Appeal Details
Counselvise Citation
[2012] 122 COUNSELVISE.COM (IT) 6888 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 1 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
20-01-2012
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
L
Next Hearing Date
12-01-2012
Assessment Year
2003-2004
Appeal Filed On
09-12-2009
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M0) & SHRI N.V.VASUDEVAN (J.M) ITA NO.5512/MUM/2007(A.Y. 2003-04) THE ACIT, CIR. 1(1), ROOM NO.579, AAYKAR BHAVAN, MK ROAD, MUMBAI 400 020. (APPELLANT) VS. GRINDWELL NORTON LTD., LEELA BUSINESS PARK, 5 TH LEVEL, ANDHERI KURLA ROAD, MAROL, ANDHERI (E), MUMBAI 400 059. PAN:AAACG 8725B (RESPONDENT) ITA NO.5176/MUM/2007(A.Y. 2003-04) GRINDWELL NORTON LTD., LEELA BUSINESS PARK, 5 TH LEVEL, ANDHERI KURLA ROAD, MAROL, ANDHERI (E), MUMBAI 400 059. PAN:AAACG 8725B (APPELLANT) VS. THE DCIT, RG. 1(1), MUMBAI. (RESPONDENT) C.O. NO.230/MUM/2009 (ARISING OUT OF ITA NO.5512/MUM/2007, A.Y. 2003-04) GRINDWELL NORTON LTD., LEELA BUSINESS PARK, 5 TH LEVEL, ANDHERI KURLA ROAD, MAROL, ANDHERI (E), MUMBAI 400 059. PAN:AAACG 8725B (CROSS OBJECTOR) VS. THE DCIT, RG. 1(1), MUMBAI. (APPELLANT IN APPEAL) REVENUE BY : SMT. MALATHI SRIDHARAN ASSESSEE BY : S/SHRI M.M.GOLWALA /A.A.KHAN ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 2 DATE OF HEARING : 12/01/2012 DATE OF PRONOUNCEMENT : 20/0 1/2012 ORDER PER N.V.VASUDEVAN, J.M, ITA NO.5512/M/07 IS AN APPEAL BY THE REVENUE WHIL E ITA NO.5176 IS AN APPEAL BY THE ASSESSEE. BOTH THE APPEALS ARE DI RECTED AGAINST THE ORDER OF THE CIT(A)-1, MUMBAI DATED 12/6/2007 RELATING TO ASSESSMENT YEAR 2003- 04. THE ASSESSEE HAS ALSO FIELD CO NO./230/M/09 AG AINST THE VERY SAME ORDER OF THE CIT(A). 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION ITA NO .5176/M/07 (ASSESEES APPEAL). GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLLOWS: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN CONFIRMING THAT SURPLUS OF RS. 2,32,48,277/- ARISIN G ON PREPAYMENT OF DEFERRED SALES WAS A REVENUE RECEIPT LIABLE TO TAX U/S. 41(1) OF THE INCOME TAX ACT. THE APPELLANT SUBMITS THAT THE ASS ESSING OFFICER BE DIRECTED TO DELETE THE SAID ADDITION. 3. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN TH E BUSINESS OF MAKING ABRASIVES. IT ALSO DEALS IN CERAMIC AND PLASTICS. IN THE PRECEDING ASSESSMENT YEARS, THE ASSESSEEE HAD AVAILED OF THE BENEFITS OF DEFERRAL OF SALES TAX OFFERED BY THE GOVERNMENT OF MAHARASHTRA AS AN INCENTIVE FOR RAPID INDUSTRIALIZATION OF THE DEVELOPING REGIONS OF THE STATE OF MAHARASHTRA. THE SALES TAX INCENTIVE SCHEME WAS AVAILED BY THE ASSES SEEE IN RESPECT OF ITS PLANT AT BUTIBORI INDUSTRIAL AREA AT NAGPUR (BUTIBO RI PLANT). IN ACCORDANCE WITH THE SALES TAX INCENTIVE SCHEME, 1993, THE SALE S TAX COLLECTED IN RESPECT OF THE BUTIBORI PLANT WAS CREDITED SEPARATELY TO SA LES TAX ACCOUNT. SET-OFF, IF ANY, AVAILABLE ON THE PURCHASES WAS DEBITED TO THIS ACCOUNT WITH CORRESPONDING CREDIT TO PURCHASES. THE NET SALES TA X DEFERRAL WAS THEN TRANSFERRED TO THE DEFERRED SALES TAX LIABILITY ACC OUNT GROUPED UNDER ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 3 UNSECURED LOAN IN THE BALANCE SHEET OF THE ASSESS EEE. THE SALES TAX, PAYMENT OF WHICH HAS BEEN DEFERRED UNDER THE INCENT IVE SCHEME, IS DEEMED TO HAVE BEEN PAID FOR THE PURPOSE OF THE BOMBAY SAL ES TAX ACT, 1959 AND THE INCOME-TAX ACT, 1961, IN THE YEAR IN WHICH THE AMOUNT IS SO DEFERRED. DURING THE PREVIOUS YEAR, THE GOVERNMENT OF MAHARAS HTRA ANNOUNCED A SCHEME OF PREMATURE REPAYMENT OF THE AMOUNT OF DEF ERRED TAX BY THE ELIGIBLE UNITS AT NET PRESENT VALUE (NPV) ON 12TH DECEMBER, 2002 INDUSTRIES IN THE STATE OF MAHARASHTRA, WHO HAD AVA ILED THE DEFERRED SALES TAX INCENTIVES SCHEME, AS PER MAHARASHTRAS 1993 PACKAGE SCHEME OF INCENTIVES WERE PERMITTED TO PREMATURELY REPAY THE DEFERRED SALES TAX LIABILITY BY ARRIVING AT A NET PRESENT VALUE BY A PPLYING A SPECIFIED DISCOUNTING RATE. WITH EFFECT FROM 1ST MAY, 2002, T HE 4TH PROVISO TO SECTION 38 OF THE BOMBAY SALES TAX ACT, 1 959 (B.S.T. ACT) WAS AMENDED TO PROVIDE THAT AN ELIGIBLE UNIT WHICH HAS AVAILED THE BENEFIT OF SALES TAX DEFERRAL MAY, AT ITS OPTION, PREMATURELY DISCHARGE ITS LIABILITY IN RESPECT OF ANY PERIOD BY PAYMENT OF SUCH REDUCED AMOUNT AS MAY BE PRESCRIB ED BY THE GOVERNMENT. THE ASSESSEEE AVAILED THE BENEFIT OF THE SCHEME ANN OUNCED ON 12TH DECEMBER, 2002, AND MADE A PREMATURE REPAYMENT OF I TS DEFERRED SALES TAX LIABILITY: THE ASSESSEEE HAD TREATED THE SURPLUS ARISING ON PR EPAYMENT OF DEFERRED SALES TAX AS A CAPITAL RECEIPT NOT LIABLE TO TAX. T HE ASSESSING OFFICER HAS HELD THAT THE SURPLUS IS LIABLE TO TAX UNDER SECTION 41( 1) OF THE ACT. ON APPEAL BY ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 4 THE ASSESSEE, THE CIT(A) CONFIRMED THE ORDER OF THE AO GIVING RISE TO THE PRESENT APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. 4. IT IS NOT IN DISPUTE BEFORE US THAT SIMILAR ISSU E CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN A.Y2004-05 IN RESPECT OF IDENTICAL SURPLUS ARISING ON PREPAYMENT OF DEFERRED SALES TA X AND THIS TRIBUNAL HELD AS FOLLOWS:- 4. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE I SSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY SPECIAL BENCH DECISION IN THE CASE OF SULZER INDIA LTD VS JCIT (42 SOT 457) W HEREIN IT HAS BEEN HELD THAT THE DEFERRED SALES TAX LIABILITY BEING THE DIFFERENCE BETWEEN THE PAYMENT OF NET PRESENT VALUE AGAINST THE FUTURE LIABILITY CREDITED BY THE ASSESSEE UNDER THE CAPITAL RESERVE ACCOUNT IN ITS BOOKS OF ACCOUNT WAS A CAPIT AL RECEIPT AND COULD NOT BE TERMED AS REMISSION/CESSATION OF L IABILITY AND, CONSEQUENTLY, NO BENEFIT WOULD ARISE TO THE ASSESSE E IN TERMS OF SECTION 41(1)( A ). THERE IS NO DISPUTE THAT MATERIAL FACTS OF THE CASE BEFORE US ARE THE SAME AS WERE THE FACTS BEFOR E THE SPECIAL BENCH IN SULZERS CASE. LEARNED DEPARTMENTAL REPRES ENTATIVE, HOWEVER, MAKES ELABORATE SUBMISSION IN SUPPORT OF H IS STAND THAT THE SPECIAL BENCH DECISION IN THE CASE OF SULZ ER INDIA LIMITED (SUPRA) CALLS FOR A RECONSIDERATION AND THA T IT IS NOT CORRECT. HE SUBMITS THAT EVEN THOUGH THE ISSUE IS COVERED BY THE SPECIAL BENCH DECISION, WE MUST TAKE INDEPENDEN T VIEW OF THE MATTER SINCE THE SPECIAL BENCH DECISION IS, WHA T HE TERMS AS, PER INCURIUM. BROADLY, HIS STAND IS THAT WHAT IS TO BE TAXED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND P ROFESSION AND IF A BENEFIT LIKE PART REMISSION OF THE DEFERRE D SALES TAX LIABILITY IS NOT TAXABLE AS A PROFIT OF THE BUSINES S, IT CAN BE TAXED AS GAINS OF BUSINESS. IT IS THEN POINTED OUT THAT THE CIRCULAR RELIED UPON BY THE SPECIAL BENCH WAS IN TH E CONTEXT OF SECTION 43B AND IT CANNOT BE CONSTRUED TO BE OF APP LICATION IN ALL THE MATTERS RELATING TO THE INCOME TAX ACT. IT IS ALSO POINTED OUT THAT SALES TAX AUTHORITIES ARE NOT IN THE BUSIN ESS OF GRANTING LOANS AND THE NATURE OF CONCESSION RECEIVE D FROM THE SALES TAX AUTHORITIES CANNOT BE TREATED AS A SIMPLICTOR LENDER BORROWER TRANSACTION. OUR ATTENTION IS THEN INVITE D TO THE ACCOUNTING TREATMENT EXTENDED TO THE SALES TAX DEFE RRAL TRANSACTIONS, WHICH, ACCORDING TO THE LEARNED DEPAR TMENTAL REPRESENTATIVE, SHOWS THAT A TAXABLE BENEFIT DID A CCRUE TO THE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 5 ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, TAKES US THROUGH THE ORDER OF THE SPECIAL BENCH, DE MONSTRATES SIMILARITY OF MATERIAL FACTS BETWEEN SULZERS CASE AND ASSESSEES CASE, AND POINTS OUT THAT ALL THE ARGUMENTS WHICH A RE NOW ADVANCED BEFORE US HAVE ALREADY BEEN DEALT WITH BY THE SPECIAL BENCH. LEARNED DEPARTMENTAL REPRESENTATIVE MAY NOT BE HAPPY WITH THE CONCLUSIONS ARRIVED AT BY THE SPECIAL BENC H AND HE MAY STILL CARRY ON POINTING OUT, WHAT HE PERCEIVES AS ERRORS, THIS DIVISION BENCH IS CERTAINLY NOT THE FORUM TO ADJUDI CATE UPON HIS SUBMISSIONS. WE ARE URGED TO FOLLOW THE SPECIAL BEN CH DECISION AND DELETE THE IMPUGNED ADDITION. 5. IN OUR CONSIDERED VIEW, IT IS USEFUL TO REMEMBER THAT, AS LAID DOWN BY THE APEX COURT IN THE CASE OF AMBIKA P RASAD MISHRA V. STATE OF U.P. AIR 1980 SC 1762 (@ 1764), EVERY NEW DISCOVERY NOR ARGUMENTATIVE NOVELTY CANNOT UNDO OR COMPEL RECONSIDERATION OF A BINDING PRECEDENT.... A DECISI ON DOES NOT LOOSE ITS AUTHORITY MERELY BECAUSE IT WAS BADLY ARG UED, INADEQUATELY CONSIDERED OR FALLACIOUSLY REASONED... .. A SPECIAL BENCH DECISION OF THE TRIBUNAL IS A BINDING JUDICIA L PRECEDENT FOR THE DIVISION BENCHES, AND WE MUST RESPECTFULLY FOLLOW THE BINDING PRECEDENTS. REVENUE AUTHORITIES MAY NOT B E HAPPY WITH THE CONCLUSIONS ARRIVED AT BY THE SPECIAL BENC H, AND THEY HAVE EVERY RIGHT TO MAKE SUBMISSIONS AGAINST THE SA ME AT HIGHER JUDICIAL FORUM BUT THIS DIVISION BENCH IS C ERTAINLY NOT THE FORUM TO ADJUDICATE UPON SUCH SUBMISSIONS. THA T APART, WE ARE IN MOST RESPECTFUL AND CONSIDERED AGREEMENT WIT H THE CONCLUSIONS ARRIVED AT BY THE SPECIAL BENCH AND WE FIND THAT ALL THE NECESSARY ASPECTS OF THE NATTER HAVE BEEN CONSI DERED BY THE SPECIAL BENCH IN A VERY COMPREHENSIVE AND ELABORATE ORDER. THE FINDINGS OF THE SPECIAL BENCH IN SULZERS CASE (SUPRA) CAN BE SUMMARIZED AS FOLLOWS: IN ORDER TO INVOKE THE PROVISIONS OF SECTION 41(1), THE FOLLOWING CONDITIONS MUST BE FULFILLED : ( I ) IN THE ASSESSMENT OF THE ASSESSEE, AN ALLOWANCE O R DEDUCTION HAS BEEN MADE IN RESPECT OF LOSS, EXPENDI TURE OR THE TRADING LIABILITY INCURRED BY THE ASSESSEE. ( II ) THE ASSESSEE MUST HAVE SUBSEQUENTLY ( I ) OBTAINED ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE O R ( II ) OBTAINED ANY BENEFIT IN RESPECT OF SUCH TRADING LIA BILITY BY WAY OF REMISSION OR CESSATION THEREOF. IN CASE EITH ER OF ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 6 THESE EVENTS HAPPEN, THE DEEMING PROVISION ENACTED IN CLOSING PART OF SUB-SECTION (1) COMES INTO PLAY. ( III ) THE AMOUNT OBTAINED BY THE ASSESSEE OR THE VALUE OF BENEFIT ACCRUING TO HIM IS DEEMED TO BE PROFIT AND GAIN OF THE BUSINESS OR PROFESSION AND IT BECOMES CHARGEABL E TO INCOME-TAX AS AN INCOME OF THAT PREVIOUS YEAR. [PAR A 70] FURTHER, ON A PLAIN READING OF SECTION 41(1), IT IS ALSO CLEAR THAT THE PROVISIONS CONTAINED IN SECTION 41(1) DO N OT MAKE ANY DISTINCTION BETWEEN ANY CONTRACTUAL TRADING LIA BILITY OR ANY STATUTORY TRADING LIABILITY. EVEN IF ANY STA TUTORY LIABILITY IS REMITTED OR CEASED OF, OR ANY AMOUNT, WHETHER IN CASH OR IN ANY OTHER MANNER, HAS BEEN OBTAINED I N RESPECT OF THE EXPENDITURE INCURRED BY WAY OF STATU TORY LIABILITY, THE SAME WOULD BE DEEMED TO BE THE PROFI T AND GAIN OF THE BUSINESS OF THE ASSESSEE AND WOULD, ACCORDINGLY, BE CHARGEABLE TO INCOME-TAX AS THE INC OME OF THAT YEAR IN WHICH SUCH BENEFIT OR AMOUNT IS OBTAIN ED. [PARA 71] ON THE PLAIN READING OF THE ABOVE PROVISIONS OF SEC TION 38(1), (2), (3), (4), OF THE BOMBAY SALES TAX ACT, 1959, IT PROVIDES THE MANNER AS TO HOW THE PAYMENT OF TAX, PENALTY AND INTEREST, AS PRESCRIBED, MAY BE MADE. T HE FIRST PROVISO STATES THAT THE COMMISSIONER MAY, IN RESPECT OF ANY PARTICULAR DEALER OR PERSON FOR THE REASON T O BE RECORDED IN WRITING, EXTEND THE DATE OF PAYMENT OR ALLOW HIM TO PAY SUCH AN AMOUNT BY INSTALMENTS WITHOUT PREJUDICE TO THE LEVY OF PENALTY, INTEREST OR BOTH. THE SECOND PROVISO PROVIDES THAT THE COMMISSIONER MAY, IN RESPECT OF A DEALER TO WHOM AN ELIGIBILITY CERTIFIC ATE HAS BEEN GRANTED, EXTEND THE DATE OF PAYMENTS OR GRANT A MORATORIUM FOR PAYMENT OF DUES OR PROVIDE INSTALMEN TS SUBJECT TO SUCH CONDITIONS AS MAY BE PRESCRIBED. TH E THIRD PROVISO SAYS THAT THE STATE GOVERNMENT OR THE COMMISSIONER MAY, BY GENERAL OR SPECIAL ORDER WHERE A DEALER TO WHOM INCENTIVE BY WAY OF DEFERMENT OF SAL ES TAX OR PURCHASE TAX OR BOTH UNDER 1979 SCHEME, 1983 SCH EME OR 1988 SCHEME OR AS THE CASE MAY BE ELECTRONIC SCH EME OR 1988 SCHEME OR 1993 PACKAGING SCHEME OF INCENTIV E, HAVE BEEN GRANTED BY VIRTUE OF ELIGIBILITY CERTIFIC ATE AND WHERE A LOAN LIABILITY EQUAL TO THE AMOUNT OF ANY S UCH TAX PAYABLE BY SUCH DEALER HAS BEEN RAISED BY THE SICOM OR OTHER DESIGNATED AUTHORITIES, DEEM THAT SUCH TAX HA S, IN THE PUBLIC INTEREST, BEEN PAID. THE FOURTH PROVISO PROVIDES ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 7 THAT WHERE AN ENTITLEMENT CERTIFICATE HAS BEEN GRAN TED TO THE ELIGIBLE UNIT FOR AVAILING OF THE INCENTIVES BY WAY OF DEFERMENT OF SALES TAX, ETC., SUCH ELIGIBLE UNIT MA Y, IN RESPECT OF THE PERIODS DURING WHICH THE SAID CERTIF ICATE IS VALID, AT ITS OPTION, PREMATURELY PAY IN PLACE OF T HE AMOUNT OF TAX DEFERRED BY IT AN AMOUNT EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRI BED AND ON MAKING SUCH PAYMENTS, IN THE PUBLIC INTEREST , THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID. [PA RA 73] IN THE INSTANT CASE, THE ASSESSEE HAD COLLECTED TOT AL AMOUNT OF RS. 752.01 LAKHS TOWARDS SALES TAX DURING THE YEARS 1989-90 TO 2001-02. IT WAS TREATED AS A LOAN LIABILITY PAYABLE AFTER 12 YEARS IN SIX ANNUAL/EQUA L INSTALMENTS AND, THUS, THE ASSESSEE TREATED THE SAI D LIABILITY AS UNSECURED LOANS IN ITS BOOKS OF ACCOUN T. [PARA 76] PURSUANT TO THE AMENDMENT MADE TO SUB-SECTION (4) O F SECTION 38 OF THE BOMBAY SALES TAX ACT, 1959 BY SUBSTITUTING THE 4TH PROVISO WHICH PROVIDES FOR PAY MENT OF NET PRESENT VALUE (NPV) OF DEFERRED TAXES UNDER THE PACKAGE SCHEME OF INCENTIVES, THE STATE GOVERNMENT BY NOTIFICATION NO. STR-12.02/CR-102/TAXATION-1, DATED 16- 11-2002, INTRODUCED RULE 31D IN THE BOMBAY SALES TA X RULES, 1959 (BST RULES) LAYING DOWN THE PROCEDURE F OR DETERMINATION OF SUCH NPV. THE PROCEDURE FOR DETERMINATION OF NPV OF THE AMOUNT OF DEFERRED TAXE S HAVING BEEN PUBLISHED, THE DEFERRAL UNITS MAY EXERC ISE THE OPTION UNDER 4TH PROVISO TO SUB-SECTION (4) OF SECTION 38 OF THE BOMBAY SALES TAX ACT, 1959 OF PRE-MATUREL Y REPAYING AT NPV, THE AMOUNT OF DEFERRED TAXES. RULE 31D OF THE BOMBAY SALES TAX RULES HAS BEEN PROVIDED WIT H A TABLE AND THE NOTES BELOW IT FOR DETERMINATION OF N PV. FOR EXAMPLE, THE PAYMENT OF BST RS. 27,903 AND CST RS. 70,171 DUE ON 1-5-2003 WAS DEPOSITED ON 30-12-2002, I.E., FOUR MONTHS BEFORE THE DUE DATE, THE DISCOUNTED PERCENTAGE OF DEFERRED TAX TO BE PAID AS NPV WAS PRESCRIBED IN THE SAID TABLE AT 96.4955 PER CENT AN D, ACCORDINGLY, THE NPV AMOUNT OF BST AND CST WAS WORK ED OUT AT RS. 26,925 AND RS. 67,712, RESPECTIVELY, AS PER CERTIFICATE DATED 27-12-2002 AND THE SAME WAS PAID ON 30-12-2002 AS PER THE CERTIFICATE DATED 25-8-2003. THIS AMOUNT WAS PAID BY THE ASSESSEE AS PER OFFER MADE B Y THE STATE GOVERNMENT WHO APPOINTED THE STATE INDUST RIAL ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 8 & INVESTMENT CORPORATION OF MAHARASHTRA LIMITED (SI COM) FOR SETTLEMENT OF THE DEFERRED SALES TAX LIABILITY BY AN IMMEDIATE ONE-TIME PAYMENT. ACCORDINGLY, THE ASSESS EE HAD PAID AN AMOUNT OF RS. 337.13 LAKHS TO SICOM, WH ICH ACCORDING TO THE ASSESSEE REPRESENTED THE NPV AS DETERMINED BY SICOM. THE PAYMENT WAS MADE TO SICOM ON 30-12-2002 AS PER CERTIFICATES DATED 25-8-2003. THE REVENUE HAD PLACED NO MATERIAL ON RECORD TO SHOW TH AT THE NET PRESENT VALUE (NPV) OF A FUTURE SUM WAS NOT THE SAME OR IN THE PROCESS OF CALCULATION OF PRESENT VALUE O F A FUTURE SUM THERE WAS ANY CONVERSION GAIN TO THE ASSESSEE. IT WAS ALSO NOT THE CASE OF THE REVENUE THAT THERE WAS NO SUCH CONVERSION PROVIDED UNDER THE BST ACT, OR THE TABLE PROVIDED FOR DETERMINATION OF NPV WAS NOT APPLICABL E TO THE CASE OF THE ASSESSEE. IN THE ABSENCE THEREOF IT WAS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE REVENUE TH AT THERE WAS A REMISSION OR CESSATION OF THE TRADING LIABILI TY. [PARA 77] HAVING REGARD TO THE LAW LAID DOWN BY THE SUPREME C OURT AND BY THE HIGH COURTS IN VARIOUS DECIDED CASES, IT WAS FOUND THAT TO INVOKE THE PROVISIONS OF SECTION 41(1 ), THE FIRST REQUIREMENT IS AS TO WHETHER IN THE ASSESSMEN T OF THE ASSESSEE, AN ALLOWANCE OR DEDUCTION HAS BEEN MADE I N RESPECT OF LOSS, EXPENDITURE OR THE TRADING LIABILI TY INCURRED BY THE ASSESSEE. IN THE CASE OF THE ASSESS EE THE REVENUES PLEA WAS THAT THE ASSESSEE HAD OBTAINED T HE BENEFIT OF DEDUCTION OF SALES TAX LIABILITY UNDER S ECTION 43B AS PER THE CBDTS CIRCULAR NO. 496, DATED 25-9- 1987. HOWEVER, IT WAS FOUND THAT IN THE SAID CIRCULAR IT HAD BEEN CLEARLY STATED VIDE PARA 5 THAT ...THE STATUTORY LIABILITY SHALL BE TREATED TO HAVE BEEN DISCHARGED FOR THE PURPOSES OF SECTION 43B [EMPHASIS SUPPLIED]. THUS, THE BENEFIT OF DEDUCTION WAS ALLOWED FOR THE PURPOSE OF SECTION 43 B ONLY AND NOT UNDER ANY OTHER PROVISIONS OF THE ACT. THER E WAS NO DISPUTE THAT THE ASSESSING OFFICER HAD ALSO APPL IED THE AFORESAID BOARD CIRCULAR WHILE GIVING THE BENEFIT O F DEDUCTION UNDER SECTION 43B. IT IS SETTLED LAW THAT THE CIRCULARS ARE BINDING ON THE DEPARTMENT. IT IS ALSO SETTLED LAW THAT THE COURT CANNOT ADD WORDS TO STATUTE OR R EAD WORDS INTO IT WHICH ARE NOT THERE. THIS BEING SO, I T WAS TO BE OPINED THAT THE FIRST REQUIREMENT OF SECTION 41( 1) HAS NOT BEEN FULFILLED IN THE FACTS OF THE CASE. [PARA 104] ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 9 THE OTHER REQUIREMENT OF SECTION 41(1) IS THAT THE ASSESSEE MUST HAVE SUBSEQUENTLY : ( I ) OBTAINED ANY AMOUNT IN RESPECT OF SUCH LOSS AND EXPENDITURE, OR ( II ) OBTAINED ANY BENEFIT IN RESPECT OF SUCH A TRADING LIABILITIES BY WAY OF REMISSION OR CESSATION THEREOF. IN THE INSTANT CASE , THE SALES TAX COLLECTED BY THE ASSESSEE DURING THE YEAR S 1989- 90 TO 2001-02 AMOUNTING TO RS. 752.01 LAKHS WAS TRE ATED BY THE STATE GOVERNMENT AS A LOAN LIABILITY PAYABLE AFTER 12 YEARS IN SIX ANNUAL/EQUAL INSTALMENTS. SUBSEQUEN TLY, PURSUANT TO THE AMENDMENT MADE TO THE FOURTH PROVIS O TO SECTION 38(4) OF THE BOMBAY SALES TAX ACT, 1959 WHI CH PROVIDES THAT WHERE AN ENTITLEMENT CERTIFICATE HAS BEEN GRANTED TO THE ELIGIBLE UNIT FOR AVAILING OF THE IN CENTIVES BY WAY OF DEFERMENT OF SALES TAX, ETC., SUCH ELIGIBLE UNIT MAY, IN RESPECT OF THE PERIODS DURING WHICH THE SAID CER TIFICATE IS VALID, AT ITS OPTION, PREMATURELY PAY IN PLACE O F THE AMOUNT OF TAX DEFERRED BY IT AN AMOUNT EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX AS MAY BE PRESCRI BED AND ON MAKING SUCH PAYMENTS, IN THE PUBLIC INTEREST , THE DEFERRED TAX SHALL BE DEEMED TO HAVE BEEN PAID. IN THE INSTANT CASE THE ASSESSEE HAD OPTED FOR THE OFFER O F SICOM, AN IMPLEMENTING AGENCY OF THE STATE GOVERNME NT AND REPAID AN AMOUNT OF RS. 337.13 LAKHS TO SICOM W HICH ACCORDING TO THE ASSESSEE REPRESENTED THE NPV OF TH E FUTURE SUM AS DETERMINED AND PRESCRIBED BY SICOM. T HE SAID PAYMENT WAS MADE TO SICOM ON 30-12-2002 AS PER CERTIFICATES DATED 25-8-2003. IT HAS ALREADY BEEN DEMONSTRATED THAT NPV IS EQUIVALENT TO FUTURE VALUE OF THE SUM. IN OTHER WORDS, WHAT THE ASSESSEE WAS REQUIRED TO REPAY AFTER 12 YEARS IN SIX ANNUAL/EQUAL INSTALMENT S, THE SAME WAS REPAID BY THE ASSESSEE, IN THE PUBLIC INTE REST, AS NPV IS EQUIVALENT TO THE FUTURE VALUE OF THE SUM . FURTHER, THERE WAS NO IOTA OF EVIDENCE TO SHOW THAT THERE HAD BEEN ANY REMISSION OR CESSATION OF LIABILITY BY THE STATE GOVERNMENT. THUS, ONE OF THE REQUIREMENTS SPE LT OUT FOR THE APPLICABILITY OF SECTION 41(1)( A ) HAD NOT BEEN FULFILLED IN THE FACTS OF THE INSTANT CASE. [PARA 1 05] ALTERNATIVELY, IT WAS CONTENDED BY THE REVENUE THAT THE ASSESSEE WAS REQUIRED TO COMPLY WITH PROCEDURE LAID DOWN IN CLAUSES 6.21 AND 6.22 OF THE STATE GOVERNME NTS RESOLUTION. ACCORDING TO THE REVENUE THE ASSESSEE H AD, ADMITTEDLY, FAILED TO DO SO. THEREFORE, THE QUESTIO N OF ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 10 CONVERSION OF DEFERRED SALES TAX LIABILITY INTO INT EREST FREE LOAN DID NOT ARISE. FURTHER, THERE WAS NO MODIFIED ELIGIBILITY CERTIFICATE INCORPORATING THE CHANGE FR OM DEFERRED SALES TAX LIABILITY TO INTEREST FREE LOAN. HOWEVER, IT WAS FOUND THAT THE ASSESSEE ON THE BASIS OF LETT ER ISSUED BY SICOM TO THE SALES TAX AUTHORITY HAD PASS ED NECESSARY ENTRIES IN THE BOOKS OF ACCOUNT CLAIMING THE DIFFERENCE OF DEFERRAL AMOUNT AS CAPITAL RECEIPT. M ERELY BECAUSE THE SALES TAX AUTHORITIES HAD NOT ISSUED TH E MODIFIED ELIGIBILITY CERTIFICATE DID NOT MEAN THAT THE PAYMENT OF RS. 337.13 LAKHS MADE BY THE ASSESSEE CO ULD NOT BE ACCEPTED AS HAVING BEEN PAID AT NPV OF THE F UTURE SUM OF RS. 752.01 LAKHS TOWARDS DISCHARGE OF FULL LIABILITY. IT IS SETTLED LAW THAT THE LAW DOES NOT CONTEMPLATE OR REQUIRE THE PERFORMANCE OF AN IMPOSS IBLE ACT- LEX NON COGIT AD IMPOSSIBILIA. FURTHER, BOTH THE PARTIES HAD AGREED DURING THE COURSE OF THEIR ARGUM ENTS THAT THE ENTRIES RECORDED IN THE BOOKS OF ACCOUNT W ERE NOT DETERMINATIVE OF THE NATURE OF TRANSACTION. EVEN AS SUMING FOR THE SAKE OF ARGUMENT THAT THE ASSESSEE DID NOT GET MODIFIED ELIGIBILITY CERTIFICATE OR THE REPAYMENT O F LOAN PAID BY THE ASSESSEE AT ITS NPV OF FUTURE SUM, THEN IN THOSE CIRCUMSTANCES, MERELY BECAUSE THE ASSESSEE HA D PASSED NECESSARY ENTRIES IN ITS BOOKS OF ACCOUNT, I T COULD NOT BE HELD THAT THERE WAS ANY CESSATION OR REMISSI ON OF LIABILITY. [PARA 106] THE ASSESSEE WAS LIABLE TO PAY SALES TAX AMOUNTS COLLECTED FROM 1-11-1989 TO 31-10-1996, PAYMENTS OF WHICH WERE DEFERRED UNDER THE SCHEME, AND THE AMOUN TS WERE PAYABLE AFTER TWELVE YEARS IN SIX EQUAL ANNUAL INSTALMENTS COMMENCING FROM 1-5-2003, WHICH MEANT T HAT THE LIABILITY WAS PAYABLE IN FUTURE. LATER ON, THE STATE GOVERNMENT CAME OUT WITH A SCHEME BY WHICH IT WAS PROVIDED THAT IF SOME DEALERS OPTED, THEN THEY COUL D PAY THE FUTURE LIABILITY AT A DISCOUNTED VALUE OR WHAT ONE MAY CALL NET PRESENT VALUE IMMEDIATELY. THUS, IN THIS S ITUATION, IT COULD NOT BE CONSTRUED AS REMISSION OF LIABILITY , BECAUSE THE STATE GOVERNMENT HAD NOT WAIVED OF ANY OF THE LIABILITY AS GIVEN IN THE ILLUSTRATIONS. HAD THE ST ATE GOVERNMENT ACCEPTED LESSER AMOUNT AFTER TWELVE YEAR S OR REDUCED SUCH INSTALMENTS, THEN IT COULD HAVE BEEN A CASE OF REMISSION OR CESSATION. HOWEVER, IN THE INSTANT CASE THE STATE GOVERNMENT HAD CHOSEN TO RECEIVE THE MONEY ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 11 IMMEDIATELY WHICH WAS RECEIVABLE FROM 1-5-2003 TO 1 -5- 2008. THE AMOUNT OF RS. 337.13 LAKHS WAS ACTUALLY P AID TO SICOM ON 30-12-2002. THUS, THE AMOUNT WHICH WAS PAYABLE FROM 1-5-2003 TO 1-5-2008, HAD BEEN PAID ON 30- 12-2002. THUS, IT DID NOT SATISFY THE CONDITION OF ACTUAL REMISSION IN PRAESENTI . IT WAS A SIMPLE CASE OF COLLECTING THE AMOUNT AT NET PRESENT VALUE WHICH WAS DUE LATER ON AND EVEN THE FORMULA FOR COLLECTING THE NET PRESENT VALUE WAS ALSO GIVEN BY THE SICOM AND THE AMOUNTS HAD BEE N PAID AS PER THAT FORMULA. THEREFORE, SUCH PAYMENT O F NET PRESENT VALUE OF A FUTURE LIABILITY COULD NOT BE CL ASSIFIED AS REMISSION OR CESSATION OF THE LIABILITY SO AS TO ATTRACT THE PROVISIONS OF SECTION 41(1)( A ). [PARA 108] FOR THE REASONS STATED ABOVE, IT WAS TO BE HELD THA T THE DEFERRED SALES TAX LIABILITY BEING THE DIFFERENCE B ETWEEN THE PAYMENT OF NET PRESENT VALUE AGAINST THE FUTURE LIABILITY CREDITED BY THE ASSESSEE UNDER THE CAPITA L RESERVE ACCOUNT IN ITS BOOKS OF ACCOUNT WAS A CAPITAL RECEI PT AND COULD NOT BE TERMED AS REMISSION/CESSATION OF LIABI LITY AND, CONSEQUENTLY, NO BENEFIT WOULD ARISE TO THE AS SESSEE IN TERMS OF SECTION 41(1)( A ). [PARA 109] 6. AS FACTS OF THE PRESENT CASE ARE MATERIALLY SIMI LAR TO THE CASE IN SULZERS CASE (SUPRA), AND RESPECTFULLY FOL LOWING THE LAW SO LAID DOWN BY THE SPECIAL BENCH, WE UPHOLD TH E GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E TRIBUNAL WE ALLOW GROUND NO.1 RAISED BY THE ASSESSEE AND DIRECT THE AO TO DE LETE THE ADDITION MADE. 5. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOLL OWS: 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN CONFIRMING THE ALLOCATION OF ADMINISTRATIVE EXPENS ES AT THE RATE OF 5% OF DIVIDEND INCOME. THE APPELLANT SUBMITS THAT THE ALLOCATION IS WHOLLY UNJUSTIFIED AND THE DEDUCTION U/S. 80M BE GR ANTED ON THE GROSS DIVIDEND INCOME. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 12 6. THE MATERIAL FACTS AS FAR AS GROUND NO.2 IS CONC ERNED ARE AS FOLLOWS: THE ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 30,66 ,430/-. IN A.Y 2003-04 DIVIDEND INCOME WAS TAXABLE. UNDER SECTION 80M OF THE INCOME TAX ACT 1961(THE ACT) THE ASSESSEE WAS ENTITLED TO CLAI M DEDUCTION OF THE DIVIDEND INCOME. UNDER SECTION 80M DEDUCTION IS AL LOWED ONLY ON THE NET DIVIDEND INCOME I.E. GROSS DIVIDEND INCOME (-) EXPE NSES INCURRED IN EARNING DIVIDEND INCOME. ACCORDING TO THE ASSESSEE IT DID NOT INCUR ANY EXPENSES IN EARNING DIVIDEND INCOME AND , THEREFORE, THE ENTIR E DIVIDEND INCOME SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 80M OF THE AC T WHILE COMPUTING TOTAL INCOME. THE AO WAS HOWEVER OF THE VIEW THAT THE AS SESSEE HAD LARGE CORPORATE OFFICE/HEAD OFFICE AND INCURRED INDIRECT EXPENSES. HE WAS OF THE VIEW THAT THE INVESTMENT PORTFOLIO WHICH YIELDED DI VIDEND INCOME HAD TO BE MONITORED AND SUPERVISED. HE WAS, THEREFORE, OF TH E VIEW THAT THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED TO EARN DIVIDEND INCOME CANNOT BE ACCEPTED. THE AO ESTIMATED 10% OF THE GROSS DI VIDEND AS INDIRECT EXPENSES ATTRIBUTABLE TO THE EARNING OF THE DIVIDE ND INCOME AND ACCORDINGLY REDUCED A SUM OF RS. 3,06,643/- WHILE ALLOWING DED UCTION UNDER SECTION 80 M OF THE ACT. 7. ON APPEAL BY THE ASSESSEE THE CIT(A) REDUCED THE DISALLOWANCE FROM 10% TO 5%. THE CIT(A) ERRONEOUSLY REFERRED TO THE PROVISIONS OF SECTION 14A OF THE ACT. IT HAS TO BE MENTIONED HERE THAT IN A. Y 2003-04 DIVIDEND INCOME WAS TAXABLE AND, THEREFORE, THE PROVISIONS OF SECTI ON 14A COULD NOT BE APPLIED TO MAKE DISALLOWANCE OF EXPENSES INCURRED I N EARNING DIVIDEND INCOME. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 8. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENT ION TO THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF M/S. GODREJ AG ROVET LTD. VS. ACIT, ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 13 ITA NO.6807/M/06 , WHEREIN THIS TRIBUNAL IN RESPECT OF SIMILAR ADHOC ATTRIBUTION OF EXPENSES TO EARN DIVIDEND INCOME OBS ERVED AS FOLLOWS: 12.WE HAVE HEARD THE RIVAL SUBMISSIONS. QUESTION A S TO WHAT SHOULD BE REDUCED AS EXPENDITURE FOR EARNING THE DIVIDEND INCOME WAS CONSIDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MAHENDRA SOBHAGCHAND SHAH, 203 ITR 178 (BORN). HON BLE COURT FIRST LAID DOWN THAT U/S. 57(III) OF THE ACT, AN EXPENDIT URE WILL BE CONSIDERED AS DEDUCTIBLE WHILE COMPUTING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES ONLY IF, IT IS INCURRED FOR THE PURP OSE OF MAKING OR EARNING SUCH INCOME. THE COURT FURTHER HELD THAT TH E ABOVE BEING WORDINGS OF THE SECTION, THERE WAS NO POWER FOR THE ASSESSING OFFICER TO ALLOCATE EXPENDITURE INCURRED BY AN ASSESSEE AMO NGST INCOME UNDER DIFFERENT HEADS ON PRO RATA BASIS. HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT VS. CENTRAL BANK OF INDIA, 264 ITR 522 (BORN) HELD AS FOLLOWS:- SECTION 18 OF THE INCOME TAX ACT, 1961 AS IT STOOD AT THE RELEVANT TIME, REFERS TO COMPUTATION OF INCOME BY W AY OF INTEREST ON SECURITIES. SECTION 20(2) STATES, INTER ALIA, TH AT EXPENSES DEDUCTED U/S. 20(1) SHALL NOT FORM PART OF THE DEDU CTIONS ADMISSIBLE UNDER SECTION 30 TO 37 FOR THE PURPOSES OF COMPUTING BUSINESS PROFITS. SECTION 80M ON THE OTHER HAND, CO MES UNDER CHAPTER VI-A OF THE INCOME TAX ACT. CHAPTER VI-A RE FERS TO SPECIAL DEDUCTION. CHAPTER VI-A CONSTITUTES A SEPAR ATE CODE DEALING WITH DEDUCTIONS TO BE MADE IN COMPUTING THE TOTAL INCOME. IN ORDER TO COMPUTE DEDUCTION UNDER SECTION 80M, ONE HAS TO COMPUTE THE AMOUNT OF DIVIDEND IN ACCORDANCE WITH THE ACT AFTER DEDUCTING INTEREST ON MONIES BORROWED FOR EARNING SUCH INCOME. THE DEDUCTIONS CONTEMPLATED BY SECTION 80M REFER TO ACTUAL EXPENDITURE WHEREAS, DEDUCTIONS CONTEMPLA TED BY SECTION 20(1) ARE ESTIMATED PROPORTIONATE EXPENSES AND INTEREST. THEREFORE, ONE CANNOT IMPORT DEDUCTION FROM INTERES T ON SECURITIES IN THE CASE OF A BANKING COMPANY UNDER S ECTION 20(1) INTO THE DEDUCTIONS CONTEMPLATED BY SECTION 80M. SECTION 20(1) CONTAINS A RULE OF PROPORTIONALITY OF EXPENSES AND INTEREST AND THAT RULE IS BASED ON ESTIMATION OF EXPENDITURE WHEREAS, DEDUCTION UNDER SECTION SOM IS ALLOWABLE ON NET DIV IDEND ARRIVED AT AFTER TAKING INTO ACCOUNT ACTUAL EXPENDI TURE INCURRED FOR THE PURPOSES OF EARNING SUCH DIVIDEND UNLESS THE FACTS OF A PARTICULAR CASE WARRANT OTHERWISE. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 14 THE SPECIAL BENCH OF ITAT CHANDIGARH IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION VS. DCIT 1 02 ITD 1 (CHD)(SB) HAS ALSO TAKEN THE VIEW THAT FOR THE PURP OSE OF SECTION 80M ONLY ACTUAL EXPENDITURE INCURRED HAS TO BE TAKE N INTO CONSIDERATION AND THERE WAS NO QUESTION OF TAKING E XPENDITURE ON ESTIMATE OR PRESUMPTION BASIS. SUBMISSION OF LE ARNED COUNSEL FOR THE ASSESSEE BASED ON THE AFORESAID DEC ISION SUPPORTS THE PLEA OF THE ASSESSEE THAT ADHOC ESTIMA TION OF EXPENSES FOR EARNING DIVIDEND INCOME AS MADE BY THE REVENUE AUTHORITIES WAS NOT CORRECT. 9. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTE D THAT PROVISIONS OF SECTION 14A OF THE ACT, COULD NOT BE APPLIED WHEN T HE DIVIDEND INCOME WAS EXEMPT AND IN THIS REGARD REFERRED TO THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. KINGS EXP ORT, 318 ITR 100 (P&H). HE REFERRED TO THE PROVISIONS OF SECTION 14A OF THE ACT AND SUBMITTED THAT ONLY EXPENDITURE INCURRED IN RESPECT OF EARNING INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME CAN BE SUBJECT MATTER OF D ISALLOWANCE UNDER SECTION 14A OF THE ACT. HE REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WILLIAMSON FINANCIAL SERVICES, 297 ITR 17(SC), WHEREIN IT WAS HELD THAT INCOME COVERED BY SECTION 10 & 11 , W HICH ARE NOT CHARGEABLE TO TAX DOES NOT FALL UNDER SECTION 14 AND UNDER VA RIOUS COMPUTATIONS, UNDER SECTION 15 TO 59. IT WAS ALSO LAID DOWN THAT DEDUCTION UNDER CHAPTER VI-A IS FOR INCOME WHICH FORMS PART OF THE TOTAL IN COME BUT WHICH IS FREE OF TAX. 10. THE LD. D.R RELIED ON THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS. UNITED GENERAL TRUST LTD., 200 ITR 488 (SC). IN THE AFORESAID CASE THE HONBLE SUPREME COURT HAD HELD THAT DEDUCT ION UNDER SECTION 80M HAS TO BE ALLOWED WITH REFERENCE TO THE NET AMOUNT OF DIVIDEND AND PROPORTIONATE MANAGEMENT EXPENSES HAVE TO BE DEDUCT ED. ACCORDING TO THE LD. D.R THE HONBLE SUPREME COURT HAS APPROVED THE DISALLOWANCE OF ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 15 PROPORTIONATE MANAGEMENT EXPENSES WHILE ARRIVING AT THE NET DIVIDEND THAT HAS TO BE COMPUTED FOR ALLOWING DEDUCTION UNDER SEC TION 80 M OF THE ACT. FURTHER REFERENCE WAS MADE TO DECISION OF THE CHAND IGARH BENCH OF ITAT IN THE CASE OF MAHAVIR SPINNING MILLS VS. DCIT, 100 TT J 471 (CHD.), WHEREIN AFTER REFERRING TO THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF UNITED GENERAL TRUST LTD.(SUPRA) THE CHANDIGARH BEN CH EXPRESSED THE OPINION THAT IT WAS OPEN TO DISALLOW EXPENSES ON PR OPORTIONATE BASIS WHILE ARRIVING AT THE NET DIVIDEND INCOME THAT HAS TO BE ALLOWED AS DEDUCTION UNDER SECTION 80M OF THE ACT. 10. THE LD. COUNSEL FOR THE ASSESSEE IN REPLY POINT ED OUT THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST LTD. (SUPRA) WAS RENDERED IN AN APPEAL AGAINST THE ORDER OF THE HONBLE BOMBAY HIGH COURT IN CIT VS. UNITED GENERAL TRUST LTD. , 1 99 ITR 664 (BOM), WHEREIN THE REVENUE SOUGHT TO RAISE THE FOLLOWING Q UESTION BEFORE THE HONBLE BOMBAY HIGH COURT. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN APPLYING THE DEC ISION OF THE BOMBAY HIGH COURT IN THE CASE OF NEW GREAT INSURANCE CO. L TD. (1973) 90 ITR 348 TO THE ASSESSMENT YEAR IN QUESTION WITHOUT CONS IDERING THE EFFECT OF THE AMENDMENT OPERATIVE FROM 1ST APRIL, 1968, AN D IN THUS HOLDING THAT THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTIO N UNDER S. 80M ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTI ONATE MANAGEMENT EXPENSES? THE HONBLE BOMBAY HIGH COURT MADE THE FOLLOWING OB SERVATION. IN OUR VIEW, THE QUESTION AS FRAMED DOES NOT REALL Y ARISE OUT OF THE TRIBUNALS ORDER SINCE THE ONLY QUESTION WHICH WA S AGITATED BEFORE THE TRIBUNAL WAS WHETHER THE DEDUCTION UNDER S. 80 M OF THE ACT WAS TO BE COMPUTED WITH REFERENCE TO THE GROSS DIVIDEND INCOME WITHOUT DEDUCTING THEREFROM THE PROPORTIONATE MANAGEMENT EX PENSES AND THE TRIBUNAL, RELYING ON THE DECISION OF THIS COURT IN SAHU BROTHERS ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 16 (SAURASHTRA) PVT. LTD. (?) AND IN THE CASE OF NEW G REAT INSURANCE CO. LTD. (SUPRA), HELD THAT THE RELIEF UNDER S. 80M WAS TO BE COMPUTED WITH REFERENCE TO THE GROSS DIVIDEND INCOME. IT APPEARS CLEAR THAT THE AFORESAID QUESTION SEEMS TO BE FINALLY CONCLUDED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. SOUTH INDIAN B ANK LTD. (1966) 59 ITR 763 AS ALSO THE DECISION IN CIT VS. INDUSTRI AL INVESTMENT TRUST CO. LTD. (1968) 67 ITR 436 (BOM) THE LD. COUNSEL FOR THE ASSESSEE THUS SUBMITTED THA T IN THE APPEAL BEFORE THE HONBLE SUPREME COURT THE QUESTION WAS ONLY AS TO W HETHER DEDUCTION UNDER SECTION 80M OF THE ACT HAD TO BE ALLOWED ON A GROSS BASIS OR NET BASIS. IT WAS SUBMITTED BY HIM THAT THE HONBLE SUPREME CO URT ONLY APPROVED THE PRINCIPLE THAT DEDUCTION UNDER SECTION 80M HAS TO B E ALLOWED ON THE NET DIVIDEND INCOME AND IT CANNOT BE SAID THAT THE HON BLE SUPREME COURT ALSO HELD THAT ADHOC DISALLOWANCE OF EXPENSES CAN BE MAD E. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WITH REGARD TO THE CONTENTIONS RAISED ON BEHALF OF THE REVENUE BY THE LD. D.R, WE FIND THAT THE FACTS OF THE CASE BEFORE HONBLE BOMBAY HIGH COURT IN THE CASE OF UNITED GENERAL TRUST LTD. (SUPRA) WERE THAT THE TRIBUNAL H ELD THAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION UNDER SECTION 80M OF THE ACT ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTIONATE MA NAGEMENT EXPENSES. THE QUESTION OF LAW SOUGHT TO BE RAISED BY THE REVENUE WAS AS TO WHETHER DEDUCTION UNDER SECTION 80M OF THE ACT HAS TO BE ALLOWED ON THE GROSS DIVIDEND BEFORE DEDUCTION OF THE PROPORTIONATE MANA GEMENT EXPENSES. AS ALREADY SEEN THE HONBLE HIGH COURT EXPRESSED THE V IEW THAT THE QUESTION BEFORE THE TRIBUNAL WAS WHETHER THE DEDUCTION UNDER SECTION 80M HAS TO BE COMPUTED WITH REFERENCE TO GROSS DIVIDEND INCOME WI THOUT DEDUCTION PROPORTIONATE MANAGEMENT EXPENSES. IN THE APPEAL BY THE REVENUE AGAINST THE ORDER OF THE HONBLE BOMBAY HIGH COURT THE HON BLE SUPREME COURT FOLLOWING THE DECISION IN THE CASE OF DISTRIBUTORS (BARODA) PVT. LTD. VS. UNION ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 17 OF INDIA & OTHERS, 155 ITR 120 ALLOWED THE APPEAL O F THE REVENUE. THE HONBLE SUPREME COURT OBSERVED AS FOLLOWS: BOTH THE COUNSEL FOR THE REVENUE AND THE ASSESSEE ARE AGREED THAT THE ONLY QUESTION WHICH WAS SOUGHT TO BE RAISED BY THE REVENUE, BUT WHICH WAS NOT ALLOWED BY THE HIGH COURT, IS CONCLUD ED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE BY THE DECISI ON OF THIS COURT IN DISTRIBUTORS (BARODA) PVT.LTD. VS. UNION OF INDIA & ORS. (1985) 47 CTR (SC)349; (1985) 155 ITR 120(SC). INDEED THE SAME R ESULT FOLLOWS FROM S.80AA, INTRODUCED BY THE FINANCE ACT, 1980, WITH R ETROSPECTIVE EFFECT FROM 1 ST APRIL, 1968. FOR THE ABOVE REASON, THE APPEALS ARE ALLOWED. THE APPLICATION UNDER S.256(2) OF THE IT ACT, MADE BY THE REVENUE SHALL B E DEEMED TO HAVE BEEN ALLOWED, A REFERENCE MADE AND ANSWERED IN THE MANNER INDICATED ABOVE. (UNDERLINING BY US FOR EMPHASIS) IT IS SIGNIFICANT TO NOTE THAT THE ISSUE BEFORE THE HONBLE SUPREME COURT IN THE CASE OF DISTRIBUTORS(BARODA) PVT. LTD. (SUPRA) WAS AS TO WHETHER DEDUCTION UNDER SECTION 80M OF THE ACT HAD TO BE AL LOWED ON THE GROSS DIVIDEND OR NET DIVIDEND. THE HONBLE SUPREME COUR T HELD THAT DEDUCTION UNDER SECTION 80M IS TO BE CALCULATED WITH REFERENC E TO THE NET DIVIDEND I.E. CROSS DIVIDEND (-) EXPENSES INCURRED IN EARNING THE DIVIDEND INCOME. THE QUESTION AS SOUGHT TO BE RAISED BY THE REVENUE BEFO RE THE HONBLE HIGH COURT WAS MODIFIED BY THE HONBLE SUPREME COURT AS CAN BE SEEN FROM THE UNDERLINED PORTION OF THE JUDGMENT REFERRED TO ABOV E AND THE QUESTION WAS AS TO WHETHER DEDUCTION U/S.80-M WAS TO BE ALLOWED ON NET DIVIDEND OR GROSS DIVIDEND. IT IS CLEAR FROM THE JUDGMENT OF T HE HONBLE SUPREME COURT THAT THE QUESTION WHETHER THE ADHOC DEDUCTION OF EX PENSES CAN BE MADE FROM THE GROSS DIVIDEND WHILE DEDUCTION UNDER SECTI ON 80M OF THE ACT WAS NEVER AN ISSUE EITHER IN THE CASE OF DISTRIBUTORS ( BARODA) PVT. LTD. OR IN THE CASE UNITED GENERAL TRUST LTD. (SUPRA). WE ARE, TH EREFORE, OF THE VIEW THAT THE PROPOSITION CANVASSED BY THE DR CANNOT BE ACCEP TED. AS FAR AS THE DECISION OF THE HONBLE CHANDIGARH BENCH OF ITAT IS CONCERNED WE ARE OF THE VIEW THAT THE SAME IS CONTRARY TO THE LAW LAID DOWN BY THE HONBLE BOMBAY ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 18 HIGH COURT IN THE CASE OF CIT VS. CENTRAL BANK OF I NDIA, 264 ITR 522(BOM), WHICH WE HAVE ALREADY REFERRED TO IN THE EARLIER PA RT OF THIS ORDER. APART FROM THE ABOVE, THE SAID DECISION STANDS SUPERSEDED BY THE DECISION OF THE SPECIAL BENCH OF ITAT CHANDIGARH IN THE CASE PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION VS. DCIT 102 ITD1 (CHND)(SB ). WE ARE ALSO OF THE VIEW THAT THE DECISION IN THE CASE OF GODREJ AGROVE T LTD.(SUPRA) WILL BE APPLICABLE TO THE FACTS OF THE PRESENT CASE. WE, T HEREFORE, HOLD THAT THE ADHOC DISALLOWANCE OF EXPENSES FOR EARNING DIVIDEND INCOME AS MADE BY THE REVENUE AUTHORITIES CANNOT BE SUSTAINED. THE ADDIT ION MADE IS ACCORDINGLY DIRECTED TO BE DELETED. 12. GROUND NO.3 RAISED BY THE ASSESSEE CAN BE CONVE NIENTLY DECIDED TOGETHER WITH GROUND NO.1 RAISED BY THE REVENUE. T HESE GROUNDS ARE AS FOLLOWS: GROUND NO.3 ASSESSEES APPEAL: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) E RRED IN CONFIRMING THE COMPUTATION OF DEDUCTION U/S. 80 HHC BY EXCLUDING 90% OF THE FOLLOWING RECEIPT FROM THE PROFITS OF T HE BUSINESS. A) INTEREST INCOME 88,87,950/- B) SURPLUS ON PREPAYMENT OF DEFERRED SALE S TAX 2,32,48,277/- C) COMPENSATION FOR GUARANTEES 11,11,900/- D) ROYALTY 71,030/- E) PENALTY LEVIED ON CUSTOMERS FOR BOUNCED CHEQU ES 4,42,000/- F) SALES TAX REFUND 27,13,822/- GROUND NO.1- REVENUES APPEAL: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO COMPUTE THE DEDUCTION U/S. 80HHC BY EXCLUDING 90% OF THE MISCELLANEOUS INCOME OF RS.7,64,81,198/- FROM THE PROFITS AND GAINS OF BUSI NESS. 13. WE MUST CLARIFY THAT AS FAR AS GROUND NO.1 RAIS ED BY THE REVENUE IS CONCERNED, THE SAME IS FACTUALLY INCORRECT. THE AO WHILE ALLOWING DEDUCTION UNDER SECTION 80 HHC OF THE ACT REDUCED FROM THE PR OFITS OF THE BUSINESS THE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 19 FOLLOWING MISCELLANEOUS INCOME WHICH ACCORDING TO T HE AO DID NOT HAVE ANY NEXUS WITH THE EXPORT ACTIVITY OF THE ASSESSEE AND, THEREFORE, NOT IN THE NATURE OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION WITHIN THE MEANING OF EXPLANATION- BAA OF SECTION 80HHC OF THE ACT. FOLLOWING WERE THE INCOME SO CONSIDERED BY TH E AO. 14. ON APPEAL BY THE ASSESSEE THE CIT(A) GRANTED RE LIEF IN RESPECT OF SOME OF THE ITEMS LISTED ABOVE BY TREATING THEM AS PROFI TS AND GAINS OF BUSINESS OR PROFESSION. IN RESPECT THE RELIEF GRANTED BY THE C IT(A) THE REVENUE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. THEREFORE, GROUND NO.1 RAISED BY THE REVENUE HAS TO BE READ AS ONE CHALLENGING THE RELIE F ALLOWED BY THE CIT(A). IN RESPECT OF ITEMS OF INCOME WHICH WERE CONSIDERED AS NOT INCOME FROM BUSINESS BY THE CIT(A) THE ASSESSEE HAS RAISED GROU ND NO.3. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 20 15. WE SHALL TAKE UP FOR CONSIDERATION GROUND NO.3 BY THE ASSESSEE. (A) INTEREST INCOME OF RS. 18,87,950/-: AS FAR AS INTEREST INCOME IS CONCERED THE LD. COUNS EL FOR THE ASSESSEE SUBMITTED THAT OUT OF THE INTEREST INCOME WHICH WAS CONSIDERED AS NOT INCOME FROM BUSINESS AS ABOVE, A SUM OF RS. 69,51,4 38/- WAS INTEREST IN RESPECT OVER DUE PAYMENTS BY THE CUSTOMERS AND TH E HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS.GRINDWELL NORTON LTD., 318 ITR 172(BOM) (ASSESSEES OWN CASE) WAS PLEASED TO HOLD THAT INTE REST ON OVER DUE PAYMENTS FROM CUSTOMERS WAS INCOME ELIGIBLE FOR DED UCTION UNDER SECTION 80HHC OF THE ACT. 16. THE LD. D.R HOWEVER RELIED ON THE DECISION OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASIAN STAR COMPANY LTD ., 326 ITR 56 (BOM), WHEREIN THE HONBLE HIGH COURT FOLLOWED THE DECISIO N OF THE HONBLE SUPREME COURT IN THE CASE OF RAVINDRANATHAN NAIR, 295 ITR 2 28(SC). IN THE AFORESAID DECISION THE HONBLE BOMBAY HIGH COURT CONSIDERED T HE FOLLOWING QUESTION OF LAW: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL WAS CORRECT IN HOLDING TH AT NET INTEREST ON FIXED DEPOSITS IN BANKS RECEIVED BY THE ASSESSEE CO MPANY SHOULD BE CONSIDERED FOR THE PURPOSE OF WORKING OUT DEDUCTION UNDER SECTION 80HH OF THE ACT AND NOT THE GROSS INTEREST ? THE HONBLE BOMBAY HIGH COURT AFTER REFERRING TO TH E PROVISO BELOW EXPLANATION BAA OF SECTION 80 HHC OF THE ACT HELD THAT RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST ARE TO BE EXCLUDED FROM BUSINESS PROFIT FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT AS THESE RECEIPTS HAVE NO NEXUS WITH THE EXPORT ACTIVI TY. SINCE EXPENSES INCURRED IN EARNING INCOME BY WAY OF INTEREST, BROK ERAGE, COMMISSION ETC. ALSO GO INTO COMPUTATION OF BUSINESS PROFIT PARLIAM ENT THOUGHT IT FIT TO ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 21 EXCLUDE ONLY 90% OF THE RECEIPTS IN ORDER TO ENSURE THAT THE EXPENDITURE WHICH IS INCURRED BY THE ASSESSEE IN EARNING RECEIP TS WHICH HAVE GONE INTO THE COMPUTATION OF BUSINESS PROFITS IS TAKEN CARE O F. THE HONBLE COURT FURTHER HELD THAT THE PARLIAMENT HAS APPROVED ADHOC DEDUCTION OF 10% FROM SUCH INCOMES ON ACCOUNT OF EXPENSES INCURRED IN EAR NING THE RECEIPTS. ONCE THE PARLIAMENT HAS SO LEGISLATED IT CANNOT BE SAID THAT 90% GROSS INTEREST RECEIVED BY THE ASSESSEE HAS TO BE REDUCED FROM THE PROFITS AND GAINS OF BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 80HHC AND NOT THE NET INTEREST. IN CIT VS. RAVINDRANATHAN NA IR (SUPRA) THE HONBLE SUPREME COURT EQUATED PROCESSING CHARGES DERIVED BY THE ASSESSEE BY PROCESSING CASHEW NUTS FOR OTHER EXPORTERS WAS NOT INCOME OF THE NATURE REFERRED TO IN THE PROVISO TO EXPLANATION BAA OF S ECTION 80 HHC OF THE ACT AND CANNOT BE SAID TO BE PROFIT DERIVED FROM THE BU SINESS OF EXPORT. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE OF THE VIEW THAT THE DECISION OF THE HONBLE SUPREM COURT IN THE CASE OF RAVINDRANATHAN NAIR WAS RENDERED ON THE THEORY OF INDEPENDENT INCOME UN CONNECTED WITH EXPORT ACTIVITY. HONBLE BOMBAY HIGH COURT IN THE CASE OF ASIA STAR COMPANY LTD. FOLLOWED THIS THEORY. IN THE CASE OF THE ASSESSEE WE ARE DEALING WITH INTEREST INCOME ON ACCOUNT OF DELAYED PAYMENT BY CUSTOMERS. SUCH INTEREST INCOME WOULD ASSUME THE SAME CHARACTER AS THAT OF THE MONI ES PAYABLE FOR THE SALE OF GOODS BY THE ASSESSEE. THEREFORE, SUCH INTEREST INCOME CANNOT BE SAID TO BE AN INDEPENDENT INCOME NOT CONNECTED WITH THE EXP ORT BUSINESS OF THE ASSESSEE. WE HOWEVER, FIND IN THE CASE OF THE ASSE SSEE THE FACTUAL DETAILS AS TO HOW THE INTEREST INCOME OF RS. 69,51,438/- HAS A RISEN ARE NOT AVAILABLE. WE ARE, THEREFORE, OF THE VIEW THAT IT WOULD BE APP ROPRIATE TO DIRECT THE AO TO EXAMINE THIS ISSUE. IF THE AO FIND THAT THE INTERE ST RECEIVED BY THE ASSESSEE IS ON ACCOUNT OF OVERDUE PAYMENTS ON REALIZATION OF EXPORT SALES BY THE ASSESSEE THEN THEY HAVE TO BE CONSIDERED AS BUSINES S INCOME. THE AO IS ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 22 DIRECTED TO EXAMINE THE ISSUE ON THE ABOVE LINES AN D DECIDE THE ISSUE AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. 18. (B) SURPLUS ON PREPAYMENT OF DEFFERED SALES T AX. RS.2,32,48,277/-: THIS GROUND BECOME INFRUCTUOUS BECAUSE WE HAVE ALR EADY HELD THAT THE SURPLUS IN QUESTION IS NOT CHARGEABLE TO TAX AS INCOME. THEREFORE, THIS GROUND IS DISMISSED. 19. (C) & (D) COMPENSATION FOR GUARANTEES / ROYALTY. (C) & (D) WERE NOT PRESSED, THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 20 .(E) PENALTY LEVIED ON CUSTOMERS FOR BOUNCED CHEQUE S RS.4,42,000/- THIS SUM WILL ALSO STAND ON THE SAME FOOTING OF IN TEREST AS INTEREST ON OVER DUE PAYMENTS FROM CUSTOMERS. THE AO IS DIRECT ED TO EXAMINE AS TO WHETHER PENALTIES RECEIVED BY THE ASSESSEE CAN BE A TTRIBUTED TO THE PAYMENT BY CUSTOMERS OF THE EXPORT BUSINESS OF THE ASSESSEE . 21. (F) SALES TAX REFUNDS : THIS CAN BE CONVENIENTLY DECIDED TOGETHER WITH THE GROUND OF THE REVENUE AS WELL AS THE SOLE GROUND OF CROSS OBJECTI ON RAISED BY THE ASSESSE, WHICH READS AS FOLLOWS: WITHOUT PREJUDICE TO THE CONTENTION OF THE RESPOND ENT AND THAT GROUND NO.1 IN THE APPEAL FILED BY THE DEPARTMENT R EQUIRES TO BE DISMISSED, IN ANY EVENT THE RESPONDENT SUBMITS THAT THE EXPENDITURE REQUIRED TO EARN THE SERVICE RECEIPTS MUST BE NETTE D (REDUCED) BEFORE ARRIVING AT THE FIGURE WHICH IS TO BE REDUCED FROM THE PROFITS & GAINS OF BUSINESS OR PROFESSION UNDER EXPLANATION (BAA) BELOW SECTION 80 HHC. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 23 22. ON GR.NO.1 RAISED BY THE REVENUE IN ITS APPEAL , THE CIT(A) HELD AS FOLLOWS: 8.2. I HAVE CAREFULLY CONSIDERED THE MATERIAL ON RECORD. FOLLOWING THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT VS. BANGALORE CLOTHING LTD. 260 ITR 371 AND MY OWN ORDE R FOR A.Y 2002- 03, THE SCRAP SALES AT RS. 1,90,60,008, INSURANCE C LAIM AT RS. 1,62,246/- SERVICE CHARGES AT RS. 2,22,82,736/- AND DVC CHARGES AT RS. 30,000/- ARE OPERATIONAL RECEIPTS WHICH ARE NOT COVERED BY EXPLANATION BAA. 23. THIS TRIBUNAL HOWEVER HAS IN ASSESSEES OWN CA SE TAKEN A CONTRARY VIEW AS CAN BE SEEN AT PARA 38 OF THE ORDER OF THE TRIBU NAL EXTRACTED ABOVE FOR A.Y 2004-05. AS FAR AS SALE OF SCRAP, SERVICE CHARGES A ND REFUND OF SALES TAX ARE CONCERNED THIS TRIBUNAL IN ASSESSEES OWN CASE IN I TA NO.434/M/09 & 406/M/09 FOR A.Y. 2004-05 WAS PLEASED TO CONSIDER T HE ISSUE AND HELD AS FOLLOWS: 33. IN GROUND NO. 3, THE ASSESSING OFFICER HAS RAI SED THE FOLLOWING GRIEVANCES: 3(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO TREAT THE INCOME FROM AGENCY COMMISSION, SERVICE CHARGES, SCRAP SALES AND SALES TAX AS A PAR T OF BUSINESS PROFIT FOR THE PURPOSE OF WORKING OUT DEDUCTION UNDER SECTION 80 HHC. 3(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO ADJUST THE INTEREST RECEIPTS AGAINST INT EREST PAID AND CONSIDER THE NET AMOUNT AS OTHER INCOME FO R THE PURPOSE OF WORKING OUT DEDUCTION UNDER SECTION 80 HHC. 34. AS FAR AS GROUND NO. 3 (B) IS CONCERNED, LEARNE D REPRESENTATIVES AGREE THAT THE ISSUE IS NOW COVERED AGAINST THE ASSESSEE BY HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 24 CASE OF CIT VS ASIAN STAR CO LTD (326 ITR 56). RESP ECTFULLY FOLLOWING HONBLE BOMBAY HIGH COURT JUDGMENT, WE VA CATE THE RELIEF GRANTED BY THE CIT(A). GROUND NO. 3 (B) IS T HUS ALLOWED. 35. WITH REGARD TO GROUND NO. 3 (A), LEARNED COUNSE L FOR THE ASSESSEE FAIRLY CONCEDES THAT THE INCOME FROM AGENC Y COMMISSION CANNOT BE TREATED AS BUSINESS PROFIT. HE POINTS OUT THAT ASSESSEE HAS SUO MOTU REDUCED THE AGENCY COMMISSION FROM BUSINESS PROFITS, AS EVIDENT FROM P AGE 7 OF THE ASSESSMENT ORDER 36. HOWEVER, AS FAR AS SERVICE CHARGES IN GROUND 3( A) ARE CONCERNED, LEARNED COUNSEL URGES US TO TAKE UP THIS ISSUE ALONG WITH GRIEVANCE RAISED IN THE CROSS OBJECTION. GRIEVANCE RAISED IN THE CROSS OBJECTION IS AS FOLLOWS: WITHOUT PREJUDICE TO THE CONTENTION OF THE RESPONDENT THAT GROUND 3(A) IN THE APPEAL FILED BY THE DEPARTMENT REQUIRES TO BE DISMISSED, IN ANY EVENT T HE RESPONDENT SUBMITS THAT THE EXPENDITURE REQUIRED TO EARN THE SERVICE RECEIPTS MUST BE NETTED (REDUCED) BEFORE ARRIVING AT THE FIGURE WHICH IS TO BE REDUCE D FROM THE PROFITS AND GAINS FROM BUSINESS OR PROFESSION UNDER EXPLANATION (BAA) BELOW SECTION 8 0 HHC. 37. THE ASSESSEE ASSEMBLES THE EFFLUENT TREATMENT P LANT AT CUSTOMERS SITE AND SERVICE CHARGES REPRESENT CHARG ES RECEIVED BY THE ASSESSEE IN RESPECT OF THE SAME. THERE ARE D IRECT COSTS INVOLVED IN THIS ACTIVITY. WHILE ASSESSING OFFICER WAS OF THE VIEW THAT SERVICE CHARGES ARE RECEIVED FOR SERVICES RENDERED BY THE ASSESSE, THE CIT(A) HAS GRANTED RELIEF ON THE G ROUND THAT SINCE THESE ACTIVITIES ARE PART AND PARCEL OF ASSES SEES BUSINESS, THE SERVICE CHARGES RECEIPT CANNOT BE EXC LUDED FROM BUSINESS PROFITS. THE ASSESSING OFFICER IS AGGRIE VED AND IS IN APPEAL BEFORE US. 38. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE ARE OF THE CONSIDERED VI EW THAT THE SERVICE CHARGES RECEIPTS ARE NOT IN RESPECT OF EXPO RT BUSINESS AND SHOULD BE EXCLUDED AS SUCH, WHAT IS TO BE EXCLU DED IS THE EARNINGS FROM SERVICE CHARGES, ON NET BASIS, BECAUS E THERE ARE DIRECT AND CLEARLY IDENTIFIABLE EXPENSES INCURRED T O EARN THE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 25 SAME, AND ANY OTHER APPROACH WILL RESULT IN DISTORT ION OF RESULTS. ACCORDINGLY, WHILE WE UPHOLD THE GRIEVANCE OF THE ASSESSING OFFICER, WE ALSO UPHOLD THE GRIEVANCE OF THE ASSESSEE RAISED IN THE CROSS OBJECTION. 39. AS REGARDS EXCLUSION OF SCARP SALES AND SALES T AX REFUND, LEARNED REPRESENTATIVES AGREE THAT THE ISSUES ARE C OVERED IN FAVOUR OF THE ASSESSEE BY DECISIONS OF THE COORDINA TE BENCHES IN THE CASES OF KODAK INDIA PVT LTD (8923/MUM/04) A ND DIAMOND DYECHEM LTD ( ITA 3342/MUM/06), COPIES OF W HICH WERE PLACED BEFORE US. LEARNED DEPARTMENTAL REPRESE NTATIVE, HOWEVER, DUTIFULLY RELIED UPON THE STAND OF THE ASS ESSING OFFICER. CONSISTENT WITH THE STAND TAKEN BY THE CO ORDINATE BENCHES, WE APPROVE THE CONCLUSIONS ARRIVED AT BY T HE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 24. AS CAN BE SEEN FROM THE AFORESAID ORDER OF THE TRIBUNAL THE GRIEVANCE PROJECTED BY THE REVENUE IN GROUND NO.1 OF ITS APPE AL HAS TO BE ACCEPTED. IT CAN ALSO BE SEEN FROM THE AFORESAID ORDER THAT THE TRIBUNAL HAS ALLOWED THE ALTERNATE PLEA OF NETTING. AS WE HAVE ALREADY SEEN HONBLE BOMBAY HIGH COURT IN THE CASE OF ASIAN STAR LTD.(SUPRA) HAS TAK EN A VIEW THAT NETTING SHOULD NOT BE ALLOWED. THE QUESTION OF LAW BEFORE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASIAN STAR LTD. (SUPRA) WAS ' WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE H ON'BLE TRIBUNAL WAS CORRECT IN HOLDING THAT NET INTEREST ON FIXED DEPO SITS IN BANKS RECEIVED BY THE ASSESSEE-COMPANY SHOULD BE CONSIDERED FOR THE PURPOSE OF WORKING OUT THE DEDUCTION UNDER SECTION 80HHC AND NOT THE GROSS INTEREST ?' THE FACTS OF THE CASE BEFORE THE HONBLE BOMBAY HIG H COURT IN THE CASE OF ASIAN STAR LTD. (SUPRA) WERE THAT THE ASSESSEE HAD DEBITED NET INTEREST OF RS.21.46 CRORES (BEING INTEREST ON BORROWINGS FOR W ORKING CAPITAL) IN ITS PROFIT AND LOSS ACCOUNT AFTER SETTING OFF RS.3.25 CRORES O F INTEREST RECEIVED ON FIXED DEPOSITS AND ARRIVED AT THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S.80-HHC OF THE ACT. HE ASS ESSEE WAS CALLED UPON ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 26 TO EXPLAIN AS TO WHY THE DEDUCTION UNDER SECTION 8 0HHC SHOULD NOT BE RECOMPUTED BY EXCLUDING NINETY PER CENT. OF THE INT EREST RECEIVED IN THE AMOUNT OF RS. 3.25 CRORES. BY ITS EXPLANATION, THE ASSESSEE SUBMITTED THAT DURING THE YEAR, IT RECEIVED INTEREST ON FIXED DEPO SITS. THE ASSESSEE STATED THAT IT HAD BORROWED MONIES IN ORDER TO FULFILL ITS WORKING CAPITAL REQUIREMENTS AND THE BANK HAD CALLED UPON IT TO MAI NTAIN A FIXED DEPOSIT AS MARGIN MONEY AGAINST THE LOANS. THE ASSESSEE CONSEQ UENTLY CONTENDED THAT THERE WAS A DIRECT NEXUS BETWEEN THE DEPOSITS KEPT IN THE BANK AND THE AMOUNTS BORROWED. THE ASSESSING OFFICER, WHILE PAS SING AN ORDER OF ASSESSMENT DATED JANUARY 30, 2006, FOUND THAT THE EXPLANATION OF THE ASSESSEE COULD NOT BE ACCEPTED SINCE A PLAIN READI NG OF EXPLANATION (BAA) TO SECTION 80HHC WOULD SUGGEST THAT NINETY PER CENT O F THE RECEIPTS ON ACCOUNT OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR RECEIPTS OF A SIMILAR NATURE WERE LIABLE TO BE EXCLUDED WHILE CO MPUTING THE PROFITS OF THE BUSINESS. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT FROM THE BANK AND FUND FLOW STATEMENTS, THE ASSESS EE HAS ESTABLISHED A DIRECT NEXUS BETWEEN INTEREST BEARING FIXED DEPOSI TS AND THE 'INTEREST CHARGING' BORROWED FUNDS. THE COMMISSIONER OF INCO ME-TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO ALLOW THE NETTING OF INTEREST INCOME AND INTEREST EXPENSES. THE VIEW OF THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS CONFIRMED IN APPEAL BY THE INCOME-TAX APPELLATE TRIBUNAL. ON FURTHER APPEAL THE HONBLE BOMBAY HIGH COURT HELD AS FOLLOW S: THE SPECIAL DEDUCTION UNDER SECTION 80HHC OF THE I NCOME-TAX ACT, 1961, IS AVAILABLE TO AN ASSESSEE ENGAGED IN THE EX PORT OF GOODS OR MERCHANDISE OUTSIDE INDIA TO THE EXTENT OF THE PROF ITS SPECIFIED IN SUB- SECTION (1B) OF THE PROVISION. CLAUSE (A) OF SUB-SE CTION (3) OF SECTION 80HHC PROVIDES THAT WHERE THE EXPORTED GOODS ARE MA NUFACTURED BY THE ASSESSEE, THE DEDUCTION UNDER SUB-SECTION (1) W OULD BE IN ACCORDANCE WITH THE FORMULA STATED THEREIN. THE FOR MULA IS THAT THE PROFITS DERIVED FROM SUCH EXPORT SHALL BE THE AMOUN T WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOVER ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 27 IN RESPECT OF SUCH GOODS BEARS TO THE TOTAL TURNOVE R OF THE BUSINESS CARRIED ON BY THE ASSESSEE. EXPLANATION (BAA) WAS I NSERTED BY THE FINANCE (NO. 2) ACT OF 1991. UNDER EXPLANATION (BAA ), THE EXPRESSION 'PROFITS OF THE BUSINESS' MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSIN ESS OR PROFESSION' AS REDUCED BY NINETY PER CENT. OF (A) ANY SUMS REFE RRED TO IN CLAUSES (IIIA), (IIIB), (IIIC), (IIID) AND (IIIE) OF SECTIO N 28 ; OR (B)ANY RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES O R ANY OTHER RECEIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS. THE P ROFITS OF ANY BRANCH, OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATED OUTSIDE INDIA HAVE ALSO TO BE REDUCED. SINCE RECEIP TS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR O THER SIMILAR RECEIPTS HAVE NO NEXUS WITH THE EXPORT ACTIVITY, THE LEGISLA TURE THOUGHT IT FIT, FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC TO EXCLUDE SUCH ITEMS FROM BUSINESS PROFITS. PARLIAMENT WAS, HOWEVE R, CONSCIOUS OF THE FACT THAT THE EXPENDITURE INCURRED IN EARNING THE I TEMS WHICH WERE LIABLE TO BE EXCLUDED HAD ALREADY GONE IN TO THE CO MPUTATION OF BUSINESS PROFITS. THIS WAS BECAUSE THE COMPUTATION OF BUSINESS PROFITS UNDER CHAPTER IV IS MADE BY AMALGAMATING THE RECEIP TS AS WELL AS THE EXPENDITURE INCURRED IN CARRYING ON THE BUSINESS. S INCE THE EXPENDITURE INCURRED IN EARNING THE INCOME BY WAY O F INTEREST, BROKERAGE, COMMISSION RENT, CHARGES OR OTHER SIMILA R RECEIPTS HAD ALSO GONE INTO THE COMPUTATION OF BUSINESS PROFITS, PARL IAMENT THOUGHT IT FIT TO EXCLUDE ONLY NINETY PER CENT. OF THE RECEIPTS RE CEIVED BY THE ASSESSEE IN ORDER TO ENSURE THAT THE EXPENDITURE WHICH IS IN CURRED BY THE ASSESSEE IN EARNING THE RECEIPTS WHICH HAS GONE INT O THE COMPUTATION OF THE BUSINESS PROFITS IS TAKEN CARE OF. IN PROVID ING A SIMPLIFIED FORMULA IN THESE TERMS, PARLIAMENT EVIDENTLY ADOPTE D A FAIR AND REASONABLE STATUTORY BASIS OF WHAT MAY BE REGARDED AS EXPENDITURE INCURRED FOR THE EARNING OF THE RECEIPTS. THE DISTO RTION OF THE PROFITS THAT WOULD TAKE PLACE BY EXCLUDING THE RECEIPTS REC EIVED BY THE ASSESSEE WHICH WERE UNRELATED TO EXPORT TURNOVER AN D NOT THE EXPENDITURE INCURRED BY THE ASSESSEE IN EARNING THO SE RECEIPTS WAS FACTORED IN BY PARLIAMENT BY EXCLUDING ONLY NINETY PER CENT. OF THE RECEIPTS RECEIVED BY THE ASSESSEE. THE EXTENT OF TH E EXCLUSION WHICH IS STATUTORILY MANDATED BY PARLIAMENT IS NINETY PER CE NT. OF THE TOTAL RECEIPTS. THIS IS BECAUSE THE EXPENDITURE WHICH IS INCURRED BY THE ASSESSEE IN EARNING THESE RECEIPTS WOULD HAVE GONE INTO THE COMPUTATION OF THE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND A DISTORTION WOULD BE CAUSED IF THE ENTIRETY OF THE I NCOME GENERATED FROM THE RECEIPTS ALONE WERE TO BE EXCLUDED. IT IS IN OR DER TO OBVIATE SUCH A DISTORTION THAT PARLIAMENT MANDATED THAT NINETY PER CENT. OF THE RECEIPTS WOULD BE EXCLUDED. ONCE PARLIAMENT HAS LEG ISLATED BOTH IN ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 28 REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTEN T OF THE EXCLUSION, IT WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE B Y REWRITING THE LEGISLATIVE PROVISION. THE TASK OF INTERPRETATION I S TO FIND OUT THE TRUE INTENT OF A LEGISLATIVE PROVISION. HENCE FOR THE PU RPOSE OF EXPLANATION (BAA) TO SECTION 80HHC THE GROSS INTEREST ON FIXED DEPOSITS IN THE BANK RECEIVED BY THE ASSESSEE SHOULD BE CONSIDERED FOR T HE PURPOSES OF WORKING OUT THE DEDUCTION UNDER SECTION 80HHC AND N OT THE NET INTEREST. 25. THE AFORESAID DECISION OF THE HONBLE BOMBAY H IGH COURT HAS NOT BEEN BROUGHT TO THE NOTICE OF THE TRIBUNAL WHILE IT DECI DED THE CASE FOR A.Y 2004- 05. IN THE LIGHT OF THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT, WE, ARE OF THE VIEW THAT THE GRIEVANCE OF THE ASSES SEE AS PROJECTED IN THE CROSS OBJECTION CANNOT BE ACCEPTED. WE ALLOW GROUN D NO.1 RAISED BY THE REVENUE TO THE EXTENT THAT IT RELATES TO INSURANCE CLAIM, SERVICE CHARGES, DVC CHARGES AND PROFESSIONAL SERVICE CHARGES. 25. AS FAR AS SALES TAX REFUND WHICH IS ONE OF THE ITEMS OF INCOMES REFERRED IN GROUND NO.3(F) OF THE ASSESSEE, IS CONC ERNED THE TRIBUNAL IN ASSESSEES OWN CASE AS WE HAVE ALREADY SEEN HAS ALL OWED THE CLAIM OF THE ASSESSEE. THE LD. D.R HOWEVER, PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DRESSER RA ND INDIA PVT. LTD., 323 ITR 429(BOM), WHEREIN THE HONBLE BOMBAY HIGH COURT WAS PLEASED TO HOLD THAT SALES TAX REFUND WOULD FALL UNDER PROVISO BELO W CLAUSE (BAA) OF SECTION 80 HHC OF THE ACT AND, THEREFORE, 90% OF THE SAME S HOULD BE EXCLUDED WHILE ALLOWING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. IN VIEW OF THE ABOVE DECISION WE DISMISS THE GRIEVANCE PROJECTED BY THE ASSESSEE IN GROUND NO. 3(F) OF THE GROUND OF APPEAL. 26. AT THE TIME OF HEARING ARGUMENTS WERE ADDRESSED ON SALE OF SCRAP WHICH IS THE GRIEVANCE PROJECTED IN GROUND NO.1 OF THE REVENUES APPEAL. AS FAR AS SALE OF SCRAP IS CONCERNED THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 29 2004-05 IN ITA NO.434/M/09 WAS PLEASED TO HOLD THAT SALE OF SCRAP HAS TO BE CONSIDERED AS INCOME FROM BUSINESS. FOLLOWING T HE SAID DECISION WE REJECT THE GROUND NO.1 OF THE REVENUE TO THIS EXTEN T REGARDING SCRAP SALES. THUS GROUND NO.3 OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. GROUND RAISED BY THE REVENUE IN GROUND NO.1 IS PART LY ALLOWED. GROUND RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION IS DI SMISSED. 27. GROUND NO.4 RAISED BY THE ASSESSEE IN ITS APPE AL READS AS FOLLOWS: THE LEARNED COMMISSIONER (APPEALS) ERRED IN CONFIR MING THAT PREMIUM OF RS.65,80,000/- PAID ON PREPAYMENT OF DE BENTURES WAS A CAPITAL EXPENDITURE. THE APPELLANT SUBMITS THAT TH E ASSESSING OFFICER BE DIRECTED TO TREAT THE SAID SUM OF RS. 65,80,000/ - AS A REVENUE EXPENDITURE AND ALLOW THE SAME. 28. THE ASSESSEE HAD ISSUED DEBENTURES OF RS. 10 CRORES TO BIRLA SUNLIFE ASSET MANAGEMENT COMPANY LTD (BIRLA MF), ON 26TH MA Y 1999. THE RATE OF INTEREST WAS L3.7% P.A., PAYABLE QUARTERLY. THE TEN URE OF DEBENTURE WAS 5 YEARS. THE REPAYMENT SCHEME WAS AS FOLLOWS: DATE REDEMPTION INSTALMENTS 25TH MAY 2002 RS. 1.75 CR. 25TH MAY 2003 RS. 1.75 CR. 25THMAY2004 RS.6.5OCR. DURING THE PREVIOUS YEAR, THE ASSESSEE PREPAID THE ABOVE REFERRED DEBENTURES IN VIEW OF SURPLUS FUNDS AT ITS DISPOSA1 . ACCORDING TO THE ASSESSEE IT WAS A CONSCIOUS BUSINESS DECISION TO RE DUCE ITS INTEREST COST FOR THE FINANCIAL YEAR 2002-03 TO 2004-05. BY PREPAYING THE DEBENTURE THE REDUCTION OF INTEREST EXPENSE OF THE ASSESSEE WAS A S GIVEN BELOW: ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 30 FINANCIAL YEAR INTEREST SAVED (RS) 2002-03 30,19,150 2003-04 92,59,699 2004-05 13,17,452 ------------- TOTAL 1,35,96,301 ========= THE ASSESSEE NEGOTIATED WITH BIRLA MF AND CONVINCED THE FUND MANAGER FOR EARLY REDEMPTION. THE FUND MANAGER WAS NOT READY FO R EARLY REDEMPTION DUE TO THE ASSESSEES STRONG CREDIT RECORD AND ABILITY TO SERVE THE LIABILITY. AFTER HOLDING SEVERAL MEETINGS WITH BIRLA MF FROM TIME TO TIME, IT WAS DECIDED TO PREPAY THE DEBENTURES WITH A PREPAYMENT PREMIUM OF RS.65,80,000/-. 29. THE PREPAYMENT PREMIUM OF RS.65,80,000/- WAS CLAIMED AS DEDUCTION AS REVENUE EXPENDITURE, ACCORDING TO THE ASSESSEE T HE EXPENDITURE WAS NEITHER INCURRED FOR THE INITIATION OF A BUSINESS, NOR FOR EXTENSION OF A BUSINESS, NOR FOR A SUBSTANTIAL REPLACEMENT OF EQUI PMENT. IT HAS NOT RESULTED IN AN ADVANTAGE FOR THE ENDURING BENEFIT TO THE BUS INESS. IT MERELY REDUCED THE REVENUE EXPENDITURE FOR THE FINANCIAL YEAR 2002 -03 TO 2004-05. IT HAS NEITHER BROUGHT INTO EXISTENCE AN ASSET NOR AN ADVA NTAGE FOR THE ENDURING BENEFIT TO THE BUSINESS. BY PREPAYING THE DEBENTU RE, THE ASSESSEE INCREASED ITS TAXABLE INCOME FOR THE FINANCIAL YEARS 2003-04 & 2004-05. 30. THE AO REJECTED THE PLEA OF THE ASSESSEE. HE HELD THAT PREMIUM HAS BEEN PAID FOR DISCHARGE OF A LIABILITY ON CAPITAL A CCOUNT BECAUSE DEBENTURE WAS IN THE NATURE OF LOAN. SINCE THE PAYMENT WAS F OR DISCHARGE OF CAPITAL LIABILITY, THE SAME HAS TO BE TREATED AS CAPITAL EX PENDITURE. ON APPEAL BY THE ASSESSEE, THE CIT(A) UPHELD THE ORDER OF THE AO. H ENCE, GR.NO.4 BY THE ASSESSEE BEFORE THE TRIBUNAL. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 31 31. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED R ELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MA DRAS AUTO SERVICE (P) LTD., 233 ITR 468(SC) WHEREIN THE HONBLE SUPREME C OURT LAID DOWN THE PRINCIPLES APPLICABLE IN DETERMINING IN DETERMINING WHETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE EXPENDITURE AS FO LLOWS: (1) OUTLAY IS DEEMED TO BE CAPITAL WHEN IT IS MADE FOR THE INITIA TION OF A BUSINESS, FOR EXTENSION OF A BUSINESS, OR FOR A SUBSTANTIAL REPLA CEMENT OF EQUIPMENT; (2) EXPENDITURE MAY BE TREATED AS PROPERLY ATTRIBUTABLE TO CAPITAL WHEN IT IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT OF A TRADE. IF WHAT IS GOT RID OF BY A LUMP SUM PAYMENT IS AN ANNUAL BUSINESS EXPENSE CHARGEABLE AGAINST REVENUE, THE LUMP SUM PAYMENT SHOULD EQUALLY BE REG ARDED AS A BUSINESS EXPENSE, BUT IF THE LUMP SUM PAYMENT BRINGS IN A CA PITAL ASSET, THEN THAT PUTS THE BUSINESS ON ANOTHER FOOTING ALTOGETHER; (3 ) WHETHER FOR THE PURPOSE OF THE EXPENDITURE, ANY CAPITAL WAS WITHDRAWN, OR, IN OTHER WORDS, WHETHER THE OBJECT OF INCURRING THE EXPENDITURE WAS TO EMPL OY WHAT WAS TAKEN IN AS CAPITAL OF THE BUSINESS. AGAIN, IT IS TO BE SEEN WH ETHER THE EXPENDITURE INCURRED WAS PART OF THE FIXED CAPITAL OF THE BUSIN ESS OR PART OF ITS CIRCULATING CAPITAL. 32. THE FACTS OF THE CASE BEFORE THE HONBLE SUPR EME COURT IN THE CASE OF CIT VS. ASSOCIATED CEMENT COMPANIES LTD. 172 ITR 25 7(SC) WHEREIN IT WAS LAID DOWN THAT WHERE BY INCURRING AN EXPENDITURE N O CAPITAL ASSET IS CREATED BUT THE EXPENDITURE ENABLES THE ASSESSEE TO AVOID A RECURRING REVENUE EXPENDITURE IN FUTURE, THE SAME WOULD BE REVENUE EX PENDITURE. FURTHER RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF MADRAS AUTO SERVICE (P) LTD., WAS THAT THE ASSESSEE WAS A COMPANY CARRYING ON THE BUSINESS OF SALE OF MOTOR PARTS. ITS HEAD OFFICE WAS AT MADRAS. IT H AD A BRANCH AT BANGALORE. UNDER AN AGREEMENT OF LEASE THE ASSESSEE OBTAINED C ERTAIN PREMISES FOR A ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 32 PERIOD OF THIRTY NINE YEARS AT BANGALORE. UNDER THE TERMS AND CONDITIONS OF THE LEASE, THE LESSEE (THAT IS TO SAY THE ASSESSEE) , HAD THE RIGHT TO DEMOLISH AT ITS OWN EXPENSE THE EXISTING PREMISES AND APPROPRIA TE TO ITSELF ALL THE MATERIAL, THEREOF, WITHOUT PAYING TO THE LESSORS AN Y COMPENSATION AND CONSTRUCT A NEW BUILDING THEREON TO SUIT THE PURPOS E OF THEIR BUSINESS AS PER THE PLAN APPROVED BY THE LESSORS. UNDER CLAUSE 2 OF THE LEASE DEED, THE LESSEE WAS REQUIRED TO PAY A RENT OF RS. 1,000 PER MONTH F OR THE FIRST FIFTEEN YEARS, RS. 1,500 PER MONTH FOR THE NEXT TEN YEARS, RS. 1,6 50 PER MONTH FOR THE NEXT TEN YEARS AND RS. 2,000 PER MONTH FOR THE REMAINING YEARS. THE LEASE DEED FURTHER PROVIDED THAT THE NEW CONSTRUCTION SHALL, R IGHT FROM THE COMMENCEMENT OF THE WORK, BE THE PROPERTY OF THE LE SSORS; AND UPON COMPLETION OF THE WORK OF CONSTRUCTION THE LESSEE W OULD HAVE ONLY THE RIGHT TO BE A TENANT FOR A PERIOD OF 39 YEARS UNDER THE E XISTING LEASE, SUBJECT TO THE PAYMENT OF RENT AND OBSERVATION OF OTHER TERMS AND CONDITIONS OF THE LEASE. THE LESSEE WOULD NOT BE ENTITLED UNDER ANY CIRCUMST ANCES TO ANY COMPENSATION WHATSOEVER ON ACCOUNT OF ITS PUTTING U P THE NEW CONSTRUCTION IN PLACE OF THE OLD. ACTING UNDER THE LEASE AGREEME NT, THE ASSESSEE INVESTED A SUM OF RS. 1,62,835 IN THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR 1968-69 AND RS. 50,937 DURING THE SUCCEEDING YEAR I N CONSTRUCTING A NEW BUILDING ON THE SAID LAND. THE ASSESSEE CLAIMED BEF ORE THE INCOME-TAX OFFICER THE EXPENDITURE OF THE SAID SUMS OF RS. 1,6 2,835 AND RS. 50,937 IN THE RELEVANT ASSESSMENT YEARS AS CAPITAL LOSS. IN T HE ALTERNATIVE, THE ASSESSEE CLAIMED DEDUCTION OF THE PAYMENTS AS BUSINESS EXPEN DITURE OR AS EXTRA RENT FOR THE LEASE. ULTIMATELY, THE INCOME-TAX APPELLATE TRIBUNAL HELD THAT THE EXPENDITURE OF THE SAID TWO AMOUNTS FOR THE CONSTRU CTION OF A NEW BUILDING WAS IN THE NATURE OF BUSINESS EXPENDITURE FOR PROPE R CARRYING ON OF THE BUSINESS OF THE ASSESSEE. THE TRIBUNAL HAD, THEREFO RE, TREATED THESE AMOUNTS AS REVENUE EXPENDITURE. THIS WAS UPHELD BY THE HIGH COURT. ON APPEAL TO THE SUPREME COURT, IT WAS HELD THAT RIGHT FROM INCE PTION, THE BUILDING WAS OF ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 33 THE OWNERSHIP OF THE LESSOR. THEREFORE, BY SPENDING THIS MONEY, THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET. THE ONLY ADVANTAGE WHICH THE ASSESSEE DERIVED BY SPENDING THE MONEY WAS THAT IT GOT THE L EASE OF A NEW BUILDING AT A LOW RENT. FROM THE BUSINESS POINT OF VIEW, THEREFORE, THE ASSESSEE GOT THE BENEFIT OF REDUCED RENT. THE HIGH COURT HAD, THEREFORE, RIGHTLY CONSIDERED THIS AS OBTAINING A BUSINESS ADV ANTAGE. THE EXPENDITURE WAS, THEREFORE, TO BE TREATED AS REVENUE EXPENDITUR E. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FACT THAT BY PAYING PREMIUM FOR PREPAYMENT OF DEBENTURES, THE ASSESSEE COULD AVOID INCURRING OF R ECURRING INTEREST EXPENDITURE IN FUTURE. ACCORDING TO HIM THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS AUTO SERVICE (SUPRA) WO ULD SQUARELY APPLY TO THE FACTS OF THE ASSESSEES CASE. FURTHER RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT AND HONBLE CALCUT TA HIGH COURT IN THE CASE OF CIT VS. SHREE RAJASTAN SYNTEX LTLD. 269 ITR 461 (RAJ) AND CIT VS. TUNGABHADRA INDUSTRIES LTD. 207 ITR 563 (CAL) FOR T HE PROPOSITION THAT PREMIUM PAYABLE ON REDEMPTION OF DEBENTURES ARE REV ENUE EXPENDITURE. 33. THE LEARNED D.R. RELIED ON THE ORDER OF THE CI T(A). HER ALTERNATE SUBMISSION IN CASE THE PREMIUM ON REDEMPTION OF DEB ENTURES IS HELD TO BE REVENUE EXPENDITURE WAS THAT THE PREMIUM PAID SHOUL D BE SPREAD OVER TO THE TENURE OF THE DEBENTURE AND CANNOT BE ALLOWED I N ONE LUMP SUM. IN THIS REGARD RELIANCE WAS PLACED BY THE LEARNED COUNSEL F OR THE ASSESSEE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT 225 ITR 802 (SC ). 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE NATURE OF EXPENDITURE INCURRED IN CONNECTION WITH BORROWINGS ON DEBENTURE S HAS BEEN EXPLAINED BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF T UNGABHADRA INDUSTRIES LTD. (SUPRA) AS FOLLOWS: ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 34 A SHARE IS CLEARLY DISTINCT AND DIFFERENT FROM A D EBENTURE. IT IS WELL- SETTLED THAT THE TAKING OF A LOAN DOES NOT LEAD TO ACQUISITION OF ANY CAPITAL ASSET OR ANY ADVANTAGE OF AN ENDURING NATUR E. THE LOAN IS A LIABILITY AND CANNOT BE CONSIDERED AS AN ADVANTAGE IRRESPECTIVE OF THE PURPOSES FOR WHICH THE LOAN IS UTILIZED, NAMELY, WH ETHER FOR ACQUISITION OF A CAPITAL ASSET OR FOR MEETING REVEN UE DISBURSEMENTS. THE EXPENDITURE INCURRED ON THE LOAN WOULD BE AN AL LOWABLE REVENUE EXPENDITURE. THE REVENUE EXPENDITURE SHOULD BE ALLO WED IN THE YEAR IN WHICH IT IS INCURRED. IN A CASE WHERE THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING THE DEDUCTION SHOUL D BE ALLOWED FOR THE ENTIRE REVENUE EXPENDITURE IN THE YEAR IN WHICH SUCH LIABILITY IS INCURRED ALTHOUGH THE PAYMENT IS MADE IN LATER YEAR S. THE HONBLE COURT WHILE COMING TO THE ABOVE CONCLUS ION REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F INDIA CEMENTS LTD. VS. CIT 60 ITR 52 (SC). IT CAN THUS BE SAFELY SAID THA T PREMIUM PAID ON PREMATURE REDEMPTION OF DEBENTURE WOULD BE REVENUE EXPENDITURE. THE EXPENDITURE WAS INCURRED IN THE PREVIOUS YEAR AND W AS THEREFORE TO BE ALLOWED AS A DEDUCTION. WITH REGARD TO THE SUBMISS ION OF THE LEARNED D.R. THAT THE EXPENDITURE SHOULD BE SPREAD OVER TO THE T ENURE OF THE DEBENTURE BY PLACING RELIANCE ON THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. (SUPRA), WE ARE OF THE VIEW THAT THE SAME IS NOT ACCEPTABLE. IN THE CASE OF MADRAS INDU STRIAL INVESTMENT CORPN.(SUPRA) THE FACTS WERE THAT THE ASSESSEE ISSU ED DEBENTURES AT A DISCOUNT AND WAS BOUND TO REPAY THE DEBENTURES AT F ACE VALUE AFTER A PERIOD OF 12 YEARS. THE QUESTION THAT AROSE FOR CONSIDERA TION WAS AS TO WHETHER THE ENTIRE DISCOUNT HAD TO BE PAID IN THE YEAR OF REDEM PTION OR WHETHER THE SAME HAS TO BE SPREAD OVER AND CLAIMED AS DEDUCTION OVER 12 YEARS, THE PERIOD FOR WHICH THE DEBENTURES WERE ISSUED. THE HONBLE SUPR EME COURT HELD : IT IS TRUE THAT THE LIABILITY HAS BEEN INCURRED IN THE ACCOUNTING YEAR. BUT THE LIABILITY IS A CONTINUING LIABILITY WHICH S TRETCHES OVER A PERIOD OF 12 YEARS. IT IS, THEREFORE, A LIABILITY SPREAD O VER A PERIOD OF 12 YEARS. ORDINARILY, REVENUE EXPENDITURE WHICH IS INCURRED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALL OWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT IS INCURRED. IT CANNOT BE S PREAD OVER A NUMBER ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 35 OF YEARS EVEN IF THE ASSESSEE HAS WRITTEN IT OFF IN HIS BOOKS OVER A PERIOD OF YEARS. HOWEVER, THE FACTS MAY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE ENTI RE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PRO FITS OF A PARTICULAR YEAR. THUS IN THE CASE OF HINDUSTAN ALUMINIUM CORPO RATION LTD. V. CIT [1983] 144 ITR 474, THE CALCUTTA HIGH COURT UPH ELD THE CLAIM OF THE ASSESSEE TO SPREAD OUT A LUMP SUM PAYMENT TO SE CURE TECHNICAL ASSISTANCE AND TRAINING OVER A NUMBER OF YEARS AND ALLOWED A PROPORTIONATE DEDUCTION IN THE ACCOUNTING YEAR IN Q UESTION. ISSUING DEBENTURES AT A DISCOUNT IS ANOTHER SUCH IN STANCE WHERE, ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABILITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES, THE PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE IS A CONTINUING BENEFIT TO THE BUSINESS OF THECOMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SH OULD, THEREFORE, BE SPREAD OVER THE PERIOD OF THE DEBENTURES. 35. IN THE PRESENT CASE, WE ARE CONCERNED WITH A C ASE WHERE DEBENTURES WERE REDEEMED MUCH PRIOR TO THE PERIOD FOR WHICH TH EY WERE ISSUED. IN OTHER WORDS, THE CONTRACTUAL TERMS OF ISSUE OF THE DEBENT URES WERE NOT FULFILLED AND THERE WAS A NOVATION OF CONTRACT BETWEEN THE ASSESS EE AND THE DEBENTURE HOLDERS. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE YEAR IN WHICH THE EXPENDITURE IN THE FORM OF PREMIUM ON PREMATURE REDEMPTION OF DEBENTURES SHOULD BE ALLOWED. WE ORDER ACCORDINGLY . GR.NO.4 RAISED BY THE ASSESSEE IS ALLOWED. 36. GR.NO.5 RAISED BY THE ASSESSEE READS AS FOLLOW S: 5. THE LEARNED COMMISSIONER (APPEALS) ERRED IN CON FIRMING THE DISALLOWANCE OF RS.3,66,972/- U/S. 43B IN RESPECT OF COMPANYS CONTRIBUTION TO PROVIDENT FUND. THE APPELLANT SUBM ITS THAT THE DISALLOWANCE BE DELETED. 37. IN ITS RETURN OF INCOME, THE ASSESSEE ADDED BA CK TO ITS INCOME AN AMOUNT OF RS.4,00,920/- ON ACCOUNT OF DELAY IN DEPO SITING THE COMPANYS CONTRIBUTION TO PROVIDENT FUND & LABOUR WELFARE FUN D. DURING THE COURSE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 36 OF ASSESSMENT PROCEEDINGS, THE ASSESSEE VIDE ITS LE TTER DATED JANUARY 30, 2006 REQUESTED THE ASSESSING OFFICER TO ALLOW THE D EDUCTION OF R.S.4,00,920/-, AS THE AMOUNT WAS DULY DEPOSITED DU RING THE YEAR UNDER CONSIDERATION, ALBEIT LATE ON THE FOLLOWING DATES: COMPANYS CONTRIBUTION TO PROVIDENT FUND (BANGALORE ) MONTH AMOUNT RS. DUE DATE PAYMENT DATE NOV.02 366,972 20 TH DEC.2002 28 TH DEC.2002 COMPANYS TOWARDS CONTRIBUTION TO LABOUR WELFARE FU ND (MUMBAI) PERIOD AMOUNT (RS.) DUE DATE PAYMENT DATE JAN.02 TO JUNE.02 16,956 15 TH JULY, 2002 18 TH JULY, 2002 JUL.02 TO MAR.03 16,992 15 TH JAN.2003 17 TH JAN.2003 THE ASSESSEE SUBMITTED THAT DELETION OF THE SECOND PROVISO BELOW SECTION 43B W.E.F. AY 2004-2005 WAS CLARIFICATORY IN NATURE AND THEREFORE RETROSPECTIVE IN OPERATION. THE ASSESSEE REQUESTED THE ASSESSING OFFICER TO ALLOW DEDUCTION IN RESPECT OF RS.4,00,920/- AND TRE AT THE RETURN OF INCOME OF THE ASSESSEE AMENDED TO THAT EXTENT. THE ASSESS ING OFFICER IGNORED THE CLAIM OF THE ASSESSEE AND DISALLOWED THE SAID AMOUN T OF RS.4,00,920/-. 38. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT IN VIEW OF THE DECISION OF SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL IN THE CASE OF KWALITY MILK FOODS LTD. (100 ITD 1 99)(CHENNAI)(SB) WHEREIN IT WAS HELD THAT THE AMENDMENT IN PROVISO TO SECTION 43B WAS MADE TO EL IMINATE UNINTENDED CONSEQUENCES THAT CAUSED UNDUE HARDSHIP TO THE TAXP AYERS AND THEREFORE, THE AMENDMENT WAS CURATIVE IN NATURE AND SHOULD HE APPLIED RETROSPECTIVELY. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 37 39. THE CIT(A) DID NOT ACCEPT THE PLEA OF THE ASSE SSEE. HE HELD THAT THE ASSESSEE MADE PAYMENT OF RS. 3,66,972 AFTER THE GRA CE PERIOD OF 5 DAYS FROM THE DUE DATE AND THEREFORE HIT BY THE PROHIBITION L AID DOWN IN SEC. 43B OF THE I.T.ACT, 1961. ACCORDINGLY THE DISALLOWANCE OF RS. 3,66,9 72 U/S. 43B WAS CONFIRMED. AGGRIEVED BY THE ORDER OF CIT(A), THE A SSESSEE HAS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. 40. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT ADDITION SUSTAINED DESERVES TO BE DELETED. THE HON BLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS LTD. 319 ITR 306 (SC) H ELD THAT DELETION OF THE SECOND PROVISO BELOW SEC.43-B OF THE ACT W.E.F. 0-1 -4-2004 WAS CLARIFICATORY IN NATURE AND THEREFORE WILL HAVE TO BE APPLIED RET ROSPECTIVELY. ADMITTEDLY THE PAYMENT OF EMPLOYERS CONTRIBUTION HAD BEEN MAD E BY THE ASSESSEE ON OR BEFORE THE DUE DATE FOR FILING RETURN OF INCOME. THEREFORE THE PAYMENT MADE ON OR BEFORE THE DUE DATE FOR FILING RETURN OF INCOME HAS TO BE ALLOWED AS DEDUCTION AS PER THE FIRST PROVISO TO SEC.43B OF THE ACT. IN VIEW OF THE AFORESAID DECISION, WE DIRECT THAT THE ADDITION SUS TAINED BY THE CIT(A) SHOULD BE DELELTED. GR.NO.5 RAISED BY THE ASSESSEE IS ACC ORDINGLY ALLOWED. ITA NO.5512/MUM/07: REVENUES APPEAL: 41. GR.NO.1 RAISED BY THE REVENUE HAS ALREADY BEEN DECIDED WHILE DECIDING GR.NO.3 OF THE ASSESSEES APPEAL. FOR THE REASONS STATED THEREIN, THE GROUND RAISED BY THE REVENUE IS PARTLY ALLOWED. 42. GR.NO.2 RAISED BY THE REVENUE READS AS FOLLOWS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO DELET E THE DISALLOWANCE OF RS. 3,18,000/- IN RESPECT OF COMMISSION PAID. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 38 40. DURING THE PREVIOUS YEAR THE ASSESSEE PAID COM MISSION OF RS.3,18,000/- TO SAINT GOBAIN ABRASIVES (SINGAPORE) (SGA SINGAPORE) ITS ASSOCIATED ENTERPRISE(AE). IN TERMS OF SEC.92 OF T HE ACT, THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION WAS RE FERRED TO TRANSFER PRICING OFFICER (TPO). IN AY 02-03 ALSO IN RESPECT OF IDEN TICAL PAYMENT OF COMMISSION TO AN AE REFERENCE WAS MADE TO TPO. THE TPO WAS OF THE VIEW THAT AS PER THE POLICY OF THE GROUP ALL AFFILIATE C OMPANIES WERE ENTITLED TO COMMISSION OF 10% ON EXPORT SALES MADE IN THEIR RES PECTIVE COUNTRIES WHEREAS THE ASSESSEE HAD PAID 12% TO ITS AE SGA (SI NGAPORE). THE COMMISSION HAD BEEN PAID TO THE AE FOR ALL SALES BY THE ASSESSEE TO CUSTOMERS IN SOUTH EAST ASIAN COUNTRIES. THE TPO WA S OF THE VIEW THAT PAYMENT OF COMMISSION TO ENTITLED LOCATED IN COUNTR IES OTHER THAN THE COUNTRY OF SALES WAS NOT PROPERLY EXPLAINED. THE T PO THEREFORE HELD THAT THE ASSESSEE HAD NOT ESTABLISHED SERVICES RENDERED FOR WHICH COMMISSION WAS PAID. HE THEREFORE DETERMINED THE ALP AT RS.NIL AN D DISALLOWED THE ENTIRE PAYMENT OF COMMISSION AS AN ADJUSTMENT TO ALP. 41. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE TRANSFER PRICING OFFICER ERRED IN DISALLOWING COMMISSION PAID FOR THE FOLL OWING REASONS: A) SAINT GOBAIN ABRASIVES SINGAPORE HAS OFFICES AL L OVER SOUTH EAST ASIAN COUNTRIES, SUCH AS SINGAPORE, MALAYSIA, INDON ESIA, BORNEO, PHILIPPINES, ETC. AND IS RESPONSIBLE FOR ALL MARKET ING EFFORTS IN THE REGION. B) THE ASSOCIATED ENTERPRISE WAS RESPONSIBLE FOR PR OCURING THE SALE AND INTRODUCING THE FOREIGN CLIENT. C) THE ASSOCIATED ENTERPRISE IS RESPONSIBLE FOR ALL MARKETING EFFORTS, SUCH AS, ADVERTISING, PUBLICITY, ETC. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 39 D) IF SUCH PAYMENTS WERE NOT MADE, THE ASSESSEE WOU LD BE COMPELLED TO OPEN OFFICES IN SUCH COUNTRIES - THE COST OF MAI NTAINING SUCH AN OFFICE IN - THE HIGHER COST ECONOMIES OF THE WORLD, IS PROHIBITIVE. E) BY NOT MAINTAINING SUCH AN OFFICE, THE ASSESSEE SAVED ITS OFFICE AND ADMINISTRATIVE EXPENSES. F) COLLECTIONS IN RESPECT OF SUCH EXPORT SALES IS A LSO LOOKED AFTER BY THE ASSOCIATED ENTERPRISE. G) IT IS NORMAL POLICY OF THE GROUP TO PAY COMMISSI ON AT THE RATE OF 10% ON SUCH INTERNATIONAL SALES AS AGAINST THIS THE ASS ESSEE HAS PAID COMMISSION AT THE RATE OF 12% TO ITS ASSOCIATED ENT ERPRISE. LETTER STATING POLICY WAS FILED IN THIS REGARD. H) THE REASON WHY THE ASSESSEE HAS PAID A HIGHER CO MMISSION IN THE CASE OF THE SINGAPORE OFFICE WAS BECAUSE ONE OF ITS OWN EMPLOYEES, PARAG KUNTE IS STATIONED IN THE OFFICE OF SAINT GO BAIN ABRASIVES SINGAPORE AND HIS ENTIRE SALARY IS PAID BY THE SING APORE COMPANY. THE OBJECT BEHIND THIS STRATEGY IS TO INCREASE EXPORT SALES IN THE FAR EAST REGION. I) WHEN THE ASSESSEE HAS RENDERED IDENTICAL SERVICE S TO A GERMAN GROUP COMPANY, IT HAS ITSELF EARNED COMMISSION AT T HE RATE OF 10%, TOTALLING RS.18.35 LAKHS. J) IN CERTAIN EXPORT TRANSACTIONS, THE ASESSEE HAS MADE HIGHER PAYMENT OF COMMISSION TO OUTSIDE PARTIES AT THE RATE OF 12. 5%, THE PARTY-WISE DETAILS OF COMMISSION PAID WAS ALSO FURNISHED. 42. THE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE CIT(A), THAT AN IDENTICAL DISALLOWANCE WAS MADE BY THE TRANSFER PRICING OFFIC ER IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2002-2003 AND THE CIT(A)- I HAD CALLED FOR A REMAND REPORT FROM THE TRANSFER PRICING OFFICER. TH E TRANSFER PRICING OFFICER IN HIS REMAND REPORT FAIRLY CONCEDED THAT HE DID NO T FIND ANY RATIONALE FOR DRAWING AN ADVERSE INFERENCE AGAINST EXPORT COMMISS ION PAYMENTS MADE BY ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 40 THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. ACCORDI NGLY, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), IN HIS APPELL ATE ORDER FOR THE ASSESSMENT YEAR 2002-2003 DATED 23D MARCH, 2007 HAS DIRECTED THAT THE DISALLOWANCE IN RESPECT OF COMMISSION BE DELETED. 43. THE ASSESSEE SUBMITTED THAT DISALLOWANCE IDENT ICAL TO THE ONE MADE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR HAS BEEN MADE BY THE TRANSFER PRICING OFFICER IN THE CURRENT ASSESSMENT YEAR. THE ASSESSEE SUBMITTED THAT TRANSFER PRICING OFFICER HAS MERELY FOLLOWED THE OR DER PASSED FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. IT WAS FURTH ER SUBMITTED THAT SINCE THE TRANSFER PRICING OFFICER HAS IN THE IMMEDIATELY PRECEDING YEAR, CONCEDED THAT THERE WAS NO RATIONALE FOR DRAWING ANY ADVERSE INFERENCE AGAINST THE EXPORT COMMISSION PAYMENTS MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES, THE SAME SHOULD EQUALLY APPLY IN THE C URRENT YEAR. THE ASSESSEE FINALLY SUBMITTED THAT THE ASSESSING OFFICER SHOULD BE DIRECTED TO DELETE THE ENTIRE DISALLOWANCE OF R.S.3,18,000/- FOLLOWING THE APPELLATE ORDER FOR THE IMMEDIATELY PRECEDING YEAR. 44. THE DETAILS OF LOWER RATE OF COMMISSION PAID T O ITS ASSOCIATE CONCERNS COMPARED TO INDEPENDENT ENTERPRISES WAS AS UNDER: S.NO. NAME & ADDRESS OF THE PARTY RATE OF COMMISSION AMOUNT (RS.) 1. YOUSUF ESSAJEE PO. BOX 1079, INDIA STREET CORNER, DAR ES SALAAM TANZANIA 12.50% 48400 2. A C W JEYANATHAN SRILANKA 12.50% 15793 3. NAJMI TRADING COMPANY C/O.YOUSUF ESSAJEE PO. BOX 1079, INDIA STREET CORNER, DAR ES SALAAM TANZANIA 12.50% 164811 664604 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 41 DETAILS OF EXPORTS COMMISSION PAID TO ASSOCIATED EN TERPRISE S.NO. NAME & ADDRESS OF THE PARTY RATE OF COMMISSION AMOUNT (RS.) 1. SAINT GOBAIN ABRASIVES (SINGAPORE), 15, BEACG ROAD, 4-03, BEACH CENTRE, SINGAPORE. 12% 318000 POINTING OUT TO THE ABOVE FACTS, THE ASSESSEE SUBMI TTED THAT THE ASSESSE HAD PAID COMMISSION AT LOWER RATE TO ITS ASSOCIATE ENTE RPRISES @ 12% COMPARED TO THE INDEPENDENT ENTERPRISES. THEREFORE, THE DIS ALLOWANCE U/S. 92C AT RS. 3,18,000/- IS NOT BASED ON CORRECT APPRECIATION ON FACTS. 45. THE CIT(A) ACCEPTED THE ABOVE SUBMISSION OF TH E ASSESSEE AND DIRECTED THE AO TO DELETE THE DISALLOWANCE OF RS. 3,18,000/- . AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 46. BEFORE US THE LEARNED D.R. RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE ORDER OF CIT(A), WE A RE OF THE VIEW THAT THE ORDER OF CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. ADMITTEDLY THE ADDITION HAS BEEN MADE ON THE BASIS OF SIMILAR ADDITION MADE IN AY 02-03. IN THAT YEAR, THE AO ADMITTED IN HIS REMAND REPORT BEFORE C IT(A) THAT THE ADDITION MADE BY WAY OF ADJUSTMENT TO ALP WAS UNCALLED FOR. IT IS ALSO SEEN THAT IN AY 04-05 IN RESPECT OF IDENTICAL TRANSACTION, THE T PO HAS NOT DRAWN ANY ADVERSE INFERENCE AND HAS ACCEPTED INTERNATIONAL TR ANSACTION AS AT ALP. THE MAIN REASON FOR PAYING 12% COMMISSION AS AGAINST TH E POLICY OF PAYING COMMISSION AT 10% TO GROUP COMPANIES HAS BEEN EXPLA INED BY THE ASSESSEE AS OWING TO ONE OF ITS KEY EMPLOYEE PARAG KUNTE STA YING WITH THE AE IN ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 42 SINGAPORE AND THE FACT THAT THE AE BEARS ALL HIS SA LARY. THE STRATEGY WAS TO INCREASE SALES IN FAR EAST REGION BY HAVING ASSESSE ES OWN EMPLOYEE. THIS EXPLANATION JUSTIFIES PAYMENT OF HIGHER COMMISSION THEN THE POLICY OF PAYING 10% TO GROUP COMPANIES. APART FROM THE ABOVE, THER E ARE ALSO INSTANCES WHERE THE ASSESSEE HAS ITSELF RECEIVED MORE THAN 10 % COMMISSION AND HAD PAID MORE THAN 12% COMMISSION TO NON AES. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DOES N OT CALL FOR ANY INTEREFERENCE. CONSEQUENTLY, GR.NO.2 RAISED BY THE REVENUE IS DISM ISSED. 47. GR.NO.3 RAISED BY THE REVENUE IN ITS APPEAL RE ADS AS FOLLOWS: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO RE-COM PUTE THE DEDUCTION U/S. 80 HHC WITHOUT MAKING THE DEDUCTION U/S. 80IB OF RS.42,95,724/- WHILE COMPUTING THE DEDUCTION U/S. 8 0 HHC. 48. IDENTICAL ISSUE WAS CONSIDERED IN ASSESSEES O WN CASE IN AY 04-05 BY THE TRIBUNAL IN ITA NO.434/MUM/09 & 406/MUM/09 AND THE TRIBUNAL HELD AS FOLLOWS: 17. IN GROUND NO. 4, THE ASSESSEE HAS RAISED THE F OLLOWING GRIEVANCE : THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION O F THE ASSESSING OFFICER IN REDUCING DEDUCTION ALLOWAB LE UNDER SECTION 80 IB RS 61,25,635 FROM THE ADJUSTED PROFITS OF THE BUSINESS WITHOUT COMPUTING DEDUCTIO N UNDER SECTION 80 HHC. THE APPELLANT SUBMITS THAT DEDUCTION UNDER SECTION 80HHC BE COMPUTED WITHOUT REDUCING THE DEDUCTION ALLOWED UNDER SECTION 80 IB. 18. IT IS SUFFICIENT TO TAKE NOTE OF THE FACT THAT THIS ISSUE WAS DECIDED AGAINST THE ASSESSEE, BY THE CIT(A), BY REL YING UPON SPECIAL BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT VS ROGINI GARMENTS ( 108 ITD 49) WHICH HAS SUBSEQUENTL Y BEEN APPROVED BY THE LARGER BENCH IN THE CASE OF ACIT VS HINDUSTAN MINT AGRO PRODUCTS PVT LTD (119 ITD SB 107) AND BY HONBLE ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 43 DELHI HIGH COURT IN THE CASE OF GREAT EASTERN EXPOR TS VS CIT ( 196 TAXMAN 145). THESE DECISIONS WERE, HOWEVER, DIS APPROVED BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES PVT LTD VS DCIT (197 TAXMAN 84), AND, WHIL E DOING SO, HONBLE JURISDICTIONAL HIGH COURT HAS OBSERVED AS FOLLOWS: 37. STRONG RELIANCE WAS ALSO PLACED BY THE COUNSEL FOR THE REVENUE ON THE SPECIAL BENCH DECISIONS OF THE TRIBU NAL IN THE CASE OF ROGINI GARMENTS (SUPRA) AND HINDUSTAN M INT & AGRO PRODUCTS (P.) LTD. (SUPRA), WHICH ARE AFFIRMED BY THE DELHI HIGH COURT IN THE CASE OF GREAT EASTERN EXPOR TS (SUPRA). RELIANCE IS ALSO PLACED ON DECISION OF THE KERALA HIGH COURT IN THE CASE OF OLAM EXPORTS (INDIA) LTD. (SUPRA) WHICH SUPPORTS THE CASE OF THE REVENUE. 38. WE FIND IT DIFFICULT TO SUBSCRIBE TO THE VIEWS EXPRESSED BY THE DELHI HIGH COURT IN INTERPRETING THE PROVISI ONS OF SECTION 80-IA(9). IN THAT CASE, IN FACT, THE COUNSE L FOR THE REVENUE HAD ARGUED (SEE PARA 38 OF THE JUDGMENT) TH AT SECTION 80-IA(9) APPLIES AT THE STAGE OF ALLOWING D EDUCTION AND NOT AT THE STAGE OF COMPUTING DEDUCTION UNDER O THER PROVISIONS UNDER HEADING C OF CHAPTER VI-A. IT WA S ARGUED THAT IN THE MATTER OF GRANT OF DEDUCTION, TH E FIRST STAGE IS COMPUTATION OF DEDUCTION AND THE SECOND ST AGE IS THE ALLOWANCE OF THE DEDUCTION. COMPUTATION OF DEDU CTION HAS TO BE MADE AS PROVIDED IN THE RESPECTIVE SECTIO NS AND IT IS ONLY AT THE STAGE OF ALLOWING DEDUCTION UNDER SECTION 80-IA(1) AND ALSO UNDER OTHER PROVISIONS UNDER HEAD ING C OF CHAPTER VI-A, THE PROVISIONS OF SECTION 80-IA(9) COMES INTO OPERATION. WHILE ACCEPTING THE ARGUMENTS ADVAN CED BY THE COUNSEL FOR THE REVENUE, IT APPEARS THAT THE DELHI HIGH COURT FAILED TO CONSIDER THE IMPORTANT ARGUMEN T OF THE REVENUE NOTED IN PARA 38 OF ITS JUDGMENT. MOREO VER, WITHOUT REJECTING THE ARGUMENT OF THE REVENUE THAT SECTION 80-IA(9) APPLIES AT THE STAGE OF ALLOWING THE DEDUC TION AND NOT AT THE STAGE OF COMPUTING THE DEDUCTION, THE DE LHI HIGH COURT COULD NOT HAVE HELD THAT SECTION 80-IA(9) SEE KS TO DISTURB THE METHOD OF COMPUTING THE DEDUCTION PROVI DED UNDER OTHER PROVISIONS UNDER HEADING C OF CHAPTER VI-A OF THE ACT. IN THESE CIRCUMSTANCES, WE FIND IT DIFF ICULT TO CONCUR WITH THE VIEWS EXPRESSED BY THE DELHI HIGH C OURT IN THE CASE OF GREAT EASTERN EXPORTS (SUPRA). FOR T HE SAME REASON, WE FIND IT DIFFICULT TO SUBSCRIBE TO THEVIE WS ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 44 EXPRESSED BY THE KERALA HIGH COURT IN THE CASE OF O LAM EXPORTS (INDIA) LTD. (SUPRA). 39. IN THE RESULT, WE HOLD THAT SECTION 80-IA(9) DO ES NOT AFFECT THE COMPUTABILITY OF DEDUCTION UNDER VARIOUS PROVISIONS UNDER HEADING C OF CHAPTER VI-A, BUT I T AFFECTS THE ALLOWABILITY OF DEDUCTIONS COMPUTED UNDER VARIO US PROVISIONS UNDER HEADING C OF CHAPTER VI-A, SO TH AT THE AGGREGATE DEDUCTION UNDER SECTION 80-IA AND OTHER PROVISIONS UNDER HEADING C OF CHAPTER VI-A DO NOT EXCEED 100 PER CENT OF THE PROFITS OF THE BUSINESS OF THE ASSESSEE. OUR ABOVE VIEW IS ALSO SUPPORTED BY THE C.B.D.T. CIRCULAR NO. 772 DATED 23-12-1998, WHEREIN IT IS STATED THAT SECTION 80IA(9) HAS BEEN INTRODUCED WIT H A VIEW TO PREVENT THE TAX-PAYERS FROM CLAIMING REPEAT ED DEDUCTIONS IN RESPECT OF THE SAME AMOUNT OF ELIGIBL E INCOME AND THAT TOO IN EXCESS OF THE ELIGIBLE PROFI TS. THUS, THE OBJECT OF SECTION 80-IA(9) BEING NOT TO CURTAIL THE DEDUCTIONS COMPUTABLE UNDER VARIOUS PROVISIONS UNDE R HEADING C OF CHAPTER, IT IS REASONABLE TO HOLD TH AT SECTION 80-IA(9) AFFECTS ALLOWABILITY OF DEDUCTION AND NOT COMPUTATION OF DEDUCTION. TO ILLUSTRATE, IF RS. 100 IS THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, RS. 30 IS THE PROFITS ALLOWED AS DEDUCTION UNDER SECTION 80-IA(1) AND THE DEDUCTION COMPUTED AS PER SECTION 80HHC IS RS. 80, THEN, IN VIEW OF SECTION 80-IA(9), THE DEDUCTION UN DER SECTION 80HHC WOULD BE RESTRICTED TO RS. 70, SO THA T THE AGGREGATE DEDUCTION DOES NOT EXCEED THE PROFITS OF THE BUSINESS. 19. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF HO NBLE JURISDICTIONAL HIGH COURT, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO RECOMP UTE DEDUCTION UNDER SECTION 80 HHC, IN THE LIGHT OF LAW SO LAID DOWN BY THEIR LORDSHIPS. 49. RESPECTFULLY FOLLOWING THE DECISION OF THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE, WE CONFIRM THE ORDER OF CIT(A) AND DISMISS GR.NO.3 RAISED BY THE REVENUE. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 45 50. IN THE RESULT, THE APPEAL BY THE ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED, WHILE THE CROSS OBJECTION BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 20 TH DAY OF JAN.2012. SD/- SD/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 20 TH JAN.2012. COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 46 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 12/01/2012 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 16/1/2012 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER
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