DCIT, CHENNAI V. Aban Offshore Ltd., CHENNAI

ITA 2022/CHNY/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4914 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 24-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 25-09-2015
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: P MURALI MOHANA RAO
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Earning of tax free income; Speculation loss; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 43(5); 28; 10; 90

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 NO. 1947/MDS/2015 / ASSESSMENT YEAR : 2009-10 M/S. ABAN OFFSHORE LTD., 113 JANPRIYA CREST, PAANTHEON ROAD, EGMORE, CHENNAI 600 008. PAN AAACA3012H ( /APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-1(1), CHENNAI. (/ RESPONDENT) . / ITA NO.2022/MDS/2015 / ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-1(1), CHENNAI. ( /APPELLANT) V. M/S. ABAN OFFSHORE LTD., 113 JANPRIYA CREST, PAANTHEON ROAD, EGMORE, CHENNAI 600 008. PAN AAACA3012H (/ RESPONDENT) ASSESSEE BY : SHRI P. MURALI MOHANA RAO, CA DEPARTM ENT BY : SHRI PATHLAVATH PEERYA, CIT - - ITA 1947 & 2022/15 2 ! ' # $%& / DATE OF HEARING : 24.01.2017 '( # $%& / DATE OF PRONOUNCEMENT : 05.04.2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AND BY THE REVENUE AGAINST THE ORDER OF THE CIT(APPEALS) DATED 17.7.2015 FOR THE ASSESSMENT YEAR 2009-10. 2. THE FIRST GROUND IN THIS APPEAL IS THAT THE CIT(APPEALS) ERRED IN CONFIRMING THE TREATMENT OF SHARE ISSUE EXPENSES OF 3,75,00,000/- AS A CAPITAL EXPENDITURE AND DISALLOWING THE SAME. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS FILED THE DETAILS OF CONSULTANCY AND PROFESSIONAL F EES OF 43,78,52,770/- AND CLAIMED AN EXPENDITURE OF 3.75 CRORES AS PREFERENCE SHARE ISSUE EXPENSES. TH E ASSESSING OFFICER STATED THAT AS THE EXPENDITURE WA S RELATED TO SHARE CAPITAL BEING CAPITAL IN NATURE, T HE SAME WAS NOT ALLOWABLE AS REVENUE EXPENDITURE. THE AO OBSERVED THAT THE ASSESSEE HAS TAKEN THE PLEA - - ITA 1947 & 2022/15 3 THAT THE SAID EXPENSES SHOULD BE ALLOWED U/S.35D OF THE ACT, WHICH DEALS WITH AMORTIZATION OF CERTAIN PRELIMINARY EXPENDITURE. BUT AS THE ASSESSEE HAS N OT COMPLIED WITH THE PROVISIONS OF SEC.35D OF THE ACT, THE AO HAS NOT GRANTED DEDUCTION U/S.35D OF THE ACT. T HE AO PLACED RELIANCE ON THE ORDER OF THE CIT(APPEALS) FOR THE AY 2007-08, WHEREIN IT WAS SEPARATELY HELD THAT THE CAPITALIZATION OF RIG ABAN VII WAS INCORRE CT AND CONFIRMED THE ORDER OF THE AO TREATING THE SURP LUS ON ITS SALE AS BUSINESS PROFITS. FURTHER, THE ASSE SSEE COMPANY HAS ALSO NOT SHOWN THAT THE PREFERENCE SHARE EXPENSES HAS BEEN INCLUDED AS PART OF THE COS T OF ABAN RIG VII ON SALE TO M/S. ABAN VII PTE LTD., SINGAPORE AND THE AMOUNT HAS BEEN RECOVERED FROM THEM. THE AO DISALLOWED THE PREFERENCE SHARE ISSUE EXPENSES OF 3.75 CRORES AND ALSO DID NOT ALLOW AMORTIZATION U/S.35D OF THE ACT BY RELYING ON THE DECISIONS OF THE SUPREME COURT IN THE CASES OF BROO KE BOND OF INDIA LTD. V. CIT (225 ITR 798) AND PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. V. CI T - - ITA 1947 & 2022/15 4 (225 ITR 792). FOR DISALLOWING AMORTIZATION U/S.35 D OF THE ACT, THE AO HELD THAT THE ASSESSEE CANNOT BE SAID TO HAVE ESTABLISHED AN INDUSTRIAL UNDERTAKING. AS ALSO, THE OIL RIG WAS NEVER PUT TO USE IN THE BUSIN ESS OF THE ASSESSEE AND IT WAS SOLD TO ABAN VII PTE LTD., SINGAPORE BEFORE BEING PUT TO USE. IT HAD ALSO NOT FULLY DISCHARGED THE LIABILITY TOWARDS PREFERENCE S HARE CAPITAL RAISED AND HENCE NOT FULFILLED THE BASIC CONDITION OF SEC.35D OF THE ACT. THE AMOUNT RAISE D THROUGH PREFERENCE SHARES WERE NOT UTILIZED BUSINES S OF THE ASSESSEE BUSINESS AND HAD BEEN USED FOR THE PURPOSE OF INVESTMENT ONLY. THE AO STATED THAT NO EXPANSION OF THE UNDERTAKING OF THE ASSESSEE HAS TAKEN PLACE AND THEREFORE, HE REJECTED THE CLAIM FO R AMORTIZATION U/S.35D OF THE ACT. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS), WHO PARTLY ALLOWED THE GROUND OF APPEAL. AGAINST T HIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. AR SUBMITTED THAT THE EXPENDITURE INCURRED FOR PREFERENCE SHARES IS TO BE TREATED AS - - ITA 1947 & 2022/15 5 REVENUE EXPENDITURE. THE LD. AR ALSO RELIED ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E A.Y. 2007-08 IN ITA NO 90/MDS/2012 DATED 26.6.2016, WHEREIN THE TRIBUNAL ALLOWED THE CLAIM OF THE ASSESSEE U/S.35D OF THE ACT ON THE SAME ISSUE. 5. THE LD. DR RELIED ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1159/MDS/2012 DATED 31.12.2015, WHEREIN THE TRIBUNAL PLACED RELIANCE ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FO R THE A.Y. 2006-07 IN ITA NO.1382/MDS/2010 DATED 15.7.2011 AND DENIED THE ASSESSEES CLAIM U/S.35D O F THE ACT. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LD. AR RELIED ON THE JUDGMENT OF RAJASTHAN HIGH COURT IN THE CASE OF SECURE METERS L TD. REPORTED IN 175 TAXMAN 567, FOR THE PROPOSITION TH AT IT SHOULD BE CONSIDERED AS EXPENDITURE U/S.35D OF THE ACT. THE LD. AR SUBMITTED THAT THE EXPENDITURE WAS INCURRED ON NON- CONVERTIBLE REDEEMABLE PREFERENCE SHARES. IT CAN BE CHARACTERI ZED IN THE - - ITA 1947 & 2022/15 6 NATURE OF DEBT. AS PER RBI GUIDELINES, NON-CONVERT IBLE REDEEMABLE AND PARTLY CONVERTIBLE REDEEMABLE PREFER ENCE SHARES ARE DEBT INSTRUMENTS AND WHOLLY CONVERTIBLE PREFERENCE SHARES ARE PART OF EQUITY. ACCORDING TO HIM, IN T HE PRESENT CASE, THERE IS A CONTRACT WITH THE SUBSCRIBER TO THE PREF ERENCE SHARES FOR REPAYMENT OF CAPITAL AFTER A PARTICULAR PERIOD OF REDEMPTION. WHEREAS IN THE CASE OF EQUITY, THERE IS NO COMMITME NT ON THE PART OF THE COMPANY IN MAKING THE REPAYMENT. THE E XPENDITURE IS INCURRED TOWARDS INCREASED DEBT FUNDING FOR THE BENEFIT OF THE COMPANY AND NOT TOWARDS INCREASE IN THE CAPITAL BAS E. THEREFORE, ANY EXPENDITURE INCURRED ON RAISING OF T HE DEBT SHOULD BE ADMISSIBLE REVENUE EXPENDITURE. ADMITTEDLY, THIS ISSUE CAME BEFORE THE TRIBUNAL IN EARLIER YEARS. SPECIFIC ALLY, IN THE ASSESSMENT YEAR 2008-09 THE TRIBUNAL DECIDED THE ISSUE AGAINST THE ASSESSEE BY FOLLOWING THE EAR LIER ORDER OF THE TRIBUNAL FOR THE A.Y. 2006-07 WITHOUT NOTICING THE SUBSEQUENT ORDER OF THE TRIBUNAL FOR T HE A.Y. 2007-08. LATER, THE ASSESSEE FILED MA IN MA NOS.95 & 96/MDS/16 AND THE TRIBUNAL VIDE ORDER DATE D 29.7.2016 HELD AS UNDER : - - ITA 1947 & 2022/15 7 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ORDER OF THE TRIBUNAL IN I.T.A.NO.90/MDS/2012, DATED 26.6.2015 F OR ASSESSMENT YEAR 2007-08. IN OUR OPINION, THERE IS A MISTAKE IN THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2008-09 ON THE BASIS OF ITAT OR DER FOR ASSESSMENT YEAR 2007-08. AS SUCH, THE ASSESSEE IS ENTITLED F OR DEDUCTION U/S 35D FOR ASSESSMENT YEAR 2008-09. ACCORDINGLY, WE RECTI FY PARA 23 AND 24 THE ORDER DATED 31.12.2015 AS FOLLOWS BY FOLLOWING THE ITAT ORDER FOR ASSESSMENT YEAR 2007-08 AND IT IS TO BE READ AS FOL LOWS: 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE ISSUE CAME UP BEFORE THE TRIBUNAL FOR ASSESSMENT YEAR 2007-08 IN ASSESSEES OWN CASE IN I.T.A.NO.90/MDS/ 2012, DATED 26.6.2015 WHEREIN THE TRIBUNAL HAS OBSERVED AS UNDE R: 11. BRINGING OUR ATTENTION TO PARA 10.2 OF THE CI T(A)S ORDER, BOTH THE PARTIES CONCURRED ON THE FACT THAT SIMILAR ISSU E WAS ADJUDICATED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN I.T.A.NO . 1382/MDS/2010 FOR ASSESSMENT YEAR 2006-07. WE REPRODUCE PARA 10.2 OF THE CIT(A)S ORDER AS UNDER: 10.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSION OF THE ID. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND AR. SIMILAR ISSUE HAD COME UP FOR CONSIDERATION IN APPELLANT'S OWN CASE F OR A.Y. 2006-07. AFTER CONSIDERING THE FACTS AND RIVAL SUBM ISSIONS, IT WAS HELD IN ITA NO.573/0809/A.1I1 DATED 23.06.201 0 FOR A.Y. 2006- 07 THAT THE EXPENDITURE ON ISSUE OF SHAR ES IS NOT DEDUCTIBLE BECAUSE IT IS DIRECTLY RELATED TO THE EX PANSION OF THE CAPITAL BASE OF THE COMPANY. THE DISALLOWANCE O F THE AO WAS SUSTAINED. HOWEVER, SINCE THE APPELLANT IS ENGA GE IN THE BUSINESS OF HIRING RIGS AS WELL AS THE BUSINESS OF DRILLING AND OTHER OIL FIELD SERVICES, HYDROCARBON EXPLORATI ON AND PRODUCTION, IT WAS HELD THAT THESE ACTIVITIES WOULD FALL WITHIN THE AMBIT OF 'MINING' UNDER CLAUSE (AA) (IV) OF SUB -SECTION (7) OF SECTION 72A OF THE ACT WHICH DEFINES 'INDUSTRIAL UNDERTAKING'. HAVING DECIDED THAT THE APPELLANT QUA LIFIES AS AN INDUSTRIAL UNDERTAKING, IT WAS FURTHER EXAMINE A S TO WHETHER IT SATISFIES THE CONDITIONS LAID DOWN IN SE CTION 350 OF THE ACT. SINCE THE APPELLANT HAD ONLY PURCHASED THE OIL RIG BUT HAD NOT PUT IT TO USE DURING THE YEAR AND HAD C LASSIFIED IT AS 'CAPITAL WORK-IN-PROGRESS' IN ITS BOOK, THE EXTE NSION OF THE INDUSTRIAL UNDERTAKING WAS HELD TO BE IN-COMPLETE. ACCORDINGLY, THE CONTENTION OF THE ID. AR THAT EXTE NSION OF THE INDUSTRIAL UNDERTAKING WAS COMPLETED ON PURCHAS E OF THE - - ITA 1947 & 2022/15 8 OIL RIG WAS NOT ACCEPTED AND THE GROUND WAS DISMISS ED LN ASSESSMENT YEAR 2006-07. ON FURTHER APPEAL, THE HON 'BLE ITAT HAS CONFIRMED THE FINDING OF THE CIT(A) FOR A. Y.2006-07 IN ITA NO.1382/MDS/10 DATED 15.07.2011. IT HELD AS UNDER: . IN VIEW OF THE ABOVE DECISION OF THE HON'BLE ITAT, IT IS CLEAR THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION U/S 35D FOR A.Y 2006-07. HOWEVER, THE APPELLANT HAS COMPLETED THE REFURBISHMENT AND INSTALLATION WORKS DURING THE PRE VIOUS YEAR RELEVANT TO THE SUBJECT ASSESSMENT YEAR. IN FACT, T HE RIG WAS SURVEYED BY THE AMERICAN BUREAU OF SHIPPING ON 27.0 5.2006 AND CERTIFICATE OF CLASSIFICATION WAS ALSO ISSUED O N 26.06.2006. HENCE, THE APPELLANT IS ELIGIBLE FOR DE DUCTION IN RESPECT OF THE RIG ABAN VII WHICH IS COMPLETE IN AL L RESPECTS. THE APPELLANT HAD ALSO BEEN AWARDED A CONTRACT TO D RILL IN THE EAST COAST OF INDIA BY HINDUSTAN OIL EXPLORATION LT D. ACCORDINGLY, THE APPELLANT GOT THE RIG MOVING FROM TEXAS SHIPYARD TOWARDS INDIA. THE FACT THAT IT WAS SOLD S UBSEQUENTLY TO A DIFFERENT COMPANY WOULD NOT BLOT OUT THE FACTU M OF COMPLETION OF EXTENSION OF THE INDUSTRIAL UNDERTAKI NG OF THE APPELLANT. HENCE, I AM OF THE CONSIDERED OPINION TH AT THE APPELLANT IS ELIGIBLE FOR DEDUCTION U/S 35D IN RESP ECT OF THE TOTAL EXPENDITURE INCURRED TOWARDS SHARE ISSUE. IN THE RESULT, THE GROUND TO ALLOW THE ENTIRE ISSUE IS DISMISSED. HOWEVER, THE APPELLANT IS ENTITLED TO CL AIM DEDUCTION U/S 35D. THE GROUND IS PARTLY ALLOWED. 12. AFTER HEARING BOTH THE PARTIES AND GOING THR OUGH THE SAID PARAGRAPH OF THE CIT(A)S ORDER AND FOLLOWING THE O RDER OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA), WE DECI DE THE ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE GROUND R AISED BY THE REVENUE IS DISMISSED. 24. IN VIEW OF THE ABOVE, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 6.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THE CLAIM OF THE ASSESSEE U/S.35D OF THE ACT TO BE ALLO WED AS THIS IS NOT THE FIRST YEAR OF CLAIM TO HOLD THAT OIL RIG - - ITA 1947 & 2022/15 9 WAS NEVER PUT TO USE SO AS TO DISALLOW THE CLAIM. THIS GROUND OF THE ASSESSEE IS ALLOWED AND THE EXPENDITU RE TO BE CONSIDERED U/S.35D OF THE ACT. 7. THE NEXT GROUND IS WITH REGARD TO DISALLOWING T HE CLAIM OF RELIEF OF 17,44,01,693/- U/S.90 OF THE ACT. 8. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HA D CLAIMED CREDIT FOR AN AMOUNT OF 17,44,01,693/- TOWARDS WITHHOLDING TAX DEDUCTED IN SINGAPORE ON THE INTEREST INCOME. THE ASSESSEE HAS EARNED INTEREST INCOME OF 167,95,25,918/- FROM ABAN HOLDINGS PVT. LTD. (AHPL), A COMPANY REGISTERED IN SINGAPORE. AHPL HAS DEDUCTED TAX OF INR 17,44,01,693 UNDER THE SINGAPORE INCOME-TAX ACT. THE AO OBSERVED THAT THE RE WAS NO DISPUTE REGARDING THE RECEIPT OF INTEREST INCOME AN D THE QUANTUM OF WITHHOLDING TAX. THE AO STATED THAT THE ASSESSE E HAS NOT SHOWN THAT IT HAD RECEIVED FROM AHPL ANYTHING IN EX CESS THE INTEREST CLAIMED IN ITS PROFIT AND LOSS ACCOUNT, FO REIGN EXCHANGE LOSSES, EXPENSES ON FCCBS ETC. IT HAS ALSO NOT SHO WN THE TAX PAID ON THE INTEREST IN SINGAPORE IS SUBSUMED IN TH E COMPUTATION CHARGING INTEREST FROM AHPL. THE AO FURTHER STATED THAT THE - - ITA 1947 & 2022/15 10 RELIEF U/S.90 OF THE ACT COULD BE PROVIDED ONLY IF REAL INCOME WAS SHOWN AS PART OF THE TAXABLE INCOME IN INDIA, WHICH THE ASSESSEE HAD FAILED TO SHOW. FURTHER, AS PER ARTICLE 25, OF DTAA WITH SINGAPORE, THE RELIEF TO BE PROVIDED TO THE ASSESSE E CANNOT EXCEED THAT PART OF TAX, WHICH IS ATTRIBUTABLE TO T HE INCOME OFFERED IN INDIA, WHICH MAY BE TAXED IN SINGAPORE. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) , WHO PARTLY ALLOWED THE GROUND OF APPEAL. 9. THE LD. AR, RELIED ON THE ORDERS OF THE TRIBUNAL IN ITA NOS.585/MDS/2015, 267/MDS/2016 DATED 14.9.2016 AND MA NOS.95 & 96/MDS/2016 DATED 29.7.2016. 10. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF LOWER AUTHORITIES. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION IN A SSESSEES OWN CASE IN I.T.A.NO.1159/MDS/2012 CHALLENGING THE ACTI ON OF THE CIT(A) IN RESTRICTING THE ASSESSEES CLAIM OF RELI EF U/S 90 OF THE ACT OF 224,67,411/- TO THE EXTENT OF TAX PAYABLE IN INDIA ON NET INCOME OF 516,93,732/- I.E DIFFERENCE BETWEEN INTEREST EARNE D - - ITA 1947 & 2022/15 11 FROM M/S AHPL AND INTEREST PAID ON BORROWINGS MADE FOR ADVANCING THE LOANS TO M/S AHPL. THE TRIBUNAL WHIL E ADJUDICATING THE GROUNDS, PLACED RELIANCE ON THE OR DER OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA VS CIT IN I.T.A.NO.2927/MDS/2011 DATED 25.7.2014 WHEREIN THE TRIBUNAL HAS GIVEN A DIRECTION THAT THE INCOME OF THE BRANCH ES OF THE ASSESSEE SHALL ALSO TAXABLE IN INDIA I.E IT WOULD B E INCLUDED IN THE RETURN OF INCOME FILED BY THE ASSESSEE IN INDIA AN D WHATEVER TAXES HAVE BEEN PAID BY THE BRANCHES IN THE OTHER CONTRACTING STATES I.E THE SOURCE COUNTRY, CREDIT OF SUCH TAXES SHALL BE GIVEN. THEREAFTER, THE TRIBUNAL IN THIS CASE REMITTED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE AFRESH IN THE LI GHT OF THE ABOVE ORDER OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA IN I.T.A.NO.2927/MUM/2011 DATED 25.7.2014. LATER ASSE SSEE FILED MA IN MA NOS. 95 & 96/MDS/2016 STATING THAT THE DI RECTION GIVEN BY THE TRIBUNAL IS NOT APPROPRIATE. SINCE TH E ASSESSEE HAS NO INCOME FROM ANY BRANCHES IN SINGAPORE, THAT DECI SION CANNOT BE APPLIED TO THE ASSESSEES CASE. THE TRIBUNAL WH ILE ADJUDICATING THE SAID MA VIDE ORDER DATED 29.7.2016 HELD AS FOLLOWS : - - ITA 1947 & 2022/15 12 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. IN OUR OPINION, THE INTERPRETATION OF THE ORDER OF THE TRIBUNAL BY THE LD. AR IS MISCONCEIVED. THE TRIBUN AL WAS OF THE OPINION THAT IF THE INCOME FROM FOREIGN COUNTRY IS OFFERED TO TAX BY THE ASSESSEE BY WHATEVER MEANS, THE ASSESSEE HAS TO GET TAX CREDIT TO THE EXTENT THE TAX WAS PAID IN FOREIGN CO UNTRY. IN OTHER WORDS, ONCE THE INCOME IS INCLUDED EITHER IN THE PR OFIT & LOSS ACCOUNT OR IN THE RETURN OF INCOME, THE CORRESPONDI NG TAX CREDIT ON THE SAME INCOME HAS TO BE GIVEN. ACCORDINGLY, WE A RE OF THE OPINION THAT THERE IS NO NEED OF APPREHENSION FOR T HE ASSESSEE THAT THE ASSESSING OFFICER WILL MISINTERPRET THE OR DER OF THE TRIBUNAL. THEREFORE, WE DO NOT FIND ANY MERIT IN TH E ARGUMENT OF THE LD. AR. ACCORDINGLY, THE MISCELLANEOUS PETITIO N IS DISMISSED. IN VIEW OF THE ABOVE, FOLLOWING THE ORDER OF THE TR IBUNAL, WE ARE INCLINED TO HOLD THAT ONCE THE INTEREST INCOME IS S UBJECT TO TAX IN ANY MANNER IN THE HANDS OF THE ASSESSEE, THE CORRES PONDING TAX CREDIT TO BE GIVEN. ACCORDINGLY, THIS GROUND IS R EMITTED TO THE AO TO EXAMINE THE ISSUE IN THE LIGHT OF OUR ABOVE FIND INGS. 12. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE MADE U/S.40(A)(I) OF THE ACT, TO THE EXTENT OF 8,64,72,123/- REPRESENTING PAYMENTS MADE BY THE DUBAI BRANCH OF T HE ASSESSEE. 13. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE - - ITA 1947 & 2022/15 13 ASSESSEE COMPANY HAD DEDUCTED TDS APPLYING THE PROV ISIONS OF SEC.44BB OF THE ACT IN MANY CASES AND IN RESPECT OF CERTAIN AMOUNTS, IT HAD NOT DEDUCTED TDS AT ALL. THE AO ST ATED THAT AS PER SEC.195 OF THE ACT, TDS ON PAYMENTS TO NON-RESI DENTS WAS DEDUCTIBLE @ 40%. IF THE NON-RESIDENTS ARE RESIDEN TS OF A PARTICULAR COUNTRY AND IF THERE IS A DTAA BETWEEN I NDIA AND THAT COUNTRY, THEN THE TDS IS DEDUCTIBLE AT THE RATE PRE SCRIBED UNDER THE SAID AGREEMENT. HOWEVER, THE ASSESSEE HAD DEDU CTED TDS U/S.195 ONLY @ 4% AS AGAINST THE PRESCRIBED RATE OF 40% IN MANY CASES. FURTHER, IT HAD NOT DEDUCTED ANY TDS I N RELATION TO CERTAIN PAYMENTS MADE TO NON-RESIDENTS CLAIMING THA T THE PAYMENTS WERE MADE FROM THEIR DUBAI BRANCH. THE AO OBSERVED THAT THIS ISSUE WAS COVERED ELABORATELY IN THE ASSESSMENT ORDER FOR THE AY 2008-09, ASSESSEE, SUO MOTU DETERMINED THE RATE OF 4% BY ITSELF APPLYING SEC.44 BB OF THE ACT ON THE PAYEE WITHOUT MAKING APPLICATION TO THE AO U /S.195(2) OF THE ACT. THEREFORE, THE AO DISALLOWED 24,62,31,363/- U/S.40(A)(I) AS IN THE LINES OF DISCUSSIONS MADE IN THE AY 2008- 09. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFO RE THE CIT(APPEALS). - - ITA 1947 & 2022/15 14 14. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE AO HAS NOT APPRECIATED THE LATEST POSITION OF LAW ON THIS ASPECT AND THEREFORE, PROVISIONS OF SEC.44BB OF THE ACT IN DET ERMINING THE RATE AT WHICH TDS NEEDS TO BE WITHHELD. ACCORDING TO THE CIT(APPEALS), THE AO HAS MADE THE DISALLOWANCE ON T HE BASIS OF THE ASSESSMENT ORDER FOR THE AY 2008-09 IN WHICH TH E AO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF FRON TIER ABAN EXPLORATION (INDIA) LTD. DATED 28.2.2007 IN ITA NO.2037/MDS/2006 FOR THE AY 2003-04, WHICH IS NO LO NGER GOOD. THE CIT(APPEALS), OBSERVED THAT THE B BENCH OF CH ENNAI, ITAT IN THE SAME CASE IN ITA NO.200/MDS/2009 FOR THE AY 2004-05 HELD THAT THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY 2003-04 NO MORE CONS TITUTES GOOD LAW. THE RELEVANT PART IS REPRODUCED FOR READ Y REFERENCE : ......AFTER A PERUSAL OF THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. AS ALSO TAKING INTO CONSIDERATION THE VIEWS EXPRESSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF HI TECH ARAI REPORTED IN 321 ITR 477 (MAD) WE ARE OF THE VIEW TH AT THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 WOULD NO MORE CONSTITUTE GOOD LAW. TO ERR IS HUMAN. TO CONTINUE - - ITA 1947 & 2022/15 15 THE ERROR IS NOT BRAVERY.... IN VIEW OF THE ABOVE, THE CIT (APPEALS) OBSERVED TH AT THE EARLIER DECISION RELIED ON BY THE AO HAS BEEN REVERSED BY T HE TRIBUNAL. HENCE, THE AO WAS NOT CORRECT IN APPLYING THE RATIO OF THE AY 2008-09 FOR THE CURRENT YEAR. FURTHER, IT IS SEEN THAT THE CIT(APPEALS), IN ASSESSEES OWN CASE FOR AYS. 2005- 06, 2006- 07 AND 2008-09 HAS DECIDED THE ISSUE IN FAVOUR OF T HE ASSESSEE. ACCORDINGLY, HE DELETED THE DISALLOWANCE. 14.1 THE CIT(APPEALS) FURTHER OBSERVED THAT APA RT FROM THE PAYMENTS TO NON-RESIDENTS FALLING UNDER THE SCOPE O F SEC.44BB OF THE ACT, THE AO HAS DISALLOWED A PORTION OF EXPE NDITURE, WHICH WAS INCURRED BY DUBAI BRANCH OF THE ASSESSEE AND TH E AMOUNT PAID TOWARDS DRY-DOCKING CONTRACT CHARGES. ON THE ISSUES INVOKING THE PROVISIONS OF SEC.44BB OF THE ACT AND IN RESPECT OF PAYMENTS MADE BY THE DUBAI BRANCH, THE ISSUE HAS BE EN DECIDED IN FAVOUR OF THE ASSESSEE IN THE APPELLATE ORDERS OF THE CIT(APPEALS) IN THE EARLIER YEARS. HOWEVER, THE TR IBUNAL IN THE AY 2007-08, REMANDED THE MATTER TO THE FILE OF THE AO. SINCE, THE FACTS ARE SIMILAR FOR THE YEAR UNDER CONSIDERAT ION AND - - ITA 1947 & 2022/15 16 THEREFORE, THE CIT(APPEALS) DIRECTED THE AO TO FOLL OW THE SAME PRINCIPLE IN CONSIDERING THE DISALLOWANCE U/S.40(A) (I) OF THE ACT AND PARTLY ALLOWED THE GROUND OF APPEAL. AGAINST T HIS, THE ASSESSEE IS IN APPEAL BEFORE US. 15. THE LD. AR RELIED ON THE DECISIONS OF THE TRIB UNAL IN ITA NOS. 1542 & 1543/MDS/2010 AND 1381 & 1382/MDS/2010, DATED 15.7.2011, 90/MDS/2012, DATED 26.6.2015, 1159 & 134 3/MDS/12 DATED 15.7.2011 IN ASSESSEES OWN CASE, IN ITA NO.2679/MDS/2014 DATED 19.6.2015 IN THE CASE OF M.M . FORGINGS LTD. AND IN ITA NOS.1038 TO 1040/HYD/2013 DATED 27.6.2014 IN THE CASE OF M/S. PRITHVI INFORMATION S OLUTIONS LTD., HYDERABAD. 16. ON THE OTHER HAND, LD. DR RELIED ON THE ORDE R OF LOWER AUTHORITIES. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION BEFOR E THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN I.T.A.NO.1343 & 1159/MDS/2012 FOR ASSESSMENT YEAR 2008-09 WHEREIN HELD THAT:- - - ITA 1947 & 2022/15 17 31. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN DEL ETING THE DISALLOWANCE U/S 40(A)(I) IN RESPECT OF PAYMENTS MA DE TO NON- RESIDENTS FROM DUBAI BRANCH WITHOUT DEDUCTION OF TD S. 32. AS DISCUSSED IN THE EARLIER PARAGRAPHS, THIS IS SUE IS COVERED BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN I.T.A.NO.90/MDS/2012, DATED 26.6.2015 FOR ASSESSMEN T YEAR 2007-08 WHEREIN THE ISSUE WAS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION BY OBSERVING AS FOLLOWS: 25. ON HEARING BOTH PARTIES, AS DISCUSSED IN THE OPEN C OURT, WE ARE OF THE OPINION THAT THIS MATTER NEEDS TO BE REM ANDED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION OF THE FACTS OF THE ASSESSEES CASE IN THE LIGHT OF THE HON'BLE BOMBAY HIGH COURT JUDGMENT CITED (SUPRA). THE ASSESSING OFFICER IS D IRECTED TO PASS A SPEAKING ORDER ON THIS ISSUE AFTER CONSIDERING THE ABOVE DECISION AND AFTER GRANTING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AS PER THE PRINCIPLES OF NATURAL JUSTICE. ACCORDINGLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. ACCORDINGLY, THIS ISSUE IS REMITTED TO THE FILE OF AO FOR FRESH CONSIDERATION ON SIMILAR DIRECTION. 18. THE NEXT GROUND IN THIS APPEAL IS THAT THE CIT(APPEALS) ERRED IN SETTING ASIDE THE MATTER RELATING TO THE A LLOWANCE OF LOSS IN TERMS OF SEC.94(7) OF THE ACT FOR 11,87,242/-. 19. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAS REPORTED AN AMOUNT OF 2,01,03,496/- AS PROFIT ON SALE OF CURRENT INVESTMENTS (NET) UNDER SCHEDULE 13 OTHER - - ITA 1947 & 2022/15 18 INCOME TO THE FINANCIALS. THE DETAILS OF TRANSAC TIONS WERE CALLED FROM THE ASSESSEE BY THE AO, WHICH ARE AS UNDER: EXPLANATION FOR PROFIT ON SALE OF INVESTMENTS AMOUNT IN REMARKS PROFIT ON SALE OF MUTUAL FUND INVESTMENTS (SHORT TERM) 2,30,16,019 LESS : LOSS ON SALE OF MUTUAL FUND INVESTMENTS (SHORT TERM) (29,12,523) WHICH CONTAINS DAILY DIVIDEND RECORD DATES PROFIT ON SALE OF CURRENT INVESTMENTS (NET) 2,01,03,496 AS PER SCHEDULE 13 OF PROFIT & LOSS A/C OTHER INCOME TOTAL AS PER SCHEDULE 13 2,01,03,496 THE AO CALLED FOR THE DETAILS OF THE LOSS ON SALE OF MUTUAL FUND INVESTMENTS (SHORT-TERM) OF 29,12,523/- CLAIMED BY THE ASSESSEE COMPANY AND SET-OFF AGAINST THE PROFIT ON SALE OF MUTUAL FUNDS WERE CALLED FOR AND HE FOUND THAT A SU M OF 11,87,242/- WARRANTED DISALLOWANCE U/S.94(7) OF TH E ACT. ACCORDINGLY, THE AO DISALLOWED THE SAME AND IGNORED THE SAME FOR THE PURPOSE OF COMPUTING SHORT TERM CAPITAL GAI NS. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(AP PEALS). 20. ON APPEAL, AFTER CONSIDERING THE SUBMISSIONS THE LD. CIT(APPEALS), RELIED ON THE ORDER OF THE TRIBUNAL I N ASSESSEES - - ITA 1947 & 2022/15 19 OWN CASE IN ITA NO.1301/MDS/2008 FOR A.Y 2004-05 DA TED 20.7.2010, WHEREIN IT WAS HELD AS UNDER: THEREFORE, IN THE INTEREST OF JUSTICE, WE RESTORE T HE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO OBTAIN THE RECORD DATES WITH REGARD TO EACH TRANSACTION FROM T HE CONCERNED MUTUAL FUND AND THEN DETERMINE WHETHER THE LOSS ON SUCH TRANSACTION IS ALLOWABLE OR NOT IN TERMS OF SEC.94( 7). IF THE ASSESSEE OR THE ASSESSING OFFICER IS NOT ABLE TO OB TAIN THE VARIOUS RECORD DATES FROM THE MUTUAL FUND, THEN THE RECORD DATES ALREADY AVAILABLE ON THE FILE OF THE ASSESSIN G OFFICER MAY BE TAKEN AS FINAL AND DETERMINE THE ALLOWABILITY OF LOSS IN ACCORDANCE WITH LAW. IN VIEW OF THE ABOVE, THE CIT(APPEALS) OBSERVED THA T THE FACTS AND ISSUE ARE SIMILAR IN THE YEAR UNDER CONSIDERATI ON AND THEREFORE, THE SAME PRINCIPLE NEEDS TO BE FOLLOWED. FOLLOWING THE SAME, HE REMITTED THE ISSUE TO THE AO WITH DIRE CTION TO OBTAIN THE RECORD DATES AS STATED BY THE TRIBUNAL AND ALLO W THE LOSS IN TERMS OF SEC.94(7) OF THE ACT. AGAINST THIS, THE AS SESSEE IS IN APPEAL BEFORE US. 21. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS VIEW CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN I.T.A.NO. 1301/MDS/2008 F OR A.Y - - ITA 1947 & 2022/15 20 2004-05 DATED 20.7.2010 WHEREIN THE TRIBUNAL REMIT TED THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION WIT H ABOVE OBSERVATIONS AS IN PARA-20. ACCORDINGLY, THIS ISSUE IS REMITTED TO AO ON SIMILAR DIRECTIONS . 22. IN THE RESULT, ASSESSEES APPEAL PARTLY ALLOWE D FOR STATISTICAL PURPOSES. REVENUES APPEAL 23. THE FIRST GROUND IN THE REVENUES APPEAL IS WITH RE GARD TO LOSS ON FOREX CONTRACTS TO BE ALLOWED AS BUSINESS E XPENDITURE. 24. THE FACTS OF THE ISSUE ARE THAT THE AO HAS FOUN D THAT AS PER SCHEDULE 21 OF THE FINANCIALS, AN AMOUNT OF 30 CRORES IN THE PROFIT AND LOSS ACCOUNT IS LOSS IN RESPECT OF DERIV ATIVE CONTRACTS OUTSTANDING AS ON 31.3.2009. THE ASSESSEE HAD FOLL OWED PRINCIPLE OF MARKED TO MARKET IN BOOKING THESE LO SSES. THE AO STATED THAT IT WAS TO BE NOTED THAT THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE VALUE AS ON THE VALUATION DA TE (31.3.2009) IN THE PROFIT AND LOSS ACCOUNT IS A NOT IONAL LOSS AS NO SALE/CONCLUSION/HEDGING/SETTLEMENT OF CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY AS ON - - ITA 1947 & 2022/15 21 31.3.2009. IT WAS FURTHER STATED THAT IT WAS NOT D EFINITE THAT THE ASSESSEE WOULD HAVE TO INCUR SUCH NOTIONAL EXPENDIT URE FOR SURE IN THE FUTURE, AS THE VALUE OF FOREIGN EXCHANGE COU LD GO HIGHER SUBSEQUENT TO THE VALUATION DATE AND EVEN GIVE PROF IT TO THE ASSESSEE AS AGAINST THE LOSS BOOKED. FURTHER, IT W AS STATED THAT THE NOTIONAL LOSS ARISING ON ACCOUNT OF OUTSTANDING FORWARD CONTRACTS ARE NEITHER IN THE NATURE OF EXPENDITURE NOR AN ACCRUED LIABILITY AS THE SAID CONTRACTS ARE NOT CONCLUDED A S ON 31.3.2009 AND THE ASSESSEE HAS ALSO OPTION TO HEDGE THE SAID CONTRACTS SUBSEQUENTLY. THEREFORE, THE AO DISALLOWED THE LOS S TREATING AS NOTIONAL IN NATURE AND NOT ALLOWED TO SET OFF AGAIN ST REAL INCOME OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE WENT IN A PPEAL BEFORE THE CIT(APPEALS). 25. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE I SSUE FOR CONSIDERATION IS IDENTICAL IN FACTS AS IN AY 2008-0 9. FURTHER, HE OBSERVED THAT THIS ISSUE HAS DRAWN ATTENTION OF VAR IOUS COURTS FOR QUITE SOME TIME. ACCORDING TO THE CIT(APPEALS) , THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDI A P. LTD. ( 312 ITR 254) HELD THAT THE LOSS IN FOREIGN EXCHANG E, IF ANY, AS AT THE END OF THE YEAR WOULD BE DEDUCTIBLE U/S.37 BY V ALUING THE - - ITA 1947 & 2022/15 22 OUTSTANDING LIABILITY AT THE RATE MARKED TO MARKET AS ON DATE OF CLOSING OF ACCOUNTS. THE ANTICIPATED LOSS CAN BE B OOKED ON THE THEORY UNDERLYING THE RULE THAT PERMITS CLOSING STO CK TO BE VALUED EITHER AT MARKET RATE OR COST, WHICHEVER IS LOWER. THE PROFIT OR LOSS HAS TO BE RECOGNIZED WITH REFERENCE TO THE REL EVANT ACCOUNTING STANDARD. THE METHOD OF ACCOUNTING THAT HAS BEEN REGULARLY FOLLOWED WOULD HAVE TO BE CONTINUED FOR T HE SAKE OF CONSISTENCY. IN COMING TO THESE CONCLUSIONS, THE S UPREME COURT FOLLOWED THE RATIONALE OF ITS EARLIER DECISION IN S UTLEJ COTTON MILLS LTD. V. CIT (116 ITR 1), WHERE IT WAS HELD THAT PRO FIT OR LOSS IN FLUCTUATION OF FOREIGN CURRENCY WOULD ORDINARILY BE A TRADING PROFIT OR LOSS, IF HELD ON THE REVENUE ACCOUNT AS A TRADIN G ASSET OR AS PART OF CIRCULATING CAPITAL EARMARKED IN BUSINESS. 25.1 HOWEVER, THE LD. AR HAS CLARIFIED THAT THE FO RWARD CONTRACT WAS ON REVENUE ACCOUNT AND NOT FOR CAPITAL ASSETS. IF THE BORROWING IS FOR ACQUIRING CURRENT ASSETS LIKE STOCK-IN-TRADE, THE LOSS RECKONED WITH REFERENCE TO PREVAILING EXCH ANGE RATE AS AT THE END OF THE ACCOUNTING PERIOD IS DEDUCTIBLE A S REVENUE EXPENDITURE. THE LD. AR HAS ALSO RELIED ON THE DEC ISION OF THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI IN THE CASE O F DCIT V. - - ITA 1947 & 2022/15 23 BANK OF BAHRAIN & KUWAIT (40 SOT 290). THE SPECIAL BENCH HELD THAT WHERE A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO BUY OR SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF THE A CCOUNTING PERIOD, LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF REVALUATION OF THE CONTRACT ON THE LAST DATE OF THE RELEVANT AC COUNTING PERIOD I.E BEFORE THE DATE OF MATURITY OF THE FORWARD CONT RACT, IS ALLOWABLE AS DEDUCTION. THE REASONS FOR ALLOWING T HE ASSESSEES APPEAL WERE AS UNDER : I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSE E THE MINUTE IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. II) A CONSISTENT ,METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE CANNOT BE DISREGARD ONLY ON THE GROUND THAT A BETTE R METHOD COULD BE ADOPTED. III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SAM E METHOD OF ACCOUNTING IN REGARD RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RAT E PREVAILING ON MARCH 31. IV) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABL E WITH REASONABLE CERTAINTY. THE CONSIDERATIONS FOR ACCOU NTING THE INCOME ARE ENTIRELY ON DIFFERENT FOOTING. V) AS PER AS-11, WHEN THE TRANSACTION IS NOT SETTLE D IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PER IOD. - - ITA 1947 & 2022/15 24 VI) THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE ALL THE TRAPPINGS OF STOCK-IN-TRADE. VII) IN VIEW OF THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE ASSESSE ES CLAIM IS ALLOWABLE. VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS / PROFIT. 26. THE CIT(APPEALS) OBSERVED THAT THE RATIO OF TH E DECISIONS CITED ABOVE ARE FULLY APPLICABLE TO THE FACTS OF TH E ASSESSEE. IN THE ASSESSMENT ORDER, THE LOSSES ON ACCOUNT OF REST ATEMENT OF FORWARD FOREIGN EXCHANGE CONTRACTS HAS ERRONEOUSLY BEEN TREATED AS NOTIONAL IN NATURE AND NOT AN ACCRUED LI ABILITY AS ON 31.3.2009. THE CIT(APPEALS) FURTHER OBSERVED THAT THE TESTS LAID DOWN IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA ) ARE DULY SATISFIED AND THEREFORE, THE LOSS CLAIMED BY THE AS SESSEE ON EVALUATION OF OUTSTANDING FORWARD FOREIGN EXCHANGE CONTRACT TAKEN TO COVER THE CURRENT ASSETS ON THE LAST DATE OF THE ACCOUNT PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORW ARD CONTRACTS, IS ALLOWABLE AS DEDUCTION. IN CONFORMITY WITH THE VIE W TAKEN BY HIM IN THE PRECEDING YEAR I.E. AY 2008-09 ON SIMILAR IS SUE, THE CIT(APPEALS) ALLOWED THE GROUND OF APPEAL. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. - - ITA 1947 & 2022/15 25 27. THE LD. DR RELIED ON THE ORDERS OF THE TRIBUNAL IN ITA NOS.585/MDS/2015, 267/MDS/2016 DATED 14.9.2016 AND MA NOS.95 & 96/MDS/2016 DATED 29.7.2016, ITA NOS.1336 & 3072/MDS/2014 IN THE CASE OF MAJESTIC EXPORT V. JCI T AND DRP ORDER FOR THE AY 2011-12. 28. THE LD. AR RELIED ON THE ORDER OF THE CIT(APPE ALS). 29. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BEFOR E THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007 -08 IN ITA NO.1159/MDS/2012 & OTHERS DATED 31.12.2015. THE TR IBUNAL HELD AS FOLLOWS : 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. SIMILAR ISSUE CAME UP FOR CON SIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF DCIT VS ASVINI FISHE RIES P. LTD IN I.T.A.NO. 2246/MDS/2014 AND THE TRIBUNAL VIDE ITS O RDER DATED 18.12.2015 HAS OBSERVED AS UNDER: 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBU NAL WHERE ONE OF THE MEMBERS IS A PARTY, IN THE CASE OF M/S MAJESTIC EXPORTS VS THE JOINT CIT IN I.T.A.NOS.1336 AND 3072/MDS/2014, DATE D 24.7.2015, WHEREIN IT HAS BEEN HELD AS UNDER: - - ITA 1947 & 2022/15 26 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE WAS ENGAGED I N THE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GAR MENTS. DURING THE COURSE OF EXPORT, THE ASSESSEE ENTERED I NTO DERIVATIVE CONTRACT. THE ASSESSEE INCURRED LOSS IN THIS TRANSACTION. THE ASSESSEE CLAIMED IT AS BUSINESS L OSS. ACCORDING TO THE ASSESSING OFFICER THIS LOSS WAS NO T BUSINESS LOSS AND IT IS A SPECULATIVE LOSS AND THI S TRANSACTION IS SPECULATIVE IN NATURE AS SUCH THE LO SS INCURRED ON THIS TRANSACTION CANNOT BE SET OFF AGAINST BUSIN ESS INCOME OF THE ASSESSEE. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE, THE DERIVATIVE TRANSAC TION CANNOT FALL UNDER SEC.73. EXPLANATION TO SEC.73 CREATES A DEEMING FICTION BY WHICH AMONG THE ASSESSEE, WHO IS A COMPANY, AS INDICATED IN THE SAID EXPLANATION DEALI NG WITH THE TRANSACTION OF SHARE AND SUFFER LOSS, SUCH LOSS SHOULD BE TREATED TO BE SPECULATIVE TRANSACTION WITHIN THE ME ANING OF SEC.73 OF THE ACT, NOTWITHSTANDING THE FACT THAT T HE DEFINITION OF SPECULATIVE TRANSACTION MENTIONED IN SEC.43(5) O F THE ACT, THE TRANSACTION IS NOT OF THAT NATURE AS THERE HAS BEEN ACTUAL DELIVERY OF THE SCRIPS OF SHARE. AS PER THE DEFINI TION OF SEC.43(5), TRADING OF SHARES WHICH IS DONE BY TAKIN G DELIVERY DOES NOT COME UNDER THE PURVIEW OF THE SAID SECTION . SIMILARLY, AS PER CLAUSE (D) OF SEC.43(5), DERIVATI VE TRANSACTION IN SHARES IS ALSO NOT SPECULATION TRANS ACTION AS DEFINED IN THE SAID SECTION. THEREFORE, BOTH PROFI T/LOSS FROM ALL THE SHARE DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING, SO FAR AS SEC.43(5) OF THE ACT IS CONCERNED. AGAIN, IN VIEW OF THE FACT THAT BOTH DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE NON-SP ECULATIVE AS FAR AS SEC.43(5) IS CONCERNED, IT FOLLOWS THAT B OTH WILL HAVE THE SAME TREATMENT AS FAR AS APPLICATION OF EXPLANA TION TO SEC.73 IS CONCERNED. THEREFORE, AGGREGATION OF THE SHARE TRADING PROFIT AND LOSS FROM DERIVATIVE TRANSACTION S SHOULD BE DONE BEFORE THE EXPLANATION TO SEC.73 IS APPLIED. THE ABOVE VIEW HAS BEEN TAKEN BY SPECIAL BENCH OF THIS TRIBUN AL, MUMBAI BENCH, IN THE CASE OF CIT V. CONCORD COMMERC IAL PVT. LTD. (2005) 95 ITD 117 (MUM)(SB). IN THIS CAS E, THE SPECIAL BENCH HELD THAT : BEFORE CONSIDERING WHETHER THE ASSESSEES CASE IS HIT BY THE DEEMING PROVISION OF EXPLANATION TO SEC. 73 OF THE ACT, THE AGGREGATE OF THE BUSINESS PROFIT / LOSS HAS TO BE WORKED OUT BASED ON THE NON-SPECULATIVE PROFITS; EITHER IT IS FROM SHARE DELIVERY OR FROM - - ITA 1947 & 2022/15 27 SHARE DERIVATIVE. 8. FROM THE ABOVE, IT IS CONCLUDED THAT BOTH TRADIN G OF SHARES AND DERIVATIVE TRANSACTIONS ARE NOT COMING U NDER THE PURVIEW OF SECTION 43(5) OF THE ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTION EXCLUSIVELY FOR PURPOS ES OF SECTION 28 TO 41 OF THE ACT. AGAIN, THE FACT THAT B OTH DELIVERY BASED TRANSACTION IN SHARES AND DERIVATIVE TRANSACT IONS ARE NON-SPECULATIVE AS FAR AS SECTION 43(5) IS CONCERNE D GOES TO CONFIRM THAT BOTH WILL HAVE SAME TREATMENT AS REGAR DS APPLICATION OF THE EXPLANATION TO SECTION 73 IS CON CERNED, WHICH CREATES A DEEMING FICTION. NOW, BEFORE APPLIC ATION OF THE SAID EXPLANATION, AGGREGATION OF THE BUSINESS P ROFIT/LOSS IS TO BE WORKED OUT IRRESPECTIVE OF THE FACT, WHETH ER IT IS FROM SHARE DELIVERY TRANSACTION OR DERIVATIVE TRANSACTIO N. 8.1 NOW, THIS VIEW HAS BEEN TAKEN BY CO-ORDINATE, CHENNAI IN THE CASE M/S. AISHWARYA & CO P. LTD IN I TA NO.860/MDS/2014, DATED 29.05.2015, WHEREIN THEY FOL LOWED THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF M/S. BALJIT SECURITIES PVT. LTD. (88 CCH 313) WHEREIN HE LD AS UNDER:- CLAUSE (D) OF SECTION 43(5) BECAME EFFECTIVE WITH EFFECT FROM 1ST APRIL, 2006. THEREFORE, PRIOR TO 1ST APRIL, 2006 ANY TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES WAS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIP WAS A SPECULATIVE TRANSACTION. SUB- SECTION 1 OF SECTION 73 PROVIDES AS FOLLOWS: (1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SHALL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHER SPECULATION BUSINESS. THE RESULTANT EFFECT WAS THAT ANY LOSS ARISING OUT OF SPECULATIVE TRANSACTION COULD ONLY HAVE BEEN SET OF F AGAINST PROFITS ARISING OUT OF SPECULATIVE TRANSACT ION. IN THE PRESENT CASE, THE ASSESSEE, AS ALREADY INDICATED, HAS BEEN DEALING IN SHARES WHERE DELIVERY WAS IN FACT TAKEN AND ALSO IN SHARES WHERE - - ITA 1947 & 2022/15 28 DELIVERY WAS NOT ULTIMATELY TAKEN. IN OTHER WORDS, THE ASSESSEE HAS BEEN DEALING IN ACTUAL SELLING AND BUYING OF SHARES AS ALSO DEALING IN SHARES ONLY FOR THE PURPOSE OF SETTLING THE TRANSACTION OTHERWISE THAN BY ACTUAL DELIVERY. THE QUESTION ARISE WHETHER THE LOSSES ARISING OUT OF THE DEALINGS AND TRANSACTION IN WHICH THE ASSESSEE DID NOT ULTIMATEL Y TAKE DELIVERY OF THE SHARES OR GIVE DELIVERY OF THE SHARES COULD BE SET OFF AGAINST THE INCOME ARISING OUT OF THE DEALINGS AND TRANSACTIONS IN ACTUAL BUYING AND SELLING OF SHARES. AN ANSWER TO THIS QUESTION IS TO BE FOUND IN THE EXPLANATION APPENDED TO SECTION 73 WHICH READS AS FOLLOWS: EXPLANATION: WHERE ANY PART OF THE BUSINESS OF A C OMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSI STS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEAD S INTEREST ON SECURITIES, OR A COMPANY THE PRINCIPA L BUSINESS OF WHICH IS THE BU9SINESS OF BANKING OR TH E GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PUR CHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE. IN ORDER TO RESOLVE THE ISSUE BEFORE US, THE SECTION HAS TO BE READ IN THE MANNER AS FOLLOWS: EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY ( . . . .. .. .. .. .. .. .. . .. .. . ) CONSIST IN THE PURCHASE AND SALE OF SHARES OF OT HER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIS TS OF THE PURCHASE AND SALE OF SUCH SHARES. IT WOULD, THUS, APPEAR THAT WHERE AN ASSESSEE, BEIN G THE COMPANY, BESIDES DEALING IN OTHER THINGS ALSO DEALS IN PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON A SPECUL ATION BUSINESS. THE ASSESSEE, IN THE PRESENT CASE, PRINCI PALLY IS A SHARE BROKER, AS ALREADY INDICATED. THE ASSESSEE IS ALSO IN THE BUSINESS OF BUYING AND SELLING OF SHARES FOR SE LF WHERE ACTUAL DELIVERY IS TAKEN AND GIVEN AND ALSO IN BUYI NG AND SELLING OF SHARES WHERE ACTUAL DELIVERY WAS NOT INT ENDED TO BE - - ITA 1947 & 2022/15 29 TAKEN OR GIVEN. THEREFORE, THE ENTIRE TRANSACTION C ARRIED OUT BY THE ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UM BRELLA OF SPECULATIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISING OUT OF DERIVATIVES FROM THE IN COME ARISING OUT OF BUYING AND SELLING OF SHARES. THIS IS WHAT T HE LEARNED TRIBUNAL HAS DONE. 9. FROM THE ABOVE DECISION OF THE CALCUTTA HIGH COU RT IN THE CASE OF BALJIT SECURITIES PVT. LTD. CITED SUPRA, TH E ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT TOTAL TRANSACTION CONSIDERED FOR DETERMINING T HIS BUSINESS LOSS FROM DERIVATIVE TRANSACTIONS CANNOT BE MORE TH AN THE TOTAL EXPORT TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF THE DERIVATIVE TRANSACTION IS IN EXCESS OF EXPORT TURNOVER, THEN THAT LOSS SUFFERED IN RESPEC T OF THAT PORTION OF EXCESS TRANSACTIONS TO BE CONSIDERED AS SPECULAT IVE LOSS ONLY AS THAT EXCESS DERIVATIVE TRANSACTION HAS NO PROXIM ITY WITH EXPORT TURNOVER AND THE ASSESSING OFFICER IS DIRECTED TO C OMPUTE ACCORDINGLY. THIS GROUND IS ALLOWED AS INDICATED AB OVE. 5. FURTHER, THE MUMBAI BENCH OF ITAT IN THE CASE OF ARASKA DIAMOND P. LTD VS ACIT, 152 ITD 203, HAS HELD AS UNDER: TOTAL SALES DURING THE YEAR AMOUNTED TO ` 27.78 C RORES, THAT THE AO AND THE FAA HAD HELD SUCH TRANSACTION WERE SPECULAT IVE IN NATURE AND HAD DISALLOWED THE CLAIM MADE BY THE ASSESSEE, THA T THE ASSESSEE WAS OF THE OPINION THAT TRANSACTIONS ENTERED INTO B Y IT WERE NOT SPECULATIVE TRANSACTIONS. ITAT FOUND THAT THE AMOU NT INVOLVED IN THE FORWARD CONTRACT (FC) WAS MORE THAN 100% OF THE TURNOVER OF THE ASSESSEE, THAT FC WERE NOT RELATABLE TO SPECIFIC BI LLS, THAT THE ASSESSEE HAD NOT RELATED ANY SINGLE BILL TO ANY OF THE CONTRACT AND HAD NOT PROVIDED ANY PURCHASE ORDER DURING THE ASSESSMENT OR APPELLATE PROCEEDINGS. ITAT FOUND THA T IN THE CASE UNDER CONSIDERATION ASSESSEE WAS NOT DEALING I N FOREIGN EXCHANGE, THEREFORE TRANSACTIONS ENTERED INTO BY IT IN FOREIGN EXCHANGE CANNOT BE HELD TO BE HEDGING TRANSACTIONS. AS THE ASSESSEE WAS DEALING IN DIAMONDS AND FC ENTERED INT O ONLY FOR DIAMONDS WOULD HAVE BEEN COVERED BY THE PROVISO (A) TO THE SECTION 43(5)OF THE ACT. AS HELD BY THE HON'BLE HIG H COURT OF CALCUTTA IN THE MATTER OF GOUREPORE CO. LTD ,ONUS W AS ON THE ASSESSEE TO PROVE THAT THE TRANSACTIONS IN QUESTION WERE NOT OF A SPECULATIVE NATURE. ITAT WAS OF THE OPINION THAT IT HAD FAILED TO DISCHARGE THE ONUS CAST UPON HIM BY THE STATUTE. IT WAS ALSO NOT ABLE TO CONTRADICT THE FINDING OF FACT THAT BOO KING AND CANCELLATION OF FC OF FOREIGN EXCHANGE WERE NOT IN RESPECT OF - - ITA 1947 & 2022/15 30 SPECIFIED EXPORT OR IMPORT. BESIDES, FINDING OF FAC T GIVEN BY THE REVENUE AUTHORITIES REMAINED UN-CONTRAVENED THAT LO SS IN QUESTION, SHOWN BY IT PERTAINED TO THOSE FC TRANSAC TIONS, AGAINST WHICH NO ACTUAL DELIVERY OF FOREIGN EXCHANG E WAS MADE. ON APPRECIATION OF THE FACTS SURROUNDING THE TRANSACTION ITAT HAD REACHED AT THE CONCLUSION THAT TRANSACTION S ENTERED IN TO BY THE ASSESSEE WERE SPECULATIVE IN NATURE AND T HE CASE OF THE ASSESSEE IS NOT COVERED BY PROVISO(A) OF THE SE CTION 43(5) OF THE ACT. DISPUTED TRANSACTIONS WERE SPECULATIVE AND NOT HEDG ING TRANSACTION, THAT THE ASSESSEE COULD NOT RELATE ANY SINGLE BILL TO ANY OF THE CONTRACT AND IT HAD NOT PROVIDED DETAIL OF ANY PURCHASE ORDER RELATABLE TO SPECIFIC TRANSACTION, D URING THE ASSESSMENT OR APPELLATE PROCEEDINGS. THUS, THE TRAN SACTIONS UNDERTAKEN BY IT HAVE TO BE TAKEN AS TRANSACTIONS R ELATABLE TO FOREIGN EXCHANGE. ITAT WAS OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL I NFIRMITY. THEREFORE, CONSIDERING THE PECULIAR FACTS AND CIRCU MSTANCES OF THE CASE, ITAT CONFIRMED HIS ORDER FAA AND DECIDE E FFECTIVE GROUND AGAINST THE ASSESSEE. 6. IN VIEW OF THE ABOVE ORDERS OF THE TRIBUNAL, WE ARE OF THE OPINION THAT THE ASSESSING OFFICER HAS TO CONSIDER THE FORE IGN EXCHANGE DERIVATIVE IN PROPORTION TO EXPORT TURNOVER AS REGU LAR BUSINESS TRANSACTION OF THE ASSESSEE. IF THE DERIVATIVE TR ANSACTION UNDERTAKEN BY THE ASSESSEE IS IN EXCESS OF EXPORT TURNOVER TH EN THAT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS TRANSACTION HA S TO BE CONSIDERED AS SPECULATIVE LOSS ONLY AND THAT EXCESS DERIVATIV E TRANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER AND THE ASSESSING OF FICER IS DIRECTED TO COMPUTE ACCORDINGLY. FURTHER, THE ASSESSING OFFICE R HAS TO SEE WHETHER THERE IS ANY PREMATURE CANCELLATION OF FORW ARD CONTRACT OF FOREIGN EXCHANGE AND THAT TRANSACTION SHOULD BE TAK EN OUT FOR THE PURPOSE OF CONSIDERING THE BUSINESS LOSS AND ONLY T HE TRANSACTIONS WHICH ARE COMPLETED TO BE CONSIDERED FOR THE PURPOS E OF DETERMINING THE BUSINESS LOSS FROM THESE FOREIGN EXCHANGE FORW ARD CONTRACT. WITH THIS OBSERVATION, WE REMAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION. 7. BEFORE US, THE LD. REPRESENTATIVE RELIED ON TH E JUDGMENT OF GUJARAT HIGH COURT IN CIT VS FRIENDS AND FRIENDS SHIPPING P . LTD, [2013] 217 TAXMAN 267, FOR THE PROPOSITION THAT IF THE ASSESS EE FAILED TO TAKE DELIVERY WITHIN THE PERIOD INDICATED IN CONTRACT AN D THE ASSESSEE HAD GIVEN INSTRUCTIONS TO BANK FOR CANCELLATION OF CONT RACT ON PAYMENT OF AGREED CHARGES TO THE BANK THESE TRANSACTIONS CANNO T BE CONSIDERED AS SPECULATIVE TRANSACTION. HOWEVER, THERE IS NO F INDING IN THIS JUDGMENT TOWARDS THIS EFFECT AND THE RELIANCE PLACE D BY THE ASSESSEE - - ITA 1947 & 2022/15 31 IS MISPLACED. MORE SO, THIS ISSUE WAS CONSIDERED B Y THE MUMBAI TRIBUNAL WHILE DELIVERING THE DECISION IN THE CASE OF ARASKA DIAMOND P. LTD, 152 ITD 203, AND AFTER FOLLOWING THE JUDGME NTS OF CALCUTTA HIGH COURT IN THE CASE OF BENGAL & ASSAM CO. LTD VS CIT 227 CTR 399, AND BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT VS BADRIDAS GAURIDU P. LTD 261 ITR 256, THE TRIBUNAL CAME TO TH E CONCLUSION THAT THE TRANSACTIONS, WHICH WERE PREMATURELY CANCELLED, CANNOT BE CONSIDERED AS BUSINESS TRANSACTION AND IT IS TO BE CONSIDERED AS SPECULATIVE TRANSACTION. 12. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE REMIT THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSIN G OFFICER SHALL RECONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE ABO VE ORDER OF THIS TRIBUNAL AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE. 38.1 LATER, THE ASSESSEE FILED MA IN MA NOS.95 & 96/MDS/16 AND THE SAME WAS DISPOSED BY THE TRIBUNAL VIDE ORDE R DATED 29.7.2016, WHEREIN IT WAS HELD AS UNDER : WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. THE TRIBUNAL WHILE HOLDING THA T THE LOSS ARISING OUT OF HEDGING CONTRACTS ENTERED INTO BY THE ASSES SEE IN THE COURSE OF BUSINESS HAS TO BE ALLOWED AS BUSINESS LO SS AND NOT TO BE CONSIDERED AS SPECULATION LOSS. WHILE HOLDING S O, THE TRIBUNAL HAS PLACED RELIANCE ON VARIOUS DECISIONS OF CO-ORD INATE BENCH INCLUDING THE DECISION IN THE CASE OF M/S MAJESTIC EXPORTS VS JCIT IN I.T.A.NOS.1336 & 3072/MS/2014, DATED 24.7.2015. BEFORE US ALSO, THE LD. AR PLACED HIS RELIANCE ON THE DECISIO N IN THE CASE OF MAJESTIC EXPORTS (SUPRA) AND REQUESTED FOR DIRECTIO N AS GIVEN IN THE ABOVE CASE. IN OUR OPINION, THE TRIBUNAL HAS R EMITTED THE ISSUE OBSERVING THAT THE ISSUE IS COVERED BY VARIOU S JUDGMENTS INCLUDING MAJESTIC EXPORTS (SUPRA). BEING SO, AT T HIS STAGE, THE ASSESSEE CANNOT HAVE ANY GRIEVANCE. THE ASSESSING OFFICER WOULD LOOK INTO ALL THE JUDGMENTS CITED IN THE ORDE R (SUPRA). ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE ARGUME NT OF THE LD. AR. IN VIEW OF THE ABOVE, WE REMIT THIS ISSUE TO THE FI LE OF THE ASSESSING OFFICER ON SIMILAR DIRECTIONS. 30. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF - - ITA 1947 & 2022/15 32 DEPRECIATION ON WINDMILL. 31. THE FACTS OF THE ISSUE ARE THAT THE AO STATED T HAT THE ASSESSEE HAD CLAIMED DEPRECIATION ON WINDMILLS OF 74,840/- @ 80% ON THE OPENING WDV AS ON 1.4.2008 OF 93,550/-, USED BY THEM FOR ITS BUSINESS PURPOSES THROUGH LEASE AND LA TER PURCHASED BY TERMINATING LEASE AT A FIXED VALUE. T HE AO OBSERVED THAT THIS ISSUE HAD BEEN EXHAUSTIVELY COVE RED IN AYS 2003-04 AND 2004-05 AND WAS DISALLOWED IN AYS 2003- 04 TO 2008-09 ON THE GROUND THAT THE ASSESSEE WAS NOT ENT ITLED TO DEPRECIATION ON WINDMILLS WHICH WERE HELD ON LEASE EARLIER BEFORE THEIR PURCHASE. ACCORDINGLY, THE AO DISALL OWED THE CLAIM OF DEPRECIATION OF 74,840/- ON SIMILAR LINES. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) . 32. THE CIT(APPEALS) OBSERVED THAT THIS ISSUE COVER ED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1964/MDS/2006 AND FOR THE AYS 2005-06 TO 200 7-08 IN ITA NOS.1542, 1543/MDS/2010 AND 90/MDS/2012 RESPECT IVELY AND FOLLOWING THE AFORESAID ORDERS OF THE TRIBUNAL, THE GROUND IS ALLOWED. AGAINST THIS, THE REVENUE IS IN APPEAL BE FORE US. - - ITA 1947 & 2022/15 33 33. THE LD. DR RELIED ON THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS.90/MDS/2012, FOR A.Y 2007-08 DATED 26.06.15, 1542 & 1543/ 1381 &1382/MDS/2010 FO R A.YS. 2005-06 & 2006-07 DATED 15.07.2011. 34. THE LD. AR, ON THE OTHER HAND, RELIED ON THE OR DER OF THE CIT(APPEALS). 35. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED BY ASSESSEES OWN CASE IN I.T.A NO.50/MDS./2012 FOR A. Y 2007-08 VIDE ORDER DATED 26.06.2015 WHEREIN HELD THAT: 4. THE FIRST ISSUE RELATES TO DISALLOWANCE OF DEPR ECIATION ON WINDMILLS. THE SAID ISSUE WAS ADJUDICATED BY THE CIT(A) IN FAV OUR OF THE ASSESSEE FOLLOWING THE TRIBUNALS ORDER IN I.T.A.NO.1964/MDS /2006 FOR THE ASSESSMENT YEAR 2003-04 AND 1542 AND 1543/MDS/2010 FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07. PARA 4 OF THE CIT(A)S ORDER IS RELEVANT AND THE SAME READS AS UNDER: 4. THE FIRST ISSUE PERTAINS TO DISALLOWANCE OF DEP RECIATION ON WINDMILL AMOUNTING TO ` 18,70,991/-. THIS IS A RECURRING ISS UE WHICH HAS ALREADY BEEN DECIDED BY THE HON'BLE ITAT, CHENNAI IN FAVOUR OF THE APPELLANT VIDE ITS ORDER IN I.T.A.NO. 1964/MDS/06 DATED 26.3. 2008 FOR A.Y 2003- 04. FOLLOWING THE ABOVE ORDER, THE HON'BLE ITAT AGA IN DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT FOR A.Y 2005-06 IN I.T.A.NO. 1542/MDS/10 DATED 15.7.2011. SINCE THE FACTS ARE SI MILAR, RESPECTFULLY FOLLOWING THE ABOVE DECISION, THE GROUND IS ALLOWED . 5. CONSIDERING THE ABOVE COVERED NATURE OF THE ISSU E, WE CONFIRM THE ORDER OF THE CIT(A). ACCORDINGLY, THE FIRST ISSUE R AISED BY THE REVENUE STANDS DISMISSED. - - ITA 1947 & 2022/15 34 IN VIEW OF THE ABOVE DECISION OF TRIBUNAL, THIS GRO UND OF REVENUE STANDS DISMISSED. 36. THE NEXT GROUND IS WITH REGARD TO CALCULATION O F DISALLOWANCE U/S.14A. 37. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAS ACCOUNTED AN AMOUNT OF 10,66,39,685/- AS DIVIDEND FROM MUTUAL FUNDS/SHARES DURING THE YEAR A ND CLAIMED THE SAME AS EXEMPT U/S.10(34) OF THE ACT. WHEN THE AO ASKED THE ASSESSEE AS TO WHY DISALLOWANCE SHALL NOT BE MA DE U/S.14A R.W. RULE 8D OF THE IT RULES, AS NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS PER SEC.1 4A, THE ASSESSEE REPLIED THAT IT HAS DISALLOWED AN AMOUNT O F 64,23,045 BEING % OF THE AVERAGE INVESTMENTS AS PER LIMB (I II) OF RULE 8D. THE AO HAS NOT ACCEPTED THE CONTENTION OF THE ASSESSEE FOR THE FOLLOWING REASONS : (I) THE APPELLANT HAS INCURRED AN AMOUNT OF 2,55,06,19,842 AS INTEREST ON ITS BORROWED CAPITAL DURING THE YEAR AN D THE APPELLANT COULD NOT ESTABLISH CLEARLY THAT THE SAME WERE NOT UTILIZED FOR MAKING INVESTMENTS. (II) FUNDS FOR A COMPANY COME IN A COMMON KITTY AND IT - - ITA 1947 & 2022/15 35 COMPRISES OF BORROWED FUNDS, SHARE CAPITAL AND RETA INED EARNINGS (RESERVES & SURPLUS) AND THEREFORE THE ARG UMENT OF THE LD. AR THAT NO PORTION OF THE INTEREST PAID RELATES TO INVESTMENT IS NOT VALID. (III) INVESTMENT DECISIONS ARE VERY COMPLEX IN NATU RE. CAPITAL HAS COST AND THAT ELEMENT OF COST IS REPRESENTED BY INT EREST. (IV) PORTION OF THE ROUTINE EXPENDITURE TO MAINTAIN ITS ESTABLISHMENT AND ADMINISTRATIVE CAN BE ATTRIBUTABL E TOWARDS THE ACTIVITY OF MAKING INVESTMENTS TO EARN DIVIDEND. A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION DEFINITELY BE ATTRIBUTABLE TOWARDS EARNING SUCH EXEMPT INCOME. THE AO RELIED ON THE JUDGMENT OF THE BOMBAY HIGH CO URT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. CIT (238 IT R 81) AND DISALLOWED A SUM OF 14,46,92,917/- U/S.14A OF THE ACT BY INVOKING THE PROVISIONS OF RULE 8D OF THE IT RULES. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(AP PEALS). 38. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE APPLICABILITY OF RULE 8D IN COMPUTING DISALLOWANCE U/S.14A FOR THE AY 2008-09 IS NOT IN DISPUTE. FURTHER, THE CIT (APPEALS) OBSERVED THAT THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. CIT, CITED SUPRA, HAS HELD T HAT THE PROVISIONS OF RULE 8D ARE APPLICABLE FROM AY 2008-0 9 ONWARDS. ACCORDING TO THE CIT(APPEALS), THE AO HAS ACCEPTED THAT NO DIRECT EXPENDITURE WAS INCURRED AS PER SUB-RULE 2(I ) OF RULE 8D - - ITA 1947 & 2022/15 36 AND COMPUTED 14,46,92,917/- AND 64,23,045/- UNDER RULE 8D(2)(II) AND 8D(2)(III) RESPECTIVELY. FROM THE DETAILS, THE CIT(APPEALS) FOUND THAT THE ASSESSEE HAS INVESTMENT S OF 1380.74 CRORES AS ON 31.3.2009. THE INVESTMENT IN FOREIGN SUBSIDIARY WAS 1365.09 CRORES CONSTITUTING 98.83% OF THE TOTAL INVESTMENTS. THE INVESTMENT IN INDIAN SISTER CONCE RNS WAS 1.06%,INVESTMENT IN SHARES WAS 0.10% AND INVESTMENT IN MUTUAL FUNDS WAS 0.01%. ACCORDING TO THE CIT(APPEA LS), THE INVESTMENT IN THE FOREIGN SUBSIDIARY COULD NOT GIVE RISE TO EXEMPT INCOME. FURTHER, INVESTMENT IN SISTER CONCERNS ARE BUSINESS INVESTMENTS. THEREFORE, THE CIT(APPEALS) OBSERVED THAT THESE INVESTMENTS ARE TO BE EXCLUDED FOR THE PURPOSE OF C OMPUTING THE DISALLOWANCE. HENCE, THE INVESTMENT THAT IS TO BE CONSIDERED FOR WORKING OUT DISALLOWANCE U/S.14A IS NEARLY 1.54 CRORES AND THE ASSESSEE HAD SUBSTANTIAL INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND FREE RESERVES AS AGAINST THE TOTA L VALUE OF SUCH INVESTMENTS. THE TOTAL CAPITAL AND RESERVES AS ON 31.3.2008 WAS 706.91 CRORES AND AS ON 31.3.2009 WAS 919.17 CRORES AND THERE WERE INTERNAL ACCRUALS ALSO. THE CIT(APP EALS), OBSERVED THAT THE AO HAS TREATED THE INTEREST OF - - ITA 1947 & 2022/15 37 136,90,88,939/- FOR CALCULATING DISALLOWANCE UNDER RULE 8D(2)(II) OF THE I.T.RULES. THE ASSESSEE HAS ENCLO SED COPIES OF THE SANCTION LETTERS IN RESPECT OF THESE LOANS (VID E LETTER DATED 22.12.2014) AND STATED THAT NO INVESTMENT WAS SANCT IONED UNDER THE TERMS OF THE LOANS AND HENCE THE FUNDS COULD NO T BE UTILIZED FOR MAKING INVESTMENT. IT IS NOTED BY THE CIT(APP EALS) FROM THE SANCTION LETTERS THAT THE LOANS HAVE BEEN SANCTIONE D FOR CAPITAL EXPENDITURE I.E. REFURBISHMENT OF EXISTING RIGS, LE NDING TO OVERSEAS SUBSIDIARIES, AUGMENTING LONG-TERM WORKING CAPITAL AND GENERAL CORPORATE PURPOSES AND FOUND MERIT IN THE C ONTENTION OF THE ASSESSEE. THE CIT(APPEALS) RELIED ON THE JUDGM ENT OF THE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (313 ITR 340), WHEREIN IT WAS HELD THAT IF THE RE BE INTEREST- FREE FUNDS AVAILABLE TO THE ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME TIME, THE ASSESSEE HAS R AISED A LOAN, IT CAN BE PRESUMED THAT INVESTMENTS WERE MADE FROM INTEREST-FREE FUND AVAILABLE AND THE SAME VIEW WAS TAKEN BY THE TRIBUNAL, MUMBAI IN THE CASE OF YATISH TRADING CO. V. ACIT (129 ITD 237) AND HDFC BANK LTD. V. ACIT (ITA NOS.4529, 3650, 3651, 4039 & 991/MUM/ FOR AY 2001-02 TO 2005-06 DA TED - - ITA 1947 & 2022/15 38 29.6.2011). FURTHER, THE CIT(APPEALS) RELIED ON HI S PREDECESSORS ORDER FOR THE AY 2008-09, WHEREIN ON SIMILAR FACTS, ALLOWED THE APPEAL OF THE ASSESSEE DELETING THE DISALLOWANCE UNDER RULE 8D(2)(II). ACCORDINGLY, TH E CIT(APPEALS) ALLOWED THIS GROUND OF APPEAL. AGAINS T THIS, THE REVENUE IS IN APPEAL BEFORE US. 39. THE LD. DR RELIED ON THE ORDERS OF THE TRIBUNAL IN ITA NOS.585/MDS/2015 & 267/MDS/2016, 90/MDS/2012 IN ASS ESSEES OWN CASE AND IN ITA NO.2277/MDS/2014 IN THE CASE OF INAUTIX TECHNOLOGIES INDIA P. LTD. AND IN THE CASE OF ACIT V. BEST CROMPTON ENGINEERING LTD. IN ITA NO.1603/MDS/2012. 40. THE LD. AR RELIED ON THE ORDER OF THE CIT(APPEA LS). 41. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. IN OUR OPINION, SIMILAR ISSUE CAME FOR C ONSIDERATION BEFORE THIS TRIBUNAL IN ASSESEES OWN CASE IN ITA N OS. 585/MDS/2015 & 267/MDS/16 FOR THE ASSESSMENT YEARS : 2010- 11 & 2011-12 VIDE ORDER DATED 14.09.2016 WHEREIN TH E TRIBUNAL HELD THAT:- - - ITA 1947 & 2022/15 39 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. THE LD. AR PLACED BEFORE US ABOUT NETTING OF INTEREST PAID WITH INTEREST RECEIVED. IN OUR OPIN ION, APPLICATION OF RULE 8D OF THE I.T. RULES DOES NOT ALLOW FOR NETTIN G OF ANY INTEREST INCOME WITH INTEREST EXPENDITURE. IF NETTING OF INT EREST INCOME IS ALLOWED, IT WOULD BE EQUIVALENT TO ADDING SOMETHING WHICH IS NOT THERE IN THE RULE BOOK, ACCORDINGLY IMPERMISSIBLE. THUS, WE UPHOLD THE AOS APPLICATION OF RULE 8D(2)(II) READ WITH SEC.14A ON GROSS INTEREST, THROUGH AO DID NOT CONSIDER INTERES T RECEIPTS AS INCOME FROM OTHER SOURCES; THE TREATMENT OF INTER EST BY AO WOULD NOT CHANGE THE NATURE OF TRANSACTION OR CHARACTER O F RECEIPTS. ACCORDINGLY, WE REVERSE THE FINDING OF THE CIT(APPE ALS), ON THIS ISSUE. 20.1 HOWEVER, THE AO HAS TO CONSIDER THE AVAIL ABILITY 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. 21. 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: - - ITA 1947 & 2022/15 40 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:- 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 - - ITA 1947 & 2022/15 41 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 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 - - ITA 1947 & 2022/15 42 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 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 - - ITA 1947 & 2022/15 43 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 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). - - ITA 1947 & 2022/15 44 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 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. 21.1 IN VIEW OF THE ABOVE DECISION, WE ARE OF THE OPINION THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR S PECIFIC PURPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PU RPOSE OF RULE 8D OF THE INCOME TAX RULES. 21.2 FURTHER, INVESTMENTS IN SISTER CONCERNS OR SUB SIDIARIES 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 JU DGMENTS OF TRIBUNAL IN THE CASE OF SUN TV NETWORKS IN ITA NO.1 340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREIN HELD THA T:- 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 - - ITA 1947 & 2022/15 45 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUD ING 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. 21.3 FURTHER, WE ALSO MAKE IT CLEAR THAT THE OWN FUNDS WHICH IS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPLUS, WHI CH WAS AVAILABLE TO THE ASSESSEE TO MAKE INVESTMENTS WHICH IS YIELDING EXEMPTED INCOME HAVE NO COST AND THEREFORE, IT IS TO BE GIVEN DUE W EIGHTAGE WHILE APPLYING THE FORMULA OF 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. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHER EIN 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/- - - ITA 1947 & 2022/15 46 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 . 21.4 IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AV AILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INCOME AND THER EAFTER HE SHALL APPLY THE FORMULA IN RULE 8D AND ALSO EXCLUDE INVES TMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDIN ATE BENCH. WITH THIS OBSERVATION, WE REMIT THE ISSUE RELATING TO DISALLO WANCE U/S.14A R.W.R.8D TO THE FILE OF AO FOR FRESH CONSIDERATION. HENCE, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 42. ACCORDINGLY, THIS ISSUE IS REMITTED BACK TO TH E FILE OF LEARNED ASSESSING OFFICER FOR FRESH CONSIDERATION O N THE SIMILAR DIRECTION. 43. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE U/S.40(A)(IA) OF THE ACT. 44. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HA S DEBITED - - ITA 1947 & 2022/15 47 AN EXPENDITURE OF 3,31,35,676/- AFTER DEDUCTING THE AMOUNT RECEIVED FROM ONGC AS CATERING CHARGES IN THE PROFI T AND LOSS ACCOUNT. THE AO FOUND THAT THE ASSESSEE IN RESPECT OF PAYMENT OF 1,12,74,640/- MADE TO M/S. RADHAKIRSHNA HOSPITALIT Y SERVICES P. LTD. HAS DEDUCTED TDS @ 1.46% ONLY AS A GAINST THE APPLICABLE RATE OF 2.26% U/S.194C (2% PLUS SURCHARG E + EC THEREON). ACCORDINGLY, THE AO DISALLOWED THE PROPO RTIONATE AMOUNT WHICH IS NOT SUBJECTED TO TDS OF 39,91,094/- U/S.40(A)(IA) OF THE ACT AS IN EARLIER YEARS. AGGR IEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 45. THE CIT(APPEALS) OBSERVED THAT THIS IS A RECUR RING ISSUE AND THE ADDITION HAS BEEN DELETED BY THE TRIBUNAL I N ITA NOS. 1542 & 1543/MDS/2010 DATED 15.7.2011 FOR THE AY 200 6-07 AND ITA NO.90/MDS/2012 DATED 26.6.2015 IN ASSESSEES OW N CASE. HE ALSO RELIED ON HIS PREDECESSORS ORDER FOR THE A Y 2008-09, WHEREIN THE ADDITIONS WERE DELETED. ACCORDINGLY, T HE ADDITION IS DELETED. AGAINST THIS, THE REVENUE IS IN APPEAL BE FORE US. 46. THE LD. DR RELIED ON THE ORDER OF CO-ORDINATE BENCH OF CHENNAI IN THE CASE OF CONFERENCE CALL SERVICES P L TD. VS. ACIT IN INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') NO.484 & - - ITA 1947 & 2022/15 48 1057/MDS./2014. 46.1 THE LD. AR RELIED ON THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A). 47 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THE MAIN CONTENTION OF THE LD.A.R IS THA T NOTHING IS PAYABLE AT THE END OF THE CLOSE OF THE FINANCIAL YE AR, AS SUCH THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE SPEC IAL BENCH OF THE TRIBUNAL IN THE CASE OF MERILYN SHIPPING AND TR ANSPORTS V. ADDL. CIT [2012] 16 ITR (TRIB) 1 (VISAKHAPATNAM) [S B]. IN OUR OPINION, THERE IS A FORCE IN THE ARGUMENT OF THE LD .A.R AND THE SPECIAL BENCH CITED SUPRA CONSIDERED THIS ISSUE AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. FURTHER, THE CO-OR DINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SHRI N.PALANIVELU V S. ITO REPORTED IN [2015] 40 ITR (TRIB) 325 [CHENNAI] VIDE ORDER DA TED 29.04.2015 WHEREIN HELD THAT: - 4. WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERI AL ON RECORD. WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF MERILYN SHIPPING AND TRANSPORTS V. ADDL. CIT [2012] 16 ITR (TRIB) 1 (VISAKHAPATNAM) [SB] AND JUDGMENT OF THE ALLAHABAD HIGH COURT IN THE CASE OF CIT V. VECTOR SHIPPING SERVICES (P.) LT D. IN [2013] 357 ITR 642 (ALL) HELD THAT SECTION 40(A)(IA) OF THE AC T IS NOT APPLICABLE WHEN THERE IS NO OUTSTANDING BALANCE AT THE END OF THE CLOSE OF THE YEAR RELEVANT TO THE ASSESSMENT YEAR IN RESPECT OF THESE PAYMENTS. HOWEVER, THE ASSESSEE HAS NOT - - ITA 1947 & 2022/15 49 BROUGHT ON RECORD, THE DETAILS OF OUTSTANDING EXPEN SES OR SCHEDULE OF SUNDRY CREDITORS SHOWING WHETHER THE IMPUGNED AM OUNT IS OUTSTANDING AT THE END OF THE CLOSE OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR EITHER IN THE NAME OF THE PARTY OR OUTSTANDING EXPENSES. HENCE, IN THE INTEREST OF JUSTICE, WE ARE REMITTING THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WIT H DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE AND THE ASSESSEE S HALL PLACE NECESSARY EVIDENCE IN SUPPORT OF HIS CLAIM. 5. FURTHER, WE MAKE IT CLEAR THAT IF THE IMPUGNED A MOUNT IS NOT OUTSTANDING AT THE END OF THE CLOSE OF THE ASSESSME NT YEAR IN RESPECT OF THE EXPENSES EITHER AS OUTSTANDING EXPEN SES OR AS SUNDRY CREDITORS, THIS AMOUNT CANNOT BE DISALLOWED. THIS GROUND IS REMITTED BACK TO THE ASSESSING OFFICER FOR FRESH CO NSIDERATION. IN VIEW OF THE ORDER OF THE TRIBUNAL, WE ARE INCLIN ED TO REMIT THIS ISSUE TO THE FILE OF THE LD. ASSESSING OFFICER WITH SIMILAR DIRECTION. THESE GROUNDS RAISED BY THE REVENUE U/S.40(A)(IA) OF THE ACT IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 48. THE NEXT GROUND IS WITH REGARD TO TP ADJUSTMENT FOR CORPORATE GUARANTEE. 49. THE FACTS OF THE ISSUE ARE THAT THE AO STATED T HAT THE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE AND A RE VISED ORDER U/S.92CA(3) WAS PASSED ARRIVING AT THE FOLLOWING AD JUSTMENT ADJUSTMENT TO INCOME TOWARDS CORPORATE GUARANTEE PROVIDE TO THE ASSOCIATE ENTERPRISES 9,30,28,500 - - ITA 1947 & 2022/15 50 THE AO ADOPTED THE ABOVE ADJUSTMENT PROPOSED BY THE TPO STATING THAT THERE IS NO MERIT IN THE EXPLANATION O F THE ASSESSEE AND MADE ADDITION ACCORDINGLY. AGGRIEVED, THE ASSE SSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 50. THE CIT(APPEALS) OBSERVED THAT THE ISSUE RELATI NG TO ISSUANCE OF CORPORATE GUARANTEE BEING AN INTERNATIO NAL TRANSACTION OR NOT, HAS BEEN DECIDED BY THE TRIBUNA L IN THE CASE OF REDINGTON (INDIA) LIMITED VS. JCIT [40 CCH 0537 (CHEN. TRIB), WHEREIN IT HAS BEEN HELD THAT PROVISION OF CORPORAT E GUARANTEE DOES NOT INVOLVE ANY COST TO THE ASSESSEE AND DOES NOT HAVE ANY BEARING ON THE PROFITS, INCOME ETC. OF THE ASSE SSEE AND THEREFORE, IT IS NOT AN INTERNATIONAL TRANSACTION , EVEN UNDER THE DEFINITION OF THE SAID TERM AS AMENDED BY THE FINAN CE ACT, 2012. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL THE CI T(APPEALS) DELETED THE ADDITION MADE ON ACCOUNT OF TRANSFER PR ICING ADJUSTMENT ON ISSUANCE OF GUARANTEE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 51. THE LD. DR RELIED ON THE ORDERS OF THE TRIBUNAL IN ITA NO. - - ITA 1947 & 2022/15 51 585/MDS/2015 & 267/MDS/2016 IN ASSESSEES OWN CASE AND IN THE CASE OF REDINGTON INDIA LTD. VS. JCIT IN ITA NO.513/MDS/2014. 52. THE LD. AR RELIED ON THE ORDER OF THE CIT(APPEA LS). 53. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BEF ORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS. 585/MDS /2015 & 267/MDS/16 FOR ASSESSMENT YEARS : 2010-11 & 2011-12 VIDE ORDER DATED 14.09.2016 WHEREIN IT WAS HELD THAT:- 34. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. ADMITTEDLY, THIS ISSUE CAME FO R CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF R EDINGTON, CITED SUPRA, AND HELD THAT GUARANTEES WILL NOT CONS TITUTE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF DETERM INING ALP. BEING SO, FOLLOWING THE ORDER OF THE TRIBUNAL, THIS GROUND OF APPEAL OF THE REVENUE IS TO BE DISMISSED. THE CONTE NTION OF THE LD.DR IS THAT THE ORDER OF THE TRIBUNAL IN THE CASE OF REDINGTON INDIA LTD., SUPRA HAS NOT ACCEPTED BY THE DEPARTMENT AND THEY HAVE PREFERRED AN APPEAL BEFORE THE HIGH COURT OF MADRAS. FURTHER, IT WAS STATED THAT THE OR DER OF THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF EVEREST KANTO CYLINDERS LTD. IN ITA NO.542/MUM/2012 TO BE FOLLOWED RATHER T HAN CO- ORDINATE BENCH DECISION. IN OUR CONSIDERED OPINION, JUDICIAL DISCIPLINE REQUIRES CONSISTENCY IN ITS PROCEEDINGS AND THE - - ITA 1947 & 2022/15 52 DECISION OF VERY CO-ORDINATE BENCH IS STARING AT US AND IT IS TO BE FOLLOWED ON THIS ISSUE INSTEAD OF THE DECISION O F MUMBAI BENCH. MORE SO, THE DECISION IN FAVOUR OF THE ASSES SEE IS FOLLOWED IN VIEW OF JUDGMENT OF VEGETABLE PRODUCTS (88 ITR 192)(SC). ACCORDINGLY, THIS GROUND STANDS DISMISSED. 54. IN THE RESULT, THE APPEAL OF REVENUE AS WELL A S THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED ON 05 TH APRIL, 2017 AT CHENNAI. SD/- SD/- ( ! ) ! * . + ,-. ) ( / 0 1 2% ) ( DUVVURU RL REDDY ) (CHANDRA POOJARI) < => /JUDICIAL MEMBER ,& =>/ACCOUNTANT MEMBER /,< ' /CHENNAI, D= /DATED, THE 05 TH APRIL, 2017. K S SUNDARAM =,E # $FG H,G$ / COPY TO: 1 . / APPELLANT 3. ! I$ () / CIT(A) 5. GJK $ L / DR 2. / RESPONDENT 4. ! I$ / CIT 6. K. M' / GF