JINDAL DRUGS LTD,MUMBAI vs. DCIT 8, MUMBAI

5394/M/13+2,Jindal drugs year. 9.5 We have also carefully gone through the order of the Tribunal in assessee’s own case for AY 1998-99 and AY 2000-01 and 2001-02, wherein the Tribunal has held that the foreign exchange fluctuation gain on forward contract constituted business income and was eligible for deduction under section 80HHC. The profit from hedging transactions is similar to the exchange fluctuation gain on forward contract and hence is in the nature of business income eligible for deduction under section 80-IB. There is no dispute that profit derived from hedging transaction is business income. For this purpose reliance can be placed on the decision of Hon’ble Gujarat High Court in the case of Pankaj Oil Mills V. CIT (115 ITR 824) (FB) which explains the concept of ‘Hedge’. In the instant case, we found that the activity of hedging against the price fluctuation of menthe oil has been done to protect the profits of the company. Since the Jammu unit is the only manufacturing activity of the company, the hedging profit has a direct nexus with the Jammu unit. If Assessee Company had not entered into such transaction, price fluctuation would have affected profitability of the company. Hence the hedging profit is eligible for deduction under section 80-IB which is derived from the business of the eligible industrial undertaking. For this purpose reliance can be placed on the decision of the Hon’ble Kerala High Court in the case of Commissioner of Income Tax Vs. Ajit Spices ( 165 ITR 755) wherein it has been held that that a forward contract of sale can be treated as a hedge transaction if such a contract is supported by a pre existing contract. 9.6 The AO has placed reliance on the decisions of Pandian Chemicals Vs. CIT (262 ITR 278)(SC) and CIT Vs. Sterling Foods (237 ITR 579) (SC) and holding that the hedging profit cannot be said to be forming a part of the profits of business of the industrial undertaking. In this regard, the decision of Hon’ble Delhi High Court in the case of Eltek SGS (P) Ltd (300 ITR 6), in case of CIT V. Dharam Pal Prem Chand (2008-TIOL-664-HC-Del-IT) are relevant, which had considered the Hon’ble Apex Court decision in the case of Pandian Chemicals (supra) and Sterling Foods Ltd (supra)and distinguished them and held that the language used in section 80-IB is different from the language in section 80-HH/80-I. The expression used in section 80-IB i.e. profit derived from business of the industrial undertaking is much wider than the expression used in section 80-HH/80- I i.e. ‘profits and gains derived from an industrial undertaking. We also found that the profit earned out of squaring off future contracts is profit earned on account of hedging transaction. Thus there is a direct nexus between the activity of Jammu unit and the profit earned in the hedging contracts. The hedging Mentha Oil stemmed from the activity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed an integral part of the income of the Jammu unit and was eligible for deduction u/s. 80-IB. 9.7The detailed finding recorded by the CIT(A) while concluding that when such profit was eligible for deduction u/s 80IB is as per material on record and the same has not been controverted by bringing any positive material by Ld. DR. Accordingly, we do not find any reason to interfere with the finding recorded by the CIT(A) holding that assessee is eligible for deduction u/s 80IB in respect of such profit.” Respectfully following the above Ground No.1 is decided against the AO.

4.Next Ground is about allowing the claim of depreciation..During the course of hearing before us The Departmental Representative (DR)and the Authorised Representative (AR) agreed that the issue stands covered by the order of the Tribunal dt.29.11.2015 (supra). We would like to reproduce the relevant portion of the Order: “14.2.From the record, we found that during this year, the assessee has filed return at income of Rs. 73,40,60,272/- u/s 115JB. In the return of income assesee has claimed deduction u/s 80IB for Rs. 68,34,32,421/- from Jammu unit. The assessee had manufacturing unit in two locations, one in Daman and other in Jammu. In the assessment year 2006-07, assessee has temporarily closed down the factory at Daman, however assessee continued to maintain the factory in hope to revive production as and when the demand would increase. During the year under consideration, the assessee has incurred expenditure in Daman unit on account of depreciation of Rs. 6,69,252/-,

5394/M/13+2,Jindal drugs electricity Rs. 28,851/-. The assessee has also offered income on account of sundry balances written off amounting to Rs. 1,54,002/-. Thus, out of the totalexpense of Rs. 5,44,101/-, the major expenses claimed by the assessee were on account of depreciation. It is a matter of record that assessee has not disposed off the assets. These assets are part of the block of asset. As the assessee has a central accounting system and management and both the units are part of the one management and there is unity of control, therefore, it cannot be said that the assessee has discontinued the manufacture of Mentha Oil products. Only because of temporary lull in business, the AO was not justified in declining expenditure of Rs. 5,45,101/-. The issue is covered by the decision of co-ordinate bench of Tribunal in the case of Shanti Synthetics Ltd. wherein it was held that assets of the unit was forming part of the block of assets along with other assets used for the purpose of business in earlier years. The year under consideration is not the first year of asset acquiring, therefore, the assets of closed unit will remain part of the block of assets. The said block of assets was used for the purpose of business during the year. Under these circumstances, the assets of the said closed unit amounts to use for the purpose of business in the year under consideration. It was, therefore, held that assessee is entitled for depreciation. Similar view has been taken by the Delhi High Court in the case of KJS India Pvt. Ltd. 340 ITR 380, and by the Hon’ble Bombay High Court in the case of Pfizer Ltd. 233 CTR 521. Respectfully following these decisions, we do not find any ground/reason for declining the assessee’s claim for depreciation in respect of assets forming part of block of asset. AO is, therefore, directed to allow the assessee’s claim.” Respectfully following the above, Ground No.2 is decided against the AO. -13(Assessee’s Appeal): 5.First Ground of appeal is about disallowing expenses of Daman Unit to the tune of Rs.17,703/-. The AR stated that the Tribunal had,vide its order dt.29.11.2015,(supra),decided the issue in favour of the assessee.We find that while deciding the appeal for the earlier years the Tribunal has dealt with the issue as under :- “20.In the cross objection,the assessee is aggrieved for disallowing expenses of Rs.129576. We have considered the rival contentions and found from the record that the assessee has 2 units; one at Daman and the other at Jammu. Even though during the year, manufacturing at Daman was closed but normal expenditure on maintenance have been incurred. The expenses are incurred in the normal maintenance of the business which have to be incurred in spite of closure of operation of the unit. The unit is part of the same management which operates units at both Dam and Jammu and the closure of operation of one unit cannot be said to be closure of business. The details of the expenses so incurred had been submitted and same are verifiable. The expenses are revenue in nature, therefore, allowable. Precise details of such expenses were as under:- Particulars Amount(Rs) Electricity-expenses 26,080 Professional-fees 50,000 Repairs 35,000 Sundry-Balance-w/off 18,386 Bank-charges 110 ---------------------------------------------------- Total-expenses 129,576 Since the entire expenses are revenue in nature, we direct the A.O. to allow the same.” Following the order of the Tribunal for the earlier years we decide Ground No.1 in favour of the assessee.

5394/M/13+2,Jindal drugs 6.Ground No.2 is about not issuing show cause notice before disallowing expenses u/s14A of the Act.Before us, the AR stated that the assessee was not interested in pursuing the said Ground. Hence,same stands dismissed. 7.Next two Grounds (Ground of Appeal-3 and 4)are about disallowing a sum of Rs.19.88 lacs u/s.14A of the Act r.w. Rule 8D of the Income tax Rules,1962. 7.1.During the course of assessment proceedings,the AO found that the assessee had claimed exempt income of Rs.1.18 crores, that it had not disallowed anything as per the provisions of section 14A of the Act.He asked the assessee to file explanation as to why disallowance u/s.14A should not be worked out as per Rule 8D of the Income tax Rules. As per the AO, the assessee did not offer any explanation.As a result he made a disallowance of Rs.30.62 lakhs. 7.2.Aggrieved by the order of the AO, the assessee filed an appeal before the First Appellate Authority(FAA).Before him, it was argued that assessee itself had disallowed a sum of Rs.81,122/- as per the provisions of section 14A, that the AO had not found any mistake in the calculation.The FAA explained to the AR of the assessee that Rule 8D was mandatory in view of the decision of the Hon'ble Bombay High Court delivered in the case of Godrej and Boyce Manufacturing Ltd.(328ITR81).The assessee stated that disallowance u/s. 14A could be restricted to Rs.19.88 lacs on account of indirect expenses.With regard to disallowance of interest payment it was argued that the assessee had more than enough surplus funds, that the interest disallowance of Rs.10.73 lacs was unjustified.After considering the submission of the assessee and the assessment order the FAA gave part relief to the assessee and directed the AO to make further verification. 7.3.Before us,the AR argued that the assessee had sufficient own funds,that the disallowance made by the AO and confirmed by FAA was without any basis, that the calculation given by the assessee was not considered by any of the authorities.He relied upon the cases of Reliance Utilities and HDFC Bank Ltd.The DR supported the order of the FAA. 7.4.We find that the AO had made disallowance of Rs.30.62 lakhs,that the FAA had given part relief to the assessee,that main grievance of the assessee is that calculation given by it was not considered by the AO and that he had mechanically applied the provisions of section 14A r.w. Rule 8D of the Rules.We find that in the earlier AY.similar issue was restored back to the file of the AO by the Tribunal.In our opinion,the issue needs further verification.Therefore,in the interest of justice matter is restored back to the file of the AO for fresh adjudication.He is directed to afford reasonable opportunity of hearing to the assessee and decide the issue after considering the latest case laws.Last ground is allowed in favour of the assessee,in part.

As a result,appeal filed by the Assessing Officer stands dismissed,appeal of the assessee is partly allowed and the CO filed by the assessee stands dismissed.. फलतः िनधा�रती अिधकारी �ारा दािखल अपील नामंजूर क� जाती है,िनधा�रती क� अपील अंशतः �वीकार क� जाती है और िनधा�रती अिधकारी का ��या�ेप नामंजूर �कया जाता है. Order pronounced in the open court on 21st, March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 21, माच� 2016 को क� गई । Sd/- Sd/- जोिग�दर�सह जोिग�दर�सह /JoginderSingh) (राजे�� / RAJENDRA) जोिग�दर�सह जोिग�दर�सह �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांकDated : 21.03..2016. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 5

5394/M/13+2,Jindal drugs