SAURABH AGROTECH (P) LTD., Alwar V. DCIT, Alwar

ITA 259/JPR/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5016 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 18-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P BATEJA CIT DHK
• Keywords: Business income; Earning of tax free income; Commercial expediency
• Section: 14A; 80IB

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH DQY HKKJR] U;KF;D LNL; ,OA JH FOE FLAG ;KNO ] YS[KK LNL; DS LE{K BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YAD AV, AM VK;DJ VIHY LA-@ ITA NO.514/JP/13 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2009-10 M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR CUKE VS. THE ACIT, CIRCLE-1, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA-@ ITA NO.556/JP/13 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2009-10 THE ACIT, CIRCLE-1, ALWAR CUKE VS. M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA-@ ITA NO.258/JP/15 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR CUKE VS. THE ACIT, CIRCLE-1, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA-@ ITA NO.243/JP/15 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 THE ACIT, CIRCLE-1, ALWAR CUKE VS. M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 2 VK;DJ VIHY LA-@ ITA NO.259/JP/15 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2011-12 M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR CUKE VS. THE ACIT, CIRCLE-1, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA-@ ITA NO.244/JP/15 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2011-12 THE ACIT, CIRCLE-1, ALWAR CUKE VS. M /S SAURABH AAGROTECH (P) LTD. 20, 21 & 22 OLD INDUSTRIAL AREA, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AADCS 4522 P VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI P.C. PARWAL (CA) JKTLO DH VKSJ LS@ REVENUE BY : SHRI O.P. BATEJA (ADDL. CIT ) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 29.09.2016 ?KKS'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 18/10/2016. VKNS'K@ ORDER PER SHRI VIKRAM SINGH YADAV, A.M. THESE ARE CROSS-APPEALS FILED BY THE ASSESSEE AS WE LL AS BY THE REVENUE FOR A.Y. 2009-10, 2010-11 & 2011-12 AGAINST THE O RDER OF LD. CIT(A) ALWAR DATED 04.03.2013 FOR A.Y. 2009-10, 06.01.2015 FOR A .Y. 2010-11 AND 16.01.2015 FOR A.Y.2011-12 RESPECTIVELY. ALL THESE APPEALS WERE HEARD TOGETHER AND DISPOSED OFF BY THIS CONSOLIDATED ORDER. FIRST, WE WILL TAKE THE APPEALS FOR AY 2009- 10 AND THE GROUNDS TAKEN BY THE ASSESSEE AS WELL AS REVENUE ARE AS UNDER: ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 3 GROUNDS IN ASSESSEES APPEAL (ITA NO. 514/JP/13) 1) THAT THE LD. AO HAS ERRED IN LAW AS WELL AS ON T HE FACTS AND CIRCUMSTANCES OF THE CASE IN INVOKING THE PROVISION OF SECTION 14 A OF THE IT ACT, 1961 AND IN MAKING DISALLOWANCE OF RS. 17,37,688/- OUT O F THE INTEREST PAYMENT IN AS MUCH AS THE ASSESSEE HAS NOT RECEIVED ANY EXEMPT INCOME DURING THE YEAR AND HAS NOT INCURRED ANY EXPENSES D URING THE YEAR UNDER CONSIDERATION AND INCOME FROM SHARES ARE NOT EXEMP T INCOME SINCE AT THE TIME OF SALE OF SHARES, THE CAPITAL GAIN IS LI ABLE TO TAX. THEREFORE, INVOKING OF PROVISIONS OF SECTION 14A UNDER THE GIV EN CIRCUMSTANCES IS ERRONEOUS AND ALSO THE HONBLE CIT(A), ALWAR HAS ER RED IN SUSTAINING THE SAME. (2) THE AO HAS ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN WORKING OUT THE PROFIT ON DIRECT TRADING OF OIL OF RS. 14,27,031/- AND IN NOT ALLOWING THE DEDUCTION U/S 80IB OF THE IT ACT, 1961 AND THE HONBLE CIT(A), ALWAR HAS ERRED IN SUSTAINING THE S AME. GROUNDS IN REVENUES APPEAL (ITA NO. 556/JP/13) (1) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) ALWAR IS JUSTIFIED IN DELETING THE ADDITION MADE ON ACCOU NT OF DISALLOWANCE OF DEDUCTION CLAIMED U/S 80IA FOR RS. 27,46,931/-. (2) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) ALWAR HAS JUSTIFIED IN DELETING THE ADDITION MADE ON ACCO UNT OF DISALLOWANCE OF DEDUCTION CLAIMED U/S 80IA FOR RS. 20,41,040/- OUT OF INTEREST EXPENSES U/S 36(1)(III) ON ACCOUNT OF INTEREST FREE LOAN OF RS. 1,70,08,670/- GIVEN TO M/S DHRUV ENCLAVE (P) LTD. 2. IN RESPECT OF GROUND NO. 1 OF THE ASSESSEES APP EAL, BRIEFLY THE FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATI ON, ASSESSEE COMPANY CLAIMED NET INTEREST EXPENSES OF RS. 1,16,32,178/- ON LOANS & ADVANCES TAKEN FROM BANKS & OTHER PARTIES. THE AO OBSERVED THAT AS SESSEE COMPANY HAS MADE INVESTMENT IN SHARES AMOUNTING TO RS. 4,86,81,350/- , THE DIVIDEND INCOME OF WHICH IS EXEMPT FROM TAX AND AS THE ASSESSEE HAS FA ILED TO PROVE THAT THE INVESTMENTS WERE MADE FROM NON-INTEREST BEARING FUN DS, IT IS CONSIDERED THAT THE INTEREST BEARING FUNDS TO THE TUNE OF RS.18,28, 72,207/- (WRONGLY TAKEN BY AO AT RS.1,40,17,2207/-) HAVE BEEN DIVERTED FOR EXT RA COMMERCIAL CONSIDERATION ON WHICH THE COMPANY HAS INCURRED INT EREST EXPENSES WITHOUT ANY CORRESPONDING RETURN. ACCORDINGLY, AO MADE DISA LLOWANCE OF RS. 17,37,688/- U/S 14A OF THE I.T. ACT,1961, AS PER RU LE 8D OF THE I. T. RULES, 1962. ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 4 2.1 THE LD CIT(A) CONFIRMED THE DISALLOWANCE BY GIV ING THE FOLLOWING FINDINGS:- THE APPELLANT HAS SUBMITTED THAT THERE WAS NO DIVID END/EXEMPT INCOME DURING THE YEAR AND THEREFORE THERE WAS NO APPLICATION OF SEC. 14A. THIS CONTENTION IS NOT ACCEPTABLE IN VIEW OF THE DECISION OF ITAT, DELHI S PECIAL BENCH IN CASE OF CHEMINVEST LTD. VS. ITO 124 TTJ 577 IN WHICH IT HAS BEEN HELD THAT DISALLOWANCE U/S 14A CAN BE MADE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY ASSESSEE OR NOT. EXPENDITURE IN RELATION TO INCOME IS WIDER IN SCOPE AND PROVIDE FOR DISALLOWANCE IF RELATED TO INCOME NOT FORMING PART OF TOTAL INCOME. THE APPELLANT HAS SUBMITTED THAT INVESTMENT WAS MAD E IN SHARES OUT OF COMMERCIAL EXPEDIENCY AND TO GAIN CONTROLLING INTEREST. IN CAS E OF MAXOPP INVESTMENT LTD. 247 CTR 162 (DEL.), IT HAD BEEN HELD BY THE HONBLE HIG H COURT THAT THE INVESTMENT IN SHARES FOR GAINING CONTROLLING INTEREST IS HIT BY P ROVISIONS OF SEC. 14A. THE CASE LAWS CITED BY THE APPELLANT I.E. 239 ITR 7 95 (MAD.), 280 ITR 525 (CAL.) AND 178 TAXMAN 135 (BOM.) ARE NOT APPLICABLE TO THIS CASE S INCE THESE RELATE TO DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT ON FUNDS ADVANCE D TO THIRD PARTY WHEREAS DISALLOWANCE OF INTEREST EXPENSES WITH RESPECT TO INVESTMENT OF RS.4,86,81,350/- IN SHARES HAS BEEN MADE BY THE AO U/S 14A OF THE ACT. THE BASIC OBJECT OF SEC. 14A IS TO DISALLOW THE DIR ECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME. THE APPELLANT HAS PREPARED A STATEMENT OF SOURCES A ND USES OF FUNDS AS ON 31.03.2009. FROM THE SAID CHART, IT IS OBSERVED THA T ALLOCATION OF INTEREST BEARING FUNDS AND THE SO CALLED NON-INTEREST BEARING SHAREHOLDERS FUNDS TO VARIOUS ASSETS HAS BEEN MADE ON ASSUMPTION WHICH SUIT THE CASE OF THE APPEL LANT. FOR INSTANCE, UNSECURED LOAN OF RS.4.74 CRORES HAS BEEN STATED TO BE INVESTED IN FIXED ASSET, DEBTORS, CASH, BANK ETC. BUT NOT IN THE INVESTMENT IN SHARES OF RS.4.86 CROR ES, WHICH IS WITHOUT ANY BASIS. A GENERALIZED ANALYSIS OF THE FIGURES IN BALANCE SHEE T CANNOT SETTLE THE ISSUE SINCE IT IS ONLY BASED ON PRESUMPTIONS. THE APPELLANT HAS NOT PROVIDED DETAILS OF SOURCE OF INVESTMENT IN SHARES ON DAY TO DAY BASIS, BEFORE THE AO OR IN THE APPELLATE PROCEEDING S, IN SUPPORT OF ITS CLAIM THAT THE INVESTMENT IN SHARES WERE OUT OF NON-INTEREST BEARI NG FUNDS. IN THIS REGARD, REFERENCE IS MADE TO CASE OF DHANUKA & SONS VS. CIT 339 ITR 3 19 (CAL.) WHEREIN IT WAS HELD THAT SINCE THE ASSESSEE WAS UNABLE TO PRODUCE MATERIAL T O SHOW THE SOURCE OF ACQUISITION OF ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 5 SHARES AND TO SHOW THAT NO INTEREST WAS PAID BY IT, THEN PROPORTIONATE DISALLOWANCE OUT OF INTEREST EXPENSES WAS JUSTIFIED. WHILE DECIDING THE APPEAL FOR A.Y. 08-09 IN THE CAS E OF THE APPELLANT, THE LD. PREDECESSOR IN ORDER DT. 20.08.2011 IN APPEAL NO. 3 56/10-11 HAS ALSO UPHELD THE DISALLOWANCE OF RS.14,68,888/- U/S 14A OF THE ACT A S PER RULE 8D OF THE IT RULES. 2.3 THE LD AR SUBMITTED THAT THE DISALLOWANCE U/S 1 4A CANNOT BE MADE WHERE ASSESSEE HAD NOT EARNED/RECEIVED EXEMPT INCOME DURI NG THE RELEVANT YEAR. THE CIT(A) IN THIS CONNECTION HAS RELIED ON THE DECISION OF SP ECIAL BENCH OF THE TRIBUNAL IN CASE OF CHEMINVEST LTD. VS. ITO (2009) 124 TTJ 577. HOWEVER , THE SAID DECISION HAS BEEN REVERSED BY THE HONBLE DELHI HIGH COURT IN CASE OF CHEMINVEST LTD. VS. ITO 378 ITR 0033 DATED 01.09.2015 WHEREIN IT WAS HELD THAT THE EXPRESSION DOES NOT FORM PART OF TOTAL INCOME IN SEC. 14A ENVISAGES THAT THERE SHOU LD BE AN ACTUAL RECEIPT OF INCOME, WHICH WAS NOT INCLUDIBLE IN THE TOTAL INCOME, DURIN G THE RELEVANT PREVIOUS YEAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE SAID INCOME. IN OTHER WORDS, SEC. 14A WILL NOT APPLY IF NO EXEMPT I NCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. IN THE PRESENT C ASE ALSO, ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME FROM INVESTMENT IN SHARES AND T HUS NO DISALLOWANCE IS CALLED FOR. IT WAS FURTHER SUBMITTED THAT THE ITAT JAIPUR BEN CH IN CASE OF M/S VIJAY INDUSTRIES VS. DCIT IN ITA NO.673/JP/2015 FOR A.Y. 2006-07 ORD ER DATED 17.06.2016 WHEREIN ALSO NO DIVIDEND INCOME WAS RECEIVED AND THE INTEREST F REE FUNDS AVAILABLE WITH THE ASSESSEE WAS MUCH MORE THAN THE INVESTMENT MADE IN SHARES, INVESTMENT MADE IN SHARES, DELETED THE DISALLOWANCE U/S 14A. 2.4 THE AR OF THE ASSESSEE HAS FURTHER DRAWN OUR RE FERENCE TO RULE 8D ON THE BASIS OF WHICH AO COMPUTED THE DISALLOWANCE WHICH IS REPR ODUCED AS UNDER:- ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 6 RULE 8D - METHOD FOR DETERMINING AMOUNT OF EXPENDI TURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1) WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE A CCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPEN DITURE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROV ISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY:- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXP ENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABL E TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY : A- AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER T HAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR ; B THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHI CH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAYAND LAST DAY OF THE PREVIOUS YEAR ; THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE F IRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE A VERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 7 AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (3) FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSE TS' SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREA SE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. IT WAS SUBMITTED THAT ON PERUSAL OF RULE 8D REPRODU CED ABOVE, IT IS EVIDENT THAT RECOURSE TO RULE 8D IS NOT AUTOMATIC. ASSESSEE CAN CLAIM THAT HAVING REGARD TO THE BOOKS OF ACCOUNTS, IT HAS NOT INCURRED ANY EXPENDIT URE IN RELATION TO INCOME NOT FORMING PART OF HIS TOTAL INCOME. IF THE AO HAVING REGARD TO SUCH ACCOUNTS IS NOT SATISFIED WITH THE CORRECTNESS OF THE ASSESSEES CL AIM, THEN ONLY HE CAN INVOKE SUB CLAUSE (2) OF RULE 8D. THE HONBLE SUPREME COURT IN CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS PVT. LTD. 326 ITR 001 IN PARA 17 HAS OBSERVED THAT FOR ATTRACTION OF SECTION 14A, THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOME. 2.5 IT WAS FURTHER SUBMITTED BY THE LD AR THAT IN T HE PRESENT CASE, ASSESSEE HAS CLAIMED THAT IT HAS NOT INCURRED ANY EXPENDITURE BY WAY OF PAYMENT OF INTEREST FOR MAKING INVESTMENT IN THE SHARES. THIS IS EVIDENT FR OM THE FACT THAT THE PAID-UP CAPITAL AND RESERVE AND SURPLUS FAR EXCEED THE INVESTMENT I N SHARES (PB 2). IN FACT, THE INVESTMENT IN SHARES WERE MADE IN VARIOUS YEARS AND IN EACH OF THOSE YEARS, THE INTEREST-FREE FUND AVAILABLE IS MUCH MORE THAN THE INVESTMENT IN SHARES. AS ON 31.03.2009, THE INTEREST-FREE FUND AVAILABLE WITH T HE ASSESSEE IS AROUND 2.5 TIMES OF THE INVESTMENT MADE IN SHARES. THEREFORE, IT CANNOT BE PRESUMED THAT BORROWED FUNDS HAS BEEN UTILIZED FOR MAKING INVESTMENT IN SH ARES. THEREFORE, IN THE ABSENCE OF ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 8 ANY PROXIMATE RELATION OF BORROWED FUNDS WITH INVES TMENT IN SHARES, NO PART OF THE INTEREST EXPENDITURE CAN BE DISALLOWED U/S 14A R.W. R. 8D(2)(II). 2.6 IT IS ALSO SUBMITTED THAT RULE 8D(2) HAS SINCE BEEN SUBSTITUTED BY NOTIFICATION DT. 02.06.2016. AS PER THIS RULE, ONLY THE EXPENDIT URE DIRECTLY RELATING TO THE INCOME WHICH DOES NOT FROM PART OF TOTAL INCOME AND AN AMO UNT EQUAL TO 1% OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGES OF OPENING AND CLOS ING BALANCE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT PART FROM OF TOTAL INCOME CAN BE DISALLOWED. THUS, THE AMENDED RULE 8D(2) DOES NOT C ALL FOR ANY DISALLOWANCE OUT OF THE INTEREST EXPENDITURE ON ATTRIBUTION BASIS. THIS AMENDMENT IS TO REMOVE UNINTENDED HARDSHIP AND BEING PROCEDURAL FOR CALCUL ATING THE DISALLOWANCE, HAS A RETROSPECTIVE APPLICATION IN VIEW OF THE PRINCIPAL LAID DOWN BY SUPREME COURT IN CASE OF CIT VS. ALOM EXTRUSIONS LTD. 319 ITR 306 AND CIT VS. VATIKA TOWNSHIP PVT. LTD. 367 ITR 466. 2.7 IT WAS FURTHER SUBMITTED THAT THE ISSUE OF DIS ALLOWANCE U/S 14A READ WITH RULE 8D CAME UP BEFORE HONBLE ITAT IN A.Y. 06-07, 07-08 AND 08-09. IN A.Y. 06-07, THE HONBLE ITAT VIDE ORDER DT. 06.0 5.2011 IN ITA NO. 956 & 475/JP/10 IN PARA 15, PAGE 10 OF THE ORDER, HELD AS UNDER:- HONBLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D IS PROSPECTIVE. GODREJ & BOYSE MANUFACTURING CO. LTD. VS. DCIT 328 ITR 81. THE HON BLE BOMBAY HIGH COURT HAS ALSO HELD THAT THE AO IS DUTY BOUND TO COMPUTE THE DISAL LOWANCE BY APPLYING A REASONABLE METHOD HAVING REGARDS TO THE FACTS AND CIRCUMSTANCE S OF THE CASE. IF BORROWED FUNDS HAVE NOT BEEN USED THEN NO DISALLOWANCE. ONUS ON AO TO ESTABLISH THE NEXUS BETWEEN EXPENDITURE AND EXEMPT INCOME. IF FUNDS ARE IN COMM ON POOL THEN REASONABLE ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 9 DISALLOWANCE. SINCE THE LD. CIT (A), HAS DIRECTED T O APPLY RULE 8D AND WE, THEREFORE MODIFY THE DIRECTION THAT THE AO WILL RECOMPUTE THE DISALLOWANCE UNDER SECTION 14A AS PER LAW AFTER GIVING THE OPPORTUNITY TO THE ASSESSE E AND TO ASCERTAIN AS AT WHETHER BORROWED FUNDS HAVE BEEN USED OR ANY OTHER EXPENDIT URE HAS LINK WITH EXEMPT INCOME AND RULE 8D WILL NOT BE APPLICABLE. IN A.Y.07-08 AND 08-09, THE HONBLE ITAT VIDE ORDER DATED 18.10.2012 HELD AS UNDER (PARA 9 PAGE 9): AFTER GOING THROUGH THE DECISION OF HONBLE SUPREM E COURT [326 ITR 1], WE ARE OF THE CONSIDERED VIEW THAT IF THE EXPENDITURE ON ACCOUNT OF INTEREST HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS, THEN IN VIEW OF DECISION O F HONBLE SUPREME COURT, IT CANNOT BE BIFURCATED FOR THE PURPOSE OF INVOKING SEC. 14A. THERE SHOULD BE A DIRECT NEXUS. THE ASSESSEE HAS CLAIMED THAT IT HAS ITS OWN INCOME WHI CH IS SURPLUS FROM WHICH THE SHARES WERE PURCHASED IN EARLIER YEAR AND THEREFORE THERE IS NO NEXUS OF INCOME, EXPENDITURE AND INVESTMENT IN SHARES. THIS ISSUE HAS ALREADY BE EN EXAMINED BY THE TRIBUNAL WHILE DECIDING THE APPEAL FOR A.Y. 06-07. IN VIEW OF THOS E FINDINGS, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO TO CONSIDER THE SAME IN LIGHT OF THE FINDING GIVEN BY THE TRIBUNAL WHILE DECIDING THE ISSUE FOR ASSESSMENT YEAR 2006-0 7. WE ORDER ACCORDINGLY. 2.8 IT WAS FURTHER SUBMITTED THAT IN VARIOUS CASES, IT HAS BEEN HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OVER DRAFT A ND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 2.9 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PURSUE D THE MATERIAL AVAILABLE ON RECORD. WE REFER TO THE PROVISIONS OF SECTION 14A OF THE AC T WHICH HAVE A BEARING ON ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 10 THE SUBJECT. SUB SECTION (1) OF SECTION 14A CLEARL Y STIPULATES THAT FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME UNDER CHAPTER IV, NO DED UCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T. THE EXPRESSION EXPENDITURE INCURRED REFER TO ACTUAL EXPENDITURE IN RELATION T O OR IN CONNECTION WITH OR PERTAINING TO THE EXEMPT INCOME. COROLLARY TO THE SAME IS THA T WHERE NO EXPENDITURE IS INCURRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE C AN BE MADE U/S 14A OF THE ACT. AS HELD BY THE SUPREME COURT IN CIT VS. WALFORT SHARE AND STOCK BROKERS PVT. LTD. (326 ITR 1), FOR ATTRACTING SECTION 14A, THERE HAS TO BE A PRO XIMATE CAUSE FOR DISALLOWANCE WHICH IS ITS RELATIONSHIP WITH THE TAX EXEMPT INCOM E. THUS, IN THE ABSENCE OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE, SECTION 14A CANNO T BE INVOKED. THERE IS NO SUCH FINDING BY THE AO IN THE INSTANT CASE THAT THE ASSE SSEE HAS INCURRED CERTAIN EXPENDITURE IN RELATION TO THE EXEMPT INCOME AND IN PARTICULAR WHETHER THE ASSESSEE HAS UTILIZED INTEREST BEARING BORROWED FUNDS FOR TH E PURPOSE OF MAKING THE IMPUNGED INVESTMENT. FURTHER, SUB SECTION (2) OF SECTION 14 PROVIDES THE MANNER IN WHICH THE AO IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURR ED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME PROVIDED THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . FURTHER, SUB SECTION (3) OF SECTION 14A APPLIES TO CASES WHERE THE ASSESSEE CL AIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES N OT FORM PART OF TOTAL INCOME UNDER THE ACT. AS HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (347 ITR 272) WHERE IT WAS HELD AS UNDER: THE REQUIREMENT OF THE AO EMBARKING UPON A DETERMI NATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE AO RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. THEREFORE, THE CONDITION ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 11 PRECEDENT FOR THE AO ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO THE EXEMPT INCO ME IS THAT THE AO MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNES S OF THE CLAIM IN RESPECT OF SUCH EXPENDITURE. SUB SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB S ECTION (2) TO SECTION 14A AND IN BOTH THE CASES, THE AO IF NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THEN THE AO GETS JURISDICTION TO DETE RMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH THE PRESCRIBED MET HOD PRESCRIBED UNDER RULE 8D OF THE SAID WHILE REJECTING THE CLAIM OF THE AS SESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAYBE I N RELATION TO EXEMPT INCOME. THE AO WOULD HAVE TO INDICATE COGENT REASO NS FOR THE SAME. IT IS THEREFORE CLEAR THAT THE DETERMINATION OF THE AMOUN T OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE AO REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. 2.10 IN LIGHT OF PROVISIONS OF SECTION 14A AND THE ABOVE PROPOSITION IN LAW, IN THE INSTANCE CASE, THE ASSESSEE HAS CLAIMED THAT IT HAS NOT INCURRED ANY EXPENDITURE BY WAY OF PAYMENT OF INTEREST FOR MAKING INVESTMENT IN THE SHARES. IT WAS SUBMITTED THAT THE PAID-UP CAPITAL AND RESERVE AND SURPLUS FAR EXC EED THE INVESTMENT IN SHARES. IN FACT, THE INVESTMENT IN SHARES WERE MADE IN VARIOUS YEARS AND IN EACH OF THOSE YEARS, THE INTEREST-FREE FUND AVAILABLE IS MUCH MORE THAN THE INVESTMENT IN SHARES. AS ON 31.03.2009, THE INTEREST-FREE FUND AVAILABLE WITH T HE ASSESSEE IS AROUND 2.5 TIMES OF THE INVESTMENT MADE IN SHARES. IT WAS SUBMITTED THA T IT CANNOT BE PRESUMED THAT BORROWED FUNDS HAS BEEN UTILIZED FOR MAKING INVESTM ENT IN SHARES AND IN THE ABSENCE OF ANY PROXIMATE RELATION OF BORROWED FUNDS WITH IN VESTMENT IN SHARES, NO PART OF THE INTEREST EXPENDITURE CAN BE DISALLOWED U/S 14A R.W. R. 8D(2)(II). HOWEVER, THE AO HAS ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 12 NOT RETURN A FINDING THAT HE IS NOT SATISFIED WIT H THE CORRECTNESS OF THE SAID CLAIM OF THE ASSESEE IN RESPECT OF EXPENDITURE NOT HAVING BE EN INCURRED IN RELATION TO THE EXEMPT INCOME. IN ABSENCE OF AO RECORDING HIS SATI SFACTION WITH CORRECTNESS OF THE CLAIM OF THE ASSESSEE, WE ARE OF THE VIEW THAT INVO CATION OF RULE 8D SIMPLICATOR WOULD NOT BE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14A OF THE ACT. SIMILAR VIEW HAS BEEN TAKEN BY THE COORDINATE BENCH IN THE EARLIER Y EARS. IN LIGHT OF THE THESE DISCUSSIONS AND FOLLOWING THE EARLIER YEAR DECISION S OF THE COORDINATE BENCH, WE SET- ASIDE AND THE RESTORE THE MATTER TO THE FILE OF THE AO TO EXAMINE THE MATTER A FRESH AND AFTER RECORDING HIS SATISFACTION VIS-A-VIS THE CLAIM OF THE ASSESSEE, RECOMPUTE THE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH LAW. THE ASSESSEES GROUND IS THUS ALLOWED FOR STATISTICAL PURPOSES. 3. IN RESPECT OF GROUND NO.2 OF THE ASSESSEES APP EAL, THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S 80-IB AT RS. 23,91,220/-. THE AO OBSERVED THAT QUALIFYING PROFIT ELIGIBLE FOR DEDUCTION U/S 80-IB IS RS.19,63,111/- AND THEREFORE HE RESTRICTED THE CLAIM OF DEDUCTION U/S 80-IB AT RS.1 9,63,111/-. THE CLAIM OF DEDUCTION U/S 80-IB WAS REDUCED FOR THE REASON THAT ASSESSEE HAS EARNED PROFIT FROM TRADING ACTIVITIES AT RS.14,27,031/- ON WHICH DEDUCTION U/S 80-IB IS NOT ALLOWABLE. 3.1 THE LD CIT(A) UPHELD THE ORDER OF THE AO AND H IS FINDINGS CONTAINED AT PARA 7.3 OF THE ORDER IS AS UNDER: I HAVE CONSIDERED THE ASSESSMENT ORDER AS WELL AS T HE SUBMISSIONS MADE BY THE AR. THE MATTER HAS BEEN EXAMINED FROM THE ASSESSMENT RE CORD. FROM THE WORKING SUBMITTED BY THE AR REGARDING THE CALCULATION OF TR ADING OF PROFIT IT IS OBSERVED THAT INTEREST HAS BEEN CHARGED ITEM-WISE @ 10.75% AMOUNT ING TO RS. 16,88,845/- (RS.12,39,608/- + RS. 4,49,237/-).THE AO HAS, ON TH E OTHER HAND COMPUTED THE TRADING PROFIT BY COMPUTING THE INTEREST COST AT RS. 9,37,0 00/-, BY MULTIPLYING THE TOTAL ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 13 INTEREST COST (RS. 1,16,32,178/-) TO THE RATIO OF TRADING SALE(RS. 14,42,93,290/-) TO THE TOTAL SALES (RS. 1,70,43,92,510/- + RS.8,51,94,66 8/- = RS. 1,78,95,87,178/-). THUS, EXCESS INTEREST COST OF RS. 7,51,845/- HAS BEEN WO RKED OUT AND ADDED TO THE TRADING PROFIT OF RS. 6,75,186/- WORKED OUT BY THE AR. THE AR HAS SUBMITTED THAT THE AO HAS NOT CONSIDERED THE INTEREST ELEMENT ON TRADING ITEM S WHICH REMAINED IN STOCK AND WERE NOT SOLD. THE AR HAS ALLOCATED ADMINISTRATIVE EXPENSES AS A PERCENTAGE OF SALES WHEREAS THE INTEREST EXPENSES HAVE BEEN WORKED OUT AT AN ASSUMED RATE OF 10.75%. FOR DIFFERENT ITEMS OF TRADING , DIFFERENT ASSUMPTI ONS HAVE BEEN MADE REGARDING THE WORKING OF INTEREST COST WHICH DO NOT APPEAR TO HAV E PROPER BASIS. I FIND THAT THE APPELLANT HAS CLAIMED EXCESSIVE ALLOCATION OF INTER EST COST WHILE WORKING OUT THE NET PROFIT ON TRADING ITEMS. WHEN THE ITEM REMAINED I N STOCK AND WAS NOT SOLD THEN THERE IS NO QUESTION OF ALLOCATING INTEREST COST ON SUCH STOCK TO WORK OUT THE NET PROFIT ON THEIR TRADING. I FIND THAT THE AO HAS ADOPTED A RE ASONABLE BASIS FOR ALLOCATING THE INTEREST COST AS PROPORTION OF TRADING SALE TO TOTA L SALES. THEREFORE THE WORKING OF TRADING PROFIT AT RS. 14,27,031/- IS UPHELD. THE CONTENTION OF THE AR THAT THE TRADING ACTIVITY UNDERTAKEN BY THE APPELLANT IS INCIDENTAL AND ANCILLARY TO THE MAIN BUSINESS AND D EDUCTION U/S 80IB SHOULD BE ALLOWED IS FOUND TO BE WITHOUT MERIT SINCE DEDUCTIO N IS ALLOWABLE ON THE PROFITS AND GAINS DERIVED FROM THE INDUSTRIAL UNDERTAKING WHICH IS ENGAGED IN MANUFACTURE OR PRODUCTION OF ARTICLES OR THINGS. THE EXPRESSION DERIVED FROM HAS NARROW MEANING AND IT CAN NOT BE EXTENDED TO INCLUDE THE ANCILLARY BUSINESS OF TRADING UNDERTAKEN BY THE APPELLANT. FURTHER IT HAS BEEN SUBMITTED WITH REGARD TO PROFI T ON SALE OF MUSTARD OIL THAT THE ASSESSEE HAS PURCHASED LOOSE OIL FROM MARKET AND HA S SOLD IT AFTER DOUBLE FILTRATION AND PACKING IT IN TINS WITH AGMARK LABEL. THE AR HAS RELIED ON THE DECISION OF CIT VS. SHIV OIL AND DAL MILL 281 ITR 221 (ALL) IN SUPPORT ITS CONTENTION. THE AR HAS SUBMITTED ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 14 THAT PROFITS AND GAINS DERIVED FROM ANY BUSINESS O F THE INDUSTRIAL UNDERTAKING WAS ELIGIBLE FOR DEDUCTION. THE ISSUE OF ALLOWING DEDUC TION U/S 80-IB ON THE PROFIT OF TRADING OF RAW MATERIAL AND OIL HAS BEEN DECIDED AGAINST TH E APPELLANT IN ITS OWN CASE FOR A.Y. 2006-07 IN ITA NO. 956/JP.2010 AND ITA NO/. 475/JP/ 2010 BY THE HONBLE ITAT JAIPUR BENCH A JAIPUR BY HOLDING THAT THE PROFIT FROM T HE TRADING IS NOT DERIVED FROM INDUSTRIAL UNDERTAKING IN VIEW OF THE APEX COURT DE CISION IN THE CASE OF LIBERTY INDIA VS. CIT 317 ITR 218. THE INDUSTRIAL UNDERTAKING OF THE APPELLANT IS ENGA GED IN THE MANUFACTURE OF MUSTARD OIL AND OILCAKE BY CRUSHING OF MUSTARD SEEDS. PURC HASE OF LOOSE OIL FROM MARKET AND ITS SALE AFTER DOUBLE FILTRATION AND PACKING IT IN TINS WITH AGMARK LABEL WILL NOT AMOUNT TO MANUFACTURE OF PRODUCTION SINCE IT DOES NOT ALTE R THE CHARACTER OF OIL IN THIS PROCESS. THE END PRODUCT AS SELL AS THE INITIAL PRODUCT IS M USTARD OIL AND THERE IS NO MANUFACTURE OR PRODUCTION INVOLVED SINCE THE VALUE ADDITION IN THIS PROCESS WOULD BE VERY MINIMAL. RELIANCE IS PLACED ON THE DECISIONS OF THE HONBLE TRIBUNAL IN THE CASE OF ACQUA MINERALS PVT. LTD. VS. DCIT 271 ITR (AT) 106 (AHD.) IN WHICH IT WAS FOUND THAT THE END OF PRODUCT I.E. PACKAGED DRINKING WATER W AS NOTHING MORE THAN A PURER MORE HYGIENIC FORM OF DRINKING WATER AND NO NEW PRODUCT HAD COME OUT OF THE PROCESS. SIMILARLY, IN THE CASE OF B.G. CHITALE VS. DCIT (IT AT PUNE) (2008)305 ITR (A.T.) IT WAS HELD THAT IN PASTEURIZATION AND STANDARDIZATION OF MILK, NO NEW COMMODITY COMES INTO EXISTENCE. ACCORDINGLY, THE PLEA OF THE APPELLANT THAT PROFIT FROM TRADING OF OIL SHOULD BE CONSIDERED AS INCOME DERIVED FROM INDUSTRIAL UND ERTAKING FOR ALLOWING DEDUCTION U/S 80IB IS REJECTED. THE APPELLANT HAS TAKEN A PLEA THAT INCOME DERIVED FROM ANY BUSINESS OF INDUSTRIAL UNDERTAKING IS ELIGIBLE FOR DEDUCTION AND THEREFORE THE PROFIT ON DIRECT TRADING OF MUSTARD OIL, OILCAKE SHOULD NOT BE DEDUCTED SINCE THESE ACTIVITY AMOUNT TO PROCESSING ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 15 OF GOODS AND IN TURN IS A MANUFACTURING ACTIVITY. T HE PROVISIONS OF SECTION 80IA AND 80IB HAVE BEEN MODIFIED W.E.F. 01.04.2000. THE CA SES CITED BY THE APPELLANT RELATE TO SECTION 80IA AND NOT TO SECTION 80IB OF THE ACT. F URTHER, SECTION 80IB(1) PROVIDES FOR CERTAIN DEDUCTION FROM THE PROFITS AND GAINS DERIVE D FROM ANY BUSINESS REFERRED TO IN SUB-SECTION 3 TO 11, 11(A) AND 11(B). THE VARIOUS TYPES OF SHIP ETC. SECTION 80IB(2) FURTHER PROVIDES THE CONDITIONS WHICH SHOULD BE FUL FILLED BY ANY INDUSTRIAL UNDERTAKING FOR BEING ELIGIBLE FOR DEDUCTION. ONE OF THE CONDI TIONS IS THAT IT MANUFACTURES OR PRODUCES ANY ARTICLE OF THING, NOT BEING ANY ARTIC LE OR THING SPECIFIED IN THE LIST IN THE ELEVENTH SCHEDULE. THUS, INCOME SHOULD BE DERIVED FROM THE MANUFACTURE OF PRODUCTION AND NOT FROM TRADING ACTIVITY OF THE IND USTRIAL UNDERTAKING FOR GETTING DEDUCTION U/S 80IB. IN VIEW OF ABOVE DISCUSSION, T HIS GROUND IS DISMISSED. 3.2 THE AR OF THE ASSESSEE HAS SUBMITTED THAT AO H AS DISALLOWED THE CLAIM OF DEDUCTION U/S 80-IB AT RS.4,28,109/-, BEING 30% OF THE TRADING PROFIT COMPUTED BY THE AO AT RS.14,27,031/-. THE DISALLOWANCE SO MADE IS I NCORRECT FIRSTLY FOR THE REASON THAT THE AO HAS INCORRECTLY WORKED OUT THE TRADING PROFI T AT RS.14,27,031/- AS AGAINST RS.6,75,186/- WORKED OUT BY THE ASSESSEE AND SECOND LY BECAUSE THE PROFIT EARNED ON SALE OF PROCESSED MUSTARD OIL IS CONSIDERED BY HIM AS TRADING PROFIT INSTEAD OF MANUFACTURING PROFIT. 3.3 IT WAS SUBMITTED THAT SOMETIMES, ASSESSEE HAS PURCHASED MUSTARD OIL FROM THE MARKET WHICH IS UNGRADED AND WITHOUT AGMARK. THE SA ME IS PURCHASED IN LOOSE. THE ASSESSEE, THEREAFTER, UNDERTAKES THE PROCESS OF DOU BLE FILTRATION OF THE OIL SO PURCHASED SO AS TO MAKE IT AGMARK. THIS PROCESS OF PURCHASING THE OIL FROM THE MARKET AND SELLING IT AFTER REFINING AMOUNTS TO MANUFACTUR ING AND PRODUCTION OF ARTICLE OR THING. THEREFORE, ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IB. FOR THIS PURPOSE, RELIANCE IS PLACED IN CASE OF CIT VS. SHIV OIL AND DAL MILLS 281 ITR 221 (ALL.) WHERE IT WAS HELD ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 16 THAT ACTIVITY OF PURCHASE AND THE REFINING OF OIL A MOUNTS TO MANUFACTURING OR PROCESSING OF GOODS ENTITLED TO DEDUCTION U/S 80HH AND 80I. THEREFORE, CONSIDERING THE PROFIT OF RS.31,60,461/- ON PROCESSING OF THE M USTARD OIL AS TRADING PROFIT IS INCORRECT. 3.4 IT WAS FURTHER SUBMITTED THAT SUCH TRADING PRO FITS INCLUDES PROFIT ON SALE OF OIL AFTER REFINING WHICH IS MANUFACTURING PROFIT IN VIE W OF SECTION 2(29BA) OF THE IT ACT, 1961 AND IN VIEW OF THE DECISION OF ALLAHABAD HIGH COURT IN CIT VS. SHIV OIL & DAL MILLS 281 ITR 221 AND SUPREME COURT IN CASE OF INDIA SHIN E AGENCIES VS. CIT 308 ITR 98. 3.5 SECTION 2(29BA) INSERTED BY FINANCE (NO. 2) AC T 2009, W.E.F. 01.04.2009 DEFINES THE TERM MANUFACTURE AS UNDER:- MANUFACTURE WITH ITS GRAMMATICAL VARIATIONS, MEAN S A CHANGE IN A NON-LIVING PHYSICAL OBJECT OR ARTICLE OR THING (A) RESULTING IN TRANSFORMATION OF THE OBJECT OR AR TICLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE; OR (B) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT O BJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTUR E. FROM THE ABOVE DEFINITION OF THE TERM MANUFACTURE APPLICABLE FROM A.Y. 09-10, IT CAN BE NOTED THAT ANY CHANGE IN A NON-LIVING PHYSIC AL OBJECT WHICH RESULTS IN TRANSFORMATION OF THAT OBJECT INTO A NEW AND DISTIN CT OBJECT HAVING A DIFFERENT NAME, CHARACTER AND USE OR A DIFFERENT CHEMICAL COMPOSITI ON OR INTEGRAL STRUCTURE IS MANUFACTURE. 3.6 IN THE PRESENT CASE, ASSESSEE HAS PURCHASED MU STARD OIL FROM THE MARKET IN LOOSE WHICH IS UNGRADED AND WITHOUT AGMARK. THE LOO SE OIL IS EMPTIED IN THE TANK AT ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 17 THE FACTORY OF THE ASSESSEE AND MIXED WITH THE OTHE R OIL WHICH IS MANUFACTURED FROM THE OIL SEED AT THE ASSESSEES FACTORY PREMISES FOR MAINTAINING THE REQUISITE QUALITY. THEREAFTER, THE ASSESSEE UNDERTAKES THE PROCESS OF DOUBLE FILTRATION OF THE OIL SO PURCHASED ALONG WITH ITS OWN MANUFACTURED OIL SO AS TO MAKE IT AGMARK. THUS, THE OIL SO PURCHASED LOSSES ITS IDENTITY AND RESULTS INTO T RANSFORMATION OF A DIFFERENT OIL HAVING DIFFERENT NAME, CHARACTER AND USE AND CHEMIC AL COMPOSITION. THEREFORE, THE PURCHASE OF OIL FROM THE MARKET, MIXING IT WITH OTH ER OIL, REFINING IT AND THEREAFTER SELLING IT AMOUNTS TO MANUFACTURE. 3.7 IN EARLIER YEARS, HONBLE ITAT HELD THAT PROCE SSING OF OIL DOES NOT AMOUNT TO MANUFACTURE. HOWEVER, WITH THE INSERTION OF DEFINIT ION OF MANUFACTURE W.E.F. A.Y. 09- 10, IT IS CLEAR THAT EVEN PROCESSING WOULD AMOUNT T O MANUFACTURE IF ITS BRINGS A CHANGE RESULTING INTO A NEW AND DISTINCT OBJECT HAVING DIF FERENT NAME, CHARACTER AND USE OR WITH A DIFFERENT CHEMICAL COMPOSITION. FURTHER, ALL AHABAD HIGH COURT IN CASE OF CIT VS. SHIV OIL AND DAL MILLS 281 ITR 221 HAS ALSO HELD TH AT ACTIVITY OF PURCHASE AND THE REFINING OF OIL AMOUNTS TO MANUFACTURING OR PROCESS ING OF GOODS ENTITLED TO DEDUCTION U/S 80HH AND 80I. IN VIEW OF THE ABOVE DEVELOPMENT IN LAW, THE LOWER AUTHORITIES WERE NOT CORRECT IN ESTIMATING THE TRADING PROFIT IN RESPECT OF PURCHAS E OF LOOSE MUSTARD OIL FOR WORKING OUT PROFIT ELIGIBLE FOR DEDUCTION U/S 80IB. 3.7 IT WAS FURTHER SUBMITTED THAT ON TRADING OF MU STARD SEED AND OTHER ITEMS, ASSESSEE INCURRED LOSS OF RS.28,22,232/- (PB 4-5). THIS LOSS IS WORKED OUT AFTER CONSIDERING THE INTEREST COST OF RS.16,88,845/- (RS .12,39,608+ RS.4,49,237) BY APPLYING INTEREST COST OF 10.75% FOR THE PERIOD INV OLVED IN TRADING. THE CIT(A) HAS HOWEVER, RESTRICTED SUCH INTEREST COST AT RS.9,37,0 00/- BY MULTIPLYING THE TOTAL INTEREST ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 18 COST IN THE RATIO OF TRADING SALES TO THE TOTAL SAL ES. THE ALLOCATION OF INTEREST COST ON THE BASIS OF SALES IS INCORRECT. THE INTEREST COST IS ON PURCHASE. THEREFORE, THE OBSERVATION OF CIT(A) THAT WHEN AN ITEM REMAINS IN STOCK, ALLOCATION OF INTEREST COST ON SUCH STOCK TO WORK OUT THE TRADING PROFIT IS INC ORRECT. THEREFORE, CIT(A) IS NOT JUSTIFIED IN REDUCING THE CLAIM OF INTEREST COST BY RS.7,51,845/- (16,88,845-9,37,000) IN WORKING OUT THE TRADING PROFIT. IN VIEW OF ABOVE, T HE DISALLOWANCE OF CLAIM OF DEDUCTION U/S 80-IB TO THE EXTENT OF RS.4,28,109/- IS UNJUSTIFIED AND THE SAME BE DELETED. 3.8 WE HAVE HEARD THE RIVAL CONTENTIONS AND PURSUE D THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, IN THE PAST, THE SUBJECT MATTE R HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE COORDINATE BENCH WHEREIN IT WAS PRO CESSING OF MUSTARD OIL DOES NOT AMOUNT TO MANUFACTURE. HOWEVER, BY THE FINANCE (NO . 2) ACT 2009, W.E.F. 01.04.2009, SECTION 2(29BA) HAS BEEN INSERTED WHICH DEFINES THE TERM MANUFACTURE AS UNDER:- MANUFACTURE WITH ITS GRAMMATICAL VARIATIONS, MEAN S A CHANGE IN A NON-LIVING PHYSICAL OBJECT OR ARTICLE OR THING (A) RESULTING IN TRANSFORMATION OF THE OBJECT OR AR TICLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DIFFERENT NAME, CHARACTER AND USE; OR (B) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT O BJECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTUR E. 3.9 THE LD AR HAS SUBMITTED THAT ASSESSEE HAS PURC HASED MUSTARD OIL FROM THE MARKET IN LOOSE WHICH IS UNGRADED AND WITHOUT AGMAR K AND IT IS THEN MIXED WITH THE OTHER OIL WHICH IS MANUFACTURED FROM THE OIL SEED A T THE ASSESSEES FACTORY PREMISES FOR MAINTAINING THE REQUISITE QUALITY. THEREAFTER, THE ASSESSEE UNDERTAKES THE PROCESS OF DOUBLE FILTRATION OF THE OIL SO PURCHASED ALONG WITH ITS OWN MANUFACTURED OIL SO AS TO MAKE IT AGMARK. THUS, THE OIL SO PURCHASED LOSSE S ITS IDENTITY AND RESULTS INTO ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 19 TRANSFORMATION OF A DIFFERENT OIL HAVING DIFFERENT NAME, CHARACTER AND USE AND CHEMICAL COMPOSITION. THEREFORE, THE PURCHASE OF OI L FROM THE MARKET, MIXING IT WITH OTHER OIL, AND REFINING IT AMOUNTS TO MANUFACTURE. THE LD AR HAS ALSO REFERRED TO DECISION OF ALLAHABAD HIGH COURT IN CIT VS. SHIV OI L & DAL MILLS 281 ITR 221 AND SUPREME COURT IN CASE OF INDIA SHINE AGENCIES VS. C IT 308 ITR 98. IN LIGHT OF THE SPECIFIC DEFINITION OF MANUFACTURE PROVIDED IN THE STATUE WHICH IS RELEVANT FOR THE YEAR UNDER CONSIDERATION, IT WOULD BE RELEVANT TO CONSID ER THE SAME IN THE FACTS OF THE PRESENT CASE. THE LD CIT(A) HAS HELD THAT THE PROC ESS WILL NOT AMOUNT TO MANUFACTURE OR PRODUCTION SINCE IT DOES NOT ALTER THE CHARACTER OF OIL AND THE END PRODUCT AS WELL AS THE INITIAL PRODUCT IS MUSTARD OIL AND THERE IS VERY MINIMAL VALUE ADDITION. HOWEVER, THE DEFINITION OF MANUFACTURE AS INTRODUCE D BY VIRTUE OF SECTION 2(29BA) WHICH IS WIDE ENOUGH TO INCLUDE A PROCESS/ACTIVITY WHERE ITS BRINGS A CHANGE RESULTING INTO A NEW AND DISTINCT OBJECT HAVING DIFFERENT NAM E, CHARACTER AND USE OR WITH A DIFFERENT CHEMICAL COMPOSITION HAS NOT BEEN CONSIDE RED. IN ABSENCE OF ANY FINDING RETURNED BY THE AO OR BY THE LD CIT(A) IN THIS REGA RD, WE DEEM IT FIT AND PROPER TO REMAND THE MATTER BACK TO THE FILE OF THE AO TO EXA MINE THE SAME A FRESH AFTER CONSIDERING THE DEFINITION OF MANUFACTURE AS PER SE CTION 2(29BA). BEING A TECHNICAL MATTER AND IN ORDER TO ARRIVE AT A DEFINITIVE POSIT ION, IT WOULD ALSO BE RELEVANT IF THE ASSISTANCE OF TECHNICAL EXPERTS IS ALSO SOUGHT AND TAKEN INTO CONSIDERATION BY THE ASSESSING OFFICER. NEEDLESS TO SAY, THE ASSEESSEE WILL COOPERATE IN PROVIDING ALL NECESSARY ASSISTANCE AND DOCUMENTATION TO THE ASSES SING OFFICER. SINCE WE HAVE SET- ASIDE THE MATTER TO THE FILE OF THE AO, THE CONTENT ION REGARDING MISTAKE IN TREATMENT OF INTEREST COST AND CALCULATION OF PROFIT IS ALSO SET-ASIDE TO THE FILE OF THE AO TO EXAMINE THE SAME AFRESH. IN THE RESULT, GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 20 4. NOW COMING TO THE REVENUES APPEAL. IN GROUND NO.1 OF THE REVENUES APPEAL, THE REVENUE HAS CHALLENGED THE DELETION BY THE LD C IT(A) OF DISALLOWANCE OF DEDUCTION CLAIMED UNDER SECTION 80IA FOR RS 27,46,931. 4.1 AT THE OUTSET, IT WAS SUBMITTED BY THE LD AR TH AT THE ISSUE IS COVERED BY THE DECISION OF HONBLE ITAT ORDER DATED. 18.10.2012 IN ASSESSEES OWN CASE FOR A.Y. 07-08 AND 08-09. THE LD DR RELIED ON THE ORDER OF AO. 4.2 THE RELEVANT FINDINGS OF THE ITAT ORDER DATED. 18.10.2012 ARE REPRODUCED AS UNDER: (34) AFTER CONSIDERING THE ORDER OF ASSESSING OFFI CER AND LD. CIT(A), WE FIND THAT LD. CIT(A) HAS DISCUSSED THE ISSUE IN DETAIL. THE LD. CIT(A) HAS NOTED THE AO HAS PLACED RELIANCE ON THE ORDER IN CASE OF GOLD MI NES CASE WHICH HAS BEEN CONSIDERED BY THE HONBLE MADRAS HIGH COURT ON SUBS EQUENT DECISION OF SAME HIGH COURT IN CASE OF VELAYUTHASWAMY SPINNING MILLS PVT. LTD. 231 CTR 368 (MAD.) BY WHICH THE ISSUE HAS BEEN DECIDED IN FAVO UR OF THE ASSESSEE. IT IS FURTHER SEEN THAT PROVISIONS OF SECTION 80IA BECAME APPLICABLE FOR ASSESSMENT YEAR 2007-08 AND ASSESSEE HAS OPTED TO CLAIM DEDUCT ION U/S 80IA WITH EFFECT FROM 2007-08 THROUGH THE PRODUCTION WAS COMMENCED FROM ASSESSMENT YEAR 2003-04. IT HAS BEEN PROVIDED THAT UNDER THE PROVI SIONS OF SECTION 80IA, THE ASSESSEE IS ELIGIBLE TO CLAIM IT IN 10 YEARS OUT OF 15 YEARS OF ITS CHOICE. THE INITIAL ASSESSMENT HAS BEEN TAKEN AS 2007-08 AND FR OM ASSESSMENT YEAR THE ASSESSEE IS ELIGIBLE FOR CLAIMING DEDUCTION U/S 80I A FOR 10 YEARS. THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN CASE OF MEWAR OIL & GENERAL MILLS LTD. 271 ITR 311 (RAJ.) WAS ALSO TAKEN INTO CONSIDERATION AND IN VIEW OF THESE FACTS, THE LD. CIT(A) HELD THAT ASSESSEE WAS CORRECT IN CLAIMING T HE DEDUCTION U/S 80IA FROM ASSESSMENT YEAR 2007-08. FINDING OF CIT(A) HAS BEE N REPRODUCED SOMEWHERE ABOVE IN THIS ORDER WHICH IS SELF EXPLANATORY. THE REFORE, WE SEE NO REASON TO INTERFERE WITH THE FINDING OF LD. CIT(A). ACCORDIN GLY WE CONFIRM THE ORDER OF LD. CIT(A) IN THIS REGARD ALSO. 4.3 IN VIEW OF ABOVE, RESPECTFULLY FOLLOWING THE CO ORDINATE BENCH DECISION REFERRED SUPRA, WE CONFIRM THE ORDER OF THE LD CIT(A). THE REVENUES GROUND IS DISMISSED. ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 21 5. IN RESPECT OF GROUND NO.2 OF THE REVENUES APPEA L, WHERE THE REVENUE HAS CHALLENGED THE DELETION OF INTEREST EXPENSE OF RS 2 0,41,040, AT THE OUTSET, IT WAS SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF HONBLE ITAT ORDER DATED. 18.10.2012 IN ASSESSEES OWN CASE FOR A.Y. 08-09. 5.1 THE RELEVANT FINDINGS OF THE ITAT ORDER DATED. 18.10.2012 ARE REPRODUCED AS UNDER: (53) AFTER CONSIDERING THE ORDERS OF AO AND LD. CI T(A) WE FIND NO INFIRMITY IN THE FINDING OF LD. CIT(A). THE LD. CIT(A) HAS CONS IDERED THE ISSUE BY TAKING INTO CONSIDERATION THE DETAILS OF BORROWED FUNDS AND DET AILS OF ADVANCES ON WHICH NO INTEREST WAS PAID OR CHARGED. IT HAS BEEN OBSER VED BY THE LD. CIT(A) THAT ASSESSEE WAS HAVING BOTH KINDS OF FUNDS I.E. INTERE ST BEARING AS WELL AS NON- INTEREST BEARING FUNDS AND THEY ARE POOLED TOGETHER . THE LD. CIT(A) HAS ALSO NOTED THAT ASSESSEE IS HAVING THE NON-INTEREST BEAR ING FUNDS SUFFICIENT ENOUGH TO COVER UP THE LOAN AND ADVANCES GIVEN TO M/S DHRU V ENCLAVE PVT. LTD. RELIANCE HAS BEEN PLACED ON THE DECISION OF RELIANC E UTILITIES & POWER LIMITED, 178 TAXMAN 135 (BOM.) WHEREIN IT IS HELD THAT THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OVER DRAFT AND/OR LOANS ARE TAKEN , THEN A PRESUMPTION WOULD RISE THAT INVESTMENT WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS ARE SU FFICIENT TO MEET THE INVESTMENT, THEN NO DISALLOWANCE COULD BE MADE. SI MILAR VIEW HAS BEEN EXPRESSED IN CASE OF CIT VS. HOTEL SAVERA, 239 ITR 795 (MAD.) AND IN CASE OR VISEN INDUSTRIES LTD. 136 ITD 309 (MUM.)(TM). FOLL OWING THESE DECISIONS AND IN VIEW OF THE REASONING GIVEN BY LD. CIT(A) WHICH IS REPRODUCED SOMEWHERE ABOVE IN THIS ORDER, WE SEE NO REASON TO INTERFERE WITH T HE FINDING OF LD. CIT()A). IT IS ALSO A MATTER OF FACT THAT THE FINDING OF LD. CIT(A ) REMAINED UNCONTROVERTED. ACCORDINGLY, WE CONFIRM THE FINDING OF LD. CIT(A) O N THIS ISSUE ALSO. 5.2 IN VIEW OF ABOVE, RESPECTFULLY FOLLOWING THE CO ORDINATE BENCH DECISION REFERRED SUPRA, WE CONFIRM THE ORDER OF THE LD CIT(A). THE REVENUES GROUND IS DISMISSED. 5.3 IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVENUE IS DISMISSED . ITA NO. 524/JP/13 (A) & ITA NO. 556/JP/13 (D) M/S SAURABH AGROTECH (P) LTD. ALWAR VS. ACIT, CIRCL E-1. ALWAR 22 6. IN ITA NO. 258/JP/15 AND ITA NO. 243/JP/15 FOR A Y 2010-11 AND ITA NO. 259/JP/15 AND ITA NO. 244/JP/15 FOR AY 2011-12, BOT H PARTIES AGREED THAT THE FACTS ARE PARI-MATERIA AND SIMILAR GROUNDS OF APPEA L HAVE BEEN RAISED BY THE ASSESSEE AND THE REVENUE AS IN ITA NO. 514/JP/15 AN D ITA NO. 556/JP/15 DECIDED SUPRA. IN VIEW OF THE SAME, OUR DECISION I N ITA NO. 514/JP/15 AND ITA NO. 556/JP/15 SHALL APPLY MUTATIS-MUTANDIS TO THESE APPEALS AS WELL. ORDER PRONOUNCED IN THE OPEN COURT ON 18/10 /2016. SD/- SD/- ( KUL BHARAT ) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER JAIPUR DATED:- 18/ 10/2016 PILLAI VKNS'K DH IZFRFYFI VXZSF'KR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S SAURABH AGROTECH (P)LTD. ALWAR 2. IZR;FKHZ@ THE RESPONDENT- THE ACIT, CIRCLE-1, ALWAR 3. VK;DJ VK;QDR@ CIT ALWAR 4. VK;DJ VK;QDRVIHY@ THE CIT(A ), ALWAR 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO.514/JP/2013 & ITANO. 556/JP/13) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASSISTANT. REGISTRAR