ACIT, CENTRAL CIRCLE, PANAJI vs. M/S SOCIADADE DE FOMENTO INDUSTRIAL P. LTD, MARGAO

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH : PANAJI, GOA BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA.No.105/PAN/2018 Assessment Year 2010-2011 Sociedade De Fomento Industrial The JCIT, Pvt. Ltd., Villa Flores Da Silva, Margao Range, Erasmo Carvalho Street, Margao, Margao, Goa. vs. Goa – 403 601. PAN AABCS8860Q

ITA.No.116/PAN/2018 Assessment Year 2010-2011

The ACIT, Central Circle, Sociedade De Fomento Pundalik Niwas, Rua de-Ourem, Industrial Pvt. Ltd., Villa Flores Panaji, Goa. Da Silva, Erasmo Carvalho [vs. Street, Margao, Goa – 403 601. PAN AABCS8860Q

(Appellants) (Respondents) For Assessee : Sh. Nishant Thakkar, Advocate For Revenue : Sh. Ranjan Kumar, CIT-DR Date of Hearing : 15.06.2022 Date of Pronouncement : 12.09.2022 ORDER PER CHANDRA MOHAN GARG, J.M. The above cross-appeals filed by the Assessee and Revenue are directed against the Order of the Ld. CIT(A)-2, Panaji, Goa dated

2 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 29.12.2017, for the A.Y. 2010-2011. Since common issues are involved in both the appeals, these appeals were heard together and are being disposed of by this consolidated order.

3 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. share as investment activity of the assessee. The shares of Sesa Goa Ltd., are purchased and sold through dematerialized account and transactions suffered Security Transaction Tax and the period of holding is less than 12 months. Hence, these are treated as short term capital gains. In support of its contention, the assessee relied on the decision of CIT vs. Gopal Purohit (2010) 188 Taxman 140 (Bom) and CIT vs. Vinay Mittal (2012) 208 Taxman 106 (Delhi). However, the A.O. has not satisfied with the submissions of the assessee and treated the short term capital gains offered by the assessee on sale of shares of Sesa Goa Ltd., as business income and added a sum of Rs.191,11,60,784/- to the total income of the assessee. Further the A.O. made disallowances under sections 14A, 40(a), foreign exchange fluctuation loss on sale proceeds of EEFC account, capital expenditure from the community development expenses claimed by the assessee, revaluation of closing stock etc., and computed the total income of the assessee company at Rs.596,87,21,240/-. Aggrieved by the order of the A.O, the assessee carried the matter in appeal before the Ld. CIT(A) who vide order dated 29.12.2017 partly allowed the appeal of the assessee.

4 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 1. The order of the Commissioner of Income Tax (Appeals)-2, Panaji-Goa, [hereinafter referred to as CIT(A)] is opposed to law and facts of the case. 2. (a) The CIT(A) legally erred in confirming the Assessing Officer’s (AO) action of treating the Short Term Capital Gains of Rs.191,11,60,784/- on account of purchase and sale of shares of M/s. Sesa Goa Ltd. as business income. (b) The CIT(A) erred in confirming the addition based on his erroneous observations without confronting the appellant with such observations. The addition in the sum of Rs.191,11,60,784/- confirmed by CIT(A) on the basis of conjecture and surmises be deleted in full. 3. (a) The CIT(A) erred in confirming the disallowance made by the AO under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 amounting to Rs.1,05,21,316/-. The whole of the addition be deleted in full. (b) Without prejudice, the CIT(A) erred in not allowing the alternative ground of the appellant that the average of the value of investments which yielded exempted income alone is to be considered for calculating disallowance as per Rule 8D(2)(iii)

5 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. and not on the basis of the average of total value of investments appeared in the audited balance sheet of the appellant. 4. (a) The Ld. CIT(A) legally erred in confirming the disallowance made by the AO in the sum of Rs.1,17,09,419/- incurred abroad on account of supervision charges at discharge port and Rs.5,77,23,014/- incurred abroad on professional and consultancy fees by invoking the provisions of section 40 (a) of the Income Tax Act, 1961. (b) Without prejudice, the CIT(A) ought to have deleted the entire addition in the sum of Rs.6,94,32,433/- in view of the fact that the explanation to section 9(1)(vii) inserted by the Finance Act. 2010 got the assent of the President on 08/05/2010 and hence not applicable for the assessment year under appeal. 5. The Ld. CIT(A) erred in upholding the addition made by the AO towards contribution of Rs.20,00,000/- given to a school for construction of building by holding that it is in the nature of capital expenditure. Similarly, the CIT(A) erred in confirming the disallowance made by AO of a sum of Rs.81,16,257/- incurred on repair and renovation of two temples situated in mining areas by holding that they do not come under the purview of current

6 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. repairs. The whole of the addition in the sum of Rs.1,01,16,257/- be deleted in full. 6. The Appellant craves leave to add, to alter or vary any of the Grounds of Appeal set out herein above.”

7 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. assessment under section 143(3) of the I.T. Act, 1961. Further, the investment made in shares of Sesa Goa Ltd., as is evident from the audited books of account is out of surplus money only and no borrowed funds were utilized. The assessee-company purchased 3,38,03,812 equity shares of M/s. Sesa Goa Ltd., in the F.Y. 2008-09 and these shares were entirely sold in the A.Y. 2010-11 by holding the shares for more than 6 months period as investments only, but, not as stock in trade. He, therefore, prayed that the orders of the lower authorities be set aside on this issue and necessary directions be given to treat the sum of Rs.191,11,60,784/- as short term capital gain instead of business income.

8 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. have rightly made the impugned addition treating the income accrued to assessee as business income. The Ld. D.R. prayed that the orders of the lower authorities be confirmed.

9 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Goa Ltd., as business income instead of short-term capital gain as shown by the assessee with following observations and findings:-

“3. Purchase and Sale of Shares of Sesa Goa Ltd., treated as business income : During the year under consideration, the assessee company shown short term capital gain of Rs. 191,11,60,784/- on purchase and sale of shares of Sesa Goa Ltd. The company offered this income as short term capital gain. The assessee company was requested to explain why the short term capital gain shown by it should not be treated as business income. The assessee company submitted that the company shown the purchase of the shares as investment in the books. The company’s main business is mining. The company’s memorandum of association permits for purchase and sale of shares. In the earlier years department accepted the purchase and sale of share as investment activity of the assessee: The shares of Sesa Goa Ltd., are purchased and sold through dematerialized account and transactions suffered Security transaction tax and the period of holding is less than 12 months. Hence, these are treated as short term capital gains. The assessee relied on the decision of CIT vs. Gopal Purohit (2010) 188 Taxman 140 (Bom) and CIT vs. Vinay Mittal (2012) 208 Taxman 106 (Delhi). The explanation of the Authorised Representative is considered and found not acceptable for the following reasons : (i) It is seen that the assessee purchased shares of Sesa Goa Ltd. of Rs.362,32,20,410/- and sold the same for Rs.554,23,19,978/-. The purchase and sale are done within a short period. The magnitude of purchase and sale of shares shows that it is a business income. The Supreme Court in the case of Raja Bahadur Visheshwara Singh & Others vs. CIT (SC) 41 ITR 685 clearly held that the magnitude of purchase and sale of shares is a determining factor to decide whether income from purchase and sale of shares is to be treated as business income or capital gains. The magnitude of transaction

