Texas Instruments (India) Private Limited, Bangalore V. DCIT, Bangalore

ITA 1/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63660 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-08-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 03-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CIT DR I
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Principle of natural justice; Competent authority; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 5(2); 234B; 32; 145; 37; 28

Judgement Text

PAGE 1 OF 33 ITA N O.1/BANG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1/BANG/2011 (ASSESSMENT YEAR 2005-06) M/S TEXAS INSTRUMENTS (INDIA) PVT. LTD., 66/3, BAGMANE TECH PARK, C V RAMAN NAGAR, BANGALORE-93. PA NO.AAACT5445M VS THE DEPUTY COMMISSIONER OF INCOME TAX (LTU), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 08.08.2012 DATE OF PRONOUNCEMENT : 07.09.2012 APPELLANT BY : SHRI PADAM CHAND KHINCHA , C.A. RESPONDENT BY : SHRI S K AMBASTHA, CIT (DR -I), ITAT ORD ER PER GEORGE GEORGE K : THIS APPEAL FILED BY THE ASSESSEE COMPANY IS DIREC TED AGAINST THE ORDER OF THE CIT (A)-LTU, BANGALORE DATED 27.10 .2010. THE RELEVANT ASSESSMENT YEAR IS 2005-06. 2. THE ASSESSEE HAS RAISED THIRTEEN GROUNDS IN IT S GROUNDS OF APPEAL. IN GROUND NO.13 , THE ASSESSEE OBJECTS TO THE CHARGING OF INTEREST U/S 234B AND U/S 234D OF THE ACT. CHARGING OF INTE REST U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. THERE FORE, THIS PART OF THE GROUND IS NOT MAINTAINABLE AND, HENCE, THE SAME IS DISMISSED. HOWEVER , PAGE 2 OF 33 ITA N O.1/BANG/2011 2 WITH REGARD TO CHARGING OF INTEREST U/S 234D OF THE ACT, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS JUSTIFIED IN CHARGI NG OF INTEREST U/S 234D OF THE ACT WHICH IS IN CONFORMITY WITH THE FINDINGS OF THE HONBLE ITAT, DELHI SPECIAL BENCH IN THE CASE OF ITO, W 11(1), NE W DELHI V. M/S. EKTA PROMOTERS PVT. LTD REPORTED IN (2008)-305 ITR (AT) 1 (DEL) (SB). 2.1 THE REMAINING GROUNDS RAISED ARE IN AN ILLUST RATIVE AND NARRATIVE MANNER. THEY ARE, THEREFORE, REFORMULATED IN A CONC ISE MANNER AS UNDER: I. GROUND NOS. 1 TO 8: - THAT THE CIT (A) HAS ERRED IN DISALLOWING THE CL AIM OF RS.1,09,62,508/- REPRESENTING LOSS ON DAMAGE OF SHIPMENT; - THAT THE CIT (A) HAS ERRED IN HOLDING THAT THE L OSS ON DAMAGED SHIPMENT WAS CAPITAL IN NATURE; - THAT THE CIT (A) ALSO ERRED IN NOT ALLOWING THE ALTERNATE CLAIM OF ALLOWING DEPRECIATION U/S 32 OF THE ACT IN RESPECT OF LOSS ON DAMAGE OF SHIPMENT. II. GROUND NO. 9: - THAT THE CIT (A) HAS ERRED IN NOT APPRECIATING THAT THE ASSESSEE OPERATED ON A COST PLUS MODEL AND CONSEQUE NTLY, IN CASE THE LOSS ON DAMAGED SHIPMENT WAS HELD TO BE CA PITAL IN NATURE, THE CORRESPONDING REVENUE DERIVED BY THE ASS ESSEE IN RESPECT OF SUCH LOSS SHOULD ALSO BE HELD TO BE C APITAL IN NATURE; & PAGE 3 OF 33 ITA N O.1/BANG/2011 3 III. GROUND NOS. 10 TO 12: - THAT THE CIT (A) HAS ERRED IN NOT ALLOWING THE ENTI RE AMOUNT OF DEDUCTION U/S 80JJAA OF THE ACT. 3. BRIEFLY STATED, THE FACTS OF THE ISSUES ARE AS UN DER: THE ASSESSEE COMPANY IS IN THE BUSINESS OF DESIGN , MANUFACTURE AND EXPORT OF COMPUTER SOFTWARE. DURING THE YEAR UN DER CONSIDERATION, THE ASSESSEE HAD FILED ITS RETURN OF INCOME, DECLARING A TOTAL INCOME OF RS.39.69 CRORES. THE ASSESSMENT WAS, HOWEVER, CONCLUDED, DE TERMINING THE ASSESSEES INCOME AT RS.128.34 CRORES THEREBY MAKING CERTAIN AD DITIONS/DISALLOWANCES. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUES WITH THE CIT (A)-LTU FOR RELIEF. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, THE C IT (A) HAD DECIDED THE ISSUES, AMONG OTHERS, AS UNDER: LOSS ON DAMAGE OF SHIPMENT: 5.2I AM INCLINED TO AGREE WITH THE AOS STA ND IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION OF RS.1,09,62,508/- BEING THE LOSS ON DAMAGE OF SHIPME NT AND TREATING THE SAME AS CAPITAL LOSS FOR THE DETAI LED REASONS ENUMERATED HEREUNDER: (A) IT IS ABUNDANTLY CLEAR FROM THE COMPUTATION OF THE N ET LOSS FURNISHED BY THE APPELLANT THAT THE LOSS OF RS.1,09,62,508/- WAS ARRIVED AT BY DEDUCTING THE INSURANCE CLAIM RECOVERED FROM THE COST OF THE EQUIPMENT I.E., THE ORIGINAL PURCHASE PRICE OF THE EQUIPMENT INCLUDING INWARD/OUTWARD FREIGHT AND CLEA RING CHARGES. BY PAYING THE ORIGINAL PURCHASE PRICE, IT I S CLEAR BEYOND A SHADOW OF DOUBT THAT THE APPELLANT HAD ACQUIRED THE ASSET AND CONSTRUCTIVELY TAKEN DELIVERY OF THE SAME. THIS VIEW IS REINFORCED BY THE FACT THAT THE APPELLANT HAD ALSO INSURED THE ITEM ON ACCOUNT OF W HICH PAGE 4 OF 33 ITA N O.1/BANG/2011 4 THE INSURANCE COMPANY MADE THE PAYMENT TO THE APPELLANT. CLEARLY, THIS CAN ONLY BE THE CASE WHEN T HE APPELLANT OWN THE ITEM. IT IS QUITE UNCLEAR AS TO WHY THE APPELLANT DESCRIBES IT AS AN ADVANCE PAYMENT WHEN IT IS QUITE APPARENT THAT THE SUM OF USD 5,98,572.76 CONSTITUTES THE FULL PURCHASE PRICE OF THE SAID EQU IPMENT. HENCE, THE APPELLANTS CLAIM THAT THE PURCHASE DID NOT FINALLY MATERIALIZE AND, THEREFORE, THERE WAS NO END URING BENEFIT IS NOT BORNE OUT BY THE FACTS. IN ANY CASE, AS ALREADY POINTED OUT BY THE AO, IF THE APPELLANTS AIM OR OBJECTIVE WAS ACQUISITION OF A CAPITAL ASSET, IT IS NOTHING BUT CAPITAL EXPENDITURE. HENCE, ANY LOSS OR EXPENDI TURE INCURRED IN THIS CONNECTION WOULD BE CAPITAL IN NAT URE. (B) THE APPELLANTS CLAIM THAT THE EXPENDITURE WAS UNDOUBTEDLY INCURRED WHOLLY AND EXCLUSIVELY FOR BUSI NESS PURPOSES IS SOMEWHAT OF A SPECIOUS ARGUMENT. AT ON E LEVEL, ALL EXPENDITURE INCURRED IN THE COURSE OF BU SINESS IS INCURRED FOR BUSINESS PURPOSES. HOWEVER, THAT DOES NOT MAKE ALL EXPENDITURE DEDUCTIBLE FROM THE POINT OF V IEW OF COMPUTATION OF INCOME UNDER THE INCOME-TAX ACT. DECISION IN THIS REGARD HAS TO BE TAKEN IN ACCORDAN CE WITH WHAT THE LAW OF THE LAND LAYS DOWN. MERELY REITERATI NG AD NAUSEAM THAT THE LOSS WAS INCURRED IN THE ORDINARY COURSE OF BUSINESS AND WAS, THEREFORE, INCIDENTAL T O IT DOES NOT MAKE IT SO NOR DOES IT AUTOMATICALLY QUALIF Y THE LOSS AS ALLOWABLE AS REVENUE EXPENDITURE. MOREOVER , THE JURISDICTIONAL HIGH COURT IN THE CASE OF DP CHIRANI A & CO., (SUPRA) HAS CATEGORICALLY HELD THAT CAPITAL EXPENDIT URE WHICH IS WHOLLY AND EXCLUSIVELY LAID OUT OR EXPENDED FOR THE PURPOSES OF BUSINESS WAS NOT AVAILABLE FOR THE REASON THAT SEC. 37 VERY CLEARLY EXCLUDED CAPITAL EXPENDITUR E FROM ITS PURVIEW WHICH HAS BEEN AFFIRMED BY THE APEX COURT IN THE CASE OF HASIMARA INDUSTRIES LTD (SUPRA ). (C) THE APPELLANTS RELIANCE ON THE PRINCIPLE UPHELD BY THE RAJASTHAN HIGH COURT IN THE CASE OF ANJANI KUMAR CO . LTD (SUPRA) THAT EXPENDITURE, ALTHOUGH INCURRED WITH TH E AIM PAGE 5 OF 33 ITA N O.1/BANG/2011 5 AND OBJECTIVE OF ACQUIRING A CAPITAL ASSET, WOULD C ARRY THE ATTRIBUTES OF REVENUE EXPENDITURE IN THE EVENT THAT THE CAPITAL ASSET WAS NOT ULTIMATELY ACQUIRED BY IT IS COMPLETELY MISPLACED. THE DECISION IN QUESTION IS RENDERED IN A SCENARIO WHERE THE CAPITAL ASSET IS N OT ULTIMATELY ACQUIRED BY THE ASSESSEE. IN THE APPELLAN TS CASE, THIS IS CLEARLY NOT THE SITUATION. AS I HAVE ALREADY HELD SUPRA, THE FACTS CONVINCINGLY GO TO SHOW THAT T HE ACQUISITION OF THE CAPITAL ASSET IS BEYOND DOUBT. A S THE RAJASTHAN HIGH COURT ITSELF HELD IF ANY ASSET IS AC QUIRED AND IF IT IS A BENEFIT OF ENDURING NATURE, THEN OF COURSE THE ASSESSEE CANNOT GET THE DEDUCTION OF THE AMOUNT FOR ACQUISITION OF LAND AS REVENUE EXPENDITURE. SINCE IN THE APPELLANTS CASE, THE ASSET HAS BEEN ACQUIRED, THE QUESTION OF CLAIMING REVENUE EXPENDITURE ON ITS LOS S DOES NOT ARISE. CONSEQUENTLY, THE APPELLANTS CONTENTION THAT THIS PRINCIPLE HAD ALSO BEEN UPHELD BY VARIOUS OT HER COURTS INCLUDING THE JURISDICTIONAL ITAT IS IRRELEV ANT AND INCONSEQUENTIAL. TP ADJUSTMENT : 4. THE CIT(A) FOR THE ABOVE ISSUE HAS HELD AS UND ER:- FINALLY, IN GROUND 28, THE APPELLANT RAISED THE ISS UE THAT SINCE IT WAS OPERATING ON A COST PLUS MODEL, IN CAS E THE LOSS ON DAMAGED SHIPMENT WAS HELD TO BE CAPITAL IN NATURE, THE CORRESPONDING REVENUE DERIVED IN R/O SU CH LOSS SHOULD ALSO BE HELD TO BE CAPITAL IN NATURE. IT IS UNCLEAR FROM THE APPELLANTS GROUND AS TO WHAT RELE VANCE THE FOLLOWING OF A COST PLUS MODEL HAS IN THIS CONT EXT AND WHAT REVENUE ADJUSTMENT IS BEING SOUGHT AS A CONSEQUENCE. UNDER THE CIRCUMSTANCES, I AM UNABLE TO ACCEPT THIS ARGUMENT. PAGE 6 OF 33 ITA N O.1/BANG/2011 6 ALLOWABILITY OF DEDUCTION U/S 80JJAA OF THE ACT: 5. THE CIT (A)-LTU HAD DEALT WITH THIS ISSUE ELAB ORATELY BY ANALYZING THE REASONING OF THE AO, EXTENSIVELY QUOTIN G THE FINDINGS OF THE EARLIER BENCHES IN THE ASSESSEES OWN CASE FOR THE AYS 2001-02 AND 2002- 03 DT.21.12.2006 AND ALSO SUBSEQUENT FINDINGS OF TH E BENCH FOR THE AY 2004-05 DATED 22.9.2010 AND OBSERVED AS UNDER: 6.2. THE AO IN PARA 5.5. OF HIS ORDER HAD ARRIVED AT THE CONCLUSION THAT DEDUCTION U/S 80JJAA WHICH WAS AVAILABLE IN THREE YEARLY INSTALLMENTS WOULD BE AVAIL ABLE ONLY IF THE EMPLOYEES HAD WORKED FOR NOT LESS THAN 30 0 DAYS IN EACH OF THE YEARS. IF IN THE FIRST YEAR, DED UCTION WAS NOT ADMISSIBLE FOR THE REASON THAT THE WORKMEN HAD NOT WORKED FOR A PERIOD OF 300 DAYS, THE DEDUCTION W OULD BE ADMISSIBLE FOR THE NEXT TWO (NOT THREE) AYS IF D URING THOSE YEARS THE WORKMEN HAD WORKED FOR AT LEAST 300 DAYS EACH. THE AO POINTED OUT THAT JUST BECAUSE THE Y HAD WORKED FOR MORE THAN 300 DAYS IN THE SECOND YEAR OF THEIR EMPLOYMENT, THE SECOND YEAR OF THEIR EMPLOYMENT CANNOT BE CONSIDERED AS THE FIRST YEAR FOR THE PURPO SE OF ALLOWING DEDUCTION UNDER THIS SECTION. THE AO FURT HER OPINED THAT IN NO CASE, HOWEVER, DEDUCTION WAS ADMI SSIBLE IN R/O NEW WORKMEN WHO HAVE NOT WORKED FOR AT LEAST 300 DAYS DURING THE YEAR. 6.3. IN VIEW OF THE FACTS OF THE CASE AND THE POSIT ION OF LAW AS DISCUSSED IN THE PRECEDING PARAGRAPHS, THE A O GAVE A CATEGORICAL FINDING THAT THE WAGES PAID TO EMPLOYEES WHO HAD WORKED FOR LESS THAN 300 DAYS IN TH IS YEAR CANNOT BE CONSIDERED FOR THE PURPOSES OF DEDUCT ION U/S 80JJAA. ACCORDINGLY, THE AO CONCLUDED THAT IN A Y 2005-06, DEDUCTION WOULD BE AVAILABLE ONLY IN R/O TH E WAGES PAID TO THE FOLLOWING EMPLOYEES: PAGE 7 OF 33 ITA N O.1/BANG/2011 7 (I) THE NEW WORKMEN EMPLOYED DURING THE FY RELEVANT FOR THE CURRENT AY AND WHO HAVE WORKED FOR AT LEAST 300 DAYS DURING THE YEAR; (II) THE NEW WORKMEN EMPLOYED DURING THE FY RELEVANT FOR AY 2004-05 AND WHO HAVE WORKED FOR MORE THAN 300 DAYS DURING THIS YEAR; AND (III) THE NEW WORKMEN EMPLOYED DURING THE FY RELEVANT FOR AY 2003-04 WHO HAVE WORKED FOR MORE THAN 300 DAYS DURING THIS YEAR. 6.4. IT IS OF RELEVANCE THAT SEC. 80JJAA SPECIFICA LLY DEFINES THE TERM REGULAR WORKMEN IN CLAUSE (II) O F THE EXPLANATION TO THE SECTION. IT IS A CARDINAL RULE OF INTERPRETATION THAT WHERE THE LANGUAGE USED BY THE LEGISLATURE IS CLEAR AND UNAMBIGUOUS, THE PLAIN AND NATURAL MEANING OF THE WORDS SHOULD BE SUPPLIED TO THE LANGUAGE USED AND RESORT TO ANY RULE OF INTERPRETATI ON TO UNFOLD THE INTENTION IS PERMISSIBLE ONLY WHERE THE LANGUAGE IS AMBIGUOUS. THERE ARE A PLETHORA OF DEC ISIONS OF THE APEX COURT WHICH SUPPORT THIS PROPOSITION, N AMELY: SMT. TARULATA SHYAM V. CIT 108 ITR 345 (SC) KESHAVJI RAVJI V. CIT (1990) 183 ITR 1 GURU DEVDATA VKSSS MARYADIT V. STATE OF MAHARASHTRA AIR 2001 SC 1980 CIT V. ANJUM M.H. GHASWALA (2001) 251 ITR 1 PRAKASH NATH KHANNA AND ANR V. CIT & ANR. 266 ITR 1 THE ABOVE JUDGMENTS MAKE IT CLEAR BEYOND A SHADOW OF DOUBT THAT COURTS ARE NOT REQUIRED TO LOOK INTO THE OBJECT OR INTENTION OF THE LEGISLATURE BY RESORTING TO AIDS TO INTERPRETATION WHERE THE LANGUAGE OF THE PROVISION IS CLEAR AND UNAMBIGUOUS. CONSEQUENTLY, T HE MEANING OF EACH WORD USED BY THE LEGISLATURE IS TO B E GIVEN ITS PLAIN AND NATURAL MEANING AND NO WORD SHO ULD BE IGNORED WHILE INTERPRETING A PROVISION OF A STATUTE . PAGE 8 OF 33 ITA N O.1/BANG/2011 8 6.5. IT IS PERTINENT TO NOTE THAT THE AO HAS ALSO R ELIED ON SEVERAL DECISIONS WHICH MAKE IT ABUNDANTLY CLEAR THA T WHEN THE WORDINGS IN A SECTION ARE CLEAR AND SPECIF IC, IT HAS TO BE FOLLOWED WITHOUT IMPUTING OR ASSIGNING AN Y OTHER MEANING OR INTENTION. (A) KARNATAKA FOREST PLANTATIONS CORPN. LTD V. CIT 156 ITR 275 (KAR); (B) KARNATAKA STATE FINANCIAL CORPN V. CIT 174 ITR 206 (KAR); (C) RAMACHANDRA MARDARAJA DEO V. CIT 27 ITR 667 (ORI); (D) RGAO ELECTRODES LTD V. CIT 173 ITR 351 (KER); (E) HAJI MOHAMMAD USMAN & SONS V. CIT 25 ITR 252 (NAG) IT IS QUITE APPARENT FROM AN ANALYSTS OF THE APPELLA TE ORDERS IN THE APPELLANTS CASE IN PARA 6.1. ABOVE T HAT THOUGH THE HONBLE ITAT, BANGALORE BENCH HAD UPHELD THE APPELLANTS ELIGIBILITY FOR THE SAID DEDUCTION F ROM THE STAND POINT OF WHETHER THE APPELLANTS EMPLOYEES QUALIFIED AS WORKMEN WITHIN THE MEANING OF SEC. 8 0JJAA OR NOT, THE ALLOW-ABILITY OF DEDUCTION U/S 80JJAA WA S NEVER EXAMINED FROM THE POINT OF VIEW OF TENURE OF WORK BY THE SAID EMPLOYEES WITHIN THE MEANING OF THE DEFINITION OF THE TERM REGULAR WORKMEN CONTAINED IN EXPLANATION (II)(C) WHEREBY THOSE WHO WERE EMPLOYED F OR A PERIOD OF LESS THAN 300 DAYS DURING THE PREVIOUS YE AR WERE EXCLUDED FROM THIS DEFINITION. WHILE RESPECTF ULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL ITAT O N THE ISSUE RELATING TO THE APPELLANTS ELIGIBILITY FOR D EDUCTION U/S 80JJAA, THE MATTER IS SET ASIDE WITH A SPECIFIC DIRECTION TO THE AO TO RESTRICT THE DEDUCTION TO TH E EXTENT IT HAS BEEN CLAIMED FOR EMPLOYEES WHO HAVE WORKED FOR LESS THAN 300 DAYS IN THE PREVIOUS YEAR I N CONTRAVENTION OF EXPLANATION (II)(C) TO SEC. 80JJAA AFTER GIVING DUE OPPORTUNITY TO THE APPELLANT OF BEING HEA RD. PAGE 9 OF 33 ITA N O.1/BANG/2011 9 6. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE P RESENT APPEAL. DURING THE COURSE OF HEARING BEFORE US, THE LEARNED AR CAME UP WITH AN ELABORATE AND COMPREHENSIVE SUBMISSION COUPLED WITH VARIOUS CASE LAWS. THE SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMARIZED AS UNDER: (1) LOSS ON DAMAGE OF GOODS IN THE COURSE OF SHIPME NT IS ALLOWABLE IN COMPUTING THE BUSINESS INCOME: - THAT THE ASSESSEE HAD IMPORTED SHIPMENT OF CERTAI N COMPUTERS WHICH WERE, HOWEVER, DAMAGED DUE TO RAIN AT THE AIRPORT IN INDIA; AND THAT THE LOSS ON ACCOUNT OF DAMAGE OF COMPUTER AFTER NETTING OFF THE RECEIPT OF INSURANCE CLAIM WAS DEBITED TO P & L ACCOUNT AND CL AIMED AS DEDUCTION IN COMPUTING THE BUSINESS INCOME; - THAT THE AUTHORITIES BELOW DISALLOWED THE SAID CL AIMS BY CONCLUDING THAT THE LOSS WAS CAPITAL IN NATURE BY RE LYING ON S.37 OF THE ACT; - THAT BY EXTENSIVELY QUOTING THE RELEVANCE OF SECTIO NS 28 TO 44DB, IT WAS CONTENDED THAT S. 145 PROVIDES THAT INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS SHALL BE COMPUTED IN ACCORDANCE WITH EITH ER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; - THAT THE DEDUCTIONS ENUMERATED IN CH. IV D ALLOWA BLE IN COMPUTING THE BUSINESS INCOME ARE NOT EXHAUSTIVE OR FINITE. THE CHARGE U/S 28(I) IS IN RESPECT OF PRO FITS AND GAINS. THE TERM PROFITS OR GAINS HAS TO BE GIVE N ITS NATURAL MEANING; THAT THE SAID TERM HAS TO BE UNDER STOOD IN A COMMERCIAL SENSE. EXPENDITURE NECESSITATED OU T OF COMMERCIAL EXPEDIENCY HAS TO BE RECKONED IN COMPUTIN G PAGE 10 OF 33 ITA NO.1/BANG/2011 10 THE PROFITS AND GAINS. THE TERM HAS TO BE UNDERSTO OD TO MEAN REAL PROFITS AND GAINS - THAT THE CONCEPT OF PROFIT IN S.28 AND THE PROV ISIONS OF SECTIONS 30 TO 43D CORRESPOND TO S. 10(1) AND S. 10 (2) RESPECTIVELY OF THE INDIAN INCOME-TAX ACT 1922; RELIES ON CASE LAWS: BADRIDAS DAGA V. CIT (1958) 34 ITR 10 (SC); KEDARNATH JUTE MFG. CO. LTD V. CIT (1971) 82 ITR 36 3(SC); (III)MADEVA UPENDRA SINAI V. UNION OF INDIA (1975) 98 ITR 209 (SC); CIT V. CHITNIVAS, AIR 1932 PC 178; RAMACHANDER SHIVNARAYAN V. CIT (1978) 111 ITR 263 (S C) - THAT THE PRINCIPLES OUTLINED IN JUDICIAL PRECEDEN TS MAKE IT CLEAR THAT EXPENDITURE INCURRED / LOSS SUFFERED IN THE COURSE OF BUSINESS AND INCIDENTAL TO THE CARRYING OF BUSINESS IS ALLOWABLE AS DEDUCTION EVEN IN THE ABSE NCE OF ANY SPECIFIC PROVISION CONFERRING THE SAID DEDUCTION ; LOSS IS DIFFERENT FROM EXPENDITURE: - THAT S. 37 PROVIDES FOR DEDUCTION IN RESPECT OF A N EXPENDITURE; AND THAT EXPENDITURE INVOLVES OUTFLO W OF MONEY. LOSS IS DIFFERENT FROM EXPENDITURE. LOS S IS SOMETHING WHICH COMES AB EXTRA. THERE WOULD BE N O OUTFLOW OF MONEY. HOWEVER, THERE WOULD BE A DEPRIVA TION OF AN ECONOMIC BENEFIT OR RESOURCE WHEN LOSS IS SUF FERED. RELIES ON IN THE CASE OF DR. T.A. QUERESHI V. CIT ( 2006) 287 ITR 547 (SC); - THAT IN THE PRESENT CASE, THE LOSS ON DAMAGE OF S HIPMENT OF GOODS WERE INCIDENTAL AND ANCILLARY TO BUSINESS C ARRIED ON BY THE ASSESSEE; AND THAT THE FACT THAT SUCH LOSS WAS PAGE 11 OF 33 ITA NO.1/BANG/2011 11 ON ACCOUNT OF IMPORT OF COMPUTERS WERE IRRELEVANT. THUS, LOSS ON DAMAGE OF SHIPMENT OF GOODS IS ALLOWABLE IN COMPUTING THE BUSINESS INCOME AND THAT IT CANNOT BE DISALLOWED U/S 37, AS NO EXPENDITURE IS OCCASIONED BY THE LOSS. ALTERNATIVE CLAIMS: - THAT INCOME CHARGEABLE UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION SHALL BE COMPUTED IN ACCORDANCE WITH THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY AN ASSESSEE. THIS IS THE MANDATE OF S. 145(1). S.145(1) SHALL, HOWEVER, BE SUBJECTED TO T HE PROVISIONS OF SUB-SEC. (2) OF S.145; AND THAT AS PE R SUB- SEC(2), THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFF ICIAL GAZETTE THE ACCOUNTING STANDARDS TO BE FOLLOWED BY A NY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INC OME; - THAT TWO ACCOUNTING STANDARDS HAVE BEEN NOTIFIED TILL DATE BY THE CENTRAL GOVERNMENT U/S 145(2). ACCOUNTI NG STANDARD 1 RELATES TO DISCLOSURE OF ACCOUNTING POLI CIES AND ACCOUNTING STANDARD 2 RELATES TO DISCLOSURE OF PRIOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUN TING POLICIES; 6.1 ELABORATELY QUOTING THE ACCOUNTING STANDARD 1 AND ALSO RELYING ON THE CASE LAWS, NAMELY: (I) CIT V. GANNON DUNCKER LY AND CO. 119 ITR 595 (BOM); (II) AP STATE FINANCE CORPORATION V. CIT 150 ITR 533: & (III) PATNAIK & CO LTD V. CIT 161 ITR 365 (SC), IT WAS CONTENDED TH AT ASSUMING WITHOUT ADMITTING THAT THE SAID LOSS IS NO T ALLOWABLE IN COMPUTING THE BUSINESS INCOME, THE ACTUAL COST OF T HE COMPUTERS ACQUIRED BY THE APPELLANT WOULD GO TO INCR EASE THE VALUE OF BLOCK OF ASSETS AND THE INSURANCE CLAIM RE CEIPTS RECEIVED BY THE APPELLANT TOWARDS DAMAGE OF SHIPMENT WOULD BE REDUCED IN COMPUTING THE WRITTEN DOWN VALUE OF THE BLOCK OF PAGE 12 OF 33 ITA NO.1/BANG/2011 12 ASSETS. IT WAS ARGUED THAT THE APPELLANT WOULD BE ELIGIBLE TO CLAIM DEPRECIATION AT THE RATE OF 60% OR 30%, AS TH E CASE MAY BE, ON THE BLOCK VALUE AFTER FACTORING THE INVARIAN CE RECEIPT. THE CIT (A) HAD ERRED IN HOLDING THAT SINCE THE ASS ETS WERE NOT ACQUIRED/NOT READY FOR USE, THE APPELLANT WAS NOT EL IGIBLE TO CLAIM DEPRECIATION, BUT, THE CIT(A) HAD FAILED TO A PPRECIATE THAT IN RELATION TO THE BLOCK ASSETS, IT WAS NOT PO SSIBLE TO SEGREGATE ITEMS FALLING WITHIN THE BLOCK FOR THE PU RPOSES OF GRANTING DEPRECIATION OR RESTRICTING THE CLAIM THER EOF. IT WAS FURTHER CONTENDED THAT ONCE IT WAS FOUND THAT THE A SSETS FALL WITHIN A BLOCK, IT WAS NOT NECESSARY THAT ALL THE IT EMS FALLING WITHIN THE BLOCK HAVE TO BE SIMULTANEOUSLY USED FOR BEING ELIGIBLE TO DEPRECIATION. RELIES ON THE CASE LAW IN THE CASE OF CIT V. SONAL GUM INDUSTRIES (2010) 322 ITR 542 (GUJ); - WITH REGARD TO THE TERM BLOCK OF ASSETS AS DEFI NED IN S. 2 (11), IT WAS CLAIMED THAT IN THE INSTANT CASE, TH E COMPUTERS ARE A SPECIE OF PLANT AND MACHINERY AND ELIGIBLE FOR DEPRECIATION AT 60%. COMPUTERS THER EFORE FORM A SEPARATE BLOCK OF ASSET. THE COMPUTERS WERE PURCHASED BY THE ASSESSEE AND THE TITLE TO THE COMPU TERS PASSED IN FAVOUR OF THE ASSESSEE. IN OTHER WORDS, IT WAS CLAIMED THAT THE ASSESSEE BECAME THE OWNER OF COMPUTERS AND THE ACTUAL COST OF THE COMPUTERS INCR EASE THE VALUE OF BLOCK OF ASSET (COMPUTERS) WHICH ALREA DY EXISTED. THE ASSETS EXISTED IN THE SAID BLOCK WERE BEING USED BY THE ASSESSEE AND, THEREFORE, THE REQUIREMENT OF USE OF ASSETS AS PER S. 32 WAS MET/SATISFIED. T HUS, THE ASSESSEE, IT WAS CONTENDED, ELIGIBLE FOR DEPRECIATI ON U/S 32 IN RESPECT OF THE AMOUNT OF LOSS ON DAMAGE ON AC COUNT OF SHIPMENT OF GOODS; - THAT WITHOUT PREJUDICE, LOSS ON SHIPMENT OF GOODS IS TO BE CONSIDERED AND ALLOWED AS SHORT TERM CAPITAL LOSS , THAT THE LOSS DUE TO DAMAGE OF COMPUTERS WOULD BE COMPUT ED PAGE 13 OF 33 ITA NO.1/BANG/2011 13 UNDER THE HEAD CAPITAL GAINS AND THE LOSS SO ASCE RTAINED WOULD BE ELIGIBLE FOR SET OFF AND CARRY FORWARD IN ACCORDANCE WITH THE MANDATE OF CH. VI. S. 45(1A) OF THE ACT PRESCRIBES HOW LOSS IS TO BE COMPUTED WHEN THE ASSET IS DESTROYED AS A RESULT OF NATURAL CAUSES; & 6.1.2 THE LEARNED AR IN HIS SUBSEQUENT SUBMISSION HAD, MORE OR LESS, REITERATED WHAT WAS CONTENDED IN THE EARLIER HEARIN G. IN CONCLUSION, THE LEARNED AR HAD PLACED RELIANCE ON THE FOLLOWING CAS E LAWS FOR THE PROPOSITION THAT THE LOSS INCURRED IS TO BE ALLOWED AS BUSINESS LOSS : CIT V. INDUSTRY AND COMMERCE ENTERPRISES (P) LTD (1 979) 118 ITR 606 (ORI); ADDL. CIT V. BMS P LTD (1979) 119 ITR 321 (MAD); CIT V. DANDAYUTHAPANI FOUNDRY (P) LTD (1980) 123 IT R 709 (MAD); CIT V. DHAMPUR SUGAR MILLS LTD (1988) 177 ITR 675 ( ALL) JWALA PRASAD RADHA KISHAN V. CIT (1971) 79 ITR 530 (ALL); CIT V. INDEN BISELERS (1973) 91 ITR 427 (MAD); THACKERS H P & CO V. CIT (1982) 134 ITR 21 (MP); CIT V. K M MODY (1983) 141 ITR 903 (BOM); CIT V. F M CHINOY & CO P LTD (1969) 74 ITR 780 (BOM ); ACIT V. W S INDUSTRIES INDIA LTD (2011) 9 ITR (TRIB) 596 (CHENNAI); IBM WORLD TRADE CORPORATION V. CIT (1990) 186 ITR 4 12 (BOM); CIT V. TULSI RAM KARAM CHAND (1964) 52 ITR 180 (PUN E); & ZENITH STEEL PIPERS LTD (NO.2) V. CIT (1990) 186 IT R 594 (BOM) 6.2 DEDUCTION UNDER SECTION 80JJAA OF THE ACT : WITH REGARD TO THE ABOVE ISSUE, THE LEARNED AR FURN ISHED ELABORATE SUBMISSIONS. THE SUMMARY OF THE SAME IS E XTRACTED AS UNDER:- ---------------------------- 7) THE HONBLE ITAT, BANGALORE IN APPELLANTS OWN CASE FOR THE EARLIER YEARS HAS HELD THAT THE EMPLOYEES OF THE APPELLANT ARE WORKMEN FOR THE PURPOSES OF SECTION 80JJAA AN D THE APPELLANT IS ELIGIBLE FOR DEDUCTION UNDER SECTION 8 0JJAA. THESE DECISIONS ARE AS FOLLOWS:- PAGE 14 OF 33 ITA NO.1/BANG/2011 14 A) ACIT V TEXAS INSTRUMENTS INDIA P LTD. (2008) 115 TT J 976 (BANGALORE) ASSESSMENT YEAR 2001-02, ASSESSMENT YEAR 2002-03; B) ACIT V TEXAS INSTRUMENTS INDIA P LTD. AND VICE VERS A ITA NO.1343/B/2008 & 1356/B/2008 ASSESSMENT YEAR 2004-05 ; C) DCIT V TEXAS INSTRUMENTS INDIA P LTD. ITA NO.1358/B/2010 DT.29.9.2011 ASSESSMENT YEAR 2005-06. 8) DEDUCTION UNDER SECTION 80JJAA IS ALLOWED I N RESPECT OF THIRTY PERCENT OF ADDITIONAL WAGES PAID TO THE NEW REGULAR WORKMEN EMPLOYED BY THE ASSESSEE IN THE PREVI OUS YEAR. THE DEDUCTION IS ALLOWED FOR THREE ASSESSMENT YEARS INCLUDING THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH SUCH EMPLOYMENT IS PROVIDED. 9) THE TERM REGULAR WORKMAN IS DEFINED IN A NEGAT IVE MANNER. SOME CATEGORIES OR CLASSES OF EMPLOYEES ARE SAID, NOT TO CONSTITUTE REGULAR WORKMAN. THESE ARE - A) A CASUAL WORKMAN; B) A WORKMAN EMPLOYED THROUGH CONTRACT LABOUR; OR C) ANY OTHER WORKMAN EMPLOYED FOR A PERIOD OF LESS TH AN 300 DAYS DURING THE PREVIOUS YEAR. 10) THE TERM REGULAR WORKMAN IS DEFINED IN A NEGA TIVE WAY. THE TERM WORKMAN HOWEVER WOULD HAVE THE SAME MEAN ING AS IS ASSIGNED TO IT UNDER THE INDUSTRIAL DISPUTES ACT. IN THE ABSENCE OF A POSITIVE DEFINITION, THE TERM REGULAR IN THE PHRASE REGULAR WORKMAN WOULD HAVE TO BE UNDERSTOO D AS NOT TEMPORARY, NOT SEASONAL, NOT IRREGULAR, AND NOT CASU AL. THE FIRST TWO LIMBS OF THE DEFINITION EXCLUDE IMPERMANENT EMP LOYEES. THE SAME PRINCIPLE SHOULD ATTACH EVEN THE THIRD LIM B OF THE DEFINITION. THIS WOULD BE ON THE PRINCIPLE OF EJUS DEM GENERIS. THE REFERENCE TO 300 DAYS SHOULD THEREFORE HAVE TO B E UNDERSTOOD AS EXCLUDING PERSONS WHO HAVE BEEN GIVEN TEMPORARY JOBS. PAGE 15 OF 33 ITA NO.1/BANG/2011 15 11) THE REFERENCE TO 300 DAYS OF EMPLOYMENT IN SECTIO N 80JJAA IS TO EXCLUDE SEASONAL INDUSTRIES FROM CLAIM ING A DEDUCTION; TO EXCLUDE INDUSTRIES, WHERE THE NATURE OF ACTIVITY IS SUCH THAT THEY ARE FORCED TO FREQUENTLY RECRUIT AND L AY-OFF PEOPLE. IN THE ERSTWHILE LAW ON DEPRECIATION FOR E XAMPLE, SEASONAL INDUSTRIES WORK REFERRED TO AS THOSE IN OP ERATION FOR 240 DAYS. 300 DAYS PROBABLY IS A BUILT-UP OF 25% OVE R AND ABOVE SUCH A FIGURE, IN AN ATTEMPT TO PREVENT THE S EASONAL INDUSTRY FROM CLAIMING A DEDUCTION UNDER SECTION 80J JAA. 12) SECTION 80JJAA WAS INTRODUCED TO FACILITATE GE NERATION OF NEW EMPLOYMENT OPPORTUNITIES. AN INCENTIVE WAS T HEREFORE OFFERED TO ASSESSEES GIVING EMPLOYMENT TO A SPECIFIE D MINIMUM NUMBER OF EMPLOYEES. THE INTERPRETATION OF THE SECT ION SHOULD BE IN A MANNER WHICH PROMOTES THE OBJECTIVE SOUGHT TO BE ACHIEVED AND NOT FRUSTRATE IT. BEING A BENEFICIAL PROVISION, IT MUST BE LIBERALLY CONSTRUED. THESE WERE THE GUIDELI NES GIVEN BY THE SUPREME COURT WHILE DEALING WITH DEDUCTION UNDE R SECTION 80J IN THE CASE OF BAJAJ TEMPO V CIT 196 ITR 188. THE SECTION IS TO BE INTERPRETED IN A PURPOSIVE MANNER . ---------------------------------- 18) ALTERNATIVELY, FOR A PERSON TO BE A NEW REGUL AR WORKMAN HE MUST HAVE BEEN IN THE FIRST PLACE A RE GULAR WORKMAN. HE COULD BE A REGULAR WORKMAN ONLY IF HE HAS WORKED FOR 300 DAYS IN ANY YEAR. IF AN EMPLOYEE HAS B EEN RECRUITED AFTER 5 TH JUNE OF A FINANCIAL YEAR, HE MAY NOT BE REGARDED AS A REGULAR WORKMAN FOR THAT YEAR AS THE CRITERIA OF EMPLOYMENT FOR THE MINIMUM NUMBER OF DAYS WOULD NO T BE SATISFIED. THIS SHOULD NOT, PREVENT HIM FROM BEING REGARDED AS A REGULAR WORKMAN IN THE NEXT YEAR PROVIDED HE HAS WORKED FOR MORE THAN 300 DAYS IN THAT YEAR. HAVING BECOME A REGULAR WORKMAN IN THE NEXT YEAR, THE WAGES PAID TO HIM WOU LD THEN QUALIFY FOR DEDUCTION. THE DEDUCTION SHOULD BE AVAI LABLE FOR 3 CONSECUTIVE ASSESSMENT YEARS FROM THE YEAR IN WHICH H E BECOMES A REGULAR WORKMAN. PAGE 16 OF 33 ITA NO.1/BANG/2011 16 6.3 TP ADJUSTMENT : WITH REGARD TO THE ABOVE ISSUE, THE LEARNED AR SUBM ITTED THAT IF IT IS CONCLUDED THAT LOSS ON DAMAGE ON ACCOUNT O F SHIPMENT OF COMPUTERS IS NOT ALLOWABLE AS DEDUCTION NOR FORMS PART OF THE BL OCK OF ASSETS, THE SAME WOULD HAVE TO BE CONSIDERED AS NON-OPERATING COST AND SHOULD BE EXCLUDED FOR THE PURPOSES OF COMPUTATION OF ARMS LENGTH PRIC E U/S 92. WHEN THE SAID LOSS IS EXCLUDED FROM OPERATING COST, THE OPERATING COST WOULD REDUCE AND ACCORDINGLY, THE ADJUSTMENT U/S 92CA WHICH IS COMPUT ED ON THE BASIS OF OPERATING COST WOULD ALSO BE REDUCED. THIS WOULD R ESULT IN DECREASE IN THE VALUE OF ADJUSTMENT DETERMINED BY THE TPO U/S 92CA A ND, ACCORDINGLY, WOULD REDUCE THE TAXABLE INCOME. 7. ON THE OTHER HAND, THE LEARNED D R HAD REPUDIA TED THE LEARNED ARS CLAIMS FOR (I) ALLOWANCE OF LOSS OF RS.1.09 CR ORES AS REVENUE LOSS U/S 37 OR BUSINESS LOSS U/S 28; (II) DEPRECIATION U/S 32 O F THE ACT; AND (III) CAPITAL LOSS U/S 45(1). THE SUBSTANCES AND SUMMARY OF THE S UBMISSIONS OF THE LEARNED D.R ARE SUMMED UP AS UNDER: THAT VARIOUS TESTS HAVE BEEN LAID BY THE COURTS FOR THE DEPRECIATION ALLOWANCE TO AN ASSESSEE IN COMPUTING THE BUSINESS INCOME, SUCH AS BENEFICIAL OWNERSHIP, POSSESSION, R EADY TO USE OR PASSIVE USER AND BUSINESS USER. RELIES ON THE CASE LAWS: (I) 323 ITR 018 (KAR); (II) 323 ITR 672 (MP); & (III) 328 ITR 297 (DEL) PAGE 17 OF 33 ITA NO.1/BANG/2011 17 THAT THE COMMON LINE IS THAT THE ASSETS HAVE BECOME PART OF THE BLOCK BY VIRTUE OF THEIR POSSESSION AND AVAILABILITY FOR USE, OR ACTUAL USER IN THE PAST AND THEY EXISTED WITH THE AS SESSEE AT THE END OF THE PREVIOUS YEAR; IN ORDER TO BE PART OF BLOCK OF ASSETS, THE ASSET M UST EXIST AND NOT SOLD, DESTROYED OR DEMOLISHED OR OTHERWISE DISPOSED OFF. IN THE PRESENT CASE, THE ASSETS WERE DESTROYED IN TRANSIT B EFORE REACHING THE PREMISES OF THE ASSESSEE FOR USE IN BUSINESS. BY NO STRETCH, THE ASSET COULD BE SAID TO BE FORM PART OF ANY BLOCK , ENTITLED TO DEPRECIATION. MERELY BECAUSE THE ASSESSEE HAD A BLO CK OF ASSET CONSISTING OF SIMILAR PLANT AND MACHINERY AND HAD IN CURRED CAPITAL OUTGO, THEY VERY FACT THAT SUCH CAPITAL OUTLAY DID NOT RESULT IN BRINGING THE ASSETS IN EXISTENCE AND BUSINESS USER, WOULD MEAN THAT SUCH EXPENDITURE WOULD NOT LEAD TO ANY ADDITION IN T HE OPENING WDV OF THE BLOCK AND, HENCE, NO DEPRECIATION. AS SEC. 2(11) CLEARLY MENTIONS THAT THE BLOCK OF AS SETS REPRESENTS A GROUP OF ASSETS, IN RESPECT OF WHICH, SAME PERCEN TAGE OF DEPRECIATION IS PRESCRIBED COMPRISING OF TANGIBLE ( BUILDING, FURNITURE, PLANT AND MACHINERY ETC., ) AND INTANGIBL E ASSETS. RULE 5(2) OF THE I.T. RULES REQUIRES THAT A NEW PLANT AN D MACHINERY MUST BE INSTALLED FOR THE PURPOSES OF BUSINESS OF MANUFA CTURE OF ANY ARTICLE OR THING..; THAT OWNERSHIP OF AN ASSET IS NOT TO BE DETERMINED BY THE PAPER OR OWNERSHIP DOCUMENT, BUT, BY POSSESSION AND EXERCISE OF DOMINION AND RIGHT TO USE AND ENJOY THE USUFRUCT; AND THAT TH E TERM ACQUIRED USED IN S. 43(6)(A) HAS TO BE UNDERSTOOD IN THIS CONTEXT, NOT MERELY IN TERMS OF PAYMENT OF CONSIDERATION AND I SSUE OF BILLS BY VENDOR. WHERE THE ASSET IS IN THE PROCESS OF AC QUISITION, BY CAPITAL OUTLAY, AND IS LOST, BEFORE REACHING THE ASS ESSEE AND BEING INSTALLED FOR BUSINESS PURPOSE, IT CANNOT BE SAID T HAT IT HAS BEEN ACQUIRED, AND/OR INCLUDED IN ANY BLOCK OF ASSETS, AN D/OR BECOMES ELIGIBLE FOR DEPRECIATION; PAGE 18 OF 33 ITA NO.1/BANG/2011 18 RELIES ON THE CASE LAWS: (A) 108 ITD 613 (B) (2002) 257 ITR 253 (MAD) (C) (2008) 21 SOT 122 (DELHI TRIB) THAT THE CASE LAWS RELIED ON BY THE LEARNED AR TO C LAIM THE LOSS AS BUSINESS RELATES TO STOCK IN TRADE OR NON-CAPITAL LOSS AND DEAL WITH OUTLAYS/LOSS WHICH WERE PRIMARILY IN THE ORDINARY COUR SE OF BUSINESS, NON-REVENUE IN NATURE (SECURITY DEPOSIT) W HICH WERE ORIGINALLY MADE FOR BUSINESS EXPEDIENCY OR TO INCREAS E THE BUSINESS, BUT THEY COULD NOT BE HELD TO BE CAPITAL O UTLAYS IN THE FIRST PLACE, SINCE THEY DID NOT ADD TO THE INCOME/P ROFIT-EARNING APPARATUS REFER 46 ITR 649 (SC). IN THE INSTANT CASE, THE OUTLAY WAS FOR CAPITAL ASSET AND NOT IN THE ORDINARY COURSE OR FOR BUSINESS EXPEDIENCY. HENCE, THE LOSS IS NOT ALLOWABLE AS A B USINESS LOSS U/S 28; THAT MERELY BECAUSE A LOSS COULD NOT BE ALLOWED AS B USINESS LOSS, THE OUTLAY WOULD NOT AUTOMATICALLY RESULT IN ANY CAPIT AL ASSET. SECTION 45(1A) CONTEMPLATES TO TREAT THE MONEY OR AS SETS RECEIVED FROM INSURER AS CAPITAL GAINS IF ANY PROF IT AND GAIN ARISES FROM SUCH RECEIPT IN RESPECT OF A CAPITAL ASSET (DE EMED TRANSFER); CLAIM U/S 80JJAA 7.1 WITH REGARD TO THE CLAIM OF DEDUCTION UNDER S ECTION 80JJAA, THE REVENUES CONTENTION IS SUMMARIZED AS FOLLOWS:- THAT THE INCENTIVE PROVISION HAS TO BE INTERPRETED IN A MANNER WHICH LEADS TO ACHIEVING THE INTENDED OBJECTIVE; TH AT ANY OTHER INTERPRETATION THAT WOULD DEFEAT THE VERY PURPOSE H AS TO BE REJECTED; AND THAT THE COMPLIANCE TO THE CONDITIONS HAS TO BE STRICT AND COMPLETE AND NOT A FORMALITY; THAT IT COULD BE SEEN FROM THE AUDITORS REPORT IN FORM 10DA, THE NUMBER OF WORKMEN AS ON THE FIRST DAY OF THE PREVIOU S YEAR WAS 846 AND THE ASSESSEE CLAIMS TO HAVE FURTHER EMPLOYED 351 NEW PAGE 19 OF 33 ITA NO.1/BANG/2011 19 REGULAR WORKMEN AND OUT OF THE TOTAL OF 1197 WORKME N, 149 WORKMEN CEASED TO BE EMPLOYED WITH THE ASSESSEE DURI NG THE YEAR. THE WORKMEN WHO LEFT THE EMPLOYMENT INCLUDED 42 WORK MEN NEWLY EMPLOYED AND ANOTHER 4 NEWLY EMPLOYED WHO WORKED FOR M ORE THAN 300 DAYS, LEAVING 1048 WORKMEN AS ON THE LAST DATE ( COL. 7). AS MENTIONED IN COL 11(C) OF FORM 10DA, NUMBER OF REGU LAR WORKMEN EMPLOYED AS ON THE LAST DATE OF THE PREVIOUS YEAR INC LUDING NEWLY EMPLOYED WORKMEN WERE EMPLOYED FOR LESS THAN 300 DAYS . HOWEVER, NO DETAILS HAVE BEEN FURNISHED. EVEN IN T HE NOTES TO REPORT IN FORM 10DA, THE AUDITOR HAD NOT MENTIONED SUCH NUMBER OF EMPLOYEES, BUT, MERELY, MENTIONED THAT THOUGH SUCH NEWLY EMPLOYED WORKMEN WORKED FOR LESS THAN 300 DAYS, THEY H AVE BEEN CONSIDERED FOR DEDUCTION; THAT THE LEGAL POSITION FORM 10DA, CBDTS CIRCULA R NO.772 DATED 23.12.1998 CLEARLY STATE THAT THE NEW REGULAR WORK MEN MUST BE IN EMPLOYMENT FOR AT LEAST 300 DAYS TO BE ELIGIBLE FOR D EDUCTION; THAT THE OBJECT OF S. 80JJA (SIC) 80JJAA IS INDISPU TABLY TO ENCOURAGE EMPLOYMENT IN THE ORGANIZED SECTOR. THE I NCENTIVE IS AIMED AT NOT ONLY PROVIDING EMPLOYMENT OR MERE RECRUI TMENT BUT ALSO RETAINING SUCH NEW WORKMEN ON REGULAR EMPLOYMEN T FOR LONG PERIODS. IF AN ASSESSEE MERELY EMPLOYS THE WORKMEN I N THE LAST QUARTER OR LAST MONTH OF THE PREVIOUS YEAR AND REMOV ES THEM IN THE SHORT TIME AFTER THE END OF THE PREVIOUS YEAR, T HE LEGISLATION IS NOT FOR GIVING TAX INCENTIVE TO SUCH ASSESSEE EMPLO YER. ANOTHER SITUATION COULD BE THAT THE WORKMEN ARE RECRUITED A ND RETRENCHED BY AN EMPLOYER ASSESSEE IN ORDER TO MERELY REACH THE R EQUIRED PERCENTAGE OF NEWLY EMPLOYED WORKMEN. IN BOTH THE SI TUATION, THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTION. EMPLO YMENT SHOULD NOT BE MERELY A FAADE OR A SUBTERFUGE FOR CLAIMING DEDUCTION; THAT THE EARLIER HONBLE BENCH HAD, IN THE ASSESSEE S OWN CASE FOR THE AY 2004-05, SET ASIDE THE CIT (A)S ORDER AND R ESTORED THE MATTER TO THE AO; AND THAT IN THE YEAR UNDER APPEAL, THE CIT (A) HAS ONLY SET ASIDE THE MATTER TO THE AO TO EXAMINE C OMPLETE FACTS AND, THEREFORE, THE ASSESSEES GRIEVANCE IS PREMATU RE AND MISPLACED. PAGE 20 OF 33 ITA NO.1/BANG/2011 20 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS, PERUSED THE MATERIALS AVAILABLE ON RECORD AND ALSO THE VARIOUS CASE LAWS ON WHICH THE LEARNED AR AS WELL AS THE LEARNED DR HAVE PLACED ST RONG RELIANCE. THE PRIME ISSUES RAISED BY THE ASSESSEE ARE ON TH REE COUNTS, NAMELY: (I) THE CLAIM OF RS.1.09 CRORES REPRESENTING LOSS ON DA MAGE OF SHIPMENT OF COMPUTERS; (II) IF THE LOSS ON DAMAGED SHIPMENT WERE TO BE HELD AS CAPITAL IN NATURE, THE CORRESPONDING REVENUE DERIVE D IN RESPECT OF SUCH LOSS SHOULD HAVE BEEN CONSIDERED AS NON- OPERATING COST AND SHOULD BE EXCLUDED FOR THE PURP OSES OF COMPUTATION OF ALP; & (III) CLAIM OF DEDUCTION U/S 80JJAA OF THE ACT. WE SHALL NOW TAKE UP THE ISSUES FOR CONSIDERATIO N CHRONOLOGICALLY AS UNDER: LOSS ON DAMAGE OF SHIPMENT OF COMPUTERS: 8.1.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS , IT WAS NOTICED BY THE AO FROM THE AUDIT REPORT IN FORM 3CD THAT A SUM OF RS.1.09 CRORES BEING LOSS ON DAMAGE OF SHIPMENT WAS DEBITED TO P & L ACCOUNT, HOWEVER, NOT ADDED BACK IN THE COMPUTATION OF TOTAL INCOME OF TH E ASSESSEE. ON BEING QUERIED, IT WAS ASCERTAINED THAT DURING THE YEAR UND ER CONSIDERATION, THE ASSESSEE HAD PLACED AN ORDER WITH ITS SUPPLIER IN U SA FOR SUPPLY OF CERTAIN COMPUTER EQUIPMENTS. ACCORDING TO THE ASSESSEE, THE COMPUTER EQUIPMENTS GOT DAMAGED WHILE IN TRANSIT AND THE SAME WAS SENT BACK FOR WHICH INSURANCE CLAIM WAS MADE. IT WAS THE CASE OF THE ASSESSEE TH AT LOSS INCURRED IN RESPECT OF DAMAGED EQUIPMENT AGGREGATING TO RS1.09 CRORES, (PURCHASE COST PAGE 21 OF 33 ITA NO.1/BANG/2011 21 MINUS INSURANCE AMOUNT RECEIVED) WAS DEBITED TO ITS P & L ACCOUNT AND CLAIMED AS A DEDUCTION. 8.1.2 REJECTING THE ASSESSEES CONTENTIONS AND CI TING VARIOUS CASE LAWS, THE AO HAD OBSERVED IN THE ASSESSMENT ORDER T HAT THE NATURE OF EXPENDITURE IS ALWAYS DECIDED BY THE AIM OR OBJECTIV E WITH WHICH IT WAS INCURRED IRRESPECTIVE OF ITS NOMENCLATURE OR THE AC COUNTING TREATMENT GIVEN TO IT. IN THE INSTANT CASE, THE APPELLANTS OBJECT IVE WAS ACQUISITION OF A CAPITAL ASSET WHICH IS NOTHING BUT CAPITAL EXPENDIT URE. HENCE, ANY LOSS OR EXPENDITURE INCURRED IN THIS CONNECTION WOULD BE CA PITAL IN NATURE. 8.1.3 THE ALTERNATIVE CLAIM OF THE ASSESSEE THAT IN THE EVENT THE LOSS WAS HELD TO BE CAPITAL IN NATURE, IT SHOULD BE ADDE D TO THE BLOCK OF ASSETS AND DEPRECIATION BE ALLOWED ON THE SAME, FOR WHICH, THE AO OPINED THAT DEPRECIATION WAS ALLOWABLE U/S 32 IN RESPECT OF ASS ETS OWNED AND USED FOR THE PURPOSE OF THE BUSINESS. IN OTHER WORDS, IN O RDER TO BE ELIGIBLE FOR DEPRECIATION, IT WAS ESSENTIAL TO FULFILL BOTH THE CONDITIONS VIZ., (I) BEING OWNED AND (II) USED FOR THE PURPOSE OF THE BUSINESS . HOWEVER, IN THE INSTANT CASE, THE AO POINTED OUT THAT WHEN THE EQUIPMENT WA S DAMAGED AND RETURNED WITHOUT BEING TAKEN INTO THE ASSESSEES PR EMISES, IT CANNOT BE SAID THAT THE EQUIPMENT WAS USED FOR THE PURPOSE OF BUSI NESS. MOREOVER, IT WAS NOT EVEN CAPABLE OF BEING PUT TO USE. HENCE, THE A SSESSEES ALTERNATIVE CLAIM FOR ALLOWING DEPRECIATION ON THE AMOUNT OF LOSS ON ACCOUNT OF DAMAGE TO THE EQUIPMENT/MACHINE WAS FOUND TO BE UN-ACCEPTABLE. PAGE 22 OF 33 ITA NO.1/BANG/2011 22 8.1.4 AFTER GIVING DUE WEIGHT-AGE TO THE ASSESSEE S CONTENTIONS DURING THE COURSE OF APPELLATE PROCEEDINGS, THE CIT (A) WAS OF THE VIEW THAT THE ASSESSEE HAD ACQUIRED THE ASSET AND TAKEN DELIV ERY OF THE SAME. IT WAS EVIDENT FROM THE FACT THAT THE ASSESSEE HAD ALSO IN SURED THE EQUIPMENT, ON ACCOUNT OF WHICH, IT HAD RECEIVED INSURANCE CLAIM A ND THAT THE ASSESSEE OWNED THE EQUIPMENT. ACCORDING TO THE CIT (A), SIN CE THE ASSESSEE HAD OWNED THE EQUIPMENT, ITS CLAIM THAT THE PURCHASE DI D NOT FINALLY MATERIALIZE AND, THEREFORE, THERE WAS NO ENDURING BENEFIT ETC., DOES NOT HOLD WATER. ULTIMATELY, THE ASSESSEES AIM WAS ACQUISITION OF A CAPITAL ASSET, IT WAS NOTHING BUT A CAPITAL EXPENDITURE AND, HENCE, ANY LO SS OR EXPENDITURE INCURRED IN THIS CONNECTION WAS CAPITAL IN NATURE. 8.1.5 FOLLOWING THE JUDGMENT OF THE HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF D. P. CHIRANIA & COMPANY AND ALSO THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF HASIMARA INDUSTRIES LT D, THE CIT (A) HAD OBSERVED THAT MERELY REITERATING AD NAUSEAM THAT THE LOSS WAS INCURRED IN THE ORDINARY COURSE OF BUSINESS AND WAS, THEREFORE I NCIDENTAL TO IT DOES NOT MAKE IT SO NOR DOES IT AUTOMATICALLY QUALIFY THE LOSS AS ALLOWABLE AS REVENUE EXPENDITURE. 8.1.6 WE HAVE DULY TAKEN COGNIZANCE OF THE SUBMISS IONS PUT FORTH DURING THE COURSE OF HEARING. HOWEVER, WE ARE NOT IN AGREEMENT WITH THE CONTENTIONS OF THE ASSESSEE. AS A MATTER OF FACT, THE ASSESSEE HAD PLACED ORDER FOR SUPPLY OF MACHINERY. WHEN THE EQUIPMENT WA S IN TRANSIT, ACCORDING TO THE ASSESSEE, IT GOT DAMAGED AND RETUR NED TO THE SUPPLIER. THE INSURANCE COMPANY HAD COMPENSATED THE ASSESSEE A PAR T OF THE COST OF THE PAGE 23 OF 33 ITA NO.1/BANG/2011 23 ASSET SO DAMAGED. AS RIGHTLY POINTED OUT BY THE AO, THE DIFFERENCE BETWEEN THE COST OF THE EQUIPMENT AND THE AMOUNT SO REIMBURSED BY THE INSURANCE COMPANY WAS A CAPITAL LOSS HAVING BEEN INC URRED IN RELATION TO ACQUISITION OF A CAPITAL ASSET. THE NATURE OF EXPE NDITURE HAS TO BE DECIDED BY THE OBJECTIVE WITH WHICH IT IS INCURRED AND NOT B Y THE NOMENCLATURE OR THE ACCOUNTING TREATMENT GIVEN TO THE EXPENDITURE. THE MAIN OBJECTIVE OF THE ASSESSEE WAS TO ACQUIRE THE MACHINERY AND NATURA LLY THE ENTIRE EXPENDITURE FOR ITS ACQUISITION WILL HAVE TO BE CAP ITALIZED. IN THE INSTANT CASE, THE EQUIPMENT GOT DAMAGED WHILE IN TRANSIT, T HE INSURANCE COMPANY AFTER DULY ASSESSING THE DAMAGE COMPENSATED A PORTIO N OF THE COST OF THE EQUIPMENT. MOREOVER, THE ASSESSEE HAD TREATED THE RECEIPT OF THE INSURANCE CLAIM AS A CAPITAL RECEIPT IN ITS ACCOUNTS. THUS, THE REMAINING PORTION OF THE COST OF THE EQUIPMENT, AS RIGHTLY OBSERVED BY THE AO AND SUBSEQUENTLY SUSTAINED BY THE CIT (A), CANNOT BE ALLOWED AS A REV ENUE LOSS. 8.1.7 AT THIS JUNCTURE, IT IS MORE APPROPRIATE TO RECALL THE RULING OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F D.P. CIRANIA & CO V. CIT REPORTED IN (1978) 112 ITR 0012 (KAR). AFTER DULY A NALYZING THE ISSUE AND ALSO EXTENSIVELY REFERRING VARIOUS RULINGS, THE HON BLE COURT HAD HELD THAT: 39. THE