ITAT Decides Key Tax Issues On Deductions, Disallowances,

ITAT Decides Key Tax Issues On Deductions, Disallowances, Capital Gains, And MAT For AY 2016-17

Issue

Deduction u/s 80-IB/80-IE: Whether interest income from staff advances/deposits and trade receivables is eligible for deduction.
Section 14A Disallowance: Whether interest and administrative expense disallowances apply when own interest-free funds are sufficient, and whether Section 14A adjustments apply to MAT book profits.
Capital Loss on LLP Interest Assignment: Whether assignment of partnership interest in an LLP constitutes a transfer of a capital asset u/s 2(14) requiring valuation.
Section 80IE Eligibility: Whether deduction for the Sikkim Unit can be denied on allegations of splitting up or P&M limits.
Business Expenditures: Whether expenses on software, management consultancy, and interest on security deposits are revenue in nature.
MAT Adjustments u/s 115JB: Whether additions for intangible amortization and DRR transfers are permissible, and whether omitted tax-free bond interest can be claimed during assessment.

Facts

Deductions & Income: Assessee earned interest on staff advances, bank deposits, and overdue trade receivables, and claimed deductions u/s 80-IB/80-IE. It also claimed Section 80IE for its Sikkim Unit.
Disallowances & Revenue Expenses: Assessee made a suo motu Section 14A disallowance despite holding sufficient interest-free funds. AO made further disallowances under Rule 8D. AO also capitalized software expenses, McKinsey consultancy fees, Makov Associates consultancy fees, and interest on security deposits.
LLP Interest Assignment: Assessee assigned its 95% partnership interest in Silverstreet LLP for ₹5 lakhs after shares held by the LLP were cancelled in a court-approved scheme, claiming a short-term capital loss of ₹263.69 crores. AO treated it as a colourable device.
MAT Adjustments: AO added back Section 14A disallowance, intangible amortization (₹152.40 crores), and Debenture Redemption Reserve (DRR) transfers (₹104.17 crores) to MAT book profits. AO also refused to deduct exempt tax-free bond interest from book profit because the claim was omitted in the return.

Decision

Deductions u/s 80-IB/80-IE:
- Interest on staff advances and statutory deposits is not derived from industrial undertakings (In favor of Revenue).
- Interest from overdue trade receivables is eligible for deduction (In favor of Assessee).
- Section 80IE deduction for the Sikkim Unit was upheld, following past orders (In favor of Assessee).
Section 14A Disallowance:
- Interest disallowance under Rule 8D(2)(ii) was deleted due to sufficient interest-free funds. Administrative expense disallowance was restricted to 0.5% of average investments (Partly in favor of Assessee).
- Section 14A disallowance cannot be added back to book profits u/s 115JB (In favor of Assessee).
LLP Partnership Interest: Partnership rights in an LLP constitute a capital asset u/s 2(14), and assignment constitutes a valid transfer. Due to improper valuation by both parties, the issue was remanded to the AO for fresh determination based on an authorized valuation report (Matter remanded).
Business Expenditures: Disallowances on software expenses, McKinsey consultancy fees, Makov Associates fees, and interest paid on security deposits were deleted, as issues were covered by preceding years’ orders (In favor of Assessee).
MAT Adjustments u/s 115JB:
- Addition of intangible amortization was deleted following precedent (In favor of Assessee).
- DRR transfer represents a provision for an ascertained liability and cannot be added back as a reserve (In favor of Assessee).
- Unclaimed exempt tax-free bond interest must be reduced from book profit despite being omitted in the return (In favor of Assessee).

Key Takeaways

Sufficient Interest-Free Funds Presumption: No interest disallowance under Rule 8D is warranted where an assessee demonstrates that interest-free funds exceed exempt-yielding investments.
LLP Interest as Capital Asset: Partnership rights in an LLP are property/capital assets u/s 2(14), and their assignment is a transfer requiring proper statutory valuation to determine capital gain or loss.
MAT Adjustments Scope: Section 14A disallowances and DRR creations for known liabilities cannot be added back to compute book profits under Explanation 1 to Section 115JB(2).
Bona Fide Omissions in MAT: Bona fide omissions of statutory exclusions (like Section 10(15) exempt income) from MAT book profits can be allowed by appellate authorities even without a revised return.

IN THE ITAT AHMEDABAD BENCH ‘D’

Sun Pharma Laboratories Ltd.

Deputy Commissioner of Income-tax

Dr. B.R.R. Kumar, Vice President
and Siddhartha Nautiyal, Judicial Member

IT APPEAL NOS. 1733 & 1742 (Ahd) OF 2024
[Assessment year 2016-17]

JULY 31, 2026

S.N. Soparkar, Sr. Adv. for the Appellant. Sher Singh, CIT-DR and Rameshwar Prasad Meena, Sr. DR for the Respondent.

ORDER

Dr. B.R.R. Kumar, Vice-president.- These cross appeals, one by the assessee and the other by the Revenue, arise out of the order dated 01.08.2024 passed by the Ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)” in short] under section 250 of the Income-tax Act, 1961 [“the Act” in short] for Assessment Year 2016-17.

2. Since both the appeals emanate from the same appellate order, involve common facts and interconnected issues, they were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

3. The assessee has raised following grounds of appeal:-

“1. Ground No. 1: Disallowance of deduction under section 80-IB/80-IE in respect of interest on staff advances & statutory/bank deposit

1.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has grossly erred in disallowing the interest income earned in respect of staff advances and statutory / bank deposits on the basis that the same have not been derived from the industrial undertaking.

1.2. The Ld. CIT(A) has failed to appreciate that the deduction under section 80-IB/80-IE is allowable in respect of the profits and gains derived from the specified business as opposed to ‘profits derived from the industrial undertaking’.

2. Ground No. 2: Disallowance under section 14A read with Rule 8D – Rs. 22,33,819/- Act. 2.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in sustaining the disallowance of Rs. 22,33,819/- made by the Ld. AO under section 14A of the Income-tax Act, 1961 (‘Act’) read with rule 8D of the Income-tax Rules, 1962 (‘Rules’) in relation to earning of income exempt under section 10 of the Act.

2.2. The Ld. CIT(A) failed to appreciate that invocation of rule 8D is not automatic and recording of satisfaction and establishing a direct nexus between the expenditure incurred and the exempt income under section 10 is a sin qua non.

2.3. The Ld. CIT(A) grossly erred in mechanically relying on the judgements of the Hon’ble ITAT, Ahmedabad in the case of Sun Pharmaceuticals Industries Limited for AY 2008-09 and AY 2009-10 without appreciating that facts in said case were categorically different from those under consideration.

2.4. Without prejudice to the above, the Ld. CIT(A) has failed to consider that the Appellant had sufficient interest free funds and that the investment in securities producing exempt income were made out of such non-interest-bearing funds thereby making the interest disallowance under rule 8D(2) (ii) uncalled for.

2.5 Without prejudice to the above, the Ld. CIT(A) ought to have appreciated that the Appellant had in fact earned net interest income and hence, there was no case for disallowance of interest expenditure under section 14A read with rule 8D.

2.6. Without prejudice to the above, the Ld. CIT(A) failed to appreciate that no direct or indirect administrative expenditure was incurred to earn the exempt income, since no active management is required for investments earning such exempt income.

2.7. Without prejudice to the above, the Ld. CIT(A) grossly erred in confirming the computational errors committed by the Ld. AO while ascertaining the disallowance under section 14A read with rule 8D.

2.8. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) grossly erred in not increasing the corresponding deduction under section 80-IB / 80-IE on account of disallowance carried out under the said ground.

3. Ground No. 3: Corresponding Adjustment to deduction u/s 80-IB/80-IE

3.1. On the facts and circumstances of the case and in law, the Ld. CIT(A) failed in directing the Ld. AO to consider the plea of the Appellant of increasing deduction under section 80-IB / 80-IE correspondingly on account of various disallowances carried out in the assessment order and further affirmed in the CIT(A) order.

4. Ground No. 4: Disallowance of short-term capital loss on account of transfer of interest in Silverstreet LLP – Rs. 263,69,11,581/-:

4.1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) grossly erred in sustaining the disallowance of the short-term capital loss suffered by the Appellant on transfer of interest in Silverstreet Limited Liability Partnership (‘Silverstreet LLP’).

4.2 The Ld. CIT(A) grossly erred in disallowing the short term capital loss incurred by the Appellant without appreciating that the interest in the LLP constituted capital asset as per section 2(14) of the Act and therefore short term capital loss arising on transfer and computed as per the provisions of section 48 read with section 45 of the Act ought to be allowed.

4.3. The Ld. CIT(A) failed to appreciate that the Appellant had made genuine investments by contributing sizeable actual capital in Silverstreet LLP, and thus loss incurred by it on account of loss of its capital cannot be regarded as a paper loss.

4.4 The Ld. CIT(A) grossly erred, in law and on facts, in alleging that no loss was incurred and loss claimed by the Appellant is fictitious loss without appreciating that the investment made by Silverstreet LLP has been eroded, consequently resulting in significant reduction in value of Appellant’s interest in Silverstreet LLP.

4.5. The Ld. CIT(A) failed to appreciate that SPIL, the Appellant and Silverstreet LLP are to be considered as distinct legal entities and therefore ‘look through’ approach cannot be adopted for denying the real losses by stating that no loss was incurred on an overall basis.

4.6. The conclusion of the Ld. CIT(A) that all concerns were the group concerns of Sun Group is erroneous and based on incorrect understanding of facts. The Ld. CIT(A) has failed to consider that Suraksha Buildwell Limited Liability Partership (‘Suraksha Buildwell LLP’), which acquired the partnership interest in Silverstreet LLP, is not part of the Sun Group.

4.7. Without prejudice to the above, the Ld. CIT(A) failed to appreciate that a loss cannot be termed as a paper loss merely basis that a transaction is carried between the alleged group entities.

4.8. The Ld. CIT(A) grossly erred in assuming the role of the businessman and questioning the rationale of the Appellant and Silverstreet LLP for making investment in shares of Ranbaxy Laboratories Limited(‘RLL’).

4.9. The Ld. CIT(A) grossly erred by stating that the cost of acquisition needs to be treated as zero basis the books of account. The Ld. CIT(A) failed to appreciate that the computation of the capital gain/ capital loss is required to be carried out in accordance with specific provisions of section 48 of the Income Tax Act, 1961 which require that cost of acquisition of the asset be reduced while computing the gain/ loss on transfer of capital asset. The order of the Ld. CIT(A) thus suffers from gross infirmity with the provisions of the Act.

5. Ground No. 5: Disallowance of loss incurred on account of transfer of interest in Silverstreet LLP while computing book profits u/s. 115JB of the Act Rs.263,69,11,581/-:

5.1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) grossly erred in not reducing the capital loss incurred on transfer of interest in Silverstreet LLP while computing the book profit under section 115JB of the Act.

5.2. The Ld. CIT(A) failed to appreciate that that the entire loss was allowable while computing book profit for the year under consideration in accordance with the provisions of clause (i) of Explanation I to Section 115JB(2) of the Act.

5.3. The Ld. CIT(A) failed to appreciate that the Appellant Company had suffered actual loss and the same was debited to the Statement of Profit and Loss Account. The Ld. CIT(A) failed to appreciate that the treatment of the Appellant Company was in accordance with the provisions of applicable accounting standards and the same was duly confirmed and certified by the Statutory Auditors of the Company.

5.4. The Ld. CIT(A) failed to appreciate that the claim of the Appellant Company was in accordance with the provisions of section 115JB of the Act and the deduction from the book profit ought to be allowed.

5.5. The Ld. CIT(A) failed to consider that it is not open for the Revenue to tinker with or discard any amount for the purpose of computing book profit under section 115JB of the Act, based on the ratio laid down by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd v CIT [2002] 255 ITR 273 (SC) .

5.6. The Ld. CIT(A) has grossly erred in stating that the accounting treatment adopted by the Appellant Company is not based on the prudent accounting policies and principles. The Ld. CIT(A) has made above statement based on pure surmises and conjectures, the Ld. CIT(A) has failed to point out any accounting standard or policies evidencing different treatment

5.7. The Ld. CIT(A) grossly erred by relying on the judgement of the Hon’ble ITAT Hyderabad Bench in the case of Gati Ltd. v. ACIT [2019] (Hyderabad – Trib.) . without considering that the peculiar facts of the said case were totally different to the situation of the Appellant. In the said case, the Assessee had himself declared that it had not followed AS-13 while finalizing the financial statements, whereas in the present case the Appellant has prepared its books of accounts duly in accordance with the all the applicable Accounting Standards which are issued by the Institute of Chartered Accountants of India (‘ICAI’), and they have been duly audited by the statutory auditors.

5.8. The Ld. CIT(A) grossly erred in holding that claiming the capital loss in income computation was not in line with established accounting principles and policies, despite the fact that the treatment accorded by the Appellant had been duly verified and accepted by its statutory auditors.

6. Re: Initiation of penalty proceedings under section 271(1)(c) of the Act

6.1. The Ld. CIT(A) failed to appreciate that the initiation of penalty proceedings under section 271(1)(c) by the Ld. AO was void-ab-initio and hence bad in law. The said penalty was initiated without appreciating the fact that Appellant has made adequate disclosures in its computation of income along-with relevant notes and further issues were highly legal and debatable in nature.”

4. The Revenue has raised the following grounds of appeal:-

“1.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the claim of the assessee for deduction u/s 80IE of the Act of Rs.761,33,69,563/- in respect of Sikkim Unit without appreciating the fact that mere submission of journal entries generated in computer cannot be treated as authentic document for establishing purchase of plant and machinery and that the assessee firm viz. Sun Pharma Sikkim, as held by the Assessing Officer, was constituted by reconstruction of existing business of M/s. Sun Pharma Industries.

