The DCIT, Circle-1(2), Baroda V. M/s. Liberty Phosphate Ltd., Baroda

ITA 160/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6438 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 06-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 16-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B L YADAV; R N PARBAT
• Keywords: Capital asset; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 43B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI A.N. PAHUJA, ACCOUNTANT MEMBER DATE OF HEARING : 06/06/2011 DRAFTED ON: 07 /06/2011 1. ITA NO.160/AHD/2009 A.Y. 2004-05 2. ITA NO.503/AHD/2009 A.Y. 2005-06 THE DCIT CIRCLE-1(2) BARODA VS. LIBERTY PHOSPHATE LTD. 74/75, GIDC NANDESARI VARODARA 391 340 PAN/GIR NO. : AAACL 3600 N ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI R.N. PARBAT & SHRI B.L. YADAV, D.R. RESPONDENT BY: SHRI SUNIL TALATI, A.R. O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THESE TWO APPEALS HAVE BEEN FILED BY THE REVENUE O F THE SAME RESPONDENT-ASSESSEE AND FOR THE SAKE OF CONVENIENC E SINCE THE BASIC GROUNDS AS ALSO THE RELATED FACTS ARE IDENTICAL, HE NCE, CONSOLIDATED AND HEREBY DECIDED BY THIS COMMON ORDER. (A) ITA NO.160/AHD/2009 FOR ASSESSMENT YEAR 2004-05 2. REVENUE HAS CHALLENGED THE ORDER OF THE CIT (A)-V, BARODA DATED 1/10/2008 ON THE FOLLOWING GROUNDS:- 1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 2 - ADDITION OF RS.15,67,382/- MADE ON ACCOUNT OF REPAIRS AND MAINTENANCE OF BUILDING AND PLANT & MACHINERY AS CAPITAL EXPENDITURE. (B) THE LD. CIT(A) FAILED TO APPRECIATE THAT RENEWA L, REPLACEMENT OR MODIFICATION OF AN ASSET OR PART OF AN ASSET CANNOT BE TREATED AS ALLOWABLE EXPENDITURE UNDER THE INCOME-TAX ACT, THOUGH AS PER ACCOUNTING NORMS, THESE COULD BE TREATED AS REVENUE EXPENDITURE OR CURRENT EXPENDITURE IN THE LIGHT OF SUPREME COURT DECISION IN THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT 224 ITR 414 AND CIT VS. SARAVANA SPINNING MILLS PVT.LTD. 293 ITR 201(SC). 3. FACTS IN BRIEF IN RESPECT OF THIS ISSUE AS APP EARED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.143(3) OF THE I.T.ACT DATED 27/11/2006 WERE THAT THE ASSESSEE-COMPANY IS IN THE BUSINESS OF MANUFACTURING OF PHOSPHATIC FERTILIZERS. IT WA S OBSERVED BY THE AO THAT A SUM OF RS.35,86,601/- WAS DEBITED IN RES PECT OF REPAIRS AND MAINTENANCE. IN RESPECT OF BUILDING REPAIRS TH E AO HAS REPRODUCED A LIST OF ITEMS OF EXPENDITURE TOTALLING TO RS.28,33,767=72. THE OBSERVATION OF THE AO WAS THAT ON PHYSICAL VERIFICATION OF THE BILLS IT WAS FOUND THAT THE MAT ERIAL PURCHASED WAS IN RESPECT OF FABRICATION, CONSTRUCTION, FLOORING, HENCE, IN THE NATURE OF CAPITAL EXPENDITURE. IN COMPLIANCE OF THE SHOW- CAUSE NOTICE IT WAS SUBMITTED THAT THE EXPENDITURE ON BUILDING WAS IN THE NATURE OF REVENUE EXPENSES. EXPLANATION SUBMITTED IS REPRODUC ED BELOW : BUILDING WE ARE TO BRING TO YOUR KIND KNOWLEDGE THAT THE CAP ITAL EXPENDITURES INCURRED FOR CONSTRUCTION OF NEW ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 3 - BUILDING/FACILITIES AT UDAIPUR AND NANDESARI (BAROD A) AMOUNTING TO RS.2833767.72 HAS ALREADY BEEN CAPITAL IZED DURING THE A.Y. 2004-05 AND THE EXPENDITURES UNDER SCRUTINY AMOUNTING TO RS.359785/- IS ON ACCOUNT OF THE CURRE NT REPAIRS OF FACTORY BUILDING SITUATED AT F-227, MEWAR INDUST RIAL AREA, UDAIPUR ADMEASURING ABOUT 5296 SQ.MTRS. YOURS GOOD SELF WILL APPRECIATE THAT THE NATURE OF BUSINESS OF THE COMPANY IS MANUFACTURER AND SALE OF CHEMICAL FERTILIZER NAMELY SINGLE SUPER PHOSPHATE. ONE OF THE INGREDIENT FOR MANUFACTURE OF SINGLE SUPER PHOSPHATE IS SULPHURIC ACID, AND USE O F SULPHURIC ACID RESULTS IN GENERATION OF ACIDIC FUME S WHICH IS BY BASIC NATURE IS HIGHLY CORROSIVE AND HARMS TH E CIVIL STRUCTURE AND THE PLANT AND MACHINERY EMBEDDED THRE AT ON REGULAR BASIS, AND ACCORDINGLY IT IS IMPERATIVE TO CARRY OUT THE REPAIRING OF CIVIL STRUCTURES ON DAY-TO-DAY BAS IS AS PREVENTIVE MEASURE IN ORDER TO MAINTAIN THE FACTORY BUILDINGS AND PLANT AND MACHINERY SITUATED THEREAT IN RUNNING AND GOOD CONDITION TO FETCH DAY-TO-DAY PROD UCTION AND SAFETY OF MAN AND MATERIAL EMPLOYED THEREAT, AN D ALSO TO AVOID UNNECESSARY HASSLE OF THE GOVERNMENT DEPARTME NT ON ACCOUNT OF SAFETY AND POLLUTION. 3.1. HOWEVER, THE AO WAS NOT CONVINCED AND BY REFER RING A DECISION OF HONBLE SUPREME COURT IN THE CASE OF B ALLIMAL NAVAL KISHORE & ANR. VS. CIT REPORTED AT (1997) 224 ITR 4 14 (SC) HELD THAT THE EXPENDITURE WAS A CAPITAL EXPENDITURE. TH E MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. ON H EARING THE SUBMISSIONS OF BOTH THE SIDES, THE CONTENTION OF TH E ASSESSEE WAS ACCEPTED VIDE FOLLOWING RELEVANT PARAGRAPHS: 5.2. I HAVE GONE THROUGH THE FACTS OF THE CASE, OB SERVATIONS OF THE AO AND THE SUBMISSIONS OF THE APPELLANT AS WELL. IT IS SEEN THAT THE ASSESSING OFFICER THOUGH THAT MAJOR R ENOVATION ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 4 - WORK WAS CARRIED OUT BY THE ASSESSEE FOR UPGRADING FIXED ASSETS. HENCE ADVANTAGE OF ENDURING NATURE IS ACQU IRED. EVEN REPAIRS RESULTING IN ENDURING BENEFIT WOULD CO NSTITUTE CAPITAL EXPENDITURE ACCORDING TO DECISION OF THE AP EX COURT IN THE CASE OF BALLIMAL NAVAL KISHOR V/S. CIT 224 ITR 414 AND AS SUCH TREATED THE CURRENT REPAIRS AS CAPITAL EXPE NDITURE. IT IS GATHERED THAT THE APPELLANT HAS A SYSTEM FOR DIS TINGUISHING CAPITAL AND REVENUE EXPENDITURE AND LARGE AMOUNT OF EXPENDITURE WHICH WAS OF CAPITAL EXPENDITURE HAS BE EN SO ACCOUNTED. CAPITAL EXPENDITURE OF RS.2833767/- ON BUILDING AND RS.5932008/- ON MACHINERY, INCURRED BY THE APPE LLANT IS ALREADY CAPITALIZED SEPARATELY AND THE EXPENDITURE LISTED BY THE ASSESSING OFFICER IS REVENUE EXPENDITURE AND NO T CAPITAL EXPENDITURE. IT IS ALSO OBSERVED THAT THE EXPENDIT URE ON REPAIRS AND REPLACEMENTS IS REASONABLE CONSIDERING THE SIZE OF THE FACTORY (5296 SQUARE METERS) AND NATURE OF BUSI NESS (APPELLANT USES SULPHURIC ACID WHICH IS CORROSIVE A ND HARMS CIVIL STRUCTURE AND PLANT & MACHINERY). REPAIRS & MAINTENANCE EXPENDITURE DEPENDS UPON NATURE OF INDU STRIES AS WELL AS USES OF THE PRODUCT. REGARDING EXPENDIT URE ON CRANE BUCKET, IT IS SENT HAT NO NEW CRANE IS PURCHA SED AND THE EXPENDITURE REPRESENTS REPLACEMENT OF PARTS OF CRAN E. 5.3.1. REGARDING THE EXPENDITURE LISTED IN THE AS SESSMENT ORDER, THE LIST GIVES NO INDICATION THAT THE EXPEND ITURE IS OF CAPITAL NATURE. FOR EXAMPLE, WHEN EXPENDITURE ON M .S. ANGLE IS INCURRED, THE SAME MAY BE FOR CREATING NEW STRUC TURE OR FOR REPLACING SUCH ANGLE FORMING PART OF EXISTING STRUC TURE. THE EXPENDITURE IN FORMER CASE WOULD BE CAPITAL EXPENDI TURE AND IN THE LATTER CASE IT WOULD BE REVENUE EXPENDITURE. ASSESSING OFFICER WAS NOT JUSTIFIED IN HOLDING THAT THE EXPEN DITURE ON M.S. ANGLE IS ALWAYS CAPITAL EXPENDITURE. SIMILARL Y, M.S. ANGLE MAY NEED REPLACEMENT EVERY YEAR OR MAY REQUIR ED REPLACEMENT AFTER A FEW YEARS. THE ASSESSING OFFIC ER WAS NOT JUSTIFIED IN HOLDING THAT EXPENDITURE GAVE BENEFIT OF ENDURING NATURE AND WAS OF CAPITAL NATURE. IT IS FURTHER OB SERVED THAT : ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 5 - (I) THERE WAS NO INCREASE IN MANUFACTURING CAPACIT Y OF THE COMPANY AS SEEN FROM THE AUDITED BALANCE SHEET. (II) PERUSAL OF DETAILS OF SAID EXPENDITURE OF LAST THRE E YEARS I.E. FROM FINANCIAL YEAR 2001-02 TO A.Y. 2004-05 UNIT WISE REVEAL THAT THERE WAS NO MAJOR JUMP IN THIS EXPENDITURE. THE HONBLE GUJARAT HIGH COURT IN CASE OF INDIAN GI NNING & PRESSING CO. LTD. V. CIT (170 CTR 122) AFTER DULY CONSIDERING DECISION OF SUPREME COURT IN CASE OF BA LLIMAL NAVAL KISHOR RELIED ON BY THE ASSESSING OFFICER HEL D THAT EXPENDITURE ON SUBSTANTIAL RENOVATION AND UP GRADAT ION IS NOT DISALLOWABLE AND THE DECISION IN CASE OF BALLIMAL N AVAL KISHOR IS NOT APPLICABLE AS THAT DECISION DEALT WIT H LIMITED QUESTION OF INTERPRETATION OF SECTION 31 AND HAD NO T CONSIDERED SECTION 37. THE GUJARAT HIGH COURT, AFT ER CONSIDERING THE SUPREME COURT DECISION IN CASE OF B ALLIMAL NAVAL KISHORE, HELD THAT EXPENDITURE ON CHANGE IN F LOORING, CHANGE IN IRON SHEETS OF ROOF, REMOVAL OF WOODEN PI LLAR, PUTTING UP NEW CABIN, ETC., WAS HELD TO BE ALLOWAB LE. SIMILARLY, IN CASE OF CIT VS. CHOWGULE & CO. (P) LT D. (214 ITR 523), BOMBAY HIGH COURT ALLOWED LARGE EXPENDITU RE EXCEEDED COST OF ENTIRE SHIP, AS NO NEW ASSET HAD C OME INTO EXISTENCE AS A RESULT OF THE EXPENDITURE. IT HELD THAT MERELY BECAUSE EXPENDITURE IS LARGE, IT IS NOT DISALLOWABL E. THE SAID DECISION IS SUPPORTED BY SEVERAL OTHER JUDICIAL DEC ISIONS. 5.3.2. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF T HE CASE THE ACTION OF THE AO IN DISALLOWING THE CURRENT REPAIR S IS NOT JUSTIFIED AND THE AO IS DIRECTED TO ALLOW THE SAME . THUS THIS GROUND OF APPEAL IS ALLOWED . 4. FROM THE SIDE OF THE REVENUE, S/SHRI R.N.PARBAT & B.L.YADAV LD. DRS APPEARED AND RELIANCE WAS PLACED ON THE O RDER OF THE AO. ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 6 - THE ONLY ARGUMENT WHICH WAS EMPHASISED BEFORE US WA S THAT BY INCURRING SUBSTANTIAL EXPENDITURE ON REPAIRS THE AS SESSEE HAS ENJOYED ENDURING BENEFIT, THEREFORE, THE EXPENDITURE WAS CA PITAL EXPENDITURE. 5. WE HAVE HEARD BOTH THE SIDES. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF COMPILATIO N FILED BEFORE US AND THE CASE LAWS CITED. 6. AT THE OUTSET, IT WAS NOT IN DISPUTE THAT IN R ESPECT OF AN ANOTHER BUILDING AT UDAIPUR, THIS ASSESSEE ITSELF H AS CAPITALISED THE EXPENDITURE. HOWEVER, THE IMPUGNED REPAIRS WERE I N RESPECT OF AN ANOTHER FACTORY BUILDING SITUATED AT F-227, MEWAR I NDUSTRIAL AREA UDAIPUR, WHEREIN THE COMPANY HAS CARRIED OUT MANUFA CTURING OF FERTILIZER; NAMELY, SINGLE SUPER PHOSPHATE. ONE OF THE INGREDIENTS OF THE SAID FERTILIZER IS STATED TO BE SULPHURIC AC ID. DUE TO ACIDIC FUMES THE CORROSION WAS HIGH. THE ACIDIC FUMES H AVE HARMED THE CIVIL STRUCTURE. REPAIRS WERE PREVENTIVE IN NATUR E TO CHECK THE CORROSION OR DECAY OF THE BUILDING. REPAIRS WERE ALSO NEEDED FOR SAFETY REASONS. FACTS OF THE CASE THUS HAVE REVE ALED THAT THE ASSESSEE BEING OWNER OF THE PROPERTY HAS CONSIDERED NECESSARY TO MAINTAIN THE PROPERTY IN GOOD CONDITION, THEREFORE, INCURRED REPAIRS WHICH WERE NOTHING BUT IN THE NATURE OF CURRENT REP AIRS. REPAIRS WERE INCURRED TO PRESERVE AND MAINTAIN AN EXISTING ASSET. THE OBJECT OF THE EXPENDITURE WAS NOT BRINGING INTO EXI STENCE AN ANOTHER NEW ASSET. BY THE INCURRING OF THE SAID EXPENDITU RE, THE ASSESSEE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 7 - HAS NOT OBTAINED A NEW ADVANTAGE. IT IS ALSO NEC ESSARY TO FIND OUT WHETHER A PARTICULAR REPAIR WAS REALLY NEEDED AND I N THE PRESENT CASE WE HAVE NOTICED THAT IT WAS A DECISION OF THE ASSES SEE TO TAKE APPROPRIATE MEASURE TO REPAIR THE BUILDING FOR ITS MAINTENANCE AS ALSO FOR SAFETY PURPOSES. THERE ARE SEVERAL JUDICI AL DECISIONS IN THIS REGARD BUT KEEPING BREVITY IN MIND WE ARE NOT REPRO DUCING THOSE DECISIONS AND HEREBY AFFIRM THE FINDINGS OF THE CIT (A). RESULTANTLY THIS PORTION OF GROUND OF THE REVENUE IS DISMISSED. 6.1. THE AO HAS ALSO NOTICED THAT THE ASSESSEE HAS INCURRED EXPENDITURE ON CRANE AND PLANT & MACHINERY WHICH ACCORDING TO HIM WAS CAPITAL EXPENDITURE, HOWEVER, THE ASSESSEE HAS FURNISHED THE SUBMISSIONS AS FOLLOWS:- CRANE. DURING THE YEAR UNDER REVIEW, THE COMPANY HAS NOT P URCHASED AND INSTALLED ANY NEW CRANE, AND WHATEVER THE EXPEN DITURE HAS INCURRED IS FOR UP-KEEPING AND MAINTENANCE OF T HE EXISTING CRANE SITUATED AT UDAIPUR WORKS, AND ACCORDINGLY RE GULAR REPAIRS & MAINTENANCE AND THE SAME MAY KINDLY BE AL LOWED. PLANT & MACHINERY . WE HAVE ALREADY CAPITALIZED THE EXPENDITURE INCURRE D ON PLANT & MACHINERY SITUATED AT UDAIPUR AND NANDESARI (BARO DA) AMOUNTING TO RS.5932008/- DURING THE A.Y. 2004-05. AS EXPLAINED ABOVE REGARDING USE OF SULPHURIC ACID AND CORROSION THERE FROM, DAY-TO-DAY REPAIRING OF PLANT AND MACHINERY IS NECESSARY, AND WE ARE ALSO TO INFORM YOU THAT DURING THE YEAR UNDER REVIEW, PRODUCTION OF SSP AT UDAIPUR IS 184024.808 MT, WHEREAS THE INSTALLED CAPACITY OF TH E PLANT ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 8 - SITUATED AT UDAIPUR IS 165000 M.T. AS SUCH, LOOKIN G TO THE NATURE OF THE INDUSTRY COUPLED WITH INCREASE IN THE PRODUCTION EXCEEDING TO THE INSTALLED CAPACITY, THE REPAIRS AN D MAINTENANCE EXPENDITURE MAY KINDLY BE ALLOWED. 7. FROM THE SIDE OF THE REVENUE, THE ONLY SUBMISSI ON OF THE LD.CIT-DRS IS THAT THE CRANE BUCKET PURCHASED O F RS.3 LACS AND SUBMERSIBLE PUMPS PURCHASED RS.14,600/- COULD BE SA ID TO BE A NEW MACHINERY CAME INTO EXISTENCE, THEREFORE, NOT TO BE ALLOWED AS REVENUE EXPENDITURE. 8. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE SIDES . WE HAVE ALSO CONSIDERED THE ARGUMENT OF THE CIT-DR. AS FAR AS THE MAJOR PART OF THE EXPENDITURE INCURRED ON PLANT & M ACHINERY WERE CONCERNED, THERE WAS NO SUCH FINDING THAT AN INDEPE NDENT PART OF A MACHINERY WAS PURCHASED OR CAME INTO EXISTENCE. HENCE, CONSIDERING THE NATURE OF EXPENDITURE IN THE LIGHT OF THE MANUFACTURING ACTIVITY CARRIED OUT BY THE ASSESSEE, THE SAME IS TO BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, IN RESPEC T OF THE SAID TWO ITEMS VIZ. EXPENDITURE OF CRANE BUCKETS AND SUB MERSIBLE PUMPS, NO SUCH DISTINCTION WAS NOTICED BY THE AO. RATHER T HE AO HAD MADE THE DISALLOWANCE IN RESPECT OF THE ENTIRE AMOUNT OF THE EXPENDITURE. NOW BEFORE US, THE LD. REPRESENTATIVE OF THE DEPAR TMENT WANTS TO SEGREGATE TWO ITEMS FOR THE PURPOSE OF DISALLOWANCE . IN THIS REGARD, ON DUE CONSIDERATION OF THE ASSESSMENT ORDER, IT IS NOT CLEAR WHETHER ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 9 - THE SAID TWO AMOUNTS WERE IN RESPECT OF EITHER REP LACEMENT OF THE MACHINERY OR UNDER THE HEAD REPAIRS. LD. DR H AS REFERRED THAT IN THE CASES OF MACHINERY IN A TEXTILE MILL IT HA D BEEN HELD BY SOME HONBLE COURTS THAT EACH SPINDLE HAD WORKED INDEPEN DENTLY AND NOT AS A MERE PART OF THE ENTIRE COMPOSITE MACHINERY, T HEREFORE, IT COULD CONSTITUTE BRINGING INTO EXISTENCE A NEW ASSET. A D ECISION IN THIS CONTEXT WAS CITED IN THE GROUNDS OF APPEAL VIZ. CIT VS.SARAVANA SPINNING MILLS P.LTD. 293 ITR 201(S.C.). THE VERDICT WAS THAT THE BASIC TEST IS TO FIND OUT WHETHER EXPENDITURE IS IN CURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET OR BRING INTO EXISTENCE A NEW ASSET SO AS TO GET AN ENDURING ADVA NTAGE. THE ISSUE IN THAT APPEAL WAS ABOUT THE REPLACEMENT OF RING AND FACTUALLY IT WAS FOUND THAT EACH MACHINE INCLUDING THE RING FRAME WAS AN INDEPENDENT AND SEPARATE MACHINE CAPABLE OF INDEPENDENT AND SPECIFIC FUNCTION. HOWEVER IN THE PRESENT APPEAL BEFORE US THE INVESTIGATION IN THAT DIRECTION HAD NEVER BEEN MADE BY THE AO. THERE IS NO MATERIAL ON RECORD TO SHOW W HETHER THE SAID CRANE BUCKET PURCHASE FOR RS.3 LAC AMOUNT WAS TOWARDS REPAIR OR TOWARDS REPLACEMENT OF AN EXISTING MACHINERY. T HEREFORE WE DEEM IT PROPER TO RESTORE THE ISSUE IN RESPECT OF THESE TWO ITEMS TO THE FILE OF THE AO. RESULTANTLY, THE QUESTION OF DI SALLOWANCE OF AND EXPENDITURE ON SUBMERSIBLE PUMPS OF RS.14,600/- TO BE RE- CONSIDERED WHETHER IT WAS REVENUE OR CAPITAL IN NA TURE. BEFORE WE PART WITH IT IS NECESSARY TO EXAMINE THE FACTS OF B ALLIMAL NAVAL KISHORE & ANR. REPORTED AT (1997) 224 ITR 414 (SC) [SUPRA] SINCE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 10 - RELIED UPON BY THE AO. WE HAVE NOTICED THAT THE FAC TS OF THE CASE HAD MADE IT EVIDENT THAT WHAT THE SAID ASSESSEE DID WAS NOT MERE REPAIRS BUT A TOTAL RENOVATION OF THE THEATRE. FR OM THE FACTS, IT WAS FOUND THAT NEW MACHINERY, NEW FURNITURE, NEW SANIT ARY FITTINGS, NEW ELECTRICAL WIRINGS WERE INSTALLED. BESIDES THAT, AN EXTENSIVE REPAIR IN THE STRUCTURE OF THE BUILDING WAS CARRIED OUT. THEREFORE, IT WAS HELD BY THE HONBLE COURT THAT DUE TO TOTAL RENOVATION THE EXPENDITURE IN QUESTION WAS CAPITAL IN NATURE. FAC TS OF THE SAID CITED PRECEDENT CAN BE DISTINGUISHED FROM THE FACTS OF T HE ASSESSEE, THAT THE ASSESSEES CASE WAS NOT A TOTAL RENOVATION OR T HE ENTIRE NEW MACHINERY, NEW FURNITURE, ETC. WERE BROUGHT TO THE EXISTENCE. WE THEREFORE HOLD THAT THE SAID RELIANCE WAS MISPLACED . IN THE RESULT THIS GROUND OF THE REVENUE IS PARTLY ALLOWED. 9. GROUND NO.2 (A) & (B) ARE AS UNDER: 2(A)THE LD. CIT(A) ERRED IN DELETING THE ADDITION O F RS.12,73,555/- ON ACCOUNT OF DELAYED PAYMENT OF EMPLOYEES CONTRIBUTION TO PF AND THE ADDITION OF RS.1,67,583/- ON ACCOUNT OF DELAYED PAYMENT OF EMPLOYEES CONTRIBUTION TO ESI. 2(B) THE LD. CIT(A) FAILED TO APPRECIATE THAT SO F AR AS EMPLOYEES CONTRIBUTION TO PF & ESI IS CONCERNED, I N CASE OF ANY DELAY IN DEPOSITING THE SAME ON OR BEFO RE THE DUE DATE, THE CASE OF THE ASSESSEE GETS COVERED UNDER THE PROVISIONS OF SECTION 36(1)(VA) R.W.S. 2(24)(X) . THUS, THE DISALLOWANCE U/S.36(1)(VA) R.W.S. 2(24)(X) IN R ESPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ES I BEYOND THE DUE DATE IS MANDATORY. ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 11 - 9.1. AS PER AO, IT WAS FOUND THAT A SUM OF RS.12,73 ,555/- WAS PAID BY THE EMPLOYER, I.E. ASSESSEE, TOWARDS EMPLOY EES PROVIDENT FUND CONTRIBUTION. AS PER AO, THE AMOUNT WAS NOT R EALISED WITHIN THE DUE DATE. THE PROVISIONS OF SECTION 36(1)(VA) READ WITH SECTION 2(24)(X) WAS RELIED UPON AND THE ENTIRE AMOUNT OF R S.12,73,555/- WAS DISALLOWED. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. LD.CIT(A) HAS EXAMINED THE FACTS AND T HEREUPON GRANTED THE RELIEF AS PER THE FOLLOWING PARAGRAPHS: 6. AS REGARDS GROUND NO.(3), THE AO, DURING THE CO URSE OF ASSESSMENT PROCEEDINGS HAD OBSERVED THAT THE APPELL ANT HAD VIOLATED THE PROVISIONS OF THE PROVIDENT FUND ACT A ND THEREFORE, DENIED THE DEDUCTION OF EXPENDITURE CLAI MED BY THE APPELLANT IN RESPECT OF DELAYED PAYMENTS OF CONTRIB UTION TO THE PROVIDENT FUND AND ADDED AN AMOUNT OF RS.12,73,555/ - TO THE TOTAL INCOME OF THE APPELLANT. 