DCIT, CENTRAL CIRCLE - 2(1), KOLKATA , KOLKATA vs. M/S. PAHARPUR COOLING TOWERS LTD., , KOLKATA

आदेश /O R D E R PER S.S.Godara, Judicial Member:- These three Revenue’s appeals and assessee’s Cross Objection(s) (CO) ITA Nos. 217 to 219/Kol/2018 with CO Nos.94 to 96/Kol/2018 for assessment year(s) 2011-12 to 2013-14, arise against the Commissioner of Income Tax (Appeals)-22 Kolkata’s separate order(s); all dated 07.11.2017

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 2 passed in case Nos. 30, 31, & 32/ CIT(A)-22/11-12/15-16/Kol (assessment year-wise) respectively, involving proceedings u/s 143(3) r.w.s sec. 144C(3) of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file(s) / paper books forming part of records stand perused. It transpires at the outset that these cases involved almost identical issue(s). The same are therefore disposed of vide our ideal common adjudication.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 3 Income Tax Settlement Commission’s order pertaining to the assessment year(s) 2008-09 to 2010-11 as under:- “14. DECISION: 1. I have carefully examined the contentions of the Ld. ARs and perused the impugned order passed by the Ld. AO. From the assessment order it transpires that in the computation of income filed with the return, the appellant had suo moto offered disallowance of Rs.11,10,201/- under Section 14A of the Income –tax Act, 1961. Although in the Ground of appeal the appellant has objected to the disallowance of Rs4,67,75,000/-; I note that by an order u/s 154, the Ld. AO rectified the mistake in adopting the wrong figure of the amount disallowable and the scaled down the amount disallowed to Rs.2,55,60,000/- which inter alia included the following: Rule 8D(2)(i) : Rs.10,1l,201/- Rule 8D(2)(ii) : Rs.53,56,000/- Rule 8D(2)(iii) : Rs.2,02,04,000/- TOTAL : Rs.2,65,71,201/- Less: Already Disallowed Rs. 10,11,201/- Amount Disallowed : Rs. 2,55,60,000/- 2. From the P&L Ale of the assessee, the Ld. AO noted that during the relevant year the assessee earned dividend of Rs.1011.20 lacs in respect of which exemption was claimed. The Ld. AO required the-assessee to provide the details as to how the disallowance u/s 14A offered in the return of income was arrived at. The appellant furnished its reply dated 23.02.2015. The contentions of the assessee however did not convince the Ld. AO and therefore the Ld. AO proceeded to make the disallowance by invoking Rule 8D(2) of the I.T. Rules, 1962. 3. The Ld AO disallowed Rs.10.11 lacs by invoking Rule 8D(2)(i) being the amount which the appellant had suo moto disallowed in the computation of income. He further noted that gross interest expenditure during the relevant year was Rs.203.77 lacs which was liable to be considered for making disallowance under Rule 8D(2)(ii). Accordingly in terms of the formula prescribed in Rule 8D(2)(ii), the AO worked out interest disallowable at Rs.53.56 lacs. The Ld. AO also made disallowance out of business administrative expenses at 0.5% of the average cost of investments, and thereby disallowed Rs.202.04 lacs in terms of Rule 8D(2)(iii). 4. In their oral and written submissions, the Ld. A.Rs have strongly contested the invocation of Rule 80(2) by the Ld. AO in the impugned order. The Ld. AR submitted that although the Ld. AO disallowed a sum of Rs.I0.12 lacs under Rule 8D(2)(i), nowhere in the assessment order the AO had identified even a single specific item of expenditure which was directly incurred in relation to earning of exempt income. In all the past assessments the appellant had suo moto disallowed 1% of the dividend income earned as the amount disallowable under Section 14A of the Act. The disallowance offered at the rate of 1% represented allocation of common administrative overheads which might have been incurred by the appellant in relation to earning of dividend. The appellant's offer to make disallowance u/s 14A at the rate of 1% of the gross dividend income was in conformity with the decisions rendered by the Hon'ble ITAT, Kolkata Benches. It is the Ld. AR's submission that no particular item of expenditure was directly relatable to earning of tax free income and therefore on fair & equitable basis the appellant had suo moto disallowed sum of Rs.10.11 lacs out of abundant caution and the amount disallowed was out of host of indirect establishment expenses incurred by tile appellant which might have had some

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 4 correlation with earning of dividend income. The mere fact that the appellant had offered disallowance of Rs.10.11 lacs in its computation of income filed, did not in any manner suggest let alone prove that such expenditure was directly relatable to earning of tax free income and therefore qualified for disallowance under Rule 8D(2)(i). 5. On due consideration of the submissions, I find merit in the Ld. AR's arguments. From the plain reading of the assessment order, it is apparent that the AO has not spelt out any single or specific item of expenditure debited in P&L A/c which had direct nexus or proximate cause with earning of tax free dividend. Merely because the appellant by following the precedent established in earlier years offered disallowance of Rs.10.11 lacs being 1% of the gross dividend received did not ipso facto prove that such amount was actually incurred and had direct correlation with earning of dividend. The amount disallowed was out of administrative expenses and the disallowance was based on fair estimate basis and therefore in my opinion the suo moto disallowance offered by the appellant in its return could not be considered as "direct expenses" disallowable under Rule 8D(2)(i). Accordingly the disallowance made under Rule 8D(2)(i) is directed to be deleted. 6. As regards disallowance under Rule 80(2)(ii), I observe that the appellant has consistently been investing its surplus funds in acquiring shares, securities & units of mutual funds from which it has been earning dividend income. I further find that as on 31.03.2011, investments capable of yielding exempt income was Rs.39,543.13 lacs. I also find that the appellant's own funds as on 31.03.2011 were to the order of Rs.1,04,014.24 lacs. The appellant's own funds in form of capital & reserves were thus substantially more than the investments capable of yielding dividend income and therefore presumption that had to be applied on the facts of the appellant's case is that the investments, yielding tax free income were made or acquired out of appellant's own funds. The appellant's reliance on the recent judgment of the Calcutta High Court in the case of CIT Vs Rasoi Ltd (ITA No. 109 of 2016) dated 15.02.2017 appeared to be very relevant. In this judgment the jurisdictional Calcutta High Court had benefit of considering the earlier judgment of the same Court in the case of Dhanuka & Sons (339 ITR 319) as also the judgment of the Bombay High Court in the case of CIT Vs HDFC Bank (383 ITR 529). In the case of Rasoi Ltd (supra), the High Court found that assessee's own funds were higher than the investments in tax free securities and in that view of the matter, the interest disallowance made u/s 14A read with Rule 8D(2)(ii) which was deleted by the ITAT was upheld by the Calcutta High Court. The relevant findings of the Hon'ble Calcutta High Court was as follows: "It appears for both the assessment years the Appellate Authority held that there was no finding of direct nexus between the borrowed fund and investment in shares. The assessee's own funds were far in excess of the average total investments. There could not be any presumption of utilization of borrowed funds. Hence disallowance under section 14A read with Rule 80(2)(ii)was deleted while disallowance of indirect expenses of Rs.1,82,346/- by application of Rule 8D(2)(iii) upheld with the direction to allow relief of the sum already disallowed by the appellant itself. On appeal preferred by the Revenue the Tribunal held as follows:- "We have heard rival submissions and gone through facts and circumstances of the case. We find that now the revenue could not establish that the investments made in shares giving exempted income is out of borrowed funds on which interest is paid by assessee. There is no nexus whatsoever. On specific query Ld. Sr.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 5 DR could not controvert that the assessee has made in investment in shares giving exempt income out of own funds which is at about 2429 lacs and investment is at Rs.365 lacs only. Once this fact has not been denied and C!T(A) has categorically observed that the assessee has made investment in shares out of its own funds no disallowance can be attributed qua the interest paid on borrowed funds for investing the same in interest free funds, In view of the above, we confirm the order of CIT( A) on the common issue .. " .. . …." .. " We find that this case has yielded concurrent finding of facts regarding expenditure incurred by the assessee for the purpose of earning the exempt income, by the Appellate Authority and the Tribunal, As such there is no scope for interference with such concurrent findings of facts. We, therefore, are not satisfied that the case involves any substantial question of law. The application and appeal are thus dismissed." I find that the above decision of the Hon'ble jurisdictional High Court squarely applied to the appellant's facts as well. I therefore find sufficient merit in the Ld. AR's contention that since the appellant's own surplus funds were sufficient to meet the cost of investments; the interest; disallowance u/s 14A was not called for. 7. I also note that the issue of disallowance under Section 14A read with Rule 8D was subject matter of dispute in the appellant's own case in the preceding years as well. It was the appellant's case before the Assessing Officer that the borrowings of the appellant were made for specific business purposes. With reference to the evidenced brought on record, the appellant had demonstrated that the borrowings were made for specific end uses and the borrowed funds were utilized entirely for business purposes and not for the purposes of making investment in shares which yielded tax free dividend income. It was also the pleading of the appellant that the appellant's own funds in the form of capital & free reserves were sufficiently large to meet the cost of investments and therefore no interest disallowance under Rule 8D(2)(ii) was called for. I find that the income-tax assessments of the appellant for AYs 2008-09 to 2010-11 were subjected to proceedings before the Hon'ble Settlement Commission and the Hon'ble Settlement Commission by its order in Application No. WB/Kol/Central-III/2011-12/9/IT dated 07.05.2012 upheld the contention put forth by the appellant. In other words, I find that the Hon'ble Settlement Commission had accepted the assessee's pleading that the loan funds were utilized by the appellant for the specific business purposes for which the loans were obtained and borrowed funds were not utilized for making investments in shares and units of mutual funds or other securities capable of yielding tax free income. The Hon'ble Settlement Commission had also accepted that that appellant's own funds were sufficiently large to meet the cost of investments and therefore interest disallowance under Rule 8D(2)(ii) was not warranted. In the circumstances therefore I find that in appellant's own case, the Hon'ble Settlement Commission ill its order for AYs 2008-09 to 2010-11 had in principle accepted and applied the ratio laid down by the jurisdictional Calcutta High court in the case of CIT Vs Rasoi Ltd (supra). It is material to note that the decision of the Hon'ble Settlement Commission pertained to AYs 2008-09 to 2010-11 during which Rule 8D was in force and despite the same the Hon'ble Settlement Commission had declined to apply the relevant Rule on being satisfied that appellant's own funds were sufficient to meet the cost of investments. Having regard to these facts and circumstances therefore, I hold that the Ld. AO was not justified in disallowing interest expense of Rs.53,56,000/- by invoking Rule 8D(2)(ii). The disallowance is accordingly deleted.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 6 8. As regards disallowance of Rs.2,02,40,000/- made Rule 8D(2)(iii), I note that the said disallowance has been made by the Ld. AO by applying the rate of 0.5%to the entire cost of investments which were capable of yielding tax free income. I note that the appellant had suo moto offered disallowance of Rs.10,11,201/- at the time of filing of return. In the course of assessment tile appellant had substantiated the basis adopted for offering the disallowance u/s 14A of the Act. I also note that the methodology adopted by the appellant for disallowing administrative expenses u/s 14A was consistently followed and accepted in the appellant's regular assessments upto AY 2007-08. On perusal of the assessment order, I find that the Ld. AO did not objectively deal with the explanation furnished in support of the basis adopted by the appellant in offering amount disallowed out of administrative expenses. In fact I find that the Ld. AO rejected the appellant's explanations by passing a non-speaking order in a perfunctory manner. 9. I find that the basis adopted by the appellant in offering the disallowance u/s 14A at the rate of 1% of the gross dividend was followed by the appellant and accepted by the Revenue upto AY 2007-08, but from AY 2008-09 onwards, the Ld. AO rejected tile said basis and sought to make the disallowance under Section 14A read with Rule 8D(2)(iii). This manner of making disallowance was objected by the appellant in the proceedings before the Hon'ble Settlement Commission for AYs 2008-09 to 2010-11. In its order dated 07.05.2012, the Hon'ble Settlement Commission recorded following material findings with regard to disallowance to be made out of administrative expenses: "9.3 Having said as above, when this Bench observed that since the Commission has exclusive Jurisdiction over the years covered by the application as pointed by the Revenue and hence for AY 2008-09 to 2010-11, it has to be satisfied about the correctness of the. Applicant's claim of expenditure to be added back in terms of Section 14A(2) read with Rule 8D, the AR replied that the expenses allocated by the Applicant as per working statement filed is actually less that the amount offered on the basis followed by the AO in earlier years as aforesaid, and hence the question of "dissatisfaction" is ruled out in the present case but none the less, in the spirit of settlement, it agreed to otter expenses quantified at approx, 3% of the exempt income instead of 1% thereof so that there may not be doubt or question whatsoever on the fairness arid correctness of the quantum offered by the Applicant. Accordingly the Applicant offered total expenditure to the tune of Rs.19.29 lacs, 37.26 lacs and Rs.34.56 lacs respectively as disallowable for the AY 2008-09 to 2010-11 and this would result in further addition of Rs.12.86 lees, 24.84 lacs & Rs.23.24 lacs respectively over and above the amount initially offered. For AY 2010-11, the above addition of Rs.23.24 lacs is to be added in computing book profit u/s 115J8 as well.” 10. From the foregoing it is apparent that on the same set of facts, the Hon'ble Settlement Commission in its order for AYs 2008-09 to 2010-11, upheld the appellant's contention that having regard to facts of the appellant’s case as it permeated through the years, the disallowance as per Rule 8D(2)(iii) was not permissible as it led to distorted findings. Having regard to the past history of the appellant and also having regard to the fact that the factual matrix of the appellant's case in the year under consideration is same, respectfully following the decision of the Hon'ble Settlement Commission in the appellant's own case for the preceding years, I direct the Ld. AQ. to make the disallowance at the rate of 3% of gross dividend income which works to Rs.30,33,603/-

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 7 11.In view of the above and for the reasons discussed in the foregoing therefore, the AO is directed to restrict the disallowance u/s 14A to Rs.30,33,603/- in computing total income as per the computational provisions as also in computing book profit u/s 115JB. Ground No. 4 is therefore partly allowed.” 4. Learned CIT-DR vehemently contends that the CIT(A) has erred in law and on facts in restricting the impugned disallowance to that @ 3% of dividend income only despite the statutory formula in Rule 8D(2)(ii) of the Income Tax Rules, 1962. His further case is that although Settlement Commission proceedings for assessment year(s) 2008-09 to 2010-11 are not in dispute, the fact also remains that the same do not acquire the character of a binding judicial precedent since restricted to the assessee’s voluntary disclosure only.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 8 action by invoking sec. 14A r.w.s. 8D disallowance @ 3% of the dividend income only. There is hardly any dispute that the Rule 8D of the Income Tax Rules comes into play for the purpose of quantification of disallowance of expenditure pertaining to an assessee’s exempt income. The same applies from assessment year(s) 2008-09 onwards as held in Godrej & Boyee Manufacturing Co. Ltd. vs. DCIT (2017) 394 ITR 449 (SC) upholding hon'ble Bombay high court’s decision to this effect. Coming to assessee’s dividend income, case file(s) suggests that it had declared suo motu expenses of ₹10.11, ₹12.04 & 15.07 (lakhs); assessment year-wise respectively. The Assessing Officer’s corresponding regular assessment disallowed proportionate interest as well as administrative expenses under Rule 8D(2)(ii)(iii). We proceed in this backdrop and observe that since the assessee could neither explain correctness of its suo motu expense; whether falling under any or all three head(s) nor there was any indication that the corresponding administrative expenditure indirect in nature stated included qua the exempt income yielding investments or not. We make it clear that this tribunal’s co-ordinate bench’s decision in REI Agro Ltd. vs. DCIT (2013) 144 ITD 141 (Kol) holds that the impugned administrative disallowance has to be computed going by the exempt income yielding investments only. We therefore decline the assessee’s arguments that the Assessing Officer’s action invoking sec. 14A / 8D disallowance was without recording any satisfaction.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 9 three head(s) of direct , proportionate interests and administrative expenditures under Rule 8D(2)(ii)(iii) of the Income Tax Rules w.e.f. assessment year 2008-09 onwards, we are of the opinion that the Income Tax Settlement Commission’s adjudication in the said preceding three assessment year(s) restricting the impugned disallowance pertaining to three AYs of exempt income does not form a binding precedent being per incarium as per CIT vs. B.R. Constructions (1993) 202 ITR 222 (AP) (FB). We thus reverse the CIT(A)’s above lower appellate findings to this effect.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 10 proportionate interest expenditure in all these three assessment year(s) involving assessee’s positive net interest income deserves to be declined.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 11 depreciation for which deduction was not allowed in the earlier year, should be allowed under Section 32(1)(iia) of the Act. 2. The Ld. ARs of the appellant have claimed that the above claim is legal in nature and submitted that the first appellate authority has the power to entertain new claim if the grounds raised are bona fide. In support of this proposition the Id. AR relied on plethora of judgments including the decision of Supreme Court in the cases of National Thermal Power Co. Ltd Vs CIT (229 ITR 383)& Jute Corporation of India Ltd. v. CIT (187 ITR 688)and Bombay High Court in the case of CIT Vs Pruthvi Brokers & Shareholders Private Limited (252 CTR 151)and the Delhi High Court in the case of CIT Vs Jai Parabolic Springs Limited (306 ITR 42).The Ld. AR further took recourse to Explanation 5 to Section 32 which puts the question of allowing depreciation beyond any doubt and makes the deduction under Section 32 mandatory. As regards the merits of the claim, the Id. AR of the appellant placed reliance on the following judgments wherein it has been held that where the additional depreciation on the newly acquired assets was allowed at reduced rate of 10% in the earlier year since they were acquired after 180 days, the remaining additional depreciation at the rate of 10% shall be allowed in the subsequent year. - DCIT vs Cosmos Films Ltd (139 ITD 628) (ITAT Delhi) - Century Enka Ltd Vs DCIT (154 ITD 426) (ITAT Kolkata) - Universal Cables Ltd Vs DCIT (68 SOT 307) (ITAT Kolkata) - Birla Corporation Ltd Vs DCIT (69 SOT 217) (ITAT Kolkata) - ACIT Vs SIL Investment Ltd (54 SOT 54) (ITAT Chennai) - Ashok Leyland Ltd Vs DCIT (67 taxmann.com 48) (ITAT Chennai) Apart from the above the appellant also referred to the second proviso to Sec 32(1) which also laid down the above proposition and clarified it beyond doubt. 3. Upon giving due consideration to the submissions made by the appellant and having regard to the facts available on record, I am of the considered view that depreciation is a statutory allowance granted under Section 32 of the Act. I agree with the Id. AR's contention that post introduction of Explanation 5 in Section 32 by Finance Act, 2001; that there is no option either to the AO or the assessee in claiming or allowing depreciation and from AY 2001-02 and onwards the depreciation is a mandatory allowance. In the circumstances even if the appellant did not raise the claim of depreciation in the return of income, then also it is incumbent upon the Department to calculate and allow the mandatory depreciation as per law. In light of the Explanation 5 to Section 32 and also the decisions of Supreme Court in the cases of National Thermal Power Co. Ltd Vs CIT (supra), I am of the considered view that the further claim of additional depreciation of Rs.13,39,47,637/- being bona fide the claim made for the first time in appellate proceedings is admissible for adjudication. 4. Now proceeding to the merit of the appellant's claim, I find that the assessee had purchased and installed new plant and machinery for its manufacturing unit and put to use for a period of less than i.e. 180 days, during the financial year 2009-10 and claimed 50 per cent additional depreciation under section 32(1)(iia) in view of the second proviso to section 32(1)(ii). The balance 50 per cent of additional depreciation on such plant and machinery has been claimed by the assessee company during the year under consideration i.e. FY 2010-11. Bare reading of clause (iia) of section 32(1) applicable with effect from the assessment year 2006-07, provides for allowance of additional depreciation equal to 20 per cent of actual cost of new plant and machinery acquired and installed after 31-3-2005 by an assessee engaged in the business of manufacture or production of any article or thing. Such additional

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 12 depreciation is to be allowed as deduction under section 32(1)(iia) but second proviso to Section 32(1)(ii) restricts the allowance of depreciation at 50 per cent, if the plant and machinery is acquired during the previous year is put to use for a period of less than 180 days in that previous year. It is because of the second proviso that the assessee claimed only 50 per cent additional depreciation in the assessment year 2010-11 and accordingly, claimed the balance amount of additional depreciation in the immediately subsequent year i.e. the year under consideration AY 2011-12. 5. I find merit in the Ld. AR's submissions that there is no restrictive condition in the Section 32(1)(iia) for the eligibility of the assessee to claim remaining additional depreciation in the subsequent year. I find sufficient force in the appellant's submissions that the benefits conferred by way of incentive provision and when the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50 per cent depreciation In the subsequent year, then impliedly the appellant is legally entitled to remaining 50% of the additional depreciation, because in the year In which the machinery was first put to use the assessee claimed only 50 Per cent of additional depreciation. I find that this proposition is supported by the judgments of the Hon'ble Income-tax Appellate Tribunal, Kolkata in the cases of Century Enka Ltd Vs DCIT (154 ITD 426), Universal Cables Ltd Vs DCIT (68 SOT 307) & Biria Corporation ltd Vs DCIT (69 SOT 217). In all these judgments, identical view has been endorsed by the jurisdictional ITAT, Kolkata that in respect of actual cost of machinery installed but put to use for period less than 180 days, additional depreciation was allowed at the reduced rate of 10% in the earlier year, then the assessee is legally entitled to allowance of the remaining 10% of the additional depreciation for which deduction was not allowed in the earlier year, in the immediately succeeding assessment year. 6. For the reasons set out in the foregoing and respectfully following the decision of the jurisdictional ITAT, Kolkata; and having regard to the details on record, I hereby direct to the Id. AO to allow the balance 10% of the additional depreciation amounting to Rs.13,39,47,637/- in terms of Sec.32(1)(iia) in the relevant AY 2011-12 on the assets which were put to use in the preceding AY 2010-11 for less than 180 days. The Id. AO shall also accordingly re-compute the closing WDV of the block of assets for the relevant year which is to be carried forward to the subsequent years. Ground No. 8 therefore stands allowed. “

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 13 simultaneous additional depreciation claim stands reversed byhon'ble Madras high court in TCA No.55/2017 dated 14.03.2017. Their lordships have made it clear that such a deduction claim is allowable even if in case than fixed assets had been put to use in earlier assessment years. We thus affirm the CIT(A)’s identical detailed reasoning extracted hereinabove in all these three assessment year(s). The Revenue fails in its identical third substantive grievance.

The Revenue’s 4th to 6th , 7th to 9th and 9th to 12th substantive 14. grievances in assessment year-wise; respectively plead that the CIT(A) has erred in law and on facts in deleting the arm’s length price (ALP for short) of corporate guarantee(s) amounting to ₹15,45,000/-, ₹147,97,045 & 175,39,089/- in the three assessment year(s). The CIT(A) holds that a corporate guarantee does not amount to an international transaction as under:- “23. DECISION: 1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO / AO. The Ld. AO has concluded that Rs.1,50,45,000/- is to be considered as income in the hands of the appellant-assessee. I have also carefully considered the submissions of the appellant-company made before the Ld. AO / TPO as well as during the appeal proceedings.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 14 demonstrate that that the transaction has a bearing on the profits, income, loss or assets of the enterprise, and that there has to be cogent material on record to indicate that intra AE international transaction has some impact on the profits, incomes, losses or assets. Most importantly, it has been argued that the Hon'ble ITAT, Delhi, in a ruling in the case of M/s. Bharti Airtel Limited Vs Addl. CIT[2014] 64 SOT 50 (URO) / 43 taxmann.com 50(Delhi) adjudicated on transfer pricing issues arising from the issuance of a Corporate Guarantee to associated enterprises among others in this case, the taxpayer, an Indian company, provided a guarantee to a third-party bank on behalf of its foreign subsidiary for which it did not charge a fee. The taxpayer contended as it did not incur any costs in providing the guarantee, there was no requirement for it to charge a fee to the subsidiary under the transfer' pricing provisions. During assessment proceedings, the AO imputed an arm's length guarantee fee by applying the CUP method and considered the commission charged by independent banks as a benchmark, The Hon'ble ITAT, considering the facts of the case, held that the corporate guarantee provided by the Taxpayer, which does not involve cost to the Taxpayer, does not have a bearing on profits, incomes, losses or assets of the Taxpayer and hence the transaction does not fall within the ambit of the amended definition of "international transaction". It would be significant to note that, the Hon'ble ITAT took cognizance of variations brought in under the amended definition and held that the precondition of a transaction having bearing on profit, losses or assets of an enterprise cannot be dispensed with even after the explanation was added to the definition of the international transaction by the Finance Act of 2012 since such explanation was merely a clarification. The Hon'ble Tribunal further held that the onus was on the Income Tax Authorities to demonstrate the transaction has a "bearing on profits, income, losses or assets" of the enterprise. Such an impact on profits, income, losses or assets has to be all a real basis, whether in the present or' ill the future, and not on a contingent or hypothetical basis. Furthermore, there has to be some evidence on record to indicate, even if not to Fully establish, that an international transaction has some impact on profits, income, losses or assets. Taking into consideration the facts of the case, the Hon'ble Tribunal held that' such conditions were not satisfied. The Hon'ble ITAT accordingly ruled that under the facts of. the case, transfer pricing provisions did not apply to the provision of guarantee and therefore the TP adjustment imputing an arm's length guarantee fee is not warranted. This judgement seems to be a departure from the OECD's approach in the sense that the shareholder incurring a cost would not normally be considered in determining whether a service has been provided or not. The fact that would need to be considered is whether the activity provides a respective group member with economic or commercial value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an Independent enterprise or would have performed the activity in-house for itself. Therefore, from the perspective of the recipient, if it were not something that he would have paid for, the activity should normally not be considered as an intra-group service under the arm's length principle. Given that Indian TP law differs from the OECD's approach in certain aspects with respect to the application of the arm's length principle, it would not be out of place to state that this judgment highlights one of them. 3. Be the case, as it may, it has to be said that the Hon'ble jurisdictional ITAT in the case of M/s Tega Industries Vs DCIT in ITA No. 1912/Kol/2012 [Reported as [2016] 76 taxmann.com(Kolkata-Trib)] has adjudicated the matter' and held that where the assessee has provided corporate guarantee to the Bank to fund its subsidiary for acquiring a company(ies) on behalf of the assessee, since the assessee's expectation from loan was that of a Shareholder, and the intention was to protect its investment interest, no T.P adjustment on account of Corporate Guarantee was to be made. In this case, the Hon'ble ITAT, based on the facts of the case has adjudicated that if the intention of the assessee is not to earn interest or guarantee fees by providing loan or guarantee, no TP adjustments could be made. The facts of the case were that the assessee is engaged in the business of manufacturing and specializing in the designs, production and application of water resistant rubber lining. During FY 2006-07, the assessee had set up an AE/subsidiary as a special purpose vehicle in

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 15 Bahamas for acquiring two South Africa based companies. The assessee had provided interest-free loan and corporate guarantee to its AE, and used comparable uncontrolled price ('CUP') as the most appropriate method for measuring the transaction at ALP. The assessee had suo-motto offered interest on such loan at LIBOR+ 100 bps. However, the Ld. TPO disregarded the contentions of the assessee, preferred cost plus method ('CPM') and made upward adjustments for the same. Aggrieved by the order, the assessee filed an application before the Ld. Dispute Resolution Panel (' DRP'), which confirmed tile order of the Ld. TPO. Further aggrieved, the assessee filed an appeal before the Hon'ble Tribunal. The Hon'ble ITAT inter- alia decided that the assessee had injected loan to its subsidiary and provided guarantee for commercial expediency as the assessee had merged to expand its foreign operations; thus, the loan injected by the assessee was a kind of a quasi-equity i.e. in the form of equity. Further, the Hon'ble Tribunal preferred internal CUP or external CUP as the most appropriate method for applying in such transactions. It may be relevant to quote the necessary portion of the order of the Hon'ble ITAT as follows: "As the Assessee's expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market share of interest or guarantee fee, rather, the expectation was that of a shareholder - to protect its investment interest, help it to achieve acquisition of TegaBruce for furtherance of its own business and get returns in terms of appreciation of value and dividends … … therefore in the present case the guarantee is a shareholder activity hence no TP adjustment on account of corporate guarantee should be required. Accordingly, we direct the Ld. DRP/ TPO to delete the addition." In view of the decision of the Hon'ble jurisdictional !TAT, it has to be said that there is strength in the contention of the appellant-company that in the facts emanating in the case, there may not have been any real justification on the part of the Ld. AO to treat the corporate guarantee given by the appellant to the AE as an international transaction. 4. I have also carefully considered other supplementary arguments of the Ld. A.Rs for the appellant-company in the matter rebutting and challenging the action of the Ld. AO/TPO. The appellant has been able to draw and demonstrate similarity in the factual and legal matrix in the case of Tega Industries and its own case. It has been pleaded that the contention of Tega Industries Ltd is similar to that of the appellant. The objective of Paharpur Cooling Towers Ltd, i.e, the appellant to set up PNRL & SFPL was to undertake the expansion of appellant's operations in South Africa. Tile appellant had set up operating subsidiaries to with the sole intent & purpose of vertically integrating Its core business activity by conducting forest operations, plantations for manufacture & supply of timber, which is the primary ingredient in constructing cooling towers. The subsidiaries thus represented an extended arm of the appellant company itself in South Africa. I further find merit in the contention of the appellant that in the course of raising funds for investment via the equity/quasi-equity route, an arrangement was employed till the time such arrangement would be subsequently replaced by equity funds generated by Paharpur. The stand of the appellant is that the loans may have been granted to AEs by the Banks, but the same was in substance a loan granted to Paharpur for enabling it to expand operations by setting up subsidiaries abroad. In fact I note that even the Id. TPO has also in principle agreed with this contention of the appellant and stated that the loans availed by the AEs which were guaranteed by the appellant, were in sum & substance obtained by the appellant and that the appellant was actually the principal -debtor. I therefore find substantial force in the Id, AR's submission that the assessee's expectation from the guarantee provided for the third-party borrowings of AEs, was never to earn a guarantee fee. This, according to the appellant is evident as in a third party scenario no entity would have lent any funds to AEs given their skewed debt - equity ratio evident from its Balance sheet, and that on the other hand, AEs could not have taken the loan from any third party lender on a standalone basis had the Appellant not been provided the corporate guarantee for the same. Thus it is clear that the intention of the Appellant for guaranteeing

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 16 the AEs was that of an investor and not a guarantor, In light of the same, it would be appropriate to classify the guarantee provided to infuse third party funds as a shareholder service meriting no monetary consideration. Therefore, in view of the judgment of the ITAT, there is legal merit in the contention of the appellant that the international transaction pertaining to the provision of corporate guarantee on behalf of the AE is a pure shareholder service and hence merits no charge. 5. There is no gainsaying that in the factual matrix present in the case, the corporate guarantee tantamount to the functions of a Shareholder. Therefore, I find myself in agreement with the contention that there can be no element of service in a shareholder's function as there is no benefit derived by the Shareholder in the said business, except that of earning more dividend income, which in any case was taxable In the hands of the said shareholder, 6. I further note that the Id, AR has also forcefully argued that even in case the issuance of corporate guarantee is held to be an 'international transaction', then appropriate internal CUP was available to benchmark the corporate guarantee. The Ld. AR submitted that the appellant had also obtained guarantees from external Banks/FIs to whom guarantee commission in range of 0.35% to 0.5% was paid. In view of the judgment rendered by the Hon'ble Bombay High Court in the case of CIT Vs Everest Kanto Cylinder Ltd (358 ITR 57) rendered on this specific issue, the Id, AR alternatively claimed that the guarantee commission fee of 0.35%-0,5% actually paid by the company to the Bank was a fair & reasonable parameter and the most appropriate benchmark for determining ALP of corporate guarantees issued to AEs. I have taken note of the foregoing argument, but in light of the findings set out in the earlier paragraphs wherein the issuance of corporate guarantees by appellant to AEs has been held to be a shareholder activity not meriting any adjustment, I am not inclined to adjudicate on this aspect as this is now only of academic importance. Overall considering the facts and circumstances, and for the reasons set out above, impugned order find that the Ld. AO /TPO was not justified in working out the total guarantee commission at Rs.1,50,45,000/-. The said adjustment of Rs.1,50,45,000/- is accordingly ordered to be deleted. Ground No.7 of appeal therefore stands allowed.”

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 17 03.04.2019 to hold that such a corporate guarantee does not amount to an international transactions even in assessment year 2013-14 as under:-

“8. Ground no. 2 to 4 relate to corporate guarantee fee extended by the assessee company to its Associate Enterprise (AE). 9. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved, in respect to corporate guarantee, in the present appeal is no longer res integra. We note that financial guarantee is a promise made by a person (the guarantor) to a lender(guaranteed party) promising to pay the lender the money owed to it by the borrower (obligor) on whose behalf the guarantee is given, if the borrower fails to pay back the debt due to the lender. A guarantee to a lender that a loan will be repaid, guaranteed by a company other than the one who took the loan, is called a corporate guarantee. The ld Counsel for the assessee submitted before us that extending corporate guarantee for borrowings by subsidiaries was a shareholder activity, that it was not an international transaction, that no fee was warranted since no cost was incurred, and that bank guarantees were not comparable to corporate guarantees since the business of the bank was different from that of a corporate. Before us, ld DR for the Revenue submitted that there are plethora of judicial pronouncements wherein it has been held that the corporate guarantee is in the nature of service provided by the taxpayer to its associate enterprises (AEs) and hence should bear a charge. The judgments have explicitly held that after the Income Tax Act,1961 was amended by the Finance Act, 2012 to include 'guarantee' within the definition of "international transaction" with retrospective effect from 01.04.2002, the corporate guarantee should be benchmarked from arm’s length perspective. 10. However, after hearing both the parties, we note that there are plethora of judicial pronouncements wherein it has been held that corporate guarantee does not constitute an international transaction and accordingly there should not be a charge. We note that in assessee’s case under consideration, the assessee, in order to avoid protracted litigation made an estimated adjustment of Rs.51,50,327/- @ 1% of the corporate guarantee amount as fees for corporate guarantee, for income tax purposes. However, the TPO rejected the method adopted by the assessee and recomputed the arm’s length price by making upward adjustment. We note that the assessee has extended this corporate guarantee as a shareholder activity hence the adjustment should not be made. The primary object of the assessee is to help the subsidiary company and protect its interest and there is no object of the assessee company to earn the interest income by furnishing the corporate guarantee to the associated enterprises. We note that in the judgment of the Co-ordinate Bench of ITAT Ahmadabad, in the case of Micro Link Limited vs. ACIT [TS-568-ITAT-2015] (Ahd) wherein the Co-ordinate Bench has held that corporate guarantee does not constitute international transaction as per section 92B of the Act as amended by the Finance Act, 2012. The relevant extracts of the judgment is reproduced as under: “On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when as is often the case, “where such a guarantee is given, it

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 18 compensates for the inadequacy in the financial position of the borrower; specifically the fact that the subsidiary does not have enough shareholders funds. There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution ... " " ... In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder's activity, is not rejected either. The concept of issuance of corporate guarantees as a shareholder activity is not alien to the transfer pricing literature in general..” ".... We have noticed that the 'OECD’ Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. " " .... We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services ... " " .... The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporate issue guarantees for their subsidiaries, is ill conceived.” “ ... These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act .... " 11. We rely on the judgment of the Co-ordinate Bench of ITAT, Delhi in the case of Bharti Airtel Ltd. vs. ACIT in I.T.A. No. 5816/Kol/2012, wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 19 international transaction. The relevant extract of the judgment is reproduced as under: “Para 23 .... The issue whether giving a corporate guarantee amounts to an ‘international transaction' has not been raised or discussed in the cases where ALP adjustments have been upheld and therefore those decisions cannot be put against the taxpayer ..... " "Para 27.... The Explanation inserted vide Finance Act 2012 is to be read in conjunction with the main provision and in harmony with the scheme of provision under section 92B of the Act. It is essential that in order to be an 'international transaction' providing corporate guarantee should have a bearing on the profits, income losses or assets of the enterprise ...:" "Para 31…. The contents of the Explanation fortifies, rather than mitigates, the significance of expression 'having a bearing on profits, income, losses or assets' appearing in section 92B( 1) of the Act ... " "Para 33 .... The onus is on the tax authorities to demonstrate that the transaction is of such nature as to have 'bearing on profits, income, losses or assets of the enterprise' and has to be on real basis even if in present or in future, and not on contingent or hypothetical basis ...." “Para 32.... There can be a situation in which a guarantee default takes place and therefore, the enterprise may have to pay the guarantee amount but such a situation even if that be so is only a hypothetical situation ....." "Para 32 ..... When an assessee extends an assistance to the associated enterprise which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets and therefore it is outside the ambit of international transaction under section 92B(1) of the Act. ..." "Para 35 .... In the case of GE Capital Canada -vs- The Queen, the tax court of Canada has indeed dealt with ALP determination of the guarantee fees, but then it was done in the light of their domestic law provisions which are quite at variance with the Indian transfer pricing legislation ....." Similar views have been held by various coordinate benches, including jurisdictional as under: i) Tega Industries Ltd. vs. DCIT [I.T.A. No. 912/2012 dated. 03.08.2016, [Kol Trib.] ii) Marico Ltd. vs. ACIT [TS-411-ITAT-2016 (Mum)-TP] iii) TVS Logistics Services Ltd. [TS-324-ITAT-2016 (CHNY)-TP] iv) Manugraph India Ltd. [TS 324-ITAT 2016 (Mum)-TP] v) Siro Clinpharm Pvt. Ltd. vs. DCIT [ITS-185- ITAT 2016 (Mum)-TP] vi) Apollo Health Street Ltd. vs. DCIT [TS-184- ITAT 2014 (HYD)-TP] Therefore, based on the above mentioned precedents, we note that the provision of corporate guarantee is not an international transaction. Hence, respectfully following

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 20 the judgment of the co-ordinate benches cited above, we confirm the findings of the ld. CIT(A).”

The Revenue’s 8th to 9th and 11th to 12th substantive grounds in all these 17. three appeal(s) seek to revive the TPO’s proposed action and Assessing Officer’s ALP adjustment of interest amount of ₹83,71,497/-, ₹279,79,306 and ₹170,64,590/-; respectively as deleted in the CIT(A)’s identical detailed discussion. The same reads as under:- “20. DECISION: 1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/ AO. The question involved ill the present ground is the determination of the ALP of the loans / advances given by the appellant to its AEs, PML & SFPL which was denominated in USD & RAND currency respectively. The details of tile loans & advances in question are as follows: Name of AE Nature of Transaction Amount Paharpur Mauritius Ltd. Loan given 13,65,96,573 Safind Forest Products Ltd Loan given 36,29,946 Safind Forest Products Ltd. Advance for purchase of timber 45,95,630

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 21 should be appropriately adjusted in view of the factors normally governing interest on loan prevailing in foreign markets. According to the SCN of Ld. TPO, the interest rates paid by AEs to Banks was also not the appropriate parameter since while advancing the loan & determining the interest rate, the Bank did not consider the credit rating of the AE on stand-alone basis but for the group as a whole. The Ld. TPO thereafter elaborated in his SCN the different parameters for ascertainment of credit rating set out by Standard & Poor in 2002-2004 booklet and also as to how the CUP analysis should be performed based on the credit rating & market information. After analyzing the financials of the AEs and having regard to the parameters set out by S&P in their booklet for 2002-2004, the TPO concluded that both the AEs were highly vulnerable to risk and therefore any Bank would command significantly high interest rate in order to advance loan to the AEs, if the same is considered on stand- alone basis. With regard to the trade advances given by the appellant to SFPL, the TPO was of the view that it was in the nature of "interest free loan" and that the same was also required to be benchmarked along with the loans advanced by the appellant to its AEs. 4. I however note that after elaborately discussing the above methodology of ascertaining the interest rate on loan at the probable cost of loan if the AEs had independently obtained such loans from foreign markets, the Ld. TPO suddenly shifted his track and moved on to propose an altogether new methodology to benchmark the transaction in the same SCN. The Ld. TPO thereafter stated that the interest rate on the loans advanced to the AE should be priced at the cost of funds in the hands of the appellant. For determination of cost of funds, the Ld. TPO was of the view that the Return on Capital Employed ('ROCE') was the most appropriate method. According to Ld. TPO the cost of funds represented the return foregone by the appellant by deciding to advance loans to AEs. As per the Id. TPO, ROCE was a function of Profit Before Interest & Tax (‘PBIT') to Capital Employed and thus worked out the ROCE at 28.39% in his SCN. The Ld. TPO accordingly show caused the appellant to explain as to why the loans / advances given to AEs should not be benchmarked at the rate of 28.39%. 5. In the paper book furnished, the appellant has enclosed the explanation furnished in response to the SCN issued by the Ld. TPO. I find that in its submissions the appellant substantiated the application of internal CUP and determination of ALP of loans at 3.6%. The appellant further submitted the details of loans subsequently obtained by its AEs from external parties which ranged between 2.25% to 2.6% to show that the ALP of 3.6% determined by it was fair & reasonable. The appellant pointed out the specific defects & fallacies in the methodology put forth by the Ld. TPO in the show cause notice. The appellant also explained the inherent fallacies in the Ld. TPO's determination of cost of funds and also application of ROCE Method. The appellant also brought on record several judgments of the coordinate benches of the Hon'ble Income-tax Appellate Tribunal wherein it has been held that the relevant currency related LIBOR rate was the most appropriate benchmark for arriving at ALP of inter-corporate loans. 6. From the impugned order, I find that having considered the objections raised by the appellant to the SCN, the Ld. TPO himself abandoned the methodology propounded by him in the SCN and altogether shifted his stance by adopting an altogether different methodology for determination of ALP, which did not have sanction or support of the five methods set out in Rule 10B. I further note that although in tile order u/s 92CA(3), the AO forsake tile methodology proposed in SCN and adopted altogether new methodology for determination of ALP, no opportunity of hearing was afforded to the appellant resulting in miscarriage of justice. In my considered opinion, it was incumbent on the Ld. TPO not only to set forth the reasons

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 22 as to why internal CUP adopted by the appellant was not acceptable but it was also incumbent on him to disclose to the appellant the new methodology which he had adopted to determine ALP. Moreover when the methodology adopted by Id. TPO was not in conformity with any of the five methods prescribed in Rule 10B, it was obligatory on his part to grant opportunity of hearing to the appellant. 7. On perusal of the impugned order, I further note that the Ld. TPO did not bring on record any cogent reason or explanation as to why the application of internal CUP by the appellant was not the most appropriate bench marking exercise, particularly when the interest rate adopted by tile appellant was that of a foreign currency denominated borrowings which was actually availed at arm's length by the appellant itself from an unrelated party. Instead it is noted that the Ld. TPO calculated the ALP as a function of cost of funds and an appropriate credit spread thereon. According to Ld. TPO, the cost of funds was now a function of the return on investments and the cost of debt in the hands of the appellant. The Ld. TPO aggregated the various returns in form of interest, dividend, capital appreciation etc. derived by the appellant from its range of investments and stated that such return which it derived from the investments was the cost of the funds since this return represent the return which the appellant had foregone on the sums advanced to AEs. Meaning thereby, according to Id. TPO, the return on investment of 14.83% calculated by him, represented the opportunity return which the appellant could have earned, had it not lent monies to AEs. The Id. TPO also calculated the cost of debt at 5.61%. The Id. TPO thereafter stated that since the loans/advances given to AEs were out of mixed pool of funds, he considered the weighted average of return on investments and cost of debt, which worked out to 11.68%, to be the cost of funds of the appellant. 8. After determining the above cost of funds, the Ld. TPO was of the view that such cost of funds of should be further increased by an appropriate spread to cover the risks involved for lending to such vulnerable & low rated AEs. This spread was determined by the Id. TPO at 600 bps. However how did the Id. TPO derive such spread of 600 bps or what was the basis of ascertainment of credit spread has nowhere been spelt out in the impugned order. The Id. TPO has only referred to a loan connector sheet of a Singapore company for the year 2007 wherein the said Singapore company is stated to have obtained a loan facility of USD 200 million at 12.25% to infer that the spread that should be charged by the appellant was 600 bps. However how did the Id. TPO connect these dots between the aforesaid loan connector sheet of Singapore and the loans advanced by the appellant to its AEs in South Africa & Mauritius is nowhere discernible from the impugned order. Nevertheless, the Ld. TPO aggregated the cost of funds and credit spread and determined the ALP interest rate at 17.68% which far exceeded the ALP interest rate of 3.6% determined by the appellant. Accordingly the Id. TPO proposed upward adjustment of Rs.83,71,497/- with reference to the loans/advances given by the appellant to its AEs. 9. On examination of appellant's submissions and TPO's order, I find that the observations made by the Ld. TPO in the impugned transfer pricing order suffered from apparent infirmities & contradictions. In the impugned TPO's order, he has taken into account return on investment to be integral part of cost of funds for determining ALP of the loan transaction. In my opinion, there is a fundamental fallacy in the Ld. TPO's working in as much as what the returns the appellant obtained from the investments made in shares, securities, mutual funds, loans & deposits etc. had apparently no bearing on determining the cost of funds. Once ell investment is made by an investor, what would be the return on such investments depends on host of economic factors affecting the business of the investee company and there cannot be correlation between the return in the form of dividend on investments with cost of

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 23 funds. Similarly income by way of capital appreciation can vary from year to year depending on the decision to encash such appreciation in a given year. In such circumstances, capital appreciation realized in anyone given year cannot be taken into account in determining the cost of funds because realization of capital appreciation can vary substantially from year on year basis. Moreover realization in form of dividend, capital appreciation, interest etc. has inbuilt element of risk taken by an investors and that being the case appropriate risk adjustments was then required to be made with reference to each of the investment made, depending upon the nature, periodically, economic activity, risk of the instrument etc. to arrive at the cost of funds. It is noted that no such analysis was conducted by the Ld. TPO but he merely took into account the figures of investments and the income derived from such investments and no risk adjustment was made to the returns derived from the investments. Moreover the income which the appellant had derived was from Investments made in the bodies corporate functioning in India where economic & country factors prevalent were far different from South Africa &. Mauritius where the funds were advanced in foreign currency and not in Indian currency. In the circumstances the return on investment in India could not be the basis for determining ALP of an international transaction which was admittedly carried out in far different economic circumstances and that too In foreign currency terms i.e. USD & SA RAND. Even with regard to credit spread of 600 bps added to the cost of funds, I find force in the Ld AR's submissions such inclusion was unwarranted and without any basis. 10. I also find considerable force in the Id. AR's submissions that in determining the ALP of the funds borrowed by AEs, the return on investment earned by the appellant could not be taken into consideration as the relevant factor. More so such "return on investment" could not have been taken into account by the Ld. TPO to determine the "cost of funds". It is apparent from the appellant's balance sheet that substantial portion of its own surplus funds have been deployed in making investments in shares of other bodies corporate as also loans and deposits. The returns derived from the range of investments represent the efficacy of the appellant's investment decisions and as such it does not reflect the cost of funds to the appellant. The "cost of funds" is what an independently lender would require the appellant for using its funds in the appellant's business. Further one also needs to factor In the currency in which the funds were borrowed or funds were lent, so as to remove the dissimilarities. In the present case the appellant had demonstrated that besides making borrowings in Indian currency, it had also borrowed the funds for its business purposes in US denominated sources where the interest was paid at the rate of 3.6%. Similarly the appellant had lent the funds to its AEs in US denominated terms. In the circumstances the cost of funds procured by the appellant in US denominated terms was properly demonstrated to be 3.6% which alone to be taken into account as the cost of funds. 11. For the reasons set out above, I agree with the appellant's contention that the methodology adopted by the Ld. TPO suffered from numerous infirmities in as much as the premises on which the working of cost of funds was made was inherently inappropriate and incorrect. Moreover the methodology adopted and the working made was in conformity with the methods prescribed in Rule 10B. In the circumstances therefore I uphold the appellant's objection that the determination of ALP as made by the Ld. TPO in his order u/s 92CA(3) could not be upheld. 12. 1 further find in the Ld. AR's submissions that having regard to the fact the appellant had itself had made the borrowings in USD denominated terms by paying interest with reference to foreign LIBOR rate; ready information was available on the basis of which the loans/advances given to AE could be appropriately benchmarked

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 24 by following internal CUP Method. In my considered view therefore, the appellant's application of internal CUP and adopting ALP interest of 3.6% was the most appropriate & reasonable method. 13. It may be also relevant to add that the question of manner & methodology of benchmarking inter-corporate loans is a vexed issue and has been debated by various High Courts & Benches of the Income-tax Tribunal. From the judicial precedents which are available in the public domain, I find that the settled view is that the foreign currency denominated loans advanced to AEs should be benchmarked against the relevant currency denominated LIBOR rate. The relevant judicial precedents in this regard are as follows: • Cotton Naturals (I) Pvt. Ltd. [TS-117-HC-2015 (DEL)-TP] • Tata Autocomp Systems Ltd. (TS-45-HC-2015(BOM)-TP) • Bhansali & Co. (TS-451-ITAT-2010(Mum)-TP) • M/s Four Soft Ltd. Vs. DCIT (ITA No.1495/HYD/2010) • DCIT vs. Tech Mahindra Ltd. (ITA No.1176/Mum/2010) • Mahindra & Mahindra Ltd. vs. DCIT (ITA No.7999/Mum/2011) • Cotton Naturals (I) Pvt. Ltd. Vs. DCIT, Circle-3(1), (ITA No.5855/Del/2012) • Tata Autocomp Systems Ltd. Vs. Assistant Commissioner of Income Tax, (2012-(052)-SOT-0048-TBOM) • Hinduja Global Solutions Ltd. vs. Addl.cit, (ITA No.254/Mum/2013) • Aurinopro Solutions Ltd., vs. Addl. Commissioner of Income Tax (ITA No.7872/Mum/2011) • VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT-MUM) • M/s Aithent Technologies Pvt. Ltd. v/s ITO (2010-TII-134-ITAT-DEL-TP) 14. In view of the above and respectfully following the judgments of the High Courts & Income-tax Appellate Tribunal, I hold that the ALP determined by the TPO in his order u/s 92CA(3) was wholly inappropriate and excessive. I further hold that the most appropriate method to be adopted in the facts & circumstances of the appellant's case was internal CUP based on the interest which the appellant had on its own foreign currency denominated borrowings. Accordingly, the Ld. AO/TPO is directed to compute the ALP of loans as well as the advances totaling to Rs.14,48,22,149/- at· the rate of 3.6% per annum. Accordingly the Ld. AO/TPO shall recomputed such interest income at the rate of 3.6% after giving credit for the income suo moto offered by the appellant in the return of income. Ground No. 6 is therefore partly allowed.” Mr. Shankar’s case during the course of hearing that the TPO’s order had rightly proposed the impugned ALP adjustment(s) in the nature of interest pertaining to assessee’s alleged interest free advance to its overseas associate (AE) enterprises keeping in mind the fact that the corresponding interest rate which the associate enterprise(s) would have obtain loans have to be kept in mind. We find no merit in Revenue’s instant grievance. The fact remains that this tribunal’s various co-ordinate benches decision have already

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 25 held that the relevant benchmark in case of loans and advances pertaining to AE’ has to be the relevant local currency’s LIBRO rate (supra). We notice that the TPO’s proceedings in all these three assessment year(s) had nowhere followed the same whilst proposing the impugned adjustment.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 26 reasonable basis and following the established doctrine of prudence. The Ld. AO however not being agreeable to the explanation furnished by the appellant disallowed the foreseeable losses provided in the books characterizing it to be contingent loss. 2. The material facts on record thus show that the Ld. AO neither disputed nor disbelieved the basis and working of the provision for foreseeable loss which the appellant made in its books of accounts. It was found by the appellant that it had obligation to execute certain contracts which it had obtained in the ordinary course of business having no escalation clauses. In the circumstances at the time when the appellant re-commenced the work on the contracts earlier suspended, the assessee had reasonably advanced knowledge that it is going to incur loss from execution of these contracts. In the circumstances on the principle of prudence, which is one of the fundamental accounting principles and which has also been accepted under Section 145 of the Act, as also required by mandatory AS-7, the appellant was obliged to create provision for such losses in its books of accounts so as to declare true, correct & fair profits in its books. The provision for foreseeable losses was created by the appellant in accordance and conformity with AS-7 which was regularly followed by the appellant in the past and therefore in terms of thereof such provision for created in FY 2011-12. The Ld. AO has not brought on record any specific provision of Section 30 to 44 of the Income-tax Act, 1961 which prohibited the appellant from claiming the deduction for foreseeable losses debited in P&L A/c on fair, equitable and scientific basis. The mere fact the loss was to be incurred by the appellant over a period of execution of contract and such period spread over more than one accounting year, was not reason enough for the Id. AO to term such loss as contingent one. I also find that in the subsequent assessment year the appellant actually executed these contracts when such losses were incurred. I find that in the subsequent year when the loss was incurred, the provision created by the appellant in the year under consideration was written back and the losses actually incurred were accounted in the books. In the income-tax assessment for AY 2014-15, the AO allowed the deduction for the losses so incurred on being satisfied that the losses were In fact incurred and moreover the provision thereof was disallowed in AY 2014- 15. From these facts therefore I note that the appellant had in fact demonstrated that the provision for foreseeable loss was not only made on the principle of prudence as also in conformity with AS-7, but in fact the appellant incurred such losses on execution of contracts in the subsequent years and in such year no deduction was claimed in the return to the extent the losses were covered by the provision made in AY 2012-13. These facts therefore lead to the conclusion that the provision for loss created by the appellant was not only scientific basis but the same was provided having regard to the facts & circumstances of the case which the appellant was able to demonstrate in reality in the subsequent year. 3. I also observe that the appellant's claim for deduction of foreseeable losses in execution of contracts is an allowable deduction is supported by the following judgments: Mazagon Dock Pvt Ltd Vs DCIT (29 SOT 356) (ITAT Mumbai) "The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress was concerned, it could not be disputed that in view of mandatory requirements of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by the

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 27 Comptroller & Auditor General of India. Therefore, the observation of the Commissioner (Appeals) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable. It was not disputed that the department in earlier years had allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it was not disputed that the estimated 1055 under the present circumstances was an allowable deduction. However, merely because the change in method of accounting was bona fide, it could not lead to the inference that the income was also deducible properly under the Act. This aspect is very evident from the first proviso to section 145 as it stood prior to the amendment by the Finance Act, 1995 with effect from 1-4- 1997. It could not be disputed that from the method adopted by the assessee, the assessee's income could not be deduced properly in the year in which the loss had been anticipated. As a matter of fact this aspect was not disputed by the Assessing Officer also. He had swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting was not of much significance in the present context because if the loss had been properly estimated in the year in which the contract had been entered into, then it had to be allowed in that very year and could not be spread over the period of contract. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant easel the effect of valuation of WIP would automatically affect the profits of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee's claim as being allowable ….” Asst.CIT Vs ITD Cementation Pvt Ltd (146 ITD 59) (ITAT Mumbai) "14. We have considered the rival submissions and perused the orders of the lower authorities. We have a/so the benefit of going through the AS-7 issued by ICAI. At the very outset, it would not be out of place to consider the provisions of s. 145 of the Act. Sec. 145(2) of the Act provides that the Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. It is a fact that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of s.145 show that accounting standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow the other accounting standards issued by ICAI. ICAI being the highest accounting body of the country, created by an Act of Permanent, accounting standards issued by it cannot be brushed aside lightly. On the contrary, if an assessee is following the accounting standards issued by ICAI, it would give more credibility and authenticity to its account. AS -71 inter alia provides: 'When the outcome of a construction contract cannot be estimated reliably: Revenue should be recognized only to the extent of contract costs incurred of which recovery is probable, and Contract costs should be recognized as an expense in the period in which they are incurred.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 28 An expected loss on the construction contract should be recognized as an expense immediately in accordance with para 35.’ 15. It is not in dispute that the assessee is executing fixed price contract which means that the contractor has agreed to a fixed contract price or rate in some cases subject to cost escalation prices. As per AS-7, the assessee is entitled to make provision for foreseeable losses. 16. A perusal of the accounting statement of the assessee for the year under consideration shows that at para 1.6 to the notes to the financial statement, the auditors have provided as under: 'Revenue recognition on contracts Contract prices are either fixed or subject to price escalation clause. Revenue from contracts is recognized on the basis of percentage completion method, and the level of completion depends on the nature and type of each contract including: Unbilled work-in-progress valued at lower of cost and net realizable value upto the stage of completion. Cost includes direct material, labour cost and appropriate overheads; and Amounts due in respect of the price and other escalation, bonus claims and/or variation in contract work approved by the customer/third parties etc. where the contract allows for such claims or variations and there is evidence that the customer/third party has accepted it. In addition, if it is expected that the contract will make a loss, the estimated loss is provided for in the books of account. Contractual liquidated damages, payable for delays in completion of contract work or for other causes, are accounted for as costs when such delays and causes are attributable to the Company or when deducted by the client. ' 17. A similar issue has been considered by the Tribunal in the case of Mazagon Dock Ltd. v. Jt. CIT (supra) wherein the Tribunal has held as under: The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress was concerned, it could not be disputed that in view of mandatory requirements of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by the Comptroller & Auditor General of India. Therefore, the observation of the CIT(A) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable. It was not disputed that the Department in earlier years had allowed

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 29 the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it was not disputed that the estimated loss under the present circumstances was an allowable deduction. However, merely because the change in method of accounting was bona fide, it could not lead to the inference that the income was also deducible property under the Act. This aspect is very evident from the first proviso to s. 145 as it stood prior to the amendment by the Finance Act, 1995 w. e. f. 1st April, 1997 It could not be dispute from the method adopted by assessee, the assessee's income could not be deducted properly in the year in which the loss had been anticipated. As a matter of fact this aspect was not disputed by the AO also. He had swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting was not of much significance in the present context because if the loss had been properly estimated in the year in which the contract had been entered into, then it had to be allowed in that very year and could not be spread over the period of contract the matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant case, the effect of valuation of WIP would automatically affect the profits of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee's claim as being allowable.’ 18. A similar view has been taken by the Tribunal in the case of Jacobs Engineering India (P.) Ltd. v. Asstt. CIT (supra) wherein the assessee's claims of foreseeable losses were allowed irrespective of method of accounting in terms of AS-7. In the case of Dredging International (supra), the issue before the Tribunal was whether under s. 37(1) of the Act- provision for foreseeable loss made in accordance with guidelines of AS-7 and duly debited in audited accounts of company is an allowable expenditure. The Tribunal decided the case in favour of the assessee and held that 'yes' it is an allowable expenditure. The Tribunal while deciding this issue has also considered the decision of Mazagon Dock Ltd. v. Jt. CIT (supra). 19. Considering the facts of the case in the light of the accounting standards and the decisions of the Tribunal (supra), and as no distinguishing cases have been brought on records by the Revenue, reversing the findings of the learned CIT(A) , we direct the AO to recompute the business profits by allowing the losses provided by the assessee in its books. The appeal filed by the assessee is allowed Asst.CIT Vs Ashok Buildcon Pvt Ltd (170 TTJ 19) (ITAT Mumbai) 8. At the time of hearing, the learned Representative submitted that a similar situation had arisen before the Mumbai Bench of the Tribunal in the case of Asstt. CIT v, ITD Cementation India Ltd. [2014] 146 ITD 59/[2013] 36 taxmann.com 74 (Mumbai) wherein a provision made for foreseeable losses was allowed as a deduction. Apart therefrom, reliance has also been placed on the decision of the Mumbai Bench of the Tribunal in the case of Mazagon Dock Ltd. v. Jt. CIT [2009] 29 SOT 356 in support of the case of the assessee. In the course of hearing, reference has also been made to the following decisions: (i) judgement of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra) (ii) Bharat Earth Movers v, CIT [20007 245 ITR 428/112 Taxman 61 (SC) and, (iii) Rotork Controls India (P.) Ltd. v. CIT [20097314 ITR 62/180 Taxman 422 (SC).

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ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 31 income of the appellant as per computational provisions as also in assessing book profit u/s 115J8 of the Act. Since the assessee's claim of provision for foreseeable losses has been allowed to be deducted in AY 2012-13, the Ld. AO may also take necessary remedial measures for withdrawing the relief allowed by him in respect of such amount in AY 2014-15. Ground No. 7 is therefore allowed.” 20. We have given our thoughtful consideration to rival pleadings against and in support of the CIT(A)’s above extracted discussion deleting the impugned disallowance. The assessee had admittedly debited these sum(s) to its profit and loss account in relation to “provision for foreseeable loss” in contract revenue for the purpose of normal as well as MAT computation. The Assessing Officer disallowed the same as a contingent liability since not crystallized in the relevant previous year. Learned counsel invited our attention to pages-12 & 13 in the assessment order containing tabulations of the corresponding project’s job details. The Assessing Officer was of the view that the alleged project qua foreseeable loss in contract revenue; had been substantially completed and revenue therefrom also stood recognized during earlier years. He thus held that the assessee’s provision was against a liability which might arise in future due to any defect in the projects and liabilities incurred by removing those defects. And that in such a liability which was to be incurred by a future rate was in the nature of a contingent liability disallowable u/s 37(1) of the Act. He included it in book profits’ computation u/s. 115JB Explaation-1 (c) of the Act. He lastly concluded that if at all the assessee had to make any such provision of liability to be incurred in future, the same therefore amounted to a contingent liability only not allowable u/s 37(1) of the Act which deserved to be included in book profits computation as well. The CIT(A) has admittedly reversed the Assessing Officer’s action in above extracted detailed discussion.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 32 very basis stood adopted in the latter assessment year 2013-14. Learned departmental representative fails to dispute that the assessee’s impugned provision also confirms AS-7 applicable “accounting for construction contracts” as per various judicial precedents taken note of the CIT(A)’s discussion. Hon'ble apex court’s landmark judgment in Commissioner of Income Tax vs. Chainrup Sampatram (1953) 24 ITR 481 (SC) held long back that although the principles of conservatism and prudence in accounting require that no anticipated profits are to be recorded as income until realised, the converse is not true regarding anticipated losses which could be booked at the first sign of reasonable probability. We conclude in view of all these foregoing facts that the assessee was very well justified in claiming the impugned foreseeable liability provision in these two assessment year(s) regarding its project works by in compliance of AS-7 of the Act. The Revenue’s instant substantive grievance fails therefore.

The Revenue’s identical 5th substantive grievance pleaded in both these 22. appeal(s) seeks to revive the Assessing Officer’s action disallowing assessee’s employees contribution to PF & ESI amounting to ₹1,05,19,532/- and ₹67,36,892/-; respectively by invoking sec. 36(1)(via) of the Act since the same had not been paid within the due date as prescribed in the specific Acts. Suffice to say, hon'ble jurisdictional high court in Commissioner of Income Tax vs. M/s Vijay Shree Ltd. ITAT 245 of 2011 G.A No. 2607 of 2011 dated 07.11.2011 holds that such a disallowance deserves to be deleted in case the assessee has deposited the ESI / PF contribution in question before the due date of filing of its return of income which is not in dispute before us. We thus affirm the CIT(A)’s action deleting the impugned disallowance on this count alone. The Revenue’s corresponding identical substantive 5th grievance in these two assessment year(s) fails accordingly. Its second appeal ITA No. 218/Kol/2018 is also partly allowed on statistical purposes in above terms.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 33 23. Now we proceed to deal with the Revenue’s remaining grievances in its last appeal ITA No. 219/Kol/2018 its 6th substantive ground avers that the CIT(A) has erred on facts and in law allowing provision of market-to-market loss amounting to ₹117,86,272/- derived from the derivative transactions. The CIT(A)’s detailed discussion to this effect reads as under:- “29. DECISION: 1. I have carefully considered the submissions of the Ld. ARs in light of the facts available on record. I have also perused the impugned order passed by the Ld. AO. From the discussion in the assessment order, it is noted that the disallowance of MTM loss of Rs.1,17,86,000/- was justified by the Ld. AO on the ground that the liability had not crystallized during the year under consideration and the amount debited was mere provision which could not be allowed under Section 37(1) as it was contingent in nature. The Ld. AO in support of the impugned disallowance relied on CBDT's Instruction No. 3/2010 dated 28.09.2010 which inter alia provided that losses on forex derivatives accounted on the basis of exchange rate prevailing on the balance sheet date was notional in nature and therefore not allowable in computing the taxable income, For the same reasons the Ld. AO added such MTM loss in arriving at the book profit of the appellant under Section 115JB of the Act by placing reliance of clause (e) of Explanation 1 to Section 115JB of the Act. 2. The findings of the Ld. AO are n compared with the facts as are brought on record by the Ld. ARs of the appellant-company, I note that the disallowance made ill the impugned order was misconceived both on facts and in law. It appears, in my considered observation that the Ld. AO did not bring on record all facts as are necessary to appreciate the controversy at hand. From the material facts on record, I find that the appellant had availed loan in foreign currency to part finance its working capital and at the time of taking the loan it had negotiated for payment of interest which was at floating LIBOR rate plus 230 bps. As such the appellant was exposed to risk of unfavorable movements in LIBOR rate and therefore any increase in LIBOR would have adversely impacted the effective rate of interest for the appellant. In the circumstances to hedge against the probable losses that would be caused by any unfavorable movement in LIBOR, the appellant entered into interest swap arrangement where under the assessee swapped its floating rate loan to a fixed rate loan of 3.35%. Consequent to such swap arrangement, the appellant had to re-state its liabilities expressed in foreign currency as on the balance sheet date which resulted in a loss. I therefore find that the arrangement put in place by the appellant was intended to cause saving in the effective interest out go. I note that the Ld. AO has not disputed the basic premise that the loan was available by the appellant to meet working capital needs and interest payable on the said loan was allowable in computing business profits of the appellant. 3. In the foregoing background therefore the interest rate swap derivative entered into by the appellant was also connected with the revenue item and therefore any gain or loss arising from such an arrangement was in the revenue field. The only question to be decided therefore is whether the loss provided for in the appellant's books as on the balance sheet date on account of re-statement of foreign exchange transactions was contingent! notional or whether it was real loss liable to be allowed in computing business income. In the Ld. AO's opinion, the loss provided in the books was mere notional loss accounted on the basis of exchange rate prevailing on the last date of previous year. In this regard I note that the provision made by the appellant in its books towards MTM loss was in conformity with Accounting Standard-

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 34 11 prescribed by the ICAI and there was no contrary provision in the IT. Act, 1961 which provided for making disallowance of such MTM loss. In fact I find that the very issue as to whether the loss arising on re-statement of outstanding foreign currency transactions is allowable as real loss or a notional loss was adjudicated by tile Supreme Court in its judgments in the cases of CIT Vs Woodward Governor India P. Ltd (312 ITR 2S4)&Oil & Natural Gas Corpn. Limited Vs CIT (322 ITR 180). In both these judgments, the Hon'ble Supreme Court took due note of AS-11, and held that any loss or gain arising from re-statement of outstanding foreign currency transactions including borrowings/payables represents actual or real loss / gain and the same does not constitute notional/contingent loss. 4. As regards the reference made by the Ld. AO to Instruction No. 3/2010, I find that the said Circular was considered by the Special Bench of ITAT, Mumbai in the case of DCIT Vs. Bank of Bahrain & Kuwait (41 SOT 290) and ITAT, Delhi the case of Bechtel India Pvt. Ltd Vs. Add!. CIT (32 Taxmann.com 123) as also the judgment of the Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd (supra) was considered by the ITAT. Having considered both, the Tribunal held that the view canvassed by the CBOT in its Instruction No.3/2010 was contrary to the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd (supra) and therefore did not represent the correct, decided and accepted legal view and accordingly it was held by the Hon'ble Tribunal that the MTM loss provided in the books by following AS-11 is not contingent or notional loss but real loss which is required to be allowed in computing the business income of an appellant. Since the facts of the appellant's case squarely come within the parameters laid down in the foregoing decisions, I hold that the Ld. AO was not justified in disallowing Rs.1,17,86,000/-, being MTM loss on derivatives holding it to be notional or contingent. Since I have observed that the MTM loss is real loss, the Ld AO is directed to allowed the deduction therefore in computing income both as per normal computation provisions as well as book profit u/s 115JB of tile Act. Grounds Nos. 15 & 16 are therefore allowed.”

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 35 of business. The CIT(A) has admittedly taken note of various judicial precedents i.e. Woodward Governor India P. Ltd. (supra) that the impugned mark-to-market loss is allowable to be recognized in respect of the outstanding derivative contracts pertaining to regular course of business. Hon'ble apex court’s decision in CIT vs. Indra Industries (2010) 248 ITR 338 (SC) also holds that Board’s circular are binding only on the departmental authorities.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 36 transactions nor could prove that the expenses were made wholly & exclusively for the business purposes and treating the amount paid as bogus expenditure the disallowance was made. 2. On careful consideration of the submissions of the Ld. AR and transactional documents furnished, I find that in the course of assessment the appellant had produced before the Ld. AO all material documents which it was expected to maintain in the ordinary course of business. It was submitted before the Ld. AO that in connection with the contract awarded by BHEL, the appellant had availed the consultancy services of RNPL. In support of the services rendered, an invoice was raised on the appellant, copy whereof was filed before the Ld. AO. It appeared from that the payee was registered with service tax department and the assessee number under the service tax was duly mentioned. The appellant had also furnished before the Ld. AO, the ST registration certificate which proved that the payee was assessed under service tax. The appellant had discharged the payment of service tax and credit therefore was allowed in the indirect tax proceedings without there being any adverse inference. It is further noted that the payee company was issued a certificate u/s 197 of the Act by the Dy. CIT Circle 59 (TDS), Kolkata which showed that not only the existence of the payee company was known to the Income-tax Department but the Ld. AO had issued certificate u/s 197 on being satisfied that the payee would not have any liability to pay tax for the relevant year. 3. In the light of the above documentary evidences, it is difficult to accept the ld. AO's contention that the existence of RNPL remained unproved or that it was a non- existent company. It is also noted that the payee was assessed to tax and for the relevant year the return of income was filed by the payee. It may be so that in the assessment proceedings, there were non-compliances by the payee company, for which adverse inference could not be drawn against the appellant particularly when the appellant's transactions were supported by proper documentary evidences which are required to be maintained in the ordinary course of business. As admitted by the Id. AO of the payee company, the gross contractual receipts for FY 2012-13 were to the or.der of Rs.6716.69 lacs whereas the amount billed to the appellant was only Rs.34.01 lacs. In percentage terms the amount billed to the appellant did not even constitute 0.5% of the contractual receipts of the payee company. I also find that the payments were made by the appellant by account payee cheques and the payments were cleared through proper banking channel and documentary evidence in support thereof was filed before the Ld. AO. The payments made inter alia included the service tax levied by the payee on the invoiced value and the payee was duly registered with the Service Tax Department. In the circumstances the primary onus cast on the appellant of substantiating the transactions was discharged by the appellant. In the assessment order the Ld. AO has observed that Inspector deputed to conduct enquiries from the payee could not locate the said company at the given address and this was the reason which prompted the Id. AO to draw adverse inference. However I note that the reason for not finding the payee at the given address has been provided by the Ld. AO himself when he observed that as per MCA data the payee company's name was struck off from the ROC, meaning thereby the company was wound up. The transactions of the appellant were conducted in FY 2012-13 whereas the enquiry about the transaction was conducted in FY 2016-17. In the circumstances if in the intervening period, the payee company had gone into liquidation, then for such circumstances the appellant could not be held responsible and for the reason that the company was found liquidated, inference could not be drawn that the appellant's transaction was bogus. In support of this inference, reference is invited to the judgment of the Calcutta High Court in the case of CIT, Kolkata-I vs. Inbuilt Merchant Pvt Ltd (G.A. No. 3825 of 2013).The relevant findings of the High Court were as follows:

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 37

"The views expressed by the Assessing Officer are erroneous in law. The Assessing Officer has overlooked the importance of the books of accounts maintained in the ordinary course of business. Reference in this regard may be made to sub-section (2) of Section 32 of the Indian Evidence Act, 1872. The books of accounts maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. The mere fact that recipient did not reply in some cases or they were not found at the address furnished by the assessee does not in the least prove the fact that they were non existent or that the payments shown to have been made by the assessee were imaginary. With the advancement of technology, it has become possible to sell goods throughout the country through the intern et. For that purpose, agents are required throughout the country. The mechanism in that regard has been disclosed by the assessee and has been recorded in the order of the CIT (Appeals). For the purpose of carrying on its business, the assessee has to recruit the agents. It may not be possible for the assessee to know them personally. Whatever address was furnished to the assessee, has been disclosed to the Income-tax Department. Payments were admittedly made by cheque after deduction of tax. The tax deducted as source has duly been deposited. The judgment in the case of CIT vs. Precision Finance Pvt. Ltd. reported in 208 ITR 465 relied upon by Mr. Bhowmick does not really assist him. The aforesaid judgment is an authority for the proposition that mere payment by account payee cheque cannot establish that the transaction was genuine, but in the case before us, besides the fact that payment was made by chegue, there are other pieces of evidence available which are as follows: a) Books of Accounts maintained by the assessee in the ordinary course of business; b) Deduction of Tax at source; c) Deposit of the money deducted at source: d) Particulars of the recipient were duly furnished; We are, as such, of the opinion that the views expressed by the learned Tribunal are unexceptionable. We, therefore refuse to admit the appeal. The appeal is thus dismissed.” 4. Similar view was taken by the Gujarat High Court in the case of CIT Vs. Nangalia Fabrics Pvt. ltd (40 taxmann.com 206) involving similar circumstances, the relevant extracts thereof are as follows: "The second question pertains to brokerage commission of Rs.72,37,808/- disallowed by the Assessing Officer. The Assessing Officer disallowed the commission on the ground that M/s. Shree Shantinath Silk Industries did not maintain its record and its name did not appear on sale bill. When it was challenged before the CIT(A) it was of the opinion that the only one party had been examined by the Assessing Officer and the person examined for and on behalf of such party in fact was not dealing with sales, and therefore, would not be having any knowledge of the brokerage. After dealing with the issue at length, it sustained addition of Rs. 36.18 lacs (rounded off). 6. When CIT( A)'s order was challenged before the Tribunal, the Tribunal deleted the entire addition by observing thus:

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 38 "23. We have heard the rival submissions and the materials placed on record. We are inclined to agree with the submission made on behalf of the assessee and find that no evidence, had been placed on record that the commission expense is bogus. Assessee made payment of commission expenses is bogus. Assessee made payment of commission through account payee cheques for sales canvassed by the party and also in consideration of the collection recovered from purchaser. Payments cannot be unreasonable particularly when M/s. Shree Shantinath Silk Industries is not related to the assessee and so even disallowance made by CIT(A) is not proper. We therefore delete the full disallowance of Rs.72137,808/- made by the assessing officer. Hence assessee's ground of appeal is allowed and revenue's ground of appeal is allowed and revenue's ground of appeal is dismissed.” 7. This issue is again based on facts. Essentially the Tribunal ties, with cogent reasons dealt with the issue, no question of law, much less any substantial question of law arises. The Tax appeal is resultantly, dismissed" 5. Applying the ratio laid down in these decisions to the facts of the case, I find that the appellant had produced before the Id. AO; all the relevant documents to substantiate its transactions with RNPL. The Ld. AO did not prove any specific falsity or infirmity in these documents. Even though in the impugned order the Ld. AO alleged that the payments made by account payee cheques were returned back to the appellant through multi-layering of the transaction, no supporting evidence to substantiate such allegation was brought on record. Even the cause for non- existence of the company at the given address was explained by the Ld. AO to the effect that company had been wound up at the time when enquiry was conducted. In view of these facts therefore, I hold that there was no valid for the Ld. AO to make disallowance of Rs.34,01,811/- and the same is accordingly deleted. Ground No. 17 is therefore allowed.” 27. We have given our thoughtful consideration to rival pleadings supporting and contesting the impugned disallowance. The Assessing Officer had admittedly invoked the impugned disallowance mainly on the ground that the payee herein alleged to have provided consultancy services to the assessee’s turned out to a shell entry in mere accommodation entry business. Learned CIT-DR fails to dispute that the assessee had placed on record all the relevant evidence of the said recipient. Hon'ble jurisdictional high court’s decision in Inbuilt Merchant Pvt. Ltd. (supra) has already set identical issue to treat that such a compliance by way of all detailed evidence forms sufficient reason to prove rendering of the services as well as genuineness of payments. We thus affirm the CIT(A)’s findings deleting the impugned management consultancy services disallowance as well.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 39 Lastly comes the Revenue’s 8th substantive grievance that the CIT(A) 28. has erred in law and on facts in deleting notional interest income addition of ₹10,23,81,896/- received / receivable from M/s SPL for loans provided. The CIT(A)’s detailed discussion deleting the impugned addition reads as under:- “35. DECISION: 1. I have carefully considered the submissions of the Ld. ARs. I have also perused the impugned issue as emanating from the assessment order. I have also considered the loan agreement and the supplementary deed between the appellant & SPL. In the impugned order the Ld. AO noted that From perusal of Form 26AS of the AST system, he found that SPL has deducted tax of Rs.1,17,22,859/- u/s 194A in respect of sum of Rs.11,72,28,588/-; whereas in the appellant's books as also in the return of income, the interest income offered by the appellant in respect of the said payer was only Rs.1,48,76,697/- . The Id. AO also noted that the appellant had claimed TDS of Rs.11,44,428/- in respect of tax deducted by SPL although as per statement of Form 26AS, the tax deducted was Rs.1,17,22,859/-. The appellant was accordingly directed to explain the discrepancy. Before the Id. AO it was explained that the appellant company had granted loan to SPL on the terms evidenced by the loan agreement dated 01.12.2007 and in terms thereof the interest at the rates prescribed amounting to Rs.1,48,46,692/- was offered to tax. The said agreement also provided for charging of penal interest by way of liquidated damages in the event there was default on the part of the borrower to pay interest and re-pay principal. It was explained that in FY 2012-13, SPL unilaterally made a provision for penal interest for the entire period of default starting from 2007 amounting to Rs.10,57,86,112/- and deducted thereon at the rate of 10%. It was the appellant's contention that it had never enforced the penal interest clause demanding liquidated damages at any time during the currency of loan agreement and SPL has unilaterally made provision for such penal interest in Its books without making actual payment. In fact in the immediately succeeding year, SPL had passed necessary entries reversing such penal interest pursuant to the addendum executed between the parties. The explanation put forth by the appellant was however found unacceptable. According to Ld. AO the appellant maintained its books of accounts by following mercantile system of accounting and therefore the income accrued to the appellant since the loan-debtor' had provided interest in its books and tax was also deducted from the interest amount in the year under consideration. Accordingly the Ld. AO made addition of Rs.10,23,81,896/ -. 2. On careful perusal of the Ld. AO's observations, I find that the conclusions drawn by the Ld. AO suffer from several infirmities, legal as well as factual. The appellant had entered into a loan agreement dated 01.12.2007 with M/s SPL, in terms of which the assessee had given loan of Rs.15 crores carrying interest rate of SBI PLR (subject to minimum of 12%). The interest was payable at quarterly rests. Clause 3.07 of the loan agreement provided for charging of penal interest in the form of liquidated damages, where the borrower committed default in

