JINDAL DRUGS LTD,MUMBAI vs. ASST CIT CC 8, MUMBAI

2 & 744/MUM/2015 M/s. Jindal Drugs Ltd. O R D E R PER C.N. PRASAD (JM) 1. Both these appeals are filed by the Revenue as well as the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-48 Mumbai dated 12.12.2014 for the Assessment Year 2011-12. 2. Revenue in its appeal has raised following grounds: - “

1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was erred in deleting the disallowance of ₹.45,61,11,542/- representing speculation loss without considering the fact that the assessee had incurred loss on account of hedging transaction of Menthol Oil, which cannot be treated as loss incurred from business of manufacturing unit at Jammu as the loss is not directly derived from industrial undertaking.

2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in holding that deduction u/s. 80IB is allowable to the assessee on the Gross total income without appreciating that deduction u/s. 80IB is to be restricted to profits taxable under the head Business income 3. whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in granting deduction u/s. 80IB to the assessee on income other than business income and which are taxable under the head income from other sources. 4. whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in not following the decision of the Hon'ble Supreme Court in the case of M/s. Liberty India Ltd., reported in 183 Taxman 249 (SC), which is applicable to the facts of the case.”

3 & 744/MUM/2015 M/s. Jindal Drugs Ltd.

4 & 744/MUM/2015 M/s. Jindal Drugs Ltd. “9. In this year, revenue is aggrieved for allowing deduction u/s.80IB on the hedging profit earned in the commodity exchange from the Jammu unit amounting to Rs. 18.23 crores. At the outset, it was submitted by the Ld. AR that issue is covered by the order of Tribunal in assessee's own case for assessment year 1998-99, 2000-01 and 2001-02 vide order dated 30.09.2008 in the forex fluctuation and section 80HHC. Ld. AR further submitted that issue is also covered by the decision of Hon'ble Gujarat High Court in the case of Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj.) 9.1 We have considered the rival contention and carefully gone through the orders of the authorities below. We had also deliberated upon the judicial pronouncements cited at bar by the ld. AR and DR in the context of factual matrix of the case. We have also deliberated upon the judicial pronouncements referred by lower authorities in their respective orders. From the record we find that the assessee is a recognized export housed dealing in menthol products since last several decades. The assessee has set up a unit at Gangyal, Jammu. The main raw material for all products dealt by the company in Jammu is Mentha Oil. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growing of the Mentha Arvensis plant. The plant has to be used to extract oil immediately after cutting the same, else the plant would dry out and no oil could be extracted from it. This crop is seasonal and is grown only during certain period of the year. The plant or the oil is not available throughout the year making its prices vulnerable to fluctuation on either side. The assessee company has therefore to store the goods during the harvesting season for the entire year. The product manufactured by the company is used in oral health care products such as toothpaste, shaving cream, certain food items, medicines, etc. The demand for the product is continuous and buyers (both national as well as international) in order to maintain its costs would like to enter in to long term fixed price contracts with the companies. The company is therefore faced with the problem of supplying finished products at fixed price, whereas the price of raw material keeps varying depending on the season and availability of scarce product in the market. It was contended by Id. AR that the company would not be able to supply finished goods and make profits if the prices of the raw material fall after the harvesting season and therefore to protect

5 & 744/MUM/2015 M/s. Jindal Drugs Ltd. its stock from price fluctuation the assessee enters in to contracts in commodity exchange. Accordingly, the assessee has hedged only part of the stock a statement is prepared year wise to show that the assessee has only hedged 50% of the total stock available in order to hedge against price fluctuation of the stock available in hand. From the record we found that the assessee has only two manufacturing unit both of which are manufacturing Menthol based products and both of which are eligible to deduction under section 80IB. The assessee does not trade in raw menthe oil and therefore the stock which is used only for manufacturing and the hedging profit and loss for such stock would be directly related to the manufacturing activity. Like the cost of bring the goods to the godown and the cost of storing the raw material are directly related to manufacturing so also the profit / loss related to the hedging of raw material are directly related to the manufacturing activity. The assessee has maintained a consistent stand and also reduced the loss incurred in A Y 2007- 08 and onwards from the eligible deduction under section 80IB. During the year the AU has declined deduction u/s 801B on such profits. By the impugned order, CIT(A) allowed assessee's claim after observing as under:- I have carefully and dispassionately considered the facts and circumstances of the case, the relevant assessment order, the statement of facts, grounds of appeal, Paper Book filed, the written submissions made and the arguments made by the Ld. AR. In the present case, the appellant has entered into various hedging transactions on the multi commodity exchange in order to hedge against the cost of raw material namely Mentha Oil, used for its manufacturing at Jammu unit and exports. It is not disputed that the main raw material for all products manufactured by the appellant is Mentha Oil. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growth of Mentha Arvensis Plant. Ld. AR submitted that Mentha Oil is extracted from Mentha Arvensis plant. The plants severed cut off from the land have to be used to make the oil in a few hours otherwise the plants dry off in view of the peculiarity of the raw material, the raw material has to 6 & 744/MUM/2015 M/s. Jindal Drugs Ltd. be purchased in the harvesting season only to meet requirement of the whole year. The prices are low at the time of season and then fluctuate widely depending upon the demand and supply position. The appellant company sells the product manufactured from Mentha Oil throughout the year. The prices of Menthol products fluctuate widely in the domestic as well as in the international markets. These fluctuations in Mentha Oil prices severely affects the cost of company's product and the profitability of the company as the raw materials are already purchased and stored for the entire year's production. Therefore, the appellant had to carry the inventory at a very high value since the supply after the harvest season is meagre. Further, export order/sales commitments are made at predetermined prices. The appellant company has to safeguard against adverse price fluctuations of the raw material product i.e. Mentha Oil. For this purpose, the appellant company enters into future sale contracts through the recognized commodity exchanges. 3.3.1 It was explained by the Ld. AR that the hedging transactions were only in respect of its raw material products i.e. Mentha Oil. He, further submitted that the quantity of Mentha Oil available with the company is substantially higher than the quantity of future contracts entered into by the appellant and squared off Ld. AR added that if the appellant was made to hand over the delivery of Mentha Oil then the actual inventory was available with the appellant. This fact clearly proves that the hedging transactions were entered into hedge against the future uncertainty of the raw material of the appellant. 3.3.2 Ld. AR further submitted that the Mentha Oil was listed on commodity exchange in May, 2005 and trading was permitted from May, 2005 for the contracts for the month of August, 2005 in accordance with Circular No. MCX/153/2005 dated 21/4/2005 read with Circular No. MCX/163/2005 dated 28/4/05 issued by Multi Commodity Exchange of India Ltd.

7 & 744/MUM/2015 M/s. Jindal Drugs Ltd. Initially, appellant did not enter into any transactions on the said MCX as the appellant was not aware of operational modalities. Further, the appellant had admittedly never done any trading in any of the commodities earlier and hence it was not possible to enter into such transactions unless entire concept was understood. Accordingly, appellant entered into contract of forward sales effectively from December, 2005. All the purchases of Mentha Oil have been made around October and November and hence the hedging transactions commenced in December. As a result of such hedging transaction the appellant was able to earn profit of Rs. 18,23,08,181/- in Asstt. Year 2006-07 However, in subsequent years, the appellant has incurred substantial losses from such hedging transactions. In subsequent assessment years, the appellant has reduced such hedging losses from the profits of business of its Jammu Industrial Undertaking which is eligible for deduction U/s. 80IB and the claim of deduction U/s. 80IB was correspondingly reduced by the appellant itself 3.3.3. Mr. George Kleinman has discussed the hedging transactions in his book named "Commodity Futures and Options a step-by-step guide to successful trading' published by Taxman. Mr, George Kleinman writes on pages 17 and 18 of this book that there are two major players or participants in the futures and options market: the hedger and the speculator. Hedger account for up to half of all the participants in most of the major futures contracts. Hedgers use commodity exchanges to offset the risk of fluctuating prices when they buy or sell physical supplies of a commodity. To illustrate, a copper manufacturing company may sell copper futures- in "lock-in" a sale price say, on 1st April, of a particular year for their future production. In this way, the said company protect its profit margins and revenue stream should copper price fall in the future. Should copper price rise, the said copper manufacturing company will loose on its future position, but the value of its physical copper metal shall rise. In this 8 & 744/MUM/2015 M/s. Jindal Drugs Ltd. illustration, the cooper manufacturing company is just trying to offset, or hedge, its price risk. A hedger can be a buyer or seller. 3.3.3.1. A copper vessel manufacturer who buys copper as a raw material in the production of copper vessel, might buy copper futures to "lock-in" its cost of copper for future purchase. If the price of copper rises, it will have a profit on its hedge, which can be used to offset the higher price of physical copper it will need to purchase in the market. If the copper prices fall, it will show a loss on the future side of the transaction, but it will be able to buy the copper cheaper in the market. This is the essence of hedging transactions. 3.3.4 Hedging transactions differ from speculative transactions on account of the fact that they are not entered into, to make profits only. Their purpose is entirely different. Their purpose is to create a "hedge" primarily to provide an insurance medium against risk of unfavourable price fluctuations. Such a contract enables the concerned trader dealing in a commodity to hedge himself, that is to say insure himself against adverse price fluctuations. A dealer or a merchant enters into a "hedge" contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may off-set it by a reverse transaction on the forward market itself [ Please see Regulation of Forward Markets by WR. Natu, page 9, quoted in Pankaj Oil Mills vs. CIT - 1977 - CTR (Guj.) (FB) 154; (1978) 115 ITR 824 (FB)]. 3.3.5. These forward contracts by way of hedge transactions usually afford to cover to a trader in as much as his loss in the ready market is offset by a profit in the forward market and vice versa. It, therefore, follows that in order to effectively hedge against adverse price fluctuations of the 9 & 744/MUM/2015 M/s. Jindal Drugs Ltd. manufactured goods or merchandise, a manufacturer or merchant has necessarily to enter into forward transaction of sale and purchase both, and without these contracts of sale and purchase constituting hedge transactions, there would be no effective insurance against the risk of loss In the price fluctuation of the commodity manufactured or merchandise sold (pankaj Oil Mills vs. CIT 1977 CTR (Guj)(FB) 154: (1978) 115 ITR 824 (Guj) (FB). It is not correct to state that in order to be a genuine hedging transaction there should be a spot purchase and forward transactions or purchase and a part of sale or forward transaction land the said transactions must be so interconnected that one is reflected in the other. The transaction of a person in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market or he may off-set it by reverse transaction of the forward market itself. It is not essential that in order to be a genuine hedging transaction there must be a ready purchase and forward sale or ready sale and forward purchase (CIT vs. Mohanlal Ranchhoddas (1992) 108 CTR (Guj) 22: (1993(203 ITR 304 (Guj). This decision was subsequently followed in CIT vs. Ashokbhai B. Shah (1996) 131 CTR (guj) 234: (1996) 218 ITR 331 (Guj). Hedging contracts contemplated by proviso to section 43(5): Proviso to section 43(5) lays down that for the purpose of section 43(5) contracts mentioned in cls. (a) to (c) of the proviso would not be deemed to be speculative transactions. In other words, although contracts mentioned in cls. (a) to (c) would otherwise fall within the definition of speculative transactions, by virtue of deeming provisions contained in the proviso they would not be regarded as speculative transactions. The contracts mentioned in cls. (a) to (c) are hedging contracts of specific category. When the question arises as to whether a particular transaction 10 & 744/MUM/2015 M/s. Jindal Drugs Ltd. represents hedging transaction, the fact that such transaction comes within the general concept of hedging transaction would not be enough: it should come strictly within the ambit of one of the three clauses, viz. c/s. (a),(b) or (c) of the proviso. 3.3.6. Clause (a) deals with the case of a person carrying on business of manufacturing of goods and a person carrying on merchanting business. Clause (b) deals with the case of a person who is a dealer or an investor in stocks and shares while ci. (C) deals with the person who is member of a forward market or a stock exchange. 3.3.7. As far as person manufacturing goods is concerned, the contract contemplated by cl.(a) is a contract in respect of raw materials which is entered into by him in the course of his manufacturing business to guard against future price fluctuations in respect off his contracts for actual delivery of goods manufactured by him. As far as person carrying on merchanting business is concerned, the contract contemplated by this clause is a contract in respect of merchandise which is entered into by him in the course of his merchanting business to guard against future price fluctuation in respect of contracts for actual delivery of merchandise sold by him. 3.3.8 Hon'ble Bombay High Court in the case of Kirtilal Jaisinqhlal & Co. Vs. Commissioner of Income Tax reported in (1980) -121 -ITR - 279 has held that loss arising from bonafide forward sales to guard against the risk of fall in the value of raw materials or merchandise to the extent of stock on hand is allowable as normal business loss. CBDT in its circular dated 12th September. 1960 had instructed the Income-tax Officers to treat bonafide forward sales entered into with a view to guard against the risk of raw materials or merchandise in stocks falling in value as normal business losses and not as speculative losses. The clarification was clearly restricted to hedging sales limited to the extent that 11 & 744/MUM/2015 M/s. Jindal Drugs Ltd. the total of such transactions did not exceed the total stock of raw materials or merchandise in hand. The appellant has clearly proved that the total of its transaction did not exceed the total stock of raw material or Menthol Oil in hand. - Therefore, in view of the aforesaid discussion and in the light of Hon'ble Bombay High Court judgment in the case of KirtilalJaisinghlal & Co. vs. Commissioner of Income Tax (supra) and CBDT's circular dated 12th September, 1960, the profits or losses from hedging transactions are normal business profits or normal business losses and not speculative losses. 3.3.9. Ld. AR had further brought to my notice that Ld. CIT(A)-III as well as Hon'ble ITAT in the appellant's own case of Asstt. Year 1998- 99 as well as for Asstt.Year 2000-2001 and 2001-2002 have held that loss on forward exchange contract was not hit by the provisions of Section 43(5) of the Act. Appellant in Asstt. Year 1998-1999, 2000- 2001 and 2001-2002 as reported had earned income by entering into speculative transactions in foreign exchange, on whose profit deduction U/s. 80HHC was claimed. Ld. Assessing Officer held it has a speculative income Ld. CIT(A)-III accepted the appellant's claim by relying on CIT Vs. Badridas Gauridas P.Ltd. (2004) 261 - ITR - 256 (Bom.) Hon'ble ITAT 'C' Bench, Mumbai in Appeal Nos. ITA No. 5549/M/2005, 5550/M/2005, 5489/M/2005 and 5490/M/2005 dated 30th "September, 2008 for Asstt. Years 2000- 2001 and 2001- 2002 clearly held that loss suffered by the appellant on account of failure to honour certain contracts was not speculation loss but was allowable as business loss. Hon'ble ITAT 'H' Bench, Mumbai in the case of the present appellant in ITA No. 4637/M/2003 for Asstt Year 1998-99 in its order dated 151312007 has also held vide para 8 on page 4 of the impugned order that the loss on forward exchange contract was not hit by the provisions of Section 43(5) of the Act. Hon'ble ITAT 'C' Bench, Mumbai have relied on Hon'ble Bombay High Court decision in the case of CIT Vs. Badridas Gauridas P.Ltd. (supra). In 12 & 744/MUM/2015 M/s. Jindal Drugs Ltd. the said case, the assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank However, the export contracts entered into by the assessee for e-export of cotton in some cases failed. In the circumstances, Hon'ble Bombay High Court held that the assessee was entitled to claim deduction in respect of payment made on account of cancellation of forward booking of foreign exchange with banks as a business loss. 3.3.10. As a matter of fact, Section 43(5) itself reads asunder. – "SECTION 43(5) -SPECULATIVE TRANSACTON This section reads as under: Speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. Provided that for the purposes of this clause – (a) a contract in respect of raw materials or merchandise entered into by a person in the course of the manufacturing or merchanting business to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contact in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations, or (c) a contract entered into by member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to 13 & 744/MUM/2015 M/s. Jindal Drugs Ltd. guard against loss which may arise in the ordinary course of his business as such member; (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; Shall not be deemed to be a speculative transaction." Therefore, it is resolved that the profit earned by the appellant out of hedging transaction in respect of raw material i.e. Mentha Oil used for its manufacturing in Jammu Unit was a business profit of Jammu unit which was accordingly credited into the Profit and Loss Account of the appellant company. Whenever the appellant has incurred losses from such hedging transactions the appellant has reduced its profit and has claimed less deduction U/s. 80IB suo motu. 3.3.11 Once it is resolved that the profit from hedging transactions in Mentha Oil used for manufacturing by Jammu unit of the appellant was business profit, the second question arises whether such business profit is eligible for deduction U/s. 80IB or not. Ld. Assessing Officer has followed the decisions of Hon'ble Supreme Court in the cases of Pandian Chemicals Ltd. vs. CIT - 262 ITR 278 (supra) and CIT Vs. Sterling Foods 237 - ITR 579 and has held that the Industrial undertaking itself had to be source of the profit for claiming deduction. 3.3.12 It is observed that there is a material difference between the language used in Section 80HH, section 801 and section 80IB. Whereas section 80HH, requires that the profit and gains should be derived from the Industrial undertaking, Section 80IB requires that the profits and gains should be derived from any business of the Industrial Undertaking. In other words, there need not necessarily be a direct nexus between the activity of an Industrial Undertaking and the profits and gains. This view has been taken by the Hon'ble 14 & 744/MUM/2015 M/s. Jindal Drugs Ltd. Delhi High Court in the case of CIT Vs. Eltek SGS (P) Ltd, reported in (2008) -300- ITR-6 (Del). Hon'ble Delhi High Court has discussed the Hon'ble Supreme Court Judgments in the case of CIT Vs. Sterling Foods (supra) and Pandian Chemicals (supra) and also CIT Vs. Ritesh Industries Ltd in 274-ITR-324 (Del). And held that it is sufficient if one sticks to the language used in section 80IB which is very different from the language used in Section 80HH of the Act. 3.3.13 Hon'ble Delhi High Court again in the case of CIT Vs. Dharam Pal Prem Chand Ltd. (2009) 221- CTR -133 discussed issue of deduction U/s. 80IB and appreciated that the difference in Section 80HH, 80I and 80IB of the Act. While the language used in section 80HH and 80IB of the Act is similar. There is a clear departure in the languages used in section 80IB of the Act and Hon'ble Delhi High Court held that it is this choice of words by the legislature that makes all the difference that the Hon'ble High Court is concerned with. 3.3.14. Apart from Hon'ble Delhi High Court decisions distinguishing the Hon'ble Supreme Court judgments in the case of CIT vs. Sterling Foods (supra) and Pandian Chemicals (supra), it may be noted here that Section 80IB of the Act does not use the expression "Profit and Gains derived from an Industrial Undertaking" as used in Section 80HH of the Act but uses the expression. "Profits and Gains derived from any business referred to in sub-section "Section 80IB of the Act reads as under: - "Sec. 80-IB(1) of the Act reads as follows: "80-IB(l) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) such business being hereinafter referred to as the eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the 15 & 744/MUM/2015 M/s. Jindal Drugs Ltd. assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section." A perusal of the above would show that there is a material difference between the language used in s. 80HH of the Act and s. 80-lB of the Act. While s. 80HH requires that the profits and gains should be derived from the industrial undertaking, s. 80-B of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains". 3.3.15. Having regard to the facts and circumstances of the case and in the light of the provisions of Section 80IB and in accordance with the latest judgments of Section 80IB as pronounced by Hon'ble Delhi High Court and Hon'ble Mumbai Tribunal and other decisions as noted below. lam of the considered opinion that the language used in Section 80IB is distinct from the language used in Section 80HH and Section 80I of the Act. There was no occasion for Hon'ble Supreme Court to consider the deduction U/s. 80IB of the Act in the cases of Pandian Chemicals Ltd. (supra) and in the case of Sterling Foods Ltd. (supra). Therefore, the decisions of Hon'ble Supreme Court given in the context of Section 80HH and in the context of Section 80I are not squarely applicable in deciding the deduction U/s. 80IB of the Act because there is a clear departure in the language used in Section 80IB of the Act from the languages used in section 80HH and Section 80I of the Act. (i) CIT Vs. Eltek SGS (P) Ltd. -(2008) 300- ITR -6 (Del). (ii) CIT vs. Dharam Pal Prem Chand ltd. -(2009) 221- CTR -133 (iii) Ranbaxy Laboratories Ltd. Vs. CIT (2009) - TIOL 02-HC-Del. -IT 16 & 744/MUM/2015 M/s. Jindal Drugs Ltd. (iv) Shah Originals - 112 TTJ 754 (Mum Trib): (v) ITO Vs. Kiran Enterprises - 92- TTJ-104 (Chd.); and (vi) Saraf Seasoning Udyog Vs. ITO -219-CTR- 461 (Raj.) 3.3.16. A combined reading of Section BOIB read with the facts and circumstances of the case and the finding that the profit from hedging transactions in Menthol Oil which is the raw material of the appellant company is a business profit, makes it abundantly clear that deduction U/s. 80IB is available to the appellant in the impugned Asstt Year 2006- 07 Therefore, following the Hon'ble Delhi High judgments, Hon'ble ITAT Mumbai decisions and other decisions referred to in the preceding paragraphs, the deduction U/s. 80IB in respect of business profits of Jammu unit of the appellant are eligible for deduction U/s. 80IB of the Act. Accordingly, Ld. Assessing Officer is directed to allow deduction U/s. 80IB on business profits of Jammu unit including the business profits on hedging transactions of Menthol Oil amounting to Rs. 18,23,08,181/-. Hence, Ground No.3, Issue No.2 is allowed." 9.2 We have considered rival contentions and carefully gone through the orders of the authorities below and found that the assessee had set-up a new manufacturing unit at Pot No. 1-A, Extn-III, Industrial Area, Gangyal Jammu for the manufacture of fractioned and determinate Mentha Oil. Ld. Assessing Officer has observed that the assessee had commenced manufacturing on 19/4/2005 and, therefore, Asstt.Year 2006-07 was the first year of operation. He called for various details and justification from the appellant for claiming deduction U/s. 80IB of the Act. After going through various details, Ld. Assessing Officer observed that the appellant had, inter-alia, claimed deduction U/s. 80IB on hedging profit of Rs. 18,23,08,181/- from hedging transactions routed through MCX exchange with reference to its raw material namely Mentha Oil for its Jammu Unit. The Assessing Officer observed in para 4.4. of the relevant assessment order that the question in the case of the appellant was not regarding the nature of transaction. According to him, the issue was whether profit from 17 & 744/MUM/2015 M/s. Jindal Drugs Ltd. hedging transaction through commodity exchange, was profit derived from manufacturing or producing of an article or a thing. For this proposition, he discussed the cases of CIT Vs. Tata Locomotive & Engg. Co. Ltd. (1968) 68 - ITR - 325 (Bom.) and the decision of Hon'ble Supreme Court in the cases of CIT Vs. Sterling Foods - 237 - ITR - 579 and Pandian Chemicals Ltd. Vs. CIT - 262 - ITR - 278 (S.C.). To come to a conclusion that hedging profit has not earned by manufacturing or producing an article or a thing, he also was of the opinion that the hedging profit was not derived from the Jammu Industrial Undertaking in view of the decisions of Hon'ble Apex Court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra). He, therefore, disallowed the appellant's claim for Section 80IB on such hedging profits of Rs.18,23,08,181/-. 9.3 From the record we found that the assessee entered into forward contracts of sale of Mentha Oil for the purpose of hedging against the fluctuation in price of raw material i.e. Mentha oil which is used for manufacturing at its Jammu Unit. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growth. In view of the peculiarity of the raw material, the raw material had to be purchased in the harvesting season to meet requirement of the whole year. The prices are low at the time of season and then fluctuate widely depending upon the supply scenario. The Appellant sells the products manufactured at Jammu Unit from Mentha oil throughout the year. The fluctuations in Mentha oil prices severely affects the cost of Company's products and the profitability of the Company as the raw materials are already purchased and stored for the entire year's production and fluctuation in price of raw menthe oil effects the price of finished products. This means that if the price of the raw material falls later on, the appellant is unable to take advantage of a fall in the price of the raw material though simultaneously prices of the final product also fall. Thus the Appellant has to carry the inventory at a very high value since the supply after the season is scarce. Further, the export order/ sales commitments were made at pre- determined prices. The company had to safeguard against adverse price fluctuations of the raw material product (being Mentha oil). For this purpose, the company entered in to future sale contracts through the recognized commodity exchanges.

18 & 744/MUM/2015 M/s. Jindal Drugs Ltd. 9.4 We had verified the statement showing month-wise details of quantities of stock and quantities of future sale contract for the Mentha Oil entered into by the company. It was evident from the same that the quantity of Mentha oil available with the company was substantially higher than the quantity of future contracts entered and squared off. Thus if the Assessee was required to give the delivery of goods then sufficient quantity for actual delivery was available. This clearly shows that the contracts were entered into for hedging against the future uncertainties of the business. Further, the Assessee has commenced hedging in the month of December 2005. This is so because Mentha OH was listed on commodity exchanges in May 2005 and trading was permitted from May 2005 for the contracts for the month of August 2005. It was also explained that the Assessee did not start entering into hedging contracts from May 2005 to September 2005 as initially the Assessee was not aware of operational modalities like how the trade will take place, how the deliveries would be made and by whom etc. Further the Assessee had never done any trading in any of the commodities earlier and hence it was not possible to enter into such transactions unless entire concept was understood and trading pattern was studied for initial months. Hence, the Assessee did not enter into hedging transactions till December 2005. Copy of relevant circular issued by Multi Commodity Exchange was also placed on record. We also found that the assessee has continued to undertake the hedging transactions in subsequent years. However, in subsequent years, the assessee has incurred a loss from such hedging transactions. The assessee has reduced the loss from the profits eligible for deduction under section 80-lB in the Return of income for subsequent year. 9.5 We have also carefully gone through the order of the Tribunal in assessee's own case for AY 1998-99 and AY 2000-01 and 2001-02, wherein the Tribunal has held that the foreign exchange fluctuation gain on forward contract constituted business income and was eligible for deduction under section 80HHC. The profit from hedging transactions is similar to the exchange fluctuation gain on forward contract and hence is in the nature of business income eligible for deduction under section 80-IB dispute that profit derived from hedging transaction is business income. For this purpose, reliance can be placed on the decision of Hon'ble Gujarat High Court in the case of Pankaj Oil Mills V. CIT (115 ITR 19 & 744/MUM/2015 M/s. Jindal Drugs Ltd. 824) (PB) which explains the concept of 'Hedge'. In the instant case, we found that the activity of hedging against the price fluctuation of menthe oil has been done to protect the profits of the company. Since the Jammu unit is the only manufacturing activity of the company, the hedging profit has a direct nexus with the Jammu unit. If Assessee Company had not entered into such transaction, price fluctuation would have affected profitability of the company. Hence the hedging profit is eligible for deduction under section 80-lB which is derived from the business of the eligible industrial undertaking. For this purpose, reliance can be placed on the decision of the Hon'ble Kerala High Court in the case of Commissioner of Income Tax Vs. Ajit Spices (165 ITR 755) wherein it has been held that that a forward contract of sale can be treated as a hedge transaction if such a contract is supported by a pre-existing contract. 9.6 The AD has placed reliance on the decisions of Pandian Chemicals Vs. CIT (262 ITR 278) (SC) and CIT Vs. Sterling Foods (237 ITR 579) (SC) and holding that the hedging profit cannot be said to be forming a part of the profits of business of the industrial undertaking. In this regard, the decision of Hon'ble Delhi High Court in the case of Eltek SGS (P) Ltd (300 ITR 6), in case of CIT V. Dharam Pal Prem Chand (2008-TIOL-664-HC-Del-IT) are relevant, which had considered the Hon'ble Apex Court decision in the case of Pandian Chemicals (supra) and Sterling Foods Ltd (supra) and distinguished them and held that the language used in section 80-lB is different from the language in section 80- HH/80-I. The expression used in section 80-lB i.e. profit derived from business of the industrial undertaking is much wider than the expression used in section 80-HH/80-I i.e. 'profits and gains derived from an industrial undertaking. We also found that the profit earned out of squaring off future contracts is profit earned on account of hedging transaction. Thus there is a direct nexus between the activity of Jammu unit and the profit earned in the hedging contracts. The hedging Mentha Oil stemmed from the activity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed an integral part of the income of the Jammu unit and was eligible for deduction u/s. 80-IB. 9.7 The detailed finding recorded by the CIT(A) while concluding that when such profit was eligible for deduction u/s 80IB is as per 20 & 744/MUM/2015 M/s. Jindal Drugs Ltd. material on record and the same has not been controverted by bringing any positive material by Ld. DR. Accordingly, we do not find any reason to interfere with the finding recorded by the CIT(A) holding that assessee is eligible for deduction u/s 80IB in respect of such profit.”

22 & 744/MUM/2015 M/s. Jindal Drugs Ltd. Amount(₹.) Particulars 26,080 Electricity expenses 50,000 Professional fees 35,000 Repairs 18,386 Sundry Bal W/off 110 Bank charges 1,29,576 Total expenses Since the entire expenses are revenue in nature, we direct the Assessing Officer to allow the same.

12. The next issue in the appeal of the assessee is regarding the disallowance of ₹.14,57,608/-.u/s. 14A r.w. Rule 8D(2)(iii) of I.T. Rules.

13. Learned Counsel for the assessee submits that in the course of Assessment Proceedings the assessee was required to explain as to why there should not be any disallowance u/s. 14A r.w. Rule 8D and the assessee has filed detailed submissions before the Assessing Officer by explaining the allocation of expenses made by the assessee towards tax 23 & 744/MUM/2015 M/s. Jindal Drugs Ltd. free income and objected for invoking of section 14A r.w. Rule 8D. Learned Counsel for the assessee referring to page 22 of the Paper Book submits that a detailed quantification of expenses attributable to tax free income out of the total expenses was furnished before the Assessing Officer stating that the expenses attributable for earning dividend income is ₹.76,354/- only. Learned Counsel for the assessee submits that the Assessing Officer without giving any reasons for rejecting the quantification of expenses made by the assessee and not recording any dissatisfaction and without pointing out as to why the working furnished by the assessee is wrong he invoked the provisions of section 14A r.w. Rule 8D and made disallowance. The Learned Counsel for the assessee further submits that during this Assessment Year there is a fall in investments from ₹.33 crores to ₹.24 crores and there is no much expenditure to be incurred for investments and therefore the expenses as allocated by the assessee is proper and justified. However, Learned Counsel for the assessee further submits that a reasonable disallowance may directed to be made.

24 & 744/MUM/2015 M/s. Jindal Drugs Ltd.