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TMI Blog2017 (11) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... 009-10 in assessee’s own case wherein allowed the claim of the assessee holding that, expenses are incurred in the normal maintenance of business which have to be incurred inspite of closer of operations of the unit. We direct the Assessing Officer to allow the said expenditure as deduction in computing the income of the assessee. This ground of appeal is allowed. Disallowance u/s. 14A r.w. Rule 8D(2)(iii) - Held that:- Taking the totality of facts and circumstances into consideration, we direct the Assessing Officer to restrict the disallowance under Rule 8D(2)(iii) to 5% of the dividend income earned by the assessee. In the result the ground raised by the assessee is partly allowed. - ITA NO.552/MUM/2015 And ITA NO.744/MUM/2015 - - - Dated:- 27-10-2017 - SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI RAJESH KUMAR, HON'BLE ACCOUNTANT MEMBER For The Assessee : Shri Ashok Mehta For The Department : Ms. Arju Garodia ORDER PER C.N. PRASAD (JM) 1. Both these appeals are filed by the Revenue as well as the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-48 Mumbai dated 12.12.2014 for the Assessment Year 2011- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We observe from the order of the Coordinate Bench that issue in appeal whether the income from hedging transaction of Menthol Oil is a business income for the purpose of section 80IB or not has been decided by the Coordinate Bench observing as under:- 9. In this year, revenue is aggrieved for allowing deduction u/s.80IB on the hedging profit earned in the commodity exchange from the Jammu unit amounting to ₹ 18.23 crores. At the outset, it was submitted by the Ld. AR that issue is covered by the order of Tribunal in assessee's own case for assessment year 1998-99, 2000-01 and 2001-02 vide order dated 30.09.2008 in the forex fluctuation and section 80HHC. Ld. AR further submitted that issue is also covered by the decision of Hon'ble Gujarat High Court in the case of Pankaj Oil Mills v. CIT [1978] 115 ITR 824 (Guj.) 9.1 We have considered the rival contention and carefully gone through the orders of the authorities below. We had also deliberated upon the judicial pronouncements cited at bar by the ld. AR and DR in the context of factual matrix of the case. We have also deliberated upon the judicial pronouncements referred by lower authorities in their respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring the goods to the godown and the cost of storing the raw material are directly related to manufacturing so also the profit / loss related to the hedging of raw material are directly related to the manufacturing activity. The assessee has maintained a consistent stand and also reduced the loss incurred in A Y 2007-08 and onwards from the eligible deduction under section 80IB. During the year the AU has declined deduction u/s 801B on such profits. By the impugned order, CIT(A) allowed assessee's claim after observing as under:- I have carefully and dispassionately considered the facts and circumstances of the case, the relevant assessment order, the statement of facts, grounds of appeal, Paper Book filed, the written submissions made and the arguments made by the Ld. AR. In the present case, the appellant has entered into various hedging transactions on the multi commodity exchange in order to hedge against the cost of raw material namely Mentha Oil, used for its manufacturing at Jammu unit and exports. It is not disputed that the main raw material for all products manufactured by the appellant is Mentha Oil. This product is an agro based product, which is grown only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t did not enter into any transactions on the said MCX as the appellant was not aware of operational modalities. Further, the appellant had admittedly never done any trading in any of the commodities earlier and hence it was not possible to enter into such transactions unless entire concept was understood. Accordingly, appellant entered into contract of forward sales effectively from December, 2005. All the purchases of Mentha Oil have been made around October and November and hence the hedging transactions commenced in December. As a result of such hedging transaction the appellant was able to earn profit of ₹ 18,23,08,181/- in Asstt. Year 2006-07 However, in subsequent years, the appellant has incurred substantial losses from such hedging transactions. In subsequent assessment years, the appellant has reduced such hedging losses from the profits of business of its Jammu Industrial Undertaking which is eligible for deduction U/s. 80IB and the claim of deduction U/s. 80IB was correspondingly reduced by the appellant itself 3.3.3. Mr. George Kleinman has discussed the hedging transactions in his book named Commodity Futures and Options a step-by-step guide to successful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction on the forward market itself [ Please see Regulation of Forward Markets by WR. Natu, page 9, quoted in Pankaj Oil Mills vs. CIT - 1977 - CTR (Guj.) (FB) 154; (1978) 115 ITR 824 (FB)]. 3.3.5. These forward contracts by way of hedge transactions usually afford to cover to a trader in as much as his loss in the ready market is offset by a profit in the forward market and vice versa. It, therefore, follows that in order to effectively hedge against adverse price fluctuations of the manufactured goods or merchandise, a manufacturer or merchant has necessarily to enter into forward transaction of sale and purchase both, and without these contracts of sale and purchase constituting hedge transactions, there would be no effective insurance against the risk of loss In the price fluctuation of the commodity manufactured or merchandise sold (pankaj Oil Mills vs. CIT 1977 CTR (Guj)(FB) 154: (1978) 115 ITR 824 (Guj) (FB). It is not correct to state that in order to be a genuine hedging transaction there should be a spot purchase and forward transactions or purchase and a part of sale or forward transaction land the said transactions must be so interconnected that one is reflecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of his merchanting business to guard against future price fluctuation in respect of contracts for actual delivery of merchandise sold by him. 3.3.8 Hon'ble Bombay High Court in the case of Kirtilal Jaisinqhlal Co. Vs. Commissioner of Income Tax reported in (1980) -121 -ITR - 279 has held that loss arising from bonafide forward sales to guard against the risk of fall in the value of raw materials or merchandise to the extent of stock on hand is allowable as normal business loss. CBDT in its circular dated 12th September. 1960 had instructed the Income-tax Officers to treat bonafide forward sales entered into with a view to guard against the risk of raw materials or merchandise in stocks falling in value as normal business losses and not as speculative losses. The clarification was clearly restricted to hedging sales limited to the extent that the total of such transactions did not exceed the total stock of raw materials or merchandise in hand. The appellant has clearly proved that the total of its transaction did not exceed the total stock of raw material or Menthol Oil in hand. - Therefore, in view of the aforesaid discussion and in the light of Hon'ble Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(5) -SPECULATIVE TRANSACTON This section reads as under: Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. Provided that for the purposes of this clause (a) a contract in respect of raw materials or merchandise entered into by a person in the course of the manufacturing or merchanting business to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contact in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations, or (c) a contract entered into by member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; (d) an eligible transaction in respect of trading in derivatives r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n U/s. 80IB and appreciated that the difference in Section 80HH, 80I and 80IB of the Act. While the language used in section 80HH and 80IB of the Act is similar. There is a clear departure in the languages used in section 80IB of the Act and Hon'ble Delhi High Court held that it is this choice of words by the legislature that makes all the difference that the Hon'ble High Court is concerned with. 3.3.14. Apart from Hon'ble Delhi High Court decisions distinguishing the Hon'ble Supreme Court judgments in the case of CIT vs. Sterling Foods (supra) and Pandian Chemicals (supra), it may be noted here that Section 80IB of the Act does not use the expression Profit and Gains derived from an Industrial Undertaking as used in Section 80HH of the Act but uses the expression. Profits and Gains derived from any business referred to in sub-section Section 80IB of the Act reads as under: - Sec. 80-IB(1) of the Act reads as follows : 80-IB(l) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) such business being hereinafter referred to as the eligible busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a business profit, makes it abundantly clear that deduction U/s. 80IB is available to the appellant in the impugned Asstt Year 2006- 07 Therefore, following the Hon'ble Delhi High judgments, Hon'ble ITAT Mumbai decisions and other decisions referred to in the preceding paragraphs, the deduction U/s. 80IB in respect of business profits of Jammu unit of the appellant are eligible for deduction U/s. 80IB of the Act. Accordingly, Ld. Assessing Officer is directed to allow deduction U/s. 80IB on business profits of Jammu unit including the business profits on hedging transactions of Menthol Oil amounting to ₹ 18,23,08,181/-. Hence, Ground No.3, Issue No.2 is allowed. 9.2 We have considered rival contentions and carefully gone through the orders of the authorities below and found that the assessee had set-up a new manufacturing unit at Pot No. 1-A, Extn-III, Industrial Area, Gangyal Jammu for the manufacture of fractioned and determinate Mentha Oil. Ld. Assessing Officer has observed that the assessee had commenced manufacturing on 19/4/2005 and, therefore, Asstt.Year 2006-07 was the first year of operation. He called for various details and justification from the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luctuation in price of raw menthe oil effects the price of finished products. This means that if the price of the raw material falls later on, the appellant is unable to take advantage of a fall in the price of the raw material though simultaneously prices of the final product also fall. Thus the Appellant has to carry the inventory at a very high value since the supply after the season is scarce. Further, the export order/ sales commitments were made at pre-determined prices. The company had to safeguard against adverse price fluctuations of the raw material product (being Mentha oil). For this purpose, the company entered in to future sale contracts through the recognized commodity exchanges. 9.4 We had verified the statement showing month-wise details of quantities of stock and quantities of future sale contract for the Mentha Oil entered into by the company. It was evident from the same that the quantity of Mentha oil available with the company was substantially higher than the quantity of future contracts entered and squared off. Thus if the Assessee was required to give the delivery of goods then sufficient quantity for actual delivery was available. This clearly shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u unit. If Assessee Company had not entered into such transaction, price fluctuation would have affected profitability of the company. Hence the hedging profit is eligible for deduction under section 80-lB which is derived from the business of the eligible industrial undertaking. For this purpose, reliance can be placed on the decision of the Hon'ble Kerala High Court in the case of Commissioner of Income Tax Vs. Ajit Spices (165 ITR 755) wherein it has been held that that a forward contract of sale can be treated as a hedge transaction if such a contract is supported by a pre-existing contract. 9.6 The AD has placed reliance on the decisions of Pandian Chemicals Vs. CIT (262 ITR 278) (SC) and CIT Vs. Sterling Foods (237 ITR 579) (SC) and holding that the hedging profit cannot be said to be forming a part of the profits of business of the industrial undertaking. In this regard, the decision of Hon'ble Delhi High Court in the case of Eltek SGS (P) Ltd (300 ITR 6), in case of CIT V. Dharam Pal Prem Chand (2008-TIOL-664-HC-Del-IT) are relevant, which had considered the Hon'ble Apex Court decision in the case of Pandian Chemicals (supra) and Sterling Foods Ltd (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the disallowance agreeing with the view of the Assessing Officer. Learned Counsel for the assessee submits that this issue came up before the Tribunal for the Assessment Year 2009-10 in assessee s own case in C.O.No.74/Mum/2014 arising out of ITA.No.1628/Mum/2013 and the Coordinate Bench by order dated 20.11.2015 allowed the claim of the assessee holding that, expenses are incurred in the normal maintenance of business which have to be incurred inspite of closer of operations of the unit 9. The Ld.DR supported the orders of the authorities below. 10. Heard rival submissions and on perusal of the Coordinate Bench decision we observe that this issue is decided in favour of the assessee observing as under:- 20. In the cross objection, the assessee is aggrieved for disallowing expenses of ₹.1,29,576/-. We have considered the rival contentions and found from the record that the assessee has 2 units; one at Daman and the other at Jammu. Even though during the year, manufacturing at Daman was closed but normal expenditure on maintenance have been incurred. The expenses are incurred in the normal maintenance of the business which have to be incurred inspite of closure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee and not recording any dissatisfaction and without pointing out as to why the working furnished by the assessee is wrong he invoked the provisions of section 14A r.w. Rule 8D and made disallowance. The Learned Counsel for the assessee further submits that during this Assessment Year there is a fall in investments from ₹.33 crores to ₹.24 crores and there is no much expenditure to be incurred for investments and therefore the expenses as allocated by the assessee is proper and justified. However, Learned Counsel for the assessee further submits that a reasonable disallowance may directed to be made. 14. The Ld.DR strongly Placed reliance on the on the orders of the lower authorities. 15. We have heard the rival submissions, perused the orders of the authorities below. It is the finding of the Assessing Officer that assessee explained giving reason for the suomotu disallowance of ₹.76,354/- towards expenses attributable for earning dividend income. We observe from the Assessment Order that the assessee s reply in the opinion of the Assessing Officer regarding the working of disallowance done by the assessee is not correct. The Assessing Officer ..... 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