JCIT, RANG-2, KOTA vs. CHAMBAL FERTILISERS AND CHEMICALS LIMITED, KOTA

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 461/JP/2015 fu/kZkj.k o"kZ@Assessment Years : 2011-12 cuke M/s Chambal Fertilisers & The JCIT, Vs. Chemicals Limited, Range-2, District- Kota. Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACC 9762 A vihykFkhZ@Appellant izR;FkhZ@Respondent

vk;dj vihy la-@ITA No. 575/JP/2015 fu/kZkj.k o"kZ@Assessment Years : 2011-12 cuke The ACIT, M/s Chambal Fertilisers & Chemicals Vs. Circle-2, Limited, Kota. District- Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACC 9762 A vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri Percy Pardiwala (Adv.) Shri M.L. Patodi (Adv.) Mrs. Ritu G.P. Das (C.A) jktLo dh vksj ls@ Revenue by: Shri Varinder Mehta (CIT) lquokbZ dh rkjh[k@ Date of Hearing : 19/07/2018 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 17/10/2018 vkns'k@ ORDER

2 ITA No. 461/JP/2015 & 575/JP/2015 M/s Chambal Fertilizers & Chemicals Ltd. Vs. ACIT

PER: VIKRAM SINGH YADAV, A.M.

These are cross appeals filed by the assessee and the Revenue against the order of CIT(A), Kota dated 30.03.2015 for A.Y. 2011-12.

ITA No. 461/JP/2015 (Ground of Assessee’s appeal):

“1. That the L'd Joint Commissioner of Income Tax, Range 2, Kota erred in allowing the depreciation @15% on video conferencing equipment instead of 60% as is applicable as per Appendix I to the Income Tax and further erred in making the addition of Rs.8,83,349/- and the L'd Commissioner of Income Tax (Appeals), Kota further erred in confirming the disallowance of depreciation of Rs.8,83,349/- under the facts and circumstances of the case. Hence the addition of Rs. 8,83,349/- deserves to be deleted.

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mutual funds and the L'd CIT(Appeals) erred in confirming the same without proving any nexus between investments and expenditure. Hence the addition made on this account deserves to be deleted.

ITA No. 575/JP/2015 (Ground of Revenue’s appeal):

“On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in:- i) deleing the addition of Rs. 1.00 Crore made by the A.O on account of loss on diminution in the value of fertilizer bonds;

ii) deleting the addition of Rs. 1061.98 Lacs being compensation received by the assessee from Govt. on account of loss on sale of fertilizers bonds since the income accrued to the assessee during A.Y. 2011-12 though the compensation was actually received in A.Y. 2012-13;

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iii) in deleting the addition of Rs. 38,31,989/- out of total addition of Rs. 1,91,59,945/- made by the A.O. on account of capitalization of anicut expenses;

iv) deleting the addition of Rs. 42,38,664/- made by the A.O. on account of loss on revaluation of inventories;

v) allowing club expenses of Rs. 18,20,700/- paid by assessee for membership of its employees;

vi) deleting the addition of Rs. 24,49,090/- made by the A.O. on account of loss on derivative transactions;

vii) deleting the addition of Rs. 1,09,38,420/- on account of depreciation disallowed on catalyst;

viii) deleting the addition of Rs. 1,52,06,275/- made out of interest paid by the assessee on borrowed funds on account of investment in mutual funds units;

ix) curtailing disallowance out of interest paid on borrowed funds to Rs. 36,92,000/- as against that of Rs. 25,78,65,553/- made by the A.O. since the decision of Ld. CIT(A) is not in conformity with the ratio laid down by the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee’s own funds go into common kitty;

x) allowing rent of Rs. 12,96,000/- paid to a persons specified u/s 40(a)(ia);

xi) deleting disallowance of Rs. 1,97,58,45,000/- made U/s 40(a)(ia) due to failure of the assessee to deduct tax at source U/s 194J in respect of gas transmission charges paid to M/s Gas Authority of India Ltd. (GAIL) and M/s Indian Oil Corporation (IOC);

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xii) holding that the donation of Rs. 51,11,399/- made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee;”

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circumstances of the case, hence, the earlier decisions of the Coordinate Benches may kindly be followed.

Ground No. 1 relating to loss on diminution in the value of fertilizers Bonds:

“15. We have given a careful consideration to the above stated factual matrix and are of the view that it is a case of substitution of subsidy debt of the assessee company whereby the assessee company has received fertilizers bonds from the Government of India of face value in lieu of and equivalent to subsidy debt due from the Government of India. The Government of India instead of settling the subsidy dues in cash has issued fertilizers bonds to the assessee company and it continues to remain liable to the assessee company, being the issue authority of the fertilizers bonds, to repay the debt by

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way of redemption of these fertilizers bonds on or before the specified maturity period and also remains liable to pay the coupon rate as specified while issuing these fertilizers bonds. We accordingly agree with the ld. AR contention’s that the Government substituted its short term liability into long term liability by way of issuance of the fertilizers bonds. These fertilizers bonds therefore continue to represent the subsidy debts of the assessee company.

The facts and the findings of the Hon’ble Supreme Court in that case are reproduced as under:

“2. The assessee deals in automobiles and also sells spare motor parts. For the assessment year 1963-64, the relevant accounting period being

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the year ended 31-3-1963, the assessee claimed a loss of Rs. 53,650 sustained by it on disposing of its subscription to the Orissa Government Floated Loan, 1972. It claimed that the loss suffered by it was revenue loss and, therefore, deductible against its profits for the year. The ITO disallowed the loss in the view that it was a capital loss,. The assessee's appeal was dismissed by the AAC. But on second appeal the Tribunal accepted the contention of the assessee that the subscription to the Government loan was conducive to its business and that the loss arose in the course of the business, and that therefore, the assessee was entitled to a deduction of the loss claimed by it.”

“5. According to the statement of the case drawn up on the basis of the appellate order of the Tribunal the assessee was told that if it subscribed for the Government loan preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government departments and to the further benefit of an advance from the Government up to 50 per cent of the value of the orders placed. Pursuant to that understanding, an advance to the extent of Rs. 18,37,062 was received by the assessee and a circular was also issued by the State Government to various departments to make purchases of the vehicles required by them from the assessee. Because of the advance received from the Government, the assessee was able to save Rs. 45,000 as bank interest during the year. It was also noticed that the sales shot up substantially. On 4-9-1961 the assessee made a deposit of Rs. 5 lakhs consequent upon a resolution of the board of directors passed about six weeks before after a statement made by the chairman during the board meeting that the Government had approached him to subscribe to the Government loan and that the

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company should do so as good orders could be expected. The purchase of the loan was approved by the board of directors and was ratified in the annual general meeting of the shareholders held on 31-12-1961. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circum stances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. We are of opinion that the Tribunal is right.

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did not bring in an asset of a capital nature, and that in the circumstances of the case the loss suffered by the assessee was a revenue loss and not a capital loss. It was held by the Orissa High Court in CIT v. Industry & Commerce Enterprises (P.)Ltd. [1979] 118 ITR 606 and by the Madras High Court in Addl. CIT v. B.M.S. (P.) Ltd. [1979] 119 ITR 321 and again in CIT v. Dhandayuthapani Foundry (P.) Ltd. [1980] 123 ITR 709, that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss.

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the course of its fertilizers business guided by the policy directive of the Government of India whereby subsidy dues were settled and substituted through issuance of Fertlizers Bonds. At the same time, the assessee company continues to hold these bonds as on the close of the financial year and have not disposed them off. Applying the ratio laid down in the said decision of the Hon’ble Supreme Court, the assessee company would accordingly be allowed to claim the loss, if any in the year of actual disposal of the Fertilizer bonds and not in the year under consideration on account of valuation of such Fertilizers Bonds. In the result, the revenue’s ground of appeal is allowed and the findings of the ld CIT(A) are set-aside.”

Ground no. 5 relating to club expenses of employees:

“11. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2005-06 passed in ITA No. 445/JP/2009 order dated 09/09/2011, the Coordinate Bench has held as under:-

“10.2 The details of payments made to club expenses are available at pages 158 to 161 of the paper book. In these details, the assessee has given the name of the employees, date, amount, name of the club, nature of payment and period. The club membership has been paid in respect of 28 employees. It is noticed from the period mentioned in the chart that payments are annual subscription or subscription for part of the year. It is not a case where the assessee has paid corporate fee to the club. There is no payment for the period exceeding one year so that the benefit may be given to the employees for more than a year. The expenditure as club membership fee is an expenditure for the purpose of the business. Hence, the expenditure is allowable u/s 37 of the Act. Therefore, the ld. CIT(A) was justified in deleting the disallowance of Rs. 6,70,422/-.”

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Admittedly, there is no change in the facts and circumstances of the case as compared to earlier years where the matter has been decided in favour of the assessee company. By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2005-06, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the revenue’s appeal is dismissed.”

Ground no. 7 relating to depreciation on Catalyst: “21. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2006-07 passed in ITA No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:-

“3.3 This issue has been decided by the Tribunal while deciding the appeal of the assessee for the assessment year 2002-03 to 2005-06. Following our findings, we hold that the ld CIT(A) was justified in deleting the disallowance of Rs 74,64,626. “

By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue’s appeal is dismissed.”

Ground no. 10 relating to rent payment under section 40A(2)(b):

“31. We have heard the rival contentions of both the parties and perused the material available on the record. The ld CIT(A) has given a finding that the employees of the assessee company stayed at the guest house in respect of which an amount of Rs 10,80,000 has been paid as rent. Further, the Revenue has not brought on record any material evidence to suggest that the rent paid was excessive vis-à-vis an accommodation of same size and facility in the same locality. We therefore confirm the order of the ld CIT(A) who has allowed the rent

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payment as incurred for the purposes of the assessee’s business. Accordingly, this ground of the Revenue’s appeal is dismissed.”

Ground No. 11 relating to disallowance of gas transmission charges U/s 40(a)(ia):

“7. In respect of ground of appeal No. 8 relating to disallowance of gas transmission charges U/s 40(a)(ia), we now refer to the decisions of the Coordinate Bench in in ITA No. 470 & 412/JP/2013 dated 25.09.2017 for A.Y. 2009-10 wherein the relevant findings are reproduced as under:- “9. Respectfully following the decision of Hon’ble Rajasthan High Court in assessee’s own case as referred supra where the Hon’ble High Court has held that the payment of gas transmission charges are not subject to levy of TDS, there is no question of disallowance u/s 40(a)(ia) of the Act. In the result, ground no. 9 of revenue’s appeal is dismissed.”

Ground no. 12 relating to donation to DAV Trust:

“16. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee’s own case for the A.Y. 2006-07 passed in ITA No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:-

“2.7 We have heard both the parties. This issue has been considered by the Tribunal in the case of the assessee for the assessment years 2003-04 to 2005-06. It is not the case of the revenue that the assessee has paid the contribution to the trust. The claim of the assessee is that it has reimbursed the expenditure and hence the provisions of Section 40A(9) may not be applicable. The Hon'ble Rajasthan High Court in the

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case of CIT Vs. Rajasthan Spinning & Weaving Mills Ltd., 281 ITR 408 had an occasion to consider the allowability of expenditure relating to the donation of bus to school. In that case, the AO was of the view that the school is not owned by the company and the entry in the school is also not restricted to the wards of the workmen and staff members of the company. The expenditure was treated as donation. The Hon'ble Jurisdictional High Court in the case CIT Vs. Rajasthan Spinning & Weaving Mills Ltd.,(supra) observed that the question of claim to deduction of any amount spent by the assessee as expenditure laid out wholly and exclusively for the purpose of assessee's business is not to be decided in the light that the assessee must be entitled to the whole benefit accruing from such expenses and nobody else should be sharing this benefit as is derived by the assessee by dint of such expenses. The Hon'ble Bombay High Court in the case of CIT Vs. B.C. Shirke & Co., 264 ITR 83 had an occasion to consider the allowability of contribution to the three trusts formulated for the welfare of the employees. The Hon'ble Bombay High Court in this case has observed as under:-

‘’Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income- tax Act. Such expenditure has nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with the employees is an expenditure for the carrying on of the business. In this view of the matter, in the facts of this case, where there is no dispute about the bona fides in creation of the trusts or utilisation of the funds contributed by the assessee to the trusts, we have no hesitation in holding that the expenditure incurred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under section 37 of the Income- tax Act.”

By respectfully following the order of the Coordinate Bench in assessee’s own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue’s appeal is dismissed.”

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Ground No. 2 relating to compensation on account of loss on sale of Fertilizers Bonds:

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the assessee was expected to declare Rs. 1061.98 Lac in its books of account of compensation receipt from Government. As per the Assessing Officer, on the one hand, the assessee had sold the Fertilizer Bonds as per the terms and conditions laid down in Government’s OM dated 31.03.2011 and on the other hand, the assessee chose to ignore para (c) of the same OM which says that the Government has decided to share at least 50% of the loss on sale of Fertilizer Bonds. As per the Assessing officer, since the assessee is consistently following mercantile system of accounting, the receipt of Rs. 1061.98 Lac on account of compensation received from the Government on account of loss on sale of Fertilizer Bonds during the period relevant to A.Y. 2011-12 accrued to the assessee in the financial year 2010-11 relevant to A.Y. 2011-12 even through the compensation was actually received in the subsequent financial year relevant to A.Y. 2012-13. Therefore, the AO made an addition of Rs 1061.98 Lac to the declared income of the assessee.

“The only question remained is whether the amount of Rs. 1061.98 Lacs was to be treated as received/receivable in A.Y. 2011-12 or 2012- 13. If we tax the same in A.Y. 2011-12, we would have to allow equal amount of reduction in A.Y. 2012-13.

The assessee submitted that the compensation was received in A.Y. 2012-13 and was also determined in A.Y. 2012-13. On the other hand, the AO stated that the compensation by Government of India was promised vide O.M. dated 31.03.2011.

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The Government of India promised to pay compensation of 50% amount of actual loss incurred on sale of fertilizer bonds in A.Y. 2011- 12, however, the actual amount of compensation was determined in subsequent year. In my opinion, what is crucial from the point of view of a businessman is the actual determination, and not the promise. As the compensation was determined and paid in A.Y. 2012-13, the assessee has rightly offered the same for taxation in A.Y. 2012-13.

The AO is therefore directed to delete addition of Rs. 10,61,98,000/-.”

“ Subject- Reimbursement of losses occurred to fertilizer companies on account of buy back of fertilizer bonds by RBI.

The undersigned is directed to say that Government had agreed to reimburse 50% of losses incurred by fertilizer companies in buy back of bonds by RBI. The 50% of the total losses incurred by the fertilizer companies as communicated by FAI is Rs. 890.94 crore. The 50% of the total losses incurred by the fertilizer companies as computed by Budget Division Department of Economic Affairs in consultation with RBI and Middle Office is Rs. 778.93 crore. The Budget Division of DOEA has directed to reconcile the figure of losses with RBI, pending reconciliation, it has been decided to make partial payment to the extent of 70% of 50% of total losses on buy back of bonds, by RBI in

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both the tranches as per the figures provided by DOEA. According, it has been decided to reimburse the losses to various fertilizers companies as per the amount mentioned in the attached statement.

Director (FA), DOF and Director (F&A), FICC (for indigenous use) are requested to make payment to the concerned fertilizer companies as per the enclosed statement, based on the claims made by them duly vetted by auditors of the companies, as per the prescribed procedure.

These issues with the concurrence of IFD vide DY. 1940 dated 9/3/2012.”

“20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.”

“27. Applying the three tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only

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hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”

“32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to be public coffers.”

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buy back of fertilizers bonds and also to compensate atleast 50% of loss suffered on sale of such fertilizer bonds. The compensation is thus linked to the actual sale of the fertilizers bonds and the fact that the assessee company has sold 50% of its holding of such fertilizer bonds during the year is not in dispute. As per the assessee company, as the actual mechanism for determination of such compensation was not notified by the Government of India, it has not accounted for the same in its books of accounts following the well-accepted policy of prudence in terms of Accounting Standard 9 - Revenue recognition and Accounting standard 12- Accounting for Government Grants and has thus not offered the same to tax. Subsequently, vide O.M dated 13th March, 2012 issued by the Department of Fertilizers, Government of India, the compensation of Rs. 2319.04 Lacs was determined by the Government of India and communicated to the assessee company and the same was reported and offered to tax in AY 2012-13. To our mind, the Assessing officer has not appreciated the accounting policy of prudence which is a well-accepted policy under the mercantile system of accounting. Accounting policy of prudence basically means that in view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. The realization or certainty of realization is thus essential for recognition of revenues. In the context of government grants and compensation which involves lengthy governmental procedures of determination, quantification and subsequent approvals from the administrative and finance approving authorities, it is prudent on the part of the assessee company to account for the compensation when there is a certainty of quantification and actual realization which has happened in AY 2012-13. Further, following the ratio laid down by the

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Hon’ble Supreme Court in case of Excel Industries, it will make a minor tax effect on a standalone basis where the compensation has been offered in AY 2012-13 instead of impunged assessment year 2011-12 as the basic tax rates are constant @ 30% for the companies though the surcharge on such taxes are payable @ 7.5% in AY 2011-12 which has been reduced to 5% in AY 2012-13. In the result, we upheld the order of the ld CIT(A) and the ground of Revenue’s appeal is dismissed. Ground No. 4 relating to loss on revaluation of Inventories:

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of the pumps in assessee’s books of account tantamount to discarding of the pumps, the assessee has already written off pumps in its books of account for F.Y. 2005-06 relevant to assessment year 2006-07 when the assessee has originally claimed a loss of Rs. 42,38,664/-. Therefore, it was held by the Assessing Officer that by any logic, the loss of Rs. 42,38,664/- cannot be said to be pertaining to F.Y. 2010-11 and thus, the assessee has failed to substantiate its claim for loss of Rs. 42,38,664/-and the same was disallowed.

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“8.6 We have heard both the parties. We also required the assessee to give brief note in respect of inventory written off. The brief note is as under:- “ The auxiliary oil pumps (AOP) were procured in the year 2000 in package under the expansion project. The cost of mechanical sale of the imported auxiliary oil Pump was Rs. 21,42,684/- per seal. The OEM for these pumps was M/s Taikokikai, Japn. In the course of time these, AOPs were also developed indigenously. We have procured four indigenous pumps (alongwith seal) from M/s Shilpa Trade Links (P) Ltd. against purchase order no. 45,495 dated 27- 11-2002 which were received in the plant on 05-03-2003 under Invoice No. 443 dated 21-02-2003. The total invoice value was Rs. 93,441/- for four pumps (i.e. Rs. 23,352/- per pump). One such pump was successfully installed in Urea-II plant on 27-01-2006 in place of imported pump and was operating smoothly. The cost of imported mechanical seals of the imported AOP is roughly hundred times the cost of complete indigenous pump (including seal). As these imported pumps were lying in the stores at the closing of the year, the valuation of the same was to be made as per the accounting policies followed consistently i.e. at monthly weighted average cost or net realizable value, whichever is lower. Hence, the cost of two imported mechanical seals of AOPs has been reduced to Rs. 46,704/- and difference of Rs. 42,38,664/- was charged to profit and loss account in the assessment year 2006-07.”

8.7 Form the above note, it is clear that the cost of indigenous pumps was less as apparent from purchase order dated 27-11-02. From this, it is not clear that the pumps have become obsolete during the year

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under reference. It is not the case of the assessee that such pumps have been discarded during the year under reference. The assessee cannot be given a choice of adjusting the business loss. It is that there is loss on account of revaluation but such loss was evident in the earlier years. We therefore, record the findings that the loss will be allowable as and when the pumps are treated as scrap or are sold. Therefore, the disallowance of loss of Rs. 42,38,664/- does not relate to the year under consideration and therefore, the AO was justified in deleting the disallowance.”

Ground No. 6 relating to loss on derivative transactions:

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order in MA no. 96/JP/18 dated 16.10.2018 are contained at para 22 & 23 of its order which are reproduced as under:-

“22. We have heard the rival contentions and purused the material available on record. The factual position which emerges is that out of provision for loss on derivative transaction of Rs. 92,79,756 disallowed by the AO, Rs. 58,55,094 is related to Interest rate Swap transactions and balance Rs. 34,24,662/- is related to forward cover transaction. The interest Rate Swap transaction is related to foreign currency borrowing of US$ 25 million for its Fertilizer Division for capitalization of revamp project at Libor linked interest rate. Further, in respect of forward cover transactions, two forward cover transactions are related to import of traded products (Rs.8,00,000/- of ING and Rs. 8,00,000/- of HDFC) and other two transactions are in respect of capital items (Rs. 9361.58 of HDFC and Rs. 18,15,300/- of ING).

“23. The interest Rate Swap transaction is related to foreign currency borrowing for the purposes of capitalization of revamp project in respect of assessee’s Fertilizer division. Similarly, two forward cover transactions are in respect of capital items. These all these transactions are on capital account. These interest rate swap transactions are closely connected and linked to the transaction of foreign currency borrowings for the purposes of acquisition of capital assets. Just like interest on borrowings for the purposes of acquisition of a capital asset (till the time the asset is first put to use) has to be capitalized and cannot be claimed as revenue expenditure, on same footing, any hedging cost or loss incurred for hedging the interest rate risk on such foreign currency borrowings for capital purposes have to be on capital account and the same cannot be allowed as revenue expenditure. Any liability or loss

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arising in respect of such transactions shall thus be on capital account. In the instant case, where the revamp project has been capitalized and interest cost post capitalization has been claimed and allowed by the Revenue, corresponding hedging cost or loss incurred for hedging the interest rate risk on such foreign currency borrowings should be allowed. The matter relating to IRS transactions amounting to Rs. 58,55,094 is thus allowed. Two forward cover transactions are related to import of traded products and are however on revenue account and the loss on account of such transaction is hereby allowed. In the result, revenue’s ground of appeal is partly allowed.”

Ground No. 8 relating to disallowance of interest on borrowed funds on account of investment in Mutual Funds Units:

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that since the assessee has failed to prove any commercial expediency for utilizing interest-bearing borrowed funds for making investment in units of Mutual Funds, he took average rate of interest @ 9% and computed the interest for the period of holding of the respective mutual fund units and computed an amount of Rs. 1,52,06,275/-. The Assessing Officer further held that the assessee is not carrying on business of purchase and sale of units of Mutual Funds, therefore, it cannot be said that the interest of Rs. 1,52,06,275/- was expenditure incurred by the assessee for the purpose of its business. The assessee could have saved interest to the extent of Rs. 1,52,06,275/-, had it not made investment in Mutual Funds. thus, it is proved that the assessee has diverted borrowed funds for making investment in Mutual Funds. Accordingly, out of total interest expenditure of Rs. 101.95 Crore paid on borrowed funds, the expenditure of Rs. 1,52,06,275/- has been incurred by the assessee-company to earn exempted income of Rs. 79.38 Lac by way of tax-free dividend on units of mutual funds hence, the same was disallowed and brought to tax in the hands of the assessee company.

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the year under consideration was submitted stating that as it is evident from the said statement that the investment in Mutual Funds was made from cash generated from business operations including subsidy & market collections, collection from sales, redemption of MF and interest of fertilizer bonds etc. It was further submitted that the investment in Mutual Funds were made from the cash credit account duly maintained with HDFC Bank and the HDFC Bank has charged total interest of Rs. 28,56,303/- for the year under consideration. It was further submitted that such investment in Mutual Funds were made for treasury operations and such operations include managing short term surpluses or deficits of funds and they cannot be any question of commercial expediency for the same hence, it is part of the assessee’s business operations to manage short term surpluses or deficits. It was further submitted that no disallowance can be made out of the interest expense for making investment in the Mutual Funds units.

“The assessee had huge surplus as well as huge loans, therefore, it was possible that the investment could be out of internal accruals or out of borrowings or partly from internal accruals and partly out of loans. Last year, I have held that interest related to investments which were out of borrowed fund was disallowable.

The AO has not established any nexus between the borrowed funds and the investment. On the other hand, the assessee claimed that the investment in mutual fund was not from borrowed funds but was out of

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internal accruals like sale of fertilizer bonds, redemption of mutual funds, normal collections and maturity of FDs. The assessee submitted cash flow statement in relation to investment in bonds, it was seen that the investment was out of normal collections, subsidy, redemption of mutual fund. Therefore, the AO is directed to delete addition of Rs. 1,52,06,275/-.”

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the purpose of business operations, then it cannot be said that such borrowings are for the purposes of making investment in Mutual Fund units and any interest incurred for the said period is a normal business expenditure. Further, nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other accounts and the nature of such funds from other accounts – in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then invested in mutual funds, again a nexus is established between the borrowed funds and the investments in mutual funds. In our view, this particular aspect of the matter in terms of nature and movement of funds has not been examined by either of the lower authorities even though the assessee had said very clearly in its submissions that cash credit account maintained by the HDFC Bank was used for making the investment in the Mutual Funds. We, therefore, deem it to appropriate to remand the matter to file of the Assessing Officer to examine this particular aspect afresh in light of above discussions. In the result, ground is allowed for statistical purposes.

Ground no. 1 of the Assessee’s appeal relating to depreciation on video conferencing equipments:

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“4.41 In this respect our submissions is as follows: The assessee claimed depreciation in installation of video conferencing system @ 60% being computers or its parts and components,:- i) Video audio conferencing Rs. 7,08,500/-. ii) Video Conferencing Equipment of Rs. 12,54,499/-.

All the above are computers or its parts and components. The complete details along with invoices were submitted during the course of assessment proceedings and are available for your kind

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verification. The capitalisation pertains to installation of video conferencing system. It is humbly submitted that Video Conferencing equipments are covered under the umbrella of Computers and parts with reference to claim the depreciation. In this regard, the definition available in section 2(1)(t) of the Information Technology Act, 2000 is relevant for understanding the meaning of computer which is as follows: "As per the said Act, "computer" means any electronic, magnet, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulation of electronics or magnetic or optical impulses and includes all input- output processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network". Further, we wish to state that: A video conference system is a computer device, it accepts information (in the form of digitalized data) by way of video input (webcam or video camera) & audio input (microphones) and process the data and transfer through analog or digital telephone network or LAN and gives the output data by way of video output (monitor, television or projector) and audio output (loudspeakers associated with display device or telephone). A computer is a programmable machine. The two principal characteristics of a computer are:- 1. It responds to a specific set of instructions in a well defined manner. 2. It can execute a prerecorded list of instructions Modern computers are electronic and digital. The actual machinery (Hardware) includes webcam, speakers in addition to input device, output device and central processing unit. Every computer is also requires a bus that transmits data from one part of the computer to another. The video conference system is nothing but a computer input device for data capturing and transfer for communication purpose.

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Please find enclosed case law viz Crabtree India Ltd. Vs. Assistant Commissioner of Income-tax, Circle 3(1), New Delhi [[2010] 38 SOT 479 (DELHI)] that supports the assessee's contention. The L’d Assessing Officer has placed reliance on the case of Federal bank Ltd. v/s ACIT (2011) 332 ITR 319 that relates to EPABX and mobile phones that understanding cannot be treated as “computer” and has to relevance to the assessee case. Considering the above submissions it is requested that the addition of Rs. 8,83,349/- to total income by restricting depreciation @ 60% on video conferencing equipment to 15% may kindly be deleted.”

“4. We have perused the orders and heard the rival contention. Claim of the assessee before the AO, was that the audio/video conference equipment and video streaming equipment were also net working equipment eligible for depreciation at 60%. The AO had held the claim of the assessee to be farfetched.

According to him, the devices had long period of effective use and were not amenable to virus attacks or redundancy. Learned CIT(A) also approved such view, taken by the AO and held that such equipment would be eligible for only 15% depreciation as available for general plant & machinery. In this regard, we find that the similar issue had come up before this Tribunal both for the assessment year 2008-09 & 2009-10 in assessee's own case. Relevant para no.5 of the

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order of this Tribunal in IT(TP)A No.116(B)/2014 dated 10-10-2013, for assessment year 2009-10 is re-produced hereunder:

“5. As regards the first issue i.e. depreciation on networking equipment allowed at 15% as against 60% as claimed by the assessee, we find that the issue is covered in favour of the assessee by the decision of this Tribunal, to which one of us i.e. the Judicial Member is the signatory, in assessee's own case for assessment year 2008-09 in IT(TP)A No.1558/Bang/2012 dated 19/9/2014. The Tribunal in para.6 to 8.3 of its order has considered this issue at length and has held as under:

“6. Having heard both the parties and having considered the rival contentions as well as the material on record, we find that the issue is covered in favour of the assessee by the decision of the Apex Court as well as the Special Bench (cited supra) as regards depreciation on routers and switches is concerned and the AO, for the assessment years 2006-07, 2007-08 and 2010-11, has followed the same in allowing depreciation at the rate of 60%. In view of the same, we direct the AO to adopt the said rationale for the relevant assessment year also and allow depreciation at the rate of 60% on routers and switches.

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The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that they have considered the issue at length and have given elaborate reasons for treating these equipments as 'plant and machinery’ only and not as computer.

8.1 As per the details furnished by the learned counsel for the assessee, audio and video conferencing system comprise of audio-video devices/equipments which facilitate in bringing people at different sites together for a meeting. Besides the audio and visual and meeting activities, these systems can also be used to share document, computer information and boards, Conferencing works across IT net- work, ISD through computers/computer network etc., and audio/video facility consist of many elements including the use of CODEC which stands for coder-decoder. Codec is a device, which converts and compresses an analog audio-video signal into digital data and then sends it over a digital line. The decoder reverses the processes at the receiving end and this compression and decompression allows large amount of data to be transferred across a network at close to real time. Conferencing systems make use of various end points in a system such as video input consisting of camera, video output in the form of microphones and speakers etc. The data transmission happens in a number of ways depending on the technology being used including digital technologies

36 ITA No. 461/JP/2015 & 575/JP/2015 M/s Chambal Fertilizers & Chemicals Ltd. Vs. ACIT

as well as analog technologies, broadband internet connection and radio frequencies which can include satellite transmission and Wifi. Therefore, according to the learned counsel for the assessee, computer system is extremely important to conferencing process and therefore the audio visual transmission equipment should be considered as part of a computer.

8.2 Regarding the video streaming equipment, it was submitted that the video streaming allows user to begin viewing the video clips stored in a server without first downloading the entire file and after a brief period of initiating and buffering, the file will begin to stream or play in real time. Video streaming involves a series of steps involving the use of media content, a computer that runs encoding software, servers for upholding the streamed media format and access to such media through various devices. From the above submissions, it is clear that the equipment used by the assessee for audio visual conferencing and also video streaming involves the use of computer. As certain input and output equipment may have independent functionality and existence but the computer devices which are involved in these activities would be of no use if these input and output devices are not used. Therefore, though the input and output devices may have independent existence and functionality in so far as the activity of the assessee is concerned, they do form part of the computer network system without which the computer used for the purpose of audio and video conferencing would be useless. The Special Bench of the Tribunal in the case of Datacraft India Ltd., (cited supra) has held that peripheral equipments used along with computer are also part of the computer. We find that a similar issue had come up before 'B' Bench of the Tribunal at Delhi in the case of M/s. Crabtree India Ltd. vs. ACIT in ITA Nos.3638 &

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3639/Del/2008 and the Tribunal vide orders dated 25-2-2010 has held that video conferencing system is a computer device that accepts information in the form of digital data by way of video input i.e. with the help of web/cam or video camera and audio input with the help of microphone and the system thereafter processed the data and transfer through analogue or digital telephone network or LAN and digital gives the output data by way of audio video output. Therefore, it is a technical device whose functions are similar to the computer because basically computer also responds to a specific set of instructions in a well defined manner. The Tribunal considered the decision of the ITAT, Calcutta Bench in the case of ITO vs. Simran Majumdar (98 ITD 119) wherein the Tribunal had considered the similar issue wherein depreciation at the rate of 60% was claimed on printers and scanners and it was held that they were eligible for depreciation at the rate of 60%. The Tribunal, however, held that the contentions of the assessee therein were not before the AO and therefore the issue was set aside to the file of the AO to consider each of the items in detail and find out which can be equated and construed as computer for the purpose of granting depreciation at the rate of 60% after providing the assessee due opportunity of hearing.

8.3 In the case before us also, all the components of the equipment are necessary for fulfillment of the objective of the audio-visual conferencing and video streaming. Some of the components may exist independently and may also be functioning independently but in the assessee's business they are only performing the functions as input and output devices. The assessee can also use this equipment independent of the computer system used in the audio visual

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conferencing and video streaming activity. But did the assessee use them independently is the question. In view of the same, we are of the opinion that the AO, instead of classifying the entire equipment as plant and machinery and not computer, is required to examine each item in detail as regards its functional dependency on the computer and its independent existence. The items which are functionally dependent on computers are definitely part of computer and the items with independent existence may not be computers but wherever it is found that the device is not used independent of the computer system and the purpose of audio visual conferencing and video streaming, the same shall be treated as computers and wherever it is used independently for any other purpose it shall be treated as plant and machinery. The AO, shall, thus allow depreciation at the rate of 60% on the equipment which could be classified as computer and at the rate of 15% on the equipment which could be classified as plant and machinery. This issue is accordingly set aside to the file of the AO for re- adjudication in accordance with law and our observation above".

Respectfully following the decision of the co-ordinate bench of the Tribunal in the assessee’s own case, we remand the issue to the file of the AO with similar directions. Needless to mention the assessee shall be given a fair opportunity for hearing”

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equipment which could be used only in conjunction with the computer. Similar directions as given earlier in the two earlier assessment years are issued here also. Ground No. 1 & 2 of the assessee are treated as allowed for statistical purposes.”

Ground No. 3 of the assessee’s appeal relating to disallowance under section 14A of the Act:

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Director, at least Shri Abhay Baijal, Vice President ( Finance) must have been involved in the decision-making process. As per Annual Report of the assessee-company (page-13), remuneration of Rs. 1,19,50,079/- was paid to Shri Anil Kapoor during the year. Further, as per the assessee, remuneration of Rs. 48,87,627/- was paid to Shri Abhay Baijal during the year. As per Assessing officer, considerable part of their time and energy as well as some part of time and energy of other personnel dealing with financial/ banking matters must have been spent in connection with earning of tax-free dividend income under reference. The Assessing officer accordingly held that in view of the legal and factual position, it is held that expenditure attributable to making of investments of Mutual Fund Units on which tax-free dividend income of Rs. 79.38 Lac has been earned by the assessee is required to be disallowed U/s 14A, since he was not satisfied with the claim made by the assessee that no expenditure has been incurred in relation to the dividend income of Rs. 79.38 Lac. The disallowance U/s 14A read with Rule 8D is worked out at Rs. 13,75,000/- as per calculations below:-

One-half persent of average value of investments in Mutual Fund Units on the first day and last day of the previous year ended on 31.03.2011 i.e. 0.5% of (55.00+Nil) Crore = Rs. 13,75,000/- 2 38. During the course of appellate proceeding before the ld. CIT(A), the assessee company submitted that it did not engage any person specifically for this job and the employees dealing with banking job also take care of the investments in Mutual Funds, which is not business of the assessee. Additionally, it was submitted that the efforts put to do such investment in Mutual Funds are miniscule and very low as

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compared to the other banking transactions of the company as a whole hence, the addition of Rs. 13,75,000/- needs to be deleted. On appeal, the ld. CIT(A) has confirmed the said addition and now the assessee in appeal before us.

“37. Regarding other administrative/indirect expenses which can be attributed to the purchase and sales of these mutual fund units and disallowance under Rule 8D(iii), the Assessing Officer observed that there are total 19 transactions involving crores of rupees which have been invested in units of various mutual funds totalling to Rs. 419.50 crore and the top management of the assessee company would obviously have decided /approved these investments. It was observed by the Assessing Officer that apart from Shri Anil Kapoor, Managing Director, at least Shri Abhay Baijal, Vice President- Finance must have been involved in the decision making process and as per annual report of the asessee company, remuneration of Rs. 1,05,56,246/- and Rs. 41,55,642/- were paid to Shri Anil Kapoor and Abhay Baijal respectively during the year. It was observed by the AO that considerable part of their time and energy as well as some of the time and energy of other personal dealing with financial/banking matters must have been spend in connection with earning tax free dividend income. Thereafter, the AO has applied Rule 8D(iii) and worked out disallowance of Rs 88.75 lacs. During the course of hearing, the ld AR submitted that the assessee company did not engage any person specifically for the job and the

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employees dealing with banking job also take care of investments in the mutual funds and further, even where the top management of the assessee company can be said to have been involved in atleast the decision making process of making the subject investments, the disallowance cannot be determined at Rs 88,75,000 which works out to approx. 60% of their salary expenditure of Rs 1,47,11,888 of these two key personnel of the assessee company. We find substance in the argument of the ld AR and are of the view that even though the formula for working out the disallowance has been provided under Rule 8D(iii), the same cannot be read as devoid of actual expenditure incurred or reasonably determined having regard to the books of accounts of the assessee company. The matter is thus set-aside to the file of the AO to determine reasonable expenditure which can be said to be attributed to subject investments in the mutual fund units and which can be disallowed under Rule 8D(iii) of the Act.”

Ground No. 5 of the assessee’s appeal relating to disallowance of interest on borrowed funds:

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44 ITA No. 461/JP/2015 & 575/JP/2015 M/s Chambal Fertilizers & Chemicals Ltd. Vs. ACIT

45 ITA No. 461/JP/2015 & 575/JP/2015 M/s Chambal Fertilizers & Chemicals Ltd. Vs. ACIT

power projects in the States of Orissa and Chhattisgarh, the investment in CIVL is a strategic investment for business purposes, the CIVL had set up two wholly owned subsidiaries for taking up power projects in the State of Chhattisgarh and Orissa.

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same or other areas. It was submitted that the assessee has earned a profit of Rs. 325.18 Crores during the year and it has huge reserves and surplus wherein the general reserves are to the tune of Rs. 19695.36 lacs and balance to the credit of profit and loss account accounting to Rs. 96054.08 lacs. It was further submitted that without prejudice to the assessee’s contention that internal accrual were used for making loans and advances to subsidiaries, Section 36(1)(iii) of the Act does not prohibit allowance of interest if the loan or advance is made to subsidiary. The only condition is that the money should be borrowed for the purpose of business and used for the purpose of assessee’s business. It was submitted that in the instant case, the assessee has given the details of loans and advances and purpose of the loans and advances to various companies, therefore, it is for the AO to examine the facts and prove that conditions stipulated for claiming deduction U/s 36(1)(iii) of the Act are not satisfied. In support, reliance was placed on the various Hon’ble Supreme Court and High Court decisions which are listed as under:- • S.A. Builders Ltd. vs. CIT(A) (2007) 158 Taxman 74 (SC) • Munjal Sales Corp. vs. CIT & Anr. (2008) 168 Taxman 43 (SC) • Hero Cycles (P.) Ltd. vs. CIT 63 taxmann.com 308 (SC) • CIT vs. Reliance Utilities & Power Ltd. (2009) 178 taxman 135 • Hindalco Industries Co. CIT (2016) 389 ITR 430 • CIT vs. Max India Ltd. (2017) 398 ITR 209

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that the assessee company has admitted that loans were given from assessee’s cash credit account, therefore, it can be presumed that loans were from borrowed funds. However, the assessee company’s contention is that no specific borrowings have been made for purposes of giving loans/advances and the same were made out of its internal accruals. In this regard, we note that the assessee in its submissions before the lower authorities has stated that the investments and loans/advances to its subsidiaries have been made from the cash credit account maintained with the SBI Bank wherein the Bank has charged total interest of Rs. 2,84,689/- for the whole of the year. Depending on the position of the funds in the said cash credit account on a given day, where the withdrawals are more than the deposits in the said cash credit account, the surplus withdrawals are in the nature of short term borrowing from the bank on which the bank has levied interest. If such borrowings are used for the purposes of making the loans/advances, then there is clearly a nexus between the borrowings and the loans/advances and interest to that extent is directly related to giving of loans/advances, however, where the surplus borrowings are used for the purpose of business operations, then it cannot be said that such borrowings are used for the purposes of making loans/advances and any interest incurred for the said period is a normal business expenditure. Further, nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other accounts and the nature of such funds from other accounts – in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then utilized in giving loans and advances, again a nexus

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is established between the borrowed funds and the loans/advances. In our view, this particular aspect of the matter in terms of nature and movement of funds has not been examined by either of the lower authorities. Merely because the loans were given from assessee’s cash credit account, a simplistic presumption cannot be drawn that loans were from borrowed funds given that the cash credit account is likely to have credits in terms of deposits from assessee’s business operations. The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to the subsidiaries/group companies. We, therefore, deem it appropriate to remand the matter to the file of the Assessing Officer to examine this particular aspect afresh in light of above discussions. In a scenario, where it is established that the borrowed funds have been utilized for making the loans and advances, the question of commercial expediency arises for consideration and the ratio laid down by the various Courts as relied upon by the ld AR needs to be examined and which we have kept open and not dealt with at present. The assessee shall be at liberty to raise the same before the Assessing officer. Needless to say, the Assessing officer shall provide reasonable opportunity to the assessee and the latter shall submit the desired information/documentation as so desired by the Assessing officer. In the result, ground of appeal is allowed for statistical purposes.

Additional Ground No. 6 of the assessee’s appeal relating to loss related to fertilizers bonds sold during the year:

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“18. As it is clear from above, in the above referred case, the assessee had claimed a loss of Rs. 53,650 sustained on disposal of its subscription in the Orissa Government Floated Loan, 1972. There was actual disposal of the Orissa Government floated loan unlike in the case of the assessee company where there is no disposal of the Fertilizers Bonds and the assessee company continues to hold these bonds. In that background of the case, it was held that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss. No doubt, in the instant case, the assessee company has accepted these bonds in settlement of its subsidy dues in the course of its fertilizers business guided by the policy directive of the Government of India whereby subsidy dues were settled and

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substituted through issuance of Fertlizers Bonds. At the same time, the assessee company continues to hold these bonds as on the close of the financial year and have not disposed them off. Applying the ratio laid down in the said decision of the Hon’ble Supreme Court, the assessee company would accordingly be allowed to claim the loss, if any in the year of actual disposal of the Fertilizer bonds and not in the year under consideration on account of valuation of such Fertilizers Bonds. In the result, the revenue’s ground of appeal is allowed and the findings of the ld CIT(A) are set- aside.”

Ground No. 3 of Revenue’s appeal and ground No. 2 of assessee’s appeal relating to anicut expenses:

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addition of Rs. 1,53,27,956/- out of total expenditure of Rs. 1,91,59,945/- in relation to construction of an anicut facility.

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construction of anicut of Rs. 669.45 lac which was debited to the profit and loss account in the subsequent financial year relevant to assessment year 2012-13 on completion of construction, and as the assessee has already claimed deduction of Rs. 1,91,59,946/- in the year under consideration, the said amount was duly offered to tax in the assessment year 2012-13. It was further submitted that as far as books of accounts were concerned, the expenditure on construction of anicut on the land not owned by the assessee is not covered under the definition of “asset” and in the instant case, the anicut is being constructed on the land not owned by the assessee, hence, the same has not been capitalized in the books of account.

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over Parwan river has given a benefit of enduring nature to the assessee since the assessee has obtained assured supply of water which is being used in manufacturing process carried out by the assessee for a long period of time. Accordingly, anicut expenses of Rs. 1,91,59,945/- incurred by the assessee during the year relevant to impugned assessment year constitute capital expenditure and the assessee’s claim of deduction made in computation of income by treading these expenses as revenue expenses was not found admissible.

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“3. But the position is different when we come to the second item of expenditure of Rs. 50,000. There the assessee is clearly on firmer ground. The amount of Rs. 50,000 was contributed by the assessee under the Sugarcane Development Scheme towards meeting the cost of

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construction of roads in the area around the factory. Now, there can be no doubt that the construction of roads in the area around the factory was considerably advantageous to the business of the assessee, because it facilitated the running of its motor vehicles for transportation of sugarcane so necessary for its manufacturing activity. It is not as if the amount of Rs. 50,000 was contributed by the assessee generally for the purpose of construction of roads in the State of U.P., but it was for the construction of roads in the area around the factory that the contribution was made and it cannot be disputed that if the roads are constructed around the factory area, they would facilitate the transport of sugarcane to the factory and the flow of manufactured sugar out of the factory. The construction of the roads was, therefore, clearly and indubitably connected with the business activity of the assessee and it is difficult to resist the conclusion that the amount of Rs. 50,000 contributed by the assessee towards meeting the cost of construction of the roads under the Sugarcane Development Scheme was laid out wholly and exclusively for the purpose of the business of the assessee. This conclusion was indeed not seriously disputed on behalf of the Revenue but the principal contention urged on its behalf was that the expenditure of the amount of Rs. 50,000 incurred by the assessee was in the nature of capital expenditure, since it was incurred for the purpose of bringing into existence an advantage for the enduring benefit of the assessee's business. The argument of the Revenue was that the newly constructed roads, though not belonging to the assessee, brought to the assessee an enduring advantage for the benefit of its business and the expenditure incurred by it was, therefore, in the nature of capital expenditure. The Revenue relied on the celebrated test laid down by Lord Cave L.C. in British Insulated &

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Helsby Cables Ltd. vs. Atherton (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated :

"When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade,.....there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

This test enunciated by Lord Cave L.C. is undoubtedly a well- known test for distinguishing between capital and revenue expenditure, but it must be remembered that this test is not of universal application and, as the parenthetical clause shows, it must yield where there are special circumstances leading to a contrary conclusion. The non-universality of this test was emphasised by Lord Radcliffe in Commr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) : TC16R.991, where the learned Law Lord said in his highly felicitous language that it would be misleading to suppose that in all cases securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". It was also pointed out by this Court in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC16R.953, thus :

"There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial

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sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future."

Now it is clear on the facts of the present case that by spending the amount of Rs. 50,000, the assessee did not acquire any asset of an enduring nature. The roads which were constructed around the factory with the help of the amount of Rs. 50,000 contributed by the assessee belonged to the Government of U.P. and not to the assessee. Moreover, it was only a part of the cost of construction of these roads that was contributed by the assessee, since under the sugarcane development scheme, one-third of the cost of construction was to be borne by the Central Government, one-third by the State Government and only the remaining one- third was to be divided between the sugarcane factories and sugarcane growers. These roads were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centres. There can be no doubt that the construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. It is no doubt true that the advantage secured for the business of the assessee was of a long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in

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the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50,000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable and it was clearly an expenditure on revenue account.”

“2. The relevant facts, very briefly stated, are as follows :

The case relates to the asst. yr. 1973-74. The respondent-company was incorporated in 1960 and carries on business of manufacture of chemicals. During the year of account ended September 30, 1972, relevant to the aforesaid assessment year, the respondent set up a new unit at Bhavnagar for the manufacture of phosphorus. For the purpose of manufacture of phosphorus, the respondent required for consumption a large quantity of electrical energy which it had to obtain from the Gujarat Electricity Board. For this purpose, the respondent entered into an agreement with the Gujarat Electricity Board under which the said Board agreed to provide an overhead service line free of cost up to 30 metres from the nearest distribution mains. The said agreement provided that for the length of the service line in excess of 30 metres, payment was to be made by the respondent. The agreement provided that notwithstanding that a portion of the cost had been paid for by the consumer, the service line would remain the property of the Gujarat Electricity Board, by whom it was to be maintained. In this

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connection, the respondent paid a sum of Rs. 9,00,000 to the Board during the period May 4, 1970, to March 29, 1972, as its contribution towards the cost of laying the overhead service line. These payments were charged to the respondent-company's accounts for the year October 1, 1971, to September 30, 1972, relevant to the asst. yr. 1973- 74. The respondent had to pay to the Gujarat Electricity Board, of course, the normal charges of consumption of electricity from month to month. The ITO took the view that the contribution of Rs. 9,00,000 paid by the respondent to the Gujarat Electricity Board towards the cost of laying the overhead service line was an expenditure of a capital nature, as the said service line had brought to the respondent an advantage of an enduring nature. On an appeal by the respondent, the AAC treated the said expenditure as an expenditure of a revenue nature. The Department appealed to the Tribunal, which upheld the conclusion of the AAC.

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consumed by it. There is also no doubt that the contribution was made by the respondent for the purposes of commercial expediency, namely, for assuring the supply of electricity which was essential for the manufacture of phosphorus.

“2. The facts for the purpose of answering this question may be stated as follows: The assessee is a Government undertaking in the public sector engaged in the refining of crude oil and production of various kinds of by-products. The assessee contributed a sum of Rs. 87,20,598 to the Railway Department for construction of railway track and siding,

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etc., outside the refinery complex. The assessee claimed the said expenditure as revenue expenditure because according to the assessee the expenditure was for carrying out its business activity in a profitable and advantageous manner. The assessee decided to write off the aforesaid expenditure in five equal annual instalments and accordingly claimed deduction of Rs. 17,44,120 in each assessment year of 1981-82 and 1982-83. The AO disallowed the same. According to him, the expenditure was a capital expenditure for the obvious reason that the assessee acquired an asset of an enduring nature.

Following the above two decisions we find that this case is squarely covered by the decisions of the Supreme Court and accordingly, we

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hold that the expenditure incurred for construction of railway track and siding was revenue expenditure and not capital expenditure and, therefore, the assessee is entitled to deduction. The next point is whether deduction can be divided and claimed in five parts. However, no provision is found under the law permitting allowance of one-fifth of the expenditure. However, deduction can be made in the relevant year if the same is incurred during that year. In this regard, we do not find any discussion in the order of the Tribunal. Therefore, it is not possible for us to answer the said question. We hold that expenditure incurred in the relevant year of assessment shall be allowed. If the expenditure is incurred in one year it will be allowed in the same year and if it is incurred in more than one year then it will be in the respective year as actually incurred. It is also not known what was the expenditure incurred during the asst. yrs. 1981-82 and 1982-83. It is for the Tribunal to find out the actual position.

“14) The High Court has also observed that it was a case of deferred interest option. Here again, we do not agree with the High Court. It has been explained in various judgments that there is no concept of deferred revenue expenditure in the Act except under specified

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sections, i.e. where amortization is specifically provided, such as Section 35-D of the Act.

15) What is to be borne in mind is that the moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs.55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax (2000) 6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote:

“The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be crtain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be disharged is not certain.”

The present case is even on a stronger footing inasmuch as not only the liability had arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year.

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16) Judgment in Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax, (1997) 4 SCC 666 was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself:

“15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year.

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But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

17) Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally

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revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.

18) What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.

19) In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta, (1972) 3 SCC

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252; Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (1997) 6 SCC 117 ; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta, (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta, (1999) 8 SCC 338].

20) At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.

21) In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs.2,72,25,000 and Rs.55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs.”

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Further, he relied on the decision of the Hon’ble Supreme Court in case of Mysore Minerals Ltd. vs CIT (1999) 239 ITR 775. Further, it was submitted that there was no basis with the ld CIT(A) to allow the said expenditure over a period of five years.

“Permission of State Government is hereby conveyed to construct an anicut of 3.0 m height by CFCL Gadepan at 70 m downstream of existing Anicut near village Rajgarh Tehsil-Sangod, District-Kota subject to the following conditions:-

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the charges of water consumed by it @ Rs. 2 per thousand cubic feet or amended from time to time. The residents of the nearby villages will be free to draw water for drinking and agriculture purposes from impounding water of existing anicut and stored water in the existing anicut near village Rajgarh will not be used by CFCL.

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obtained assured supply of water which is being used in manufacturing process carried out by the assessee for a long period of time. However, the question for consideration is whether the advantage or benefit so obtained even though of enduring nature is in capital field or not. In other words, whether any tangible assets were acquired/built by the assessee or there was any addition or expansion of the profit making apparatus of the assessee, a test which has been laid down by the Hon’ble Supreme Court in its various rulings including the rulings relied upon by the ld AR.

“9. In our opinion, the term owned as occurring in section 32(1) must be assigned a wider meaning. Any one in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings though a formal deed of title may not have been executed and registered as contemplated by Transfer of Property Act, Registration Act, etc. 'Building owned by the assessee' - the expression as occurring in section 32(1) means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as

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Transfer of Property Act and Registration Act etc. but nevertheless is entitled to hold the property to the exclusion of all others.”

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eligible for claim of depreciation under section 32 of the Act as per prescribed rate of depreciation so provided in the Income tax Rules on such anicut facility in light of decision of the Hon’ble Supreme Court referred supra.

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In the instant case, the assessee has itself constructed the anicut facility with its own funds and for its own benefit and captive consumption of water so captured in such facility and the facility thus belongs to and owned by the assessee. Thus, the said decisions are distinguishable on facts. Similarly, in case of Excel Industries, under an agreement with the Electricity Board, the assessee paid a part of the cost of laying the overhead line which remained the property of the electricity Board unlike the present case and is thus distinguishable. The decision in case of Taparia Tools is on the issue of allowability of revenue expenditure in the year of incurrence or spreading over a period of time. The same doesn’t support the case of the assessee as we have held above that the expenditure incurred on constructing the anicut facility is on capital account and not on revenue account.

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cost of anicut facility so incurred amounting to Rs. 669.45 lac starting AY 2012-13 onwards as per prescribed rate of depreciation so determined by the AO as per law and there shall be no allowance for the year under consideration. In the result, the disallowance of claim of expenditure of Rs 1,91,59,946/- in the year under consideration is sustained. In the result, respective grounds of appeal are disposed off. Ground No. 9 of Revenue’s appeal and ground no. 4 of the assessee’s appeal relating to disallowance of interest on borrowings for making investments in various group of companies:

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“4.112 The assessee invested amounts in five companies out of them three companies namely CFCL Overseas Ltd., India Steamship Pte Ltd., Singapur & Indo Morroco Phospher S.A. Morroco (IMACID) were foreign companies. As per the scheme of the Act, the income, including dividend from foreign companies was not exempt under the Income Tax Act. Therefore, section 14A does not apply in relation to these companies. Therefore, it is held that no disallowance can be made in relation to investment made in these companies.

Regarding investment in other two companies, namely Chambal Infrastructure Venture Ltd. & Zuari Investments ltd., the income (dividend) from these companies was exempt under the Income Tax Act and section 14A was applicable. In this case, it is practically difficult to identify the nexus of funds. Secondly, for disallowance u/s 14A, there is specific rule (Rule 8D) in the Income Tax Rules, which provides the method for determining expenditure in relation to exempt income. The assessee stated that as no income was received from these companies, provision of section 14A read with Rule 8D were not applicable.

When the dividend was taxable, it was held by various courts that interest expenditure was allowable whether there was any income or not. Similarly, whether assessee earns any income or not, the disallowance U/s 14A has to be made. Therefore, it is held that the disallowance in this case is to be computed as per Rule 8D read with Section 14A. The same is computed as under:-

i) Amount of Direct Expenditure Rs. Nil

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ii) Proportionate Expenditure Rs. 34.66 lacs (10978.41x452.05/143182.5)* iii) Half percent of Average Investment Rs. 2.26 Lacs Rs. 36.92 lacs [* Interest payment during the year Rs. 10978.41 Lacs Investment at the beginning of the year Rs. 764.10 Lacs Investment at the end of the year Rs. 140.00 Lacs Average Investment Rs. 452.05 Lacs Assets at the beginning of the year Rs. 125975 Lacs Total Assets at the end of year Rs. 160390 Lacs Average total Assets Rs. 143182.5 Lacs]

Therefore, addition of Rs. 36.92 Lacs is confirmed. The AO is directed to delete balance addition of Rs. 25,41,73,553/-.

This ground of appeal is, therefore, partly allowed.”

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deem it appropriate to remand the matter to file of the ld. CIT(A) in light of directions given by the Bench in A.Y. 2010-11 which are contained at para 48 of our order dated 31.01.2018 which are reproduced as under:- “48. We have heard the rival the rival contentions and purused the material available on record. The AO has made the disallowance of interest invoking the provisions of section 36(1)(iii) holding that the assessee had utilised the borrowed funds lying in its cash credit account for making the investment in subsidiary companies and has failed to prove the commercial expediency for making these investments. The ld CIT(A) has however invoked the provisions of section 14A of the Act holding that no disallowance can be made in respect of investment in foreign companies and in respect of investments in India companies, disallowance under 14A read with Rule 8D has been determined by him. What we find surprising is that the ld CIT(A) has totally ignored the whole discussions and findings of the AO which have been rendered in the context of section 36(1)(iii) of the Act and has not given any findings as to why the provisions of section 36(1)(iii) are not attracted in the instant case. The ground of appeal raised by the assessee company before the ld CIT(A) was in the context of disallowance made by the AO invoking the provisions of section 36(1)(iii) of the Act and even the submissions and contentions so advanced by the assessee company, as we have noted above, were in the context of section 36(1)(iii) of the Act. It is therefore incumbent upon the ld CIT(A) that he should while disposing off the said ground, examine whether the disallowance so made by the AO invoking section 36(1)(iii) is justified or not. Once the ld CIT(A) has examined the applicability of section 36(1)(iii) and forms an opinion that the AO has wrongly invoked the

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provisions of section 36(1)(iii) and he should have invoked the provisions of section 14A instead, in that case, we agree that the ld CIT(A) will be within his jurisdiction to examine the matter from the perspective of section 14A given that the matter forms part of assessment order and the same has been examined by the AO though in context of section 36(1)(iii). There are instances where the AO has wrongly invoked the relevant provisions of the Act, in those cases, the Courts have held that the ld CIT(A) is well within his jurisdiction to examine the matter from the perspective of correct provisions of law. Given that there is no finding recorded by the ld CIT(A) regarding section 36(1)(iii) of the Act, we are constrained to remand the matter back to his file to examine the matter afresh after providing reasonable opportunity to the assessee. In the result, respective grounds of appeal are allowed for statistical purposes.”

In the result, the grounds raised in respective appeals are disposed off in light of above findings and directions.

Order pronounced in the open Court on 17/10/2018.

Sd/- Sd/- ¼fot; iky jko½ ¼foØe flag ;kno½ (Vijay Pal Rao) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 17/10/2018. *Santosh आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Chambal Fertilisers & Chemicals Limited, Kota. 2. izR;FkhZ@ The Respondent- ACIT, Circle-2/JCIT Range-2,Kota. 3. vk;dj vk;qDr@ CIT

81 ITA No. 461/JP/2015 & 575/JP/2015 M/s Chambal Fertilizers & Chemicals Ltd. Vs. ACIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File {ITA. No. 461/JP/2015 & 575/JP/2015 } vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत