M/s Glaxosmithkline Pharmaceuticals Ltd, V. The DCIT Cir - 6(1),

CO 46/MUM/2005

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9879 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 6 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 26-02-2013
• Assessment Year: misc
• Appeal Filed On: 01-02-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALA
• Keywords: Earning of tax free income; Proportionate interest; Retrospective amendment; Additional evidence; Bad and doubtful debts; Capital receipt
• Section: 143(3); 80HHC; 14A; 10

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI SANJAY GARG, J M ITA NO. 28 2 7 / MUM/20 0 5 ( ASSESSMENT YEAR : 200 1 - 0 2 ) ACIT, CIR.6(1), MUMBAI - 20 VS. M/S BURROUGHS WELLCOME (INDIA) LTD., 252, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 025 PAN/GIR NO. : A A AC B 0465 O AND ITA NO. 2792 /MUM/200 5 ( ASSESSMENT YEAR :200 1 - 0 2 ) M/S GLAXOSMITHKLINE PHARMACEUTICALS LIMITED (SUCCESSOR TO M/S BURROUGHS WELLCOME (INDIA) LTD.), 252, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 025 VS. ACIT, CIR.6(1), MUMBAI - 20 PAN/GIR NO. : AAACB 0465 O AND ITA NO. 4002 /MUM/2004 ( ASSESSMENT YEAR :2000 - 01) D CIT, CIR.6(1), MUMBAI - 20 VS. M/S BURROUGHS WELLCOME (INDIA) LTD., 252, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 025 PAN/GIR NO. : AAACB 0465 O AND NO. 46 /MUM/200 5 (ARISING OUT OF ITA NO.4002/MUM/2004) ( ASSESSMENT YEAR :2000 - 01) M/S GLAXOSMITHKLINE PHARMACEUTICALS LIMITED (SUCCESSOR TO M/S BURROUGHS WELLC OME (INDIA) LTD. ) , 252, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 025 VS. D CIT, CIR.6(1), MUMBAI - 20 PAN/GIR NO. : AAACB 0465 O ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 2 AND ITA NO. 28 09 / MUM/20 04 ( ASSESSMENT YEAR :2000 - 01 ) M/S BURROUGHS W ELLCOME (INDIA) LTD., 252, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 025 VS. D CIT, CIR.6(1), MUMBAI - 20 PAN/GIR NO. : AAACB 0465 O ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI MALLIK ARJUN UTTURE /ASSESSEE BY : SHRI P.J.PARDIWALA & SHRI NITESH JOSHI DATE OF HEARING : 3 RD JUNE , 201 4 DATE OF PRONOUNCEMENT : 22 ND AUG , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : THE SE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AND ONE CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A ) , FOR THE ASSESSMENT YEAR S 200 1 - 0 2 & 2000 - 01 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT . 2 . SINCE IN ALL THE AFORESAID CASES COMMON ISSUES ARE INVOLVED, THEREFORE, ALL THE CASES HAVE BEEN HEARD ALTOGETHER AND DISPOSED OF BY THIS CONSOLIDATED ORDER. 3 . THE REVENUE IN ITS APPEAL I.E. ITA NO. 2827/MUM/200 5 (AY 2001 - 02) , HAS RAISED THE FOLLOWIN G GROUNDS : - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE U/S. 14A FROM RS.1,75,56,917/ - TO RS.4 ,30,844/ - HOLDING THAT INTEREST ON FIXED DEPOSITS AND INTEREST PAID ON SECURITY DEPOSIT P LACED BY C&FA ARE ONLY TO BE ALLOCATED AND THE BALANCE INTEREST PERTAINING TO BANK ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 3 OVERDRAFTS/CASH CREDITS, BANK COLLECTION CHARGES, BILL DISCOUNTING CHARGES AND MISCELLANEOUS BANK CHARGES HAVE NO RELATION TO THE MONEY BORROWED FOR THE PURPOSE OF MAKING IN VESTMENT WITHOUT APPRECIATING THAT THE ASSESSEE HAS, DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS WELL AS BEFORE THE CIT(A), FA I LED TO ESTABLISH THAT THE INVESTMENT MAKING FUNDS PERTAINS TO OWN FUNDS FOR WHICH THE ONUS LIES WITH THE ASSESSEE AND, IN VIEW OF THE SAME, THE ASSESSING OFFICER RIGHTLY DISALLOWED THE PROPORTIONATE INTEREST OF RS.1 ,75,56,917/ - RELATED TO THE EXEMPT INCOME U/S.14A.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO ALLOW THE PAYMENT TO WELLCOME RECREATION CLUB OF RS.59,000/ - WHICH WAS DISALLOWED U/S 40A (9) WITHOUT APPRECIATING THAT THE DEPARTMENT HAS NOT ACCEPTED THE CIT(A)'S ORDER ON THIS ISSUE ON SIMILAR LINES FO R THE AYRS. 1999 - 2000 AND 2000 - 01 AND HAS CONT ESTED THE SAME BY WAY OF FILING APPEAL TO THE ITA T.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE AMOUNT OF EXCISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT RELYING UPO N THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF SUDARSHAN CHEMICALS INDUSTRIES LTD (245 ITR 769) WHICH HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND CONTESTED BY WAY OF SLP. 4. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS ENTITLED FOR REDUCTION OF RS.37,35,239/ - WHICH WAS OFFERED TO TA X ON UTILIZATION BASIS WITHOUT APPRECIATING THAT ON SIMILAR ISSUE THE CIT(A) HAD, IN THE ASSESSE E CASE FOR THE AY 1999 - 2000, REJECTED THE ASSESSEE'S G ROUND AND DECIDED IT IN FAVOUR OF REVENUE AND, FURTHER WITH OUT APPRECIATING THAT THE DEPARTMENT HAS NOT ACCEPTED THE CIT(A) ORDER ON THIS ISSUE FOR THE AYR. 2000 - 01 AND HAS CONTESTED THE SA M E BY WAY OF FILING APPEAL TO THE ITAT.' 5. 'THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASI DE AND THAT OF THE ASSESSING OFFICER BE RESTORED.' 4 . THE ASSESSEE IN ITS APPEAL I.E. ITA NO. 2 7 9 2 /MUM/200 5 (AY 2001 - 02) , HAS RAIS ED THE FOLLOWING GROUNDS : - 1. WHILE COMPUTING LONG TERM CAPITAL LOSS ON THE SALE OF THE FOLLOWING GOVERNMENT OF INDIA LOANS, THE COMMISSIONER OF INCOME - TAX (APPEALS) - VI [HEREINAFTER REFERRED TO AS THE CIT(A)] ERRED IN UPHOLDING THE ACTION OF THE DY. COMM ISSIONER OF INCOME - TAX, CIRCLE 6(1) [HEREINAFTER REFERRED TO AS THE DCIT] IN NOT ALLOWING INDEXATION THEREON, TREATING THE SAID INSTRUMENT AS 'BOND' AND THEREBY, NOT ALLOWING THE APPELLANT'S CLAIM OF LONG TERM CAPITAL LOSS. ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 4 (RS.) INVE STMENT ORIGINAL COST YEAR OF PURCHASE YEAR OF SALE SALE PRICE 11.40%GOI LOAN 2000 3,30,33,000 NOV,98 SEPT,00 3,30,00,000 11.15%GOI LOAN 2002 4,98,20,000 MAR99 MAR01 5,15,15,000 2. (A) THE CIT (A) ERRED IN DISALLOWING PROPORTIONATE INTEREST EXPENS ES OF RS. 4,30,844/ - UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME- TAX ACT, TREATING THE SAME AS HAVING BEEN INCURRED IN EARNING TAX-FREE INCOME OF RS. 1,75,56,917/ - FROM UNITS AND BONDS. ( B ) THE CIT(A) OUGHT TO HAVE HELD THAT NO EXPENDITURE WAS ATTR IBUTABLE TO THE DIVIDENDS RECEIVED ON UNITS AS, THESE WERE OLD INVESTMENTS MADE OUT OF SURPLUS FUNDS. FURTHER SOME OF THE UNITS WERE ALLOTTED AS BONUS WHICH DID NOT INVOLVE ANY COST. (C) THE CIT(A) OUGHT TO HAVE HELD THAT THE INVESTMENT IN TAX FREE BONDS H AD BEEN MADE BY THE APPELLANTS FROM THEIR SURPLUS FUNDS AND/OR OUT OF THE MATURITY PROCEEDS. (D) THE APPELLANTS SUBMIT THAT THEY HAVE NOT BORROWED ANY FUNDS FOR MAKING THESE INVESTMENTS AND NOT INCURRED ANY EXPENDITURE IN EARN ING SUCH INCOME. THE INVESTME NTS IN TAX - FREE SECURITIES HAVE BEEN MADE SOLELY OUT OF THE SURPLUS FUNDS GENERATED DURING THE COURSE OF THE BUSINESS AND FROM THE MATURITY PROCEEDS OF OTHER INVESTMENTS AND THEREFORE, THE EXEMPTION UNDER SECTION 10 OUGHT TO HAVE BEEN ALLOWED ON THE ENTIRE ELIGIBLE TAX FREE INCOME OF RS. 1,75,56,917/ - . THE APPELLANTS HAVE IN FACT RECEIVED ONLY ONE DIVIDEND WARRANT FOR UNITS AND APPROXIMATELY 11 INTEREST WARRANTS FOR BONDS DURING THE YEAR, WHICH WERE DEPOSITED INTO THE BANK IN A ROUTINE MANNER ALONG WITH OTHE R CHEQUES. THE APPELLANTS THEREFORE PRAY THAT THE AO BE DIRECTED TO ALLOW THE EXEMPTION UNDER SECTION 10 IN FULL. (E) WITHOUT PREJUDICE THE APPELLANT SUBMITS THAT THE DISALLOWANCE MADE BY THE AO IS HIGHLY EXCESSIVE. THE APPELLANT PRAYS FOR SUITABLE DIRE CTIONS IN THE MATTER. 3. EXPORT BENEFIT U/S. 80HHC : - A) THE CIT (A) ERRED IN CONSIDERING SALE OF SCRAP OF RS.77.39 LAKHS AS PART OF 'TOTAL TURNOVER'. B) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE DCIT IN REDUCING 90% OF THE INCOME RECEIVED BY WAY OF REN T IN RESP ECT OF PLANT & MACHINERY OF RS. 8.65 LACS IN COMPUTING 'PROFITS OF THE BUSINESS' FOR THE PURPOSE OF DEDUCTION U / S 80HHC. C) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE DCIT THAT IN COMPUTING INDIRECT COST OF TRADING GOODS EXPORTS, THE S UPPORT DIVISION EXPENSES (I.E.HO ADMINISTRATIVE EXPENSES) INCLUDING INTEREST ARE TO BE ALLOCATED. ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 5 D) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE AO IN ALLOCATING GROSS INTEREST CHARGES AS AGAINST NET INTEREST CHARGES FOR COMPUTING INDIRECT COST IN THE CASE OF EXPORT OF TRADING GOODS. THE APPELLANTS PRAY THAT THE AO BE GIVEN SUITABLE DIRECTIONS IN THIS MATTER. 4. ADVANCE LICENCE BENEFIT A) THE CIT(A) ERRED IN HOLDING THAT RS. 8,21,228/ - BEING THE CLOSING BALANCE OF ADVANCE LICENCE BENEFIT HAD ACCR UED TO THE APPELLANTS AND WAS TAXABLE AS THEIR INCOME. B) THE CIT(A) ERRED IN HOLDING THAT EXPORT INCENTIVE ON ACCOUNT OF ADVANCE LICENCE BENEFIT IS REQUIRED TO BE TAXED ON AN ACCRUAL BASIS. THE APPELLANT SUBMITS THAT THE SAID AMOUNT OF RS. 8,21,2281 - WAS CREDITED TO PROFIT AND LOSS ACCOUNT AS RECOMMENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE APPELLANTS FURTHER SUBMIT THAT THOUGH EXPORTS ARE MADE THE BENEFIT DOES NOT ACCRUE TILL THE ACTUAL IMPORT WAS MADE TO WHICH DUTY SAVING APPLIES. IT WAS THEREFORE A CONTINGENT AMOUNT AS ON 31.3.2001 AND WOULD ACCRUE ONLY WHEN THE IMPORT TRANSACTION TAKES PLACE. THE GOI ACCEPTS SUCH CLAIM ONLY WHEN ACTUAL IMPORT IS MADE AND HENCE THE BENEFIT ACCRUES ONLY WHEN ACTUAL IMPORT IS EFFECTED AND THEREFORE T HE INCOME ACCRUES ONLY WHEN THE CLAIM IS ADMITTED BY THE GOI ON IMPORT BEING MADE. THE APPELLANTS PRAY FOR SUITABLE DIRECTIONS IN THE MATTER. 