LAXMI DIAMOND P.LTD, MUMBAI V. ADDL CIT 5(1), MUMBAI

ITA 6991/MUM/2012

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9214 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-03-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 22-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R P MEENA
• Assessee Lawyers: K A VAIDYALINGAN
• Keywords: Capital asset; Earning of tax free income; Speculation loss
• Section: 143(3); 142(1); 14A; 43(5); 37

Judgement Text

1 ITA 8612/UM/2011 & 6991/MUM/2012 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.8612/MUM/2011 - A.Y. 2007-08 I.T.A NO.6991 /MUM/2012 - A.Y. 2008-09 M/S LAXMI DIAMOND PVT LTD DW-2332, BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI PAN : AABCL1815G VS ADDL CIT-5(2), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI K.A. VAIDYALINGAN RESPONDENT BY SHRI R.P. MEENA DATE OF HEARING 26-07-2017 DATE OF PRONOUNCEMENT 04-10-2017 O R D E R PER G MANJUNATHA, AM : THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIREC TED AGAINST SEPARATE BUT IDENTICAL ORDERS OF THE CIT(A)-9, MUMBAI DATED 17-1 1-2011 AND 24-09-2012 FOR THE ASSESSMENT YEAR 2007-08 AND 2008-09, RESPECTIVE LY. SINCE FACTS ARE IDENTICAL AND THE ISSUES ARE COMMON, FOR THE SAKE O F CONVENIENCE, THESE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER. 2. THE BRIEF FACTS OF THE CASE, AS EXTRACTED FROM ITA NO.8612/MUM/2011 ARE THAT THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS O F IMPORT OF ROUGH 2 ITA 8612/UM/2011 & 6991/MUM/2012 DIAMONDS, POLISHING AND EXPORT OF POLISHED DIAMONDS , FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 ON 18-10-200 7 DECLARING TOTAL INCOME OF RS.26,13,41,450. THE CASE WAS SELECTED FOR SCRU TINY AND STATUTORY NOTICES U/S 143(2) AND 142(1) WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME AND FURNISHED THE DETAILS, AS CALLED FOR. THE ASSESSMENT WAS COMPLET ED U/S 143(3) ON 29-12-2012 DETERMINING THE TOTAL INCOME AT RS.28,27,65,840 INT ERALIA MAKING DISALLOWANCES U/S 14A, DISALLOWANCE OF INTEREST U/S 36(1)(III) AND DISALLOWANCE OF SPECULATION LOSS. AGGRIEVED BY THE ASSESSMENT O RDER, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 3. THE CIT(A), FOR THE DETAILED REASONS RECORDED IN HI S ORDER DATED 17-11- 2011, PARTLY ALLOWED APPEAL FILED BY THE ASSESSEE W HEREIN HE RESTRICTED DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A R.W.R. 8D OF RS.29,82,050 OUT OF TOTAL DISALLOWANCE WORKED OUT BY THE AO AT RS.31,91,936. INSOFAR AS DISALLOWANCE OF LOSS INCU RRED ON FOREIGN EXCHANGE, THE CIT(A) CONFIRMED DISALLOWANCE MADE BY THE AO BY HOL DING THAT THE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF FORWARD CON TRACTS IS IN THE NATURE OF SPECULATIVE TRANSACTIONS COVERED U/S 43(5) OF THE I NCOME-TAX ACT, 1961. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS I N APPEAL BEFORE US. 4. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATION IS DISALLOWANCE OF 3 ITA 8612/UM/2011 & 6991/MUM/2012 EXCHANGE FLUCTUATION LOSS ON FORWARD CONTRACTS. TH E FACTUAL MATRIX OF THE CASE WHICH LEADS TO THE IMPUGNED DISPUTE ARE THAT THE AS SESSEE IS IN THE BUSINESS OF IMPORT AND EXPORT OF DIAMONDS, HAS ENTERED INTO FOR WARD CONTRACTS WITH ITS BANKERS TO MITIGATE THE POSSIBLE LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY AND THE RESULTANT LOSS ON ACCOUNT OF PRE-C LOSURE / MATURITY OF FORWARD CONTRACTS AND MARKED TO MARKET LOSSES AT THE END OF THE FINANCIAL YEAR OF OUTSTANDING FORWARD CONTRACTS HAS BEEN TREATED AS B USINESS LOSS. AS STATED EARLIER, THE ASSESSEE IS IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS AND RE- EXPORT OF POLISHED DIAMONDS. DURING THE FINANCIAL YEAR RELEVANT TO AY 2007-08, THE ASSESSEE ACHIEVED TURNOVER OF RS.1,018.83 CRORE S. THE ASSESSEE HAS ENTERED INTO 2,280 FORWARD CONTRACTS TRANSACTIONS W ITH REGARD TO EXPORT RECEIVABLES AND IMPORT PAYABLES. THE ASSESSEE HAS EARNED GAIN ON FORWARD CONTRACTS WHICH HAS BEEN TREATED AS BUSINESS PROFIT . THE ASSESSEE ALSO INCURRED FLUCTUATION LOSS IN RESPECT OF FORWARD CON TRACTS WHICH HAS BEEN TREATED AS BUSINESS LOSS AND THE NET EFFECT OF GAIN S / LOSS HAS BEEN EITHER TREATED AS FOREIGN EXCHANGE LOSS OR GAIN. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE AO CALLED UPON THE ASSESSEE TO EXP LAIN AS TO WHY EXCHANGE FLUCTUATION LOSS CANNOT BE DISALLOWED AS SPECULATIO N LOSS WITHIN THE MEANING OF SECTION 43(5) OF THE I.T. ACT, 1961. IN RESPONSE T O NOTICE, THE ASSESSEE SUBMITTED THAT IT IS IN THE BUSINESS OF IMPORT / EX PORT OF DIAMONDS AND TO 4 ITA 8612/UM/2011 & 6991/MUM/2012 HEDGE ITS EXPORT RECEIVABLES AND PAYABLES ENTERS IN TO FORWARD CONTRACT WITH ITS BANKERS TO MITIGATE POSSIBLE LOSS ON ACCOUNT OF FLU CTUATION IN FOREIGN CURRENCY AND THE RESULTANT GAINS / LOSS HAS BEEN TREATED AS BUSINESS LOSS. THE ASSESSEE FURTHER SUBMITTED THAT IT IS CONSISTENTLY FOLLOWING THE ACCOUNTING METHOD WHEREIN MARKED TO MARKET GAIN / LOSS IN RESPECT OF ALL ASSETS OR LIABILITIES DENOMINATED IN FOREIGN CURRENCY IS BEING CONSISTENT LY RECOGNIZED IN THE BOOKS OF ACCOUNT. THE ASSESSEE FURTHER SUBMITTED THAT TH E TERM MARKED TO MARKET (MTM) LOSS IN CONNECTION WITH FORWARD CONTRACT REFE RS TO GAIN OR LOSSES COMPUTED ON A PARTICULAR DATE WITH REFERENCE TO PRE VAILING EXCHANGE RATE IN RESPECT OF FORWARD CONTRACTS. IN OTHER WORDS, THE TERM CRYSTALLIZED LOSS REFERS TO THE LOSSES CRYSTALLIZED AND DEBITED TO P&L ACCOU NT, WHEREAS MARKED TO MARKET LOSSES ARE PROVISION CREATED IN THE BOOKS OF ACCOUNT TOWARDS LOSS / GAIN IN FLUCTUATION IN CURRENCY AS ON THE VALUATION DATE . THE ASSESSEE FURTHER SUBMITTED THAT ITS FORWARD CONTRACTS ARE ENTERED IN TO TO HEDGE THE CURRENCY RISK ASSOCIATED WITH THE NORMAL BUSINESS TRANSACTIO NS. THESE DERIVATIVE CONTRACTS ARE ENTERED INTO WITHIN THE FRAMEWORK OF RELEVANT RBI GUIDELINES INCLUDING QUANTUM LIMITS SET BY RBI. THE INTENT OF ENTERING INTO DERIVATIVE CONTRACTS WAS TO SAFEGUARD INTEREST AGAINST EXCHANG E RATE FLUCTUATION RISK ON FOREIGN CURRENCY RECEIVABLE / PAYABLE AND NOT TO CA RRY ON SEPARATE BUSINESS ACTIVITY IN DEALING WITH CURRENCY. THE ASSESSEE FU RTHER SUBMITTED THAT THESE 5 ITA 8612/UM/2011 & 6991/MUM/2012 TRANSACTIONS ARE DIRECTLY LINKED TO NORMAL BUSINESS ACTIVITY AND HAVE DIRECT AND PROXIMATE NEXUS TO THE BUSINESS OF THE ASSESSEE. T HOUGH IT IS DIFFICULT TO MAKE ONE TO ONE CO-RELATION BETWEEN FORWARD CONTRACTS AN D ITS EXPORT RECEIVABLE / PAYABLE, THE TOTAL VALUE OF FORWARD CONTRACTS ENTER ED DURING THE PERIOD DOES NOT EXCEED ITS EXPOSURE IN FOREIGN CURRENCY IN THE FORM OF EXPORT RECEIVABLES / EXPORT PAYABLES AND OTHER FOREIGN CURRENCY TRANSACT IONS IN THE FORM OF LOANS, ETC. THEREFORE, IT HAS RIGHTLY TREATED LOSS INCURR ED ON FORWARD CONTRACTS AS ITS BUSINESS LOSS. IN SUPPORT OF ITS ARGUMENTS, THE AS SESSEE RELIED UPON PLETHORA OF DECISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF WOODWARD GOVERNOR VS CIT 312 ITR 254(SC) AND ALSO T HE SPECIAL BENCH OF THE ITAT, IN THE CASE OF BANK OF BAHRAIN & KUWAIT (2010 ) 5 ITR (TRIB) 301 (MUM). 5. THE AO, AFTER CONSIDERING THE EXPLANATIONS GIVEN BY THE ASSESSEE OBSERVED THAT THE ASSESSEE FAILED TO LINK ANY OF TH E TRANSACTIONS IN FORWARD CONTRACTS WITH SPECIFIC BILLS RECEIVABLES / BILLS P AYABLES SO AS TO CHARACTERIZE THEM AS HEDGING TRANSACTIONS. ALL THE CONTRACTS WE RE EITHER CANCELLED OR MATURED OTHERWISE THAN BY TAKING ACTUAL DELIVERY. THE AO FURTHER OBSERVED THAT THOUGH THE ASSESSEE HAS IMPORT AND EXPORT ACTI VITY AND OBLIGATION IN FOREIGN CURRENCY IN THE FORM OF EXPORT RECEIVABLES / IMPORT PAYABLES, FAILED TO LINK ANY OF ITS BILLS TO THE FORWARD CONTRACTS. TH EREFORE, HE OPINED THAT THE ASSESSEE WAS CONDUCTING SYSTEMATIC AND ORGANIZED AC TIVITY OF FORWARD AND 6 ITA 8612/UM/2011 & 6991/MUM/2012 OPTION CONTRACTS AND THE ASSESSEES FORWARD CONTRAC TS ARE IN THE CATEGORY OF SPECULATIVE TRANSACTIONS. THE AO FURTHER REFERRING TO THE CIRCULAR OF CBDT ,DATED 23-10-2010 OBSERVED THAT AS PER THIS CIRCULA R OF CBDT ANY ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES RE FERRED TO IN CLAUSE (AC) OF SECTION (2) OF SECURITIES CONTRACTS (REGULATIONS) ACT, 1956, THAT HAS BEEN CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NO T BE TREATED AS SPECULATIVE TRANSACTIONS. THE ASSESSEE HAD NOT CARRIED OUT ANY TRANSACTION IN RECOGNIZED STOCK EXCHANGE. THEREFORE, HE OPINED THAT THEY ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS AS PROVIDED IN SECTION 43( 5) AND HENCE, LOSS INCURRED ON FORWARD CONTRACTS CANNOT BE ALLOWED AS DEDUCTION AGAINST BUSINESS PROFITS. THE AO HAS EXTENSIVELY DISCUSSED THE PROVISIONS OF SECTION 43(5) OF THE ACT, THE CIRCULAR ISSUED BY THE BOARD AND CERTAIN DECISIONS TO COME TO THE CONCLUSION THAT FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE WITH ITS BANKERS ARE SETTLED OTHERWISE THAN DELIVERY AND MAJORITY OF THE M WERE FORWARD AND OPTION CONTRACTS WHERE DELIVERY WAS NOT TAKEN. THE AO FUR THER OBSERVED THAT HEDGING TRANSACTIONS TAKE PLACE NORMALLY TO GUARD AGAINST POSSIBLE LOSS IN FOREIGN CURRENCY MOVEMENTS, WHEREAS SPECULATIVE TRANSACTION S ARE NORMALLY ENTERED INTO TO MAKE PROFIT BY SPECULATION OR CAMOUFLAGING; THEREFORE, THERE IS A DIFFERENCE BETWEEN HEDGING TRANSACTIONS AND SPECULA TIVE TRANSACTIONS. THE FACTS CLEARLY INDICATE THAT FORWARD CONTRACTS ENTER ED INTO BY THE ASSESSEE ARE 7 ITA 8612/UM/2011 & 6991/MUM/2012 CLEARLY IN THE NATURE OF SPECULATIVE TRANSACTIONS, THEREFORE, LOSS ON SUCH FORWARD CONTRACTS CANNOT BE ALLOWED AS DEDUCTION; A CCORDINGLY THE AO DISALLOWED EXCHANGE LOSS AND ADDED BACK TO THE TOTA L INCOME OF THE ASSESSEE. 6. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE LD.AO , ON A MISTAKEN FACT THAT LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF FO RWARD CONTRACTS REPRESENT LOSS IN RESPECT OF CANCELLATION OF FORWARD CONTRACT S AND BEING SPECULATIVE IN NATURE IS NOT ALLOWABLE AS PER THE PROVISIONS OF SE CTION 43(5) OF THE ACT. BUT IN REALITY, THIS LOSS IS ON ACCOUNT OF OUTSTANDING FOR WARD CONTRACTS (MARKED TO MARKET) AT THE YEAR END IN ACCORDANCE WITH METHOD O F ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE, AS PER ACCOUNTING STANDAR D 11 ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI). THE LD.AR F URTHER SUBMITTED THAT THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS TO HEDG E ITS EXPORT RECEIVABLES / PAYABLES TO MITIGATE POSSIBLE LOSS ON ACCOUNT OF FL UCTUATION IN FOREIGN CURRENCY WHICH ARE IN THE NATURE OF HEDGING TRANSACTIONS, TH EREFORE, THE AO WAS ERRED IN TREATING THE FORWARD CONTRACTS AS SPECULATIVE TRANS ACTIONS U/S 43(5) OF THE ACT. THE LD.AR REFERRING TO THE PAPER BOOK FILED SUBMITT ED THAT THE ASSESSEE HAS ENTERED INTO VARIOUS FORWARD CONTRACTS AND THE TOTA L VALUE OF SUCH CONTRACTS DOES NOT EXCEED ITS EXPOSURE TO FOREIGN CURRENCY IN THE FORM OF EXPORT RECEIVABLES / PAYABLES. THOUGH THE ASSESSEE IS NOT ABLE TO HAVE ONE TO ONE CO- RELATION BETWEEN FORWARD CONTRACTS AND ITS EXPORT B ILLS RECEIVABLES / PAYABLES, 8 ITA 8612/UM/2011 & 6991/MUM/2012 AT ANY POINT OF TIME, VALUE OF ITS FORWARD CONTRACT S DOES NOT EXCEED TOTAL RECEIVABLES / PAYABLES FROM ITS BUSINESS. IT IS FU RTHER SUBMITTED THAT THE ASSESSEE HAS RECOGNIZED LOSS ON FORWARD CONTRACTS T ERMINATED / MATURED AS CRYSTALLIZED LOSSES ARE DEBITED TO THE P&L ACCOUNT. IN RESPECT OF FORWARD CONTRACTS WHICH ARE OUTSTANDING AT THE YEAR END HAS BEEN MARKED TO MARKET BASED ON THE PREVAILING EXCHANGE RATE ON THE VALUAT ION DATE IN ACCORDANCE WITH THE CONSISTENT ACCOUNTING PRACTICES FOLLOWED A S PER THE AS-11 ISSUED BY ICAI. THE ASSESSEE HAS FURNISHED ALL THE DETAILS I N RESPECT OF ITS FORWARD CONTRACTS TO PROVE THAT ITS FORWARD CONTRACTS ARE I N THE NATURE OF HEDGING TRANSACTIONS, BUT NOT SPECULATIVE TRANSACTIONS AS D EFINED U/S 43(5)(D). THE AO IGNORED ALL THE EVIDENCES FILED BY THE ASSESSEE TO TREAT FORWARD CONTRACT AS SPECULATIVE TRANSACTIONS MERELY ON THE SOLE GROUND THAT THE ASSESSEE HAS NOT FILED ONE TO ONE CO-RELATION BETWEEN FORWARD CONTRA CTS AND ITS BILLS RECEIVABLES / PAYABLES. IN THIS REGARD, HE RELIED UPON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR (I) PVT LTD VS CIT (SUPRA) AND ITAT SPECIAL BENCH, IN THE CASE OF BANK OF BAHRAIN & KUW AIT (SUPRA). 7. ON THE OTHER HAND, THE LD.DR STRONGLY SUPPORTED ORD ER OF THE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAS FAILED TO LINK ANY OF ITS FORWARD CONTRACTS WITH SPECIFIC BILLS SO AS TO BE CATEGORIZED THEM AS HEDG ING TRANSACTIONS. ALL THE CONTRACTS ARE CANCELLED OTHERWISE THAN BY TAKING AC TUAL DELIVERY. THE AO HAS 9 ITA 8612/UM/2011 & 6991/MUM/2012 BROUGHT OUT THE CLEAR FACTS TO THE EFFECT THAT FORW ARD CONTRACTS ENTERED INTO BY THE ASSESSEE ARE NOT COVERED UNDER EXCEPTIONS PROVI DED IN SECTION 43(5)(D) NOR IN THE BOARDS CIRCULAR NO.3 OF 2010 DATED 23-10-20 10 AS DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF SECURITIES CONTR ACTS (REGULATIONS) ACT, 1956, HAS BEEN CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE . THEREFORE, THE AO HAS RIGHTLY TREATED THE LOSS INCURRED ON FORWARD CONTRA CTS AS SPECULATIVE LOSS AND HIS ORDER SHOULD BE UPHELD. 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES B ELOW. THE AO DISALLOWED EXCHANGE LOSS INCURRED BY THE ASSESSEE ON FORWARD C ONTRACTS ON THE GROUND THAT THE FORWARD CONTRACTS ARE IN THE NATURE OF SPE CULATIVE TRANSACTIONS COVERED BY PROVISIONS OF SECTION 43(5) OF THE INCOM E-TAX ACT, 1961. THE AO FURTHER OBSERVED THAT THE ASSESSEE IS NOT ABLE TO L INK ONE TO ONE CO-RELATION BETWEEN FORWARD CONTRACTS AND EXPORT BILLS RECEIVAB LES / PAYABLES. ACCORDING TO THE AO, A LOSS INCURRED ON UNMATURED OUTSTANDING FORWARD CONTRACTS AT THE END OF THE FINANCIAL YEAR IS A NOTIONAL LOSS WHICH IS MARKED TO MARKET AS PER THE PREVAILING EXCHANGE RATE AS ON THE VALUATION DATE W HICH IS A CONTINGENT LIABILITY BUT NOT AN ASCERTAINED LIABILITY AND HENCE, CANNOT BE ALLOWED AS DEDUCTION. THE AO FURTHER OBSERVED THAT THE ASSESSEE IS CARRYI NG OUT SPECULATIVE TRANSACTIONS BY ENTERING INTO FORWARD CONTRACTS IN ORGANIZED AND SYSTEMATIC 10 ITA 8612/UM/2011 & 6991/MUM/2012 MANNER. IT WAS FURTHER OBSERVED THAT IN ORDER TO C HARACTERIZE A PARTICULAR TRANSACTION UNDER HEDGING, IT SHOULD BE LINKED TO B ILLS RECEIVABLES OR PAYABLES IN RESPECT OF ITS EXPORT BUSINESS. THE AO HAS EXTE NSIVELY DISCUSSED PROVISIONS OF SECTION 43(5), HEDGING TRANSACTIONS, SPECULATIVE TRANSACTIONS AND CIRCULAR OF BOARD TO COME TO THE CONCLUSION THAT FORWARD CONTR ACTS ENTERED INTO BY THE ASSESSEE ARE NOT IN THE NATURE OF HEDGING TRANSACTI ONS ENTERED IN ORDER TO MINIMIZE EXCHANGE FLUCTUATION LOSS IN CURRENCY MOVE MENT. THE AO FINALLY CONCLUDED THT FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS. ACCORDING TO THE AO O NLY THOSE FORWARD CONTRACTS WHICH ARE SETTLED BY DELIVERY ARE IN THE NATURE OF DERIVATIVE TRANSACTIONS, WHICH COMES UNDER HEDGING. IN OTHER WORDS, IF FORWARD CO NTRACTS ARE CLOSED / MATURED OTHERWISE THAN BY WAY OF ACTUAL DELIVERY TH AN THEY ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS. 10. THE BASIC FACT WITH REGARD TO THE NATURE OF BUSINES S OF THE ASSESSEE AND ITS EXPORT RECEIVABLES / PAYABLES ARE NOT DISPUTED. T HE ASSESSEE IS IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS AND EXPORT OF POLISHED DIAMONDS. DURING THE FINANCIAL YEAR RELEVANT TO AY 2007-08, THE ASSESSEE HAS ACHIEVED MORE THAN 1018 CRORES EXPORT TURNOVER. THE ASSESSEE ALSO HAS OUTSTANDING BILLS RECEIVABLES FROM ITS EXPORTS AND OUTSTANDING PAYABL ES FOR IMPORT OF DIAMONDS. THE ASSESSEE CLAIMS THAT AT ANY POINT OF TIME ITS E XPORT RECEIVABLES / PAYABLES 11 ITA 8612/UM/2011 & 6991/MUM/2012 (EXPOSURE TO FOREIGN CURRENCY) IS MORE THAN TOTAL V ALUE OF ITS FORWARD CONTRACTS; HOWEVER, ACCEPTS THAT ONE TO ONE CO-RELATION BETWEE N FORWARD CONTRACTS AND OUTSTANDING BILLS RECEIVABLES / PAYABLES IS NOT FEA SIBLE. WE FIND THAT THE ASSESSEE HAS ENTERED INTO MORE THAN 2200 FORWARD CO NTRACTS IN THE YEAR. HOWEVER, THE TOTAL VALUE OF SUCH FORWARD CONTRACTS ARE NOT READILY AVAILABLE. EVEN BOTH THE LOWER AUTHORITIES ORDERS ARE SILENT A BOUT VALUE OF TOTAL FORWARD CONTRACTS. THE AO IS ONLY ON THE POINT THAT FORWAR D CONTRACTS ENTERED INTO BY THE ASSESSEE ARE SETTLED OTHERWISE THAN BY ACTUAL D ELIVERY AND THE ASSESSEE IS NOT ABLE TO HAVE ONE TO ONE CO-RELATION BETWEEN EXP ORT BILLS RECEIVABLES / PAYABLES. THE AO NEVER DISPUTED THE FACT THAT THE ASSESSEES EXPOSURE IN FOREIGN CURRENCY IN THE FORM OF BILLS RECEIVABLES / PAYABLES IS NOT MORE THAN ITS VALUE OF FORWARD CONTRACTS. THEREFORE, ONE HAS TO SEE THE NATURE OF FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE ARE FIT INTO THE DEFINITION OF HEDGING TRANSACTIONS ENTERED INTO TO MITIGATE THE POSSIBLE LOSS IN FLUCTUATION IN CURRENCY MOVEMENT OF / OR SPECULATIVE TRANSACTION A S DEFINED IN SECTION 43(5). THE ASSESSEE CLAIMS THAT LOSS INCURRED ON MATURITY / CLOSURE OF FORWARD CONTRACTS HAS BEEN TREATED AS CRYSTALLIZED LIABILIT Y AND DEBITED TO THE P & L ACCOUNT. LOSS INCURRED IN RESPECT OF CONTRACTS OUT STANDING AT THE YEAR END HAS BEEN MARKED TO MARKET BASED ON THE PREVAILING EXCHA NGE RATE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY FOLLOWED IN ITS BUSINESS AS PER AS-11 12 ITA 8612/UM/2011 & 6991/MUM/2012 ISSUED BY ICAI. THE ASSESSEE FURTHER CONTENDED THA T IT IS FOLLOWING THIS METHOD OF ACCOUNTING CONSISTENTLY FOR THE PAST SEVERAL YEA RS. THE ASSESSEE FURTHER CONTENDED THAT IT IS NOT THE CASE OF THE AO THAT ON LY LOSS INCURRED ON FORWARD CONTRACTS HAS BEEN TREATED AS BUSINESS LOS,S BUT EV EN GAIN ON FORWARD CONTRACTS HAS BEEN TREATED AS BUSINESS PROFITS. TH E AO CONVENIENTLY IGNORED THE GAIN ON FORWARD CONTRACTS AND HAS DISALLOWED LO SS INCURRED ON FORWARD CONTRACTS ON THE GROUND THAT THESE ARE IN THE NATUR E OF SPECULATIVE TRANSACTIONS AS DEFINED IN SECTION 43(5). 10. THE PROVISIONS OF SECTION 43(5) DEALS WITH SPECULAT IVE TRANSACTIONS. AS PER SECTION 43(5), SPECULATIVE TRANSACTION MEANS A TRAN SACTION IN WHICH A CONTRACT FOR THE PURCHASE / SALE OF ANY COMMODITY INCLUDING STOCK AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS. THE PROVISO PROVIDED T O SECTION 43(5) EXCLUDES A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF ITS MANUFACTURING OR MERCHANTING B USINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT O F HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR BY MERCHAN DISE SOLD BY HIM. SIMILARLY CLAUSE (D) OF PROVISO PROVIDES FOR EXCLUS ION OF AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE (AC) OF SECTION (2) OF SECURITIES CONTRACTS (REGULATIONS) ACT, 1956 CARRIE D OUT IN A RECOGNISED STOCK 13 ITA 8612/UM/2011 & 6991/MUM/2012 EXCHANGE. THEREFORE, IN ORDER TO CATEGORISE THAT A PARTICULAR FORWARD CONTRACTS ARE IN THE NATURE TRANSACTION IS IN THE NATURE OF S PECULATIVE TRANSACTION OR HEDGING TRANSACTION, ONE HAS TO SEE THE NATURE OF B USINESS OF THE ASSESSEE AND ITS EXPOSURE TO FOREIGN CURRENCY. IN CASE THE ASSE SSEE IS ABLE TO LINK ONE TO ONE CO-RELATION BETWEEN ITS FORWARD CONTRACTS WITH ITS BILLS RECEIVABLES / PAYABLES THEN CERTAINLY, THE FORWARD CONTRACTS ENTERED BY TH E ASSESSEE ARE DEFINITELY IN THE NATURE OF HEDGING TRANSACTIONS WHICH CANNOT BE CATEGORISED AS SPECULATIVE TRANSACTIONS. IN CASE THE ASSESSEE IS NOT ABLE TO HAVE ONE TO ONE CO-RELATION THEN ATLEAST ITS EXPOSURE TO FOREIGN CURRENCY DURIN G THE RELEVANT PERIOD SHOULD BE MORE THAN THE VALUE OF ITS FORWARD CONTRACTS. 11. IN THIS CASE, THERE IS NO DISPUTE WITH REGARD TO TH E EXPOSURE TO FOREIGN CURRENCY. THE ASSESSEE IS HAVING EXPOSURE TO FOREI GN CURRENCY IN THE FORM OF EXPORT RECEIVABLE / IMPORT PAYABLES. THE ONLY DISP UTE IS WITH REGARD TO WHETHER THE ASSESSEE IS ABLE TO HAVE ONE TO ONE CO- RELATION BETWEEN FORWARD CONTRACTS AND ITS BILLS RECEIVABLES / PAYABLES. TH E AO OPINED THAT THEY ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS AS DEFINED U /S 43(5) OF THE ACT. 12. THE ASSESSEE HAS FILED PAPER BOOK WHICH CONTAINS TH E DETAILS OF FORWARD CONTRACTS ENTERED INTO DURING THE YEAR, EXPORT RECE IVABLES / PAYABLES AND TOTAL TURNOVER FROM ITS EXPORT ACTIVITIES. BOTH THE LOWE R AUTHORITIES DID NOT THROW ANY LIGHT ON THE ASPECT OF TURNOVER OF THE ASSESSEE FROM ITS EXPORT ACTIVITY, ITS 14 ITA 8612/UM/2011 & 6991/MUM/2012 EXPOSURE TO FOREIGN CURRENCY IN THE FORM OF BILLS RECEIVABLES / PAYABLES AND OBLIGATIONS. THOUGH THE ASSESSEE HAS FILED A CHART EXPLAINING THE EXPORT TURNOVER, VALUE OF FORWARD CONTRACTS, ITS EXPORT RE CEIVABLES / PAYABLES TO CONTEND THAT AT ANY POINT OF TIME, ITS EXPOSURE TO FOREIGN CURRENCY IS MORE THAN VALUE OF FORWARD CONTRACTS ENTERED INTO DURING THE RELEVANT PERIOD, THE FACT REMAINS THAT THE ASSESSEE IS NOT ABLE TO FILE ONE T O ONE CO-RELATION BETWEEN ITS FORWARD CONTRACTS AND EXPORT RECEIVABLES / PAYABLES . SINCE THE AO AS WELL AS THE CIT(A) HAVE NOT CONSIDERED THE CLAIM OF THE ASS ESSEE THAT ITS EXPOSURE TO FOREIGN CURRENCY IS MORE THAN THE VALUE OF ITS FORW ARD CONTRACTS. IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEES CASE IS NOT COVER ED BY THE EXCEPTION PROVIDED U/S 43(5)(D) OF THE INCOME-TAX ACT, 1961. THE SUB CLAUSE (D) OF SECTION 43(5) DEALS WITH CASES OF DERIVATIVE TRANSACTIONS CARRIED OUT IN THE RECOGNIZED STOCK EXCHANGE. IN THIS CASE, IT IS AN UNDISPUTED FACT T HAT THE ASSESSEE HAS NOT CARRIED OUT ITS FORWARD CONTRACTS THROUGH RECOGNIZE D STOCK EXCHANGE. THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS WITH IT S BANKERS. THEREFORE, TO ASCERTAIN FORWARD CONTRACTS ENTERED INTO BY THE ASS ESSEE ARE HEDGING TRANSACTIONS OR SPECULATIVE TRANSACTIONS, FORWARD C ONTRACTS HAVE TO CLEAR THE BASIC TEST PROVIDED FOR EXAMINING THE NATURE OF TRA NSACTIONS OF HEDGING AND SPECULATIVE TRANSACTIONS. 13. THE LD.AR FOR THE ASSESSEE HEAVILY RELIED UPON THE DECISION OF HONBLE 15 ITA 8612/UM/2011 & 6991/MUM/2012 SUPREME COURT IN THE CASE OF WOODWORD GOVERNOR (I) PVT LTD (SUPRA) AND ARGUED THAT LOSS INCURRED ON FOREIGN EXCHANGE FLUCT UATION OF REVENUE ACCOUNT ON MARKED TO MARKET BASIS IS NOT NOTIONAL LOSS AND THE SAME IS ALLOWABLE U/S 37 OF THE INCOME-TAX ACT, 1961. NO DOUBT, THE HONBLE SUPREME COURT HAS CONSIDERED THE ISSUE OF MARKED TO MARKET LOSSES INC URRED ON FOREIGN EXCHANGE FLUCTUATION ON REVENUE ACCOUNT AND GAVE A CATEGORIC AL FINDING THAT IF THE ASSESSEE PROVIDES LOSS ON FORWARD CONTRACTS ON THE BASIS OF MARKED TO MARKET BY FOLLOWING THE METHOD OF ACCOUNTING REGULARLY FOL LOWED IN ITS BUSINESS AS PRESCRIBED BY AS-11 ISSUED BY ICAI THEN THE SAME CA NNOT BE TREATED AS NOTIONAL LOSS. HOWEVER, THE BASIC QUESTIONS WITH R EGARD TO NATURE OF TRANSACTIONS WHETHER A PARTICULAR TRANSACTION IS A SPECULATIVE TRANSACTION OR HEDGING TRANSACTION, IS NOT DISPUTED BY THE HONBLE COURT. FIRST OF ALL, THE ASSESSEE HAS TO PROVE THAT ITS FORWARD CONTRACTS AR E IN THE NATURE OF HEDGING TRANSACTIONS ENTERED INTO TO MITIGATE POSSIBLE LOSS ON FLUCTUATION IN FOREIGN CURRENCY, BUT NOT SPECULATIVE TRANSACTION ENTERED I NTO TRADING IN CURRENCY. THEREFORE, WE ARE OF THE VIEW THAT PRIMA FACIE THE CASE OF THE ASSESSEE IS COVERED BY THE DECISION OF SUPREME COURT IN THE CAS E OF WOODWORD GOVERNOR (I) PVT LTD (SUPRA) BECAUSE THE ASSESSEE HAS PROFIT / LOSS ON FLUCTUATION IN RESPECT OF ITS FORWARD CONTRACTS ON THE BASIS O MAR KED TO MARKET AT THE END OF THE FINANCIAL YEAR BASED ON THE PREVAILING EXCHANGE RATE. HOWEVER, THE 16 ITA 8612/UM/2011 & 6991/MUM/2012 ASSESSEE HAS FAILED TO PROVE THE BASIC TEST PROVIDE D FOR CATEGORIZING THAT ITS FORWARD CONTRACTS ARE IN THE NATURE OF HEDGING TRAN SACTIONS. EVEN THE LOWER AUTHORITIES HAVE FAILED TO APPRECIATE THE FACTS IN THE RIGHT PERSPECTIVE IN THE LIGHT OF THE ARGUMENTS OF THE ASSESSEE THAT ITS FOR WARD CONTRACTS CANNOT BE LINKED TO ITS EXPORT BILLS RECEIVABLES / PAYABLES, BUT TOTAL VALUE OF ITS FORWARD CONTRACTS IS NOT MORE THAN ITS EXPOSURE TO FOREIGN CURRENCY IN THE FORM OF RECEIVABLES / PAYABLES. THEREFORE, WE ARE OF THE C ONSIDERED VIEW THAT THE ISSUE NEEDS TO BE RE-EXAMINED BY THE AO IN THE LIGHT OF A BOVE DISCUSSIONS. HENCE, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO AND DI RECT HIM TO CONSIDER THE ISSUE AFRESH AFTER AFFORDING OPPORTUNITY OF HEARING TO TH E ASSESSEE FOR THE AY 2007- 08 AND 2008-09. 14. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U /S 14A R.W.R. 8D(2)(I) AND 8D2)(III) OF I.T. RULES, 1962. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS EARNED DIVIDEND IN COME OF RS.1,60,00,000 FROM GROUP COMPANIES WHICH HAS BEEN CLAIMED AS EXEM PT U/S 10(34). THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS MADE INVESTM ENT IN GROUP COMPANIES AT RS.5,96,41,000. AS PER THE FINANCIAL STATEMENTS , THE ASSESSEE HAS TAKEN SECURED LOANS OF RS.469.30 CRORES AND HAS PAID INTE REST OF RS.44 CRORES. THEREFORE, ISSUED A SHOW CAUSE NOTICE AND ASKED AS TO WHY EXPENDITURE 17 ITA 8612/UM/2011 & 6991/MUM/2012 INCURRED IN RELATION TO EXEMPT INCOME SHALL NOT BE DISALLOWED U/S 14A R.W.R. 8D(2)(I) AND (III). IN RESPONSE TO NOTICE, THE ASS ESSEE, VIDE ITS LETTER DATED 23- 12-2-2010 HAS STATED THAT NO DIRECT EXPENDITURE HAS BEEN INCURRED ON EARNING EXEMPT INCOME. THE ASSESSEE FURTHER STATED THAT NO SPECIFIC BORROWINGS WERE MADE FOR MAKING INVESTMENTS AND THAT NO INTEREST EX PENSE HAS BEEN DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE AO, AFTER CONSIDERING THE EXPLANATIONS OF THE ASSESSEE OBSERVED THAT THE ASSE SSEE HAS NOT BEEN ABLE TO CORROBORATE WITH RELEVANT EVIDENCE WITH THE INVESTM ENT MADE IN EXEMPT INCOME YIELDING PRODUCTS HAVE BEEN MADE OUT FROM TH E INTEREST FREE FUNDS. NO CASAH FLOW VALUATION STATEMENT OR ANY OTHER WORKING HAS BEEN FURNISHED TO EXPLAIN THE AVAILABILITY OF INTEREST FREE FUNDS TO MAKE INVESTMENTS IN GROUP COMPANIES. AS REGARDS THE OTHER EXPENSES, CONSIDER ING THE VOLUME OF THE INVESTMENTS MADE AND INCOME EARNED, IT IS NOT POSSI BLE FOR THE ASSESSEE TO EARN INCOME IN VACUUM WITHOUT ALLOCATING CONSIDERAB LE RESOURCES INCLUDING THE TIME AND THE MANAGEMENT OF THE MANPOWER. THEREFORE , HE INVOKED PROVISIONS OF SECTION 14A AND WORKED OUT THE DISALLOWANCE AS P ER THE FORMULA PRESCRIBED IN RULE 8D AND DETERMINED DISALLOWANCE OF RS.31,91, 936. 15. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED APPEAL BEFORE CIT(A). BEFORE CIT(A), ASSESSEE REITERATED THE SUB MISSIONS MADE BEFORE THE AO. THE ASSESSEE FURTHER CONTENDED THAT NO INTERES T BEARING FUNDS HAS BEEN 18 ITA 8612/UM/2011 & 6991/MUM/2012 USED FOR MAKING INVESTMENTS IN COMPANIES WHICH YIEL DED DIVIDEND INCOME. THEREFORE, THE AO WAS INCORRECT IN DISALLOWING INTE REST U/S 14A. AS REGARDS EXPENDITURE, THE ASSESSEE HAS NOT INCURRED ANY SPEC IFIC EXPENDITURE IN RELATION TO INVESTMENTS MADE IN COMPANIES, WHICH YIELDED DIV IDEND INCOME, THEREFORE, THE QUESTION OF DISALLOWANCE OF EXPENDITURE U/R 8D( 2)(III) DOES NOT ARISE. THE CIT(A), AFTER CONSIDERING THE RELEVANT SUBMISSIONS OF THE ASSESSEE AND ALSO BY RELYING UPON THE DECISION OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF GODREJ & BOYCE MFG CO. LTD REPORTED IN 234 DTR 1 OBSERVED THAT WEF AY 2008-09 DISALLOWANCE PROVIDED U/S 14A SHOULD BE DETERMINED IN ACCORDANCE WITH RULE 8D. THE CIT(A) FURTHER OBSERVED THAT IN RESPECT OF AY 2007-08 THOUGH THE RULE IS NOT DIRECTLY APPLICABLE, THE AO IS BOUND TO DETE RMINE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME HAVING REGARD TO THE F ACTS AND CIRCUMSTANCES OF THE CASE. IN THIS CASE, THE ASSESSEE HAS FAILED TO PROVE THE AVAILABILITY OF INTEREST FREE FUNDS TO EXPLAIN THE INVESTMENTS WHIC H YIELDED EXEMPT INCOME. THOUGH THE ASSESSEE HAS CLAIMED THAT NO SPECIFIC EX PENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME, THE POSSIBIL ITY OF EXPENDITURE IN THE FORM OF GENERAL ADMINISTRATION AND OTHER EXPENSES C ANNOT BE RULED OUT. SINCE THE ASSESSEE HAS NOT FURNISHED ANY DETAILS WITH REG ARD TO THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, THE POSSIBIL ITY OF EXPENDITURE IN THE FORM OF GENERAL ADMINISTRATION AND OTHER EXPENSES C ANNOT BE RULED OUT. SINCE 19 ITA 8612/UM/2011 & 6991/MUM/2012 THE ASSESSEE HAS NOT FURNISHED ANY DETAILS WITH REG ARD TO EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, THE AO WAS RIGHT IN A PPLICATION OF REASONABLE METHOD IN DETERMINING DISALLOWANCES HAVING REGARD T O ALL THE FACTS AND CIRCUMSTANCES OF THE CASE. WITH THESE OBSERVATIONS , HE RESTRICTED THE DISALLOWANCE TO 5% OF THE INVESTMENT MADE IN SHARES AND WORKED OUT DISALLOWANCE OF RS.29,82,050 AS AGAINST DISALLOWANC E WORKED OUT BY THE AO AT RS.31,99,936. 16. FACTS REMAIN UNCHANGED. THE ASSESSEE FAILED TO BRI NG ON RECORD ANY EVIDENCE TO CONTROVERT THE FINDING OF THE LOWER AUT HORITIES. THOUGH THE LD.AR CONTENDED THAT THE AO HAS NOT ESTABLISHED LINK BETW EEN EXPENDITURE INCURRED BY THE ASSESSEE TO EARN EXEMPT INCOME, FAILED TO PR OVE THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE IN THE BACKDROP OF THE CLEAR FINDINGS OF THE AO AS WELL AS THE CIT(A) THAT THE ASSESSEE HAS PAID HUGE INTEREST ON BORROWINGS AND ALSO INCURRED COMMON EXPENDITURE LIKE GENERAL ADMIN ISTRATION AND OTHER EXPENSES. THEREFORE, WE ARE OF THE VIEW THAT THE C IT(A) WAS RIGHT IN RESTRICTING DISALLOWANCE TO 5% OF THE VALUE OF INVESTMENTS. WE DO NOT FIND ANY ERROR IN THE ORDER OF CIT(A). HENCE, WE ARE INCLINED TO UPH OLD THE ORDER OF CIT(A) AND DISMISS THE GROUND RAISED BY THE ASSESSEE. 17. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION F OR AY 2008-09 IS DISALLOWANCE OF INTEREST U/S 36(1)(III) FOR DIVERSI ON OF INTEREST BEARING FUNDS. 20 ITA 8612/UM/2011 & 6991/MUM/2012 THE AO DISALLOWED INTEREST ON LOANS U/S 36(1)(III) ON THE GROUND THAT THE ASSESSEE HAD INVESTED INTEREST BEARING FUNDS OF RS .5,38,90,790 FOR ACQUIRING CAPITAL ASSETS. THE AO FURTHER OBSERVED THAT THE A SSESSEE HAS PAID HUGE INTEREST EXPENSES OF RSA.44 CRORES ON LOANS BORROWE D FROM BANKS AND FINANCIAL INSTITUTIONS. THEREFORE, HE OPINED THAT INTEREST P AID ON LOANS BORROWED TO THE EXTENT OF FUND DIVERSION FOR ACQUIRING CAPITAL ASSE TS CANNOT BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE INCOME-TAX ACT, 196 1. THE CIT(A), AFTER CONSIDERING THE RELEVANT FACTS AND ALSO RELYING UPO N THE PROVISIONS OF SECTION 36(1)(III) AND ALSO RELYING UPON THE DECISION OF H ONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF POWER DRUGS LTD VS CIGT (2011) 245 CTR 623 & CIT VS VARDHMAN POLYTEX LTD 214 CTR 561 HELD THAT NO DEDUC TIONS WILL BE ALLOWED IN RESPECT OF ANY AMOUNT OF INTEREST PAID FOR THE PERI OD BEGINNING FROM THE DATE ON WHICH THE CAPITAL ASSET WAS BORROWED FOR THE ACQ UISITION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE. ADM ITTEDLY, IN THE CASE THE RELEVANT PREMISES WERE NEVER PUT TO USE; HENCE, INT EREST FOR THE INITIAL IDLE PERIOD IS INADMISSIBLE. THE RELEVANT PORTION OF TH E CIT(A)S ORDER IS EXTRACTED BELOW:- 5.2.7 IN CIT VS VARDHMAN POLYTEX LIMITED (2008) 214 CTR (P&H) (FB) 561, HON'BLE FULL BENCH OF P&H HIGH COURT HELD THA T PROVISIONS OF S. 36(1)(III) AND EXPLN 8 TO S. 43(1) HAVE TO BE READ IN CONJUNCTION WITH EACH OTHER AND THEREFORE, INTEREST PAID ON AMOUNT BORROWED FOR ACQUISITION OF NEW ASSETS FOR THE PERI OD BEFORE SUCH ASSETS 21 ITA 8612/UM/2011 & 6991/MUM/2012 ARE FIRST PUT TO USE IS TO BE CAPITALIZED. PROVISO TO SEC 36(1)(III) IS CLARIFACTORY AND HAS MADE EXPLICIT WHAT WAS IMPLICI T. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES, THE DISALLOWANCE OF INTEREST OF RS.49,47,188/- AS DISALLOWED BY THE LAO, VIDE PARA NO. 5 OF THE IMPUGNED ASSESSMENT ORDER, IS CONFIRMED. GROUND OF APPEAL NO.1 IS DISMISSED. 18. FACTS REMAIN UNCHANGED. THE ASSESSEE FAILS TO BRIN G ON RECORD ANY EVIDENCES TO REBUT THE FINDINGS OF FACTS RECORDED BY THE CIT(A). THOUGH THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF VARDHMAN POLYTEX LTD (SUPRA), IN THE BACKDROP OF TH E CLEAR FINDINGS OF THE AO AND CIT(A) THAT THE ASSESSEE HAS FAILED TO EXPLAIN THE AVAILABILITY OF INTEREST FREE FUNDS TO EXPLAIN ACQUISITION OF CAPITAL ASSET, INTEREST PAID ON LOANS BORROWED HAS TO BE DISALLOWED U/S 36(1)(III) FOR DI VERSION OF FUNDS FOR ACQUISITION OF CAPITAL ASSET. THEREFORE, WE ARE IN CLINED TO UPHOLD THE ORDER OF THE CIT(A) AND REJECT THE GROUND RAISED BY THE ASSE SSEE. 19. WITH REGARD TO APPEAL IN ITA NO.6991/MUM/2012 FOR A Y 2008-09, IDENTICAL GROUNDS ARE TAKEN BY THE ASSESSEE. THERE IS NO CHANGE IN FACTS AND CIRCUMSTANCES OF THIS YEAR, TOO. THEREFORE, THE DI SCUSSION AND THE DECISIONS ARRIVED AT ABOVE, WHILE DEALING WITH THE APPEAL FOR AY 2007-08 EQUALLY APPLY TO THIS APPEAL. 20. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESS EE ARE PARTLY ALLOWED, FOR STATISTICAL PURPOSE. 22 ITA 8612/UM/2011 & 6991/MUM/2012 ORDER PRONOUNCED IN THE OPEN COURT ON 04TH OCTOBER, 2017. SD/- SD/- (MAHAVIR SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 04 TH OCTOBER, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI