THE BOMBAY DYEING & MFG. CO. LTD,MUMBAI vs. DCIT RG 2(1)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI N K PRADHAN, AM ITA No. 1716/Mum/2017 (A.Y:2012-13) The Bombay Dyeing & Mfg. Co. Dy. Commissioner of Limited Income Tax, Range- Neville House, J.N. Heradia Marg, 2(1)(1), Mumbai Vs. Ballard Estate, Mumbai-400 001 Room No.561, Aayakar PAN No.AAACT2328K Bhavan, Mumbai-400 020

Appellant .. Respondent Assessee by .. Shri Yogesh A. Thar & Shri D Doshi Ms. Rity Punjabi Ms. Ayushi Madani, Anrs Revenue by .. Shri Jayant Kumar, DR Date of hearing .. 18-08-2017 Date of pronouncement .. 27-10-2017

O R D E R PER MAHAVIR SINGH, JM:

This appeal by the assessee is arising out of the order of DRP-2, Mumbai, in Objection No. 172 dated 29-12-2016. The Assessment was framed by DCIT Circle-2(1)(1), Mumbai for the A.Y. 2011-12 vide order dated 27-02-2017 under section 144C(5) of the Income Tax Act, 1961(hereinafter ‘the Act’).

2 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) “GROUND NO. 1: ADDIITION OF RS. 1,27,66,301/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO NON-INTEREST BEARING SHAREHOLDERS DEPOSIT:

a. The deposit amount was receivable from an associate company for royalty on technical knowhow and as per restructuring agreement it was converted into a non- interest bearing shareholders' deposit:

b. Non-interest bearing shareholder's deposits made in earlier years is not an international transaction:

c. RBI and Government of Indonesia have given approval and accordingly, the same cannot be regarded as not being at Arm's length.

3 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Company, Indonesia. The background relating to this issue is that the assessee had entered into a technical collaboration agreement with PTFSI on 09.08.1978. Under this agreement, the assessee agreed to collaborate with the JV for setting up of their integrated textile mill at Indonesia and also supply technical experience and knowledge in the field of production including continuous technical, industrial and marketing expertise. The assessee also agreed to depute its technicians to the JV to assist and train them in installation and commissioning of the plant. The agreement was entered into, initially for a period of 20 years, and further agreed that PTFSI would pay the assessee for a period of 20 years commencing from the date of production, technical knowhow fee of 2% of ex- factory net selling price of each of the textile products manufactured by PTFSI in convertible foreign currency. The commercial production of PTFSI started in 1981 and it was liable to pay technical knowhow fees from 1981 onwards. As the financial position of PTFSI was not good and it was making losses, it was not able to make the remittance of technical knowhow fees to the assessee. Know how fees receivable by the assessee was outstanding from January 1981 to December 1995. The total outstanding on this account was estimated at US $. 32,00,692.48. Under a restructuring agreement entered by the JV with its lender, it was required to pay their dues before making any payment on account of technical knowhow fees to the assessee. The assessee had also to agree to this restructuring in the light of the poor financial condition of the JV. Hence, the total amount receivable on account of technical knowhow fees as on December 1995 was converted into interest free shareholder's deposit in the JV.

4 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) equity shall be followed by allotment of shares and these non interest bearing deposits placed with AE pending allotment shares is in the form of loan and not the equity. The DRP directed the AO/TPO vide para 6.3 of its order as under: -

“6.3 Discussions and directions of the DRP

6.3.1. We have considered the submissions of the assessee. We find that this issue was also subject matter of dispute before the CIT(A)-15, Mumbai and this issue has been decided against the assessee by CIT(A)-15 vide order No. CIT(A)-15/IT- 294/Addl.cit Rg.2(1)/11-12 dt. 30-11-2011 for AY 2007-08.

6.3.2. The facts of the case remain the same during the year under reference. Hence, there is no reason to deviate from the decision of the CIT(A)-15, Mumbai.

6.3.3. In view of the foregoing, the objection raised by the assessee is rejected.”

5 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) These contractual obligations bind the assessee and the assessee cannot be expected to go back on its contact, which is approved by the RBI. The provision of Section 92 of the Act comes into play only if there is any income earned or an expense claimed. In the absence of any income whatsoever, the question of applying TP provision does not arise. In this behalf he placed reliance in the case Dana Corporation in re. Authority For Advance Rulings (Income-Tax), New Delhi (2010) 321 ITR 178 (AAR), wherein it has been held that where there is no consideration, there is no income chargeable u/s 45 of the Act and hence TP provisions cannot be invoked to hold that the assessee must charge a minimum consideration so as to meet ALP norms. The AAR held that section 92 of the Act is not an independent charging section. Furthermore, according to him, besides, there is no 'transaction' in the current year. The deposit with the AE continues to be held since 1998 and there is no change in that balance. He placed reliance on the case law of this Tribunal in the case of Nimbus Communications Ltd vs. ACIT [2012] 16 ITR (AT) 477 (Mumbai), wherein it is held that a continuing debit balance per Se, in the account of an AE does not amount to an international transaction. In view of these facts, he argued that the notional charge of interest @ 8.39% on such shareholder's deposit is unwarranted and unreasonable and deserves to be deleted. On the other hand, Sh. Jayant Kumar CIT-DR relied on the order of DRP and that of the AO/TPO.

6 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) and PTFSI was liable to pay technical know-how fees from January 1981. However, as the financial position of PTFSI was not good as it was making significant losses, it was not able to make the remittance of technical know-how fee to assessee as well as to other joint venture partner. Operations of PTFSI have suffered considerably on account of continues devaluation of Indonesia Rupiah during the construction period & subsequently due to hostile trading environment. As a result, it was unable to remit technical know- how fees to assessee and the other joint venture partner as per terms of agreement with the consortium lenders. In view of this scenario, PTFSI had entered into a Memorandum of Understanding ("MOU") with the consortium lenders, dated 19.12.1995. The total amount outstanding to be payable to the consortium lenders by PTFSI towards principal as on 30.11.1995 was US $55.077million. In the said MOU it has been stated that PTFSI, due to financial difficulties has requested the consortium lenders to review and restructure the repayment schedule o the amounts due and owning by PTFSI. The relevant Para 1 of the restructuring clause stated as under: –

The Lenders hereby agree that out of the total dues of US $ 54,977,270.57 ( fifty four million nine hundred and seventy-seven thousand two hundred and seventy United States Dollars and Fifty - seven cents) as on 30 November 1995 to forgo the balance of the total debt ( including unpaid accrued interest ) and also not to initiate recovery proceedings against the Borrower under the said loan agreements, subject however to the borrowing paying US $ 29,715,000.00 (twenty nine million seven hundred and fifteen thousand United States Dollars) out of which US 5,150,000.00 (Five

7 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) million one hundred and fifty thousand United States Dollars) to be paid on the date of execution of this Memorandum of understanding and the remaining US $ 24,565,000.00(twenty four million five hundred and sixty-five thousand United States Dollars) without default as per clause- 3 hereunder, in 28 half yearly installment within 14 years commencing from 1St July 1996 and compliance of the terms of the Memorandum of Understanding.

From the above reading it is clear that the JV was not able to pay even the principal amount of the term loan and working capital loan taken from the consortium lenders due to financial constraints and continuous loss in its business operations. Even, the consortium lenders at least to recover back to some extent principal amount from PTFSI have foregone more than 50% of its total outstanding principal amount and also the unpaid interest amount. The consortium lenders, therefore as per the MOU, is demanding 50% of its principal in installments spread over a period of 14 years. This fact is further clarified vide para 8 (Borrower's Covenants) of the said MOU, which states as under:

“(a) To procure an irrevocable undertaking from The Bombay Dyeing & Mfg. Co. Ltd. and Commonwealth Textiles (Jakarta) Ltd. (herein after referred to as the "Promoters) to the effect that: (i) so long as amounts due under the settlement Programme is outstanding to the Consortium of Lenders, the Borrower shall not remit any payment due as on the date of this Memorandum of Understanding due to the

8 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Promoters viz., The Bombay Dyeing & Mfg. Co. Ltd. and Commonwealth Textiles (Jakarta) Ltd., under the Agreements dated 29-9-1978 and 2- 2-1980 executed by an between the Borrower and said Promoters viz., The Bombay Dyeing & Mfg. Co. Ltd. and Commonwealth Textiles (Jakarta) Ltd., respectively (ii) future dues to the Promoters viz., The Bombay Dyeing & Mfg. Co. Ltd. and Commonwealth Textiles (Jakarta) Ltd., will be subordinated to the commitments as contained in this Memorandum of Undertaking to be fulfilled by the Borrower to the Consortium of Lenders. It is, however understood between the parties that the irrevocable undertaking from The Bombay Dyeing & Manufacturing Co. Ltd. would be made available to the Lenders subject to the Bombay Dyeing & Manufacturing Co. Ltd. receiving the requisite Reserve Bank of India approval under the Foreign Exchange Regulation Act in this behalf

b) ..........

c)..........

d) The Borrower shall not declare any dividend so long as the obligation under this Memorandum of Understanding is subsisting without prior approval of the Lenders."

9 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) partners namely The Bombay dyeing & Mfg Co Ltd and Common Wealth textiles. The RBI has given its approval on treating the Outstanding entitlements on account of technical know-how fees for the period Jan 1981 to Dec 1995 estimated to US $ 32,00,692.48 (INR 15.22 Crores) as a shareholder deposit. RBI has given permission vide approval to obtain repayment of the said deposits on or before 2010 or earlier as the case may be. This repayment date is extended to 2015 by RBI. Copy of relevant letters issued by RBI is enclosed at Annexure-4 of the assessee’s paper book. Under the facts of the case, we appreciate the argument of the assessee that the said interest free deposit cannot be considered as an international transaction for the previous year ended 31st March 2012 as the said transaction was entered into during the previous year ended 31 March 1998 with the approval of statutory authorities. The statutory permissions required under the foreign exchange laws of India, are equally applicable to controlled and uncontrolled enterprises i.e. they are universally applicable and hence the very restrictions for permissions would be deemed to encompass the principle of neutrality and hence, the standard of arms length is inherent in the provision of law. Hence the company has a contractual and statutory obligation with the PTFSI for not charging any interest on the shareholder deposits and thereby it cannot take any recourse for charging interest till the year 2015 by which PTFSI is required to make payment to the company. There has been no inflow or outflow relating to the above deposit during the Previous Year 2011-12 and hence it is outside the purview of transfer pricing provisions. We are of the view that the assessee cannot be asked to do something which is impermissible in law and expenditure incurred in compliance of law or the direction of the statutory authorities, the same is allowable. This view is supported by the case law relied on by the assessee of Hon’ble Bombay High court in the case of CIT vs. Hukumchand Mills Ltd. (1993) 202 ITR 474 (Bom.). Further, another aspect argued by the learned Counsel is that interest

10 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) and principal amount itself is doubtful of recovery, the question of taxing hypothetical interest does not arise. This view is also supported by the decision of Hon’ble Supreme Court in the case of UCO Bank Vs. CIT (1999) 237 ITR 889 (SC). In view of the above discussion, we are of the considered opinion that no addition on account of transfer pricing adjustment can be made in relation to interest @ 8.39% amounting to Rs.1,27,66,301/- in relation to non-interest bearing shareholder’s deposits amounting to Rs. 15,21,60,920/- with an associate company. We reverse the orders of DRP and AO/TPO on this issue and allow this issue of the appeal of assessee.

GROUND NO. 2: ADDITION OF RS. 1,05,35,800/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS TECHNICAL KNOWHOW FEES FROM AE, P.T FIVE STAR- INDONESIA ('PTFSI’):

11 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) a. the fees for technical knowhow has not been received/ accrued in view of the had financial conditions of the AE, PTFSI.

b. since there is uncertainty involved in collection of the technical know-how fees from PTFSI due to its bad financial condition, the Appellant has rightly not recognized the revenue.

7.3.1 The fact of the case is that the appellant entered into technical collaboration agreement with the PTFS on 09.08 1978. The agreement was initially for a period of 20 years. It was further added that the TFS would pay the appellant a technical know-how fee of 2% on the ex-factory net selling price of the textile products manufactured by the PFTS in convertible foreign currency for period of 20

12 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) years commencing from the date of commercial production.

7.3.2 The agreement was amended in 1998 whereby terms of payment of the technical know- how was changed from convertible currency to US$ and it was also agreed that the annual amount to be paid to the appellant shall not be less than US$ 219115.30 irrespective of the actual annual sales of PTFS. Thus w.e.f. 1997, the appellant had a right to receive a minimum technical how fee fixed in USD.

7.3.3 The technical collaboration agreement was further amended on 28.09.2001 w.e.f. 01.03.2001 whereby the technical know-how fee was payable for an additional period of 20 years subject to Approval from government authorities. The minimum annual fee payable by PT FS commencing from 01.03.2001 was fixed at 2, 20, 000/- USD.

7.3.4 The commercial production of PTFS began in January 1981 and accordingly the appellant was to receive the technical know-how fees.

7.3.5 The contention of the assessee is that due the bad financial position of the PTFS, it was unreasonable to expect ultimate collection, the assessee has not recognized royalty income (luring the year under consideration. The assessee has relied on Accounting Standard -9 'Revenue recognition' and Accounting Standard- I submitted that it is the 'real' income and not hypothetical income which is to be taxed under the Act and 'real' income has to be ascertained from realistic and practical point of view. The arguments advanced by

13 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the assessee that it is the 'real' income and not hypothetical income which is to be taxed tinder the Act and 'real' income has to be ascertained from realistic and practical point of view is misplaced.

7.3.6 It is a fact that the assessee has reflected the receipt of royalty for providing technical know- how as an international transaction in the audit reports in form 3 CEB in the earlier years, and the assessee has recognized this fee amounting to Rs. 1.02 crores on accrual basis for financial year 2009-10. However, the assessee has not recognized this technical fee in the annual accounts for FY 2011-12 and it has also not reported this is receivable from its non-resident AE in form 3CEB for AY 2013-14.

14 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) production, technical knowhow fee of 2% of ex-factory net selling price of each of the textile products manufactured by PTFSI in convertible foreign currency. However, due the bad financial position of the PTFSI, it was unreasonable to expect ultimate collection and hence, the assessee has not recognized royalty income during the year under consideration. The assessee has relied on Accounting Standard -9 'Revenue recognition' and Accounting Standard-i 'Significant accounting policies'. The relevant paras of the said standards are as under: -

Accounting Standard -9:

Para 8.3

"Royalties accrue in accordance with the terms of the relevant agreement and are usually recognized on that basis unless, having regards to the substance of the transaction, it is more appropriate to recognize revenue on some other systematic and rational basis."

Para 9.1:

"Recognition of revenue requires that revenue is measurable and that at the time of sale of rendering of services it would not be unreasonable to expect ultimate collection."

Para 9.2:

"Where the ability to assessee the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved."

15 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Accounting Standard -1:

"In view of uncertainty attached to future events, profits are not anticipated but recognized only when though not necessarily in cash"

16 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 12. The next issue in this appeal of assessee is against the order of DRP confirming the action of AO/TPO in making of addition on account of transfer pricing adjustment towards risk involved in guarantee on loans advanced to the AE-PTFSI amounting Rs.1,30,35,649/-. For this assessee raised following grounds: -

GROUND NO. 3: ADDITION OF Rs. 1,30,86,649/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS RISK INVOLVED IN GIVING GUARANTEE ON LOANS ADVANCED TO AN AE:

a. the provision of counter guarantee to a third party for the loans borrowed by the joint venture of the Appellant cannot be regarded as an' International Transaction within the meaning of section 92B of the Act;

b. the Appellant had already debited actual commission on counter indemnity charged by banks for the year ended March 31, 2012 to the associate company's account;

17 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 3. The Appellant prays that the addition on account of risk involved in giving guarantee on loans advanced to an AE be deleted.

Brief facts are that the assessee has given counter indemnity for an 13. amount of Rs. 113.47/- crores. The details of which are as under: -

(i) Rs. 84.08 crores in favour of IDBI Bank Limited against guarantees issued to Punjab National Bank International London for loans granted to PTFSI.

(ii) Rs. 12.00 crores in favour of IDBI Bank Limited against guarantees issued to Punjab National Bank International London for loans granted to PTFSI.

(iii) Rs. 17.39 crores in favour of Bank of Bahrain & Kuwait, Bahrain for loans granted to PTFSI.

According to assessee the definition of international transaction u/s 92B of the Act, the above said Counter Indemnity is not covered. This Counter Indemnity is provided to IDBI Bank, Mumbai and Bank of Bahrain & Kuwait, Bahrain. It is not in the nature of purchase, sale or lease of any property and also not in the nature of provision of services or lending or borrowing money, or any other transaction having bearing on the profits, income, losses or assets of such enterprises and there is no mutual agreement between The Bombay Dyeing & Mfg Co Ltd & PTFSI for allocation or apportionment of or any contribution to any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. It is relevant to note that assessee is debiting the actual commission on counter guarantee charged by banks to PTFSI. The AO/TPO made adjustment of Rs. 1,30,86,649/- on account of risk involved in giving guarantee on loans advanced to associate company. The DRP also

18 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) confirmed the action by observing in its order by observing in para 8.3 as under: -

8.3 Discussions and Directions of the DRP:

8.3.1 We have considered the submissions of the assessee. We find that this issue was subject matter of dispute before the CIT(A)-10, Mumbai and this issue has been decided in favour of the assessee by CIT(A)-15 vide order No. C1T(A)-10 Addl. CIT Rg.2(1)/ IT-106/1 3-14 dt.12.03.2012 for AY 2008- 09.

8.3.2 We may observe here that the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. The final assessment order is yet to be passed by the assessing officer. 1-lence, the DRP is not an appellate authority and the proceeding before the DRP is continuation of assessment proceedings. This view is fortified by the decision of the division bench of the Hon'ble High Court of Bombay in the Writ Petition No. 1877 of 2013 in the case of Vodafone India Services Pvt. Ltd. vs. Additional Commissioner of Income Tax & Ors. (2014) 264 CTR 0030 (Bom) (2013) 96 DTR 0193 (Bom): (2014) 361 FIR 0531 (Bom) (2014) 221 1axrnan 0166 (Born); wherein with regard to functioning of the DRP, the Hon'ble High Court of Bombay held that The proceeding before the DRP is not all proceeding but a continuation of the Assessment proceedings till such time a final order of assessment which is appealable is passed by the Assessing Officer.

19 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 3.3.3 As discussed earlier, the above issue is being contested by the Revenue before the Hon’ble ITAT, Mumbai. The issue has not yet attained the finality and the possibility that the issue is decided in favour of revenue, cannot be ruled out. However, at the stage when the issue attains the finality, it is likely that the remedial measures available to lag and collect tax on account of this issue, may not be available to the Revenue oil account of limitation placed by the statute. In this regard, we may refer to the decision of the Hon'ble Supreme Court of India in the case of Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax (2000) 159 CTR 0001 (2000) 243 ITR 0083: (2000) 109 TAXMAN 0066 wherein it is observed that "The scheme of Act is to levy and collect taxi accordance with the provisions of the Act and this task is entrusted to the Revenue. "Therefore, in order to protect the interest of the revenue, the DRP is of the considered opinion that the issue has to be kept alive and hence the addition made by the TPO needs to be sustained.

20 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) "In view of the submissions made by the assessee that counter indemnity charges have already been debited to PTFS, the very basis on which the TPO has made the adjustment appears to have gone. As the TPO had merely taken a benchmark of 3% while the assessee has debited the actual expenses, the adjustment made on this account is directed to be deleted."

Further, in assessee’ own case for AY 2007-08, this transaction was accepted at arm's length and no addition was made. Further in assessee’ own case for AY 2008-09 addition was made by AO but deleted by CIT(A) on this ground. It was argued that the lower authorities observed that the assessee has assumed risk in providing the counter guarantee to bank for lending money to its subsidiary and for that it should have charged risk premium for assuming the risk by providing the counter guarantee.

"International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or

21 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more enterprises."

It is submitted that an 'international transaction' would arise only when the foreign subsidiary defaults in making the payment of loan to the bank. Therefore, section 92(1) of the Act would, primarily, not be applicable at all, till the guarantee is invoked.

"There can be number of situations in which an item may fall within the description set out in clause (c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus 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 is, as discussed above, excluded.

22 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) In any event, the onus is on the revenue authorities to demonstrate that the transaction is of such a nature as to have "bearing on profits, income, losses or assets" of the enterprise, and there was not even an effort to discharge this onus. Such an impact on profits, income, losses or assets has to be on real basis, even if in present or in future, and not on contingent. or hypothetical basis, and there has to be some material on record to indicate, even if not to establish it to hilt, that an intra AE international transaction has some impact on profits, income, losses or assets. Clearly, these conditions are not satisfied on the facts of this case.

We have held that even after the amendment in Section 92 B'by amending Explanation to Section 92 B, a corporate guarantee issued for the benefit of the AEs, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and, therefore, it is outside the ambit of ‘international transaction' to which ALP adjustment can be made. As we have decided the matter in favour of the assessee on this short issue, we see no need to address ourselves to other legal issues raised by the assessee and the judicial precedents cited before us.

For the reasons set out above, and as we have held that the issuance of corporate guarantees in question did not constitute ' international transaction' within meanings thereof under section 92B, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP

23 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) adjustment of Rs 33,10,161. The assessee gets the relief accordingly."

24 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) guarantee is given with a view to safeguard and to further business interest. Hence, relying on the Hon'ble Supreme Court's decision in case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC), wherein it has been held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure and having regard to the circumstances of the case.

"For the guarantee given to the bank against the financial assistance given to its AEs, no commission was charged by the assessee- company on the ground that the said AEs were not benefited by the guarantee so given and it was the assessee who benefited as a result of commercial benefits secured for future. In support of this stand of the assessee, the assessee has contended that business strategy should be taken into consideration while making any TP adjustments in respect of such transactions and has relied on the OECD Transfer Pricing Guidelines issued in 2010. As stated in para 1.59 of the said guidelines, the business strategies should also be examined in determining comparability for transfer pricing

25 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) purposes and certain illustrations of such business strategies are also given therein. As stated in para 1.60 of the said guidelines which has been relied upon by the assessee, business strategies also could include market penetration schemes and taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. As explained further, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs and hence achieve lower profit levels than other taxpayers operating in the same market. The relevant facts of the present case do not indicate that there was any such business strategy adopted by the assessee in not charging commission in respect of guarantees issued for its AEs. As a matter of fact, there is nothing to suggest that any such business strategy was adopted by the assessee with specific intention or motive and the case has been sought to be made out merely on the basis of commercial expediency by claiming that the assessee was benefited as a result of giving the guarantees in the form of commercial benefits secured for future."

