TMI Blog2016 (1) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 laid down in the case of Radhasoami Satsang [1991 (11) TMI 2 - SUPREME Court] and by Paul Brothers [1992 (10) TMI 5 - BOMBAY High Court ]. Accordingly, we uphold the action of CIT(A) deleting the disallowance of interest u/s 36(1)(iii) of the I.T. Act. Denial of deduction u/s 80IB in respect of new unit set up at Daman - Held that:- Considering the facts and circumstances of the case vis-à-vis order of the Tribunal in assessee’s own case for assessment year 2004-05 and also the order of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 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 recorded by the CIT(A) holding that assessee is eligible for deduction u/s 80IB in respect of such profit. Disallowance of depreciation on the plea that the Daman unit had discontinued its business activity - Held that:- The year under consideration is not the first year of asset acquiring, therefore, the assets of closed unit will remain part of the block of assets. The said block of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 years under consideration, therefore, all the appeals were heard together and are being disposed of by this single consolidated order. 2. We first take up the appeal of assessee for assessment year 2005-06. 2.1 Facts in brief are that assessee is engaged in the business of manufacturing, trading and export of essential oils and die intermediaries. During the course of scrutiny assessment, the AO made disallowance u/s 14A, deduction claimed u/s 80IB was also disallowed; addition on account of excise 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g ₹ 6,83,090/- and bank charges totaling to ₹ 2,08,08,332/- to the Profit Loss Account. The AO disallowed the interest so 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 the detailed finding deleted the disallowance of interest. The precise observation of Tribunal is as under:- 9. We have heard both the parties, perused the orders of the Revenue Authorities as well as the contents of para 19 of the order of the Tribunal for AY 2003-2004 in the context of Revenue s appeal where the assessee was given relief and the disallowance of interest was finally deleted. Relevant para 19 is reproduced here under: 19. We have heard the rival submissions and considered them carefully. We have also gone through the case laws on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances has to be taken into consideration and not on day to day basis utilization of the funds. Moreover, as stated above, the department could not prove that these funds were not given for the purpose of business. Therefore, in view of these facts and circumstances, we confirm the finds of the Ld CIT (A) on this issue. 10. Considering the above settled nature of the issue, we are of the opinion that the ground raised by the Revenue is required to be dismissed. Accordingly, ground no.(iii) of the Revenue s appeal is dismissed. 3.1 We have carefully gone 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, the entire purchases of non ferrous metals made in A.Y. 1995-96 onwards (against the Duty Exemption Pass Book Credit Scheme) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 laid down by the Hon ble Supreme Court in the case of Radhasoami Satsang 193 ITR 321 and by Jurisdictional High Court in the case of Paul Brothers 216 ITR 548. Accordingly, we uphold the action of CIT(A) deleting the disallowance of interest 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of employment of less than 10 workers based on the statement of Mr. Udaysingh M. Ghorpade u/s. 131 is not well founded. We found that statement of Mr. Udaysingh M. Ghorpade was recorded on 20.03.2007 but extract of the same was provided to the assessee only on 14.12.2007. Further assessee was not provided any opportunity to cross examine Mr. Udaysingh M. Ghorpade. A full copy 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 proper record of the workmen provided to the Assessee. The contractor has also said that the workmen were used to shift and install the machinery. This shows that the machinery was installed at the factory and workmen were working in the factory. The workers were under the control and supervision of the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 from the record that the assessee has earned interest income of ₹ 8,47,25,116 from fixed. The fixed deposits were kept with Canara Bank and State Bank of India as a Bank Guarantee for the purpose of issue of Letter of Credit. The AO has treated the interest income as income from other sources and denied deduction u/s 80-IB on the same. The CIT(A) upheld the action of the AO on the ground that the interest was earned on fixed deposits and hence could not be considered as business income.. 5.2 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to closing stock of finished goods which were not subject to duty under the excise Act. Consequently the Ground no. 9, 10 11 12 of assessee s appeal are allowed. 7. Now we take up the appeal for assessment 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 year 2005-06, following the same reasoning, we allow assessee s ground of appeal. 9. In this year, revenue is aggrieved for allowing deduction u/s 80IB on the hedging profit earned in the commodity exchange from the Jammu unit amounting to ₹ 18.23 crores. At the outset, it was submitted by the Ld. AR that issue is covered by the order of Tribunal in assessee s own case for assessment year 1998-99, 2000-01 and 2001-02 vide order dated 30.09.2008 in the forex fluctuation and sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total stock available in order to hedge against price fluctuation of the stock available in hand. From the record we found that the assessee has only two manufacturing unit both of which are manufacturing Menthol based products and both of which are eligible to deduction under section 801B. The assessee does not trade in raw menthe oil and therefore the stock which is used only for manufacturing and the hedging profit and loss for such stock would be directly related to the manufacturing activity. Like the cost of bring the goods to the godown and the cost of storing the raw material are directly related 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 facts and circumstances of the case, the relevant assessment order, the statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This fact clearly proves 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 enter into any transactions on the said MCX as the appellant was not aware of operational modalities. Further, the appellant had admittedly never done any trading in any of the commodities earlier and hence it was not possible to enter into such transactions unless entire concept was understood. Accordingly, appellant entered into contract of forward sales effectively from December, 2005. All the purchases of Mentha Oil have been made around October and November and hence the hedging transactions commenced 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 subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract enables the concerned trader dealing in a commodity to hedge himself, that is to say insure himself against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction 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 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 vice versa. It, therefore, follows that in order to effectively hedge against adverse price fluctuations of the manufactured goods or merchandise, a manufacturer or merchant has necessarily to enter into forward transaction of sale and purchase both, and without these contracts of sale and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock 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 manufactured by him. As far as person carrying on merchanting business is concerned, the contract contemplated by this clause is a contract in respect of merchandise which is entered into by him in the course of his merchanting business to guard against future price fluctuation in respect of contracts for actual delivery of mechandise sold by him. 3.3.8 Hon'ble Bombay High Court in the case of Kirtilal Jaisinqhlal Co. Vs.Commissioner of Income Tax reported in (1980) -121 -ITR - 279 has held that 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 ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for e-xport of cotton in some cases failed. In the circumstances, Hon'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 periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. Provided that for the purposes of this clause (a) a contract in respect of raw materials or merchandise entered into by a person in the course of the manufacturing or merchanting business to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods manufactured by him or merchandise sold by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i 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-324 (Del). And held that it is sufficient if one sticks to the language used in section 80IB which is very different from the language used in Section 80HH of the Act. 3.3.13 Hon ble Delhi High Court again in the case of CIT Vs. Dharam Pal Prem Chand Ltd. (2009) 221- CTR -133 discussed issue of deduction U/s. 80IB and appreciated that the difference in Section 80HH, 80I and 80IB of the Act. While the language used in section 80HH and 80I of the Act is similar. There is a clear departure in the 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 derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009) 221-CTR -133 (iii) Ranbaxy Laboratories Ltd. Vs. CIT (2009) TIOL 02-HC-Del.-IT (iv) Shah 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- 07. Therefore, following the Hon'ble Delhi High judgments, Hon'ble IT AT Mumbai decisions and other decisions referred to in the preceding paragraphs, the deduction U/s. BOIB in respect of business profits of Jammu unit of the appellant are eligible for deduction U/s. BOIB of the Act. Accordingly, Ld. Assessing Officer is directed to allow deduction U/s. BOIB on business profits of Jammu unit including the business profits on hedging transactions of Menthol Oil amounting to ₹ 18,23,OB,l81/. Hence, Ground No.3, Issue No.2 is allowed. 9.2 We have co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the harvesting season to meet requirement of the whole year. The prices are low at the time of season and then fluctuate widely depending upon the supply scenario. The Appellant sells the products manufactured at Jammu Unit from Mentha oil throughout the year. The fluctuations in Mentha oil prices severely affects the cost of Company's products and the profitability of the Company as the raw materials are already purchased and stored for the entire year's production and fluctuation in price of raw menthe oil effects 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 fluctuations of the raw material product (being Mentha oil). For this purpose, the company entered in to future sale contracts through the recognized commodity exchanges. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 hedging profit has a direct nexus with the Jammu unit. If Assessee Company had not entered into such transaction, price fluctuation would have affected profitability of the company. Hence the hedging profit is eligible for deduction under section 80-IB which is derived from the business of the eligible industrial undertaking. For this purpose reliance can be placed on the decision of the Hon ble Kerala High Court in the case of Commissioner of Income Tax Vs. Ajit Spices ( 165 ITR 755) wherein it has 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. Sterli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat High Court in the case of Pankaj Oil Mills (supra), we do not find any infirmity in the order of CIT(A). 11. In the Cross objection filed by the assessed, the issue relates the directing the AO to grant increase deduction u/s 80IB in case of loss to be held as speculation loss. This ground is consequential to the ground decided in revenue s appeal. 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 objection, the assessee is aggrieved by the order of CIT(A) directing the AO to grant increased deduction u/s 80IB in case of loss of ₹ 30,54,540/- is to be held as speculative loss, is consequential in nature. 14. Now we take up the appeal in ITA Nos. 4752/Mum/2012 and 4247/Mum/2012 for assessment year 2008-09. 14.1 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. AO is, therefore, directed to allow the assessee s claim. 15. In ITA No. 4752/Mum/2012 for assessment year 2008-09, the ground taken by the revenue with regard to deleting addition on account of speculation loss, has been discussed by us in the assessment year 2006-07 vide para no 9. Following the same reasoning, we do not find any infirmity in the order of CIT(A). 16. ITA No. 755/Mum/2013 for assessment year 2008-09, in this appeal Assessee is aggrieved for reopening of assessment u/s 147 and also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this ground of Revenue appeal. 20. In the cross objection, the assessee is aggrieved for disallowing expenses of ₹ 129576. We have considered the rival contentions and found from the record that the assessee has 2 units; one at Daman and the other at Jammu. Eventhough during the year, manufacturing at Daman was closed but normal expenditure on maintenance have been incurred. The expenses are incurred in the normal maintenance of the business which have to be incurred inspite of closure of operation of the unit. The unit is part of the same management which operates units at both Dam and Jammu and the closure of operation of one unit cannot be said to be closure of business. The details of the expenses so incurred had been submitted and same are verifiable. The expenses are revenue in nature, therefore, allowable. Precise details of such expenses were as under:- Particulars Amount(Rs) Electricity expenses 26,080 Professional fees 50,000 Repairs 35,000 Sundry Bal w/off 18,386 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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