5 . THE REVENUE IN ITS APPEAL I.E. ITA NO. 4002 /MUM/200 4 (AY 200 0 - 0 1 ) , HAS RAISED THE FOLLOWING GROUNDS : - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW. THE CIT(A) ERRED IN DELETING THE ADDITION OF RS.6,77,2001 - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF MODVAT CREDIT AND EXCISE DUTY NOT ADDED TO THE VALUE OF CLOSING STOCK U/S.145A OF THE ACT, WI THOUT APPRECIATING THAT IN TERMS OF SECTION 145A OF THE ACT, THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY SHALL BE ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED ) ACTUALLY PAID OR INCURRED BY THE ASSESSE E TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AND, IN VIEW OF THE SAME, THE ASSESSING OFFICER RIGHTLY INCLUDED THE VALUE OF MOD VAT CREDIT AND EXCISE DUTY OF RS.6, 77,2001 - IN THE VALUE OF THE CLOSING STOCK U/S.145A OF THE ACT. ' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DELETING THE ADDITION OF RS. 6,77 ,2001 - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF MODVAT CREDIT AND EXCISE DUTY NOT ADDED TO THE VALUE OF CLOSING STOCK U/S.145A OF THE ACT, WITHOUT APPRECIATING THAT THE BOMBAY HIGH COURT HAS, IN THE CASE OF MELMOULD CORPORATION (202 ITR 789) , HELD THAT A PROCEDURE ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 6 CANNOT BE ADOPTED FOR CHANGING THE VALUE OF THE OPENING STOCK OF A PARTICULAR YEAR BECAUSE IT WILL LEAD TO A CHAIN REACTION OF C HANGES IN THE SENSE THAT THE CLOSING STOCK OF THE PRECEDING YEAR WILL ALSO BE REQUIRED TO BE CHANGED AND HENCE, ADJUSTMENT IN THE OPENING STOCK SHOULD NOT BE MADE BECAUSE THAT WILL HAVE THE EFFECT OF DISTURBING THE VALUATION OF CLOSING STOCK AND, IN VIEW O F THE SAME, THE ASSESSING OFFICER RIGHTLY INCLUDED THE VALUE OF MOD VAT CREDIT AND EXCISE DUTY OF RS.6,77,2001 - IN THE VALUE OF THE CLOSING STOCK U/S.145A OF THE ACT.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE U/S.14A FROM RS.38,60,232/ - TO RS.15,51,087/ - HOLDING THAT INTEREST ON FIXED DEPOSITS AND INTEREST PAID ON SECURITY DEPOSIT PLACED BY C&F A ARE ONLY TO BE ALLOCATED AND THE BALANCE INTEREST PERTAINING TO BANK OVERDRAFTS CASH CR EDITS, BANK COLLECTION CHARGES, BILL DISCOUNTING CHARGES AND MISCELLANEOUS BANK CHARGES HAVE NO RELATION TO THE MONEY BORROWED FOR THE PURPOSE OF MAKING INVESTMENT WITHOUT APPRECIATING THAT THE ASSESSEE HAS, DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS W ELL AS BEFORE THE CIT(A), FAILED TO ESTABLISH THAT THE INVESTMENT MAKING FUNDS PERTAINS TO OWN FUNDS FOR WHICH THE ONUS LIES WITH THE ASSESSEE AND, IN VIEW OF THE SAME, THE ASSESSING OFFICER RIGHTLY DISALLOWED THE PROPORTIONATE INTEREST OF RS.38,60,232/ - R ELATED TO THE EXEMPT INCOME U/S.14A. ' 4. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE C!T(A) HAS DIRECTED THE ASSESSING OFFICER TO ALLOW THE PAYMENT TO WELLCOME RECREATION CLUB OF RS.45,0001 - WHICH WAS DISALLOWED U/S.40A(9) WITHOUT APPRECIATING THAT THE DEPARTMENT HAS NOT ACCEPTED THE CIT(A)'S ORDER ON THIS ISSUE ON SIMILAR LINES FOR THE A Y 1999 - 2000 AND HAS CONTESTED THE SAME BY WAY OF FILING APPEAL TO THE ITAT. ' 5. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE AMOUNT OF EXCISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 80HHC OF THE ACT RELYING UPON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF SUDARSHAN CHEMICALS INDUSTRIES LTD. (245 ITR 769) WHICH HAS NO T ACCE PT ED BY THE DEPARTMENT AND CONTESTED BY WAY OF FILING SLP. 6. 'ON THE FACTS AND IN THE CIRCUM ST ANCES OF THE CASE AND IN LAW , THE CIT(A) ERRED IN DIRECTING TH E ASSESSING OFFICER NOT TO EXCLUD E PURCHASE REBATE CASH DISCOUNT AND SALES - TAX SET OFF FROM THE PROFITS OF BU SINESS FOR THE PU RPOSE OF COMPUTATION OF DEDUCTION U/S.80RRC RELYING UPON THE DECISION O F THE BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING (260 ITR 371) WITHOUT GIV ING ANY FINDING TO THE EFFECT THAT THE AFORESAID ITEMS OF INCOME ACTUALLY FULFILLED THE TESTS LAID DOWN BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID CASE, NAMELY THAT THESE INCOMES HAD ACTUALLY ACCRUED OUT OF THE MAIN BUSINESS ACTIVITY OF THE COMPANY AND THESE WERE OPERATIONAL INCOME. ' ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 7 7. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO CONSIDER THE PROFIT ON SALE OF DEPB LICENSES AS COVERED U/S.28(IIIA) AND THE UTIL ISATION OF DEPB AS COVERED U/S.28(IIIB) OF THE ACT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 80RRC WITHOUT APPRECIATING THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF METAL ROLLING WORKS PVT. LTD. (142 ITR 170) HAS HELD THAT THE AMOUNT REALISED O N SALE OF LICENSE CONSTITUTES INCOME ASSESSABLE UNDER CLAUSE (IV) OF SECTION 28 OF THE ACT AND, IN VIEW OF THE SAME, THE ASSESSING OFFICER RIGHTLY CONSIDERED THE PROFIT ON SALE OF DEPB LICENSES AS INCOME ASSESSABLE UNDER CLAUSE (IV) OF SECTION 28 FOR THE P URPOSE OF COMPUTATION OF DEDUCTION U/S.80RRC.' 8. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS ENTITLED FOR REDUCTION OF RS.28,77,971/ - WHICH WAS OFFERED TO TAX ON UTILISATION BASIS WITHO UT APPRECIATING THAT ON SIMILAR ISSUE THE CIT(A) HAD, IN THE ASSESSEE'S CASE FOR THE AY 1999 - 2000, REJECTED THE ASSESSEE'S GROUND AND DECIDED IT IN FAVOUR OF REVENUE.' 9. 'THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY'. 6 . THE ASSESSEE IN ITS CROSS OBJECTION I.E. CO NO. 46 /MUM/200 5 (AY 200 0 - 0 1 ) , HAS RAISED THE FOLLOWING GROUNDS : - THE RESPONDENTS SUBMIT THAT IN CASE THE APPELLANTS STAND OF DISALLOWING THE CLAIM OF BAD DEBTS WRITTEN OFF OF RS. 60,606/ - FOR THE ASSESSMENT YEAR 1999 - 2000 IS UPHELD, THEN THE SAID WRITE OFF SHOULD BE ALLOWED AS A DEDUCTION IN ASSESSMENT YEAR 2000 - 01 . 7 . THE ASSESSEE IN ITS APPEAL I.E. ITA NO. 2809 /MUM/200 4 (AY 200 0 - 0 1 ) , HAS RAISED THE FOLLOWING GROUNDS : - 1 . 'WHILE COMPUTING LONG TERM CAPITAL LOSS ON SALE OF 5.75% GOVERNMENT OF INDIA LOAN, 2002, THE COMMISSIONER OF INCOME - TAX (APPEALS) - VI [HEREINAFTER REFERRED TO AS THE CIT(A)] ERRED IN UPHOLDING THE ACTION OF THE AO IN NOT ALLOWING INDEXATION THEREON, TREATING THE SAID INSTRUMENT AS 'BOND' AND THEREBY, NOT ALLOWING THE APPELLANT'S CLAIM OF LONG TERM CAPITAL LOSS OF RS. 9,136/ - . 2. (A) THE CIT (A) ERR ED IN DISALLOWING PROPORTIONATE INTEREST EXPENSES OF RS. 15,51,087/ - UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME- TAX ACT, TREATING THE SAME AS HAVING INCURRED IN EARNING TAX - FREE INCOME OF RS. 2,13,37,553/ - FROM UNITS AND BONDS. ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 8 (B) THE CIT(A) OUG HT TO HAVE HELD THAT NO EXPENDITURE WAS ATTRIBUTABLE TO THE DIVIDENDS RECEIVED ON UNITS AS, THESE WERE OLD INVESTMENTS MADE OUT OF SURPLUS FUNDS. FURTHER SOME OF THE UNITS WERE ALLOTTED AS BONUS WHICH DID NOT INVOLVE ANY COST. (C) THE CIT(A) OUGHT TO HA VE HELD THAT THE INVESTMENT IN TAX FREE BONDS HAD BEEN MADE BY THE APPELLANTS FROM THEIR SURPLUS FUNDS AND/OR OUT OF THE MATURITY PROCEEDS. (D) THE APPELLANTS SUBMIT THAT THEY HAVE NOT BORROWED ANY FUNDS FOR MAKING THESE INVESTMENTS AND NOT INCURRED ANY EXPENDITURE IN EAR NING SUCH INCOME. THE INVESTMENTS IN TAX - FREE SECURITIES HAVE BEEN MADE SOLELY OUT OF THE SURPLUS FUNDS GENERATED DURING THE COURSE OF THE BUSINESS AND FROM THE MATURITY PROCEEDS OF OTHER INVESTMENTS AND THEREFORE, THE EXEMPTION U/S. 10 O UGHT TO HAVE BEEN ALLOWED ON THE ENTIRE ELIGIBLE TAX FREE INCOME OF RS. 2,13,37,553/ - . THE APPELLANTS HAVE IN FACT RECEIVED ONLY FOUR DIVIDEND WARRANTS FOR UNITS AND APPROXIMATELY 20 TO 22 INTEREST WARRANTS FOR BONDS DURING THE YEAR, WHICH WERE DEPOSITED I NTO THE BANK IN A ROUTINE MANNER ALONG WITH OTHER CHEQUES. THE APPELLANTS THEREFORE PRAY THAT THE AO BE DIRECTED TO ALLOW THE EXEMPTION U/S. 10 IN FULL. ( E) WITHOUT PREJUDICE THE APPELLANT SUBMITS THAT THE DISALLOWANCE MADE BY THE AO IS HIGHLY EXCESSIVE. THE APPELLANT PRAYS FOR SUITABLE DIRECTIONS IN THE MATTER. 3. EXPORT BENEFIT U/S. 80HHC : - (A) THE CIT (A) E RR ED IN CONSIDERING SALE OF SCRAP AS PART OF 'TOTAL TURNOVER'. B) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE DCIT IN REDUCING 90% OF THE GROSS AMOUNT OF INTEREST OF RS. 650.45 LACS IN COMPUTING 'PROFITS OF THE BUSINESS' FOR THE PURPOSE OF DEDUCTION U/ S 80HHC. C) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE DCIT THAT IN COMPUTING INDIRECT COST OF TRADING GOODS EXPORTS, THE SUPPORT DIVISI ON EXPENSES (I.E.HO ADMINISTRATIVE EXPENSES) INCLUDING INTEREST ARE TO BE ALLOCATED. D) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE AO IN ALLOCATING GROSS INTEREST CHARGES AS AGAINST NET INTEREST CHARGES FOR COMPUTING INDIRECT COST IN THE CASE OF EXPO RT OF TRADING GOODS. THE APPELLANTS PRAY THAT THE AO BE GIVEN SUITABLE DIRECTIONS IN THIS MATTER. 4. ADVANCE LICENCE BENEFIT THE CIT(A) ERRED IN HOLDING THAT RS. 45 , 56 , 467 / - BEING THE CLOSING BALANCE OF ADVANCE LICENCE BENEFIT HAD ACCRUED TO THE APPEL LANTS AND WAS TAXABLE AS THEIR INCOME. ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 9 THE APPELLANT SUBMITS THAT THE SAID AMOUNT OF RS .45,56,467/ - WAS CREDITED TO PROFIT AND LOSS ACCOUNT AS RECOMMENDED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE APPELLANTS FURTHER SUBMIT THAT THOUGH EXPORT S ARE MADE THE BENEFIT DOES NOT ACCRUE TILL THE ACTUAL IMPORT WAS MADE TO WHICH DUTY SAVING APPLIES. IT WAS THEREFORE A CONTINGENT AMOUNT AS ON 31.3.2001 AND WOULD ACCRUE ONLY WHEN THE IMPORT TRANSACTION TAKES PLACE. THE GOI ACCEPTS SUCH CLAIM ONLY WHEN AC TUAL IMPORT IS MADE AND HENCE THE BENEFIT ACCRUES ONLY WHEN ACTUAL IMPORT IS EFFECTED AND THEREFORE THE INCOME ACCRUES ONLY WHEN THE CLAIM IS ADMITTED BY THE GOI. WITHOUT PREJUDICE TO ABOVE, IF IT IS HELD THAT IF THE PROVISIONS OF SECTION 28(IIIA)(IIIB)/( IIIC) ARE NOT APPLICABLE, THEN THE AMOUNT IS A CAPITAL RECEIPT NOT EXIGIBLE TO TAX. THE APPELLANTS PRAY FOR SUITABLE DIRECTIONS IN THE MATTER. 8 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD P ERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN T HE BUSINESS OF MANUFACTURE, DISTRIBUTION AND TRADING OF PHARMACEUTICAL PRODUCTS BULK DRUGS AND CHEMICALS. THE RETURN OF INCOME FOR A.Y. 2000 - 01 WAS FILED DECLARING TOTAL INCOME AT RS. 26.91 CRORES, WHICH WAS ASSESSEE BY AO AT RS. 27.28 CRORES. WHILE FRAMING THE ASSESSMENT, THE AO HAD MADE DISALLOWANCE U/S. 14A, PAYMENT TO CLUB, PAYMENT MADE TO RECREATIONAL CLUB U/S. 40A(9). THE AO ALSO RECOMPUTED DEDUCTION CLAIMED BY ASSESSEE U/S. 80 HH C. COMMON GROUNDS HAVE BEEN TAKEN IN ALL THE YEARS UNDER CONSIDERATION, THEREF ORE, WE HAVE HEARD ALL THE APPEALS TOGETHER AND NOW DECIDED BY THIS CONSOLIDATED ORDER. 9 . AS A LEAD CASE WE ARE DEALING WITH A.Y. 2000 - 01 AND CONCLUSION DRAWN THEREIN WILL BE APPLICABLE TO OTHER YEARS UNDER CONSIDERATION. WITH REGA RD TO THE DISALLOWANCE MADE U/S. 14A, WE FOUND THAT BOTH THE LOWER AUTHORITIES HAVE DISALLOWED INTEREST EXPENDITURE ON PRO RATA BASIS IN RESPECT OF INVESTMENT IN UNITS OF UTI AND MORGAN STANLEY MUTUAL ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 10 FUND AS WELL AS TAX FREE BONDS ISSUED BY IRFC AND HUDCO. FOR THIS PURPOSE, THE AO TOOK INTO ACCOUNT THE ENTIRE INTEREST EXPENDITURE WHILE THE CIT(A) RESTRICTED THE DISALLOWANCE ONLY IN RESPECT OF INTEREST PAID ON FIXED DEPOSITS AND SECURITY DEPOSITS PLACED BY C&F AGENTS. 10 . DURING THE COURSE OF HEARING BEFORE US, THE ASSESSEE PLA CED ON RECORD STATEMENT SHOWING POSITION OF FUNDS AND INVESTMENT IN SECURITIES EARNING TAX FREE INCOME. AS PER THIS STATEMENT, INVESTMENT IN UNITS OF UTI WERE MADE AT VARIOUS DATES FROM 1989 TO 31.3.1999 AND IN UNITS OF MORGAN STANLEY MUTUAL FUND WERE MADE DURING THE FINANCIAL YEAR 1993 - 94 BOTH OF WHICH WERE OUT OF OWNED FUNDS. INVESTMENTS IN TAX FREE BONDS ISSUED BY IRFC AND HUDCO WERE MADE IN THE PREVIOUS YEARS RELEVANT TO THE ASSESSMENT YEARS 1998 - 99, 1999 - 2000 AND 2000 - 01 . IN EACH OF THESE THREE YEARS, THE CASH PROFIT GENERATED BY THE ASSESSEE WAS IN EXCESS OF THE SAID INVESTMENTS. AS PER THIS STATEMENT IN VESTMENT OF RS. 1,34,05,000/ - WAS MADE DURING PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2000 - 01, THE ASSESSEE HAD A CASH PROFIT OF RS. 29,86,07,000/ - FO R THE YEAR ENDING ON 31.03.2000. APART FROM THIS, THERE IS A REDUCTION IN THE BORROWED FUNDS DURING THIS YEAR WHERE THE BORROWINGS HAVE REDUCED FROM RS. 7,18,72,000/ - AS ON 31.3.21999 AS ON 31.3.2000. AS THESE FACTS AND FIGURES ARE REQUIRED TO BE CONSIDERED WHILE INVOKING PROVISIONS OF SECTION 14A . 11 . THERE IS NO DISPUTE TO THE PROPOSITION THAT DISALLOWANCE U/S. 14A IS REQUIRED TO BE MADE ONLY IN RESPECT OF INTEREST EXPENDITURE, IF INTEREST ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 11 BEARING FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN SECURITIES EARNI NG TAX FREE INCOME. IT APPEARS THAT THE AO HAS NOT PROPERLY APPRECIATED THE CASH - FLOW STATEMENT INDICATING INVESTMENT OF INTEREST FREE FUNDS AVAILABLE WITH ASSESSEE, CASH PROFIT EARNED BY ASSESSEE AND REDUCTION IN BORROWED FUNDS ETC . IN THE INTEREST OF JUS TICE AND FAIRPLAY, WE RESTORE THIS ISSUE BACK TO THE FILE OF THE AO FOR DECIDING AFRESH. WE DIRECT ACCORDINGLY. 12 . THE NEXT ISSUE PERTAINS TO DENIAL OF CLAIM OF INDEXATION FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS ARISING FROM TRANSFER OF GOVERNMEN T STOCK BY TREATING THE SAID SECURITY AS A BOND. 12.1 THE AO AND THE CIT(A) HAVE DENIED BENEFIT OF INDEXATION BY RELYING UPON THIRD PROVISO TO SECTION 48 OF THE ACT, 1961, WHEREBY THE INDEXATION BENEFIT IS NOT AVAILABLE WHIL E COMPUTING THE CAPITAL GAINS ARISING ON THE TRANSFER OF A BOND OR A DEBENTURE. 12.2 WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT IN THE PRESENT CASE THE ASSESSEE TRANSFERRED GOVERNMENT STOCK AND NOT A BOND. THE ASSESSEE HAS PLACED A SAMPLE COPY OF A CERTIFICATE ISSUED BY THE GOVERNMENT OF INDIA IN RESPECT OF GOVERNMENT STOCK. THIS CERTIFICATE HAS BEEN FILED AS ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL. HOWEVER, ACCORDING TO THE REVENUE, SECURITY IN THE FORM OF GOVERNMENT STOCK SHOULD ALSO BE REGARDED AS A BOND. TH E ASSESSEE SUBMITS THAT THE SAID PROVISO HAS NO APPLICATION TO ITS CASE AS THERE IS A DISTINCTION BETWEEN A SECURITY ISSUED IN THE FORM OF A STOCK AS WELL AS A BOND AND, IN ITS CASE, THE SECURITY INVOLVED IS GOVERNMENT STOCK. FOR ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 12 THIS PURPOSE RELIANCE WAS PLACED ON SECTION 2(2) OF THE PUBLIC DEBT ACT, 1944, WHICH DEFINES GOVERNMENT SECURITY AS COMPROMISING OF A STOCK, A PROMISSORY NOTE, A BEARER BOND OR ANY OTHER FORM OF SECURITY AS MAY BE PRESCRIBED. RELIANCE WAS ALSO PLACE D ON RULES 3 & 5 OF THE PUBLIC DE BT RULES, 1946, WHICH RECOGNIZES A BOND AND A STOCK AS DIFFERENT FORMS OF GOVERNMENT SECURITIES . AS THE LEGISLATURE HAS DELIBERATELY DRAWN A DISTINCTION BETWEEN VARIOUS KINDS OF GOVERNMENT SECURITIES WHILST THE THIRD PROVISO TO SECTION 48 PUTS A FETTER ON THE BENEFIT OF THE INDEXATION ONLY IN RESPECT OF TWO KINDS OF SECURITIES. THE CLAIM OF THE ASSESSEE CANNOT BE OUTRIGHTLY DECLINED. SINCE THE CERTIFICATE ISSUED BY THE GOVERNMENT OF INDIA IN RESPECT OF GOVERNMENT STOCK HAS BEEN FILED BY ASSESSEE AS ADDITION AL EVIDENCE BEFORE THE TRIBUNAL, WHICH REQUIRES EXAMINATION AT THE PART OF THE AO. WE ACCORDINGLY RESTORE THE MATTER TO THE AO TO DECIDE AFRESH AFTER CONSIDERING THE ADDITIONAL EVIDENCE IN THE LIGHT OF PROVISIONS OF SECTION 2(2) OF PUBLIC DEBT ACT, 1944 RE AD WITH RULES 3 & 5 OF PUBLIC DEBT RULES, 1946 AND SECTION 2(H) OF SECURITIES CONTRACT REGULATION ACT, 1956. NEEDLESS TO SAY THAT THE AO IS TO DECIDE THE ISSUE AFRESH AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. 13 . THE NEXT GRIEVANCE OF THE ASSESSEE RELA TES TO COMPUTATION OF DEDUCTION U/S. 80HHC WITH RESPECT TO SALE OF SCRAP WHICH WAS TREATED BY THE AO AS PART OF TOTAL TURNOVER. THE CONTENTION OF THE AR WAS THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT VS. PUNJAB STAINLESS STEEL ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 13 INDUSTRIES, IN CIVIL APPEAL NO.5592 OF 2008 , WHEREIN THE HONBLE APEX COURT HAS HELD THAT THE SALE PROCEEDS OF SCRAP COULD NOT FORM PART OF THE TOTAL TURNOVER WHILST APPLYING THE FORMULA PROVIDED IN SECTION 80HHC(3) . WITH RESPECT TO OBSERVATION OF THE BENCH THAT ONCE THE SALE OF SCRAP IS EXCLUDED FROM THE TOTAL TURNOVER, THE PROFIT EARNED ON SUCH SALE OF SCRAP IS ALSO REQUIRED TO BE EX CLUDED FROM THE ELIGIBLE PROFIT, I T WAS SUBMITTED BY THE LEARNED AR THAT THE SAID IS SUE IS NOT IN DISPUTE BEFORE THE TRIBUNAL AND THE TRIBUNAL HAS LIMITED POWER TO DECIDE THE APPEAL U/S. 254(1) TO THE GROUNDS OF APPEAL RAISED BEFORE I T . 13.1 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. IN THIS CASE, ASSESSEE IS AGGRIEVED FOR COMPUTATION OF DE DUCTION U/S. 80HHC BY INCLUSION OF SALE OF SCRAP IN THE TOTAL TURNOVER. ONCE WE FOLLOW THE DECISION OF HON BLE SUPREME COURT FOR NOT INCLUDING THE SALE OF SCRAP IN THE TOTAL TURNOVER AS A NATURAL COROLLARY THE PROFIT ARISING OUT OF SALE OF SCRAP IS ALSO REQ UIRED TO BE EXCLUDED FROM THE ELIGIBLE PROFIT OF ASSESSEE FOR COMPUTING DEDUCTION U/S. 80HHC. SINCE THE ENTIRE ISSUE WITH REGARD TO COMPUTATION OF DEDUCTION U/S. 80HHC WITH RESPECT TO RECEIPT FROM SALE OF SCRAP IS BEFORE US, WE HAVE TO DECIDE I N THE TOTALITY BY APPLYING FORMULA FOR COMPUTATION OF DEDUCTION IN RESPECT OF SUCH RECEIPTS. IT IS ACTUALLY PROFIT WHICH IS BEING ALLOWED AS DEDUCTION AND NOT THE RECEIPT FROM SALE OF SCRAP. THEREFORE, BOTH RECEIPTS FROM SALE OF SCRAP AS WELL AS PROFIT OUT OF SUCH SALE OF SCRAP IS TO BE TAKEN INTO ACCOUNT FOR COMPUTING DEDUCTION U/S. 80HHC. WE ACCORDINGLY DIRECT THE AO TO EXCLUDE THE RECEIPT FROM SALE OF SCRAP FROM TOTAL TURNOVER AND AT THE ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 14 VERY SAME TIME, EXCLUDE THE PROFIT ON SUCH SCRAP FROM THE ELIGIBLE PROFIT OF ASSES SEE FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 80HHC. WE DIRECT ACCORDINGLY. 14 . WITH REGARD TO ASSESSEES GRIEVANCE OF EXCLUSION OF 90% OF THE INTEREST RECEIPT FROM THE PROFIT OF THE BUSINESS, WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LEARNED A R THAT N ET INTEREST INCOME IS TO BE EXCLUDED AND NOT THE GROSS INTEREST AS HELD BY HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES (P) LTD. VS. CIT, 343 ITR 89 . ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE 90% NET INTEREST INCOME. 15 . THE NEXT G RIEVANCE OF THE ASSESSEE RELATES TO COMPUTATION OF INDIRECT COST FOR THE PURPOSES OF DETERMINING PROFITS OF THE BUSINESS FROM TRADING EXPORTS. AS PER OUR CONSIDERED VIEW, THE ADMINISTRATIVE EXPENDITURE INCURRED BY THE HEAD OFFICE IS REQUIRED TO BE EXCLUDE D WHILE COMPUTING TRADING PROFIT QUALIFYING FOR DEDUCTION U/S. 80HHC OF THE ACT, WHICH IS IN THE NATURE OF INDIRECT COST. ACCORDINGLY, GROUND TAKEN BY THE ASSESSEE IS DISMISSED. 16 . WITH RESPECT TO TREATMENT OF CLOSING BALANCE OF ADVANCE LICENCE BENEFIT OF RS. 45,56,467/ - , WE FOUND THAT T HE ASSESSEE HAS TREATED THE BENEFIT IN RESPECT OF ADVANCE LICENCE OBTAINED BY IT AS CHARGEABLE TO TAX ONLY IN THE YEAR IN WHICH THE ADVANCE LICENCE IS UTILIZED FOR THE PURPOSES OF MAKING A DUTY FREE IMPORT. ACCORDING TO THE R EVENUE, THE SAID INCOME IS TO BE ASSESSED IN THE YEAR IN WHICH THE EXPORT, ON THE ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 15 BASIS OF WHICH THE RIGHT TO OBTAIN THE ADVANCE LICENCE ARISES, TAKES PLACE/THE APPLICATION FOR GRANT OF AN ADVANCE LICENSE IS MADE. 16.1 WE FOUND THAT SIMILAR IS SUE HAS BE EN DEALT BY TRIBUNAL I N THE EARLIER YEAR AND ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT BENEFIT IN RESPECT OF ADVANCE LICENCE IS CHARGEABLE TO TAX ONLY IN THE YEAR IN WHICH ADVANCE LICENCE IS UTILIZED FOR THE PURPOSE OF MAKING A DUTY FREE IMPORT. WE FOUND THAT DURING THE FINANCIAL YEAR ENDED 31 ST MARCH, 2000, THE ASSESSEE HAD OFFERED TO TAX ADVANCE TAX BENEFIT OF RS. 87,68,172/ - ON UTILIZATION BASIS. THE AMOUNT OF ADVANCE LICENSE BENEFIT CREDIT TO PROFIT AND LOSS ACCOUNT DURING THE YEAR END ED 31 ST MARCH, 2000 IS RS. 58,90,201/ - . THE AO, HOWEVER, ACCEPTED THE AMOUNT OFFERED BY ASSESSEE ON UTILIZATION BASIS, SINCE IT WAS MORE THAN THE AMOUNT CREDITED DURING THE YEAR. ON APPEAL BY ASSESSEE, THE CIT(A) DIRECTED TO TAX THE AMOUNT OF ADVANCE LICENS E CREDITED TO PROFIT AND LOSS ACCOUNT AS PER STAND TAKEN BY REVENUE IN EARLIER YEARS. THIS TREATMENT HAS RESULTED IN TAXING THE AMOUNT OF ADVANCE LICENSE BENEFIT CREDITED DURING THE YEAR ENDED 31 ST MARCH, 2000 OF RS. 58,90,201/ - , WHICH INCLUDES UNUTILIZED CLOSING BALANCE OF ADVANCE LICENSE BENEFIT OF RS. 45,56,467/ - . IN THIS REGARD WE FOUND THAT HONBLE SUPREME COURT IN THE CASE OF EXCEL INDUSTRIES LTD. 358 ITR 295 , HELD THAT SUCH INCOME IS TO BE ASSESSED IN THE YEAR OF UTILIZATION OF THE ADVANCE LICENCE AN D NOT EARLIER. RESPECTFULLY FOLLOWING THE PROPOSITION LAID DOWN BY THE HONBLE SUPREME COURT THE ADDITION OF RS. 45,56,467/ - IN RESPECT OF CLOSING BALANCE OF ADVANCE LICENCE, WHICH HAS NOT BEEN UTILIZED TILL 31 - ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 16 3 - 2000, CANNOT BE ADDED DURING THE YEAR. WE AL SO DIRECT THE AO TO BRING TO TAX NET ADVANCE LICENCE BENEFIT OF RS. 87,68,172/ - OFFERED BY ASSESSEE ON UTILIZATION BASIS INSTEAD OF RS. 58,90,201/ - CREDITED BY ASSESSEE TO ITS P&L ACCOUNT. 17 . IN THE DEPARTMENTS APPEAL I.E. ITA NO.4002/MUM/2004, THE REVENU E IS AGGRIEVED FOR DELETION OF ADDITION MADE ON ACCOUNT OF MODVAT CREDIT AND EXCISE DUTY TO THE VALUE OF CLOSING STOCK UNDER SECTION 145A OF THE ACT. IN THIS REGARD, WE FOUND THAT THE AO HAD MADE AN ADJUSTMENT IN RESPECT OF MODVAT CREDIT AND EXCISE DUTY U NDER SECTION 145A OF THE ACT ONLY TO THE ASSESSEES CLOSING STOCK. THE CIT(A) HAS HELD THAT ADJUSTMENT UNDER THE SAID SECTION HAS TO BE MADE ALSO TO THE OPENING STOCK, THE PURCHASES AND THE SALES. 18 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT A FTER VERIFYING THE FIGURE OF OPENING STOCK PURCHASES AND SALES, THE CIT(A) HAS GIVEN A FACTUAL FINDING TO THE EFFECT THAT IF SUCH ADJUSTMENT IS MADE TO THE SAID ITEMS , THE NET EFFECT UNDER SECTION 145A IS NIL. THE HONBLE BOMBAY HIGH COURT ALSO IN THE CASE OF MAHALAXMI GLASSWORKS 318 ITR 116 SUPPORTS THE CONCLUSION OF CIT(A). RESPECTFULLY FOLLOWING THE SAME, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR DELETING THE ADDITION MADE ON ACCOUNT OF MODVAT CREDIT AND EXCISE DUTY TO THE VALUE OF CLOSING STOCK U/S. 145A . 19. GROUND TAKEN BY THE REVENUE WITH REGARD TO DISALLOWANCE U/S. 14A, HAS ALREADY BEEN DEALT BY US WHILE DEALING WITH THE GROUND ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 17 NO. 2 OF ASSESSEES APPEAL. AS WE HAVE RESTORED THE MATTER BACK TO THE FILE OF THE AO, THEREFORE, GROUND NO . 3 O F THE REVENUES APPEAL STANDS ALLOWED FOR STATISTICAL PURPOSES. 20 . WITH REGARD TO DISALLOWANCE OF PAYMENT OF WELCOME RECREATION CLUB UNDER SECTION 40A(9) OF THE ACT, WE FOUND THAT SECTION 40A(9) OF THE ACT IS NOT APPLICABLE TO A PAYMENT BY WAY OF REIMB URSEMENT TO AN EMPLOYEE WELFARE CLUB AS HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GLAXOSMITHKLINE PHARMACEUTICALS LTD. THE ORDERS OF THE HIGH COURT IN THE CASE OF ASSESSEE FOR ASSESSMENT YEARS 1989 - 90 TO 1991 - 92 WERE ALSO PLACED AT PAGES 253 TO 264 OF THE PAPER BOOK. SINCE THE ASSESSEE HAS REIMBURSED COST INCURRED BY THE CLUB FOR THE WELFARE OF ITS EMPLOYEES. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR DELETING THE DISALLOWANCE. 21 . THE ISSUE WITH REGARD TO EXCLUSION OF EXC ISE DUTY AND SALES TAX FROM TOTAL TURNOVER, COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS, 290 ITR 667 . RESPECTFULLY FOLLOWING THE SAME, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR EXCLUDING EXCISE DU TY SALE TAX FROM THE TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80HHC. 22 . THE REVENUE IS ALSO AGGRIEVED WITH THE EXCLUSION OF PURCHASE REBATE, CASH DISCOUNT AND SALES TAX SET OFF FROM THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 18 80HHC OF THE ACT. ACCORDING TO THE AO THE AFORESAID RECEIPTS DO NOT QUALIFY FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT AS THE SAID RECEIPTS DO NOT HAVE AN ELEMENT OF EXPORT. THE CIT(A) HAS ALLOWED THE DEDUCTION AS THE RECEIPTS A RE IN THE NATURE OF OPERATIONAL INCOME. 