26 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. Thus, following the decisions of the co-ordinates benches of the Tribunal (supra), we, in the present case are of the view that the above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed. This issue of assessee’s appeal is allowed.

GROUND NO. 4: ADDITION OF RS. 1,40,04,120/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TOWARDS INTEREST ON OUTSTANDING BALANCES OF THE AE:

1.On the facts and in the circumstances of the case and in law the Ld. AO, pursuant to the directions of the Ld. DRP, erred in making addition of Rs. 1,40,04,120/- towards interest on outstanding debit balances with the associate company.

a. the outstanding debit balance with the associate company cannot be regarded as an 'International Transaction' within the meaning of section 92B of the Act;

b. the said outstanding debit balance has arisen mainly on account of reimbursement of

27 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the counter guarantee fee and not in the course of business.

“9.3 Discussions and directions of the DRP

9.3.1 We have considered the submissions of the assessee. We find that this issue was also subject matter of dispute before the CIT(A)-15, Mumbai and this issue has been decided against the assessee by CIT(A)-15 vide order No. CIT(A)-15/IT-294/Addl. CIT Rg.2(1)/11-12 dt. 30-11-2011 for AY 2007-08. The issue has also been decided against the assessee by CIT(A)-10 in the assessee’s own case vide order No. CIT(A)-10/Addl. CIT Rg. 2(1)/IT- 106/13-14 dt. 28-03-2014 for AY 2008-09.

28 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 9.3.2. The facts of the case remain the same during the year under reference. Hence, there is no reason to deviate from the decision of the CIT(A)-15, Mumbai

9.3.3 In view of the foregoing, the objection raised by the assessee is rejected.”

The facts are that the assessee has shown outstanding balance of 23. Rs. 15.65 crores due from PTFSI as on 31.03.2012, the same is accumulated balance of charges debited to PTFSI towards guarantees and technical fee receivable of earlier years. These both transactions are already shown in form 3CEB of respective years. Hence this is not a transactions entered during the year. The assessee is not charging interest on debit balance due to bad financial condition of the AE. Even assuming, according to assessee, if it would have provided for interest on outstanding balance from PTFSI, it could not have recovered the same from PTFSI, as PTFSI has not honored its commitments to the lenders, as well as it has incurred heavy losses year after year. It was argued by Ld Counsel that following the real income principle it can be said that no interest accrues to the Company based on business prudence, commercial expediency and exigency.

29 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) "International transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more enterprises."

As will be observed from the above provision the outstanding debit balances with the associates is not directly covered within the ambit of 'international transaction'. Also, the terms "any other transaction having a bearing on the profits, income, losses or assets of such enterprises" must be interpreted ejusdem generis with the transactions mentioned in the preceding clause or at least analogous to it and therefore would not include the provision of guarantee for loans taken by associate enterprises. In view of the above, we are of the view that it is the real income and not the hypothetical income which is to be taxed and real income is to be ascertained from the realistic and practical point of view as held by Hon’ble Supreme Court in the case of UCO Bank (Supra). Hence, we delete the disallowance and reverse the orders of the lower authorities.

30 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 25. The next issue in this appeal of assessee is against the order of DRP confirming the action of AO/TPO in making addition on account of subsidy received under package scheme of incentive from Government of Maharashtra amounting Rs.30,60,02,721/- by holding the same as revenue receipt. For this assessee raised following grounds: -

GROUND NO. 5: ADDITION OF RS. 30,60,02,721/- ON ACCOUNT OF SUBSIDY RECEIVED UNDER PACKAGE SCHEME OF INCENTIVES FROM THE GOVERNMENT OF MAHARASHTRA:

I. On the facts and in the circumstances of the case and in law the Ld. AO, pursuant to the directions of the Ld. DRP, erred in making addition of Rs. 30,60,02,721/- on account of subsidy received from Government of Maharashtra under "The Package Scheme of Incentive 2007" ("PSI"), treating the same as a revenue receipt and includible in the total income on the alleged ground that the scheme is applicable after commencement of production.

a. The Government of Maharashtra with a view to encourage the dispersal of industries to less developed areas of the state, announced the said PSI w.e.f. April 1,2007;

b. the PSI was applicable based on the level of Fixed Capital investment or Employment Generation;

31 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) c. the Appellant has during the year under consideration made investments in new plant commenced at Patalganga and Ranjangaon;

d. The character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted and

32 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) as revenue receipt and includible in the total income on the ground that the scheme is applicable after commencement of production. The assessee contended that the State Government of Maharashtra with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra announced PSI w.e.f. 01.04.2007, which was applicable based on the level of Fixed Capital Investment or Employment Generation. The assessee during the year under consideration made investments in new plant commenced at Patalganga and Ranjangaon and claimed that the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. The assessee therefore prayed that the subsidy received from the Government amounting to Rs. 30,60,02,721/- be held as capital receipt and hence, not chargeable to tax. The DRP also confirmed the action of the AO/TPO by observing in para 10.03 of its order as under: -

10.3.1 We have considered the submissions of the assessee, the views of the AO and per used the material on record. In this regard you find that the honorable HIGH COURT OF MADRAS in the case of COMMISSIONER OF INCOME TAX vs. PONNI SUGARS AND CHEMICALS LTD.(2003) 179 CTR 0477 : (2003) 260 ITR 0605: (2003) 127 TAXMAN 0188 has a dedicated on a similar issue in the following manner:

"10. The nature of the receipt of incentive, therefore, has to be examined in the light of that object. Law has to keep up with the new devices and methods adopted in the

33 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) world of business as also in the several schemes that policy-makers draw up from time to time to ensure the desired development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post- production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P. Lid. vs. (31' (supra), it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling within the capital field or out of it.

34 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 11. If the true character of the incentive here is to enable the assessee to meet the capital cost, then Mal true character must be given full recognition and the fact that the receipt was subsequent to the commencement of productino should not be allowed to stand in the way of it i proper treatment as a receipt in the capital fie/d meant to meet a capital cost. The line separating "capita!' front "revenue" is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital field or in the revenue field.

35 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the assessee to app/y the subsidy equivalent to the quantum of the purchase-tax for the period for which it was given for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the Stale Government.

10.3.2 As observed by the Supreme Court in the case of K.C.P. Ltd. vs. CIT (supra), it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling within the capital field or out of it.

10.3.3 We find that the facts of the case are identical to the one before the Hon'ble High COURT OF MADRAS in the case of COMMISSIONER OF INCOME TAX vs. PONNI

36 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) SUGARS AND CHEMICALS LTD.(Supra) So far as this concession extended by the State Government is concerned, it was in no way linked to the expenditure incurred in setting up the industry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government.

10.3.4 In view of the foregoing, the objection raised by the assessee is rejected."

i. Assessee company is eligible for getting subsidy on account of investment made in new plant commenced at Patalganga and Ranjangaon.

ii. The Supreme Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd. (2008) (306 ITR 392)(SC), after considering Sahney Steel & Press Works Ltd. Vs. CIT (1997) 228 ITR

37 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 253 (SC), has reiterated that the character of the receipt in hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such case, one has to apply the 'purpose test'. The point at which the subsidy is paid is not relevant. Also the form of subsidy and the source of the subsidy is immaterial. On the facts of this case, it was held that Incentive subsidy received by the sugar mill was a capital receipt not chargeable to tax having regard to the purpose of the relevant scheme of incentives.

iii. Also, attention is invited to the decision of the Special Bench of Mumbai Tribunal in DCIT vs. Reliance Industries Limited [2004] 88 ITD 273 (Mumbai) (SB), wherein the Tribunal has, after considering the decision of the Supreme Court in Sahney Steels (supra) and held that if a subsidy is received for development of industries in backward areas, it constitutes capital receipt regardless of the fact that it has been received only after the commencement of production as it is the 'purpose' of the scheme which is of fundamental importance in determining the nature of the subsidy as revenue or capital. The decision of the Hon'ble Special bench has been subsequently affirmed by Hon'ble Bombay High Court.

iv. Thus, to conclude, one of the main test to determine is as to whether the subsidy is in

38 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) the nature of capital or revenue would depend on purpose test for which the said subsidy has been given.

V. The assessee has received capital subsidy pursuant to Package Scheme of Incentives, 2007. It is observed that the objectives of Package Scheme of Incentives, 2007 is the purpose of subsidy is that of promotion of employment and balanced regional development. Thus, seeing the overall substance of the Scheme it seems that the objective is arguably that of industrial development and thus, applying the 'purpose test' laid down in Ponni Sugars & Chemicals Ltd. (Supra) & Reliance Industries (supra) that the subsidies/incentives receivable from the Government of India is to be claimed as a capital receipt and hence, not chargeable to tax.

vi. The Supreme Court in Sahney Steel & Press Works Ltd. (supra) has held that 'the character of subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If the purpose is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purpose. But, if moneys are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional

39 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.

40 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 'capital' receipt regardless of the fact that it has been received only after the commencement of production, as it is the 'purpose' of the scheme which is of fundamental importance in determining the nature of the subsidy as 'revenue' or 'capital'. This decision of the Special Bench has been upheld by Hon’ble Bombay High Court in CIT v. Reliance Industries Limited [2011] 339 ITR 632 (Bom.).

41 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Government of West Bengal under scheme of industrial promotion for expansion of its capacities, modernization and improving its marketing capabilities would be 'capital' receipt.

GROUND NO. 6: DISALLOWANCE OF RS. 2,73,960/- U/S. 14A R.W.R. 8D:

42 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) I. On the facts and in the circumstances of the case and in law the Ld. AO, pursuant to the directions of the Ld. DRP, erred in making disallowance of Rs. 2,73,960/- u/s. 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (the Rules").

43 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Therefore, no disallowance u/s 14A is made in the computation of income. The AO has considered following investments which do not yield exempt income and the investments on which company has not received any exempt income during the year: -

“Zero Interest debenture and fully convertible debenture of which interest income is not exempt.

Equity shares in foreign companies the dividend on which is not exempt.”

“23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

Respectfully, following the Hon'ble Delhi High Court in the case of Cheminvest Limited (supra), we delete the disallowance confirmed by the

44 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) DRP. However, the assessee itself has made disallowance of Rs. 2,73,960/- and the same is returned by the assessee in its return of income for the relevant assessment year and hence, we restrict the addition to this extend only. The learned counsel for the assessee during the course of hearing also conceded this issue. Accordingly, this issue of assessee’s appeal is partly allowed.

GROUND NO. 7: ADDITION OF Rs. 768,18,00,000/- U/S. 115-JB OF THE ACT ON ACCOUNT OF REVALUATION RESERVE CREATED FOR REVALUATION OF LAND:

a. adjustments to Book Profits are restricted to those specified in the Explanation to section 115JB of the Act;

b. the revaluation reserve was not created by debiting the Profit and Loss Account;

45 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) c. Without prejudice. the Id. AO erred in not allowing to reduce the book profits as per Explanation I to section 115JB of the Act to the extent the revaluation reserve is released and credited to Profit and loss Account.

46 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) account. Therefore, the effect of revaluation is profit neutral as the same amount is reflected both on the debit and credit side. This basis of representation and revenue recognition has been accepted by the Department in all the earlier years. During the year, the assessee had converted land being capital asset to stock in trade. At the time of conversion, the appreciation i.e. the difference between the market value of land on the date of conversion so converted into stock in trade and the cost of the said land in books of the company was credited to revaluation reserve. The details are as under: -

Market value of Land on conversion into stock in trade 768.18

Less: cost of the land in the books 3.88

Net unrealized appreciation arising on 764.30 Revaluation credited to Revaluation Reserve

ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Sr. No. Account Debit Credit Narration 1 Revaluation of land-Transfer from fixed asset to Stock in Trade ONE ICC Stock in trade-One ICC-Revalued Land 37785,47,250 FSI 251903 15 Sq. Ft. ₹15,000/- sq. Ft Cost One ICC-Land Cost 4,03,630 ₹ 8,20,584 34XFSI 231828.74 Sq. Ft/512121.74 Sq. Ft Legal Charges (SM & TM) 80,98,175 (SM) TM Restructuring Expenses 51,87,896 SM Operating Expenses (Land related 57,86,070 exps) Reval Res One ICC 38834,36,643 2. Transfer of land to P&L be used under construction from stock in trade One ICC Land Cost 37785,47,250 To stock in trade 37785,47,250 3. Cost of Sale One ICC Reval Res ONE ICC 8169,56,453 Land Cost 17976,81,125 Land & Construction and Revaluation Construction cost 1268,84,153 Reserve for one ICC TRF to cost of sales Cost of sale 11076,08,825 Two ICC Reval Res Two ICC 8357,27,418 Land & Construction and Revaluation Reserve for two ICC TRF to cost of sales Land cost 18119,78,332 Construction cost 1345,95,521 Cost of sale 11108,46,435 4. Transfer of closing stock of land from P&L to stock in trade One ICC Stock in trade 58243,61,125 Include ₹ 3,843,495,000/- revalued land cost in 2011 To Land cost 58243,61,125 Two ICC Stock in trade 60567,27,668 Include ₹ 4,718,685,000/- revalued land cost in 2011 less cost incurred in YE 2011 ₹ 743,258,000/- To land cost 60567,27,668 5 Transfer of work-in-progress (construction cost) from P&L to stock in trade One ICC Stock in trade 4110,95,781 To real estate dev work in progress 4110,95,781 Two ICC Stock in trade 5058,52,388 To real estate dev work in progress 5058,52,388 Car park Stock in trade 541,17,781 To real estate dev work in progress 541,17,781 128521,54,744 128521,54,744

From the above, it is evident that, the revaluation reserve has been created on account of the revaluation of the fixed asset and not by debiting to the P&L Account. The transaction of revaluation and conversion of land is independent of the actual utilization of the land for the purpose of the assessee's real estate business. In case, the assessee converts larger piece of land, however does not in the same year utilize the land or utilise a small piece of land, the revaluation

48 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) reserve would be created for the full land which is converted. However, the debit to P&L account would only be to the extent of land utilized for the real estate business. Accordingly, the debit to the P&L Account is of the total cost of the land i.e. which has been utilized for the purpose of business. The assessee during the relevant year has entered into agreement for sale on 30-03-2012. As the assessee is following percentage completion method of accounting, which has been accepted by the Revenue in current year, the income from the project is offered to the extent of the project completed by the assessee. The assessee has completed ICC - 145.62 % and ICC-11 46.30 %. Accordingly, proportionate income is offered to tax. To the extent of the revalued land transferred, the amount of the revalued land transferred of Rs. 165.27 crores has been credited in the P&L Account and reduced from the revaluation reserve. The balance of the revaluation reserve to the extent of unsold land, forms part of the closing stock as Work-in-Progress (WIP) and again credited to the P&L account. Accordingly, the amount of profit shown in the P&L Account would have been the same, even if no revaluation of the land had been done. The balance amount of the revaluation reserve has also been withdrawn and credited to the P&L Account as and when the balance land has been transferred and the same has been offered for taxation in subsequent years.

"(d) Revenue from real estate is recognized on the transfer of all significant risks and rewards of ownership to the buyers and it is not unreasonable to expect ultimate collection and

49 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) no significant uncertainty exists regarding the amount of consideration.”

The freehold land under Real Estate Development planned for sale is converted from fixed assets into stock-in-trade at market value. The difference between the market value and cost of that part of freehold land is credited to revaluation reserve. Revenue arising on sale of undivided interest in the underlying freehold land pertaining to flats/office premises, which are under construction, is being accounted on the percentage of completion method. Revenue from construction activity is recognized on the 'Percentage Completion Method' of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress. Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project/ activity and the foreseeable losses to completion.

50 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) "31. The Company has during the year ended March 31, 2012 converted a part of the freehold land under real estate development from Fixed Assets to Stock in trade at market value and the difference between the market value and cost amounting to Rs. 764.30 crores (2010-11 Rs. 853.96 crores) has been credited to Revaluation Reserve. An amount of Rs. 165.27 crores (2010-11 Rs. 70.57 crores) has been released from revaluation reserve to Statement of Profit and Loss in proportion of revenue recognized on the area sold in accordance with the accounting policy.

51 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) have been lower by 'Rs 146.22 crores and Rs.13.92 crores respectively, the release from Revaluation Reserve would have been higher by Rs 205.81 crores and the net profit before tax would have been higher by Rs 73.51 crores."

52 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) profit and loss account. According to assessee, the AO has proceeded on pure misconception by observing that the revaluation reserve has been created by debiting profit and loss account. The AO has not understood that the 'Revaluation Reserve' has been created on account of revaluation of the land and simultaneous conversion of land from fixed asset to stock in trade. The debit to profit and loss account is on account of the utilization of stock in trade for the purpose of the assessee's business which has nothing to do with the revaluation of land. The AO failed to understand that these were two separate & independent transactions. The AO has also not understood that the revaluation as profit neutral and accordingly there should be no adjustment.

“12.3 We have considered the submission of the assessee.

12.3.1 The relevant provisions of Section 115JB of the Act read as under:

Special provision for payment of tax by certain companies

(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012 , is less than eighteen and one- half per cent of its book Profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half percent

53 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) (2) Every assessee, -

(a) being a company, other than a company referred to in clause b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part Ii of Schedule VI to the Companies Act, 1956 (1 of 1956); or

b) being a company, to which the proviso to sub- section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:

Provided that while preparing the annual accounts including profit and loss account, -

(i) the accounting policies;

(ii) the accounting standards followed for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):

54 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act, -

(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,

shaft correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.

Explanation. —For the purposes of this section, "hook profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared tinder subsection (2), as increased by—

(a) the amount of income-tax paid or payable, and the provision therefor; or

(b) the amounts carried to any reserves, by whatever name called 3106 other than a reserve specified under section 33AC ; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

55 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) (d) the amount by way of provision for losses of subsidiary companies; or

(c) the amount or amounts of dividends paid or proposed; or

The assessee admits that, following the conventional accounting principles, the revalued land amount is transferred to the debit of the Profit and Loss Account.

The provisions of the section 115JB are clear. Once the amount is carried to any reserves, by whatever name called it has to be added to the “book profit” for the purpose of Section 115JB.”

a. Textile Division

b. Polyster Division

C. Real Estate Division

56 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) In respect of the Real Estate Segment, as at the beginning of the relevant year- the assessee carried opening stock of certain work-in-progress relating to two residential projects under construction, namely, ICC-I Project and ICC-2 Project. The Opening WIP of the two Projects was as follows:

(a) For ICC- I Project: Rs.384,34,95,000/-

(b) For 1CC-2 Project: Rs.396,54,27,000/-

During the year under consideration, for the purpose of these two projects, the assessee converted further pieces of land, hitherto held by it as fixed assets, into Stock-in-trade. For this purpose, consistent with the requirement of the provision of section 45(2) of the Act, the assessee got the market value of the land determined by approved valuer as per valuation report dated 10.03.2011. This report is filed by assessee in its Paper Book before us. The entries for conversion were passed in the books of account at such market value. Thus, for these two transactions, viz. (i) revaluation of fixed asset; and (ii) its conversion into stock-in-trade, assessee has passed one consolidated accounting entry as under: -

For ICC Project 1: Account Grouped as Entry Debit Credit Code 13270 Current Stock-in- 377,85,47,250 Assets, trade A/c Loans and Advances 11105 Fixed To Land 4,03,630 Assets A/c. 11521, Capital To 1,86,04,439 11525, work in capitalized 11510 Progress Costs A/c. (under Fixed Assets) 22210 Reserves & To 375,95,30,182 Surplus Revaluation

57 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Reserve For ICC Project 2: Account Grouped as Entry Debit Credit Code 13270 Current Stock-in- 390,32,79,000 Assets, trade A/c Loans and Advances 11105 Fixed To Land 4,16,954 Assets A/c. 11521, Capital To 1,94,25,403 11525, work in capitalized 11510 Progress Costs A/c. (under Fixed Assets) 22210 Reserves & To 388,34,36,643 Surplus Revaluation Reserve It is evident from the Account Codes and the relevant Groupings mentioned in the above entries that the credit to the Revaluation Reserve account has been created with a corresponding debit to the 'Current Assets, Loans and Advances.' It is evident that this is not a case where the Revaluation Reserve is created out of profits for the year. Having recorded the stock-in-trade at its fair value at the time of conversion, the entire value of such stock in trade becomes the cost for the real estate division. Consequently, this entire cost amounting to Rs. 768.18 Crs (i.e. Rs. 377.85 Crs + 390.33 Crs) is recorded as 'Land cost on conversion of freehold land from fixed assets to stock in trade' under the head 'Construction Expenses' as an item of debit to P&L account. Needless to say, to the extent the land is lying in 'Stock-in-Trade' of construction business, it is once again recognised as part of closing inventory by crediting the P&L account and debiting Asset Account. From this it is clear that this debit of Rs. 768.18 Crs. to the Profit and Loss Account reflects the cost of the Stock-in-Trade to the real estate business and that it does not reflect any amount carried to reserves.

58 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 42. During the year, the Assessee incurred certain further expenses towards these two projects which were debited directly to the P&L account and in computing the profits of the real estate segment, these have been duty considered separately. It was claimed by the assessee before us that the Revenues from the said construction business is recognized on the basis of 'percentage completion method'. See note 31 on page 1 & 2 of the Annual Accounts as part of the notes on Significant Accounting Policies. Accordingly, the Assessee has recognized revenue of Rs.258,62,49,100/- in respect of ICC-1 Project and revenue of Rs.260,78,49,630/-for ICC-2 Project, aggregating to Rs. 519,40,98 730/-, Working of the Real Estate Projects based on the percentage completion method. Having recognized the revenues as above, the portion of the Revaluation Reserve which relates to the sale recognized as per percentage completion method needs to be released to the P&L account. Thus, to that extent, the proportionate part of the 'Revaluation Reserve' is withdrawn and credited to the Profit and Loss Account (Amount Rs. 165.27 Crs.).

Entries passed for release from Revaluation Reserve

(a) For ICC-I Project:

Revaluation Reserve…………Dr. 81,69,56,453

To Profit and Loss Account... Cr. 81,69,56,453

(b) For ICC-2 Project:

Revaluation Reserve……….. Dr. 83,57,27,418

To Profit and Loss Account. . .Cr. 83,57127,418

This is given by the assessee in its paper book at page 82 note no. 31 to 32, the audited accounts explaining this Position.

59 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 43. Having recognized the revenues as above, the assessee claimed that it is now left with Closing stock-in-trade and its valuation. As the revalued amount of land is included in the cost of the project, to the extent of the revenues from the project are not yet recognize the revalued amount is carried forward as part of work-in-progress by crediting the P&L account and carrying forward the closing WIP to the Balance Sheet. This is reflected in the following accounting treatment:

(a) For ICC-i Project:

Stock-in-trade (Balance Sheet). . .Dr. 582,43,61,125

To Profit and Loss A/c..............Cr. 582,43,61,125

(b) For ICC-2 Project:

Stock-in-trade (Balance Sheet).. .Dr. 605,67,27,668

To Profit and Loss A/c...... .......Cr. 605067,27,668

From the above, we find that Revaluation Reserve was created on transfer of land from Fixed Asset to Stock-in-trade. Thus, Revaluation Reserve was not created by debiting the P&L account as assumed by the AO. The amount of Revaluation Reserve embedded in the value of the stock-in-trade transferred to the P&L account (Debit side) is, at the end of the year, based on the matching principles, either recognized as revenue corresponding to the revenues recognized based on percentage completion method (Credit side) or reflected as part of the Closing work- in-progress (debit side) carried forward to Balance Sheet. The profits of the assessee as shown in its P&L account duly considers the profits based on Percentage Completion Method on the portions sold during the year and hence there is no warrant for again adding the revaluation. Reserve to such declared profits. The addition, made by the AO leads to not merely double accounting of the book profits actually earned by the assessee but also leads to accounting for profits not yet earned by the

60 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) assessee in respect of the portion of the project not yet completed and not yet sold and which is carried forward as part of closing work-in- progress.

In Merriam Webster's Collegiate Dictionary:

'6: to transfer from one place (as a column) to another (---, a number in adding)'

'4: a quantity that is transferred in addition from one number place to the adjacent one of higher place value'.

In. the Oxford English Reference Dictionary:

(in reckoning) transfer (a figure) to a column of a higher value'

61 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) It is apparent from the plain reading of the phrase 'amounts carried to' in clause (b) of Explanation 1 read with the above referred shades of meanings of the word 'carry' that the amounts contemplated to be increased in computing the book profits are the amounts that are transferred from the Profit and Loss Account to the Reserves Account. As claimed by Ld Counsel Sh. Thar in the present case, there is no transfer of amounts from the Profit and Loss Account to the Reserves Account. Indeed, the reserves in the present case are created by way of revaluation of land which means that the reserves do not reflect the amounts carried from the Profits and Loss Account. In view of the above, it is evident that the AO has misread the provisions of the law and misdirected himself in making the addition to the book profits in this behalf.

“….9. We quote herein below Explanation I to section 115JB of the 1961 Act which reads as under:

"Explanation I. For the purposes of this section, 'book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection ('2), as increased by,

62 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) (a) * ** **

(b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33A C; or if any, amount referred to in clauses (a) to (Ii) is debited to the profit and loss account, and as reduced by"

(a) There must be a debit of the amount to the profit and loss account.

(b) The amount so debited must be carried to the reserve.

Since the amount of AAD is reduced from sales, there is no debit in the profit and loss account The amount did not enter the stream of income for the purposes of determination of net profit at all, hence clause b) of Explanation I 'was not applicable. Further, "reserve" as contemplated by clause (b) of the Explanation Ito section 1 15JB of the 1961 Act is required to be carried through the profit and loss account. At this stage it may be stated that there are broadly, two types of reserves, viz., those that are routed through profit and loss account and those which are not carried via profit and loss account, for example, a Capita! Reserve such as Share Premium Account. AAD is not a reserve. It is not appropriation of profits….

63 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) The term 'Appropriation of profits' is explained in the Guidance Note on 'Terms used in Financial -Statements' issued by the Institute of Chartered Accountants of India in the following words:

“An account sometimes included as a separate section of-the- profit and loss statement showing application of profits towards dividends, reserves etc.”

It is evident on the given facts that the revaluation reserve is not created by 'Application of profits'. Indeed, the debit to the Profit and Loss Account indicates the cost of land to the real estate division and not 'Application of profits".

64 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) that the provisions of section 217 have been duly complied with. Indeed, the phrase 'amounts carried to reserves' as understood under the Act in the context of section 115JB cannot be different from its interpretation under the Companies Act. In view of the above, the application of clause (b) of the Explanation I to section 115JB (2) is evidently inappropriate.

65 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) should be increased by - 'the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset ' The said clause was introduced by Finance Act, 2012. The Memorandum explaining the provisions of Finance Bill, 201.2 has explained the rationale in the following words.

"It is noted that in certain cases, the amount3landing in the revaluation reserve is taken directly to the general reserve on disposal of revalued asset. Thus, the gain attributable to revaluation of the asset is not subject to MAT liability. It is, therefore, proposed to amend section II5JB to provide that the book profit of the purpose of section 115JB shall be increased in the amount standing in the revaluation reserve relating to the revalued asset which has been retired or disposed, the same is not credited to the profit and Loss account" Relevant Extracts from the Explanatory memorandum to the Finance Bill, 2012 are set out at Annexure 7.”

Para II of the relevant portion of Explanatory Memorandum clearly indicates that the amount standing to the Revaluation Reserve should be treated as part of taxable Book Profits only in the year in which the relevant asset is retired or disposed. In view of the above, we are of the view that valuation of inventory is essentially a part of the process of determining the trading results and that valuation of inventories does not give rise to any profits [see an early decision of the Hon’ble Supreme Court in the case of Chainrup Sampatram V. CIT (24 FIR 481). The Hon’ble Supreme Court has explained at Page 485, the purpose of crediting the value of unsold stock in the Profit and Loss Account in the following words:

66 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) "The true purpose of crediting the value of, unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading."

In any case, this is not a case of revaluation of stocks. The Indian Accounting Standards (AS-2) does not permit upward revaluation of stock-in-trade. This is, a case of transfer of Fixed Asset to Stock-in-trade at a revalued amount. Indeed, in the year of creation of Revaluation Reserve, there is no commercial profit earned by the Assessee Company by virtue of revaluation. The entire purpose of introduction of MAT was that certain companies were declaring significant book profits, paying dividends to its shareholders but not paying any tax because of various tax shields like investment allowance, depreciation etc. Accordingly, we delete the addition made by AO of the entire amount of revaluation reserve created during the year to its audited profit applying the provisions of section clause (b) of explanation (1) to section 115JB (2) of the Act. However, the AO will verify whether the assessee has released a sum of Rs. 165,26,83,871/- from revaluation reserve and credited to the profit and loss account, in that case this is not to be added as income under section 115JB of the Act. This issue of assessee’s appeal is partly allowed.

67 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) GROUND NO. 8: ADDITION OF RS. 96,17,31.250/- TOWARDS CAPITAL GAINS ON CONVERSION OF LAND INTO STOCK-IN-TRADE:

On the facts and circumstances of the case and in law, pursuant to the directions of' the Id. DRP. Id. AO erred in re-computing the Long Term Capital Gains on sale of land recognized by the Appellant on land convened into stock in trade at Rs. 259,44,03,914/- instead of Its. 116,29,63,578/-as offered by the assessee and thereby making incremental addition of Rs. 96,17,31,250/- to the total income.

The Appellant prays that capital gains offered by the Appellant be accepted and addition of incremental capital gains of Rs. 96,17,31,250/- made by the AO he deleted.

Brief facts are that the AO re-computed Long Term Capital Gains on 51. sale of Land recognized by the assessee on land converted into stock in trade at Rs. 266,27,25,000/- instead of Rs. 116,29,63,578/- as offered by the assessee. According to assessee, the AO failed to appreciate the facts that the assessee has offered proportionate capital gain on conversion of land into stock-in-trade to the extent of sale of the flats based on the percentage completion method. The assessee, therefore, prayed that the addition on account of capital gain on conversion of fixed

68 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) asset into stock in trade be deleted. The DRP also confirmed the action of AO by observing in para 13.3 of its order as under: -

13.3.1 The Assessee also stated that it has offered the income from the real estate business oil percentage completion basis tinder the head business income. Similarly, assessee has also offered the capital gain oil conversion of the capital asset into stock in trade for proportionate sale of the capital assets for which corresponding business income has been offered.

13.3.2 As per section 45(2) r.w.s. 2(47) when the capital asset is convened into stock in trade then it would be considered as transfer of such capital asset and capital gain or loss would be computed in the year of sale of the stock in trade. Therefore, the time of chargeability of income-tax for capital gain arising from the conversion of capital asset to stock-in-trade is the point when the stock-in-trade is sold or otherwise transferred. Therefore, The AO is directed to verify salt of the stock in trade and compute the capital gain on the conversion of the land (fixed asset) to stock in trade in the year in which only part sale of stock in trade is effected.

69 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) followed since F.Y. 2005-06. This method of accounting is as per Accounting Standard ('AS')-7/AS-9 read with Guidance Note on accounting for real estate activity issued by ICAI as applicable. Further the same method of accounting has been accepted in the past assessments as well as by other statutory authorities for e.g. Service Tax department, Sales Tax authorities. Under this method "revenue" is recognized during the period of construction as against "project completion method" where under revenue "sale of flats" is recognized when the possession of the flats is handed over to the purchasers. Under the Percentage Completion Method there is no relevance of possession for recognition of revenue. The revenue is recognized even before the flats are constructed. Hence the revenue is not booked as income from sale of flats (Stock in trade). The relevant paragraph of the AS- 7 is reproduced herewith for ready reference: -

70 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed. However, any expected excess of total contract costs over total contract revenue for the contract is recognised as an expense immediately in accordance with paragraph 35.

"5.1 The percentage completion method should be applied in the accounting of all real estate transactions/activities in the situations described in paragraph 3.3 above, i.e., where the economic substance is similar to construction contracts. Some further indicators of such transactions/activities are:

(a) The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods.

(b) Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc.

(c) While individual units of the project are contracted to be delivered to different buyers

71 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) these are interdependent upon or interrelated to completion of a number of common activities and/or provision of common amenities.

(d) The construction or development activities form a significant proportion of the project activity."

The accounting policy followed in respect of real estate activity as disclosed in Notes to Financial Statements at (d) under Significant Accounting Policies, is as under:

"(d) Revenue from real estate is recognized on the transfer of all significant risks and rewards of ownership to the buyers and it is not unreasonable to expect ultimate collection and no significant uncertainly exists regarding the amount of consideration.

The freehold land under Real Estate Development planned for sale is converted from fixed assets into stock-in-trade at market value. The difference between the market value and cost of that part of freehold land is credited to revaluation reserve. Revenue arising on sale of undivided interest in the underlying freehold land pertaining to fiats / office premises, which are under construction, is being accounted on the percentage of completion method.

Revenue from construction activity is recognized on the 'Percentage of Completion Method' of accounting. Revenue is recognized in relation to the sold areas only, on the basis of percentage of cost incurred as against the total cost of project (including land). Revenue is recognized if the cost incurred is in excess of 25% of the total estimated

72 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) cost. The estimates of saleable area and cost of construction are revised periodically by the management. The effect of such changes to estimates is recognized in the period such changes are determined. The estimated cost of construction as determined is based on management's estimate of the cost expected to be incurred till the final completion and includes cost of materials, service and other related overheads. Unbilled costs are carried as real estate work in progress.

Determination of revenues under the percentage of completion method necessarily involves making estimates by the Company, some of which are of a technical nature, concerning, where relevant, the percentages of completion, costs to completion, the expected revenues from the project activity and the foreseeable losses to completion."

73 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) 55. Our attention was drawn towards the provision of section 2(47)(iv) of the Income Tax Act, 1961 ("the Act")

"transfer, in relation to a capital asset, includes, -

……

…….

"(iv) In a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment".

Hence, under section 45 of the Act, profits & gains arising from such transfer (conversion to stock in trade) is chargeable to tax in the year of transfer. However as per non obstante provision contained in sub section (2) of section 45, the capital gains shall be chargeable to income tax as income of the previous year in which such stock in trade is sold or otherwise transferred by him. Since the sale of Stock in Trade would actually happen when the flats are completed and ownership transferred, a strict interpretation of section 45(2) would suggest that the capital gains arising on conversion of stock in trade would be chargeable to tax when project is completed. However, it would be inconsistent to say that the business profits arising from real estate activity would be chargeable to tax on percentage completion method each year during the construction activity and the capital gains portion of there is chargeable to tax in a different year i.e. when the project is completed. A reading down of section 45(2) of the Act would therefore mean that the capital gains on conversion should be charge to tax in the same year in which the corresponding business income is offered to tax, on the same basis i.e. percentage completion method which the company is following. Further, the assessee has made disclosure by way of a note at serial no. 31 in Notes to Financial Statement in relation to the Revaluation Reserve and

74 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) amount released from the revaluation reserve on credited to profit and loss account and which is read as under:

"31. The Company has during the year ended March 31, 2012 converted a part of the freehold land under real estate development from Fixed Assets to Stock in trade at market value and the difference between the market value and cost amounting to Rs. 764.30 crores (2010-11 Rs. 853.96 crores) has been credited to Revaluation Reserve. An amount of Rs. 165.27 crores (2010-11 Rs. 70.57 crores) has been released from revaluation reserve to Statement of Profit and Loss in proportion of revenue recognized on the area sold in accordance with the accounting Policy.”

75 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) GROUND NO. 9: ADDITION OF RS. 2,73,960/- BEING AMOUNT DISALLOWED U/S 14A OF THE ACT WHILE COMPUTING BOOK PROFITS U/S.115JB OF THE ACT

• On the facts and in the circumstances of the case and in law the IA. AO, pursuant to the directions of the l.d. DRP. erred in adding the disallowance made u/s NA to the book profits on the alleged ground that expenditure pertains to earning exempt income.

Order pronounced in the open court on 27-10-2017. Sd/- Sd/- (N.K. PRADHAN) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 27-10-2017 Sudip Sarkar /Sr.PS

76 ITA No. 1716/Mum/2017 The Bombay Dyeing & Mfg. Co. Limited (A.Y:2012-13) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai //True Copy// 6. Guard file. BY ORDER, Assistant Registrar ITAT, MUMBAI