TaxTMI 
TaxTMI 
2016 (1) TMI 864
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....sessee 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 year under consideration, AO has disallowed expenses to the extent of 10% of the exempt dividend and interest income amounting to Rs. 21,70,628/- treating them as incurred for earning tax free dividend income. The CIT(A) has upheld the disallowance to the extent of Rs. 4,29,880/- being the total administrative expenses in the proportion of exempt income to the total receipts of the business. We fo....
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....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 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....
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....e 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) was organized and arranged by Mr. Harikishan Agarwal. The total imports arranged was organized by Mr. Harikishan Agarwal in these years were to the tune of Rs. 250 crores. With a view to further import some specified type of non ferrous metals, the assessee Company had given advance of Rs. 75 lacs and Rs. 80 lacs to these concerns in the year 1999 and 2001. However, due to the wide fluctuation i....
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....ars 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 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 carefully gone through the orders of authorities below and found that the assessee had commenced manufacturing activity at the new u....
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....ment 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 Assessee and hence the contractor could not have any information about the nature of work done by the workmen. Thus the statement of the contractor that the workmen were not involved in manufacturing 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 availabl....
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....eposits 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 enough to cover the interest income. Reliance is placed on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Eltek SGS Private Ltd (300 ITR 6), and ACIT V. Dharampal Premchand Ltd. (221 CTR 133). 5.3 We also found that exactly similar issue was considered by Tribunal in assessee's own case for assessment year 1999-00, 2001-02, & 2003-04 for interest on FD kept as margin money....
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....t 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 Rs. 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 section 80HHC. Ld. 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 o....
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....he 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 of facts, grounds of appeal, Paper Book filed, the written submissions made and the arguments made by the Ld. AR. In the present case, the appellant has entered into various hedging transactions on the multi commodity exchange in order to hedge against the cost of raw material namely Metha Oil, used for its manufacturing at Jammu unit and exports. It is not disputed that the main raw material for al....
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....005 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 Rs. 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 reduced by the appellant itself. 3.3.3 . Mr. George Kleinman ....
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....ket 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 purchase constituting hedge transactions, there would be no effective insurance against the risk of loss In the price fluctuation of the commodity manufactured or merchandise sold (pankaj Oil Mills vs. CIT 1977 CTR (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 transact....
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....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 risk of raw materials or merchandise in stocks falling in value as normal business losses and not as speculative losses. The clarification was clearly restricted to hedging sales limited to the extent that the total of such transactions did not exceed the total stock of raw materials or merchandise in hand. The appellant has clearly proved that the total of its transaction did ....
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....orward 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 him; or (b) a contact in respect of stocks and shares 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 gua....
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....0HH 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 from an Industrial Undertaking" as used in Section 80HH of the Act but uses the expression. "Profits and Gains derived from any business referred to in sub-section". Section 80IB of the Act reads as under:- "Sec. 80-IB(1) of the Act reads as follows: "80-IB(1) Where the gross total income of an assessee includes an....
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....f 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 Rs. 18,23,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 ....
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....ffects 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. 9.4 We had verified the statement showing month-wise details of quantities of stock and quantities of future sale contract for the Mentha Oil entered into by the company. It was evident from the same that the quantity of Mentha oil available with the company was substantially higher than the quantity of future contra....
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....ne 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. 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 (P) Ltd (300 ITR 6), in case of CIT V. Dharam Pal Prem Chand (2008-TIOL-664-....
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....he 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 Rs. 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 Rs. 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 this year, the assessee is aggrieved for confirming disallowance of Rs. 5,44,101/- by AO on the plea that the Daman unit had discontinued its business activity. 14.2 From the record, we found that during this year, the assessee has filed return at income of Rs. 73,40,60,272/- u/s 115JB. In the return of income assesee has ....
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....012 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 that full particulars were filed before the AO at the time of the original assessment proceedings in respect of expenditure incurred in earning exempt income. No new fact has come to the notice of the AO and there was only change of opinion. In view of the decision in the case of Kelvinator Indian Ltd., reopening was not justified. However, the learned DR r....