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DCIT, Circle 11 (1),New Delhi. Vs. M/s. Indian Sugar Exim Corporation Ltd., C Block, 2nd Floor, Ansal Plaza, August Kranti Marg, New Delhi 110 049.
September, 19th 2014
          IN THE INCOME TAX APPELLATE TRIBUNAL
               (DELHI BENCH `C' : NEW DELHI)

         BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
                             and
          SHRI B.C. MEENA, ACCOUNTANT MEMBER

                           ITA No.2103/Del./2012
                       (ASSESSMENT YEAR : 2008-09)

DCIT, Circle 11 (1),              vs.   M/s. Indian Sugar Exim Corporation Ltd.,
New Delhi.                              C ­ Block, 2nd Floor, Ansal Plaza,
                                        August Kranti Marg,
                                        New Delhi ­ 110 049.

                                              (PAN : AAACI1163M)

                           ITA No.1671/Del./2012
                       (ASSESSMENT YEAR : 2008-09)

M/s. Indian Sugar Exim Corporation Ltd.,      vs.    DCIT, Circle 11 (1),
C ­ Block, 2nd Floor, Ansal Plaza,                   New Delhi.
August Kranti Marg,
New Delhi ­ 110 049.

      (PAN : AAACI1163M)

      (APPELLANT)                                    (RESPONDENT)

                       ASSESSEE BY : Shri Ashwani Taneja, Advocate and
                                     Shri Sumit Jain, CA
                       REVENUE BY : Shri Sunil Bajpai, CIT DR

                                        ORDER

PER B.C. MEENA, ACCOUNTANT MEMBER :

      Both these cross appeals filed by the revenue and assessee emanate

from the order of the CIT (Appeals)-XV, New Delhi dated 17.02.2012 for

the Assessment Year 2008-09.
                                     2               ITA No.2103/Del./2012
                                                     ITA No.1671/Del./2012

2.    The assessee is a company incorporated under the Companies Act,

1956, engaged in the business of export/import of sugar. The return of

income was filed on 29.09.2008 declaring income at Rs.3,58,38,518/-.

3.    The grounds of appeal of revenue read as under :-

      "1. On the facts and circumstances of the case and in law,
      the Ld. CIT (A) has erred in deleting the addition of
      Rs.98,33,833/- made on account of loss on sale of
      investment.

      2.    On the facts and circumstances of the case and in law,
      the Ld. CIT (A) has erred in restricting the addition of
      Rs.5,11,00,925/- to the extent of Rs.1,89,70,367/- made u/s
      14A read with Rule 8D of the Income Tax Rules, 1962.

      3.     On the facts and circumstances of the case and in law,
      the Ld. CIT (A) has erred in deleting the addition of
      Rs.10,79,68,722/- made on account of valuation of closing
      stock.

      4.   The appellant craves leave to add, alter or amend any
      ground of appeal raised above at the time of hearing."


The grounds of appeal of assessee read as under :-

      "l(a) That the learned CIT(A) erred, both on facts and in
      law in sustaining a disallowance of Rs.1,89,70,367/-
      (Rs.64,60,071/- towards interest and Rs.1,25,10,296/-
      towards administrative expenditure) u/s 14A of the Income
      Tax Act read with Rule 8D of the Income Tax Rules.

      1(b) The Id CIT(A) failed to appreciate that the assessee
      had made investments during the year from the redemption
      proceeds of earlier investments / Realisation from Debtors
      and interest free funds available with the assessee and as
      such disallowance u/s 14A with respect to interest of
      Rs.64,60,071/- deserves to be deleted .
                                     3              ITA No.2103/Del./2012
                                                    ITA No.1671/Del./2012

      1(c) That the ld CIT(A) in the facts and circumstances of
      the case has erred in sustaining disallowance of
      Rs.1,25,10,296/- u/s 14A towards administrative
      expenditure @ 0.5% of the Average Value of Investments
      in a mechanical manner.

      l(d) That the ld CIT(A) has erred in failing to appreciate
      that the computation of the average value of investments,
      income from which does not form part of total income, is
      incorrect.

      2.     The learned CIT(A) has grossly erred in sustaining
      disallowance of Rs.824,125/- in relation to TDS deducted
      during the FY 2007-08 and deposited on or before due date
      of filing of return .

      3.     That the ld CIT(A) has erred in sustaining
      disallowance of Rs.1528/- towards interest on late payment
      of TDS without appreciating that it an allowable
      expenditure.

      4.    That the appellant craves leave to add, amend, alter
      any grounds of appeal of appeal."


4.    Ground Nos.1 (a) to 1 (d) of assessee's appeal and ground no.2 of

the revenue's appeal are with regard to the disallowance of

Rs.5,11,00,925/- made by the Assessing Officer by invoking the provisions

of section 14A of the Income-tax Act, 1961 read with Rule 8D of the

Income-tax Rules, 1962 which has been partly allowed by the CIT (A) and

restricted addition to Rs.1,89,70,367/- (interest Rs.64,60,071/- and

administrative expenses Rs.1,25,10,296/-).

5.    While pleading on behalf of the assessee, ld. AR submitted that the

CIT   (A)    has   sustained   the   disallowance     of   Rs.1,89,70,369/-
                                    4             ITA No.2103/Del./2012
                                                  ITA No.1671/Del./2012

(Rs.64,60,071/-   towards    interest   and    Rs.1,25,10,296/-    towards

administrative expenditure) u/s 14A read with Rule 8D. It was submitted

by the ld. AR that investments made during the year were from the

redemption proceeds of earlier investments / realization from debtors and

interest free funds available with the assessee. It was also submitted that

the sustenance of disallowance of Rs.1,25,10,296/- being administrative

expenses was a mechanical exercise.       It was also submitted that the

computation of the average value of investments, income from which does

not form part of the income, was wrongly done. While pleading on behalf

of the assessee ld. AR submitted written submissions reproduced as

under:-

      "During the year under consideration assessee company
      has     made     investments     to    the     tune   of
      Rs.2,18,16,75,912.68 and received a sum of
      Rs.2,16,09,61,251.25       from      redemption       of
      investments. Besides, assessee company has also shown
      income of Rs.2,37,40,339/- by way of interest on UTI
      Bonds (Refer PB 273,274) and Rs.55,23,351/- (Refer PB
      273, 275) as dividend income on mutual funds investment
      which was claimed as exempt u/s 10(35) of the Income Tax
      Act, 1961.
      It is respectfully submitted:

      As regards Interest income of Rs. 64,60,071/-
      · That during the year assessee company has
        made     investments    to   the     tune   of
        Rs.2,18,16,75,912.68 and received a sum of
        Rs.2,16,09,61,251.25   from    redemption   of
        investments.
                         5           ITA No.2103/Del./2012
                                     ITA No.1671/Del./2012

· That purchase of investments is from proceeds
  of redemption of existing investments and other
  cash surplus generated during the year.
· That it is also not out of place to mention here
  that the balance of General Fund as on 01-04-
  2007 was much more than the investments as on
  01-04-2007.
· That interest expenditure which was debited to
  Income and Expenditure account was with
  respect to import/ export of sugar alone and not
  for investment activity, detailed evidences of
  which were filed during the course of
  assessment proceedings and also before Ld.
  CIT(A).
· That assessee company is paying bank interest
  only in relation to packing credit/ packing
  credit in foreign currency utilised for export of
  sugar from India which is as such a short term
  borrowing for purposes of export. The same was
  submitted before Ld. CIT(A) vide assessee's
  submissions dated 18-08-2011 enclosed at PB
  904 in Para 10.9.
· That sanction letters from various banks
  confirming that the assessee is enjoying only
  packing credit limit (refer PB 276-305) was
  also filed to Ld. CIT(A) vide assessee's
  submissions dated 09-10-2010 ( refer PB 78-
  193).
· That copy of certificates from various banks
  certifying that only packing credit in foreign
  currency limit were utilised by the assessee
  company and was not enjoying any cash credit
  limit. The same was submitted before Ld. AO as
  well as before Ld. CIT(A) vide assessee's
  submissions dated 20-10-2010 enclosed at PB
  726-730.
· That, from A.Y. 2001-02 upto A.Y. 2007-08
  Hon'ble Income Tax Appellate Tribunal has
                            6            ITA No.2103/Del./2012
                                         ITA No.1671/Del./2012

   held that no interest has been incurred towards
   investment activity. Moreover, order of Hon'ble
   ITAT for A.Y. 2001-02 has also been approved
   by Hon'ble Delhi High Court.
PB 73 -77 is assessee's letter dated 04-10-2010
filed to Ld. AO enclosing details of investments as
on 31.03.2008.

PB 905 would show that out of Rs.218.16 crores,
Rs.216.16 crores were available from the past
investments made from interest free funds.

PB 276-305 are Sanction letters of Bank facilities
confirming that the assessee is not enjoying any
cash credit limit.

PB 306-725 are copies of ledger account of bank
interest and all bank advises for debiting interest
on packing credit in foreign currency filed to Ld.
AO vide assessee' s submissions dated 09-10-2010
enclosed at PB 78-193.

PB 726-730 is assessee's submission dated 20-10-
2010 filed before Ld. AO submitting that assessee
is not enjoying any overdraft/ cash credit facility
and is having credit/ packing credit in foreign
currency facility which is given to exporter for
export purposes. These funds are to be utilised for
purchases etc. for export and cannot be invested in
mutual funds and therefore, no part of interest on
bank loans is attributable to earning of interest
income. Also, enclosed are the Bank Certificates
from various banks certifying only interest on
packing credit /packing credit in foreign currency
for exports has been paid by the assessee company.

PB 898 - 907 is detailed submissions filed before Ld.
CIT(A) on the above aspect.

PB 1042-1206 is submissions dated 13-12-2011 filed
before Ld. CIT(A) together with annexures showing details
of investment made in mutual funds and tax free bonds for
                             7            ITA No.2103/Del./2012
                                          ITA No.1671/Del./2012

the year ending 31-03-2008 and copy of ICICI Bank
statement showing purchase and redemption of investments
during the year.

PB 913-918 is Investment Summary showing opening
balance, investments made during the year, investments
redeemed during the year and closing balance together with
detailed ledger account of Investments.

PB 925-926 is Detailed Statement of Investments made
during F.Y. 2007-08 together with source of investments.

PB 927 to 963 Copies of bank statement identifying entries
of purchase and redemption of Investments made during
F.Y. 2007-08.

PB 1032 to 1041 is detailed submissions dated 12-10-2011
filed to Ld. CIT(A) regarding 14A.

PB 1207 to 1208 is detailed statement of Investments made
in mutual fund and tax free bonds during F.Y. 2006-07
together with source of investments.

As regards administration and other expenses i.e. 0.5%
of average value of investments

Our first and foremost submission is that Ld.
CIT(A) has erred in calculating the disallowance
as per clause (iii) of sub-section (2) of Rule 8D of
Income Tax Rules, 1962. While calculating 0.5%
of average value of investment, Ld. CIT(A) has
wrongly taken the average value of investment at
Rs.2,50,20,59,294/- instead of Rs.41,88,44,725/-,
which is 16.94% of Rs.2,50,20,59,294, being
investment made during the year from the mixed
funds as calculated by Ld. CIT(A) in his order at
page 16 . Therefore, 0.5% of Rs.41,88,44,725/-
comes to Rs.20,94,224/- and total disallowance
comes      to      Rs.85,54,295/-      instead    of
Rs.1,89,70,367/- as made by Ld. CIT(A).
Therefore, it is prayed that Rs.1,89,70,367/- of
                                8             ITA No.2103/Del./2012
                                              ITA No.1671/Del./2012

disallowance may          please    be   substituted     with
Rs.85,54,295/-.

Without prejudice to above, it is respectfully submitted
that no addition on this ground is called for on account of
the following reasons:-

i)     Ld. CIT(A) as well as Ld. AO has not specifically
       pointed out any expenditure incurred by assessee
       company towards investments/ interests.
ii)    The assessee had huge surplus and interest free funds
       available at its disposal which were more than the
       investments made by the assessee during the
       impugned year.
iii)   It was also submitted that interest expenditure was
        incurred in relation to business and not in relation to
        investment activity.
iv)    Further, it is submitted that investments in debt based
       growth funds should be excluded while calculating
       average investments for the purposes of exempt
       income since it forms part of taxable income and no
       dividend can be earned as per the scheme of
       investments itself. The same was submitted before
       Ld. AO vide assessee's submissions dated 26-10-
       2010 together with evidences showing that
       investments were made in growth funds (Refer PB
       731-846).
v)     Moreover, flat rate of 0.5% cannot be made
       applicable on those investments on which taxes on
       long term capital gain have already been paid by the
       assessee company.
vi)    That upto A.Y. 2007-08 it has been held that no
       interest has been incurred for earning of exempt
       income by the assessee company.
vii) Hon'ble Delhi High Court in A.Y. 2001-02 has
     decided this issue in favour of the assessee stating
     that no interest was incurred towards investment
     activity.
                             9            ITA No.2103/Del./2012
                                          ITA No.1671/Del./2012

viii) No part of interest was attributable to investments
      made during the year, therefore, no disallowance can
      be made on this ground.
ix)   When no expenditure relating to exempt income
      which does not form part of total income has ever
      been made part of income and expenditure account,
      then no question of disallowance of such expenditure
      arises.


Reliance is placed on following judicial pronouncements

(a) The principle of apportionment embedded in section
    14A, has application only when it is not possible to
    determine the actual expenditure in relation to the
    exempt income. When it is possible to determine the
    actual expenditure in relation to exempt income or,
    when no expenditure has been incurred in relation to
    exempt income the principle of apportionment has no
    application.


· -Expenses towards dividend income exempt under s.
  10(33)-Expenditure which the AO seeks to disallow
  under s. 14A should be actually incurred-There being no
  material with the AO to show that any expenditure was
  incurred in earning dividend income, nothing could be
  disallowed under s. 14A on estimate basis, ACIT vs.
  Eicher Ltd. ­ 101 TTJ 369 (Del)

· Whether it is for Assessing Officer to identify
  expenditure which can be reasonably said to have been
  incurred to earn a tax exempt income before invoking
  disallowance under section 14A ­ Held yes ­ Dresdner
  Bank AG v. Addl. CIT ­ 11 SOT 158 (Mum.)

