The DCITRange-1, Ahmedabad V. Adani Enterprises Ltd., Ahmedabad

ITA 558/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9918 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 01-12-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R I PATEL
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Proportionate interest; Question of law; Revised return; Capital expenditure
• Section: 92C; 43B; 143(3); 10AA; 80HHC; 234B; 14A; 115JB; 80IB; 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH BEFORE: S H RI PRAMOD KUMAR , ACCOUNTANT MEMBER AND SHR I S. S. GODARA , JUDICIAL MEMBER ADANI ENTERPRISES LTD, ADANI HOUSE, NR. FORTUNE HOUSE, NAVARANGPURA, AHMEDABAD - 380009 PAN: AABCA 2804 L (APPELLANT) VS ADDL. COMMISSIONER OF INCOME TAX, RANGE - 1, AHMEDABAD (RESPONDENT) DCIT, CIRCLE - 01, AHMEDABAD (APPELLANT) VS ADANI ENTERPRISES LTD, ADANI HOUSE, NR. FORTUNE HOUSE, NAVARANGPURA, AHMEDABAD - 380009 PAN: AABCA 2804 L (RESPONDENT) ITA NO. 1859 /AHD/20 11 ASSESSMENT YEAR 200 6 - 07 ITA NO. 2078 /AHD/20 11 ASSESSMENT YEAR 200 6 - 07 I T A NO . 486 / A HD/20 12 A SSESSMENT YEAR 2 00 7 - 08 I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 2 ADANI ENTERPRISES LTD, ADANI HOUSE, NR. FORTUNE HOUSE, NAVARANGPURA, AHMEDABAD - 380009 PAN: AABCA 2804 L (APPELLANT) VS ADDL. COMMISSIONER OF INCOME TAX, RANGE - 1, AHMEDABAD (RESPONDENT) DCIT, CIRCLE - 01, AHMEDABAD (APPELLANT) VS ADANI ENTERPRISES LTD, ADANI HOUSE, NR. FORTUNE HOUSE, NAVARANGPURA, AHMEDABAD - 380009 PAN: AABCA 2804 L (RESPONDENT) REVENUE BY : S H RI R.I. PATEL, CIT - D . R. ASSESSEE BY: S H RI S.N. SOPARKAR , A.R. DATE OF HEARING : 01 - 12 - 2 015 DATE OF PRONOUNCEMENT : 01 - 01 - 2 01 6 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS IS A SET OF FOUR APPEALS. THE ASSESSEE AND REVENU E HAVE FILED CROSS APPEAL S ITA NO S. 1859 & 2078/AHD/2011 AGAIN ST ORDER OF THE CIT(A) - VI DATED 01 - 06 - 2011 IN APPEAL NO. CIT(A) - ITA NO. 558 /AHD/20 12 ASSESSMENT Y EAR 200 7 - 08 I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 3 VI/DCIT.CIR.1/404/08 - 09 F OR ASSESSMENT YEAR 2006 - 07. THE NEXT ASSESSMENT YEAR 2007 - 08 INVOLVES SIMILAR CROSS APPEALS NO. 486 & 558/AHD/2012 AGAINST ORDER OF THE LOWER APPELLATE AUTHORITY DATED 20 - 12 - 2011 IN APPEAL NO. CIT(A) - VI/ADDL.CIT./R.1/334/2010 - 11 THE RELEVANT PROCEEDI NGS ARE U/S, 143(3) AND 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961, IN SHORT THE ACT RESPECTIVELY. WE PROCEE D ASSESSMENT YEAR WISE FOR THE SAKE OF CONVENIENCE AND BREVITY. ASSESSMENT YEAR 2006 - 07 2. THE ASSESSEE S APPEAL ITA 1859/AHD/2011 RAISES FIRST SUBSTANTIVE GROUND CHALLENGING THE CIT(A) S ACTION IN CONFIRMING PRIOR PERIOD EXPENDITURE DISALLOWANCE OF RS. 67,88,591/ - MADE IN THE COURSE OF A REGULAR ASSESSMENT. THIS ASSESSEE - COMPANY IS ENGAGED IN A VARIETY OF BUSINESSES I.E. EXPORT AND IMPORT, DOMESTIC TRADING AND MANUFACTURING OF COMMODITIES. IT CLAIM ED PRIO R PERIOD EXPENDITURE INTER ALIA ON THE GROUND THAT THE VERY PRACTICE IS CONSISTENTLY FOLLOWED IN MANY ASSESSMENT YEAR S , PRIOR PERIOD INCOME OF RS. 24,53,397/ - HAD ALREADY BEEN DECL ARED, RELEVANT BILLS HAD NOT BEEN RECEIVED AT THE TIME OF FINALIZING ACCOUNTS OF THE PREVIOUS ASSESSMENT YEAR, ITS UNIQUE BUSINESS GAVE RISE TO CREDIT AND DEBIT ENTRIES OF EARLIER YEARS, THERE WAS NO REVENUE LOSS INVOLVED AND THE ISSUE HAD ALREADY BEEN DEC IDED IN ITS FAVOUR IN EARLIER ASSESSMENT YEAR S . THIS WAS FOLLOWED A N ALTERNATIVE PLEA OF NETTING OF PRIOR PERIOD INCOME AGAINST THE I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 4 IMPUGNED EXPENDITURE. THE ASSESSING OFFICER REJECTED ALL THIS EXPLANATION BY QUOTING LACK OF PROOF OF CRYSTALLIZATION OF T HE IMPUGNED EXPENDITURE. HE OBSERVED THAT NO SUPPORTIVE BILLS, VOUCHERS , AND REASONING FOR LACK OF PROVISION THEREOF HAD BEEN SUBMITTED. HE CONCLUDED IN THE END THAT THE NETTING PLEA COULD NOT BE ACCEPTED SINCE PRIOR PERIOD INCOME HEREINABOVE HAD NOT BEE N ASSESSED IN CORRESPONDING ASSESSMENT YEAR. ALL THIS CULMINATED IN THE IMPUGNED DISALLOWANCE WHICH IN TURN STANDS AFFIRMED IN LOWER APPELLATE PROCEEDINGS. 3. THE ASSESSEE RAISES MULTI - FOLDED ARGUMENTS IN THE COURSE OF HEARING. IT INVITES OUR ATTENTION TO THE FACT THAT ITS PRIOR PERIOD INCOME ALREADY STAND ASSESSED. RELEVANT BILLS AND VOUCHERS OF THE IMPUGNED PRIOR PERIOD EXPENDITURE ARE STATED TO HAVE BEEN RECEIVED ONLY IN THE RELEVANT PREVIOUS YEAR AFTER BEING CRYSTALIZED . IT IS STATED TO HAVE BEEN FOLLOWING CONSISTENT ACCOUNTING PRACTICE AS IN PRECEDING ASSESSMENT YEAR S . THE ASSESSEE ACCORDINGLY ARGUES THAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING THE IMPUGNED PRIOR PERIOD EXPENDITURE. THE NETTING PLEA AS RAISED BEFORE THE LOWER AUTHOR ITIES IS ALSO REITERATED. IT CITES RELEVANT CASE LAW WHICH WOULD BE DISCUSSED IN SUCCEEDING PARAGRAPHS. 4. THE REVENUE STRONGLY SUPPORTS THE BOTH THE LOWER AUTHORITIES ACTION IN MAKING THE IMPUGNED DISALLOWANCE BY SUBMITTING THAT THE RELEVANT DETAILS HA VE NOT BEEN FILED IN LOWER PROCEEDINGS SO AS TO PROVE CRYSTALLIZATION OF PRIOR PERIOD EXPENDITURE. IT SUBMITS THAT I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 5 ASSSESSEE S ACCOUNTING SYSTEM GOES CONTRARY TO MERCANTILE SYSTEM SINCE ITS EXPENDITURE HAS NOT BEEN CLAIMED IN CORRESPONDING ASSESSMENT YEAR . THREE JUDICIAL DECISIONS ARE ALSO QUOTED IN SUPPORT. 5. WE HAVE HEAR D RIVAL CONTENTIONS. PAGE 13 TO 16 OF THE PAPER BOOK COMPRISE ALL DETAILS OF ASSESSEE S PRIOR PERIOD EXPENDITURE AMOUNTING TO RS. 67,88,591/ - FALLING UNDER MAJOR HEADS OF C & F, M ISC. EXPENDITURE, OUTWARD FREIG HT AND TRAVELLING ETC. ITS LEDG E R ACCOUNT S REVEALS THAT THE SAME HAVE BEEN RECOGNIZED ON VARIOUS DATES FROM 01 - 04 - 2005 TO 31 - 03 - 2006. THERE IS HARDLY ANY DISP UTE ON GENUINENESS ASPECT OF THE ABOVE STATED EXPENDITURE HEADS. THIS IS NOT THE REVENUE S CASE THAT THE SAME IS CAPITAL EXPENDITURE OTHERWISE NOT ALLOWABLE U/S. 37 OF THE ACT. BOTH THE LOWER AUTHORITIES NOWHERE REBUT ASSESSEE S CASE THAT IT HAS BEEN FOLLOWING PAST PRACTICE OR THE ISSUE STANDS DECIDED IN ITS FAVOUR IN EARLIER ASS ESSMENT YEARS. C ASE LAW (1958) 33 ITR 681 (BOM) CIT VS. NAGRI MILLS CO. LTD HOLDS THAT WHEN AN ASSESSEE COMPANY IS ASSESSED AT UNIFORM RATE, YEAR OF RAISING AN EXPENDI TURE CLAIM IS OF NO CONSEQUENCE, M ORE PARTICULARLY, WH EN THE SAME IS ALLOWAB LE. N EXT JUDGMENT (2010) 194 TAXMANN 158 (DEL) CIT VS. JAGATJIT INDUSTRIES ACCEPTS CONSISTENT ACCOUNTING PRACTICE CLAIMING IDENTICAL EXPENDITURE IN MERCANTILE SYSTEM OF ACCOUNTING WHEREIN THE NECESSARY EXPENDITURE VOUCHERS HAVE BEEN RECEIVED AFTER 31 ST MA RCH OF THE RELEVANT ACCOUNTING PERIOD. CASE LAW (2014) 221 TAXMANN 80 (BOM) CIT VS. MAHANAGAR GAS LTD SUPPORTS ASSESSEE S CASE THAT I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 6 PRIOR PERIOD EXPENDITURE CRYSTALLIZE DURING THE YEAR ON RECEIPT OF BILL S IS ALLOWABLE. THIS IS FOLLOWED BY (2010) 328 ITR 17 (DEL) CIT VS. EXXON MOBIL LUBRICANTS PVT. LTD UPHOLDING CIT(A) S AND TRIBUNAL S VIEW THAT IF THE ASSESSEE ADMITS PRIOR PERIOD INCOME WHICH WAS NOT EXCLUDE D WHILE WORKING OUT RELEVANT PREVIOUS YEAR INCOME, IT IS UNREASONABLE TO ALLOW ONE PART OF PRIOR P ERIOD ADJUSTMENT I.E. PRIOR PERIOD EXPENDITURE. WE COME TO REVENUE S CASE LAW NOW. THE FIRST ONE IS (2013) 33 TAXMANN.COM 92 (BANG) BEARING POINT BUSINESS SOLUTIONS VS. DCIT AND (2013) 35 TAXMANN.COM (HYD) NOW BHARAT VENTURES LTD VS. CIT DECIDING THE ISSUE IN REVENUE S FAVOUR. WE FIND THAT THESE TRIBUNAL S DECISIONS DO NOT CONFIRM TO DIFFERENT VIEWS OF VARIOUS HON BLE HIGH COURTS HEREINABOVE. N EXT CASE LAW (2013) 42 TAXMANN.COM 142 (GUJ) CIT VS. GUJARAT MINERAL DEVELOPMENT CORPORATION IS AN ADMISSION ORDER AFTER FRAMING SUBSTANTIAL QUESTION OF LAW WHEREIN THE MAIN CASE IS STILL PENDING FOR FINAL DISPOSAL . WE OBSERVE THAT THIS LA TTER ORDER DOES NOT SETTLE A RATIO. WE TAKE INTO ACCOUNT ABOVE STATED DISCUSSIONS , RELEVANT FACTS AND CASE LAW TO CONCLUDE T HAT BOTH THE LOWER AUTHORITIES HAVE WRONGLY DISALLOWED ASSESSEE S CLAI M OR PRIOR PERIOD EXPENDITURE. THE SAME STANDS DELETED. THIS FIRST SUBSTANTIVE GROUND IS TREATED AS ALLOWED. 6. THE NEXT TWO SUBSTANTIVE GROUNDS RAISED IN ASSESSEE S APPEALS CHALLENG E INTEREST LEVIES U/S. 234B - D OF RS. 13,31,538/ - , RS. 21,96,126/ - AND RS. 3,24,127/ - RESPECTIVELY. ITS FURTHER GRIEVANCE IS I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 7 THAT ONCE ITS IMPUGNED PRIOR PERIOD EXPENDITURE IS DISALLOWED, AN IDENTICAL CLAIM OF RS. 2,80,17,537/ - RAISED IN THE SUCCEEDING YEA R 2007 - 08 IS LIABLE TO BE ACCEPTED IN THE IMPUGNED ASSESSMENT YEAR AS THE SAME STANDS DISALLOWED THEREIN AS PRIOR PERIOD EXPENDITURE. BOTH PARTIES ARE UNANIMOUS THAT OUR FINDINGS ON FIRST SUBSTANTIVE GROUND DECIDED HEREINABOVE RENDER THE SAME AS HAVING BE COME INFRUCTUOUS. ORDERED ACCORDINGLY. 7. THE ASESSEEE S LAST SUBSTANTIVE GROUND PLEADS THAT THE CIT(A) HAS ERRED IN DISMISSING ITS ADDITIONAL GROUND SEEKING DIRECTIONS TO ASSESSING OFFICER TO REDUCE TOTAL ASSESSED INCOME BY RS. 3,72,10,750/ - BEING MARK TO MARKET GAIN ON ACCOUNT OF OUTSTANDING LIABILITY FOR FCCB ISSUED IN 2004 SHOWN AS INCOME WHICH HAS BEEN DISALLOWED IN IMPUGNED ASSESSMENT YEAR DUE TO FLUCTUATION IN FOREIGN EXCHANGE RATES. THE CASE FILE INDICATES THAT THE CIT(A) HAS REJECTED THE SAME INTER ALIA BY HOLDING THAT THIS CLAIM WAS NOWHERE MADE DURING ASSESSMENT NOR IS ANY MATERIAL FORTHCOMING FROM THE CASE FILE ON RECORD. 8. HEARD BOTH SIDES. ASSESSEE AS WELL AS REITERATE THEIR RESPECTIVE STANDS. THERE IS NO DISPUTE THAT THIS PLEA WAS RA ISED IN LOWER APPELLATE PROCEEDINGS ONLY. WE FIND IN THESE FACTS THAT THE HON BLE JURISDICTIONAL HIGH COURT IN (2014) 270 CTR 66 (GUJ) CIT VS. MITESH IMPEX SETTLES THE LAW REGARDING ADMISSIBILITY OF ADDITIONAL GROUNDS RAISED BEFORE APPELLATE FO R U MS AS UN DER: - I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 8 27. IN THE CASE OF ALL OTHER ASSESSEES SIMILAR FACTS EMERGE. THE CLAIMS UNDER SECTION 80 - IB/80HHC WERE MADE FOR THE FIRST TIME BEFORE CIT(APPEALS)AND FROM FACTS ON RECORD GRANTED TO THE EXTENT FOUND ALLOWABLE. THE TRIBUNAL HAD CONFIRMED THE VIEW OF CIT (APPEALS). WE MAY RECORD THE TRIBUNAL'S DISCUSSION ON THIS ASPECT. '36. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. WE RELIED UPON THE DECISION OF HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF RAMCO INDUSTRIES REPORTED IN 17 DTR 241 , WHEREIN IT IS HELD AS UNDER: 'WHEN THE ASSESSEE HAVING FOLLY FURNISHED THE DOCUMENTS AND SUBMITTED FORM NO. 10CCB DURING THE ASSESSMENT PROCEEDINGS, CLAIMING THE DEDUCTION UNDER SECTION 80 - IB WHICH WAS NOT CLAIMED IN THE RETURN, THE DEDUCTION IS ADMISS IBLE EVEN IN ABSENCE OF REVISED RETURN. THE HON'BLE HIGH COURT HELD THAT THERE WAS NO REQUIREMENT FOR FILING OF ANY REVISED RETURN. HON. HIGH COURT HAS FURTHER CONSIDERED THE DECISION OF THE HON'BLE GOETZ (INDIA) LTD. V. CIT (284 ITR323) (SC) AND AFTER CON SIDERING THE DECISION OF SC THE HIGH COURT HAS HELD THAT WHEN THE ASSESSEE HAS FILED FORM NO. 1OCCB DURING THE ASSESSMENT PROCEEDINGS, THE CLAIM IS ADMISSIBLE AND CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE AND WE FIND THAT THERE IS NO REQUIREMENT OF FILING ANY REVISED RETURN.' 37. IN THE INSTANT CASE, ON HAND, THE ASSESSEE HAS FILED ALL THE REQUIRED DOCUMENTS BEFORE AO. WE FIND THAT IN SUPPORT OF THE CLAIM, AUDIT REPORT IN FORM NO. 10CCAC WAS ALSO SUBMITTED AND THAT CLAIM WAS ALSO FORWARDED TO TH E AO. THEREFORE, WE ARE OF THE VIEW THAT CIT(A) IS JUSTIFIED IN ALLOWING THE CLAIM. AS ABOUT THE DEDUCTION U/S. 80 - IB, THE CONDITION REQUIRED FOR BEING ELIGIBLE TO THE DEDUCTION ARE SIMILAR TO THAT OF THE CONDITIONS APPLICABLE FOR SECTION 10B. MOREOVER, TH ERE IS SPECIFIC BAR IN GRANTING TWO BENEFITS. THE AUDIT REPORT IN FORM NO. 1OCCB WAS FURNISHED IN SUPPORT OF THE CLAIM. THE PROVISION OF SECTION 10B(6) APPLIED TO POST HOLIDAY PERIOD APPLICABLE FOR SECTION 10B. THEREFORE, WHEN THE ASSESSEE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80 - IB. HOWEVER, FIRST PART OF PRODUCTION OF ASSESSEE HELD NOT TO BE FROM MANUFACTURING ACTIVITIES, THE PROFIT DERIVED FROM THE UNDERTAKING IS ELIGIBLE FOR DEDUCTION IS TO BE PROPORTIONATELY REDUCED. SECONDLY, THE QUANTUM OF I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 9 DEDUCTIO N UNDER SECTION 1OB IS TO BE REDUCED FROM THE BUSINESS PROFIT FROM THE ELIGIBLE PROFIT FOR UNDERTAKING FOR COMPUTING THE DEDUCTION UNDER SECTION 80 - IB. ACCORDINGLY, THE DEDUCTION UNDER SECTION 80IB HAS TO BE RECOMPUTED AND THE CIT(A) HAS ALREADY GIVEN THE DIRECTION AND THE RE - RECOMPUTATION OF DEDUCTION U/S.80 - IB IS SHOWN IN THE CIT(A)'S ORDER, THEREFORE, WE ARE OF THE VIEW THAT OUR INTERFERENCE IS NOT REQUIRED. WE THEREFORE GROUND NO.2 OF REVENUE'S APPEAL IS DISMISSED.' 28. LEARNED COUNSEL MR. PRANAV DESAI FOR THE DEPARTMENT SUBMITTED THAT IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LTD. (SUPRA), THE ASSESSEE COULD NOT HAVE MAINTAINED ADDITIONAL CLAIM THAT TOO AT AN APPELLATE STAGE WITHOUT REVISING THE RETURN. 29. ON THE OTHE R HAND LEARNED COUNSEL MR. B.S. SOPARKAR FOR THE ASSESSEES REFERRING TO VARIOUS DECISIONS OF HIGH COURTS AND SUPREME COURT CONTENDED THAT THE TRIBUNAL COMMITTED NO ERROR. WE WOULD REFER TO HIS CITATIONS AT AN APPROPRIATE STAGE. 30. IN WHAT MANNER AND TO W HAT EXTENT, A GROUND, A LEGAL CONTENTION OR A FRESH CLAIM CAN BE MADE AT AN APPELLATE STAGE ARE VEXED QUESTIONS AND HAVE OCCUPIED THE MINDS OF THE COURTS IN NUMEROUS OCCASIONS. 31. IN THE CASE OF JUTE CORPN. OF INDIA LTD. V. CI T[1991] 187 ITR 688 THE SUPR EME COURT NOTED WITH APPROVAL OBSERVATION OF THE COURT IN THE CASE OF CIT V. KANPUR COAL SYNDICATE [ 1964 ] 53 ITR 225 TO THE EFFECT THAT 'THE APPELLATE ASSISTANT COMMISSIONER, THEREFORE, HAS PLENARY POWERS IN DISPOSING OF APPEAL THE SCOPE OF HIS POWER IS C O - TERMINUS WITH THAT OF THE INCOME - TAX OFFICER. HE CAN DO WHAT THE INCOME - TAX OFFICER CAN DO AND ALSO DIRECT HIM TO DO WHAT HE HAS FAILED TO DO.' IT WAS OBSERVED THAT THERE WAS NO REASON WHY THE APPELLATE AUTHORITY CANNOT MODIFY THE ASSESSMENT ORDER ON AN ADDITIONAL GROUND EVEN IF NOT RAISED BEFORE THE INCOME - TAX OFFICER. THE ACT DOES NOT PLACE ANY RESTRICTION OR LIMITATION ON THE EXERCISE OF APPELLATE POWER. IT WAS OBSERVED THAT 'THE ABOVE OBSERVATIONS ARE SQUARELY APPLICABLE TO THE INTERPRETATION 251(L) (A) OF THE ACT. THE DECLARATION OF LAW IS CLEAR THAT THE POWER OF THE APPELLATE ASSISTANT COMMISSIONER I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 10 IS CO - TERMINUS WITH THAT OF THE INCOME - TAX OFFICER, IF THAT BE SO, THERE APPE ARS TO BE REASON AS TO WHY THE APPELLATE AUTHORITY CANNOT MODIFY THE ASSE SSM ENT ORDER ON AN ADDITION G ROUND EVEN IF NOT RAISED BEFORE THE INCOME - TAX OFFICER. NO EXCEPTION COULD BE TAKEN TO THIS VIEW AS THE ACT DOES NOT PLACE ANY RESTRICTION OR LIMITATION ON THE EXERCISE OF APPELLATE POWER. EVEN OTHERWISE AN APPELLATE AUTHORITY WHI LE HEARING APPEAL AGAINST THE ORDER OF A SUBORDINATE AUTHORITY HAS ALL THE POWERS WHICH THE ORIGINAL AUTHORITY MAY HAVE IN DECIDING THE QUESTION BEFORE IT SUBJECT TO THE RESTRICTIONS OR LIMITATIONS IF ANY PRESCRIBED BY THE STATUTORY PROVISIONS. IN THE ABSE NCE OF ANY STATUTORY PROVISION THE APPELLATE AUTHORITY IS VESTED WITH ALL THE PLENARY POWERS WHICH THE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. THERE APPEARS TO BE NO GOOD REASON AND NONE WAS PLACED BEFORE US TO JUSTIFY CURTAILMENT OF THE POWER OF THE APPELLATE ASSISTANT COMMISSIONER IN ENTERTAINING AN ADDITIONAL GROUND RAISED BY THE ASSESSEE IN SEEKING MODIFICATION OF THE ORDER OF ASSESSMENT PASSED BY THE INCOME - TAX OFFICER.' 32. IN CASE OF NATIONAL THERMAL POWER CO. LTD. V. CI T[1998] 229 ITR 383 (SC ) WHEN THE QUESTION OF LAW WAS RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL THOUG H F ACTS WERE ALREADY ON RECORD, THE SUPREME COURT OBSERVED THAT THERE IS NO REASON WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING SUCH A QUESTION BEFORE THE TRIBUNAL FOR T HE FIRS T TIME SO LONG AS THE RELEVANT F ACTS ARE ON RECORD IN RESPECT OF THE ITEM CONCERNED. THERE IS NO REASON TO RESTRICT THE POWER OF THE TRIBUNAL IN SUCH APPEAL ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF COMMISSIONER (APPEALS). THE TRIBUNA L SHOULD NOT BE PREVENTED FROM CONSIDERING THE QUESTIONS OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. 33. IN CASE OF GOETZE (INDIA) LTD. (SUPRA) THE SUPREME COURT DISTINGUISHED THE JUDGMENT IN THE CASE OF NATIONAL THERMAL POWER CO . LTD. (SUPRA) ON THE GROUND THAT THE SAME PERTAINED TO THE POWER OF THE TRIBUNAL UNDER SECTION 254 OF THE ACT TO ENTERTAIN A POINT OF LAW FOR THE FIRST TIME AND COMMENTED THAT SUCH DECISION DOES NOT RELATE TO THE POWER OF THE ASSESSING OFFICER TO ENTERTAI N A CLAIM FOR DEDUCTION OTHERWISE THAN BY FILING A REVISED RETURN. IN THE PROCESS THE SUPREME COURT RECOGNIZED THAT A NEW CLAIM COULD NOT BE ENTERTAINED BY THE ASSESSING OFFICER WITHOUT THE ASSESSEE REVISING THE RETURN. WHILE DOING SO IT WAS CLARIFIED THAT I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 11 '4. . . HOWEVER, WE MAKE IT CLEAR THAT THE ISSUE IN THIS CASE IS LIMITED TO THE POWER OF THE ASSESSING AUTHORITY AND DOES NOT IMPINGE ON THE POWER OF THE INCOME - TAX APPELLATE TRIBUNAL UNDER SECTION 254 OF THE INCOME - TAX ACT, 1961. THERE SHALL BE NO ORDE R AS TO COSTS.' 34. IN THE CASE OF CIT V. JAI PARABOLIC SPRINGS LTD. [2008] 306 ITR 42/172 TAXMAN258 (DELHI), THE DELHI HIGH COURT HELD THAT THERE IS NO PROHIBITION ON THE POWERS OF THE TRIBUNAL TO ENTERTAIN AN ADDITIONAL GROUND WHICH ACCORDING TO THE TRI BUNAL AROSE IN THE MATTER AND FOR JUST DECISION OF THE CASE. 35. IN CASE OF CIT V. PRUTHVI BROKERS & SHAREHOLDERS (P.) LTD. [ 2012] 349 ITR 336/208 TAXMAN 498/23 TAXMANACOM 23 (BOM) THE BOMBAY HIGH COURT CONSIDERED THE ISSUE AT CONSIDERABLE LENGTH AND HELD THAT COMMISSIONER (APPEALS) AS WELL AS THE TRIBUNAL HAVE THE JURISDICTION TO CONSI DER THE ADDITIONAL CLAIM AND NOT MERELY ADDITIONAL LEGAL SUBMISSIONS. THE APPELLATE AUTHORITIES HAVE DISCRETION TO PERMIT SUCH ADDITIONAL CLAIMS. SUCH CLAIMS NEED NOT BE THO SE WHICH BECAME AVAILABLE ON ACCOUNT OF CHANGE OF CIRCUMSTANCES OF LAW BUT WHICH WERE EVEN AVAILABLE WHEN THE RETURN WAS FILED. 36. THE DELHI HIGH COURT ONCE AGAIN IN RECENT JUDGMENT IN THE CASE OF CIT V. SAM GLOBAL SECURITIES LTD. [2014] 360 ITR 682/[20 13] 38 TAXMANN.COM 1 29 OBSERVED THAT THE COURTS HAVE TAKEN A PRAGMATIC VIEW AND NOT A TECHNICAL ONE AS TO WHAT IS REQUIRED TO BE DETERMINED IN TAXABLE INCOME. IN THAT SENSE ASSESSMENT PROCEEDINGS ARE NOT ADVERSARIAL IN NATURE. WITH THESE OBSERVATIONS COURT CONFIRMED THE VIEW OF THE TRIBUNAL REVERSING THE DECISION OF THE ASSESSING OFFICER REJECTING THE CLAIM OF THE ASSESSEE ON THE GROUND THAT NO REVISED RETURN WAS FILED. 37. IN CASE OF COMMISSIONER OF INCOME TAX V. CELLULOSE PRODUCTS OF INDIA LTD. [1985] 15 1 ITR 499 (GUI.). FULL BENCH OF THIS COURT HELD THAT MERELY BECAUSE A GROUND HAS NOT BEEN RAISED THOUGH IT COULD HAVE BEEN RAISED IN SUPPORT OF THE RELIEF SOUGHT IN THE APPEAL, IT CANNOT BE SAID THAT SUCH GROUND CANNOT BE RAISED BEFORE THE TRIBUNAL. SUCH G RO UND CAN BE RAISED PROVIDED IT FA LLS WITHIN THE CONTOURS OF THE SUBJECT MATTER, OF THE APPEAL . 38. IT THUS BECOMES CLEAR THAT THE DECISION OF THE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LTD. (SUPRA} IS CONFINED TO THE POWERS OF I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 12 THE ASSESSING OFFICER AND ACCEPTING A CLAIM WITHOUT REVISED RETURN. THIS IS WHAT SUPREME COURT OBSERVED IN THE SAID JUDGMENT WHILE DISTINGUISHING THE JUDGMENT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD.(SUPRA) AND THAT IS HOW VARIOUS HIGH COURTS HAVE VIEWED THE DICTUM OF THE DECISION IN THE CASE OF GOETZE (INDIA) LTD.(SUPRA). WHEN IT COMES TO THE POWER OF APPELLATE COMMISSIONER OR THE TRIBUNAL, THE COURTS HAVE RECOGNIZED THEIR JURISDICTION TO ENTERTAIN A NEW GROUND OR A LEGAL CONTENTION. A GROUND WOULD HAVE A REFERENCE TO AN ARGUMENT TOUCHING A QUESTION EFFECT OR A QUESTION OF LA W OR MIXED QUESTION OF LAW OR FA CTS. A LEGAL CONTENTION WOULD ORDINARILY BE A PURE QUESTION OF LAW WITHOUT RAISING ANY DISPUTE ABOUT THE FA CTS. NOT ONLY SUCH ADDITIONAL GROUND OR CONTENTION, THE COURT S HAVE ALSO, AS NOTED ABOVE, RECOGNIZED THE POWERS OF THE APPELLATE COMMISSIONER AND THE TRIBUNAL TO ENTERTAIN A NEW CLAIM FOR THE FIRST TIME THOUGH NOT MADE BEFORE THE ASSESSING OFFICER. INCOME - TAX PROCEEDINGS ARE NOT STRICTLY SPEAKING ADVERSARIAL IN NATU RE AND THE INTENTION OF THE REVENUE WOULD BE TO TAX REAL INCOME. 39. THIS IS PRIMARILY ON THE PREMISE THAT IF A CLAIM THOUGH AVAILABLE IN LAW IS NOT MADE EITHER INADVERTENTLY OR ON ACCOUNT OF ERRONEOUS BELIEF OF COMPLEX LEGAL POSITION, SUCH CLAIM CANNOT B E SHUT OUT FOR ALL TIMES TO COME, MERELY BECAUSE IT IS RAISED FOR THE FIRST TIME BEFORE THE APPELLATE AUTHORITY WITHOUT RESORTING TO REVISING THE RETURN BEFORE THE ASSESSING OFFICER. 40. THEREFORE, ANY GROUND, LEGAL CONTENTION OR EVEN A CLAIM WOULD BE PER MISSIBLE TO BE RAISED FOR THE FIRST TIME BEFORE THE APPELLATE A UTHORITY OR THE TRIBUNAL WHEN FA CTS NECESSARY TO EXAMINE SUCH GROUND, CONTENTION OR CLAIM ARE ALREADY ON RECORD. IN SUCH A CASE THE SITUATION WOULD BE AKIN TO ALLOWING A PURE QUESTION OF LAW TO BE RAISED AT ANY STAGE OF THE PROCEEDINGS. THIS IS PRECISELY WHAT HAS HAPPENED IN THE PRESENT CASE. THE APPELLATE COMMISSIONER AND THE TRIBUNAL DID NOT NEED TO NOR DID THEY TRAVEL BEYOND THE MATERIALS ALREADY ON RECORD, IN ORDER TO EXAMINE THE CLAIMS OF T HE ASSESSEES FOR DEDUCTIONS UNDER SECTIONS 80 - IB AND 80HHC OF THE ACT . 41. IN THE DECISIONS THAT WE HAVE NOTED ABOVE, THE COURTS HAVE CONSIDERED SUCH QUESTIONS WHEN A LEGAL CONTENTION OR A CLAIM WAS BASED ON MATERIAL ALREADY ON RECORD BUT RAISED AT AN APP ELLATE STAGE. ON SUCH PREMISE WE WHOLEHEARTEDLY AGREE THAT THE APPELLATE AUTHORITY AND THE TRIBUNAL WOULD HAVE THE POWER TO ENTERTAIN ANY SUCH NEW GROUND, LEGAL CONTENTION OR CLAIM. HOWEVER, IT IS ONLY THE I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 13 BOMBAY HIGH COURT IN THE CASE OF CIT V. PRUTHVI BR OKERS & SHAREHOLDERS (P.) LTD. (SUPRA), WHICH HAS TRAVELLED A LITTLE BEYOND THIS PREPOSITION AND COME T O THE CONCLUSION THAT EVEN IF FA CTS NECESSARY TO EXAMINE SUCH A CLAIM ARE NOT PLACED BEFORE THE ASSESSING OFFICER AND, THEREFORE, NOT ON RECORD, THERE WO ULD BE NO IMPEDIMENT IN THE COMMISSIONER (APPEALS) ENTERTAINING SUCH A CLAIM. SUCH AN ISSUE DOES NOT ARISE IN THESE APPEALS. WE WOULD, THEREFORE, RESERVE OUR OPINION ON THIS LIMITED ASPECT OF THE MATTER IF AND WHEN IN FUTURE THE QUESTION PRESENTS BEFORE US IN SUCH FORM. FOR THE PRESENT, WE ANSWER QUESTIONS (3) AND (4) AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEES IN MANNER DESCRIBED ABOVE. 9 . WE DRAW SUPPORT FROM ABOVE EXTRACTED REASONING TO HOLD THAT THE CIT(A) OUGHT TO HAVE ENTERTAIN ED ASSESSE E S ADDITIONAL GROUND THEREBY IGNORING TECHNICAL ASPECT OF THE MATTER. WE FIND THAT MERITS OF THE ISSUE HAVE NOWHERE BEEN DISCUSSED IN LOWER APPELLATE FINDINGS UNDER CHALLENGE. THIS MAKES US TO ADMIT THIS ADDITIONAL GROUND WITH DIRECTIONS TO ASSESSING OF FICER FOR ITS APPROPRIATE ADJUDICATION AS PER LAW AFTER AFFORDING ADEQUATE OPPORTUNIT IES OF HEARING. THIS GROUND IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA 1859/AHD/2011 IS PARTLY ACCEPTED . 10 . THIS LEAVES US WITH REVENUE S CROSS APPEAL ITA 20 78/AHD/2011 RAISING SOLE SUBSTANTIVE GROUND THAT THE CIT(A) HAS ERRED IN DELETING BAD DEBT DISALLOWANCE OF RS. 17,89,26,5818/ - WHILE COMPUTING SECTION 115JB BOOK PROFITS. IT IS TO BE SEEN THAT THE LOWER APPELLATE FINDINGS IN PARA 5.3 PAGE 8 HOLD THAT ASSE SSEE IS ALREADY ASSESSED UNDER NORMAL PROVISION RATHER THAN MAT U/S. 115JB. THE REVENUE IS UNABLE TO DISPEL THIS FACTUAL POSITION IN THE COURSE OF HEARING. WE ACCORDINGLY HOLD THAT THE ISSUE OF BAD DEBT IN QUESTION I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 14 VIS - A - VIS FOR COMPUTING BOOK PROFITS BEC OMES MERE ACADEMIC IN NATURE. THIS GROUND IS REJECTED. REVENUE S APPEAL ITA 2078/AHD/2011 FAILS. ASSESSMENT YEAR 2007 - 08 11 . THE REVENUE S APPEAL ITA 486/AHD/2012 RAISES FIRST GROUND AVERRING THAT THE CIT(A) HAS WRONGLY DELETED TRANSFER PRICING ADJUSTM ENT OF RS. 3,65,96,000/ - IN LOWER APPELLATE FINDINGS UNDER CHALLENGE READING AS FOLLOWS: - 2. THE FIRST GROUND OF APPEAL IS AGAI NST ADDITION OF RS. 3,65,96,000/ - ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 2.1 THE T.P.O - I HAS STATED IN THE ORDER U/S 92CA (3) DTD. 18/10/2010, WHICH IS AS UNDER: 'DURING THE YEAR ASSESSEE'S AE M/S ADANI GLOBAL PVT. LTD. SINGAPORE HAS RAISED TERM LOAN OF RS. 731.92 CRORES FROM ICICI BANK IT. OR WHICH THE ASSESSEE COMPANY HAS PROVIDED GUARANTEES. IT WAS FOUND FROM FINANCIAL ST ATEMENT OF ADANI GLOBAL PTE. LTD. SINGAPORE THAT THIS LOAN WAS RAISED BY PLEDGING 23.5% SHAREHOLDING OF MUNDRA PORT AND SE2 LIMITED OWNED BY ASSESSEE COMPANY. FOR PROVIDING THIS GUARANTEE BY PLEDGING SHARES NO GUARANTEE FEES WAS CHARGED BY THE ASSESSEE. IN VIEW OF SAME, A SHOW - CAUSE NOTICE DATED L 10.2010 WAS ISSUED TO THE ASSESSEE TO SHOW CAUSE WHY ARM'S LENGTH GUARANTEE FEES SHOULD NOT BE COMPUTED USING CUP AS MOST APPROPRIATE METHOD FOR THE TRANSACTION. 5.2 IN RESPONSE TO THE ABOVE SHOW - CAUSE NOTICE THE ASSESSEE HAS SUBMITTED ITS REPLY VIDE LETTER DATED 16/10/2010. THE RELEVANT PORTION IS REPRODUCED HEREUNDER. '... IN RESPECT OF ABOVE THE ASSESSEE COMPANY WOULD HEREBY LIKE TO CLARIFY THAT ITS AE (M/S. ADANI GLOBAL PTE LTD.) HAD RAISED TERM LOAN OF$ 239. 82 MILLION FROM ICICI BANK LIMITED AND FOR THE SAME T HE I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 15 ASSESSEE COMPANY INTENDED TO PROVIDE A GUARANTEE BY PLEDGING THE ABOVE MENTIONED SHARES. HOWEVER THOUGH THE BANK AND AE AGREED ON T HE GIVEN TERMS (ANNEXED ENCLOSURE 1 TO THIS LETTER) THE SAME COULD NO T HAVE BEEN DONE WITHOUT THE PERMISSION AND APPROVAL OF RB.I. IN ORDER TO DO SO AE WROTE A LETTER (ANNEXED HEREWITH AS ENCLOSURE - 2) TO R.B.I. FOR OBTAINING PERMISSION FOR THE SAME. BUT IN RESPONSE TO THE SAID LETTER RB.I. AFTER DOING DETAILED ANALYSIS DID NOT APPROVE THE PLEDGE OF SHARES BY THE ASSESSEE COMPANY. THE COPY OF T HE SAME LETTER HAS BEEN ATTACHED AS ENCLOSURE - 3 TO THIS LETTER. SO THE ASSESSEE COMPANY DID NOT PLEDGE ANY SHARES FOLLOWING THE ORDERS OF RB.I. AND ACCORDINGLY NO SERVICES WERE PROVIDE D TO AE. SO NO QUESTION OF GUARANTEE COMMISSION ARISES, THERE IS NO NEED TO SUBMIT THE COPY OF THE AGREEMENT AS NO AGREEMENT FOR THE SAME HAS BEEN ENTERED INTO. ACCORDINGLY THE ASSESSEE COMPANY IS OF THE OPINION THAT THE DETAILS DEMANDED BY YOUR HONOUR CAN NOT BE SUBMITTED AS THE SAID CASE IS NOT COVERED WITHIN THE PROVISIONS OF TRANSFER PRICING,' I HAVE GONE THROUGH ASSESSEE'S SUBMISSION AND DISCUSSION IN THIS REGARD DURING TRANSFER PRICING PROCEEDINGS. IT IS SEEN THAT M/S. ICICI BANK SINGAPORE BRANCH HAS SANCTIONED VIDE THEIR LETTER DATED 28.12.2006 ABOVE TERM LOAN WHICH INCLUDES EXTENSION OF PLEDGE OF ABO VE MENTIONED SHARE AS WELL. IT I S CLEAR FROM THAT LETTER THAT THE ASSESSEE PROVIDED GUARANTEE BY PLEDGING SHARE TO ITS AE. ADANI GLOBAL PTE. LIMITED HAS NEGOTIATED INTEREST RATE ON THE BASIS OF THIS PLEDGE WHICH IS CLEARLY REFLECTED IN THEIR L ETTER TO THE BANK DATED 28. 12.2006. ALL THESE CORRESPONDENCE IS ON RECORD AS SUBMITTED BY THE ASSESSEE. IT MAY BE THAT RBI MAY HAVE TURNED DOWN THEIR REQUEST FOR PLED GE OF SHARES OF MUNDRA PORT AND SEZ LTD. BUT AE AND THE BANK MAY HAVE PROCEEDED FURTHER ON THE BASIS OF ABOVE PLEDGE OF SHARES. THE LETTER OF RESERVE BANK OF INDIA DATED 21.2.2007 IS REGARDING PLEDGING OF SHARES IN FAVOUR OF M/S. IDBI TRUSTEESHIP SERVICES LIMITED AND NOT IN FAVOUR OF ICICI BANK LIMITED AND THIS LETTER MAY BE REFERRING TO SOME OTHER TRANSACTION. IN VIEW OF ABOVE, ASSESSEE'S CONTENTION THAT GUARANTEE HAS NOT BEEN PROVIDED BY PLEDGING SHARES IS NOT CORRECT AND HENCE REJECTED . ASSESSEE'S GENERA L CONTENTION REGARDING CHARGING OF CORPORATE GUARANTEE FEES FOR PROVIDING GUARANTEES TO THE AE ARE DISCUSSED BELOW. 5.4 A GUARANTEE IS A LEGALLY ENFORCEABLE AGREEMENT THAT INTENDS TO SURVIVE THE INSOLVENCY OF THE PERSON OR CONCERN ON WHOSE BEHALF IT IS I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 16 IS SUED AND OBLIGES THE GUARANTOR TO PROVIDE FOR PAYMENT IF THAT PERSON OR CONCERN FAILS TO. IN CASE THE GUARANTEE IS VALID, UNCONDITIONAL AND IRREVOCABLE AND IT REQUIRES PROMPT PAYMENT IN FULL BEFORE PURSUIT OF REMEDIES, IN PRINCIPLE IT PROVIDES FULL CREDIT SUBSTITUTION. IF SUFFICIENT FUNDING IS NOT PROVIDED BY THE PARENT COMPANY FOR SOME REASON, SUBSIDIARIES THAT ATTRACT FUNDING FROM THIRD PARTIES ARE NECESSARILY REQUIRED TO ARRANGE ADDITIONAL COLLATERAL FROM RELATED (PARENT) COMPANY IN THE FORM OF GUARANTEE S. AT THE SAME TIME, GUARANTEES ARE ALSO BEING USED, AT THE OPTION OF THE BORROWER, TO OBTAIN BETTER CONDITIONS, NOTABLY INTEREST RATES, ON EXTERNAL FINANCIAL TRANSACTIONS, CREATING A BENEFIT ON A GROUP - WIDE BASIS.' 2.2 THE APPELLANT HAS SUBMITTED IN ITS WRITTEN SUBMISSION, WHICH IS AS UNDER: 1.1. 'THIS GROUND OF APPEAL PERTAINS TO AN ADDITION OF RS. 3,65,96,000 MADE BY THE LD. A.O. PURSUANT TO THE ORDER DATED 18TH OCTOBER, 2010 PASSED UNDER SECTION 92CA(3) OF THE INCOME TAX ACT, 1961 BY THE TRANS FER PRICING OFFICER - I, AHMEDABAD. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, THE APPELLANT COMPANY WAS INFORMED BY THE TPO THAT ITS ASSOCIATE ENTERPRISE M/S. ADANI GLOBAL PTE LIMITED, SINGAPORE, RAISED TERM LOAN OF SINGAPORE DOLLARS 239.882 MILLION (CONVERTING TO RS. 731.92 CRORES) FROM ICICI BANK LIMITED, FOR WHICH THE APPELLANT COMPANY PROVIDED GUARANTEE BY WAY OF PLEDGING 23. 5% SHAREHOLDING OF MUNDRA PORT & SEZ LIMITED. 1.2. THE TRANSFER PRICING OFFICER MENTIONED THAT FOR PROVIDING THE AFORESAID GUARANTEE, NO GUARANTEE FEE WAS CHARGED BY THE APPELLANT COMPANY, AND THEREFORE, THE TRANSFER PRICING OFFICER ISSUED A SHOW CAUSE NOTICE CALLING UPON THE APPELLANT COMPANY TO EXPLAIN AS TO WHY THE ARM'S LENGTH VALUE OF THE GUARANTEE FEES BE NOT COMPUTED A S PER CUP METHOD. 1.3. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE APPELLANT COMPANY VIDE ITS LETTER DATED 16.10.2010 SUBMITTED THAT THE APPELLANT COMPANY INTENDED TO PROVIDE GUARANTEE BY PLEDGING THE SHARES. HOWEVER, SINCE THE PERMISSION WAS NOT GRANTED BY THE RBI, THE TRANSACTION WAS NOT TAKEN PLACE. ACCORDINGLY, THE SERVICE WAS NOT PROVIDED TO THE AE OF THE APPELLANT COMPANY. I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 17 HENCE, THE QUESTION FOR GUARANTEE COMMISSION ALSO DOES NOT ARISE. 1.3.1. HOWEVER, THE LD. TPO HELD THAT THE APPELLANT COMPANY HAS PROVIDED THE GUARANTEE BY PLEDGING THE SHARES TO ITS AE. FURTHER, THE LD. TPO HELD THAT THE LETTER OF RBI DATED 21.02.2007 IS REGARDING PLEDGING OF SHARES IN FAVOUR OF M/S. IDBL TRUSTEESHIP SERVICES LTD. AND NOT IN FAVOUR OF ICICI BANK LIMITED AND THIS LE TTER MAY BE REFERRING TO SOME OTHER TRANSACTION. IN VIEW OF ABOVE, ASSESSEE'S CONTENTION THAT GUARANTEE HAS NOT BEEN PROVIDED BY PLEDGING SHARES IS NOT CORRECT AND HENCE REJECTED. THE LD. TPO BASED ON MARKET PREVALENT RATE OF 2% OF GUARANTEE FEES COMPUTED RS. 3,65,96,000/ - . 1.3.2. THE LD. A.O. BASED ON THE CONTENTION OF THE LD. TPO MAKE AN ADDITION OF RS. 3,65,96,0007 - IN THE HANDS OF T HE APPELLANT COMPANY. 1.4. IN THIS REGARDS, WE FIRSTLY SUBMIT THAT RBI DID NOT PERMIT SUCH PLEDGING OF SHARES BY WAY OF GUARANTEE AND ACCORDINGLY NO GUARANTEE WAS PROVIDED BY THE APPELLANT COMPANY AND, THEREFORE, THE QUESTION OF CHARGING GUARANTEE FEES DOES NOT ARISE, COPY OF LETTER OF RBI IS ENCLOSED ON PAGE NO. 65 OF PAPER BOOK. ACCORDINGLY, WE SUBMIT THAT, SINCE THE RBI HAS NOT GRANTED THE PERMISSION FOR PLEDGING OF SHARES, THE TRANSACTION WAS ACTUALLY NOT MATERIALIZED AND ACCORDINGLY, THE QUESTION FOR ADDITION BASED ON THE ASSUMPTIONS OF LD. TPO CANNOT BE MADE TO THE APPELLANT COMPANY'S TOTAL INCOME. 1.4.1. FURTHER, WE SUBMIT THAT THE EVEN IF THE PERMISSION COULD HAVE BEEN OBTAINED BY THE RBI, FURNISHING OF CORPORATE GUARANTEE IS NOT AN INTERNATIONAL TRANSACTION AND ADDITION CANNOT BE MADE IN THE HANDS OF APPELLANT COMPANY. IN THIS REGARDS, WE DRAW YOUR HONOUR'S ATTENT ION TO RECENT JUDGMENT OF HON'BLE HYDERABAD I TAT IN CASE OF FOUR SOFT LTD. VS. DCI T, CIRCLE - 1(3), HYDERABAD (ITA NO. 1495/HYD/W) (COPY ENCLOSED ON PAGE NO. 285 OF PB), FURTHER, WE SUBMIT THAT IT IS NOT A FINANCIAL TRANSACTION FOR THE APPELLANT COMPANY AN D ACCORDINGLY THE ADDITION CANNOT BE MADE IN THE HANDS OF APPELLANT COMPANY. I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 18 1.5. IN ADDITION TO ABO VE, WE ALSO SUBMIT THAT, THE LD. TPO HAS FURTHER MENTIONED THAT THE LETTER DATED 21ST FEBRUARY, 2007 FROM RESERVE BANK OF INDIA IS REGARDING PLEDGING OF SH ARES IN FAVOUR OF IDBI TRUSTEESHIP SERVICES LIMITED AND NOT IN FAVOUR OF ICICI BANK LIMITED. BASED ON THE ABOVE MENTIONED FACTS, THE LD. TPO HAS ARBITRARILY CONCLUDED THAT THE APPELLANT COMPANY DID PROVIDE GUARANTEE BY PLEDGING THE AFORESAID SHARES AND, TH EREFORE, HE PROCEEDED TO CALCULATE THE ARMS LENGTH PRICE. 1.5. 1 IT IS RESPECTFULLY SUBMITTED THAT THE ORDER PASSED BY THE LD. TPO IS BASED ON NON - EXISTENT AND INCORRECT FACTS. THE TRANSFER PRICING OFFICER HAS REFERRED TO THE LETTER DATED 28TH DECEMBER, 2006 OF ICICI BANK LIMITED, SINGAPORE THE COPY OF SAME IS ENCLOSED HEREWITH AS ANNEXURE - A - 8. FROM THIS LETTER IT IS CLEAR THAT THE LOAN WAS SANCTIONED TO ADANI GLOBAL PTE LIMITED ON THE BASIS OF CERTAIN SECURITIES WHICH INCLUDED EXTENSION OF PLEDGE OF 23.5% SHA REHOLDING (212.5 MILLION SHARES) OF MUNDRA PORT & SEZ LIMITED. IN THIS REGARDS, WE SUBMIT THAT THE TRANSACTION WAS TO BE DONE BY PLEDGING THE SHARES OF MPSEZ TO IDBI TRUSTEESHIP SERVICES LTD. AND NOT ICICI BANK LTD. 1.6. IN SO FAR AS THE APPELLAN T COMPANY IS CONCERNED, NO SHARES HELD BY IT WERE OFFERED BY WAY OF PLEDGE AGAINST RAISING LOAN BY THE ASSOCIATE ENTERPRISE. IN THESE CIRCUMSTANCES, IT MAY KINDLY BE APPRECIATED THAT NO SERVICES WHATSOEVER WERE RENDERED BY THE APPELLANT COMPANY BY WAY OF F URNISHING GUARANTEE AND THE UPWARD ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IS ON ASSUMPTIONS WITHOUT ANY BASIS WHATSOEVER. 1.7. BASED ON ABOVE FACTS, WE STATE THAT THE LD. TPO HAS GROSSLY ERRED IN UNDERSTANDING THE FACTS THAT SINCE NO GUARANTEE HAS BEEN GIVEN, THE SAME CAN BE POSSIBLE BY OVERSIGHT OF THE DETAILS AVAILABLE WITH THE LD. TPO. THE APPELLANT COMPANY REITERATES THAT SINCE PLEDGING WAS NOT AT ALL DONE, THE QUESTION FOR ADDITION SHOULD NOT BE MADE BASED ON ASSUMPTIONS ON LD. A.O.'S OWN WISHES. 1.8. IN VIEW OF ABOVE, WE REQUEST HUMBLY BEFORE YOUR HONOUR TO KINDLY DIRECT THE LD. A.O. TO DELETE THE SAID DISALLOWANCE OF RS. 3,65,96,000/ - AS IT IS TOTALLY UNCALLED FOR, BASELESS AND IT DESERVES TO BE DELETED.' I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 19 2.3 I HAVE CONSIDERED THE FA CTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. TRANSFER PRICING OFFICER MADE ADJUSTMENT IN RESPECT OF GUARANTEE COMMISSION FOR PLEDGING THE SHARES OF MPSEZ HELD BY THE APPELLANT WITH ICICI BANK LIMITED, SINGAPORE FOR PROVIDING LOAN T O ITS SINGAPORE AE. HOWEVER APPELLANT SUBMITTED THAT IT INTENDED PLEDGING THE SHARES OF MPSEZ FOR LOAN TAKEN BY ITS SINGAPORE AE BUT RBI REFUSED PERMISSION TO PLEDGE THE SHARES AND FINALLY IT COULD NOT PROVIDE GUARANTEE TO ITS AE. SINCE THE SHARES WERE NOT FINALLY PLEDGED DUE TO REFUSAL OF RB1 PERMISSION, THERE IS NO QUESTION OF MAKING ADJUSTMENT IN RESPECT OF GUARANTEE COMMISSION. APPELLANT SUBMITTED COPY OF LETTER WRITTEN BY ADANI GLOBAL PTE LTD, SINGAPORE DATED 15 JANUARY 2007 TO RBI REQUESTING APPROVAL FOR PLEDGE OF SHARES IN FAVOUR OF IDBI TRUSTEESHIP SERVICES LTD (INDIAN SECURITY TRUSTEE APPOINTED BY ICICI BANK LIMITED, SINGAPORE) AND RBI'S LETTER DATED 21ST OF FEBRUARY 2007 REFUSING THE PERMISSION TO PLEDGE SHARES OF MPSEZ IN FAVOUR OF IDBI TRUSTEESHI P SERVICES LTD (THESE LETTERS WERE STATED TO HAVE BEEN SUBMITTED TO THE TPO). TPO MADE THE ADDITION ON THE GROUND THAT LOANS WERE TAKEN FROM ICICI BANK LIMITED, SINGAPORE WHEREAS RBI'S PERMISSION REFUSING PLEDGE OF SHARES WAS IN THE CASE OF IDBI TRUSTEESHI P LTD. TPO CONSIDERED THESE TWO TRANSACTIONS SEPARATE AND HELD THAT APPELLANT PROVIDED GUARANTEE TO AE BY PLEDGING ITS INVESTMENT IN SHARES. HOWEVER AFTER CONSIDERING THESE LETTERS REFERRED EARLIER, IT IS CLEAR THAT IDBI TRUSTEESHIP LTD IS SECURITY TRUSTEE OF ICICI BANK LIMITED, SINGAPORE AND RBI'S LETTER REFUSING THE PERMISSION FOR PLEDGE OF SHARES IS IN RESPECT OF SAME SHARES WHICH WERE PROVIDED FOR GUARANTEE TO ICICI BANK LIMITED, SINGAPORE. THUS, IT IS CLEAR THAT ENTIRE ADDITION IS BASED ON THE MISCONCE PTION THAT THESE TWO ENTITIES REPRESENTED SEPARATE TRANSACTIONS. IN VIEW OF THIS IT IS CLEAR THAT APPELLANT DID NOT PROVIDE GUARANTEE SERVICES BY PLEDGING SHARES OF MPSEZ FOR WHICH ANY ADJUSTMENT OF GUARANTEE COMMISSION CAN BE MADE. THE ADDITION MADE BY TH E ASSESSING OFFICER IS THEREFORE NOT SUSTAINABLE ON FACTS. APART FROM THIS, APPELLANT ALSO RELIED UPON THE DECISION OF ITAT HYDERAB A D IN WHICH IT IS HELD THAT FOR PROVIDING CORPORATE GUARANTEE IN OBTAINING LOANS BY AE, NO ADJUSTMENT CAN BE MADE. ITAT IN THE CASE OF FOUR SO FT LTD. VS DCIT, CIRCLE - 1(3), HYDERABAD (ITA NO. 1495/HYD/10) DATED 09 - 09 - 2011 HELD AS UNDER: '21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE JP I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 20 LEGISLATION PROVIDES FOR COMP UTATION OF INCOME FROM INTERNATIONAL TRANSACTION AS PER SECTION 928 OF T HE ACT. THE CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE COMPANY DOES NOT FALL WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTION. THE TP LEGISLATION DOES NOT STIPULATE ANY GUIDELINES IN RESPECT TO GUARANTEE TRANSACTIONS. IN THE ABSENCE OF ANY CHARGING PROVISION, THE LOWER AUTHORITIES ARE NOT CORRECT IN BRINGING AFORESAID TRANSACTION IN THE TP STUDY. IN OUR CONSIDERED VIEW, THE CORPORATE GUARANTEE IS VERY MUCH INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND HENCE, THE SAME CANNOT BE COMPARED TO A BANK GUARANTEE TRANSACTION OF THE BANK OR FINANCIAL INSTITUTION. IN VIEW OF THIS MATTER, WE HOLD THAT NO TP ADJUSTMENT IS REQUIRED IN RESPECT OF CORPORATE GUARANTEE TRANSACTION DONE BY THE ASSESS EE COMPANY. HENCE, WE ANSWER THIS QUESTION IN FAVOUR OF THE ASSESSEE AND ALLOW THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE.' FROM THE ABOVE IT IS CLEAR THAT APPELLANT'S CASE IS COVERED BY THE AFORESAID DECISION ALSO. THEREFORE EVEN OTHERWISE, THE ADJ USTMENT MADE BY THE TPO IN RESPECT OF GUARANTEE COMMISSION IS NOT SUSTAINABLE. ACCORDINGLY ADDITION MADE BY THE ASSESSING OFFICER BASED ON THE TPO'S ORDER IS DELETED. 12 . THE REVENUE SEEKS TO REBUT ABOVE NARRATED FINDINGS OF FACT THE ASSESSEE HAS NOT TEN DERED THE IMPUGNED CORPORATE GUARANTEE IN FAVOUR OF ITS SINGAPORE BASED ASSOCIATE ENTERPRISE (AE). PAGE 22 OF THE PAPER BOOK CONTAINS ASSESSEE S EXPLANATION IN LOWER PROCEEDINGS THAT IT ONLY INTENDED TO PROVIDE THE IMPUGNED GUARANTEE BY PLEDGING ITS S HARE S FOR ARRANGING A TERM LOAN OF $ 239.82 MILLIONS FROM ICICI BANK LTD. PAGE 225 IS BANK S LETTER THAT ACCEPTANCE OF LOAN TERM S BE NOT TAKEN AS A BINDING LOAN OBLIGATION . THEN COMES ASSESSEE S AE S REQUEST TO RBI DATED 15 - 01 - 2007 SEEKING APPROVAL OF THE MP SEZ S SHARES PLEDGING. THE SAME STOOD DECLINED ON 21 - 02 - 2007 AT PAGE 229 OF THE PAPER BOOK. THERE IS NO EVIDEN C E TO THE CONTRARY I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 21 FORTHCOMING FROM THE CASE RECORD. WE CONCLUDE IN THESE FACTS AND CIRCUMSTANCES THAT THE CIT(A) HAS RIGHTLY HELD THE ASSESSEE NOT TO HAVE FURNISHED THE IMPUGNED CORPORATE GUARANTEE IN FAVOUR OF ITS AE SO AS TO BE TAKEN AS AN INTERNATIONAL TRANSACTION U/S. 92C OF THE ACT. THIS FIRST SUBSTANTIVE GROUND IS REJECTED. 13 . WE COME TO REVENUE S SECOND SUBSTANTIVE GROUND CHALLENG ING LOWER APPELLATE ORDER RESTRICTING SECTION 14A DISALLOWANCE OF RS. 8,13,65,928/ - TO RS. 2,10,81,000/ - . THE ASSESSEE ALSO RAISES A CORRESPONDING GROUND IN ITS APPEAL ITA 558/AHD/2012. THERE IS NO DISPUTE THAT ASSESSEE HAS EARNED EXEMPT INCOMES FROM DIV IDENDS AMOUNTING TO RS. 8,77,953/ - AS WELL AS ITS SHARE PROFIT FROM PARTNERSHIP FIRM M/S ADANI EXPORTS OF RS. 71.86 CRORES EXEMPT U/S. 10(2A). THE ASSESSING OFFIC ER SOUGHT TO INVOKE SECTION 14A TO DISALLOW CORRESPONDING EXPENDITURE. THE ASSESSEE SUBMITTE D THAT THERE WAS NO NEXUS ARISING BETWEEN ITS EXEMPT INCOME AND EXPENDITURE INCURRED. IT DENIED TO HAVE PUT ON USE ANY BORROWED FUNDS IN MAKING THE IMPUGNED TAX FREE INVESTMENTS. AND ALSO THAT NO ADMINISTRATIVE EXPENDI TU RE HAD BEEN INCURRED ON ITS PART. THE ASSESSING OFFICER APPEARS TO HAVE ENTERED INTO A MUCH LENGTHIER DISCUSSION FOR OBSERVING THAT THOUGH RULE 8D OF THE INCOME TAX RULES APPLIED FROM ASSESSMENT YEAR 2008 - 09 ONLY, THE SAME WOULD STILL PROVIDE A REASONABLE BASIS FOR COMPUTING THE IMPUGNED DISALLOWANCE. HE PROCEEDED ACCORDINGLY TO MAKE PROPORTIONATE INTEREST DISALLOWANCE OF RS. 4,54,30,654/ - AND ARRIVED AT ADMINISTRATIVE EXPENDITURE OF RS. 3,59,35,275/ - TOTALING TO RS. I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 22 8,13,65,928/ - U/S. 14A OF THE ACT. THE CIT(A) PARTLY CONFIRMS THE SAME B Y ADOPTING THE FOLLOWING REASONING: - 7.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. APPELLANT EARNED DIVIDEND INCOME FROM SHARES AND ALSO SHARE OF PROFIT FROM PARTNERSHIP FIRM WHICH ARE EXEMPT FROM TAX. A SSESSING OFFICER DISALLOWED INTEREST AND PART OF ADMINISTR ATIVE EXPENSES UNDER SECTION 14 A BY HOLDING THOSE EXPENSES RELATING TO EXEMPT INCOME. APPELLANT SUBMITTED THAT IT WAS MAINTAINING SEPARATE BOOKS OF ACCOUNTS FOR TREASURY AND INVESTMENT ACTIVITIES AN D THEREFORE ALL EXPENSES RELATING TO EXEMPT INCOME HAVE BEEN DEBITED THERE AND NO SEPARATE DISALLOWANCE IS REQUIRED TO BE MADE UNDER SECTION 14A. APPELLANT FURTHER ARGUED THAT NO BORROWINGS WERE MADE FOR MAKING INVESTMENTS. ALL THE INVESTMENTS WERE MADE FR OM OWNED FUNDS AND THEREFORE DISALLOWANCE OF INTEREST IS NOT JUSTIFIED. ASSESSING OFFICER DEALT WITH APPELLANT'S SUBMISSIONS IN DETAIL WHICH IS NOT REPEATED HERE. IT IS NOT IN DISPUTE THAT RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09 IN VIEW OF THE B OMBAY HIGH COURT DECISION. HOWEVER, RULE 8D PROVIDES REASONABLE BASIS AND METHODOLOGY FOR MAKING DISALLOWANCE UNDER SECTION 14A. ASSESSING OFFICER HAS ALSO USED THE METHOD PROVIDED IN RULE 8D FOR MAKING DISALLOWANCE OF INTEREST. THE DISALLOWANCE OF INTERES T AND ADMINISTRATIVE EXPENSES ARE SEPARATELY DEALT WITH IN SUBSEQUENT PARA. AS REGARDS DISALLOWANCE OF INTEREST, APPELLANT'S ARGUMENTS ARE IN THE FOLLOWING LINES - 1 - SINCE SEPARATE BOOKS ARE MAINTAINED, NO EXPENSES SHOULD BE SEPARATELY DISALLOWED. 2 - AP PELLANT DID NOT BORROW FUNDS FOR MAKING INVESTMENTS. TILL LAST YEAR, NO DISALLOWANCE OF INTEREST WAS MADE UNDER SECTION 14 A AND THIS YEAR ALL THE INVESTMENTS WERE MADE FORM OWNED FUNDS THEREFORE AS PER RECENT GUJARAT HIGH COURT DECISION, NO DISALLOWANCE O F INTEREST CAN BE MADE. 3 - WHILE COMPUTING PROPORTIONATE INTEREST DISALLOWANCE AS PER RULE 8D(II), ASSESSING OFFICER DID NOT REDUCE INTEREST INCOME OF RS 59.71 CRORES RECEIVED FROM ADVANCES GIVEN TO SUBSIDIARY COMPANIES OUT OF FUNDS BORROWED DURING THE YE AR. SINCE ASSESSING OFFICER I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 23 REDUCED OTHER INTEREST INCOME FROM INTEREST EXPENSE, THIS INTEREST INCOME SHOULD ALSO HAVE BEEN REDUCED AND ONLY ON NET INTEREST EXPENSE OF RS 2.66 CRORES, THE PROPORTIONATE DISALLOWANCE OF INTEREST SHOULD BE WORKED OUT AS PER R ULE 8D (II) THE AFORESAID ARGUMENTS OF THE APPELLANT HAVE BEEN CONSIDERED IN DETAIL. JUST BY MAINTAINING SEPARATE BOOKS OF ACCOUNTS, APPELLANT CANNOT CLAIM EXEMPTION FROM DISALLOWANCE UNDER SECTION 14A. WHEN BUSINESS FUNDS WERE COMMONLY USED FOR BUSINESS AS WELL AS INVESTMENT, IT CANNOT BE SAID THAT NO PART OF BORROWED FUNDS WERE USED IN MAKING INVESTMENTS RESULTING IN EXEMPT INCOME. ASSESSING OFFICER DEALT WITH THIS ARGUMENT IN DETAIL. JUST BY MAINTAINING SEPARATE BOOKS OF ACCOUNTS, APPELLANT CANNOT BE EX EMPTED FROM APPLICABILITY OF SECTION 14 A. THE DISALLOWANCE OF INTEREST UNDER SECTION 14 A CAN STILL BE MADE IF APPELLANT PAID INTEREST WHICH IS NOT DIRECTLY RELATING TO EARNING TAXABLE INCOME AND ALL EXPENSES RELATING TO INVESTMENT ARE DISCERNIBLE. SINCE APPELLANT WAS NOT ABLE TO DEMONSTRATE THE WORKING OF DISALLOWABLE EXPENSES FROM SEPARATE BOOKS, THIS ARGUMENT OF THE APPELLANT IS NOT ACCEPTED. THE OTHER ARGUMENT OF THE APPELLANT THAT IT MADE INVESTMENT RESULTING IN EXEMPT INCOME OUT OF OWNED FUND AND TH EREFORE AS PER RECENT DECISION OF GUJARAT HIGH COURT, NO DISALLOWANCE OF INTEREST CAN BE MADE. ASSESSING OFFICER FOUND THAT COMMON POOL OF FUNDS WERE USED IN INVESTMENTS AS WELL AS BUSINESS AND THEREFORE IT CANNOT BE SAID THAT INVESTMENTS WERE MADE ONLY FR OM OWN FUNDS AND NOT BORROWED FUNDS. SINCE APPELLANT IS NOT ABLE TO PROVE DIRECT NEXUS BETWEEN OWNED FUND WITH INVESTMENT IN EXEMPT ASSETS, THE DECISION OF GUJARAT HIGH COURT RELIED UPON BY THE APPELLANT IS NOT DIRECTLY APPLICABLE TO THE FACTS OF ITS CASE. COMING TO THE LAST ARGUMENT OF THE APPELLANT THAT ASSESSING OFFICER WHILE REDUCING THE INTEREST INCOME FROM INTEREST EXPENSES, DID NOT REDUCE RS 59.71 CRORES BEING INTEREST RECEIVED FROM SUBSIDIARIES AND LC INTEREST. IN THE DISALLOWANCE OF INTEREST UNDER SECTION 14A READ WITH RULE 8D (II), THIS IS THE ONLY DIFFERENCE BETWEEN APPELLANT'S WORKING AND ASSESSING OFFICER'S WORKING OF INTEREST DISALLOWANCE. THEREFORE THE ISSUE TO BE DECIDED HERE IS WHETHER THIS INTEREST INCOME ALSO DESERVED TO BE REDUCED FROM I NTEREST EXPENSE OR NOT. THE REASON FOR NOT REDUCING THIS INTEREST INCOME WHILE COMPUTING DISALLOWANCE AS PER THE FORMULA GIVEN IN RULE 8D (II) IS THAT IT WAS NOT SPECIFIC PURPOSE INTEREST INCOME. HOWEVER I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 24 APPELLANT POINTED OUT THAT BORROWED FUNDS WERE DIREC TLY USED IN GRANTING LOAN TO SUBSIDIARIES WHICH RESULTED IN TAXABLE INTEREST INCOME AND THEREFORE IT IS ALSO SPECIFIC INTEREST INCOME LIKE OTHER INTEREST INCOME OF RS 112.07 CRORES REDUCED BY THE ASSESSING OFFICER. IT IS NOT IN DISPUTE THAT APPELLANT EARNE D INTEREST INCOME FROM ADVANCES GIVEN TO SUBSIDIARIES OUT OF BORROWED FUNDS. SUCH INTEREST INCOME IS THEREFORE NOT GENERAL INTEREST BUT SPECIFIC INTEREST EARNED OUT OF SPECIFIC BORROWINGS. EVEN AS PER RULE 8D (II), ANY INTEREST EXPENSE DIRECTLY ATTRIBUTABL E TO TAXABLE INCOME IS TO BE EXCLUDED FROM INTEREST TO BE USED FOR PROPORTIONATE DISALLOWANCE. SINCE ASSESSING OFFICER DID NOT REDUCE THIS INTEREST INCOME FROM THE INTEREST EXPENSE WITHOUT ANY BASIS, THE APPELLANT'S ARGUMENT IS JUSTIFIED. APPELLANT ALSO RE LIED UPON VARIOUS DECISIONS AS PER WHICH NETTING OFF OF INTEREST IS CONSIDERED APPROPRIATE WHILE MAKING INTEREST DISALLOWANCE. CONSIDERING ALL THESE DECISIONS AND ALSO ASSESSING OFFICER'S COMPUTATION OF INTEREST DISALLOWANCE, I FIND MERIT IN APPELLANT'S AR GUMENT THAT RS 59.71 CRORES INTEREST INCOME SHOULD BE REDUCED FROM INTEREST EXPENSES WHILE COMPUTING DISALLOWANCE OF INTEREST. AFTER REDUCING THE SAID INTEREST INCOME, BALANCE INTEREST PAYMENT OF RS 2,65,86,319 REMAINS FOR PROPORTIONATE DISALLOWANCE AS PER RULE 8D (II). ASSESSING OFFICER IS DIRECTED TO DISALLOW INTEREST AS PER THE FORMULA GIVEN IN RULE 8D (II) BY ADOPTING INTEREST FIGURE AT RS 2,65,86,319 AS AGAINST RS 62.37 CRORES TAKEN IN ASSESSMENT ORDER. APPELLANT COMPUTED THE INTEREST DISALLOWANCE AT R S 30.99 LACS IN THE SUBMISSION WHICH MAY BE VERIFIED BY THE AO. THE DISALLOWANCE OF INTEREST UNDER SECTION 14 A IS CONFIRMED TO THIS EXTENT. AS REGARDS DISALLOWANCE OF ADMINISTRATIVE EXPENSES, APPELLANT'S ARGUMENTS ARE IN THE FOLLOWING LINES - 1 - PROFIT FROM PARTNERSHIP FIRM IS NOT REALLY EXEMPT AS HELD BY BOMBAY TRIBUNAL IN THE DECISIONS RELIED UPON BY THE APPELLANT AND ACCORDINGLY NO DISALLOWANCE OF EXPENSES RELATING TO THIS INCOME CAN BE MADE. 2 - THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES TIL L ASSESSMENT YEAR 2007 - 08 CANNOT BE MADE AS PER KERALA HIGH COURT DECISION IN THE CASE OF CATHOLIC SYRIAN BANK LTD SINCE RULE 8D IS APPLICABLE FROM ASSESSMENT YEAR 2008 - 09. I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 25 3 - THERE WERE HARDLY ANY ADMINISTRATIVE EXPENSES FOR EARNING DIVIDEND AND OTHER INC OME THEREFORE A NOMINAL DISALLOWANCE AS LAST YEAR SHOULD BE MADE. THE DECISION OF BOMBAY ITAT WITH RESPECT TO SHARE OF PROFIT FROM PARTNERSHIP FIRM IS DIRECTLY APPLICABLE AGAINST THE ASSESSING OFFICER'S ACTION OF DISALLOWING 5% OF PROFIT FROM PARTNERSHIP FIRM. AS PER THIS DECISION, DISALLOWANCE OF ADMINISTRATIVE EXPENSES COMPUTED BY THE AO IS NOT SUSTAINABLE. THE DECISION OF KERALA HIGH COURT THAT DISALLOWANCE OF ADMINISTRATIVE EXPENSES SHOULD BE MADE FROM ASSESSMENT YEAR 2008 - 09 IS NOT FOLLOWED IN SEVERAL DECISIONS OF ITAT. APART FROM THIS, BOMBAY HIGH COURT DECISION IN THE CASE OF GODREJ AND BOYCE CONFIRMED THE DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSES UNDER SECTION 14A EVEN BEFORE AY 2008 - 09 AS PER REASONABLE ESTIMATE. THEREFORE, THE DISALLOWA NCE UNDER SECTION 14A HAS TO BE MADE IRRESPECTIVE OF THE APPLICABILITY OF RULE 8D IN THIS YEAR. WHEN MAIN SECTION MANDATED DISALLOWANCE OF EXPENSES RELATED TO EXEMPT INCOME, SUCH DISALLOWANCE CANNOT BE POSTPONED TO THE YEAR IN WHICH COMPUTATION RULES WERE FRAMED. I AM THEREFORE OF THE CONSIDERED VIEW THAT DISALLOWANCE OF ADMINISTRATIVE EXPENSES ON THE REASONABLE ESTIMATE HAS TO BE MADE. APPELLANT SUBMITTED THAT THERE ARE HARDLY ANY ADMINISTRATIVE EXPENSES FOR EARNING EXEMPT INCOME BUT THE SAME IS A GENERAL STATEMENT WITHOUT ANY SUPPORTING OR BASIS. CONSIDERING THE QUANTUM OF INVESTMENT, EXPENSES INCURRED BY THE APPELLANT, THE DISALLOWANCE @.5% OF AVERAGE VALUE OF INVESTMENT IS HELD TO BE REASONABLE, APPROPRIATE AND ALSO AS PER RULE 8D. THE DISALLOWANCE OF AD MINISTRATIVE EXPENSES IS ACCORDINGLY CONFIRMED TO THE EXTENT OF .5% OF THE AVERAGE VALUE OF INVESTMENTS (RS 359.64 CRORES AS PER ASSESSMENT ORDER). THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES COMES TO RS 179.82 LAKHS WHICH IS CONFIRMED IN ADDITION TO INTER EST DISALLOWANCE AS MENTIONED IN EARLIER PARA. THE BALANCE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DELETED. 14. HEARD RIVAL CONTENTIONS IN SUPPORT OF RESPECTIVE SUBMISSION S AS PER PLEADINGS OF BOTH THE PARTIES. THERE IS NO DISPUTE THAT INTEREST AND ADMINISTRATIVE EXPENDITURE HEREINABOVE FORM TWO COMPONENT S OF T HE IMPUGNED DISALLOWANCE. THE A SSESSEE S CASE CLAIMS AVAILABILITY OF SUFFICIENT NON - INTEREST BEARING FUNDS MUCH MORE THAN ITS TAX FREE I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 26 INVESTMENT THROUGHOUT . ITS FURTHER CASE DENIES TO HA VE INCURRED ANY ADMINISTRATIVE EXPENDI TU RE AS WELL. ITS CATEGORIC CASE MADE OUT IN LO WER PROCEEDINGS IS THAT ITS NON - INTEREST BEARING FUNDS IN THE NATURE OF GENERAL RESERVES, DEBT REDEMPTION RESERVES AND SHARE PREMIUM AMOUNTS READ RS. 396.61 CRORES, RS. 7 0 CRORES A ND RS. 181.30 CRORES RESPECTIVELY. ITS TAX FREE INVESTMENTS ARE OF RS. 600.82 CRORES. THESE FIGURES ARE AS ON THE LAST DAY OF THE RELEVANT ACCOUNT YEAR 31 - 03 - 2007. WE OBSERVE IN THESE FACTS AND CIRCUMSTANCES THAT A PRESUMPTION CAN SAFELY BE DR AWN AS PER CASE LAW OF (2014) 363 ITR 474 (GUJ) CIT VS. TORRENT POWER LTD THAT THE IMPUGNED TAX FREE INVESTMENT S HAVE BEEN MADE OUT OF SUCH SURPLU S FUNDS NOT CARRYING ANY INTEREST COMPONENT. HON BLE JURISDICTIONAL HIGH COURT FURTHER CONCLUDES THAT A SPEC IFIC FINDING REGARDING INVOLVEMENT OF ACTUAL ADMINISTRATIVE EXPENDITURE HAS ALSO TO BE GIVEN WHILE MAKING SUCH A DISALLOWANCE. THE ABOVE EXTRACTED PORTION OF THE RELEVANT FINDING MAKE S IT CLEAR THAT THE SAME NEITHER TAKES INTO ACCOUNT ASSESSEE S NON - INTER EST BEARING FUNDS NOR ITS PLEA OF HAVING INCURRED NO ADMINISTRATIVE EXPENDITURE FOR MAKING THE IMPUGNED SECTION 14A DISALLOWANCE. THE C IT(A) HAS INDIRECTLY BEEN GUIDED BY RULE 8D OTHER WISE NOT APPLICABLE IN THE IMPUGNED ASSESSM ENT YEAR. WE HOLD IN THESE FAC TS AND CIRCUMSTANCES THAT THE IMPUG N ED SECTION 14A R.W. RULE 8D DISALLOWANCE IN QUESTION IS LIABLE TO BE DELETED IN ENTIRETY. ORDERED ACCORDINGLY. THIS SUBSTANTIVE GROUND RAISED IN REVENUE S APPEAL FAILS. THE ASSESSEE S CORRESPONDING GROUND (SUPRA) S UCCEEDS. I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 27 15. THE REVENUE S THIRD SUBSTANTIVE GROUND PLEADS THAT THE CIT(A) HAS WRONGLY DELETED DEPRECIATION DISALLOWANCE OF RS. 8,97,576/ - MADE BY THE ASSESSING |OFFICER. THIS CLAIM RELATES TO PURCHASE OF OFFICE PREMISES OF RS. 3.75 CRORES INCLUDING A SUM OF RS. 2.32 CRORES OF UNQUOTED SHARES NUMBERING 160 OF A TYPE CATEGORY FOLLOWED BY ALONG WITH 1280/ - OF B TYPE ;EACH HAVING FULLY PAID UP VALUE OF RS. 100 EACH IN RUPARELIA THEATRES PVT. LTD. THE ASSESSEE SUBMITTED TO HAVE BEEN ENJOYED RIGHTS IN L EASE HOLD LAND. REMAINING FIGURE OF RS. 1.44 CRORES WAS ATTRIBUTED TOWARDS CONSTRUCTION CONTRIBUTION ALONG WITH EXCLUSIVE USE OF TERRACE AND ALLOTTED PARKING SPACE. THE ASSESSING OFFICER DID NOT DENY THE FACT THAT THE ASSESSEE HAD RAISED DEPRECIATION CLA IM ON ABOVE STATED SHARES. HE OBSERVED THAT THIS SHARE OWNERSHIP WOULD NOT INCLUDE ASSETS THEMSELVES UNDER THE ACT SINCE THE SAME COULD NOT BE HELD TO BE BUILDING AS PER THE DEPRECIATION SCHEDULE. THIS REASONING RESULTED IN THE IMPUGNED DISALLOWANCE. 16 . THE CIT(A) REVERSES ASSESSING OFFICER S ACTION AS FOLLOWS: - 8.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. APPELLANT PURCHASED OFFICE PREMISE BY PURCHASING SHARES. OUT OF TOTAL CONSIDERATION OF RS 3.75 CRORES, RS 1.43 CRORES WAS ON ACCOUNT OF CONSTRUCTION AND BALANCE 2.32 CRORES WAS FOR PURCHASE OF SHARES ENTITLING THE APPELLANT THE OFFICE PREMISE. APPELLANT HAS BEEN CLAIMING DEPRECIATION ON THE COMPOSITE SUM OF RS 3.75 CRORES SINCE 1998. ASSESSING OFFI CER FOR THE FIRST TIME DISTURBED THE CLAIM OF DEPRECIATION ON THE GROUND THAT NO DEPRECIATION IS ALLOWABLE ON SHARES. APPELLANT SUBMITTED THAT THE OWNERSHIP OF BUILDING OCCUPIED BY IT IS REPRESENTED IN THE FORM OF SHARES. THESE SHARES ENTITLED IT TO OCCUPY AND USE OFFICE PREMISE. APPELLANT ALSO SUBMITTED THAT THIS ASSET WAS PURCHASED IN 1998 AND THE SAME IS PART OF BLOCK OF ASSET. WDV OF BUILDING BLOCK INCLUDED I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 28 THIS ASSET. AS PER SECTION 43 (6), WDV CANNOT BE CHANGED SUBSEQUENTLY WITHOUT ANY BASIS. DEPRECIA TION IS ALLOWABLE ON WDV OF BLOCK OF ASSET AND THEREFORE ASSESSING OFFICER CANNOT MODIFY THE SAME IN ANY SUBSEQUENT YEAR. APART FROM THESE ARGUMENTS, APPELLANT'S RELIANCE UPON THE DECISION OF ITAT MUMBAI IN THE CASE OF DEEPAK FERTILIZERS AND PETROCHEMICAL CORPORATION LTD, 116 ITD 372 IS VERY RELEVANT. IN THE SAID DECISION IT IS HELD THAT ASSESSEE WAS THE OWNER OF THE PREMISES ALLOTTED TO IT BY VIRTUE OF PURCHASES OF SHARES AND CONSEQUENTLY WAS ENTITLED TO CLAIM DEPRECIATION. RESPECTFULLY FOLLOWING THIS DECI SION, ASSESSING OFFICER IS DIRECTED TO ALLOW DEPRECIATION ON FULL VALUE OF OFFICE PREMISES WHICH IS PARTLY REPRESENTED IN THE FORM OF SHARES. THIS GROUND IS ACCORDINGLY ALLOWED. 17. HEARD RIVAL CONTENTIONS. THERE IS NO DISPUTE ABOUT THE FACT THAT THE A SSESSEE HAS CLAIMED DEPRECATION IN QUESTION ON SHARES OF THE ABOVE STATED ASSETS. THE REVENUE FAILS IN REBUTTING THE CRUCIAL APPELLATE FINDING THAT THE SAME ALREADY FORMS PART OF THE RELEVANT B LOC OF ASSETS SINCE 1998 TREATED ELIGIBLE FOR DEPRECATION. W E FURTHER FIND THAT A CO - ORDINATE BENCH DECISION OF THE TRIBUNAL IN DEEPAK FERTILIZER CASE (SUPRA) ALREADY ALLOWS IDENTICAL DEPRECIATION CLAIM ON SHARES OF THE RELEVANT ASSETS. THERE IS NO DISTINCTION ON FACTS OR LAW POINTED OUT IN THE COURSES OF HEARING. WE AFFIRM THE CIT(A) S FINDING THEREBY DECLINING WITH REVENUE S INSTANT SUBSTANTIVE GROUND. ITS APPEAL ITA 558/AHD/2012 FAILS. 18 . NOW, WE COME TO ASSESSEE S APPEAL ITA 486/AHD/2012. ITS FIRST SUBSTANTIVE GROUND CHALLENGES SECTION 43B DISALLOWANCE O F RS. 1,33,82,156/ - COMPRISING OF LEAVE ENCASHMENT SUM OF RS. 70,46,416/ - , VAT PAYABLE (KARNATAKA) OF RS. 3,720/ - , ENTRY TAX OF RS. 5470/ - AND CUSTOMS DUTY OF RS. 73,26,550/ - ; RESPECTIVELY INCURRED IN I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 29 THE PREVIOUS YEAR AND NOT PAID ON OR B E FORE FURNISHING THE RETURN OF INCOME. THE CIT(A) S FINDIN GS UNDER CHALLENGE DISCUSSED THE ISSUE AS UNDER: - 4. THE THIRD GROUND OF APPEAL IS AGAINST ADDITION OF RS. 1,33,82,156/ - U/S . 43B OF THE L.T. ACT. 4.1 THE A.O HAS STATED IN THE ASSESSMENT ORDER DTD. 21/02/2011, WHICH IS AS UNDER: '6.1 ON PERUSAL OF CLAUSE 21(B) OF THE 3CD REPORT READ WITH ANNEXURE - XI THERETO IT IS SEEN THAT THE AUDITORS HAVE QUALIFIED VARIOUS AM OUNTS ON ACCOUNT OF PAYMENT OF T AX, DUTY OR OTHER SUM U/S.43B WHICH WERE INCURRED IN THE PREVIOUS YE AR AND WERE NOT PAID ON OR BEFORE THE DUE DATE OF FURNISHING THE RETURN OF INCOME. OUT OF THE AMOUNTS SO QUALIFIED BY THE TAX AUDITOR, IT WAS SEEN THAT FEW OF THE AMOUNTS PERTAINING TO UNPAID TERM LOAN INTEREST WHI CH REMAINED UNPAID TOTALING TO 122041 / - WE RE DISALLOWED IN THE COMPUTATION OF INCOME. HOWEVER, THE OTHER AMOUNTS QUALIFIED BY THE AUDITOR WERE NOT OFFERED FOR TAX BY THE ASSESSEE IN ITS RETURN OF INCOME. 6.2 ACCORDINGLY, VIDE QUESTIONNAIRE DATED 09.08.2010, THE ASSESSEE WAS REQUIRED TO EXPLAIN A S UNDER: (A) PLEASE REFER ANNEXU RE XI R.W. CLAUSE 21 (1) (B) OF 3CD. IN THIS CONNECTION A) PLEASE EXPLAIN WHY THE FOLLOWING AMOUNTS HAVE NOT BEEN DISALLOWED BY YOU IN THE COMPUTATION OF INCOME ALTHOUGH NOT PAID U/ S.43B AND PROVIDE A NOTE FOR ALLOWABIL ITY - BONUS RS. 79,48,837, LEAVE ENCASHMENT RS. 70,46,416, VAT PAYABLE (KARNATAKA) RS. 3720, ENTRY FAX RS. 5470, CUSTOM DUTY RS. 63,26,550. B) 6.4 THE CONTENTION OF THE ASSESSEE HAS BEEN CONSIDERED. AS REGARDS THE OUTSTANDING BONUS AMOUNTING RS. 79,48,837 / - QUALIFIED BY THE AUDITORS BY THEIR REPORT DATED 19.10.2007, THE ASSE SSEE HAS FURNISHED COPY OF CHALL AN SHOWING PAYMENT OF OUTSTANDING BONUS AS QUALIFIED BY THE AUDITOR ON 26.10.2007 AND 27.10,2007 (AFTER THE DATE OF REPORT BY THE AUDITOR & BEFORE THE DUE DATE OF FILING OF RETURN]. IN I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 30 VIEW OF THE EVIDENCES ON RECORD, NO DISALLOWANCE FOR OUTSTANDING BONUS AS QUALIFIED BY THE AUDITOR IS BEING MADE. C) 6.5 AS REGARDS LEAVE ENCASHMENT THE CONTENTION OF THE ASSESSEE HAS BEEN CONSIDERED AND IS NOT FOUND ACCE PTABLE. IT IS WITH RESPECT SUBMITTE D THAT AS ON DATE SECTION 43B(F) IS A PART OF THE INCOME - T AX ACT. MOREOVER, THE DECISION OF THE CALCUTTA HIGH COURT IS NOT BINDING AS THE MATTER IS PENDING BEFORE THE HON'BLE SUPREME COURT. AS HAS BEEN EXPLAINED BY THE AS SESSEE ABOVE, THE DECISION OF HON'BLE CALCUTTA HIGH COURT M/S. EXI DE INDUSTRIES HAS BEEN STAYED BY THE HON'BLE SUPREME COURT AND THE ASSESSEE HAS BEEN DIRECTED TO PAY FAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK. ACCORDINGLY, SINCE THE ASSESSEE HAS NOT PAID THE AMOUNT OF PROVISION FOR LEAVE ENCASHMENT DEBITED IN ITS BOOKS OF ACCOUNTS DURING THIS YEAR BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME (THERE IS NO DISPUTE ON THESE FACTS), THE SAME ARE CLEARLY DISALLOWABLE U/S.43B(F) AND ARE AC CORDINGLY AD DED. PENALTY U/S.271(1) (C) IS SEPARATELY BEING INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. D) 6.6 AS REGARDS AMOUNT OUTSTANDING ON ACCOUNT OF VAT PAYABLE (KARNAT AKA) 3,720/ - , ENTRY TAX OF 5,470/ - AND CUSTOM DUTY OF 63,26,550/ - , THE CONT ENTION OF THE ASSESSEE IS THAT THESE AMOUNTS HAVE NOT BEEN PASSED THROUGH THE P&L ACCOUNT AND THEREFORE, THEY SHOULD NOT BE CON SIDERED FOR DISALLOWANCE U/S.43B . IF IS A SETTLED LAW THAT ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE NATURE OF THE TRANSACTIONS AS HAS BEEN HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF M/S. KEDARNATH JUTE MANUFACTURING CO. (SC) [82 ITR 363]. THE OBSERVATIONS OF THE HON'BLE SUPREME COURT ARE REPRODUCED FOR READY REFERENCE: E) THE MAIN CONTENTION OF THE LEARNED SOLICITOR - GENERAL IS THAT THE ASSESSEE FAILED TO DEBIT THE LIABILITY IN ITS BOOKS OF ACCOUNTS AND, THEREFORE, 10(1) OR UNDER SECTION 10(2) (XV) OF THE ACT. WE ARE WHOLLY UNABLE TO APPRECIATE THE SUGGESTION THAT IF AN ASSESSEE UNDER I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 31 SOME MISAPPREHEN SION OR MISTAKE FAILS TO MAKE AN ENTRY IN THE BOOKS OF ACCOUNT AND ALTHOUGH, UNDER THE LAW, A DEDUCTION MUST BE ALLOWED BY THE INCOME - TAX OFFICER, THE ALLOWED THAT DEDUCTION. WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW, RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. THE ASSESSEE WHO WAS MAINTAINING ACCOUNTS ON THE MERCANTILE SYSTEM WAS FULLY JUSTIFIED IN CLAIMING DEDUCTION OF THE SUM OF RS. 1,49,776 BEING THE AMOUNT OF SAL ES TAX WHICH IT WAS II ABLE UNDER THE LAW TO PAY DURING THE RELEVANT ACCOUNTING YEAR. F) 6.6.1 AGAIN, IN THE CASE OF SUTLEJ COTTON MIL LS {1 16ITR 1} {SC} THE HON'BLE SUPREME COURT HAS OBSERVED AS UNDER: G ) IT IS SETTLED T HAT THE WAY IN WHICH ENTRIES, AR E MA DE BY THE ASSESSEE IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE EARNED ANY PROFIT OR SUFFERED ANY LOSS. THE ASSESS EE MAY, BY MAKING ENTRIES WHICH ARE NOT IN CONFORMITY WITH THE PROPER ACCOUNTANCY PRINCIPLES, CONCEAL PROFIT OR SHOW L OSS AND THE ENTRIES MADE BY HIM CANNOT, THEREFORE, BE REGARDED AS CONCLUSIVE ONE WAY OR THE OT HER. WHAT IS TO BE CONSIDERED I S THE TRUE NA TURE OF THE TRANSACTION AND WHETHER IN FACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSESSEE H) 6.6.2 THUS, ON COMBINED READING OF ABOVE TWO DECISIONS, IT IS CLEAR THAT THE ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE QUESTION WHET HER THE ASS ESSEE HAS EARNED ANY PROFIT OR I NCURRED ANY EXPENDITURE, OR NOT. WHAT IS TO BE CONSIDERED IS THE TRUE NATURE OF THE TRANSACTIONS. IN THE CASE AT HAND, THE TRUE NATURE OF THE TRANSACTIONS WITH RESPECT TO VAT PAYABLE (KARNATAKA), ENTRY TAX AND CUS TOM DUTY IS THAT THESE ARE REVENUE ITEMS WHICH SHOULD HAVE BEEN PASSED THROUGH P&L ACCOUNT. ACCORDINGLY, IF IS HELD THAT THESE RECEIPTS ARE REVENUE IN NATURE AND ARE OF THE NATURE I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 32 SPECIFIED U/S.43B I.E. T AX & DUTY, IF MAY BE NOTED THAT THESE ENTRIES OF TAX ES AND DUTI ES PAYABLE WOULD REPRESENT THE T AXES COLLECTED BY THE ASSESSEE FROM ITS CUSTOMERS ON SALES, WHICH HAS BEEN CREDITED TO THE T AX/ DUTY PAYABLE ACCOUNT INSTEAD OF CREDITING IF TO THE SATES ACCOUNT. THUS, TO THIS EXTENT THE CREDITS IN THE P&L ACCOUN T ARE REFLECTED LESS. I) THE ASSESSEE HAS THE ABILITY TO PAY THESE AMOUNTS TO THE GOVERNMENT WHICH IF PASSED TO THE P&L ACCOUNT, WOULD BE DEBITED TO IT . HENCE, BY NOT PASSING THE ENTRIES TO THE P&L ACCOUNT THE CREDITS HAVE BEEN RECORDED LESS AND SIMILARLY, THE CORRESPONDING LIABILITY OF PAYMENT REPRESENTING THE DEBIT TO THE P&L ACCOUNT HAS ALSO NOT BEEN SHOWN, WHICH SHOULD BE DISALLOWABLE UND ER THE PROVISIONS OF SECTION 43B . THUS, LOOKED FROM ANY ANGLE I.E. WHETHER FROM THE ANGLE OF SHORT RECORDIN G OF CREDITS IN THE P&L ACCOUNT OR FROM THE ANGLE OF AMOUNT UNPAID LIABLE TO BE DISALLOWED U/S.43B WHICH SHOULD HAVE BEEN DEBITED TO P&L ACCOUNT, THE NET IMPACT WOULD BE TO INCREASE THE PROFITS OF THIS YEAR. ACCORDINGLY, THESE AMOUNTS ARE ADDED AND DISALLO WED IN THE TOTAL INCOME. PENALTY U/S.271(1 )(C) IS SEPARATELY BEING INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 6.7 THUS, THE TOTAL DISALLOWANCE WORKS OUT TO RS. 133,82,1561 - U/S.43B AS UNDER: PARTICULARS AMT.(LN RS.) LEAVE ENCASHMENT 70,46,416 VAT PAYABLE (KARNATAKA) 3,720 ENTRY TAX 5,470 CUSTOM DUTY 63,26,550 TOTAL 1,33,82, 156 I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 33 4.2 THE APPELLANT HAS SUBMITTED IN ITS WRITTEN SUBMISSION, WHICH IS AS UNDER: 1.1. 'THIS GROUND OF APPEAL PERTAINS TO DISALLOWANCES U/S. 43B OF THE ACT ON ACCOUNT OF NOT DEPOSITING LEAVE ENCASHMENT OF RS. 70,46,416/ - WITHIN DUE OF FILING RETURN OF INCOME, VAT PAYABLE OF RS. 3,720/ - ENTRY TAX OF RS, 5,4707 - & CUSTOM DUTY OF RS. 63,26,550/ - . 1.2. THE LD. A.O. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS ASKED THE APPELLANT COMPANY TO EXPLAIN AS TO WHY THE ABOVE EXPENSES SHOULD NOT BE DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE APPELLANT COMPANY. 1.2. 1. IN THIS REGARDS, THE APPELLANT COMPANY FILED ITS REPLY DATED 29.10.2010 STATING THAT AS R EGARDS TO LEAVE ENCASHMENT AMOUNTING TO RS. 70,46,4161 - , THE APPELLANT COMPANY WHILE FILING THE RETURN OF INCOME, H AD NOT DISALLOWED RS. 70,46,416/ - RELYING UPON THE DECISION OF HON'BLE CALCUTTA HIGH COURT IN CASE OF EXIDE INDUSTRIES LTD. VS. UOI (292 ITR 470), THE COPY OF SAME IS ON PAGE NO. 141 OF PAPER BOOK, WHEREIN IT HAS BEEN HELD THAT ALLOWANCE OF LEAVE ENCASHMENT ON CASH BASIS ONLY WAS UNCONSTITUTIONAL. HOWEVER, AGAINST THE SAID ORDER OF HON'BTE CALCUTTA HIGH COURT, AN INTERIM ORDER WAS PASSED BY THE HON'BLE SUPREME COURT. THE RELEVANT EXTRACT OF INTERIM ORDER IS AS UNDER FOR YOUR HONOUR'S REFERENCE: 'PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL APPEAL, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AND INTEREST WHICH HAS ACCRUED TILL DATE. IT IS MADE CLEAR THAT AS FAR AS THE OUTSTANDING INTEREST DEMAND AS OF DATE IS CONCERNED, IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THAT AMOUNT IN CASE CIVIL APPEAL OF THE DEPARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD, DURING THE P ENDENCY OF THIS CIVIL APPEAL, PAY TAX AS IF SECTION 43B(F) IS ON THE STATUTE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN ITS RETURNS.' I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 34 1.2.2. HOWEVER, THE ID A.O. HELD THAT SINCE THE APPELLANT COMPANY HAS NOT PAID THE AMOUNT DURING T HE YEAR BEFORE FILING ITS RETURN OF INCOME, THE SAME IS CLEARLY DISALLOWABLE. 1. 3. IN THIS REGARDS, IT IS RESPECTFULLY SUBMITTED THAT THE DECISION OF HON'BLE CALCUTTA HIGH COURT IS GOOD IN LAW TILL THE ULTIMATE OUTCOME OF THE DEPARTMENT'S CIVIL APPEAL BY THE SUPREME COURT . FURTHER, WE STATE THAT THE SAID CANNOT BE APPLIED AS A UNIVERSAL PRINCIPAL FOR OTHER CASES. WE ALSO SUBMIT THAT TILL TODAY THE HON 'BLE SUPREME COURT HAS NOT PASSED ITS FINAL ORDER. THE LAST HEARING OF THE SAID CASE WAS CALLED ON 13.07.2 011, WHEREIN BOTH APPELLANT & RESPONDENT HAVE FILED THEIR STATEMENT OF CASES. THE COPY OF ORDER OF HON'BLE SUPREME COURT IS ENCLOSED ON PAGE NO. 72 OF PAPER BOOK, FOR YOUR HONOUR'S REFERENCE. 1.4. FURTHER, WE SUBMIT THAT THE APPELLANT COMPANY WAS MAKING P ROVISION OF THE SAID EXPENSES IN ITS BOOKS OF ACCOUNTS. AT THIS JUNCTURE, IT IS PERTINENT TO TAKE THROUGH THE PROCEDURE FOR MAKING PROVISION BY THE APPELLANT COMPANY FOR YOUR HONOUR'S REFERENCE: ON IMPORT OF MATERIALS, THE APPELLANT COMPANY FILES 'INFO BO ND OF ENTRY' BASED ON PROVISIONAL INVOICE RECEIVED FROM THE SUPPLIER. BASED ON THE FILING OF PROVISIONAL BILL ON ENTRY, THE APPELLANT COMPANY CLEARS THE MATERIAL FROM CUSTOM BONDED AREA BY PAYING CUSTOM DUTY FOR THE REQUIRED MATERIAL. MANY A TIMES IT HAPPE NS THAT BY THE TIME FINAL INVOICE FROM THE SUPPLIER IS RECEIVED, THE MATERIAL IS DISCHARGED FROM THE CUSTOM HOUSE. ONLY AT THE TIME OF FINAL ASSESSMENT BY THE CUSTOM AUTHORITIES THE APPELLANT COMPANY RECEIVES CALL FOR MAKING PAYMENT OF DIFFERENTIAL AMOUNT OF DUTY. TO TAKE CARE OF SUCH DIFFERENTIAL AMOUNT, DEMAND IN RESPECT OF WHICH MAY ARISE IN FUTURE, PROVISION IS CREATED, WHICH IS NOT PASSED THROUGH PROFIT & LOSS ACCOUNT. THE AFORESAID PROCEDURE PROVES THAT THIS IS NOT IN THE NATURE OF INCOME AS UNDERSTO OD BY THE LD. A. O. WITHOUT A NY BASIS. FURTHER WE SUBMIT THAT THERE IS NO QUESTION OF CUSTOMS DUTY HAVING BEEN RECOVERED FROM ANY CUSTOMER, AND THEREFORE, THE QUESTION OF CREDITING THE SAID AMOUNT DOES NOT ARISE. AS A MATTER OF FACT THE AFORESAID AMOUNT IS ONLY IN THE NATURE OF I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 35 PROVISION IN RESPECT OF CUSTOMS DUTY WHICH MAY BE ULTIMATELY DETERMINED AS PAYABLE BY THE APPELLANT COMPANY. IN VIEW OF THE ABOVE, WE SUBMIT THAT THE SAID DISALLOWANCE BY THE LD. A.O. IS TOTALLY UNJUSTIFIED AND SHOULD DESERVE TO BE DELETED.' 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION, IT IS NOT IN DISPUTE THAT APPELLANT DID NOT PAY LEAVE ENCASHMENT, CUSTOM DUTY AND ENTRY TAXES ETC DURING THE YEAR FILL THE DUE DATE OF FILING RETU RN. ACCORDINGLY THESE EXPENSES ARE NOT ALLOWABLE IN VIEW OF THE E XPRESS PROVISION OF SECTION 43B. APPELLANT'S ONLY ARGUMENT IS THAT IN THE CASE OF EXIDE INDUSTRIES LTD, CALCUTTA HIGH COURT DECIDED THE ISSUE IN RESPECT OF LEAVE ENCASHMENT IN APPELLANT'S FAV OR. THE SAID DECISION OF CALCUTTA HIGH COURT IS STAYED BY HONOURABLE SUPREME COURT AND ACCORDINGLY THIS DECISION CANNOT BE TREATED AS GOOD LAW. CU STOM DUTY AND OTHER GOVERNMENT T AXES WERE ALSO PAYABLE BUT WERE NOT PAID THEREFORE IRRESPECTIVE OF THE METHOD OF ACCOUNTING; THESE EXPENSES ARE NOT ALLOWABLE IN THIS YEAR. THE SAME WILL BE ALLOWED IN THE YEAR OF PAYMENT AS PER SECTION 43B. ACCORDINGLY THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CONFIRMED. 19 . THERE IS NO DISPUTE SO FAR AS FACTUAL POSITION THAT THE ASSESSEE HAS NOT PAID THE ABOVE STATED SUMS ON OR BEFORE THE DUE DATE OF FURNISHING THE RETURN IS CONCERNED. IT REFERS TO CASE LAW OF EXIDE INDUSTRIES VS . UNION OF INDIA 292 ITR 470 (CA L) STRIKING DOWN SECTION 43B (F) AS ULTRA - VIRES FOLLOWED BY A CO - ORDINATE BENCH OF THE TRIBUNAL IN 33 TAXMANN.COM 476 (AHMEDABAD) IN CASE OF EIMCO ELECOM (INDIA) LTD VS. ADDL. CIT ACCEPTING THE VERY ARGUMENT. THE REVENUE PLACES STRONGLY RELIANCE ON THE CASE OF (2014) 45 TAXMANN.COM 428 (KERALA) SOUTH INDIAN BANK L TD VS. CIT IN SUPPORT OF THE IMPUGNED DISALLOWANCE QUA LEAVE ENCASHMENT PROVISION. IT IS TO BE SEEN THAT HON BLE CALCUTTA HIGH COURT QUASHED SECTIO N 43B(F) BEING ULTRA - VIRES. HON BLE APEX COURT ADMITTED REVENUE S SPECIAL LEAVE PETITION AGAINST I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 36 THE SAME. THE LD. CO - ORDINATE BENCH (SUPRA) DELETES THE IMPUGNED DISALLOWANCE AFT ER QUOTING HE ABOVE STATED HIGH COURT DECISION. THE HON BLE KERALA HIGH COURT ADOPTS A CONTRARY VIEW AFTER TAKING INTO VIEW HON BLE APEX COURT ADMISSION OF THE REVENUE S SLP. WE OBS ERVE IN THESE FACTS THAT THE LATTER DECISION PREVAILS OVER THE CO - ORDINATE BENCH VIEW IN THESE FACTS AND CIRCUMSTANCES. WE ACCORDINGLY REJECT ASSESSEE S CONTENTIONS AND CONFIRM THE IMPUGNED LEAVE ENCASHMENT DISALLOWANCE OF RS. 70,46,416/ - . 20. NOW, WE COME TO THE VAT COMPONENT COUPLED WITH ENTRY TAX AND CUSTOM DUTY SUM (SUPRA) AS DISALLOWED BY BOTH THE LOWER AUTHORITIES. PAGES 94 TO 95 OF THE PAPER BOOK CONTAINED ASSESSEE S ARGUMENT JUSTIFYING ITS ACCOUNTING TREATMENT IN NOT CREDITING THE IMPUGNED HEAD S IN ITS PROFIT AND LOSS ACCOUNT BY NOT TAKING DAMAGE AS REVENUE RECEIPT. IT CLARIFIED IN THE LOWER APPELLATE PROCEEDINGS THAT NEITHER IT HAD PASSED THE ABOVE STATED ACCOUNT THROUGH P & L ACCOUNT NOR RAISED A DEDUCTION CLAIM OUT OF ITS TAXABLE INCOME. IT FURTHER FILED ELABORATE DETAILED INVOLVING CUSTOM PROCEDURE THEREBY PRAYING FOR DELETING THE IMPUGNED DISALLOWANCES. WE DEEM IT APPROPRIATE TO REFER TO THE ABOVE EXTRACTED LOWER APPE LLATE FINDINGS DEALING WITH THE LEAVE ENCASHMENT ISSUE ONLY AND WITHOUT EVEN ADVERTING TO ASSESSEE S DETAILED SUBMISSION NARRATED HEREINABOVE. THE CIT(A) HAS SIMPLY BRUSHED ASIDE THE SAME WITH SWEEPING OBSERVATIONS QUA APPLICABILITY OF SECTION 43B. WE ARE OF THE VIEW IN THESE PECULIAR FACTS AND CIRCUMSTANC ES THAT LARGER INTE REST OF JUSTIC E WOULD BE MET IN C ASE THIS LIMITED ISSUE OF VAT, E NTRY TAX AND CUSTOMS DUTY VIS - - VIS I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 37 APPLICATION OF 43B IS RESTORED BACK TO THE ASSESSING AUTHORITY FOR A FRESH ADJUDICATION AS PER LAW AFTER TAKING INTO ACCOUNT ASSESSEE S DETAILED SUBMISSION S AND SUPPORTIVE EVIDENCE PLACED ON RECORD. WE ORDER ACCORDINGLY. THIS FIRST SUBSTANTIVE GROUND IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 21. THE ASSESSEE S SECOND SUBSTANTIVE GROUND CHALLENGES DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS . 3,07,53,106/ - MADE BY BOTH THE LOWER AUTHORITIES. THE ASSESSEE AS WELL THE REVENUE STATE VERY CLEARLY THAT THIS ISSUE IS IDENTICAL TO THAT ARISING IN ITA 1859/AHD/2011 (SUBSTANTIVE GROUND NO. 1 IN ASSESSEE S APPEAL FOR ASSESSMENT YEAR 2006 - 07) WITHOUT I NVOLVING ANY DISTINCTION ON FACTS OR LAW. WE APPRECIATE THIS FAIR SUBMISSION. WE REFERRED TO OUR CORRESPONDING FINDING HEREINABOVE ON THE VERY ISSUE IN ASSESSMENT YEAR 2006 - 07 AND ACCEPT ASSESSEE S SUBMISSIONS. THIS SUBSTANTIVE GROUND IS TREATED AS ALLO WED. 22. THE ASSESSEE S THIRD SUBSTANTIVE GROUND ASSAILS CORRECTNESS OF DISALLOWANCE OF RS. 50,31,149/ - OUT OF EXEMPTION CLAIM U/S. 10AA OF THE ACT. THE CIT(A) REJECTS ASSESSEE S CORRESPONDING GROUND AS UNDER: - 6. THE FIFTH GROUND OF APPEAL IS AG A INST ADDITION OF RS. 50,31,149/ - U/S 10AA OF THE ACT. 6.1 THE A.O HAS STATED IN THE ASSESSMENT ORDER DTD. 2170272011, WHICH IS AS UNDER: THE SUBMISSIONS OF THE A SSESSEE HOVE BEEN CONSIDERED AND ARE NOT FOUND ACCEPTABLE. ALTHOUGH, THE ASSESSEE HAS I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 38 P RODUCED AUDITED ACCOUNT OF THE UNDERTAKING AS EXTRACTED FROM THE TRIAL BALANCE RUN THROUGH SAP ACCOUNTING SOFTWARE, THE FACT REMAINS THAT THE COMMON HEAD OFFICE EXPENSE HAVE NOT BEEN CHARGED TO P&L ACCOUNT FOR WORKING OUT THE PROFITS ELIGIBLE FOR EXEMPTION U/S, 10 AA. AT THIS JUNCTURE, ATTENTION IS INVITED TO NOTE - 838 OF SCHEDULE - 20 WHEREIN, THE COMMISSION PAID TO THE CHAIRMAN AND THE MANAGING DIRECTOR {@ 2% EACH} OF 4% OF THE PROFITS EARNED BY THE COMPANY HAS BEEN STATED AND CHARGED TO THE P&L ACCOUNT OF TH IS YEAR. THE PROFITS ON WHICH SUCH COMMISSION HAS BEEN WORKED OUT INCLUDES THE PROFITS EARNED BY THIS SEZ UNDERTAKING AND CLAIMED EXEMPT U/S. 10 AA. THUS, THE COMMISSION PAID TO THE DIRECTORS' HAS A DIRECT CO - RELATION TO THE PROFITS EARNED BY THE SEZ UNDERT AKING. HENCE, IT IS ILLOGICAL TO CONTEND THAT SINCE THE SEZ HAS A SEPARATE OFFICE, NO EXPENDITURE INCURRED IN RELATION TO CORPORATE OFFICE SHOULD BE ALLOCATED TO THE SEZ UNDERTAKING OF THE ASSESSEE. FURTHER, THERE ARE BOUND TO BE EXPENSES DEBITED TO THE CO RPORATE OFFICE ACCOUNT FOR ADMINISTRATIVE WORK RELATING TO THE SEZ UNDERTAKING FOR EG. TRAVELLING BY THE DIRECTORS FOR WORK OF THE SEZ, COMMUNICATION EXPE NSES, PRINTING & STATIONERY ETC. IN THIS CONNECTION, ATTENTION IS INVITED TO SECTION 44C OF THE INCOME - TAX ACT AS PER WHICH IN THE CASE OF ASSESSMENT OF NON - RESIDENTS, THE HEAD - OFFICE EXPENDITURE IS TO BE COMPUTED @ 5% OF THE TOTAL INCOME. ON THIS BASIS AND CONSIDERING THE FACT THAT DIRECTORS' COMMISSION INCURRED DIRECTLY IN RELATION TO THIS INCOME @ 4% HA S NOT BEEN CHARGED TO THE SEPARATE P&L ACCOUNT OF THE SEZ UNDERTAKING, IT IS HELD THAT THE ALLOCABLE HEAD - OFFICE EXPENDITURE BE TAKEN AT 5% OF THE INCOME OF THIS UNDERTAKING FOR CALC ULATING THE PROFITS EXEMPT U/S.10 AA WHICH WORKS OUT TO 50,31,497 - (5% OF 10,06,22,988/ - ). ACCORDINGLY, A DISALLOWANCE OF 50,31, 149/ - IS MADE OUT OF EXEMPTION CLAIMED U/S. 10AA. PENALTY U/S.271(L)( C) IS SEPARATELY BEING INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME.' 6.2 THE APPELLANT HAS SUBMITTED IN ITS WRIT TEN SUBMISSION, WHICH IS AS UNDER: 'IN THIS REGARDS, WE SUBMIT AS UNDER: 1.1.1. THE LD. A.O. GROSSLY ERRED I N UNDERSTANDING THAT SINCE THE APPELLANT COMPANY IS MAINTAINING ITS SEPARATE SETS OF I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 39 BOOKS FOR HEAD OFFICE AND THAT OF SEZ UNITS, THE AD - HOC EXPEN SES SHOULD NOT BE DEBITED TO PROFITS PERTAINING TO SEZ UNIT. HOWEVER, THE LD. A.O. FAILED TO APPRECIATE THE FACT THAT AS PER FORM NO. 56F CERTIFIED BY THE AUDITORS OF THE APPELLANT COMPANY, IT HAS BEEN SPECIFICALLY STATED THAT ALL T HE NECESSARY INFORMATION FOR COMPUTING ALLOWABLE DEDUCTION HAS BEEN VERIFIED. FROM THE ABOVE, IT CAN BE CONCLUDED THAT ALL THE EXPENSES PERTAINING TO SURAT SEZ HAS BEEN TAKEN INTO CONSIDERATION AND HAS - BEEN DEBITED TO CALCULATE PROFITS OF THE SAID SEZ UNIT. 1.1.2 . IT IS FURTHER SUBMITTED THAT COMMISSION PAYABLE TO THE CHAIRMAN AND MANAGING DIRECTOR IS BASED UPON A RESOLUTION PASSED BY THE BOARD OF DIRECTORS AND IN RESPECT OF THE OVERALL SERVICES RENDERED BY THEM, THE APPELLANT COMPANY DECIDED TO PAY THE AFORESAID COMMISSION TO BE CALCULATED AT 2% EACH OF THE PROFITS. IT IS SUBMITTED THAT, THIS IS ONLY A MODE OF CALCULATION OF THE COMMISSION PAYABLE TO THE DIRECTORS AND IT DOES NOT FOLLOW THAT THE COMMISSION IS IN RELATION TO THE EARNING OF THE PROFIT IN THE SEZ UNIT. 1.1.3. THE AFORESAID COMMISSION IS PAYABLE ON THE NET PROFITS OF THE APPELLANT COMPANY IRRESPECTIVE THE FACT AS TO WHETHER SUCH NET PROFIT INCLUDES ANY EXEMPT INCOME OR NOT. SIMILARLY, THERE IS NO JUSTIFICATION WHATSOEVER FOR ALLOCATING GENERAL HEAD OFFICE ADMINISTRA TIVE EXPENSES OF T HE SEZ UNIT AT 1% OF THE PROFIT OF THE SEZ UNIT. SEPARATE SET OF BOOKS OF ACCOUNT HAS BEEN MAINTAINED IN RESPECT OF SEZ AND ALL EXPENSES RELATING TO THIS UNIT HAVE ALREADY BEEN DEBITED IN THE BOOKS OF SEZ UNIT. IT IS RESPECTFULLY SUBMITTE D THAT THE EXPENSES SHOULD NOT BE ASSUMED, THAT THE SAID EXPENSES HAS BEEN INCURRED BY THE APPELLANT COMPANY. FURTHER NO ALLOCATION CAN BE MADE MERELY ON ASSUMPTIONS AS DONE BY LD. A.O. 1.1.4. IN VIEW OF ABOVE, IT IS HUMBLY SUBMITTED THAT THE ADDITION OF RS. 50,41 , 149/ - MAY KINDLY BE DELETED.' 6.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. APPELLANT CLAIMED THE PROFIT FROM SEZ UNIT AT SURAT EXEMPT UNDER SECTION 10 AA OF THE ACT. APPELLANT MAINTAINED SEPA RATE ACCOUNTS FOR SEZ UNIT BUT DID NOT ALLOCATE HEAD OFFICE EXPENSES TO THIS UNIT AND ACCORDINGLY CLAIMED EXCESS I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 40 DEDUCTION. ASSESSING OFFICER FOUND THAT CHAIRMAN AND MD EACH ARE ENTITLED TO 2% OF THE NET PROFIT AS COMMISSION. SUCH COMMISSION IS ALSO GIVEN ON INCOME FROM THIS UNIT. THEREFORE IT CANNOT BE SAID THAT THE MANAGERIAL COMMISSION IS NOT AN EXPENSE RELATING TO SEZ UNIT INCOME OF WHICH IS EXEMPT. CONSIDERING THIS, ASSESSING OFFICER ESTIMATED HEAD OFFICE EXPENSES TO THE EXTENT OF 5% OF THE NET PROFIT OF SEZ UNDERTAKING. SINCE APART FROM MANAGERIAL COMMISSION, THERE WOULD BE SOME MORE EXPENSES, THE 5% HEAD OFFICE EXPENSES ALLOCATED TO THE EXEMPT UNIT IS JUSTIFIED. ACCORDINGLY THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CONFIRMED. 23. HEARD RIVAL CONTENTIONS. THE ASSESSEE S ONLY ARGUMENT IS THAT THE IMPUGNED DISALLOWANCE HAS TO BE CONFINED TO ALLOCATION OF EXPENDITURE AND NOT ITS PROFITS DERIVED FROM THE ELIGIBLE UNDERTAKING. IT STATES TO HAVE BEEN MAINTAINING COMPLETE BOOKS ALLOCATING ALL SPECI FIC EXPENSES. THE REVENUE S SUBMISSIONS STRONGLY SUPPORT THE CIT(A) S ACTION UNDER CHALLENGE. HOWEVER, IT FAILED TO JUSTIFY THE IMPUGNED COURSE OF ACTION IN INVOKING THE IMPUGNED DISALLOWANCE VIS - - VIS ASSESSEE S ELIGIBLE PROFIT INSTEAD OF SPECIFIC EXPEN DITURE ALLOCATED IN BOOKS. WE FEEL IT MORE APPROPRIATE IN THESE PECULIAR FACTS AND CIRCUMSTANCES THAT THIS ISSUE ALSO NEEDS TO BE RE - ADJUDIC ATED AT THE LEVEL OF ASSESSING OFFICER AS PER LA W AFTER AFFORDING ADEQUATE OPPORTUNITY TO THE ASSESSEE. WE ORDER A CCORDINGLY. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 24. THE ASSESSEE S NEXT SUBSTANTIVE GROUND CHALLENGES SECTI ON 14A DISALLOWANCE OF RS. 2,10, 81,000/ - ALREADY ADJUDICATED WITH THE REVENUE S CORRESPONDING GROUND HEREINABOVE IN PRECEDING PARAG RAPH. WE HAVE ALREADY ACCEPTED ASSESSEE S SUBMISSIONS. IT I.T.A NO S. 486, 558 /AHD/20 12 & 1859, 2078/AHD/2011 A.Y. 2007 - 08 & 2006 - 07 PAGE NO ADANI ENTERPRISES LTD VS. ACIT & DCIT VS. ADANI ENTERPRISES LTD 41 SUCCEEDS IN THE IMPUGNED SUBSTANTIVE GROUND. ITA 486/AHD/2012 IS PARTLY ACCEPTED. 25. THE RE VENUE S BOTH APPEAL S ITA NOS. 207 8/AHD/2011AND 558/AHD/2012 ARE DISMISSED. ASSESSEE S CROSS APPEAL NOS. 1859/AHD/2011 AND 486/AHD/2012 ARE PARTLY ALLOWED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 01 - 01 - 201 6 SD/ - SD/ - ( PRAMOD KUMAR ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 01 / 01 /201 6 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / , ,