Thermax Limited, Pune V. Deputy Commissioner of Income-tax,

ITA 512/PUN/2014

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6137 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-06-2019
• Assessment Year: 2009-2010
• Appeal Filed On: 14-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARISE FROM
• Assessee Lawyers: AND OTHER
• Keywords: Depreciation; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.512/PUN/2014 / ASSESSMENT YEAR : 2009-10 THERMAX LIMITED, 14, MUMBAI PUNE ROAD, WAKDEWADI, PUNE 411 003 PAN : AAACT3910D VS. DCIT, CIRCLE-10, PUNE APPELLANT RESPONDENT . / ITA NO.717/PUN/2014 / ASSESSMENT YEAR : 2009-10 ACIT, CIRCLE-10, PUNE VS. THERMAX LIMITED, 14, MUMBAI PUNE ROAD, WAKDEWADI, PUNE 411 003 PAN : AAACT3910D APPELLANT RESPONDENT / ORDER PER R.S. SYAL, V.P.: THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARISE FROM THE ORDER PASSED BY THE COMM ISSIONER OF ASSESSEE BY SHRI H.P. MAHAJANI & SHRI SANJAY BHAVE REVENUE BY MRS. NANDITA KANCHAN DATE OF HEARING 18-09-2019 DATE OF PRONOUNCEMENT 19-09-2019 ITA NO.512 & 717/PUN/2014 THERMAX LTD., 2 INCOME-TAX (APPEALS)-2, NASHIK ON 29-01-2014 IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2. BEFORE PROCEEDING WITH THESE APPEALS, IT IS PERTINENT TO MENTION THAT THE CROSS APPEALS OF THE ASSESSEE AS WELL AS THE REVEN UE FOR THE A.YS. 2006-07 TO 2008-09 CAME UP FOR HEARING BEFORE THE TRIBUNAL ON 11.09.2019, FOR WHICH SEPARATE ORDERS HAVE BEEN PA SSED, ONE FOR THE A.Y. 2006-07 (ITA NO. 509 AND 714 OF 2014) AND O NE FOR THE OTHER TWO YEARS (ITA NO. 510 TO 511 AND 715 TO 716 OF 2 014) . SOME OF THE ISSUES RAISED IN THE INSTANT APPEALS ARE SIMILAR TO THOSE RAISED IN THE EARLIER YEARS INCLUDING THE A.YS. 2006-07 TO 2 008-09. BOTH THE SIDES ARE IN AGREEMENT THAT FACTS AND CIRCUMSTANCES OF SUCH SIMILAR GROUNDS ARE MUTATIS MUTANDIS SIMILAR TO THE EARLIER YEARS, EXCEPT WHERE SEPARATELY ARGUED. 3. GROUND NO.1 OF THE ASSESSEES APPEAL AND GROUND NO.1 OF THE REVENUES APPEAL ARE AGAINST THE SUSTENANCE/ DELETION OF AD DITION ON ACCOUNT OF REVENUE RECOGNITION IN RESPECT OF FREIGHT AND CON TRACT ACTIVITY. 4. GROUND NO.3 OF THE ASSESSEES APPEAL IS AGAINST THE AD DITION ON ACCOUNT OF LIQUIDATED DAMAGES. GROUND NO. 2 OF THE REV ENUES APPEAL IS ALSO ON THE SAME ISSUE. ITA NO.512 & 717/PUN/2014 THERMAX LTD., 3 5. GROUND NO.4 OF THE ASSESSEES APPEAL IS AGAINST TH E ADDITION ON ACCOUNT OF CLAIM OF DEPRECIATION AT 80% ON CERTAIN PLANT AND MACHINERY. 6. THE ABOVE ISSUES HAVE BEEN DETERMINED BY THE TRIBU NAL IN EARLIER YEARS IN FAVOUR OF THE ASSESSEE. AS SUCH, THE AB OVE GROUNDS OF THE ASSESSEE ARE ALLOWED AND THOSE OF THE REVENUE ARE DISMISSED. 7. GROUND NO. 2 OF THE ASSESSEES APPEAL IS AGAINST TH E CONFIRMATION OF ADDITION IN RESPECT OF PRIOR PERIOD EXPENSES AMOUNTING TO RS.12,93,616/-. SUCH GROUND HAS BEEN DISM ISSED BY THE TRIBUNAL IN EARLIER YEARS. FOLLOWING THE SAME, WE DISMISS TH IS GROUND OF APPEAL AS WELL. 8. GROUND NO.5 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE AMOUNTING TO RS.192.02 LAKH MADE BY THE AO U/S.14A READ WITH RULE 8D. 9. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE EA RNED DIVIDEND OF RS.21.84 CRORE, WHICH WAS CLAIMED AS EXEMPT . TOTAL INVESTMENT OF RS.176.45 CRORE WAS MADE. THE ASSESSEE OFFERED SUO MOTO DISALLOWANCE U/S.14A FOR A SUM OF RS.54.59 LAKH. INVOKIN G THE PROVISIONS OF SECTION 14A R.W. RULE 8D, THE AO COMPUTED THE TOTAL DISALLOWANCE AT RS.246.61 LAKH. AFTER ALLOWING THE BENEF IT OF ITA NO.512 & 717/PUN/2014 THERMAX LTD., 4 AMOUNT ALREADY OFFERED BY THE ASSESSEE, HE COMPUTED NET DISALLOWANCE AT RS.192.02 LAKH, WHICH CAME TO BE AFFIRMED IN THE FIRST APPEAL. 10. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE DISALLOWANCE HAS BEEN MADE IN TWO PARTS. THE FIRST COMPONENT OF DISALLOWANCE IS ON ACCOUNT OF INTERES T U/S.14A R.W. RULE 8D(2)(II). IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE SHAREHOLDERS FUND OF THE ASSESSEE INCLUDING RESERVE A ND SURPLUS AS ON 31-03-2009 STANDS AT RS.961.89 CRORE AS AGAINST THE TOTAL AMOUNT OF INVESTMENTS STANDING AT RS.176.45 CRORE. 11. THE ISSUE OF DISALLOWANCE OF INTEREST UNDER RULE 8D( 2)(II) IS NOW NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT DELIVERED BY THE HON'BLE SUPREME COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT (2017) 394 ITR 449 (SC) , UPHOLDING THE VIEW OF THE LOWER AUTHORITIES THAT WHEN INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES ETC. ARE MORE THAN THE AMOUNT OF INVESTMENT, THEN NO DISALLOWANCE OF INTEREST CAN BE MADE U/S 14A. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE BOMBAY HIGH COU RT IN CIT VS. HDFC BANK LTD. (2014) 366 ITR 515 (BOM). THE HON'BLE KARNATAKA HIGH COURT IN CIT & ANR VS. MICROLABS (2016) 383 ITR 490 (KAR) HAS ALSO HELD THAT WHEN INVESTMENTS ARE MADE FROM A ITA NO.512 & 717/PUN/2014 THERMAX LTD., 5 COMMON POOL AND NON-INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENT IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A CAN BE MADE. RESPECTFULLY FOLLOWING THE PRECEDENTS, WE ORDER TO DELETE THE DISALLOWANCE UNDER RULE 8D(2)(II). 12. IN SO FAR AS THE SECOND PART OF THE DISALLOWANCE UNDE R RULE 8D(2)(III) IS CONCERNED, IT IS SEEN THAT ORDINARILY THE DISALLOWANC E IS MADE AT 0.5% OF THE AVERAGE VALUE OF INVESTMENTS, AS HA S BEEN DONE BY THE AO. HOWEVER, IN THIS REGARD, IT IS RELEVANT TO NOTE THAT THE HONBLE DELHI HIGH COURT IN ACB INDIA LTD. VS. CIT (2015) 374 ITR 108 (DEL) HAS HELD THAT THE AVERAGE VALUE OF INVESTMENTS, FOR THE PURPOSES OF RULE 8D(2)(III), SHOULD BE CONFINED TO THOSE S ECURITIES IN RESPECT OF WHICH EXEMPT INCOME IS EARNED AND NOT THE TOTAL INVESTMENTS. SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL BEN CH OF THE TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTMENTS (P) LTD. (2017) 165 ITD 27 (DEL) (SB) HOLDING THAT ONLY THOSE INVESTMENTS SHOULD BE CONSIDERED FOR COMPUTING AVERAGE VALUE OF INVES TMENTS WHICH YIELD EXEMPT INCOME DURING THE YEAR. 13. THE LD. AR CONTENDED THAT THE ASSESSEE DID NOT EARN EX EMPT INCOME FROM CERTAIN INVESTMENTS AND HENCE THEY SHOULD BE EXCLUDED. SINCE THE RELEVANT FACTS FOR DETERMINING SUCH AN IS SUE ARE ITA NO.512 & 717/PUN/2014 THERMAX LTD., 6 NOT AVAILABLE ON RECORD, WE SET-ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO WITH A DIRECTION TO DECIDE IT ACCORDING LY. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING. 14. GROUND NO.8 OF THE ASSESSEES APPEAL AND GROUN D NO.4 OF THE REVENUES APPEAL ARE AGAINST THE CONFIRMATION/DELETION OF ADD ITION TOWARDS PROVISION OF WARRANTY. 15. BOTH THE SIDES AGREE THAT SIMILAR GROUNDS HAVE CO NSISTENTLY BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES FAVOUR FOR TH E EARLIER ASSESSMENT YEARS. FOLLOWING THE PRECEDENTS, WE DECIDE THESE GROUNDS OF THE APPEALS IN THE ASSESSEES FAVOUR. 16. GROUND NO.6 OF THE ASSESSEES APPEAL IS AGAINST TH E CONFIRMATION OF SALES COMMISSION @10% AMOUNTING TO RS.1,25,36,932/-. FOLLOWING THE VIEW TAKEN BY THE TRIBUNAL IN EARLIER YEARS IN DELETING SUCH AD HOC ADDITIONS, EXCEPT THE A.Y. 2006-07 FOR THE SPECIAL REASONS AS DISCUSSED IN THE TRIBU NAL ORDER FOR THAT YEAR, WE ORDER TO DELETE THE SUSTENANCE OF AD HOC DISALLOWANCE OUT OF THE COMMISSION EXPENSE. 17. GROUND NO.7 OF THE ASSESSEES APPEAL IS AGAINST TH E CONFIRMATION OF ADDITION OF RS.6.89 CRORE TOWARDS LEGAL AND ITA NO.512 & 717/PUN/2014 THERMAX LTD., 7 PROFESSIONAL FEES PAID TO BAKER & MCKINSEY LLP AND OTHERS. THIS GROUND IS ADMITTEDLY SIMILAR TO GROUND NO. 7 FOR THE A.YS. 2 007-08 AND 2008-09. FOLLOWING THE VIEW IN SUCH EARLIER YEARS, WE ALLO W THIS GROUND OF APPEAL. 18. GROUND NO. 9 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS.11,06,00,000/- ON ACCO UNT OF FOREIGN FLUCTUATION EXCHANGE LOSS AND LOSS SUFFERED IN A SE PARATE CONTRACT IN THE NEXT YEAR. 19. THE FACTS CONCERNING THIS ISSUE ARE THAT THE ASSESSEE C LAIMED DEDUCTION OF NET FOREIGN EXCHANGE LOSS OF RS.89.54 CRORE. THE INSTANT DISPUTE RELATES TO TWO ITEMS OF LOSS, NAMELY, RS.2.18 CRORE ON ACCOUNT OF EXCHANGE GAIN/LOSS ON ACCOUNT OF OPEN FORW ARD CONTRACT AND RS.8.88 CRORE, BEING, A PROVISION AGAINST SAB AH FORWARD CONTRACT AS THE ORDER WAS CANCELLED BEYOND THE YE AR ENDING. ON BEING CALLED UPON TO EXPLAIN THE REASONS FOR CLAIMING DE DUCTION IN RESPECT OF THESE ITEMS, THE ASSESSEE CONTENDED THAT LOSS O F RS.2.18 CRORE WAS ON ACCOUNT OF MTM EXERCISE AND FURTHER LOSS O F RS.8.88 CRORE WAS ON ACCOUNT OF INEFFECTIVE HEDGE FOR ITS SABAH OR DER AND IT WAS IN THE NATURE OF PROVISION AGAINST MTM LOSS WITH RESPEC T TO FORWARD CONTRACT OF THE SAID ORDER WHICH WAS CANCELLED. T HE AO TOOK NOTE OF THE INSTRUCTION NO.03/2010 PROVIDING FOR NOT ALLO WING ITA NO.512 & 717/PUN/2014 THERMAX LTD., 8 DEDUCTION IN RESPECT OF MTM LOSS. HE FURTHER HELD THAT THE LOSS OF RS.8.88 CRORE WAS A CONTINGENT LOSS AS ON THE CLOSING DATE AND HENCE NOT DEDUCTIBLE. THE LD. CIT(A) ECHOED THE ASSESSMENT ORDER ON THE POINT. 20. HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD, IT IS SEEN THAT NEITHER THE AO NOR THE LD. F IRST APPELLATE AUTHORITY HAS DISPUTED THE FACT THAT THE FIRST ITEM OF LOS S OF RS.2.18 CRORE IS ON ACCOUNT OF A TRANSACTIONS OTHERWISE O F REVENUE NATURE AND THIS TRANSACTION RESULTED DUE TO MARKING THE LIABILITY TO MARKET RATE AS AT THE END OF THE YEAR. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. BANK OF BAHRAIN AND KUWAIT (2010) 132 TTJ 505 (SB)(MUM) HAS HELD THAT SUCH LOSS OR PROFIT IS OF REVENUE CHARACTER. AFTER CONSIDERING THE ADVERSE INSTRUCTION NO.03 /2010, THE HONBLE DELHI HIGH COURT IN MUNJAL SHOWA VS. DCIT (2016) 67 TAXMANN.COM 359 (DELHI) HAS HELD THAT SUCH LOSS/PROFIT TO BE OF REVENUE CHARACTER. IT FURTHER HELD THAT THE CBDT INSTRUCTION CANNOT OVERRIDE THE JUDICIALLY SETTLED POSITION. IN VIEW OF THE FOREGOIN G, WE OVERTURN THE IMPUGNED ORDER AND DIRECT TO DELETE THE ADDITION OF RS.2.18 CRORE. 21. AS REGARDS THE LOSS OF RS.8.88 CRORE, THE LD. C IT(A) HAS HELD THAT THE LOSS ACTUALLY HAPPENED IN APRIL/MAY, 2009 AND HENCE W AS OF ITA NO.512 & 717/PUN/2014 THERMAX LTD., 9 CONTINGENT NATURE. THE LD. AR HARPED ON THE FACT THAT IT WAS AN EVENT OCCURRING AFTER THE BALANCE SHEET DATE, BUT AFFECTING THE PR OFITABILITY FOR THE YEAR UNDER CONSIDERATION, AND HENCE SHOULD BE ALLO WED. 22. IN OUR OPINION, THE AUTHORITIES BELOW HAVE CORRECTLY VIEWED THIS TRANSACTION AS NOT AFFECTING THE PROFIT FOR THE YEAR UNDER CONSIDERATION. THE CONTRACT, RESULTING INTO LOSS OF RS.8.88 CR ORE, WAS ACTUALLY CANCELLED IN APRIL/MAY OF 2009, WHICH FALLS IN THE SUCCEEDING YEAR. EVEN THOUGH IT IS AN EVENT OCCURRING AFTE R THE BALANCE SHEET DATE, BUT IT FALLS IN THE CATEGORY OF `NON-ADJUSTIN G EVENTS, FOR WHICH THE ACCOUNTS CLOSING BEFORE THAT DATE ARE NOT TO BE ADJUSTED. INCURRING OF LOSS IN A SUCCEEDING YEAR IS SOMETHIN G QUITE DIFFERENT FROM MARKING TRANSACTION TO MARKET RATE AS AT THE CLO SE OF THE YEAR. SINCE THE INSTANT LOSS OF RS.8.88 CROER ACTUALLY FE LL UPON THE ASSESSEE IN THE SUCCEEDING YEAR, THE SAME CANNOT BE A LLOWED AS DEDUCTION IN THE YEAR UNDER CONSIDERATION. 23. GROUND NO.3 OF THE REVENUES APPEAL IS AGAINST THE D ELETION OF DISALLOWANCES MADE ON ACCOUNT OF PUBLIC RELATION EXPENSES, M ISC. EXPENSES, VEHICLE EXPENSES, FOREIGN TRAVEL EXPENSES AND TELEPHONE EXPENSES. ITA NO.512 & 717/PUN/2014 THERMAX LTD., 10 24. BOTH THE SIDES AGREE THAT THIS GROUND IS SIMILAR TO THE GROUND NO.3 OF THE REVENUES APPEAL FOR THE A.Y. 2008-09 IN WH ICH THE AD HOC ADDITIONS MADE BY THE AO HAVE FINALLY BEEN DELETED BY THE TRIBUNAL. RELEVANT DISCUSSION HAS BEEN MADE IN PARAS 30 & 31 ON PAGE 12 OF THE ORDER OF TRIBUNAL. FOLLOWING THE SAME, THIS GROUND IS NOT ALLOWED. 25. GROUND NO.5 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.1,10,87,830/- ON ACCOUNT OF PROVISION FOR MEDICAL AND LTA EXPENSES. BOTH THE SIDES AGREE THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THE GROUND NO.5 OF THE REVENUES APPEAL FOR THE A.Y. 2008-09. RELEVANT DISCUSS ION HAS BEEN MADE IN PARAS 32 AND 33 ON PAGE 13 OF THE TRIBUNA L ORDER DETERMINING THE ISSUE IN ASSESSEES FAVOUR. FOLLOWING THE SAM E, WE UPHOLD THE IMPUGNED ORDER ON THIS SCORE. 26. GROUND NO.6 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE ON ACCOUNT OF UNPAID AMOUNT OF PROVISION OF SHORT TERM INCENTIVE PLAN AMOUNTING TO RS.5,99,25,000/-. 27. HERE AGAIN, BOTH THE SIDES AGREE THAT THE FACTS AND CIRCUMSTANCES OF THIS ISSUE ARE SIMILAR TO GROUND NO.3 OF TH E REVENUES APPEAL FOR THE A.Y. 2006-07, IN WHICH THIS ISSUE HAS BEEN ITA NO.512 & 717/PUN/2014 THERMAX LTD., 11 DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE. RESPE CTFULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER ON THIS SCORE. 28. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THAT OF THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH SEPTEMBER, 2019. SD/- SD/- (S.S. VISWANETHRA RAVI) (R.S.SY AL) JUDICIAL MEMBER VICE P RESIDENT PUNE; DATED : 19 TH SEPTEMBER, 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-2, NASHIK 4. 5. 6. THE CCIT, NASHIK , , / DR B, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE ITA NO.512 & 717/PUN/2014 THERMAX LTD., 12 DATE 1. DRAFT DICTATED ON 18-09-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 18-09-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *