SAPPHIRE LAND DEVELOPMENT P. LTD., MUMBAI V. DY CIT -CC-5(4), MUMBAI

ITA 340/MUM/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5386 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: H
• Assessment Year: 2010-2011
• Appeal Filed On: 21-03-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHARAM VEER SING H
• Keywords: Capital asset; Business income; Transactions in derivatives; Earning of tax free income; Source of fund; Cost of acquisition; Speculation loss; Revenue expenditure; Rule 8D; Set aside; Liquidation; Capital Gains
• Section: 147; 142(1); 14A; 115JB; 43(5); 251; 143(2); 139(1); 43; 73(1); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 340/Mum/2021 (A.Y. 2010-11) M/s Sapphire Land Development Pvt. Ltd. Room No. 5, 3 rd Floor, Capri, Anant Kanekar Marg, Bandra (E), Mumbai-400051 PAN: AAACS7785H ...... Appellant Vs. DCIT, CC-5(4), Room No. 1927, 19 th Floor, Air India Building, Nariman Point, Mumbai-400021. ..... Respondent ITA No. 7279/Mum/2019 (A.Y. 2010-11) DCIT, CC-5(4), Room No. 1927, 19 th Floor, Air India Building, Nariman Point, Mumbai-400021. ..... Appellant Vs. M/s Sapphire Land Development Pvt. Ltd. Room No. 5, 3 rd Floor, Capri, Anant Kanekar Marg, Bandra (E), Mumbai-400051 PAN: AAACS7785H ...... Respondent Appellant/Assessee by : None 2 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) Respondent/Revenue by : Sh. Dharam Veer Singh, CIT-DR Date of hearing : 04/05/2022 Date of pronouncement : 20/07/2022 ORDER PER GAGAN GOYAL, A.M: These cross appeals by Assessee and Revenue are directed against the common order of Ld. Commissioner of Income Tax (Appeals)-53, Mumbai [hereinafter referred to as ‘the CIT (A)’] dated 03.09.2019 for the Assessment Year (AY) 2010-11. The assessee has raised the following grounds of appeal: “Following grounds of appeal are without prejudice to each other: 1) The Learned CIT (A) has erred in law & on facts in partiality upholding the Ld. AO's action of disallowance u/s 14A to the tune of Rs.62,07,459/-. 2) The Learned CTT (A) has further erred in this connection in law & on facts in directing the learned assessing officer to exclude interest on any loan that is for specific purpose and only consider Interest on such loans that are general purpose for computing the disallowance while calculating disallowance u/s 14A. 3) The Learned CIT (A) has erred in law & on facts in directing the learned assessing officer to re-verify claim of long-term capital loss of Rs.7,82,60,511/- which otherwise accepted by him. 4) The Learned CIT (A) has erred in law & on facts in enhancing the income in case of Appellant Company by treating loss on sale of derivatives to the tune of Rs.9, 77, 79,340/- as speculative loss (with its consequential limitation to be carried forward periods and adjustments) and not a business loss as declared by the Appellant Company and accepted by the assessing officer. 5) The Learned CIT (A) has erred in law & on facts in enhancing the income in case of Appellant Company by disallowing treatment of reduction of debenture redemption reserve to the tune of Rs.18,40,00,000/- while computing book profit under section 115JB of the I.T Act, 1961. 3 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) 6) The Appellant craves leave to add to and/ or amend and/ or delete and/ or modify and/ or alter the aforesaid grounds of appeal as and when the occasion demands. 7) All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.” 2. Brief facts of the case are that the assessee-company filed its return of income u/s 139(1) on 15-10-2010 declaring total income at Rs. Nil under the normal provisions of the Income Tax Act, 1963( hereinafter referred to ‘the Act’) claiming current year loss of Rs. 48,71,09,547/- and book profit at Rs. 47,47,609/-. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and duly served on the assessee. 3. Assessee is engaged in the business of builder and property developer. The Assessing Officer (AO) assessed the income of assessee at Rs. 37,81,71,479/- against the returned income of Rs. 48,71,09,547/- and accepted book profit as it is as declared by the Assessee at Rs. 47,47,609/-. 4. Against the assessment order, assessee grievance preferred an appeal before the Ld. CIT (A)-53, Mumbai. 5. Ground No. 1 pertains to disallowance under section 14A of the Act to the tune of Rs. 2, 68, 68,693/- made by AO. This amount of disallowance was further reduced to Rs. 62, 07,459/- (Rs. 60, 35,871/- + Rs. 1, 71,588/-) by the Ld. CIT (A). AO has applied section 14A read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’). 4 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) 6. While deciding the issue of disallowance under section 14A, the Ld. CIT (A) observed the facts of the case with reference to the order of AO and submissions made by the assessee as under: “Assessee has earned dividend income of Rs.60, 39,871/ which was claimed as exempt. The assessee had not made any suo motu disallowance u/s 14A. The AO invoked section 14A read with Rule #D. The disallowance of Rs.2, 68, 68,693/- was computed as per Rule 8D, the computation of which has been given in para 4.11 of the assessment order. This comprises of expenditure of Rs.6, 57,738/- as direct expenses as per Rule 8D (2)(1). Rs.2.07,73,366/- out of interest expenses as per Rule 8D(2)( and Rs.54,37,789/- as 0.5% of investment of Rs. 108,75,57,795/- as per Rule 8D(2)(iii). 4.2. In the appellate proceedings, it was submitted that during the year, had incurred total administrative expenses of Rs. 11, 17, 78,569/-. None of the expenses were incurred towards earning exempt income of Rs.60, 35,871/-. The assessee had incurred / paid finance expenses of Rs. 16, 70, 74,363/-. Such interest is paid /credited on unsecured loan obtained by the appellant company during the previous year and the same is not to purchase shares during the year under consideration on overdraft facility from Punjab & Maharashtra Coop. Bank Ltd. and the same is utilized towards payment of creditors, payment of expenses, payment of advance for land. Hence, the assessee company had not incurred / paid any direct or indirect expenditure towards earning the exempt income and therefore section 14A r.w.r. 8D cannot be invoked. 4.3. Further, it was submitted that the assessee company had incurred demat charges of Rs.6,57,738/- duly debited / claimed against long term capital gain and short term capital loss and it was not debited to profit & loss account. Therefore, on without prejudice basis, disallowance u/s.14A can be restricted to the extent of Rs.6, 57,738/-. It was contended that there was no objective satisfaction recorded that the assessee has incurred expenditure to earn tax free income. It was further contended that no amount of interest expenditure should have been taken into account for computing the disallowance as per Rule 8D. It was submitted that the assessee company had incurred interest expenditure to the tune of Rs. 16, 70, 74,363/-. The interest was on unsecured loans obtained by the appellant company during the previous year which was not utilized to purchase shares during the year under consideration. The overdraft facility from Punjab & Maharashtra Coop. Bank Ltd. was utilized towards payments of 5 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) creditors, payment of expenses, and payment of advance for land. There was an increase in investments during the year to the tune of Rs. 191, 37, 89,290/-. The amounts of Rs.189, 20, 00,000/- was computed during the previous year. Only Rs.2, 17, 89,290/- was paid in the current year. There were sufficient free funds available with the assessee company and, therefore, no disallowance could be made u/s.14A. It was further contended that the disallowance as per Rule 8D read with section 14A cannot exceed the exempt income. It was further contended that the disallowance cannot exceed the total expenditure. The total expenditure during the year as administrative expenses was Rs. 11, 17, 78,569/- Lastly, it was contended that Rule 8D cannot be invoked when majority of investments are in subsidiary / group companies. 4.4. In the appellate proceedings, the appellant was asked to furnish details of source of fresh investment in shares duly supported with ledger a/c of parties, bank statements, etc. The details of increase in investment during the year are tabulated as follows: Particulars of investment Purchased / invested during the year Sold during the year Net increase in investment Quoted Shares Rs. 124,78,74,295 Rs. 124,78,74,295 Unquoted shares Rs. 16,24,00,010 Rs.2,51,50,000 Rs. 13,72,50,010 Investment in debentures Rs. 189,20,00,000 Rs. 189,20,00,000 Investment in capital account with firms Rs.14,49,09834 Rs. 14,11,60,544 Total Rs. 313,59,63,761 The appellant submitted that the investment in Kiran Promoters & Developers to the tune of Rs.1, 28, 31,974/- and debentures of Rs. 189, 20, 00,000/- should be excluded since the interest income is offered for taxation under the head Income from Other Sources. Similarly, the investment in Housing Development & Infrastructure Ltd. to the tune of Rs. 122,02,45,986/- should be excluded since the sale of shares of this company was offered for taxation under the head Short Term Capital Gains in AY 2011-12. 6 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) 4.5. I have considered the submissions carefully. The primary important facts noted are the following. The appellant has claimed dividends of Rs. 60,35,871/- as exempt as seen from the computation of income filed in respect of the return of income filed by the appellant. There is share of profit from partnership firm of Rs.171588/-. The appellant did not compute any disallowance u/s 14A in the computation of income. There is a large increase in investments during the year having gone up from Rs 47.19 crores to Rs 360.79 crores during the year. The finance cost was Nil in preceding year but is Rs 16.70 crores in current year. The administrative expenses have gone up from Rs 1.14 crores last year to Rs 11.33 crores in the current year. The details of dividend income claimed as exempt were tabulated as follows: Name of the company Amount (Rs.) DHFL 48,81,063 Ruchi Soya Industries 1,18,000 India Bulls Securities 6,00,000 Amtek Auto Limited 29,000 Others 4,07,808 Total 60,35,871 4.6. The appellant has submitted that the assessing officer has not recorded has satisfaction that expenditure is incurred for earning of exempt income. I find that the assessing officer has clearly expressed his dissatisfaction with the claim of the appellant that no expenses are attributable to earning of exempt income in para 4.2 and 4.3 of the assessment order. The fact that there are direct expenses such as demat charges, increase in investments financed by borrowings clearly show that the claim of the appellant of no expenses attributable to exempt income is untenable. Hence this contention of the appellant is rejected. The action of the assessing officer to invoke Rule 8D is upheld.” “4.9. The next issue to consider is the disallowance of interest expenses. The fact is that there are fresh investments during the year at the same time borrowings have also gone up. Despite seeking specific details of the source of investments during the year, the appellant has not been able to show that no borrowed funds are used for investments. Further the borrowings from Punjab and Maharshtra Co-op Bank Ltd. is not earmarked from which any specific purpose can be shown. 7 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) However, the assessing officer is directed to exclude interest on any loan that is for specific purpose and only consider interest on such loans that are general purpose for computing the disallowance. Further, the assessing officer has already excluded increase in investments such as debentures and as such Rule 8D (2)(i) has been correctly applied, subject to what has been directed above. 4.10. The computation as per Rule 8D (2)(iii) at Rs 54,37,789 is upheld as the administrative expenses claimed are Rs 11.33 crores and the disallowance as per Rule 8D(2)(iii) at Rs 54,37,789 is reasonable. 4.11. The alternative argument that the disallowance cannot exceed the exempt income has support of judicial decisions. The same is accepted. Hence the disallowance u/s 14A is restricted to Rs 60, 35,871 plus Rs. 171588/- i.e. Rs. 62, 07,459/-. Ground of appeal no 2 is partly allowed.” 7. For sake of clarity, section 14A and Rule 8D is reproduced here-in-below as under: “[Expenditure incurred in relation to income not includible in total income. 14A. [(1)][Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] [Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to 8 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.] “Method for determining amount of expenditure in relation to income not includible in total income.” “8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). 51. Substituted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016. Prior to its substitution, sub-rule (2) read as under: "(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— A × B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; 9 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;” 8. Section 14A read with Rule 8D clearly mandates that if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under this Act or where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act, in that situation Rule 8D will come into picture as mentioned (supra) and a formula for calculation of disallowance has been prescribed. 9. However, the total disallowance calculated under section 14A read with Rule 8D is restricted to the extent of exempt income earned by the assessee. 10. Considering the facts of the case, order of the AO and findings of the Ld. CIT (A), we are of the considered view that assessee is liable for disallowance of Rs. 62, 07,459/- as determined by the Ld. CIT (A), we are not inclined to disturb the order of Ld. CIT(A). Hence, this ground of appeal of the assessee is dismissed. 11. Ground No.2 is with reference to the direction of Ld. CIT (A) to the AO to exclude interest on any loan that is for specific purpose and only consider interest on such loans that are for general purpose for computing the disallowance while calculating disallowance under section 14A. 12. We have considered assessee’s ground of appeal mentioned (supra) and found that assessee’s interest cost had been increased from Rs. Nil to Rs. 16.70 Cr. in current year and fresh investments as well as fresh borrowings have also 10 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) gone up. Despite of a specific query seeking details of the source of the investments during the year, the appellant has not been able to demonstrate that no interest bearing borrowed funds were used for investments, hence, we are not inclined to disturb the factual finding given by Ld. CIT(A). In the result, this ground of appeal of assessee is dismissed. 13. Ground No.3 pertains to the direction of Ld. CIT(A) to AO to re-verify claim of Long Term Capital Loss of Rs. 7,82,60,511/-, which otherwise accepted by him. To understand the nuances of this issue, we are reproducing here-in-below the provisions of section 251 of the I.T. Act. “Powers of the Commissioner (Appeals). 251. (1) In disposing of an appeal, the Commissioner (Appeals)] shall have the following powers— (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; [(aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment;] (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c) in any other case, he may pass such orders in the appeal as he thinks fit. (2) The (Commissioner (Appeals)] shall not enhance an assessment or a penalty or reduce the amount of refund unless the appellant has had a reasonable opportunity of showing cause against such enhancement or reduction. 11 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) Explanation.—In disposing of an appeal, the Commissioner (Appeals)] may consider and decide any matter arising out of the proceedings in which the order appealed against was passed, notwithstanding that such matter was not raised before the Commissioner (Appeals)] by the appellant.” 14. It is an established position of law about the powers of the Ld. CIT (A) as discussed (supra), based on above, Ld. CIT (A) can confirm, reduce, enhance or annul the assessment, but he cannot remand the matter back to the file of AO. Direction of Ld. CIT(A) in directing the AO to re-verify claim of Long Term Capital Loss of Rs. 7,82,60,511/- will tantamount to remand of matter back to the file of AO which is not permissible in the eyes of law. If required and Ld. CIT(A) deemed it fit to confirm, reduce, enhance or annul the assessment, he may ask for a report from the AO to act. Hence, this action of Ld. CIT (A) is bad-in-law and not sustainable. Hence, this ground of appeal raised by assessee is allowed. 15. Ground No.4 pertains to enhancement of income by treating loss on sale of derivatives to the tune of Rs. 9,77,79,340/- as speculative loss (with its consequential limitation to be carried forward periods and adjustments) and not a business loss as declared by the assessee and accepted by the AO. For ready reference, we are reproducing here-in-below the provisions of section 43(5) as under: “(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip’s: Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or 12 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] [(d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or]] [(e) an eligible transaction in respect of trading in commodity derivatives carried out in a [recognised stock exchange] [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be a speculative transaction: [Provided further that for the purposes of clause (e) of the first proviso, in respect of trading in agricultural commodity derivatives, the requirement of chargeability of commodity transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013) shall not apply.] [Explanation 1].—For the purposes of [clause (d)], the expressions— (i) "eligible transaction" means any transaction,— (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose.] [Explanation 2.—For the purposes of clause (e), the expressions— (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction,— (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the [recognised stock exchange] for trading in commodity derivative in accordance with the 13 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a [recognised stock exchange]; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; [(iii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 1 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;]” “INCOME TAX : By virtue of insertion of clause (d) to proviso to section43(5), transactions in respect of trading in derivatives as prescribed in clause (d) inserted in proviso to section43(5) would not be a speculative transaction INCOME TAX : Section 73(1) as well as Explanation inserted by Taxation Laws (Amendment) Act, 1975 with effect from 1-4-1977 would not apply to loss having arisen in trading in derivatives being not speculative transaction which is excluded from definition of "speculation transaction" described under section43(5)■■ [2022] 138 taxmann.com 187 (Bombay) Souvenir Developers (I) (P.) Ltd. v. Union of India Section43(5), read with sections28(i) and 73, of the Income-tax Act, 1961 - Speculative transactions (Derivative transactions) - Assessment year 2009-10 - Whether by virtue of insertion of clause (d) to proviso to section43(5), transactions in respect of trading in derivatives as prescribed in clause (d) inserted in proviso to section43(5) would not be a speculative transaction - Held, yes [Paras 43 and 44] [In favour of assessee] Section73, read with section43(5), of the Income-tax Act, 1961 - Losses - In speculative business (Derivative transactions) - Assessment year 2009-10 - Whether section 73(1) as well as Explanation inserted by Taxation Laws (Amendment) Act, 1975 with effect from 1-4-1977 would not apply to loss having arisen in trading in derivatives being not speculative transaction which is excluded from definition of "speculation transaction" described under section43(5) - Held, yes - Whether thus, assessee was entitled to claim set-off of loss suffered by it in derivatives transactions against business income - Held, yes [Paras 36, 43 & 44] [In favour of assessee] Circulars & Notifications: Notification No. SO 932(t), dated 1-7-2005 16. In view of the provisions of section 43(5) and decision of jurisdictional High Court discussed (supra), we are of the view that enhancement done by Ld. CIT (A) 14 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) on account of loss on sale of derivatives to the tune of Rs. 9,77,79,340/- is not sustainable, hence deleted. In the result, this ground of appeal of assessee is allowed. 17. Ground No.5 pertains to enhancement made by Ld. CIT(A) by disallowing treatment of reduction of debenture redemption reserve to the tune of Rs. 18,40,00,000/- while computing book profit under section 115JB of the Act. 18. Debenture is a loan liability, i.e., borrowed capital of the entity raising funds through the issue of debentures. The said liability is classified as a secured loan in the balance-sheet prepared under Part I of Schedule VI to the Companies Act, 1956 [Companies Act]. The interest accrued on the same would be a revenue expenditure of the enterprises, whether the said capital is utilized as working capital or for acquisition of any fixed asset, or for even discharge of any loan or liability undertaken earlier inasmuch as there is thereby a substitution of the source of financing of the business purpose for which the said liability was assumed therewith. The said interest would stand to be debited to the profit and loss account or the operating statement of the enterprises for the relevant period, as well as deductible under section 36(1)(iii) in the computation of the income for the relevant assessment year under section 28. The only exception would be where the capital asset being acquired thereby is under construction or otherwise in the process of being initialized, so that it is not put to use. The interest, under such circumstances, would stand to be capitalized as a part of the cost of acquisition of the relevant asset in the assessee's accounts. It would also, likewise, form part of the actual cost of the said asset in terms of section 43 read with Explanation 8 thereto, and not allowable under section 36(1)(iii) in the 15 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) computation of business income. The accounting treatment of both the loan liability as well as of the interest thereon, i.e., as prescribed by the applicable accounting standards as well as the principles of commercial accounting, is in complete harmony and agreement with the corresponding provisions of the Act. 19. As the debenture funds form part of the capital structure of the enterprise, the relevant provisions of the Companies Act provide that its profits are to that extent, and over the period of its currency, set aside for the purpose. This ensures, simultaneously, two things. Firstly, that the debentures are redeemed out of the profits of the enterprise and, two, that the profits are capitalized to that extent. This is also a measure of prudence, which is a fundamental accounting assumption, so that even if not mandated by the provisions of the Companies Act, is so by the accounting norms. The Companies (Acceptance of Deposit) Rules, 1975, as prescribed under section 58A of the Companies Act, also provide, similarly, for a set aside, over a period of time, i.e., the tenure of the public deposits, of the profits of the depositee-company, investing a part thereof in liquid government securities each year. This ensures that the terms of the redemption are met in a timely manner (out of the fund so created), and there are no defaults by the depositee- companies, as where the company invests its profits on expansion or in business or otherwise dissipates them, as by way of dividends, so that the liquid funds are not available for discharge of the loan liability at the relevant time, i.e., the time of redemption, but at hand through the sale/realization of the liquid securities. This can also be considered as a measure to protect investor's confidence as well as to promote investment climate and corporate discipline. The set aside of profits is, therefore, only a sinking fund to fund (meet) a capital liability (out of the profits). 16 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) 20. The set aside of profits, though for meeting a liability, is of one on capital account so that neither the assumption thereof (the liability) nor its liquidation (discharge) would impact the operating statement of the enterprises, i.e., the company's profit and loss account prepared /to be prepared under Parts II and III of Schedule VI to the Companies Act. The adjustments to the book profit undersection115JB are again also consistent with the preparation of the profit and loss account under the Companies Act. The set side of the profits is not to meet a trading liability or a liability on revenue account, so as to form part of or get incorporated therein, i.e., the profit and loss account. In fact, no set aside for meeting a trading liability would be required in actual practice. As such a liability would itself be charged to the operating statement, reducing the profit to that extent. That is, even if not actually discharged out of the profits, as where the same stand locked up in an asset/s, the profits have been deemed to have been absorbed to that extent, so as to become the source of its discharge. 21. Therefore, the revenue is not incorrect in stating that the said set aside of the profits is only an appropriation of profits, and would not amount to a provision, so as to qualify for deduction in the computation of the profit of the assessee-company. The issue, in fact, is not if it is a 'provision' against an ascertained liability or a 'reserve' per se, but whether it could be considered as deductible in computing the profit of the enterprise. On the contrary, as afore stated, the said accounting treatment, i.e., the set aside of profit, ensures capitalization of the profits, so that the debenture funds forming part of the capital structure, the same (capital) is no depleted on the redemption of the liability representing the said source of funds. In short, the liability, for the discharge of which the profits are being set aside, is in the capital field, so that 17 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) neither the liability (on its assumption) nor the profit set aside (for its discharge) could be considered as a charge against the profits. This is precisely the reason that the same is not either claimed or allowed as deduction in the computation of income under the regular provisions of the Act. 22. Accordingly, the adjustment made by the assessee in the computation of book profit undersection115JB gets validated. 23. Further reliance is placed on the judgement of Hon’ble Apex Court in the case of National Rayon Corporation Limited vs. CIR, [1997] 227 ITR 764 (SC) and SREI Infrastructure Finance Ltd. Vs. ACIT (2015) taxmann.com 254 (Del.) 24. Keeping in view the above discussion and analysis of connotations provided in the Companies Act and case laws mentioned (supra), we are not in agreement with the decision of Ld. CIT(A), hence, enhancement done by him is deleted. In the result, ground of appeal raised by the assessee is allowed. 25. In the result, appeal filed by the assessee is partly allowed. ITA No. 7279/Mum/2019 for AY 2010-11 by Revenue 26. The Revenue has raised the following grounds of appeal: (1) "On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in reducing the addition u/s 14A of the Income Tax Act, 1961 from Rs. 2, 68, 68,693 to Rs. 62, 07,459 ignoring that the provisions of Section 14A which apply even if no exempt income has actually been earned or received during the year in any form whatsoever." (2) "On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in reducing the addition u/s 14A of the Income Tax Act, 1961 from Rs. 2,68,68,693 to Rs. 62,07,459 by ignoring the provisions of CBDT Circular no. 5/2014 dated 11.02.2014 wherein, it has been clarified that the Rule 8D r.w.s.14A provides for disallowance of expenditure even where the assessee in particular has not earned exempt income" 18 ITA Nos. 340/Mum/2021 & 7279/Mum/2019 (AY- 2010-11) The appellant prays that the order of Commissioner of Income-tax (Appeal) on the above ground be set aside and that of the Assessing Officer be restored. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.” 27. Both the grounds of appeal raised by Revenue has already been elaborately discussed in assessee’s appeal (supra) in para 10 & 12 wherein grounds raised by assessee has been adjudicated, hence no separate adjudication is required here. In the result, keeping in view the findings of para-10 & 12 of assessee’s appeal, grounds raised by Revenue are dismissed. 28. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 20 th day of July, 2022. Sd/- Sd/- (ABY T VARKEY) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, िदनांक/Dated: 20/07/2022 SK, Sr.PS Copy of the Order forwarded to: 1. अपीलाथŎ/The Appellant , 2. Ůितवादी/ The Respondent. 3. आयकर आयुƅ(अ)/ The CIT(A)- 4. आयकर आयुƅ CIT 5. िवभागीय Ůितिनिध, आय.अपी.अिध., मुबंई/DR, ITAT, Mumbai 6. गाडŊ फाइल/Guard file. BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai