DCM Shriram Consolidated Ltd., New Delhi V. ACIT, New Delhi

ITA 1447/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91062 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 28-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Assessee Lawyers: PRADEEP DENODIA
• Keywords: Commercial expediency
• Section: 143(3); 14A; 37(1); 37; 263

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER ITA NO. 1447/DEL/2012 ASSESSMENT YEARS: 2008-09 DCM SHRIRAM CONSOLIDATED LTD., VS. ACIT, 5 TH FLOOR, KANCHANJUNGA BLDG., CIRCLE 10(1), 18, BARAKHAMBA ROAD, NEW DELHI. C.R. BLDG., NEW DLEHI. AAACD0097R (APPELLANT) (RESPONDENT) & ITA NO. 1836/DEL/2012 ASSESSMENT YEARS: 2008-09 DCIT, VS. DCM SHRIRAM CONSOLIDATED LTD., CIRCLE 10(1), 5 TH FLOOR, KANCHANJUNGA BLDG., C.R. BLDG., NEW DELHI. 18, BARAKHAMBA ROAD, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. PRADEEP DENODIA, CA & SH. V.P. GUPTA, ADV. RESPONDENT BY : SMT. PARWINDER KAUR, SR. DR DATE OF HEARING: 23.03.2015 DAT E OF PRONOUNCEMENT: 20.05.2015 2 ORDER PER SHRI C.M. GARG, J.M. THE CAPTIONED APPEALS HAVE BEEN FILED AGAINST THE O RDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, NEW DELHI DATED 11/01/2012 IN APPEAL NO. 73/11-12 FOR A.Y. 2008-09. 2. IN ITA NO. 1836/D/2012 THE SOLE GROUND RAISED BY THE REVENUE IN THIS APPEAL READS AS UNDER: 1. WHETHER THE LD. CIT(A) ON THE FACTS AND CIRCUM STANCES OF THE CASE IS CORRECT IN DELETING THE DISALLOWANCE OF RS. 9,52,14,000/- MADE ON ACCOUNT OF DIMINUTION IN VALUE OF FERTILIZE R BONDS BY THE AO. 3. BRIEFLY STATED THE FACTS GIVING RISE TO THIS APP EAL ARE THAT THE AO NOTED THAT THE CLAIM OF THE LOSS OF RS. 9.52 CRORES ON ACCOUNT OF DIMINUTION IN VALUE OF BONDS NEITHER SUFFERED BY TH E ASSESSEE COMPANY DURING THE YEAR NOR THERE WAS PROVISION OF ANY ASCE RTAIN LIABILITY ACCRUE DURING THE YEAR UNDER CONSIDERATION. BY OBSERVING ABOVE FACTS, THE LD. AO FURTHER HOLDING THAT THE CLAIM OF DEDUCTION OF S AID LOSS OF RS. 9.52 CRORES WAS PROBABLY MADE WITH THE INTENTION TO SUPP RESS THE TAXABLE INCOME FOR THE YEAR UNDER CONSIDERATION AND THE AO MADE IMPUGNED DISALLOWANCE IN THIS REGARD. THE ASSESSEE PREFERRE D AN APPEAL BEFORE THE CIT(A) WHICH WAS ALLOWED ON THIS POINT AND THE IMPUGNED ADDITION MADE BY THE AO ON ACCOUNT OF LOSS ON DIMINUTION OF THE FERTILIZERS BONDS 3 WAS DELETED. NOW THE AGGRIEVED REVENUE IS BEFORE T HIS TRIBUNAL IN THIS SECOND APPEAL WITH THE SOLE GROUND AS REPRODUCED HE REINABOVE. 4. THE LD. DEPARTMENTAL REPRESENTATIVE (DR) SUBMITT ED THAT THE AO RIGHTLY OBSERVED THAT THE AMOUNT OF LOSS OF RS. 9.5 2 CRORES ON VALUATION OF BONDS AT THE END OF THE YEAR WAS BEING CLAIMED I N COMPUTATION OF TAXABLE INCOME AS BUSINESS LOSS FOR THE REASON THAT THESE BONDS WERE IN THE NATURE OF BUSINESS ASSETS NOTWITHSTANDING THE F ACT THAT IN THE ACCOUNTS OF ASSESSEE THE SAID BONDS HAVE BEEN CATEG ORIZED UNDER THE HEAD OF CURRENT INVESTMENT ASSETS. THE LD. DR VE HEMENTLY CONTENDED THAT THE AO WAS RIGHT IN MAKING DISALLOWANCE BECAUS E THE CLAIMED LOSS NEITHER SUFFERED BY THE ASSESSEE COMPANY DURING THE YEAR UNDER CONSIDERATION NOR ANY PROVISION OF ANY ASCERTAIN LI ABILITY ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, HENCE , THE CIT(A) WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE. THE LD . DR FINALLY PRAYED THAT THE IMPUGNED ORDER ON THIS ISSUE MAY BE SET ASIDE B Y RESTORING THAT OF THE AO. 5. REPLYING TO THE ABOVE, THE LD. AR SUBMITTED THAT THE COMPANY HAD RECEIVED FERTILIZERS BONDS IN LIEU OF PAYMENT OF F ERTILIZER SUBSIDY BY THE GOVERNMENT OF INDIA. THE LD. AR FURTHER EXPLAINED THAT THE COMPANY HAD NO INTENTION TO HOLD BONDS AS SUCH AND THE SAME HAD BEEN RECEIVED BY THE COMPANY UNDER COMPULSION FOR THE REASON THAT THE GOVERNMENT OF 4 INDIA WAS SHORT OF FUNDS AND WAS NOT MAKING PAYMENT S OF THE OUTSTANDING FERTILIZER SUBSIDY AMOUNT. THE LD. AR STRENUOUSLY CONTENDED THAT THE ASSESSEE WAS COMPELLED TO ACCEPT FERTILIZE RS BONDS IN LIEU OF CASH FERTILIZER SUBSIDY AND THE ASSESSEE COMPANY HA D IMMEDIATELY SOLD A PART OF BONDS DURING THE YEAR UNDER CONSIDERATION AND HAD VALUED THE REMAINING BONDS AT THEIR REALISABLE VALUE AS ON 31/ 03/2008 AND HAD ACCOUNTED THE LOSS OF RS. 9.52 CRORES IN THE BOOKS OF ACCOUNTS SUBMITTED BEFORE THE AO. 6. THE LD. AR FURTHER SUBMITTED THAT THE SAID AMOUN T OF CLAIM REPRESENTS THE ACCRUED LOSS TO THE ASSESSEE DURING THE YEAR BECAUSE AT THE END OF THE YEAR THE MARKET VALUE OF THE FERTILI ZERS BOND WAS LESS THAN THE VALUE OF WHICH THE ASSESSEE COMPANY WAS COMPELL ED AND FORCED TO RECEIVE THE SAME. THE LD. AR PLACING RELIANCE ON T HE VARIOUS DECISIONS OF THE HONBLE SUPREME COURT, HONBLE HIGH COURT AN D ITAT MUMBAI SUBMITTED THAT THE ASSESSEE COMPANY WAS COMPELLED T O RECEIVE FERTILIZERS BOND IN LIEU OF CASH FERTILIZERS SUBSID Y AND, THEREFORE, THESE BONDS WERE SHOWN BY THE ASSESSEE AS CURRENT ASSETS AND THERE WAS NO INTENTION OF THE ASSESSEE COMPANY TO MAKE INVEST MENTS IN THE SAID BONDS AND THE SAME WERE RECEIVED BY THE ASSESSEE FR OM GOVERNMENT OF INDIA UNDER COMMERCIAL EXPEDIENCY AND LOSS OF DI MINUTION OF THE 5 SAME WAS RIGHTLY CLAIMED BY THE ASSESSEE WHILE COMP UTING TAXABLE INCOME FOR THE PERIOD UNDER CONSIDERATION. 7. SUPPORTING THE IMPUGNED ORDER THE LD. AR DRAWN O UR ATTENTION TOWARDS PARAGRAPH NO. 5 TO 5.3 OF THE IMPUGNED ORDE R AND SUBMITTED THAT AS PER DECISION OF HONBLE SUPREME COURT IN THE CAS E OF PATNAIK COMPANY LIMITED VS. CIT, 161 ITR 365 (SC) AND DECIS ION OF HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF C IT VS. D.S. BISHT & SONS, 243 ITR 179 (DEL.) THE CLAIM OF THE ASSESSEE IS ALLOWABLE. THE LD. AR SUBMITTED THAT WHILE INVESTMENT WAS MADE BY THE ASSESSEE UNDER COMMERCIAL EXPEDIENCY THEN THE SAME DID NOT BRING A N ASSET OF A CAPITAL NATURE AND THE LOSS WAS, THEREFORE, ALLOWABLE AS BU SINESS LOSS. THE LD. AR FURTHER POINTED OUT THAT THE ASSESSEE HAD NO INT ENTION TO HOLD THESE BONDS TILL THE DATE OF THEIR MATURITY AND IT WAS IN NEED OF FUNDS TO CARRY ON ITS BUSINESS AND, THEREFORE, BONDS HAVE BEEN ACTUAL LY SOLD PARTLY DURING THE CURRENT YEAR AND THE BALANCE WAS SOLD IN THE SU BSEQUENT YEAR. THE LD. AR FURTHER POINTED OUT THAT THE DIFFERENCE IN T HE AMOUNT OF LOSS/PROFIT ON ACTUAL SALE OF BONDS HAS BEEN DULY ACCOUNTED FOR IN THE BOOKS OF ACCOUNT OF THE RELEVANT ASSESSMENT YEAR AND REVENUE AUTHORITY HAS NOT DISPUTED THE SAID CLAIM. 8. IT IS PERTINENT TO NOTE THAT THE LD. DR HAS ALSO PLACED RELIANCE ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT 6 VS. STERIPLATE PVT. LTD. (2011) 338 ITR 547 (P&H) A ND DECISION OF HONBLE ORISSA HIGH COURT IN THE CASE OF TRIPATI DR INKS P. LTD. VS. CIT, 112 ITR 721 (ORISSA) AND SUBMITTED THAT PROVISION FOR DIMINUTION IN THE VALUE OF INVESTMENT OF ASSETS WILL NOT REDUCE BOOKS PROFIT AND THE CLAIM OF LOSS MUST BE REAL LOSS AND NOT THE NOTIONAL LOSS . THEREFORE, THE ASSESSEE IS NOT ENTITLED TO DEDUCT THE SAME FROM TA XABLE INCOME. 9. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS, A T THE VERY OUTSET, WE NOTE THAT UNDISPUTEDLY THE ASSESSEE COMPANY WAS FORCED AND COMPELLED BY THE GOVERNMENT OF INDIA TO RECEIVE FER TILIZERS BONDS IN LIEU OF FERTILIZER SUBSIDY BY THE GOVERNMENT OF INDIA. IT IS ALSO PERTINENT TO NOTE THAT THE ASSESSEE WAS ENTITLED TO RECEIVE FERT ILIZER SUBSIDY IN CASH BUT DUE TO SHORTAGE OF FUNDS WITH THE GOVERNMENT OF INDIA AN ALTERNATIVE WAY WAS CREATED AND THE ASSESSEE COMPANY WAS COMPEL LED TO RECEIVE FERTILIZERS BONDS IN LIEU OF CASH FERTILIZERS SUBS IDY. IN THIS SITUATION, WE HOLD THAT THE ASSESSEE COMPANY RIGHTLY SHOWED THESE BONDS AS OTHER CURRENT ASSETS (PRAYED) UNDER THE HEAD CURRENT AS SETS, LOANS AND ADVANCES. IN THE CASE OF PATNAIK & COMPANY (SUPRA ) THE APEX COURT EXPLICITLY HELD THAT WHERE THE INVESTMENTS WERE MAD E UNDER COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF CARRYING ON THE ASSES SEES BUSINESS, THEN, THE LOSSES SUFFERED BY THE ASSESSEE ON THE SA LE OF SUCH INVESTMENTS MUST BE REGARDED AS REVENUE LOSS BECAUS E THE INVESTMENT 7 DID NOT BRINGING AN ASSET OF CAPITAL NATURE AND IN THESE CIRCUMSTANCES OF THE CASE, THE LOSSES SUFFERED BY THE ASSESSEE SHOUL D BE TREATED AS REVENUE LOSS AND NOT A CAPITAL LOSS. WE, FURTHER R ESPECTFULLY TAKE COGNIZANCE OF THE JUDGMENT OF THE HONBLE HIGH COUR T OF DELHI IN THE CASE OF CIT VS. D.S. BISHT AND SONS (SUPRA), WHEREI N IT WAS HELD THAT WHEN THE ASSESSEE HAD NO OPTION BUT TO SUBSCRIBE TH E SECURITIES IF IT WANTED TO CONTINUE TO DO BUSINESS WITH THE GOVERNME NT DEPARTMENTS, THEN THE INVESTMENTS WERE THUS, NECESSARILY BY WAY OF COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF CARRYING ON THE BUSIN ESS. 10. FROM THE IMPUGNED ORDER, WE NOTE THAT THE CIT(A ) GRANTED RELIEF FOR THE ASSESSEE BY OBSERVING AS UNDER: 5.2.2 AS REGARDS THE FACT THAT SAID BONDS WERE SH OWN IN THE BALANCE SHEET AS ON 31.03.2008 UNDER THE HEAD CURR ENT INVESTMENTS, IT IS SUBMITTED BY THE LD. AR VIDE WR ITTEN SUBMISSION THAT THE ABOVE WAS AN INADVERTENT MISTAK E AND THE SAME HAS BEEN CORRECTED IN THE BALANCE SHEET FOR TH E YEAR ENDING 31.03.2009, WHEREIN THE ABOVE FERTILIZER BON DS HAVE BEEN SHOWN AS OTHER CURRENT ASSETS (TRADE) UNDER THE HEAD CURRENT ASSETS, LOANS AND ADVANCES. IT IS ARGUED BY THE LD. AR THAT THE FACTS RELATING TO THE ABOVE BONDS WERE CLEARLY MENTIONED IN NOTE NO. 2 OF THE STATEMENT OF COMPUTA TION OF TAXABLE INCOME REPRODUCED IN PARA 5 ABOVE. IT IS S UBMITTED THAT THE LOSS ON VALUATION OF BONDS IS CLEARLY ALLO WABLE AS BUSINESS LOSS AS THE BONDS WERE IN THE NATURE OF BU SINESS ASSETS NOTWITHSTANDING THE INADVERTENT GROUPING OF THE SAM E UNDER THE HEAD CURRENT INVESTMENT IN THE BALANCE SHEET AS ON 31.03.2008. IT IS FURTHER SUBMITTED THAT THE APPEL LANT HAS BEEN CREDITING THE AMOUNT OF FERTILIZER SUBSIDY IN ITS P ROFIT AND LOSS ACCOUNT AS PART OF SALE OF PRODUCTS AS PER THE CONS ISTENT METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE FROM YEAR TO YEAR. IT WAS SUBMITTED THAT NOTE NO. 1(V)(B) OF SCHEDULE 13 8 OF THE PRINTED ACCOUNTS ON PAGE 66 PROVIDES FOR ACC OUNTING POLICY FOR REVENUE RECOGNITION, WHEREIN IT HAS BEEN STATED THAT FERTILIZER SUBSIDY IS ACCOUNTED FOR BY THE COMPANY AS INCOME ON ACCRUAL BASIS. REFERENCE WAS ALSO MADE TO THE L ETTER DATED 16.12.2010 SUBMITTED TO THE AO, A COPY WHICH HAS BE EN GIVEN IN THE PAPER BOOK ON PAGE 16, WHEREIN IT HAS BEEN S TATED THAT THE FERTILIZER SUBSIDY HAS ALWAYS BEEN ACCOUNTED FO R AS PART OF SALE CONSIDERATION OF FERTILIZER. ATTENTION WAS AL SO INVITED TO LETTER DATED 6.12.2010 FILED BEFORE THE AO, A COPY WHICH IS GIVEN IN THE PAPER BOOK ON PAGE 14-15, WHEREIN ALSO IT HAD BEEN STATED THAT AMOUNT OF FERTILIZER SUBSIDY HAD B EEN ACCOUNTED FOR AS INCOME IN THE BOOKS OF ACCOUNT. T HE LD. AR HAS ALSO RELIED UPON THE FOLLOWING DECISIONS IN SUP PORT OF ITS CONTENTION THAT WHEREVER GOVT. BONDS HAVE BEEN ALLO TTED OR PURCHASED IN THE INTEREST OF BUSINESS, THE LOSS SUF FERED ON SALE THEREOF HAS TO BE CONSIDERED AS BUSINESS LOSS. PATNAIK & CO. LTD. VS. COMMISSIONER OF INCOME TAX-1 61 ITR 365 (SC); COMMISSIONER OF INCOME-TAX VS. D.S. BIST & SONS 2 43 ITR 179 (DEL); ADDITIONAL COMMISSIONER OF INCOME-TAX VS. UPPER DOA B SUGAR MILLS LTD. 188 ITR 190 (ALL); COMMISSIONER OF INCOME-TAX VS. S.B. SUGAR MILLS 1 87 ITR 441 (ALL). IT HAS BEEN CONTENDED BY THE LD. AR THAT THE ABOVE DECISIONS DIRECTLY SUPPORT THE CASE OF THE APPELLANT. THE IS SUE IS WELL SETTLED BY THE SUPREME COURT THAT IF THE ASSESSEE H AS PURCHASED OR SUBSCRIBED GOVT. SECURITIES IN THE INTEREST OF I TS BUSINESS, LOSS SUFFERED THEREON WILL BE ALLOWABLE AS BUSINESS LOSS . IT WAS STATED THAT IN THE CASE OF THE APPELLANT, IT HAD BE EN ALLOTTED FERTILIZER BONDS UNDER COMPULSION AND IT HAD NO OPT ION. FURTHER, IT HAD NO INTENTION TO HOLD THE BONDS TILL THEIR MATURITY AS IT WAS IN NEED OF FUNDS TO CARRY ON ITS BUSINESS AND, THEREFORE, BONDS HAVE BEEN ACTUALLY SOLD PARTLY IN CURRENT YEAR AND BALANCE IN THE SUBSEQUENT YEARS. IT WAS ALSO S UBMITTED THAT DIFFERENCE IN THE AMOUNT OF LOSS/PROFIT ON ACT UAL SALE OF BONDS HAS BEEN DULY ACCOUNTED FOR IN THE BOOKS OF A CCOUNT OF THE RELEVANT ASSESSMENT YEAR. 5.3 UNDER THE FACTS AND CIRCUMSTANCES AS MENTIONE D ABOVE AND FOLLOWING THE PLETHORA OF JUDICIAL DECISIONS ON THE ISSUE (SUPRA). I FIND THAT THE IMPUGNED DISALLOWANCE OF RS. 9,52,14,000/- ON ACCOUNT OF DIMINUTION IN THE VALUE OF THE 9 AFORESAID FERTILIZER BONDS HELD AS BUSINESS ASSET C ANNOT BE SUSTAINED ON FACTS OR IN LAW. THE SAME IS, THEREFO RE, DELETED. 11. ON CAREFUL CONSIDERATION OF ABOVE RIVAL SUBMISS IONS OF BOTH THE SIDES AND CAREFUL PERUSAL OF THE RELEVANT MATERIAL PLACED BEFORE US, WE NOTE THAT THE DEPARTMENT HAS NOT AGITATED THE ISSUE OF LOSS ON SALE OF INVESTMENTS/FERTILIZERS BONDS SUFFERED BY THE ASSE SSEE DURING THE YEAR UNDER CONSIDERATION, BUT THE MAIN CONTROVERSY REVOL VES ON THE ISSUE OF LOSS RECORDED BY THE ASSESSEE ON DIMINUTION OF THE FERTILIZERS BONDS IN THE HAND AT THE END OF THE YEAR WHICH WAS SHOWN AS OTHER CURRENT ASSETS (TRADE) UNDER THE HEAD CURRENT ASSETS, LOANS AND A DVANCES. THE LD. AR HAS ALSO DRAWN OUR ATTENTION TOWARDS ORDER OF ITAT MUMBAI, D BENCH IN THE CASE OF RELIANCE INDUSTRIES LTD. VS. CIT (20 14)-TIOL-160-ITAT- MUM AND SUBMITTED THAT IT IS A WELL ACCEPTED PRINCI PLE THAT THE ASSESSEE IS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED A SSETS AS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE R ATE OF EXCHANGE AT EACH OF THE RELEVANT BALANCE SHEET DATES THEN IN TH E SAME MANNER LOSS ON FERTILIZERS BONDS GIVEN TO THE ASSESSEE BY THE GOVERNMENT OF INDIA UNDER COMPULSION WHICH WERE RECEIVED BY THE ASSESSE E UNWILLINGLY UNDER COMMERCIAL EXPEDIENCY THEN THE LOSS ARISING O N ACCOUNT OF FLUCTUATION IN THE MARKET RATE OF BONDS AT THE END OF YEAR CAN BE CONSIDERED AS ASCERTAIN LOSSES AND ALLOWABLE AS A B USINESS EXPENDITURE. IN THIS ORDER ITAT MUMBAI HELD AS UND ER: 10 8. WE HAVE CAREFULLY CONSIDERED THE ORDER OF LD. C OMMISSIONER OF INCOME TAX AND THE SUBMISSIONS OF LD. REPRESENTATIV ES OF THE PARTIES. WE HAVE ALSO CAREFULLY CONSIDERED THE CASE S CITED BEFORE US (SUPRA). IT IS RELEVANT TO STATE THAT IN THE CAS E OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA), THE HON'BLE APEX COURT OBSERVED AND HELD THAT THE ASSESSEE DEBITED TO ITS PROFIT AN D LOSS ACCOUNT CERTAIN UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLU CTUATION IN FOREIGN CURRENCY TRANSACTIONS TOWARDS REVENUE ITEMS AS ON THE LAST DAY OF THE ACCOUNTING YEAR. THE A.O. HELD THAT THE LIABILITY AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS NOT AN ASCER TAINED BUT A CONTINGENT LIABILITY. RESULTANTLY, THE SAME WAS ADD ED BACK TO THE TOTAL INCOME. THE CIT(A) ECHOED THE ASSESSMENT ORDE R. HOWEVER, THE TRIBUNAL HELD THAT THE CLAIM OF THE ASSESSEE FO R DEDUCTION OF UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS DEDUCTIBLE. THE SAID ORDER OF THE TRIBUNAL WAS UPHELD BY THE HON'BLE HIGH COURT. ON F URTHER APPEAL BY THE DEPARTMENT, THE HON'BLE SUPREME COURT HELD T HAT THE LOSS SUFFERED BY THE ASSESSEE IS ON REVENUE ACCOUNT TOWA RDS FOREIGN EXCHANGE DIFFERENCE AS ON THE DATE OF BALANCE SHEET AND IS AN ITEM OF EXPENDITURE DEDUCTIBLE U/S 37(1). IT FURTHER OBS ERVED THAN AN ENTERPRISE HAS TO REPORT OUTSTANDING LIABILITY RELA TING TO IMPORT OF RAW MATERIAL USING CLOSING RATE OF FOREIGN EXCHANGE AND ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF SAID LIABILITY AT CLOSING RATE SHOULD BE RECOGNIZED IN PROFIT AND LOS S ACCOUNT FOR REPORTING PERIOD. FROM THE JUDGMENT OF THE HON'BLE SUPREME COURT IT CAN BE CLEARLY DEDUCED THAT UNREALIZED LOS S DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN I.T.A. NO.7223/MUM/ 2011 CURRENCY TRANSACTIONS ON REVENUE ITEM AS ON THE LAS T DATE OF THE ACCOUNTING YEAR IS DEDUCTIBLE. 9. ITAT, IN THE CASE OF KOTAK MAHINDRA INVESTMENT L TD. (SUPRA) ALSO CONSIDERED A SIMILAR ISSUE. IN THE SAID CASE T HE ASSESSEE- COMPANY WAS ENGAGED IN THE BUSINESS OF GRANTING OF LOANS AND ADVANCES AGAINST SHARES AND SECURITIES ALSO TRADED IN DERIVATIVE SEGMENT BY ENTERING INTO FUTURE AND OPTION CONTRACT . SOME OF THE FUTURE CONTRACTS COULD NOT BE SQUARED UP AT THE END OF THE FINANCIAL YEAR. THE ASSESSEE BOOKED THE EXPECTED LOSS IN SUCH CONTRACTS ON MTM BASIS. THE ASSESSEE THUS CLAIMED A LOSS AS CALC ULATED ON MTM BASIS CLAIMING THAT HE WAS FOLLOWING THIS PRACT ICE CONSISTENTLY. THAT IT WAS ALSO AS PER RECOGNIZED AC COUNTING STANDARD. AO REJECTED THE CLAIM ON THE GROUND THAT THE DERIVATIVE CONTRACTS WERE NOT STOCK IN TRADE AS THERE WAS NO C OST OF ACQUISITION. HE FINALLY HELD THAT THE LOSS ON ACCOU NT OF 'MTM' 11 BASIS WAS THUS A NOTIONAL LOSS AND WAS CONTINGENT I N NATURE AND COULD NOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE INCOME. ON APPEAL, THE LD. CIT(A) ALLOWED THE SAME BY AGREEING WITH THE CONTENTION OF THE ASSESSEE THAT SUCH LOSS ON SUCH V ALUATION WHICH IS CALLED 'MTM' HAS TO BE ALLOWED EVEN THOUGH IT MAY A PPEAR TO BE A NOTIONAL LOSS. THE TRIBUNAL WHILE CONFIRMING ORDER OF LD. CIT(A) AND ALLOWING THE SAID LOSS PLACED RELIANCE ON THE D ECISION OF HON'BLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA) AND ALSO THE DECISION OF TRIBUNAL IN T HE CASE OF EDELWEISS CAPITAL LTD V/S ITO IN ITA NO.5324/MUM/20 07 (AY- 2004-05) DATED 10.11.2010 AND THE DECISION IN THE C ASE OF RAMESH KUMAR DAMANI V/S ADDL.CIT IN ITA NO.1443/MUM/2009 ( AY- 2006-07)DATED 26.11.2010. COPIES OF WHICH ARE PLACE D IN THE COMPILATION OF CASE LAWS AT PAGES 76 TO 84 AND PAGE S 85 TO 90 RESPECTIVELY. 10. WE ALSO OBSERVE THAT SIMILAR ISSUE WAS CONSIDER ED BY HON'BLE APEX COURT IN THE CASE OF ONGC LTD (SUPRA). THE ASS ESSEE A PUBLIC SECTOR UNDERTAKING WAS ENGAGED IN THE CAPITA L INTENSIVE EXPLORATION AND PRODUCTION OF PETROLEUM PRODUCTS FO R WHICH IT HAD TO HEAVILY DEPEND ON FOREIGN LOANS TO COVER ITS EXP ENSES, BOTH CAPITAL AND REVENUE AND FOR PAYMENT TO NON-RESIDENT CONTRACTORS IN FOREIGN CURRENCY FOR VARIOUS SERVICES RENDERED. THE ASSESSEE MADE THREE TYPES OF FOREIGN EXCHANGE BORROWINGS I.E.(I) ON REVENUE ACCOUNT; (II) ON CAPITAL ACCOUNT, AND (III) FOR GEN ERAL PURPOSES. SOME OF THE LOANS BECAME REPAYABLE IN THE RELEVANT ACCOUNTING YEAR AND THE DATE OF PAYMENT OF SOME LOANS FELL AFT ER THE END OF THE RELEVANT ACCOUNTING YEAR. THE ASSESSEE REVALUED ITS FOREIGN EXCHANGE LOANS IN FOREIGN EXCHANGE ON REVENUE ACCOU NT, ON CAPITAL ACCOUNT AND FOR GENERAL PURPOSES OUTSTANDING AS ON 31-3-1991, AND CLAIMED THE DIFFERENCES I.T.A. NO.7223/MUM/2011 BETWEEN THEIR RESPECTIVE AMOUNTS IN INDIAN CURRENCY AS ON 3 1-3-1990 AND 31-3-1991 AS REVENUE LOSS UNDER SECTION 37(1) IN RE SPECT OF LOANS USED IN REVENUE ACCOUNT. THE ASSESSEE ALSO TREATED THE SIMILAR DIFFERENCE IN FOREIGN EXCHANGE AS AN INCREASED LIAB ILITY U/S 43A. THE AO ALLOWED THE DEDUCTION CLAIMED U/S 37(1), TAK ING INTO CONSIDERATION THE INCREASED FOREIGN EXCHANGE LIABIL ITY AND REPAID IN THE ACCOUNTING YEAR FOR THE PURPOSE OF DEPRECIAT ION. HE DID NOT HOWEVER, ALLOW THE CLAIM FOR FOREIGN EXCHANGE LOSS ON LOANS BOTH IN RELATION TO CAPITAL AS WELL AS REVENUE ACCOUNT W HICH WERE OUTSTANDING ON THE LAST DAY OF ACCOUNTING YEAR. ON APPEAL, THE CIT(A) AFFIRMED THE VIEW OF AO IN RELATION TO DEDUC TION U/S 37 OF THE INTEREST ON LOANS OUTSTANDING ON THE LAST DAY O F THE ACCOUNTING 12 YEAR BUT ALLOWED THE BENEFIT OF INCREASED LIABILITY FOR COMPUTATION U/S 43A IN RELATION TO LOSS OUTSTANDING ON THE LAST DAY OF THE ACCOUNTING YEAR. HENCE, THE ASSESSEE AS WELL AS DEP ARTMENT TOOK THE MATTER IN APPEAL TO THE APPELLATE TRIBUNAL. THE TRIBUNAL HELD THAT THE LOSS CLAIMED BY THE ASSESSEE ON REVENUE AC COUNT WAS ALLOWABLE U/S 37(1) AND ALSO REJECTED THE APPEAL OF THE DEPARTMENT AND HELD THAT THE ASSESSEE WAS ENTITLED TO ADJUST A CTUAL COST ON IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACC OUNT OF FLUCTUATION IN THE RATE OF EXCHANGE IN TERMS OF SEC TION 43A. ON APPEAL BY THE DEPARTMENT, THE HON'BLE HIGH COURT RE VERSED THE DECISION OF THE TRIBUNAL ON BOTH THE ISSUES. ON FUR THER APPEAL TO THE APEX COURT, THE DECISION OF THE HIGH COURT WAS REVERSED AND IT WAS HELD THAT (A) THAT THE LOSS CLAIMED BY THE ASSE SSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS O N THE DATE OF THE BALANCE-SHEET WAS ALLOWABLE AS AN EXPENDITURE U/S 3 7(1), AND (B) THAT THE ASSESSEE WAS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF F LUCTUATION IN THE RATE OF EXCHANGE AT EACH OF THE RELEVANT BALANCE SH EET DATES, PENDING ACTUAL PAYMENT OF THE LIABILITY U/S 43A, PR IOR TO ITS AMENDMENT BY FINANCE ACT, 2002. 11. IN VIEW OF ABOVE DECISIONS, IT IS CLEAR THAT TH E LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TR ANSACTIONS IN DERIVATIVES HAS TO BE CONSIDERED ON THE LAST DATE O F ACCOUNTING YEAR AND IT IS DEDUCTIBLE U/S 37(1) OF THE ACT. THE REFORE, IN ALLOWING THE SAID CLAIM OF THE ASSESSEE BY AO, THE ACTION OF THE AO IS IN CONSONANCE WITH THE DECISIONS OF THE HON'BLE APEX COURT AND ALSO THE VIEW TAKEN BY THE TRIBUNAL IN THE CASES CI TED HEREINABOVE (SUPRA). HENCE, THE VIEW TAKEN BY AO TO ALLOW LOSS OF RS.43.78 CRORES WHILE MAKING ASSESSMENT U/S 143(3) ON ACCOUN T OF DERIVATIVE CONTRACT OUTSTANDING IS NOT AN ERRONEOUS VIEW TAKEN BY AO, NOR THE ACTION OF AO IS PREJUDICIAL TO THE INTE REST OF REVENUE. HENCE, THE ORDER OF COMMISSIONER OF INCOME TAX U/S 263 OF THE ACT TO HOLD THAT THE ACTION OF AO IS ERRONEOUS TO T HE EXTENT THE LOSS CONSIDERED AS I.T.A. NO.7223/MUM/2011 ALLOWABLE ON ACCOUNT OF DERIVATIVE CONTRACTS OUTSTANDING AS ON THE DATE OF BALANCE SHEET I.E. 31.3.2008 IS NEITHER JUSTIFIED NOR IN ACCORDANCE WI TH LAW. HENCE, WE QUASH THE SAID ORDER OF LD. COMMISSIONER OF INCO ME TAX BY ALLOWING THE GROUNDS OF APPEAL TAKEN BY THE ASSESSE E. 12. IN VIEW OF THE ABOVE NOTED FACTS AND CIRCUMSTAN CES OF THE PRESENT CASE, WE ARE INCLINED TO HOLD THAT AS WE HAVE ALREA DY OBSERVED THAT THE 13 ASSESSEE COMPANY WAS COMPELLED TO RECEIVE FERTILIZE RS BONDS IN LIEU OF CASH FERTILIZERS SUBSIDY BY THE GOVERNMENT OF INDIA . THE AO HAS NOT BROUGHT OUT ANY ALLEGATION THAT THE ASSESSEE COMPAN Y BOUGHT FERTILIZERS BONDS FOR THE PURPOSE OF MAKING INVESTMENT AND THUS , THE BONDS WERE TO BE GIVEN THE SAME TREATMENT WHICH WAS TO BE GIVEN T O CASH IN HAND, FOREIGN CURRENCY OR CASH IN BANK AS CURRENT TRADING ASSETS. IN THIS SITUATION, WE RESPECTFULLY TAKE COGNIZANCE OF DECIS ION OF HONBLE APEX COURT IN THE CASE OF PATNAIK & COMPANY (SUPRA) AND DECISION OF HONBLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF C IT VS. D.S. BISHT, (SUPRA) WHEREIN IT WAS HELD THAT THE LOSS ON INVEST MENTS WHICH WERE MADE UNDER COMMERCIAL EXPEDIENCY DID NOT BRING AN A SSET OF A CAPITAL NATURE AND LOSSES THEREON, THEREFORE, IS ALLOWABLE AS BUSINESS LOSSES. THE DISPUTE REMAINS ON THE LOSS BOOKED BY THE ASSES SEE ON DIMINUTION OF FERTILIZERS BONDS WHICH WERE REMAINED UNSOLD AT THE END OF THE YEAR. ON CAREFUL CONSIDERATION OF THE RATIO LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF PATNAIK CO. (SUPRA) AND BY HON BLE DELHI HIGH COURT IN THE CASE OF D.S. BIST (SUPRA) WE ARE INCLINED TO HOLD THAT THE FERTILIZER BONDS RECEIVED BY THE ASSESSEE IN LIEU OF CASH SUBS IDY ALSO DESERVES TO BE GIVEN THE SAME TREATMENT AS FOREIGN EXCHANGE BEC AUSE FOREIGN EXCHANGE IS ALSO RECEIVED IN LIEU OF CASH/INDIAN NA TIONAL RUPEE (INR) AND THE SAME IS ALSO SHOWN AS CURRENT TRADING ASSET S IN THE BOOKS OF ACCOUNTS AS PER WELL ACCEPTED ACCOUNTING PRINCIPLES . 14 13. AS OBSERVED BY ITAT MUMBAI IN THE CASE OF RELIA NCE INDUSTRIES LIMITED (SUPRA) THE LOSS DUE TO FOREIGN EXCHANGE FL UCTUATION IN FOREIGN CURRENCY TRANSACTION IS DERIVATIVES HAS TO BE CONSI DERED ON THE LAST DATE OF ACCOUNTING YEAR AND THE SAME IS DEDUCTIBLE U/S 3 7 OF THE ACT IN THE SAME MANNER THE CIT(A) WAS RIGHT IN HOLDING THAT TH E DIFFERENCE IN THE AMOUNTS OF LOSS/PROFIT ON ACTUAL SALE OF POINTS HAS BEEN DULY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS OF THE RELEVANT ASSESS MENT YEAR AND THE LOSS OF RS. 9.52 CRORES ON ACCOUNT OF DIMINUTION IN THE MARKET VALUE OF THE FERTILIZERS BONDS HELD AT THE END OF THE YEAR A S BUSINESS ASSETS CANNOT BE DISALLOWED AND SUCH DISALLOWANCE CANNOT B E SUSTAINED ON FACTS OR IN LAW. WE, THEREFORE, ARE OF THE CONSIDE RED OPINION THAT THE CONCLUSION ARRIVED BY THE CIT(A) IS JUST AND PROPER AND WE ARE UNABLE TO SEE ANY VALID REASON TO INTERFERE WITH THE SAME AND HENCE, WE DECLINE TO INTERFERE WITH THE IMPUGNED ORDER ON THIS ISSUE. A CCORDINGLY, SOLE GROUND OF THE REVENUE BEING DEVOID OF MERITS IS DISMISSED. 14. ASSESSEES APPEAL ITA NO. 1447/D/2012 : GROUND NO. 3 RAISED BY THE ASSESSEE IS OF GENERAL I N NATURE WHICH NEEDS NO ADJUDICATION. GROUND NO. 2 OF THE ASSESSEE CHAL LENGING THE ACTION OF THE AO TO INITIATE PROCEEDING U/S 271(1)(C) OF THE ACT IS PREMATURE AND WE ALSO DISMISSED THE SAME WITHOUT ANY DELIBERATION S AND ADJUDICATION ON MERITS. THE REMAINING SOLE GROUND OF THE ASSESS EE READS AS UNDER: 15 1. THAT THE CIT(A) ERRED IN UPHOLDING DISALLOWAN CE MADE BY THE ASSESSING OFFICER IN THE ORDER OF ASSESSMENT OF RS. 75 LACS U/S 14A OF THE ACT ON ACCOUNT OF INTEREST EXPENDITURE IN TH E FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT. 15. BRIEFLY STATED THE FACTS GIVING RISE TO THIS AP PEAL OF THE ASSESSEE ARE THAT THE AO MADE DISALLOWANCE OF RS. 90 LACS HE LD TO BE EXPENSES INCURRED IN RELATION TO EARN THE TAX FREE INCOME DU RING THE YEAR UNDER CONSIDERATION AND THE AO MADE SAID DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES, 1962. THE AGG RIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) BUT REMAINED EMPTY HANDED AS THE CIT(A) UPHELD THE SAID ADDITION. HOWEVER, THE CIT(A) CONSIDERED THE CLAIM OF THE ASSESSEE THAT IT HAD ALREADY DISAL LOWED RS. 14,94,750/- IN THIS REGARD IN THE RETURN OF INCOME FOR WHICH SE T OFF HAS NOT BEEN ALLOWED BY THE AO IN THE ASSESSMENT ORDER AND THE C IT(A) DIRECTED THE AO TO VERIFY THE RECORD AND ALLOW THE SET OFF OF TH E SAID AMOUNT WHICH WAS SUOMOTO DISALLOWED BY THE ASSESSEE IN THE RETURN OF INCOME. NOW THE AGGRIEVED ASSESSEE IS BEFORE THIS TRIBUNAL WITH THE SOLE GROUND AS REPRODUCED HEREINABOVE. 16. THE LD. AR CONTENDED THAT WHEN THE ASSESSEE ITS ELF HAS MADE SUOMOTO DISALLOWANCE THEN THE CONCLUSION OF THE AUTHORITIES BELOW SHOULD BE DEMOLISHED AND DISMISSED. THE LD. AR FUR THER CONTENDED THAT FOR MAKING DISALLOWANCE U/S 14A OF THE ACT READ WIT H RULE 8D OF THE I.T. RULES, THE REVENUE AUTHORITIES HAS TO DEMONSTRATE A ND ESTABLISH THAT 16 THE SUOMOTO DISALLOWANCE MADE BY THE ASSESSEE IS NOT CORRECT. THE LD. AR FURTHER DRAWN OUR ATTENTION TOWARDS PARAGRAPH NO . 4.4 OF THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSEE MA DE INVESTMENT IN THE EQUITY SHARES OF SUBSIDIARY COMPANIES OF RS. 20 .15 CRORES OUT OF CURRENT ACCOUNT OF THE COMPANY AND THERE WAS NO DIV ERSION OF FUNDS ANYWHERE. THE LD. AR FURTHER SUBMITTED THAT THE IN VESTMENT OF RS. 20 CRORES IN SRIRAM BIOSEEDS VENTURES LTD. WAS MADE ON 28.02.2008 THROUGH HDFC BANK AND COPY OF CURRENT ACCOUNT WAS A LSO PLACED ALONG WITH WRITTEN SYNOPSIS/SUBMISSIONS OF THE ASSESSEE. THE LD. AR FURTHER ADDED THAT DURING THE FIRST APPELLATE PROCEEDINGS T HE CIT(A) EXAMINED DETAILS OF INVESTMENTS INCLUDING DISALLOWANCE ON AC COUNT OF INTEREST AFTER EXAMINING THE FACTUAL POSITION AND AFTER BEING SATI SFIED THAT THE INVESTMENTS HAS BEEN MADE OUT OF OWN FUNDS OF THE A SSESSEE COMPANY. THE LD. AR ALSO PLACED A COPY OF THE APPELLATE ORDE R OF THE CIT(A) FOR A.Y. 2010-11 AND DRAWN OUR ATTENTION TOWARDS PARAGR APH NO. 3.1 AT PAGE 7, 8 & 9 OF THE IMPUGNED ORDER AND SUBMITTED THAT T HE CIT(A) IN THE SUBSEQUENT ASSESSMENT YEAR 2010-11 HAS NOT MAKE ANY DISALLOWANCE IN REGARD TO INTEREST EXPENDITURE AND HAS MADE DISALLO WANCE U/S 14A READ WITH RULE 8D(III) OF THE I.T. RULES AFTER GIVING CR EDIT OF SUOMOTO DISALLOWANCE OF THE ASSESSEE. THE LD. DR FAIRLY AC CEPTED THAT THE ASSESSEE WAS GRANTED RELIEF BY THE CIT(A) IN A.Y. 2 010-11 IN THE SAID 17 MANNER AND THERE WAS NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE IN F.Y. 2009-10 RELEVANT TO A.Y. 2010-1 1. 17. IN VIEW OF ABOVE NOTED FACTS AND CIRCUMSTANCES, WE NOTE THAT THE ASSESSEE COMPANY WAS GRANTED RELIEF BY THE CIT(A) F OR A.Y. 2010-11 WITH FOLLOWING CONCLUSIONS: 3.1 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT IN THIS REGARD. IN RE GARD TO THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES FOR INTEREST EXPENDITURE, THE APPE LLANT COMPANY GAVE DATE-WISE DETAILS OF INVESTMENTS HELD BY THE COMPANY AS ON 31.03.2010 AND ALSO EXPLAINED THE POS ITION REGARDING DISALLOWANCE ON ACCOUNT OF INTEREST WITH REFERENCE TO PARTICULAR INVESTMENTS IN EARLIER YEARS. THE COMPA NY AS ON 31.03.2010 HAD TOTAL INVESTMENTS OF RS. 58.85 CRORE S AND INVESTMENTS AGGREGATING TO RS. 14.98 CRORE ARE THE INVESTMENTS, INCOME FROM WHICH IS TAXABLE. THE COMPANY FILED TH E DETAILS OF THE AMOUNT OF INVESTMENT WHICH HAS TO BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT UNDER CO VER OF ITS LETTER DATED 11.02.2012, A COPY OF WHICH IS IN PAPE R BOOK ON PAGES 14 TO 17 AND THE STATEMENT IS ON PAGE 17 OF T HE PAPER BOOK. THE ASSESSING OFFICER INSPITE OF DETAILS SUB MITTED BY THE COMPANY HAS ADOPTED AVERAGE INVESTMENTS AT RS. 57.2 4 CRORES, WHICH IS THE AMOUNT OF AVERAGE INVESTMENTS INCLUDIN G THE AMOUNT OF INVESTMENTS, INCOME FROM WHICH IS TAXABLE . NO DISALLOWANCE HAD BEEN MADE IN THE EARLIER YEARS UPT O A.Y. 2007-08 ON ACCOUNT OF INTEREST RELATING TO THE INVE STMENTS UNDER REFERENCE. IN SOME OF THE YEARS, DISALLOWANCE ON A CCOUNT OF ADMINISTRATIVE EXPENSES HAD BEEN MADE EQUAL TO 10% OF THE DIVIDEND INCOME. YEAR-WISE POSITION IN THIS REGARD HAS BEEN GIVEN IN THE STATEMENT ON PAGE 16 OF THE PAPER BOOK , WHICH HAD BEEN SUBMITTED BEFORE THE ASSESSING OFFICER UNDER T HE COVER OF LETTER DATED 11.02.2013. ACCORDINGLY, IT IS STATED BY THE APPELLANT THAT NO DISALLOWANCE ON ACCOUNT OF INTERE ST HAD BEEN MADE IN ANY OF THE ASSESSMENT YEARS UPTO A.Y. 2007 -08. THE AO HAD MADE AD-HOC DISALLOWANCE ON PROPORTIONATE BA SIS AS PER CLAUSE (II) OF RULE 8D(2) OF THE INCOME TAX RUL ES. THE CIT(A), IN APPEALS OF THE COMPANY FOR THOSE YEARS H AD UPHELD 18 THE DISALLOWANCE MADE BY THE AO ON PROPORTIONATE BA SIS NOTWITHSTANDING THAT THE COMPANY HAD CLAIMED IN THO SE YEARS THAT NO DISALLOWANCE ON ACCOUNT OF INTEREST IS CALL ED FOR AS THE COMPANY WAS HAVING SUFFICIENT FUNDS IN THE FORM OF SHARE CAPITAL RESERVES AND PROFITS FOR THE RESPECTIVE YEA RS WHICH WERE MUCH MORE THAN THE AMOUNT OF INVESTMENTS MADE IN TH OSE YEARS. THE COMPANY HAS ENCLOSED COPIES OF RELEVANT DOCUME NTS AND STATEMENTS AS ANNEXURES A1TO A6 AND IT IS OBSER VED FROM THESE STATEMENTS THAT ALL THE INVESTMENTS HAVE BEEN MADE BY THE COMPANY OUT OF ITS OWN FUNDS. DURING THE YEAR ENDE D 31.03.2010 RELEVANT TO ASSESSMENT YEAR UNDER APPEAL , THE COMPANY HAD MADE THREE INVESTMENTS AGGREGATING TO R S. 4.16 CRORES, DETAILS OF WHICH HAVE BEEN GIVEN IN ANNEXUR E A. THE BANK STATEMENTS HAVE BEEN FILED IN RESPECT OF THESE INVESTMENTS TO SUBSTANTIATE THE CONTENTION THAT ALL THESE INVES TMENTS HAVE BEEN MADE BY THE COMPANY OUT OF ITS OWN FUNDS AS PI NPOINTED IN ANNEXURE A7 TO A9. IT EMERGES FROM THE DETAILS THA T DURING THE CURRENT YEAR, THE APPELLANT HAD MADE THE INVESTMENT OF RS. 4.16 CRORE OUT OF ITS OWN FUNDS AS DEMONSTRATED WITH THE BANK STATEMENTS AND OTHER DOCUMENTARY EVIDENCE. NO SPEC IFIC DISALLOWANCE OF INTEREST HAS BEEN MADE BY THE AO IN THE EARLIER YEARS REGARDING THE TAX FREE INVESTMENTS WHICH ARE FORMING PART OF THE TOTAL INVESTMENTS OF RS. 58.85 CRORE. IN VI EW OF THIS, THE DISALLOWANCE OF INTEREST OF RS.1,33,27,000 UNDER RU LE 8D(II) R.W.S. 14A OF THE ACT IS NOT WARRANTED. 18. IN VIEW OF ABOVE, AT THE OUTSET, WE OBSERVE THA T WE ARE UNABLE TO SEE ANY ORDER OF THE APPELLATE OR HIGHER FIRM TO SH OW THAT THE RELIEF GRANTED BY THE CIT(A) ON THIS ISSUE IN A.Y. 2010-11 VIDE HIS ORDER DATED 10.06.2014 HAS BEEN ALTERED, MODIFIED OR SET ASIDE. HENCE, WE CAN SAFELY PRESUME THAT THE DEPARTMENT HAS ACCEPTED THI S CONTENTION OF THE ASSESSEE THAT THE ASSESSEE HAS NOT DIVERTED HIS INT EREST BEARING FUNDS FOR THE PURPOSE OF INVESTMENTS OR ANY OTHER MANNER FOR MAKING INVESTMENT WHICH ACCRUE TAX FREE INCOME FOR THE ASS ESSEE. IN THE SAME MANNER, WE ARE FURTHER INCLINED TO HOLD THAT THE RE VENUE AUTHORITY HAS 19 NOT BROUGHT OUT ANY FACT TO ESTABLISH THIS FACT THA T THE ASSESSEE DIVERTED HIS INTEREST BEARING FUNDS FOR MAKING INVESTMENTS F OR EARNING TAX FREE INCOME. IN THIS SITUATION, WE ARE FULLY AGREE WITH THE APPROACH OF THE CIT(A) FOR A.Y. 2010-11, WHEREIN THE CIT(A) HAS MAD E DISALLOWANCE ONLY U/S 14A READ WITH RULE 8D(III) OF THE I.T. RUL ES, 1962 BY MAKING TOTAL DISALLOWANCE OF .5% OF AGGREGATE OF OPENING AND CLO SING VALUE OF INVESTMENTS AND THE CIT(A) WAS ALSO RIGHT IN DIRECT ING THE AO TO DEDUCT THE AMOUNT OF SUOMOTO DISALLOWANCE ALREADY MADE BY THE ASSESSEE. HENCE, THE SOLE GROUND OF THE ASSESSEE IS ALLOWED W ITH A DIRECTION TO THE AO THAT THE DISALLOWANCE U/S 14A READ WITH RULE 8D( III) OF THE I.T. RULES SHOULD ALSO BE MADE FOR THE YEAR UNDER CONSIDERATIO N IN THIS APPEAL I.E. FOR A.Y. 2008-09 AND THE AO IS ALSO DIRECTED TO GIV E SET OFF OF AMOUNT OF SUOMOTO DISALLOWANCE ALREADY MADE BY THE ASSESSEE IN THE CO MPUTATION OF RETURNED INCOME. WITH THESE DIRECTIONS SOLE GRO UNDS OF THE ASSESSEE ARE ALLOWED IN THE MANNER AS INDICATED ABOVE. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND APPEAL OF THE ASSESSEE IS ALLOWED AS INDICATED ABOVE. THIS DECISION WAS PRONOUNCED IN THE OPEN COURT ON 20/05/2015 SD/- SD/- (S.V. MEHROTRA) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: *KAVITA, P.S. 20 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR 21 SL. NO. DESCRIPTION DATE 1. DATE OF DICTATION BY THE AUTHOR 15.05.2015 2. DRAFT PLACED BEFORE THE DICTATING MEMBER 19 .05.2015 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT APPROVED BY THE SECOND MEMBER 5. DATE OF APPROVED ORDER COMES TO THE SR. PS 6. DATE OF PRONOUNCEMENT OF ORDER 7. DATE OF FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER