Appeal details
Counselvise Citation
[2016] 133 COUNSELVISE.COM (IT) 3608 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 8 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-03-2016
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
E
Next Hearing Date
27-07-2015
Assessment Year
2008-2009
Appeal Filed On
11-06-2012
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI . . , , BEFORE SHRI C.N. PRASAD , JM AND SHRI RAJESH KUMAR, AM ./ I.T.A. NO .6751/MUM/2011 ( / ASSESSMENT YEAR S : 2007 - 08 ) DY. COMMISSIONER OF INCOME TAX RANGE 8(1), ROOM NO. 210, A A YAKAR BHAVAN, M.K.ROAD, MUMBAI - 400020 / VS. M/S ENERCON INDIA LIMITED, ENERCON TOWER, A - 9, VEERA INDUSTRIAL EST ATE, VEERA DESAI ROAD, ANDHERI (W), MUMBAI - 400053 ( / APPELLANT) : ( / RESPONDENT ) ./ I.T.A. NO . 4089 /MUM/201 2 ( / ASSESSMENT YEAR S : 200 8 - 09 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE 8(1), ROOM NO. 260A 2 N D FLOOR, A A YAKAR BHAVAN, M.K.ROAD, MUMBAI - 400020 / VS. M/S EN E RCON INDIA LIMITED, ENERCON TOWER, A - 9, VEERA INDUSTRIAL ESTATE, VEERA DESAI ROAD, ANDHERI (W), MUMBAI - 400053 ./ ./ PAN : AAACE0319D ( / APPELLANT) : ( / RESPONDENT ) / APPELLANT BY : SHRI MANJUNATHA SWAMY /RESPONDENT BY : SHRI J P BAIRAGRA / DATE OF HEARING : 0 3 .02.2016 / DATE OF PRONOUNCEMENT : 8.3 .2016 2 6751/MUM/2011 AND NO.4089/MUM/2012 / O R D E R PER RAJESH KUMAR, A. M: T HESE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST THE SEPARATE ORDERS PASSED BY LEARNED CIT(A) IN THEIR RESPECTIVE HANDS . BOTH THE SE APPEAL ARE RELATED TO THE ASSESSMENT YEAR 2007 - 08 AND 2008 - 09 . SINCE SOME OF THE ISSUES URGED IN THESE APPEALS ARE IDENTICAL IN NATURE, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE SHALL TAKE UP THE APPEAL BEARING ITA NO.4089/MUM/2012 . '1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO INTERPRET THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT,1961 AND RULE 80 IN ITS RIGHT PERSPECTIVE AND TRUE MEANING. ' 2 .'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE ADDITION/ADJUSTMENT OF THE DISALLOWANCE U/S. 14A OF THE ACT WHILE COMPUTING THE BOOK PROFITS U/S. 115JB OF THE ACT TO RS.13514428/ - AS AGAINST RS. 11,24,17,511/ - ADDED BY AO. 3. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE L D.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.2,42,24,011/ - U/S. 36(1)(III) ON ACCOUNT OF PROPORTIONATE INTEREST EXPENDITURE PERTAINING TO INTEREST FREE LOANS & ADVANCES GIVEN BY THE ASSESSEE COMPANY TO ITS SUBSIDIARIES OUT OF INTEREST BEARING FUNDS W ITHOUT APPRECIATING THAT THE ASSESSEE HAD NOT PROVED THE COMMERCIAL EXPEDIENCY FOR DOING SO'. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF CONTINGENT LIABILITY OF RS.279246564/ - MADE BY THE AO - U/S 43( 5) (D) OF THE ACT IN SPECT OF MARKED TO MARKET (MTM) LOSS AND INSTEAD HOLDING THAT THE SAID LOSS IS ALLOWABLE AS COVERED U/S 43(5)(A) OF THE ACT 3 6751/MUM/2011 AND NO.4089/MUM/2012 2. 1 THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.9.2009 DECLARING A LOSS OF RS.57,25,03,911/ - UNDER THE NORMAL PROVISIONS OF THE ACT AND BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT, 1961 AT RS.49,25,53,548/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142 (1) WERE ISSUED T O THE ASSESSEE AND SERVED UPON IT. 2. 2 THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS , NOTICED THAT THE ASSESSEE HAD EARNED CERTAIN EXEMPT INCOME NOT FORMING PART OF THE TOTAL INCOME OF THE ASSESSEE AND FAILED TO DISALLOW EXPENSES ATTRIBUTABLE TO TH E EARNING OF EXEMPT INCOME AS COVERED BY THE PROVISION OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (THE RULES) . SIMILARLY, THE AO FOUND THAT THE ASSESSEE HAD RAISED MONEY FROM SECURED AND UNSECURED LOANS AND FAILED TO ADD BA CK THE INTEREST ATTRIBUTABLE TO THE MONEY WHICH WAS ADVANCED TO THE OTHER ENTITIES WITHOUT CHARGING ANY INTEREST F ROM THEM . SIMILARLY, THE AO FOUND THAT DURING THE YEAR THE ASSESSEE HAD WRITTEN OFF MARKED TO MARKET (MTM) LOSS AMOUNTING TO RS.27,92,46, 546/ - WHICH WERE CONTINGENT AND NOTIONAL IN NATURE AND WERE NOT ADMISSIBLE. ACCORDINGLY, THE AO, FRAMED THE ASSESSMENT U/S 143(3) OF THE ACT VIDE ORDER DATED 16.9.2011 AT RS.15,66,15,825/ - UNDER THE NORMAL PROVISIONS OF THE ACT AND AT RS.88,42,17,620/ - U NDER THE PROVISIONS OF SECTION 115JB OF THE ACT. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A), WHO IN TURN ALLOWED THE APPEAL ON VARIOUS GROUNDS RAISED BY THE ASSESSEE. THE LD. CIT(A) HELD THAT THE PROVISIONS OF SECTI ON 14A READ WITH RULE 8D WERE APPLICABLE TO THE ASSESSEE AS DECIDED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE GODREJ & BOYCE MANUFACTURING CO. LTD. 328 ITR 81 . HOWEVER, THE LD. CIT(A) DIFFERED WITH THE AO ON THE ISSUE OF DISALLOWANCE OF INTER EST UNDER RULE 8D(1)(II) THAT THE INTEREST COULD NOT 4 6751/MUM/2011 AND NO.4089/MUM/2012 BE DISALLOWED ON THE BASIS OF PRORAT A APPORTIONMENT OF INTEREST BETWEEN THE INVESTMENT OF THE ASSESSEE AND TOTAL ASSETS. THE TOTAL INVESTMENT IN THE EQUITY SHARES AND DEBENTURES WERE RS.330.59 CRORES AS GIVEN IN SC - 7 OF THE BALANCE SHEET O UT OF WHICH RS.11,16,00,000/ - RELATED TO DEBENTURES, THE INTEREST ON WHICH WERE DULY DISCLOSED AS INTEREST INCOME DURING THE YEAR. THE APPELLANT FURTHER SUBMITTED BEFORE THE LD. CIT(A) THAT THE INVESTMENT OF RS. 319.43 CRORES WERE MADE OVER THE YEARS IN THE EQUITY SHARES OF THE SUBSIDIARY COMPANIES AND NO OTHER INVESTMENTS IN THE SHARES OF OTHER LISTED COMPANY WERE MADE AND THESE INVESTMENTS WERE MADE ON ACCOUNT OF BUSINESS EXPEDIENCY IN THE SUBSIDIARY COMPANIES IN WHICH THE ASSESSEE S STAKE HOLDING WAS RANGING BETWEEN 51% TO 100%. THE RESERVES AND SURPLUS OF THE ASSESSEE INCREASED FROM 54.66 LAKHS IN THE FINANCIAL 2000 - 01 TO RS.41414.24 LAKHS IN THE FINANCIAL YEAR 2007 - 08. SIMILARLY, THE INVESTMENT IN SUBSID IARIES COMPANIES WHICH WERE AT RS.17.89 CRORES IN FINANCIAL YEAR 2001 - 02 HAD GONE UP TO RS.319.44 CRORES IN FINANCIAL YEARS 2007 - 08. THE LD. CIT(A) DELETED THE ADDITION MADE BY THE AO ON ACCOUNT OF INTEREST ON THE GROUND THAT THE ASSESSEE S OWN FUNDS WER E FAR MORE THAN THE INVESTMENT MADE IN THE SUBSIDIARIES COMPANIES AND THEREFORE RELYING ON THE DECISIONS IN THE CASES OF CIT V/S RELIANCE UTILITIES AND POWER LTD (2009) 313 ITR 340 (BOM), WOOLCOMBERS OF INDIA LTD V/S CIT 1981) 23 CTR (CAL) 204 AND EAST INDIA PHARMACEUTICALS WORKS LTD V/S CIT (1987) 139 CTR (SC) 372 DELETED THE DISALLOWANCE MADE ON ACCOUNT OF INTEREST WHILE SUSTAINING THE DISALLOWANCE IN RESPECT OF OTHER IN DIRECT EXPENSES AT THE RATE OF 0.5% OF THE AVERAGE OF VALUE OF INVESTMENT WHICH CA ME TO RS.1,35,14,428/ - . 2. 3 THE LD. DR HEAVILY RELIED ON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE ADDITION OF RS.11,24,70,515/ - WERE WRONGLY REDUCED TO RS.1,35,14,428/ - AND PRAYED FOR THAT THE ORDER OF THE LD.CIT(A) BE SET ASIDE AN D THE ORDER OF AO BE UPHOLD ON THIS POINT. 5 6751/MUM/2011 AND NO.4089/MUM/2012 2. 4 PER CONTRA, THE LD. AR SUBMITTED BEFORE US THAT THE CASE OF THE ASSESSEE WAS COVERED IN ITS FAVOUR BY THE DECISIONS OF COORDINATE BENCHES IN ITS OWN CASE IN THE ITA NO 8373/MUM/2010 AY 2005 - 06 & ITA NO 6121/M UM/2011 WHEREIN A SIMILAR DECIDED IN FAVOUR OF THE ASSESSEE. THE COUNSEL SUBMITTED THAT THE TOTAL INVESTMENT AT THE YEAR END IN THE EQUITY SHARES AND DEBENTURES WERE AT RS.330.59 CRORES WHICH WERE INCLUSIVE OF DEBENTURES PURCHASED OF RS. 11.16 CRORE S AND INTEREST THEREON WAS DULY DISCLOSED IN THE INCOME OF THE ASSESSEE. SO FAR AS THE INVESTMENT IN SHARES AMOUNTING TO RS.319.43 CRORES W ERE CONCERNED THE SAME WERE INTO SHARES OF SUBSIDIARIES IN WHICH THE ASSESSEE HELD 51 TO 100% OF THE EQUITY CAPI TAL AND NO INVESTMENT WAS MADE IN OTHER LISTED COMPANIES. THE LD. CIT(A) FURTHER SUBMITTED THAT NO DIVIDEND WAS RECEIVED FROM THESE COMPANIES WHICH WERE CLAIMED TO BE A EXEMPT DURING THE YEAR. THE INVESTMENTS WERE MADE OUT OF SHARE CAPITAL OLD RESERV E AND ACCRUAL OF PROFIT OVER THE YEARS AND THEREFORE, LD AR PRAYED THAT THE DISALLOWANCE OF INTEREST U/S 14A R.W. RULE 8D(II) WAS NOT CALLED FOR AND WAS RIGHTLY DELETED BY THE LD.CIT(A). THE LD. COUNSEL FURTHER POINTED OUT THAT THE LOANS RAISED BY TH E ASSESSEE WERE TOWARDS SPECIFIC PURPOSE AND INTEREST ON THESE LOANS IN THE FORM OF CASH CREDIT AND WORKING CAPITAL WAS PAID AT RS.8.04 CRORES WHICH WAS STATED IN THE SC - 14 OF THE BALANCE SHEET. THE AO ALSO POINTED OUT THAT THE RESERVES AND SURPLUS AS ON 31.3.2008 WERE RS.414 CRORES AS AGAINST RS.54.66 CRORES AS ON 31.3.2001. SIMILARLY, THE INVESTMENT IN THE SUBSIDIARIES COMPANIES WERE RS.319.44 CROR ES AS ON 31.3.2008 AS AGAINST RS.96.51 CRORES AS ON 31.3.2001 WHICH PROVE D THAT THE INVESTMENT IN T HE SUBSIDIARIES COMPANIES WERE MADE OUT OF ASSESSEES OWN FUNDS AND ACCRU ALS OVER THE YEARS AND NOT OUT OF LOAN FUNDS . THE LD. COUNSEL HEAVILY PLACED RELIANCE ON THE VARIOUS DECISIONS SOME OF WHICH ARE AS FOLLOWS: - A) CIT VS HERO CYCLES LTD(2010) 323ITR51 8 (P&H) 6 6751/MUM/2011 AND NO.4089/MUM/2012 B) SHOPPERS STOP LTD VS ACIT 2011 - TIOL - 581 - ITAT - MUM DT 30.08.2011 C) CIT VS HDFC BANK LTD (2014) 366ITR 505 D ) CIT V/S RELIANCE UTILITIES AND POWER LTD (2009) 313 ITR 340 (BOM), IN VIEW OF THE ABOVE DECISIONS IF THE INTEREST FREE FUNDS ADVANCED BY THE ASSESSEE WERE SUFFICIENT TO MEET THE INVESTMENT AND SIMULTANEOUSLY, THE ASSESSEE HAS INTEREST BEARING LOANS THE PRESUMPTION UNDER THE LAW WAS THAT THE INVESTMENT WERE MADE OUT OF INTEREST FREE FUNDS AND NOT OUT OF LOANS. 2.5 WE HAVE CONSIDE RED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD AND FIND THAT THE ASSESSEES OWN FUNDS AS STATED ABOVE WERE FAR MORE THAN THE INVESTMENT MADE IN THE SUBSIDIARY COMPANIES AND DEBENTURES. THE FACTS ARE PROVED BY THE INCREASE IN RESERVE AND SURPLUS OVER TH E YEARS WHICH WERE AT RS.414 CRORES AS ON 31.3.2008 AGAINST THE INVESTMENT IN SUBSIDIARIES WHICH STOOD RS.319.43 CRORES AS ON 31.3.2008. WE ALSO NOTE THAT THE ASSESSEE HAD TAKEN LOANS FROM FINANCIAL INSTITUTIONS AMOUNTING TO RS.722.24 CRORES, OUT OF W HICH THE WORKING CAPITAL LOAN RS. 2 58.79 CRORES AND REMAINING PERTAIN S TO TERM LOANS FOR THE SPECIFIC PURPOSES. THE AO TOOK THE ENTIRE INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT AMOUNTING TO RS.94.35 CRORES AND WORKED OUT THE DISALLOWANCE ACCORDI NGLY. IN OUR OPINION, THE LD CIT(A) HAD RIGHTLY DELETED THE DISALLOWANCE ON ACCOUNT OF INTEREST UNDER RULE 8 D(2) (II) OF THE RULES AND RIGHTLY UPHELD THE DISALLOWANCE TO THE TUNE OF RS.0.5% OF THE VALUE OF INVESTMENT WHICH COME S TO RS. 1,35,14,428 / - BE ING 0. 5 % OF RS.270.28 CRORES BY FOLLOWING THE DECISIONS OF THE EARLIER YEARS IN THE CASE OF THE ASSESSEE WHEREIN THE SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL AND DECIDED IN FAVOUR OF THE ASSESSEE . WE, THEREFORE, RESPECTFULLY THE DECIS IONS OF THE COORDINATE BENCHES IN ITS OWN CASES FOR AY 2005 - 06 7 6751/MUM/2011 AND NO.4089/MUM/2012 AND AY 2006 - 07 AND OTHER DECISIONS OF THE HIGH COURT DISMISS THIS GROUND OF REVENUE BY UPHOLDING THE ORDER OF LD. CIT(A). THE AO IS DIRECTED ACCORDINGLY. 3. THE SECOND ISSUE RAISED IN THE GROUND NO.3 IS AGAINST THE DELETION OF RS.2,42,24,011/ - BY THE LD. CIT(A) WHICH WAS MADE BY THE AO U/S 36(1)(III) ON ACCOUNT OF PROPORTIONATE INTEREST EXPENDITURE PERTAINING TO INTEREST FREE LOANS AND ADVANCES GIVEN BY THE ASSESSEE TO SUBSIDIARIES CO MPANIES OUT OF INTEREST BEARING FUNDS RAISED BY THE ASSE SS EE. 3.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD RAISED SECURED LOANS OF RS.620.19 CRORES AND UNSECURED LOANS OF RS.102,05,42,595/ - AND ASSESSEE HAD ADVANCED MONEY DURING THE YEARS TO ITS OTHER ENTITIES AMOUNTING TO RS.307,15,52,214/ - . ACCORDINGLY, THE AO DISALLOWED A SUM OF RS.2,42,24,011/ - ON ACCOUNT OF DIVERSION OF INTEREST BEARING LOANS TO THE SUBSIDIARY COMPANIES OF THE ASSESSEE WHICH WERE H ELD TO BE ADVANCES BY THE ASSESSEE NOT OUT OF COMMERCIAL EXPEDIENCY AND FOR GENUINE BUSINESS NEEDS BUT MERELY TO DIVERT THE INTEREST BEARING FUNDS OF THE COMPANIES. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO DELETED THE ADDITION BY OBSERVING THAT THE SECURED AND UNSECURED LOANS OF THE ASSESSEE WERE OF RS .620.19 CRORES AND UNSECURED LOANS OF RS.102,05,42,595/ - RESPECTIVELY. THE LOAN GIVEN DURING THE YEAR WERE RS.307.15 CRORES AND INTEREST EXPENDITURE D EBITED TO THE PROFIT AND LOSS ACCOUNT WAS RS.94.35 CRORES. THE TOTAL LOAN GIVEN TO THE SUBSIDIARIES COMPANIES AT THE YEAR END STOOD AT RS.78.94 CRORES OUT OF WHICH RS.16.56 CRORES WERE ADVANCED TO M/S ENERCON WIND FARMS (KARNATAKA) LIMITED AT THE RATE O F 10% ON THE REDUCING BALANCE METHOD AND THE INTEREST RECEIVED FROM THE SAID SUBSIDIARY COMPANY WAS D ULY SHOWN AS INCO M E OF THE 8 6751/MUM/2011 AND NO.4089/MUM/2012 ASSESSEE. SIMILARLY, THE ASSESSEE ADVANCED RS.38.15 CRORES TO ANOTHER 100% OWNED SUBSIDIARY M/S ENERCON (INDIA) INFRASTR UCTURE PRIVATE LIMITED WHICH WAS ALSO ADVANCED AT THE RATE OF 10% AND THE INTEREST RECEIVED FROM THE SUBSIDIARY COMPANY WAS ALSO SHOWN AS INCOME OF THE ASSESSEE. ON THE REMAINING AMOUNT OF RS.24.22 CRORES, THE ADVANCES WERE ADVANCED TO VARIOUS 11 SUBSIDI ARY COMPANIES WHEREIN THE ASSESSEE HOLDING WERE TO TUNE OF 51 % TO 100% SHARE. IT WAS ALSO SUBMITTED THAT THESE SUBSIDIARIES WERE ENGAGED IN THE BUSINESS OF INSTALLATION OF WINDMILLS SOLD BY THE ASSESSEE COMPANY. THE LD AR FOR THE ASSESSEE FURTHER SU BMITTED THAT THE INTEREST FREE FUNDS GIVEN TO SUBSIDIARY COMPANIES WERE NOT UTILIZED FOR ANY NON - BUSINESS PURPOSE OR FURTHER PERSONAL PURPOSES OF THE DIRECTORS OF THE COMPANIES BUT USED FOR THE PURPOSES OF BUSINESS AND WERE GIVEN PURELY FOR COMMERCIAL EX IGENCY AND THEREFORE INTEREST THEREON COULD NOT BE DISALLOWED AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF S A BUILDERS LIMITED V/S CIT 288 ITR 1 (SC). 3.2 THE LD. DR VEHEMENTLY SUBMITTED BEFORE US THAT THE INTEREST DISALLOWANCE OF RS.2.42 CRORE S WAS WRONGLY DELETED BY THE LD. CIT(A) BY IGNORING THE FACTS THAT THE INTEREST FREE LOANS TO THE SUBSIDIARY COMPANIES WERE GIVEN OUT OF THE INTEREST BEARING FUNDS RAISED BY THE COMPANIES AND THEREFORE PRAYED FOR SETTING ASIDE THE ORDER OF LD. CIT(A) ON TH IS POINT. 3.3 ON THE OTHER HAND, THE LD.AR POINTED OUT THAT THE ASSESSEE HAD ADVANCED THESE FUNDS OUT OF COMMERCIAL EXPEDIENCY AND GENUINE BUSINESS REQUIREMENT. THE LD. AR EXPLAINED BEFORE US THE MODUS OPERANDI OF THE SUBSIDIARY COMPANIES. THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, SALE AND TRADING OF WIND ENERGY, CONVERTERS (WIND MILL), ACCESSORIES AND PARTS/COMPONENTS AND ALL ACTIVITIES INCIDENTAL AND RELATED THERETO AND THE SUBSIDIARY COMPANY TO WHOM THE INTEREST FREE ADVANCES 9 6751/MUM/2011 AND NO.4089/MUM/2012 WERE GIVEN WERE FOR THE PURPOSE OF INSTALLATION OF WIND MILL WHICH WERE USED BY THE ASSESSEE COMPANY FOR TRANSMITTING THE POWER GENERATED BY THE WIND MILL TO THE ULTIMATE END USER TO WHOM IT WAS SOLD. THUS, THE ADVANCES WERE PURELY OUT OF BUSINESS CO NSIDERATION AND COMMERCIAL EXPEDIENCY. ONCE, THE WINDMILL IS INSTALLED BY THE SUBSIDIARY COMPANY, THE LOAN TAKEN FROM THE ASSESSEE WERE REPAID BY RECEIVING LOANS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS. FINALLY THE LD. AR PRAYED THAT IN VIEW OF T HE DECISION OF THE HONBLE APEX COURT IN THE CASE OF S A BUILDER ( 2007 ) 288 ITR 1 AND ALSO THE DECISION RENDERED IN THE CASE OF RELIANCE UTILITIES AND POWER LTD ( 2009 ) 313 ITR 340 , THE ORDER OF THE LD. CIT(A) DESERVES TO BE UPHOLD. 3. 4 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSAL THE MATERIALS ON RECORD. WE FIND FROM THE RECORD PLACED BEFORE US THAT THE ASSESSEE HAS SHOWN THE COMMERCIAL EXPEDIENCY AND BUSINESS NEEDS TO ADVANCE THE LOANS TO THE SUBSIDIARY COMPAN Y FOR THE REASONS THAT THE WIND MILL I NSTALLED BY THE SUBSIDIARY COMPANY WERE BEING USED BY THE ASSESSEE FOR TRANSMISSION OF ITS ELECTRICITY TO THE PO W ER GREED OF THE ELECTRICITY BOARD FOR FURTHER DISTRIBUTION AND TO THE ULTIMATE CUSTOMERS. WE ALSO NOTE THAT THE MOMENT THE INSTALLATION OF WINDMILL WAS COMPLETED, THE SUBSIDIARY COMPANY USED TO PAY BACK THE ADVANCES RECEIVED BY THE ASSESSEE BY BORROWING FUNDS FROM THE BANKS AND OTHER FINANCIAL INSTITUTIONS. IT IS ALSO SETTLED PROPOSITION OF LAW, IF THE ASSESSEE USES ITS INTEREST BEARING F UNDS AND LENT TO THE SISTER CONCERN WITHOUT CHARGING ANY INTEREST AND WITHOUT CHARGING ANY INTEREST ON THE SAID ADVANCES, THE ADVANCE IS LIABLE TO BE DISALLOWED U/S 36(1)(III) OF THE ACT. FURTHER, IN THE INSTANT CASE, THE ASSESSEES BUSINESS EXPEDIENCY IS PROVED BEYOND DOUBT THAT THE ENTIRE INTEREST FREE ADVANCES WERE GIVEN TO THE SUBSIDIARY COMPANY OUT OF COMMERCIAL EXPEDIENCY . THE CASE OF THE ASSESSEE ALSO SQUARELY COVERED 10 6751/MUM/2011 AND NO.4089/MUM/2012 BY T HE DECISION OF THE HONBLE APEX COURT RENDERED IN THE CASE OF S A BUILDER S (SUPR A ) WHEREIN IT HAS BEEN HELD THAT INTEREST ON BORROWED FUNDS CANNOT BE DISALLOWED ON THE GROUND THAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS TO SISTER CONCERN AS MEASURE OF COMMERCIAL EXPEDIENCY AND WHAT HAS TO BE SEEN IS THE BUSINESS PURPO SE AND WHAT THE SISTER CONCERN UTILIZATION OF BORROWED THE MONEY FOR BUSINESS PURPOSE . THE HON,BLE APEX COURT COURT IN THE CASE OF S A BUILDER (SUPRA) HAS HELD AS UNDER : - THE HIGH COURT IN THE IMPUGNED JUDGMENT AS WELL AS THE TRIBUNAL AND THE INCOME - TAX AUTHORITIES HAD APPROACHED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE INSTANT CASE, THE ASSESSEE BORROWED THE FUND FROM THE BANK AND LENT PART OF IT TO ITS SISTER CONCERN (A SUBSIDIARY) AS INTEREST - FREE LOAN. THE TEST IN SUCH A CASE WAS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE DECISIONS RELATING TO SECTION 37 WILL ALSO BE APPLICABLE TO SECTION 36(1)( III ) BECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS FOR THE PURPOSE OF BUSINESS. IT HAS BEEN CONSISTENTLY HELD IN DECIS IONS RELATING TO SECTION 37 THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. THE HIGH COURT AS WELL AS THE TRIBUNAL AND OTHER INCOME - TAX AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER WORDS, THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHER THE INTEREST - FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. NEITHER THE HIGH COURT NOR THE TRI BUNAL AND OTHER AUTHORITIES HAD EXAMINED WHETHER THE AMOUNT ADVANCED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE EXAMINED THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER CO NCERN, AND WHAT THE SISTER CONCERN DID WITH THE MONEY, IN ORDER TO DECIDE WHETHER IT WAS 11 6751/MUM/2011 AND NO.4089/MUM/2012 FOR COMMERCIAL EXPEDIENCY, BUT THAT HAD NOT BEEN DONE. THE IMPUGNED JUDGMENTS OF THE HIGH COURT, THE TRIBUNALS AND OTHER AUTHORITIES ARE SET ASIDE AND THE MATTER IS RE MANDED TO THE TRIBUNAL FOR AFRESH DECISION, IN ACCORDANCE WITH LAW AND IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE. IT IS MADE CLEAR THAT IT IS NOT THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCE RN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADV ANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IN THE CASE OF RELIANCE UTILITIES AND POWER LTD (SUPRA), THE HONBLE COURT HAS HELD THAT THE ASSESSEE HAS ITS OWN FUNDS AND SIMULTANEOUSLY HAS BORROWED INTEREST BEARING FUNDS THE PRESUMPTION IS THAT THE ADVANCE OF MONEY IS OU T OF OWN FUNDS AND NOT OUT OF INTEREST BEARING FUNDS. WE, THEREFORE, RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE ABOVE DECISIONS SUPRA CONFIRM THE ORDER OF LD. CIT(A) ON THIS ISSUE. 4. THE GROUND NO.4 IS AGAINST THE DELETION OF LOSS OF RS.27,92, 46,564/ - BY THE LD. CIT(A) MAD E BY THE AO U/S 43(5)(D) OF THE ACT ON ACCOUNT OF M TO M LOSSES. 4.1 DURING THE COURSE OF SCRUTINY PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD CLAIMED A SUM OF RS.28,69,53,073/ - IN THE PROFIT AND LOSS ACCOUNT UNDER TH E HEAD CASH P/L ON OPTIONS W HICH WAS ON ACCOUNT OF MARKED TO MARKET LOSS ON OPTION OF DERIVATIVES COMPRISING OF A SUM OF 12 6751/MUM/2011 AND NO.4089/MUM/2012 RS.77,06,509/ - BEING ACTUAL LOSS ON OF OP TION OF DERIVATIVES ON THOSE CONTRACTS WHICH MATERIALIZED WITHIN THE YEAR AND FURTHER SUM OF RS.27,92,46,564/ - BEING PROVISIONS FOR MTM ON OPTIONS AT THE EXCHANGE RATE ON THE REPORTING DATE OR AT THE CLOSE OF THE YEAR ON THOSE CONTRACTS WHICH WERE DUE TO BE MATURED AFTER THE CLOSE OF THE YEAR AT THE EXCHANGE RATE PREVALENT ON THE CLOSING DATE OR REPORTING DATE . THE AO DISALLOWED THE SAME AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE BY HOLDING THAT THE SAID LOSS ES W ERE SPECULATIVE AND CONTINGENT IN NATURE AND COVERED BY THE PROVISIONS OF SECTION 43(5)(D) OF THE ACT BY REJECT ING THE CONTENTIONS OF THE ASSESSEE THAT THE SAID LOSS ES OF M ARKED TO M ARKET NATURE WERE ALLOW ABLE IN VIEW OF THE DECISION RENDERED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V/S BANK OF BAHRAIN AND KUWAIT (2010) 132 TTJ (MUM) (SB) 50 5 AND THE DECISION OF THE HONBLE SUPREM E COURT IN THE CASE OF WOODWORDS GOVERNOR INDIA PVT.LTD. (2009) 312 ITR (SC) 254 . T HE LD. CIT(A) DELETED THE DISALLOWANCE ON THE GROUND THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING , SALE AND T RADING OF WIND ENERGY, CONVERTERS (WIND MILL), ACCESSORIES AND PARTS/COMPONENTS AND ALL ACTIVITIES INCIDENTAL AND RELATED THERETO AND USED TO IMPORT RAW MATERIALS FOR MANUFACTURING OF ITS PRODUCTS FROM THE HOLDING COMPANY AND OTHER SUPPLIERS IN EUROPE . DURING THE YEAR THE ASSESSEE IMPORTED THE RAW MATERIAL FROM ITS HOLDING COMPANY TO THE TUNE OF RS.279.83 CRORES AND REMAINING OF RS. 155 . 48 CRORES WERE FROM VARIOUS OTHER SUPPLIERS IN EUROPE AND THUS TOTAL IMPORTS OF THE ASSESSEE WERE AT RS.435.31 CRORE S. THE LD. CIT(A) OBSERVED THAT IT WAS A NORMAL PRACTICE IN THE CASE OF EXPORT AND IMPORT OF THE GOODS TO HEDGE AND ENTER INTO FOREIGN EXCHANGE FORWARD CONTRACT IN ORDER TO COVER THE RISK OF FLUCTUATION IN THE FOREIGN EXCHANGE. THE ASSESSEE HAD TO CON TRACT FOR THE SUPPLY OF RAW MATERIALS AND TO MEET ITS FOREIGN COMMITMENTS AND TO GUARD AGAINST THE FLUCTUATION IN EXCHANGE BETWEEN THE DATE OF CONTRACT AND ACTUAL 13 6751/MUM/2011 AND NO.4089/MUM/2012 PERFORMANCE OF THE CONTRACT T HE ASSESSEE USED TO ENTER INTO FORWARD CONTRACT IN FOREIGN E XCHANGE SO THAT THE LOSS COULD BE MINIMIZE D BETWEEN THE DATE OF THE CONTRACT OF PURCHASE . THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE WAS FOLLOWING CONS IS T E NT SYSTEM OF ACCOUNTING AND LOSS OR GAIN ON THE FORWARD FOREIGN CONTRACT WERE BEING RE COGNIZED AT THE YEAR END ACCORDING TO ACCOUNTING STANDARED - 11 OF ICAI WHICH PROVIDED FOR RECOGNIZING THE GAIN OR LOSS ON THE FOREIGN EXCHANGE CONTRACT. THE PRACTICE OF THE ASSESSEE HAD BEEN ACCEPTED BY THE DEPARTMENT IN THE EARLIER AND SUCCEEDING YEARS . 5. THE LD DR ON THE OTHER HAND RELIED HEAVILY ON THE ORDER OF AO AND PRAYED FOR UPHOLDING THE SAME AND SETTING ASIDE THE ORDER OF CIT(A) IN VIEW OF INSTRUCTION NO 17/2008 DATED 26.11.2008 WHICH PROVIDED FOR DISALLOWANCE OF LOSSES OF NOTIONAL AND CONTI NGENT NATURE. THE LD DR SUBMITTED THAT THE AS ON BASED ON THE RATE OF EXCHANGE ON MATURITY OF THE CONTRACT BUT WERE ACCOUNTED FOR AT THE YEAR END AS PER ACCOUNTING STANDARD - 11 WHICH WAS NOT MANDATORY AS NOT BEING NOTIFIED U.S 145(3) OF THE ACT. 6 . THE AR VEHEMENTLY SUBMITTED BEFORE US THAT THE CASE OF THE ASSESSEE WAS COVERED IN ITS FAVOR BY DECISIONS OF THE HONBLE SUPREME COURT, HIGH COURT AND TRIBUNALS AND CIT(A) HAD ALLOWED THE APPEAL OF THE ASSESSEE AFTER FOLLOWING THE RATIO DECIDED IN THE SPECIAL B ENCH OF THE TRIBUNAL IN THE CASE OF DCIT V/S BANK OF BAHRAIN AND KUWAIT (2010) 132 TTJ (MUM) (SB) 505 AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WOODWORDS GOVERNOR INDIA PVT.LTD. (2009) 312 ITR (SC) 254. THE LD AR ARGUED THAT THE MARKED TO MARKET LOSS OF RS. 27,92,46,564 / - WHICH HAD ACCRUED FROM THE REVALUATION AND RE - STATEMENT OF OUTSTANDING FORWARD CONTRACT AT THE END OF THE YEAR AS PER ACCOUNTING STANDARD - 11 14 6751/MUM/2011 AND NO.4089/MUM/2012 BASED FOREIGN EXCHANGE ON THE CLOSING DATE OR REPORTING DATE WERE ALLOWABLE AS BUSINESS LOSS AND WERE NOT A CONTINGENT OR NOTIONAL LOSS. IN ORDER TO COVER THE RISK OF THE FLUCTUATION IN FOREIGN CURRENCY RATE, THE ASSESSEE HAD ENTERED INTO FOREIGN EXCHANGE FOREIGN EXCHANGE FORWARD CONTRACT RS.28,69,53,073 / - PENDING MATUR ITY AT THE YEAR END ON WHICH THE ASSESSEE REVALUED AND RE - STATED AT THE CURRENT EXCHANGE RATE PREVAILING AT THE END OF THE YEAR. THE LD COUNSEL STRONGLY PLACED RELIANCE ON THE FOLLOWING DECISIONS OF TRIBUNAL IN WHICH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOOLWARD GOVERNOR INDIA PVT. LTD(2009) 312 ITR 254 AND SPECIAL BENCH DECISION IN THE CASE OF BANK OF BAHRAIN AND KUWAIT (41SOT29) WERE FOLLOWED: - A) ACIT VS M/S VENUS JEWEL ITA NO.7328 AND 7329/MUM/2013 DATED 31.7.2015; B) ACIT VS H DIPAK AND CO - ITA NO.7629/M/2011 DATED 30.4.2013; C) CIT VS PASHUPATI CAPITAL SERVICES PVT LTD D ATED 24 . 4 .2015 (2015 - TOIL - 1142 - HC - MUMIT) D) LANDAN STAR DIAMOND COMPANY (I) LTD DCIT (2012)38.TAXMAN.COM 338; E) CIT VS FRIENDS & FRIENDS SHIPPING PVT LTD (2 013)217 TAXMAN267 F) CIT VS BRIGHT ENTERPRISES PVT LTD (2015)234TAXMAN509. G) CIT(APPEALS) VS GURDAS GARG(2015)63 TAXMAN.COM289 THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ISSUE NOW SETTLED BY THE DECISION OF THE ABOVE CITED CASES, WHEREIN IT HAS B EEN CLEARLY HELD THAT MTM LOSS WERE NOT SPECULATIVE IN NATURE OR NOTIONAL IN NATURE BUT ARE BUSINESS LOSS. THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE IS FOLLOWING ACCOUNTING SYSTEM RECOGNIZED OF THE GAIN AND LOSS ON THE FOREIGN EXCHANGE FORWARD CONTRACT AT THE YEAREND BASED ON THE FOREIGN EXCHANGE RATE PERTAIN TO AS - 11 ISSUED BY HE ICAI AND IN THE YEAR 2005 - 06 AND 2006 - 07 THE ASSESSEE EARNED RS. 19.71 CRORES AND RS. 2.66 CRORES WERE CREDITED TO THE PROFIT AND LOSS ACCOUNT WHICH WERE ACCEPTED BY THE D EPARTMENT. 15 6751/MUM/2011 AND NO.4089/MUM/2012 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORDS AND AFTER GOING THROUGH THE DECISIONS RELIED UPON BY THE LD.AR FIND THAT ASSESSEE HAD RECOGNIZED A LOSS OF RS. 27,92,46,564 / - ON ACCOUNT OF PRO VISIONS OF MARKED TO MARKET LOSSES ON FORWARD FOREIGN EXCHANGE CONTRACT UPON RE - STATEMENT OF FOREIGN EXCHANGE FORWARD CONTRACT AT THE EXCHANGE PREVALENT AT THE CLOSE OR THE YEAR OR REPORTING DATE. WE ALSO NOTE THAT THE ASSESSEE WAS FOLLOWING A CONSISTEN T METHOD OF ACCOUNTING TO ACCOUNT FOR THE GAIN OR LOSS ON FORWARD CONTRACT FOR FOREIGN EXCHANGE AS PER ACCOUNTING STANDARD 11 WHICH DEALS WITH THE TREATMENT OF FOREX LOSSES OR GAINS NOT ACTUALLY REALIZED. THE SAME PRACTICE WAS BEING FOLLOWED IN THE EARLIER YEAR AND WAS ALSO ACCEPTED BY THE REVENUE. THE NEED TO HEDGE IS A COMMERCIAL EXPEDIENCY AND NECESSITY WHICH IS PRACTICALLY FOLLOWED IN ALL THE BUSINESS HOUSES ENGAGED IN THE BUSINESS IMPORT/EXPORT THESE DAY S SPECIALLY WHEN THE EXCHANGE RATE IS HIGHLY VOL ATILE. THE SPECIAL BENCH DECISION IN CASE OF DCIT VS BANK OF BAHRAIN AND KUWAIT (2010)132 TTJ MUMBAI (SB) 505 THE SPECIAL BENCH HELD THAT MTM LOSSES IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT DEBITED TO THE PROFIT AND LOSS ACCOUNT ARE ALLOWABLE AND FURTHER HELD (I) A BINDING OBLIGATION IS ACCRUED AGAINST THE ASSESSEE THE MOMENT IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACT(II) CONSISTENT ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE TO ACCOUNT FOR THE FOREX GAIN AND LOSS AT THE YEAREND BASED UPON THE CURRENT EXCHANGE RATE CANNOT BE DISREGARDED(III) THE LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE DATE OF BALANCE SHEET IS DETERMINABLE WITH REASONABLE CERTAINTY(IV) AS PER AS - 11 WHEN THE TRANSACTION IS NOT SETTLED IN THE SAM E ACCOUNTING YEAR AS THAT IN WHICH IT OCCURRED , THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD (V)IN THE ULTIMATE ANALYSIS , THERE IS NO REVENUE EFFECT AND IT IS ONLY TIMING OF TAXATION OF LOSS/PROFIT. THE TRIBUNAL IN THE 16 6751/MUM/2011 AND NO.4089/MUM/2012 CASE OF VE NUS JEWEL (SUPRA) HAS VIDE PARA 10 OBSERVED AND HELD AS UNDER : 10. THE ISSUE ARISING IN THE PRESENT APPEAL BEFORE US IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL AND ALSO IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS . WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA) WHICH SQUARELY COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE, WE UPHOLD THE ORDER OF THE CIT(A) IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF THE LOSS INCURRED ON FORWARD CONTRACT IN FOREIGN EXCHANGE. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE THUS DISMISSED. IN THE CASE OF ACIT VS H DIPAK AND CO HAS HELD THAT THE LOSSES OF MARKED TO MARKET ON REVALUATION AND RE - STATEMENT OF PENDING FORWARD CONTRACT FOR FOREIGN EXCHANGE IS ALLOWABLE AFGTER FOL LOWING THE DECISION OF SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN & KUWAIT. IN THE CASE OF CIT VS PASHUPATI CAPITAL SERVICES PVT THE HONBLE BOMBAY HIGH COURT HAS HELD ON REFERENCE OF SUBSTANTIAL QUESTION OF LAW WHETHER THE MAR TO MARKET LOSS IN FUT URE AND OPTIONS CAN BE ALLOWED TO THE ASSESSEE WHO IS DEALING IN FIANANCIAL MARKET ON ACCOUNT OF CLOSING OF THE YEAR IN DERIVATIVE TRANSACTIONS THAT AFTER PERUSING THE REASONING OF THE TRIBUNAL WE DO NOT FIND THAT VIEW TAKEN IS PERVERSE.THE VIEW IS IN C ONSONANCE WITH THE FACTUAL MATERIALS THE GUIDELINES SO ALSO THE GUIDELINES FROM SEBI AND ICAI AND UNDER THESE CIRCUMSTANCES WE DO NOT AGREE THAT THE APPEAL RAISES ANY SUBSTANTIAL QUESTION OF LAW AND IS ACCORDINGLY DISMISSED TO THAT EXTENT. THE TRIBUNA L IN THE CASE OF INTER JEWL PRIVATE LIMITED (SUPRA) VIDE PARA 10 HAS OBSERVED AND HELD AS UNDER : 10. WE HAVE CAREFULLY PERUSED THE ORDER OF LD. CIT(A) AND THE DECISIONS BROUGHT TO OUR NOTICE. IN OUR CONSIDERED OPINION AND THE UNDERSTANDING OF THE FACTS W E FIND THAT THE REVENUE AUTHORITIES HAVE PROCEEDED ON A WRONG ASSUMPTION OF FACTS. WE FIND THAT THE DECISION OF THE TRIBUNALS SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) SQUARELY APPLY ON THE FACTS OF THE CASE AND ALSO BY THE VARIOUS JUD ICIAL PRONOUNCEMENTS LIKE KUMBH GEMS IN ITA NO. 6600/MUM/2012, H. DIPAK & CO. IN ITA NO. 7629/MUM/2011, 17 6751/MUM/2011 AND NO.4089/MUM/2012 BHAVANI GEMS IN ITA NO.2855/MUM/2010 AND M/S. SUTARIYA GEMS PVT. LTD. IN 3361/MUM/2013. THEREFORE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF L D. CIT(A) AND IN DIRECTING THE AO TO DELETE THE ADDITION OF RS.2,59,623/ - . GROUND NO.2 IS ALLOWED. 8. I N VIEW OF THE FACTS OF THE ASSESSEE AND VARIOUS JUDICIAL DECISIONS OF THE COORDINATE BENCHES FOLLOWING THE DECISION OF APEX COURT IN THE CASE OF WOOL WARD GOVERNOR INDIA PVT. LTD(SUPRA) AND SPECIAL BENCH DECISION IN THE CASE OF BANK OF BAHRAIN AND KUWAIT(SUPRA) , WE ARE OF THE CONSIDERED VIEW THAT CASE OF THE ASSESSEE IS FULLY COVERED BY THE DECISIONS OF THE COORDINATE BENCHES AND WE THEREFORE RESPECTF ULLY FOLLOWING THE SAME ALLOW THE APPEAL OF THE ASSESSEE ON THE ISSUE OF MTM LOSSES BY D ELETING THE DISALLOWANCE OF RS. 27,92,46,564 / - . THE AO IS DIRECTED ACCORDINGLY. 9. NOW WE WILL TAKE UP THE APPEAL BEARING ITA NO.6751/MUM/2011. 10. GROUNDS RAISE D IN THIS APPEAL BY THE REVENUE ARE REPRODUCED BELOW: ' 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE PRIOR PERIOD EXPENSES OF RS.18,87,320/ - WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING AND THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO PROVE THAT THE EXPENSES HAD CRYSTALLISED DURING FY 2006 - 07; 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE PRIOR PERIOD EXPE NSES OF RS.12,83,864/ - ON ACCOUNT OF REPAIR AND MAINTENANCE OF FURNITURE, WITHOUT APPRECIATING THE FACT THAT THE BILL DATED 25.10.2005 RAISED BY THE VENDOR SHOWED THAT THESE EXPENSES HAD CRYSTALLISED IN THE PRECEDING YEAR; 3. 'ON THE FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE OF RS.23,47,67,605/ - U /S. 14A OF THE ACT TO THE EXTENT OF RS.10,00,000/ - WITHOUT APPRECIATING THE FACT THAT THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE DISALLOWABLE U/S 14A EVEN IF NO DIVIDEND IS YIELDED ON INVESTMENT; 18 6751/MUM/2011 AND NO.4089/MUM/2012 4. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S. 36(1)(III) OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE INTEREST BEARING FUNDS WER E NOT UTILISED FOR COMMERCIAL EXPEDIENCY '. 10.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 28.8.2009 DECLARING A LOSS OF RS.2,61,57,710/ - UNDER THE NORMAL PROVISIONS OF ACT AND BOOK PROFIT OF RS.53,18,87,596/ - UNDER T HE SPECIAL PROVISIONS OF SECTION 115JB OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) WERE ISSUED TO THE ASSESSEE AND DULY SERVED . THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF WINDMILLS, ACCESSORIE S AND PARTS, OPERATIONS AND MAINTENANCE SERVICE IN RESPECT OF WINDMILL AND GENERATION OF POWER BY WIND ENERGY THROUGH WIND FARMS AND SALE THEREOF. 10 .2. THE GROUND NO.1 IS AGAINST THE DELETION OF REPAIRS AND MAINTENANCE OF RS.18,87,320/ - BY THE LD.CI T(A). THE AO DURING THE COURSE OF SCRUTINY PROCEEDINGS FOUND THAT A SUM OF RS.12,06,95,137/ - TOWARDS REPAIRS AND MAINTENANCE WERE DEBITED TO THE PROFIT AND LOSS ACCOUNT. OUT OF WHICH RS.18, WHICH RELATES TO THE EARLIER YEARS AND ADDED THE SAME TO THE TO TAL INCOME OF THE ASSESSEE. THE LD. CIT(A) DELETED THE ADDITION ON THE GROUND THAT THE SAID EXPENSES PERTAINING TO CURRENT YEAR AS THESE WERE UTILIZED DURING THE YEAR BY HOLDING THAT THOSE EXPENSES RELATES TO THE EARLIER YEARS BUT THE SAME WERE CRYSTALLIZ ED WHEN THE BILLS WERE RECEIVED OF THE SAME DURING THE CURRENT YEAR WERE LIABLE TO TREATED AS CURRENT YEARS EXPENSES. THE LD.AR SUBMITTED BEFORE US THAT THE BILLS OF THE PROFESSIONAL CHARGES RS.6,61,200/ - PAID TO L.E.DCHEZ AGAINST THEIR PROFESSIONAL FEE FOR THE PERIOD 1.1.06 TO 31.3.2006. THE LD. COUNSEL SUBMITTED THAT THE BILLS FOR THE PROFESSIONAL CHARGES WERE RECEIVED LATE AND AS A RESULT OF WHICH THE PAYMENT OF THE SAID EXPENSES COULD NOT BE CREDITED. AS REGARDS, THE 19 6751/MUM/2011 AND NO.4089/MUM/2012 AMOUNT OF RS.12,26,120, THE BIL LS WERE RECEIVED LATE AND COULD NOT BE BOOKED AND THEREFORE, IN VIEW OF THIS FACTS, THESE COULD NOT BE CREDITED FOR THE YEAR TO WHICH THESE EXPENSES WERE RELATED AND THUS, IN NO WAY COULD BE CONSTRUED AS PART OF EXPENSES AS THE SAME WERE CRYSTALLIZED DURI NG THE YEAR. THE LD. COUNSEL ARGUED THAT THE LD. CIT(A) AFTER GOING INTO THE DETAILS DEBTS OF THE ISSUE ALLOWED THE APPEAL OF THE ASSESSEE AND THEREFORE, THE LD. COUNSEL SUBMITTED THAT THE ORDER OF THE LD. CIT(A) BER UPHELD. 10 .3. WE HAVE CONSIDERED TH E RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE ARE IN AGREEMENT WITH THE FINDING OF THE LD.CIT(A) THAT LIABILITY FOR THE BILLS FOR FEES PAID TO M/S L.E.DCHEZ OF RS.6,61,200/ - WAS CRYSTALISED DURING THE YEAR AS THESE BILLS WERE RECEIVED LATE AND PAYMEN T COULD NOT BE APPROVED AND BOOKED DURING THE YEAR ENDED ON 31.3.2006. THE LD. CIT(A) ALSO RELIED ON THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT AND CHEMICALS LTD V/S CIT (213 ITR 523) AND HONBLE HIGH COURT HAS HELD THAT THE EXPENSES COULD NOT BE DISALLOWED MERELY ON THE GROUND THAT THEY ARE RELATED TO THE TRANSACTIONS PERTAINING TO EARLIER YEARS UNLESS AND UNTIL THE AO IS FULLY SATISFIED AFTER PROPER INVESTIGATION ABOUT THE CRYSTALLIZATION OF THE LIABILITY AND ALSO THE HONBLE HIGH COURT FURTHER HELD THAT THE DISALLOWANCE CANNOT BE MADE MERELY ON THE GROUND THAT ACCOUNT MAINTAINED IN THE SYSTEM OF ACCOUNTING AND RELATES TO THE TRANSACTIONS OF THE PREVIOUS YEAR. IN OUR OPINION THE TRUE PROFITS AND LOSS OF THE ASS ESSEE COULD ONLY BE DETERMINED IF THE EXPENSES ARE ALLOWED. MOREOVER, IF THESE EXPENSES ARE NOT ALLOWED IN THIS YEAR, THEY ARE LIABLE TO BE SET OFF FROM THE PROFIT OF THE YEAR ENDED 31.3.2006 RELATED TO THE ASSESSMENT YEAR 2006 - 07. WE, THEREFORE, UPHOLD THE ORDER OF THE LD. CIT(A) BY DISMISSING THE APPEAL OF THE REVENUE ON THIS GROUND. THE AO IS DIRECTED ACCORDINGLY. 20 6751/MUM/2011 AND NO.4089/MUM/2012 11 . THE ISSUE RAISED IN GROUND NO.2 IS AGAINST THE DELETION OF ADDITION OF RS.12,83,864/ - ON ACCOUNT OF REPAIR AND MAINTENANCE OF FURNITU RE. THE AO NOTICED THAT THE ASSESSEE VIDE BILL NO.6, DATED 25.10.2005 FOR RS.12,83,864/ - WAS CLAIMED BY THE ASSESSEE DURING THE YEAR IT IS PERTAINS TO THE PRIOR PERIOD EXPENSES AND SHOULD NOT BE ALLOWED AS PER THE MERCANTILE SYSTEM OF ACCOUNTING. THE LD . CIT(A) DELETED THE ADDITION AFTER CALLING THE REMAND REPORT FROM THE AO WHICH STATED THAT THE AMOUNT OF RS.12,83,864/ - WAS DISALLOWED BEING PRIOR PERIOD EXPENSES AND DURING THE COURSE OF REMAND PROCEEDINGS THE ASSESSEE HAS FILED FULL DETAILS OF REPAIRS AND MAINTENANCE OF FURNITURE AND PRODUCED THE COPIES OF THE BILLS. THE AO FURTHER STATED IN THE REMAND REPORT THAT AFTER VERIFICATION OF THE RECORD AND BILLS, IT WERE ACCOUNTED FOR FURNITURE PERTAINS TO PRIOR PERIOD EXPENSES RIGHTLY DISALLOWED DURING TH E YEAR AND SUBMITTED THAT THE ISSUE DECIDED ON MERITS. HOWEVER, THE LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE ON THE GROUND THAT THE BILL WERE RECEIVED AS ALLEGED BY THE ASSESSEE WAS ONLY SETTLED DURING THE YEAR AFTER THE SAME WERE RECEI VED AND THEREFORE CRYSTALLISED DURING THE YEAR AND THUS REJECTED THE OBSERVATIONS OF THE AO. 11.1 THE LD. DR SUBMITTED BEFORE US THAT THE THAT THE AMOUNT OF RS.12,83,864/ - HAS INCURRED BY THE ASSESSEE VIDE BILL DATED 25.10.2005 RECEIVED FROM M.P.MALVI YA TOWARDS REPAIRS OF FURNITURE TOWARDS CIVIL WORK, POP, PAINTING WORK ETC WERE PERTAINING TO EARLIER YEAR AND WRONGLY BROUGHT IN THIS YEAR, THEREFORE, THE AO HAD RIGHTLY DISALLOWED THE SAME. THE LD. DR PRAYED THAT THE ORDER OF AO BE UPHELD AND THE OR DER OF LD. CIT(A) BE SET ASIDE. 11 .2. PER CONTRA, THE LD. AR SUBMITTED BEFORE US THAT THE ASSESSEE 21 6751/MUM/2011 AND NO.4089/MUM/2012 HAD CARRIED OUT HEAVY REPAIRS TO FURNITURE, POP AND PAINTING WORK ETC WHICH WERE DAMAGED DUE TO HEAVY RAIN IN 2005 AND THE BILLS WERE RECEIVED AND SETTL ED DURING THE YEAR AND THUS, THE SAME WAS BOOKED IN THE CURRENT YEAR AND THE LD. AR FURTHER SUBMITTED THAT THE AO HAS NO BASIS TO DISALLOW THESE ESSENTIAL EXPENSES INCURRED, WHICH WERE EXCLUSIVELY FOR THE BUSINESS PURPOSES AND SMOOTH RUNNING OF THE B USINESS. HE SUBMITTED THAT THE AO DISALLOWED THESE EXPENSES ON THE GROUND THAT THE BILL WAS DATED 25.10.2005 AND WITHOUT GOING INTO THE FURTHER DETAILS HAS TO BE CRYSTALLISED ALL THESE EXPENSES. THE LD. AR ARGUED THAT MERE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING DID NOT MANDATE THAT ALL THE EXPENSES WHICH ARE NOT EVE KNOWN TO THE ASSESSEE OR WHICH WERE NOT POSSIBLE IF ESTIMATED WITH SOME CERTAINTY AT THE YEAREND SHOULD NOT BE PROVIDED IN THAT YEAR AND THUS RIGHTLY CLAIMED IN THE CURRENT YEAR. THE LD . CIT(A) HAS RIGHTLY ALLOWED THE APPEAL OF THE ASSESSEE AND THE ORDER OF THE LD. CIT(A) SHOULD BE UPHELD ON THIS SQUARE. 11.3 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED MATERIAL AVAILABLE BEFORE US AND WE FIND THAT THE BILL DATED 25.10.2005 OF RS.12,83,864/ - IS IN RESPECT OF REPAIRS AND MAINTENANCE OF THE FURNITURE, POP, PAINTING ETC WERE SETTLED AND FINALISED DURING THE YEAR. WE FURTHER OBSERVED FROM THE SAID RECORD S THAT THE SAID BILL COULD NOT BE ACCOUNTED FOR IN THE YEAR TO WHICH IT PERTA INED AS IT WAS RECEIVED LATE AND AT THE YEAR END IT COULD NOT BE POSSIBLE TO ESTIMATE THE LIABILITY WITH REASONABLE DEGREE OF ACCURANCY. THE BILL WAS RECEIVED IN THE SUBSEQUENT YEAR AND THE CIT(A) HAS RECORDED THE FINDING OF FACTS THAT THE CRYSTALLISATIO N HA D TAKEN PLACED DURING THE YEAR AND PERTAIN ED TO THE CURRENT YEAR AND AO HA D WRONGLY DISALLOWED THE SAME . WE, THEREFORE UPHOLD THE ORDER OF LD. CIT(A) ON THIS GROUND 22 6751/MUM/2011 AND NO.4089/MUM/2012 BY DISMISSING THE APPEAL OF THE REVENUE ON THIS GROUND. THE AO IS DIRECTED ACCORDI NGLY. . 12 . THE ISSUE RAISED BY THE REVENUE IN THE GROUND NO.3 AGAINST THE SUSTAINING OF ADDITION TO THE EXTENT OF RS. 10,00,000/ - AGAINST RS. 23,47,67,605 AS MADE BY THE AO U/S 14 A OF THE ACT. WE HAVE DECIDED HEREINABOVE AN IDENTICAL ISSUE IN ITA NO 6751 /MUM/2011 ASSESSMENT YEAR 207 - 08 AND THEREFORE OUR DECISION IN THE ITA NO 6751/MUM/2011 SHALL MUTATIS MUTANDIS APPLY TO THIS ISSUE AND ACCORDINGLY WE UPHOLD THE DECISION OF THE CIT(A) ON THIS ISSUE AND THE AO IS DIRECTED ACCORDINGLY. 1 3 . THE ISSUE RAISED BY THE REVENUE IN THE GROUND NO.4 AGAINST THE DELETION OF DISALLOWANCE BY THE CIT(A) AS MADE BY THE AO U/S 36(1)(III) OF THE ACT . WE HAVE DECIDED HEREINABOVE AN IDENTICAL ISSUE IN ITA NO 6751/MUM/2011 ASSESSMENT YEAR 207 - 08 AND THEREFORE OUR DECISION IN T HE ITA NO 6751/MUM/2011 SHALL MUTATIS MUTANDIS APPLY TO THIS ISSUE AND ACCORDINGLY WE UPHOLD THE DECISION OF THE CIT(A) ON THIS ISSUE AND THE AO IS DIRECTED ACCORDINGLY. 1 4 . IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED . ORDER PRONO UNCED IN THE OPEN COURT ON MARCH, 201 6 SD SD ( C.N. PRASAD ) ( RAJESH KUMAR) / J UDICIAL M EMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 8 . 03 .201 6 SRL,SR.PS 23 6751/MUM/2011 AND NO.4089/MUM/2012 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, TRUE COPY / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
