ACIT CIR 4(2), MUMBAI vs. JBF INDUSTRIES LTD, MUMBAI

The above mentioned appeals have been filed by the assessee as well as revenue against the different order passed by the CIT (A) Mumbai for the A.Y.2006-07 to 2008-09. In these appeals the parties are the same and the matter of controversy also seems to the same, therefore these appeals can conveniently be adjudicated together for adjudication. (Revenue’s appeal for A.Y.2006-07):-

1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) erred in cancelling the penalty of Rs.19,78,865/- levied u/s.271(1)(c) of the I.T.Act, 1961. 2. On the facts and in the circumstances of the case, the impugned order of the Ld. CIT(A) is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored.

&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

“In the case of Nalwa Sons Investments Ltd., it has been clarified that where assessment u/s.115JB was made as the assessee’s income computed as per normal procedure was less than the income determined by legal fiction, namely, “book profit” u/s.115Jb and thus, the income was assessed u/s.115Jb and not under normal provisions, though there was concealment 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 it had repercussions only when assessment was made under normal procedure. In view of such finding, it was held in Nalwa Sons Investments Ltd. That when tax was paid or income assessed u/s.115JB, the concealment did not lead to tax evasion and penalty u/s.271(1)(c) could not be imposed in respect of depreciation. Thus, from the decision in the case of Nalwa Sons Investments Ltd., it is clear that when additions made by the AO has the effect of affecting income determined under normal provisions of Income Tax Act but tax is payable u/s.115JB, no penalty u/s.271(1)(c) can be levied as no such concealment did lead to tax evasion. The additions in respect of which the AO has levied penalty have been made to determine the assessee’s income under normal sections of Income Tax Act at Rs.18,76,73,741/- which being less than book profit of Rs.5,03,41,46,600/- u/s. 115JB, tax was required to be paid on the amount determined u/s.115JB. The penalty, therefore, in view of the decision in the case of Nalwa Sons Investments Ltd. is not leviable u/s.271(1)(c). The penalty of Rs.93,30,870/- levied u/s.271(1)(c) is, therefore, cancelled in respectfully compliance of the order in the case of Nalwa Sons Investments Ltd. The appeal is allowed.”

“1. Disallowance of interest & expenditure u/s.14A read with Rule 8D of Rs.1,00,82,828/- 1.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in not accepting the working of disallowance of Interest u/s.14A submitted during the course of proceedings and worked out the disallowance of interest on the basis of entire interest debited to profit & loss account which includes interest on fixed loans. 1.2 The learned CIT(A) failed to appreciate the facts that interest on fixed loans are for fixed purpose and utilization of the said loans were also for the purpose for which loan taken.

2. Excess payment to party covered u/s.40A(2)(b) Rs.8,79,242/- 2.1 The learned CIT(A) erred in confirming disallowance of Rs.8,79,242/- u/s.40A(2)(b) in respect of purchase of Plastic Adaptors from Arya Industries, without appreciating the facts that payment made to specified persons are 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 well within the prevailing market rates in competitive atmosphere and are comparable with other manufactures.

2.2 The learned CIT(A) failed to appreciate the facts that the AO has followed the order of assessment year 2006-07, without appreciating the facts of lower quotation were available on records.

2.3 The learned CIT(A) failed to appreciate the facts that appellant company cannot compromise on the quality of Plastic Adaptors for its use in packing of finished products to avoid damaged to finished goods.

3. Disallowance of expenditure covered u/s.35D of Rs.21,94,414/- for raising FCCB 3.1 The Learned CIT(A) erred in confirming the disallowance made by AO u/s.35D incurred for raising FCCB on account of expenditure in the nature of travelling, bank charges, other pro. Fee, actuarial valuation charges, advisory service charges, out of pocket charges, listing fee and offering circular for issue of the FCCB and also charges for opinion, certification charges filing fee, for increase in authorized capital and professional fee for private placement which are not specified in section 35D of the Income Tax Act, 1961 3.2 The Learned CIT(A) failed to appreciate the facts that there was direct nexus between these expenditure incurred and FCCB and issue of fresh share Capital raised during the year. The word in connection with--- is wide expression to encompass even other expenditure which is not mentioned in section 35D. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