1.2) On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing the claim of the assessee for deduction u/s 80IE of the Act of Rs.761,33,69,563/- in respect of Sikkim Unit even though the assessee firm was formed by splitting up and reconstruction of the existing business of M/s. Sun Pharma Industries and the condition of using less than 20% of old/used machinery has not been fulfilled by the assessee.

2) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the claim of the assessee for deduction u/s 80IB/80IE of the Act in respect of interest income of Rs.54,25,44,720/- derived on overdue bills from M/s Aditya Medisales Ltd.

3) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the assessee’s ground on disallowance of Rs.22,33,819/- u/s 115JB r.w.s. 14A of the Act without appreciating the fact that the said amount was disallowed u/s 14A of the Act and hence was required to be added to the book profit as per clause (f) to Explanation 1 of Section 115JB(2) of the Act.

4) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the assessee’s ground on disallowance of depreciation/amortization of intangibles of Rs.15239.75 million by virtue of clause (iia) to Explanation 1 to Section 115JB(1) of the Act, without appreciating the fact that the assessee was not the owner of the alleged assets and thus, was not entitled to claim depreciation on those assets and, therefore, depreciation claimed of Rs.15239.75 millions was liable to be disallowed for the purpose of working out book profit u/s 115JB of the Act.

5.1) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of interest expenditure of Rs.11,59,000/- paid to Neetnav Real Estate Pvt. Ltd without appreciating the fact that the claim of interest payment to M/s Neetnav Real Estate Pvt. Ltd is nothing but an arrangement with its group concern.

5.2) On the facts and circumstances of the case and in law, the Ld.CIT(A) ought to have appreciated the fact that the assessee company is a cash rich company and has been making huge investments in Mutual Funds and even outstanding mutual fund as on 31/03/2016 was Rs.636.1 millions on one side and on other side, even after entering into agreement with Neetnav, the assessee company has paid security deposit late not only by 30 days but by 232 days which resulted in to payment of interest to Neetnav Real Estate Pvt. Ltd.

6) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs.6,65,02,398/- on account of software upgradation and support expenses without appreciating the fact that the assessee had accepted the enduring nature of benefit of the said expenses in its submission submitted during the assessment proceedings.

7.1) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of management consultancy fees of Rs.14,01,75,034/-paid to Mckinsey & Co. without appreciating the finding of the AO in assessment order.

7.2) Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of management consultancy fees paid to Mckinsey & Co., without appreciating the fact that the impugned expenses being arisen on account of merger of Ranbaxy & SPIL and therefore clearly attracts the provisions of Section 35DD of the Act.

8.1) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of expenses incurred towards consultancy fees paid to Makov Associates Limited amounting to Rs.10,72,73,655/-, without appreciating the findings of the AO in assessment order and also the fact that the assessee company itself declared that the benefits of the services provided by M/s Makov Associates Limited would provide enduring benefits to the company in domestic as well as global level market.

8.2) On the facts and circumstances of the case and in law, the Ld.CIT(A) failed to appreciate that the disallowance in the assesse’s case was made by the AO on the basis of agreement between the assessee company and Makov Associates Limited.

9) On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 104,16,66,667/- made by the Assessing Officer on account of the amount transferred to Debenture Redemption Reserve while calculating book profit under section 115 JB of the Act,without appreciating the findings of the AO in the assessment order.

10) On the facts and in the circumstances of the case and in, law, the Ld.CIT(A) erred in allowing the claim of the assessee to reduce the amount of interest of Rs.2,98,76,675/ – on tax free bonds (exempt u/s 10) while computing books profit u/s 115JB of the Act, even though the assessee has not claimed the same in the original or revised return of income.”

5. The brief facts of the case are that the assessee-company is engaged in the manufacturing and trading of pharmaceuticals products. The assessee has manufacturing units located at Jammu and Kashmir, Sikkim as well as in Guwahati. The assessee filed its return of income for the year under consideration on 29.11.2016 declaring total income of Rs. 447,76,25,270/-under the normal provisions and book profit of Rs. 495,02,76,436/- under section 115JB of the Act. Thereafter, the assessee revised its return of income on 29.03.2018 declaring total income at Rs. 447,76,25,270/- under the normal provisions and book profit under section 115JB of Rs. 495,02,76,436 for availing additional TDS credit. The case was selected for scrutiny and subsequently Assessment Order dated 26.12.2019 was passed u/s. 143(3) r.w.s. 92CA(3) of the Act by the Deputy Commissioner of Income tax, Circle 2(1)(1), Vadodara after making several additions and disallowances. As a result, the taxable income was computed at Rs. 1400,68,90,290/- under the normal provisions and book profit of Rs. 2387,08,38,503/- under section 115JB of the Act.

6. Aggrieved by the assessment order passed by the Assessing Officer, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions of the assessee, granted partial relief by deleting certain additions/disallowances, while sustaining the remaining additions.

7. Being aggrieved by the additions/disallowances sustained by the Ld. CIT(A), the assessee is in appeal before the Tribunal. The Revenue, on the other hand, has also preferred an appeal challenging the relief granted by the Ld. CIT(A) in respect of the additions/disallowances deleted by him.

Assessee’s Appeal (ITA No.1733/Ahd/2024)

8. Ground No. 1 raised by the assessee relates to disallowance of deduction u/s 80IB/80IE of the Act amounting to Rs.4,81,888/- in respect of interest on staff advances and statutory/bank deposits.

8.1 We have heard the rival submissions and perused the material available on record on this issue. We find that the issue involved in the present ground is squarely covered against the assessee by the decisions of the Coordinate Benches of the Tribunal in the assessee’s own case for Assessment Years 2013-14 to 2015-16. For the sake of completeness, the relevant findings of the Coordinate Bench in the assessee’s own case for Assessment Year 2015-16 in Dy. CIT v. Sun Pharma Laboratories Ltd. [IT Appeal No.741 (Ahd.) of 2019, dated 9-10-2024] are reproduced below::-

“4. We have heard the rival contentions and perused the materials available on record. Identical issue has been decided against the Assessee by the Co-ordinate Benches in A.Yrs. 2011-12 to 2014-15 [cited supra] and relevant portion of the said order is reproduced as follows:

“. 34. We have heard the rival contention of both the parties and perused the material available on record. We found that the issue on hand is covered against the assessee by the order of the coordinate bench of Amritsar Tribunal in the own case of the assessee for AY 2004-05 followed in subsequent years being AY 2006-07 to 2010-11. The relevant finding of the coordinate bench in ITA No.2465/Mum/2014 reads as under:

“23. Ground No IV pertains to adjustment of delayed payments, staff advances and statutory/bank. The issue regarding interest on delayed payments from customers is covered in favour of the assessee. But the issues regarding interest on staff advances and FDRs are covered against the assessee by the orders of the Amritsar Tribunal passed in assessee’s own cases pertaining to the financial years 2004-05, 2006-07, 2007-08, 2008-09 and 2009-10. The relevant paras of the order passed by the Amritsar tribunal are reproduced as under:-

”51. As – regards ground No 3 of the Revenue, regarding disallowance of deduction under section 80-16 in respect of delayed payments from M/s Aditya Medisales Ltd. Amounting to Rs.48,20,32,772/-, the facts are identical to the facts in assessee’s own case for the assessment year 2004-05 decided by us hereinabove. Following the same/ this ground of the Revenue is dismissed.”

“54. As regards ground No 5&6 of the assessee with respect to the interest on FDR amounting to Rs. 3,27,5997-(correct figure Rs.2,27,599/-) and loan to employees with regard to disallowance of deduction u/s 80-IB, the facts of the issues in hand are identical to the facts decided by the tribunal in assessee’s own case dated 11.06.210 in ITA No. 184(Asr)/2009for the assessment year 2005-06. Following the same, the ground No 5&6 of the assessee are dismissed.” 24. Following the orders of the decisions of the Amritsar Tribunal in the identical issues, we allow the assessee’s claim of deduction under section 80-IB of the Act in respect of interest on delayed payments in question and direct the AO to delete the additions. However, we disallow the assessee’s claim of deductions in respect of interest on staff advances & statutory/bank deposits.”

34.1 Thus, respectfully following the consistent view of Amritsar tribunal in the own case of the assessee, we do not find infirmity in the finding of the learned CIT(A). Hence the ground of appeal of the assessee is hereby dismissed.

4.1. Thus, respectfully following the above orders of the Coordinate Benches of the Tribunal in assessee’s own case, we uphold the finding of the learned CIT(A). Thus, the Ground no.1 raised by the assessee is hereby dismissed.

8.2 Since the issue is squarely covered against the assessee by the aforesaid decisions of the Coordinate Benches in the assessee’s own case, and no distinguishing facts or contrary judicial precedent have been brought to our notice, we respectfully follow the said decisions and uphold the order of the Ld. CIT(A) on this issue.

Accordingly, Ground No.1 raised by the assessee is dismissed.

9. Ground No. 2 raised by the assessee relates to disallowance u/s 14A r.w. Rule 8D amounting to Rs. 22,33,819/-. The assessee earned exempt income of Rs. 2,98,76,675/- from tax-free bonds and, in the return of income, suo motu disallowed Rs. 1,02,500/- under section 14A of the Act. The Assessing Officer, after recording satisfaction that the disallowance offered by the assessee was inadequate, invoked the provisions of section 14A read with Rule 8D and made a further disallowance of Rs. 22,33,819/-. The Ld. CIT(A) confirmed the disallowance by following the orders passed in the assessee’s own case for earlier assessment years and the decision of the Coordinate Bench in the case of the flagship company of the group. Before us, it was submitted that the investments in tax-free bonds were made in earlier years, no fresh investments were made during the year, and the assessee had sufficient own interest-free funds to cover such investments.

9.1 We have considered the rival submissions and perused the material available on record. It is noticed that the investments yielding exempt income were made in earlier years and no fresh investments were made during the year under consideration. It is a settled proposition that where the assessee possesses sufficient own interest-free funds to cover the investments, a presumption arises that such investments have been made out of those own funds and, consequently, no disallowance of interest expenditure under Rule 8D(2)(ii) is called for. Accordingly, we direct the Assessing Officer to verify the availability of sufficient own interest-free funds. If the assessee is found to have sufficient own funds, no disallowance of interest expenditure shall be made. However, the disallowance towards administrative expenditure shall be restricted to 0.5% of the average value of investments yielding exempt income in accordance with Rule 8D, after allowing credit for the suo motu disallowance already made by the assessee. Thus, this ground of appeal is allowed for statistical purposes.

Accordingly, Ground No.2 of assessee’s appeal is allowed for statistical purposes.

10. Ground No. 4 of appeal raised by assessee relates to disallowance of short-term capital loss on account of transfer of interest in Silverstreet LLP amounting to Rs.263,69,11,581/-.

10.1 During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed short-term capital loss of Rs.263.69 crores on transfer of its 95% partnership interest in Silverstreet LLP. The assessee had contributed capital aggregating to Rs.263.74 crores in Silverstreet LLP during F.Y. 2013-14. Silverstreet LLP, in turn, invested in equity shares of Ranbaxy Laboratories Ltd. (“RLL”). Subsequently, pursuant to the Scheme of Arrangement approved by the Hon’ble High Courts of Gujarat and Punjab & Haryana for amalgamation of RLL with Sun Pharmaceutical Industries Ltd. (“SPIL”), the shares of RLL held by SPIL, its subsidiaries and LLPs stood cancelled without allotment of any corresponding shares of SPIL. Thereafter, on 01.04.2015, the assessee assigned its entire partnership interest in Silverstreet LLP to Suraksha Buildwell LLP for a consideration of Rs.5,00,000/- and computed short-term capital loss under section 45 read with section 48 of the Act.

10.2 The Assessing Officer held that the entire arrangement was a colourable device intended to generate artificial capital loss. According to him, Silverstreet LLP and Suraksha Buildwell LLP were entities controlled directly or indirectly by the promoters and family members of Sun Pharma Group; therefore, no real loss had actually arisen. The Assessing Officer further held that the investment in Ranbaxy shares had substantially remained within the same group and that the transaction merely resulted in book entries without any genuine commercial loss. He accordingly treated the impugned loss as fictitious and disallowed the same while computing income under the normal provisions as well as under section 115JB of the Act.

10.3 Aggrieved by the assessment order, the assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A), after reproducing in detail the submissions of the assessee, upheld the action of the Assessing Officer. According to the Ld. CIT(A), the entire sequence of transactions indicated that all the concerned entities were either directly or indirectly under the control of Sun Pharma Group and that the investment in Silverstreet LLP was made with the knowledge of the impending amalgamation. The Ld. CIT(A) further observed that since the investment in the books of the assessee had already become Nil after cancellation of the RLL shares, the cost of acquisition of the partnership interest also ought to be regarded as Nil and, therefore, at the highest, only the consideration of Rs.5 lakhs could be regarded as capital gain/loss. He ultimately concluded that no real loss had arisen and that the transaction was only intended to create an artificial capital loss for tax purposes. Accordingly, the addition made by the Assessing Officer was confirmed.

10.4 Being aggrieved by the order of the Ld.CIT(A), the assessee is in further appeal before us.

10.5 The Ld. Senior Counsel, appearing on behalf of the assessee, submitted that the authorities below have completely misdirected themselves in law by overlooking the settled statutory provisions governing taxation of capital gains. The Ld. Sr. Counsel submitted that the asset transferred by the assessee was its partnership interest in Silverstreet LLP, which unquestionably constitutes a “capital asset” within the meaning of section 2(14) of the Act. It was argued that section 42 of the Limited Liability Partnership Act specifically recognizes the transferability of a partner’s rights and even section 49(2AAA) of the Income-tax Act recognizes such rights as a capital asset. Therefore, once the partnership interest was transferred through a duly executed Deed of Assignment for valuable consideration, the provisions of section 45 stood automatically attracted.

10.6 The Ld. Senior Counsel further submitted that the computation of capital gains is governed exclusively by section 48 of the Act, which mandates deduction of the cost of acquisition from the sale consideration. The assessee had admittedly contributed capital of Rs.263.74 crores in Silverstreet LLP and such capital contribution constituted the cost of acquisition of the partnership interest. Reliance was placed on the decision of the Mumbai Bench of the Tribunal in New Kamlesh Jewellers v. ITO (Mumbai) wherein it has been held that the capital contribution made by a partner constitutes the cost of acquisition of the partnership interest while computing capital gains. The Ld. Senior Counsel further submitted that the authorities below have erroneously treated the impugned loss as a paper loss merely because Silverstreet LLP had invested in shares of Ranbaxy which subsequently stood cancelled under the Scheme of Amalgamation. It was argued that the investment made by the assessee in Silverstreet LLP was real, genuine and substantial. The subsequent cancellation of RLL shares pursuant to a court-approved scheme resulted in complete erosion of the value of Silverstreet LLP, thereby drastically reducing the value of the assessee’s partnership interest. Consequently, when the assessee assigned its partnership interest for Rs.5 lakhs, it actually suffered a genuine commercial loss. Merely because the investment did not yield the intended commercial result cannot render the loss fictitious.

10.7 The Ld. Senior Counsel further contended that the Assessing Officer as well as the Ld. CIT(A) have wrongly adopted a “look-through” approach by treating SPIL, the assessee and Silverstreet LLP as one economic entity. It was submitted that each of these entities is a separate juristic person recognized under law and their corporate identities cannot be ignored in the absence of any statutory provision. Reliance was placed upon the judgment of the Hon’ble Supreme Court in Vodafone International Holdings B.V. v. Union of India 341 ITR 1 (SC) wherein it has been held that a look-through approach cannot be adopted unless specifically provided under the statute. It was further submitted that the allegation that Suraksha Buildwell LLP was part of the same group is factually incorrect. Suraksha Buildwell LLP was neither a subsidiary nor a related party of the assessee and was not disclosed as a related party in the financial statements. Even otherwise, merely because parties may be related cannot by itself lead to the conclusion that a genuine transaction has become sham. Reliance was also placed upon the decision of the Delhi Bench of the Tribunal in Consolidated Finvest and Holdings Ltd., wherein it was held that a transaction cannot be regarded as sham merely because it resulted in a capital loss between related concerns. The Ld. Senior Counsel further submitted that the finding of the Ld. CIT(A) that the cost of acquisition should be treated as Nil is contrary to the express mandate of section 48. The Act nowhere authorizes substitution of the statutory cost of acquisition merely because the value of the investment has diminished in the books of account. According to him, book entries cannot override the statutory computation mechanism prescribed under the Act.

10.8 The Ld. DR, on the other hand, strongly relied upon the orders of the authorities below. The Ld. DR argued that the said capital asset has been transferred by the Appellant Company for a consideration of Rs.5,00,000/-. It was argued that no prudent person shall acquire such partnership interest, therefore the transfer is devoid of any merit. The Ld. DR argued that no prudent person will pay any consideration for the stake of such company which is having total negative balances on the date of sale looking to the fact that the Silverstreet LLP is not having any fixed assets or any other investment in RLL which was shown as converted into total loss. It was argued that these types of transactions are done by the internal group concerns for purpose of creating fictitious losses. The Ld. DR argued that assessee-company is one of the group entities of Sun pharma group engaged in the business of manufacturing and marketing of pharmaceutical chemicals. Hence the partners of the disputed Silverstreet LLP, i.e. the appellant and Skisen Labs Pvt Ltd (‘Skisen’) both being the subsidiaries of the SPIL, are also group entities of Sun Pharma group. The Silverstreet LLP which was reconstituted vide deed of reconstitution dated October 30th, 2013, in turn is also become group concern of the Sun Pharma. It was argued that the business activities of the Silverstreet LLP were added with the provision to do business in nature of investment in shares, securities, fixed deposits, mutual funds or other body corporates as and when required which was specifically provided only during the Reconstitution through the deed executed by October 2013 while the assessee-company became the partner of the LLP. In April 2014, the board of the directors of SPIL and RLL approved a scheme for the amalgamation of RLL with SPIL. The Scheme was approved by Hon’ble High Court of Punjab and Haryana on 9th March 2015 and that by Hon’ble High Court of Gujarat on 14 November, 2014. As per the scheme the share held by Silverstreet LLP stand cancelled without any substitution as on 1.4.2014 onwards without any compensation. Later Silverstreet LLP was transferred to Suraksha Buildwell LLP for a value of Rs.5,00,000 and the assessee has claimed the short-term capital loss.

The Ld. DR argued that Suraksha Buildwell LLP is also a concern controlled by the promoters family members and accomplices while the assessee claims it is not so. It was argued that the Assessing Officer has rightly denied the capital loss to the assessee-company on the grounds that Silverstreet LLP and Suraksha Buildwell LLP is controlled by Sun Pharma Group, hence it is not actual loss but a fictitiously created loss. The Ld. DR argued that from the materials available on record, from October 2013 with the investment by assessee in Silverstreet LLP in turn its investment in Ranbaxy shares to April 2015, when Silverstreet LLP was transferred to Suraksha Buildwell LLP, notably all the concerns are the group concerns of Sun Pharma group either directly or indirectly. Hence, it is hard to believe that when the board of directors came to a finalisation of approval for amalgamation by 1.4.2014, the assessee was necessitated with indirectly investing in Ranbaxy shares through its group entity by October 2013 during which period in all probability the directors of both the amalgamating concerns were in discussion for arriving at the consensus for amalgamation. The Ld. DR submitted that the loss to the assessee-company is only based on the scheme of arrangement as approved by the Hon’ble High Courts of Gujarat and Punjab and Haryana. As per the terms of the scheme, the shares held by the Silverstreet LLP in RLL shall stand cancelled and no consideration will be paid by either the transferor company or by the transferee company against the cancellation of those shares’ of Ranbaxy. Any prudent business entity losing the shares will definitely raise the issue for compensation, particularly if it is a third party and a separate legal entity as claimed by the assessee; whereas, in this case, apparently there is no such incident of claiming compensation by either Silverstreet or by the assessee-company. Since the assessee-company or Silverstreet LLP have not registered any grievance against this arrangement of scheme of amalgamation by filing any petition before the Hon’ble High Courts of Gujarat and Punjab and Haryana, it shows that the assessee-company being a subsidiary of the holding company as well as the transferee company in the amalgamation has accepted for the terms of the scheme and similar is the situation in the case of Silverstreet LLP also. The Ld. DR further argued that on the date of approval of the scheme of amalgamation, the book value of the investment made in Silverstreet LLP by the appellant company are recorded as Nil in its books of accounts and not the original amount invested due to that fact the shares stand cancelled by the order of the Honourable High Courts. Hence on subsequent transfer of its interest in Silverstreet LLP for a consideration of Rs.5,00,000, then in all probability the cost of acquisition needs to be treated as zero only as per the books and not the original value, if that is the case the capital loss if any arose in the above transaction will be of 5 lakhs only. In conclusion, the Ld. DR argued that the Assessing Officer is correct in his observation and deciding that the transactions were planned for taxation purpose and there is no actual loss to any party involved in the transactions.

10.9 We have heard the rival submissions and perused the material available on record.

The issue is whether the short-term capital loss arising on transfer of the assessee’s partnership interest in Silverstreet LLP is allowable under the provisions of the Act. At the outset, we find that there is no dispute regarding the basic factual position that the assessee had contributed capital aggregating to Rs.263.74 crores in Silverstreet LLP and that the said partnership interest was transferred by a duly executed Assignment Deed on 01.04.2015 for a consideration of Rs.5 lakhs. It is equally undisputed that the transfer was effected in accordance with section 42 of the Limited Liability Partnership Act. In our considered view, once these foundational facts are accepted, the statutory provisions contained in sections 2(14), 2(47), 45 and 48 of the Act become applicable in their ordinary meaning. The partnership rights held by the assessee in Silverstreet LLP constitute “property of any kind” and, therefore, a capital asset within the meaning of section 2(14) of the Act. Section 49(2AAA) of the Act itself recognizes rights of a partner referred to under section 42 of the LLP Act as capital assets. Likewise, assignment of such rights squarely falls within the expression “transfer” under section 2(47) of the Act.

10.10 During the course of hearing, the Bench specifically asked the Ld. Senior Counsel regarding the valuation report obtained for valuing the interest in the LLP as on the date of transfer. The Ld. Senior Counsel specifically pointed out that there is no valuation report on record. On a query raised to the Ld. DR regarding the valuation of the interest in the LLP, he extensively relied upon the findings of the Assessing Officer.

10.11 The Assessing Officer has alleged that the impugned loss is a paper loss. The Assessing Officer has also alleged that the loss arose as a result of cancellation of shares on account of the merger. The fact remains that the shares of Ranbaxy Laboratories Ltd. held by Silverstreet LLP stood cancelled and no new equity shares of Sun Pharmaceutical Industries Ltd. were issued to the partnership firm as a result of the Scheme of Arrangement. Needless to say, the Scheme was approved by the Hon’ble High Court after receiving approvals from SEBI, the creditors, the shareholders and competition commission of India and all other regulatory authorities. Therefore, the transaction of cancellation of shares as a result of the merger is a consequential effect, process of law.

10.12 It is also noted that the Assessing Officer has doubted the sale of interest in the LLP to Suraksha Buildwell LLP as a transaction between entities controlled by two related family-owned groups, inasmuch as Silverstreet LLP was owned by the assessee company, in which Shri Dilip Sanghvi is a director and promoter shareholder, whereas Suraksha Buildwell LLP is an entity owned by Smt. Raksha Valia, wife of Shri Sudhir Valia. Since the transaction was between two related entities, the question that arises for consideration is whether the assessee had made any efforts to get its interest in the LLP valued as on the date of transfer. As noted hereinabove, the Ld. Senior Counsel admitted that no valuation report was obtained. However, he strongly submitted that the Assessing Officer has also not applied any of the available or prescribed methods of valuation while rejecting the transaction. Therefore, it is noted that neither the department nor the assessee had followed proper valuation mechanisms in respect of transfer of interest of the said LLP to Suraksha Buildwell LLP. Valuation becomes more relevant in light of the fact that the transaction is allegedly between two related parties. The Ld. Senior Counsel, has brought on record critical fact that Suraksha Buildwell LLP is not a related party under provisions of Income Tax Act. However, said no specific finding dealing with such fact has been given by Assessing Officer in assessment order. It is also evident that the said transaction has resulted into a loss which is alleged to be a paper loss because the assessee as well as the transferee LLP has been alleged to be related parties.

10.13 In the light of the aforesaid facts, we deem it appropriate to set aside the issue to the file of the Assessing Officer with the following directions:

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That the Assessing Officer should call for the pre-merger and postmerger financial statements of amalgamating companies and the amalgamated companies in order to understand the accounting treatment given as a result of the merger;

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That the Assessing Officer should call for accounts of Silverstreet LLP as on the date of transfer of interest in Silverstreet LLP.

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That the assessee is directed to get the interest in Silverstreet LLP valued as on the date of transfer by an approved methodology. The assessee is directed to bring on record valuation report from authorized person valuing the interest in Silverstreet LLP as on the date of transfer, so as to arrive at the fair valuation of the interest in the LLP and to compute the actual gain or loss arising from this transaction.

The Assessing Officer shall thereafter decide the issue afresh in accordance with law, after affording reasonable opportunity of hearing to the assessee.

This Ground of Appeal raised by the Assessee is treated as set aside to Assessing Officer.

11. Ground No. 5 of assessee’s appeal relates to disallowance of loss incurred on transfer of interest in Silverstreet LLP while computing book profit under section 115JB of the Act amounting to Rs.263,69,11,581/-.

Since the core issue is set aside to the Assessing Officer, no adjudication on this ground is required at this juncture.

12. Ground No. 3 of assessee’s relates to corresponding adjustment to deduction under section 801B/801E and the same, being consequential, is treated as infructuous.

In the result, the appeal of the assessee is partly allowed for statistical purposes.

Revenue’s Appeal (ITA No.1742/Ahd/2024)

13. Ground No. 1 raised by the Revenue relates to disallowance of deduction under section 80-IE of the Act for Sikkim – I unit amounting to Rs. 76,13,369,563/-.

13.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground is squarely covered by the decisions of the ITAT (in the case of erstwhile SPS) for AY 2010-11 and AY 2011-12, by the orders of the Ld. CIT(A) (in the case of erstwhile SPS) for AY 2010-11 to AY 2013-14, by the decisions of the Coordinate Bench of the Tribunal in the assessee’s own case for AY 2013-14 to AY 2015-16, and by the orders of the Ld. CIT(A) in the appellant’s own case for AY 2013-14 and AY 2016-17. The Ld. CIT(A), while granting relief, has merely followed the aforesaid binding decisions and no distinguishing facts or change in law have been brought to our notice by the Revenue. Respectfully following the earlier orders in the assessee’s own case, we find no infirmity in the order of the Ld. CIT(A). Accordingly, the same is upheld and the Ground of Appeal raised by the Revenue is dismissed.

14. Ground No. 2 raised by the Revenue relates to disallowance of deduction under section 80-IB/80-IE in respect of interest income on overdue bills, staff advances and statutory/bank deposit amounting to Rs. 54,25,44,720/-.

14.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the order of the ITAT Amritsar in the case of erstwhile firm M/s Sun Pharma Industries for AY 2005-06 to AY 2009-10, which was subsequently followed for AY 2010-11 and AY 2011-12, and further covered by the orders of the Ld. CIT(A) for AY 2013-14 to AY 2015-16. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

15. Ground No. 3 raised by the Revenue relates to 14A disallowance under section 115JB amounting to Rs. 22,33,819/-.

15.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2008-09 to AY 2010-11 and AY 2012-13, and further by the orders of the Ld. CIT(A) for AY 2011-12, AY 2013-14, AY 2014-15 and AY 2018-19 to AY 2021-22. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

16. Ground No. 4 raised by the Revenue relates to disallowance of amortization of intangibles under section 115JB amounting to Rs. 1,52,39,750,000/-.

16.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2013-14 to AY 2015-16 and by the CIT(A) Order for AY 2018-19 to AY 2022-23. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

17. Ground No. 5 raised by the Revenue relates to disallowance of interest paid to Neetnav Real Estate Pvt. Ltd. amounting to Rs. 11,59,000/-.

17.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2015-16. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

18. Ground No. 6 raised by the Revenue relates to disallowance of software upgradation and maintenance expenses amounting to Rs. 6,65,02,398/-.

18.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2015-16. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

19. Ground No. 7 raised by the Revenue relates to disallowance of consultancy fees paid to Mckinsey & Co. amounting to Rs. 1,40,17,503/-.

19.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2015-16. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

20. Ground No. 8 raised by the Revenue relates to disallowance of consultancy fees paid to Makov Associates Ltd amounting to Rs. 10,72,73,655/-.

20.1 We have heard the rival submissions and perused the material available on record. We find that the issue involved in the present ground stands covered by the ITAT Order for AY 2015-16. The Ld. CIT(A) has followed the consistent view taken in the preceding years and no material has been brought before us to justify a different view. Respectfully following the earlier orders in the assessee’s own case, we uphold the order of the Ld. CIT(A). Accordingly, the Ground of Appeal raised by the Revenue is dismissed.

21. Ground No.9 raised by the Revenue relates to deletion of the addition of Rs. 104,16,66,667/- made by the Assessing Officer on account of amount transferred to Debenture Redemption Reserve (DRR) while computing book profit under section 115JB7 of the Act.

21.1 During the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed deduction of Rs.104,16,66,667/-being the amount transferred to Debenture Redemption Reserve while computing book profit under section 115JB of the Act. According to the Assessing Officer, the assessee had claimed the deduction under the head “amount withdrawn from reserve or provision”, whereas such amount had not been credited to the Profit & Loss Account. He was therefore of the view that the conditions prescribed under Explanation 1 to section 115JB(2) were not fulfilled and accordingly added back the aforesaid amount while computing the book profit.

21.2 In appeal, the Ld. CIT(A), after examining the audited financial statements, accounting treatment adopted by the assessee, the provisions of section 71(4) of the Companies Act, 2013 and the judicial precedents relied upon by the assessee, held that the Debenture Redemption Reserve represented a provision created towards an ascertained statutory liability and not a reserve in the true sense. The Ld. CIT(A) further recorded a categorical finding that the amount had in fact been appropriated out of the profits of the relevant year by way of debit to the Profit & Loss Account and that the disallowance had arisen primarily because of the manner in which the computation was reflected in the ITR utility. Relying, inter alia, upon the decisions of the Hon’ble Supreme Court in National Rayon Corpn. Ltd. v. CIT 227 ITR 764 (SC) and the Hon’ble Bombay High Court in CIT v. Raymond Ltd. (Bombay), as well as the decision of the Coordinate Bench of Ahmedabad Tribunal in Asstt. CIT v. Genus Electrotech Ltd. 161 ITD 644 (Ahmedabad – Trib.), the Ld. CIT(A) held that the Debenture Redemption Reserve represented an ascertained liability and was therefore eligible for deduction while computing book profit under section 115JB. He accordingly directed the Assessing Officer to delete the addition.

21.3 Aggrieved by the aforesaid findings of the Ld. CIT(A) , the Revenue is in appeal before us.

21.4 The Ld. CIT-DR relied upon the assessment order and submitted that since the amount was claimed by the assessee under the head “amount withdrawn from reserve or provision” without satisfying the conditions prescribed under Explanation 1 to section 115JB(2), the Assessing Officer was justified in making the impugned addition.

21.5 The Ld. Senior Counsel appearing for the assessee, on the other hand strongly supported the order of the Ld. CIT(A). He submitted that the Debenture Redemption Reserve was created pursuant to the statutory mandate contained in section 71(4) of the Companies Act, 2013 and represented an amount set apart for meeting a known and existing liability towards redemption of debentures. It was contended that merely because the Companies Act uses the expression “reserve”, the true character of the amount cannot be altered, as the liability to redeem debentures is an existing and ascertained liability. He further submitted that the amount was charged to the profits of the relevant previous year by debiting the Profit & Loss Account and the accounting treatment was duly reflected in the audited financial statements. The learned Senior Counsel also explained that the manner in which the claim was reflected in the return of income was only on account of the inherent limitation of the ITR-6 utility, which compulsorily adopts the profit before appropriation as the starting point for computation under section 115JB, whereas the statutory scheme contemplates computation based on profit after appropriations. It was therefore submitted that a mere procedural or presentation issue cannot defeat a substantive claim otherwise allowable in law.

21.6 We have heard the rival submissions and perused the material available on record. We find no infirmity in the order passed by the Ld. CIT(A). The undisputed factual position emerging from the record is that the amount of Rs. 104, 16,66,667/- was transferred to the Debenture Redemption Reserve pursuant to the statutory requirement contained in section 71(4) of the Companies Act, 2013 for the purpose of redemption of debentures. Such amount was charged against the profits of the relevant previous year and was reflected in the audited financial statements of the assessee. The Ld. CIT(A), after examining the books of account and financial statements, has recorded a categorical finding that the provision was created by debit to the Profit & Loss Account while appropriating the profits of the year. The Revenue has not brought any material before us/to controvert this factual finding

21.7 We further find that the controversy is no longer res integra. The Hon’ble Supreme Court in National Rayon Corporation Ltd. (supra) has authoritatively held that the liability towards redemption of debentures is a known and existing liability and that any amount set apart for meeting such liability cannot be regarded as a reserve. Following the aforesaid decision, the Hon’ble Bombay High Court in Raymond Ltd. (supra), while dealing with the provisions of section 115JA, held that a Debenture Redemption Reserve is not a reserve within the meaning of the Explanation to the MAT provisions since it merely represents an amount retained for meeting a known and ascertained liability. The same principle has thereafter been followed by the Coordinate Bench of the Ahmedabad Tribunal in Genus Electrotech Ltd. (supra) while interpreting section 115JB of the Act. Respectfully following the aforesaid binding precedents, we are of the considered view that the amount transferred to Debenture Redemption Reserve represents a provision for an ascertained liability and cannot be treated as a reserve for the purpose of computation of book profit under section 115JB.

21.8 We also find merit in the finding recorded by the Ld. CIT(A) that the Assessing Officer proceeded on an erroneous factual premise that no debit had been made to the Profit & Loss Account. The material on record clearly demonstrates that the amount stood appropriated out of the profits of the relevant year and the manner in which the claim came to be reflected in the return of income was merely on account of the structural limitations of the prescribed ITR utility. It is well settled that a substantive claim otherwise allowable under the Act cannot be denied merely because of an inadvertent or procedural manner in which it has been presented in the return of income, particularly when all the relevant facts are available on record and the claim is otherwise in accordance with law.

21.9 In view of the foregoing discussion, we find ourselves in complete agreement with the well-reasoned findings recorded by the Ld. CIT(A). We accordingly uphold the order of the Ld. CIT(A) directing the Assessing Officer to delete the addition of Rs. 104,16,66,667/- made while computing the book profit under section 115JB of the Act. Consequently, Ground No.9 raised by the Revenue is dismissed.

22. Ground No. 10 of appeal raised by the Revenue relates to the deletion of the addition of Rs.2,98,76,675/- made by the Assessing Officer by denying reduction of interest income exempt under section 10(15) of the Act while computing book profit under section 115JB of the Act.

22.1 . During the course of assessment proceedings, the Assessing Officer observed that the assessee had earned interest income of Rs.2,98,76,675/-from tax-free bonds, which was exempt under section 10(15) of the Act and had accordingly been excluded while computing income under the normal provisions of the Act. However, while computing book profit under section 115JB, the assessee had inadvertently omitted to reduce the said exempt income in the original as well as the revised return of income.

22.2 During the assessment proceedings, the assessee requested that the exempt interest income be reduced from the book profit in terms of clause (ii) of Explanation 1 to section 115JB(2) of the Act. The Assessing Officer rejected the claim solely on the ground that the same had not been made through a revised return of income and, relying upon the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT 284 ITR 323 (SC), declined to entertain the claim.

22.3 In appeal, the Ld. CIT(A), after considering the provisions of Explanation 1 to section 115JB(2), the submissions made by the assessee and the judicial precedents relied upon, held that the interest income earned from tax-free bonds was admittedly exempt under section 10(15) of the Act and was therefore specifically required to be reduced while computing book profit under section 115JB. The Ld. CIT(A) observed that the Assessing Officer had not disputed the exempt nature of the income and had rejected the claim only on the procedural ground that it had not been made in the return of income. Relying upon the judgment of the Hon’ble Bombay High Court in CIT v. Pruthvi Brokers & Shareholders 349 ITR 336 (Bombay), after considering the decision of the Hon’ble Supreme Court in Goetze (India) Ltd., the Ld. CIT(A) held that while the Assessing Officer may not entertain a fresh claim otherwise than through a revised return, the appellate authorities are fully empowered to admit and allow a lawful claim arising from the facts already on record. The Ld. CIT(A) further observed that the object of the Income-tax Act is to assess the correct taxable income and not to deny a legitimate statutory deduction merely on account of a procedural omission. Accordingly, he directed the Assessing Officer to reduce the exempt interest income of Rs.2,98,76,675/- while computing book profit under section 115JB.

22.4 Aggrieved by the aforesaid findings of the Ld. CIT(A), the Revenue is in appeal before us.

22.5 The Ld. CIT-DR relied upon the assessment order and submitted that since the assessee had not claimed the deduction either in the original return or by filing a revised return, the Assessing Officer was justified in rejecting the claim in view of the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra).

22.6 Per contra, the Ld. Senior Counsel appearing for the assessee strongly supported the order of the Ld. CIT(A). He submitted that there was no dispute whatsoever regarding the exempt nature of the interest income of Rs.2,98,76,675/- under section 10(15) of the Act, which had been accepted by the Assessing Officer himself while computing income under the normal provisions as well as while invoking section 14A of the Act. He submitted that clause (ii) of Explanation 1 to section 115JB(2) specifically mandates reduction of income exempt under section 10, if credited to the Profit & Loss Account, while computing book profit and therefore the assessee was legally entitled to the deduction. It was contended that the omission to claim the deduction in the return of income was merely inadvertent and procedural and could not defeat a substantive statutory entitlement. He further submitted that the restriction laid down in Goetze (India) Ltd. (supra) is confined only to the powers of the Assessing Officer and does not curtail the jurisdiction of the appellate authorities, as authoritatively explained by the Hon’ble Bombay High Court in Pruthvi Brokers & Shareholders Pvt. Ltd. (supra). The learned Senior Counsel further submitted that the computation mechanism under section 115JB is a self-contained code and only those adjustments specifically contemplated under Explanation 1 can be made. Since the statute itself requires reduction of exempt income under section 10, the Assessing Officer could not deny the statutory adjustment merely because of an inadvertent omission in the return. He accordingly prayed that the order passed by the Ld. CIT(A) deserved to be upheld.

22.7 We have heard the rival submissions and perused the material available on record. We find no infirmity in the order passed by the Ld. CIT(A). The undisputed factual position emerging from the record is that the assessee had earned interest income of Rs.2,98,76,675/- from tax-free bonds, which was exempt under section 10(15) of the Act. The Assessing Officer himself has accepted the exempt character of the said income while computing the income under the normal provisions as well as while making disallowance under section 14A. The only reason assigned for denying the reduction while computing book profit under section 115JB is that the assessee had failed to claim the same in the original or revised return of income.

22.8 We find that clause (ii) of Explanation 1 to section 115JB(2) specifically provides that income to which section 10 applies (other than section 10(38)) shall be reduced while computing the book profit, provided such income has been credited to the Profit & Loss Account. Once the exempt nature of the income is undisputed and the statutory conditions stand satisfied, the assessee cannot be denied the benefit of the statutory deduction merely because of an inadvertent omission in the return of income. We further find that the reliance placed by the Assessing Officer on the decision of the Hon’ble Supreme Court in Goetze (India) Ltd. (supra) is misplaced. The Hon’ble Supreme Court itself has clarified that the restriction contained therein is confined only to the powers of the Assessing Officer and does not impinge upon the powers of the appellate authorities. The Hon’ble Bombay High Court in Pruthvi Brokers & Shareholders Pvt. Ltd. (supra), after considering the decision in Goetze (India) Ltd. (supra), has categorically held that appellate authorities are fully empowered to entertain and allow a lawful claim even though the same was not made through a revised return of income. Respectfully following the aforesaid binding precedent, we hold that the Ld. CIT(A) was fully justified in entertaining and allowing the assessee’s claim.

22.9 We also find merit in the observations of the Ld. CIT(A) that the Income-tax Act seeks to assess the correct taxable income in accordance with law and that a substantive statutory benefit cannot be denied merely on account of a procedural lapse and the same is also supported by CBDT Circular No. 14 (XL-35) of 1955. In the present case, the entitlement of the assessee to reduce the exempt income while computing book profit flows directly from the provisions of section 115JB itself. The Revenue has not disputed either the quantum or the exempt character of the income. In these circumstances, denial of the statutory reduction merely because the claim was not made in the return would defeat the very scheme of section 115JB and result in taxing an amount which the statute itself excludes from the computation of book profit.

22.10 In view of the foregoing discussion, we find ourselves in complete agreement with the well-reasoned findings recorded by the Ld. CIT(A). We accordingly uphold the order of the Ld. CIT(A) directing the Assessing Officer to reduce the exempt interest income of Rs.2,98,76,675/- while computing the book profit under section 115JB of the Act. Consequently, Ground No. 10 raised by the Revenue is dismissed.

23. In the result, the appeal of the assessee is partly allowed for statistical purposes, while the appeal of the Revenue is dismissed in above terms.