APpolloTyres Ltd, Cochin V. ACIT, Cochin

CO 75/COCH/2006

• Counselvise Citation: [2010] 122 COUNSELVISE.COM (IT) 5268 (ITAT-COCHIN)
• Duration Of Justice: 4 year(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-10-2010
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 12-08-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 06-09-2006
• Court: TRIBUNAL
• Department Lawyers: S C SONKAR
• Assessee Lawyers: T N CHOPRA
• Keywords: Capital asset; Depreciation; Business expenditure; Rule of consistency; Earning of tax free income; Retrospective amendment; Question of law; Tangible material; Bad and doubtful debts; Difference of opinion; Notional interest; Commercial expediency; Revised return; Reason to believe; Change of opinion; Revenue expenditure
• Section: 143(3); 115JB; 80IB; 37(1); 148; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENC H, COCHIN BEFORE S/SHRI T.R.SOOD, AM AND N.VIJAYAKUMARAN, JM I.T.A.NOS.429/COCH/2006 & 377/COCH/2006 A.Y 2002-03 THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(1), ERNAKULAM VS. APOLLO TYRES LTD., SHANMUGHAM ROAD, KOCHI-31. [PAN:AAACA 6990Q] AND I.T.A.NO.298/COCH/2009 - A.Y 2002-03 APOLLO TYRES LTD., SHANMUGHAM ROAD, KOCHI-31. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(1), ERNAKULAM (APPELLANT) (RESPONDENT) C.O.NO.75/COCH/2006 - A.Y 2002-03 [ARISING OUT OF I.T.A.NO.429/COCH/06 APOLLO TYRES LTD., SHANMUGHAM ROAD, KOCHI-31. [PAN:AAACA 6990Q] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(1), ERNAKULAM [APPLICANT] [RESPONDENT] REVENUE BY : SHRI S.C.SONKAR, CIT-DR ASSESSEE BY : SHRI T.N. CHOPRA, ADVOCATE O R D E R PER T.R.SOOD, AM: THE ISSUES RAISED IN THESE CROSS APPEALS ARE RELATE D TO COMMON ISSUES, THEREFORE, THESE WERE HEARD TOGETHER AND AR E BEING DISPOSED OF BY A COMMON ORDER 2. I.T.A.NO.429/COCH/06 : IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 2 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT DEPRECIATION AT RS.31,66,617 WAS ALLOW ABLE PROPORTIONATELY ON THE BUILDING WHICH WAS PARTLY LE T OUT AND PARTLY USED FOR BUSINESS PURPOSE; 2. THE COMMISSIONER OF INCOME TAX (APPEALS) WENT WR ONG IN DELETING THE DISALLOWANCE OF CLUB FEE AMOUNTING TO RS.1,63,815 A NON-BUSINESS EXPENDITURE, WHICH WAS HELD TO BE IN ADMISSIBLE IN EARLIER YEARS BY THE COMMISSIONER OF INCOME TAX (APPEALS); 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.15,59, 046/- OUT OF INTEREST PAYMENTS FOR NON BUSINESS PURPOSES. THE BU RDEN WAS ON THE ASSESSEE TO PROVE THE GENUINENESS OF THE CLA IM; 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT THE AMOUNT OF RS.32,69,65,146/- BEING ADVANCE MADE TO GUJARAT PRESTROP ELECTRICALS LTD. [GPEL] TO WARDS THE LIABILITY OF FINANCIAL INSTITUTIONS, WAS FOR BUSINE SS PURPOSE AND THAT THE CLAIM OF WRITE OFF OF THE SAME WAS ADMISSI BLE. THE LEARNED CIT(A) ALSO ERRED IN ALLOWING WRITE OFF OF RS.4,66,20,000/- ON ACCOUNT OF REDUCTION IN THE VAL UE OF EQUITY INVESTMENTS IN THE SAID GUJARAT PRESTROP ELECTRICAL S LTD. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE COMPANY HAD NO NORMAL BUSINESS TRANSACTIONS WITH GPEL. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT ACTUAL PAYMENT OF BONUS PERTAINING TO A.Y 2001- 02 SHOULD BE ALLOWED IN A.Y 2002-03 IN TOTAL DISREG ARD TO PROVISIONS OF SEC.43B, WHICH ALLOW EDUCATION IN RES PECT OF PAYMENTS WHICH ARE OTHERWISE ALLOWABLE AND MADE ON OR BEFORE THE DUE DATE FOR FURNISHING THE RETURN LU/S. 139[1]. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE CAN ACT ONLY WITH THE PROVISIONS OF LAW. 6. IN THE CONTEXT OF QUANTIFICATION OF DEDUCTION U/ S.80IA IN RESPECT OF BARODA UNIT, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONCURRING WITH THE PLEA THAT PO WER GENERATING UNIT CAN PERFORM INDEPENDENTLY WITHOUT T HE CONTROL OF HEAD OFFICE AND ALSO IN HIS OBSERVATION THAT THE ASSESSING OFFICER WAS NOT AUTHORIZED TO MAKE ALTERATION IN TH E PROFITS BY ALLOCATING RELATIVE EXPENDITURE IN RESPECT OF HEAD OFFICE IN THE EXPENDITURE UNIT. THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) WENT WRONG IN OVERLOOKING THE DECISION OF HIS PREDECESSOR ON THIS ISSUE FOR A.Y 2002-02. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE ADDITION OF RS.32,69,65,146/- FOR THE COMPUTATION OF BOOK PROFIT U/S.115JB, WITHOUT APPRECIATING THAT THE SAID AMOUNT WAS NEVER CREDITED TO THE PROFIT AND LOSS AC COUNT. 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE TO BOOK PRO FIT U/S.115JB ON ACCOUNT OF UNCERTAINED LIABILITY. THE LEARNED CO MMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE SEEN THAT PRO VISION FOR DIMINUTION/REDUCTION IN THE VALUE OF INVESTMENTS CR EATED IN A.Y 3 2002-03 WAS REVERSED IN SUBSEQUENT YEAR, WHICH INDI CATES THAT THE SAME WAS NOT BASED ON ANY ACTUARIAL VALUATION O F LIABILITY. 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WENT WRONG IN HIS OBSERVATION THAT THE ADDITION OF RS.15 ,59,046/- WAS ADHOC AND NOT PROVIDED UNDER STATUTE. THE CIT(A ) OUGHT TO HAVE APPRECIATED THAT THIS WAS AN EXPENDITURE CO VERED U/S.10[34] READ WITH SEC.14A, AND WOULD BE HIT BY E XPLANATION [II] OF SECTION 115JB[2]. 10. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN ALLOWING THE CLAIM OF DEDUCTION FOR PROVISIONS FOR BONUS AND ENCASHMENT OF LEAVE IN THE COMPUTATION U/S.115JB WH ICH WAS NOT ASCERTAINED TILL 31-03-2002. 11. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN DELETING THE INTEREST LEVIED U/S.234D ON THE EXCESS REFUND GRANTED. 3. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURING THE ASSESSMENT PROCEEDINGS AO NOTICED THAT A SSESSEE HAD GIVEN ABOUT 1/8 TH OF THE CORPORATE OFFICE BUILDING ON RENT TO SISTER CONCERN M/S APOLLO INTERNATIONAL LTD. INCOME FROM THE RENT WAS OFFERED AND ASSESSED AS INCOME FROM HOUSE PROPERTY. IT WAS FURT HER NOTICED THAT NO PART OF DEPRECIATION ON CORPORATE BUILDING AND R EPAIRS AND MAINTENANCE HAS BEEN DISALLOWED BY THE ASSESSEE. AC CORDINGLY, AO WORKED OUT THE DEPRECIATION AND ALSO WORKED OUT THE REPAIR EXPENSES AND ULTIMATELY DISALLOWED A SUM OF RS.31,66,617/-. 4. ON APPEAL, THE LD. CIT(A) ADJUDICATED THE ISSUE VIDE PARA-4 WHICH IS AS UNDER: 4. THE NEXT GROUND IS RELATING TO THE DISALLOWING ` `` ` .3166617/- BEING DEPRECIATION AND REPAIRS EXPENSES INCURRED IN RESPECT OF A BUILDING LET OUT BY THE ASSESSEE TO APOLLO INTERNAT IONAL LTD. IN GURGAON AND ` `` ` .50000/- TOWARDS BUILDING LET OUT TO OTHERS. THE AO S VIEW IS THAT THE LET OUT PORTION OF THE BUILDING IS NOT USED FOR ASSESSEES OWN BUSINESS. SINCE DEPRECIATION IS BEING CLAIMED ON TH E BASIS OF USE WHOLLY AND EXCLUSIVELY FOR BUSINESS, THE ASSESSEE S HOULD NOT BE ENTITLED TO IT IN PROPORTION. THE CLAIM OF THE AR A ND APPELLANT IS THAT THEY ARE ENTITLED TO DEPRECIATION ON THE ENTIRE BLO CK OF ASSETS WHICH CONSTITUTES THE BUILDING. UNDER THE CONCEPT OF BLOC K OF ASSETS, PROPORTIONATE DISALLOWANCE CANNOT BE MADE. THERE H AS BEEN ADDITION AND REDUCTION IN THE TOTAL BLOCK OF ASSETS UNDER TH E HEAD BUILDING. IT 4 WAS HOWEVER, SEEN THAT ` `` ` .2.8 LAKHS IN RESPECT OF REPAIR EXPENSES RELATING TO BUILDING LET OUT TO APOLLO INTERNATIONA L LTD. AND ` `` ` .50000/- RELATING TO OTHER LET OUT BUILDING WERE IN EXCESS O F THE DEDUCTION OF 33% ALLOWED UNDER SEC.24. THE AO IS, THEREFORE, DIR ECTED TO RESTRICT THE DISALLOWANCE TO ` `` ` .330000/-. THE APPEAL IS PARTLY ALLOWED ON THIS POINT. 5. BEFORE US, BOTH THE PARTIES MADE SIMILAR ARGUMEN TS AS WERE MADE IN RESPECT OF GROUND NO.8 IN I.T.A.NO.274/COCH /2005 AND SUBMITTED THAT DECISION TAKEN IN THAT GROUND MAY BE FOLLOWED HEREIN. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT IDENTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE US IN I.T.A. NO.274/COCH/2005 AND THE SAME WAS ADJUDICATED VIDE PARAS 121 TO 124 WHICH ARE AS UNDER 121. BEFORE US, THE LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT APOLLO INTERNATIONAL LTD. WAS ENGAGED IN THE BUSINE SS OF EXPORTING OF TYRES AND THEREFORE, THE ASSESSEE HAS SOME BUSINE SS CONNECTIONS BECAUSE THE ASSESSEE COMPANY WAS SUPPLYING TYRES T O APOLLO INTERNATIONAL LTD. IN THAT SENSE, THE PREMISES LET OUT TO APOLLO INTERNATIONAL LTD. WERE BEING USED FOR BUSINESS PUR POSE ONLY AND THEREFORE, DEPRECIATION, REPAIRS ETC. OF THIS PORTI ON ARE ALSO TO BE ALLOWED. 122. ON THE OTHER HAND, THE LD. CIT-DR SUBMITTED TH AT ONCE INCOME FROM LET OUT PORTION WAS RETURNED AND ASSESSED AS I NCOME FROM HOUSE PROPERTY, THEN ONLY DEDUCTIONS AGAINST THE INCOME F ROM HOUSE PROPERTY WOULD BE ALLOWED IN RESPECT OF LET OUT POR TION. 123. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREF ULLY. WE FIND FORCE IN THE SUBMISSIONS OF THE LD. CIT-DR. ONCE A PARTICULAR PORTION HAS BEEN LET OUT AND INCOME IS BEING RETURNED AS WE LL AS ASSESSED FROM LET OUT PORTION AS INCOME FROM HOUSE PROPERTY, THEN ONLY DEDUCTIONS ALLOWABLE UNDER THE HEAD INCOME FROM HOU SE PROPERTY WOULD BE ALLOWED AGAINST SUCH INCOME. THE SUPREME COURT IN THE CASE OF DR. V.P. GOPINATHAN, (SUPRA) HELD THAT DEDU CTION UNDER A PARTICULAR HEAD COULD BE ALLOWED ONLY IN RESPECT OF DEDUCTIONS PERMITTED UNDER THAT PARTICULAR HEAD. WE, FURTHER, FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. H.G . GUPTA & SONS, 149 ITR 253 (DEL.) WAS CONCERNED WITH THE SIMILAR I SSUE. IN THAT CASE, THE ASSESSEE COMPANY HAD LEASED OUT A PARTICULAR P ROPERTY ON LEASE AND LEASE DEED INTER ALIA PROVIDED THAT STAMP DUTY AND REGISTRATION CHARGES OF THE LEASE DEED WERE TO BE BORNE BY THE A SSESSEE , I.E., LESSOR. THE QUESTION AROSE WHETHER SUCH STAMP DUTY CHARGE WERE 5 ALLOWABLE EXPENDITURE, THE HONBLE DELHI HIGH COURT OBSERVED AS UNDER:- THE LEGISLATURE HAS USED THE WORD NAMELY IN SECT ION 24 OF THE I.T.ACT, 1961, AND THIS SHOWS THAT THE HEADS OF EXP ENDITURE WHEREOF DEDUCTION CAN BE CLAIMED IN THE COMPUTATION OF INCO ME FROM HOUSE PROPERTY ARE EXHAUSTIVE. IF A PARTICULAR TYPE OF E XPENDITURE IS NOT SPECIFICALLY PROVIDED TO BE DEDUCTIBLE, DEDUCTION T HEREOF CANNOT BE CLAIMED FROM OUT OF THE ANNUAL VALUE. NEITHER SECT ION 23 NOR SECTION 24 PROVIDES FOR THE DEDUCTION OF THE EXPENSES INCUR RED TOWARDS STAMP DUTY OR REGISTRATION IN RESPECT OF THE LEASE OF THE HOUSE PROPERTY FOR A PERIOD OF FIVE YEARS, IN COMPILING ITS INCOME FROM THE HOUSE PROPERTY . ON THE BASIS OF THE ABOVE OBSERVATION, IT WAS HELD AS UNDER:- HELD ACCORDINGLY, THAT THE ASSESSEE-FIRM WAS NOT E NTITLED TO DEDUCTION OF A HALF SHARE OF THE STAMP DUTY AND REGISTRATION CHARGES BORNE BY IT IN RESPECT OF A LEASE OF ITS HOUSE PROPERTY FOR A P ERIOD OF FIVE YEARS, IN COMPUTING ITS INCOME FROM THE HOUSE PROPERTY . 124. THUS FROM THE ABOVE DECISION, IT IS CLEAR THAT IN RESPECT OF INCOME FROM HOUSE PROPERTY, ONLY THOSE EXPENDITURE CAN BE ALLOWED WHICH ARE SPECIFICALLY BROUGHT U/S. 24. TH E ASSESSEE COMPANY IS ALREADY GETTING STATUTORY REDUCTION OF 3 0% FOR REPAIRS ETC. NO SEPARATE DEDUCTION IS MENTIONED IN RESPECT OF REPAIRS OR DEPRECIATION. THEREFORE, THESE AMOUNTS H AVE BEEN CORRECTLY DISALLOWED BY THE LOWER AUTHORITIES. THE REFORE, WE FIND NOTHING WRONG WITH THE ORDER OF THE CIT(A). AN D CONFIRM THE SAME. FOLLOWING THE SAME DECISION, WE DECIDE THIS ISSUE I N FAVOUR OF THE REVENUE. 8. GROUND NO.2 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS AO NOTICED FROM TAX A UDIT REPORT U/S.44AB THAT A SUM OF RS.4,38,829/- WAS INCURRED A S CLUB EXPENSES WHICH CONSISTED OF MEMBERSHIP FEE AND SUBSCRIPTION OF RS.2,75,014/- AND OTHER SERVICES OF RS.1,63,815/-. FOR CLAIMING T HIS EXPENDITURE RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL FOR A.Y 1988-89. ON GOING THROUGH THE PARTICULARS, IT WAS FURTHER NOTIC ED THAT MAJOR PART OF THE EXPENDITURE UNDER OTHER SERVICES WAS INCURRED A T COCHIN OFFICE 6 WHICH REPRESENTED FOOD EXPENSES ON VARIOUS HOTELS A ND RESORTS AND, ACCORDINGLY, THIS EXPENDITURE WAS DISALLOWED. 9. BEFORE THE CIT(A) IT WAS MAINLY ARGUED THAT THIS EXPENDITURE WAS PART OF THE EMPLOYEES SALARY PACKAGE AND WAS NO T IN THE NATURE OF ENTERTAINMENT EXPENDITURE OR PERSONAL IN NATURE. LD . CIT(A) AGREED WITH THIS CONTENTION AND ALLOWED THE SAME. 10. BEFORE US, IT WAS SUBMITTED THAT THIS ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN I.T.A.NO.301/COCH/1991 AND FURTHER SIMILAR ARGUMENTS WERE MADE AS IN GROUND NO.4 FOR I.T.A.NO. 274/COCH/2005. 11. ON THE OTHER HAND, LD. CIT DR STRONGLY RELIED O N THE ORDERS OF THE AO. 12. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT IDENTICAL ISSUE CAME UP IN EARLIER YEARS ALSO BEFORE THE ITR AND IT HAS BEEN ADJUDICATED IN I.T.A.NO.274/COCH/2005 VIDE PARA-104 WHICH IS AS UNDER- 104. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE F IND THAT IDENTICAL ISSUE CAME UP BEFORE THE TRIBUNAL AND SAME WAS ADJU DICATED IN FAVOUR OF THE ASSESSEE VIDE PARA 23 OF THE ORDER F OLLOWING THE EARLIER ORDER OF THE TRIBUNAL IN I.T.A. 301/COCH/1991. IT HAS BEEN RECORDED BY THE TRIBUNAL THAT THE DEPARTMENT HAS NOT FILED ANY APPEAL BEFORE THE HONBLE JURISDICTIONAL HIGH COURT AGAINST THE ORDER . THEREFORE, IN OUR HUMBLE OPINION, THE ISSUE HAS NOW BEEN SETTLED AS T HE DEPARTMENT HAS NOT FILED ANY APPEAL AS NOTED IN THE EARLIER OR DER OF THE TRIBUNAL. THE RELEVANT PARA 23 IS AS UNDER:- THE SECOND ISSUE IS REGARDING DISALLOWANCE OF RS. 1,68,857/- AS DEDUCTION BEING PAYMENTS MADE TO THE CLUBS IN THE I NTEREST OF FURTHERING THE BUSINESS OF THE ASSESSEE . ACCORDI NG TO THE ASSESSING OFFICER AN AMOUNT OF RS. 15,12,898/- WAS SHOWN AS EXPENSES TOWARDS CLUBS. THESE EXPENSES WERE NOT TR EATED AS BUSINESS EXPENSES AND HENCE WERE ADDED BACK. HOWEVE R, THE ASSESSEE CLAIMED THAT SUCH EXPENSES WERE ADMISSIBLE AS THEY WERE INCURRED IN THE REGULAR COURSE OF BUSINESS AND ARE ALLOWABLE U/S. 37(1) OF THE ACT. IT WAS ALSO SUBMITTED THAT FOR THE AS SESSMENT YEAR 7 1996-97, THE CIT(A) HAS SET ASIDE A SIMILAR DISALLO WANCE TO EXAMINE WHETHER SUCH EXPENSES WERE OF A PERSONAL NATURE OR WERE IN THE NATURE OF DONATION OR ANY OTHER CONTRIBUTION BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ASSESSI NG OFFICER AFTER VERIFICATION HAD ALLOWED THE FULL AMOUNT FOR THE AS SESSMENT YEAR 1996- 97. ON APPEAL, THE CIT(A) FOUND THAT THE BREAK UP O F EXPENSES FILED BY THE ASSESSEE WAS IDENTICAL IN NATURE TO THE EXPENS E INCURRED IN THE ASSESSMENT YEAR 1996-97. THE CIT(A) FURTHER FOUND THAT AS PER THE BREAK UP OF THE CLUB EXPENSES FILED BY THE ASSESSEE , AN AMOUNT OF RS. 1,68,857/-REPRESENTED EXPENSES INCURRED BY THE OFFI CERS AND STAFF IN THE CLUB AND REIMBURSED TO THEM. ACCORDING TO THE CIT(A), SUCH EXPENSES CAN ONLY BE TERMED AS PERSONAL EXPENSES OF THE OFFICERS AND STAFF AND CANNOT BE CONSIDERED AS EXPENDITURE F OR THE PURPOSE OF BUSINESS. THEREFORE, HE DIRECTED THE ASSESSING OFFI CER TO DISALLOW ONLY AN AMOUNT OF RS. 1,68,857/- AND ALLOW THE BALANCE A MOUNT TAKING INTO ACCOUNT THE FACTS STATED ALREADY. HOWEVER, THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THIS ISSUE HAS BEEN DECIDE D IN FAVOUR OF THE AS COMPANY BY THE ITAT, COCHIN BENCH, IN ASSESSEES OWN CASE IN I.T.A. NO. 301/COCH/1991 FOR ASSESSMENT YEAR 1988- 89, VIDE ITS ORDER DATED 29.7.1992. HE FURTHER SUBMITTED THAT THE DE PARTMENT HAS NOT PREFERRED AN APPEAL BEFORE THE HONBLE HIGH COURT A GAINST THE SAID ITAT ORDER. FOLLOWING THE ABOVE ORDER, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE.. FOLLOWING THE ABOVE DECISION, WE DECIDE THIS ISSUE AGAINST THE REVENUE. 13. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURING ASSESSMENT PROCEEDINGS AO NOTED THAT ASSESSE E HAS REDUCED A SUM OF ` `` ` .10,59,119/- BEING DIVIDEND RECEIVED FROM UTI MUTUA L FUND AND BANK OF INDIA FROM THE BOOK PROFITS U/S.115JB. HE FURTHER NOTICED THAT NO AMOUNT OF EXPENDITURE HAS BEEN REDUCED FROM THIS. ON ENQUIRY, IT WAS SUBMITTED THAT NO BORROWED FUNDS WE RE USED FOR BUYING THESE UNITS AND, THEREFORE, THERE WAS NO NEXUS BETW EEN THE BORROWED FUNDS AND INTEREST FREE INVESTMENTS. IT WAS NOTED B Y THE AO THAT SUCH FUNDS WERE BEING INVESTED FROM THE POOL OF FUNDS AN D THE SAME ARGUMENT WAS TAKEN BY THE ASSESSEE IN THE EARLIER Y EAR BEFORE THE 8 SUPREME COURT IN THE CASE OF IN THE CASE REPORTED A T 255 ITR 273. FURTHER, NO SEPARATE ACCOUNTS WERE BEING MAINTAINED FOR INVESTMENTS IN MUTUAL FUND. SINCE, ACCORDING TO THE AO, INVESTM ENT WAS MADE FROM THE COMMON POOL OF FUND, HE ALLOCATED THE PROPORTIO NATE AMOUNTING TO ` `` ` .15,59,046/-. HE DISALLOWED THE INTEREST ACCORDINGL Y. 14. ON APPEAL, THE LD. CIT[A] BY FOLLOWING EARLIER YEAR ORDER AND BY OBSERVING THAT THIS ADDITION WAS ON AN ADHOC BASIS, DELETED THE ADDITION. 15. BEFORE US, LD. CIT DR SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE REVENUE BY THE DECISION OF THE TRIBUNAL IN I.T.A.NO.43/COCH/2001 AND STRONGLY RELYING ON THE O RDER OF THE AO. HE ALSO SUBMITTED THAT SINCE ASSESSEE HAS A MIXED POOL OF FUNDS, THEREFORE, INTEREST EXPENSES HAVE BEEN CORRECTLY AL LOCATED ON PROPORTIONATE BASIS ON THE INVESTMENT IN TAX FREE F UNDS AND AS SUCH RIGHTLY DISALLOWED. 16. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THESE ARE TRADE ASSETS AS PER THE DECISION OF THE H ON'BLE SUPREME COURT IN THE ASSESSEES OWN CASE REPORTED IN 255 IT R 223 AND, THEREFORE, NO INTEREST COULD HAVE BEEN DISALLOWED. HE FURTHER SUBMITTED THAT THE EARLIER DECISION BY THE TRIBUNAL WAS RENDERED ON THE BASIS OF THE DECISION OF THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. & ORS. IN ITA NO. 8057/M/03 & ORS., DATED 20 TH OCTOBER, 2008, WHEREIN IT WAS HELD THAT SECTION 14 A IS APPLICABLE TO ALL HEADS OF INCOME AND RULE 8D IS OF RETROSPECTIVE 9 NATURE. HOWEVER, THIS SPECIAL BENCH DECISION HAS BE EN REVERSED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. HOLDING THAT RULE 8D DOES NOT HAVE RETROSPECTIVE EFFECT AND ACCORDINGLY THE EARLIER DECISION OF THE TRIBUNAL WOULD NOT APPLY. H E ALSO REFERRED TO ANOTHER UNREPORTED DECISION OF THE HON'BLE KERALA H IGH COURT IN THE CASE OF CIT VS. LEENA RAMCHANDRAN [COPY OF THE DECI SION IS FILED], WHEREIN IT WAS HELD THAT IF INVESTMENT WAS MADE IN SHARES WHICH WERE HELD AS BUSINESS ASSETS, THEN, SEC.14A WOULD NOT AP PLY. THEREFORE, IN THE CASE BEFORE US, SEC.14A COULD NOT HAVE BEEN INV OKED AS HAS BEEN DONE BY THE AO. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT IN EARLIER YEAR THE TRIBUNAL HAS ADJUDICATED THIS I SSUE IN I.T.A.NO.43/COCH/2001 VIDE PARA 31 WHICH READS AS U NDER: 31. ON CAREFUL CONSIDERATION OF THE RIVAL SUBMISSI ONS, WE FIND THAT IN THE ABSENCE OF THE SATISFACTION OF THE ASSESSING OFFICER FOR INVOKING RULE 8D(1), RULE 8D(3) IS NOT DIRECTLY APPLICABLE. THEREFORE, TO MEET THE ENDS OF JUSTICE, IF THE DISALLOWANCE IS FIXED A T 0.5% OF THE AVERAGE OF THE VALUE OF SUCH INVESTMENT, IT WILL BE A LEGIT IMATE DISALLOWANCE. IN THIS CASE, IT IS A CASE OF REOPENING AND THE ABSENC E OF THE SATISFACTION OF THE ASSESSING OFFICER TO INVOKE RULE 8D JUSTIFY THAT THE CLAIM MADE BY THE ASSESSEE IS ON THE LOWER SIDE WHEREAS THE AS SESSING OFFICER S ESTIMATION OF EXPENDITURE IS ON THE HIGHER SIDE. UN DER THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, WE CANNOT BELIEVE TH AT THE ASSESSEE HAS NOT INCURRED EXPENDITURE IN RELATION TO THE INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. HENC E, AFTER ASCERTAINING THE TOTALITY OF THE FACTS AND CIRCUMST ANCES, THE DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELAT ION TO SUCH INCOME SHOULD BE 0.5% OF SUCH EXPENDITURE INCURRED IN RELA TION TO THE EXEMPTED INCOME. HENCE, THAT ALONE WILL JUSTIFY THE ASSESSEES CLAIM AND TO THAT EXTENT THE ASSESSEES CLAIM IS PARTLY A LLOWED. FOR THE LIMITED PURPOSE OF COMPUTING OF THE EXPENDITURE AT THE ABOVE PERCENTAGE FOR THE PURPOSE OF DISALLOWANCE , WE REM IT THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER AND DECIDE IN ACCORDANCE WITH THE ABOVE DIRECTIONS OF THE TRIBUNAL. HENCE THIS ISSUE IS DECIDED PARTLY IN FAVOUR OF THE ASSESSEE. 10 IN THE ABOVE DECISION, THE TRIBUNAL WHILE HOLDING T HAT RULE 8D WAS PROSPECTIVE IN NATURE, ESTIMATED THE EXPENDITURE AT 0.5% OF THE INCOME. BUT, HOWEVER, IT WAS CLAIMED BEFORE US THAT INVESTMENT WAS HELD ON ACCOUNT OF BUSINESS ASSETS. THE HON'BLE KER ALA HIGH COURT IN THE CASE OF CIT VS. LEENA RAMCHANDRAN [SUPRA] HAS H ELD AS UNDER: (II) DEDUCTION U/S.36(1)(III) ON BORROWED FUNDS UT ILIZED FOR THE ACQUISITION OF SHARES IS ADMISSIBLE ONLY IF IN TRAD E AND THE ASSESSEE IS ENGAGED IN TRADING IN SHARES. SO FAR AS ACQUISITION OF SHARES IN THE FORM OF INVESTMENT IS CONCERNED THE ONLY BENEFIT DE RIVED IS DIVIDEND INCOME WHICH IS NOT ASSESSABLE UNDER THE ACT, DISAL LOWANCE U/S.14A IS SQUARELY ATTRACTED THUS, IT IS CLEAR THAT THE EARLIER DECISION OF THE TRIBUNAL IS NOT APPLICABLE IN THIS YEAR BECAUSE RULE 8D WHICH WAS HELD TO BE RETR OSPECTIVE IN NATURE BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. & ORS. [SUPRA] WHICH WAS FOLLOWED, HAS IT SELF BEEN REVERSED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE WHEREIN THE RULE WAS HELD TO BE NOT OF RETROSPECTIVE IN NAT URE. IN THAT CASE IT WAS FURTHER HELD THAT IN EARLIER YEAR ONLY A REASONABLE SUM OF EXPENDITURE WHICH WAS DIRECTLY RELATED TO EARNING EXEMPT INCOME COULD BE DISALLOWED. SECONDLY, THE HON'BLE KERALA HIGH COURT IN THE CASE OF LEENA RAMCHANDRAN [SUPRA] HAS CLEARLY HELD THAT IF SHARES ARE PURCHASED ON ACCOUNT OF TRADE ASSETS, THEN SEC.14A IS NOT ATTRACTED. HOWEVER, IT IS NOT CLEAR FROM THE ORDERS OF THE LOW ER AUTHORITIES WHETHER THE SHARES WERE PURCHASED ON ACCOUNT OF TRADE OR IN VESTMENT. THEREFORE, IN THE INTERESTS OF JUSTICE, WE SET ASID E THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY WHETHER THE UNITS OF UTI MUTUAL FUND WERE PU RCHASED ON 11 ACCOUNT OF TRADING OR INVESTMENT. IF THEY ARE ON AC COUNT OF TRADING, THEN FOLLOWING THE DECISION OF THE HON'BLE KERALA HIGH C OURT IN THE CASE OF LEENA RAMCHANDRAN [SUPRA], NO EXPENDITURE CAN BE DI SALLOWED U/S.36(1)(III). IF THEY ARE ON ACCOUNT OF INVESTMEN T, THEN REASONABLE EXPENDITURE WHICH IS DIRECTLY ATTRIBUTABLE TO EARNI NG SUCH DIVIDEND INCOME MAY BE DISALLOWED. THIS GROUND IS, ACCORDING LY, ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.4 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURING ASSESSMENT PROCEEDINGS, AO NOTICED THAT THE ASSESSEE COMPANY HAD ADVANCED A SUM OF ` `` ` .32.70 CRORES TO GUJARAT PETRO ELECTRICAL LTD. (FOR SHORT GPEL) A COMPANY PROMOTED BY THE ASSESSEE AND HAD WRITTEN OFF THIS AMOUNT BY TRANSFER FROM THE GENERAL RESERV E ACCOUNT AS PER THE BOARDS RESOLUTION PASSED IN THE BOARD MEETING HELD ON 26-6-2002. THOUGH THIS AMOUNT WAS NOT CHARGED TO THE PROFIT & LOSS ACCOUNT, BUT THE SAME WAS DEDUCTED WHILE COMPUTING TOTAL INCOME AS PER THE RETURN. GPEL WAS JOINTLY PROMOTED COMPANY BY THE AS SESSEE AND GUJARAT INDUSTRIAL AND INVESTMENT CORPORATION (FOR SHORT GIIC) FOR TRANSFER OF ELECTRIC GRADE PAPER PHERIOLIC COPPER C LAD LAMINATES AND GLASS EPOXY COPPER CLAD LAMINATES. THE ASSESSEE HAD ACQUIRED 51,80,000 EQUITY SHARES OF ` `` ` .10 EACH IN GPEL WHICH WORKED OUT TO 37.45% OF THE SHARE CAPITAL OF GPEL. THE ASSESSEE H AD ALSO STOOD GUARANTOR TO THIS COMPANY AND HAD PAID A SUM OF ` `` ` .32,69,65,146/- TO THE FINANCIAL INSTITUTIONS AND BANKS OF GPEL TOWARD S ONE TIME SETTLEMENT OF THE DUES OF GPEL AND ITS CAPITAL REQ UIREMENTS WHICH WAS 12 IN ACCORDANCE WITH THE REHABILITATION SCHEME APPROV ED BY THE BIFR/GUJARAT HIGH COURT. THE CLAIM WAS MADE U/S.28 OF THE I.T.ACT AS, ACCORDING TO THE ASSESSEE COMPANY, IT WAS A LOSS IN CURRED IN THE COURSE OF CARRYING ON THE BUSINESS. HOWEVER, AO WAS OF THE VIEW THAT THERE WAS NO CONNECTION BETWEEN THE ASSESSEE AND GP EL AND NONE OF THE PRODUCTS OF GPEL WERE USED BY THE ASSESSEE COMP ANY. HE WAS ALSO OF THE OPINION THAT REPAYMENT OF THE LOAN CANN OT BE CALLED AS REVENUE EXPENDITURE. THE LOSS, IF ANY, SUFFERED BY THE ASSESSEE HAS NO DIRECT AND PROXIMATE NEXUS BETWEEN THE BUSINESS OPE RATIONS OF THE ASSESSEE AND THAT OF THE GPEL. HE OBSERVED THAT GPE L WAS A SEPARATE ENTITY AND WERE LIABILITIES CREATED BY GPEL AND, TH EREFORE, THOSE LIABILITIES CANNOT BECOME THE BUSINESS EXPENDITURE OF THE PROMOTER/GUARANTOR I.E. THE ASSESSEE COMPANY. IN TH IS BACKGROUND, ACCORDING TO HIM, THE LOSS COULD NOT BE ALLOWED U/S .28 OF THE ACT. 19. IT WAS SUBMITTED BEFORE THE AO VIDE LETTER DATE D 27-12-2005 THAT INVESTMENTS IN GPEL BY MAKING PAYMENT AS A GUA RANTOR TOWARDS SETTLEMENT OF CREDITORS OF GPEL WOULD BE TREATED AS BUSINESS CARRIED ON BY THE ASSESSEE AND IN THIS RESPECT RELIANCE WAS PL ACED ON THE DECISION OF THE APEX COURT IN THE ASSESSEES OWN CASE FOR TH E A.Y 1998-99 REPORTED AT 255 ITR 273. AO OBSERVED THAT IN THAT C ASE THE ISSUE WAS WHETHER INVESTMENT MADE IN THE UNITS OF UTI COULD B E SAID TO BE BUSINESS OF THE ASSESSEE OR NOT. HE FURTHER OBSERVE D THAT INVESTMENTS IN THE UNITS OF UTI COULD NOT BE EQUATED WITH THE R EPAYMENT OF CREDITORS OF OTHER COMPANY. HE ALSO OBSERVED THAT A NY PROFIT OR LOSS 13 FROM INVESTMENTS IN UNITS AND SHARES HAS BEEN TREAT ED AS INCOME FROM CAPITAL GAINS IN THE SUBSEQUENT YEAR AND ACCORDINGL Y THE ARGUMENT THAT GPEL SHOULD BE CONSIDERED AS ONE OF THE BUSINESS AC TIVITY WAS ALSO REJECTED. HE ALSO REFERRED TO THE SEGMENT REPORT AS PER ACCOUNTING STANDARD AS-17 WHICH WAS PLACED AT ITEM NO.13 OF PA RT-B OF SCHEDULE 12 OF THE BALANCE SHEET WHERE IT WAS CLEARLY MENTIO NED THAT ASSESSEE HAD ONLY ONE SEGMENT OF BUSINESS I.E. TYRES, TUBES AND FLAPS. 20. THE ASSESSEE HAS FURTHER RELIED ON THE DECISION OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF TURNER MORRISONS & CO. LTD. VS. CIT [245 ITR 724], WHEREIN IT WAS HELD THAT MONEY ADVAN CED TO THE SUBSIDIARY COMPANY WHICH WAS WOUND UP AND ASSETS OF THAT COMPANY WERE PURCHASED BY A GOVERNMENT COMPANY AND THE ENTI RE AMOUNT PAID TO THE SECURED CREDITORS AND RECOVERY OF THE SAME H AD BECOME IMPOSSIBLE, THEN SUCH AMOUNT SHOULD BE ALLOWED AS B AD DEBT. AO OBSERVED THAT THIS DECISION IS DISTINGUISHABLE BECA USE GPEL WAS NOT A SUBSIDIARY COMPANY WHICH WAS WOUND UP AND THE ASSET S OF THE COMPANY WERE NOT SOLD AND, THEREFORE, THE AMOUNT IN VESTED WAS NOT LOST FOREVER. THEREFORE, THIS DECISION WAS DISTINGU ISHABLE. HE ALSO REFERRED TO THE MINUTES OF THE BOARD MEETING HELD O N 26-6-2002 AND OBSERVED THAT DEBT UNDER CONSIDERATION DID NOT BECA ME IRRECOVERABLE DURING THE RELEVANT PREVIOUS YEAR AND THAT THE SAME WAS NOT A DEBT CONSIDERED FOR COMPUTING THE INCOME OF THE ASSESSEE AND IN ANY CASE IT WAS NOT THE MONEY LENT IN THE ORDINARY COURSE OF BUSINESS AND, 14 THEREFORE, SAME COULD NOT BE ALLOWED AS BAD DEBT U/ S.36(1)(VII) R.W.S. 36(2)(I). 21. PERHAPS AN ALTERNATE CLAIM U/S.37 WAS ALSO MADE FOR WHICH AO OBSERVED THAT IT WAS TREATED AS A DEBT IN ASSESSEE S BOOKS AND WAS WRITTEN OFF AS BAD DEBT AND, THEREFORE, DENIAL U/S. 36(1)(VII) DID NOT MAKE THE ASSESSEE ELIGIBLE FOR CLAIMING THE SAME AL TERNATIVELY U/S.37. AO ALSO RELIED ON THE DECISION OF THE HON'BLE SUPRE ME COURT IN THE CASE OF CIT VS. BIRLA BROS. (P) LTD. [77 ITR 751], AND OBSERVED THAT BY GUARANTYING THE LOAN OF GPEL THE BUSINESS OF APOLLO TYRES [I.E. THE ASSESSEE] WAS NOT BENEFITED AT ALL. AO ALSO RELIED ON THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF ROOMPOORIA BROS. PVT. LTD. VS. CIT [167 ITR 59]. 22. THE ASSESSEE COMPANY HAD ALSO FILED COPIES OF F INANCIAL STATEMENTS OF GPEL FOR THE YEAR ENDED 31-3-2001 AND 31-3-2002 ON WHICH AO COMMENTED AS UNDER: ON GOING THROUGH THOSE STATEMENTS IT IS SEEN THAT T HE AMOUNT OF INTEREST WAIVED BY THE BANK AS PER THE SCHEME OF RE HABILITATION AMOUNTING TO ` `` ` .1305.69 LAKHS WAS ONLY CREDITED TO THEIR P&L ACCOU NT AND THE PRINCIPAL PART OF LOAN PAID BY APOLLO TYRES ON BEHALF OF GPEL AS PER THE SCHEME WAS TRANSFERRED FROM THE BANKS A CCOUNT TO THE ACCOUNTS OF APOLLO TYRES AND SHOWN IN THEIR BALANCE SHEET AS AN UNSECURED LIABILITY TO APOLLO TYRES LTD. HENCE, ACC ORDING TO THE ACCOUNTS MAINTAINED BY GPEL, THE LIABILITY WAS NOT RELINQUISHED BUT IT WAS SHIFTED FROM THE BANKS TO THE GUARANTOR VIZ., A POLLO TYRES. IN THE ABOVE BACKGROUND, AO DENIED THE CLAIM FOR DE DUCTION OF ` `` ` .32,69,65,146/-. 23. ON APPEAL, LD. CIT[A] DECIDED THE ISSUE VIDE PA RAS 11 AND 12. THE RELEVANT PORTIONS OF THOSE PARAS ARE AS UNDER: 15 11. BUT I FIND THAT THE AO HAS NOT GONE INTO TH E CRUX OF THE FACTS STATED ABOVE. AS FAR AS THE FACTS ARE CONCERN ED, THE FOLLOWING SITUATION EMERGE:- (I) IT WAS AN AUTHORISED AND LEGITIMATE BUSINESS D ECISION. (II) IT IS A JOINT VENTURE BY THE GOVERNMENT OF GU JRAT, NOT AN ARRANGEMENT TO SIPHON MONEY OR PARK FUNDS, NEITHER THE AO HAS ESTABLISHED THIS NOR ANY SUCH SITUATION EMERGE FROM THE FACTS. (III) AND MOST IMPORTANTLY, BOTH THE PAYMENTS AND REDUCTION IN VALUE OF INVESTMENTS WAS DIRECTLY OUT OF THE SETTLE MENT PACKAGE BY THE APPROPRIATE AUTHORITY I.E. BIFT. 12. THE APPELLANT HAS RELIED ON 74 ITR 780 (BOMBAY HC) WHERE IT WAS HELD THAT WHEN A COMPANY WHILE CARRYING ON BUSI NESS ALSO ACTS AS MANAGERS OF VARIOUS COMPANIES TO THEM, ANY LOSS SO INCURRED HAS TO BE ALLOWED AS BUSINESS EXPENDITURE. AS PER 117 I TR 858, THE CALCUTTA HIGH COURT HELD THAT IF AN ASSESSEE IS FOR CED TO DISCHARGE THE SURELY DEBTS AND SUCH DEBITS BECOME BAD, IN THE ABS ENCE OF ANY ULTERIOR MOTIVE, SUCH DEBT IS DEDUCTIBLE AS BAD DEB T. THE PUNJAB HIGH COURT IN THE CASE OF PUNJAB AGRO CORPORATION 253 ITR 788 HAS HELD IN IDENTICAL CIRCUMSTANCES THAT PUNJAB AGRO HAD PRO MOTED M/S AGRO MOOD TO MANUFACTURE JUICES AND THE LATTER WAS DECLA RED AS A SICK UNIT. THE LIABILITIES INCURRED BY THE PROMOTER COMPANY AS PART OF THE REVIVAL PLAN, BY WHICH PART OF THE ADVANCES WERE WRITTEN OF F WAS CONSIDERED TO BE GENUINE ALLOWABLE BUSINESS EXPENDITURE. VARIOUS TRIBUNAL DECISIONS ARE ALSO IN SUPPORT OF THE CLAIM OF THE A PPELLANT. IN THE CASE OF PARASMANI INVESTMENT COMPANY 85 ITD 133- WHERE THE ISSUES WERE EXACTLY IDENTICAL, IT WAS HELD THAT WHEN THE C OMPANY HAS GONE UNDER BIFR, THE LOAN MUST BE CONSIDERED AS IRRECOVE RABLE. AN IDENTICAL VIEW HAS BEEN TAKEN BY THE BANGALORE ITAT IN THE CASE OF MC DOWEL CO. I.T.A.NO.373 DATED 22-12-1998. THE ISSU E, THEREFORE, BECOMES CLEAR. THE ASSESSEE IS ENTITLED TO WRITE OF F THE ADVANCE OF ` `` ` .326965146/- MADE TO GPEL AND WRITTEN OFF AS BAD DE BT AND ALSO ` `` ` .46620000/- WRITTEN OFF BY THE ASSESSEE ON ACCOUNT OF REDUCTION IN THE VALUE OF EQUITY INVESTMENTS MADE IN GPEL. THE A PPEAL ON THIS POINT IS ALLOWED. 24. BEFORE US, THE LD. DR REFERRED TO PAGES 18 TO 2 2 OF THE ASSESSMENT ORDER WHERE THIS CLAIM HAS BEEN DISCUSSE D IN DETAIL AND STRONGLY SUPPORTED THE OBSERVATIONS MADE BY THE AO. HE THEN REFERRED TO THE OLD DECISION OF THE HOUSE OF LORDS IN THE CA SE OF SOLEMAN VS. SOLEMAN WHERE THE WHOLE CONCEPT OF JOINT STOCK COMP ANY WAS DISCUSSED AND ULTIMATELY IT WAS HELD THAT EVERY JOI NT STOCK COMPANY IS A 16 SEPARATE LEGAL ENTITY AND, THEREFORE, GPEL IS A SEP ARATE AND DISTINCT ENTITY IN CONTRAST TO THE ASSESSEE COMPANY I.E. APO LLO TYRES LTD. (FOR SHORT ATL). BASICALLY, THE ASSESSEE COMPANY I.E. AT L WAS TRYING TO SET UP A NEW BUSINESS THROUGH GPEL AND IT CANNOT BE SAI D THAT GPEL IS A PART OF THE ASSESSEE COMPANY. HOWEVER, THE ASSESSEE AS A COMPANY DID NOT PURCHASED THE BUSINESS OF GPEL BECAUSE PURC HASING OF A COMPANY CANNOT BE BUSINESS OF ANY COMPANY. HE ARGUE D THAT WHATEVER WAS GIVEN BY ATL TO GPEL OR ITS CREDITORS WAS BASICALLY A CONTRIBUTION ON ACCOUNT OF CAPITAL TO GPEL. EVEN TH E SETTLEMENT WAS REACHED WITH ITS CREDITORS BY THE GPEL AND IT CANNO T BE SAID THAT THE ASSESSEE COMPANY SETTLED THE CREDITORS OF GPEL. THE ROLE OF ATL I.E. THE ASSESSEE COMPANY WAS LIMITED TO ONLY FINANCING THE SETTLEMENT. IN FACT, THE ASSESSEE COMPANY HAS MADE AN INVESTMENT A ND THE FATE OF THAT INVESTMENT WOULD BE KNOWN IN FUTURE AND, THERE FORE, PRESENTLY THE INVESTMENT MADE BY THE ASSESSEE CANNOT BE TREATED A S LOSS. 25. HE ALSO EMPHASIZED THAT EVEN THE BOARD RESOLUTI ON FOR WRITING OFF THIS INVESTMENT WAS PASSED ON 26-6-2002 I.E. MU CH AFTER CLOSING THE ACCOUNTS AND, THEREFORE, THIS CLAIM, IN ANY CAS E, COULD NOT HAVE BEEN MADE IN THIS CASE. HE ALSO SUBMITTED THAT THE CLAIM CANNOT BE ENTERTAINED EVEN AS BAD DEBT BECAUSE THE ASSESSEE C OMPANY HAS NOT ACCOUNTED FOR INVESTMENT MADE IN GPEL WHILE DETERMI NING THE PROFITS OF THE ASSESSEE COMPANY. 26. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE CLAIM MADE BY THE ASSESSEE HAS TO BE CONSIDERED AS GENUINE CLAIM 17 SUFFERED BY THE ASSESSEE WHILE SETTLING THE DUES AN D THE SAME MAY BE TREATED AS EITHER BUSINESS LOSS U/S.28(1) OR SAME M AY BE ALLOWED AS BAD DEBT U/S.36(1)(VII) OR A REVENUE EXPENDITURE U/ S.37. WHILE NARRATING THE FACTS, HE POINTED OUT THAT ASSESSEE W AS A DIVERSIFIED COMPANY AND WAS ALSO IN THE BUSINESS OF FLOATING VA RIOUS COMPANIES AS SUBSIDIARIES OR SISTER CONCERNS. IT HAS ALSO PROMOT ED COMPANIES LIKE APOLLO FINANCE LTD., APOLLO INTERNATIONAL LTD AND A LSO WAS IN THE PROCESS OF REVIVAL OF ITS OTHER GROUP COMPANIES LIK E UNIVERSAL STEEL ALLOYS LTD., BST MANUFACTURING LTD., AND PREMIER TY RES LTD. THE FORMATION OF GEPL WAS A STEP IN THAT DIRECTION. IN FACT, ASSESSEE COMPANY WANTED TO ESTABLISH A FOOTHOLD IN THE STATE OF GUJARAT WHICH WAS ENCOURAGING SETTING UP OF INDUSTRIES BY PROVIDI NG INFRASTRUCTURE AS WELL AS SUBSIDIES AND, THEREFORE, ASSESSEE COMPANY HAD DECIDED TO START A PROJECT IN THE STATE OF GUJARAT AND ULTIMAT ELY THE ASSESSEE COMPANY HAD ESTABLISHED A TYRE MANUFACTURING PLANT AT LIMDA NEAR BARODA IN GUJARAT WHICH IS ASIAS BIGGEST TYRE MANU FACTURING PLANT. BEFORE ESTABLISHMENT OF THIS PLANT, ASSESSEE COMPAN Y NEEDED TO ESTABLISH FOOT HOLD IN THE STATE OF GUJARAT FOR WHI CH ASSESSEE COMPANY OBTAINED A LETTER OF INTENT FOR ESTABLISHMENT OF TH E PLANT TO MANUFACTURE 200 TONS P.A. COPPER CLAD LAMINATES IN THE STATE OF GUJARAT FROM THE GOVERNMENT OF INDIA IN AUGUST, 198 9. TO REALIZE THIS DREAM OF PUTTING UP OF THIS PLANT, THE ASSESSEE COM PANY ENTERED INTO AN AGREEMENT WITH GUJARAT INDUSTRIAL INVESTMENT COR PORATION LIMITED (FOR SHORT GIIC). HE THEN REFERRED TO PAGES 299 TO 308 OF THE PAPER 18 BOOK WHICH IS COPY OF THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPANY AND REFERRED TO CLAUSE III-B(6) WHICH IS PA RT OF OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MA IN OBJECT WHICH READS AS UNDER: TO AMALGAMATE, ENTER INTO PARTNERSHIP OR INTO ANY ARRANGEMENTS FOR SHARING PROFITS, UNION OF INTERESTS, CO-OPERATION, JOINT-ADVENTURE, OR RECIPROCAL CONCESSIONS OR FOR LIMITING COMPETITION WITH ANY PERSON OR COMPANY CARRYING ON OR ENGAGED IN OR ABOUT TO CARRY ON OR ENGAGE IN, ANY BUSINESS OR TRANSACTION WHICH THE COMPANY IN AU THORISED TO CARRY ON OR ENGAGE IN OR WHICH CAN BE CARRIED ON IN CONJU NCTION THEREWITH OR WHICH IS CAPABLE OF BEING CONDUCTED SO AS TO DIRECT LY OR INDIRECTLY BENEFIT THE COMPANY. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE COMPA NY HAD POWER TO AMALGAMATE OR ENTER INTO PARTNERSHIP OR START NEW J OINT VENTURE FOR SHARING OF THE PROFITS AND GPEL WAS ESTABLISHED UND ER THAT POWER. 27. HE SUBMITTED THAT ASSESSEE COMPANY WAS ALREADY IN THE PROCESS OF REHABILITATION OF OTHER GROUP COMPANIES, SUCH AS , BST MFG. LTD, UNIVERSAL STEEL AND ALLOYED LTD. AND SUCH PRE-REHAB ILITATION SCHEMES WERE APPROVED BY THE BOARD OF DIRECTORS OF THE COMP ANY. HE SUBMITTED THAT DEDUCTION ON ACCOUNT OF WRITE OFF OF THE OUTSTANDING LOANS OF UNIVERSAL STEEL AND ALLOYED LTD. HAS ALREA DY BEEN ALLOWED BY THE TRIBUNAL IN A.Y 1996-97 ON THE GROUNDS OF BUSIN ESS EXPEDIENCY [I.T.A.NO.43/COCHIN2001 (COPY FILED)]. HE SUBMITTED THAT THE ABOVE NOTED BACKGROUND AND THE FACTUAL MATRIX WOULD SHOW THE NATURE OF MULTI DIMENSIONAL ACTIVITY UNDERTAKEN IN A REGULAR AND SYSTEMATIC MANNER BY THE ASSESSEE COMPANY AS PER THE OBJECTS O F THE COMPANY THE FORMATION OF GPEL WAS ALSO A STEP IN THAT DIREC TION. 19 28. COMING TO THE FACTS OF THE WRITE OFF HE POINTED OUT THAT GPEL WAS INCORPORATED IN JUNE 28, 1990 AND PURSUANT OF T HE GRANT OF LETTER OF INTENT BY THE GOVERNMENT OF INDIA FOR MANUFACTUR E OF COPPER CLAD LAMINATES THE ASSESSEE COMPANY ENTERED INTO A SHARE HOLDERS AGREEMENT WITH GIIC ON MAY 2, 1991 FROM WHICH TWO P ROMOTER COMPANIES I.E. GIIC AND ATL WERE TO HOLD 51% OF THE EQUITY CAPITAL OUT OF WHICH 11% WAS TO BE HELD BY GIIC AND 40% BY THE ASSESSEE COMPANY. FOR THIS, THE ASSESSEE COMPANY INVESTED A SUM OF ` `` ` .5.18 CRORES TOWARDS EQUITY CAPITAL WHICH WAS ` `` ` .13.83 CRORES. AS PER ARTICLE 2.8 OF THIS SHAREHOLDERS AGREEMENT, GIIC WAS ENTITL ED TO REDUCE ITS EQUITY SHAREHOLDING AFTER COMMENCEMENT OF THE COMME RCIAL PRODUCTION. AS PER ARTICLE 3.1, WHICH DEALS WITH THE COMPOSITION OF THE BOARD OF DIRECTORS, IT PROVIDES THAT ATL WOULD BE R EPRESENTED ON THE BOARD BY FOUR OF ITS NOMINEES, WHEREAS GIIC WAS ENT ITLED TO APPOINT TWO DIRECTORS. CHAIRMAN AND MANAGING DIRECTOR OF GP EL WERE TO BE NOMINEES OF THE ASSESSEE COMPANY I.E. ATL. AS PER A RTICLE 7.4 ATL WAS MADE RESPONSIBLE TO FINALISE ALL MATTERS RELATING T O FORMATION OF GPEL AS WELL AS OBTAINING OF NECESSARY APPROVALS OF THE GOVERNMENT. THUS, IT WAS A CASE OF PUBLIC PRIVATE SECTOR PARTNERSHIP BET WEEN ATL AND GUJARAT GOVERNMENT THROUGH GIIC. IN THIS PARTNERSHI P ASSESSEE WAS DESCRIBED AS ASSOCIATE SECTOR PARTNER (ASP) AND AS PER ARTICLE 7.4 IT WAS PROVIDED ASP SHALL ALSO BE RESPONSIBLE TO NEGO TIATE AND OBTAIN ALL NECESSARY FINANCES ON BEHALF OF THE COMPANY FOR THE TIMELY AND EFFECTIVE IMPLEMENTATION OF THE PROJECT AND ITS EFF ICIENT WORKING. THIS 20 AGREEMENT WAS LATER ON MODIFIED ON 25-3-1993 THROUG H WHICH GIIC AGREED TO CONTRIBUTE FURTHER SUM OF ` `` ` .30,80,000/- TOWARDS SHARE CAPITAL. THUS, IN SHORT THROUGH SHAREHOLDERS AGREEM ENT THE CONCEPT OF PUBLIC PRIVATE SECTOR PARTNERSHIP PROJECT WAS FURTH ER MANIFESTED THROUGH WHICH GIIC WAS TO PLAY THE ROLE OF CATALYST AS AN INSTRUMENT OF THE GOVERNMENT OF GUJARAT IN PUTTING LARGE PROJECTS IN THE STATE OF GUJARAT WHEREAS THE ASSESSEE COMPANY WAS ENTRUSTED WITH THE OPERATIONAL MANAGEMENT OF THE NEW PROJECT. 29. AS PER THE SHAREHOLDERS AGREEMENT, ATL ADVANCED THE MONEY AGGREGATING TO ` `` ` .5 CRORES TO GPEL OUT OF WHICH ` `` ` .2.57 CRORE WAS ADVANCED IN F.Y 1997-98 AND ` `` ` .2.57 CRORE WAS ADVANCED IN F.Y 1998- 99. FOR A.Y 1998-99 AO DISALLOWED THE NOTIONAL INTE REST OF ` `` ` .24.30 LAKHS ON INTEREST FREE LOAN TO GPEL AND THE SAID DI SALLOWANCE WAS DELETED BY THE TRIBUNAL IN VIEW OF THE RATIO OF THE HON'BLE SUPREME COURT DECISION IN THE CASE OF VEECUMSEES VS. CIT [2 20 ITR 185] AS WELL AS THE DECISION IN THE CASE OF S.A.BUILDERS VS. CIT [288 ITR 1]. HOWEVER, IN THE NEXT YEAR I.E. A.Y 1999-2000, AO HI MSELF ACCEPTED THE CONCEPT OF BUSINESS EXPEDIENCY AND NO DISALLOWANCE OF INTEREST WAS MADE FOR INTEREST FREE LOAN GIVEN TO GPEL. 30. HE FURTHER POINTED OUT THAT BEING MAIN PROMOTER OF GPEL, ATL ALSO STOOD GUARANTOR FOR VARIOUS TERM LOANS AVAILED BY GPEL FROM VARIOUS BANKS AND FINANCIAL INSTITUTIONS WHICH WERE DULY APPROVED BY THE BOARD OF DIRECTORS, THE OPERATIONS OF GPEL WHIC H WERE CONTINUOUSLY BEING MONITORED BY THE ASSESSEE COMPANY, TURNED UNS ATISFACTORY RIGHT 21 FROM INCEPTION AND GPEL INCURRED HEAVY CASH LOSSES IN F.YRS. 1993-94 AND 1994-95 LEADING TO LIQUIDITY PROBLEMS AND WORKI NG CAPITAL CONSTRAINS. ULTIMATELY, GPEL MADE A REFERENCE TO BO ARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION (FOR SHORT BIFR). THE BIFR AT ITS MEETING HELD ON AUGUST 11, 1997 DECLARED GPEL AS SICK INDUS TRIAL COMPANY AND APPOINTED IDBI AS THE OPERATING AGENCY TO FORMULATE A SCHEME FOR REVIVAL. A DRAFT REHABILITATION SCHEME DATED OCTOBE R 8, 1999 WAS PREPARED AND CIRCULATED BY IDBI, COPY OF WHICH HAS BEEN PLACED AT PAGES 188 TO 202 OF THE PAPER BOOK. THIS SCHEME WAS ULTIMATELY APPROVED BY THE HON'BLE GUJARAT HIGH COURT VIDE ORD ER DATED 15-6- 2001, COPY OF WHICH IS PLACED AT PAGES 154 TO 179 O F THE PAPER BOOK. SINCE ATL HAD STOOD AS A CORPORATE GUARANTOR IT WAS REQUIRED BY BIFR TOWARDS IMPLEMENTATION OF THE REHABILITATION SCHEME TO SETTLE THE DUES OF THE BANKS AND FINANCIAL INSTITUTIONS BY WAY OF O NE TIME SETTLEMENT. IF THE ASSESSEE COMPANY HAD NOT SETTLED THOSE DUES, TH EN THE SAID DUES WOULD HAVE GONE UP SUBSTANTIALLY AND BEING THE CORP ORATE GUARANTOR THE SAME COULD HAVE BEEN RECOVERABLE FROM ATL. THER EFORE, AS A PRUDENT BUSINESSMAN ASSESSEE THOUGHT IT WISE TO SET TLE THE DUES IN TERMS OF THE REHABILITATION SCHEME FORMULATED BY B IFR AND SAVED SUBSTANTIAL AMOUNT OF ` `` ` .18 CRORES APPROXIMATELY. THE DETAILS OF DUES PAID BY THE ASSESSEE COMPANY HAVE BEEN PLACED AT PA GE 116 OF THE PAPER BOOK. INITIALLY THIS AMOUNT OF ` `` ` .32.70 CRORES, AS PER THE DETAILS ON PAGE 116 OF THE PAPER BOOK, WAS REFLECTED IN THE BOOKS OF THE ASSESSEE COMPANY AS ADVANCE TO GPEL BUT SINCE SAME WAS NOT 22 RECOVERABLE DESPITE VARIOUS EFFORTS AS GPEL COULD N OT BE REVIVED, THE BOARDS OF DIRECTORS AFTER DELIBERATION THOUGHT IT F IT TO WRITE OFF THIS AMOUNT. THIS AMOUNT WAS ULTIMATELY WITHDRAWN FROM T HE GENERAL RESERVE AND WRITTEN OFF IN THE ACCOUNTS IN F.Y 2001 -02 AND HAS BEEN CLAIMED IN THE YEAR BEFORE US I.E. A.Y 2002-03. 31. COMING TO THE ARGUMENTS, HE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN I.T.A.NO.43/COCHIN/2001 VIDE PARA-16 WHEREIN THE DE CISION OF THE MADRAS BENCH IN THE CASE OF SPENCER AND CO. LTD. VS . ACIT I.T.A.NOS. 598/MAD/04 & 704/MAD/04 HAS BEEN FOLLOWED. IN THAT CASE CERTAIN BAD DEBTS OF SUBSIDIARY WERE WRITTEN OFF WHICH WERE NOT ALLOWED BY THE AUTHORITIES BELOW. THE TRIBUNAL WHILE ADJUDICATING THE ISSUE HELD THAT IF SAME WERE NOT ALLOWABLE AS BAD DEBTS, THEN THE SAME SHOULD BE ALLOWED AS BUSINESS LOSS FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS VS. CIT [SUPRA] W HEREIN THE HON'BLE SUPREME COURT HAD OBSERVED THAT THERE EXISTED RELAT IONSHIP BETWEEN THE ASSESSEE AND ITS SISTER CONCERN AND THAT THE AM OUNTS WERE ADVANCED IN THE COURSE OF THE BUSINESS AND FOR THE PURPOSE OF THE BUSINESS. IT WAS ALSO OBSERVED BY REFERRING TO A TH IRD MEMBER DECISION IN THE CASE OF DUNCAN AGRO INDUSTRIES LTD., I.T.A.N O.2091/CAL/95 WHEREIN IT WAS HELD THAT ONCE SOME GRANTS WERE GIVE N ON BEHALF OF THE SUBSIDIARY OF THE SISTER CONCERN AND ASSESSEE HAD A SSURED THE BANKERS THAT IT WAS THE POLICY OF THE ASSESSEE COMPANY THAT NO LENDING INSTITUTION WOULD SUFFER LOSS IN THE BUSINESS DEALI NGS AT THE BEHEST OF 23 THE ASSESSEE, THEN PAYMENTS ON ACCOUNT OF SUCH GRAN TS WOULD AMOUNT TO HONOURING THE COMMITMENTS OF THE ASSESSEE COMPAN Y. THEREFORE, FOLLOWING THIS DECISION, THE TRIBUNAL HAS ALREADY D ECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 32. IN ANY CASE, FROM THE ABOVE FACTS IT BECOMES CL EAR THAT THE ASSESSEE COMPANY IS THE MAIN PROMOTER OF GPEL AND A S A PROMOTER OF GPEL THE ASSESSEE IS DOING BUSINESS THROUGH GPEL BE CAUSE THE PROMOTER IS BASICALLY A PRE INCORPORATE AGENT, WHER EAS THE MANAGING AGENT IS A POST INCORPORATE AGENT. CONSIDERING THE BASIC REALITY OF THE SITUATION, IT COULD BE SAID THAT THE ASSESSEE COMPA NY WAS VIRTUALLY IN PARTNERSHIP WITH THE GOVERNMENT OF GUJARAT THROUGH GIIC FOR RUNNING THE BUSINESS OF GPEL. HE SUBMITTED THAT BUSINESS AS DEFINED IN SEC.2(13) OF THE I.T.ACT, WOULD INCLUDE ANY TRADE, COMMERCE, OR MANUFACTURE OR ANY ADVENTURE OR CONCERN IN THE NATU RE OF TRADE, COMMERCE OR MANUFACTURE. THIS DEFINITION IS OF WIDE IMPORT AND IS INCLUSIVE AND NOT EXHAUSTIVE. HE ARGUED THAT BUSINE SS HAS BEEN DEFINED IN HALISBURYS LAW OF ENGLAND, THIRD EDITIO N, VOLUME 38 PAGE 10 WHICH WAS EXTRACTED BY THE HON'BLE KERALA HIGH C OURT IN THE DECISION OF CIT VS. UPASNA HOSPITAL [225 ITR 845] A ND THIS DEFINITION HAS BEEN EXTRACTED AT PAGE 851 OF THE REPORT WHICH READS AS UNDER: BUSINESS IS A WIDER TERM BASE AND NOT A SYNONYMOUS WITH TRADE AND MEANS PRACTICALLY ANY THING WHICH IS AN OCCUPATION AND DISTINCT FROM A PLAYER THUS, THE SYSTEMATIC AND ORGANIZED ACTIVITY OF THE ASSESSEE IN PROMOTING AND RUNNING OF THE JOINT SECTOR PROJECTS SHOULD ALSO BE 24 CONSTRUED AS BUSINESS. IN THIS REGARD, FURTHER RELI ANCE WAS PLACED ON THE FOLLOWING DECISIONS: A) NARAIN SWADESHI WVG. MILLS VS. CEPT 26 ITR 765 (S.C) WHEREIN IT WAS OBSERVED THAT BUSINESS CONNOTES SOME REAL SUBSTANTIAL AND SYSTEMATIC OR ORGANIZED COURSE OF A CTIVITY OR CONDUCT WITH A SAID PERSON. B) MAZGAON DOCK LTD. VS. CIT 34 ITR 68 (S.C). IN THIS CASE ASSESSEE WAS CARRYING ON BUSINESS OF MARINE ENGINEE RING AND SHIP REPAIRMENT AND TWO NON RESIDENT BRITISH COMPAN IES ENGAGED IN THE BUSINESS OF PLYING SHIPS HELD ENTIRE SHARE CAPITAL OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY REPAI RED THE SHIPS AT COST WITHOUT ANY PROFITS. A QUESTION AROSE BEFORE THE HON'BLE SUPREME COURT WHETHER TAX COULD BE CHARGED ON THE PROFITS WHICH ASSESSEE COMPANY WOULD ORDINARILY HAV E MADE OUT OF THIS BUSINESS ACTIVITY. THE INCOME OF THE ASSESS EE COMPANY WAS HELD TO BE CHARGEABLE BY OBSERVING THAT BECAUSE THE ACTIVITY WAS ORGANIZED IN CHARACTER AND THE BRITISH COMPANIE S WERE CARRYING ON THE BUSINESS IN SUCH A MANNER THAT NO P ROFITS COULD ACCRUE TO THEM WAS RELEVANT. C) T. KRISHNA MENON VS. CIT 35 ITR 48 (S.C). IN T HIS CASE ASSESSEE AFTER RETIREMENT FROM THE GOVERNMENT SERVI CE WAS STUDYING AND TEACHING VEDANTA PHILOSOPHY. A QUESTIO N AROSE WHETHER TEACHING WAS A VOCATION. THE HON'BLE SUPREM E COURT HELD THAT TEACHING OF VEDANTA BY THE ASSESSEE WAS C ARRYING ON OF A VOCATION BY HIM. D) SIMILAR VIEW WAS TAKEN BY THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF ADDL. CIT VS. RAMKRIPAL TRIPATHI 124 IT R 408, 33. HE FURTHER SUBMITTED THAT BUSINESS PROFITS ARE ASSESSED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. THE LEGISLATURE HAS INTENTIONALLY USED TWO DIFFERENT EXPRESSIONS I. E. PROFITS AND GAINS AND SAME CANNOT BE TAKEN AS SYNONYMOUS. HE ARGUED THAT THE 25 WORD GAIN WOULD ENCOMPASS EVEN NON PECUNIARY BENE FIT FLOATING FROM THE CONDUCT OF THE BUSINESS ACTIVITY. IN THIS REGARD HE READ OUT THE FOLLOWING OBSERVATIONS: A) WHILE CONSTRUING THE WORD PROFIT AS USED IN SE CTION 2(15) OF THE ACT, IT WAS OBSERVED BY THE HON'BLE SUPREME COU RT IN THE CASE OF SOLE TRUSTEE, LOK SHIKSHANA TRUST VS. CIT 101 ITR 234 HELD THAT- BY THE USE OF THE EXPRESSION 'PROFIT MOTIVE' IT IS NOT INTENDED THAT PROFIT MUST IN FACT BE EARNED. NOR DOES THE EXPRESS ION COVER A MERE DESIRE TO MAKE SOME MONETARY GAIN OUT OF TRANS ACTION OR EVEN A SERIES OF TRANSACTIONS. IT PREDICATES A MOTI VE WHICH PERVADES THE WHOLE SERIES OF TRANSACTIONS EFFECTED BY THE PERSON IN THE COURSE OF HIS ACTIVITY. IN THE CASE OF CIT V S. LAHORE ELECTRIC SUPPLY CO. LTD. (1966) 60 ITR 1 (SC), SARKAR J., SP EAKING FOR THE MAJORITY, OBSERVED THAT BUSINESS AS CONTEMPLATED BY S. 10 OF THE INDIAN INCOME TAX ACT, 1922, IS AN ACTIVITY CAPABLE OF PRODUCING A PROFIT WHICH CAN BE TAXED. THE COURT FURTHER OBSERV ED THAT WHEN BUSINESS ACTIVITY IS CARRIED OUT, PROFIT MOTIVE AS A NORMAL INCIDENT IS IMPLIED UNLESS EXPLICITLY EXCLUDED. B) IN THE CASE OF INDIAN CHAMBER OF COMMERCE VS. CI T [101 ITR 796] (S.C) IT WAS OBSERVED THAT AN ACTIVITY WHICH Y IELDS PROFIT OR GAIN IN THE ORDINARY COURSE MUST BE PRESUMED TO HAV E BEEN TERMED FOR PROFIT OR GAIN. BE BROUGHT TO OUR ATTENT ION THE FOLLOWING OBSERVATIONS AT PAGE 805 OF THE REPORT WH ICH READS AS UNDER: AS AN ANTITHESIS, TAKE A FUNERAL HOME OR AN ANIMAL WELFARE ORGANISATION OR A SUPER- BAZAAR RUN FOR GENERAL PUB LIC UTILITY BY AN INSTITUTION WHICH CHARGES LARGE SUMS AND MAKES HUGE PROFITS. INDUBITABLY THEY RENDER SERVICES OF GENERAL PUBLIC UTILITY. THEIR OBJECTS ARE CHARITABLE BUT THEIR ACTIVITIES ARE FOR PROFIT. TAKE THE CASE OF A BLOOD BANK WHICH COLLECTS BLOOD ON PAYMEN T AND SUPPLIES BLOOD FOR A HIGHER PRICE THEREBY MAKING PR OFIT. UNDOUBTEDLY, THE BLOOD BANK MAY BE SAID TO BE A GEN ERAL PUBLIC UTILITY BUT IF IT ADVANCES ITS PUBLIC UTILITY BY SA LE OF BLOOD AS AN 26 ACTIVITY FOR (MAKING) PROFIT, IT IS DIFFICULT TO CA LL ITS PURPOSE CHARITABLE. IT IS JUST BLOOD BUSINESS C) THE ABOVE PROPOSITION HAS BEEN FURTHER FOLLOWED IN THE CASE OF CIT VS. HYCON INDIA LTD. 308 ITR 251 (RAJ) WHICH RE ADS AS UNDER: THEN FOR THE DEFINITION OF 'PROFITS AND GAINS', WE ARE LEFT TO SEEK ASSISTANCE FROM OTHER SOURCES. DICTIONARY MEANING, AS SUCH, DOES NOT PROVIDE MUCH OF ASSISTANCE. THEN ARTHUR AVERAGE ASSOCIATION FOR BRITISH, FOREIGN & COLONIAL SHIPS, IN RE: EX PA RTE HARGOROVE & CO. (1875), L.R.10 CH.APP. 545, THE MEANING OF WORD 'GAIN' HAS BEEN GIVEN AS ACQUISITION, AND HAS NO OTHER MEANING . GAIN IS SOMETHING OBTAINED OR ACQUIRED, AND IS NOT LIMITED TO PECUNIARY GAIN. REGARDING 'PROFIT', IN GENERAL, THE PROFIT ME ANS THE PRICE RECEIVED OVER THE COST OF PURCHASING AND HANDLING T HE GOODS, IT MEANS PECUNIARY GAIN, AS HELD IN STRATTON VS. CARTM ELL, 42 A.2D 419, 422, 114 VT. 191. IN OLIVER VS. HALSTEAD, 86 S .E.2D 858, 859, 196 VZ. 992, THE WORD 'PROFIT', AS ORDINARILY USED, IS HELD TO MEAN, THE GAIN MADE UPON ANY BUSINESS OR INVESTMENT, AND DOES NOT INCLUDE COMPENSATION FOR LABOUR. HE ARGUED THAT ON THE BASIS OF THE ABOVE, IT CAN BE EASILY SAID THAT ANY ACTIVITY DONE FOR PROFITS AND GAINS WOULD AMOUN T TO BUSINESS AND GAIN COULD BE IN ANY FILED. IN THE CASE BEFORE US, ASSESSEE MAINLY GAINED BY ENTERING INTO COLLABORATION WITH GIIC FOR STARTING THE PROJECT THROUGH GPEL BY ESTABLISHING A FOOTHOLD IN THE STAT E OF GUJARAT BY SETTING UP ONE OF ASIAS LARGEST TYRE MANUFACTURING PLANT AT LIMDA NEAR BARODA. THUS, BY ENTERING INTO THIS COLLABORATION A GREEMENT THE ASSESSEE HAS BEEN ABLE TO ENHANCE ITS BUSINESS AND, THEREFORE, THERE IS DEFINITELY SYNERGY BETWEEN THIS PROJECT AND THE TYR E BUSINESS OF THE ASSESSEE. 27 34. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THOUGH GPEL CANNOT BE CALLED SUBSIDIARY OF THE ASSESSEE, BUT ST ILL IT CANNOT BE DENIED THAT ASSESSEE HAD DEEP INTEREST IN THE AFFAI RS OF THIS JOINT SECTOR COMPANY AND WAS ALSO MADE RESPONSIBLE FOR DAY-TO-DA Y OPERATIONS OF THIS COMPANY. IN FACT, THE ASSESSEE COMPANY WANTED TO EMBARK ON DIVERSIFICATION OF ITS BUSINESS ACTIVITIES TO NEW A REAS OF INDUSTRIES AND THIS WAS THE STEP IN THAT DIRECTION THE LOAN AND GU ARANTEE GIVEN TO GPEL ARE THUS ON THE BASIS OF COMMERCIAL EXPEDIENCY AND EVEN THE WRITE OFF OF THE SAME IS ON THE BASIS OF COMMERCIAL EXPEDIENCY AND IN THAT SENSE THE CLAIM SHOULD BE ALTERNATIVELY ALLOWE D U/S.36(1)(VII) AS BADE DEBT OR AS REVENUE EXPENDITURE U/S.37(1). IN T HIS REGARD HE MAINLY RELIED ON THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF S.A. BUILDERS VS. CIT [SUPRA]. HE PARTICULARLY E MPHASIZED THE OBSERVATION OF THE SUPREME COURT WHEREIN IT WAS HEL D THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER I N SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING PROFITS. HE ALSO LAID LOT OF EMPHASIS ON THE FOLLOWING OBSERVATIONS OF THE HON'B LE SUPREME COURT: HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPAN Y HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDIN G COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INT EREST ON ITS BORROWED LOANS. HE ARGUED THAT NORMALLY THE BUSINESS MAN CANNOT BE COMPELLED TO MAXIMIZE HIS PROFITS AND THE AUTHORITY SHOULD PUT T HEMSELVES IN THE SHOES OF THE ASSESSEE AND CONSIDER AS TO WHAT A PRU DENT BUSINESS MAN WOULD DO IN THE GIVEN SET OF CIRCUMSTANCES. FOR THI S, HE RELIED ON THE 28 DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF CIT VS. DALMIA CEMENT (B) LTD. [254 ITR 377]. HE ALSO RELIED ON TH E FOLLOWING DECISIONS: I. CIT VS. PUNJAB AGRO INDS. LTD. 253 ITR 788 IN THIS CASE INTEREST HAS BEEN PAID BY A CO-PROMOTER ON A LOAN A DVANCED TO JOINT VENTURE COMPANY WHICH HAD SUFFERED HUGE LOSSE S. A REHABILITATION PLAN WAS PREPARED BY THE PROMOTERS O F THE COMPANY IN COOPERATION WITH THE OTHER FINANCIAL INS TITUTIONS. THE DEDUCTION OF WRITE OFF OF THE OUTSTANDING WAS H ELD TO BE LEGITIMATE BUSINESS EXPENDITURE BY THE HIGH COURT. II. VASSANJI SONS & CO. P. LTD. 125 ITR 462 (BOM) IN THIS CASE IN ALMOST IDENTICAL FACTS THE COURT TOOK A HARD ECO NOMIC REALITY INTO VIEW AND ALLOWED THE CLAIM OF THE ASSESSEE IN RESPECT OF MONIES LENT TO THE MANAGED COMPANY. HE PARTICULARLY READ THE HEAD-NOTE WHICH IS AS UNDER: (II) THAT THIS WAS A CASE IN WHICH THE COURT IS EN TITLED TO PAY REGARD TO THE ECONOMIC REALITIES WHICH EXISTED BEHIND THE LEGAL FACADE. THE ASSESSEE-COMPANY, UNDER ITS MEMORANDUM, WAS ENT ITLED TO UNDERTAKE MANAGING AGENCY BUSINESS. IT UNDERTOOK TH AT BUSINESS BUT NOT DIRECTLY AND WHOLLY BUT ACTING IN CONCERT W ITH TWO OTHER PARTIES AND THROUGH THE DEVICE OF A LIMITED COMPANY , VIZ., VHDA LTD. THERE WAS NO REASON WHY THE MONEYS LENT BY THE ASSESSEE COMPANY TO NI LTD., THE MANAGED COMPANY, COULD NOT BE REGARDED AS FINANCES PROVIDED FOR A COMPANY IN WHICH THE ASS ESSEE WAS SUBSTANTIALLY INTERESTED. IT WAS NOT NECESSARY FOR THE ASSESSEE COMPANY TO HAVE UNDERTAKEN ANY MONEY LENDING ACTIVI TY. IF THE OBJECT OF ADVANCING OF MONEY WAS TO PROVIDE FINANCE FOR A COMPANY IN WHICH THE ASSESSEE WAS SUBSTANTIALLY INT EREST, THE DEBT MUST BE REGARDED AS DIRECTLY SPRINGING FROM IT S BUSINESS ACTIVITY AND THE CONNECTION CANNOT BE CONSIDERED TO BE TOO REMOTE FOR THE PURPOSE OF THE ALLOWANCE AS A TRADING DEBT. THE TEST AND THE APPROACH TO BE APPLIED IN THIS CASE MUST BE THA T OF A BUSINESSMAN. THE AMOUNT OF ` `` ` .1,30,925 WAS DEDUCTIBLE AS A TRADING LOSS FOR THE YEAR IN QUESTION. 29 HE SUBMITTED THAT SIMILAR VIEW WAS TAKEN BY THE HON 'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. F.M.CHINOY AND CO. (P) LTD. [74 ITR 780] AND CIT VS. INVESTA INDUSTRIAL CORPORATION LTD. [11 9 ITR 380] (BOM). SIMILARLY, THE HON'BLE SUPREME COURT IN THE CASE OF ESSEN P. LTD. VS. CIT [65 ITR 625] WHEREIN SOME MONEY WAS ADVANCED TO THE MANAGED COMPANY AND ALSO CERTAIN GUARANTEES WERE GIVEN, THE SAME WERE HELD TO BE ALLOWABLE AS BAD DEBT UNDER THE OLD I.T.ACT. AGAIN THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. AMALGAMATIONS PVT. LTD. [226 ITR 188] WHEREIN THE ASSESSEE HAD GIVEN GUARANTEES FOR LOAN TAKEN BY THE SUBSIDIARY COMPANY AND SUCH SUBSIDIARY COMPANY HAVING GONE INTO LIQUIDATION, THE LOSS WAS HELD TO BE ALLOWABLE EXPE NDITURE. AGAIN, THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF TURNER M ORRISON AND CO. LTD. VS. CIT [SUPRA] WHERE SOME MONIES WERE ADVANCED TO SOME SUBSIDIARY COMPANY AND SUCH SUBSIDIARY COMPANY WAS BEING WOUND UP AND CERTAIN MONIES WERE PAID TO THE SECURED CREDITORS O F THE SUBSIDIARY AND WHEN SUCH AMOUNTS WERE NOT RECOVERABLE, THE SAME WE RE HELD TO BE ALLOWABLE AS BAD DEBTS. 35. THE LD. COUNSEL OF THE ASSESSEE FURTHER SUBMITT ED THAT ONE IMPORTANT ASPECT HAS TO BE KEPT IN MIND I.E. THAT T HE COLLABORATION AGREEMENT WAS ENTERED INTO WITH GIIC WHICH IS A STA TE OF GUJARAT GOVERNMENTS ORGANISATION AND THEREFORE IT CANNOT B E SAID THAT THE WHOLE EXERCISE WAS TO SPIN OFF THE MONEY. IN FACT, GUARANTEES WERE GIVEN BY THE ASSESSEE COMPANY UNDER LEGAL COMPULSIO N BECAUSE 30 ASSESSEE WAS MADE RESPONSIBLE FOR PROVIDING FINANCE TO GPEL AND THE SETTLEMENT HAS TAKEN PLACE ON THE BASIS OF REHABILI TATION SCHEME APPROVED BY BIFR WHICH WAS ULTIMATELY CONFIRMED BY THE HON'BLE GUJARAT HIGH COURT. FURTHER ASSESSEE WAS DUTY BOUND TO PAY THE MONEY BECAUSE HAD ASSESSEE NOT PAID THE LIABILITIES ON ACCOUNT OF GPEL, IT WOULD HAVE PILED UP FURTHER LIABILITY WHIC H IN TURN WOULD HAVE RESULTED IN HIGHER LOSSES. IN ANY CASE, THE RBI HAD ISSUED INSTRUCTIONS THAT IF THERE IS A FAILURE BY ANY INDUSTRIAL HOUSES IN NOT PAYING THE LOANS OF ANY GROUP COMPANIES, THEN SUCH INDUSTRIAL HOUSES SHOULD BE BLACKLISTED AND SHOULD NOT BE GRANTED ANY FRESH LOA NS. UNDER THESE CIRCUMSTANCES, ASSESSEE HAS NO ALTERNATIVE BUT TO A CT AS A PRUDENT BUSINESS MAN BY PAYING THE MONEY TOWARDS FINANCES P ROVIDED BY THE FINANCIAL INSTITUTIONS TO GPEL. 36. THE LD. COUNSEL WHILE ADVERTING TO THE ISSUES R AISED BY THE LD. CIT DR THAT BOARDS RESOLUTION WAS PASSED ON 26-6-2 002 THEREFORE LIABILITIES CANNOT BE SAID TO HAVE BEEN INCURRED IN THIS YEAR, SUBMITTED THAT GENERALLY ACCOUNTS ARE NOT CLOSED IMMEDIATELY AT THE END OF THE YEAR AND IT IS A RECOGNISED ACCOUNTING PRACTICE THA T EVEN EVENT OCCURRING AFTER THE DATE OF BALANCE SHEET SHOULD AL SO BE CONSIDERED BY PREPARING FINAL ANNUAL ACCOUNTS AND THAT IS WHY LIA BILITY WAS RECOGNISED IN THIS YEAR. BY REFERRING TO THE OBJECTION RAISED BY THE AO, HE ARGUED THAT THE FIRST OBJECTION WAS THAT THERE IS NO CONNE CTION BETWEEN THE ASSESSEE AND GPEL BUT THAT IS NOT CORRECT, BECAUSE THE COMPANY EXISTS FOR BUSINESS PURPOSES AND BY ENTERING INTO A JOINT VENTURE AGREEMENT 31 WITH GIIC FOR STARTING GPEL WITH LARGE OBJECT OF ES TABLISHING A FOOTHOLD IN THE STATE OF GUJARAT, WAS DEFINITELY IN THE OVER ALL BUSINESS SYNERGY OF THE ASSESSEE COMPANY. IN FACT, STARTING OF GPEL WAS NOT WITH ANY ALTRUISTIC MOTIVE OR FUN OR SPORT OR PLEASURE. IT W AS MAINLY TAKEN UP WITH OVER ALL BUSINESS PLANS OF THE ASSESSEE COMPAN Y. SIMILARLY, THERE IS NO FORCE IN THE OBJECTION OF THE AO THAT LOSS WA S OF CAPITAL NATURE BECAUSE THE LOSS HAS BEEN INCURRED IN THE COURSE OF CARRYING ON OF THE BUSINESS OF THE JOINT VENTURE AND IT WAS NOT FOR AC QUISITION OF ANY CAPITAL ASSET. SIMILARLY, THERE IS NO FORCE IN THE OBJECTION THAT ASSESSEE IS NOT IN THE BUSINESS OF BANKING OR MONEY LENDING AND BY GIVING GUARANTEES FOR A COMPANY WHICH IS NOT SUBSIDIARY TH E CLAIM IS NOT TENABLE BECAUSE GPEL WAS PROMOTED BY THE ASSESSEE C OMPANY IN WHICH ASSESSEE WAS DEEPLY INTERESTED. THE CONTROL A ND MANAGEMENT OPERATIONS OF GPEL WERE WITH THE ASSESSEE COMPANY I N TERMS OF JOINT SHAREHOLDERS AGREEMENT AND IN ANY CASE STARTING OF THIS PROJECT AND LENDING MONEY WAS BECAUSE OF THE COMMERCIAL EXPEDIE NCY AS OBSERVED BY THE HON'BLE SUPREME COURT IN THE CASE OF S. A. B UILDERS VS. CIT [SUPRA]. REGARDING THE OBJECTION OF THE AO THAT GPE L HAS NOT GONE INTO LIQUIDATION AND, THEREFORE, CLAIM SHOULD NOT BE ALL OWED HE REFERRED TO THE OBSERVATIONS OF THE HON'BLE KERALA HIGH COURT I N THE CASE OF CIT. KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION [28 9 ITR 238] WHEREIN IT WAS MAINLY OBSERVED AS UNDER: THE IRRECOVERABILITY OF A BAD DEBT DEPENDS UPON TH E FACTS AND CIRCUMSTANCES OF EACH CASE AND IT IS NOT NECESSARY FOR THE LENDER TO 32 WAIT TILL THE DEBTOR COMPANY ACTUALLY GOES INTO LIQ UIDATION BEFORE WRITING OFF THE LOAN AND INTEREST THEREON AND CLAIMING THE DEDUCTION UNDER S. 36(1)(VII) OF THE INCOME TAX ACT 1961. WINDING UP P ROCEEDINGS IS A CUMBERSOME PROCESS WHERE CLAIMS OF A LARGE NUMBER O F SECURED AND UNSECURED CREDITORS HAVE TO BE SETTLED, WHICH MAY T AKE A CONSIDERABLY LONG PERIOD TO ATTAIN FINALITY. THE CREDITOR COMPAN Y IN A GIVEN CASE COULD FORM A CONSCIOUS JUDGMENT OF ITS OWN AS TO WH ETHER ANY AMOUNT WOULD BE RECOVERABLE OR NOT AND MAKE A PROVISION FO R BAD AND DOUBTFUL DEBTS. IN A GIVEN CASE, THE ASSESSEE COULD ESTABLISH THAT THERE IS NO POSSIBILITY OF RECOVERING THE BAD AND D OUBTFUL DEBTS DEPENDING UPON THE FINANCIAL POSITION OF THE DEBTOR COMPANY. THE ASSESSEE CAN MAKE AN HONEST JUDGMENT THAT THE DEBT HAS BECOME BAD AND SHOULD BE WRITTEN OFF AND IN FACT HAS WRITT EN OFF NOT IN WORDS, BUT ON CONDUCT. HE ALSO POINTED OUT THAT AO HAS MAINLY RELIED ON TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF IN THE CASE OF CIT VS. BIRLA BROTHERS (P) LTD. [SUPRA]. BUT THAT DECISION IS QUI TE DISTINGUISHABLE ON FACTS. IN THAT CASE THE HON'BLE SUPREME COURT HAD S PECIFICALLY OBSERVED THAT NEITHER THE MEMORANDUM OF ASSOCIATION OF THE C OMPANY NOR MANAGING AGENCY CONTAINED ANY PROVISION WHEREBY GUA RANTYING OF THE LOAN COULD BE SAID TO BE THE BUSINESS OF THE ASSESS EE. THIS BEING SO THERE WAS NO LEGAL OBLIGATION TO PAY THE AMOUNT. TH EREFORE, THE PROPOSITION LAID BY THE HON'BLE SUPREME COURT IS TH AT UNLESS THE GUARANTOR IS UNDER A LEGAL OBLIGATION TO GIVE THE G UARANTEE OR THE GUARANTEE HAS BEEN GIVEN AS PART OF OR INCIDENTAL T O BUSINESS PURPOSES, THE GUARANTOR CANNOT CLAIM THE AMOUNT WHICH HE WAS FORCED TO PAY UNDER THE GUARANTEE. WHEREAS IN THE CASE OF THE ASS ESSEE, GUARANTEES WERE GIVEN IN VIEW OF THE JOINT AGREEMENT WHEREBY A SSESSEE WAS MADE 33 RESPONSIBLE FOR ARRANGING FINANCES AND SUCH GUARANT Y WAS CALLED INCIDENTAL TO THE BUSINESS OF PROJECT PROMOTION WHI CH IS AUTHORISED BY THE MEMORANDUM OF ASSOCIATION AS ENVISAGED IN CLAUS E III B(6) OF OBJECT INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF MAIN OBJECT OF THE MEMORANDUM OF ASSOCIATION. IN FACT, THE RATIO OF TH E DECISION OF THE HON'BLE SUPREME COURT RATHER SUPPORTS THE CASE OF T HE ASSESSEE. 37. WHILE CONCLUDING HE AGAIN EMPHASIZED THAT THE I SSUE IS BASICALLY COVERED BY THE EARLIER DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE VIDE I.T.A.NO.43/COCH/01 FOR A.Y 1996-97 WHEREIN VI DE PARA-16AT PAGE 13 THE TRIBUNAL WHILE REFERRING TO THE DECISION OF SPENCER & CO. [SUPRA] AND DUNGAN AGRO INDS. [SUPRA] ALLOWED THE WRITE OFF OF THE LOANS ON ACCOUNT OF ADVANCES AND BANK GUARANTEES GIVEN TO RE VIVE THE GROUP COMPANY I.E. UNIVERSAL STEEL AND ALLOYED LTD., WHIC H WAS ALSO DECLARED AS A SICK INDUSTRIAL UNIT. 38. IN HIS REJOINDER, THE LD. CIT DR SUBMITTED THAT THE DECISIONS CITED BY THE LD. COUNSEL OF THE ASSESSEE ARE NOT AP PLICABLE BECAUSE GPEL WAS NOT A SUBSIDIARY OF THE ASSESSEE COMPANY. HE THEN REFERRED TO CLAUSE-11 OF THE MEMORANDUM OF ASSOCIATION GIVEN AT PAGE-301 OF THE PAPER BOOK AND SUBMITTED THAT EVERYTHING PERMIT TED BY THE MEMORANDUM CANNOT MEAN THAT ASSESSEE WOULD HAVE RIG HT TO DO BUSINESS IN SUCH FIELDS. MEMORANDUM IS BASICALLY AL LOWING ONLY TO MEAN AND PROVIDE ACTIVITY WHICH A COMPANY IS AUTHORISED TO CARRY ON. HE ALSO EMPHASIZED AGAIN THAT THE CLAIM MADE BY THE ASSESSE E CANNOT BE 34 CALLED BAD DEBT AND, THEREFORE, SAME COULD NOT BE A LLOWED U/S.36(1)(VII) OF THE ACT. 39. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY IN THE LIGHT OF THE MATERIAL ON RECORD AS WELL AS THE DECISIONS CITED BY BOTH THE PARTIES. WE FIND THAT THE ASSESSEE IN ORDER TO ESTA BLISH A FOOTHOLD FOR EXTENSION OF ITS BUSINESS IN THE STATE OF GUJARAT E NTERED INTO AN AGREEMENT WITH GIIC FOR ESTABLISHMENT OF THE PROJEC T BY FLOATING GPEL WHICH WAS INCORPORATED ON JUNE 28, 1990. LATER ON, A SHAREHOLDERS AGREEMENT WAS ENTERED INTO ON 2 ND MAY, 1991 THROUGH WHICH ASSESSEE ALONG WITH GIIC WAS TO TAKE 51% OF THE EQUITY, OUT OF WHICH 11% WAS TO BE GIVEN TO GIIC AND BALANCE 40% TO THE ASSESSEE . THE ASSESSEE WAS DESIGNATED AS AN ASSOCIATED PARTNER AND THE DAY -TO-DAY MANAGEMENT AS WELL AS OPERATIONS OF THIS PROJECT WE RE ENTRUSTED TO THE ASSESSEE. THE ASSESSEE COMPANY WAS ALLOWED TO D EPUTE FOUR DIRECTORS IN THE BOARD GPEL, WHEREAS GIIC WAS TO HA VE ONLY TWO MEMBERS ON THE GPEL. THE CHAIRMAN AND MANAGING DIRE CTOR OF GPEL WERE ALSO TO BE THE NOMINEE OF THE ASSESSEE COMPANY . FURTHER, ASSESSEE COMPANY WAS ENTRUSTED THE ROLE OF ARRANGIN G FINANCES FOR THIS PROJECT WHICH WAS FOR MANUFACTURE OF COPPER CLAD LA MINATES AS PER THE LETTER OF INTENT BY GOVERNMENT OF INDIA. ACCORDINGL Y, ASSESSEE SUBSCRIBED TO THE SHARE CAPITAL OF GPEL FOR A SUM O F ` `` ` .5.18 CRORES. AN ADVANCE OF ` `` ` .5 CRORES IN TWO TRANSCRIPTS AMOUNTING TO ` `` ` .2.43 CRORES IN F.Y 1997-98 AND ` `` ` .2.57 CRORES IN F.Y 1998-99 WAS ALSO GIVEN. ASSESSE E ALSO STOOD GUARANTOR TO THE LOANS GRANTED TO GPEL B Y BANKS AND 35 FINANCIAL INSTITUTIONS. THE OPERATIONS OF THE GPEL WERE UNSATISFACTORY RIGHT FROM ITS INCEPTION AND ULTIMATELY GPEL WAS RE FERRED TO BIFR ON 11-8-1997 AND LATER ON A REHABILITATION SCHEME WAS PROPOSED WHICH HAS BEEN CONFIRMED BY THE HON'BLE GUJARAT HIGH COUR T. AS PER THIS REHABILITATION SCHEME, COPY OF WHICH IS PLACED AT P AGES 188 TO 202 OF THE PAPER BOOK, MAINLY RESTRUCTURING OF LONG TERM L IABILITY AS WELL AS REDUCTION OF SHARE CAPITAL WAS PROPOSED. CERTAIN SA CRIFICES WERE ALSO REQUIRED TO BE MADE BY GOVERNMENT OF GUJARAT AS WEL L AS GOVERNMENT OF INDIA. AS PER PARA-3 OF THE SCHEME ATL WAS ACCEP TED AS GUARANTOR OF THE LOANS TO GPEL TO MAKE PAYMENTS OF ENTIRE PRI NCIPAL TERM LOAN AND 50% OF THE SIMPLE INTEREST TO BANKS AND FINANCI AL INSTITUTIONS THE DEBENTURE HOLDERS WERE ALSO REQUIRED TO WAIVE 50% O F THE INTEREST. THE GOVERNMENT OF GUJARAT WAS REQUIRED TO (I) DEFE R THE PAYMENT OF PURCHASE TAX ON THE BASIS OF INTEREST FREE DEPOSITS , (II) TO DEFER SALES TAX LIABILITY, (III) TO DEFER OCTROI DUTY AND (IV) TO DEFER ELECTRICITY DUTY. THE CENTRAL GOVERNMENT TO GRANT (I) AN EXEMPTION FROM SEC.41(1) OF THE INCOME TAX ACT, (II) AN EXEMPTION FROM SEC.36(1 ) OF THE ACT, (III) TO EXEMPT THE COMPANY FROM THE PROVISIONS OF SECTIONS 100 TO 102 OF THE COMPANIES ACT, 1956 AND (IV) TO EXEMPT THE COMPANY FROM THE APPLICABILITY FROM THE PROVISIONS OF SEC.81A OF THE COMPANIES ACT. 40. THE ASSESSEE COMPANY WAS FURTHER EXEMPTED FROM COMPLIANCE OF SEC.372 OF THE COMPANIES ACT AND FROM SEBI REGUL ATIONS. EVEN AHMEDABAD ELECTRICITY CORPORATION WAS REQUIRED TO M AKE MINIMUM DEMAND CHARGES AND PENALTY THEREON AS WELL AS TO EN SURE 36 UNINTERRUPTED POWER SUPPLY TO GPEL. THE EQUITY CAPI TAL WAS ALSO REQUIRED TO BE WRITTEN DOWN BY 90%. IN VIEW OF THIS SCHEME, ASSESSEE COMPANY MADE PAYMENTS IN THE FORM OF GUARANTEES AND /OR PAYMENT OF LOANS AND INTEREST CHARGES TO BANKS AND FINANCIAL I NSTITUTIONS WHICH AMOUNTED TO ` `` ` .32.70 CRORES. IN ITS BOARD MEETING HELD ON 26-6-20 02 IT WAS DECIDED THAT THE AMOUNT RECOVERABLE FROM GPEL W AS NOT RECOVERABLE CONSIDERING THE OVER ALL FACTS AND FINA NCIAL HEALTH OF GPEL AND, THEREFORE, IT WAS DECIDED TO WRITE OFF THE SAM E. IT WAS FURTHER DECIDED IN THIS MEETING THAT THIS AMOUNT SHOULD BE WITHDRAWN FROM THE GENERAL RESERVE. ACCORDINGLY, ASSESSEE HAS MADE CLA IM FOR THIS LOSS DURING THE A.Y 2002-03 I.E. THE YEAR UNDER CONSIDER ATION BEFORE US. 41. THIS CLAIM HAS BEEN NOT ALLOWED BY THE AO BECAU SE, ACCORDING TO HIM, THERE WAS NO DIRECT BUSINESS CONNECTION BET WEEN THE ASSESSEE AND GPEL. THE PRODUCTS OF GPEL WERE NOT BEING USED BY THE ASSESSEE IN ITS MANUFACTURING PROCESS. THE ACTIVITIES OF GPE L HAD NO CONNECTION WITH THAT OF THE ASSESSEE AND, THEREFORE, LOSS SUFF ERED BY THE ASSESSEE HAS NO DIRECT AND PROXIMATE NEXUS BETWEEN THE BUSIN ESS OPERATIONS CARRIED ON BY IT OR INCIDENTAL TO ITS BUSINESS. IT WAS FURTHER OBSERVED THAT IN ANY CASE IT WAS A LOAN REPAYMENT AND, THERE FORE, IT CANNOT BE TERMED AS REVENUE LOSS. IT WAS ALSO NOTED THAT GPEL WAS A SEPARATE ENTITY AND ASSESSED AS SUCH AND, THEREFORE, LIABILI TIES CREATED BY IT DID NOT AUTOMATICALLY BECAME THE BUSINESS EXPENDITURE O F THE ASSESSEE. THE ALTERNATE CLAIM U/S.36(1)(VII) WAS ALSO REJECTE D BY OBSERVING THAT ASSESSEE WAS NOT IN THE BUSINESS OF BANKING OR MONE Y LENDING AND 37 EVEN THE DECISION OF THE HON'BLE CALCUTTA HIGH COUR T IN THE CASE OF TURNER MORISSON & CO. VS. CIT [SUPRA] WAS DISTINGUI SHED BY OBSERVING THAT IN THAT CASE MONEY WAS ADVANCED TO A SUBSIDIAR Y COMPANY ON THE WINDING UP AND IN THE PRESENT CASE GPEL WAS NOT THE SUBSIDIARY AND IT HAS ALSO NOT BEEN WOUND UP. IT WAS ALSO NOTED THAT RESOLUTION FOR WRITING OFF THIS CLAIM WAS PASSED ON 26-6-2002 AND, THEREFORE, THIS AMOUNT COULD NOT BE CLAIMED IN THE PRESENT YEAR. AO ALSO PLACED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF CIT VS. BIRLA BROS (P) LTD. [SUPRA] TO DISALLOW THI S CLAIM. 42. THE LD. CIT[A] HAS ALLOWED THE RELIEF MAINLY ON THE BASIS THAT IT WAS A LEGITIMATE BUSINESS DECISION. THE JOINT VENTU RE ENTERED INTO BY THE ASSESSEE COMPANY WAS WITH THE GOVERNMENT OF GUJ ARAT AND IT WAS NOT AN ARRANGEMENT TO SIPHON OFF THE MONEY AND THE PAYMENTS HAVE BEEN MADE IN TERMS OF THE SETTLEMENT APPROVED BY BI FR. 43. ON THE ABOVE FACTS WE ARE REQUIRED TO FIND OUT WHETHER ASSESSEES CLAIM IS ALLOWABLE. FOR THIS, WE NEED TO LOOK AT THE PROPER ASPECT OF THE WHOLE ISSUE. THE ASSESSEE IS A COMPAN Y ENGAGED IN THE MANUFACTURE AND SALE OF TYRES AND TUBES BUT AT THE SAME TIME IT IS AUTHORISED BY CLAUSE IIIB(6) OF OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECT WHICH READS AS UNDER : 6. TO AMALGAMATE, ENTER INTO PARTNERSHIP OR INTO A NY ARRANGEMENTS FOR SHARING PROFITS, UNION OF INTERESTS, CO-OPERATI ON, JOINT-ADVENTURES, OR RECIPROCAL CONCESSIONS OR FOR LIMITING COMPETITION WITH ANY PERSON OR COMPANY CARRYING ON OR ENGAGED IN OR ABOUT TO CARRY ON OR ENGAGE IN OR WHICH CAN BE CARRIED ON IN CONJUNCTION THEREWITH OR WHICH IS CAPABLE OF BEING CONDUCTED SO AS TO DIRECTLY OR IND IRECTLY BENEFIT THE COMPANY. 38 THE ABOVE CLAUSE CLEARLY SHOWS THAT TO MEET THE ASP IRATION OF BECOMING A DIVERSIFIED COMPANY THE ABOVE CLAUSE AUT HORISED IT TO ENTER INTO ANY PARTNERSHIP OR ARRANGEMENT TO START ANY BU SINESS. THEREFORE, FOR GETTING INTO THE NEW BUSINESS A LETTER OF INTEN T WAS GOT ISSUED FROM GOVERNMENT OF INDIA TO START NEW BUSINESS OF PRODUC TION AND MANUFACTURE OF COPPER CLAD LAMINATES AND THE COMPAN Y KNOWN AS GPEL WAS INCORPORATED IN MAY 2, 1999. THE ASSESSEE WITH SPECIFIC INTENTION OF ESTABLISHING ITS FOOTHOLD IN THE STATE OF GUJARAT FOR EXPANSION OF ITS EXISTING BUSINESS OF TYRE ENTERED INTO COLLABORATION WITH THE GOVERNMENT OF GUJARAT THROUGH GIIC TO STAR T A NEW COMPANY. BECAUSE OF THIS AGREEMENT, ASSESSEE HAS BEEN SUCCES SFULLY ABLE TO ESTABLISH ASIAS LARGEST BUSINESS PLANT AT LIMDA NE AR BARODA IN THE STATE OF GUJARAT. THEREFORE, IT IS CLEAR THAT WHATE VER WAS BEING TRIED TO BE ACHIEVED THROUGH GIIC WAS A LARGER BUSINESS INTE REST OR WHAT IN OTHER WORDS IS KNOWN AS COMMERCIAL EXPEDIENCY. THE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS LTD. VS. CIT [SUP RA] HAS GIVEN THE FOLLOWING DEFINITION OF COMMERCIAL EXPEDIENCY AT PL ACITUM-26: THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRE SSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE SUCH AS A PRUD ENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET I T IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 44. THE ASSESSEE HAVING THOUGH ACHIEVED ITS MAJOR O BJECT OF ESTABLISHING ITS TYRE BUSINESS AT LIMDA BUT IN THE MEANTIME THE OPERATIONS OF GPEL WERE NOT RUNNING SATISFACTORILY. ULTIMATELY, GPEL 39 WENT TO BIFR AND A SCHEME OF REHABILITATION WAS FRA MED WHICH HAS BEEN CONFIRMED BY THE HON'BLE GUJARAT HIGH COURT. A S CONTENDED BY THE LD. COUNSEL OF THE ASSESSEE EVERY STAKE HOLDER OF GPEL WAS TO MAKE SOME SACRIFICES. PARA 3 OF THE REHABILITATION SCHEME PROVIDES FOR FOLLOWING: I. FINANCIAL INSTITUTIONS AND BANKS WERE REQUIRED T O ACCEPT PRINCIPAL AMOUNTS OF LOAN ONLY @ 50% OF THE SIMPLE INTEREST OUTSTANDING; II. FOR THIS, THEY WERE DIRECTED TO ACCEPT THE ASSE SSEE COMPANY AS GUARANTOR OF THE LOANS AND ULTIMATELY ONE TIME P AYMENT OF THE PRINCIPAL AND 50% INTEREST WAS PRESCRIBED; III. DEBENTURE HOLDERS WERE TO SACRIFICE 50% OF THE INTEREST; IV. GOVERNMENT OF GUJARAT WAS REQUIRED TO DEFER PAY MENT OF PURCHASE TAX ON INTEREST FREE BASIS AND WAS ALSO RE QUIRED TO DEFER SALES TAX LIABILITY AS WELL AS OCTROI DUTY AN D ELECTRICITY DUTY; V. CENTRAL GOVERNMENT WAS REQUIRED TO GRANT EXEMPTI ON U/S.41(1) OF THE I. T. ACT FOR REMISSION OF LIABILITY AND TO GIVE EXEMPTION U/S.36(1)(III) OF THE I.T.ACT FOR NOTIONAL INTEREST ON PROMOTERS CONTRIBUTION. THE GOVERNMENT WAS FURTHER REQUIRED T O EXEMPT THE COMPANY FROM THE PROVISIONS OF SECTIONS 100 TO 102 OF THE COMPANIES ACT REGARDING ALTERATION/DEDUCTION OF SHA RE CAPITAL; VI. FURTHER IT WAS REQUIRED TO GRANT EXEMPTION FROM THE PROVISIONS OF SEC.81A OF THE COMPANIES ACT AND COMPLIANCE OF S EBI GUIDELINES FOR ISSUE OF OPTIONAL CONVERTIBLE DEBENT URES. VII. THE GOVERNMENT WAS ALSO REQUIRED TO GRANT EXEM PTION TO ATL I.E. THE ASSESSEE COMPANY FROM COMPLIANCE OF PROVIS IONS OF SEC.370A OF THE COMPANIES ACT; VIII. THE AHMEDABAD ELECTRICITY CORPORATION WAS REQ UIRED TO WAIVE MINIMUM DEMAND CHARGES AND PENALTY FROM THE DATE OF DISCONTINUATION TO THE DATE OF RECONNECTION AND WAS FURTHER DIRECTED TO ENSURE UNINTERRUPTED POWER OF SUPPLY. 40 IX. THE ASSESSEE COMPANY WAS SPECIFICALLY REQUIRED TO BRING IN CAPITAL OF ` `` ` .291 LAKHS TOWARDS THE REHABILITATION SCHEME. THE PAYMENT MADE BY THE ASSESSEE IS, IN FACT, TOWAR DS COMPLIANCE OF THE REHABILITATION SCHEME. IT CLEARLY SHOWS THAT TH E ASSESSEE COMPANY WAS TRYING TO REHABILITATE THE OPERATIONS OF THE GP EL BUT STILL THE SAME COULD NOT BE REVIVED. THEREFORE, IN ADDITION TO THE ABOVE COMPULSIONS BY THE ORDER OF THE BIFR, THE ASSESSEE COMPANY WAS FURTHER REQUIRED TO DEFEND ITS REPUTATION BY PAYING TO THE FINANCIAL INSTITUTIONS AND BANKERS TOWARDS DISCHARGE OF ITS GUARANTEED LIABILI TIES AND OTHER LIABILITIES AS PROPOSED BY THE BIFR. FAILURE TO PAY THESE LIABILITIES WOULD HAVE EXPOSED THE ASSESSEE COMPANY OF GETTING BLACK LISTED AND LOSING THE FACE FROM FINANCIAL INSTITUTIONS AND BANKS FOR ITS FUTURE PROJECTS. IN FACT, WHEN THE WHOLE SITUATION IS LOOKED FROM THIS ANGLE, IT SEEMS THAT THE ASSESSEE COMPANY HAD NO CHOICE BUT TO PAY THE A MOUNT. EVEN THE DELAY FOR MAKING THESE PAYMENTS WOULD HAVE LED THE ASSESSEE COMPANY INTO FURTHER TROUBLE IN THE SENSE THAT LIAB ILITIES OF FINANCIAL INSTITUTIONS AND BANKS WOULD HAVE GONE UP FURTHER. 45. THUS, IT IS CLEAR THAT PAYMENTS WERE MADE OUT O F THE COMMERCIAL EXPEDIENCY AND AS OBSERVED BY THE HON'BLE SUPREME C OURT IN THE CASE OF IN THE CASE OF S. A. BUILDERS THAT EVEN IF THERE IS NO NECESSITY TO MAKE THE PAYMENTS AND SUCH PAYMENTS ARE MADE VOLUNT ARILY ON THE GROUNDS OF COMMERCIAL EXPEDIENCY, THEN SUCH CLAIM H AS TO BE ALLOWED. WE WOULD LIKE TO REPRODUCE THE RELEVANT OBSERVATION S WHICH ARE GIVEN AT PLACITUM 24 OF THE JUDGMENT AS UNDER: 41 THUS IN ATHERTON VS. BRITISH INSULATED & HELSBY CA BLES LTD. (1925) 10 TAX CASES 155 (HL), IT WAS HELD BY THE HOUSE OF LOR DS THAT IN ORDER TO CLAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MO NEY IS EXPENDED, NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMME DIATE BENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST IN ATHERTONS CASE (SUPRA) HAS BEEN APPROVED BY THIS C OURT IN SEVERAL DECISIONS E.G. EASTERN INVESTMENTS LTD. VS. CIT (19 51) 20 ITR 1 (SC), CIT VS. CHANDULAL KESHAVLAL & CO. (1960) 38 ITR 601 (SC), ETC. THE HON'BLE APEX COURT HAS FURTHER AT PLACITUM-35 W HILE APPROVING THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT (B) LTD. [254 ITR 377] OBSERVED AS UNDER: WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COU RT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 174 CTR (DEL) 18 8 : (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLISHED THAT THER E WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WH ICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCH AIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND AS SUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING RE GARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE CO MPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST PUT TH EMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINES SMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FR OM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALR EADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS T O A SISTER-CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR E ARNING PROFITS. FROM THE ABOVE OBSERVATIONS IT BECOME CLEAR THAT CL AIM HAS TO BE ALLOWED EVEN IF IT IS NOT NECESSARY TO MAKE SUCH PA YMENTS IF THE PAYMENTS HAD BEEN MADE VOLUNTARILY ON THE GROUNDS O F COMMERCIAL EXPEDIENCY. FURTHER IT IS NOT NECESSARY THAT SUCH B USINESS SHOULD BE THAT OF ASSESSEE ITSELF. IN THE CASE BEFORE US THOU GH THE AMOUNTS HAVE BEEN MADE IN RESPECT OF GPEL BUT BASICALLY ASSESSEE WAS TRYING TO ESTABLISH THE NEW BUSINESS THROUGH GPEL AND WAS ALS O TRYING TO ACHIEVE THE LARGER BUSINESS INTEREST BY ESTABLISHIN G FURTHER FACTORY IN 42 THE STATE OF GUJARAT AND IT HAS BEEN DONE ALSO BY E STABLISHMENT OF TYRE MANUFACTURING UNIT AT LIMDA NEAR BARODA. 46. WE ALSO FIND THAT THIS IS NOT THE FIRST TIME TH AT THE ASSESSEE COMPANY HAS VENTURED INTO THIS NEW DIVERSIFICATION BUT EARLIER ALSO THE ASSESSEE COMPANY HAS FORMED THE VARIOUS COMPANIES L IKE APOLLO FINANCE LTD., APOLLO INTERNATIONAL LTD. THE ASSESSE E COMPANY HAS FURTHER TRIED TO REVIVE OPERATIONS OF OTHER SICK CO MPANIES WHICH WERE SISTER CONCERNS LIKE UNIVERSAL STEEL ALLOYED LTD., PREMIERE TYRES LTD. AND BST MANUFACTURING LTD., AND HAS BEEN IN FACT, S UCCESSFULLY REVIVED THE BUSINESS OF PREMIERE TYRES LTD. IN FACT THE PAY MENTS MADE TOWARDS REHABILITATION OF UNIVERSAL STEEL ALLOYED L TD. AGAIN AS PER THE REHABILITATION SCHEME WERE CLAIMED IN A.Y 1996-97 A ND THAT CLAIM WAS ALSO DISALLOWED BUT ULTIMATELY THE TRIBUNAL IN I.T. A.NO.43/COCH/2001 HELD THE CLAIM TO BE ALLOWABLE VIDE PARAS 15 & 16 W HICH ARE AS UNDER: 15. THE EIGHTH ISSUE IS REGARDING BAD DEBTS WRITTE N OFF. THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM OF BAD DE BTS IN RESPECT OF PARTIES CLAIMED BY THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAD NOT BEEN ABLE TO SUBSTANTIATE AS TO WHY SUCH ITEMS WERE TO BE TREATED AS BAD DEBTS/ADVANCES. DURING THE COURSE OF THE APP ELLATE PROCEEDINGS, THE LD.COUNSEL FOR THE ASSESSEE WAS AS KED AS TO HOW THESE DEBTS WERE TAKEN INTO ACCOUNT IN THE COMPUTAT ION OF THE INCOME OF THE ASSESSEE IN THE PAST. HOWEVER, THE LD.COUNSE L FOR THE ASSESSEE DID NOT GIVE ANY DETAILS TO SUPPORT THE STAND OF TH E ASSESSEE. FURTHER, NO EVIDENCE WAS GIVEN AS TO HOW THESE ITEMS COULD B E TREATED AS BAD DEBTS. THEREFORE, THE CIT(A) DISMISSED THIS GROUND OF APPEAL. HOWEVER, THE CIT(A) FOUND THAT IN RESPECT OF IRREVO CABLE ADVANCE GIVEN TO A GROUP COMPANY USAL, THE ASSESSING OFFICE R HAS NOT EXAMINED AN ITEM OF RS.90,00,000/- BEING THE CORPOR ATE GUARANTEE TO USAL WHICH WAS ALSO WRITTEN OFF. FURTHER, HE FOUND THAT THE ASSESSING OFFICER HAS ALLOWED A SUM OF RS.18,18,325/- BEING I RRECOVERABLE ADVANCE FOR SUPPLY OF COMPRESSORS MADE TO K G KHOSL A COMPRESSORS LTD. WHICH WAS ADVANCE GIVEN FOR THE PURCHASE OF A CAPITAL ASSET BUT THIS AMOUNT WAS NOT ADVANCED DURING THE COURSE OF C ARRYING ON THE BUSINESS. THE ALTERNATIVE CONTENTION OF THE ASSESSE E IS THAT THE AMOUNT OF RS.90 LAKHS WRITTEN OFF IN THE BOOKS REPR ESENTS THE BUSINESS DEDUCTION COVERED UNDER SECTION 36(1)(VII) OR THE R ESIDUARY SECTION 43 37(1) OF THE ACT. THE LD.COUNSEL FOR THE ASSESSEE C ONTENDED THAT THE LOSS ARISING OUT OF BUSINESS ACTIVITY IS ALLOWED AS DEDUCTION UNDER SECTION 28/37 OF THE ACT PROVIDED THE LOSS SHOULD B E INCIDENTAL TO THE CARRYING ON OF THE BUSINESS AND SHOULD ARISE FROM T HE CARRYING ON THE BUSINESS. THE LOSS SHOULD BE A REVENUE LOSS AND NOT CAPITAL LOSS. THE ASSESSEE COMPANY HAD INITIATED STEPS TO REVIVE GROU P COMPANIES LIKE UNIVERSAL STEEL AND ALLOYS LTD. (USAL) WHICH WAS DE CLARED AS SICK INDUSTRIAL UNIT. THE ASSESSEE COMPANY HAD ADVANCED MONEY TO IT AND HAS ALSO FURNISHED CORPORATE GUARANTEES TO THE BANK ERS OF USAL ON THE DIRECTIONS OF BIFR. ON APPEAL, HOWEVER, THE CIT (A0 DIRECTED THE ASSESSING OFFICER TO EXAMINE BOTH THE ITEMS AND TO THAT EXTENT, HE RESTORED THE MATTER TO THE FILE OF THE ASSESSING OF FICER. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD. COUNSEL FOR THE ASSESS EE MADE AN EXHAUSTIVE INTERPRETATION OF `BUSINESS. FOR THIS P ROPOSITION, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON VARIOUS CASE LAW S BY VARIOUS HIGH COURTS AND SUPREME COURT. PROMINENT AMONG THEM IS T HE DECISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF M/S.SPENCER & COMPANY LTD. VS. ACIT IN ITA NO.598/MDS/2004 FOR THE ASSESSMENT YEAR 2000-01 IN WHICH THE HONBLE JM IS PARTY. IN THIS CASE IT H AS BEEN HELD THAT WHEN THE ASSESSEE COMPANY DISCHARGED CERTAIN LIABIL ITIES OF ITS SUBSIDIARY COMPANY TO SAVE ITS REPUTATION, THE SAME WERE ALLOWABLE AS BUSINESS LOSS. RESPECTFULLY FOLLOWING THE ITAT, CHENNAI BENCH CITED SUPRA AS WELL AS THE THIRD MEMBER DECISION OF THE ITAT, KOLKATA BENCH IN THE CASE OF DY. CIT VS. DUNCAN AGRO INDUST RIES IN ITA NO.2091/CAL/95 AND 169/CAL/97, WE ALLOW THE CLAIM O F THE ASSESSEE. 47. THE LD. COUNSEL OF THE ASSESSEE HAD ALSO REFERR ED TO THE DECISION OF THE CIT VS. AMALGAMATIONS PVT. LTD. [226 ITR 188 ], WHEREIN THE HON'BLE SUPREME COURT WAS CONCERNED WITH ONE OF THE ISSUES WHICH IS SIMILAR TO THE ASSESSEES CASE AND IS AS UNDER: THE COMPANY SSM, WAS ORIGINALLY A SUBSIDIARY OF A, WHICH WAS THE SUBSIDIARY OF THE ASSESSEE-COMPANY. ON AND FROM FEB RUARY 1, 1954, THE ASSESSEE COMPANY PURCHASED ALL THE SHARES OF SS M FROM A AND SSM THUS BECAME THE DIRECT SUBSIDIARY OF THE ASSESS EE-COMPANY. SSM HAD BORROWED MONIES FROM A BANK AND THE ASSESSE E-COMPANY HAD GUARANTEED THE LOAN TO THE SAID COMPANY BY THE SAID BANK. SSM WENT INTO LIQUIDATION, SOME TIME IN 1955. WHEN SSM WENT INTO LIQUIDATION, THE ASSESSEE-COMPANY, AS GUARANTOR, WA S REQUIRED TO CLEAR THOSE OVERDRAFTS IN ACCORDANCE WITH THE TERMS OF THE GUARANTEE. AFTER ADJUSTING THE AMOUNT RECOVERED FROM THE LIQUI DATORS, THE SUM DUE TO THE ASSESSEE-COMPANY FROM THE LIQUIDATED COM PANY ON ACCOUNT OF THE SAID OVERDRAFT WAS RS. 9,08,764. THE ASSESSEE- COMPANY CLAIMED THIS AMOUNT AS A LOSS WHICH AROSE I N THE COURSE OF AND INCIDENTAL TO ITS BUSINESS IN THE ASSESSMENT FO R THE YEAR 1958-59. THERE WERE RECEIPTS BY THE ASSESSEE-COMPANY IN THE COURSE OF THE 44 LIQUIDATION OF SSM IN THE LATER YEARS. THE TOTAL AM OUNT RECEIVED CAME TO RS. 4,85,508.28 SPREAD OVER THE RELEVANT ACCOUNT ING YEARS FOR THE ASST. YRS. 1959-60 TO 1962-63. THE ASSESSEE-COMPANY RELIED ON THE CLAUSE IN THE MEMORANDUM OF ASSOCIATION AUTHORISING IT TO BE THE GUARANTOR FOR THE LOANS AND CONTENDED THAT THE TRAN SACTIONS IN QUESTION SPRANG OUT OF NORMAL BUSINESS TRANSACTIONS AND HENCE, THE LOSS WAS AN ALLOWABLE DEDUCTION IN THE ASSESSMENT F OR 1958-59. THE INCOME TAX OFFICER HELD THAT THE LOSS IN QUESTION D ID NOT ARISE DURING THE COURSE OF OR INCIDENTAL TO THE BUSINESS OF THE ASSESSEE-COMPANY AND IN HIS VIEW IT WAS AT BEST A CAPITAL LOSS WHICH DID NOT COME WITHIN THE SCOPE OF S. 12B OF THE 1922 ACT. IN MAKING THE ASSESSMENTS FOR THE YEARS 1959-60 TO 1962-63 THE INCOME TAX OFFICER TREATED THE RECEIPTS FROM THE LIQUIDATOR AS INCOME AS A PROTECT IVE MEASURE. THE TRIBUNAL HELD THAT THE ASSESSEE- COMPANY HAD GUARAN TEED THE LOAN IN THE COURSE OF CARRYING ON ITS OWN BUSINESS AND THAT THE LOSS WAS CLEARLY ADMISSIBLE AS A DEDUCTION. BUT SINCE THE AS SESSEE-COMPANY HAD RECEIVED THE LAST OF THE PAYMENTS FROM THE LIQU IDATOR IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1962- 63, IT WAS HELD THAT THE BALANCE OF RS. 4,23,256 REMAINING UNRECOVE RABLE REPRESENTED THE REAL BUSINESS LOSS ALLOWABLE FOR THE ASSESSMENT YEAR 1962-63. THIS WAS UPHELD BY THE HIGH COURT. ON APPEAL TO THE SUPREME COURT BY THE REVENUE HELD, DISMISSING THE APPEAL, THAT THE ASSESSEE COMP ANY HAD INCURRED THE LOSS IN CARRYING ON ITS OWN BUSINESS WHICH INCL UDES FURNISHING GUARANTEES TO DEBTS BORROWED BY ITS SUBSIDIARY COMP ANIES. THE ASSESSEE-COMPANY COULD HAVE ASCERTAINED WHETHER THE RE WAS LOSS IN THE TRANSACTION OF GUARANTEE ONLY AT THE STAGE OF F INAL PAYMENT BY THE LIQUIDATORS WHICH WAS RECEIVED IN THE RELEVANT PREV IOUS YEAR FOR THE ASST. YR. 1962-63 AND IT WAS ALLOWABLE IN THAT YEAR . IN THE CASE OF TURNER AND MORRISON & CO. LTD. VS. C IT [SUPRA], THE AO AS WELL AS THE LD. CIT DR DISTINGUISHED THESE TWO D ECISIONS ON THE BASIS THAT GPEL WAS NOT A SUBSIDIARY OF THE ASSESSEE COMP ANY AND GPEL WAS NOT WOUND UP. WE DO NOT AGREE WITH THIS OBJECTI ON. AS POINTED OUT EARLIER, THE ASSESSEE COMPANY WAS TRYING TO DIVERSI FY ITS BUSINESS AND WAS ALSO TRYING TO ACHIEVE LARGE OBJECT OF EXPANDIN G ITS BUSINESS BY ESTABLISHMENT OF A VERY LARGE MANUFACTURING UNIT IN THE STATE OF GUJARAT. THEREFORE, EVEN IF GPEL IS NOT THE SUBSIDI ARY, THE EXPENDITURE HAS BEEN INCURRED ON THE BASIS OF LARGER BUSINESS I NTEREST AND COMMERCIAL EXPEDIENCY. 45 48. IN FACT, AS POINTED OUT BY THE LD. COUNSEL OF T HE ASSESSEE, THE WHOLE EXERCISE WAS NOT DONE FOR THE SAKE OF FUN OR WITH AN ALTRUISTIC MOTIVE. BUT THE ASSESSEE WAS TRYING TO ACHIEVE A LA RGE BUSINESS INTEREST. HERE IT WOULD BE PERTINENT TO NOTE THAT T HIS EXERCISE IS NOT BEING DONE UP WITH THE PURPOSE OF SIPHONING OFF THE MONEY OR PARKING OF THE FUNDS IN THE PRIVATE COMPANIES OF THE PROMOT ERS. THIS IS SO, BECAUSE, GIIC IS A GOVERNMENT COMPANY BEING AN ORGA NISATION PROMOTED BY THE STATE OF GUJARAT FOR ESTABLISHMENT AND ENCOURAGEMENT OF NEW INDUSTRIAL PROJECTS IN THE STA TE OF GUJARAT. MOREOVER, THE EFFECTIVE MANAGEMENT OF GPEL WAS WITH THE ASSESSEE COMPANY AND THE CHAIRMAN AND MANAGING DIRECTOR ALSO BELONGED TO THE ASSESSEE COMPANY. THEN VIEWING IT FROM THIS ANG LE, WHICH WE HAVE OBSERVED EARLIER ALSO, THAT AFTER ALL IT WAS A CASE OF SAVING OF REPUTATION OF ASSESSEE COMPANY BY MEETING THE LIABILITIES OF B ANKS AND FINANCIAL INSTITUTIONS WHICH WERE IN PURSUANCE OF REHABILITAT ION SCHEME. 49. ONE MORE OBJECTION WAS TAKEN BY THE AO AS WELL AS THE LD. CIT DR THAT SINCE BOARDS RESOLUTION WAS PASSED ON 26-6 -2002, THEREFORE, LIABILITIES CANNOT BE CLAIMED IN THIS YEAR. FIRSTLY , WE AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE THAT IN THE CASE OF COMPANY ACCOUNTS ARE NOT CLOSED ON THE LAST DAY OF BUSINESS BUT THEY ARE GENERALLY FINALISED MUCH AFTER THAT AND, THEREF ORE, ASSESSEE COMPANY HAD THE RIGHT TO CLAIM THIS AMOUNT BEFORE T HE ACCOUNTS WERE FINALISED. IN ANY CASE, THIS ISSUE CAME UP BEFORE T HE HON'BLE CALCUTTA 46 HIGH COURT IN THE CASE OF TURNER MORRISON AND CO. L TD. VS. CIT [SUPRA] AND THE RELEVANT PARAGRAPH RELATING TO THIS ISSUE I S AS UNDER: COMING TO QUESTION NOS. 5 AND 6, WITH REGARD TO TH E DISALLOWANCE OF RS. 15,40,264, THE AO AND THE CIT(A) HAVE DISALLOWE D THIS DEDUCTION ON THE GROUND THAT NO MATERIAL WAS PLACED BEFORE TH EM BY THE ASSESSEE TO ESTABLISH THAT THE AMOUNTS WERE IRRECOV ERABLE. THE TRIBUNAL, ON THE OTHER HAND, HAS DEALT WITH THIS QU ESTION FROM TWO ANGLESFIRSTLY, THAT THE DEDUCTION WAS DISALLOWABLE SINCE THE ASSESSEE HAD SHOWN THIS AMOUNT AFTER THE CLOSE OF T HE ACCOUNTING YEAR AS ON 13TH MAY, 1982; AND, SECONDLY, BECAUSE T HE ASSESSEE WAS NOT IN THE BUSINESS OF MONEY-LENDING. ON BOTH THE C OUNTS, WE DISAGREE WITH THE TRIBUNAL FOR THE FOLLOWING REASON S. IT IS IMMATERIAL WHETHER THE BAD DEBT IS SHOWN AFTE R THE CLOSE OF THE ACCOUNTING YEAR OR DURING THE ACCOUNTING YEAR ITSEL F. A DIVISION BENCH OF THIS COURT, IN THE CASE OF CIT VS. UNITED BANK OF INDIA (1993) 69 TAXMAN 505 (CAL), HAS HELD AS UNDER: 'THE ACCOUNTS OF A COMPANY ARE GENERALLY MADE UP FO R EVERY YEAR AFTER A PARTICULAR DATE AT A LATER POINT OF TIME. A COMPANY IS ENTITLED IN LAW TO FINALISE LATER AS TO WHAT WAS THE POSITION O F ITS ACCOUNTS UP TO A PARTICULAR DATE. A COMPANY CAN SIMILARLY FINALISE I TS ACCOUNTS FOR VARIOUS PURPOSES AT A LATER DATE WITH RETROSPECTIVE EFFECT. IN THE INSTANT CASE, IN THE ACCOUNTS NECESSARY ENTRIES WERE MADE F OR WRITING OFF THE DEBT AS BAD IN THE LIGHT OF THE FACTS AND CIRCUMSTA NCES OF THE CASE. RECOMMENDATION WAS MOVED BY THE CONCERNED BRANCH OF THE BANK TO WRITE OFF THE AMOUNTS IN DISPUTE WHICH WAS FORWARDE D TO THE BOARD OF DIRECTORS FOR APPROVAL. THE BOARD OF DIRECTORS ACCE PTED AND APPROVED THE RECOMMENDATION AND ADOPTED RESOLUTION TO THAT E FFECT. IN VIEW OF THE PROCESS INVOLVED IN THE PREPARATION OF ACCOUNTS , UNTIL THE RECOMMENDATION WAS ACCEPTED AND RESOLUTION PASSED B Y THE DIRECTORS, THE ACCOUNTS DID NOT BECOME FINAL. IN SU CH A CASE THE APPROVAL OF THE BOARD OF DIRECTORS COULD NOT HAVE B EEN OBTAINED BEFORE THE CLOSE OF THE ACCOUNTING YEAR. THE RESOLUTION, A PPROVING AND ACCEPTING THE RECOMMENDATION RELATING TO THE TREATM ENT OF CERTAIN ITEMS, MUST BE RELATED BACK TO THE DATE UP TO WHICH THE ACCOUNTS WERE FINALISED AND SUCH DETERMINATION OR APPROVAL MUST B E TREATED AS BEING EFFECTIVE FROM THAT DATE.' THUS, FROM ABOVE IT IS CLEAR THAT A COMPANY IS ENTI TLED IN LAW TO FINALISE THE ACCOUNTS LATER AS TO WHAT WAS THE POSITION OF I TS ACCOUNT UPTO A PARTICULAR DATE. THEREFORE, WE FIND NO MERIT IN THI S OBJECTION. 50. WE WOULD ALSO LIKE TO DEAL WITH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BIRLA BROS (P) LTD. [SUPRA], WHICH HAS BEEN STRONGLY RELIED UPON BY THE AO FOR DENYING THIS CLAM. IN FACT, 47 THE HON'BLE SUPREME COURT WHILE REVERSING THE DECIS ION OF THE HON'BLE HIGH COURT OBSERVED AS UNDER: IN OUR JUDGMENT THE FACTS RELIED UPON BY THE APPEL LATE TRIBUNAL AND THE HIGH COURT ARE BARELY SUFFICIENT FOR BRINGING T HE ALLOWANCE CLAIMED UNDER SECTION 10(2) (XI). IT MAY BE MENTIONED THAT THE CASE OF THE ASSESSEE WAS CONFINED TO THAT PROVISION AND NO RELI ANCE WAS PLACED ON ANY OTHER PROVISION UNDER WHICH SUCH AN ALLOWANC E COULD BE CLAIMED. THERE WAS NO PRIVITY OF CONTRACT OR ANY LE GAL RELATIONSHIP BETWEEN THE ASSESSEE PROVISION OR SELLING AGENT. NE ITHER UNDER CUSTOM NOR UNDER ANY STATUTORY PROVISION OR ANY CON TRACTUAL OBLIGATION WAS THE ASSESSEE WAS THE ASSESSEE BOUND TO GUARANTE E THE LOAN ADVANCED BY THE BANK TO THE SELLING AGENT. IT IS DI FFICULT TO SEE HOW IT WAS IN THE INTEREST OF THE ASSESSEE'S BUSINESS THAT THE GUARANTEE WAS GIVEN. THERE WAS EVEN NO MATERIAL TO ESTABLISH THAT THE MANAGED- COMPANY WAS UNDER ANY LEGAL OBLIGATION TO FINANCE T HE SELLING AGENT OR TO GUARANTEE ANY LOANS ADVANCED TO THE SELLING AGEN T BY A THIRD PARTY. IT IS INCOMPREHENSIBLE IN WHAT MANNER THE GUARANTEE ING OF THE LOAN ADVANCED TO THE SELLING AGENT INDIRECTLY FACILITATE D THE CARRYING ON OF THE ASSESSEE'S BUSINESS. IT IS EQUALLY DIFFICULT TO APPRECIATE THE OBSERVATIONS OF THE HIGH COURT THAT IT WAS IN THE L ARGER INTEREST OF THE ASSESSEE'S BUSINESS THAT THE GUARANTEE WAS GIVEN. I N OUR OPINION THE VIEW OF THE APPELLATE TRIBUNAL WAS BASED ON A COMPL ETE MISAPPREHENSION OF THE TRUE LEGAL POSITION. THE HIG H COURT ALSO FELL INTO THE SAME ERROR. THE ALLOWANCE WHICH WAS CLAIME D DID NOT FALL WITHIN S. 10 (2)(XI). NO ATTEMPT WAS MADE NOR INDEE D COULD IT BE USEFULLY MADE TO CLAIM ANY ALLOWANCE UNDER S. 10(2) (XI) OF THE ACT. FOR THE REASON GIVEN ABOVE THE CORRECT ANSWER TO TH E QUESTION REFERRED SHOULD BE IN THE NEGATIVE AND AGAINST THE ASSESSEE. THE APPEALS ARE THUS ALLOWED. FROM THE ABOVE IT IS CLEAR THAT THE CLAIM WAS MADE ONLY AS A BAD DEBT. NO OTHER PROVISION WAS RELIED ON. MOREOVER, THERE W AS NO PRIVITY OF CONTRACT OR ANY LEGAL RELATIONSHIP BETWEEN THE ASSE SSEE AND THE SELLING AGENT. THERE WAS NO STATUTORY PROVISION OR CONTRACT UAL OBLIGATION BY WHICH THE ASSESSEE WAS BOUND TO PAY THE GUARANTEED LOAN AND IT WAS NOT AUTHORISED BY THE MEMORANDUM OF ASSOCIATION OF THE COMPANY. IN THE CASE BEFORE US, AS POINTED OUT BY THE LD. COUNS EL OF THE ASSESSEE, THE SAME IS AUTHORISED BY CLAUSE-6 OF ANCILLARY OBJ ECT. WITH GPEL ASSESSEE IS CLEARLY RELATED AS A PROMOTER AND MAJOR SHAREHOLDER 48 TOWARDS DIVERSIFICATION OF ITS BUSINESS. MOREOVER, THE PAYMENTS HAVE BEEN MADE UNDER THE LEGAL COMPULSION IN TERMS OF RE HABILITATION SCHEME FORMULATED BY BIFR. THEREFORE, IN OUR, HUMBL E OPINION, THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF BIRLA BROS (P) LTD. [SUPRA] IS NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE US. IN VIEW OF THE ABOVE DISCUSSION, WE CONFIRM THE ORDER OF THE LD. CIT[A]. 51. GROUND NO.5 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS, AO NOTICED THAT DURI NG A.Y 2001-02 A PROVISION TOWARDS PAYMENT OF BONUS AMOUNTING TO RS. 4.55 CRORES WAS MADE. OUT OF THIS, A SUM OF RS.2,72,76,982/- WAS PA ID BEFORE FILING OF THE RETURN FOR A.Y 2001-02 BUT THE ASSESSEE DID NOT MAKE A CLAIM THEN FOR DEDUCTION U/S.43B ON PAYMENT BASIS. AO OBSERVED THAT THIS WAS DONE BECAUSE IN THAT YEAR THERE WAS A LOSS AND THAT IS WHY SAME WAS NOT CLAIMED BY THE ASSESSEE BECAUSE ASSESSEE COULD NOT HAVE DERIVED ANY BENEFIT. SINCE IN THE PRESENT YEAR I.E. A.Y 200 2-03 THERE WAS A PROFIT, ASSESSEE WANTED TO TAKE AN ADVANTAGE AND HA S CLAIMED THE DEDUCTION ON PAYMENT BASIS. AO MADE FURTHER OBSERVA TIONS THAT ASSESSEE HAS NOT FOLLOWED THE SPIRIT OF SEC.43B. HE ALSO REFERRED TO THE DECISION OF MCDOWELL & CO., THAT TAX PLANNING IS PE RMITTED ONLY UPTO A PARTICULAR EXTENT AND ACCORDINGLY DISALLOWED THIS S UM. 52. LD. CIT(A) ADJUDICATED THE ISSUE VIDE PARA-14 W HICH IS AS UNDER: I HAVE GONE THROUGH THE DETAILS. IT IS FACT THAT I T COULD HAVE BEEN CLAIMED IN THE EARLIER YEAR. BUT IT IS ALSO A FACT THAT SEC.43B IMPOSES NO SUCH RESTRICTION ON THE ASSESSEE. WHAT SECTION 4 3B PROVIDES IS CERTAIN PAYMENTS SHOULD BE ALLOWED ONLY ON ACTUAL P AYMENT BASIS. SINCE THE ACTUAL PAYMENT HAS BEEN MADE DURING THE P REVIOUS YEAR 49 RELEVANT FOR THE CURRENT YEAR UNDER APPEAL, THERE I S NO BAR IN THE ASSESSEE MAKING THE CLAIM IN THIS YEAR. THE AOS AR GUMENT THAT IT HAS BEEN DONE TO AVOID TAX CAN BE ANSWERED BY TAKING RE COURSE TO THE GAUHATI HIGH COURT DECISION IN 256 ITR 626, 222 ITR 83 AND THE FAMOUS MCDOWEL DECISION 158 ITR 148. ALL THESE DE CISIONS HELD THAT A LEGITIMATE TAX PLANNING IS ALLOWED AND CANNOT BE DISALLOWED UNLESS IT IS ESTABLISHED THAT IT HAS BEEN DONE WITH AN ULTERI OR MOTIVE. THE OVERRIDING FACT REMAINS THAT THERE IS NO RESTRICTIV E PROVISIONS IN SEC.43B THAT THE DEDUCTION CANNOT BE ALLOWED IN THE YEAR OF PAYMENT IF IT HAS BEEN MADE BEFORE THE DUE DATE FOR FILING THE RETURN FOR THE PREVIOUS YEAR. I AM, THEREFORE, INCLINED TO FULLY A GREE WITH THE APPELLANT THAT THE CLAIM OF BONUS PAYMENT IS TO BE ALLOWED IN THE CURRENT YEAR. THE APPEAL ON THIS POINT IS ALLOWED. 53. BEFORE US, LD. CIT DR STRONGLY SUPPORTED THE OR DER OF THE AO AND SUBMITTED THAT WHEN PAYMENT WAS MADE IN THE EAR LIER YEAR ONLY, ASSESSEE COULD HAVE EASILY CLAIMED THE DEDUCTION IN THAT YEAR. 54. ON THE OTHER HAND, LD.COUNSEL OF THE ASSESSEE R EFERRED TO THE CROSS OBJECTION FILED BY THE ASSESSEE COMPANY AND S UBMITTED THAT PAYMENT HAS BEEN MADE IN THE NEXT ASSESSMENT YEAR I .E. 2003-04 AS THE ASSESSEE IS MAKING PAYMENT OF BONUS GENERALLY O N THE OCCASION OF ONAM WHICH IS A BIG FESTIVAL IN KERALA. HE ARGUED T HAT LD. CIT(A) HAS CLEARLY OBSERVED THAT PROVISIONS OF SEC.43B DOES NO T IMPOSE ANY SUCH RESTRICTION. HE POINTED OUT THAT SIMILARLY THE BONU S PAYMENT FOR THIS YEAR WAS MADE IN A.Y 2003-04 AND DEDUCTION WAS ALSO CLAIMED IN THAT YEAR AND NOT FOR THIS YEAR WHICH IS A CONSISTENT ST AND OF THE ASSESSEE AND IN ANY CASE, THERE SHOULD BE SOME CONSISTENCY A ND IF THE PROVISION IS NOT ALLOWED ON THE BASIS OF PAYMENT IN THIS YEAR THEN SAME SHOULD BE ALLOWED IN A.Y 2001-02. 55. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT IN C.O.NO.75/COCH/2008 THE FOLLOWING GROUND HAS BEE N TAKEN: 50 BONUS RELATING TO THE FINANCIAL YEAR ENDED 31-3-02 (A.Y 02-03) WHICH WAS PAID DURING THE FINANCIAL YEAR ENDED 31-3-03 AN D BEFORE THE DUE DATE OF FILING OF INCOME TAX RETURN FOR THE ASSESSM ENT YEAR 2002-03, WAS CLAIMED IN THE ASST. YEAR 2003-04 AND WAS ALLOW ED BY THE COMMISSIONER OF INCOME TAX [APPEALS] IN ASST. YEAR 2003-04 [PARA 8 OF THE COMMISSIONER OF INCOME TAX [APPEALS] FOR A. Y 03-04]. IF FOR ANY REASON THE SAID DECISION IS REVERSED, SUCH AMOUNT M AY BE ALLOWED IN ASSESSMENT YEAR 02-03. 56. WE FIND THAT SEC.43B READS AS UNDER: 43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PRO VISION OF THIS ACT A DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT IN RESPECT OF A) XX XX XX B) XX XX XX C) ANY SUM REFERRED TO IN CLAUSE ( II ) OF SUB-SECTION (1) OF SECTION 36 ,] [OR] D) XX XX XX E) XX XX XX F) XX XX XX SHALL BE ALLOWED (IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) ONLY IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 OF THAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM : [ PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL APPLY IN RELATION TO ANY SUM WHICH IS ACTUALLY PAID BY THE ASSESSEE ON OR BEFORE THE DUE DATE APPLICABLE IN HIS CASE FOR FURNISHING THE RETURN OF INCOME UNDER SUB- SECTION (1) OF SECTION 139 IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED AS AFORESAID AND THE EVIDENCE OF SUCH PAYMENT IS FURNISHED BY THE ASSESSEE ALONG WIT H SUCH RETURN. CLAUSE MAKES REFERENCE TO CLAUSE (II) OF SUB-SEC. (1) OF SEC.36 WHICH REFERS TO ANY SUM PAID TO AN EMPLOYEE AS BONUS OR C OMMISSION. THEREFORE, PAYMENT ON ACCOUNT OF BONUS IS ALSO CONT ROLLED BY SEC.43B. THE PLAIN READING OF THE PROVISION CLEARLY SHOWS TH AT DEDUCTION ON ACCOUNT OF ANY OF THE ITEMS MENTIONED IN SEC.43B WO ULD NOT BE ALLOWED UNLESS AND UNTILL THE PAYMENT HAS BEEN MADE AND THE SAME IS ALLOWABLE IN THE YEAR IN WHICH PAYMENT HAS BEEN MAD E IRRESPECTIVE OF 51 THE ASSESSMENT YEAR IN WHICH LIABILITY FOR THE SAME HAS BEEN INCURRED AND RECOGNISED BY THE ASSESSEE BY THE METHOD OF ACC OUNTING ADOPTED BY HIM. THEREFORE, IT IS CLEAR THAT ITEMS REFERRED TO IN SEC.43B CAN BE ALLOWED ONLY IF PAYMENT HAS BEEN MADE AND THE SAME ARE ALLOWABLE IN WHICH PAYMENT HAS BEEN MADE. SINCE ASSESSEE HAS BEE N MAKING PAYMENT ON ACCOUNT OF BONUS ON THE OCCASION OF ONAM WHICH IS A MOST IMPORTANT FESTIVAL IN THE STATE OF KERALA AND HAS BEEN CONSISTENTLY CLAIMING DEDUCTION OF PAYMENT OF BONUS ONLY IN THE YEAR OF PAYMENT. THIS FACT BECOMES CLEAR FROM THE ASSESSMENT ORDER B ECAUSE NO CLAIM HAS BEEN MADE IN THE A.Y 2003-04 ON THE BASIS OF PR OVISO TO SEC.43B. 57. THE PROVISO TO SEC.43B GIVES FURTHER CONCESSION THAT IF PAYMENT IN RESPECT OF ANY OF THE ITEMS REFERRED IN SEC.43B IS MADE IN A PARTICULAR YEAR BEFORE THE DUE DATE OF FILING OF TH E INCOME TAX RETURN, THEN SUCH CLAIM CAN BE MADE IN THE EARLIER YEAR ALS O FOR WHICH RETURN IS DUE TO BE FILED. THIS SEEMS TO BE ONLY A FURTHER CO NCESSION AND CANNOT BE READ AS A RESTRICTION THAT NECESSARILY DEDUCTION HAS TO BE CLAIMED IN THE EARLIER YEAR WHICH AO HAD INTERPRETED. WE FAIL TO UNDERSTAND THAT AS TO HOW AO HAS REFERRED TO THE DECISION OF MCDOWE LL BY OBSERVING THAT IN EARLIER YEAR I.E. A.Y 2001-02 THERE WAS A L OSS AND THAT IS WHY ASSESSEE HAS NOT CLAIMED ANY DEDUCTION. EVEN IF IT IS A CASE OF LOSS, SUCH LOSS WOULD HAVE BEEN CARRIED FORWARD TO NEXT Y EAR AND ALLOWED ACCORDINGLY. SIMPLY BECAUSE ASSESSEE HAS NOT CLAIME D A PARTICULAR DEDUCTION, IT CANNOT BE SAID TO BE A COLOURABLE DEV ICE AS ENVISAGED BY THE DECISION OF MCDOWELL CASE. THE DEDUCTION RELATE S TO PAYMENT OF 52 BONUS WHICH HAS BEEN ACTUALLY PAID IN THE PRESENT Y EAR AND DEDUCTION HAS BEEN CLAIMED AS PER SEC.43B. SUCH DEDUCTION HAS BEEN CLAIMED ON CONSISTENT BASIS IN THE YEAR OF PAYMENT AND, THEREF ORE, NO ADVERSE INFERENCE SHOULD HAVE BEEN TAKEN. IN THESE CIRCUMST ANCES, WE FIND NOTHING WRONG IN THE ORDER OF THE LD. CIT[A] AND CO NFIRM THE SAME. 58. GROUND NO.6 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURING ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSES SEE HAD COMPUTED AS PER THE ORIGINAL RETURN PROFITS OF DG P OWER GENERATION UNIT AT ` `` ` .15,64,94,628/- WHICH WERE LATER ON ENHANCED TO ` `` ` .15,77,91,697/- AS PER THE REVISED RETURN. THE POWE R GENERATED BY DG POWER UNIT WAS CONSUMED BY MANUFACTURING UNIT AT BARODA. DIRECT EXPENDITURE INCURRED AT THE UNDERTAKING, NAMELY, FU EL COST, STORES AND SPARES, REPAIRS, WAGES AND DEPRECIATION HAS ALREADY BEEN ACCOUNTED FOR. HOWEVER, THE HEAD OFFICE EXPENSES WHICH WERE I NCURRED AT THE HEAD OFFICE WERE NOT CONSIDERED WHILE DETERMINING T HE PROFITS. EVEN THE FINANCIAL CHARGES WERE NOT CONSIDERED. THEREFO RE, AO ALLOCATED THE HEAD OFFICE EXPENSES ON THE BASIS OF NOTIONAL TURNO VER AND REDUCED A SUM OF ` `` ` .1,44,10,200/- WHICH HAS BEEN WORKED OUT AS UNDER: A) HO OVERHEADS UNDER MISC EXPENSES [NET OF DISALLOWANCE ] AS PER ACCOUNTS ` `` ` .16,00,00,000 B) DIRECTORS REMUNERATION, ALLOWANCES, COMMISSIONS, SITTING FEE ETC. AS PER 44AB REPORT ` `` ` . 3,54,86,500 C) SALARY OF OFFICE STAFF INCLUDING COMPANY SECRETARY [ESTIMATED] ` `` ` . 1,00,00,000 D) DEPRECIATION OF CORPORATE OFFICE BUILDING AS GIVENBY THE ASSESSEE [NET DISALLOWANCE] 53 IN PARA 6(II) ` `` ` . 2,02,02,800 E) DEPRECIATION COMPUTED ON THE BASIS OF ASSESSMENT FOR THE ASST YEAR 2001-02 ON THE FOLLOWING ASSETS USED AT HO AND ITS BRANCHES I. MOTOR CARS ` `` ` . 1,85,29,000 II. COMPUTERS ` `` ` . 3,00,85,000 III. OTHER OFFICE BUILDING & FURNITURE ` `` ` . 1,53,80,000 IV. OTHER OFFICE ASSETS EXCLUDING MARKETING ASSETS GROSS AMOUNT ` `` ` .9.76 CRORE ESTIMATED AT 50% ` `` ` . 4,88,00,000 TOTAL ` `` ` .33,84,83,300 EXPENSES ATTRIBUTABLE TO BARODA UNIT IN THE RATIO OF PRODUCTION BEING 45% AS ADOPTED BY THE ASSESSEE ` `` ` .15,23,17,500 ADD: 1) FINANCE CHARGES RELATING TO BARODA ` `` ` .22,38,00,000 UNIT AS ALLOCATED BY THE ASSESSEE [41.34%] 2) INTEREST ON TERM DEPOSIT RECEIVED WHICH WAS NETTED OFF AGAINST FINANCE CHARGES AND ASSESSED AS INCOME FROM OTHER SOURCES ` `` ` .1.2 CRORES (2.89-1.69) :41.34% ` `` ` . 49,60,800 3) PREMIUM O REDEMPTION OF DEBENTURES NOT DEBITED TO P&L ACCOUNT CLAIMED 27.95 LAKHS 41.34% ` `` ` . 11,55,400 TOTAL ` `` ` . 33,22,33,700 EXPENSES ATTRIBUTABLE TO POWER GENERATION UNIT AT BARODA @ 3.77% AS STATED SUPRA ` `` ` . 1,44,10,200 ========== 59 THIS ISSUE HAS BEEN ADJUDICATED BY THE LD. CIT[A ] VIDE PARA-15 WHICH IS AS UNDER: 15. THE NEXT GROUND RELATE TO COMPUTATION OF DEDUC TION UNDER SECTION 80IA IN RESPECT OF THE NEW INDUSTRIAL UNDER TAKING I.E. POWER GENERATING UNIT AT BARODA. WHILE CONSIDERING THIS C LAIM, THE AO HAS REDUCED THE PROFIT OF THE UNIT BY ALLOCATING HEAD O FFICE EXPENSES PROPORTIONATELY ON THE GROUND THAT CERTAIN ACTIVITI ES UNDERTAKEN AT THE HEAD OFFICE IS IN RESPECT OF THE FUNCTIONING OF THE 80IA UNIT. FACTUALLY IT 54 HAS BEEN ARGUED THAT THE AO DOES NOT HAVE ANY SUCH EVIDENCE. THE 80IA UNIT CAN AND ACTUALLY PERFORMS WITHOUT ANY SPE CIFIC DIRECTIONS OR CONTROL EXERCISED FROM THE HEAD OFFICE. I TEND TO F ULLY AGREE WITH THIS. THE AO CERTAINLY DOES NOT HAVE ANY SUCH INFORMATION . FURTHER, THE SCOPE OF SEC. 80IA IS THAT IT IS ALLOWABLE ON THE P ROFIT OF THE UNDERTAKING TREATING THE UNIT AS A SEPARATE INDEPEN DENT AND ISOLATED UNIT. THE MANNER OF COMPUTATION OF PROFIT FOR THE 8 0IA UNDERTAKING IS SPECIFICALLY DIRECTED IN THE ACT. IN RESPECT OF SUC H SPECIFIC PROVISION, UNLESS THERE IS A CLEAR CUT PROVISION IN LAW, THE A O IS NOT AUTHORIZED TO MAKE ANY SUCH PROPORTIONATE ALLOCATION. THE APPEAL ON THIS POINT IS, THEREFORE, ALLOWED. 60. BEFORE US, LD. CIT DR SUBMITTED THAT ASSESSEE H AS ONLY CONSIDERED THE DIRECT COST FOR PRODUCING POWER AND NO ALLOCATION OF OVERHEAD EXPENSES HAS BEEN DONE. THE HEAD OFFICE EX PENDITURE WOULD DEFINITELY INCLUDE ITEMS LIKE SALARY, REMUNERATION PAID TO DIRECTORS, AND OTHER COMMISSION EXPENSES ETC. WHICH WILL HAVE SOME BEARING EVEN ON THIS EVENT AND IN THE ABSENCE OF ANY OTHER CRITERIA THEY HAVE TO BE ALLOCATED ON THE BASIS OF THE TURNOVER ONLY. FURTHE R, EVEN NO INTEREST HAS BEEN ALLOCATED. HE SUBMITTED THAT THIS CANNOT B E BRUSHED ASIDE BY THE CIT[A] SIMPLY BECAUSE AO HAD NO EVIDENCE FOR TH IS. HE, ULTIMATELY STRONGLY SUPPORTED THE ORDER OF THE AO. 61. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT ADMITTEDLY ALL DIRECT COST LIKE, FUEL COST, STORES AND SPARES, REPAIRS, SALARIES OF STAFF AS WELL AS DEPRECIATION, HAS ALRE ADY BEEN CONSIDERED TO ARRIVE AT THE VALUE OF THE POWER GENERATED. SINCE T HE POWER IS BEING CONSUMED BY BIAS UNIT AT BARODA FOR MANUFACTURING T YRES AND THERE IS NO OCCASION FOR ALLOCATING HEAD OFFICE EXPENSES LIK E RENT, TAXES ETC. THIS POSITION HAS BEEN ADMITTED BY THE AO IN THE RE -ASSESSMENT ORDER FOR A.Y 2002-03 VIDE ORDER DATED 12-12-2008 WHEREIN IT WAS OBSERVED 55 THAT THUS EVEN THOUGH THIS POWER GENERATION UNIT C AN WORK EVEN WHEN THE BARODA UNIT IS NOT WORKING AND IN THAT RE -ASSESSMENT HEAD OFFICE EXPENSES HAVE NOT BEEN ALLOCATED AND, THEREF ORE, KEEPING THE PRINCIPLE OF CONSISTENCY FACTUAL EFFECT IN EARLIER YEARS ORDER SHOULD BE ADOPTED IN THIS YEAR ALSO. IN THIS REGARD HE ALSO R EFERRED TO THE DECISION OF THE HON'BLE MADHYA PRADESH HIGH COURT IN THE CAS E OF PRAKASH CHANDRA BASANT KUMAR 276 ITR 664 AND THE DECISION O F HON'BLE AAR IN THE CASE OF NATIONAL FERTILIZER LTD. 142 TAXMAN 5. 62. HE ARGUED THAT FOR COMPUTING THE PROFITS OF AN UNDERTAKING ELIGIBLE FOR DEDUCTION U/S.80IA, ONLY THE PROFIT OF THE UNDERTAKING HAS TO BE COMPUTED. HE ARGUED THAT HEAD OFFICE EXPENSES WOULD MAINLY BE IN RELATION TO THE MARKETING DIVISION. THIS WILL HA VE NO RELEVANCE TO THE PRODUCTION OF POWER. THEREFORE, SUCH EXPENDITURE CA NNOT BE ALLOCATED. SIMILARLY, THE OTHER IMPORTANT ACTIVITY CARRIED OUT BY THE HEAD OFFICE WOULD BE IN RESPECT OF PROCUREMENT OF MATERIAL. ISS UES LIKE PROCUREMENT OF TECHNOLOGY ETC., ARE HANDLED AT THE HEAD OFFICE LEVEL WHICH HAVE NO RELEVANCE WITH THE PRODUCTION OF POWE R. THEREFORE, THERE IS NO RATIONAL IN ALLOCATION OF THE HEAD OFFI CE EXPENSES TO THIS UNIT. 63. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. AS FAR AS THE DECISION OF THE HON'BLE MADHYA PRADESH HIGH COURT I N THE CASE OF PRAKASH CHANDRA BASANT KUMAR [SUPRA] IS CONCERNED, IN THAT CASE ASSESSEE HAD TWO UNITS. ONE WAS CALLED MAIN UNIT AN D OTHER WAS CALLED 56 UNIT NO. 2. THE ASSESSEE OWNED CAR, SCOOTER, TRUCKS AND TANKERS. THE ASSESSEE, HOWEVER, CONFINED ITS CLAIM OF DEPRECIATI ON ON THESE VEHICLES TO THE MAIN UNIT. THE ASSESSING OFFICER ALLOCATED THE DEPRECIATION IN BOTH THE UNITS THEREBY REDUCING THE PROFIT EARNED B Y ASSESSEE IN UNIT NO. 2 AFTER TAKING INTO ACCOUNT THE CLAIM OF DEPREC IATION SO ALLOCATED. SINCE THE ASSESSEE HAD CLAIMED DEDUCTION UNDER S. 8 0HH/80-I FOR UNIT NO. 2 ONLY, DUE TO ASSESSING OFFICERS ALLOCATING P ART OF DEPRECIATION TO UNIT NO. 2, THE ASSESSEE COULD NOT CLAIM THE DEDUCT ION ON THE ENTIRE PROFIT THAT THEY HAD EARNED FROM UNIT NO. 2 SO AS T O TAKE ITS FULL BENEFIT UNDER S. 80HH/80-I. THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THE TRIBUNAL HELD THAT SINCE THE VEHICLES IN QUESTI ON WERE OWNED BY UNIT NO. 1, THE CLAIM OF DEPRECIATION COULD BE ADJU STED IN UNIT NO. 1 AND NOT IN UNIT NO. 2 WHERE, THE ASSESSEE HAD CLAIM ED THE BENEFIT OF SECTIONS 80HH AND 80-I. ON APPEAL TO THE HIGH COURT , IT WAS HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT THE BENEFIT OF SECTION 80HH/80-I WAS GRANTED TO ASSESSEE ON A FINDING OF FACT RECORD ED IN RELATION TO UNIT NO. 2 BY DIRECTING THAT THERE COULD BE NO ALLO CATION OF DEPRECIATION, INTER SE, TWO UNITS BECAUSE THE VEHIC LES IN QUESTION BELONGED TO UNIT NO. 1. NO SUBSTANTIAL QUESTION OF LAW AROSE FROM THIS ORDER. THUS, IT IS CLEAR THAT IN ABOVE CASE, THE HON'BLE H IGH COURT HAS CONFIRMED THE FINDING GIVEN BY THE TRIBUNAL AND THE ISSUE INVOLVED WAS REGARDING ALLOCATION OF DEPRECIATION ON VEHICLES. T HE ISSUE THEREIN WAS NOT IN RESPECT OF HEAD OFFICE EXPENSES. THOUGH IT I S TRUE THAT AT HEAD OFFICE THE MAJOR EFFORT IS ALWAYS ON MARKETING OF T HE PRODUCTS PRODUCED 57 BY ANY COMPANY AND SECOND MAJOR EFFORT WOULD BE TOW ARDS PROCUREMENT OF RAW MATERIAL, THEIR SANCTIONS FROM V ARIOUS GOVERNMENT AUTHORITIES FOR PUTTING UP THE PLANT AS WELL AS PRO CUREMENT OF TECHNOLOGY ETC. AND THESE EXPENSES WOULD HAVE NO RE LEVANCE WITH THE POWER PLANT. HOWEVER, AT THE SAME TIME THERE ARE CE RTAIN COMMON EXPENSES LIKE REMUNERATION PAID TO THE DIRECTORS, C OMPANY SECRETARY, OFFICE STAFF, PERSONNEL DEPARTMENT ETC., CAN DEFINI TELY BE OF THE COMMON NATURE. IT HAS ALREADY BEEN OBSERVED THAT NO ALLOCATION OF INTEREST HAS BEEN MADE THOUGH NEITHER AO HAS GIVEN ANY FINDING OF FACT WHETHER POWER GENERATION UNIT WAS ACQUIRED FRO M ASSESSEES OWN FUNDS OR IT WAS FINANCED FROM THE BORROWINGS. CONSI DERING THE OVER ALL ASPECTS OF THE CASE, WE ARE OF THE VIEW THAT THE AO HAS ALLOCATED THE SUM OF ` `` ` .15,23,17,500/- BEING 45% OF THE TOTAL EXPENSES TOW ARDS BARODA UNIT. AS OBSERVED BY US, THAT THE MAJOR EXPE NDITURE ON ACCOUNT OF MARKETING AND PROCUREMENT OF MATERIAL ETC., MAY NOT HAVE ANY RELEVANCE WITH THE POWER GENERATION UNIT AND, THERE FORE, ALLOCATION OF THESE EXPENSES ON THE BASIS OF THE TURNOVER MAY NOT BE APPROPRIATE. CONSIDERING THE OVER ALL CIRCUMSTANCES, WE ARE OF T HE VIEW THAT IF A SUM OF ` `` ` .10 LAKHS IS ALLOCATED OUT OF THE EXPENSES OF THIS POWER UNIT THAT WOULD MEET THE ENDS OF JUSTICE. HOWEVER, IN AD DITION TO THIS, INTEREST HAS ALSO TO BE ALLOCATED. FOR THIS PURPOSE , WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK T O THE FILE OF THE AO WITH A DIRECTION TO ASCERTAIN WHETHER ANY DIRECT BO RROWINGS WERE MADE FOR THE PURPOSE OF ACQUIRE THE MACHINERY FOR POWER GENERATION UNIT, 58 THEN SUCH INTEREST MAY BE ALLOCATED. IF THE INVESTM ENT HAS BEEN MADE OUT OF THE COMMON FUNDS THEN INTEREST MAY BE ALLOCA TED ON THE BASIS OF THE TURNOVER WHICH THE AO HAS ALREADY ADOPTED FO R ALLOCATION OF THE EXPENSES. THUS, THIS GROUND IS PARTLY ALLOWED. 64. GROUND NO.7 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE AO DURING ASSESSMENT PROCEEDINGS WHILE ANALYZING TH E BOOK PROFITS COMPUTED U/S.115JB NOTICED THAT ASSESSEE, INTER ALI A, REDUCED ONE ITEM FROM SUCH BOOK PROFITS AMOUNTING TO ` `` ` .32,69,65,146/- ON ACCOUNT OF AMOUNTS WITHDRAWN FROM THE GENERAL RESERVE. ACTUALL Y AO HAS DISCUSSED REGARDING OTHER ITEMS ALSO AND TOTAL AMOU NT REDUCED IS ` `` ` .33,56,74,266/- BUT REVENUE HAS RAISED DISPUTE ONLY FOR ` `` ` .32,69,65,146/- AND, THEREFORE, WE SHALL DISCUSS AN D ADJUDICATE ONLY THIS ITEM. THE REDUCTION WAS MADE ON THE BASIS OF E XPLANATION 1 CL.(I) TO SEC.11JB BELOW SUB-SEC.(2). THEN HE REFERRED TO CLAUSE (I) WHEREIN IT IS PROVIDED THAT BOOK PROFITS CAN BE REDUCED BY THE AMOUNTS WITHDRAWN FROM RESERVE IF THE SAME HAS BEEN CONSIDE RED BY INCREASING BOOK PROFITS OF THOSE YEARS. ON QUERY, IT WAS SUBMI TTED AS UNDER: DURING THE YEAR 31-3-2002 ` `` ` .32.70 CRORES HAVE BEEN WRITTEN BACK FROM GENERAL RESERVE AS ADJUSTMENT AGAINST ADVANCE TO GPEL WRITTEN OFF. THE GENERAL RESERVES HAVE BEEN CREATED OUT OF PROFIT CONSIDERED FOR MAT COMPUTATION IN PRIOR YEARS. DETAILS OF TRAN SFER TO GENERAL RESERVES OUT OF SUCH PROFIT ARE AS UNDER: YEAR ENDED PROFIT TAKEN FOR TRANSFER TO GENERAL MAT COMPUTATION RESERVE RUPEES IN CRORES 31-3-2001 25.42 10.00 31-3-2000 76.06 15.00 31-3-1999 31.08 TOTAL 35.00 59 OUT OF THIS 35 CRORES, RS.32.70 CRORES WAS WRITTEN BACK IN THE YEAR ENDED 31-3-2002. 65. AFTER CONSIDERING THE ABOVE, BE OBSERVED THAT T HE ABOVE AMOUNTS WERE NOT CONSIDERED WHILE COMPUTING THE BOO K PROFITS UNDER SECTIONS 115JA AND 115JB BECAUSE TAX WAS PAID UNDER THE NORMAL PROVISIONS OF THE ACT AS PER THE RETURNS FILED AND ASSESSMENTS MADE FOR THOSE YEARS. HENCE, MAT WAS NOT SUFFERED ON THE RES ERVE WRITTEN BACK AMOUNTING TO ` `` ` .32.70. NO PART OF THE GENERAL RESERVE CREATED BY DEBITING THE PROFIT & LOSS ACCOUNT FOR THOSE YEARS WHICH WAS UTILIZED IN THIS YEAR FOR MEETING THE LIABILITY ARISING FROM TH E WRITE OFF OF ADVANCES TO GPEL COULD HAVE BEEN REDUCED FROM THE PROFITS BY VIRTUE OF PROVISO TO THE SAID EXPLANATION. HE ALSO REFERRED TO THE DE CISION OF THE HONBLE SUPREME COURT IN THE CASE REPORTED IN 255 ITR 273 WHEREIN IT WAS HELD THAT IN THE CONTEXT OF COMPUTATION OF BOOK PROFITS U/S.115J NO ADJUSTMENT OTHER THAN PROVIDED IN THE STATUTE COULD BE MADE TO THE BOOK PROFITS SINCE PROVISIONS OF SECTIONS 115JA AND 115JB ARE OF SIMILAR NATURE. ACCORDINGLY, HE REJECTED THE CLAIM OF REDUC TION OF THE SUM OF ` `` ` .32,69,65,165/- FROM THE BOOK PROFITS. 66. ON APPEAL, LD. CIT(A) ALLOWED THE CLAIM VIDE PA RA-18 OF HIS ORDER AND THE RELEVANT PORTION IS AS UNDER: 18 ON GOING THROUGH THESE PAGES, HOWEVER, I FIND THAT THE STRESS APPLIED BY THE AO IS ON ALLOWABILITY OF THIS EXPEND ITURE AS A GENUINE BUSINESS EXPENDITURE WHICH HAS ALREADY BEEN DISCUSS ED EARLIER. THE AO HAS NOT GONE INTO THE DETAILS AS TO HOW AN AMOUN T TRANSFERRED FROM RESERVES CREATED OUT OF THE PROFITS OF EARLIER YEAR S CAN BE TREATED AS BOOK PROFIT FOR THE PURPOSE OF LEVYING TAX UNDER TH E MAT PROVISION UNDER SEC.115JB. ONE HAS TO GO INTO PLAIN UNDERSTAN DING OF THE MAT PROVISIONS. THE MINIMUM ALTERNATIVE TAX WAS IMPOSED ON CERTAIN 60 COMPANIES WHERE THE TAXABLE INCOME WAS REDUCED BECA USE OF VARIOUS DEDUCTIONS UNDER THE IT ACT. THE SPECIFIC MANNER OF COMPUTATION OF THE BOOK PROFIT BY MAKING CERTAIN ADDITIONS TO THE BOOK PROFIT AND CERTAIN EXCLUSIONS HAVE BEEN SPECIFICALLY PROVIDED UNDER TH E ACT. ON PLAIN READING OF THE SECTION, THERE IS NO ADDITION IN RES PECT OF ANY WITHDRAWAL OR TRANSFER FROM AN EARLIER YEARS RESERVE. BOTH FA CTUALLY AND LEGALLY SUCH A SITUATION CANNOT ARISE FOR THE SIMPLE REASON THAT AN AMOUNT EXISTING IN AN EARLIER YEARS RESERVE IS NOTHING BU T THE POST-TAX PAID PROFIT OF THE COMPANY OF EARLIER YEARS. ALL INCOME THAT HAS ALREADY SUFFERED TAX EITHER UNDER THE GENERAL PROVISIONS OR UNDER THE MAT PROVISIONS CANNOT BE TAXED AGAIN. I FULLY AGREE WIT H THE APPELLANT THAT THE ADDITION MADE BY THE AO OF THIS AMOUNT TO THE B OOK PROFIT UNDER SECTION 115JB IS INCORRECT AND THE APPEAL ON THIS P OINT IS ALLOWED. 67. BEFORE US, LD. CIT DR SUBMITTED THAT THIS AMOUN T IS NOT PART OF PROFIT & LOSS ACCOUNT AMOUNT AND THEREFORE, SAME CO ULD NOT HAVE BEEN REDUCED AND IN THIS REGARD HE RELIED ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT 255 ITR 273. 68. ON THE OTHER HAND, LD.COUNSEL OF THE ASSESSEE S UBMITTED THAT THE CLAIM FOR REDUCTION OF AMOUNTS WRITTEN BACK FRO M GENERAL RESERVE HAS BEEN MADE UNDER EXPLANATION 1 CLAUSE (I) TO SEC .115JB(2). HE THEN REFERRED TO PAGE-50 OF THE ANNUAL ACCOUNTS, COPY OF WHICH IS PLACED ON RECORD, AND POINTED OUT THAT BEFORE ARRIVING AT THE FINAL PROFIT THIS SUM WAS CREDITED FROM GENERAL RESERVE AND THIS WAS UTIL IZED FOR WRITING OFF THE CLAIM ON ACCOUNT OF GPEL AND THAT IS WHY THE FI NAL FIGURE IS ZERO. THIS HAS BEEN DONE IN ACCORDANCE WITH THE BOARDS R ESOLUTION PASSED ON 26-6-2002 WHICH HAS BEEN DISCUSSED BY US WHILE A DJUDICATING GROUND NO.4 AND IN THAT RESOLUTION IT WAS RECOMMEND ED TO WRITE OFF THE SUM OF ` `` ` .32.70 CRORES. IT WAS FURTHER RECOMMENDED THAT THIS AMOUNT SHOULD BE WITHDRAWN FROM THE GENERAL RESERVE . ACCORDINGLY, SAME ACTION WAS TAKEN AND THE AMOUNTS HAVE BEEN DUL Y REFLECTED IN 61 THE PROFIT & LOSS ACCOUNTS NOTE B-3 WHICH IS CONTA INED AT PAGE 54 OF THE PAPER BOOK EXPLAINING THE MATTER. 69. HE ARGUED THAT THIS REDUCTION WAS MAINLY DISALL OWED BY THE AO BECAUSE SAME WAS NOT CONSIDERED WHILE COMPUTING THE BOOK PROFITS FOR A.YRS. 1999-2000 TO 2000-01 BECAUSE IN THOSE YEARS ASSESSEE SUFFERED TAX UNDER THE NORMAL PROVISIONS. HE THEN REFERRED T O THE PROVISIONS OF SEC.115JB(2) AND POINTED OUT THAT EVERY ASSESSEE IS REQUIRED TO PREPARE THE ACCOUNTS IN ACCORDANCE WITH THE PROVISI ONS OF PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT, 1956. THE ACCOUNTS OF THE COMPANY HAVE BEEN PREPARED IN ACCORDANCE WITH SEC.2 11 OF THE COMPANIES ACT AND AS PER THE REQUIREMENTS OF SCHEDU LE VI IN PARTS II AND III THE AMOUNT OF ` `` ` .32.69 CRORES HAS BEEN DULY CREDITED FROM GENERAL RESERVE BUT BEFORE THAT THERE IS A WRITE OF F OF THE SUM OF ` `` ` .32.69 CRORES AND THAT IS WHY THE SAME HAS BECOME N IL, BUT THE SAME IS STILL ALLOWED TO BE REDUCED IN VIEW OF CLAUSE (I ) OF EXPLANATION 1 TO SEC.115JB(2). HE SUBMITTED THAT DETAILS REGARDING T HE RESERVE BEING CREATED OUT OF THE PROFITS WERE SUBMITTED BEFORE TH E AO AND THAT EXPLANATION HAS BEEN REJECTED MERELY ON THE BASIS T HAT IN THOSE YEARS THE COMPANY SUFFERED TAX UNDER NORMAL PROVISIONS AN D NOT UNDER THE PROVISIONS OF SECTIONS 115JA AND 115JB. HE ARGUED T HAT THE BASIC PURPOSE OF ENACTMENT OF SECTIONS 115J, 115JA AND 1 15JB WAS TO BRING TO TAXATION THOSE COMPANIES WHICH WERE THOUGH DECLA RING PROFITS AND ALSO DISTRIBUTION DIVIDENDS BUT WERE NOT PAYING TAX ES IN VIEW OF THE DEDUCTIONS CLAIMED UNDER VARIOUS PROVISIONS OF THE ACT. THE MAT 62 CONCEPT WAS BASICALLY TO LEVY SOME TAX ON THE SO CA LLED ZERO TAX COMPANIES. 70 HE SUBMITTED THAT AS OBSERVED IN ASSESSEES CASE REPORTED AT 255 ITR 273 AO HAS NO POWER TO CHANGE NET PROFITS E XCEPT IN THE CIRCUMSTANCES PRESCRIBED UNDER THE ACT ITSELF. THES E OBSERVATIONS HAVE BEEN LATER ON FOLLOWED BY THE HONBLE SUPREME COUR T IN THE CASE OF MALAYALA MANORAMA CO. LTD. VS. CIT [300 ITR 251]. 71. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS CAREFULLY AND FIND FORCE IN THE SUBMISSIONS LD. COUNSEL OF THE AS SESSEE. THE RELEVANT PORTION OF PROFIT & LOSS ACCOUNT READS AS UNDER: PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 2002 SCHEDULE YEAR ENDED 3 1 ST MARCH, 2002 ` `` ` ./CRS ------------------------ INCOME SALES 8 1,710.14 OTHER INCOME 2.61 1,712.75 ======= EXPENDITURE MANUFACTURING AND OTHER EXPENSES 9 1,177.64 (INCREASE)/DECREACE IN WORK IN PROCESS AND FINISHED GOODS 10 61.05 INTEREST 54.14 EXCISE DUTY 11 322.84 1,625.67 PROFIT BEFORE DEPRECIATION & TAX DEPRECIATION FOR THE YEAR 33.20 TRANSFER FROM REVALUATION RESERVE (0.87) 32.33 PROFIT BEFORE TAX & EXCEPTIONAL ITEMS 54.7 5 EXCEPTIONAL ITEM: ADVANCES TO GPEL WRITTEN OFF (NOTE B-3) 32.70 PROVISION FOR REDUCTION IN THE VALUE OF INVESTMENT S TRANSFER FROM GENERAL RESERVE/INVESTMENT FLUCTUATION RESERVE (32.70) 0.00 63 54.75 PROFIT BEFORE TAX PROVISION FOR TAX CURRENT 12.35 PROFIT AFTER CURRENT TAX 42.40 PROVISION FOR TAX DEFERRED (NOTE B-7) 5.59 PROFIT AFTER TAX 36.81 THE RELEVANT NOTE B-3 WHICH HAS BEEN GIVEN AS NOTES ON ACCOUNTS IN SCHEDULE XII READS AS UNDER: GUJARAT PERSTROP ELECTRONICS LTD. (GPEL ) A COMPAN Y PROMOTED BY APOLLO TYRES LTD. HAS BEEN REGISTERED AS A SICK INDUSTRIAL UNIT UNDER THE PROVISIONS OF SICK INDUSTRIAL COPNAIES (SPECIAL PROVISIONS) ACT, 1985. THE COMPAN Y, AS PRINCIPAL GUARANTOR AND MAIN PROMOTER HAS ADVANCED RS .32.70 CRORES TO FINANCIAL INSTITUTIONS AND BANKS O F GPEL TOWARDS ONE TIME SETTLEMENT OF THEIR DUES AS WELL AS TOWARDS WORKING CAPITAL REQUIREMENTS OF GPEL IN ACCORDANCE WITH THE DRAFT REHABILITATION SCHEME WHICH WAS FINALLY APPROVED BY THE GUJARAT HIGH COURT/BIFR DUR ING THE YEAR. THE SAID ADVANCES OF 32.70 CRORES HAVE BEEN WRITTEN OFF TO THE PROFIT AND LOSS ACCOUNT AS THE COMPANY IS NOT HOPEFUL OF THEIR RECOVERY AND AN EQUIVALENT AMOUNT HAS BEEN TRANSFERRED FROM GENERAL RESERVE. THE ABOVE CLEARLY SHOWS THAT A SUM OF ` `` ` .32.70 CRORES WAS WRITTEN OFF ON ACCOUNT OF PAYMENT AS GUARANTEES ETC. WITH RESPE CT TO GPEL WHICH WE HAVE ALREADY DISCUSSED IN DETAIL WHILE ADJUDICAT ION GROUND NO.4. THIS AMOUNT WAS TO BE WITHDRAWN FROM THE GENERAL RE SERVE OF THE EQUIVALENT AMOUNT. THEREFORE, IT CANNOT BE SAID THA T THIS WITHDRAWAL IS NOT PART OF THE PROFIT & LOSS ACCOUNT. THE WITHDRAW AL IS VERY MUCH PART OF THE PROFIT & LOSS ACCOUNT AND HAS BEEN SPECIFICA LLY MET FOR WRITE OFF OF GPEL ACCOUNT. CLAUSE (I) TO EXPLANATION 1 TO SEC .115JB READS AS UNDER: SEC.115JB: EXPLANATION [ 1 ].FOR THE PURPOSES OF THIS SECTION, BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCO UNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS IN CREASED BY A) B) C) D) 64 E) F) G) H) I) .. IF ANY AMOUNT REFERRED TO IN CLAUSES ( A ) TO ( I ) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY, ( I ) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVISI ON (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL, 1997 O THERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO AN ASSESSE E IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERVES C REATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 1997 S HALL NOT BE REDUCED FROM THE BOOK PROFIT UNLESS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREASED BY THOSE RESERVES OR PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WITHDRAWN) UNDER THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO SECTION 115JA , AS THE CASE MAY BE; OR] THE ABOVE CLEARLY SHOWS THAT ANY AMOUNT WITHDRAWN F ROM ANY RESERVE IS TO BE ALLOWED TO BE REDUCED. HOWEVER, PROVISO TO ABOVE CLAUSE PUTS A RESTRICTION THAT SUCH REDUCTION IS PERMITTED ONLY IF SUCH AMOUNTS WERE ADDED BACK TO THE BOOK PROFITS IN THE EARLIER YEAR. BEFORE THE AO THE DETAILS OF RESERVE CREATED IN EARLIER YEARS WERE AL SO FILED. THESE GENERAL RESERVES WERE STATED TO BE RESERVES WHICH WERE CREA TED AFTER DEBITING THE PROFIT & LOSS ACCOUNT. HOWEVER, AO HAS REJECTED THE SAME ON THE PREMISE THAT STRICTLY SPEAKING THE SAME HAS NOT BEE N ADDED TO THE BOOK PROFITS BECAUSE IN THOSE YEARS ASSESSEE SUFFER ED TAX UNDER THE NORMAL PROVISIONS. THIS IS NOT THE CORRECT WAY OF I NTERPRETING THE CONCEPT OF MAT. THE MAT PROVISIONS SECTIONS 115JA A ND 115JB WERE INTRODUCED IN THE STATUTE BECAUSE CERTAIN COMPANIES WHICH ARE ALSO KNOWN AS ZERO TAX COMPANIES WERE THOUGH DECLARING P ROFITS IN THE 65 BOOKS AND WERE ALSO PAYING DIVIDENDS BUT BECAUSE OF DEDUCTIONS PRESCRIBED UNDER THE ACT NOT TAX WAS BEING PAID. TO AVOID THAT SITUATION, MINIMUM ALTERNATE TAX WHAT IS NOW GENERA LLY KNOWN AS MAT WAS PRESCRIBED SO THAT EVEN ZERO TAX COMPANIES PAID SOME AMOUNT OF TAX. THEREFORE, IF A COMPANY HAS SUFFERED TAX UNDER THE NORMAL PROVISIONS WHICH IS NATURALLY HIGHER TO THE 30% OF THE BOOK PROFITS, THEN IT IS NOT NECESSARY THAT SUCH COMPANY SHOULD S IMULTANEOUSLY BE LEVIED MAT ALSO BECAUSE THAT WOULD AMOUNT TO DOUBLE TAXATION. THEREFORE THE PROFITS WHICH HAVE ALREADY SUFFERED T AX UNDER THE NORMAL PROVISIONS AND WERE CREDITED TO THE GENERAL RESERVE ARE NOW WITHDRAWN TO MEET THE ASSESSEES LIABILITIES, THE SAME HAS TO BE REDUCED EVEN FROM THE BOOK PROFITS SO THAT THE PROFITS TAXED EAR LIER DO NOT SUFFER TAX AGAIN AND THAT IS WHY THE LEGISLATURE HAS PROVIDED THE REDUCTION OF AMOUNTS WITHDRAWN FROM RESERVE UNDER CLAUSE (I) OF EXPLANATION 1 TO SEC.115JB. 72. INTERESTINGLY, AO AND LD. CIT DR AS WELL AS THE LD.COUNSEL OF THE ASSESSEE HAVE ALL RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT [SUPRA]. T HEREFORE, WE DEEM IT FIT TO DISCUSS THAT DECISION BECAUSE IT CANNOT SUPP ORT BOTH SIDES. IN THAT CASE THE ISSUE IS REGARDING COMPUTATION OF BOOK PRO FITS ARISING IN THE FOLLOWING MANNER: THE ASSESSING OFFICER WHILE COMPUTING THE INCOME U NDER S. 115J HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF AC COUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES AC T AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIE S ACT. THE ASSESSING OFFICER THEREAFTER HAS THE LIMITED POWER OF MAKING 66 INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXP LANATION TO SECTION 115J. THE AO DOES NOT HAVE THE JURISDICTION TO GO B EHIND THE NET PROFIT SHOWN IN THE PROFIT & LOSS ACCOUNT EXCEPT TO THE EX TENT PROVIDED IN THE EXPLANATION. THE USE OF THE WORDS 'IN ACCORDANCE WI TH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT' IN SEC.115J WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING OFFICER TO RELY UPON THE AUTHENTIC STATEMENT OF AC COUNTS OF THE COMPANY. WHILE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT, W HICH OBLIGATE THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A PROVIDED BY T HAT ACT AND THE SAME TO BE SCRUTINIZED AND CERTIFIED BY THE STATUTO RY AUDITORS APPROVED BY THE COMPANY IN GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLI GATION ALSO TO EXAMINE AND BE SATISFIED THAT THE ACCOUNTS OF THE C OMPANY ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF T HE COMPANIES ACT. SUB-SECTION (1A) OF SECTION 115J DOES NOT EMPO WER THE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY . ON THE BASIS OF THE ABOVE, HONBLE SUPREME COURT HE LD AS UNDER: HELD ACCORDINGLY, THAT WHILE DETERMINING THE BOOK PROFITS UNDER SECTION 115J, THE ASSESSING OFFICER COULD NOT COMPU TE THE PROFITS IN THE PROFIT & LOSS ACCOUNT BY EXCLUDING PROVISIONS M ADE FOR ARREARS OF DEPRECIATION. THUS, FROM THE ABOVE, IT IS CLEAR THAT HONBLE SUPR EME COURT HAS LAID DOWN A VERY SIMPLE PRINCIPLE THAT NORMALLY THE ASSE SSING AUTHORITY IS BOUND TO ASSESS ACCOUNTS PREPARED AS PER THE REQUIR EMENTS OF PARTS II AND III OF SCHEDULE VI OF THE COMPANIES ACT AND THE BOOK PROFITS DECLARED THEREIN CANNOT BE TINKERED WITH EXCEPT IN THE CIRCUMSTANCES PRESCRIBED UNDER THE ACT. NOW EXPLANATION 1 PRESCRI BES VARIOUS ADJUSTMENTS BY WHICH PROFITS CAN BE INCREASED AS WE LL AS DECREASED. NOW WHEN CLAUSE (I) OF EXPLANATION 1 TO SEC.115JB W HICH WE HAVE ALREADY REPRODUCED ABOVE SPECIFICALLY PROVIDES FOR REDUCTION OF THE AMOUNTS WITHDRAWN FROM ANY RESERVE OR PROVISION, TH EN SUCH AMOUNTS HAVE TO BE REDUCED FROM THE BOOK PROFITS UNLESS IT IS HIT BY THE PROVISO TO THAT CLAUSE. ADMITTEDLY, THE PROFITS CREDITED IN EARLIER YEAR HAVE 67 ALREADY SUFFERED TAX THOUGH UNDER NORMAL PROVISIONS AND, THEREFORE, SAME IS NOT HIT BY THE PROVISO. IN THESE CIRCUMSTAN CES, WE ARE OF THE VIEW, THAT ASSESSEE HAS CORRECTLY REDUCED THE AMOUN T OF GENERAL RESERVE WHICH WAS DULY WITHDRAWN AND REFLECTED IN T HE PROFIT & LOSS ACCOUNT. IN THESE CIRCUMSTANCES, WE CONFIRM THE ORD ER OF THE LD. CIT(A). 73. GROUND NO.8 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURING ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSES SEE HAD DEBITED A SUM OF ` `` ` .1,24,73,244/- TO PROFIT & LOSS ACCOUNT UNDER THE S UB-HEAD PROVISION FOR DIMINUTION/REDUCTION IN THE VALUE OF INVESTMENTS UNDER THE HEAD MANUFACTURING AND OTHER EXPENSES AS PER SCHEDULE-9. THIS WAS ADDED BACK WHILE COMPUTING THE TOTAL INCOME UND ER THE NORMAL PROVISIONS OF THE ACT. HOWEVER, IT WAS NOT ADDED TO THE NET PROFIT WHILE COMPUTING THE BOOK PROFITS U/S.115JB. ON ENQUIRY IT WAS SUBMITTED THAT THIS SUM COULD NOT BE DISALLOWED UNDER ANY ITE MS OF (A) TO (F) MENTIONED IN EXPLANATION TO SEC.115JB. IT WAS FURTH ER SUBMITTED THAT DIMINUTION IN THE INVESTMENT COULD NOT BE A PROVISI ON MADE FOR MEETING LIABILITIES AND THE PROVISION WAS TOWARDS R EDUCTION OF THE VALUE OF INVESTMENT. AO DID NOT ACCEPT THIS ARGUMENT AND BY FOLLOWING THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CA SE OF DCIT VS. BEARDSELL LTD. 162 CTR 467, WHEREIN IT WAS OBSERVED THAT PROVISION FOR DOUBTFUL DEBTS COULD BE CONSIDERED AS AN AMOUNT TOW ARDS UNASCERTAINED LIABILITY. HE ADDED THIS SUM TO THE B OOK PROFITS COMPUTED U/S.115JB. 68 74. ON APPEAL, LD. CIT[A] DECIDED THIS ISSUE VIDE P ARA-20 WHICH IS AS UNDER: 20. THE NEXT GROUND RELATE TO THE AO ADDING BACK P ROVISION MADE OR DEDUCTION IN RESPECT OF VALUE OF INVESTMENTS AMO UNTING TO ` `` ` .1,24,73,244/- FOR SEC.115JB. THIS IS DEALT IN PARA 3(II) OF PAGE 8 OF THE ASSESSMENT ORDER. THE AO HAS RELIED ON 219 ITR 388 & 706 WHERE THE APEX COURT HAS HELD THAT APPROPRIATION OF PROFIT FOR MEETING THE LOSS ON RECOVERY OF DEBTS CAN BE REGARDED AS A RESERVE BUT NOT AS A PROVISION. THE APPELLANT ON THE OTHER HAND HAS AR GUED THAT THESE PROVISIONS HAS BEEN AS PER THE ACCOUNTING STANDARD 13 OF THE INSTITUTE OF CAS AND IT MANDATORY FOR PREPARING ACCOUNTS AS P ER THE SCHEDULE VI TO THE COMPANIES ACT, WHICH RELATE TO COMPUTATIO N OF BOOK PROFIT. ONCE SUCH A PROVISION IS CREATED, IT CANNOT BE TREA TED AS AN UNASCERTAINED LIABILITY. A PROVISION IS NOT MEETING ANY LIABILITY. IT IS ONLY A REDUCTION IN CARRYING THE AMOUNT OF ASSET OR THE VALUE OF THE ASSET. IT HAS BEEN SO HELD IN THE ASSESSEES OWN CASE BY THE SUPREME COURT IN 255 ITR 725. I HAVE CAREFULLY EXAMINED THE FACTS AN D THE LEGAL POSITION. UNDER THE PROVISIONS OF SEC.115JB, ONLY S PECIFIC ITEMS AS PROVIDED HAS TO BE ADDED BACK TO THE BOOK PROFIT CO MPUTED UNDER SCHEDULE VI TO THE COMPANIES ACT. ONE OF THE AMOUNT S TO BE ADDED BACK IS IN EXPLANATION I.E. PROVISION FOR MEETING UNASCERTAINED LIABILITIES. AS DISCUSSED ABOVE, THIS IS NOT AN UNA SCERTAINED LIABILITY AS PER THE ACCOUNTING STANDARDS APPLICABLE TO DETERMIN ATION OF A COMPANYS BOOK PROFIT. THE AO CANNOT MAKE ANY ADHOC DISALLOWANCE. I, THEREFORE, HOLD THAT THE ASSESSEE IS ENTITLED TO THIS DEDUCTION. THE APPEAL ON THIS POINT IS ALLOWED. 75. BEFORE US, LD. CIT DR SUBMITTED THAT ANY PROVIS ION, EVEN TOWARDS REDUCTION IN THE VALUE OF INVESTMENT, HAS T O BE CONSIDERED AS A PROVISION FOR UNASCERTAINED LIABILITY AND, ACCORD INGLY, SHOULD BE ADDED BACK TO THE BOOK PROFITS. HE STRONGLY SUPPORTED THE ORDER OF THE AO. 76. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IT IS NOT A CASE OF PROVISION, WHICH IS CLEAR FROM THE FIGURES GIVEN BY THE AO AT THE STARTING OF PARA-3 OF HIS ASSESSMENT ORDE R WHERE NO SUM EQUIVALENT TO ` `` ` .1,24,73,244/- IS SHOWN. ACTUALLY THE AMOUNT WAS SI MPLY WRITTEN OFF AND IT WAS NOT A CASE OF PROVISION. THE AMOUNT WAS DEBITED TO THE PROFIT & LOSS ACCOUNT AND CREDITED TO THE CO RRESPONDING ASSET 69 ACCOUNT AND THE SAME IS IN CONFORMITY WITH THE ACCO UNTANT STANDARD 13 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS AS WELL AS RULE 6 OF THE COMPANIES ACT. 77. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. THE FIGURE IN RESPECT OF WHICH BOOK PROFIT GIVEN BY THE AO AT THE STARTING OF PARA- 3 IS AS UNDER: THE COMPUTATION OF THE BOOK PROFIT U/S.115JB AS PE R THE REVISED RETURN WAS IN THE FOLLOWING MANNER: NET PROFIT AS PER P&L ACCOUNT ` `` ` .36,80,96,430 ADD: PROVISION FOR TAX ` `` ` .17,94,62,418 ` `` ` .54,75,58,848 LESS: DIVIDEND INCOME U/S.10(33) 10,59,119 AMOUNT WITHDRAWN FROM RESERVE 32,69,65,146 AMOUNT WITHDRAWN FROM FIXED ASSET REVALUATION RESERVE 87,09,140 AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U/S.80HHC 3,33,459 ` `` ` .33,70,66,864 BOOK PROFIT ` .21,04,91,984 FROM THE ABOVE, IT IS CLEAR THAT THERE IS NO FIGURE OF ` `` ` .1,24,73,244/-. THEREFORE, IT IS NOT CLEAR AS TO HOW THE AO HAS CON SIDERED THIS FIGURE AS PROVISION. SINCE THE ORDER OF THE LD. CIT[A] IS ALS O NOT CLEAR ON THIS FACT, THEREFORE, IN THE INTERESTS OF JUSTICE, WE SET ASID E THE ORDER OF THE CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY WHETHER IT IS A CASE OF ACTUAL WRITE OFF OR PROVISION AND THEN DECIDE THE ISSUE IN ACCORDANCE WITH LAW. ACCORDINGL Y, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 78. GROUND NO.9 : THIS ISSUE IS IDENTICAL TO THE ISSUE DECIDED BY U S VIDE PARA-17 WHILE ADJUDICATING GROUND NO.3. BOTH T HE PARTIES MADE SIMILAR ARGUMENTS. THEREFORE, FOLLOWING THAT ORDER WE SET ASIDE THIS 70 ISSUE ALSO TO THE FILE OF THE AO AND DECIDE THE SAM E IN VIEW OF THE DIRECTIONS CONTAINED IN ABOVE PARA-17. 79. GROUND NO.10 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT WHILE COMPUTING THE PROFITS AO NOTICED THAT ASSESSE E HAD DEBITED THE FOLLOWING AMOUNTS IN THE PROFIT & LOSS ACCOUNT ON A CCOUNT OF PROVISIONS: (A) PROVISION FOR BONUS TO THE EXTENT TO WHICH IT WAS IT WAS REVERSED IN THE SUBSEQUENT YEAR DUE TO NON EXISTENCE OF THE LIABILITY ` `` ` .27,24,504/- (B) PROVISION FOR LEAVE ENCASHMENT NOT PAID ` `` ` .13,00,802/- SUBSEQUENTLY (C) PROVISION FOR GRATUITY REVERSED FULLY IN THE ` .72,58,101/- SUBSEQUENT YEAR DUE TO THE NONEXISTENCE OF THE LIABILITY TOTAL ` `` ` .112,83,407 HE WAS OF THE VIEW THAT AS FOR AS PROVISION FOR BON US IS CONCERNED, THE SAME HAS ALREADY BEEN REVERSED IN THE SUBSEQUENT YE AR DUE TO NON EXISTENCE OF LIABILITY WHICH CLEARLY SHOWS THAT THI S PROVISION WAS TOWARDS UNASCERTAINED LIABILITY. ACCORDINGLY, HE AD DED BACK THE SUM OF ` `` ` .1,12,83,407/- TO THE BOOK PROFITS OF THE ASSESSEE. 80. ON APPEAL, LD. CIT[A] ALLOWED THE RELIEF ON THE SE ITEMS VIDE PARAS 21 WHICH IS AS UNDER: 21. THE SAME ARGUMENTS HOLDS GOOD FOR GROUND NOS.1 9, 20 & 21 RELATING TO ADDING BACK OF ` `` ` .2724504/- BEING PROVISION FOR BONUS, ` `` ` .1300802/- BEING PROVISION FOR LEAVE ENCASHMENT OF ` `` ` .7258101/- BEING PROVISION FOR GRATUITY. THE APPEALS ON THESE POINTS ARE ALSO ALLOWED. 71 81. BEFORE US, LD. CIT DR SUBMITTED THAT CLEARLY TH ESE PROVISIONS HAVE BEEN MADE FOR UNASCERTAINED LIABILITIES. HE FU RTHER SUBMITTED THAT AS FAR AS PROVISION FOR BONUS IS CONCERNED, THE SAM E HAS BEEN REVERSED IN NEXT YEAR DUE TO NON EXISTENCE OF THE LIABILITY. HE ARGUED THAT EVEN LEAVE ENCASHMENT PROVISION AS WELL AS PROVISION OF GRATUITY ARE ALSO CANNOT BE SAID TO BE FOR ASCERTAINED LIABILITIES AN D, THEREFORE, SAME HAS BEEN CORRECTLY ADDED BACK TO THE BOOK PROFITS BY TH E AO. 82. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT ALL THESE LIABILITIES HAVE ACTUALLY BEEN INCURRED. THE LIABILITY OF BONUS IS CALCULATED ON THE BASIS OF ACTUAL PAYMENT OF BONUS FOR WHICH ACTUAL PAYMENTS HAVE ALSO BEEN MADE IN THE NEXT YEAR ON TH E EVE OF ONAM. SIMILARLY, LIABILITY FOR LEAVE ENCASHMENT AND GRATU ITY HAS BEEN DETERMINED ON THE BASIS OF ACTUARIAL VALUATION AND, THEREFORE, SAME CANNOT BE SAID TO BE AN UNASCERTAINED LIABILITY. IN THIS REGARD HE REFERRED TO THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT 245 ITR 428. 83. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. WE ARE UNABLE TO AGREE WITH THE SUBMISSIONS OF THE LD. DR. NORMALLY BONUS WILL BE CALCULATED ON THE BASIS OF ENTITLEMENT OF EACH O F EMPLOYEE. SIMILARLY, ONCE LEAVE ENCASHMENT AND GRATUITY HAS B EEN ASCERTAINED ON THE BASIS OF ACTUARIAL VALUATION, THEN IT CANNOT BE SAID THAT THESE ARE UNASCERTAINED LIABILITIES. THE HON'BLE SUPREME COUR T IN THE CASE OF BHARAT EARTH MOVERS VS. CIT [SUPRA] HAS HELD AS UND ER: 72 HELD, REVERSING THE DECISION OF THE HIGH COURT, THAT THE PROVISION MADE BY THE ASSESSEE COMPANY FOR MEETING THE LIABI LITY INCURRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WIT H THE ENTITLEMENT EARNED BY EMPLOYEES OF THE COMPANY, INC LUSIVE OF THE OFFICERS AND THE STAFF, SUBJECT TO THE CEILING ON A CCUMULATION AS APPLICABLE ON THE RELEVANT DATE, WAS ENTITLED TO DE DUCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION IS MADE OF THE LIABILITY. THE LIABILITY IS NOT A CONTI NGENT LIABILITY. HOWEVER, WE FURTHER FIND THAT AO HAS PERHAPS NOT EX AMINED THE ISSUE IN DETAIL AND BEFORE US NO EVIDENCE HAS BEEN FILED SHOWING THAT LIABILITY ON ACCOUNT OF LEAVE ENCASHMENT AND GRATUITY WAS ON THE BASIS OF ACTUARIAL VALUATION. THEREFORE, IN THE INTERESTS OF JUSTICE, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BA CK TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE ACTUARIAL VALUATI ON AND IF THE SAME SHOW THE AMOUNTS CLAIMED BY THE ASSESSEE AS PROVISI ONS, THEN SAME SHOULD BE TREATED AS DEFINITE LIABILITY IN THE LIGH T OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH M OVERS [SUPRA] AND SHOULD NOT BE ADDED BACK TO THE BOOK PROFITS. OTHER WISE AO MAY DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 84. GROUND NO.11 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF EK TA PROMOTERS PVT. LTD. 305 ITR (AT) 1 (DEL) (S.B) AS WELL AS THE DECI SION OF THE HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS. KERALA CHE MICALS & PROTEINS LTD. 323 ITR 584 WHEREIN IT WAS HELD AS UNDER: HELD, THAT EVEN THOUGH REFUND WAS GRANTED WHILE SE NDING INTIMATION U/S. 143(1) ON JUNE 28, 2000 AND REGULAR ASSESSMENT U/S. 143(3) WA S COMPLETED CONVERTING THE REFUND TO DEMAND OF TAX ON JANUARY 22, 2004, INTEREST COULD BE DEMANDED ONLY FOR THE PERIO D FROM JUNE 1, 2003 TILL JANUARY 22, 2004. 73 SINCE IN THE CASE BEFORE US REFUND WAS ISSUED PRIOR TO 1-6-2003, THE INTEREST U/S.234D CANNOT BE CHARGED BEFORE 1-6-2003 . THEREFORE, WE FIND NOTHING WRONG IN THE ORDER OF THE CIT[A] AND C ONFIRM THE SAME. 85. IN THE RESULT REVENUES APPEAL IS PARTLY ALLOWE D. 86. C.O.NO.75/COCH/ : IN THIS CROSS OBJECTION THE ASSESSEE HAS RAISED THE FOLLOWING GROUND: BONUS RELATING TO THE FINANCIAL YEAR ENDED 31-3-02 (A.Y 02-03) WHICH WAS PAID DURING THE FINANCIAL YEAR ENDED 31-3-03 AN D BEFORE THE DUE DATE OF FILING OF INCOME TAX RETURN FOR THE ASSESSM ENT YEAR 2002-03, WAS CLAIMED IN THE ASST. YEAR 2003-04 AND WAS ALLOW ED BY THE COMMISSIONER OF INCOME TAX [APPEALS] IN ASST. YEAR 2003-04 [PARA 8 OF THE COMMISSIONER OF INCOME TAX [APPEALS] FOR A. Y 03-04]. IF FOR ANY REASON THE SAID DECISION IS REVERSED, SUCH AMOUNT M AY BE ALLOWED IN ASSESSMENT YEAR 02-03. 87. AFTER HEARING BOTH THE PARTIES, WE FIND THAT TH IS ISSUE HAS ALREADY BEEN ADJUDICATED BY US WHILE ADJUDICATING G ROUND NO.5 OF THE REVENUES APPEAL WHEREIN WE HAVE ALLOWED THE CLAIM FOR PAYMENT OF BONUS VIDE PARAS 55 TO 57. IN VIEW OF THAT DECISION , THE CROSS OBJECTION HAS BECOME INFRUCTUOUS. THEREFORE, THE SAME IS DISM ISSED ACCORDINGLY. 88. IN THE RESULT, CROSS OBJECTION IS DISMISSED AS INFRUCTUOUS. 89. I.T.A.NO.377/COCH/2006 :IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APP EALS)-II, KOCHI IN APPEAL NO.24, 25, 26 & 27//R-I/CIT-II/08-0 9 DATED 30- 03-2009 IS OPPOSED TO LAW, WEIGHT OF EVIDENCE, FACT S AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT DG POWER GENERATION UNITS I & II CONST ITUTED AN UNDERTAKING IN TERMS OF SUB-SECTION 4(IV) OF SECT ION 80IA OF THE INCOME TAX ACT. HE OUGHT TO HAVE HELD THAT NO U NDERTAKING ELIGIBLE FOR DEDUCTION UNDER SECTION 80IA WAS IN EX ISTENCE. 74 90. AS OBSERVED WHILE ADJUDICATING I.T.A.NO.298/COC H/2009, THE ASSESSMENT WAS REOPENED FOR RECONSIDERATION WHETHER ASSESSEE IS ENTITLED TO DEDUCTION U/S.80IA FOR THE POWER GENERA TION UNITS. AFTER EXAMINING THE FACTS DEDUCTION WAS DENIED MAINLY ON THE BASIS THAT NO SEPARATE UNDERTAKING EXISTED AND THE POWER GENERATE D FROM SUCH POWER UNIT HAS BEEN USED BY THE ASSESSEE IN ITS OWN PLANT I.E. POWER HAS BEEN USED FOR CAPTIVE CONSUMPTION. 91. BOTH THE PARTIES MADE SIMILAR ARGUMENTS WHICH W ERE MADE FOR I.T.A.NO.376/COCH/2009 AND SUBMITTED THAT THE SAME RESULT MAY BE ADOPTED HEREIN. 92. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THIS ISSUE HAS BEEN ADJUDICATED BY US IN I.T.A.NO.OCH/2009 VID E PARAS 52 TO 55 WHICH ARE AS UNDER: 52. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF THE MATERIAL ON RECORD INCLUDING THE DECISIONS CITED BY THE PARTIES. WE FIND THAT THERE IS SEPARATE UNDERTAKING AND THE POWER IS BEING CONSUMED BY THE ASSESSEE COMPANY ON A CAPTIVE BASIS IN ITS O WN TYRE MANUFACTURING UNIT. THE LD. CIT DR HAS EMPHASIZED T HAT NO SEPARATE UNDERTAKING HAS BEEN STARTED BUT IT HAS NOT BEEN D ENIED THAT NEW DG SETS WERE PURCHASED BY THE ASSESSEE COMPANY AND THE SAME WAS INSTALLED AFTER OBTAINING THE APPROVAL OF THE STATE ELECTRICITY BOARD. THUS THE DG SETS WERE PUT UP IN A SEPARATE BUILDING . THEREFORE, THE SAME CANNOT BE CALLED AS A RECONSTRUCTION OF THE OL D UNIT. THE HONBLE SUPREME COURT IN THE CASE OF TEXTILE MACHINERY CORP ORATION LTD. VS. CIT (SUPRA), WHILE DEALING WITH THE ISSUE OF RECONS TRUCTION, HAS OBSERVED AS UNDER:- RECONSTRUCTION OF BUSINESS INVOLVES THE IDEA OF SU BSTANTIALLY THE SAME PERSONS CARRYING ON SUBSTANTIALLY THE SAM E 75 BUSINESS. IT IS STATED ON BEHALF OF THE REVENUE TH AT THE SAME COMPANY IN THE INSTANT CASE CONTINUES TO DO THE SAM E BUSINESS OF HEAVY ENGINEERING NO MATTER CERTAIN S PARE PARTS NECESSARY AS COMPONENTS TO COMPLETION OF THE END PR ODUCT ARE NOW MANUFACTURED IN THE BUSINESS ITSELF. THE FACT THAT THE ASSESSEE IS CARRYING ON THE GENERAL BUSINESS OF HE AVY ENGINEERING WILL NOT PREVENT HIM FROM SETTING UP N EW INDUSTRIAL UNDERTAKINGS AND FROM CLAIMING BENEFIT U /S. 15C IF THAT SECTION IS OTHERWISE APPLICABLE. HOWEVER, IN ORDER TO BE ENTITLED TO THE BENEFIT U/S.15C THE FOLLOWING FACTS HAVE TO BE ESTABLISHED BY THE ASSESSEE, SUBJECT ALWAYS TO TIME -SCHEDULE IN THE SECTION. (1) INVESTMENT OF SUBSTANTIAL FRESH CAPITAL IN THE INDUSTRIAL UNDERTAKING SET UP, (2) EMPLOYMENT OF REQUISITE LABOUR THEREIN, (3) MANUFACTURE OR PRODUCTION OF ARTICLES IN THE SA ID UNDERTAKING, (4) EARNING OF PROFITS CLEARLY ATTRIBUTABLE TO THE SAID NEW UNDERTAKING, AND, (5) ABOVE ALL, A SEPARATE AND DISTINCT IDENTITY OF THE INDUSTRIAL UNIT SET UP. WE MAY ADD THAT THERE IS NO BAR TO AN ASSESSEE CARR YING ON A PARTICULAR BUSINESS TO SET UP A NEW INDUSTRIAL UNDE RTAKING ON ACCOUNT OF WHICH EXEMPTION OF TAX U/S. 15C MAY BE C LAIMED. IT HAS BEEN CLEARLY OBSERVED THAT EVEN IF THE COMMO DITIES PRODUCED BY THE NEW UNITS WERE CONSUMED BY THE OLD UNITS, EVEN THEN DEDUCTION UNDER SECTION 15C OF THE OLD ACT WERE ALLOWABLE. T HEREFORE, IN VIEW OF THE ABOVE OBSERVATION, THE ASSESSEES DG UNITS CANN OT BE CALLED RECONSTRUCTION OF THE OLD UNIT AND THEY ARE DEFINIT ELY NEW UNITS. 53. THE SECOND ASPECT WHICH HAS BEEN EMPHASIZED BY THE REVENUE IS THAT THERE IS NO SALE OF POWER TO ANY OU TSIDER. IN THIS REGARD, WE WOULD LIKE TO REFER TO THE BOARDS CIRCU LAR WHICH WAS ISSUED TO INDIAN MERCHANTS CHAMBERS WHICH IS AS UNDER:- MOST IMMEDIATE BY SPEED POST F.NO. 178/28/2001-I.T.A.1 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE CENTRAL BOARD OF DIR ECT TAXES NEW DELHI, THE 3 RD OCTOBER, 2001 76 TO, THE SECRETARY-GENERAL, INDIAN MERCHANTS CHAMBER, LNM IMV BUILDING, P.B. NO. 11211, CHURCHGATE, MUMBAI-400 020. SUBJECT: SECTION 80IAOF THE INCOME-TAX ACT, 1961- INDUSTRIAL UNDERTAKINGS ENGAGED IN THE BUSINESS OF GENERATION OF CAPTIVE POWER. SIR, I AM DIRECTED TO REFER TO YOUR LETTER NO. 362 DATED 23 RD MAY, 2001 ON THE ABOVE MENTIONED SUBJECT. 2. I AM DIRECTED TO SAY THAT BOARD EXAMINED THE ABOVE MATTER AND ARE OF THE VIEW THAT IF AN UNDERTAKING, WHICH IS S ET UP IN ANY PART OF INDIA FOR THE GENERATION OR GENERATION AND DISTRI BUTION OF POWER, BEGINS TO GENERATE POWER AT ANY TIME DURING THE PE RIOD BEGINNING ON THE 1 ST DAY OF APRIL 1993 AND ENDING ON THE 31 ST DAY OF MARCH, 2006 WILL BE ELIGIBLE FOR THE BENEFIT OF DEDUCTION U/S. 80-IA. IN CASE OF A CAPTIVE POWER UNIT, THE PROVISIONS OF LAW IS ALSO T HE SAME. 3. THERE MAY BE A CASE WHERE A CAPTIVE POWER PLANT IS SET UP BY AN UNDERTAKING WHICH IS DIFFERENT FROM THE UNDERTAKING MAKING USE OF THE POWER GENERATED. AS LONG AS THE TWO UNDERTAKINGS AR E DISTINCT AND SEPARATE AND THERE IS AN ELEMENT OF COMMERCIAL PROF IT AND GAINS BY THE POWER GENERATING UNDERTAKING FROM THE INDUSTRIA L USER, THE PROVISIONS OF THE ACT WITH REFERENCE TO THE BENEFIT OF DEDUCTION U/S. 80- IA TO SUCH UNDERTAKING, WOULD BE AVAILABLE, WITHIN THE FRAMEWORK OF LAW AND SUBJECT TO THE FOLLOWING:- (I) THE TAX HOLIDAY PROVISIONS U/S. 80-IA COME INT O EFFECT FROM THE DATE SUCH AN UNDERTAKING BEGINS TO GENERATE POWER. IN A CAPTIVE POWER PLANT, THE DATE OF GENERATION MAY REQUIRE DETERMIN ATION BY THE ASSESSING OFFICER WITH REFERENCE TO THE INITIAL DAT E ON WHICH SUCH CAPTIVE POWER PLANT STARTS GENERATION. (II) WHERE A CAPTIVE POWER PLANT IS MERELY HIVED OF F AS A SEPARATE ENTITY AND NOT SOLD TO A THIRD PARTY, OWING TO THE CLOSE C ONNECTION BETWEEN THE POWER GENERATING UNDERTAKING AND ITS INDUSTRIAL USER UNDERTAKING, THE TRANSACTIONS WOULD REQUIRE EXAMINATION AT THE L EVEL OF ASSESSING OFFICER TO ENSURE THAT THEY ARE ARMS LENGTH AND TH AT THE PROVISIONS OF SUB-SECTION (8) OF SECTION 80-IA ARE NOT ATTRACTED ADVERSELY. (III) ANY GRANT OF DEDUCTION U/S. 80IA OF THE INCOM E-TAX ACT, 1961 SHOULD NOT BE TAKEN TO LEGITIMIZE SOMETHING NOT PER MISSIBLE UNDER THE PROVISIONS OF THE ELECTRICITY SUPPLY ACT AND RELATE D LAWS OF VARIOUS STATES AND THE UNION. (IV) WHERE AN UNDERTAKING GENERATING CAPTIVE POWER FOR THE EXCLUSIVE USE OF ANOTHER INDUSTRIAL UNDERTAKING CLAIMS THE BE NEFIT OF DEDUCTION 77 U/S. 80IA, THE INDUSTRIAL USER UNDERTAKING WILL NOT BE ELIGIBLE FOR CLAIMING SIMILAR DEDUCTION IN RESPECT OF THE AFORES AID POWER GENERATING PLANT. FURTHER, THE USER UNDERTAKING SHO ULD ALSO NOT DEBIT THE EXPENDITURE INCURRED BY THE CAPTIVE POWER GENE RATING UNDERTAKING IN ITS OWN PROFIT AND LOSS A/C. SD/- UN DER SECRETARY TO THE GOVT. OF INDIA 54 . THE ABOVE VERY CLEARLY SHOWS PARTICULARLY PARA 3 TH AT EVEN IN THE CASE OF CAPTIVE POWER CONSUMPTION AS LONG AS IT IS A SEPARATE UNIT, DEDUCTION HAS TO BE ALLOWED. IN FACT THIS PRINCIPL E WAS LAID DOWN IN THE CASE OF TEXTILE MACHINERY CORPORATION LTD. VS. CIT (SUPRA) BY THE HONBLE SUPREME COURT ITSELF LONG BACK. IN ANY CAS E, AN IDENTICAL ISSUE REGARDING DEDUCTION UNDER SECTION 80IA IN RES PECT OF FOUR POWER UNITS WHEREIN POWER WAS USED IN THE ASSESSEES OWN UNITS FOR MANUFACTURING OF PAPER, CAME UP FOR CONSIDERATION O F THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF WEST COAST PAP ER MILLS LTD. VS. ACIT (SUPRA). IN THAT CASE, IT WAS HELD BY PARA-6 A S UNDER:- WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE RECORDS, INCLUDING THE VOLUMINOUS PAPER BOOK FILED BY THE ASSESSEE. THE ASSESSEE, ALTHOUGH ENGAGED IN THE M ANUFACTURE AND SALE OF PAPER AND PAPER BOARDS, MULTI-LAYER BOARDS , ETC., WAS ALSO INTO THE BUSINESS OF POWER GENERATION RIGHT FROM TH E ASSESSMENT YEAR 1996-97. THE FINDINGS IN THE IMPUGNED ORDER ARE CL EARLY UNASSAILABLE. THE ASSESSEE HAS FROM TIME TO TIME RIGHT FROM THE A SSESSMENT YEAR 1996-97 SET UP FOUR SUCH UNITS TO FACILITATE ITS PO WER REQUIREMENT IN THE PAPER PLANT AT DANDELI IN KARNATAKA STATE. THE ASSESSEE, AS THE RECORDS SHOW, MADE SUBSTANTIAL CAPITAL OUTLAYS FOR THIS PURPOSE. THIS ONLY CONFIRMS THAT ASSESSEE WAS IN THE BUSINESS OF GENERATION OF POWER. NOW THE QUESTION IS WHETHER THE ASSESSEES C LAIM FOR DEDUCTION U/S. 80IA OF THE ACT COULD BE DENIED MERE LY ON THE GROUND THAT THESE D.G. UNITS WERE CATERING TO THE CAPTIVE POWER REQUIREMENT. AS THE ASSESSING OFFICER PUTS IT, IF THE ASSESSEE H AS NOT REALIZED ANY REVENUE BY SELLING THE POWER TO OUTSIDERS, CAN THE ASSESSEE BE HELD TO BE ENTITLED FOR DEDUCTION U/S. 80-IA OF TH E ACT? THE ASSESSING OFFICER WAS OF THE VIEW THAT IT IS ONLY AN INTER-DI VISION TRANSFER AND THERE WAS NO REVENUE REALIZED BY IT AND CONSEQUENTL Y THERE WAS NO DERIVATION OF PROFIT OR INCOME IN THE BUSINESS OF I NDUSTRIAL UNDERTAKING. THE QUESTION RAISED BY THE ASSESSING OFFICER HAVE A LL BEEN ANSWERED BY THE SUPREME COURT IN THE CASE OF ORIENT PAPER MI LLS LTD. (SUPRA). THIS DECISION OF THE SUPREME COURT DOES BRING OU T THE FACTS. IT HAS ONLY AFFIRMED THE DECISION OF THE CALCUTTA HIGH COU RT IN CIT VS. ORIENT PAPER MILLS LTD. (1974)94 ITR 73. THE FACTS COULD ONLY BE FOUND IN THIS JUDGMENT OF THE CALCUTTA HIGH COURT. THE ASSES SEE IN THAT CASE OWNED A PAPER MILL. IT SET UP A PLANT FOR THE MANU FACTURE OF CAUSTIC SODA, AN ESSENTIAL CHEMICAL FOR USE IN THE PROCESS OF MANUFACTURE OF PAPER. THE ASSESSEE OBTAINED A SEPARATE LICENCE FO R THE MANUFACTURE OF CAUSTIC SODA AND THE PLANT WAS HOUSED IN A SEPAR ATE BUILDING. THE INCOME-TAX OFFICER IN THAT CASE HELD THAT THE CAUST IC SODA PLANT WAS ANCILLARY TO THE MAIN MANUFACTURING UNIT AND NO PAR T OF CAUSTIC SODA WAS SOLD TO ANY OUTSIDER AND THEREFORE NO RELIEF CO ULD BE CLAIMED BY 78 THE ASSESSEE U/S. 15C OF THE 1922 ACT. THE MATERIAL PRODUCED IN THE PLANT WAS USED FOR CAPTIVE CONSUMPTION. BEFORE THE TRIBUNAL IT WAS CONTENDED BY THE REVENUE THAT THE LANGUAGE USED IN SECTION 15C WAS PROFIT AND GAIN DERIVED FROM AN INDUSTRIAL UNDERT AKING. UNLESS THE PROFITS AROSE BY THE SALE OF THE PRODUCT OF THE NEW PLANT, NO PROFIT COULD BE SAID TO HAVE BEEN DERIVED. THE ARGUMENT WAS THAT PROFIT SHOULD BE DIRECTLY DERIVED AND NOT INDIRECTLY OR DEEMED TO BE DERIVED. THE TRIBUNAL DID NOT ACCEPT THESE SUBMISSIONS OF THE RE VENUE AND PROCEEDED TO GRANT THE RELIEF. THE HONBLE CALCUTTA HIGH COURT CONFIRMED THE ORDER OF THE TRIBUNAL AND THE APEX CO URT HAS DISMISSED THE APPEAL OF THE REVENUE BY TAKING SUPPORT FROM IT S OWN DECISION IN TEXTILE MACHINERY CORPORATION LTD.S CASE (SUPRA) A ND CIT VS. INDIAN ALUMINIUM CO.LTD. (1977) 108 ITR 367 (SC). THEREFO RE, THE STAND OF THE ASSESSING OFFICER CANNOT BE ACCEPTED. AGAIN TH E CALCUTTA HIGH COURT WAS FACED WITH THE SAME SET OF FACTS IN THE C ASE OF HINDUSTHAN MOTORS LTD. (SUPRA). THE ASSESSEE IN THAT CASE WAS ENGAGED IN THE MANUFACTURE OF MOTOR CARS. IT ESTABLISHED CERTAIN ANCILLARY UNITS. THE ASSESSING OFFICER REPEATED HIS FINDINGS ON THE SAME LINE AS HE DID IN THE CASE OF ORIENT PAPER MILLS LTD. (SUPRA) AND DEN IED THE RELIEF U/S. 80E OF THE 1961 ACT. THE CALCUTTA HIGH COURT HELD THAT ASSESSEE IS ENTITLED TO SUCH RELIEF IRRESPECTIVE OF WHETHER TH E ANCILLARIES MANUFACTURED WERE SOLD BY THE ASSESSEE TO OUTSIDERS OR WERE USED BY IT FOR ITS OWN MANUFACTURE OF CARS. SIMILARLY, THE BOMBAY HIGH COURT IN SAHNEY STEEL AND PRESS WORK LTD.S CASE (SUPRA), TH E ASSESSING OFFICER DENIED A SIMILAR CLAIM U/S. 80J OF THE ACT ON THE GROUND THAT THE NEW UNIT WAS MANUFACTURING ARTICLES TO BE USEDAS RA W MATERIAL FOR THE EXISTING BUSINESS OF THE ASSESSEE. THE BOMBAY HIGH COURT HELD THAT THE FACT THAT NEW UNIT MANUFACTURED ARTICLES USED I N THE EXISTING BUSINESS OF THE ASSESSEE WAS NOT RELEVANT AND THE A SSESSEE WAS HELD TO BE ENTITLED FOR RELIEF U/S. 80J OF THE ACT. IN T HE LIGHT OF THESE DECISIONS, WE ARE OF THE OPINION THAT THE CLAIM OF THE AS CANNOT BE DENIED ONLY ON THE GROUND THAT THE DG SETS MANUFACT URED THE POWER ONLY FOR THE CAPTIVE CONSUMPTION OF THE ASSESSEE. IT MAY BE STATED THAT THE TRIBUNAL IN THE ASSESSMENT YEARS 1997-98 A ND 1998-99 HAS ALREADY GRANTED RELIEF IN RESPECT OF UNIT NOS. I AN D II WHICH WERE ESTABLISHED FOR THE PURPOSE OF CAPTIVE CONSUMPTION. MOREOVER, THE PROVISION OF SECTION 80I-A(8) ITSELF SAYS THAT WHER E ANY GOODS OR SERVICE OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE AND THE CONSIDERATION IF ANY, FOR SUCH TRANSFER IS RECORDED IN THE ACCOUNTS OF THE ELIGIBL E BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS OR SER VICES AS ON THE DATE OF TRANSFER, THEN FOR THE PURPOSE OF DEDUC TION UNDER THAT SECTION, THE PROFIT AND GAIN FOR SUCH TRANSFERRED B USINESS SHALL BE COMPUTED AS IF THE TRANSFER HAS BEEN MADE AT MARKET VALUE AS ON THAT DATE. IN OTHER WORDS, THE PROVISIONS OF SECTION 80 IA THEMSELVES PROVIDE AN ANSWER AND GIVE A SOLUTION WHERE THERE I S A CAPTIVE CONSUMPTION OF THE FINISHED GOODS OF THE ELIGIBLE U NITS. IN THE LIGHT OF THESE DISCUSSION, THE ORDER OF THE CIT(A) GRANTING 80IA RELIEF IN RESPECT OF DG UNITS I,II, III & IV CANNOT BE FOUND FAULT WITH. THE OTHER CONSIDERATION THAT THE ASSESSEE HAS NOT OPERATED TH ESE UNITS BY ITSELF BUT GOT THEM OPERATED THROUGH OUTSIDERS AND THEREFO RE THE ASSESSEE IS NOT ENTITLED TO 80IA RELIEF, IN OUR VIEW, IS NOT A RIGHT APPROACH. SUCH CONSIDERATION, IN OUR OPINION, IS NOT A RELEVANT C ONSIDERATION. KEEPING IN VIEW, THE PURPOSE AND INTENT OF THE RELIEF UNDER SECTION 80IA, SUCH 79 CONSIDERATION, IN OUR OPINION, IS NOT GERMANE FROM THE PROVISIONS OF SECTION 80IA OF THE ACT. 55. THE FACTS BEFORE US ARE ALMOST IDENTICAL IN THE SENSE THAT IN THE CASE BEFORE US ALSO POWER GENERATED FROM THE DG UNI TS HAS BEEN USED BY THE ASSESSEE COMPANY FOR THE PURPOSE OF TYR E MANUFACTURING UNITS ON A CAPTIVE BASIS. RESPECTFULLY FOLLOWING T HE ABOVE DECISION, WE ARE OF THE VIEW THAT THE ASSESSEE COMPANY IS ENT ITLED TO DEDUCTION UNDER SECTION 80IA IN RESPECT OF THE NEW DG POWER U NITS. UNDER THE CIRCUMSTANCES, WE FIND NOTHING WRONG WITH THE ORDER OF THE LD. CIT(A) AND CONFIRM THE SAME. FOLLOWING ABOVE DECISION, WE CONFIRM THE ORDER OF T HE LD. CIT(A). 93. IN THE RESULT, REVENUES APPEAL IN I.T.A.NO.377 /COCH/2006 IS DISMISSED. 94. I.T.A.NO.298/COCH/2009 : IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN HOLDING THAT THE REASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER U/S.143[3] R.W.S. 147 OF IT ACT I S VALID AND IN ORDER. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN HOLDING THAT THE REASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER WAS NOT BASED ON CHANGE OF OPINIO N ON SAME SET OF FACTS ALREADY EXISTING ON RECORD. 3. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN CONCLUDING THAT THE HONBLE SUPREME COUR T IN THE CASE OF GKN DRIVESHAFTS [INDIA] LTD VS ITO [2003] 2 59 ITR 19 [S.C] HAS NOT HELD THAT THE NOTICE U/S. 147/148 OR ASSESSMENT ORDER WOULD BE BAD IN LAW IF OBJECTIONS FILEDL BY T HE ASSESS ARE NOT DISPOSED OFF BY THE ASSESSING OFFICER. OUT OF THE ABOVE GROUNDS, GROUND NO.3 WAS NOT PRESS ED AND, THEREFORE, IS DISMISSED AS NOT PRESSED. 95. AFTER HEARING BOTH THE PARTIES WE FIND THAT THE ASSESSEE FILED RETURN OF INCOME ON 28-10-2002 DECLARING TOTAL INCO ME AT NIL AND BOOK PROFITS AT RS.21,05,46,883/-. DEDUCTION CLAIME D U/S.80IA AMOUNTING TO RS.15,77,91,697/- WAS ALLOWED IN THE A SSESSMENT ORDER 80 PASSED U/S.143[3] R.W.S. 147 ON 24-2-2006. THE DEDU CTION U/S.80IA WAS REDUCED TO RS.14,33,81,497/- AFTER PASSING AN O RDER U/S.154 ON 16-1-2007. LATER ON, IT WAS DECIDED THAT THE ASSESS EE COMPANY HAS CLAIMED DEDUCTION FROM THE PROFITS DERIVED FROM DG POWERS GENERATION UNIT WHICH WERE OPERATIONAL SINCE A.Y 1999-2000. ON GOING THROUGH THE ANNUAL REPORT AND COST REPORT, IT WAS SEEN THAT POWER GENERATOR UNITS 1 & 2 WERE NOT SHOWN AS SEPARATE UNITS OF APO LLO TYRES. IN FACT, ANNEXURE TO THE DIRECTORS REPORT FOR A.Y 1999-2000 MENTIONED THE INSTALLATION OF DG SET ONLY AS AN ENERGY CONSERVATI ON MEASURE IMPLEMENTED AT ITS BARODA PLANT. IT WAS OBSERVED TH AT WITHOUT EXISTENCE OF A SEPARATE UNDERTAKING, PROFITS CANNOT BE MATERIALIZED FROM SUCH UNDERTAKING WHICH WOULD QUALIFY FOR DEDUC TION U/S.80IA. IN THE INSTANT CASE THERE WAS NO SUCH UNDERTAKING OF I NCOME WHICH WOULD QUALIFY FOR DEDUCTION U/S.80IA. SINCE THE DEDUCTION WAS ALLOWED FOR WHICH ASSESSEE WAS NOT ELIGIBLE, THEREFORE, THERE W AS REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMEN T. PROCEEDINGS U/S.147 WERE INITIATED AND NOTICE U/S.148 WAS ISSUE D ON 25-3-2008 FOR REOPENING OF THE ASSESSMENT. 96 THE ISSUE RAISED IN THIS APPEAL IS IDENTICAL TO THAT OF ISSUE RAISED IN I.T.A.NO.297/COCH/2009. BOTH THE PARTIES MADE SA ME ARGUMENTS AND SUBMITTED THAT DECISION TAKEN IN I.T.A.NO.297/C OCH/2009 MAY BE FOLLOWED HEREIN. 81 97. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT THIS ISSUE HAS BEEN ADJUDICATED BY US IN I.T.A.NO.297/COCH/200 9 VIDE PARAS 28 TO 40 WHICH ARE AS UNDER: 28. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FI ND THAT THE ISSUE REGARDING DEDUCTION UNDER SECTION 80IA FO R POWER GENERATION UNIT CAME BEFORE THE ASSESSING AUTHORITY FOR THE FIRST TIME IN THE ASSESSMENT YEAR 1999-2000 AND THE SAME WAS ADJUDICATED VIDE PARA 13 OF THE ASSESSMENT ORDER A ND THE RELEVANT PORTION IS REPRODUCED BELOW:- DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMEN T YEAR 1999-2000, THE COMPANY STARTED A NEW INDUSTRIAL UNDERTAKING FOR THE GENERATION OF POWER FOR ITS FAC TORY AT BARODA. ACCORDING TO THE PROVISIONS OF SECTION 80 -IA AS WAS AMENDED W.E.F. 1.4.2000, HUNDRED PERCENT OF TH E PROFIT AND GAINS DERIVED FROM THE UNDERTAKING IS ELIGIBLE FOR DEDUCTION FROM A.Y. 2000-01 ONWARDS UNDER SUB SECT ION (1) SUBJECT TO THE PROVISION OF SUB SECTION (3) AND ( 4) OF SECTION 80-IA. IT IS FOUND THAT ALL THE CONDITIONS PRESCR IBED ARE COMPLIED WITH AND AS SUCH THE DEDUCTION IS ADMISSIB LE. THE METHOD FOR COMPUTING THE PROFIT IS ALSO FOUND TO BE CORRECT. SUBJECT TO THE ADJUSTMENTS TO BE MADE AS DISCUSSED IN THE FOLLOWING SUB-PARAS, PROFIT OF THIS UNDERTAKING CO MPUTED AS PER RETURN IS ALLOWED AS DEDUCTION. EVEN THOUGH TH E DEDUCTION IS FOR THE FIRST YEAR, THIS IS THE SECOND YEAR OF O PERATION OF THIS UNIT. IN REGARD TO THE LIMDA BIAS PLANT AT BARODA WHICH WAS STARTED DURING THE PREVIOUS YEAR RELEVANT TO ASSESS MENT YEAR 1992- 93, A SUM OF RS. 10,31,65,896/- HAS BEEN CLAI MED AS DEDUCTION U/S. 80IB (OLD PROVISION OF 80IA. FOR T HE PURPOSE OF COMPUTING THE ABOVE DEDUCTION, THE PROFITS OF TH E ELIGIBLE BUSINESS WAS ARRIVED AT R. 34,38,86,321/-. IN AR RIVING AT THE ABOVE PROFIT, THE CONSOLIDATED PROFIT AS PER P &L ACCOUNT OF RS. 94.07 CRORES (BEFORE IT PROVISION) WAS FIR ST ALLOCATED AMONG THE VARIOUS UNITS. 29. THUS, FROM THE ABOVE IT IS CLEAR THAT DEDUCTION UNDER SECTION 80IA WAS ALLOWED FOR DG POWER UNIT IN THE ASSESSMENT YEAR 1999-2000, THOUGH THE SAME WAS REST RICTED BECAUSE OF OTHER ISSUES LIKE EXCLUSION OF OTHER INC OME. FURTHER, IN THIS YEAR ALSO, DETAILS REGARDING COMPU TATION OF DEDUCTION HAS BEEN FILED BEFORE THE LOWER AUTHORITI ES, COPIES OF WHICH ARE AVAILABLE AT PG. 11 TO 20 OF THE PAPER BO OK FROM THE ABOVE, IT BECOMES CLEAR THAT THERE IS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULL AND TRUE PARTICULARS WHICH WERE NECESSARY FOR CLAIMING THIS DEDUCTION. THIS DEDUCT ION HAS ALSO BEEN ALLOWED BY THE AO FOR THE SAME DG POWER UNIT F OR THE ASSESSMENT YEAR 1999-2000. IN FACT BEFORE US, THE LD. CIT-DR COULD NOT POINT OUT ANY MATERIAL FACT WHICH WAS NOT DISCLOSED TO THE DEPARTMENT. ONCE DEDUCTION HAS BEEN ALLOWED, T HE SAME 82 CANNOT BE WITHDRAWN IN THE LATER YEARS BY REOPENING OF THE ASSESSMENT. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD. (SUP RA) HAS CLEARLY HELD THAT AUTHORITIES WERE NOT JUSTIFIED IN REFUSING THE CLAIM OF TAX HOLIDAY FOR LATER YEARS ONCE DEDUCTION WAS GRANTED IN THE INITIAL YEAR. FOLLOWING THIS DECISION, THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PAUL BROTHERS, 21 6 ITR 548 HAS HELD AS UNDER:- UNLESS DEDUCTIONS ALLOWED FOR THE ASSESSMENT YEAR 1980-81 ON THE SAME GROUND WERE WITHDRAWN, THEY COULD NOT BE DENIED IN THE SUBSEQUENT YEARS. EITHER IN SECTION 80HH OR IN SECTION 80J THERE IS NO PROVISION FOR WITHDRAWAL OF THE SAID DEDUCTION FOR BREACH OF THE CERTAIN CONDITIONS. 30. NOW LET US EXAMINE THE ISSUE PURELY FROM RE-OPE NING ANGLE. THE PROVISO TO SECTION 147 READS AS UNDER:- PROVIDED THAT WHERE AN ASSESSMENT UNDER SUB SECTI ON (3) OF SECTION 143 OR THIS SECTION HAS BEEN MADE FOR THE R ELEVANT ASSESSMENT YEAR, NO ACTION SHALL BE TAKEN UNDER THI S SECTION AFTER THE EXPIRY OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, UNLESS ANY INCOME CHARGEABLE TO TA X HAS ESCAPED ASSESSMENT FOR SUCH ASSESSMENT YEAR BY REAS ON OF THE FAILURE ON THE PART OF THE ASSESSEE TO MAKE A R ETURN U/S. 139 OR IN RESPONSE TO A NOTICE ISSUED UNDER SUB-SEC TION (1) OF SECTION 142 OR SECTION 148 OR TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSMENT, FOR TH AT ASSESSMENT YEAR. 31. THE PLAIN READING OF THE ABOVE PROVISION MAKES IT VERY CLEAR, PARTICULARLY THE HIGHLIGHTED PORTION THAT AN ASSESSMENT WHICH HAS BEEN COMPLETED UNDER SECTION 143(3), THEN THE SAME CANNOT BE RE-OPENED AFTER FOUR YEARS UNLESS AN D UNTIL THERE IS FAILURE ON THE PART OF THE ASSESSEE TO DIS CLOSE ANY MATERIAL FACT RELEVANT TO THE ASSESSMENT. AS WE HAV E OBSERVED ABOVE, THE MATERIAL FACTS WERE ALREADY DISCLOSED AN D THE ASSESSMENT HAS BEEN REOPENED MERELY ON THE BASIS OF ANNUAL REPORT AND COST AUDIT REPORT WHEREIN IT WAS STATED THAT THIS NEW DG POWER UNIT WAS MERELY INSTALLED AS AN ENERG Y CONSERVATION MEASURE AND THE MATERIAL WAS ALREADY T HERE WITH THE AUTHORITIES FOR THE EARLIER YEARS AND DESPITE O F THAT, DEDUCTION WAS ALLOWED FOR THE ASSESSMENT YEAR 1999- 2000 ITSELF WHICH IS CLEAR FROM PARA 13 OF THE ASSESSMEN T ORDER QUOTED ABOVE. EVEN DURING THIS YEAR, THE ASSESSEE HAS FILED ALL THE NECESSARY PARTICULARS BEFORE THE AO. 32. WE FIND THAT IN THE CASE OF GEMINI LEATHER STOR ES VS. I.T.O. (SUPRA) THE ASSESSEE DID NOT DISCLOSE FACTS RELATING TO THE TRANSACTION EVIDENCED BY CERTAIN DRAFTS. FURTH ER, THE OFFICER HIMSELF DISCOVERED THE FACTS RELEVANT THERETO BUT B Y OVERSIGHT DID NOT BRING THE AMOUNTS REPRESENTED BY THE DRAFTS TO TAX AS INCOME OF THE ASSESSEE. SUBSEQUENTLY, NOTICE FOR TH E 83 REOPENING OF THE ASSESSMENT WAS ISSUED AND WHEN THI S MATTER TRAVELED TO THE HONBLE SUPREME COURT, IT WAS HELD AS UNDER:- HELD, REVERSING THE DECISION OF THE HIGH COURT, TH AT AFTER DISCOVERY OF THE PRIMARY FACTS RELATING TO THE TRAN SACTIONS EVIDENCED BY THE DRAFTS IT WAS FOR THE OFFICER TO MAKE THE NECESSARY ENQUIRIES AND DRAW PROPER INFERENCE AS T O WHETHER THE AMOUNTS REPRESENTED BY THE DRAFTS COULD BE TREA TED AS PART OF THE TOTAL INCOME OF THE APPELLANT. THIS THE OFFI CER DID NOT DO. IT WAS PLAINLY A CASE OF OVERSIGHT AND IT COULD NOT BE SAID THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT BY REASON OF THE OMISSION OR FAILURE ON THE PART OF T HE APPELLANT TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS. HE COULD NOT, THEREAFTER, TAKE RECOURSE TO SECTION 147(A) TO REMEDY THE ERROR RESULTING FROM HIS OWN OVERSIGHT. 33 . THUS, IT IS CLEAR THAT WHERE PRIMARY FACTS WERE NOT ED BY THE AUTHORITIES THEMSELVES, EVEN THEN IT CANNOT BE SAI D THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE PARTICULAR FACTS TRULY AND FULLY AND IN THIS CASE, DEDUCTION H AS ALREADY BEEN ALLOWED FOR A.Y. 1999-2000 AND FOR CURRENT YEA R, ALL THE RELEVANT FACTS HAVE BEEN GIVEN, AND EVEN DEDUCTION WAS ALLOWED BUT IN A TRUNCATED FASHION AND THEREFORE, I T CANNOT BE SAID THAT THE ASSESSEE HAD NOT DISCLOSED THE RELEVA NT FACTS TRULY AND FULLY. 34. NOW LET US EXAMINE HOW THE VARIOUS COURTS HAVE DEALT WITH THE ISSUE. THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF FORAMER VS. CIT, 247 ITR 436 (ALL.) WHILE DEALING W ITH THE ISSUE OF NOTICE U/S. 148 UNDER THE AMENDED PROVISIO N HELD AS UNDER:- THAT THE LAW PREVAILING ON THE DATE OF ISSUE OF TH E NOTICE U/S. 148, I.E, NOVEMBER 20, 1998, HAD TO BE TAKEN INTO A CCOUNT AND BY THAT DATE THE NEW SECTION 147 HAD COME INTO FORC E. THERE WAS ADMITTEDLY NO FAILURE ON THE PART OF THE ASSESS EE TO MAKE A RETURN OR TO DISCLOSE FULLY AND TRULY ALL MATERIA L FACTS NECESSARY FOR THE ASSESSMENT. HENCE, THE PROVISO T O THE NEW SECTION 147 APPLIED AND THE NOTICES WERE BARRED BY LIMITATION. SECTION 153 WHICH REMOVES THE BAR OF LIMITATION WAS NOT APPLICABLE TO A NOTICE U/S. 148. MOREOVER, THE CASE OF AN EXPATRIATE EMPLOYEE WAS TO BE DECIDED ON THE BASIS OF THE PROVISIONS OF ARTICLE XIV OF THE TREATY, WHEREAS CO RPORATE INCOME WAS TO BE DECIDED ON THE BASIS OF EITHER ART ICLE III OR ARTICLE XIV OF THE TREATY OR SECTION 44BB. HENCE, T HE OBSERVATIONS OF THE TRIBUNAL IN BOUDIER CHRISTIANS CASE WAS NOT A DIRECTION NECESSARY FOR THE DISPOSAL OF THE A PPEAL RELATING TO THE PETITIONER. THE EXIGIBILITY OF INCOME OF TH E PETITIONER FROM MANNING AND MANAGEMENT CONTRACTS WAS NEVER AN ISSUE DIRECTLY OR INDIRECTLY INVOLVED IN THE CASE OF BOUD IER CHRISTIAN. MOREOVER, THE TRIBUNAL IN THE APPEAL RELATING TO TH E ASSESSMENT OF THE PETITIONER OWN CASE HAD CONSIDER ED THE DECISION OF THE TRIBUNAL IN BOUDIER CHRISTIANS CA SE. IT IS SETTLED LAW THAT AN APPEAL IS A CONTINUATION OF THE ORIGINAL 84 PROCEEDINGS AND HENCE WHEN THE TRIBUNAL IN THE APPE AL RELATING TO THE PETITIONER HAD CONSIDERED THE DECIS ION OF THE TRIBUNAL IN BOUDIER CHRISTIANS CASE THE NOTICE U/S . 147/148 WOULD OBVIOUSLY BE ON THE BASIS OF A MERE CHANGE OF OPINION BY THE INCOME TAX AUTHORITIES, WHICH WOULD NOT BE V ALID. EVEN IF IT WERE ASSUMED THAT THE LAW PRIOR TO THE INSERT ION OF THE NEW SECTION 147 WOULD APPLY, IT WOULD MAKE NO DIFFERENC E SINCE EVEN UNDER THE ORIGINAL 147 NOTICE FOR REASSESSMENT COULD NOT BE GIVEN ON A MERE CHANGE OF OPINION. HENCE, THE NO TICE U/S. 147/148 WAS ILLEGAL. 35. THIS DECISION OF THE HONBLE HIGH COURT WAS CON FIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. FORAMER FRANCE, 264 ITR 566 (SC). 36. THE LD. CIT(A) HAS MAINLY RELIED ON THE DECISIO N OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PRAFUL CH UNNILAL PATEL VS. ACIT (SUPRA). HE HAS EXTRACTED THE FOLLOW ING OBSERVATIONS OF THE COURT:- THE POWER TO MAKE ASSESSMENT OR REASSESSMENT WITHI N FOUR YEARS OF THE END OF THE RELEVANT ASSESSMENT YEAR W OULD BE ATTRACTED EVEN IN CASES WHERE THERE HAS BEEN A COMP LETE DISCLOSURE OF ALL RELEVANT FACTS UPON WHICH A CORRE CT ASSESSMENT MIGHT HAVE BEEN BASED IN THE FIRST INSTA NCE, AND WHETHER IT IS AN ERROR OF FACT OR LAW THAT HAS BEEN DISCOVERED OR FOUND OUT JUSTIFYING THE BELIEF REQUIRED TO INITIAT E THE PROCEEDINGS. THE WORDS ESCAPED ASSESSMENT WHERE THE RETURN IS FILED, COVER THE CASE OF DISCOVERY OF A M ISTAKE IN THE ASSESSMENT CAUSED BY EITHER AN ERRONEOUS CONSTRUCT ION OF THE TRANSACTION OR DUE TO ITS NON-CONSIDERATION, OR CAU SED BY A MISTAKE OF LAW APPLICABLE TO SUCH TRANSFER OR TRANS ACTION EVEN WHERE THERE HAS BEEN A COMPLETE DISCLOSURE OF ALL R ELEVANT FACTS UPON WHICH A CORRECT ASSESSMENT COULD HAVE BE EN BASED. IN CASES WHERE THE ASSESSING OFFICER HAD OVER-LOOKE D SOMETHING AT THE FIRST ASSESSMENT, THERE CAN BE NO QUESTION OF ANY CHANGE OF OPINION WHEN THE INCOME WHICH WAS CHA RGEABLE TO TAX IS ACTUALLY TAXED AS IT OUGHT TO HAVE BEEN U NDER THE LAW, BUT WAS NOT,DUE TO AN ERROR COMMITTED AT THE FIRST ASSESSMENT. THE WORD REASON IN THE PHRASE REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION. IF THE ASSESSING OFFIC ER HAS A CAUSE OR JUSTIFICATION TO THINK OR SUPPOSE THAT INC OME HAD ESCAPED ASSESSMENT. THE WORDS REASON TO BELIEVE C ANNOT MEAN THAT THE ASSESSING OFFICER SHOULD HAVE FINALLY ASCERTAINED THE FACTS BY LEGAL EVIDENCE. UNLESS THE GROUND OR THE MATERIAL ON WHICH HIS BELIEF IS BASED, IS FOUND TO BE SO IRRATIONAL AS NOT TO BE WORTHY OF BEING CALLED A RE ASON BY ANY HONEST MAN, HIS CONCLUSION THAT IT CONSTITUTES A SU FFICIENT REASON, CANNOT BE O IT CONSTITUTES A SUFFICIENT REA SON, CANNOT 85 BE OVERRIDDEN. IF THE ASSESSING OFFICER HONESTLY CO MES TO A CONCLUSION THAT A MISTAKE HAS BEEN MADE, IT MATTERS NOTHING SO FAR AS HIS JURISDICTION TO INITIATE THE PROCEEDI NGS U/S. 147 IS CONCERNED, THAT HE MAY HAVE COME TO A CONCLUSION WH ETHER ON LAW OR ON CONSTITUTION, EXAMINE THE SUFFICIENCY OF THE REASON WHICH LED THE ASSESSING OFFICER TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT. , 37 . BUT AS POINTED OUT BY THE LD. COUNSEL OF THE ASSESS EE, THIS POSITION WAS CONSIDERED BY THE FULL BENCH OF T HE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA LTD., 256 ITR 1. BEFORE DISCUSSING ITS DECISION, THE HON BLE DELHI HIGH COURT HAS EXTRACTED THE FOLLOWING OBSERVATIONS OF HONBLE SUPREME COURT IN THE CASE OF CALCUTTA DISCOUNT CO. LTD., 41 ITR 191(SC) WHICH IS AS UNDER:- IT IS FOR HIM TO DECIDE WHAT INFERENCES OF FACTS C AN BE REASONABLY DRAWN AND WHAT LEGAL INFERENCES HAVE ULT IMATELY TO BE DRAWN. IT IS NOT FOR SOMEBODY ELSE FAR LESS T HE ASSESSEE TO TELL THE ASSESSING AUTHORITY WHAT INFERENCES, WHETHER OF FACTS OR LAW, SHOULD BE DRAWN FROM GIVEN FACT , IT WILL BE MEANINGLESS TO DEMAND THAT THE ASSESSEE MUST DISCLO SE WHAT INFERENCES WHETHER OF FACTS OR LAW HE WOULD DRA W FROM THE PRIMARY FACTS. THE SCHEME OF THE LAW CLEARLY IS THAT WHERE THE IN COME-TAX OFFICER HAS REASON TO BELIEVE THAT AN UNDERASSESSME NT HAS RESULTED FROM NON-DISCLOSURE HE SHALL HAVE JURISDIC TION TO START PROCEEDINGS FOR REASSESSMENT WITHIN A PERIOD OF EIG HT YEARS; AND WHERE HE HAS REASON TO BELIEVE THAT AN UNDERASS ESSMENT HAS RESULTED FROM OTHER CAUSES HE SHALL HAVE JURISD ICTION TO START PROCEEDINGS FOR REASSESSMENT WITHIN FOUR YEAR S. BOTH THE CONDITIONS, (I) THE INCOME-TAX OFFICER HAVING REASO N TO BELIEVE THAT THERE HAS BEEN UNDERSTATEMENT AND (II) HIS HAV ING REASON TO BELIEVE THAT SUCH UNDERASSESSMENT HAS RESULTED FROM NON-DISCLOSURE OF MATERIAL FACTS, MUST CO-EXIST BEF ORE THE INCOME-TAX OFFICER HAS JURISDICTION TO START PROCEE DINGS AFTER THE EXPIRY OF FOUR YEARS. THE ARGUMENT THAT THE COU RT OUGHT NOT TO INVESTIGATE THE EXISTENCE OF ONE OF THESE CONDIT IONS, VIZ., THAT THE INCOME-TAX OFFICER HAS REASON TO BELIEVE T HAT UNDERASSESSMENT HAS RESULTED FROM NON-DISCLOSURE OF MATERIAL FACTS, CANNOT THEREFORE BE ACCEPTED. 38. WHILE DEALING WITH THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PRAFUL CHUNNILAL PATEL (SUPRA ), IT WAS OBSERVED AT PG. 15 OF THE DECISION OF FULL BENCH OF THE HONBLE DELHI HIGH COURT IN THE CASE OF KELVINATOR OF INDIA LTD. 256 ITR 1 AS UNDER:- WE ARE, WITH RESPECT, UNABLE TO SUBSCRIBE TO THE ABOVEMENTIONED VIEW. IF THE CONTENTIONOF THE REVE NUE IS ACCEPTED, THE SAME, IN OUR OPINION, WOULD CONFER AN ARBITRARY POWER UPON THE ASSESSING OFFICER. THE 86 ASSESSING OFFICER WHO HAD PASSED THE ORDER OF ASSESSMENT OR EVEN HIS SUCCESSOR OFFICER ONLY ON TH E SLIGHTEST PRETEXT OR OTHERWISE WOULD BE ENTITLED TO REOPEN THE PROCEEDING. ASSESSMENT PROCEEDINGS MAY BE FURTHERMORE REOPENED MORE THAN ONCE. IT IS NOW TRITE THAT WHERE TWO INTERPRETATIONS ARE POSSIBLE, THAT WHICH FULFILS THE PURPOSE AND OBJECT OF THE ACT SHO ULD BE PREFERRED. 39. FURTHER, THIS DECISION HAS BEEN RECENTLY CONFIR MED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. KE LVINATOR OF INDIA LTD., 320 ITR 561 (SC).. THE HEAD-NOTE OF TH E DECISION IS AS UNDER:- THE CONCEPT OF CHANGE OF OPINION ON THE PART OF THE ASSESSING OFFICER TO REOPEN AN ASSESSMENT DOES NOT STAND OBLITERATED AFTER THE SUBSTITUTION OF SECTION 147 OF THE INCOME-TAX ACT, 1961, BY THE DIRECT TAX LAWS (AMEND MENT) ACTS, 1987 AND 1989. AFTER THE AMENDMENT, THE ASSE SSING OFFICER HAS TO HAVE REASON TO BELIEVE THAT INCOME H AS ESCAPED ASSESSMENT, BUT THIS DOES NOT IMPLY THAT THE ASSESS ING OFFICER CAN REOPEN AN ASSESSMENT ON MERE CHANGE OF OPINION. THE CONCEPT OF CHANGE OF OPINION MUST BE TREATED AS A N IN-BUILT TEST TO CHECK THE ABUSE OF POWER. HENCE AFTER APRI L 1,1989, THE ASSESSING OFFICER HAS POWER TO REOPEN AN ASSESS MENT, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO TH E CONCLUSION THAT THERE WAS ESCAPEMENT OF INCOME FROM ASSESSMENT . REASON MUST HAVE A LINK WITH THE FORMATION OF BELIE F. THUS, IT IS CLEAR THAT THE DECISION OF HONOURABLE G UJARAT HIGH COURT IN THE CASE OF PRAFUL CHEMICAL STANDS OVER RU LED. 40. THOUGH THERE ARE VARIOUS AUTHORITIES AVAILABLE FROM VARIOUS HIGH COURTS LIKE CIT VS. ANNAMALAI FINANCE LTD., 275 ITR 451, CIT VS. EICHER LTD. 294 ITR 310, SEIMENS I NFORMATION SYSTEM LTD. VS.ACIT, 295 ITR 332 BUT WE ARE OF THE VIEW THAT THERE IS NO NEED TO DISCUSS THEM IN DETAIL. THE SI MPLE FACT REMAINS THAT THE ASSESSMENT WAS RE-OPENED MAINLY ON THE BASIS OF CHANGE OF OPINION. PARTICULARLY AFTER FOUR YEARS AND THAT TOO WHEN THERE IS NO FAILURE ON THE PART OF THE ASS ESSEE TO DISCLOSE THE RELEVANT FACTS FULLY AND TRULY. SINCE IN THIS CASE, THE ASSESSMENT HAS BEEN RE-OPENED AFTER FOUR YEARS, AND NO MATERIAL HAS BEEN BROUGHT TO OUR KNOWLEDGE SHOWING THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO DI SCLOSE THE FACTS FULLY AND TRULY, WE ANNUL THE RE-OPENING PROC EEDINGS. IN THIS REGARD, WE SET ASIDE THE ORDER OF THE CIT(A) . FOLLOWING THE ABOVE DECISION, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 98. IN THE RESULT, ASSESSEES APPEAL IN I.T.A.NO.29 8/COCH/2009 IS ALLOWED. 87 ORDER PRONOUNCED IN THE OPEN COURT ON THIS FIFTH DA Y OF OCTOBER, 2010. SD/ SD/- (N.VIJAYAKUMARAN) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED : 5TH OCTOBER, 2010 P/-* COPY TO: 1. M/S. APOLLO TYRES, CHERUPUSHPAM BUILDING, 6TH FL OOR, SHANMUGHAM ROAD, KOCHI-682031. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCL E-1(1), ERNAKULAM. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-V, KOCH I 4.THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(1 ), RANGE-1, ERNAKULAM 5. THE COMMISSIONER OF INCOME-TAX, KOCHI 6. D.R./I.T.A.T., COCHIN BENCH, COCHIN. 7. GUARD FILE. TRUE COPY BY ORDER DY /ASST.REGISTRAR,ITAT ERANAKULAM. SR.NO. PARTICULARS DATE INITIALS 1 DRAFT DICTATED ON 13-9-10- 20-9-10 P 2 DRAFT PLACED BEFORE AUTHOR P 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO SR.PS/PS 6 ORDER KEPT FOR PRONOUNCEMENT 7 FILE SENT TO BENCH CLERK 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 88 9 DATE OF DISPATCH OF ORDER