JINDAL DRUGS LTD,MUMBAI vs. DCIT 8, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER Rajendra A.M.- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dated 10.6.2013,of CIT(A)-37 Mumbai the Assessing Officer (AO)and the assessee have filed cross-appeals for the year under consideration.The assessee has also filed Cross objections.During the course of hearing before us,the AR stated that the assessee was not interested in pursuing the C.O. filed by it.Hence,same stands dismissed as not pressed. ITA/5495/Mum/2013: (Revenue’s Appeal) : 2.Assessee-company,engaged in the business of manufacturing and trading of dyes,dye intermediates etc.,filed its return of income on 15.10.2010 declaring total income of Rs.14.04 crores.The AO completed the assessment on 24.4.12 determining the income of the assessee at Rs.15.70 crores. 3.First Ground of appeal filed by the AO is about deleting the addition of Rs.1.30 crores as speculation loss.During the course of hearing before us,representatives of both the sides agreed that identical issue has been decided in favour of the assessee by the Tribunal, while adjudicating the appeals for the earlier years(ITA No.2592/Mum/2008 and Others dated 20.11.2015): “9.2.We have considered rival contentions and carefully gone through theorders of the authorities below and found that the assessee had set-up a new manufacturing unit at Pot No. 1- A, Extn-III, Industiral Area, Gangyal Jammu for the manufacture of fractioned and deterpinated Mentha Oil.Ld. Assessing Officer has observed that the assessee had commenced manufacturing on 19/4/2005 and, therefore, Asstt.Year 2006-07 was the first year of operation.He called for various details and justification from the appellant for claiming deduction U/s. 80IB of the Act.

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5394/M/13+2,Jindal drugs After going through various details,Ld.Assessing Officer observed that the appellant had, inter- alia, claimed deduction U/s. 80IB on hedging profit of Rs. 18,23,08,181/- from hedging transactions routed through MCX exchange with reference to its raw material namely Mentha Oil for its Jammu Unit. The Assessing Officer observed in para 4.4. of the relevant assessment order that the question in the case of the appellant was not regarding the nature of transaction. According to him, the issue was whether profit from hedging transaction through commodity exchange, was profit derived from manufacturing or producing of an article or a thing. For this proposition, he discussed the cases of CIT Vs. Tata Locomotive & Engg. Co. Ltd. (1968) 68 - ITR - 325 (Bom.) and the decision of Hon'ble Supreme Court in the cases of CIT Vs. Sterling Foods - 237 - ITR - 579 and Pandian Chemicals Ltd. Vs. CIT - 262 - ITR - 278 (S.C.). To come to a conclusion that hedging profit has not earned by manufacturing or producing an article or a thing, he also was of the opinion that the hedging profit was not derived from the Jammu Industrial Undertaking in view of the decisions of Hon'ble Apex Court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd.(supra). He, therefore, disallowed the appellant's claim for Section 80IB on such hedging profits of Rs. 18,23,08,181/-. 9.3 From the record we found that the assessee entered into forward contracts of sale of Mentha Oil for the purpose of hedging against the fluctuation in price of raw material i.e. mentha oil which is used for manufacturing at its Jammu Unit. This product is an agro based product,which is grown only in some parts of India where the environment issuitable for the growth. In view of the peculiarity of the raw material, the raw material had to be purchased in the harvesting season to meet requirement of the whole year. The prices are low at the time of season and then fluctuate widely depending upon the supply scenario.The Appellant sells the products manufactured at Jammu Unit from Mentha oil throughout the year. The fluctuations in Mentha oil prices severely affects the cost of Company's products and the profitability of the Company as the raw materials are already purchased and stored for the entire year's production and fluctuation in price of raw menthe oil effects the price of finished products. This meansthat if the price of the raw material falls later on, the appellant is unable to take advantage of a fall in the price of the raw material though simultaneously prices of the final product also fall. Thus the Appellant has to carry the inventory at a very high value since the supply after the season is scarce. Further, the export order/ sales commitments were made at pre determined prices. The company had to safeguard against adverse price fluctuations of the raw material product (being Mentha oil). For this purpose, the company entered in to future sale contracts through the recognized commodityexchanges. 9.4 We had verified the statement showing month-wise details of quantitiesof stock and quantities of future sale contract for the Mentha Oil entered into by the company. It was evident from the same that the quantity of Mentha oil available with the company was substantially higher than the quantity of future contracts entered and squared off. Thus if the Assessee was required to give the delivery of goods then sufficient quantity for actual delivery was available. This clearly shows that the contracts were entered into for hedging against the future uncertainties of the business. Further, the Assessee has commenced hedging in the month of December 2005. This is so because Mentha OH was listed on commodity exchanges in May 2005 and trading was permitted from May 2005 for the contracts for the month of August 2005. It was also explained that the Assessee did not start entering into hedging contracts from May 2005 to September 2005 as initially the Assessee was not aware of operational modalities like how the trade will take place, how the deliveries would be made and by whom etc. Further the Assessee had never done any trading in any of the commodities earlier and hence it was not possible to enter into such transactions unless entire concept was understood and trading pattern was studied for initial months. Hence, the Assessee did not enter into hedging transactions till December 2005. Copy of relevant circular issued by Multi Commodity Exchange was also placed on record. We also found that the assessee has continued to undertake the hedging transactions in subsequent years. However, in subsequent years, the assessee has incurred a loss from such hedging transactions. The assessee has reduced the loss from the profits eligible for deduction under section 80-IB in the Return of income for subsequent

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