DCIT 9(3)(2), MUMBAI V. GARWARE POLYSTER LTD, MUMBAI

ITA 6537/MUM/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 7825 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 08-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Revised return; Unabsorbed depreciation
• Section: 92C; 43B; 14A; 115JB; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN , JM ITA NO. 6537 / MUM/20 1 6 & 5083/MUM/2015 ( ASSESSMENT YEAR : 2011 - 12 & 2010 - 11 ) DY. CIT 9(3)(1) 215, 2 ND FLOOR AAYAKAR BHAVAN MUMBAI 400 020 VS. M/S. GARWARE POLYSTER LTD., 50A, SWAMI NITYANAND MARG WESTERN EXPRESS HIGHWAY VILE PARLE (E) MUMBAI 400 057 PAN/GIR NO. AAACG0571D ( APPELLANT ) .. ( RESPONDENT ) ITA NO. 2208/MUM/2014 &31 /MUM/20 15 ( ASSESSMENT YEAR : 2008 - 09 & 2009 - 10 ) M/S. GARWAR E POLYSTER LTD., 50A, SWAMI NITYANAND MARG WESTERN EXPRESS HIGHWAY VILE PARLE (E) MUMBAI 400 057 VS. DY. CIT 8(1) MUMBAI 400 020 PAN/GIR NO. AAACG0571D ( APPELLANT ) .. ( RESPONDENT ) REVENUE BY MS. NEHA THAKUR ASSESSEE BY SHRI ANUJ KISNADWALA / S HRI VIJAY MEHRA DATE OF HEARING 07 / 12 /201 8 DATE OF PRONOUNCEMENT 27 / 12 /201 8 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE APPEALS FILED BY ASSESSEE AND REVENUE AGAINST THE ORDER OF CIT(A) - 56, MUMBAI DATED 20/07/2016 FOR A.Y.2008 - 09 TO 2011 - 12 IN THE MATTER OF ORDER PASSED U/S.143(3) R.W.S. 144C OF THE IT ACT. 2. GROUNDS TAKEN BY REVENUE ARE AS UNDER: - ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 2 A.Y.2011 - 12 I) 'WHETHER THE LD. C1T(A) HAS ERRED IN DELETING THE ALP ADJUSTMENT MADE AMOUNTING TO RS.28,87,510; - FOR A.Y. 2011 - 12' II) 'WHETHER THE LD. CIT(A) HAS ERRED IN DELETING THE ALP ADJUSTMENT MADE BY THE TP O BY ACCEPTING THE INTERNAL TNMM OF THE ASSESSEE WITHOUT OPPRECIATING THE FACT THAT THE GEOGRAPHICAL DIFFERENCES IN SALES MADE TO AE AND NON AE ARE VERY MUCH EXISTING IN THE INTERNAL TNMM, AND HENCE IN VARIATION OF RULE N O(B)(2)(D) AND RULE N O(B)(3). III ) 'WHETHER THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE INTERNAL TNMM ADOPTED BY TE ASSESSEE AS THE MOST APPROPRIATE METHOD WITHOUT EXAMINING THE COMPARABLE ADOPTED BY THE ASSESSEE ARE PROPER OR NOT.' IV) 'WHETHER ON THE FACTS AND IN THE CIRCUMSTAN CES OF THE CASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO EXCLUDE THE STRATEGIC INVESTMENT MADE BY THE ASSESSEE TO THE TUNE OF RS. 38,10,02,000 / - AS ON 31.03.2010 AND RS. 5,12,86,000 / - AS ON 31,03.2011 WHILE COMPUTING THE DISALLOWANCE OF UNDER SECTION 1 4A READ WITH RULE 8D OF THE INCOME - TAX RULE, 1962.' V) 'WHETHER ON THE FACTS, AND THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES OF RS. 42,87,OOO/ - UNDER SECTION 14A WITHOUT APPRECIATING THE SUB - RU LE 80(3) STARTS WITH HEADING 'FORMULA FOR DETERMINATION OF EXPENDITURE' AND THE THREE STEPS PRESCRIBED UNDER THIS SUB - RULE TO COMPUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND SHALL BE APPLIED COLLECTIVELY. THEREFORE, THE TOTAL DISALLOWANCE UNDER SE CTION 14A HAS TO BE THE AGGREGATE OF THE AMOUNTS DETERMINED SO BY APPLYING THREE STEPS TOGETHER AND NOT IN ISOLATION AS DONE BY THE LD. CIT(A).' VI) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN IGNORING THE CBDT CIRCULAR NO. 5 OF 2014 DATED 11.02.2014 WHEREIN IT HAS BEEN CLARIFIED THAT THE TERM 'INCLUDIBLE' IN THE HEADING SECTION 14A OF THE ACT AND THE HEADING TO RULE 8D OF INCOME - TAX RULES, 1962 INDICATES THAT FOR INVOKING DISALLOWANCE U/S. 14A, IT IS NOT MATERIA L THAT THE ASSESSEE SHOULD HAVE EARNED SUCH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATION'. VII) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT PROVISIONS OF SECTION 14A CANNOT BE IMPORTED WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB'. VIII) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN ALLOWING SET OFF OF UNABSORBED D EPRECIATION OF RS. 62,56,80,138/ - PERTAINING TO A.Y. 2001 - 02 AGAINST BUSINESS IN COME OF CURRENT YEAR' THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ACIT 9(3 )( 2) BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 3 2010 - 11 (I) 'WHETHER THE LD. CIT(A) HAS ERRED IN DELETING THE AL P ADJUSTMENT MADE AMOUNTING TO RS. 20,41,2557 - FORA.YR. 2010 - 11. (II) 'WHETHER THE LD. CIT(A) HAS ERRED IN DELETING THE ALP ADJUSTMENT MADE BY THE TPO BY ACCEPTING THE INTERNAL TNMM OF THE AS SESSEE WITHOUT APPRECIATING THE FACT THAT THE GEOGRAPHICAL DIFFERENCES IN SALES MADE TO AE AND NON AE ARE VERY MUCH EXISTING IN THE INTERNAL TNMM, AND HENCE IN VARIATION OF RULE 10B(2)(D) AND RULE 10(B)(3). (III) 'WHETHER THE LD. CIT(A) HAS ERRED IN HOLD ING THAT THE INTERNAL TNMM ADOPTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD WITHOUT EXAMINING THE COMPARABLES ADOPTED BY THE ASSESSEE ARE PROPER OR NOT'. (IV) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN D IRECTING THE AO TO EXCLUDE THE STRATEGIC INVESTMENTS MADE BY THE ASSESSEE TO THE TUNE OF RS. 38,10 ,02,000/ - AS ON 31.03.2009 AND RS. 38,10,02,200/ - AS ON 31.03.2010 WHILE COMPUTING THE DISALLOWANCE OF U/S 14A READ WITH RULE 8D OF THE I.T. RULES, 1962.' (V) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN DELETING THE DISALL OWANCE OF INTEREST EXPENSES OF RS. 40,28, 50,0007 - U/S 14A WITHOUT APPRECIATING THAT SUB - RULE 8D(3) STARTS WITH HEADING 'FORMULA FOR DETERMINATI ON OF EXPENDITURE' AND THE THREE STEPS PRESCRIBED UNDER THIS SUB - RULE TO COMPUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND SHALL BE APPLIED COLLECTIVELY. THEREFORE, THE TOTAL DISALLOWANCE U/S 14A HAS TO BE THE AGGREGATE OF THE AMOUNTS DETERMINED SO BY APPLYING THREE STEPS TOGETHER AND NOT IN ISOLATION AS DONE BY THE LD. CIT(A). (VI) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN IGNORING THE CBDT CIRCULAR NO. 5 OF 2014 DATED 11.02.2014 WHEREIN IT HAS BEEN C LARIFIED THAT THE TERM 'INCLUDIBTE' IN THE HEADING SECTION 14A OF THE ACT AND THE HEADING TO RULE 8D OF I.T. RULES, 1962 INDICATES THAT FOR INVOKING DISALLOWANCE U/S 14A, IT IS NOT MATERIAL THAT THE ASSESSEE SHOULD HAVE EARNED SUCH EXEMPT INCOME DURING THE FINANCIAL YEAR UNDER CONSIDERATION'. (VII) 'WHETHER ON THE FACTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN HOLDING THAT PROVISIONS OF SEC 14A CANNOT BE IMPORTED WHILE COMPUTING BOOK PROFIT U/S 115JB'. (VIII) 'WHETHER ON THE FA CTS, AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) PERTAINING TO A.YS . 1999 - 2000 AND 2000 - 01 AGAINST BUSINESS INCOME OF CURRENT YEAR. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ACIT 9(3)(2) BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 4 2. GROUNDS TAKEN BY ASSESSEE ARE AS UNDER: - 2008 - 09 GROUND NO. 1: IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ('CIT(A)' ) GROSSLY ERRED IN NOT DIRECTING THE AO TO DELETE THE TRANSFER PRICING ADDITION OF RS. 1,56,91,736/ - U/S. 92 OF THE INCOME TAX ACT, 1961 ('ACT') AND INSTEAD DIRECTING THE AO TO EXAMINE THE ARM'S LENGTH PRICE {'ALP') IN RE SPECT OF THE INTERNATIONAL TRANSACTIONS OF SALE OF POLYESTER FILM PRODUCTS BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES ('AES') APPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM') WITHOUT APPRECIATING THE FACT THAT - I) THE APPELLANT HAD FOLLOWED TNMM FO R BENCHMARKING ITS INTERNATIONAL TRANSACTION OF SALE OF POLYESTER FILMS TO ITS AES AND HAD FILED DETAILED WORKING THEREOF WITH LD. TPO WHEREIN THE PROFIT MARGIN EARNED BY APPELLANT FROM INTERNATIONAL TRANSACTIONS WITH ITS AES AT 13.55% IS HIGHER THAN PROFI T MARGIN OF 12.53% EARNED ON COMPARABLE TRANSACTIONS WITH NON - AES. II) THE LD. TPO HAS ALREADY GIVEN ITS FINDING IN ITS ORDER ON THE RESULTS OF BENCHMARKING UNDER TNMM ADOPTED BY THE APPELLANT AND HAD NOT DISPUTED THE AFORESAID PROFIT MARGIN ANALYSIS OF THE APPELLANT. GROUND NO. 2: IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD CIT (A) GROSSLY ERRED IN DETERMINING THE ALP OF COMMISSION PAYABLE TO AE GPF @10% WITHOUT APPRECIATING THE FACT THAT ADMITTEDLY THE SAID COMMISSION PAYABLE TO AE GPF HAD NOT BEEN PAID AT ALL AND THE SAME IS REVERSED IN THE SUBSEQUENT FINANCIAL YEAR 2010 - 11 IN THE APPELLANT'S BOOKS OF ACCOUNTS. GROUND NO. 3: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE. CIT(A) ERRED IN CONFIRMING THE AD DITION MADE BY LD. AO U/S 43B DISALLOWING THE CONVERSION OF OUTSTANDING INTEREST OF RS 56,53,97,332 BY WAY OF ISSUE OF CUMULATIVE REDEEMABLE PREFERENCE SHARES AND EQUITY SHARES OF THE COMPANY. THE APPELLANT PRAYS THAT THE SAID ACTION OF THE HONB LE. CIT(A) IS BAD IN LAW AND ACCORDINGLY THE SAID DEDUCTION BE GRANTED. GROUND NO. 4: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON BLE CIT (A) ERRED IN CONFIRMING THE ACTION OF THE LD. A.O. IN ADDING THE ERRONEOUS DISALLOWANCE U/S. 14A OF RS 11,45,035 OF THE INCOME TAX ACT WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE INCOME TAX ACT. THE APPELLANT PRAYS THAT THE SAME MAY KINDLY BE DELETED. GROUND WO, 5: ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON B LE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN FAILING TO GRANT A DEDUCTION OF RS 21.82 LAKHS, ON ACCOUNT OF DEPRECIATION ON REVALUED ASSETS, WHILE CALCULATING THE BOOK PROFITS U/S 115JB OF THE ACT. THE APPELLANT PRAYS THAT THE SAID ACTION OF THE HON'BLE CIT (A ) BE DELETED. GROUND NO. 6: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN FAILING TO GRANT A DEDUCTION OF RS 1,58,60,913 INSTEAD OF RS 61,43,854, BEING DEDUCTION RELATING G AIN ON FOREIGN EXCHANGE FLUCTUATIONS ON CAPITAL ASSETS. THE APPELLANT PRAYS T HAT THE SAID ACTION OF THE HON'BLE CIT (A) MAY KINDLY BE DELETED. THE APPELLANT CRAVES TO ADD, ALTER, AMEND OR DELETE ALL OR ANY OF THE GROUNDS OF APPEAL BEFORE OR DURING THE COUR SE OF HEARING. 2009 - 10 GROUND NO. 1: IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ('CIT(A)' ) GROSSLY ERRED IN NOT DIRECTING THE ASSESSING OFFICER (*AO1 TO DELETE THE TRANSFER PRICING ADDITION OF RS. 43,02,039/ - U/S. 92 OF THE INCOME TAX ACT, 1961 ('ACT*) AND INSTEAD DIRECTING THE AO TO EXAMINE THE ARM'S LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS OF SALE OF POLYESTER FILM PRODUCTS BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES ('AES*) A PPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM') WITHOUT APPRECIATING THE FACT THAT - I) THE APPELLANT HAD FOLLOWED TNMM FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION OF SALE OF POLYESTER FILMS TO ITS AES AND HAD FILED DETAILED WORKING THEREOF WITH LD. TPO WHEREIN THE PROFIT MARGIN EARNED BY APPELLANT FROM INTERNATIONAL TRANSACTIONS WITH ITS AES AT 15.99% IS HIGHER THAN PROFIT MARGIN OF 1 1.65% EARNED ON COMPARABLE TRANSACTIONS WITH NON - AES. II) THE LD. TPO HAS ALREADY GIVEN ITS FINDING IN ITS ORDER ON THE RESULTS OF BENCHMARKING UNDER TNMM ADOPTED BY THE APPELLANT AND HAD NOT DISPUTED THE AFORESAID PROFIT MARGIN ANALYSIS OF THE APPELLANT. THE APPELLANT PRAYS THAT SAME MAY KINDLY BE DELETED. GROUND NO. 2: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HON'BLE. CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY LD. AO U/S 43B DISALLOWING THE CONVERSION OF OUTSTANDING INTEREST OF RS 3,92,00,000 BY WAY OF ISSUE OF SHARES OF THE COMPANY. THE APPELLANT PRAYS THAT THE SAID ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 6 ACTION OF THE HON'B LE. CIT(A) IS BAD IN LAW AND ACCORDINGLY THE SAID DEDUCTION BE GRANTED. GROUND NO. 3: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE LEARNED AO U/S 43B IN NOT GRANTING DEDUCTIO N OF CA RS. 65,34,000, BEING OUTSTANDING INTEREST PAID TO UTL BANK, BY CONVERSION INTO SHARES U/S V* 43B. THE APPELLANT PRAYS THAT THE SAID ACTION OF THE AO IS BAD IN LAW AND ACCORDINGLY THE SAID DEDUCTION SHOULD BE GRANTED. GROUND NO. 4: ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT (A) ERRED IN CONFIRMING THE ACTION OF THE LD. A.O. IN MAKING ADDITION U/S. 14A OF RS 1,98,61,000 OF THE INCOME TAX ACT UNDER NORMAL PROVISIONS OF THE ACT THE APPELLANT PRAYS THAT THE SAME MAY KINDLY BE DELETED. GROUND NO. 5: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN ADDING AN AMOUNT OF RS. 2,01,81,000 U/S 14A WHILE COMPUTING BOOK PROFITS UNDER MAT PROVISIONS. THE APPELLANT PRAYS THAT THE SAME MAY KINDLY BE DELETED. A.YS. 2010 - 11 & 2011 - 12 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF POLYESTER FILMS. DURING THE COURSE OF SCRUTINY ASSESSMENT FOR THE A.YS 2010 - 11 & 2011 - 12 THE A.O MADE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT U/S 92C OF THE ACT, DISALLOWANCE U/S 14A WHILE COMPUTING NORMAL INCOME AS WELL AS INCOME U/S 115JB OF THE ACT. THE A.O ALSO DECLINED SET OFF OF UNABSORBED DEPRECIATION PERTAINS TO THE A.YS 1999 - 2000 AND 2000 - 01. 4. BY THE IMPUGNED ORDER THE LD. CIT(A) DELETED THE ABOVE ADDITION IN BOTH THE YEARS AGAINST WHICH REVENUE IS IN FURTHER APPEAL BEFORE US. ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 7 5. WE HAVE CONSIDERED RIVAL CONTENTIONS A ND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. FROM THE RECORD WE FOUND THAT GROUND OF APPEAL NO. 1 TO 3 TAKEN BY THE REVENUE IS WITH REGARD TO DELETION OF TRANSFER PRICING ADJUSTMENT MADE U/S 92C OF THE ACT WE FOUND THAT ADDITION WAS DELE TED BY CIT(A) AFTER FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.YS 2006 - 07 AND 2007 - 08. THE CIT(A) FURTHER HELD THAT THE MARGIN EARNED ON SALES MADE TO AES AND NON - AES FALLS WITHIN THE SAFE HARBOR LIMIT OF (+)( - ) 5%. 6. WE HAVE H EARD THE RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE TRIBUNAL , FOR THE A.Y 2006 - 07 AND 2007 - 08 IN ASSESSEES OWN CASE AND FOUND THAT EXACTLY SIMILAR ADDITIONS SO MADE BY THE TPO HAS BEEN DELETED BY THE TRIBUNAL. THE FACTS AND CIRCUMSTAN CES DURING BOTH THE ASSESSMENT YEARS 2010 - 11 AND 2011 - 12 UNDER CONSIDERATION ARE SAME, WE THEREFORE RESPECTFULLY FOLLOW THE SAME AND DO NOT FIND ANY REASON TO INTERFE RE WITH THE ORDER OF THE CIT(A) FOR DELETING THE ADDITION MADE ON ACCOUNT OF TRANSFER PRIC ING ADJUSTMENT. A.Y 2008 - 09 AND 2009 - 10. 7. IN THESE YEARS THE A.O HAS MADE ADDITION U/S 92 OF THE ACT AMOUNTING TO RS. 43,02,039/ - FOR THE A.Y 2009 - 10. SIMILAR ADDITIONS WAS ALSO MADE BY THE A.O IN THE A.Y 2008 - 09. BY THE IMPUGNED ORDER THE CIT(A) CONF IRMED BY THE ADDITIONS. THE LD. AR DID NOT PRESS THE GROUND OF APPEAL NO. 1 IN BOTH THE ASSESSMENT YEARS UNDER CONSIDERATION , THE SAME ARE THEREFORE DISMISSED IN LIMINI AS NOT PRESSED. ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 8 8. IN BOTH THE ASSESSMENT YEARS THE ASSESSEE IS ALSO AGGRIEVED FOR THE DISALLOWANCE MADE U/S 43B OF THE ACT IN RESPECT OF PAYMENT OF INTEREST BY ISSUE OF EQUITY SHARES. BOTH THE LOWER AUTHORITIES WERE OF THE VIEW THAT CONVERSATION INTEREST IN THE EQUITY SHARES DOES NOT AMOUNT TO ACTUAL PAYMENT OF INTEREST AND THEREFORE SAM E IS LIABLE TO BE DISALLOWED U/S 43B OF THE ACT. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT ISSUE IS COVERED BY THE JUDGMENT OF THE HONBLE ITAT IN THE CASE OF THE ASSESSEES G ROUP COMPANY, GARWARE CHEMICALS LTD., [2015] 68 SOT 223 A.Y 2005 - 06 IN ITA NO. 7819/MUM/2010, WHEREIN IT WAS HELD THAT THERE COULD BE NO DISALLOWANCE U/S 43B OF THE ACT BY INVOKING EXPLANATION 3C, WHERE INTERST PAYABLE WAS CONVERTED INTO EQUITY SHARES AS INTEREST LIABILITY STOOD CEASED TO EXIST AND NOT DEFERRED AS IN CASE OF CONVERSION OF INTEREST LOAN OR BORROWING. FURTHER, THE ITAT HAS ALSO DISCUSSED IN DETAIL THE DISTINCTION BETWEEN LOANS AND SHARE CAPITAL AND HAS FURTHER REPRODUCED THE VARIOUS JUDICI AL PRECEDENTS WHEREIN THE RATIO THAT CONVERSION OF OUTSTANDING INTEREST INTO SHARE CAPITAL LED TO EXTINGUISHMENT OF THE LIABILITY WAS LAID. RELEVANT EXTRACT OF THE JUDGMENT IS REPRODUCED HEREUNDER: - IN VIEW OF THE ABOVE DISCUSSION AS WELL AS DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN THE C A SE OF BIOCON LTD., (SUPRA), WE ARE OF THE VIEW THAT THE INTEREST EXPENDITURE WHICH IS OTHERWISE ALLOWABLE DEDUCTION U/S 36(1)(III) OF THE ACT BUT DIFFERED AS PER THE PROVISIONS OF SEC. 43B CANNOT BE DISALLOWED BECAU SE OF THE REASON THAT THE ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 9 PAYMENT IS NOT IN CASH BUT BY ISSUANCE OF SHARE CAPITAL. ACCORDINGLY, WE CONCUR WITH THE VIEW OF THE TRIBUNAL IN THE CASE OF SURYALAKSHMI COTTON MILLS LTD., JSW STEEL LTD AND CABLE CORPORATION OF INDIA LTD AND BY FOLLOWING THE DE CISION OF SPECIAL BENCH IN THE CASE OF BIOCON LTD., IN OUR VIEW, THE EXPLANATION3C CANNOT BE APPLIED IN THE CASE OF INTEREST PAYABLE, CONVERTED INTO SHARE CAPITAL AS THE INTEREST LIABILITY STAND CEASED TO EXIST AND NOT DEFERRED AS IN CASE OF CONVERSION OF INTEREST LOAN OR BORROWING. THE RBI MASTER CIRCULAR WOULD NOT HELP THE CASE OF REVENUE AS IT WAS A GUIDELINE FOR THE BANKS OUGHT TO GIVE THE ACCOUNTING TREATMENT OF RESTRUCTURED LOAN AND INTEREST 10. THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT VS. RATHI GRAPHICS TECHNOLOGIES LTD., [2015] 378 ITR 107 (DELHI) IN ITA NO. 780 AND 785 OF 2014 ALSO SUPPORTS THE CASE OF THE ASSESSEE. WHEREIN IT WAS HELD THAT WHEN PURSUANT TO A SETTLEMENT, THE CREDITOR AGREES TO CONVERT A PORTION OF INTEREST INTO SHARES, IT MUST BE TREATED AS AN EXTINGUISHMENT OF LIABILITY TO PAY INTEREST TO THAT EXTENT AND IN ESSENCE, THERE WILL BE NO FURTHER OUTSTANDING INTEREST TO THAT EXTENT. CONSEQUENTLY, THE SITUATION WHERE AN INTEREST PAYABLE ON A LOAN IS CONVERTED INT O SHARES IN THE NAME OF THE LENDER/CREDITOR IS DIFFERENT FROM THE SITUATION ENVISAGED IN EXPLANATION 3C TO SEC 43B, VIZ., CONVERSATION OF INTEREST INTO A LONG OR BORROWING. ACCORDINGLY, IT WAS HELD THAT CONVERSION OF PORTION OF INTEREST INTO SHARES IS T O BE CONSIDERED AS ACTUAL PAYMENT WITHIN THE MEANING OF SEC. 43B OF THE ACT. 11. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF SISTER CONCERN AS WELL AS HONBLE DELHI HIGH COURT DECISION (SUPRA), WE DO NOT FIND MERIT FOR THE DISALLOWANC E OF INTEREST U/S 43B OF THE ACT, WHICH WAS ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 10 PAID BY ISSUE OF EQUITY SHARES. AS PER OUR CONSIDERED VIEW THE CONVERSION OF INTEREST LIABILITY INTO SHARE CAPITAL WOULD LEAD TO EXTINGUISHMENT OF THE LIABILITY WHEREAS ITS CONVERSION INTO BORROWINGS OR LOANS W OULD SIMPLY LEAD TO CHANGE IN THE NATURE OF THE LIABILITY. THUS, COURTS HAVE CONCEDED WITH THE APPELLANTS VIEW THAT CONVERSION OF INTEREST LIABILITY INTO SHARE CAPITAL WOULD INDEED BE TREATED AS ACTUAL PAYMENT OF INTEREST FOR THE PURPOSES OF SEC. 43B O F THE ACT. 12. IN THE RESULT GROUND TAKEN BY THE ASSESSEE IN BOTH THE YEARS WITH RESPECT TO DISALLOWANCE U/S 43B OF THE ACT ALLOWED IN ASSESSEES FAVOUR. 13. ASSESSEE IS ALSO AGGRIEVED IN ALL THE ASSESSMENT YEARS I.E 2008 - 09, 2009 - 10, 2010 - 11 AND 2011 - 12 F OR THE DISALLOWANCE MADE U/S 14A O F THE ACT WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF SPECIAL BENCH, ITAT DELHI IN THE CASE OF VIRE E T INVESTMENT 165 ITD 25 (DEL) (SB) . RESPECTFULLY F OLLOWING THE PROPOSITION LAID DOWN IN THE CASE OF ABOVE SAID CASE, WE DO NOT FIND ANY MERIT FOR THE ADDITION OF DISALLOWANCE MADE U/S 14A OF THE ACT , WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. 14. IN THE A.YS 2009 - 10, 2010 - 11 AND 2011 - 12 A.O ALSO M ADE DISALLOWANCE U/S 14A OF THE ACT WHILE COMPUTING THE NORMAL PROFIT. 15. IN THE A.Y 2009 - 10 THE CIT(A) HAS CONFIRMED THE ADDITION WHEREAS FOR THE A.Y 2010 - 11 AND 2011 - 12 THE CIT(A) HAS DELETED THE SAME. 16. RIVAL CONTENTIONS HAVE BEEN HEARD AND PERUSED I N THE A.Y 2009 - 10 F ROM THE RECORD, WE FIND THAT DURING THE COURSE OF ASSESSMENT THE ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 11 ASSESSEE HAS ARGUED FOR EX CLUSION THE INVESTMENTS MADE IN THE GROUP CONCERNS WHILE COMPUTING THE DISALLOWANCE U/S 14A OF THE ACT AND RELIED ON THE DECISION OF THE TRIBUNAL IN EARLIER YEARS. WE DO NOT FIND ANY MERIT IN THIS CONTENTION OF THE LD. AR IN SO FAR AS HONBLE SUPREME COURT RECENT DECISION IN THE CASE OF MAXOUP INVESTMENT DATED 12.02.2018 HAVE HELD THAT EVEN INVESTMENTS MADE IN GROUP CONCERN A S STRATEGIC AL INVESTME NT IS ALSO LIABLE FOR DISALLOWANCE U/S 14A OF THE ACT. 16. IN VIEW OF THE ABOVE WE CO NFIRMED THE ACTION OF THE A.O WITH REGARD TO INCLUSION OF STRATEGIC AL INVESTMENT / INVESTMENT MADE IN GROUP CONCERNS WHILE WORKING OUT AVERAGE INVESTMENT ON WHICH DISALLOW ANCE U/S 14A R.W.R. 8D OF THE IT RULES IS WARRANTED. 17. HOWEVER, AS PER OUR CONSIDER ED VIEW NO DISALLOWANCE IS TO MA D E IF THERE IS NO DIVIDEND INCOME DURING THE YEAR, IN THIS REGARD HONBLE ITAT, MUMBAI IN THE CASE OF SLYVEX CABLE CO. PVT. LTAD VS. DCIT IN ITA NO. 8581/MUM/2011 DATED 24.02.2016, HELD AS UNDER: 6. WE FIND FORCE IN THE SUBMISSION OF THE ASSESSEE THAT ONLY THOSE INVESTMENTS WHICH WOULD YIELD DIVIDEND AND WHICH IS EXEMPT SHOULD BE CONSIDERED FOR DISALLOWANCE UNDER RULE 8D2(III) OF THE ACT. WE ALSO HOLD THAT THE DISALLOWANCE U/S 14A SHOULD NOT EXCEED THE DIVIDEND INCOME EARNED BY THE ASSESSEE. WE DIRECT THE AO TO RECOMPUTED THE DISALLOWANCE TAKING ONLY THOSE INVESTMENTS WHICH YIELD DIVIDEND INCOME AND APPLY RULE 8D(2)(III) AND SUCH DISALLOWA NCE SHOULD NOT EXCEED THE DIVIDEND INCOME EARNED BY THE ASSESSEE. 18. IN VIEW OF THE ABOVE WE DIRECT THE A.O TO RESTRICT THE DISALLOWANCE U/S 14A IN ALL THE YEARS TO THE AMOUNT OF EXEMPT INCOME EARNED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION. WE ALSO FIND SUPPORT FOR ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 12 THIS CONTENTION IN THE JUDGEMENT OF THE HONBLE ITAT, MUMBAI IN THE CASE OF DAGA GLOBAL CHEMICALS VS. ACIT IN ITA NO. 5592/MUM/2012 WHEREIN HE ASSESSEE HAD APPEALED AGAINST THE EXCESSIVE DISALLOWANCE MADE U/S 14A OF THE ACT. THE ITAT SUBSEQUENTLY HELD THAT EVEN IF DISALLOWANCE U/S 14A OF THE ACT IS MADE, THE SAME SHALL NOT EXCEED THE AMOUNT OF EXEMPT INCOME EARNED. RELEVANT EXTRACT OF THE SAID JUDGEMENT IS REPRODUCED HEREUNDER; AT BEST, IF ANY DISALLOWANCE COULD BE MADE THAT CA N BE RESTRICTED TO RS. 1,485/ - WHICH WERE CLAIMED AS DEMAT CHARGES. DISALLOWANCE U/S 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT INCOME. IN VIEW OF THIS FACT, WE FIND MERIT IN THE CLAIM OF THE ASSESSEE. THE APPEAL OF THE ASSESSEE IS THEREFORE ALLOWED. 19 . FURTHERMORE NO INTEREST DISALLOWANCE CAN BE MADE U/S 14A OF THE ACT WHEN OWN FUNDS OF THE ASSESSEE ARE SUFFICIENT TO COVER THE VALUE OF INVESTME NTS FOR THIS PURPOSE RELIANCE CAN BE PLACED ON THE FOLLOWING JUDICIAL PRONOUNCEMENT: 1. CIT VS. RELIANCE U TILITIES LTD [313 ITR 340 (BOM)] 2. CIT VS. HDFC BANK LTD [366 ITR 505 (BOM)] 3. HDFC BANK VS. DCIT [383 ITR 529 (BOM)] 20. FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT ONLY THOSE INVESTMENTS ARE TO BE CONSIDERED FORM WHICH EXEMPT INCOME HAS BEEN R ECEIVED DURING THE YEAR FOR THIS PURPOSE RELIANCE IS PLACED ON FOLLOWING JUDICIAL PRONOUNCEMENT: 1. ACIT VS. VIREET INVESTMENT [165 ITD 25 (DEL) (SB)] 2. ACB INDIA VS. ACIT [374 ITR 108 (DEL)] ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 13 3. CIT VS. INTERGLOBE ENTERPRISES LTD. (DELHI HIGH COURT) 4. M/S. SLYVEX CABLE CO. PVT. LTD VS. DCIT BEING ITA NO. 8581/MUM/2011 FOR A.Y 2008 - 09 DATED 24.02.2016. 5. SYNTEX CORP PVT LTD VS. ITO BEING ITA NO. 2994/MUM/2012 DATED 21.06.2018. 21. IN THE A.Y 2009 - 10 , WE FIND THAT ASSESSEE WA S HAVING OWN FUNDS OF RS. 23,758.60 LAKHS AGAINST WHICH INVESTMENT WA S ONLY TO THE TUNE OF RS. 3,810.02 LAKHS. ACCORDINGLY NO DISALLOWANCE OF INTEREST IS WARRANTED IN TERMS OF JUDICIAL PRONOUNCEMENTS REFERRED ABOVE. 22. FACTS AND CIRCUMSTANCES IN THE A.Y 2010 - 11 AND 2011 - 12, WHER EIN THE REVENUE IS AGGRIEVED FOR DELETING THE DISALLOWANCE OF INTEREST SO MADE BY THE A.O U/S 14A OF THE ACT. RE SPECTFULLY FOLLOWING THE REASONING GIVEN IN THE A.Y 2009 - 10 HEREIN ABOVE WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE LD. CIT(A) FOR THE A.Y 2010 - 11 AND 2011 - 12 WITH REGARD TO DELETING DISALLOWANCE OF INTEREST SO MADE U/S 14A OF THE ACT. 23. FOR THE A.Y 2008 - 09 ASSESSEE IS AGGRIEVED FOR DISALLOWANCE OF DEPRECIATION ON REVALUED ASSETS IN COMPUTING THE BOOK PROFIT U/S 115JB OF THE AC T. 24. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT THE ASSESSEE HAS MADE FRESH CLAIM BEFORE THE A.O DURING THE ASSESSMENT PROCEEDINGS WHICH WAS DECLINED BY THE A.O ON THE PLEA THAT THE ASSESSEE HAS NOT FILED REVISED RETURN OF INCOME. KEEPING IN VIEW OF THE DECISION OF ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 14 THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PRUTHVI BROKERS AND SHARE HOLDERS PVT LTD. IN 349 ITR 336, WE RESTORE THE MATTER BACK TO THE FILE OF THE A.O FOR DECIDING AS PER LAW WE DIRECT ACCORDINGLY. 25 . FOR THE A.Y 2010 - 11 THE REVENUE AGGRIEVED FOR DELETING DISALLOWANCE OF SET OFF OF UNABSORBED DEPRECIATION PERTAINS TO THE A.YS 1999 - 00 AND 2000 - 01. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT THE ISSUE IS COVERED IN FAVOUR OF ASSESSEE VIDE DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. ASSOCIATED CABLES PVT LTD DATED 03.08.2018 AND DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF GENERAL MOTORS INDIA PVT LTD VS. DCIT (354 ITR 244). RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE BOMBAY HIGH COURT AN D GUJARAT HIGH COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) FOR ALLOWING SET OFF OF UNABSORBED DEPRECIATION PERTAINING TO THE A.YS 1999 - 00 AND 2000 - 01 SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI HIGH COURT IN THE CASE OF MOTOR AND GENERAL FI NE LTD., REPORTED IN 393 ITR 60. F OLLOWING THE ABOVE REASONS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A). 26 . FOR THE A.Y 2008 - 09 THE ASSESSEE HAS AGGRIEVED DISALLOWANCE OF DEDUCTION OF GAIN ON EXCHANGE RATE FLUCTUATIONS ON LOAN TAKEN BY THE ASSESSEE. 27 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT THIS PLEA WAS TAKEN BY THE ASSESSEE FIRST TIME BEFORE THE A.O DURING THE COURSE OF ASSESSMENT WITHOUT FILING REVISED RETURN, ACCORDINGLY A.O DECLINED SAME ITA NO. 6537/MUM/2016 AND OTHER APPEALS M/S. GARWARE POLYSTER LTD., 15 BY FOLLOWING THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) PVT LTD. 28 . FOLLOWING THE REASONS GIVEN HEREIN ABOVE WITH RESPECT TO DISALLOWANCE ON DEPRECIATION ON REVALUED ASSETS WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT WHICH WAS ALSO FILED BEFORE THE A.O DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS. WE RESTORE THE MATTER BACK TO THE FILE OF THE A.O FOR DECIDING AS PER LAW WE DIRECT ACCORDINGLY. 29 . IN THE RESULT APPEALS OF THE ASSESSEE AND REVENUE ARE ALLOWED IN PART IN TERMS INDICTED ABOVE . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27 / 12 /201 8 SD/ - ( SANDEEP GOSAIN ) SD/ - (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 27 / 12 /201 8 KARUNA SR. PS COPY OF THE O RDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//