Kirloskar Oil Engines Ltd., Pune V. Additional Commissioner of Income-tax,

ITA 616/PUN/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9300 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-11-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 01-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A S DESHPANDE
• Keywords: Capital asset; Depreciation; Earning of tax free income; Bad and doubtful debts; Avoidance of tax
• Section: 143(3); 2(14); 14A; 28

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.616/PUN/2014 / ASSESSMENT YEAR : 2007-08 KIRLOSKAR OIL ENGINES LIMITED, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411003. PAN : AAACP3590P. . / APPELLANT V/S JT. COMMISSIONER OF INCOME TAX, RANGE 9, AKURDI, PUNE 44. . / RESPONDENT . / ITA NO.963/PUN/2014 / ASSESSMENT YEAR : 2007-08 DY.COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE. . / APPELLANT V/S KIRLOSKAR OIL ENGINES LIMITED, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411003. PAN : AAACP3590P. . / RESPONDENT ASSESSEE BY : SHRI C.H. NANIWADEKAR & SHRI A.S. DESHPANDE. REVENUE BY : SHRI RAJEEV KUMAR, CIT. / ORDER PER ANIL CHATURVEDI, AM : 1. THESE CROSS-APPEALS FILED BY ASSESSEE AND REVENUE U /S 253 OF THE ACT, EMANATE OUT OF THE ORDER OF COMMISSIONER O F INCOME- TAX (A) 2, NASHIK DT.24.02.2014 FOR A.Y. 2007-08. / DATE OF HEARING : 01.02.2018 / DATE OF PRONOUNCEMENT: 12.02.2018 2 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUS INESS OF MANUFACTURING OF ENGINES, GENERATORS, ENGINE PARTS ETC. ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2007-08 ON 27.10.2007 DECLARING TOTAL INCOME OF RS.1,55,61,71,300/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER ASSESSMEN T WAS FRAMED U/S 143(3) OF THE ACT VIDE ORDER DT.30.12.2009 AN D THE TOTAL INCOME WAS DETERMINED AT RS.1,65,82,98,190/-. AGGRIEV ED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.C IT(A), WHO VIDE ORDER DT.24.02.2014 (IN APPEAL NO.NSK/CIT(A)-2/733/20 13-14) GRANTED SUBSTANTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE AND REVENUE ARE NOW IN APPEAL BEFORE US. 3. THE GROUNDS RAISED BY THE ASSESSEE IN APPEAL NO.616/PUN/2014 READS AS UNDER : 1.0 BAD DEBTS AND IRRECOVERABLE BALANCES WRITTEN OFF-- RS.21,11,554/- THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN DIS ALLOWING IRRECOVERABLE DEBIT BALANCES AS WRITTEN OFF UNDER S ECTION 36(1)(VII) OF THE ACT WHEN THE ASSESSEE HAS CLAIMED AMOUNT OF RS.21,11,554/- UNDER SECTION 28 OF THE ACT. THE LEA RNED CIT(A) FURTHER ERRED IN ALLOWING HIM TO BE MISGUIDE D WITH NATURE OF CLAIM U/S. 28 AND BAD DEBTS U/S. 36. HE F AILED TO APPRECIATE THE WRITTEN AND ORAL ARGUMENTS PUT BEFOR E HIM. 2.0 DISALLOWANCE OF LATE DELIVERY FEES- RS. 21,57,8 15/- THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN DIS ALLOWING LATE DELIVERY FEES OF RS.21,57,815/- ON THE GROUND THAT THE PROVISION IS MADE ON AD-HOC BASIS. HE FAILED TO APP RECIATE THAT THE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOU NTING AND EXPENSES RELATING THE PREVIOUS YEAR HAVE BEEN P ROPERLY PROVIDED FOR TO ARRIVE AT THE CORRECT PROFIT DURING THE YEAR. 3.0 DISALLOWANCE OF EXPENSES U/S 14A - RS. 1,20,90,752/- THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN DIS ALLOWING RS.1,20,90,752/- U/S. 14A OF THE ACT. THE LEARNED C IT(A) ERRED IN CONSIDERING THE INTEREST EXPENDITURE OF R S 1,10,90,752/- FOR THE PURPOSE OF DISALLOWANCE WHEN THE RULE 3 MANDATES THAT IT IS ONLY THE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, H AS TO BE CONSIDERED. THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ATTRIBUTABLE FOR EARNING DIVIDEND. THE CIT(A) COULD NOT POINT OUT ANY OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE FOR EARNING THE TAX FREE INCOME AND ARBITRARILY MAD E AD-HOC DISALLOWANCE OF RS.10,00,000/- AND NO NEXUS OF THE EXPENDITURE WITH THE TAX FREE INCOME WAS ESTABLISHE D. 4. ON THE OTHER HAND, THE GROUND RAISED BY THE REVENUE IN APPEAL NO.963/PUN/2014 READS AS UNDER : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) IS JUSTIFIED IN HOLDING THAT THE CO ST OF ALLIED CIVIL CONSTRUCTION AND ERRECTION AND COMMISSIONING ARE ELIGIBLE FOR THE SAME DEPRECIATION RATE AS APPLICABLE FOR WI NDMILL WITHOUT APPRECIATING THAT THESE ARE NOT THE INTEGRA L PART OF THE WINDMILL WITHOUT WHICH THE WINDMILL CANNOT BE WORKE D. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITI ON OF RS . 45,69,505/-ON ACCOUNT OF DEBIT BALANCES WRITTEN OFF BY ADMITTING THE NEW EVIDENCES FILED BY THE ASSESSEE A ND WITHOUT GIVING ANY OPPORTUNITY TO THE AO TO EXAMINE THE SAME AT HIS LEVEL. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITI ON OF RS. 15,60,235 ON ACCOUNT OF LIQUIDATED DAMAGES BY ADMIT TING THE NEW EVIDENCES, WITHOUT GIVING AN OPPORTUNITY TO THE AO TO EXAMINE THE SAME AT HIS LEVEL. 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW , THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITION OF RS . 15,60,823/- ON THE ISSUE OF PROVISION FOR L I QUIDATED DAMAGES , WITHOUT APPRECIATING THAT THE PROVISION HAS NOT BEEN MADE ON A SCIENTIFIC BASIS? 5.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) IS JUSTIFIED IN RESTRICTING THE ADD ITION MADE TO RS.1,20,90,752/- AS AGAINST THE ADDITION MADE OF RS . 8,01,87,883/- MADE ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES FOR EARNING TAX FREE DIVIDENDS U/S. 14A? 6. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITI ON OF RS.12,46,100/- MADE U/S 40A(2) OUT OF COMMISSION PA ID TO DIRECTORS WITHOUT JUSTIFYING THE REASONABLENESS OF THE P AYMENT TO DIRECTORS? 7. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITI ON MADE ON THE ISSUE OF PROVISION FOR WARRANTY, WITHOUT APPREC IATING THAT THE PROVISION HAS NOT BEEN MADE ON A SCIENTIFIC BAS IS. 8A. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN NOT APPRECIATIN G THAT THE INVESTMENT BY THE ASSESSEE COMPANY IN PREFERENCE SH ARES OF A LOSS SUFFERING COMPANY WAS ONLY A GUISE OF PROVID ING FUNDS TO THE LOSS SUFFERING COMPANY SO AS TO RESTRUCTURE ITS DEBTS. 4 8B. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN NOT APPRECIATING T HAT KFIL WAS A COMPANY WHICH HAD HUGE ACCUMULATED LOSSES AND PROMOTED BY THE ASSESSEE COMPANY, AND PREFERENCE SH ARES WERE PURCHASED AND REDEEMED BY THE COMPANY AS A CONVENIENT ARRANGEMENT FOR TAX AVOIDANCE THROUGH CL AIM OF CAPITAL LOSS. 5. WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO.616/PUN/2014. 6. BEFORE US, AT THE OUTSET, LD.A.R. SUBMITTED THAT HE DOE S NOT WISH TO PRESS GROUND NOS.1 AND 3 AND THEREFORE THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 7. GROUND NO.2 IS WITH RESPECT TO DISALLOWANCE OF LATE DELIVE RY FEE OF RS.21,57,815/-. 7.1 ON PERUSING THE DETAILS FURNISHED BY THE ASSESSEE DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTICED THAT ASSES SEE HAS INCURRED EXPENDITURE ON ACCOUNT OF LATE DELIVERY FEE W HICH WAS IN CONNECTION WITH LATE DELIVERY AND DEFICIENCY IN SERVICES. HE NOTICED THAT THIS AMOUNT INCLUDED PROVISION OF RS.37,18,638/- TOW ARDS LIQUIDATED DAMAGES. AO NOTICED THAT SIMILAR ADDITION WAS M ADE IN THE PREVIOUS ASSESSMENT YEAR FOR THE REASON THAT THE PROVISION WAS MADE ON ADHOC BASIS AND WAS EXCESSIVE. HE FURTHER NOTE D THAT ASSESSEE COULD NOT PROVIDE REQUISITE INFORMATION ABOUT THE PROVISION DESPITE VARIOUS OPPORTUNITIES GRANTED TO ASSESS EE. HE ACCORDINGLY PRESUMED THE FACTS TO BE THE SAME AS IN EA RLIER. IN THE PRESENT CASE, ACCORDING TO AO SINCE THE PROVISION WAS MA DE ON ADHOC BASIS, IT CANNOT BE ALLOWED AS DEDUCTION. AO ACCORD INGLY DISALLOWED RS.37,18,638/-. AGGRIEVED BY THE ORDER OF AO, A SSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO GRANTED PARTIAL RE LIEF TO ASSESSEE BY HOLDING AS UNDER : 5 6.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT, AND I FIND IT PARTLY ACCEPTABLE. CONSIDERING THE FA CT THAT AN AMOUNT OF RS.7,99,257/- HAS BEEN PAID IN SUBSEQUENT YEAR O N ACCOUNT OF LIQUIDATED DAMAGES, THE SAME CANNOT BE TREATED AS A D-HOC PROVISION. ON IDENTICAL ISSUE IN AY 2005-06, I HAD ALLOWED THE CLAIM OF APPELLANT TO THE EXTENT OF LIQUIDATED DAMAGES PAID IN SUBSEQUENT YEARS. THE APPELLANT HAD FILED DETAILS OF HOW THE P ROVISION HAD BEEN WORKED OUT, GIVING DETAILS OF THE INVOICE NO, CUSTO MER NAME, INVOICE AMOUNT, COPIES OF PO SHOWING LD CLAUSES, ETC. THE P ROVISION FOR LIQUIDATED DAMAGES HAD BEEN WORKED OUT ON TERMS OF PURCHASE ORDERS, DELAY IN EXECUTING THE CUSTOMER'S ORDER, ET C. OUT OF DISALLOWANCE OF RS.37,18,638/-,THE APPELLANT HAD FI LED DETAILS OF RS.31,68,638/-. NO DETAILS OF RS.6,00,000/-(DIFFERENCE OF RS.37,18,638/-LESS RS. 31,68,638/-) HAD BEEN PROVID ED. THEREFORE, DISALLOWANCE OF RS. 6,00,000/- IS CONFIRMED. CONSID ERING THE BASIS OF WORKING OF THE PROVISION RS.15,57,815/- NEEDS TO BE DISALLOWED, SINCE THE SAME IS EXCESS PROVISION. 6.3 THE TOTAL DISALLOWANCE WILL BE RS.21,57,815/- ( RS.6,00,000/- + RS.15,57,815/-). CONSIDERING THE FACTS OF THIS ASSE SSMENT YEAR, THE BALANCE AMOUNT OF RS.15,60,823/- (RS.37,18,638/- LE SS RS.6,00,000/- LESS RS.15,57,815/-) IS ALLOWED. THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS.15,60,823/-. ACCORDINGLY, T HIS GROUND IS PARTLY ALLOWED. AGGRIEVED BY THE ORDER OF LD.CIT(A), ASSESSEE IS NOW IN APP EAL BEFORE US. REVENUE IS ALSO AGGRIEVED TO THE EXTENT OF R ELIEF GRANTED BY LD.CIT(A) AND HAS THEREFORE RAISED GROUND NO.3 IN ITS AP PEAL. SINCE THE GROUNDS ARE INTER-CONNECTED, THE GROUNDS RAIS ED BY THE ASSESSEE AND REVENUE ARE CONSIDERED TOGETHER. 8. BEFORE US, LD.A.R. SUBMITTED THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN EARLIER YEARS. HE FURTHER SUBMITT ED THAT THE PUNE BENCH OF THE TRIBUNAL WHILE DECIDING THE ISSUE IN A.Y. 20 05- 06 RELYING ON THE ORDER OF TRIBUNAL IN ASSESSEES OWN C ASE IN ITA NOS.857 AND 854/PUN/2006 FOR A.Y. 2001-02, HAD IN PRINCIPA L ALLOWED THE GROUND IN FAVOUR OF THE ASSESSEE BUT RESTORE D THE MATTER TO THE FILE OF AO FOR VERIFICATION OF THE FACTUAL POSITION . HE POINTED TO THE RELEVANT FINDINGS AT PAGE 5 OF THE TRIBUNAL ORDER. HE SUBMITTED THAT SINCE THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THAT OF EARLIER YEARS, THE MA TTER MAY BE 6 REMITTED BACK TO THE FILE OF AO TO DETERMINE THE FACTS AN D DECIDE THE ISSUE IN THE LIGHT OF THE ORDER FOR A.Y.2005-06. LD.D.R. SUPPO RTED THE ORDER OF AO. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE ISSUE OF LIQUIDATED DAM AGES AROSE IN ASSESSEES OWN CASE IN EARLIER YEARS ALSO. WE FIN D THAT THE CO-ORDINATE BENCH OF THE PUNE TRIBUNAL WHILE DECIDING THE A PPEAL FOR A.Y. 2005-06 RELIED ON THE ORDER OF THE PUNE TRIBUNA L IN ITA NO.857 AND 884/PUN/2006 FOR A.Y. 2001-02 AND REMITTED THE ISSUE BACK TO THE FILE OF AO TO EXAMINE THE FACTS AND DEC IDE THE ISSUE IN THE LIGHT OF THE ORDER OF A.Y. 2001-02. THE RELEV ANT FINDING OF TRIBUNAL IN A.Y. 2005-06 ARE AS UNDER : 38. THE ISSUE IN GROUND OF APPEAL NO.12 IS AGAINS T THE DISALLOWANCE OF LIQUIDATED DAMAGES OF RS.33,56,236/ -. 39. THE ASSESSEE HAD MADE A CLAIM UNDER THE SAID HE AD TO THE TUNE OF RS.1,99,10,567/-. AS PER THE ASSESSEE, THE LIQU IDATED DAMAGES REPRESENT THE PAYMENTS FOR LATE DELIVERY, DEFICIENC Y IN QUALITY OF GOODS / MATERIAL SUPPLIED VIS-A-VIS SPECIFICATIONS / REQUIREMENTS, ETC. THE ASSESSEE EXPLAINED THAT THE LIQUIDATED DA MAGES HAD NOTHING TO DO WITH ANY INFRACTION OF LAW. THE MAJO R RECOVERY WAS OF RS.1,56,62,034/- EFFECTED BY M/S. OIL INDIA LTD., W HO HAD MADE THE SAID RECOVERY AS THE ASSESSEE HAD FAILED TO COMPLET E INSTALLATION AND COMMISSIONING WITHIN THE AGREED CONTRACT SCHEDULE. THE ASSESSING OFFICER HELD THE SAME TO BE IN THE NA TURE OF PENALTY AND DISALLOWED THE SAME. IN THIS REGARD, HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF DELHI IN ROHTAK TEXTILES MILLS VS. CIT (1997) 226 ITR 485 (DEL), WHEREIN PAY MENT OF LIQUIDATED DAMAGES WERE HELD AS NON-DEDUCTIBLE. AS REGARDS THE OTHER LIQUIDATED DAMAGES, SINCE THE ASSESSEE HAD ON LY GIVEN GENERAL SUBMISSIONS, THE SAME WAS NOT ACCEPTED AND THE ENTI RE CLAIM TOWARDS LIQUIDATED DAMAGES WAS DISALLOWED. 40. BEFORE THE CIT(A), THE ASSESSEE POINTED OUT THA T IN THE PURCHASE ORDER PLACED BY M/S. OIL INDIA LTD., THERE WAS CLEA R STIPULATION OF COMPLETION DATES AND ALSO PROVISION OF LIQUIDATED D AMAGES TO BE PAID AT SPECIFIC RATES ON ACCOUNT OF DEFAULT IN DEL IVERY. THE DAMAGES WERE THUS, IN THE NATURE OF BREACH OF CONTRACT. TH E ASSESSEE ALSO FILED A COPY OF LETTER DATED 20.01.2001 OF M/S. OIL INDIA LTD., WHEREIN DAMAGES OF RS.1.56 CRORES HAD BEEN WORKED O UT AND DEMANDED. THE ASSESSEE ALSO FURNISHED THE COPIES OF VOUCHERS, STATEMENTS, CORRESPONDENCE WITH THE CONCERNED PARTI ES IN RESPECT OF BALANCE LIQUIDATED DAMAGES PAID BY THE ASSESSEE. TH E CIT(A) IN VIEW OF THE LETTER RECEIVED FROM M/S. OIL INDIA LTD ., WHEREIN THE 7 ACTUAL LIQUIDATED DAMAGES WERE OF THE ORDER OF RS.1, 49,97,482/-, HELD THE SAME AS ADMISSIBLE AND THE DISALLOWANCE TO THAT EXTENT WAS DELETED. THE REMAINING AMOUNT OF RS.6,64,552/- REPRESENTED INTEREST ON MOBILIZATION ADVANCE. THE CIT(A) NOTED THAT AS PER PURCHASE ORDER, MOBILIZATION ADVANCED WAS INTEREST FREE AND IT HAD TO BE SEEN AS TO WHY M/S OIL INDIA LTD. DEMANDED IN TEREST ON THE SAID MOBILIZATION ADVANCE. IN THE ABSENCE OF COMPL ETE DETAILS BEING FILED BY THE ASSESSEE, THE MATTER WAS RESTORED TO T HE FILE OF ASSESSING OFFICER TO CALL FOR RELEVANT PARTICULARS AND DECIDE THE SAME. 41. IN RESPECT OF BALANCE LIQUIDATED DAMAGES, THE ASSESSEE FILED EVIDENCES IN RESPECT OF CERTAIN ITEMS AND THE CIT(A ) HELD THAT IN VIEW OF THE EVIDENCES FILED FOR RS.3,41,724/-, RS.5,44,9 87/-, 1,45,072/- AND RS.5,25,067/-, ALLOWABILITY TOWARDS THE PAYMENT OF LIQUIDATED DAMAGES HAD ARISEN DURING THE RELEVANT PREVIOUS YEA R AND THE SAME WAS HELD TO BE ALLOWABLE. IN RESPECT OF LAST ITEM I .E. OF RS.20,82,1401-, THE ASSESSEE HAD ONLY MADE THE PROV ISION, EVEN BEFORE ANY DEMAND WAS RAISED BY THE CONCERNED PARTY . SINCE IT WAS NOT KNOWN AS TO WHETHER THE DEMANDS WERE ACTUALLY R ECEIVED OR NOT, THE CIT(A) HELD THAT THE ASSESSEE WAS NOT JUSTIFIED IN MAKING THE CLAIMS TOWARDS LIQUIDATED DAMAGES MERELY ON THE BAS IS OF PROVISION. HENCE, OUT OF LIQUIDATED DAMAGES OF RS.36,38,990/-, CLAIM TO THE EXTENT OF RS.20,82,139/- WAS HELD AS INADMISSIBLE A ND THE DISALLOWANCE WAS CONFIRMED TO THAT EXTENT. 42. THE ASSESSEE IS IN APPEAL VIDE GROUND OF APPEAL NO.12. THE REVENUE IS ALSO IN APPEAL AGAINST THE ORDER OF CIT( A) IN ALLOWING LIQUIDATED DAMAGES OF RS.1,49,97,483/- PAID TO M/S. OIL INDIA LTD. VIDE GROUND OF APPEAL NO.7. 43. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT OUT OF LIQUIDATED DAMAGES PAID TO M/S. OIL INDIA LTD., SUM OF RS.1.49 CRORES WAS ALLOWED BY THE CIT(A), AGAINST W HICH THE REVENUE IS IN APPEAL. HOWEVER, BALANCE SUM OF RS.6, 64,552/- PAYABLE TO M/S. OIL INDIA LTD. WAS TO BE VERIFIED B Y THE ASSESSING OFFICER. HOWEVER, TILL DATE, NO SUCH APPEAL EFFECT HAS BEEN ALLOWED. HE REFERRED TO PAGE 190 OF PAPER BOOK AND POINTED O UT THAT CLAUSE (III) RELATED TO CHARGING OF INTEREST AS PER PURCHA SE ORDER AND HE FURTHER REFERRED TO PAGE 199 OF THE PAPER BOOK TO E STABLISH THAT THE AMOUNT HAS BEEN RECOVERED BY M/S. OIL INDIA LTD. AN D HENCE, THERE IS NO DISCREPANCY IN THE CLAIM OF ASSESSEE. HE, TH EN, REFERRED TO THE PROVISION MADE ON ACCOUNT OF OTHER PARTY I.E. RS.20 ,82,140/-. HE STRESSED THAT THE SAID PROVISION WAS MADE IN RESPEC T OF SALES EFFECTED DURING THE YEAR WHICH WAS CUSTOMER-WISE AN D THE SAID PRINCIPLE WAS FOLLOWED IN RESPECT OF ALL THE PARTIE S AND THE AMOUNTS WERE PAID IN THE SUCCEEDING YEAR AND IN CASE THOSE ARE NOT DEMANDED, THEN THE PROVISION WAS REVERSED. HE FURTH ER STATED THAT OUT OF TOTAL SUM OF RS.20,82, 1401-, RS.6,09,543/- WAS ALREADY PAID DURING THE YEAR BY THE ASSESSEE. THE LEARNED AUTHOR IZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE ISSUE RAISED IN THE PRESENT APPEAL IS COVERED BY THE ORDE R OF PUNE BENCH OF TRIBUNAL IN THERMAX BABCOCK & WILCOX LTD. VS. ADDL. CIT (2008) 7 DTR (PUNE) (TRIB) 162. 44. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR T HE REVENUE ON THE OTHER HAND, RELIED ON THE RATIO LAID DOWN BY TH E HON'BLE SUPREME COURT IN HAJI AZIZ AND ABDUL SHAKOOR BROS. VS. CIT (1961) 41 ITR 350 (SC), WHEREIN LIQUIDATED DAMAGES PAID WERE NOT ALLOWED. HE ALSO PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HON'BLE HIGH COURT OF DELHI IN ROHTAK TEXTILES MILLS VS. CIT (SUPRA), WHICH WAS RELIED ON BY THE ASSESSING OFFICER. 8 45. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS IN RESPECT OF LIQUIDATED DAMAGES PROVIDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THE CASE OF ASSESSEE BEFORE US IS THAT IN VIEW OF IT TAKING UP TURNKEY PROJECTS AND AS PER THE CONDITIONS OF PU RCHASE ORDER PLACED, THE PROJECT HAS TO BE COMPLETED WITHIN STIP ULATED PERIOD AND IN CASE THE SAME IS NOT SO COMPLETED, THEN THE ASSE SSEE IS LIABLE TO PAY LIQUIDATED DAMAGES. FURTHER, IN CASE OTHER CON DITIONS OF THE PURCHASE ORDER ARE NOT COMPLIED WITH BY THE ASSESSE E, THEN ALSO AS PART OF PURCHASE ORDER ITSELF, THERE IS A CLAUSE TH AT THE PURCHASER MAY AT HIS DISCRETION WITHHOLD ANY PAYMENTS UNTIL T HE WHOLE OF STORES HAS BEEN SUPPLIED AND HE MAY ALSO DEDUCT REC OVERY FROM THE SUPPLIER LIQUIDATED DAMAGES. THE MAJOR ITEM OF EXPE NDITURE RELATES TO DAMAGES OF RS.1.56 CRORES CLAIMED BY AND PAID TO M/S. OIL INDIA LTD. THE ASSESSEE WAS DUTY BOUND TO COMPLETE THE SA ID PROJECT WITHIN STIPULATED PERIOD AND SINCE THE ASSESSEE COU LD NOT FULFILL THE SAME, M/S. OIL INDIA LTD. VIDE LETTER DATED 20.01.2 001 DEMANDED DAMAGES OF RS.1.49 CRORES. IN VIEW OF THE UNDERSTAN DING BETWEEN THE PARTIES, THE CLAIM OF RS.1.49 CRORES ON ACCOUNT OF LIQUIDATED DAMAGES BEING RELATABLE TO CARRYING ON OF BUSINESS OF ASSESSEE, IS DULY ALLOWABLE AS EXPENDITURE IN THE HANDS OF ASSES SEE. ACCORDINGLY, UPHOLDING THE ORDER OF CIT(A), WE DISM ISS THE GROUND OF APPEAL NO.7 RAISED BY THE REVENUE. 46. NOW, COMING TO THE BALANCE EXPENDITURE OF RS .6,64,552/-, WHICH WAS THE INTEREST PAID ON MOBILIZATION ADVANCE S. CLAUSE (III) OF CONTRACT COPY, WHICH IS PLACED AT PAGE 190 OF THE P APER BOOK AND THE EVIDENCE OF HAVING PAID THE SAID AMOUNT AS PER DOCUMENT AT PAGE 199 OF THE PAPER BOOK, WE FIND THAT THE SAID C LAIM OF RS.6,64,552/- IS ALSO TO BE ALLOWED IN THE HANDS OF ASSESSEE. IN VIEW OF THE FACTS AND CIRCUMSTANCES AND THE EVIDENC ES WHICH ARE AVAILABLE ON RECORD, WE FIND NO MERIT IN THE ORDER OF CIT(A) IN REMITTING THE ISSUE TO THE FILE OF ASSESSING OFFICE R TO CALL FOR RELEVANT PARTICULARS. ACCORDINGLY, WE REVERSE THE FINDINGS OF CIT(A) IN THIS REGARD AND DELETE THE ADDITION OF RS.6,64,552/-. 47. NOW, COMING TO BALANCE LIQUIDATED DAMAGES OF RS .20,82,140/- FOR WHICH THE ASSESSEE HAD MADE THE PROVISION IN IT S BOOKS OF ACCOUNT. THE ASSESSEE POINTS OUT THAT AFTER EFFECTI NG SALES DURING THE RELEVANT YEARS, PROVISIONS ARE MADE DURING THE YEAR CUSTOMER-WISE AND THE SAID PRINCIPLE HAS BEEN FOLLOWED BY THE ASS ESSEE FROM YEAR TO YEAR. IN OTHER WORDS, THE ASSESSEE IS FOLLOWING THE METHOD OF ACCOUNTING, UNDER WHICH PROVISION IS MADE ON ACCOUN T OF ANY LIQUIDATED DAMAGES, WHICH THE ASSESSEE MAY HAVE TO PAY. IN CASE THE SAME ARE PAID IN THE NEXT YEAR, THEN THE SAME A RE DEBITED TO PROVISION AND IF NOT PAID, THEN THE PROVISION IS RE VERSED. THE ASSESSEE HAVING FOLLOWED THE SAID SYSTEM OF ACCOUNT ING PERSISTENTLY AND IN VIEW OF THE FACT THAT THE SALES HAVE BEEN EF FECTED DURING THE YEAR, THEN WHERE THE ASSESSEE IS AWARE OF ITS DEFIC IENCIES AND HAVING MADE THE PROVISIONS AS PER PURCHASE ORDER, T HEN SUCH PROVISION OF LIQUIDATED DAMAGES MERITS TO BE ALLOWE D IN THE HANDS OF ASSESSEE IN ENTIRETY. WE FIND NO MERIT IN THE ORDER S OF AUTHORITIES BELOW IN ALLOWING THE LIQUIDATED DAMAGES ONLY TO TH E EXTENT WHERE THE AMOUNT HAS BEEN PAID AND IN NOT ALLOWING THE BA LANCE. IN ANY CASE, THE SAID LIQUIDATED DAMAGES ARE RELATABLE TO THE BUSINESS UNDERTAKEN BY THE ASSESSEE AND ARE NOT FOR INFRACTI ON OF LAW. HENCE, THERE IS NO MERIT IN DISALLOWING ANY PART OF EXPEND ITURE. RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTAT IVE FOR THE REVENUE ON THE DECISIONS OF HON'BLE SUPREME COURT A RE MISPLACED AS IN BOTH THE CASES, DAMAGES WERE PAID ON ACCOUNT OF INFRACTION OF LAW AND HENCE, WERE HELD TO BE NOT ALLOWABLE AS EXPENDI TURE IN THE HANDS OF SAID ASSESSEE. HOWEVER, IN THE PRESENT CA SE, LIQUIDATED DAMAGES ARE PAID BY THE ASSESSEE ON ACCOUNT OF VIOL ATION OF TERMS OF 9 CONTRACT ENTERED INTO WITH THE PARTIES TO WHOM THE GOODS HAVE BEEN SUPPLIED BY THE ASSESSEE. THERE IS NO INFRACTION O F LAW IN SUCH CASES AND ACCORDINGLY, WE FIND NO MERIT IN THE ORDE RS OF AUTHORITIES BELOW IN THIS REGARD. REVERSING THE ORDER OF CIT(A ), WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE AL SO ON ACCOUNT OF PROVISION MADE OF RS.20,82,139/-. THE GROUND OF AP PEAL NO.12 RAISED BY THE ASSESSEE IS THUS, ALLOWED AND THE GRO UND OF APPEAL NO.7 RAISED BY THE REVENUE IS DISMISSED. IN VIEW OF THE SUBMISSIONS OF LD.A.R., THAT THE FAC TS IN THE YEAR UNDER CONSIDERATION ARE SIMILAR TO EARLIER YEARS AN D WHICH HAS NOT BEEN CONTROVERTED BY REVENUE, WE IN PRINCIPAL ALLO W THE GROUND IN FAVOUR OF THE ASSESSEE BUT FOR EXAMINING THE FACTS AND TO DECIDE THE ISSUE IN THE LIGHT OF THE ORDER FOR A.Y. 2001-02, WE RESTORE THE ISSUE TO THE FILE OF AO. NEEDLESS TO STATE THAT AO SHALL GRANT REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND THEREAFT ER DECIDE THE ISSUE. THUS THE GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 10. BEFORE US, LD.A.R. HAS SUBMITTED THAT THE FACTS IN THE YEAR UNDER APPEAL ARE IDENTICAL TO THAT OF A.Y. 2005-06 AND IN A .Y. 2005- 06 THE MATTER HAS BEEN REMITTED BACK TO AO AND THERE FORE THE MATTER BE REMITTED BACK TO AO. THE AFORESAID CONTENTION OF LD.A.R. HAS NOT BEEN CONTROVERTED BY LD.D.R. WE THEREFORE FOLLOWIN G THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL AND FOR SIM ILAR REASONS RESTORE THE ISSUE TO THE FILE OF AO. THUS, THE GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND GROUND OF REVENUE IS DISMISSED. 10.1. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 11. NOW WE TAKE UP REVENUES APPEAL IN ITA NO.963/PUN/2014. 12. FIRST GROUND IS WITH RESPECT TO DEPRECIATION ON WINDMILL. 12.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO O N PERUSING THE DEPRECIATION SCHEDULE NOTICED THAT ASSESSEE HAS CLAIMED DEPRECIATION OF RS.10,51,87,561/- ON WINDMILL. AO ALSO 10 NOTICED THAT THE ADDITION MADE TO FIXED ASSETS ON ACCOU NT OF SEVEN WINDMILLS WAS TO THE EXTENT OF RS.26,29,68,903/-. THE ASSESS EE WAS ASKED TO FURNISH THE DETAILS WITH RESPECT TO ADDITION TO WINDMILL AND THE CALCULATION OF DEPRECIATION ON WINDMILL. AO NOTICED THAT DURING THE YEAR ASSESSEE COMPANY HAD INSTALLED SEVEN WIN DMILLS ON 30.12.2006 FOR GENERATION OF POWER AND HAD CLAIMED 40% DEPRECIATION ON SUCH WINDMILLS. ON PERUSING THE DETAILS, HE NOTICED THAT ASSESSEE HAD CLAIMED DEPRECIATION ON THE WI NDMILLS AND ALSO ON THE COST OF TRANSFORMER, DP, CIVIL CONSTRUCTION AND OTHERS. THE SUBMISSION OF THE ASSESSEE THAT THE ENTIRE EXPENDITURE WITH COST OF WINDMILLS IS ENTITLED TO HIGHER DEPRECIATION AS O THER EXPENDITURE INCURRED ARE INTEGRAL PART OF WINDMILLS WAS NOT FOUND ACCEPTABLE TO AO. AO WAS OF THE VIEW THAT THE DEPRECIAT ION RATE APPLICABLE ON CIVIL CONSTRUCTION, EARTH WORK AND FOUNDATION E TC., IS 10% AS IN THE CASE OF BLOCK OF ASSETS OF BUILDINGS AND NOT 40% AS CLAIMED BY THE ASSESSEE. HE THEREFORE RESTRICTED THE DEPRECIATION O N CONSTRUCTION ACTIVITY TO 10% AND ON ERECTION AND COMMIS SIONING EXPENDITURE TO 15%, BEING THE RATE APPLICABLE TO THE PLANT AND MACHINERY, AND ACCORDINGLY WORKED OUT THE EXCESS DEPR ECIATION TO THE TUNE OF RS.56,69,031/- AND DISALLOWED THE SAME. AGGRIEV ED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.C IT(A), WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 4.2 I HAVE GONE THROUGH THE SUBMISSIONS OF APPELLAN T AND REASONS GIVEN BY THE AO FOR DISALLOWANCE OF DEPRECI ATION ON WINDMILL. I HAVE ALSO GONE THROUGH THE DECISION ON WHICH THE AO & THE APPELLANT HAVE PLACED RELIANCE. 4.3 THE MAIN CONTENTION OF THE ASSESSEE IS THAT CIV IL WORK RELATED TO FOUNDATION DONE TO INSTALL WINDMILL AND COMMISSI ON CHARGES ARE PART OF THE PLANT & MACHINERY LE. WINDMILL AND THE ASSESSEE IS ENTITLED FOR DEPRECIATION OF AT 80%. THE ASSESSEE H AS ALSO STATED THE PUNE ITAT CASE (POONAWALA FINWEST & AGRO P LTD) ON WHICH AO HAD PLACED RELIANCE DEALS WITH CIVIL COST INCURRED ON R OADS, CONTROL ROOM, ETC ADJACENT TO WINDMILL. THE ASSESSEE ALSO PLEADED DURING THE APPELLATE PROCEEDINGS THAT IN ORDER TO TREAT A PART ICULAR STRUCTURE AS 11 BUILDING, IT IS NECESSARY TO HAVE A ROOF, FLOORING ETC. FOR THE SAME. CONSIDERING THE HUGE STRUCTURE OF WINDMILLS, SPECIA L FOUNDATION IS REQUIRED FOR THE SAME AND THE SAME IS INTEGRAL PART OF WINDMILLS. 4.4 TO DECIDE THE ISSUE OF THE CLASSIFICATION OF AS SET FOR THE PURPOSE OF DEPRECIATION, ITS PREDOMINANT FUNCTION NEEDS TO BE CHECKED. IN OTHER WORDS, FUNCTIONAL TEST NEEDS TO BE APPLIED. B Y APPLYING FUNCTIONAL TEST TO CIVIL FOUNDATION FOR WINDMILLS, THERE IS NO DOUBT THAT, WITHOUT CIVIL FOUNDATION THE WINDMILL WILL NO T GENERATE POWER. IN OTHER WORDS, IT (CIVIL FOUNDATION) IS EMPLOYED IN C ARRYING ON THE ACTIVITY OF GENERATION OF ELECTRICITY. THE CIVIL FO UNDATION CANNOT BE SEPARATED FROM THE WINDMILL & TREATED AS BUILDING. IN MY OPINION, COST ON THE FOUNDATION OF WINDMILL IS ELIGIBLE FOR DEPRECIATION RATE WHICH IS APPLICABLE FOR WINDMILL AS IT IS INTEGRAL PART OF WINDMILL. THE WORK ORDER PLACED BY THE APPELLANT ON CONTRACTOR FO R CIVIL FOUNDATION ALSO INCLUDES WORK RELATED TO CONSTRUCTION OF APPRO ACH & INTERNAL ROADS. THE APPELLANT INFORMED DURING APPELLATE PROC EEDINGS, THE COST OF INTERNAL ROAD IS APPROX. RS. 5 LACS. RELYING ON THE DECISION ON PUNE ITAT IN POONAWALA FINVEST & AGRO PVT. LTD. VS ACIT, I HOLD THAT DEPRECIATION ON INTERNAL ROADS WILL NOT BE ALLOWABL E AT RATE OF 80% BUT THE SAME IS ALLOWABLE @ 10%. THE COST OF FOUNDA TION WILL BE RS.1,24,45,634/- (I.E. COST OF FOUNDATION RS.1,24,9 5,634/- LESS COST OF ROADS RS. 5,00,000/-. THE DEPRECIATION ALLOWABLE ON ROADS WILL BE RESTRICTED TO RS. 25,000/-. THE ASSESSING OFFICER I S DIRECTED TO DELETE THE ADDITION RS. 15,90,219/- ( RS. 16,15,219 LESS R S. 25,000). 4.5 THE COST OF ERRECTION COMMISSIONING INCLUDES ER RECTION OF WIND ENERGY CONVERTERS (WEC), INTERCONNECTING THE WEC WI TH GRID, EVACUATION OF POWER GENERATED, ETC. THE COST OF ERE CTION AND COMMISSIONING CANNOT BE SEPARATED FROM WINDMILL AS THE SAME IS DIRECTLY RELATED TO FUNCTIONING OF WINDMILL. IN MY OPINION, COST OF ERRECTION AND COMMISSIONING IS ELIGIBLE FOR DEPRECI ATION RATE WHICH IS APPLICABLE FOR WINDMILL AS IT IS INTEGRAL PART OF WI NDMILL. THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N RS.40,53,812/-. ACCORDINGLY, THE GROUND IS ALLOWED. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 13. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF AO. LD.A.R. O N THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE AO AN D LD.CIT(A) AND FURTHER SUBMITTED THAT THE ISSUE IS ALSO COVE RED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. AMINITY DEVELOPERS AND BUILDERS IN ITA NO.1505/PN/2011 ORDER DT.12.12.2012. HE THUS SUPPO RTED THE ORDER OF LD.CIT(A). 12 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RES PECT TO DEPRECIATION ON WINDMILLS. AO DENIED THE CLAIM OF DEPREC IATION AT 40% WHICH IS APPLICABLE TO THE WINDMILLS, ON COST OF FOUND ATION, ERECTION AND COMMISSIONING EXPENDITURE. HE DENIED THE H IGHER RATE OF DEPRECIATION FOR THE REASON THAT HE WAS OF THE VIEW THAT THE RATE OF DEPRECIATION APPLICABLE ON SUCH COSTS IS THE NORM AL RATE OF DEPRECIATION WHICH IS APPLICABLE TO BUILDING AND PLANT AND MACHINERY. WE FIND THAT LD.CIT(A) WHILE DECIDING THE ISSUE HA S GIVEN A FINDING THAT BY APPLYING FUNCTIONAL TEST THAT WITHOU T CIVIL FOUNDATION THE WINDMILLS WILL NOT GENERATE POWER AND THAT CIV IL FOUNDATION CANNOT BE SEPARATED FROM WINDMILLS AND CANNOT B E TREATED AS A SEPARATE BUILDING. WITH RESPECT TO THE COS T OF ERECTION AND COMMISSIONING EXPENDITURE, LD.CIT(A) HAS GIVEN A FINDING THAT THE SAME CANNOT BE SEPARATED FROM WINDMILLS AS THE SAME ARE DIRECTLY RELATED TO THE FUNCTIONING OF WINDMILLS. THE AFORE SAID FINDINGS OF LD.CIT(A) HAS NOT BEEN CONTROVERTED BY REVENUE . WE FURTHER FIND THAT THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. MEHRU ELECTRICALS AND MECHANICAL ENGINEERS PVT. LTD., REPORTED IN (2016) 388 ITR 168 (RAJASTHAN) HAS HELD THAT THE RATE OF DEPRECIATION APPLICABLE TO WINDMILLS ALSO APPLIES TO CIVIL FOUNDATIO N AND ELECTRIC TURBINE GENERATOR FOR WINDMILL AS THEY ARE THE PART OF THE WINDMILL. WE FURTHER FIND THAT THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF CIT VS. CTR MANUFACTURING INDUSTRIES PVT . LTD., (IN ITA NO.2125 OF 2013 ORDER DT.01.03.2016) HAS HELD THAT TH E DEPRECIATION OF WINDMILL IS TO BE ALLOWED EVEN ON THE COST LIKE ERECTION AND COMMISSIONING CHARGES, ELECTRIC ITEMS, APPLICATIO N CHARGES ETC., WHICH ARE CAPITALIZED TO WINDMILL. BEFORE US, REV ENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPOR T. IN 13 VIEW OF THE AFORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD.CIT(A) AND THUS, THIS GROUND OF THE REVENUE IS DISMISSED. 15. 2 ND GROUND IS WITH RESPECT TO DELETING THE ADDITION OF RS.45,69,505/- ON ACCOUNT OF DEBIT BALANCES WRITTEN OFF. 15.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO ON PERUSING THE DETAILS NOTICED THAT ASSESSEE HAD CLAIMED RS.69,53,304/- ON ACCOUNT OF DEBIT BALANCES WRITTEN OFF. AO WAS OF THE VIEW THAT FOR CLAIMING THE DEDUCTION DEBIT BALANCES, TH E AMOUNT WRITTEN OFF SHOULD HAVE BEEN TAKEN INTO ACCOUNT W HILE COMPUTING THE INCOME OF THE ASSESSEE. IN THE PRESENT CASE HE WAS OF THE VIEW THAT THE WRITTEN OFF BALANCES WAS IN THE NATUR E OF ADVANCES, DEPOSITS ETC., AND THEREFORE THE SAME CANNOT BE CLAIMED AS BAD DEBTS. HE ACCORDINGLY DENIED THE CLAIM OF WRITTEN OFF DEBIT BALANCES OF RS.66,81,059/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 5.2 I HAVE GONE THROUGH THE SUBMISSIONS OF APPELL ANT. THE APPELLANT HAS GIVEN EXPLANATION ONLY FOR FEW ITEMS OUT OF VARIOUS LINE ITEMS APPEARING IN THE DETAILS PROVIDED. 5.3 THERE WAS DISPUTE WITH KARNATAKA GOVT ON APPLIC ABILITY OF ENTRY TAX ON INPUTS REQUIRED FOR GENERATION OF ELECTRICIT Y. THE ASSESSEE HAD STATED THAT THE ENTRY TAX WAS ACTUALLY PAID AMOUNTI NG TO RS. 62,62,297/- AND LIABILITY FOR THE SAME WAS RS.24,12 ,202/-. THUS THE APPELLANT HAD PAID RS. 38,50,095/- EXCESS ON ACCOUN T OF ENTRY TAX. THE APPELLANT ALSO EXPLAINED THAT THIS AMOUNT WAS S HOWN AS RECEIVABLE & CONSIDERING THE DECISION OF AUTHORITIE S UNDER KARNATAKA ENTRY TAX TO LEVY PENALTY U/S 3B OF THE KARNATAKA E NTRY TAX ACT PROPOSING THE PENALTY OF RS. 52,99,970/- AS UNJUST ENRICHMENT, IT WAS DECIDED TO WRITE OFF THE AMOUNT PAID ON ACCOUNT OF ENTRY TAX. THE APPELLANT FILED APPEAL WITH THE KARNATAKA APPEL LATE TRIBUNAL AND THE DISPUTE WAS DECIDED IN FAVOUR OF THE APPELL ANT. THE ENTRY TAX PAID WAS ALSO REFUNDED AFTER THE DECISION OF KA RNATAKA APPELLATE TRIBUNAL AND THE APPELLANT HAD OFFERED TH E SAME FOR INCOME TAX. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, I HOLD THE AMOUNT IS ALLOWABLE AS DEDUCTION UNDER INC OME TAX ACT. THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADD ITION RS. 14 38,50,000/-. 5.4 THE OTHER AMOUNTS CLAIMED BY THE APPELLANT ARE ON ACCOUNT OF ADVANCE PAID TO SUPPLIERS WHICH WAS NEITHER REFUNDE D NOR WAS MATERIAL NOT SUPPLIED. AFTER GOING THROUGH THE REP LY, IT IS SEEN THAT IDENTICAL ISSUE CAME UP IN AY 2006-07, WHEREIN THE CLAIM OF THE APPELLANT WAS ALLOWED. THE ASSESSING OFFICER IS DI RECTED TO DELETE THE ADDITION OF RS.7,19,505/-. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 16. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF AO. LD.A.R. ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE AO AN D LD.CIT(A) AND FURTHER SUPPORTED THE ORDER OF LD.CIT(A). 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESP ECT TO WRITING OFF OF DEBIT BALANCES. WE FIND THAT LD.CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS NOTED TH AT WITH RESPECT TO THE AMOUNT OF RS.7,19,505/-, IT WAS ON ACCOUN T OF ADVANCE PAID TO SUPPLIERS, WHO HAD NEITHER REFUNDED THE A DVANCES NOR HAD SUPPLIED THE MATERIALS. HE ALSO NOTICED THAT IDE NTICAL ISSUE CAME UP IN ASSESSEES OWN CASE BEFORE THE PUNE B ENCH OF THE TRIBUNAL IN ITA NO.615/PUN/2014 FOR A.Y. 2006-07 WHEREIN T HE CLAIM OF THE ASSESSEE WAS ALLOWED. HE ACCORDINGLY DIRECTED THAT THE SAME MAY BE ALLOWED. WITH RESPECT TO THE ADDITION OF RS.38,50,000/- HE NOTED THAT IT WAS WITH RESPECT TO THE ENTRY TAX LEVIED BY THE KARNATAKA GOVERNMENT. HE HAS NOTED THAT ASSESSEE HAD FILED APPEAL BEFORE KARNATAKA BENCH OF THE TRIBUNAL AN D THE DISPUTE WAS DECIDED IN FAVOUR OF THE ASSESSEE AND THE E NTIRE TAX WAS REFUNDED AND THE ASSESSEE HAS OFFERED THE SAME AS INCOME. IN SUCH A SITUATION, LD.CIT(A) WAS OF THE VIEW THAT THE ADDITIO N OF RS.38,50,000/- WAS NOT WARRANTED. WITH RESPECT TO RS.21,1 1,554/- 15 HE NOTED THAT SINCE ASSESSEE COULD NOT FURNISH THE DET AILS, HE CONFIRMED THE ADDITION TO THAT EXTENT. BEFORE US, REVEN UE HAS NOT POINTED OUT ANY FALLACY IN THE FINDINGS OF LD.CIT(A). IN VIEW OF THESE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE O RDER OF LD.CIT(A) AND THUS, THE GROUND NO.2 OF THE REVENUE IS DISMISSED. 18. 3 RD AND 4 TH GROUNDS ARE INTER-CONNECTED AND ARE WITH RESPECT TO DELETION OF LIQUIDATED DAMAGES OF RS.15,60,235/-. 18.1. BEFORE US, BOTH THE PARTIES SUBMITTED THAT THE ISSUE IN THE PRESENT GROUND IS INTER-CONNECTED WITH GROUND NO.2 OF THE ASSESSEES APPEAL. 18.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. IN VIEW OF THE SUBMISSIONS OF BOTH THE PARTIES WHILE DECIDING GROUND NO.2 IN ASSESSEES APPEAL HEREINABOV E, WE HAVE DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. WE THEREFOR E FOR THE SIMILAR REASONS STATED HEREIN WHILE DECIDING THE GROUND NO .2 OF THE ASSESSEE IN ASSESSEES FAVOUR AND FOR SIMILAR REASONS, DIS MISS THE GROUNDS NOS.3 AND 4 OF REVENUE. THUS, THESE GROUNDS OF THE REVENUE ARE DISMISSED. 19. GROUND NO.5 IS WITH RESPECT TO DISALLOWANCES U/S 14A O F THE ACT. 20. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOTIC ED THAT ASSESSEE HAD MADE INVESTMENTS IN SHARES AND MUT UAL FUNDS FOR AN AMOUNT OF RS.517.38 CRORES AND HAD CLAIMED INTEREST 16 EXPENDITURE OF RS.8.93 CRORES. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE EXPENDITURE INCURRED FOR ANY EXEMPT INCOM E NOT BE DISALLOWED BY APPLYING THE FORMULA PRESCRIBED IN RULE 8D OF T HE INCOME TAX RULES. ASSESSEE INTER-ALIA SUBMITTED THAT IT HAS ALREADY DISALLOWED OF RS.5,00,000/- SUO MOTU AND THAT THE INVESTME NT ACTIVITIES ARE ANCILLARY TO ASSESSEES PRINCIPAL BUSINESS. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO T HE AO. AO NOTED THAT ASSESSEE HAD NOT KEPT SEPARATE POOL O F FUNDS FOR MANAGING THE ACTIVITIES OF EARNING EXEMPT INCOME. HE WAS THEREFORE OF THE VIEW THAT EXPENDITURE INCURRED FOR EARNIN G OF EXEMPT INCOME NEEDS TO BE DISALLOWED. HE THEREAFTER, FOLLOWIN G THE METHOD PRESCRIBED UNDER RULE 8D OF THE INCOME TAX RULE S, WORKED OUT THE DISALLOWANCE U/S 14A AT RS.8,06,87,773/- AND AFTER GRANTING CREDIT OF RS.5,00,000/- WHICH WAS SUO MOTU DISALLOWE D BY THE ASSESSEE, DISALLOWED BALANCE EXPENDITURE OF RS.8,01,87,77 3/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATT ER BEFORE LD.CIT(A), WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 8.2 THE FIRST ISSUE IS WHETHER RULE 8D WOULD APPLY RETROSPECTIVELY OR PROSPECTIVELY? THE AO HAD RELIED ON THE DECISIO N OF SB OF ITAT, MUMBAI ITO VS. DAGA CAPITAL. THE APPELLANT IS RELY ING ON THE DECISION OF MUMBAI HC IN GODREJ & BOYCE MFG. CO. LT D. (2010) 234 CTR (BOM.) 1. FOLLOWING THE DECISION OF JURISDICTI ONAL HON. HC, I HOLD THAT RULE 8D IS APPLICABLE W. E. F. AY 2008-09 AND IS NOT APPLICABLE TO AY 2007-08. THE RULE 8D IS APPLICABLE FROM AY 2008- 09. THE AO CANNOT MAKE RECOURSE TO RULE 8D FOR PRIO R YEARS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY THE COMPANY IN RELATION TO EXEMPT INCOME. THE APPELLANT HAS STATED THAT RS. 1,10,90,752/- INT EREST PAID DURING THE YEAR IS RELATED TO INVESTMENTS. THE APPELLANT H AS AVAILED SHORT TERM LOAN FOR THE PURCHASE OF EQUITY SHARES OF KIRL OSKAR FERROUS INDUSTRIES LIMITED DURING THE YEAR. THE LOAN HAS BEE N REPAID DURING THIS ASSESSMENT YEAR. CONSIDERING THESE FACTS AND P ROVISIONS OF SECTION 14A, THE INTEREST EXPENSES ARE DIRECTLY REL ATED TO EARNINGS OF EXEMPT INCOME AND NEEDS TO BE DISALLOWED. SIMILARLY, THE APPELLANT STATED THAT OTHER DIRECT & INDIRECT EXPENSES RELATE D TO INVESTMENTS (MUTUAL FUNDS) ARE THE SALARY OF EMPLOYEES IN THE F INANCE DEPARTMENT LOOKING AFTER PURCHASE AND SALE OF MUTUA L FUNDS. THE APPELLANT HAS ESTIMATED THESE SALARY EXPENSES AT RS . 5,00,000/-. THE APPELLANT HAS ESTIMATED ONLY THE SALARY EXPENSE S IN THE FINANCE DEPARTMENT LOOKING AFTER THE PURCHASE AND SALE OF M UTUAL FUNDS FOR 17 THE PURPOSE OF DISALLOWANCE. THE APPELLANT HAS NOT CONSIDERED THE OTHER INDIRECT EXPENSES WHICH ARE ALSO RELATED TO E ARNING OF EXEMPT INCOME. THUS, THE WORKING/ESTIMATE PROVIDED BY THE APPELLANT IS NOT COMPLETE. THEREFORE, ADDITIONAL AMOUNT OF RS. 5,00, 000/- IS CONSIDERED AS OTHER INDIRECT EXPENSES RELATED TO TH E EXEMPT INCOME FOR THE PURPOSE OF DISALLOWANCE U/S 14A. 8.3 AFTER GOING THROUGH THE REPLY OF THE APPELLANT AS WELL AS FACTS OF THE CASE, THIS ISSUE HAS BEEN DECIDED BY CIT(A) IN AY 2004-05, 2005-06 WHEREIN THE DISALLOWANCE WAS RESTRICTED TO RS.50,000/- ONLY. IN THE APPELLATE ORDERS PASSED BY ME FOR AY 2005-06 & 2006- 07, THE DISALLOWANCE WAS RESTRICTED TO RS.2,00,000/ -. AFTER CONSIDERATION OF THE FACTS OF THIS ASSESSMENT YEAR, THE TOTAL DISALLOWANCE WILL BE RS.1,20,90,752/-. (RS.1,10,90, 752/- + RS.5,00,000 + RS.5,00,000). THE AO IS DIRECTED TO DELETE DISALLOWANCE OF RS.6,80,97,131/-. ACCORDINGLY, THE GROUND IS PARTLY ALLOWED. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 21. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF AO. LD.A.R. ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE AO AN D LD.CIT(A) AND FURTHER SUBMITTED THAT FOR THE YEAR UNDER CONSIDERATION, METHOD PRESCRIBED BY RULE 8D OF THE INCOME TAX RULES ARE NOT APPLICABLE AND FOR WHICH HE RELIED ON THE DEC ISION OF BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG., C O., LTD., VS. DCIT REPORTED IN (2010) 328 ITR 81 (BOM). HE FURTHER SUBMITTED THAT AFORESAID DECISION OF GODREJ AND BOYCE M FG., CO., LTD (SUPRA) HAS BEEN UPHELD BY THE HONBLE SUPREME COUR T REPORTED IN (2017) 394 ITR 449 (SC). HE THEREFORE SUBMITTE D THAT THE GROUND OF REVENUE NEEDS TO BE DISMISSED. HE THUS SUPPORTED THE ORDER OF LD.CIT(A). 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESP ECT TO DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT BY FOLLOWING RULE 8D OF I.T. RULES. IT IS AN UNDISPUTED FACT THAT THE YEAR UN DER CONSIDERATION IS A.Y. 2007-08. THE HONBLE BOMBAY HIGH COU RT IN 18 THE CASE OF GODREJ AND BOYCE MFG., CO., LTD (SUPRA) HAS HE LD THAT THE METHOD PRESCRIBED BY RULE 8D OF THE INCOME TAX RU LES, FOR WORKING OUT DISALLOWANCE U/S 14A ARE APPLICABLE FROM A.Y. 20 08- 09. IN VIEW OF THE AFORESAID DECISION OF HONBLE BOMBAY HIGH COURT, THE PROVISIONS OF RULE 8D OF I.T. RULES ARE NOT APPLICABLE T O THE YEAR UNDER CONSIDERATION BEING A.Y. 2007-08. IT IS ALSO A FACT THAT ASSESSEE HAS SUO-MOTU DISALLOWED RS. 5 LAC U/S 14A OF TH E ACT AND THAT THE ASSESSEE IS NOT IN APPEAL AGAINST THE AFORESAID ADDITION. FURTHER BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN SUCH A SITUATION, WE FIND NO RE ASON TO INTERFERE WITH THE ORDER OF LD.CIT(A) AND THUS, THE GROUND OF THE REVENUE IS DISMISSED. 23. GROUND NO.6 IS WITH RESPECT TO DELETION OF ADDITION MADE OF RS.12,46,100/- U/S 40A(2) OF THE ACT. 23.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NO TICED THAT ASSESSEE HAD PAID COMMISSION OF RS.8,03,65,000/- AS COMMISSION TO EXECUTIVE AND NON-EXECUTIVE DIRECTORS. TH E ASSESSEE WAS ASKED TO EXPLAIN THE REASONABLENESS OF THE EXPENDITU RE OF COMMISSION IN TERMS OF SEC.40A(2) OF THE ACT. ASSESSEE INTER -ALIA SUBMITTED THAT THE REMUNERATION HAS BEEN PAID AS PER T HE PROVISIONS OF THE COMPANIES ACT, 1956 AND THE ACTUAL PAYM ENTS ARE LESS THAN THE ELIGIBLE AMOUNTS PRESCRIBED UNDER COMPANIES ACT. IT WAS FURTHER SUBMITTED THAT THE REMUNERATION HAS BEEN O FFERED FOR TAX BY THE RESPECTIVE DIRECTORS AND THERE IS NO EVASION OF TAX. IT WAS THEREFORE SUBMITTED THAT THE COMMISSION TO THE DIRE CTORS WAS REASONABLE AND FULLY ALLOWABLE. THE SUBMISSION OF THE ASSESS EE WAS NOT FOUND ACCEPTABLE TO THE AO IN VIEW OF THE FACT THAT IN A.Y. 2006- 19 07 ASSESSEE HAD PAID AN AMOUNT OF RS.6.79 CRORES AS COMMISSION AND DURING THE YEAR IT HAD PAID RS.8.37 CRORES. AO NOTICE D THAT THERE WAS AN INCREASE IN THE COMMISSION TO THE TUNE O F RS.1.24 CRORES AND THE ASSESSEES EXPLANATION FOR JUSTIFYING TH E INCREASE OF COMMISSION WAS GENERAL IN NATURE. AO THEREAFTER DISALLOWED 10% OF THE INCREASED REMUNERATION (RS.8.37 CRORE LESS RS.6.79 CR ORE) AND ACCORDINGLY MADE A DISALLOWANCE OF RS.12,46,100/-. AGGR IEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFOR E LD.CIT(A), WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 9.2 SIMILAR ISSUE OF DISALLOWANCE OF DIRECTOR COMM ISSION WAS DECIDED IN FAVOUR OF THE APPELLANT IN A.Y. 2002-03, 2004-05, 2005- 06 & 2006-07. THE FACTS OF THE ASSESSMENT YEAR ARE SIMILAR TO THE FACTS OF THE EARLIER YEARS IN WHICH THE EXPENDITURE IS ALLOWED. ACCORDINGLY, THIS GROUND IS ALLOWED AND AO IS DIREC TED TO DELETE THE DISALLOWANCE. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 24. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF AO. LD.A.R. ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE AO AN D LD.CIT(A) AND FURTHER SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF PUNE BENCH OF TRIBUNA L IN THE CASE OF ITS SISTER CONCERN, KIRLOSKAR FEEROUS INDIA LIMITE D IN ITA NO.911/PN/2013 ORDER DT.27.11.2014. HE THUS SUPPORTED THE ORDER OF LD.CIT(A). 25. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DISALLOWANCE OF COMMISSION U/S 40A(2) OF THE ACT. BEFORE US, IT IS ASSESSEES SUBMISSION THAT THE PAYMENT OF REMUNERATION PAID TO THE DIRECTORS IS WITHIN THE LIMIT PRESCRIBED BY THE COMPAN IES ACT, 20 1956 AND IS BELOW THE AMOUNT PRESCRIBED BY THE COMPANIE S ACT, 1956. THESE FACTS ARE NOT CONTROVERTED BY REVENUE. U NDER SEC.40A(2) OF THE ACT, THE AO CAN DISALLOW THE EXPENDITURE M ADE TO CLOSE ASSOCIATES HAVING SUBSTANTIAL INTEREST IN THE COMPAN Y FOR GOODS, SERVICES AND FACILITIES. THE AO CAN DISALLOW ONLY THA T PORTION OF EXPENDITURE, WHICH IN HIS OPINION, IS EXCESSIVE OR UNREASO NABLE. REASONABLENESS OF THE EXPENDITURE HAS TO BE SEEN FROM T HE VIEW POINT OF THE BUSINESSMAN AND NOT FROM THE VIEW POINT OF RE VENUE AUTHORITIES. FURTHER BEFORE DISALLOWING THE EXPENSES, THE A O MUST ESTABLISH THAT THE PAYMENT IS EXCESSIVE OR UNREASONABLE AND HE HAS TO PLACE ON RECORD EVIDENCES WITH RESPECT TO EXCESSIVEN ESS AND UNREASONABLENESS. HE CANNOT PROCEED MERELY ON THE BA SIS OF SURMISES AND CONJECTURES. BEFORE US, NO MATERIAL HAS B EEN PLACED BY THE REVENUE TO DEMONSTRATE THAT THE PAYMENT OF CO MMISSION WAS NOT BONAFIDE OR HOW IT WAS UNREASONABLE. MERELY BY COMPARING THE COMMISSION PAID BETWEEN TWO YEARS, IT CANNOT BE CONC LUDED THAT THE COMMISSION WAS EXCESSIVE. WE FURTHER FIND THAT LD.CIT(A) WHILE DECIDING THE ISSUE HAS NOTED THAT THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THAT OF EARLIER YEARS AND IN EARLIER YEARS, THE PAYMENT OF COMMISSION WAS ALLOWED. BEFORE US, RE VENUE HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT T HE FINDINGS OF LD.CIT(A). WE THEREFORE FIND NO REASON TO INTERFERE WITH TH E ORDER OF LD.CIT(A). THUS, THE GROUND OF REVENUE IS DISMISSED. 26. GROUND NO.7 IS WITH RESPECT TO ADDITION ON ACCOUNT OF WARRANTY EXPENSES. 26.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NO TICED THAT ASSESSEE MADE A PROVISION OF RS.1.07 CRORES FOR WARRANTIES ON SALE 21 OF SMALL, MEDIUM AND LARGE ENGINES. HE ALSO NOTICED THAT THE PROVISION MADE WAS NOT COMPLETELY UTILIZED AND IT WAS UTILIZE D ONLY TO THE EXTENT OF RS.91.86 LACS. AO THEREFORE CONCLUDED THAT THE PROVISION FOR WARRANTY TO THE EXTENT OF RS.15.16 LACS (RS.1.07 CRORE BEING PROVISION RS.91.86 LACS BEING AMOUNT UTILIZED) WAS NOT ALLOWABLE. HE ACCORDINGLY DISALLOWED AN A MOUNT OF RS.15,16,618/-. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A), WHO DECIDED THE ISSUE BY HOLD ING AS UNDER : 11.2 I HAVE GONE CAREFULLY THROUGH THE SUBMISSION OF APPELLANT AND THE ASSESSMENT ORDER. SIMILAR ISSUE WAS DECIDED IN A Y 2005-06 &2006-07. THE APPELLANT HAS FILED LETTER TO CHANGE THE GROUND OF APPEAL. THE APPELLANT HAS REQUESTED TO CHANGE THE A MOUNT FROM RS.15,16,618/- TO RS.1,07,02,212/-.THE ABOVE CHANGE IN THE AMOUNT WAS REQUESTED SINCE IN THE EARLIER ASSESSMENT YEARS THE WARRANTY PROVISION WAS DISALLOWED AND IN AY 2007-08, THE AO HAS ALLOWED RS. 91,85,594/- ON THE BASIS OF UTILISATION OF WARR ANTY FOR EARLIER YEARS. 11.3 CONSIDERING THE FACTS OF THE CASE, THE DECISIO N OF SC JUDGMENT IN ROTORK CONTROLS INDIA (P) LTD VS CIT (SC) (2009) 314 ITR 62 IS APPLICABLE TO THE ISSUE. THE PROVISION FOR WARRANTY WILL BE ALWAYS BASED ON PAST TRENDS ONLY AND AS A % OF TURNOVER. T HE AO CANNOT CONSIDER SUBSEQUENT REVERSALS MADE BY THE APPELLANT FOR DISALLOWING THE PROVISION OF WARRANTY FOR EARLIER YEARS. THE RE VERSALS OF PROVISION MADE BY THE APPELLANT ARE OFFERED FOR THE TAXATION IN THE FUTURE YEARS. SIMILARLY IN THE CASE OF LARGE ENGINES, THE WARRANTY OBLIGATION STARTS IMMEDIATELY AFTER THE SALES ARE MADE BY THE A PPELLANT. CONSIDERING THE FACTS OF THE CASE AND FOLLOWING THE DECISION OF THE AY 2005-06 & 2006-07, I HOLD THE PROVISION OF WARRA NTY FOR LARGE ENGINES AMOUNTING TO RS.1,07,02,212/- AS ALLOWABLE DEDUCTION. THE AO HAS ALREADY ALLOWED DEDUCTION OF RS.91,85,59 4/- AND HENCE THE ASSESSEE WILL BE ENTITLED TO A DEDUCTION OF RS. 15,16,618/-. THE ASSESSEES REVISED CLAIM OF RS.1,07,02,212/- IS MIS CONCEIVED IN AS MUCH AS THE ASSESSEES CLAIMS FOR A.Y. 2005-06 AND 2006-07 ARE ALREADY ALLOWED. IN THE RESULTS, THE APPELLANT GET S A RELIEF OF RS.15,16,618/-. THE GROUND IS THUS ALLOWED. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 22 27. BEFORE US, LD.D.R. SUPPORTED THE ORDER OF AO. LD.A.R. ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE AO AN D LD.CIT(A) AND SUPPORTED THE ORDER OF LD.CIT(A). 28. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT WHILE DECIDING THE ISSUE, LD .CIT(A) HAS GIVEN A FINDING THAT IN CASE OF LARGE ENGINES THE WARRA NTY OBLIGATION STARTS IMMEDIATELY AFTER THE SALES MADE BY THE ASSESSEE. LD.CIT(A), FOLLOWING THE DECISION OF ORDER IN ASSESSEES OWN CASE IN A.YS. 2005-06 AND 2006-07 ALSO HELD THAT THE PROVISION OF WARRANTY FOR LARGE ENGINES AT RS. 1,07,02,212/- IS AN ALLOWABLE DEDUC TION. BEFORE US, REVENUE HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT THE FINDINGS OF LD.CIT(A). WE THEREFORE FIND NO RE ASON TO INTERFERE WITH THE ORDER OF LD.CIT(A). THUS, THE GROUND OF REVENUE IS DISMISSED. 29. GROUND NOS.8(A) AND 8(B) ARE INTER-CONNECTED AND ARE W ITH RESPECT TO DISALLOWANCE OF CLAIM OF LONG TERM CAPITAL LOSS O F RS.31,24,06,458/-. 29.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NO TICED THAT ASSESSEE HAS CLAIMED LOSS OF RS.31,24,06,458/- ON RED EMPTION OF CUMULATIVE REDEEMABLE NON CONVERTIBLE PREFERENCE SHARES OF KIROLSKAR FERROUS INDIA LTD., (KFIL). THE ASSESSEE WAS ASK ED TO JUSTIFY THE CLAIM. ASSESSEE INTER-ALIA SUBMITTED THAT KFIL WAS A LOSS MAKING COMPANY AND WAS IN FINANCIAL CRISIS AND THEREFORE COULD NOT PAY THE DUES TO THE BANKS. A RESTRUCTURING PACKAGE WAS DESIGNED BY WHICH ALL THE DUES OF KFIL WAS TO BE CLEARED BY ASSESSEE. THE PREFERENCE SHARES WERE ALLOTTED TO ASSES SEE TOWARDS 23 FINANCIAL ASSISTANCE PROVIDED FOR AUGMENTATION OF KFILS LONG TERM RESOURCES, RESTRUCTURING OF EXISTING LIABILITIES AND TO FUND THE ADVERSE LIQUIDITY SITUATION. IT WAS FURTHER SUBMITTED THAT THE PREFERENCE SHARES WERE ACQUIRED BY ASSESSEE AS A PART OF ONE TIME SETTLEMENT OF ALL OUTSTANDING DEBTS OF KFIL. THE ASSESSEE FURTHER SUBMITTED THAT THE SHARES WERE REDEEMED PRIOR TO ORIGIN AL DATE FOR WHICH NECESSARY BOARD RESOLUTIONS WERE PASSED AND THAT THE LONG TERM CAPITAL LOSS WAS ONLY DUE TO INDEXATION. THE SUBMIS SIONS OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO AO FOR THE RE ASON THAT KFIL WAS A COMPANY PROMOTED BY ASSESSEE AND IT WAS A LOSS MAKING COMPANY, HAD HUGE ACCUMULATED LOSSES AND WAS NOT IN A POSITION TO REPAY THE INTEREST ON LOANS. HE ALSO NOTICED THAT FROM MARCH 1998 TO SEPTEMBER 2002, ASSESSEE HAD PROVIDED HUGE FUNDS BY CONVERTING INTEREST OVER DUES AS PREFERENCE SHARES AS PART OF FINANCIAL RESTRUCTURING OF ITS EXISTING DEBTS. HE NOTED THAT ASSESSEE WAS PROVIDING FUNDS TO KFIL BY CONVERTING DEBTS TO PREFE RENCE SHARES AND HELPED TO OVERCOME FINANCIAL CRISIS. HE WAS OF THE VIEW THAT WHEN THE PREFERENCE SHARES ARE REDEEMED, ASSESSE E ACQUIRES HUGE LOSSES SO THAT IT ESCAPES PAYING CAPITAL GAINS TAX. HE ALSO NOTED THAT NO SPECIFIC REASONS WERE FORTHCOMING FOR PREPO NING THE DATE OF REDEMPTION. HE THEREFORE CONCLUDED THAT THE A RGUMENT OF ACQUIRING AND REDEEMING THE PREFERENCE SHARES AT PAR WA S A TAX PLANNING DEVISE EMPLOYED TO SAVE TAXES. HE ACCORDINGLY D ISALLOWED THE CLAIM OF LOSS. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CARRIED TH E MATTER BEFORE LD.CIT(A), WHO GRANTED RELIEF TO ASSESSEE BY OBSERVING AS UNDER : 13.3 I HAVE GONE CAREFULLY THROUGH THE REASONS GIVEN BY THE AO IN TH E A S SESSMENT ORDER FOR REJ E CTION OF CL A IM OF LONG TERM CAPIT A L LOSS AND AL S O THROUGH THE SUBMISSION OF THE APPELLANT. DURING A PPEAL HEARING, THE APPELLANT SUBMITTED COPY OF DECISION O F MUMBAI HC IN CIT VS. ENAM SECURITIES LTD. 24 13.4 THE APPELLANT INVESTED RS 15 CRS IN THE EQUITY SHAR E CAPI T AL OF KFIL WAY BACK IN 199 3 -94. KFIL CAME OUT WITH A RIGHTS ISSUE IN FY 2006-0 7 & ONE OF THE OBJECTIVES OF ISSUE OF EQUITY SHAR E S WAS REDEMPTION OF PREF E R E NC E SHARES. FURTHER IN V ESTMENT BY THE APPELLANT WAS MADE IN EQUIT Y SHARES IN F Y 2006-07. THE APPELLANT SUBSCRIBED TO 2,43,00 , 000 EQUITY SHARES OF RS. 5 EACH I N KFIL IN FY 2 006-0 7 ACCORDING TO ITS ENTITLEMENT OF RIGHTS ISSUE. THE A PPELL A NT ALSO SUBSCRIBED 1,4 6 , 9 2,00 2 EQUITY SHARES AS PER UNDERTAKING TO SUBSCRIBE FOR THE UNSUBSCRIBED PORTION. THE INVESTMENT IN PREFERENCE SHARE CAPITAL WAS MADE (DETAILS OF PURCHASE OF PREFERENCE SHARE CAPITAL MENTIONED ON P AGE NO 23 OF THE ASSESSMENT ORDER) IN VARIOUS YEARS LE. FY 1997-98 T O FY 2003-04. THE TOTAL INVESTMENT OF THE APPELLANT IS SUMMARISED AS FOLLOWS: SR. NO. PARTICULARS FACE VALUE RS. NO. OF SHARES AS ON 31.03.2007 (IN RS.) NO OF SHARES AS ON 31.03.2008 RS. (IN RS.) 1 EQUITY SHARES 5 27000000 270000 65992002 1634720 2 1% CUMULATIVE REDEEMABLE NON- CONVERTIBLE PREFERENCE SHARE CAPITAL 10 72220000 722200 3 12% CUMULATIVE REDEEMABLE NON- CONVERTIBLE PREFERENCE SHARE CAPITAL 10 32466253 274134 1266334 1634720 THE ABOVE TABLE CLEARLY INDICATES THAT APPELLANT WA S HAVING HUGE STAKE. THE APPELLANT WAS ALSO DEPENDENT ON KFIL AS A MAJOR SOURCE OF RAW MATERIAL AND ITS BUSINESS WOULD HAVE AFFECTE D IF KFIL WOULD HAVE FAILED TO SUPPLY THE MATERIAL. 13.5 I HAVE ALSO NOTED THE FACT STATED BY APPELLANT AND AO THAT KFIL WAS SUFFERING FROM LOSSES AND HAD NOT DECLARED DIVI DEND AND NOT PAID PREFERENCE DIVIDEND. THE APPELLANT HAD MENTION ED DUE TO HUGE LOSSES KFIL ENTERED INTO RESTRUCTURING ARRANGEMENTS AND KFIL ISSUED PREFERENCE SHARES IN LIEU OF ITS DEBTS TO FINANCIAL INSTITUTIONS (IDBI & ICICI) AND TO KOEL THE RESTRUCTURING OF LOANS WAS W ITH LENDERS I.E., IDBI & ICICI. THE KIRLOSKAR OIL ENGINES LTD AS A P ROMOTER OF KFIL WAS REQUIRED TO SUBSCRIBE PREFERENCE SHARES. 13.6 THE APPELLANT HAD INVESTED IN PREFERENCE SHARE CAPITAL OF KFIL SINCE IT WAS PROMOTED BY THE APPELLANT AND THE KFIL WAS PROMOTED AS A BACKWARD INTEGRATION FOR SUPPLY OF PIG IRON & CASTINGS. I AGREE WITH THE APPELLANT THAT INVESTMENTS MADE BY IT IN P REFERENCE SHARE CAPITAL WAS MADE WITH A VIEW TO PROTECT ITS BUSINES S INTEREST IN INVESTMENT ALREADY MADE AND OUTSTANDING AMOUNTS DUE . THE AO HAD NOT NOTED THE FACT THAT KFIL HAD COME OUT WITH RIGHTS ISSUE OF EQUITY SHARES AND ONE OF THE OBJECTIVES OF RIGHTS I SSUE TO PUBLIC WAS REDEMPTION OF PRESENCE SHARE CAPITAL. THE APPELLANT HAD RECEIVED BACK THE AMOUNT OF PREFERENCE SHARE CAPITAL DUE TO REDEMPTION IN AY 2007-08 AND HAD NOT INCURRED ANY LOSS ON THAT ACCOU NT. THE APPELLANT HAD RECEIVED THE ARREARS OF PREFERENCE DI VIDEND ON PREFERENCE SHARE CAPITAL AMOUNTING TO RS 22.77 CRS IN THIS ASSESSMENT YEAR BEFORE REDEMPTION OF PREFERENCE SHA RES. I ALSO AGREE WITH THE STATEMENT MADE BY THE APPELLANT THAT REDEMPTION WAS MADE IN THIS AY HAD BENEFITED IT, SI NCE THE AMOUNT WAS RECEIVED EARLIER. THE AO HAD ALSO FAILED TO NOT E THAT THE FORM OF INVESTMENT LOAN OR PREFERENCE SHARE CAPITAL WILL BE DECIDED BY FACTS 25 OF THE CASE AND THE SAME WAS DECIDED BY THE APPELLA NT AND LENDERS KEEPING ITS INTEREST IN MIND. THERE IS CLEAR DISTINCTION BETWEEN LOAN OR DEBT AND SHARE CAPITAL. IN THE CASE OF DEBT, THERE IS UNDERTAKING TO PAY THE A MOUNT AND PAY INTEREST. THE EXPRESSION SHARE IS DEFINED IN COMPAN IES ACT TO MEAN SHARE IN SHARE CAPITAL OF THE COMPANY. THE COMPANIE S ACT ENVISAGES TWO TYPES OF SHARE CAPITAL, EQUITY SHARE CAPITAL & PREFERENCE SHARE CAPITAL. THUS THERE IS DIFFERENCE BETWEEN A LOAN & PREFERENCE SHARE CAPITAL. THE INVESTMENT IN PREFERENCE SHARES OF A COMPANY SU FFERING LOSSES MAY BE SAFER THAN LOAN AS THE SAME HAS RIGHT TO REC EIVE DIVIDENDS, RIGHT TO RECEIVE BACK CAPITAL, ETC. THE AO HAD STAT ED THAT THE APPELLANT ESCAPES PAYING CAPITAL GAINS TAX BUT NOT STATED ANY FACTS HOW THE APPELLANT HAD ESCAPED PAYING CAPITAL TAX. T HE LONG TERM CAPITAL GAINS IN THIS ASSESSMENT YEAR EVEN AFTER DI SALLOWING LONG TERM CAPITAL LOSS FOR THIS YEAR GETS ADJUSTED AGAIN ST THE CARRIED FORWARD LONG TERM LOSS FROM EARLIER YEARS. THE APPE LLANT CONFIRMED DURING APPEAL PROCEEDINGS THAT THERE WERE NO FREQUE NT PURCHASE AND SALE TRANSACTIONS OF KFIL PREFERENCE SHARES. THE AP PELLANT ALSO CONFIRMED THAT IN THE EARLIER ASSESSMENT YEARS IN W HICH THE INVESTMENT IN PREFERENCE SHARES WAS MADE, THE AO HA D NOT QUESTIONED THE TRANSACTION. 13.7 I HAVE CAREFULLY GONE THROUGH THE BOMBAY HIGH COURT DECISION IN CIT VS. ENAM SECURITIES PVT. LTD., (2012) 345 IT R 64 (BOM). THE BOMBAY HIGH COURT HAD HELD AS FOLLOWS : 'TRANSACTION WAS NOT QUESTIONED BY THE REVENUE FOR TEN Y E AR S . BOTH THE ASSESSEE AND THE COMPANY OF WHICH THE ASSESSE E H E LD REDEEMABLE PREFEREN CE S HARES WERE JURIDICAL ENTITIES. M E R E FA C T THAT BOTH WER E UNDER COMMON MANAGEMENT WOULD NOT NECESSARILY INDICATE THAT THE TRANSACTION WAS NOT GENUINE. REVENUE DID NOT BRING ANY MATERIAL ON RECORD WHATSOEVER TO SUBSTANTIATE THE TRANSACTION WAS SHAM. ' 'THE JUDGMENT OF THE SUPREME COURT IN ANARKALI SARA BHAI CONCLUDES THE ISSUE THAT REDEMPTION OF PREFERENCE S HARES BY A COMPANY SQUARELY COMES WITHIN THE AMBIT OF SECTIO N 2(47) OF THE INCOM E TAX ACT , 1961, SINCE IT AMOUNTS TO TRANSFER.' 'SECTION 48 DENIES THE BENEFIT OF INDEXATION TO BONDS AND DEBENTURES OTHER THAN CAPITAL INDEXED BONDS ISSUE B Y THE GOVERNMENT. THE FOUR PERCENT NON-CUMULATIVE REDEEMA BLE PREFERENCE SHARES WERE NOT BONDS OR DEBENTURES WITH IN THE MEANING OF THAT EXPRESSION OF SECTION 48 OF THE INCOME TAX ACT, 1961 . ' RELYING ON THE DECISION OF JURISDICTIONAL HE , I HOLD THAT, THE INVESTMENTS IN PREFERENCE SHARES (PURCHASE) AND SAL E (REDEMPTION) WAS MADE KEEPING ITS BUSINESS INTEREST AND I DO NOT AGREE WITH THE VIEW OF THE AO THAT THE ARRANGEM ENT OF PURCHASING AND SELLING PREFERENCE REDEEMABLE SHARES AT PAR IS TAX PLANNING DEVICE SYSTEMATICALLY EMPLOYED BY THE ASSESSEE TO AVOID TAX . 13.8 CONSIDERING THE FACTS OF THE CASE AND RELYING ON THE DECISION OF THE BOMBAY HC IN ENAM SECURITIES LIMITED, I DO NOT A GREE WITH THE REASONS GIVEN BY AO IN THE ASSESSMENT ORDER FOR REJ ECTING THE CLAIM OF LONG TERM CAPITAL LOSS. RELYING ON THE DECISION OF THE BOMBAY HC 26 IN ENAM SECURITIES LIMITED, I HOLD THAT PREFERENCE S HARES ARE CAPITAL ASSETS WITHIN THE MEANING OF SECTION 2(14) OF THE I NCOME TAX ACT, REDEMPTION OF PREFERENCE SHARES IS A TRANSFER WITHI N THE MEANING OF SECTION 2(47) OF THE INCOME TAX ACT AND INDEXATION BENEFIT IS AVAILABLE TO THE APPELLANT AS PER PROVISIONS OF SEC TION 48 OF THE INCOME TAX ACT. THE APPELLANT IS ENTITLED TO LONG T ERM CAPITAL LOSS INCURRED ON REDEMPTION OF PREFERENCE SHARE CAPITAL AMOUNTING TO RS.31,24,06,458/-. THUS THE APPEAL IS ALLOWED AND T HE AO IS DIRECTED TO ALLOW THE LONG TERM CAPITAL LOSS. THE A O WILL ALSO STATE THE LONG TERM CAPITAL LOSSES TO BE CARRIED FORWARD CONS IDERING THE LONG TERM CAPITAL LOSS OF THIS YEAR IS RS.31,24,06,458/- .THUS THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THE ORDER OF LD.CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 30. BEFORE US, LD.D.R. TOOK US THROUGH THE FINDINGS OF AO AN D SUBMITTED THAT STRATEGY OF ASSESSEE WAS A TAX PLANNING DEVISE TO EVADE TAXES. HE THUS SUPPORTED THE ORDER OF AO. LD.A.R . ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSEE AND KFIL A RE LISTED COMPANIES. KFIL IS PROMOTED BY ASSESSEE AND THAT ASSES SEE IS DEPENDENT ON KFIL FOR THE PROCUREMENT OF RAW MATERIALS REQUIRED BY THE ASSESSEE. HE SUBMITTED THAT IN VIEW OF RESTRUCTU RING ARRANGEMENT, ASSESSEE AND OTHER FINANCIAL INSTITUTIONS WERE ISSUED PREFERENCE SHARES IN LIEU OF ITS DEBTS AND ONE OF THE PREC ONDITION FOR RESTRUCTURING ARRANGEMENT WAS THAT THE PRMOTORS SHOU LD BRING ADDITIONAL CAPITAL IN KFIL. THE LD.A.R. FURTHER SUBMITTED THA T HAD THE PREFERENCE SHARES BEEN REDEEMED IN 2008 TO 2011, ASSESSEE WOULD HAVE GOT SAME AMOUNT ON REDEMPTION BUT A HIGHER LOSS FOR INCOME TAX PURPOSE DUE TO EXTENDED INDEXATION. HE FURT HER SUBMITTED THAT ASSESSEE HAD ALSO RECEIVED ARREARS OF PR EFERENCE DIVIDENDS WHICH HAVE ALSO BEEN OFFERED TO TAX BY ASSESSEE . HE THEREFORE SUBMITTED THAT THERE WAS NO EVIDENCE TO PROV E THE ALLEGED TAX PLANNING FOR AVOIDANCE OF TAXES AND THEREFORE NO INTE RFERENCE TO THE ORDER OF LD.CIT(A) IS CALLED FOR. 27 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. IN THE PRESENT GROUND, AO HAD DISALLO WED THE CLAIM OF LONG TERM CAPITAL LOSS FOR THE REASON THAT THE TRA NSACTION WAS A TAX PLANNING DEVISE TO EVADE TAXES. BEFORE US, LD.A .R. HAS REITERATED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES A ND HAS SUBMITTED THAT THE PREFERENCE SHARES WERE ALLOTTED TO A SSESSEE DUE TO THE RESTRUCTURING EXERCISE CARRIED OUT AS PER THE M ANDATE OF OTHER PUBLIC FINANCIAL INSTITUTIONS. IT IS AN UNDISPUTED FACT T HAT KFIL WAS PROMOTED BY ASSESSEE, IS A LISTED COMPANY AND HAD HUGE ACCUMULATED LOSSES. THE ISSUANCE OF PREFERENCE SHARES TO THE ASSESSEE ON ACCOUNT OF RESTRUCTURING EXERCISE UNDERTAK EN TO REVIVE KFIL IS AN UNDISPUTED FACT. IT IS ALSO A FACT THAT THE AS SESSEE WAS ISSUED PREFERENCE SHARES IN EARLIER YEARS AND IN THOSE YE ARS THE TRANSACTION WAS NOT DOUBTED BY THE REVENUE. FURTHER NO MATERIAL HAS BEEN BROUGHT ON RECORD BY REVENUE TO DEMONSTRAT E THAT THE TRANSACTION WAS A SHAM. WE FURTHER FIND THAT WHILE DECID ING THE ISSUE IN FAVOUR OF ASSESSEE, LD.CIT(A) HAD RELIED ON THE DECIS ION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ENAM SE CURITIES PVT. LTD., (2012) 345 ITR 64. BEFORE US, REVENUE HAS NOT POINTED OUT ANY FALLACY IN THE FINDINGS OF LD.CIT(A) NOR HAS POINTED OU T AS TO WHY THE RATIO OF DECISION RELIED UPON BY LD.CIT(A) WHILE DECID ING THE APPEAL IS NOT APPLICABLE TO THE PRESENT FACTS. CONSIDERING THE TOTALITY OF AFORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD.CIT(A) AND THUS, THE GROUND OF REVENUE IS DISMISSED. 32. THUS, THE APPEAL OF REVENUE IS DISMISSED. 28 33 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVE NUE IS DISMISSED. ORDER PRONOUNCED ON 12 TH DAY OF FEBRUARY, 2018. SD/- SD/- ( VIKAS AWASTHY ) ( ANIL CHATURVEDI ) ' / JUDICIAL MEMBER #' / ACCOUNTANT MEMBER PUNE; DATED : 12 TH FEBRUARY, 2018. YAMINI $%&'()(& / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3 . 4. 5. 6. CIT(A)-II, NASHIK CCIT-NASHIK. '#$ %%&',) &', / DR, ITAT, B PUNE; $,-./ GUARD FILE. / BY ORDER , / // TRUE COPY // // TRUE COPY // /01%2&3 / SR. PRIVATE SECRETARY ) &', / ITAT, PUNE