Cairn India Ltd., Gurgaon V. ACIT, Gurgaon

ITA 1459/DEL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3993 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 01-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SH
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Additional depreciation; Earning of tax free income; Deemed to accrue or arise in india; Cost of acquisition; Wholly owned subsidiary; Revised return; Capital expenditure
• Section: 92C; 143(3); 92B; 5(2); 14A; 115JB; 80IB; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.1459/DEL/2016 ASSESSMENT YEAR : 2011-12 CAIRN INDIA LTD., DLF ATRIA BUILDING, JACARANDA MARG, N BLOCK, DLF CITY PHASE II, GURGAON. PAN: AACCC8799D VS. DCIT, CIRCLE-1(1), GURGAON. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE, SHRI RAVI SHARMA, ADVOCATE, SHRI PIYUSH AHUJA, CA & MS POONAM AHUJA, CA DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR, SHRI NEERAJ KUMAR, SR. DR & SHRI KUMAR PRANAV, SR. DR DATE OF HEARING : 04.10.2017 DATE OF PRONOUNCEMENT : 09.10.2017 ORDER PER R.S. SYAL, VP : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE FIN AL ASSESSMENT ORDER DATED 12.01.2016 PASSED BY THE ASSESSING OFFI CER (AO) UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME -TAX ACT, 1961 ITA NO.1459/DEL/2016 2 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2011-12. 2. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPLORIN G AND DRILLING, DEVELOPING, PRODUCING, REFINING AND MARKETING OF MI NERALS, OILS AND RELATED BY-PRODUCTS AND OTHER ACTIVITIES INCIDENTAL TO IT. IT E-FILED ITS RETURN ON 30.11.2011 DECLARING LOSS OF RS.313.18 CR ORE. THEREAFTER, A REVISED RETURN WAS FILED ON 26.03.2013 DECLARING IN COME OF RS.417.20 CRORE UNDER THE NORMAL PROVISIONS AND RS.3505.76 CR ORE UNDER MAT PROVISIONS AS PER SECTION 115JB OF THE ACT. ON PERU SAL OF THE ASSESSEES ANNUAL ACCOUNTS, IT WAS NOTICED BY THE A O THAT THE ASSESSEE MADE INVESTMENTS IN SHARES/MUTUAL FUNDS AND EARNED EXEMPT DIVIDEND INCOME OF RS.64,76,90,189/-. THE ASSESSEE OFFERED SUO MOTU DISALLOWANCE U/S14A OF THE ACT TO THE TUNE OF RS. 1 8 LAKH AS THE AMOUNT OF EXPENSES INCURRED IN RELATION TO THE EXEM PT INCOME. THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS AND BASIS OF QUANTUM OF THE DISALLOWANCE. THE ASSESSEE FURNISHED ITS REPLY WHIC H HAS BEEN REPRODUCED ON PAGES 4 AND 5 OF THE ASSESSMENT ORDER . IT WAS TENDERED ITA NO.1459/DEL/2016 3 THAT IT RAISED FUNDS THROUGH INITIAL PUBLIC OFFER ( IPO) IN DECEMBER, 2006. IDLE FUNDS REALIZED FROM THE IPO AND PENDING UTILIZATION FOR THE PROJECTS WERE USED IN SHORT-TERM RISK FREE LIQUID I NVESTMENTS. IT WAS FURTHER EXPLAINED THAT UP TO THE FINANCIAL YEAR 200 8-09, THE ASSESSEE HAD NOT BORROWED ANY FUNDS; DURING THE FINANCIAL YE AR 2009-10, THE ASSESSEE COMPANY BORROWED RS.1345 CRORE FROM STATE BANK OF INDIA FOR ITS RAJASTHAN OPERATIONS; DURING THE FINANCIAL YEAR 2010-11 RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION , THE ASSESSEE ISSUED UNSECURED DEBENTURES OF RS.1350 CRORE FOR RE PAYING THE LOAN TAKEN FROM SBI. THAT IS HOW, IT WAS CLAIMED THAT NO BORROWED FUNDS WERE UTILIZED FOR MAKING INVESTMENTS IN MUTUAL FUND S/EQUITY SHARES. THE SUO MOTU DISALLOWANCE WAS SUBSTANTIATED BY THE ASSESSEE WITH THE HELP OF A QUOTATION FROM JN FINANCIAL SERVICES PVT. LTD. OFFERING TO CHARGE RS.18.00 LAC FOR HANDLING THE ASSESSEES INV ESTMENTS. THE ASSESSING OFFICER CONSIDERED THE REPLY FURNISHED BY THE ASSESSEE AND FOUND THE SAME TO BE UNTENABLE. HE GAVE HIS REASONS FOR NOT ACCEPTING THE ASSESSEES EXPLANATION AS TO THE NON-APPLICABIL ITY OF RULE 8D, WHICH ARE SET OUT ON PAGE 6 OF HIS ORDER. THEREAFTE R, HE COMPUTED THE DISALLOWANCE UNDER RULE 8D(2)(II) TOWARDS INTEREST AT RS.9,63,25,777/- ITA NO.1459/DEL/2016 4 AND UNDER RULE 8D(2)(III) TOWARDS EXPENSES AT RS.5, 89,98,005/-. THUS, TOTAL DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D WAS WORKED OUT AT RS.15,53,23,782/-. THE ASSESSEE REMAINED UNS UCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE AMOUNT OF D ISALLOWANCE WAS ADDED IN THE COMPUTATION OF INCOME UNDER NORMAL PRO VISIONS AS WELL AS UNDER MAT PROVISIONS UNDER SECTION 115JB OF THE ACT. THE ASSESSEE IS AGGRIEVED AGAINST THIS DISALLOWANCE. 3. WE HAVE HEARD BOTH SIDES AND PERUSED THE RELEVA NT MATERIAL ON RECORD. THE FIRST MAJOR ISSUE TAKEN BY THE LEARNED AUTHORIZED REPRESENTATIVE IS AGAINST THE NON-RECORDING OF SATI SFACTION BY THE ASSESSING OFFICER IN TERMS OF SECTION 14A(2) OF THE ACT. THE LEARNED AUTHORIZED REPRESENTATIVE RELIED ON CERTAIN DECISIO NS IN SUPPORT OF SUCH ARGUMENT. WITHOUT DISCUSSING SUCH DECISIONS, W E ARE IN FULL AGREEMENT WITH THE CONTENTION THAT THE RECORDING OF SATISFACTION IS A PRE-CONDITION AND SINE QUA NON FOR MAKING ANY DISAL LOWANCE UNDER SECTION 14A. SUB-SECTION (2) OF SECTION 14A CLEARLY STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO EXEMPT INCOME AS PER RULE 8D IF HE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE ITA NO.1459/DEL/2016 5 CLAIM MADE BY THE ASSESSEE. THE CRUCIAL QUESTION WH ICH LOOMS LARGE BEFORE US IS WHETHER THE ASSESSING OFFICER RECORDED PROPER SATISFACTION BEFORE VENTURING TO MAKE DISALLOWANCE AS PER RULE 8 D. 4. IN THIS REGARD, IT IS RELEVANT TO NOTE THAT A QU ERY WAS RAISED ABOUT THE EXEMPT DIVIDEND INCOME OF RS.64.76 CRORE EARNED BY THE ASSESSEE AND THE AMOUNT OF DISALLOWANCE OFFERED UNDER SECTIO N 14A AT RS.18 LAKH. THE ASSESSEES REPLY HAS BEEN REPRODUCED IN T HE ASSESSMENT ORDER AND THEREAFTER, THE ASSESSING OFFICER PROCEED ED TO DEAL WITH THE SAME ON PAGE 6 OF HIS ORDER AS UNDER: - A FURTHER QUERY HAS BEEN RAISED ON THIS ISSUE ON 3 0.01.2015 AND 06.02.2015 WHEREIN THE AR OF THE ASSESSEE COMPANY W AS ASKED TO FURNISH THE WORKING OF DISALLOWANCE UNDER SECTION 1 4A AND 115JB SINCE THE DETAILS FURNISHED SO FAR WAS NOT FOUND TO BE CORRECT AS PER PROVISION OF SECTION 14A OF THE IT ACT, 1961. THE A R OF THE ASSESSEE RELIED UPON THE SUBMISSION MADE IN HIS LETTER DATED 12.01.2015 AND ALSO FURNISHED WORKING OF EXPENSES U/S 14A AMOUNTIN G TO RS. 13,35,108. THE REPLY OF THE ASSESSEE HAS BEEN CONSI DERED CAREFULLY BUT NOT FOUND TO BE CORRECT. THE ASSESSEE COMPANY HAS S UBMITTED IN ITS REPLY THAT THE COMPANY HAS RELIED UPON THE QUOTATIO N RECEIPT FROM THE JM FINANCIAL SERVICES PVT. LTD. TO DETERMINE THE AM OUNT OF EXPENSES RELATABLE TO EARN THIS DIVIDEND INCOME ON THE BASIS OF FEE TO BE CHARGED FOR MANAGEMENT OF SURPLUS FUNDS IN TO VARIO US COMPOUND DEBTS OR MUTUAL FUND SCHEMES. HOWEVER THIS SUBMISSI ON OF ASSESSEE IS NOT CORRECT AS IT HAS NOT CONSIDERED VARIOUS ASPECT S OF INDIRECT EXPENSES IN THE SHAPE OF ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES. THERE ARE LOT OF COST FACTORS INVOLVED IN INVESTMEN T IN SHARES/MUTUAL FUNDS. HENCE THE SUBMISSION MADE BY THE ASSESSEE IS NOT FOUND TO BE CORRECT. THEREFORE THE PROVISION OF SECTION 14A REA D WITH RULE 8D IS APPLIED IN THE CASE OF THE ASSESSEE COMPANY TO DETE RMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. ITA NO.1459/DEL/2016 6 THE CLAIM OF THE ASSESSEE THAT THE AMOUNT INVESTED IN SHARES WAS ONLY OUT OF ITS OWN FUNDS AND NO PART OF IT WAS INVESTED OUT OF BORROWED FUNDS CANNOT BE ACCEPTED, AS ENTIRE MONEY OF A COMP ANY IS PART OF A COMMON KITTY, IT HAS BEEN HELD BY JURISDICTIONAL HO BLE HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES [2006] 156 TAXMAN 257. IN THAT DECISION, THE HONBLE COURT HAD OBSERVED THAT THE MONIES RECEIVED AS, SHARE CAPITAL, AS TERM LOANS, AS WORKI NG CAPITAL LOANS, AS SALE PROCEEDS ETC DO NOT HAVE ANY DIFFERENT COLOUR. WHATEVER ARE THE RECEIPTS IN BUSINESS THAT HAVE THE COLOUR OF BUSINE SS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. THUS, WHILE BORROWED FU ND AND OWN FUND WERE EXISTING SIMULTANEOUSLY WITH THE COMPANY, THER E WAS NO WAY THAT THE ASSESSEE COULD REACH THE CONCLUSION THAT WHILE MAKING THE SAID INVESTMENT, ONLY PART OF OWN FUNDS WAS PICKED AND B ORROWED FUNDS WERE LEFT UNTOUCHED. MONIES FROM DIFFERENT SOURCES MERGE INTO A COMMON POOL. JUST LIKE UPON PICKING WAFER IN A BUCK ET FROM A POOL, IT IS NOT POSSIBLE TO DETERMINE WHETHER ITS SOURCE IS RAIN OR AN INFLOWING STREAM, SIMILARLY IT IS NOT POSSIBLE TO PINPOINT WH ETHER MONEY FOR THE SAID INVESTMENT WAS PICKED FROM ONE SPECIFIC SOURCE ONLY, TO THE EXCLUSION OF OTHER SOURCES. SINCE OWN FUNDS AND BOR ROWED FUNDS EXISTED SIMULTANEOUSLY, PART OF THE INVESTED MONEY CAN BE ATTRIBUTED TO HAVE BEEN SOURCED FROM BORROWED INTEREST BEARING FU NDS. 5. ON GOING THROUGH THE ABOVE EXTRACTION FROM THE ASSESSMENT ORDER, IT IS ABUNDANTLY CLEAR THAT THE ASSESSING OF FICER DID NOT FIND SATISFACTORY THE REPLY OF THE ASSESSEE AS REGARDS T HE DISALLOWANCE OF RS.18.00 LAC ON THE BASIS OF THE QUOTATION FROM JM FINANCIAL SERVICES. HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2), PR OVIDING FOR EXAMINING THE CLAIM `HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IT WAS ONCE AGAIN REQUIRED TO FURNISH THE WORKING OF D ISALLOWANCE UNDER SECTION 14A. THE ASSESSEE FURNISHED WORKING OF EXPE NSES U/S 14A ITA NO.1459/DEL/2016 7 HAVING REGARD TO ITS ACCOUNTS COMPUTING THE AMOUNT OF DISALLOWANCE AT RS. 13,35,108. THE SAME WAS AGAIN CONSIDERED CAREFU LLY BUT NOT FOUND TO BE CORRECT AS THE ASSESSEE : `DID NOT CONSIDER V ARIOUS ASPECTS OF INDIRECT EXPENSES IN THE SHAPE OF ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES. HE FURTHER FOUND THAT : `THERE ARE LOT OF COST FACTORS INVOLVED IN INVESTMENT IN SHARES/MUTUAL FUNDS, WHI CH WERE NOT CONSIDERED BY THE ASSESSEE. IN THE NEXT PARA, THE A SSESSING OFFICER DEALT WITH THE CLAIM OF THE ASSESSEE ABOUT THE NOT MAKING ANY INVESTMENT IN SHARES OUT OF BORROWED FUNDS. HE PLAC ED RELIANCE ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS. ABHISHEK INDUSTRIES [2006] 156 TAXMAN 257 (P&H) TO NEGATIVE THE ASSESSEES CLAIM ON THIS ISSUE AS WELL. THAT IS HOW , HE DID NOT FIND CORRECT THE ASSESSEES WORKING OF DISALLOWANCE. THE REAFTER, THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WERE AP PLIED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME. 6. IT IS THUS DISCERNIBLE FROM PAGE 6 OF THE ASSE SSMENT ORDER THAT THE ASSESSING OFFICER RECORDED PROPER SATISFACTION WITH REGARD TO THE ASSESSEES COMPUTATION OF DISALLOWANCE AND ONLY THE REAFTER MOVED TO ITA NO.1459/DEL/2016 8 COMPUTE DISALLOWANCE U/S 14A OF THE ACT IN TERMS OF RULE 8D OF THE INCOME-TAX RULES, 1962. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICER DID RECORD PROPER SATISFACTION IN TERMS OF SECTION 14(2) OF THE ACT BEFORE RESORTING TO RULE 8D. THIS CONTENTION OF THE ASSESSEE, THEREFORE, FAILS. 7. FIRST PART OF THE DISALLOWANCE BY THE AO IS RS. 9.63 CRORE AND ODD WHICH HAS BEEN MADE UNDER RULE 8D(2)(II). THIS PROV ISION STIPULATES THAT IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE YEAR WHICH IS NOT DIRECTLY ATTR IBUTABLE TO ANY PARTICULAR INCOME, THE DISALLOWANCE SHALL BE MADE F OR AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FORMULA GIVEN THERE IN. SUM AND SUBSTANCE OF DISALLOWANCE UNDER RULE 8D(2)(II) IS T HAT THE INTEREST RELATABLE TO INVESTMENTS/SECURITIES YIELDING EXEMPT INCOME IS TO BE DISALLOWED. 8. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT SE CTION 36(1)(III) PROVIDES FOR DEDUCTION OF INTEREST OF THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSI NESS OR PROFESSION. THE ESSENCE OF THIS PROVISION IS THAT THE INTEREST SHOULD BE ALLOWED SO ITA NO.1459/DEL/2016 9 LONG AS THE CAPITAL BORROWED, ON WHICH SUCH INTERES T IS PAID, IS USED FOR THE PURPOSE OF BUSINESS OR PROFESSION. IF, HOWEVER , AN ASSESSEE IS HAVING ITS OWN INTEREST FREE SURPLUS FUNDS AND SUCH FUNDS ARE UTILISED AS INTEREST FREE ADVANCES EVEN FOR A NON-BUSINESS P URPOSE, THERE CANNOT BE ANY DISALLOWANCE OF INTEREST PAID ON INTEREST BE ARING LOANS. THE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , HAS HELD THAT WHERE AN ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTE REST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WER E MADE OUT OF INTEREST BEARING FUNDS. IN THAT CASE, THE AO RECORD ED A FINDING THAT A SUM OF RS.213 CRORE WAS INVESTED BY THE ASSESSEE OU T OF ITS OWN FUNDS AND RS.1.74 CRORE OUT OF BORROWED FUNDS. ACCORDINGL Y, DISALLOWANCE OF INTEREST WAS MADE TO THE TUNE OF RS.2.40 CRORE. THE ASSESSEE ARGUED THAT NO PART OF INTEREST BEARING FUNDS HAD GONE INT O INVESTMENT IN THOSE TWO COMPANIES IN RESPECT OF WHICH THE AO MADE DISAL LOWANCE OF ITA NO.1459/DEL/2016 10 INTEREST. IT WAS ALSO ARGUED THAT INCOME FROM OPERA TIONS OF THE COMPANY WAS RS.418.04 CRORE AND THE ASSESSEE HAD AL SO RAISED CAPITAL OF RS.7.90 CRORE, APART FROM RECEIVING INTEREST FRE E DEPOSIT OF RS.10.03 CRORE. THE ASSESSEE SUBMITTED BEFORE THE FIRST APP ELLATE AUTHORITY THAT THE BALANCE-SHEET OF THE ASSESSEE ADEQUATELY DEPICT ED THAT THERE WERE ENOUGH INTEREST FREE FUNDS AT ITS DISPOSAL FOR MAKI NG INVESTMENT. THE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMIS SIONS AND DELETED THE ADDITION. BEFORE THE TRIBUNAL, IT WAS CONTENDED ON BEHALF OF THE REVENUE THAT THE SHAREHOLDERS FUNDS WERE UTILIZED FOR THE PURCHASE OF ITS ASSETS AND HENCE THE ASSESSEE WAS LEFT WITH NO RESERVE OR OWN FUNDS FOR MAKING INVESTMENT IN THE SISTER CONCERN. THUS, IT WAS ARGUED THAT THE BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOS E OF MAKING INVESTMENT IN THE SISTER CONCERN AND THE DISALLOWAN CE OF INTEREST WAS RIGHTLY CALLED FOR. THE TRIBUNAL, ON APPRECIATION O F FACTS, RECORDED A FINDING THAT THE ASSESSEE HAD SUFFICIENT FUNDS OF I TS OWN FOR MAKING INVESTMENT WITHOUT USING THE INTEREST BEARING FUNDS . ACCORDINGLY, THE ORDER OF CIT(A) WAS UPHELD. WHEN THE MATTER CAME UP BEFORE THE HONBLE HIGH COURT, IT WAS CONTENDED BY THE DEPARTM ENT THAT THE SHAREHOLDERS FUNDS STOOD UTILIZED IN THE PURCHASE OF FIXED ASSETS AND ITA NO.1459/DEL/2016 11 HENCE COULD NOT BE CONSTRUED AS AVAILABLE FOR INVES TMENT IN SISTER CONCERN. REPELLING THIS CONTENTION, THE HONBLE HI GH COURT OBSERVED THAT : IN OUR OPINION, THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDER S FUND TO THE TUNE OF OVER RS.172 CRORE WAS UTILIZED FOR THE PURPOSE OF FIXED ASSETS IN TERMS OF THE BALANCE-SHEET AS ON MARCH 31, 1999, IS FALLACIOUS. IN UPHOLDING THE ORDER OF THE TRIBUNAL, THE HONBLE HI GH COURT HELD THAT: IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASS ESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME TIME THE ASSESS EE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE . THEREAFTER, THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. VS. CIT (1997) 224 ITR 627 (SC) AND ALSO THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. VS. CIT (1981) 134 ITR 219 (CAL) WERE CONSIDERED. IT WAS FINALLY CONCLUDED THAT: THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE A RE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND/OR L OANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE ITA NO.1459/DEL/2016 12 FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT . CONSEQUENTLY THE INTEREST WAS HELD TO BE DEDUCTIBLE IN FULL. FROM TH E ABOVE JUDGMENT, IT IS MANIFEST THAT THERE CAN BE NO PRESUMPTION THAT T HE SHAREHOLDERS FUND OF A COMPANY WAS UTILIZED FOR THE PURCHASE OF FIXED ASSETS. IF AN ASSESSEE HAS INTEREST FREE FUNDS AS WELL AS INTERES T BEARING FUNDS AT ITS DISPOSAL, THEN THE PRESUMPTION WOULD BE THAT INVEST MENTS WERE MADE FROM INTEREST FREE FUNDS AT THE DISPOSAL OF THE ASS ESSEE. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DEHI HIGH COURT IN CIT VS. TIN BOX COMPANY (2003) 260 ITR 637 (DEL) , HOLDING THAT WHEN THE CAPITAL AND INTEREST FREE UNSECURED LOAN WITH THE ASSESSEE FAR EXCEEDED THE INTEREST FREE LOAN ADVANCED TO THE SISTER CONCERN, DISALLOWA NCE OF PART OF INTEREST OUT OF TOTAL INTEREST PAID BY THE ASSESSEE TO THE BANK WAS NOT JUSTIFIED. 9. APPLYING THE ABOVE PROPOSITION IN THE CONTEXT OF SECTION 14A, THE HON'BLE KARNATAKA HIGH COURT IN CIT & ANR VS. MICROLABS (2016) 383 ITR 490 (KAR) HAS HELD THAT WHEN INVESTMENTS ARE MADE FROM COMMON POOL AND NON-INTEREST BEARING FUNDS ARE MORE THAN T HE INVESTMENT IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EX PENDITURE U/S 14A CAN BE MADE. THIS VIEW HAS BEEN TAKEN BY FOLLOWING THE JUDGMENT OF THE ITA NO.1459/DEL/2016 13 HON'BLE BOMBAY HIGH COURT IN CIT VS. HDFC BANK LTD. (2014) 366 ITR 515 (BOM) . IT IS FURTHER OBSERVED THAT THIS ISSUE IS NO MOR E RES INTEGRA IN VIEW OF THE RECENT JUDGMENT DELIVERED BY THE HO N'BLE SUPREME COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT (2017) 394 ITR 449 (SC), IN WHICH IT HAS BEEN HELD THAT WHEN INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AN D RESERVES ARE MORE THAN INVESTMENT, THEN NO DISALLOWANCE OF INTEREST C AN BE MADE U/S 14A. 10. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSING OFFICER HAS TAKEN VALUE OF INVESTMENTS YI ELDING EXEMPT INCOME AT RS.1,179.96 CRORE. AS AGAINST THIS, THE A SSESSEESS SHARE CAPITAL WITH THE RESERVE AND SURPLUS AT THE CLOSE O F THE YEAR STANDS AT RS.25,351.75 CRORE. THIS SHOWS THAT THE ASSESSEES SHAREHOLDERS FUND IS FAR IN EXCESS OF THE AMOUNT OF INVESTMENTS IN SE CURITIES YIELDING EXEMPT INCOME. 11. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTL Y ARGUED THAT THE CONTENTION OF THE ASSESSEE FOR HAVING UTILIZED IDLE IPO PROCEEDS IN MAKING INVESTMENTS IS NOT CORRECT AND HENCE DISALLO WANCE TOWARDS ITA NO.1459/DEL/2016 14 INTEREST UNDER RULE 8D(2)(II) SHOULD BE SUSTAINED. THIS WAS SOUGHT TO BE ESTABLISHED W.R.T. THE ANNUAL REPORTS OF THE ASS ESSEE COMPANY FOR THE PRECEDING YEARS. THERE IS NO DOUBT THAT SUCH AN NUAL REPORTS DO REFLECT THE UTILIZATION OF IPO FUNDS AT PLACES OTHE R THAN THE SECURITIES EARNING EXEMPT INCOME. HOWEVER, IT IS ALSO PERTINEN T TO NOTE FROM THE SAME ANNUAL REPORTS, AS HAS BEEN POINTED OUT BY THE LD. AR, THAT IT HAS BEEN MENTIONED THAT PART OF THE INVESTMENTS WERE AL SO FINANCED FROM IPO. BE THAT AS IT MAY, WE ARE NOT SO MUCH CONCERNE D WITH THE QUESTION AS TO WHETHER OR NOT PROCEEDS FROM IPO WER E UTILIZED FOR THE PURPOSES OF MAKING INVESTMENTS IN SECURITIES YIELDI NG EXEMPT INCOME. SINCE THE INVESTMENTS IN SECURITIES FETCHING EXEMPT INCOME IS FAR LESS THAN THE AMOUNT OF SHAREHOLDERS FUNDS NOT ONLY AT THE END OF THE FINANCIAL YEAR 2010-11 UNDER CONSIDERATION BUT EVEN IN THE EARLIER YEARS, WHOSE ANNUAL REPORTS HAVE BEEN PLACED ON REC ORD, AS THE SEQUITUR, SUCH SECURITIES ARE HELD TO HAVE BEEN PUR CHASED FROM THE INTEREST-FREE SHAREHOLDERS FUND. ERGO, WE ARE SATI SFIED THAT THE DISALLOWANCE UNDER RULE 8D(2)(II) AT RS.9.63 CRORE IS NOT SUSTAINABLE. THE SAME IS DIRECTED TO BE DELETED. ITA NO.1459/DEL/2016 15 12. NOW, WE TURN TO THE LAST PART OF THE DISALLOWA NCE MADE UNDER RULE 8D(2)(III). THIS PART OF THE RULE PROVIDES THA T AN AMOUNT EQUAL TO 1/2 % OF THE AVERAGE OF THE VALUE OF INVESTMENT, IN COME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , SHALL BE DISALLOWED. THE ASSESSING OFFICER HAS COMPUTED THIS AMOUNT OF D ISALLOWANCE AT RS.5,89,98,005/-. WE HAVE NOTICED ABOVE THAT THE AS SESSEE FURNISHED QUOTATION FROM JM FINANCIAL SERVICES STATING FEE OF RS.18 LAKH AS A BASIS OF ITS DISALLOWANCE. HOWEVER, WHEN THE ASSESS ING OFFICER REQUIRED THE ASSESSEE TO COMPUTE THE DISALLOWANCE A S PER ITS BOOKS OF ACCOUNTS, THE ASSESSEE DETERMINED SUCH AMOUNT AT 13 ,35,108/- AS UNDER:- `WORKING OF EXPENSES DIRECTLY OR INDIRECTLY RELATED TO EARNING DIVIDEND INCOME. MARCH, 2011 PARTICULARS AMOUNT (IN RS.) STAFF COST 1,07,56,90,703 ADMINISTRATIVE EXPENSES 1,96,86,30,968 LESS: COMPANY SHARE IN FOLLOWING EXPENSES NOT RELAT ED TO EARNING DIVIDEND INCOME -LEGAL & PROFESSIONAL SERVICES 62,99,47,521 -CONTRACT EMPLOYEE CHARGES 66,50,568 63,65,98,089 TOTAL 2,40,77,23,582 LESS: DIRECTORS SALARY (REFER TAX AUDIT REPORT) 23,59,48,525 BALANCE 2,17,17,75,057 NO OF EMPLOYEES (SUPPORT STAFF) 244 COST PER EMPLOYEE 89,00,717 ITA NO.1459/DEL/2016 16 CONSIDERING THE NUMBER OF TRANSACTIONS 15% COST OF EMPLOYEE IS CONSIDERED ALSO REFER TO NOTE 1 13,35,108 NOTE 1: CONSERVATIVELY AMOUNT IS VERY HIGH AS IT IN CLUDES SALARY OF EMPLOYEE AT VERY SENIOR LEVEL AND WHO ARE NOT DIREC TLY OR INDIRECTLY INVOLVED IN INVESTMENT PORTFOLIO MANAGEMENT 13. IT CAN BE SEEN FROM THE ABOVE COMPUTATION THAT THE ASSESSEE TOOK STAFF COST AT RS.107.56 CRORE AND ADMINISTRATIVE EX PENSES AT RS.196.86 CRORE. THEREAFTER, IT REDUCED A SUM OR RS .63.65 CRORE TOWARDS LEGAL AND PROFESSIONAL SERVICES AND CONTRAC T EMPLOYEES. FROM THE REMAINING AMOUNT OF RS.240.77 CRORE, THE A SSESSEE FURTHER REDUCED DIRECTORS SALARY AMOUNTING TO RS.23.59 CRO RE FOR COMPUTING THE REMAINING AMOUNT OF RS.217.17 CRORE. THIS AMOUN T HAS BEEN DIVIDED WITH 244, BEING, NUMBER OF EMPLOYEES FOR WO RKING OUT THE COST PER EMPLOYEE AT RS.89.00 LAKH. THEREAFTER, 15% OF THE COST OF ONE EMPLOYEE HAS BEEN ATTRIBUTED TO DISALLOWANCE UN DER SECTION 14A AT RS.13,35,108/-. WE FIND THAT THERE ARE SEVERAL I NCONSISTENCIES IN THE ABOVE CALCULATION MADE BY THE ASSESSEE. THE ASSESSI NG OFFICER HAS ALSO HELD SUCH CALCULATION AS INCORRECT: `AS IT HAS NOT CONSIDERED VARIOUS ASPECTS OF INDIRECT EXPENSES IN THE SHAPE O F ESTABLISHMENT IN ADDITION TO DIRECT EXPENSES. THERE ARE A LOT OF COS T FACTORS INVOLVED IN INVESTMENTS IN SHARES/MUTUAL FUNDS. TURNING TO THE ABOVE ITA NO.1459/DEL/2016 17 COMPUTATION, IT IS SEEN THAT THE ASSESSEE HAS REDUC ED DIRECTORS SALARY FROM THE BASE FIGURE, IMPLYING, THAT THE DIRECTORS WERE NOWHERE INVOLVED IN TAKING ANY DECISIONS OR HANDLING THE IN VESTMENTS. THIS IS AN ABSURD PROPOSITION. THE ASSESSEE IS A LIMITED CO MPANY AND ALL THE RELEVANT DECISIONS OF THE COMPANY ARE TAKEN BY THE BOARD OF DIRECTORS. HERE IS A CASE IN WHICH THE ASSESSEE IS HOLDING INV ESTMENTS TO THE TUNE OF RS.1179.96 CRORE AND HAS EARNED EXEMPT INCOME OF RS.64.76 CRORE AND THERE IS A CONTENTION THAT BOARD OF DIRECTORS W AS NOT INVOLVED IN ANY OF THE DECISIONS QUA SUCH INVESTMENTS. THIS CON TENTION IS OBVIOUSLY NOT ACCEPTABLE. FURTHER, THE ASSESSEE DET ERMINED COST PER EMPLOYEE AT RS.89.00 LAKH AND THE AMOUNT DISALLOWAB LE UNDER SECTION 14A AT RS.13.35 LAKH, BEING, 15% OF THE COST OF ONE EMPLOYEE. THIS MEANS THAT THE CLAIM OF THE ASSESSEE IS THAT OUT OF ITS 244 EMPLOYEES, ONLY ONE PERSON WAS INVOLVED IN THE INVESTMENTS AND DIVIDEND INCOME AND THAT TOO, ONLY 15% OF THE TIME OF THAT SINGLE P ERSON WAS UTILIZED IN SUCH ACTIVITY. IN OTHER WORDS, OUT OF 244 EMPLOYEES , 243 EMPLOYEES IN FULL AND 85% OF THE REMAINING EMPLOYEE WERE LOOKING AFTER THE REGULAR OPERATIONS OF THE BUSINESS AND ONLY 0.15% OF ONE EM PLOYEE WAS ATTENDING TO SUCH HUGE INVESTMENTS IN TERMS OF VALU E AND VOLUME. IN ITA NO.1459/DEL/2016 18 OUR CONSIDERED OPINION, THIS COMPUTATION OF DISALLO WANCE MADE BY THE ASSESSEE AT RS.13.35 LAKH IS ABSOLUTELY DEVOID OF A NY MERIT AND TOTALLY UNACCEPTABLE. 14. AS REGARDS QUOTATION OF JM FINANCIAL SERVICES PVT. LTD., WHOSE COPY PLACED ON RECORD, WE FIND THAT THE SAME IS ME RELY A QUOTATION AND DOES NOT SATISFY PRESCRIPTION OF SECTION 14A(2) BEING ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING EX EMPT INCOME, AND THE SATISFACTION OF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. MOREOVER, THIS QUOTATION IS ONLY FOR HANDLING THE SURPLUS FUNDS ` IN LINE WITH YOUR INVESTMENT POLICY GUIDELINES . IT TRANSPIRES THAT EVEN AS PER THIS QUOTATION, I NVESTMENT POLICY GUIDELINES HAVE TO BE DRAWN BY THE ASSESSEE ONLY, WHICH AGAIN ENTAILS COSTS. WE, THEREFORE, HOLD THAT THE ASSESSE ES CALCULATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(2)(III) HAS BEEN RIGHTLY REJECTED BY THE ASSESSING OFFICER. 15. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THE RATIO DECIDENDI OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N PUNJAB TRACTORS LTD. VS. COMMISSIONER OF INCOME TAX, (2017) 78 TAXM ANN.COM 65 (P&H). IN THIS CASE, THE DISALLOWANCE WAS MADE BY THE ASS ESSING ITA NO.1459/DEL/2016 19 OFFICER UNDER SECTION 14A READ WITH RULE 8D. THE AS SESSEE CHALLENGED THE SAME BEFORE THE HONBLE HIGH COURT. THEIR LORD SHIPS OBSERVED IN PARA 38 THAT ASSESSING OFFICER CANNOT BE FAULTED FOR NOT BEING SATISFIED WITH THE CLAIM OF THE ASSESSEE . THEREAFTER, THE LORDSHIPS OBSERVED IN PARA 40 THAT THE ASSESSING OFFICER ON NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM BY THE ASSESSEE I N RESPECT OF THE EXPENDITURE INCURRED TO EARN EXEMPT INCOME OUGHT TO HAVE APPLIED RULE 8D WHICH HE DID NOT.......WHERE AN ASSESSING O FFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN THIS REGARD, HE IS BOUND BY THE PROVISIONS OF SUB SECTIO N (2) OF SECTION 14A TO FOLLOW THE PRESCRIBED METHOD WHICH AT THE RELEVA NT TIME WAS RULE 8D . IT IS CLEAR FROM THE JUDGMENT OF THE HONBLE JUR ISDICTIONAL HIGH COURT THAT WHERE THE ASSESSING OFFICER HAS REJECTED THE ASSESSEES CLAIM OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, THEN SUCH DISALLOWANCE HAS NECESSARILY TO BE COMPUTED IN TERM S OF RULE 8D TO THE RELEVANT EXTENT. 16. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSING OFFICER, ON BEING DISSATISFIED WITH THE A SSESSEES COMPUTATION OF DISALLOWANCE, EMBARKED ON HIS OWN CO MPUTATION ITA NO.1459/DEL/2016 20 UNDER RULE 8D(2)(III) AT RS. 5,89,98,005/-. THE ASS ESSEE HAS NOT DISPUTED ANY PART OF THE CALCULATION OF SUCH DISALL OWANCE. THIS COMPUTATION OF DISALLOWANCE, HAVING BEEN MADE IN TE RMS OF RULE 8D(2)(III), IS HELD TO HAVE RIGHTLY MADE. THE ASSE SSMENT ORDER MAKING DISALLOWANCE OF RS.5.89 CRORE U/S 14A UNDER THE NOR MAL PROVISIONS OF THE ACT IS UPHELD PRO TANTO . 17. AS REGARDS THE ADDING BACK OF THE AMOUNT OF DI SALLOWANCE UNDER SECTION 14A IN THE CALCULATION OF `BOOK PROFIT UND ER SECTION 115JB OF THE ACT, WE FIND THAT THE ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN ACIT VS. VIREET INVESTMENTS (P) LTD. DATED 16.6.2017 HOLDING THAT THE COMPUTATION UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB( 2) IS TO BE MADE WITHOUT RESORTING TO THE COMPUTATION AS CONTEMPLATE D U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES 1962. RESPECTF ULLY FOLLOWING THE SPECIAL BENCH DECISION, WE HOLD THAT NO SEPARAT E DISALLOWANCE SHOULD BE MADE UNDER SECTION 14A IN THE COMPUTATION OF BOOK PROFITS UNDER SECTION 115JB OF THE ACT. THE IMPUGNED ORDER IS SET ASIDE TO THIS EXTENT. ITA NO.1459/DEL/2016 21 18. NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST TH E FORCEFULLY ALLOWING OF CLAIM OF ADDITIONAL DEPRECIATION AMOUNTING TO RS .538,66,55,780/- UNDER SECTION 32(1)(IIA) OF THE ACT HOLDING THE SAM E AS MANDATORY. 19. FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED DEPRECIATION AMOUNTING TO RS.503.24 CRORE APART FRO M ADDITIONAL DEPRECIATION AMOUNTING TO RS.538.66 CRORE IN THE RE VISED RETURN. HOWEVER, AS PER LETTER DATED 07.01.2005 FILED DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WITHDREW THE C LAIM OF ADDITIONAL DEPRECIATION AMOUNTING TO RS.538.66 CRORE. AS A RES ULT OF WITHDRAWAL OF THE CLAIM OF ADDITIONAL DEPRECIATION, THE ORIGIN AL DEDUCTION CLAIM UNDER SECTION 80IB FROM RS. 2042.81 CRORE SHOT UP T O RS.2579.07 CRORE. THE ASSESSING OFFICER ALLOWED THE CLAIM OF A DDITIONAL DEPRECIATION BY RELYING ON EXPLANATION 5 TO SECTION 32(1)(II) AND ALSO HOLDING THAT THE JUDGMENT OF THE HONBLE SUPREME CO URT IN THE CASE OF GOETZE INDIA LTD. VS. COMMISSIONER OF INCOME TAX (2 006) 284 ITR 323 (SC) DOES NOT PERMIT HIM TO TAKE COGNIZANCE OF A CLAIM MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS AFTER T HE COMPLETION OF THE TIME FOR FILING REVISED RETURN. THE ASSESSEE IS AGGRIEVED AGAINST THE DECISION OF THE ASSESSING OFFICER IN THIS REGARD. ITA NO.1459/DEL/2016 22 20. HAVING HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD, WE FIND THAT THE JUDGMENT OF THE HONBLE SU PREME COURT IN THE CASE OF GOETZE INDIA LTD. (SUPRA) THOUGH RESTRICTS THE POWER OF THE ASSESSING OFFICER IN ENTERTAINING A NEW CLAIM MADE BEFORE HIM OTHERWISE THEN BY WAY OF A REVISED RETURN, BUT SUCH DECISION DOES NOT AFFECT THE POWERS OF THE APPELLATE AUTHORITIES IN E NTERTAINING SUCH A CLAIM IF IT IS LEGALLY SUSTAINABLE. HOWEVER, WE FIN D THAT THE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSEE DOES NOT DESERVE ANY RELIEF ON THIS SCORE. 21. THE HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. MAHENDRA MILLS (2000) 243 ITR 56 (SC ), HAS HELD THAT IF AN ASSESSEE DOES NOT CLAIM THE DEPRECIATION AND DOES NOT FURNISH PARTICULARS FOR CLAIMING DEPRECIATION, AS PRESCRIBE D, DEPRECIATION CANNOT THRUST UPON HIM . TO REMEDY THE SITUATION FLOWING FROM SUCH JUDGMENT, THE LEGISLATURE BROUGHT IN EXPLANATION 5 TO SECTION 32(1)(II) THROUGH THE FINANCE ACT, 2001 W.E.F. 01.04.2002. TH E EXPLANATION PROVIDES THAT THE PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED DEDUCTION I N RESPECT OF DEPRECIATION IN COMPUTING HIS TOTAL INCOME . THE EFFECT OF THIS ITA NO.1459/DEL/2016 23 EXPLANATION IS THAT DEDUCTION ON ACCOUNT OF DEPRECI ATION HAS TO BE MANDATORILY ALLOWED UNDER SECTION 32(1)(II) OF THE ACT NOTWITHSTANDING THE FACT THAT ASSESSEE CLAIMS OR DO ES NOT CLAIM IT IN THE COMPUTATION OF ITS TOTAL INCOME. 22. THE LD. AUTHORIZED REPRESENTATIVE CONTENDED TH AT THE EXPLANATION DOES NOT COVER THE ASSESSEES CASE INAS MUCH AS THE AMOUNT OF ADDITIONAL DEPRECIATION ORIGINALLY CLAIME D BUT SUBSEQUENTLY WITHDRAWN BY THE ASSESSEE IS AN INCENTIVE AND NOT D EPRECIATION, AND THE SAME IS ADMISSIBLE UNDER SECTION 32(1)(IIA). IT WAS SUBMITTED THAT EXPLANATION 5 OPERATES ONLY FOR THE PURPOSES OF SEC TION 32(1)(II) AND NOT SECTION 32(1)(IIA) OF THE ACT. 23. IN ORDER TO APPRECIATE THE CONTENTION, IT WILL BE SIGNIFICANT TO NOTE THE PRESCRIPTION OF THE RELEVANT PARTS OF SECTION 3 2 AS UNDER : - DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF ( I ) BUILDINGS, MACHINERY, PLANT OR FURNITURE, BEING T ANGIBLE ASSETS; ( II ) KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENC ES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMIL AR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCT IONS SHALL BE ALLOWED (I) . ITA NO.1459/DEL/2016 24 (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAG E ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED: PROVIDED THAT .. EXPLANATION 5. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE PROVISIONS OF THIS SUB-SECTION SHALL APPLY WHETHER OR NOT THE ASSESSEE HAS CLAIMED THE DEDUCTION IN RESPECT OF DE PRECIATION IN COMPUTING HIS TOTAL INCOME; ( IIA ) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AF TER THE 31ST DAY OF MARCH, 2005, BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING O R IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRIBUTION OF POW ER, A FURTHER SUM EQUAL TO TWENTY PER CENT OF THE ACTUAL COST OF SUCH MACHINERY OR PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE (II) : 24. IN OUR CONSIDERED OPINION, THE CONTENTION THAT ADDITIONAL DEPRECIATION IS AN INCENTIVE AND NOT DEPRECIATION H AS NO LEGAL LEGS TO STAND. IT CAN BE NOTICED THAT SECTION 32 WITH CAPTI ON DEPRECIATION OPENS THROUGH SUB-SECTION (1) WITH THE EXPRESSION IN RESPECT OF DEPRECIATION OF AND THEN SETS OUT TANGIBLE AND INT ANGIBLE ASSETS OWNED AND USED BY THE ASSESSEE FOR THE PURPOSES OF BUSINE SS OR PROFESSION AND THEN PROVIDES THAT `THE FOLLOWING DEDUCTIONS SH ALL BE ALLOWED. THEN THERE ARE CLAUSES (I), (II), (IIA) AND (III). THIS SHOWS THAT THE DEDUCTION ON ACCOUNT OF DEPRECIATION IS RELEVANT TO ALL THE CLAUSES INCLUDING CLAUSES (II) AND (IIA). THUS, IT IS NOT C ORRECT TO CONTEND THAT ITA NO.1459/DEL/2016 25 RELIEF PROVIDED U/S 32(1)(IIA) IS A SEPARATE INCENT IVE DE HORS DEPRECIATION. 25. A CURSORY LOOK AT CLAUSE (IIA) DIVULGES THAT T HE ASSESSEE IS ENTITLED TO DEDUCTION EQUAL TO 20% OF THE ACTUAL CO ST OF SUCH MACHINERY OR PLANT, WHICH SHALL BE ALLOWED AS A DED UCTION UNDER CLAUSE (II). CONTENTION OF THE LD. AUTHORIZED REPRE SENTATIVE THAT THE MANDATE OF EXPLANATION 5 DOES NOT APPLY TO RELIEF U NDER CLAUSE (IIA) AS THE SAME HAS BEEN PLACED UNDER CLAUSE (II), IN OUR VIEW, IS FAR-FETCHED. IT IS NO DOUBT CLEAR THAT EXPLANATION 5 GRANTING MA NDATORY DEPRECIATION IS PLACED IN CLAUSE (II) OF SECTION 32 (1) OF THE ACT, BUT WHEN WE CONSIDER THE LANGUAGE OF CLAUSE (IIA) PROVI DING FURTHER DEDUCTION FOR DEPRECIATION @ 20%, IT BECOMES VIVID THAT SUCH FURTHER CLAIM SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE ( II). IT ERGO BECOMES OVERT THAT THE CLAIM FOR ADDITIONAL DEPRECI ATION AS PROVIDED UNDER CLAUSE (IIA) HAS TO BE ALLOWED AS DEDUCTION U NDER CLAUSE (II). SO, FOR ALL PRACTICAL PURPOSES, THE CLAIM FOR ADDITIONA L DEPRECIATION HAS TO BE CONSIDERED AND ALLOWED AS DEDUCTION ONLY UNDER C LAUSE (II) AND THERE IS NO SEPARATE PROVISION FOR ALLOWING ADDITIO NAL DEPRECIATION ITA NO.1459/DEL/2016 26 UNDER CLAUSE (IIA) SO AS TO MAKE THE PRESCRIPTION O F EXPLANATION 5 INOPERATIVE. 26. WE AGREE WITH THE LD. AUTHORIZED REPRESENTATIVE THAT THE WORD SHALL IS NOT ALWAYS CONCLUSIVE OF THE MANDATORY N ATURE AND CAN BE READ AS THE WORD MAY IN CERTAIN CIRCUMSTANCES. HO WEVER, WHEN WE CONSIDER THE TEXT AND THE CONTEXT OF THE WORD SHAL L AS EMPLOYED IN CLAUSE (IIA), THERE REMAINS NO DOUBT WHATSOEVER THA T THE GRANT OF ADDITIONAL CLAIM AT THE RATE OF 20% HAS NECESSARILY TO BE ALLOWED AS DEDUCTION UNDER CLAUSE (II). ONCE THE CLAIM OF ADDI TIONAL DEPRECIATION UNDER CLAUSE (IIA) IS TO BE ALLOWED AS DEDUCTION UN DER CLAUSE (II), A FORTIORI, THE COMMAND OF EXPLANATION 5 WHICH APPLIE S TO CLAUSE (II) AUTOMATICALLY BECOMES APPLICABLE TO SUCH A CLAIM OF ADDITIONAL DEPRECIATION. ONCE WE HOLD THAT THE CLAIM FOR ADDIT IONAL DEPRECIATION IS ALLOWABLE AS DEDUCTION UNDER SECTION 32(1)(II), THE WRIT OF EXPLANATION 5 PROVIDING FOR ALLOWING DEPRECIATION M ANDATORILY, GETS MAGNETIZED. EXPLANATION 5, EVEN IF PLACED UNDER CLA USE (II), APPLIES TO SUB-SECTION (1) OF SECTION 32, WHICH ALSO COVERS CL AUSE (IIA). WE, THEREFORE, HOLD THAT THE ASSESSING OFFICER WAS FULL Y JUSTIFIED IN GRANTING ADDITIONAL DEPRECIATION AMOUNTING TO RS. 538.66 CRORE UNDER ITA NO.1459/DEL/2016 27 CLAUSE (IIA) READ WITH CLAUSE (II) OF SECTION 32(1) . THIS GROUND IS NOT ALLOWED. 27. THE NEXT ISSUED RAISED IN THIS APPEAL IS AGAINS T THE COMPUTATION UNDER SECTION 115JB OF THE ACT WHEREBY THE ASSESSEE IS AGGRIEVED AGAINST THE DISALLOWANCE AND ADDITION OF RS.2,53,87 ,76,183/- TO THE `BOOK PROFIT. 28. FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSIN G OFFICER OBSERVED FROM THE COMPUTATION OF `BOOK PROFIT MADE BY THE A SSESSEE UNDER SECTION 115JB OF THE ACT THAT IT CLAIMED DEPRECIATI ON/AMORTIZATION OF RS.299.17 CRORE AND DEPLETION OF RS.332.65 CRORE. T HE ASSESSEE CLAIMED DEPRECIATION ON FIXED ASSETS AS PER STRAIGH T LINE METHOD, WHEREAS THE CLAIM OF DEPLETION WAS MADE ON THE BASI S OF COST OF PRODUCING FACILITIES ON UNIT OF PRODUCTION (UOP) BA SIS. THERE IS NO DISPUTE ON THE FORMER AMOUNT. AS REGARDS THE SECOND AMOUNT OF RS.332.65 CRORE, THE AO DID NOT AGREE WITH THE CLAI MING OF DEPLETION (DEPRECIATION) UNDER THE UOP METHOD. HE TOOK NOTE O F CIRCULAR F. NO. 45/12/2000-CL.III DATED 21.2.2003 PROHIBITING CLAIM ING DEPRECIATION UNDER THE UOP METHOD. HE FURTHER HELD THAT SUCH A M ETHOD IS NOT PERMISSIBLE UNDER THE COMPANIES ACT, 1956 (HEREINAF TER ALSO CALLED ITA NO.1459/DEL/2016 28 `THE COMPANIES ACT). THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS TO WHY THE BOOK PROFIT U/S 115JB BE NOT COMPUTED BY AL LOWING DEPRECIATION UNDER STRAIGHT LINE METHOD AS PRESCRIB ED UNDER SCHEDULE XIV OF THE COMPANIES ACT INSTEAD OF UOP METHOD FOLL OWED BY IT. THE ASSESSEE SUBMITTED THAT IT HAS FOLLOWED THIS METHOD OF ACCOUNTING FOR OIL AND GAS ASSETS AS SET OUT BY THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (HEREIN AFTER ALSO CALLED `THE INSTITUTE) ON `ACCOUNTING FOR OIL AND GAS PRO DUCING ACTIVITIES AND ACCORDINGLY THE EXPENDITURE ON PRODUCING PROPER TIES HAS BEEN DEPLETED BY RS.332.65 CRORE ON UOP BASIS. THE ASSES SEE FURTHER RELIED ON THE INDUSTRY PRACTICE FOR CHARGING DEPLETION TO THE PROFIT AND LOSS ACCOUNT UNDER UOP BASIS. IT ALSO FURNISHED EXTRACTS FROM THE ANNUAL REPORTS OF ONGC AND OIL INDIA LTD., WHICH HAVE BEEN REPRODUCED ON PAGE 15 OF THE ASSESSMENT ORDER. THE ASSESSING OFFI CER OBSERVED THAT THERE ARE TWO STAGES IN THE PRODUCTION OF MINERAL O ILS, WHERE CAPITAL EXPENDITURE IS INCURRED, NAMELY, EXPLORATION AND DE VELOPMENT. HE IDENTIFIED COSTS ON ACTIVITIES OF GEOLOGICAL AND GE OPHYSICAL STUDIES; AND DRY WELL CONTRIBUTION UNDER THE EXPLORATION STA GE, AS CHARGEABLE TO PROFIT AND LOSS ACCOUNT. ON THE OTHER HAND, COS TS ON DRILLING AND ITA NO.1459/DEL/2016 29 EQUIPPING EXPLORATORY AND APPRAISAL WELLS; AND COST OF DRILLING EXPLORATORY TYPE STRATIGRAPHIC TEST WELLS UNDER THE EXPLORATION STAGE WERE HELD TO BE A PART OF CAPITAL WORK IN PROGRESS. ALL THE ACTIVITIES OF THE DEVELOPMENT STAGE, SUCH AS, GAINING ACCESS/PREP ARING FOR WELL LOCATIONS FOR DRILLING; DRILLING AND EQUIPPING DEVE LOPMENT WELLS, COST OF PLATFORMS, WELL MATERIAL AND EQUIPMENTS ETC.; AN D CONSTRUCTION/INSTALLATION OF PRODUCTION FACILITIES, FLOW LINE, SEPARATORS AND HEATERS ETC. WERE FOUND TO BE PART OF CAPITAL W ORK IN PROGRESS. HE OPINED THAT UNDER THE SUCCESSFUL EFFORTS METHOD I N RESPECT OF A COST CENTRE, CAPITAL WORK IN PROGRESS IS TO BE CAPITALIZ ED WHEN THE WELL IS READY TO COMMENCE THE COMMERCIAL PRODUCTION. IF THE RE IS NO PROOF OF RESERVES IN THE DRILLING/EXPLORATORY WELLS, THEN TH E CORRESPONDING CAPITAL WORK IN PROGRESS IS CHARGED AS EXPENSE. IN THE BACKGROUND OF THE ABOVE DISCUSSION, THE ASSESSING OFFICER HELD TH AT IN RESPECT OF A SUCCESSFUL OIL PRODUCING FACILITY, ITS BLOCK OF ASS ETS WILL HAVE ALL THE COSTS TRANSFERRED FROM CAPITAL WORK IN PROGRESS TO THE CAPITAL COST. THE ASSESSEE WAS FOUND TO HAVE TRANSFERRED CAPITAL WORK IN PROGRESS (EXPLORATION AND DEVELOPMENT) AMOUNTING TO RS.3090. 26 CRORE TO THE FIXED ASSETS, ON WHICH DEPRECIATION WAS CHARGED ON STRAIGHT LINE BASIS. ITA NO.1459/DEL/2016 30 A FURTHER SUM OF RS. 9275.52 CRORE WAS FOUND TO HAV E BEEN TRANSFERRED TO THE COST OF PRODUCING FACILITIES (SCHEDULE 8A), ON WHICH DEPLETION WAS CHARGED ON UOP BASIS. ON THE BASIS OF THE AMOUN T OF DEPLETION CLAIMED BY THE ASSESSEE, THE AO WORKED OUT THE RATE OF `DEPLETION UNDER THE `STRAIGHT LINE METHOD AT 22.32%. CONSIDE RING THE PROVISIONS OF SCHEDULE XIV TO THE COMPANIES ACT, TH E ASSESSING OFFICER OPINED THAT SERIAL NO. II OF SUCH SCHEDULE, WHICH IS APPLICABLE INSOFAR AS THE DEPLETION IS CONCERNED, PROVIDES FOR DEPRECIATION @ 5.28% ON STRAIGHT LINE METHOD. IN HIS OPINION, THE PROFIT AND LOSS ACCOUNT WAS NOT PREPARED AS PER PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT. THE ASSESSING OFFICER RE-WORKED OUT THE AMOUNT OF `BOOK PROFIT UNDER SECTION 115JB BY ADDING BACK TH E EXCESS DEPLETION (DEPRECIATION) CLAIM OF RS.2,53,87,76,138 /-, BEING, THE DIFFERENCE BETWEEN 22.32% (CLAIM OF THE ASSESSEE AS PER UOP METHOD) AND 5.28% (AS ALLOWABLE UNDER SCHEDULE XIV TO THE C OMPANIES ACT). THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION TO THE BOOK PROFIT U/S 115JB OF THE ACT. 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE AO HAS RECO MPUTED THE AMOUNT ITA NO.1459/DEL/2016 31 OF `BOOK PROFIT U/S 115JB BY DISALLOWING EXCESS D EPRECIATION UNDER UOP METHOD AT RS.253,87,76,138/-. FIRSTLY, LET US UNDERSTAND HOW THIS FIGURE WAS DETERMINED BY HIM. THE AO NOTICED THAT THE ASSESSEE CLAIMED DEPLETION AMOUNTING TO RS.332.65 CRORE IN ITS PROFIT & LOSS ACCOUNT UNDER THE UOP METHOD. RATE OF 22.32 % WAS W ORKED OUT BY DIVIDING THE ABOVE AMOUNT OF DEPLETION WITH A SUM O F RS.1489.89 CRORE, BEING THE TOTAL COST OF PRODUCTION FACILITIE S BEFORE THE AMOUNT OF DEPLETION WRITTEN OFF. THESE TWO FIGURES CAN BE BE TTER APPRECIATED FROM SCHEDULES 8A AND 8B TO THE FINANCIAL STATEMENT S OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION, A COPY OF WHICH I S AVAILABLE AT PAGE 145 OF THE PAPER BOOK, AS UNDER:- (AMOUNTS IN RS.000 ) AS AT AS AT MARCH 31, 2011 MARCH 31, 2010 SCHEDULE - 8A COST OF PRODUCING FACILITIES (NET) OPENING BALANCE 5,060,388 NET BALANCE ACQUIRED ON IMPLEMENTATION OF THE SCHEM E 4,696,093 9,275,231 455,544 ADD: TRANSFERRED FROM EXPLORATION, DEVELOPMENT AND CAPITAL WORK IN PROGRESS ADD: ADDITIONS 563,302 234,402 14,898,921 5,386,039 LESS: DEPLETION (3,326,581) (325,650) CLOSING BALANCE 11,572,340 5,060,389 (AMOUNTS IN RS.000 ) AS AT AS AT MARCH 31, 2011 MARCH 31, 2010 SCHEDULE-8B EXPLORATION, DEVELOPMENT AND CAPITAL WORK IN PROGRE SS OPENING BALANCE 42,788,683 540,299 ITA NO.1459/DEL/2016 32 NET BALANCE ACQUIRED ON IMPLEMENTATION OF THE SCHEM E - 39,748,148 ADD: ADDITIONS 17,657,095 4,756,902 LESS: TRANSFERRED TO COST OF PRODUCING PROPERTIES (9,275,231) (455,544) LESS: TRANSFERRED TO FIXED ASSETS (30,902,650) (259,542) LESS: UNSUCCESSFUL EXPLORATION COSTS (1,510,44 7) (1,621,581) CLOSING BALANCE 18,647,450 42,708,682 30. IT CAN BE SEEN FROM SCHEDULE 8-B THAT THE ASSES SEE INCURRED EXPLORATION AND DEVELOPMENT COSTS DURING THE YEAR A MOUNTING TO RS.1765.70 CRORE. A SUM OF RS.927.52 CRORE HAS BEE N TRANSFERRED TO COST OF PRODUCING FACILITIES. AN AMOUNT OF RS.309 0.26 CRORE, REPRESENTING TANGIBLE FIXED ASSETS, HAS BEEN TRANSF ERRED FROM SCHEDULE 8-B TO THE SCHEDULE OF FIXED ASSETS FOR THE PURPOSE S OF REGULAR DEPRECIATION. A SUM OF RS.1510.44 CRORE IS IN RESP ECT OF UNSUCCESSFUL EXPLORATION, WHICH HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. WE ARE NOT CONCERNED DIRECTLY WITH ANY OF THE FIGUR ES FROM SCHEDULE 8-B. NOW, WE ESPOUSE SCHEDULE 8-A IN WHICH A SUM O F RS.927.52 CRORE, REPRESENTING COSTS INCURRED IN RESPECT OF SU CCESSFUL EXPLORATION AND DEVELOPMENT, HAS BEEN TRANSFERRED FROM SCHEDULE 8-B. AFTER ADDING THIS AMOUNT TO THE OPENING BALANCE AND ADDIT IONS, A GROSS FIGURE OF RS.1489.89 CRORE HAS BEEN DETERMINED. FR OM THIS AMOUNT, THE ASSESSEE HAS REDUCED THE AMOUNT OF DEPLETION TO THE TUNE OF RS.332.65 CRORE FOR DETERMINING THE CLOSING BALANCE OF RS.1157.23 ITA NO.1459/DEL/2016 33 CRORE. THE AMOUNT OF DEPLETION AT RS.332.65 CRORE IS IN DISPUTE, WHICH WAS WORKED BY APPORTIONING THE GROSS AMOUNT O F COST OF PRODUCING FACILITIES IN THE RATIO OF PRODUCTION DU RING THE YEAR VIS-A-VIS THE OPENING RESERVES OF OIL. THIS, IN THE OPINION O F THE ASSESSEE, IS THE CORRESPONDING COST OF PRODUCING FACILITIES, WHICH H AS BEEN PRODUCED DURING THE YEAR. WORKING OF DEPLETION AS GIVEN BY THE ASSESSEE IS CAPTURED AS UNDER:- CAIRN INDIA LIMITED ASSESSMENT YEAR 2011-12 WORKING OF DEPLETION BLOCK RJ-ON-90/1 S.NO. PARTICULARS PRODUCTION FACILITIES COST (OTHER THAN SITE RESTORATION COST) CILS SHARE (INR) SITE RESTORATION COST CILS SHARE (INR) TOTAL (INR) A NET AMOUNT TO BE DEPLETED 6,106,363,510 5,585,865 ,901 11,692,229,412 B RESERVES 31.03.2011 52,686,550 52,686,550 C PRODUCTION 12,901,808 12,901,808 D OPENING RESERVE (B+C) 65,588,358 65,588,358 E UOP (A/D) 93.10 85.17 F DEPLETION CHARGE FOR 2010-11 (C*E) 1,201,175,481 1,098,789,018 2,299,964,499 BLOCK RV S.NO. PARTICULARS PRODUCTION FACILITIES COST (OTHER THAN SITE RESTORATION COST) CILS SHARE (INR) SITE RESTORATION COST CILS SHARE (INR) TOTAL (INR) A NET AMOUNT TO BE DEPLETED 2,072,322,693 135,443,6 69 2,207,766,363 B OPENING RESERVE 9,673,752 9,673,752 D PRODUCTION 3,034,383 3,034,383 E UOP (A/D) 214.22 14.00 F DEPLETION CHARGE FOR 2010-11 (C*E) 650,029,188 42 ,484,859 692,514,047 BLOCK CB S.NO. PARTICULARS PRODUCTION FACILITIES COST (OTHER THAN SITE RESTORATION COST) CILS SHARE (INR) SITE RESTORATION COST CILS SHARE (INR) TOTAL (INR) A NET AMOUNT TO BE DEPLETED 970,946,854 27,978,281 998,925,136 B OPENING RESERVE 4,875,654 4,875,654 D PRODUCTION 1,630,719 1,630,719 E UOP (A/D) 199.14 5.74 F DEPLETION CHARGE FOR 2010-11 (C*E) 324,744,450 9, 357,661 334,102,111 NET AMOUNT TO BE DEPLETED TOTAL FOR ALL BLOCKS (TOT AL OF SR NO.A) 9,149,633,058 5,749,287,852 14,898,920,910 DEPLETION CHARGE TOTAL FOR ALL BLOCKS (TOTAL OF SR. NO. F) 2,175,949,119 1,150,631,538 3,32 6,580,657 ITA NO.1459/DEL/2016 34 31. THE AO COMPUTED THE RATE OF DEPLETION (DEPRECIA TION) UNDER THE STRAIGHT LINE METHOD AT 22.32% BY DIVIDING THE AMOU NT OF DEPLETION AMOUNTING TO RS.332.65 CRORE WITH THE GROSS AMOUNT OF COST OF PRODUCING FACILITIES BEFORE SUCH DEPLETION AT RS.14 89.89 CRORE. IT CAN BE NOTICED FROM THE ABOVE TABLE THAT THE AMOUNT OF DEPLETION CHARGES FOR ALL THE THREE BLOCKS TOTALING RS.332.65 CRORE H AS BEEN WORKED OUT FROM THE PRODUCTION FACILITIES COSTS AND SITE RESTO RATION COSTS. FOR EXAMPLE, CLOSING PRODUCTION FACILITIES COST IN RESP ECT OF BLOCK RJ-ON- 90/1, BEFORE DEPLETION, STANDS AT RS.610.63 CRORE. THE AMOUNT OF DEPLETION FOR THE YEAR AT RS. 120.11 CRORE HAS BEEN WORKED OUT BY MULTIPLYING UNIT OF PRODUCTION COST OF RS.93.10 WIT H THE FIGURE OF PRODUCTION OF OIL DURING THE YEAR AT 1,29,01,808. PER UNIT COST OF RS.93.10 HAS BEEN COMPUTED BY DIVIDING THE TOTAL AM OUNT BEFORE DEPLETION AMOUNTING TO RS.610.63 CRORE WITH OPENING RESERVE OF OIL BARRELS AT 6,55,88,358. SIMILAR WORKING OF PRODUCTI ON FACILITIES COST HAS BEEN DONE FOR OTHER TWO BLOCKS, NAMELY, RV AND CB. IN THE SAME MANNER, CALCULATION HAS BEEN DONE FOR SITE RESTORAT ION COST OF ALL THE THREE BLOCKS. TO PUT IT SIMPLY, THE ASSESSEE WORKE D OUT THE AMOUNT OF DEPLETION CHARGES FOR THE YEAR BY APPORTIONING THE TOTAL PRODUCTION ITA NO.1459/DEL/2016 35 FACILITIES COST AND SITE RESTORATION COSTS IN THE R ATIO OF BARRELS OF OIL PRODUCED DURING THE YEAR VIS-A-VIS TOTAL RESERVES OF BARRELS OF OIL AT THE BEGINNING OF THE YEAR. 32. THE LD. DR DISPUTED THE WORKING OF DEPLETION CH ARGES AT RS.332.65 CRORE BY CONTENDING THAT THIS IS BASED SI MPLY ON PRODUCTION OF OILS AND TOTAL RESERVES OF OIL. HE SUBMITTED THA T THE AMOUNT OF RESERVES CAN AT BEST BE CONSIDERED AS AN ESTIMATE A ND THERE CAN BE NO WAY TO PRECISELY CALCULATE THE ACTUAL AMOUNT OF RES ERVES OF OIL IN THE WELLS. IT IS, NO DOUBT, TRUE THAT THE FIGURE OF PR ODUCTION IS ACTUAL AND THE FIGURE OF RESERVES IS AN ESTIMATE. HOWEVER, TH E ASSESSEE CLAIMS TO HAVE DONE SUCH AN ESTIMATION OF RESERVES OF OIL IN THE WELLS ON A SCIENTIFIC BASIS AND SUCH ESTIMATION DONE ON YEAR TO YEAR BASIS HAS NOT BEEN DISTURBED IN THE PAST. ANOTHER IMPORTANT FACT WHICH NEEDS TO BE NOTED IN THIS REGARD IS THAT THE ASSESSEE IS WORKIN G UNDER `PRODUCTION SHARING CONTRACT. THE FIGURES OF RESERVES OF OIL INDICATED BY THE ASSESSEE ARE ITS SHARE IN THE TOTAL RESERVES WHICH ARE SHARED BY OTHER CONSORTIUM PARTNERS AS WELL. THE LD. AR SUBMITTED THAT THE OTHER CONSORTIUM PARTNERS ALSO ADOPTED THE FIGURES OF RES ERVES OF OIL IN THE ITA NO.1459/DEL/2016 36 SAME MANNER AND FROM THE SAME BASE AS THE ASSESSEE DID AND SUCH FIGURES HAVE NOT BEEN QUESTIONED IN THEIR RESPECTIV E ASSESSMENTS. 33. THE METHOD ADOPTED BY THE ASSESSEE FOR CALCULAT ING THE AMOUNT OF DEPLETION IS IN ACCORDANCE WITH THE `GUIDANCE NO TE ON ACCOUNTING FOR OIL AND GAS PRODUCING ACTIVITIES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS ON 04.02.2003, A COPY OF WHIC H HAS BEEN PLACED ON PAGES 803 ONWARDS OF THE PAPER BOOK. THE GUIDANCE NOTE STATES THAT `DEPRECIATION ALSO INCLUDES DEPLETION OF NATURAL RESOURCES THROUGH THE PROCESS OF EXTRACTION OR USE . IT RECOGNIZES TWO METHODS FOR CALCULATING THE AMOUNT OF DEPLETION VIZ ., UNIT OF PRODUCTION (UOP) METHOD OR SUCCESSFUL EFFORTS METHO D AND FULL COST METHOD. UNDER THE FORMER, ONLY THOSE COSTS THAT LE AD DIRECTLY TO THE DISCOVERY, ACQUISITION OR DEVELOPMENT OF SPECIFIC, DISCRETE OIL AND GAS RESERVES ARE CAPITALIZED AND BECOME PART OF THE CAP ITALIZED COSTS OF THE COSTS CENTRE. COSTS THAT ARE KNOWN AT THE TIME OF I NCURRENCE TO FAIL TO MEET THIS CRITERION ARE GENERALLY CHARGED TO EXPENS E IN THE PERIOD THEY ARE INCURRED. AMOUNT OF DEPRECIATION/DEPLETION IS C ALCULATED ON THE BASIS OF THE NUMBER OF PRODUCTION OR SIMILAR UNITS EXPECTED TO BE OBTAINED FROM THE ASSET BY THE ENTERPRISE. PARAS 40 TO 43 OF THE ITA NO.1459/DEL/2016 37 GUIDANCE NOTE PROVIDES THE MECHANISM FOR CALCULATIN G THE AMOUNT OF DEPRECIATION/DEPLETION UNDER THE UOP METHOD. PARAS 41 AND 42 OF THE NOTE, WHICH ARE MORE RELEVANT FOR OUR PURPOSE, READ AS UNDER:- 41. THE DEPRECIATION CHARGE OR THE UOP CHARGE FO R THE ACQUISITION COST WITHIN A COST CENTRE IS CALCULATED AS UNDER: UOP CHARGE FOR THE PERIOD = UOP RATE X PRODUCTION FOR THE PERIOD UOP RATE = ACQUISITION COST OF THE COST CENTRE / P ROVED OIL AND GAS RESERVES 42. THE DEPRECIATION CHARGE OR THE UNIT OF PRODUC TION (UOP) CHARGE FOR ALL CAPITALISED COSTS EXCLUDING ACQUISITION COS T WITHIN A COST CENTRE IS CALCULATED AS UNDER: UOP CHARGE FOR THE PERIOD = UOP RATE X PRODUCTION FOR THE PERIOD UOP RATE = DEPRECIATION BASE OF THE COST CENTRE / PROVED DEVELOPED OIL AND GAS RESERVES 34. THE OTHER METHOD SET OUT IN THE GUIDANCE NOTE I S FULL COST METHOD UNDER WHICH ALL COSTS INCURRED IN PROSPECTIN G, ACQUIRING MINERAL INTERESTS, EXPLORATION AND DEVELOPMENT ARE ACCUMULATED IN LARGE COST CENTRES. MECHANISM FOR DETERMINING DEPR ECIATION (DEPLETION) UNDER THE FULL COST METHOD HAS BEEN GIV EN IN PARAS 48 AND 49 OF THE GUIDANCE NOTE. 35. THE ASSESSEE HAS CHOSEN TO CALCULATE THE AMO UNT OF DEPLETION UNDER THE UOP METHOD IN PREFERENCE TO THE FULL COST METHOD. THE ASSESSEES WORKING OF DEPLETION FOR THE YEAR AT RS. 332.65 CRORE IS ON ITA NO.1459/DEL/2016 38 THE SAME LINES AS PROVIDED IN THE ABOVE REFERRED PA RAS 40-44. IN OUR CONSIDERED OPINION, THE UOP METHOD IS MORE APPROPRI ATE AS IT GOES WITH THE MATCHING CONCEPT OF SUCCESSFUL EXPLORATION AND THE AMOUNT OF REDUCTION IN THE COSTS. TO PUT IT IN SIMPLE WORDS, PRODUCTION FACILITIES COST AND SITE RESTORATION COSTS, WHICH ARE CAPITALI SED TILL THE EXPLORATION STAGE ARE CLAIMED AS DEDUCTION ON ACCOUNT OF DEPLET ION IN THE SAME PROPORTION IN WHICH THE RESERVES OF OIL DEPLETE DUR ING THE YEAR. IF DEPLETION OF RESERVES OF OIL IS MORE, THE DEPLETION COST WILL BE CORRESPONDINGLY MORE AND VICE VERSA . THIS METHOD ENSURES THAT THE COSTS ARE CHARGED TO THE PROFIT AND LOSS ACCOUNT IN TANDEM WITH THE PRODUCTION FROM ACTUAL EXPLORATION. PARA 35 OF THE GUIDANCE NOTE, AFTER CONSIDERING THE PROS AND CONS OF THE UOP METH OD, EVENTUALLY RECOMMENDS IT BY NOTICING THAT :`ON AN OVERALL CONS IDERATIONS, THE ADVANTAGES OF THE SUCCESSFUL EFFORTS METHOD FAR OUT WEIGH ITS DISADVANTAGES PARTICULARLY KEEPING IN VIEW ITS CONC EPTUAL SUPERIORITY OVER THE FULL COST METHOD. ACCORDINGLY, THE SUCCESS FUL EFFORTS METHOD IS RECOMMENDED TO BE THE PREFERRED METHOD, THOUGH A N ENTERPRISE IS PERMITTED TO FOLLOW THE FULL COST METHOD. IT IS, E RGO, PATENT THAT THE ITA NO.1459/DEL/2016 39 INSTITUTE HAS ALSO RECOMMENDED THE FOLLOWING OF UOP METHOD IN PREFERENCE TO THE FULL COST METHOD. 36. IT IS A MATTER OF RECORD THAT THE ASSESSEE HAS BEEN CONSISTENTLY CHARGING THE AMOUNT OF DEPLETION IN ITS ANNUAL ACCO UNTS UNDER UOP BASIS. NO SUCH DISALLOWANCE ON THIS SCORE HAS BEEN MADE IN THE PAST. FOR THE IMMEDIATELY PRECEDING YEAR, THE AO DID RAIS E A SPECIFIC QUERY ON THE AMOUNT OF DEPLETION CHARGED IN ACCOUNTS, WHI CH WAS RESPONDED BY THE ASSESSEE. NO ADVERSE INFERENCE HAS BEEN DRAW N ON THIS ISSUE IN THE ASSESSMENT MADE U/S 143(3) OF THE ACT. THE ASSE SSEE ALSO RELIED BEFORE THE AO ON THE INDUSTRY PRACTICE IN CHARGING DEPLETION IN THE ACCOUNTS ON UOP BASIS, WHICH HAS BEEN REPRODUCED ON PAGES 14 AND 15 OF THE ASSESSMENT ORDER. THIS HAS NOT BEEN CONTR OVERTED BY THE AO IN ANY MANNER. RULE OF CONSISTENCY REQUIRES THAT A STAND CONSISTENTLY FOLLOWED BY THE ASSESSEE AND ACCEPTED BY THE REVENU E SHOULD NOT BE CALLED IN QUESTION IN LATER YEARS IN THE ABSENCE OF ANY CHANGE IN FACTUAL OR LEGAL POSITION. ONCE THE REVENUE HAS THROUGHOUT ACCEPTED THE CALCULATION OF DEPLETION BY THE ASSESSEE UNDER THE UOP METHOD IN THE EARLIER YEARS, THERE WAS NO LOGIC IN DEVIATING FROM THE SAME IN THE INSTANT YEAR. ITA NO.1459/DEL/2016 40 37. THE LD. DR VEHEMENTLY RELIED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN KRISHAK BHARATI COOPERATIVE LTD. VS. DCIT (2013) 350 ITR 24 (DEL) IN WHICH IT HAS BEEN HELD THAT IF THE REVENUE HAS TAKEN A MISTAKEN VIEW OF STATUTORY PROVISIONS I N ASSESSMENT FOR ONE YEAR, THEN THERE IS NO ESTOPPEL IN TAKING A COR RECT VIEW IN SUBSEQUENT YEAR. WE ARE IN RESPECTFUL AGREEMENT WIT H THE PROPOSITION. HOWEVER, THE FACT OF THE MATTER IN THE INSTANT CASE IS THAT THE UOP METHOD ADOPTED BY THE ASSESSEE IS NOT ONLY RECOMMEN DED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA BUT ALS O FOLLOWED BY THE OIL INDUSTRY AS SUCH. 38. THE LD. DR RELIED ON A PUBLICATION OF THE INSTI TUTE: `COMPENDIUM OF ACCOUNTING STANDARDS TO PUT FORTH THAT A GUIDAN CE NOTE NEED NOT BE FOLLOWED. THIS COMPENDIUM UNEQUIVOCALLY NOTES TH AT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS, FROM TIME TO TIME, ISSUED `GUIDANCE NOTES AND `STATEMENTS ON A NUMBER OF MA TTERS. WHEREAS, THE `STATEMENTS ARE MANDATORY, `GUIDANCE NOTES AR E RECOMMENDATORY IN NATURE EXCEPT FOR `TREATMENT OF I NTEREST ON DEFERRED PAYMENTS AND `PROVISION OF DEPRECIATION I N RESPECT OF EXTRA OR MULTIPLE SHIFT ALLOWANCE. IT HAS FURTHER BEEN L AID DOWN THAT : `A ITA NO.1459/DEL/2016 41 MEMBER SHOULD ORDINARILY FOLLOW RECOMMENDATIONS IN A GUIDANCE NOTE RELATING TO AN AUDITING MATTER EXCEPT WHERE HE IS S ATISFIED THAT IN THE CIRCUMSTANCE OF THE CASE, IT MAY NOT BE NECESSARY T O DO SO. IT IS VIVID THAT A GUIDANCE NOTE HAS NOT THE STATURE OF `STATEM ENTS. HOWEVER, A GUIDANCE NOTE, ALBEIT NOT MANDATORY, IS DEFINITELY MEANT TO BE FOLLOWED. REVERTING TO THE GUIDANCE NOTE ON `ACCOUN TING FOR OIL AND GAS PRODUCING ACTIVITIES, WE FIND THAT THE INSTITU TE HAS RECOMMENDED TWO METHODS, INCLUDING UOP, FOR RECORDING THE AMOUN T OF DEPLETION IN THE BOOKS OF ACCOUNT. IN OTHER WORDS, THE UOP IS A METHOD SUGGESTED TO BE FOLLOWED AND IS IN THE NATURE OF AN ENABLING PROVISION. WHEN THE GUIDANCE NOTE IS RECOMMENDING THE FOLLOWIN G OF UOP METHOD IN ACCOUNTING FOR OIL AND GAS PRODUCING ACTI VITIES, NO FAULT CAN BE FOUND WITH THE ASSESSEE FOLLOWING THE SAME. THE SITUATION WOULD HAVE BEEN OTHERWISE, IF THE GUIDANCE NOTE HAD PROHI BITED THE USE OF UOP AND STILL THE ASSESSEE WOULD HAVE FOLLOWED THE SAME. IN SUCH CIRCUMSTANCES, THE CONTENTION OF THE LD. DR WOULD H AVE MERITED CONSIDERATION. CURRENTLY, WE ARE CONFRONTED WITH A SITUATION IN WHICH THE INSTITUTE HAS GIVEN AN ENABLING PROVISION OF FO LLOWING THE UOP METHOD IN CONTRAST TO A DISABLING PROVISION IN THE GUIDANCE NOTE AND ITA NO.1459/DEL/2016 42 THE ASSESSEE HAS RELIGIOUSLY FOLLOWED THE SAME, AS IS BEING DONE BY THE OTHER PLAYERS IN THE SAME INDUSTRY. IN SUCH CIRCUMS TANCES, WE FIND IT DIFFICULT TO ACCEPT THE ARGUMENT OF THE LD. DR THAT THE ASSESSEE SHOULD NOT HAVE FOLLOWED SUCH RECOMMENDED METHOD OF DEPLET ION. A FORTIORI , THERE IS NOTHING WRONG WITH THE ASSESSEE FOLLOWING UOP FOR RECORDING DEPLETION IN ITS ANNUAL ACCOUNTS. THUS THE JUDGMENT IN THE CASE OF KRISHAK BAHARTI (SUPRA) DOES NOT BAIL OUT THE CASE OF THE REVENUE AS THE ACTION OF THE ASSESSEE IN FOLLOWING THE UOP MET HOD IS NOT CONTRARY EITHER TO THE STATUTORY PROVISIONS OF THE COMPANIES ACT, 1956 OR THE GUIDANCE NOTE. 39. IT IS SIGNIFICANT TO NOTE THAT THE ASSESSING OF FICER HAS NOT POINTED OUT ANY INFIRMITY IN THE AMOUNT OF DEPLETION CALCUL ATED BY THE ASSESSEE AT RS.334.10 CRORE IN ACCORDANCE WITH THE GUIDANCE NOTE. ALTERATION TO SUCH AMOUNT HAS BEEN MADE ONLY IN THE COMPUTATION OF `BOOK PROFIT U/S 115JB BY NOTICING THAT THE AMOUNT OF DEPLETION CALCULATED BY THE ASSESSEE UNDER THE UOP METHOD GIV ES RATE OF DEPRECIATION OF 22.32%, WHEREAS SCHEDULE XIV TO TH E COMPANIES ACT PROVIDES RATE OF DEPRECIATION UNDER THE SLM AT 5.28 %. IN OTHER WORDS, THE AO DISPUTED THE PERCENTAGE OF DEPLETION AT 22.32% ITA NO.1459/DEL/2016 43 WITHOUT QUESTIONING THE ACCURACY OF THE AMOUNT OF D EPLETION GIVEN BY THE ASSESSEE AND, THEREAFTER, REDUCED THE RATE OF 5 .28% GIVEN IN SCHEDULE XIV TO THE COMPANIES ACT FOR RECOMPUTING B OOK PROFIT U/S 115JB BY DISALLOWING THE ALLEGED EXCESS DEPRECIATIO N RATE. TO PUT IT SIMPLY, THE POINT OF VIEW OF THE AO IS THAT THE AMO UNT OF DEPLETION CALCULATED BY THE ASSESSEE UNDER THE UOP BASIS GIVE S RATE OF 22.32% UNDER THE STRAIGHT LINE METHOD, WHICH IS HIGHER THA N 5.28% GIVEN UNDER SCHEDULE XIV TO THE COMPANIES ACT AND HENCE S UCH LOWER RATE SHOULD BE APPLIED FOR WORKING OUT THE BOOK PROFIT U /S 115JB OF THE ACT. 40. THE LD. DR AS ALSO THE AO PRESSED INTO SERVICE CIRCULAR NO. F. NO. 5/31/2002-CL-III DATED 21.2.2003 DEALING WITH T HE ALTERNATIVE BASIS FOR PROVIDING DEPRECIATION U/S 205(2)(C) OF T HE COMPANIES ACT. FIRST PARA OF THIS CIRCULAR STATES THAT SOME COMPAN IES, PARTICULARLY COMPANIES ENGAGED IN PRODUCTION OF STEEL, HAVE REQU ESTED TO PRESCRIBE AN APPROPRIATE METHOD TO MAKE PROVISION FOR DEPRECI ATION BASED ON UNIT OF PRODUCTION. IN PARA 2, IT HAS BEEN MENTIONE D THAT UPON CONSULTATIONS WITH THE INSTITUTES OF ICAI & ICWAI, A VIEW EMERGED THAT PROVIDING DEPRECIATION ON UOP METHOD WILL NOT BE IN TUNE WITH ITA NO.1459/DEL/2016 44 THE BASIC CONCEPT OF DEPRECIATION. IN THE LAST PARA , IT HAS BEEN CLARIFIED THAT COMPANIES MAY DEPRECIATE THE ASSETS ON STRAIGH T LINE METHOD OR WRITTEN DOWN VALUE METHOD, BUT MAY NOT FOLLOW UOP M ETHOD. 41. THIS CIRCULAR WAS ISSUED, ON A REQUEST MADE BY CERTAIN COMPANIES ENGAGED IN PRODUCTION OF STEEL, AFTER CON SULTING, INTER ALIA, THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. T HERE IS MERIT IN THE CONTENTION OF THE LD. DR THAT THERE IS NOTHING TO S HOW THAT THIS CIRCULAR IS SPECIFIC TO STEEL INDUSTRY ONLY. PRIMA FACIE IT APPEARS TO BE OPERATING GENERALLY. HOWEVER, INSTANTLY, WE ARE DEALING WITH ACCOUNTING OF COMPANIES ENGAGED IN OIL AND GAS PRODUCING ACTIVITI ES, FOR WHICH A DEDICATED GUIDANCE NOTE DT. 4.2.2003 HAS BEEN ISSUE D BY THE INSTITUTE PERMITTING THE UOP METHOD. SUCH A GUIDANCE NOTE HAS NOT BEEN WITHDRAWN BY THE INSTITUTE. ONCE THERE IS A GUIDANC E NOTE DEVOTED TO A SPECIFIC OIL AND GAS INDUSTRY, IT WILL HAVE PRIMA CY OVER THE INSTRUCTIONS ISSUED APPLICABLE GENERALLY. 42. FURTHER, THIS CIRCULAR HAS BEEN ISSUED FOR DEPR ECIATION U/S 205 OF THE COMPANIES ACT. IT WILL BE SEEN INFRA THAT SECTION 205 OF THE COMPANIES ACT IS RELEVANT FOR PREPARING PROFIT AND LOSS ACCOUNT FOR THE LIMITED PURPOSE OF PAYMENT OF DIVIDEND AND HAS NO BEARING ON THE ITA NO.1459/DEL/2016 45 PREPARATION OF PROFIT AND LOSS ACCOUNT IN ACCORDANC E WITH PARTS II AND III OF THE SCHEDULE VI TO THE COMPANIES ACT, WHICH IS THE REQUIREMENT OF SECTION 115JB OF THE ACT. 43. EVEN IF THIS CIRCULAR IS PRESUMED TO BE OPERATI NG TO PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT, IT WILL ST ILL NOT COME IN THE WAY OF GRANTING HIGHER DEPRECIATION FOR CALCULATING PROFIT U/S 115JB OF THE ACT. THE REASON IS THAT CIRCULAR NO. 2 OF 1989 DT. 7TH MARCH, 1989 ISSUED BY THE COMPANY LAW DEPARTMENT PERMITS CHARGI NG DEPRECIATION AT RATES HIGHER THAN THOSE PRESCRIBED UNDER SCHEDULE XIV TO THE COMPANIES ACT. PARA 1 OF THE SAID CIRCULAR R EADS AS UNDER: ' 1. CAN HIGHER RATES OF DEPRECIATION BE CHARGED ? IT IS STATED THAT SCH. XIV CLEARLY STATES THAT A COMPANY SHOULD DISCL OSE DEPRECIATION RATES IF THEY ARE DIFFERENT FROM THE P RINCIPAL RATES SPECIFIED IN THE SCHEDULE. ON THIS BASIS, IT IS SUG GESTED THAT A COMPANY CAN CHARGE DEPRECIATION AT RATES WHICH ARE LOWER OR HIGHER THAN THOSE SPECIFIED IN SCH. XIV. IT MAY BE CLARIFIED THAT THE RATES AS CONTAINED IN SCH. XIV SHOULD BE VIEWED AS THE MINIMUM RATES AND, THEREFORE, A COMPANY SHALL NOT BE PERMITTED TO CHARGE DEPRECIATION AT RATES LO WER THAN THOSE SPECIFIED IN THE SCHEDULE IN RELATION TO ASSETS PUR CHASED AFTER THE DATE OF APPLICABILITY OF THE SCHEDULE.' 44. THE HONBLE SUPREME COURT IN MALAYALA MANORAMA COMPANY LTD. VS. CIT (2008) 300 ITR 251 (SC) DEALT WITH A QUESTION: WHETHER ITA NO.1459/DEL/2016 46 IN RESPECT OF A COMPANY CONSISTENTLY CHARGING DEPRE CIATION IN ITS BOOKS OF ACCOUNT AT THE RATES PRESCRIBED IN THE IT RULES, THE ITO HAS JURISDICTION U/S 115J OF THE IT ACT, 1961 TO RE-WOR K NET PROFITS BY SUBSTITUTING THE RATES PRESCRIBED IN SCHEDULE XIV O F THE COMPANIES ACT, 1956? IT TOOK NOTE OF THE CIRCULAR DT. 7TH M ARCH, 1989 ISSUED BY THE COMPANY LAW DEPARTMENT, WHICH PROVIDES THAT THE RATES OF DEPRECIATION PRESCRIBED IN SCH. XIV ARE THE MINIMUM RATES. THE ASSESSEE IN THAT CASE ARGUED BEFORE THE HONBLE SUP REME COURT THAT NOTE 5 OF SCH. XIV CONTEMPLATES THAT RATES MAY BE D IFFERENT FROM THE RATES SPECIFIED IN THE SAID SCHEDULE, WHICH PROVIDE D THAT: '5. THE FOLLOWING INFORMATION SHOULD ALSO BE DISCLOSED IN THE ACCOUNTS: (I) DEPRECIATION METHODS USED; AND (II) DEPRECIATION RATES OR THE USEFUL LIVES OF THE ASSETS, IF THEY ARE DIFFERENT FROM THE PRINCIPAL RATES, SPECIFIED IN TH E SCHEDULE.' 45. CONSIDERING THE CIRCULAR WHICH PROVIDES THAT A COMPANY CAN CHARGE DEPRECIATION AT A RATE EQUAL OR HIGHER THAN THE RATES PRESCRIBED IN SCHEDULE XIV, BUT NOT LOWER THAN SUCH PRESCRIBED RATES, THE HONBLE SUPREME COURT ANSWERED THE ABOVE QUESTION I N NEGATIVE BY HOLDING THAT THE ITO HAS NO JURISDICTION TO REWORK THE BOOK PROFIT U/S ITA NO.1459/DEL/2016 47 115J OF THE ACT BY SUBSTITUTING THE RATES OF DEPREC IATION PRESCRIBED IN SCHEDULE XIV OF THE COMPANIES ACT FOR THE RATES PRE SCRIBED IN THE INCOME-TAX RULES. 46. THE LD. DR RELIED ON THE JUDGMENT IN THE CASE O F DYNAMIC ORTHOPEDICS P. LTD. VS. CIT (2010) 321 ITR 300 (SC) TO CONTEND THAT THE PROVISIONS OF SECTION 205 OF THE COMPANIES ACT STAND INCORPORATED INTO SECTION 115J OF THE ACT. HE READ SOME OBSERVAT IONS OF THE HONBLE APEX COURT IN DYNAMIC ORTHOPAEDICS (SC)(SUPRA) EXPRESSING DISAGREEMENT WITH THE RATIO LAID DOWN IN THE CASE OF MALAYALA MANORAMA (SUPRA) . WE ARE IN FULL AGREEMENT WITH THE LD. DR TO THE EXTENT THAT THE HONBLE SUPREME COURT DID RECORD ITS RESPECTFUL DISSENT WITH MALAYALA MANORAMA (SC)(SUPRA) TO THE EFFECT THAT DEPRECIATION NEED NOT BE COMPUTED AS PER SCHED ULE XIV OF THE COMPANIES ACT IN COMPUTING PROFITS FOR THE PURPOSE OF SECTION 115J. HOWEVER, WHAT IS SIGNIFICANT TO NOTE IS THAT THE HO NBLE SUPREME COURT MADE THESE OBSERVATIONS WHILE DIRECTING THE R EGISTRY TO PLACE THE CIVIL APPEAL BEFORE THE HONBLE CHIEF JUSTICE O F INDIA FOR APPROPRIATE DIRECTIONS AS THE MATTER NEEDS RECONSID ERATION BY A LARGER BENCH. IN OTHER WORDS, THIS IS SIMPLY A REFERRAL OR DER FOR CONSIDERATION ITA NO.1459/DEL/2016 48 OF THE ISSUE BY A LARGER BENCH AND NOT AN ENUNCIATI ON OF LAW BY THE APEX COURT. THE LD. AR PLACED ON RECORD A REPORT P OINTING OUT THAT THE ABOVE APPEAL REFERRED TO A LARGER BENCH IN DYNAMIC ORTHOPAEDICS IS STILL PENDING BEFORE THE HONBLE SUPREME COURT. THE POSITION, WHICH THEREFORE, EMERGES IS THAT THE DECISION IN TH E CASE OF MALAYALA MANORAMA (SC)(SUPRA) CANNOT BE CONSTRUED AS OVERRULED. IT STILL HOLDS THE FIELD AS A BINDING PRECEDENT. 47. ONCE HIGHER RATES OF DEPRECIATION ARE PERMISSIB LE AND THE FACT THAT THE AO CONVERTED THE AMOUNT OF DEPLETION CHARG ED BY THE ASSESSEE UNDER THE UOP METHOD TO THE RATE UNDER STR AIGHT LINE METHOD, WHICH TURNED OUT TO BE A RATE HIGHER THAN THAT PRES CRIBED UNDER SCHEDULE XIV, CIRCULAR DATED 7.3.1989 WILL REGULARI ZE THE CLAIM OF DEPRECIATION AT HIGHER RATE UNDER THE STRAIGHT LINE METHOD. THUS THE RELIANCE OF THE LD. DR ON CIRCULAR DATED 21.2.2003, PROHIBITING THE FOLLOWING OF UOP METHOD, DOES NOT ADVANCE HIS CASE. 48. NOW, LET US EXAMINE IF THE LEGISLATURE HAS PUT A CEILING ON THE RATE OF DEPRECIATION TO BE CLAIMED FOR THE PURPOSE OF COMPUTING BOOK PROFIT U/S 115JB OF THE ACT FOR THAT, WE CONSIDER IT APT TO REPRODUCE ITA NO.1459/DEL/2016 49 THE RELEVANT PARTS OF SECTION 115JB, AT THE MATERIA L TIME, AS UNDER:- ` SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COM PANIES. 115JB. (1) NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISION OF THIS ACT, WHERE IN THE CASE OF AN ASSE SSEE, BEING A COMPANY, THE INCOME-TAX, PAYABLE ON THE TOTAL INCOM E AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELE VANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2010 , IS LESS THAN FIFTEEN PER CENT OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AN D THE TAX PAYABLE BY THE ASSESSEE ON SUCH TOTAL INCOME SHALL BE THE A MOUNT OF INCOME- TAX AT THE RATE OF FIFTEEN PER CENT . (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PUR POSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR TH E RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956) : ] PROVIDED THAT WHILE PREPARING THE ANNUAL ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT, ( I ) THE ACCOUNTING POLICIES; ( II ) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING S UCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; ( III ) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURP OSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 195 6 (1 OF 1956) : PROVIDED FURTHER THAT WHERE THE COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHICH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THIS ACT, ( I ) THE ACCOUNTING POLICIES; ( II ) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING S UCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; ITA NO.1459/DEL/2016 50 ( III ) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL CORRESPOND TO THE ACCOUNTING POLICIES, ACCOUN TING STANDARDS AND THE METHOD AND RATES FOR CALCULATING THE DEPRECIATI ON WHICH HAVE BEEN ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT FOR SUCH FINANCIAL YEAR OR PART OF SUCH FIN ANCIAL YEAR FALLING WITHIN THE RELEVANT PREVIOUS YEAR. EXPLANATION 1 .FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION ( 2), AS INCREASED BY (A) TO (I) IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (I) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY, (I) TO (VIII) (EMPHASIS SUPPLIED BY US) 49. SUB-SECTION (2) OF SECTION 115JB OF THE ACT PRO VIDES THAT EVERY COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, PR EPARE ITS PROFIT & LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCO RDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO TH E COMPANIES ACT. EXPLANATION 1 TO THIS SUB-SECTION PROVIDES MODUS OPERANDI FOR CALCULATING BOOK PROFIT. IT STATES THAT `BOOK PR OFIT MEANS `THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2) AS INCREASED BY CERTAIN ITEMS GIVEN IN THE EXPLANATION, IF ANY OF THEM HAS BEEN C ONSIDERED IN THE PROFIT & LOSS ACCOUNT, AND AS REDUCED BY CERTAIN IT EMS SET OUT IN THE ITA NO.1459/DEL/2016 51 EXPLANATION. THUS, IT IS CLEAR THAT THE EXERCISE O F CALCULATING `BOOK PROFIT BEGINS WITH THE AMOUNT OF `NET PROFIT AS SH OWN IN THE PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH THE PROVIS IONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT. IT IS, TH EREFORE, ESSENTIAL THAT THE PROFIT & LOSS ACCOUNT OF A COMPANY MUST HA VE BEEN DRAWN IN THE FIRST INSTANCE IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI. IF THE PROFIT & LOSS ACCOUNT IS NOT IN ACCORDANCE WITH THE SAME, THEN, NECESSARY ALTERATION IS REQUIRED TO BE MADE SO AS T O CONFIRM THE PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI. AT THIS STAGE, WE NEED TO DISCUSS THE SCOPE OF ALTE RNATIONS TO THE AMOUNT OF NET PROFIT AS SHOWN IN THE PROFIT AND LOS S ACCOUNT BY THE AO FOR ASCERTAINING THE FIGURE OF NET PROFIT, BEING , THE FIRST STEP IN THE COMPUTATION OF BOOK PROFIT U/S 115JB. 50. IT HAS BEEN HELD IN APOLLO TYRES LTD. VS. CIT (2002) 255 ITR 273 (SC) THAT THE CORRECTNESS OF THE PROFIT & LOSS ACCOUNT PREPARED BY THE ASSESSEE COMPANY AND CERTIFIED BY THE STATUTORY AUD ITORS AS HAVING BEEN PREPARED IN ACCORDANCE WITH THE REQUIREMENTS O F PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT CANNOT BE EXAMINED BY THE AO WHILE ASSESSING A COMPANY FOR INCOME-TAX U/S 115J O F THE ACT. THE ITA NO.1459/DEL/2016 52 HONBLE SUMMIT COURT OBSERVED THAT: THE USE OF THE WORDS 'IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCH. VI TO THE COMPANIES ACT' WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING AUTHORITY TO RELY UPON THE AUTHENTIC STAT EMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, AN AO UNDER THE IT ACT HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT WH ICH OBLIGATES THE COMPANY TO MAINTAIN ITS ACCOUNT IN A MANNER PROVIDE D BY THE COMPANIES ACT AND THE SAME TO BE SCRUTINISED AND CE RTIFIED BY STATUTORY AUDITORS AND WILL HAVE TO BE APPROVED BY THE COMPANY IN ITS GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE T HE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLIGATION ALSO TO EX AMINE AND SATISFY THAT THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES ACT.. THERE CANN OT BE TWO INCOMES ONE FOR THE PURPOSE OF COMPANIES ACT AND AN OTHER FOR THE PURPOSE OF INCOME-TAX BOTH MAINTAINED UNDER THE SAM E ACT. . THEREFORE, THE AO WHILE COMPUTING THE INCOME UNDER S. 115J HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVING B EEN PROPERLY ITA NO.1459/DEL/2016 53 MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. TH E AO THEREAFTER HAS THE LIMITED POWER OF MAKING INCREASES AND REDUC TIONS AS PROVIDED FOR IN THE EXPLANATION TO THE SAID SECTION. TO PUT IT DIFFERENTLY, THE AO DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFIT SHOWN IN THE P&L A/C EXCEPT TO THE EXTENT PROVIDED IN THE EXPLAN ATION TO S. 115J. 51. THE HONBLE APEX COURT DEALT WITH SECTION 115JA IN CIT VS. HCL COMNET SYSTEMS AND SERVICES LTD. (2008) 305 ITR 409 . IT REPRODUCED AND RELIED ON THE RELEVANT PARTS OF ITS EARLIER DECISION IN APOLLO TYRES (SUPRA) DELIVERED IN THE CONTEXT OF SECTION 115J OF THE ACT. IN THE LATER JUDGMENT, THEIR LORDSHIPS HELD T HAT : `THE AO HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS MAINTAINED IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCH. VI T O THE COMPANIES ACT, WHICH ARE CERTIFIED BY THE AUDITORS AND PASSED BY T HE COMPANY IN THE GENERAL MEETING. THE AO DOES NOT HAVE THE JURISDI CTION TO GO BEYOND THE NET PROFIT SHOWN IN THE P&L A/C EXCEPT T O THE EXTENT PROVIDED IN THE EXPLANATION. THEREAFTER, THE AO HAS TO MAKE ADJUSTMENT PERMISSIBLE UNDER THE EXPLANATION GIVEN IN S. 115JA OF THE 1961 ACT. .. FOR THE PURPOSES OF S. 115JA, THE AO CAN INCREASE THE NET PROFIT DETERMINED AS PER THE P&L A/C PREPARED A S PER PARTS II AND ITA NO.1459/DEL/2016 54 III OF SCH. VI TO THE COMPANIES ACT ONLY TO THE EXT ENT PERMISSIBLE UNDER THE EXPLANATION THERETO. 52. IN A STILL LATER DECISION AJANTHA PHARMA LTD. VS. CIT (2010) 327 ITR 305(SC) , THE HONBLE SUPREME COURT, DEALING WITH SECTION 1 15JB OBSERVED THAT : `SEC. 115JB IS THE SUCCESSOR SECTIO N TO S. 115JA. IN ESSENCE, IT IS THE SAME EXCEPT THAT S. 115JA PROVID ED FOR MAT ON COMPANIES, SO FAR AS IT DOES NOT DEEM THE BOOK PROF IT AS TOTAL INCOME. UNDER S. 115JB, HOWEVER, CL. (VIII) OF S. 115JA IS RENUMBERED AS CL. (IV). S. 115JB CONTINUES TO REMAIN A SELF-CONTAINED CODE. 53. A SURVEY OF THE ABOVE THREE JUDGMENTS COMING FR OM THE HIGHEST COURT OF THE LAND DEALING WITH SECTIONS 115J, 115JA AND 115JB OF THE ACT REVEALS THAT THE NET PROFIT IS REQUIRED TO BE N ECESSARILY DRAWN IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT. IF IT DOES NOT ACCORD WITH THESE PARTS, THEN THE AO IS COMPETENT TO ALTER THE AMOUNT OF NET PROFIT SO DECLARED BY THE ASSESSE E SO AS TO BRING IT IN CONFORMITY WITH SUCH PARTS. THE SPECIAL BENCH OF TH E TRIBUNAL IN RAIN COMMODITIES LTD. VS. DCIT (2010) 40 SOT 265 (HYD)(S B) WAS CONFRONTED WITH A SITUATION IN WHICH THE ASSESSEE, FOR THE PURPOSES OF ITA NO.1459/DEL/2016 55 SECTION 115JB, REDUCED THE AMOUNT OF CAPITAL GAIN E XEMPT U/S 47(IV) OF THE ACT FROM THE AMOUNT OF NET PROFIT SHOWN IN T HE PROFIT AND LOSS ACCOUNT DRAWN IN ACCORDANCE WITH PARTS II AND III O F SCHEDULE VI. THE AO ADDED BACK SUCH AMOUNT OF CAPITAL GAIN. REPELLIN G THE CONTENTION OF THE ASSESSEE, THE HONBLE SPECIAL BENCH HELD THA T MERELY BECAUSE THE LONG-TERM CAPITAL GAIN IS EXEMPT UNDER S. 47(IV ) UNDER THE NORMAL PROVISION OF THE ACT, IT IS NOT CORRECT TO SAY THAT IT IS ALSO TO BE REDUCED FROM THE NET PROFIT FOR THE PURPOSE OF COMPUTING BO OK PROFIT UNDER S. 115JB WHEN THE EXPLANATION TO S. 115JB DOES NOT PRO VIDE FOR ANY DEDUCTION IN TERMS OF S. 47(IV). THIS DECISION RELI ED BY THE LD. DR, RATHER SUPPORTS THE VIEW POINT OF THE ASSESSEE THAT THE AO CAN ALBEIT ALTER THE AMOUNT OF THE NET PROFIT FOR THE PURPOSES OF SECTION 115JB, BUT SUCH ALTERATION IS LIMITED TO BRINGING IT IN CO NFORMITY WITH PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT. NATURA L COROLLARY, WHICH, THEREFORE, FOLLOWS IS THAT THE PROFIT AND LO SS ACCOUNT HAS TO BE NECESSARILY DRAWN IN ACCORDANCE WITH PARTS II AND I II OF SCHEDULE VI AND IF IT DOES NOT ACCORD WITH THE SAME, THEN THE A O CAN DEFINITELY BRING IT IN LINE WITH THE SAME. ONCE NET PROFIT HAS BEEN SO DETERMINED, ITA NO.1459/DEL/2016 56 THEN THE AO HAS NO POWER TO MAKE ADJUSTMENTS TO SUC H PROFIT, OTHER THAN THOSE SET OUT IN THE EXPLANATION. 54. WHEN WE CONSIDER THE RATIO DECIDENDI OF THE ABOVE REFERRED THREE JUDGMENTS OF THE HONBLE SUPREME COURT AND ALSO THE SPECIAL BENCH, IT IS FOUND THAT A COMMON THREAD WHICH RUNS THROUGH SECTIONS 115J, 115JA AND 115JB IS THAT THE AO CANNOT TINKER WITH T HE AMOUNT OF NET PROFIT DECLARED BY THE ASSESSEE IN ITS PROFIT AND L OSS ACCOUNT AS A STARTING POINT FOR CALCULATING `BOOK-PROFIT, ONCE THE STATUTORY AUDITORS HAVE CERTIFIED IT TO BE IN ACCORDANCE WITH THE PROV ISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT AND SUCH AC COUNTS HAVE BEEN APPROVED BY THE COMPANY IN ITS GENERAL MEETING AND THEREAFTER ACCEPTED AND REGISTERED BY THE REGISTRAR OF COMPANI ES. HOWEVER, SUCH AMOUNT OF NET PROFIT AS DETERMINED IN A UNIFOR M MANNER IN ALL THE THREE SECTIONS AS A STARTING POINT IS REQUIRED TO B E ADJUSTED IN ACCORDANCE WITH THE PRESCRIPTION OF THE EXPLANATION CONTAINED IN EACH SUCH SECTION. FOR EXAMPLE, THERE IS CLAUSE (IV) OF THE EXPLANATION TO SECTION 115J WHICH PROVIDES THAT THE AMOUNT OF LOSS OR DEPRECIATION WHICH WOULD BE REQUIRED TO BE SET OFF AGAINST THE P ROFITS OF THE RELEVANT PREVIOUS YEAR AS IF THE PROVISIONS OF SECT ION 205 OF THE ITA NO.1459/DEL/2016 57 COMPANIES ACT ARE APPLICABLE, WOULD BE REDUCED. INT ERPRETING THIS CLAUSE, THE HONBLE SUPREME COURT IN SURANA STEELS (P) LTD. VS. DCIT (1999) 237 ITR 777 (SC) HAS HELD THAT THE TERM LOSS OCCURRING IN CL. (B) OF THE FIRST PROVISO TO SECTION 205(1) OF COMPA NIES ACT HAS TO BE READ AS AMOUNT ARRIVED AT AFTER TAKING INTO ACCOUNT THE DEPRECIATION AND IT HAS TO BE SO READ AND UNDERSTOOD IN THE CONT EXT OF S. 115J OF THE ACT. IN HOLDING SO, THE HONBLE COURT APPLIED THE D OCTRINE OF INCORPORATION AND HELD THAT THE PROVISIONS OF SECTI ON 205 OF THE COMPANIES ACT WILL BE BODILY LIFTED IN SECTION 115J OF THE ACT. IT IS PERTINENT TO NOTE THAT THERE IS NO PROVISION IN SEC TION 115JB OF THE ACT ANALOGOUS TO CLAUSE (IV) OF THE EXPLANATION TO SECT ION 115J. 55. THE LD. DR CONTENDED THAT THE LANGUAGE OF SECTI ON 115JB IS DIFFERENT FROM ITS PREDECESSOR SECTIONS, NAMELY, SE CTION 115J AND 115JA AND, HENCE, THE RATIO LAID DOWN IN THE DECISIONS GOVERNING THE FORMER SECTIONS CANNOT BE TAKEN INTO CONSIDERATION FOR DECIDING AN ISSUE GOVERNED BY SECTION 115JB. WE HAVE SET OUT T HE RELEVANT PARTS OF SECTION 115JB EARLIER. NOW, WE WILL REPRODUCE TH E RELEVANT PARTS OF SECTIONS 115J AND 115JA, AS UNDER:- ITA NO.1459/DEL/2016 58 `SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES. 115J. (1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHE R PROVISION OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE BEING A COMPANY (OTHER THAN A COMPANY ENGAGED IN THE BUSINESS OF GENERATION OR DI STRIBUTION OF ELECTRICITY)], THE TOTAL INCOME, AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR C OMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1988 BUT BEFORE THE 1ST DAY OF APRIL, 1991(HEREAFTER IN THIS SECTION REFERRED TO AS THE R ELEVANT PREVIOUS YEAR), IS LESS THAN THIRTY PER CENT OF ITS BOOK PROFIT, TH E TOTAL INCOME OF SUCH ASSESSEE CHARGEABLE TO TAX FOR THE RELEVANT PREVIOU S YEAR SHALL BE DEEMED TO BE AN AMOUNT EQUAL TO THIRTY PER CENT OF SUCH BO OK PROFIT. (1A) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR TH E PURPOSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR TH E RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND I II OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956).] EXPLANATION. FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' ME ANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (1A)], AS INCREASED BY (2). `DEEMED INCOME RELATING TO CERTAIN COMPANIES. 115JA. (1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHE R PROVISIONS OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE, BEIN G A COMPANY, THE TOTAL INCOME, AS COMPUTED UNDER THIS ACT IN RESPECT OF AN Y PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AF TER THE 1ST DAY OF APRIL, 1997 BUT BEFORE THE 1ST DAY OF APRIL, 2001 ( HEREAFTER IN THIS SECTION REFERRED TO AS THE RELEVANT PREVIOUS YEAR) IS LESS THAN THIRTY PER CENT OF ITS BOOK PROFIT, THE TOTAL INCOME OF SUCH A SSESSEE CHARGEABLE TO TAX FOR THE RELEVANT PREVIOUS YEAR SHALL BE DEEMED TO BE AN AMOUNT EQUAL TO THIRTY PER CENT OF SUCH BOOK PROFIT. (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SECTION PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND I II OF SCHEDULE VI 58 TO THE COMPANIES ACT, 1956 (1 OF 1956) : PROVIDED THAT WHILE PREPARING PROFIT AND LOSS ACCOUNT, THE DEPRECIATION SHALL BE CALCULATED ON THE SAME METHOD AND RATES WH ICH HAVE BEEN ITA NO.1459/DEL/2016 59 ADOPTED FOR CALCULATING THE DEPRECIATION FOR THE PU RPOSE OF PREPARING THE PROFIT AND LOSS ACCOUNT LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTIO N 210 OF THE COMPANIES ACT, 1956 (1 OF 1956) : PROVIDED FURTHER THAT WHERE A COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHICH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THE ACT, THE METHOD AND RATES FOR CALCULATION OF DEPRECIATION SHALL CORRESPOND TO THE METHOD AND RATES WHICH HAVE BEEN ADOPTED FOR CALCULATING THE DEPRECI ATION FOR SUCH FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLI NG WITHIN THE RELEVANT PREVIOUS YEAR. EXPLANATION. FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' MEA NS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS IN CREASED BY 56. ON GOING THROUGH THE LANGUAGE OF SECTION 115J(1 A) AS CONSIDERED IN APOLLO TYRES (SC)(SUPRA) , IT IS CLEAR THAT EVERY ASSESSEE, BEING A COMPANY, IS REQUIRED TO PREPARE ITS PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF THE SCHEDULE VI TO THE COMPANIES ACT FOR THE PURPOSES OF SECTION 11 5J. IDENTICAL LANGUAGE IS USED IN SUB-SECTION (2) OF SECTION 115J A AS CONSIDERED IN HCL COMNET SYSTEMS & SERVICES LTD. (SC) (SUPRA) AND SUB-SECTION (2) OF SECTION 115JB AS CONSIDERED IN AJANTHA PHARMA LTD. (SC)(SUPRA) . THE ONLY DIFFERENCE BETWEEN SECTION 115J POR UNA PARTE AND SECTIONS 115JA AND 115JB POR OTRA PARTE IS THAT WHEREAS THERE IS NO PROVISO TO SUB-SECTION (1A) OF SECTION 115J, THE LEGISLATURE INSERTED ITA NO.1459/DEL/2016 60 TWO PROVISOS TO THE LATER SECTIONS. IT TRANSPIRES ON GOING THROUGH THE LANGUAGE OF THE FIRST PROVISO TO SECTION 115JA THAT WHILE PREPARING PROFIT & LOSS ACCOUNT, DEPRECIATION SHALL BE CALCUL ATED ON THE SAME METHOD AND RATES WHICH HAVE BEEN ADOPTED FOR CALCUL ATING THE DEPRECIATION FOR THE PURPOSE OF PREPARING THE PROFI T & LOSS ACCOUNT LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETI NG IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 1956. WHEN WE CONSIDER THE LANGUAGE OF FIRST PROVISO TO SECTIO N 115JB(2), IT CLEARLY EMERGES THAT EXCEPT FOR ADDITION OF (I) TH E ACCOUNTING POLICIES AND (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREP ARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT, THERE IS NO MAT ERIAL DIFFERENCE BETWEEN FIRST PROVISO TO SECTION 115JA(2) AND FIRST PROVISO TO SECTION 115JB(2). FIRST PROVISO TO SECTION 115JB ALSO PROV IDES THAT WHILE PREPARING THE PROFIT & LOSS ACCOUNT, NOT ONLY THE M ETHODS AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, BUT ALSO THE ACCOUNTING POLICIES AND ACCOUNTING STANDARDS ETC. SHALL ALSO B E THE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING SUCH ACCO UNTS INCLUDING PROFIT AND LOSS ACCOUNT AS LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS O F SECTION 210 OF ITA NO.1459/DEL/2016 61 THE COMPANIES ACT. THE SECOND PROVISO TO SECTION 11 5JA IS NOT MATERIAL FOR OUR PURPOSE WHICH DEALS WITH A SITUATI ON IN WHICH A COMPANY ADOPTS FINANCIAL YEAR UNDER THE COMPANIES A CT, WHICH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THE INCOME-T AX ACT, 1961. BE THAT AS IT MAY, EVEN THE LANGUAGE OF SECOND PROVISO UNDER SECTION 115JA IS SIMILAR TO THE LANGUAGE OF THE SECOND PROV ISO TO SECTION 115JB EXCEPT FOR THE ADDITION OF (I) THE ACCOUNTIN G POLICIES AND (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT. IT, THEREFORE, BECOMES EVIDENT THAT THE MATERIAL PART OF THE PROVISIONS OF SECTION 115J , 115JA AND 115JB, IN SO FAR AS IT CONCERNS THE PREPARATION OF PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, IS SIMILAR. THE CONTENTION OF TH E LD. DR THAT THE DECISIONS RENDERED IN THE CONTEXT OF SECTIONS 115J AND 115JA OF THE ACT ON PREPARING PROFIT AND LOSS ACCOUNT IN ACCORDA NCE WITH PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT CANNOT OPERATE IN THE CONTEXT OF SECTION 115JB, IS, THEREFORE, SANS MERIT . EX CONSEQUENTI, WE ARE HELPLESS TO TAKE COGNIZANCE OF THE DECISIONS RE LIED BY THE LD. DR HOLDING THAT THE LANGUAGE OF SECTIONS 115J, 115JA AND 115JB IS ITA NO.1459/DEL/2016 62 DIFFERENT AND HENCE THE DECISIONS RENDERED IN THE F ORMER SECTIONS CANNOT APPLY IN THE LATER SECTIONS. IT IS SO BECAUS E THE HONBLE SUPREME COURT IN HCL COMNET (SUPRA) [SECTION 115JA] CONSIDERED AND APPLIED THE RATIO OF APOLLO TYRES (SUPRA) [SECTION 115J] AND THEN HELD IN AJANTHA PHRAMA (SUPRA) [SECTION 115JB] THAT THERE IS NO DIFFERENCE IN THESE SECTIONS IN SO FAR AS THE PREPA RATION OF PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT IS CONCERNED. 57. NOW WE TURN TO THE MAIN CONTENTION OF THE LD. D R TO THE EFFECT THAT THE FIRST PROVISO OF SECTION 115JB OF THE ACT REQUIRES CHARGING OF DEPRECIATION IN ACCORDANCE WITH THE RATES PROVIDED UNDER SCHEDULE XIV OF THE ACT. IT TURNS OUT FROM THE LANGUAGE OF T HIS PROVISO THAT WHILE PREPARING THE PROFIT & LOSS ACCOUNT THE METH OD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION SHALL BE T HE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING ...... PROFIT AND LOSS ACCOUNT LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETI NG IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT. THIS PART OF THE FIRST PROVISO SIMPLY PROVIDES THAT THE METHOD A ND RATES FOR CALCULATING DEPRECIATION WHILE PREPARING THE PROFIT & LOSS ACCOUNT U/S ITA NO.1459/DEL/2016 63 115JB SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR PR EPARING PROFIT & LOSS ACCOUNT TO BE LAID BEFORE THE COMPANY AT ITS A NNUAL GENERAL MEETING. 58. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THE RE LEVANT PARTS OF SECTION 210 OF THE COMPANIES ACT, AS UNDER:- `210. ANNUAL ACCOUNTS AND BALANCE SHEET (1) AT EVERY ANNUAL GENERAL MEETING OF A COMPANY HE LD IN PURSUANCE OF SECTION 166, THE BOARD OF DIRECTORS OF THE COMPA NY SHALL LAY BEFORE THE COMPANY- (A) A BALANCE SHEET AS AT THE END OF THE PERIOD SPE CIFIED IN SUB-SECTION (3); AND (B) A PROFIT AND LOSS ACCOUNT FOR THAT PERIOD. (2) IN THE CASE OF A COMPANY NOT CARRYING ON BUSINE SS FOR PROFIT, AN INCOME AND EXPENDITURE ACCOUNT SHALL BE LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING INSTEAD OF A PROFIT AND LOSS ACCOUNT, AND ALL REFERENCES TO 'PROFIT AND LOSS ACCOUNT', 'PROFIT' A ND 'LOSS' IN THIS SECTION AND ELSEWHERE IN THIS ACT, SHALL BE CONSTRU ED, IN RELATION TO SUCH A COMPANY, AS REFERENCES RESPECTIVELY TO THE ' INCOME AND EXPENDITURE ACCOUNT', 'THE EXCESS OF INCOME OVER EX PENDITURE', AND 'THE EXCESS OF EXPENDITURE OVER INCOME'. (3) TO (6) 59. IT IS CLEAR FROM THE LANGUAGE OF SUB-SECTION (1 ) OF SECTION 210 OF THE COMPANIES ACT THAT A PROFIT & LOSS ACCOUNT SHAL L BE PREPARED AND PLACED BEFORE A COMPANY AT EVERY ANNUAL GENERAL MEE TING. THE RELEVANT PART OF SECTION 211 OF THE COMPANIES ACT, DEALING WITH THE ITA NO.1459/DEL/2016 64 FORMAT AND CONTENTS OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT, READS AS UNDER:- 211. FORM AND CONTENTS OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT (1) EVERY BALANCE SHEET OF A COMPANY SHALL GIVE A T RUE AND FAIR VIEW. (2) EVERY PROFIT AND LOSS ACCOUNT OF A COMPANY SHA LL GIVE A TRUE AND FAIR VIEW OF THE PROFIT OR LOSS OF THE COMPANY FOR THE FINANCIAL YEAR AND SHALL, SUBJECT AS AFORESAID, COMPLY WITH THE REQUIR EMENTS OF PART II OF SCHEDULE VI, SO FAR AS THEY ARE APPLICABLE THERETO : (3) . (3A) EVERY PROFIT AND LOSS ACCOUNT AND BALANCE SHE ET OF THE COMPANY SHALL COMPLY WITH THE ACCOUNTING STANDARDS. (3B) WHERE THE PROFIT AND LOSS ACCOUNT AND THE BALA NCE SHEET OF THE COMPANY DO NOT COMPLY WITH THE ACCOUNTING STANDARDS , SUCH COMPANIES SHALL DISCLOSE IN ITS PROFIT AND LOSS ACC OUNT AND BALANCE SHEET, THE FOLLOWING, NAMELY :- (A) THE DEVIATION FROM THE ACCOUNTING STANDARDS; (B) THE REASONS FOR SUCH DEVIATION; AND (C) THE FINANCIAL EFFECT, IF ANY, ARISING DUE TO SUCH D EVIATION. (3C) FOR THE PURPOSES OF THIS SECTION, THE EXPRESSI ON 'ACCOUNTING STANDARDS' MEANS THE STANDARDS OF ACCOUNTING RECOMM ENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CONSTIT UTED UNDER THE CHARTERED ACCOUNTANTS ACT, 1949 AS MAY BE PRESCRIBE D BY THE CENTRAL GOVERNMENT IN CONSULTATION WITH THE NATIONAL ADVISO RY COMMITTEE ON ACCOUNTING STANDARDS ESTABLISHED UNDER SUB-SECTION (1) OF SECTION 210A : PROVIDED THAT THE STANDARD OF ACCOUNTING SPECIFIED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SHALL BE DEEMED TO B E THE ACCOUNTING STANDARDS UNTIL THE ACCOUNTING STANDARDS ARE PRESCR IBED BY THE CENTRAL GOVERNMENT UNDER THIS SUB-SECTION. ITA NO.1459/DEL/2016 65 (4) THE CENTRAL GOVERNMENT MAY, ON THE APPLICATION, OR WITH THE CONSENT OF THE BOARD OF DIRECTORS OF THE COMPANY, B Y ORDER, MODIFY IN RELATION TO THAT COMPANY ANY OF THE REQUIREMENTS OF THIS ACT AS TO THE MATTERS TO BE STATED IN THE COMPANY'S BALANCE SHEET OR PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF ADAPTING THEM TO THE CIR CUMSTANCES OF THE COMPANY. (5) TO (8) . 60. SUB-SECTION (2) OF SECTION 211 CLEARLY PROVIDES THAT THE PROFIT & LOSS ACCOUNT OF A COMPANY SHALL COMPLY WITH THE REQ UIREMENTS OF PART II OF SCHEDULE VI. IN TURN, PART II OF SCHEDU LE VI TO THE COMPANIES ACT CONTAINS REQUIREMENTS AS TO PROFIT & LOSS ACCOUNT. CLAUSE 1 OF PART II PROVIDES THAT THE PROVISIONS OF THIS PART SHALL APPLY TO THE INCOME AND EXPENDITURE ACCOUNT REFERRED TO I N SUB-SECTION (2) OF SECTION 210 OF THE ACT. CLAUSE 2 OF PART II STATES THAT THE PROFIT & LOSS ACCOUNT SHALL DISCLOSE THE RESULT OF THE WORKING OF THE COMPANY AND ALSO EVERY MATERIAL FEATURE. CLAUSE 3 OF PART II PR OVIDES THAT THE PROFIT & LOSS ACCOUNT SHALL SET OUT VARIOUS ITEMS RELATING TO THE INCOME AND EXPENDITURE OF THE COMPANY ARRANGED UNDER THE MOST CONVENIENT HEADS, AND, IN PARTICULAR, SHALL DISCLOSE THE FOLLO WING INFORMATION IN RESPECT OF THE PERIOD COVERED BY THE ACCOUNT. THERE ARE (I) TO (XV) SUB- CLAUSES OF CLAUSE 3 OF PART II. SUB-CLAUSE (IV), W HICH IS RELEVANT FOR OUR PURPOSE, READS AS UNDER:- ITA NO.1459/DEL/2016 66 (IV) THE AMOUNT PROVIDED FOR DEPRECIATION, RENEWAL S OR DIMINUTION IN VALUE OF FIXED ASSETS. IF SUCH PROVISION IS NOT MADE BY MEANS OF A DEPRECI ATION CHARGE, THE METHOD ADOPTED FOR MAKING SUCH PROVISION. IF NO PROVISION IS MADE FOR DEPRECIATION, THE FACT THAT NO PROVISION HAS BEEN MADE SHALL BE STATED AND THE QUANTUM OF AR REARS OF DEPRECIATION COMPUTED IN ACCORDANCE WITH SECTION 20 5(2) OF THE ACT SHALL BE DISCLOSED BY WAY OF A NOTE. 61. THEN, THERE ARE OTHER CLAUSES OF PART II OF SCH EDULE VI TO THE COMPANIES ACT WHICH ARE NOT RELEVANT IN SO FAR AS T HE ISSUE UNDER CONSIDERATION IS CONCERNED. ON GOING THROUGH THE P RESCRIPTION OF SUB- CLAUSE (IV) OF CLAUSE 3 OF PART II OF SCHEDULE VI O F THE COMPANIES ACT AS EXTRACTED ABOVE, IT BECOMES MANIFEST THAT THE RE QUIREMENT IS TO DISCLOSE THE AMOUNT PROVIDED FOR DEPRECIATION, REN EWALS OR DIMINUTION IN THE VALUE OF FIXED ASSETS. THERE IS NO REFERENCE TO THE RATES OF DEPRECIATION TO BE ADOPTED FOR THE PURPOSE OF PREPARING PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH PART II OF SCHEDU LE VI OF THE COMPANIES ACT. THE REMAINING PART OF SUB-CLAUSE (I V) DEALS WITH A SITUATION IN WHICH PROVISION FOR DEPRECIATION HAS N OT BEEN MADE. THE LATER PART OF SUB-CLAUSE (IV) STATES THAT IF NO PRO VISION IS MADE FOR DEPRECIATION, THIS FACT SHALL BE STATED AND THE QUA NTUM OF ARREARS OF DEPRECIATION COMPUTED IN ACCORDANCE WITH THE SECTIO N 205(2) OF THE ITA NO.1459/DEL/2016 67 COMPANIES ACT SHALL BE DISCLOSED BY WAY OF A NOTE. IT IS, THUS, DISCERNIBLE THAT THE REFERENCE TO SECTION 205(2) IN SUB-CLAUSE (IV) OF PART II OF SCHEDULE VI IS ONLY TRIGGERED WHEN A COM PANY HAS NOT MADE A PROVISION FOR DEPRECIATION. IF, HOWEVER, A PROVI SION HAS BEEN MADE FOR DEPRECIATION IN THE VALUE OF FIXED ASSETS, THEN , THE REFERENCE TO SECTION 205(2) PALES INTO INSIGNIFICANCE. IN A NUTS HELL, THE SUB-CLAUSE (IV) OF PART II OF SCHEDULE VI PROVIDES THAT THE AM OUNT OF DEPRECIATION IN THE VALUE OF FIXED ASSETS SHOULD BE PROVIDED AND SEPARATELY DISCLOSED IN THE PROFIT & LOSS ACCOUNT. AT WHAT RAT ES SUCH DEPRECIATION IS TO BE COMPUTED HAS NOT BEEN ENSHRIN ED IN THIS PROVISION. 62. THE LD. DR, REFERRING TO THE PROVISION OF SECTI ON 205(2) OF THE COMPANIES ACT, SUBMITTED THAT THE DEPRECIATION HAS TO BE PROVIDED TO THE EXTENT SPECIFIED IN SECTION 350 OF THE COMPANIE S ACT AND SECTION 350 OF THE COMPANIES ACT REFERS TO THE RATES OF DEP RECIATION SPECIFIED IN SCHEDULE XIV OF THE COMPANIES ACT. IN OTHER WORD S, HIS CONTENTION WAS THAT THE RATES PROVIDED UNDER SCHEDULE XIV OF T HE COMPANIES ACT HAVE TO BE CONSIDERED FOR THE PURPOSE OF PREPARING PROFIT & LOSS ACCOUNT U/S 115JB OF THE ACT. WE FIND OURSELVES UNA BLE TO CONCUR ITA NO.1459/DEL/2016 68 WITH THIS SUBMISSION. SECTION 205 OF THE COMPANIES ACT DEALS ONLY WITH THE PAYMENT OF DIVIDEND AS IS MANIFEST FROM IT S HEADING: `DIVIDEND TO BE PAID ONLY OUT OF PROFITS. SUB-SECT ION (1) OF SECTION 205 OF THE COMPANIES ACT CLEARLY PROVIDES THAT: NO DIVIDEND SHALL BE DECLARED OR PAID BY A COMPANY FOR ANY FINANCIAL YEA R EXCEPT OUT OF THE PROFITS OF A COMPANY FOR THAT YEAR ARRIVED AT AFTER PROVIDING FOR DEPRECIATION IN ACCORDANCE WITH THE PROVISIONS OF S UB-SECTION (2). SUB-SECTION (2) STATES THAT THE DEPRECIATION SHALL BE PROVIDED, INTER ALIA, TO THE EXTENT SPECIFIED IN SECTION 350. IT, THERE FORE, BECOMES CLEAR THAT SECTION 205 OF THE COMPANIES ACT, PROVID ING FOR CHARGING DEPRECIATION IN ACCORDANCE WITH RATES GIVEN IN SCHE DULE XIV OF THE COMPANIES ACT, IS MEANT ONLY FOR DETERMINING THE A VAILABILITY OF PROFITS FOR PAYING DIVIDEND. THUS, TO SAY THAT THE MANDATE OF SECTION 205 APPLIES TO THE PAN COMPANIES ACT, IS NOT ACCEPT ABLE. IT CAN BE NOTICED THAT THERE ARE OTHER PROVISIONS IN THE COMP ANIES ACT AS WELL WHICH REQUIRE THE CALCULATION OF NET PROFIT IN THE MANNER LAID DOWN IN SECTIONS 349 AND 350 OF THE COMPANIES ACT. SECTION 350, IN TURN, PROVIDES FOR CALCULATING DEPRECIATION IN TERMS OF S CHEDULE XIV OF THE ACT. FOR EXAMPLE, SECTION 198 OF THE COMPANIES ACT DEALS WITH ITA NO.1459/DEL/2016 69 OVERALL MAXIMUM MANAGERIAL REMUNERATION PAYABLE IN CASE OF ABSENCE OR INADEQUACY OF PROFITS. SUB-SECTION (1) OF SECTI ON 198 PROVIDES THAT IN CASE OF ABSENCE OR INADEQUACY OF PROFITS, THE TO TAL MANAGERIAL REMUNERATION SHALL NOT EXCEED 11% OF THE NET PROFIT S OF THAT COMPANY FOR THAT FINANCIAL YEAR COMPUTED IN THE MANNER LAID DOWN IN SECTION 349 AND 350 OF THE ACT. SIMILARLY, THERE IS ANOTHE R SPECIFIC PROVISION OF SECTION 387 DEALING WITH REMUNERATION OF MANAGER OF A COMPANY. THIS SECTION ALSO PROVIDES FOR ALLOWING REMUNERATIO N TO A MANAGER BY WAY OF A SPECIFIED PERCENTAGE OF THE NET PROFITS OF THE COMPANY CALCULATED IN THE MANNER LAID DOWN IN SECTION 349 A ND 350 OF THE COMPANIES ACT. THERE IS STILL ANOTHER SPECIAL PROV ISION IN SECTION 293, WHICH PLACES CERTAIN RESTRICTIONS ON THE POWERS OF THE BOARD. CLAUSE (E) OF SUB-SECTION (1) OF SECTION 293 PROVIDES THAT THE BOARD OF DIRECTORS OF A COMPANY SHALL NOT EXCEPT WITH THE CO NSENT OF A COMPANYS GENERAL MEETING CONTRIBUTE TO CHARITABLE AND OTHER FUNDS NOT DIRECTLY RELATING TO THE BUSINESS OF THE COMPAN Y FOR THE WELFARE OF ITS EMPLOYEES, ETC., ANY AMOUNT EXCEEDING RS.50,000 /- OR 5% OF ITS AVERAGE NET PROFITS AS DETERMINED IN ACCORDANCE WIT H THE PROVISIONS OF SECTION 349 AND 350. STILL ANOTHER SIMILAR PROVISI ON IS SECTION 293A OF ITA NO.1459/DEL/2016 70 THE COMPANIES ACT, WHICH PLACES CERTAIN RESTRICTION S AND PROHIBITIONS REGARDING POLITICAL CONTRIBUTIONS. THIS SECTION ALS O PROVIDES THAT A COMPANY MAY CONTRIBUTE ANY AMOUNT TO ANY POLITICAL PARTY, PROVIDED THE AMOUNT SO CONTRIBUTED IN A FINANCIAL YEAR DOES NOT EXCEED 5% OF ITS AVERAGE NET PROFITS DETERMINED IN ACCORDANCE WITH T HE PROVISIONS OF SECTION 349 AND 350 OF THE COMPANIES ACT. 63. SUB-SECTION (4) OF SECTION 349 OF THE COMPANIES ACT HAS CLAUSES (A) TO (P) AND CLAUSE (K) OF SECTION 349 PROVIDES T HAT IN MAKING THE COMPUTATION OF PROFIT, DEPRECIATION TO THE EXTENT S PECIFIED IN SECTION 350 SHALL BE ALLOWED. SECTION 350, IN TURN, DEALING WITH ASCERTAINMENT OF DEPRECIATION, PROVIDES THAT: THE AMOUNT OF DEPR ECIATION TO BE DEDUCTED IN PURSUANCE OF CLAUSE (K) OF SUB-SECTION 4 OF SECTION 349 SHALL BE THE AMOUNT OF DEPRECIATION OF ASSETS SHOWN BY THE BOOKS OF THE COMPANY AT THE RATES SPECIFIED IN SCHEDULE XIV. AN OVERVIEW OF THE AFORE DISCUSSED PROVISIONS OF THE COMPANIES ACT REVEALS THAT THE CHARGING OF DEPRECIATION IN ACCORDANCE WITH SCHEDUL E XIV OF THE COMPANIES ACT, IS MEANT FOR SPECIFIC PROVISIONS, SU CH AS, SECTION 205 (PAYMENT OF DIVIDEND), SECTION 198 (OVERALL MAXIMUM MANAGERIAL REMUNERATION), SECTION 387 (REMUNERATION OF MANAGER ) AND SECTIONS ITA NO.1459/DEL/2016 71 293 & 293A (IMPOSING CERTAIN RESTRICTION ON THE POW ERS OF THE BOARD). WHENEVER PROFIT IS REQUIRED TO BE DETERMINED FOR TH E ABOVE SECTIONS, IT BECOMES INCUMBENT TO CHARGE DEPRECIATION AT THE RAT ES GIVEN IN SCHEDULE XIV OF THE COMPANIES ACT. SUCH REQUIREMEN T OF CHARGING DEPRECIATION IN TERMS OF SECTION 350 OR SCHEDULE XI V OF THE COMPANIES ACT IS NOT A PART OF THE SCHEME UNDER PAR TS II AND III OF SCHEDULE VI. AS SECTION 115JB OF THE ACT REQUIRES THAT FOR THE PURPOSE OF THIS SECTION, PROFIT & LOSS ACCOUNT OF A COMPANY SHALL BE PREPARED IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, THE COMMAND OF SC HEDULE XIV OF THE COMPANIES ACT, REQUIRING THE CHARGING DEPRECIAT ION AT THE PRESCRIBED RATES, DOES NOT, THEREFORE, GET ATTRACTE D. IN THE ABSENCE OF THE PRESCRIPTION OF ANY RATES OF DEPRECIATION IN PARTS II AND III OF SCHEDULE VI, AND FURTHER SECTION 115JB OF THE ACT MANDATING EVER Y COMPANY TO PREPARE ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, WE ARE UNABLE TO RESTRICT THE RATE OF DEPLETION TO THE RATE SPECIFIED IN SCHEDULE XIV TO THE COMPANIES ACT. IF THE INTENTION OF THE LEGISLATURE HAD BEEN TO PREPARE PROFIT AND LOSS ACCOUNT BY CHARGING DEPRECIATION AT THE RATES PROVI DED IN SCHEDULE XIV, IT ITA NO.1459/DEL/2016 72 WOULD HAVE SPECIFICALLY SET OUT SO UNEQUIVOCALLY IN SECTION 115JB BY MAKING REFERENCE TO SCHEDULE XIV TO THE COMPANIES A CT. IN THE ABSENCE OF ANY SUCH PROVISION, WE CANNOT IMPORT RATES OF DEPRE CIATION GIVEN IN SCHEDULE XIV TO BE MANDATORILY FOLLOWED FOR PREPARI NG PROFIT AND LOSS FOR THE PURPOSES OF SECTION 115JB OF THE ACT. 64. AGAIN COMING BACK TO FIRST PROVISO TO SECTION 1 15JB(2) OF THE ACT HEAVILY RELIED BY THE LD. DR, WE FIND THAT IT S IMPLY PROVIDES THAT WHILE PREPARING THE PROFIT & LOSS ACCOUNT FOR THE P URPOSE OF THIS SECTION, THE METHODS AND RATES ADOPTED FOR CALCULAT ING DEPRECIATION SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR PREPARIN G PROFIT & LOSS ACCOUNT LAID BEFORE THE COMPANY AT ITS ANNUAL GENER AL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF TH E COMPANIES ACT. THE EFFECT OF THE PROVISO IS THAT THE METHOD AND RA TES OF DEPRECIATION FOR PREPARING PROFIT & LOSS ACCOUNT U/S 115JB OF TH E ACT SHOULD BE THE SAME AS WERE USED FOR PREPARING PROFIT & LOSS A CCOUNT TO BE PLACED BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEE TING. BY VIRTUE OF THIS PROVISO, A COMPANY IS DEBARRED FROM CHARGING D IFFERENT RATES OF DEPRECIATION IN ITS PROFIT & LOSS ACCOUNT PREPARED FOR THE PURPOSE OF SECTION 115JB AND THE ONE THAT IS PREPARED FOR THE PURPOSES OF PLACING ITA NO.1459/DEL/2016 73 IN THE AGM. SO LONG AS THE METHOD AND RATES OF DEP RECIATION CHARGED IN THE PROFIT & LOSS ACCOUNT MADE FOR THE PURPOSE O F SECTION 115JB AND TO BE PLACED AT THE ANNUAL GENERAL MEETING ARE SAME, THE FIRST PROVISO DOES NOT GET PROMPTED. 65. REVERTING TO THE FACTS OF THE EXTANT CASE, WE F IND THAT THE ASSESSEE DETERMINED THE AMOUNT OF NET PROFIT AS PER ITS PROFIT AND LOSS ACCOUNT - BOTH FOR THE PURPOSES OF SECTION 115JB AN D ALSO FOR PLACING IN THE ANNUAL GENERAL MEETING - AFTER CLAIMING DEPL ETION (DEPRECIATION) AT A HIGHER RATE THAN THE ONE PRESCRIBED IN SCHEDUL E XIV OF THE COMPANIES ACT, WHICH IS NOT FORBIDDEN IN PARTS II A ND III TO SCHEDULE VI OF THE COMPANIES ACT. IT IS FURTHER FOUND THAT THE AUDIT REPORT ISSUED BY THE AUDITORS OF THE ASSESSEE COMPANY IS U NQUALIFIED. THE ANNUAL ACCOUNTS AS PREPARED BY THE AUDITORS ARE STA TED TO HAVE BEEN APPROVED BY THE COMPANY IN ITS AGM AND THEN REGISTE RED BY THE REGISTRAR OF COMPANIES WITHOUT ANY OBJECTION. SUCH A CONTENTION PUT FORTH ON BEHALF OF THE ASSESSEE HAS NOT BEEN DISPUT ED BY THE REVENUE. WHEN POSITION IS SO, WE FAIL TO COMPREHEND AS TO HO W THE ACTION OF THE AO IN ADDING THE ALLEGED EXCESS DEPRECIATION CAN BE SUSTAINED. THE IMPUGNED ORDER IS SET ASIDE PRO TANTO AND THE ENHANCEMENT TO THE ITA NO.1459/DEL/2016 74 AMOUNT OF NET PROFIT TO THE TUNE OF RS.2,53,87,76, 183/- MADE FOR THE PURPOSES OF SECTION 115JB OF THE ACT IS HEREBY DEL ETED. 66. NEXT DISPUTE IN THIS APPEAL IS AGAINST THE ADDI TION OF RS.14,36,18,797/- ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT FROM THE INTERNATIONAL TRANSACTION OF PAYMENT FOR INTRA GROU P SERVICES IN THE NATURE OF BUSINESS PLANNING AND PROJECT REVIEW BOAR D. 67. BRIEFLY STATED, THE FACTS OF THIS ISSUE ARE THA T THE ASSESSEE REPORTED 22 INTERNATIONAL TRANSACTIONS CLUBBED UNDE R CONVENIENT HEADS, INCLUDING RECEIPT OF SERVICES, RECOVERY OF EXPENSES , CONSIDERATION FOR BANK GUARANTEE (RECEIVED), RECOVERY OF EXPENSES FROM UJVS AND REIMBURSEMENT OF EXPENSES TO UJVS. THE AO MADE REF ERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE TPO HA S TABLED ALL THE INTERNATIONAL TRANSACTIONS AT PAGE 2 OF HIS ORDER. THE INSTANT DISPUTE RELATES TO THE THREE INTERNATIONAL TRANSACTIONS CLU BBED UNDER THE HEAD RECEIPT OF SERVICES, WHICH HEAD HAS FOUR TRANSACT IONS IN TOTAL, NAMELY, RECEIPT OF SERVICES IN RELATION TO BUSINESS PLANNING FROM CAIRN ENERGY PLC. WORTH RS.11,93,02,725/-; RECEIPT OF SERVICES IN ITA NO.1459/DEL/2016 75 RELATION TO BUSINESS PLANNING FROM CAPRICORN ENERGY LTD. WORTH RS.2,15,18,396/-; RECEIPT OF SERVICES IN RELATION T O PROJECT REVIEW BOARD FROM CAPRICORN ENERGY LTD. WORTH RS.1,71,59,5 56/-; AND REIMBURSEMENT OF RELATED TRAVEL AND ACCOMMODATION E XPENSES TO CAPRICORN ENERGY LTD. AMOUNTING TO RS.1,04,29,960/- . THE TPO ACCEPTED FOURTH INTERNATIONAL TRANSACTION, BEING, ` REIMBURSEMENT OF RELATED TRAVEL AND ACCOMMODATION EXPENSES, AT ALP. THE ASSESSEE FOLLOWED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO DEMONSTRATE THAT THE FORMER T HREE INTERNATIONAL TRANSACTIONS WERE AT ALP, FOR WHICH IT PAID RS.14,3 6,18,797/- IN ADDITION TO MARK UP OF 10%. FOR SHOWING THE TRANSAC TIONS AT ALP, THE ASSESSEE IDENTIFIED TEN COMPARABLE COMPANIES WITH S UBSTANTIAL OPERATIONS IN UNITED KINGDOM. BESIDES, MULTIPLE YEA R DATA OF SUCH COMPANIES WAS USED FOR FINDING THE AVERAGE PROFIT R ATE OF 7.42%. IT WAS STATED THAT THE AES CHARGED 10% MARK UP, WHICH WAS NOT CLAIMED AS DEDUCTION BY THE ASSESSEE AND HENCE THE INTERNAT IONAL TRANSACTIONS WERE AT ALP. THE TPO DID NOT ACCEPT THE ASSESSEES APPROACH OF AGGREGATION OF THE TRANSACTIONS OF `RECEIPT OF SERV ICES WITH OTHER INTERNATIONAL TRANSACTIONS VIDE PAGE 22 PARA 5.1 OF HIS ORDER. FOR THIS, ITA NO.1459/DEL/2016 76 HE RELIED ON SEVERAL DECISIONS DISCUSSED ON PAGES 2 3-25 OF HIS ORDER. HE OPINED THAT SINCE THESE SERVICES ARE A SEPARATE CLASS OF TRANSACTIONS, THE SAME NEEDED TO BE ANALYSED SEPARATELY. THE ASS ESSEE WAS CALLED UPON TO SUBSTANTIATE ITS CLAIM OF HAVING RECEIVED S UCH SERVICES FROM ITS AE. THE ASSESSEE FILED A COPY OF AGREEMENT BETWEEN CAIRN ENERGY INDIA PVT. LTD. AND CAIRN ENERGY PLC ENTERED IN THE YEAR 2011 AND STATED THAT THE INDIAN OPERATIONS OF CAIRN ENERGY I NDIA PVT. LTD. WERE TRANSFERRED AND VESTED IN THE ASSESSEE ON GOING CON CERN BASIS W.E.F. 01.01.2010 IN PURSUANCE OF THE SCHEME OF DEMERGER A PPROVED BY THE HONBLE BOMBAY HIGH COURT VIDE ITS ORDER DATED 22.0 6.2010. AFTER CONSIDERING THE ASSESSEES REPLY AND OTHER RELEVANT MATERIAL AVAILABLE ON RECORD, THE TPO HELD THAT THERE WAS NO EVIDENCE THAT THE AES ACTUALLY PROVIDED SOME SERVICES AND, FURTHER, THE A SSESSEE FAILED TO DEMONSTRATE ANY NEED FOR THEM. HE FURTHER NOTICED T HAT THE ASSESSEE FAILED TO ESTABLISH ANY DIRECT NEXUS BETWEEN THE SE RVICES RECEIVED FROM ITS AE AND ITS BUSINESS OPERATIONS. IN THIS BACKDR OP, THE TPO HELD THAT THE ASSESSEE DID NOT RECEIVE ANY INTRA GROUP SERVIC ES AND IF AT ALL SOME SERVICES WERE THERE, THESE WERE MERELY DUPLICATE IN NATURE AND NO BENEFIT WAS DERIVED. SUCH SERVICES WERE ALSO HELD TO BE IN THE NATURE ITA NO.1459/DEL/2016 77 OF SHAREHOLDERS SERVICES REQUIRING NO PAYMENT OF C ONSIDERATION. THE TPO REQUIRED THE ASSESSEE TO STATE IF THE AE HAS RE NDERED SUCH SERVICES TO OTHERS AS WELL AND IF YES, THEN THE BAS IS OF ALLOCATION AMONGST VARIOUS ENTITIES BE FURNISHED. THE ASSESSEE DID NOT FURNISH SUCH INFORMATION BY STATING THAT IT WAS NOT PRIVY T O THE INFORMATION WHETHER THE AES RENDER SUCH SERVICES TO ANY OTHER A ES/THIRD PARTIES. FURTHER, THE ASSESSEE FAILED TO GIVE JUSTIFICATION OF THE RATE OF FEE PAID BY IT FOR THE SERVICES RENDERED. IN SUCH CIRCUMSTAN CES, THE TPO REJECTED THE ASSESSEES APPROACH OF AGGREGATION AND APPLICATION OF THE TNMM AS THE MOST APPROPRIATE METHOD. HE SELECTED CO MPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPR IATE METHOD. IN THE ABSENCE OF ANY DEMONSTRABLE BENEFIT ARISING TO THE ASSESSEE BECAUSE OF THESE SERVICES, THE TPO COMPUTED ALP AT NIL AND PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.14.36 CRORE. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (D RP) AND EVENTUALLY, THE AO MADE AN ADDITION OF EQUAL AMOUNT IN THE IMPUGNED ORDER. THE ASSESSEE IS AGGRIEVED AGAINST THE ADDIT ION. 68. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE ASSESSEE PAID RS.14 .36 CRORE AS COST OF ITA NO.1459/DEL/2016 78 THE ABOVE SERVICES AND ALSO MARK UP OF 10% AMOUNTIN G TO RS.1.43 CRORE. HOWEVER, WHILE COMPUTING THE TOTAL INCOME, THE ASSESSEE VOLUNTARILY ADDED BACK THE AMOUNT OF MARK UP CHARGE D BY THE AES AT RS.1.43 CRORE. INTRA GROUP SERVICES WERE RECEIVED BY THE ASSESSEE PURSUANT TO AGREEMENT OF 2011 SIGNED BETWEEN CAIRN ENERGY INDIA PTY. LTD. AND CAIRN ENERGY PLC LTD. AND ITS DIRECT AND INDIRECT SUBSIDIARIES FROM TIME TO TIME INCLUDING CAPRICORN ENERGY LTD. THE BUSINESS OF CAIRN ENERGY INDIA PTY LTD. WAS TRANSFE RRED TO THE ASSESSEE COMPANY BY MEANS OF DEMERGER. THAT IS HOW THIS AGR EEMENT, EFFECTIVE FROM 01.01.2010, IS RELEVANT FOR OUR PURP OSE. AS PER THIS AGREEMENT, A COPY OF WHICH HAS BEEN PLACED AT PAGES 394 ONWARDS OF THE PAPER BOOK, CAIRN ENERGY PLC AND CAPRICORN ENER GY LTD. AGREED TO PROVIDE SERVICES, WHICH TERM HAS BEEN DEFINED IN THE AGREEMENT TO MEAN ASSISTING CIL GROUP WITH PREPARATION OF BUSIN ESS PLANS. SUCH SERVICES ARE CONCERNED WITH THE BUSINESS OPERATION S, WHICH TERM HAS ALSO BEEN DEFINED TO MEAN: THE EXPLORATION, DEVELO PMENT AND PRODUCTION OF OIL AND GAS AND SUPPORTING AND ANCILL ARY ACTIVITIES (WHEREVER LOCATED)...... A LIST OF THE EMPLOYEES O F CAIRN ENERGY PLC., WHO RENDERED SUCH SERVICES HAS BEEN GIVEN ON PAGE 4 08 OF THE PAPER ITA NO.1459/DEL/2016 79 BOOK, BEING, ANNEXURE A TO THE AGREEMENT. SUCH ANNE XURE CONTAINS CERTAIN NAMES AND RATES OF HOURLY PAYMENT TO BE MAD E IN US DOLLARS. FOR EXAMPLE, JUDY ANDERSON WAS TO BE PAID @ US $ 29 3 PER HOUR, PHIL TRACY AND RICHARD HEATON @ US $ 1303 PER HOUR, TOM MORRIS @ US $ 293 PER HOUR. CLAUSE 2 OF THE AGREEMENT DEALI NG WITH OBJECT AND SCOPE IS RELEVANT FOR OUR PURPOSE, WHOSE MATERI AL PART IS REPRODUCED AS UNDER:- `2.1 THE OBJECT OF THIS AGREEMENT IS TO SET OUT TH E TERMS AND CONDITIONS FOR THE NON-EXCLUSIVE PROVISION BY CAIRN OF THE SERVICES TO CEIL AND ITS AFFILIATES IN SUPPORT OF, AND IN CONNECTION WITH, THE OPERATIONS. 2.2 CEIL OR ANY AFFILIATE OF CEIL FROM TIME TO TIME, ENGAGES CAIRN TO PROVIDE SUCH SERVICES TO CEIL OR THE RELEV ANT AFFILIATE AS IT MAY REQUEST, PROVIDED ALWAYS THAT C AIRN SHALL NOT RENDER ANY SUCH SERVICES TO CEIL OR ANY AFFILI ATE IF TO DO SO WOULD IN THE OPINION OF CAIRN (ACTING REASONABLY ) HAVE A MATERIAL ADVERSE EFFECT ON CALRNS EXISTING AND FUT URE OPERATIONS AND/OR BUSINESS. 2.3 CAIRN SHALL PERFORM THE SERVICES UNDER THIS A GREEMENT (I) WITH SUCH SKILL AND CARE AS COULD REASONABLY B E EXPECTED OF AN EXPERIENCED INTERNATIONAL COMPANY OPERATING IN T HE OIL AND GAS INDUSTRY BUT IN ANY EVENT TO A STANDARD WHICH I S AT LEAST EQUIVALENT TO, AND NOT LOWER THAN, THAT TO WHICH SU CH SERVICES ARE PROVIDED TO CAIRN OR ITS AFFILIATES; (II) IN ACCORDANCE WITH GOOD AND PRUDENT PRACTICE IN THE INTERNATIONAL OIL AND GAS INDUSTRY; (III) IN COMPLIANCE WITH ALL APPLICABLE LAWS; AND (IV) IN CONFORMITY WITH ALL DESCRIPTIONS AND SPEC IFICATIONS PROVIDED BY CEIL AND ITS AFFILIATES TO CAIRN. 2.4 CAIRN SHALL UNDERTAKE ITS OBLIGATIONS UNDER TH IS AGREEMENT AS AN INDEPENDENT CONTRACTOR AND SHALL NOT BE THE AGEN T OF, NOR HAVE ANY AUTHORITY TO BIND OR COMMIT, CEIL OR ANY A FFILIATE OF CEIL TO ANY THIRD PARTY. NOTHING IN THIS AGREEMENT AND NO ACTION TAKEN BY THE PARTIES OR THEIR AFFILIATES UND ER THIS ITA NO.1459/DEL/2016 80 AGREEMENT SHALL CONSTITUTE A PARTNERSHIP, ASSOCIATI ON, JOINT VENTURE OR OTHER CO-OPERATIVE ENTITY BETWEEN THE PA RTIES OF THEIR AFFILIATES. 2.5 THE SERVICES SHALL BE PROVIDED BY INDIVIDUALS WHO ARE SUITABLY SKILLED, EXPERIENCED AND QUALIFIED TO CARRY OUT TH E SERVICES. NOTHING IN THIS AGREEMENT SHALL RENDER ANY EMPLOYEE S OF CAIRN OR ANY AFFILIATES OF CAIRN AS EMPLOYEES, WORK ERS OR AGENTS OF CEIL OR ANY AFFILIATE OF CEIL. 2.6 IF REQUIRED, CEIL SHALL OBTAIN AT ITS OWN COS T AND EXPENSE, ALL MATERIAL GOVERNMENTAL AUTHORISATIONS (INCLUDING WIT HOUT LIMITATION ANY LICENCES, PERMITS, EXCEPTIONS, AND O THER AUTHORISATIONS) AND ALL OTHER THIRD PARTY CONSENTS THAT MAY BE REASONABLY REQUIRED FROM TIME TO LIME FOR CAIRN'S PERFORMANCE OF THE SERVICES (OR ANY PART THEREOF). 2.7 UNLESS OTHERWISE AGREED BY THE PARTIES, CAIRN SHALL FURNISH ALL RESOURCES, PERSONNEL, FACILITIES AND EQUIPMENT NECESSARY TO PERFORM THE SERVICES, AND PROVIDE ANY NECESSARY ACC ESS THERETO TO CEIL AND ITS AFFILIATES IN CONNECTION THEREWITH 2.8 CAIRN AT ITS OWN EXPENSE, SHALL AT ALL TIMES DU RING THE TERM OF THIS AGREEMENT CARRY AND MAINTAIN (AND SHALL PROCUR E THAT EACH OF ITS AFFILIATES AND ANY THIRD PARTY WHICH PROVID ES SERVICES CARRIES AND MAINTAINS), INSURANCE OF SUCH TYPE, AMO UNT AND NATURE AS IT MAY BE REQUIRED BY LAW AND GOOD AND PR UDENT PRACTICE TO CARRY SAVE THAT NEITHER CAIRN NOR ANY O F ITS AFFILIATES SHALL BE REQUIRED TO PUT IN PLACE ANY AD DITIONAL INSURANCE AS A RESULT OF ITS PERFORMANCE OF THE SER VICES UNDER THIS AGREEMENT. 69. ON GOING THROUGH THE SCOPE OF THE AGREEMENT, IT IS MANIFESTED THAT CAIRN ENERGY PLC. AND CAPRICORN ENERGY LTD. PR OVIDED SERVICES TO CAIRN ENERGY INDIA PTY. LTD., WHOSE UNDERTAKING WAS ACQUIRED BY THE ASSESSEE. IT WAS ALSO SUBMITTED TO THE TPO VIDE ITS LETTER DATED 17.11.2014, COPY AVAILABLE AT PAGE 371 ONWARDS OF T HE PAPER BOOK, THAT OIL AND GAS INDUSTRY IS A HIGHLY TECHNICAL, CA PITAL INTENSIVE AND RISKY INDUSTRY AND, AS SUCH, INTERNATIONAL KNOWLEDG E AND EXPERIENCE ITA NO.1459/DEL/2016 81 FOR OPERATIONS LIKE EXPLORATION, DEVELOPMENT AND PR ODUCTION IS ALWAYS REQUIRED. THE ASSESSEE FURTHER EXPLAINED THAT IT S TARTED PRODUCTION OF CRUDE OIL IN RAJASTHAN AND FOR THAT PURPOSE TWO COM MITTEES VIZ., BUSINESS PLAN COMMITTEE AND PROJECT REVIEW BOARD WE RE FORMED ALSO CONSISTING OF HIGHLY TECHNICAL PROFESSIONALS FROM A ES. OVERVIEW OF THE BUSINESS PLAN COMMITTEE AND THE PROJECT REVIEW BOARD WAS SET OUT IN DETAIL. CERTAIN COPIES OF E-MAILS EXCHANGED BETWEEN EXPERTS OF AES AND THE ASSESSEES EMPLOYEES WERE ALSO PLACED B EFORE THE AO WHICH ARE AVAILABLE AT PAGES 436 ONWARDS OF THE PAP ER BOOK. IN SUCH E-MAIL COMMUNICATIONS, PLANNING, ACTUAL CONDUCT OF THE OPERATIONS AND CONNECTED MATTERS HAVE BEEN DISCUSSED. THEN, TH ERE IS A COPY OF DEBIT NOTE ON PAGE 455 OF THE PAPER BOOK WHICH RECO RDS THE AMOUNT BILLED AT US $ 611172.57, BEING, CHARGES FOR BUSINE SS PLANNING ON THE BASIS OF HOURLY RATES OF THE EXPERTS. PAGES 456 TO 459 ARE THE DETAILS OF SUCH BILLED AMOUNT WHICH RECORD NAME OF THE EMPLOYE E OF THE AE, NUMBER OF HOURS, HOURLY RATE AND TOTAL AMOUNT IN US DOLLARS. SIMILARLY, PAGE 460 IS A COPY OF ANOTHER INVOICE DA TED 31.10.2010 WITH VALUE OF US $ 103795.69. THIS ALSO TALKS OF C HARGES FOR BUSINESS PLANNING TIME WRITING. SUBSEQUENT PAGES CONTAIN SI MILAR DETAILS OF ITA NO.1459/DEL/2016 82 EMPLOYEES WHO WORKED FOR THE ASSESSEE, NUMBER OF HO URS SPENT, RATE PER HOUR AND THE TOTAL AMOUNT. FACTUM OF THE ASSES SEE HAVING RECEIVED SERVICES FROM ITS AE IS CLEARLY EVIDENCED FROM THES E DOCUMENTS. THE VIEW POINT OF THE TPO THAT SUCH SERVICES WERE DUPLI CATE IN NATURE AS THE ASSESSEE WAS ALREADY IN SIMILAR LINE OF BUSINES S, IS NOT CORRECT. THE ASSESSEE UNDERTOOK EXPLORATION WORK IN RAJASTHAN OI L WELLS IN THE LATER PART OF THE PRECEDING YEAR. THE ASSESSEE ALSO EXPLA INED TO THE TPO THAT IT IS A HIGHLY TECHNICAL WORK REQUIRING SERVICES OF EXPERTS FOR OPTIMISING PRODUCTION. SUCH CONTENTIONS HAVE NOT B EEN CONTROVERTED WITH ANY COGENT MATERIAL. THUS, THE CLAIM OF THE RE VENUE THAT THE ASSESSEE WAS ALREADY HAVING PERSONNEL FOR DOING SIM ILAR WORK AND THE RECEIPT OF SERVICES WAS A CASE OF DUPLICATION OF SE RVICES, IS BELIED BECAUSE OF THE MAGNITUDE AND COMPLEXITY OF THE WORK UNDERTAKEN BY THE ASSESSEE DURING THE YEAR IN RAJASTHAN. THIS PRO VES THAT THE ASSESSEE DID RECEIVE SERVICES FROM ITS AE IN THE EXPLORATION , DEVELOPMENT AND PRODUCTION OF OIL AND SUCH SERVICES ARE NOT DUPLICA TE IN NATURE. WHEN THE FACT OF THE ASSESSEE HAVING RECEIVED THE SERVIC ES, WHICH ARE NOT DUPLICATE IN NATURE, IS PROVED, THE AUTHORITIES CAN NOT DETERMINE NIL ALP OF THE PAYMENT MADE FOR SUCH SERVICES. ITA NO.1459/DEL/2016 83 70. THIS BRINGS US TO THE QUESTION OF DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF SERVICES. WE HAVE NOTED ABOVE THAT THE ASSESSEE AGGREGATED THE INTERNATIONA L TRANSACTIONS AND DETERMINED ALP ON THE BASIS OF TNMM. 71. SECTION 92(1) OF THE ACT PROVIDES THAT: ANY I NCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE PROCEDURE FOR COMPUTA TION OF ARMS LENGTH PRICE HAS BEEN SET OUT IN SECTION 92C. SUB-S ECTION (1) OF SECTION 92C PROVIDES THAT: THE ARMS LENGTH PRICE IN RELA TION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CL ASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR S UCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE. FIVE SPECIFIC METHODS HAVE BEEN ENSHRINED IN THIS PROVISION APART FROM ONE GENERAL METHOD, BEING : SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOAR D. OUT OF THE FIVE SPECIFIC METHODS, THE FIRST ONE IS COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AND THE FOURTH ONE IS TRANSACTIONAL NE T MARGIN METHOD ITA NO.1459/DEL/2016 84 (TNMM). A BARE READING OF SECTION 92C(1) BRINGS OU T THAT: (I) THE ALP IS REQUIRED TO BE DETERMINED OF AN INTERNATIONAL TRANSACTION; AND (II) THE ALP OF SUCH AN INTERNATIONAL TRANSAC TION IS TO BE DETERMINED BY APPLYING THE MOST APPROPRIATE METHOD OUT OF THE PRESCRIBED METHODS WHICH, INTER ALIA , INCLUDE CUP AND TNMM. 72. THE FIRST INGREDIENT IS THAT THE ALP SHOULD BE DETERMINED IN RELATION TO AN INTERNATIONAL TRANSACTION. THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFINED IN SECTION 92B TO MEA N : ` A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, ... IT IS DISCERNIBLE FROM THE ABOVE DEFINITION OF INTERNATIONAL TRANSACT ION GIVEN IN SECTION 92B THAT IT REFERS TO A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES. THE TERM TRANSACTION HAS BEEN DEFIN ED IN SECTION 92F(V) AND ALSO IN RULE 10A(D) OF THE INCOME-TAX RULES, 1 962. THE RULE DEFINES THE TERM TRANSACTION TO INCLUDE: A NUMBER OF CLOSELY LINKED TRANSACTIONS. ON GOING THROUGH THE ABOVE PROVISIONS, IT BECOMES ITA NO.1459/DEL/2016 85 PALPABLE THAT THE ARMS LENGTH PRICE IS ESSENTIALLY DETERMINED ON TRANSACTION-BY-TRANSACTION APPROACH FOR EACH INTERN ATIONAL TRANSACTION SEPARATELY; AND FOR THAT PURPOSE, A TRANSACTION IN SINGULAR ALSO INCLUDES PLURAL FOR CLOSELY LINKED TRANSACTIONS. IN OTHER W ORDS, WHERE THE TRANSACTIONS ARE NOT CLOSELY LINKED, THEN THEIR ALP SHOULD BE DETERMINED SEPARATELY FOR EACH INTERNATIONAL TRANSA CTION AND SUCH DETERMINATION OF ALP FOR AN INTERNATIONAL TRANSACTION AS PER SECTION 92C(1) IS DONE AS PER THE MOST APPROPRIATE METHOD. TO PUT IT SIMPLY, EACH INTERNATIONAL TRANSACTION IS VIEWED SEPARATELY AND INDEPENDENT OF OTHER INTERNATIONAL TRANSACTIONS FOR DETERMINING IT S ALP BY USING ONE OF THE GIVEN METHODS, WHICH IS THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRA NSACTION OR FUNCTIONS PERFORMED, ETC. IT IS IMPERMISSIBLE TO COMBINE ALL THE INTERNATIONAL TRANSACTIONS FOR DETERMINING THEIR ALP IN A UNIFIED MANNER WHEN SUCH TRANSACTIONS ARE DIVERSE IN NATURE. 73. IT IS SIMPLE AND PLAIN THAT CROSS SUBSIDIZATION OF THE INTERNATIONAL TRANSACTIONS IN A COMBINED APPROACH IS IMPERMISSIBL E. IT IS OVERT FROM SECTION 92(1) THAT IF AN INTERNATIONAL TRANSACTION IS RECORDED SHOWING A LOWER INCOME THAN ITS ALP INCOME, THEN IT IS THE HI GHER ALP INCOME, ITA NO.1459/DEL/2016 86 WHICH SHOULD BE CONSIDERED FOR THE PURPOSE OF COMPU TATION OF THE TOTAL INCOME. SECTION 92(3) OF THE ACT MANIFESTS THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTA TION OF INCOME HAVING REGARD TO ALP HAS THE EFFECT OF REDUCING INC OME CHARGEABLE TO TAX. THE NET EFFECT OF SECTION 92(3) IS THAT IF TRA NSACTED VALUE INCOME FROM AN INTERNATIONAL TRANSACTION IS MORE THAN ITS ARMS LENGTH INCOME, THEN, THE ARMS LENGTH INCOME SHOULD BE DISCARDED A ND THE ACTUAL INCOME SHOULD BE CONSIDERED. TO SUM UP, IT IS THE H IGHER OF ACTUAL INCOME OR THE ARMS LENGTH INCOME FROM AN INTERNATI ONAL TRANSACTION, WHICH IS TAKEN INTO CONSIDERATION FOR COMPUTING THE TOTAL INCOME. IT DOES NOT MEAN THAT AN ACTUAL MORE INCOME FROM AN IN TERNATIONAL TRANSACTION VIS-A-VIS ITS ARMS LENGTH INCOME SHOULD BE COMBINED WITH ANOTHER UNRELATED TRANSACTION WHICH GIVES ACTUAL IN COME LESS THAN THE ARMS LENGTH INCOME AND THEN BOTH BE PROCESSED TOGE THER UNDER THIS CHAPTER SO AS TO SET OFF THE INCOME (TRANSACTED INC OME MINUS ARMS LENGTH INCOME) FROM THE FIRST TRANSACTION WITH THE POTENTIAL INCOME ARISING FROM THE SECOND TRANSACTION (ARMS LENGTH I NCOME MINUS TRANSACTED VALUE INCOME). WHEN WE CONSIDER MORE THA N ONE SEPARATE TRANSACTION UNDER THE COMBINED UMBRELLA OF TNMM ON AN ENTITY LEVEL, ITA NO.1459/DEL/2016 87 IT IS QUITE POSSIBLE THAT A PROBABLE ADDITION ON AC COUNT OF TRANSFER PRICING ADJUSTMENT ARISING FROM ONE INTERNATIONAL T RANSACTION MAY BE GRABBED BY THE INCOME FROM THE OTHER INTERNATIONAL TRANSACTION GIVING HIGHER INCOME ON TRANSACTED VALUE. 74. THE HONBLE JURISDICTIONAL HIGH COURT IN KNORR BREMSE INDIA (P) LTD. VS. ACIT (2016) 380 ITR 307 (P&H) CONSIDERED THE QUESTION OF AGGREGATION OF INTERNATIONAL TRANSACTIONS. THEI R LORDSHIPS HELD THAT SEVERAL TRANSACTIONS BETWEEN TWO OR MORE AES CAN FO RM A SINGLE COMPOSITE TRANSACTION IF THEY ARE CLOSELY LINKED TR ANSACTIONS AND THE ONUS IS ALWAYS ON THE ASSESSEE TO ESTABLISH THAT SU CH TRANSACTIONS ARE PART OF AN INTERNATIONAL TRANSACTION PURSUANT TO AN UNDERSTANDING BETWEEN VARIOUS MEMBERS OF A GROUP. THE HONBLE HI GH COURT OBSERVED THAT I N CASE OF A PACKAGE DEAL WHERE EACH ITEM IS NOT SEPARATELY VALUED BUT ALL ARE GIVEN A COMPOSITE PRI CE, THESE ARE ONE INTERNATIONAL TRANSACTION. IT WENT ON TO HOLD THAT WHERE A NUMBER OF TRANSACTIONS ARE PRICED DIFFERENTLY BUT ON THE UNDE RSTANDING THAT THE PRICING WAS DEPENDENT UPON THE ASSESSEE ACCEPTING A LL OF THEM TOGETHER (I.E. EITHER TAKE ALL OR LEAVE ALL), THEN IT IS ALSO AN INTERNATIONAL TRANSACTION. BUT IT WILL BE ON THE ASSESSEE TO PROV E THAT ALTHOUGH EACH ITA NO.1459/DEL/2016 88 IS PRICED SEPARATELY, BUT THEY ARE PROVIDED UNDER O NE COMPOSITE AGREEMENT. IT STILL FURTHER HELD THAT EACH COMPONEN T MAY BE PRICED DIFFERENTLY ALSO, BUT IT WILL HAVE TO BE SHOWN THAT THEY ARE INEXTRICABLY LINKED THAT ONE CANNOT SURVIVE WITHOUT OTHER. MEREL Y BECAUSE PURCHASE OF GOODS AND ACCEPTANCE OF SERVICES LEAD TO MANUFAC TURE OF FINAL PRODUCT, IT DOES NOT FOLLOW THAT THEY ARE DEPENDENT TRANSACTIONS. 75. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE INTERNATIONAL TRANSACTIONS COMBINED BY THE ASSESSEE FOR SHOWING THEM AT ALP CANNOT BE AGGREGATED AS THEY DO NOT SATISFY THE ABOVE CRITERIA LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN KNORR BREMSE INDIA (P) LTD.(SUPRA) . FIRSTLY, THERE IS NO PACKAGE DEAL AND THE INTERNATIONAL TRANSACTION IN QUESTION IS SEPARATELY VALUED. SECONDLY, DESPITE THE FACT THAT THE INTERNATIONAL TRANSACTION S ARE PRICED DIFFERENTLY, BUT, THERE IS NOTHING TO SHOW AN UNDER STANDING THAT THE PRICING WAS DEPENDENT UPON THE ASSESSEE ACCEPTING A LL OF THEM TOGETHER. BESIDES, THE ASSESSEE HAS NOT SHOWN ANY INEXTRICABLE LINK BETWEEN THESE TRANSACTIONS AS ONE NOT SURVIVING WIT HOUT THE OTHER. WE, THEREFORE, UPHOLD THE VIEW POINT OF THE TPO IN REJECTING THE AGGREGATION APPROACH ADOPTED BY THE ASSESSEE. ITA NO.1459/DEL/2016 89 76. HAVING HELD THAT THE INTERNATIONAL TRANSACTIONS OF `RECEIPT OF SERVICES SHOULD BE SEPARATELY BENCHMARKED, THE NEX T CRUCIAL QUESTION WHICH ARISES FOR OUR CONSIDERATION IS THE DETERMINA TION OF THE MOST APPROPRIATE METHOD. IT IS SEEN THAT THE ASSESSEE AP PLIED THE TNMM AS THE MOST APPROPRIATE METHOD ON AN AGGREGATE BASIS, WHICH HAS BEEN REJECTED BY THE TPO. OBVIOUSLY, THE TNMM APPLIED BY THE ASSESSEE SIMPLY ESTABLISHES THE AGGREGATE PRICE PAID FOR IND EPENDENT INTERNATIONAL TRANSACTIONS TO BE AT ALP. SINCE THE INTERNATIONAL TRANSACTION OF `RECEIPT OF SERVICES HAS BEEN HELD ABOVE TO BE SEPARATE, THE DETERMINATION OF ITS ALP ALSO NEEDS TO BE DONE DISTINCTLY. 77. NOW LET US EXAMINE IF THE APPLICATION OF THE CU P METHOD, AS EMPLOYED BY THE TPO, IS IN ORDER FOR DETERMINING TH E ALP OF `RECEIPT OF SERVICES. BY NOW, IT IS FAIRLY SETTLED THROUGH A CATENA OF DECISIONS THAT THE CUP IS THE MOST APPROPRIATE METHOD TO DETE RMINE THE ALP OF AN INTERNATIONAL TRANSACTION BECAUSE IT SEEKS TO CO MPARE THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICE S RENDERED, PROVIDED PROPER COMPARABLES ARE AVAILABLE. IT IS UNDER THIS METHOD ALONE THAT THE PRICE CHARGED OR PAID IS DIRECTLY COMPARED WITH THE PRICE CHARGED OR PAID IN AN UNCONTROLLED COMPARABLE TRANSACTION. THE REMAINING FOUR ITA NO.1459/DEL/2016 90 SPECIFIC METHODS SEEK TO MAKE COMPARISON OF THE PRI CE CHARGED OR PAID INDIRECTLY THROUGH THE MEDIUM OF NORMAL PROFIT ARISING IN A COMPARABLE UNCONTROLLED TRANSACTION. FURTHER, THE C UP METHOD IS A TRANSACTION SPECIFIC METHOD WHICH STRIVES TO DETERM INE THE ALP OF AN INTERNATIONAL TRANSACTION ON A MICRO LEVEL, THEREBY LENDING MORE CREDIBILITY TO THE ALP OF A TRANSACTION. AS SUCH, WE HOLD THAT THE CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION UNDER THE PRESENT CIRCUMS TANCES AND THE TPO WAS FULLY JUSTIFIED IN APPLYING THE CUP AS THE MOST APPROPRIATE METHOD. 78. TURNING TO THE METHODOLOGY ADOPTED, WE FIND THA T THE TPO THOUGH APPLIED CUP METHOD BUT DETERMINED NIL ALP WI THOUT MAKING REFERENCE TO ANY COMPARABLE UNCONTROLLED TRANSACTIO NS. IT WAS ON ACCOUNT OF HIS HAVING CANVASSED A VIEW THAT EITHER THE SERVICES WERE NOT RECEIVED BY THE ASSESSEE OR WERE DUPLICATE IN N ATURE. SUCH A VIEW HAS BEEN OVERTURNED BY US IN EARLIER PARAS. UNDER T HESE CIRCUMSTANCES, WE ARE LEFT WITH NO OPTION BUT TO SET ASIDE THE IMP UGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF SERVICES PRIMARILY ITA NO.1459/DEL/2016 91 UNDER THE CUP METHOD. IN CASE, THE TPO FINDS THAT T HE CUP METHOD CANNOT BE APPLIED EITHER DUE TO NON-AVAILABILITY OF THE RELEVANT DATA OR FOR SOME OTHER GENUINE REASONS, HE IS FREE TO APPLY ANY OTHER APPROPRIATE METHODS FOR A FRESH DETERMINATION OF TH E ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF SERVICES. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY O F HEARING IN SUCH FRESH PROCEEDINGS. 79. THE NEXT CHALLENGE IN THIS APPEAL IS TO AN ADDI TION OF RS.154,53,28,255/-, BEING, ARMS LENGTH INTEREST ON REDEEMABLE PREFERENCE SHARES OF CAIRN INDIA LTD. RE-CHARACTERI SED AS UNSECURED LOAN ADVANCED TO THE AE. FACTS APROPOS THIS GROUND ARE THAT DURING THE FINANCIAL YEAR 2009-10, THE ASSESSEE INVESTED I N 1,75,560 REDEEMABLE PREFERENCE SHARES OF FACE VALUE OF GBP 1 000 EACH OF CAIRN INDIA HOLDING LTD. (CIHL). TOTAL INVESTMENT O F RS.1343,76,37,000/- WAS MADE IN THE JERSEY BASED 10 0% SUBSIDIARY OF THE ASSESSEE BY WAY OF THE PREFERENCE SHARES. CIHL IS AN INVESTMENT COMPANY. THE PREFERENCE SHARES WERE CARRYING 0% CO UPON RATE AND THE ASSESSEE STATED IN ITS TP STUDY REPORT FOR THE FINANCIAL YEAR 2009- 10 THAT CIHL DID NOT DECLARE DIVIDEND ON ANY CATEGO RY OF SHARE CAPITAL ITA NO.1459/DEL/2016 92 INCLUDING THE REDEEMABLE PREFERENCE SHARES. WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS FOR THE ASSES SMENT YEAR 2010-11, THE TPO RE-CHARACTERISED THE INVESTMENT IN REDEEMAB LE PREFERENCE SHARES AS UNSECURED LOAN ADVANCED TO CIHL. INTERES T @ 14.88% WAS TREATED AS ARMS LENGTH RATE WHICH SHOULD HAVE BEEN CHARGED ON SUCH RE-CHARACTERISED TRANSACTION. RESULTANTLY, A TRANSF ER PRICING ADJUSTMENT OF RS.84,36,33,259/- WAS MADE IN THE PRECEDING YEAR . 80. ADOPTING THE VIEW TAKEN FOR THE IMMEDIATELY PRE CEDING ASSESSMENT YEAR, THE TPO FOR THE INSTANT YEAR ALSO CHARGED INTEREST @ 11.69% ON THE RE-CHARACTERISED INVESTMENT IN REDEEM ABLE PREFERENCE SHARES AS DEEMED LOAN. THIS RESULTED INTO THE INSTA NT TRANSFER PRICING ADDITION. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP AND THE AO MADE SUCH ADDITION IN THE COMPUTATION OF INCOME UNDER THE NORMAL PROVISIONS. THE ASSESSEE IS AGGRIEVED AGAINS T SUCH ADDITION. 81. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ORIGIN OF THE IN STANT ADDITION IS FROM THE PROCEEDINGS FOR THE IMMEDIATELY PRECEDING YEAR, IN WHICH THE TRANSACTION OF INVESTMENT IN REDEEMABLE PREFERENCE SHARES IN THE ITA NO.1459/DEL/2016 93 ASSESSEES 100% SUBSIDIARY COMPANY WAS RE-CHARACTER ISED AS LOAN. ON A SPECIFIC QUERY, IT WAS STATED THAT THE ORDER O F THE AO MAKING SUCH ADDITION FOR THE PRECEDING ASSESSMENT YEAR IS STILL PENDING IN APPEAL BEFORE THE CIT(A) AND THERE IS NO FINALITY T O THE ISSUE. SINCE THE INSTANT TRANSFER PRICING ADDITION HAS ITS FOUNDATIO N IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR IN WHICH RE-CHARACTERISAT ION OF THE TRANSACTION OF INVESTMENT IN REDEEMABLE PREFERENCE SHARES WAS DONE, WE ARE HANDICAPPED TO INDEPENDENTLY DECIDE THE ISSU E BEFORE US UNLESS THE PRECEDING YEAR ON THE SAME ISSUE IS DECIDED. IT IS FOR THE REASON THAT IF THE RE-CHARACTERIZATION IS HELD TO BE VALID , THEN THE ADDITION WILL BE REQUIRED TO BE MADE IN THIS YEAR AS WELL. IF ON THE OTHER HAND, THE RE-CHARACTERIZATION IS HELD TO BE INVALID, THIS ADD ITION WILL HAVE TO BE DELETED. UNDER THESE CIRCUMSTANCES, WE SET ASIDE TH E IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER TO THE FILE OF A O/TPO FOR DECIDING IT AFRESH IN CONFORMITY WITH THE VIEW OF THE HIGHER AP PELLATE AUTHORITY FOR THE PRECEDING YEAR, AVAILABLE BEFORE THEM AT THE TI ME OF DECISION. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD IN SUCH PROCEEDINGS. ITA NO.1459/DEL/2016 94 82. GROUND NO.8 IS AGAINST NOT ALLOWING CREDIT FOR TAX DEDUCTED AT SOURCE AND ADVANCE TAX AS CLAIMED IN THE RETURN OF INCOME. THE AO IS DIRECTED TO ALLOW NECESSARY CREDIT FOR THE ADVANCE TAX PAID BY THE ASSESSEE AND TDS PAID ON ITS BEHALF, AFTER NECESSAR Y VERIFICATION. 83. THE LAST GROUND REGARDING THE STATUTORY INTERES T IS CONSEQUENTIAL. 84. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 09.10.20 17. SD/- SD/- [SUDHANSHU SRIVASTAVA] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 09 TH OCTOBER, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.