10 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. in this case clearly shows that it is a business income based on the above Supreme Court decision. (ii) Since dealing in shares is authorized by Articles of Association of company, income earned from share transactions to be assessed as business income. This was so held in the case of Paimia Cement Ltd..vs. CIT (Pat) 12 ITR 50. (iii) Purchase and sale of shares in a Private company within a short period is adventure in the nature of trade even if such shares are shown as investments in the books of accounts. This was so held in the case of V. Amiratham Ammal vs. CIT (Mad) 7,4 ITR 739 and Burnside Investment & Holdings Ltd., Vs. CIT (ITAT, Mad),61 ITD 501. (iv) There is nothing on record to show that purchase of shares was for non- commercial purpose. Shares sold within a short period and the manner in which shares are shown in the balance sheet is not conclusive. Purchase and sale of shares within a short period is to be treated as business income irrespective of the treatment given to the shares in the balance sheet viz. whether shown under the head investment or under the head stock-in- trade. This was so held in the following cases: a. CIT Vs. Karam Chand Thapar & Bros.Pvt. Ltd., (SC) 176 ITR 535 b. New Era Agencies Pvt. Ltd., Vs. CIT (SC) 68 ITR 585 c. Matheson Bosanquet Enterprises Ltd., Vs. DCIT (Mad) 316 ITR 375 V) Transaction in exchange traded derivatives - life of short duration and they do not yield any income like dividend - Income can be derived only on their purchases and sales and so they are held only as stock-in-trade - Hence the income from such transactions is business income and not capital gains, This was so held in the case of Morgan Stanley & Co. Intl. Ltd., IN RE (AAR) 272 ITR 416. In view of the above judicial decisions and facts of the case, the short term capital gain shown by the assessee on sale of shares

11 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. of Sesa Goa Ltd., is treated as business income and added to the total income of the assessee.”

“4.3 I have gone through the assessment order and the submissions of the AR of the appellant. During the appellate proceedings, the ledger of Sesa Goa Ltd. shares in the books of the appellant company was called for and the same was produced by the AR vide written submissions dated 29.12.2017. Here it is important to note that the appellant is engaged in mining and export of iron ore and Sesa Goa Ltd. is also engaged in mining and export of iron ore. Thus, the appellant of having a business interest in Sesa Goa Ltd. in the form of acquisition of stake in Sesa Goa Ltd. cannot be ruled out. The appellant started purchasing the shares of Sesa Goa Ltd. after passing a resolution in the board meeting held on 15.09.2008. The AR of the appellant produced the copy of the board resolution which was as under: "RESOLVED THAT the Company be and is hereby authorized to invest from time to time in the shares of Sesa Goa Ltd. Sd/- (AUDUTH TIMBLO) CHAIRMAN 4.4. From the ledger of Sesa Goa Ltd. shares produced, it is found that the appellant started investing in shares of Sesa Goa Ltd. from 30.09.2008. In a single day on 30.09.2008, the Sesa Goa Ltd. shares (1,53,35,525 shares) were purchased in 11 transactions with different contract notes and total value of shares purchased were worth Rs.187.53 crores. Thereafter,

12 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. on 07.10.2008 vide 6 contract notes further Sesa Goa Ltd. shares (47,34,395 shares) worth Rs.52.41 crores were bought. Thereafter, from 08.10.2008 to 31.03.2009 vide 24 contract notes on different dates shares (1,37,33,892 shares) worth Rs. 122.38 crores were bought. Thus, during Financial year 2008-09, appellant bought 3,38,03,812 shares worth Rs.362.32 crores of single company M/s Sesa Goa Ltd.. The AR of the appellant did not show any earlier evidences that the appellant company had made such huge investments in the shares of a single company. The appellant company, no doubt, has been making investments in the shares of some companies year after year but such investments were in smaller quantities and the portfolio was spread over various companies. The appellant does have the investments in the shares of other companies as well. But, after going through the mode and quantity of investment in the shares of a single company i.e. Sesa Goa Ltd., it can be reasonably be held that the buying of shares of Sesa Goa Ltd. was not for the purpose of investment but was a major business decision to acquire a particular percentage of stake in Sesa Goa Ltd.. Therefore, acquiring of 3.38 crores shares of a single company cannot be merely with an intention to make investment and to earn dividend from such investment. 4.5. The said shares purchased during Financial year 2008- 09 were sold by the appellant during Financial year 2009-10 from 14.04.2009 to 13.06.2009 for a total consideration of Rs.554.23 crore and earning gain of Rs. 191.11 crores. 4.6. From the above analysis, it is quite clear that the magnitude of purchase and sale of the shares of a single company i.e. Sesa Goa Ltd. is very large as 3.38 crore shares were purchased and sold within a period of less than 1 year. Further, it is not a case of purchase and sale intermittently. The appellant first acquired 3.38 crore shares worth Rs.362.32 crores and thereafter sold the shares and thus, from the nature of the said purchase and sale transactions, one can come to the conclusion that considering the magnitude of turnover and that to in the shares of a single company, it cannot be for the purpose of investment. It is

13 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. certainly for the purpose of business or adventure in the nature of trade as held by the AO in the assessment order. 4.7. On the basis of the facts and circumstances of the appellant's case, I am of the opinion that the appellant had normal investments in different shares in relatively smaller quantities which are held to be investments and uniformity and consistency with reference to those investments is maintained by the AO in the assessment order. Whereas, investment in the shares of Sesa Goa Ltd., considering the fact that the appellant is engaged in identical business, same as Sesa Goa Ltd., the acquiring of 3.38 crore shares of Sesa Goa Ltd. has to be treated as investment for the purposes of business and profit received from the sale of shares of Sesa Goa Ltd. should be treated as business income. Merely because the appellant has shown the shares of Sesa Goa Ltd. as ’investment1 in Balance Sheet is not a conclusive proof to decide the income and nature of transaction. This was decided by Hon’ble Bombay High Court in the case of CIT Vs Gopal Purohit 336 ITR 287 (Bom.). Further, the purchase and sale of huge quantity of shares of Sesa Goa Ltd. has happened during the previous year relevant to the impugned assessment year. Such transaction of this magnitude was not effected by the appellant in any of the preceding assessment years. Therefore, this transaction of sale of 3.38 crores of Sesa Goa shares is the unique transaction pertaining to the impugned assessment year and hence, cannot be compared with the normal investments the appellant was making in the regular course of appellant's business. 4.8. On examination of the manner in which the Appellant carried out its activity of purchase and sale of shares of Sesa Goa Ltd., the following facts have emerged: "(a) The appellant has carried out series of transactions to purchase the shares of a single company which normally an investor will never do. This proves beyond doubt that the appellant had business motive of acquiring a stake in Sesa Goa Ltd., which cannot be considered as normal investment. It needs to be remembered that the appellant purchased 3.38 crore shares of Sesa Goa Ltd. for total consideration of Rs.362.32 crores.

14 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. (b) In majority of the cases, shares are purchased in huge quantity and holding period of shares were not significant and was in the range of 6 to 8 months. Further, the shares were purchased first in F. Y. 2008-09 and sold in F. Y. 2009- 10. (c) Further, the value of the shares transacted by the appellant runs into crores of rupees. It cannot be said that the appellant has carried out investments in those shares and that to the shares of a single company, Sesa Goa Ltd. 4.9. All the above facts are indicia of the Appellant had some business interest or strategy of acquiring a percentage stake in Sesa Goa Ltd. which is in identical business as that of the appellant. The transaction in question can also be called as 'adventure in the nature of trade' as all 3.38 crore shares were sold after realising that the desired quantity of shares could not be acquired by the appellant. No investor generally will take a risk of investing in the shares of a single company which is like 'putting all eggs in a single basket1. Hence, the decision to buy such a large quantity of shares of a single company was a business decision. Further, the turnover in case of the appellant from sale of shares of Sesa Goa Ltd. in the impugned previous year was Rs. 554.23 Crores. All these were indicative of there being a systematic activity which is the activity of business being pursued by the Appellant. 4.10. The decision in the case of Gopal Purohit {supra) is completely distinguishable. In the present case, the appellant has not before the AO or during appellate proceedings led any evidence to show that the transaction in the earlier assessment and the present assessment year are identical, calling for the same treatment in view of the decision of this Court in Gopal Purohit (supra). This is particularly so when it is the Appellant's case that the view taken in the earlier Assessment Year be followed in this year on account of the principle of consistency. I have proved beyond doubt that the transaction of purchase and sale of 3.38 crore shares of Sesa Goa Ltd. was an unique transaction for which the appellant does not have precedents in the past assessment years. Further, accounting the said shares as 'investment' in the Balance Sheet does not make any

15 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. difference as the entries in the books of accounts are not conclusive in determining the nature of income as held by Hon'ble Bombay High Court in the case of Gopal Purohit (supra). Reliance is also placed on the decision of the jurisdictional High Court in the case of Ratanlal J. Oswal Vs CIT reported in 63 Taxmann.com 57 (Bom.). 4.11. In view of the facts and circumstances of the purchase and sale of shares o Sesa Goa Ltd. by the appellant and in view of the judicial pronouncemen discussed in the earlier paras, I am of the considered opinion that acquiring shares of Sesa Goa Ltd. was a business decision and therefore, the gain earned on sale of the said shares has to be brought to tax as income from business. Accordingly, the action of the AO in treating the gain from sale of shares of Sesa Goa Ltd. as business income is upheld.”

16 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. purchase and sale of shares intermittently as the appellant first acquired 3.38 crore shares worth Rs.362.32 crores and, thereafter, sold the entire shares and, therefore, from the nature and magnitude of transactions of purchase and sale of shares of only one company, it can be safely concluded that it cannot be for the purpose of investment only and for the purpose of business or adventure in the nature of trade as noted by the AO in the assessment order.

17 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. because the assesseee has shown the shares as investment in the balance sheet is not a conclusive proof to decide the nature of transaction and head of income. Concurring with the findings arrived at by the ld.CIT(A), we hold that in view of above noted factual matrix of the transaction of sale of 3.38 crore shares is a unique transaction which cannot be compared with the normal investments of the appellant which was held during the regular course of appellant’s business.

18 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. one financial year and after holding for some months the sale of the same during immediately next FY is a strategic business decision as the turnover in the case of appellant from sale of shares of Sesa Goa Ltd., during the impugned previous year 2009-10 was Rs.554.23 crores which is clearly indicative that there was systematic and strategic business decision which was not an investment but was an activity of business and adventure in the nature of trade undertaken by the appellant.

19 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. hold that the facts and circumstances in the case of CIT vs. Gopal Purohit (supra) are not similar to the facts and circumstances of the present case.

20 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. liable to tax as short-term capital gain to be allowed. But, in the present case, the assessee had not purchased 3.38 crore shares in single transaction but high volume of shares were purchased in repetitive transactions of the same company Sesa Goa Ltd., and, after acquiring high volume of shares, sold the same in immediately during the next/following financial period, therefore, we respectfully observe that the proposition rendered by the Hon’ble jurisdictional High Court of Bombay in the case of PCIT vs. Business Match Services (supra) is not applicable to the present case in favour of assessee.

21 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. that its regular business is to trade in engineering goods metal and other commodities. It had also made investments in shares over the last 10-15 years without any borrowings. When we analyse the facts and circumstances of the present case, we clearly noted that on the issue involved in the present case, the AO has noted certain reason to dislodge the contention of the assessee in para 3 of the assessment order (supra) and, thereafter, by relying on the judgements of the Hon’ble Supreme Court in the case of CIT vs. Karam Chnd Thapar & Bros Pvt. Ltd. (supra), New Era Agencies Pvt. Ltd. vs. CIT (supra) and the judgement of the Hon’ble Madras High Court in the case of Matheson Bosanquet Enterprises Ltd. vs. DCIT (supra), held that the purchase and sale of shares within a short period has to be treated as business income irrespective of the treatment given in the balance sheet as short-term capital gain and the magnitude of the transaction in the case of purchase and sale of shares of Sesa Goa Ltd. which is in the similar line of business as that of the assessee clearly shows that it is a business income.

22 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. that the magnitude of sale and purchase of shares is a determinant in treating an income as business income or capital gains income. At the cost of repetition, we may again point out that the AO as well as the ld.CIT(A) in the respective assessment and first appellate order, considered the facts and circumstances in which the assessee undertaken the impugned transaction and, thereafter, held that the magnitude of transaction and surrounding circumstances clearly shows that it is a business income and not short-term capital gain. Therefore, in view of the foregoing we reach to a logical conclusion that the AO was right in treating the income accrued to the assessee as business income and the ld.CIT(A) was also justified in upholding the findings arrived at by the AO on this issue. Accordingly, grounds No. 2(a) and 2(b) of the assessee are dismissed.

23 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Rs.11,44,724/-. The A.O. observed that the stipulation of Section 14A is to quantify the amount of expenditure which is not allowable as it is relatable to the earning of exempt income. Since the assessee company has not been able to show before the A.O. as to how the specific amount of expenditure claimed had been incurred towards earning the income exempt from tax during the relevant period, therefore, the A.O. invoked the provisions of Section 8D of I.T. Rules, 1962 along with provisions of Section 14A and computed the disallowance of Rs.1,16,66,040/-. While making the net addition of Rs.1,05,21,316/-, the A.O. reduced an amount of Rs.11,44,724/- which was already claimed as expenditure against the exempt income by the assessee company i.e., [Rs.1,16,66,040 (-) Rs.11,44,724/- = Rs.1,05,21,316/-].

24 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. from the average investment and to re-work the disallowance under section 14A r.w. Rule 8D of I.T. Rules. Accordingly, the Ld. CIT(A) partly allowed the claim of assessee.

25 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 23. The ld. Counsel of the assessee has placed reliance on the judgement of the ITAT, Delhi Special Bench in the case of ACIT vs. Vireet Investment Pvt. Ltd., reported as (2017) 188 TTJ 1 (Del-Tribunal) (SB) and submitted that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. He vehemently pointed out that the AO has also included the amount of investment in shares of Sesa Goa Ltd. for computing the disallowance u/s 14A of the Act r.w. Rule 8D(iii) of the IT(AT) Rules. Therefore, he prayed that the disallowance may be restricted to the amount suo moto disallowed by the assessee at Rs.11,44,074/-. No other argument has been placed by the ld. Counsel of the assessee. 24. On careful consideration of the above rival submissions, order of ITAT, Special Bench in the case of Vireet Investment Pvt. Ltd. (supra) and orders of the authorities below we find that the ld.CIT(A) has decided the issue partly confirming the disallowance made by the AO u/s 14A of the Act r.w.r 8D(2)(iii) of the Rules with the following observations and findings:-

“5.2 I have gone through the submissions of the AR of the appellant. The appellant has received a tax free dividend of Rs.5,83,58,130/- and therefore as per the decision of KLJ Organics Ltd. referred by the appellant, disallowance u/s 14A

26 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. is applicable to the facts of the appellant's case. It is an admitted fact that the appellant had earned tax-free dividend income of Rs.5,83,58,130/- during the year out of the investments made, however the appellant has suo-moto disallowed megre expenditure of Rs.11,44,724/- which was claimed incurred for earning the said exempt income. During the assessment proceedings, A.O. has applied Rule 8D and worked out the administrative cost disallowance at Rs. 1,16,66,040/-. I find the appellant’s contention that megre expenditure of Rs.11,44,724/- is incurred for the average investments worth Rs.233,32,08,055/- for purpose of maintaining the investments that earn tax free income has been rightly rejected by the A.O. The appellant has an average investment portfolio of more than Rs.233 crores and it is impossible to believe that the making of investment (which earns the exempt income) is a passive activity involving no input or no cost. In fact, making or continuing with any investment in a particular share/ mutual funds etc and even the time when to exit from one investment to another, all these activities are well coordinated and well informed management decisions, requiring liaison of the partners and some senior management with banking/investment firm authorities. No prudent businessman (who is going to invest a substantial sum of money on investment) will leave decision entirely on a third party with no stakes. Perusal of profit and loss account shows that appellant has debited expenditure pertaining to office expenses, audit expenses, overheads such as telephone, electricity, depreciation etc and portion of said expenses will be attributable to maintenance of the investment portfolio and to the earning of the exempt income as rightly concluded by the A.O. Thus the disallowance by invoking Rule 8D is justified and is in accordance with the Bombay High Court decision in the case of M/s. Godrej and Boyce Manufacturing Co. Ltd. 328 ITR 81. 5.3. Appellant has taken the plea that no dividend was received on some of the investments hence the disallowance under Rule 8D be made only in respect of investments on which dividend is earned. In this connection, the language of Rule 8D(2)(iii) reads as under:-

27 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. “an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee , on the first day and last day of the previous year.” 5.4. As per language of the statue, disallowance has to be computed in respect of investments, income from which “does not” and “shall not” form part of total income. Thus the appellant’s action of only considering the investments that have yielded dividend income during the year is not in consonance with the language of the Act. In this regard reliance in placed on the order of the Income Tax Appellate Tribunal, Mumbai Bench "D", Mumbai in the case of M/s. Doubledot Finance Ltd., ITA No.2035/M/2013 dated 31.07.2014 for Assessment Year: 2009-10 that dealt with similar ground of appeal namely, "1. The Learned Commissioner of Income Tax (Appeals)8 has erred in confirming the disallowance at the rate of 0.50% of the average value of such investments (which includes some equity shares and infrastructure units on which no dividend had been received during the assessment year) under Rule 8D(2) (Hi) of the Income Tax Rules. Where no exempt income has arisen out of such assets they cannot be a contributory to any expenses in connection with the exempt income. ’ 5.5. Hon’ Tribunal has after analysing the issue has held as under: “5. We have considered the rival submissions of the Id. representatives. In our view, the contention of the Id. A.R. that the disallowance under Rule 8(2)(iii) in respect of administrative and managerial expenses out of the common pool of expenses in relation to exempt income is to be made even if no exempt income is earned out of such investments. Rule 8(2)(iii) is clear in this respect which for the sake of convenience is reproduced as under: "an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance

28 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. sheet of the assessee, on the first day and the last day of the previous year." 6. A perusal of the above rule shows that for the purpose of calculation of disallowance under this rule, the value of investments not only income from which "does not" but also "shall not" part of the total income are to be considered. While dealing with an identical issue, the co-ordinate bench of the Tribunal in the case of "Sitsons India (P.) Ltd. vs. ACIT" 2014 (44) Taxmann.com 340, while analyzing the provisions of rule 8D(2)(ii) has made the following observations: "5.6 The Ld A.R contended that the average value of investments should be arrived by considering only those investments which have yielded dividend. Though the Ld A.R placed reliance on the decision rendered by Calcutta bench of Tribunal, we are unable to accept the same in view of the. clear provisions prescribed in Rule 2(H) of Rule 8D of the Income tax Rules. For the sake of convenience, we extract below the relevant provisions:- "B the average of value of investments, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year". 5.7 A careful perusal of the above said provisions would show that the words "does not" or "shall not" have got their own significance, i.e., the words "does not" refer to the income which has already been received and the words "shall not" refer to the income that may be received. In our view, the words "shall not" mandates that the entire investments, the income which shall not form part of the total income are required to be considered, otherwise the words "shall not" shall loose its significance in the above said provision. Accordingly, we reject the said contentions of the assessee." 7. Similarly in Rule 8(2) (iii) the words 'does not' and 'shall not" have been used in respect of exempt income for calculating the disallowance @0.5 % of the value of investments. This issue is accordingly covered against the assessee by the judgment of the co-ordinate bench of the Tribunal’’.

29 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa.

