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2016 (1) TMI 864 - ITAT MUMBAI

2016 (1) TMI 864 - ITAT MUMBAI - TMI - Disallowance u/s 14A - CIT(A) deleted addition - Held that:- No infirmity in the order of the CIT(A) deleting the disallowance of interest so made as where the assessee has both own funds as well as borrowed funds and the own funds are sufficient as compared to the amounts of investments, then it is to be presumed that investments have been made out of own funds. So far as the CIT (A) has upheld the disallowance of administrative expenses u/s 14A in the rat .....

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mity in the order of CIT(A) appeal for deleting the disallowance of interest so made. From the record we also found that there has been no disallowance in earlier years up to assessment year 2001-02 when these advances had been given. However, in the current year, the department cannot make such a disallowance unless there is any change in the facts during the year. Accordingly, we do not find any merit in the action of the AO for disallowing the interest even in view of consistency principle la .....

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the AO giving effect to the order of Tribunal allowing assessee’s claim of deduction u/s 80-IB, we do not find any merit in the action of lower authorities in declining assessee’s claim for deduction u/s 80IB in respect of new unit set up at Daman during the assessment year 2005-06 and 2006-07. Accordingly, the AO is directed to allow assessee’s claim for deduction u/s 80IB for assessment year 2005-06 and 2006-07.

Denial of deduction u/s 80IB on interest income treating it as income .....

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by Tribunal in assessee’s own case for assessment year 1999-00, 2001-02, & 2003-04 for interest on FD kept as margin money to be considered as business income and deduction to be allowed u/s 80HHC.

We found that the issue of netting of interest is squarely covered by the decision of Hon’ble Supreme Court in the case of ACG Associated Capsules (P) Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA ). However, in view of the fact that interest being earned out of the deposit given to the .....

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be included in the value of closing stock of sugar. Respectfully following the order of Jurisdictional High Court in the case of Loknet Balasaheb Desai SSK Ltd [2011 (6) TMI 48 - BOMBAY HIGH COURT] we do not find any merit in the action of lower authorities for making additions on account of excise duty to closing stock of finished goods which were not subject to duty under the excise Act.

Deduction u/s 80IB on the hedging profit earned in the commodity exchange - Held that:- The expr .....

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vity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed an integral part of the income of the Jammu unit and was eligible for deduction u/s. 80-IB. The detailed finding recorded by the CIT(A) while concluding that when such profit was eligible for deduction u/s 80IB is as per material on record and the same has not been controverted by bringing any positive material by Ld. DR. Accordingly, we do not find any reason to interfere with the finding rec .....

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e said closed unit amounts to use for the purpose of business in the year under consideration. It was, therefore, held that assessee is entitled for depreciation. Similar view has been taken in the case of KJS India Pvt. Ltd. [2011 (9) TMI 667 - Delhi High Court] and Pfizer Ltd. [2010 (6) TMI 433 - Bombay High Court ]. Respectfully following these decisions, we do not find any ground/reason for declining the assessee’s claim for depreciation in respect of assets forming part of block of asset. A .....

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. As per the figure of share capital and free reserves vis-a-vis investment during the years, we found that the assessee had ₹ 39.84 crores in the form of share capital and reserve surplus against which investment was merely ₹ 9.16 crores. Applying proposition of law laid down in the case of Reliance Utilities Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) we do not find any merits in disallowing proportionate interest. With respect to claim of administrative expenses, we found that main .....

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m/2014 - Dated:- 20-11-2015 - SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER For The Appellant : Shri V. Sridhahran & Shri Prakash Shah Respondent : Shri Manjunata R. Swamy ORDER PER R.C. SHARMA, A.M These are cross appeals filed by the assessee and the Revenue against the order of CIT(A) for assessment years 2005-06 to 2009-10, in the matter of order passed u/s 143(3)/ 147 read with section 143(3) of the Income Tax Act. As common grounds have taken in all the y .....

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se duty not included in closing stock was also made. By the impugned order the CIT(A) allowed assessee s proportionate claim of deduction u/s 14A. The CIT(A) confirmed the disallowance of deduction u/s 80-IB. The AO has disallowed interest u/s 36(1)(iii) and the CIT(A) has deleted the disallowance so made. In this background of the matter, both assessee and revenue are in appeal before us. 2.2 We have considered the rival submissions and found that during the year under consideration, AO has dis .....

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ding the finding at para 3 to 5.1, the Tribunal has upheld the addition as sustained by the CIT(A). 2.3 We have carefully gone through the order of the Tribunal as well as facts of the case during the year under consideration and found that the assessee was having sufficient own funds out of which investments have been made. A statement showing the availability and utilization of own funds was furnished before the lower authorities. From the same, it can be seen that assessee had enough own fund .....

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sidering the decision in the case of Daga Capital Management Ltd., 117 ITD 169, held that if the investments are made out of own funds no disallowance can be made u/s 14A of the Act.. 2.4 Respectfully following the decisions referred above, we do not find any infirmity in the order of the CIT(A) deleting the disallowance of interest so made. So far as the CIT (A) has upheld the disallowance of administrative expenses u/s 14A in the ratio of exempt income to the total turnover of business, the is .....

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paid to the bank on the ground that assessee had given interest free advances to Ashish Ship breaking Ltd. and M/s. BV Metals and Tien Yuan India Pvt. Ltd. The CIT(A) deleted the disallowance by recording the finding to the effect that there is no diversion of interest bearing funds. We found that exactly similar issue was dealt by the Tribunal in assessee s own case for assessment year 1999-00, 2000-01, 2002-03 and also for assessment year 2002-03 and 2004-05, wherein the Tribunal after giving .....

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carefully. We have also gone through the case laws on which out attentions were drawn by the respective parties. After considering the submissions and also taking into consideration the various case laws, we find that there is no infirmity in the findings of the Ld CIT (A). The contention of the assessee that interest free advances were given to the sister concern for business purposes neither is incorrect nor false. The assessee advances money on account of purchase of goods from sister concern .....

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on Sugar Works Ltd has been reversed by the Hon ble Supreme Court in the case of SA Builders in 288 ITR 1 =(2006-TIOL-179-SCIT). The Hon ble Supreme Court has categorically held that if funds given to the sister concern or its subsidiary for the purpose of own business or their business, then no disallowance can be made u/s 36(1)(iii) as it has to be taken into consideration that those funds are to be treated as used for business purposes. The ratio of the decision of the Supreme Court is square .....

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year; in our view, is not well founded on the facts of the present case. It has to be taken into consideration that what is the amount available with the assessee on the first day of the accounting year and what is the amount has been given to its sister concern and thereafter what is the closing balance at the end of the year. Therefore, in our considered view, the contention of the Ld Counsel of the assessee that totality of the circumstances has to be taken into consideration and not on day t .....

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e through the orders of the Tribunal of earlier years and found that exactly similar disallowance of interest was deleted. As the facts and circumstances during the year under consideration are same, therefore, respectfully following the order of Tribunal, we affirm the action of CIT(A) deleting the disallowance of interest so made. 3.2 On merits, we found that Both the concerns belong to Mr. Harikishan Agarwal. The company since number of years has business relations with these parties. In fact .....

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owever, due to the wide fluctuation in the non ferrous metal prices and after the expiry of Duty Exemption Pass Book Scheme, the Assessee had to cancel the purchase orders. Due to the fluctuation in the prices of non ferrous metal, the various concerns of Mr. Harikishan Agarwal Group had to carry on with the large amount of stocks and in this process, some financial loss was suffered by them. Therefore, looking to long business relations, the assessee agreed to receive the outstanding amount in .....

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he Appellant for the purpose of export. The menthol products and essential oils are manufactured from raw mentha oil. The mentha oil is an agricultural based produce which is generally available and procured during the period June to November. For manufacture and supply of the products i.e. menthol products and essential oils, M/s. Tien procures the raw menthol as and when available and stores it for supply throughout the year after carrying out necessary production processes to the Appellant Co .....

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ssessee Company. 3.4 As per the details of opening and closing balance and purchases made in last three years, it is very clear that this is not a non business advance but it is a pure business advance given in the interest of business, accordingly there is no infirmity in the order of CIT(A) appeal for deleting the disallowance of interest so made. From the record we also found that there has been no disallowance in earlier years up to assessment year 2001-02 when these advances had been given. .....

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erest u/s 36(1)(iii) of the I.T. Act. 4. The next grievance of the assessee relates to denial of deduction u/s 80IB in respect of new unit set up at Daman. Ld. AR placed on record order of Tribunal in assessee s own case for assessment year 2004-05 wherein the matter was restored to AO with certain directions and also the order of AO giving effect to the Tribunal s order wherein, AO had allowed Assessee s claim of deduction u/s 80-IB. 4.1 We have considered the rival contentions and have careful .....

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er names of B workmen out of the 17 were the same as those who had been employed by Rutuja Enterprises as per the statement of Mr. Udaysingh M. Ghorpade of Rutuja Enterprises. Thus, the Appellant had not employed more than 10 workmen for the purpose of manufacture during the year and hence was not eligible for deduction u/s 80-IB • Further, it was noticed by the AO that the bill of Technip Engg. Works (P) Ltd for the distillation unit was dated 31.3.04. Thus the AO came to the conclusion th .....

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of lower authorities in assessment year 2004-05 and remanded the matter back to the file of AO and after considering the specific directions given by the Tribunal, the AO passed an order giving effect to the order of Tribunal and allowed assessee s claim for deduction u/s 80IB. Thus to the extent of objections which are similar to the objections raised in assessment year 2004-05, we found the issue to be covered both by the order of Tribunal as well as consequential order passed by the AO. With .....

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py of the statement was not provided to the assessee. In relation to the extract provided to the assessee, we find that the contractor Mr. Udaysingh M. Ghorpade was fired by Assessee Company with effect from July 2004 and the contract employees supplied by him were directly employed by the Assessee. Thus his statement was biased. The contractor has accepted that 12 workmen were working at the factory in Daman under the control and supervision of the assessee. The contractor has not maintained a .....

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ring process cannot be accepted. Further proper records have been maintained by the Assessee Company and those maintained by the contractor cannot be relied upon as the names of only 8 of the 12 workmen are available in his records. The contentions of the Assessee are further strengthened by the fact that the Assessee has been regularly deducting and paying to the credit of the Central Government the employee contribution to Provident fund in respect of all its workers. We have also verified the .....

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n 10 workmen were employed during the year. 4.4 In respect of the allegation of the AO that the bill of Technip Engg. Works (P) Ltd was dated 31.3.04 and thus the manufacturing activity had not commenced before 31.3.04, we found that the said machinery was purchased on 8.3,04 (Delivery Challan enclosed at Pg X and Copy of Invoice enclosed at Pg X). On successful running and implementation of said distillation unit, balance invoice was raised by M/s Technip Engineering on 31.3.2004. Likewise, in .....

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tion of lower authorities in declining assessee s claim for deduction u/s 80IB in respect of new unit set up at Daman during the assessment year 2005-06 and 2006-07. Accordingly, the AO is directed to allow assessee s claim for deduction u/s 80IB for assessment year 2005-06 and 2006-07. 5. Next grievance of assessee relate to denial of deduction u/s 80IB on interest income treating it as income from other sources instead of business income. 5.1 We have considered the rival contentions and found .....

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.2 It is clear from the above facts that fixed deposits were kept for the purposes of business it partakes the character of business income. The earning of interest income is incidental to the main business of the assessee, therefore, it does not constitute a separate activity in itself for it to be taxed separately. The words used in Sec 80-IB are profit and gains derived from any business are wide enough to cover the interest income. Reliance is placed on the decision of the Hon ble Delhi High .....

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ITR 420 (Bom) and also the decision of Hon ble Delhi High Court in the case of CIT Vs. Eltek SGS (P) Ltd. [2008] 300 ITR 6 (Del). 5.4 The assessee has also raised alternate claim for excluding only net interest income and not the gross interest while computing the eligible income for deduction u/s 80IB and for this purpose reliance was placed on the decision of Hon ble Supreme Court in the case of ACG Associated Capsules (P) Ltd. Vs. CIT [2012] 343 ITR 89 (SC). We found that the issue of netting .....

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to duty under excise Act. This issue is squarely covered by the decision of Hon ble Bombay High Court in the case of Loknet Balasaheb Desai SSK Ltd 339 ITR 288 and by the Hon ble Bombay High Court in the case of SPV Industries 228 Taxmann 104. In the case of Loknet Balasaheb Desai SSK Ltd. (supra), the Hon ble Bombay High Court held that excise duty liability crystallizes on the day of clearance of excisable goods and not on the date of manufacture and, therefore, excise liability was not incur .....

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ssessment year 2006-07. 7.1 In Ground no. (a), of the assessee s appeal, the issue relates to denial of deduction u/s 80-IB of ₹ 4,42,16,581/-. We have already discussed this issue in assessment year 2005-06 vide para 4.5 of this order. Following the same reasoning, we direct the AO to allow assessee s claim for deduction u/s 80IB. 8. In Ground No. (b) the issue relate to addition of excise duty in the valuation of closing stock u/s 145A. We have already discussed the issue in assessment y .....

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. AR further submitted that issue is also covered by the decision of Hon ble Gujarat High Court in the case of Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj.) 9.1 We have considered the rival contention and carefully gone through the orders of the authorities below. We had also deliberated upon the judicial pronouncements cited at bar by the ld. AR and DR in the context of factual matrix of the case. We have also deliberated upon the judicial pronouncements referred by lower authorities in the .....

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ter cutting the same, else the plant would dry out and no oil could be extracted from it. This crop is seasonal and is grown only during certain period of the year. The plant or the oil is not available throughout the year making its prices vulnerable to fluctuation on either side. The assessee company has therefore to store the goods during the harvesting season for the entire year. The product manufactured by the company is used in oral health care products such as toothpaste, shaving cream, c .....

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ould not be able to supply finished goods and make profits if the prices of the raw material fall after the harvesting season and therefore to protect its stock from price fluctuation the assessee enters in to contracts in commodity exchange. Accordingly, the assessee has hedged only part of the stock a statement is prepared year wise to show that the assessee has only hedged 50% of the total stock available in order to hedge against price fluctuation of the stock available in hand. From the rec .....

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d to manufacturing so also the profit / loss related to the hedging of raw material are directly related to the manufacturing activity. The assessee has maintained a consistent stand and also reduced the loss incurred in A Y 2007-08 and onwards from the eligible deduction under section 80IB. During the year the AO has declined deduction u/s 80IB on such profits. By the impugned order, CIT(A) allowed assessee s claim after observing as under:- I have carefully and dispassionately considered the f .....

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ctured by the appellant is Mentha Oil. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growth of Mentha Arvensis Plant. Ld. AR submitted that Mentha Oil is extracted from Mentha Arvensis plant. The plants severed cut off from the land have to be used to make the oil in a few hours otherwise the plants dry off In view of the peculiarity of the raw material, the raw material has to be purchased in the harvesting season onl .....

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re already purchased and stored for the entire year's production. Therefore, the appellant had to carry the inventory at a very high value since the supply after the harvest season is meagre. Further, export order/sales commitments are made at predetermined prices. The appellant company has to safeguard against adverse price fluctuations of the raw material product i.e. Mentha Oil. For this purpose, the appellant company enters into future sale contracts through the recognized commodity exch .....

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that the hedging transactions were entered into hedge against the future uncertainty of the raw material of the appellant. 3.3.2 Ld. AR further submitted that the Mentha Oil was listed on commodity exchange in May, 2005 and trading was permitted from May, 2005 for the conracts for the month of August, 2005 in accordance with Circular No. MCX/153/2005 dated 21/4/2005 read with Circular No. MCX/163/2005 dated 2814/05 issued by Multi Commodity Exchange of India Ltd. Initially, appellant did not ent .....

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ommenced in December. As a result of such hedging transaction the appellant was able to earn profit of ₹ 18,23,08,181/- in Asstt.Year 2006-07. However, in subsequent years, the appellant has incurred substantial losses from such hedging transactions. In subsequent assessment years, the appellant has reduced such hedging losses from the profits of business of its Jammu Industrial Undertaking which is eligible for deduction U/s. 80IB and the claim of deduction U/s. 80IB was correspondingly r .....

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commodity exchanges to offset the risk of fluctuating prices when they buy or sell physical supplies of a commodity. To illustrate, a copper manufacturing company may sell copper futures- in "lock-in" a sale price say, on 1st April, of a particular year for their future production. In this way, the said company protect its profit margins and revenue stream should copper price fall in the future. Should copper price rise, the said copper manufacturing company will loose on its future p .....

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higher price of physical copper it will need to purchase in the market. If the copper prices fall, it will show a loss on the future side of the transaction, but it will be able to buy the copper cheaper in the market. This is the essence of hedging transactions. 3.3.4 Hedging transactions differ from speculative transactions on account of the fact that they are not entered into, to make profits only. Their purpose is entirely different. Their purpose is to create a "hedge" primarily t .....

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propose to cover it later by a corresponding transaction in the ready market, or he may off-set it by a reverse transaction on the forward market itself [ Please see Regulation of Forward Markets by W.R. Natu, page 9, quoted in Pankaj Oil Mills vs. CIT - 1977 - CTR (Guj.) (FB) 154; (1978) 115 ITR 824 (FB)]. 3.3.5. These forward contracts by way of hedge transactions usually afford to cover to a trader in as much as his loss in the ready market is offset by a profit in the forward market and vic .....

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TR (Guj)(FB) 154: (1978) 115 ITR 824 (Guj) (FB). It is not correct to state that in order to be a genuine hedging transaction there should be a spot purchase and forward transactions or purchase and a part of sale or forward transaction land the said transactions must be so interconnected that one is reflected in the other. The transaction of a person in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding tra .....

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iso to section 43(5): Proviso to section 43(5) lays down that for the purpose of section 43(5) contracts mentioned in cls. (a) to (c) of the proviso would not be deemed to be speculative transactions. In other words, although contracts mentioned in cls. (a) to (c) would otherwise fall within the definition of speculative transactions, by virtue of deeming provisions contained in the proviso they would not be regarded as speculative transactions. The contracts mentioned in cls. (a) to (c) are hed .....

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se (b) deals with the case of a person who is a dealer or an investor in stocks and shares while cl. (C) deals with the person who is member of a forward market or a stock exchange. 3.3.7. As far as person manufacturing goods is concerned, the contract contemplated by cl.(a) is a contract in respect of raw materials which is entered into by him in the course of his manufacturing business to guard against future price fluctuations in respect off his contracts for actual delivery of goods manufact .....

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at loss arising from bonafide forward sales to guard against the risk of fall in the value of raw materials or merchandise to the extent of stock on hand is allowable as normal business loss. CBDT in its circular dated 12th September, 1960 had instructed the Income-tax Officers to treat bonafide forward sales entered into with a view to guard against the risk of raw materials or merchandise in stocks falling in value as normal business losses and not as speculative losses. The clarification was .....

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CBDT's circular dated 12th September, 1960, the profits or losses from hedging transactions are normal business profits or normal business losses and not speculative losses. 3.3.9. Ld. AR had further brought to my notice that Ld. CIT(A)-III as well as Hon'ble ITAT in the appellant's own case of Asstt.Year 1998- 99 as well as for Asstt.Year 2000-2001 and 2001-2002 have held that loss on forward exchange contract was not hit by the provisions of Section 43(5) of the Act. Appellant in .....

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0th " September, 2008 for Asstt. Years 2000- 2001 and 2001- 2002 clearly held that loss suffered by the appellant on account of failure to honour certain contracts was not speculation loss but was allowable as business loss. Hon'ble ITAT 'H' Bench, Mumbai in the case of the present appellant in ITA No. 4637/M/2003 for Asstt.Year 1998-99 in its order dated 15/3/2007 has also held vide para 8 on page 4 of the impugned order that the loss on forward exchange contract was not hit by .....

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9;ble Bombay High Court held that the assessee was entitled to claim deduction in respect of payment made on account of cancellation of forward booking of foreign exchange with banks as a business loss. 3.3.10. As a matter of fact, Section 43(5) itself reads as under:- "SECTION 43(5) - SPECULATIVE TRANSACTON This section reads as under: Speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodicall .....

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es entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securiti .....

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om such hedging transactions the appellant has reduced its profit and has claimed less deduction U/s. 80IB suo motu. 3.3.11 Once it is resolved that the profit from hedging transactions in Mentha Oil used for manufacturing by Jammu unit of the appellant was business profit, the second question arises whether such business profit is eligible for deduction U/s. 80IB or not. Ld. Assessing Officer has followed the decisions of Hon'ble Supreme Court in the cases of Pandian Chemicals Ltd. vs. CIT .....

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e Industrial Undertaking. In other words, there need not necessarily be a direct nexus between the activity of an Industrial Undertaking and the profits and gains. This view has been taken by the Hon ble Delhi High Court in the case of CIT Vs. Eltek SGS (P) Ltd, reported in (2008)-300- ITR-6 (Del). Hon ble Delhi High Court has discussed the Hon ble Supreme Court Judgments in the case of CIT Vs. Sterling Foods (supra) and Pandian Chemicals (supra) and also CIT Vs. Ritesh Industries Ltd in 274-ITR .....

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languages used in section 80IB of the Act and Hon ble Delhi High Court held that it is this choice of words by the legislature that makes all the difference that the Hon'ble High Court is concerned with. 3.3.14.Apart from Hon'ble Delhi High Court decisions distinguishing the Hon'ble Supreme Court judgments in the case of CIT vs. Sterling Foods (supra) and Pandian Chemicals (supra), it may be noted here that Section 80IB of the Act does not use the expression "Profit and Gains de .....

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ible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section." A perusal of the above would show that there is a material difference between the language used in s. 80HH of the Act and s. 80-IB of the Act. While s. 80HH requires that the profits and gaH1s .....

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ounced by Hon'ble Delhi High Court and Hon'ble Mumbai Tribunal and other decisions as noted below. I am of the considered opinion that the language used in Section 80IB is distinct from the language used in Section 80HH and Section 80I of the Act. There was no occasion for Hon'ble Supreme Court to consider the deduction U/s. 80IB of the Act in the cases of Pandian Chemicals Ltd. (supra) and in the case of Sterling Foods Ltd. (supra). Therefore, the decisions of Hon'ble Supreme Co .....

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Originals - 112 TTJ 754 (Mum Trib): (v) ITO Vs. Kiran Enterprises - 92- TTJ-104 (Chd.); and (vi) Saraf Seasoning Udyog Vs. ITO - 219-CTR-461 (Raj.) 3.3.16. A combined reading of Section BOIB read with the facts and circumstances of the case and the finding that the profit from hedging transactions in Menthol Oil which is the raw material of the appellant company is a business profit, makes it abundantly clear that deduction U/s. BOIB is available to the appellant in the impugned Asstt.Year 2006- .....

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3,OB,l81/. Hence, Ground No.3, Issue No.2 is allowed. 9.2 We have considered rival contentions and carefully gone through the orders of the authorities below and found that the assessee had set-up a new manufacturing unit at Pot No. 1-A, Extn-III, Industiral Area, Gangyal Jammu for the manufacture of fractioned and deterpinated Mentha Oil.Ld. Assessing Officer has observed that the assessee had commenced manufacturing on 19/4/2005 and, therefore, Asstt.Year 2006-07 was the first year of operatio .....

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the question in the case of the appellant was not regarding the nature of transaction. According to him, the issue was whether profit from hedging transaction through commodity exchange, was profit derived from manufacturing or producing of an article or a thing. For this proposition, he discussed the cases of CIT Vs. Tata Locomotive & Engg. Co. Ltd. (1968) 68 - ITR - 325 (Bom.) and the decision of Hon'ble Supreme Court in the cases of CIT Vs. Sterling Foods - 237 - ITR - 579 and Pandian .....

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23,08,181/-. 9.3 From the record we found that the assessee entered into forward contracts of sale of Mentha Oil for the purpose of hedging against the fluctuation in price of raw material i.e. mentha oil which is used for manufacturing at its Jammu Unit. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growth. In view of the peculiarity of the raw material, the raw material had to be purchased in the harvesting season to .....

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fects the price of finished products. This means that if the price of the raw material falls later on, the appellant is unable to take advantage of a fall in the price of the raw material though simultaneously prices of the final product also fall. Thus the Appellant has to carry the inventory at a very high value since the supply after the season is scarce. Further, the export order/ sales commitments were made at pre determined prices. The company had to safeguard against adverse price fluctua .....

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uared off. Thus if the Assessee was required to give the delivery of goods then sufficient quantity for actual delivery was available. This clearly shows that the contracts were entered into for hedging against the future uncertainties of the business. Further, the Assessee has commenced hedging in the month of December 2005. This is so because Mentha OH was listed on commodity exchanges in May 2005 and trading was permitted from May 2005 for the contracts for the month of August 2005. It was al .....

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the Assessee did not enter into hedging transactions till December 2005. Copy of relevant circular issued by Multi Commodity Exchange was also placed on record. We also found that the assessee has continued to undertake the hedging transactions in subsequent years. However, in subsequent years, the assessee has incurred a loss from such hedging transactions. The assessee has reduced the loss from the profits eligible for deduction under section 80-IB in the Return of income for subsequent year. .....

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re is no dispute that profit derived from hedging transaction is business income. For this purpose reliance can be placed on the decision of Hon ble Gujarat High Court in the case of Pankaj Oil Mills V. CIT (115 ITR 824) (FB) which explains the concept of Hedge . In the instant case, we found that the activity of hedging against the price fluctuation of menthe oil has been done to protect the profits of the company. Since the Jammu unit is the only manufacturing activity of the company, the hedg .....

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been held that that a forward contract of sale can be treated as a hedge transaction if such a contract is supported by a pre existing contract. 9.6 The AO has placed reliance on the decisions of Pandian Chemicals Vs. CIT (262 ITR 278)(SC) and CIT Vs. Sterling Foods (237 ITR 579) (SC) and holding that the hedging profit cannot be said to be forming a part of the profits of business of the industrial undertaking. In this regard, the decision of Hon ble Delhi High Court in the case of Eltek SGS ( .....

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n 80-HH/80-I i.e. profits and gains derived from an industrial undertaking. We also found that the profit earned out of squaring off future contracts is profit earned on account of hedging transaction. Thus there is a direct nexus between the activity of Jammu unit and the profit earned in the hedging contracts. The hedging Mentha Oil stemmed from the activity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed an integral part of the income of the .....

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the Revenue is dismissed. 10. Now we take up the appeal for assessment year 2007-08 ITA No. 376/Mum2010 10.1 The only ground taken by the revenue relate to CIT(A) s direction to AO to allow the deduction u/s 80IB on business profit of Jammu Unit after reducing the business loss of ₹ 88,12,803/- on hedging transactions of Mentha Oil. We have already discussed this issue while deciding the appeal for assessment year 2006-07 vide para 9. Following the same reasoning as well as the order of Tr .....

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. 12. Now we take up the appeal in ITA No. 1628/Mum/2013, assessment year 2007-08. 12.1 In this year, the department has challenged the action of CIT(A) in deleting the disallowance of ₹ 30,54,540/- representing speculation loss which cannot be treated as loss from business of hedging activity. We have already discussed this issue while dealing with the appeal for assessment year 2006-07 vide para 9. Following the same reasoning we dismiss the ground raised by the Revenue. 13. In the cross .....

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rom the record, we found that during this year, the assessee has filed return at income of ₹ 73,40,60,272/- u/s 115JB. In the return of income assesee has claimed deduction u/s 80IB for ₹ 68,34,32,421/- from Jammu unit. The assessee had manufacturing unit in two locations, one in Daman and other in Jammu. In the assessment year 2006-07, assessee has temporarily closed down the factory at Daman, however assessee continued to maintain the factory in hope to revive production as and whe .....

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the assets. These assets are part of the block of asset. As the assessee has a central accounting system and management and both the units are part of the one management and there is unity of control, therefore, it cannot be said that the assessee has discontinued the manufacture of Mentha Oil products. Only because of temporary lull in business, the AO was not justified in declining expenditure of ₹ 5,45,101/-. The issue is covered by the decision of co-ordinate bench of Tribunal in the c .....

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amounts to use for the purpose of business in the year under consideration. It was, therefore, held that assessee is entitled for depreciation. Similar view has been taken by the Delhi High Court in the case of KJS India Pvt. Ltd. 340 ITR 380, and by the Hon ble Bombay High Court in the case of Pfizer Ltd. 233 CTR 521. Respectfully following these decisions, we do not find any ground/reason for declining the assessee s claim for depreciation in respect of assets forming part of block of asset. A .....

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so for the addition made u/s 14 A read with Rule 8D. 17. We have heard the rival contentions and found that in this case the assessment framed u/s 143(3) was reopened within four years. Reopening was on the plea that disallowance was not made as per Rule 8D of the Income Tax Rules, 1962 while computing the disallowance u/s 14A of the Act. Accordingly, there is escapement of income. Contentions of learned A.R. was that full particulars were filed before the AO at the time of the original assessme .....

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framing assessment, the AO has not applied Rule 8D for working of disallowance of expenditure incurred for earning exempt income and accepted the disallowance offered by the assessee. Thus, there was reason to believe that to the extent of disallowance warranted under Rule 8-D which came into force from the assessment year 2008-09 which is under consideration, there was escapement of income and the A.O. was justified in reopening the assessment. Coming to the merits of disallowance, we found tha .....

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8377; 39.84 crores in the form of share capital and reserve surplus against which investment was merely ₹ 9.16 crores. Applying proposition of law laid down in the case of Reliance Utilities Ltd. (supra) we do not find any merits in disallowing proportionate interest. With respect to claim of administrative expenses, we found that main administrative expenditure of the assessee was towards manufacturing activity. However, full detail of such expenses have not been furnished, therefore, we .....

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