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DCM Shriram Consolidated Ltd., 5th Floor, Kanchanjunga Bldg., 18, Barakhamba Road, New Delhi. C.R. Bldg., Vs. ACIT, Circle 10(1), New Dlehi.
May, 22nd 2015
                                                                            1




              IN THE INCOME TAX APPELLATE TRIBUNAL
                  DELHI BENCH `B': NEW DELHI

     BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
                          AND
            SHRI C.M. GARG, JUDICIAL MEMBER

                       ITA No. 1447/Del/2012
                     Assessment Years: 2008-09

DCM Shriram Consolidated Ltd.,              vs.          ACIT,
5th Floor, Kanchanjunga Bldg.,                           Circle 10(1),
18, Barakhamba Road, New Delhi.                          C.R. Bldg., New Dlehi.
AAACD0097R

(Appellant)                                              (Respondent)

                                      &

                       ITA No. 1836/Del/2012
                     Assessment Years: 2008-09

DCIT,                          vs.          DCM Shriram Consolidated Ltd.,
Circle 10(1),                               5th Floor, Kanchanjunga Bldg.,
C.R. Bldg., New Delhi.                      18, Barakhamba Road, New Delhi.

(Appellant)                                              (Respondent)


  Appellant by : Sh. Pradeep Denodia, CA & Sh. V.P. Gupta, Adv.
Respondent by : Smt. Parwinder Kaur, Sr. DR
                          Date of Hearing: 23.03.2015
                         Date of Pronouncement: 20.05.2015
                                                                         2


                                ORDER

PER SHRI C.M. GARG, J.M.

     The captioned appeals have been filed against the order of the

Commissioner of Income Tax (Appeals)-IV, New Delhi dated 11/01/2012

in appeal no. 73/11-12 for A.Y. 2008-09.


2.   In ITA No. 1836/D/2012 the sole ground raised by the Revenue in

this appeal reads as under:

     1. "Whether the ld. CIT(A) on the facts and circumstances of the
     case is correct in deleting the disallowance of Rs. 9,52,14,000/-
     made on account of diminution in value of fertilizer bonds by the
     AO."
3.   Briefly stated the facts giving rise to this appeal are that the AO

noted that the claim of the loss of Rs. 9.52 crores on account of

diminution in value of bonds neither suffered by the assessee company

during the year nor there was provision of any ascertain liability accrue

during the year under consideration. By observing above facts, the ld.

AO further holding that the claim of deduction of said loss of Rs. 9.52

crores was probably made with the intention to suppress the taxable

income for the year under consideration and the AO made impugned

disallowance in this regard. The assessee preferred an appeal before

the CIT(A) which was allowed on this point and the impugned addition

made by the AO on account of loss on diminution of the fertilizers bonds
                                                                          3


was deleted. Now the aggrieved Revenue is before this Tribunal in this

second appeal with the sole ground as reproduced hereinabove.


4.   The ld. Departmental Representative (DR) submitted that the AO

rightly observed that the amount of loss of Rs. 9.52 crores on valuation

of bonds at the end of the year was being claimed in computation of

taxable income as business loss for the reason that these bonds were in

the nature of business assets notwithstanding the fact that in the

accounts of assessee the said bonds have been categorized under the

head of "current investment assets". The ld. DR vehemently contended

that the AO was right in making disallowance because the claimed loss

neither suffered by the assessee company during the year under

consideration nor any provision of any ascertain liability accrued to the

assessee during the year under consideration, hence, the CIT(A) was

not justified in deleting the disallowance. The ld. DR finally prayed that

the impugned order on this issue may be set aside by restoring that of

the AO.


5.   Replying to the above, the ld. AR submitted that the company had

received fertilizer's bonds in lieu of payment of fertilizer subsidy by the

Government of India. The ld. AR further explained that the company

had no intention to hold bonds as such and the same had been received

by the company under compulsion for the reason that the Government of
                                                                         4


India was short of funds and was not making payments of the

outstanding fertilizer subsidy amount. The ld. AR strenuously contended

that the assessee was compelled to accept fertilizer's bonds in lieu of

cash fertilizer subsidy and the assessee company had immediately sold

a part of bonds during the year under consideration and had valued the

remaining bonds at their realisable value as on 31/03/2008 and had

accounted the loss of Rs. 9.52 crores in the books of accounts submitted

before the AO.


6.   The ld. AR further submitted that the said amount of claim

represents the accrued loss to the assessee during the year because at

the end of the year the market value of the fertilizers bond was less than

the value of which the assessee company was compelled and forced to

receive the same. The ld. AR placing reliance on the various decisions

of the Hon'ble Supreme Court, Hon'ble High Court and ITAT Mumbai

submitted that the assessee company was compelled to receive

fertilizers bond in lieu of cash fertilizers subsidy and, therefore, these

bonds were shown by the assessee as "current assets" and there was

no intention of the assessee company to make investments in the said

bonds and the same were received by the assessee from Government

of India under commercial expediency and loss of diminution of the
                                                                            5


same was rightly claimed by the assessee while computing taxable

income for the period under consideration.


7.    Supporting the impugned order the ld. AR drawn our attention

towards paragraph no. 5 to 5.3 of the impugned order and submitted that

as per decision of Hon'ble Supreme Court in the case of Patnaik

Company Limited vs. CIT, 161 ITR 365 (SC) and decision of Hon'ble

Jurisdictional High Court of Delhi in the case of CIT vs. D.S. Bisht &

Sons, 243 ITR 179 (Del.) the claim of the assessee is allowable. The ld.

AR submitted that while investment was made by the assessee under

commercial expediency then the same did not bring an asset of a capital

nature and the loss was, therefore, allowable as business loss. The ld.

AR further pointed out that the assessee had no intention to hold these

bonds till the date of their maturity and it was in need of funds to carry on

its business and, therefore, bonds have been actually sold partly during

the current year and the balance was sold in the subsequent year. The

ld. AR further pointed out that the difference in the amount of loss/profit

on actual sale of bonds has been duly accounted for in the books of

account of the relevant assessment year and revenue authority has not

disputed the said claim.





8.    It is pertinent to note that the ld. DR has also placed reliance on

the decision of Hon'ble Punjab & Haryana High Court in the case of CIT
                                                                            6


vs. Steriplate Pvt. Ltd. (2011) 338 ITR 547 (P&H) and decision of

Hon'ble Orissa High Court in the case of Tripati Drinks P. Ltd. Vs. CIT,

112 ITR 721 (Orissa) and submitted that provision for diminution in the

value of investment of assets will not reduce books profit and the claim

of loss must be real loss and not the notional loss.         Therefore, the

assessee is not entitled to deduct the same from taxable income.


9.    On careful consideration of above submissions, at the very outset,

we note that undisputedly the assessee company was forced and

compelled by the Government of India to receive fertilizer's bonds in lieu

of fertilizer subsidy by the Government of India. It is also pertinent to

note that the assessee was entitled to receive fertilizer subsidy in cash

but due to shortage of funds with the Government of India an alternative

way was created and the assessee company was compelled to receive

fertilizer's bonds in lieu of cash fertilizers subsidy. In this situation, we

hold that the assessee company rightly showed these bonds as "other

current assets" (prayed) under the head "current assets, loans and

advances". In the case of Patnaik & Company (supra) the Apex Court

explicitly held that where the investments were made under commercial

expediency for the purpose of carrying on the assessee's business,

then, the losses suffered by the assessee on the sale of such

investments must be regarded as Revenue loss because the investment
                                                                            7


did not bringing an asset of capital nature and in these circumstances of

the case, the losses suffered by the assessee should be treated as

Revenue loss and not a capital loss.          We, further respectfully take

cognizance of the judgment of the Hon'ble High Court of Delhi in the

case of CIT vs. D.S. Bisht and Sons (supra), wherein it was held that

when the assessee had no option but to subscribe the securities if it

wanted to continue to do business with the Government Departments,

then the investments were thus, necessarily by way of commercial

expediency for the purpose of carrying on the business.


10.   From the impugned order, we note that the CIT(A) granted relief

for the assessee by observing as under:

        "5.2.2 As regards the fact that said bonds were shown in the
        Balance Sheet as on 31.03.2008 under the head "current
        investments", it is submitted by the ld. AR vide written
        submission that the above was an inadvertent mistake and the
        same has been corrected in the Balance Sheet for the year
        ending 31.03.2009, wherein the above fertilizer bonds have
        been shown as "other current assets (trade)" under the head
        "Current assets, loans and advances". It is argued by the ld.
        AR that the facts relating to the above bonds were clearly
        mentioned in Note No. 2 of the Statement of computation of
        taxable income reproduced in para 5 above. It is submitted
        that the loss on valuation of bonds is clearly allowable as
        business loss as the bonds were in the nature of business assets
        notwithstanding the inadvertent grouping of the same under
        the head "current investment" in the Balance Sheet as on
        31.03.2008. It is further submitted that the appellant has been
        crediting the amount of fertilizer subsidy in its profit and loss
        account as part of sale of products as per the consistent
        method of accounting being followed by the assessee from year
        to year. It was submitted that Note No. 1(v)(b) of Schedule 13
                                                                     8


of the Printed Accounts on page 66 provides for accounting
policy for revenue recognition, wherein it has been stated that
fertilizer subsidy is accounted for by the company as income
on accrual basis. Reference was also made to the letter dated
16.12.2010 submitted to the AO, a copy which has been given
in the paper book on page 16, wherein it has been stated that
the fertilizer subsidy has always been accounted for as part of
sale consideration of fertilizer. Attention was also invited to
letter dated 6.12.2010 filed before the AO, a copy which is
given in the paper book on page 14-15, wherein also it had
been stated that amount of fertilizer subsidy had been
accounted for as income in the books of account. The ld. AR
has also relied upon the following decisions in support of its
contention that wherever Govt. Bonds have been allotted or
purchased in the interest of business, the loss suffered on sale
thereof has to be considered as `business loss'.
    · Patnaik & Co. Ltd. vs. Commissioner of Income Tax-161
        ITR 365 (SC);
    · Commissioner of Income-tax vs. D.S. Bist & Sons ­ 243
        ITR 179 (Del);
    · Additional Commissioner of Income-tax vs. Upper Doab
        Sugar Mills Ltd. ­ 188 ITR 190 (All);
    · Commissioner of Income-tax vs. S.B. Sugar Mills ­ 187
        ITR 441 (All).
It has been contended by the ld. AR that the above decisions
directly support the case of the appellant. The issue is well
settled by the Supreme Court that if the assessee has purchased
or subscribed Govt. Securities in the interest of its business,
loss suffered thereon will be allowable as business loss. It was
stated that in the case of the appellant, it had been allotted
fertilizer bonds under compulsion and it had no option.
Further, it had no intention to hold the bonds till their maturity
as it was in need of funds to carry on its business and,
therefore, bonds have been actually sold partly in current year
and balance in the subsequent years. It was also submitted
that difference in the amount of loss/profit on actual sale of
bonds has been duly accounted for in the books of account of
the relevant assessment year.
5.3 Under the facts and circumstances as mentioned above
and following the plethora of judicial decisions on the issue
(supra). I find that the impugned disallowance of Rs.
9,52,14,000/- on account of diminution in the value of the
                                                                          9


        aforesaid fertilizer bonds held as business asset cannot be
        sustained on facts or in law. The same is, therefore, deleted."
11.   On careful consideration of above rival submissions of both the

sides and careful perusal of the relevant material placed before us, we

note that the Department has not agitated the issue of loss on sale of

investments/fertilizer's bonds suffered by the assessee during the year

under consideration, but the main controversy revolves on the issue of

loss recorded by the assessee on diminution of the fertilizer's bonds in

the hand at the end of the year which was shown as other current assets

(trade) under the head "current assets, loans and advances". The ld. AR

has also drawn our attention towards order of ITAT Mumbai, `D' Bench

in the case of Reliance Industries Ltd. Vs. CIT (2014)-TIOL-160-ITAT-

MUM and submitted that it is a well accepted principle that the assessee

is entitled to adjust the actual cost of imported assets as acquired in

foreign currency on account of fluctuation in the rate of exchange at

each of the relevant balance sheet dates then in the same manner loss

on fertilizer's bonds given to the assessee by the Government of India

under compulsion which were received by the assessee unwillingly

under commercial expediency then the loss arising on account of

fluctuation in the market rate of bonds at the end of year can be

considered as ascertain losses and allowable as                 a business

expenditure. In this order ITAT Mumbai held as under:
                                                                       10


"8. We have carefully considered the order of ld. Commissioner of
Income Tax and the submissions of ld. Representatives of the
parties. We have also carefully considered the cases cited before
us (supra). It is relevant to state that in the case of Woodward
Governor India (P.) Ltd. (supra), the Hon'ble Apex Court observed
and held that the assessee debited to its profit and loss account
certain unrealized loss due to foreign exchange fluctuation in
foreign currency transactions towards revenue items as on the last
day of the accounting year. The A.O. held that the liability as on
the last date of the previous year was not an ascertained but a
contingent liability. Resultantly, the same was added back to the
total income. The CIT(A) echoed the assessment order. However,
the Tribunal held that the claim of the assessee for deduction of
unrealized loss due to foreign exchange fluctuation as on the last
date of the previous year was deductible. The said order of the
Tribunal was upheld by the Hon'ble High Court. On further appeal
by the department, the Hon'ble Supreme Court held that the loss
suffered by the assessee is on revenue account towards foreign
exchange difference as on the date of balance sheet and is an item
of expenditure deductible u/s 37(1). It further observed than an
enterprise has to report outstanding liability relating to import of
raw material using closing rate of foreign exchange and any
difference, loss or gain, arising on conversion of said liability at
closing rate should be recognized in profit and loss account for
reporting period. From the judgment of the Hon'ble Supreme
Court it can be clearly deduced that unrealized loss due to foreign
exchange fluctuation in foreign I.T.A. No.7223/Mum/2011
currency transactions on revenue item as on the last date of the
accounting year is deductible.

9. ITAT, in the case of Kotak Mahindra Investment Ltd. (supra)
also considered a similar issue. In the said case the assessee-
company was engaged in the business of granting of loans and
advances against shares and securities also traded in derivative
segment by entering into future and option contract. Some of the
future contracts could not be squared up at the end of the financial
year. The assessee booked the expected loss in such contracts on
MTM basis. The assessee thus claimed a loss as calculated on
MTM basis claiming that he was following this practice
consistently. That it was also as per recognized Accounting
Standard. AO rejected the claim on the ground that the derivative
contracts were not stock in trade as there was no cost of
acquisition. He finally held that the loss on account of "MTM"
                                                                       11


basis was thus a notional loss and was contingent in nature and
could not be allowed to be set off against taxable income. On
appeal, the ld. CIT(A) allowed the same by agreeing with the
contention of the assessee that such loss on such valuation which is
called "MTM" has to be allowed even though it may appear to be a
notional loss. The Tribunal while confirming order of ld. CIT(A)
and allowing the said loss placed reliance on the decision of
Hon'ble Apex Court in the case of Woodward Governor India (P.)
Ltd. (supra) and also the decision of Tribunal in the case of
Edelweiss Capital Ltd V/s ITO in ITA No.5324/Mum/2007 (AY-
2004-05) dated 10.11.2010 and the decision in the case of Ramesh
Kumar Damani V/s Addl.CIT in ITA No.1443/Mum/2009 (AY-
2006-07)dated 26.11.2010. Copies of which are placed in the
compilation of case laws at pages 76 to 84 and pages 85 to 90
respectively.

10. We also observe that similar issue was considered by Hon'ble
Apex Court in the case of ONGC Ltd (supra). The assessee a
public sector undertaking was engaged in the capital intensive
exploration and production of petroleum products for which it had
to heavily depend on foreign loans to cover its expenses, both
capital and revenue and for payment to non-resident contractors in
foreign currency for various services rendered. The assessee made
three types of foreign exchange borrowings i.e.(i) on revenue
account; (ii) on capital account, and (iii) for general purposes.
Some of the loans became repayable in the relevant accounting
year and the date of payment of some loans fell after the end of the
relevant accounting year. The assessee revalued its foreign
exchange loans in foreign exchange on revenue account, on capital
account and for general purposes outstanding as on 31-3-1991,
and claimed the differences I.T.A. No.7223/Mum/2011 between
their respective amounts in Indian currency as on 31-3-1990 and
31-3-1991 as revenue loss under section 37(1) in respect of loans
used in revenue account. The assessee also treated the similar
difference in foreign exchange as an increased liability u/s 43A.
The AO allowed the deduction claimed u/s 37(1), taking into
consideration the increased foreign exchange liability and repaid
in the accounting year for the purpose of depreciation. He did not
however, allow the claim for foreign exchange loss on loans both
in relation to capital as well as revenue account which were
outstanding on the last day of accounting year. On appeal, the
CIT(A) affirmed the view of AO in relation to deduction u/s 37 of
the interest on loans outstanding on the last day of the accounting
                                                                              12


      year but allowed the benefit of increased liability for computation
      u/s 43A in relation to loss outstanding on the last day of the
      accounting year. Hence, the assessee as well as department took
      the matter in appeal to the Appellate Tribunal. The Tribunal held
      that the loss claimed by the assessee on revenue account was
      allowable u/s 37(1) and also rejected the appeal of the department
      and held that the assessee was entitled to adjust actual cost on
      imported assets acquired in foreign currency on account of
      fluctuation in the rate of exchange in terms of section 43A. On
      appeal by the department, the Hon'ble High Court reversed the
      decision of the Tribunal on both the issues. On further appeal to
      the Apex Court, the decision of the High Court was reversed and it
      was held that (a) that the loss claimed by the assessee on account
      of fluctuation in the rate of foreign exchange as on the date of the
      balance-sheet was allowable as an expenditure u/s 37(1), and (b)
      that the assessee was entitled to adjust the actual cost of imported
      assets acquired in foreign currency on account of fluctuation in the
      rate of exchange at each of the relevant balance sheet dates,
      pending actual payment of the liability u/s 43A, prior to its
      amendment by Finance Act, 2002.

      11. In view of above decisions, it is clear that the loss due to
      foreign exchange fluctuation in foreign currency transactions in
      derivatives has to be considered on the last date of accounting
      year and it is deductible u/s 37(1) of the Act. Therefore, in
      allowing the said claim of the assessee by AO, the action of the AO
      is in consonance with the decisions of the Hon'ble Apex Court and
      also the view taken by the Tribunal in the cases cited hereinabove
      (supra). Hence, the view taken by AO to allow loss of Rs.43.78
      crores while making assessment u/s 143(3) on account of
      derivative contract outstanding is not an erroneous view taken by
      AO, nor the action of AO is prejudicial to the interest of revenue.
      Hence, the order of Commissioner of Income Tax u/s 263 of the
      Act to hold that the action of AO is erroneous to the extent the loss
      considered as I.T.A. No.7223/Mum/2011 allowable on account of
      derivative contracts outstanding as on the date of balance sheet i.e.
      31.3.2008 is neither justified nor in accordance with law. Hence,
      we quash the said order of ld. Commissioner of Income Tax by
      allowing the grounds of appeal taken by the assessee."

12.   In view of the above noted facts and circumstances of the present

case, we are inclined to hold that as we have already observed that the
                                                                          13


assessee company was compelled to receive fertilizer's bonds in lieu of

cash fertilizers subsidy by the Government of India. The AO has not

brought out any allegation that the assessee company bought fertilizers

bonds for the purpose of making investment and thus, the bonds were to

be given the same treatment which was to be given to cash in hand,

foreign currency or cash in bank as current trading assets.          In this

situation, we respectfully take cognizance of decision of Hon'ble Apex

Court in the case of Patnaik & Company (supra) and decision of Hon'ble

Jurisdictional High Court of Delhi in the case of CIT vs. D.S. Bisht,

(supra) wherein it was held that the loss on investments which were

made under commercial expediency did not bring an asset of a capital

nature and losses thereon, therefore, is allowable as business losses.

The dispute remains on the loss booked by the assessee on diminution

of fertilizers bonds which were remained unsold at the end of the year.

On careful consideration of the ratio laid down by Hon'ble Supreme

Court in the case of Patnaik Co. (supra) and by Hon'ble Delhi High Court

in the case of D.S. Bist (supra) we are inclined to hold that the fertilizer

bonds received by the assessee in lieu of cash subsidy also deserves to

be given the same treatment as foreign exchange because foreign

exchange is also received in lieu of cash/Indian National Rupee (INR)

and the same is also shown as current trading assets in the books of

accounts as per well accepted accounting principles.
                                                                       14


13.   As observed by ITAT Mumbai in the case of Reliance Industries

Limited (supra) the loss due to foreign exchange fluctuation in foreign

currency transaction is derivatives has to be considered on the last date

of accounting year and the same is deductible u/s 37 of the Act in the

same manner the CIT(A) was right in holding that the difference in the

amounts of loss/profit on actual sale of points has been duly accounted

for in the books of accounts of the relevant assessment year and the

loss of Rs. 9.52 crores on account of diminution in the market value of

the fertilizers bonds held at the end of the year as business assets

cannot be disallowed and such disallowance cannot be sustained on

facts or in law. We, therefore, are of the considered opinion that the

conclusion arrived by the CIT(A) is just and proper and we are unable to

see any valid reason to interfere with the same and hence, we decline to

interfere with the impugned order on this issue.       Accordingly, sole

ground of the Revenue being devoid of merits is dismissed.


14.   Assessee's appeal ITA No. 1447/D/2012:


Ground no. 3 raised by the assessee is of general in nature which needs

no adjudication. Ground no. 2 of the assessee challenging the action of

the AO to initiate proceeding u/s 271(1)(c) of the Act is premature and

we also dismissed the same without any deliberations and adjudication

on merits. The remaining sole ground of the assessee reads as under:
                                                                            15


       "1. That the CIT(A) erred in upholding disallowance made by the
      Assessing Officer in the order of assessment of Rs. 75 lacs u/s 14A
      of the Act on account of interest expenditure in the facts and
      circumstances of the case of the appellant."
15.   Briefly stated the facts giving rise to this appeal of the assessee

are that the AO made disallowance of Rs. 90 lacs held to be expenses

incurred in relation to earn the tax free income during the year under

consideration and the AO made said disallowance u/s 14A of the Act

read with Rule 8D of the I.T. Rules, 1962. The aggrieved assessee

preferred an appeal before the CIT(A) but remained empty handed as

the CIT(A) upheld the said addition. However, the CIT(A) considered

the claim of the assessee that it had already disallowed Rs. 14,94,750/-

in this regard in the return of income for which set off has not been

allowed by the AO in the assessment order and the CIT(A) directed the

AO to verify the record and allow the set off of the said amount which

was suomoto disallowed by the assessee in the return of income. Now

the aggrieved assessee is before this Tribunal with the sole ground as

reproduced hereinabove.





16.   The ld. AR contended that when the assessee itself has made

suomoto disallowance then the conclusion of the authorities below

should be demolished and dismissed. The ld. AR further contended that

for making disallowance u/s 14A of the Act read with Rule 8D of the I.T.

Rules, the Revenue authorities has to demonstrate and establish that
                                                                        16


the suomoto disallowance made by the assessee is not correct. The ld.

AR further drawn our attention towards paragraph no. 4.4 of the

assessment order and submitted that the assessee made investment in

the equity shares of subsidiary companies of Rs. 20.15 crores out of

current account of the company and there was no diversion of funds

anywhere. The ld. AR further submitted that the investment of Rs. 20

crores in Sriram Bioseeds Ventures Ltd. was made on 28.02.2008

through HDFC Bank and copy of current account was also placed along

with written synopsis/submissions of the assessee. The ld. AR further

added that during the first appellate proceedings the CIT(A) examined

details of investments including disallowance on account of interest after

examining the factual position and after being satisfied that the

investments has been made out of own funds of the assessee company.

The ld. AR also placed a copy of the appellate order of the CIT(A) for

A.Y. 2010-11 and drawn our attention towards paragraph no. 3.1 at page

7, 8 & 9 of the impugned order and submitted that the CIT(A) in the

subsequent assessment year 2010-11 has not make any disallowance in

regard to interest expenditure and has made disallowance u/s 14A read

with Rule 8D(iii) of the I.T. Rules after giving credit of suomoto

disallowance of the assessee.      The ld. DR fairly accepted that the

assessee was granted relief by the CIT(A) in A.Y. 2010-11 in the said
                                                                           17


manner and there was no disallowance on account of interest

expenditure in F.Y. 2009-10 relevant to A.Y. 2010-11.


17.   In view of above noted facts and circumstances, we note that the

assessee company was granted relief by the CIT(A) for A.Y. 2010-11

with following conclusions:

         "3.1 I have carefully considered the facts of the case and the
        submissions of the appellant in this regard. In regard to the
        disallowance under section 14A read with Rule 8D of the
        Income Tax Rules for interest expenditure, the appellant
        company gave date-wise details of investments held by the
        company as on 31.03.2010 and also explained the position
        regarding disallowance on account of interest with reference to
        particular investments in earlier years. The company as on
        31.03.2010 had total investments of Rs. 58.85 crores and
        investments aggregating to Rs. 14.98 crore are the investments,
        income from which is taxable. The company filed the details of
        the amount of investment which has to be considered for the
        purpose of disallowance u/s 14A of the Act under cover of its
        letter dated 11.02.2012, a copy of which is in paper book on
        pages 14 to 17 and the statement is on page 17 of the Paper
        Book. The Assessing Officer inspite of details submitted by the
        company has adopted average investments at Rs. 57.24 crores,
        which is the amount of average investments including the
        amount of investments, income from which is taxable. No
        disallowance had been made in the earlier years upto A.Y.
        2007-08 on account of interest relating to the investments under
        reference. In some of the years, disallowance on account of
        administrative expenses had been made equal to 10% of the
        dividend income. Year-wise position in this regard has been
        given in the statement on page 16 of the Paper Book, which had
        been submitted before the Assessing Officer under the cover of
        letter dated 11.02.2013. Accordingly, it is stated by the
        appellant that no disallowance on account of interest had been
        made in any of the assessment year's upto A.Y. 2007-08. The
        AO had made ad-hoc disallowance on proportionate basis as
        per Clause (ii) of Rule 8D(2) of the Income Tax Rules. The
        CIT(A), in appeals of the company for those years had upheld
                                                                            18


        the disallowance made by the AO on proportionate basis
        notwithstanding that the company had claimed in those years
        that no disallowance on account of interest is called for as the
        company was having sufficient funds in the form of share
        capital reserves and profits for the respective years which were
        much more than the amount of investments made in those years.
            The company has enclosed copies of relevant documents
        and statements as Annexures A1to A6 and it is observed from
        these statements that all the investments have been made by the
        company out of its own funds. During the year ended
        31.03.2010 relevant to assessment year under appeal, the
        company had made three investments aggregating to Rs. 4.16
        crores, details of which have been given in Annexure A. The
        bank statements have been filed in respect of these investments
        to substantiate the contention that all these investments have
        been made by the company out of its own funds as pinpointed in
        Annexure A7 to A9. It emerges from the details that during the
        current year, the appellant had made the investment of Rs. 4.16
        crore out of its own funds as demonstrated with the bank
        statements and other documentary evidence. No specific
        disallowance of interest has been made by the AO in the earlier
        years regarding the tax free investments which are forming part
        of the total investments of Rs. 58.85 crore. In view of this, the
        disallowance of interest of Rs.1,33,27,000 under Rule 8D(ii)
        r.w.s. 14A of the Act is not warranted."
18.   In view of above, at the outset, we observe that we are unable to

see any order of the appellate or higher firm to show that the relief

granted by the CIT(A) on this issue in A.Y. 2010-11 vide his order dated

10.06.2014 has been altered, modified or set aside. Hence, we can

safely presume that the Department has accepted this contention of the

assessee that the assessee has not diverted his interest bearing funds

for the purpose of investments or any other manner for making

investment which accrue tax free income for the assessee. In the same

manner, we are further inclined to hold that the Revenue authority has
                                                                         19


not brought out any fact to establish this fact that the assessee diverted

his interest bearing funds for making investments for earning tax free

income. In this situation, we are fully agree with the approach of the

CIT(A) for A.Y. 2010-11, wherein the CIT(A) has made disallowance

only u/s 14A read with Rule 8D(iii) of the I.T. Rules, 1962 by making total

disallowance of .5% of aggregate of opening and closing value of

investments and the CIT(A) was also right in directing the AO to deduct

the amount of suomoto disallowance already made by the assessee.

Hence, the sole ground of the assessee is allowed with a direction to the

AO that the disallowance u/s 14A read with Rule 8D(iii) of the I.T. Rules

should also be made for the year under consideration in this appeal i.e.

for A.Y. 2008-09 and the AO is also directed to give set off of amount of

suomoto disallowance already made by the assessee in the computation

of returned income. With these directions sole grounds of the assessee

are allowed in the manner as indicated above.


19.   In the result, the appeal of the Revenue is dismissed and appeal of

the assessee is allowed as indicated above.


      This decision was pronounced in the open court on 20/05/2015

     Sd/-                                                Sd/-
  (S.V. MEHROTRA)                                   (C.M. GARG)
ACCOUNTANT MEMBER                                JUDICIAL MEMBER

Dated:
*Kavita, P.S.
                                               20




Copy to:

1.   Appellant
2.   Respondent
3.   CIT
4.   CIT(A)
5.   DR, ITAT, New Delhi.
                       TRUE COPY

                                               By Order

                                   ASSISTANT REGISTRAR
                                                                21




Sl.                    Description                   Date
No.

1.    Date of dictation by the Author              15.05.2015

2.    Draft placed before the Dictating Member     19.05.2015

3.    Draft placed before the Second Member

4.    Draft approved by the Second Member

5.    Date of approved order comes to the Sr. PS

6.    Date of pronouncement of order

7.    Date of file sent to the Bench Clerk

8.    Date on which file goes to the Head Clerk

9.    Date of dispatch of order

 
 
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