5.6 Thus relying on the above judgment of Mumbai Tribunal, and on facts and circumstances of the appellant's case, the disallowance under Rule 8D(2)(iii) as worked out by the A.O. is upheld in principle. However, the AO while determining this disallowance has considered the shares of Sesa Goa Ltd. as investment for the purpose of section 14A r.w. Rule 8D. In para 4 above, I have confirmed the action of the AO in treating the gain from sale of shares of Sesa Goa Ltd. as business income. Hence, the AO is directed to reduce the amount of investment in Sesa Goa Ltd. shares from the average investment and re-work the disallowance u/s. 14A r.w. Rule 8D. Ground No. 3 is considered to be partly allowed.”

30 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Bench in the case of ACIT vs. Vireet Investments Pvt. Ltd. (supra) wherein it was held that only those investments are to be considered for computing the average value of investment under rule 8D(2)(iii) of the Rules, which yielded exempt income during the year. Therefore, we are unable to see any reason to interfere with the findings arrived at by the ld. First appellate authority on this issue in partly allowing the claim of the assessee in accordance with the judgement of the ITAT Special Bench (supra). Accordingly, ground No.3 of the assessee is dismissed and the AO is directed to recomputed the disallowance as per the directions of the ld.CIT(A).

Ground No.4

31 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Finance (No.2) Act, 2010 got asset of the President of India on 08.05.2010 and, hence, not applicable for the present assessment year 2010-11. The ld. Counsel has placed reliance on the following orders:- (i) Judgement of the Hon’ble Bombay High Court in the case of DIT vs. TUV Bayren (India) Ltd. reported in (2015) 61 taxmann.com 443 (Bombay); (ii) Order of ITAT Mumbai Bench in the case of TUV Bayren (India) Ltd. vs. DCIT, (2012) 23 taxmann.com 127 (Mum); (iii) Order of ITAT Delhi Bench ‘G’ in the case of ONGC vs. DCIT (IT) (2020) 117 taxmann.com 867 (Delhi-Trib.); (iv) Order of ITAT, Panaji Bench in the case ACIT vs. Ajit Ramakant Phatarpekar (2015) 56 taxmann.com 357 (Panaji- Trib.) 27. On perusal of the above judgements/orders, we find that in the case of DCIT vs. TVS Bayren, there was a issue of payment of audit work and certification. In the case of TUV Bayren (India) Ltd. vs. DCIT, there was an issue of company’s income from ISO 9000 Certification. In the case of ONGC vs. DCIT, the issue was rendering professional legal services abroad and certain amount paid to an Australian company for construction, installation and maintenance of high resolution CT scan facility whereas in the present case the issue is pertaining to TDS on

32 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. demand on account of supervision charges at discharged port and on professional and consultancy fees paid by the assessee without complying with the TDS provisions. Therefore, we respectfully hold that the above judgement of the Hon’ble High Court of Bombay in the case of DCIT vs. TUV Bayren, order of the ITAT Mumbai in the case of TUV Bayren (supra) and order of the ITAT Delhi in the case of ONGC (supra) having dissimilar facts and circumstances, have no application to the facts and circumstances of the present case. Therefore, benefit of these judgements/orders are not available to the assessee in the present case.

33 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. “4. Ground no. 2 relates to deletion of the addition of Rs. 28,87,983/- added by the AO u/s 40(a)(i). The AO noted that the Assessee has paid a sum of Rs.28,87,983/- towards destination sampling charges to the parties of Hongkong and Singapore but Assessee has not deducted any TDS on the belief that the services are rendered outside India and India is having DTAA with China and Singapore, therefore, these charges are taxable in those countries. The AO did not agree in view of the Explanation 2 to Sec. 9(1)(vii). According to him the interest and fee for technical services/professional services is taxable in the hands of the party who received it outside India as the income is deemed to accrue or arise in India. According to the AO, the Finance Act, 2010 amended Sec. 9(1)(vii) retrospectively w.e.f. 1.6.1976 and as per the amended provisions, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered the services in India. The income arising to the non-resident agent on account of the commission payable to him is to be deemed to accrue or arise in India in respect of soliciting export order and is taxable in view of the specific provision of Sec. 5(2)(b) r.w.s. 9(1)(i) as the right to receive the commission has arisen in India when the order is executed by the Indian company in India. CBDT withdrew Circular no. 786 dt. 7.2.2000 by subsequent circular no. 7 of 2009 dt. 22.10.2009. The AO also observed that Article 12 of the DTAA with all the above countries state that fees for technical/consultancy services arising in a contracting state and paid to a resident of other contracting state may be taxed in that other state. It further states that, however, such royalties and technical/consultancy fees may also be taxed in the contracting state in which they arise and according to the laws of that state. As per the Indian law, these fees are deemed to accrue or arise in India. Referring to Article 8 of the DTAA it was observed by the AO that the profit derived by an enterprise of a contracting state from operation by that enterprise of ships or aircraft in international territory shall be taxable only in that state. Thus, there is difference between Article 12 and Article 8 and in view of the specific provision of Article

34 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 12 the royalties and technical/consultancy fees may also be taxed in the contracting state in which they arise and according to the laws of that state. The non-resident will only get double taxation benefit in their respective countries but they have to pay the tax in India for services rendered by them and therefore, the Assessee was liable to deduct TDS as per the provisions of Sec. 195. The Assessee went in appeal before the CIT(A) and submitted that the Assessee has made payment to Zhao Long (Asia) Ltd., Hong Kong amounting to Rs. 17,43,033/- and Delong Mineral & Logistic PTE Ltd. of Rs. 11,44,950/-, payment to Zhao Long (Asia) Ltd. is for monitoring, supervision of discharged cargo, draft survey, joint sampling of discharged cargo, photographs, sample preparation and sealing of samples, analysis of grade etc. and payment to Delong Mineral & Logistic PTE Ltd. was for supervision of the vessel at the discharge port, the non- residents did not have any permanent establishment in India and there has to be territorial nexus with the earning of the income, no services are rendered in India and neither the same is received in India. Therefore, no income accrued in India. Explanation to Sec. 9 inserted by the Finance Act, 2010 is not applicable as all the payments were made when the Finance Act received assent of the President on 8.5.2010. The payment does not constitute fees for technical services as defined under Explanation 2 to Sec. 9(1)(vii) of the Act. Ultimately, the CIT(A) deleted the disallowance by observing as under : “6.4 I have gone through the assessment order and submission of the appellant. The admitted fact is that, the appellant is engaged in the business of export of iron ore. At the destination of export, again the sampling of exported ore has to be done, for which the payment has been made by the appellant. The appellant did not deduct any TDS because, (i) the consultancy firm was a foreign national, no part of whose income was assessable in India, and ii) the services were rendered outside India. On the other hand, the A.O. held that, since the services rendered are of technical in nature and payment has been sent from India, the income has accrued in India and therefore, TDS was deductible on the payment made. In my considered opinion, the view taken by the A.O. is factually and legally incorrect. Since the services have been rendered outside India, the income

