Appeal Details
Counselvise Citation
[2022] 105 COUNSELVISE.COM (IT) 8260 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
10 year(s) 8 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
22-02-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
D
Assessment Year
2005-2006
Appeal Filed On
21-06-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Ms. Madhumita Roy, Judicial Member Atul Limited 3 rd Floor, Ashoka Chambers, Rasala Marg, Ellisbridge, Ahmedabad-390 009 PAN: AABCA 2390M (Appellant) Vs ACIT, Range-1, Ahmedabad (Respondent) Appellant by : Shri Bandish Soparkar, A.R. Respondent by : Shri Mohd Usman, CIT/DR Date of hearing : 16-12-2021 Date of pronouncement : 23-02-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:- The present appeal has been filed by the Assessee against the order passed by the Commissioner of Income Tax (Appeals)-VI, Ahmedabad, (in short referred to as CIT(A)), dated 01-04-2011, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2005-06 . 2. Ground No. 1 raised by the Assessee reads as under: 1 Ld. CIT (A) erred in law and on facts in confirming addition made by AO of Rs. 2,70,80,490/- on account of adjustments to the Arm's length price without there being any legal and factual basis for the same. Ld. CIT (A) simply followed the appellate order of the earlier year and confirmed the adjustments made by AO ignoring the submissions, ITA No. 1681/Ahd/2011 Assessment Year 2005-06 I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 2 explanation and various case laws relied upon by the appellant. Such confirmation of addition by Id. CIT (A) without independent application of mind or on merits or justification deserves to be quashed. 3. Ld. Counsel for the assessee pointed out that the issue involved related to addition made to the income of the assessee of Rs. 2,70,80,490/- on account of adjustments to the Arm’s Length Price of the transaction of sales made with its Associated Enterprises (AE), as per the provisions of Section 92CA of the Act. Ld. Counsel for the assessee pointed out that the same was upheld by the Ld. CIT(A) following his order in the case of the assessee for Assessment Year 2004-05 finding the issue to be identical. He drew our attention to Para 2.3 of the order of the Ld. CIT(A) in this regard as under: 2.3. I have considered the facts of the case, assessment order and appellant's submission. Similar issue came up in earlier years also and my learned predecessors decided the same against the appellant. In appeal order for AY 2004-05 dated 23-03- 2007, the decision is as under- "The appellant has raised many technical issues challenging the action of assessing officer in making the adjustments of transfer pricing. However I find that all the issues were raised in assessment year 2003-04 and decided negative i.e. against the appellant by my own order. Following my own order for assessment year 2003-04 in appeal order dated 21-11-2006, all these grounds of appeal are dismissed." Admittedly the issue is identical and therefore it is covered against the appellant. Respectfully following the orders of my learned predecessors, this ground is dismissed. 4. Ld. Counsel for the assessee thereafter stated that the appeal of the assessee for assessment year 2004-05 stood adjudicated by the ITAT in ITA No. 1547/Ahd/2007 vide order dated 24.09.2010 wherein this issue was set aside to the A.O. Ld. Counsel for the assessee drew our attention to Para 18 to 21 of the said order of the ITAT ,placed before us at paper book page no. 144 to 155, as under: I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 3 18. Ground Nos.9 to 14 in the appeal relate to an addition of Rs.1,82,97,194/- on account of adjustment in arms length price. The AO while computing the total income of the assessee, made an adjustment of Rs.1,82,97,194/- in terms of provisions of section 92CA(1) of the Act on account of determination of arm's length price of international transaction entered into by the assessee. 19. On appeal, the learned CIT(A) upheld the findings of the AO while relying upon his own decision for the AY 2003-04. 20. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). Both the parties agreed that the issue is squarely covered by the decision dated 24-07-2009 of the ITAT Ahmedabad Bench-D in the assessee's own case for the AY 2003- 04 in ITA No.157/Ahd/2007. 21. We have heard both the parties and gone through the facts of the case as also aforesaid decision of the ITAT. We find that while adjudicating a similar issue, the Tribunal vide their aforesaid order dated 24-07-2009 in ITA No.157/Ahd/2007, concluded as under:- "21. The next common issue in both the appeals of the assessee is as regards to the orders of CIT(A) confirming the addition on account of transfer pricing adjustment. The assessee has raised the following grounds in respective appeals are under:- "8. The learned CIT(Appeals)-V, Ahmedabad erred in confirming the addition of income on account of Transfer Pricing adjustment." "4. The learned CIT(A) has erred in law and on facts in confirming the action of AO in adding Rs.1,80,62,067/- on account of adjustments to the Arm's length price without there being any jurisdiction as well as legal and factual basis for the same." "5. The learned CIT(A) has erred in law and on facts in confirming the action of AO in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance." "6. The learned CIT(A) has erred in law and on facts in confirming the action of AO in making a reference to the Transfer Pricing Officer (TOP) u/s.92C(3) r.w.s. 92CA(1) of the Act without providing an opportunity of being heard to the appellant." "7. In any case the whole reference and the consequent orders are bad and illegal because the alleged approval granted by CIT u/s.92C(1) of the Act is vitiated in law firstly because the appellant was not heard before any such I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 4 approval and secondly because the same has been granted mechanically, without any application of mind and without due diligence." "8. The learned CIT(A) has erred in law and on facts in confirming the action of AO in referring the case of the appellant to the transfer pricing officer. Under the facts and circumstances of the case, there was no reasons to interfere with the pricing as well as method thereof adopted by the appellant as the same is falling within the parameters of transfer pricing laid down under the scheme of the Act." "9. Alternatively and without prejudice, the learned CIT(A) has erred in law and on facts in confirming the order of the Additional Commissioner of Income Tax acting as Transfer Pricing Officer which is without jurisdiction and against the express provisions of law inasmuch as Additional Commissioner of Income Tax could not have acted as transfer pricing officer." .................................................................................................. 26. We have heard the rival contentions and gone through the facts and circumstances of the case. The facts in detail are available in assessment year 2003-04 in ITA No.157/Ahd/2007, hence, we will discuss this appeal first. 27. We find that the assessee is engaged in the business of manufacturing & sale of Intermediates, dies, colours etc. The assessee has two subsidiaries based in USA and UK namely, AAI and AEL. The transaction with both the AEs have been adjusted by the TPO at Arm's Length Price, reason being the said transaction with these AEs have been understated to the extent of Rs.1,80,62,067/-. For this purpose, the assessee has opted for CUP method as the assessee was having sales of large number of products to these AEs during the years under consideration. The assessee, apart from the AEs, also sold diversified products to various other enterprises who are not related to the assessee. The assessee in view of these facts, opted for CUP method, considering the complexity of the transactions, product diversity and multiplicity of transactions, and this was only the practicable method to determine the profits earned by the assessee, as a whole, as well as to the transactions to which the comparable price applies in an Uncontrolled transactions in the International market, both the AEs as well as non-AEs. The assessee claimed during the course of hearing before TPO, before the AO during the course of assessment proceedings and before CIT(A) submitted the details of price charged to AEs and non-AEs and the reasons for variation. The same details were even produced before us as Annexure-A, which is available at pages 34 to 111 of the assessee's paper book-II. The assessee has I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 5 made comparison in many of the cases with the sales made with AEs in the developed countries and the sales made to under-developed countries to non- AEs. The main contention of the assessee is that the assessee has more margins in the sales made to under-developed countries due to various risks involved in dealing with the under-developed countries. Accordingly, it was the contention that its sales goods to the AEs and the AEs in turn sale the goods to their customers in North / South America, Europe etc., which are highly competitive markets and as such it becomes difficult to sustain. The assessee has denied that it has charged lower rates from AE's as compared to those of Non-AE's, the AE's have not been able to make profits. As per assessee, if the assessee has charged rates, which are higher than those charged to Non-AE's there is a possibility that the AE's will not be able to sale anything. According to assessee, the CUP method is used, as in the said method, controlled transactions are being compared with uncontrolled transactions wherein the degree of comparability with uncontrolled transactions is very high. According to assessee, in any case, it is not necessary to give all the reasons or grounds for justification of a particular method in the audit report itself. If it is stated that a particular method is followed because in majority of the cases prices are comparable between AE and non-AEs, as per the assessee, it has every right to adopt the CUP method. The assessee also admits that in few instances, when prices of other comparable cases are not available, in the assessee's case, the prices charged by it to AE in such cases can be adopted as an ALP. As per the TPO the wholesale margins and volume discounts as well as political risks have not been substantiated by the assessee. Now as per the assessee, both these margins i.e. wholesale discounts and political risks vary from party to party and country to country and in African Countries where high political uncertainty is there, the prices are obviously higher compared to the prices charged to a highly developed nations where law and order and political stability is there. 28. Whether the information submitted by the assessee is enough in the case of Transactions recorded as per the CUP method. We are of the view that the CUP method compares the price charge for property transferred in a controlled transaction to the price charged for property transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the associated Enterprises are not at arm's length and, that the price in the uncontrolled transaction may need to be substitute for the price in the controlled transaction. In the cases, where controlled and uncontrolled transactions are comparable, then regard should be had to the effect on price of border business function other than just product comparability. The examples provided in the OECD guidelines of Transfer Pricing Guidelines for I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 6 Multinational Enterprises and Tax Administration has discussed how the CUP method is to be applied. The relevant para 2.10 to 2.13 read as under:- "2.10 The following examples illustrate the application of the CUP method, including situation where adjustments ma need to be made to uncontrolled transactions to make them comparable uncontrolled transactions. 