CHAMBAL FERTILISERS AND CHEMICALS LIMITED, Kota V. ACIT, Kota

ITA 291/JPR/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 2301 (ITAT-JAIPUR)
• Duration Of Justice: 5 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-05-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 17-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Capital asset; Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Proportionate interest; Retrospective amendment; Question of law; Notional interest; Commercial expediency; Revenue expenditure; Set aside
• Section: 32; 145; 37; 14A; 80IC; 264; 192; 64; 44AB; 80IC; 43; 48; 73; 145(3); 119; 22

Judgement Text

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH ‘B’,VC, JAIPUR Jh laanhi xkslkbZ] U;kf;d lnL; ,oa Jh jkBkSM+ deys'k t;arHkkbZ] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ITA No. 201, 291/JP/2017 & 744/JP/2018 Assessment Years : 2012-13, 13-14 & 14-15. M/s. Chambal Fertilizers & Chemicals Ltd., Gadepan, District Kota. cuke Vs. Dy. Commissioner of Income-tax, Circle-2, Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACC 9762 A vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 170, 335/JP/2017 & 821/JP/2018 Assessment Years : 2012-13, 13-14 & 14-15. Assistant Commissioner of Income-tax, Circle-2, Kota. cuke Vs. M/s. Chambal Fertilizers & Chemicals Ltd., Gadepan, District Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACC 9762 A vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@Assessee by : Shri Percy Pardiwalla, Shri M.L. Patodi (Advocates) & Smt. Ritu G.P. Das (CA) jktLo dh vksj ls@ Revenue by : Shri Sanjay Dhariwal (CIT) lquokbZ dh rkjh[k@ Date of Hearing : 15.02.2022. ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 13/05/2022. vkns'k@ ORDER PER SANDEEP GOSAIN, J.M. These are six cross appeals filed by the assessee and the revenue against three separate orders of ld. CIT (Appeals), Kota dated 13.12.2016, 23.02.2017 and 09.03.2018 for the assessment years 2012-13, 13-14 and 14-15 respectively. These 2 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. appeals were heard together and are being disposed off by this consolidated order for the sake of convenience. The respective grounds raised in these appeals are as under :- ITA No. 201/JP/2017 AY 2012-13 (Assessee) 1. The Ld. Dy. Commissioner of Income Tax, Circle-2, Kota erred in disallowing the revenue expenditure of Rs. 4,75,33,434/- in respect of expenditure incurred on construction of anicut that would remain the property of the Government. The Ld. CIT (Appeals) further erred in allowing only Rs. 95,06,687/- by spreading the expenditure over a period of 5 years as on the basis of “long term benefit” accruing to the assessee. Since the expenditure is revenue in nature and hence the addition of remaining amount maintained of Rs. 3,80,26,747/- should be allowed. 2. That the Ld. Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest of Rs. 35,92,45,372/- in respect of borrowed funds alleged to be taken for investment made in the subsidiaries and the Ld. Commissioner of Income Tax (Appeals), Kota further erred in partially confirming the disallowance of interest of Rs. 24,90,000/-, under the facts and circumstances of the case. Hence the partial addition of Rs. 24,90,000/- maintained should be set aside. 3. That the Ld. Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest of Rs. 41,33,649/- in respect of borrowed funds alleged to be taken for loans and advances given to the subsidiaries and the Ld. Commissioner of Income Tax (Appeals), Kota further erred in maintaining the addition of interest of Rs. 41,33,649/- under the facts and circumstances of the case. Hence the addition made on this account should to be deleted. 4. That any other grounds and facts will be explained at the time of hearing of the appeal. That the appellant reserves the right to withdraw, modify, and add any of the grounds during appeal hearing. ITA No. 170/JP/2017 AY 2012-13 (Revenue) “ On the facts and in the circumstances of the case, the ld. CIT (A) has erred in :- i) Deleting addition of Rs. 95,06,687/- out of total addition of Rs. 4,75,33,434/- made by disallowing anicut expenses. ii) Allowing club expenses of Rs. 5,97,737/- paid by assessee for membership of its employees; 3 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. iii) Deleting the addition of Rs. 18,35,481/- made by disallowing provision for loss on derivative transactions; iv) Deleting addition of Rs. 10,89,108/- made on account of depreciation disallowed on catalyst; v) Curtailing disallowance out of interest paid on borrowed funds to Rs. 24,90,000/- as against that of Rs. 35,92,45,372/-, made by AO since the decision of Ld. CIT (A) is not in conformity with the ratio laid down by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee’s own funds go into common kitty; vi) Deleting the addition of Rs. 90,14,795/- made out of interest paid by the assessee on borrowed funds on account of investment in mutual fund units ; vii) Allowing rent of Rs. 7,13,862/- paid to a person specified u/s 40A(2)(b); viii) Holding that the donation of Rs. 76,15,213/- made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee; ix) Deleting the addition of Rs. 13,31,39,886/- made by the AO on account of rejection on Books of account in respect of Baddi Unit named Birla Textile Mills situated at Baddi, Himachal Pradesh. x) The appellant craves liberty to raise additional ground and to modify/amend the ground of appeal at the time of hearing. ITA No. 291/JP/2017 AY 2013-14 (Assessee) 1. That the ld. Assistant Commissioner of Income Tax, Circle-2, Kota erred in not allowing the deduction in respect of Exchange Rate Variation (ERV) which was credited to Profit & Loss Account, and the ld. Commissioner of Income Tax (Appeals) further erred in confirming the same. The ERV was debited to the Profit & Loss Account in the Assessment Year 2012-13 in accordance with AS-16 but was disallowed in the Computation of Total Income. Since the amount was disallowed when debited to Profit & Loss account, the same should be allowed as deduction when credited to Profit & Loss account. Hence the deduction of Rs. 11,95,73,056/- should be allowed. 4 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Without prejudice to above, if for any reason it is treated as taxable income in AY 2013-14 in that case the appellant submits that direction may kindly be given to allow the deduction in AY 2012-13. 2. That the ld. Assistant Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest of Rs. 50,89,57,989/- in respect of borrowed fund alleged to be taken for investment made in the subsidiaries & joint venture and the ld. Commissioner of Income Tax (Appeals), Kota further erred in partially confirming the disallowance of interest of Rs. 21,27,000/-, under the facts and circumstances of the case. Hence the partial addition of Rs. 21,27,000/- maintained should be set aside. 3. That the ld. Assistant Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest of Rs. 44,23,882/- in respect of borrowed fund alleged to be taken for Loans and Advances given to the subsidiaries and the ld. Commissioner of Income Tax (Appeals), Kota further erred in maintaining the addition of interest of Rs. 44,23,882/- under the facts and circumstances of the case. Hence the addition made on this account should be deleted. 4. That any other grounds and facts will be explained at the time of hearing of the appeal. That the Appellant reserve the right to withdraw, modify and add any of the ground during appeal hearing. ITA No. 335/JP/2017 AY 2013-14 (Revenue) “ On the facts and in the circumstances of the case, the ld. CIT (A) has erred in :- i) Allowing club expenses of Rs. 10,61,297/- paid by assessee for membership of its employees. ii) Deleting addition of Rs. 45,98,882/- made on account of depreciation disallowed on catalyst; iii) Curtailing disallowance out of interest paid on borrowed funds to Rs. 21,27,000/- as against that of Rs. 50,89,57,989/- made by AO since the decision of ld. CIT (A) is not in conformity with the ratio laid down by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee’s own funds go into common kitty; iv) Holding that the donation of Rs. 81,99,839/- made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee; 5 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. v) The appellant craves liberty to raise additional ground and to modify/amend the ground of appeal at the time of hearing. ITA No. 744/JP/2018 AY 2014-15 (Assessee) 1. That the ld. Assistant Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest in respect of borrowed fund alleged to be taken for investment made in Subsidiaries and Joint Ventures and the ld. Commissioner of Income Tax (Appeals), Kota further erred in partially confirming the disallowance of interest of Rs. 22,45,000/-, under the facts and circumstances of the case. Hence the partial addition of Rs. 22,45,000/- maintained should be set aside. 2. That the ld. Assistant Commissioner of Income Tax, Circle-2, Kota erred in disallowing interest of Rs. 53,79,100/- in respect of borrowed fund alleged to be taken for Loans and Advances given to the subsidiaries and the ld. Commissioner of Income Tax (Appeals), Kota further erred in maintaining the disallowance, under the facts and circumstances of the case. Hence the disallowance made on this account deserves to be deleted. 3. That any other grounds and facts will be explained at the time of hearing of the appeal. That the Appellant reserve the right to withdraw, modify and add any of the ground during appeal hearing. ITA No. 821/JP/2018 AY 2014-15 (Revenue) “ On the facts and in the circumstances of the case, the ld. CIT (A) has erred in :- i) Allowing club expenses of Rs. 21,61,818/- paid by the assessee for membership of its employees. ii) Deleting addition of Rs. 20,10,438/- made on account of depreciation disallowance on catalyst. iii) Curtailing disallowance out of interest paid on borrowed funds to Rs. 22,45,000/- as against that of Rs. 55,92,19,845/- made by AO since the decision of ld. CIT (A) is not in conformity with the ratio laid down by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee’s own funds go into common kitty; 6 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. iv) Holding that the donation of Rs. 80,38,964/- made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee; v) The appellant craves liberty to raise additional ground and to modify/amend the ground of appeal at the time of hearing” At the outset, the ld. A/R for the assessee requested for permission to raise following additional grounds of appeal for the Assessment Year 2012-13 as under :- “(4) The appellant incurred the expenses towards Education and Secondary High Education Cess of Rs. 478.74 lacs. Inadvertently, the said amount was not claimed as deductible expenditure in computation of total income. “(6) Following the findings of the Hon’ble ITAT, Jaipur Bench, while disposing off ground no. 9 of the departmental appeal (ITA No. 389/JP/14) of the Assessment Year 2010-11 vide its order dated 31.01.2018, that the assessee company would be allowed to claim the loss in the year of actual disposal of fertilizer bonds and not in the year on account of revaluation of such fertilizer bonds; the appellant should be allowed business loss of Rs. 2155.00 lacs related to value of the fertilizers bonds sold during the year relevant to the Assessment year 2012-13.” 2. The ld. A/R has submitted that the additional grounds are purely consequential grounds arising out of order and directions passed this Bench in ITA No. 389/JP/14 dated 31.01.2018 for AY 2010-11. After hearing both the parties, the additional grounds being purely consequential ground pursuant to order passed for AY 2010-11 are being admitted for adjudication. 3. Firstly, we refer to Revenue’s grounds of appeal, other than common grounds of appeal which we shall be discussing along with the assessee’s grounds of appeal. 4. At the outset, the ld. A/R submitted that grounds No. 1, 2, 3, 4, 7 & 8 of the Revenue’s appeal are covered in favour of the assessee by the earlier decisions of 7 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. the Coordinate Benches. It was further submitted that there are no changes in the facts and circumstances of the case, the earlier decisions of the Coordinate Benches may kindly be followed. 5. Per Contra, the ld. D/R vehemently supported the order of the Assessing Officer but fairly admitted that all these issues are covered in favour of the assessee by the earlier decisions of the Coordinate Benches though the same have not been accepted by the Department. 6. We now refer to the decision of the Bench in ITA No. 461/JP/2015 & ITA No. 575/JP/2015 dated 17.10.2018 for A.Y. 2011-12 wherein the Bench following its earlier decisions in ITA Nos. 306/JP/2014, 389/JP/2014 & 638/JP/2014 dated 31.01.2018 for A.Y. 2010-11 and ITA Nos. 459 & 588/JP/2012 dated 28.10.2016 for A.Y. 2008-09 and ITA Nos. 470 & 412/JP/2013 dated 25.09.2017 for AY 2009-10 has disposed off these grounds of appeal. The relevant findings in respect of each of these grounds of appeal are reproduced as under :- Ground No. 1 of Revenue’s appeal and Ground No. 1 of Assessee’s appeal relating to anicut expenses. 7. This ground of Revenue and Assessee is covered by the decision of Coordinate Bench in ITA Nos. 461 & 575/JP/2015 dated 17.10.2018 for the Assessment Year 2011-12 wherein the relevant findings of the Tribunal in para 64 to 73 are as under :- “ 64. In order to appreciate the rival contentions and the factual matrix of the case, we refer to the Letter of Chief Engineer, Water Resources Department, Jaipur dated 23.03.2010 granting approval for construction of anicut which verbatim reads as under:- 8 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. “Permission of State Government is hereby conveyed to construct an anicut of 3.0 m height by CFCL Gadepan at 70 m downstream of existing Anicut near village Rajgarh Tehsil-Sangod, District-Kota subject to the following conditions:- 1. The construction of anicut will be carried out by CFCL at its own cost as per specifications of Water Resources Deptt. & design and hydrology of the anicut shall be approved by the Chief Engineer ID & R unit Jaipur for which all expenditure will be borne by CFCL. The quality assurance and supervision of the work shall be carried out by IMTI, Kota for which all expenditure will be borne by CFCL. 2. Chambal Fertilizers shall maintain the anicut and appurtenant structures at its own cost. The officers of Water Recourses Deptt. however can inspect, these facilities and advise to the CFCL regarding requirement of maintenance works. This shall be followed by CFCL. 3. The Government will, from time to time assess the quantity of the water accumulated in the Anicut and will have the right to manage and change the usage of water as per its requirement in future. 4. Chambal Fertilizers shall pay the charges of water consumed by it @ Rs. 2 per thousand cubic feet or amended from time to time in line with item 5(aa) of schedule 1 of Rajasthan Irrigation and Drainage Rules, 1955. 5. Chambal Fertilizers shall obtain NOC from Department of Mines & Geology and Environment Department before construction of anicut. 6. The residents of the nearby villages will be free to draw water for drinking and agriculture purposes from impounding water of existing anicut. 7. Chambal Fertilizer shall pay the compensation for all Government as well as private property, which may come under the submergence area before construction of anicut. 9 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 8. The Government reserves the right to demolish or reduce the height of Anicut in future for any department requirement or in public interest and Chambal Fertilizer shall have no right for compensation for cost incurred on the anicut for required demolition & reduction of height. 9. The Government/Central Government are free to implement any project on the parwan river any time and if anicut or other facilities constructed by the Chambal Fertilizers comes under the submerged area, no compensation shall be paid to the Chambal fertilizers. 10. That if during any lean year or for any reason beyond the control of the Government, there is insufficient supply of water available at the said site, the Government will not be responsible for any reduction or lack of water supply. 11. Any protection work for Parwan Aqueduct on RMC of Chambal project if suggested by CAD shall be carried out by CFCL at its own cost. 12. Stored water in the existing anicut near village Rajgarh will not be used by CFCL.” 65. Pursuant to the above approval, the assessee company has constructed the anicut at its own cost and has incurred an expenditure of Rs 1,91,59,945 during the year under consideration. The specification and design shall be approved by the Chief Engineer, ID & R unit Jaipur. The quality assurance and supervision shall be carried out by IMTI Kota for which expenses shall be borne by the assessee company. The assessee company shall obtain NOC from Department of Mines & Geology and Environment Department before construction of anicut. The assessee company shall pay the compensation for all Government as well as private property, which may come under the submergence area before construction of anicut. Further, the Government reserves the right to demolish or reduce the height of Anicut in future for any department requirement or in public interest and the assessee shall have no 10 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. right for compensation for cost incurred on the anicut for required demolition & reduction of height. 66. Post construction, the assessee company shall maintain the anicut and appurtenant structures at its own cost. The officers of Water Recourses Deptt, however can inspect, these facilities and advise regarding requirement of maintenance works. The Government will, from time to time assess the quantity of the water accumulated in the Anicut and will have the right to manage and change the usage of water as per its requirement in future. The assessee company shall pay the charges of water consumed by it @ Rs. 2 per thousand cubic feet or amended from time to time. The residents of the nearby villages will be free to draw water for drinking and agriculture purposes from impounding water of existing anicut and stored water in the existing anicut near village Rajgarh will not be used by CFCL. 67. Looking at the totality of facts and circumstances of the case, we find that at the request of the assessee company, the Government has allowed the assessee company to construct the anicut at its own cost. However, the design, specification, quality assurance and supervision shall be closely monitored through its designated authorities. The assessee company has been permitted to use the water accumulated in the anicut for its captive consumption and for the purposes, the assessee company shall pay the necessary charges for such consumption as specified. In other words, the assessee company has been permitted to build, operate, maintain and use the anicut facility for its captive consumption the water accumulated in such facility. There is nothing which has been specified regarding the period for which such facility shall be utilized by the assessee company meaning thereby the assessee company shall be at liberty to use the said facility for the period such facility has functional useful life. The only condition which the Government has provided is that it shall have the right to demolish or reduce the height of the anicut in public interest where such a need so arise in future 11 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. and in such an eventuality, the assessee company shall have no right of compensation for the cost incurred on the anicut. 68. We therefore agree with the views of the Assessing Officer that the expenditure on building of anicut over Parwan river has given a benefit of enduring nature to the assessee since the assessee has obtained assured supply of water which is being used in manufacturing process carried out by the assessee for a long period of time. However, the question for consideration is whether the advantage or benefit so obtained even though of enduring nature is in capital field or not. In other words, whether any tangible assets were acquired/built by the assessee or there was any addition or expansion of the profit making apparatus of the assessee, a test which has been laid down by the Hon’ble Supreme Court in its various rulings including the rulings relied upon by the ld AR. 69. In the context of whether a tangible asset in form of anicut facility has been built and owned by the assessee company, we refer to the decision of Hon’ble Supreme Court in case of Mysore Minerals Ltd. vs CIT (1999) 239 ITR 775 wherein it was held as under: “9. In our opinion, the term owned as occurring in section 32(1) must be assigned a wider meaning. Any one in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by Transfer of Property Act, Registration Act, etc. 'Building owned by the assessee' - the expression as occurring in section 32(1) means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as Transfer of Property Act and Registration Act etc. but nevertheless is entitled to hold the property to the exclusion of all others.” 12 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 70. In the present case, applying the ratio so laid down by the Hon’ble Supreme Court in case of Mysore Minerals, we agree with the findings of the Assessing officer where he said that the assessee company has built the anicut on parwan river entirely with its own funds to enjoy water resources of a part of the river exclusively, it has sole right and possession over the anicut and the benefits accruing therefrom, and the dominion and control over anicut is with the assessee company and to the exclusion of others. In our view, merely because the river over which the anicut was built doesn’t belong to the assessee, given the fact that the assessee has been granted permission by the Government which has the sovereign right over the river, the assessee has got an intangible right to build the anicut facility for its own benefit to the exclusion of the others. Further, having built the anicut facility entirely with its own funds, the assessee has got the ownership rights which the assessee exercise for all practical and commercial purposes over such anicut facility. The condition which the Government has provided while granting the approval that it shall have the right to demolish or reduce the height of the anicut in public interest where such a need so arise in future and in such an eventuality, the assessee company shall have no right of compensation for the cost incurred on the anicut. In our view, such a condition doesn’t take away the assessee’s right of sale/disposal of such a facility, an inherent right attached with the ownership over such facility. In view of the same, we are of the view that tangible asset in form of anicut facility has been built and owned by the assessee and the same is clearly in the capital field. The assessee company shall therefore be eligible for claim of depreciation under section 32 of the Act as per prescribed rate of depreciation so provided in the Income tax Rules on such anicut facility in light of decision of the Hon’ble Supreme Court referred supra. 13 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 71. Now, coming to various decisions relied upon by the ld AR. We have carefully gone through these decisions and find that the same were rendered in the particulars facts and circumstances of the respective cases and much prior to the latest decision of the Hon’ble Supreme Court in case of Mysore Minerals. We find that all these decisions relied upon by the ld AR were rendered in the context of determining the nature of expenditure whether in the capital or in the revenue field and one of the principles emanating from these decisions is that what has to be examined is whether any tangible or intangible assets were acquired by the assessee. The decision in case of Mysore Minerals has further dealt with the issue of determining whether by incurring an expenditure and its possession and usage, the assessee becomes the owner of any tangible asset for the purposes of claiming the depreciation over the life of the asset. 72. In case of L.H. Sugar Factor & Oil Mills, the assessee had contributed a part of cost of construction of the roads around its factory under the sugarcane development scheme and in that context, it was held that roads which were constructed belonged to the Government of UP and not to the assessee and then, the Court held that the contribution so made by the assessee facilitated the conduct of its business to run it more efficiently and profitable and the expenditure was held on revenue account. The said decision has been followed subsequently in case of Bongaigaon Refinery and petrochemicals ltd. In the instant case, the assessee has itself constructed the anicut facility with its own funds and for its own benefit and captive consumption of water so captured in such facility and the facility thus belongs to and owned by the assessee. Thus, the said decisions are distinguishable on facts. Similarly, in case of Excel Industries, under an agreement with the Electricity Board, the assessee paid a part of the cost of laying the overhead line which remained the property of the electricity Board unlike the present case and is thus distinguishable. The decision in case of Taparia Tools is on the issue of allowability of revenue expenditure in the year of incurrence or spreading over a period of time. The same doesn’t 14 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. support the case of the assessee as we have held above that the expenditure incurred on constructing the anicut facility is on capital account and not on revenue account. 73. As we have noted above, the assessee has submitted before the lower authorities that it has incurred expenditure of Rs. 1,91,59,946/- during the year under consideration and has debited the same in the “capital work in progress” in the books of account, however, in the return of income, the same has been claimed as a Revenue expenditure. It was further submitted that it has incurred total expenditure on construction of anicut of Rs. 669.45 lac which was debited to the profit and loss account in the subsequent financial year relevant to assessment year 2012-13 on completion of construction of anicut facility, and as the assessee has already claimed deduction of Rs. 1,91,59,946/- in the year under consideration, the said amount was duly offered to tax in the assessment year 2012-13. In light of above submissions, it is noted that the construction of the anicut facility was completed in the financial year relevant to assessment year 2012-13 and the assessee will therefore be eligible to claim depreciation on the cost of anicut facility so incurred amounting to Rs. 669.45 lac starting AY 2012-13 onwards as per prescribed rate of depreciation so determined by the AO as per law and there shall be no allowance for the year under consideration. In the result, the disallowance of claim of expenditure of Rs 1,91,59,946/- in the year under consideration is sustained. In the result, respective grounds of appeal are disposed off.” Respectfully following the discussions above in ITA Nos. 461 & 575/JP/2015 dated 17.10.2018 for the Assessment Year 2011-12, the grounds of the revenue and assessee for the assessment year 2012-13 are disposed off accordingly. 15 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Ground No. 2 of the revenue’s appeal relates to Club expenses for membership of its employees. 8. This ground of the Revenue is covered by the decision of the Coordinate Bench of the Tribunal in assessee’s own case in ITA Nos. 461 & 575/JP/2015 at page 11 for the assessment year 2011-12 as under :- “ 11. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2005-06 passed in ITA No. 445/JP/2009 order dated 09/09/2011, the Coordinate Bench has held as under:- “10.2 The details of payments made to club expenses are available at pages 158 to 161 of the paper book. In these details, the assessee has given the name of the employees, date, amount, name of the club, nature of payment and period. The club membership has been paid in respect of 28 employees. It is noticed from the period mentioned in the chart that payments are annual subscription or subscription for part of the year. It is not a case where the assessee has paid corporate fee to the club. There is no payment for the period exceeding one year so that the benefit may be given to the employees for more than a year. The expenditure as club membership fee is an expenditure for the purpose of the business. Hence, the expenditure is allowable u/s 37 of the Act. Therefore, the ld. CIT(A) was justified in deleting the disallowance of Rs. 6,70,422/-.” Admittedly, there is no change in the facts and circumstances of the case as compared to earlier years where the matter has been decided in favour of the assessee company. By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2005-06, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the revenue’s appeal is dismissed.” Following the Coordinate Bench decision above, the ground of the Revenue for the assessment year 2012-13 is dismissed. 16 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Ground No. 3 relates to deletion of addition made by disallowing provision for loss on derivative transaction. 9. In ground no. 3, the Revenue has challenged the deletion of addition of Rs.18,35,21,481/- made by the Assessing Officer on account of loss on derivative transactions. We find that a similar issue was involved in A.Y. 2010-11 and the relevant findings of the Coordinate Bench of the Tribunal in ITA Nos. 306/JP/2014 & 389/JP/2014 dated 31.01.2018 as modified by the order in MA No. 96/JP/18 dated 16.10.2018 are contained at pages 24-26 para 22 & 23 of its order which are reproduced as under :- “ 22. We have heard the rival contentions and perused the material available on record. The factual position which emerges is that out of provision for loss on derivative transaction of Rs. 92,79,756 disallowed by the AO, Rs. 58,55,094 is related to Interest rate Swap transactions and balance Rs. 34,24,662/- is related to forward cover transaction. The interest Rate Swap transaction is related to foreign currency borrowing of US$ 25 million for its Fertilizer Division for capitalization of revamp project at Libor linked interest rate. Further, in respect of forward cover transactions, two forward cover transactions are related to import of traded products (Rs.8,00,000/- of ING and Rs. 8,00,000/- of HDFC) and other two transactions are in respect of capital items (Rs. 9361.58 of HDFC and Rs. 18,15,300/- of ING). 23. The interest Rate Swap transaction is related to foreign currency borrowing for the purposes of capitalization of revamp project in respect of assessee’s Fertilizer division. Similarly, two forward cover transactions are in respect of capital items. These all these transactions are on capital account. These interest rate swap transactions are closely connected and linked to the transaction of foreign currency borrowings for the purposes of acquisition of capital 17 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. assets. Just like interest on borrowings for the purposes of acquisition of a capital asset (till the time the asset is first put to use) has to be capitalized and cannot be claimed as revenue expenditure, on same footing, any hedging cost or loss incurred for hedging the interest rate risk on such foreign currency borrowings for capital purposes have to be on capital account and the same cannot be allowed as revenue expenditure. Any liability or loss arising in respect of such transactions shall thus be on capital account. In the instant case, where the revamp project has been capitalized and interest cost post capitalization has been claimed and allowed by the Revenue, corresponding hedging cost or loss incurred for hedging the interest rate risk on such foreign currency borrowings should be allowed. The matter relating to IRS transactions amounting to Rs. 58,55,094 is thus allowed. Two forward cover transactions are related to import of traded products and are however on revenue account and the loss on account of such transaction is hereby allowed. In the result, revenue’s ground of appeal is partly allowed.” Undisputedly, there are no changes in the facts and circumstances of the case. Therefore, following the Coordinate Bench decision for the AY 2010-11, we confirm the order of the ld CIT(A) and ground of revenue’s appeal is dismissed. Ground No. 4 relates to deletion of addition of Rs. 10,89,108/- made on account of depreciation disallowed on catalyst. 10. This ground of the Revenue is covered by the decision of the Coordinate Bench of the Tribunal in ITA Nos. 461 & 575/JP/2015 for the A.Y. 2011-12 at page 12 para 21 as under :- “ 21. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2006-07 passed in ITA 18 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:- “3.3 This issue has been decided by the Tribunal while deciding the appeal of the assessee for the assessment year 2002-03 to 2005-06. Following our findings, we hold that the ld CIT(A) was justified in deleting the disallowance of Rs 74,64,626. “ By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue’s appeal is dismissed.” Therefore, following the Coordinate Bench decision for the AY 2011-12, we confirm the order of the ld CIT(A) and ground of revenue’s appeal is dismissed. Ground No. 5 of the revenue and Ground No. 2 of the assessee relates to curtailing disallowance out of interest paid on borrowed funds taken for investment made in subsidiaries, to Rs. 24,90,000/- as against Rs. 35 92,45,372/- made by the AO. 11. These are two common grounds raised by the revenue and assessee relate to disallowance of notional interest on the investments made by the assesse in its subsidiaries, namely, i) Indo Maroc Phosphore S.A; ii) CFCL Overseas Limited iii) Chambal Infrastructure Ventures Limited iv) India Steamship Pte. Ltd, Singapore v) India Steamship Limited Details of investments are tabulated as under : 19 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. (Rs. in lakhs) Sr. No. Name of subsidiary / associate /joint venture Investment as on 01.04.11 Movement during FY 11-12 Investment as on 31.03.12 1 Indo MarocPhosphore S.A 8,513.32 - 8513.32 2 CFCL Overseas Ltd (Foreign Subsidiary) 31,114.13 8,304.18 39,418.31 3 Chambal Infrastructure Ventures Ltd. 140.00 350.00 490.00 4 India Steamship Pte. Ltd., Singapore (Foreign Subsidiary) 286.04 - 286.04 5 India Steamship Limited - 515.00 515.00 Total investment made during the year was Rs. 9169.18 lakhs 12. The brief facts of the case are that the AO observed that the assessee has made investments in subsidiary companies from AY 2008-09 to AY 2011-12 and since no income was earned by the assessee on these investments, the AO held that the assessee failed to prove that there was any commercial expediency for making the investments in its subsidiaries and group companies. Further, the AO held that the assessee had diverted a part of its borrowed funds for making investment in subsidiaries and proportionate interest paid on borrowed funds was disallowed by the AO. The AO also observed that had the assessee not utilised the funds in making investments in subsidiaries, the same funds would have been employed for its business purpose and interest paid on borrowed funds would have been substantially lesser. The AO rejected the contention of the assessee that these 20 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. investments were made from internal accruals and held that the assessee failed to substantiate how its investments made in subsidiaries benefited its existing business of manufacture and sale of fertilizers, shipping and textiles. The AO adopted an average rate of interest at 9% p.a. on the investments made and arrived at an interest disallowance aggregating Rs. 35,92,45,372/- as under:- S. No. Name of Subsidiary Investm ent (Rs. Lakhs) ROI Days Disallowance (in Rs) 1 CFCL Overseas Ltd. - Equity Shares 21.78 9% 365 1,96,020 2 Chambal Infrastructure Ventures Ltd - Equity Shares 140.00 9% 365 12,60,000 350.00 9% 365 31,50,000 3 India Steamship Pte. Ltd., Singapore (Foreign Subsidiary) 286.04 9% 365 25,74,360 4 CFCL Overseas Ltd. - Preference Shares 31092.35 9% 365 27,98,31,150 2895.10 9% 345 2,48,42,336 931.88 9% 389 70,02,212 4477.20 9% 305 3,74,24,514 6 India Steamship Limited 5.00 9% 233 28,726 510.00 9% 233 29,30,055 Total Disallowance 35,92,45,372 21 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Hence, the AO held that the assessee had utilized a part of its borrowing for making investments in group companies without any commercial expediency and, accordingly, a disallowance of Rs. 35,92,45,372/- was made out of the interest paid by the assessee on borrowed funds which was claimed under section 36(1)(iii) of the Act. The AO relied on the his order for the AY 2011-12 where a part of interest claimed by the assessee on borrowed funds was disallowed as it failed to prove any commercial expediency for making investments in equity shares / preference shares. 13. Being aggrieved by the order of A.O., the assessee preferred appeal before the ld. CIT (A). The CIT(A) referred to his earlier order for the AY 2011-12 wherein the disallowance was computed under section 14A r.w.r 8D and confirmed an addition of Rs. 24.90 lakhs (i.e. proportionate expenditure of Rs. 22.03 lakhs and half percent of average investments of Rs. 2.86 lakhs) and directed the AO to delete the balance addition of Rs. 35,67,55,372/- thereby, partly allowing the assessee appeal. 14. Now the revenue and assessee preferred appeal before us challenging the deletion of addition of Rs. 35,67,55,372/- and the assessee challenged the partial disallowance of Rs. 24.90 lacs. 15. Before us, the ld. A/R of the assessee submitted that no borrowed funds were used for the purpose of making the aforesaid investments. Even though the investments were made from cash credit accounts with the State Bank of India, State Bank of Hyderabad and the HDFC bank the interest free funds available with the assessee in the form of share capital and reserves aggregating Rs. 1,778.70 22 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. crores which is far in excess of the aggregate investments. Even the current year’s profits amounting to Rs. 247.28 crores is in excess of the investment of Rs. 91.69 crores made during the year. The assessee submits that it has furnished bank statements showing the date of investments in the subsidiaries along with the source of funds utilised for making such investments. Further, the assessee has provided the ledger accounts for the investments made in the subsidiaries during the year under consideration. The details of the same are summarised as under CFCL Overseas Limited– The assessee has made a further investment of Rs. 8304.18 lakhs from its cash credit account maintained with State Bank of India. Out of the total investments, Rs. 44,77,20,332/- is by way of conversion of an ICD and the balance amount of Rs. 38,26,97,500/- is through utlising the funds in its State Bank of India account. • Chambal Infrastructure Ventures Ltd. – the assessee had given share application money in the previous assessment year and allotment of the shares has been made to the assessee in the year under consideration. Hence, there is no outflow made by the assessee for Rs. 350 lakhs in the year under consideration. • India Steamship Limited – The assessee has made a total investment of Rs. 5,15,00,000/- out of which Rs. 4,94,000/- is from its HDFC bank account, Rs. 5,10,00,000/- is from its State Bank of Hyderabad account and balance amount of Rs. 6,000/- is from other sources. 15.1. The interest charged for the year by each of the banks is tabulated as under:- Sr No. Bank Name Amount of Interest (in Rs.) State Bank of India 10,69,528/- 23 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. State Bank of Hyderabad 4,09,170/- HDFC Bank 78,56,936/- Further, it is submitted that the relevant pages of the Memorandum of Association showing the strategic intent of the assessee in making investments has also been furnished along with the statement of reserves and surplus of past years. 15.2. The assessee has submitted details of all borrowings as on 31 March 2011 and 31 March 2012, where the average rate of borrowing is 3.46% and 3.07% respectively. The assessee has also submitted copies of annual accounts of its subsidiaries and joint ventures and a brief summary regarding its subsidiaries. 15.3. The assessee submits that the AO has erroneously adopted a notional interest rate of 9% on the cost of investments making a disallowance of Rs. 35,92,45,372/- by including the opening balance of investment made in CFCL Overseas Ltd, Chambal Infrastructure Ventures Limited and India Steamship Pte. Ltd without considering the fact that investment has been made in the earlier years and no notional interest can be attributed towards the same. Further the disallowance made is far in excess of the total sum of Rs 93,35,634/- being the interest debited in the bank accounts from which the investment is made. The CIT(A) deleted this addition however, he wrongly upheld the disallowance, by invoking section 14A r.w.r 8D, of Rs. 24,90,000/-. It is submitted that the provisions of section 36(1)(iii) of the Act allow a deduction for interest on 24 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. borrowed capital if the same is used for the purpose of assessee’s business. The assessee has invested in separate subsidiary companies to manage its risk which protects different businesses from financial and operational or business risks. 15.4. The ld. A/R submitted that investments have been made out of internal accruals of the assessee. The assessee has earned a profit of Rs. 247.28 crores during the year and has reserves of Rs. 1312.87 crores (comprising of General Reserve of Rs. 246.95 crores and profit and loss account of Rs. 1065.91 crores). Thus, investments in subsidiaries have been made out of internal accruals generated by the assessee and the amount of internal accruals is far in excess of the investments in subsidiaries and, hence, there can be no disallowance of interest. 15.5. The ld. A/R further submitted that reliance placed by the AO on the decision of SA Builders [(2007) 288 ITR 1(SC)] is misplaced as that decision was a case where admittedly borrowed funds were used to make advances. However, in the present case there is no evidence adduced by the revenue to establish that borrowed funds were used by the assessee and the submissions made above clearly demonstrate that the shares were not acquired out of borrowed funds. Further, even if borrowed funds were used, the ratio of the judgment of the Supreme Court clearly supports the contention of the appellant. The AO has not proved that the appellant has utilised the investments for the personal benefit of its directors which is the sine qua non for the disallowance as per the decision of SA Builders (supra). 25 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 15.6. The focus of the AO in the assessment order is that interest on funds alleged to be used for investments by the Appellant must be disallowed merely due to use of a common pool of funds (including borrowed and own funds) and in this regard, the AO has relied on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. (286 ITR 1). Without prejudice to the appellant’s contention that borrowed funds were not used for investment in various companies, even assuming though not admitting, borrowed funds were used, nevertheless, deductibility of the interest under section 36(1)(iii) of the Act is permissible since the investment in various companies is for strategic reasons and it is for the purpose of the business of the appellant. 15.7. The Hon’ble Supreme Court in case of Munjal Sales Corporation vs. CIT (298 ITR 298) held that profits of the appellant for the relevant year were sufficient to cover loans advanced to sister concerns, thus disallowance of interest is unwarranted. Further, it is also submitted that this decision has impliedly overruled the decision of CIT v. Abhishek Industries Ltd. (supra) relied upon by the AO. 15.8. The Supreme Court in the decision of CIT (LTU) vs. Reliance Industries Limited (2019) 307 CTR 121 (SC) held that when interest free funds available with the appellant are sufficient to meet its investment, then, it can be presumed that investments are made from those funds and hence, the interest is allowable as a deduction in terms of section 36(1)(iii) of the Act. 26 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 15.9. The Bombay High Court in CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) held that the where the Tribunal has recorded a clear finding that the appellant possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, the presumption stands established that the investments in sister concerns were made by the appellant out of interest-free funds and, therefore, no part of the interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. 15.10. The Gujarat High Court in CIT vs. R K Kalthia Engineering & Automobiles (P) Ltd. [33 taxmann.com 14] has held that the disallowance of interest expenditure was not permissible where the AO had disallowed interest paid on borrowed funds on the ground that assessee diverted interest bearing funds for the purpose of investment in shares and loans to sister concern when sufficient interest free funds were available with the assessee. The relevant extract is as under :- “6. It is a well-established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly.” 27 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 15.11. The Mumbai Tribunal in Metro Exporters Ltd v. ITO (ITA No. 1693/M/05) held that a presumption cannot always be made that source of investment is borrowed funds in cases where mixed (own and borrowed) funds are used. Where an assessee has sufficient interest free funds (capital and reserves), disallowance for alleged use of borrowed funds is not warranted. Relevant extract of the same is reproduced below: “On the basis of above discussion a proposition / Formula can be laid down that if an assessee having sufficient interest free funds, in the form of capital reserves and other funds without interest bearing from relatives and friends not related to business, to cover funds given interest free or utilized other than for business purposes, no disallowance are warranted. If the own funds are not sufficient to cover interest free advances, a proportionate disallowance is warranted. While examining interest free funds available with assessee and interest free? given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proportion is fortified by the decision of ITAT in the case of Torrent Financers V. ACIT, 73 TTJ 624 (Ahd), judgment of Allahabad High Court in the case of CIT V. Prem Heavy Engineering Works P. Ltd., 285 ITR 554 (All.), and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corporation V. CIT, 298 ITR 298 (SC).” a. As regards the disallowance made under section 14A of the Act, the appellant submits that there was no tax-free income earned by the appellant during the year as no dividend income has been received from both the Indian subsidiaries. Also, no expenditure was incurred by the appellant in investing in the subsidiary companies. Since there was no dividend income, no claim for exemption was made and no expenditure was incurred in making investment. Thus, the appellant 28 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. submits that there can be no disallowance under the provisions of section 14A of the Act. 15.12. Reliance is placed on the decision of the co-ordinate bench in the case of ACIT v. A.U. Financiers (India) Ltd (2009) 175 ITD 245 (Jaipur trib.) which held that when investments in subsidiary companies has been made out of fresh capital raised during relevant year and there has been no dividend income in respect of investment in subsidiary, the said investment would not form part of disallowance under section 14A of the Act. 15.13. The Special Bench of the Tribunal in ACIT v. Vireet Investment Pvt. Ltd. (2017) 165 ITD 27 (Del)(SB) held that as per rule 8D(2)(iii), only those investments were to be considered for computing average value of investments which yielded exempt income during the year under consideration. 15.14. The Delhi High Court in Cheminvest Limited v. CIT (2015) 378 ITR 33 (Del) which held that the expression ‘does not form part of the total income’ in section 14A envisages that there should be an actual receipt of income, which was not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. 15.15. The Delhi High Court in PCIT v. Oil Industries Development Board (2018) 101 CCH 452 held that in absence of any exempt income, disallowance under section 14A of the Act of any amount is not permissible. 29 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 15.16. Further, reliance is also placed on the following decisions laying down the similar position that where no exempt income is earned there can be no disallowance under section 14A of the Act. • CIT v. Hero Cycles Limited (323 ITR 518)(P&H) • CIT v. Winsome Textile Industries Ltd (319 ITR 204) • CIT v. Corrtech Energy (P.) Ltd 223 Taxman 130 (Guj) • CIT v. Shivam Motors (P) Ltd. (2015) 230 Taxman 63 (Del) • CIT v. Holcim India P. Ltd. (2014) 90 CCH 81 (Del) A similar issue had come up for adjudication in the appellant’s appeals in the earlier years as under:- AY 2009-10 The AO had disallowed proportionate interest of Rs. 78.47 lakhs in respect of fresh investments made in subsidiary companies. The CIT(A) deleted the addition made by the Assessing Officer except to the extent the investment resulted in a negative balance of Rs. 37.65 lakhs in the cash credit account on the day on which the investment was made. The Tribunal confirmed the view of the CIT(Appeals). The matter came up before the Hon’ble High Court of Rajasthan, Jaipur Bench who also upheld the order of the Tribunal. AY 2010-11 The AO had disallowed proportionate interest of Rs. 2936.97 lakhs under section 36(1)(iii). The CIT(A) invoked the provisions of section 14A and calculated a disallowance of only Rs. 70.23 lakhs. The Tribunal, while principally approving the finding of the CIT(A), remanded the matter back to the file of the CIT(A) to examine the applicability of section 36(1)(iii). The matter is still pending before the CIT(A). 30 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. AY 2011-12 The AO had disallowed proportionate interest of Rs. 2578.65 lakhs under section 36(1)(iii). The CIT(A) invoked the provisions of section 14A and calculated a disallowance of only Rs. 36.92 lakhs. The Tribunal while principally approving the finding of the CIT(A), remanded the matter back to the file of the CIT(A) to examine the applicability of section 36(1)(iii). The matter is still pending before the CIT(Appeals). 15.17. The Appellant submits that in light of the ratio of the judgments of the Supreme Court in the case of Reliance Industries and South Indian Bank delivered post the decisions of the Tribunal for the assessment years 2010/11 and 2011/12, there is no need to remand the matter to the CIT(A) to consider the correctness of the finding of the Assessing Officer that a disallowance under section 36(1)(iii) can be made. In the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) had to consider the issue as where interest free own funds available with the assessee exceeded the investments in tax free securities, could the investments be presumed to be made out of assessee’s own funds and, hence, a proportionate disallowance is not warranted under section 14A of the Act on the ground that separate accounts have not been maintained by the assessee for investments and other expenses incurred for earning tax free income. The Court held that a proportionate disallowance of interest attributable to funds invested to earn tax free income under section 14A of the Act was unwarranted. The relevant extract is as under:- “.....In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have 31 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure..... .....Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made... ... The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.” 15.18. The Supreme Court in CIT v. Reliance Industries Limited (2019)410 ITR 466 held that where there is a finding of fact that interest free funds available to the assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds and, hence, on this ground alone the deletion of disallowance of interest claimed under section 36(1)(iii) was upheld. In so doing the Court observed thus, “....Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03...” 15.19. Hence, in light of the above two judgments, which have been pronounced by the Supreme Court post the earlier orders of the Tribunal, there is no need to follow the earlier decisions of the Tribunal and remand that matter to the 32 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. CIT(A) but matter should now be decided in favour of the appellant by placing reliance on these decisions of the Supreme Court because it is an undisputed position that the interest free funds were far in excess of the investments made. 15.20. The Learned Department Representative (‘DR’) vide his written submissions has submitted that the decision of South India Bank Ltd (supra) is not applicable as it was concerned with applicability of section 14A of the Act and dealt with an issue of disallowance of interest for investments made in tax free bonds / securities by a bank. Further, the DR referred to paragraph 21 of the judgement referring to the fact that the issue in SA Builders is pending for consideration before a larger bench in CIT v. Tulip Star Hotels Ltd. The Appellant submits that the Supreme Court has referred to its earlier judgement in SA Builders and applied its ratio in Hero Cycles (P.) Ltd. v. CIT (379 ITR 347)(SC) where the Supreme Court observed that the assessee had advanced an amount to its subsidiary company without charging any interest and had also advanced an amount to its directors charging a lower interest rate of 10%. The amount advanced to its subsidiary and directors was borrowed from banks and interest thereon was paid by the assessee at 18%. The assessee had claimed the entire interest paid as a business expenditure. The Supreme Court referred to its earlier decision in S.A. Builders [(2007) 288 ITR 1] on the principle of commercial expediency and held that once there is nexus between the expenditure and the business purpose, the revenue authorities cannot put itself in the arm-chair of the businessman or in the 33 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. position of the Board of Directors and assume the role to decide how much expenditure would be reasonable. The revenue authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own point of view but from the point of view of a prudent businessman and, hence, the amount of interest paid by the assessee was allowed as a deduction. Further, even if a case is referred to a larger bench, the earlier decision does not in any manner, loose its precedential value and the Tribunal would still be bound by the earlier judgment of the Supreme Court in S A Builders. 15.21. Therefore, based on the above submissions and reliance on the various decisions referred to, it is humbly submitted that no disallowance is warranted in respect of proportionate interest either under the provisions of section 36(1)(iii) or under the provisions of section 14A of the Act and the disallowance of Rs. 24.90 lakhs sustained by the CIT(A) should be allowed as a deduction to the Appellant. 16. On the other hand, the ld. D/R relying on the order of the Assessing Officer submitted the ld. CIT (A) was not right in deleting the disallowance. 17. We have heard the rival submissions and perused the material available on record and the case laws cited by both the sides. The Assessing Officer has made a disallowance of Rs. 35,92,45,372/- under section 36(1)(iii) stating that the assessee had utilised a part of its borrowing for making investments in group companies without any commercial expediency. He made a disallowance out of the interest paid 34 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. by the assessee on borrowed funds which was claimed by the assesse under section 36(1)(iii) of the Act and observed that had the assessee not utilised the funds in making investments in subsidiaries, the same funds would have been employed for its business purpose and interest paid on borrowed funds would have been substantially lesser. The CIT(A) referred to his earlier order for the AY 2011-12 where the disallowance was computed under section 14A r.w.r 8D and confirmed an addition of Rs. 24.90 lakhs (i.e. proportionate expenditure of Rs. 22.03 lakhs and half percent of average investments of Rs. 2.86 lakhs) and directed the AO to delete the balance addition of Rs. 25,67,55,372/- thereby, partially allowing the assessee appeal. Thus, he implicitly accepted that no disallowance could be made under section 36(1)(iii) but a disallowance was to be made in terms of section 14A. 17.1. In the earlier assessment years the Tribunal had remanded the matter to the file of the CIT(A) in order to determine the applicability of Section 36(1)(iii) as observed by the AO since the finding had been given by the CIT(A) with reference to section 14(A) and not with reference to section 36(1)(iii). 17.2. However, in light of the ratio of the judgments of the Supreme Court in the case of Reliance Industries and South Indian Bank delivered post the decisions of the Tribunal for the assessment years 2010-11 and 2011-12, we are of the considered opinion that there is no need to remand the matter to the CIT(A) to consider the correctness of the finding of the Assessing Officer whether a disallowance under section 36(1)(iii) can be made. The Supreme Court in CIT v. Reliance Industries Limited (2019)410 ITR 466 held that where there is a finding of fact that interest free funds available to the assessee were sufficient to meet its 35 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. investment it will be presumed that investments were made from such interest free funds and, hence, on this ground alone the deletion of disallowance of interest claimed under section 36(1)(iii) was upheld. In the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) had to consider the issue as where interest free own funds available with the assessee exceeded the investments in tax free securities, could the investments be presumed to be made out of assessee’s own funds and, hence, a proportionate disallowance is not warranted under section 14A of the Act. Thus applying the ratio of both the judgments, we direct that no disallowance of interest be made in respect of amount invested in subsidiaries either under section 36(1)(iii) or section 14A. The ground of the revenue is dismissed and the ground of the assessee is allowed. Ground No. 6 relates to deletion of addition of Rs. 90,14,795/- made out of interest paid by the assessee on borrowed funds on account of investment in mutual fund units. This ground of the Revenue relates to the investments made in mutual funds by the assesse allegedly out of surplus short term funds available within the business. 18. The brief facts of the case are that the A.O. while making the assessment has observed that the assessee has used part of the borrowings for making investment in units of various mutual funds which have yielded tax free dividend income of Rs. 62.99 lakhs and hence, disallowance is required to be made out of interest paid by the assessee on borrowed funds under section 36(1)(iii) of the Act, since assessee has failed to prove any commercial expediency for utilizing the interest bearing 36 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. borrowed funds for making investments in units of mutual funds. The AO pointed out that the assessee claimed deduction of Rs. 94.43 crores on account of interest paid on borrowed funds i.e. term loans, cash credit facilities, debentures etc. The AO observed that the assessee paid interest ranging from 1% to 13% p.a. on rupee funds borrowed from various persons. The AO found 9% p.a. to be fair and reasonable as interest on funds were utilized by the assessee for the purpose of making investments in mutual fund units. The AO calculated interest at 9% p.a. amounting to Rs. 90,14,794/- which was disallowed as the assessee cannot be said to be carrying on a business of purchase and sale of mutual funds. The AO calculated the disallowance in respect of interest on investment in mutual funds under section 36(1)(iii) of the Act as under:- S. No MF Investment Redemption Dividend Income Days Interest Disallowed In INR Date In INR Date 1 Birla Sunlife 50,000,000 23-Jun-11 50,000,000 28-Jun-11 44,587.39 5 61,643.84 2 Reliance 320,000,000 15-Apr-11 10 789,041.10 180,000,000 19-Apr-11 500,000,000 25-Apr-11 637,998.13 637,998.13 6 266,301.37 3 Franklin MF 30,000,000 25-Apr-11 30,000,000 26-Apr-11 5,356.02 1 7,397.26 130,000,000 27-Apr-11 70,000,000 28-Apr-11 1 17,260.27 60,000,000 2-May-11 66,694.70 5 73,972.60 37 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 30,000,000 12-May-11 30,000,000 18-May11 6 44,383.56 200,000,000 20-Aug-11 200,000,000 28-Aug-11 104,826.98 8 394,520.55 120,000,000 4-Oct-11 120,000,000 7-Oct-11 67,809.29 3 88,767.12 4 Tata MF 460,000,000 11-Apr-11 460,000,000 21-Apr-11 818,735.40 10 1,134,246.58 5 SBI MF 130,000,000 27-Jun-11 130,000,000 28-Jun-11 21,730.95 1 32,054.79 6 ICICI MF 500,000,000 19-Apr-11 500,000,000 21-Apr-11 168,487.74 2 246,575.34 7 Principal MF 50,000,000 29-Jul-11 50,000,000 5-Aug-11 62,744.88 7 86,301.37 8 Kotak MF 400,000,000 28-Jul-11 500,000,000 5-Aug-11 707,812.04 8 789,041.10 100,000,000 29-Jul-11 7 172,602.74 9 JP MF 300,000,000 5-Aug-11 300,000,000 8-Aug-11 165,349.84 3 221,917.81 10 DWS MF 100,000,000 1-Aug-11 100,000,000 5-Aug-11 72,866.48 4 98,630.14 11 IDFC MF 90,000,000 14-Jun-11 90,000,000 15-Jun-11 16,154.47 1 22,191.78 100,000,000 24-Jun-11 100,000,000 28-Jun-11 72,198.29 4 98,630.14 150,000,000 2-Aug-11 150,000,000 5-Aug-11 81,882.27 3 110,958.90 12 BNP Paribas MF 50,000,000 11-Apr-11 50,000,000 25-Apr-11 14 172,602.74 38 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 450,000,000 2-May-11 1,890,397.99 21 2,330,136.99 80,000,000 3-May-11 80,000,000 6-May-11 42,032.59 3 59,178.08 120,000,000 29-Jun-11 250,000,000 5-Jul-11 282,161.21 6 177,534.25 130,000,000 30-Jun-11 5 160,273.97 150,000,000 26-Aug-11 150,000,000 30-Aug-11 107,178.73 4 147,945.21 13 DSP Black Rock 90,000,000 19-Apr-11 6 133,150.68 50,000,000 20-Apr-11 140,000,000 25-Apr-11 130,728.33 5 61,643.84 230,000,000 2-May-11 230,000,000 6-May-11 161,275.99 4 226,849.32 400,000,000 28-Jul-11 400,000,000 5-Aug-11 569,790.08 8 789,041.10 Total 4,740,000,000 5,190,000,00 0 6,298,799.79 9,014,794.52 19. Aggrieved by the order of the A.O., the assessee preferred appeal before the ld the CIT(A). The ld. CIT (A) referred to his earlier order where an addition was deleted as the AO had failed to establish any nexus between borrowed funds and investments and the assessee had invested in mutual funds out of internal accruals like sale of fertilizer bonds, redemption of mutual funds, normal collections and maturity of FDs and not from borrowed funds. The CIT(A) for the year under consideration held that facts in AY 2012-13 were similar to the earlier year and 39 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. investments in mutual funds were made out of internal accruals and hence, disallowance of Rs. 90,14,794/- has been deleted by the CIT(A). Now the revenue is in appeal before us. 20. Before us, the ld. A/R of the assessee submitted that the investment in mutual funds was made out of the surplus short term funds available within the business during the relevant period. The investments were made from cash generated from business operations including subsidy, market collections, collection from sales, redemption of mutual funds and inter corporate deposits and sale of fertiliser bonds etc. There were no specific / direct borrowings for the investment. As surplus funds were invested in the mutual funds, no interest expenditure relating thereto was incurred. The investment in mutual funds during the whole year was based on the availability of surplus fund, generally for a short period. 20.1. The ld. A/R further submitted that the assessee had both secured and unsecured loans outstanding both at the beginning as well as at the end of the captioned year. However, the assessee had utilized the interest bearing loans (both secured as well as unsecured) for acquisition of fixed assets and general working capital requirements. These were not used for making any investment in mutual funds, which was done only from internal accruals and temporary surplus funds. 20.2. The assessee had, during the course of assessment proceedings, submitted the board resolution which duly supports the fact that such investments in Mutual Funds were made for treasury operations. Treasury operations include managing short funds surpluses or deficits of funds. There cannot be any question of 40 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. commercial expediency for the same since it is well within the assessee’s business operations to manage short term surplus or deficits. 20.3. The provisions of section 36(1)(iii) of the Act does not prohibit allowance of interest for investment in mutual funds. The only condition precedent for allowing interest on borrowed capital is that it must be used for the purpose of assessee’s business. The investment in mutual funds, were made to effectively utilize the surplus funds to enable reduction in cost of funds by temporarily parking the same in dividend bearing funds. No nexus was proven between the interest paid on borrowed funds and investment in mutual funds. Hence, the provisions of section 36(1)(iii) of the Act do not apply to the assessee and there can be no disallowance under section 36(1)(iii) of the Act. 20.4. Further, the assessee has made investment in the mutual funds from the cash credit account maintained with HDFC Bank. HDFC bank has charged a total interest of Rs. 78,56,936/- for the year under consideration. Hence, the disallowance cannot be Rs. 90,14,795/- which exceeds the amount of interest itself. 20.5. Without prejudice to the above, the assessee submitted that the overall weighted average cost of borrowing is 3.07% calculated as on 31 March 2012 as against 3.46% calculated on 1 April 2011. 20.6. The Bombay High Court in CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) held that the where the tribunal has recorded a clear finding that the appellant possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, 41 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. the presumption stands established that the investments in sister concerns were made by the appellant out of interest-free funds and, therefore, no part of the interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. 20.7. Further, reliance is also placed on the other decisions referred in Ground 2 above to support the position that where sufficient own funds are available, it is presumed that investments have been made out of such interest free funds and no part of the interest on borrowings can be disallowed on the basis that the investments are made out of interest bearing funds. 20.8. The ld. A/R submitted that in light of the above decisions which have laid down the settled law, the Tribunal ought to follow these decisions and not follow the Tribunal’s order for the earlier years remanding the matter to the AO, in light of the aforesaid decisions as well as the recent Supreme Court decisions in South Indian Bank (supra) and Reliance Industries Limited (supra). Further, the DR’s submission of remanding the matter back to the AO should be rejected in light of the aforesaid Supreme Court decisions as referred above as well as referred in Ground 2 above. 20.9. The ld. A/R therefore, submitted that no disallowance is warranted in respect of proportionate interest in respect of temporary investments in mutual funds and the order of the CIT(A) should be upheld. 21. On the other hand, the ld. D/R relying on the order of the Assessing Officer submitted that the ld. CIT (A) was not justified in deleting the addition. 42 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 22. We have heard the rival submissions and perused the material available on record and the case laws cited by both the sides. We have also gone through the order of the ITAT in the earlier years where the matter was remanded to the file of the Assessing Officer. As in the earlier grounds , we are of the considered opinion that in light of the recent Supreme Court decisions in South Indian Bank (supra) and Reliance Industries Limited (supra) and the Hon’ble Supreme Court’s finding in the case of Munjal Sales Corporation vs. CIT (298 ITR 298) as well as the CIT(A)’s order for AY 2012-13 where the addition was deleted because the AO had failed to establish any nexus between borrowed funds and investments. The ld. CIT(A) had given the finding that the assessee had invested in mutual funds out of internal accruals like sale of fertilizer bonds, redemption of mutual funds, normal collections and maturity of FDs and not from borrowed funds. We thus hold that no disallowance is warranted and we uphold the findings of the CIT(A) and reject the ground of the Department. Ground No. 7 relates to allowing rent of Rs. 7,13,862/- paid to a person specified u/s 40A(2)(b). 23. This ground of the Revenue is covered by the decision of the Coordinate Bench of the Tribunal in ITA Nos. 461 & 575/JP/2015 for the Assessmemt Year 2011-12 at page 12 para 31 as under :- “31. We have heard the rival contentions of both the parties and perused the material available on the record. The ld CIT(A) has given a finding that the employees of the assessee company stayed at the guest house in respect of which an amount of Rs 10,80,000 has been paid as rent. Further, the Revenue has not brought on record any material evidence to suggest that the rent paid was excessive vis-à-vis an accommodation of same size and facility in the same locality. We therefore confirm the order of the ld CIT(A) who has 43 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. allowed the rent payment as incurred for the purposes of the assessee’s business. Accordingly, this ground of the Revenue’s appeal is dismissed.” Therefore, following the Coordinate Bench decision for the AY 2011-12, we confirm the order of the ld CIT(A) and ground of revenue’s appeal is dismissed. Ground No. 8 relates to donation of Rs. 76,15,213/- made to DAV Trust. 24. This ground of the Revenue is covered by the decision of the Coordinate Bench of the Tribunal in ITA Nos. 461 & 575/JP/2015 for the assessment year 2011-12 at page 13-14 para 16 of its order as under :- “ 16. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2006-07 passed in ITA No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:- “2.7 We have heard both the parties. This issue has been considered by the Tribunal in the case of the assessee for the assessment years 2003-04 to 2005-06. It is not the case of the revenue that the assessee has paid the contribution to the trust. The claim of the assessee is that it has reimbursed the expenditure and hence the provisions of Section 40A(9) may not be applicable. The Hon'ble Rajasthan High Court in the case of CIT Vs. Rajasthan Spinning & Weaving Mills Ltd., 281 ITR 408 had an occasion to consider the allowability of expenditure relating to the donation of bus to school. In that case, the AO was of the view that the school is not owned by the company and the entry in the school is also not restricted to the wards of the workmen and staff members of the company. The expenditure was treated as donation. The Hon'ble Jurisdictional High Court in the case CIT Vs. Rajasthan Spinning & Weaving Mills Ltd.,(supra) observed that the question of claim to deduction of any amount spent by the assessee as expenditure laid out wholly and exclusively for the purpose of assessee's business is not to be decided in the light that the assessee must be entitled to the whole benefit accruing from such expenses and nobody else should be sharing this benefit as is derived by the assessee by dint of such expenses. The Hon'ble Bombay High Court in the case of CIT Vs. B.C. Shirke & Co., 264 ITR 83 had an occasion to consider the allowability of contribution to the three trusts 44 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. formulated for the welfare of the employees. The Hon'ble Bombay High Court in this case has observed as under:- “ Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income- tax Act. Such expenditure has nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with the employees is an expenditure for the carrying on of the business. In this view of the matter, in the facts of this case, where there is no dispute about the bona fides in creation of the trusts or utilisation of the funds contributed by the assessee to the trusts, we have no hesitation in holding that the expenditure incurred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under section 37 of the Income- tax Act.” By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue’s appeal is dismissed.” Therefore, following the Coordinate Bench decision for the A.Y. 2011-12, we confirm the order of the ld CIT(A) and ground of revenue’s appeal is dismissed. Ground No. 9 relates to deletion of addition of Rs. 13,31,39,886/- made by the AO on account of rejection of Books of account in respect of Baddi Unit named Birla Textile Mills. 25. The brief facts of the case are that the assessee has a textile unit in Baddi in Himachal Pradesh. The unit produces both cotton and synthetic yarn. The assessee purchases cotton and receive the same at the factory. During the scrutiny proceedings, it was found that actual weight received in the factory as per details of dharma khanta (weighing machine) is different from weight as per details of invoices/purchase bills produced by the assessee on various dates as per order sheet notings. The books of accounts of textile division were produced for examination on 28.01.2015. The assessee was asked specifically to explain the reasons of this 45 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. difference, the assessee company vide its reply dated 03.02.2015 has stated as under :- “ In this respect, we submit that cotton being a natural produce observes moisture from the environment. At the point of packing and ginning, there is a spray of water that causes the weight of raw material to increase. Some of this moisture dries up at the time goods are delivered. Sometimes the reverse is true and the product observes further moisture between dispatch and delivery. Also the packing material used accounts for a difference in weight. These the above lead to minor discrepancies between actual weight and invoice weight.” The AO observed differences between the physical weight and invoice weight of cotton purchased and despite all explanations and clarifications regarding differences in weight, the AO invoked the provisions of section 145 of the Act, rejected the accounts and estimated the income by applying the average gross profit rate earned by the appellant in the past, thereby making an addition of Rs. 13,31,39,887/-. The AO observed that actual weight received at the factory as per weighing machine vis- à-vis weight as per invoice / purchase bills are different and, hence the actual weight of raw material consumed itself is faulty. Therefore, balance of opening stock and closing stock as well as consumption cannot be relied upon. Further, the AO held that purchases were made by assessee while the goods were in trtansit and, hence, the actual price was not verifiable and the price may be inflated. Further, the AO inquired regarding the reason for fall in gross profit from 12.97% to 0.27% in AY 2012-13. 46 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 26. The AO did not agree with assessee’s reasoning and for the cotton and textile division held that the raw materials purchased in transit and actual price are not verifiable. Further, he alleged that the cotton was purchased at a price higher than the market price on many occasions without giving any specific instances. Raw material consumed was not verifiable as the assessee has not maintained details of actual weight. Hence, books of accounts of cotton division were rejected under section 145(3) of the Act. Further, the AO observed that the assessee has not mentioned details of actual weight. Weight as per scale showed higher amount than as per invoice and assessee failed to prove correctness/completeness of accounts for the cotton division. Hence, the AO estimated gross profit of assessee at 9.67% of turnover by taking average of last 4 years profit. The gross profit for year under consideration for the cotton division was (0.83%). Being aggrieved by the order of AO, the assessee preferred appeal before ld. CIT (Appeals). The ld. CIT (A) deleted the addition by observing at pages 110-111 as under :- “ It may be noted that his main objections were only that explanation given as process loss claimed by the appellant for difference in weight of the actual & invoice weight was not acceptable explanation. Secondly, he objected to purchase of raw materials in transit from commission agents. Hence he held that price inflation could not be ruled out. He has given a generalized verdict that “On random explanation of purchase prices it was found that the company has purchase raw material i.e. cotton at higher than market price on many occasion.” However, he self contradicts himself as firstly, he is talking of price inflation but does not explain how the appellant would be benefited by paying higher than market purchase prices thereby reducing its profits on which the appellant was entitled for deduction u/s 80IC so it would be illogical to reduce the profits anyways. Secondly, he has not brought out specific instances 47 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. where such prices were inflated in order to benefit any parties/subsidiaries etc. Thirdly, raw material consumption as per actual weight purchase which he felt was unverifiable due to discrepancy in the weight mentioned earlier due to claimed process laws has not actually be examined by him as it is absent in one assessment order. This is not the first year of assessee’s business & the department has accepted the books on the same basis in earlier years. Though res judicata is not applicable to income tax proceedings, however, a principle of consistency does need to be followed. Rejection of books of accounts cannot be based on superficial & flimsy reasons without bringing out specific defects in the same, which in this case the AO has failed to do. Further, in the course assessment as well as appellate proceedings, the appellant has brought on record detailed explanation for both the gross profit decline, difference in weight and market reports on the comparative cases as well as the impact on the industry as such. The assessee was also able to produce proper bills, vouchers, registers, ledgers etc. before the AO in support of its accounts and contentions made in response. On the contrary, the AO could not bring on record any findings is comparable cases where such G.P as he has estimated has been returned. He should have at least brought out the cyclical analysis of the assessee’s business which are now easily collectible form various independent sources, so as to prove that what the assessee was claiming was acceptable or not. In the absence of any independent verifications and findings to sustain his conclusions, I am not inclined to agree with the A.O. on the defects listed as being sufficient for rejection of assessee’s books of accounts. As has been mentioned in the case of CIT vs. Smt. Poonam Rani (2010) 192 Taxman 167 (Delhi), wherein the officer had rejected the books because of the quantitative variation in the weight of the output products as against input items, in this case also, the basis for rejection falls short on all the grounds as was highlighted in the above referred case law. 48 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. The rejection made u/s 145(3) is accordingly not upheld and is not validated. The resultant estimation of profit leading to an addition of Rs. 13,31,39,887/- is also directed to be deleted.” Now the revenue is in appeal before us. 27. Before us, the ld. D/R supported the order of the A.O. The ld. D/R submitted that the plea of the ld. CIT (A) that the department has accepted the books of accounts of the assessee on the same basis in earlier years also does not have any legal footing. Firstly, because of the fact that estoppels and res-judicata are not applicable in income tax proceedings and secondly this was an exceptional year wherein there was an extraordinary fall in GP rate and this might have prompted the AO to deeply scrutinize the books of accounts of the assessee company. On the plea of conducting no enquiry by the AO, the ld. D/R placed reliance on the decision of Hon’ble Supreme Court in the case of Kapurchand Shrimal vs. CIT, 131 ITR 451 (SC) wherein it is held that it is not merely a discretion but duty of the appellate authority to remove all procedural defects such as lack of necessary inquiries by the assessing officer or failure in granting cross examination to the taxpayer, by exercising specific powers granted to first appellate authority under section 250(4) of the IT Act. The ld. D/R placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. Jansampark Advertising and Marketing Pvt. Ltd., 375 ITR 373 (Delhi) wherein it has been held that the AO may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion, but the CIT (A) having noticed want of proper inquiry, could not have closed the chapter 49 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. simply by allowing the appeal and deleting the additions made. He, therefore, prayed to confirm the addition. 28. On the other hand, the ld. A/R submitted as under :- 28.1 The assessee submits that proper books of accounts were maintained being fully supported by vouchers and these books of accounts were duly audited. Complete stock records were maintained by the assessee. The financial statements of the assessee were prepared in accordance with generally accepted accounting principles in India (Indian GAAP). These financial statements were prepared on an accrual basis and under the historical cost convention. 28.2. The assessee was registered under the Central Excise Act and is maintaining proper quantitative details in the prescribed manner and filing prescribed excise returns. The assessee maintained proper books of accounts which were audited by S.R. Batliboi& Co. Various other audits were also conducted like cost audit, excise audit, tax audit etc. None of these audit reports have any suggestion, let alone a finding, that the Appellant's accounts are not correct and complete. Even the excise authorities have not found any fault with the Appellant's production records. 28.3. The assessee had submitted all details called for by the AO vide its letters dated 8 January 2015 (see pg 140), 15 January 2015 (pg 188), 19 January 2015 (pg 190), 27 January 2015 (pg 195), 3 February 2015 (pg 205) and 6 February 2015 (pg 219)where details pertaining to the reasons for the fall in gross profit (hereinafter referred to as 'GP') ratio as well as explanation for the negative impact 50 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. throughout the industry; excerpts from the annual reports of companies in the same line of business, list of suppliers of textile division, quarter wise details and accounting records of the textile division, details of cotton prices in mandi and its comparison with the prices paid, reasons for difference between actual weight and invoice weight, copy of the purchase invoices and purchase register, stock register for March 2012 and details of top 10 customers in the textile division for cotton and synthetic units were submitted to the AO to support the assessee's contention. 28.4. The vouchers, bills, ledgers, purchase registers etc were called for from the textile division situated in Baddi (Himachal Pradesh) and submitted before the AO. Two personnel from Baddi (HP) were also present before AO to help in the verification process and to provide for any clarification that may be needed. The AO observed that there was a difference in weight of material as per weight slips and invoice. It was explained that cotton being a natural product absorbs moisture. Similarly, sometimes some of the moisture dries up due to wind and weather conditions. Further, packing material often is the cause of the differential weight. Sometimes withdrawal of samples for testing also resulted in weight difference. It was explained that the entry in the books of accounts was consistently made on the basis of the "invoice weight". Also, the issues to shop floor and valuation of closing stock was also made considering invoice weight. Complete record of quantity purchased and issued to shop floor were maintained and the same were verified by 51 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. the AO. Despite such valid explanations, the AO found the books to be incorrect. The difference in weight was treated by the appellant as a process loss. Cotton being a natural product absorbs moisture from the environment. Moisture dries up at the time of delivery and sometimes even the reverse happens where the moisture increases the weight of cotton. 28.5. Further, the Department Representative (`DR') vide its written submissions has mentioned that the AO rejected the books of accounts due to reason (a) to (e) mentioned in the assessment order and not because of the fall in GP rate. As mentioned above, the assessee has submitted all the relevant details along with reasons for difference in weight being a process loss which have been submitted and hence, the weight of raw material in the books of accounts as per the purchase invoice being less than the weight of the weighment slips has already been explained by the assessee and this cannot be the basis to reject its books of accounts. Further, the fact that the assessee has a company policy in place to charge commission agents when difference is more than 50kgs itself shows that there are differences in weight as cotton is a natural product which absorbs moisture. Further, no addition can be made as pointed out by the DR, when the books of accounts have always been accepted in earlier years and there is no change in facts warranting taking a different position and, hence, the books of accounts cannot be rejected and the CIT(A) has correctly decided the issue. Further, the DR referred to the decision of Kapurchand Shrimal v. CIT (131 ITR 451)(SC) 52 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. which has no application to the facts of this case as the decision is in the context of an assessee making a claim for partition and requesting the AO to pass an order under section 25A of the 1922 Act. The assessment order was passed in the case of an HUF without holding an inquiry and the tribunal set aside the assessment for non-compliance with the provisions of section 25A of the 1922 Act as no inquiry was made by the AO. The Supreme Court held that the Tribunal was right in setting aside the order passed under section 25A as the same was passed without complying with the requirement of holding an inquiry. But the court thereafter observed that the tribunal would have the jurisdiction to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose directions the appeal is preferred. It is submitted that the present case is not a case where it is necessary to issue such a direction and proper inquiry has been made by both the AO and the CIT(A). The reliance placed on the decision of CIT v. Jansampark Advertising and Marketing Pvt Ltd (375 ITR 373)(Del) is not applicable and not relevant to the facts of this case. 28.6. Further, the causes for reduction in gross profit in the year under consideration compared to the previous years was due to the cost of raw material consumed increased by 22%, personnel expenses increased by 10%, power and fuel cost per unit increased from 3.85/- per unit to 4.40/- per unit and the selling price per unit decreased by 8%. It may be noted that the Assessing Officer has not doubted the correctness of the sales turnover so there can be no allegation of any 53 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. suppression of sales. Similarly the no evidence has been adduced to establish that any expenditure incurred by the assessee is not genuine or is overstated. Therefore, the only reason which can be used to sustain the addition is a fall in the gross profit rate, which is a circumstance as is explained below not sufficient to invoke section 145(3). 28.7. Assessee has also provided details of 2 comparable companies where their profit had also shown a reduction in AY 2012-13. CRISIL data also revealed that the entire industry was suffering. Assessee's entries in the books are based on invoice. Agents and dealers billed same rate to assessee. Further, the downward fall in gross profit ratio in current year from earlier years cannot be a valid reason to reject the books of accounts. 28.8. The Delhi High Court in CIT v. Smt. Poonam Rani (2010) 326 ITR 223 (Del) held that where the rate of gross profit declared by the assessee in a particular period is lower than the gross profit of the preceding year, it may serve as a warning to the AO to look into the accounts more carefully, but a low rate of gross profit in absence of any material pointing towards falsehood of account books cannot by itself be a ground to reject account books under section 145(3) of the Act. Reference is invited to paragraph 9 of the judgement which is extracted as under:- " The fall in gross profit ratio could be for various reasons such as increase in the cost of raw material, decrease in the market price of finished product, increase in the cost of processing by the assessee etc. There is no finding 54 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. that the actual cost of the raw material purchased by the assessee was less than what was declared in the account books. There is no finding that the actual cost of processing curried out by the assessee was less than what had been declared in her account books. No particular expenditure shown in the account books has been disallowed by the Assessing Officer. There is no finding by the Assessing Officer that the actual quantity of finished product produced by the assessee was more than what it was shown in the account books. There is no finding that the assessee had made any such sale of the finished product which was not reflected in the account books. There is no finding by the Assessing Officer that the finished product was sold by the assessee at a price higher than what was declared in the account books. In these circumstances, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, in our view, were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. 28.9. Further, the above decision of the Delhi High Court dealt with a case of an assessee being engaged in the business of manufacturing copper wires. The assessee had declared a gross profit of 1.4% as against 5.91% in the earlier year. The AO rejected the books of accounts and considered the gross profit rate at 5.91%. The CIT(A) held that the AO was not justified in rejecting the books of accounts and applying the enhanced gross profit rate as the assessee had explained the marginal increase in weight of wires and observed that the assessee was registered under Central Excise Act and was maintaining proper quantitative details. The High Court observed that the AO had not pointed out any particular defect or discrepancy in the account books maintained by the assessee. Further, the High Court observed that the CIT(A) was satisfied with the details furnished by the assessee including quantitative details in respect of purchase of raw material, manufacture of copper wire and sale of finished products. Further, with respect to the marginal increase in weight of the 55 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. finished product accepted the explanation given by the assessee and held that the AO had no justification in law to reject the explanation of the assessee and hence, books of accounts cannot be rejected under section 145(3) of the Act. 28.10. The Delhi Tribunal in ACIT v. Talbros Engineering Ltd (2015) 43 CCH 55 held that books of accounts cannot be rejected on the solidarity reason of decline in the gross profit rate. Further, the AO had no reason for reject the books of accounts when he had not contradicted the chart furnished by the assessee and the AO had not pointed out any mistake in the quantitative records maintained by the assessee or its closing stock, the CIT(A) was justified in cancelling the action of the AO of rejecting the books and resultantly deleted the addition. The relevant extract of paragraph 4 of the judgment is as under:- “ It is a matter of record that the assessee is engaged in a manufacturing activity and has maintained all the stock registers required for the purpose of the payment of excise duty. The Assessing Officer has not controverted the quantity or value of the closing and opening inventory. There is no dearth of judicial precedents unanimously holding that books of account cannot be rejected on the solitary reasons of decline in the gross profit rate. Since the Assessing Officer was swayed only by the decline in the G.P. rate to reject the books of account without anything else, we are of the considered opinion that such an action of the Assessing Officers has no sanction of law...." 28.11. The Calcutta High Court in CIT v. Eastern Commercial Enterprises (1994) 210 ITR 103 (Cal) held that where the assessee has given a comparative instance of gross profit rate, it is necessary for the department to come to a finding as to the norm of the gross profit on the basis of comparative cases. Therefore, it is the duty of the 56 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Assessing Officer to counter the comparative statement cited by the assessee before he can have the option to estimate the gross profit. 28.12. The Gauhati Hon'ble Court in case of Aluminium Industries (P.) Ltd. v. CIT [1995] 8o Taxman 184 (Gauhati) held that additions to the profits of the assessee made solely on the ground that it was low without giving a specific finding that the accounts of the assessee were not correct and complete, or that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. The mere fact that there was a lower rate of gross profit declared by an assessee as compared to the previous year would not by itself be sufficient to justify the addition. 28.13 The Punjab High Court in Pandit Bros v. CIT (1954) 26 ITR 159 held that to reject the accounts there must be a definite finding of the ITO for which there must be definite material before him to come to such a finding. Mere absence of stock register or insufficiency of profits cannot be material to reject the accounts. 28.14. The Jammu and Kashmir High Court in International Forest Co. v. CIT 1975) 101 ITR 721 while considering the issue of yield of saw timber shown by the assessee as being low as compared to earlier years held that mere low yield or the manifestation of meagre gross profit cannot indicate suppression of sales on part of the assessee. 28.15. The High Court of Bombay at Nagpur in R.B. Bansilal Abichand Spinning & Weaving Mills v. CIT (1970) 75 ITR 26o dealt with a case where the AO had made an 57 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. addition by rejecting the books of accounts on the ground that there was excessive dead loss of cotton which indicated suppression of production figures. The High Court held that the mere percentage of loss being very low in a particular year could not possibly lead to an inference that there has been suppression in the weight of yarn that was processed and the addition made by the AO was deleted. 28.16. Various decisions have held that deviation in gross profit cannot be a ground to reject books of accounts. The assessee relies on the following decisions:- • MalaniRamjivan Jagannath (2009) 316 ITR 120 (Raj HC) — para 9 to 11 • Pawan Enterprises v. ACIT (ITA No. 76/JP/2018)(Jaipur trib) — para 7 • PCIT v. IBILT Technologies Ltd. (2018) 98 taxmann.com 255 (Del HC) — para 9 • ACIT v. Mewar Polytex (51 TTJ 698)(Jaipur trib.) — para 13, 16 & 21 • Madan Lal v. ITO (99 TTJ 538)(jodhpur trib.) — para 9 • Century Tiles Ltd. V. JCIT (152 ITD 327)(Ahm. trib.) — para 23 Hence, basis the above decisions, the appellant submitted that the AO has not pointed out any specific defect or discrepancy in the account books maintained by the assessee. The assessee has been maintaining regular books of accounts, which were duly audited by an independent chartered accountant. The financial results were fully supported by the assessee with vouchers and the books of account were complete and correct in all respects. The accounts which are regularly maintained in the course of business are duly audited and free from any qualification by the auditors. Hence, there is no adequate reason to indicate that the accounts are incorrect or unreliable. 58 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 28.17. The AO himself admits that proper books of accounts have been maintained by the appellant. He has neither alleged nor proven either sale outside the books, suppressed production or mistake in quantitative details maintained for excise purposes. All returns under VAT and Excise have been correctly filed and no discrepancies were pointed out either by the Assessing Officer or the Indirect Taxes authorities. 28.18. It is also humbly submitted that the present system of accounting has been carried on by the assessee since the textile unit started production. No addition has been made either in any of the earlier years or any of the subsequent years. A low rate of gross profit, in the absence of any material defect pointed out in the accounts books, cannot by itself be a ground to reject the account books under section 145(3) of the Act. In view of the facts and the legal position set out above, it is submitted that the appeals be decided in favour of the assessee. 29. We have heard rival contentions and perused the material available on record. The facts of the case are that during the course of scrutiny proceedings the AO noted that there was difference in actual weight of the cotton (raw material) purchased/ received in the factory as per details of dharma khanta (weighing machine) from the weight as per details of invoices/purchase bills produced by the assessee on various dates. The books of accounts of textile division were produced 59 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. for examination on 28.01.2015. On being asked to explain the difference in weight of cotton, the assessee submitted as under :- “ In this respect, we submit that cotton being a natural produce observes moisture from the environment. At the point of packing and ginning, there is a spray of water that causes the weight of raw material to increase. Some of this moisture dries up at the time goods are delivered. Sometimes the reverse is true and the product observes further moisture between dispatch and delivery. Also the packing material used accounts for a difference in weight. These the above lead to minor discrepancies between actual weight and invoice weight.” The A.O. considered the above explanation of the assessee but did not find the same satisfactory for the reason that during scrutiny proceedings the assessee could not offer plausible explanation as to what treatment was given to this difference in weight except saying that this is only a process loss. Thus the AO was of the view that balance of opening and closing stock as well as consumption cannot be relied upon. The AO further mentioned that books of accounts of the assessee are audited u/s 44AB and the audit report does not disclose these facts. For want of complete details, the AO invoked the provisions of section 145(3) of the Act and made the trading addition of Rs. 13,31,39,887/- on the declared turnover of Rs. 175,20,71,152/- by applying average G.P of last 4 years @ 9.67% as against g.p. rate of (-) 0.83% shown by the assessee in respect of cotton unit of textile division. In first appeal, the ld. CIT (A) has deleted the addition by observing at pages 110- 111 as under :- “ It may be noted that his main objections were only that explanation given as process loss claimed by the appellant for difference in weight of the 60 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. actual & invoice weight was not acceptable explanation. Secondly, he objected to purchase of raw materials in transit from commission agents. Hence he held that price inflation could not be ruled out. He has given a generalized verdict that “On random explanation of purchase prices it was found that the company has purchase raw material i.e. cotton at higher than market price on many occasion.” However, he self contradicts himself as firstly, he is talking of price inflation but does not explain how the appellant would be benefited by applying higher than market purchase prices thereby reducing its profits on which the appellant was entitled for deduction u/s 80-IC so it is would be illogical to reduce the profits anyways. Second, he has not brought out specific instances where such prices were inflated in order to benefit any parties/subsidiaries etc. Thirdly, raw material consumption as per actual weight purchase which he felt was unverifiable due to discrepancy in the weight mentioned earlier due to claimed process laws has not actually been examined by him as it is absent in one assessment order. This is not the first year of assessee’s business & the department has accepted the books on the same basis in earlier years. Though Res judicata is not applicable in income tax proceedings, however, a principle of consistency does need to be followed. Rejection of books of accounts cannot be based on superficial & flimsy reasons without bringing out specific defects in the same, which in this case the A.O. has failed to do. Further, in the course assessment as well as appellate proceedings, the appellant has brought on record detailed explanation for both the gross profit decline, difference in weight and market reports on the comparative cases as well as the impact on the industry as such. The assessee was also able to produce proper bills, vouchers, registers, ledgers etc. before the A.O. in support of its accounts and contentions made in response. On the contrary, the A.O. could not bring on record any findings is comparable cases where such G.P. as he has estimated has been returned. 61 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. He should have at least brought out the cyclical analysis of the assessee’s business which are now easily collectible form various independent sources, so as to prove that what the assessee was claiming was acceptable or not. In the absence of any independent verifications and findings to sustain his conclusions, I am not inclined to agree with the A.O. on the defects listed as being sufficient for rejection of assessee’s books of accounts. As has been mentioned in the case of CIT vs. Smt. Poonam Rani (2010) 192 Taxman 167 (Delhi), wherein the Officer had rejected the books because of the quantitative variation in the weight of the output products as against input items, in this case also, the basis for rejection falls short on all the grounds as was highlighted in the above referred case law. The rejection made u/s 145(3) is accordingly not upheld and is not validated. The resultant estimation of profit leading to an addition of Rs. 13,31,39,887/- is also directed to be deleted.” We have also taken into consideration the detailed written submission of the assessee holding that AO’s action to reject the books of account is not tenable as the present system of accounting has been carried on by the assessee since the textile unit started production. The ld. A/R of the assessee during the course of hearing submitted that no addition has been made either in any of the earlier years or any of the subsequent years. A low rate of gross profit, in the absence of any material defect pointed out in the accounts books, cannot by itself be a ground to reject the account books under section 145(3) of the IT Act. The ld. A/R further submitted that the causes for reduction in gross profit in the year under consideration compared to the previous years was due to the cost of raw material consumed increased by 22%, personnel expenses increased by 10%, power and fuel cost per unit increased from Rs. 3.85/- per unit to Rs. 4.40/- per unit and the selling price per 62 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. unit decreased by 8%. It may be noted that the Assessing Officer has not doubted the correctness of the sales turnover so there can be no allegation of any suppression of sales. Similarly no evidence has been adduced to establish that any expenditure incurred by the assessee is not genuine or is overstated. In this regard reliance is placed on various High Court decisions including jurisdictional High Court in case of Malani Ramjivan Jagannath (2009) 316 ITR 120 (Raj.) and also decisions of Jaipur Benches of the Tribunal in cases of Pawan Enterprises vs. ACIT in ITA No. 76/JP/2018 and ACIT vs. Mewar Polytex (51 TTJ 698). Taking into consideration all these facts and circumstances of the case and also considering the judgments of various High Courts including the decision of Hon’ble Delhi High Court in case of CIT vs. Smt. Poonam Rani (2010) 326 ITR 223 (Delhi) wherein it has been held that “ where the rate of gross profit declared by the assessee in a particular period is lower than the gross profit of the preceding year, it may serve as a warning to the AO to look into the accounts more carefully, but a low rate of gross profit in absence of any material pointing toward falsehood of account books cannot by itself be a ground to reject account books under section 145(3) of the Act” , we do not find any infirmity in the order of ld. CIT (Appeals) in deleting the addition and the same is upheld. In the result, this ground of the revenue dismissed. Assessee’s Appeal in ITA No. 201/JP/2017 A.Y. 2012-13 : Now we take up remaining Ground No. 3 of the assessee’s appeal relating to sustenance of disallowance of interest of Rs. 41,33,649/- in respect of borrowed funds alleged to be taken for loans and advances to the various subsidiaries. 63 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 30. This ground of the assessee relates to the loans and advances given by the assesse to various subsidiaries over a period of time amounting Rs. 442.91 lakhs. The indebtedness from the subsidiaries during the year under consideration amounted to Rs. 19.57 lakh. The details are as under:- (Rs in lakhs) Sr. No. Name of subsidiary / associate /joint venture Opening balance as on 01.04.11 Movement during FY 11-12 Closing balance as on 31.03.12 1 Chambal Energy (Chhatisgarh) Limited 114.05 1.01 115.06 2 Chambal Energy (Orissa) Limited 24.68 1.01 25.69 3 Chambal Infrastructure Ventures Ltd. 284.17 17.39 301.56 4 CFCL Overseas Limited 0.44 - 0.44 5 India Steamship Limited 0 0.16 0.16 Total 423.34 19.57 442.91 As per the details submitted, the assessee incurred expenses of Rs. 1,01,278/- pertaining to audit fees, ROC fee and other certification and verification charges on behalf of Chambal Energy (Chattisgarh) Limited and Chambal Energy (Orissa) Limited which are recoverable from them and, hence, not debited to the profit and loss account of the assessee as an expense but shown as an advance. The assessee has also incurred expenses of Rs. 17,39,248/- on behalf of Chambal Infrastructure Ventures Limited which are recoverable from it and, hence, not debited to the profit 64 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. and loss account of the assessee as an expense. Further, the assessee has also given an interest bearing loan to CFCL Overseas Limited of Rs. 43,75,26,000/- bearing interest rate at 8% p.a. This loan has been repaid on April 20, 2011. 31. The brief facts of the case are that the AO held that the assessee failed to prove the commercial expediency for giving loans and advances to its subsidiaries. Further, the assessee also could not explain why interest at 8% was charged on the loan given to CFCL Overseas Ltd whereas it had borrowed funds at a higher rate of interest. He also opined that the assessee has diverted a part of its borrowed funds for giving advance of Rs. 43,75,26,000/- to M/s CFCL Overseas Ltd., as well as for paying expenses of its subsidiaries and for paying an advance for purchasing shares of its subsidiaries Chambal Infraventure Ltd. Hence, the AO disallowed a part of interest paid by the assessee on borrowed funds by making a disallowance of interest by taking a rate of 9% p.a. on such borrowing. The AO considered interest at 9% p.a. and worked out a disallowance of Rs. 38,14,207/-. Therefore, total disallowance made amounted to Rs. 41,33,649/- as under:- Particulars Amount (Rs.) Rate of Interest Days Disallowance (Rs.) Loan to CFCL Overseas Ltd. (repaid on 20.04.2011) 29,21,30,000 9% 20 14,40,641 14,53,96,000 9% 20 7,17,021 Total 21,57,662 Interest already charged @ 8% 18,38,220 Disallowance 3,19,442 65 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Chambal Energy (Chhatisgarh) Ltd. 1,14,05,000 9% 365 10,26,450 Chambal Energy (Orissa) Ltd 24,68,000 9% 365 2,22,120 Chambal Infrastructure Venture Ltd 2,84,17,000 9% 365 25,57,530 CFCL Technologies Ltd. (repaid on 30.04.2011) 10,96,000 9% 30 8,107 TOTAL DISALLOWANCE 41,33,649 32. Aggrieved by the order of A.O., the assessee preferred appeal before the ld. CIT (A). The ld. CIT(A) referred to his earlier order where a disallowance of Rs. 61,96,798/- was confirmed as loans were given from the assessee’s cash credit account and it was presumed that loans were from borrowed funds and following the same, the CIT(A) confirmed the disallowance of Rs. 41,33,649/-. Now the assessee is in appeal before us. 33. At the outset, the ld. A/R of the assessee submitted that no material is brought on record by the AO to establish that any part of the borrowed funds were utilised to lend the amounts or incur expenses on behalf of the subsidiaries. In any event having regard to the fact that the aggregate of the share capital and reserves is far in excess of the amount lent/incurred a presumption must be drawn that the advances were not made from borrowed funds as already dealt with in detail earlier. In any event having regard to the fact that interest is charged at 8% p.a. on the loan given to CFCL Overseas Ltd. which was at a rate higher than the weighted 66 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. average borrowing cost of 2.85% p.a., accordingly, no disallowance of interest should be made. Further, the AO has arbitrarily adopted the rate of 9% p.a. and calculated the disallowance. The assessee submits that the department cannot put itself into the shoes of a businessman and it is not for the department to determine what rate of interest is to be charged without providing any cogent reasoning. Further, it is submitted that the loans and advances were made out of the internal accruals of the appellant and not out of borrowed funds and there were no specific/direct borrowings for the loans and advances. The assessee submitted that the loans and advances to the subsidiaries were made in the normal course of business for the furtherance of its business activities. The appellant had earned a profit of 247.28 crores during the year and has reserves of Rs. 1312.87 crores (comprising of General Reserve of Rs. 246.95 crores and profit and loss account of Rs. 1065.91 crores) Thus, loans and advances to subsidiaries have been made out of internal accounts generated by the assessee and the amount of internal accruals is far in excess of the loans and advances made to the subsidiaries. Hence, there can be no disallowance under section 36(1)(iii) of the Act. 33.1. The Assessing Officer has alleged that the commercial expediency of granting loans/ meeting expenditures of subsidiaries was not adequately proven by the appellant. It is submitted that the appellant, in order to limit its liability, entered into new business avenues through wholly owned subsidiaries. The business of power generation is part of the objects in the Memorandum of the appellant. Software business is also a part of the object clause of the appellant. Further, CFCL Overseas Limited was incorporated as a Special Purpose Vehicle and is a wholly owned 67 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. subsidiary of the appellant for consolidation of its entire software business. Chambal Infrastructure Ventures Ltd. (‘CIVL’) was set up by the appellant for entering into Power business. It had set up two wholly owned subsidiaries for taking up power projects in the states of Chhattisgarh and Odisha. CIVL has been pursuing various business opportunities for setting up power projects in the states of Odisha and Chhattisgarh through its subsidiaries. There has been continuous dialogue with the Government of Odisha for various approvals for the power project. CIVL had entered into a Memorandum of Understanding (‘MoU’) with the Government of Odisha to set up a 1320 MW (2x660 MW) Thermal Power plant (TPP), based upon Super Critical Technology, near village Siaria in Dhenkanal District. Due to some land acquisition related issues, the project has been delayed. Similarly, CECL has signed a MoU with the Government of Chhattisgarh for 1100 MW and it is also pending for land acquisition and other approvals. In view of the above, it is clear that the Appellant’s investments in CECL and CEOL through CIVL are strategic in nature and for running of proposed power projects whose regulatory approvals are pending and land acquisition related issues have delayed the projects. Without prejudice to the appellant’s submission that loans and advances to the subsidiaries had been made out of its internal sources, the interest disallowance should be calculated considering the rate of 2.85% p.a. only instead of 9% p.a. 33.2. Without prejudice to the assesse’s contention that internal accruals were used for making loans and advances to its subsidiaries, it is submitted that the Act does not prohibit allowance of interest if the loans and advances is made to subsidiaries 68 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. and the only condition is that the money should be borrowed for the purpose of the business. The assesse has discharged its liability of proving commercial expediency by giving details of the loans and advances to various subsidiaries and the commercial necessity for the same and, hence, the conditions stipulated for claiming deduction under section 36(1)(iii) of the Act are satisfied. The ld. A/R placed reliance on the judgment of Hon’ble Supreme Court in the case of S.A. Builders v. CIT (2007) 288 ITR 1 (SC) wherein it has been held that the amounts advanced to sister concern should be for commercial expediency, if it is to be allowed under section 36(1)(iii) of the Act. The relevant extract of paragraph 35 is as under:- “...It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans...” The Hon’ble Supreme Court in case of Munjal Sales Corporation vs. CIT (298 ITR 298) held that profits of the appellant for the relevant year were sufficient to cover loans advanced to sister concerns, thus disallowance of interest is unwarranted. The relevant extract of paragraph 17 is as under:- “17. One aspect needs to be mentioned during the assessment year 1995-96, apart from the loan given in August/September 1991, the assessee advanced interest-free loan to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given 69 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. to the sister concern by the assessee-firm out of its Own Funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The Opening Balance as on 1-4-1994 was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs.” The Gujarat High Court in CIT vs. R K Kalthia Engineering & Automobiles (P) Ltd. [33 taxmann.com 14] has held that the disallowance of interest expenditure was not permissible where the AO had disallowed interest paid on borrowed funds on the ground that assessee diverted interest bearing funds for the purpose of investment in shares and loans to sister concern when sufficient interest free funds were available with the assessee. The relevant extract is as under :- “6. It is a well-established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly.” The Madras High Court in CIT v. RPG Transmissions Ltd (2014) 48 taxmann.com 57 held that the interest on borrowed funds utilized for investment in group companies for strategic business purposes is allowable under section 36(1)(iii) of the Act. The Mumbai Tribunal in Metro Exporters Ltd v. ITO (ITA No. 1693/M/05) held that a presumption cannot always be made that source of investment is borrowed funds in cases where mixed (own and borrowed) funds are used. Where an assessee has 70 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. sufficient interest free funds (capital and reserves), disallowance for alleged use of borrowed funds is not warranted. Relevant extract of the same is reproduced below: “On the basis of above discussion a proposition / Formula can be laid down that if an assessee having sufficient interest free funds, in the form of capital reserves and other funds without interest bearing from relatives and friends not related to business, to cover funds given interest free or utilized other than for business purposes, no disallowance are warranted. If the own funds are not sufficient to cover interest free advances, a proportionate disallowance is warranted. While examining interest free funds available with assessee and interest free? given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proportion is fortified by the decision of ITAT in the case of Torrent Financers V. ACIT, 73 TTJ 624 (Ahd), judgment of Allahabad High Court in the case of CIT V. Prem Heavy Engineering Works P. Ltd., 285 ITR 554 (All.), and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corporation V. CIT, 298 ITR 298 (SC).” Further, reliance is also placed on the other decisions referred in Ground 2 above to support the position that where sufficient own funds are available, it is presumed that investments have been made out of such interest free funds and no part of the interest on borrowings can be disallowed on the basis that the investments are made out of interest bearing funds. Hence, in light of the above decisions which have laid down the settled law, the Tribunal ought to follow these decisions and not follow the Tribunal’s order for the earlier years remanding the matter to the AO in light of the aforesaid decisions as well as the recent Supreme Court decisions in South Indian Bank (supra) and Reliance Industries Limited (supra). Further, the ld. DR’s submission of remanding the matter back to the AO should be rejected in light of the aforesaid Supreme Court decisions as referred above as well as referred in Ground 2 above. Therefore, based on the above submissions and reliance placed on various 71 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. judicial pronouncements, it is humbly submitted that no disallowance is warranted under the provisions of section 36(1)(iii) of the Act. 34. On the other hand, the ld. D/R supported the orders of the lower authorities. 35. We have heard the rival submissions and gone through the material available on record. We have also gone through the order of the ITAT in the earlier years where the matter was remanded to the file of the Assessing Officer. As in the earlier ground , we are of the considered opinion that in light of the recent Supreme Court decisions in South Indian Bank (supra) and Reliance Industries Limited (supra) and the Hon’ble Supreme Court’s finding in the case of Munjal Sales Corporation vs. CIT (298 ITR 298) wherein it has been held that where profits of the appellant for the relevant year were sufficient to cover loans advanced to sister concerns, disallowance of interest is unwarranted. We, therefore, following the above decisions of the Hon’ble Apex Court, direct to delete the disallowance of Rs. 41,33,649/-. This ground of the assessee is allowed. 36. In the result, Ground No. 1 of the Revenue’s appeal is allowed and Ground Nos. 2, 3, 4, 5, 6, 7, 8 & 9 are hereby dismissed and in assessee’s appeal Ground No.1 is dismissed and Ground 2 & 3 are allowed. Now we take up additional grounds raised by the assessee for the assessment year 2012-13 as under :- (4) The appellant incurred the expenses towards Education and Secondary High Education Cess of Rs. 478.74 lacs. Inadvertently, the said amount was not claimed as deductible expenditure in computation of total income. 72 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 37. We have heard the rival submissions and perused the material available on record. The assessee has paid education cess of Rs. 5,10,01,273/- comprising education cess of Rs. 3,40,00,849/- and secondary and higher education cess of Rs.1,70,00,424/-. The assesse has filed an additional ground claiming deduction of education cess based on the decision of the Hon’ble High Court of Rajasthan, Jaipur Bench wherein, while disposing of ground No. 3 of the assessee’s appeal No. 52/2018 for the AY 2009-10 vide its order dated 31.07.2018 held “that Education and Secondary Higher Education Cess paid by the appellant along with the Income- tax are not a “tax” for the purpose section of 40(a)(ii) and hence are allowed as deductible expenses.” It is further noted that in the SLP(C) No.7379/2019 – for AY 2009-10 filed by the revenue before the Hon’ble Supreme Court, the ground was not admitted by the Hon’ble Supreme Court. Thus, Education and Secondary Higher Education Cess were held to be allowable expenses and no addition was warranted under section 40(a)(ii) as the law stood before the enactment of Finance Act 2022. Subsequently, the Finance Act, 2022 brought about a retrospective amendment in the Income Tax Act whereby the “Education and Secondary Higher Education Cess” (‘Education Cess’) paid by an assessee is clarified to be a disallowable expense. The Finance Act 2022 has amended section 40 by inserting Explanation 3 with effect from 1-4-2005 to provide that the term ‘tax’ shall include and shall be deemed to have always included any surcharge or cess. In light of the amendment effected retrospectively, it is held that Education cess is not an allowable Expense and the additional ground raised by the assesse is dismissed. 73 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. “(6) Following the findings of the Hon’ble ITAT, Jaipur Bench, while disposing off ground no. 9 of the departmental appeal (ITA No. 389/JP/14) of the Assessment Year 2010-11 vide its order dated 31.01.2018, that the assessee company would be allowed to claim the loss in the year of actual disposal of fertilizer bonds and not in the year on account of revaluation of such fertilizer bonds; the appellant should be allowed business loss of Rs. 2155.00 lacs related to value of the fertilizers bonds sold during the year relevant to the Assessment Year 2012-13.” 38. We have heard the rival submissions and perused the material available on record. The ld. A/R submitted that following the finding of ITAT Jaipur Bench while disposing off ground no. 9 of the Departmental Appeal (ITA No. 389/JP/14) of the assessment year 2010-11 vide its order dated 31.01.2018, that the assessee company would be allowed to claim the loss, in the year of actual disposal of Fertilizer Bonds and not in the year under consideration on account of revaluation of such Fertilizer Bonds, the appellant should be allowed business loss of Rs. 2155 lakhs related to value of the Fertilizer Bonds sold during the year relevant to assessment year 2012-13. The ld. A/R further submitted that following the order of the Jaipur Bench of the Tribunal in ITA No. 306, 389 & 638/JP/2014 dated 31.01.2018 for the assessment year 2010-11, the Assessing Officer vide his Order no. 03/103 dated 20.02.2020 after considering all the facts on record, has allowed the loss in respect of Tranche-1 sold in A.Y. 2011-12. The ld. A/R thus prayed that the loss of Rs. 2155.00 in respect of Tranche-2 may kindly be directed to be given in AY 2012-13 as was given for Tranche-1 in AY 2011-12. While adjudicating the matter, the Jaipur Bench of the Tribunal in ITA No. 306, 389 & 638/JP/2014 dated 31.01.2018 for the assessment year 2010-11 has elaborately discussed in para 15 to 18 of its order as under :- 74 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. “ 15. We have given a careful consideration to the above stated factual matrix and are of the view that it is a case of substitution of subsidy debt of the assessee company whereby the assessee company has received fertilizers bonds from the Government of India of face value in lieu of and equivalent to subsidy debt due from the Government of India. The Government of India instead of settling the subsidy dues in cash has issued fertilizers bonds to the assessee company and it continues to remain liable to the assessee company, being the issue authority of the fertilizers bonds, to repay the debt by way of redemption of these fertilizers bonds on or before the specified maturity period and also remains liable to pay the coupon rate as specified while issuing these fertilizers bonds. We accordingly agree with the ld. AR contention’s that the Government substituted its short term liability into long term term liability by way of issuance of the fertilizers bonds. These fertilizers bonds therefore continue to represent the subsidy debts of the assessee company. 16. Now coming to loss on account of the valuation of fertilizers bonds, it was submitted by the ld AR that there was a fall in the market value of these bonds and the assessee company, though had made a provision in the earlier year, has decided to write off the fall in the value of these bonds by an amount of Rs. 42.10 Cr and the same was claimed as a business loss. In support, the ld AR has placed reliance on the decision of the Hon’ble Supreme Court of India in case of Patnaik & Co Ltd vs CIT reported in 27 Taxman 287. 17. In the case of Patnaik & Co ltd, the issue for consideration before the Hon’ble Supreme Court was "Whether, on the facts and in the circumstances of the case, the loss of Rs. 53,650 sustained by the assessee on the sale of the Government loan is a capital loss or a revenue loss?" The facts and the findings of the Hon’ble Supreme Court in that case are reproduced as under: 75 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. “2. The assessee deals in automobiles and also sells spare motor parts. For the assessment year 1963-64, the relevant accounting period being the year ended 31-3-1963, the assessee claimed a loss of Rs. 53,650 sustained by it on disposing of its subscription to the Orissa Government Floated Loan, 1972. It claimed that the loss suffered by it was revenue loss and, therefore, deductible against its profits for the year. The ITO disallowed the loss in the view that it was a capital loss,. The assessee's appeal was dismissed by the AAC. But on second appeal the Tribunal accepted the contention of the assessee that the subscription to the Government loan was conducive to its business and that the loss arose in the course of the business, and that therefore, the assessee was entitled to a deduction of the loss claimed by it.” “5. According to the statement of the case drawn up on the basis of the appellate order of the Tribunal the assessee was told that if it subscribed for the Government loan preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government departments and to the further benefit of an advance from the Government up to 50 per cent of the value of the orders placed. Pursuant to that understanding, an advance to the extent of Rs. 18,37,062 was received by the assessee and a circular was also issued by the State Government to various departments to make purchases of the vehicles required by them from the assessee. Because of the advance received from the Government, the assessee was able to save Rs. 45,000 as bank interest during the year. It was also noticed that the sales shot up substantially. On 4-9-1961 the assessee made a deposit of Rs. 5 lakhs consequent upon a resolution of the board of directors passed 76 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. about six weeks before after a statement made by the chairman during the board meeting that the Government had approached him to subscribe to the Government loan and that the company should do so as good orders could be expected. The purchase of the loan was approved by the board of directors and was ratified in the annual general meeting of the shareholders held on 31-12-1961. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circum stances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. We are of opinion that the Tribunal is right. 6. The High Court, as has been mentioned, re-examined the facts on the record and found that the investment was not connected with the orders placed by the Government with the assessee and the advance payment made by the Government departments to the assessee, and it was in that context that the High Court held that the investment in the loan was a capital asset and the loss was a capital loss. The High Court took the view that the investment was of enduring benefit to the assessee and, therefore, it could not be allowed. We find it difficult to hold that an enduring benefit was brought about by the assessee investing in the loan. So far as orders from the Government departments were concerned the material on record shows that on 30-8-1961 it was decided to purchase 16 jeeps, 8 trucks and 4 one-ton pick-up vans. There is nothing to show that there was any reason for the assessee to hold on to 77 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. the investment in the loan indefinitely. There was no enduring advantage. Accordingly, we hold that the investment did not bring in an asset of a capital nature, and that in the circumstances of the case the loss suffered by the assessee was a revenue loss and not a capital loss. It was held by the Orissa High Court in CIT v. Industry & Commerce Enterprises (P.)Ltd. [1979] 118 ITR 606 and by the Madras High Court in Addl. CIT v. B.M.S. (P.) Ltd. [1979] 119 ITR 321 and again in CIT v. Dhandayuthapani Foundry (P.) Ltd. [1980] 123 ITR 709, that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss. 7. We hold that the High Court has erred in the view taken by it and that the Tribunal was right in allowing the appeal” 18. As it is clear from above, in the above referred case, the assessee had claimed a loss of Rs. 53,650 sustained on disposal of its subscription in the Orissa Government Floated Loan, 1972. There was actual disposal of the Orissa Government floated loan unlike in the case of the assessee company where there is no disposal of the Fertilizers Bonds and the assessee company continues to hold these bonds. In that background of the case, it was held that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss. No doubt, in the instant case, the assessee company has accepted these bonds in settlement of its 78 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. subsidy dues in the course of its fertilizers business guided by the policy directive of the Government of India whereby subsidy dues were settled and substituted through issuance of Fertlizers Bonds. At the same time, the assessee company continues to hold these bonds as on the close of the financial year and have not disposed them off. Applying the ratio laid down in the said decision of the Hon’ble Supreme Court, the assessee company would accordingly be allowed to claim the loss, if any in the year of actual disposal of the Fertilizer bonds and not in the year under consideration on account of valuation of such Fertilizers Bonds. In the result, the revenue’s ground of appeal is allowed and the findings of the ld CIT(A) are set-aside.” Taking into consideration the above findings of the Coordinate Bench of Jaipur Tribunal (supra) in assessee’s own case for the assessment year 2010-11, we allow the assessee to claim the loss, if any, in the year of actual disposal of the Fertilizer Bonds. In the result, the additional ground of the assessee is allowed. ITA No. 335/JP/2017 (Revenue) and ITA No. 291/JP/2017 (Assessee) For the Assessment Year : 2013-14 : Now we take up first Revenue’s appeal in ITA No. 335/JP/2017 AY 2013-14. Ground No. 3 in revenue’s appeal and Ground No. 2 of assessee’s appeal are common. These grounds relate to curtailing disallowance out of interest paid on borrowed funds taken for investment made in subsidiaries, to Rs. 21,27,000/- as against Rs. 50,89,57,989/- made by the AO. 39. We have already adjudicated these grounds for the assessment year 2012-13 hereinabove in para 17 to 17.2. In the light of above discussion and 79 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. following our order hereinabove, we dismiss the ground of the revenue and allow the ground of the assessee. Ground No. 1 of the revenue relates to allowing club expenses of Rs. 10,61,297/- paid by assessee for membership of its employees. 40. This ground of the revenue is covered by our decision in para 8 hereinabove. Therefore, following the decision taken for the assessment year 2012-13, we dismiss the ground of the revenue in the assessment year 2013-14. Ground No. 2 of the revenue relates to deleting addition of Rs. 45,98,882/- made on account of depreciation disallowed on catalyst. 41. This ground of the revenue is covered by our decision in para 10 hereinabove. Therefore, following the decision taken for the assessment year 2012-13, we dismiss the ground of the revenue for the assessment year 2013-14. Ground No. 4 of the revenue relates to donation of Rs. 82,99,839/- made to DAV Trust. 42. We have already adjudicated this ground for the assessment year 2012- 13 hereinabove in para 24. Therefore, following the decision taken for the assessment year 2012-13, we dismiss the ground of the revenue in the assessment year 2013-14. 43. In the result, appeal of the revenue is dismissed. 80 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. ITA No. 291/JP/2017 A.Y. 2013-14 (Assessee ): Ground No. 1 of the assessee relates to disallowance of Exchange Rate Variation (ERV) credited to Profit and Loss account. 44. Before us, the ld. A/R for the assessee submitted that the matter relates to a liability of Rs. 11,95,73,056/- incurred by the assessee in the previous year relevant to the AY 2012-13 pertaining to the exchange rate variation relating to a loan taken for acquisition of fixed assets and the amount of interest expenses debited to the profit and loss account in respect thereof. This amount was recorded as an expense in the assessee’s accounts in accordance with AS-16. The same was added back in the computation of total income for the A.Y. 2012-13 and brought to tax in AY 2012-13. Subsequently, as per the clarification issued by the Ministry of Corporate Affairs, Government of India dated August 9, 2012, the assessee changed its accounting policy in respect of ERV arising from foreign currency borrowings with effect from 1 st April 2011 and the said amount of Rs. 11,95,73,056/- had been recognized as borrowing cost in A.Y. 2012-13 was reversed and shown as an exceptional income in the Profit and Loss account for the year ended March 31,2013 relevant for the AY 2013-14. 44.1. The ld. A/R submitted that the Assessing Officer made an addition of Rs. 11,95,73,056/- and brought to tax the reversal amount in the year of change i.e. AY 2013-14, holding that since the credit to Profit & Loss account was because of change in AS -16 hence such reversal would be taxable in the relevant year of change i.e. AY 2013-14. The ld. CIT(A) also held the treatment of the assessee appellant to be incorrect since the effect of the clarification comes in AY 2013-14. 81 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. The CIT(A) has further opined that the assesse could claim rectification in respect of disallowance in AY 2012-13. 45. On the other hand, the ld. D/R supported the orders of the authorities below. 46. We have heard the rival submissions and perused the material available on record. The assessee had changed its accounting policy in respect of ERV arising from foreign currency borrowings with effect from 1 st April 2011 as per the clarification dated August 9, 2012 issued by Ministry of Corporate Affairs, Government of India. An amount of Rs. 11,95,73,056/- was recognized by the assessee as borrowing cost in the previous year relevant to the AY 2012-13 and was reversed and shown as an exceptional income in the accounts for the year ended March 31,2013 relevant to the AY 2013-14. Since the amount was already added back in AY 2012-13, the assesse did not offer it to tax in the AY 2013-14. It is evident that the same amount cannot be brought to tax twice i.e. both in the AY 2012-13 as a disallowance of expense and in the AY 2013-14 being a write back (reversal) of expense. We are also conscious to the fact that there will not be any impact on the Revenue if the assessee claims the deduction of expense on Exchange variation in AY 2012-13 and offers the same to tax in AY 2013-14. Thus, the entire exercise over the two assessment-year period is tax neutral. Further, the entries were based on interpretation and clarification of new standards. The ld. CIT (A) has failed to appreciate that as the very same income was taxed in the previous year and the entire exercise is revenue neutral as the applicable tax rates remained the same in the relevant years. Thus, we are of the opinion that the ld. CIT (A) is not justified in sustaining the addition of Rs. 11,95,73,056/- representing the Exchange 82 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. rate variation (‘ERV’) credited to profit and loss account being reversal of expense claimed in earlier year and offered to tax in the computation of income. We, thus delete the disallowance of deduction. The ground of the assessee is allowed. Ground No. 3 relates to disallowing interest of Rs. 44,23,882/- in respect of borrowed fund alleged to be taken for Loans and Advances given to the subsidiaries. 47. We have adjudicated this ground of the assessee for the assessment year 2012-13 in para 35 hereinabove. In the light of above discussion and following our order hereinabove, we allow this ground of the assessee. 48. In the result, the appeal of the assessee is allowed. ITA No. 821/JP/2018 (Revenue) and ITA No. 744/JP/2018 (Assessee) For the Assessment Year : 2014-15 : 49. Now we take up first Revenue’s appeal in ITA No. 821/JP/2018 AY 2014-15. Ground No. 1 of the revenue relates to allowing club expenses of Rs. 21,61,818/- paid by the assessee for membership of its employees. 50. This ground of the Revenue is covered by the decision of the Coordinate Benches of the Tribunal in assessee’s own case in ITA Nos. 461 & 575/JP/2015. Therefore, respectfully following the decision of the coordinate bench, we have decided this ground in para 8 hereinabove against the revenue. This ground of the revenue is dismissed. Ground No. 2 of the revenue relates to deleting addition of Rs. 20,10,438/- made on account of depreciation disallowance on catalyst. 83 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 51. This ground of the Revenue is covered by the decision of the Coordinate Benches of the Tribunal in assessee’s own case in ITA Nos. 461 & 575/JP/2015. Therefore, respectfully following the decision of the coordinate bench, we have decided this ground in para 10 hereinabove against the revenue. This ground of the revenue is dismissed. Ground No. 3 in revenue’s appeal and Ground No. 1 of assessee’s appeal are common. These grounds relate to curtailing disallowance out of interest paid on borrowed funds taken for investment made in subsidiaries, to Rs. 22,45,000/- as against that of Rs. 55,92,19,845/- made by AO. 52. We have already adjudicated these grounds for the assessment year 2012-13 hereinabove in para 17 to 17.2. In the light of above discussion and following our order hereinabove, we dismiss the ground of the revenue and allow the ground of the assessee. Ground No. 4 of the revenue relates to donation of Rs. 80,38,964/- made to DAV Trust. 53. We have already adjudicated this ground for the assessment year 2012-13 hereinabove in para 24. Therefore, following the decision taken for the assessment year 2012-13, we dismiss the ground of the revenue in the assessment year 2014-15. 54. In the result, appeal of the revenue is dismissed. 84 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. ITA No. 744/JP/2018 AY 2014-15 (Assessee) Ground No. 2 relates to disallowing interest of Rs. 44,23,882/- in respect of borrowed fund alleged to be taken for Loans and Advances given to the subsidiaries. 55. We have adjudicated this ground of the assessee for the assessment year 2012-13 in para 35 hereinabove. In the light of above discussion and following our order hereinabove, we allow the ground of the assessee. 56. In the result, Assessee’s appeals in ITA No.201/JP/2017 is partly allowed, ITA No. 744/JP/2018 & ITA No. 291/JP/2017 are allowed and Revenue’s appeals in ITA No. 170/JP/2017 is partly allowed, ITA No. 335/JP/2017 & ITA No. 821/JP/2018 are dismissed. Order pronounced in the open court on 13/05/2022. Sd/- Sd/- ¼ jkBkSM+ deys'k t;arHkkbZ] ½ ¼lanhi xkslkbZ½ (RATHOD KAMLESH JAYANTBHAI) (SANDEEP GOSAIN) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 13/05/2022. das/ vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. vihykFkhZ@The Appellant-M/s. Chambal Fertilizers & Chemicals Ltd., Kota. 2. izR;FkhZ@ The Respondent-The DCIT Circle-2, Kota. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur 85 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. 6. xkMZ QkbZy@ Guard File {ITA No. 201(6)/JP/2017} vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar 86 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.