TMI Blog2016 (7) TMI 1582X X X X Extracts X X X X X X X X Extracts X X X X ..... n the reason that the price depends upon quality or grade as well as on the demand and supply position. The AO has taken average rate of ₹ 1,680/- per MT, in respect of one customer - HELD THAT:- addition made by the AO cannot be sustained and we find no reason to interfere with the order of Ld.CIT(A). The price of the molasses is depending on the quality of the same. The prices are to be compared with same quality of molasses.The AO s comparison of price is not proper. The Ld.CIT(A) considered the quality of molasses and various components included in it to arrive at a proper comparison. The Departmental Representative was not able to controvert the findings of CIT(A). Hence, the same is confirmed and this ground of Revenue is rejected. Deemed dividend u/s.2(22)(e) - HELD THAT:- When there is a running account between the parties on account of business transactions and there is no obligation of repayment by the parties, which is in nature of trade advance, to give effect to commercial transaction does fall within the meaning of sec.2(22)(e) of the Act. Hence, in our opinion deletion of addition by the CIT(A) is justified and the order of Ld.CIT(A) is confirmed on this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are directed against the order of the Commissioner of Income-tax (Appeals)-III, Chennai dated 14.03.2013 pertaining to assessment year 2009-10. First we take up Revenue s Appeal (ITA No.1457/Mds./13) 2. The first ground in the appeal of Revenue is with regard to deletion of addition of ₹ 11,03,84,378/- made towards difference of profit between the value of bagasse transferred to and power transferred from M/s.Terra Energy Ltd. 2.1. The facts of the issue are that the assessee is engaged in the manufacture of sugar. The subsidiary company, M/s.Terra Energy Ltd. is engaged in the business of co-generation of power with bagassee as fuel predominantly. The assessee supplies the bagasse from its sugar factory to Tel, which is burnt in the boiler of M/s.Terra Energy Ltd.(TEL) to produce steam and the steam is in turn used to produce electricity. The assessee company has entered into a barter agreement with Terra Energy Ltd., whereby the assessee company shall supply bagasse from its sugar factory to TEL and TEL in return for the bagasse supplied shall supply to the assessee company necessary steam which shall not be less than 45% of the cane cruses and electricity w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of computing profits. In this view of matter and more so, when there is no record rebutting the findings of the CIT(A) qua valuation of steam, we observe that assessee s claim has been by the CIT(A). Hence, we see no reason to interfere. In view of this above decision of the Tribunal in assessee's own case, we are inclined to decide the issue in favour of the assessee. This ground raised by the Revenue is dismissed. 3. The second ground in the appeal of Revenue is with regard to deletion of addition made by AO in respect of sale of Molasses. 3.1. The facts of the case are that the AO has made an addition of ₹ 30,09,770/- in respect of the sale of molasses by the assessee by comparing the price at which another company, Trichy Distilleries and Chemicals Limited has purchased the molasses. The AO found that the average rate at which the Molasses was sold by the assessee during the period from 1.4.2008 to 31.3.2009 was ₹ 1,618.62 per MT whereas the prevailing rate as per the purchases made by M/s.Trichy Distilleries and Chemicals Ltd., was ₹ 2,259/- per MT. Therefore, the AO added the difference to the total income of assessee which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the AO cannot be sustained and we find no reason to interfere with the order of Ld.CIT(A). The price of the molasses is depending on the quality of the same. The prices are to be compared with same quality of molasses.The AO s comparison of price is not proper. The Ld.CIT(A) considered the quality of molasses and various components included in it to arrive at a proper comparison. The Departmental Representative was not able to controvert the findings of CIT(A). Hence, the same is confirmed and this ground of Revenue is rejected. 6. The next ground in the appeal of Revenue is with regard to deletion of addition of ₹ 8.60 crores made as deemed dividend u/s.2(22)(e) of the Act by AO. 6.1. The facts of the issue are that during the course of assessment proceedings the AO found that the assessee has received a sum of ₹ 28,60,00,000/- from Shree Ambika Sugars Ltd, an associate company of the assessee in which the assessee is holding more than 10% of the equity share capital. During the year, the assessee purchased ₹ 76,56,610/- equity shares of Shree Ambika Sugars Ltd. (SASL) for total consideration of ₹ 30,70,30,061/-. The AO noted that the shares we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition made by AO on account of deemed dividend u/s.2(22)(e) of the Act. Against this, the Revenue is in appeal before us. 7. We have heard both the parties and perused the material on record. In this case after rectification u/s.154 of the Act vide order dated 23.02.2012, AO considered the amount of ₹ 8.6 crores as deemed dividend in the hands of assessee as received from SASL on account of payment to M/s.Aarsee Investments P Ltd. on behalf of the assessee. The Ld.CIT(A) was of the opinion that SASL has been a sister concern of the assessee company which is engaged in the manufacture of sugar and alcohol apart from co-generation of power and managed by a common Managing Director Mr.R.V.Tyagarajan. Further, Ld.CIT(A) observed that funds and personnel and resources which are common in nature and thus, there is unity of management and control between these two companies. Hence, provisions of the section 2(22)(e) of the Act cannot be applied to running account between the assessee and SASL, which is in the ordinary course of business transaction and deleted the addition made u/s.2(22)(e) of the Act. 7.1. Contrary to this, the ld.D.R submitted before us that even running acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 209 : (1998) 229 ITR 444 (SC) and Smt. Tarulata S/warn Ors. vs. CIT 1977 CTR (SC) 275: (1977) 108 ITR 345 (SC) distinguished; LIC of India vs. Retd. LIC Officers Association (2008) 3 SCC 321 and Rohit Pulp Paper Mills Ltd. vs. CCE AIR 1991 SC 754 applied. Being so, in our opinion when there is a running account between the parties on account of business transactions and there is no obligation of repayment by the parties, which is in nature of trade advance, to give effect to commercial transaction does fall within the meaning of sec.2(22)(e) of the Act. Hence, in our opinion deletion of addition by the CIT(A) is justified and the order of Ld.CIT(A) is confirmed on this issue. This ground is rejected. 8. The next ground in the appeal of Revenue is with regard to deletion of addition made on account of export sales to Agrocorp. 8.1 The facts of the issue are that the addition of Rs. 7,59,38,975/- was made by AO on account of export sales to M/s.Agrocorp. The AO found that assessee had made export sales in addition to levy sugar and free sale. After analyzing the details furnished by the assessee,the AO noted that from the said shipping documents on sugar shipped to M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sugar turnover is found included in the total sales, reported in the P L A/c. Therefore, Ld.CIT(A) came to a conclusion that there is no omission on the part of the assessee to report the export turnover of M/s.Agrocorp. Hence, Ld.CIT(A) deleted the addition made by the ld. Assessing Officer. Against the Revenue is in appeal before us. 8.3 We have heard both the parties and perused the material on record. The details of document produced by the assessee before the authorities show that the assessee has properly accounted the export sales at ₹ 40.94 crores, which was duly reflected in the sales reported in the P L A/c for the year ended on 31.03.2009. Further, the assessee has produced before the Ld.CIT(A), the party-wise and group-wise export of sale of Sugar to M/s.Agrocorp, which is at Rs. 40.94 crores. Ld.D.R is not able to controvert the findings of the Ld.CIT(A) s recording in para 11.3 of CIT(A) s order. Hence, when the books of accounts are duly audited and there is no adverse findings regarding the recording of the export sales and documents relating to the export show the same export figure, there is no question of doubting the same. Hence, we do not find an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red and he drew our attention to the paper book at page 21 to 22 to show that most of the investments are in equity shares of sister concerns and these investments are made on account of commercial expediency. He placed reliance on the judgment of Delhi High Court in the case of CIT Vs. Bharti Oversas Pvt. Ltd., reported in 17th December, 2015 wherein held that expenditure in relation to income which is exempt shall be aggregate of expenditure attributable to tax exempted income, and where there is common expenditure, that cannot be attributable to either tax exempt income or taxable income. He also submitted that interest on borrowings which is available for specific purpose cannot be considered for disallowance u/s.14A r.w.Rule 8D. In our opinion, the Tribunal considered this issue in the case of Farida Shoes Pvt. Ltd. in ITA Nos.2102 2103/Mds./15 for assessment years 2011-12 2012-12 vide order dated 08.01.16 wherein held that:- 5.1 Coming to the merits of the issue regarding disallowance u/s.14A r.w. Rule 8D of the I.T.Rules, in our opinion, similar issue was considered by this Tribunal in the case of ACIT v. M/s. Best Crompton Engineering Ltd. in ITA No.1603/Mds/2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in subsidiaries which earns tax-free income. The loan amounts were fully disbursed and utilized in the year ended 31.03.2008 (A.Y. 2008-09) itself. Taking into all the facts as stated above, I am of the considered opinion that if loans/borrowed amounts are granted for specific projects/expansion and no amount from the same has been directly utilized for investments, then the first and second limb of rule 80 attributing the interest payments to the investments will not be applicable. Accordingly, interest on bank loan and term loan amounting to Rs. 67,92,000/- and ₹ 3,82,11,000/- respectively are to be excluded from the calculation to determine the disallowance under rule 8D(2)(ii). The AO is, therefore, directed to take into account only the remaining interest on other accounts amounting to Rs. 1,29,43,000/- for computing the proportionate disallowance under rule 80(2)(ii). 11. On going through the order of the Commissioner of Income Tax (Appeals), we find that the Commissioner of Income Tax (Appeals) excluded the interest on bank loan and term loans from the calculation of disallowance under Rule 8D(2)(ii) as the assessee has utilized the bank loan and term loan for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of interest, which is not directly attributable to any particular income or receipt it ends up allocating expenditure by way of interest, which is not directly attributable to any particular income or receipt, plus interest which is directly attributable to taxable income (emphasis by underlining supplied by us). This incongruity will be more glaring with the help of following simple example: In the case of A Co Ltd, total interest expenditure is Rs. 1,00,000, out of which interest expenditure in respect of acquiring shares from which tax free dividend earned is Rs. 10,000. Out of the balance Rs. 90,000, the assessee has paid interest of Rs. 80,000 for factory building construction which clearly relates to the taxable income. The interest expenditure which is not directly attributable to any particular receipt or income is thus only Rs. 10,000. However, in terms of the formula in rule 8D (2)(ii), allocation of interest which is not directly attributable to any particular income or receipt will be for Rs. 90,000 because, as per formula the value of A (i.e. such interest expenses to be allocated between tax exempt and taxable income) will be A = amount of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral it has been stated, with reference to r. 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.) The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 16. Once the revenue authorities have taken a particular stand about the applicability of formula set out in rule 8 D(2)(ii), and based on such a stand constitutional validity is upheld by Hon ble High Court, it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that the interest on borrowing which are made for specific purpose of business cannot be considered for the purpose of Rule 8D of the Income Tax Rules. Further, investments in sister concerns or subsidiaries with which the assessee is having business transactions, that investments cannot be considered for the purpose of applicability of Rule-8D. For this proposition we rely on the judgments of Tribunal in the case of Sun TV Networks in ITA No.1340 1341/Mds./15 1578 to 1579/Mds,/15 wherein held that:- 12. We have considered the rival submissions on either side and perused the relevant material available on record. The main contention of the assessee is that the available share capital including reserves and surplus was ₹ 2385.7 Crores as on 31.03.2010. The available share capital is ₹ 1970.4 Crores and Reserves and surplus is Rs. 21,886.7 Crores. The investments made in mutual funds including subsidiary companies are only ₹ 541.11 Crores. Therefore, it cannot be said that the assessee has diverted the borrowed funds for making any investment either in the sister concerns or in the mutual funds. When the assessee has sufficient share capital, reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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