2.11 The CUP method is a particularly reliable method where an independent enterprise sells the same product as is sold between two associated enterprise. For example, an independent enterprise sells unbranded Colombian coffee beans of a similar type, quality, and quantity as those sold between two associated enterprises, assuming that the controlled and uncontrolled transactions occur at about the same time, at the same stage in the production / distribution chain, and under similar conditions. If the only available uncontrolled transaction involved unbranded Brazilian coffee beans, it would be appropriate to inquire whether the difference in the coffee beans has a material effect o the price. Of example, I could be asked whether the source of coffee beans commands a premium or requires a discount generally in the open market. Such information ma be obtainable from commodity markets or may be deduced from dealer prices. If this difference does have a material effect on price, some adjustments would be appropriate. If a reasonably accurate adjustment cannot be made, here liability of the CUP Method would be reduced, and it might be necessary to combine the CUP method with other less direct methods, or to use such methods instead. 2.12 One illustrative case where adjustments may be required is whether the circumstances surrounding controlled and uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms. 2.13 As another example, assume a taxpayer sells 1000 tons of a product for $9=80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analyzing transactions in similar products to determine typical volume discounts." I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 7 29. Similarly the Bangalore Special Bench of this Tribunal in the case of Aztec Software & Technology Services Ltd. v. ACIT, Circle-11(1), Bangalore (2007) 107 ITD 141 (Bang) ((SB) has held that the burden to establish that international transaction carried by the assessee is at ALP is on the taxpayer. The Special Bench held as under:- "127. Having regard to above statutory provisions, it is clear that burden to establish that international transaction was carried at ALP is on the taxpayer. He has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the Revenue authorities. In case Revenue authorities are not satisfied with the ALP and the supporting documents/information furnished by the taxpayer, the authorities have ample power to determine the same and make suitable adjustments. In such a situation, as rightly admitted in the ground of appeal by the Revenue, this responsibility of determination of ALP is shifted to the Revenue authorities who are to determine the same in accordance with statutory regulations. 128. There is criticism that legislature is not justified in placing onerous burden on the taxpayer to maintain detailed documents and to justify that transaction was carried at ALP. It is contended/argued that this is like insisting upon production of self-incriminating evidence and is uncalled for. This criticism, in our opinion, is without any valid basis. It is to be remembered that international transactions carried out by taxpayer are cross-border transactions. Departmental authorities in India are required to deal with and determine ALP of transactions carried in Asia, Europe, America, Australia, other developed and under-developed countries in Africa, etc. It is very difficult, if not impossible for them to find relevant data of an exact or of a similar transaction or profit made not only by the taxpayer, but also by other similarly situated uncontrolled enterprises. Knowledge of economic conditions prevailing at the place where transactions are carried is also essential. The very nature of this job of collection of data is such that the assessee is in the best position to gather the requisite information. 129. The taxpayer, on the other hand, as a party to the transaction has full knowledge of the transaction carried and profit earned by him. As a person associated with that particular line of business activity, the assessee is reasonably expected to be not only aware about nuances of that business, but also about economic conditions and peculiar circumstances, if any, of that business. He is likely to know even about comparable uncontrolled transactions. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 8 Otherwise too as per the settled law every attempt to collect best evidence has to be made. Evidence of situation has to be called from a person possessing special means to know that situation. Therefore, it is reasonable to call upon the taxpayer to furnish evidence of controlled/uncontrolled transactions which are within taxpayers ' special knowledge. However, tax authorities cannot insist upon the taxpayer to furnish information he does not possess or is not required to maintain under rules. Guidelines given in circulars of CBDT are to be followed. We, therefore, hold that burden of proof to establish ALP and to furnish relevant information has rightly been placed on the assessee. 130. It would not be out of place to mention that almost all countries world over are facing problem of diversion of income by multinational companies and other enterprises to jurisdictions where the tax burden is least or the lowest. Therefore, almost all countries have similar enactments to tackle this menace. We quote below the position of "burden of proof" in some of important countries; it being not possible and practical to note in full details of provision of all the countries. This information is being extracted from Commentaries on Transfer Pricing, 2006 published by Price Water House: "Burden of proof Denmark The question of burden of proof has been one of the most important issue in relation to the development of transfer pricing in Denmark. In the Texaco and BP Denmark Court cases the High Court and Supreme Court confirmed that the burden of proof lies with the tax authorities and that the taxpayer is required to disclose information relevant to the question of whether the arm ' s length principle has been violated. This information would include items such as prices and gross profit earned by the parent company when dealing with other group companies and with unrelated customers. Where this information is not disclosed, the Court concludes that the burden of proof on the Danish tax authorities is reduced. France As a rule, the burden of proof lies with the tax authorities, unless the transfer of profits concerns a tax haven, in which case the burden of proof is transferred to the taxpayer. Recent developments mean that there is now a legal requirement for taxpayers to provide documentation supporting their transfer pricing policies. Though in theory the burden of proof lies with the tax administration, in practical terms the burden of proof has always fallen on the taxpayer where the tax authorities have deemed a profit shift to have taken place or inappropriate transfer pricing to exist. Indonesia Indonesia operates on a self- assessment system with companies setting their own transfer prices. The burden of proof lies with the taxpayer to prove that the original price has been set at arm ' s length. Ireland Under Ireland is self-assessment system, the burden of proof in the event of a revenue audit will fall on the taxpayer. Italy The general principle is that the burden of proof lies with the tax authorities. Where the tax authorities issue an assessment to I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 9 additional tax, however, the taxpayer must prove there is no liability for the additional tax. There are other circumstances in which the burden of proof lies with the taxpayer. The most important of these are the following : If an enterprise that is tax resident in Italy wants to claim a deduction for the costs of transactions with parties that are resident in certain tax havens, then the Italian taxpayer must provide evidence that the foreign party is a genuine commercial undertaking or that the transactions were effected in connection with a real economic interest; and An Italian taxpayer would also have to be able to prove that the relevant transaction actually took place. Malaysia In the self- assessment system, the burden of proof lies with the taxpayer to clear any tax avoidance allegation and/or alleged transfer pricing abuse. The intention of the Malaysian Transfer Pricing Guidelines is to assist the taxpayer in their efforts to determine arm ' s length transfer prices and at the same time comply with the local tax laws and the administrative requirements of the Malaysian tax authorities. In this connection, upon a field audit or enquiry, the relevant taxpayers with related party transactions must be able to substantiate with documents, and to the tax authorities ' satisfaction, that its transfer prices have been determined in accordance with the arm's length principle and that there has not been any abuse of the transfer prices resulting in an alteration of the incidence of tax in Malaysia. Netherlands As indicated previously, there is a legal obligation for the taxpayer to maintain certain transfer pricing documentation. To the extent that this requirement is not met, the burden of proof is ultimately transferred to the taxpayer. In general, there are no statutory provisions to indicate how the burden of proof is divided between the taxpayer and the tax authorities. The allocation of the burden of proof between the parties is at the discretion of the Court. However, in practice and as a result of Dutch case law, if the company ' s revenue is adjusted upwards because of transfer pricing issues, the burden of proof usually lies with the tax authorities. On the other hand, the burden lies with the taxpayer to prove the deductibility of expenses. In transfer pricing cases the burden of proof transfers to the taxpayer if the pricing arrangements are very unusual, for example if comparable uncontrolled prices (CUP) are available but not used, or goods or services are provided at cost or below cost. The burden of proof is also transferred to the taxpayer, and will be more onerous, if s/he refuses to provide information requested by the tax authorities where there is a legal obligation to provide that information, or if the requisite tax return is not filed. Finally, the Court sometimes allocates the burden of proof to the party best able to provide the evidence. New Zealand In New Zealand, the burden of proof normally lies with the taxpayer, not the Commissioner. However, s. GD13(9) places the burden of proof on the Commissioner where the taxpayer has determined its transfer prices in accordance with ss. 13(6) to 13(8) of the New Zealand Tax Act. Where the I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 10 Commissioner substitutes an arm ' s length price for the actual price, then the Commissioner must prove that either : (1) this is a more reliable measure : or (2) the taxpayer has not co- operated with the Commissioner. The guidelines provide guidance on what is considered to be non-cooperation : Where the taxpayer does not provide the requested relevant information to the Commissioner : or If a taxpayer does not prepare adequate documentation, and provide it to the inland Revenue if requested. United Kingdom The position after the 1999 rules is that the burden for proving that transfer prices are at arm ' s length falls squarely on the taxpayer ' s shoulders. The act of submitting the return under self- assessment implicitly assumes that the taxpayer has made all necessary adjustments to taxable profits to take account of non-arm ' s length pricing. Switzerland The burden of proof within Switzerland lies with : The taxpayer regarding the justification of tax deductible expenses; and The tax authorities regarding adjustments, which increase taxable income. This effectively means that a taxpayer has to prove to the Swiss tax authorities that the price it has paid for its tangibles, intangibles and any service it has received from a related party satisfies the arm ' s length principle (i.e., justifies their tax deductibility). On the other side, the Swiss tax authorities ' responsibility is to prove that the compensation for any service rendered by the taxpayer or any tangibles or intangibles transferred to a related party does not reach an arm ' s length level. However, if a taxpayer fails to produce the documents required by the tax authorities, this burden of proof also reverts to the taxpayer. Therefore, it is recommended that Swiss taxpayers maintain appropriate documentation to justify all income and expenses resulting from related party transactions. This is specifically also true with regard to license fees charged to a Swiss entity or support and defense of low profits in connection with limited risk type entities. United States Non- US tax authorities and practitioners alike have tended to be critical of the level of detail included in the US regulations and procedures. However, in considering the US regime, it is important to bear in mind that unlike many of its major trading partners, the US corporate tax system is a self- assessment system where the burden of proof is generally placed on the taxpayer, and where there is an adversarial relationship between the Government and the taxpayer. This additional compliance burden is not unique to the field of transfer pricing." 131. Similar provisions are available in the laws of other countries. It would be seen that even a most advanced country like United Kingdom has provisions placing on the taxpayer the burden of proving that international transaction is carried at ALP. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 11 132. A dispassionate study of provisions of various countries on burden of proof, would show, the following fundamental features : (i) That the burden to establish that international transaction is carried at ALP, is on the taxpayer who is to disclose all the relevant information and documents relating to prices charged and profit earned with related and unrelated customer. (ii) If the AO has determined an ALP, other than the price declared by the assessee, AO has to prove that the price determined by him is reliable and reasonable and confirms the statutory requirement unless the case is covered by situation No. (iii) below. (iii) In case of failure on the part of the taxpayer to comply with the statutory provisions, the tax authorities would have to determine the ALP. In such a situation, burden of proof on tax authorities is much reduced. 133. Having regard to the statutory provisions, particularly the mandate of ss. 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to co-operate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of ss. 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any material collected to be used against the taxpayer is to be put to taxpayer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and record a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the Revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted. This is because the mandate of s. 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record have to determine ALP itself. Subject to statutory provisions, appellate authorities can direct lower Revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 12 134. There would be cases, where taxpayer does not co-operate and fails to furnish ALP or disclose full information, relevant for determination of ALP when called upon to do so by tax authorities. The taxpayer fails to discharge burden placed on the taxpayer. In similar enactments of other countries, it is provided that burden on the Revenue authorities in such a case would be reduced. We have not come across similar provision in Chapter X of the Act. The tax authorities therefore, have to resort to provision of s. 144 of the IT Act and determine the ALP on the basis of the material collected or available on record. In such circumstances, the ALP determined would be on the parity with a best judgment assessment. Such assessment (determination of ALP) would have some approximations and estimations. But even such approximations and estimations must satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. The order of TPO is appealable and therefore, it must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair. 135. On consideration of the relevant provisions, it is evident that in the process of determining ALP, the first important factor to consider is the specific characteristics of services rendered both in the international transaction as also in the uncontrolled transaction. Next important aspect required to be considered is amount of assets employed, risk involved, both in controlled and uncontrolled transactions. If there are such differences between transactions taken for comparison, which are likely to affect the price or cost charge etc. in the open market then reasonable and accurate evaluation is to be done and adjustment made. Reliability of uncontrolled transaction would depend upon the degree of comparability. The uncontrolled transaction may not be taken "as comparable" if there are such material differences as cannot be adjusted. If data found satisfies above requirements then further proceedings to find the most appropriate method, best suited to the facts and circumstances of a particular international transaction is to be selected. In other words, most appropriate method would be the method which provides most reasonable results having regard to the data available for determining arm ' s length price. If there are more than one ALPs determined on the application of most appropriate method then arithmetical mean of such prices or price at option of the assessee within 5 per cent variation is to be adopted [Proviso to s. 92C(2)]. 136. In the light of above general observations, we now proceed to consider various objections of the parties first being clubbing of international transactions for reference to the TPO. The taxpayer, before the learned CIT(A), had contended that clubbing of all transactions with mere mention of aggregate value of all I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 13 transactions in reference to TPO was wrong. A separate reference in respect of each international transaction should have been made. Likewise approval granted by the learned CIT has also been challenged as mechanical and illegal. Such an objection has also been raised in the grounds of appeal. While answering seven questions referred to the Special Bench, we have discussed this objection relating to approval of CIT in detail. In the light of above Idiscussion, we do not find any substance in the technical objections raised by the assessee and accepted by the learned CIT(A) in the impugned order. It is further to be noted that in the audit report filed by the taxpayer in Form No. 3CEB it was stated that the taxpayer had paid Rs. 28,32,20,103 to Aztec US towards onsite software services. Likewise sum paid for marketing services was also stated. Taking above details from the audit report, a reference was made by the AO to TPO to determine ALP of international transactions. The taxpayer and TPO had fully and clearly understood what international transactions were referred for the determination of the ALP. In the light of Circular No. 3 of 2003, approval was rightly given by the CIT as aggregate value of transactions exceeded Rs. 5 crores. The circular being binding was required to be followed. The taxpayer filed all conceivable objections before the TPO. Although each transaction should be separately mentioned, but no prejudice is shown to have been caused to the taxpayer on account of non-mention of each transaction separately. Therefore, in our opinion, this contention is to be rejected." 30. In view of the above dictates provided in the guidelines of transfer price for multi-national enterprises and tax administration in the case of CUP method including the situation where adjustments need to be made to uncontrolled transactions to make them comparable uncontrolled transaction. The assessee has not filed the details of functional analysis of these enterprises taking into account assets used and risk assumed. Similarly, the Hon'ble ITAT Bangalore Special Bench in the case of Aztec Software & Technology Services Ltd. (supra) has placed burden of the taxpayer to justify the transactions carried at ALP by maintaining the documents and other details. The Hon'ble Bangalore Special Bench has also held that taxpayer as a party to the transaction has full knowledge of transaction carried out and as a personal associate with that particular line of business, the assessee reasonably accepted to be not only aware about nuisance of that business and but also economic conditions and peculiar situation of that business. The Bench further held that the assessee knew even about the comparable uncontrolled transaction, and therefore it is reasonable to call upon the taxpayer to furnish controlled / un-controlled transactions which are within taxpayer's special knowledge. Accordingly, the burden placed on the assessee is not discharged in the present case before us as the assessee has not filed the details before TPO or the Assessing officer. The I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 14 relevant details, i.e. the transaction carried out of comparable controlled and uncontrolled transactions. In view of these facts, and in the absence of material, we have no alternative but to expect to set aside this issue to the file of the Assessing officer to decide the issue afresh after giving reasonable opportunity of being heard to the assessee. The assessee may show that sale price of the controlled transactions are at arm's length. If there are differences between the controlled and uncontrolled transactions, then the assessee is entitled to the benefit of adjustment for such differences under the T.P. Rules. The AO/TPO is directed to pass a fresh order in the light of the above observations. This mater is set aside in the entirely to the file of the AO of this issue." 5. He therefore, stated that the issue stood covered by the order of the ITAT in Assessment Year 2004-05 and accordingly needed to be restored to the A.O. 6. Ld. D.R. fairly admitted that the issue was covered by the afore-stated order of the ITAT in the case of the assessee for Assessment Year 2004-05. 7. In view of the above, since the Ld. CIT(A) adjudicated the issue following his order for Assessment Year 2004-05 which has been adjudicated by the ITAT vide its order for the said year dated 24-09-2010 ,as afore-stated, restoring the issue to the A.O. for fresh adjudication.,the issue stands covered by the decision of the ITAT in the case of the assessee for Assessment Year 2004-05 as above. Accordingly, the issue is restored back to the A.O. to be decided in accordance with the direction of the ITAT in Assessment Year 2004-05. Needless to add, the assessee be granted full opportunity of hearing. 8. In view of the above, Ground no. 1 is allowed for statistical purposes. 9. Ground no. 2 raised by the assessee reads as under: 2. Ld. CIT (A) erred in law and on facts in confirming disallowance of claim of depreciation of Rs. 2,66,83,892/- made by AO reducing the depreciation claimed for the year under consideration by enhancing depreciation for A.Y. 2001/02 without I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 15 appreciating the facts that the appellant had opted not to claim any depreciation for A.Y. 2001/02. Ld. CIT (A) instead of taking into consideration the submissions of the appellant confirmed the disallowance on the basis of the decision of the Hon'ble ITAT for A.Y. 2001/02. Ld. CIT (A) ought to have appreciated the controversy independently and deleted the disallowance made by AO. 10. Drawing our attention to the facts of the case from Para 5 page no. 3 of the assessment order and page 4 to 5 and Para 3 of the Ld. CIT(A)’s order, Ld. Counsel for the assessee pointed out that the issue involved related to disallowance of depreciation of Rs. 2,66,83,892/- which was disallowed for the reason that while the assessee had not claimed depreciation for Assessment Year 2001-02, the A.O. had allowed the same for the said year and in subsequent years had accordingly worked out the claim of depreciation on the reduced WDV ,while the assessee had claimed higher depreciation. On account of this difference, A.O. had found the assessee’s claim of depreciation to be in excess to the extent of Rs. 2,66,83,892/- which accordingly was denied to the assessee. The ld. CIT(A) noted that the A.O’s Act of allowing depreciation in Assessment Year 2001-02 had been confirmed by the ITAT. Noting the same he therefore, upheld the order of the A.O. in allowing depreciation to the assessee on the reduced value of WDV worked out accordingly after taking into consideration the depreciation claimed for Assessment Year 2001-02. Our attention was drawn to the relevant findings of the Ld. CIT(A) at para 3.3 of the order as under: 3.3 I have considered the facts of the case, assessment order and appellant's submission. Since the claim of depreciation is coming from assessment year 2001-02 in which the addition made by the assessing officer is confirmed by ITAT. In view of this, appellant doesn't have any case on this issue. Since this issue is decided against the appellant by ITAT in its own case for assessment year 2001-02, this ground is dismissed. 11. Ld. Counsel for the assessee pointed out that in the preceding year also, for Assessment Year 2004-05, the issue had been adjudicated against the assessee by the I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 16 ITAT vide its order in ITA No. 1547/Ahd/2007 dated 24.09.2010. Our attention was drawn to para 2 to 5 of the order dealing with the issue as under: 2 Adverting first to ground no.1, facts, in brief, as per relevant orders are that return declaring nil income filed on 30-10-2004 by the assessee, manufacturing intermediates, dyes and colors, etc., after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"], was selected for scrutiny with the issue of notice u/s 143(2) of the Act on 28-04-2005.During the course of assessment proceedings, the Assessing Officer (AO in short) noticed that though the assessee did not claim any depreciation in the AY 2001-02, the AO allowed the depreciation to the assessee in that year. Since the assessee had claimed depreciation of Rs.37,08,10,879/- in the year under consideration, the AO show-caused the assessee as to why the claim for depreciation be not reduced in the light of his own findings in the AY 2001-02. In response, the assessee submitted vide letter dated 25- 11-2006 that the assessee did not opt for depreciation in AY 2001- 02 in view of the decision of the Hon'ble Jurisdictional High Court in the case of Arun Textile Ltd. as also decision of the Hon'ble Supreme Court in the case of Mahendra Mills Ltd. It was also pointed out by the assessee that the explanation 5 to section 32(1)(ii) was not explanatory and came into operation only with effect from AY 2002-03. Accordingly, relying upon the decision of the Hon'ble Punjab & Haryana High Court in the case of Ram Nath Jindal vs. CIT ,170 CTR 251 and the decision of the Hon'ble Kerala High Court in the case of CIT vs. Kerala Electric Lamp Works Ltd.,183 CTR 182, the assessee contended that depreciation should not be reduced in the year under consideration. However, the AO did not accept the contentions of the assessee. While referring to the amendment in the provisions of section 32 of the Act and the principles laid down by the Hon'ble Jurisdictional High Court in the case of CIT vs. Gujarat Warehousing Corporation,104 ITR 1 and the decision of Hon'ble Supreme Court in the case of CIT vs. Mother India Refrigeration Industries Pvt. Ltd.,155 ITR 711 as also the decision of the ITAT Ahmedabad Bench in the case of United Phosphours Ltd. vs. JCIT (2001) 73 TTJ 404 (Ahd), the AO reduced the claim for depreciation on the basis of his own findings in the AY 2001-02. 3. On appeal, the learned CIT(A) upheld the disallowance, following his own decision for the AY 2003-04. 4. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). Both the parties agreed that the issue is squarely covered against the assessee by the decision dated 24- 07-2009 of the ITAT Ahmedabad Bench-D in the assessee's own case for the AY 2003-04 in ITA No.157/Ahd/2007, following the decision of the Special Bench of ITAT in the case of Vahid Paper Converters vs. ITO (2006) 98 ITD 165 (Ahd) (SB). I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 17 5. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. We find that while adjudicating a similar issue, the Tribunal vide their aforesaid order dated 24-07-2009 in ITA No.157/Ahd/2007, concluded as under:- "3. At the outset, it was brought to our notice that this common issue is recurring in every year and in earlier assessment year 2001-02 in ITA No.3528/Ahd/2004, the "D" Bench of this Tribunal vide order dated 16-05-2008, following the Special Bench of this Tribunal i.e., the Ahmedabad Special Bench in the case of Vahid Paper Converters v. ITO, Vapi Ward- 4, Daman (2006) 98 ITD 165 (Ahd) (SB), wherein under para-5 it was held as under:- "5. We have carefully considered the rival submissions and, perused the material on record. We find that the issue involved is duly covered by the decision of the Special Bench of ITAT in the case of Vahid Paper Converters v. ITO, Vapi Ward-4, Daman (1006) 98 ITD 165 (Ahd) (SB), in which it was held as under: " it is, thus evident that for the purpose of Chapter VI-A, the Assessing officer has to compute the profits and gains of business separately. Of course, the computation has to be made as per the provisions of the Act meaning thereby, while computing the profits and gains of the eligible business, the Assessing officer has to give effect to all the relevant provisions of the Act, which include section 32 also. Therefore, while computing the profits and gains of the eligible business, the Assessing officer has to give effect to the provisions of section 32 also and work out the profits and gains after allowing the depreciation. It is true that certain Division Benches of the Tribunal have taken the view that for computing deduction under Chapter VI-A also, it is the option of the assessee to claim the depreciation or not to claim. However, when the view canvassed by the Revenue is supportable by the decisions of the Supreme Court, the jurisdictional High Court and other High Courts in the sense that while working out the income for the purpose of Chapter VI-A, the depreciation has to be deducted whether opted to the claimed by the assessee or not; and the view canvassed by the assessee was only supported by the decisions of the Tribunal that it is choice of the assessee as in the case of normal computation of income, it cannot be said that both the views are equally possible or reasonable views. The view, which is supported by the decisions of the Supreme Court, jurisdictional High Court and other High Courts, has to be preferred than the view taken by the Tribunal. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 18 Therefore, the depreciation, which is though allowable but not claimed in the return for normal computation of income, has to be allowed while computing the deductions under Chapter VI-A viz., sections 80HH, 80IA, 80IB, etc., of an industrial undertaking. Respectfully following the aforesaid decisions, we do not find any illegality or infirmity in the order of the CIT(A). We accordingly confirm the order of the CIT(A) on this issue. Thus, this ground stands dismissed." 4. Now before us both the Ld. Counsel for the assessee and the learned DR agreed that the issue is covered against the assessee and in favour of the Revenue. We find from the Tribunal's order for assessment year 2001-02, which has confirmed the orders of the lower authorities allowing the depreciation. Accordingly, in these two assessment years, the CIT(A) as well as the Assessing officer has allowed depreciation on correct amount of WDV as worked out. Before us no mistake is pointed out in the computation of WDV and accordingly we uphold the order of CIT(A). This common issue of the assessee's appeals is dismissed." 12. Ld. Counsel for the assessee fairly conceded that the issue stood covered against it in view of the decision of the ITAT in its own case in preceding year as above. Ld. D.R. agreed to the same. I3. In view of the above, since admittedly identical issue stands decided against the assessee in the preceding year i.e assessment year 2004-05 as above, the issue raised in the present ground stands squarely covered by the same following which we confirm the order of the Ld. CIT(A) upholding the disallowance of depreciation of Rs. 2,66,83,892/-. 13.1. Ground of appeal no. 2 is dismissed. 14. Ground no. 3 of the assessee reads as under: 3. Ld. CIT(A) has erred in law and on facts in confirming disallowance of Rs. 14,00,410/- computed by A.O. as per Rule 8D r.w.s. 14A(2) of the Act. Both the lower authorities failed to appreciate that Rule 8D was made applicable from A.Y. 2007-08 and further I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 19 overlooked the submissions of the appellant that in absence of incurring of direct and indirect expenses as well availability of sufficient free funds, no disallowance u/s. 14A was called for. Ld. CIT(A) without giving any cogent reasons confirmed the disallowance made by AO that ought to have been deleted. 15. Brief facts relating to the issue are that the A.O. noted that the assessee had earned exempt income in the form of dividend income amounting to Rs. 2,62,37,663/- during the impugned year. Accordingly, the assessee was asked to submit as to why expenses incurred in earning the said income be not disallowed as per the provisions of Section 14A of the Act. The assessee denied incurring any such expenditure stating that the dividend was received by way of five cheques and the only expenditure incurred was on the person who deposited it. The A.O. was not convinced with the explanation of the assessee stating that a number of costs like interest, administrative and management were associated with the earning of dividend income. Accordingly, the assesee was directed to submit the working of disallowance of expenses pertaining to the dividend income earned as per Rule 8D of the Income Tax Rules, 1962. The same was submitted by the assessee and the expenditure calculated as per the said rules amounting to Rs. 14,00,410/- was accordingly disallowed by the A.O. . 16. Before the Ld. CIT(A), the assessee challenged the disallowance stating that it had sufficient own funds for making the investments and therefore no disallowance was called for u/s. 14A of the Act. It was also contended that the investments were old and no disallowance had been made in the past. The Assessee also contended that Rule 8D was not applicable for the impugned year. The Ld. CIT(A) however upheld the order of the A.O. holding at para 4.3 of his order as under: 4.3 I have considered the facts of the case, assessment order and appellant's submission. It is not in dispute that appellant earned exempt income in the form of dividend on investment of more than RS 6902 Lakhs. It is also not in dispute that appellant borrowed substantial funds on which interest to the extent of RS 2178 lakhs were paid. Apart from this substantial administrative expenses were incurred, part of which may relate to I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 20 investment resulting in exempt income. Considering these facts it is clear that there are expenses in the form of interest and other administrative expenses relatable to earning of exempt income which are to be disallowed under section 14 A. Therefore disallowance under section 14 A is necessary. Assessing officer disallowed the expenses relating to exempt income as per calculation under rule 8D given by the appellant. Coming to the method of computing disallowance under section 14 A, assessing officer disallowed expenses relatable to exempt income as per rule 8D. Up to 2007-08 the method to arrive at disallowable expense was estimation. Thereafter rule 8 D was framed which gives formula for disallowance of expenses relating to exempt income. For interest, proportionate expense is disallowable whereas for other expenses .5% of investment value is disallowable but rule 8D is not applicable for this assessment year. Considering the facts of the case and claim of administrative and other expenses, disallowance made by the assessing officer as per rule 8D is confirmed treating the same as relating to earning exempt income. As regards interest, appellant submitted that it was having interest free funds and profit therefore no interest is relatable to investment resulting in exempt income. However it is seen that appellant borrowed which was used in business purpose as well as investment. Since Common funds are maintained and appellant could not identify the immediate source of investment. Considering the fact that expenses relating to exempt income are to be estimated and rule 8D gives basis for computing such disallowance, therefore the disallowance of interest under section 14 A made by the assessing officer as per rule 8 D is confirmed 17. Before us, the Ld. Counsel for the assessee , reiterating his contentions made before the ld. CIT(A) contested the action of the Ld.CIT(A) for the following reasons a) that Rule 8D was not applicable for the impugned year. b) that there was sufficient own funds available for the purpose of making the impugned investments. c) that disallowance u/s 14A is not automatic on earning of exempt income. 18. Ld.DR on the other hand supported the order of the Ld.CIT(A) I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 21 19. We have heard both the parties. 19.1 With regards to the assesses contention of Rule 8D of the Income Tax Rules,1962 not being applicable for the impugned year,we find that there is no dispute as regards the same with even the Ld.CIT(A) agreeing with it and the Hon’ble Supreme Court having settled this issue in the case of Commissioner of Income Tax Vs Essar Teleholdings Ltd. (2018) 401 ITR 445(SC) .But we find that the Ld.CIT(A) has still gone on to uphold the disallowance of expenses computed as per Rule 8D. We are not in agreement with the same since though the inapplicability of Rule 8D does not rule out any disallowance to be made ,at the same time the quantum of disallowance has to be worked out as per the most appropriate method considering the facts and circumstances of the case.In the present case the Ld.Counsel for the assessee has demonstrated availability of sufficient own funds for the purposes of making the impugned investments calling for no disallowance of interest u/s 14A.Our attention was drawn to the submissions made before the Ld. CIT(A) reproduced at para 4.2 of his order as under: The investment in the shares have been made out of owned funds which was very much available at the disposal during the course of year under consideration. As at 01/04/2004, the Appellant Company was having sufficient owned funds of Rs. 28,524.85 lacs (Pl. refer page no. 20 of Annual Report placed on page no. 1 of Paper Book-1) and during the year under consideration, the Appellant had generated cash of Rs.4,770.83 lacs from operating activities (PI. refer page no.22 of Annual Report placed on page no. 1 of Paper Book -1). The Appellant would like to draw Your Honours attention to Ten Year Preview given on page no.4 of Annual Report (PI. refer pg. no.4 of Annual Report placed on page no.] of Paper Book -1), from where, it can be perused that since 10 years i.e from F.Y. !°95-96 to F.Y.2004-05, the Appellant Company is having sufficient owned funds ranging from Rs.20,593 lacs to Rs.20,011 lacs, which itself demonstrates that the Appellant Company was in a financial position to make investments in shares out of owned funds. This I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 22 proves that the Appellant had available sufficient owned funds at the disposal so as to make investment in shares. In nutshell, submits that the appellant company had sufficient owned funds to make investment in shares/mutual funds and therefore it can never be said that any interest- bearing funds have been diverted in making investment and therefore it is incorrect to say that interest expenditure has been incurred to earn dividend income. In fact when one indivisible bank account is maintained and all the sales proceeds are credited in the said account, even if the said account is CC/OD accounts, funds utilised from such account cannot be said to be from borrowed money if cash accruals are more than the said investments. Reliance is placed on the decision of Woolcombers of India Ltd, v. CIT H34 ITR 219) (Cal). .Therefore addition made by the Ld. assessing officer under section 14A is required to be deleted. 20. We are aware of the proposition of law settled by the Hon’ble Apex Court in the case of CIT (large tax buyer unit) vs. Reliance Industries Ltd. 307 CTR 121 (SC) which was followed in another recent decision of the Hon’ble Apex Court in the case of South Indian Bank Ltd. vs. CIT in Civil Appeal No. 9606 of 2011 dated 09.09.2021, to the effect that where there is a finding of fact that interest free funds available to the assessee was sufficient to meet its investment it will be presumed that the investments were made from such interest free funds. The relevant extract of the order of the Hon’ble Apex Court in its latest decision in South Indian Bank Ltd. from Para 2 to 30 is as under: 2. The question of law to be answered in the present batch of appeals is on interpretation of Section 14A of the Income Tax Act (for short “the Act”) and the same reads as follows: “Whether proportionate disallowance of interest paid by the banks is called for under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to assessee Banks when assessee had sufficient interest free own funds which were more than the investments made” 3. While common arguments have been advanced by the learned counsel for the parties, to place the legal issues in the appropriate perspective, the relevant facts are adverted from the Civil Appeal No. 9606 of 2011 (South Indian Bank Ltd. Vs. CIT, Trichur), for the purpose of this judgment. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 23 4. The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free. 5. Chapter IV of the Act provides for the Heads of Income for computation of Total Income. In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources. The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee. 6. Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962. The new section was inserted in aftermath of judgment of this Court in the case of Rajasthan State Warehousing Corporation Vs. CIT The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income. As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure. Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002. It may be noted that in the present batch of appeals, we are concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments. 7. At outset it is clarified that none of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee. In other words, the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds and shares which yielded the tax-free income, cannot conveniently be related to a separate account, maintained for the purpose. The situation is same so far as overheads and other administrative expenditure of the assessee. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 24 8. In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income. The assessees in these appeals had earned substantial tax-free income by way of interest from tax free bonds and dividend income which also is tax free. It is manifest that substantial expenditure is incurred for earning tax free income. Since actual expenditure figures are not available for making disallowance under Section 14A, the Assessing Officer worked out proportionate disallowance by referring to the average cost of deposit for the relevant year. The CIT (A) had concurred with the view taken by the Assessing Officer. 9. The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone. In consequence, it was held by the ITAT that disallowance under Section 14A is not warranted, in absence of clear identity of funds. 10. The decision of the ITAT was reversed by the High Court by acceptance of the contentions advanced by the Revenue in their appeal and accordingly the Assessee Bank is before us to challenge the High Court’s decision which was against the assessee. 11. Since, the scope of Section 14A of the Act will require interpretation, the Section with sub-clauses (2) and (3) along with the proviso is extracted hereinbelow: - “14A. Expenditure incurred in relation to income not includible in total income - (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 25 Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.” 12. The sub-Section (2) and (3) were introduced to the main section by the Finance Act, 2006 with effect from 01.04.2007. 13. The question therefore to be answered is whether Section 14A, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income. 14. We have heard Mr. S. Ganesh, Mr. S.K. Bagaria, Mr. Jehangir Mistri and Mr. Joseph Markose, learned Senior Counsel appearing for the appellants. Also heard Mr. Vikramjit Banerjee, learned Additional Solicitor General and Mr. Arijit Prasad, learned Senior Counsel on behalf of the respondent/Revenue. 15. The appellants argue that the investments made in bonds and shares should be considered to have been made out of interest free funds which were substantially more than the investment made and therefore the interest paid by the assessee on its deposits and other borrowings, should not be considered to be expenditure incurred in relation to tax free income on bonds and shares and as a corollary, there should be no disallowance under Section 14A of the Act. On the other hand, the counsel for the revenue refers to the reasoning of the CIT(A) and of the High Court to project their case. 16. As can be seen, the contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act. 17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interestbearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing and Mfg. Co. Ltd2 where the answer was in favour of the assessee on the question, whether the Tribunal I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 26 was justified in deleting the disallowance under Section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion. 18. In the above context, it would be apposite to refer to a similar decision in Commissioner of Income Tax (Large Tax Payer Unit) Vs. Reliance Industries Ltd3 where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds. 19. In HDFC Bank Ltd. Vs. Deputy Commissioner of Income Tax4, the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under Section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee’s case for a different Assessment Year) that, if assessee possesses sufficient interest free funds as against investment in tax free securities then, there is a presumption that investment which has been made in tax free securities, has come out of interest free funds available with assessee. In such situation Section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CIT Vs. Suzlon Energy Ltd.5, CIT Vs. Microlabs Ltd.6 and CIT Vs. Max India Ltd.7 Mr. S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of Section 14A of the Act in their decisions favouring the assessees. 20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under Section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made. 21. On behalf of Revenue Mr. Arijit Prasad, the learned Senior Advocate refers to SA Builders v. CIT8 where this Court ruled on issue of disallowance in relation to funds lent to sister concern out of mixed funds. The issue in SA Builders is pending consideration before the larger bench of this Court in SLP (C) No. 14729 of 2012 titled as Addl. CIT v. Tulip Star Hotels Ltd. The counsel therefore, argues that there is no finality on the issue of disallowance, when mixed funds are used. On this aspect, since the issue is pending before a larger Bench, comments from I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 27 this Bench may not be appropriate. However, at the same time it is necessary to distinguish the facts of present appeals from those in SA Builders/Tulip Star Hotels Ltd. In that case, loans were extended to sister concern while here the Assessee- Banks have invested in bonds/securities. The factual scenario is different and distinguishable and therefore the issue pending before the larger Bench should have no bearing at this stage for the present matters. 22. The High Court herein endorsed the proportionate disallowance made by the Assessing Officer under Section 14A of the Income Tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee. On this aspect we wanted to know about the law which obligates the assessee to maintain separate accounts. However, the learned ASG could not provide a satisfactory answer and instead relied upon Honda Siel Power Products Ltd. v. DCIT9 to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment, as can be seen, mainly dealt with re-opening of assessment in view of escapement of income. The contention of department for re-opening was that the assessee had earned tax-free dividend and had claimed various administrative expenses for earning such dividend income and those (though not allowable) was allowed as expenditure and therefore the income had escaped assessment. On this, suffice would be to observe that the action in Honda Siel (supra) related to re-opening of assessment where full disclosure was not made. An assessee definitely has the obligation to provide full material disclosures at the time of filing of Income Tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. In absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the judgment cited by the learned ASG will have no application to support the Revenue’s contention against the assessee. 23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT10. This case interestingly is relied by both sides’ counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of Section 14A in the Act in the following words: - “3............. The purpose behind Section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income........” The following was written explaining the scope of Section 14-A(1): “41. In the first instance, it needs to be recognised that as per Section 14- A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in relation to income which does not form part of the total income under this Act”. Axiomatically, it is that I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 28 expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.” Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court. Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: “ 50. It is to be kept in mind that in those cases where shares are held as “stock-in-trade”, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT, 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stockin-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits..........” The learned Judge then considered the implication of Rule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying the theory of apportionment, the Assessing Officer must record satisfaction on Suo Moto disallowance only in those cases where, the apportionment was done by the assessee. The following is relevant for the purpose of this judgment: 51. ...................It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect..............” I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 29 24. Another important judgment dealing with Section 14A disallowance which merits consideration is Godrej and Boyce Manufacturing Company Ltd. V. DCIT11. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads as follow: “36. ......... what cannot be denied is that the requirement for attracting the provisions of Section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income.............” 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 02.11.2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in- trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT Vs. Nawanshahar Central Cooperative Bank Ltd.12 wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr. CIT, vs. State Bank of Patiala13 while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock in trade, and all income received on such shares and securities must be considered to be business income. That is why Section 14A would not be attracted to such income. 26. Reverting back to the situation here, the Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular. 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 30 28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work – The Wealth of Nations may aptly be quoted: “The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.” Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue. 30. In view of the forgoing discussion, the issue framed in these appeals is answered against the Revenue and in favour of the assessee. The appeals by the Assessees are accordingly allowed with no order on costs. 21. Therefore it is settled law that where sufficient own funds are available and the investments have been made out of mixed funds, no disallowance u/s. 14A is called for. In the facts of the present case, the assessee had canvassed the facts before the Ld. CIT(A) that it had own funds of 28,524.85 lacs and had generated cash of 4,770.83 lacs during the year. That in the past 10 years from 1995-96 to 2004-05, the assessee was having sufficient own funds ranging from 20,593 lacs to 20,011 lacs which was more than sufficient for making the impugned investments of Rs. 6902 lacs . Since these facts have remained uncontroverted by the Ld. CIT(A) as also the fact that the investments have been made out of mixed funds, we have no hesitation I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 31 in holding that no disallowance of interest u/s. 14A was warranted in the impugned case. 21.1 As for disallowance of administrative expenses the assessee has contended that other than depositing cheques of dividend earned no other expense was incurred by the assessee. The counter of the Revenue to the same we find does not address this contention of the assessee and is purely presumptive, that considering the huge amount of administrative expenditure incurred some amount must relate to the earning of exempt income. But at the same time considering the quantum of investment made, some amount of expenses must have been incurred in relation to maintaining the same and earning income therefrom . Considering the entire facts and circumstances therefore the disallowance of expenses with respect to administrative expenses is restricted to Rs. 1,00,000/-The balance disallowance of Rs,.13,00,410/- is directed to be deleted. 22. Ground of Appeal no.3 is partly allowed. 23. Ground no. 4 raised by the assessee reads as under: 4. Ld. CIT (A) has erred in law and on facts in confirming disallowance of Rs. 16, 26, 668/- made by AO on account of writing off of irrecoverable balances without appreciating the fact that these advances were given for and during the course of business of the appellant. Ld. CIT (A) ought to have allowed such loss as business loss. 24. Brief facts relating to the issue are that the assessee had claimed irrecoverable balance written off during the year amounting to Rs. 16,26,668/-. On being confronted during assessment proceedings to explain the nature regarding the same, it was contended by the assessee that it related to payment made to M/s. Consultare Makaya Aso. Ltd. (Makaya) in relation to an agreement entered into for collaboration for technology. That it was the first installment paid which was written off since the contract was closed down as the technology did not work well. The assessee was I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 32 asked to explain as to why the same should not be treated as capital expenditure to which it was submitted that no new product was developed in lieu of the agreement and the payment related to the business of the assessee company and hence was to be allowed as revenue expenditure. The A.O. was not convinced with the explanation of the assessee and held that the amount written off related to capital expenditure and accordingly disallowed the claim of irrevocable balances relating to the same by the assessee. 25. The Ld. CIT(A) upheld the order of the A.O. holding at para 5.3 of his order as under: 5.3 I have considered the facts of the case, assessment order and appellant's submission. Appellant claimed advances given for new project for technical collaboration. Undoubtedly this claim is capital in nature and not allowable as revenue. Further it is also not allowable as bad debts since condition of section 36 (2) is not satisfied. Appellant claimed it as business loss but the same is not allowable since it was not incurred for the running of business. Undoubtedly it was incurred for new project in the form of technical collaboration. Therefore this loss is not incidental to the running of business and accordingly not allowable under section 28 also. The decisions relied upon by the appellant are on different facts. The advances were given in those cases for running of the business whereas in the case of appellant; the advance was given for new project which did not commence. Therefore assessing officer is justified in disallowing the claim. The disallowance made is therefore confirmed. 26. Before us, Ld. Counsel for the assessee reiterated the contentions made before the lower authorities. He drew our attention to the letter addressed to the Assessing Officer dated 28 th November, 2008 explaining the nature of the irrevocable balances written off placed at paper book page no. 31 is as under: 4. Further to details of ‘irrecoverable balances written off’ given in Annexure -5 of our letter dt. 19-11-2008, You have asked us to explain the amount written of M/s Consultore Makaya Aso. Ltd. (Makaya) In this regards please note that the Assessee Company entered into an agreement with Makaya for collaboration for technology. The amount was paid as first installment. But ultimately the technology did not work well and the contract was closed down. Now the I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 33 amount paid was written off. We enclose copy of approval for payment from the Govt Department of Industrial Policy & Promotion as Annexure - 3. We produce ledger accounts of creditors for your verification. 27. He also drew our attention to the copy of approval for payment from the Government Department of Industrial Policy and Promotion placed before us at paper book page no. 35. 28. Referring to the above, he contended that clearly the amounts written off were revenue in nature relating to payment made for technical knowhow and therefore the revenue authorities, it was contended had incorrectly treated the same as being capital in nature. 29. Ld. D.R. on the other hand supported the order of the lower authorities. 30. We have heard the rival contentions. The solitary issue is whether irrevocable balances written off by the assessee amounting to Rs. 16,26,668/- were capital or revenue in nature. On going through the documents referred to before us and also the orders of the authorities below, we find that none of the parties have been able to bring out clearly the facts to establish the exact nature of the amount which was written off. There is nothing on record clarifying the exact purpose for which the expense was incurred. The assessee has claimed that the same related to the first installment paid in lieu of technical collaboration agreement entered into with a party namely M/s. Consultare Makaya Aso. Ltd. Besides this, the assessee has referred to the Government approval granted for making the payment. We have perused the contents of this document and except for stating that it relates to technical knowhow fees.,there is nothing else in the said document to bring out the exact nature of the payment.Even the Revenue, we find has no basis for treating the same as capital in nature. It goes without saying that the real test for determining whther the payment I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 34 was revenue or capital in character entirely depends on the pupose for which it was incurred. The same can be determined from the technical collaboration agreement. In the absence of the same, the claim of either of the parties merits no consideration and it is not possible to adjudicate on the issue. We, therefore, considerate it fit to restore this matter to the Assessing Officer to determine the nature of the amount written off by the assessee from the contents of the technical collaboration agreement and any other document which he considers necessary. The A.O. is directed thereafter to adjudicate this issue in accordance with law. Needless to add, the assessee be granted due opportunity of hearing. 31. Ground of appeal no. 4 is allowed for statistical purposes. 32. Ground no. 5 raised by the Assessee reads as under: 5 Ld. CIT (A) erred in law and on facts in confirming disallowance of deduction claimed of Rs. 4,90,84,017/- for new power plant made by AO denying the benefit u/s 80IA of the Act. Ld. CIT (A) also rejected the claim without independently examining the issue by merely holding that the same was to be denied since it was not allowed in the earlier years. 33. Drawing our attention to the facts of the issue, Ld. Counsel for the assessee pointed out from page 12 to 18 para 7 of the CIT(A)’s order that the assessee had been denied deduction u/s. 80IA of the Act on new power plant claimed at Rs. 4,90,84,017/-,since the assessee’s claim for the same since assessment year 2001-02 had been consistently denied by the department which had been upheld by the ITAT. The Ld. CIT(A) upheld the order of the A.O. for the same reason at para 7.3 of his order as under: 7.3 I have considered the facts of the case, assessment order and appellant's submission. This ground has two limbs- rejection of claim of deduction under section 80 IA in respect of new power plant RS 4,90,84,017 and reduction in claim of deduction in respect of I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 35 captive power plant. As far as rejection of claim in respect of new power plant is concerned, it is admitted by the appellant that this issue is decided against it by ITAT Ahmedabad in assessment year 2001-02 and therefore it is covered against the appellant. In view of this the appellant's claim in respect of deduction under section 80 IA for new power plant is rejected and addition made by the assessing officer is confirmed. 34. Before us, Ld. Counsel for the assessee pointed out that the order of the ITAT for Assessment Year 2001-02 which was relied upon by the lower authorities for denying the claim of deduction u/s. 80IA of the Act on the new power plant was recalled in a Miscellaneous Application filed by the assessee in M.A. No. 324/Ahd/2008.That the department had gone in appeal against the order passed in the Miscellaneous Application to the High Court which in turn had set aside the order of the ITAT in the Miscellaneous Application vide order dated 01.08.2016 . Copy of the order of the Hon’ble High Court in Tax Appeal No. 635 of 2012 with Tax Appeal No. 740 of 2013 was placed before us. Ld. Counsel for the assessee contended that the issue is pending in assessee’s appeal in quantum proceedings before the Hon’ble High Court. 35. Ld. D.R. agree with the contentions of the Ld. Counsel for the assessee. 36. We have heard both the parties. We have also gone through the orders of the lower authorities and the decisions referred to by the ld. Counsel for the assessee before us. On going through all of the above, we find that the assessee had been denied deduction u/s. 80IA on new power plant in assessment year 2001-02 which had been upheld by the ITAT also. This fact is evident from the orders of the lower authorities who in turn have relied on the order of the ITAT in A.Y. 2001-02 for denying deduction u/s. 80IA on new power plant. We have also gone through the order of the Jurisdictional High Court in the case of the assessee for assessment year 2001-02, passed in appeal filed by the Revenue against order of the ITAT in Miscellaneous application filed recalling the order passed by it in quantum I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 36 proceedings. We find that the High Court had noted that the issue arises out of the rectification application by the assessee and the substantial question of law framed by the High Court was whether the ITAT was justified in recalling its judgment relying upon the subsequent decision of the Jurisdictional High Court in the Case of Gujarat Alkalies and Chemicals Ltd. vs. CIT reported in [2013] 350 ITR 94 (Guj) on the ground that there was error apparent on record. The question of law framed by the Hon’ble High Court is reproduced hereunder: “For the purpose of this Tax Appeal, we frame following substantial question of law. "Whether the Income Tax Appellate Tribunal was justified in recalling its judgment relying on the subsequent decision of this Court in case of Gujarat Alkalies and Chemicals Ltd. v. Commissioner of Income-tax, reported in [2013 350 ITR 94 (Guj) on the ground that there was an error apparent on the face of the record committed by the Tribunal." 37. The Hon’ble High Court went on to hold against the assessee,holding that while the case of Gujarat Alkalies and Chemicals Ltd. (supra) laid down certain broad propositions for ascertaining whether a new industrial undertaking was established, it did not lay down a ratio which could be straightway applied to the facts of the present case before the Tribunal. The Hon’ble High Court therefore held that the order on the issue could not have been recalled by the ITAT in rectification application on the basis of the decision in the case if Gujarat Alkalies(supra) and therefore, the order passed by the ITAT in Miscellaneous Application recalling its order for adjudicating the issue afresh, was set aside. The relevant findings of the Hon’ble High Court at para 10 to 17 of the order is as under: 10. From the facts on record, it emerges that the Tribunal in its original judgment dated 16.05.2008 had held that the assessee had not established a new power plant so as to qualify for deduction under section 80IA of the Act. The Tribunal recalled this order in exercise of powers of rectification on the ground that this view is not in consonance with I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 37 in case of Gujarat Alkalies and Chemicals Ltd. (supra). It is undisputed that under section 254(2) of the Act, the Tribunal enjoys the power to rectify any mistake apparent on the face of the record at any time within four years from the date of the order. In view of the judgment of this Court in case of Assistant Commissioner of Income-Tax v. Saurashtra Kutch Stock Exchange Limited, reported in 262 ITR 146, the decision of the jurisdictional High Court even if rendered subsequently, would constitute a mistake apparent on record, investing the Tribunal with jurisdiction to rectify the mistake. It was therefore not even the argument of the Revenue that merely because the judgment of the Gujarat High Court in case of Gujarat Alkalies and Chemicals Ltd. (supra) was delivered subsequent to the judgment of the Tribunal, the same would not form a ground to hold that the Tribunal's judgment suffered from an apparent mistake. However, the Revenue argued that the said judgment did not clinch the issue and at any rate, it was debatable whether by virtue of the judgment of Gujarat High Court, the Tribunal's view would be rendered incorrect and in that view of the matter, power of rectification could have been exercised. 11. As noted, the Supreme Court in case of T.S. Balram (supra) held that a mistake apparent on record must be obvious and patent mistake and not something which can be established on a long drawn process of reasoning where two opinions are possible. 12. In case of Honda SIEL Power Products Ltd.(supra), the Supreme Court highlighted that the purpose behind enactment of section 254(2) is based on the fundamental principle and no party appearing before the Tribunal should suffered on account of the mistake committed by the Tribunal and that power of rectification of the Tribunal is granted to see that no prejudice is caused to either of the parties by the decision of the Tribunal based on the mistake apparent from the record. Section 254 (2) itself refers to a mistake apparent on record/ which can be rectified. The concept of mistake apparent on record was not diluted by the Supreme Court in case of Honda SIEL Power Products Ltd. (supra) also. 13. In case of Saurashtra Kutch Stock Exchange Ltd. (supra) also, the Supreme Court observed that a patent manifest and self evident error which does not require elaborate I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 38 discussion of evidence or arguments to establish it can be said to be an error apparent on the face of the record. In the said judgment, the II Supreme Court approved the decision of Gujarat High Court in case of Saurashtra Kutch Stock Exchange Ltd. (supra). 14. In view of such settled legal position, we may examine the facts on hand. As noted, the assessee had installed a turbine for power generation, which relied on the excess steam production capacity of the plant. The assessee claimed that it had thus, set up a new power plant which qualify for deduction under section 80IA of the Act. The Tribunal by its original judgment, upheld the view of the Revenue authorities holding that turbine itself would not be sufficient to generate power and the plant therefore would not qualify as a new industry. On the basis of judgment of Supreme Court in case of Gujarat Alkalies and Chemicals Ltd. (supra), however, the Tribunal was persuaded to recall this judgment and post the appeal for further hearing. In Gujarat Alkalies' case, the facts were that the assessee was in the business of manufacturing caustic soda and other chemicals, for which, it had installed a production plant. The assessee acquired a new industrial license and a new letter of intent for substantial expansion of the production capacity of the caustic soda, by which, its existing capacity was nearly doubled. The assessee had made sizable investment in acquiring new machinery and plant. The assessee therefore claimed that this was a new industrial undertaking and the profit in respect of which would qualify for deduction under section 80IA of the Act. The claim was rejected by the Revenue authorities and the Tribunal on the ground that this is a case of substantial expansion and not of installment of new industry. One of the grounds pressed in service was that, the assessee did not produce any evidence to prove that the new unit could independently produce the goods without taking assistance of the existing plant and machinery of the old unit. When the assessee approached the High Court, in this context, the High Court observed that there was no logic for the argument that the true test would be whether a new industrial undertaking can function independently of the existing industrial undertaking. On the question of satisfying the test of a separate and distinct identity of the industrial unit set up, the Court was of the opinion that only because to a certain extent, the new undertaking is dependent on the existing unit, will not deprive the new undertaking status of a separate and distinct identity. It all depends on the nature of technicality and the mechanism of production. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 39 15. Thus while discarding the theory of the test of separate and distinct identity failing merely because the new undertaking was dependent on the existing one, the Court opined that it all depends on the nature of technicality and the mechanism of production. In the later portion of the judgment, the Court observed that "The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is a new identifiable endeavor where substantial investment of fresh capital is made to enable earning of profit attributable to that new capital." 16. It can thus, be seen that the High Court in case of Gujarat Alkalies and Chemicals Ltd. (supra) while laying down certain broad propositions for ascertaining whether a new industrial undertaking in the given set of facts was established, did not lay down ratio which can be straightway applied to the facts of the present case. In the present case, the view adopted by the Revenue authorities which was upheld by the Tribunal was that by mere installation of turbines, the assessee did not install a new industry, since turbines themselves would not be sufficient for power generation, without generation of steam. When the High Court in case of Gujarat Alkalies and Chemicals Ltd. (supra) referred to the issue depending on the nature of technology and mechanism of production, it left this question open to be judged case specific. This was therefore not a case where by virtue of the judgment of the case of High Court in case of Gujarat Alkalies and Chemicals Ltd. (supra), it can be stated that the Tribunal had committed an error apparent on record which needed rectification. At best, the High Court propounded that mere dependence of a new industry on an existing industry, would not disqualify itself from claiming deduction. 17. In the result, respective orders of the Tribunal dated 11.05.2012 and 22.03.2013 are set aside. Question answered in favour of the Revenue. Tax appeals disposed of accordingly. 38. Therefore on setting aside of the order passed in the Miscellaneous Application, by the ITAT, the original order of the ITAT on the issue stands restored and I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 40 according to which, the assessee is not eligible to claim deduction u/s. 80IA on new power plant set up. This position as on date is admitted to by both the parties. 39. In view of the above, we see no reason to interfere in the order of the Ld. CIT(A) who has followed the order of the ITAT in assessment year 2001-02 while denying the claim of deduction u/s. 80IA of the Act on new power plant amounting to Rs. 4,90,84,017/-. 40. Ground of appeal no. 5 is accordingly dismissed. 41. Ground No. 6 raised by the assssee reads as under: 6 Ld. CIT (A) has erred in law and on facts in confirming disallowance of Rs. 3, 35, 59, 689/- out of total deduction claimed of Rs. 9, 58, 97,268/- for captive power plant denying the benefit u/s 80IA of the Act. Ld. CIT (A) erred in confirming action of AO in estimating profits ignoring the certificate issued by the Auditor, which itself being illegal and without jurisdiction ought to have been quashed. Ld. CIT (A) failed to appreciate various submissions, evidences and supporting case laws relied upon by the appellant and instead formulated a completely new basis of computing deduction to be granted u/s. 80IA of the Act. The order of Ld. CIT(A) against the provisions of law deserves to be quashed and claim of deduction u/s. 80IA of the act be granted as claimed. 42. The facts relating to the issue are that the assessee had claimed deduction u/s. 80IA in respect of profits earned on captive power plant amounting to Rs. 9,62,10,765/-. The A.O. noted that the basis of computing the profits was the selling price of electricity of Gujarat Electricity Board at Rs. 5.766 per unit. The A.O. noted that as per this rate, the assessee had earned profits @ 37.75% of the entire credit for internal consumption which according to him was too high, therefore he reduced the rate of credit for electricity to 4.266 and accordingly reduced the profits earned on captive power plant to Rs. 6,26,51,076/- as against 9,62,10,765/- claimed by the I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 41 assessee. Thus reducing the claim of deduction on captive power plant by Rs. 3,35,59,689/-. 43. The matter was carried in appeal before the Ld. CIT(A) who upheld the order of the A.O. holding at para 7.3 as under: As regards reduction of claim in respect of captive power plant, assessing officer reduced the deduction under section 80 IA (8) on the ground that appellant considered transfer of electricity generated by captive plant to other business of the appellant is at the rate on which GEB sold electricity to the appellant. However it is not in dispute that appellant cannot sale electricity at this rate in the open market. The market rate is defined in explanation below sub section 8 to section 80 IA and as per that market value means the price those goods or services would ordinarily fetch in open market. Therefore this has to be considered in the price at which appellant's captive power plant can sell electricity in the open market in ordinary course of business. The rate at which appellant is buying GEB included distributing company's margin which is not available to the generator which is the appellant's eligible unit. If the distributors margin and transmission and distribution losses are considered, the rate on which electricity can be sold by a generator is the GEB's buying rate and not selling rate. The rate at which GEB which is distributor is selling cannot be the market rate for electricity in the case of electricity generator. This is so because generator will not get distributing margin and transmission and distribution losses which accounts for sizeable sale price. In view of this appellant is not justified in adopting the sale rate of GEB rather than buying rate of GEB. The important test is that if appellant would not have used electricity for captive use, at what rate it could have sold in the market. The answer to this is clear and unambiguous. It can be sold only at the rate at which GEB buys electricity in the market. Therefore it is crystal clear that GEB buying rate is the market rate of electricity for the appellant which is generator of electricity and not GEB selling rate which consists of many other items as discussed earlier apart from electricity cost. There can't be any preferential treatment for captive use as against open market sale. Considering this I am of the clear view that GEB buying rate is the market rate for the purpose of working out profit of electricity generated by captive power plant. The decisions relied upon by the appellant have not considered the specific features of electricity market in which distributors suffers transmission and distribution losses which is not there with generators. In view of this the market price in case of distributor of electricity will be much higher than market price for generator of electricity. If this aspect is considered, the market value for the generator of electricity will be the rate at which electricity generator can sale which is nothing but the buying rate of distributor which is GEB in this case. In view of this I uphold the disallowance made by the assessing officer. In the final result, appeal is partly allowed. I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 42 44. Before us, Ld. Counsel for the assessee contended that this issue was squarely covered by the decision of the Jurisdictional High Court in the Case of Gujarat Alkalies & Chemicals Ltd. 395 ITR 247, Alembic Ltd. in ITA No. 553 & 554 of 2017 and by the decision of the ITAT Ahmedabad Bench in the case of Gujarat Fluorochemicals Ltd. in ITA No. 805 & 2744/Ahd/2017. Copies of all the above orders was placed before us in compilation of orders at paper book page no. 10 to 27. 45. Ld. D.R. on the other hand supported the order of the revenue authorities. 46. We have heard the contentions of both the parties. The solitary issue to be considered and adjudicated is whether for the purpose of computing profits earned by captive power plant for the purposes of claiming deduction u/s.80IA(4) of the Act, the credit for captive consumption of electricity is to be the selling price adopted by the State Electricity Board i.e. (GEB) or the purchase price of GEB. This identical issue, it has been pointed out to us by the Ld. Counsel for the assessee, has already been dealt with by the Jurisdictional High Court in the case of Gujarat Alkalies & Chemicals Ltd. & Alembic Ltd (supra) as under: In both the tax appeals though slightly differently worded, the questions concerning the same assessee are identical and concern the issue of deduction under section 80IA of the Income Tax Act granted to the assessee by the Tribunal on captive power generation plant. The second question is with respect to recognising such claim on the basis of purchase price of power from GEB and substituting the rates of 2.47 per unit adopted by the Assessing Officer. 3. Since both the issues are covered by various judgments of this Court, we do not find it necessary to record facts at any length. Division Bench of this Court by judgement dated 22.11.2011 in Tax Appeal No.2092/2010 in somewhat similar controversy observed as under : “3. With respect to Question [B], the issue pertains to sub-Section (8) of Section 80IA of the Income Tax Act, 1961. The assessee had a CPP Unit generating electricity, which was supplying it to a general unit. The electricity generated is being supplied to other consumers also. The CPP unit charged Rs.5.40 ps. per unit from the general unit. The Assessing Officer applying sub-Section (8) of Section 80IA restricted the same to Rs.5.32 ps. per unit and, thereby, restricted the deductions claimed by the assessee under Section 80IA of the Act. This restriction was primarily I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 43 on the basis that the rate of Rs.5.40 ps. charged by Gujarat Electricity Board (“ GEB” for short) was inclusive of 8 paise per unit of electricity duty. This component of electricity duty the Assessing Officer discarded for the purposes of ascertaining market value of the electricity generated by the CPP Unit and supplied to its general unit. 4. CIT (Appeals) confirmed the view of the Assessing Officer on the same line of reasoning. The Tribunal, however, on further appeal by the assessee, reversed the orders passed by the Revenue authorities referring to and relying upon the decisions of other Tribunals. The Tribunal was of the opinion that the market value of the electricity supplied by the CPP Unit to the general unit would be the same being charged by GEB from the consumers. 5. Counsel for the Revenue contended that the component of 8 paise per unit was the electricity duty which GEB was not authorized to retain but had to pass on to the Government. In essence, GEB was only collecting 8 paise per unit as electricity duty for and on behalf of the Government. He submitted that the market value of the electricity should be reckoned on Rs.5.32 ps. per unit as was done by the Revenue authority. 6. Under sub-Section(8) of Section 80IA of the Act, if it is found that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80IA in case of the eligible business as if the transfer had been made at the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture. 7. We may notice that the Tribunal did not accept the contention of the assessee that the electricity is neither goods nor services and that, transfer of electricity, therefore, would not be covered under sub-Section (8) of Section 80IA of the Act. However, in so far as the Tribunal's reasoning to adopt the market value of the goods at Rs.5.40 ps. per unit is concerned, we find no error. Undisputedly, GEB supplied the electricity to its consumers at the same rate. This, therefore, was a market value of the electricity supplied by the CPP Unit to the general unit. The fact that this amount of Rs.5.40 ps. comprises of a component of 8 paise, which was electricity duty, to our mind, would make no difference in so far as the market value is concerned. To a consumer, the price being paid remains 5.40 ps. per unit. The fact that the seller retains only Rs.5.32 ps. out of the said collection and passes on 8 paise per unit to the Government in the form of electricity duty, to our mind, would make no difference. This question is, therefore, not required to be considered.” 4. This was followed in case of Commissioner of Income-tax v. Shah Alloys Limited in Tax Appeal No.2093/2010. This was reiterated in Tax Appeal No.1646/2010 in case I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 44 of ACIT Bharuch Circle, Bharuch Through Commissioner v. Pragati Glass Works Pvt Ltd. (order dated 30.1.2012), in which following observations were made : “7. To our mind, Tribunal has committed no error. Assessing Officer and CIT(Appeals) while adopting Rs.4.51 per unit as the value of electricity generated by eligible unit of assessee and supplied through its non eligible unit only worked out cost of such electricity generation. In fact CIT(Appeals) in terms recorded that Rs.4.51 was computed as the reasonable value of the electricity generated by eligible unit of assessee. This amount included Rs.4.17 per unit which was the cost of electricity generation and Rs.0.34 per unit which was duty paid by the assessee to GEB for such power generation. Thus the sum of Rs.4.51 per unit only represented the cost of electricity generation to the assessee. In Section 80IA(8) of the Act what is required to be ascertained is the market value of the goods transferred by the eligible business, when such transfer is by eligible business to another non eligible business of the same assessee and the consideration recorded in the accounts of the eligible business does not correspond to market value of such goods. Term “Market Value” is further explained in explanation to said sub-section to mean in relation to any goods or services, price that such goods or services will ordinarily fetch in the open market. To our mind sum of Rs.4.51 per unit of electricity only represented cost of electricity generation to the assessee and not the market value thereof. It is not in dispute that the GEB charged Rs.5 per unit for supplying electricity to other industries including non eligible unit of the assessee itself. Tribunal therefore, while adopting the said base figure and excluding excise duty therefrom to work out Rs.4.90 as the market value of the electricity generated by the assessee, to our mind, committed no error. It can be easily seen that if the assessee were to supply such electricity or was allowed to do so in the open market, surely it would not fetch Rs. 4.51 per unit but Rs.5 per unit as was being charged by GEB. Since the excise duty component thereof would not be retained by the assessee, Tribunal reduced the said figure by the nature of excise duty and came to the figure of Rs.4.90 to ascertain the market value of electricity generated by the eligible unit and supplied to non eligible business of the assessee. No error was committed by the Tribunal. No question of law therefore, arises. Tax Appeal is dismissed.” 5. Issue once again reached the Division Bench of this Court in case of Commissioner of Income-tax-I v. Alembic Limited in Tax Appeal No.471/2009 and connected appeals. The Division Bench referring to earlier judgments of the Court held as under : “11. We have considered the submissions made by the learned counsel for the parties. We have also considered the case laws cited by the learned counsel for the assessee. Taking into consideration the judements of this court and other High Courts, cited above, we are of the opinion that the Tribunal has rightly allowed the claim of the assessee. In that view of the matter, we do not find any infirmity in the order of the Tribunal. Therefore, we answer question (C) and (D) in favour of the assessee and against the revenue.” I.T.A No. 1681/Ahd/2011 A.Y. 2005-06 Page No Atul Ltd. vs. ACIT 45 6. Issues are thus considered on number of occasions by the Court and held against the Revenue. Questions are answered against the Revenue. Both the tax appeals are therefore, dismissed. 47. The same was followed by the ITAT in the case of Gujarat Fluorochemicals Ltd.(supra). 48. The Ld. D.R. was unable to distinguish the aforesaid decision before us. In view of the above since the issue is squarely covered in favour of the assessee by the decision of the Jurisdictional High Court as above. The issue stands decided in favour of the assessee. 50. Ground of appeal no. 6 is allowed. 51. In effect appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 23-02-2022 Sd/- Sd/- (MADHUMITA ROY) (ANNAPURNA GUPTA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad : Dated 23/02/2022 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद
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