22.1 THE STAND OF THE CIT(A) IS SUPPORTED BY THE DECISIONS OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. PFIZER LTD., 330 ITR 62, IT IS ONLY 90% OF THE RECEIPT, OF THE NATURE SPECIFICALLY MENTIONED IN CL AUSE (BAA) OF THE EXPLANATION THAT CAN BE REDUCED IN COMPUTING THE PROFITS OF THE BUSINESS. THE RECEIPTS THAT ARE THE SUBJECT MATTER OF DISPUTE CANNOT BE REGARDED AS AN INDEPENDENT INCOME. IN FACT, THEY ARE DIRECTLY CONNECTED WITH ITS OPERATIONS AND ALL TH E THREE RECEIPTS SHOULD ACTUALLY GO TO REDUCE THE RAW MATERIAL COST. RESPECTFULLY FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT, WE CONFIRM THE ACTION OF CIT(A) IN THIS REGARD. 23 . THE LAST GRIEVANCE OF THE REVENUE RELATES TO ALLOWING CLAIM OF DEDUC TION IN RESPECT OF INCOME FROM DEPB INCENTIVES U/S. 80HHC. 23.1 T HE AO HAD TREATED INCOME FROM DEPB LICENSES AS TAXABLE UNDER SECTION 28(IV) OF THE ACT. ACCORDING TO HIM, SINCE THE SAID INCOME DOES NOT QUALIFY AS DERIVED FROM EXPORTS THE ASSESSEE IS NOT EN TITLED TO DEDUCTION UNDER SECTION 80HHC IN RESPECT OF THE SAME. ACCORDING TO THE CIT(A), THE SAID INCOME QUALIFIES FOR DEDUCTION U/S.80HHC OF THE ACT AS A BENEFIT COVERED BY SECTION 28(IIIA) OF THE ACT. ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 19 23.2 IT WAS ARGUED BY THE LEARNED AR THAT INCOME FRO M DEPB LICENSES COMPRISES OF TWO COMPONENTS (A) FACE VALUE OF THE LICENCE AND (B) PROFIT REALIZED FROM THE SALE OF THE LICENCE I.E. DIFFERENCE BETWEEN THE SALE PRICE AND THE FACE VALUE. RELIANCE WAS PLACED ON THE DECISION OF HON BLE SUPREME COURT IN THE CA SE OF TOPMAN EXPORTS VS. CIT, 342 ITR 49, WHEREIN IT WAS HELD THAT INCOME TO THE EXTENT OF FACE VALUE OF THE LICENCE WOULD BE COVERED BY SECTION 28(IIIB) OF THE ACT AND THE PROFIT ARISING FROM THE TRANSFER THEREOF WOULD FALL WITHIN THE SCOPE OF SECTION 28( IIID) AND WOULD THEREFORE, QUALIFY FOR DEDUCTION U/S. 80HHC IN TERMS THEREOF. 23.3 WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT THE PROFIT FROM SALE OF DEPB LICENCE IS COVERED BY SECTION 28(IIID) AND WOULD NOT QUALIFY FOR DEDUCTION U/S. 80HHC IN CA SE OF ASSESSEE WHOSE TOTAL TURNOVER EXCEEDS RS. 10 CRORES. THE SAID PROVISOS WERE INSERTED IN THE ACT BY THE TAXATION LAWS (AMENDMENT) ACT, 2005 WITH RETROSPECTIVE EFFECT FROM 01.04.1998. HOWEVER, THE JURISDICTIONAL HIGH COURT IN TEXPORT LTD. VS. CIT, W.P.N O.2051 OF 2009 , FOLLOWING THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF AVANI EXPORTS VS. CIT, 348 ITR 391, HELD THAT THE SAID PROVISOS WILL NOT APPLY RETROSPECTIVELY I.E., UPTO ASSESSMENT YEAR 2004 - 05. THEREFORE, THE ASSESSEE WOULD BE ELIG IBLE FOR DEDUCTION U/S. 80HHC IN RESPECT OF PROFIT ELEMENT ALSO AS THE AMENDMENTS WHICH IMPOSE A BAR ON SUCH DEDUCTION HAVE BEEN HELD TO BE APPLICABLE ONLY FROM ASSESSMENT YEAR 2005 - 06. IN VIEW OF THE ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 20 ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT( A) FOR ALLOWING THE CLAIM OF DEDUCTION IN RESPECT OF EXPORT INCENTIVES. 24 . WITH REGARD TO GROUND TAKEN BY THE REVENUE FOR ALLOWING FOR TAXATION OF ADVANCE LICENCE BENEFIT IN THE YEAR OF ACCRUAL, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CA SE OF EXCEL INDUSTRIES LTD., 358 ITR 295 , THE INCOME FROM ADVANCE LICENCE BENEFITS HAS TO BE ASSESSED ON UTILIZATION BASIS, THEREFORE, ASSESSEE WOULD NOT BE ENTITLED TO THIS REDUCTION AS ALLOWED BY CIT(A) . ACCORDINGLY, WE ALLOW THIS GROUND OF REVENUE. 25 . IN THE CROSS OBJECTION NO. 46/MUM/2005, THE ASSESSEE HAD CLAIMED DEDUCTION IN RESPECT OF WRITE OFF OF BAD DEBTS WHILE COMPUTING ITS INCOME CHARGEABLE TO TAX FOR THE ASSESSMENT YEAR 1999 - 2000 WHICH CLAIM WAS DENIED ON THE GROUND THAT THE BOARD RESOLUTION A PPROVING SUCH WRITE OFF WAS PASSED IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2000 - 01. IN SO FAR AS THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 1999 - 2000 IS CONCERNED, THE SAME IS PENDING BEFORE THE CIT(A) FOR FRESH DISPOSAL AS PER THE DIRECTION OF T HE TRIBUNAL IN ITS ORDER DATED 27 - 6 - 2007. THE CIT(A) HAS NOT GIVEN EFFECT TO THE TRIBUNALS ORDER TILL DATE. IN VIEW OF THE ABOVE, WE DIRECT THE CIT(A) TO GIVE EFFECT TO THE DIRECTION GIVEN BY THE TRIBUNAL IN ITS ORDER DATED 27 - 6 - 2007 . 26 . GROUNDS RAISED IN BOTH THE APPEAL S OF THE ASSESSEE AS WELL REVENUE FOR A.Y. 2001 - 02 ARE SIMILAR TO THE GROUNDS RAISED IN THE ITA NO S . 2827/04, 2792/05, 4002/04, 2809/04 & CO46/05 21 APPEAL FOR A.Y.2000 - 01. ON THE SAME REASONING, WE DISPOSE THE APPEAL OF THE ASSESSEE AND REVENUE FOR A.Y. 2001 - 02. 27 . IN THE RESULT, APPEAL S OF THE ASSESSEE (I.E. ITA NO. 2792/MUM/2005 & ITA NO.2809/MUM/2004 ) AND APPEALS OF THE RE VENUE (I.E. ITA NO.2827/ MUM /2005 & ITA NO. 4002/MUM/2004) ALONG WITH CROSS OBJECTION FILED BY THE ASSESSEE I.E. CO NO. 46/MUM/2005, ARE ALLOWED IN PART FOR ALL THE ASSESSMEN T YEARS CONCERNED, IN TERMS INDICATED HEREIN ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 22/08/ 201 4 . 22/08/ 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBE R MUMBAI ; DATED 22/08 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//