DCIT, CHENNAI V. Sical Logistics Ltd., CHENNAI

ITA 1695/CHNY/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6271 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 13-06-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BHUSARI
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Search and seizure; Earning of tax free income; Proportionate interest; Question of law; Cost of acquisition; Wholly owned subsidiary; Fair market value; Bad and doubtful debts; Valuation report; Notional interest; Tax effect; Capital receipt; Commercial expediency; Revised return; Revenue expenditure
• Section: 32; 37; 28; 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' ! # . $ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER . /ITA NOS. 1695, 1696 & 1697/MDS/2014 / ASSESSMENT YEAR : 2008-09, 2009-10 & 2010-11 & CO NO.84/MDS/2014 (IN ITA NO.1697/MDS/2014) THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-V(1), CHENNAI 34. ( /APPELLANT) V. M/S. SICAL LOGISTICS LTD ., SOUTH INDIA HOUSE, 73, ARMENIAN STREET, CHENNAI 600 001. PAN AAACS3789B RESPONDENT/CROSS OBJECTOR) / APPELLANT BY : SHRI MILIND MADHUKAR, JCIT & SHRI BHUSARI, CIT / RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE / DATE OF HEARING : 25.05.2017 !' / DATE OF PRONOUNCEMENT : 18.08..2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THE APPEALS FILED BY THE REVENUE AND THE CROSS-OB JECTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST DIFFEREN T ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR THE ASSESS MENT YEARS 2008-09, 2009-10 & 2010-11. - - ITA 1695 TO 16 97 & CO 84/MDS/14 2 2. THE FIRST COMMON GROUND IN THESE REVENUE APPEALS IS THAT THE CIT(APPEALS) ERRED IN CONFIRMING ONLY PAR T OF DISALLOWANCE MADE BY THE AO U/S.14A READ WITH RULE 8D BY HOLDING THAT ONLY AS PER CLAUSE (II) OF RULE 8D PRO PORTIONATE INTEREST PAID ON BORROWED FUNDS ARE TO BE DISALLOWE D. 3. WE CONSIDER THE FACTS NARRATED IN ITA NO.1695/MD S/2014 FOR THE SAKE OF BREVITY, WHICH ARE THAT THE ASSESSE E HAS EARNED INCOME OF 702.26 LAKHS DURING THE AY 2008-09 AND 158.29 LAKHS DURING AY 2009-10 AND CLAIMED THE SAME AS EXE MPT U/S.10 OF THE INCOME-TAX ACT. 1961. THE ASSESSEE H AS NOT INDICATED THE EXPENDITURE RELATABLE EXCLUSIVELY TO EARNING THIS INCOME. HENCE, THE AO HAS CALCULATED IN TERMS OF R ULE 8D OF THE IT RULES AND DISALLOWED A SUM OF 6,62,34,193/-, 6,39,24,000/- AND 9,31,48,000/- FOR THE A.YS 2008-09, 2009- 10 AND 2010-11 RESPECTIVELY. THE ASSESSEE OBJECT ED THE DISALLOWANCES AND CONTENDED THAT THE AO ERRED IN AD OPTING RULE 8D FOR ALLOCATION OF EXPENDITURE AGAINST DIVIDEND I NCOME. THE EXPENDITURE ACTUALLY INCURRED CAN BE DISALLOWED U/ S.14A OF THE ACT AND ESTIMATED EXPENDITURE CANNOT BE APPORTIONED . IT IS - - ITA 1695 TO 16 97 & CO 84/MDS/14 3 FURTHER SUBMITTED THAT THE INVESTMENTS ON WHICH DIV IDEND ARE RECEIVED WERE INVESTED ONLY OUT OF SELF GENERATED P ROFITS AND NO BORROWED FUNDS WERE INVESTED FOR INVESTMENTS. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. FOR THE ASSESSMENT YEAR 2008-09, SEC.14 A, ALTHOUGH APPLICABLE, RULE 8D CANNOT BE APPLIED, SINCE IT WAS INSERTED TO RULE-8D ONLY ON 24.03.2008. BEING SO, WE DIRECT TH E AO TO DISALLOW 2% OF THE EXEMPTED INCOME AS INCURRED TO EARN THE SAME IN TERMS OF PROVISIONS OF SEC.14A R.W.RULE 8D, AS PER THE JUDGEMENT OF THE MADRAS HIGH COURT IN THE CASE OF S IMPSON & CO., VS. DCIT IN TAX CASE NO.2621 OF 2006 DATED 15. 10.2002. FURTHER, WE MAKE IT CLEAR THAT IF THE DISALLOWANCE SUSTAINED BY CIT(A), IS MORE THAN 2% OF GROSS EXEMPTED INCOME SA ME TO BE SUSTAINED. THIS GROUND OF APPEAL IS PARTLY ALLOWED FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO.1695/MDS/2014. 4.1 FOR THE ASSESSMENT YEARS 2009-10 AND 2010-11, T HE CONTENTION OF THE AR IS THAT THE ASSESSEE MADE INVE STMENTS WHICH WERE TOWARDS ACQUISITION OF SHARES AND UNITS IN VARIOUS - - ITA 1695 TO 16 97 & CO 84/MDS/14 4 MUTUAL FUNDS. THESE INVESTMENTS MADE FOR LONG TERM PURPOSES AND IN ORDER TO ACHIEVE THE COMPANYS VISION OF BEC OMING MULTI- MODEL OPERATOR. ACCORDING TO HIM THE INVESTMENTS A RE KEPT IN LONG TERM PERIOD IN INVESTMENT PORTFOLIO AND GAIN A RISING FROM IT ON TRANSFER IS LIABLE FOR CAPITAL GAINS TAX. FURTHE R, HE SUBMITTED THAT CERTAIN INVESTMENTS ARE FOREIGN SUBSIDIARY AND THE DIVIDEND RECEIVED FROM FOREIGN SUBSIDIARY IS TAXABLE AS SUCH SEC.14A HAVE NO APPLICATION. IN OUR CONSIDERED OPINION, PR OVISIONS OF SEC.14A AS WELL AS RULE 8D ARE APPLICABLE WHILE COM PUTING THE DISALLOWANCE AND THE AO HAS TO EXCLUDE THE INVESTME NT IN SUBSIDIARY COMPANIES AND ALSO INVESTMENT WHICH DOE S NOT YIELD ANY EXEMPTED INCOME WHILE APPLYING THE RULE-8D. TH IS VIEW OF OURS IS FORTIFIED BY ORDER OF TRIBUNAL IN THE CASE OF EIH ASSOCIATED HOTELS LTD VS. DCIT REPORTED IN 2013- TIOL-796-ITAT -MAD AND ALSO THE JUDGMENTS OF THE MADRAS HIGH COURT IN THE CASE OF REDINGTON (INDIA) LTD., VS. ACIT IN T.C.A NO.520 O F 2016 DATED 23.12.2016 AND CIT VS. M/S.CHETTINAD LOGISTICS PVT . LTD.,CHENNAI IN T.C.A NO.24 TO 2017 DATED 13.03.201 7. - - ITA 1695 TO 16 97 & CO 84/MDS/14 5 5.1 FURTHER, THE AO HAS TO CONSIDER THE AVAILA BILITY OF SHARE CAPITAL, RESERVES AND SURPLUS WHILE INVOKING THE PR OVISIONS OF SEC.14A READ WITH RULE 8D OF THE INCOME-TAX RULES, AS THIS IS THE NON-INTEREST BEARING OWN FUNDS AVAILABLE WITH THE A SSESSEE FOR INVESTMENTS AND DUE WEIGHTAGE TO BE GIVEN WHILE CO MPUTING AVERAGE VALUE OF INVESTMENTS IN THE FORMULA IN RULE 8D. 5.2 WITH REGARD TO THE INTEREST ON BORROWINGS USED FOR THE SPECIFIC PURPOSE, IT IS TO BE NOTED THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF A CIT V. M/S. FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS/2 015 DATED 8.1.2016, WHEREIN IT WAS HELD AS UNDER :- 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DI SALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINI ON, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTON ENGINEERING LTD. IN ITA NO.1603/MDS/2012 D ATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE BUSINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND THE RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF T HIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVEST MENTS HAVING TAX FREE INCOME. WHILE HOLDING SO, THE COMM ISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER:- - - ITA 1695 TO 16 97 & CO 84/MDS/14 6 5.2.1 HAV I NG HELD THAT PROVIS I ONS OF RU L E 8D ARE APPLICABLE , LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORR ECTLY QUANT I FIED. THE AO HAD CALCU LAT ED THE DISALLOWANCE AT NIL, 1,04,38,000/- AND 26,87,000/- UNDER (I), (I I ) & (III) OF RULE 80 ( 2)RESPECTIVELY . THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT , BECAUSE IT IS N I L . WITH REGARD TO THE SECOND COMPONENT BE I NG THE EXPENDITURE BY W A Y O F INTEREST WHICH IS NOT DIRECT L Y AT T RIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT , THE AO HAS DE T ERMINED THE AMOUNT AT 1,04,38,000/ . THE AO HAS TAKEN I NTO ACCOUNT T H E ENT I RE IN T EREST EXPEND I TURE OF 5 , 79 , 46 ,000 /- FOR COMPUT I NG THE ABOVE D I SALLOWA N CE . THE I D . AR , IN H I S SUBMISS I ON , HAS G I VEN THE BREAK-UP OF INTEREST WH I CH INCLUDES ( 1) I NTEREST ON BANK LOANS: I 67,92 , 000/- (2) I NTEREST ON TERM LOANS 3,82 , 11 , 000/- AND (3) I NTEREST ON OTHER ACCOUNTS: 1,29 , 43,000/- . IF LOANS HAVE BEEN SANCT I ONED FOR SPEC I FIC PROJECTS/EXPANS I ON AND HAVE BEEN UT I LIZED TOWARDS THE SAME , THEN O B VIOUSLY THEY COULD NOT HAVE BEEN UTI L IZED FOR MAKING ANY INVESTMENTS HAVING TAX - FREE I NCOMES . FROM THE COPY OF THE SANCT I ON LETTERS FROM STATE BANK OF BIKANER & JAIPUR I T CAN BE SEEN THA T THE LOAN WAS GRANTED WITH A SPECIFIC R EQU I REMEN T T HA T THE LOAN SHAL L BE UTI L IZE D FOR PURCHASE OF IMPOR T ED M A CHINERY WHI L E IN THE CASE OF LOAN FR O M FE D ERA L B ANK , I T I S SE E N T HAT T HE LOAN WAS TO BE U T I LI ZED FO R EXPANSION OF P R O J EC T S. S AN C T ION O F B OTH THESE LOANS PROHIB I T U T I L IZAT I ON OF FUNDS FOR PURPOSES OTHER THAN FOR THE U TILIZAT I ON F OR WHICH T HEY ARE S A NCTIONED . FROM THE LEDGER EX T RACT FOR THE YEAR ENDED 3 1. 03 . 2008 FOR BOTH LOAN ACCOU N TS, IT I S SEEN THAT NO AMOUNT HAS BEEN UT I LIZED F OR INVES T MENT IN SUBSID I ARIES WH I C H EARNS TAX-FREE INCOME . T HE LOAN AMOUNTS WERE FUL L Y D I SBU R S ED A N D U T IL IZ ED IN T H E YEA R ENDED 3 1. 03.2008 (A . Y . 2008-09) I T SE L F. TAK I NG IN T O A L L THE F A CTS AS ST AT ED ABOVE, I AM OF THE CONS I DERED OPINION THAT IF LOANS/BO R ROWED AMOUNTS ARE G RANTED F OR SPEC IF IC P R O J EC T S/EXPANS I ON AND NO AMOUNT FROM THE SAME H A S BEEN D IRECTLY U TILI ZED FOR I NVESTMEN T S , TH EN THE F I RS T AN D SECOND LIMB OF RU L E 80 A TT RI BUT ING THE I N T EREST PAYMENTS T O T HE I N VES T MEN T S WI L L NOT BE APPLICABLE. ACCORDING L Y, IN TE RES T ON BANK LOAN AND TERM LOAN AMOUNT I NG TO 67 , 92 , 000/- AND 3,82, 1 1,000/- R ESPECTIVE L Y ARE TO BE EXC L UDED FROM T HE CA L CULATION TO DETERM I NE THE D I SAL L OWANCE UNDER RULE 8D(2)(II). THE AO IS , THEREFORE, DIREC T ED TO T AKE INTO ACCOUNT ONLY T HE R EMAINING INTERES T ON OTHER ACCOUNTS AMOUNTING TO 1 , 29 , 43,000/- FOR COMPUTING THE PROPO R TIONATE DISA L LOWANCE UNDER RULE 8D(2)( I I) . 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLOWANCE UNDER RU LE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED THE BANK LOAN AND TERM LO AN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSIO N OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTIONED FOR SP ECIFIC PROJECT - - ITA 1695 TO 16 97 & CO 84/MDS/14 7 AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR W HICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY EX CLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTATION OF DISALL OWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO. LTD. (SUPRA) ALSO SUPPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). THE TRIBU NAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINERIES, INTEREST ARISING OUT OF SU CH LOANS, WHETHER SUCH INTEREST IS TO BE EXCLUDED FOR THE PUR POSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II), THE TR IBUNAL HELD THAT SUCH INTEREST HAS TO BE EXCLUDED. WHILE HOLDIN G SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METH OD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WI TH REGARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISIO N ADMITTEDLY DEALS WITH A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCA TE COMMON INTEREST EXPENSES TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D (2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOM E AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECE IPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATI ON IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DO ES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRU OUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WH ILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITU RE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD, TOTAL IN TEREST EXPENDITURE IS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN - - ITA 1695 TO 16 97 & CO 84/MDS/14 8 RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIV IDEND EARNED IS 10,000. OUT OF THE BALANCE 90,000, THE ASSESSEE HAS PAID INTEREST OF 80,000 FOR FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICUL AR RECEIPT OR INCOME IS THUS ONLY 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCATION OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT WI LL BE FOR 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAX ABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUS E (I) [ I.E. DIRECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INC URRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4: 1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8 D(2)(I I) WILL BE 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE W ILL ONLY BE 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTEREST EXPENSES, IN TEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDE D, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCO ME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITI ES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E,IS THAT IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTL Y ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (F OR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UN DER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO T AXABLE INCOME, WHICH IS TO BE EXCLUDED FROM THE DEFINITION OF VARI ABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECA USE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX E XEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOL LOWING - - ITA 1695 TO 16 97 & CO 84/MDS/14 9 OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOM BAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSI ONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERA L IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SI NCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX-FREE INVESTMENTS. IT IS ONLY THE INTERES T ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITUR E BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY P ARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT OF THE RATIONALE FOR R. 8D CANNOT BE REGARD ED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING T HE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRA TIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTI CULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UP HELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AU THORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO TH E ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY AS SESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, AS HAS BEEN NOTED BY HONBL E BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKE N (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR IN COME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIREC TLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM CO MPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER R ULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROC EED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAK EN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENGE BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE S AME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIRECT TAXE S TO MAKE THE POSITION CLEAR ONE WAY OR THE OTHER EITHER BY INITI ATING SUITABLE - - ITA 1695 TO 16 97 & CO 84/MDS/14 10 AMENDMENT TO RULE 8D(2)(II) OR BY ADOPTING AN INTER PRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE F ACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDIN G, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATIN G LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D B EFORE HONBLE HIGH COURT, AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE L EARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH T HE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED I N PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONE R OF INCOME TAX (APPEALS) IN EXCLUDING THE INTEREST ON BANK LO AN AND TERM LOANS FOR THE PURPOSE OF COMPUTING DISALLOWANCE UND ER RULE 8D(2)(II). THE GROUNDS RAISED BY THE REVENUE ARE RE JECTED ON THIS ISSUE. 5.3 IN VIEW OF THE ABOVE DECISION, WE ARE OF THE O PINION THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR S PECIFIC PURPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PU RPOSE OF APPLYING RULE 8D OF THE INCOME TAX RULES. 5.4 FURTHER, INVESTMENTS IN SISTER CONCERNS OR SUBS IDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSINESS TRANSACT IONS, THAT INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF APPLICABILITY OF RULE-8D. FOR THIS PROPOSITION WE RELY ON THE JUDGMENTS OF TRIBUNAL IN THE CASE OF SUN TV NETWOR KS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREI N HELD THAT:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVA ILABLE SHARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS 2 385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITA L IS 1970.4 CRORES AND RESERVES AND SURPLUS IS 21,886 .7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUD ING - - ITA 1695 TO 16 97 & CO 84/MDS/14 11 SUBSIDIARY COMPANIES ARE ONLY 541.11 CRORES. THER EFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAS DIVERTED TH E BORROWED FUNDS FOR MAKING ANY INVESTMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE AS SESSEE HAS SUFFICIENT SHARE CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY DISALLOWANCE TOWARDS THE INTEREST PAID ON THE B ORROWED FUNDS UNDER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOWING INTEREST INCOME UNDER SECTION 14A READ WITH RULE 8D, THERE SHOULD BE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE BY THE ASSESSEE IN THE SH ARE CAPITAL AND MUTUAL FUNDS. IN THE ABSENCE OF ANY NEX US, THE PRESUMPTION IS THAT THE ASSESSEE HAS INVESTED THE A VAILABLE INTEREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUN DS. FURTHERMORE, MAKING INVESTMENT IN SISTER CONCERNS I S FOR COMMERCIAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF AP EX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1 . IT IS NOT THE CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF THE DIRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHEN THE SISTER CONCERN USES THE FUNDS ON LY FOR BUSINESS PURPOSE, THERE WAS COMMERCIAL EXPEDIENCY F OR MAKING INVESTMENT. THEREFORE, THIS TRIBUNAL IS OF T HE CONSIDERED OPINION THAT THERE CANNOT BE ANY DISALLO WANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF T HE INCOME-TAX RULES, 1962. 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, T HE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. 5.5 FURTHER, WE ALSO MAKE IT CLEAR THAT THE OWN FUNDS WHICH IS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SU RPLUS, WHICH WAS AVAILABLE TO THE ASSESSEE TO MAKE INVESTMENTS W HICH IS YIELDING EXEMPTED INCOME HAVE NO COST AND THEREFORE , IT IS TO BE GIVEN DUE WEIGHTAGE WHILE APPLYING THE FORMULA O F RULE 8D. THIS VIEW OF OURS IS FORTIFIED BY THE ORDER OF THE CO- ORDINATE BENCH IN THE CASE OF BEACH MINERS CO. PVT LTD. VS. - - ITA 1695 TO 16 97 & CO 84/MDS/14 12 ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THAT: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR 3,11 ,34,630/- SINCE THE ASSESSEE HAD MADE INVESTMENTS OF 71,55, 33,570/- FOR EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF 3,11,34,630/- INVOKIN G THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE IN VESTMENT MADE OF 71,55,33,570/-, BEARS NO COST IN THE FOR M OF INTEREST OR WHATSOEVER, SINCE THE FUNDS BY WHICH TH E INVESTMENT IS MADE IS ASSESSEES OWN FUNDS. FURTHER , THESE INVESTMENTS ARE MADE ONLY WITH SISTER COMPANIES OF THE ASSESSEE AND NO COST CAN BE ATTRIBUTED FOR THE MANA GEMENT OF SUCH FUNDS. THEREFORE, WE HEREBY DELETE THE ADDITI ON OF 3,11,34,630/- MADE BY THE LD. ASSESSING OFFICER INV OKING THE PROVISIONS OF SECTION 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN ITS FAVOUR . 5.6 IN VIEW OF THE ABOVE JUDGMENTS, ONE HAS TO CON SIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AV AILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INC OME AND EXCLUDE THE SAME AND THEREAFTER A.O SHALL APPLY THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVESTMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDIN ATE BENCH. WITH THIS OBSERVATION, WE REMIT THE ISSUE R ELATING TO DISALLOWANCE U/S.14A R.W.R.8D TO THE FILE OF AO FOR FRESH CONSIDERATION. - - ITA 1695 TO 16 97 & CO 84/MDS/14 13 5.7 ACCORDINGLY, RELATING TO DISALLOWANCE UNDER SE CTION 14A IN A.Y 2009-10, & 2010-11 IS REMITTED TO THE FILE OF T HE AO TO RE-COMPUTE THE SAME AFTER GIVING OPPORTUNITY TO THE ASSESSEE. 6. THE NEXT COMMON GROUND IN ALL THE APPEALS IS WIT H REGARD TO DISALLOWANCE OF PROPORTIONATE INTEREST MADE BY T HE AO AS ATTRIBUTABLE FOR ADVANCE GRANTED TO SUBSIDIARY COMP ANIES BY THE ASSESSEE. 6.1 THE FACTS OF THE ISSUE AS NARRATED IN ITA NO.1695/MDS/2014 FOR THE ASST. YEAR 2008-09 ARE THA T THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO ITS RE LATED CONCERNS TO THE EXTENT OF 248 CRORES FOR THE AY 2008-09. THE AO HAS DISALLOWED AN AMOUNT OF 13,61,41,202/- FOR THE AY 2008-09 AS INTEREST EXPENDITURE INCURRED NOT WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE OF THE ASSESSE E ON THE GROUND THAT THE PROPORTIONATE INTEREST EXPENDITURE ATTRIBUTABLE TO THE AMOUNTS ADVANCED BY THE ASSESSEE COMPANY TOWARD S ITS ASSOCIATES AS INTEREST FREE LOAN. THE LD. AR HAS O BJECTED THE ABOVE ADDITION AND SUBMITTED THE WRITTEN SUBMISSION BEFORE AO, WHICH READS AS UNDER: - - ITA 1695 TO 16 97 & CO 84/MDS/14 14 INTEREST DISALLOWANCE PROPORTIONATE TO SUBSIDIARY A DVANCE 13,61,41,202/- THE ADVANCE OF 24899.44 LAKHS TO VARIOUS SUBSIDIARIES OF THE ASSESSEE WAS MADE AS DETAILS BELOW: ADVANCES TO COMPANIES A Y 2008-09 BERGEN OFFSHORE LOGISTICS PTE LTD. 8,388.47 DIVIDEND RECEIVABLE BERGEN OFFSHORE 479.34 NORSEAL GLOBAL OFFSHORE PTE LTD. SICAL INFRA ASSETS LTD. 7,984.24 SICAL MULTIMODAL AND RAIL TRANSPORT LTD.(SAM) 5,000 .00 SICAL MULTIMODAL AND RAIL TRANSPORT LTD 200.85 SICAL HAMBUJA LOGISTICS PVT. LTD. 159.01 NAGPUR SICAL GUPTA ROAD TERMINALS LTD. 322.92 NAGPUR SICAL GUPTA LOGISTICS LTD. 60.30 SICAL DISTRIPARKS LTD. CHENNAI INTERNATIONAL TERMINAL PVT. LTD. 100.00 SICAL IRON ORE TERMINALS LTD. 2,201.20 SICAL IRON ORE TERMINAL (BANGALORE) LTD. ENNORE AUTOMOTIVE LOGISTICS LTD. PSA SICAL TERMINALS LTD. 3.09 TOTAL 24,899.44 ACCORDINGLY, DISALLOWANCES WERE MADE AT 13,61,41,202/- FOR THE AY 2008-09 AND 2,06,54,000/- FOR THE AY 2009-10 AND 3.14 CRORES FOR THE AY 2010-11. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 7. THE CIT(APPEALS) OBSERVED THAT ACCORDING TO THE AO, THE ASSESSEE HAS NOT PROVED THE EXISTENCE OF ANY BUSINE SS COMPULSION OR COMMERCIAL EXPEDIENCY WARRANTING MAKI NG SUCH HUGE ADVANCES COMMENSURATE WITH THE RETURNS RECEIVE D FROM - - ITA 1695 TO 16 97 & CO 84/MDS/14 15 THE SISTER CONCERNS. SINCE THE FUNDS ARE INTEREST BEARING WHICH ARE PLACED AT THE DISPOSAL OF SISTER CONCERNS, THE AO OPINED THAT HUGE INTEREST PAID BY THE ASSESSEE COMPANY TO THE L OAN CREDITORS IS NOT JUSTIFIABLE FROM THE COMMERCIAL PO INT OF VIEW, DISALLOWED INTEREST PAID AFTER CONSIDERING 10% OF T HE ABOVE ADVANCES TREATING THE SAME AS FOR COMMERCIAL EXPEDI ENCY AND THE BALANCE AMOUNT IS DISALLOWED AT 3,14,89,492/-. 7.1 THE ASSESSEE IN HIS SUBMISSIONS BEFORE THE CIT( APPEALS) STATED THAT THE LOANS AMOUNTING TO 7211.29 LAKHS HAVE BEEN ADVANCED TO 9 DIFFERENT COMPANIES IN TERMS OF COMME RCIAL EXPEDIENCY. FURTHER, IT WAS SUBMITTED THAT THE LOA NS HAVE BEEN EXTENDED TO THE 9 SISTER CONCERNS FOR THE PURPOSE O F EXPANSION OF THE BUSINESS OF THE ASSESSEE ITSELF. THE ASSES SEE PRIMARILY OBJECTED TO THE DISALLOWANCES MADE ON THE INTEREST TO THE EXTENT OF 3,14,89,482/- ON THE GROUND THAT THE ADVANCES WERE GIVEN OUT OF OWN FUNDS AND THE BORROWED FUNDS ARE NOT DIV ERTED TO SUBSIDIARIES. THE ASSESSEE WAS ENGAGED IN MULTI MO DEL LOGISTICS AND STEVEDORING ACTIVITIES EXPENDING HIS BUSINESS ACTIVITIES. THE SUBSIDIARIES WERE DEVELOPING THE R OAD, RAIL, PORT - - ITA 1695 TO 16 97 & CO 84/MDS/14 16 TERMINAL AND VARIOUS PLACES. THEIR ACTIVITIES WILL AID THE ASSESSEE TO GET MORE CONTRACTS AND EARN PROFIT. TH US, THERE IS A DIRECT NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE A ND SUBSIDIARY COMPANIES. THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF S.A.BUILDERS( 288 ITR 01 ) IS APPLICABL E TO THE ASSESSEES CASE AND NO INTEREST DISALLOWANCE IS WAR RANTED. 7.2 ACCORDING TO THE CIT(APPEALS), THE SUPREME COUR T IN THE ABOVE CASE (S.A.BUILDERS) HELD THAT ONCE IT IS ESTA BLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE INCURRED FO R THE PURPOSE OF THE BUSINESS, WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF, THE REVENUE CANNOT JUSTIFIABLE CLAIM TO PUT ITSELF IN THE ARM CHAIR OF BUSINESS MA N OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUMED THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING RE GARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESS MAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST NO T LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF PRUDEN T BUSINESS MAN. ONE HAS TO SEE THE TRANSFER OF THE BORROWED F UNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY - - ITA 1695 TO 16 97 & CO 84/MDS/14 17 AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT W AS ADVANCED FOR EARNING PROFITS. IF THE DIRECTORS OF THE SISTER CONCERNS UTILIZED THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY THE AMOUNT ADVANC ED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT AND IT CANN OT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, WHERE IT IS OBVIOUS THAT A HO LDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, IF T HE HOLDING COMPANY ADVANCES BORROWED MONEY IN THE SUBSIDIARY A ND THE SAME IS USED BY THE SUBSIDIARY FOR BUSINESS PURPOSE S, HENCE, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTE REST ON ITS BORROWED LOANS. ACCORDING TO THE CIT(APPEALS), THI S VIEW HAS ALSO BEEN ADVANCED BY THE DELHI HIGH COURT IN THE C ASE OF DALMIA CEMENT LTD. V. CIT (354 ITR 377). FURTHER , THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE ADVANCED FU NDS TO THE EXTENT OF 7211.29 LAKHS TO ITS SUBSIDIARY COMPANIES WHEREIN SOME OF THEM ARE 100% WHOLLY OWNED SUBSIDIARIES AND ENGAGED IN THE EXPANSION OF ASSESSEES BUSINESS IN A MULTI MODEL LOGISTICS AND STEVEDORING ACTIVITIES. THE CIT(APPE ALS) ALSO OBSERVED THAT OVER AND ABOVE, THE AO HAS NOT ESTABL ISHED THAT - - ITA 1695 TO 16 97 & CO 84/MDS/14 18 ONLY BORROWED FUNDS FROM BANKS OF FINANCIAL INSTITU TIONS ARE USED TO FUND THE ADVANCES TO SUBSIDIARY COMPANIES, HENCE NO INTEREST ON BORROWED FUNDS CAN BE ATTRIBUTABLE TO T HE ADVANCES WHICH CAN BE DISALLOWED. SINCE THERE IS A CLEAR CO MMERCIAL EXPEDIENCY AND BUSINESS EXPANSION DRIVE IS SEEN FRO M THE MULTI MODEL LOGISTICS AND STEVEDORING ACTIVITIES OF THE A SSESSEE, ACCORDING TO THE CIT(APPEALS), THE ADDITION MADE BY THE AO IS UNWARRANTED. ACCORDINGLY, HE DELETED THE ADDITION MADE BY THE AO. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 7.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE QUESTION INVOLVED IN THIS CASE IS O NLY ABOUT THE ALLOWABILITY OF THE INTEREST ON BORROWED FUNDS AND HENCE WE ARE DEALING ONLY WITH THAT QUESTION. IN THIS CONNECTION, WE REFER TO S. 36(1)(III) OF THE IT ACT, 1961 WHICH STATES THAT 'T HE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF THE BUSINESS OR PROFESSION' HAS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME-TAX UNDER S. 28 OF THE ACT. 7.4 IN OUR CONSIDERED OPINION THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN - - ITA 1695 TO 16 97 & CO 84/MDS/14 19 THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS'. 7.5 IN OUR OPINION, THE A.O HAS APPROACHED THE MATTER F ROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, EVEN IF T HE ASSESSEE BORROWED THE FUND FROM THE BANK AND LENT IT TO ITS SISTER-CONCERN, AS INTEREST-FREE LOAN, THE TEST IN SUCH A CASE IS R EALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY OR N OT. 7.6 IN OUR OPINION, THE DECISIONS RELATING TO S. 37 OF THE ACT WILL ALSO BE APPLICABLE TO S. 36(1)(III) BECAUSE IN S. 3 7 ALSO THE EXPRESSION USED IS 'FOR THE PURPOSE OF BUSINESS'. I T HAS BEEN CONSISTENTLY HELD IN DECISIONS RELATING TO S. 37 TH AT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 7.7 IN OUR CONSIDERED OPINION, IN ORDER TO CL AIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS EXPENDED, NOT O F NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE BENEFIT, BU T VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDE R TO INDIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST - - ITA 1695 TO 16 97 & CO 84/MDS/14 20 HAS BEEN APPROVED BY THE SUPREME COURT IN SEVERAL D ECISIONS E.G. EASTERN INVESTMENTS LTD. VS. CIT (1951) 20 ITR 1 (SC), CIT VS. CHANDULAL KESHAVLAL & CO. (1960) 38 ITR 601 (SC ), SA BUILDERS LTD. V. CIT ( 288 ITR 1 (SC) ), HERO CYLCES PVT LTD. VS. CIT (379 ITR 347)(SC) ETC. 7.8 IN OUR OPINION, THE A.O SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWE D FUNDS FROM THE ABOVE ANGLE. IN OTHER WORDS, THE A.O SHOULD HA VE ENQUIRED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO T HE SISTER COMPANY, OR TO A SUBSIDIARY OF THE ASSESSEE AS A ME ASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAV E BEEN ALLOWED. 7.9 THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRES SION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A P RUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXP ENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. - - ITA 1695 TO 16 97 & CO 84/MDS/14 21 7.10 THUS, THE RATIO OF MADHAV PRASAD JATIAS CASE (118 ITR 200) (SC) IS THAT THE BORROWED FUND ADVANCED TO A T HIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER S. 36(1)(III) OF THE ACT. 7.11 IN THE PRESENT CASE, THE CIT(A) HAS EXAMINED WHETHE R THE AMOUNT ADVANCED TO THE SISTER-CONCERN WAS BY WA Y OF COMMERCIAL EXPEDIENCY OR NOT AND CAME TO A CONCLUSI ON THAT IT IS ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND INCURRED FO R THE PURPOSE OF BUSINESS OF ITS SISTER CONCERNS WHICH IN DIRECTLY FACILITATE THE CARRYING ON THE BUSINESS OF THE ASSE SSEE. IT HAS BEEN REPEATEDLY HELD BY SUPREME COURT THAT THE EXPR ESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING PROFITS' VIDE CIT VS. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC), CIT VS. BI RLA COTTON SPINNING & WEAVING MILLS LTD. (1971) 82 ITR 166 (SC), SA BUILDERS LTD. V. CIT ( 288 ITR 1 (SC) ), HERO CYLCES PVT LTD. VS. CIT (379 ITR 347)(SC) ETC. 7.12 THE A.O SHOULD HAVE EXAMINED THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER-CONCE RN, AND - - ITA 1695 TO 16 97 & CO 84/MDS/14 22 WHAT THE SISTER-CONCERN DID WITH THIS MONEY, IN ORD ER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY, BUT THAT HAS NOT BEEN DONE BY HIM. HOWEVER, CIT(APPEALS) CARRIED ON THAT EXERCISE AND CAME TO A CONCLUSION THAT THERE IS CLEAR COMMER CIAL EXPEDIENCY AND BUSINESS EXPANSION DRIVE WHICH WAS S EEN FROM THE MULTI MODEL LOGISTICS AND STEVEDORING ACTIVITIE S OF THE ASSESSEE. 7.13 IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT H AD BEEN ADVANCED AS INTEREST-FREE LOAN TO ITS SISTER-CONCER N. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOU NT TO ITS SISTER-CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENC Y. 7.14 IT IS TO BE NOTED THAT THE DELHI HIGH COUR T IN CIT VS. DALMIA CEMENT (BHARAT) LTD. 254 ITR 377 (DEL) IS AP PLICABLE TO THE FACTS OF THE PRESENT CASE. IT WAS HELD THAT ON CE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSA RILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNO T JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESS MAN OR IN THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 23 POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE C OMPELLED TO MAXIMIZE ITS PROFIT. THE LOWER AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOO K AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDE NT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SE E THE TRANSFER OF THE BORROWED FUNDS TO A SISTER-CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE P OINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS . IN SUCH CIRCUMSTANCES, IT IS NOT POSSIBLE TO US TO CONFIRM THE DISALLOWANCE OF INTEREST U/S.36(1)(III) OF THE ACT. 7.15 FURTHER, IT IS A SETTLED LEGAL POSITION TH AT INCOME OF AN ASSESSEE HAS TO BE COMPUTED UNDER VARIOUS HEADS SPE CIFIED UNDER SECTION 14 OF THE ACT. THEREFORE, THE DEDUCTI ONS ARE TO BE ALLOWED IN COMPUTING THE INCOME UNDER VARIOUS HEADS ONLY TO THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 24 EXTENT IT IS PROVIDED BY THE LEGISLATURE UNDER THAT VERY HEADS. THE COMPUTATION OF CAPITAL GAIN IS PROVIDED IN SECT ION 48 OF THE ACT. ACCORDING TO THIS SECTION, THE ONLY DEDUCTIONS WHICH ARE ALLOWABLE ARE - (1) THE COST OF ACQUISITION OF THE ASSET, (2) THE COST OF ANY IMPROVEMENT THERETO AND (3) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANS FER OF THE ASSET. THE COST OF ACQUISITION, IN OUR OPINION, MEA NS THE AMOUNT PAID FOR ACQUIRING THE ASSET. ONCE THE ASSET IS ACQ UIRED, THEN ANY EXPENDITURE INCURRED THEREAFTER CANNOT BE CONSIDERE D AS THE COST OF ACQUISITION, SINCE SUCH EXPENDITURE WOULD NOT HA VE ANY NEXUS WITH THE ACQUISITION OF THE ASSET. WHEREVER THE LEG ISLATURE INTENDED TO ALLOW SUCH EXPENDITURE AS DEDUCTION, IT HAD SPECIFICALLY PROVIDED SO UNDER VARIOUS HEADS. FOR E XAMPLE, IN COMPUTING THE INCOME FROM HOUSE PROPERTY, THE ASSES SEE IS ALLOWED DEDUCTION UNDER SECTION 24 OF THE ACT ON AC COUNT OF INTEREST PAID ON THE BORROWED FUNDS UTILISED FOR AC QUIRING THE IMMOVABLE PROPERTY. SIMILARLY, WHEN THE INCOME IS T O BE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS FROM BUS INESS OR PROFESSION', THE DEDUCTION ACCOUNT OF INTEREST ON B ORROWED FUND IS PROVIDED UNDER SECTION 36(1)(III) THE ACT, WHERE THE BUSINESS - - ITA 1695 TO 16 97 & CO 84/MDS/14 25 ASSETS ARE ACQUIRED OUT OF BORROWED FUNDS. AT THIS STAGE, IT MAY BE PERTINENT TO NOTE THAT DEPRECIATION IS ALSO ALLO WABLE AS DEDUCTION UNDER SECTION 32 IN RESPECT OF BUSINESS A SSETS ON THE COST OF ACQUISITION. IN DETERMINING THE COST OF ACQ UISITION, THE INTEREST COMPONENT AFTER BRINGING THE ASSET INTO EX ISTENCE IS NOT TAKEN INTO CONSIDERATION AS EXPLANATION 8 TO SECTIO N 43 OF THE ACT. IF THE INTEREST IS TO BE ADDED TO COST OF ACQU ISITION, THEN THE ASSESSEE WOULD BE ENTITLED TO DOUBLE DEDUCTION ONCE UNDER SECTION 36(1)(III) AND THE OTHER UNDER SECTION 32 O F ACT, WHICH IS NOT PERMISSIBLE IN VIEW OF THE DECISION OF THE SUPR EME COURT IN THE CASE OF ESCORTS LTD. V. UOI[1993] 199 ITR 43. 7.16 SIMILARLY, WHEN THE SHARES ARE PURCHASED BY W AY OF INVESTMENT, AND THE DIVIDEND IS RECEIVED IN RESPECT OF SUCH SHARES, THE INTEREST PAID ON BORROWED FUNDS HAS BEE N HELD TO BE ALLOWABLE AS DEDUCTION AGAINST DIVIDEND INCOME. THE SUPREME COURT HAS GONE A STEP FURTHER IN THE CASE OF CIT VS . RAJENDRA PRASAD MOODY [1978] 115 ITR 519, WHEREIN IT HAS BEE N HELD THAT DEDUCTION ON ACCOUNT OF INTEREST PAID ON BORROWED F UNDS IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME UNDE R THE HEAD - - ITA 1695 TO 16 97 & CO 84/MDS/14 26 INCOME FROM OTHER SOURCES, EVEN WHERE THE DIVIDEN D IS NOT RECEIVED IN A PARTICULAR YEAR. IF THIS IS THE LEGAL POSITION, THEN WE ARE AFRAID, HOW THE INTEREST PAID BY THE ASSESSEE C AN BE CONSIDERED AS PART OF THE COST OF ACQUISITION OF TH E SHARES. IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED THEN IT WOUL D AMOUNT TO ALLOWING DOUBLE DEDUCTION I.E., UNDER SECTION 57 AS WELL AS UNDER SECTION 48 OF THE ACT, WHICH CAN NEVER BE THE INTEN TION OF THE LEGISLATURE. AS ALREADY STATED, THE DOUBLE DEDUCTIO N IS PROHIBITED AS LAID DOWN BY THE SUPREME COURT IN THE CASE OF ES CORTS LTD. (SUPRA). THE ENTIRE SCHEME OF THE ACT, THEREFORE, R EVEALS THAT INTEREST COMPONENT AFTER THE DATE OF ACQUISITION AN D TILL THE DATE OF SALE CANNOT BE TREATED AS THE COST OF ACQUISITIO N. IT IS ONLY ALLOWABLE AS A REVENUE DEDUCTION ON YEAR TO YEAR BA SIS AGAINST THE INCOME GENERATED FROM SUCH ASSET OR LIKELY TO B E GENERATED TO THE EXTENT PROVIDED BY THE LEGISLATURE UNDER DIF FERENT HEADS. 7.17 THE ABOVE VIEW IS ALSO FORTIFIED BY THE D ECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MAC INTOSH FINANCE ESTATES LTD. VS. ACIT(12 SOT 324), WHEREIN IT HAS BEEN HELD 'ONCE WE FIND THAT INTEREST EXPENSES IS AN ALL OWABLE EXPENDITURE UNDER THE HEAD 'INCOME FROM OTHER SOURC ES, IT - - ITA 1695 TO 16 97 & CO 84/MDS/14 27 CANNOT BE ALLOWED TO BE ADDED TO THE COST OF INVEST MENT ONLY BECAUSE IN THIS YEAR NO DEDUCTION IS ALLOWABLE BECA USE THE DIVIDEND INCOME HAS BEEN MADE EXEMPT. THE FOLLOWI NG OBSERVATIONS OF SUPREME COURT IN THE CASE OF SAHARA NPUR ELECTRIC SUPPLY CO. LTD VS. CIT (1992) 194 ITR 29 4 (SC) WERE RELIED ON BY THE COURT:- IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPA NY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTI NG ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMEN T OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISE D AND ADDED TO THE COST OF THE FIXED ASSETS. 7.18 A BARE LOOK AT THE ABOVE OBSERVATIONS REVEALS THAT ACTUAL COST WOULD INCLUDE ALL EXPENDITURE NECESSARY TO BRI NG THE ASSETS INTO EXISTENCE AND PUT THEM IN WORKING CONDITION. NOWHERE IN THE ABOVE OBSERVATIONS, THE SUPREME COURT HELD THAT THE EXPENDITURE INCURRED AFTER THE ACQUISITION OF ASSET WOULD BE IN CLUDED IN THE COST OF ASSETS. THE TERMINAL POINT IS THE TIME WHEN THE ASSET IS BROUGHT INTO EXISTENCE OR WHEN THE ASSET IS PUT IN A WORKIN G CONDITION. THEREFORE, ON THE BASIS OF THE SUPREME COURT JUDGME NT, IT CANNOT BE SAID THAT EXPENDITURE INCURRED AFTER THE ASSET B ROUGHT INTO EXISTENCE, I.E., AFTER THE ACQUISITION OF THE ASSET WOULD FORM PART OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 28 THE ACTUAL COST. THE SUPREME COURT LAID DOWN THE P ROPOSITION THAT INTEREST PAID ON MONIES BORROWED FOR ACQUISITION OF CAPITAL ASSET AND TO MEET EXPENSES CONNECTED WITH ITS INSTALLATIO N ETC. AND CAPITALIZED, HAS TO BE ADDED TO THE COST OF ASSET F OR THE PURPOSE OF DEPRECATION. 7.19 THUS IN OUR OPINION IF THE MONEY WAS BORROWED FOR INVESTMENT IN SUBSIDIARY COMPANY, AND IT RESULTED I N PROMOTE THE BUSINESS OF THE ASSESSEE AS WELL AS HELPFUL TO THE ASSESSEE FOR HAVING MANAGEMENT CONTROL OVER-SAID SUCH SUBSIDIARY COMPANY, THEN THE INTEREST EXPENDITURE SHOULD BE ALLOWED U/S .36(1)(III) OF THE ACT. 7.20 IN THE PRESENT CASE, AS RIGHTLY SUBMITTED BY THE LD. A.R THAT THE ASSESSEE DIVERTED THE FUNDS FOR MAKING ADVANCE TO THE SUBSIDIARIES, HENCE, WE ARE OF THE OPINION THAT THE AO CANNOT DISALLOW THE NOTIONAL INTEREST, IT IS NOT THE CASE OF THE REVENUE THAT THE SUBSIDIARY COMPANIES HAD MISUSED THE FUNDS FOR ANY OTHER PURPOSE. IN OTHER WORDS, SINCE THE SUBSIDIARY COMP ANIES USED THE FUNDS FOR THEIR BUSINESS PURPOSE, AND THERE IS NEXU S BETWEEN THE BUSINESS OF THE ASSESSEE AND THE SUBSIDIARIES, WHIC H FACILITATED THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 29 BUSINESS ADVANTAGE OF THE ASSESSEE COMPANY, THERE CANNOT BE ANY DISALLOWANCE TOWARDS NOTIONAL INTEREST AS HELD BY THE SUPREME COURT IN THE M/S.S.A BUILDERS (288 ITR 1). FURTHER, THIS VIEW HAS ALSO BEEN ADVANCED BY THE DELHI HIGH COURT IN THE C ASE OF DALMIA CEMENT LTD. V. CIT (354 ITR 377). FURTHER, THE C IT(APPEALS) OBSERVED THAT THE ASSESSEE ADVANCED FUNDS TO ITS SU BSIDIARY COMPANIES WHEREIN SOME OF THEM ARE 100% WHOLLY OWNE D SUBSIDIARIES AND ENGAGED IN THE EXPANSION OF ASSESS EES BUSINESS IN A MULTI MODEL LOGISTICS AND STEVEDORING ACTIVITI ES. THE CIT(APPEALS) ALSO OBSERVED THAT OVER AND ABOVE, THE AO HAS NOT ESTABLISHED THAT ONLY BORROWED FUNDS FROM BANKS OF FINANCIAL INSTITUTIONS ARE USED TO FUND THE ADVANCES TO SUBSI DIARY COMPANIES, HENCE NO INTEREST ON BORROWED FUNDS CAN BE ATTRIBUTABLE TO THE ADVANCES WHICH CAN BE DISALLOWE D. SINCE THERE IS A CLEAR COMMERCIAL EXPEDIENCY AND BUSINESS EXPAN SION DRIVE IS SEEN FROM THE IN MULTI MODEL LOGISTICS AND STEVEDOR ING ACTIVITIES OF THE ASSESSEE, ACCORDING TO THE CIT(APPEALS), THE AD DITION MADE BY THE AO IS UNWARRANTED AND WE DO NOT FIND ANY INFIRM ITY IN THE FINDINGS OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, THIS GROUND RAISED BY THE REVENUE IN ITS APPEALS STAND DISMISSED. - - ITA 1695 TO 16 97 & CO 84/MDS/14 30 8. THE NEXT GROUND IN ITA NO.1697/MDS/2014 FOR THE ASSESSMENT YEAR 2010-11 IS WITH REGARD TO DELETION OF 1.20 CRORE ON THE ISSUE OF DISALLOWANCE OF DEDUCTION U/S.80IA OF THE ACT. 9. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE, SI CAL LOGISTICS LTD. (SLL) IS A COMPANY ENGAGED IN THE BUSINESS OF STEVE DORING, TRANSPORTATION, WAREHOUSING ETC. DURING 200-01, TH E ASSESSEE ENTERED INTO A BUILD, OPERATE AND TRANSFER AGREEMEN T WITH TAMILNADU ELECTRICITY BOARD (TNEB). ACCORDINGLY, THE ASSESSE E HAS TO BUILD THE COAL HANDLING EQUIPMENTS AT ENNORE PORT AND MANAGE AND MAINTAIN THE FACILITY FOR 20 YEARS. AFTER THE EXPIRY OF 20 YEARS PERIOD THE FACILITY HAS TO BE HANDED OVER / TRANSFERRED TO THE TNEB. T HE FACILITY DEVELOPED BY THE ASSESSEE FORMS PART OF THE PORT AN D IS DEVELOPED IN THE PORT. 9.1 TNEB WILL BE CHARGED FOR THE HANDLING OF COAL T HROUGH THE FACILITY DEVELOPED BY THE ASSESSEE. THE ASSESSEE C OMMENCED ITS OPERATION OF HANDLING COAL AT ENNORE PORT IN FEBRUA RY 2002. ASSESSEE IS RUNNING THE BUSINESS OF COAL HANDLING F ROM THE FINANCIAL YEAR 2001-02. - - ITA 1695 TO 16 97 & CO 84/MDS/14 31 9.2 FROM THE ASSESSMENT YEAR 2002-03 TO 2006-07 THE SAID BUSINESS END IN INCOME-TAX LOSS CARRIED FORWARD AND THE SAME WAS SET OFF AGAINST THE TAXABLE INCOME OF THE BUSINESS IN THE AY 2007-08. FOR THE AYS 2007-08 TO 2009-10, GROSS TOTAL INCOME OF THE ASSESSEE WAS EITHER LOSS OR CONSISTED OF LONG TERM CAPITAL G AIN AGAINST WHICH THE ASSESSEE COULD NOT CLAIM DEDUCTION UNDER CHAPTE R VIA. FOR THE AY 2010-11, THE ASSESSEE HAS PAID THE TAX UNDER NOR MAL PROVISIONS. ON THE BASIS OF THE ABOVE FACTS, THE ASSESSEE CLAIM ED THE DEDUCTION U/S.80IA OF THE ACT TO THE EXTENT OF 8,05,21,425/- WHILE COMPUTING THE INCOME LIABLE FOR TAXATION FOR THE AY 2010-11, WHICH WAS DISALLOWED BY THE AO. BEFORE THE LD.CIT(A), THE AS SESSEE SUBMITTED THAT IT HAS CLAIMED EXEMPTION FOR THE INFRASTRUCTUR E FACILITIES PROVIDE BY THE ASSESSEE TO TNEB, AT ENNORE PORT TRUST ON TH E FOLLOWING REASONS:- A) COAL HANDLING FACILITY IS OWNED BY THE COMPANY REGISTERED IN INDIA. B) AGREEMENT IS ENTERED WITH TNEB, A STATUTORY BODY CONSTITUTED UNDER THE ELECTRICITY (SUPPLY) ACT, 1948 TO OPERATE AND MAINT AIN THE FACILITY ON A BOT BASIS AND IT HAS COMMENCED OPERATION AFTER 1.4.95 I .E. FEBRUARY, 2002. C) THE DEFINITION OF INFRASTRUCTURE FACILITY INCLUD ES PORT AND AS PER THE CERTIFICATION FROM THE ENNORE PORT LTD., THE FACILI TY DEVELOPED BY SICAL LOGISTICS LTD FORMS PART OF PORT. I - - ITA 1695 TO 16 97 & CO 84/MDS/14 32 FURTHER, THE LD.A.R RELIED ON CBDT CIRCULAR NO 793 DATED 23.062000 WHICH CLARIFIED THAT STRUCTURES AT PORTS FOR STORAG E, LOADING AND UNLOADING ETC WILL BE INCLUDED IN THE DEFINITION OF PORT FOR THE PURPOSES OF SECTIONS 10 (23G) AND SECTION 80 IA SUBJECT TO T HE FOLLOWING CONDITIONS ARE TO BE FULFILLED I) THE PORT AUTHORITY HAS ISSUED A CERTIFICATE THAT THE SAID STRUCTURES FORM PART OF THE PORT. II) STRUCTURES ARE BUILT UNDER BOT OR BOLT SCHEMES AND THERE IS AN AGREEMENT TO TRANSFER THE STRUCTURES TO THE SAID AUTHORITY ON THE EXPIRY OF THE TIME STIPULATED UNDER THE AGREEMENT. IN THE ABOVE CIRCUMSTANCES, IT IS AMPLY CLEAR THAT THE ASSESSEE HAS FULFILLED VARIOUS CONDITIONS LAID DOWN FOR THE DEDU CTION CLAIMED U/S 801A SUPPORTED BY VARIOUS JUDGEMENTS PRONOUNCED BY VARIOUS HIGH/SUPREME COURT. 1. IT IS A COMPANY REGISTERED IN INDIA 2. IT HAS ENTERED INTO AN AGREEMENT WITH TNEB A STA TE GOVERNMENT AUTHORITY FOR PROVIDING THE INFRASTRUCTURE FACILITY FOR COAL HANDLING AT A COST AND 3. THE SAID FACILITY WILL BE TRANSFERRED TO TNEB AF TER THE PERIOD STIPULATED IN THE AGREEMENT AND IN SO FAR AS THE APPELLANT SATISF IED THE CONDITIONS AS ABOVE FOR CLAIMING THE DEDUCTION U/S.801A(4) IT SHO ULD BE ENTITLED FOR THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 33 DEDUCTION CLAIMED TO THE EXTENT OF RS.8,05,21 ,425/ - IN THE RETURN FILED FOR THE ASST YEAR UNDER CONSIDERATION. IN SO FAR AS, THE ABOVE MENTIONED CONDITIONS WERE S ATISFIED, THE APPELLANT IS ELIGIBLE FOR THE DEDUCTION CLAIMED U/S 801A. THE APPELLANT HAS ALSO FURNISHED A COPY OF THE AGREEMENT BETWEEN THE APPELLANT AND TNEB AND ALSO THE CERTIFICATE ISSUED BY THE ENN ORE PORT STATING THAT THE COAL HANDING FACILITY DEVELOPED BY THE APP ELLANT FORMS PART OF THE PORT. OVER AND ABOVE SECTION 80LA (2) GIVES AN OPTION TO THE ASSESSEE TO CLAIM THE DEDUCTION FOR 10 YEARS OUT OF 15 YEARS FROM THE YEAR OF COMMENCEMENT. THE APPELLANT HAS COMMENCED O PERATION IN 2001 -02 AND IT CAN CLAIM DEDUCTION WITHIN 15 YEARS IN THE BLOCK PERIOD OF 2001-02 TO 2015 -16. SINCE FROM THE AY 20 02-03 TO 2006- 07 WHICH RESULTED IN LOSS, THE APPELLANT HAS CARRIE D FORWARD THE SAME LOSS AND SET OFF AGAINST THE TAXABLE INCOME TILL AS SESSMENT YEAR 2006-07. THE DEDUCTION U/S 80LA IS NOT CLAIMED TILL ASSESSMENT YEAR 2006-07. THUS THE APPELLANT HAS EXERCISED THE OPTIO N OF CLAIMING DEDUCTION U/S 80IA FROM THE AY 2007-08 ONWARDS. HOW EVER, THE APPELLANT HAS NOT CLAIMED THE OPTION FOR CLAIMING D EDUCTION U/S 8OLA TILL AY 2009-10 DUE TO GROSS TOTAL INCOME OF THE AP PELLANT WAS EITHER LOSS OR CONSISTED OF LONG TERM CAPITAL GAIN. FOR TH E AY 2010-11, THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 34 TAX WAS PAYABLE UNDER NORMAL PROVISION AND THE GROS S TOTAL INCOME CONSISTED OF INCOME FROM BUSINESS. HENCE THE ASSESS EE CLAIMED THE DEDUCTION IN THE YEAR 2010-11. ON THAT BASIS TH E LD.CIT(A) ALLOWED THE CLAIM OF ASSESSEE. AGAINST THIS, THE R EVENUE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.D.R IS THAT D EDUCTION U/S.80- IA(4) COULD BE ALLOWED ONLY IN THE CASE WHEN THE AS SESSEE ENTERED INTO CONTRACT WITH THE ENNORE PORT TRUST, BUT NOT W ITH TNEB. TNEB IS ONLY A CUSTOMER OF ENNORE PORT TRUST, WHO DOES NOT OWN THE INFRASTRUCTURE FACILITIES AND THE CONDITIONS LAID D OWN U/S.80-IA(4) OF THE ACT WAS NOT SATISFIED. 10.1 THE CONTENTIONS OF THE ASSESSEE IS THAT THE A SSESSEE HAS RIGHTLY CLAIMED THE DEDUCTION U/S 80-LA BY FULFILLI NG THE CONDITIONS STIPULATED U/S 80-IA. THE DEDUCTION WILL BE AVAILAB LE IF THE ENTERPRISE IS OWNED BY A COMPANY OR CONSORTIUM OF COMPANIES RE GISTERED IN INDIA, ENTERS INTO AN AGREEMENT WITH THE CENTRAL OR A STATE GOVERNMENT OR A LOCAL AUTHORITY OR ANY STATUTORY BO DY FOR DEVELOPMENT, MAINTENANCE AND OPERATION OF A NEW INF RASTRUCTURE - - ITA 1695 TO 16 97 & CO 84/MDS/14 35 FACILITY, TRANSFERS SUCH INFRASTRUCTURE FACILITY AF TER THE PERIOD STIPULATED IN THE AGREEMENT TO SUCH GOVERNMENT OR AUTHORITY OR BODY CONCERNED AND STARTS OPERATING AND MAINTAINING THE INFRASTRUC TURE FACILITY ON OR AFTER 1ST APRIL 1995. INFRASTRUCTURE FACILITY HAS B EEN DEFINED TO MEAN A ROAD, HIGHWAY, BRIDGE, AIRPORT, PORT OR RAIL SYST EM OR ANY OTHER PUBLIC FACILITY OF A SIMILAR NATURE AS MAYBE NOTIFI ED BY THE BOARD. THE PROVISIONS OF SEC. 80-IA SHALL NOT APPLY TO A PERS ON WHO EXECUTES A WORK CONTRACT ENTERED INTO WITH THE UNDERTAKING OR ENTERPRISE REFERRED TO IN THE SAID SECTION. HOWEVER, IN A CASE WHERE A PERSON MAKES THE INVESTMENTS AND HE HIMSELF EXECUTES THE DEVELOPMENT WORK, I.E. CARRIES OUT THE CIVIL CONSTRUCTION WORK, HE WILL BE ELIGIBLE FOR TAX BENEFIT U/S 801A. IN CONTRAST TO THIS, A PERSON WHO ENTERS INTO A CONTRACT WITH ANOTHER PERSON ( I.E. UNDERTAKING OR ENTERPRISE REFER TO SEC. 80-IA) FOR EXECUTING WORKS CONTRACT, WILL NOT BE ELIGIBLE FOR THE TAX BENEFIT U/S 801A. SINCE THE ASSESSEE IN THE INS TANT CASE IS NOT A CONTRACTOR AND DEVELOPED THE INFRASTRUCTURE FACILIT Y ON BOT/ BOOT FULFILLING THE CONDITIONS STIPULATED U/S 801A, THE APPELLANT IS ELIGIBLE TO CLAIM THE DEDUCTION U/S 801A. THE APPELLANT PLACED ITS RELIANCE ON HONBLE GUJARAT HIGH COURT IN THE CASE OF KATIRA CO NSTRUCTION LTD., VS UNION OF INDIA & OTHERS 352 ITR 513 WHICH SQUARELY APPLIES TO THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 36 FACTS OF THE INSTANT CASE AS THE APPELLANT DEVELOPE D NEW INFRASTRUCTURE FACILITY I.E THE COAL HANDLING FACIL ITY ON ITS OWN BY AN AGREEMENT ENTERED INTO WITH TNEB. THE INFRASTRUCTUR E FACILITY DEVELOPED BY THE APPELLANT IN THE FORM OF COAL HAND LING FACILITY FOR IMPORTING COAL AT ENNORE PORT NEED NOT BE OWNED BY THE ENNORE PORT TRUST IT CAN AS WELL BE OWNED BY THE APPELLANT BEIN G A THIRD PARTY WHICH PROVIDES THE SAME FACILITY CAN AS WELL BE ELI GIBLE TO CLAIM THE DEDUCTION U/S 801A (4). IT TANTAMOUNT TO I.E. THE N EW INFRASTRUCTURE FACILITY A PART AND PARCEL OF PORT, THE APPELLANT B EING A DEVELOPER IS DEFINITELY ELIGIBLE FOR DEDUCTION PROVIDED U/S 80LA (4). AS THE APPELLANT COMPANY IS REGISTERED IN INDIA AND ENTERED INTO AGR EEMENT WITH TNEB (A STATE GOVT. AUTHORITY) FOR PROVIDING THE INFRAST RUCTURE FACILITY IN THE FORM OF COAL HANDLING AT COST FOR A STIPULATED PERI OD OF 20 YEARS AND THE COAL HANDLING FACILITY TO BE TRANSFERRED TO TNE B AFTER STIPULATED PERIOD. THE TNEB HAD THE EXCLUSIVE RIGHTS OVER THE BERTH IN ENNORE PORT FOR IMPORTING COAL, THE APPELLANT HAD TO ENTER INTO AN AGREEMENT FOR COAL HANDLING WITH THE TNEB ITSELF. THUS THE AP PELLANT SATISFIES THE REQUIREMENTS IN THE ENTIRETY FOR CLAIMING THE DEDUC TION U/S 801A (4) OF THE IT ACT. THE APPELLANT FURTHER PLACED ITS RELIAN CE IN THE CASE / OF BAJA] TEMPO LTD., VS. CIT 196 ITR 188 (SC) WHEREIN THE APEX COURT - - ITA 1695 TO 16 97 & CO 84/MDS/14 37 HAS HELD THAT THE PROVISION RELATING TO DEDUCTION U /S 80 OF THE ACT SHOULD BE CONSTRUED LIBERALLY AND IN FAVOUR OF THE ASSESSEE. THUS, THE APPELLANT IS ELIGIBLE TO CLAIM OF THE DEDUCTION U/S 801A AND CLAIMED CORRECTLY. HOWEVER, KEEPING IN VIEW OF THE OBJECTIO NS RAISED BY THE ASSESSING OFFICER THE CLAIM OF DEDUCTION U/S 8OLA O N THE GROUND THAT THE APPELLANT HAS SHOWN MAGNIFIED PROFITS BY MAKING SOME COMPUTATION ERRORS BY NOT ALLOCATING THE COMMON EXP ENDITURE WHILE WORKING OUT THE PROFITS OF THE UNDERTAKING. SUCH EX PENDITURE WHICH WAS NOT CONSIDERED IS IN THE FORM OF REMUNERATION P AID TO THE DIRECTORS, COMMISSION AND SITTING FEE TO THE DIRECT ORS, PAYMENT TO AUDITORS, TRAVELLING AND CONVEYANCE, EXPENDITURE AN D DEPRECIATIONS IN RESPECT OF OFFICE EQUIPMENTS. THE ASSESSING OFFI CER IS OF THE OPINION THAT OUT OF THE SALE, PROPORTIONATE EXPENDI TURE SHOULD HAVE BEEN TAKEN INTO ACCOUNT BY THE APPELLANT TO SHOW TH E CURRENT PROFITS EARNED FROM THE UNDERTAKING. THE CIT(A) AGREED WITH THE CONTENTIONS OF THE ASSESSING OFFICER; HOWEVER THE ASSESSING OFF ICER COULD NOT GIVE ANY RE-COMPUTATION IN THE SAID DEDUCTION FOR A LLOWING CORRECT CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 80-IA. CO NSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ON AN EST IMATED BASIS 15% OF THE CLAIM MADE BY THE ASSESSEE FOR DEDUCTION U/S. 80-IA WAS - - ITA 1695 TO 16 97 & CO 84/MDS/14 38 DISALLOWED TO SHOW THE CORRECT PROFITS AFTER REDUCI NG COMMON EXPENDITURE FOR THE ABOVE CLAIM AND THE CIT(A) DIR ECTED THE AO TO ALLOW THE BALANCE AMOUNT OF RS.6,84,43,211/- (RS.8, 05,21,425/- RS.1,20,78,213/- ). ACCORDINGLY, WE CONFIRM THE FIN DINGS OF THE CIT(APPEALS) ON THIS ISSUE AND REJECT THE GROUND TA KEN BY THE REVENUE. THEREFORE, THE GROUND OF APPEAL IS DISMISS ED. 11. THE NEXT ISSUE RAISED BY THE REVENUE IN ITA NO.1697/MDS/2014 IS AS UNDER: 5.1 THE LD. CIT(A) ERRED IN DELETING THE DISALLOW ANCE U/S 40(A)(I) ON FCCB OF 12.09 CRORE MADE BY THE AO, BY HOLDING THAT THE ASSESSEE IS REQUIRED TO DEDUCT TAX ON THE MATURITY OF THE FCCBS AT THE END OF FIVE YEAR O NE MONTH ONLY; THAT SINCE THE ASSESSEE HAD BOUGHT BACK THE FCCBS MIDWAY, TDS PROVISIONS U/S.195 ARE NOT APPLICABLE AS PER CBDT CIRCULAR NO.4/2004. 12. THE FACTS OF THE ISSUE ARE THAT THE AO DISALLOW ED THE PREMIUM PAYABLE ON FOREIGN CURRENCY CONVERTIBLE BONDS TO TH E EXTENT OF 12.09 CRORES UNDER THE PROVISIONS OF SEC.40(A)(I) OF THE ACT, FOR THE REASON THAT ADEQUATE TAXES HAVE NOT BEEN DEDUCTED OUT OF S UCH PREMIUM PAYABLES REQUIRED U/S.195 OF THE ACT. THE ASSESSEE ISSUED FOREIGN CURRENCY CONVERTIBLE BONDS DURING APRIL 2006 FOR AN AMOUNT OF US$75 MILLION, WHICH WOULD MATURE IN FIVE YEARS AND ONE D AY. THE BONDS - - ITA 1695 TO 16 97 & CO 84/MDS/14 39 CARRIED ON OVERALL PREMIUM OF 36.49% WHICH GAVE A Y IELD TO MATURITY RATE OF 6.32% CALCULATED ON HALF YEARLY BASIS. THE DETAILS FURNISHED IN SCHEDULE 4 TO THE BALANCE SHEET WOULD INDICATE THAT THE ASSESSEE CREATED A CUMULATIVE PROVISION OF 61.30 CRORES IN RESPECT OF THE PREMIUM PAYABLE BY IT ON THE FOREIGN CURRENCY CONVE RTIBLE BONDS ISSUED BY IT DURING APRIL 2006. THE PREMIUM PAYABL E FOR THE RELEVANT PREVIOUS YEAR OF 12.09 CRORES WAS ALSO INCLUDED IN THE SAID PROVISION AND THE QUANTIFICATION OF THE SAID PREMIU M AT 12.09 CRORES HAD BEEN DONE. 12.1 THE BONDS ISSUED ARE IN THE NATURE OF BORROWIN G FOR THE PURPOSE OF BUSINESS AND THE EXPENDITURE INCURRED FO R THE SAID BORROWING IS REVENUE EXPENDITURE AS HELD BY THE APE X COURT IN THE CASE OF INDIA CEMENTS LTD (60 ITR 52) AND HENCE, THE INTEREST PAYABLE ON THE BONDS BY THE NAME PREMIUM IS ALSO ALLOWABLE AS BUSINESS EXPENDITURE. WITH THIS, IN VIEW, PREMIUM PAYABLE ON THE BONDS, THE ASSESSEE CAN CLAIM PREMIUM PAYABLE ON A PRO RATA BASIS AS HELD BY THE APEX COURT IN THE CASE OF MADRAS IN DUSTRIAL INVESTMENT CORPORATION LTD. (225 ITR 802). ACCORDI NGLY, THE ASSESSEE CLAIMED THE SAID PREMIUM PAYABLE OF 12.09 CRORES AS - - ITA 1695 TO 16 97 & CO 84/MDS/14 40 EXPENDITURE IN THE COMPUTATION OF INCOME LIABLE FOR ASSESSMENT FOR THE ASST. YEAR UNDER CONSIDERATION. HOWEVER, THE A O OBSERVED THAT THE PREMIUM PAYABLE OF 12.09 CRORES CLAIMED AS A DEDUCTIBLE EXPENDITURE BY THE ASSESSEE IS NOT ADMISSIBLE UNDER THE PROVISIONS OF SEC.40(A)(I) OF THE ACT, AS THE TAXES REQUIRED TO B E DEDUCTED UNDER THE PROVISIONS OF SEC.195 OF THE ACT OUT OF THE ABO VE MENTIONED EXPENDITURE HAVE NOT BEEN DEDUCTED AND REMITTED TO THE GOVT. ACCOUNT AND BY THE NOTICE DATED 13.3.2013, THE AO R EQUESTED THE ASSESSEE TO SHOW CAUSE AS TO WHY SUCH A DISALLOWANC E SHOULD NOT BE EFFECTED WHILE COMPLETING THE ASSESSMENT FOR THE ASST. YEAR UNDER CONSIDERATION. 13. THE LD. AR SUBMITTED BEFORE THE AO, AS UNDER : I. THE PREMIUM ON FOREIGN CURRENCY CONVERTIBLE BON DS IS PAYABLE AT THE END OF 5 TH YEAR AT THE TIME OF MATURITY AS PER THE TERMS AND CONDITIONS OF THE ISSUE. FOR INC OME TAX PURPOSES, THE SAME IS CLAIMED ON ACCRUAL BASIS. AT THE END OF EACH YEAR, THE PREMIUM IS NOT CREDITED T O THE PAYEE AS THE AMOUNT IS DUE ONLY AT THE END OF 5 YEA RS. HENCE, BOTH PAYMENT/CREDIT ARE NOT MADE TO THE NON RESIDENT DURING THE YEAR. ACCORDINGLY THERE IS NO LIABILITY - - ITA 1695 TO 16 97 & CO 84/MDS/14 41 TO DEDUCT TDS U/S.195 OF IT ACT 1961 AND AS THERE I S NO LIABILITY TO DEDUCT TAX U/S.195 OF THE IT ACT 1961, THE EXPENDITURE UNDER CONSIDERATION CANNOT BE DISALLOWE D U/S.40(A)(I) OF IT ACT 1961. II. THE APPELLANT ALSO REFERRED, TO THE CBDT CIRCULAR NO.2 OF 2002 ISSUED IN THE CONTEXT OF TDS ON DEEP DISCOU NT BONDS / STRIPS U/S.193 OF IT ACT 1961. IT WAS CLARIFIED IN THE SAID CIRCULAR THAT THE TDS WOULD BE ON THE DIFFERENCE BETWEEN THE BID PRICE AND REDEMPTION PRICE AND SHAL L BE DEDUCTED AT THE TIME OF MATURITY. THE SAME REASONI NG CAN BE EXTENDED TO FOREIGN CURRENCY CONVERTIBLE BON DS AND TDS SHALL BE DEDUCTED ONLY AT THE TIME OF MATUR ITY / REDEMPTION. THE APPELLANT HAS COMPLIED WITH THE AB OVE PROVISIONS, AND THE APPLICABLE TDS WAS DEPOSITED AT THE TIME OF MATURITY. HENCE, NO DISALLOWANCE U/S.40(A) (I) IS CALLED FOR. III. THE EXCHANGE RATE ALSO KEEPS DIFFERING FROM D ATE TO DATE AND THE APPELLANT IS NOT SURE THE RATE AT WHIC H THE PREMIUM WOULD BE PAID TO THE BOND HOLDERS. IT CAN ONLY BE THE BEST ESTIMATE OF THE AMOUNT PAYABLE TO THE B OND HOLDERS WHICH ACCRUES DURING THE YEAR. HOWEVER, TH E PAYMENT MAY BE DIFFERENT FROM WHAT HAD ACCRUED. FO R EXAMPLE, CERTAIN BOND HOLDERS MAY OPT FOR BUY BACK AT A LOWER RATE, IN WHICH THE PREMIUM GETS REVERSED. HE NCE, IT IS DIFFICULT TO EXACTLY DETERMINED AS TO WHAT WO ULD BE - - ITA 1695 TO 16 97 & CO 84/MDS/14 42 THE AMOUNT PAYABLE TO THE NON-RESIDENT BEFORE THE MATURITY DATE / REDEMPTION DATE. SO THE PREMIUM IS NOT CREDITED TO THE BOND HOLDERS ACCOUNT AND TREATED AS PROVISION FOR OUTSTANDING EXPENSES. WHEN THERE IS NO REASONABLE CERTAINTY ON THE AMOUNT OF INCOME ACCRUI NG IN THE HANDS OF NON RESIDENT, THEN TDS CANNOT BE MADE. TO REACH THE ABOVE CONCLUSION, THE APPELLANT PLACED RELIANCE ON THE DECISION OF ITAT MUMBAI IN T HE CASE OF IDBI V. INCOME TAX OFFICER (293 ITR 267). IV. THERE CANNOT BE ANY DISALLOWANCE IF THE RECIPI ENT HAD OFFERED THE SAME TO TAX. SINCE IN THE CASE OF THE APPELLANT, THE RECIPIENTS HAVE OFFERED THE PREMIUM FOR TAX IN INDIA AS PER THEIR METHOD OF ACCOUNTING, NO DISALLOWANCE CAN BE MADE U/S.40(A)(I) OF IT ACT 196 1. V. THE WHOLE SCHEME OF TDS PROCEEDS ON THE ASSUMPTION THAT THE PERSON WHOSE LIABILITY TO PAY A N INCOME, KNOWS THE IDENTITY OF THE RECIPIENT. FOR T HE VICARIOUS TDS LIABILITY THERE HAS TO BE A PRINCIPAL TAX LIABILITY AND SUCH PRINCIPAL TAX LIABILITY COMES IN TO EXISTENCE ONLY WHEN IT CAN BE ASCERTAINED. VI. THE APPELLANT HAS NEITHER CREDITED THE PARTY ( NOT KNOWN), NOR PAID THE AMOUNT DURING THE RELEVANT PREVIOUS YEAR AND HENCE SECTION 195 OF IT ACT 1961 IS NOT APPLICABLE. - - ITA 1695 TO 16 97 & CO 84/MDS/14 43 VII. THE EXPLANATION TO SEC.195 OF IT ACT 1961 CANN OT BE INVOKED IN A CASE WHERE THE PERSON WHO IS TO RECEIV E THE PREMIUM CANNOT BE IDENTIFIED AND THIS POSITION WAS ACCEPTED BY THE CBDT IN THEIR LETTER DATED 05.07.96 ADDRESSED TO TISCO LTD, AND A COPY OF THE SAID LETT ER ENCLOSED AS ANNEXURE 18 TO THIS WRITTEN ARGUMENTS . HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH T HE EXPLANATIONS GIVEN BY THE APPELLANT, AS ABOVE, BUT, THOUGH IT FIT TO DISALLOW THE PREMIUM PAYABLE ON FO REIGN CURRENCY CONVERTIBLE BONDS TO THE EXTENT OF 12.09 CRORES U/S.40(A)(I) OF IT ACT IN THE ASSESSMENT ORD ER UNDER APPEAL. THE AO DID NOT ACCEPT THE EXPLANATIONS OFFERED BY T HE ASSESSEE AND DISALLOWED THE CLAIM OF THE ASSESSEE. AGGRIEVE D, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 14. ON APPEAL, THE CIT(APPEALS), AFTER CONSIDERING THE CBDT CIRCULAR NO.2/2002 DATED 15.2.2002 AND 4/2004 DATED 13.5.2004, RELIED ON BY THE ASSESSEE, OBSERVED THAT THESE ARE ISSUED BY THE CBDT IN RELATION TO A CLARIFICATION R EGARDING TAX DEDUCTION AT SOURCE U/S.193 OF THE ACT FROM INTERES T ON DEEP DISCOUNT BONDS. FURTHER, THE CIT(APPEALS) OBSERVED THAT THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 44 TAX PAYERS ARE FACING DIFFICULTIES IN VIEW OF SEC.1 99 OF THE ACT, WHICH PROVIDES THAT CREDIT FOR TAX DEDUCTION AT SOU RCE SHALL BE ALLOWED ONLY IN THE YEAR IN WHICH THE CORRESPONDING INCOME IS DECLARED. THUS, IT IS CLARIFIED THAT THE TAX IS RE QUIRED TO BE DEDUCTED AT SOURCE U/S.193 OR 195, AS THE CASE MAY BE ONLY AT THE TIME OF REDEMPTION OF SUCH BONDS, IRRESPECTIVE OF WHETHER THE INCOME FROM THE BONDS HAS BEEN DECLARED BY THE BOND HOLDER ON ACCRUAL BASIS FROM YEAR TO YEAR OR DECLARED ONLY IN THE YEAR OF REDEMPTION. THE CBDT CIRCULAR NO.4/2004 ISSUED SUBSEQUENT TO THE CIRCULAR NO.2/2002 CLEARLY MENTIONED THAT TA X IS REQUIRED TO BE DEDUCTED AT SOURCE U/S.193 OR 195, ONLY AT TH E TIME OF REDEMPTION OF SUCH BONDS, IRRESPECTIVE OF WHETHER T HE INCOME FROM THE BONDS HAS BEEN DECLARED BY THE BOND HOLDER ON APPROVED BASIS FROM YEAR TO YEAR OR DECLARED ONLY I N THE YEAR OF REDEMPTION. THUS, THE CIT(APPEALS) OPINED THAT TH E ASSESSEE IS REQUIRED TO DEDUCT TAX ON THE MATURITY OF THE FC CBS AT THE END OF FIVE ONE MONTH THEN ONLY THE ASSESSEE IS SUPPOSE D TO DEDUCT TAX. ACCORDING TO THE CIT(APPEALS), SINCE, THE ASS ESSEE HAS BOUGHT BACK THE FCCBS MIDWAY, THE TDS PROVISIONS U/ S.195 ARE NOT APPLICABLE AS PER THE CIRCULAR NO.4/2004 ISSUED BY THE CBDT - - ITA 1695 TO 16 97 & CO 84/MDS/14 45 AND RULE 37DA OF THE IT RULES IS ALSO NOT APPLICABL E IN THE CASE OF THE ASSESSEE, WHICH PROVIDES A SITUATION WHERE T AX IS TO BE DEDUCTED ON INCOME, WHICH IS ASSESSABLE OVER A NUMB ER OF YEARS AS WELL AS CREDIT TO SUCH DEDUCTION OF TAX SH ALL BE GIVEN TO IN THE SAME RATIO AS THE INCOME IS ASSESSED. 14.1 THE LD. AR PLACED HIS RELIANCE ON THE DECISION OF THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF IDBI V. ITO, IN 293 ITR 267(MUM.)(A.T), BEFORE THE CIT(APPEALS), TO SUPPORT HIS VIEW. 14.2 EVEN IN THE CASE OF THE ASSESSEE, WHO HAD CREA TED THE INTEREST PAYABLE TO INTEREST LIABILITY ACCOUNT AND NOT DEBITED THE SAME TO THE P & L ACCOUNT DURING THE YEAR UNDER CON SIDERATION, BUT FAILED TO DEDUCT TDS. THE DEDUCTION OF TAX AT SOURCE CAN ONLY EFFECTED WHEN THE PAYEE IS KNOWN. IN THIS CA SE, THE GDRS BEING TRANSFERABLE OR TRADED AT SINGAPORE STOCK EXC HANGE, BEING A TRANSFERABLE ON BIDDING AND ON SIMPLE ENDORSEMENT AND DELIVERY, THE RELEVANT REGISTRATION DATE BEING A DA TE SUBSEQUENT TO THE CLOSURE OF BOOKS OF ACCOUNT, THE ASSESSEE CO ULD NOT HAVE ASCERTAINED THE PAYEES AT THE POINT OF TIME WHEN TH E PROVISION FOR INTEREST ACCRUED BUT NOT DUE WAS MADE. ACCOR DINGLY, THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 46 CIT(APPEALS) OBSERVED THAT NO TAX WAS REQUIRED TO B E DEDUCTED AT SOURCE IN RESPECT OF THE PROVISION FOR INTEREST PAYABLE MADE BY THE ASSESSEE WHICH REFLECTED PROVISION FOR INTEREST ACCRUED BUT NOT DUE, IN A SITUATION WHERE THE ULTIMATE RECIPIEN T OF SUCH INTEREST ACCRUED BUT NOT DUE COULD NOT HAVE BEEN AS CERTAINED AT THE POINT OF TIME, WHEN THE PROVISION IS MADE. THE INTEREST TO SUCH BOND HOLDERS IS TO BE PAID AS ARE REGISTERED W ITH THE ASSESSEE COMPANY, BUT THEY COULD NOT HAVE BEEN ANY METHOD OF ASCERTAINING AT THE TIME OF THE MAKING THE PROVISIO N FOR INTEREST ACCRUED BUT NOT DUE AS ON 31 ST MARCH OF THE CURRENT FINANCIAL YEAR UNDER CONSIDERATION. ACCORDING TO THE CIT(APP EALS), IT IS IMPORTANT TO BEAR IN MIND THAT TAXES WERE DULY DEDU CTED AT SOURCE AT THE TIME OF PAYMENT. HOWEVER, THE ASSESS EE DID NOT HAVE ANY LIABILITY TO DEDUCT TAX AT SOURCE, IN RESP ECT OF PROVISION FOR INTEREST ACCRUED BUT NOT DUE. FOLLOWING THE DE CISION OF THE TRIBUNAL CITED SUPRA IN THE CASE OF IDBI V.ITO AND CBDT CIRCULAR NO.4/2004, THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE IS NOT REQUIRED TO DEDUCT TDS ON THE PREMI UM PAYABLE AT 12.09 CRORES DURING THE YEAR UNDER CONSIDERATION A ND DIRECTED THE AO TO DELETE THE ADDITION MADE FOR NON -DEDUCTION OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 47 TDS U/S.40(A)(I) OF THE ACT. AGAINST THIS, THE REV ENUE IS IN APPEAL BEFORE US. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE SUBMISSIONS OF THE ASSESSEE ON DEDUCTION OF TDS ON THE PREMIUM PAYABL E AT RS.12.09 CRORES AS WELL AS THE ASSESSMENT ORDER ON THIS ISSUE. THE LD.A.R PLACED RELIANCE IN BOARD CIRCULAR NO.2 /2002 DATED 15.02.2002 AS WELL AS CIRCULAR NO.4/2004 DATED 13.0 5.2004. THE CIRCULAR ISSUED BY THE CBDT IS IN RELATION TO A CLA RIFICATION REGARDING TAX DEDUCTION AT SOURCE U/S 193 OF THE IT ACT FROM INTEREST ON DEEP DISCOUNT BONDS. IN THIS CIRCULAR, IT WAS DISCUSSED THAT THE TAX PAYERS ARE FACING DIFFICULTI ES IN VIEW OF SECTION 199 OF THE IT ACT WHICH PROVIDES THAT CREDI T FOR TAX DEDUCTION AT SOURCE SHALL BE ALLOWED ONLY IN THE YE AR IN WHICH THE CORRESPONDING INCOME IS DECLARED. THUS, IT IS CLARI FIED THAT THE TAX IS REQUIRED TO BE DEDUCTED AT SOURCE U/S 193 OR 195 , AS THE CASE MAY BE ONLY AT THE TIME OF REDEMPTION OF SUCH BONDS , IRRESPECTIVE OF WHETHER THE INCOME FROM THE BONDS H AS BEEN DECLARED BY THE BOND HOLDER ON ACCRUAL BASIS FROM Y EAR TO YEAR - - ITA 1695 TO 16 97 & CO 84/MDS/14 48 OR DECLARED ONLY IN THE YEAR OF REDEMPTION. THE CBD T CIRCULAR NO.4/2004 ISSUED SUBSEQUENT TO THE CIRCULAR NO.2/20 02 CLEARLY MENTIONED THAT TAX IS REQUIRED TO BE DEDUCTED AT SO URCE U/S 193 OR 195, ONLY AT THE TIME OF REDEMPTION OF SUCH BOND S, IRRESPECTIVE OF WHETHER THE INCOME FROM THE BONDS HAS BEEN DECLA RED BY THE BOND HOLDER ON APPROVED BASIS FROM YEAR TO YEAR OR DECLARED ONLY IN THE YEAR OF REDEMPTION. THUS IT IS CLEAR TH E APPELLANT IS REQUIRED TO DEDUCT TAX ON THE MATURITY OF THE FCCBS AT THE END OF FIVE YEAR ONE MONTH THEN ONLY THE APPELLANT IS SUPP OSED TO DEDUCT TAX. SINCE THE APPELLANT HAS BOUGHT BACK THE FCCBS MIDWAY, THE TDS PROVISIONS ULS 195 NOT APPLICABLE A S PER THE CIRCULAR IN THIS REGARD, RULE 37DA OF THE IT RULES IS ALSO NOT APPLICABLE IN THE CASE OF THE APPELLANT WHICH PROVI DES A SITUATION WHERE TAX IS DEDUCTED ON INCOME WHICH IS ASSESSABLE OVER A NUMBER OF YEARS AS WEIL AS CREDIT TO SUCH DEDUCTION OF TAX SHALL BE GIVEN TO IN THE SAME RATIO AS THE INCOME IS ASSE SSED. FURTHER, THE LD. AR OF THE APPELLANT FURTHER PLACED HIS RELI ANCE ON IDBI VS. ITO CITED SUPRA WHEREIN THE TRIBUNAL HAS DISCUSSE D THE CORE ISSUE IN THIS CASE PERTAINS TO THE SCOPE OF EXPLANA TION TO SEC. 193 OF THE ACT WHICH REQUIRES WHETHER TAX TO BE DED UCTED AT - - ITA 1695 TO 16 97 & CO 84/MDS/14 49 SOURCE IN RESPECT OF THE PROVISION FOR INTEREST AC CRUED BUT NOT DUE MADE BY AN ASSESSEE, WHETHER THE ULTIMATE RECI PIENT OF SUCH INTEREST ACCRUED BUT NOT DUE CANNOT BE ASCERTA INED AT THE POINT OF TIME WHEN THE PROVISION IS MADE. 15.1 THE EXPRESSION INTEREST ACCRUED BUT NOT DUE IS ESSENTIALLY AN ACCOUNTING EXPRESSION WHICH REFERS T O THE INTEREST LIABILITY WHICH HAS ARISEN IN RESPECT OF THE INTERE ST PAYABLE BY A PERSON BUT LIABILITY TO PAY SUCH INTEREST HAS NOT B EEN CRITICIZED. THE EXPRESSION BECOMES PARTICULARLY RELEVANT WHEN I NTEREST IS PAYABLE ON A DATE, LATER THAN THE DATE ON WHICH BOO KS OF ACCOUNTS OF THE ASSESSEE ARE CLOSED ANNUALLY. AT TH E TIME OF CLOSURE OF ANNUAL ACCOUNTS, THE ASSESSEE HAS INCURR ED THE LIABILITY IN RESPECT OF INTEREST BUT THE LIABILITY IS TO BE DISCHARGED AT A LATER DATE. EVEN IN THE CASE OF THE ASSESSEE WHO HAD CREATED THE INTEREST PAYABLE TO INTEREST LIABILITY ACCOUNT AND NOT DEBITED THE SAME TO THE P & L ACCOUNT DURING THE YEAR UNDER CONSIDERATION, BUT FAILED TO DEDUCT TDS. THE DEDUCT ION OF TAX AT SOURCE CAN ONLY BE EFFECTED WHEN THE PAYEE IS KNOWN . IN THE INSTANT CASE OF THE APPELLANT, THE GDRS BEING TRANS FERABLE OR - - ITA 1695 TO 16 97 & CO 84/MDS/14 50 TRADED AT SINGAPORE STOCK EXCHANGE, BEING A TRANSFE RABLE ON BIDDING AND ON SIMPLE ENDORSEMENT AND DELIVERY, THE RELEVANT REGISTRATION DATE BEING A DATE SUBSEQUENT TO THE CL OSURE OF BOOKS OF ACCOUNTS, THE ASSESSEE COULD NOT HAVE ASCERTAIN ED THE PAYEES AT THE POINT OF TIME WHEN THE PROVISION FOR INTEREST ACCRUED BUT NOT DUE WAS MADE. ACCORDINGLY, NO TAX W AS REQUIRED TO BE DEDUCTED AT SOURCE IN RESPECT OF THE PROVISIO N FOR INTEREST PAYABLE MADE BY THE ASSESSEE WHICH REFLECTED PROVIS ION FOR INTEREST ACCRUED BUT NOT DUE, IN A SITUATION WHERE THE ULTIMATE RECIPIENT OF SUCH INTEREST ACCRUED BUT NOT DUE COUL D NOT HAVE BEEN ASCERTAINED AT THE POINT OF TIME WHEN THE PROV ISION IS MADE. THE INTEREST TO SUCH BOND HOLDERS IS TO BE PA ID AS ARE REGISTERED WITH THE ASSESSEE COMPANY, BUT THEY COUL D NOT HAVE BEEN ANY METHOD OF ASCERTAINING AT THE TIME OF THE MAKING THE PROVISION FOR INTEREST ACCRUED BUT NOT DUE AS ON 31 ST MARCH OF THE CURRENT FINANCIAL YEAR UNDER CONSIDERATION. IT IS IMPORTANT TO BEAR IN MIND THAT TAXES WERE DULY DEDUCTED AT SOURC E AT THE TIME OF PAYMENT. HOWEVER, THE ASSESSEE DID NOT HAVE ANY LIABILITY TO DEDUCT TAX AT SOURCE, IN RESPECT OF PROVISION FOR I NTEREST. ACCRUED BUT NOT DUE. - - ITA 1695 TO 16 97 & CO 84/MDS/14 51 15.2 KEEPING IN VIEW OF THE CBDT CIRCULAR NO.4/20 04 AS WELL AS THE RATIO HELD IN THE CASE OF IDBI MENTIONE D SUPRA WHICH ARE SQUARELY APPLICABLE TO FACTS OF THE CASE OF THE APPELLANT AND THEREFORE THE APPELLANT IS NOT REQUIRED TO DEDUCT T DS ON THE PREMIUM PAYABLE AT RS.12.09 CRORES DURING THE YEAR UNDER CONSIDERATION. THE LD.CIT(A) DIRECTED THE LD. ASSES SING OFFICER TO DELETE THE ADDITION MADE FOR NON-DEDUCTION OF TD S U/S.40(A)(IA) OF THE ACT. WE DO NOT FIND ANY INFIR MITY IN THE ORDER OF LD. LEARNED COMMISSIONER OF INCOME TAX(A) AND TH E SAME IS CONFIRMED. AS DISCUSSED ABOVE PREMIUM PAYABLE ON F CCB BOND ON MATURITY CANNOT BE EQUATED WITH INTEREST SO AS TO DEDUCT THE TDS ON IT. ACCORDINGLY, THIS GROUND OF APPEAL I S DISMISSED. 16. THE NEXT GROUND IN THE APPEAL OF REVENUE IN ITA NO.1697/MDS/2014 IS THAT THE CIT(APPEALS) ERRED IN DELETING THE ADDITION MADE BY THE AO WITH REGARD TO PREMIUM ON F CCBS BOUGHT BACK TO THE TUNE OF 25.61 CRORE AND ALSO GAIN ARISING OUT OF BUY BACK OF FCCBS OF 134.76 CRORE. - - ITA 1695 TO 16 97 & CO 84/MDS/14 52 17. THE FACTS OF THE ISSUE ARE THAT THE AO ASSESSED THE PREMIUM ON THE FOREIGN CURRENCY CONVERTIBLE BONDS P ERTAINING TO THE PERIOD 1.4.2009 TO 31.12.2009 IN RESPECT OF FOR EIGN CURRENCY CONVERTIBLE BONDS BOUGHT BACK BY THE ASSESSEE U/S.2 8(I) AND 29(IV) OF THE ACT TO THE EXTENT OF 25,61,65,000/-. THE ASSESSEE HAS ISSUED FCCBS DURING APRIL 2006 FOR AN AMOUNT OF US$ 75 MILLION DOLLARS WHICH WILL MATURE IN FIVE YEARS ONE DAY. THE BONDS CARRY AN OVERALL PREMIUM OF 36,49% WHICH GIVES A YIELD- TO-MATURITY RATE OF 6.32% CALCULATED ON HALF YEARLY BASIS. THE ASSESSEE ACCORDINGLY CALCULATED THE PREMIUM FROM YE AR TO YEAR AND CLAIMED THE PREMIUM ON ACCRUAL BASIS IN THE EAR LIER THREE ASST. YEARS 2007-08, 2008-09 AND 2009-10 TOTALLING TO 72.76 CRORES. DURING THE PRESENT PREVIOUS YEAR, OUT OF T HE TOTAL BONDS WORTH 75M $, THE ASSESSEE BOUGHT BACK BONDS OF FACE VALUE OF 38.25 MILLION US$ AT A HUGE DISCOUNT RESULTING IN T WO-FOLD BENEFIT TO IT. FIRSTLY, NO PREMIUM IS PAYABLE ON THE AMOUN T COVERED BY SUCH BUY BACK AND ACCORDINGLY THE AMOUNT WHICH WAS CLAIMED AS EXPENDITURE IN EARLIER THREE ASST. YEARS WAS OFF ERED AS INCOME U/S.41(1) OF THE ACT. SECONDLY, THE LIABILITY OF 38.25 M$ ITSELF WAS PURCHASED BACK AT 15.86 M$ AT A HUGE DISCOUNT R ESULTING IN - - ITA 1695 TO 16 97 & CO 84/MDS/14 53 A SUBSTANTIAL BENEFIT IN THE FORM OF REDUCTION IN L IABILITY TO THE EXTENT OF THE DIFFERENCE BETWEEN THE TWO. THE TOTA L BENEFIT WORKS OUT TO 160.3834 CRORES WHICH WAS RECOGNIZED IN THE BOOKS OF THE ASSESSEE. THE COMPUTATION OF THE BENEFIT WAS F URNISHED BY THE ASSESSEE AS UNDER : BUY BACK QUANTITY 38.25 M$ 171.8458 CR ADD : PREMIUM ACCRUED FOR FINANCIAL YEARS 2006-07 TO 2009-10 13.96 M$ 62.7223 CR TOTAL 52.21 M$ 234.5681 CR LESS : AMOUNT AT WHICH BONDS WERE BOUGHT BACK 15.86 M$ 74.1847 CR PROFIT ON BUY BACK 36.35 M$ 160.3834 CR THE ASSESSEE, OUT OF THE AMOUNT OF 160.38 CRORES, A SUM OF 83.50 CRORES WAS ADJUSTED AGAINST THE GOODWILL WRIT E OFF. IN THIS REGARD, A NOTE IS GIVEN IN THE SCHEDULE 19B AS POIN T NO.21, WHEREIN IT IS MENTIONED EXCLUSIVELY THE PROFIT ON B UY BACK AFTER IMPAIRMENT OF GOODWILL. AS PER THE ACCOUNTING STAN DARD 26, THE IMPAIRMENT OF INTANGIBLE ASSETS HAS TO BE TREATED A S AN EXPENSE AND LIKE OTHER EXPENSES THIS ALSO HAS TO BE DEBITED TO THE PROFIT AND LOSS ACCOUNT. IN OTHER WORDS, NET AMOUNT AFTE R EXPENSING THE GOODWILL IMPAIRMENT IS CREDITED TO THE PROFIT A ND LOSS ACCOUNT. THE EFFECT ON THE BOOK PROFIT WOULD BE NIL IN BOT H THE CASES VIZ. - - ITA 1695 TO 16 97 & CO 84/MDS/14 54 CREDITING THE NET AMOUNT TO THE PROFIT AND LOSS ACC OUNT OR CREDITING THE GROSS AMOUNT OF PROFIT ON BUY BACK AN D DEBITING THE GOODWILL WRITE OFF / IMPAIRMENT OF GOODWILL TO THE PROFIT AND LOSS ACCOUNT. OUT OF THE BALANCE 76.88 CRORES, A SUM OF 62.72 CRORES PERTAINS TO THE PREMIUM PAYABLE WITH REGARD TO PREMIUM, ORIGINALLY AT THE TIME OF ISSUE OF BONDS, THE PREMI UM PAYABLE WAS ADJUSTED AGAINST THE SHARE PREMIUM ACCOUNT. ACCORD INGLY, THE PREMIUM EXTINGUISHED WAS ALSO ADJUSTED AGAINST THE SHARE PREMIUM ACCOUNT. THE SHARE PREMIUM DOES NOT FORM P ART OF RESERVES SINCE THE SAME IS NOT AVAILABLE FOR ALL TH E PURPOSES AND AVAILABLE ONLY FOR SPECIFIC PURPOSES AS PRESCRIBED UNDER THE COMPANIES ACT, 1956 AND THE BALANCE AMOUNT OF 14.16 CRORES WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT. IT WA S ALSO CLAIMED BY THE ASSESSEE THAT THE PROFIT ON BUY BACK WOULD N OT CONSTITUTE INCOME TAXABLE UNDER THE PROVISIONS OF SEC.28(IV) O F THE ACT. 17.1 HOWEVER, THE AO DIFFERED WITH THE ASSESSEE ON THE TAXABILITY OF THE PROFIT ARISING ON THE BUYBACK OF FCCBS. ACCORDING TO THE AO, THE ASSESSEE GETS A BENEFIT RE GARDING PREMIUM PAYABLE IN SO FAR AS A CONSEQUENCE TO THE B UYBACK NOT - - ITA 1695 TO 16 97 & CO 84/MDS/14 55 ONLY FOR THE THREE EARLIER YEARS, BUT ALSO FOR THE CURRENT ASST. YEAR, THE LIABILITY TO PAY PREMIUM ON BOND WORTH 38.25 MI LLION US$ VANISHED. HENCE, ACCORDING TO THE AO, IN CONTINUAT ION OF THE TREATMENT GIVEN BY THE ASSESSEE TO THE PREMIUM FOR THE EARLIER THREE ASST. YEARS OF OFFERING OF THE DISAPPEARED LI ABILITY TO TAX, THE PREMIUM LIABILITY WHICH CEASED TO EXIST FOR THE CUR RENT ASST. YEAR ALSO SHOULD HAVE BEEN OFFERED TO TAX. THIS IS A BE NEFIT TO THE ASSESSEE ON THE REVENUE ACCOUNT, IN THE NATURE OF B ENEFIT MENTIONED IN SEC.28(IV) OF THE ACT, AND WHICH IS NO T CONVERTIBLE INTO MONEY. HENCE, THE SAME SQUARELY FALLS U/S.28( IV) OF THE ACT AND LIABLE TO BE TREATED AS INCOME. SUCH BENEFIT W AS COMPUTED AT 25.61 CRORES (TOTAL PREMIUM BENEFIT 62.72 CRORES OFFERED IN EARLIER YEARS 37.11 = 25.61 CRORES). 17.2 THE ASSESSEE WAS REQUESTED IN THE NOTICE DATED 13.3.2013 TO EXPLAIN AS TO WHY THE ABOVE AMOUNT OF 25.61 CRORES SHOULD NOT BE TAXED, FOR THE ASST. YEAR UNDE R CONSIDERATION AND THE ASSESSEE FILED ITS REPLY DATE D 19.3.2013. THE ASSESSEE ALSO FILED ITS FURTHER REPLIES DATED 2 2.3.2013 AND 26.3.2013. IN THE REPLY DATED 19.3.2013, THE ASSES SEE REFERRED - - ITA 1695 TO 16 97 & CO 84/MDS/14 56 TO THE FACTS PERTAINING TO THE ISSUE ON HAND AND TH E ASSESSEE CLAIMED THAT THE FCCB WAS UTILIZED FOR PURCHASE OF CAPITAL ASSETS AND CANNOT BE USED FOR WORKING CAPITAL REQUI REMENTS, AS PER THE REGULATIONS OF THE RESERVE BANK OF INDIA. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE JURISDICTIONAL H IGH COURT IN THE CASE OF ISKRAMEMCO REGENT LTD. VS. CIT (331 ITR 317 ), WHEREIN THE ABOVE ISSUE HAS BEEN DISCUSSED. THE AS SESSEE ALSO PLACED RELIANCE ON THE DECISIONS IN THE CASES OF MAHINDRA & MAHINDRA LTD. V. CIT (261 ITR 501-BOM), CIT V. CHET AN CHEMICALS (P) LTD. (267 ITR 770-GUJ), ISKRAEMECO RE GENT LTD. VS. C.I.T IN [2011] 331 ITR 317(MAD.) IN SUPPORT OF ITS CONTENTIONS. 17.3 HOWEVER, THE AO OBSERVED THAT THE DECISION IN 331 ITR 317(MAD) IS NOT APPLICABLE TO THE CASE OF THE ASSES SEE, AS THE FACTS ARE DIFFERENT. IN THE CASES CITED, ACCORDING TO THE AO, THE ISSUE INVOLVED WAS WITH REFERENCE TO THE LOAN AMOUN T WAIVED BY THE BANK CONSEQUENT ON ONE TIME SETTLEMENT WITH ITS CUSTOMER AND THE COURT HELD THAT THE WAIVER AMOUNT IS NOT TA XABLE U/S.28(IV) OF THE ACT. BUT IN THE CASE OF THE ASSE SSEE, ACCORDING - - ITA 1695 TO 16 97 & CO 84/MDS/14 57 TO THE AO, THE FACTS ARE DIFFERENT. THE ASSESSEE I TSELF TREATED SUCH PREMIUM RELATING TO EARLIER YEARS AS INCOME DU RING THE PRESENT FINANCIAL YEAR U/S.41(1) OF THE ACT, BUT DI D NOT DO SO FOR THE CURRENT ASST. YEAR AND THEREFORE, AS AN EXTENSI ON THERETO, IT WAS PROPOSED TO TREAT THE PREMIUM RELATING TO THE C URRENT FINANCIAL YEAR 2009-10, FOR WHICH NO PREMIUM IS PAY ABLE CONSEQUENT ON BUYBACK OF THE BONDS, AS INCOME OF TH E PRESENT PREVIOUS YEAR. THE VALUE OF THE BOND WHICH WAS LIS TED ON SINGAPORE STOCK EXCHANGE HAS COME DOWN BELOW THE FA CE VALUE AND WAS TRADED AT A DISCOUNT AND THE ASSESSEE MADE USE OF THE OPPORTUNITY TO REDUCE ITS LIABILITY AND ACCORDINGLY , BOUGHT BACK THE BONDS AT A DISCOUNT WHICH RESULTED IN BOTH INTE REST AND PRINCIPAL BENEFIT TO IT. WHEREAS, IN THE CASE BEFO RE THE MADRAS HIGH COURT, IT WAS A CASE OF WAIVER BY THE BANK OF THE LOAN, WHICH, BUT FOR THE WAIVER, WOULD HAVE BEEN PAYABLE BY THE BANK AND HENCE, THE CASE LAW UNDER REFERENCE DOES NOT HE LP THE ASSESSEE. FURTHER, THE AO OBSERVED THAT THE PREM IUM RELATING TO THE CURRENT ASST. YEAR OF 25.61 CRORES, WHICH IS A BENEFIT, WHICH ACCRUED TO THE ASSESSEE ON BUYBACK OF THE BON DS IS TREATED AS INCOME AS PER THE PROVISIONS OF SEC.28(I ) AND 28(IV) OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 58 THE ACT AND BROUGHT TO TAX THE AMOUNT OF 25.61 CRORES. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 18.1 AFTER VERIFYING THE DETAILS OF APPROVAL LETTER S GIVEN BY THE RBI AS WELL AS CORRESPONDENCE WITH YES BANK AND ALLOTMENT OF LRN APPROVING THE FCCB LOAN OBTAINED A S PER ECB/FCCB GUIDELINES AND ALSO CERTIFICATION OF FORM NO.83 ISSUED BY THE YES BANK TO THE RBI, THE CIT(APPEALS) , OBSERVED THAT THE FCCB LOAN OBTAINED IS IN COMPLIANCE OF ECB GUIDELINE AS WELL AS THE ASSESSEE IS REQUIRED TO SUBMIT ECB-2 RETURN AS PER CIRCULAR NO.60 DATED 31.1.2004 ON MONTHLY BASIS GIVING THE DETAILS OF WITHDRAWALS OF FOREIGN LOAN AMOUNT, UTIL IZATION, REPAYMENT, CONVERSION, REDEMPTION AND OTHER PAYMENT S ETC., STARTING FROM MARCH 2006, THE DETAILS FILED BY THE ASSESSEE AS MENTIONED AMPLY PROVED THAT THE LOAN OBTAINED IN TH E FORM OF FCCBS AT 75 MILLION US$ FOLLOWING THE GUIDELINES AN D CIRCULARS ISSUED BY THE RBI FROM TIME TO TIME. 18.2 THE CIT(APPEALS) OBSERVED THAT THE VARIOUS DOC UMENTS FILED SHOWED THAT THE ASSESSEE HAS FOLLOWED THE GUI DELINES OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 59 RBI CIRCULAR NO.5 DATED 1.8.2005 AND THE ASSESSEE H AS ALSO FOLLOWED THE RBI GUIDELINES IN ISSUING THE FCCBS AN D THE UTILIZATION FUNDS SHOWED THAT THE FUNDS HAVE BEEN U TILIZED FOR PURCHASE OF CAPITAL EQUIPMENTS AND MACHINERY AS CAN BE SEEN FROM THE STATEMENT OF UTILIZATION OF FCCB FUNDS. 18.3 ACCORDING TO THE CIT(APPEALS), EVEN IN THE CAS E OF PAYMENT MADE TOWARDS BUYBACK OF FCCBS, GOVERNED BY THE RBI GUIDELINES IN CIRCULAR NO.39 DATED 8.12.2008, THE A SSESSEE HAS PROVED THAT THE FUNDS USED FOR BUYBACK HAVE BEEN GE NERATED FROM ITS OFF-SHORE FOREIGN RESERVES AVAILABLE WITH BERGEN OFF- SHORE LOGISTICS PTE LTD., WHICH IS A WHOLLY OWNED O VERSEAS SUBSIDIARY, WHICH HAS SUFFICIENT FOREIGN RESERVES F OR PAYMENT OF BUYBACK OF FCCBS. THE AMOUNT PAID FOR BUYBACK OF F CCBS IS AT 74.18 CRORES OR US$ 15.86 MILLION UNDER AUTOMATIC ROUTE AS STIPULATED BY THE RBI CIRCULAR NO.5 OUT OF FOREIGN CURRENCY FUNDS THE ASSESSEE HAD RECEIVED FROM ITS OWN GROUP CONCER NED OF WHOLLY OWNED OVERSEAS SUBSIDIARY I.E. BERGEN OFF-SH ORE GLOBAL PTE LTD., SINGAPORE. THE RBI IN ITS GUIDELINES AS PER CIRCULAR NO.39 HAS STIPULATED CERTAIN GUIDELINES FOR BUYBACK / REPAYMENT - - ITA 1695 TO 16 97 & CO 84/MDS/14 60 OF FCCBS VIDE CIRCULAR DATED 8.12.2008 ONCE THE ASS ESSEE PREFERS TO PAY BACK TOWARDS FCCBS IN FOREIGN CURREN CY THEN THERE IS NO REQUIREMENT OF APPROVAL FROM THE RBI. THE ASSESSEE CAN FOLLOW AN AUTOMATIC ROUTE BY UTILIZING ITS OWN FOREIGN RESERVES FOR PREPAYMENT OR BUYBACK OF FCCBS AS ALLO WED BY RBI GUIDELINES VIDE CIRCULAR NO.39. THE ASSESSEE C OMPANY HAS FOLLOWED THIS ROUTE BY REPAYING 74.18 CRORES OR US$ 15.87 MILLION OUT OF ITS OWN SUBSIDIARY FOREIGN RESERVES. THE RBIS APPROVALS IS REQUIRED FOR PREPAYMENT OR BUYBACK OF FCCBS, ONCE THE ASSESSEE DOES NOT HAVE FOREIGN RESERVES BU T AS INDIAN CURRENCY IN TERMS OF RUPEES FOR PREPAYMENT OR BUYBA CK OF FCCBS, WHEREIN RBI PERMISSION IS REQUIRED FOR CONVE RTING THE INDIAN CURRENCY INTO FOREIGN CURRENCY THROUGH APPRO VAL ROUTE. SINCE, THE ASSESSEE HAS FOLLOWED AUTOMATIC ROUTE AP PARENTLY NO FORMAL APPROVAL FROM THE RBI IS REQUIRED FOR BUYBAC K / PREPAYMENT OF FCCBS. THIS AMOUNT HAS BEEN PAID OUT OF FOREIGN SUBSIDIARY COMPANY OF THE ASSESSEE I.E. BER GEN OFF- SHORE GLOBAL PTE LTD., SINGAPORE, WHICH WAS HAVING SUFFICIENT FOREIGN RESERVES AT US$ 16.10 MILLION OUT OF WHICH BERGEN OFF- SHORE GLOBAL PTE LTD., HAS TRANSFERRED AN AMOUNT OF US$ 15.86 - - ITA 1695 TO 16 97 & CO 84/MDS/14 61 MILLION TO THE ACCOUNT OF THE ASSESSEE COMPANY MAIN TAINED WITH RBS COUTTS BANK SINGAPORE FROM 16.1.2009 TO 16.11.2 009. THE ASSESSEE COMPANY PAID OUT OF THIS RBS COUTTS BANK A CCOUNT THE AMOUNT OF BUYBACK OF FCCBS TO THE TUNE OF 74.18 CRORES OR US$ 15.86 MILLION TO THE BANK OF NEW YORK, MELLON, LONDON. THUS, THE ASSESSEE HAD SUFFICIENT FOREIGN RESERVES FUNDS AVAILABLE FOR PAYMENT OF 74.18 CRORES ON ACCOUNT OF BUYBACK OF FCCBS TO THE BOND HOLDERS VIA RBS COUTTS AND VIA HE DGE GROVE STREET AND ULTIMATELY THE BONDS WERE CANCELLE D VIDE LETTER DATED 31.3.2010 WRITTEN BY SICAL LOGISTICS LTD., TO BANK OF NEW YORK, MELLON, LONDON AND RECONFIRMED BY BANK OF NEW YORK, MELLON VIDE EMAIL DATED 21.9.2010. ALSO LETTER ISS UED BY BANK OF NEW YORK, MELLON ON 9.4.2011 CLEARLY INDICATES THAT THE CURRENT NOMINAL VALUE OF THE BONDS STANDS REDUCED AT 6.75 M ILLION US$. ALSO IT MAY PERTINENT TO ADD THAT VERIFICATION OF C OMPLIANCE OF FCCB GUIDELINES IS A MATTER CONCERNED WITH RESERVE BANK OF INDIA (RBI) BEFORE ALLOWING ANY MOVEMENT OF FOREIGN CURRENCY EITHER INWARD OR OUTWARD REMITTANCES OF FOREIGN CUR RENCY OR INDIAN CONVERTIBLE CURRENCY. - - ITA 1695 TO 16 97 & CO 84/MDS/14 62 18.4 AS FAR AS THE FINANCIAL ACTION TASK FORCE (FAT F) IS CONCERNED WHICH PRESCRIBES ASSESSMENT OF THE IMPLEM ENTATION OF ANTI-MONEY LAUNDERING AND COUNTER-TERRORIST FINA NCING (AML/CFT) STANDARD IN SINGAPORE, WHICH ARE ISSUED B Y MONITORY AUTHORITY OF SINGAPORE AND COVERED THE FULL RANGE O F MEASURES REQUIRED BY THE FATF RECOMMENDATIONS IN PARTICULAR, CUSTOMER DUE DILIGENCE REQUIREMENTS WHICH ARE VERY BROAD AND ARE EFFECTIVELY IMPLEMENTED BY SINGAPOREAN FINANCIAL IN STITUTIONS. OVER ALL, SINGAPORE HAS A COMPREHENSIVE REGIME TO P ROVIDE INTERNATIONAL COOPERATION IN ALL THE FOREIGN CURREN CY TRANSACTIONS. ALL THE FOREIGN TRANSACTIONS ENTERED INTO BY THE AS SESSEES COMPANY ARE SUBJECTED TO FATF GUIDELINES AS CAN BE VERIFIABLE FROM THE MATERIAL FILED BY THE ASSESSEE IN SUPPORT OF THE ABOVE FOREIGN TRANSACTIONS. IN CASE ANY DEFAULT ON THE P ART OF THE ASSESSEE ACTIVITIES, IT IS THE SINGAPORE GOVERNMENT WHICH HAS TO OBJECT ANY APPLY FATF GUIDELINES BEFORE ALLOWING AL L THESE TRANSACTIONS FROM THE ASSESSEE GROUP OF COMPANIES A S WELL AS FOREIGN CURRENCY TRANSACTIONS. ON VERIFYING THE MA TERIAL BROUGHT ON RECORD, THE CIT (APPEALS) OBSERVED THAT THE ASS ESSEE FOLLOWED THE GUIDELINES OF VARIOUS FINANCIAL INSTIT UTIONS AS PER - - ITA 1695 TO 16 97 & CO 84/MDS/14 63 SINGAPOREAN LAWS WHICH ARE ALL SUBJECTED TO FATF GU IDELINES. THUS, THE ASSESSEE HAS BROUGHT ON RECORD MATERIAL R ELEVANT TO THE COMPLIANCE OF VARIOUS GUIDELINES IN REPAYMENT O F FOREIGN CURRENCY FOR BUY-BACK OF FCCB BONDS. 18.5 REGARDING THE ISSUE OF DUE DILIGENCE CERTIFICA TE AS PER THE RBI CIRCULAR NO.5 DATED 1.8.2005, WHICH PRESCRI BES THAT THE DUE DILIGENCE CERTIFICATE HAS TO BE FURNISHED FROM THE OVERSEAS BANKER DULY DESIGNATED AUTHORIZED DEALER. THE SAID CIRCULAR ALSO REQUIRED THE FORM 83 TO BE SUBMITTED THROUGH AUTHOR IZED DEALER. AFTER ALLOTTING LOAN REGISTRATION NUMBER(LRN) BY TH E RBI BASED ON THE CERTIFICATION GIVEN BY THE AUTHORIZED DEALER , FORM 83 CERTIFICATION BY THE AUTHORIZED DEALER ITSELF BECOM ES THE FINAL EVIDENCE OF COMPLIANCE WITH THE RBI GUIDELINES AS P ER CIRCULARS ISSUED BY THE RBI FROM TIME TO TIME. THUS, KEEPING IN VIEW OF THE VARIOUS APPROVAL LETTERS ISSUED BY THE RBI AND AUTHORIZED DEALER I.E. YES BANK, FORM 83 AND UTILIZATION CER TIFICATE OF FCCBS FUNDS THE ASSESSEE HAS FULFILLED THE RBI GUID ELINES AS WELL AS CIRCULARS ISSUED FROM TIME TO TIME THEREBY COMPLYING THE VARIOUS RBI CONDITIONS IN ISSUING FCCBS AS WELL AS BUYING BACK - - ITA 1695 TO 16 97 & CO 84/MDS/14 64 FCCBS. THEREFORE, ACCORDING TO THE CIT(APPEALS), T HE CONTENTIONS OF THE AO THAT THE ASSESSEE HAS NOT FOL LOWED RBI GUIDELINES IS NOT BASED ON MATERIAL FACTS, AS THE A SSESSEE HAS FILED DOCUMENTARY EVIDENCES AS APPENDED ABOVE PROVE D WITH EVIDENCE THAT THE ASSESSEE HAS COMPLIED WITH ALL TH E RBI GUIDELINES IN ISSUING AS WELL AS BUYING BACK OF FCC BS. 18.6 THE ASSESSEE COMPANY HAS ALSO FILED A STATEMEN T OF UTILIZATION OF FCCB FUNDS, WHICH IS AS UNDER : SICAL LOGISTICS LIMITED STATEMENT OF UTILIZATION OF FCCB FUNDS PARTICULARS DEBIT / UTILIZATION US $ PURCHASE OF SHIP / DREDGER 4,63,28,582 2,08,04,42,3 30 PLATFORM VESSEL TORINO AND DREDGER PORTOFINO BY TRANSFER / INVESTMENT IN BERGEN OFFSHORE LOGISTICS PTE LTD. AND ITS 100% SUBSIDIARY NORSEA GLOBAL OFFSHORE PTE LTD. PURCHASE OF RAILWAY LICENSE LICENSING FEES FOR PURCHASE OF CATEGORY I CONCESSIONAIR PURCHASE OF LAND FOR RAIL TERMINAL DEVELOPMENT BANGALORE MINJUR MUMBAI ANUPAMPATTU PURCHASE OF TRUCKS 1,12,40,292 40,55,964 5,61,117 21,59,093 75,03,020 54,893 50,00,00,000 18,04,20,776 2,49,60,050 9,60,42,571 33,37,55,562 24,41,796 - - ITA 1695 TO 16 97 & CO 84/MDS/14 65 FCCB ISSUE EXPENSES 30,97,038 13,71,00,169 TOTAL FUNDS RAISED THROUGH ISSUE OF FCCB 7,50,00,000 3,35,51,63,254 18.7 THE CIT(APPEALS), AFTER VERIFYING THE WRITTEN SUBMISSIONS AS WELL AS ENCLOSED DOCUMENTS SUBMITTED BY THE LD. AR, OBSERVED THAT THE PROFIT ARISING ON THE BUYBACK OF FCCBS HAS BEEN QUANTIFIED BY THE ASSESSEE AT 160.38 CRORES, WHICH CONSISTS OF PROFIT ON BUYBACK OF FCCBS AT 97.66 CRORES AND THE PREMIUM WHICH ACCRUED ON THE BONDS BOUGHT BACK AT 62.72 CRORES AGGREGATING TO 160.38 CRORES. THE CIT(APPEALS) OBSERVED THAT THE AO IN HIS ASSESSMENT ORDER QUANTI FIED THE SAME PROFIT AT 160.38 BUT BIFURCATED INTO PROFIT ON BUYBACK AT 134.77 CRORES AND THE PREMIUM AT 25.61CRORES AND INCLUDED THE PREMIUM WHICH ACCRUED ON THE BONDS BOUGHT RELAT ING TO THE FINANCIAL YEARS 2006-07, 2007-08 AND 2008-09 TOGE THER AT 37.11 CRORES IN THE PROFIT ON THE BUYBACK OF SHARES QUANTIFIED AT 134.77 CRORES. THE AO HAS SET THE MISTAKE IN CALCU LATION BY CORRECTION BIFURCATION OF THE SAID PROFIT INTO PROF IT AND BUYBACK OF FCCBS AT 97.66 CRORES AND PREMIUM RELATING TO THE BUYBACK O F FCCBS AT 67.72 CRORES. THUS, THE TOTAL QUANTUM OF PROFIT - - ITA 1695 TO 16 97 & CO 84/MDS/14 66 ARISING FROM THE BUYBACK FCCBS REMAINS AT 160.38 CRORES. HENCE, ACCORDING TO THE CIT(APPEALS), THERE CANNOT BE ANY ENHANCEMENT OF INCOME OVER AND ABOVE THE PROFIT ON BUYBACK OF FCCBS AT 160.38 CRORES, AS EXPRESSED BY THE AO VIDE HIS LETTER DATED 19.6.2013. 18.8 THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE SU BMITTED THAT BOTH THE AMOUNTS MENTIONED ABOVE ARE NOT TAXAB LE AS INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERA TION. THE ASSESSEE IN ITS SUBMISSIONS STATED THAT THE ASSESSE E COMPANY HAS ALREADY RETURNED BACK THE PREMIUM RELATING TO E ARLIER FINANCIAL YEARS I.E. 2006-07 TO 2008-09 AMOUNTING T O 37.11 CRORES, WHICH WAS CLAIMED AS A DEDUCTION IN THE PRO FIT AND LOSS ACCOUNT OF THE RESPECTIVE FINANCIAL YEARS, AS REVEN UE EXPENDITURE, ADMITTED AS INCOME IN THE FINANCIAL YE AR 2009-10 RELEVANT TO THE ASST. YEAR UNDER CONSIDERATION AND PAID TAXES ON 37.11 CRORES. THIS WAS DONE U/S.41(1) OF THE ACT. A SIMILAR ADJUSTMENT WAS NOT REQUIRED FOR THE FINANCIAL YEAR UNDER CONSIDERATION AS THE PREMIUM RELATING TO THIS PERIO D I.E. AT 25.61 CRORES WAS NEITHER DEBITED TO THE PROFIT AND LOSS ACCOUNT - - ITA 1695 TO 16 97 & CO 84/MDS/14 67 NOR CLAIMED AS EXPENDITURE DURING THE PERIOD UNDER CONSIDERATION. SINCE THE ASSESSEE HAS NOT CLAIMED THE BALANCE AMOUNT OF 25.61 CRORES RELEVANT TO THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS TAKEN THE SAME AMOU NT TO THE PROVISION PREMIUM ACCOUNT, WHICH CANNOT BE TREATED AS INCOME AND EVEN THE PROVISIONS OF SEC.41(1) OF THE ACT ARE NOT APPLICABLE AND HENCE CANNOT BE TAXED AS INCOME EITH ER 28(I) OR 28(IV) OF THE ACT. 18.9 REGARDING THE ADDITION MADE BY THE AO ON ACCOU NT OF BENEFIT OF PREMIUM PAYABLE AS A CONSEQUENT TO THE B UYBACK OF FCCBS NOT ONLY FOR THE EARLIER 3 YEARS, BUT ALSO FO R THE CURRENT ASST. YEAR, THE ASSESSEE IN ITS SUBMISSION STATED T HAT ONCE THE LIABILITY TO PAY PREMIUM ON BOND WORTH 38.25 MILLIO N US$ VANISHED ON ACCOUNT OF BUYBACK OF FCCBS, THE ASSESS EE COMPANY DID NOT HAVE ANY PREMIUM LIABILITY WHICH HA S CEASED TO EXIST FOR THE CURRENT ASST. YEAR. HENCE, THERE IS NO LIABILITY ON THE PART OF THE ASSESSEE COMPANY TO OFFER THE NON-EXIST ING LIABILITY TO THAT OF THE TREATMENT GIVEN BY THE ASSESSEE TO THE PREMIUM FOR THE EARLIER THREE ASST. YEARS. - - ITA 1695 TO 16 97 & CO 84/MDS/14 68 18.10 AS FAR AS THE FCCBS RECEIVED IN THE FORM O F LOAN FROM ABROAD WAS UTILIZED ONLY FOR THE PURPOSE OF PURCHAS E OF CAPITAL ASSETS AS PER THE REGULATION OF RBI. SUCH LOAN AMO UNT CANNOT BE USED FOR WORKING CAPITAL REQUIREMENTS. THIS HAS BEEN BROUGHT TO THE KNOWLEDGE OF AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND ALSO PLACED ITS RELIANCE ON SEVERAL CASE LAWS SUCH AS ISKRAMEMCO REGENT LTD. VS. CIT (3 31 ITR 317), WHICH IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. THE VALUE OF THE BOND WHICH WAS LISTED ON SI NGAPORE STOCK EXCHANGE HAS COME DOWN BELOW THE FACE VALUE A ND WAS TRADED AT A DISCOUNT AND THE ASSESSEE MADE USE OF S UCH OCCASION TO REDUCE ITS LIABILITY AND ACCORDINGLY, B OUGHT BACK THE BONDS AT A DISCOUNT RESULTED IN BOTH INTEREST AND P RINCIPAL BENEFIT TO IT. BEFORE THE MADRAS HIGH COURT, IT WAS A CAS E OF WAIVER BY THE BANK OF THE LOAN AS A ONETIME SETTLEMENT RESULT ED IN REDUCTION IN LIABILITY OR REMISSION IN PRINCIPAL. WHEREAS THE AO OBSERVED THAT THE PREMIUM RELATING TO THE CURRENT A SST. YEAR AT 25.61 CRORES (62.72 37.11), WHICH IS A BENEFIT AC CRUED TO THE ASSESSEE ON BUYBACK OF THE BONDS AND TREATED THE SA ME AS - - ITA 1695 TO 16 97 & CO 84/MDS/14 69 INCOME AS PER THE PROVISIONS OF SEC.28(I) AND 28(IV ) OF THE ACT. 18.11 AFTER VERIFYING THE VARIOUS SUBMISSIONS AS WELL AS SUPPORTIVE CASE LAWS AND THE ASSESSMENT ORDER, THE CIT(APPEALS) OBSERVED THAT FCCBS IS DEBT INSTRUMENT ISSUED BY CORPORATE ENTITIES FOR RISING DEBT FUNDS WHICH ALSO GIVES AN OPTION TO THE BOND HOLDER FOR SEEKING CONVERSION OF THE DE BT INTO EQUITY AT AN AGREED VALUATION. THE FCCBS ISSUED BY CORPOR ATE ENTITIES CAN BE REDEEMED/REPAID EITHER THROUGH REDEMPTION OR CONVERTED INTO EQUITY SHARES AT THE OPTION OF THE BOND HOLDER . DUE TO CERTAIN MARKET CONDITIONS, FEW BOND HOLDERS HAVE AG REED TO BUYBACK OF THEIR HOLDINGS ON BONDS AHEAD OF THE MAT URITY DATE. DUE TO EARLY REDEMPTION OF BONDS, WHICH ARE REDEEME D AT A DISCOUNT TO THE FACE VALUE OF THE BONDS, IN ADDITIO N TO INTEREST ACCRUED IF ANY TILL SUCH REDEMPTION. ACCORDINGLY, FCCBS ARE BEING REDEEMED AT A LESSER VALUE THAN THE BOOK VALU E RESULTED IN PRINCIPAL REMISSION. 18.12 THE CIT(APPEALS) OBSERVED THAT THE ASSES SEE, WHO HAS FOLLOWED THE PRINCIPLE OF ACCOUNTING CONSISTENT LY IN TREATING THE PREMIUM PAYABLE AS A REVENUE LIABILITY AND HAS DEBITED AN - - ITA 1695 TO 16 97 & CO 84/MDS/14 70 AMOUNT OF 37.11 CRORES UNDER THE PREMIUM PAYABLE ACCOUNT FOR THE FINANCIAL YEARS 2006-07 TO 2008-09. SIMILA RLY, THE PREMIUM OF 25.61 CRORES IS RELATED TO THE FINANCIAL YEARS 200 9- 10, 2010-11 AND 2011-12, NOT DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE SAID FINANCIAL YEARS. SINCE, THE ASSESSEE HAS BOUGHT BACK THE BONDS TO WHICH THE PREMIUM PAYABLE AT 62.72 CRORES RELATE TO, THE ASSESSEE HAS FOLLOWED THE ACC EPTED ACCOUNTING PRINCIPLE OF REVERSING THE CLAIMS MADE T O THE EXTENT OF 37.11 CRORES MADE FOR THE EARLIER YEARS TOWARDS PR EMIUM PAYABLE AND OFFERED THE SAME AS INCOME OF THE FINAN CIAL YEAR 2009-10 I.E. THE YEAR UNDER CONSIDERATION IN THE ME MO OF ADJUSTED STATEMENT OF INCOME LIABLE FOR ASSESSMENT. THE ASSESSEE HAS NOT DEBITED THE AMOUNT OF 25.61 CRORES TO THE PROFIT AND LOSS ACCOUNT OF THE FINANCIAL YEAR 2009- 10 AS THE SAID LIABILITY HAS NOT ACCRUED BECAUSE OF THE BUYBACK OF THE FCCBS. HENCE, THE ASSESSEE HAS FOLLOWED UNIFORM ACCOUNTING PRINCIPLE REGARDING THE ADMISSION OF THE REVENUE LIABILITY AS PER THE PROVISIONS OF ACCOUNTING STANDARDS AND ACCORDINGLY FOLLOWED FOR ALL THE FINANCIAL YEARS FROM 2006-07 TO 2009-10. - - ITA 1695 TO 16 97 & CO 84/MDS/14 71 18.13 AFTER GOING THROUGH THE STATUTORY PERMI SSION OBTAINED BY THE ASSESSEE COMPANY FROM RBI, WHICH HAS AUTHORI ZED YES BANK, CHENNAI, WHICH IS CONSIDERED AS AUTHORIZED DE ALER (AD) TO OBTAIN EXTERNAL COMMERCIAL BORROWINGS (ECB) IN T HE FORM OF FCCBS, THE CIT(APPEALS) OBSERVED THAT THE ASSESSEE COMPANY IS ALSO SUBMITTED A STATEMENT OF UTILIZATION OF FCC B FUNDS, WHEREIN THE ASSESSEE HAS USED THE ENTIRE AMOUNT OF FCCBS FOR PURCHASING OF CAPITAL ASSET SUCH AS PURCHASE OF SHI P/DREDGER, PURCHASE OF RAILWAY LICENSE, PURCHASE OF LAND FOR R AIL TERMINAL DEVELOPMENT AT BANGALORE, MINJUR, MUMBAI AND ANUPAM PATTU. APART FROM THE ABOVE PURCHASE OF CAPITAL ASSETS, TH E ASSESSEE HAS ALSO PURCHASED SOME TRUCKS. THE ENTIRE AMOUNT OF FCCB FUNDS HAS BEEN UTILIZED AS PER THE RBI GUIDELINES A ND ACCORDINGLY, INVESTED IN CAPITAL ASSETS AS IT IS SE EN FROM THE STATEMENT OF UTILIZATION OF FCCBS FUNDS. ONCE THE FOREIGN LOAN WAS TAKEN FOR THE PURPOSE OF CAPITAL ASSETS, ANY GA IN CONNECTED WITH THE ASSETS WILL RESULT INTO CAPITAL RECEIPTS. THE CIT(APPEALS) ALSO OBSERVED THAT IT IS CLEAR BY SEVERAL JUDICIAL PRONOUNCEMENTS EVEN THOUGH IT IS CONNECTED WITH FORWARD CONTRACT I N FOREIGN CURRENCY WHICH WAS OBTAINED FOR PURCHASE OF CAPITAL ASSETS, THAT - - ITA 1695 TO 16 97 & CO 84/MDS/14 72 THE AMOUNT RECEIVED BY THE ASSESSEE ON ACCOUNT OF F ORWARD CONTRACT IN FOREIGN CURRENCY WAS A CAPITAL RECEIPT AND NOT EXIGIBLE TO TAX. ACCORDING TO THE CIT(APPEALS), THE SAME VI EW HAS BEEN HELD IN THE CASE OF M/S. SUTLEJ COTTON MILLS PVT. L TD. VS. CIT (SC) (116 ITR 1), M/S. TIRUVENI ENGINEERING WORKS LTD. V S. CIT ( 156 ITR 202)( DELHI) AND GUJARAT NARMADHA VALLY FERTILI ZERS LTD. VS. CIT (AHD) ( 73 TTJ 787). 18.14 ACCORDING TO THE CIT(APPEALS), IT IS A SETTLED POSITION THAT A GAIN ARISING FROM A FIXED CAPITAL IS CAPITAL RECEIPT AND NOT CHARGEABLE TO TAX. IT IS TAXABLE AS REVENUE ITEM, WHEN IT IS PREFERABLE TO CIRCULATING CAPITAL OR STOCK-IN-TRADE . THE FIXED CAPITAL IS WHAT THE OWNER TURNS TO PROJECT BY KEEPI NG IN ITS OWN POSITION. CIRCULATING CAPITAL IS WHAT THE ASSESSEE MAKES PROFIT OF BY PARTING WITH A LETTING IT CHANGE ITS MASTERS. T HE ENTIRE LOAN TRANSACTION IN THE INSTANT CASE UNDER CONSIDERATION WAS FOR THE PURPOSE OF ACQUISITION OF FIXED ASSETS AS PER THE G UIDELINES APPROVED BY THE RBI WHICH THE ASSESSEE HAS FOLLOWED FROM TIME TO TIME OBTAINING REQUIRED PERMISSIONS, WHICH IS SU PPORTED BY THE FOLLOWING JUDICIAL PRECEDENTS: - - ITA 1695 TO 16 97 & CO 84/MDS/14 73 1. TATA LOCOMOTIVE & ENGINEERING LTD. VS. CIT (60 I TR 405-SC) 2. MAHINDRA & MAHINDRA LTD. VS. CIT (91 ITR 130-MUM ) 3. SUTLEJ COTTON MILLS LTD. VS. CIT (116 ITR 17) 4. UNION CORPORATE INDIA LTD. VS. CIT (19 CTR 351-C AL.) 5. TIRUVANI ENGINEERING WORKS LTD. VS. CIT (156 ITR 202-DEL.) 6. CALCUTTA ELECTRICITY SUPPLY CORPORATION LTD. (59 CTR 232-CAL.) 7. EID PARRY LTD. VS. CIT (69 ITR 49-MAD.)/174 ITR 11(MAD). 8. GUJARAT NAMADHA VALLEY FERTILIZERS LTD. VS. DCIT (73 TTJ 787-AHD.) 18.15 THE CIT(APPEALS) OBSERVED THAT ANY FOREI GN CURRENCY OR ANY CURRENCY IS NEITHER A COMMODITY NOR SHARES. THE SALE OF GOODS ACT SPECIFICALLY EXCLUDES CASH FROM THE DEFIN ITION OF GOODS. BESIDES, NO PERSON OTHER THAN AUTHORIZED DE ALERS AND MONEY CHANGES ARE ALLOWED IN INDIA TO TRADE IN FORE IGN CURRENCY MUCH LESS SPECULATE. SECTION 8 OF THE FOREIGN EXCH ANGE REGULATION ACT (FERA) 1973 PROVIDES THAT EXCEPT WIT H PRIOR GENERAL OR SPECIAL PERMISSION OF RBI, NO PERSON OTH ER THAN AN AUTHORIZED DEALER SHALL PURCHASE, ACQUIRE, BORROW O R SELL FOREIGN CURRENCY. THE CIT(APPEALS) OBSERVED THAT IN THIS CASE, THE AUTHORIZED DEALER I.E. YES BANK PERMITTED BY THE RB I AS PER FERA HAS DEALT THE FOREIGN CURRENCY TRANSACTION ENT ERED INTO BY THE ASSESSEE COMPANY FOR OBTAINING A LOAN AMOUNT OF 75 MILLION US$ OBTAINED FROM BANK OF NEW YORK, LONDON BY ISSUING - - ITA 1695 TO 16 97 & CO 84/MDS/14 74 FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBS). FOR OB TAINING A FOREIGN LOAN, THE GUIDELINES PRESCRIBED BY THE RBI HAVE TO BE STRICTLY COMPLIED WITH. ACCORDING TO THE CIT(APPE ALS), THE ASSESSEE HAS UNDERGONE THE ENTIRE PROCESS OF GETTIN G PERMISSION FROM THE RBI BY DULY COMPLYING ALL THE G UIDELINES OF EXTERNAL COMMERCIAL BORROWINGS (ECB) POLICY GUIDELI NES ISSUED BY THE RBI FROM TIME TO TIME WHICH ARE EQUALLY APPL ICABLE TO FCCBS FOR GETTING THE EXTERNAL BORROWING FOR THE PU RPOSE OF PURCHASING CAPITAL ASSETS. ACCORDING TO THE CIT(A PPEALS), THE ASSESSEE HAD OBTAINED THE RELEVANT PERMISSION AS PE R THE POLICY OF ECB/FCCBS, FOLLOWING RBI GUIDELINES. THE CIT(AP PEALS) OBSERVED THAT THE AO IS NOT JUSTIFIED BY MAKING AN ALLEGATION THAT THE ASSESSEE COMPANY HAS NOT FOLLOWED THE RBI GUIDELINES IN OBTAINING FOREIGN LOAN. THEREFORE, THE CONTENTI ON OF THE AO IS NOT ACCEPTED THAT THE ASSESSEE HAS NOT PROVED WHETH ER THE RBI GUIDELINES ARE TO BE FOLLOWED OR NOT ? ACCORDING TO THE CIT(APPEALS), THE ASSESSEE COMPANY HAS PROVED THAT THE FOREIGN FUNDS HAVE BEEN UTILIZED FOR ACQUIRING CAPI TAL ASSETS. IN THIS REGARD, THE RELIANCE PLACED BY THE ASSESSEE ON THE JURISDICTIONAL HIGH COURT IN THE CASE OF ISKRAEMECO REGENT LTD. - - ITA 1695 TO 16 97 & CO 84/MDS/14 75 VS. CIT (331 ITR 317), IS SQUARELY APPLICABLE TO TH E ASSESSEES CASE, AS THE FUNDS WERE UTILIZED FOR THE PURCHASE O F CAPITAL ASSET AS IT IS SEEN FROM THE UTILIZATION OF FUNDS. 18.16 THE MADRAS HIGH COURT DEALT THE SITUATION WHEREIN THE ASSESSEE HAD OBTAINED A LOAN FROM SBI FOR ACQUIRING ASSETS AND IT HAD PAID A PART OF THE PRINCIPAL AMOUNT IN THE E ARLIER ASST. YEARS. IN THE RELEVANT ASST. YEAR, A ONETIME SETTL EMENT WAS ARRIVED AT BETWEEN THE ASSESSEE AND THE BANK IN TER MS OF WHICH BANK WAIVED OUTSTANDING DUE OF PRINCIPAL AMOUNT AND INTEREST. THE ASSESSEE CREDITED WAIVER OF PRINCIPAL AMOUNT TO CAPITAL RESERVE ACCOUNT IN BALANCE SHEET TREATING IT AS CA PITAL IN NATURE. WHEREAS THE AO TREATED THE SAID AMOUNT AS INCOME CO MING UNDER THE PURVIEW OF SEC.28(IV) R.W. SEC.2(24) OF T HE ACT. THE TRANSACTION IN THE CASE BEING A LOAN TRANSACTION TH E JURISDICTIONAL HIGH COURT HELD THAT SEC.28(IV) OF THE ACT WOULD HA VE NO APPLICATION AND AMOUNT OF WAIVER COULD NOT BE TERME D AS INCOME U/S.2(24) OF THE ACT. IN THE CASE OF THE ASSESSEE, THE PROFIT ARISING ON THE BUYBACK OF FCCBS WHICH HAS BEEN QUAN TIFIED BY THE ASSESSEE AT 160.38 CRORES WHICH HAS BEEN BIFURCATED INTO - - ITA 1695 TO 16 97 & CO 84/MDS/14 76 PROFIT ON BUYBACK AT 97.66 CRORES AND THE PREMIUMS WHICH ACCRUED ON THE BONDS BOUGHT BACK AT 62.72 CRORES. 18.17 SIMILARLY, THE ASSESSEE HAS PLACED RELIA NCE ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS . TOSHA INTERNATIONAL (319 ITR 7 (ST)(SC), WHEREIN IT WAS HELD THAT REMISSION OF PRINCIPAL AMOUNT OF LOAN DID NOT AMOUN T TO INCOME U/S.41(1) NOR U/S.28(IV) NOR U/S.2(24) OF THE ACT. THE REMISSION WOULD BECOME INCOME U/S.41(1) OF THE ACT ONLY IF TH E ASSESSEE CLAIMED DEDUCTION IN RESPECT OF EXPENDITURE OR TRAD ING LIABILITY. THE CIT(APPEALS) OBSERVED THAT IN THE PRESENT CASE, REMISSION OF PREMIUM ON AMOUNT OF LOAN SO OBTAINED ON ACCOUNT OF BUYBACK OF FCCBS, THE ASSESSEE HAS NOT CLAIMED AS EXPENDITURE OR TRADING LIABILITY IN THE FINANCIAL Y EAR RELEVANT TO THE ASST. YEAR UNDER CONSIDERATION. EVEN IN THE CASE O F EARLIER 3 YEARS I.E. FOR FINANCIAL YEARS 2006-07, 2007-08 AND 2009-10, THE ASSESSEE HAS REVERSED THE CLAIM OF THE EXPENDITURE AND OFFERED FOR TAXATION AND PAID THE TAXES DURING THE YEAR UND ER CONSIDERATION. SO FAR AS WAIVER OF INTEREST WAS CO NCERNED ON ACCOUNT OF BUYBACK OF FCCBS DURING THE YEAR UNDER - - ITA 1695 TO 16 97 & CO 84/MDS/14 77 CONSIDERATION, THE ASSESSEE COMPANY HAD NOT CLAIMED SAME AS EXPENDITURE IN COMPUTATION OF INCOME. THE REMISSIO N WOULD BECOME INCOME ONLY IF THE ASSESSEE HAS CLAIMED DEDU CTION IN RESPECT OF EXPENDITURE OR TRADING LIABILITY. IN MA HINDRA & MAHINDRA LTD. VS. CIT (161 ITR 501), THE HIGH COURT OF BOMBAY HELD THAT WAIVER OF THE LOAN REPAYMENT WAS NOT RELA TED TO STOCK- IN-TRADE BUT TO CAPITAL ASSET AND, THEREFORE, IT WA S NOT REMISSION OF LIABILITY U/S.41(1) OF THE ACT. 18.18 FURTHER, THE CIT(APPEALS) OBSERVED THA T THE PROFIT ARISING FROM THE BUYBACK OF BONDS IS CAPITAL IN NAT URE AND THE PREMIUM PAYABLE ON THE SAID BONDS HAS BEEN CONSIDER ED BY THE ASSESSEE AS REVENUE IN NATURE. HOWEVER, THE AO TOO K THE STAND THAT THE ENTIRE PREMIUM PAYABLE OF 62.72 CRORES RELATING TO THE BONDS BOUGHT BACK WILL CONSTITUTE INCOME ASSESSABLE UNDER THE HEAD BUSINESS AS PER THE PROVISIONS OF SEC.28(IV) OF THE ACT. HOWEVER, THE PROVISIONS OF SEC.28(IV) OF THE ACT WO ULD NOT BE APPLICABLE TO THE REMISSION IN THE PREMIUM PAYABLE CONSEQUENT TO THE BUYBACK OF THE FCCBS, AS IT DOES NOT RESULT IN PERQUISITE OR BENEFIT AS CONTEMPLATED UNDER THE SAID PROVISION S. THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 78 LANGUAGE OF SEC.28(IV) SPEAKS OF WHETHER CONVERTIB LE INTO MONEY OR NOT. SINCE THE BENEFIT CONTEMPLATED UNDER THIS SUB SECTION IS NOT DIRECTLY IN TERMS OF MONEY. THE AO HAS ALSO A CCEPTED THE CONTENTION IN HIS ASSESSMENT ORDER THAT THE BENEFI T IS OBVIOUSLY NOT CONNECTED TO MONEY. THE ASSESSEE IN ITS SUBMI SSION STATED THAT WHATEVER AMORTIZATIONS DEBITED IN THE PROFIT A ND LOSS ACCOUNT IN THE EARLIER YEARS HAVE BEEN MADE GOOD BY WAY OF COMPENSATION AS PER THE PROVISIONS OF SEC.41(1), SI NCE THE ASSESSEES LIABILITY ARE TOWARDS PREMIUM ON FCCBS W HICH IS NOT A PRINCIPLE AMOUNT. SINCE THE ASSESSEE HAS NOT CR EATED THIS LIABILITY BY DEBITING THE TRADING ACCOUNT WITH THE INTENTION THAT IT IS NOT A TRADING LIABILITY. WAIVER OF TRADING LIAB ILITY IS ALONE TAXABLE. THE ACT OF WRITING BACK UN-DEBITED PREMIU M IS TO GIVE ACCOUNTING EFFECT TO THE BUSINESS TRANSACTIONS. HE NCE, THIS UN- DEBITED PREMIUM TO THE TUNE OF 25.61 CRORES IS NOT TAXABLE EITHER U/S.28(I) OR 28(IV) OF THE ACT. THE CONTENT ION OF THE ASSESSEE IS SUPPORTED BY THE JURISDICTIONAL HIGH CO URT IN THE CASE OF ISKRAEMECO REGENT LTD. CITED SUPRA, WHEREIN THE ASSESSEE ADOPTED A LOAN FROM STATE BANK OF INDIA FO R ACQUIRING A CAPITAL ASSET AND IT HAD PAID A PART OF THE PRINCIP AL AMOUNT IN THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 79 EARLIER ASST. YEARS. IN THE RELEVANT ASST. YEARS, A ONETIME SETTLEMENT WAS ARRIVED AT BETWEEN THE ASSESSEE AND THE BANK IN TERMS OF WHICH, THE BANK WAIVED OUTSTANDING DUE OF PRINCIPLE AMOUNT AND INTEREST. THE ASSESSEE CREDITED WAIVER OF PRINCIPAL, AMOUNT TO CAPITAL RESERVE ACCOUNT IN BALANCE SHEET TREATED IT AS CAPITAL IN NATURE WHEREAS THE AO TREATED THE SAID A MOUNT AS INCOME UNDER THE PROVISIONS OF SEC.28(IV) R.W.SEC.2 (24) OF THE ACT. THE JURISDICTIONAL HIGH COURT OF MADRAS HELD THAT THE TRANSACTION IN THE INSTANT CASE BEING A LOAN TRANSA CTIONS, SEC.28(IV) OF THE ACT WOULD NOT APPLY TO THE SAME A ND AMOUNT OF WAIVER COULD NOT BE TERMED AS INCOME U/S.2(24) OF T HE ACT. THE COURT HELD THAT SEC.28(IV) DOES NOT HAVE ANY APPLIC ATION TO A TRANSACTION INVOLVING MONEY. SINCE THE ASSESSEE WA S NOT TRADING IN MONEY TRANSACTION AND THE GRANT OF LOAN BY A BANK CANNOT BE TERMED AS A TRADING TRANSACTION AND HELD THAT IT CANNOT ALSO BE CONSTRUED IN THE COURSE OF BUSINESS. THE C OURT FURTHER HELD THAT SEC.41(1) ALSO COULD NOT HAVE ANY APPLICA TION. THE TAXABILITY OF AN AMOUNT WHICH HAS NOT BEEN TREATED AS A TRADING LIABILITY WITH A DEBIT TO THE PROFIT AND LOSS ACCOU NT CANNOT CONSTRUE THE INCOME OF AN ASSESSEE. IN THE INSTANT CASE, THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 80 ASSESSEE DID NOT DEBIT THE PREMIUM OF 25.61 CRORES TO THE PROFIT AND LOSS ACCOUNT OF THE FINANCIAL YEARS 2009 -10 TO 2011-12. ONCE THE TRADING LIABILITY RELATING TO PREMIUM PAYA BLE CEASED TO EXIST WITH THE BUY BACK OF THE FCCBS UNDER CONSIDER ATION, ACCORDINGLY, THE ASSESSEE HAS RETURNED BACK PREMIUM TO THE EXTENT OF 37.11 CRORES DEBITED TO THE EARLIER FINANCIAL YEAR S AND OFFERED FOR TAXATION DURING THE FINANCIAL YEAR 2009 -10 I.E. YEAR UNDER CONSIDERATION. THE ABOVE CONTENTION OF THE A SSESSEE HAS ALSO BEEN SUPPORTED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS.TOSHA INTERNATIONAL (319 ITR 7 (ST)(SC), WHEREIN IT WAS HELD THAT REMISSION OF PRINCIPAL AMO UNT OF LOAN DID NOT AMOUNT TO INCOME U/S.41(1) NOR U/S.18(IV) NOR U /S.2(24) OF THE ACT. SIMILARLY, THE ASSESSEE PLACED ITS RELIANCE I N THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT (116 ITR 1), WHERE IN IT WAS HELD THAT NON-EXISTENT INCOME CANNOT BE TAXED EITHER UND ER THE PROVISIONS OF SEC.28(I) OR SEC.28(IV) OF THE ACT. IN MAHINDRA & MAHINDRA LTD. VS. CIT (261 ITR 501), THE HIGH COURT OF BOMBAY HELD THAT WAIVER OF THE LOAN REPAYMENT WAS NOT RELA TED TO STOCK- IN-TRADE BUT TO CAPITAL ASSET AND, THEREFORE, IT WA S NOT A REMISSION OF LIABILITY U/S.41(1) OF THE ACT. ACCORDINGLY, T HE CIT(APPEALS) - - ITA 1695 TO 16 97 & CO 84/MDS/14 81 OBSERVED THAT THE ADDITION MADE BY THE AO TO THE EX TENT OF 62.72 CRORES AS BUSINESS INCOME IS TO BE DELETED W HICH IS INCLUSIVE OF 37.11 CRORES OFFERED BY THE ASSESSEE ON ACCOUNT OF REVERSING THE CLAIMS MADE FOR EARLIER YEARS I.E. 2006-07 TO 2008-09. 19. AS FAR AS THE ASSESSABILITY OF GAINS ARISING TO THE ASSESSEE ON THE FCCBS BOUGHT BACK BY THE ASSESSEE U /S.28(I)( AND 28(IV) OF THE ACT AT 97.66 CRORES IS CONCERNED, THE ASSESSEE SUBMITTED THAT THE GAIN OF 97.66 CRORES REPRESENTS REDUCTION / WAIVER OF PRINCIPAL LIABILITY WHICH IS IN NATURE OF CAPITAL RECEIPT, THE PROFIT ON BUYBACK OF FCCB IS NOT TAXAB LE U/S.28(IV) OF THE ACT. THE CONTENTION OF THE ASSESSEE IS SUPPOR TED BY THE MADRAS HIGH COURT DECISION IN THE CASE OF ISKRAEMEC O REGENT LTD. CITED SUPRA. 19.1 BEFORE THE CIT(APPEALS), IN THIS REGARD, REI TERATED THAT THE PROCEEDS OF FCCBS WAS UTILIZED ONLY FOR CAPITAL PURPOSES I.E. FOR PURCHASE OF FIXED ASSETS, MAKING PAYMENT OF ISS UE EXPENSES AND PARTLY FOR FUNDING THE BUYBACK OF FCCB ITSELF. AS PER THE GUIDELINES OF RBI, FOREIGN LOANS RECEIVED ON ACCOUN T OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 82 ECBS/FCCBS CANNOT BE UTILIZED FOR REVENUE EXPENSES OR WORKING CAPITAL REQUIREMENTS. THEREFORE, THIS LIAB ILITY CANNOT BE TREATED AS TRADE LIABILITY. OBTAINING LOAN FOR BUS INESS PURPOSE DOES NOT FORM PART OF THE TRADING ACTIVITY AND WAIV ER OF THE SAME DOES NOT FORM PART OF TRADING RECEIPT. A GRANT OF LOAN BY A BANK CANNOT BE TERMED AS A TRADING TRANSACTION AND IT CA NNOT ALSO BE CONSTRUED IN THE COURSE OF BUSINESS. THE ASSESSEE COMPANY OBTAINED THE LOAN FOR THE PURPOSE OF INVESTING IN I TS CAPITAL ASSETS. A PART OF THIS LOAN AMOUNT ALONG WITH INTE REST WAS WAIVED BY WAY OF AN AGREEMENT BETWEEN THE PARTIES. IN THE CASE REFERRED BY THE AO I.E. SUNDARAM IYENGAR & SON S LTD. (225 ITR 344), THE FACTS ARE TOTALLY DIFFERENT TO THAT OF THE ASSESSEES CASE, WHERE IN THE REFERRED CASE ABOVE, THERE WAS A TRADING TRANSACTION IN WHICH THE MONEY WAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON IN HIS BUSINESS. THE LO AN IN ITS ENTIRETY WAS COMPLETELY WAIVED, THE LOAN ITSELF WAS TAKEN FO R A TRADING ACTIVITY AND ON WAIVING, IT WAS RETAINED IN BUSINES S BY THE ASSESSEE. IN THE CASE OF SUNDARAM IYENGAR & SONS LTD., CITED SUPRA, THERE WAS A TRADING TRANSACTION AND THE MONE Y RECEIVED WAS USED TOWARDS A BUSINESS TRANSACTION. THUS, THE SAID FACTS - - ITA 1695 TO 16 97 & CO 84/MDS/14 83 WOULD INDICATE THAT THE RATIO LAID DOWN IN TV SUNDA RAM IYENGAR & SONS LTD.S CASE (SUPRA) HAS NO APPLICATION AT ALL TO THE FACTS AND CIRCUMSTANCES OF THIS CASE. 19.2 THE CIT(APPEALS) OBSERVED THAT EVEN DEPOSI T OF MONEY CANNOT BE TREATED AS A TRADING RECEIPT; THEREFORE, THE AMOUNT REFERRED TO THE LOANS OBTAINED BY THE ASSESSEE TOWA RDS THE PURCHASE OF ITS CAPITAL ASSETS WOULD NOT CONSTITUTE A TRADING RECEIPT AND THE SAME VIEW HAS BEEN HELD IN THE CASE OF AVM LTD. VS. CIT (146 ITR 355). ACCORDING TO THE CIT(A PPEALS), THE CONTENTION OF THE AO REGARDING THE APPLICATION OF S EC.28(IV) OF THE ACT IS ALSO NOT TENABLE, AS THE SECTION CAN BE APPLICABLE ONLY TO THE CASES, WHERE THE BENEFIT OR PERQUISITE ARE R ECEIVED IN KIND. THIS SECTION DOES NOT APPLY TO THE BENEFITS IN CASH OR MONEY AND IT APPLIES ONLY TO A TRANSACTION ARISING FROM BUSIN ESS AND THIS VIEW HAS ALSO BEEN SUPPORTED BY THE DELHI HIGH COUR T IN THE CASE OF RAVINDER SINGH VS. CIT (205 ITR 353) AND AL CHEMIC PVT. LTD. V. CIT (130 ITR 168). SECTION 28(IV) PROVIDES FOR CHARGEABILITY OF PROFITS AND GAINS OR BUSINESS OR P ROFESSION WITH RELATION TO THE VALUE OF ANY BENEFIT OR PERQUISITE ARISING OUT OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 84 BUSINESS OR THE EXERCISE OF PROFESSION AND THEREFOR E, THE SAME WOULD NOT INCLUDE THE MONEY TRANSACTIONS. THUS, TH E CIT(APPEALS) OBSERVED THAT SEC.28(IV) OF THE ACT MA KES IT CLEAR THAT IT WOULD COVER ONLY TRANSACTIONS OTHER THAN MO NEY TRANSACTIONS. SINCE, IN THE INSTANT CASE UNDER CON SIDERATION, THE TRANSACTION INVOLVED BEING A LOAN TRANSACTION AND B EING A TRANSACTION OF MONEY, SEC.28(IV) OF THE ACT HAS NO APPLICATION. IN SUPPORT OF THIS CONTENTIONS, SEVERAL CASE LAWS HAVE BEEN MENTIONED BY THE ASSESSEE, WHICH WERE DISCUSSED IN RELATION TO THE PREMIUM AMOUNT OF 62.72 CRORES IN EARLIER PARAGRAPHS WHICH ARE EQUALLY APPLICABLE TO THE ISSUE UNDER CON SIDERATION RELATING TO PRINCIPAL AMOUNT OF 97.66 CRORES RECEIVED ON ACCOUNT OF REMISSION OF LIABILITY OR BUYBACK OF FCC BS. ACCORDING TO THE CIT(APPEALS), SIMILARLY, SEC.41(1) OF THE AC T ALSO DOES NOT APPLY TO THE FACTS OF THE ASSESSEES CASE, AS IT MA NDATES THAT THERE HAS TO BE AN ACTUAL ALLOWANCE OR DEDUCTION MA DE FOR THE PURPOSE OF COMPUTING INCOME UNDER THE SAID SECTION. AS THERE IS NO CLAIM OF SUCH ALLOWANCE OR DEDUCTION IN THE CASE OF THE ASSESSEE REGARDING EITHER REMISSION IN LIABILITY OR PREMIUM, THE QUESTION OF APPLICATION OF SEC.41(1) OF THE ACT ALS O DOES NOT ARISE - - ITA 1695 TO 16 97 & CO 84/MDS/14 85 FOR CONSIDERATION. IN SUPPORT OF THE CLAIM, THE LD . AR HAS CITED THE FOLLOWING JUDGMENTS BEFORE THE CIT(APPEALS). I) P. GANESH CHETTIARY VS. CIT (133 ITR 103)[MAD.] II) AVM LTD. VS. CIT (146 ITR 355) III) ALCHEMIC PVT. LTD. V. CIT (130 ITR 168). IV) MAFTHLAL GANGA BAI & CO. (P) LTD. VS. CIT (219 ITR 644) V) GARDEN SILK MILL PVT. LTD. VS. DCIT (320 ITR 720 (GUJ.) 19.3 THE CIT(APPEALS) OBSERVED THAT THE ABOVE CAS E LAWS ARE ALL IN SUPPORT OF THE ASSESSEES CASE THAT SEC. 28(IV) HAS NO APPLICATION TO A MONEY TRANSACTION AND HENCE NOT AP PLICABLE TO THE FACTS OF THE PRESENT CASE UNDER CONSIDERATION. IN VIEW OF THE ABOVE FINDINGS, THE CIT (APPEALS) OBSERVED THAT THE PROFIT ON BUYBACK OF FCCB TO THE EXTENT OF 97.66 CRORES WHICH REPRESENTS THE GAIN RECEIVED ON ACCOUNT OF WAIVER O F CAPITAL LIABILITY IS NOT TAXABLE U/S.28(IV) OF THE ACT AND THE COMPANY IS NOT IN THE BUSINESS OF MONEY MARKET TRANSACTIONS AND AS WELL THE PROFIT ON BUYBACK OF FCCBS CANNOT BE TREATED AS BUS INESS INCOME. FURTHER, THE CIT(APPEALS) OBSERVED THAT EV EN THE CONTENTION OF THE AO THAT THE GAIN AROSE AS A RESUL T OF AN ADVENTURE IN THE NATURE OF TRADE AND THEREFORE, SUC H GAIN FALLS - - ITA 1695 TO 16 97 & CO 84/MDS/14 86 U/S.28(IV) OF THE ACT NOTWITHSTANDING THE NATURE OF THE ASSESSEES BUSINESS DO NOT STAND ON LEGALITY. AN ISOLATED TRA NSACTION CANNOT BE CONSIDERED AS TRADE. IN CASE, SUCH A TRANSACTIO N FORMS PART OF SERIES OF TRANSACTION THEN ONLY IT REFLECTS THE TRANSACTION AS ADVENTURE IS IN THE NATURE OF TRADE. THEREFORE, AC CORDING TO THE CIT(APPEALS), THIS CANNOT BE APPLIED TO THE ASSESSE ES CASE OF ISOLATED TRANSACTION OF BUYBACK OF FCCBS TO TAX THE PROFITS EVEN U/S.28(IV) OF THE ACT. ACCORDINGLY, HE ALLOWED THI S GROUND OF APPEAL OF THE ASSESSEE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS OBSERVED THAT THE STAND OF THE D. R TO TREAT THE SURPLUS OR REDEMPTION DEBENTURE AS A REVENUE RECEIP T EXIGIBLE TO TAX IS BASED MAINLY ON THE PROPOSITION THAT SUCH SU RPLUS ASSUMES THE SIMILAR NATURE AND CHARACTER AS THAT OF DISCOUNT ON DEBENTURE, WHICH HAS BEEN HELD TO BE A REVENUE EXPE NDITURE BY THE VARIOUS COURTS INCLUDING THE APEX COURT. IT IS HEREIN PERTINENT TO NOTE THAT THE PROPOSITION PRONOUNCED I N THE VARIOUS JUDICIAL PRONOUNCEMENTS IS IN SUPPORT OF REVENUES STAND ARE - - ITA 1695 TO 16 97 & CO 84/MDS/14 87 THAT MADRAS INDUSTRIAL INVESTMENTS CORPORATION VS. LEARNED COMMISSIONER OF INCOME TAX IN 225 ITR 802(S.C) AND THE NATIONAL ENGINEERING INDUSTRIES LTD. VS. C.I.T IN [ 1999] 236 ITR 577 (CAL). 21. WE HAVE ALSO CAREFULLY PERUSED THE VARIOUS CAS ES LAWS CITED BY THE LEARNED REPRESENTATIVES OF BOTH THE SI DES. A) IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT COR PORATION VS. CIT (SUPRA) WHEREIN HELD THAT:- THE DISCOUNT ON DEBENTURES IS AN ALLOWABLE REVENUE EXPENDITURE. WHEN A COMPANY ISSUES DEBENTURES AT A DISCOUNT, IT INCURS A LIABILITY TO PAY THE TRADING AMOUNT THAN WHAT ITS BORROWED AT A FUTURE DATE. THE LIABILITY TO PAY A LARGER AMOUNT THAN THE AMOUN T RECEIVED FOR THE DEBENTURES IS A LIABILITY WHICH HAS BEEN INCURRED B Y THE COMPANY FOR THE PURPOSE OF ITS BUSINESS IN ORDER TO GENERATE FU NDS FOR ITS BUSINESS ACTIVITIES. THE PURPOSE OF PAYMENT OF DISC OUNT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS AND SINCE THERE IS A CONTINUING BENEFIT TO THE BUSINESS OF THE ASSESSEE-COMPANY OVE R THE ENTIRE PERIOD, THE SAID LIABILITY SHOULD BE SPREAD OVER TH E PERIOD OF THE DEBENTURES. B) IN THE CASE OF NATIONAL ENGINEERING INDUSTRIES VS. CIT (SUPRA) WHEREIN HELD THAT:- THE LIABILITY TO PAY DEBENTURE PREMIUM IS TO BE SP READ OVER THE YEARS FROM THE ISSUE OF DEBENTURES TO THE YEAR OF REDEMPT ION. - - ITA 1695 TO 16 97 & CO 84/MDS/14 88 C) IN THE CASE OF HIMACHAL PRADESH FINANCIAL CORPORATION LTD. VS. CIT (232 ITR 158) WHEREIN HEL D THAT:- THE AMOUNT OF DISCOUNT ON BONDS AND DEBENTURES HAS TO BE SPREAD OUT PROPORTIONATELY OVER THE NUMBER OF YEARS FOR WH ICH THE BONDS ARE ISSUED AND THE PROPORTIONATE AMOUNT OF SUCH DISCOUN T WOULD BE AN ALLOWABLE EXPENDITURE IN THE RELEVANT ASSESSMENT YE ARS. D) IN THE CASE OF M.P. FINANCIAL CORPORATION VS. CIT (165 ITR 765) WHEREIN HELD THAT:- THE AMOUNT OF DISCOUNT ON BONDS AND DEBENTURES IN EFFECT REPRESENTS DEFERRED INTEREST AND LOOKING IT AS A LO SS, A PROPORTIONATE AMOUNT OF DISCOUNT CAN BE WRITTEN OFF OUT OF REVENU E EVERY YEAR DURING THE PERIOD THE BONDS WOULD REMAIN OUTSTANDIN G. E) IN THE CASE OF CIT VS. SCINDIA STEAM NAVIAGATION C O. LTD ( 125 ITR 118(BOM.) WHEREIN OBSERVED THAT:- 15. THE SURPLUSES ACCRUED TO THE COMPANY SINCE THE DEBENTURES WERE QUOTED AT A DISCOUNT IN THE OPEN MARKET. WE ARE ONL Y CONCERNED WITH THE SURPLUSES IN THE LAST TWO YEARS, VIZ., RS. 44,048 I N THE ACCOUNTING YEAR 1956- 57 AND RS. 46,511 IN THE ACCOUNTING YEAR 1957-58. T HE SURPLUSES IN THE EARLIER YEARS WERE NOT CHARGED TO TAX. THE ITO TOOK THE VIEW THAT SINCE THE ASSESSEE-COMPANY WAS PURCHASING AND CANCELLING DEBE NTURES YEAR AFTER YEAR, THESE TWO AMOUNTS FOR THE TWO YEARS IN QUESTI ON COULD PROPERLY BE REGARDED AS BUSINESS PROFITS. ACCORDING TO HIM, PRO FIT-MAKING WAS THE DOMINANT MOTIVE AND IN VIEW OF THE MOTIVE AND THE F REQUENCY AND THE NATURE OF THE TRANSACTIONS, THE CONCLUSION WAS INESCAPABLE THAT THESE WERE BUSINESS PROFITS AND SHOULD BE REGARDED PROPERLY AS PART OF THE BUSINESS INCOME OF THE ASSESSEE FOR THESE YEARS. IN APPEAL, THE AC. AGREED WITH THE ITO, RELYING ON THE DEFINITION OF 'GROSS INCOME' IN THE UNITED STATES' INLAND - - ITA 1695 TO 16 97 & CO 84/MDS/14 89 REVENUE CODE. IN FURTHER APPEAL, THE TRIBUNAL UPHEL D THE ASSESSEE'S CONTENTION, OBSERVING THAT WHAT HAD BEEN DONE HAD N OTHING WHATSOEVER TO DO WITH THE REGULAR BUSINESS OF SHIPPING. ACCORDING TO THE TRIBUNAL, WHAT HAD BEEN DONE WAS TO MATERIALLY ALTER ITS PERMANENT FRA MEWORK OR ITS CAPITAL STRUCTURE AND IN THE PROCESS THE ASSESSEE HAD TAKEN ADVANTAGE OF THE FAVOURABLE CAPITAL MARKET. SUCH OPERATION, ACCORDIN G TO THE TRIBUNAL, WAS ESSENTIALLY RELATABLE TO ITS CAPITAL AND THE BENEFI T REAPED BY THE COMPANY WAS ESSENTIALLY A CAPITAL BENEFIT. ACCORDING TO THE TRIBUNAL, 'THE MERE FREQUENCY OF OPERATIONS DOES NOT CHANGE THE CAPITAL ASPECT. IT HAD TO BE FROM YEAR TO YEAR BECAUSE INVESTMENT, EACH YEAR, HA D TO BE CONFINED TO A PRESCRIBED AMOUNT OF SINKING FUND, EXCEPT IN THE YE AR 1952-53 WHEN THE ACCUMULATED SINKING FUND COULD BE UTILISED'. IT WAS FURTHER OBSERVED THAT IT WAS NOT POSSIBLE TO TRACE ANY INDICIA OF TRADE IN T HESE OPERATIONS AS ALLEGED BY THE DEPARTMENTAL REPRESENTATIVE. ACCORDING TO TH E TRIBUNAL, IN THE CONTEXT IN WHICH IT WAS DONE, IT WAS MORE PROPER TO TAKE TH E VIEW THAT WHAT HAD BEEN DONE WAS WITH A VIEW TO REDUCE THE CAPITAL COMMITME NTS IN THE CONTEXT OF FAVOURABLE CAPITAL MARKET. 16. MR. JOSHI, ON BEHALF OF THE CIT, DREW OUR ATTENTIO N TO THE DECISION OF THE SUPREME COURT IN INDIA CEMENTS LTD. VS. CIT (1966) 60 ITR 52, WHERE A DISTINCTION WAS MADE BETWEEN OBTAINING OF CAPITAL B Y ISSUE OF SHARES AND OBTAINING LOAN BY DEBENTURES. IT IS IMPORTANT TO RE MEMBER IN CONNECTION WITH THE OBSERVATIONS TO BE FOUND IN THE ABOVE DECISION THAT THEY ARE IN THE CONTEXT OF CONSIDERING THE AMOUNT SPENT BY THE ASSE SSEE TOWARDS STAMP DUTY, REGISTRATION FEE, LAWYER'S FEES, ETC., IN CON NECTION WITH THE LOAN WHICH THE ASSESSEE IN THE CASE BEFORE THE SUPREME COURT, HAD OBTAINED FROM THE INDUSTRIAL FINANCE CORPORATION AND WHICH HAD BEEN S ECURED BY A CHARGE ON ITS FIXED ASSETS. THE TRANSACTIONS WHICH WE ARE CON SIDERING ARE OF A TOTALLY DIFFERENT NATURE AND IT APPEARS TO US TO BE IMPROPE R TO PICK OUT STRAY OBSERVATIONS FROM A DECISION AND APPLY THEM IN A TO TALLY DIFFERENT CONTEXT TO A DIFFERENT SET OF FACTS. THE TRIBUNAL HAS FOUND TH AT WHAT WAS BEING DONE BY THE ASSESSEE- COMPANY COULD BE REGARDED AS OPERATIO NS IN CONNECTION WITH ITS CAPITAL AND THAT FROM THE MERE FREQUENCY OF THE TRANSACTIONS OR THE FACT THAT IT WAS REPEATED FROM YEAR TO YEAR (AS IT HAD T O BE) IT COULD NOT BE HELD - - ITA 1695 TO 16 97 & CO 84/MDS/14 90 THAT IT WAS PART OF THE BUSINESS PROFITS OF THE ASS ESSEE. WE ARE IN AGREEMENT WITH THIS CONCLUSION.. IT IS QUITE CLEAR THAT THE A CCRUAL OF SURPLUS CANNOT BE REGARDED AS EQUIVALENT TO PROFITS EARNED OUT OF THE BUSINESS ACTIVITY. ONCE THAT CONCLUSION IS REACHED, IT IS IMMATERIAL FOR US TO CONSIDER WHETHER THE ACCRUAL OF SURPLUS BY THE ASSESSEE-COMPANY IS OF CA PITAL NATURE OR ASSET. IN THIS VIEW OF THE MATTER WE ARE IN AGREEMENT WITH TH E CONCLUSIONS OF THE TRIBUNAL AND THE QUESTION WOULD BE REQUIRED TO BE A NSWERED IN FAVOUR OF THE ASSESSEE. 22. A CONSPECTUS OF THE AFORESAID DECISIONS GOES T O SHOW THAT THE DISCOUNT AT WHICH THE DEBENTURES OR B ONDS ARE ISSUED ON A PREMIUM WHICH IS PAYABLE ON THE REDEMPTION OF THE BONDS OR DEBENTURES, IS REGARDED AS A REVENUE EXPENDITURE BY THE VARIOUS COURTS TREATING THE SAME AS AKIN TO THE ADDITIONAL INTEREST PAYABLE BY THE ASSESSEE-COMPANY IN RESPECT OF THE SAID BONDS OR DEBENTURES AND AS SUCH THE DISCOUNT OR PREMIUM SO PAYABLE AS PER THE TERMS AND CONDITIONS OF THE DEBE NTURE OR BOND WAS CONSIDERED AS THE COST INCURRED BY THE ASS ESSEE FOR THE PURPOSE OF ITS BUSINESS IN ORDER TO GENERAT E FUNDS FOR ITS BUSINESS ACTIVITIES. IT IS THUS CLEAR THAT THE CHARACTER OF DISCOUNT OR PREMIUM PAYABLE ON THE REDEMPTION OF DEBENTURES AS PER THE AGREED TERMS AND CONDITIONS I S ALTOGETHER DIFFERENT FROM THE SURPLUS ARISING TO TH E ASSESSEE - - ITA 1695 TO 16 97 & CO 84/MDS/14 91 FROM THE REDEMPTION OF DEBENTURES PREMATURELY IN TH E PRESENT CASE INASMUCH AS THE DISCOUNT/PREMIUM ON DEBENTURES OPERATES IN THE REVENUE FIELD WHEREAS TH E SURPLUS ON REDEMPTION OF DEBENTURES BEING AN INTEGR AL PART OF THE EXERCISE OF RESTRUCTURING ITS CAPITAL OPERAT ES IN THE CAPITAL FIELD. WE, THEREFORE, ARE OF THE VIEW THAT THE DISCOUNT ON DEBENTURES CANNOT BE EQUATED WITH THE SURPLUS ON THE REDEMPTION OF DEBENTURES ARISING TO THE ASSESSEE IN THE PRESENT CASE AND THIS BEING SO, THE ANALOGY ON THE BASIS OF WHICH THE DISCOUNT WAS HELD TO BE REVENUE EXPENDITU RE BY THE VARIOUS COURTS CANNOT BE STRAIGHTAWAY APPLIED T O THE SURPLUS ON REDEMPTION IN THE PRESENT CASE TO HOLD I T AS A REVENUE RECEIPT. AS A MATTER OF FACT, THE LIABILITY ON ACCOUNT OF DEBENTURES WAS CERTAINLY NOT A TRADING LIABILITY AND AS HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. PHOOL CHAND JIWAN RAM (131 ITR 37) THE REMISSION OF PORTION OF SUCH LIABILITY DOES NOT GIVE RISE TO ANY INCOME OF REVENUE NATURE WHICH COULD BE SUBJECTED TO TAX. 23. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SCINDIA STEAM NAVIGATION COMPANY LTD. [125 ITR 118] WHEREIN - - ITA 1695 TO 16 97 & CO 84/MDS/14 92 HELD THAT THE SURPLUS ON REDEMPTION OF DEBENTURE CO ULD NOT BE TREATED AS A REVENUE RECEIPT. IN THE SAID CASE, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF IN DIA CEMENT LTD. VS. CIT (62 ITR 52), WAS ALSO RELIED UP ON BY THE REVENUE AND THE HONBLE BOMBAY HIGH COURT FOUND THE SAME DISTINGUISHABLE ON FACTS FOR THE FOLLOWING REA SONS GIVEN IN PARA NO. 16 OF ITS JUDGMENT : 'MR. JOSHI ON BEHALF OF THE CIT, DREW OUR ATTENTION TO THE DECISION OF THE SUPREME COURT IN INDIA CEMENT LTD. VS. CIT ( 1996) 60 ITR 52 (SC), WHERE DISTINCTION WAS MADE BETWEEN OBTAINI NG OF CAPITAL BY ISSUE OF SHARES AND OBTAINING LOAN BY DEBENTURES . IT IS IMPORTANT TO REMEMBER IN CONNECTION WITH THE OBSERV ATIONS TO BE FOUND IN THE ABOVE DECISION THAT THEY ARE IN THE CO NTEXT OF CONSIDERING THE AMOUNT SPENT BY THE ASSESSEE TOWARD S STAMP DUTY, REGISTRATION FEE, LAWYERS FEE, ETC. IN CONNE CTION WITH THE LOAN WHICH THE ASSESSEE IN THE CASE BEFORE THE SUPREME C OURT, HAD OBTAINED FROM THE INDUSTRIAL FINANCE CORPORATION AN D WHICH HAD BEEN SECURED BY A CHARGE ON ITS FIXED ASSETS. THE T RANSACTIONS WHICH WE ARE CONSIDERING ARE OF A TOTALLY DIFFERENT NATURE AND IT APPEARS TO US TO BE IMPROPER TO PICK OUT STRAY OBSE RVATIONS FROM A DECISION AND APPLY THEM IN A TOTALLY DIFFERENT CONT EXT TO A DIFFERENT SET OF FACTS.' 24. IT IS OBSERVED THAT THE FACTS INVOLVED IN THE AFORESAID CASE BEFORE THE HONBLE BOMBAY HIGH COURT ARE SIMILAR T O THE FACTS OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 93 THE PRESENT CASE IN AS MUCH AS CERTAIN AMOUNTS HAD ACCRUED TO THE ASSESSEE IN THAT CASE AS A RESULT OF CANCELLATI ON OF THE DEBENTURES BY WAY OF INVESTMENT MADE BY THE COMPANY IN ITS OWN DEBENTURES WHICH WERE BEING QUOTED AT DISCOUNT. THIS SURPLUS AMOUNT ACCRUED TO THE ASSESSEE-COMPANY WAS REGARDED AS A BUSINESS PROFITS BY THE AO AS THE COMPANY WAS FOUND TO BE PURCHASING AND CANCELLING ITS DEBENTURES YEAR AFTER YEAR. IN THE APPEAL FILED BY THE ASSESSEE, THE FIRST APPELLATE A UTHORITY AGREED WITH THE AO AND WHEN THE MATTER WAS CARRIED BEFORE THE TRIBUNAL IN A FURTHER APPEAL, THE TRIBUNAL UPHELD THE ASSESS EES STAND OBSERVING THAT WHAT HAD BEEN DONE BY THE ASSESSEE-C OMPANY WAS TO MATERIALLY ALTER ITS CAPITAL STRUCTURE AND I N THE PROCESS THE ASSESSEE HAD TAKEN ADVANTAGE OF THE FAVOURABLE CAPI TAL MARKET WHICH WAS ESSENTIALLY RELATABLE TO ITS CAPITAL AND THE BENEFIT REAPED BY THE ASSESSEE-COMPANY WAS ESSENTIALLY A CA PITAL BENEFIT. THE HONBLE BOMBAY HIGH COURT FOUND ITSELF IN AGREEMENT WITH THE CONCLUSION DRAWN BY THE TRIBUNAL OBSERVING THAT IT IS QUITE CLEAR THAT THE ACCRUAL OF SURPLUS CANNOT BE REGARDED AS EQUIVALENT TO PROFITS EARNED OUT OF ITS BUSINESS ACTIVITY AND ONCE THAT CONCLUSION IS REACHED, IT IS IMMATERIAL TO - - ITA 1695 TO 16 97 & CO 84/MDS/14 94 CONSIDER WHETHER THE ACCRUAL OF SURPLUS BY THE ASSE SSEE- COMPANY IS OF CAPITAL NATURE OR NOT. IN OUR OPINION , THIS DECISION OF THE HONBLE BOMBAY HIGH COURT IS SQUARELY APPLIC ABLE TO THE FACTS OF THE PRESENT CASE AND RESPECTFULLY FOLLOWIN G THE SAME AS WELL AS FOR THE REASONS GIVEN ABOVE, WE HOLD THAT T HE LEARNED CIT(A) WAS FULLY JUSTIFIED IN DELETING THE ADDITION MADE BY AO ON THIS ISSUE, HOLDING THAT THE SAME CANNOT BE TREATED AS A REVENUE RECEIPT. HIS IMPUGNED ORDER ON THIS ISSUE IS, THERE FORE, TO BE UPHELD. 25. FURTHER, IT WAS ALSO SUBMITTED BY D.R THAT THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF C.I.T VS. RAMANIYAM HOMES P. LTD., IN (2016) 95 CCH 0147/ 384 ITR 530 ( MAD.) WHEREIN THE JURISDICTIONAL HIGH COURT DEFERRED FROM EARLIER DECISION OF THE CO-ORDINATE BENCH ON THE ISSUE OF T AXABILITY OF WAIVER OF LOAN TAKEN FOR ACQUIRING A CAPITAL ASSET, AND ALSO THAT WAIVER OF PRINCIPAL PORTION OF SUCH LOAN WOULD FAL L WITHIN THE PURVIEW OF SEC.28(IV) OF THE ACT AND HENCE, TAXABL E AS REVENUE RECEIPT. EARLIER JUDGEMENT OF JURISDICTIONAL HIGH C OURT IN THE CASE OF ISKRAEMECO REGENT LTD. VS. C.I.T IN [2011] 331 I TR 317(MAD.) WHEREIN HELD ON THE ABOVE ISSUE THAT WAIVER OF LOAN WHICH HAS - - ITA 1695 TO 16 97 & CO 84/MDS/14 95 BEEN TAKEN FOR ACQUIRING THE CAPITAL ASSET, IS NOT A TRADE LIABILITY AND WAIVER OF SUCH LOAN CANNOT CONSIDER AS INCOME U /S.41(1) OR 28(IV) OF THE ACT. THE SAME VIEW WAS TAKEN BY MADR AS HIGH COURT IN THE CASE OF C.I.T VS. M/S.FIDELITY TEXTILE S P LTD., IN TAX CASE (APPEAL) NO.1034 /2007 VIDE ORDER DATED 24.02. 2016 WHEREIN CONSIDERING THE JUDGEMENT OF SUPREME CORT I N THE CASE OF TVS SUNDRAM IYENGAR AND SONS LTD. IN 88 TAXMAN 4 29(SC) AND THE JUDGEMENT IN ISKRAEMECO REGENT LTD. (SUPRA) OBSERVED AS FOLLOWS:- 6. INSOFAR AS THE DECISION IN TVS SUNDRAM IYENGAR AND SONS LTD.(SUPRA) IS CONCERNED, THE AROSE OUT OF ADMITTED FACTS TO THE EFFECT THAT THE ASSESSEE ITSELF TREATED THE MONEY AS ITS O WN AND TOOK IT TO THE P&L A/C. PARAGRAPH 23 OF THE SAID DECISION READS AS FOLLOWS:- 23. IN THE PRESENT CASE, THE MONEY WAS RECEIVE D BY THE ASSESSEE IN COURSE OF CARRYING ON HIS BUSINESS. ALT HOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT WAS RECEIVED, BY INFLUX OF TIME THE MONEY HAS BE COME THE ASSESSEE'S OWN MONEY. WHAT REMAINS AFTER ADJUSTMENT OF THE DEPOSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS. THE CLAIMS OF THE CUSTOMERS HAVE BECOME BARRED BY LIMITATION. THE ASSESSEE ITSELF HAS TREATED THE MONEY AS ITS OWN MONEY AND T AKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THERE IS NO EXPLANATION FROM THE ASSESSEE WHY THE SURPLUS MONEY WAS TAKEN T O ITS PROFIT AND LOSS ACCOUNT EVEN IF IT WAS SOMEBODY ELSE'S MON EY. IN FACT, - - ITA 1695 TO 16 97 & CO 84/MDS/14 96 AS ATKINSON, J. POINTED OUT THAT WHAT THE ASSESSEE DID WAS THE COMMONSENSE WAY OF DEALING WITH THE AMOUNTS. 7. HOWEVER, THE DIVISION BENCH OF THIS COURT WAS C ONCERNED DIRECTLY WITH THE QUESTION THAT IS RAISED AS QUESTION OF LAW NO.2 IN THIS CASE. THE QUESTION WAS ANSWERED IN FAVOUR OF THE RESPONDE NT / ASSESSEE. 8 THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE RATIO IN TVS SUNDARAM IYENGAR AND SONS LIMITED WILL NOT APPLY TO THE CASE ON HAND. THE PROTECTION GIVEN TO THE BRITISH NATIONAL BY THE AGREEMENT DATED 26.06.2000, CANNOT BE TREATED AS A CONSIDERAT ION. THE CUSTOMS DEPARTMENT WAS NOT BOUND BY SUCH AN UNDERTA KING GIVEN BY THE TWO INDIAN NATIONALS. AT THE MOST IT WAS A P ROMISE ON THE PART OF THE INDIAN NATIONALS TO PROTECT THE BRITISH NATI ONAL AGAINST ANY CLAIM FROM THE CUSTOMS DEPARTMENT. IT WAS A PROMISE TO HEDGE THE RISK THAT MAY FALL UPON THE BRITISH NATIONAL. 9. ONCE THE LOAN IS WRITTEN OFF AND THE PERSON WRI TING OFF THE LOAN, DOES NOT STAND TO BENEFIT, IN ANY CONCRETE MANNER, EXCEPT TO THE EXTENT THAT HE WILL BE PROTECTED AGAINST ANY STATUT ORY CLAIM, THE SAME CANNOT BE TREATED AS REVENUE INCOME. THEREFORE, THE QUESTIONS OF LAW ARE ANSWERED AGAINST THE APPELLANT/DEPARTMENT. 26. IN OUR OPINION, ONE SHOULD NOT PLACE RELIANCE ON A DECISION WITHOUT UNDERSTANDING THE FACTUAL SITUATIO N INVOLVED IN THE SAID DECISION AND HOW IT WOULD APPLY TO THE FAC TS INVOLVED IN THE SUBSEQUENT CASE. A RATIO LAID DOWN BY A HIGHER FORUM SHALL - - ITA 1695 TO 16 97 & CO 84/MDS/14 97 NOT BE TAKEN OUT OF THE CONTEXT AND CONSTRUED LIKE A STATUTE. THE REDUCTION IN VALUE OF DEBENTURE AT THE TIME OF REDE MPTION CANNOT BE EQUATED AS A WAIVER OF LOAN SO AS TO TREAT IT AS A REVENUE RECEIPT. FURTHER, IN OUR OPINION, WAVIER OF INTERES T CANNOT BE EQUATED WITH GAIN ON REDEMPTION OF DEBENTURES. SUC H AN INTERPRETATION OF JUDGMENT IS TOTALLY OUT OF CONTEX T IN WHICH THE QUESTION AROSE FOR THE DECISION IN THAT CASE. IT I S NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A S ENTENCE FORM THE JUDTGMENT OF A COURT, DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE LAW DECLARED BY THE COURT. THE JUDGEMENT MUST BE READ AS A WHOLE AND THE OBSERVATION FROM THE JUDGMENT HAVE TO BE CONSIDERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THE COURT. A DECISION OF THE COURT TAKES ITS COLOUR FR OM THE QUESTIONS INVOLVED IN THE CASE WHICH IT IS RENDERED AND, WHILE APPLYING THE DECISION TO A LATER CASE, THE COURTS M UST CAREFULLY TRIED TO ASCERTAIN THE TRUE PRINCIPLE LAID DOWN BY THE DECISION OF THE COURT AND NOT TO PICK OUT WORDS OR SENTENCES FR OM THE JUDGEMENT, DIVORCED FROM THE CONTEXT OF THE QUESTIO N UNDER CONSIDERATION BY THE COURT TO SUPPORT THEIR REASONI NG.(REF. - - ITA 1695 TO 16 97 & CO 84/MDS/14 98 MADHAV RAO JIVAJI RAO SCINDIA BAHADUR VS. UOI [1971 ] 3 SCR 9; AIR 1971 SC 530. 27. IT IS ALSO PERTINENT TO MENTION HEREIN THAT TH E AO HAS HIMSELF RAISED THE GROUND IN GROUND NO.6.3 THAT THE CIT(A) ERRED IN PLACING RELIANCE IN THE CASE OF M/S.ISKROMEACO R EGENT LTD AS THE FACTS OF THAT CASE IS DIFFERENT FROM THE INSTAN T CASE AND THE DEPARTMENT HAS NOT ACCEPTED THAT DECISION AND SLP I S PENDING BEFORE THE SUPREME COURT IN DIARY NUMBER 18135/201 1. HOWEVER, CONTRADICTORY TO THIS, THE DR ONCE AGAIN R ELIED ON THE LATER JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RAMANIYAM HOMES P LTD. (SUPRA) WHICH WAS ON SIMILA R FACTS WITH REGARD TO THE TREATMENT OF WAVIER OF LOAN, WHI CH THE ACTION DR IS NOT PROPER. EVEN OTHERWISE, THE JUDGEMENT OF SUPREME COURT IN THE CASE OF C.I.T VS. VEGETABLE PRODUCTS L TD., IN [1973] 88 ITR 192 (SC) HELD THAT DECISION IS IN FAVOUR OF ASSESSEE HAVE TO BE ACTED UPON. 28. FURTHER, THE JURISDICTIONAL HIGH COURT IN THE CASE OF C.I.T VS. PVP VENTURE LTD IN 90 DTR 340 HELD THAT WHILE ADJUDICATING - - ITA 1695 TO 16 97 & CO 84/MDS/14 99 THE ISSUE RELATING TO THE GAIN ON EXCHANGE OF FLUCT UATION, WHICH RELATED TO THE ISSUE OF SHARES IN THE FORM OF GDS C ONSIDERED AS A CAPITAL NATURE AND NOT TAXABLE BY PLACING RELIANC E ON THE JUDGMENT OF SUPREME COURT IN THE CASE OF SUTLEJ COT TON MILLS LTD. IN [1979] 116 ITR 1 (SC) AND ALSO IN THE CASE OF E. I. D. PARRY LIMITED IN [1988] 174 ITR 11 (MAD) AND JAGAT JIT INDUSTRIES LTD., IN [2011] 337 ITR 21 (DEL). 29. CONSIDERING ALL THESE FACTS, WE ARE OF THE OPI NION THAT ANY GAIN AT THE TIME OF REDEMPTION OF DEBENTURE CANNOT BE BROUGHT INTO TAX IN TERMS OF SEC.28(IV) OF THE ACT OR UNDE R SECTION 41(1) OF THE ACT WHICH IS BEING A CAPITAL RECEIPT. THE SAME IS APPLICABLE WITH REGARD TO CESSATION OF PREMIUM ON F CCB BOUGHT BACK TO THE TUNE OF RS.25.61 CRORES. ACCORDINGLY, WE DISMISS THE GROUND TAKEN BY THE REVENUE ON THIS ISSUE AND U PHELD THE ORDER OF LD. LEARNED COMMISSIONER OF INCOME TAX(A). 30. THE NEXT GROUND IN THIS APPEAL IN ITA NO.1697/M DS./14 IS WITH REGARD TO DELETING THE ADDITION TO THE BOOK PR OFIT U/S.115JB OF THE ACT OF 146.22 CRORES MADE BY THE AO. - - ITA 1695 TO 16 97 & CO 84/MDS/14 100 30.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE AD MITTED A BOOK PROFIT OF 3,22,32,469/-, UNDER THE PROVISIONS OF COMPANIES ACT, 1956 FOR THE PURPOSE OF MAT UNDER TH E PROVISIONS OF SEC.115JB OF THE ACT. HOWEVER, THE A SSESSING OFFICER MADE AN ADDITION OF 146,22,34,000/- TO THE BOOK PROFIT FOR THE PURPOSES OF MAT U/S.115JB OF THE ACT AT 149,44,66,469/- WITH A CORRESPONDING TAX EFFECT OF 25,39,84,576/-. THE AO HAS MADE THE ADDITION OF 146,22,34,000/- ON THE GROUND THAT THE ASSESSEE EAR NED A PROFIT OF 160.3834 CRORES ON BUYBACK OF FCCBS AND THE SAME WAS NOT TREATED AS INCOME UNDER THE EXTRA ORDINARY ITEM AS MENTIONED IN AS 5, BUT ADJUSTED AGAINST THE GOODWIL L AND SHARE PREMIUM ACCOUNT AND A SMALL LEFT OVER SUM OF 14.16 CRORES WAS ONLY CREDITED TO THE PROFIT AND LOSS ACCOUNT AS AN EXTRAORDINARY ITEM. THE ASSESSEE EXPLAINED THAT IT HAD WRITTEN O FF GOODWILL TO THE EXTENT OF 83.50 CRORES AGAINST THE SAID PROFIT IN LINE WITH T HE AS 26 & AS 14. THE AMOUNT OF GOOD WILL WRITE OFF I S AS CERTIFIED BY THE AUDITORS AND DECIDED IN THE BOARD MINUTES. THE AMOUNT OF GOOD WILL OF 83.50 CRORES HAS BEEN WRITTEN OFF OUT OF THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 101 TOTAL GOOD WILL AMOUNT OF 170.86 CRORES CREATED DURING THE AY 2007-08, WHICH HAS BEEN ACCEPTED BY THE AO. THE P REMIUM REVERSAL WAS SET OFF AGAINST THE SHARE PREMIUM OF 62.72 CRORES AND THE BALANCE OF 14.16 CRORES WAS CARRIED TO PROFIT AND LOSS ACCOUNT. 30.2 THE AO HAS NOT ACCEPTED THE REPLY OF THE ASSES SEE. THE AO OBSERVED THAT THE GOOD WILL OF 83.50 CRORES REFERRED TO BY THE ASSESSEE IS THE RESULT OF AMALGAMATIONS / DEMER GES AND AS 26 DOES NOT APPLY TO SUCH GOOD WILL. THEREFORE, TO THAT EXTENT, THE PROFIT AND LOSS ACCOUNT REQUIRES TO BE ADJUSTED . FURTHER, THE AO OBSERVED THAT AS REGARDS THE SETTING OFF OF THE BALANCE PROFITS, AGAINST THE SHARE PREMIUM, THE ASSESSEE CO ULD NOT JUSTIFY ITS ACTION WITH REFERENCE TO ANY ACCOUNTING STANDAR D. HENCE, THE AO OBSERVED THAT THE ADJUSTMENT OF GOOD WILL AND SH ARE PREMIUM, WHICH ARE NOT IN ACCORDANCE WITH THE MANDA TORY ACCOUNTING STANDARDS WERE MADE ONLY TO REDUCE ITS B OOK PROFIT FOR THE PURPOSE OF MAT U/S.115JB OF THE ACT. THERE FORE, ACCORDING TO THE AO, THE BOOK PROFITS HAVE TO BE RE -ADJUSTED IN ACCORDANCE WITH THE MANDATORY ACCOUNTING STANDARD B Y ADDING - - ITA 1695 TO 16 97 & CO 84/MDS/14 102 BACK THE ENTIRE PROFIT OF ( 160.3834 CRORES - 14.16 CRORES = 146.22 CRORES) TO THE BOOK PROFITS AS REQUIRED UND ER AS-5. ACCORDINGLY, THE AO MADE AN ADDITION OF 146,22,34,000/- TO THE BOOK PROFIT RETURNED FOR THE COMPUTATION OF BOO K PROFITS FOR THE PURPOSE OF MAT UNDER THE PROVISIONS OF SEC.115J B OF THE ACT. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 31. THE CIT(APPEALS) OBSERVED THAT THE AO CLEARLY P OINTED OUT THAT THE GOOD WILL OF 83.50 CRORES MENTIONED BY THE ASSESSEE IS A RESULT OF AMALGAMATION / DEMERGE. AS -26 DOES NOT APPLY TO SUCH GOOD WILL. ACCORDING TO THE CIT (APPEALS), THE AO HAS ALSO CLEARLY BROUGHT IN THE ASSESSMENT ORDER AS PER THE COMPENDIUM OF ACCOUNTING STANDARD PUBLISHED BY THE ICAI, NEW DELHI WHICH CLEARLY STATED THAT IF ANOTHER ACCOUNT ING STANDARD DEALS WITH A SPECIFIC TYPE OF INTANGIBLE ASSET, AN ENTERPRISE APPLIES THAT ACCOUNTING STANDARD, THE STATEMENT DOE S NOT APPLY TO GOOD WILL ARISING ON AMALGAMATION (SEE AS-14) AN D GOOD WILL ARISING ON CONSOLIDATION (SEE AS-21). HOWEVE R, THE AO HAS NOT REFERRED TO THE PRESCRIPTION UNDER ACCOUNTI NG STANDARDS- - - ITA 1695 TO 16 97 & CO 84/MDS/14 103 14. IT IS SEEN FROM ACCOUNTING STANDARDS THAT THE ACCOUNTING STANDARD 14 PRESCRIBES THAT THE AMORTIZATION CHARGE OF GOOD WILL FOR EACH PERIOD SHOULD BE RECOGNIZED AS AN EXPENSE UNLESS ANOTHER ACCOUNTING STANDARD PERMITS OR REQUIRES IT TO BE INCLUDED IN THE CARRYING AMOUNT OF ANOTHER ASSET. ONCE PROFIT ON BUY BACK OF FCCBS TO THE EXTENT UTILIZED TO WRITE O FF GOOD WILL IS CREDITED TO PROFIT AND LOSS ACCOUNT AMORTIZATION WI LL ALSO TO BE DEBITED TO PROFIT AND LOSS ACCOUNT. THE NET EFFECT ON THE PROFIT IS NIL. 31.1 THE ADJUSTMENT OF PREMIUM REVERSAL TO SHARE PREMIUM ACCOUNT IS SUBMITTED TO BE IN LINE WITH THE COMPANI ES ACT REQUIREMENTS. THOUGH THERE IS NO SPECIFIC REFERENC E TO ANY ACCOUNTING STANDARDS THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE IS IN ACCORDANCE WITH COMPANIES ACT. THE BALANCE LEFT OUT PROFIT OF 14.16 CRORES WAS CREDITED BY THE ASSESSEE AND DULY OFFERED FOR BOOK PROFIT. 31.2 THE CIT(APPEALS) OBSERVED THAT THE AO REFERR ED TO APPLICABILITY OF AS-26 TO GOOD WILL WRITE OFF BUT N OT REFERRED TO THE PRESCRIPTION UNDER ACCOUNTING STANDARDS 14. HOWEVE R, THE AO - - ITA 1695 TO 16 97 & CO 84/MDS/14 104 HAD CONCLUDED THE ADDITION UNDER AS-5. THEREFORE, ACCORDING TO THE CIT(APPEALS), THE AO HIMSELF IS NOT CLEAR ABOUT THE PROVISIONS OR PRESCRIPTIONS UNDER ACCOUNTING STANDA RDS AND COMPANIES ACT. ACCORDINGLY, THE CIT(APPEALS) DEL ETED THE ADDITION WORKED OUT BY THE AO FOR THE PURPOSE OF MA T U/S.115JB OF THE ACT 146,22,34,000/-. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 32. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF OUR FINDINGS IN THE EARLIER P ARA IS WITH REGARD TO TREATMENT OF GAIN ON REDEMPTION OF DEBENTURE AT DISCOUNT RATE AND PREMIUM ON FCCB BROUGHT BACK, WHICH IS IN CAPIT AL FIELD AND IT CANNOT BE BROUGHT TO P&L A/C BY RE-CASTING THE S AME WHICH WAS PREPARED IN CONFORMITY WITH THE ` OF PART-II OF SCHEDULE-VI OF COMPANY ACT, 1956 AND MORE SO, THE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD VS CIT, 255 ITR 273 WHEREIN HE LD THAT:- THE USE OF THE WORDS IN ACCORDANCE WITH THE PROVI SIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES AC T IN SECTION 115J WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING OFFICER TO RELY UPON THE A UTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOK ING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERE NCE TO THE - - ITA 1695 TO 16 97 & CO 84/MDS/14 105 PROVISIONS OF THE COMPANIES ACT, WHICH OBLIGATE THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A MANNER PROVIDED BY TH AT ACT AND THE SAME TO BE SCRUTINISED AND CERTIFIED BY STATUTO RY AUDITORS AND APPROVED BY THE COMPANY IN GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMP ANIES WHO HAS A STATUTORY OBLIGATION ALSO TO EXAMINE AND BE S ATISFIED THAT THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT. SUB-SECTION (1A) OF SECTION 115J DOES NOT EMPOWER T HE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COM PANY. 32.1 HENCE, THE LEARNED ASSESSING OFFICER CANNOT D ISTURB THE COMPUTATION OF BOOK PROFIT ON THE ISSUE RAISED BY H IM. THIS GROUND OF REVENUES APPEAL IS REJECTED. 33. THE ISSUE RAISED BY THE REVEUNE IN I.T.A NO.1695/MDS./2014 IN GROUND NO.4.1 IS WITH REGARD T O DELETION OF ADDITION IN RESPECT OF LONG TERM CAPITAL GAIN O N SALE OF VANAGARAM LAND BY HOLDING THAT THE ASSESSEEES VALU ATION REPORT AS ON 1.4.81 IS VALID. 33.1 THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAS CLAIMED LONG TERM CAPITAL GAIN FROM SALE OF VANAGARAM LAND OF - - ITA 1695 TO 16 97 & CO 84/MDS/14 106 ` 39,92,868/-. WHILE COMPUTING THE LONG TERM CAPITAL GAIN FROM SALE OF LAND, THE ASSESSEE HAS ADOPTED FAIR MARKET VALUE AS ON 01.04.1981 AS THE COST OF ACQUISITION. BASED ON TH E VALUATION REPORT AT ` 665.80 PER SQ.FT., ASSESSEE OBTAINED A VALUATION REPORT FROM M/S.ANBU SIVAM VALUERS, A REGISTERED VA LUER STATING THE FAIR MARKET VALUE AS ON 01.04.1981 TO BE ` 665.80 PER SQ.MT. HOWEVER, THE VALUATION REPORT IS WITHOUT ANY SUPPOR TING EVIDENCE OR PROOF OR BASIS AS TO HOW THIS VALUE HAS BEEN ARR IVED. THEREFORE, AS THERE IS NO BASIS FOR THIS VALUATION REPORT, THE LEARNED ASSESSING OFFICER REJECTED THE SAME. MOREOV ER, THE GUIDELINE VALUE AS ON 01.04.1981 WAS OBTAINED FROM SUB REGISTRAR OFFICER, THE VALUE OF THE RELEVANT LAND A S ON 01.04.1981 IS ` 7500/- FOR THE AREA SOLD. THE GUIDELINE VALUE COMMU NICATED BY THE SRO IS BASED ON A SYSTEMATIC PROVEN DATA BAS E THEREFORE THE LEARNED ASSESSING OFFICER ADOPTED THE GUIDELINE VALUE AS PER THE RECORDS OF SUB REGISTER AND ACCORDINGLY WOR KED OUT THE LONG TERM CAPITAL GAIN. AGGRIEVED, THE ASSESSEE CA RRIED THE APPEAL BEFORE THE LD. LEARNED COMMISSIONER OF INCOM E TAX(A). 33.2 ON APPEAL, THE LD. LEARNED COMMISSIONER OF INC OME - - ITA 1695 TO 16 97 & CO 84/MDS/14 107 TAX(A) OBSERVED THAT THE ASSESSEE HAS SOLD LAND AT VANAGARAM IN 3 DIFFERENT ASSESSMENT YEARS I.E.2004-05, 2007-0 8 AND 2008- 08. IN THE A.YS 2004-05 AND 2007-08 THE DISPUTE ON MARKET VALUE AS ON 01.04.1981 WAS SETTLED BY THE ORDER OF TRIBUNAL IN I.T.A NO.1206/MDS./11 IN FAVOUR OF THE ASSESSEE WHE REIN HELD THAT IT IS A COMMON FACTOR THAT THE GUIDELINE VALUE S WERE NOT UPDATED IN EARLIER PERIOD. THE VALUERS REPORT HAS TAKEN INTO ACCOUNT ALL THE RELEVANT FACTORS. THE LD. LEARNED C OMMISSIONER OF INCOME TAX(A) FOLLOWING THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS, DIRECTED THE LEARNED AS SESSING OFFICER TO DELETE THE ADDITION MADE AT RS.30,15,807 /-. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 34. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE IS SQUARELY COVERED BY THE E ARLIER ORDER OF TRIBUNAL IN ASSESSEES OWN CASE I.T.A NO.1206/MDS./ 11 FOR EARLIER YEARS I.E 2004-05, 2007-08 & 2008-09, WHICH WAS FOLLOWED BY THE LD. LEARNED COMMISSIONER OF INCOME TAX(A). THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF TRIBUNAL AND THE SAME IS CONFIRMED. THIS ISSUE RAISED BY TH E REVENUE STANDS DISMISSED. - - ITA 1695 TO 16 97 & CO 84/MDS/14 108 CROSS OBJECTIONS NO.80/MDS./2014 35. THE A.R HAS NOT PRESSED THE FOLLOWING FIRST TH REE GROUNDS FOR WHICH HE MADE AN ENDORSEMENT. 2. THE CIT(A) ERRED IN SUSTAINING CERTAIN PORTION O F DISALLOWANCE U/S.80-IA OF THE ACT BY RE-WORKING THE ELIGIBLE PRO FITS BY RESORTING TO AN ESTIMATE ON THE ASSUMPTION OF INFLATION OF EXPENSES INCURRED/BOOKED IN RELATION THERETO IN THE COMPUTATION OF TAXABLE TOTA L INCOME WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 3. THE CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE OF THE CLAIM OF BAD DEBTS AGGREGATING TO ` 41 LAKHS IN THE COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASONS AND JUSTIFI CATION. 4 THE CIT(A) ERRED IN ENHANCING THE DISALLOWANCE O 9F THE CLAIM OF DEDUCTION U/S.35DDA OF THE ACT AND IN SUSTAINING TH E ACTION OF THE AO IN MAKING THE PARTIAL DISALLOWANCE OF THE SAID CLAI M IN THE COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER RE ASONS AND JUSTIFICATION. 35.1 ACCORDINGLY THE ABOVE THREE GROUNDS ARE DISMI SSED AS NOT PRESSED. 36. THE LAST GROUND IN THE C.O IS WITH REGARD TO THE CIT(A) ERRED IN SUSTAINING THE ACTION OF THE AO IN BRINGIN G TO TAX ` 4,55,84,615/- BEING THE DIFFERENCE BETWEEN THE RECE IPTS/INCOME AS PER FORM NO.26AS AND THE AUDITED BOOKS OF ACCOUN T IN THE COMPUTATION OF TAXABLE TOTAL INCOME WITHOUT ASSIGNI NG PROPER REASONS AND JUSTIFICATION. 36.1 THE LD. AUTHORISED REPRESENTATIVE OF ASSESSEE SUBMITTED THAT THE ASSESSEE HAD EXPLAINED IN DETAIL FOR THE DIFFERENTIAL - - ITA 1695 TO 16 97 & CO 84/MDS/14 109 FIGURE OF RECEIPTS/INCOME AS PER FORM NO.26AS AND A UDITED BOOKS OF ACCOUNTS. FURTHER, THE LD. A.R PUT FORTH THE FOLLOWING POINTS FOR OUR CONSIDERATION. A. CUSTOMER NAME DIFFERENCE BETWEEN THE ONE IN 26 AS AND IN BOOKS OF ACCOUNTS: I) THE WORK ORDER OR BILLING IS MADE TO THE BUSINE SS ENTITY / TRADE NAME, HOWEVER IN CERTAIN CASES THE NAME IN 26 AS AN D TRADE NAME DIFFERS ESPECIALLY WHEN IT IS PROPRIETARY BUSI NESS. NAME IN 26 AS IS THAT OF INDIVIDUAL PROPRIETOR HOWEVER, ACC OUNTING IN OUR BOOKS IS IN THE NAME OF TRADE. HENCE, THERE IS DIFF ERENCE ON COMPARISON BY NAME. II) ASSESSING OFFICER CONFIRMED THIS ADDITION AFTE R RECEIVING CONFIRMATION IN CASE OF VALLIAPPAN VALLIAPPAN. IN T HAT CASE ALSO THE PROPRIETOR NAME IS VALLIAPPAN VALLIAPPAN IN WHI CH CREDIT APPEARS IN 26 AS STATEMENT AND THE TRADE NAME IS VA LLI & SONS IN WHICH INCOME IS ACCOUNTED IN OUR BOOKS OF ACCOUN TS. III) A CONFIRMATION IS PLACED ON RECORD IN RESPECT OF SUCH DIFFERENCE TO THE TUNE OF RS.1,22,13,989/- ALONG WI TH THE STATEMENT OF ACCOUNTS IN BOOKS. - - ITA 1695 TO 16 97 & CO 84/MDS/14 110 TRADE NAME: ASSOCIATED TRADING COMPANY (INVOICES AR E ALSO RAISED IN THIS NAME) PROPRIETOR NAME: SURENDRA SINGH BHATIA THE CUSTOMER NAME DIFFERENCE IS ALSO ON ACCOUNT OF CHANGE IN THE NAME SUBSEQUENT TO THE FINANCIAL YEAR. ACCOUNTI NG IS IN THE OLD NAME OR IN ONE OF THEIR TRADE / DIVISION NAME H OWEVER, 26 AS SHOWS THE NEW NAME / COMPANY NAME RETROSPECTIVELY A S PER TAN MASTER. TOTAL DIFFERENCES ON ACCOUNT OF NAME CHANGE AMOUNTS TO RS.3,89,66,586/- B. CUSTOMERS FILING THEIR TDS RETURN WITH WRONG PA N : SICAL LOGISTICS LIMITED WAS PREVIOUSLY KNOWN AS SOU TH INDIA CORPORATION (AGENCIES) LIMITED AND WERE IN THE VARI OUS BUSINESSES INCLUDING SERVICES AND TRADING. VARIOUS BUSINESSES WERE CARRIED ON IN DIFFERENT TRADE NAMES. IN THE YE AR 2008, THERE WAS MAJOR REORGANIZATION BY DEMERGING VARIOUS BUSIN ESSES TO SICAGEN INDIA LIMITED. THE CUSTOMERS OF DEMERGED BU SINESSES CONTINUED TO REMIT TDS IN THE NAME OF SICAL LOGISTI CS LIMITED ITSELF LEADING DIFFERENCE IN ACCOUNTED INCOME AND 2 6 AS - - ITA 1695 TO 16 97 & CO 84/MDS/14 111 RECEIPTS. THE ASSESSEE IS READY FOR DISALLOWING TH E CREDIT IN RESPECT OF SUCH RECEIPTS AND REQUEST TO DELETE THE ADDITIONS. TOTAL ADDITIONS ON ACCOUNT OF THIS IS RS.66,18,029/ - AND TDS PERTAINING TO THE SAME IS RS.8,02,674/- C. FORM NO.26 AS IS NOT THE FINAL PROOF TO WARRANT ADDITIONS: THE AMOUNT IN THE FORM NO.26 AS IS KEEP ON CHANGING FOR EVERY REVISED RETURNS FILED BY THE DEDUCTOR FOR ANY CORRE CTIONS IN PAN OR AMOUNT. HENCE, THIS CANNOT BE TAKEN TO BE THE BA SE TO DETERMINE INCOME OF THE PAYEE ESPECIALLY DURING THE TEETHING PERIOD. E-FILING OF TDS AND CREDIT BASED ON SAME WA S BROUGHT ONLY FROM AY 2009-10 AND WOULD BE TOO EARLY TO ADOP T THE SAME AS FOOLPROOF. THIS IS CLEAR FROM THE AMOUNTS SHOWN IN FORM NO.26 AS ON DOWNLOADED ON VARIOUS DATES FOR THE SAM E PAN AND ASST YEAR AS TABULATED BELOW: PARTICULARS AMOUNT TDS 26 AS AS ON 12.4.2010 97,29,83,499 2,54,04,560 26 AS AS ON 04.6.2014 1,46,40,67,738 3,73,89,519 26 AS AS ON 07.2.2017 1,47,11,44,364 3,74,97,657 - - ITA 1695 TO 16 97 & CO 84/MDS/14 112 TOTAL INCOME AS PER BOOKS IS HIGHER THAN THE INCOME SHOWN IN 26 AS EVEN AFTER ALL THE REVISIONS AS LISTED OUT AB OVE. ACCORDING TO LD.A.R,THE CIT (APPEALS) ERRED IN SUST AINING THE ACTION OF THE AO IN BRINGING TO TAX RS. 4,55,84,615 /- BEING THE DIFFERENCE BETWEEN THE RECEIPTS/INCOME AS PER FORM NO. 26AS AND THE AUDITED BOOKS OF ACCOUNT IN THE COMPUTATIO N OF TAXABLE TOTAL INCOME WITHOUT ASSIGNING PROPER REASONS AND J USTIFICATION. 37. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. IN OUR OPINION, FIGURES IN FORM NO.26AS IS REQUIRED TO BE RECONCILED WITH THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESS EE AND AR PLEADED THAT IF AN OPPORTUNITY IS GIVEN TO THE ASSE SSEE, IT COULD BE RECONCILED THE SAME. CONSIDERING THE PLEA OF TH E AR, WE ARE INCLINED TO REMIT THE ISSUE TO THE FILE OF THE AO W ITH A DIRECTION TO ASSESSEE TO RECONCILE THE SAME AND THE ASSESSING OF FICER SHALL CONSIDER ALL THE ARGUMENT RAISED BY THE ASSESSEE BE FORE US ON THIS ISSUE AND PASS FRESH ORDER. THIS ISSUE IN THE C.O IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 38. IN THE RESULT, THE APPEAL OF REVENUE IN1695/MD S./14 IS PARTLY ALLOWED, THE APPEALS OF REVENUE IN ITA NOS. 1696 & - - ITA 1695 TO 16 97 & CO 84/MDS/14 113 1697/MDS./14 AND THE CROSS OBJECTIONS RAISED BY THE ASSESSEE IN C.O NO.84/MDS./2014 ARE PARTLY ALLOWED FOR STATI STICAL PURPOSES. ORDER PRONOUNCED ON 18 TH AUGUST, 2017 AT CHENNAI. SD/- SD/- ( # $ . % &' ) ( ( ) * + ) DUVVURU RL REDDY , -./012/3445/26, 7 89 /JUDICIAL MEMBER 89:;<<4=0>/0>?@AB@2 (7 /CHENNAI, C8 /DATED, THE 18 TH AUGUST, 2017. K S SUNDARAM 8D EFGF / COPY TO: 1 . / APPELLANT 3. H, / CIT(A) 5. FIJ K / DR 2. / RESPONDENT 4. H / CIT 6. J'L / GF