35 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. shall accrue or arise outside India, where the actual service has been rendered. Nature of service rendered and source country of the payment is immaterial in this context. Second aspect of the issue is that no part of recipient's income is assessable in India. Therefore, in view of these undisputed facts, in my opinion, TDS was not deductible in this case and the disallowance made by the A.O amounting to Rs. 28,87,983/- is hereby deleted. This Ground of appeal of the appellant is allowed." 5. We heard the rival submissions and carefully considered the same alongwith the order of the tax authorities below. The issue before us is whether any disallowance can be made u/s 40(a)(i). The AO during the course of the assessment proceedings noted that the Assessee has made payment amounting to Rs. 28,87,983/- to Hongkong and Singapore parties, Rs. 17,43,033/- to Zhao Long (Asia) Ltd. for monitoring, supervision of discharged cargo, draft survey, joint sampling of discharged cargo, photographs, sample preparation and sealing of samples, analysis of the grades etc. Copies of the bills were placed at pg. 134-140 of the paper book. From all the bills it is apparent that these services were rendered in the People's Republic of China. Similarly, the Assessee has paid a sum of Rs. 11,44,950/- to De Long Minerals and Logistics Pte Ltd., Singapore for supervision of the vessel at the discharge port. The payment has been made through DBS Bank Ltd., Singapore. Details of the payments made are given at pg. 133 of the paper book. From these payments, it is apparent that the payment of Rs. 2,58,506/- does not relate to the impugned assessment year. Rest of the payments was made prior to 31.3.2010. The Revenue was of the opinion that due to retrospective amendment made by the Finance Act, 2010 w.e.f. 1.6.1976 the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of sub- section (1) and shall be included in the total income of the non- resident whether or not the non-resident has residence or place of business or business connection in India or the non-resident has rendered services in India. The destination sample charges are consultant/technical charges paid for gradation of the iron ore exported and due to explanation-2 to Sec. 9(1)(vii) fee for technical services means any consideration including any lump

36 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. sum consideration for rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel). The technical services rendered in the case of the Assessee, according to the ld. DR, was taxable in the hands of the party who received it outside India as the said income is deemed to accrue or arise in India. In view of the provisions of Sec. 40(a)(i) any interest or fee for technical services which is payable outside India on which tax is deductible at source under Chapter 17B is not allowable unless TDS is deducted. This is an undisputed fact that in this case the Assessee has not deducted the tax.”

“We are not going on the merits of the taxability of the payments made by the Assessee to the non-resident company as, in our opinion, once the payments made by the Assessee to the non-residents are of the nature of technical fee, the legal position in view of the retrospective amendment w.e.f. 1.6.1976 in Sec. 9 brought out by the Finance Act, 2010 is indisputably that the said income will be deemed to accrue and arise in India whether or not the non-resident has residence or place of business or business connection in India or the non- resident has rendered services in India. Under the amended explanation to Sec. 9(1) as it exists today it is specifically stated that the income of non-resident shall be deemed to accrue or arise in India under clause (v) or (vi) or (vii) of Sec. 9(1) and shall be included in the total income whether or not (a) the non- resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. Similar view has been taken by the co- ordinate Mumbai bench of this Tribunal in the case of Ashapura Minichem Ltd. vs. ADIT, 40 SOT 220 (Mum.) in which it was observed as under :

37 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. "9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment with effect from 1-6-1976 in section 9 brought out by the Finance Act, 2010. Under the amended Explanation to section 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1), and shall be included in his total income, whether or not (a) the non-resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. 10. The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders. Under this system, any foreign income that is earned outside of its borders is not taxed by the tax jurisdiction, but then apart from tax heavens, the only prominent countries that are considered territorial tax systems are France, Belgium, Hong Kong and the Netherlands, and in those countries also this system comes with certain anti abuse riders. In other major tax systems, the source and residence rules are concurrently followed. On a conceptual note, source rule of taxation requires an income sourced from a tax jurisdiction to be taxed in this jurisdiction, and residence rule of taxation requires income, earned from wherever, to be taxed in the tax jurisdiction in which earner is resident. In the US tax system, this residence rule is further stretched to cover US taxation of all its citizens irrespective of their domicile, and the source rule is also concurrently followed. It is this conflict of source and residence rules which has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation either by way of exclusion of income from the scope of

38 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9." 6. It is an undisputed fact that the Finance Act, 2010 received the assent of the President on 8.5.2010 and all the payments have been made by the Assessee to the non-resident party prior to receiving of assent of the President making the retrospective amendment by adding explanation to Sec. 9(1). At the time when the Assessee made the payment there was no provision u/s 9(1) making the technical fees deemed to accrue or arise in India whether or not (a) the non- resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. It is not disputed by the ld. DR that the non-resident did not have residence or place of business or business connection in India. The non- resident has also not rendered services in India. The source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the Assessee made the payment as there was no provision under Sec. 9(1), the income received by the non-resident as per the existing law at the time when the Assessee made the payment, in our opinion, was not taxable in India under the Income Tax Act. We are not going through the tax treaty which under Article 12 provides that any fees for technical/consultancy services arising in a contracting state and paid to a resident of other contracting state may be taxed in that other state. This article also provides that such royalty and technical/consultancy fees may also be taxed in the contracting state in which they arise or accrue according to the

39 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. laws of the state. Prior to the insertion of explanation to Sec. 9(1) by the Finance Act, 2010 with retrospective effect, the professional and consultancy services even though rendered outside India were not deemed to accrue or arise in India irrespective of the fact whether the party who rendered the services is having place of residence or place of business in India. It is only due to the retrospective amendment made by the Finance Act, 2010 that the position has become clear. If the income was not taxable in India it cannot be made taxable in view of the tax treaty. This is a fact that as argued by the ld. AR the retrospective amendment brought by the Finance Act, 2010 was not in existence at the time when the Assessee had made the payments. The ld. AR submitted that the Assessee cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged. In this regard, we perused the decision of the co-ordinate bench in the case of Channel Guide India Ltd. vs. ACIT, 139 ITD 49 (Mum.) as relied by the ld. AR. We noted that in this decision the co-ordinate bench of ITAT held as under : "25. In our opinion, the issue involved in the present case however, is relating to disallowance made u/s.40(a)(i) for non- deduction of tax-at-source from the payment made by the assessee to SSA and as held by Ahmedabad Bench of this Tribunal in the case of Sterling Abrasives Ltd. by its order dated 23.12.2010 cited by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In the said case, Explanation to sec.9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and it was held by the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee. The Tribunal based its decision on a legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform and relied on the decision of Hon'ble Supreme Court in the case of Krishna Swamy S. PD and

40 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Another v. Union of India and others 281 ITR 305 wherein the said legal Maxim was accepted by the Hon'ble apex court. 26. In view of the above discussion, we are of the view that the amount in question paid by the assessee to SSA was not taxable in India in the hands of SSA either u/s.9(1)(vi) or 9(1)(vii) as per the legal position prevalent at the relevant time and the assessee therefore was not liable to deduct tax at source from the said amount paid to M/s. SSA and there was no question of disallowing the said amount by invoking the provisions of sec.40(a)(i). In that view of the matter, we delete the disallowance made by the AO u/s.40(a)(i) and confirmed by Ld. CIT (A) and allow ground no.1 of the assessee's appeal." The ld. DR even though vehemently contended but did not deny that the Finance Act, 2010 got the assent of the President on 8.5.2010 much later than the date when the Assessee had made the payment to these parties. Even the ld. DR could not site any contrary decision. Therefore, we hold that the aforementioned amendment does not create any liability against the Assessee as the legal position prevailing at the relevant time has to be considered when the payment was made by the Assessee to the non-resident party. Accordingly, we hold that the Assessee was not liable for deduction of tax u/s 195 of the Income Tax Act. Since the Assessee was not liable at that time to deduct the tax, the disallowance u/s 40(a)(i) cannot be made. We accordingly confirm the order of CIT(A) deleting the addition though on a different ground pleaded by the ld. AR. Thus, this ground stands dismissed.”

41 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. view. Therefore, we hold that the aforementioned amendment does not create any liability against the assessee as the legal position prevailing at the relevant time, i.e., during FY 2009-10 has to be considered when the payment was made by the assessee to the non-resident party. Accordingly, we hold that the assessee was not liable for deduction of tax u/s 195 of the Act and since the assessee was not liable at that time to deduct the tax, the disallowance u/s 40(a)(ia) of the Act cannot be made. We accordingly dismiss gound No. 4(a) of the assessee. However, the alternative ground of the assessee, i.e., the ground No.4(b) is allowed following the orders of the coordinate Bench of ITAT, Panaji in the case of Ajeet Ramakant Phatarpekar (supra).

Ground No.5

42 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. made by the assessee to have cordial relation and betterment of the villagers living around the mining activities area of the assessee. The ld. Counsel further submitted that the ld.CIT(A) has also erred in confirming the disallowance made by the AO of a sum of Rs.81,16,257/- incurred on repair and renovation of two temples do not come under the purview of current repairs. The ld. Counsel further submitted that this expenditure has also been incurred to maintain and establish cordial relation and betterment of the villages residing around the vicinity of the mines and working area of the assessee and the assessee having incurred this expenditure out of business expediency as without incurring such expenditure it is not possible to conduct smooth functioning of mining, therefore, both the expenditure may kindly be allowed as revenue expenditure incurred out of business expediency without acquiring any capital asset. The ld. Counsel has placed vehement reliance on the order of the ITAT Panaji Bench in the case of M/s Prime Mineral Exports Pvt. Ltd., dated 28.08.2013, in ITA No.28 & 52/PNJ/2013 for AY 2008-09 and judgement of the Hon’ble Supreme Court in the case of L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT, reported as 125 ITR 293 (SC).

43 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. assessee has made any bogus or false claim or the assessee has acquired any capital asset by incurring the impugned expenses towards construction of school building and renovation of two temples in the vicinity of the assessee’s mining and business activity area. So far as the conclusion of the authorities below regarding contribution towards school building is concerned, when the assessee has not acquired any capital asset and the expenditure has been made to create and build a cordial relation between the villagers residing around the mining area and business activity area of the assessee, then, in view of the order of the ITAT, Panaji Bench in the case of M/s Prime Mineral Exports Pvt. Ld. (supra), such expenditure has to be allowed as revenue expenditure.

44 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. the mining and business area of the assessee, it is required by the assessee to have healthy relations with such villagers, so that a smooth business and mining activity can be undertaken. Therefore, this expenditure has to be held as incurred out of business expediency and, thus, the same is allowable as revenue expenditure. Accordingly, ground No.5 of the assessee is allowed and the AO is directed to allow the claim of the assessee towards contribution towards construction of school and expenditure incurred on repair and renovation of two temples situated in mining areas of the assessee.

ITA No.116/PAN/2018 (AY: 2010-11)

45 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 36. The ld. CIT-DR submitted that the Ld. CIT(A) erred in allowing fluctuation loss on sale proceeds of EEFC account, while such a notional loss being contingent in nature cannot be allowed to be set off against the taxable income. The ld. CIT-DR further contended that the Ld. CIT(A) has also erred in allowing the said loss claimed which were already received by the assessee and the assessee was not under obligation to keep sale proceeds under EEFC account and once income is received, it is capital and any loss on account of the same cannot be claimed to be revenue expenditure. The ld.CIT-DR also drew our attention towards relevant para 7 of the assessment order and submitted that the CBDT Circular No.3/2010 dated 23.03.2010 clearly states that the notional loss/contingent loss which are worked out basing on the market closing date are not allowable losses. Therefore, the notional loss worked out by the assessee on account of foreign exchange fluctuations was to be disallowed and added to the total income of the assessee. The ld.CIT-DR submitted that the ld.CIT(A) in para 7 of the first appellate order has erred in allowing ground No.5 of the assessee by wrongly observing that the Instruction No.3 of 2010 issued by the CBDT (supra) would have no application to the facts of the case. The ld.CIT-DR submitted that keeping in view the incorrect findings arrived at by the ld.CIT(A), the

46 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. impugned first appellate order may kindly be set aside by restoring that of the AO on this issue.

47 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. Court in the case of CIT vs. Woodward Governor India (P) Ltd., 312 ITR 254 (SC), held thus:-

“4.On further appeal, the impugned order of the Tribunal has allowed the respondent assessee's appeal holding that the claim of expenditure of Rs.62.62 lakhs is permissible under Section 37 of the Act. The impugned order of the Tribunal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. 312 ITR 254 to hold that where the loss suffered by an assessee due to fluctuation of foreign exchange as on the date of balancesheet in respect of purchase and sales of goods (payment have to be made / received) is allowable as expenditure under Section 37(1) of the Act. 5.The grievance of the Revenue before us is that Instruction no. 3 of 2010 dated 31st March, 2010 issued by the CBDT in respect of loss on account of foreign exchange derivatives is subsequent to the Apex Court's decision in Woodward Governor India (P) Ltd. (supra) and was not considered by the Tribunal. This instruction according to the Revenue would govern the issue. 6.In the present facts, we find that the loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to the purchase and sales transactions i.e. creditors and debtors outstanding as on 31st March, 2010. Therefore, the Instruction no.3 of 2010 issued by CBDT would have no application to the facts of the present case. In fact, the issue arising herein would be covered by the principles laid down sby the Apex Court in Woodward Governor India (P) Ltd. (supra). 7.Accordingly, as the impugned order of Tribunal followed by the decision of the Apex Court in Woodward Governor India (P) Ltd. (supra) which governs the issue, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.”

48 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 39. In the present case, the ld.CIT(A) has granted relief to the assessee with the following observations and findings:- “7. Ground no.5 is regarding disallowance of exchange loss amounting to Rs.8,65,74,413/- pertaining to conversion of US dollar currency in EEFC account to Indian rupees at the close of the year. According to the AO, the appellant claimed an unrealised loss due to change in the dollar rate in respect of the amounts of sale proceeds held in EEFC account with SBI, Vasco and Syndicate Bank, Margao amounting to Rs. 1,78,79,317/- and Rs.6,86,95,096/- respectively. Before the AO, the appellant submitted that the loss on account of foreign exchange fluctuation as on 31.03.2010 should be considered as per accounting standards and it should be an allowable deduction. However, the AO held that once the sale proceeds were received by the appellant, it is accounted as income of the appellant in the books of accounts. The said amount is neither payable or receivable to any third party. Therefore, if the appellant incurs any loss on the said amount, the said loss is notional and cannot be allowed as deduction. The AO further held that the appellant was not under obligation to keep sale proceeds under EEFC account and once the income is received, any further loss due to foreign exchange fluctuation is not a revenue expenditure. Reliance was placed on the decision of Delhi High Court in the case of CIT Vs Philips Petroleum International Corporation reported in 272 ITR 355. The AO also relied CBDT Instruction NO.3 of 2010 dated 23.03.2010. 7.1. During appellate proceedings, the AR of the appellant made following written submissions: "The appellant company maintained EEFC Accounts each one of which is maintained with State Bank of India, Vasco and Syndicate Bank, Margao. These accounts are maintained in US Dollar. The company is allowed to make direct remittances from those accounts for the purpose of business. Likewise the proceeds received in foreign currencies out of our export activities are allowed to be credited to this account. As per the Accounting Standard - 11(AS-11), which

49 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. has to be mandatorily followed by the appellant company, requires to reinstate the closing balance available in the said accounts into Indian Rupees by applying the exchange rate of 31st March of the relevant financial year. As per the said standard the gain or loss as the case may be on account of this reinstatement has to be either credited to Profit and Loss Account (if gain) or has to be charged off to Profit and Loss Account (if loss). Accordingly the company had charged off sum of Rs. 8,65,74,413/- (17,879,317 + 68,695,096) as exchange loss for the year ended 31.03.2010 relevant to assessment year 2010-11. Hence the same is to be allowed in full. There is no occasion of any notional loss on account of this transaction as alleged. The AO however got confused with the accounting of derivatives and of financial instruments held by the company. The relying of the AO on the CBDT instruction is wholly misplaced. The CBDT instruction will come into operation only when the appellant company enters into foreign exchange derivative transactions. The appellant company never entered into any such transactions and as such incurring loss on “marked to market” basis did not arise at all. The appellant company has never traded in derivatives or in the financial instruments as alleged which is very much evident from the audited financial statements and as also from the books of account maintained and produced before the AO. For the aforesaid reasons it is prayed that the AO may be directed to allow the entire expenditure amounting to Rs. 8,65,74,413/- suffered on account of exchange difference." 7.2. I have gone through the assessment order and the submissions made by the AR of the appellant. The system of accounting followed by the appellant is that the sale proceeds received in foreign exchange are credited to EEFC/ECFC account which is in foreign exchange. The required amount is converted into Indian rupees and transferred to the regular bank account and balance amount remains in dollar currency. This EEFC/ECFC account is valued in Indian rupees on last day of the Financial year i.e. on 31st March and gain or loss is accordingly accounted. This accounting treatment is given as per the accounting standard 11. Needless to say, impugned

50 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. currency fluctuation loss has emanated from foreign currency EEFC account in which the sale proceeds of iron ore are deposited by the appellant. Besides AS-11, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and consequently to augment the profitability or reduce revenue losses of the appellant. Thus, the business exigencies are implicit as well explicit in the action of the appellant. Thus, I am of the opinion that the plea of the appellant for claim of expenditure is attributable to revenue account has considerable merits. 7.3 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair view of the profit and loss of the company for the financial year. It also requires the company to adhere the accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that the Appellant is obliged to follow the accounting standards prescribed to determine business income under the head "business or profession". I find that the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. (312 ITR 254) has observed that AS-11 is mandatory in nature. In the light of observations made in Woodward Governor India (P) Ltd. (supra), I am of the view that loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit & Loss account in accordance with accounting fiat of AS-11. 7.4. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. (116 ITR 1) had canvassed the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on

51 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the appellant bears no nexus or relation to the acquisition to the assets. Thus, the loss generated in impugned action bears the character of revenue expenditure. Similarly, decision of the Apex Court in the case of Tata Iron and Steel co. (231 ITR 285) also weighs in favour of the appellant. 7.5. For the aforesaid reasons, claim of exchange fluctuation loss in revenue account by the appellant in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAl cannot be faulted. The CBDT notification no.3 of 2010 applied by the AO to the case of the appellant is on foreign exchange derivative transactions and hence, is not applicable to the facts of the appellant's case. Hon'ble Bombay High Court in the case of CIT Vs Vinergy International Pvt. Ltd. (Tax Appeal No.376 of 2014 order dated 11.08.2016) has held that the Instruction No.3 of 2010 issued by CBDT would have no application to the facts of the case if the foreign exchange loss was not on account of derivatives. Therefore, I have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. Accordingly, the addition made by the AO amounting to Rs.6,94,32,433/- is hereby deleted.”

52 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. generally accepted accounting practices and mandatory accounting standards notified by the ICAI cannot be alleged or held as faulty or baseless. The ld.CIT(A) has also considered the judgement of the Hon’ble Supreme Court in the case of Woodward Governor (India) Pvt. Ltd. (supra) wherein it was observed that the AS-11 is mandatory in nature and the loss arising out of foreign exchange fluctuation has to be accounted for as revenue expenses in the Profit & Loss Account in accordance with AS-11.

53 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa.

54 ITA.No.105 & 116/PAN./2018 Sociedade De Fomento Industrial Pvt. Ltd., Margao, Goa. 43. In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.

Order pronounced u/s Rule 34(4) of the IT(AT) Rules, 1963 on 12.09.2022. Sd/- Sd/- (GIRISH AGRAWAL) (CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

Delhi, Dated 12th September, 2022 dk Copy to 1. The appellant 2. The respondent 3. CIT(A) concerned 4. CIT concerned 5. D.R. ITAT Panaji Bench, Panaji Goa 6. Guard File. // BY Order //

Assistant Registrar : ITAT Panaji Bench : Panaji.