4. Disallowance of expenditure under the head repair and maintenance Rs.2,75,401/-. 4.1 The learned CIT(A) erred in confirming the disallowance made by the AO for repair & maintenance of Rs.2,75,401/- as non genuine business expenditure. 4.2 The learned CIT(A) failed to appreciate the facts that these are genuine repair expenditure merely because due to volume in some miscellaneous purchases proper narration was not given during the course of assessment proceedings.” ADDITIONAL GROUND:- “1. The learned CIT(A) failed to appreciate the fact that if the expenses are not allowable u/s.35D, then alternative the revenue expenditure may be allowed u/s.37.” ISSUE NO.1:

10. Under this issue the assessee has challenged the expenses to earn the exempt income to the tune of Rs.2.28 cr. The Assessing Officer assessed the expenses to the tune of Rs.4,27,47,657/- in view of the provision of rule 8D read with section 14A of the Act being dissatisfied the assessee filed the appeal before the CIT(A) and the CIT(A) assessed the expenses to the tune of Rs.1,00,82,828/-. On appraisal of the order of CIT(A), it came into the notice that the CIT(A) was satisfied on account of non-applicability of the Rule 8D of the Act as assessment order was of the year is A.Y.2007-08 but the CIT(A) was of the view that since the assessee has earned to exempt the income to the tune of Rs.2.28 cr., therefore certainly disallowance 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 u/s.14A of the Act is called for. The CIT(A) assessed the expenditure to the tune of Rs.1,00,82,828/- u/s.14A of the Act but he did not apply any proper ways to assess the expenses. It is not in dispute that the present assessment year is the year of 2007-08 to which rule 8D of the Act is not applicable. Working to assess the expenditure incurred to earn the exempt income is not on record. Even on perusal of the order of the Assessing Officer, it is apparent that the Assessing Officer has applied rule 8D of the Act. In this regard we are also found support of law settled on the judgment of Hon’ble Mumbai High Court in the case of Godrej & Boyce Vs. DCIT[2010] 328 ITR 81. The contention of the assessee is that the assessee did not incur any expenditure to earn the exempt income. There is no working on the part of the authority to assessee the expenditure if any incurred to earn the exempt income. No satisfaction has been recorded by the Assessing Officer as well as CIT(A) on the record. In view of the record, we are of the view that the expenditure of the assessee to earn the exempt income is required to be assessed in view of the provision contained in section 14A(2) of the Act. Therefore in the said circumstances we set aside the finding of the CIT(A) on this ground and direct the Assessing Officer to assess the income in view of the provision contained in section 14A(2) of the Act. Accordingly, the appeal of the assessee is hereby allowed and on this ground the appeal of the revenue is also hereby ordered to be dismissed. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 ISSUE NO.2:

11. Under this issue the assessee has challenged the confirmation of the disallowance of Rs.8,79,242/- u/s.40A(2)(b) of the Act in respect of purchase of Plastic Adaptors from M/s. Arya Industries. The assessee purchase 80,42,425 units plastic adaptor @ 1.45 per piece and 25,000 units of plastic liners @ 67 piece from M/s. Arya Industries. The purchase is covered u/s.40A(2)(b) of the Act. The Assessing Officer assessed the purchase to the higher side and reduced the purchase as Rs.8,04,242/- (80,42,425 units x 0.10) and Rs.75,000/- (Rs.25,000/- x 3.00) as access expenditure. The total addition was made to the tune of Rs.8,79,242/- (Rs.75,000/- + Rs.8,04,242/-) which has been confirmed by the CIT(A). The assessee purchase the plastic adaptor from the M/s. Arya Industries @ Rs.1.45 per piece (as in A.U.2006-07). The Assessing Officer was of the view that the assessee has showed the higher price to the extent of 00.10/- per piece in comparison to the A.Y.2006-07. Therefore, reduced the price per piece to the extent of 00.10% and added the difference into the income of the assessee. AT the time of the assessment, the Assessing Officer was of the view that the rates applied for third party purchases varied from 58.25 to 72.79 with majority of the purchases in January being in the range of 63.00 to 64.27. Therefore, the rate of Rs.64.00 per unit is considered to be reasonable. Since the assessee has purchased 25,000 units from M/s. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 Arya Industries @ Rs.67.00, the difference of Rs.3.00 per unit was disallowed. The CIT(A) confirmed the same. On appraisal of the order in question it came into the notice that there is not cogent and convincing reasons are on record to reduce the purchase price of the above mentioned articles. There should be some comparable price on record to which it can be assumed that the Assessing Officer has rightly reduced the purchase price of the plastic adaptor and plastic liner. No disallowance of purchase is required to be sustainable on the basis of assumption and presumption. There should be some plausible explanation on record to arrive at the conclusion to reduce the prices of the articles mentioned above. Just taking the average purchase price of the articles mentioned above nowhere justified the assessment of the revenue on this ground. This matter has been considered by the Income Tax Appellate Tribunal in the assessee’s own case in ITA No.1624.M.2009 for 2005-06 dated 17.12.2014 wherein the disallowance @ 6% was sustained in the similar circumstances on the purchase of plastic liner from the Arya Industries. So far as purchase of plastic adopter is concerned matter is required to be re-examined in view of the evidence adducible by the assessee and by giving an opportunity being heard to the assessee in the interest of justice. In view of the observations made above we direct the Assessing Officer to re-compute the expenditure incurred for the purchase of plastic liner and plastic adaptor in view of the observations made above. This issue is hereby accordingly allowed. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 ISSUE NO.3:

15. Ground No.4 relates to the allowability of the claim u/s.35D of the Act. In this regard, Ld. Counsel for the assessee brought our attention to the additional ground filed before us for the first time making an alternate claim seeking relief u/s.37(1) of the Act. In this regard, Ld. Representatives of both the parties mentioned that this issue raised in ground no.4 needs to be remanded to the file of the AO for fresh adjudication after admitting the said additional ground.

16. After hearing both the parties and on perusal of the additional ground raised by the assessee, we find the request for admission of the additional ground and remanding the same for fresh adjudication is appropriate and it requires to be sustained. Accordingly, the additional ground along with the ground no.4 raised by the assessee is remanded to the file of the AO for fresh adjudication. It is needless to mentioned that the AO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, additional ground as well as ground no.4 with its sub-grounds are allowed for statistical purposes.”

I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 In view of the said circumstances, we restore this issue before the Assessing Officer to re-assess the matter of controversy in view of the guidelines as mentioned in the mentioned above by giving an opportunity of being heard to the assessee. Therefore, we allow this issue on the same terms and conditions for statistical purpose.

ISSUE NO.4:

15. Under this issue the assessee asserted that if the expenses are not allowable u/s.35D, then alternative the revenue expenditure may be allowed u/s.37. Since this matter of controversy has been adjudicated while deciding the issue no. 3 and the said issue has been restore to the file of Assessing Officer to adjudicate the matter afresh on certain guidelines therefore there is no need to decide this issue separately. However, it is left open to raise this issue before the Assessing Officer by the assessee.

In result the appeal of the assessee is partly Allowed (Revenue’s appeal for A.Y.2007-08)

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation of electric fitting amounting to Rs.5,41,42,278/-.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.4,27,47,657/- made u/s.14A read with Rule 8D of the Income Tax Act by Assessing Officer.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.21,94,414/- made u/s.35D of the Income-tax Act, 1961. 4 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 disallowance of commission of Rs.60 lacs paid to the Chairman of the company u/s.36(1)(ii) of the Act. 5 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Short Term Capital Gain and Long Term Capital Gain amounting to Rs.1,83,92,811/- as ‘business income’ since the perusal of records revealed that the activity of purchase and sale of securities has been carried out by the assessee throughout the year.

6. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of commission amounting to Rs.67,17,779/- paid to foreign agents under section 40a(ia) of the Act.

7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the AO’s action in respect of bad debts written off amounting to Rs.2,59,237/- on the ground that the conditions of section 36(1)(vii) r.w.s. 36(2) were not fulfilled.

8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.52,96,852/- on account of ERP development charges, made by the AO.

9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation on assets taken on lease from Bombay Dying at Rs.29,24,290/-.

ISSUE NO.1: &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

“29. We notice the Note No.5 given under the Depreciation Schedule applicable to the assessment year 2005-06 (which is available in the Income Tax Rules) defines the expression “electrical fitting”. According to the said definition electrical fittings includes electrical wires, switches, clutches, other fittings and fans etc. Under the Depreciation Schedule “electrical fittings” is clubbed along with “Furniture & Fixtures”. Hence, the expression “Electrical Fittings” should mean only those items which can be considered as “Fixtures” of general nature as defined in Note No.5. However, the heavy 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 electrical items, which are attached to plant and machinery and the same cannot be classified as fixtures of general nature. We also notice that the Ahmedabad Bench of the Tribunal in the case of Madhu Industries Ltd. (Supra) has taken the view that the electrical installation attached to plant and machinery should be considered as plant and machinery only. The ld. AR also submitted that the assessee has classified the electrical fittings. Hence, by following the decision of the Ahmedabad Bench of the Tribunal referred above we hold that the electrical fittings in the instant case should be considered as plant and machinery and hence the depreciation should be allowed at the rate of 25% to plant and machinery.”

ISSUE NO.2 & 3: &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

ISSUE NO.4:

6.3. After careful examination of the facts and circumstances of the case and hearing the arguments of the authorized representative of the appellant I am of the view that the provisions of section 36(1)(ii) are not applicable in this case as the commission of Rs.60,00,000/- has not been 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 paid to Chairman as a Bonus instead it is in nature of salary which was duly approved by the shareholders of the company in the Annual General Meeting. An employer may remunerate his employee partly by way of salary and partly by way of commission of sales. In view of the fact that the definition of salary under section 17(1) is an inclusive one making a specific reference to commission paid in lieu of or in addition to salary, it should also be treated as part of salary. The High Court in CIT V. T.Abdul Wahid and Co. [2000] 24 ITR 467 (Mad.) held that commission should also be treated as salary apparently for the purpose of tax deduction at source. I find in the present case the appellant company has also deducted TDS on the payment of commission which is in the nature of salary. The Income tax payable by the Chairman of the Company or by the appellant company @ 30% is same. Therefore, the interest of the revenue is not affected. Payment of similar commission to the Chairman in the earlier assessment years has already been allowed by the assessing officer and no new facts have come to light during the year. Since the addition has been made by the assessing officer without proper appreciation of facts and examining the legal I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 position of law therefore, the addition made by the assessing officer is directed to be deleted.

ISSUE NO.5:

7.2.21.I have carefully gone through the order of the assessing officer and the arguments of the authorized representative of the appellant company and various case laws cited by the authorized representative. I find that the investments in shares were made by appellant company to earn 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 dividend income out of the surplus fund available with the appellant company before it could be deployed for purchase of capital assets in the ongoing project work. The company had taken up huge expansion work and in order to reduced the overall project cost, it had temporarily parked surplus funds in equities and mutual funds. The appellant company is a public limited company engaged in manufacturing of POY and cannot be said to be trader in shares merely because it had entered into some share transaction. In the immediately preceding assessment year 06-07 the assessing officer himself had accepted the submissions of the appellant company that investment in shares is assessable under the head capital gains and not under the head business. There has been no material change in the facts of the case during the assessment year 07-08 which requires reversal of a stand. Therefore, the assessing officer is not justified in treating the income earned by the appellant company by trading in shares under the head business income. During the assessment year 07-08 merely because rates of taxation for the business income are higher as compared to rates of taxation for the business income are higher as compared to rates applicable for short term capital gain cannot be a basis for change of I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 stand. Further, the decision of the Hon’ble ITAT Mumbai in the case of Janak S. Rangwall Vs. ACIT (2007) 11 SOT 627 (Mum) is in the favour of the appellant company wherein it has been held as under, “The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken income consideration and the magnitude of the transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts.

In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding year and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock in trade. The mere magnitude of the transaction does not change in the nature of transaction, which are being assessed as income from capital gains in the past several years.”

Accordingly, I am inclined to agree with the views of the authorized representative of the appellant company that in the light of various case laws cited by him on the subject, and the factual position of this case, the income of the appellant company earned by trading in shares, should be assessed under the head Capital Gain and not under the head Business Income. Accordingly, the 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 assessing officer is directed to assess the income of the appellant company under the head Capital Gains on the investments made by the appellant company on purchase and sale of equities and units of mutual funds as in the past and not under the head Business Income.”

ISSUE NO.6:

ISSUE NO.7: &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

ISSUE NO.8:-

ISSUE NO.9:-

ISSUE NO.10 & 11:-

In result the appeal filed by the revenue is hereby partly allowed. (Revenue’s (Penalty)appeal for A.Y.2007-08):-

“1. Disallowance of interest u/s.14A Rs.1,57,69,118/- The learned CIT(A) erred in confirming the stand taken by the AO for considering the entire interest of Rs.41.84 Crores for the purpose of calculation of disallowance of interest u/s.14A against exempt income of dividend received, as against the working capital interest of Rs.9.47 Crores. The learned CIT(A) failed to appreciate the facts that interest paid on fixed loans, are for fixed purpose and same were utilized for the purpose for which loan were taken. 2 Excess payment to party covered u/s.40A(2)(b) Rs.12,46,310/- The learned CIT(A) erred in confirming disallowance of Rs.12,46,310/- u/s.40A(2)(b) in respect of purchase of Plastic Adaptors from Arya Industries, without appreciating the facts that payment made to specified persons are 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 well within the prevailing market rates in competitive atmosphere and are comparable with other manufacturers.

The learned CIT(A) failed to appreciate the facts that while comparing the rates with third parties, though the lower quotations were also available, the than AO has purposely taken the higher quotation available.

The learned CIT(A) failed to appreciate the facts that appellant company cannot compromise on the quality of Plastic Adaptors for its use in packing of finished products to avoid damaged to finished goods. 3. Disallowance of interest of Rs.60,47,905/- On the facts and circumstances of the case the learned CIT(A) erred in confirming disallowance of interest @ 2.87125% on share application money by not treating the same for business purpose.

The learned CIT(A) failed to appreciate the facts that investment as share application money in overseas subsidiary company was for commercial expediency and part of business strategy to expands its business globally in addition to business established in India.”

ADDITIONAL GROUND:- “1. The learned CIT(A) failed to appreciate the fact that if the expenses are not allowable u/s.35D, then alternative the revenue expenditure may be allowed u/s.37.”

ISSUE NO.1:- &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

ISSUE NO.2:-

“9.2 Upon consideration of relevant facts and the reasons for which the disallowance has been made by the A.O. as mentioned in the assessment order, I find that the 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 appellant has correctly pointed out that the quantum of disallowance was worked out by the A.O. without proper appreciation of facts though the entire facts were available with him. Copious excerpts from the assessee’s letter dated 07.12.2010 has been reproduced in the assessment order which indicates that this letter was produced before the A.O. From the assessment order, I find that the A.O. in his order has simply mentioned that the arguments put forward by the assessee are general one and, therefore, cannot be accepted. Thus, the A.O. has not mentioned as to what were the relevant facts, which were pointed out by the assessee and for what reasons and on what basis the assessee’s arguments and contentions were not acceptable. The A.O. has also not contradicted or disputed the facts mentioned in the assessee’s letter dated 07.12.2010. Huge addition of Rs.7,51,08,000/- has been made without even ascertaining the date and period of the transactions between the assessee and its subsidiary company and source of fund for giving advance or share application money. Regarding the rate of interest on the loans taken by the assessee and that charged by the assessee, there is only a general mention that such rate varies from 10% to 13% and 6% respectively without ascertaining the source I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 of loan and share application money given to the subsidiary company and rate of interest paid, if any by the assessee. Without specifically ascertaining the source of fund advanced to the subsidiary and the cost of such fund as well as the date of such advances and share application, I do not find any basis whatsoever for a finding that certain cost was incurred by the assessee in respect of fund given to subsidiary. Without ascertaining these facts, no disallowance of interest can be justified. Further, from the assessment order, I find that the A.O. has also failed to point out as to how the payments of advances / loans to subsidiary were not for business purpose of the assessee. There being no such finding, no disallowance of interest for the reason that such expenditure of interest was not for business purpose could be made, in view of the decisions of the Hon’ble Apex Court in the cases of S.S.Builders (Supra), as the A.O. has failed to enquire whether the loan was given as a measure of commercial expediency. The disallowance made by the A.O. is, therefore, not justified. However, payment of share application money cannot be treated to be business purpose and, therefore, any interest expenditure incurred with respect to fund which was given as share application money has to be disallowed 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 being expenditure not for business purpose. The A.O. has made addition of Rs.3,85,56,000/- in this regard which cannot be sustained as the A.O. has adopted a general rate of 12% without enquiring or ascertaining the rate of interest, if any on fund borrowed out of which share application money was given. The A.O. has also not disputed the assessee’s contention that the rate of interest on such borrowing was 2.17825%. The additions of Rs.3,85,56,000/- is, therefore, deleted. The appellant itself has quantified the amount of such expenditure at Rs.60,47,905/-. The disallowance made by the A.O. to the extent of Rs.60,47,905/-. The disallowance made by the A.O. to the extent of Rs.60,47,905/- is confirmed and balance out of Rs.7,51,08,000/- is deleted. The appeal on this ground is partly allowed”

ADDITIONAL GROUND:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the A.O. u/s.14A read with Rule 8D amounting to Rs.4,11,40,270/-. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of depreciation of electric fitting amounting to Rs.45,61,645/-.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the A.O. u/s.35D amounting to Rs.21,94,414/-.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)has erred in deleting the disallowance made by the A.O. u/s. 36(i)(ii) amounting to Rs.86,75,000/- 5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in treating the capital gain of Rs.1,83,13,622/-. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Professional Fees or Commission paid by the foreign parties made by the A.O. amounting to Rs.4,02,67,016/- u/.s 40(a)(ia) of the Income Tax Act, 1961. 7. On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance made by the A.O. on account of ERP development charges amounting to Rs.71,27,000/- 8. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the Proportionate disallowance of interest of Rs.7,51,08,000/-. 9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,42,38,000/- on account of unreconciled AIR. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

10. On the facts and in the circumstances of the case and in law, the Ld. CITA() has erred in deleting the disallowance on account of penalty payment of Rs.10,700/- u/s. 37(1).

11. On the facts and in the circumstances of the case, the impugned order of the Ltd. CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored.”

ISSUE NO.1:

ISSUE NO.2:

43 Under this issue the revenue has challenged the deleting of disallowance of depreciation of electric fitting amounting of Rs.45,61,645/-. It is not in dispute that the assessee has installed electric fitting which consists of 66KVA line station, heavy duty power cabling, penal board, power cabling for DG sets for generating power and heavy duty power cabling used in distribution the powers 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 at various sides of plants. The deprecation was allowed @ 15%. This matter of controversy has been adjudicated by the Income Tax Appellate Tribunal in the assessee’s own case in ITA No.1624.M.2009 for 2005-06 dated 17.12.2014. Wherein depreciation was allowed to the extent of 25%. The finding of the said order is hereby mentioned below for ready reference.

“29. We notice the Note No.5 given under the Depreciation Schedule applicable to the assessment year 2005-06 (which is available in the Income Tax Rules) defines the expression “electrical fitting”. According to the said definition electrical fittings includes electrical wires, switches, clutches, other fittings and fans etc. Under the Depreciation Schedule “electrical fittings” is clubbed along with “Furniture & Fixtures”. Hence, the expression “Electrical Fittings” should mean only those items which can be considered as “Fixtures” of general nature as defined in Note No.5. However, the heavy electrical items, which are attached to plant and machinery and the same cannot be classified as fixtures of general nature. We also notice that the Ahmedabad Bench of the Tribunal in the case of Madhu Industries Ltd. (Supra) has taken the view that the electrical installation attached to plant and machinery should be 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 considered as plant and machinery only. The ld. AR also submitted that the assessee has classified the electrical fittings. Hence, by following the decision of the Ahmedabad Bench of the Tribunal referred above we hold that the electrical fittings in the instant case should be considered as plant and machinery and hence the depreciation should be allowed at the rate of 25% to plant and machinery.”

ISSUE NO.3:

16. After hearing both the parties and on perusal of the additional ground raised by the assessee, we find the request for admission of the additional ground and remanding the same for fresh adjudication is appropriate and it requires to be sustained. Accordingly, the additional ground along with the ground no.4 raised by the assessee is remanded to the file of the AO for fresh adjudication. It is needless to mentioned that the AO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, additional ground as well as ground no.4 with its sub-grounds are allowed for statistical purposes.”

6.3. After careful examination of the facts and circumstances of the case and hearing the arguments of the authorized representative of the appellant I am of the view that the provisions of section 36(1)(ii) are not applicable in this case as the commission of Rs.60,00,000/- has not been paid to Chairman as a Bonus instead it is in nature of salary which was duly approved by the shareholders of the company in the Annual General Meeting. An employer may remunerate his employee partly by way of salary and partly by way of commission of sales. In view of the fact that the definition of salary under section 17(1) is an inclusive one making a specific reference to commission paid in lieu of or in addition to salary, it should also be treated as part of salary. The High Court in CIT V. T.Abdul Wahid and Co. [2000] 24 ITR 467 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 (Mad.) held that commission should also be treated as salary apparently for the purpose of tax deduction at source. I find in the present case the appellant company has also deducted TDS on the payment of commission which is in the nature of salary. The Income tax payable by the Chairman of the Company or by the appellant company @ 30% is same. Therefore, the interest of the revenue is not affected. Payment of similar commission to the Chairman in the earlier assessment years has already been allowed by the assessing officer and no new facts have come to light during the year. Since the addition has been made by the assessing officer without proper appreciation of facts and examining the legal position of law therefore, the addition made by the assessing officer is directed to be deleted.

ISSUE NO.5:-

7.2.21.I have carefully gone through the order of the assessing officer and the arguments of the authorized representative of the appellant company and various case laws cited by the authorized representative. I find that the investments in shares were made by appellant company to earn dividend income out of the surplus fund available with the appellant company before it could be deployed for purchase of capital assets in the ongoing project work. The company had taken up huge expansion work and in order to reduced the overall project cost, it had temporarily parked surplus funds in equities and mutual funds. The appellant company is a public limited company engaged in manufacturing of POY and cannot be said to be trader in shares merely because it had 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 entered into some share transaction. In the immediately preceding assessment year 06-07 the assessing officer himself had accepted the submissions of the appellant company that investment in shares is assessable under the head capital gains and not under the head business. There has been no material change in the facts of the case during the assessment year 07-08 which requires reversal of a stand. Therefore, the assessing officer is not justified in treating the income earned by the appellant company by trading in shares under the head business income. During the assessment year 07-08 merely because rates of taxation for the business income are higher as compared to rates of taxation for the business income are higher as compared to rates applicable for short term capital gain cannot be a basis for change of stand. Further, the decision of the Hon’ble ITAT Mumbai in the case of Janak S. Rangwall Vs. ACIT (2007) 11 SOT 627 (Mum) is in the favour of the appellant company wherein it has been held as under, “The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 transaction in whole has to be taken income consideration and the magnitude of the transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts.

In the facts of the instant case, the assessee was holding the shares as investment from year to year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding year and the same was to be accepted as short-term capital 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock in trade. The mere magnitude of the transaction does not change in the nature of transaction, which are being assessed as income from capital gains in the past several years.”

Accordingly, I am inclined to agree with the views of the authorized representative of the appellant company that in the light of various case laws cited by him on the subject, and the factual position of this case, the income of the appellant company earned by trading in shares, should be assessed under the head Capital Gain and not under the head Business Income. Accordingly, the assessing officer is directed to assess the income of the appellant company under the head Capital Gains on the investments made by the appellant company on purchase and sale of equities and units of mutual funds as in the past and not under the head Business Income.”

ISSUE NO.6:

ISSUE NO.7:

11.3 After careful consideration of facts and circumstances of the case, I find that the appellant company has outsourced the entire software development, its day to day running to M/s. Cyret Technologies (I) Pvt. Ltd. and therefore the appellant company has not employed any officer or staff for this work and monthly bills are being paid for outsourcing work done by the M/s. Cyret Technologies (I) Pvt. Ltd.. The appellant company capitalizes any expenditure incurred for development of new software and other charges are claimed by it as revenue expenditure. This method of accounting has been continuing from earlier years where the assessing officer had accepted the same. There has been no significant departure from this practice during the year. &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 Accordingly assessing office is directed to allow this sum as revenue expenditure as claimed by the appellant public limited company.”

ISSUE NO.8: &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

“9.2 Upon consideration of relevant facts and the reasons for which the disallowance has been made by the A.O. as mentioned in the assessment order, I find that the appellant has correctly pointed out that the quantum of disallowance was worked out by the A.O. without proper appreciation of facts though the entire facts were available with him. Copious excerpts from the assessee’s letter dated 07.12.2010 has been reproduced in the assessment order which indicates that this letter was produced before the A.O. From the assessment order, I find that the A.O. in his order has simply mentioned that the arguments put forward by the assessee are general one and, therefore, cannot be accepted. Thus, the A.O. has not mentioned as to what were the relevant facts, which were pointed out by the assessee and for what reasons and on what basis the assessee’s arguments and contentions were not acceptable. The A.O. has also not contradicted or disputed the facts mentioned in the assessee’s letter dated 07.12.2010. Huge addition of 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 Rs.7,51,08,000/- has been made without even ascertaining the date and period of the transactions between the assessee and its subsidiary company and source of fund for giving advance or share application money. Regarding the rate of interest on the loans taken by the assessee and that charged by the assessee, there is only a general mention that such rate varies from 10% to 13% and 6% respectively without ascertaining the source of loan and share application money given to the subsidiary company and rate of interest paid, if any by the assessee. Without specifically ascertaining the source of fund advanced to the subsidiary and the cost of such fund as well as the date of such advances and share application, I do not find any basis whatsoever for a finding that certain cost was incurred by the assessee in respect of fund given to subsidiary. Without ascertaining these facts, no disallowance of interest can be justified. Further, from the assessment order, I find that the A.O. has also failed to point out as to how the payments of advances / loans to subsidiary were not for business purpose of the assessee. There being no such finding, no disallowance of interest for the reason that such expenditure of interest was not for business purpose could be made, in view of the decisions of the Hon’ble I.T.A. No.2695&6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 Apex Court in the cases of S.S.Builders (Supra), as the A.O. has failed to enquire whether the loan was given as a measure of commercial expediency. The disallowance made by the A.O. is, therefore, not justified. However, payment of share application money cannot be treated to be business purpose and, therefore, any interest expenditure incurred with respect to fund which was given as share application money has to be disallowed being expenditure not for business purpose. The A.O. has made addition of Rs.3,85,56,000/- in this regard which cannot be sustained as the A.O. has adopted a general rate of 12% without enquiring or ascertaining the rate of interest, if any on fund borrowed out of which share application money was given. The A.O. has also not disputed the assessee’s contention that the rate of interest on such borrowing was 2.17825%. The additions of Rs.3,85,56,000/- is, therefore, deleted. The appellant itself has quantified the amount of such expenditure at Rs.60,47,905/-. The disallowance made by the A.O. to the extent of Rs.60,47,905/-. The disallowance made by the A.O. to the extent of Rs.60,47,905/- is confirmed and balance out of Rs.7,51,08,000/- is deleted. The appeal on this ground is partly allowed” &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

ISSUE NO.9: &6209/Mum/11, 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09

10.2 From the assessment order, I find that the A.O. has not disputed the fact that the Tripartite agreement was executed on 31.01.2008 and M/s. D. Dhayabhai & Co. Pvt. Ltd. had sold the said property purchased by them earlier in 1997-98 from the assessee as per this Tripartite agreement. The A.O. has rejected the assessee’s explanation while observing that the assessee had not been able to provide the details as to whether other parties had offered any income on this account in their return or not and whether the amount claimed to have been received by third party actually been offered to tax in their case. I find that such stand taken by the A.O. is not justified. The A.O. has not disputed that M/s. D. Dhayabhai & Co. Pvt. Ltd. had sold the said property acquired by them from the assessee in 1997-98 to M/s.Privi Organics for sale consideration of 5637/Mum/13, I.T.A.2765/Mum/11, 638/Mum/2013 & 6042/Mum/2011 A.Y.2006-07, 2007-08 & 2008-09 Rs.1,88,00,000/- as per Tripartite agreement executed on 31.01.2008. If these facts have not been disputed by the A.O., as the A.O. has not brought on record any material to contradict these facts, the sum of Rs.1,18,00,000/- is to be treated as receipt in the hand of M/s. D. Dhayabhai & Co. Pvt. Ltd. and not in the hand of the assessee. The addition made by the A.O. is not justified which is deleted. The appeal on this ground is allowed.

ISSUE NO.10:

ISSUE NO.11 & 12:

In the result, the appeal of the revenue is partly allowed.

Order pronounced in the open court on 12th August, 2016.