· Whether when no expenditure is incurred by an assessee
  in earning dividend income ,no notional expenditure can
  be deducted from said income for purpose of computing
  deduction     under    section    80M--Held,      yes--
  MAHARASHTRA APEX CORPORATION LTD.
  V/S CIT--VOL.155-TAXMAN-53(KAR.).
                              10            ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012


· --Disallowance under s. 14A--Apportionment of
  expenditure--Disallowance under s. 14A requires
  finding of incurring of expenditure--Where it is found
  that for earning exempted income no expenditure has
  been incurred, disallowance under s. 14A cannot
  stand.--CIT vs. Hero Cycles Ltd. 31 DTR 301(P&H)

· DCIT vs. Jindal Photo Limited in ITA N.
  4539/Del/2010 (Delhi ITAT)
  "18.      Now, as per section 14A(2) of the Act, if the
  AO, having regard to the accounts of the assessee, is not
  satisfied with the correctness of the claim of the assessee
  in respect of expenditure incurred in relation to income
  which does not form part of the assessee's total income
  under the Act, the AO shall determine the amount
  incurred in relation to such income, in accordance with
  such method as may be prescribed, i.e., under Rule 8D
  of the I.T. Rules. However, in the present case, the
  assessment order does not evince any such satisfaction
  of the AO regarding the correctness of the claim of the
  assessee. As such, Rule 8D of the rules was not
  appropriately applied by the AO as correctly held by the
  CIT(A). It has not been done by the AO that any
  expenditure had been incurred by the assessee for
  earning its dividend income.           Merely, an adhoc
  disallowance was made. The onus was on the AO to
  establish any such expenditure. This onus has not been
  discharged. In "CIT Vs. hero Cycles" (P&H) 323 ITR
  518, under similar circumstances, it was held that the
  disallowance u/s 14A of the Act requires a clear finding
  of incurring of expenditure and that no disallowance can
  be made on the basis of presumptions. In "ACIT Vs.
  Eicher Ltd.," 101 TTJ (Del) 369, that it was held that
  the burden in on the AO to establish nexus of expenses
  incurred with the earning of exempt income, before
  making any disallowance u/s 14A of the Act. In "Maruti
  udyog Vs. DCIT, 92 ITD 119 (Del), it has been held that
  before making any disallowance u/s 14A of the Act, the
  onus to establish the nexus of the same with the exempt
  income, is on the revenue. In "Wimco Seedlings Limited
  Vs. DCIT", 107 ITD 267 (Del) TM, it has been held that
                               11             ITA No.2103/Del./2012
                                              ITA No.1671/Del./2012

   there can be no presumption that the assessee much
   have incurred expenditure to earn tax free income.
   Similar are the decisions in:

       1. Punjab National Bank Vs. DCIT 103 TTJ 908
          (Del);
       2. Vidyut Investment Ltd., 10 SOT 284 (Del); and
       3. D.J. Mehta Vs. ITO 290 ITR 238 (Mum.)(AT)"

· CCI Ltd. vs. JCIT 206 Taxman 563 (Kar.) High
  Court
   Disallowance on notional basis is invalid. When no
   expenditure is incurred by the assessee in earning
   dividend income, notional expenditure cannot be
   disallowed u/s 14A.


· CIT vs. Metalman Auto P. Ltd., 336 ITR 434 (P&H)
   It has been held that disallowance under section 14A of
   presumptive expenditure in absence of actual
   expenditure could not be taken into account.


Ld.AO has mentioned in para 10 on page 3 of the
assessment order that if the assessee had surplus
funds then it should not make borrowing for
working capital purposes


In reply it is respectfully submitted that Ld. A.O. cannot
step into the shoes of the assessee company and decide as to
how it should run its business. It is assessee company's
prerogative to decide and take decisions accordingly as to
how it runs its business. Therefore, the action of Ld. A.O. in
making the disallowance of expenditure on account of
interest u/s 14A read with rule 8D in the absence of any
contrary evidence is not sustainable under any
circumstances.

It is further submitted that no evidence has been brought by
Ld. A.O. to establish that any interest expenditure in relation
                             12            ITA No.2103/Del./2012
                                           ITA No.1671/Del./2012

to investments made, was incurred by the assessee
company. Apparent is real unless proved otherwise by
the person making allegations that it is not so. This
principle was recognized by Hon'ble Supreme Court in
the case of P.S. Bedi & Company 230 ITR 518. Burden to
prove this allegation was all the more stringent on the
shoulders of Ld. A.O. as no such expenditure have been
paid in earlier years and stood accepted by the Revenue.
Therefore, when the business expediency of such
expenses has been recognized by the Revenue in earlier
years and now to say in the same breath that interest
was paid for investment purposes is nothing but self
defeating argument of Ld. A.O.

Reliance is placed on following judicial decisions:-

(a) Rule 8D cannot be resorted to unless satisfaction is
    recorded having regard to the accounts of the
    assessee.


· REI Agro Ltd. vs. DCIT (Kol.)
   No s. 14A disallowance if satisfaction not recorded with
   reference to A/cs. Under Rule 8D(2)(ii) loans for
   specific business purposes cannot be included. Under
   Rule 8D(2)(ii) & (iii) investments which have not yielded
   income cannot be included, wherein :-

   In AY 2008-09, the assessee invested Rs.103 crores in
   shares on which it earned tax-free dividends of Rs. 1.3
   lakhs. The assessee claimed that though its borrowings
   had increased by Rs. 122 crores, the said investments
   were funded out of own funds like capital and profits. It
   claimed that no expenditure had been incurred to earn
   the dividends and no disallowance u/s 14A could be
   made. The AO applied Rule 8D and computed the
   disallowance at Rs. 4 crore. On appeal by the assessee,
   the CIT(A) reduced the disallowance to Rs. 26 lakh. On
   cross appeals, HELD by the Tribunal:

   (i) When the AO does not accept the assessee's claim
   regarding   the  non-applicability/   quantum      of
                              13              ITA No.2103/Del./2012
                                              ITA No.1671/Del./2012

   disallowance u/s 14A, he has to record satisfaction on
   that issue. This satisfaction cannot be a plain satisfaction
   or a simple note. It has is to be done with regard to the
   accounts of the assessee. On facts, as there is no
   satisfaction by the AO, no disallowance u/s 14A can be
   made (Balarampur Chini Mills 140 TTJ (Kol) 73
   followed)

· Relaxo Footwears Ltd vs. Addl. CIT (2012) 50 SOT
  102 (Del.)

   Satisfaction of the AO is a pre­requisite to invoke the
   provision of Rule 8D.

   AO has to record his satisfaction about correctness or
   otherwise of computation made by the AO, which
   mutatis mutandis means that if the contention is that no
   expenditure has been incurred, it has to be rebutted.



· JK Investors (Bombay) Ltd vs. ACIT in ITA
  No.7858/Mum/2011 ITA No.7851/Mum/2011 dated
  13-03-2013 of ITAT, Mumbai Bench

   The condition precedent for the AO to invoke Rule 8D is
   that he first must examine the accounts of assessee and
   then record by giving cogent reasons why he is not
   satisfied with the correctness of the assessee's claim. In
   the absence of an examination of accounts and the
   recording of satisfaction, Rule 8D cannot be invoked.

(b) No expense disallowance if investment is out of own
    funds or own funds are more than investments

· Reliance is also placed on the judgement of Hon'ble
  Mumbai Tribunal in case of Godrej Industries Ltd.
  (ITA No. 1090/Mum/2009) wherein it was held that
  assessee had sufficient own funds in the form of own
  capital and reserves to make the investments. The
  Tribunal also considered the Fund Flow Statement
  presented to observe that assessee had generated
  sufficient funds from its own operations to make
                             14             ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012

  investments and thus disallowance u/s 14A is not
  justifiable.

· Reliance in this regard is placed on the judgement of
  Hon'ble Mumbai ITAT in case of Avshesh Mercantile P.
  Ltd. vs DCIT (ITAT Mumbai) (ITA No.
  5779/Mum/2006) wherein it has been held that the
  investment in premium notes had the potential of
  generating taxable income in the form of short term
  capital gains etc. and it is immaterial whether such
  taxable income was earned in the year under
  consideration or not. The mere possibility of an
  investment having the potential of earning taxable
  income was adequate to rule that disallowance u/s 14A
  could not be made. Similar view has been expressed by
  Hon'ble Chennai ITAT in case of MSA Security
  Services Pvt. Ltd. vs ACIT (ITA No. 1523/Mds.2012).

  CIT v. Lubi Submersibles Ltd.; ITA 868/2010 dated
  25.07.2011 (Guj)

  In this case it has been held that if the investment in tax
  free income yielding securities is made from interest free
  funds, no disallowance can be made under section 14A.

  G.D. Met Steel (P) Ltd v. Asstt. CIT: (2011) 47 SOT 62
  (Mum)

  When investments are made from own funds, merely
  because the assessee had to subsequently borrow the
  funds for business use, it cannot be said that the
  borrowed funds have been used for the purposes of
  investments. There were no such disallowance in the
  earlier years and the investments are old investments. In
  these circumstances, the assessee was quite justified in
  contending that no part of the interest paid on
  borrowings could be treated as having been used for the
  purposes of investments, and, accordingly, no
  disallowance under section 14A could be made in
  respect of the same. The disallowance in respect of
  interest was to be deleted. [Para 10]
                              15            ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012

Ld.CIT(A) has alleged in para 10 at page15-16 of
the appellate order that the investment worth Rs. 35
crores were made through mixed funds (Refer PB 15 of
CIT(A) order) out of total worth investment of
Rs.2,09,00,03,543/- during the year, which comes to
16.94% of total investments made during the year
(35,00,00,000/2,09,00,03,543 X 100)(Refer PB 16 of
CIT(A) order). Hence, for the purpose of disallowance of
interest under Rule 8D, same percentage is taken,
calculation of which is mentioned at page 16 of his order.

In reply it is respectfully submitted that it is not disputed
that mixed funds were used for investment worth Rs. 35
crores. But, if there are substantial reserves in addition to
other reserves in the books of the assessee company and it
can be proved that the investments were out of own funds,
no disallowance on account of interest u/s 14A could be
made. Reliance is placed in the case of Harrisons
Malayalam Ltd vs. ACIT (2008) 19 SOT 363 Cochin.

Also, a date wise chart of proceeds from redemption
received in the bank accounts of the assessee company and
the dates on which the investments were made was filed
before Ld. CIT(A), showing the source of investments
made. The same has been also accepted by Ld. CIT(A) in
his order in Para 10 at Page 15. The same is again being
reproduced hereunder:-

(a) As regards Birla Mutual Fund investment amounting
    to Rs 14 Crores, dated 21-6-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 10
shows that investment in Birla Sun Mutual Fund has been
made from Standard Chartered Bank Current Account.

PB 934 to 937 is Standard Chartered Bank Current Account
Statement wherein PB 936 shows that on 19-06-2007 two
deposits of Rs 2.69 Crores and Rs 11.48 Crores were
received, being receipts from sale of sugar which were
transferred from EEFC account to Standard Chartered Bank
Current Account and withdrawals made on 21-06-2007
                             16             ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012

aggregating to Rs. 14 crores vide cheque nos. 370653,
370654, 370655 for investment in Birla Sun Mutual Fund
were out of the above mentioned sale proceeds.

PB 938       is copy of bank statement of ICICI Bank
current account, showing that Rs 6.25 Crores were refunded
by Birla Mutual Fund to the assessee company and have
been credited in bank account on 30-07-2007, as the
investment allotted were only to the tune of Rs. 7.75 crores
as against Rs. 14 crores applied by the appellant on
21.6.2007.

PB 1022 ­ PB 1023 (second half portion) is the copy of
email from Shri JP Silswal (Accountant of appellant
Company) asking for rates on 19.6.2007 and 9.7.2007 on
which USD transfer from EEFC account to Current account
of USD 28 lacs and USD 6.50 lacs has been made. And PB
1022 (first half portion) is email giving the exchange rates
in response to the above email.

PB 1024 is the copy of email from Standard Chartered
Bank to Shri JP Silswal (Accountant of appellant Company)
showing relevant extract of EEFC Bank Statement wherein
entries amounting to USD 28 lacs and USD 6.50 lacs dated
19-06-2007 and USD 35 lacs dated 09-07-2007 are
appearing as transfer to Standard Chartered Bank current
account.

PB 1017 to 1020 is copy of Standard Chartered EEFC
Book ledger account in the books of assessee company
wherein PB 1017 shows that on 10-7-2007 a combined
entry for transfer on 19.6.2007 and 9.7.2007 from EEFC to
Current Account has been made, establishing that sugar
proceeds were transferred to Current Account immediately
before investment in Birla Sun Mutual Fund was made.
This shows that the source of funds of Rs 14 crores was
made out of export proceeds.

IN EEFC a/c company can keep certain percentage of
export realisations.
                             17            ITA No.2103/Del./2012
                                           ITA No.1671/Del./2012

Even otherwise also, if we see redemption out of
investments up to the date of investment in various banks,
then, the total redemption proceeds received were `41crores
(`14.89crores+`18.78Crores+`8.38Crores),           whereas
investments      made    were    `27.25crores    (`10crores
+`9crores+`8.25crores). Hence, investments proceeds
utilised for sugar payments was about `14crores.

In any case, if we see immediate redemption and immediate
investments then also Rs 10.69 Crores was from interest
free funds (sugar sale proceeds) Pls see excel sheet

(b) As regards JM Mutual Fund amounting to Rs 14
    Crores , Investment dated 12 -07-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 11
shows that investment in JM Mutual Fund has been made
from Standard Chartered Bank Current A/c.

PB 1022 ­1023 (second half portion) is the copy of email
dated 12-07-2007 from Shri JP Silswal (Accountant of
appellant Company) asking for rates on 19.6.2007 and
9.7.2007 on which USD transfer from EEFC account to
Current account of USD 28 lacs and USD 6.50 lacs has
been made. And PB 1022 (first half portion) is email
giving the exchange rates in response to the above email.

PB 1024 is the copy of email from Standard Chartered
Bank to Shri JP Silswal (Accountant of appellant Company)
showing relevant extract of EEFC Bank Statement wherein
entries amounting to USD 28 lacs and USD 6.50 lacs dated
19-06-2007 and USD 35 lacs dated 09-07-2007 are
appearing as transfer to Standard Chartered Bank current
account.

PB 1025 is assessee's letter dated 09-07-2007 to Standard
Chartered Bank requesting for transfer of funds amounting
to USD 35 lacs from EEFC account to Standard Chartered
Bank current account.
                            18            ITA No.2103/Del./2012
                                          ITA No.1671/Del./2012

PB 1017 to 1020 is Standard Chartered EEFC Book ledger
account in the books of assessee company wherein PB
1018 shows that on 13-07-2007 a combined entry for
transfer of funds on 19.6.2007 and 9.7.2007 from EEFC to
Current account has been made, establishing that sugar
proceeds were transferred to Current Account. This shows
that the source of funds of Rs 14 crores was made out of
export proceeds.




PB 939 - 940 is Standard Chartered Bank current account
statement showing on 09-07-2007 an amount of USD
35lacs @ 40.30 being transferred from EEFC account to
Standard Chartered Bank current account.

(c) As regards Optimix Mutual Fund amounting to Rs 1
    Crore, Investment dated 24 -07-2007

PB 938 is ICICI Bank current account statement showing
that on 24-07-2007 an investment of Rs. 1 crore was made
by assessee company vide cheque no. 733882.

PB 938 is ICICI Bank current account statement showing
credit of Rs.1,26,11,952/-, being amount received as
Income Tax Refund vide cheque no. 554479.

PB 938 is ICICI Bank current account statement showing
credit of Rs.8,90,64,500/-, being amount received from
redemption of Tata Mutual Fund.

PB 985 is credit voucher no. 32 dated 13-07-2007 showing
amount of Rs.1,26,11,952/- received as refund from Income
Tax Department issued by Deputy Commissioner of Income
Tax.

PB 986 is copy of cheque no. 554479 dated 29-06-2007
showing the amount of refund of Rs.1,26,11,952/- issued in
the name of assessee company by Deputy Commissioner of
Income Tax for A.Y. 1995-96.

All the above mentioned evidences prove that assessee
company had sufficient funds to invest in mutual funds
from its own sources.
                            19            ITA No.2103/Del./2012
                                          ITA No.1671/Del./2012


(d) As regards Optimix Mutual Fund amounting to Rs 3
    Crores ( out of Rs. 6.25 crores invested), Investment
    dated 31 -07-2007
PB 938 is ICICI Bank current account statement showing
that on 30.7.2007 Rs 6.25 Crores received from redemption
of Birla MF as mentioned in bank narration itself.

PB 938 is ICICI Bank current account statement showing
that on 31.7.2007 Rs 6.25 Crores were invested in Optimix
Dynamic Multi Multiplier by the assessee company.
Thus, the entire investments were funded out of the
proceeds from redemption of Birla Sun Mutual Fund. Also,
it can be seen from the order of Ld. CIT(A), he itself has
mentioned in his order at page 15 Rs.3Crores (which is
rather `30 lacs, misinterpreted as `3crores by Ld. CIT(A))
invested out of Rs. 6.25 crores.

This investment has been made out of refund from Birla
Mutual Fund (`14 - `7.75 = `6.25). Remaining is from the
left over proceeds from Tata Mutual Fund and Income Tax
Refund.

Even otherwise, on 30.7.2007 and 31.7.2007, total
withdrawals of Rs 30,17,160 were made (this can be fully
covered from Opening balance of `1.26 crores before credit
of `6.25crores)

(e) As regards SBI Mutual Fund amounting to Rs 2
    Crores , Investment dated 30 -10-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 22
shows that investment amounting to Rs. 2 crores in SBI
Mutual Fund has been made from Standard Chartered Bank
Current Account out of sale proceeds received from DEPB
licences.

PB 946 is ICICI Bank current account statement showing
credit of Rs.64,59,888/- as on 29-10-2007, being amount
received as Income Tax Refund.
                             20             ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012


PB 996 is credit voucher no. 55 dated 27-10-2007 showing
amount of Rs. 64,59,888/- received as refund from Income
Tax Department issued by Deputy Commissioner of Income
Tax.

PB 997 is copy of pay-in- slip showing bank name, name of
the assessee company, date of deposit of amount, amount
deposited, account no. of the assessee company, branch of
bank at which amount is deposited and seal of the bank.

PB 998, 999 are copies of cheque no. 554556 dated 17-10-
2007 showing the amount of refund of Rs.64,59,888/-
issued in the name of assessee company by Deputy
Commissioner of Income Tax for A.Y. 2002-03.

All the above mentioned evidences prove that assessee
company had sufficient funds to invest in mutual funds
from its own sources.

Investments made till this date is less than the redemption
proceeds of investments reinvested and Rs 28 Crores
introduced from EEFC account.

UTI bond dividend Rs. 98.60 lacs credited on 4.10.07,
balance Rs. 40 lacs no source, and its not from DEPB .
further on 27.9.07 lots of mutual funds have been redeemed
amounting to Rs. 13.70 cr and Rs. 13.25 cr invested and bal.
Can be utilised???PB 945

(f) As regards Prudential       ICICI Mutual Fund
    amounting to Rs 1 Crore , Investment dated 19 -12-
    2007

Pls see page 1080 of Paper Book (Bank Statement of
Standard Chartered Current a/c wherein loan proceeds are
also deposited)

It is submitted that the amount of ` 1crore was invested out
of `2crores ( ` 1crore + ` 1crore) received from Shri Vinay
Kumar and Shri Shanti Lal Jain on account of endorsement
of Keyman Unit Link Endowment Insurance Policy, which
                              21            ITA No.2103/Del./2012
                                            ITA No.1671/Del./2012

was taken by the Corporation (ISEC) for the above named
persons vide minutes dated 30-10-2007. This receipt was
offered for taxation also during the impugned year by the
assessee company.

PB..... is copy of minutes of Steering Committee Meeting
held on 30-10-2007 of assessee company acknowledging
that Keyman Unit Link Endowment Insurance shall be
endorsed to Shri Vinay Kumar and Shri Shanti Lal Jain on
the receipt of payment of `1crore each from them.

PB..... is cheque no. 395253 received from Shri Vinay
Kumar for Keyman Insurance Policy transferred, deposited
in bank on 19-12-2007.

PB..... is cheque no. 263453 dated 18-12-2007 received
from Shri Shanti Lal Jain for Keyman Insurance Policy
transferred deposited in bank on 19-12-2007.

Even otherwise also, it is submitted that total redemption of
investments upto 19-12-2007 amounted to `135 Crores (`
107 crores from redemption of investments + introduction
of ` 28 Crores from EEFC for purchase of investments) and
total investments made upto 19-12-2007 amounted to ` 118
Crores. Therefore, it can be seen that the net proceeds were
put into mixed funds.


Also, in the subsequent year i.e. A.Y. 2009-10, Ld. CIT (A)
has given a finding at PB 21 of his order "that out of ` 35
crores, the assessee has brought forward investments of
`10.75 crores as at 1.4.2008 and the balance ` 24.25 crores
had already been redeemed in the last year. Further, these
investments of `10.75 crores remained throughout the year
and were also held by the assessee as at 31/3/2009. In view
of the same, for working out disallowance under Rule 8D
(2)(ii), average investments of ` 10.75 crores alone are
being taken, since use of mixed funds could be held only to
that extent. The remaining investments made during the
year, taxable or exempt, were made out of redemption
proceeds of investments made in earlier years and thus held
to be not from interest bearing funds."
                             22            ITA No.2103/Del./2012
                                           ITA No.1671/Del./2012


All the investment amounting to ` 35 crores are into growth
fund earning capital gains.

Reliance is placed on following judgements

(a) Nexus is necessary ingredient to invoke the
    provisions of section 14A of the Act. If no such nexus
    could be made by the Ld. AO in respect of any such
    expenditure in relation to exempt income, Rule 8D
    cannot be resorted to.

· ITO vs. Karnavati Petrochmem Pvt. Ltd (ITAT
  Ahmedabad)

    HELD No nexus has been established by the AO
   between the expenditure incurred by the assessee and
   the tax free income earned by him. Further, as the
   interest income was more than interest expense and the
   assessee was having net positive interest income, the
   interest expenditure cannot be considered for
   disallowance u/s 14A and Rule 8D


   DCIT vs. Maharashtra Seamless Ltd. (ITAT Del.)
   ITA no. 4063/2006 dated 16.12.2010.

   No s. 14A disallowance of interest on borrowed funds if
   AO does not show nexus between borrowed funds & tax-
   free investment.

· CIT vs. Winsome Textile Industries Ltd. [319 ITR
  204 (P&H)]

   No S. 14A disallowance in absence of nexus between
   investment in tax-free securities & borrowed funds.

· CIT vs. Maxopp Investment Ltd. [347 ITR 272 (Del)]
   No S. 14A or Rule 8D Disallowance without showing
   how assessee's calculation is wrong. Only real
   expenditure can be disallowed
                             23              ITA No.2103/Del./2012
                                             ITA No.1671/Del./2012

· ACIT vs. Justice           Sam      P    Barucha      [ITA
  No.3889/Mum/2011]

  No s. 14A disallowance in absence of "live nexus"
  between expenditure & tax-free income.


· CIT vs. Gujarat Power Corporation [Tax Appeal
  NO. 1587 of 2009 (Guj.) (High Court)]
  The assessee has sufficiently explained that a majority of
  the investment in the tax-free security was made before
  the borrowing. The assessee had demonstrated that it
  had other sources of investment and that no part of the
  borrowed fund could be stated to have been diverted to
  earn tax free income. As borrowed funds were not used
  for earning tax-free income, applying s. 14A was not
  justified.

· ACIT vs. SIL           Investment       Ltd.   [ITA    No.
  2431/Del/2010]
  S. 14A: Onus is on AO to show expenditure is incurred
  to earn tax-free income.
  The contention of the Revenue that some expenditure,
  directly or indirectly, is always incurred for earning tax-
  free income cannot be accepted. The burden is on the
  AO to establish the nexus of the expenditure incurred
  with the earning of exempt income before making any
  disallowance u/s 14A.

· CIT vs. Walfort Share & Stock Brokers Pvt. Ltd.
  [326 ITR 1 (SC)]
  For attracting s. 14A, there has to be a proximate cause
  for disallowance, which is its relationship with the tax
  exempt income.

· Godrej & Boyce Mfg. Co. Ltd. vs. DCIT & ANR.
  [(2010) 328 ITR 81]
  S. 14A supersedes the principle of law that in the case of
  a composite business expenditure incurred towards tax-
  free income could not be disallowed and incorporates an
                            24            ITA No.2103/Del./2012
                                          ITA No.1671/Del./2012

   implicit theory of apportionment of expenditure between
   taxable and non-taxable income. Once a proximate
   cause for disallowance is established ­ which is the
   relationship of the expenditure with income which does
   not form part of the total income ­ a disallowance u/s
   14A has to be effected.

· Minda Investments vs. DCIT [(2011) 138 TTJ 240
  (Delhi)]
   S. 14A disallowance has to be on basis of nexus between
   income & expenditure & not on adhoc estimate basis.

· ACIT vs. Yatish Trading Co. P. Ltd. (2011) 50 DTR
  158 (Mum) (Trib.)
   The expression "in relation to" in s. 14A means
   dominant and immediate connection or nexus with the
   exempt income. In order to disallow expenditure u/s
   14A, there must be a live nexus between the
   expenditure incurred and the tax-free income.
   Disallowance cannot be made on presumptions and
   estimation by the AO. Notional expenditure can be
   apportioned for the purpose of earning income if there
   is no actual expenditure incurred "in relation to" the
   tax-free income.

   ACIT v Punjab state Coop & Mktg: ITA no.
   548/Chd/2011 & 579/Chd/2011 dated 30.09.2011

   It has been held that if there is no nexus between the
   borrowed funds and investments made in purchase of
   shares disallowance u/s 14A is not warranted.

(b) Interest on loans for specific taxable purposes to be
   excluded

· ACIT vs. Best & Crompton Engineering Ltd (ITAT
  Chennai)
   HELD: Rule 8D(2)(ii) refers to expenditure by way of
   interest which is not directly attributable to any
   particular income or receipt. If loans have been
                                     25             ITA No.2103/Del./2012
                                                    ITA No.1671/Del./2012

          sanctioned for specific projects/expansion and have
          been utilized towards the same, then obviously they
          could not have been utilized for making any investments
          having tax-free incomes and have to be excluded from
          the calculation to determine the disallowance under
          Rule 8D(2)(ii)

       (c) Investments on which Capital Gains Tax has been
          paid to be excluded

       · Sundaram Asset Management Co. Ltd vs. DCIT
         (ITAT Chennai), I.T.A. No. 1774/Mds/2012

          Some of the investments made by the assessee are short
          term. Since assessee is paying capital gains tax on short
          term investments, Rule 8D will not apply on them and
          the AO is directed to recompute disallowance u/s 14A
          read with Rule 8D after excluding short term
          investments.

      In view of the above submissions and in view of the judicial
      pronouncements relied upon, the entire interest amounting
      to Rs.64,60,071/- deserves to be deleted."


6.    On the other hand, ld. DR relied on the order of the Assessing

Officer and also pleaded that the relief granted by the CIT (A) was not

justified. He also submitted that if the issue is restored back to the file of

the Assessing Officer then it should be restored in toto.

7.    We have heard both the sides on the issue. For the year under

consideration, the assessee has made investment to the tune of

Rs.2,18,16,75,912/-. It is claimed that Rs.2,16,09,61,251/- was received

from redemption of investments. The assessee's claim that investments

were from the proceeds of redemption of old investments and cash surplus
                                    26            ITA No.2103/Del./2012
                                                  ITA No.1671/Del./2012

generated by way of interest income on UTI Bonds and dividend income

on mutual funds investment.       It was also claimed that the interest

expenditure debited in the profit & loss account was with respect to export

and import of sugar alone and it was not at all related to any investment

activity and it was claimed that no interest was incurred towards the

investment activity.   The assessee has also relied on the decision of

Hon'ble Delhi High Court in the case of assessee's own case for

Assessment Year 2001-02 wherein the ITAT's view that no interest has

been incurred towards investment activity has been accrued. On this, we

hold that the Rule 8D is applicable for Assessment Year 2008-09 and

earlier decision on the disallowance u/s 14A shall not have impact for

applicability of Rule 8D for the year under consideration. We would also

like to state that Rule 8D of the Income-tax Rules, 1962 is mandatory by

using the word "shall" in section 14A(2), the legislature made it mandatory

for the Assessing Officer to determine the amount of expenditure incurred

in relation to exempt income according to the prescribed method. Prior to

insertion of Rule 8D of the Rules, the Assessing Officers were having

discretion to determine expenditure on a reasonable and acceptable method

of apportionment of expenditure between the exempt taxable income and

exempt income. Now, the legislature has provided in Rules the method of

apportionment of expenditure between the exempt income and taxable
                                          27                 ITA No.2103/Del./2012
                                                             ITA No.1671/Del./2012

income, the Assessing Officer as well as the other statutory authorities

under the Act are required to determine the amount of expenditure in

relation to exempt income according to method prescribed in the Rules.

However, the Assessing Officer can embark upon determination of amount of

expenditure incurred in relation to the exempt income only if he records the

finding that he is not satisfied with the correctness of the claim of the assessee

in respect of such expenditure. In the instant case, the Assessing Officer

has worked out the disallowance by holding as under :-

       "9.    During the instant year, the assessee has shown income of
       Rs.2,37,46,339 by way of Interest on UTI Bonds and Rs.55,23,351 as dividend
       on mutual funds which was claimed as exempt under Section 10 of the Income
       Tax Act. Vide Questionnaire dated 31/8/2010, the assessee was required to
       explain why disallowance u/s 14A may not be made.

       10.     The assessee has mainly submitted that the assessee has hugs surplus
       and interest free funds available at its disposal which are more than the
       investments made by the assessee. It has also been submitted by the assessee
       that interest expenditure is incurred in relation to business of the assessee and
       not in relation to investment activity. The submissions of the assessee have
       been considered. However, the same is not acceptable. If the assessee had
       surplus funds then it should not make borrowings for working capital purposes.

       Therefore expenses attributable to earning of exempt income are worked out as
       under :

        I.       Expenditure directly relating to      NIL
                 Income which does not form part
                 of total Income
        II.      In case where the assessee has        AXB
                 incurred expenditure by way of          C
                 interest during the previous year
                 which is not directly attributable
                 to any particular income or receipt   = Rs
                 an     amount       computed     in   7,68,45,729 x 250,20,59,294
                 accordance with the formula,                        498,23,64,227
                                                       = 385,90,629
                 A:      Amount      of     Interest
                 Expenditure other than included In
                 clause (I)
                                        28             ITA No.2103/Del./2012
                                                       ITA No.1671/Del./2012

               B: Average 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
               first and last date of the
               assessment year.

               C: Average Total Assets as
               appearing in the balance sheet of
               the assessee on

               A = Interest Rs.7,68,45,729

               B = Average Investments =
               31.3.2007 : 249,17,01,962
               31.3.2008 : 251,24,16,625

               B = Average Investments =
               250,20,59,294

               C = Average Total Assets =
               31.3.2007      total       assets
               322,43,39,582
               31.3.2008      total       assets
               674,03,88,872

               Average Total Assets =
               498,23,64,227

      III.     0.5% percent of the average value 0.5% X 250,20,59,294
               of investment, income from which = 1,25,10,296
               does not or shall not form part of
               the total income, as appearing in
               the balance sheet of the assessee,
               on 1/4/2007 and 31/3/2008
               Average Investments as calculated
               above : 250,20,59,294

                 Total                               5,11,00,925
      The total disallowance on this account comes to Rs.5,11,00,925/-. The same is
      therefore, being disallowed and added to the total income."

From the submissions of assessee and from the orders of the revenue

authorities, we find that the Assessing Officer has not considered all
                                    29             ITA No.2103/Del./2012
                                                   ITA No.1671/Del./2012

relevant facts on record and has also not verified the claim of the assessee

with regard to the source of investment. To reach at the conclusion that he

was not satisfied with the claim of assessee with regard to expenses

incurred to earn exempted income, then only he can invoke Rule 8D for

working out the disallowance. Therefore, in our considered view, this

issue requires a relook at the level of Assessing Officer. The same is

restored to the file of the Assessing Officer for deciding de novo after

providing an opportunity of being heard to the assessee.

7.1    Similarly, in the case of disallowance with regard to the

administrative and other expenses being 0.5% of average value of

investment, the assessee's claim is that average value of investment taken

by    the   Assessing   Officer   was    Rs.2,50,20,59,294/-   instead   of

Rs.41,88,44,725/- which is only 16.94% of the average value of

investment taken by the Assessing Officer. Therefore, for this aspect also,

we set aside the issue to the file of the Assessing Officer. The Assessing

Officer shall decide both these disallowances after providing an

opportunity of being heard to the assessee and considering the legal

position on these issues.

8.     Ground No.2 in assessee's appeal is with regard to the sustenance of

disallowance of Rs.8,24,125/- where the TDS deducted during the
                                       30             ITA No.2103/Del./2012
                                                      ITA No.1671/Del./2012

financial year 2007-08 and deposited on or before due date of filing the

return.

9.    We have heard both the sides on the issue.            The assessee has

deducted TDS of Rs.8,21,625/- u/s 194C and Rs.2,500/- u/s 194J of the

Act which have been deposited on 16.06.2008 and 31.05.2008

respectively. After hearing both the sides, we hold that this issue has been

settled by various decisions of High Courts. The Hon'ble Calcutta High

Court in the case of CIT vs. Virgin Creations in ITA No.302 of 2011 has

held that the proviso to section 40(a)(ia) should be deemed to have come

into force from the retrospective operation from 1.4.2005. The reliance

was also placed by ld. AR on the decision of Hon'ble Delhi High Court in

the case of CIT vs. Talbros (P) Ltd. in ITA No.218/2013 dated 06.09.2013

wherein the issue has been decided in favour of the assessee. The relevant

para which states the facts of the case are in para 2 and the same is

reproduced below :-

          "2. The contention of the Revenue is that the Income Tax
          Appellate Tribunal (Tribunal, for short) in their impugned
          orders dated 21st May, 2012 (in the case of Naresh Kumar)
          and 8th October, 2012 (in the case of Talbros (P) Ltd.), has
          erred in holding that the amendments made to Section
          40(a)(ia) of the Act by Finance Act, 2010 should be given
          retrospective effect. The contention of the Revenue is that
          these amendments are w.e.f. 1st April, 2010 and are not
          retrospective and, therefore, not applicable to the
          assessment year in question i.e. 2008-09."
                                     31             ITA No.2103/Del./2012
                                                    ITA No.1671/Del./2012

The decision of Hon'ble Delhi High Court in paras 26 & 27 read as under:-

      26. Principle of matching which is disturbed by Section
      40(a)(ia) of the Act, may not materially be of consequence
      to the Revenue when the tax rates are stable and uniform or
      in cases of big assessees having substantial turnover and
      equally huge expenses as they have necessary cushion to
      absorb the effect. However, marginal and              medium
      taxpayers, who work at low G.P. rate and when expenditure
      which becomes subject matter of an order under Section
      40(a)(ia) is substantial, can suffer severe adverse
      consequences as is apparent from the case of Naresh
      Kumar. Transferring or shifting expenses to a subsequent
      year, in such cases, will not wipe off the adverse effect and
      the financial stress. Nevertheless the Section 40(a)(ia) has to
      be given full play keeping in mind the object and purpose
      behind the section. At the same time, the provision can be
      and should be interpreted liberally and equitable so that an
      assessee should not suffer unintended and deleterious
      consequences beyond what the object and purpose of the
      provision mandates. Case of Naresh Kumar is not one of
      rare cases, but one of several cases as we find that Section
      40(a)(ia) is invoked in large number of cases.

      27. One important consideration in construing a
      machinery section is that it must be so construed so as to
      effectuate the liability imposed by the charging section and
      to make the machinery workable. However, when the
      machinery section results in unintended or harsh
      consequences which were not intended, the remedial or
      correction action taken is not to be disregarded but given
      due regard."


The Hon'ble High Court had held the amendment to be interpreted liberally

and retrospective. In view of these, we allow this ground of assessee's

appeal.
                                     32            ITA No.2103/Del./2012
                                                   ITA No.1671/Del./2012

10.   Ground No.3 in the assessee's appeal was not pressed and the same

is dismissed as not pressed.

10.   Ground No.4 is general in nature and does not require any

adjudication, hence, the same is dismissed.

11.   Ground No.1 in revenue's appeal is with regard to the deletion of

addition of Rs.98,33,833/- made on account of loss on sale of investment.

12.   We have heard both the sides on the issue. This issue has been dealt

by the CIT (A) in para 5 of his order, which read as under :-

      "5. Ground of Appeal No.3 relates to addition of
      Rs.98,33,833 on account of loss on sale of investment. The
      appellant has submitted that it has shown in the Profit on
      Sale of Investment (Net) Rs.9,31,58,877 in its profit and
      loss account. The appellant has submitted that the above
      amount is net of Loss on Sale of Investment of
      Rs.98,33,833 has been disallowed without confronting the
      appellant.

      I have carefully gone through the submissions of the
      appellant and found that its contention that loss on sale of
      investment has already been considered as it has shown Net
      Profit on Sale of Investment is correct. In the Computation
      of Income, the appellant while computing the business
      income has excluded Net Profit on Sale of Investment and
      has also considered the same under the head Capital Gains.

      No separate disallowance of Rs.98,33,833 is required to be
      made. Hence, disallowance of Rs.98,33,833 is hereby
      deleted."


After hearing both the sides, we find that the revenue has not controverted

the findings of the CIT (A) that the loss on the sale of investment has been
                                     33             ITA No.2103/Del./2012
                                                    ITA No.1671/Del./2012

excluded in computation of business income and the same has been

considered under the head `capital gains'. In such a situation, we find no

infirmity in the order of the CIT (A) and the same is sustained on this

ground. Accordingly, this ground of revenue's appeal is dismissed.

13.   In the ground no.3, the revenue has raised the deletion of addition of

Rs.10,79,68,722/- made on account of valuation of closing stock.

14.   This issue has been decided by the CIT (A) in para 11 which read as

under :-

      "11. Ground no 9 relates to addition of Rs.10,79,68,722 to
      the value of closing stock of the appellant. During the
      course of appellant proceedings, the appellant stated that the
      Hon'ble ITAT in AY 1993-94 has decided this issue in
      favour of the appellant.

      The issue is that the appellant valued the closing stock on
      cost or net realizable value whichever is lower. This method
      of valuation of closing stock was followed by the appellant
      in Assessment Year 1993-94 and had been accepted by the
      Tribunal. Since the facts of the case are identical to the facts
      of earlier years and since the appellant is following the
      method of valuation consistently on cost or net realizable
      value whichever is lower, which is a prescribed method
      under AS -2 issued by the Institute of Chartered
      Accountants of India, the addition on account of Closing
      Stock of Rs.10,79,68,722 is hereby deleted."


The assessee is valuing closing stock on cost or net realizable value

whichever is lower since 1993. The issue was contested in Assessment

Year 1993-94 up to the Hon'ble Delhi High Court wherein the contention

of the assessee has been accepted. Ld. AR has submitted a copy of the
                                     34             ITA No.2103/Del./2012
                                                    ITA No.1671/Del./2012

order of the Hon'ble Delhi High Court in ITA No.645/2005 & Ors. wherein

the controversy has been decided in favour of the assessee. The question

of law framed by Hon'ble High Court vide order dated 30.01.2012 is as

under :-

      "Whether Income Tax Appellate Tribunal was correct in
      law in deleting the addition of Rs.3,64,584/- made by the
      Assessing Officer to the income of assessee on account of
      under valuation of closing stock by rejecting the change
      made by the assessee in the method of valuation of closing
      stock?"


This question has been answered by Hon'ble High Court in paras 19 & 20

which read as under :-

      "19. The third common question raises a separate issue.
      The question is whether the reimbursement payable by the
      manufactures should be included in the Net Realizable
      Value. This is a different aspect and relates to computation
      of Net Realizable Value. We have quoted the reasoning
      given by the Assessing Officer in the assessment order in
      the assessment year 1993-94. He has stated that the
      international price of sugar was lower than the domestic
      price and therefore when the respondent/assessee had
      incurred losses on exports. The Assessing Officer has not
      disputed or stated that the international price cannot be the
      criteria to compute or calculate the market value.
      International price is not disputed. This is not the contention
      of the Revenue. The Assessing Officer in his reasoning has
      mentioned that the respondent assessee was receiving
      reimbursement of the loss on export from the sugar
      manufacturers and losses were reimbursed. Therefore, the
      respondent/assessee should compute the closing stock on
      cost basis i.e. Net realizable Value plus reimbursement,
      which is nothing but the cost price.
                                       35          ITA No.2103/Del./2012
                                                   ITA No.1671/Del./2012

       20. We have considered the said contention of the
       Revenue but are unable to agree with them for several
       reasons.


The CIT (A) has granted the relief by relying on the decision of ITAT

which has been confirmed by Hon'ble High Court. Therefore, in our

considered view, there is no fault in the order of the CIT (A) and the same

is sustained on this issue. This ground of revenue's appeal is dismissed.

15.   Ground No.4 is general in nature and does not require any

adjudication, hence, the same is dismissed.

16.   In the result, the appeal of the revenue and the appeal of the assessee

is partly allowed for statistical purposes.

Order pronounced in open court on this 15th day of September, 2014.

                  Sd/-                                 sd/-
          (I.C. SUDHIR)                          (B.C. MEENA)
        JUDICIAL MEMBER                       ACCOUNTANT MEMBER

Dated the 15th day of September, 2013
TS

Copy forwarded to:
     1.Appellant
     2.Respondent
     3.CIT
     4.CIT(A)-XV, New Delhi.
     5.CIT(ITAT), New Delhi.
                                                            AR, ITAT
                                                          NEW DELHI.

 
 
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