Aban Offshore Limited, CHENNAI V. DCIT, CHENNAI

ITA 585/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8593 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 16-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 23-03-2015
• Court: TRIBUNAL
• Department Lawyers: ANURAG SAHAY
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Residential status; Search and seizure; Salary income; Double taxation relief; Principle of natural justice; International transaction; Earning of tax free income; Cost of acquisition; Date of conversion; Wholly owned subsidiary; Speculation loss; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 92C; 40A(3); 14A; 43(5); 90

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' ! # . $ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NOS. 585/MDS/2015 & 267/MDS/16 / ASSESSMENT YEARS : 2010-11 & 2011-12 M/S. ABAN OFFSHORE LTD., 113, PANTHEON ROAD, EGMORE, JANPRIYA CREST, CHENNAI 600 008. PAN AAACA3012H APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI 34. RESPONDENT) ./ ITA NOS. 927/MDS/2015 & 668/MDS/2016 / ASSESSMENT YEARS : 2010-11 & 2011-12 THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-1(1), CHENNAI 34. APPELLANT) V. M/S. ABAN OFFSHORE LTD. CHENNAI 600 008. RESPONDENT) / APPELLANT BY : SHRI P. MURALI MOHAN RAO, FCA / RESPONDENT BY : SHRI ANURAG SAHAY, CIT ! / DATE OF HEARING : 16.06.2016 '# ! / DATE OF PRONOUNCEMENT: 14.09.2016 - - ITA 585, 927/15 ETC. 2 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FOR THE ASSESSMENT YEARS 2010- 11 AND 2011-12 EMANATING FROM THE ASSESSMENT ORDER DATED 25.2.2015 AND 21.1.2016 RESPECTIVELY, WHICH ARE CON SEQUENT TO THE DIRECTIONS OF THE DRP FOR THESE TWO ASSESSMENT YEARS. ITA NO. 585/MDS/2015 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED ASSESSING OFFICER ('LD. AO') BASED ON THE DIRECTIONS OF DISPUTE RESOLUTION PANEL, CHENNAI (' LD. DRP') GROSSLY ERRED, IN LAW AND IN FACTS, IN DIRECT ING DISALLOWANCE OF 28,15,18,658 PAID TOWARDS MANAGEMENT FEE TO M/S. INDIA OFFSHORE INC. BY TREATING IT AS NON-GENUINE WITHOUT PROPER APPRECIATION OF THE F ACTS AND INFORMATION ON RECORD. 2. THE LD. AO HAS GROSSLY ERRED IN NOT ALLOWING CARRY FORWARD OF CAPITAL LOSS OF 3,47,00,000 ON ACCOUNT OF LOSS ON SALE OF JOINT VENTURE IN THE COMPUTATION OF THE ASSESSED INCOME EVEN WHEN THE SAME WAS ALLOWED AS LONG TERM CAPITAL LOSS IN CONFORMITY WITH THE DIREC TIONS OF LD. DRP. 3. LD DRP GROSSLY ERRED IN DIRECTING INCLUSION OF T HE INCOME FROM LETTING OUT OF BUILDING UNDER THE HEAD 'INCOME FROM HOUSE PROPERTY' AS AGAINST 'INCOME FRO M BUSINESS' OFFERED BY THE APPELLANT. - - ITA 585, 927/15 ETC. 3 4.THE LD. AO/LD DRP ERRED IN TREATING PREFERENCE SHARE ISSUE EXPENSES OF 3,75,00,000 PAID TOWARDS ARRANGER 'S FEE (BROKERAGE) AS A CAPITAL EXPENDITURE AND DISALL OWED THE SAME. WITHOUT PREJUDICE TO THE ABOVE THE LD. AO/LD. DRP GROSSLY ERRED IN NOT ALLOWING AMORTIZATION OF PREFE RENCE SHARE ISSUE EXPENSES U/S. 35D OF THE ACT BY HOLDING THAT APPELLANT'S RIG IS NOT AN 'INDUSTRIAL UNDERTAKING' AND FURTHER FOR THE REASON THAT REFURBISHED RIG WAS NOT PUT TO USE. 5.THE LD. AO/ LD. DRP GROSSLY ERRED IN DIRECTING DISALLOWANCE 1,44,50,789 U/S. 14A R.W.R. 8D. IN DOING SO, A) HE DISALLOWED 1,34,18,595 U/R 8D(2) TOWARDS INTEREST EVEN WHEN THE APPELLANT HAD TOTAL CAPITAL AND RESER VES WERE RS. 2,172.91 CRORES AS AGAINST INVESTMENT OF 25.11 CRORES. B) WITHOUT PREJUDICE TO A) ABOVE, THE LD. AO GROSSLY ERRED IN NOT EXCLUDING THE INTEREST OF 1,935,718,053 TREATED BY HIM AS HAVE BEEN INCURRED FOR FUNDING TH E FOREIGN SUBSIDIARY OF THE APPELLANT. C) LD. AO/LD. DRP IGNORED THE SUBMISSIONS POINTING OUT THE APPARENT ARITHMETICAL ERRORS IN COMPUTING THE AVERAGE INVESTMENTS OF THE APPELLANT U/R 8D(2)(II) & 8D(2)(III) OF INCOME TAX RULES, 1962. 6A) THE LD. AO GROSSLY ERRED IN DISALLOWING THE APP ELLANTS CLAIM OF RELIEF U/S 90 OF 17,63,24,330. B) IN DOING SO, LD. AO GROSSLY ERRED IN IGNORING THE DIRECTIONS OF LD. DRP WITHOUT VERIFYING THE FACTS ON RECORDS. - - ITA 585, 927/15 ETC. 4 7. THE LD. AO/LD. DRP GROSSLY ERRED IN LAW AND ON FACTS, IN DISALLOWING INTEREST EXPENDITURE OF 57,46,43,700 DEBITED TO PROFIT AND LOSS ACCOUNT INCURRED BY THE APPELLANT I N THE COURSE OF BUSINESS. 2.1 THE ASSESSEE HAS RAISED THE ADDITIONAL GROUNDS AS FOLLOWS : 9. WE WOULD LIKE TO SUBMIT THAT AS PER THE RATIO L AID DOWN BY THE HONOURABLE SUPREME COURT OF INDIA IN TH E CASE OF NATIONAL THERMAL POWER CO. LTD V. CIT (1998 ) 229 ITR 383 (SC) THE IT AT HAS JURISDICTION TO EXAM INE ISSUES WHICH THOUGH NOT AROSE BEFORE THE FIRST APPE LLATE AUTHORITY BUT AROSE BEFORE IT A T FOR THE FIRST TIM E. 10. THE ASSESSING OFFICER HAS ERRED IN LAW BY MAKIN G A REFERENCE TO THE LEARNED TPO WITHOUT MEETING THE PRECONDITIONS FOR SUCH REFERENCE UNDER SECTION 92CA OF THE ACT. 11.THE AO OUGHT TO HAVE APPRECIATED THE FACT THAT THERE WAS NEITHER NECESSITY NOR EXPEDIENCY FOR SUCH REFERENCE AS THERE WAS NO ATTEMPT ON THE PART OF TH E ASSESSEE TO WILFULLY UNDERSTATE THE VALUE OF ITS INTERNATIONAL TRANSACTIONS. 12. THE AO ERRED IN NOT COMPLYING THE PROVISIONS OF SECTION 92C BEFORE REFERRING THE TRANSFER PRICING I SSUES TO THE LEARNED TPO. THE ASSESSEE PRAYS THAT THE SAM E - - ITA 585, 927/15 ETC. 5 IS IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AS THE AO HAS NOT INDEPENDENTLY APPLIED HIS JUDGMENT TO THE ORDER OF THE TPO WITH DUE COGNIZANCE TO THE ASSESSEE'S VARIOUS REBUTTALS AND HAS MECHANICALLY ACCEPTED THE CONCLUSIONS STATED IN THE TPO'S ORDER. 3. AT THE TIME OF HEARING, THE LD. COUNSEL MADE AN ENDORSEMENT THAT THE ADDITIONAL GROUNDS (9 TO 12) A RE NOT PRESSED. ACCORDINGLY, WE DISMISS THE GROUND NOS. 9 TO 12, AS NOT PRESSED. 4. REGARDING THE ISSUE OF DISALLOWANCE OF MANAGEMEN T FEES PAID TO INDIA OFFSHORE INC, THE FACTS OF THE CASE A RE THAT THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT CLAIMED AN EXPENDITURE OF 28,15,18,658/-, UNDER THE HEAD MANAGEMENT FEE PAID TO ITS GROUP CONCERN INDIA OFFSHORE INC. THE ASSESSEE BEF ORE THE DEPARTMENT SUBMITTED THAT SINCE THERE WAS A DTAA BE TWEEN INDIA AND U.S., THE TDS DEDUCTIBLE ON THE PAYMENTS WAS AT LOWER RATES. HOWEVER, THE ASSESSEE BEFORE THE DEPA RTMENT FURNISHED VARYING EXPLANATIONS THAT IT HAS WITHHELD THE TAX @ 15% ON ONE OCCASION AND LATER ON CLAIMED THAT IT HA S WITHHELD THE TAX @ 4.0478%. FURTHER, WHEN CALLED FOR THE DE TAILS LIKE THE RESIDENCY CERTIFICATE OF DEDUCTEE, THE ASSESSEE COU LD NOT FURNISH - - ITA 585, 927/15 ETC. 6 THE SAME. HENCE, THE AO OPINED THAT THE AMOUNTS AR E NOT ALLOWABLE IN VIEW OF THE PROVISIONS CONTAINED U/S.4 0(A)(I) R.W.S.195 OF THE ACT. IN ADDITION, THE ASSESSEE AL SO FAILED TO FURNISH THE DETAILS OF THE NATURE OF SERVICES RENDE RED BY INDIA OFFSHORE INC., EVEN AFTER REPEATED REQUESTS. THE A SSESSEE HAS ONLY FURNISHED THE COPY OF THE AGREEMENT BETWEEN TH E ASSESSEE AND INDIA OFFSHORE INC. NO OTHER DETAILS LIKE THE COPIES OF THE INVOICES, NATURE OF THE SERVICES RENDERED HAVE BEEN FURNISHED BY THE ASSESSEE TILL THE DATE OF PREPARING THE DRAFT O RDER. HENCE, THE AO HELD THAT THE GENUINENESS AND THE BUSINESS REQUIREMENTS OF THE MANAGEMENT FEE PAYMENTS HAVE NO T BEEN ESTABLISHED AND ACCORDINGLY, PROPOSED TO DISALLOW T HE SAME. 4.1 FURTHER, THE ASSESSEE CLAIMED IN ITS SUBMISSION BEFORE THE AO THAT THE AMOUNT OF TAX WITHHELD WAS @ 4.0478 % WAS AN INTENDED ERROR. THE ASSESSEE EXPLAINED THAT THE AC TUAL AMOUNT OF TAX WITHHELD WAS 4,45,81,999/ -, BEING @ 15% ON 28,15,18,658/- AND THE ABOVE PAYMENT OF MANAGEMENT FEE OF 28,15,18,658/- WILL NOT BE HIT BY THE PROVISIONS OF SEC.40(A)(I) OF THE ACT. - - ITA 585, 927/15 ETC. 7 5. THE DRP OBSERVED THAT SUBMISSION OF RESIDENCY CERTIFICATE OF THE NON-RESIDENTS IS A MANDATORY REQ UIREMENT FROM 1.4.2013 ONLY AS SUBMITTED BY THE ASSESSEE AND HENC E, NOT APPLICABLE TO THE CURRENT A.Y. 2010-11 UNDER CONSID ERATION. AT THE SAME TIME, THE RESIDENCY CERTIFICATE CAN BE CAL LED FOR BY THE AO IN ORDER TO VERIFY THE RESIDENTIAL STATUS OF A F OREIGN COMPANY (OR PERSON), SO THAT THE CORRECT RATES OF TAXES CAN BE DETERMINED IN THE CASES OF NON-RESIDENTS FOR THE PURPOSE OF TA XES CAN BE DETERMINED IN THE CASES OF NON-RESIDENTS FOR THE PU RPOSE OF WITHHOLDING TAX U/S.195 OF THE ACT. IF THE RESIDEN CY CERTIFICATE IS NOT AVAILABLE, IT MAY NOT BE POSSIBLE FOR THE AO TO DETERMINE THE RESIDENCE OF THE NON-RESIDENT AND HENCE, THE AO WI LL NOT BE IN A POSITION TO APPLY THE PROPER DOUBLE TAXATION AVOIDA NCE AGREEMENT. SINCE THE ASSESSEE HAS FILED A RESIDEN CY CERTIFICATE ON 31.3.2014, BEFORE THE AO, NO ADVERSE INFERENCE C AN BE DRAWN IN THIS REGARD. 5.1 THE NEXT ISSUE IS REGARDING THE GENUINENESS OF THE EXPENDITURE. AS PER THE ASSESSEE, THERE WAS A COLL ABORATION AGREEMENT BETWEEN THE ASSESSEE AND INDIA OFFSHORE I NC., USA, ENTERED IN 1986. AS PER THE AGREEMENT, THE ASSESSE E HAS TO PAY - - ITA 585, 927/15 ETC. 8 MANAGEMENT FEES FOR THE MANAGEMENT SERVICES RENDERE D BY INDIA OFFSHORE INC. HOWEVER, THE ASSESSEE, EITHER BEFORE THE AO OR BEFORE THE DRP, HAS NOT FURNISHED ANY EVIDENCES REGARDING THE NATURE OF THE SERVICES RENDERED BY INDIA OFFSHO RE INC. NOR THE ASSESSEE HAS FURNISHED THE COPIES OF THE INVOIC ES RAISED BY INDIA OFFSHORE INC. 5.2 THE DRP OBSERVED THAT THE ASSESSMENT PROCEEDINGS WERE NOT CONCLUDED IN A HURRIED MANNER. THE ASSESSE E WAS GIVEN SUFFICIENT TIME TO FURNISH ITS EXPLANATIONS AND THE DETAILS. IN FACT, THERE WAS AN ENQUIRY BY THE INVESTIGATION WING IN THE CASE OF THE ASSESSEE ON 05.07.2011. DURING THE COURSE OF VERIFICATIONS THE DRP REQUIRED THE ASSESSEE TO FURNISH THE NATURE OF TILE SERVICES RENDERED BY INDIA OFFSHORE INC., COPIES OF THE INVOICES, THE DETAILS OF THE TAX WITHHELD, RESIDENC Y CERTIFICATE, ETC. FROM THE DATE OF ENQUIRY U/S.131 TILL THE DATE OF DRAFT ASSESSMENT ORDER ON 31.03.2014, THERE WERE SEVERAL REMINDERS BY THE ASSESSING OFFICER TO THE ASSESSEE TO FURNISH THE DETAILS. HOWEVER, THE ASSESSEE FAILED TO FURNISH ANY OF THE DETAILS CALLE D FOR - - ITA 585, 927/15 ETC. 9 BY THE INVESTIGATION WING AS WELL AS THE ASSESSING OFFICER. 5.3 EVEN BEFORE THE DRP, THE ASSESSEE FAILED TO FURNISH ANY DETAILS I EVIDENCES REGARDING THE NATURE OF THE SERVICES RENDERED BY INDIA OFFSHORE INC. INSTEAD OF FURNISHING THE DETAILS CALLED FOR BY THE ASSESSING OFFICER AND PROVING THE GENUINENESS OF THE TRANSACTIONS, THE ASSESSEE TRIED TO EXPLAIN THAT ON CE THE ASSESSING OFFICER DISALLOWS AN AMOUNT U/S.40(A) (I) OF THE ACT, IT IS NOT OPEN TO THE ASSESSING OFFICER TO DISALLOW THE SAME UNDER AN ALTERNATIVE PLEA. THIS CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE TO DRP . AN EXPENDITURE CAN BE DISALLOWED FOR MORE THAN ONE REASON. IT IS NOT THE INTENTION OF THE LEGISLATURE THAT IF THE EXPENDITURE WHICH IS DISALLOWED UNDER A PARTICU LAR PROVISION SHOULD NOT BE EXAMINED FROM THE POINT OF VIOLATIONS, IF ANY, UNDER OTHER PROVISIONS. AS PER THE PROVISIONS OF THE ACT, THE EXPENSES CLAIMED BY THE ASSESSEE SHOULD BE NOT ONLY PERMITTED UNDER VARIOUS PROVISIONS OF THE ACT, BUT ALSO NOT HIT BY THE PROH IBITIVE - - ITA 585, 927/15 ETC. 10 CLAUSES OF THE OTHER PROVISIONS. AS PER THE PROVISI ONS OF THE ACT , ONLY THE GENUINE EXPENSES ARE TO BE ALLOWED AS A DEDUCTION. EVEN AFTER PROVING THE GENUINENESS OF THE EXPENDITURE, IF THE EXPENDITURE IS HIT BY OTHER PROVISIONS LIKE 40A(3) , 43B, 40(A)(I), ETC., THE DISALLOWANCE CAN BE MADE UNDER THE RESPECTIVE SECTIONS. THEREFORE, THE DRP OBSERVED THAT THE ASSESSING OFFICER HAS TO EXAMINE THE PROVISIONS OF EACH SECTION AND THE ASSESSEE'S CLAIM SHOULD FULFIL THE REQUIREMENTS PROVIDED UNDER VARIOUS SECTIONS. 5.4 THE DRP OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED ANY DETAILS LIKE COPIES OF INVOICES, NATU RE OF THE SERVICES RENDERED BY INDIA OFFSHORE INC. ETC. E ITHER BEFORE THE AO OR BEFORE THE PANEL. MERE MAKING OF THE PAYMENT THROUGH BANKING CHANNEL IS NOT A CONCLUSIVE PROOF FOR THE INCURRENCE OF THE EXPENSES . IT IS THE RESPONSIBILITY OF THE ASSESSEE TO PROVE THE GENUINENESS OF THE PAYMENTS AND ALSO THE NEXUS BETWEEN THE BUSINESS AND THE PAYMENTS. IF THERE IS NO DIRECT NEXUS BETWEEN THE ASSESSEES BUSINESS AND - - ITA 585, 927/15 ETC. 11 PAYMENTS, THE AMOUNTS PAID SHOULD NOT BE ALLOWED AS A DEDUCTION, EVEN IF THE ASSESSEE CONCLUSIVELY PROV ES THE PAYMENTS. IN THE PRESENT CASE, EVEN THE COMMERCIAL EXPEDIENCY IS NOT ESTABLISHED BY THE ASSESSEE. THE ASSESSEE HAS NOT ESTABLISHED ANYTHING AS TO HOW THE PAYMENTS TO INDIA OFFSHORE I NC. ARE REQUIRED FOR THE BUSINESS OF THE ASSESSEE AND A LSO THE NATURE OF THE SERVICES RENDERED BY IT. IN THE ABSENCE OF ANY SUCH DETAILS, THE AO HAS RIGHTLY CONCLUDED THAT THE CLAIM OF PAYMENTS OF MANAGEMENT FEE OF 28,15,18,658/- AS NON-GENUINE EXPENDITURE AND WITHOUT ANY COMMERCIAL EXPEDIENCY. HENCE, IN THE ABSENCE OF ANY EVIDENCES, THE DRP OBSERVED THAT IT IS NOT POSSIBLE FOR THE PANEL TO COME TO A CONCL USION THAT THE ABOVE PAYMENTS ARE GENUINE OR COMMERCIALLY EXPEDIENT. THEREFORE, THE ACTION OF THE AO PROPOSE D TO DISALLOW THE MANAGEMENT FEES OF 28,15,18,658/- IS CONFIRMED BY THE DRP. AGAINST THIS, THE ASSESSE E IS IN APPEAL BEFORE US. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE - - ITA 585, 927/15 ETC. 12 MATERIAL ON RECORD. ADMITTEDLY, THIS EXPENDITURE W AS INCURRED IN TERMS OF AGREEMENT ENTERED INTO BY THE ASSESSEE AND INDIA OFFSHORE INC. VIDE AGREEMENT DATED 15.12.1986, WHICH WAS EXTENDED UPTO 15.12.2014. THIS AGREEMENT WAS SUBJECT TO SCRUTINY BEFORE THE AUTHORITIES AND THE TRIBUNAL IN EARLIER YEARS AND THERE WAS NO ADDITION ON THIS COUNT. THE PAYME NT HAS BEEN MADE ORIGINALLY, VIDE AGREEMENT DATED 15.12.1986 AND IT WAS FURTHER EXTENDED UPTO 15.12.2014. THEREFORE, THERE IS NO QUESTION OF RAI SING INVOICES FOR EACH ASSESSMENT YEAR AND THE PAYMENT I S MADE IN TERMS OF APPROVED AGREEMENT. FURTHER, IN O UR OPINION, THE GENUINENESS AGREEMENT CANNOT BE QUESTIONED BY THE ASSESSING AUTHORITIES WHEN IT IS DULY APPROVED BY THE CENTRAL GOVT., MINISTRY OF COMMERCE & INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION AND BY THE RESERVE BANK OF INDIA AS WELL. IT IS BROUGHT ON RECORD THAT MINISTRY OF COMMERCE & INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION APPROVED THIS PAYMENT VIDE THEIR LETTER - - ITA 585, 927/15 ETC. 13 DATED 25.4.2005. IT IS ALSO BROUGHT ON RECORD THAT THE PAYMENT MADE TO INDIAN OFFSHORE INC WAS SUBJECTED T O WITHHOLDING TAXES U/S.195 OF THE ACT AND TDS WAS DU LY DEDUCTED AND DEPOSITED IN THE GOVT. BANK AS SEEN FROM FORM 16A PLACED ON PAPER BOOK AT PAGE 204. WHEN THE DEPARTMENT HAS GIVEN NO OBJECTION CERTIFICATE FOR REMITTANCE MADE TO INDIAN OFFSHORE INC FOR EARLIER YEARS WHICH IS PLACED ON RECORD AT PAGE NOS.211-212 OF THE PAPER BOOK. FURTHER, IT IS BROU GHT ON RECORD THAT THERE WAS NO ADDITION IN EARLIER ASSESSMENT YEARS AS EVIDENT FROM THE COPIES FILED BEFORE US FOR THE ASSESSMENT YEARS 2005-06 TO 2008- 09 WHICH IS KEPT ON RECORD AT PAGES 1 TO 146 OF THE PAPER BOOK. THEREFORE, IT IS NOT POSSIBLE TO HOLD THAT THE PAYMENT IS NOT GENUINE. 6.1 FURTHER, THE TRIBUNAL IN THE CASE OF CADBURY I NDIA LTD. V.ADCIT IN ITA NO.7408/MUM/2010 DATED 13.11.2013 HE LD IN PARAGRAPH 39 THAT IF THE ASSESSEE HAS PAID THE P AYMENTS IN RELATION TO ROYALTY TO ITS PARENT AE FOR USE OF TECHNICAL KNOW-HOW AND TRADEMARK AFTER GETTING DUE APPR OVAL FROM - - ITA 585, 927/15 ETC. 14 RBI AND SIA, THE DISALLOWANCE CANNOT BE MADE. FURTHER, IF THE AMOUNT PAID BY ASSESSEE WAS LESSER THAN SIMILAR PAYMENTS MADE BY OTHER GROUP ENTITIES TO PARENT AE, THEN, TPO SHOULD NOT MAKE THE TP ADJUSTMENT IN RESPECT OF THE ROYALTY PAYMENT TO ITS PARENT AE. 6.2 IT IS PERTINENT TO NOTE THAT THE TRIBUNAL, HYDERABAD BENCH IN THE CASE OF AIR LIQUID ENGINEERING INDIA P. LTD. IN ITA NOS.1040 & 1159/HYD/2011 AND 1408/HYD/2010, VIDE ORDER DATED 13.2.2014 HELD THAT IN TRANSFER PRICING PROCEEDINGS TPO COULD NOT SIT IN JUDGMENT ON BUSINESS AND COMMERCIAL EXPEDIENCY OF ASSESSEE COMPANY SO AS TO CONCLUDE THAT PAYMENT OF ROYALTY MADE BY ASSESSEE T O ITS AE WAS UNREASONABLE AND THUS ALP OF SAID PAYMENT WAS TO BE TAKEN AS NIL. 6.3 IT IS TO BE NOTED THAT IN THE CASE OF DCIT V. S ONA OKEGAWA PRECISION FORGINGS LTD. IN ITA NO. 5386/DEL/2010 DATED 16.12.2011, THE TRIBUNAL HELD - - ITA 585, 927/15 ETC. 15 THAT THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS OVERSEAS ASSOCIATES AND PAID ROYALTY @ 3% WHICH WAS CONSIDERED AS EXCESSIVE BY TPO DID NOT BRING ANY MATERIAL ON RECORD WHICH COUL D SUGGEST THAT PAYMENT OF ROYALTY AS EXCESSIVE ORDER OF TPO WAS TO BE DISMISSED AND A COLLABORATION AGREEMENT HAD BEEN APPROVED BY THE MINISTRY OF INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION. 6.4 THE TRIBUNAL ALSO HELD IN THE CASE OF ABHISHEK AUTO INDUSTRIES LTD. IN ITA NO.1433/DEL/2009 DATED 12.11.2010, THAT IT IS A SETTLED PROPOSITION OF THE LAW THAT LEGALLY BINDING AGREEMENTS BETWEEN UNRELATED PARTIES CANNOT BE DISREGARDED WITHOUT ASSIGNING ANY COGENT REASONS THERETO. IN THIS CASE, IT HAS AGREEMENTS THAT ARE DULY APPROVED BY RBI AND OTHER REGULATORY AGENCIES. IT IS ALSO A SETTLED PROPOSIT ION THAT COMMERCIAL TRANSACTIONS ARE IN THE DOMAIN OF T HE BUSINESSMAN AND INCOME-TAX DEPARTMENT CANNOT INTERVENE IN REALM OF INTRICACIES OF COMMERCIAL - - ITA 585, 927/15 ETC. 16 EXPEDIENCIES INVOLVED IN THESE ARRANGEMENTS. 6.5 IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE PAYMENT IS MADE IN ACCORDANCE WITH AGREEMENT ENTERED INTO BY THE PARTIES, WHICH IS EVIDENT FROM THE RECORD AND IT WAS SUBJECTED TO TDS , DISALLOWANCE IS NOT JUSTIFIED. ACCORDINGLY, WE ALL OW THE GROUND RAISED BY THE ASSESSEE. 7. THE NEXT GROUND IS WITH REGARD TO IN NOT ALLOWING CARRY FORWARD OF CAPITAL LOSS OF 3 , 47 , 00 , 000 ON ACCOUNT OF LOSS ON SALE OF JOINT VENTURE IN THE COMPUTATION OF THE ASSESSED INCOME EVEN WHEN THE SAME WAS ALLOWED AS L ONG TERM CAPITAL LOSS I N CONFORMITY WITH THE DIRECTIONS OF LD . DRP . 8. THE FACTS OF THE CASE ARE THAT THE NEXT OBJECTIO N OF THE ASSESSEE IS REGARDING THE PROPOSED DISALLOWANCE OF LOSS ON ACCOUNT OF SALE OF BUSINESS INTEREST AND ADDITION ON ACCOUNT OF SALE OF BUSINES S IN JOINT VENTURE. THE OBJECTIONS HAS TWO PARTS : (I) DISALLOWANCE OF BUSINESS LOSS ON ACCOUNT OF SALE OF BUSINESS INTEREST IN JV WITH PRIZE PETROLEUM - - ITA 585, 927/15 ETC. 17 3,47,00,000/- AND (II) ADDITION OF AMOUNT OF AMOUNT RECEIVED OVER THE YEARS TOWARDS SALE CONSIDERATION OF TRANSFER OF BUSINESS INTEREST IN JV AS CAPITAL GAIN S 9,50,00,000/-. THE ASSESSEE HAS SOLD ITS JOINT VENTURE BUSINESS FOR A CONSIDERATION OF 13 CRORES WHICH WAS LATER REVISED TO 50 CRORES. IN THE RETURN OF INCOME FILED, THE ASSESSEE HAS CLAIMED A LOSS OF 3.47 CRORES ON ACCOUNT OF SALE OF THE JOINT VENTURE. HOWEVER, THE ASSESSEE HAS NOT FURNISHED THE DETAILS OF THE WORKING OF THE LOSS OF 3.47 CRORES. HENCE, THE AO PROPOSED TO DISALLOW THE LOSS CLAIMED OF 3.47 CRORES. IN ADDITION, THE AO ALSO PROPOSED TO BRING THE ENTIRE SALE CONSIDERATION OF 9.50 CRORES TO TAX AS LONG TERM CAPITAL GAINS. AGAINST THIS, THE ASSESSE E CARRIED THE MATTER BEFORE THE DRP. 9. THE DRP OBSERVED THAT THE ASSESSEE ENTERED INTO A JOINT VENTURE BUSINESS WITH M/S. PRIZE PETRO LEUM LTD. WITH 50:50 RATIO. THE ASSESSEE HAS BEEN INCLUDING THE ASSETS AND LIABILITIES OF THE JOINT V ENTURE, TO THE EXTENT OF 50%, IN ITS BALANCE SHEET AND THE - - ITA 585, 927/15 ETC. 18 BUSINESS TRANSACTIONS IN THE PROFIT AND LOSS ACCOUN T. THE ASSESSEE SOLD ITS 50% INTEREST IN THE JOINT VEN TURE TO M/S. VALDEL OIL & GAS P. LTD. FOR A CONSIDERATION OF 13 CORES IN THE F.Y. 2007-08. THE T OTAL BUSINESS VALUE VALUE [ASSETS -LIABILITIES] OF IT S 50% INTEREST IN THE JOINT VENT URE, AT THE TIME OF SALE IN 2007-08 WAS 13,64,91,065/-. HENCE THE ASSESSEE, IN THE RETURN O F INCOME FOR THE A.Y.2008-09 CLAIMED A NET LOSS OF 64,91,005/-. THE ASSESSING OFFICER, IN A.Y.2008-09 DISALLOWED THE ASSESSEE'S CLAIM. ON APPEALS, THE CIT(A)-III, CHENNAI (VIDE ITA NOS. 514, 515 AND 516/11-12/(A)-III DATED 28.03.2012), HAD ALLOWED TH E LOSSES OF 64,91,065/-, BUT HELD THAT THE SHARE CAPITAL LOSSES AND COULD BE SET OFF ONLY AGAINST THE CAPITA L GAINS IF ANY. 9.1 SUBSEQUENTLY, DURING THE F.Y.2009-10 THE ASSESSEE ENTERED INTO AN ADDENDUM TO THE NOVATION AGREEMENT WITH VALDEL OIL & GAS P LTD, WHEREIN THE AGREED CONSIDERATION FOR THE SALE OF THE ABOVE 50% INTEREST IN THE JOINT VENTURE WAS REDUCED FROM 13.00 - - ITA 585, 927/15 ETC. 19 CRORES TO 9.50 CRORES. THUS, THE ASSESSEE FURTHER SUFFERED ADDITIONAL LOSS OF 3.47 CRORES, ON ACCOUNT OF THE NON-RECEIPT OF THE RECEIVABLE. HENCE THE ASSES SEE CLAIMED THE SAME AS LOSS FROM THE SALE OF ITS 50% INTEREST IN THE JOINT VENTURE. 9.2 AS HELD BY THE CIT(A) IN A.Y.2008-09, THE LOSS ON THE SALE OF 50% INTEREST IN THE JOINT VENTURE WAS A CAPITAL LOSS. SINCE THE ABOVE WAS THE REDUCTION (ON ACCOUNT OF REVISION OF THE SALE AGREEMENT) OF THE V ERY SAME SALE CONSIDERATION, THE ADDITIONAL LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF THE REVISION OF THE SALE CONSIDERATION ALSO CONSTITUTES A CAPITAL LOSS. THER EFORE, IT WAS OBSERVED BY THE DRP THAT THE ASSESSEE IS NOT JUSTIFIED IN CLAIMING 3.47 CRORES AS A BUSINESS EXPENDITURE IN THE CURRENT AY 2010-11 , UNDER CONSIDERATION. THE LOSS OF 3.47 CRORES IS A LONG TERM CAPITAL LOSS, AS HELD BY THE CIT(A) IN A.Y. 2008-09. THEREFORE, THE ASSESSING OFFICER I S DIRECTED TO CONSIDER AND ALLOW THE ABOVE LOSS OF 3.47 AS A LONG TERM CAPITAL LOSS. - - ITA 585, 927/15 ETC. 20 9.3 AS MENTIONED ABOVE, ALL THE TRANSACTIONS AND THE ASSETS AND LIABILITIES OF THE JOINT VENTURE, TO THE EXTENT OF THE ASSESSEE'S INTEREST OF 50%, ARE BEING SHOWN IN THE ASSESSEE'S BOOKS OF ACCOUNTS. WHEN, THE ASSESSEE HAS SOLD ITS INTEREST OF 50% OF THE JOINT VENTURE FOR 13 CRORES (OR REVISED VALUE OF 9.50 CRORES), THE BUSINESS VALUE OF 13.64 CRORES HAS BEEN REDUCED FROM THE ASSESSEE'S BALANCE SHEET IN THE A.Y. 2008-09. HENCE, THE QUESTION OF OFFERING THE S ALE CONSIDERATION SEPARATELY ONCE AGAIN IN THE RETURN O F INCOME OF A.Y. 2008-09 OR 2010-11 WILL NOT ARISE. FURTHER, THE ACTUAL SALE OF 50% INTEREST IN THE JOI NT VENTURE HAS ACTUALLY HAPPENED IN THE F.Y. 2007-08 F OR A CONSIDERATION OF 13 CRORES. THEREFORE, THE ISSUE OF CAPITAL GAINS, IF ANY, IS TO BE EXAMINED IN THE ASSESSMENT OF A.Y. 2008-09. IN FACT, THERE WAS A CAPITAL LOSS OF 64.91 LAKHS, WHICH WAS ALSO ALLOWED BY THE CIT(A) IN A.Y. 2008-09. THEREFORE, NO SEPAR ATE CAPITAL GAINS ARE ASSESSABLE ON THE SAME TRANSACTIO N IN THE SUBSEQUENT YEARS. THE PRESENT ISSUE IS ONLY - - ITA 585, 927/15 ETC. 21 REDUCTION IN THE SALE CONSIDERATION OF THE TRANSACT ION WHICH HAS ALREADY HAPPENED IN F.Y. 2007-08. HENCE, NO ACTION IS REQUIRED IN THE CURRENT A.Y. 2010-11. THEREFORE, THE DRP OBSERVED THAT THE AO IS NOT JUSTIFIED IN BRINGING THE REVISED SALE CONSIDERATIO N OF 9.50 CRORES TO TAX AS LONG TERM CAPITAL GAINS IS NO T JUSTIFIED AND DELETED. NOW THE ASSESSEE IS IN APPE AL BEFORE US WITH REGARD TO THE FINDINGS OF THE DRP TH AT LOSS OF 3.47 CRORES IS A LONG TERM CAPITAL LOSS, AS HELD BY THE CIT(APPEALS) IN A.Y. 2008-09 AND ALLOW THE ABOVE LOSS AS A LONG TERM CAPITAL LOSS ONLY. 10. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERIAL ON RECORD. THE CONTENTION OF THE LD.AR IS THAT THE ABOVE IMPUGNED AMOUNT WAS RECEIVABLE FROM VALDEL OIL & GAS PVT. LTD. OUT OF THE TOTAL CONSIDERATION OF 13 CRORES AND THIS IS A BUSINESS LOSS ON ACCOUNT OF NON-RECEIPT OF RECEIVABLE IN ORDINARY COURSE OF BUSINESS U/S.28(VA) OF THE ACT. HE RELIED ON THE JUDGMENT OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SUMEET TANEJA VS CIT (38 - - ITA 585, 927/15 ETC. 22 TAXMAN.COM 149), WHEREIN IT WAS HELD THAT TRANSFER OF SHARES WITH ALL PERVASIVE CONTROL OVER BUSINESS BEI NG ENTRUSTED TO PURCHASER AND TO COMPLETE THE EXCLUSIO N OF THE ASSESSEE WITH A NON-COMPETE CLAUSE FELL WITH IN THE REALM OF SEC.28(VA) OF THE ACT. IN OUR OPINION , THE ARGUMENT OF THE LD. AR IS TOTALLY MISPLACED. THE T OTAL TRANSACTION RELATING TO SALE OF BUSINESS INTEREST U NDER JOINT VENTURE AGREEMENT WITH PRIZE PETROLEUM LTD. A ND SUBSEQUENT TRANSFER OF RIGHT OF DEVELOPMENT OF ONGCS OIL FIELD IN FAVOUR OF VALDEL OIL & GAS LTD. WAS SUBJECT MATTER OF DISPUTE IN THE ASSESSMENT YEA R 2008-09. THE DRP FOR THE ASSESSMENT YEAR 2008-09, HELD THAT LOSS ARISING OUT OF TRANSFER OF 50% INTER EST IN THE JOINT VENTURE WAS A CAPITAL LOSS. HENCE, SUBSEQUENT REDUCTION IN THIS SALE CONSIDERATION FRO M 13 CRORES TO 9.5 CRORES WOULD TAKE THE SAME CHARACTER AS CAPITAL LOSS ONLY AND IT CANNOT TAKE A DIFFERENT CHARACTER TO SAY IT IS A BUSINESS LOSS IN TERMS OF SEC.28(VA) OF THE ACT. THEREFORE, LOWER AUTHORI TIES ARE JUSTIFIED IN TREATING IT AS A CAPITAL LOSS ONLY . THE - - ITA 585, 927/15 ETC. 23 JUDGMENT CITED BY THE LD. AR HAS NO APPLICATION TO THE PRESENT CASE. ACCORDINGLY, THIS GROUND IS DISMISSE D. 11. THE NEXT GROUND IS WITH REGARD TO INCLUSION OF THE INCOME FROM LETTING OUT OF BUILDING UNDER THE HEAD INCOME FROM HOUSE PROPERTY AS AGAINST INCOME FRO M BUSINESS OFFERED BY THE ASSESSEE. 12. AT THE TIME OF HEARING, THE LD. AR SUBMITTED TH AT THE ASSESSEE DID NOT PRESS THIS GROUND AND THE SAME IS DISMISSED AS NOT PRESSED. 13. THE NEXT GROUND IS WITH REGARD TO IN TREATING PREFERENCE SHARE ISSUE EXPENSES OF 3,75,00,000/- PAID TOWARDS ARRANGERS FEE (BROKERAGE) AS A CAPITA L EXPENDITURE AND DISALLOWED THE SAME. 14. THE LD. AR SUBMITTED THAT THE EXPENDITURE INCURRED FOR PREFERENCE SHARES IS TREATED AS REVENU E EXPENDITURE. 15. THE LD. DR RELIED ON THE ORDER OF THE TRIBUNAL IN - - ITA 585, 927/15 ETC. 24 ASSESSEES OWN CASE IN ITA NO.1159/MDS/2012 DATED 31.12.2015, WHEREIN THE TRIBUNAL PLACED RELIANCE ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FO R THE A.Y. 2006-07 IN ITA NO.1382/MDS/2010 DATED 15.7.2011 AND DENIED THE ASSESSEES CLAIM U/S.35D O F THE ACT. 15.1 ON THE OTHER HAND, THE LD. AR RELIED ON TH E ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E A.Y. 2007-08 IN ITA NO 90/MDS/2012 DATED 26.6.2016, WHEREIN THE TRIBUNAL ALLOWED THE CLAIM OF THE ASSESSEE U/S.35D OF THE ACT ON THE SAME ISSUE. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LD. AR RELIED ON THE JUDGMENT OF RAJASTHAN HIGH COURT IN THE CASE OF SECURE METERS L TD. REPORTED IN 175 TAXMAN 567, FOR THE PROPOSITION TH AT IT SHOULD BE CONSIDERED AS EXPENDITURE U/S.35D OF THE ACT. THE LD. AR SUBMITTED THAT THE EXPENDITURE WAS INCURRED ON NON- CONVERTIBLE REDEEMABLE PREFERENCE SHARES. IT CAN BE CHARACTERI ZED IN THE NATURE OF DEBT. AS PER RBI GUIDELINES, NON-CONVER TIBLE REDEEMABLE AND PARTLY CONVERTIBLE REDEEMABLE PREFER ENCE - - ITA 585, 927/15 ETC. 25 SHARES ARE DEBT INSTRUMENTS AND WHOLLY CONVERTIBLE PREFERENCE SHARES ARE PART OF EQUITY. ACCORDING TO HIM, IN T HE PRESENT CASE, THERE IS A CONTRACT WITH THE SUBSCRIBER TO THE PREF ERENCE SHARES FOR REPAYMENT OF CAPITAL AFTER A PARTICULAR PERIOD OF REDEMPTION. WHEREAS IN THE CASE OF EQUITY, THERE IS NO COMMITME NT ON THE PART OF THE COMPANY IN MAKING THE REPAYMENT. THE E XPENDITURE IS INCURRED TOWARDS INCREASED DEBT FUNDING FOR THE BENEFIT OF THE COMPANY AND NOT TOWARDS INCREASE IN THE CAPITAL BAS E. THEREFORE, ANY EXPENDITURE INCURRED ON RAISING OF T HE DEBT SHOULD BE ADMISSIBLE REVENUE EXPENDITURE. ADMITTEDLY, THIS ISSUE CAME BEFORE THE TRIBUNAL IN EARLIER YEARS. SPECIFIC ALLY, IN THE ASSESSMENT YEAR 2008-09 THE TRIBUNAL DECIDED THE ISSUE AGAINST THE ASSESSEE BY FOLLOWING THE EAR LIER ORDER OF THE TRIBUNAL FOR THE A.Y. 2006-07 WITHOUT NOTICING THE SUBSEQUENT ORDER OF THE TRIBUNAL FOR T HE A.Y. 2007-08. LATER, THE ASSESSEE FILED MA IN MA NOS.95 & 96/MDS/16 AND THE TRIBUNAL VIDE ORDER DATE D 29.7.2016 HELD AS UNDER : 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ORDER OF THE TRIBUNAL IN I.T.A.NO.90/MDS/2012, DATED 26.6 .2015 FOR ASSESSMENT YEAR 2007-08. IN OUR OPINION, THERE IS A MISTAKE - - ITA 585, 927/15 ETC. 26 IN THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 20 08-09 ON THE BASIS OF ITAT ORDER FOR ASSESSMENT YEAR 2007-08 . AS SUCH, THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 35D FOR ASSESSMENT YEAR 2008-09. ACCORDINGLY, WE RECTIFY P ARA 23 AND 24 THE ORDER DATED 31.12.2015 AS FOLLOWS BY FO LLOWING THE ITAT ORDER FOR ASSESSMENT YEAR 2007-08 AND IT I S TO BE READ AS FOLLOWS: 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. THE ISSUE CAME UP BEFORE THE T RIBUNAL FOR ASSESSMENT YEAR 2007-08 IN ASSESSEES OWN CASE IN I.T.A.NO.90/MDS/2012, DATED 26.6.2015 WHEREIN THE T RIBUNAL HAS OBSERVED AS UNDER: 11. BRINGING OUR ATTENTION TO PARA 10.2 OF THE CI T(A)S ORDER, BOTH THE PARTIES CONCURRED ON THE FACT THAT SIMILAR ISSUE WAS ADJUDICATED BY THE TRIBUNAL IN ASSESSEE S OWN CASE IN I.T.A.NO. 1382/MDS/2010 FOR ASSESSMENT YEAR 2006-07. WE REPRODUCE PARA 10.2 OF THE CIT(A)S O RDER AS UNDER: 10.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSION OF THE ID. AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AO AND AR. SIMILAR ISSUE HAD COME UP FOR CONSIDERATION IN APPELLANT'S OWN CASE FOR A.Y. 2006-07. AFTER CONSIDERING THE FACTS AND RIVAL SUBMISSIONS, IT WAS HELD IN ITA NO.573/0809/A.1I1 DATED 23.06.2010 FOR A.Y. 2006- 07 THAT THE EXPENDITURE ON ISSUE OF SHARES IS NOT DEDUCTIBLE BECAUSE IT IS DIRECTLY REL ATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY . THE DISALLOWANCE OF THE AO WAS SUSTAINED. HOWEVER, SINCE THE APPELLANT IS ENGAGE IN THE BUSINESS OF HIRING RIGS AS WELL AS THE BUSINESS OF DRILLING AND OTHER OIL FIELD SERVICES, HYDROCARBON EXPLORATION AND PRODUCTION, IT WAS HELD THAT THESE ACTIVITIES WOULD FALL WITHIN THE AMBIT OF 'MINING' UNDER CLAUSE (AA) (IV) OF SUB-SECTION (7) OF SECTIO N 72A OF THE ACT WHICH DEFINES 'INDUSTRIAL - - ITA 585, 927/15 ETC. 27 UNDERTAKING'. HAVING DECIDED THAT THE APPELLANT QUALIFIES AS AN INDUSTRIAL UNDERTAKING, IT WAS FURT HER EXAMINE AS TO WHETHER IT SATISFIES THE CONDITIONS L AID DOWN IN SECTION 350 OF THE ACT. SINCE THE APPELLANT HAD ONLY PURCHASED THE OIL RIG BUT HAD NOT PUT IT T O USE DURING THE YEAR AND HAD CLASSIFIED IT AS 'CAPIT AL WORK-IN-PROGRESS' IN ITS BOOK, THE EXTENSION OF THE INDUSTRIAL UNDERTAKING WAS HELD TO BE IN-COMPLETE. ACCORDINGLY, THE CONTENTION OF THE ID. AR THAT EXTENSION OF THE INDUSTRIAL UNDERTAKING WAS COMPLETED ON PURCHASE OF THE OIL RIG WAS NOT ACCEPTED AND THE GROUND WAS DISMISSED LN ASSESSMENT YEAR 2006-07. ON FURTHER APPEAL, THE HON'BLE ITAT HAS CONFIRMED THE FINDING OF THE CIT(A) FOR A.Y.2006-07 IN ITA NO.1382/MDS/10 DATED 15.07.2011. IT HELD AS UNDER: . IN VIEW OF THE ABOVE DECISION OF THE HON'BLE ITAT, IT IS CLEAR THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DE DUCTION U/S 35D FOR A.Y 2006-07. HOWEVER, THE APPELLANT HA S COMPLETED THE REFURBISHMENT AND INSTALLATION WORKS DURING THE PREVIOUS YEAR RELEVANT TO THE SUBJECT ASSESSMENT YEAR. IN FACT, THE RIG WAS SURVEYED BY THE AMERICAN BUREAU OF SHIPPING ON 27.05.2006 AND CERTIFICATE OF CLASSIFICATION WAS ALSO ISSUED ON 26.06.2006. HENCE, THE APPELLANT IS ELIGIBLE FOR DEDUCTION IN RESPECT OF THE RIG ABAN VII WHICH IS COMPLETE IN ALL RESPECTS. THE APPELLANT HAD ALSO BEEN AWARDED A CONTRACT TO DRILL IN THE EAST COAST OF INDIA BY HINDUSTAN OIL EXPLORATION LTD. ACCORDINGLY , THE APPELLANT GOT THE RIG MOVING FROM TEXAS SHIPYAR D TOWARDS INDIA. THE FACT THAT IT WAS SOLD SUBSEQUENT LY TO A DIFFERENT COMPANY WOULD NOT BLOT OUT THE FACTU M OF COMPLETION OF EXTENSION OF THE INDUSTRIAL UNDERTAKING OF THE APPELLANT. HENCE, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT IS ELIGIBLE F OR DEDUCTION U/S 35D IN RESPECT OF THE TOTAL EXPENDITU RE INCURRED TOWARDS SHARE ISSUE. - - ITA 585, 927/15 ETC. 28 IN THE RESULT, THE GROUND TO ALLOW THE ENTIRE ISSUE IS DISMISSED. HOWEVER, THE APPELLANT IS ENTITLED TO CL AIM DEDUCTION U/S 35D. THE GROUND IS PARTLY ALLOWED. 12. AFTER HEARING BOTH THE PARTIES AND GOING THR OUGH THE SAID PARAGRAPH OF THE CIT(A)S ORDER AND FOLLOWING THE O RDER OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA), WE DECI DE THE ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE GROUND R AISED BY THE REVENUE IS DISMISSED. 24. IN VIEW OF THE ABOVE, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 16.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THE CLAIM OF THE ASSESSEE U/S.35D OF THE ACT TO BE ALLO WED AS THIS IS NOT THE FIRST YEAR OF CLAIM TO HOLD THAT OIL RING WAS NEVER PUT TO USE SO AS TO DISALLOW THE CLAIM. THIS GROUND OF THE ASSESSEE IS ALLOWED AND THE EXPENDITU RE TO BE CONSIDERED U/S.35D OF THE ACT. 17. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF 1,44,50,789/- U/S.14A OF THE ACT. 18. THE FACTS OF THE ISSUE REGARDING THE DISALLO WANCE OF EXPENSES U/S.14A READ WITH RULE 8D ARE THAT THE ASS ESSEE COMPANY IS FOUND TO HAVE INVESTED 25.63 CRORES AS ON 31.03.2010. THE ASSESSEE ALSO DERIVED DIVIDENDS INC OME OF - - ITA 585, 927/15 ETC. 29 2,19,07,337/- AND THE SAME WAS CLAIMED AS EXEMPT U/ S.L0(34) OF THE ACT. HOWEVER THE ASSESSEE HAS NOT SEGREGATED ANY EXPENDITURE ATTRIBUTABLE TO SUCH INVESTMENTS. HENCE THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SEC.14A OF THE ACT READ WITH RULE 8D AND DETERMINED THE EXPENDITURE AT TRIBUTABLE FOR EARNING SUCH EXEMPT INCOME AT 1,44,50,789/- AND PROPOSED TO DISALLOW THE SAME. 18.1 BEFORE THE DRP, THE ASSESSEE COMPANY S UBMITTED THAT THE INVESTMENTS IN THE ACQUISITION OF SHARES WERE F ROM ITS OWN INTEREST-FREE FUNDS. THE ASSESSEE ALSO STATED THAT IT HAD NOT INCURRED ANY EXPENSES IN RELATION TO INVESTMENTS MA DE IN SHARES. THE ASSESSEE FURTHER CLAIMED THAT SINCE THERE WERE NO DIVIDENDS INCOME RECEIVED DURING THE YEAR NO EXPENSES U/S.14A CAN BE DISALLOWED. HENCE, THE ASSESSEE STATED THAT THE ASS ESSING OFFICER IS NOT JUSTIFIED IN PROPOSING TO DISALLOW T HE EXPENSES U/S.14A OF THE ACT R.W.R.8D. 18.2 THE DRP OBSERVED THAT THE TOTAL INVESTMENTS IN SHARES/FUNDS DURING THE FINANCIAL YEAR 2009-10 W AS 25.63 - - ITA 585, 927/15 ETC. 30 CRORES (CLOSING BALANCE AS ON 31.03.2010) AS COULD BE SEEN FROM THE INVESTMENTS OF THE BALANCE SHEET OF THE FINANCI AL YEAR. 18.3 THE ASSESSEE IS NOT MAINTAINING ANY SEPAR ATE BOOKS OF ACCOUNTS FOR THE INVESTMENTS IN SHARES. NOR THERE W AS A SEPARATE ESTABLISHMENT TO LOOK AFTER THE INVESTMENT S IN SHARES/FUNDS. THE ASSESSEE MAY BE HAVING SUBSTANTIA L INTEREST FREE OWN FUNDS (IN THE FORM OF CAPITAL/RESERVES AND SURPLUSES ETC]. BUT THIS DOES NOT MEAN THAT THE INVESTMENTS A RE MADE ONLY FROM THESE OWN INTEREST FREE FUNDS, ESPECIALLY WHEN THE BOOKS ARE NOT MAINTAINED SEPARATELY. FURTHER, ALL THE FUN DS. I.E. THE INTEREST-FREE OWN FUNDS AND THE INTEREST BEARING BO RROWED FUNDS ARE PUT INTO A COMMON POOL OF FUNDS. FROM THIS COM MON KITTY ALL THE OUTGOINGS (I.E. INVESTMENTS IN SHARES, REGU LAR BUSINESS EXPENSES ETC.) ARE MET WITH. IN OTHER WORDS, ONCE THE FUNDS, I.E. WHETHER THE INTEREST FREE OWN FUNDS OR THE INT EREST BEARING BORROWED FUNDS, ARE PUT INTO A COMMON POOL OF FUNDS , THEY WILL LOOSE THEIR DISTINCTION AND ALL TYPES OF FUNDS WILL BE TREATED ALIKE. IN SUCH A SITUATION, THE ONLY WAY TO ASCERTAIN THE INVESTMENTS MADE FROM THE BORROWED FUNDS, IF ANY, IS ON A PROPO RTIONATE BASIS. THEREFORE, THE INTEREST EXPENSES, WHICH COU LD NOT BE - - ITA 585, 927/15 ETC. 31 DIRECTLY LINKED TO ANY ACTIVITY, ARE TO BE TREATED AS COMMON INTEREST EXPENSES AND CONSIDERED IN THE STEP-2 OF T HE FORMULA GIVEN IN RULE 8D FOR THE PURPOSE OF ATTRIBUTING THE INDIRECT INTEREST BURDEN ON THE INVESTMENTS MADE, ON A PROPO RTIONATE BASIS. EVEN BOMBAY HIGH COURT, IN THE CASE OF GODR EJ BOYCE MFG. CO. LTD. V. CIT(328 ITR 81), HELD THAT SEC.14A (2) & (3) OF THE ACT, IS CONSTITUTIONALLY VALID AND IS APPLICABL E FROM ASSESSMENT YEAR 2008-09 ONWARDS. IN THIS CASE, THE HIGH COURT HAS CLEARLY AND CATEGORICALLY HELD THAT THE PROVIS IONS OF RULE 8D OF THE INCOME TAX RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 SHALL APPLY WITH EFFECT F ROM ASSESSMENT YEAR 2008-09. 18.4 ACCORDING TO THE DRP, THE DISALLOWANCE OF EXPENSES U/S.14A R.W. RULE 8D IS IN RELATION TO THE EARNING OF THE EXEMPT INCOME AND NOT IN RELATION TO THE EXEMPT INCOME EARNED AS SUCH. THE DISALLOWANCE OF EXPENSES IS ALWAYS IN RELATION TO THE EFFORTS MA DE FOR EARNING SUCH EXEMPT INCOME AND NOT PROPORTIONAT E TO THE EXEMPT INCOME EARNED. IT IS PARTICULARLY SO BECAUSE, IN SOME YEARS THE INCOME SO EARNED MAY BE - - ITA 585, 927/15 ETC. 32 LESS OR NIL. THEREFORE, THE DISALLOWANCE TO BE COMPUTED SHOULD ALWAYS BE WITH REFERENCE TO THE INVESTMENTS MADE IN SUCH ACTIVITY AND THE EFFORT MA DE THEREIN, AS HELD BY SPECIAL OF ITAT, DELHI IN THE C ASE OF CHEMINVEST LTD. V. ITO(2009) (121 ITD 318)(DEL)(SB). IT WAS HELD THAT THE AMOUNT OF EXEMP T INCOME EARNED DURING THE YEAR IS NOT RELEVANT FOR T HE PURPOSE OF DISALLOWANCE OF EXPENSES U/S.14A READ WITH RULE 8D. WHAT IS TO BE SEEN THE AMOUNT OF INVESTMENTS MADE AND THE EFFORTS TAKEN BY THE ASSESSEE IN THE SAID PROCESS. THEREFORE, THE AMOUN T OF DISALLOWANCE IS TO BE WORKED OUT PROPORTIONATE T O THE INVESTMENTS MADE AND THE EXPENSES (EITHER DIREC T OR INDIRECT) INVOLVED IN THE PROCESS, EVEN IF THERE ARE NO SUCH EXEMPT INCOME EARNED DURING THE YEAR. 18.5. IT IS SEEN FROM THE P & L ACCOUNT THAT THE ASSESSEE HAS SEVERAL ACTIVITIES INCLUDING INVESTMENTS IN SHARES. FOR THE PURPOSE OF MAKING THESE INVE STMENT S ETC. THE SAME MANAGEMENT, MANPOWER, MACHINERY AND INFRASTRUCTURAL FACILI TIES OF THE ASSESSEE ARE BEING USED. - - ITA 585, 927/15 ETC. 33 HENCE, THERE IS AN ELEMENT OF EXPENDITURE INVOLVED IN THE PROCESS. THIS EXPENDITURE MAY NOT BE DIRECT. THUS, THERE IS AN EXPENDITURE INVOLVED IN MAKING THESE INVESTMENTS. THEREFORE, THERE IS A L NEED TO IDENTIFY AND APPORTION A REASONABLE AMOUNT OF EXPENSES AS ATTRIBUTABLE FOR EARNING THE EXEMPTED INCOME. THIS PURPOSE RELIANCE PLACED ON THE FOLLOWING DECISIONS BY THE DRP: . DY. CIT V. SREI INTERNATIONAL FINANCE LTD. ( 2006) 10 SOT 722 (DELHIL- TRIB). IN LIGHT OF CLEAR PROVISIONS OF SECTION 14A, EVEN IN CASE IT IS NOT POSSIBLE TO IDENTIFY EXPENSES INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, DISALLOWANCE HAS TO BE MADE ON SOME BASIS. MOREZBAN BHARUCHA V. ASSTT. CIT (2007) 12 SOT 133(MUM-TRIB) : WHERE AN EXPENDITURE IS COMPOSITE ONE, I.E., RELATING TO TAXABLE RECEIPTS AS WELL AS NON-TAXABLE RECEIPTS, ASSESSING OFFICER IS DUTY-BOUND TO DISALLOW PROPORTIONATE AMOUNT OF EXPENDITURE RELATABLE TO NON- TAXABLE OR EXEMPTED INCOME BY INVOKING PROVISIONS OF SECTION 14A. 18.6 ACCORDING TO THE DRP, I N ORDER TO ARRIVE AT A REASONABLE AMOUNT OF EXPENDITURE, WHICH MAY VARY FROM CASE TO CASE AND SITUATION TO SITUATION, THE - - ITA 585, 927/15 ETC. 34 LEGISLATURE, AFTER TAKING VARIOUS FACTORS INTO CONSIDERATION, CAME TO A CONCLUSION THAT SUCH EXPENSES CAN BE REASONABLY CALCULATED @ 0.5% OF THE AVERAGE INVESTMENTS MADE BY THE ASSESSEE. FOR THIS PURPOSE, THE LEGISLATURE HAS ARRIVED AT A COMMON FORMULA TO CALCULATE THE EXPENSES @ 05% OF THE AVERAGE INVESTMENTS MADE AS PER STEP-3 OF THE FORMULA GIVEN IN RULE-8D. ACCORDINGLY THE LEGISLATU RE INCORPORATED AND INTRODUCED THE RULE-8D. 18.7 IT WAS OBSERVED BY THE DRP THAT THE AO HAS ANALYZED THE ASSESSEES ACTIVITY OF INVESTING IN SHARES AND OBSERVED THAT THERE WILL BE SOME ELEMENT OF EXPENDITURE, BOTH IN TERMS OF FINANCIAL BURDEN (INTEREST ELEMENT) AS WELL AS IN T ERMS OF USE OF MANPOWER AND INFRASTRUCTURAL FACILITIES IN MAKING T HE INVESTMENTS IN SHARES/FUNDS. HENCE, THERE WAS A SA TISFACTION OF THE AO THAT THERE WAS SOME ELEMENT OF EXPENSES INCU RRED BY THE ASSESSEE IN RELATION TO THE INVESTMENTS IN SHAR ES AND EARNING THE EXEMPT INCOME, WHICH NEEDS TO BE QUANTI FIED AND DISALLOWED U/S.14A OF THE ACT. ACCORDINGLY, AS PRO VIDED U/S.14A OF THE ACT THE AO HAD RIGHTLY QUANTIFIED THE SAID E XPENSES AT RS - - ITA 585, 927/15 ETC. 35 1,44,50,789/- BY USING THE RULE 8D, AND DISALLOWED U/S.14A OF THE ACT. 18.8 THUS, THE AO IS SATISFIED THAT THERE WAS AN ELEMENT OF EXPENSES INVOLVED IN MAKING INVESTMENTS WHOSE INCOM E IS EXEMPT FROM TAX. THE AO IS DUTY BOUND TO INVOKE TH E PROVISIONS OF RULE-8D. ONCE THE PROVISIONS OF RULE -8D ARE INVOKED, THE AO HAS NO OPTION BUT TO ARRIVE AT THE EXPENSES @ 0.5% AS PER STEP-3 OF THE FORMULA WHICH IS MANDATOR Y. IN FACT, THE AO IN HIS ORDER HAS CLEARLY STATED THESE FACTS BEFORE INVOKING THE PROVISIONS OF SECTION 14A R.W.R.8D. H ENCE THE AO RIGHTLY INVOKED RULE 8D AND ARRIVED AT THE DISALLOW ANCE OF EXPENSES U/S.14A R.W.RULE 8D. 18.9 IN VIEW OF THE ABOVE, THE DRP OBSERVED THAT THE AOS ACTION OF DETERMINING THE EXPENSES ATTRIBUTABLE FOR EARNING EXEMPT INCOME AT 1,44,50,789/-, U/S.14A R.W.R.8D, IS AS PER THE LAW AND JUSTIFIED. THEREFORE, THE PROPOSAL FOR DISALLOWANCE OF EXPENSES, BY THE AO, U/S.14A R.W.R.8D, IS JUSTIF IED AND CONFIRMED. - - ITA 585, 927/15 ETC. 36 19. CONSEQUENTLY, AO PASSED THE ORDER AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. THE LD. AR PLACED BEFORE US ABOUT NETTING OF INTEREST PAID WITH INTEREST RECEIVED. IN OUR O PINION, APPLICATION OF RULE 8D OF THE I.T. RULES DOES NOT ALLOW FOR NET TING OF ANY INTEREST INCOME WITH INTEREST EXPENDITURE. IF NETTI NG OF INTEREST INCOME IS ALLOWED, IT WOULD BE EQUIVALENT TO ADDING SOMETHING WHICH IS NOT THERE IN THE RULE BOOK, ACCORDINGLY IM PERMISSIBLE. THUS, WE UPHOLD THE AOS APPLICATION OF RULE 8D(2)(II) READ WITH SEC.14A ON GROSS INTEREST, THROUGH AO DID NOT CONSI DER INTEREST RECEIPTS AS INCOME FROM OTHER SOURCES; THE TREATM ENT OF INTEREST BY AO WOULD NOT CHANGE THE NATURE OF TRANSACTION OR CH ARACTER OF RECEIPTS. ACCORDINGLY, WE REVERSE THE FINDING OF TH E CIT(APPEALS), ON THIS ISSUE. 20.1 HOWEVER, THE AO HAS TO CONSIDER THE AVAIL ABILITY OF SHARE CAPITAL, RESERVES AND SURPLUS WHILE INVOKING THE PR OVISIONS OF SEC.14A READ WITH RULE 8D OF THE INCOME-TAX RULES, AS THIS IS THE - - ITA 585, 927/15 ETC. 37 NON-INTEREST BEARING OWN FUNDS AVAILABLE WITH THE A SSESSEE FOR INVESTMENTS. 21. WITH REGARD TO THE INTEREST ON BORROWINGS USED FOR THE SPECIFIC PURPOSE, IT IS TO BE NOTED THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF A CIT V. M/S. FARIDA SHOES PVT. LTD. IN ITA NOS.2102 & 2103/MDS/2 015 DATED 8.1.2016, WHEREIN IT WAS HELD AS UNDER : 5.1 COMING TO THE MERITS OF THE ISSUE REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES, IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ACIT V. M/S. BEST & CROMPTO N ENGINEERING LTD. IN ITA NO.1603/MDS/2012 DATED 16.7.2013, WHEREIN IT WAS OBSERVED THAT INTEREST ON BORROWINGS USED FOR THE BUSINESS PURPOSE CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING DISALLOWANC E U/S.14A R.W. RULE 8D(2)(II) OF THE IT RULES AND THE RELEVANT PORTION IS REPRODUCED AS BELOW: 10. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL RELIED ON BY THE ASSESSEES COUNSEL. THIS ISSUE HAS BEEN CONSIDERED ELABORATELY BY THE COMMISSIONER OF INCOME TAX(APPEALS) AND DELETED THE INTEREST ON BANK LOAN AND TERM LOANS WHICH WERE NOT UTILIZED FOR MAKING ANY INVESTMENTS HAVING TAX FREE INCOME. WHILE HOLDING SO, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER:- 5.2.1 HAV I NG HELD THAT PROVIS I ONS OF RU L E 8D ARE APPLICABLE , LET US NOW EXAMINE WHETHER THE AMOUNT HAS BEEN CORRECTLY QUANT I FIED. THE AO HAD CALCU LAT ED THE DISALLOWANCE AT NIL, 1,04,38,000/- AND 26,87,000/- UNDER (I), (I I ) & - - ITA 585, 927/15 ETC. 38 (III) OF RULE 80 ( 2)RESPECTIVELY . THERE IS NO DISPUTE REGARDING THE FIRST COMPONENT , BECAUSE IT IS N I L . WITH REGARD TO THE SECOND COMPONENT BE I NG THE EXPENDITURE BY W A Y O F INTEREST WHICH IS NOT DIRECT L Y AT T RIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT , THE AO HAS DE T ERMINED THE AMOUNT AT 1,04,38,000/ . THE AO HAS TAKEN I NTO ACCOUNT T H E ENT I RE IN T EREST EXPEND I TURE OF 5 , 79 , 46 ,000 /- FOR COMPUT I NG THE ABOVE D I SALLOWA N CE . THE I D . AR , IN H I S SUBMISS I ON , HAS G I VEN THE BREAK-UP OF INTEREST WH I CH INCLUDES ( 1) I NTEREST ON BANK LOANS: I 67,92 , 000/- (2) I NTEREST ON TERM LOANS 3,82 , 11 , 000/- AND (3) I NTEREST ON OTHER ACCOUNTS: 1,29 , 43,000/- . IF LOANS HAVE BEEN SANCT I ONED FOR SPEC I FIC PROJECTS/EXPANS I ON AND HAVE BEEN UT I LIZED TOWARDS THE SAME , THEN O B VIOUSLY THEY COULD NOT HAVE BEEN UTI L IZED FOR MAKING ANY INVESTMENTS HAVING TAX - FREE I NCOMES . FROM THE COPY OF THE SANCT I ON LETTERS FROM STATE BANK OF BIKANER & JAIPUR I T CAN BE SEEN THA T THE LOAN WAS GRANTED WITH A SPECIFIC R EQU I REMEN T T HA T THE LOAN SHAL L BE UTI L IZE D FOR PURCHASE OF IMPOR T ED M A CHINERY WHI L E IN THE CASE OF LOAN FR O M FE D ERA L B ANK , I T I S SE E N T HAT T HE LOAN WAS TO BE U T I LI ZED FO R EXPANSION OF P R O J EC T S. S AN C T ION O F B OTH THESE LOANS PROHIB I T U T I L IZAT I ON OF FUNDS FOR PURPOSES OTHER THAN FOR THE U TILIZAT I ON F OR WHICH T HEY ARE S A NCTIONED . FROM THE LEDGER EX T RACT FOR THE YEAR ENDED 3 1. 03 . 2008 FOR BOTH LOAN ACCOU N TS, IT I S SEEN THAT NO AMOUNT HAS BEEN UT I LIZED F OR INVES T MENT IN SUBSID I ARIES WH I C H EARNS TAX-FREE INCOME . T HE LOAN AMOUNTS WERE FUL L Y D I SBU R S ED A N D U T IL IZ ED IN T H E YEA R ENDED 3 1. 03.2008 (A . Y . 2008-09) I T SE L F. TAK I NG IN T O A L L THE F A CTS AS ST AT ED ABOVE, I AM OF THE CONS I DERED OPINION THAT IF LOANS/BO R ROWED AMOUNTS ARE G RANTED F OR SPEC IF IC P R O J EC T S/EXPANS I ON AND NO AMOUNT FROM THE SAME H A S BEEN D IRECTLY U TILI ZED FOR I NVESTMEN T S , TH EN THE F I RS T AN D SECOND LIMB OF RU L E 80 A TT RI BUT ING THE I N T EREST PAYMENTS T O T HE I N VES T MEN T S WI L L NOT BE APPLICABLE. ACCORDING L Y, - - ITA 585, 927/15 ETC. 39 IN TE RES T ON BANK LOAN AND TERM LOAN AMOUNT I NG TO 67 , 92 , 000/- AND 3,82, 1 1,000/- R ESPECTIVE L Y ARE TO BE EXC L UDED FROM T HE CA L CULATION TO DETERM I NE THE D I SAL L OWANCE UNDER RULE 8D(2)(II). THE AO IS , THEREFORE, DIREC T ED TO T AKE INTO ACCOUNT ONLY T HE R EMAINING INTERES T ON OTHER ACCOUNTS AMOUNTING TO 1 , 29 , 43,000/- FOR COMPUTING THE PROPO R TIONATE DISA L LOWANCE UNDER RULE 8D(2)( I I) . 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) EXCLUDED THE INTEREST ON BANK LOAN AND TERM LOANS FROM THE CALCULATION OF DISALLO WANCE UNDER RULE 8D(2)(II) AS THE ASSESSEE HAS UTILIZED T HE BANK LOAN AND TERM LOAN FOR THE PURPOSE OF PURCHASE OF MACHINERIES AND FOR EXPANSION OF PROJECTS AND THESE LOANS WERE SPECIFICALLY SANCTIONED FOR SPECIFIC PRO JECT AND SUCH LOANS WERE ALSO USED FOR THE PURPOSE FOR W HICH THEY WERE SANCTIONED. IN THE CIRCUMSTANCES, WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTL Y EXCLUDED SUCH INTEREST FROM THE PURVIEW OF COMPUTA TION OF DISALLOWANCE UNDER RULE 8D(2)(II). 12. THE DECISION OF CALCUTTA BENCH OF THIS TRIBUNAL IN THE CASE OF CHAMPION COMMERCIAL CO. LTD. (SUPRA) ALSO SUPPORTS THE VIEW OF THE COMMISSIONER OF INCOME TAX (APPEALS). THE TRIBUNAL HAD CONSIDERED A SITUATION WHEN THE LOANS WERE UTILIZED FOR THE PURCHASE OF MACHINE RIES, INTEREST ARISING OUT OF SUCH LOANS, WHETHER SUCH IN TEREST IS TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II), THE TRIBUNAL HEL D THAT SUCH INTEREST HAS TO BE EXCLUDED. WHILE HOLDING SO, IT HAS HELD AS UNDER:- 11. THERE IS NO DISPUTE ABOUT WORKING OF THIS METHOD SO FAR AS RULE 8D(2)(I) AND (III) IS CONCERNED. IT IS ONLY WITH REGARD TO THE COMPUTATION UNDER RULE 8D(2)(II) THAT THE ASSESSING OFFICER AND THE CIT(A) HAVE DIFFERENT APPROACHES. THIS PROVISION ADMITTEDLY DEALS WITH - - ITA 585, 927/15 ETC. 40 A SITUATION IN WHICH THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT . CLEARLY, THEREFORE, THIS SUB CLAUSE SEEKS TO ALLOCATE COMMON INTEREST EXPENSES TO TAXABLE INCOME AND TAX EXEMPT INCOME. IN OTHER WORDS, GOING BY THE PLAIN WORDINGS OF RULE 8D(2)(II) WHAT IS SOUGHT TO BE ALLOCATED IS EXPENDITURE BY WAY OF INTEREST..WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT AND THE ONLY CATEGORIES OF INCOME AND RECEIPT, SO FAR AS SCHEME OF RULE 8 D IS CONCERNED, ARE MUTUALLY EXCLUSIVE CATEGORIES OF TAX EXEMPT INCOME AND RECEIPT AND TAXABLE INCOME AND RECEIPT. NO OTHER CLASSIFICATION IS GERMANE TO THE CONTEXT IN WHICH RULE 8 D IS SET OUT, NOR DOES THE SCHEME OF SECTION 14 A LEAVE ANY AMBIGUITY ABOUT IT. 12. IRONICALLY, HOWEVER, THE DEFINITION OF VARIABLE A EMBEDDED IN FORMULA UNDER RULE 8D(2)(II) IS CLEARLY INCONGRUOUS INASMUCH WHILE IT SPECIFICALLY EXCLUDES INTEREST EXPENDITURE DIRECTLY RELATED TO TAX EXEMPT INCOME, IT DOES NOT EXCLUDE INTEREST EXPENDITURE DIRECTLY RELATED TO TAXABLE INCOME. RESULTANTLY, WHILE RULE 8D(2)(II) ADMITTEDLY SEEKS TO ALLOCATE EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCO ME OR RECEIPT IT ENDS UP ALLOCATING EXPENDITURE BY WAY OF INTEREST, WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, PLUS INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME (EMPHASIS BY UNDERLINING SUPPLIED BY US). THIS INCONGRUITY WILL BE MORE GLARING WITH THE HELP OF FOLLOWING SIMPLE EXAMPLE: IN THE CASE OF A & CO LTD, TOTAL INTEREST EXPENDITURE IS 1,00,000, OUT OF WHICH INTEREST EXPENDITURE IN RESPECT OF ACQUIRING SHARES FROM WHICH TAX FREE DIVIDEND EARNED IS 10,000. OUT OF THE BALANCE 90,000, THE ASSESSEE HAS PAID INTEREST OF 80,000 FOR - - ITA 585, 927/15 ETC. 41 FACTORY BUILDING CONSTRUCTION WHICH CLEARLY RELATES TO THE TAXABLE INCOME. THE INTEREST EXPENDITURE WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICUL AR RECEIPT OR INCOME IS THUS ONLY 10,000. HOWEVER, IN TERMS OF THE FORMULA IN RULE 8D (2)(II), ALLOCAT ION OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO A NY PARTICULAR INCOME OR RECEIPT WILL BE FOR 90,000 BECAUSE, AS PER FORMULA THE VALUE OF A (I.E. SUCH INTEREST EXPENSES TO BE ALLOCATED BETWEEN TAX EXEMPT AND TAXABLE INCOME) WILL BE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) [ I.E. DIRECT INTEREST EXPENSES FOR TAX EXEMPT INCOME] INCURRED DURING THE PREVIOUS YEAR. LET US SAY THE ASSETS RELATING TO TAXABLE INCOME AND TAX EXEMPT INCOME ARE IN THE RATIO OF 4:1. IN SUCH A CASE, THE INTEREST DISALLOWABLE UNDER RULE 8 D(2)(II) WILL BE 18,000 WHEREAS ENTIRE COMMON INTEREST EXPENDITURE WILL ONLY BE 10,000/-. 13. THE INCONGRUITY ARISES BECAUSE, AS THE WORDINGS OF RULE 8D(2)(II) EXIST, OUT OF TOTAL INTE REST EXPENSES, INTEREST EXPENSES DIRECTLY RELATABLE TO TAX EXEMPT INCOME ARE EXCLUDED, INTEREST EXPENSES DIRECTLY RELATABLE TO TAXABLE INCOME, EVEN IF ANY, ARE NOT EXCLUDED. 14. THE QUESTION THEN ARISES WHETHER WE CAN TINKER WITH THE FORMULA PRESCRIBED UNDER RULE 8D(2)(II) OF THE INCOME TAX RULES, OR CONSTRUE IT ANY OTHER MANNER OTHER THAN WHAT IS SUPPORTED BY PLAIN WORDS OF THE RULE 8 D (2)(II). 15. WE FIND THAT NOTWITHSTANDING THE RIGID WORDS OF RULE 8D(2)(II), THE STAND TAKEN BY THE REVENUE AUTHORITIES ABOUT ITS APPLICATION, AS WAS BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (328 ITR 81) WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENGE,IS THAT IT IS ONLY THE INTEREST ON - - ITA 585, 927/15 ETC. 42 BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.). THEREFORE, IT IS NOT ONLY THE INTEREST DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME, I.E. UNDER RULE 6D(2)(I), BUT ALSO INTEREST DIRECTLY RELATABLE TO TAXABLE INCOME, WHICH IS TO B E EXCLUDED FROM THE DEFINITION OF VARIABLE A IN FORMULA AS PER RULE 6D(2)(II), AND RIGHTLY SO, BECAUSE IT IS ONLY THEN THAT COMMON INTEREST EXPENSES, WHICH ARE TO BE ALLOCATED AS INDIRECTLY RELATABLE TO TAXABLE INCOME AND TAX EXEMPT INCOME, CAN BE COMPUTED. THIS IS CLEAR FROM THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA): 60. IN THE AFFIDAVIT-IN-REPLY THAT HAS BEEN FILED ON BEHALF OF THE REVENUE AN EXPLANATION HAS BEEN PROVIDED OF THE RATIONALE UNDERLYING R. 8D. IN THE WRITTEN SUBMISSIONS WHICH HAVE BEEN FILED BY THE ADDL. SOLICITOR GENERAL IT HAS BEEN STATED, WITH REFERENCE TO R. 8D(2)(II) THAT SINCE FUNDS ARE FUNGIBLE, IT WOULD BE DIFFICULT TO ALLOCATE THE ACTUAL QUANTUM OF BORROWED FUNDS THAT HAVE BEEN USED FOR MAKING TAX- FREE INVESTMENTS. IT IS ONLY THE INTEREST ON BORROWED FUNDS THAT WOULD BE APPORTIONED AND THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLE ANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) THE JUSTIFICATION THAT HAS BEEN OFFERED IN SUPPORT - - ITA 585, 927/15 ETC. 43 OF THE RATIONALE FOR R. 8D CANNOT BE REGARDED AS BEING CAPRICIOUS, PERVERSE OR ARBITRARY. APPLYING THE TESTS FORMULATED BY THE SUPREME COURT IT IS NOT POSSIBLE FOR THIS COURT TO HOLD THAT THERE IS WRIT ON THE STATUTE OR ON THE SUBORDINATE LEGISLATION PERVERSITY, CAPRICE OR IRRATIONALITY. THERE IS CERTAINLY NO 'MADNESS IN THE METHOD'. 16. ONCE THE REVENUE AUTHORITIES HAVE TAKEN A PARTICULAR STAND ABOUT THE APPLICABILITY OF FORMULA SET OUT IN RULE 8 D(2)(II), AND BASED ON SUCH A STAND CONSTITUTIONAL VALIDITY IS UPHELD BY HONBLE HIGH COURT, IT CANNOT BE OPEN TO REVENUE AUTHORITIES TO TAKE ANY OTHER STAND ON THE ISSUE WITH REGARD TO THE ACTUAL IMPLEMENTATION OF THE FORMULA IN THE CASE OF ANY ASSESSEE. VIEWED THUS, THE CORRECT APPLICATION OF THE FORMULA SET OUT IN RULE 8D(2)(II) IS THAT, AS HAS BEEN NOTED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE (SUPRA), AMOUNT OF EXPENDITURE BY WAY OF INTEREST THAT WILL BE TAKEN (AS 'A' IN THE FORMULA) WILL EXCLUDE ANY EXPENDITURE BY WAY OF INTEREST WHICH IS DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (FOR EXAMPLEANY ASPECT OF THE ASSESSEE'S BUSINESS SUCH AS PLANT/MACHINERY ETC.) . ACCORDINGLY, EVEN BY REVENUES OWN ADMISSION, INTEREST EXPENSES DIRECTLY ATTRIBUTABLE TO TAX EXEMPT INCOME AS ALSO DIRECTLY ATTRIBUTABLE TO TAXABLE INCOME, ARE REQUIRED TO BE EXCLUDED FROM COMPUTATION OF COMMON INTEREST EXPENSES TO BE ALLOCATED UNDER RULE 8D(2)(II). 17. TO THE ABOVE EXTENT, THEREFORE, WE HAVE TO PROCEED ON THE BASIS THAT RIGOUR OF RULE 8 D (2)(II ) IS RELAXED IN ACTUAL IMPLEMENTATION, AND REVENUE AUTHORITIES, HAVING TAKEN THAT STAND WHEN CONSTITUTIONAL VALIDITY OF RULE 8 D WAS IN CHALLENG E BEFORE HONBLE HIGH COURT, CANNOT NOW DECLINE THE SAME. IDEALLY, IT IS FOR THE CENTRAL BOARD OF DIRECT TAXES TO MAKE THE POSITION CLEAR ONE WAY - - ITA 585, 927/15 ETC. 44 OR THE OTHER EITHER BY INITIATING SUITABLE AMENDMENT TO RULE 8D(2)(II) OR BY ADOPTING AN INTERPRETATION AS PER PLAIN WORDS OF THE SAID RULE, BUT EVEN ON THE FACE OF THINGS AS THEY ARE AT PRESENT , IN OUR HUMBLE UNDERSTANDING, REVENUE AUTHORITIES CANNOT TAKE ONE STAND WHEN DEMONSTRATING LACK OF PERVERSITY, CAPRICE OR IRRATIONALITY IN RULE 8D BEFORE HONBLE HIGH COURT , AND TAKE ANOTHER STAND WHEN IT COMES TO ACTUAL IMPLEMENTATION OF THE RULE IN REAL LIFE SITUATIONS. THEREFORE, EVEN AS WE ARE ALIVE TO THE FACT THAT THE STAND OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS IN ACCORDANCE WITH THE STRICT WORDING OF RULE 8D(2)(II), WE HAVE TO HOLD THAT, FO R THE REASONS SET OUT ABOVE, THIS RIGID STAND CANNOT BE APPLIED IN PRACTICE. 13. IN VIEW OF THE DECISION OF THE CALCUTTA BENCH O F THIS TRIBUNAL CITED ABOVE, WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN EXCLUDING THE INTEREST ON BANK LOAN AND TERM LOANS FOR THE PURPOS E OF COMPUTING DISALLOWANCE UNDER RULE 8D(2)(II). THE GROUNDS RAISED BY THE REVENUE ARE REJECTED ON THIS ISSUE. 21.1 IN VIEW OF THE ABOVE DECISION, WE ARE OF THE OPINIO N THAT THE INTEREST ON BORROWING WHICH ARE MADE FOR S PECIFIC PURPOSE OF BUSINESS CANNOT BE CONSIDERED FOR THE PU RPOSE OF RULE 8D OF THE INCOME TAX RULES. 21.2 FURTHER, INVESTMENTS IN SISTER CONCERNS OR SUB SIDIARIES WITH WHICH THE ASSESSEE IS HAVING BUSINESS TRANSACT IONS, THAT INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF APPLICABILITY OF RULE-8D. FOR THIS PROPOSITION WE RELY ON THE - - ITA 585, 927/15 ETC. 45 JUDGMENTS OF TRIBUNAL IN THE CASE OF SUN TV NETWOR KS IN ITA NO.1340 & 1341/MDS./15 & 1578 TO 1579/MDS/15 WHEREI N HELD THAT:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AVA ILABLE SHARE CAPITAL INCLUDING RESERVES AND SURPLUS WAS (2 385.7 CRORES AS ON 31.03.2010. THE AVAILABLE SHARE CAPITA L IS (1970.4 CRORES AND RESERVES AND SURPLUS IS ( 21,886 .7 CRORES. THE INVESTMENTS MADE IN MUTUAL FUNDS INCLUD ING SUBSIDIARY COMPANIES ARE ONLY ( 541.11 CRORES. THER EFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAS DIVERTED TH E BORROWED FUNDS FOR MAKING ANY INVESTMENT EITHER IN THE SISTER CONCERNS OR IN THE MUTUAL FUNDS. WHEN THE AS SESSEE HAS SUFFICIENT SHARE CAPITAL, RESERVES AND SURPLUS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY DISALLOWANCE TOWARDS THE INTEREST PAID ON THE B ORROWED FUNDS UNDER SECTION 14A OF THE ACT. FOR THE PURPOSE OF DISALLOWING INTEREST INCOME UNDER SECTION 14A READ WITH RULE 8D, THERE SHOULD BE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE BY THE ASSESSEE IN THE SH ARE CAPITAL AND MUTUAL FUNDS. IN THE ABSENCE OF ANY NEX US, THE PRESUMPTION IS THAT THE ASSESSEE HAS INVESTED THE A VAILABLE INTEREST-FREE FUNDS IN SHARE CAPITAL AND MUTUAL FUN DS. FURTHERMORE, MAKING INVESTMENT IN SISTER CONCERNS I S FOR COMMERCIAL EXPEDIENCY IN VIEW OF THE JUDGMENT OF AP EX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1 . IT IS NOT THE CASE OF THE REVENUE THAT THE SISTER CONCERN OR ANY OF THE DIRECTORS HAS MISUSED THE FUNDS INVESTED BY THE ASSESSEE. WHEN THE SISTER CONCERN USES THE FUNDS ON LY FOR BUSINESS PURPOSE, THERE WAS COMMERCIAL EXPEDIENCY F OR MAKING INVESTMENT. THEREFORE, THIS TRIBUNAL IS OF T HE CONSIDERED OPINION THAT THERE CANNOT BE ANY DISALLO WANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF T HE INCOME-TAX RULES, 1962. 13. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE T O UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. ACCORDINGLY, T HE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ENTIRE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. - - ITA 585, 927/15 ETC. 46 21.3 FURTHER, WE ALSO MAKE IT CLEAR THAT THE OWN FUNDS WHICH IS IN THE FORM OF SHARE CAPITAL AND RESERVES AND SURPL US, WHICH WAS AVAILABLE TO THE ASSESSEE TO MAKE INVESTMENTS WHICH IS YIELDING EXEMPTED INCOME HAVE NO COST AND THEREFORE, IT IS T O BE GIVEN DUE WEIGHTAGE WHILE APPLYING THE FORMULA OF RULE 8D . THIS VIEW OF OURS IS FORTIFIED BY THE ORDER OF THE CO-ORDINAT E BENCH IN THE CASE OF BEACH MINERS CO. PVT LTD. VS. ACIT IN ITA NO.2110/MDS./14 DATED 06.08.15 WHEREIN HELD THAT: 6.1. GROUND NO.3 DISALLOWANCE OF EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT FOR ( 3,11 ,34,630/- SINCE THE ASSESSEE HAD MADE INVESTMENTS OF ( 71,55, 33,570/- FOR EARNING EXEMPT INCOME. AT THE OUTSET, WE FIND THAT THERE IS NO MERIT FOR THE REVENUE TO MAKE ADDITION OF ( 3,11,34,630/- INVOKIN G THE PROVISIONS OF SECTION 14A OF THE ACT BECAUSE THE IN VESTMENT MADE OF ( 71,55,33,570/-, BEARS NO COST IN THE FOR M OF INTEREST OR WHATSOEVER, SINCE THE FUNDS BY WHICH TH E INVESTMENT IS MADE IS ASSESSEES OWN FUNDS. FURTHER , THESE INVESTMENTS ARE MADE ONLY WITH SISTER COMPANIES OF THE ASSESSEE AND NO COST CAN BE ATTRIBUTED FOR THE MANA GEMENT OF SUCH FUNDS. THEREFORE, WE HEREBY DELETE THE ADDITI ON OF ( 3,11,34,630/- MADE BY THE LD. ASSESSING OFFICER INV OKING THE PROVISIONS OF SECTION 14A OF THE ACT. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED IN ITS FAVOUR . 21.4 IN VIEW OF THE ABOVE JUDGMENTS, THE AO HAS TO CONSIDER THE ASSESSEES OWN FUND I.E. CAPITAL AND RESERVES AS AVAILABLE ON THE DATE OF INVESTMENT WHICH YIELDS EXEMPTED INC OME AND THEREAFTER HE SHALL APPLY THE FORMULA IN RULE 8D AN D ALSO - - ITA 585, 927/15 ETC. 47 EXCLUDE INVESTMENTS IN SUBSIDIARIES AS HELD BY THE ABOVE ORDER OF CO-ORDINATE BENCH. WITH THIS OBSERVATION, WE RE MIT THE ISSUE RELATING TO DISALLOWANCE U/S.14A R.W.R.8D TO THE FI LE OF AO FOR FRESH CONSIDERATION. HENCE, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 22. THE NEXT GROUND IS WITH REGARD TO DISALLOWIN G THE CLAIM OF RELIEF U/S.90 OF THE ACT OF 17,63,24,330/ - AND IGNORING THE DIRECTION OF THE DRP WITHOUT VERIFYING THE FACTS O N RECORDS. 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE CAME FOR CONSIDERATION IN A SSESSEES OWN CASE IN I.T.A.NO.1159/MDS/2012 CHALLENGING THE ACTI ON OF THE CIT(A) IN RESTRICTING THE ASSESSEES CLAIM OF RELI EF U/S 90 OF THE ACT OF 224,67,411/- TO THE EXTENT OF TAX PAYABLE IN INDIA ON NET INCOME OF 516,93,732/- I.E DIFFERENCE BETWEEN INTEREST EARNE D FROM M/S AHPL AND INTEREST PAID ON BORROWINGS MADE FOR ADVANCING THE LOANS TO M/S AHPL. THE TRIBUNAL WHIL E ADJUDICATING THE GROUNDS, PLACED RELIANCE ON THE OR DER OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA VS CIT IN I.T.A.NO.2927/MDS/2011 DATED 25.7.2014 WHEREIN THE TRIBUNAL - - ITA 585, 927/15 ETC. 48 HAS GIVEN A DIRECTION THAT THE INCOME OF THE BRANCH ES OF THE ASSESSEE SHALL ALSO TAXABLE IN INDIA I.E IT WOULD B E INCLUDED IN THE RETURN OF INCOME FILED BY THE ASSESSEE IN INDIA AN D WHATEVER TAXES HAVE BEEN PAID BY THE BRANCHES IN THE OTHER CONTRACTING STATES I.E THE SOURCE COUNTRY, CREDIT OF SUCH TAXES SHALL BE GIVEN. THEREAFTER, THE TRIBUNAL IN THIS CASE REMITTED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE AFRESH IN THE LI GHT OF THE ABOVE ORDER OF THE TRIBUNAL IN THE CASE OF BANK OF BARODA IN I.T.A.NO.2927/MUM/2011 DATED 25.7.2014. LATER ASSE SSEE FILED MA IN MA NOS. 95 & 96/MDS/2016 STATING THAT THE DI RECTION GIVEN BY THE TRIBUNAL IS NOT APPROPRIATE. SINCE TH E ASSESSEE HAS NO INCOME FROM ANY BRANCHES IN SINGAPORE, THAT DECI SION CANNOT BE APPLIED TO THE ASSESSEES CASE. THE TRIBUNAL WH ILE ADJUDICATING THE SAID MA VIDE ORDER DATED 29.7.2016 HELD AS FOLLOWS : WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. IN OUR OPINION, THE INTERPRETA TION OF THE ORDER OF THE TRIBUNAL BY THE LD. AR IS MISCONCE IVED. THE TRIBUNAL WAS OF THE OPINION THAT IF THE INCOME FROM FOREIGN COUNTRY IS OFFERED TO TAX BY THE ASSESSEE BY WHATEVER MEANS, THE ASSESSEE HAS TO GET TAX CREDI T TO THE EXTENT THE TAX WAS PAID IN FOREIGN COUNTRY. IN OTHER WORDS, ONCE THE INCOME IS INCLUDED EITHER IN THE PR OFIT & LOSS ACCOUNT OR IN THE RETURN OF INCOME, THE - - ITA 585, 927/15 ETC. 49 CORRESPONDING TAX CREDIT ON THE SAME INCOME HAS TO BE GIVEN. ACCORDINGLY, WE ARE OF THE OPINION THAT THE RE IS NO NEED OF APPREHENSION FOR THE ASSESSEE THAT THE ASSESSING OFFICER WILL MISINTERPRET THE ORDER OF TH E TRIBUNAL. THEREFORE, WE DO NOT FIND ANY MERIT IN TH E ARGUMENT OF THE LD. AR. ACCORDINGLY, THE MISCELLAN EOUS PETITION IS DISMISSED. IN VIEW OF THE ABOVE, FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO HOLD THAT ONCE THE INTEREST INCO ME SUBJECT TO TAX IN ANY MANNER IN THE HANDS OF THE ASSESSEE, THE CORRESPONDING TAX CREDIT TO BE GIVEN. ACCORDINGLY, THIS GROUND IS REMITTED TO THE AO TO EXAMINE THE ISSUE IN THE LIGH T OF OUR ABOVE FINDINGS. 24. THE NEXT GROUND IS WITH REGARD TO DISALLOWIN G INTEREST EXPENDITURE OF 57,46,43,700/ - DEBITED TO PROFIT AND LOSS ACCOUNT INCURRED BY THE ASSESSEE IN THE COURSE OF B USINESS. 25. REGARDING THE PROPOSED DISALLOWANCE OF EXPENSES OF 57,46,43,000/- IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE BORROWED FUNDS FROM BANKS/OTHER FINANCIAL INSTITUTIONS AND ADVANCED TO ITS SUBSIDIARY CONCERN M/S. ABAN HOLDINGS PTE. LTD, SINGAPORE. THE TOTAL AMOUNT OF TERM LOANS AVAILED BY THE ASSESSEE (AS ON 01.04.2009 ) WAS 2773 CRORES, OUT OF WHICH AN AMOUNT OF 1760 - - ITA 585, 927/15 ETC. 50 CRORES WAS ADVANCED TO M/S. ABAN HOLDINGS PVT. LTD, SINGAPORE. THE TOTAL INTEREST PAID BY THE ASSESSEE ON THE CONCERNED TERM LOANS WAS 193.57 CRORES AND THE INTEREST RECEIVED BY THE ASSESSEE FROM ITS SUBSIDIA RY COMPANY WAS 176 CRORES. SUBSEQUENTLY, DURING THE FINANCIAL YEAR 2009-10, THE LOANS TO THE SUBSIDIARY COMPANY WERE CONVERTED INTO EQUITY SHARES. THE ASSESSEE, BEFORE THE ASSESSING OFFICER, FURNISHED T HE DETAILS OF INTEREST PAYMENTS ON TERM LOANS (WHOSE FUNDS ARE ADVANCED TO THE SUBSIDIARY COMPANY) FOR T HE PERIODS PRIOR TO THE DATE OF CONVERSION INTO EQUITY AND THE POST CONVERSION. AS PER THE DETAILS FURNISHED B Y THE ASSESSEE, 57,46,43,700/- PERTAINS TO THE POST CONVERSION (INTO EQUITY) PERIOD, AND THE BALANCE PERTAINS TO THE PERIOD WHERE THE AMOUNTS WERE REMAINING AS LOANS ONLY. HENCE THE ASSESSING OFFICE R PROPOSED TO DISALLOW 57,46,43,700/- , AS IT REPRESENTS EXPENSES ON THE LOANS FOR PURCHASING EQUITY OF ANOT HER COMPANY, WHERE THE EXPENSES BECOMES CAPITAL EXPENSES, BY RELYING ON THE DECISION OF THE - - ITA 585, 927/15 ETC. 51 JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS TRI SHUL INVESTMENTS LTD., [2008] 305 ITR 434 (MAD). 26. THE DRP OBSERVED THAT THE ABOVE INTEREST PAYMENT OF 57,46,43,000/- PERTAIN TO THE PURCHASE OF EQUITY OF THE ASSESSEES SUBSIDIARY COMPANY M/S. ABAN HOLDINGS PT E. LTD., SINGAPORE. AS PER THE IT ACT, ONLY THE EXPENSES, W HICH ARE INCURRED OR LAID OUT WHOLLY, SOLELY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, ARE TO BE ALLOWED WHILE COMPUTING THE INCOME TAXABLE UNDER THE HEAD 'INCOME FROM BUSINESS OR PROFESSION'. THE ASSESSEE'S BUSINESS IS OFFSHORE DRILLING ACTIVITIES. THEREFORE ONLY THE EXPENSES INCURRED IN RELATION TO THE OFFSHORE DRILLING ARE TO BE ALLOWED AS BUSINESS EXPENSES. THE LOANS ADVANCED (O R THE INVESTMENTS) TO THE SUBSIDIARY COMPANY WILL NOT FORM PART OF THE BUSINESS OF OFFSHORE DRILLING, EVEN IF THE SUBSIDIARY IS ENGAGED IN THE SAME LINE OF BUSINESS. IF THE ASSESSEE CLAIMS THAT THE INVESTMENTS ITSELF IS A SEPARATE BUSINESS ACTIVITY, THEN THE RESULTING GAIN S FROM SUCH INVESTMENTS SHOULD BE ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS, AND THE INVESTMENTS - - ITA 585, 927/15 ETC. 52 SHOULD BE INCLUDED IN THE STOCK- IN-TRADE IN THE BA LANCE SHEET. HOWEVER, PERUSAL OF THE ASSESSEE ACCOUNTS SHOWS THAT THE GAINS (OR THE LOSSES) FROM THE INVESTMENTS ARE OFFERED TO TAX UNDER THE HEAD 'CAPI TAL GAINS' AND THE INVESTMENTS ARE SEPARATELY REFLECTED AS INVESTMENTS AND NOT UNDER STOCK-IN-TRADE CATEGORY, IN THE BALANCE SHEET. THEREFORE, THE INVESTMENTS IN TH E SUBSIDIARY COMPANY CANNOT BE CONSIDERED AS A REGULA R 'BUSINESS ACTIVITY'. 26.1 THE DRP, FURTHER OBSERVED THAT E ACH AND EVERY ACTIVITY, WHICH IS AIMED AT EARNING INCOME, EITHER DIRECTLY OR INDIRECTLY, IMMEDIATELY OR ON A LONG RU N, IS A BUSINESS ACTIVITY. BUT, WHEN IT COMES TO INCOME TAX ACT AND FOR THE PURPOSE OF DETERMINING TILE ALLOWABILIT Y OR CHARGEABILITY TO TAX, THE SAME IS GOVERNED BY VARIO US PROVISIONS OF THE INCOME TAX ACT. AS PER THE INCOME TAX ACT, ALL THE INCOMES AND THEIR SOURCES ARE TO B E CLASSIFIED INTO ONE OF THE FIVE HEADS OF INCOMES, A S UNDER: I) INCOME FROM SALARY. - - ITA 585, 927/15 ETC. 53 II) INCOME FROM HOUSE PROPERTY. III) INCOME FROM BUSINESS OR PROFESSION , IV) CAPITAL GA I NS , AND V) INCOME FROM OTHER SOURCES . 26.2 ANY INCOME WHICH IS ASSESSABLE UNDER A PARTICULAR H EAD IS TO BE ASSESSED UNDER THAT HEAD ONLY, IRRESPECTIV E OF THE OBJECTS OR TREATMENT OF THE ASSESSEE IN ITS BOOKS O F ACCOUNT. FOR EXAMPLE, WHEN A FIRM IS CONSTITUTED WITH THE OB JECT OF CONSTRUCTING AND LETTING OUT OF BUILDINGS, THE SAID ACTIVITY AMOUNTS TO A BUSINESS ACTIVITY FOR GENERAL PURPOSES LIKE REGISTRATION OF THE FIRM, ETC. [AS HELD BY THE HIGH COURT OF KARNATAKA IN THE CASE OF 'BALAJI ENTERPRISES VS. CL T, [225 ITR 471]. HOWEVER, WHEN IT COMES TO ASSESSABILITY OF RE NTAL INCOMES, THE SAME (RENTAL INCOME) IS TO BE ASSESSED UNDER THE HEAD 'INCOME FROM HOUSE PROPERTY' ( THE HEAD NOTE GIVEN IN THE CASE OF BALAJI ENTERPRISES CITED SUPRA, IS NOT CORRECT. THE ACTUAL JUDGMENT IS TO BE SEEN) . FURTHER, THE SUPREME COURT IN THE CASES OF EAST INDIA HOUSING AND LAND DEVELOPMENT TRUST LTD. VS. CIT (42 ITR 49)(SC) AND S.G. MERCANTILE CORPORATION (P.) LTD V. CIT (83 ITR 700(SC), ALSO HELD THAT THE OBJECT AND PURPOSE OF THE ASSESSEE CANNOT ALTER THE CHARACTER OF - - ITA 585, 927/15 ETC. 54 THE INCOME. SIMILARLY, THE EXPENDITURE INCURRED IN RELATION TO A PARTICULAR ACTIVITY, IS TO BE ALLOWED UNDER THE H EAD UNDER WHICH THE CONCERNED INCOME IS ASSESSABLE TO TAX. 26.3 ACCORDING TO THE DRP, BEFORE ALLOWING THE EXPENDITURE AS BUSINESS EXPENDITURE, ONE HAS TO SEE THE NATURE OF EXPENDITURE : I) WHETHER IT IS INCURRED DURING THE COURSE OF BUSINESS AND FOR THE PURPOSE OF BUSINESS. II) THE BUSINESS PROCESS, IN RELATION TO WHICH THE EXPENSES ARE INCURRED / CLAIMED, IS CAPABLE OF GENERATING INCOME. III) WHETHER INCOME SO GENERATED (OR LIKELY TO BE GENERATED) IS ASSESSABLE TO TAX. IV) IF ASSESSABLE TO TAX, WHETHER ASSESSABLE UNDER THE HEAD 'INCOME FROM BUSINESS / PROFESSION' AND V) IN WHOSE HANDS THE SAID INCOME IS ASSESSABLE. FURTHER, IF A PARTICULAR INCOME IS ASSESSABLE UNDER ANY OTHER HEAD, OTHER THAN THE HEAD 'INCOME FROM BUSINESS OR PROFESSION', THE EXPENSES ALLOWABL E ARE SPECIFICALLY PROVIDED IN THE RESPECTIVE HEADS O F - - ITA 585, 927/15 ETC. 55 INCOME. EXPENSES, OTHER THAN SPECIFIED UNDER THE RESPECTIVE HEADS OF INCOME, CANNOT BE ALLOWED. 26.4 UNDER THIS BACKGROUND, THE DRP OBSERVED THAT THE SUBSIDIARY COMPANY (M/S. ABAN HOLDINGS PTE LTD, SINGAPORE), IN WHICH THE ASSESSEE INVESTED, IS AN INDEPENDENT COMPANY WITH SEPARATE LEGAL STATUS AND ALSO ASSESSABLE TO INCOME TAX IN ITS OWN STATUS. FURTHER, M/S. ABAN HOLDINGS PTE LTD., SINGAPORE, BEING A FOREIGN COMPANY IS NOT ASSESSABLE TAX IN INDIA, BUT UNDER THE LAWS IN SINGAPORE. IN OTHER WO RDS, THE INCOME EARNED BY THE SAID SUBSIDIARY IS ASSESSABLE IN THE HANDS OF THE SAID SUBSIDIARY COMPANY ONLY (THAT TOO IN SINGAPORE) AND NOT IN THE HANDS OF THE INSTANT ASSESSEE. 26.5 IT IS ALSO OBSERVED BY THE DRP THAT THERE SHOULD B E 'PRINCIPLE OF MATCHING' BETWEEN THE EXPENDITURE INC URRED AND INCOME EARNED/ACCRUED. ANY EXPENDITURE, WHOSE CORRE SPONDING INCOME, IF NOT LIABLE TO TAX IN THE YEAR OR IN THE HANDS OF THE ASSESSEE, SUCH EXPENSES, EVEN IF FORMS PART OF BUSI NESS - - ITA 585, 927/15 ETC. 56 EXPENDITURE, SHOULD NOT BE ALLOWED. IN OTHER WORDS, ONLY THE EXPENDITURE WHOSE CORRESPONDING INCOME IS ASSESSABL E TO TAX IN THAT YEAR, THAT TOO, IN THE HANDS OF THE ASSESS EE AND UNDER THE HEAD INCOME FROM BUSINESS /PROFESSION', IS ALL OWABLE AS BUSINESS EXPENDITURE. IF THIS PRINCIPLE OF ACCOUNTA NCY IS NOT FOLLOWED THE TRUE AND CORRECT PROFITS OF BUSINESS C AN NEVER BE DEDUCED OR COMPUTED. 26.6 WHEN THE RESULTING INCOME (WHETHER IN THE CURRENT YEAR OR LIKELY TO BE IN FUTURE YEARS) IS LIKELY TO BE IN TH E HANDS OF SOME OTHER PERSON (THE SUBSIDIARY COMPANY IN THE PRESENT CASE), THERE IS NO PROVISION IN THE I.T. ACT WHICH PERMITS THE ALLOWABILITY OF SUCH EXPENSES IN THE HANDS OF THE HOLDING COMPANY. ALSO, ONE HAS TO REMEMBER THAT LIKE EVERY ASSESSMENT YEAR IS INDEPENDENT, EVERY ASSESSEE IS SEPARATE AND INDEPENDENT FROM EACH OTHER. HENCE, ANY EXPENDITURE INCURRED FOR THE PURPOSE OF SETTING UP OF INCUBATING ANOTHER COMPANY SHOULD NOT BE ALLOWED AS BUSINESS EXPENDITURE' IN THE HANDS OF ANY OTHER PERSON (HOLDING COMPANY). - - ITA 585, 927/15 ETC. 57 26.7 THE ARGUMENT OF THE ASSESSEE, BEFORE THE D RP WAS THAT SINCE THE SUBSIDIARY COMPANY IS A 100% OWNED SUBSID IARY, PROFITS AND BENEFITS OF THE SAID SUBSIDIARY COMPANY WILL ULTIMATELY BENEFIT THE ASSESSEE AND HENCE, THE PRESENT EXPENSE S WILL BECOME BUSINESS EXPENSES AND ALLOWABLE. THIS ARGUME NT OF THE ASSESSEE IS ALSO NOT WELL FOUNDED. THE DRP OBSERVED THAT, EACH ASSESSMENT YEAR AND EVERY ASSESSEE IS INDEPENDENT. THE INCOME EARNED BY A PERSON IS TO BE ASSESSED IN THE HANDS OF THAT PERSON ONLY. FURTHER, HOW THE ULTIMATE BENEFIT S FROM THE SUBSIDIARY COMPANIES WILL REACH THE ASSESSEE? THESE BENEFITS WILL BE EITHER BY WAY OF DIVIDENDS OR BY WAY OF APP RECIATION IN THE VALUE OF SHARES (HELD BY THE ASSESSEE IN THE SUBSID IARY COMPANIES). IF THE ASSESSEE GETS THE BENEFIT BY WAY OF DIVIDENDS, THE SAME GOES TO THE HEAD 'INCOME FROM O THER SOURCES' AND THE DIVIDENDS ARE EITHER EXEMPT U/S.10 (34) OF THE ACT OR TAXABLE AT LOWER RATES. TH E OTHER WAY OF BENEFIT IS APPRECIATION OF SHARES OF THE SUBSIDIARIES. SU CH APPRECIATION IN THE SHARE PRICES (WHENEVER SOLD) WILL RESULT IN CAPITAL GAINS IN THE HANDS OF THE ASSESSEE AND ASSESSABLE UNDER T HE HEAD CAPITAL GAINS. THE CAPITAL GAINS ON SALE OF SHARES ARE - - ITA 585, 927/15 ETC. 58 EITHER EXEMPT OR TAXABLE AT LOWER RATES. FURTHER, I N BOTH OF THESE SITUATIONS, I.E. DIVIDENDS OR CAPITAL GAINS, NO OTH ER EXPENSES (ESPECIALLY, THE PRESENT CLAIM OF EXPENSES) ARE ALL OWABLE. THEREFORE, THE DRP OBSERVED THAT THE PRESENT CLAIM OF INTEREST EXPENSES BY THE ASSESSEE IS NOT ALLOWABLE IN THE HA NDS OF THE ASSESSEE, IN ANY MANNER. 26.8 ACCORDING TO THE DRP, IN ORDER TO MAKE THE EXPENSES ELIGIBLE TO BE CLAIMED AS EXPENDITURE UNDE R THE HEAD 'INCOME FROM BUSINESS', UNDER SECTIONS 28 TO 37 OF THE I.T. ACT, THE EXPENDITURE MUST HAVE BEEN INCURRED WHOLLY, SOLELY AND EXCLUSIVELY FOR THE PUR POSE OF THE BUSINESS. THE BUSINESS HERE MEANS THE BUSINESS WHOSE PROFITS ARE ASSESSABLE TO TAX UNDER THE HEAD INCOME FROM BUSINESS', THAT TOO, IN THE HANDS OF THE ASSESSEE ONLY. IF THESE TWO INGREDIENTS ARE MISSING, THE EXPENDITURE CANNOT BE CONSIDERED A S INCURRED. IN THE INSTANT CASE, AS THE ASSESSEE UNDE R THE HEAD 'INCOME FROM BUSINESS' EITHER IN THE CURRE NT YEAR OR IN THE SUBSEQUENT YEARS. THEREFORE, THE ABO VE EXPENSES CANNOT BE TREATED AS BUSINESS EXPENSES IN - - ITA 585, 927/15 ETC. 59 T HE HANDS OF THE ASSESSEE. 26.9 THE ASSESSEE FURTHER CLAIMED BEFORE THE DRP THAT THE INVESTMENTS IN THE SUBSIDIARY COMPANY WERE [OR THE FURTHERANCE OF ITS BUSINESS ACTIVITIES. THE ASSESSEE ALSO RELIED ON CERTAIN CASE LAWS, WHEREIN IT WAS HELD THAT PROTECTION OF THE ASSESSEE'S INTEREST IN THE GROUP COMPANIES IS A BUSINESS ACTIVITY AND ANY EXPENSES INCURRED IN THAT CONNECTION, IS ALLOWABLE EXPENDITURE. THIS ARGUMENT OF THE ASSESSEE IS ALSO NOT WELL FOUNDED. IT IS OBSERVED BY THE DRP THAT PROTECTING THE INTEREST OF THE ASSESSEE IN THE GROU P CONCERNS MAY SOMETIMES AMOUNT TO BUSINESS INTEREST. AS PER THE PROVISIONS OF THE INCOME TAX A CT AND THE PRINCIPLES OF ACCOUNTANCY, THE EXPENSES ARE ALLOWABLE ONLY WHEN THE RESULTING INCOME IS ASSESSABLE TO TAX IN THE HANDS OF THE ASSESSEE. IF THE EXPENSES INCURRED ARE GOING TO RESULT IN PROFITS IN THE HANDS OF SOME OTHER ASSESSEE, OR IF THE RESULTING INCOME IS NOT ASSESSABLE TO TAX IN THE HANDS OF ASSESSEE, SUCH EXPENSES SHOULD NOT BE ALLOWED. - - ITA 585, 927/15 ETC. 60 26.10. THE DRP OBSERVED THAT U NDER THE PROVISIONS OF INCOME TAX ACT, EACH ASSESSEE AND EACH ASSESSMENT YEAR IS INDEPENDENT. IF THE EXPENSES INCURRED ARE IN RELATION TO A BUSINESS ACTIVITY, WH OSE RESULTING INCOME IS ASSESSABLE TO TAX IN THE HANDS OF SOME OTHER PERSON, ARE TO BE ALLOWED IN THE HANDS O F THE ASSESSEE, THE VERY PURPOSE OF PRINCIPLES OF MATCHING IN ACCOUNTANCY AND THE CONCEPT OF 'INDEPENDENCE OF EACH ASSESSEE AND EVERY ASSESSMENT YEAR' WILL BE DEFEATED. IF THIS IS PERMI TTED, THE EXPENSES OF ONE ASSESSEE CAN BE CLAIMED IN THE HANDS OF THE OTHER ASSESSEE, WHICH IS NOT THE INTENTION OF THE LAW MAKERS. 26.11 THE DRP PLACED RELIANCE ON A SIMILAR ISSUE, WHICH CAME UP BEFORE THE TRIBUNAL, CHENNAI BENCH IN THE CASE OF IFMR TRUST. IN THE SAID CASE, THE TRUST WAS FORMED WITH THE OBJECT OF FLOATING VARIOUS (100% OWNED/NEAR 100% OWNED) SUBSIDIARIES AND MAKING THEM OPERATIONAL AND VIABLE. IN THE SAID PROCESS M/ S. IFMR TRUST INCURRED SEVERAL EXPENSES AND CLAIMED - - ITA 585, 927/15 ETC. 61 THE SAME AS BUSINESS EXPENDITURE ON THE GROUND THAT INVESTMENTS IN THE SUBSIDIARIES AND MAKING THEM VIABLE ITSELF IS THE 'BUSINESS MODEL' IN ITS CASE. 'THE ASSESSING OFFICER DISALLOWED THE EXPENSES AS THE EXPENSES ARE NOT GOING TO RESULT ANY INCOME, WHICH IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS IN THE HANDS OF M/S. IFMR TRUST. THE CIT(A) CONFIRMED THE DISALLOWANCE OF EXPENSES MADE BY THE ASSESSING OFFICER. ON FURTHER APPEALS BY THE ASSESSEE, THE TRIBUNAL VIDE ORDER DATED 7.7.2014 IN ITA NO. 1035/MDS/2013 HELD THAT THE EXPENSES INCURRED BY M/S. IFMR TRUST ARE NOT ALLOWABLE AS THEY ARE NOT INCURRED FOR THE BUSINESS. THE TRIBUNA L FURTHER HELD THAT IFMR TRUST WAS ACTING LIKE A PROVIDER AND FACILITATOR FOR ITS SUBSIDIARIES AND S UCH CREATION AND FACILITATION OF ASSETS FROM THE SUBSIDIARIES CANNOT BE HELD AS A BUSINESS IN THE HANDS OF THE M/ S. IFMR TRUST. HENCE, THE BENCH DISMISSED APPEALS. THE RE LEVANT PORTION OF THE ORDER OF THE TRIBUNAL IN ITA NO.1035 /MDS/2013 DATED 07.07.2014 IS AS UNDER: - - ITA 585, 927/15 ETC. 62 22. W E HEARD BOTH SIDES IN DETAIL. IT IS ADMITTED THAT THE ASSESSEE IS A PRIVATE TRUST FORMED WITH THE OBJECT OF CARRYING ON CERTAIN SPECIFIC TARGETS. THE ACTIVITIES OF THE ASSESSEE TRUST IS TO IDENTIFY THE SECTORS, W HERE SMALL ENTITIES CAN BE SET UP ESPECIALLY STRESSING ON THE REQUIREMENT OF RURAL POPULATION. THE ASSESSEE IS SELLING UP SUCH MICRO UNITS IN DIFFERENT SECTORS AND HANDING OVER TO THE ENTREPRENEUR'S TO CARRY ON SUCH UNITS IN A V IABLE MANN ER. THE MAIN OBJECT OF THE ASSESSEE TRUST IS THE ULTIMATE FINANCIAL INCLUSION OF ALL INDIVIDUALS AND ENTITIES WORKING IN DIFFERENT RURAL SECTORS. THE ASSESSEE TRUST PROCLAIMS AS ONE OF ITS OBJECTS TO PROVIDE ACCESSIBILITY OF MODEM MARKETS FOR ARTISAN AND CRAFTSMEN. IT ALSO DECLARES AS I TS OBJECTS THE AVAILABILITY OF FINANCE AND F ACILITIES FOR DIFFERENT SECTORS TO ATTAIN SUSTAINABLE GROWTH. IT IS IN THE ABOVE CONTEXT. THAT ALL TILE ACTIVITIES OF THE ASSESSEE TRUST ARE BEING CARRIED OUT. 23. WHEN WE EXAMINE THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE TRUST, WE FIND THAT INCUBATION EXPENSES, CONSULTANCY, LEGAL AND PROFESSIONAL CHARGES ARE ALL INCURRED FOR CONDUCTING STUDIES AND RESEARCH IN SETTING UP OF INDIVIDUAL PRODUCTIVE UNITS IN DIFFERENT SECTORS. I N FACT, THE ASSESSEE IS CREATING PRODUCTIVE ASSETS FOR ITS SUBSIDIARY UNITS. THE ASSESSEE IS ENGAGED IN THE PROCESS OF ASSET CREATION FOR SUCH UNITS, SO TH AT THEY MAY SURVIVE AND FLOURISH THEREON. THE ASSESSEE IS NOT CARRYING ON ANY OTHER ACTIVITIES BY THEMSELVES. THE ASSESSEE IS ACTING AS A PROVIDER AND A FACILITATOR. THE ACTUAL PRODUCTION I SERVICE ACTIVITIES ARE CARRIED OUT BY THOSE MICRO INDIVIDUA L UNITS. WHEN THE ASSESSEE IS CREATING SUCH PRODUCTIVE ASSETS FOR THE UNITS SET UP BY IT, IT IS NOT POSSIBLE TO HOLD THAT THOSE EXPENDITURE WERE INCURRED FOR THE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE TRUST IN THAT WAY, WE AGREE WITH THE FINDING OF THE COMMISSIONER OF INCOME-TAX - - ITA 585, 927/15 ETC. 63 {APPEALS) THAT THE ASSESSEE TRUST IS NOT CARRYING ON ANY BUSINESS OF ITS OWN. 24. IT IS ALSO NOT POSSIBLE TO ACCEPT THE ARGUMENT OF THE LEARNED SENIOR COUNSEL THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF 'BUSINESS OF INVESTMENT'. THE ASSESSEE IS NOT CARRYING ON ANY ACTIVITIES OF INVESTMENT AS ALREADY STATED. THE ASSESSEE TRUST IS CARRYING ON ITS ACTIVITIES AS AN ORGANIZER, AS A PROVIDER AND AS A FACILITATOR. ITS MAIN OBJECTS ARE NOT CORPOREAL / PHYSICAL; RATHER I TS OBJECTS ARE SUPPORTIVE. THE ASSESSEE IS STRIVING FOR FINANCIAL INCLUSION AND. MARKET INCLUSION. IT DOES NOT CARRY OUT ANY BUSINESS DIRECTLY. IT ALSO DOES NOT ACT AS PARTNERS OF THE MICRO UNITS SET UP BY IT. WHEN THE ASSESSEE IS FACILITATING THE CREATION OF ASSETS FOR OTHER UNITS TO CARRY THEIR BUSINESS, IT IS NOT POSSIBLE TO HOLD THAT THE SAID BUSINESS IS ALSO CARRIED ON BY THE ASSESSEE TRUST. IT IS ALSO NOT POSSIBLE AS ALREADY STATED TO HOLD THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF 'THE BUSINESS OF INVESTMENT'. 26.12 THEREFORE, SINCE THE ABOVE INTEREST EXPENSE S ARE INCURRED IN RELATION TO THE ESTABLISHING THE SUBSIDIARY COMPANY AND/OR MAKING THE SUBSIDIARY COMPANY OPERATIONAL/VIABLE, THE INTEREST EXPENSES UNDER CONSIDERATION ARE ATTRIBUTABLE TO THE CONCERNED SUBSIDIARY COMPANY ONLY AND NOT IN RELATION TO THE EARNING OF ANY INCOME IN THE HANDS OF THE INSTANT ASSESSEE COMPANY. IN OTHER WORDS, THERE IS NO LINK OR NEXUS BETWEEN THE ASSESSEE'S INCURRENCE - - ITA 585, 927/15 ETC. 64 OF THE EXPENSES AND THE R ECEIPTS ACCOUNTED IN THE PROFIT AND LOSS ACCOUNT, DURING THE YEAR UNDER CONSIDERATION. HENCE, IT IS HELD THAT THE ABOVE INTEREST EXPENSES INCURRED ARE NOT IN RELATION TO EARNING OF THE INCOME WHICH IS ASSESSABLE UNDER THE HEAD INCOME FROM BUSINESS IN THE HANDS OF THE ASSESSEE FOR THE F.Y. 2009-10 UNDER CONSIDERATION. THEREFOR E, THE PRESENT INTEREST EXPENSES ARE NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. THE INTEREST EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT AND CLAIMED IN THE RETURN OF INCOME, TO THE TUNE OF 57,46,43,700/- CLAIMED BY THE ASSESSEE ARE NOT ALLOWABLE. THEREFORE, THE ACTION OF THE AO IN PROPOSING IN THE DRAFT ASSESSMENT ORDER TO DISALLOW THE INTEREST EXPENSES OF 57,46,43,700/- WAS CONFIRMED BY THE DRP. CONSEQUENTLY, THE AO PASSED THE FINAL ASSESSMENT ORDER. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 27. THE LD. AR SUBMITTED THAT THE ASSESSMENT COMPANY HAS INVESTED SHARE CAPITAL IN ITS WHOLLY - - ITA 585, 927/15 ETC. 65 OWNED SUBSIDIARY, M/S. ABAN HOLDINGS PTE. LTD., SINGAPORE, WHICH IS ENGAGED IN THE SIMILAR LINE OF BUSINESS. HE SUBMITTED THAT THE INVESTMENT WAS MADE DUE TO THE COMMERCIAL EXPEDIENCY STATED AS UNDER : I) THE INVESTMENT IS MADE IN THE SUBSIDIARY WITH AN OBJECT TO CAPTURE THE BUSINESS IN WORLD MARKET THROUGH THE SUBSIDIARY. II) THE INVESTMENT WAS REQUIRED TO BE MADE AS THE BANKERS REQUIRED THE SUBSIDIARY TO HAVE A BETTER DEBT EQUITY RATIO. III) THE INVESTMENT SO MADE FACILITATED THE SUBSIDIARY TO RAISE FURTHER CAPITAL SINCE THE ABILITY OF A BUSINESS ENTERPRISE TO BORROW MONEY DEPENDS PRIMARILY ON ITS OWN SHARE CAPITAL BASE AND LEVEL OF ITS DEBT EQUITY RATIO. IV) THE INVESTMENT IS MADE IN SUBSIDIARY IN ORDER T O FACILITATE THEM TO RAISE MONEY IN THEIR HOME COUNTRY. IT IS PERTINENT TO MENTION HERE THAT COST OF BORROWING FOR THE ASSESSEE TO INVEST IN THE SUBSIDIARY WOULD HAVE BEEN SUBSTANTIALLY HIGHER IN INDIA RATHER THAN BORROWINGS AT SUBSIDIARY LEVEL OUTSIDE INDIA. THIS HAS SAVED ASSSESSEES COSTS RESULTING INTO HIGHER PROFITS AND BENEFITS TO THE ASSESSEE. V) THE GROWTH OF THE SUBSIDIARY OMPANY RESULTS IN GROWTH OF OVERALL WEALTH OF THE COMPANY ND INCREASE IN MARKET CAPITALIZATION VI) THE INVESTMENT IN THE SUBSIDIARY HELPED IN GROWING OF THE BUSINESS OF THE ASSESSEE COMPANY WHICH IN TURN GIVE IT BENEFIT OF - - ITA 585, 927/15 ETC. 66 ECONOMIES OF LARGE SCALE AND COST SYNERGIES. UNDER SECTION 36(1)(III) THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISFIED BEFORE THE ASSESSEE CAN SUCCESSFULLY CLAIM THE DEDUCTION IN RESPECT OF INTEREST PAID : A) THE ASSESSEE SHOULD HAVE BORROWED CAPITAL; B) THE BORROWING OF THE CAPITAL SHOULD BE FOR THE PURPOSE OF THE BUSINESS AND C) INTEREST SHOULD HAVE BEEN PAID ON THE BORROWING. 27.1 FURTHER, THE LD. AR PLACED RELIANCE ON THE F OLLOWING DECISIONS: (I) IN THE CASE OF HERO CYCLES PVT. LTD. V. CIT (63 TAXMANN.COM 308)(SC), THE SUPREME COURT HELD THAT T HE PROVISIONS OF SEC.36(1)(III) ARE NOT APPLICABLE ONC E IT IS ESTABLISHED THAT THE LOAN IS GIVEN TO A SUBSIDIARY FOR ITS BUSINESS PURPOSE. (II) IN THE CASE OF SA BUILDERS LTD. V. CIT (288 IT R 1)(SC), IT WAS HELD BY THE SUPREME COURT THAT WHEN THE ASSESSE E HAS ADVANCED BORROWED FUNDS TO ITS SUBSIDIARY AS INTERE ST FREE LOAN AS A PART OF BUSINESS EXPEDIENCY. THE INTEREST ON SUCH LOAN TO BE ALLOWED AS BUSINESS EXPENDITURE WHEN THE ASSESSE E PROVE THAT THE AMOUNT GIVEN WAS FOR BUSINESS EXPEDIENCY. - - ITA 585, 927/15 ETC. 67 (III) IN THE CASE OF CIT V. BHARTI TELEVENTURES LTD . (11 TAXMANN 356)(DELHI), THE DELHI HIGH COURT HELD THAT THE AO SHOULD NOT DISALLOW THE INTEREST EXPENDITURE WITHOUT CONSIDERI NG WHETHER INTEREST BEARING FUNDS WERE ROUTED TO SUBSIDIARY. FURTHER, IF THE ASSESSEE CLEARLY PROVES THAT THE ASSESSEE HAS GIVEN ADVANCES AND INVESTMENTS MADE IN AE IS OUT OF THE INTEREST F REE FUNDS THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE SHOULD NOT BE DISALLOWED. (IV) THE DELHI HIGH COURT IN THE CASE OF CIT V. D ALMIA CEMENT (P) LTD.(121 TAXMAN 706), HELD THAT IF ALL REQUISIT E CONDITIONS FOR ALLOWANCE OF INTEREST ARE FULFILLED, IT IS NOT OPEN TO REVENUE TO MAKE A PART DISALLOWANCE, UNLESS THERE IS A POSITIV E FINDING RECORDED THAT A PART OF AMOUNT BORROWED IS NOT USED FOR PURPOSE OF BUSINESS SCOPE FOR ALLOWING A DEDUCTION UNDER SECTION 36(1)(III) IS MUCH WIDER THAN ONE AVAILABLE UNDER SECTION 57(III) (V) THE BOMBAY HIGH COURT IN THE CASE OF CIT V. REL IANCE COMMUNICATION INFRASTRUCTURE LTD. (21 TAXMANN 232), HELD THAT WHEN ASSESSEE PROVES THAT THE ADVANCES AND INVESTME NT TO AE - - ITA 585, 927/15 ETC. 68 ARE FOR THE PURPOSE OF BUSINESS EXPEDIENCY, NO DISA LLOWANCE OF INTEREST TO BE MADE. (VI) IN THE CASE OF CIT V. TONNECO RC INDIA (P) LT D. (36 TAXMANN 232), THE MADRAS HIGH COURT HAS HELD THAT W HERE AN AMOUNT WAS ADVANCED TO SICK SUBSIDIARY COMPANY OUT OF BORROWED FUNDS ON ACCOUNT OF COMMERCIAL EXPEDIENCY, AS WELL AS IN ACCORDANCE WITH ORDERS OF BIFR, INTEREST ON L OAN COULD NOT BE DISALLOWED UNDER SECTION 36(1)(III) ON GROUND TH AT IT WAS NOT UTILIZED FOR PURPOSE OF ASSESSEES BUSINESS. (VII) THE TRIBUNAL, HYDERABAD BENCH IN THE CASE OF AMBIENCE PROPERTIES LTD. VS. DCIT IN ITA NO.58/HYD/2013 DATE D HELD THAT IF THE ASSESSEE HAS ADVANCED THE AMOUNTS TO TH E SUBSIDIARIES IN VIEW OF THE COMMERCIAL EXPEDIENCY O UT OF INTEREST FREE FUNDS, NO DISALLOWANCE OF INTEREST TO BE MADE. FURTHER, REVENUE CAN NOT DECIDE WHETHER THE ASSESSE E HAS TO DO AND CANNOT COMPEL THE ASSESSEE TO MAXIMIZE THE P ROFITS SO AS TO PAY HIGHER TAXES. IT IS THE PREROGATIVE OF T HE ASSESSEE TO TAKE A BUSINESS DECISION IN WHAT MANNER THE ASSESSE E HAS TO DEPLOY ITS FUNDS. - - ITA 585, 927/15 ETC. 69 (VIII) AGAIN, THE TRIBUNAL, HYDERABAD BENCH IN THE CASE OF SSPDL LTD. V. DCIT(33 TAXMANN 447) HAS HELD THAT IN ABSENCE OF CLEAR CUT NEXUS BETWEEN AMOUNT ADVANCED TO SISTER CONCERNS AND INTEREST INCURRED ON BORROWINGS, NOTIO NAL INTEREST CANNOT BE DISALLOWED ON GROUND OF NON-UTILIZATION F OR PURPOSE OF BUSINESS. (IX) THE TRIBUNAL IN THE CASE OF TOLL (INDIA) LOGI STICS (P) LTD. V. DCIT(48 TAXMANN 78), HAS HELD THAT WHERE ASSESSEE H AD ADVANCED INTEREST FREE LOAN TO ITS SUBSIDIARY COMPA NY AS A MEASURE OF COMMERCIAL EXPEDIENCY AND FUNDS WERE USE D BY SUBSIDIARY FOR PURPOSE OF BUSINESS ONLY, NO DISALLO WANCE OF INTEREST UNDER SEC.36(1)(III) OF THE ACT ON DIVERSI ON OF INTEREST BEARING LOANS BE MADE. (X) IN THE CASE OF QUINTEGRA SOLUTIONS P. LTD. IN ITA NOS. 1263 TO 1266 & 1629/MDS/2010, THE TRIBUNAL HELD THAT CIT (A) DELETED THE DISALLOWANCE OF DIVERSION OF INTEREST BEARING A DVANCES TO THE SISTER CONCERN OF THE ASSESSEE HOLDING THAT THE ASSESSEE HAD PROVIDED FUNDS TO ITS SISTER CONCERN IN THE INT EREST OF ITS OWN BUSINESS. BUT THE TRIBUNAL STATED THAT FUNDS PROVI DED BY THE - - ITA 585, 927/15 ETC. 70 ASSESSEE TO ITS SISTER CONCERN OUT OF BUSINESS EXIG ENCIES COULD NOT BE HELD TO BE PERSONAL DIVERSION OF FUNDS AND I NTEREST PAID ON SUCH FUNDS COULD NOT BE DISALLOWED. (XI) THE MADRAS HIGH COURT IN THE CASE OF PREMIER POLY SACKS P. LTD. (321 ITR 450), HAS HELD THAT THE AO HAS DIS ALLOWED @ 18% INTEREST ON BORROWED CAPITAL STATING THAT INVES TMENT WAS NOT RELATING TO THE BUSINESS. BUT THE TRIBUNAL STA TED THAT ASSESSEE WOULD GET ORDERS FROM THE COMPANY FOR EXIS TENCE AND INVESTMENT MADE IS OF COMMERCIAL INTEREST THEREFORE DELETED THE ADDITION. THE HIGH COURT ALSO CONTENDED THE SAME A S THE TRIBUNAL. (XII) THE TRIBUNAL, CHENNAI BENCH IN THE CASE OF AP OLLO HOSPITALS ENTERPRISES LTD. IN ITA NO.605/MDS/2012 H AS HELD THAT THE AO DISALLOWED A PART OF INTEREST EXPENDITU RE STATING THE ASSESSEE HAS PROVIDED INTEREST FREE FUNDS TO ITS SI STER CONCERN OUT OF THE BORROWED CAPITAL. BUT THE CIT(A) AND TH E TRIBUNAL HAS DELETED THE DISALLOWANCE STATING THAT THE BORRO WED FUNDS WERE UTILIZED FOR SPECIFIC PROJECTS AND FUNDS TO SI STER CONCERN WERE GIVEN FROM OWN FUNDS. - - ITA 585, 927/15 ETC. 71 (XIII) THE SUPREME COURT IN THE CASE OF CIT V. RAJE NDRA PRASAD MOODY (115 ITR 519) HELD THAT IT IS NOT NECE SSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RES ULT OF EXPENDITURE. THEREFORE, INTEREST PAID ON MONEY BOR ROWED FOR INVESTMENT IN SHARES, WHICH HAD NOT YIELDED ANY DIV IDEND, WAS ADMISSIBLE U/S.57(III). (XIV) THE BOMBAY HIGH COURT IN THE CASE OF CIT V. M ODI (P) LTD. (79 TAXMANN 428) HELD THAT INTEREST PAID BY AN ASSESSEE ON BORROWINGS FOR PURCHASING SHARES FROM WHICH ASSE SSEE EXPECTED TO RECEIVE/EARN DIVIDENDS COULD BE ALLOWED AS DEDUCTION. (XV) THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF ULTR AMARINE & PIGEMENT LTD. V. ACIT IN ITA NO.7617/MUM/2005 HAS H ELD THAT THE INTEREST EXPENDITURE INCURRED TO EARN INCOME FR OM OTHER SOURCES IS ALLOWABLE U/S.57(III) OF THE ACT. 28. THE LD. DR PLACED STRONG RELIANCE ON THE ORDER OF THE LOWER AUTHORITIES AND ALSO THE JUDGMENT OF THE MADRAS HIG H COURT IN THE CASE OF CIT V. TRISHUL INVESMENTS LTD. 305 ITR 434(MAD). - - ITA 585, 927/15 ETC. 72 29. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE QUESTION INVOLVED IN THIS CASE IS ONLY ABOUT THE ALLOWABILITY OF THE INTEREST ON BORROWED FUNDS AND HENCE WE ARE DEALING ONLY WITH THAT QUESTION. IN THIS CONNECTION, WE REFER TO S. 36(1)(III) OF THE IT ACT, 1961 WHICH STATES THAT 'T HE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF THE BUSINESS OR PROFESSION' HAS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME-TAX UNDER S. 28 OF THE ACT. 29.1 IN OUR CONSIDERED OPINION THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS'. 29.2 IN OUR OPINION, THE LOWER AUTHORITIES HAVE APPROACH ED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, THE ASSESSEE BORROWED THE FUND FROM THE BANK AND LENT I T TO ITS SISTER-CONCERN, WHICH IS A WHOLLY OWNED SUBSIDIARY , M/S. ABAN OFFSHORE PTE. LTD. AS INTEREST-FREE LOAN LATER CON VERTED INTO SHARE CAPITAL. THE TEST, IN OUR OPINION, IN SUCH A CASE I S REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY . - - ITA 585, 927/15 ETC. 73 29.3 IN OUR OPINION, THE DECISIONS RELATING TO S. 37 OF THE ACT WILL ALSO BE APPLICABLE TO S. 36(1)(III) BECAUSE IN S. 37 ALSO THE EXPRESSION USED IS 'FOR THE PURPOSE OF BUSINESS'. I T HAS BEEN CONSISTENTLY HELD IN DECISIONS RELATING TO S. 37 TH AT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 29.4 IN OUR CONSIDERED OPINION, IN ORDER TO C LAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS EXPENDED, NO T OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE B ENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST HAS BEEN APPROVED BY THE SUPREME COURT IN SEVERAL DECISIONS E.G. EASTERN INVESTMENTS LTD. VS. CIT (19 51) 20 ITR 1 (SC), CIT VS. CHANDULAL KESHAVLAL & CO. (1960) 38 I TR 601 (SC), SA BUILDERS LTD. V. CIT (SUPRA) ETC. 29.5 IN OUR OPINION, THE LOWER AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER WORD S, THE LOWER - - ITA 585, 927/15 ETC. 74 AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER COMPANY WHICH IS A WHO LLY OWNED SUBSIDIARY OF THE ASSESSEE AS A MEASURE OF COMMERCI AL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLO WED. 29.6 THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDI TURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSIN ESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS E XPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 29.7 THUS, THE RATIO OF MADHAV PRASAD JATIAS CASE (118 ITR 200) (SC) IS THAT THE BORROWED FUND ADVANCED TO A T HIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER S. 36(1)(III) OF THE ACT. 29.8 IN THE PRESENT CASE, THE LOWER AUTHORITIES HAVE NOT EXAMINED WHETHER THE AMOUNT ADVANCED TO THE SISTER- CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY . IT HAS BEEN REPEATEDLY HELD BY SUPREME COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNI NG PROFITS' - - ITA 585, 927/15 ETC. 75 VIDE CIT VS. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC), CIT VS. BIRLA COTTON SPINNING & WEAVING M ILLS LTD. (1971) 82 ITR 166 (SC), ETC. 29.9 THE LOWER AUTHORITIES SHOULD HAVE EXAMINED THE PURP OSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SI STER- CONCERN, AND WHAT THE SISTER-CONCERN DID WITH THIS MONEY, IN ORDER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPED IENCY, BUT THAT HAS NOT BEEN DONE. 29.10 IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT H AD BEEN ADVANCED AS INTEREST-FREE LOAN TO ITS SISTER-CONCER N AND LATER CONVERTED INTO SHARE CAPITAL. HOWEVER, IN OUR OPIN ION, THAT FACT IS NOT REALLY RELEVANT. WHAT IS RELEVANT IS WHETHER TH E ASSESSEE ADVANCED SUCH AMOUNT TO ITS SISTER-CONCERN AS A MEA SURE OF COMMERCIAL EXPEDIENCY. 30. THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. 254 ITR 377 (DEL) IS APPLICABLE TO THE FACTS OF THE PRESENT CASE , WHEREIN IT WAS HELD THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE - - ITA 585, 927/15 ETC. 76 EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCH AIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRE CTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EX PENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT . THE LOWER AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AU THORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOIN T BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HA VE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER-CONC ERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PR OFITS. FURTHER, IT IS ALSO TO BE NOTED THAT THE INCOME EAR NED BY THE ASSESSEE FROM FOREIGN SUBSIDIARY IS TAXED IN INDIA WHICH IS EVIDENT FROM THE INCOME OFFERED BY THE ASSESSEE IN ITS RETURN OF INCOME. IN SUCH CIRCUMSTANCES, IT IS NOT POSSIBLE TO US TO CONFIRM THE DISALLOWANCE OF INTEREST OF 57,46,43,700/- U/S.36(1)(III) OF THE ACT. - - ITA 585, 927/15 ETC. 77 30.1 THE LD. DR RELIED ON THE JUDGMENT OF THE MADRAS HIG H COURT IN THE CASE OF TRISHUL INVESTMENTS LTD. 305 I TR 434, WHEREIN IT WAS HELD THAT THE INTEREST ON CAPITAL BO RROWED FOR INVESTMENT IN SHARES TO BE ADDED TO THE COST OF ACQ UISITION OF SHARES. AS THE ASSESSEE HAS UNDERTAKEN THE ACTIVIT Y OF INVESTMENT IN SHARES, THE SHARES ARE CAPITAL ASSET S. 31. WE FIND THAT THE RELIANCE PLACED ON BY THE LD. DR ON THE JUDGMENT OF MADRAS HIGH COURT IN THE CASE OF TRISHU L INVESTMENTS (SUPRA) IS MISPLACED. THE MAIN CONTE NTION OF THE LD. DR IS THAT THE INTEREST EXPENDITURE ON BORROWIN GS USED FOR INVESTMENT IN WHOLLY OWNED SUBSIDIARY CANNOT BE ALL OWED AS DEDUCTION U/S.36(1)(III) OF THE ACT INSTEAD IT SHOU LD BE ADDED TO THE COST OF INVESTMENT, IN VIEW OF THE ABOVE JUDGME NT OF THE MADRAS HIGH COURT. IN OUR OPINION, WHEN ACTIVITY IS UNDERTAKEN AS AN INVESTMENT ACTIVITY AND INTEREST INCURRED UP TO THE ACQUISITION OF THE SHARES OF SUBSIDIARY COMPANY COU LD BE CONSIDERED AS PART OF INVESTMENT. ONCE IT IS ACQUI RED, THEN IT WILL BE A REVENUE EXPENDITURE. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE WHOLLY OWNED SUBSIDIARY COMPANY HAS A LREADY ACQUIRED SHARES AND IT IS FUNCTIONING. - - ITA 585, 927/15 ETC. 78 31.2 IN THIS CASE THE ASSESSEE CLAIMED THE INTE REST INCURRED ON LOAN WHICH WAS USED FOR THE PURPOSE OF PURCHASE OF SHARES AS REVENUE EXPENDITURE, BUT IT WAS NOT CAPITALIZED AS PART OF THE INVESTMENT IN SHARES. THE CONTENTION OF THE DR WAS THAT IT IS TO BE ADDED TO THE COST OF THE INVESTMENT SO AS TO INC REASE THE VALUE OF THE CAPITAL ASSET. 31.3 IN THE PRESENT CASE, THERE IS NO DISPUTE T HAT THE ASSESSEE HAS BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT IN SHARES AND THEREAFTER THE ASSESSEE HAS INCURRED INTEREST ON IT . IN OUR OPINION, THE INTEREST IS TO BE CONSIDERED AS PART O F THE COST OF INVESTMENT TILL DATE OF ACQUISITION AND INTEREST PA ID BY THE ASSESSEE COMMENCING FROM THE DATE OF ACQUISITION OF SHARES TILL THE DATE OF SALE WOULD NOT FORM PART OF THE COST OF ACQUISITION. 31.4 FURTHER, IT IS A SETTLED LEGAL POSITION TH AT INCOME OF AN ASSESSEE HAS TO BE COMPUTED UNDER VARIOUS HEADS SPE CIFIED UNDER SECTION 14 OF THE ACT. THEREFORE, THE DEDUCTI ONS ARE TO BE ALLOWED IN COMPUTING THE INCOME UNDER VARIOUS HEADS ONLY TO THE - - ITA 585, 927/15 ETC. 79 EXTENT IT IS PROVIDED BY THE LEGISLATURE UNDER THAT VERY HEADS. THE COMPUTATION OF CAPITAL GAIN IS PROVIDED IN SECT ION 48 OF THE ACT. ACCORDING TO THIS SECTION, THE ONLY DEDUCTIONS WHICH ARE ALLOWABLE ARE - (1) THE COST OF ACQUISITION OF THE ASSET, (2) THE COST OF ANY IMPROVEMENT THERETO AND (3) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANS FER OF THE ASSET. THE COST OF ACQUISITION, IN OUR OPINION, MEA NS THE AMOUNT PAID FOR ACQUIRING THE ASSET. ONCE THE ASSET IS ACQ UIRED, THEN ANY EXPENDITURE INCURRED THEREAFTER CANNOT BE CONSIDERE D AS THE COST OF ACQUISITION, SINCE SUCH EXPENDITURE WOULD NOT HA VE ANY NEXUS WITH THE ACQUISITION OF THE ASSET. WHEREVER THE LEG ISLATURE INTENDED TO ALLOW SUCH EXPENDITURE AS DEDUCTION, IT HAD SPECIFICALLY PROVIDED SO UNDER VARIOUS HEADS. FOR E XAMPLE, IN COMPUTING THE INCOME FROM HOUSE PROPERTY, THE ASSES SEE IS ALLOWED DEDUCTION UNDER SECTION 24 OF THE ACT ON AC COUNT OF INTEREST PAID ON THE BORROWED FUNDS UTILISED FOR AC QUIRING THE IMMOVABLE PROPERTY. SIMILARLY, WHEN THE INCOME IS T O BE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS FROM BUS INESS OR PROFESSION', THE DEDUCTION ACCOUNT OF INTEREST ON B ORROWED FUND IS PROVIDED UNDER SECTION 36(1)(III) THE ACT, WHERE THE BUSINESS - - ITA 585, 927/15 ETC. 80 ASSETS ARE ACQUIRED OUT OF BORROWED FUNDS. AT THIS STAGE, IT MAY BE PERTINENT TO NOTE THAT DEPRECIATION IS ALSO ALLO WABLE AS DEDUCTION UNDER SECTION 32 IN RESPECT OF BUSINESS A SSETS ON THE COST OF ACQUISITION. IN DETERMINING THE COST OF ACQ UISITION, THE INTEREST COMPONENT AFTER BRINGING THE ASSET INTO EX ISTENCE IS NOT TAKEN INTO CONSIDERATION AS EXPLANATION 8 TO SECTIO N 43 OF THE ACT. IF THE INTEREST IS TO BE ADDED TO COST OF ACQU ISITION, THEN THE ASSESSEE WOULD BE ENTITLED TO DOUBLE DEDUCTION ONCE UNDER SECTION 36(1)(III) AND THE OTHER UNDER SECTION 32 O F ACT, WHICH IS NOT PERMISSIBLE IN VIEW OF THE DECISION OF THE SUPR EME COURT IN THE CASE OF ESCORTS LTD. V. UOI[1993] 199 ITR 43. 31.6 SIMILARLY, WHEN THE SHARES ARE PURCHASED BY W AY OF INVESTMENT, AND THE DIVIDEND IS RECEIVED IN RESPECT OF SUCH SHARES, THE INTEREST PAID ON BORROWED FUNDS HAS BEE N HELD TO BE ALLOWABLE AS DEDUCTION AGAINST DIVIDEND INCOME. THE SUPREME COURT HAS GONE A STEP FURTHER IN THE CASE OF CIT VS . RAJENDRA PRASAD MOODY [1978] 115 ITR 519, WHEREIN IT HAS BEE N HELD THAT DEDUCTION ON ACCOUNT OF INTEREST PAID ON BORROWED F UNDS IS ALLOWABLE AS DEDUCTION IN COMPUTING THE INCOME UNDE R THE HEAD - - ITA 585, 927/15 ETC. 81 INCOME FROM OTHER SOURCES, EVEN WHERE THE DIVIDEN D IS NOT RECEIVED IN A PARTICULAR YEAR. IF THIS IS THE LEGAL POSITION, THEN WE ARE AFRAID, HOW THE INTEREST PAID BY THE ASSESSEE C AN BE CONSIDERED AS PART OF THE COST OF ACQUISITION OF TH E SHARES. IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED THEN IT WOUL D AMOUNT TO ALLOWING DOUBLE DEDUCTION I.E., UNDER SECTION 57 AS WELL AS UNDER SECTION 48 OF THE ACT, WHICH CAN NEVER BE THE INTEN TION OF THE LEGISLATURE. AS ALREADY STATED, THE DOUBLE DEDUCTIO N IS PROHIBITED AS LAID DOWN BY THE SUPREME COURT IN THE CASE OF ES CORTS LTD. (SUPRA). THE ENTIRE SCHEME OF THE ACT, THEREFORE, R EVEALS THAT INTEREST COMPONENT AFTER THE DATE OF ACQUISITION AN D TILL THE DATE OF SALE CANNOT BE TREATED AS THE COST OF ACQUISITIO N. IT IS ONLY ALLOWABLE AS A REVENUE DEDUCTION ON YEAR TO YEAR BA SIS AGAINST THE INCOME GENERATED FROM SUCH ASSET OR LIKELY TO B E GENERATED TO THE EXTENT PROVIDED BY THE LEGISLATURE UNDER DIF FERENT HEADS. 31.6 THE ABOVE VIEW IS ALSO FORTIFIED BY THE D ECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MAC INTOSH FINANCE ESTATES LTD. VS. ACIT(12 SOT 324), WHEREIN IT HAS BEEN HELD 'ONCE WE FIND THAT INTEREST EXPENSES IS A N ALLOWABLE EXPENDITURE UNDER THE HEAD 'INCOME FROM OTHER SOURC ES, IT - - ITA 585, 927/15 ETC. 82 CANNOT BE ALLOWED TO BE ADDED TO THE COST OF INVEST MENT ONLY BECAUSE IN THIS YEAR NO DEDUCTION IS ALLOWABLE BECAUSE THE DIV IDEND INCOME HAS BEEN MADE EXEMPT. THE FOLLOWING OBSERVATIONS OF SUPREM E COURT IN THE CASE OF SAHARANPUR ELECTRIC SUPPLY CO. LTD VS. CIT (1992) 194 ITR 294 (SC) WERE RELIED ON BY THE COURT:- IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMP ANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTI NG ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMEN T OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISE D AND ADDED TO THE COST OF THE FIXED ASSETS. 31.7 A BARE LOOK AT THE ABOVE OBSERVATIONS REVEALS THAT ACTUAL COST WOULD INCLUDE ALL EXPENDITURE NECESSARY TO BRING THE ASSETS INTO EXIS TENCE AND PUT THEM IN WORKING CONDITION. NOWHERE IN THE ABOVE OBSERVATIONS, THE SUPREME COURT HELD THAT THE EXPENDITURE INCURRED AFTER THE ACQUISITION OF ASSET WOULD BE INCLUDED IN THE COST OF ASSETS. THE TERMINAL POINT IS THE TIME WHEN THE AS SET IS BROUGHT INTO EXISTENCE OR WHEN THE ASSET IS PUT IN A WORKING CONDITION. THEREFORE, ON THE BASIS OF THE SUPREME COURT JUDGMENT, IT CANNOT BE SAID THAT EXPENDITURE INCURR ED AFTER THE ASSET BROUGHT INTO EXISTENCE, I.E., AFTER THE ACQUISITION OF THE ASSET WOULD FORM PART OF THE ACTUAL COST. THE SUPREME COURT LAID DOWN THE PROPOSITION THAT INTERE ST PAID ON MONIES BORROWED FOR ACQUISITION OF CAPITAL ASSET AND TO MEET EXPENSES C ONNECTED WITH ITS INSTALLATION ETC. AND CAPITALIZED, HAS TO BE ADDED TO THE COST OF ASS ET FOR THE PURPOSE OF DEPRECATION. 31.8 THUS IN OUR OPINION IF THE MONEY WAS BORROWED FOR PURCHASE OF - - ITA 585, 927/15 ETC. 83 SHARES OF SUBSIDIARY COMPANY FOR THE PURPOSE OF ACQ UIRING CONTROLLING INTEREST AND ACQUISITION OF SUCH CONTROLLING INTERE ST WAS OF THEBUSINESS OF THE ASSESSEE AND IT RESULTED IN PROMOTE THE BUSINES S OF THE ASSESSEE AS WELL AS HELPFUL TO THE ASSESSEE FOR HAVING MANAGEMENT C ONTROL OVERSAID SUCH SUBSIDIARY COMPANY, THEN THE INTEREST EXPENDITURE SHOULD BE ALLOWED U/S.36(1)(III) OF THE ACT. FURTHER IF THE ASSESSING OFFICER FOUND THA T INVESTMENT IN SHARES OF SUBSIDIARY COMPANY NOT FOR MAINTAINING CONTROLLING INTEREST, THEN THE ASSESSING OFFICER SHOULD SEE THAT THERE CANNOT BE A NY DISALLOWANCE IN RESPECT OF INVESTMENT OF ASSESSEES OWN FUND. THIS IS SO BECAUSE THE BORROWED FUNDS AND OWN FUNDS ARE ADMITTEDLY MIXED U P IN SUCH CASES, THE DISALLOWANCE OF INTEREST HAS TO BE MADE ON PROPORTI ONATE BASIS AND BENEFIT HAS TO BE GIVEN TO THE ASSESSEE TOWARDS INVESTMENT OF OWN FUND. IT IS ALSO TO BE NOTED THAT WHILE COMPUTING DISALLOWANCE IF AN Y U/S.36(1)(III) OF THE ACT, INTEREST CONSIDERED FOR DISALLOWANCE U/S.14A O F THE ACT WAS REQUIRED TO BE EXCLUDED. WITH THIS OBSERVATION, WE RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AFTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE AS SESSEE. IN THE RESULT, ITA NO.585/MDS/2016 IS PARTLY ALLOWED FOR STATISTIC AL PURPOSE. ITA NO.927/MDS/15. 32. THE FIRST GROUND IN THIS APPEAL IS THAT THE DRP HAS ERRED BY DELETING THE TP ADJUSTMENT OF 8.13 CRORES MADE BASED ON THE TPO ORDER FOR THE VALUE OF SERVICE CHARGES RECEIVABLE BY THE ASSESSEE ON CORPORATE GUARANTEES ISSUED ON BEHALF OF AE WHICH WAS NOT DIS CLOSED IN FORM NO.3CED RELYING O THE DECISION OF ITAT IN THE CASE OF REDINGTON INDIA LTD. VS. JCIT (ITA NO.513/MDS/2014, DATED 7.7.2014 ) 33. THE FACTS REGARDING THE DETERMIN ATIONS OF THE ALP OF ITS INTERNATIONAL TRANSACTIONS OF EXTENDING CORPORATE GUARANTEE TO - - ITA 585, 927/15 ETC. 84 THE AES AND THE RESULTING ADJUSTMENTS PROPOSED BY THE TPO ARE THAT THE ADJUSTMENTS PROPOSED BY THE TPO ARE ON ACCOUNT OF THE SERVICE CHARGES/COMMISSION OF THE GU ARANTEE EXTENDED TO THE AES. THE ASSESSEE EXTENDED GUARANTE E OF US $ 462.24 MILLION (= 2166.89 CRORES) TO ITS AES, BUT HAS NOT CHARGED ANY COMMISSION ON THE GUARANTEE EXTENDED. H ENCE, AFTER VERIFYING THE ASSESSEE'S SUBMISSIONS THE TPO HAS DETERMINED BASED ON THE RISKS ASSUMED AND FUNCTIONS OF THE ASSESSEE, THAT 1% RATE IS THE ALP RATE FOR GUARANTE E COMMISSION. ACCORDINGLY THE TPO DETERMINED THE ALP OF THE TRANSACTION OF GUARANTEE COMMISSION AT 8,13,99,814/- AND PROPOSED THE UPWARD ADJUSTMENT. 33.1 THE ASSESSEE, BEFORE THE DRP SUBMITTED TH AT THE COMPANY HAS NOT INCURRED ANY COSTS WHILE EXTENDING THE CORPORATE GUARANTEE TO THE AES AND HENCE NO ADJUSTM ENT TO THE ALP IS REQUIRED TO BE MADE. FOR THIS PURPOSE THE AS SESSEE ALSO RELIED ON THE DECISION OF THE CHENNAI ITAT IN THE C ASE OF REDINGTON INDIA LTD. V. JCIT (ITA NO.513/MDS/2014). 33.2 THE DRP OBSERVED THAT THE ASSESSEE IS FOU ND TO HAVE EXTENDED CORPORATE GUARANTEES TO ITS AES - - ITA 585, 927/15 ETC. 85 DURING THE YEAR WITHOUT RECEIVING ANY SERVICE CHARG ES / COMMISSION FROM THE SAID AES. HENCE, THE TPO CONSID ERED 1% OF THE CORPORATE GUARANTEE AS SERVICE CHARGES / COM MISSION AND DETERMINED THE ALP ACCORDINGLY. 33.3 FURTHER, THE DRP OBSERVED THAT THE ISSUE OF DETERMINING THE ALP ON CORPORATE GUARANTEE HAS ALREADY BEEN EXA MINED BY THE TRIBUNAL, CHENNAI BENCH IN THE CASE OF REDINGTO N INDIA LTD. V. JCIT (ITA NO.513/MDS/2014). THE TRIBUNAL HAS HEL D THAT SINCE THERE IS NO COST INVOLVED IN EXTENDING THE CORPORAT E GUARANTEE, IT WILL NOT CONSTITUTE 'AN INTERNATIONAL TRANSACTION'. THE RELEVANT PORTION OF THE ORDER OF THE ITAT OF REDINGTON INDIA LTD. V. JCIT (ITA NO.513/MDS/2014 DATED 07.07.2014) ARE AS UNDER : 94. THE ITAT, DELHI BENCH, IN THE CASE OF BHARTI AIRTEL LTD. VS. ADDL. CIT, 43 TAXMANN.COM 150, HAS HELD THAT PROVIDING OF CORPORATE GUARANTEE DOES NOT INVOLVE ANY COST TO THE ASSESSEE AND, THEREFORE, IT IS NOT 'AN INTERNATIONAL TRANSACTION', EVEN UNDER THE DEFINITION OF THE SAID TERM AS AMENDED BY THE FINANCE ACT 2012. THIS IS BECAUSE, THE GUARANTEE PROVIDED BY AN ASSESSEE DOES NOT HAVE - - ITA 585, 927/15 ETC. 86 ANY BEARING ON PROFITS, INCOME, LOSS OR ASSETS OF THE ASSESSEE. 95. IN VIEW OF THE NATURE OF CORPORATE AND BANK GUARANTEES GIVEN BY THE ASSESSEE COMPANY AND IN THE LIGHT OF THE ABOVE ORDER OF THE ITAT, DELHI BENCH, WE HOLD THAT THE TP ADDITION MADE AGAINST CORPORATE AND BANK GUARANTEES IS NOT SUSTAINABLE IN LAW. THE ADDITION IS THEREFORE DELETED. 33.4 THE DRP FOLLOWED THE DECISION OF THE TRIB UNAL, IN THE CASE OF REDINGTON INDIA LTD. V. JCIT CITED SUPRA, AND OBSERVED THAT PROVIDING OF CORPORATE GUARANTEE WILL NOT CONS TITUTE AN INTERNATIONAL TRANSACTION FOR THE PURPOSE OF DETERM INING THE ALP. HENCE, THE TPO'S ACTION OF DETERMINING THE ALP AT 8,13,99,814/- IS NOT JUSTIFIED, AND CONSEQUENTLY TH E PROPOSED UPWARD ADJUSTMENT OF 8,13,99,814/- WAS DELETED BY THE DRP. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 34. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. ADMITTEDLY, THIS ISSUE CAME FOR CONSIDE RATION BEFORE THIS TRIBUNAL IN THE CASE OF REDINGTON, CITED SUPRA , AND HELD THAT - - ITA 585, 927/15 ETC. 87 GUARANTEES WILL NOT CONSTITUTE INTERNATIONAL TRANSA CTION FOR THE PURPOSE OF DETERMINING ALP. BEING SO, FOLLOWING TH E ORDER OF THE TRIBUNAL, THIS GROUND OF APPEAL OF THE REVENUE IS T O BE DISMISSED. THE CONTENTION OF THE LD.DR IS THAT THE ORDER OF THE TRIBUNAL IN THE CASE OF REDINGTON INDIA LTD., SUPRA HAS NOT ACCEPTED BY THE DEPARTMENT AND THEY HAVE PREFERRED AN APPEAL BEFORE THE HIGH COURT OF MADRAS. FURTHER, IT WAS ST ATED THAT THE ORDER OF THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF EVEREST KANTO CYLINDERS LTD. IN ITA NO.542/MUM/2012 TO BE F OLLOWED RATHER THAN CO-ORDINATE BENCH DECISION. IN OUR CONS IDERED OPINION, JUDICIAL DISCIPLINE REQUIRES CONSISTENCY I N ITS PROCEEDINGS AND THE DECISION OF VERY CO-ORDINATE BENCH IS STARI NG AT US AND IT IS TO BE FOLLOWED ON THIS ISSUE INSTEAD OF THE DECI SION OF MUMBAI BENCH. MORE SO, THE DECISION IN FAVOUR OF THE ASSES SEE IS FOLLOWED IN VIEW OF JUDGMENT OF VEGETABLE PRODUCTS (88 ITR 192)(SC). 35. THE NEXT GROUND IS THAT THE DRP HAS ERRED BY C ONTENDING THAT FOREIGN CURRENCY NEITHER A SHARE/STOCK NOR A C OMMODITY FOR THE PURPOSE OF SEC.43(5) OF THE ACT AND BY EXTENSIO N THE TRANSACTIONS OF FOREIGN EXCHANGE CONTRACT CANNOT BE VIEWED AS - - ITA 585, 927/15 ETC. 88 SPECULATIVE TRANSACTION AND THE CONSEQUENT LOSSES A RE NOT SPECULATIVE LOSSES FOR THE PURPOSE OF SECTION 43(5) . THERE IS NO FINDING BY THE DRP THAT THE SAID LOSS WAS PROVIDED WITH COGENT MATERIAL EVIDENCE. 36. THE FACTS OF THE ISSUE ARE THAT THE AO TREAT ED THE LOSS OF 55,55,03,695/- FROM THE 'CANCELLATION OF FORWARD C ONTRACTS' AS A SPECULATIVE LOSS AND DISALLOWED ITS SET OFF AGAINST THE REGULAR BUSINESS INCOME. THE ASSESSEE IN P&L ACCOUNT DEBITE D AN AMOUNT OF 55,55,03,695/- BY WAY OF LOSS FROM 'CANCELLATION OF FORWARD CONTRACTS. THE ASSESSING OFFICER OPINED THA T THE CANCELLATION OF FORWARD CONTRACTS ARE SPECULATIVE T RANSACTIONS U/S. 43(5) OF THE ACT AND THE RESULT LOSSES ARE SPE CULATIVE LOSSES. HENCE HE DISALLOWED THE SAME AND ADDED TO THE TOTAL INCOME. 36.1 BEFORE THE DRP, THE ASSESSEE COMPANY SUBMITT ED THAT THE 'FORWARD CONTRACTS ARE ENTERED INTO BY THE ASSESSE E TO REDUCE THE INCIDENCE OF UNFORESEEN LOSSES AND DEPRECIATION OF RUPEE VALUE THEREBY PROTECTING THE INTERESTS OF BUSINESS. THE 'FORWARD CONTRACT TRANSACTIONS WERE ENTERED WITH BANKS TO R EDUCE ITS RISK ON LOSSES FLUCTUATIONS IN THE FOREIGN CURRENCY RATE S. HENCE IT WILL - - ITA 585, 927/15 ETC. 89 AMOUNT TO A BUSINESS TRANSACTION AND NOT A SPECULAT IVE TRANSACTION FOR THE PURPOSE OF SEC.43(5) OF THE ACT . FOR THIS PURPOSE THE ASSESSEE ALSO RELIED ON SEVERAL CASE LA WS. 37. THE DRP OBSERVED THAT IN VIEW OF THE ABOVE D ISCUSSIONS AND JUDICIAL PRONOUNCEMENTS IT IS CLEAR THAT FOREIG N CURRENCY IS NEITHER A SHARE/STOCK NOR A COMMODITY FOR THE PURPO SE OF SEC.43(5) OF THE ACT. THEREFORE, THE TRANSACTIONS OF FOREIGN EXCHANGE CONTRACTS CANNOT BE VIEWED AS SPECULATIVE TRANSACTIONS. CONSEQUENTLY, ASSESSEES LOSSES FROM THE FORWARD CONTRACT TRANSACTION IS NOT A SPECULATIVE LOSSES FO R THE PURPOSE OF SEC.43(5). THEREFORE, THE AO IS NOT JUSTIFIED IN T REATING THE LOSSES FROM THE FORWARD CONTRACT TRANSACTION AS SPECULATIV E LOSSES. THE AO IS DIRECTED TO CONSIDER THE LOSSES FROM THE FORW ARD CONTRACT TRANSACTIONS AS REGULAR BUSINESS LOSSES AND ALLOW T HEIR SET OFF AGAINST OTHER BUSINESS PROFITS OF THE ASSESSEE. TH E ASSESSEE SUCCEEDS IN THIS REGARD. 38. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BE FORE THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007- - - ITA 585, 927/15 ETC. 90 08 IN ITA NO.1159/MDS/2012 DATED 31.12.2015. THE T RIBUNAL HELD AS FOLLOWS : 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. SIMILAR ISSUE CAME U P FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF DCIT VS ASVINI FISHERIES P. LTD IN I.T.A.NO. 2246/MDS/2014 AND THE TRIBUNAL VIDE ITS ORDER DATED 18.12.2015 HAS OB SERVED AS UNDER: 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. SIMILAR ISSUE WAS CONSIDERED B Y THIS TRIBUNAL WHERE ONE OF THE MEMBERS IS A PARTY, IN TH E CASE OF M/S MAJESTIC EXPORTS VS THE JOINT CIT IN I.T.A.NOS.1336 AND 3072/MDS/2014, DATED 24.7.2015, WHEREIN IT HAS BEEN HELD AS UNDER: 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GARMENTS. DURING THE COURSE OF EXPORT, THE ASSESSEE ENTERED INTO DERIVATIVE CONTRACT. THE ASSESSEE INCURRED LOSS IN THIS TRANSACTION. THE ASSESSEE CLAIMED IT AS BUSINESS LOSS. ACCORDING TO THE ASSESSING OFFICER THIS LOSS WAS NOT BUSINESS LOSS AND IT IS A SPECULATIVE LOSS AND THIS TRANSACTION IS SPECULATIVE IN NATURE AS SU CH THE LOSS INCURRED ON THIS TRANSACTION CANNOT BE SET OFF AGAINST BUSINESS INCOME OF THE ASSESSEE. ACCORDING TO THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE, THE DERIVATIVE TRANSACTION CANNOT FALL UNDER SEC.73. EXPLANATION TO SEC.73 CREATES A DEEMING FICTION BY WHICH AMONG THE ASSESSEE, WHO IS A COMPANY, AS INDICATED IN THE SAID EXPLANATION DEALING WITH THE TRANSACTION OF SHARE AND SUFFER LO SS, SUCH LOSS SHOULD BE TREATED TO BE SPECULATIVE TRANSACTION WITHIN THE MEANING OF SEC.73 OF THE ACT , NOTWITHSTANDING THE FACT THAT THE DEFINITION OF - - ITA 585, 927/15 ETC. 91 SPECULATIVE TRANSACTION MENTIONED IN SEC.43(5) OF THE ACT, THE TRANSACTION IS NOT OF THAT NATURE AS THERE HAS BEEN ACTUAL DELIVERY OF THE SCRIPS OF SHARE. A S PER THE DEFINITION OF SEC.43(5), TRADING OF SHARES WHICH IS DONE BY TAKING DELIVERY DOES NOT COME UNDER THE PURVIEW OF THE SAID SECTION. SIMILARLY, AS PER CLAUSE (D) OF SEC.43(5), DERIVATIVE TRANSACTION IN SHARES IS ALSO NOT SPECULATION TRANSACTION AS DEFIN ED IN THE SAID SECTION. THEREFORE, BOTH PROFIT/LOSS F ROM ALL THE SHARE DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING, SO FAR AS SEC.43(5) OF THE ACT IS CONCERNED. AGAIN, IN VIEW OF THE FACT THAT BOTH DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTIONS ARE NON-SPECULATIVE AS FAR AS SEC.43(5) IS CONCERNED, IT FOLLOWS THAT BOTH WILL H AVE THE SAME TREATMENT AS FAR AS APPLICATION OF EXPLANATION TO SEC.73 IS CONCERNED. THEREFORE, AGGREGATION OF THE SHARE TRADING PROFIT AND LOSS FR OM DERIVATIVE TRANSACTIONS SHOULD BE DONE BEFORE THE EXPLANATION TO SEC.73 IS APPLIED. THE ABOVE VIEW HAS BEEN TAKEN BY SPECIAL BENCH OF THIS TRIBUNAL, MUMBAI BENCH, IN THE CASE OF CIT V. CONCORD COMMERCIAL PVT. LTD. (2005) 95 ITD 117 (MUM)(SB). IN THIS CASE, THE SPECIAL BENCH HELD THAT : BEFORE CONSIDERING WHETHER THE ASSESSEES CASE IS HIT BY THE DEEMING PROVISION OF EXPLANATION TO SEC. 73 OF THE ACT, THE AGGREGATE OF THE BUSINESS PROFIT / LOSS HAS TO BE WORKED OUT BASED ON THE NON-SPECULATIVE PROFITS; EITHER IT IS FROM SHARE DELIVERY OR FROM SHARE DERIVATIVE. 8. FROM THE ABOVE, IT IS CONCLUDED THAT BOTH TRADING OF SHARES AND DERIVATIVE TRANSACTIONS ARE N OT COMING UNDER THE PURVIEW OF SECTION 43(5) OF THE ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTION EXCLUSIVELY FOR PURPOSES OF SECTION 28 TO 41 OF THE ACT. AGAIN, THE FACT THAT BOTH DELIVER Y - - ITA 585, 927/15 ETC. 92 BASED TRANSACTION IN SHARES AND DERIVATIVE TRANSACTIONS ARE NON-SPECULATIVE AS FAR AS SECTION 43(5) IS CONCERNED GOES TO CONFIRM THAT BOTH WILL HAVE SAME TREATMENT AS REGARDS APPLICATION OF THE EXPLANATION TO SECTION 73 IS CONCERNED, WHICH CREATES A DEEMING FICTION. NOW, BEFORE APPLICATION OF THE SAID EXPLANATION, AGGREGATION OF THE BUSINES S PROFIT/LOSS IS TO BE WORKED OUT IRRESPECTIVE OF THE FACT, WHETHER IT IS FROM SHARE DELIVERY TRANSACTION OR DERIVATIVE TRANSACTION. 8.1 NOW, THIS VIEW HAS BEEN TAKEN BY CO- ORDINATE, CHENNAI IN THE CASE M/S. AISHWARYA & CO P. LTD IN ITA NO.860/MDS/2014, DATED 29.05.2015, WHEREIN THEY FOLLOWED THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF M/S. BALJIT SECURITIES PV T. LTD. (88 CCH 313) WHEREIN HELD AS UNDER:- CLAUSE (D) OF SECTION 43(5) BECAME EFFECTIVE WITH EFFECT FROM 1ST APRIL, 2006. THEREFORE, PRIOR TO 1ST APRIL, 2006 ANY TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES WAS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIP WAS A SPECULATIVE TRANSACTION. SUB-SECTION 1 OF SECTION 73 PROVIDES AS FOLLOWS: (1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATION BUSINESS CARRIED ON BY THE ASSESSEE, SHALL NOT BE SET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHER SPECULATION BUSINESS. THE RESULTANT EFFECT WAS THAT ANY LOSS ARISING OUT OF SPECULATIVE TRANSACTION COULD ONLY HAVE BEEN SET OFF AGAINST PROFITS ARISING - - ITA 585, 927/15 ETC. 93 OUT OF SPECULATIVE TRANSACTION. IN THE PRESENT CASE, THE ASSESSEE, AS ALREADY INDICATED, HAS BEEN DEALING IN SHARES WHERE DELIVERY WAS IN FACT TAKEN AND ALSO IN SHARES WHERE DELIVERY WAS NOT ULTIMATELY TAKEN. IN OTHER WORDS, THE ASSESSEE HAS BEEN DEALING IN ACTUAL SELLING AND BUYING OF SHARES AS ALSO DEALING IN SHARES ONLY FOR THE PURPOSE OF SETTLING THE TRANSACTION OTHERWISE THAN BY ACTUAL DELIVERY. THE QUESTION ARISE WHETHER THE LOSSES ARISING OUT OF THE DEALINGS AND TRANSACTION IN WHICH THE ASSESSEE DID NOT ULTIMATELY TAKE DELIVERY OF THE SHARES OR GIVE DELIVERY OF THE SHARES COULD BE SET OFF AGAINST THE INCOME ARISING OUT OF THE DEALINGS AND TRANSACTIONS IN ACTUAL BUYING AND SELLING OF SHARES. AN ANSWER TO THIS QUESTION IS TO BE FOUND IN THE EXPLANATION APPENDED TO SECTION 73 WHICH READS AS FOLLOWS: EXPLANATION: WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCOME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SECURITIES, OR A COMPANY THE PRINCIPAL BUSINESS OF WHICH IS THE BU9SINESS OF BANKING OR THE GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE. IN ORDER TO RESOLVE THE ISSUE BEFORE US, THE SECTION HAS TO BE READ IN THE MANNER AS FOLLOWS: EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY ( . . . .. .. .. .. .. .. .. . - - ITA 585, 927/15 ETC. 94 .. .. . ) CONSIST IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHASE AND SALE OF SUCH SHARES. IT WOULD, THUS, APPEAR THAT WHERE AN ASSESSEE, BEING THE COMPANY, BESIDES DEALING IN OTHER THINGS ALSO DEALS IN PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS. THE ASSESSEE, IN THE PRESENT CASE, PRINCIPALLY IS A SHARE BROKER, AS ALREADY INDICATED. THE ASSESSEE IS ALSO IN THE BUSINESS OF BUYING AND SELLING OF SHARES FOR SELF WHERE ACTUAL DELIVERY IS TAKEN AND GIVEN AND ALSO I N BUYING AND SELLING OF SHARES WHERE ACTUAL DELIVERY WAS NOT INTENDED TO BE TAKEN OR GIVEN. THEREFORE, THE ENTIRE TRANSACTION CARRIED OUT BY THE ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UMBRELLA OF SPECULATIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISING OUT OF DERIVATIVES FROM THE INCOME ARISING OUT OF BUYING AND SELLING OF SHARES. THIS IS WHAT THE LEARNED TRIBUNAL HAS DONE. 9. FROM THE ABOVE DECISION OF THE CALCUTTA HIGH COU RT IN THE CASE OF BALJIT SECURITIES PVT. LTD. CITED SU PRA, THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT TOTAL TRANSACTION CONSIDERED FOR DETERMINING THIS BUSINESS LOSS FROM DERIVATIVE TRANSACTIONS CANNOT BE MORE THAN THE TO TAL EXPORT TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF THE DERIVATIVE TRANSACTION IS IN EXCESS OF EXPORT TURNOVER, THEN THAT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS TRANSACTIONS TO BE CONSIDERED AS SPECULATIVE LOSS O NLY AS THAT EXCESS DERIVATIVE TRANSACTION HAS NO PROXIM ITY WITH EXPORT TURNOVER AND THE ASSESSING OFFICER IS DIRECTED TO COMPUTE ACCORDINGLY. THIS GROUND IS ALL OWED AS INDICATED ABOVE. - - ITA 585, 927/15 ETC. 95 5. FURTHER, THE MUMBAI BENCH OF ITAT IN THE CASE OF ARASKA DIAMOND P. LTD VS ACIT, 152 ITD 203, HAS HE LD AS UNDER: TOTAL SALES DURING THE YEAR AMOUNTED TO ` 27.78 C RORES, THAT THE AO AND THE FAA HAD HELD SUCH TRANSACTION W ERE SPECULATIVE IN NATURE AND HAD DISALLOWED THE CLAIM MADE BY THE ASSESSEE, THAT THE ASSESSEE WAS OF THE OPINIO N THAT TRANSACTIONS ENTERED INTO BY IT WERE NOT SPECULATIV E TRANSACTIONS. ITAT FOUND THAT THE AMOUNT INVOLVED IN THE FORWARD CONTRACT (FC) WAS MORE THAN 100% OF THE TURNOVER OF THE ASSESSEE, THAT FC WERE NOT RELATABL E TO SPECIFIC BILLS, THAT THE ASSESSEE HAD NOT RELATED A NY SINGLE BILL TO ANY OF THE CONTRACT AND HAD NOT PROV IDED ANY PURCHASE ORDER DURING THE ASSESSMENT OR APPELLATE PROCEEDINGS. ITAT FOUND THAT IN THE CASE UNDER CONSIDERATION ASSESSEE WAS NOT DEALING IN FOREIGN EXCHANGE, THEREFORE TRANSACTIONS ENTERED IN TO BY IT IN FOREIGN EXCHANGE CANNOT BE HELD TO BE HEDGING TRANSACTIONS. AS THE ASSESSEE WAS DEALING I N DIAMONDS AND FC ENTERED INTO ONLY FOR DIAMONDS WOULD HAVE BEEN COVERED BY THE PROVISO (A) TO THE SECTION 43(5)OF THE ACT. AS HELD BY THE HON'BLE HIG H COURT OF CALCUTTA IN THE MATTER OF GOUREPORE CO. LT D ,ONUS WAS ON THE ASSESSEE TO PROVE THAT THE TRANSACTIONS IN QUESTION WERE NOT OF A SPECULATIVE NATURE. ITAT WAS OF THE OPINION THAT IT HAD FAILED TO DISCHARGE THE ONUS CAST UPON HIM BY THE STATUTE. IT WAS ALSO NOT ABLE TO CONTRADICT THE FINDING OF FACT THAT BOOKING AND CANCELLATION OF FC OF FOREIGN EXCHANGE WERE NOT IN RESPECT OF SPECIFIED EXPORT OR IMPORT. BESIDES, FINDING OF FACT GIVEN BY THE REVENUE AUTHORITIES REMAINED UN-CONTRAVENED THAT LOSS IN QUESTION, SHOWN BY IT PERTAINED TO THOSE FC TRANSACTIONS, AGAINST WHICH NO ACTUAL DELIVERY OF FOREIGN EXCHANGE WAS MADE. ON APPRECIATION OF THE FACTS SURROUNDING THE TRANSACTION ITAT HAD REACHED AT THE CONCLUSION THAT TRANSACTIONS ENTERED IN TO BY T HE - - ITA 585, 927/15 ETC. 96 ASSESSEE WERE SPECULATIVE IN NATURE AND THE CASE OF THE ASSESSEE IS NOT COVERED BY PROVISO(A) OF THE SECTION 43(5) OF THE ACT. DISPUTED TRANSACTIONS WERE SPECULATIVE AND NOT HEDGING TRANSACTION, THAT THE ASSESSEE COULD NOT RELATE ANY SINGLE BILL TO ANY OF THE CONTRACT AND I T HAD NOT PROVIDED DETAIL OF ANY PURCHASE ORDER RELATABLE TO SPECIFIC TRANSACTION, DURING THE ASSESSMENT OR APPELLATE PROCEEDINGS. THUS, THE TRANSACTIONS UNDERTAKEN BY IT HAVE TO BE TAKEN AS TRANSACTIONS RELATABLE TO FOREIGN EXCHANGE. ITAT WAS OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER F ROM ANY LEGAL OR FACTUAL INFIRMITY. THEREFORE, CONSIDER ING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, I TAT CONFIRMED HIS ORDER FAA AND DECIDE EFFECTIVE GROUND AGAINST THE ASSESSEE. 6. IN VIEW OF THE ABOVE ORDERS OF THE TRIBUNAL, WE ARE OF THE OPINION THAT THE ASSESSING OFFICER HAS TO CONSIDER THE FOREIGN EXCHANGE DERIVATIVE IN PROPORTION TO EXPORT TURNOVER AS REGULAR BUSINESS TRANSACTION OF THE ASSESSEE. IF THE DERIVATIVE TRANSACTION UNDERTAKEN BY THE ASSESSEE IS IN EXCESS OF EXPORT TURNOVER THEN THAT LOSS SUFFERED I N RESPECT OF THAT PORTION OF EXCESS TRANSACTION HAS TO BE CON SIDERED AS SPECULATIVE LOSS ONLY AND THAT EXCESS DERIVATIVE T RANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER AND THE ASSES SING OFFICER IS DIRECTED TO COMPUTE ACCORDINGLY. FURTHE R, THE ASSESSING OFFICER HAS TO SEE WHETHER THERE IS ANY PREMATURE CANCELLATION OF FORWARD CONTRACT OF FOREI GN EXCHANGE AND THAT TRANSACTION SHOULD BE TAKEN OUT F OR THE PURPOSE OF CONSIDERING THE BUSINESS LOSS AND ONLY T HE TRANSACTIONS WHICH ARE COMPLETED TO BE CONSIDERED F OR THE PURPOSE OF DETERMINING THE BUSINESS LOSS FROM THES E FOREIGN EXCHANGE FORWARD CONTRACT. WITH THIS OBSER VATION, WE REMAND THIS ISSUE TO THE FILE OF THE ASSESSING O FFICER FOR FRESH CONSIDERATION. 7. BEFORE US, THE LD. REPRESENTATIVE RELIED ON TH E JUDGMENT OF GUJARAT HIGH COURT IN CIT VS FRIENDS AND FRIENDS - - ITA 585, 927/15 ETC. 97 SHIPPING P. LTD, [2013] 217 TAXMAN 267, FOR THE PRO POSITION THAT IF THE ASSESSEE FAILED TO TAKE DELIVERY WIT HIN THE PERIOD INDICATED IN CONTRACT AND THE ASSESSEE HAD GIVEN INSTRUCTIONS TO BANK FOR CANCELLATION OF CONTRACT O N PAYMENT OF AGREED CHARGES TO THE BANK THESE TRANSACTIONS CA NNOT BE CONSIDERED AS SPECULATIVE TRANSACTION. HOWEVER, TH ERE IS NO FINDING IN THIS JUDGMENT TOWARDS THIS EFFECT AND TH E RELIANCE PLACED BY THE ASSESSEE IS MISPLACED. MORE SO, THI S ISSUE WAS CONSIDERED BY THE MUMBAI TRIBUNAL WHILE DELIVER ING THE DECISION IN THE CASE OF ARASKA DIAMOND P. LTD, 152 ITD 203, AND AFTER FOLLOWING THE JUDGMENTS OF CALCUTTA HIGH COURT IN THE CASE OF BENGAL & ASSAM CO. LTD VS CIT 227 CTR 3 99, AND BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT V S BADRIDAS GAURIDU P. LTD 261 ITR 256, THE TRIBUNAL C AME TO THE CONCLUSION THAT THE TRANSACTIONS, WHICH WERE PR EMATURELY CANCELLED, CANNOT BE CONSIDERED AS BUSINESS TRANSAC TION AND IT IS TO BE CONSIDERED AS SPECULATIVE TRANSACTI ON. 12. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE REMIT THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER. T HE ASSESSING OFFICER SHALL RECONSIDER THE ISSUE AFRESH IN THE LIGHT OF THE ABOVE ORDER OF THIS TRIBUNAL AFTER GIV ING ADEQUATE OPPORTUNITY TO THE ASSESSEE. 38.1 LATER, THE ASSESSEE FILED MA IN MA NOS.95 & 96/MDS/16 AND THE SAME WAS DISPOSED BY THE TRIBUNAL VIDE ORDE R DATED 29.7.2016, WHEREIN IT WAS HELD AS UNDER : WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. THE TRIBUNAL WHILE HOLDING THAT THE LOSS ARISING OUT OF HEDGING CONTRACTS ENTERED I NTO BY THE ASSESSEE IN THE COURSE OF BUSINESS HAS TO BE ALLOWED AS BUSINESS LOSS AND NOT TO BE CONSIDERED A S SPECULATION LOSS. WHILE HOLDING SO, THE TRIBUNAL H AS PLACED RELIANCE ON VARIOUS DECISIONS OF CO-ORDINATE BENCH INCLUDING THE DECISION IN THE CASE OF M/S MAJ ESTIC EXPORTS VS JCIT IN I.T.A.NOS.1336 & 3072/MS/2014, DATED 24.7.2015. BEFORE US ALSO, THE LD. AR PLACED HIS - - ITA 585, 927/15 ETC. 98 RELIANCE ON THE DECISION IN THE CASE OF MAJESTIC EX PORTS (SUPRA) AND REQUESTED FOR DIRECTION AS GIVEN IN THE ABOVE CASE. IN OUR OPINION, THE TRIBUNAL HAS REMITTED TH E ISSUE OBSERVING THAT THE ISSUE IS COVERED BY VARIOUS JUDG MENTS INCLUDING MAJESTIC EXPORTS (SUPRA). BEING SO, AT T HIS STAGE, THE ASSESSEE CANNOT HAVE ANY GRIEVANCE. TH E ASSESSING OFFICER WOULD LOOK INTO ALL THE JUDGMENTS CITED IN THE ORDER (SUPRA). ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE ARGUMENT OF THE LD. AR. IN VIEW OF THE ABOVE, WE REMIT THIS ISSUE TO THE FI LE OF THE ASSESSING OFFICER ON SIMILAR DIRECTIONS. 38.2 IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.585/MDS/15 AND THE APPEAL OF THE REVENUE IN ITA NO.927/MDS/15 ARE PARTLY ALLOWED FOR STATISTICAL PU RPOSES. ITA NO.267/MDS/16 39. AT THE TIME OF HEARING, THE LD. AR SUBMITTE D THAT THE ASSESSEE DID NOT PRESS THE FOLLOWING GROUNDS AND TH E SAME IS DISMISSED AS NOT PRESSED : 1. ERRED IN LAW BY MAKING A REFERENCE TO THE TPO W ITHOUT MEETING THE PRECONDITIONS FOR SUCH REFERENCE UNDER SECTION 92CA OF THE ACT. 2. OUGHT TO HAVE APPRECIATED THE FACT THAT THERE WA S NEITHER NECESSITY NOR EXPEDIENCY FOR SUCH REFERENCE AS THER E WAS NO ATTEMPT ON THE PART OF THE ASSESSEE TO WILLFULLY UN DERSTATE THE VALUE OF ITS INTERNATIONAL TRANSACTIONS. - - ITA 585, 927/15 ETC. 99 3. ERRED IN NOT PROVIDING OPPORTUNITY BEFORE REFERR ING THE TRANSFER PRICING ISSUES TO THE LEARNED TPO. THE AS SESSEE PRAYS THAT THE SAME IS IN VIOLATION OF PRINCIPLES O F NATURAL JUSTICE AS THE AO HAS NOT INDEPENDENTLY APPLIED HIS JUDGMENT TO THE ORDER OF THE TPO WITH DUE COGNIZANC E TO HE ASSESSEES VARIOUS REBUTTALS AND HAS MECHANICALLY A CCEPTED THE CONCLUSIONS STATED IN THE TPOS ORDER. 40. THE NEXT GROUND IS WITH REGARD TO DISALLOWA NCE OF MANAGEMENT FEES PAID TO INDIA OFFSHORE INC., USA OF 28,44,58,896/-. 41. THIS ISSUE IS COVERED BY THE ORDER OF THE TR IBUNAL IN ITA NO.585/MDS/2015 IN EARLIER PARA. FOLLOWING THE SAM E, THIS ISSUE IS ALLOWED. 42. THE NEXT GROUND IS WITH REGARD TO UPHOLDING ADJUSTMENT OF 1,95,81,130/- TOWARDS CHARGES ON CORPORATE GUARANT EE ISSUED ON BEHALF OF AES WHICH IS NOT CORRECT AND NOT JUSTI FIED. 43. THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY OUR ORDER IN EARLIER PARA. ACCORDINGLY, THIS GROUN D IS ALLOWED. 44. THE NEXT GROUND IS WITH REGARD TO DISALLOWIN G 10,42,456/- U/S.14A R.W. RULD 8D WITHOUT APPRECIATI NG THE FACT THAT THE ASSESSEE HAS CAPITAL AND RESERVES OF 2,357 CRORES AS AGAINST THE INVESTMENT OF 25.63 CRORES. - - ITA 585, 927/15 ETC. 100 45. THIS ISSUE IS DISPOSED OF AS DISCUSSED IN EARLI ER PARA FOR THE ASSESSMENT YEAR 2010-2011. WE REMIT THIS ISSUE TO T HE FILE OF THE ASSESSING OFFICER ON SIMILAR LINE. 46. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF TAX CREDIT U/S.90 OF THE ACT. 47. THIS ISSUE IS DISPOSED OF AS DISCUSSED IN EARLI ER PARA FOR THE ASSESSMENT YEAR 2010-2011. WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER ON SIMILAR LINE. 48. THE NEXT ISSUE IS WITH REGARD TO DISALLOWANCE O F INTEREST U/S.36(1)(III) OF THE ACT. 49. THIS ISSUE CAME FOR CONSIDERATION BEFORE THIS T RIBUNAL FOR THE A.Y. 2010-2011. ACCORDINGLY, THIS GROUND IS PARTLY ALLO WED AS DISCUSSED IN EARLIER PARAGRAPHS 31 TO 31.8. 50. THE NEXT ISSUE WAS RAISED BY THE ASSESSEE IN FO LLOWING GROUNDS:- 29. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, EVEN I TITS NOT ALLOWED AS A BUSINESS EXPENDITURE, THEN INTEREST EX PENDED TO MAKE INVESTMENTS IN SUBSIDIARIES IS ALLOWED U/S.57( III) OF THE ACT. - - ITA 585, 927/15 ETC. 101 30. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE EXPENDITURE INCURRED TOWARDS INTEREST IS ALLOWABLE U/S.37(1) OF THE ACT AS IT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS . 51. THIS ISSUE DOES NOT REQUIRE ANY ADJUDICATION IN VIEW OF OUR FINDINGS IN IMMEDIATE EARLIER PARA OF THE TRIBUNALS ORDER F OR THE ASSESSMENT YEAR 2010-2011 AND THIS GROUND IS DISMISSED. THIS ITA NO.267/MDS/2015 PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA NO.668/MDS/2016 : 52. THE REVENUE HAS RAISED THE FOLLOWING GROUND:- 2.1 THE HONBLE DRP ERRED IN DIRECTING THE ASSESSI NG OFFICER TO GIVE UPWARD ADJUSTMENT OF 7,28,32,816/ - BEING THE ARMS LENGTH VALUE OF SERVICE CHARGES RECEIVABLE BY THE ASSESSEE FROM IS AES ON CORPORATE GUARANTEE ISSUED ON BEHALF OF AES AND NOT DISCLOSED IN FORM 3CB . 53. IN VIEW OF OUR FINDINGS IN REVENUES APPEAL IN THE ASSESSMENT YEAR 2010-2011 IN EARLIER PARA, THIS GRO UND IS DISMISSED. 54. THE ASSESSEES APPEAL IN ITA NO.267/MDS/2016 I S PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IN ITA NO.668/MDS/2016 IS DISMISSED. 55. TO SUM UP, THE ASSESSEES APPEAL IN IT A NO. 585/MDS/2015 , 267/MDS/ 2016 AND THE REVENUES APPEAL IN I.T.A. - - ITA 585, 927/15 ETC. 102 NO.927/MDS/2015 IS PARTLY ALLOWED FOR STATISTICAL P URPOSES. REVENUES APPEAL IN ITA NO.668/MDS/2016 IS DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 14 TH OF SEPTEMBER, 2016 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 14 TH SEPTEMBER, 2016. MPO* 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.