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2016 (3) TMI 1069 - ITAT MUMBAI

2016 (3) TMI 1069 - ITAT MUMBAI - [2016] 48 ITR (Trib) 362 - Disallowance u/s 14A r.w.r 8D - Held that:- The facts are proved by the increase in reserve and surplus over the years which were at ₹ 414 crores as on 31.3.2008 against the investment in subsidiaries which stood ₹ 319.43 crores as on 31.3.2008. We also note that the assessee had taken loans from Financial Institutions amounting to ₹ 722.24 crores, out of which the working capital loan ₹ 258.79 crores and remain .....

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owing the decisions of the earlier years in the case of the assessee wherein the similar issue came up for consideration before the Tribunal and decided in favour of the assessee.

Addition u/s 36(1)(iii) - proportionate interest expenditure pertaining to interest free loans and advances given by the assessee to subsidiaries companies out of interest bearing funds raised by the assessee - CIT(A) deleted addition - Held that:- The assessee's business expediency is proved beyond doubt th .....

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confirm the order of ld. CIT(A) on this issue. - Decided in favour of the assessee.

Loss u/s 43(5)(d) on account of M to M losses - CIT(A) deleted the loss - Held that:- In view of the facts of the assessee and various judicial decisions of the coordinate benches following the decision of apex court in the case of Woolward Governor India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ) and special bench decision in the case of Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI ), w .....

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AO is fully satisfied after proper investigation about the crystallization of the liability and also the disallowance cannot be made merely on the ground that account maintained in the system of accounting and relates to the transactions of the previous year. In our opinion the true profits and loss of the assessee could only be determined if the expenses are allowed. Moreover, if these expenses are not allowed in this year, they are liable to be set off from the profit of the year ended 31.3.20 .....

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for in the year to which it pertained as it was received late and at the year end it could not be possible to estimate the liability with reasonable degree of accurancy. The bill was received in the subsequent year and the CIT(A) has recorded the finding of facts that the crystallisation had taken placed during the year and pertained to the current year and AO had wrongly disallowed the same. - Decided in favour of the assessee. - ITA No. 6751/Mum/2011, ITA No. 4089/Mum/2012 - Dated:- 8-3-20 .....

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the sake of convenience. 2. First we shall take up the appeal bearing ITA No.4089/Mum/2012. "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) failed to interpret the provisions of Section 14A of the Income Tax Act,1961 and Rule 80 in its right perspective and true meaning." 2 ."On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition/adjustment of the disallowance u/s. 14A of the Act while computing the book p .....

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cial expediency for doing so". 4. on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of contingent liability of ₹ 279246564/- made by the AO- u/s 43(5) (d) of the Act inspect of Marked to Market (MTM) loss and instead holding that the said loss is allowable as covered u/s 43(5)(a) of the Act" 2.1 The facts of the case in brief are that the assessee filed its return of income on 30.9.2009 declaring a loss of ₹ 57,25,03,91 .....

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e as covered by the provision of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (the rules). Similarly, the AO found that the assessee had raised money from secured and unsecured loans and failed to add back the interest attributable to the money which was advanced to the other entities without charging any interest from them. Similarly, the AO found that during the year the assessee had written off "marked to market" (MTM) loss amounting to ₹ 27,92,46,546 .....

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isions of section 14A read with Rule 8D were applicable to the assessee as decided by the Hon'ble Jurisdictional High Court in the case 'Godrej & Boyce Manufacturing Co. Ltd.' 328 ITR 81. However, the ld. CIT(A) differed with the AO on the issue of disallowance of interest under rule 8D(1)(ii) that the interest could not be disallowed on the basis of prorata apportionment of interest between the investment of the assessee and total assets. The total investment in the equity share .....

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account of business expediency in the subsidiary companies in which the assessee's stake holding was ranging between 51% to 100%. The Reserves and Surplus of the assessee increased from 54.66 lakhs in the financial 2000-01 to ₹ 41414.24 lakhs in the financial year 2007-08. Similarly, the investment in subsidiaries companies which were at ₹ 17.89 crores in financial year 2001-02 had gone up to ₹ 319.44 crores in financial years 2007-08. The ld. CIT(A) deleted the addition ma .....

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t of other in direct expenses at the rate of 0.5% of the average of value of investment which came to ₹ 1,35,14,428/-. 2.3 The ld. DR heavily relied on the orders of authorities below and submitted that the addition of ₹ 11,24,70,515/- were wrongly reduced to ₹ 1,35,14,428/- and prayed for that the order of the ld.CIT(A) be set aside and the order of AO be uphold on this point. 2.4 Per contra, the ld. AR submitted before us that the case of the assessee was covered in its favou .....

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; 319.43 crores were concerned the same were into shares of subsidiaries in which the assessee held 51 to 100% of the equity capital and no investment was made in other listed companies. The ld. CIT(A) further submitted that no dividend was received from these companies which were claimed to be a exempt during the year. The investments were made out of share capital old reserve and accrual of profit over the years and therefore, ld AR prayed that the disallowance of interest u/s 14A r.w. Rule 8D .....

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the subsidiaries companies were ₹ 319.44 crores as on 31.3.2008 as against ₹ 96.51 crores as on 31.3.2001 which proved that the investment in the subsidiaries companies were made out of assessee's own funds and accruals over the years and not out of loan funds. The ld. Counsel heavily placed reliance on the various decisions some of which are as follows:- a) CIT Vs Hero Cycles Ltd(2010) 323 ITR 518 (P&H) b) Shoppers Stop Ltd Vs ACIT - dt 30.08.2011 c) CIT Vs HDFC Bank Ltd (2 .....

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d above were far more than the investment made in the subsidiary companies and debentures. The facts are proved by the increase in reserve and surplus over the years which were at ₹ 414 crores as on 31.3.2008 against the investment in subsidiaries which stood ₹ 319.43 crores as on 31.3.2008. We also note that the assessee had taken loans from Financial Institutions amounting to ₹ 722.24 crores, out of which the working capital loan ₹ 258.79 crores and remaining pertains t .....

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sions of the earlier years in the case of the assessee wherein the similar issue came up for consideration before the Tribunal and decided in favour of the assessee. We, therefore, respectfully the decisions of the coordinate benches in its own cases for AY 2005-06 and AY 2006-07 and other decisions of the High Court dismiss this ground of Revenue by upholding the order of ld. CIT(A). The AO is directed accordingly. 3. The second issue raised in the Ground No.3 is against the deletion of ₹ .....

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o its other entities amounting to ₹ 307,15,52,214/-. Accordingly, the AO disallowed a sum of ₹ 2,42,24,011/- on account of diversion of interest bearing loans to the subsidiary companies of the assessee which were held to be advances by the assessee not out of commercial expediency and for genuine business needs but merely to divert the interest bearing funds of the companies. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld. CIT(A) who deleted the add .....

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d at the rate of 10% on the reducing balance method and the interest received from the said subsidiary company was duly shown as income of the assessee. Similarly, the assessee advanced ₹ 38.15 crores to another 100% owned subsidiary M/s Enercon (India) Infrastructure Private Limited which was also advanced at the rate of 10% and the interest received from the subsidiary company was also shown as income of the assessee. On the remaining amount of ₹ 24.22 crores, the advances were adv .....

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given purely for commercial exigency and therefore interest thereon could not be disallowed as held by the Hon'ble Supreme Court in the case of S A Builders Limited V/s CIT 288 ITR 1 (SC). 3.2 The ld. DR vehemently submitted before us that the interest disallowance of ₹ 2.42 crores was wrongly deleted by the ld. CIT(A) by ignoring the facts that the interest free loans to the subsidiary companies were given out of the interest bearing funds raised by the companies and therefore prayed .....

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subsidiary company to whom the interest free advances were given were for the purpose of installation of wind mill which were used by the assessee company for transmitting the power generated by the wind mill to the ultimate end user to whom it was sold. Thus, the advances were purely out of business consideration and commercial expediency. Once, the windmill is installed by the subsidiary company, the loan taken from the assessee were repaid by receiving loans from banks and other financial in .....

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ns to the subsidiary company for the reasons that the wind mill installed by the subsidiary company were being used by the assessee for transmission of its electricity to the power greed of the Electricity Board for further distribution and to the ultimate customers. We also note that the moment the installation of windmill was completed, the subsidiary company used to pay back the advances received by the assessee by borrowing funds from the banks and other financial institutions. It is also se .....

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d by The decision of the Hon'ble Apex Court rendered in the case of S A Builders (supra) wherein it has been held that interest on borrowed funds cannot be disallowed on the ground that the assessee has advanced interest free loans to sister concern as measure of commercial expediency and what has to be seen is the business purpose and what the sister concern utilization of borrowed the money for business purpose. The Hon'ble Apex court Court in the case of S A Builder (supra) has held a .....

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ction 37 also the expression used is 'for the purpose of business'. It has been consistently held in decisions relating to section 37 that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the abo .....

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egal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Neither the High Court nor the Tribunal and other authorities had examined whether the amount advanced to the sister concern was by way of commercial expediency. The High Court and other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with the money, in order to decide whether it was fo .....

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stance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company ad .....

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We, therefore, respectfully following the ratio laid down in the above decisions supra confirm the order of ld. CIT(A) on this issue. 4. The Ground No.4 is against the deletion of loss of ₹ 27,92,46,564/- by the ld. CIT(A) made by the AO u/s 43(5)(d) of the Act on account of M to M losses. 4.1 During the course of scrutiny proceedings, the AO found that the assessee had claimed a sum of ₹ 28,69,53,073/- in the profit and loss account under the head "Cash P/L on Options" wh .....

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or reporting date. The AO disallowed the same and added the same to the total income of the assessee by holding that the said losses were speculative and contingent in nature and covered by the provisions of section 43(5)(d) of the Act by rejecting the contentions of the assessee that the said losses of Marked to Market nature were allowable in view of the decision rendered by the Special Bench of the Tribunal in the case of DCIT V/s Bank of Bahrain and Kuwait (2010) 132 TTJ (Mum) (SB) 505 and t .....

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uring the year the assessee imported the raw material from its holding company to the tune of ₹ 279.83 crores and remaining of ₹ 155.48 crores were from various other suppliers in Europe and thus total imports of the assessee were at ₹ 435.31 crores. The ld. CIT(A) observed that it was a normal practice in the case of export and import of the goods to hedge and enter into foreign exchange forward contract in order to cover the risk of fluctuation in the foreign exchange. The as .....

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act were being recognized at the year end according to Accounting Standared-11 of ICAI which provided for recognizing the gain or loss on the foreign exchange contract. The practice of the assessee had been accepted by the department in the earlier and succeeding years. 5. The ld DR on the other hand relied heavily on the order of AO and prayed for upholding the same and setting aside the order of CIT(A) in view of instruction no 17/2008 dated 26.11.2008 which provided for disallowance of losses .....

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g the ratio decided in the Special Bench of the Tribunal in the case of DCIT V/s Bank of Bahrain and Kuwait (2010) 132 TTJ (Mum) (SB) 505 and the decision of the Hon'ble Supreme Court in the case of Woodwords Governor India Pvt.Ltd. (2009) 312 ITR (SC) 254. The ld AR argued that the marked to market loss of ₹ 27,92,46,564/- which had accrued from the revaluation and re-statement of outstanding forward contract at the end of the year as per accounting standard -11 based foreign exchange .....

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of Tribunal in which the decision of hon'ble Supreme Court in the case of Woolward Governor India Pvt. Ltd (2009) 312 ITR 254 and Special Bench decision in the case of Bank of Bahrain and Kuwait (41 SOT 29) were followed:- a) ACIT Vs M/s Venus Jewel - ITA No.7328 and 7329/Mum/2013 dated 31.7.2015 b) ACIT Vs H Dipak and Co-ITA No.7629/M/2011 dated 30.4.2013 c) CIT Vs Pashupati Capital Services Pvt Ltd dated 24.4.2015 d) Landan Star Diamond Company (I) Ltd DCIT (2012)38.Taxman.com 338; e) CIT .....

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e gain and loss on the foreign exchange forward contract at the yearend based on the foreign exchange rate pertain to AS-11 issued by he ICAI and in the year 2005-06 and 2006-07 the assessee earned ₹ 19.71 crores and ₹ 2.66 Crores were credited to the profit and loss account which were accepted by the department. 7. We have considered the rival submissions and perused the materials on records and after going through the decisions relied upon by the ld.AR find that assessee had recogn .....

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ly realized. The same practice was being followed in the earlier year and was also accepted by the Revenue. The need to hedge is a commercial expediency and necessity which is practically followed in all the business houses engaged in the business import/export these days specially when the exchange rate is highly volatile. The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010)132 TTJ Mumbai (SB) 505 the special bench held that MTM losses in respect of forward foreign ex .....

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easonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in which it occurred, the exchange difference arises over more than one accounting period (v)in the ultimate analysis, there is no revenue effect and it is only timing of taxation of loss/profit. The Tribunal in the case of Venus Jewel (supra) has vide para 10 observed and held as under : "10. The issue arising in the present appeal before us is identical to the issue before the Trib .....

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market on revaluation and re-statement of pending forward contract for foreign exchange is allowable afgter following the decision of special bench in the case of Bank of Bahrain & Kuwait. In the case of CIT Vs Pashupati Capital Services Pvt the Honble Bombay High Court has held on reference of substantial question of law "Whether the mar to market loss in future and options can be allowed to the assessee who is dealing in fianancial market on account of closing of the year in derivati .....

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efully perused the order of Ld. CIT(A) and the decisions brought to our notice. In our considered opinion and the understanding of the facts we find that the Revenue Authorities have proceeded on a wrong assumption of facts. We find that the decision of the Tribunal's Special Bench in the case of Bank of Bahrain & Kuwait (supra) squarely apply on the facts of the case and also by the various judicial pronouncements like Kumbh Gems in ITA NO. 6600/Mum/2012, H. Dipak & Co. in ITA No. 7 .....

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ase of Bank of Bahrain and Kuwait(supra), we are of the considered view that case of the assessee is fully covered by the decisions of the coordinate benches and we therefore respectfully following the same allow the appeal of the assessee on the issue of MTM losses by deleting the disallowance of ₹ 27,92,46,564/-. The AO is directed accordingly. 9. Now we will take up the appeal bearing ITA No.6751/Mum/2011. 10. Grounds raised in this appeal by the revenue are reproduced below: "1. O .....

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air and maintenance of furniture, without appreciating the fact that the bill dated 25.10.2005 raised by the vendor showed that these expenses had crystallised in the preceding year; 3. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in restricting the disallowance of ₹ 23,47,67,605/- u/s. 14A of the Act to the extent of ₹ 10,00,000/- without appreciating the fact that the AO is duty bound to determine the expenditure disallowable u/s 14A even if no d .....

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- under the special provisions of section 115JB of the Act. The case of the assessee was selected for scrutiny and notices u/s 143(2) and 142(1) were issued to the assessee and duly served. The assessee company was engaged in the business of windmills, accessories and parts, operations and maintenance service in respect of windmill and generation of power by Wind energy through Wind farms and sale thereof. 10.2. The Ground No.1 is against the deletion of repairs and maintenance of ₹ 18,87, .....

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r years but the same were crystallized when the bills were received of the same during the current year were liable to treated as current years' expenses. The ld.AR submitted before us that the bills of the professional charges ₹ 6,61,200/- paid to L.E.Dchez against their professional fee for the period 1.1.06 to 31.3.2006. The ld. Counsel submitted that the bills for the professional charges were received late and as a result of which the payment of the said expenses could not be cred .....

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e order of the ld. CIT(A) ber upheld. 10.3. We have considered the rival submissions and perused the record. We are in agreement with the finding of the ld.CIT(A) that liability for the bills for fees paid to M/s L.E.Dchez of ₹ 6,61,200/- was crystalised during the year as these bills were received late and payment could not be approved and booked during the year ended on 31.3.2006. The ld. CIT(A) also relied on the judgment of the Hon'ble Gujarat High Court in the case of Saurashtra C .....

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o the transactions of the previous year. In our opinion the true profits and loss of the assessee could only be determined if the expenses are allowed. Moreover, if these expenses are not allowed in this year, they are liable to be set off from the profit of the year ended 31.3.2006 related to the assessment year 2006-07. We, therefore, uphold the order of the ld. CIT(A) by dismissing the appeal of the revenue on this ground. The AO is directed accordingly. 11. The issue raised in Ground No.2 is .....

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ed being prior period expenses and during the course of remand proceedings the assessee has filed full details of repairs and maintenance of furniture and produced the copies of the bills. The AO further stated in the remand report that after verification of the record and bills, it were accounted for furniture pertains to prior period expenses rightly disallowed during the year and submitted that the issue decided on merits. However, the ld. CIT(A) allowed the appeal of the assessee on this iss .....

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ngly brought in this year, therefore, the AO had rightly disallowed the same. The ld. DR prayed that the order of AO be upheld and the order of ld. CIT(A) be set aside. 11.2. Per contra, the ld. AR submitted before us that the assessee had carried out heavy repairs to furniture, POP and painting work etc which were damaged due to heavy rain in 2005 and the bills were received and settled during the year and thus, the same was booked in the current year and the ld. AR further submitted that the A .....

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ot possible if estimated with some certainty at the yearend should not be provided in that year and thus rightly claimed in the current year. The ld. CIT(A) has rightly allowed the appeal of the assessee and the order of the ld. CIT(A) should be upheld on this square. 11.3 We have considered the rival contentions and perused material available before us and we find that the bill dated 25.10.2005 of ₹ 12,83,864/- is in respect of repairs and maintenance of the furniture, POP, painting etc w .....

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