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 40 3. From the foregoing facts and the sequence of events, I note that the entire addition as made in the impugned order was simply based on book entries passed by the loan debtor in its books without there being any intention on its part to make payment of penal interest at any time. I note that in the impugned order the Ld. AO has justified the addition solely on the ground that the appellant followed mercantile system of accounting and therefore appellant was obliged to recognize the income in the same year in which corresponding provision for interest payment was made by the loan-debtor. I find that the reasoning put forth by the Id. AO is devoid of any merit and addition cannot be sustained on such reason. Admittedly the interest of Rs.10,23,81,896/- did not pertain to FY 2012-13 being relevant AY 2013-14 alone. The provision for penal interest to the entire period of default commencing from December 2007 when the loan was taken by SPL. In the circumstances the interest including penal interest for the period prior to 1st April 2012 could not have been considered by the Id. AO as appellant's income for AY 2013-14 even under mercantile system of accounting. Where the assessee followed mercantile system of accounting, then it was wholly immaterial whether- or not the debtor or the appellant had passed accounting entries in their books in respect of such interest. However the facts & the assessee's action demonstrate beyond any doubt that assessee had never invoked penal clause of Article 3.07 of the Agreement and had never demanded from the borrower payment of liquidated damages. Even though in the past assessments, the appellant had followed mercantile system of accounting, the Id. AO had not made out a case that penal interest was also assessable as income because the appellant followed mercantile system of accounting. In the circumstances I find that even in the regular assessments of earlier years, the AO accepted that penal interest did not accrue to the assessee as income and on that footing no addition was made, there was no legal justification for the Id. AO to assess tire entire arrears of penal interest in AY 2013-14 merely because an entry in the books of accounts was passed by the borrower and that too there being no demand for payment of liquidated damages from the appellant's side. I therefore find merit in the Ld. ARs' submissions that penal interest, if any, for period 1st April 2012 could not have been assessed as income of the appellant in AY 2013-14, merely on the basis of provision made therefore in the books of debtor. 4. Even with regard to the penal interest allegedly pertaining to FY 2012-13, I find merit in the Id. ARs' submissions that such interest did not represent any “real income" assessable to tax in the appellant's hands. From the conduct of the parties, it is noted that the appellant had granted loan of Rs.15 crores in December 2007. The agreement prescribed for payment of interest equal to SBI Prime Lending Rate or 12%, whichever is higher. The said agreement also contained clause for payment of liquidated damages in the event the borrower committed default in payment of interest. It was a penal clause incorporated in the agreement to protect the interest of lender and to force the borrower to pay without committing any default. However' such penal clause was never invoked by the appellant and no demand was ever raised on the borrower till 31st March 2013. I also note that SPL was declared as a sick industrial company and referred to BIFR. Accordingly the borrower enjoyed statutory protections from the creditors such as appellant who could not have

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 41 instituted any legal proceedings for recovery of loan amounts. In such background therefore, I find merit in the AR's submissions that the ground realities were such even the recovery of principal was in serious question and therefore merely because the agreement contained a clause for payment of liquidated damages, income in form of penal interest did not accrue or arise, giving rise to accrual of "real income". The fact that no income in the form of liquidated damages were actually earned or received is further fortified from the fact that in the immediately succeeding year, the appellant entered into an addendum where under the fact the appellant had never demanded payment of penal interest or liquidated damages was recognized by the parties in writing. Pursuant to execution of such addendum, SPL had passed entries in its books of accounts r reversing the provision made for payment of penal interest. A confirmation of these facts issued by SPL was also furnished before the Ld. AO in the course of assessment. The foregoing facts and documents therefore prove beyond doubt that save & except passing tile entries books of accounts for FY 2012-13, SPL had never acted upon these entries and payment of penal interest never materialized and the assessee did not receive any part of such penal interest. In fact I note that since the appellant had not demanded payment of liquidated damages not only the appellant did not account for such penal interest but also did not claim credit for the tax which was unilaterally by SPL from the amount of penal interest. These facts therefore cumulatively show that the appellant had never made any demand for payment of liquidated damages from SPL even though the appellant followed mercantile system of accounting but accounted only the income in the form of normal interest. 5. The Ld. AO has justified the assessment of penal interest or liquidated damages solely on the ground that the appellant followed mercantile system of accounting. The issue as to whether a fictional income or hypothetical income call be assessed to tax, in the hands of assessees, following mercantile system of accounting has been adjudicated by numerous judicial authorities including the Apex Court. The authoritative judgment on the subject was rendered by the Supreme Court in the case of CIT Vs. Shoorji Vallabhdas (46 ITR 144) wherein it was held as follows: "Income-tax is a levy on income. No doubt! the income-tax Act takes into account two points of time at which the liability to tax is attracted, vlz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient even though given up the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This was exactly what had happened in instant case. Here the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 42 been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the instant case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. “

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 43 during the pendency of the said suit the undertaking of the assessee- company was taken over by the Government of Gujarat under the Defence of India Rules, and subsequently, it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges. In subsequent representative suit the consumers were challenging the enhancement in charges made in 1963 and had sought a declaration that the assessee-company was not entitled to recover more than 31 paise per unit for light and fans and 20 paise per unit for motive power and the trial court, while decreeing the said suit had given a declaration in these terms. Hence, the said declaration was not confined to the period subsequent to 31-3-1969. The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity had to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter was considered in this light it was not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the AO while passing the assessment orders in respect of the assessment years under consideration. The Tribunal, therefore, had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Assessing Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years.” 7. Applying the same ratio, the jurisdictional Calcutta High Court in the case of Sri Kewal Chand Bagri Vs CIT (183 ITR 207); had held as follows: "The mercantile system of accounting is relevant only to determine the point of time at which tax liability is attracted and whether the income has accrued or not. It cannot be relied on to determine whether the income has, in fact, resulted or materialised in favor of the assessee. In the instant case, it was true that the assessee had been maintaining his accounts on the basis of mercantile system of accounting. The interest income might have accrued according to the mercantile system, but the issue had to be viewed in the context of commercial and business realities of the situation. The fact remained that from the year 1970 onwards the assessee did not receive any interest as the debtor was unable to pay any interest; income by way of interest was not, in fact, realised by the assessee and had not become his income in the real sense. The assessee was not able to recover the principal, and, accordingly, the charge of interest in such a case would have only inflated the assessee's income and the assessee would have been liable to pay tax on such hypothetical income, when it was not the real income of the assessee and when it really was not reflected in the accounts of the assessee. Hence, the ITO was not right in estimating the interest income of the assessee.”

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 44 8. Besides the foregoing judgments, the Id. AR of the appellant had relied upon several other judgments wherein the same legal principle has been stated by the Judicial authorities and therefore for the sake of avoiding the repetition, these judicial decisions are not discussed herein. Suffice to say, that it has been Judicially held that subject matter of taxation is and has always been the "real income" and not hypothetical income or notional income and therefore unless in reality the income accrues to an assessee, there cannot be any charge of tax irrespective of entries made in the books of accounts or lack of entries in the books. Having regard to the facts involved in the present case, I find that SPL in default since inception of the loan transaction and being a BIFR declared sick company, the realization of the principal itself was in serious doubt. In the circumstances merely because the assessee followed mercantile system of accounting, the AO could not bring to tax income in the form of liquidated damages although a clause in the agreement provided for payment of such liquidated damages. I also find that a unilateral entry made by the borrower in FY 2012-13 was immediately reversed in the books of the borrowers in the immediately succeeding year and no part of the penal interest was received by the appellant at any time. On these facts therefore I have no hesitation in holding that no income in 'real terms' accrued to the appellant and therefore the addition of Rs.I0,23,81,896/- was legally as well as factually unsustainable and same is ordered to be deleted. Ground No. 18 is therefore allowed.” 29. We have heard rival contentions. The factual position, as it is evident from the case file(s) is that the assessee had admittedly advance a loan of ₹15 crores to M/s SPL Ltd. vide agreement dated 01.12.2007. The said entity appears to have been defaulting consistently since then. Coming to the relevant financial year, the borrower concerned accounted for penal interest expenditure as well from the inception of the above stated loan agreement. Learned counsel clarifies that assessee thereafter entered into an addendum dated 06.03.2014 contending delay on the said entity part. These two parties resolved not to enforce the damages clause in the original agreement. We are informed that the Assessing Officer went by the said clause only in adding the impugned sum. There is no evidence about the assessee having received any such amount since we are dealing with an instance of notional interest income only. That being the case, we find no fault in the CIT(A)’s action going only by real income principle in view of the various judicial precedents that such a notional income in case of defaulting entity a NPA does not lead to assessment of taxable income. Tribunal’s co-ordinate bench’s decision in

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 45 Yash Corporation vs. Income Tax Officer Ward-5(2)(4) Ahmedabad ITA No.95/Ahd/2017 dated 01.01.2019 and Toyo Engineering India vs. JCIT (2006) SOT 616 (Mum) also hold that the department could not add any notional income in an assessee’s hands just because a payer had deposited TDS qua the same. We wish to re-emphasis here that there is material whatsoever which could suggest payment credit of any interest income in assessee’s books. We thus uphold the CIT(A)’s findings under challenge. This Revenue’s instant last appeal ITA No.219/Kol/2018 is partly allowed for statistical purposes therefore.

ITA No.217-219/K/18 & CO 94-96/K/18 A.Y.s 11-12 to 13-14 DCIT, CC-2(1), Kol. Vs. M/s Paharpur Cooling Towers Ltd. Page 46 dated 27.11.2018 also decided the very issue in assessee’s favour. Hon'ble jurisdictional high court’s Srei Infrastructures Finance Ltd. vs. PCIT ITAT 121 of 2019 dated 08.08.2019 has also reversed this tribunal’s co-ordinate bench’s decision dated 27.02.2019 deciding the issue in Revenue’s favour. Learned CIT-DR at this stage quoted (2016) 72 taxmann.com 238 (Cal) Srei Infrastructures Finance Ltd. vs. DCIT that a “surcharge” is not anything else other than income tax qua MAT credit under sec.115JAA of the Act. We conclude in this backdrop of fact that since their lordship’s latter decision specifically deleting with sec. 40(a)(ii) of the Act has gone in assessee’s favour, we direct the assessing authority to finalise corresponding computation after deleting the impugned disallowance. These three cross objections CO Nos. 94 to 96/Kol/2018 are accepted. 33. The Revenue’s instant three appeal(s) ITA Nos. 217 to 219/Kol/2018 are partly allowed for statistical purposes whereas assessee’s three cross objection(s) CO Nos.94 to 96/Kol/2018 are allowed. A copy of the instant common order be placed in the respective case file(s). Order pronounced in the open court 28/02/2020 Sd/- Sd/- (लेखा सद$य) (�या,यक सद$य) (Dr.A.L.Saini) (S.S.Godara) (Accountant Member) (Judicial Member) Kolkata, *Dkp, Sr.P.S -दनांकः- 28/02/2020 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee-M/s Paharpur Cooling Towers Ltd., 8/1/B, Diamond Harbour Rd. Kolkata-27 2. राज$व/Revenue-DCIT, CC-2(1), 3rd Floor, Aayakar Bhawan, Poorva E.M. Bye Pass 110, Shanti Pally, Kolkata-107 3. संबं7धत आयकर आयु8त / Concerned CIT Kolkata 4. आयकर आयु8त- अपील / CIT (A) Kolkata 5. ;वभागीय �,त,न7ध, आयकर अपील�य अ7धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड@ फाइल / Guard file. By order/आदेश से, /True Copy/ सहायक पंजीकार आयकर अपील�य अ7धकरण, कोलकाता ।