M/S KOHINOOR FOODS LTD,NEW DELHI vs. DEPUTY COMMISSIONER OF INCOME-TAX, NEW DELHI

Ld. DR appearing on behalf of the Revenue could not be able to point out any difference in the facts and circumstances of the impugned year and has relied upon the order of AO and DRP. -: Finding of the Bench:- 7. After considering the rival submissions, we observe that the disallowance on account of Loss in Forex Derivatives had arisen in Assessment Year 2008-09 and that year has reached to the Hon’ble High Court in ITA No.79/2015. In that year, the Hon’ble High Court has observed as under: “So far as the second question is concerned, we notice that the AO disallowed a sum of Rs.41,19,29,639/- which the assessee had claimed as loss on account of forex derivatives. The assessee an exporter hedges itself through forex derivatives instrument which ensure that it is not subjected to foreign exchange fluctuation risks. For the relevant year, its realization led to losses. Its claim for losses was disallowed. The assessee had, inter alia, pointed out that for the previous years, i.e., 2005-06, 2006-07 and 2007-08 in respect of similar transactions, i.e., assumption of derivative trading or sale, the claim for profits and tax realized therefrom had been accepted. The assessee had shown that for some of the years, the net gain/losses had been accepted. That for FY 2006-07, the net profit or gain of Rs.3.72 crores; for FY 2007-08, the net profit of Rs.1.34 crores had been taxed as business profit. On this ground, the ITAT, applying the rule of consistency [accepted by this Court in CIT v. New Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del)] accepted the assessee's contentions. The ITAT also held, while allowing the appeal, as follows: - "54. We have heard both the sides on this issue. We have also gone through the records available in the paper book. We have also taken into consideration the written submissions from both the sides on this issue. The assessee is engaged in the export of rice and other processed goods. The assessee also deals in agro commodities which are imported for domestic consumption. Assessee also involved in import of machinery for processing of rice and also units for food processing. Thus, assessee is exposed to the risk of fluctuation in foreign exchange. The assessee is eligible to cover the risk by following the RBI guidelines in this regard by way of entering into hedging contracts which also includes hedging through cross currency hedging contracts. This type of hedging contracts can be entered only through authorized dealers. The assessee has submitted copy of invoices related to export for financial year 2007-08, copies of invoices related to import for financial year 2007-08 and a certificate from CA with regard to the export/import turnover Kohinoor Foods Ltd. vs. ACIT and also submitted a certificate from CA for the financial year 2008-09 relating to export/import of goods. The assessee has also submitted details of advance payments against export proceeds, copy of bank realization certificates, copy of certificate issued by consultancy firm M/s. Eforexindia. Com (P) Ltd. The hedging contracts with regard to fluctuation in foreign exchange rate were booked by the assessee on the counter based on requirements with the leading banks which were authorized dealers in foreign exchange. The export invoices also establish that there are underlying contracts. The assessee has covered exchange risk against these outstanding foreign exchange convertible bonds. The assessee has also covered the exchange fluctuation risk against outstanding foreign currency convertible bonds, import of commodities and machinery and also outstanding PCFC loans drawn in EURO and US Dollar. The Assessing Officer without examining the details filed by the assessee and without making specific enquiries simply brushed aside the evidences and mentions no specific underlying assets/liabilities/transactions which were hedged. In our considered view, all the relevant details were filed by the assessee before the Assessing Officer and Assessing Officer was not justified in the absence of any particular derivative any transaction was for hedging for assets/liabilities/expenditure/income/transaction. It is also a fact that assessee has made profit on similar hedging transactions in the Assessment Year 2006-07 and 2007-08 of Rs.3.72 crores and Rs.1.34 crores respectively and the same have been offered as business profit in the respective year. Considering all these factual aspects and also the case laws relied upon, we find that the revenue was not justified in not allowing the loss incurred by the assessee on the hedging transactions and holding the same as speculative loss. This ground of assessee's appeal stands allowed." Considering the totality of circumstances and the fact that there is nothing to show that the assessee was in any manner disentitled to claim the loss, the correctness of which was never doubted, we are of the opinion that ITAT's findings cannot be faulted.” 7.1 Respectfully following the above decision of the Hon’ble High Court, we hereby allow this ground of appeal of the assessee and direct the AO to delete the addition of Rs 29,07,45,593 in AY 2010-11 and Rs 54,05,44,972/- in AY 2011-12.

Ld. DR relied upon the orders of the authorities below.

We further observe that the Co-ordinate Bench of the Tribunal while deciding the appeal for Assessment Year 2009-10 in vide its order dated 25th June, 2017 has also dealt with the issue of stock discrepancy and has observed as under: “8.1 Having gone through the above cited decisions of the Tribunal/Hon’ble High Court in the case of assessee on an identical issue under the similar facts of the case, we find that like in the present year in the assessment years 2002-03 to 2008-09 the Assessing Officer had also made an ad-hoc addition of 1% of the sales on account of the alleged discrepancy in closing stock and the same has been deleted by the Tribunal in favour of the assessed vide para No. 9.2 of the order, reproduced hereunder “9.2 The assessee has demonstrated that its yield of rice, bran and faak is as per the industry norm and the GP rate in all the years is favourably comparable. Under these circumstances, it cannot be held that the assessec's book results are unsatisfactory. Merely because a search is carried on it is not automatically meant that assessee is indulging in some nefarious activities. This is the burden of the revenue to prove in this behalf with material and cogent reasons. Rejection of audited books of account otherwise properly maintained cannot be recourse to by Assessing Officer in a casual and wishy vice manner. The ad hoc disallowance, Kohinoor Foods Ltd. vs. ACIT rejection of books and taking support of this fact which we are not able to subscribe the ad hoc addition of 1% of sales is again without any basis whatsoever. Stock tally cannot lead to an ad hoc assumption that 1% of sales are liable to be added in the income of the assessee. Our findings are supported by Hon'ble Rajasthan High Court judgment in the case of CIT vs. Gotan Lime Khanji Udyog and ITAT, Amritsar Bench in the Mehra vs. ACIT, cited supra. In view thereof, we delete the ad hoc addition of 1% sal This ground of assessee is allowed. " The Hon'ble jurisdictional High Court vide its order dated 20.04.2015 (supra) has upheld the order of the Tribunal in the appeal preferred by the Revenue. Respectfully following the same, we direct the Assessing Officer to delete the ad-hoc addition in question made on account of discrepancy in closing stock at the rate of 1% of sale of rice. The ground No. 3 is accordingly allowed.”

Since, the facts and circumstances of the impugned year are similar to the earlier year, therefore, respectfully following the verdict of the Hon’ble High Court and Co-ordinate Bench for Assessment Year 2009-10 (supra), we allow this ground of appeal of the assessee.

We have heard the rival submissions and perused the material available on record. Perusal of the draft assessment order would show that the AO has not at all discussed this issue at the time of assessment, neither the same was subject Kohinoor Foods Ltd. vs. ACIT matter of the assessment proceedings. Therefore, the fact of the matter is that this issue has been roped in for the first time by the Ld DRP. Now the question would arise whether DRP can touch those issues which were not discussed at all by the AO or which were not the subject matter of the assessment proceedings. In legal terminology whether DRP can assess a new source, which is not there in draft assessment framed by the AO. Powers of DRP are described in section 144C(8). While discussing the purport of this section Hon’ble Delhi High Court in the case of Lahmeyer Holding reported in (2015) 59 taxman.com 336(Del) has held that DRP has all the powers of enhancement. This decision has been relied upon by the Ld DRP in the present proceedings. We have perused the decision of Lahmeyer(supra) carefully and observe that it was a case of 147 proceedings, challenged by the assessee before the Hon’ble High Court in writ petition. It is one of the contention of the assessee’s counsel that the aspect on which jurisdiction has been assumed by the AO u/s 147 has been discussed by the DRP and hence it is a case of change of opinion. The contention of the counsel for revenue was that the DRP cannot touch those issues which were not subject matter of the assessment. The relevant observations of Hon’ble Delhi High Court are reproduced hereunder for the sake of convenience. “23. One more aspect which needs some discussion is with regard to the submission that the DRP had no occasion to consider the issue of taxability of the transaction involving the transfer of the expired value of the contract in exchange of shares as no variation had been suggested by the Assessing Officer on this aspect of the matter in his draft assessment order. It was submitted by the learned counsel for the revenue that the jurisdiction of the DRP in terms of Section 144C(8) was that it could confirm, reduce or enhance the variations proposed in the draft order, but it could not introduce a new element of tax or variation. In response to this, the learned counsel for the petitioner drew our attention to the Explanation added after Section 144 C(8). It was submitted by the learned counsel for the petitioner that by virtue of the said Explanation, the DRP always had the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Section 144 C(8) and the Explanation appended thereto reads as under:— "144C (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation. — For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included Kohinoor Foods Ltd. vs. ACIT the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee."

Perusal of the above factual observations as taken note by the Hon’ble High Court would show that the issue on which DRP has taken cognizance was subject matter of assessment proceedings and the AO and DRP has ultimately not made any addition qua such issue. Facts of the present case are not similar to that of Laheymer (Supra). Here is a case where the issue on which the DRP has made an addition was not the subject matter of assessment proceedings. Therefore, in our view the DRP has acted beyond jurisdiction. It is settled position of law that there has to be finality of proceedings and if the AO has not touched certain issues, the appellate authorities are not allowed to look into those issues the powers of appellate authorities/ DRP is limited to the extent of those matters which have been discussed during assessment. It is also settled law that if an AO commits an error by not examining the facts and issues which are involved in a given case, then there are other remedies such as 147 and 263 as the case may be. We would like to refer to certain important Para(s) of the judgment of Full Bench of Delhi High Court in the case of CIT Vs Sardari Lal(Supra). The main contentions of the counsels for revenue and assessee are as under: -

On the contrary, learned counsel for the assessee submitted that if such a view is taken, the provisions for reopening of assessment available under s. 147/148 of the Act and/or setting aside of the order on the ground that it is prejudicial to the interest of the Revenue as available to the CIT under s. 263 of the Act would be meaningless and purposeless. Findings of the Hon’ble High Court :- 6. A similar question has been examined by the apex Court, as noted above, on several occasions. We do not think it necessary and appropriate to proliferate this judgment by making reference to all the decisions. A few of the important ones need to be noticed. One of the earliest decisions on the point was in CIT vs. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC) : TC 7R.576. The matter related to corresponding provisions of the IT Act, 1922 (in short, ‘the old Act’). It was held inter alia that in an appeal filed by the assessee, AAC has no power to enhance the assessment by discovering a new source of income not considered by the ITO in the order appealed against. A similar view was expressed in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) : TC 7R.590. That also related to a case under s. 31(3) of the old Act. It was held that the power of enhancement under s. 31(3) of the old Act was restricted to the subject-matter of assessment or the source of income, which had been considered expressly or by clear implication by the AO from the point of view of taxability and that AAC had no power to assess the source of income, which had not been taken into consideration by the AO…… 8. Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the AO, the jurisdiction to deal with the same in appropriate cases may be dealt with under s. 147/148 of the Act and s. 263 of the Act, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, decision in Union Tyres’ case (supra) of this Court expresses the correct view and does not need re-consideration. This reference is accordingly disposed of.

The observations made by the Hon’ble Full Bench in the case of Sardari lal would mutatis mutandis apply to the proceedings before the DRP also. Therefore, we are of the firm view that the DRP has no power to assess new source of income which has not been the subject matter of the assessment proceedings.

Learned Counsel for the assessee appearing on behalf of the assessee pointed out that the Hon’ble ITAT while deciding the appeal of the assessee for Assessment Year 2009-10(Supra) has discussed this issues is at length and has followed the findings of the Co-ordinate Bench given in assessee’s own case for Assessment Year 2008-09 (supra) and has held that LIBOR rate is justifiable with respect to loan advance by the assessee to its AEs.

Ld. DR relied upon the orders of authorities below. -: Finding of the Bench:- 21. We have heard the rival submissions and perused the material available on record. We observe that the ITAT while deciding the appeal for Assessment Year 2009-10 in para 13 of his order at page 19 has observed as under: “13. Ground Nos. 5 (d) & 5 (e) In ground No. 5 (d) the action of respect of interest on loans given by the assessee to its AEs, has been quashed. 13.1 The Id. AR submitted that the Id. TPO has erred in relying upon the data provided by CRISIL, and in applying rate of 17.24% to determine the arm's length interest income, on the loan given by assessee its AG by failing to appreciate that the interest rate on Joan by appellant to its foreign associated enterprises, could not have been determined by relying upon the data provided by CRISIL in respect of corporate bonds. Further, the interest rate in Indian market and foreign market could not be compared for determining arm's length interest income as a loan has been given in foreign currency. In alternative the ld. AR [ground No. 5 (e)] submitted that the authorities below have erred in calculating the interest on the amount, the opening balance for the purpose of making adjustment on account of Kohinoor Foods Ltd. vs. ACIT interest without appreciating that the opening balance cannot be treated as international transaction for the relevant assessment year. He referred page Nos. 135 to 148 of the order of the ld. TPO, page Nos. 85 to 88 of the order of the Id. DRP, both placed in the appeal as well as page Nos. 275 to 278 of the P.B.-1 i.e. the relevant order of the Tribunal on the issue for assessment years 2002-03 to 2008-09 (supra). He submitted that the Revenue has not preferred any appeal against the order of the Tribunal on the issue. 13.2 Having gone through the above cited decision of the Tribunal (supra) we find that an identical issue has been dealt b the Tribunal in the case of assessee itself for the assessment yean 2002-03 to 2008-09 under similar set of facts. The relevant para Nos. 68.2 thereof is being reproduced hereunder for a ready reference :- 68.2 In consideration of the contentions, case laws and foregoing observations, we are of the view that the correct comparable which can be applied in these facts and circumstances is of LIBRO rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific. uncontrolled comparable to be applied to the assessee's loan transactions. We direct the AO/TPO to work out the TP adjustment accordingly depending on the LIBOR rate applicable to year from year. In view thereof, the grounds raised

The next issue is related to the addition of notional interest qua delayed the receivables. In respect of this issue at the outset counsel for the assessee Kohinoor Foods Ltd. vs. ACIT pointed out that the amendment made in section 92B is not applicable to the impugned years and, hence, there is no question of treating this transactions as international transactions, and, hence, the TPO and DRP have acted without jurisdiction in making adjustment with respect to outstanding receivables. Alternatively, the Counsel for the assessee pointed out that assessee has not charges any interest from its non AE with respect to outstanding and, therefore, no adjustment can be made with respect to this transaction.

Ld. DR relied upon the orders of authorities below. -: Finding of the Bench:- 25. After considering the rival submissions, we hereby observe that similar issue has been decided by both of us in assessee’s own case while deciding the appeals of Assessment Year 2012-13, 2014-15 and 2016-17 wherein it has been observed as under: “11. We have heard the rival submissions and perused the materials available on record. So far as Assessment Year 2012-13 is concern the transaction of notional interest on delayed receivables was out of the purview of section 92B explanation. This issue has been thread barely examined by the Co-ordinate Bench in the case of SIRO (supra) and KGK Enterprises vs. ACIT, reported in 88 taxmann.com 264. Therefore, we are of the firm view that for Assessment Year 2012-13 amendment brought into the statute with effect from 2013-14 is not applicable to AY 2012-13. Therefore, there is no question of any adjustment for the impugned year towards outstanding receivables. 12. Without prejudice to the above. Counsel for the assessee has drawn the attention to the Bench towards position of transactions entered into with NON AEs, the same chart reproduced herein for the sake of convenience. DETAIL OF SALES UPTO 31.03.2012 PARTICULARS AMOUNT EXPORT SALES-A.E KFL INC. 29.17,03,834.00 INDO EUROPEAN 89,11,95,017.00 RICH RICE 92,95,10,598,00 2,11,24,09,449.00 EXPORT SALES-NON-A.E 3,50,51,48,916.00 TOTAL DOMESTIC SALES 5,61,75,58,365.00 3,98,16,68,371.47 TOTAL SALES AS PER Balance Sheet 9,59,92,26,736.47

Following our view as quoted above we allow this ground of the appeal of the assessee on two counts a) the amendment brought to section 92B is prospective and not applicable to the present year and hence there is no question of treating this transaction as international transaction b) the assessee has not charged any interest on the outstanding related to Non- AEs. We further observe that the Co-ordinate Bench of ITAT in the case of SIRO Clinpharm (P.) Ltd. vs. DCIT [2017] 88 taxmann.com 338 (Mumbai) has held that prior to the enhancement of the Explanation to section 92B, this transactions of outstanding receivables out of the purview of international transactions and hence cannot be subjected to TP adjustments.

The last issue for our consideration is in respect of the addition on account of notional commission on Corporate Guarantee given by the assessee. At the outset, the Ld. Counsel for the assessee pointed out that this issue has been decided by the Co-ordinate Bench in assessee’s own case for Assessment Year 2009-10 in vide order dated 25th Jan, 2017 wherein the Co-ordinate Bench has held that 1% notional addition on account of corporate guarantee commission can be made.

Ld. DR relied upon the orders of authorities below. -: Finding of the Bench:-

We have heard the rival submissions and perused the materials available on record. We observe that the similar issue has been decided by us in Assessment Year 2012-13, 2014-15 and 2016-17 (supra), wherein we observed as under: “15. The last issue is addition on account of notional commission on corporate guarantee given by the assessee. At the outset, Ld. Counsel for the assessee pointed out this issue has already been decided by the Co-ordinate Bench in assessee’s own case for Assessment Kohinoor Foods Ltd. vs. ACIT Year 2009-10 wherein 1% notional addition has been held to be justifiable on account of corporate guarantee commission. 16. Ld. DR relied upon the orders of authorities below. 17. After considering the rival submissions, we observe that similar issue has come up for consideration before the Co-ordinate Bench in assessee’s own case in to 3691/Del/2012 dated 21st July, 2014 wherein it has been held that 1% rate of interest is appropriate for making adjustment towards commission attributable to the guarantee fee. Respectfully following the verdict of the Co-ordinate Bench, we direct the AO to apply the rate of 1% vis-à-vis transaction of guarantee commission. This issue is restored to the file of AO only for computing interest @1% towards corporate guarantee.”

Following the above verdict, we hereby direct the AO to compute the interest @ 1% towards the corporate guarantee given by the assessee.

Facts and issues involved in Assessment Year 2011-12, expect one issue of late fee payment to marketing committee of Sonipat, are similar. Our findings given in respect of the other issues above would apply mutatis mutandis in Assessment Year 2011-12 also.

In the result, both the appeals of the assessee are allowed as indicated above. Order pronounced in the open Court 22.08.2025.