6.1. IT IS DISCUSSED BY THE AO ON PAGE NO.5 TO 7 O F THE ASSESSMENT ORDER. 6.2. THE AR WHILE EXPLAINING AS TO HOW THE DISALLOW ANCE WAS NOT SUSTAINABLE RELIED ON THE AMENDMENT MADE BY THE FINANCE ACT 2003, WHERE BY THE DUE DATES OF RELEVANT FUNDS HAVE BEEN EXTENDED TO THE DUE DATES AS PER THE PROVISIONS OF SECTION 139(1) OF THE IT ACT AND REQUESTED FOR NULLIFYING T HE ACTION OF THE AO. 10. WE HAVE HEARD BOTH THE SIDES. WE HAVE ALSO PE RUSED THE ORDERS OF THE AUTHORITIES BELOW. FROM THE SIDE OF THE ASSESSEE, LD.AR MR.SUNIL TALATI HAS PLACED RELIANCE ON THE DECISION OF HONBLE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 12 - SUPREME COURT IN THE CASE OF CIT VS. VINAY CEMENT LTD. REPORTED AT (2007) 213 CTR 268 (SC), FOR THE LEGAL PROPOSITION THAT UNDER THE PROVISIONS OF SECTION 43B OF THE ACT, THE SAID PAYMENT IN THE HANDS OF THE EMPLOYER COULD NOT BE DISALLOWED AS IT STOOD PRIOR TO 1/4/2001. HE HAS FURTHER INFORMED THAT THE EMPLOY ERS CONTRIBUTION WAS MADE THROUGH CHEQUES AND THAT WAS WITHIN DUE DA YS, HOWEVER THOSE CHEQUES WERE REALISED AFTER FEW DAYS, A TIME TAKEN BY THE BANK FOR REALISATION OF CHEQUES. IN THIS REGARD, THERE IS ONE MORE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. REPORTED AT (2009) 319 ITR 306(SC) , WHEREIN IT WAS CONCLUDED THAT THE OMISSION OF SECOND PROVISO T O SECTION 43B OPERATED RETROSPECTIVELY W..E.F. 1.4.1988 AND THE A MENDMENT OF FIRST PROVISO BY FINANCE ACT, 2003 BRINGING ABOUT UNIFORM ITY IN PAYMENT OF CONTRIBUTIONS ARE CURATIVE IN NATURE AND THUS EF FECTIVE RETROSPECTIVELY WITH EFFECT FROM 01/04/1998. IT IS THEREFORE CONTESTED THAT THE FACTS OF THIS CASE HAVE REVEALED THAT ALL THE PAYMENTS WERE MADE BEFORE THE DUE DATE OF FILING THE RETURN. LD. AR HAS ALSO EMPHASISED THAT THE RETURN FOR AY 2004-05 WAS FILE D ON 29/10/2004, HOWEVER, THE CHEQUES WERE REALISED BEFO RE THE DATE OF FILING OF THE RETURN. ON THE OTHER HAND, THE CONTE NTION OF THE LD.CIT- DRS S/SHRI R.N.PARBAT & B.L. YADAV IS THAT THE DEC ISION CITED FROM THE SIDE OF THE ASSESSEE HAVE NOT CONSIDERED THE PR OVISIONS OF SECTION 36(1)(VA) R.W.S.2(24)(X) OF THE I.T. ACT, 1961. A CCORDING TO HIM, THE ISSUE WAS DIFFERENT THAN THE ISSUE WHICH WAS IN RESPECT OF DELAYED PAYMENT OF EMPLOYERS CONTRIBUTION AS PER T HE SAID ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 13 - PROVISIONS OF THE ACT. UNDISPUTEDLY, THE CHANGE BY WAY OF INSERTION OF SECOND PROVISO W.E.F. 1.4.1988 AND SUBSTITUTION W.E.F. 1.4.1989 TO SECTION 43B IS THAT THE DEDUCTION IN RESPECT OF ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO PROVIDENT FUND SHALL BE ALLOWED FROM THE AY 1998-99 AND SUB SEQUENT YEARS ONLY WHEN THEY ARE PAID ON OR BEFORE THE DUE DATE O F FILING OF RETURN. HOWEVER, AS PER THE DEFINITION OF THE TERM DUE DATE IN EXPLANATION BELOW CLAUSE-(VA) OF SUB SECTION(1) O F SECTION 36; MEANS THE DATE BY WHICH THE ASSESSEE IS REQUIRED AS AN EMPLOYER TO CREDIT AN EMPLOYEES CONTRIBUTION TO THE EMPLOYE ES ACCOUNT IN THE RELEVANT FUND UNDER ANY ACT , RULE , ORDER O R NOTIFICATION. FOR THIS LEGAL PROPOSITION, WHETHER THE PROVISIONS OF SEC.36 AND THE PROVISIONS OF 43B ARE INDEPENDENT OF EACH OTHER, NO W A DECISION OF HONBLE S.C OF CIT VS ALOM EXTRUSIION LTD. 319 ITR 306 IS AVAILABLE. BUT THIS DECISION IS DATED 25 NOV.2009 , HOWEVER, THE ORDER OF THE A.O. IS DATED 27.11.2006, HENCE IT WAS NOT AVAILABLE AT THE ASSESSMENT STAGE. THE A.O. IS THEREFORE REQUIRE D TO FIND OUT THE SIMILARITY AND IF ON FACTS IDENTICAL THEN HAS TO FO LLOW THE LAW LAID DOWN THEREIN. THEREFORE BEING THE OBJECTION RAISED FROM THE SIDE OF THE REVENUE, WE DEEM IT PROPER TO GIVE AN OPPORTUNI TY TO THE REVENUE TO RE-DECIDE AS PER LAW. THIS GROUND OF THE REVENUE MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE . 11. GROUND NOS.3(A) & 3(B) ARE AS UNDER: ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 14 - 3(A) THE LD. CIT(A) ERRED IN DELETING THE DISALLO WANCE OF RS.13,86,222/- U/S.36(1)(III) BEING INTEREST COST INCURRED BY THE ASSESSEE ON THE ADVANCES GIVEN FOR NON-BUSIN ESS PURPOSES. 3(B) THE LD. CIT(A) FAILED TO APPRECIATE THAT AS H ELD BY THE HON.HIGH COURT IN THE CASE OF CIT VS. ABHISHEK LAND PVT.LTD. (288 ITR 01) THE ONUS WAS ENTIRELY ON THE ASSESSEE TO PROVE THAT ALL THE BORROWED FUNDS WERE USED FOR BUSINESS. EVEN IF MIXED FUNDS WERE DIVERTED, I NTEREST U/S.36(1)(III) IS NOT ALLOWABLE BY VIRTUE OF THE ON US BEING ON PERSON WHO IS IN THE SPECIAL KNOWLEDGE OF FACTS IN TERMS OF SECTION 106 OF THE EVIDENCE ACT. 11.1. AS PER THE OBSERVATION OF THE ASSESSING OFF ICER THERE WERE INVESTMENTS OF RS.1,14,77,750/-. THE ASSESSING OFF ICER WANTED TO DISALLOW THE PROPORTION OF THE INTEREST COST WHICH WAS FOUND TO BE BORNE ON THE BORROWED FUNDS. 12. THE EXPLANATION OF THE ASSESSEE WAS THAT THOSE INVESTMENTS HAVE BEEN MADE IN EARLIER YEARS, HENCE, DID NOT PERTAIN TO THE YEAR UNDER CONSIDERATION, THEREFORE, NO DISALLOWANCE OF ANY IN TEREST SHOULD BE MADE FOR ASSESSMENT YEAR 2004-05. AN ANOTHER FACT HAS A LSO BEEN BROUGHT TO THE NOTICE OF THE ASSESSING OFFICER THAT THE SAID INVESTMENT WAS OUT OF THE SHARE CAPITAL OF RS.4.13 CRORES, THEREFORE, NO DISALLOWANCE OF INTEREST SHOULD BE MADE. AS AGAINST THAT THE OBSER VATION OF THE ASSESSING OFFICER WAS THAT THE ASSESSEE-COMPANY HAD INVESTED RS.7.32 CRORES AS ON 31.3.2003 IN FIXED ASSETS, THEREFORE, THE SURPLUS, IF ANY, AVAILABLE AS ALSO THE SHARE CAPITAL WAS UTILIZED TOWARDS FIXED ASSETS . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE LOAN TAKEN OF RS.1 8.21 CRORES AS ON 31.3.2003 WAS CARRIED OVER AND FOR THE YEAR UNDER C ONSIDERATION THE LOAN ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 15 - WAS AT RS.17.88%, WHICH ACCORDING TO HIM WAS INVEST ED IN THE SAID INVESTMENTS. THERE WAS ONE REASON ASSIGNED BY THE ASSESSING OFFICER THAT ON THOSE INVESTMENTS THE DIVIDEND WAS RECEIVED WHICH WAS EXEMPT U/S.10 OF THE I.T.ACT. BY INVOKING THE PROVISIONS OF SECTION 14A OF THE I.T.ACT IT WAS HELD BY HIM THAT THE EXPENSES WHICH WERE INCURRED TO EARN EXEMPTED INCOME SHOULD ALSO BE DISALLOWED. HE HAS MADE A COMPUTATION IN THE FOLLOWING MANNER: THEREFORE, THE INTEREST COST OF RS.25,42,321/- (39 607009 X 100 / 178759346 = 21.15%) INCURRED BY THE ASSESSEE ON THE FUNDS INVESTED IN SHARES SHALL NOT BE ALLOWED UNDER THE S PECIFIC PROVISIONS OF SECTION 14A OF THE ACT, IN VIEW OF TH E INCOME ENSUING FROM SUCH INVESTMENTS BEING EXEMPT UNDER THE SPECIF IC PROVISIONS OF SECTION 10 OF THE ACT. ACCORDINGLY A SUM OF RS. 25,42,321/- IS INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. 12.1. THERE IS ONE MORE DISALLOWANCE OF INTEREST ON THE GROUND THAT AN AMOUNT OF RS.62,58,343/- WAS GIVEN BY THE ASSESSEE FOR NON-BUSINESS PURPOSES. IN HIS OPINION, THE SAID AMOUNT WAS ADV ANCED TO VARIOUS PARTIES AND NO INTEREST WAS RECOVERED. ACCORDING TO HIM, THE SAID ADVANCE WAS OUT OF THE BORROWED FUNDS. HENCE, THE PAYMENT OF INTEREST WAS SUFFERED BY THE ASSESSEE. HE HAS COMPUTED THE DISALLOWANCE OF INTEREST BY INVOKING THE PROVISIONS OF SECTION 36(1 )(III) OF RS.13,86,222/-. IN THE SAID MANNER, A TOTAL ADDITION OF RS.39,28,54 3/- WAS MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST. THE MATTER W AS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 16 - 13. THE LEARNED CIT(APPEALS) HAS PASSED A CRYPTIC O RDER AS PER THE FOLLOWING OBSERVATIONS:- 7.1. AS FAR AS FIRST PART A IS CONCERNED THE MAJO R INVESTMENT IS ALLOTMENT OF EQUITY SHARES MET OUT OF INTERNAL ACCR UALS AND AS SUCH DIVERSION OF FUNDS DOES NOT ARISE. THE NEW INVESTM ENTS DURING THE YEAR ARE IN SHARES OF UMA CO-OP BANK AND NANDESARI ENVIRONMENT CONTROL LIMITED (NECL FOR SHORT) ONLY. IT IS STATED BY THE AR THAT TO BECOME A MEMBER IN THE CO-OP BAN K, MEMBERSHIP HAS TO BE TAKEN BY SUBSCRIBING TO SHARES AND AS A MEMBER OF THESE CO-OP BANKS, TOOK LOAN FOR BUSINESS PURPOSES. HENCE, AS THE CO-OP BANK IS NOT A DOMESTIC COMPANY THE DIVIDEND U/S 10(34) IS NOT EXEMPT FROM TAX. SINCE, NANDESAR I ENVIRONMENT CONTROL LIMITED IS NON-PROFIT ORGANIZATION ENGAGED IN PROTECTION OF ENVIRONMENT THE APPELLANT HAS TO BECOME A MEMBER COMPULSORILY AND NECL BEING AN NGO DIVIDEND RECEIVE D FROM IT IS NOT EXEMPT FROM TAX. AS FAR AS SECOND PART B IS CONCERNED, THE AO HAS NOT GIVEN ANY WHERE THE DETAILS OF NON-BUSI NESS INVESTMENTS WORKED OUT BY HIM AT RS.62,58,343/-. B UT HOWEVER, AS SEEN FROM THE DETAILS SUBMITTED ONLY AN AMOUNT OF R S.38,03,277/- PERTAIN TO FINANCIAL TRANSACTIONS, MET FROM OWN FUN DS, BUT NOT OUT OF BARROWED FUNDS. IN THE CIRCUMSTANCES, THE ACTIO N OF THE AO IS NOT JUSTIFIED AND AS SUCH HE IS DIRECTED TO DELETE THE ADDITION OF RS.39,28,543/- MADE IN THIS REGARD . 14. IN RESPECT OF THE ADDITION OF RS.25,42,321/-, T HE EXPLANATION OF THE ASSESSEE WAS THAT AN INVESTMENT OF RS.1,12,50,000/- WAS TOWARDS SHARE CAPITAL OF M/S.LIBERTY PESTICIDES AND FERTILISERS L TD. (A 100% SUBSIDIARY OF THE ASSESSEE-COMPANY). IT WAS EXPRESSLY DENIED THAT THE BORROWED FUNDS WERE UTILIZED FOR INVESTMENT IN FIXED ASSETS. BEFORE THE LEARNED CIT(APPEALS), IT WAS ALSO CONTESTED THAT AS PER THE RECORDS AVAILABLE, THERE WAS A DIRECT NEXUS BETWEEN NON-INTEREST BEARING FUNDS AND THE INVESTMENT MADE. IT WAS NOTICED BY THE LEARNED CIT(APPEALS) THAT T HE INVESTMENT WITH M/S.LIBERTY PESTICIDES AND FERTILIS ERS LTD. WAS IN THE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 17 - RATIO OF 3:2 DURING THE FINANCIAL YEAR 1996-97. T HE CONCLUSION WAS THAT THE INVESTMENT MADE AGAINST ALLOTMENT OF EQUITY SHA RES OF M/S.LIBERTY PHOSPHATE LTD. DID NOT INVOLVE ANY CASH TRANSACTION , HENCE, IT WAS CONCLUDED THAT NO ADDITION WAS WARRANTED. 14.1. IN RESPECT OF SECOND ADDITION, THE CONTENTI ON OF THE ASSESSEE WAS THAT THE SAID AMOUNT OF RS.62,58,343/- WAS ADVANCED OUT OF INTEREST- FREE LOANS. ASSESSEES ONLY SUBMISSION WAS THAT THERE WERE SUF FICIENT INTEREST-FREE FUNDS AVAILABLE WITH THE APPELLANT AN D AGAINST THAT INTEREST- FREE FUNDS, THOSE ADVANCES WERE GIVEN. PLACING R ELIANCE ON CERTAIN DECISIONS, IT WAS PLEADED NOT TO TAX THE SAME. WE HAVE ALREADY REPRODUCED HEREINABOVE A PARAGRAPH TO DEMONSTRATE T HAT THE ADDITION MADE BY THE ASSESSING OFFICER REQUIRED A DETAILED O RDER AND NOT A CRYPTIC ORDER FROM THE FIRST APPELLATE AUTHORITY. WE HAVE ALSO NOTICED THAT THE PROVISIONS OF SECTION 14A OF THE I.T.ACT HAVE NOT B EEN DISCUSSED AT ALL BY THE LEARNED CIT(APPEALS). ON ONE HAND, THE ASSESS ING OFFICER HAS STATED THAT THE ASSESSEE WAS UNABLE TO DEMONSTRATE THAT THE NON-INTEREST BEARING FUNDS WERE UTILIZED TOWARDS INVESTMENT FOR EARNING DIVIDEND INCOME. ON THE OTHER HAND, THE ARGUMENT OF THE ASS ESSEE WAS THAT THERE WERE SUFFICIENT RESERVES AND SHARE CAPITAL OUT OF W HICH THE SAID INVESTMENT WAS MADE. HOWEVER, THE FINDINGS OF TH E ASSESSING OFFICER HAVE NOT BEEN DEALT WITH BY LEARNED CIT(APPEALS) IN THEIR RIGHT PERSPECTIVE AND ONE OF THE REASONS OF THE DISALLOW ANCE OF THE INVOCATION OF SECTION 14A OF THE I.T.ACT HAS ALSO NOT BEEN DEA LT WITH, THEREFORE, WE DEEM IT PROPER TO RESTORE THIS GROUND BACK TO THE STAGE OF LEARNED CIT(APPEALS) TO DECIDE DE NOVO , NEEDLESS TO SAY AFTER PROVIDING OPPORTUNITY OF HEARING TO BOTH THE SIDES. SINCE T HE MATTER HAS BEEN ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 18 - RESTORED BACK, THEREFORE, THIS GROUND OF THE REVENU E MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. (B) ITA NO.503/AHD/2009 FOR ASSESSMENT YEAR 2005-06 15. REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A)- I, BARODA DATED 4/11/2008 ON THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.6,79,458/- MADE ON ACCOUNT OF FOREIGN EXCHANGE LOSS WITHOUT APPRECIATING THE RATIO OF THE DECISION IN T HE CASE OF INDIAN OVERSEAS BANK LTD. V/S. CIT 151 ITR 446 (MAD .). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS.9,86,209/- U/S.3691)(III) ON INTEREST FREE LOANS/ADVANCES GIVEN TO ITS SISTER CONCERNS AMOUNTING TO RS.59,26, 738/-. 16. GROUND NO.1 :- THE ASSESSEE IS STATED TO BE MANUFACTURING PHOSPHATIC FERTILISERS. IN THAT REGARD, THE ASSES SEE HAS TO TRADE WITH CERTAIN FOREIGN PARTIES, AS STATED BY THE LD.AR. A SUM OF RS.6,79,458/- WAS DEBITED IN THE PROFIT & LOSS ACCOUNT DUE TO F OREIGN EXCHANGE FLUCTUATION LOSS. AS PER THE ASSESSING OFFICER, S INCE IT WAS AN UNREALIZED LOSS WHICH WAS DEBITED TO PROFIT & LOSS ACCOUNT, THEREFORE, THE LIABILITY WAS CONTINGENT IN NATURE. THE ASSESS EES ARGUMENT WAS THAT THE EXCHANGE RATE VARIATION WAS CORRECTLY APPROPRIA TED AT THE END OF THE FINANCIAL YEAR WHICH WAS IN CONSONANCE WITH THE ACC OUNTING STANDARD. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCED AN D HELD THAT THE ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 19 - EXCHANGE FLUCTUATION. LOSS WAS A NOTIONAL LOSS, HE NCE, NOT TO BE ALLOWED. ACCORDINGLY, THE IMPUGNED ADDITION WAS MADE. 17. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST AP PELLATE AUTHORITY, THE LEARNED CIT(APPEALS) HELD AS UNDER:- 6.4. THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACC OUNTING. THIS SYSTEM HAS BEEN FOLLOWED FROM THE VERY BEGINNING. THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO THE LOSSES AS WELL AS TO THE GAINS. THE ASSESSEE HAS CONSISTENTLY MADE ENTRIES IN ITS A CCOUNT BOOKS BOTH IN RESPECT OF LOSSES AS WELL AS GAINS. THE ME THOD ADOPTED BY THE ASSESSEE FOR BOTH LOSSES AND GAINS IS AS PER NA TIONALLY ACCEPTED ACCOUNTING STANDARDS. THE ICAI HAS PRESCRIBED ACCOUNTING STANDARD 11 (AS-11) FOR THE PURPOSE OF ACCOUNTING F OR TRANSACTIONS INVOLVING FOREIGN EXCHANGE. THESE ACCOUNTING STANDARDS HAVE BEEN CONSISTENTLY FOLLOWED BY THE AS SESSEE. THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR & REASONABLE . THUS, THE ASSESSEE HAS COMPLIED WITH ALL THE SIX REQUIREMENTS LAID DOWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE ONGC CASE. FINALLY, THE TRIBUNAL HAS ALSO HELD THAT THE MAIN INGREDIENT OF A CONTINGENT LIABILITY IS THAT IT DEPENDS UPON THE HAPPENING OF A CERTAIN EVENT. IN THE CASE OF THE ASSESSEE, THE EVENT, I.E., THE CHANGE IN THE VALUE OF FOREIGN CURRENCY IN RELATION TO THE INDIAN CURRENCY HAD ALREADY TAKEN PLACE IN THE CURRENT YEAR. THEREFORE , THE LOSS INCURRED BY THE ASSESSEE WAS HELD TO BE A FAIT ACCO MPLI AND NOT A NOTIONAL LOSS. FOLLOWING THE JUDICIAL DECISIONS AS ABOVE, IT IS HELD THAT THE ACTION OF THE AO IN DISALLOWING THE EXPEND ITURE OF ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 20 - RS.6,79,458/- WAS NOT WARRANTED AND IS ACCORDINGLY DIRECTED TO BE DELETED. 18. DURING THE COURSE OF HEARING, AN ENQUIRY HAS BE EN RAISED THAT ABOUT THE NATURE OF TRANSACTION FROM THE FOREIGN PARTY RE SULTING INTO EXCHANGE FLUCTUATION LOSS. THE LEARNED AUTHORISED REPRESEN TATIVE HAS STATED THAT THE ASSESSING OFFICER HAS NOT MADE THE DISALLO WANCE ON ACCOUNT OF THE FACT THAT THE BORROWINGS WERE TOWARDS ACQUISITI ON OF ANY CAPITAL ASSET. RATHER AS PER LD.AR THE TRANSACTION WAS IN RESPECT OF THE RUNNING OF THE BUSINESS, HENCE, THE FOREIGN EXCHANGE FLUCTUATION LOSS IS ADMISSIBLE AS REVENUE EXPENDITURE. 19. ON HEARING THE SUBMISSIONS OF BOTH THE SI DES AND ON CAREFUL PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW, WE HAVE FOUND THAT THE ISSUE CAN BE DECIDED IN THE LIGHT OF A PRECEDENT VI Z. CIT VS. V.S. DEMPO & CO. PVT.LTD. REPORTED AT (1994)206 ITR 291 (BOM), WHEREIN THE LEGAL PROPOSITION LAID DOWN WAS THAT FOR DETERMINING WHE THER DEVALUATION LOSS IS A REVENUE LOSS OR A CAPITAL LOSS, WHAT IS R ELEVANT IS THE UTILIZATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT TH E OBJECT FOR WHICH THE LOAN HAD BEEN OBTAINED. THE OBSERVATION OF THE COU RT WAS THAT IF AT THE TIME OF DEVALUATION THE CHARACTER OF THE TRANSACTIO N WAS IN THE NATURE OF STOCK-IN-TRADE OR CIRCULATING CAPITAL, THEN THE LOS S OCCURRED ON THAT ACCOUNT SHALL BE HELD AS REVENUE LOSS. AS FAR AS T HE QUESTION OF NATURE OF LIABILITY WHETHER CONTINGENT OR NOT IN CASE OF C IT VS. WOODWARD GOVERNOR INDIA (P) LTD. & ORS. REPORTED AT 294 ITR 451 (DEL), IT WAS HELD THAT INCREASE IN LIABILITY DUE TO EXCHANGE FLU CTUATION IS NOT NOTIONAL OR CONTINGENT LIABILITY, HENCE, ALLOWABLE. SINCE THE ASSESSING OFFICER ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 21 - HAS NOT DEALT WITH THE ISSUE IN THE LIGHT OF THE LA W PRONOUNCED AND PROCEEDED WITHOUT RECORDING ANY SPECIFIC FINDING AB OUT THE NATURE OF THE LIABILITY, THEREFORE, SUCH AN ADDITION BASED UPON A HYPOTHETICAL REASONING OR MERELY ON SURMISES, THUS DO NOT SURVIVE IN THE E YES OF LAW. WE FIND NO FORCE IN THE GROUND OF THE REVENUE AND AFFIRM TH E FINDINGS OF THE LEARNED CIT(APPEALS). THIS GROUND OF THE REVENUE IS DISMISSED. 20. GROUND NO.2 :- FOR THIS GROUND AS WELL, AFTER ASSIGNING IDE NTICAL REASONS AND ALMOST FROM IDENTICAL FACTS, THE DISALL OWANCE U/S.36(1)(III) WAS REPEATED BY THE ASSESSING OFFICER. WE HAVE DIS CUSSED AT LENGTH THE ISSUE HEREINABOVE WHILE DECIDING REVENUES APPEAL F OR ASSESSMENT YEAR 2004-05 AND THOUGHT IT PROPER TO RESTORE THE ISSUE BACK TO THE STAGE OF ASSESSING OFFICER FOR DE NOVO CONSIDERATION. LIKEWISE, FOR THIS YEAR THIS GROUND OF THE REVENUE MAY BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. 21. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 17 TH JUNE,2011. SD/- SD/- ( A.N. PAHUJA ) ( MU KUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED 17 TH JUNE, 2011 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. ITA NOS.160 & 503/AHD/ 2009 DCIT VS. BARODA ASST.YEARS - 2004-05 & 2005-06 - 22 - 3. THE CIT CONCERNED. 4. THE LD. C IT(APPEALS)-V, BARODA 5. THE DR, AHMEDABAD BENCH. 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD 1. DATE OF DICTATION..06/06/2011 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 08/06/2011 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S17/6/2011 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 17/6/2011 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER