUND NOS. 7 AND 8 BEING GENERAL IN NATURE AND NO SPECIFIC ISSUES INVO LVED, THEY DO ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 2 OF 45 NOT SURVIVE FOR ADJUDICATION. THE REMAINING GROUND S RELATE TO THE FOLLOWING TWO MAIN ISSUES, NAMELY: (1) (GR.NOS. 1 TO 4) THAT THE CIT (A) HAD ERRED IN SUSTAINING THE DISALLOWANCE OF DEPRECIATION OF RS.9,73,54,400/-ON WIND MILLS; & (2) (GR.NOS. 5 & 6) THAT THE CIT ALSO ERRED IN NOT ALLOWING TO SET OFF OF THE LOSS PERTAINING TO THE RECTIFIED SPIRIT UNIT OF MARUTHI ORGANICS LIMITED [MOL] EVEN THOUGH THE CONDITIONS SPECIFIED U/S 72A OF THE ACT HAD BEE N DULY COMPLIED WITH. II. ITA NO.1363/B/2011 A Y 2007-08: 3. THOUGH THE ASSESSEE COMPANY HAS RAISED NINE GROUNDS, GROUND NOS. 1, 7 AND 9 BEING GENERAL IN NATURE, THEY DO NOT SURVIVE FOR ADJUDICATION. GROUND NO.8 IS NOT MAINTAINABLE AS CHARGING OF INTEREST U/S 234B AND 2 34C OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. THE REMAINING GROUNDS RELATE TO THE FOLLOWING ISSUES, NAMELY: (1) (GROUND NOS.2 TO 4) THAT THE CIT (A) ERRED IN SUSTAINING THE DISALLOWANCE OF INTEREST TO THE EXTE NT OF RS.10,97,85,319/-; & (2) (GROUND NOS.6 & 7) THAT THE CIT (A) ALSO ERRED I N NOT ALLOWING THE PRIOR PERIOD EXPENDITURE OF RS.10,58,536/-. 4. AS THE ISSUES RAISED IN BOTH THE APPEALS WERE PERTAINING TO THE SAME ASSESSEE, THEY WERE HEARD TO GETHER AND DISPOSED OF, FOR THE SAKE OF CONVENIENCE, IN THIS C ONSOLIDATED ORDER. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 3 OF 45 I. ITA NO.1362/B/2011 A Y 2006-07: 5. BRIEFLY STATED, THE FACTS OF THE ISSUES ARE AS UNDER: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS O F MANUFACTURING OF INDIAN MADE FOREIGN LIQUORS [IMFL] , SUGAR, CO- GENERATION OF POWER, WIND ENERGY AND SPEED ZONE. TH E ASSESSEE HAD CLAIMED DEPRECATION OF RS.9,73,54,400/- ON THE PREMISE THAT IT HAD PURCHASED 37 WIND MILLS WORTH OF RS.24,33,86 ,000/- DURING THE MONTH OF MARCH, 2006 FROM M/S INDOWIND E NERGY LIMITED [IEL] AND PUT TO USE DURING THE PERIOD UN DER CONSIDERATION; AND, HENCE, ELIGIBLE FOR DEPRECIATIO N ETC., 5.1. HOWEVER, THE AO HAD DISALLOWED THE CLAIM OF DEPRECIATION MAINLY FOR THE FOLLOWING REASONS: (1) DESPITE A SURVEY WAS CONDUCTED IN THE BUSINESS PREMISES OF THE ASSESSEE ON 28.3.2006, NO BILLS/INV OICES RELATING TO THE PURCHASE OF WINDMILLS WERE FOUND AN D NO ENTRY REGARDING THE WINDMILLS WAS FOUND IN ITS BOOK S; (2) THE ASSESSEE COMPANY FURNISHED THE UP-DATED FIX ED ASSETS LIST ON 4.5.2006, HOWEVER, THIS UPDATED LI ST INCLUDED THREE WINDMILLS WHICH WERE SUPPOSEDLY RETURNED BACK TO M/S. INDOWIND ON 31.3.2006; (3) THE ASSESSEE COMPANY CLAIMS TO HAVE PURCHASED ONE OF THE WINDMILLS FROM M/S IEL ON 15/3/2006 WHICH INDOWIND ENERGY ITSELF CLAIMS THAT IT WAS COMMISSIO NED ONLY ON 31/3/2006; (4) THAT THE END-USERS OF WINDMILLS, VIZ., M/S. AS HOK LEYLAND LIMITED, WHEELS INDIA LIMITED, ABI SHOWTECH LIMITED, TURBO ENERGY LIMITED, WICHITRA AUTO LIMITE D (5 OF THE 6 LESSEES CONSUMING POWER FROM WINDMILLS) HA VE CONFIRMED THAT THEY WERE MADE AWARE OF THE TRANSFER OF WINDMILLS FROM IEL TO THE ASSESSEE ONLY IN THE MONT H OF MAY 2006; ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 4 OF 45 (5) THAT IT WAS NOT THE REVENUES CONTENTION THAT THE WINDMILLS WERE NOT FUNCTIONING OR GENERATING AND SUPPLYING ELECTRICITY; AND THAT MOST OF THE WINDMI LLS (EXCEPT ONE) WERE COMMISSIONED LONG BEFORE AND CHAN GE IN OWNERSHIP DID NOT IN ANY WAY AFFECT EITHER THE GENERATION OR UTILIZATION OF POWER AND, HENCE, THE ASSESSEE USING THIS AS EVIDENCE IN ITS FAVOUR WAS H IGHLY ERRONEOUS; (6) THAT THERE WAS NO PHYSICAL MOVEMENT OF GOODS W HICH CAN BE VERIFIED FOR THE CORRECT DATE OF TRANSACTION . THE ASSESSEE HAD USED THIS LACUNA AND TRIED TO MISLEAD THE DEPARTMENT ABOUT THE CORRECT DATE OF THE TRANSACTIO N SO AS TO AVOID TAX LIABILITY; & (7) THAT THE RULING OF THE HONBLE SUPREME COURT I N THE CASE OF CIT V. DURGA PRASAD MORE (1971) 82 ITR 540 (SC) IS SQUARELY APPLICABLE TO THE CASE ON HAND. 5.2. WITH REGARD TO THE ASSESSEES CLAIM TO SET OF F BROUGHT FORWARD LOSS OF RECTIFIED SPIRIT UNIT OF MOL ON THE GROUND THAT AS PER THE PROVISIONS OF S. 72A OF THE ACT WHICH GOVER NS THAT THE SET OFF OF LOSSES DOESNT WARRANT THAT THE UNDER-TAKING BEING TRANSFERRED NEEDS TO BE ACTIVE ETC, THE AO HAD REJE CTED THE SAME ON THE PREMISE THAT 15. IF THE DEFINITION SECTION GIVES THE DEFINITIO N OF DEMERGER, THE WORD DEMERGER WHEREVER IT APPEARS I N THE ACT IS TO BE GIVEN THAT MEANING, UNLESS SPECIFI CALLY STATED IN THE ACT THAT A TRANSFER IS DEEMED TO BE DEMERGER OR DEEMED NOT TO BE DEMERGER. THE MERE BLESSING OF THE HIGH COURT FOR AN AMALGAMATION OR DEMERGER DOES NOT MAKE IT AMALGAMATION OR DEMERGER AS DEFINED OR AS REQUIRED BY THE I.T. ACT. IF THAT WOULD HAVE BEEN THE CASE, THE ACT WOULDNT NEED TO DEFINE THE TERMS AMALGAMATION OR DEMERGER. SO THE POSITION TA KEN BY THE ASSESSEE THAT AS LONG AS THE MERGER IS THROU GH COURT APPROVAL, THE ASSESSEE SHALL HAVE THE BENEFIT OF SET-OFF OF CARRY FORWARD LOSS/UNABSORBED DEPRECIATI ON IS OPPOSED TO LAW. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 5 OF 45 5.2.1 THE AO HAD, FURTHER, REJECTED THE ASSESSEES CONTENTION THAT MOL CONTINUES TO BE BEFORE BIFR AND THE ORDER IS AWAITED ETC., FOR THE FOLLOWING REASONS: 20. THE ASSESSEES SUBMISSIONS HAVE BEEN EXAMINED AND ARE REJECTED ON ACCOUNT OF MISINTERPRETATION OF THE NON-OBSTANTE CLAUSE AND THE ASSESSEES STAND DESPIT E THE TRANSFER NOT FALLING WITHIN THE DEFINITION OF DEMERGER AS PER I.T. ACT, THE SET OFF OF LOSSES ARE TO BE ALLOWED IS UNACCEPTABLE. 5.3. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUES BE FORE THE CIT (A). AFTER TAKING INTO CONSIDERATION OF THE AS SESSEES CONTENTIONS, ITS REJOINDERS, STATEMENT ON OATH OF T HE ASSESSEES FINANCE & ACCOUNTS IN-CHARGE, AS RECORDED IN HIS FI NDINGS, THE CIT (A) HAD REJECTED THE ASSESSEES CLAIM FOR DEPRE CIATION FOR THE FOLLOWING REASONS: 15. (ON PAGE 20) A SURVEY U/S 133A (1) OF I.T. ACT WAS CONDUCTED ON 28.3.2006 IN THE BUSINESS PREMISES OF THE ASSESSEE. THE BOOKS OF ACCOUNT/BILLS AND VOUCHER W AS (WERE) EXAMINED. NONE OF THEM REVEALED THAT THE WE GS HAD BEEN PURCHASED THEN. THE STATEMENT OF SRI DWARKANATH RECORDED ON 3.4.2006. FINANCE & ACCOUNT S IN-CHARGE ALSO CORROBORATED SUCH PRESUMPTION OF THE REVENUE. HOWEVER, SUCH PRESUMPTION WAS REBUTTED BY SRI CHAKRAPANI, THE PROJECT CONSULTANT, RECORDED U/ S 131 ON 6.12.2008 WHEREIN HE STATED THAT INVOICES OF PURCHASE OF ALL 37 WEGS HAVE BEEN RECEIVED BY HIM I N (ON) 15.3.2006 AND 24.3.2006 AND HAD BEEN SENT TO BANGALORE OFFICE ON THE SAME DAY AND SRI DWARKANATH HAD BEEN INFORMED TELEPHONICALLY OF SUCH TRANSACTIO NS. THE MD ALSO CORROBORATED SUCH STATEMENT STATING THA T HE HAD HELD BACK THESE INVOICES AND ACTUALLY GAVE THEM TO THE ACCOUNTANT/AUDITOR ON 4.5.2006 AND, THEREFORE, SRI DWARKANATH WAS IGNORANT OF THAT TRANSACTION. THUS, THERE IS CONTRADICTION BETWEEN THE STATEMENT OF MD IN (ON) ONE HAND AND PROJECT CONSULTANT ON THE OTHER H AND IN RESPECT OF THE KNOWLEDGE OF SUCH TRANSACTIONS OF PURCHASE OF WEGS SO FAR (AS) DWARKANATH IS CONCERNE D. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 6 OF 45 I CONSIDER SUCH CONTRADICTORY STATEMENT GOES TO THE ROOT OF THE FACTUAL MATRIX WHETHER THE APPELLANT HAD BEC OME THE OWNER OF THE WEGS AND HAD ACTUALLY PUT THEM IN USE FOR THE PURPOSE OF BUSINESS IN MARCH 2006 TO MAKE I T ELIGIBLE TO CLAIM THE DEPRECIATION. SUCH CONTRADIC TION IS NOT LIMITED TO STATEMENT ONLY. SO IS ALSO IN THE D IRECTORS ANNUAL REPORT IN FORM NO. A & 3CD REPORT OF AUDITOR . IN DIRECTORS REPORT DATED 6.9.2006 WHICH THOUGH SPEAK S ABOUT THE PURCHASE OF WEGS DOES NOT SAY ABOUT ITS U SE IN FORM NO. A. THE AUDITORS REPORT ALSO IN THE 3C D REPORT REVEAL SALE OF SOME ELECTRICITY WHILE IN THE QUANTITATIVE DETAILS NO SUCH PRODUCTION HAS BEEN SH OWN AT ALL. IN THE MEANWHILE, IN RESPECT OF 31 WEGS ALLEGEDLY PURCHASED BY IEL FROM WIL AND TRANSFERRED TO THE APPELLANT ON THE SAME DAY, THE WIL HAS CLAIMED THAT THE OWNERSHIP GOT TRANSFERRED TO IEL ONLY ON 17.4.2 006 INSOMUCH AS ON THAT DAY THE CONDITIONS OF DEVOLUTIO N OF THESE WEGS TO KBDL, THE APPELLANT AND SINCE THE TIT LE IS DEFECTIVE, THE APPELLANT IS NOT ELIGIBLE FOR CLAIM OF DEPRECIATION THEREON. I FIND JUSTIFICATION IN SUCH ALLEGATION EVEN IF I HOLD THAT THE CONCEPT OF OWNER SHIP EMBEDDED IN S. 32(1) OF I.T. ACT HAS NOT BEEN GIVEN A VERY LIBERAL AND LOOSE INTERPRETATION EVEN TO INCLU DE BENEFICIAL OWNERSHIP FAR LESS THE DEJURE OR DEFACTO OWNERSHIP. HOWEVER, I RELY UPON OTHER DOCUMENTS AL SO TO CONCLUDE THAT OWNERSHIP HAD NOT PASSED TO THE APPELLANT IN MARCH 2006 AND THEY WERE NOT UTILIZED IN MARCH, 2006. THE DOCUMENTS ARE TRIPARTITE AGREEMEN TS BETWEEN IEL, THE ASSET MANAGER, KBDL, THE SO CALLED BENEFICIARY OWNER AND THE CUSTOMER OR END-USER OF T HE PRODUCT I.E., POWER. NONE OF SUCH DOCUMENTS HAVE B EEN EXECUTED IN MARCH 2006. ALL OF THEM HAD PAID CHARG ES ON THE SUPPLY OF ELECTRICITY FROM APRIL, 2006 EVEN IF IN THE CASE OF M/S ASHOK LEYLAND IT IS CLAIMED BY THE APPELLANT THAT THE CHARGE HAS STARTED FROM 24.3.200 6 EVEN THOUGH TRIPARTITE AGREEMENT IN THAT CASE HAD B EEN EXECUTED IN MARCH 2007. BESIDES, SUCH PAYMENT HAS NOT BEEN PAID DIRECTLY TO KBDL OR ITS ACCOUNT MAINT AINED BY IEL BUT TO IEL WHICH WAS SUBSEQUENTLY TRANSFERRE D TO KBDL BY IEL. BESIDES, AS MENTIONED ABOVE, DIRECTOR S REPORT/ AUDITORS REPORT ALSO CONTROVERT THE MDS STATEMENT THAT KBDL BECAME OWNER OF THE WEGS AND ALSO USED THE SAME FOR PRODUCTION OF POWER AND SOLD ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 7 OF 45 THEM TO END-USERS IN MARCH 2006. BESIDES, THE APPEL LANT HAS ENTERED INTO ASSET MANAGEMENT AGREEMENT WITH IE L ON 31.3.06 AND, THEREFORE, THE PREPONDERANCE OF PROBABILITY IS AGAINST THE PRESUMPTION THAT THE ASS ET MANAGER HAS STARTED THE USE EITHER ON 31.3.2006 OR EARLIER TO THAT FOR THE APPELLANT. THUS, I HOLD AL L EVIDENCES GO AGAINST THE PRESUMPTION THAT THE APPEL LANT HAD BECOME OWNER OF WEGS AND UTILIZED THEM FOR PRODUCTION OF POWER TO JUSTIFY CLAIM OF DEPRECIATIO N EVEN IF I APPRECIATE AND CONSIDER THE STATEMENTS OF MD A ND PROJECT CONSULTANT EXPLAINING THE JOURNAL ENTRIES I N BOOKS INDICATING SUCH PURCHASES IN 15.3.2006 & 24.3.2006 SUBSEQUENT TO SURVEY ON 28.3.2006.. 5.4. WITH REGARD TO THE ALLOW-ABILITY OR OTHERWISE OF SET OFF OF CARRIED FORWARD DEPRECIATION AND LOSS OF DEMERGE D RECTIFIED SPIRIT UNIT OF MOL, THE CIT (A) HAD RECORDED HIS FI NDINGS AS UNDER: 18M/S. MARUTHI ORGANICS LTD WAS IN THE BUSINESS OF MANUFACTURE OF LIQUOR. IT HAS STOPPED ITS OPERATION SINCE 23.12.1999 AND, THEREFORE, IT HAS APPLIED TO BIFR FOR ITS REVIVAL. IT GOT THE UNIT P RODUCING RECTIFIED SPIRIT DEMERGED BY THE ORDER OF ANDHRA PR ADESH HIGH COURT W. E. F. 01.04.2005. AFTER ITS DEMERGER , THE RECTIFIED SPIRIT UNIT GOT AMALGAMATED WITH THE APPE LLANT COMPANY BY THE ORDER OF HIGH COURT OF KARNATAKA W. E. F. 1.4.2005. AT THE TIME OF DEMERGER, IT HAD BROUG HT FORWARD BUSINESS LOSS OF 7 CRORES WHICH THE APPELLA NT CLAIMS THE BENEFIT OF SET OFF, AFTER AMALGAMATION. 18.1. IN THIS BACK-GROUND FACTS, AO HAS DISALLOWED THE SET OFF ON THE GROUND THAT THE DEMERGED UNIT/INDUST RIAL UNDERTAKING WAS NOT A GOING CONCERN ON THE APPOINTE D DATED AND, THEREFORE, AS PER THE PROVISIONS OF SECT ION 2 (19AAA) SUCH SET OFF IS NOT ALLOWABLE. 18.2. THE AR ON THE OTHER HAND PLEADS THAT THE RELE VANT SECTION IS 72A OF THE I. T. ACT WHICH OVERRIDES EVE N THE PROVISIONS OF S. 2 (19AAA) BEING BEGINNING WITH THE NON- SUBSTANTIVE CLAUSE NOTWITHSTANDING. BESIDES, THE INTENTION OF BOTH SECTIONS WERE REVIVAL OF WEAK ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 8 OF 45 UNITS/UNDERTAKINGS AND HERE ALSO THE PURPOSE OF DEMERGER AND AMALGAMATION IS TO REVIVE THE ACTIVITI ES OF RECTIFIED SPIRIT UNIT OF M/S MARUTHI ORGANICS LTD B Y UTILIZATION OF THE FINANCIAL STRENGTH AND PERSONNEL OF THE APPELLANT COMPANY. THEREFORE, THE CONCEPT OF GOIN G CONCERN IS NOT AT ALL APPLICABLE HERE TO JUSTIFY T HE DENIAL OF SET OFF OF BROUGHT FORWARD LOSS OF AMALGAMATING COMPANY WITH THE PROFIT OF THE AMALGAMATED APPELLAN T COMPANY. 18.3. I FIND IN BOTH CASES THE SCHEME OF DEMERGER A ND AMALGAMATION HAS BEEN APPROVED BY THE HIGH COURTS O F ANDHRA PRADESH & KARNATAKA RESPECTIVELY. SUCH SCHEME IS INTENDED TO REVIVE THE WEAK CONCERN BUT C LAIM OF SET OFF OF BROUGHT FORWARD LOSS UNDER INCOME-TAX HAS TO BE ALLOWED ONLY WHEN THE CONDITIONS PRESCRIBED I N S. 72A OF I. T. ACT ARE FULFILLED. ONE OF SUCH CONDIT ION(S) IS THAT THE AMALGAMATING UNIT SHOULD BE A GOING CONCER N AND MUST HAVE INCURRED LOSSES IN PAST THREE OR MORE YEARS. GOING CONCERN MEANS ALIVE BUT MAY NOT BE MAKING PROFIT. HERE THE RECTIFIED SPIRIT UNIT HAD STOPPED FUNCTIONING SINCE 1999 AND NOT IN BUSINESS ACTIVITY SINCE THEN AND, THEREFORE, THE LOSS BROUGHT FORWARD PERTA INED TO PRE 1999, IN OTHER WORDS ON 1.4.2005, IT IS A CO RPS. THE ACT HAS ONLY THOUGHT OF SET OFF OF ACCUMULATED LOSS OF NOT A DEAD CONCERN BUT ONLY A WEAK CONCERN OR A RUNNING CONCERN NOT DEAD BUT MORIBUND BECAUSE IT STIPULATES FOR THE AMALGAMATING COMPANY NOT TO SALE 75% OF PLANT AND MACHINERY BUT UTILIZE THEM FOR AT LEAST 5 YEARS AND THE MORIBUND COMPANIES EMPLOYEES TO REVIVE THE UNIT/UNDERTAKING. IN THIS CASE, THE PLA NT AND MACHINERY HAD REMAINED UNUTILIZED SINCE 1999. THE STATUS OF EMPLOYEES IS NOT KNOWN. 18.4. THUS WHEN SUCH LEGAL EXPOSITION IS APPLIED TO THE FACTS OF THE CASE ON HAND, I FIND THE CLAIM OF SET OFF OF BROUGHT FORWARD LOSSES OF 7 CRORES OF THE RECTIFIED SPIRIT UNIT OF M/S MARUTHI ORGANICS LIMITED CANNOT BE ALLO WED TO GET SET OFF AGAINST THE PROFITS OF AMALGAMATED COMPANY BECAUSE THE CONDITIONS PRESCRIBED IN S. 72 A OF THE ACT DO NOT GET ATTRACTED AT ALL.. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 9 OF 45 6. AGGRIEVED, THE ASSESSEE HAS COME UP BEFORE US W ITH THE PRESENT APPEAL. DURING THE COURSE OF HEARING, THE ELABORATE SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMARIZED A S UNDER: - THAT IT WAS A FACT THAT WHEELS INDIA LIMITED [WI L] SOLD WEGS TO IEL BY AN INVOICE DATED 15.3.2006 WHICH WAS ADMITTED BY WIL IN ITS LETTER TO THE DEPARTMENT DAT ED 28.10.2008 BY SAYING THAT THEY WERE DISPUTING THE S ALE OF 28 WEGS TO IEL AS IEL HAVE NOT FULFILLED CERTAIN OB LIGATIONS WHICH IT HAD TO PURSUANT TO THE SALE OF 28 WEGS TO THEM AND THAT THE SAME CAME TO BE DISPUTED BY WIL IN THE YEAR 2007, A YEAR AFTER THE SALE HAD TAKEN PLACE; - THAT THOUGH IN THE SAID LETTER, WIL HAD STATED T HAT THE INVOICE WAS DATED 15.3.2006, THE SALE WAS APPROVED IN THE EGM OF WIL HELD ON 15.4.2006 AND THAT THE BOARD OF DIRECTORS OF IEL PASSED A RESOLUTION TO APPROVE THE CONSIDERATION PAYABLE TO IEL ONLY ON 17.4.2006 AND, THEREFORE, THE SALE COMES INTO EFFECT ONLY ON AND F ROM 17.4.2006. THAT THE APPROVAL BY THE EGM WAS, IN ES SENCE, A RATIFICATION OF THE SALE TRANSACTION WHICH WAS EF FECTED ON 15.3.06 AND ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS OF WIL AS HAVING COME INTO EFFECT FROM 15.3.06; - THAT WIL HAD ALSO STATED IN THE SAME COMMUNICATI ON THAT IT HAD GIVEN EFFECT TO THE SALE OF 28 WEGS IN ITS BOOK S OF ACCOUNT FOR THE YEAR-ENDING 31.3.2006 AND ACCOUNTED FOR THE INCOME ARISING OUT OF THE SAME IN THE AY 2006-0 7 ITSELF; THAT WIL HAD STATED THAT IT WOULD REVERSE THE ENTRY IF IT DOES GET A FAVOURABLE ORDER IN THE ARBITRATION PROC EEDING; AND THAT IT WAS CLEAR THAT WIL HAD ITSELF ACCOUNTED FOR THE SALE IN THE MONTH OF MARCH, 2006. HAD IT SERIOUSLY QUESTIONING THE SALE, IT WOULD NOT HAVE ACCOUNTED F OR THE SAME IN THE YEAR ENDED 31.3.2006; - THAT WIL HAD, IN ITS LETTER, STATED THAT EVEN TH OUGH IT RECORDED THE SALE OF WEGS IN ITS BOOKS FOR THE YEAR -ENDED 31/3/2006 AND HAD FINALISED ITS ACCOUNTS ACCORDINGL Y, IT WOULD ACTUALLY BE JEOPARDISING ITS DISPUTE AGAINST IEL, IF IT WERE TO ADMIT THE SAME. THIS AMPLY SHOWS THAT THE STATEMENT OF WIL WAS PURELY SELF-SERVING AND THUS, IT CANNOT BE RELIED UPON; ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 10 OF 45 JOURNAL ENTRIES PASSED ON 15.3.2006 & 24.3.2006: - THAT THE JOURNAL ENTRIES PASSED ON 15 TH AND 24 TH MARCH 06 WERE NOT TO BE DISBELIEVED AS THEY HAVE BEEN CONFIR MED BY IEL THE ENTITY THAT ACTUALLY SOLD THE WEGS TO THE ASSESSEE; - THAT IT WAS NOT NECESSARY THAT ALL TRANSACTIONS OF PURCHASE/SALE WERE MADE ON CASH BASIS. A PURCHASE EVEN BY AN ORAL CONTRACT WAS BINDING ON THE PARTIES TO T HE SAME. A PURCHASE MADE ON CREDIT WAS NORMALLY ACCOUNTED FO R BY MEANS OF A JOURNAL ENTRY AND THERE WAS NO REASON TO DOUBT THE SAME, MERELY IT WAS ACCOUNTED FOR BY MEANS OF A JOURNAL ENTRY; - WITHOUT PREJUDICE TO THE FACT THAT THE CONTRACT WAS ACTUALLY ENTERED INTO ON 15 TH AND 24 TH MARCH, 2006, ASSUMING FOR AN ARGUMENTS SAKE, THAT THE CONTRACT WAS ENTERED INTO ON OR AFTER THE DATE OF SURVEY, THE CONTRACT CAN BE SUCH THAT IT COMES INTO EFFECT ON AND FROM AN EARLIER DATE AND A S LONG AS BOTH THE PARTIES TO THE CONTRACT CONFIRM THE TRANSA CTION AND ITS TERMS AND CONDITIONS AND MORE IMPORTANTLY ACT I N ACCORDANCE WITH THE SAME, THEN IT WAS CLEAR THAT TH E CONTRACT CAME INTO EFFECT FROM THE DATE ON WHICH IT WAS SUPPOSED TO COME INTO EFFECT. IN THE INSTANT CASE, IF THE AGREEMENT WAS ACTUALLY ENTERED INTO AFTER 31/3/06, BUT, W. E. F. 15 TH & 24 TH MARCH, 06, AS THE CASE MAY BE AND BOTH THE PARTIES HAVE ACTED IN A MANNER WHICH WAS IN KEEPING WITH THE TERMS AND CONDITIONS OF THE AGREEMENT AND HAVE EXECUTED/DISCHARGED THEIR RESPECTIVE OBLIGATIONS UN DER THE SAME AND THAT THERE WAS NO DISPUTE BETWEEN THEM ABO UT THE TRANSFER OF WEG COMING INTO EFFECT ON OR FROM 1 5 TH & 24 TH MARCH, 06 AND THE FACT THAT BOTH THE PARTIES HAVE ACCOUNTED FOR THE SAME IN THEIR RESPECTIVE BOOKS, I T IS CLEAR THAT THE EFFECTIVE DATES OF CONTRACT WERE 15 TH & 24 TH MARCH 06 RESPECTIVELY. - THAT MERELY BECAUSE THE TRANSACTION WAS NOT WITH IN THE KNOWLEDGE OF THE ACCOUNTANT WHILE IT WAS ENTERED IN TO, DOES NOT RENDER THE SAME FALSE. WHEN THE MD HAD THE POWE R TO ENTER INTO SUCH A TRANSACTION OF THIS MAGNITUDE AND HE WAS SOLELY RESPONSIBLE FOR THE SAME. CERTAIN DEMAND DR AFTS WHICH WERE ACTUALLY PURCHASED ON 31.3.2006 ALSO FOR TIFY ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 11 OF 45 THAT THE TRANSACTION WAS, IN FACT, ENTERED INTO IN MARCH, 2006 ITSELF. THE MD HAD THE PREROGATIVE IN NOT INF ORMING HIS ACCOUNTANT WHICH DOESNT RENDER THE TRANSACTION A SHAM; - THAT WHEN A SURVEY WAS CONDUCTED, NO EVIDENCE W AS UNEARTHED TO PROVE THAT THE TRANSACTION WAS GENUIN E AND ALSO DID NOT COME ACROSS ANY BOOK ENTRIES TO SUPPOR T THE TRANSACTION . NO STAFF INCLUDING THAT OF THE ACCOU NTANT HAD ANY KNOWLEDGE OF THIS PURCHASE. EVEN THEN, THE AO HAD NOT CHOSEN TO EXAMINE THE MD OF THE COMPANY TO FIND OUT THE VERACITY OF THE TRANSACTION. HAD THE AO DONE S O SUCH EXERCISE AND IF THE MD WAS UNABLE TO THROW ANY LIGH T ON THE SAME, THEN IT CAN BE CONCLUDED THAT THE TRANSACTION WAS SHAM AND AN AFTERTHOUGHT TO AVOID TAXES ETC., - THAT EXAMINING OF THE MD OF THE ASSESSEE COMPANY WAS PARAMOUNT TO ESTABLISH THE CORRECT FACT AS THE ACCO UNTANT HAD, IN HIS DEPOSITION, STATED THAT ONLY MD WOULD B E AWARE OF THE PURCHASE OF WIND MILLS AND THAT IN THE ABSEN CE OF ANY STATEMENT RECORDED FROM THE MD, THE CONCLUSION REACHED BY THE AO WAS MERELY ON SUSPICION AND SURMI SE. - THAT IN RESPONSE TO THE AOS QUERIES, THE END US ERS HAVE ACKNOWLEDGED THAT THEY CAME TO KNOW OF THE PURCHASE OF WEGS BY THE ASSESSE FROM IEL ONLY IN THE MONTH OF M AY, 2006 AS THEY HAVE MADE PAYMENTS IN LUMP SUM ONLY FR OM THE MONTH OF MAY, 2006, BUT, MADE PAYMENTS TO IEL I N MARCH FOR THE POWERS SUPPLIED. THUS, THE AUTHORITI ES BELOW HAVE CONSIDERED THE RESPONSE RECEIVED FROM THE END- USERS AS A VITAL EVIDENCE AND CAME TO THE CONCLUSION THAT NO TRANSACTION OF PURCHASE OF WEGS BY THE ASSESSEE TOO K PLACE IN MARCH 2006; - THAT THE CONTRACT OF PURCHASE OF WEGS WAS BETWEE N THE ASSESSEE AND IEL WHO WERE KNOWING THE TERMS, CONDIT IONS AND OBLIGATIONS OF SUCH CONTRACT AND, THUS, THE END -USERS WERE NOT PUT TO NOTICE OF THE SAID CONTRACT SIMULTA NEOUSLY WHEN THE CONTRACT WAS ACTUALLY ENTERED INTO. THE E ND- USERS CAN ONLY CONFIRM THAT THE ASSESSEE HAD PURCHA SED WEGS FROM IEL AND THAT THE PURCHASE WAS NOT MERELY A PAPER TRANSACTION. ASSUMING THAT NONE OF THE END-U SERS WERE PUT TO NOTICE ABOUT THE TRANSACTION AND IEL CO NTINUED TO ACT AS OWNER AS FAR AS THE END-USERS WERE CONCER NED AND ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 12 OF 45 THAT IEL HAD RECEIVED THE POWER CHARGES FROM THEM A ND, SUBSEQUENTLY, TRANSFERRED THE SAME TO THE ASSESSEE, EVEN THEN, THE TRANSACTION WAS NOT RENDERED FICTITIOUS A ND THE ASSESSEE WAS THE OWNER OF THE ASSET AND, ACCORDINGL Y, ENTITLED TO CLAIM DEPRECIATION ON THE SAME; - THAT AS LONG AS THE SELLER OF WEGS IEL HAD C ONFIRMED THE TRANSACTION WHICH TOOK PLACE ON 15 TH AND 24 TH MARCH, 2006, THE STATEMENTS OF THE END-USERS HAVE OF NO CONSEQUENCE TO DETERMINE THE DATE OF SALE/TRANSACTI ON OF WEGS; - THAT THE WEGS SOLD TO THE ASSESSEE WAS PHYSICAL EXISTENCE AS ON 15 TH & 24 TH MARCH, 06 THE RELEVANT DATES OF SALE THEY WERE PUT TO USE IN THE PREVIOUS YEAR RELEVANT TO THE AY 2006-07 AND 28 WEGS SOLD BY IEL TO THE ASSESSEE WE RE PURCHASED BY IEL FROM WIL; - THAT WIL SOLD 28 WEGS TO IEL ON 15.3.06 AND THE SALE/INCOME WAS ACCOUNTED FOR IN ITS BOOKS OF ACCO UNT FOR THE YEAR-ENDED 31.3.2006, BUT, NO DEPRECIATION WAS CLAIMED ON THOSE WEGS FOR THE YEAR-ENDED 31.3.06 BY IT; - THAT THE ASSESSEE HAD PURCHASED WEGS FROM IEL O N 15 TH & 24 TH MARCH, 06 AND SINCE THE ASSESSEE WAS THE LEGITIMAT E OWNER OF THOSE WEGS AS ON 31.3.2006 AND, ACCORDINGL Y, IT HAS CLAIMED DEPRECIATION AS ON 31.3.2006 ON THOSE W EGS; - THAT THE INCOME FROM THE SALE OF POWER GENERATED FROM WEGS FOR THE PERIOD FROM 15 TH TO 31 ST OF MARCH, 06 HAS BEEN ACCOUNTED FOR AND OFFERED TO TAX ONLY BY THE A SSESSEE AND NOT EITHER IEL OR WIL; - IF THE CONCLUSION DRAWN BY THE AO IN THE ASSESSM ENT ORDER WERE TO BE TRUE THAT THERE WAS NO PURCHASE OF WEGS IN THE MONTH OF MARCH, 06, HOW DID THE SURVEY TEAM [ON 28.3.2006] HAVE THE KNOWLEDGE OF THE PURCHASE OF SU CH WEGS AND LOOKING FOR EVIDENCE FOR THE SAME; 6.1. ON THE OTHER HAND, THE LEARNED DR SUPPORTED T HE AUTHORITIES BELOW. IT WAS, FURTHER, SUBMITTED THAT THE JOURNAL ENTRIES DATED 15 TH AND 24 TH MARCH 2006, THOUGH NOT MADE ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 13 OF 45 AVAILABLE DURING THE COURSE OF SURVEY, BUT, WERE CR EATED LATER ON IN THE AUDITED BOOKS AND, THUS, THEY CANNOT BE HELD AS EVIDENCE FOR OWNERSHIP OVER WEGS AND ALSO PUT TO USE DURING MARCH, 2006 SO AS TO ALLOW THE ASSESSEES CLAIM FOR DEPREC IATION. IN FURTHERANCE, IT WAS ARGUED THAT THE SALE DEEDS WERE NOT REGISTERED. HENCE, THE TRANSFER OF WIND MILLS WAS ILLEGAL AND IT CANNOT BE BACK-DATED TO 15 TH & 24 TH MARCH, 2006 TO CLAIM THE DATE OF TRANSFER THROUGH JOURNAL ENTRIES, SALES INV OICES AND TRIPARTITE AGREEMENTS. SINCE THE OWNERSHIP DID NOT VEST WITH THE ASSESSEE, THE DISALLOWANCE OF DEPRECIATION ON WIND MILLS WAS JUSTIFIED. IT WAS, FURTHER, SUBMITTED THAT THE CIT (A) HAD MADE OUT A CASE THAT THE OWNERSHIP WAS VESTED WITH THE A SSESSEE ONLY ON 17.4.2006, THE DATE OF APPROVAL OF TRANSFER BY W IL TO IEL. TILL THEN, IT WAS ARGUED, THE ISSUE OF OWNERSHIP WAS IN SUSPENSE. THE DIRECTORS REPORT AS WELL AS THE AUDITORS REPO RT BOTH WERE DATED 6.9.2006 JUSTIFY THAT THE END-USERS HAVE STAR TED PAYING TO THE ASSESSEE FOR WINDMILL ELECTRICITY FROM SEPTEMBE R, 2006 FOR THE PERIOD FROM APRIL 2006 WHICH SHOWS NO USE OF WI NDMILLS GENERATION OF ELECTRICITY IN MARCH, 2006. THE BANK DRAFTS DATED 31.3.2006 MADE IN THE NAME(S) OF FINANCERS EVIDENCE D THAT THE ASSESSEE WAS IN A SERIOUS DOUBT AS TO FROM WHOM IT HAD TO PURCHASE THE WINDMILLS. 6.2. COUNTERING THE LEARNED D.RS ARGUMENTS THAT T HE DEMAND DRAFTS PURCHASED WERE NOT IN THE NAME OF THE SELLER, NAMELY, IEL, THE ASSESSEE IN ITS REJOINDER HAD CLAR IFIED AS UNDER: - THAT THE CONTRACT OF PURCHASE AND SALE OF WINDMI LL BETWEEN THE ASSESSEE AND IEL WAS GOVERNED BY THE LAW OF CON TRACTS; ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 14 OF 45 - THAT THE CONSIDERATION NEED NOT NECESSARILY BE P AID TO THE SELLER AND INSTEAD CAN BE PAID TO ANYBODY ELSE ON B EHALF OF THE SELLER AND SUCH PAYMENT OUGHT TO BE CONSTRUED A S PAYMENT OF CONSIDERATION; - THAT THE DDS WERE PURCHASED AS ON 31.3.2006 SHOW S THAT THE FUNDS OF THE ASSESSEE ALREADY STOOD DEPLOYED AS ON 31.3.2006 AS THE DDS WERE NOT PURCHASED ON CREDIT B ASIS; - THAT THE SELLER HAD ACKNOWLEDGED FOR HAVING SOLD THE WIND MILLS AS ON 31/3/2006 AND IT HAD NOT CLAIMED ANY BE NEFIT ARISING OUT OF THE SAID MILLS AS DEPRECIATION FOR T HE YEAR- ENDED 31.3.2006 AMOUNTING TO RS.9.73 CRORES; - THAT THE SELLER AND THE BUYER HAVE ACTED IN ACCO RDANCE WITH THE SPIRIT OF SALE AND HAVE NOT ACTED ANYTHING TO T HE CONTRARY TO SHOWS THAT THE SALE WAS A FICTITIOUS OR SHAM TRANSACTION; RELIES ON THE JUDGMENT IN THE CASE OF UOI V. AZADI BACHAO ANDOLAN 263 ITR 706 (SC) 6.3. WITH REGARD TO THE REVENUES CONTENTION THAT THE ISSUE OF DEPRECIATION WAS THAT THE TRANSFER OF OWNE RSHIP OF WIND MILLS CAN TAKE PLACE ONLY IF THE SALE WAS ACTUALLY EVIDENCED BY A REGISTERED DEED AS THE WIND MILLS WERE IMMOVABLE PR OPERTY ETC., THE ASSESSEE HAD COUNTERED THE REVENUES ARGUMENT A S UNDER: - THAT THE WIND MILLS CONSTITUTED MOVEABLE PROPERT Y AND WERE NOT IMMOVABLE PROPERTY AS CLAIMED BY THE REVENUE, A S THE PURCHASE AND SALE OF WIND MILLS WERE SUBJECTED TO T HE PROVISIONS OF SALE OF GOODS ACT, 1930 AND NOT BY TH E PROVISIONS OF TRANSFER OF PROPERTY ACT, 1883 OR BY THE REGISTRATION ACT, 1908; RELIES ON THE JUDGMENT OF THE HONBLE MADRAS HIGH C OURT IN WP NOS.4434, 4435, 13652 & AMP 13653 OF 2009 DATED 1.3 .2013 IN THE CASE OF SRI VELAYUTHASWAMY SPINNING MILLS (P) L TD & ORS V/S THE INSPECTOR GENERAL OF REGISTRATION; ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 15 OF 45 6.4. IN RESPECT OF THE LEARNED DRS ARGUMENT THAT THE INVOICES EVIDENCING PURCHASES DATED 15 TH AND 24 TH MARCH 2006 WERE NOT AVAILABLE AT THE TIME OF SURVEY OF THE ASS ESSEES PREMISES, IT WAS REBUTTED BY THE ASSESSEE THAT: - THAT THE VERY FACT THAT THE SURVEY WAS CONDUCTED EVEN BEFORE THE CLOSURE OF THE FY AND THE VERY PURPOSE O F SUCH A SURVEY WAS TO ENQUIRE INTO THE GENUINENESS OF THE P URCHASE ITSELF WHICH SHOWS THAT EVEN THE REVENUE WAS AWARE OF SUCH A TRANSACTION ON 23.3.2006 ITSELF WHICH EVIDEN CE THAT THE TRANSACTION DID TAKE PLACE IN THE FY 2005-06 IT SELF; 6.5. REBUTTING THE REVENUES CLAIM THAT THE ASSESS EE BECAME THE OWNER OF WIND MILLS ONLY ON 17.4.2006 BE ING THE DATE ON WHICH THE SHARE-HOLDERS OF WIL APPROVED THE SALE OF WINDMILLS TO IEL IN THEIR AGB MEETING HELD ON THE SAID DATE A ND, THUS, IEL COULD NOT HAVE CONVEYED THE TITLES TO THE WINDMILLS IN THE FY 2005-06 ETC., THE ASSESSEE CONTENDED THAT THOUGH TH E DATE OF RATIFICATION OF SALE OF THE SHAREHOLDERS OF WIL WAS ON 17.4.200 6, THE SALE CAME INTO EFFECT ON 15.3.2006 ITSELF. WIL HAD ACCOUNTED FOR THE SALE IN THE FY 2005-06 AND OFFERED THE INCO ME ARISING OUT OF THE SALE TO TAX FOR THE AY 2006-07 ITSELF. THE RELEVANT INFORMATION IS AVAILABLE ON THE RECORDS OF THE I.T. DEPARTMENT. THE ASSESSEE HAD PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF MARSHALL SONS & CO (IN DIA) LTD V/S ITO REPORTED IN 223 ITR 809 (SC). 6.6. WITH REGARD TO THE OBSERVATION OF THE LEARNED DR THAT THE TRIPARTITE AGREEMENTS ENTERED INTO BY THE ASSES SEE ALONG WITH IEL AND THE END USERS OF POWER WERE TERMS AS OPERAT ING LEASE AGREEMENT, IT WAS THE STAND OF THE ASSESSEE THAT TH E PREAMBLE TO ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 16 OF 45 THE AGREEMENT CLEARLY DESCRIBES THE ASSESSEE AS THE ABSOLUTE OWNER OF THE WIND MILLS. 6.7. IN RESPECT OF THE REVENUES CLAIM THAT THERE WAS NO POWER GENERATION FROM THE WINDMILLS SHOWN IN THE DI RECTORS REPORT FOR THE AY 2006-07 AND, HENCE, NO PRODUCTION WAS MADE FROM THE WIND MILLS ETC., IT WAS CONTENDED BY THE A SSESSEE THAT THE INCOME FROM SALE OF POWER GENERATED FROM WIND M ILLS FROM 15 TH AND 24 TH OF MARCH AND UP-TO 31.3.2006 WAS ACCOUNTED FOR IN THE BOOKS OF THE ASSESSEE AND THE SAME WAS OFFERED TO TAX BY THE ASSESSEE FOR THE AY 2006-07. THE WIND MILLS PURCHAS ED WERE NOT NEW BUT WERE IN OPERATION AND GENERATING OF POWER A S ON THE DATES OF PURCHASE WAS NOT IN DISPUTE. THEREFORE, I T WAS ARGUED THAT THE DIRECTORS REPORT DOES NOT INDICATE THE GE NERATION OF POWER WILL NOT DISPROVE THE FACTS. THE PURCHASERS OF POWER HAVE PAID THE ASSESSEE DIRECTLY IN RESPECT OF POWER SUPP LIED TO THEM FROM 1.4.2006 ONWARDS. THEY HAVE, HOWEVER, PAID IE L FOR THE POWER SUPPLIED FROM 15 TH TO 31 ST MARCH, 2006 WHICH HAD IN TURN PAID THE SAME TO THE ASSESSEE AND THIS FACT WAS ALS O NOT IN DISPUTE. 6.8. IN CONCLUSION, IT WAS CLAIMED THAT THE ASSESS EE WAS AN ABSOLUTE OWNER OF THE WINDMILLS AS ON 31.3.2006 AND, ACCORDINGLY, ENTITLED TO CLAIM DEPRECIATION ON THE SAME. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS, PERUSED THE RELEVANT MATERIALS ON RECORD AND ALSO T HE CASE LAWS ON WHICH EITHER OF THE PARTY HAVE PLACED THEIR RELI ANCE. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 17 OF 45 ACCORDINGLY, THE ISSUES RAISED BY THE ASSESSEE ARE ADJUDICATED AS UNDER: DISALLOWANCE OF DEPRECIATION OF RS.9,73,54,400/-ON WIND MILLS: 7.1. IT WAS AN UNDISPUTED FACT THAT THE BUSINESS P REMISES OF THE ASSESSEE WERE SUBJECTED TO A SURVEY U/S 133A OF THE ACT ON 28.3.2006. IT IS ALSO AN UNDISPUTED FACT THAT T HE DEPARTMENT DOES NOT DISPUTE THE FACT OF PURCHASE OF WEGS BY T HE ASSESSEE, SINCE DEPRECIATION HAS BEEN GRANTED AS CLAIMED BY T HE ASSESSEE IN THE SUBSEQUENT ASSESSMENT YEAR. THE ONLY DISPUTE IS THE YEAR OF PURCHASE OF THE WEGS BY THE ASSESSEE. ACCORDING TO THE AO, NO BILLS AND VOUCHERS RELATING TO THE ALLEGED PURCH ASE OF WIND MILLS WERE MADE AVAILABLE FOR VERIFICATION. SUBSEQ UENTLY, ON 3.4.2006, THE ACCOUNTANT OF THE ASSESSEE DEPOSED BE FORE AO, ACCORDING TO WHICH, HE APPEARED TO HAVE AVERRED THA T THE BOOKS OF ACCOUNT WERE UP-TO-DATE. TAKING INTO ACCOUNT TH E ABOVE FACTS, THE AO CAME TO THE CONCLUSION THAT THE ALLEGED TRAN SACTION OF PURCHASE OF WEGS ON 15 TH AND 24 TH MARCH, 2006, AS CLAIMED BY THE ASSESSEE, CANNOT BE CONSIDERED TO BE GENUINE AN D THAT THERE WAS NO CREDIBLE EVIDENCE FOR THE ALLEGED PURCHASE A ND SUBSEQUENT USE OF WIND MILLS AS ON 31.3.2006 SO AS TO ALLOW DEPRECIATION FOR THE SAID WEGS. MOREOVER, IT WAS T HE STAND OF THE AO THAT THE END-USERS, TO WHOM POWER SUPPLIES W ERE MADE, HAVE STATED THAT THE PAYMENTS WERE MADE ONLY TO THE ASSESSEE FROM MAY, 2006 AND THE TRIPARTITE AGREEMENTS BETWEE N THE ASSESSEE, IEL AND THE END-USERS WERE EXECUTED MUCH LATER, SAY, IN NOVEMBER, 2006. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 18 OF 45 7.2. IT WAS, HOWEVER, CONTENDED BY THE ASSESSEE TH AT WIL HAD IN ITS LETTER DATED 28.10.2008 ADMITTED THAT IT HAD SOLD 28 WEGS TO IEL BY AN INVOICE DATED 15.3.2006. IN THE S AID LETTER, WIL HAD, FURTHER, STATED THAT THOUGH THE INVOICE WA S DATED 15.3.2006, THE SALE WAS APPROVED IN THE EGM OF WIL HELD ON 15.4.2006 AND THE BOARD OF DIRECTORS OF IEL PASSED A RESOLUTION TO APPROVE THE CONSIDERATION PAYABLE BY IEL ONLY ON 17.4.2006 AND, THEREFORE, THE SALE CAME INTO EFFECT ONLY FROM 17.4.2006. IN THIS CONNECTION, IT WAS THE SUBMISSION OF THE ASSES SEE THAT EVEN THOUGH THE APPROVAL BY THE EGM WAS, IN ESSENCE, A R ATIFICATION OF THE SALE TRANSACTION WHICH WAS, IN FACT, EFFECTED O N 15.3.2006. THE ASSESSEE HAD, FURTHER, CONTENDED THAT WIL IN TH E SAID LETTER CONFIRMED THAT IT HAD GIVEN EFFECT TO THE SALE OF 2 8 WEGS IN ITS BOOKS FOR THE YEAR-ENDED 31.3.2006 ITSELF. FURTHER , THE JOURNAL ENTRIES PASSED ON 15 TH & 24 TH MARCH 2006 CANNOT BE DISBELIEVED AS THEY HAVE BEEN CONFIRMED BY IEL THAT IT HAD ACTU ALLY SOLD WEGS TO THE ASSESSEE. THE TRANSACTION OF 28 WEGS W AS PUT UNDER THE SCANNER BY THE AO MAINLY AND SOLELY ON TH E PREMISE THAT THE ACCOUNTANT OF THE ASSESSEE WHO APPEARED TO HAVE AVERRED THAT HE WAS UNAWARE OF SUCH TRANSACTION TOO K PLACE ON 15 TH & 24 TH OF MARCH, 2006. DISPUTING THE AOS CONCLUSION, IT WAS CONTENDED BY THE ASSESSEE THAT THE SAID TRANSAC TION WAS FINALIZED AT THE LEVEL OF THE MD OF THE ASSESSEE WH O HAD THE POWERS TO NEGOTIATE, FINALISE AND ENTER INTO ANY TR ANSACTION. THIS ASSERTION OF THE ASSESSEE CANNOT BE DOUBTED AS THE MD OF A COMPANY WHILE NEGOTIATING/FINALIZING ANY TRANSACTIO N NEED NOT AND NOT EXPECTED TO TAKE HIS ACCOUNTANT INTO CONFID ENCE FOR SUCH TRANSACTION. AS THE ACCOUNTANT OF THE ASSESSEE WHO WAS UNAWARE OF SUCH A TRANSACTION, IN HIS DEPOSITION, A DMITTED THAT ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 19 OF 45 HE WAS NOT AWARE OF THE TRANSACTION WHICH TOOK PLAC E ON 15 TH & 24 TH MARCH, 2006. APPARENTLY, THE ASSESSEES ACCOUNTAN T HAD ONLY PLEADED HIS IGNORANCE, AT THE TIME DEPOSITION, WITH THE REGARD TO THE TRANSACTION, BUT , NOT HAVING DENIED WHATSOEVER THAT NO SUCH TRANSACTION EVER TOOK PLACE. THIS IMPLIES T HAT THERE WAS A POSSIBILITY THAT THE TRANSACTION COULD HAVE TAKEN PLACE AT THE HIGHEST LEVEL, VIZ., AT THE LEVEL OF THE MD OF THE ASSESSEE. THOUGH, THE AO MADE ENQUIRIES WITH THE STAFF AND THE ACCOUN TANT OF THE ASSESSEE IN RESPECT OF THE ALLEGED TRANSACTION OF P URCHASE OF WEGS, BUT, OSTENSIBLY CHOSEN NOT TO EXAMINE/QUESTIO N THE MD OF THE ASSESSEE TO ASCERTAIN THE VERACITY OF SUCH A TRANSACTION. WHAT HAD PROMPTED THE AO TO LOSE SIGHT OF SUCH A VI TAL ASPECT? AS A MATTER OF FACT, THE ACCOUNTANT HAD CLEARLY IND ICATED, ON DEPOSITION, THAT ONLY THE MD WILL KNOW ABOUT THE TR ANSACTION OF PURCHASE OF WINDMILLS. FOR APPRECIATION OF FACTS, THE RELEVANT PORTION OF HIS DEPOSITION IS EXTRACTED AS UNDER: 10. PLEASE STATE; IS THERE ANY PERSON WHO KNOWS AB OUT THE MAINTENANCE OF BOOKS OF ACCOUNTS OR THE TRANSACTION OF PURCHASE OF WINDMILL? ANS: NO, THERE ARE NO OTHER PERSONS OTHER THAN ME W HO KNOWS THE ENTIRE AFFAIRS OF FINANCE AND ACCOUNTS OF M/S K ARNATAKA BREWERIES & DISTILLERIES LTD. ONLY THE MANAGING DI RECTOR SHRI D.K. AUDIKESAVALU WILL KNOW ABOUT THE TRANSACTION O F PURCHASE OF WINDMILL. [COURTESY: PARA 12 OF CIT (A)S ORDER] 7.3. AT THIS POINT OF TIME, WE REFER TO THE LETTER OF WIL DATED 28.10.2008 ADDRESSED TO THE AO WHEREIN, AMONG OTHERS, IT HAS BEEN STATED THAT- WE WOULD LIKE TO INFORM YOU THAT THERE IS A SERIOUS DISPUTE PENDING BETWEEN US AND INDOWIN D ENERGY LIMITED (HEREINAFTER REFERRED TO AS IEL) WIT H ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 20 OF 45 REGARD TO THE SALE OF THE 28 WEGS. THE SALE OF THE 28 WEGS WAS PURSUANT TO AN AGREEMENT DATED 24.2.2006 BETWEEN US AND SUBUTHI FINANCE LTD., WHO IS THE PROMOTER OF IEL AND IEL, WAS THE NOMINEE FOR AND WHOSE BEHALF THE AGREEMENT WAS ENTERED INTO. IT IS PERTINENT TO POINT OUT TO YOU AT THIS JUNCTUR E THAT THOUGH THE INVOICE FOR THE WEGS WAS RAISED BY US IN FAVOUR OF IEL ON 15.3.2006; THE SALE WAS APPROVED B Y THE EXTRA-ORDINARY GENERAL (BODY) MEETING OF IEL ON LY ON 15.4.2006, AND THE BOARD OF IEL PASSED A RESOLUTION FOR THE PAYMENT OF CONSIDERATION ONLY ON 17.4.2006. THEREFORE, IEL CANNOT BE CONSIDERED THE LEGAL OWNER OF THE WEGS BEFORE 15.4.2006 AND, HENCE , COULD NOT HAVE TRANSFERRED THE WEGS TO KBD SUGARS AND DISTILLERS LTD (KBDSDL) IN MARCH, 2006 TO ENABL E KBDSDL TO CLAIM DEPRECIATION ON THE WEGS. IT IS FURTHER PERTINENT TO POINT OUT THAT IEL HAD A GREED TO PAY PART OF THE CONSIDERATION BY ISSUING THEIR S HARES TO US AT RS.100/ PER SHARE AND FURTHER UNDERTOOK NO T TO ALLOT SHARES TO ANY OTHER ENTITY FOR A VALUE LES S THAN RS.100/- PER SHARE. HOWEVER, IN BREACH OF THIS AGREEMENT, IEL ALLOTTED BONUS SHARES TO ITSELF AND ITS PROMOTERS. WHEN THIS CAME TO OUR KNOWLEDGE, WE RAISED A DISPUTE AND DEMANDED REVERSAL OF THE SALE AS THE ALLOTMENT OF BONUS SHARES SUBSTANTIALLY DILUTED THE CONSIDERATION PAID TO US AND WE FURTHER DEMANDED THAT THE DISPUTE BE REFERRED TO ARBITRATION AS PRO VIDED UNDER THE AGREEMENT DATED 24.2.2006. AT THIS POINT , IEL CAME UP WITH THE RIDICULOUS CONTENTION THAT THE Y ARE NOT A SIGNATORY TO THE AGREEMENT AND REFUSED TO SUBMIT TO ARBITRATION. WE THEN FILED A PETITION UN DER SECTION 11 OF THE ARBITRATION AND CONCILIATION ACT, 1996 BEFORE THE HONBLE CHIEF JUSTICE, HIGH COURT, MADRA S, FOR THE APPOINTMENT OF AN ARBITRATOR. IEL CONTESTE D THE SAID PETITION, BUT BY AN ORDER DATED 1.8.2008, THE HONBLE CHIEF JUSTICE REJECTED THE CONTENTIONS OF I EL AND APPOINTED MR JUSTICE K VENKATASWAMI (RETIRED JUDGE, SUPREME COURT OF INDIA) AS SOLE ARBITRATOR ( THE ORDER DATED 1.8.2008 ENCLOSED HEREWITH FOR YOUR REFERENCE). UNFORTUNATELY, THE LEARNED ARBITRATOR E XPIRED DURING THE PENDENCY OF THE ARBITRATION PROCEEDINGS AND ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 21 OF 45 WE ARE FILING AN APPLICATION TO THE CHIEF JUSTICE F OR THE APPOINTMENT OF A NEW ARBITRATOR TO REPLACE THE LATE MR JUSTICE VENKATASWAMI. WE DEEM IT OUR SOLEMN DUTY TO INFORM YOU THAT IN PARALLEL LEGAL PROCEEDINGS PENDING BEFORE THE LEARN ED DISTRICT COURT, THIRUNELVELI PERTAINING TO THE REMO VAL OF THE GROUP CONTROL CENTRE FOR THE SAID 28 WEGS AND HAVE OBTAINED AN ORDER FOR THE RESTORATION OF THE G CC TO THEM. THIS AFFIDAVIT HAS BEEN FILED ON 11.4.200 7 WHICH IS AFTER THE ALLEGED SALE IN FAVOUR OF KBDSDL . A COPY OF THE SAID AFFIDAVIT IS ENCLOSED HEREWITH FOR YOUR KIND PERUSAL. THIS CLEARLY PROVES THAT THE SALE OF THE 28 WEGS IN FAVOUR OF KBDSDL IS SHAM AND NOMINAL AND THAT IEL CONTINUES TO CLAIM OWNERSHIP OF 28 WEG S. WE THEREFORE FAIL TO UNDERSTAND AS TO HOW KBDSDL HA S CLAIMED DEPRECIATION AS IF THEY ARE THE OWNERS OF T HE WEGS. WE FURTHER UNDERSTAND THAT AFTER ENTERING IN TO THE SHAM AND NOMINAL SALE IN FAVOUR OF KBDSDL, IEL HAS ENTERED INTO AN OPERATING LEASE AGREEMENT UNDER WHICH THEY ARE OPERATING THE WEGS AND SELLING THE POWER GENERATED FROM THE WEGS. THIS FURTHER CONFIR MS THE FACT THAT THE SALE IN FAVOUR OF KBDSDL IS A COM PLETE SHAM AND IEL CONTINUE TO BE IN POSSESSION AND ENJOYMENT OF THE WEGS. IN ANY EVENT, WE ARE DISPUTING THE SALE OF THE WEGS TO IEL ITSELF AND DEMANDING REVERSAL OF THE SALE IN THE ARBITRATION PROCEEDINGS. OUR PLEA BEFORE THE ARBITRATOR IS TO REVERSE THE SALE OF THE WEGS TO IEL AND HANDOVER TH E WEGS BACK TO WESCARE (INDIA) LIMITED. THOUGH WE HAD DECLARED THE ENTIRE SALE AS INCOME IN WESCARE BOOKS DURING THE YEAR 2005-06, WE WOULD BE REVERSIN G THE SALE SHOULD WE GET THE AWARD IN OUR FAVOUR. [COURTESY: PAGES 17 & 18 OF THE PB AR] 7.4. IT WAS A FACT THAT WIL HAD SOLD 28 WEGS TO IE L BY AN INVOICE DATED 15.3.2006 WHICH HAS BEEN ADMITTED BY WIL IN ITS LETTER (SUPRA). AT THE SAME TIME, IT HAD DISPUTED THE SALE OF 28 WEGS TO IEL ON THE PREMISE THAT IEL HAD NOT FULFILL ED CERTAIN OBLIGATIONS WHICH IEL HAD TO DO IN PURSUANCE OF THE SALE OF 28 ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 22 OF 45 WEGS. OBVIOUSLY, WIL HAD DISPUTED THE SALE WELL AF TER THE LAPSE OF ONE YEAR FROM THE ACTUAL TRANSACTION TOOK PLACE. IT HAD, FURTHER, STATED THAT EVEN THOUGH THE INVOICE WAS DA TED 15.3.2006, THE SALE WAS APPROVED BY THE EGM WHICH W AS HELD ON 15.4.2006 AND THAT THE BOARD OF DIRECTORS OF WIL PA SSED A RESOLUTION TO APPROVE THE SALE CONSIDERATION ONLY O N 17.4.2006 AND, THUS, THE SALE CAME INTO EFFECT ONLY FROM 17.4 .2006. THIS ARGUMENT OF WIL DOESNT CARRY MUCH CONVICTION AS TH E APPROVAL OF EGM ON 17.4.2006 WAS NOTHING BUT A RATIFICATION OF THE SALE TRANSACTION WHICH ACTUALLY TOOK PLACE AND EFFECTED FROM 15.3.2006. THE SAME WAS TOO ACCOUNTED FOR IN THE B OOKS OF ACCOUNT OF WIL AS ON 15.3.2006. ANOTHER SALIENT FE ATURE WHICH ULTIMATELY CAME TO LIGHT WAS THAT WIL HAD GIVEN EFF ECT TO THE SALE OF 28 WEGS IN ITS BOOKS OF ACCOUNT FOR THE YEAR-END ED 31.3.2006 AND, THUS, ACCOUNTED FOR THE INCOME AROSE OUT OF SA LE OF THE SAID WEGS FOR THE AY 2006 -07 WITH A RIDER THAT IT WOULD REVERSE THE ENTRY IF IT GETS A BREATHER IN THE ARBITRATION PROCEEDINGS. THUS, THE ASSERTION OF WIL IN ITS LETTER (SUPRA) MAKES IT ABUNDANTLY CLEAR THAT THE SALE DID TAKE PLACE DURING MARCH 200 6 ITSELF WHICH HAS ALSO BEEN ACCOUNTED FOR IN ITS BOOKS OF ACCOUNT FOR THE YEAR- ENDED 31.3.2006. MOREOVER, THE CONTRACT OF PURCHAS E OF WEGS WAS BETWEEN THE ASSESSEE AND IEL WHO KNEW THE TERMS , CONDITIONS AND OBLIGATIONS OF SUCH CONTRACT AND, TH US, AS RIGHTLY POINTED OUT BY THE ASSESSEE, THE END-USERS WERE NOT PUT TO NOTICE OF THE SAID CONTRACT SIMULTANEOUSLY WHEN THE CONTRA CT WAS ACTUALLY ENTERED INTO WILL HAVE NO CONSEQUENCE AT A LL. ASSUMING FOR A MOMENT THAT NONE OF THE END-USERS WERE PUT TO NOTICE ABOUT THE TRANSACTION AND IEL CONTINUED TO ACT AS O WNER AND AS FAR AS THE END-USERS WERE CONCERNED, THE IEL HAD RE CEIVED THE ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 23 OF 45 POWER CHARGES FROM THEM AND, SUBSEQUENTLY, TRANSFER RED THE SAME TO THE ASSESSEE ETC., EVEN THEN, THE TRANSACTI ON CANNOT BE TERMED AS FICTITIOUS AS THE ASSESSEE WAS THE ACTUAL OWNER OF THE ASSET SINCE THE TRANSACTION OF WEGS WAS BETWEEN THE ASSESSEE AND IEL. FURTHERMORE, AS LONG AS THE SELLER OF WEG S, I.E., IEL HAD CONFIRMED THE TRANSACTION WHICH TOOK PLACE ON 1 5 TH AND 24 TH MARCH, 2006 AND AS SUCH, THE STATEMENTS OF THE END -USERS HAVE OF NO CONSEQUENCE TO DETERMINE THE DATE OF SALE/TRA NSACTION OF WEGS. 7.4.1. FURTHER, REBUTTING THE WILS ALLEGATION OF THE SALE OF 28 WEGS TO THE ASSESSEE WAS A SHAM, THE ASS ESSEE HAD EXTENSIVELY QUOTED THE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN REPO RTED IN 263 ITR 706 [SC] WHEREIN THE HONBLE COURT HAD DEALT WI TH THE ISSUE OF SHAM TRANSACTION. FOR APPRECIATION OF FACTS, THE RELEVANT PORTIONS OF THE JUDGMENT OF THE HONBLE COURT ARE E XTRACTED AS UNDER: (ON PAGE 754) IN THE CLASSIC WORDS OF LORD SUMNER IN IRC V. FISHERS EXECUTORS (1926) AC 395 AT 412 (HL) : MY LORDS, THE HIGHEST AUTHORITIES HAVE ALWAYS RECOGNISED THAT THE SUBJECT IS ENTITLED SO TO ARRAN GE HIS AFFAIRS AS NOT TO ATTRACT TAXES IMPOSED BY THE CROW N, SO FAR AS HE CAN DO SO WITHIN THE LAWS, AND THAT HE MA Y LEGITIMATELY CLAIM THE ADVANTAGE OF ANY EXPRESSED TERMS OR OF ANY OMISSIONS THAT HE CAN FIND IN HIS F AVOUR IN TAXING ACTS. IN SO DOING, HE NEITHER COMES UNDE R LIABILITY NOR INCURS BLAME. SIMILAR VIEWS WERE EXPRESSED BY LORD TOMLIN IN IRC V. DUKE OF WESTMINSTER (1936) AC 1 (HL); 19 TC 490, 52 0 ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 24 OF 45 (HL) WHICH REFLECTED THE PREVALENT ATTITUDE TOWARDS TAX AVOIDANCE: EVERY MAN IS ENTITLED IF HE CAN TO ORDER HIS AFFAI RS SO THAT THE TAX ATTACHING UNDER THE APPROPRIATE ACTS I S LESS THAN IT OTHERWISE WOULD BE. IF HE SUCCEEDS IN ORDERING THEM SO AS TO SECURE THIS RESULT, THEN, HOWEVER, UNAPPRECIATIVE THE COMMISSIONERS OF INLAND REVENUE OR HIS FELLOW TAX PAYERS MAY BE IN HIS INGENUITY, HE CANNOT BE COMPELLED TO PAY AN INCREAS ED TAX. 7.5. ANALYSING AND QUOTING VARIOUS JUDGMENTS IN RESPECT OF THE PROPOSITION THAT MOTIVE OF TAX AVOID ANCE IS IRRELEVANT IN CONSIDERATION OF THE LEGAL EFFICACY O F A TRANSACTIONAL SITUATION, THE HONBLE APEX COURT HAD OBSERVED [ON PAGE 761] THAT THOUGH THE WORDS SHAM AND DEVISE WERE LOOSELY USED IN CONNECTION WITH THE INCORPORATION UNDER THE MAURITIUS LAW, WE DEEM IT FIT TO ENTER A CAVEAT HER E. THESE WORDS ARE NOT INTENDED TO BE USED ASS MAGIC MANTRAS OR CATCH-ALL PHRASES TO DEFEAT OR NULLIFY T HE EFFECT OF A LEGAL SITUATION. AS LORD ATKIN POINTED OUT IN DUKE OF WESTMINSTERS CASE (1936) AC 1 (HL); (1935) 19 TC 490, 511): I DO NOT USE THE WORD DEVICE IN ANY SINISTER SENSE : FOR IT HAS TO BE RECOGNISED THAT THE SUBJECT, WHETHER P OOR AND HUMBLE OR WEALTHY AND NOBLE, HAS THE LEGAL RIGH T SO TO DISPOSE OF HIS CAPITAL AND INCOME AS TO ATTRA CT UPON HIMSELF THE LEAST AMOUNT OF TAX. THE ONLY FUNCTION OF A COURT OF LAW IS TO DETERMINE THE LEGA L RESULT OF HIS DISPOSITIONS SO FAR AS THEY AFFECT TA X. LORD TOMLIN SAID (PAGE 521) : THERE MAY, OF COURSE, BE CASES WHERE DOCUMENTS ARE NOT BONA FIDE NOR INTENDED TO BE ACTED UPON, BUT AR E ONLY USED AS A CLOAK TO CONCEAL A DIFFERENT TRANSAC TION. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 25 OF 45 IN SNOOK V. LONDON AND WEST RIDING INVESTMENTS LTD (1967) 1 ALL ER 518 AT 528 (CA) LORD DIPLOCK L. J., EXPLAINED THE USE OF THE WORK SHAM AS A LEGAL CON CEPT IN THE FOLLOWING WORDS: . IT IS, I THINK, NECESSARY TO CONSIDER WHAT, IF ANY, LEGAL CONCEPT IS INVOLVED IN THE USE OF THIS P OPULAR AND PEJORATIVE WORD. I APPREHEND THAT, IF IT HAS A NY MEANING IN LAW, IT MEANS ACTS DONE OR DOCUMENTS EXECUTED BY THE PARTIES TO THE SHAM WHICH ARE INTENDED BY THEM TO GIVE TO THIRD PARTIES OR TO THE COURT THE APPEARANCE OF CREATING BETWEEN THE PARTIES LEGA L RIGHTS AND OBLIGATIONS DIFFERENT FROM THE ACTUAL LE GAL RIGHTS AND OBLIGATIONS (IF ANY) WHICH THE PARTIES I NTEND TO CREATE. ONE THING I THINK, HOWEVER, IS CLEAR IN LEGAL PRINCIPLE, MORALITY AND THE AUTHORITIES (SEE YORKSH IRE RAILWAY WAGON CO V. MACLURE (1882) 21 CH. D 309; STONELEIGH FINANCE LTD V. PHILLIPS [1965] 1 ALL ER 513 (CA); [1965] 2 QB 537 (CA)) THAT FOR ACTS OR DOCUME NTS TO BE A SHAM, WITH WHATEVER LEGAL CONSEQUENCES FO LLOW FROM THIS, ALL THE PARTIES THERETO MUST HAVE A COMM ON INTENTION THAT THE ACTS OR DOCUMENTS ARE NOT TO CRE ATE THE LEGAL RIGHTS AND OBLIGATIONS WHICH THEY GIVE TH E APPEARANCE OF CREATING. NO UNEXPRESSED INTENTIONS OF A SHAMMER AFFECT THE RIGHTS OF A PARTY WHOM HE DECEIVED. IN WAMAN RAO V UNION OF INDIA (1981) 2 SCC 362 AT PARA. 45 AND MINERVA MILLS LTD V. UNION OF INDIA (1 980) 3 SCC 625 AT PARA 91 THIS COURT CONSIDERED THE IMPORT OF THE WORD DEVICE WITH REFERENCE TO ARTICLE 31B WHI CH PROVIDED THAT THE ACTS AND REGULATIONS SPECIFIED IN THE NINTH SCHEDULE SHALL NOT BE DEEMED TO BE VOID OR EV EN TO HAVE BECOME VOID ON THE GROUND THAT THEY ARE INCONSISTENT WITH THE FUNDAMENTAL RIGHTS. THE USE OF THE WORD DEVICE HERE WAS NOT PEJORATIVE, BUT TO DESCR IBE A PROVISION OF LAW INTENDED TO PRODUCE A CERTAIN LEGA L RESULT. IF THE COURT FINDS THAT NOTWITHSTANDING A SERIES OF LEGAL STEPS TAKEN BY AN ASSESSEE, THE INTENDED LEGAL RESU LT HAS NOT BEEN ACHIEVED, THE COURT MIGHT BE JUSTIFIED IN OVERLOOKING THE INTERMEDIATE STEPS, BUT IT WOULD NO T BE ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 26 OF 45 PERMISSIBLE FOR THE COURT TO TREAT THE INTERVENING LEGAL STEPS AS NON- EST BASED UPON SOME HYPOTHETICAL ASSESSMENT FOR THE REAL MOTIVE OF THE ASSESSEE. IN OUR VIEW, THE COURT MUST DEAL WITH WHAT IS TANGIBLE IN AN OBJECTIVE MANNER AND CANNOT AFFORD TO CHASE A WILL- O- THE-WISP. 7.6. FROM THE ABOVE READING OF THE HON'BLE APEX COU RT, IT IS CLEAR THAT THE TRANSACTION OF PURCHASE OF WEGS BY T HE ASSESSEE CANNOT BE TERMED AS A SHAM TRANSACTION. IN THE INST ANT CASE, THE FOLLOWING VITAL POINTS EMERGE, AFTER CONSIDERING TH E FACTS AND CIRCUMSTANCES OF THE CASE AND JUDGMENT OF THE APEX COURT, NAMELY: WIL SOLD 28 WEGS TO IEL ON 15.3.2006 AND THE SAME H AVE BEEN ACCOUNTED FOR AS SALE IN ITS BOOKS OF ACCOUNT FOR THE YEAR-ENDED 31.3.2006 AND ALSO ACCOUNTED FOR THE INC OME FROM THE SAID SALE PROCEEDS FOR THE AY 2006-07. NO DEPRECIATION WAS CLAIMED ON THOSE WEGS FOR THE YEAR - ENDED 31.3.2006 BY WIL OR IEL; IEL CONFIRMED THE SALE OF WEGS TO THE ASSESSEE AS O N 15 TH AND 24 TH OF MARCH 2006 WHICH HAVE BEEN DULY ACCOUNTED FOR AS SALE FOR THE YEAR-ENDED 31.3.2006 (FOR THE A Y 2006- 07). AS ADMITTED, IEL WAS NOT THE OWNER OF THE SAI D ASSET AS ON 31.3.2006 AND NO DEPRECIATION WAS CLAIMED BY IT FOR THOSE WEGS FOR THE YEAR-ENDED 31.3.2006; THAT THE ASSESSEE HAD PURCHASED THE WEGS FROM IEL ON 15 TH AND 24 TH MARCH 2006 AND AS SUCH IT WAS THE ACTUAL AND LEGITIMATE OWNER OF THOSE WEGS AS ON 31.3.2006 AND, ACCORDINGLY, CLAIMED DEPRECIATION FOR THE YEAR-ENDE D 31.3.2006; THAT ACCORDING TO THE ASSESSMENT ORDER, ONE HAS TO ARRIVE AT A CONCLUSION THAT IEL WAS THE OWNER OF THOSE WEG S AS ON 31.3.2006. HOWEVER, IEL HAD, IN ITS OWN ADMISSI ON, DENIED THE OWNERSHIP AS ON THE SAID DATE. NEITHER WIL NOR IEL HAD CLAIMED DEPRECIATION. MOREOVER, THE LEGITI MATE ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 27 OF 45 OWNER OF THOSE 28 WEGS, NAMELY, THE ASSESSEE HAS AL SO BEEN DENIED DEPRECIATION; THAT WHEN IEL WHO OWNED THE ASSETS MADE A CATEGORIC AL STATEMENT TO THE EFFECT THAT IT HAD SOLD THOSE ASSE TS TO THE ASSESSEE AND THEREBY CONFIRMED THAT IT HAD RELINQUI SHED ALL VALUABLE RIGHT AND INTEREST IN THOSE WEGS, THE AO C ANNOT MAKE A SWEEPING REMARK THAT IEL HAS BEEN MAKING A S ELF- SERVING STATEMENT; THAT THE INCOME FROM THE SALE OF POWER GENERATED FR OM WEGS FOR THE PERIOD FROM 15.3.2006 ENDING ON 31.3.2 006 HAS BEEN DULY ACCOUNTED FOR AND OFFERED TO TAX BY T HE ASSESSEE AND NOT EITHER BY IEL OR WIL. THIS ASSERT ION AMPLY EXHIBITS THAT THE ASSESSEE WAS THE LEGITIMATE OWNER OF THOSE WEGS IN THE MONTH OF MARCH, 2006 ITSELF; SURPRISINGLY, IN THE INSTANT CASE, THE SURVEY HAD T AKEN PLACE BEFORE THE END OF THE PREVIOUS YEAR 2005-06 A ND ALSO WELL BEFORE THE DUE DATE FOR FILING OF THE RETURN O F INCOME FOR THE RELEVANT ASSESSMENT YEAR UNDER DISPUTE AND THAT DURING THE COURSE OF SURVEY, THE EMPLOYEES OF THE ASSESSEE WERE SUBJECTED TO INTERROGATION TO ASCERTAIN AS TO WHETHER THEY HAVE ANY KNOWLEDGE OF THE TRANSACTION OF THE PURCHASE OF WEGS BY THE ASSESSEE ETC., LEAD TO A FE ELING THAT THE AUTHORITY CONCERNED WAS FULLY AWARE OF THE TRANSACTION OF WEGS AND WAS LOOKING FOR ANY DOCUMEN TARY PROOF OF THE SAME. 7.7. TAKING INTO ACCOUNT THE ABOVE FACTS AND ALSO IN CONFORMITY WITH THE JUDGMENT OF THE HONBLE SUPREME COURT (SUPRA) WITH REGARD TO SHAM OR DEVICE, WE ARE O F THE CONSIDERED VIEW THAT THE ASSESSEE WAS ELIGIBLE FOR DEPRECIATIO N ON THOSE WEGS FOR THE YEAR-ENDING 31.3.2006. IT IS ORDERED ACCORDINGLY. DISALLOWANCE OF SET-OFF OF BROUGHT FORWARD OF LOSS OF RS.7.00 CRORES: 8. IT WAS THE STAND OF THE AO THAT LOSSES PERTAINI NG TO AN UNDERTAKING/UNIT OF BUSINESS CAN BE ALLOWED, IF THE UNDER-TAKING ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 28 OF 45 IS TRANSFERRED ON A GOING CONCERN BASIS AS PER S. 2 (19AA) OF THE ACT. AS THE OPERATION OF MOL WAS STAND-STILL FROM 23/12/1999 AND AS A WINDING NOTICE WAS ISSUED BY BIFR, IT CANN OT BE SAID THAT THE COMPANY IS BEING TRANSFERRED ON A GOING C ONCERN BASIS. CONTESTING THE ASSESSEES INTERPRETATION OF NON OB STANTE CLAUSE [OF THE PROVISIONS OF S. 72A (4)] AS ERRONEOUS, THE AO WENT ON TO ADD THAT WHEN THE DEFINITION SECTION HAS DEFINED D EMERGER, THE SAME MEANING SHALL BE APPLIED TO THE SAID TERMINOLO GY WHEREVER IT APPEARS IN THE ACT UNLESS SPECIFICALLY STATED SO THAT A TRANSFER IS DEEMED TO BE A DEMERGER OR DEEMED NOT TO BE A DE MERGER. IT WAS THE STAND OF THE AO THAT MERE APPROVAL OF THE H IGH COURT FOR AMALGAMATION OR DEMERGER DOES NOT MAKE THE AMALGAMA TION OR DEMERGER AS DEFINED OR AS REQUIRED BY THE ACT. IF THAT WERE THE CASE, IT WAS CLAIMED, THERE WAS NO NEED TO DEFINE T HE TERMS AMALGAMATION OR DEMERGER IN THE ACT. IT WAS, FUR THER, STATED THAT THE CONTENTION OF THE ASSESSEE THAT ONCE A MER GER WAS APPROVED BY A COURT, THE BENEFIT OF BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION WILL HAVE TO BE ALLO WED IS OPPOSED TO LAW, AND THAT THE GOING CONCERN HAS BE EN DEFINED IN THE AUDITING AND ASSURANCE STANDARDS [AAS], ACCORDI NG TO WHICH, MOL WAS NOT QUALIFIED TO BE OF ONE. 8.1. ON AN APPEAL, THE CIT (A) HAD CONFIRMED THE S TAND OF THE AO ON THE PREMISE THAT S. 72A STIPULATES THAT T HE CONCERN SHOULD BE A GOING CONCERN. HE HAD, FURTHER, OPIN ED THAT IN THE INSTANT CASE, THE PLANT & MACHINERY OF MOL WERE IN- OPERATIVE SINCE 1999 AND, HENCE, MOL CANNOT BE CATEGORIZED AS A GOING CONCERN. THE CIT (A) HAD, IN HIS CONCLUSION, MAIN TAINED THAT IT WAS A DEAD CONCERN AND, HENCE, THE PROVISIONS OF S. 72A HAVE NO ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 29 OF 45 APPLICATION TO THE PRESENT CASE AS THE CONDITIONS P RESCRIBED THEREIN WERE NOT ATTRACTED AT ALL. 8.1.1. BEFORE US, IT WAS SUBMITTED BY THE LEARNED AR AS UNDER: - THAT THE AUTHORITIES BELOW WERE OF THE OPINION T HAT THE ASSESSEE WAS INELIGIBLE TO THE BENEFIT OF BROUGHT F ORWARD LOSS U/S 72A (4) FOR THE REASON THAT THE RECTIFIED SPIRIT UNDER-TAKING BELONGED TO MOL WAS DYSFUNCTIONAL SINC E 1999 AND, THEREFORE, DOES NOT QUALIFY TO BE A GOIN G CONCERN. THE AO WAS OF THE VIEW THAT THE UNDER-TA KING NOT BEING A GOING CONCERN, THE DEMERGER DOES NOT SATI SFY THE DEMERGER AS DEFINED BY S. 2 (19AA) OF THE ACT INASM UCH AS SUB-CLAUSE (VI) OF S. 2 (19AA) OF THE ACT STANDS VI OLATED AND THE CIT (A) TERMED IT AS A DEAD CONCERN; - THAT AS PER SUB-CLAUSE (VI) OF S. 2 (19AA), IT O NLY MEANS THAT THE UNDER-TAKING SHALL BE TRANSFERRED IN A MANNER S IMILAR TO THE TRANSFER OF AN UNDER-TAKING WHICH IS A GOIN G CONCERN AS ON THE DATE OF TRANSFER; - THAT THE WORDS USED ON A GOING CONCERN BASIS H OLD THE KEY TO UNDERSTANDING THE IMPORT OF SUB-CLAUSE (VI) OF S . 2 (19AA). IT ONLY MEANS THAT THE TRANSFER SHOULD BE ON THE BASIS OF A GOING CONCERN AND IT DOES NOT MEAN THA T THE UNDER-TAKING BEING TRANSFERRED SHOULD BE A GOING C ONCERN AS ON THE DATE OF TRANSFER; - THAT THE SCHEME OF DEMERGER WHICH STANDS APPRO VED BY THE HIGH COURTS OF ANDHRA PRADESH AND THE JURISDICT IONAL COURT CLEARLY ESTABLISHES THE FACT THAT THE TRANSFE R OF THE UNDERTAKING IS INDEED ON A GOING CONCERN BASIS. THE ASSETS, LIABILITIES, EMPLOYEES, DEBTS, OBLIGATIONS, RIGHTS ETC., OF THE UNDERTAKING, IMMEDIATELY PRIOR TO THE DEMERG ER STAND COMPLETELY VESTED WITH THE ASSESSE UPON DEME RGER. THIS IS WHAT WHICH AMOUNTS TO TRANSFER OF THE UNDE RTAKING ON A GOING CONCERN BASIS; - THAT THE PLAIN READING OF S.72A(4) OF THE ACT WH ICH STARTS WITH AN NON-OBSTANTE CLAUSE, IT IS CLEAR THAT THE A SSESSEE IS ENTITLED TO THE BENEFITS U/S 72A(4) OF THE ACT; ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 30 OF 45 - THAT SECTIONS 2 (19AA) AND 72A (4) OF THE ACT AR E TO BE READ HARMONIOUSLY. IN THIS CONNECTION, THE ASSESSEE RELI ES ON THE FINDINGS OF THE EARLIER BENCH OF THIS TRIBUNAL IN T HE CASE OF JCIT V. M/S. VALDEL ENGINEERS & CONSTRUCTORS PVT LI MITED IN ITA NO.1370/B/2011 DATED 28.9.2012 WHEREIN IT HA D DEALT WITH AT LENGTH THE PROVISIONS OF SECTIONS 2 ( 19AA) AND 72A(4) AND HOW THEY SHOULD BE READ HARMONIOUSLY WIT H ONE ANOTHER IN ORDER TO ENSURE THAT THE BENEFIT INTENDE D BY THE LEGISLATURE REACHES THOSE INTENDED TO RECEIVE THE S AME. RELIES ON THE FOLLOWING CASE LAWS : (I) INDO RAMA TEXTILE LTD., IN RE (2012) 23 TAXMANN .COM 390(DEL); 8.1.2. ON THE OTHER HAND, IT WAS THE SUBMISSION OF THE LEARNED DR THAT THE ASSESSEE CANNOT BE ALLOWED TO G ET SET OFF LOSSES AGAINST THE PROFITS OF AMALGAMATED COMPANY B ECAUSE THE CONDITIONS PRESCRIBED IN S. 72A OF THE ACT DO NOT A PPLICABLE IN THE PRESENT CASE. OUR ATTENTION WAS DRAWN TO THE CIT (A )S FINDING THAT AS ON 1.4.2005 THE RECTIFIED UNIT OF MOL WAS N OT AT ALL A GOING CONCERN AND, THEREFORE, THE PROVISIONS OF S .72A CANNOT BE APPLIED TO GIVE RELIEF TO THE ASSESSEE. 8.1.3. HOWEVER, IT IS NOTICED THAT THE SCHEME OF DEMERGER HAS BEEN APPROVED BY THE HONBLE HIGH COUR TS OF ANDHRA PRADESH AND KARNATAKA CLEARLY VOUCH THAT THE TRANSFER OF THE UNDER-TAKING WAS ON A GOING CONCERN BASIS. T HE ASSETS, LIABILITIES, EMPLOYEES, DEBTS, OBLIGATIONS, RIGHTS ETC., OF THE UNDER- TAKING PRIOR TO THE DEMERGER STAND VESTED WITH THE ASSESSEE UPON DEMERGER. TO ILLUSTRATE FURTHER, THE HONBLE HIGH COURT OF KARNATAKA HAD, IN ITS ORDER U/S 391 TO 394 OF THE C OMPANIES ACT DATED 3.3.2008 HAS APPROVED UNANIMOUSLY THE PROPOSE D SCHEME ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 31 OF 45 OF ARRANGEMENT BETWEEN THE ASSESSEE AND MOL. FOR A PPRECIATION OF FACTS, THE RELEVANT PORTIONS OF APPROVED SCHEME OF ARRANGEMENT ARE EXTRACTED AS UNDER: PART II 4. TRANSFER OF UNDER TAKING 4.1. ON AND WITH EFFECT FROM THE APPOINTED DATE, TH E DEMERGED UNDERTAKING SHALL, PURSUANT TO THE PROVISI ONS CONTAINED IN THE SECTION 394(2) OF THE ACT AND OTHE R APPLICABLE PROVISIONS OF LAW FOR THE TIME BEING IN FORCE AND WITHOUT ANY FURTHER ACT OR DEED, BE DEMERGED FROM M OL, AND BE TRANSFERRED TO AND VEST IN OR BE DEEMED TO H AVE BEEN TRANSFERRED TO AND VESTED IN KSDL ON THE APPOI NTED DATE, ON A GOING CONCERN BASIS , SO AS TO BECOME AS AND FROM THE APPOINTED DATE, THE UNDERTAKING OF KSDL. 8.1.4. WE SHALL NOW PROCEED TO ANALYSE THE PROVISI ONS OF S. 72A (4) OF THE ACT. FOR READY REFERENCE, THE RELEVANT SECTION IS EXTRACTED AS UNDER: 72A(4) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT, IN THE CASE OF A DEME RGER, THE ACCUMULATED LOSS AND THE ALLOWANCE FOR UNABSORBED DEPRECIATION OF THE DEMERGED COMPANY SHALL- (A) WHERE SUCH LOSS OR UNABSORBED DEPRECIATION IS DIREC TLY RELATABLE TO THE UNDERTAKINGS TRANSFERRED TO THE RESULTING COMPANY, BE ALLOWED TO BE CARRIED FORWARD AND SET OFF IN THE HANDS OF THE RESULTING COMPANY; (B) WHERE SUCH LOSS OR UNABSORBED DEPRECIATION IS NOT DIRECTLY RELATABLE TO THE UNDERTAKINGS TRANSFERRED TO THE RESULTING COMPANY, BE APPORTIONED BETWEEN THE DEMERGED COMPANY AND THE RESULTING COMPANY IN THE SAME PROPORTION IN WHICH THE ASSETS OF THE UNDERTAK ING HAVE BEEN RETAINED BY THE DEMERGED COMPANY AND TRANSFERRED TO THE RESULTING COMPANY, AND BE ALLOWE D TO BE CARRIED FORWARD AND SET OFF IN THE HANDS OF T HE DEMERGED COMPANY OR THE RESULTING COMPANY, AS THE CASE MAY BE. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 32 OF 45 8.1.5. FROM A SIMPLE READING OF THE SAME, IT MAKES IT VERY CLEAR THAT THE ASSESSEE IS ELIGIBLE TO THE BEN EFITS U/S 72A (4) OF THE ACT. THE ACT DOES NOT STATE THAT THE UNDER- TAKING BEING DEMERGED OUGHT TO BE A GOING CONCERN AT THE TIME OF DEMERGER. IT ONLY STATES THAT THE UNDER-TAKING BEING DEMERGED SH OULD STAND TRANSFERRED IN A MANNER SIMILAR TO THE MANNER IN WH ICH A GOING CONCERN IS TRANSFERRED. AS MENTIONED EARLIER, THE DEMERGER SCHEME WAS APPROVED BY THE HONBLE HIGH COURTS OF K ARNATAKA AND ANDHRA PRADESH AND THE SCHEME CLEARLY STIPULATE S THAT THE DEMERGER IS ON A GOING CONCERN BASIS AND THAT IT COMES INTO EFFECT W.E.F. 1.1.2006 I.E., RELEVANT TO THE ASSESS MENT YEAR 2006- 07. IN OTHER WORDS, ONCE DEMERGER IS APPROVED, IT SHOULD BE TREATED AS RELATING BACK TO THE APPOINTED DATE WITH REFERENCE TO WHICH THE ACCOUNTS OF BOTH DEMERGED AND RESULTANT C OMPANIES ARE MADE UP. IT IS SO SETTLED BY THE HONBLE APEX COURT IN THE CASE OF MARSHALL SONS & CO (INDIA) LIMITED V. ITO R EPORTED IN 223 ITR 809 (SC). 8.1.6. FURTHERMORE, THE ASSESSEES CONTENTION THAT SECTIONS 2(19AA) AND 72A (4) OF THE ACT TO BE READ HARMONIOUSLY IS HAVING THE BACKING OF THE FINDINGS OF THE EARLIE R BENCH OF THIS TRIBUNAL IN THE CASE OF JCIT V. M/S VALDEL ENGINEER S & CONSTRUCTORS PVT LTD IN ITR NO. 1370/B/2011 DATED 2 8.9.2012. AFTER DUE CONSIDERATION OF THE PROVISIONS OF S. 72A (4) OF THE ACT, THE EARLIER BENCH HAD RECORDED ITS FINDINGS AS UNDE R: 10(ON PAGE 13) A PERUSAL OF THE PROVISIONS OF SECTION 72A (4) REVE AL THAT IT CONSIDERS THE UNDER-TAKING WHICH IS DEMERGED AS A DISTINCT AND SEPARATE BUSINESS ENTITY IN AS MUCH AS ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 33 OF 45 ONCE IT STANDS DEMERGED, THE CARRY FORWARD LOSSES A ND UNABSORBED DEPRECIATION ALLOWANCE WHICH ARE RELATAB LE TO THE SAID UNDERTAKING AND AVAILABLE FOR SET OFF O NLY IN THE HANDS OF THE RESULTING COMPANY AND NO PART OF I T IS ALLOWED TO BE SET OFF IN THE HANDS OF THE DEMERGED COMPANY AFTER THE DEMERGER. 11.1. AFTER PERUSAL AND CONSIDERATION OF THE PROVI SION OF SECTIONS 2(19AA), 10A(1), 10A(7A) AND 72A(4) OF THE ACT, IT IS NECESSARY TO ARRIVE AT A HARMONIOUS CONSTRUCT ION TO ASSUME THAT THE INTENTION OF LEGISLATURE IS NOT FRU STRATED ESPECIALLY IN VIEW OF THE DECISION OF THE HONBLE A PEX COURT IN THE CASE OF K.P. VARGHESE V. ITO REPORTED IN 131 ITR 597 WHEREIN THE HONBLE APEX COURT HAS RULED TH AT A LITERAL CONSTRUCTION OF A STATUTE THAT LEADS TO A N ABSURDITY OR UNJUST RESULT OR MISCHIEF IS TO BE AVO IDED. 8.1.7. THE HONBLE HIGH COURT OF DELHI IN THE CASE OF INDO RAMA TEXTILE LTD., IN RE REPORTED IN (2012) 23 TAXMANN.COM 390 (DEL) HAD, WHILE ANALYSING SECTION 2 (19AA) OF THE ACT, HELD AS UNDER: 41. UPON READING OF THE AFORESAID SECTION, IT IS A PPARENT THAT THE DEFINITION OF DEMERGER IN ACT, 1961, WOULD BE SATISFIED IF THE UNDERTAKING THAT IS BEING DEMERGED IS HIVED OFF AS A GOING CONCERN THAT MEANS, IF IT CONS TITUTES A BUSINESS ACTIVITY CAPABLE OF BEING RUN INDEPENDENTL Y FOR A FORESEEABLE FUTURE. TO ENSURE THAT IT IS A GOING C ONCERN, THE COURT WHILE SANCTIONING A SCHEME CAN CERTAINLY EXAMINE WHETHER ESSENTIAL AND INTEGRAL ASSETS LIKE PLANT, MACHINERY AND MANPOWER WITHOUT WHICH IT WOULD NOT B E ABLE TO RUN AS AN INDEPENDENT UNIT HAVE BEEN TRANSF ERRED TO THE DEMERGED COMPANY. 8.1.8. TAKING INTO ACCOUNT THE FACT THAT THE MERGE R AS SUCH IS NOT IN DISPUTE AND THE ISSUE AS DISCUSSED I N THE FORE- GOING PARAGRAPHS AND ALSO IN CONFORMITY WITH THE JU DICIAL VIEWS (SUPRA), WE ARE OF THE VIEW THAT THE AUTHORITIES BE LOW WERE NOT ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 34 OF 45 JUSTIFIED IN DENYING THE BENEFIT OF THE SET OFF OF THE BROUGHT FORWARD LOSSES TO THE EXTENT OF RS.7 CRORES. IT IS ORDERED ACCORDINGLY. II. ITA NO.1363/B/2011 A Y 2007-08: DISALLOWANCE OF INTEREST OF RS.10,97, 85,319/- : 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO HAD OBSERVED, ON PERUSAL OF THE AUDITORS REPORT, T HAT THE ASSESSEE HAD GIVEN LOANS/ADVANCES TO OTHER COMPANIE S ETC., FOR RS.149.63 CRORES. ALL THOSE CONCERNS WERE INTER-CO NNECTED TO THE ASSESSEE AND, THUS, NO INTEREST WAS COLLECTED EXCEP T FROM M/S. SAPTHAGIRI ENTERPRISES TO WHOM RS.32.23 LAKHS WAS G IVEN. AFTER DISCUSSION WITH THE ASSESSEE, THE AO CONCLUDED THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS TO ITS RELAT ED CONCERNS, BUT, IT HAD PAID INTEREST ON THE LOANS AVAILED AND, ACCORDINGLY, DISALLOWED A SUM OF RS.10,97,85,319/- BEING PROPORT IONATE TO THE LOANS GIVEN BY THE ASSESSEE FREE OF INTEREST. I T WAS THE STAND OF THE AO THAT THE ASSESSEE COULD HAVE INVOLVED ITS OWN MONEY IN ITS BUSINESS INSTEAD OF TAKING BANK LOANS ON INTERE ST AS THE ASSESSEE HAD INVESTED RS.7 CRORES AND HAD GOT NET C URRENT ASSETS OF RS.202 CRORES. 9.1. ON APPEAL, THE CIT (A) HAD COME TO A CONCLUSI ON THAT THE INTEREST FREE LOANS AND ADVANCES HAD COME FROM A MIXED KITTY OF INTEREST FREE AS WELL AS INTEREST BEARING FUNDS. HE HAD, ACCORDINGLY, CONFIRMED THE ADDITION ON THE PREMISE THAT THE ASSESSEE WAS NOT ABLE TO PROVE THE COMMERCIAL EXPED IENCY WHICH NECESSITATED IN LENDING SUCH LOANS. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 35 OF 45 9.2. DURING THE COURSE OF HEARING BEFORE US, THE SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMED UP AS UNDER: - THAT THE ENTIRE AMOUNT OF INTEREST FREE LOANS OF RS .117.39 CRORES WAS OUT OF NON-INTEREST BEARING FUNDS OF RS. 170.93 CRORES, THE DETAILS OF WHICH, AS PER THE AUDITED BA LANCE SHEET AS ON 31.3.2007 ARE AS UNDER: PARTICULARS AS ON 31.3.2007 (IN RS) AS ON 31.3.2006 (IN RS) CAPITAL AS ON 31.3.2007 2,01,84,210 2,01,84,210 RESERVES & SURPLUS 80,74,56,393 67,63,55,169 INTEREST FREE UNSECURED LOANS 88,17,01,808 71,44,02,628 TOTAL 170,93,42,411 141,09,41,647 - THAT IN THE PRESENT CASE THE LAST DATE OF THE RELEV ANT PREVIOUS YEAR WAS 31.3.2007. THE NON-INTEREST BEAR ING FUNDS AVAILABLE WITH THE ASSESSEE AS ON 31.3.2007 W AS RS.170.93 CRORES WHEREAS THE NON-INTEREST BEARING L OANS AND ADVANCES DEPLOYED BY THE ASSESSEE WAS RS.117.39 CRORES AND, THUS, THE QUESTION OF INTEREST BEARING FUNDS BEING UTILISED TO ADVANCE NON-INTEREST BEARING LOAN S DOES NOT ARISE; AND THAT THE OPENING BALANCE OF NON-INTE REST BEARING FUNDS AVAILABLE WITH THE ASSESSEE AT THE BE GINNING OF THE YEAR I.E., AS ON 1.4.2006 WAS RS.141.09 CROR ES AND THAT THE AMOUNTS WERE SUFFICIENT TO MEET THE OUTFLO W IN THE NATURE OF NON-INTEREST BEARING LOANS AND ADVANCES O F RS.117.39 CRORES; - RELIES ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LT D 313 ITR 340 (BOM); 9.3. IN CONCLUSION, IT WAS ASSERTED THAT IN CONSON ANCE WITH THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT (SUPRA), NO ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 36 OF 45 DISALLOWANCE OF INTEREST WAS WARRANTED INASMUCH AS THE NON- INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE AS ON 31.3.2006 WAS FAR IN EXCESS OF THE INTEREST FREE LO ANS MADE AS ON 31.3.2007 AND, HENCE, THE DISALLOWANCE MADE WAS UNJ UST WHICH DESERVES TO BE DELETED. 9.4. ON THE OTHER HAND, THE LEARNED D R SUPPORTED THE STAND OF THE AUTHORITIES BELOW IN DISALLOWING THE I NTEREST AMOUNT OF RS.10.97 CRORES BEING PROPORTIONATE TO THE LOANS AND ADVANCES GIVEN BY THE ASSESSEE FREE OF INTEREST. IT WAS, FU RTHER, SUBMITTED THAT AS THE ASSESSEE HAD FAILED TO SUBSTANTIATE WIT H ANY DOCUMENTARY PROOF OF ITS CLAIM THAT THE LOANS EXTEN DED TO ITS SISTER CONCERNS WERE FROM OUT OF ITS SURPLUS FUNDS. FURTHER, IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT GIVEN THE D ETAILS TO WHOM AND FOR WHICH PURPOSE INTEREST FREE LOANS GIVE N EITHER BEFORE THE AUTHORITIES BELOW OR EVEN BEFORE THIS HO NBLE BENCH. THUS, IT WAS ARGUED THAT THE INTEREST FREE LOAN DOE S NOT CONFORM TO THE COMMERCIAL EXPEDIENCY PRINCIPLES, NAMELY: > ONE OF THE WAYS, BESIDES BY SHOWING THE COMMERCI AL EXPEDIENCY TO WRIGGLE OUT FROM THE RIGOURS OF DISAL LOWANCE U/S 36(1)(III) OF THE ACT WAS THE ARGUMENT THAT THE LOAN WAS EITHER PURELY FROM OWN FUNDS OR A MIXED KITTY WHERE IN THE PORTION OF OWN FUNDS WAS PROPORTIONATELY HIGHER THA N THAT OF THE BORROWED FUNDS. MOREOVER, THE LOANS WERE AV AILED FROM THE BANKS FOR SPECIFIC PURPOSE(S), HOWEVER, TH E SAME HAS NOT BEEN KEPT SEPARATELY AS ENJOINED BY THE PRO VISIONS OF S. 36(1)(III) OF THE ACT; > ADMITTEDLY, THE INTEREST FREE FUNDS HAD FLOWN FR OM MIXED FUNDS INCLUDING RESERVE SURPLUS, SHARE CAPITAL, UNS ECURED AND SECURED LOANS ETC., AND IT WAS SO INTERMINGLED, IT CANNOT BE CONCLUDED FIRMLY THAT THE SOURCE OF INTER EST FREE FUNDS USED FOR NON-BUSINESS PURPOSES ETC. FOR THIS REASON ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 37 OF 45 ONLY, THE ACT IS VERY SPECIFIC THAT BORROWED FUNDS (NOT MIXED FUNDS) IF USED FOR NON-BUSINESS PURPOSE, INTE REST PAID THEREON HAS TO BE DISALLOWED. IN OTHER WORDS, IT ENJOINS UPON THE ASSESSEE TO KEEP SEPARATE ACCOUNTS FOR EACH BORROWING SO THAT IT CAN BE EXAMINED BY THE BANKER/CREDITOR THAT THE LOAN IS BEING UTILISED AS PER THE TERMS OF LOAN AGREEMENT OR NOT. THUS, MAINTENANCE OF SEPARATE ACCOUNTS FOR EACH BORROWING HAS BEEN MADE SINE QUA NON BY THE PROVISIONS OF S. 36(1)(III) OF THE A CT IN ORDER TO FACILITATE THE WORKS OF ALL THE THREE, NAMELY, T HE ASSESSEE, THE CREDITOR AND THE REVENUE. SINCE NO ACCOUNTS FO R BORROWINGS HAVE BEEN KEPT, IT WAS DIFFICULT TO COME IN AGREEMENT THAT THE ENTIRE INTEREST FREE FUND HAD IT S GENESIS IN OWN FUNDS AND, THEREFORE, NO DISALLOWANCE WAS PO SSIBLE. 9.4.1. IT WAS, THEREFORE, PLEADED THAT THE STAND O F THE AO AS WELL AS THE CIT (A) REQUIRES TO BE SUSTAINED. 9.4.2. DISPUTING THE LEARNED DRS OBSERVATION OF COMMERCIAL EXPEDIENCY, THE ASSESSEE, IN ITS REJOIND ER, SUBMITTED THAT THE FACTS AS PREVAILING IN THE ASSESSEES CASE ARE ENTIRELY DIFFERENT FROM THOSE IN THE CASE LAWS CITED BY THE REVENUE. IT WAS ARGUED THAT THE QUESTION OF PROVING COMMERCIAL EXPEDIENCY WILL ARISE ONLY AFTER IT IS PROVED THAT THE INTERES T FREE LOANS WERE GIVEN OUT OF INTEREST BEARING FUNDS. THERE WAS NO BAR AS SUCH ON GIVING INTEREST FREE LOANS OUT OF INTEREST BEARING FUNDS PROVIDED THERE EXISTS COMMERCIAL EXPEDIENCY TO DO SO. IT WA S, FURTHER, SUBMITTED THAT IN THE CASE LAWS RELIED UPON BY THE REVENUE, THE QUESTION OF PROVING COMMERCIAL EXPEDIENCY CAME UP A S IN THOSE CASES INTEREST FREE LOANS WERE MADE OUT OF INTEREST BEARING FUNDS. HOWEVER, IN THE ASSESSEES CASE, IT WAS ARGUED, IT WAS CLEAR THAT THE NON-INTEREST BEARING FUNDS WERE QUITE SUFFICIEN T TO COVER THOSE INTEREST FREE ADVANCES. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 38 OF 45 RELIES ON THE FOLLOWING CASE LAWS : (A) WOOLCOMBERS OF INDIA LTD 134 ITR 219 (CAL); (B) CIT V. RELIANCE UTILITIES & POWER LTD 313 ITR 340 (BOM); & (C) CIT V. SRIDEV ENTERPRISES 192 ITR 165 (KAR) 9.5. WE HAVE CAREFULLY EXAMINED THE RIVAL SUBMISSI ONS, PERUSED THE RELEVANT MATERIALS ON RECORD AND ALSO D OCUMENTARY EVIDENCES ADDUCED BY THE ASSESSEE IN THE FORM OF BA LANCE SHEET, P & L ACCOUNT ETC. AS ON 31.3.2007. 9.5.1. AS COULD BE SEEN FROM THE DETAILS FURNISHED BY THE ASSESSEE DURING THE COURSE OF HEARING THAT THE CHUN K OF INTEREST FREE LOANS TO THE TUNE OF RS.117.39 CRORES WERE OUT OF NON- INTEREST BEARING FUNDS, COMPRISED OF CAPITAL, RESER VES & SURPLUS AND INTEREST FREE UNSECURED LOANS TO THE EXTENT OF RS.170.93 CRORES. THUS, THE QUESTION OF INTEREST BEARING FUN DS BEING UTILISED TO ADVANCE NON-INTEREST BEARING LOANS BY T HE ASSESSEE DID NOT ARISE. THE AO HAD OPINED IN THE ASSESSMENT ORDER THAT THE ASSESSEE COMPANY COULD HAVE INVOLVED ITS OWN M ONEY IN ITS BUSINESS INSTEAD OF TAKING BANK LOANS ON INTEREST. [COURTESY: PAGE 2 OF ASST. ORDER]. IT IS, HOWEVER, THE PREROG ATIVE OF THE ASSESSEE AS HOW TO CONDUCT ITS BUSINESS. FURTHER, IT IS VERY EVIDENT FROM THE DETAILS FURNISHED BY THE LEARNED A R AND ALSO PERUSAL OF THE SCHEDULES TO PROFIT & LOSS ACCOUNT AS AT MARCH, 31, 2007, IT IS OBVIOUS THAT THE INTEREST BEARING L OANS OBTAINED FROM THE BANKS WERE AVAILED FOR SPECIFIC PURPOSES, NAMELY, WORKING CAPITAL, KSBCL ADVANCE, VEHICLE LOANS [MOTO R CARS, TRUCKS] ETC., [COPIES OF BALANCE SHEET/SCHEDULES TO P & L A/C AS AT MARCH 31, 2007 ARE PLACED ON RECORD]. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 39 OF 45 9.5.2. WE SHALL NOW ANALYSE THE CASE LAWS AS TO WHETHER THE AO WAS WITHIN HER REALM TO DISALLOW THE INTEREST AMOUNT OF RS.10.97 CRORES. (I) CIT V. RELIANCE UTILITIES AND POWER LTD (2009 ) 313 ITR 340 (BOM) : (A) IN THAT CASE, THE ASSESSEE CLA IMED DEDUCTION OF INTEREST ON BORROWED CAPITAL. THE AO RECORDED A FIN DING THAT THE SUM OF RS.213 CRORES WAS INVESTED OUT OF ITS OWN FU NDS AND RS.147 CRORES WAS INVESTED OUT OF BORROWED FUNDS. ACCORDINGLY, HE DISALLOWED INTEREST OF RS.4.4 CRORES CALCULATED AT 12% PER ANNUM. THE CIT (A) FOUND THAT THE ASSESSEE HAD ENO UGH INTEREST FREE FUNDS AT ITS DISPOSAL FOR INVESTMENT AND, ACCO RDINGLY, DELETED THE ADDITION WHICH WAS SUBSEQUENTLY UPHELD BY THE T RIBUNAL. ON APPEAL, THE HONBLE COURT HAD HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AN D/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE, THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FI NDING THE FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTEREST WAS DEDUCTIBLE. (B) WE HAVE, WITH DUE REGARDS, PERUSED THE JUDGMENT OF THE HONBLE COURT (SUPRA) AND OF THE VI EW THAT THE RATIO LAID DOWN BY THE COURT IS DIRECTLY APPLICABLE TO THE PRESENT ASSESSEE AS THE ISSUE UNDER CONSIDERATION IS IDEN TICAL TO THAT OF THE MATTER DEALT BY THE HONBLE COURT. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 40 OF 45 (II) THE HONBLE HIGH COURT OF G UJARAT HAD AN OCCASION TO DEAL WITH A SIMILAR ISSUE IN THE CASE O F CIT V. RAGHUVIR SYNTHETICS LTD REPORTED IN (2013) 354 ITR 222 (GUJ). THE ISSUE BEFORE THE HONBLE COURT, IN BRIEF, WAS T HAT THE AO NOTICED THAT THE ASSESSEE HAD INCURRED HEAVY INTERE ST EXPENSES OF RS.59.83 LAKHS AND, ON THE OTHER HAND, IT HAD GI VEN INTEREST- FREE LOANS TO THE PARTIES TO THE EXTENT OF RS.19.45 CRORES. ON EXAMINING THE DETAILS FURNISHED, THE AO DISALLOWED THE INTEREST TO THE EXTENT OF RS.18.66 LAKHS OF THE INTEREST FR EE LOANS ADVANCED ON THE PREMISE THAT THE EXPENSES WERE NOT INCURRED FOR BUSINESS EXPENSES. THE CIT (A) SET ASIDE THE ORDER OF THE AO AND DELETED THE ADDITION, HOLDING THAT THE AMOUNTS ADVA NCED TO THE PARTIES WERE NOT GIVEN DURING THE YEAR UNDER CONSID ERATION. THE CIT (A) HAD ALSO TAKEN NOTE OF THE FACT THAT THERE WERE SUFFICIENT FUNDS AVAILABLE WITH THE ASSESSEE ON WHICH NO INTER EST LIABILITY HAD BEEN INCURRED AND, THUS, HELD THAT THE DISALLOW ANCE WAS UNJUSTIFIABLE. THE TRIBUNAL UPHELD THE STAND OF TH E CIT (A), HOLDING THAT THE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE FAR GREATER THAN THE LOAN ADVANCED TO SISTER C ONCERNS AND THE BORROWED MONEY WAS NOT UTILIZED FOR THE PURPOSE OF ADVANCE TO ITS SISTER CONCERNS AND THE INTEREST WAS NOT DIS ALLOWABLE MERELY ON ACCOUNT OF THE UTILIZATION OF THE FUNDS F OR NON- BUSINESS PURPOSES. ON APPEAL, THE HONBLE COURT HE LD THAT WHEN THERE WAS NO EVIDENCE BROUGHT ON RECORD BY TH E DEPARTMENT FOR THE TRIBUNAL TO HOLD OTHERWISE THAN WHAT HAD BEEN CONCLUDED BY WAY OF ANY MATERIAL; THE ASSE SSEE WAS ELIGIBLE FOR ALLOWANCE OF INTEREST. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 41 OF 45 9.5.3. TAKING ALL THE ABOVE FACTS INTO CONSIDER ATION AND ALSO IN CONFORMITY WITH THE JUDICIAL VIEWS ON A SIM ILAR ISSUE (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE AUT HORITIES BELOW WERE NOT JUSTIFIED IN RESORTING TO DISALLOW THE INTEREST CLAIM OF RS.10,97,85,319/ - . IT IS ORDERED ACCORDINGLY. (2) DISALLOWANCE OF PRIOR PERIOD EXPENSES: 10. BRIEFLY, THE ASSESSEE HAD DEBITED RS.22,64,149 /- AS PRIOR PERIOD EXPENDITURE IN ITS P & L ACCOUNT. BEI NG QUERIED BY THE AO, THE ASSESSEE HAD SUBMITTED THAT THE PAYMENT S WERE TOWARDS SALARIES, BONUS ETC., FOR WHICH PROVISION W AS NOT MADE DURING THE PREVIOUS YEARS. THE CONTENTION PUT-FORT H BY THE ASSESSEE WAS NOT ACCEPTED BY THE AO ON THE GROUND T HAT THE ASSESSEE WAS FOLLOWING THE MERCANTILE BASIS OF ACCO UNTING WHEREIN THE PROVISIONS FOR ALL THOSE EXPENSES WOULD HAVE BEEN MADE ON AN ACCRUAL BASIS. ON FURTHER VERIFICATION OF THE DETAILS, THE AO HAD ALLOWED ONLY RS.12,05,613/- AND THE BALA NCE OF RS.10,58,536/- WAS DISALLOWED. ON APPEAL, THE CIT (A) HAD UPHELD THE DISALLOWANCE WITH THE FOLLOWING OBSERVAT IONS: 15.I FIND AOS REASONING PERFECT AND COHERENT IN MAKING THE DISALLOWANCE OF RS.10,58,536/- AFTER EXAMINATION OF EACH ITEMS OF EXPENDITURE OF RS.22,64,149/- AND, THEREFORE DO NOT HESITATE TO CO NFIRM THE ORDER IN VIEW OF THE FACT THAT NO NEW ARGUMENT OR NEW FACTS TO REFUTE THE REASONING HAS BEEN FORWARDE D AT THE APPELLATE HEARING. ADDITION IS UPHELD. 10.1. BEFORE US, IT WAS CONTENDED ON BEHALF OF THE ASSESS EE THAT CONVEYANCE OF RS.20000/- AND LEGAL & PROFESSIONAL CHARGES OF RS.40000/- PAID TO CONSULTANT: ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 42 OF 45 - THAT A CONSULTANT WAS ENGAGED FOR THE BUSINESS D URING THE PREVIOUS YEAR 2005-06 AND THE ASSESSEE HAD NOT MADE ANY PROVISION FOR THE SAME AS NO BILL WAS RECEIVED FROM THE CONSULTANT AND THE AMOUNT WAS PAID DURING THE RELEV ANT PREVIOUS YEAR ON RECEIPT OF THE BILL. SALARY & WAGES PAID TO V.VIJAY OF RS.1.89 LAKHS: THE SAID AMOUNT WAS EXPENDED DURING THE YEAR WHOLLY AND EXCLUSIVELY FOR THE SERVICES RENDERED BY HIM FOR TH E PURPOSE OF BUSINESS FROM JANUARY 2004 TO MARCH, 2005. THE SAME WAS NOT CLAIMED AS EXPENDITURE IN THE EARLIER AYS A S NO PROVISION WAS MADE IN RESPECT OF THE SAME. BONUS PAID TO EMPLOYEES RS.2,93,360/-: CERTAIN EMPLOYEES WHO HAD LEFT THE SERVICES OF THE ASSESSEE DURING THE PREVIOUS YEAR 2005-06 WERE PAID IN ALL D URING THE COURSE OF SETTLING THEIR DUES IN THIS PREVIOUS YEAR. THE SAID AMOUNT WAS EXPENDED DURING THE RELEVANT PREVIO US YEAR WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSI NESS. MOREOVER, AS PER THE PROVISIONS OF S. 36(II) & S. 4 3B(C), ANY SUM TO BE ALLOWED AS BONUS AS TO HAVE BEEN NECESSA RILY PAID DURING THE RELEVANT PREVIOUS YEAR AND, HENCE, THE SAME REQUIRES TO BE ALLOWED AS EXPENDITURE SINCE TH E SAME WAS ACTUALLY PAID IN THE AY 2007-08. EX-GRATIA PAID TO EMPLOYEES OF RS.3,94,000/-: CERTAIN EMPLOYEES WHO LEFT THE SERVICES OF THE ASSE SSEE DURING THE PREVIOUS YEAR 2005-06 WERE PAID WHILE SE TTLING THEIR DUES IN THE PREVIOUS YEAR. THIS AMOUNT EXPEN DED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSIN ESS DURING THE RELEVANT PREVIOUS YEAR, THE SAME REQUIRE S TO BE ALLOWED FOR THE AY UNDER CONSIDERATION. SUBSCRIPTION FEE OF RS.50000/- PAID TO ASSOCIATION OF DISTILLERIES & BREWERIES: THIS AMOUNT EXPENDED WAS WHOLLY AND EXCLUSIVELY DUR ING THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF BUSIN ESS AND THE SAME REQUIRES TO BE ALLOWED AS EXPENDITURE FOR THE AY UNDER DISPUTE. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 43 OF 45 RS.1,000/- BEING INCOME-TAX CHALLAN FEE WAS SPENT W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS DURING THE RELEVANT PREVIOUS YEAR REQUIRES TO BE ALLOWED AS EXPENDITURE. TRAVELLING EXPENSES OF RS.59,753/- THIS AMOUNT WAS EXPENDED DURING THE RELEVANT PREVIO US YEAR WHOLLY AND EXCLUSIVE FOR THE PURPOSE OF BUSINE SS AND, THUS, THE SAME REQUIRES TO BE ALLOWED. LEGAL & PROFESSIONAL CHARGES OF RS.8,000/-: THIS AMOUNT WAS SPENT WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS AND AS SUCH, THE SAME REQUIRES TO BE ALLOWED. FURTHER, THE AO DID NOT DOUBT THE EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES. HOWEVER, THE AO HAD DISALLOWED THE SAME SINCE THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE WOULD HAVE MADE A PROVISIO NS FOR ALL THESE EXPENSES ON ACCRUAL BASIS AND, ACCORDINGLY, M ADE A BALD STATEMENT THAT THOSE EXPENSES WERE NOT ALLOWABLE AS PER THE PROVISIONS OF THE ACT. 10.2. IN THIS CONNECTION, IT WAS CONTENDED BY THE ASSESSEE THAT EACH OF THE ABOVE ITEMS OTHER THAN BONUS OUGHT TO HAVE BEEN ALLOWED AS EXPENDITURE U/S 37 OF THE ACT INASM UCH AS THE SECTION EXPLICITLY PROVIDES THAT ANY EXPENDITURE (NOT BEING EXPENDITURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSE OF BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 44 OF 45 THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND G AINS FROM BUSINESS OR PROFESSION. 10.3. IN CONCLUSION, THE ASSESSEE RELIES ON THE RA TIO OF THE FINDINGS OF THE CO-ORDINATE BENCH OF THE ITAT, BANG ALORE, IN THE CASE OF HOTEL PARAAG LIMITED IN ITA NO.471/B/2010. 10.4. ON THE OTHER HAND, THE LEARNED D.R FULLY SUP PORTED THE STAND OF THE AUTHORITIES BELOW ON THE ISSUE. A S THERE IS NO ANY INFIRMITY IN THE FINDINGS OF THE CIT (A), IT WA S PLEADED THAT THE SAME REQUIRES TO BE SUSTAINED. 10.5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMI SSIONS AND ALSO PERUSED THE RELEVANT MATERIALS ON RECORD. 10.6. AT THE OUTSET, WE WOULD LIKE TO POINT OUT TH AT THE ISSUE HAS NOT BEEN DEALT WITH PROPERLY EITHER BY TH E AO OR THE FIRST APPELLATE AUTHORITY FOR THAT MATTER. AS A MA TTER OF FACT, THE REASONING OF THE AO IN DISALLOWING THE CLAIM OF THE ASSESSEE AS WELL AS THE FINDING OF THE CIT (A) IN SUSTAINING TH E STAND OF THE AO IS VERY CRYPTIC. IT DOESNT THROW MUCH LIGHT AS TO WHETHER THE ISSUE HAS BEEN ANALYSED IN DEPTH TO ARRIVE AT SUCH A CONCLUSION. DURING THE COURSE OF HEARING, AS ALREADY DETAILED S UPRA, THE ASSESSEE HAS JUSTIFIED ITS CLAIM BY FURNISHING THE DETAILS OF EXPENSES INCURRED BY IT UNDER VARIOUS HEADS. THESE DETAILS, IT LOOKS, HAVE NOT BEEN EXAMINED/VERIFIED BY THE AO BE FORE ARRIVING AT A CONCLUSION THAT THE REST OF THE EXPENSES [RS.10,58,536/-] WHICH ARE NOT ALLOWABLE AS PER THE PROVISIONS OF TH E INCOME-TAX ACT. ITA NOS 1362 & 1362 OF 2011 KBD SUGARS & DISTILLERI ES LTD BANGALORE PAGE 45 OF 45 10.7. TAKING INTO ACCOUNT THE FACTS OF THE ISSUE A ND ALSO KEEPING THE INTEREST OF THE PRINCIPLES OF NATURAL J USTICE AND EQUITY IN VIEW, THE MATTER IS RESTORED ON THE FILE OF THE AO WITH A SPECIFIC DIRECTION TO LOOK INTO THE ISSUE AFRESH WI TH REFERENCE TO THE DETAILS WHICH WILL BE FURNISHED BY THE ASSESSEE AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROVISION S OF THE ACT. IT IS ORDERED ACCORDINGLY. 11. IN THE RESULT : (I) THE ASSESSEES APPEAL FOR THE AY 2006-07 IS ALLOWED; & II) THE ASSESSEES APPEAL FOR THE AY 200 7-08 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND NOVEMBER, 2013. SD/- SD/- (JASON P. BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED 22 ND NOVEMBER,, 2013. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE