CHAMBAL FERTILISERS & CHEMICALS LTD., Kota V. JCIT, Kota

ITA 306/JPR/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2133 (ITAT-JAIPUR)
• Duration Of Justice: 3 year(s) 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 25-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VARINDAR MEHTA CIT ITA NO; JP JT CI
• Keywords: Capital asset converted into stock in trade; Capital asset; Business income; Depreciation; Business expenditure; Rectification of order; Opportunity of being heard; Rule of consistency; Earning of tax free income; Source of fund; Proportionate interest; Wholly owned subsidiary; Wrong claim; Bad and doubtful debts; Notional interest; Capital receipt; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 14A; 145; 37; 154

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH FOT; IKWY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM VK;DJ VIHY LA -@ ITA. NO. 306 /JP/2014 FU/KZKJ.K O'KZ@ ASSESSMENT YEAR : 2010-11 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD., GADEPAN, DISTRICT- KOTA CUKE VS. JT. COMMISSIONER OF INCOME TAX RANGE-02, KOTA L F K K ; H Y S [ K K L A -@THVKBZVKJ LA -@ PAN NO. AAACC 9762A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA -@ ITA. NO. 389 /JP/2014 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-02, KOTA CUKE VS. M/S CHAMBAL FERTILIZERS & CHEMICALS LTD., GADEPAN, DISTRICT- KOTA L F K K ; H Y S [ K K L A -@THVKBZVKJ LA -@ PAN NO. AAACC 9762A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA -@ ITA. NO. 638 /JP/2014 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2010-11 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-02, KOTA CUKE VS. M/S CHAMBAL FERTILIZERS & CHEMICALS LTD., GADEPAN, DISTRICT- KOTA L F K K ; H Y S [ K K L A -@THVKBZVKJ LA -@ PAN NO. AAACC 9762A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI PARSI PARDIWALA SHRI M. L. PATODI (ADV.) MRS. RITU G.P.DAS (CA) JKTLO DH VKSJ LS @ REVENUE BY : SHRI VARINDAR MEHTA (CIT) ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 2 LQUOKBZ DH RKJH[K@ DATE OF HEARING : 03/ 11/2017 ?KKS 'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 31/01/2018 VKNS'K@ ORDER PER BENCH: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE AGAINST THE ORDER OF LD. CIT(A), KOTA DATED 19.03.2014 PURSUANT TO ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE ACT AND APPEAL OF THE REVENUE AGAINST THE ORDER OF THE LD CIT(A) DATED 06.08.2014 PURSUANT TO RECTIFICATION ORDER PASSED UNDER SECTION 154 OF THE ACT FOR A.Y. 2010-11. 2. THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER. THE RESPECTIVE GROUNDS OF THE APPEAL ARE AS UNDER:- ITA NO. 306/JP/14 (GROUND OF ASSESSEES APPEAL): I) THAT THE LD. JOINT COMMISSIONER OF INCOME TAX, RANGE-2, KOTA ERRED IN DISALLOWING INTEREST IN RESPECT OF INTEREST ON BORROWED FUNDS ON ACCOUNT OF INVESTMENT MADE IN SUBSIDIARY COMPANIES AND THE LD. COMMISSIONER OF INCOME TAX (APPEALS), KOTA FURTHER ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS. 79,76,000/- UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. HENCE THE ADDITION OF RS. 79,76,000/- SUSTAINED, DESERVES TO BE DELETED. II) THAT THE LD. JOINT COMMISSIONER OF INCOME TAX, RANGE-2, KOTA ERRED IN DISALLOWING INTEREST IN RESPECT OF INTEREST ON LOAN FOR INVESTMENT IN MUTUAL FUNDS AND THE LD. COMMISSIONER OF INCOME TAX (APPEALS), KOTA FURTHER ERRED IN MAINTAINING THE ADDITION OF INTEREST OF RS. 2,06,90,178/- UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. HENCE THE ADDITION MADE ON THIS ACCOUNT DESERVES TO BE DELETED. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 3 ITA NO. 389//JP/14 (GROUND OF REVENUES APPEAL): ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN:- I). HOLDING THAT THE DONATION OF RS. 41,46,751/- MADE BY THE ASSESSEE TO DAV TRUST WAS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. II). DELETING ADDITION OF RS. 1,00,39,030/- ON ACCOUNT OF DEPRECIATION DISALLOWED ON CATALYST; III). ALLOWING CLUB EXPENSES OF RS. 3,36,127/- PAID BY ASSESSEE FOR MEMBERSHIP OF ITS EMPLOYEES. IV). ALLOWING RENT OF RS. 12.96 LAC PAID FOR FLAT TO A PERSON SPECIFIED U/S 40A(2)(B); V). CURTAILING DISALLOWANCE OUT OF INTEREST PAID ON BORROWED FUNDS TO RS. 79,76,000/- AS AGAINST THAT OF RS. 29,36,97,412/- MADE BY AO SINCE THE DECISION OF LD. CIT(A) IS NOT IN CONFORMITY WITH THE RATIO LAID DOWN BY THE HONBLE 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 ASSESSEES OWN FUNDS GO INTO COMMON KITTY. MOREOVER, THE FINDING OF LD. CIT(A) THAT THE DISALLOWANCE WAS MADE BY AO U/S 14A IS NOT CORRECT SINCE THE AO MADE THE DISALLOWANCE U/S 36(1)(III). VI). CURTAILING DISALLOWANCE MADE U/S 14A TO RS. 2,06,90,178/- AS AGAINST THAT OF RS. 9,53,10,962/- MADE BY AO SINCE THE DECISION OF LD. CIT(A) IS NOT IN CONFORMITY WITH THE RATIO LAID DOWN BY THE HONBLE 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 ASSESSEES OWN FUNDS GO INTO COMMON KITTY. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 4 VII). TREATING INCENTIVE OF RS. 3,75,63,562/- RECEIVED ON PRE-PAYMENT OF DEFERRED SALES TAX LIABILITY AS INCOME FOR AY 2005-06 AND NOT FOR AY 2010-11; VIII). DELETING DISALLOWANCE OF RS. 1,45,14,10,075/- MADE U/S 40(A)(IA) DUE TO FAILURE OF THE ASSESSEE TO DEDUCT TAX AT SOURCE U/S 194J IN RESPECT OF GAS TRANSMISSION CHARGES PAID TO M/S GAS AUTHORITY OF INDIA LTD. (GAIL) AND M/S RELIANCE GAS TRANSPORTATION INDIA LTD. (RGTIL); IX). DELETING THE ADDITION OF RS. 42.10 CRORE MADE BY THE AO ON ACCOUNT OF PROVISION FOR LOSS ON DIMINUTION IN THE VALUE OF FERTILIZER BONDS; X). DELETING THE ADDITION OF RS. 92,79,756/- MADE BY THE A.O ON ACCOUNT OF PROVISION FOR LOSS ON DERIVATIVE TRANSACTIONS. ITA NO. 638//JP/14 (GROUND OF REVENUES APPEAL): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN CURTAILING DISALLOWANCE OUT OF INTEREST PAID ON BORROWED FUNDS TO RS. 70,23,000/- (ORIGINALLY CONFIRMED AT RS. 79.76 LAKHS) AS AGAINST THAT OF RS. 29,36,97,412/- MADE BY AO SINCE THE DECISION OF LD. CIT(A) IS NOT IN CONFORMITY WITH THE RATIO LAID DOWN BY THE HONBLE 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 ASSESSEES OWN FUNDS GO INTO COMMON KITTY. MOREOVER, THE FINDING OF LD. CIT(A) THAT THE DISALLOWANCE WAS MADE BY A.O U/S 14A IS NOT CORRECT SINCE THE AO MADE THE DISALLOWANCE U/S 36(1)(III). 3. FIRSTLY, WE REFER TO REVENUES GROUNDS OF APPEAL, OTHER THAN COMMON GROUNDS OF APPEAL WHICH WE SHALL BE DISCUSSING ALONG WITH THE ASSESSEES GROUNDS OF APPEAL. 4. AT THE OUTSET, THE LD AR SUBMITTED THAT GROUNDS NO. 1 TO 4, 7 & 8 OF THE REVENUES APPEAL ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER DECISIONS OF THE COORDINATE BENCH. IT WAS FURTHER SUBMITTED THAT THERE ARE NO ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 5 CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, HENCE, THE EARLIER DECISIONS OF THE COORDINATE BENCH MAY KINDLY BE FOLLOWED. 5. PER CONTRA, THE LD. DR 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 BENCH. 6. WE NOW REFER TO THE DECISIONS OF THE COORDINATE BENCH IN ITA NO. 459 & 558/JP/2012 DATED 28.10.2016 FOR AY 2008-09 WHEREIN THE RELEVANT FINDINGS IN RESPECT OF EACH OF THIS GROUNDS OF APPEAL ARE REPRODUCED AS UNDER:- GROUND NO. 1 RELATING TO DONATION TO DAV TRUST: 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 ASSESSEES 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 ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 6 CASE OF CIT VS. B.C. SHIRKE & CO., 264 ITR 83 HAD AN OCCASION TO CONSIDER THE ALLOWABILITY OF CONTRIBUTION TO THE THREE TRUSTS 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 ASSESSEES 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 REVENUES APPEAL IS DISMISSED. GROUND NO. 2 RELATING TO DEPRECIATION ON CATALYST: 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 ASSESSEES 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:- 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 ASSESSEES 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 REVENUES APPEAL IS DISMISSED. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 7 GROUND NO. 3 RELATING TO CLUB EXPENSES OF EMPLOYEES: 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 ASSESSEES 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 ASSESSEES 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 REVENUES APPEAL IS DISMISSED. GROUND NO. 4 RELATING TO RENT PAYMENT UNDER SECTION 40A(2)(B): 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--VIS AN ACCOMMODATION OF SAME SIZE AND FACILITY IN THE SAME LOCALITY. WE THEREFORE CONFIRM THE ORDER OF THE LD CIT(A) WHO HAS ALLOWED THE RENT PAYMENT AS INCURRED FOR THE PURPOSES OF THE ASSESSEES BUSINESS. ACCORDINGLY, THIS GROUND OF THE REVENUES APPEAL IS DISMISSED. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 8 GROUND NO. 7 RELATING TO PRE-PAYMENT OF DEFERRED SALES TAX LIABILITY: 6. 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 ASSESSEES OWN CASE FOR THE A.Y. 2005-06, THE COORDINATE BENCH HAS HELD AS UNDER:- 2.19 IT IS TRUE THAT IN NOTIFICATION DATED 27.3.2003, THE STATE GOVT. PROVIDED A SCHEME FOR THE DEALERS WHO AVAILED THE DEFERMENT OF SALES TAX TO DEPOSIT THE AMOUNT OF DEFERRED TAX EVEN BEFORE THE STIPULATED DUE DATE OF DEPOSIT. THE PAYMENT IS TO BE ON THE BASIS OF NET PRESENT VALUE AS SPECIFIED IN THAT NOTIFICATION. NET PRESENT VALUE HAS BEEN MENTIONED AS PERCENTAGE OF AMOUNT PAYABLE AND SUCH PERCENTAGE VARIES AS PER THE PERIOD OF MONTH BETWEEN THE ACTUAL DATE OF PAYMENT AND THE EXTENDED DATE OF PAYMENT. HOWEVER BOARD CIRCULAR 496 DATED 25.9.87 STATED THAT STATUTORY LIABILITY IS TO BE TREATED AS PAID IN CASE THE STATE GOVT. MAKES AN AMENDMENT THAT SALES TAX DEFERRED UNDER THE SCHEME IS TO BE TREATED AS ACTUALLY PAID. BENOVELENT CIRCULAR OF BOARD ARE MANDATORY. THE LIABILITY IS NOT THAT OF SALES TAX BUT IT IS A LIABILITY OF LOAN. HENCE THE DECISION OF SPECIAL BENCH IN THE CASE SULZER INDIA LTD. IS SQUARELY APPLICABLE. IT WILL BE USEFUL TO REPRODUCE HEAD NOTE IN THE CASE OF SULZER INDIA LTD. BUSINESS INCOME-PROFITS CHARGEABLE TO TAX UNDER S.41(1)-PAYMENT OF NET PRESENT VALUE AGAINST DEFERRED SALES-TAX LIABILITY-ASSESSEE COMPANY OBTAINED INCENTIVE BY WAY OF SALES-TAX DEFERRAL SCHEMES OF 1983 AND 1988 NOTIFIED BY THE GOVERNMENT OF MAHARASHTRA-AS PER THE SAID SCHEMES, THE SALES-TAX COLLECTED BY THE ASSESSEE DURING THE PERIOD FROM 1 ST NOV., 1989 TO 31 ST OCT., 1996, WAS TO BE PAID AFTER 12 YEARS IN SIX EQUAL ANNUAL INSTALMENTS-FOURTH PROVISO TO S. 38(4) OF BOMBAY SALES-TAX ACT, 1959 PROVIDES THAT WHERE AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED TO THE ELIGIBLE UNIT FOR AVAILING OF THE INCENTIVES BY WAY OF DEFERMENT OF SALES-TAX, ETC. SUCH UNIT MAY, AT ITS OPTION PREMATURELY PAY AN AMOUNT EQUAL TO THE NPV OF THE DEFERRED TAX AND ON MAKING SUCH PAYMENTS, THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID- ASSESSEE PAID AN AMOUNT OF RS.3,37,13,393 AGAINST THE AGGREGATE DEFERRAL AMOUNT OF RS.7,52,01,338 TO SICOM, THE IMPLEMENTING AGENCY, WHICH REPRESENTED THE NPV AS DETERMINED BY THE LATTER-IT CANNOT BE SAID THAT THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 9 ASSESSEE HAS OBTAINED THE BENEFIT OF DEDUCTION OF SALES-TAX LIABILITY SIMPLY BECAUSE DEDUCTION WAS ALLOWED FOR THE PURPOSE OF S. 43B BY APPLYING CIRCULAR NO.496, DT. 25 TH SEPT., 1987-SAID CIRCULAR CLEARLY STATES THAT THE STATUTORY LIABILITY SHALL BE TREATED TO HAVE BEEN DISCHARGED FOR THE PURCHASES OF S. 43B- THUS, THE FIRST REQUIREMENT OF S. 41(1) IS NOT FULFILLED-NPV IS EQUIVALENT TO THE PRESENT VALUE OF FUTURE SUM-WHAT THE ASSESSEE WAS REQUIRED TO PAY AFTER 12 YEARS IN SIX EQUAL INSTALMENTS HAS BEEN PAID AS NPV-THERE IS NO IOTA OF EVIDENCE OF SHOW THAT THERE HAS BEEN ANY REMISSION OR CESSATION OF LIABILITY- THUS, FURTHER REQUIREMENT FOR THE APPLICABILITY OF S. 41(1) IS ALSO NOT FULFILLED- ASSESSEE HAS PASSED NECESSARY ENTRIES IN ITS BOOKS OF ACCOUNT SHOWING THE DIFFERENCE AS CAPITAL RECEIPT MERELY BECAUSE THE SALES TAX AUTHORITIES HAVE NOT ISSUED MODIFIED ELIGIBILITY CERTIFICATE, IT DOES NOT MEAN THAT THE PAYMENT MADE BY THE ASSESSEE CANNOT BE ACCEPTED AS THE PAYMENT OF NPV OF THE FUTURE SUM TOWARDS DISCHARGE OF FULL LIABILITY-AMOUNT WHICH WAS PAYABLE FROM 1ST MAY, 2003 TO 1ST MAY, 2008 HAS BEEN PAID ON 30 TH DEC., 2002-THIS DOES NOT SATISFY THE CONDITION OF ACTUAL REMISSION IN PRASENTI-AMOUNT HAS BEEN PAID AS PER THE FORMULA FOR COLLECTING THE NPV GIVEN BY SICOM-THEREFORE, SUCH PAYMENT OF NPV OF THE FUTURE LIABILITY CANNOT BE TREATED AS REMISSION OR CESSATION OF LIABILITY SO AS TO ATTRACT THE PROVISIONS OF S. 41(1) 2.20 THE SPECIAL BENCH IN RESPECT OF APPLICABILITY OF SECTION 28 (IV) HAS HELD THAT IT WILL NOT BE APPLICABLE. THE SPECIAL BENCH OBSERVED AS UNDER. SEC.28(IV) SEEKS TO CHARGE THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSION, AS PROFITS AND GAINS OF BUSINESS OR PROFESSION. THEREFORE, WHAT IS TO BE EXAMINED IS WHETHER THE WAIVER OF LOAN WOULD AMOUNT TO A PERQUISITE SO AS TO BE TAXABLE, AS SUCH, UNDER S. 28. THE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA LTD. VS. CIT (2003) 182 CTR (BOM) 34 : (2003) 261 ITR 501(BOM) : (2003) 128 TAXMAN 394 (BOM), HAS EXPLAINED THAT S. 28(IV) SEEKS TO CHARGE THE VALUE OF ANY BENEFIT OR PERQUISITE, MEANING THEREBY THAT THE BENEFIT MUST BE IN KIND; THE COURT FURTHER HELD THAT WAIVER OF LOAN IS IN RESPECT OF MONEY TRANSACTION AND, THEREFORE, WOULD NOT BE IN NATURE OF ANY BENEFIT OR PERQUISITE AS CONSTRUED IN S. 28(IV). 2.21 THE ARGUMENT OF THE LD. DR THAT SCHEME OF RAJASTHAN GOVT IS DIFFERENT IS NOT OF RELEVANCE. IN THE CASE OF MAHARASHTRA, THE SCHEME OF RECEIPT OF PREPAYMENT OF LOAN WAS BY A STATE CORPORATION WHILE IN RAJASTHAN IT HAS BEEN ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 10 IMPLEMENTED BY STATE GOVT. THE IMPLEMENTING AGENCY MAY BE DIFFERENT BUT THE NATURE OF THE SCHEME IS THE SAME 2.22 WE THEREFORE HOLD THAT LD.CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ADDITION OF RS.12,06,33,254/- AS PROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE. FOR THE CASE OF A.Y. 2007-08, THE COORDINATE BENCH IN ITA NO. 374/JP/2010 HAS HELD AS UNDER:- 16.2 FOLLOWING OUR ORDER FOR THE ASSESSMENT YEAR 2005-06 (SUPRA) WE HOLD THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THE RECEIPT OF RS. 1,74,49,093/- AS CAPITAL RECEIPT. DURING THE COURSE OF HEARING, THE LD AR SUBMITTED THE YEAR-WISE BREAKUP OF AMOUNT OF DEFERRED SALES TAX PAYABLE, ITS NPV AND THE RESULTANT DIFFERENCE TREATED AS CAPITAL RECEIPT. FOR THE YEAR UNDER CONSIDERATION, AS AGAINST THE DEFERRED SALES TAX LIABILITY OF RS 90,692,932, THE ASSESSEE HAS PAID ITS NPV AMOUNTING TO RS 65,810,057 RESULTING IN DIFFERENCE OF RS 24,882,876 WHICH HAS BEEN TREATED AS CAPITAL RECEIPT AND NOT OFFERED TO TAX. FURTHER, IT IS NOTED THAT THE PRE-PAYMENT OF DEFERRED SALES TAX LIABILITY FOR THE ALL THE YEARS TOGETHER (INCLUDING THE IMPUNGED ASSESSMENT YEAR) HAS BEEN MADE IN THE AY 2005-06 WHEREIN THE COORDINATE BENCH HAS DELETED THE ADDITION OF RS.12,06,33,254/- (WHICH INCLUDES THE AMOUNT OF 24,882,876) AS PROVISIONS OF SECTION 41(1) WERE HELD NOT APPLICABLE. BY RESPECTFULLY FOLLOWING THE ORDER OF THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR THE A.Y. 2005-06 AND 2007- 08, WE UPHOLD THE ORDER OF THE LD. CIT(A) FOR THE IMPUNGED ASSESSMENT YEAR. ACCORDINGLY, THIS GROUND OF THE REVENUES APPEAL IS DISMISSED. 7. IN RESPECT OF GROUND OF APPEAL NO. 8 RELATING TO DISALLOWANCE OF GAS TRANSMISSION CHARGES UNDER SECTION 40(A)(IA), WE NOW REFER TO THE DECISIONS OF THE COORDINATE BENCH IN ITA NO. 470 & 412/JP/2013 DATED 25.09.2017 FOR AY 2009-10 WHEREIN THE RELEVANT FINDINGS ARE REPRODUCED AS UNDER:- 9. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN ASSESSEES OWN CASE AS REFERRED SUPRA WHERE THE HONBLE HIGH COURT HAS HELD THAT THE PAYMENT OF GAS TRANSMISSION CHARGES ARE NOT SUBJECT TO LEVY OF TDS, THERE IS NO QUESTION OF DISALLOWANCE U/S 40(A)(IA) OF THE ACT. IN THE RESULT, GROUND NO. 9 OF REVENUES APPEAL IS DISMISSED. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 11 OUR FINDINGS 8. ADMITTEDLY, THERE ARE NO CHANGES IN THE FACTS AND CIRCUMSTANCES OF THE CASE OR IN THE LEGAL POSITION AS COMPARED TO EARLIER YEARS WHERE THE MATTER IN RELATION TO EACH OF THE SUBJECT GROUNDS OF APPEAL WERE DECIDED IN FAVOUR OF THE ASSESSEE COMPANY BY THE COORDINATE BENCHES. BY FOLLOWING THE ORDER OF THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR THE A.Y. 2008-09 AND A.Y. 2009-10, WE UPHOLD THE ORDER OF THE LD. CIT(A) FOR THE IMPUNGED ASSESSMENT YEAR. ACCORDINGLY, THE GROUNDS NO. 1 TO 4, 7 & 8 OF THE REVENUES APPEAL ARE HEREBY DISMISSED. 9. REGARDING GROUND NO. 9 OF THE APPEAL, WHEREIN REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 42.10 CRORE MADE BY THE AO ON ACCOUNT OF PROVISION FOR LOSS ON DIMINUTION IN THE VALUE OF FERTILIZERS BONDS. THE FACTS OF THE CASE ARE THAT DURING THE F.Y 2008-09 RELEVANT TO ASSESSMENT YEAR 2009- 10, THE ASSESSEE COMPANY HAS RECEIVED FERTILIZERS BONDS OF RS. 49715 LACS FROM THE MINISTRY OF FERTILIZERS, GOVERNMENT OF INDIA AGAINST THE OUTSTANDING AMOUNT OF SUBSIDY RECEIVABLE AND OUT OF WHICH BONDS AMOUNTING TO RS. 36,715.40/- LACS WERE OUTSTANDING AS ON 31.03.2010. THE ASSESSEE ESTIMATED MARKET VALUE OF THESE BONDS LOWER THAN THE BOOK VALUE AND THEREFORE A PROVISION FOR DIMINUTION IN THE VALUE OF THESE BONDS AMOUNTING TO RS. 2810 LAC WAS MADE IN FY 2008-09 (AY 2009-10). DURING THE F.Y 2009-10 (AY 2010-11), THERE WAS FURTHER DEDUCTION IN THE MARKET VALUE OF THESE BONDS BY RS. 1400 LAC AND THE ASSESSEE DECIDED TO RIGHT OFF THE VALUE OF THE BONDS BY AMOUNT OF RS. 4210 LAC WHICH INCLUDES PROVISION OF RS. 2810 LAC MADE IN FY 2008-09. IN THE FINANCIAL STATEMENTS, THE AFORESAID BONDS ARE CLASSIFIED UNDER SCHEDULE-12 AS PART OF OTHER CURRENT ASSETS. IN THE RETURN OF INCOME FILED BY THE ASSESSEE COMPANY FOR AY 2009-10, THE SAID PROVISION OF RS. 2810 LAC WAS ADDED BACK IN RETURN OF INCOME AND OFFERED FOR TAXATION. HOWEVER, IN THE RETURN OF INCOME FOR THE IMPUNGED AY 2010-11, THE ASSESSEE COMPANY HAS CLAIMED THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 12 DEDUCTION OF WHOLE OF THE AMOUNT OF THE PROVISIONS AMOUNTING TO RS. 4210 LACS TOWARDS DIMINUTION IN THE VALUE OF THE FERTILIZERS BONDS. 10. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY WAS SPECIFICALLY ASKED TO EXPLAIN WHY THE CLAIM HAS NOT BEEN WITHDRAWN THIS YEAR BY FOLLOWING THE ACCOUNTING PRINCIPLE OF CONSISTENCY GIVEN THAT IN THE PRECEDING YEAR, THE ASSESSEE COMPANY HAD SUO-MOTO WITHDRAWN THE CLAIM OF RS. 28.10 LAC ON ACCOUNT OF SIMILAR DIMINUTION IN VALUE OF FERTILIZERS BONDS. IN RESPONSE, THE ASSESSEE SUBMITTED THAT IT HAS RECEIVED FERTILIZERS BONDS FROM THE GOVERNMENT OF INDIA IN LIEU OF CASH AS PART OF SETTLEMENT OF PART OF THE SUBSIDY DUES OF THE COMPANY. THESE BONDS ARE TRADEABLE FREELY IN THE OPEN MARKET. THEY ARE LIKE GOVERNMENT SECURITIES WITH COUPON RATES OF 6%-7%. THE BONDS RECEIVED BY THE ASSESSEE ARE FOR THE PURPOSE OF LIQUIDATION OF BOOK DEBTS AND THEREFORE, ARE TREATED AS OTHER CURRENT ASSETS AND NOT AS INVESTMENTS FOR THE REASON THAT THE ASSESSEE DOES NOT INVEST ITS FUNDS IN THESE INVESTMENTS. IT WAS FURTHER EXPLAINED THAT WHEN THE SALES ARE MADE BY THE ASSESSEE, IT TREATS PART OF THE CONSIDERATION RECEIVABLES FROM THE GOVERNMENT AS DUE FROM THE GOVERNMENT AND FORM PART OF THE SUNDRY DEBTORS. WHEN THE ASSESSEE RECEIVES THE BONDS, IT ADJUSTS THE FACE VALUE OF THE BONDS AGAINST THE AMOUNT RECEIVABLES FROM THE GOVERNMENT EQUIVALENT TO THE SUBSIDY DUE. IT WAS SUBMITTED THAT FERTILIZERS BONDS HAVE REPLACED THE RECEIVABLE SUBSIDY SUM FROM THE GOVERNMENT OF INDIA, WHICH SUM ITSELF IS AN ITEM OF CURRENT ASSET. IT WAS FURTHER SUBMITTED THAT THE BONDS WHICH ARE HELD AS CURRENT ASSETS HAVE TO BE VALUED AT LOWER OF COST AND FAIR VALUE (I.E. MARKET VALUE OR NET REALIZABLE VALUE). AS PER ACCOUNTING STANDARD-13, IT WAS FURTHER SUBMITTED THAT LOSS ON ACCOUNT OF VALUATION OF BONDS IS LOSS ON VALUATION OF CURRENT ASSETS AND THE SAME IS ALLOWABLE AS DEDUCTION IN COMPUTATION OF BUSINESS INCOME. IN SUPPORT, RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN CASE OF CIT VS. WOODWARD GOVERNOR ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 13 INDIA P. LTD. (312 ITR 254) THAT CURRENCY FLUCTUATION LOSS IN RELATION TO CURRENT ASSETS WAS HELD AS TAX-DEDUCTIBLE. 11. THE CONTENTION SO ADVANCED BY THE ASSESSEE WAS CONSIDERED BUT NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER AND HIS FINDINGS CONTAINED AT PARA 5.1 OF THE ASSESSMENT ORDER ARE AS UNDER:- D) I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE BUT FIND THESE TO BE UNTENABLE. THE ACCOUNTING PRINCIPLE OF CONSISTENCY IS WELL- RECOGNIZED. FURTHER, VIDE COLUMN 11(B) OF FORM 3CD ANNEXED TO THE RETURN, THE ASSESSEE HAS STATED THAT THERE IS NO CHANGE IN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN PRECEDING YEARS. THE ASSESSEE HAD ESTIMATED LOSS OF RS. 28.10 CRORE WHILE VALUING FERTILIZER BONDS AS ON 31.03.2009 AND CREATED THE PROVISION FOR THE SAME IN ITS BOOKS OF ACCOUNT. HOWEVER, IN THE COMPUTATION OF INCOME FILED WITH THE RETURN FOR AY 2009-10, THE ASSESSEE HAD RIGHTLY ADDED BACK THIS PROVISION SINCE IT WAS A CONTINGENT LIABILITY. SIMILARLY, THE ASSESSEE ESTIMATED LOSS OF RS. 14.00 CRORE WHILE VALUING FERTILIZER BONDS AS ON 31.03.2010 AND CREATED THE PROVISION. HOWEVER, THE ASSESSEE DID NOT ADD BACK THE SAME IN THE COMPUTATION OF INCOME. THUS, THE ASSESSEE HAS VIOLATED ACCOUNTING PRINCIPLE OF CONSISTENCY. ON THE CONTRARY, THE ASSESSEE CLAIMED DEDUCTION FOR PROVISION OF RS. 28.10 CRORE ALSO PERTAINING TO PRECEDING ASSESSMENT YEAR. BY ANY STRETCH OF IMAGINATION, THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION FOR A PROVISION OF LOSS PERTAINING TO AY 2009-10 IN AY 2010- 11. MOREOVER, THE CONTENTION OF ASSESSEE THAT THESE FERTILIZERS BONDS ARE OTHER CURRENT ASSETS AND LOSS OF RS. 42.10 CRORE ON VALUATION OF FERTILIZER BONDS HAS BEEN WRITTEN OFF HAS NO MERIT. THE ASSESSEE IS TO REALIZE SUBSIDY ON SALE OF FERTILIZERS MANUFACTURED BY IT, FROM GOVT. OF INDIA. THUS, GOVT. OF INDIA IS TRADE DEBTOR OF ASSESSEE. ONCE THE ASSESSEE HAS ACCEPTED FERTILIZER BONDS FROM GOVT. OF INDIA IN LIEU OF CASH ON ACCOUNT OF SUBSIDY RECEIVABLE, THE TRADE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 14 DEBT TO THAT EXTENT STANDS REALIZED AND DOES NOT EXIST ANYMORE. AS PER PROVISIONS OF SECTION 36(1)(VII), THE ASSESSEE IS ENTITLED FOR DEDUCTION ON ACCOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THE CONTENTION OF THE ASSESSEE THAT THE LOSS OF RS. 42.10 CRORE HAS BEEN WRITTEN OFF IN ITS BOOKS OF ACCOUNT IS DEVOID OF ANY MERIT SINCE FERTILIZER BONDS ARE NOT DEBT OR BAD DEBT FOR THE ASSESSEE. RATHER, FERTILIZER BONDS HAVE BEEN RECEIVED BY THE ASSESSEE FROM ITS TRADE DEBTOR I.E. GOVT. OF INDIA IN REALIZATION OF ITS TRADE DEBTS. WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT HAVE TAKEN OF HIS RIGHT NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING CO. LTD. VS. CIT (1971) 82 ITR 363(SC). E) THE RELIANCE OF THE ASSESSEE ON ACCOUNTING STANDARDS IS ALSO MISPLACED SINCE AS PER WELL-ESTABLISHED PRINCIPLES OF ACCOUNTANCY, THE ASSESSEE IS ENTITLED TO VALUE ONLY ITS STOCK-IN-TRADE AT LOWER OF COST OR MARKET PRICE AS PER METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. FERTILIZER BONDS ARE NOT STOCK-IN-TRADE FOR THE ASSESSEE. THEREFORE, THE ASSESSEE IS NOT ENTITLED TO CLAIM ANY DEDUCTION ON THE GROUND THAT MARKET VALUE OF FERTILIZER BONDS IS LOWER THAN THEIR COST PRICE. FERTILIZER BONDS ARE LIKE ANY OTHER INVESTMENT FOR THE ASSESSEE WHICH HAVE TO BE VALUED AT THEIR FACE VALUE. PROFIT OR LOSS ON THESE INVESTMENTS CAN BE BOOKED ONLY WHEN THEY ARE ACTUALLY SOLD. THE ASSESSEE IS ENTITLED TO CREATE PROVISION FOR LOSSES IN ITS BOOKS OF ACCOUNT BUT NO PROVISION IS ADMISSIBLE AS DEDUCTION UNDER THE ACT SINCE PROVISIONS ARE ONLY UNASCERTAINED AND CONTINGENT LIABILITIES. CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE AND CANNOT BE THE SUBJECT-MATTER OF DEDUCTION EVEN UNDER THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 15 MERCANTILE SYSTEM OF ACCOUNTING. EXPENDITURE WHICH IS DEDUCTABLE FOR INCOME TAX PURPOSES IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME BUT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING CASE- LAWS:- I) SHRE SAJJAN MILLS LTD. VS. CIT (1985) 156 ITR 585 (SC) II) INDIAN MOLASSES CO. (P) LTD. VS. CIT (1956) 37 ITR 66 (SC) III) MAHADEO GANGAPRASAD VS. SECOND ITO (1966) 61 ITR 384 (BOM.) IV) MYSORE LAMP WORKS LTD. VS. CIT (1990) 52 TAXMAN 260/285 ITR 96 (KAR.) THE ASSESSEE WOULD HAVE BEEN ENTITLED TO CLAIM LOSS ON ACCOUNT OF DIMINUTION IN VALUE OF FERTILIZER BONDS HAD THE ASSESSEE ACTUALLY SOLD THESE BONDS ON OR BEFORE 31.03.2010. DEDUCTION CAN BE ALLOWED TO THE ASSESSEE ONLY IN RESPECT OF A LIABILITY WHICH COULD BE ASCERTAINED AND ENFORCED ON OR BEFORE THE END OF THE RELEVANT PREVIOUS YEAR. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OFF HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. PHALTON SUGAR WORKS LTD. (1986) 162 ITR 622(BOM.). AS FOR ACCOUNTING STANDARDS MENTIONED BY THE ASSESSEE, RELIANCE IS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. CIT (1997) 227 ITR 172 (SC) HOLDING THAT INCOME TAX LAW DOES NOT MATCH STEP BY STEP WITH THE DIVERGENT FOOTSTEPS OF THE ACCOUNTING PROFESSION. F) IN VIEW OF THE FACTUAL MATRIX OF THE CASE AND ACCOUNTING PRINCIPLE DISCUSSED ABOVE AS WELL AS THE FINDINGS GIVEN ABOVE, IT IS HELD THAT THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 16 DEDUCTION FOR LOSS ON DIMINUTION IN VALUE OF FERTILIZER BONDS CLAIMED BY THE ASSESSEE AT RS. 42.10 CRORE IS NOT ADMISSIBLE TO THE ASSESSEE AND THE SAME STANDS DISALLOWED. ACCORDINGLY, ADDITION OF RS. 42.10 CRORE IS MADE IN THE RETURNED INCOME. 12. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND SUBMITTED AS UNDER: WRITTEN SUBMISSION DATED 24.05.2013 3.2 FROM THE FINANCIAL YEAR 2007-08 (ASSESSMENT YEAR 2008-09), THE GOVERNMENT OF INDIA STARTED TO SETTLE A PART OF SUBSIDY DUES OF THE FERTILIZER COMPANIES IN THE FORM OF SPECIAL BONDS (FERTILISER BONDS). IN VIEW OF THE POLICY, THE FERTILIZER COMPANIES HAD NO OPTION BUT TO ACCEPT THESE BONDS ALLOTTED IN SETTLEMENT OF ITS SUBSIDY DUES. 3.3 IN OTHER WAY THE GOVT. SUBSTITUTED ITS SHORT TERM LIABILITY INTO LONG TERM LIABILITY BY ISSUING FERTILISER BONDS (FB) IN LIEU OF SUBSIDY DEBT. THESE BONDS (FB) SUBSTITUTED IN LIEU OF SUBSIDY LIABILITY OF THE GOVT. WERE FREELY TRADABLE IN THE OPEN MARKET. THE GOVERNMENT ALLOTTED THE FB FOR A FACE VALUE OF RS. 38,358.00 LACS DURING THE AY 2008-09 AND OF RS 49,715 LACS DURING THE AY 2009-10. THESE BONDS THEREFORE SUBSTITUTED THE COMPANYS SUBSIDY RECEIVABLE AND HAD BEEN REFLECTED UNDER OTHER CURRENT ASSETS IN THE ACCOUNTS. (PLESE REFER TO SCHEDULE 12 AT PAGE NO. 39 OF THE ANNUAL REPORT OF THE CAPTIONED YEAR) 3.4 AS THESE BONDS REPRESENTED THE SUBSIDY DEBTORS, THE APPELLANT CATEGORISED THE FBS AS OTHER CURRENT ASSETS AT A VALUE BEING LOWER OF COST OR MARKET VALUE IN COMPLIANCE WITH ACCOUNTING STANDARD-13 (AS) OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND NOT AS INVESTMENTS SINCE SUCH FBS WERE RECEIVED FOR THE PURPOSE OF LIQUIDATION OF BOOK DEBTS IN ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 17 ACCORDANCE WITH THE POLICY OF THE GOVERNMENT. RELEVANT EXTRACTS OF PARAGRAPH 14 OF AS 13 ARE HEREUNDER: 14. THE CARRYING AMOUNT FOR CURRENT INVESTMENTS IS THE LOWER OF COST AND FAIR VALUE. IN RESPECT OF INVESTMENTS FOR WHICH AN ACTIVE MARKET EXISTS, MARKET VALUE GENERALLY PROVIDED THE BEST EVIDENCE OF FAIR VALUE. THE VALUATION OF CURRENT INVESTMENTS AT LOWER OF COST AND FAIR VALUE PROVIDES A PRUDENT METHOD OF DETERMINING THE CARRYING AMOUNT TO BE STATED IN THE BALANCE SHEET. IN THE INSTANT CASE, THE APPELLANT RECOGNISED THE LOSS IN THE DIMINUTION OF VALUE OF FBS TO THE PROFIT OR LOSS ACCOUNT CLAIMING THE SAME AS BUSINESS LOSS BEING AN EXPENDITURE INCURRED TOWARDS BUSINESS OR PROFESSION. 3.5 THE APPELLANT VALUED THE AFORESAID BONDS ON PREVAILING MARKET PRICE ON THE BASIS OF THE PRICE PUBLISHED BY THE CLEARING CORPORATION OF INDIA LIMITED AS ON 31.03.2010 AND REALISED THAT THE VALUE OF FBS HAD DIMINISHED BY RS. 42.10 CR (INCLUDING RS. 28.10 CR PERTAINING TO THE AY 2009-10). CONSEQUENTLY, IN VIEW OF THE ACCOUNTING STANDARD AS AFOREMENTIONED AND FOLLOWING THE MERCANTILE SYSTEM, THE APPELLANT REDUCED THE VALUE OF THE BONDS ON THE BASIS OF DIMINUTION IN THE VALUE OF THE FBS AND CLAIMED THE AFORESAID LOSS AS DEDUCTION IN THE RETURN OF INCOME OF THE SUBJECT YEAR. IT IS PERTINENT TO MENTION HERE THAT FOLLOWING THE FINANCIAL CRISIS IN FY 2008-09 THE GOVT. OF INDIA AND RBI DECIDED TO REDUCE THE INTEREST RATES. AS A RESULT THE MARKET VALUE OF THE BONDS, WHICH WAS SUBSTANTIALLY DISCOUNTED, WENT UP BUT STILL IT WAS MUCH LOWER THAN ITS FACE VALUE. DURING THIS PERIOD, THERE WAS UNCERTAINTY WRT MARKET VALUE OF BONDS. THIS SCENARIO WAS PREVAILING TILL MID JUNE 2009. AFTER THE FINANCIAL CRISIS WAS OVER, INDIAN ECONOMY STARTED FACING INCREASED INFLATION. AS A RESULT RBI DECIDED TO RAISE THE INTEREST RATE, WHICH FURTHER REDUCED THE MARKET VALUE OF THE BONDS. DURING FY 2009-10 (SEPTEMBER 2009 ONWARDS) THE DIMINUTION IN THE VALUE OF THE FBS REACHED ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 18 VERY HIGH. BY MARCH 2010, IT WAS CLEAR THAT HIGH INTEREST RATE SCENARIO WILL ALSO PREVAIL IN THE NEAR FUTURE, THEREFORE, THE DIMINUTION IN THE VALUE OF FBS WAS PRACTICALLY OF PERMANENT NATURE. IN VIEW OF THE ABOVE AND AFTER INTERNAL DELIBERATIONS, A DECISION WAS TAKEN FOR PERMANENT DIMINUTION IN THE VALUE OF FBS BY RS.42.10 CRORE (INCLUDING RS.28.10 CRORE PROVIDED DURING AY 2009-10) AS AT MARCH 31, 2010. AS THE MONEY MARKET WAS VOLATILE TOWARDS END OF ASSESSMENT YEAR 2009-10 (RELEVANT TO FINANCIAL YEAR 2008-09), A PROVISION FOR DIMINUTION IN THE VALUE OF ABOVE BONDS AMOUNTING TO INR 28.10 CR WAS MADE IN AY 2009-10 BASED ON THE ESTIMATED MARKET VALUE OF ABOVE BONDS. THE SAME WAS ADDED BACK IN THE INCOME FOR THAT YEAR AND OFFERED FOR TAXATION AS THERE WAS NO CERTAINTY DUE TO MARKET VOLATILITY ON THE DIMINUTION IN THE VALUE OF ABOVE BONDS. SUBSEQUENTLY DURING AY 2010-11, AS THE MONEY MARKET HAD MORE OR LESS STABILIZED AND THERE WAS CERTAINTY ON THE DIMINUTION IN THE VALUE OF BONDS, THERE WAS FURTHER REDUCTION IN THE MARKET VALUE OF THESE BONDS BY RS. 14 CR. THE APPELLANT AS A PRUDENT BUSINESSMAN FINALLY WROTE IT OFF THE VALUE OF BONDS BY THE TOTAL LOSS OF RS. 42.10 CR (INCLUDING RS. 28.10 CR PERTAINING TO AY 2009-10). IN THIS REGARD, A CHART DEPICTING THE MARKET MOVEMENT IN THE VALUE OF BONDS IS ANNEXED HEREWITH AS ANNEXURE 3A 3.6 HOWEVER, THE LD AO WHILE PASSING THE ASSESSMENT ORDER, DISALLOWED THE ABOVE CLAIM OF THE APPELLANT ON THE FOLLOWING GROUNDS: I. THE ASSESSEE SHOULD HAVE ADDED BACK THE PROVISION OF RS 14 CR IN THE COMPUTATION FOLLOWING THE PRINCIPLE OF CONSISTENCY, FOR THE REASON THAT THE SAME WAS ADDED BACK IN THE EARLIER YEAR (AY 2009-10); II. FERTILIZER BONDS HAVE BEEN RECEIVED BY THE ASSESSEE FROM ITS TRADE DEBTORS I.E. THE GOVERNMENT IN REALISATION OF TRADE DEBTS AND ACCORDINGLY IT CANNOT BE SAID THAT THE LOSS OF RS. 42.10 CRORE HAS BEEN WRITTEN OFF IN THE BOOKS OF ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 19 ACCOUNT FOR THE REASON THAT THE FERTILIZER BONDS CANNOT BE TERMED AS DEBTS OR BAD DEBTS; III. RELIANCE OF THE ASSESSEE ON THE ACCOUNTING STANDARD IS MISPLACED FOR THE REASON THAT THE FERTILIZER BONDS ARE NOT STOCK IN TRADE BUT HAVE TO BE VALUED AT THEIR FACE VALUE. PROFIT AND LOSS ON THESE INVESTMENT CAN BE BOOKED ONLY WHEN THEY ARE ACTUALLY SOLD; IV. PROVISIONS ARE ONLY UNASCERTAINED AND CONTINGENT LIABILITIES AND ACCORDINGLY THE SAME CANNOT BE CLAIMED AS EXPENDITURE. DEDUCTION CAN BE ALLOWED TO THE ASSESSEE ONLY IN RESPECT OF A LIABILITY WHICH COULD BE ASCERTAINED OR ENFORCED ON OR BEFORE THE END OF RELEVANT PREVIOUS YEAR 3.7 IN REPLY TO THE ABOVE, THE APPELLANT SUBMITS AS UNDER: 3.7.1 THE APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. UNDER SUCH SYSTEM OF ACCOUNTING INCOME AND EXPENSES SHOULD BE RECOGNISED AS AND WHEN THEY OCCUR AND NOT AS AND WHEN RECEIPT / PAYMENT THEREOF ARE MADE. THE SUBSIDY DEBTORS OF THE APPELLANT WERE SUBSTITUTED WITH FBS. THE DIMINUTION IN VALUE OF THESE BONDS IS COMPUTED AND CLAIMED AS DEDUCTION AS IT REFLECTS A LOSS OF THE ACCOUNTING YEAR. IT IS PERTINENT TO MENTION HERE AS AFOREMENTIONED AND AS ALSO OBVIOUS FROM THE ANNEXED CHART THAT ONCE THERE WAS SOME SORT OF CERTAINTY ON THE DIMINUTION IN VALUE OF BONDS IN THE CURRENT AY, A CLAIM OF RS. 42.10 CRORE WAS MADE BY THE APPELLANT. 3.7.2 THE SUBSIDY DEBTORS WERE SUBSTITUTED TO THE APPELLANT WITH FBS; THEREFORE, NOT PROVIDING FOR DIMINUTION IN VALUE OF BONDS AND CLAIMING THE SAME WOULD MEAN A DEVIATION FROM THE ACCRUAL CONCEPT OF ACCOUNTING AND A VIOLATION OF THE PROVISIONS OF THE MANDATORY ACCOUNTING STANDARDS AS PRESCRIBED UNDER SECTION 145 OF THE ACT. THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 20 3.8 C ONCEPT OF A CCRUAL UNDER M ERCANTILE S YSTEM OF A CCOUNTING 3.8.1 SECTION 145 OF THE ACT PRESCRIBES THE METHOD OF ACCOUNTING TO BE FOLLOWED BY THE APPELLANT FOR COMPUTING INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION.' SECTION 145(1) STATES THAT THE COMPUTATION WOULD BE 'IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE APPELLANT.' SECTION 145(2) FURTHER STATES THAT THE CENTRAL GOVERNMENT MAY NOTIFY FROM TIME TO TIME 'ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF APPELLANT OR IN RESPECT OF ANY CLASS OF INCOME.' 3.8.2 THE MERCANTILE SYSTEM AS DISTINGUISHED FROM THE CASH SYSTEM BRINGS IN THE CONCEPT OF ACCRUAL OF LIABILITY OR INCOME IN THE RELEVANT PREVIOUS YEAR WHICH IS THE SUBJECT-MATTER OF THE ASSESSMENT. THE LIABILITY IS REFLECTED EVEN WHERE THERE IS NO ACTUAL EXPENDITURE; LIKEWISE THE INCOME IS REFLECTED EVEN WHERE THERE IS NO ACTUAL RECEIPT OF MONEY. MOREOVER, SECTION 209(3) OF THE COMPANIES ACT MAKES IT MANDATORY FOR COMPANIES TO KEEP ACCOUNTS ON ACCRUAL BASIS ONLY. ACCOUNTING STANDARDS NOTIFIED BY THE CENTRAL GOVERNMENT PURSUANT TO SECTION 145 (2) OF THE ACT, THE CENTRAL GOVERNMENT HAD NOTIFIED ACCOUNTING STANDARD- I VIDE NOTIFICATION NO. S.O. 69 (E) DATED 25-1-1996 WHEREIN IT WAS PROVIDED AS UNDER :- PRUDENCE PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY THE BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. THOUGH THE ACTUAL LOSS ON FERTILISER BONDS WILL BE INCURRED ONLY AT THE TIME OF SALE OF BONDS, THE ASSESSEE, WHICH MAINTAINS ITS BOOKS OF ACCOUNT ON THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 21 MERCANTILE BASIS, HAS CONSIDERED IT IMPERATIVE AS WELL AS PRUDENT TO CREATE PROVISIONS IN ITS BOOKS YEAR AFTER YEAR SO AS TO BE ABLE TO REPORT THE LOSSES AS AND WHEN IT ARISES AS ALSO UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THE AFORESAID ACCOUNTING STANDARD IS A PART AND PARCEL OF SECTION 145 OF THE ACT. IT IS WORTH MENTIONING THAT THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA (P) LTD., 294 ITR 451 (DEL), WHICH WAS CONFIRMED BY THE HONBLE SUPREME COURT, IT WAS HELD AS UNDER: THE ABOVE STATEMENT OF THE CONCEPT OF 'ACCRUAL' HAS HELD GOOD TILL DATE. THEREFORE, IT FOLLOWS THAT WHILE COMPUTING BUSINESS INCOME CHARGEABLE TO TAX UNDER SECTION 28 OF THE ACT, THE MERCANTILE SYSTEM OF ACCOUNTING HAS TO BE FOLLOWED AND PROVISION FOR ANTICIPATED LOSSES AND FORESEEABLE LIABILITIES WILL HAVE TO BE TAKEN INTO ACCOUNT. SECTION 145 ALSO ACKNOWLEDGES THE NEED TO FOLLOW ACCOUNTING STANDARDS. THESE MAY BE PRESCRIBED BY THE CENTRAL GOVERNMENT. IN VIEW OF THE ABOVE OBSERVATIONS OF THE HONBLE DELHI HIGH COURT, IT IS INFERRED THE APPELLANT CLAIMED THE LOSS ONCE IT WAS DETERMINED THAT THERE IS A DIMINUTION IN THE VALUE OF FERTILISER BONDS. 3.9 AS PER SETTLED LAW, IT FOLLOWS THAT WHILE COMPUTING BUSINESS INCOME CHARGEABLE TO TAX UNDER SECTION 28 OF THE ACT, THE MERCANTILE SYSTEM OF ACCOUNTING HAS TO BE FOLLOWED AND PROVISION FOR ANTICIPATED LOSSES AND FORESEEABLE LIABILITIES WILL HAVE TO BE TAKEN INTO ACCOUNT. 3.10 IN VIEW OF THE ABOVE, IT IS MOST HUMBLY SUBMITTED THAT THE APPELLANT DETERMINED ITS TAXABLE INCOME BY RELYING UPON AS 13 ISSUED BY ICAI FOR VALUATION OF THE FBS. THE AFORESAID METHOD OF ACCOUNTING ENABLED THE APPELLANT TO DETERMINE THE REAL MANDATORY UNDER THE ACT, HAD SURELY THE SEAL OF APPROVAL OF A PROFESSIONAL BODY I.E. ICAI. THUS, LOSS IN RELATION TO AN ITEM OF CURRENT ASSET IS AN ALLOWABLE DEDUCTION. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 22 3.10.1 IN SUPPORT OF THE AFORESAID, RELIANCE IS PLACED ON THE CASE OF CIT VS. U.P. STATE INDUSTRIAL DEVELOPMENT CORPORATION 225 ITR 703, THE HONBLE SUPREME COURT HAS HELD THAT FOR DETERMINING THE QUESTION OF TAXABILITY, WELL-SETTLED LEGAL PRINCIPLES AS WELL AS PRINCIPLES OF ACCOUNTANCY HAVE TO BE TAKEN INTO ACCOUNT. THE SC OBSERVED THAT IT IS A WELL ACCEPTED PROPOSITION THAT FOR THE PURPOSE OF ASCERTAINING PROFITS AND GAINS, THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY EXPRESS PROVISION OF THE RELEVANT STATUTE. RELIANCE IS FURTHER PLACED ON DECISION OF SUPREME COURT IN THE CASE OF INVESTMENT LTD. VS. CIT, 77 ITR 533 (SC) WHERE IN IT WAS HELD THAT THE METHOD OF ACCOUNTING CONSISTENTLY AND REGULARLY FOLLOWED BY THE APPELLANT CANNOT BE DISCARDED BY THE DEPARTMENTAL AUTHORITIES ON THE VIEW THAT APPELLANT SHOULD HAVE ADOPTED A DIFFERENT METHOD OF KEEPING ACCOUNT OR OF VALUATION. 3.11 RELIANCE IS FURTHER PLACED ON THE HONBLE DELHI HIGH COURT IN THE DECISION OF CIT VS. VIRTUAL SOFT SYSTEMS LTD. [341 ITR 593] WHEREIN THE APPELLANT FOLLOWED ICAIS GUIDANCE NOTE IN ACCOUNTING FOR LEASES. IN VIEW OF THE HIGH COURT, NOTWITHSTANDING THE FACT THAT THE OPINION OF THE ICAI WAS EXPRESSED IN A GUIDANCE NOTE WHICH HAD NOT ATTAINED A MANDATORY STATUS, WOULD NOT PROVIDE A BASIS TO THE AO TO DISREGARD THE BOOKS OF ACCOUNTS OF THE APPELLANT AND IN EFFECT METHOD OF ACCOUNTING FOR LEASES, FOLLOWED BY THE APPELLANT. IDENTICAL VIEW HAS BEEN TAKEN BY DELHI TRIBUNAL IN THE CASE OF JOINT CIT V. PACT SECURITIES AND FINANCIAL LTD. [86 ITD 115]. 3.12 IN THE INSTANT CASE, THE ASSESSING OFFICER DISREGARDED, IN SUBSTANCE, THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT QUA CURRENT INVESTMENTS WITHOUT BASING IT ON THE GROUNDS PROVIDED IN SECTION 145 OF THE ACT. THE FACT THAT THE APPELLANT JUSTIFIED ITS METHOD OF ACCOUNTING, BY TAKING RECOURSE TO ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 23 THE AS 13 ISSUED BY THE ICAI IN THAT BEHALF, WAS DISREGARDED, ON WHAT WE WOULD TERM AS, A DISJOINTED READING OF THE PROVISIONS OF THE SAID AS. THE LD. AO ERRONEOUSLY CONCLUDED IN THAT IN DETERMINING AS TO WHETHER DEDUCTION ON ACCOUNT OF PROVISION FOR DIMINUTION IN VALUE OF FBS OUGHT TO BE ALLOWED OR NOT, WHAT WAS TO BE BORNE IN MIND IS ULTIMATELY THE PROVISIONS OF THE ACT. 3.13 IT IS FURTHER SUBMITTED THAT THE PROVISIONS FOR DIMINUTION OF VALUE OF FBS WAS, BY NO STRETCH OF IMAGINATION A CONTINGENT LOSS AND WAS AN ASCERTAINED LOSS SINCE THE SAME WAS BASED ON THE DEFINITE PRINCIPLES LAID DOWN IN AS 13 OF ICAI. 3.14 THE LD. AO, WHILE DISALLOWING THE CLAIM OF THE APPELLANT HAS ALSO MENTIONED THAT THE LOSS AMOUNTING TO RS. 28 CR. PERTAINS TO AY 2009-10 WHEREIN THE APPELLANT ITSELF HAS ADDED THE SAME IN THE COMPUTATION OF INCOME AND ACCORDINGLY LOSS AMOUNTING TO RS. 28 CR CANNOT BE CLAIMED IN THE CURRENT AY. IN THIS REGARD, IT IS MOST HUMBLY SUBMITTED THAT EVEN IF THERE IS NO CLAIM BY THE ASSESSEE OR A WRONG CLAIM HAS BEEN MADE BY IT THEN ALSO IT IS A SETTLED LAW THAT THE AO IS DUTY BOUND TO ALLOW THE GENUINE CLAIM OF THE ASSESSEE AS PER THE PROVISIONS OF LAW. HOWEVER, ALTERNATIVELY IT IS PRAYED THAT IF YOUR HONOUR IS OF THIS VIEW THAT CLAIM OF RS. 28 CR PERTAINS TO AY 2009-10 AND THE SAME IS ALLOWABLE IN THAT YEAR, THEN THE DIRECTIONS MAY BE ISSUED TO THE LD. AO TO ALLOW THE LOSS AMOUNTING TO RS. 28 CR IN AY 2009-10. IN THIS REGARD, IT IS SUBMITTED THAT THE ASSESSING OFFICER, BEING QUASI JUDICIAL AUTHORITY, IS DUTY BOUND TO ALLOW THE DEDUCTIONS AND EXEMPTIONS AVAILABLE TO THE ASSESSEE EVEN IF SUCH DEDUCTIONS WAS NOT CLAIMED IN THE RETURN OF INCOME. TO SUPPORT THE AFORESAID, RELIANCE IS PLACED ON THOMAS KURIAN V. ACIT [303 ITR 110] WHEREIN IT WAS HELD AS UNDER (REFER PARA 7): ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 24 THE ASSESSING OFFICER, THOUGH AN EXECUTIVE OFFICER IN THE ADMINISTRATION OF THE ACT, THE FUNCTION OF THE ASSESSING OFFICER IS FUNDAMENTALLY QUASI-JUDICIAL. THE TAXING AUTHORITIES SHOULD EXERCISE QUASI-JUDICIAL POWERS, IN DOING SO HE MUST ACT IN A FAIR AND NOT IN A PARTISAN MANNER. BEING A QUASI-JUDICIAL AUTHORITY, THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE CORRECT TAX PAYABLE BY THE ASSESSEE. IN ARRIVING AT SUCH CORRECT TAX, THE ASSESSING OFFICER IS DUTY BOUND TO ALLOW THE DEDUCTIONS AND EXEMPTIONS AVAILABLE TO THE ASSESSEE IN ACCORDANCE WITH LAW AND DISALLOW THE CLAIMS, WHICH ARE NOT ELIGIBLE AS PER LAW. IT IS NOT FAIR AND PROPER TO ARGUE AND PRESUME THAT THE ASSESSEE SHOULD BE AWARE OF ALL THE PROVISIONS OF THE COMPLEX NATURE OF THE INCOME-TAX ACT. WHEN THE FACTS ARE AVAILABLE ON RECORD BEFORE THE ASSESSING OFFICER AND PARTICULARLY WHEN HE HAS ALSO OBSERVED THAT THE ASSESSEE IS IN THE EXPORT BUSINESS OF SEA FOODS AND ALSO NOTED THE TURNOVER AND NET PROFIT FROM SUCH BUSINESS, IN OUR CONSIDERED OPINION THE ASSESSING OFFICER IS DUTY BOUND TO HAVE ASKED THE ASSESSEE AT LEAST WHY HE HAD NOT CLAIMED THE DEDUCTION UNDER SECTION 80HHC, TO WHICH THE ASSESSEE IS ELIGIBLE IN ACCORDANCE WITH LAW. IN LIGHT OF THE ABOVE FACTS AND SUBMISSIONS, THE APPELLANT REQUESTS YOUR HONOUR TO KINDLY DIRECT THE LD. AO TO DELETE THE DISALLOWANCE OF PROVISION FOR DIMINUTION IN VALUE FBS AMOUNTING TO RS. 42.10 CR. 13. AFTER CONSIDERING THE ASSESSEES SUBMISSION, THE LD. CIT(A) DELETED THE ADDITION OF RS. 42.10 CRORE AND HIS FINDINGS ARE AS UNDER:- THE ASSESSEE HAS NOT PURCHASED THESE BONDS FROM MARKET, THESE BONDS WERE RECEIVED AGAINST SUBSIDY FROM THE GOVT. OF INDIA. THE AMOUNT OF SUBSIDY WAS INCLUDED IN THE RECEIPTS OF ASSESSEE, THEREFORE, IT WOULD BE REASONABLE TO TREAT THE OUTSTANDING AMOUNT AS TRADE DEBTOR. INSTEAD OF PAYING THE DEBT IN CASH THE SAME WAS PAID IN KIND (BONDS). IF THE VALUE OF BONDS GO DOWN, IT RESULTS IN CORRESPONDING REDUCTION IN VALUE OF DEBT. ANY WRITE OFF OF DEBT IS ALLOWABLE AS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 25 PER THE IT ACT. LAST YEAR, THE ASSESSEE MADE ONLY PROVISION OF REDUCTION IN VALUE, THEREFORE, THE SAME WAS NOT ALLOWABLE. HOWEVER, IN THE CURRENT YEAR, THE ASSESSEE HAS WRITTEN OFF THE REDUCTION IN VALUE BY ACTUALLY WRITING OF THE SAME. IN VIEW OF THE ABOVE, IT IS HELD THAT THE WRITE OFF OF REDUCTION IN VALUE OF BONDS IS TREATED AS REDUCTION IN VALUE OF DEBT AND THE SAME IS TREATED AS BAD DEBTS WRITTEN OFF. THEREFORE, THE AO IS DIRECTED TO DELETE ADDITION OF RS. 42.10 CRORE. OUR FINDINGS 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSED THE MATERIAL AVAILABLE ON RECORD. THE MAIN ISSUE WHICH ARISES FOR CONSIDERATION IS WHAT IS THE NATURE OF THE FERTILIZERS BONDS AND WHETHER THEY REPRESENT TRADE DEBTORS OF THE ASSESSEE COMPANY. AS PER THE ASSESSING OFFICER, THE ASSESSEE IS TO REALIZE SUBSIDY ON SALE OF FERTILIZERS MANUFACTURED BY IT FROM THE GOVERNMENT OF INDIA AND THE GOVERNMENT OF INDIA IS THEREFORE THE TRADE DEBTOR OF THE ASSESSEE. ONCE THE ASSESSEE HAS ACCEPTED FERTILIZERS BONDS FROM GOVT. OF INDIA IN LIEU OF CASH ON ACCOUNT OF SUBSIDY RECEIVABLE, THE TRADE DEBT TO THAT EXTENT STANDS REALIZED AND DOES NOT EXIST ANYMORE. AS PER ASSESSING OFFICER, THE CONTENTION OF THE ASSESSEE THAT LOSS OF RS. 42.01 CR HAS BEEN WRITTEN OFF IN ITS BOOKS OF ACCOUNT IS DEVOID OF ANY MERIT SINCE FERTILIZERS BONDS ARE NOT DEBTOR OR BAD DEBT FOR THE ASSESSEE RATHER FERTILIZERS BONDS HAVE BEEN RECEIVED BY THE ASSESSEE FROM ITS TRADE DEBTOR IN REALIZATION OF ITS TRADE DEBTS. AS PER THE LD. CIT(A), THE ASSESSEE HAS NOT PURCHASED THESE BONDS FROM THE MARKET, THESE BONDS WERE RECEIVED AGAINST SUBSIDY FROM THE GOVERNMENT OF INDIA AND THE AMOUNT OF SUBSIDY WAS INCLUDED IN THE RECEIPTS OF THE ASSESSEE. THEREFORE, IT WAS HELD BY THE LD CIT(A) THAT IT WOULD BE REASONABLE TO TRADE THE OUTSTANDING AMOUNT AS TRADE DEBTOR. IT WAS HELD BY THE LD CIT(A) THAT INSTEAD OF PAYING THE DEBT IN CASH, THE SAME WAS PAID IN KIND (BONDS) AND IF ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 26 THE VALUE OF BONDS GO DOWN, IT RESULTS IN CORRESPONDING REDUCTION IN VALUE OF DEBT. AS PER THE ASSESSEES CONTENTIONS, THE GOVT. OF INDIA STARTED TO SETTLE A PART OF THE SUBSIDY DEBTS OF THE FERTILIZERS COMPANY IN THE FORM FERTILIZERS BONDS FROM THE FY 2007-08 AND AS PER THE SAID POLICY, THE FERTILIZERS COMPANIES INCLUDING THE ASSESSEE COMPANY HAD NO OPTION BUT TO ACCEPT THESE BONDS ALLOTTED IN SETTLEMENT OF ITS SUBSIDY DUES. IT WAS SUBMITTED THAT THE GOVT. OF INDIA HAD SUBSTITUTED ITS SHORT TERM LIABILITY INTO LONG TERM LIABILITY BY ISSUING FERTILIZER BONDS IN LIEU OF SUBSIDY DEBT. THESE BONDS SUBSTITUTED THE COMPANYS SUBSIDY RECEIVABLE BUT AT THE SAME TIME, CONTINUE TO REPRESENT THE SUBSIDY DEBTS IN FORM OF FERTILIZERS BONDS AND THE SAME WERE CATEGORIZED AS OTHER CURRENT ASSETS IN THE FINANCIAL STATEMENTS AND VALUED AT A VALUE BEING LOWER OF COST AND MARKET VALUE IN COMPLIANCE WITH AS-13 ISSUED BY ICAI. IT WAS FURTHER SUBMITTED THAT THESE BONDS ARE FREELY TRADABLE IN THE OPEN MARKET AND THEY ARE LIKE GOVERNMENT SECURITIES WITH COUPON RATE OF 6% TO 7%. 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 CONTENTIONS THAT THE GOVERNMENT SUBSTITUTED ITS SHORT TERM LIABILITY INTO LONG TERM TERM LIABILITY BY WAY OF ISSUANCE OF THE FERTILIZERS BONDS. THESE FERTILIZERS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 27 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 HONBLE 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 HONBLE 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 HONBLE SUPREME COURT IN THAT CASE ARE REPRODUCED AS UNDER: 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 ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 28 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 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 ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 29 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 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. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 30 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 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 HONBLE 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 REVENUES GROUND OF APPEAL IS ALLOWED AND THE FINDINGS OF THE LD CIT(A) ARE SET-ASIDE. 19. IN ITS GROUND NO. 10, THE REVENUE HAS CHALLENGED THE DELETION OF ADDITION OF RS. 92,79,756/- MADE BY THE AO ON ACCOUNT OF PROVISION FOR LOSS ON DERIVATIVE TRANSACTIONS. IN THE REVISED RETURN OF INCOME FILED BY THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 31 ASSESSEE COMPANIES ON 30.03.2012, THE ASSESSEE HAS CLAIMED DEDUCTION OF RS. 92,79,756/- BEING PROVISION FOR LOSS ON DERIVATIVE TRANSACTIONS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. THE ASSESSEE HAS SUBMITTED THAT THE SAID LOSS RELATES TO INTEREST RATE SWAP TRANSACTION OF RS. 92.80 LAC RELATED TO FOREIGN CURRENCY BORROWING OF US$ 25 MILLION FOR ITS FERTILIZER DIVISION FOR CAPITALIZATION OF REVAMP PROJECT AT LIBOR LINKED INTEREST RATE. IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT ADOPTED AS 30 ISSUED BY THE ICAI AND ACCOUNTED THE MTM LOSSES IN LINE WITH THE ICAI GUIDELINES ON DERIVATIVE TRANSACTION EFFECTIVE FROM MARCH, 31, 2008 AND BASED ON THE FAIR VALUATION, THE LOSS WAS ACCOUNTED AS MARK TO MARKET LOSS IN ITS BOOKS OF ACCOUNTS. IN SUPPORT, RELIANCE WAS PLACED ON MUMBAI BENCH OF THE TRIBUNAL IN CASE OF ABN AMRO SECURITIES INDIA (P) LTD VS. ITO REPORTED IN (2011) 133 ITD 343 (MUM.) THE ASSESSING OFFICER HOWEVER DID NOT FIND THE SUBMISSIONS OF THE ASSESSEE ACCEPTABLE AND HIS FINDINGS ARE AS UNDER:- C) I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE BUT FIND THEM TO BE UNTENABLE. THE PROVISION MADE BY ASSESSEE FOR LOSS ON DERIVATIVE TRANSACTIONS IS A CONTINGENT AND UNASCERTAINED LIABILITY. CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE AND CANNOT BE THE SUBJECT-MATTER OF DEDUCTION EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. EXPENDITURE WHICH IS DEDUCTIBLE FOR INCOME TAX PURPOSES IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME BUT SETTING APART MONEY WHICH MIGHT BE COME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING CASE-LAWS:- I) SHREE SAJJAN MILLS LTD. VS. CIT (1985) 156 ITR (SC) II) INDIAN MOLASSES CO. (P.) LTD. VS. CIT (1956) 37 ITR 66 (SC) III) MAHADEO GANGAPRASAD VS. SECOND ITO (1966) 61 ITR 384 (BOM.) ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 32 IV) MYSORE LAMP WORKS LTD. VS. CIT (1990) 52 TAXMAN 260/285 ITR 96 (KAR.) THE ASSESSEE WOULD HAVE INCURRED THE LOSS OF RS. 92,79,756/- ONLY IN CASE THE INTEREST RATE SWAPS HAD BEEN SQUARED UP ON 31.03.2010. IT IS, THUS, A LOSS WHICH MAY OR MAY NOT ACTUALLY OCCUR. DEDUCTION CAN BE ALLOWED TO THE ASSESSEE ONLY IN RESPECT OF A LIABILITY WHICH COULD BE ASCERTAINED AND ENFORCED ON OR BEFORE THE END OF THE RELEVANT PREVIOUS YEAR. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OFF HONBLE MUMBAI COURT IN CASE OF CIT VS. PHALTON SUGAR WORKS LTD. (1986) 162 ITR 622 (BOM.). AS FOR ACCOUNTING STANDARDS MENTIONED BY THE ASSESSEE, RELIANCE IS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. CIT (1997) 227 ITR 172 (SC) HOLDING THAT INCOME TAX LAW DOES NOT MATCH STEP BY STEP WITH THE DIVERGENT FOOTSTEPS OF THE ACCOUNTING PROFESSION. D) THE ASSESSEE HAS MADE PROVISION OF RS. 92,79,756/- IN RESPECT OF UNSETTLED INTEREST RATE SWAP CONTRACTS AS AT 31.03.2010 IN RESPECT OF WHICH SETTLEMENTS ARE TO TAKE PLACE AFTER THE RELEVANT PREVIOUS YEAR. THE RELIANCE OF THE ASSESSEE ON THE DECISION OF HONBLE ITAT, MUMBAI BENCH IN THE CASE OF ABN AMRO SECURITIES INDIA PVT. LTD. VS. ITO (2011) 15 TAXMAN.COM. 177 (MUM.) IS ALSO MISPLACED SINCE IN THAT CASE, THE ASSESSEE WAS DEALING IN GOVT. SECURITIES, BONDS, DEBENTURES ETC. AND THE HONBLE TRIBUNAL OBSERVED THAT THE ASSESSEE WAS ENTITLED TO VALUE ITS STOCK IN TRADE IN TRADE AT COST OR MARKET PRICE, WHICHEVER IS LESS. HOWEVER, THE ASSESSEE UNDER REFERENCE HAS ENTERED INTO SWAP CONTRACTS IN RESPECT OF INTEREST PAYABLE ON FOREIGN CURRENCY LOANS TAKEN FOR CAPITAL EXPENDITURE OF ITS FERTILIZER DIVISION. SINCE THE FACTS OF ASSESSEES CASE ARE DIFFERENT, THE DECISION OF HONBLE ITAT, MUMBAI BENCH (SUPRA) IS NOT RELEVANT HERE. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 33 E) IN VIEW OF THE FACTUAL MATRIX OF THE CASE AND DISCUSSION AND FINDINGS GIVEN ABOVE, IT IS HELD THAT THE DEDUCTION OF RS. 92,79,756/- CLAIMED BY THE ASSESSEE IS NOT ADMISSIBLE TO THE ASSESSEE. ACCORDINGLY, THE SAME IS DISALLOWED. 20. BEFORE THE LD. CIT(A), THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND FURTHER SUBMITTED AS UNDER:- WRITTEN SUBMISSION DATED 24.05.2013 THAT THE LD JOINT COMMISSIONER ERRED IN DISALLOWING LOSS ON DERIVATIVE TRANSACTIONS OF RS. 92,79,756/- IN RESPECT OF INTEREST RATE SWAP TRANSACTIONS. THE LOSS IS A NORMAL FINANCIAL LOSS INCURRED IN THE NORMAL COURSE OF BUSINESS AND HENCE THE ADDITION MADE ON THIS ACCOUNT DESERVES TO BE DELETED. BACKGROUND FACTS THE APPELLANT (CFCL) HAS AVAILED A US DOLLAR (USD) DENOMINATED FOREIGN CURRENCY LOAN FOR THE FOLLOWING PURPOSES: AMOUNT OF LOAN PURPOSE OF LOAN USD 225 MILLION FOR THE PURCHASE OF SHIPS FOR THE PURPOSE OF THE SHIPPING DIVISION AT LIBOR LINKED INTEREST RATE USD 25 MILLION FOR THE CAPITALISATION IN THE COMPANYS REVAMP PROJECT FOR THE PURPOSE OF THE FERTILISER DIVISION AT LIBOR LINKED INTEREST RATE THE INTEREST, ON THE ABOVEMENTIONED LOAN, IS PAYABLE BY CFCL ON QUARTERLY BASIS ON FLOATING BENCHMARKING OF 3 TO 6 MONTH LONDON INTERBANK OFFERED RATE (LIBOR) WHICH IS SET EVERY 3 TO 6 MONTHS. IN ORDER TO HEDGE THE RISK OF EXPOSURE TO THE VARIABLE INTEREST RATE LIABILITY, THE COMPANY HAS ENTERED ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 34 INTO DERIVATIVE TRANSACTIONS, NAMELY INTEREST RATE SWAP (IRS), WITH BANKS/FINANCIAL INSTITUTIONS. UNDER THE IRS ARRANGEMENT, CFCL HAS TO PAY A FIXED INTEREST RATE ON AN AGREED NOTIONAL AMOUNT AND IN EXCHANGE WILL RECEIVE VARIABLE INTEREST RATES BASED ON LIBOR FROM THE BANKS AND THE SAME WOULD BE TIMED IN A MANNER SUCH THAT THE LIABILITY UNDER THE DERIVATIVE TRANSACTION WOULD CORRESPOND TO THE LIABILITY UNDER THE UNDERLYING LOAN TRANSACTION. CFCL IS FOLLOWING AN ACCOUNTING POLICY WHEREIN THE INTEREST, AT FIXED RATE, IS CHARGED TO THE EXPENSE ACCOUNT AS THE LIABILITY OF CFCL IS FIXED BY VIRTUE OF THE IRS TRANSACTION. FURTHER, THE DERIVATIVES ARE RE-MEASURED OR MARKED TO MARKET TO THEIR FAIR VALUE AT THE END OF EACH REPORTING PERIOD AND THE RESULTING LOSSES ARE RECOGNISED IN THE PROFIT OR LOSS ACCOUNT. CFCL HAD NOT ADOPTED AS-30 WHICH WAS RECOMMENDATORY AND NOT MANDATORY FOR AY 2010-11. CFCL HAS MARKED TO MARKET THE IRS TRANSACTIONS AND THE LOSSES ARISING ON SUCH FAIR VALUATION HAVE BEEN RECOGNISED IN THE STATEMENT OF PROFIT AND LOSS OF THE COMPANY. MARK TO MARKET OR FAIR VALUATION REFERS TO THE PROCESS OF ACCOUNTING THE FAIR VALUE OF AN ASSET OR LIABILITY BASED ON THE CURRENT MARKET PRICE OF THE ASSET OR LIABILITY. IN OTHER WORDS, THE UN-MATURED IRS TRANSACTIONS ARE EVALUATED ON THE LAST DAY OF THE ACCOUNTING PERIOD BASED ON THE INTEREST RATE PREVAILING ON THAT DATE AND THE PROFITS OR LOSSES ARISING THERE FROM ARE BOOKED IN THE FINANCIAL STATEMENTS OF THE COMPANY. IT IS PERTINENT TO NOTE THAT THE GROUND OF RS. 92.80 LACS IN APPEAL RELATES ONLY TO THE FERTILISERS DIVISION SINCE THE SHIPPING DIVISION WAS UNDER THE TONNAGE TAX SCHEME IN THE AY 2010-11. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 35 CLAIM UNDER THE INCOME TAX ACT IT IS PERTINENT TO NOTE THAT FOR CLAIMING LOSSES AS A DEDUCTION UNDER THE PROVISIONS OF THE ACT, SUCH LOSS MUST BE A REAL OR ACCRUED LOSS AND NOT A NOTIONAL, CONTINGENT OR FICTITIOUS LOSS. IN THE INSTANT CASE, THE LOSS ARISING IN THE HANDS OF CHAMBAL AS A RESULT OF FAIR VALUATION OF THE IRS TRANSACTIONS CANNOT BE SAID TO BE A CONTINGENT, NOTIONAL OR FICTITIOUS LOSS, ALTHOUGH, IT HAS TO BE SETTLED AT A FUTURE DATE. IN THIS REGARD, IT IS RELEVANT TO NOTE THE DECISION OF THE SUPREME COURT, IN THE CASE OF METAL BOX COMPANY OF INDIA LTD (73 ITR 53) WHEREIN THE APPELLANT COMPANY ESTIMATED ITS LIABILITY UNDER TWO GRATUITY SCHEMES FRAMED BY THE COMPANY AND THE AMOUNT OF LIABILITY WAS DEDUCTED FROM THE GROSS RECEIPTS IN THE PROFIT AND LOSS ACCOUNT. THE COMPANY HAD WORKED OUT ON AN ACTUARIAL VALUATION ITS ESTIMATED LIABILITY AND MADE PROVISION FOR SUCH LIABILITY NOT ALL AT ONCE BUT SPREAD OVER A NUMBER OF YEARS. ON APPEAL BEFORE THE SUPREME COURT, THE APPELLANT COMPANYS PROVISION FOR GRATUITY WAS ALLOWED ON THE BASIS THAT THE COMPANY WAS LIABLE TO PAY THE GRATUITY AS ON THAT DATE AND THAT THE LIABILITY WOULD BE MERELY DISCHARGED IN A LATER YEAR. IN THE CONTEXT OF ALLOWABILITY OF PROVISION FOR WARRANTY CREATED ON ACCOUNT OF WARRANTY CLAIMS LIKELY TO ARISE ON SALES, THE APEX COURT, IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD (314 ITR 62), HELD THAT THE SAME IS ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 37 OF THE ACT STATING THAT THE SAME CANNOT BE CONSIDERED AS CONTINGENT LIABILITY. FURTHER, THE COURT HELD THAT THE FOLLOWING CONDITIONS HAVE TO BE SATISFIED FOR RECOGNITION OF A PROVISION: A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 36 REQUIRED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION FURTHER, IN THE CONTEXT OF REVALUATION OF FOREIGN EXCHANGE LOANS IN THE MANNER PRESCRIBED UNDER AS 11 AND THE ALLOWABILITY OF UNREALISED LOSSES ARISING THERE FROM FOR TAX PURPOSES, THE FOLLOWING JUDICIAL PRECEDENTS CONFIRM THE DEDUCTIBILITY UNDER THE PROVISIONS OF THE ACT: THE SUPREME COURT, IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD (2009 TIOL 50), HELD THAT THE EXCHANGE FLUCTUATION LOSSES DEBITED TO PROFIT AND LOSS ACCOUNT ON ACCOUNT OF REVENUE TRANSACTION IS ALLOWABLE EXPENDITURE DESPITE THE FACT THAT THE SAME HAVE NOT BEEN ACTUALLY CRYSTALLIZED. IN THE CASE OF BESTOBELL (INDIA) LTD (117 ITR 789 (CAL)), IT WAS HELD THAT THE LIABILITY OF THE ASSESSEE WOULD INCREASE ON DEVALUATION OF THE INDIAN CURRENCY WHERE THE ASSESSEE HAS MAINTAINED ITS ACCOUNTS ON MERCANTILE BASIS. THE LIABILITY WOULD ACCRUE DURING THE RELEVANT PERIOD AND CANNOT BE SAID TO BE A CONTINGENT LIABILITY OR AN ANTICIPATED FUTURE LOSS. THE SPECIAL BENCH OF THE DELHI ITAT IN THE CASE OF OIL AND NATURAL GAS CORPORATION LTD (261 ITR 1) HELD AS FOLLOWS: THE ASSESSEE'S CLAIM FOR LOSS ARISING AS A RESULT OF FLUCTUATION IN FOREIGN EXCHANGE RATES ON THE CLOSING DAY OF THE YEAR HAS BEEN DISALLOWED BY THE ASSESSING OFFICER, INTER ALIA, ON THE GROUND THAT THIS LIABILITY WAS A CONTINGENT LIABILITY AND THE LOSS WAS A NOTIONAL ONE. THE MAIN INGREDIENT OF A CONTINGENT LIABILITY IS THAT IT DEPENDS UPON HAPPENING OF A CERTAIN EVENT. WE ARE OF THE CONSIDERED OPINION THAT IN THE CASE OF THE ASSESSEE, THE 'EVENT' I.E., THE CHANGE IN THE VALUE OF FOREIGN CURRENCY IN RELATION TO INDIAN CURRENCY HAS ALREADY TAKEN PLACE IN THE CURRENT YEAR. THEREFORE, THE LOSS INCURRED BY THE ASSESSEE IS A FAIT ACCOMPLI AND NOT A NOTIONAL ONE. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 37 THE JURISDICTIONAL HIGH COURT HAS, IN THE CASE OF CIT VS IFCI (185 TAXMAN 296), IN THE CONTEXT OF EXPENSES INCURRED IN FOREIGN CURRENCY SWAP HELD AS UNDER: IT IS CLEAR FROM THE NATURE OF THE TRANSACTION, THAT THE ASSESSEE HAD RAISED FOREIGN CURRENCY BORROWINGS AND SWAPPED SUCH FOREIGN CURRENCY INTO INDIAN RUPEES IN ORDER TO AUGMENT ITS RUPEE RESOURCES FOR MEETING ITS LENDING REQUIREMENTS. THE FOREIGN CURRENCIES BORROWED WERE REPAYABLE TO THE FOREIGN LENDERS ON LATER DATES FALLING WITHIN THE CURRENT PREVIOUS YEAR ENDING ON 31.3.1995 AND IN SOME CASES FALLING IN THE NEXT PREVIOUS YEAR RELEVANT TO SUBSEQUENT ASSESSMENT YEAR. IN ORDER TO ENSURE THAT IT IS ABLE TO REPAY THE FOREIGN LENDERS IN THE FOREIGN CURRENCY ON THEIR RESPECTIVE DUE DATES OF REPAYMENTS, THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS AS A SAFEGUARD AGAINST FOREIGN CURRENCY FLUCTUATIONS. IT IS THE DIFFERENCE BETWEEN THE FORWARD CONTRACT RATE AND THE EXCHANGE RATE ON THE DATE OF TRANSACTION WHICH WAS CLAIMED AS DEDUCTION IN THAT VERY YEAR. THE FORWARD CONTRACT IS AN AGREEMENT BETWEEN TWO PARTIES, REQUIRING THE DELIVERY AT SOME SPECIFIED FUTURE DATE OF A SPECIFIED AMOUNT OF FOREIGN CURRENCY BY ONE OF THE PARTIES, AGAINST PAYMENT IN DOMESTIC CURRENCY TO THE OTHER PARTY, AT THE PRICE AGREED UPON IN THE CONTRACT. THE RATE OF EXCHANGE APPLICABLE TO THE FORWARD CONTRACT IS CALLED THE FORWARD EXCHANGE RATE AND THE MARKET FOR FORWARD TRANSACTIONS IS KNOWN AS THE FORWARD MARKET. THUS, IN CASE OF A FORWARD CONTRACT, ASSESSEE ENTERS INTO A LEGALLY BINDING, ENFORCEABLE CONTRACT FOR PURCHASE OF FOREIGN CURRENCY ON A FUTURE DATE AT THE PREDETERMINED RATES. THE DATE AND THE RATE OF PURCHASE OF THE FOREIGN CURRENCY ARE DECIDED AT THE TIME OF ENTERING INTO CONTRACT. THE DIFFERENCE BETWEEN THE FORWARD CONTRACT AND THE EXCHANGE RATE ON THE DATE OF ENTERING INTO THE CONTRACT HAS TO BE RECOGNIZED AS INCOME OR EXPENSES, WHICH IS ASCERTAINED AND DEFINITE, IN TERMS OF THE CONTRACT ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 38 AND CANNOT BE REGARDED AS NOTIONAL OR CONTINGENT. IT IS CLEAR THAT THE SWAPPING COST INCURRED BY THE ASSESSEE IS CAPABLE OF DETERMINATION AT THE TIME OF EXECUTION OF THE FORWARD CONTRACT AND SUCH DETERMINATION DOES NOT GET POSTPONED. THEREFORE, THE TEST LAID DOWN IN THE AFORESAID JUDGMENTS IS TO TREAT IT AS BUSINESS EXPENDITURE IN THE SAME YEAR, THOUGH PART OF THE LIABILITY OCCURS ON A FUTURE DATE, IS ALLOWABLE AS EXPENDITURE IN THIS VERY YEAR. IT WAS A DEBT OWED BY THE ASSESSEE, WHICH ACCRUED ON THE DATE OF ENTERING INTO THE FORWARD CONTRACT ITSELF, THOUGH AS PER THE CONTRACT, PART PAYMENT WAS TO BE MADE IN SUCCEEDING YEARS. THE EXPENDITURE UNDER THE ACCRUAL SYSTEM OF ACCOUNTING HAD, THUS, CRYSTALLIZED ON THE DATE OF THE CONTRACT. IN THE INSTANT CASE, CFCL HAS A SUBSISTING CONTRACT ON THE REPORTING DATE AND HAS A CERTAIN OBLIGATION TO PAY A FIXED RATE OF INTEREST, REGARDLESS OF THE MOVEMENT OF ACTUAL INTEREST RATE. WHEN THIS OBLIGATION IS VALUED BASED ON THE CURRENT AND FORECASTED MOVEMENT OF INTEREST RATE, IT ONLY VALUES THE PROBABLE LOSS ON ACCOUNT OF THE IRS CONTRACT. IN OTHER WORDS, THE OBLIGATION TO PAY EXISTS AND THE LOSS IS ONLY VALUED BASED ON A SCIENTIFIC BASIS AND PROVIDED FOR. IN LIGHT OF THE ABOVE DECISIONS, WHEN THE FAIR VALUE OF THE IRS IS DETERMINED ON THE REPORTING DATE FOLLOWING A SCIENTIFIC BASIS OF VALUATION, THE SAME CANNOT BE SAID TO BE FICTITIOUS OR NOTIONAL OR CONTINGENT. THE PRESENT TREND OF JUDICIAL DECISIONS IS TO ALLOW MARKED TO MARKET LOSSES DEBITED TO THE STATEMENT OF PROFIT AND LOSS, IN RESPECT OF DERIVATIVE CONTRACTS, IN THE COMPUTATION OF PROFITS OF THE COMPANY. THE BROAD PRINCIPLES ESTABLISHED IN THESE CASES ARE AS FOLLOWS: IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD, THE APEX COURT HELD THAT MARKED TO MARKET LOSSES ARISING AS A RESULT OF FOREIGN EXCHANGE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 39 FLUCTUATION AS ON THE BALANCE SHEET DATE WAS ALLOWABLE AS AN ITEM OF EXPENDITURE UNDER SECTION 37 OF THE ACT. THE MUMBAI BENCH OF THE TRIBUNAL HELD, IN ABN AMRO SECURITIES INDIA (P) LTD, HELD THAT UNREALIZED LOSSES ARISING ON THE VALUATION OF IRS AT THE END OF THE YEAR IS ALLOWABLE AS A DEDUCTION. A RELEVANT PARA IS QUOTED BELOW: ............ LOSS HAVING BEEN INCURRED IS A REALITY, ITS RECOUPMENT OR AGGRAVATION IS CONTINGENT. IT IS CONTINGENT UPON FUTURE HAPPENINGS IS WHETHER OR NOT LOSS THE ASSESSEE WILL BE ABLE TO RECOUP THE LOSSES TILL SETTLEMENT DATE, AND SUCH RECOUPMENT OR AGGRAVATION OF LOSS WILL FALL IN PERIOD BEYOND THE END OF THE RELEVANT PREVIOUS YEAR. VIEWED THUS, AND BEARING IN MIND THE FACT THAT THE REAL ISSUE IN THIS APPEAL BEFORE US IS NOT THE DEDUCTIBILITY BUT ONLY TIMING OF THE DEDUCTION, WE ARE OF THE CONSIDERED VIEW THAT THE LOSS COMPUTED VIS-- VIS THE VARIATION AS ON THE END OF THE RELEVANT PREVIOUS YEAR, THE LOSS IS DEDUCTIBLE IN THE RELEVANT PREVIOUS YEAR.. THE LD ASSESSING OFFICER HOWEVER PLACED RELIANCE ON THE FOLLOWING CASE LAWS: 1. SHREE SAJJAN MILLS LTD V/S COMMISSIONER OF INCOME TAX [1985] 156 ITR 1585 (SC) - IN MERCANTILE SYSTEM OF ACCOUNTING CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE UNDER I.T. ACT 1961. 2. INDIAN MOLASSES CO.(P) V/S COMMISSIONER OF INCOME TAX [1950] 37 ITR 66 (SC) -SPENDING IN THE SENSE OF PAYING OUT OR AWAY OF MONEY IS THE PRIMARY MEANING OF EXPENDITURE EXPENSES DEDUCTIBLE FROM INCOME TAX PURPOSE IS ONE WHICH IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME, BUT PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE 3. MYSORE LAMP WORKS LTD V/S COMMISSIONER OF INCOME TAX [1990] 185ITR 96 (KAR.) EXPENSES WHICH IS DEDUCTIBLE FOR INCOME TAX PURPOSE IS ONE WHICH IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME BUT THE PUTTING ASIDE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 40 OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE 4. CIT V/S PHALTON SUGAR WORKS LIMITED (162 ITR 622) (BOM) DEDUCTION CAN BE ALLOWED TO THE ASSESSEE ONLY IN RESPECT OF A LIABILITY WHICH COULD BE ASCERTAINED AND ENFORCED ON OR BEFORE THE END OF THE RELEVANT PREVIOUS YEAR. THE ABOVE CASES ALL SIMPLY STATE THAT CONTINGENT LIABILITIES ARE NOT ALLOWED AS DEDUCTIONS. IT HAS BEEN AMPLY EXPLAINED ABOVE THAT IN THE INSTANT CASE, CFCL HAS A SUBSISTING CONTRACT ON THE REPORTING DATE AND HAS A CERTAIN EXISTING (NOT CONTINGENT) OBLIGATION TO PAY A FIXED RATE OF INTEREST, REGARDLESS OF THE MOVEMENT OF ACTUAL INTEREST RATE. WHEN THIS OBLIGATION IS VALUED BASED ON THE CURRENT AND FORECASTED MOVEMENT OF INTEREST RATE, IT ONLY VALUES THE PROBABLE LOSS ON ACCOUNT OF THE IRS CONTRACT. IN OTHER WORDS, THE OBLIGATION TO PAY EXISTS AND THE LOSS IS ONLY VALUED BASED ON A SCIENTIFIC BASIS AND PROVIDED FOR. IT IS NOT THE ACCOUNTING FOR A PROBABLE LOSS IT IS MERELY ACCOUNTING USING A SCIENTIFIC METHOD TO QUANTIFY ITS LOSS. THE LD ASSESSING OFFICER HAS ALSO PLACED RELIANCE ON THE CASE OF TUTICORIAN ALKALI CHEMICALS & FERTILIZERS LTD. V/S COMMISSIONER OF INCOME TAX [1997] 227 ITR 172 (SC). THE CASE STATES THAT INCOME TAX LAW DOES NOT MATCH STEP BY STEP WITH THE DIVERGENT FOOTSTEPS OF THE ACCOUNTING PROFESSION. IT IS HUMBLY SUBMITTED THAT THE APPELLANT HAS NOT ADOPTED THE RECOMMENDATORY AS-30 HENCE THE REFERENCE TO ACCOUNTING PROFESSION SEEMS UNWARRANTED. THE LD ASSESSING OFFICER HAS ALSO REFERRED TO ABN AMROS CASE STATING THAT IT IS NOT RELEVANT TO THE ASSESSEES CASE. WE REITERATE THAT THE MUMBAI BENCH OF THE TRIBUNAL HELD, IN ABN AMRO SECURITIES INDIA (P) LTD, HELD THAT UNREALIZED LOSSES ARISING ON THE VALUATION OF IRS AT THE END OF THE YEAR IS ALLOWABLE AS A DEDUCTION. THE RELEVANT PARA IS ONCE AGAIN QUOTED BELOW: ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 41 ............ LOSS HAVING BEEN INCURRED IS A REALITY, ITS RECOUPMENT OR AGGRAVATION IS CONTINGENT. IT IS CONTINGENT UPON FUTURE HAPPENINGS IS WHETHER OR NOT LOSS THE ASSESSEE WILL BE ABLE TO RECOUP THE LOSSES TILL SETTLEMENT DATE, AND SUCH RECOUPMENT OR AGGRAVATION OF LOSS WILL FALL IN PERIOD BEYOND THE END OF THE RELEVANT PREVIOUS YEAR. VIEWED THUS, AND BEARING IN MIND THE FACT THAT THE REAL ISSUE IN THIS APPEAL BEFORE US IS NOT THE DEDUCTIBILITY BUT ONLY TIMING OF THE DEDUCTION, WE ARE OF THE CONSIDERED VIEW THAT THE LOSS COMPUTED VIS-- VIS THE VARIATION AS ON THE END OF THE RELEVANT PREVIOUS YEAR, THE LOSS IS DEDUCTIBLE IN THE RELEVANT PREVIOUS YEAR.. AS IS EVIDENT FROM THE ABOVE DISCUSSION, THE IRS OF RS. 92.80 LACS WHICH IS NOT A CONTINGENT LIABILITY BUT A LIABILITY THAT EXISTS ON THE BALANCE SHEET DATE AND THE ONLY POINT IS THAT ITS QUANTITY HAS BEEN ESTIMATED ON A SCIENTIFIC BASIS AND IS A LOSS ALLOWABLE AS DEDUCTION FROM PROFITS AND GAINS OF BUSINESS. WRITTEN SUBMISSION DATED 01.10.2013 THAT THE LD JOINT COMMISSIONER ERRED IN DISALLOWING LOSS ON DERIVATIVE TRANSACTION OF RS.92,79,756/- IN RESPECT OF INTEREST RATE SWAP TRANSACTIONS. THE LOSS IS A NORMAL FINANCIAL LOSS INCURRED IN THE NORMAL COURSE OF BUSINESS AND HENCE THE ADDITION MADE ON THIS ACCOUNT DESERVES TO BE DELETED. ASSESSING OFFICER HAS DISALLOWED PROVISION FOR LOSS ON DERIVATIVE TRANSACTION OF RS. 9,279,756.27/- FOR AY 2010-11. OUT OF WHICH RS. 58,55,094.70 /- IS RELATED TO INTEREST RATE SWAPS AND BALANCE RS. 34,24,662/- IS RELATED TO FORWARD COVER TRANSACTION. AS DESIRED, PLEASE FIND ENCLOSED HEREWITH THE DETAILS OF RS.34,24,662/- WHICH IS RELATED TO FORWARD COVER TRANSACTIONS. FIRST 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 ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 42 ARE IN RESPECT OF CAPITAL ITEMS (RS. 9361.58 OF HDFC AND RS. 18,15,300/- OF ING). FORWARD COVER IS TAKEN FOR A FUTURE DATE. FORWARD COVER RATE IS DETERMINED BASED ON THE CURRENT SPOT RATE, FORWARD PREMIUM AND MARGIN MONEY. IN CASE OF REVENUE TRANSACTION, THE FORWARD PREMIUM AND MARGIN MONEY IS CONSIDERED AS PERIOD COST AND IS CHARGED TO REVENUE ON PERIODICAL BASIS; HOWEVER, IN CASE OF CAPITAL EXPENDITURE, IT IS TREATED AS ONE TIME COST AND CAPITALIZED ALONG WITH EXCHANGE RATE VARIANCE. WE HAVE TAKEN FORWARD COVER IN DOLLAR/EURO TO HEDGE THE RISK OF FLUCTUATION AGAINST FOREIGN CURRENCY LIABILITIES. IN CASE OF FORWARD COVER FOR IMPORT OF TRADED PRODUCTS THE CALCULATION OF LOSS IS THE DIFFERENCE BETWEEN THE CLOSING RATE (EXCHANGE RATE AS ON 31.03.2010 I.E. SPOT RATE) AND SPOT RATE ON DEAL BOOKING DATE. HOWEVER, IN CASE OF CAPITAL ITEMS IT IS THE DIFFERENCE BETWEEN THE CLOSING RATE AND HEDGING RATE. WE ARE ALSO ENCLOSING HEREWITH COPY OF THE SPOT RATE ON THE DATE OF HEDGING (DEAL BOOKING DATE) AS PER HDFC LETTER DATED 05.09.2013. 21. THE RELEVANT FINDING OF THE CIT(A) IS REPRODUCED AS UNDER: 4.132 I HAVE GONE THROUGH AOS FINDINGS AND ASSESSEES SUBMISSION. THE ASSESSEE HAS BORROWED FOREIGN CURRENCY ON FLUCTUATING RATE OF INTEREST. TO PROTECT ITSELF FROM FLUCTUATION IN INTEREST RATE, THE ASSESSEE ENTERED INTO INTEREST SWAP TRANSACTION WHICH RESULTED IN EXPENSES OF RS. 92,79,756/-. IN MY OPINION, THE TRANSACTION WAS IN THE NATURE OF HEDGING TRANSACTION TO PROTECT LOSS ON ACCOUNT OF FLUCTUATION IN INTEREST RATES. LOSS ON HEDGING WAS HELD TO BE ALLOWABLE BY VARIOUS COURTS. THEREFORE, LOSS ON SUCH TRANSACTION IS HELD TO BE ALLOWABLE. THE AO IS THEREFORE DIRECTED TO DELETE ADDITION OF RS. 92,79,756. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 43 OUR FINDINGS 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSED 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 ASSESSEES 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 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. 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, REVENUES GROUND OF APPEAL IS PARTLY ALLOWED. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 44 COMMON GROUNDS OF APPEAL 24. REGARDING GROUND NO. 6 OF THE REVENUES APPEAL AND GROUND NO. 2 OF THE ASSESSEES APPEAL WHEREIN MATTER RELATING TO DISALLOWANCE MADE U/S 14A HAS BEEN CHALLENGED BY BOTH THE PARTIES. 25. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY HAS MADE INVESTMENTS IN UNITS OF VARIOUS MUTUAL FUNDS DURING THE YEAR AMOUNTING TO RS. 490.50 CRORES. FURTHER, THERE ARE INVESTMENTS IN THE UNITS OF THE MUTUAL FUNDS WHICH WERE MADE IN THE EARLIER YEARS AMOUNTING TO RS. 300 CRORES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 4,39,37,400/- ON THESE MUTUAL FUND UNITS WHICH HAS BEEN CLAIMED AS EXEMPT U/S 10(35) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A SHOW-CAUSE NOTICE WAS ISSUED TO THE ASSESSEE AS TO WHY DISALLOWANCE U/S 14A SHOULD NOT BE MADE. 26. THE ASSESSEE IN RESPONSE TO THE SHOW-CAUSE SUBMITTED THAT INVESTMENT IN THE MUTUAL FUNDS WERE MADE OUT OF THE SURPLUS SHORT TERM FUNDS AVAILABLE DURING THE YEAR AND THERE WAS NO SPECIFIC/TARGET BORROWING FOR MAKING SAID INVESTMENTS AND IN SUPPORT, COPY OF THE BANK STATEMENT REFLECTING ENTRIES RELATING TO INVESTMENT IN THE MUTUAL FUNDS AS WELL AS SOURCE OF SUCH INVESTMENTS WERE SUBMITTED. IT WAS SUBMITTED BY THE ASSESSEE THAT AS SURPLUS FUNDS WERE INVESTED IN THE MUTUAL FUNDS, THE ASSESSEE DID NOT INCUR ANY INTEREST EXPENDITURE. IT WAS FURTHER SUBMITTED THAT THE INVESTMENTS WERE MADE OUT OF CASH CREDIT ACCOUNT MAINTAINED BY THE ASSESSEE WITH HDFC BANK LTD., ON WHICH HDFC HAS CHARGED TOTAL INTEREST OF RS. 13,58,758/-ONLY. 27. THE SUBMISSION SO FILED BY THE ASSESSEE WAS HOWEVER, NOT FOUND ACCEPTABLE TO THE ASSESSING OFFICER. AS PER ASSESSING OFFICER, THE ASSESSEE HAS CLAIMED DEDUCTION FOR INTEREST OF RS. 8515.21 LACS PAID ON VARIOUS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 45 BORROWINGS IN THE FORM OF TERM LOANS, DEBENTURES, CASH CREDIT FACILITY ETC AND THE ASSESSEE HAS UTILIZED A PART OF THE BORROWED FUNDS FOR MAKING INVESTMENT IN THE MUTUAL FUNDS UNITS. THEREFORE PROPORTIONATE INTEREST PAID ON BORROWED FUNDS IS REQUIRED TO BE DISALLOWED U/S 14A OF THE ACT. 28. REGARDING OTHER EXPENSES WHICH CAN BE ATTRIBUTED TO THE PURCHASE AND SALES OF THESE MUTUAL FUND UNITS, THE ASSESSING OFFICER OBSERVED THAT THERE ARE TOTAL 19 TRANSACTIONS INVOLVING CRORES OF RUPEES WHICH HAVE BEEN INVESTED IN UNITS OF VARIOUS MUTUAL FUNDS TOTALLING TO RS. 419.50 CRORE AND THE TOP MANAGEMENT OF THE ASSESSEE COMPANY WOULD OBVIOUSLY HAVE DECIDED /APPROVED THESE INVESTMENTS. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT APART FROM SHRI ANIL KAPOOR, MANAGING DIRECTOR, AT LEAST SHRI ABHAY BAIJAL, VICE PRESIDENT- FINANCE MUST HAVE BEEN INVOLVED IN THE DECISION MAKING PROCESS AND AS PER ANNUAL REPORT OF THE ASESSEE COMPANY, REMUNERATION OF RS. 1,05,56,246/- AND RS. 41,55,642/- WERE PAID TO SHRI ANIL KAPOOR AND ABHAY BAIJAL RESPECTIVELY DURING THE YEAR. IT WAS OBSERVED BY THE AO THAT CONSIDERABLE PART OF THEIR TIME AND ENERGY AS WELL AS SOME OF THE TIME AND ENERGY OF OTHER PERSONAL DEALING WITH FINANCIAL/BANKING MATTERS MUST HAVE BEEN SPEND IN CONNECTION WITH EARNING TAX FREE DIVIDEND INCOME. THE REPLY OF THE ASSESSEE THAT THEY DID NOT ENGAGE ANY PERSON SPECIFICALLY FOR THE JOB AND THE EMPLOYEES DEALING WITH BANKING JOB ALSO TAKE CARE OF INVESTMENTS IN THE MUTUAL FUNDS WHICH IS NOT REGULAR BUSINESS OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFICER. 29. THE AO FINALLY OBSERVED THAT HE IS NOT FULLY SATISFIED WITH THE REPLY OF THE ASSESSEE COMPANY AND HELD THAT THERE ARE CERTAIN EXPENSES WHICH HAVE BEEN INCURRED IN RELATION TO EXEMPT INCOME AND THE PROVISIONS OF SECTION 14A ARE CLEARLY APPLICABLE IN THE CASE OF THE ASSESSEE COMPANY. THE AO ACCORDINGLY WORKED OUT THE DISALLOWANCE UNDER RULE 8D(II) AMOUNTING TO RS. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 46 8,64,35,962/- APPLYING 9% INTEREST RATE PAID BY THE ASSESSEE COMPANY ON THE TERM LOAN, TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSEE HAS PAID INTEREST RANGING FROM 5.80% TO 11.50% ON FUNDS BORROWED DURING THE YEAR AND IN PARTICULAR PAID INTEREST @ 9% ON TERM LOAN TAKEN FROM HDFC BANK. THE AO ALSO WORKED OUT THE DISALLOWANCE UNDER RULE 8D (III) ON THE AVERAGE VALUE OF INVESTMENT IN THE MUTUAL FUND UNITS AMOUNTING TO RS. 88,75,000/-. 30. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN BEFORE LD. CIT(A) AND SUBMITTED VIDE ITS SUBMISSION DATED 9.05.2013 THAT THE INVESTMENT IN THE MUTUAL FUNDS WERE MADE OUT OF THE SURPLUS SHORT TERM FUNDS AVAILABLE WITHIN THE BUSINESS DURING THE RELEVANT PERIOD. IT WAS SUBMITTED THAT THERE WERE NO SPECIFIC / DIRECT BORROWINGS FOR THE INVESTMENT. THE COPIES OF BANK STATEMENTS REFLECTING ENTRIES RELATING TO INVESTMENT IN THE MUTUAL FUNDS AS WELL AS SOURCE OF INVESTMENT WERE SUBMITTED. AS NO SURPLUS FUNDS WERE INVESTED IN THE MUTUAL FUNDS, SO NO INTEREST EXPENDITURE WAS INCURRED. THE INVESTMENT IN MUTUAL FUNDS DURING THE WHOLE YEAR IS BASED ON THE AVAILABILITY OF SURPLUS FUND, GENERALLY FOR THE SHORT PERIOD AND IT IS NOT OUR REGULAR BUSINESS. THE INVESTMENTS IN MUTUAL FUNDS ARE MAINLY FROM CASH GENERATED FROM SALE OF FERTILIZER BONDS, SALES COLLECTION, FDR MATURITY, MUTUAL FUND REDEMPTION. THE TABLE SUMMARIZING THE POSITION IS ENCLOSED HEREWITH. THE INVESTMENT IN THE MUTUAL FUNDS HAVE BEEN MADE FOR VERY SHORT TERM PERIODS AND WERE MADE TO EFFECTIVELY UTILIZE THE TEMPORARY SURPLUS CASH AVAILABLE WITH THE ASSESSEE FROM TIME TO TIME. THERE ARE VERY FEW TRANSACTIONS OF INVESTMENT IN THE MUTUAL FUNDS DURING THE WHOLE OF THE ASSESSMENT YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THAT THE INVESTMENT IN MUTUAL FUNDS DURING THE WHOLE YEAR IS BASED ON THE AVAILABILITY OF SURPLUS FUND, GENERALLY FOR THE SHORT PERIOD AND IT WAS NOT THEIR REGULAR BUSINESS. THEREFORE, THE ASSESSEE DOES NOT ENGAGE ANY PERSON SPECIFICALLY FOR THIS JOB. THE EMPLOYEES DEALING WITH BANKING JOB ALSO TAKE CARE OF THE INVESTMENTS IN MUTUAL FUNDS, WHICH IS NOT ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 47 THE REGULAR BUSINESS OF THE COMPANY. ADDITIONALLY, THE EFFORTS PUT TO DO SUCH INVESTMENT IN MUTUAL FUNDS ARE MINISCULE AND VERY LOW AS COMPARED TO THE OTHER BANKING TRANSACTIONS OF THE COMPANY AS A WHOLE. WITHOUT PREJUDICE TO ABOVE, IT WAS SUBMITTED THAT HDFC BANK HAS ONLY CHARGED TOTAL INTEREST OF RS. 13,58,758/- FOR THE ENTIRE YEAR UNDER CONSIDERATION. HOWEVER, THE LD ASSESSING OFFICER CALCULATED NOTIONAL INTEREST BASED ON THE PERIOD OF HOLDING OF THE SECURITY WITHOUT CONSIDERING THE ACTUAL INTEREST PAID DURING THE RELEVANT PERIOD. IT IS INCONCEIVABLE THAT AN INTEREST OF ABOUT RS. 9.53 CRORES HAS BEEN CALCULATED BY THE LD ASSESSING OFFICER WITHOUT ANY BASIS. THIS IS RELEVANT TO MENTION HERE THAT ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 4,39,37,400/- ON THE INVESTMENT IN MUTUAL FUNDS AND CLAIMED THE SAME AS EXEMPT. SUBMISSIONS BEFORE LD CIT(A) DATED 24.05.2013 31. DURING THE CAPTIONED YEAR, THE APPELLANT EARNED DIVIDEND INCOME OF RS 4,39,37,400 FROM UNITS OF VARIOUS MUTUAL FUNDS (MF). THIS DIVIDEND WAS CLAIMED TO BE EXEMPT UNDER SECTION 10(35) OF THE ACT. THE OPENING BALANCE OF MF INVESTMENT WAS RS 300 CRORES. THE APPELLANT MADE TOTAL INVESTMENT OF RS 490.5 CRORES IN MFS AND REDEEMED MFS WORTH RS 735.5 CRORES DURING THE CAPTIONED YEAR. THIS RESULTED IN NET REDEMPTION OF RS 245 CRORES DURING THE CAPTIONED YEAR AND CLOSING BALANCE OF RS 55 CRORES AT THE END OF CAPTIONED YEAR. THE DETAILS OF TRANSACTION OF PURCHASE (INVESTMENT) AND SALE (REDEMPTION) OF MF ALONG WITH CORRESPONDING DIVIDEND INCOME ARE ENCLOSED AS ANNEXURE 2A. FURTHER, COPY OF BANK STATEMENT OF THE APPELLANT FOR THE CAPTIONED YEAR FROM WHICH THESE INVESTMENTS WERE SOURCED IS ENCLOSED AS ANNEXURE 2B. THESE MF DETAILS ALONG WITH COPY OF BANK STATEMENT WERE FILED WITH THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 48 IT IS RELEVANT TO STATE THAT MFS WERE PURCHASED OUT OF SURPLUS FUNDS AVAILABLE WITH THE APPELLANT. IN OTHER WORDS, THE APPELLANT DID NOT TAKE ANY SPECIFIC / DIRECT BORROWINGS FOR ACQUISITION OF MFS. FURTHER, SINCE SURPLUS FUNDS WERE UTILIZED FOR MAKING INVESTMENT IN MFS, NO DISALLOWANCE WAS MADE BY THE APPELLANT FOR THE CAPTIONED YEAR. IT IS FURTHER SUBMITTED BEFORE YOUR GOODSELF THAT THE APPELLANT MADE INVESTMENT IN THE MFS USING CASH CREDIT ACCOUNT WITH HDFC BANK LTD., WHICH CHARGED A TOTAL INTEREST OF RS. 13,58,758/- FOR THE YEAR UNDER CONSIDERATION. THE APPELLANT SUBMITS THAT THE INVESTMENT IN MFS WAS MADE FOR A VERY SHORT PERIOD RANGING FROM A FEW DAYS TO AROUND 3 MONTHS AND WAS MADE OUT OF SHORT TERM SURPLUS CASH AVAILABLE WITH THE APPELLANT FROM TIME TO TIME. WHILE IT IS TRUE THAT THE APPELLANT HAD BOTH SECURED AS UNSECURED LOANS OUTSTANDING BOTH AT THE BEGINNING AS WELL AS AT THE END OF THE CAPTIONED YEAR. HOWEVER, THE APPELLANT HAS 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 MFS, WHICH IS DONE THROUGH INTERNAL ACCRUALS. THE AFORESAID STATEMENT IS SUBSTANTIATED BY EXAMINING THE CASH FLOW STATEMENT OF THE APPELLANT FOR THE CAPTIONED YEAR. THE APPELLANT HAS GIVEN BELOW DETAILS OF CASH GENERATED FROM BORROWINGS AND CASH UTILIZED IN FIXED ASSET ACQUISITIONS DURING THE CAPTIONED YEAR AND AY 2009-10 WHEN MFS WERE PURCHASED BY THE APPELLANT: RS IN CRORES PARTICULARS AY 2010 - 11 AY 2009-10 A. DETAILS OF CASH GENERATED FROM BORROWINGS PROCEEDS FROM LONG TERM BORROWINGS 277.68 626.79 ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 49 REPAYMENT OF LONG TERM BORROWINGS (258.27) (69.66) NET PROCEEDS OF SHORT TERM BORROWINGS 285.12 1.22 TOTAL CASH GENERATED FROM BORROWINGS 304.53 558.35 B. DETAILS OF CASH UTILIZED FOR ACQUIRING FIXED ASSETS PURCHASE OF FIXED ASSETS (311.36) (1040.77) PROCEEDS FROM SALE OF FIXED ASSETS 2.9 0.67 TOTAL CASH UTILIZED FOR ACQUIRING FIXED ASSETS (308.46) (1040.10) IT IS EVIDENT FROM THE ABOVE THAT TOTAL CASH GENERATED FROM BORROWINGS IS LESS THAN TOTAL CASH UTILIZED IN ACQUISITION OF FIXED ASSETS. THUS, APPARENTLY, THE APPELLANT HAD NOT UTILIZED BORROWED FUNDS FOR INVESTMENT IN MFS AND CONSEQUENTLY DID NOT INCUR ANY EXPENDITURE IN THE NATURE OF INTEREST THEREON. ALL THE BORROWINGS (WHETHER SHORT TERM OR LONG TERM) WERE UTILIZED FOR ACQUISITION OF FIXED ASSETS OR FOR GENERAL WORKING CAPITAL REQUIREMENTS AND NOT FOR INVESTMENT IN MFS. HOWEVER, THE LD. AO IN COMPLETE DISREGARD TO THE FACTS OF CASE AND THE APPELLANTS SUBMISSIONS HELD THAT DISALLOWANCE OF RS 9,53,10,962 (8,64,35,962 + 88,75,000) UNDER SECTION 14A OF THE ACT NEEDS TO BE MADE. THE DISALLOWANCE HAS BEEN WORKED OUT UNDER RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) AND IS DETAILED BELOW: DISALLOWANCE OF RS 8,64,35,962: THE LD. AO ERRONEOUSLY CONSIDERED THIS AS EXPENDITURE DIRECTLY RELATED TO EXEMPT DIVIDEND INCOME FROM MF. INTEREST AT THE NOTIONAL RATE OF 9% APPLIED ON AMOUNT INVESTED IN MF FOR THE DURATION OF HOLDING THE MF. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 50 DISALLOWANCE OF RS 88,75,000: THE LD. AO DISALLOWED 0.5% OF AVERAGE OF OPENING AND CLOSING VALUE OF INVESTMENT IN MFS. I.E. 0.5% OF (300+55) CRORES = RS 88,75,000. 2 AT THE OUTSET, IT IS SUBMITTED THAT IT IS CLEARLY EVIDENT THAT NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT IN THE APPELLANTS CASE SINCE NO MONEY WAS SPECIFICALLY BORROWED FOR INVESTING IN MFS AND THUS NO EXPENDITURE BY WAY OF INTEREST WAS INCURRED DURING THE YEAR. THE APPELLANT IN SUPPORT TO ABOVE CONTENTION PLACES RELIANCE ON DECISION IN THE CASE OF CIT VS. HERO CYCLES LTD. (323 ITR 518 - PUNJAB AND HARYANA HIGH COURT), IT WAS HELD THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT BE DONE UNLESS THERE IS EVIDENCE TO SHOW THAT THE INTEREST BEARING FUNDS HAVE BEEN INVESTED IN THE INVESTMENTS WHICH HAVE GENERATED THE TAX EXEMPT DIVIDEND INCOME. THE RELEVANT EXTRACT OF THE JUDGEMENT IS REPRODUCED BELOW: THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 51 SIMILAR VIEW HAS BEEN UPHELD IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (194 TAXMAN 203)- BOMBAY HIGH COURT, WHEREIN IT WAS OBSERVED AS UNDER: XIV) IN ORDER TO DETERMINE THE QUANTUM OF THE DISALLOWANCE, THERE MUST BE A PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. ONCE SUCH A PROXIMATE RELATIONSHIP EXISTS, THE DISALLOWANCE HAS TO BE EFFECTED. ALL EXPENDITURE INCURRED IN THE EARNING OF INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE DISALLOWED SUBJECT TO COMPLIANCE WITH THE TEST ADOPTED BY THE SUPREME COURT IN WALFORT AND IT WOULD NOT BE PERMISSIBLE TO RESTRICT THE PROVISIONS OF SECTION 14A BY AN ARTIFICIAL METHOD OF INTERPRETATION. HOWEVER, WHERE YOUR GOODSELF DO NOT AGREE WITH THE APPELLANTS CONTENTIONS, THE APPELLANT DRAWS YOUR ATTENTION TO YOUR HONOURS ORDER FOR AY 2009-10 WHEREIN DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS BEEN PARTLY ALLOWED IN THE PARAGRAPH 4.92 OF THE ORDER (POST VERIFYING DETAILS, SIMILAR TO THOSE MENTIONED IN PARAGRAPH 2.11 BELOW). COPY OF CIT(A) ORDER IS ATTACHED AS ANNEXURE 2C. THE FOLLOWING TABLE TRACES THE INVESTMENT IN MFS TO VARIOUS SOURCES OF FUNDS: S. NO. MF NAME AMOUNT OF INVESTMENT (IN RS) DATE OF INVESTMENT SOURCE OF FUNDS 1. RELIANCE - MF 50,00,00,000 5 DECEMBER 2008* SALE OF FERTILISER BONDS 50,00,00,000 14 SEPTEMBER 2009 SUBSIDY & MARKET COLLECTION RECEIVED 8,00,00,000 14 DECEMBER 2009 MARKET COLLECTION RECEIVED 45,50,00,000 07 JANUARY 2010 MARKET COLLECTION & ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 52 SUBSIDY RECEIVED 30,00,00,000 22 JANUARY 2010 MARKET COLLECTION & SUBSIDY RECEIVED 9,00,00,000 03 FEBRUARY 2010 MARKET COLLECTION & SUBSIDY RECEIVED BIRLA SUNLIFE MF 12,50,00,000 5 DECEMBER 2008* SALE OF FERTILISER BONDS 37,50,00,000 7 DECEMBER 2008* SALE OF FERTILISER BONDS 22,00,00,000 09 DECEMBER 2009 SUBSIDY & MARKET COLLECTION RECEIVED 20,00,00,000 31 MARCH 2010 SUBSIDY RECEIVED SBI - MF 25,00,00,000 19 MARCH 2009* REDEMPTION OF MF AND COLLECTION ICICI MF 33,50,00,000 10 DECEMBER 2008* COLLECTION FROM SALES AND NCD# 16,50,00,000 29 JANUARY 2009* COLLECTION/FIXED DEPOSIT MATURED/NCDS# FRANKLIN - MF 50,00,00,000 25 FEBRUARY 2009* REDEMPTION OF MF KOTAK MF 25,00,00,000 25 FEBRUARY 2009* REDEMPTION OF MF 25,00,00,000 19 MARCH 2009* REDEMPTION OF MF AND COLLECTION 20,00,00,000 31 MARCH 2010 SUBSIDY RECEIVED FORTIS - MF 25,00,00,000 19 MARCH 2009* REDEMPTION OF MF AND COLLECTION 25,00,00,000 23 APRIL 2009 MF REDEMPTION PROCEEDS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 53 15,00,00,000 11 DECEMBER 2009 MARKET COLLECTION RECEIVED 26,00,00,000 22 JANUARY 2010 MARKET COLLECTION & SUBSIDY RECEIVED JP MF 25,00,00,000 23 APRIL 2009 MF REDEMPTION PROCEEDS 9,00,00,000 28 AUGUST 2009 COLLECTION & SUBSIDY RECEIVED. 22,00,00,000 14 SEPTEMBER 2009 SUBSIDY & MARKET COLLECTION RECEIVED 30,00,00,000 20 NOVEMBER 2009 SUBSIDY & MARKET COLLECTION RECEIVED TATA - MF 25,00,00,000 23 APRIL 2009 MF REDEMPTION PROCEEDS HDFC MF 44,00,00,000 16 JULY 2009 SUBSIDY RECEIVED 15,00,00,000 31 MARCH 2010 SUBSIDY RECEIVED PRINCIPAL - MF 50,00,00,000 29 MAY 2009 MUTUAL FUND REDEMPTION PROCEEDS * INCLUDED IN OPENING MF BALANCE FOR CAPTIONED YEAR #IT IS FURTHER SUBMITTED THAT THE NCDS ISSUED BY THE APPELLANT WERE REPAID ON 9 FEBRUARY 2009 AND THEREFORE, NO BORROWING WAS USED FOR MF INVESTMENTS. IT IS APPARENT FROM THE ABOVE THAT THE INVESTMENT IN MFS WAS MADE EITHER FROM CASH GENERATED FROM BUSINESS OPERATIONS INCLUDING SALE OF FERTILISER BONDS, SUBSIDY & MARKET COLLECTIONS, COLLECTION FROM SALES, REDEMPTION OF MF AND MATURITY OF FIXED DEPOSITS. THUS, NO DISALLOWANCE IS WARRANTED FOR THESE MFS. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 54 BASED ON THE INFORMATION PROVIDED IN PARAGRAPH 2.11 ABOVE AND APPLYING THE DECISION OF YOUR HONOUR FOR AY 2009-10, THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WORKS OUT TO BE NIL AS ALL THE MF INVESTMENTS HAVE THEIR SOURCE IN CASH GENERATED FROM BUSINESS OPERATIONS. IN VIEW OF THE ABOVE SUBMISSIONS, IT IS CLEARLY EVIDENT THAT NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT IN THE APPELLANTS CASE SINCE IT IS APPARENT FROM THE FINANCIAL STATEMENT THAT NO MONEY WAS BORROWED AND THUS NO EXPENDITURE BY WAY OF INTEREST WAS INCURRED DURING THE YEAR. HOWEVER, EVEN WHERE SECTION 14A OF THE ACT IS APPLIED, BASED ON VERIFICATION (AS MENTIONED IN PARAGRAPH 2.12 ABOVE), DISALLOWANCE IS UNWARRANTED. THE LD. AO HAS ALSO TAKEN ALTERNATIVE GROUND OF DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT ON ACCOUNT OF COMMERCIAL EXPEDIENCY IN VIEW OF RATIO LAID DOWN IN SA BUILDERS VS. CIT (288 ITR 1). THE RELIANCE OF THE AFORESAID JUDGMENT TO INVESTMENT IN MF IS UNWARRANTED SINCE THE APPELLANTS BOARD RESOLUTION (ATTACHED AS ANNEXURE 2D) DULY SUPPORTS THE FACT THAT SUCH INVESTMENT WAS MADE FOR TREASURY OPERATIONS. TREASURY OPERATIONS INCLUDE MANAGING SHORT FUNDS SURPLUSES OR DEFICITS OF FUNDS AND IS WELL WITHIN THE APPELLANTS BUSINESS OPERATIONS TO MANAGE SHORT TERM SURPLUSES OR DEFICITS. THE LD. AOS RELIANCE ON DECISION OF SA BUILDERS VS. CIT (288 ITR 1) IS MISCONCEIVED AND UNWARRANTED. THE APPELLANT REQUEST YOUR GOODSELF TO GRANT IT AN OPPORTUNITY OF BEING HEARD IN CASE YOUR GOODSELF PROPOSES TO MAKE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT. 32. THE LD CIT(A) TAKING INTO CONSIDERATION THE ABOVE SUBMISSIONS OF THE ASSESSEE COMPANY HAS GRANTED PARTIAL RELIEF TO THE ASSESSEE COMPANY AND HIS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 55 FINDINGS ARE CONTAINED AT PARA 4.7.2 OF HIS ORDER WHICH ARE REPRODUCED AS UNDER: 4.7.2 ..I HAVE EXAMINED THE DETAILS AND IT WAS FOUND THAT THE INVESTMENT WERE FROM COLLECTION, REDEMPTION OF MUTUAL FUND, SALE OF FERTILIZER BONDS, MATURITY OF FDS & NCDS. OUT OF THESE, EXCEPT NCD ALL OTHER ITEMS RELATE TO INTERNAL SOURCES. ON THESE AMOUNTS, RELATED TO NCDS, THE INTEREST IS HELD TO BE DISALLOWABLE. THE AMOUNT OF DISALLOWANCE IS COMPUTED AS UNDER:- S. NO. DT. OF REDEMPTION DT. OF INVESTMENT AMOUNT NAME OF MF SOURCE NO. OF DAYS AV. RATE OF NCD INT. AMOUNT 1 30/06/2009 23/04/2009 250,000,000 TOTAL MF MF REDEMPTI ON 68 3.55% 16,53,425 27/07/2009 250,000,000 JP MP MF REDEMPTI ON 95 3.55% 7,85,377 23/04/2009 335,000,000 ICICI MP NCD 23 3.55% 7,49,390 2 23/04/2009 29/01/2009 500,000,000 TATA MP NCD 118 3.55% 57,38,356 3 25/02/2009 10/12/2008 300,000,000 SBI NCD 99 3.55% 28,88,630 GRAND TOTAL RS 1,18,15,178 APART FROM THE ABOVE, THE FOLLOWING AMOUNT AS PER RULE 8D HAS TO BE DISALLOWED. ONE-HALF PERCENT OF AVERAGE VALUE OF INVESTMENTS IN MUTUAL FUND UNITS ON 01.04.2009 AND 31.03.2010 I.E. 0.5% OF (300 + 55)/2 CRORE: RS. 88,75,000/- TOTAL RS. 2,06,90,178/- ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 56 THEREFORE, ADDITION OF RS. 2,06,90,178/- IS CONFIRMED. THE BALANCE INTEREST OF RS. 7,46,20,784/- IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS, THEREFORE PARTLY ALLOWED. OUR FINDINGS 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURUSED THE MATERIAL AVAILABLE ON RECORD. REGARDING THE DISALLOWANCE OF INTEREST AND NECESSARY NEXUS OF INVESTMENTS AND INTEREST BEARING BORROWED FUNDS, THE LD CIT(A) HAS RETURNED A FINDING THAT THE INVESTMENT WERE FROM COLLECTIONS, REDEMPTION OF MUTUAL FUND, SALE OF FERTILIZER BONDS, MATURITY OF FDS & NCDS AND OUT OF THESE, EXCEPT NCD ALL OTHER ITEMS RELATE TO INTERNAL SOURCES AND ON THESE AMOUNTS WHICH WERE RELATED TO NCDS, THE INTEREST WAS HELD TO BE DISALLOWABLE. THE SAID FINDINGS OF THE LD CIT(A) REMAIN UNCONTROVERTED BEFORE US EXCEPT FINDINGS RELATING TO SOURCE OF INVESTMENT FROM NCDS AND CERTAIN INCONSISTENCIES WHICH WE HAVE NOTED BELOW. 34. FIRSTLY, WHILE WORKING OUT THE ACTUAL DISALLOWANCE OF INTEREST, THE LD CIT(A) HAS CONSIDERED INVESTMENT IN TATA MF AND JP MUTUAL FUND EVEN THOUGH THE SOURCE OF INVESTMENT HAS BEEN STATED TO BE MF REDEMPTION. THE INTEREST DISALLOWANCE ON SUCH INVESTMENT WORKED OUT AT RS 16,53,425 AND RS 7,85,377 IS HEREBY DELETED. SECONDLY, REGARDING INVESTMENT IN TATA MUTUAL FUND, THERE ARE APPARENT INCONSISTENCIES IN TERMS OF AMOUNT OF INVESTMENT, PERIOD OF INVESTMENT BETWEEN WHAT THE AO HAS STATED IN HIS ORDER AND WHAT HAS BEEN STATED BY THE LD CIT(A). THE AO HAS CONSIDERED INVESTMENT OF RS 25 CRORES FOR THE PERIOD 23.04.2009 TO 30.06.2009 WHILE THE LD CIT(A) HAS CONSIDERED THE INVESTMENT OF RS 50 CRORES FOR THE PERIOD 29.01.2009 TO 23.04.2009. REGARDING SOURCE OF INVESTMENT IN TATA MUTUAL FUNDS, THE ASSESSEE HAS STATED THE SAME TO BE OUT OF MF REDEMPTION PROCEEDS WHILE THE LD CIT(A) HAS CONSIDERED THE SAME TO BE OUT OF NCDS. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 57 THIRDLY, REGARDING INVESTMENT IN SBI MUTUAL FUND, THERE ARE APPARENT INCONSISTENCIES IN TERMS OF AMOUNT OF INVESTMENT, PERIOD OF INVESTMENT BETWEEN WHAT THE AO HAS STATED IN HIS ORDER AND WHAT HAS BEEN STATED BY THE LD CIT(A). THE AO HAS CONSIDERED INVESTMENT OF RS 25 CRORES FOR THE PERIOD 01.04.2009 TO 23.04.2009 WHILE THE LD CIT(A) HAS CONSIDERED THE INVESTMENT OF RS 30 CRORES FOR THE PERIOD 10.12.2008 TO 25.02.2009. REGARDING SOURCE OF INVESTMENT, THE ASSESSEE HAS STATED THE SAME TO BE OUT OF MF REDEMPTION PROCEEDS AND COLLECTIONS WHILE THE LD CIT(A) HAS CONSIDERED THE SAME TO BE OUT OF NCDS. 35. REGARDING SOURCE OF INVESTMENT OUT OF NCDS AS STATED BY THE LD CIT(A), THE LD AR HAS SUBMITTED THAT NCDS ISSUED BY THE ASSESSEE WERE REPAID ON 9.02.2009 AND NO BORROWING WERE USED FOR MAKING SUCH INVESTMENT. IN OUR VIEW, MATTERS RELATING TO INVESTMENT IN TATA MF AND SBI MUTUAL FUND AND THE SOURCE OF SUCH INVESTMENTS REQUIRE FRESH EXAMINATION AND MATTER REQUIRED TO BE SET-ASIDE TO THE FILE OF THE AO. 36. IN LIGHT OF ABOVE DISCUSSIONS, ALL THE DISALLOWANCE MADE UNDER RULE 8D(II) EXCEPT FOR DISALLOWANCE CONFIRMED BY THE LD CIT(A) IN RELATION TO INVESTMENT IN TATA MF AND SBI MUTUAL FUND IS HEREBY DELETED. REGARDING DISALLOWANCE OF INTEREST IN RELATION TO INVESTMENT IN TATA MF AND SBI MUTUAL FUND, THE MATTER IS SET-ASIDE TO THE FILE OF THE AO TO EXAMINE THE SAME A FRESH IN LIGHT OF ABOVE DISCUSSIONS. 37. REGARDING OTHER ADMINISTRATIVE/INDIRECT EXPENSES WHICH CAN BE ATTRIBUTED TO THE PURCHASE AND SALES OF THESE MUTUAL FUND UNITS AND DISALLOWANCE UNDER RULE 8D(III), THE ASSESSING OFFICER OBSERVED THAT THERE ARE TOTAL 19 TRANSACTIONS INVOLVING CRORES OF RUPEES WHICH HAVE BEEN INVESTED IN UNITS OF VARIOUS MUTUAL FUNDS TOTALLING TO RS. 419.50 CRORE AND THE TOP MANAGEMENT OF THE ASSESSEE COMPANY WOULD OBVIOUSLY HAVE DECIDED /APPROVED THESE INVESTMENTS. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT APART FROM SHRI ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 58 ANIL KAPOOR, MANAGING DIRECTOR, AT LEAST SHRI ABHAY BAIJAL, VICE PRESIDENT- FINANCE MUST HAVE BEEN INVOLVED IN THE DECISION MAKING PROCESS AND AS PER ANNUAL REPORT OF THE ASESSEE COMPANY, REMUNERATION OF RS. 1,05,56,246/- AND RS. 41,55,642/- WERE PAID TO SHRI ANIL KAPOOR AND ABHAY BAIJAL RESPECTIVELY DURING THE YEAR. IT WAS OBSERVED BY THE AO THAT CONSIDERABLE PART OF THEIR TIME AND ENERGY AS WELL AS SOME OF THE TIME AND ENERGY OF OTHER PERSONAL DEALING WITH FINANCIAL/BANKING MATTERS MUST HAVE BEEN SPEND IN CONNECTION WITH EARNING TAX FREE DIVIDEND INCOME. THEREAFTER, THE AO HAS APPLIED RULE 8D(III) AND WORKED OUT DISALLOWANCE OF RS 88.75 LACS. DURING THE COURSE OF HEARING, THE LD AR SUBMITTED THAT THE ASSESSEE COMPANY DID NOT ENGAGE ANY PERSON SPECIFICALLY FOR THE JOB AND THE EMPLOYEES DEALING WITH BANKING JOB ALSO TAKE CARE OF INVESTMENTS IN THE MUTUAL FUNDS AND FURTHER, EVEN WHERE THE TOP MANAGEMENT OF THE ASSESSEE COMPANY CAN BE SAID TO HAVE BEEN INVOLVED IN ATLEAST THE DECISION MAKING PROCESS OF MAKING THE SUBJECT INVESTMENTS, THE DISALLOWANCE CANNOT BE DETERMINED AT RS 88,75,000 WHICH WORKS OUT TO APPROX. 60% OF THEIR SALARY EXPENDITURE OF RS 1,47,11,888 OF THESE TWO KEY PERSONNEL OF THE ASSESSEE COMPANY. WE FIND SUBSTANCE IN THE ARGUMENT OF THE LD AR AND ARE OF THE VIEW THAT EVEN THOUGH THE FORMULA FOR WORKING OUT THE DISALLOWANCE HAS BEEN PROVIDED UNDER RULE 8D(III), THE SAME CANNOT BE READ AS DEVOID OF ACTUAL EXPENDITURE INCURRED OR REASONABLY DETERMINED HAVING REGARD TO THE BOOKS OF ACCOUNTS OF THE ASSESSEE COMPANY. THE MATTER IS THUS SET-ASIDE TO THE FILE OF THE AO TO DETERMINE REASONABLE EXPENDITURE WHICH CAN BE SAID TO BE ATTRIBUTED TO SUBJECT INVESTMENTS IN THE MUTUAL FUND UNITS AND WHICH CAN BE DISALLOWED UNDER RULE 8D(III) OF THE ACT. 38. REGARDING GROUND NO. 5 OF THE REVENUES APPEAL AND GROUND NO. 1 OF THE ASSESSEES APPEAL WHEREIN MATTER RELATING TO DISALLOWANCE OF INTEREST ON ACCOUNT OF INVESTMENTS IN SUBSIDIARY COMPANIES HAVE BEEN CHALLENGED BY BOTH THE PARTIES. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 59 39. THE FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS MADE FRESH INVESTMENT OF RS. 6096.29 LACS IN CFCL OVERSEAS LTD. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY WAS ASKED TO EXPLAIN THE COMMERCIAL EXPEDIENCY FOR MAKING THE SAID INVESTMENT. IN RESPONSE, THE ASSESSEE COMPANY SUBMITTED THAT CFCL OVERSEAS LTD. WAS INCORPORATED AS A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY FOR CONSOLIDATION OF ITS ENTIRE SOFTWARE BUSINESS AND THE INVESTMENT HAVE BEEN MADE OUT OF ITS INTERNAL ACCRUALS. IT WAS FURTHER SUBMITTED THAT THE PAYMENT FOR THE INVESTMENT HAS BEEN MADE THROUGH THE COMPANYS CASH CREDIT ACCOUNT. HOWEVER, IT DOES NOT EXACTLY DENOTE THE BORROWINGS AS THE COMPANY DOES NOT MAINTAIN ITS PROFIT FROM OPERATIONS IN A SEPARATE BANK ACCOUNT RATHER PARKS THE SAME INTO ITS CASH CREDIT BANK ACCOUNT TO REDUCE THE INTEREST COST. IT WAS SUBMITTED THAT THE BANK ACCOUNT IS A RUNNING ACCOUNT WHERE PAYMENTS ARE ISSUED AND COLLECTIONS ARE DEPOSITED. 40. THE ASSESSING OFFICER OBSERVED THAT SIMILAR INVESTMENTS IN ITS SUBSIDIARY COMPANIES WERE MADE BY THE ASSESSEE COMPANY DURING THE PERIOD RELEVANT TO AY 2008-09 AND AY 2009-10 AND SINCE NO INCOME WAS EARNED BY THE ASSESSEE ON THESE INVESTMENTS AND THE ASSESSEE FAILED TO PROVE ANY COMMERCIAL EXPEDIENCY FOR MAKING THESE INVESTMENTS, IT WAS HELD THAT ASSESSEE HAD DIVERTED A PART OF ITS BORROWED FUNDS FOR MAKING INVESTMENT IN SUBSIDIARIES AND PROPORTIONATE INTEREST PAID ON BORROWED FUNDS WAS DISALLOWED. THE ASSESSEE COMPANY WAS ACCORDINGLY ASKED TO EXPLAIN WHY SIMILAR DISALLOWANCE BE NOT MADE IN THIS YEAR AS WELL. 41. IN RESPONSE, THE ASSESSEE SUBMITTED THAT AN AMOUNT OF RS. 1262.35/- LACS WAS INVESTED ON 30.07.2009 AND AN AMOUNT OF RS. 4833.95 WAS INVESTED ON 01.12.2009 AND THE BANK STATEMENT OF ITS ACCOUNT MAINTAINED WITH THE STATE BANK OF INDIA (SBI) SHOWING DATE OF INVESTMENT WAS SUBMITTED FOR EXAMINATION OF THE ASSESSING OFFICER. IT WAS SUBMITTED THAT THE SBI HAS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 60 CHARGED TOTAL INTEREST OF RS. 6,13,453/- FOR THE YEAR UNDER CONSIDERATION AND FOR THE PERIOD FROM JULY 2009 TO MARCH 2010, SBI HAS CHARGED INTEREST OF RS. 4,15,218/-. AT THE SAME TIME, IT WAS SUBMITTED THAT THE INVESTMENT MADE DURING THE YEAR HAS BEEN MADE OUT OF THE INTERNAL ACCRUALS I.E. THE PROCEEDS OF MUTUAL FUNDS INVESTMENTS AND SUBSIDY RECEIPTS. 42. THE REPLY OF THE ASSESSEE COMPANY WAS CONSIDERED BUT WAS FOUND NON- ACCEPTABLE BY THE ASSESSING OFFICER. AS PER THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR EARLIER ASSESSMENT YEAR I.E, AY 2009- 10, IT WAS OBSERVED THAT INVESTMENT OF RS. 5,23,94,115/- WAS MADE BY THE ASSESSEE ON 03.04.2008 IN PURCHASE OF SHARES OF M/S CFCL OVERSEAS LTD. OUT OF CASH CREDIT ACCOUNT MAINTAINED BY THE ASSESSEE WITH STATE BANK OF INDIA. SIMILARLY, INVESTMENT OF RS. 1.20 CRORE WAS MADE BY THE ASSESSEE OUT OF THE CASH CREDIT ACCOUNT MAINTAINED WITH STATE BANK OF HYDERABAD ON 19.08.2008 FOR PURCHASE OF SHARES OF M/S CHAMBAL INFRASTRUCTURE VENTURES LTD. THIS YEAR, THE ASSESSEE COMPANY HAS MADE FURTHER INVESTMENT OF RS. 6096.29/- LAC IN PREFERENCE SHARES OF CFCL OVERSEAS LTD. BESIDES EARLIER INVESTMENTS IN SHARES OF CFCL OVERSEAS LTD., CHAMBAL INFRASTRUCTURE VENTURES LTD. AND M/S STEAMSHIP PVT. LTD. IT WAS OBSERVED BY THE AO THAT SINCE THE ASSESSEE HAS CLAIMED DEDUCTION FOR INTEREST PAID ON BORROWED FUNDS, ONUS LIES ON THE ASSESSEE TO PROVE THAT THERE WAS COMMERCIAL EXPEDIENCY FOR MAKING THESE INVESTMENTS (NEW AS WELL AS OLD INVESTMENT). IN SUPPORT, THE AO REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN CASE OF S.A. BUILDERS VS. CIT 288 ITR 1 (SC), THE DECISION IN CASE OF CIT VS. PANIPAT WOOLLEN & GENERAL MILLS CO. LTD. (1976) 103 ITR 66 (SC) AND THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (PUJ.). IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAS FAILED TO PROVE THE COMMERCIAL EXPEDIENCY FOR MAKING INVESTMENTS IN SUBSIDIARY AND GROUP COMPANY. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 61 43. IT WAS ACCORDINGLY HELD BY THE AO THAT THE INVESTMENT OF RS. 6096.29/- LACS IN SHARES OF CFCL OVERSEAS LIMITED HAS BEEN MADE DURING THE YEAR OUT OF CASH CREDIT ACCOUNT MADE WITH SBI AND SIMILARLY, IN THE LAST YEAR, THE INVESTMENT IN SUBSIDIARY COMPANIES WERE MADE OUT OF CASH CREDIT ACCOUNT WITH VARIOUS BANKS. APPLYING THE INTEREST RATE OF 9% PAID BY THE ASSESSEE ON TERM LOAN TAKEN FROM HDFC BANK, THE ASSESSING OFFICER WORKED OUT THE INTEREST PAYABLE ON BORROWED FUND UTILISED FOR MAKING INVESTMENT IN THE SUBSIDIARY AT RS. 21,07,21,984/- @ 9% FOR THE WHOLE YEAR ON OLD INVESTMENTS OF RS 20963.74 LACS AND @ 9% ON FRESH INVESTMENTS OF RS. 6096.29/- LACS FROM THE DATE OF INVESTMENT TO THE LAST DATE OF THE FINANCIAL YEAR. FURTHER, THE AO, APPLYING THE SAME REASONING, WORKED OUT INTEREST @ 9% ON INVESTMENT IN SHARES OF INDO MAROC PHOSPHORE S.A AND ZUARI INVESTMENT LIMITED TOTALLING TO RS. 8,29,75,428/-. THE AO THUS MADE A DISALLOWANCE OF RS 29,36,97,412 U/S 36(1)(III) OF THE ACT. 44. BEFORE THE LD. CIT(A), THE ASSESSEE REITERATED ITS SUBMISSION MADE BEFORE THE ASSESSING OFFICER. IT WAS FURTHER SUBMITTED THAT IN RESPECT OF INVESTMENT IN CFCL LIMITED AMOUNTING TO RS 4833.95 LACS, ON THE DATE OF MAKING THE SAID INVESTMENT, THE BALANCE IN CASH CREDIT ACCOUNT REMAINED POSITIVE EVEN AFTER THE PAYMENT WAS MADE AND HENCE IT CANNOT BE SAID THAT ANY INTEREST EXPENSE WAS INCURRED ON ACCOUNT OF SUCH INVESTMENT. IT WAS FURTHER SUBMITTED THAT ALL INVESTMENTS HAVE BEEN MADE ON THE GROUND OF COMMERCIAL EXPEDIENCY IN THE NORMAL COURSE OF BUSINESS FOR THE FURTHERANCE OF ITS BUSINESS ACTIVITIES IN THE SAME OR OTHER AREAS AND THE INVESTMENT HAVE BEEN MADE OUT OF ITS OWN INTERNAL ACCRUALS. IT WAS SUBMITTED THAT EACH INVESTMENT IN SUBSIDIARIES/ JOINT VENTURES OR ASSOCIATES WAS WITH A STRATEGIC INTENT EITHER TO FORAY IN NEW BUSINESS SUCH AS SOFTWARE SECTOR (COL), POWER SECTOR(CVL) AND FINANCIAL SERVICES SECTOR (ZIL) OR FOR EXPANSION OR STRENGTHENING OF EXISTING BUSINESSES SUCH A FERTILIZERS (IMACID) AND SHIPPING (ISPL). ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 62 45. DRAWING RELIANCE ON THE SUPREME COURT DECISION IN CASE OF S.A. BUILDERS CIT 288 ITR 1 (SC), IT WAS SUBMITTED THAT ASSESSEE HAS PROVIDED DETAILS OF THE INVESTMENT IN VARIOUS SECTORS AS LISTED ABOVE. THE LD AO FAILED TO PROVE AS TO HOW THE ASSESSEE HAS UTILIZED THE INVESTMENT FOR PERSONAL BENEFIT OF DIRECTORS. IT WAS SUBMITTED THAT THE AO HAS FAILED TO PROVE HOW THE TRANSACTION IN THE INSTANT CASE IS MERE SUBTERFUGE OR FUNDS ARE ULTIMATELY USED FOR GIVING LOANS TO RELATIVES OF DIRECTORS OR SHAREHOLDERS OR IN ANY OTHER MANNER WHICH WARRANTS DISALLOWANCE. IT WAS SUBMITTED THAT THE ASSESSEE HAS GIVEN THE DETAIL AND PURPOSE OF INVESTMENT AND IT IS FOR THE AO TO EXAMINE THE FACTS AND PROVE THAT CONDITION STIPULATED FOR CLAIMING DEDUCTION U/S 36(1)(III) ARE NOT SATISFIED. FURTHER, THE ASSESSEE REFERRED TO THE DECISION OF SUPREME COURT IN CASE OF MUNJAL SALES CORPORATION VS. CIT (298 ITR 298) AND SUBMITTED THAT NO DISALLOWANCE CAN BE MADE U/S 36(1)(III) OF THE ACT AS NO PAYMENT WAS MADE TO THE SUBSIDIARIES THROUGH BORROWED FUNDS AND NO EXPENDITURE BY WAY OF INTEREST WAS INCURRED THEREON AND THE INNVESTMENT WERE MADE IN THE SUBSIDIARY COMPANIES SOLELY FOR THE BENEFIT OF BUSINESS OF THE ASSESSEE COMPANY. 46. THE LD. CIT(A) CONSIDERED THE ASSESSEE COMPANYS SUBMISSION AND HAS CONFIRMED THE DISALLOWANCE OF RS. 96.76 LACS AND THE BALANCE ADDITION OF RS. 28,57,21,412/- WAS DELETED. AGAINST THE SAID ACTION OF THE LD CIT(A), BOTH THE PARTIES ARE IN APPEAL BEFORE US. THE ASSESSEE COMPANY IS AGGRIEVED WITH THE SUSTENANCE OF DISALLOWANCE OF RS 96.76 LACS AND THE REVENUE IS AGGRIEVED WITH THE DELETION OF ADDITION OF RS 28.57 CRORES. 47. WE NOW REFER TO THE FINDINGS OF THE LD. CIT(A) WHICH ARE UNDER CHALLENGED BEFORE US WHICH ARE CONTAINED AT PARA 4.62 OF HIS ORDER WHICH ARE REPRODUCED AS UNDER:- 4.62 THE ASSESSEE INVESTED AMOUNTS IN FIVE COMPANIES OUT OF THEM THREE COMPANIES NAMELY CFCL OVERSEAS LTD., INDIA STEAMSHIP PTE. LTD., ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 63 SINGAPUR & INDO MORROCO PHOSPHER S.A. MORROCO (IMACID) WERE FOREIGN COMPANIES. AS PER THE SCHEME OF THE ACT, THE INCOME, INCLUDING DIVIDEND FROM FOREIGN COMPANIES WAS NOT EXEMPT UNDER THE INCOME TAX ACT. THEREFORE, SECTION 14A DOES NOT APPLY IN RELATION TO THESE COMPANIES. THEREFORE, IT IS HELD THAT NO DISALLOWANCE CAN BE MADE IN RELATION TO INVESTMENT MADE IN THESE COMPANIES. REGARDING INVESTMENT IN OTHER TWO COMPANIES, NAMELY CHAMBAL INFRASTRUCTURE VENTURE LTD., ZUARI INVESTMENTS LTD., THE INCOME (DIVIDEND) FROM THESE COMPANIES WAS EXEMPT UNDER THE INCOME TAX ACT AND SECTION 14A WAS APPLICABLE. IN THIS CASE, IT IS PRACTICALLY DIFFICULT TO IDENTIFY THE NEXUS OF FUNDS. SECONDLY, FOR DISALLOWANCE U/S 14A, THERE IS SPECIFIC RULE (RULE 8D) IN THE INCOME TAX RULES, WHICH PROVIDES THE METHOD FOR DETERMING EXPENDITURE IN RELATION TO EXEMPT INCOME. THE ASSESSEE STATED THAT AS NO INCOME WAS RECEIVED FROM THESE COMPANIES, PROVISION OF SECTION 14A READ WITH RULE 8D WERE NOT APPLICABLE. WHEN THE DIVIDEND WAS TAXABLE, IT WAS HELD BY VARIOUS COURTS THAT INTEREST EXPENDITURE WAS ALLOWABLE WHETHER THERE WAS ANY INCOME OR NOT. SIMILARLY WHETHER ASSESSEE EARNS ANY INCOME OR NOT, THE DISALLOWANCE U/S 14A HAS TO BE MADE. THEREFORE, IT IS HELD THAT THE DISALLOWANCE IN THIS CASE ALSO IS TO BE COMPUTED AS PER RULE 8D READ WITH SECTION 14A. THE SAME IS COMPUTED AS UNDER:- I) AMOUNT OF DIRECT EXPENDITURE RS. NIL II) PROPORTIONATE EXPENDITURE RS. 73.65 LAC (8515.21 X 1222.185/141299.5 LAC)* III) HALF PERCENT OF AVERAGE INVESTMENT RS. 6.11 LACS TOTAL RS. 79.76 LACS ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 64 OUR FINDINGS 48. WE HAVE HEARD THE RIVAL THE RIVAL CONTENTIONS AND PURUSED THE MATERIAL AVAILABLE ON RECORD. THE AO HAS MADE THE DISALLOWANCE OF INTEREST INVOKING THE PROVISIONS OF SECTION 36(1)(III) HOLDING THAT THE ASSESSEE HAD UTILISED THE BORROWED FUNDS LYING IN ITS CASH CREDIT ACCOUNT FOR MAKING THE INVESTMENT IN SUBSIDIARY COMPANIES AND HAS FAILED TO PROVE THE COMMERCIAL EXPEDIENCY FOR MAKING THESE INVESTMENTS. THE LD CIT(A) HAS HOWEVER INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT HOLDING THAT NO DISALLOWANCE CAN BE MADE IN RESPECT OF INVESTMENT IN FOREIGN COMPANIES AND IN RESPECT OF INVESTMENTS IN INDIA COMPANIES, DISALLOWANCE UNDER 14A READ WITH RULE 8D HAS BEEN DETERMINED BY HIM. WHAT WE FIND SURPRISING IS THAT THE LD CIT(A) HAS TOTALLY IGNORED THE WHOLE DISCUSSIONS AND FINDINGS OF THE AO WHICH HAVE BEEN RENDERED IN THE CONTEXT OF SECTION 36(1)(III) OF THE ACT AND HAS NOT GIVEN ANY FINDINGS AS TO WHY THE PROVISIONS OF SECTION 36(1)(III) ARE NOT ATTRACTED IN THE INSTANT CASE. THE GROUND OF APPEAL RAISED BY THE ASSESSEE COMPANY BEFORE THE LD CIT(A) WAS IN THE CONTEXT OF DISALLOWANCE MADE BY THE AO INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT AND EVEN THE SUBMISSIONS AND CONTENTIONS SO ADVANCED BY THE ASSESSEE COMPANY, AS WE HAVE NOTED ABOVE, WERE IN THE CONTEXT OF SECTION 36(1)(III) OF THE ACT. IT IS THEREFORE INCUMBENT UPON THE LD CIT(A) THAT HE SHOULD WHILE DISPOSING OFF THE SAID GROUND, EXAMINE WHETHER THE DISALLOWANCE SO MADE BY THE AO INVOKING SECTION 36(1)(III) IS JUSTIFIED OR NOT. ONCE THE LD CIT(A) HAS EXAMINED THE APPLICABILITY OF SECTION 36(1)(III) AND FORMS AN OPINION THAT THE AO HAS WRONGLY INVOKED THE PROVISIONS OF SECTION 36(1)(III) AND HE SHOULD HAVE INVOKED THE PROVISIONS OF SECTION 14A INSTEAD, IN THAT CASE, WE AGREE THAT THE LD CIT(A) WILL BE WITHIN HIS JURISDICTION TO EXAMINE THE MATTER FROM THE PERSPECTIVE OF SECTION 14A GIVEN THAT THE MATTER FORMS PART OF ASSESSMENT ORDER AND THE SAME HAS BEEN EXAMINED BY THE AO THOUGH IN CONTEXT OF SECTION 36(1)(III). THERE ARE INSTANCES WHERE THE AO HAS WRONGLY INVOKED THE RELEVANT PROVISIONS OF THE ACT, IN THOSE CASES, THE ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 65 COURTS HAVE HELD THAT THE LD CIT(A) IS WELL WITHIN HIS JURISDICTION TO EXAMINE THE MATTER FROM THE PERSPECTIVE OF CORRECT PROVISIONS OF LAW. GIVEN THAT THERE IS NO FINDING RECORDED BY THE LD CIT(A) REGARDING SECTION 36(1)(III) OF THE ACT, WE ARE CONSTRAINED TO REMAND THE MATTER BACK TO HIS FILE TO EXAMINE THE MATTER AFRESH AFTER PROVIDING REASONABLE OPPORTUNITY TO THE ASSESSEE. IN THE RESULT, RESPECTIVE GROUNDS OF APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 638//JP/14 49. IN ITA NO. 638/JP/14, THE REVENUE HAS CHALLENGED THE ACTION OF THE LD CIT(A) IN CURTAILING DISALLOWANCE OUT OF INTEREST PAID TO RS. 70,23,000/- (ORIGINALLY CONFIRMED AT RS. 79.76 LAKHS) AS AGAINST THAT OF RS. 29,36,97,412/- MADE BY AO ON BORROWED FUNDS UTILISED IN MAKING INVESTMENT IN SUBSIDIARY COMPANIES. IT WAS CONTENDED BY THE REVENUE THAT FINDING OF LD. CIT(A) THAT THE DISALLOWANCE WAS MADE BY A.O U/S 14A IS NOT CORRECT SINCE THE AO MADE THE DISALLOWANCE U/S 36(1)(III). IT IS NOTED THAT THE IMPUNGED ORDER OF THE LD CIT(A) IS PURSUANT TO RECTIFICATION APPLICATION FILED BY THE ASSESSEE COMPANY ARISING OUT OF THE EARLIER ORDER OF THE LD CIT(A) WHICH IS THE SUBJECT MATTER OF ADJUDICATION IN ITA NO. 306/JP/14 AND 389/JP/14. WHILE DISPOSING OFF GROUND NO. 5 OF THE REVENUES APPEAL AND GROUND NO. 1 OF THE ASSESSEES APPEAL WHEREIN MATTER RELATING TO DISALLOWANCE OF INTEREST ON ACCOUNT OF INVESTMENTS IN SUBSIDIARY COMPANIES HAVE BEEN CHALLENGED BY BOTH THE PARTIES, WE HAVE ALREADY REMANDED THE MATTER BACK TO THE FILE OF LD CIT(A) TO EXAMINE THE MATTER AFRESH. FOLLOWING THE SAME AND APPLYING THE SAME REASONING, THE SUBJECT MATTER IS SET ASIDE TO THE FILE OF THE LD CIT(A) TO EXAMINE THE SAME AFRESH AND THE APPEAL OF THE REVENUE IS THUS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT, THE APPEALS OF THE REVENUE AND THE ASSESSEE ARE DISPOSED OFF WITH ABOVE DIRECTIONS. ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2018. ITA NO. 306, 389 & 638/JP/14 JT. CIT, KOTA VS. M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 66 SD/- SD/- FOT; IKWY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER JAIPUR DATED:- 31 /01/2018 GANESH KR* VKNS'K DH IZFRFYFI VXZSF'KR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- JT.CIT, RANGE-2, KOTA 2. IZR;FKHZ@ THE RESPONDENT- M/S CHAMBAL FERTILISERS & CHEMICALS LTD., KOTA 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDRVIHY@ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 306,389 & 638 /JP/2014) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASSISTANT REGISTRAR.