M/s. Southern Petrochemical Industries Corporation Ltd., CHENNAI V. ACIT, CHENNAI

ITA 937/CHNY/2008

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1683 (ITAT-CHENNAI)
• Duration Of Justice: 11 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 16-03-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 25-04-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Business expenditure; Search and seizure; Proportionate interest; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 143(1); 143(2); 43; 72; 13; 263; 63

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI ... , ' , ' BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ITA NO.937/CHNY/2008 ( ( /ASSESSMENT YEAR: 2003-04 M/S. SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD., C/O M/S. SUBBARAYAR AIYAR PADMANABHAN & RAMAMANI ADVOCATES, NEW NO.75A (OLD NO.105A), DR. RADHAKIRSHNAN SALAI, MYLAPORE, CHENNAI -600004. [PAN: AAACS4668K] V . THE COMMISSIONER OF INCOME-TAX, CHENNAI-III CHENNAI- ( + /APPELLANT) ( ,-+ /RESPONDENT) + . / APPELLANT BY : MR. R.VIJAYARAGHAVAN, ADV. ,-+ . /RESPONDENT BY : MR. M.SRINIVASA RAO, CIT . /DATE OF HEARING : 16.09.2019 . /DATE OF PRONOUNCEMENT : 12.12.2019 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER : THIS APPEAL FILED BY ASSESSEE IN ITA NO. 937/CHNY/ 2008 FOR AY: 2003-04 IS DIRECTED AGAINST REVISIONARY ORDER DATE D 05.02.2008 PASSED BY LEARNED COMMISSIONER OF INCOME TAX, CHENNAI-III, CHENNAI (HEREINAFTER CALLED THE CIT), IN C.NO.3033/35/III /2006-07 FOR ASSESSMENT YEAR (AY) 2003-04 U/S 263 OF THE INCOME- TAX ACT, 1961( HEREINAFTER CALLED THE ACT) WHEREIN ASSESSMENT OR DER DATED 30.03.2006 ITA NO.937/CHNY/2008 :- 2 -: PASSED BY LEARNED ASSESSING OFFICER U/S 143(3) OF T HE 1961 ACT WAS HELD BY LEARNED CIT TO BE ERRONEOUS SO FAR AS PREJUDICIA L TO THE INTEREST OF REVENUE ON AS MANY AS SIX GROUNDS/ISSUES . 2. THE ASSESSEE ON THE DIRECTIONS OF THE TRIBUNAL HAS FILED CONCISE GROUNDS OF APPEAL WITH INCOME-TAX APPELLATE TRIBUN AL, CHENNAI (HEREINAFTER CALLED THE TRIBUNAL), WHICH CONCISE GROUNDS OF APPEAL READ AS UNDER:- 1. THE ORDER OF THE COMMISSIONER OF INCOME T AX IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 1.1. THE COMMISSIONER OF INCOME TAX ERRED IN ASSUMI NG JURISDICTION UNDER SECTION 263 TO REVISE THE ASSESSMENT ORDER AND TREA TING THE ASSESSMENT ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 2. THE COMMISSIONER OF INCOME TAX ERRED IN HOLDING THAT THE APPELLANT IS NOT ENTITLED TO DEDUCTION IN RESPECT OF INTEREST AN D EXCHANGE FLUCTUATION LOSS OUTSTANDING ON FLOATING RATE NOTES (FRN) AMOUN TING TO RS. 11627.84 LAKHS. 2.1. THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE A PPRECIATED THAT ALL THE MATERIAL FACTS WERE PLACED BY THE APPELLANTS BE FORE THE ASSESSING OFFICER AT THE TIME OF ASSESSMENT AND THE ASSESSING OFFICER AFTER CONSIDERING THE SAME HAS FORMED A VIEW THAT THE SAI D EXPENDITURE CHARGED OF BY THE APPELLANTS IN THE BOOKS OF ACCOUNT IS A R EVENUE EXPENDITURE AND ACCORDINGLY ALLOWED THE DEDUCTION IN HIS ASSESSMENT ORDER DATED 30.3.2006. 3. THE COMMISSIONER OF INCOME TAX ERRED IN HOLDING THAT THE APPELLANT IS NOT ENTITLED TO DEDUCTION OF A SUM OF RS.202.42 LAK HS WRITTEN OFF, REPRESENTING THE WDV OF THE CRANKSHAFT ATTACHED TO THE DIESEL GENERATOR SET AT THEIR PHARMACEUTICAL DIVISION, CUDDALORE, AF TER SETTING OFF THE INSURANCE CLAIM RECEIVED AMOUNTING TO RS.88.57 LAKH S. 4. THE COMMISSIONER OF INCOME TAX ALSO ERRED IN DIR ECTING THE ASSESSING OFFICER TO DISALLOW THE PROPORTIONATE INTEREST ON T HE INTEREST CREDIT OF RS.139.96 LAKHS AND RS.16.78 CRORES GIVEN TO AN ASS OCIATE COMPANY, VIZ. SPEL SEMI CONDUCTOR LTD. IN THE LIGHT OF THE LAW LA ID DOWN BY THE APEX COURT IN THE CASE OF S.A. BUILDERS VS. CIT AND OTHE RS (288 ITR 1 (SC)). 4.1. THE COMMISSIONER OF INCOME TAX HAS ERRED IN DI RECTING THE ASSESSING OFFICER TO EXAMINE THE FACT WHETHER THE INTER CORPO RATE DEPOSIT (ICD) OF RS.675 LAKHS MADE BY THE APPELLANTS DURING THE YEAR 1999 WERE MADE OUT OF THEIR OWN FUNDS OR BORROWED FUNDS AND DECIDE THE QUESTION OF ITA NO.937/CHNY/2008 :- 3 -: ALLOWABILITY OF INTEREST ON SUCH ICDS. THIS WILL AM OUNT TO REVISION / REOPENING OF EARLIER YEAR'S ASSESSMENT. 4.2. WITHOUT PREJUDICE, THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE CONSIDERED THE FACT THAT THE APPELLANTS HAVE SUFFIC IENT GENERAL RESERVE DURING THE RELEVANT PERIOD OF INVESTMENT. THE COMMI SSIONER OF INCOME TAX OUGHT TO HAVE FURTHER CONSIDERED THAT THE APPELLANT S HAVE REPORTED A PROFIT OF RS.2837.26 LAKHS FOR THE ASSESSMENT YEAR 2000-20 01 (FINANCIAL YEAR 1999-2000) AND ALSO CARRIED FORWARD A GENERAL RESER VE OF RS.23924.42 LAKHS AS ON 31.3.2000. AS PER THE CASH FLOW STATEME NT FOR THE YEAR ENDED 31.3.2000 ANNEXED TO THE ANNUAL REPORT FOR THE YEAR 1999-2000, THE NET CASH AVAILABLE FROM OPERATING ACTIVITIES AMOUNTS TO RS.159.78 CRORES. 5. THE COMMISSIONER OF INCOME TAX ERRED IN HOLDING THAT THE INTEREST RELIEF OF RS.883.98 LAKHS OUT OF RS.1827.88 LAKHS AVAILED BY THE APPELLANTS IN RESPECT OF BORROWINGS FROM VARIOUS BANKS AND FINANC IAL INSTITUTIONS PERTAINING TO THE ASSESSMENT YEAR 2002-03 UNDER COR PORATE RESTRUCTURING PROGRAMME (CDR) HAS TO BE SUBJECTED TO TAX IN THE R ELEVANT ASSESSMENT YEAR. 5.1. THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE C ONSIDERED THE SUBMISSIONS MADE BY THE APPELLANTS DURING THE ASSES SMENT AS WELL AS THE REVERSIONARY PROCEEDINGS AND THE OBSERVATIONS OF TH E STATUTORY AUDITORS OF THE COMPANY VIDE ITEM 14 TO THE NOTES ON ACCOUNTS A NNEXED TO THE AUDITED ANNUAL REPORT FOR THE ASSESSMENT YEAR 2003- 2004 AND UPHELD THAT THE SAID DISCLOSURE WAS MADE ONLY FOR STATISTICAL P URPOSES AND TO HIGHLIGHT THE NON-RECEIPT OF CONFIRMATION ON THE REDUCTION IN INTEREST RATE FROM TWO SECURED LENDERS. 5.2. THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE C ONSIDERED THAT THE APPELLANTS HAVE ACTUALLY ACCOUNTED THE INTEREST EXP ENDITURE ONLY AT REDUCED RATES AS PER THE CDR AND THE AMOUNT DISCLOS ED IN THE ANNUAL REPORT WAS NEITHER CLAIMED BY THE APPELLANTS IN THE IR RETURN NOR ALLOWED BY THE ASSESSING OFFICER AT THE TIME OF ASSESSMENT AND THEREFORE, WILL NOT FORM PART OF ANY BENEFIT OR PERQUISITE AS PER SEC.28 (IV ) OF THE INCOME TAX ACT 1961. 5.3. THE COMMISSIONER OF INCOME TAX OUGHT TO HAVE A PPRECIATED THAT THERE WAS NO REDUCTION/REMISSION OF LIABILITY WHICH HAS B EEN CLAIMED AND ALLOWED PERTAINING TO THE EARLIER YEARS. HENCE THE RELIEFS GRANTED BY THE BANKS ARE NOT CHARGEABLE UNDER SECTION 41(1). 5.4. THE APPELLANT CRAVES LEAVE TO FILE ADDITION AL GROUNDS AT THE TIME OF HEARING. ITA NO.937/CHNY/2008 :- 4 -: 3. THE BRIEF FACTS OF CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF FERTILIZERS, PHARMA , BIO-TECH AND ENGINEERING S ERVICES. THE AO OBSERVED IN ITS ASSESSMENT ORDER THAT THE ASSESSEE IS DEALING IN :- A) TUTICORN FACTORY- MANUFACTURING AND SALE OF UREA , DAP , ALUMINUM AND FLUORIDE. B) SMO, EHVT DIVISION- EXECUTION OF TURNKEY PROJECT S AND EXECUTION OF ELECTRIFICATION WORKS CONTRACT. C) PHARMA DIVISION- MANUFACTURE OF BULK DRUGS AND F ORMULATIONS INCLUDING PEN-G ; AND D) BIO-TECH DIVISION- PRODUCTION OF TISSUE CULTURE PLANTS, ENZYMES AND EXPORT OF CUT FLOWERS. 3.2 THE ASSESSEE FILED ITS RETURN OF INCOME WITH RE VENUE FOR IMPUGNED ASSESSMENT YEAR VIZ. AY: 2003-04 ON 23.10.2003 DEC LARING LOSS OF RS. 403,84,01,506/-. THE SAID RETURN OF INCOME WAS PROC ESSED BY REVENUE U/S 143(1) OF THE 1961 ACT ON 12.03.2004. THE ASSES SEE ALSO FILED REVISED RETURN OF INCOME ON 30.03.2004 DECLARING LOSS OF RS . 298,10,70,500/- . IN THIS REVISED RETURN OF INCOME FILED ON 30.03.2004 , THE ASSESSEE OFFERED INTEREST INCOME OF RS. 105.73 CRORES. THE CASE OF T HE ASSESSEE WAS SELECTED FOR FRAMING SCRUTINY ASSESSMENT BY AO U/S 143(3) READ WITH SECTION 143(2) OF THE 1961 ACT. THE AO ISSUED STATU TORY NOTICES U/S 143(2) AND 142(1) OF THE 1961 ACT TO THE ASSESSEE A ND FINALLY SCRUTINY ASSESSMENT WAS FRAMED BY AO U/S 143(3) OF THE 1961 ACT, VIDE ASSESSMENT ORDER DATED 30.03.2006 PASSED BY AO U/S 143(3) OF THE 1961 ACT , ASSESSING LOSS OF THE ASSESSEE AT RS. 342,32 ,81,858/-. ITA NO.937/CHNY/2008 :- 5 -: 4. THE COMMISSIONER OF INCOME-TAX , CHENNAI-III, CH ENNAI IN EXERCISE OF ITS REVISIONARY POWERS U/S 263 OF THE 1961 ACT ON P ERUSAL OF THE RECORDS FOR AY: 2003-04 OBSERVED THAT ASSESSMENT FRAMED BY THE AO U/S 143(3) VIDE ASSESSMENT ORDER DATED 30.03.2006 IS ERRONEOUS SO FAR AS IS PREJUDICIAL TO THE INTEREST OF REVENUE WHICH LED LE ARNED CIT TO ISSUE SCN DATED 24.10.2007 TO THE ASSESSEE U/S 263 OF THE 196 1 ACT ON AS MANY AS SIX ISSUES/GROUNDS SHOW CAUSING ASSESSEE AS TO WHY ASSESSMENT ORDER DATED 30.03.2006 PASSED BY AO U/S 143(3) OF THE 196 1 ACT BE NOT TREATED AS ERRONEOUS SO FAR AS IS PREJUDICIAL TO THE INTERE ST OF REVENUE WITHIN MEANING OF SECTION 263 OF THE 1961 ACT. 4.2 THE AFORESAID SCN DATED 24.10.2007 ISSUED BY LE ARNED CIT U/S 263 OF THE 1961 ACT IS REPRODUCED AS HEREUNDER:- C.NO.3033/35/III/06-07 DATED: 24.10.2007 TO THE PRINCIPAL OFFICER, M/S SPIC LTD., SPIC HOUSE, 88, MOUNT ROAD, GUINDY, CHENNAI-600032. SIR, SUB: REVISION OF ASSESSMENT IN THE CASE OF THE COMPANY - ASST. YEAR 2003-04 - NOTICE U/S 263 REG. **** ON PERUSAL OF THE RECORDS FOR THE ASST. YEAR 2003-0 4 IT IS NOTICED THAT THE ASSESSMENT HAS BEEN COMPLETED ON 30.3.2006 U/S 143( 3) OF THE IT ACT IN ITA NO.937/CHNY/2008 :- 6 -: YOUR CASE WHICH IS ERRONEOUS IN SO FAR AS IT IS PRE JUDICIAL TO THE INTEREST OF REVENUE FOR THE FOLLOWING REASONS: IT IS SEEN FROM THE ANNUAL REPORT, NOTES ON ACCOUNT S, ITEM NO.16, YOU HAVE RAISED US DOLLARS 120 MILLIONS AS UNSECURED FL OATING RATE NOTES(FRN) IN 1996 FOR FINANCING THE IMPORT OF CAPITAL GOODS F OR ITS OPERATIONS AND PROJECTS AND FOR GENERAL CORPORATE PURPOSES. INTERE ST AND EXCHANGE FLUCTUATIONS INCURRED UP TO 31.3.2002 PART OF THE L OAN HAS BEEN CARRIED FORWARD IN CAPITAL WORK IN PROGRESS AS IT WAS EXPEC TED TO BE ADJUSTED TO PROPOSED PROJECTS/SCHEMES. AS NO SUCH PROPOSED PROJ ECTS ARE ENVISAGED DURING THE CURRENT YEAR, INTEREST OF RS.7760.49 EXC HANGE FLUCTUATION (NET) OF RS.3867.35 LAKHS BEING CAPITAL WORK IN PROGRESS HAVE BEEN CHARGED TO P&L ACCOUNT AND WAS ALLOWED BY THE AO, WHILE COMPLE TING THE ASSESSMENT WHICH IS ERRONEOUS. YOU HAVE CLAIMED WRITE OFF IN RESPECT OF DIESEL GEN ERATOR SET AMOUNTING TO RS.202.42 LAKHS AND AO HAS ALLOWED IN THE ASSESSMENT. THE DG SET (PHARMA DIVISION) HAD ALREADY BEEN INCLUDED IN THE BLOCK OF ASSETS AND INSURANCE AMOUNT OF RS.88,57,620/- HAD BEEN DED UCTED FROM THE (BLOCK PLANT & MACHINERY) OPENING WDV AND STILL CLO SING WDV REMAINS TO BE CARRIED FORWARD. THE SUM OF RS.202.42 LAKHS REPR ESENTING LOSS OF DEPRECIABLE ASSETS WAS ONLY CAPITAL IN NATURE AND C OULD NOT BE ALLOWED AS REVENUE EXPENDITURE. IT IS SEEN FROM THE ANNUAL ACCOUNT 2002-03 SCHEDULE 14, INTEREST INCOME & FINANCIAL CHARGES THAT INCOME ON DEPOSITS ETC. AMOUNTING TO RS.139.96 LAKHS HAS BEEN SET OFF AGAINST THE TOTAL INTEREST PAYMENT OF RS.17942.64 LAKHS AND NET INTEREST PAYMENT OF RS.17 802.62 LAKHS. WHILE COMPLETING THE DISALLOWANCE OF INTEREST ON BORROWED FUNDS A SUM OF RS.17802.62 LAKHS HAVE BEEN ADOPTED AS AGAINST RS. 17942.64 LAKHS WHICH REPRESENTS INTEREST LIABILITY TOWARDS SECURED /UNSECURED LOANS AND DISALLOWANCE REQUIRES RECTIFICATION. YOU HAVE INVESTED SUM IN EQUITY GRANTED LOANS AND A DVANCES TO ITS SUBSIDIARY/ ASSOCIATE COMPANIES AND THAT INTEREST A ND OTHER RECOVERABLE THAT ARE DUE FROM M/S TUTICORIN ALAKALIES & PETRO C HEMICALS, MPL, SPEL SEMICONDUCTOR LTD., IN THE SCHEDULE TO NOTES ON ACC OUNTS IT HAS BEEN STATED THAT ENTIRE AMOUNT OF UNSECURED LOANS FROM P ROMOTERS WAS DUE TO YOU AND THAT NO PROVISION HAS BEEN MADE FOR INTERES T ON RS.16.78 CRORES BROUGHT IN BY THE PROMOTERS. WHILE COMPUTING THE DI SALLOWANCE OF PROPORTIONATE INTEREST ON BORROWED CAPITAL THE AMOU NT OF RS.16.78 CRORES GIVEN BY YOU TO YOUR ASSOCIATE SPEL HAD NOT BEEN TA KEN INTO ACCOUNT. IN THE NOTES ON ACCOUNT 13(A) IT IS SEEN THAT RS. 6 72 LAKHS HAD BEEN PLACED AS INTER CORPORATE DEPOSITS ON WHICH NO INTE REST HAD BEEN RECEIVED. THIS ASPECT WAS NOT CONSIDERED BY THE AO WHILE COMP UTING THE DISALLOWANCE OF PROPORTIONATE INTEREST ON BORROWED FUNDS. ITA NO.937/CHNY/2008 :- 7 -: IN THE NOTES ON ACCOUNT ITEM 14, CONSEQUENT TO DEBT RESTRUCTURING RS.4110.36 LAKHS FOR THE YEAR ENDING 31.3.2003 HAS BEEN CONSIDERED AS INTEREST RELIEF IN THE ACCOUNTS. IN THE ANNUAL REPO RT FOR ASST. YEAR 2004-05 INTEREST RELIEF AVAILED FROM VARIOUS BANKS AND FINA NCIAL INSTITUTIONS INCLUDED RS.1827.88 LAKHS (INCLUDING RS.943.90 LAKHS FOR THE YEAR 2003-04). THE BALANCE OF RS.883.98 LAKHS PERTAINED TO EARLIER YEA R 2002-03(AY 2003- 04). THIS SUM HAD BEEN OMITTED TO BE CONSIDERED AND WAS REQUIRED TO BE BROUGHT TO TAX FOR THE ASST. YEAR 2003-04. THE ABOVE ASPECT WAS NOT CONSIDERED BY THE AO WHILE COMPLETING THE ASST ORDER WHICH RESULTED IN THE ESCAPEMENT OF INCOME. HENCE I CONSIDER THE ORDER OF THE ASSESSMENT PASSED BY THE AO ON 30.3.2006 FOR THE AY 2003-04 AS ERRONEOUS IN SO FAR AS IT IS PREJ UDICIAL TO THE INTEREST OF REVENUE AND THEREFORE PROPOSE TO DIRECT THE AO TO R EVISE THE ASSESSMENT PASSED U/S 143(3) DATED 30.3.2006. IN THIS CONNECTION, YOU ARE HEREBY GIVEN SHOW CAUSE NOTICE AS TO WHY DIRECTIONS SHOULD NOT BE GIVEN TO REVISE THE IM PUGNED ORDER U/S 263 OF THE IT ACT IN THE ABOVE ISSUE. IF NO REPLY IS RE CEIVED, IT WILL BE PRESUMED THAT YOU HAVE NO OBJECTION IN REVISING THE ASSESSME NT FOR THE ASST. YEAR 2003-04 ON THE PROPOSED LINES. IN THIS REGARD, YOU ARE REQUESTED TO APPEAR BEFORE ME ON 06.11.2007 AT 11.00 A.M. IN MY OFFICE IN THE IV FLO OR OF MAIN BUILDING, 121 NUNGAMBAKKAM HIGH ROAD, CHENNAI-34 EITHER IN PERSON OR THROUGH A DULY AUTHORISED REPRESENTATIVE ALONG WITH THE WRITTEN SU BMISSIONS, IF ANY, IN THE ABOVE MATTER. 4.3 THE ASSESSEE IN RESPONSE TO AFORESAID SCN DATED 24.10.2017 ISSUED BY LEARNED CIT PROPOSING TO REVISE ASSESSMENT BY I NVOKING ITS REVISIONARY POWERS U/S 263 OF THE 1961 ACT , SUBMITTED ITS REPL Y BEFORE LEARNED CIT DURING REVISIONARY PROCEEDINGS HELD BY LEARNED CIT , WHICH REPLY FILED BY ASSESSEE IS REPRODUCED HEREUNDER WRITTEN SUBMISSION TO THE NOTICE DATED 24.10.2007 ISSUED BY THE COMMISSIONER OF INCOME TAX U/S 263 OF THE IN COME TAX ACT 1961 WITH REFERENCE TO THE REVISION NOTICE DATED 24.10.2 007 ISSUED BY THE LEARNED COMMISSIONER OF INCOME TAX-CHENNAI-LLL, U/S 263 OF THE INCOME TAX ACT 1961, OUR WRITTEN SUBMISSIONS ARE AS FOLLOWS: ITA NO.937/CHNY/2008 :- 8 -: 1. INTEREST AND EXCHANGE FLUCTUATIONS ON FLOATING RATE NOTES (FRNS) -RS.116.28 CRORES IT HAS BEEN OBSERVED BY THE LEARNED COMMISSIONER OF INCOME TAX, CHENNAI-III IN THE REVISION NOTICE THAT THE INTERES T OF RS.7760.49 LAKHS AND AN EXCHANGE FLUCTUATIONS (NET) OF RS.3867 .35 LAKHS CHARGED OFF TO THE PROFIT AND LOSS ACCOUNT DURING T HE RELEVANT ASSESSMENT YEAR WAS ERRONEOUSLY ALLOWED BY THE ASSE SSING OFFICER WHILE COMPLETING THE ASSESSMENT. IN THIS CONNECTION , IT IS INFORMED THAT THE ASSESSEE COMPANY BORROWED 120 MILLION US$ AGAINST UNSECURED FLOATING RATE NOTES (FRNS) DURING THE YEA R 1996 TOWARDS FINANCING THE IMPORT OF CAPITAL GOODS FOR ITS OPERA TIONS AND PROJECTS IN WHICH IT WAS INVOLVED AND FOR GENERAL CORPORATE PURPOSES. A COPY OF THE OFFER DOCUMENT DATED 11.1.96 ALONG WITH FULL DETAILS OF THE ABOVE REVENUE EXPENDITURE WAS FILED BEFORE THE ASSE SSING OFFICER VIDE OUR LETTER DATED 5.7.2006. AS SEEN FROM PAGE NO.20 OF THE OFFER DOCUMENT, THE NET PROCEEDS OF THE ISSUE WAS EXPECTED AROUND US$ 118.06 MILLION AF TER EXPENSES AND THE SAME WILL BE APPLIED BY THE ASSESSEE COMPAN Y TOWARDS FINANCING THE IMPORT OF CAPITAL GOODS FOR ITS OPERA TIONS AND PROJECTS IN WHICH IT IS INVOLVED AND FOR GENERAL CORPORATE P URPOSES PERMITTED BY GOVT. OF INDIA. THE FUNDS MOBILISED THROUGH FRNS WERE UTILISED BY T HE COMPANY FOR THE MODERNISATION OF ITS FERTILISER PLANT AT TUTICO RIN AND PURCHASE OF CAPITAL GOODS FOR ITS OTHER DIVISIONS AND SUCH ASSE TS WERE UTILISED BY THE COMPANY FOR THE PURPOSE OF ITS BUSINESS. THE AL LOCATION OF FRN FUNDS TO VARIOUS DIVISIONS OF SPIC WAS BASED ON THE APPLICATION OF FUNDS FOR THE PURPOSE OF ACQUIRING THE CAPITAL ASSE TS. THE UNALLOCATED PORTION OF THE FUNDS WAS IN THE COMPANY 'S SYSTEM WITH AN ULTIMATE OBJECTIVE OF PURCHASE OF CAPITAL GOODS IN THE FUTURE. SINCE THE BORROWAL THROUGH FRNS WAS MADE IN FOREIGN CURRENCY (I.E. US$), THE LOAN LIABILITY WAS VALUED AT THE END OF E ACH FINANCIAL YEAR AND THE LOAN LIABILITY RESTATED BY THE COMPANY IN T HE BALANCE SHEET OF THE RESPECTIVE YEARS. THE DIFFERENCE BETWEEN THE LOAN LIABILITY OF THE PREVIOUS AND CURRENT YEAR (EITHER GAIN OR LOSS) WAS TREATED AS EXCHANGE FLUCTUATION AND THE SAME WAS ALLOCATED/ADJ USTED ON THE COST OF ASSETS BASED ON THE APPLICATION OF FUNDS ON THESE ASSETS. DURING THE ASSESSMENT YEARS 1997-1998 TO 2000-2001, THE TOTAL EXCHANGE LOSS INCURRED BY THE COMPANY WAS RS.15128. 07 LAKHS. OUT OF RS.15128.07 LAKHS, EXCHANGE LOSS CAPITALISED BAS ED ON THE ALLOCATION OF FUNDS FOR CAPITAL EXPENDITURE WAS RS. 7235.26 LAKHS. THE EXCHANGE FLUCTUATION CHARGED TO PROFIT AND LOSS ACCOUNT DURING THE RELEVANT ASSESSMENT YEARS WAS RS.2753.64 LAKHS. THE BALANCE EXCHANGE FLUCTUATION AMOUNTING TO RS.5139.17 LAKHS WAS CARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT FOR THE PURPOS E OF CAPITALISATION ITA NO.937/CHNY/2008 :- 9 -: AS AND WHEN FRN FUNDS WERE UTILISED FOR THE PURPOSE OF PURCHASE OF CAPITAL GOODS/EXPANSION SCHEMES. OUT OF RS.5139.17 LAKHS, THE COMPANY HAD CAPITALISE D THE EXCHANGE LOSS OF RS.74.63 LAKHS DURING THE ASSESSMENT YEAR 2 002-2003 AND THE BALANCE EXCHANGE LOSS OF RS.5064.54 IAKHS WAS C ARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT. DURING THE ASSESS MENT YEAR 2003- 2004, AN EXCHANGE GAIN OF RS. 1008.55 LAKHS WAS ADJ USTED AGAINST THE CARRIED FORWARD EXCHANGE LOSS OF RS.5064.54 LAK HS AND A SUM OF RS. 188.64 LAKHS WAS FURTHER CAPITALISED OUT OF THE BALANCE, BY WHICH UNALLOCATED FOREIGN EXCHANGE FLUCTUATION CARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT WAS REDUCED TO RS.3867.35 LAKHS AS AT THE END OF THE ASSESSMENT YEAR 2003-2004. LIKEWISE, THE TOTAL INTEREST PAID BY THE COMPANY ON THE ABOVE UNSECURED LOAN DURING THE ASSESSMENT YEARS 1997-199 8 TO 2000- 2001 WAS RS.20905.10 LAKHS. OUT OF THE :ABOVE, INTE REST AMOUNTING TO RS.3195.63 LAKHS WAS CAPITALISED DURING THE RELE VANT ASSESSMENT YEARS AND INTEREST AMOUNTING TO RS.9948.98 LAKHS WA S CHARGED TO PROFIT AND LOSS ACCOUNT. THE BALANCE INTEREST OF RS .7760.49 LAKHS WAS CARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT IN ORDER TO CAPITALISE THE SAME IN THE FUTURE PROJECTS/EXPANSIO N SCHEMES. THE COMPANY ENVISAGED CERTAIN FUTURE PROJECTS AND D ESIRED TO CAPITALISE THE INTEREST AND EXCHANGE FLUCTUATION CA RRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT. THE TOTAL AMOUNT CARRIED BY THE COMPANY IN THE CAPITAL WORK IN PROGRESS ACCOUNT AT THE END OF THE ASSESSMENT YEAR 2003-2004 WAS RS. 11627.84 LAKHS (INTEREST RS. 7760.49 LAKHS + EXCHANGE FLUCTUATION RS.3867.35 LAKHS), WHICH REL ATED TO THE ASSESSMENT YEARS 1997-98 TO 2000-2001. AS NO FURTHER EXPANSION SCHEMES WERE UNDERTAKEN OR ENVISAGED BY THE COMPANY, THE COMPANY HAD CHARGED OFF THE ENTIRE AMOUNT OF RS.11627.84 LAKHS TO THE PROFIT AND LOSS ACCOUNT IN THE ASSESSMENT YEAR 2003-2004, AS IT REPRESENTED THE INTEREST AND EXCHANGE FLUCTUATIONS INCURRED BY THE COMPANY ON THE LOAN FU NDS UTILISED BY IT TOWARDS WORKING CAPITAL AND GENERAL CORPORATE PURPO SES. THIS HAD BEEN DULY CERTIFIED AND DISCLOSED BY THE STATUTORY AUDITORS OF THE COMPANY VIDE ITEM 16 TO THE NOTES ON ACCOUNTS ANNEX ED TO THE AUDITED ANNUAL REPORT OF THE ASSESSMENT YEAR 2003-2 004 AND THE OBSERVATIONS OF THE STATUTORY AUDITORS ARE AS FOLLO WS: 'THE COMPANY HAD RAISED USD 120 MILLION AS UNSECURE D FLOATING RATE NOTES (FRN) IN 1996 FOR FINANCING THE IMPORT OF CAPITAL GOODS FOR ITS OPERATIONS AND PROJECTS AND F OR GENERAL CORPORATE PURPOSES. INTEREST AND EXCHANGE FLUCTUATI ON INCURRED UP TO 31 MARCH 2000 ON PART OF THE LOAN WA S BEING ITA NO.937/CHNY/2008 :- 10 -: CARRIED FORWARD IN CAPITAL WORK IN PROGRESS AS IT W AS EXPECTED TO BE ADJUSTED TO PROPOSED PROJECTS / SCHEMES. AS N O SUCH PROPOSED PROJECTS ARE NOW ENVISAGED DURING THE CURR ENT YEAR INTEREST OF KS.7760,49 LAKHS AND EXCHANGE FLUCTUATI ON (NET) OF RS.3867.35 LAKHS LYING IN CAPITAL WORK IN PROGRESS HAVE BEEN CHARGED TO PROFIT AND LOSS ACCOUNT'. A STATEMENT CONTAINING THE OVERALL MOVEMENT OF ALLOCATED/UNALLOCATED FRN FUND; INTEREST AND EXCHAN GE FLUCTUATION THEREON CAPITALISED, CHARGED TO PROFIT AND LOSS AC COUNT AND CARRIED ON IN THE CAPITAL WORK IN PROGRESS ACCOUNT FOR THE ASSESSMENT YEARS 1997-98 TO 2003-2004 ARE ENCLOSED AS ANNEXURE-L, II AND III, FOR YOUR KIND PERUSAL. THE RELEVANT DETAILS WERE ALREADY FURNISHED TO THE ASSESSING OFFICER BY THE ASSESSEE COMPANY DURING THE ASSESSMENT PROCE EDINGS VIDE ITS LETTER DATED 5.7.2006. THE ASSESSING OFFICER AF TER EXAMINING ALL THE MATERIALS FACTS ON RECORD HAS COME TO THE CONCL USION THAT THE AMOUNT OF RS. 11627.84 LAKHS REPRESENTS THE COST OF PROJECTS GIVEN UP BY THE ASSESSEE COMPANY AND ALLOWED THE EXPENDIT URE SINCE IT CONSISTS OF ONLY INTEREST AND EXCHANGE FLUCTUATION. THE ASSESSING OFFICER HAS COME TO THIS ABOVE CONCLUSION IN LINE W ITH THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF P. NAGIREDDY V S COMMISSIONER OF INCOME TAX REPORTED IN 199 1TR - PAGE 451 WHEREI N IT WAS HELD THAT THE COST OF PROJECT GIVEN UP IS AN ALLOWABLE E XPENDITURE. IN THE ABOVE CIRCUMSTANCES, THE VIEW TAKEN BY THE ASSESSIN G OFFICER IS IN ACCORDANCE WITH THE PRINCIPLE LAID BY THE MADRAS HI GH COURT AND CANNOT BE CONSIDERED BY THE LEARNED COMMISSIONER OF INCOME TAX AS ERRONEOUS. THEREFORE, NO REVISION IS WARRANTED I N THIS CONNECTION. 2) ASSETS WRITTEN OFF - RS.202.42 LAKHS THE ASSET WRITTEN OFF AMOUNTING TO RS.202.42 LAKHS REPRESENTS THE WRITTEN DOWN VALUE (WDV) OF THE CRANK SHAFT ATTACHE D WITH THE DG SET MAINTAINED BY THE PHARMACEUTICAL DIVISION OF TH E ASSESSEE COMPANY, WHICH WAS USED FOR THE PURPOSE OF MANUFACT URE OF PHARMACEUTICAL PRODUCTS. THE WDV OF THE CRANK SHAFT AS ON 31.3.2003 AS PER BOOKS OF ACCOUNT WAS RS.290.99 LAK HS. AFTER SETTING OF THE INSURANCE CLAIM RECEIVED AMOUNTING T O RS.88.57 LAKHS, THE NET VALUE WRITTEN OFF BY THE ASSESSEE COMPANY W AS RS.202.42 LAKHS. THE SAME WAS CLAIMED AS BUSINESS LOSS AS PER SEC. 32(1) (III) OF THE INCOME TAX ACT, 1961. 3) INTEREST DISALLOWANCE THE DISALLOWANCE OF INTEREST OF RS.3151.15 LAKHS MA DE BY THE ASSESSING OFFICER VIDE PARA 6.3 OF THE ASSESSMENT O RDER DATED 30.3.2006 HAS BEEN CHALLENGED BY THE ASSESSEE COMPA NY BEFORE ITA NO.937/CHNY/2008 :- 11 -: CIT(A) AND THE APPEAL IS STILL PENDING. THE INTERES T DISALLOWANCE OF RS.3151.15 LAKHS WAS COMPUTED BY THE ASSESSING OFFI CER ON THE ADVANCES MADE BY THE ASSESSEE COMPANY TO ITS SUBSID IARY AND GROUP COMPANIES AND PENDING AS AT THE END OF THE RE LEVANT ASSESSMENT YEAR. THE DETAILS OF BUSINESS NEXUS OF T HE ASSESSEE COMPANY WITH SUCH SUBSIDIARY/GROUP COMPANIES ARE FU RNISHED IN ANNEXURE-IV. AS SEEN FROM THE ABOVE ANNEXURE, THE B USINESS NEXUS BETWEEN THE ASSESSEE COMPANY AND SPIC PETROCHEMICAL S LTD. AND SPIC FERTILIZERS AND CHEMICALS, FZE, DUBAI, HAS ALR EADY BEEN UPHELD BY THE TRIBUNAL AND THE HON'BLE ITAT VIDE ITS ORDER NO. ITA- 2252/MDS/2003 DT. 20.10.2004 FOR THE ASSESSMENT YEA R 2000-01 AND THE COMMON ORDER NO.640/MDS/2002, 123 AND 124/M DS/2004 DATED 3.8.2005 FOR THE ASSESSMENT YEARS 1997-98, 19 98-99 AND 1999-00 HAS HELD THAT THE INTEREST ON SUCH ADVANCES IS A BUSINESS EXPENDITURE. IN THIS CONNECTION, WE ALSO WISH TO POINT OUT THAT THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. COMMISSIONER OF INCOME TAX (APPEALS) AND OTHERS REPORTED IN 288 ITR -1 HAD HELD THAT THE INTEREST EXPENDITURE INCURRED BY THE ASSES SEE ON THE AMOUNT BORROWED BY IT FOR ADVANCING THE SAME TO ITS SISTER CONCERNS IS A BUSINESS EXPENDITURE AND THEREFORE ALLOWABLE U /S 36(1)[III) OF THE INCOME TAX ACT SINCE SUCH ADVANCES WERE MADE ON LY OUT OF COMMERCIAL EXPEDIENCY. APPLYING THE RATIO OF THE AB OVE JUDGMENT OF THE APEX COURT, THE ENTIRE INTEREST EXPENDITURE OF RS.3151.15 LAKHS ON THE ADVANCES MADE BY THE ASSESSEE COMPANY TO ITS SUBSIDIARY/GROUP COMPANIES MAY BE ALLOWED AS A BUSI NESS EXPENDITURE, SINCE SUCH ADVANCES WERE MADE BY THE A SSESSEE COMPANY ONLY OUT OF COMMERCIAL EXPEDIENCY. THE ABOVE SUBMISSIONS ARE MADE BY THE ASSESSEE COMP ANY AGAINST YOUR PROPOSAL TO ADD RS. 139.96 LAKHS BEING THE SET OFF CLAIMED BY THE ASSESSEE COMPANY TOWARDS INTEREST INCOME AND TH E DISALLOWANCE OF PROPORTIONATE INTEREST ON BORROWED CAPITAL OF RS. 16.78 CRORES GIVEN TO THE ASSOCIATE COMPANY, VIZ. S PEL SEMI CONDUCTOR LTD. SINCE THE ENTIRE INTEREST ON THE ADV ANCES GIVEN TO SUBSIDIARY/ GROUP COMPANIES IS AN ALLOWABLE EXPENDI TURE, THE QUESTION OF DISALLOWANCE OF PRORATED INTEREST ON TH E INTEREST CREDIT OF RS. 139.96 LAKHS AND DISALLOWANCE OF INTEREST ON BO RROWED CAPITAL OF RS. 16.78 CRORES GIVEN TO THE ASSOCIATE COMPANY, VI Z. SPEL, SEMI CONDUCTOR LTD. DOES NOT ARISE. FURTHER, WE REQUEST YOU TO FURNISH THE SCHEDULE REF ERENCE NUMBER OF THE AUDITED ANNUAL REPORT WHEREIN, THE BORROWED CAP ITAL OF RS.16.78 CRORES WAS REFERRED TO, FOR OUR REFERENCE AND SUITA BLE COMMENTS. 4) PROPORTIONATE DISALLOWANCE ON INTER CORPORATE DEPOS IT OF RS.675 LAKHS MADE BY THE ASSESSEE COMPANY ITA NO.937/CHNY/2008 :- 12 -: AS SEEN FROM ITEM 13(A) OF THE NOTES ON ACCOUNTS AN NEXED WITH THE AUDITED ANNUAL REPORT OF THE ASSESSEE COMPANY FOR T HE YEAR 2002- 03 (ASSESSMENT YEAR 2003-04), RS.675 LAKHS HAD BEEN PLACED AS INTER CORPORATE DEPOSIT (ICD) ON CERTAIN COMPANIES. THE ABOVE ICDS WERE PLACED BY THE ASSESSEE COMPANY DURING THE YEAR 1999- 2000. AS SEEN FROM THE AUDITED ANNUAL REPORT FOR TH E YEAR 1999- 2000 (ASSESSMENT YEAR 2000-01), THE COMPANY HAS REP ORTED A PROFIT OF RS.2837.26 LAKHS AND CARRIED A GENERAL RE SERVE OF RS.23924.42 LAKHS AS AT 31.3.2000. IT IS EVIDENT TH AT THE ABOVE ICDS WERE PLACED BY THE ASSESSEE COMPANY ONLY FROM ITS OWN FUNDS AND NO BORROWED FUNDS WERE UTILISED FOR THE SAID PU RPOSE. THEREFORE, THE QUESTION OF DISALLOWANCE OF ANY INTEREST ON SUC H ICDS DOES NOT ARISE. 5) INTEREST RELIEF OF RS.4110.36 LAKHS GIVEN BY THE BA NKERS TO THE COMPANY THE STATUTORY AUDITORS OF THE COMPANY VIDE ITEM NO. !4 OF THE NOTES ON ACCOUNTS ANNEXED WITH THE AUDITED ANNUAL REPORT FOR THE YEAR 2002-03 HAVE OBSERVED1 AS FOLLOWS; 'THE CDR CELL APPROVED THE PACKAGE VIDE ITS LETTER DATED I9TH MARCH 2003, GIVING CERTAIN TERMS AND CONDITIONS FOR THE BUSINESS AND FINANCIAL RESTRUCTURING INCLUDING SHAR ING OF SECURITY AMONG LENDERS. THE FORTY PARTICIPATING LEN DERS WILL NOW BE TAKING NECESSARY STEPS TO OBTAIN APPROVALS F ROM RESPECTIVE AUTHORITIES TO EFFECTUATE THE PACKAGE AT THE EARLIEST. PENDING EXECUTION OF NECESSARY DOCUMENTS AND COMPLI ANCE WITH CERTAIN SPECIAL AND GENERAL CONDITIONS OF THE CDR WHICH HAS BEEN AGREED TO BY THE COMPANY AND THE PROMOTERS , THE INTEREST RELIEF OF RS.4110.36 LAKHS FOR THE YEAR EN DING 31 MARCH 2003 HAS BEEN CONSIDERED IN THESE ACCOUNTS. T HE BALANCES OF LOANS / INTEREST PENDING IMPLEMENTATION OF CDR ARE SUBJECT TO CONFIRMATION AND RESULTANT ADJUSTMEN TS, IF ANY, WOULD BE MADE AFTER THE IMPLEMENTATION OF THE PACKA GE'. FURTHER, THE ASSESSING OFFICER AT THE TIME OF SCRUT INY ASSESSMENT WAS ALSO INFORMED BY THE ASSESSEE COMPANY VIDE LETTER D ATED 20.2.2006 THAT THE COMPANY HAD ACCOUNTED INTEREST EXPENDITURE ONLY AT THE REDUCED RATE IN THE BOOKS OF ACCOUNT AND THEREFORE, THE RELIEF OF RS.4110.36 LAKHS WAS DISCLOSED IN THE NOTES ON ACCO UNTS ONLY FOR STATISTICAL PURPOSE. THE WORKINGS RELATING TO THE I NTEREST SAVINGS OF RS.4110.36 LAKHS FOR THE PURPOSE OF DISCLOSURE IN T HE NOTES ON ACCOUNTS IS ALSO ENCLOSED VIDE ANNEXURE-V FOR YOUR KIND PERUSAL. FURTHER, THE STATUTORY AUDITORS OF THE ASSESSEE COM PANY VIDE ITEM NO. 12 OF NOTES ON ACCOUNTS ANNEXED WITH THE AUDITE D ACCOUNTS FOR ITA NO.937/CHNY/2008 :- 13 -: THE YEAR 2003-04 (ASSESSMENT YEAR 2004-05) HAVE ALS O OBSERVED AS FOLLOWS: 'THE RESTRUCTURING OF THE DEBT PORTFOLIO UNDER THE CORPORATE DEBT RESTRUCTURING MECHANISM [CDR) HAS BEEN IMPLEME NTED DURING THE YEAR. CONSEQUENT TO THIS, INTEREST RELIE F AVAILED FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS UNDER THE CDR SCHEME OR OTHERWISE INCLUDES RS. 1827.88 LAKHS (INC LUDING RS.943.90 LAKHS FOR THE YEAR) AVAILED FROM TWO LEND ERS WHO ARE YET TO CONFIRM THEIR CONSENT FOR REDUCTION IN T HE INTEREST RATE. THE BALANCES OF LOANS/INTEREST ACCRUED TO SOM E OF THE LENDERS ARE ALSO SUBJECT TO CONFIRMATION'. THIS DISCLOSURE WAS ALSO MADE ONLY FOR STATISTICAL PURPOSE, SINCE THE INTEREST EXPENDITURE OF THE RELEVANT ASSESSMENT YEA R WAS ACCOUNTED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE COMPANY ONL Y AT THE REDUCED RATE OF INTEREST. OUT OF RS.1827,88 LAKHS, THE RELIEF OF RS.943.90 LA KHS PERTAINS TO THE YEAR 2C03-04 (ASSESSMENT YEAR 2004-05) AND RS.8 83.98 LAKHS PERTAINS TO THE YEAR 2002-03 (ASSESSMENT YEAR 2003- 04) WHICH WAS ALREADY INCLUDED IN THE TOTAL RELIEF OF RS.4110.36 LAKHS DISCLOSED IN THE NOTES ON ACCOUNTS OF THE PREVIOUS ASSESSMENT YE AR (I.E. 2003- 04). HAD THE ASSESSEE COMPANY ACCOUNTED INTEREST EX PENDITURE AT NORMAL RATES, IT WOULD HAVE CLAIMED MORE INTEREST E XPENDITURE SINCE THE INTEREST COST WOULD HAVE BEEN HIGHER TO THE EXT ENT OF RS.R83.98 LAKHS PERTAINING TO THE ASSESSMENT YEAR 2003-04. SI NCE THE ASSESSEE COMPANY HAD ACCOUNTED THE INTEREST EXPENDI TURE ONLY AT THE REDUCED RATE OF INTEREST, THE ABOVE AMOUNT HAS BEEN DISCLOSED AS SAVINGS AVAILED BY THE ASSESSEE COMPANY, SUBJECT TO THE APPROVAL OF TWO LENDERS. THEREFORE, YOUR PROPOSAL T O CONSIDER THE AMOUNT OF INTEREST RELIEF OF RS.883.98 LAKHS PERTAI NING TO THE FINANCIAL YEAR 2002-03 (ASSESSMENT YEAR 2003-04) AS INCOME, DOES NOT ARISE IN THIS CASE. 6) FINAL PRAYER IN VIEW OF THE FOREGOING REASONS, THE ASSESSMENT DO NE BY THE ASSESSING OFFICER VIDE HIS ORDER DATED 30.3.2006 U/ S 143(3) OF INCOME TAX ACT 1961, IS IN ORDER AND NO; REVISION I S REQUIRED BY THE LEARNED COMMISSIONER OF INCOME TAX U/S 263 OF THE I NCOME TAX ACT 1961. THEREFORE, IT IS PRAYED THAT FURTHER PROCEE DINGS ON ACCOUNT / OF THE ABOVE NOTICE DATED 24.10.2007 MAY KINDLY BE DROPPED. ITA NO.937/CHNY/2008 :- 14 -: 4.4 BEFORE WE DELVE ON THE REVISIONARY ORDER OF LEA RNED CIT , DATED 05.02.2008 PASSED U/S 263 OF THE 1961 ACT, IT IS PE RTINENT TO MENTION HERE THAT AO DID MADE ENQUIRY AT THE TIME OF FRAMIN G OF SCRUTINY ASSESSMENT U/S 143(3) ON THE ISSUE OF WRITE OFF CAP ITAL WORK IN PROGRESS CONSISTING OF INTEREST ON FRN AS WELL FOREIGN EXCHA NGE FLUCTUATION LOSS ON FRN OF EARLIER YEARS WHICH STOOD DEBITED TO CAPITAL WORK-IN-PROGRESS IN EARLIER YEARS PRIOR TO IMPUGNED AY: 2003-04 AND THE SAME WAS CHARGED OFF AS REVENUE EXPENSES IN PROFIT AND LOSS ACCOUNT DURING THE IMPUGNED YEAR UNDER CONSIDERATION BEFORE US VIZ. AY: 2003-04 AND THE ASSESSEE DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDING S HELD BY THE AO U/S 143(3) READ WITH SECTION 143(2) OF THE 1961 ACT VID E SUBMISSIONS 05.07.2006(PAGE 51-53/PAPER BOOK) REPLIED BEFORE T HE AO , WHICH REPLY IS REPRODUCED HEREUNDER:- JULY 5, 2006 ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE - V(1), AAYAKKAR BHAVAN, 121 NUNGAMBAKKAM HIGH ROAD, CHENNAI-600 034 DEAR SIR, SUB: SPIC LTD. - INCOME TAX ASSESSMENT FOR THE YEA R 2003-04 - INTEREST AND FOREIGN EXCHANGE FLUCTUATIONS OF RS.11627.84 LA KHS (INTEREST RS.7760.50 LAKHS + RS.3867.35 LAKHS) - CERTAIN FURT HER PARTICULARS CALLED FOR. WE SOLICIT KIND REFERENCE TO OUR LETTER DATED 9.3.2 006 WHEREIN THE DETAILS RELATING TO THE BORROWAL OF US$ 120 MILLION AGAINST UNSECURED FLOATING RATE NOTES (FRNS) DURING THE YEAR 1996 AND INTEREST AND EXCHANGE FLUCTUATION'S AMOUNTING TO RS.116.28 CRORES CHARGED TO THE PROFIT AND LOSS ACCOUNT DURING THE ASSESSMENT YEAR 2003-2004 WERE F URNISHED. ITA NO.937/CHNY/2008 :- 15 -: AS DESIRED BY YOUR GOODSELF, A COPY OF THE OFFER DO CUMENT DATED 11.1.96 (ANNEXURE-L) IS ENCLOSED FOR YOUR KIND PERUSAL. AS SEEN FROM PAGE NO.20 OF THE OFFER DOCUMENT, THE NET PROCEEDS OF THE ISSUE W AS EXPECTED AROUND US$ 118.06 MILLION AFTER EXPENSES AND THE SAME WILL BE APPLIED BY THE ASSESSEE COMPANY TOWARDS FINANCING THE IMPORT OF CA PITAL GOODS FOR ITS OPERATIONS AND PROJECTS IN WHICH IT IS INVOLVED AND FOR GENERAL CORPORATE PURPOSES PERMITTED BY GOVT. OF INDIA. THE FUNDS MOBILISED THROUGH FRNS WERE PREDOMINANTLY UTILISED BY THE COMPANY FOR THE MODERNISATION OF ITS FERTILISER PLA NT AT TUTICORIN AND PURCHASE OF CAPITAL GOODS FOR ITS OTHER DIVISIONS A ND SUCH ASSETS WERE UTILISED BY THE COMPANY FOR THE PURPOSE OF ITS BUSI NESS. THE ALLOCATION OF FRN FUNDS TO VARIOUS DIVISIONS OF SPIC WAS BASED ON THE APPLICATION OF FUNDS FOR THE PURPOSE OF ACQUIRING THE CAPITAL ASSE TS. THE UNALLOCATED PORTION OF THE FUNDS WAS IN THE COMPANY'S SYSTEM WI TH AN ULTIMATE OBJECTIVE OF PURCHASE OF CAPITAL GOODS IN THE FUTUR E. SINCE THE BORROWAL THROUGH FRNS WAS MADE IN FOREIGN CURRENCY (I.E. US$ ), THE LOAN LIABILITY WAS VALUED AT THE END OF EACH FINANCIAL YEAR AND TH E LOAN LIABILITY RESTATED BY THE COMPANY IN THE BALANCE SHEET IN THE RESPECTI VE YEARS. THE DIFFERENCE BETWEEN THE LOAN LIABILITY OF THE PREVIO US AND CURRENT YEAR (EITHER GAIN OR LOSS) WAS TREATED AS EXCHANGE FLUCT UATION AND THE SAME WAS ALLOCATED/ADJUSTED ON THE COST OF ASSETS BASED ON THE APPLICATION OF FUNDS ON THESE ASSETS. DURING THE ASSESSMENT YEARS 1997-1998 TO 2000-2001, THE TOTAL EXCHANGE LOSS INCURRED BY THE COMPANY WAS RS.15128.07 LAKHS. OUT OF RS.15128.07 LAKHS, EXCHANGE LOSS CAPITALISED BASED ON THE ALLOC ATION OF FUNDS FOR CAPITA! EXPENDITURE PURPOSE WAS RS.7235.26 LAKHS. THE EXCHA NGE FLUCTUATION CHARGED TO PROFIT AND LOSS ACCOUNT DURING THE RELEV ANT ASSESSMENT YEARS WAS RS.2753.64 LAKHS. THE BALANCE EXCHANGE FLUCTUAT ION AMOUNTING TO RS.5139.17 LAKHS WAS CARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT FOR THE PURPOSE OF CAPITALISATION AS AND WHEN FRN FUNDS WERE UTILISED FOR THE PURPOSE OF PURCHASE OF CAPITAL GOODS/EXPANSION SCHE MES. OUT OF RS.5139.17 LAKHS, THE COMPANY HAD CAPITALISE D THE EXCHANGE LOSS OF RS.74.63 LAKHS DURING THE ASSESSMENT YEAR 2002-2 003 AND THE BALANCE EXCHANGE LOSS OF RS.5064.54 LAKHS WAS CARRIED IN TH E CAPITAL WORK IN PROGRESS ACCOUNT. DURING THE ASSESSMENT YEAR 2003-2 004, AN EXCHANGE GAIN OF RS. 1008.55 LAKHS WAS ADJUSTED AGAINST THE CARRIED FORWARD EXCHANGE LOSS OF RS.5064.54 LAKHS AND A SUM OF RS. 188.64 LAKHS WAS FURTHER CAPITALISED OUT OF THE ABOVE BALANCE, BY WH ICH UNALLOCATED FOREIGN EXCHANGE FLUCTUATION CARRIED IN THE CAPITAL WORK IN PROGRESS ACCOUNT WAS REDUCED TO RS.3867.35 LAKHS AS AT THE END OF THE AS SESSMENT YEAR 2003- 2004. LIKEWISE, THE TOTAL INTEREST PAID BY THE COMPANY ON THE ABOVE UNSECURED LOAN DURING THE ASSESSMENT YEARS 1997-1998 TO 2000- 2001 WAS RS.20905.10 LAKHS. OUT OF THE ABOVE, INTEREST AMOUN TING TO RS.3195.63 LAKHS WAS CAPITALISED DURING THE RELEVANT ASSESSMEN T YEARS AND INTEREST AMOUNTING TO RS.9948.98 LAKHS WAS CHARGED TO PROFIT AND LOSS ACCOUNT. THE BALANCE INTEREST OF RS.7760.49 LAKHS WAS CARRIE D IN THE CAPITAL WORK IN ITA NO.937/CHNY/2008 :- 16 -: PROGRESS ACCOUNT, IN ORDER TO CAPITALISE THE SAME I N THE FUTURE PROJECTS/EXPANSION SCHEMES. THE COMPANY ENVISAGED CERTAIN FUTURE PROJECTS AND D ESIRED TO CAPITALISE THE INTEREST AND EXCHANGE FLUCTUATION CARRIED IN TH E CAPITAL WORK IN PROGRESS ACCOUNT. THE TOTAL AMOUNT CARRIED BY THE C OMPANY IN THE CAPITAL WORK IN PROGRESS ACCOUNT AT THE END OF THE ASSESSME NT YEAR 2003-2004 WAS RS.11627.35 LAKHS (INTEREST RS.7760.50 LAKHS + EXCHANGE FLUCTUATION RS.3867.35 LAKHS), WHICH RELATED TO THE ASSESSMENT YEARS 1997-98 TO 2000-2001. AS NO FURTHER EXPANSION SCHEMES WERE UNDERTAKEN OR ENVISAGED BY THE COMPANY, THE COMPANY HAD CHARGED OF THE ENTIRE AMOU NT OF RS.11627.85 LAKHS TO THE PROFIT AND LOSS ACCOUNT IN THE ASSESSM ENT YEAR 2003-2004, AS IT REPRESENTED THE INTEREST AND EXCHANGE FLUCTUATIO NS INCURRED BY THE COMPANY ON THE LOAN FUNDS UTILISED BY IT TOWARDS WO RKING CAPITAL AND GENERAL CORPORATE PURPOSES. THIS HAD BEEN DULY CERT IFIED AND DISCLOSED BY THE STATUTORY AUDITORS OF THE COMPANY VIDE ITEM 16 TO THE NOTES ON ACCOUNTS ANNEXED TO THE AUDITED ANNUAL REPORT FOR T HE ASSESSMENT YEAR 2003-2004. IN VIEW OF THE ABOVE REASONS, THE COMPANY HAD CLAIM ED THE SAME AS REVENUE EXPENDITURE IN ITS REGULAR INCOME TAX RETUR N FOR THE ASSESSMENT YEAR 2003-2004. A STATEMENT CONTAINING THE OVERALL MOVEMENT OF ALLO CATED/UNALLOCATED FRN FUNDS, INTEREST AND EXCHANGE FLUCTUATION THEREON CA PITALISED, CHARGED TO PROFIT AND LOSS ACCOUNT AND CARRIED ON IN THE CAPIT AL WORK IN PROGRESS ACCOUNT FOR THE ASSESSMENT YEARS 1997-98 TO 2003-20 04 ARE ENCLOSED AS ANNEXURE-II, III AND IV, FOR YOUR KIND PERUSAL. THE RECEIPT OF THIS LETTER ALONG WITH THE ENCLOSURE S MAY KINDLY BE ACKNOWLEDGED. THE AFORESAID REPLY WAS ACCEPTED BY THE AO AND NO A DDITIONS WERE MADE TO THE INCOME OF THE ASSESSEE WHILE FRAMING ASSESSM ENT U/S 143(3) OF THE 1961 ACT. 4.4.2 THE AO WHILE FRAMING ORIGINAL ASSESSMENT ALSO MADE ENQUIRIES AS TO WRITE OFF WRITTEN DOWN VALUE OF RS. 202.42 LACS OF DG SET DURING ASSESSMENT PROCEEDINGS AND THE ASSESSEE VIDE REPLY DATED 09.03.2006 (PAGE 57/PB), REPLIED AS UNDER: ITA NO.937/CHNY/2008 :- 17 -: III. ASSETS WRITTEN OFF PHARMACEUTICAL DIVISION - RS.202.42 LAKHS AS DESIRED BY YOUR GOODSELF, WE ARE ENCLOSING A STA TEMENT (ANNEXURE-VII) CONTAINING THE DETAILS OF THE HISTOR ICAL COST OF DG SET SCRAPPED AND ITS WRITTEN DOWN VALUE AS ON 31.3.2003 . AS SEEN FROM THE ABOVE STATEMENT, WE HAVE ADJUSTED THE INSURANCE CLAIM RECEIVED BY US AMOUNTING TO RS.88,57,620/- AND THE BALANCE A LONE WAS CLAIMED AS REVENUE EXPENDITURE IN THE INCOME TAX RE TURN. A COPY OF THE INSURANCE CLAIM SETTLED BY THE NEW INDIA ASS URANCE COMPANY IS ENCLOSED (ANNEXURE-VIII) FOR YOUR KIND PERUSAL. AS THE WRITE OFF, OF THE ABOVE ASSET WAS IN LINE WITH THE PROVISIONS OF SEC. 32(1) (III), WE REQUEST YOUR GOODSELF TO ALLOW THE SAME AS REVEN UE EXPENDITURE. THE AFORESAID REPLY WAS ACCEPTED BY THE AO AND NO A DDITIONS WERE MADE TO THE INCOME OF THE ASSESSEE WHILE FRAMING ASSESSM ENT U/S 143(3) OF THE 1961 ACT. 4.5 THE LEARNED CIT AFTER CONSIDERING REPLIES OF T HE ASSESSEE FILED IN RESPONSE TO THE SCN ISSUED BY LEARNED CIT U/S 263 O F THE 1961 ACT DURING THE COURSE OF REVISIONARY PROCEEDINGS U/S 263 OF TH E 1961 ACT AND ON PERUSAL OF THE RECORDS REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THAT ASSESSMENT ORDER DATED 30.03.2006 PASSED BY AO AS ERRONEOUS SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE, BY H OLDING AS UNDER VIDE REVISIONARY ORDER DATED 05.02.2008 PASSED BY LEARN ED CIT U/S 263 OF THE 1961 ACT (ISSUE WISE DECISION OF LEARNED CIT IN ITS REVISIONARY ORDER DATED 05.02.2008 IS REPRODUCED HEREUNDER): I) CLAIM OF WRITE OFF OF INTEREST AND FOREIGN EXCHAN GE FLUCTUATION LOSS ON FRN OF US $ 120 MILLIONS ISSUED BY ASSESSEE IN THE YEAR 1996-DECISION OF LEARNED CIT U /S 263 OF THE 1961 ACT ITA NO.937/CHNY/2008 :- 18 -: 2.2 ON CAREFUL CONSIDERATION OF THE ABOVE SUBMISS IONS AND PERUSAL OF THE RECORDS AND REPORT OF THE AO, I FIND THAT EVEN THOUGH ALL THE MATERIALS DELINEATED ABOVE WERE PLAC ED BEFORE THE AO AT THE TIME OF ASSESSMENT ON BEING CALLED FO R, THE AO HAD NOT TAKEN ANY SPECIFIC VIEW ON THE MATTER OF DE DUCIBILITY OF THE EXPENDITURE TO THE TUNE OF RS.11627.84 LAKHS UN DER CONSIDERATION. THE AO HAD NOT EMBARKED UPON ANY CRI TICAL EXAMINATION OF THE MATERIAL IN THE LIGHT OF THE SIG NIFICANT FACT THAT THE EXPENDITURE DID NOT RELATE TO THE YEAR OF ACCOUNT. IT IS CLEAR THAT THE AO WITHOUT DUE APPLICATION OF MIND AND PROPER CONSIDERATION OF THE FACTS IN THE C ORRECT PERSPECTIVE HAD ALLOWED THE SAME AS DEDUCTION. HENC E IN THE LIGHT OF THE RATIO OF DECISION OF THE SUPREME COURT IN MALABAR INDUSTRIAL COMPANY LTD., VS CIT (243 ITR 83), THE T WIN CONDITIONS OF SECTION 263 ARE DULY SATISFIED IN THI S REGARD. THE APEX COURT HAD HELD IN THE CASE OF KEDARANATH J UTE MANUFACTURING COMPANY LTD., VS CIT(82 ITR 363) THAT ONLY SUCH EXPENDITURE THAT ACCRUES IN A YEAR UNDER MERCA NTILE SYSTEM OF ACCOUNTING IS ALLOWABLE AS A DEDUCTION FR OM THE PROFITS OF THAT YEAR. THIS RATIO WAS AGAIN CONFIRME D BY THE SUPREME COURT IN THE CASE OF CIT VS M/S KALINGA TUB ES LTD.,(218 ITR 164).THUS ANY EXPENDITURE NOT BEING C APITAL IN NATURE LAID OUT EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS DURING THE ACCOUNTING YEAR IS O NLY ALLOWABLE AS A DEDUCTION WHICH THE SUPREME COURT HA D UPHELD IN VARIOUS DECISIONS. THE INTEREST PAID ON LOANS AN D EXCHANGE FLUCTUATION LOSS THEREON HAS ALREADY BEEN CAPITALIS ED IN THE BOOKS BY THE ASSESSEE. THE RELEVANT EXPENDITURE OBV IOUSLY RELATED TO THE EARLIER YEARS UPTO THE PREVIOUS YEAR ENDED 31.3.2000. WHEN THIS IS SO, THE ASSESSEE CANNOT BRI NG IT BACK FROM THE CAPITAL WORK IN PROGRESS ACCOUNT AND CHARG E IT OFF AS REVENUE EXPENDITURE IN THE CURRENT YEAR. IT HAS BEE N HELD BY THE SUPREME COURT THAT THE ACCOUNTING PRACTICE CANN OT OVERRIDE THE MANDATORY PROVISIONS OF THE INCOME TAX ACT VIDE TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD., VS CIT (227 ITR 172), HENCE THE DEDUCTION OF EXPENDITURE OF RS.1162 7.84 LAKHS IS NOT IN ORDER. THE DECISION IN THE CASE OF B.FORM VS CIT(199 ITR 451) RELIED UPON BY THE ASSSESSEE RELAT ED TO THE CASE OF AN ASSESSEE ENGAGED IN PRODUCTION OF FILMS. HE STARTED PRODUCTION OF TWO FILMS AND INCURRED AN EXPENDITURE OF RS.14,000/- THEREIN AND SUBSEQUENTLY ABANDONED THE' PROJECT. THE HIGH COURT CONSIDERED THAT WHEN THE ASSESSEE FO UND THAT THE PROJECT WAS NOT LIKELY TO BE PROFITABLE HE GAVE IT UP IN ORDER THAT HE WAS FREED FROM HIS EFFORTS FROM THE P RODUCTION OF TWO FILMS AND THE ASSESSEE CAN CONCENTRATE ON MAKIN G OF BETTER AND MORE PROFITABLE VENTURES IN FILM MAKING. THE HIGH ITA NO.937/CHNY/2008 :- 19 -: COURT THEREFORE ALLOWED IT AS REVENUE EXPENDITURE. THUS, THE FACTS AND CIRCUMSTANCES OF THE CASE RELIED ON ARE Q UITE DIFFERENT FROM THE FACTS IN THE INSTANT CASE AND TH EREFORE THIS DECISION IS OF NO HELP TO THE ASSESSEE BEING CLEARL Y DISTINGUISHABLE. HENCE, IN VIEW OF THE ABOVE REASON S, I HEREBY DIRECT THE AO TO MODIFY THE ASSESSMENT BY DISALLOWI NG THE INTEREST-AND EXCHANGE FLUCTUATION LOSS OF RS.11627. 84 LAKHS IN QUESTION. II) CLAIM OF WRITE OFF OF RS. 202.42 LACS OF DG SET- DECISION OF LEARNED CIT U/S 263 OF THE 1961 ACT 3.2 I HAVE CAREFULLY CONSIDERED THE ABOVE SUBMISSI ONS. AS PER SECTION 32(1)(III) IF ANY MACHINERY OR PLANT ON WHICH DEPRECIATION HAD BEEN ALLOWED IS DESTROYED IN THE P REVIOUS YEAR THEN THE AMOUNT BY WHICH THE INSURANCE PAYABLE FALLS SHORT OF THE WDV THEREOF SHALL BE ALLOWED AS A DEDU CTION PROVIDED SUCH DEFICIENCY IS ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNTS. IT IS SEEN FROM THE ANNEXURE 5 TO IT DEPR ECIATION SCHEDULE GIVING DETAILS OF DELETION OF PLANT AND MA CHINERY THAT THE AMOUNT REALISED ON ACCOUNT OF THE DELETIONS OF GENERATOR SET UNDER CONSIDERATION HAS BEEN GIVEN AS RS.88,57, 620/-. IT IS CLEAR FROM THE RECORDS THAT: THE DG SET UNDER CO NSIDERATION HAD ALREADY BEEN INCLUDED IN THE BLOCK OF ASSETS (P LANT AND MACHINERY) FOR CLAIMING IT DEPRECIATION. THE INSURA NCE AMOUNT RECEIVED ON THE DG SET OF RS.88.57 LAKHS HAD ALREAD Y BEEN DULY DEDUCTED FROM THE OPENING WDV OF THAT BLOCK AN D THAT EVEN AFTER SUCH DEDUCTION AND ALLOWANCE OF DEPRECIA TION AS PER RULES, THE CLOSING WDV OF THE BLOCK STILL REMAINS N AMELY RS.182.77 CRORES AS ON 31.3.2003. AS PER SEC. 50 OF THE ACT IN RESPECT; OF DEPRECIATION OF THE ASSETS, AFTER THE R EALISABLE VALUE IS DEDUCTED FROM THE WDV OF THE RELEVANT BLOC K OF ASSETS ONLY SHORT TERM CAPITAL LOSS WOULD ARISE SUBJECT TO THE CONDITION THAT THE BLOCK ASSETS CONCERNED CEASES TO EXIST OR THE MONEYS PAYABLE EXCEED THE WDV OF THAT BLOCK. IN THE INSTANT CASE SINCE THE CLOSING WDV OF THE BLOCK STI LL EXISTS NO OTHER TERM LIKES WOULD ARISE. THE FACT THAT THE LOS S OF THIS ASSET HAD BEEN TREATED DIFFERENTLY IN THE BOOKS OF ACCOUNTS WOULD NOT ALTER THIS STATUTORY POSITION. THEREFORE, A SUM OF RS.202.42 LAKHS REPRESENTING WRITE OFF IN THE HONKS OF DEPRECIABLE ASSETS WAS ONLY A CAPITAL LOSS IN NATUR E AND COULD NOT BE ALLOWED AS A REVENUE EXPENDITURE FOR IT PURP OSES. WHILE COMPLETING THE ASSESSMENT BY ORDER DATED 30.3 .2006, THE AO FAILED TO APPLY HIS MIND TO THIS CLAIM FOR D EDUCTION. HENCE, THE ASSESSMENT ORDER IS RENDERED ERRONEOUS A ND ITA NO.937/CHNY/2008 :- 20 -: PREJUDICIAL TO THE INTEREST OF REVENUE. I THEREFORE DIRECT THE AO TO CARRY OUT A FRESH EXAMINATION OF THE CLAIM AS PR EFERRED BY THE ASSESSEE. III & IV) DISALLOWANCE OF INTEREST WITH RESPECT TO ADVANCES TO ASSOCIATED CONCERN SPEL SEMI CONDUCTOR LIMITED & SET OFF OF INTEREST RECEIVED AGAINST INTEREST EXPENSES WHILE MAKING DISALLOWANCE OF INTEREST EXPENSES-DECISION O F LEARNED CIT U/S 263 OF THE 1961 ACT 4.2 I HAVE CAREFULLY GONE THROUGH THE OBJECTIONS R AISED BY THE ASSESSEE. I HEREBY DIRECT THE AO TO EXAMINE T HE ABOVE TWO ITEMS NAMELY THE QUESTION OF A) DISALLOWANCE OF PRORATED INTEREST ON THE INTERES T CREDIT OF RS.139.96 LAKHS AND B) DISALLOWANCE OF INTEREST ON BORROWED CAPITAL OF RS.16.78 CRORES GIVEN BY THE ASSESSEE TO ITS ASSOCIATED COMP ANY IN THE LIGHT OF THE LAW LAID DOWN BY THE APEX COURT IN THE CASE OF S.A.BUILDERS LTD., REFERRED TO ABOVE. IN OTHER WORD S THE AO SHOULD EXAMINE WHETHER THE AMOUNTS WERE ADVANCED TO THE SISTER CONCERNS BY THE ASSESSEE AS A MEASURE OF COM MERCIAL EXPEDIENCY OR NOT AND DECIDE THE ISSUE ACCORDINGLY. 5. THE NEXT ISSUE IS REGARDING THE INTEREST INCOM E ON DEPOSITS, ETC. AMOUNTING TO RS.139.96 LAKHS THAT H AS BEEN SET OFF AGAINST THE GROSS INTEREST PAYMENT OF RS.17942. 66 LAKHS AND WHETHER THE DISALLOWANCE OF PROPORTIONATE INTER EST ON LOAN TO SISTER CONCERN SHOULD NOT BE BASED ON THE GROSS INTEREST LIABILITY. THIS ISSUE HAS BEEN COVERED IN THE PREVI OUS PARAGRAPH AND THE DIRECTIONS GIVEN THEREIN HOLD GOOD. V) INTEREST DISALLOWANCE ON ICD OF RS. 675 LACS AND DECISION OF LEARNED CIT U/S 263 OF THE 1961 ACT 6. REGARDING THE PROPORTIONATE INTEREST DISALLOWAN CE ON INTER CORPORATE DEPOSITS OF RS.675 LAKHS MADE BY TH E ASSESSEE, THE ASSESSEE STATED THAT THESE DEPOSITS W ERE PLACED BY THE ASSESSEEE DURING THE YEAR 1999-2000 AND THAT AS SEEN FROM THE AUDITED ANNUAL REPORT FOR THE ASST. YEAR 2 000-01 THE COMPANY HAD REPORTED A PROFIT OF RS.2837.26 LAKHS A ND ALSO CARRIED A GENERAL RESERVE OF RS.23924.42 LAKHS AS O N 31.3.2000. THE ASSESSEE STATED THAT IT WAS EVIDENT FROM THE ITA NO.937/CHNY/2008 :- 21 -: ABOVE THAT THE ICDS WERE PLACED BY THE ASSESSEE ONL Y FROM ITS OWN FUNDS AND NO BORROWED FUNDS WERE UTILISED FOR T HE SAID PURPOSE AND THEREFORE THE QUESTION OF DISALLOWANCE OF ANY INTEREST ON SUCH ICDS DOES NOT ARISE. 6.2 I HEREBY DIRECT THE AO TO EXAMINE WHETHER THE I CDS HAD BEEN PLACED FROM THE INTERNAL ACCRUALS OF THE ASSES SEE AS CONTENDED. IF THE AO FINDS THAT A PART OF THE INTE REST BEARING BORROWED FUNDS HAD BEEN UTILISED FOR MAKING ICDS, H E IS DIRECTED TO APPLY THE LITMUS TEST OF THE RATIO OF S A BUILDERS LTD., CASE CITED ABOVE AND DECIDE THE ISSUE ACCORDI NGLY. VI) INTEREST WAIVER OF RS. 883.93 LACS IN CDR-DECIS ION OF LEARNED CIT U/S 263 OF THE 1961 ACT 7.2 I FIND THAT THE AO WHILE COMPLETING THE AS SESSMENT BY ORDER DATED 30.3.2006 HAD NOT CONSIDERED THE ABOVE ISSUE IN ITS PROPER PERSPECTIVE WITH DUE APPLICATION OF MIND. I THERE FORE DIRECT THE AO TO EXAMINE THE ISSUE AFRESH IN THE LIGHT OF THE ASS ESSEE'S REPLY EXTRACTED ABOVE AND DECIDE THE MATTER IN ACCORDANCE WITH LAW. THE A.O. WILL OF COURSE BE ENTITLED TO CALL FOR FURTHER EVIDENCE FOR THIS PURPOSE AS MAY BE REQUIRED AND TO EXAMINE THE SAME. NO DOUBT BEFORE PASSING ANY SUCH FRESH ASSESSMENT ORDER, THE ASSESSEE SHOULD BE GIVEN REASONABLE OPPORTUNITY OF BEING HEA RD. 5. AGGRIEVED BY DECISION OF LEARNED CIT TREATING AS SESSMENT ORDER DATED 30.03.3006 PASSED BY AO U/S 143(3) OF THE 1961 ACT AS ERRONEOUS SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE VIDE REVI SIONARY ORDER DATED 05.02.2008 PASSED BY LEARNED CIT U/S 263 OF THE 196 1 ACT , THE ASSESSEE HAS FILED AN APPEAL WITH TRIBUNAL CHALLENGING THE R EVISIONARY ORDER DATED 05.02.2008 PASSED BY LEARNED CIT U/S 263 OF THE 196 1 ACT . THE LEARNED COUNSEL FOR THE ASSESSEE OPENED ARGUMENTS BEFORE TH E BENCH AND SUBMITTED THAT GROUND NUMBER 1 AND 1.1 RAISED BY AS SESSEE IN CONCISE GROUND OF APPEAL FILED WITH TRIBUNAL ARE GENERAL IN NATURE. WITH RESPECT TO ITA NO.937/CHNY/2008 :- 22 -: FIRST EFFECTIVE GROUND NUMBER 2 , IT WAS SUBMITTED THAT THE ASSESSEE BORROWED MONEY IN 1996 BY ISSUING FLOATING RATE NOT ES(FRN) WHICH WAS FOR ACQUISITION OF CAPITAL ASSETS/PROJECTS AND FOR WORKING CAPITAL PURPOSES . THE ASSESSEE HAS ADDED INTEREST PAID AND FOREIGN EX CHANGE LOSS ON THE DATE OF BALANCE SHEET TO CAPITAL ASSETS IN THOSE CA SES WHERE FUNDS WERE APPLIED FOR ACQUISITION OF CAPITAL ASSETS/PROJECTS AND IN CASE IF THE FUNDS ARE APPLIED FOR WORKING CAPITAL , THEN THE SAID INT EREST / FOREIGN EXCHANGE LOSSES WERE CHARGED TO PROFIT AND LOSS ACCOUNT AS R EVENUE EXPENSES. IT WAS SUBMITTED THAT SO FAR AS UNALLOCATED FUNDS ARE CONCERNED, THE INTEREST AND FOREIGN EXCHANGE FLUCTUATION LOSS ON THESE FRN WERE DEBITED TO CAPITAL WORK IN PROGRESS FROM YEAR TO YEAR UNTIL AY : 2002-03 AND IN THIS YEAR UNDER CONSIDERATION BEFORE THE BENCH VIZ. AY: 2003-04 AS IT WAS ENVISAGED THAT NO PROJECT IS TO BE UNDERTAKEN , ENT IRE OUTSTANDING BALANCE IN CAPITAL WORK IN PROGRESS WAS CHARGED TO P & L A CCOUNT AS REVENUE EXPENSES. THUS , CAPITAL WORK IN PROGRESS ACCUMULAT ED SINCE 1996 ONWARDS UNTIL AY: 2002-03 WRT TO UNAPPROPRIATED FUN DS WERE CHARGED OFF TO P & L ACCOUNT IN THE YEAR UNDER CONSIDERATION VI Z. AY: 2003-04 . IT WAS STATED THAT PROJECTS ENVISAGED TO BE SET UP WERE SH ELVED AND AMOUNT STANDING IN CAPITAL WORK IN PROGRESS WAS WRITTEN OF F TO PROFIT AND LOSS AS REVENUE EXPENSES. OUR ATTENTION WAS DRAWN TO PAGE 7 0-73/PAPER BOOK FILED WITH TRIBUNAL , WHICH IS OFFERING CIRCULAR/DO CUMENT ISSUED BY ASSESSEE FOR RAISING FLOATING RATE NOTE(FRN) OF US $ 120 MIL LION DUE FOR MATURITY IN 2003. IN THIS DOCUMENT IT WRITTEN THAT NET PROCEED S OF FRN AFTER MEETING ISSUE EXPENSES WILL BE USED FOR THE PURPOSES OF FIN ANCING IMPORTS INTO ITA NO.937/CHNY/2008 :- 23 -: INDIA OF CAPITAL GOODS FOR ITS OPERATIONS AND PROJE CTS IT IS INVOLVED AND FOR GENERAL CORPORATE PURPOSES PERMITTED BY GOI. IT IS STATED THAT THESE PROJECTS WHICH THE ASSESSEE WAS CONTEMPLATING TO SE T UP WERE SHELVED . THE ASSESSEES COUNSEL WOULD RELY ON THE DECISION O F HONBLE DELHI HIGH COURT IN THE CASE OF INDO RAMA SYNTHETIC ( INDIA) LIMITED V. CIT REPORTED IN (2010) 228 CTR 0278(DEL.) AND DECISION OF HONB LE HIGH COURT OF JHARKHAND IN THE CASE OF CIT V. TATA ROBINS FRASER LIMITED REPORTED IN (2012) 211 TAXMAN 257(JHARKHAND) TO SUPPORT ITS CO NTENTIONS AND TO SUBMIT THAT THE AO HAS RIGHTLY ALLOWED THE SAID EXP ENSES AS REVENUE EXPENSES WHILE FRAMING ORIGINAL ASSESSMENT ORDER PA SSED U/S 143(3) OF THE 1961 ACT AND THE SAID ORDER CANNOT BE SAID TO B E ERRONEOUS SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE. 5.1.2. ON THE NEXT EFFECTIVE GROUND IT WAS STATED B Y LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS CLAIMED ASSET WR ITTEN OFF AMOUNTING TO RS. 202.42 LACS REPRESENTING WRITTEN DOWN VALUE OF THE CRANK SHAFT ATTACHED WITH DG SET MAINTAINED BY PHARMA DIVISION OF THE ASSESSEE, WHICH WAS USED FOR MANUFACTURE OF PHARMACEUTICAL PR ODUCTS. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SAID AMOUNT REPRESENTS W.D.V. OF THE SAID CRANKS SHAFT AFTER ADJUSTING INSURANCE CLA IM RECEIVED BY IT , WHILE BALANCE AMOUNT IS WRITTEN OFF AND CHARGED TO P&L AC COUNT BY INVOKING PROVISIONS OF SECTION 32(1)(III) OF THE 1961 ACT. 5.1.3 ON THE NEXT EFFECTIVE GROUND OF DISALLOWANCE , IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT EARLIER AO HA S DISALLOWED INTEREST ITA NO.937/CHNY/2008 :- 24 -: EXPENSES TO THE TUNE OF RS. 3151.15 LACS WHICH WAS ALLOWED BY LEARNED CIT(A). IT WAS SUBMITTED THAT LEARNED CIT INVOKED R EVISIONARY POWERS TO DIRECT AO TO LOOK INTO DISALLOWANCE OF INTEREST WIT H RESPECT TO ADVANCES MADE TO ANOTHER GROUP CONCERN NAMELY SPEL SEMICONDU CTOR LIMITED TO THE TUNE OF RS. 16.78 CRORES , WHICH WAS NOT THE MA TTER OF DISALLOWANCE BY AO WHILE FRAMING REGULAR ASSESSMENT U/S 143(3) OF T HE 1961 ACT , AS ADVANCES MADE TO THIS COMPANY NAMELY SPEL SEMICONDU CTOR LIMITED WAS NOT BROUGHT WITHIN IN AMBIT OF DISALLOWANCE BY THE AO AND IT IS ONLY FOR THE FIRST TIME LEARNED CIT BROUGHT THIS ASSOCIATE COMPA NY OF THE ASSESSEE NAMELY SPEL SEMICONDUCTORS LIMITED WITHIN AMBIT OF DISALLOWANCE BY INVOKING REVISIONARY POWERS U/S 263 OF THE 1961 ACT WITH RESPECT TO INTEREST FREE ADVANCES MADE TO THE SAID ASSOCIATE/G ROUP COMPANY. IT WAS FAIRLY ADMITTED THAT ISSUE BEFORE LEARNED CIT(A) WA S NOT WITH RESPECT TO ADVANCES MADE BY ASSESSEE TO ITS ASSOCIATE/GROUP CO MPANY NAMELY SPEL SEMI CONDUCTORS LIMITED AND LEARNED CIT(A) WAS SEIZ ED OF OTHER ADVANCES MADE BY ASSESSEE TO OTHER GROUP COMPANY FOR WHICH I NTEREST WAS DISALLOWED BY THE AO WHICH LATER WAS ALLOWED BY LEA RNED CIT(A). IT WAS SUBMITTED THAT LATER THIS ADVANCE TO SPEL SEMI COND UCTOR LIMITED WAS CONVERTED INTO EQUITY. IT WAS CLAIMED THAT THESE AD VANCES WERE MADE OWING TO COMMERCIAL EXPEDIENCY . 5.1.4 WITH RESPECT TO NEXT EFFECTIVE ISSUE OF ICD P LACED TO THE TUNE OF RS. 675 LACS ON WHICH NO INCOME WAS RECEIVED, IT WAS SU BMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS ITS OWN FUNDS WHICH ARE ITA NO.937/CHNY/2008 :- 25 -: SUFFICIENT TO ADVANCE THESE ICDS AND PRESUMPTION S HOULD BE DRAWN THAT THE ASSESSEE ADVANCED THESE ICDS OUT OF ITS OWN AV AILABLE FUNDS. 5.1.5 WITH RESPECT TO INTEREST WAIVER ON CDR , IT WAS CLAIMED THAT THERE WAS NO WAIVER OF INTEREST BY FIS/BANKS FINALIZED A S IT WAS SUBJECT TO APPROVALS BY FIS/BANKS. OUR ATTENTION WAS DRAWN TO PAGE 12 OF THE REVISIONARY ORDER OF LEARNED CIT , WHEREIN THE LEAR NED CIT HAS DIRECTED AO TO EXAMINE THIS ISSUE. 5.2 THE LEARNED CIT-DR WOULD SUBMITTED IN REBUTTAL THAT LEARNED CIT HAS RIGHTLY EXERCISED ITS REVISIONARY POWERS U/S 263 OF THE 1961 ACT AS ASSESSMENT ORDER ORIGINALLY PASSED BY THE AO U/S 14 3(3) OF THE 1961 ACT ON 30.03.2006 WAS ERRONEOUS SO FAR AS PREJUDICIAL T O THE INTEREST OF REVENUE. IT WAS SUBMITTED THAT FOREIGN EXCHANGE FLU CTUATION LOESS ON FRN WAS INCURRED WHICH WAS CAPITAL LOSS. THE ASSESSEE H AS CLAIMED TO HAVE ABANDONED THESE PROJECTS AND THESE COULD NOT BE SAI D TO BE REVENUE EXPENSES WHICH THE ASSESSEE HAS CHARGED TO P&L ACCO UNT IN THIS YEAR AS REVENUE EXPENSES. IT WAS SUBMITTED BY LEARNED CIT-D R THAT CHANGE IN ACCOUNTING POLICY IS NOT PERMISSIBLE. OUR ATTENTION WAS DRAWN TO REVISIONARY ORDER PASSED BY LEARNED CIT U/S 263 OF THE 1961 ACT AND PRAYERS ARE MADE TO UPHOLD THE SAME. REGARDING SECO ND EFFECTIVE GROUND, IT WAS SUBMITTED THAT CRANK SHAFT WAS ATTACHED TO D G SET OF WHOSE WDV VALUE AFTER NETTING WITH THE INSURANCE CLAIM RECEIV ED WAS WRITTEN OFF IN BOOKS OF ACCOUNTS IN P & L ACCOUNT AS REVENUE EXPEN SES AND BY STRETCH OF NO IMAGINATION, IT COULD BE SAID THAT CRANK SHAFT A TTACHED TO DG SET IS AN ITA NO.937/CHNY/2008 :- 26 -: UNDERTAKING AND THE ASSESSEE ERRED IN RELYING ON PR OVISIONS OF SECTION 32(1)(III) OF THE 1961 ACT. IT WAS SUBMITTED THAT S AID CRANK SHAFT ATTACHED TO DG SET WAS PART OF BLOCK OF ASSET AND THE SAID B LOCK OF ASSET HAS NOT CEASED TO EXIST AS THE END OF THE PREVIOUS YEAR AND HENCE SECTION 50 OF THE 1961 ACT IS APPLICABLE. THE PRAYERS WERE MADE T O SUSTAIN THE REVISIONARY ORDER PASSED BY LEARNED CIT U/S 263 OF THE 1961 ACT. REGARDING NEXT ISSUE , IT WAS SUBMITTED THAT SO FAR AS ICD ARE CONCERNED WHEREIN CLAIM IS MADE THAT THE ASSESSE HAS OWN FUND S WHICH ARE SUFFICIENT TO MAKE THESE ICD, THE LEARNED CIT HAS ONLY DIRECTE D AO TO LOOK INTO THE MERITS OF THE CONTENTIONS OF THE ASSESSEE. SIMILARL Y, IT WAS STATED BY LEARNED CIT-DR THAT ON OTHER ISSUE NO PREJUDICE IS CAUSED TO ASSESSEE AS LEARNED CIT DIRECTED AO TO LOOK INTO THE ISSUES AND EXAMINE THE SAME ON MERITS. THUS , IN NUTSHELL , THE LEARNED CIT DR WOU LD PRAY FOR CONFIRMING AND SUSTAINING THE REVISIONARY ORDER DATED 05.02.20 08 PASSED BY LEARNED CIT U/S 263 OF THE 1961 ACT . 5.3 IN REJOINDER, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT DG SET CAN BE AN SEPARATE UNDERTAKING . 6. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD INCLUDING ORDERS OF AUTHORITIES BELOW AND CI TED CASE LAWS. WE HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINE SS OF FERTILIZERS, PHARMA , BIO-TECH AND ENGINEERING SERVICES. IT IS O BSERVED THAT THE ASSESSEE IS DEALING IN :- ITA NO.937/CHNY/2008 :- 27 -: A) TUTICORN FACTORY- MANUFACTURING AND SALE OF UREA , DAP , ALUMINUM AND FLUORIDE. B) SMO, EHVT DIVISION- EXECUTION OF TURNKEY PROJECT S AND EXECUTION OF ELECTRIFICATION WORKS CONTRACT. C) PHARMA DIVISION- MANUFACTURE OF BULK DRUGS AND F ORMULATIONS INCLUDING PEN-G ; AND D) BIO-TECH DIVISION- PRODUCTION OF TISSUE CULTURE PLANTS, ENZYMES AND EXPORT OF CUT FLOWERS. THE ASSESSEE HAD FILED ITS RETURN OF INCOME WITH RE VENUE FOR IMPUGNED ASSESSMENT YEAR AY: 2003-04 ON 23.10.2003 DECLARIN G LOSS OF RS. 403,84,01,506/-. THE SAID RETURN OF INCOME WAS PROC ESSED BY REVENUE U/S 143(1) OF THE 1961 ACT ON 12.03.2004. THE ASSES SEE FILED REVISED RETURN OF INCOME WITH REVENUE ON 30.03.2004 DECLARI NG LOSS OF RS. 298,10,70,500/- . IN THIS REVISED RETURN OF INCOME FILED ON 30.03.2004 BY ASSESSEE WITH REVENUE, THE ASSESSEE HAD OFFERED AN INTEREST INCOME OF RS. 105.73 CRORES. LATER SCRUTINY ASSESSMENT WAS FR AMED BY AO VIDE ASSESSMENT ORDER DATED 30.03.2006 PASSED U/S 143(3) OF THE 1961 ACT , ASSESSING LOSS OF THE ASSESSEE AT RS. 342,32,81,858 /-. THEREAFTER, LEARNED CIT INVOKED ITS REVISIONARY POWERS U/S 263 OF THE 1 961 ACT AND ISSUED SHOW CAUSE NOTICE DATED 24.10.2007 TO ASSESSEE AS TO WHY THE ASSESSMENT ORDER OF THE AO BE NOT HELD AS ERRONEOUS SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE WITHIN PROVISIONS OF SEC TION 263 OF THE 1961 ACT, ON AS MANY AS SIX ISSUES/GROUNDS WHICH WE HAVE ENUMERATED IN DETAIL IN PRECEDING PARAS OF THIS ORDER. THE SAID SCN DATED 24.10.2007 ISSUED BY LEARNED CIT U/S 263 OF THE 1961 ACT IS RE PRODUCED BY US IN THIS ITA NO.937/CHNY/2008 :- 28 -: ORDER AT PARA 4.2. THE ASSESSEE DULY REPLIED TO THE SAID SHOW CAUSE NOTICE ISSUED BY LEARNED CIT U/S 263 OF THE 1961 ACT EXPLA INING ITS STAND ON EACH OF THE ISSUES RAISED BY LEARNED CIT IN ITS SCN , S UBMITTING THAT ASSESSMENT ORDER PASSED BY THE AO IS NEITHER ERRONE OUS NOR PREJUDICIAL TO THE INTEREST OF REVENUE WITHIN THE MEANING OF SECTI ON 263 OF THE 1961 ACT. WE HAVE DULY EXTRACTED SAID REPLY FILED BY ASS ESSEE IN PRECEDING PARA 4.3 OF THIS ORDER. THE LEARNED CIT THEN PROCEEDED TO PASS REVISIONARY ORDERS U/S 263 OF THE 1961 ACT, DATED 05.02.2008 HO LDING THAT ASSESSMENT ORDER DATED 30.03.2006 PASSED BY AO U/S 143(3) OF THE 1961 ACT IS ERRONEOUS SO FAR AS IS PREJUDICIAL TO THE IN TEREST OF REVENUE WITHIN MEANING OF SECTION 263 OF THE 1961 ACT ON ALL THE S IX ISSUES/GROUNDS RAISED BY LEARNED CIT IN ITS SCN AND ACCORDINGLY NE CESSARY DIRECTIONS WERE GIVEN BY LEARNED CIT IN ITS ORDER. WE HAVE ALSO ENU MERATED DECISION OF LEARNED CIT VIDE REVISIONARY ORDER DATED 05.02.2008 PASSED U/S 263 OF THE 1961 ACT ON ALL THE SIX ISSUES IN PRECEDING PAR A 4.6 OF THIS THIS ORDER. THE ASSESSEE BEING AGGRIEVED HAS COME IN APPEAL BEF ORE US AND CONTENTIONS ARE RAISED BY BOTH THE RIVAL PARTIES TO SUPPORT THEIR STAND. WE HAVE CAREFULLY HEARD BOTH THE PARTIES AND PERUSED E NTIRE MATERIAL ON RECORD INCLUDING ORDERS OF AUTHORITIES BELOW AND CI TED CASE LAWS BEFORE US. WE WILL NOW PROCEED TO ADJUDICATE ALL THE SIX ISSUE S/GROUNDS WHICH LED LEARNED CIT TO INVOKE ITS EXTRAORDINARY POWERS AS A RE CONTAINED IN SECTION 263 OF THE 1961 ACT TO DECLARE ASSESSMENT ORDER PAS SED BY AO U/S 143(3) OF THE 1961 ACT TO BE ERRONEOUS SO FAR AS PREJUDICI AL TO THE INTEREST OF REVENUE . THE FACTUAL MATRIX OF THE CASE BEFORE US IS UNDISPUTED AND ONLY ITA NO.937/CHNY/2008 :- 29 -: IT IS TO BE TESTED WHETHER DECISION OF LEARNED CIT IN INVOKING REVISIONARY POWERS U/S 263 OF THE 1961 ACT ON UNDISPUTED FACTS BEFORE US WAS VALID AND SUSTAINABLE IN THE EYES OF LAW KEEPING IN VIEW POWERS VESTED IN LEARNED CIT BY VIRTUE OF SECTION 263 OF THE 1961 AC T. WE WILL NOW PROCEED ISSUE WISE TAKING ONE BY ONE ALL THE SIX ISSUES/GRO UNDS WHICH LED LEARNED CIT TO INVOKE ITS EXTRAORDINARY REVISIONARY POWERS U/S 263 OF THE 1961 ACT:- I) CLAIM OF WRITE OFF OF INTEREST AND FOREIGN EXCHAN GE FLUCTUATION LOSS ON FRN OF US $ 120 MILLIONS ISSUED BY ASSESSEE IN THE YEAR 1996:- THE ASSESSEE RAISED FLOATING RATE NOTE(FRN) TO THE TUNE OF US$ 120 MILLIONS IN THE YEAR 1996. THE SAID BORROWINGS ARE DENOMINATED IN FOREIGN CURRENCY. THESE FRNS ARE DUE FOR REPAYMENT /MATURITY IN 2003. THE OFFER DOCUMENT DATED 11.01.1996 ISSUED BY ASSESSEE FOR RAISING THESE FRN TO THE TUNE OF US $ 120 MILLION I S FILED BY ASSESSEE AND IS PLACED ON RECORD IN FILE. THE NET PROCEED ST ATED TO BE EXPECTED FROM ISSUE OF FRN IS AROUND US $ 118.06 MI LLION , AFTER MEETING ISSUE EXPENSES. THESE FRNS ISSUED BY ASSES SEE ARE DENOMINATED IN FOREIGN CURRENCY AND LIABILITY OF TH E ASSESSE TO PAY INTEREST AND REPAYMENT OF PRINCIPAL IS ALSO DENOMIN ATED IN FOREIGN CURRENCY. IT IS STATED IN THE SAID OFFER DOCUMENT T HAT PROCEEDS OF FRN WILL BE UTILIZED FOR FINANCING THE IMPORT INTO INDIA OF CAPITAL GOODS FOR ITS OPERATIONS AND PROJECTS IN WHICH THE ASSESSEE IS INVOLVED AND FOR GENERAL CORPORATE PURPOSES PERMITT ED BY ITA NO.937/CHNY/2008 :- 30 -: GOVERNMENT OF INDIA. THUS, THESE FRNS WERE ISSUED IN THE YEAR 1996 AND WERE DUE FOR MATURITY /REPAYMENT IN 2003. SINCE ITS ISSUE AND RECEIPT OF PROCEEDS BY THE ASSESSEE IN 1996, TH E ASSESSEE WAS CHARGING OFF INTEREST AND FOREIGN EXCHANGE FLUCTUAT ION LOSS TO THE CAPITAL ASSETS WHEREIN THE PROCEEDS OF FRNS WERE U TILIZED FOR ACQUIRING CAPITAL ASSETS. THE ASSESSEE HAS STATED T HAT THE PROCEEDS OF THE FRN WERE , INTER-ALIA, UTILIZED BY THE ASSE SSEE FOR MODERNIZATION OF ITS FERTILIZER PLANT AT TUTICORIN AND PURCHASE OF CAPITAL ASSETS FOR OTHER DIVISIONS OF THE ASSESSEE AND SUCH CAPITAL ASSETS WERE UTILIZED FOR THE PURPOSES OF THE BUSINE SS OF THE ASSESSEE. SO FAR THERE IS NO DIFFICULTY AS THIS ISS UE IS NOT BEFORE US FOR ADJUDICATION . THEN, THE ASSESSEE ALSO , INTER- ALIA, USED PROCEEDS OF FRN ISSUED IN 1996 FOR WORKING CAPITAL PURPOSES AND THE INTEREST ON FRN AND FOREIGN EXCHANGE FLUCTUATION LOSS WAS CH ARGED OFF TO PROFIT AND LOSS ACCOUNT AS REVENUE EXPENSES FROM YE AR TO YEAR . AGAIN, THERE IS NO DIFFICULTY FOR US AS THIS ISSUE IS NOT BEFORE US FOR ADJUDICATION . THE ASSESSEE HAS CLARIFIED THAT THE FUNDS WHICH ARE USED BY IT FOR ACQUISITION OF CAPITAL ASSETS AS WEL L FOR WORKING CAPITAL PURPOSES WERE ALLOCATED FUNDS OUT OF PROCEEDS OF FR N ISSUED BY ASSESSEE . THE DIFFICULTY HAS ARISEN SO FAR AS UNAL LOCATED FUNDS OUT OF PROCEEDS OF FRN RECEIVED BY ASSESSEE AS FAR AS B ACK IN 1996, WHICH HAD REMAINED UNALLOCATED SINCE 1996 TILL THE END OF PREVIOUS YEAR ENDING ON 31.03.2003. THE ASSESSEE RAISED FRN IN 1996 WHICH ARE DUE FOR MATURITY/REDEMPTION IN 2003 AND WE ARE SEIZED OF ITA NO.937/CHNY/2008 :- 31 -: PREVIOUS YEAR 2002-03 RELEVANT TO AY: 2003-04 ,AND 2003 IS THE YEAR OF MATURITY AND REPAYMENT OF THESE FRN AS THES E FRNS ARE DUE FOR REPAYMENT IN 2003. THE ASSESSEE HAS CLAIMED THA T IT HAS UNALLOCATED FUNDS REMAINING OUT OF PROCEEDS OF FRN RAISED IN 1996 WHICH ARE SO FAR NOT ALLOCATED FOR ANY USAGES. THE ASSESSEE HAS DEBITED INTEREST AS WELL FOREIGN EXCHANGE FLUCTUATI ON LOSS ON THESE UNALLOCATED FUNDS OUT OF FRN RAISED IN 1996 TO CAP ITAL WORK-IN- PROGRESS FROM YEAR TO YEAR SINCE 1996 TILL THE END OF PRECEDING AY: 2002-03 AND NO CLAIM OF DEDUCTION OF REVENUE EXPENS ES OR BY WAY OF BENEFIT OF DEPRECIATION IS CLAIMED TILL AY: 2002 -03 ON THIS CAPITAL WORK IN PROGRESS WAS CLAIMED BY ASSESSEE FROM REVEN UE. THUS, NO PREJUDICE WAS CAUSED TO REVENUE UNTIL AY: 2002-03 A S NO BENEFIT OF ANY DEDUCTION/EXPENSES EITHER BY WAY OF REVENUE EXP ENSES OR DEPRECIATION WAS CLAIMED BY ASSESSEE UNTIL AY: 2002 -03 ON THESE UN-ALLOCABLE FUNDS OUT OF PROCEEDS OF FRN RAISED IN AS FAR AS BACK IN 1996 WHILE COMPUTING INCOME CHARGEABLE TO INCOME-TA X , BUT IN THE YEAR UNDER CONSIDERATION VIZ. PREVIOUS YEAR RELEVAN T TO AY: 2003-04, THE ASSESSEE HAS CLAIMED THAT IT IS DECIDED THAT TH E COMPANY DOES NOT INTEND TO UNDERTAKE OR ENVISAGED ANY FURTHER EX PANSION AND HENCE THE ENTIRE OUTSTANDING AMOUNT AS WAS APPEARIN G IN THE AFORESAID CAPITAL WORK IN PROGRESS ACCOUNT UNTIL AY : 2002-03 REPRESENTING INTEREST ON UN-ALLOCATED FUNDS OUT OF PROCEEDINGS OF FRN AND FOREIGN EXCHANGE LOSS ON RESTATEMENT OF LOA N LIABILITY DENOMINATED IN FOREIGN CURRENCY AS AT YEAR END FROM YEAR TO YEAR ITA NO.937/CHNY/2008 :- 32 -: SINCE 1996 UNTIL AY: 2002-03 WAS CHARGED OFF AS REV ENUE EXPENSE IN PROFIT AND LOSS ACCOUNT. THERE IS NO WHISPER BY ASSESSEE COMPANY AS TO HOW THESE UNALLOCATED FUNDS OUT OF PR OCEEDS OF FRN WERE UTILIZED/APPLIED BY ASSESSEE SINCE 1996 UNTIL AY: 2003-04, I.E. WHETHER THESE UNALLOCATED FUNDS WERE CONTINUED TO B E HELD IN ESCROW ACCOUNT WITH BANKS OR WITH CURRENT ACCOUNT MAINTAINED WITH BANK, FDRS , GOVERNMENT SECURITIES ETC. OR WERE DI VERTED OUT TO OTHER ENTITIES ETC.. IT IS TO BE NOTED THAT PROCEE DS OF THESE FRNS COULD ONLY BE UTILIZED FOR THE PURPOSES PERMITTED B Y GOI AND IT COULD NOT BE DIVERTED FOR ANY OTHER PURPOSES AS PER POLIC Y OF GOI. THE PURPOSE FOR RAISING THESE FRN WAS FOR FINANCING THE IMPORT INTO INDIA OF CAPITAL GOODS FOR ITS OPERATIONS AND PROJECTS IN WHICH THE ASSESSEE IS INVOLVED AND FOR GENERAL CORPORATE PURPOSES PERM ITTED BY GOVERNMENT OF INDIA. THE ONUS WAS ENTIRELY ON THE A SSESSEE TO DEMONSTRATE THAT IT UTILIZED THE PROCEEDS OF FRN FO R THE PERMITTED PURPOSES AND UNALLOCATED FRN ISSUED AS FAR AS BACK IN 1996 WAS EITHER KEPT IN ESCROW ACCOUNT MAINTAINED WITH BANK OR BANK ACCOUNTS OR IN FDRS OR GOVERNMENT SECURITIES OR OT HER PERMITTED PURPOSES ETC. AND THERE IS NO DIVERSION OF SAID FUN DS . THERE IS ALSO NO EXPLANATION COMING FORTH FROM THE ASSESSEE AS TO WHAT PROJECTS WERE ENVISAGED TO BE UNDERTAKEN WHICH ARE NOW STATE D TO BE ABANDONED, WHAT ARE THE STEPS TAKEN FOR UNDERTAKING THESE ABANDONED PROJECTS AND STATUS OF THE SAID PROJECTS WHICH WERE ENVISAGED TO BE IMPLEMENTED , THEIR NEXUS OF THESE PROJECTS WITH ITA NO.937/CHNY/2008 :- 33 -: BUSINESS OF THE ASSESSEE AND REASONS FOR THEIR ABAN DONMENT. THERE IS NO EXPLANATION/EVIDENCES FORTHCOMING FROM THE A SSESSEE ON THE SAME AND ONLY BALD STATEMENTS ARE MADE THAT THE ASS ESSEE DOES NOT ENVISAGE TO UNDERTAKE ANY FURTHER PROJECTS AND HENC E IT IS DECIDED TO WRITE OFF THE ENTIRE CAPITAL WORK IN PROGRESS WH ICH WAS EXISTING UPTO AY: 2002-03 IN THE YEAR UNDER CONSIDERATION VI Z. AY: 2003-04 AS REVENUE EXPENSES. THUS, NO DETAILS AT ALL WERE S UBMITTED BEFORE AO DURING ASSESSMENT PROCEEDINGS, LEARNED CIT DURIN G REVISIONARY PROCEEDINGS U/S 263 AND EVEN BEFORE US. THE ASSESSE E HAS RELIED UPON CERTAIN JUDICIAL PRECEDENTS WHICH WE HAVE CITE D IN CONTENTIONS OF THE ASSESSEE AT PARA 5 OF THIS ORDER BUT WE ARE AFRAID WHENCE NO DETAILS ARE FORTHCOMING FROM THE ASSESSEE AS DETAIL ED ABOVE, WE FAIL TO UNDERSTAND HOW THESE JUDGMENTS CAN BE APPLIED T O THE BENEFIT OF THE ASSESSEE. THE LEARNED AO MERELY ACCEPTED THE CO NTENTION OF THE ASSESSEE THAT PROJECTS ARE ABANDONED OR IT IS NO MO RE ENVISAGED THAT ANY PROJECTS WILL BE UNDERTAKEN AND THE ENTIRE CAPITAL WORK IN PROGRESS AS WAS ACCUMULATED SINCE 1996 UNTIL AY: 20 02-03 WAS ALLOWED BY AO AS REVENUE EXPENSES WHILE COMPUTING I NCOME OF THE ASSESSEE FOR AY: 2003-04. THE ASSESSEE HAS COMPLETE LY FAILED TO DISCHARGE ITS ONUS AND THE AO CLEARLY ERRED IN ACC EPTING THE BALD STATEMENT MADE BY THE ASSESSEE WITHOUT CONDUCTING A NY ENQUIRY AND CERTAINLY THE ACTION OF THE AO IN ACCEPTING THE SE CAPITAL WORK IN PROGRESS ACCUMULATED OVER YEARS AS REVENUE EXPENSES IN THE YEAR UNDER CONSIDERATION WHILE COMPUTING INCOME OF THE A SSESSEE ITA NO.937/CHNY/2008 :- 34 -: CHARGEABLE TO TAX WITHOUT MAKING ANY ENQUIRY WHICH WAS CERTAINLY WARRANTED BASED ON FACTS AND CIRCUMSTANCES OF THIS CASE BEFORE ALLOWING ENTIRE CAPITAL WORK IN PROGRESS EXISTING U PTO AY: 2002-03 AS REVENUE EXPENSES IN THIS YEAR VIZ. AY: 2003-04 IS C LEARLY ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND LEAR NED CIT RIGHTLY INTERFERED BY INVOKING HIS REVISIONARY POWERS U/S 2 63 OF THE 1961 ACT. IT IS PERTINENT THAT 2003 IS THE YEAR WHEN T HESE FRNS WERE DUE FOR REPAYMENTS AND THE ASSESSEE IS CLAIMING THA T FOR ENTIRE DURATION OF FRN RUNNING FROM 1996 WHEN THE SAME WAS RAISED TILL ITS MATURITY , PROCEEDS WERE UNALLOCATED . THE ONUS WAS HEAVY ON ASSESSEE TO PROVE THAT NOT ONLY THE FUNDS WERE UNAL LOCATED FOR PROJECTS OR WORKING CAPITAL, BUT THE SAME WAS KEPT IN ESCROW ACCOUNT MAINTAINED WITH BANK OR IN A BANK ACCOUNT/ FDRS , GOVERNMENT SECURITIES ETC OR OTHER PERMITTED PURPOS ES AS THERE WERE RESTRICTIONS IMPOSED BY GOI ON END USE OF FORE IGN CURRENCY BORROWINGS MADE THROUGH FRNS AS THE FUNDS CANNOT B E ALLOWED TO BE DIVERTED FOR PURPOSES OTHER THAN PERMITTED USAGE S. THE EVIDENCES WHICH COULD BE PRODUCED BUT ARE NOT PRODU CED , THE PRESUMPTION WILL BE DRAWN AGAINST THE PERSON WHO I S IN POSITION TO PRODUCE THESE EVIDENCES BUT DID NOT PRODUCE THE SAM E. IN OUR CONSIDERED VIEW, THE LEARNED CIT RIGHTLY INTERFERED BY INVOKING ITS REVISIONARY PROVISIONS U/S 263 OF THE 1961 ACT AND WE ARE NOT INCLINED TO INTERFERE WITH THE WELL REASONED DECISI ON TAKEN BY LEARNED ITA NO.937/CHNY/2008 :- 35 -: CIT U/S 263 OF THE 1961 ACT, FOR THE AFORESAID REA SONS. WE ORDER ACCORDINGLY. II) CLAIM OF WRITE OFF OF RS. 202.42 LACS OF DG SET: - WE HAVE OBSERVED THAT THE ASSESSEE HAS CLAIMED WRIT E OFF OF WRITTEN DOWN VALUE OF CRANKSHAFT ATTACHED TO DG SET AFTER NETTING OFF WITH INSURANCE CLAIM , TO THE TUNE OF RS. 202.42 LA CS AS REVENUE EXPENSES WHILE COMPUTING INCOME OF THE ASSESSEE. TH E AO MADE ENQUIRY WITH RESPECT TO THE SAID WRITE OFF AND THE ASSESSEE FILED ITS REPLY STATING THAT THIS CLAIM IS COVERED BY PROVISI ONS OF SECTION 32(1)(III) OF THE 1961 ACT AND HENCE ALLOWABLE AS D EDUCTION , VIDE LETTER DATED 09.03.2006(PAGE 57/PB) . THE SAID REPL Y OF THE ASSESSEE IS REPRODUCED BY US AT PARA 4.4.2 IN THE O RDER. THE AO SIMPLY ACCEPTED THE CONTENTIONS OF THE ASSESSEE WIT HOUT MAKING ANY FURTHER ENQUIRY AND WITHOUT LOOKING INTO THE FACT W HETHER THE SAID ASSET WAS PART OF BLOCK OF ASSET AND APPLICABILITY OF SECTION 32(1)(II) AND 50 OF THE 1961 ACT. THE LEARNED CIT INVOKED REV ISIONARY POWERS U/S 263 OF THE 1961 ACT AND DIRECTIONS WERE ISSUED BY LEARNED CIT TO AO TO CARRY OUT FRESH EXAMINATION OF THE AFORESA ID CLAIM PREFERRED BY ASSESSEE. IT WAS OBSERVED BY LEARNED CIT THAT CR ANKSHAFT WAS PART OF THE DG SET AND THE SAID WDV OF CRANKSHAFT WAS PART OF THE BLOCK OF ASSET AND THE BLOCK HAS NOT CEASED TO EXIS T EVEN AFTER TAKING INTO EFFECT INSURANCE CLAIM RECEIVED BY THE ASSESSEE, AS THE END OF THE PREVIOUS YEAR . THE IMPUGNED AY: 2003-04 IS BEFORE US ITA NO.937/CHNY/2008 :- 36 -: AND THERE IS A CONCEPT OF BLOCK OF ASSET FOR PROVI DING DEPRECIATION U/S 32 OF THE 1961 ACT WHICH WAS APPLICABLE FOR IMP UGNED AY UNDER CONSIDERATION AND SECTION 50 WILL COME INTO PLAY UN DER THE SPECIFIED CIRCUMSTANCES MENTIONED IN SECTION 50 . IN THIS CA SE, THERE IS AN OBSERVATION BY LEARNED CIT THAT THE BLOCK OF ASSET HAS NOT CEASED TO EXIST AND THERE IS A BALANCE IN THE BLOCK OF ASSET EVEN AT YEAR END AFTER ADJUSTING THE INSURANCE CLAIM RECEIVED BY ASS ESSEE ON CRANK SHAFT. BLOCK OF ASSET IS DEFINED U/S 2(11) OF THE 1 961 ACT . THERE IS NO DOUBT THAT THERE IS A DIFFERENT SCHEME OF PROVID ING DEPRECATION ON UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER U/S 32(1)(I) READ WITH SECTION 32(1)(III) OF THE 1961 ACT. THESE ARE MATTER OF ENQUIRY WHILE WE HAVE OBSERVED THAT THE AO SIMPLY ACCEPTED THE CLAIM OF ASSESSEE DURING THE C OURSE OF ASSESSMENT PROCEEDINGS WITHOUT MAKING FURTHER ENQUI RIES AS WERE NECESSARILY WARRANTED IN THE FACTUAL MATRIX OF THE CASE. THE AO DID NOT VERIFY WHETHER THE WRITE OFF RS. 202.42 LACS ON ACCOUNT OF WRITTEN DOWN VALUE NET OF INSURANCE CLAIM WITH RESP ECT TO CRANK SHAFT WHICH FORMED PART OF DG SET IS TO BE GOVERNED BY CONCEPT OF BLOCK ASSET AS THE BLOCK OF ASSET DID NOT CEASE TO EXIST EVEN AT YEAR END OR ELSE IT WILL BE GOVERNED AS IN THE CASE OF U NDERTAKING ENGAGED IN GENERATION OF POWER U/S 32(1)(I) OF THE 1961 ACT READ WITH SECTION 32(1)(III) OF THE 1961 ACT. THESE ARE FACT FINDING EXERCISE WHICH AO WAS OBLIGATED NECESSARILY TO UNDERTAKE BEF ORE ALLOWING OR DISALLOWING THE CLAIM OF THE ASSESSEE BUT IN THE IN STANT CASE, THE AO ITA NO.937/CHNY/2008 :- 37 -: DID NOT MADE ANY ENQUIRY WHATSOEVER BEFORE ALLOWING THE CLAIM OF THE ASSESSEE. UNDER THESE CIRCUMSTANCES, THE LEARNE D CIT EXERCISE ITS REVISIONARY POWERS U/S 263 OF THE 1961 ACT AND DIRECTIONS WERE ISSUED BY LEARNED CIT TO AO TO CARRY OUT FRESH EXAM INATION OF THE CLAIM PREFERRED BY ASSESSEE. WE ARE NOT INCLINED TO INTERFERE WITH REVISIONARY POWERS EXERCISED BY LEARNED CIT U/S 263 OF THE 1961 ACT AS IN OUR CONSIDERED VIEW THERE WAS LACK OF ENQUIRY BY THE AO AND HENCE THE ASSESSMENT ORDER WAS RIGHTLY HELD TO BE E RRONEOUS SO FAR AS PREJUDICIAL TO THE INTEREST OF REVENUE BY LEARNE D CIT AND DIRECTIONS WERE RIGHTLY ISSUED BY LEARNED CIT TO TH E AO TO EXAMINE THIS ISSUE , WHICH DECISION OF LEARNED CIT, WE UPHO LD. WE ORDER ACCORDINGLY. III & IV) DISALLOWANCE OF INTEREST WITH RESPECT TO ADVANCES TO ASSOCIATED CONCERN SPEL SEMI CONDUCTOR LIMITED & SET OFF OF INTEREST RECEIVED AGAINST INTEREST EXPENSES WHILE MAKING DISALLOWANCE OF INTEREST EXPENSES:- WE HAVE OBSERVED THAT THE AO DID NOT EXAMINE THIS I SSUE OF DISALLOWANCE OF PROPORTIONATE INTEREST WITH RESPECT TO THE INTEREST FREE ADVANCES MADE BY ASSESSEE TO THE TUNE OF RS. 1 6.78 CRORES TO SPEL SEMI CONDUCTOR LIMITED . THE AO DID DISALLOW P ROPORTIONATE INTEREST WITH RESPECT TO INTEREST FREE ADVANCES MAD E BY ASSESSEE TO OTHER ASSOCIATED/GROUP COMPANIES BUT INTEREST FREE ADVANCES MADE BY ASSESSEE TO THIS CONCERN NAMELY SPEL SEMI CONDUC TOR LIMITED WAS NOT ENQUIRED/EXAMINED BY AO WHILE FRAMING ASSE SSMENT AND NO DISALLOWANCE WAS MADE BY THE AO. THUS, THERE WAS COMPLETE LACK ITA NO.937/CHNY/2008 :- 38 -: OF ENQUIRY BY THE AO WITH RESPECT TO THESE INTEREST FREE ADVANCES MADE BY ASSESSEE TO ITS ASSOCIATED/GROUP CONCERN SP EL SEMI CONDUCTOR LIMITED. THE ASSESSEE HAS PLEADED BEFORE LEARNED CIT , COMMERCIAL EXPEDIENCY IN GRANTING OF THESE INTEREST FREE ADVANCES TO SPEL SEMI CONDUCTOR LIMITED AND RELIANCE WAS PLA CED ON DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A.BUILDER S LIMITED(SUPRA). THE LEARNED CIT IN EXERCISE OF ITS REVISIONARY POWE RS HAS ONLY DIRECTED AO TO EXAMINE THE CLAIM AS TO COMMERCIAL E XPEDIENCY IN GRANT OF THESE INTEREST FREE ADVANCES TO SAID ASSOC IATED/GROUP COMPANY NAMELY SPEL SEMI CONDUCTOR LIMITED. THE ASS ESSEE ON ITS PART IS CLAIMING HUGE INTEREST EXPENDITURE ON BORRO WINGS, THUS IT WAS INCUMBENT ON THE AO TO SEE WHETHER THE INTEREST BEA RING FUNDS ARE UTILIZED FOR BUSINESS PURPOSES KEEPING IN VIEW COMM ERCIAL EXPEDIENCY BEFORE ALLOWING THESE EXPENSES AS BUSINE SS EXPENSES AND THERE IS NO DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSES. SINCE THERE WAS COMPLETE LACK OF ENQUIRY BY AO WRT TO INT EREST FREE ADVANCE OF RS. 16.78 CRORES MADE BY ASSESSEE TO SPE L SEMI CONDUCTOR LIMITED , THE LEARNED CIT RIGHTLY HELD TH E ASSESSMENT ORDER PASSED BY AO AS ERRONEOUS SO FAR AS PREJUDICI AL TO THE INTEREST OF REVENUE WITHIN PROVISIONS OF SECTION 263 OF THE 1961 ACT. IN ANY CASE, DIRECTIONS ARE ISSUED BY LEARNED CIT TO AO TO EXAMINE THE CLAIM OF THE ASSESSEE THAT THESE ADVANCES ARE MADE OWING TO COMMERCIAL EXPEDIENCY. WE ARE NOT INCLINED TO INTER FERE WITH THE REVISIONARY ORDER PASSED BY LEARNED CIT U/S 263 ON THIS ISSUE. WHILE ITA NO.937/CHNY/2008 :- 39 -: UPHOLDING THE DECISION OF LEARNED CIT U/S 263 OF TH E 1961 ACT, WE ALSO NOTE THAT THE AO HAS DISALLOWED PROPORTIONATE INTEREST EXPENSES ON INTEREST FREE ADVANCES MADE BY ASSESSEE TO OTHER GROUP ENTITIES, WHILE NO ENQUIRY WAS MADE BY AO WIT H RESPECT TO PROPORTIONATE DISALLOWANCE OF INTEREST EXPENSES ON INTEREST FREE ADVANCES MADE TO THIS GROUP ENTITY NAMELY SPEL SEMI CONDUCTOR LIMITED. THE AO DID NOT MADE ANY ADDITIONS ON DISAL LOWANCE OF PROPORTIONATE DISALLOWANCE OF INTEREST EXPENSES ON INTEREST FREE ADVANCES MADE BY ASSESSEE TO ITS GROUP ENTITY NAMEL Y SPEL SEMI CONDUCTOR LIMITED , WHILE OTHER DISALLOWANCE OF PRO PORTIONATE INTEREST EXPENSES ON INTEREST FREE ADVANCES MADE TO OTHER GROUP ENTITY WAS MADE WHICH WAS SUBJECT MATTER OF CHALLEN GE BY ASSESSEE BEFORE LEARNED CIT(A) . THE DOCTRINE OF MERGER WILL NOT BE APPLICABLE IN VIEW OF EXPLANATION 1(C ) TO SECTION 263(1) OF THE 1961 ACT . SIMILAR VIEW IS TAKEN BY CO-ORDINATE BENCHES OF CHE NNAI-TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 961 & 962/MDS/2011 V IDE COMMON ORDER DATED 09.02.2017 AT PARA 11 AT PAGE 18 WHEREI N REVISIONARY ORDER OF LEARNED CIT PASSED U/S 263 OF THE 1961 ACT WAS UPHELD BY TRIBUNAL FOR AY: 2005-06 AND 2006-07, BY HOLDING AS UNDER: 11. BEFORE US, LD.A.R SUBMITTED THAT INTEREST DIS ALLOWANCE BY THE LD. CIT WAS A SUBJECT MATTER OF THE APPEAL. IN THIS CONNECTION, IT IS TO BE NOTED THAT THE ENTIRE ASSES SMENT ORDER CANNOT BE SAID TO HAVE MERGED WITH APPELLATE ORDER. IN VIEW OF EXPLANATION-C TO SEC.263(1) OF THE ACT WHEREAS THE ASSESSEE HAD PREFERRED AN APPEAL ONLY ON CERTAIN POINTS; CIT CAN REVISE THE ASSESSMENT ORDER ON THE OTHER POINTS. THE RELIA NCE WAS PLACED ON THE JUDGEMENTS OF JURISIDICTIONAL HIGH CO URT IN THE ITA NO.937/CHNY/2008 :- 40 -: CASE OF CIT VS. FARIDA PRIME TANNERY IN [2000] 244 ITR 465 (MAD) AND IN THE CASE OF SESHASAYEE PAPER AND BOARD S LIMITED IN [1999] 238 ITR 683 (MAD) AND IN THE CASE OF SOFT BEVERAGES P. LTD. IN [2001] 249 ITR 552 (MAD). HENC E, IN OUR OPINION, THE CONCEPT OF MERGER WITH THE APPELLATE O RDER CANNOT BE APPLIED; THEREFORE, LD. CIT IS WELL WITHIN HIS P OWER IN EXERCISING REVISIONAL JURISDICTION ON THIS ISSUE. T HIS GROUND OF ASSESSEE IS REJECTED. WITH RESPECT TO THE NETTING OFF OF INTEREST INCOME EARNED BY ASSESSEE WITH INTEREST EXPENSES INCURRED AND CONSID ERING OF NET INTEREST EXPENSES FOR DISALLOWANCE OF PROPORTIONATE INTEREST EXPENSES , WE HAVE OBSERVED THAT NET INTEREST EXPEN SES WERE CONSIDERED FOR DISALLOWANCE OF INTEREST EXPENSES AF TER ADJUSTING INTEREST INCOME RECEIVED BY ASSESSEE WITH INTEREST EXPENSES. WE HAVE OBSERVED THAT CHENNAI-TRIBUNAL IN ASSESSEES O WN CASE IN ITA NO. 961 & 962/MDS/2011 FOR AY: 2005-06 AND 2006-07 , VIDE COMMON ORDER DATED 09.02.2017 AT PARA 10 PAGE 17 , HAS HELD AS AS UNDER: 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. ADMITTEDLY THE INTEREST PAID B Y THE ASSESSEE ON BORROWINGS USED FOR THE PURPOSE OF THE BUSINESS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE INCOME OF ASSESSEE. THE INTEREST RECEIVED BY THE ASSESSEE CANNOT BE SET OFF AGAINST THE INTEREST PAI D BY THE ASSESSEE. THE INTEREST PAID AND CLAIMED AS A DEDUCTION IN THE COMPUTATION OF PROFITS AND GAINS O F THE BUSINESS, CANNOT BE SET OFF AGAINST INTEREST RECEIV ED UNDER THE HEAD INCOME FROM OTHER SOURCES. SO THAT WHILE COMPUTING THE DISALLOWANCE OF INTEREST ON MON EY ADVANCED TO GROUP CONCERN, THE GROSS INTEREST TO BE CONSIDERED AND PROPORTIONATE INTEREST DISALLOWANCE TO BE WORKED OUT, BEING SO, THE CIT JUSTIFIED IN GIVING THE DIRECTION TO THE AO ACCORDINGLY. ITA NO.937/CHNY/2008 :- 41 -: WE ARE IN AGREEMENT WITH AFORE-SAID DECISION OF CO- ORDINATE BENCHES OF THE CHENNAI-TRIBUNAL AND WE AFFIRM DECISION OF L EARNED CIT PASSED U/S 263 OF THE 1961 ACT FOR IMPUGNED AY: 2003-04 . WE ORDER ACCORDINGLY. V) INTEREST DISALLOWANCE ON ICD OF RS. 675 LACS AND DECISION OF LEARNED CIT U/S 263 OF THE 1961 ACT:- IT WAS OBSERVED BY LEARNED CIT FROM NOTES TO ACCOUN TS TO BALANCE SHEET THAT THE ASSESSEE HAS PLACED FUNDS IN INTERES T FREE ICD TO THE TUNE OF RS. 675 LACS . THE LEARNED AO DID NOT MADE ANY ENQUIRY AS TO THE INTEREST FREE FUNDS PLACED BY ASSESSEE WITH ICD. THE SAID FUNDS WERE CLAIMED BY ASSESSEE TO HAVE BEEN DEPLOYE D IN THE YEAR 1999-00 AND THE ASSESSEE PLACED AUDITED FINANCIAL S TATEMENTS BEFORE THE LEARNED CIT STATING THAT IT HAS EARNED P ROFITS OF RS. 2837.26 LACS DURING THE YEAR UNDER CONSIDERATION AN D IT HAD A CARRIED GENERAL RESERVES TO THE TUNE OF RS. 23924.4 2 LACS AS ON 31.03.2000. THE ASSESSEE THUS STATED THAT IT HAS IN VESTED THESE ICD OUT OF ITS OWN FUNDS AND BORROWED FUNDS WERE UTILIZ ED FOR OTHER PURPOSES AND NO DISALLOWANCE OF PROPORTIONATE INTER EST CAN BE MADE. THE LEARNED CIT DIRECTED AO TO EXAMINE WHETHE R THE ICDS HAVE BEEN PLACED BY ASSESSEE OUT OF INTERNAL ACCRUA LS AND WHETHER ANY INTEREST BEARING BORROWED FUNDS WERE USED FOR T HE PURPOSES OF MAKING THESE INTEREST FREE ICDS AND IN CASE INTERE ST BEARING BORROWED FUNDS WERE USED THEN DIRECTIONS WERE ISSUE D BY LEARNED CIT TO FOLLOW DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITA NO.937/CHNY/2008 :- 42 -: S.A.BUILDERS(SUPRA). WE ARE OF THE CONSIDERED VIEW, THAT THERE WAS COMPLETE LACK OF ENQUIRY BY THE AO AS THE AO DID NO T RAISE ANY QUERY REGARDING INTEREST FREE ICD GRANTED BY ASSESS EE WHILE ON THE OTHER HAND THE ASSESSEE IS INCURRING HUGE INTEREST EXPENSES ON BORROWINGS MADE BY IT, WHICH IS CLAIMED AS BUSINESS DEDUCTION. WE ARE NOT INCLINED TO INTERFERE WITH REVISIONARY ORDE R PASSED BY LEARNED CIT. IN ANY CASE, LEARNED CIT HAS DIRECTED TO EXAMI NE THE CLAIM OF THE ASSESSEE THAT THESE ICDS WERE PLACED OUT OF IN TERNAL ACCRUAL AND IN CASE INTEREST BEARING BORROWINGS WERE USED, THEN PRINCIPLES OF COMMERCIAL EXPEDIENCY BE APPLIED AS LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF S.A.BUILDERS(SUPRA) AN D THEN TO ALLOW OR DISALLOW THE CLAIM OF THE ASSESSEE. WE UPHOLD RE VISIONARY ORDER PASSED BY LEARNED CIT . WE ORDER ACCORDINGLY. VI) INTEREST WAIVER OF RS. 883.93 LACS IN CDR:- THE LEARNED CIT OBSERVED FROM NOTES TO ACCOUNTS FOR MING PART OF THE AUDITED FINANCIAL STATEMENT THAT CONSEQUENT TO CORP ORATE DEBT RESTRUCTURING (CDR) UNDERTAKEN BY BANKS/FI OF THE A SSESSEE, AN AMOUNT OF RS.4110.36 LACS HAS BEEN CONSIDERED AS IN TEREST RELIEF FOR THE YEAR ENDING 31.03.2003. THE LEARNED CIT OBSERVE D THAT IN THE ANNUAL REPORT FOR AY: 2004-05 , INTEREST RELIEF AVA ILED FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS INCLUDED RS. 1827. 88 LACS ( INCLUDING RS. 943.90 LACS FOR THE YEAR 2003-04) . THUS , BALA NCE AMOUNT OF RS. 883.98 LACS PERTAINED TO EARLIER YEAR 2002-03 ( AY: 2003-04) ITA NO.937/CHNY/2008 :- 43 -: WHICH HAS BEEN OMITTED TO BE BROUGHT TO TAX FOR AY: 2003-04. THE LEARNED CIT OBSERVED THAT THE AO DID NOT CONSIDER T HIS ASPECT WHILE FRAMING ASSESSMENT U/S 143(3) OF THE 1961 ACT AND H ENCE THE ASSESSMENT ORDER WAS HELD TO BE ERRONEOUS AND PREJU DICIAL TO THE INTEREST OF REVENUE U/S 263 OF THE 1961 ACT. THE AU DITORS STATED IN THE NOTES TO ACCOUNTS THAT CDR CELL APPROVED PACKA GE ON 19.03.2003 GIVING CERTAIN TERMS AND CONDITIONS FOR BUSINESS AND FINANCIAL RESTRUCTURING INCLUDING SHARING OF SECURI TY AMONGST LENDERS, WHICH IS PENDING FINAL APPROVAL BY THE LENDERS. IT WAS SUBMITTED THAT INTEREST RELIEF TO THE TUNE OF RS. 4110.36 LACS FOR THE YEAR ENDING 31.03.2003 HAS BEEN CONSIDERED IN THESE ACCOUNTS , WHICH IS PENDING EXECUTION OF NECESSARY DOCUMENTS AND COMPLI ANCES WITH CERTAIN SPECIAL AND GENERAL CONDITIONS. THE ASSESSE E SUBMITTED THAT THE AO WAS INFORMED DURING ASSESSMENT PROCEEDINGS T HAT COMPANY HAS ACCOUNTED FOR INTEREST EXPENSES ONLY AT REDUCED RATE OF INTEREST IN BOOKS OF ACCOUNTS AND THEREFORE THE INTEREST REL IEF OF RS. 4110.36 LACS WAS DISCLOSED IN NOTES TO ACCOUNTS ONLY FOR ST ATISTICAL PURPOSES. THE LEARNED CIT OBSERVED THAT THE AO HAS NOT CONSID ERED THE ABOVE ISSUE IN PROPER PERSPECTIVE AND DIRECTION WERE ISSU ED TO THE AO TO EXAMINE THE ISSUE IN PROPER PERSPECTIVE AFTER CONSI DERING SUBMISSIONS OF THE ASSESSEE IN ACCORDANCE WITH LAW AND THE AO SHALL BE ENTITLED TO CALL FOR FRESH EVIDENCES , IF SO REQ UIRED AND TO EXAMINE THE SAME. THE ASSESSEE HAS AVAILED LOANS/BORROWINGS FROM FORTY LENDERS AND CDR PACKAGE IS STATED TO BE APPROVED ON 19.03.2003, ITA NO.937/CHNY/2008 :- 44 -: SUBJECT TO FINAL APPROVAL BY LENDERS. THE ASSESSEE HAS OVER A PERIOD OF TIME ADMITTEDLY AVAILED BENEFIT OF DEDUCTION OF INTEREST EXPENSES WHILE COMPUTING INCOME FOR PAST SEVERAL AYS. NOW , INTEREST RELIEF AND OTHER CONCESSIONS WERE GRANTED BY THESE LENDERS AND IT WAS INCUMBENT ON THE AO TO HAVE LOOKED INTO IN DETAILS AS TO CDR PACKAGE APPROVED BY THE LENDERS AND WHETHER ANY INC OME CHARGEABLE TO INCOME-TAX WITH IN CONTEMPLATION OF S ECTION 41(1) OR SECTION 28(IV) OR ANY OTHER APPLICABLE PROVISIONS O F THE 1961 ACT IS REQUIRED TO BE BROUGHT TO TAX FOR ANY BENEFIT, CONC ESSION ETC GRANTED IN INTEREST RELIEF OR WAIVER OF LOAN LIABILITY ETC BY THESE LENDERS . THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F CIT V. RAMANIYAM HOMES PRIVATE LIMITED REPORTED IN (2016) 68 TAXMANN.COM 289(MAD.) IS RELEVANT. IN ANY CASE THE LEARNED CIT HAS DIRECTED AO TO EXAMINE THE ISSUE AGAIN AS THERE WAS NO PROPER ENQUIRY CONDUCTED BY THE AO WHICH HE OUGHT TO HAVE CONDUCTED OWING TO INTEREST RELIEF AND OTHER RELIEFS GRANTED BY LENDERS I.E. BANKS/FIS TO THE ASSESSEE UNDER CDR PACKAGE WHICH WAS APPROVED ON 19.03.2003 AND THEIR TAXABILITY IN THE YEAR UNDE R CONSIDERATION . WE ARE CONCERNED WITH AY: 2003-04. THE AO SIMPLY AC CEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE ASSESSEE HAS M ADE CLAIM OF DEDUCTION OF LOWER INTEREST BUT HAS NOT DIRECTED IT S ENQUIRY AS TO WHETHER ANY BENEFIT OR CESSATION OR REMISSION OF LI ABILITY HAS TAKEN PLACE WHICH IS REQUIRED TO BE BROUGHT TO TAX U/S 41 (1) OR SECTION 28(IV) OR ANY OTHER RELEVANT SECTION OF THE 1961 AC T. THUS, UNDER ITA NO.937/CHNY/2008 :- 45 -: THESE CIRCUMSTANCES, THE ASSESSMENT ORDER PASSED BY AO IS ERRONEOUS SO FAR AS IS PREJUDICIAL TO THE INTEREST OF REVENUE AND THE LEARNED CIT RIGHTLY INVOKED ITS REVISIONARY POWERS U/S 263 OF THE 1961 ACT, WHICH ACTION OF LEARNED CIT WE UPHELD/CON FIRMS. WE ORDER ACCORDINGY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO.937/CHNY/2008 FOR AY: 2003-04 IS DISMISSED. ORDER PRONOUNCED ON THE 12 TH DAY OF DECEMBER, 2019 IN CHENNAI. SD/- SD/- ( . . . ) ( N.R.S. GANESAN ) /JUDICIAL MEMBER ( ' ) ( RAMIT KOCHAR ) /ACCOUNTANT MEMBER /CHENNAI, 2 /DATED: 12 TH DECEMBER, 2019. TLN . ,'3 43 /COPY TO: 1. + /APPELLANT 4. 5 /CIT 2. ,-+ /RESPONDENT 5. 3 , /DR 3. 5 ( ) /CIT(A) 6. ( /GF