M/S. CHAMBAL FERTILIZERS AND CHEMICALS LIMITED,KOTA vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, KOTA

per unit decreased by 8%. It may be noted that the Assessing Officer has not

doubted the correctness of the sales turnover so there can be no allegation of any

53 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. suppression of sales. Similarly the no evidence has been adduced to establish that

any expenditure incurred by the assessee is not genuine or is overstated.

Therefore, the only reason which can be used to sustain the addition is a fall in the

gross profit rate, which is a circumstance as is explained below not sufficient to

invoke section 145(3).

28.7. Assessee has also provided details of 2 comparable companies where their

profit had also shown a reduction in AY 2012-13. CRISIL data also revealed that the

entire industry was suffering. Assessee's entries in the books are based on invoice.

Agents and dealers billed same rate to assessee. Further, the downward fall in gross

profit ratio in current year from earlier years cannot be a valid reason to reject the

books of accounts.

28.8. The Delhi High Court in CIT v. Smt. Poonam Rani (2010) 326 ITR 223 (Del)

held that where the rate of gross profit declared by the assessee in a particular

period is lower than the gross profit of the preceding year, it may serve as a

warning to the AO to look into the accounts more carefully, but a low rate of gross

profit in absence of any material pointing towards falsehood of account books

cannot by itself be a ground to reject account books under section 145(3) of the

Act. Reference is invited to paragraph 9 of the judgement which is extracted as

under:-

" The fall in gross profit ratio could be for various reasons such as increase in the cost of raw material, decrease in the market price of finished product, increase in the cost of processing by the assessee etc. There is no finding

54 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. that the actual cost of the raw material purchased by the assessee was less than what was declared in the account books. There is no finding that the actual cost of processing curried out by the assessee was less than what had been declared in her account books. No particular expenditure shown in the account books has been disallowed by the Assessing Officer. There is no finding by the Assessing Officer that the actual quantity of finished product produced by the assessee was more than what it was shown in the account books. There is no finding that the assessee had made any such sale of the finished product which was not reflected in the account books. There is no finding by the Assessing Officer that the finished product was sold by the assessee at a price higher than what was declared in the account books. In these circumstances, the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, in our view, were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year.

28.9. Further, the above decision of the Delhi High Court dealt with a case of an

assessee being engaged in the business of manufacturing copper wires. The assessee

had declared a gross profit of 1.4% as against 5.91% in the earlier year. The AO

rejected the books of accounts and considered the gross profit rate at 5.91%. The

CIT(A) held that the AO was not justified in rejecting the books of accounts and

applying the enhanced gross profit rate as the assessee had explained the marginal

increase in weight of wires and observed that the assessee was registered under

Central Excise Act and was maintaining proper quantitative details. The High Court

observed that the AO had not pointed out any particular defect or discrepancy in the

account books maintained by the assessee. Further, the High Court observed that the

CIT(A) was satisfied with the details furnished by the assessee including quantitative

details in respect of purchase of raw material, manufacture of copper wire and sale

of finished products. Further, with respect to the marginal increase in weight of the

55 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. finished product accepted the explanation given by the assessee and held that the

AO had no justification in law to reject the explanation of the assessee and hence,

books of accounts cannot be rejected under section 145(3) of the Act.

28.10. The Delhi Tribunal in ACIT v. Talbros Engineering Ltd (2015) 43 CCH 55 held

that books of accounts cannot be rejected on the solidarity reason of decline in the

gross profit rate. Further, the AO had no reason for reject the books of accounts

when he had not contradicted the chart furnished by the assessee and the AO had

not pointed out any mistake in the quantitative records maintained by the assessee

or its closing stock, the CIT(A) was justified in cancelling the action of the AO of

rejecting the books and resultantly deleted the addition. The relevant extract of

paragraph 4 of the judgment is as under:-

“ It is a matter of record that the assessee is engaged in a manufacturing activity and has maintained all the stock registers required for the purpose of the payment of excise duty. The Assessing Officer has not controverted the quantity or value of the closing and opening inventory. There is no dearth of judicial precedents unanimously holding that books of account cannot be rejected on the solitary reasons of decline in the gross profit rate. Since the Assessing Officer was swayed only by the decline in the G.P. rate to reject the books of account without anything else, we are of the considered opinion that such an action of the Assessing Officers has no sanction of law...."

28.11. The Calcutta High Court in CIT v. Eastern Commercial Enterprises (1994) 210

ITR 103 (Cal) held that where the assessee has given a comparative instance of gross

profit rate, it is necessary for the department to come to a finding as to the norm of

the gross profit on the basis of comparative cases. Therefore, it is the duty of the

56 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. Assessing Officer to counter the comparative statement cited by the assessee before

he can have the option to estimate the gross profit.

28.12. The Gauhati Hon'ble Court in case of Aluminium Industries (P.) Ltd. v. CIT

[1995] 8o Taxman 184 (Gauhati) held that additions to the profits of the assessee

made solely on the ground that it was low without giving a specific finding that the

accounts of the assessee were not correct and complete, or that the income could

not be properly determined and deduced from the accounting method employed by

the assessee, is not justified. The mere fact that there was a lower rate of gross profit

declared by an assessee as compared to the previous year would not by itself be

sufficient to justify the addition.

28.13 The Punjab High Court in Pandit Bros v. CIT (1954) 26 ITR 159 held that to

reject the accounts there must be a definite finding of the ITO for which there must

be definite material before him to come to such a finding. Mere absence of stock

register or insufficiency of profits cannot be material to reject the accounts.

28.14. The Jammu and Kashmir High Court in International Forest Co. v. CIT 1975)

101 ITR 721 while considering the issue of yield of saw timber shown by the assessee

as being low as compared to earlier years held that mere low yield or the

manifestation of meagre gross profit cannot indicate suppression of sales on part of

the assessee.

28.15. The High Court of Bombay at Nagpur in R.B. Bansilal Abichand Spinning &

Weaving Mills v. CIT (1970) 75 ITR 26o dealt with a case where the AO had made an

57 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd. addition by rejecting the books of accounts on the ground that there was excessive

dead loss of cotton which indicated suppression of production figures. The High

Court held that the mere percentage of loss being very low in a particular year could

not possibly lead to an inference that there has been suppression in the weight of

yarn that was processed and the addition made by the AO was deleted.

28.16. Various decisions have held that deviation in gross profit cannot be a ground

to reject books of accounts. The assessee relies on the following decisions:-

• MalaniRamjivan Jagannath (2009) 316 ITR 120 (Raj HC) — para 9 to 11 • Pawan Enterprises v. ACIT (ITA No. 76/JP/2018)(Jaipur trib) — para 7 • PCIT v. IBILT Technologies Ltd. (2018) 98 taxmann.com 255 (Del HC) — para 9 • ACIT v. Mewar Polytex (51 TTJ 698)(Jaipur trib.) — para 13, 16 & 21 • Madan Lal v. ITO (99 TTJ 538)(jodhpur trib.) — para 9 • Century Tiles Ltd. V. JCIT (152 ITD 327)(Ahm. trib.) — para 23 Hence, basis the above decisions, the appellant submitted that the AO has not

pointed out any specific defect or discrepancy in the account books maintained by

the assessee. The assessee has been maintaining regular books of accounts, which

were duly audited by an independent chartered accountant. The financial results

were fully supported by the assessee with vouchers and the books of account were

complete and correct in all respects. The accounts which are regularly maintained in

the course of business are duly audited and free from any qualification by the

auditors. Hence, there is no adequate reason to indicate that the accounts are

incorrect or unreliable.

58 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

28.17. The AO himself admits that proper books of accounts have been maintained

by the appellant. He has neither alleged nor proven either sale outside the books,

suppressed production or mistake in quantitative details maintained for excise

purposes. All returns under VAT and Excise have been correctly filed and no

discrepancies were pointed out either by the Assessing Officer or the Indirect Taxes

authorities.

28.18. It is also humbly submitted that the present system of accounting has been

carried on by the assessee since the textile unit started production. No addition has

been made either in any of the earlier years or any of the subsequent years. A low

rate of gross profit, in the absence of any material defect pointed out in the accounts

books, cannot by itself be a ground to reject the account books under section 145(3)

of the Act.

In view of the facts and the legal position set out above, it is submitted that the

appeals be decided in favour of the assessee.

record. The facts of the case are that during the course of scrutiny proceedings the

AO noted that there was difference in actual weight of the cotton (raw material)

purchased/ received in the factory as per details of dharma khanta (weighing

machine) from the weight as per details of invoices/purchase bills produced by the

assessee on various dates. The books of accounts of textile division were produced

59 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

for examination on 28.01.2015. On being asked to explain the difference in weight

of cotton, the assessee submitted as under :-

“ In this respect, we submit that cotton being a natural produce observes moisture from the environment. At the point of packing and ginning, there is a spray of water that causes the weight of raw material to increase. Some of this moisture dries up at the time goods are delivered. Sometimes the reverse is true and the product observes further moisture between dispatch and delivery. Also the packing material used accounts for a difference in weight. These the above lead to minor discrepancies between actual weight and invoice weight.”

The A.O. considered the above explanation of the assessee but did not find the

same satisfactory for the reason that during scrutiny proceedings the assessee could

not offer plausible explanation as to what treatment was given to this difference in

weight except saying that this is only a process loss. Thus the AO was of the view

that balance of opening and closing stock as well as consumption cannot be relied

upon. The AO further mentioned that books of accounts of the assessee are audited

u/s 44AB and the audit report does not disclose these facts. For want of complete

details, the AO invoked the provisions of section 145(3) of the Act and made the

trading addition of Rs. 13,31,39,887/- on the declared turnover of Rs.

175,20,71,152/- by applying average G.P of last 4 years @ 9.67% as against g.p.

rate of (-) 0.83% shown by the assessee in respect of cotton unit of textile division.

In first appeal, the ld. CIT (A) has deleted the addition by observing at pages 110-

111 as under :-

“ It may be noted that his main objections were only that explanation given as process loss claimed by the appellant for difference in weight of the

60 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

actual & invoice weight was not acceptable explanation. Secondly, he objected to purchase of raw materials in transit from commission agents. Hence he held that price inflation could not be ruled out. He has given a generalized verdict that “On random explanation of purchase prices it was found that the company has purchase raw material i.e. cotton at higher than market price on many occasion.” However, he self contradicts himself as firstly, he is talking of price inflation but does not explain how the appellant would be benefited by applying higher than market purchase prices thereby reducing its profits on which the appellant was entitled for deduction u/s 80-IC so it is would be illogical to reduce the profits anyways. Second, he has not brought out specific instances where such prices were inflated in order to benefit any parties/subsidiaries etc. Thirdly, raw material consumption as per actual weight purchase which he felt was unverifiable due to discrepancy in the weight mentioned earlier due to claimed process laws has not actually been examined by him as it is absent in one assessment order. This is not the first year of assessee’s business & the department has accepted the books on the same basis in earlier years. Though Res judicata is not applicable in income tax proceedings, however, a principle of consistency does need to be followed. Rejection of books of accounts cannot be based on superficial & flimsy reasons without bringing out specific defects in the same, which in this case the A.O. has failed to do. Further, in the course assessment as well as appellate proceedings, the appellant has brought on record detailed explanation for both the gross profit decline, difference in weight and market reports on the comparative cases as well as the impact on the industry as such. The assessee was also able to produce proper bills, vouchers, registers, ledgers etc. before the A.O. in support of its accounts and contentions made in response. On the contrary, the A.O. could not bring on record any findings is comparable cases where such G.P. as he has estimated has been returned.

61 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

He should have at least brought out the cyclical analysis of the assessee’s business which are now easily collectible form various independent sources, so as to prove that what the assessee was claiming was acceptable or not. In the absence of any independent verifications and findings to sustain his conclusions, I am not inclined to agree with the A.O. on the defects listed as being sufficient for rejection of assessee’s books of accounts. As has been mentioned in the case of CIT vs. Smt. Poonam Rani (2010) 192 Taxman 167 (Delhi), wherein the Officer had rejected the books because of the quantitative variation in the weight of the output products as against input items, in this case also, the basis for rejection falls short on all the grounds as was highlighted in the above referred case law. The rejection made u/s 145(3) is accordingly not upheld and is not validated. The resultant estimation of profit leading to an addition of Rs. 13,31,39,887/- is also directed to be deleted.”

We have also taken into consideration the detailed written submission of the

assessee holding that AO’s action to reject the books of account is not tenable as the

present system of accounting has been carried on by the assessee since the textile

unit started production. The ld. A/R of the assessee during the course of hearing

submitted that no addition has been made either in any of the earlier years or any of

the subsequent years. A low rate of gross profit, in the absence of any material

defect pointed out in the accounts books, cannot by itself be a ground to reject the

account books under section 145(3) of the IT Act. The ld. A/R further submitted

that the causes for reduction in gross profit in the year under consideration

compared to the previous years was due to the cost of raw material consumed

increased by 22%, personnel expenses increased by 10%, power and fuel cost per

unit increased from Rs. 3.85/- per unit to Rs. 4.40/- per unit and the selling price per

62 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

unit decreased by 8%. It may be noted that the Assessing Officer has not doubted

the correctness of the sales turnover so there can be no allegation of any

suppression of sales. Similarly no evidence has been adduced to establish that any

expenditure incurred by the assessee is not genuine or is overstated. In this regard

reliance is placed on various High Court decisions including jurisdictional High Court

in case of Malani Ramjivan Jagannath (2009) 316 ITR 120 (Raj.) and also decisions

of Jaipur Benches of the Tribunal in cases of Pawan Enterprises vs. ACIT in ITA No.

76/JP/2018 and ACIT vs. Mewar Polytex (51 TTJ 698). Taking into consideration all

these facts and circumstances of the case and also considering the judgments of

various High Courts including the decision of Hon’ble Delhi High Court in case of CIT

vs. Smt. Poonam Rani (2010) 326 ITR 223 (Delhi) wherein it has been held that “

where the rate of gross profit declared by the assessee in a particular period is lower

than the gross profit of the preceding year, it may serve as a warning to the AO to

look into the accounts more carefully, but a low rate of gross profit in absence of

any material pointing toward falsehood of account books cannot by itself be a

ground to reject account books under section 145(3) of the Act”, we do not find

any infirmity in the order of ld. CIT (Appeals) in deleting the addition and the same

is upheld. In the result, this ground of the revenue dismissed.

Assessee’s Appeal in ITA No. 201/JP/2017 A.Y. 2012-13 :

Now we take up remaining Ground No. 3 of the assessee’s appeal relating to sustenance of disallowance of interest of Rs. 41,33,649/- in respect of borrowed funds alleged to be taken for loans and advances to the various subsidiaries.

63 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

assesse to various subsidiaries over a period of time amounting Rs. 442.91 lakhs.

The indebtedness from the subsidiaries during the year under consideration

amounted to Rs. 19.57 lakh. The details are as under:-

(Rs in lakhs)

Sr. Name of subsidiary / Opening Movement Closing No. associate /joint venture balance as during FY balance as on 01.04.11 11-12 on 31.03.12

114.05 1.01 115.06 1 Chambal Energy (Chhatisgarh) Limited

24.68 1.01 25.69 2 Chambal Energy (Orissa) Limited

284.17 17.39 301.56 3 Chambal Infrastructure Ventures Ltd.

0.44 - 0.44 4 CFCL Overseas Limited

0 0.16 0.16 5 India Steamship Limited

423.34 19.57 442.91 Total

As per the details submitted, the assessee incurred expenses of Rs. 1,01,278/-

pertaining to audit fees, ROC fee and other certification and verification charges on

behalf of Chambal Energy (Chattisgarh) Limited and Chambal Energy (Orissa)

Limited which are recoverable from them and, hence, not debited to the profit and

loss account of the assessee as an expense but shown as an advance. The assessee

has also incurred expenses of Rs. 17,39,248/- on behalf of Chambal Infrastructure

Ventures Limited which are recoverable from it and, hence, not debited to the profit

64 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

and loss account of the assessee as an expense. Further, the assessee has also

given an interest bearing loan to CFCL Overseas Limited of Rs. 43,75,26,000/-

bearing interest rate at 8% p.a. This loan has been repaid on April 20, 2011.

prove the commercial expediency for giving loans and advances to its subsidiaries.

Further, the assessee also could not explain why interest at 8% was charged on the

loan given to CFCL Overseas Ltd whereas it had borrowed funds at a higher rate of

interest. He also opined that the assessee has diverted a part of its borrowed funds

for giving advance of Rs. 43,75,26,000/- to M/s CFCL Overseas Ltd., as well as for

paying expenses of its subsidiaries and for paying an advance for purchasing shares

of its subsidiaries Chambal Infraventure Ltd. Hence, the AO disallowed a part of

interest paid by the assessee on borrowed funds by making a disallowance of

interest by taking a rate of 9% p.a. on such borrowing. The AO considered interest

at 9% p.a. and worked out a disallowance of Rs. 38,14,207/-. Therefore, total

disallowance made amounted to Rs. 41,33,649/- as under:-

Rate of Disallowance Particulars Amount (Rs.) Days Interest (Rs.)

14,40,641 29,21,30,000 9% 20 Loan to CFCL Overseas Ltd. (repaid on 20.04.2011) 14,53,96,000 9% 20 7,17,021

21,57,662 Total

18,38,220 Interest already charged @ 8%

3,19,442 Disallowance

65 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

10,26,450 Chambal Energy (Chhatisgarh) Ltd. 1,14,05,000 9% 365

Chambal Energy (Orissa) Ltd 24,68,000 9% 365 2,22,120

Chambal Infrastructure Venture 25,57,530 Ltd 2,84,17,000 9% 365

CFCL Technologies Ltd. (repaid 8,107 on 30.04.2011) 10,96,000 9% 30

41,33,649 TOTAL DISALLOWANCE

CIT (A). The ld. CIT(A) referred to his earlier order where a disallowance of Rs.

61,96,798/- was confirmed as loans were given from the assessee’s cash credit

account and it was presumed that loans were from borrowed funds and following

the same, the CIT(A) confirmed the disallowance of Rs. 41,33,649/-.

Now the assessee is in appeal before us.

brought on record by the AO to establish that any part of the borrowed funds were

utilised to lend the amounts or incur expenses on behalf of the subsidiaries. In any

event having regard to the fact that the aggregate of the share capital and reserves

is far in excess of the amount lent/incurred a presumption must be drawn that the

advances were not made from borrowed funds as already dealt with in detail earlier.

In any event having regard to the fact that interest is charged at 8% p.a. on the

loan given to CFCL Overseas Ltd. which was at a rate higher than the weighted

66 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

average borrowing cost of 2.85% p.a., accordingly, no disallowance of interest

should be made. Further, the AO has arbitrarily adopted the rate of 9% p.a. and

calculated the disallowance. The assessee submits that the department cannot put

itself into the shoes of a businessman and it is not for the department to determine

what rate of interest is to be charged without providing any cogent reasoning.

Further, it is submitted that the loans and advances were made out of the internal

accruals of the appellant and not out of borrowed funds and there were no

specific/direct borrowings for the loans and advances. The assessee submitted that

the loans and advances to the subsidiaries were made in the normal course of

business for the furtherance of its business activities. The appellant had earned a

profit of 247.28 crores during the year and has reserves of Rs. 1312.87 crores

(comprising of General Reserve of Rs. 246.95 crores and profit and loss account of

Rs. 1065.91 crores) Thus, loans and advances to subsidiaries have been made out of

internal accounts generated by the assessee and the amount of internal accruals is

far in excess of the loans and advances made to the subsidiaries. Hence, there can

be no disallowance under section 36(1)(iii) of the Act.

33.1. The Assessing Officer has alleged that the commercial expediency of granting

loans/ meeting expenditures of subsidiaries was not adequately proven by the

appellant. It is submitted that the appellant, in order to limit its liability, entered into

new business avenues through wholly owned subsidiaries. The business of power

generation is part of the objects in the Memorandum of the appellant. Software

business is also a part of the object clause of the appellant. Further, CFCL Overseas

Limited was incorporated as a Special Purpose Vehicle and is a wholly owned

67 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

subsidiary of the appellant for consolidation of its entire software business. Chambal

Infrastructure Ventures Ltd. (‘CIVL’) was set up by the appellant for entering into

Power business. It had set up two wholly owned subsidiaries for taking up power

projects in the states of Chhattisgarh and Odisha. CIVL has been pursuing various

business opportunities for setting up power projects in the states of Odisha and

Chhattisgarh through its subsidiaries. There has been continuous dialogue with the

Government of Odisha for various approvals for the power project. CIVL had entered

into a Memorandum of Understanding (‘MoU’) with the Government of Odisha to set

up a 1320 MW (2x660 MW) Thermal Power plant (TPP), based upon Super Critical

Technology, near village Siaria in Dhenkanal District. Due to some land acquisition

related issues, the project has been delayed. Similarly, CECL has signed a MoU with

the Government of Chhattisgarh for 1100 MW and it is also pending for land

acquisition and other approvals.

In view of the above, it is clear that the Appellant’s investments in CECL and CEOL

through CIVL are strategic in nature and for running of proposed power projects

whose regulatory approvals are pending and land acquisition related issues have

delayed the projects. Without prejudice to the appellant’s submission that loans and

advances to the subsidiaries had been made out of its internal sources, the interest

disallowance should be calculated considering the rate of 2.85% p.a. only instead of

9% p.a.

33.2. Without prejudice to the assesse’s contention that internal accruals were used

for making loans and advances to its subsidiaries, it is submitted that the Act does

not prohibit allowance of interest if the loans and advances is made to subsidiaries

68 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

and the only condition is that the money should be borrowed for the purpose of the

business. The assesse has discharged its liability of proving commercial expediency

by giving details of the loans and advances to various subsidiaries and the

commercial necessity for the same and, hence, the conditions stipulated for claiming

deduction under section 36(1)(iii) of the Act are satisfied. The ld. A/R placed

reliance on the judgment of Hon’ble Supreme Court in the case of S.A. Builders v.

CIT (2007) 288 ITR 1 (SC) wherein it has been held that the amounts advanced to

sister concern should be for commercial expediency, if it is to be allowed under

section 36(1)(iii) of the Act. The relevant extract of paragraph 35 is as under:-

“…It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans…”

The Hon’ble Supreme Court in case of Munjal Sales Corporation vs. CIT (298 ITR

298) held that profits of the appellant for the relevant year were sufficient to cover

loans advanced to sister concerns, thus disallowance of interest is unwarranted. The

relevant extract of paragraph 17 is as under:-

“17. One aspect needs to be mentioned during the assessment year 1995-96, apart from the loan given in August/September 1991, the assessee advanced interest-free loan to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given

69 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

to the sister concern by the assessee-firm out of its Own Funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The Opening Balance as on 1-4-1994 was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs.”

The Gujarat High Court in CIT vs. R K Kalthia Engineering & Automobiles (P) Ltd. [33

taxmann.com 14] has held that the disallowance of interest expenditure was not

permissible where the AO had disallowed interest paid on borrowed funds on the

ground that assessee diverted interest bearing funds for the purpose of investment

in shares and loans to sister concern when sufficient interest free funds were

available with the assessee. The relevant extract is as under :-

“6. It is a well-established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly.”

The Madras High Court in CIT v. RPG Transmissions Ltd (2014) 48 taxmann.com 57

held that the interest on borrowed funds utilized for investment in group companies

for strategic business purposes is allowable under section 36(1)(iii) of the Act.

The Mumbai Tribunal in Metro Exporters Ltd v. ITO (ITA No. 1693/M/05) held that a

presumption cannot always be made that source of investment is borrowed funds in

cases where mixed (own and borrowed) funds are used. Where an assessee has

70 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

sufficient interest free funds (capital and reserves), disallowance for alleged use of

borrowed funds is not warranted. Relevant extract of the same is reproduced below:

“On the basis of above discussion a proposition / Formula can be laid down that if an assessee having sufficient interest free funds, in the form of capital reserves and other funds without interest bearing from relatives and friends not related to business, to cover funds given interest free or utilized other than for business purposes, no disallowance are warranted. If the own funds are not sufficient to cover interest free advances, a proportionate disallowance is warranted. While examining interest free funds available with assessee and interest free? given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proportion is fortified by the decision of ITAT in the case of Torrent Financers V. ACIT, 73 TTJ 624 (Ahd), judgment of Allahabad High Court in the case of CIT V. Prem Heavy Engineering Works P. Ltd., 285 ITR 554 (All.), and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corporation V. CIT, 298 ITR 298 (SC).”

Further, reliance is also placed on the other decisions referred in Ground 2 above to

support the position that where sufficient own funds are available, it is presumed

that investments have been made out of such interest free funds and no part of the

interest on borrowings can be disallowed on the basis that the investments are made

out of interest bearing funds. Hence, in light of the above decisions which have laid

down the settled law, the Tribunal ought to follow these decisions and not follow the

Tribunal’s order for the earlier years remanding the matter to the AO in light of the

aforesaid decisions as well as the recent Supreme Court decisions in South Indian

Bank (supra) and Reliance Industries Limited (supra). Further, the ld. DR’s

submission of remanding the matter back to the AO should be rejected in light of the

aforesaid Supreme Court decisions as referred above as well as referred in Ground 2

above. Therefore, based on the above submissions and reliance placed on various

71 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

judicial pronouncements, it is humbly submitted that no disallowance is warranted

under the provisions of section 36(1)(iii) of the Act.

on record. We have also gone through the order of the ITAT in the earlier years

where the matter was remanded to the file of the Assessing Officer. As in the earlier

ground , we are of the considered opinion that in light of the recent Supreme Court

decisions in South Indian Bank (supra) and Reliance Industries Limited (supra) and

the Hon’ble Supreme Court’s finding in the case of Munjal Sales Corporation vs. CIT

(298 ITR 298) wherein it has been held that where profits of the appellant for the

relevant year were sufficient to cover loans advanced to sister concerns,

disallowance of interest is unwarranted. We, therefore, following the above

decisions of the Hon’ble Apex Court, direct to delete the disallowance of Rs.

41,33,649/-. This ground of the assessee is allowed.

Ground Nos. 2, 3, 4, 5, 6, 7, 8 & 9 are hereby dismissed and in assessee’s

appeal Ground No.1 is dismissed and Ground 2 & 3 are allowed.

Now we take up additional grounds raised by the assessee for the

assessment year 2012-13 as under :-

(4) The appellant incurred the expenses towards Education and Secondary High Education Cess of Rs. 478.74 lacs. Inadvertently, the said amount was not claimed as deductible expenditure in computation of total income.

72 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

record. The assessee has paid education cess of Rs. 5,10,01,273/- comprising

education cess of Rs. 3,40,00,849/- and secondary and higher education cess of

Rs.1,70,00,424/-. The assesse has filed an additional ground claiming deduction of

education cess based on the decision of the Hon’ble High Court of Rajasthan, Jaipur

Bench wherein, while disposing of ground No. 3 of the assessee’s appeal No.

52/2018 for the AY 2009-10 vide its order dated 31.07.2018 held “that Education

and Secondary Higher Education Cess paid by the appellant along with the Income-

tax are not a “tax” for the purpose section of 40(a)(ii) and hence are allowed as

deductible expenses.” It is further noted that in the SLP(C) No.7379/2019 – for AY

2009-10 filed by the revenue before the Hon’ble Supreme Court, the ground was not

admitted by the Hon’ble Supreme Court. Thus, Education and Secondary Higher

Education Cess were held to be allowable expenses and no addition was warranted

under section 40(a)(ii) as the law stood before the enactment of Finance Act 2022.

Subsequently, the Finance Act, 2022 brought about a retrospective amendment in

the Income Tax Act whereby the “Education and Secondary Higher Education Cess”

(‘Education Cess’) paid by an assessee is clarified to be a disallowable expense. The

Finance Act 2022 has amended section 40 by inserting Explanation 3 with effect

from 1-4-2005 to provide that the term ‘tax’ shall include and shall be deemed to

have always included any surcharge or cess. In light of the amendment effected

retrospectively, it is held that Education cess is not an allowable Expense and the

additional ground raised by the assesse is dismissed.

73 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

“(6) Following the findings of the Hon’ble ITAT, Jaipur Bench, while disposing off ground no. 9 of the departmental appeal (ITA No. 389/JP/14) of the Assessment Year 2010-11 vide its order dated 31.01.2018, that the assessee company would be allowed to claim the loss in the year of actual disposal of fertilizer bonds and not in the year on account of revaluation of such fertilizer bonds; the appellant should be allowed business loss of Rs. 2155.00 lacs related to value of the fertilizers bonds sold during the year relevant to the Assessment Year 2012-13.”

record. The ld. A/R submitted that following the finding of ITAT Jaipur Bench while

disposing off ground no. 9 of the Departmental Appeal (ITA No. 389/JP/14) of the

assessment year 2010-11 vide its order dated 31.01.2018, that the assessee

company would be allowed to claim the loss, in the year of actual disposal of

Fertilizer Bonds and not in the year under consideration on account of revaluation of

such Fertilizer Bonds, the appellant should be allowed business loss of Rs. 2155

lakhs related to value of the Fertilizer Bonds sold during the year relevant to

assessment year 2012-13. The ld. A/R further submitted that following the order of

the Jaipur Bench of the Tribunal in ITA No. 306, 389 & 638/JP/2014 dated

31.01.2018 for the assessment year 2010-11, the Assessing Officer vide his Order

no. 03/103 dated 20.02.2020 after considering all the facts on record, has allowed

the loss in respect of Tranche-1 sold in A.Y. 2011-12. The ld. A/R thus prayed that

the loss of Rs. 2155.00 in respect of Tranche-2 may kindly be directed to be given in

AY 2012-13 as was given for Tranche-1 in AY 2011-12. While adjudicating the

matter, the Jaipur Bench of the Tribunal in ITA No. 306, 389 & 638/JP/2014 dated

31.01.2018 for the assessment year 2010-11 has elaborately discussed in para 15 to

18 of its order as under :-

74 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

“ 15. We have given a careful consideration to the above stated factual matrix and are of the view that it is a case of substitution of subsidy debt of the assessee company whereby the assessee company has received fertilizers bonds from the Government of India of face value in lieu of and equivalent to subsidy debt due from the Government of India. The Government of India instead of settling the subsidy dues in cash has issued fertilizers bonds to the assessee company and it continues to remain liable to the assessee company, being the issue authority of the fertilizers bonds, to repay the debt by way of redemption of these fertilizers bonds on or before the specified maturity period and also remains liable to pay the coupon rate as specified while issuing these fertilizers bonds. We accordingly agree with the ld. AR contention’s that the Government substituted its short term liability into long term term liability by way of issuance of the fertilizers bonds. These fertilizers bonds therefore continue to represent the subsidy debts of the assessee company. 16. Now coming to loss on account of the valuation of fertilizers bonds, it was submitted by the ld AR that there was a fall in the market value of these bonds and the assessee company, though had made a provision in the earlier year, has decided to write off the fall in the value of these bonds by an amount of Rs. 42.10 Cr and the same was claimed as a business loss. In support, the ld AR has placed reliance on the decision of the Hon’ble Supreme Court of India in case of Patnaik & Co Ltd vs CIT reported in 27 Taxman 287. 17. In the case of Patnaik & Co ltd, the issue for consideration before the Hon’ble Supreme Court was "Whether, on the facts and in the circumstances of the case, the loss of Rs. 53,650 sustained by the assessee on the sale of the Government loan is a capital loss or a revenue loss?" The facts and the findings of the Hon’ble Supreme Court in that case are reproduced as under:

75 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

“2. The assessee deals in automobiles and also sells spare motor parts. For the assessment year 1963-64, the relevant accounting period being the year ended 31-3-1963, the assessee claimed a loss of Rs. 53,650 sustained by it on disposing of its subscription to the Orissa Government Floated Loan, 1972. It claimed that the loss suffered by it was revenue loss and, therefore, deductible against its profits for the year. The ITO disallowed the loss in the view that it was a capital loss,. The assessee's appeal was dismissed by the AAC. But on second appeal the Tribunal accepted the contention of the assessee that the subscription to the Government loan was conducive to its business and that the loss arose in the course of the business, and that therefore, the assessee was entitled to a deduction of the loss claimed by it.” “5. According to the statement of the case drawn up on the basis of the appellate order of the Tribunal the assessee was told that if it subscribed for the Government loan preferential treatment would be granted to it in the placing of orders for motor vehicles required by the various Government departments and to the further benefit of an advance from the Government up to 50 per cent of the value of the orders placed. Pursuant to that understanding, an advance to the extent of Rs. 18,37,062 was received by the assessee and a circular was also issued by the State Government to various departments to make purchases of the vehicles required by them from the assessee. Because of the advance received from the Government, the assessee was able to save Rs. 45,000 as bank interest during the year. It was also noticed that the sales shot up substantially. On 4-9-1961 the assessee made a deposit of Rs. 5 lakhs consequent upon a resolution of the board of directors passed

76 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

about six weeks before after a statement made by the chairman during the board meeting that the Government had approached him to subscribe to the Government loan and that the company should do so as good orders could be expected. The purchase of the loan was approved by the board of directors and was ratified in the annual general meeting of the shareholders held on 31-12-1961. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circum stances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. We are of opinion that the Tribunal is right. 6. The High Court, as has been mentioned, re-examined the facts on the record and found that the investment was not connected with the orders placed by the Government with the assessee and the advance payment made by the Government departments to the assessee, and it was in that context that the High Court held that the investment in the loan was a capital asset and the loss was a capital loss. The High Court took the view that the investment was of enduring benefit to the assessee and, therefore, it could not be allowed. We find it difficult to hold that an enduring benefit was brought about by the assessee investing in the loan. So far as orders from the Government departments were concerned the material on record shows that on 30-8-1961 it was decided to purchase 16 jeeps, 8 trucks and 4 one-ton pick-up vans. There is nothing to show that there was any reason for the assessee to hold on to

77 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

the investment in the loan indefinitely. There was no enduring advantage. Accordingly, we hold that the investment did not bring in an asset of a capital nature, and that in the circumstances of the case the loss suffered by the assessee was a revenue loss and not a capital loss. It was held by the Orissa High Court in CIT v. Industry & Commerce Enterprises (P.)Ltd. [1979] 118 ITR 606 and by the Madras High Court in Addl. CIT v. B.M.S. (P.) Ltd. [1979] 119 ITR 321 and again in CIT v. Dhandayuthapani Foundry (P.) Ltd. [1980] 123 ITR 709, that where the Government bonds or securities were purchased by the assessee with a view to increasing his business with the Government or with the object of retaining the goodwill of the authorities for the purpose of his business, the loss incurred on the sale of such bonds or securities was allowable as a business loss. 7. We hold that the High Court has erred in the view taken by it and that the Tribunal was right in allowing the appeal”

78 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

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

Taking into consideration the above findings of the Coordinate Bench of Jaipur

Tribunal (supra) in assessee’s own case for the assessment year 2010-11, we allow

the assessee to claim the loss, if any, in the year of actual disposal of the Fertilizer

Bonds. In the result, the additional ground of the assessee is allowed.

ITA No. 335/JP/2017 (Revenue) and ITA No. 291/JP/2017 (Assessee) For the Assessment Year : 2013-14 :

Now we take up first Revenue’s appeal in ITA No. 335/JP/2017 AY 2013-14.

Ground No. 3 in revenue’s appeal and Ground No. 2 of assessee’s

appeal are common. These grounds relate to curtailing disallowance out of

interest paid on borrowed funds taken for investment made in subsidiaries, to

Rs. 21,27,000/- as against Rs. 50,89,57,989/- made by the AO.

2012-13 hereinabove in para 17 to 17.2. In the light of above discussion and

79 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

following our order hereinabove, we dismiss the ground of the revenue and

allow the ground of the assessee.

Ground No. 1 of the revenue relates to allowing club expenses of

Rs. 10,61,297/- paid by assessee for membership of its employees.

hereinabove. Therefore, following the decision taken for the assessment

year 2012-13, we dismiss the ground of the revenue in the assessment

year 2013-14.

Ground No. 2 of the revenue relates to deleting addition of Rs.

45,98,882/- made on account of depreciation disallowed on catalyst.

hereinabove. Therefore, following the decision taken for the assessment year

2012-13, we dismiss the ground of the revenue for the assessment year

2013-14.

Ground No. 4 of the revenue relates to donation of Rs. 82,99,839/-

made to DAV Trust.

13 hereinabove in para 24. Therefore, following the decision taken for the

assessment year 2012-13, we dismiss the ground of the revenue in the

assessment year 2013-14.

80 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

ITA No. 291/JP/2017 A.Y. 2013-14 (Assessee ):

Ground No. 1 of the assessee relates to disallowance of Exchange Rate

Variation (ERV) credited to Profit and Loss account.

liability of Rs. 11,95,73,056/- incurred by the assessee in the previous year relevant

to the AY 2012-13 pertaining to the exchange rate variation relating to a loan taken

for acquisition of fixed assets and the amount of interest expenses debited to the

profit and loss account in respect thereof. This amount was recorded as an expense

in the assessee’s accounts in accordance with AS-16. The same was added back in

the computation of total income for the A.Y. 2012-13 and brought to tax in AY

2012-13. Subsequently, as per the clarification issued by the Ministry of Corporate

Affairs, Government of India dated August 9, 2012, the assessee changed its

accounting policy in respect of ERV arising from foreign currency borrowings with effect from 1st April 2011 and the said amount of Rs. 11,95,73,056/- had been

recognized as borrowing cost in A.Y. 2012-13 was reversed and shown as an

exceptional income in the Profit and Loss account for the year ended March 31,2013

relevant for the AY 2013-14.

44.1. The ld. A/R submitted that the Assessing Officer made an addition of Rs.

11,95,73,056/- and brought to tax the reversal amount in the year of change i.e.

AY 2013-14, holding that since the credit to Profit & Loss account was because of

change in AS -16 hence such reversal would be taxable in the relevant year of

change i.e. AY 2013-14. The ld. CIT(A) also held the treatment of the assessee

appellant to be incorrect since the effect of the clarification comes in AY 2013-14.

81 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

The CIT(A) has further opined that the assesse could claim rectification in respect of

disallowance in AY 2012-13.

record. The assessee had changed its accounting policy in respect of ERV arising from foreign currency borrowings with effect from 1st April 2011 as per the

clarification dated August 9, 2012 issued by Ministry of Corporate Affairs,

Government of India. An amount of Rs. 11,95,73,056/- was recognized by the

assessee as borrowing cost in the previous year relevant to the AY 2012-13 and was

reversed and shown as an exceptional income in the accounts for the year ended

March 31,2013 relevant to the AY 2013-14. Since the amount was already added

back in AY 2012-13, the assesse did not offer it to tax in the AY 2013-14. It is

evident that the same amount cannot be brought to tax twice i.e. both in the AY

2012-13 as a disallowance of expense and in the AY 2013-14 being a write back

(reversal) of expense. We are also conscious to the fact that there will not be any

impact on the Revenue if the assessee claims the deduction of expense on Exchange

variation in AY 2012-13 and offers the same to tax in AY 2013-14. Thus, the entire

exercise over the two assessment-year period is tax neutral. Further, the entries

were based on interpretation and clarification of new standards. The ld. CIT (A) has

failed to appreciate that as the very same income was taxed in the previous year

and the entire exercise is revenue neutral as the applicable tax rates remained the

same in the relevant years. Thus, we are of the opinion that the ld. CIT (A) is not

justified in sustaining the addition of Rs. 11,95,73,056/- representing the Exchange

82 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

rate variation (‘ERV’) credited to profit and loss account being reversal of expense

claimed in earlier year and offered to tax in the computation of income. We, thus

delete the disallowance of deduction. The ground of the assessee is allowed.

Ground No. 3 relates to disallowing interest of Rs. 44,23,882/- in

respect of borrowed fund alleged to be taken for Loans and Advances

given to the subsidiaries.

2012-13 in para 35 hereinabove. In the light of above discussion and following

our order hereinabove, we allow this ground of the assessee.

ITA No. 821/JP/2018 (Revenue) and ITA No. 744/JP/2018 (Assessee) For the Assessment Year : 2014-15 :

Ground No. 1 of the revenue relates to allowing club expenses of Rs.

21,61,818/- paid by the assessee for membership of its employees.

Benches of the Tribunal in assessee’s own case in ITA Nos. 461 & 575/JP/2015.

Therefore, respectfully following the decision of the coordinate bench, we have

decided this ground in para 8 hereinabove against the revenue. This ground of the

revenue is dismissed.

Ground No. 2 of the revenue relates to deleting addition of Rs.

20,10,438/- made on account of depreciation disallowance on catalyst.

83 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

Benches of the Tribunal in assessee’s own case in ITA Nos. 461 & 575/JP/2015.

Therefore, respectfully following the decision of the coordinate bench, we have

decided this ground in para 10 hereinabove against the revenue. This ground of the

revenue is dismissed.

Ground No. 3 in revenue’s appeal and Ground No. 1 of assessee’s

appeal are common. These grounds relate to curtailing disallowance

out of interest paid on borrowed funds taken for investment made in

subsidiaries, to Rs. 22,45,000/- as against that of Rs. 55,92,19,845/-

made by AO.

2012-13 hereinabove in para 17 to 17.2. In the light of above discussion and

following our order hereinabove, we dismiss the ground of the revenue and

allow the ground of the assessee.

Ground No. 4 of the revenue relates to donation of Rs. 80,38,964/-

made to DAV Trust.

2012-13 hereinabove in para 24. Therefore, following the decision taken for

the assessment year 2012-13, we dismiss the ground of the revenue in the

assessment year 2014-15.

84 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.

ITA No. 744/JP/2018 AY 2014-15 (Assessee) Ground No. 2 relates to disallowing interest of Rs. 44,23,882/- in respect of borrowed fund alleged to be taken for Loans and Advances given to the subsidiaries. 55. We have adjudicated this ground of the assessee for the assessment year 2012-13 in para 35 hereinabove. In the light of above discussion and following

our order hereinabove, we allow the ground of the assessee.

Order pronounced in the open court on 13/05/2022.

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86 ITA NO. 201(6)/JP/2017 M/s. Chambal Fertilizers & Chemicals Ltd.