CONSIDERATION IN THE PRESENT CASE WHICH, I N OUR OPINION, POINT SO CLEARLY AS TO DOMINATE THE OTHER A ND VAGUER INDICATION TO THE CONTRARY ARE THOSE THAT BEA R UPON THE QUESTION WHETHER THE OUTLAY BRINGS INTO EXISTENCE AN ADVANTAGE FOR THE ENDURING BENEFIT O F THE BUSINESS AND PERTAINS TO THAT ASPECT OF THE STRUCTU RE AND ORGANIZATIONAL SET UP OF THE BUSINESS WHICH CORRESP ONDS TO THE PROFIT EARNING APPARATUS AS DISTINCT FROM IT S PROFIT EARNING PROCESS. PAGE 24 OF 33 ITA NO.1/BANG/2011 24 40. THE OUTLAY IN THE PRESENT CASE IS ON THE CONSTRU CTION OF ACCESS ROADS. THE OUTLAY, UNDOUBTEDLY, BRINGS INT O EXISTENCE AN ADVANTAGE. WHETHER IT IS OF AN ENDURI NG NATURE IS ESSENTIALLY, A MATTER OF DEGREE. IF THE O UTLAY HAD BEEN MADE ORIGINALLY BEFORE THE COMMENCEMENT OF THE ACTUAL WORK OF TRANSPORTATION PURSUANT TO THE CONTRACT, IT WOULD HAVE PERTAINED MORE TO THE ORGANIZATIONAL SET-UP AND THE PROFIT EARNING APPARA TUS THAN TO PROFIT EARNING PROCESS. IN OUR OPINION, TH E OUTLAY DOES NOT SHED THIS ESSENTIAL ELEMENT BY REASON ALONE OF THE CIRCUMSTANCE THAT IT WAS MADE DURING THE PERFORMANCE OF THE CONTRACT TRANSPORTATION OF ORE. THIS IS APART FROM THE ONCE FOR ALL QUALITY OF THE OUTLA Y WHICH IS MADE FOR CONSTRUCTION OF THE ACCESS ROADS. 41. IN OUR OPINION, THE OUTLAY DOES, THEREFORE, BRI NG INTO EXISTENCE AN ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS, ENDURING IN THE SENSE THAT IT IS REASONAB LY EXPECTED TO EXTEND OVER THE DURATION OF THE BUSINES S VENTURE UNDER THE CONTRACT. ON AN APPRECIATION OF THE WHOLE SET OF CIRCUMSTANCES AND ALL THE GUIDING FEAT URES THE OUTLAY MUST BE HELD TO BELONG TO THE STRUCTURE A ND ORGANIZATIONAL SET-UP OF THE BUSINESS. THE OUTLAY Q UEST ACCORDINGLY BE HELD TO BE OF A CAPITAL AND NOT REVEN UE NATURE. 8.1.8 WITH DUE RESPECTS, WE HAVE PERUSED THE RULI NG OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA) AND OF THE FIRM V IEW THAT THE RATIO LAID DOWN BY THE HONBLE COURT IS DIRECTLY APPLICABLE TO T HE FACTS OF THE ISSUE ON HAND IN THE SENSE THAT THE CAPITAL EXPENDITURE WHIC H WAS WHOLLY AND EXCLUSIVELY LAID OUT OR EXPENDED FOR THE PURPOSE OF BUSINESS WAS NOT ALLOWABLE. THE RATIO PRESCRIBED BY THE HONBLE HIGH COURT (SUPRA) HAS BEEN REINFORCED BY THE VERDICT OF THE HONBLE SUPREME COU RT IN THE CASE OF HASIMARA INDUSTRIES LTD V. CIT & ANR REPORTED IN (1 998) 230 ITR 927 (SC). PAGE 25 OF 33 ITA NO.1/BANG/2011 25 IT WAS RULED BY THE HONBLE APEX COURT THAT THE ASSESSEE BEING ENGAGED IN TEA BUSINESS, AMOUNT DEPOSITED BY THE ASSESSEE WITH THE LICENSOR COMPANY FOR THE PURPOSE OF SECURING LICENCE UNDER WHICH THE ASSESSEE COULD WORK LICENSORS COTTON MILLS WAS FOR THE PURPOSE OF ACQU IRING A PROFIT MAKING ASSET AND LOSS OF SUCH DEPOSIT FOLLOWING LIQUIDATION OF L ICENSOR-COMPANY COULD NOT BE DEDUCTED AS BUSINESS LOSS. 8.1.9 TAKING INTO ACCOUNT ALL THE FACTS AS DELIBE RATED UPON IN THE FORE-GOING PARAGRAPHS AND ALSO IN CONFORMITY WITH TH E RULINGS OF THE HONBLE JURISDICTIONAL HIGH COURT AND THE HONBLE APEX COUR T CITED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS FULLY JUSTIFIED IN REJECTING THE ASSESSEES CLAIM OF DEDUCTION OF RS.1.09 CRORES BEI NG THE LOSS ON ACCOUNT OF DAMAGE TO AN ASSET. 8.2 BEFORE PARTING WITH, WE WOULD LIKE TO REITERA TE THAT WE HAVE DULY PERUSED THE CASE LAWS RELIED ON BY THE ASSESSEE AND OF THE FIRM VIEW THAT THEY HAVE NO RELEVANCE TO THE FACTS OF THE ISSU E UNDER CONSIDERATION. 8.2.1 IN RESPECT OF ALTERNATIVE CLAIM OF THE ASSE SSEE IN ALLOWING DEPRECIATION U/S 32 OF THE ACT, WE FIND THAT THE AO HAD, AFTER CONSIDERING THE ASSESSEES CONTENTIONS, REJECTED THE CLAIM ON T HE GROUND THAT 4.12..THUS, IN ORDER TO BE ELIGIBLE FOR DEPRE CIATION, IT IS NECESSARY THAT BOTH THE ABOVE CONDITIONS VIZ., (I) BEING OWNE D AND (II) USED FOR THE PURPOSE OF THE BUSINESS, SHOULD BE SATISFIED. APPA RENTLY IN THIS CASE, THE SECOND REQUIREMENT OF BEING USED IS NOT SATISFIED . WHEN THE MACHINE GOT DAMAGED IN THE AIRPORT AND WAS RETURNED WITHOUT IT BEING TAKEN TO THE PAGE 26 OF 33 ITA NO.1/BANG/2011 26 ASSESEES PREMISES, IT CANNOT BE SAID THAT THE MACH INE WAS USED FOR THE PURPOSE OF THE BUSINESS. IT WAS NOT EVEN CAPABLE O F BEING PUT TO USE. CONSIDERING THESE FACTS OF THE CASE, THE ASSESSEES ALTERNATIVE CLAIM FOR ALLOWING DEPRECIATION ON THE AMOUNT OF LOSS ON ACCO UNT OF DAMAGE TO THE MACHINE ALSO CANNOT BE ACCEPTED. 8.2.2 AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE, AMONG OTHERS, BEFORE THE CIT (A)-LTU VIDE GROUND NO.27. HOWEVER , WE FIND THAT THERE HAS BEEN NO FINDING RECORDED BY THE FIRST APPELLATE AUTHORITY. WITH REGARD TO THE ASSESSEES OTHER ALTERNATIVE CLAIM OF LOSS O N ACCOUNT OF DAMAGE OF COMPUTER EQUIPMENTS CONSTITUTES SHORT TERM CAPITAL LOSS UNDER S. 45(1A) OF THE ACT, WE WOULD LIKE TO POINT OUT THAT THE ASSESS EE HAD NOT RAISED THIS CONTENTION BEFORE THE LOWER AUTHORITIES. HOWEVER, SINCE THE CLAIM IS PURELY A LEGAL ISSUE, IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW THAT THE MATTER NEEDS TO BE CONSIDERED BY THE CIT(A). IN VIEW OF THE ABOVE AND IN THE INTEREST OF THE PRINCIPLES OF NATURAL JUSTICE AND E QUITY, BOTH THE ALTERNATIVE CLAIMS ARE RESTORED BACK TO THE FILE OF THE CIT (A) -LTU WITH A SPECIFIC DIRECTION TO ADDRESS TO THE GRIEVANCE OF THE ASSESS EE AFTER OBTAINING THE REQUIRED CLARIFICATIONS FROM THE ASSESSEE, IF NEED BE, AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROVISION S OF THE RELEVANT ACT. IT IS ORDERED ACCORDINGLY. 9. TP ADJUSTMENT : THE TPO VIDE HIS ORDER UNDER SECTION 92CA DATED 12/3/2008 HAD MADE A TRANSFER PRICING ADJUSTMENT TO THE ALP O F SOFTWARE SERVICES RENDERED BY THE ASSESSEE TO HIS ASSOCIATE ENTERPRISE AMOUNTING TO PAGE 27 OF 33 ITA NO.1/BANG/2011 27 RS.76,28,07,672/-. THE ASSESSEE HAD FILED AN APPEA L AGAINST THE TP ADJUSTMENT BEFORE THE FIRST APPELLATE AUTHORITY. IN THE COURSE OF APPELLATE PROCEEDINGS, THE ASSESSEE CLARIFIED THAT IT HAD REC EIVED MAP RESOLUTION FOR ASSESSMENT YEAR 2005-06 BETWEEN THE INDIAN COMPETENT AUTHORITY AND THE US COMPETENT AUTHORITY UNDER ARTICLE 27 OF THE INDO US DOUBLE TAXATION AVOIDANCE CONVENTION AND AS A RESULT OF WHICH, THE ARMS LENGTH MARGIN WAS DETERMINED AT 17.5% ON OPERATING COST. ACCORDINGLY, THE GROUNDS RAISED BEFORE THE CIT(A) WITH REGARD TO THE TRANSFER PRICI NG ADJUSTMENT (GROUND NOS.2 TO 19) WAS DISMISSED. 9.1 THE GROUND NO.28 RAISED BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY WAS ALSO REJECTED. GROUND NO.28 RAISED BEFORE THE CIT(A) READS AS FOLLOWS:- THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND IN FACTS IN NOT APPRECIATING THAT THE APPELLANT OPERAT ED ON A COST PLUS MODEL AND CONSEQUENTLY, IN CASE THE LOSS O N DAMAGED SHIPMENT IS HELD TO BE CAPITAL IN NATURE, T HE CORRESPONDING REVENUE DERIVED BY THE APPELLANT IN RESPECT OF SUCH LOSS SHOULD ALSO BE HELD TO BE CAPI TAL IN NATURE. 9.2 THE FINDING RENDERED BY THE CIT(A) IN RESPECT O F THE ABOVE GROUND READS AS FOLLOWS :- FINALLY, IN GROUND 28, THE APPELLANT RAISED THE ISS UE THAT SINCE IT WAS OPERATING ON A COST PLUS MODEL, IN CAS E THE LOSS ON DAMAGED SHIPMENT WAS HELD TO BE CAPITAL IN NATURE, THE CORRESPONDING REVENUE DERIVED IN R/O SU CH LOSS SHOULD ALSO BE HELD TO BE CAPITAL IN NATURE. IT IS UNCLEAR FROM THE APPELLANTS GROUND AS TO WHAT RELE VANCE PAGE 28 OF 33 ITA NO.1/BANG/2011 28 THE FOLLOWING OF A COST PLUS MODEL HAS IN THIS CONT EXT AND WHAT REVENUE ADJUSTMENT IS BEING SOUGHT AS A CONSEQUENCE. UNDER THE CIRCUMSTANCES, I AM UNABLE TO ACCEPT THIS ARGUMENT. 9.3 AGGRIEVED BY THE DISMISSAL OF THE ABOVE GROUND, THE ASSESSEE RAISED THE FOLLOWING CONTENTION BEFORE US:- IF IT IS CONCLUDED THAT LOSS ON DAMAGE ON ACCOUNT O F SHIPMENT OF COMPUTERS IS NOT ALLOWABLE AS DEDUCTION NOR FORMS PART OF THE BLOCK OF ASSETS, THE SAME WOULD H AVE TO BE CONSIDERED AS NON-OPERATING COST AND SHOULD BE EXCLUDED FOR THE PURPOSES OF COMPUTATION OF ARMS LE NGTH PRICE U/S 92. WHEN THE SAID LOSS IS EXCLUDED FROM OPERATING COST, THE OPERATING COST WOULD REDUCE AND ACCORDINGLY, THE ADJUSTMENT U/S 92CA WHICH IS COMPUT ED ON THE BASIS OF OPERATING COST WOULD ALSO BE REDUCE D. THIS WOULD RESULT IN DECREASE IN THE VALUE OF ADJUS TMENT DETERMINED BY THE TPO U/S 92CA AND, ACCORDINGLY, WOUL D REDUCE THE TAXABLE INCOME. 9.4 AFTER HAVING HEARD THE RIVAL CONTENTIONS, WE A RE OF THE VIEW THAT SINCE THE CIT(A) HAS NOT CONSIDERED THE ISSUE, THE MATTER NEEDS TO BE RESTORED TO THE CIT(A) FOR DENOVO CONSIDERATION. I T IS IN DOUBT, AFTER HAVING ACCEPTED THE MAP RESOLUTION PASSED BY THE COM PETENT AUTHORITY, WHETHER THE ALP ARRIVED AT CAN BE ALTERED. HOWEVER , SINCE THE ISSUE WAS NOT DISPOSED OFF BY THE CIT(A), ADDRESSING THE ASSESSEE S CONTENTION, WE DEEM IT FIT AND PROPER TO RESTORE THE MATTER TO THE CIT( A). 9.5 ACCORDINGLY, GROUND NO.9 RAISED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PAGE 29 OF 33 ITA NO.1/BANG/2011 29 III. DEDUCTION U/S 80JJAA OF THE ACT : 10. THE GRIEVANCE OF THE ASSESSEE BEING THAT THE CIT (A) ERRED IN DIRECTING THE AO TO RESTRICT THE DEDUCTION TO THE E XTENT IT HAS BEEN CLAIMED FOR EMPLOYEES WHO HAVE WORKED FOR LESS THAN 300 DAYS IN THE PREVIOUS YEAR IN CONTRAVENTION OF EXPLANATION (II) (C) TO SECTION 80JJ. AT THIS JUNCTURE, WE WOULD LIKE TO POINT OUT THAT THE POWER OF THE CIT ( A) TO SET ASIDE AN ISSUE/ASSESSMENT U/S 251(1)(A) OF THE ACT HAS SINCE BEEN OMITTED BY THE FINANCE ACT 2001 W. E. F. 1.6.2001. 10.1 REVERTING BACK TO THE ISSUE ON HAND, THE ASS ESSEE HAD CLAIMED 11.17 CRORES AS DEDUCTION U/S 80JJAA OF THE ACT. H OWEVER, THE AO, QUOTING EXTENSIVELY THE PROVISIONS OF S.80JJAA, TOOK A STAND THAT THE EMPLOYEES OF THE ASSESSEE ALL OF WHOM DREW SALARIES OF MORE THAN RS.1600/MONTH CANNOT BE CLASSIFIED AS WORKMEN. IT WAS, FURTHER, CLARIFI ED BY THE AO THAT THE ASSESSEES CLAIM FOR SUCH DEDUCTION FROM THE AY 200 1-02 ONWARDS HAS BEEN REJECTED BY THE DEPARTMENT ON THE GROUND THAT THE EM PLOYEES IN RESPECT OF WHOM DEDUCTION CLAIMED WERE NOT WORKMEN WITHIN TH E MEANING ASSIGNED TO THE WORD IN THE INDUSTRIAL DISPUTES ACT. 10.2 HOWEVER, THE HONBLE EARLIER BENCH OF THE TR IBUNAL HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOR THE AYS 200 1-02 & 2002-03 IN THE ASSESSEE OWN CASE. SINCE THE FINDING OF THE SAID BENCH FOR THE SAID AYS HAS BEEN CHALLENGED BEFORE THE HONBLE HIGH COURT BY THE REVENUE, THE AO REJECTED THE ASSESSEES CLAIM U/S 80JJAA OF THE ACT FOR THE AY UNDER CONSIDERATION. PAGE 30 OF 33 ITA NO.1/BANG/2011 30 10.3 AFTER TAKING INTO ACCOUNT THE FINDINGS OF TH E EARLIER BENCH OF THE TRIBUNAL, THE CIT (A)-LTU TOOK A STAND THAT THOUGH THE TRIBUNAL HAD UPHELD THE ASSESSEES ELIGIBILITY FOR THE SAID DEDUC TION FROM THE STAND POINT OF WHETHER THE ASSESSEES EMPLOYEES QUALIFIED AS WO RKMEN WITHIN THE MEANING OF S. 80JJAA OR NOT, THE ALLOW-ABILITY OF DE DUCTION U/S 80JJAA WAS NEVER EXAMINED FROM THE POINT OF VIEW OF TENURE OF WORK BY THE SAID EMPLOYEES WITHIN THE MEANING OF THE DEFINITION OF TH E TERM REGULAR WORKMEN CONTAINED IN EXPLANATION (II)(C) WHEREBY TH OSE WHO WERE EMPLOYED FOR A PERIOD OF LESS THAN 300 DAYS DURING THE PREVIO US YEAR WERE EXCLUDED FROM THIS DEFINITION. WHILE FOLLOWING THE FINDINGS OF THE JURISDICTIONAL TRIBUNAL ON THE ISSUE RELATING TO THE APPELLANTS E LIGIBILITY FOR DEDUCTION U/S 80JJAA, THE MATTER WAS SET ASIDE WITH A DIRECTION T O THE AO TO RESTRICT THE DEDUCTION TO THE EXTENT IT HAS BEEN CLAIMED FOR EMPLOYEES WHO HAVE WORKED FOR LESS THAN 300 DAYS IN THE PREVIOUS YEAR IN CONTRAVENTION OF EXPLANATION (II)(C) TO S. 80JJAA. 10.4 THIS STAND OF THE CIT (A) HAS BEEN OBJECTED TO BY THE ASSESSEE BEFORE THIS BENCH. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS ON THE ISSUE. WITH DUE RESPECTS, WE HAVE PERUSED THE FIND INGS OF THE HONBLE EARLIER BENCH FOR THE AYS 2001-02 AND 2002-03 IN TH E ASSESSEES OWN CASE WHEREIN THE HONBLE BENCH HAD ALLOWED THE CLAIM OF DEDUCTION ON THE FOLLOWING REASONS: DEDUCTION U/S 80JJA WAS CLAIMED BY THE ASSESSEE IN R ESPECT OF EMPLOYEES WHO HAD JOINED AS ENGINEERS IN THEIR RE SPECTIVE FIELDS SUCH AS SYSTEMS ENGINEERS, TEST ENGINEER, SOF TWARE DESIGN ENGINEER, IC DESIGN ENGINEER, LEAD ENGINEER ETC., DEDUCTION WAS CLAIMED IN RESPECT OF ENGINEERS WHO W ERE NOT IN THE CATEGORY OF SUPERVISORY CONTROL; PAGE 31 OF 33 ITA NO.1/BANG/2011 31 AS PER NOTIFICATION ISSUED BY THE GOVERNMENT OF KARN ATAKA, THE APPELLANT ENGAGED IN THE DEVELOPMENT OF SOFTWAR E WAS COVERED BY THE INDUSTRIAL DISPUTES ACT, 1947; THE APPELLANT APPEARED TO FULFILL ALL THE CONDITION S LAID DOWN FOR PURPOSES OF ELIGIBILITY FOR DEDUCTION U/S 80JJAA . 10.5 HOWEVER, THE HONBLE EARLIER BENCH HAD, FOR THE AY 2004-05 IN THE ASSESSEES OWN CASE, REMITTED BACK A SIMILAR IS SUE TO THE AO FOR EXAMINATION ON THE GROUNDS THAT: 2.8.DETAILS WITH REGARD TO THE EMPLOYEES ON WHOS E SALARY, DEDUCTION U/S 80JJAA OF THE ACT HAVE BEEN CLAIMED ARE NOT PRODUCED BEFORE US AND WE ARE NOT I N A POSITION TO VERIFY WHETHER THE PERSONS EMPLOYED IN TH E SUPERVISORY ROLES ARE ALSO INCLUDED IN THE LIST. TH E MATTER HAS ALREADY BEEN REMITTED BY THE CIT (A) TO TH E ASSESSING OFFICER, THEREFORE, IN THE INTEREST OF JU STICE; WE ARE OF THE VIEW THAT THIS ASPECT CAN BE EXAMINED BY THE ASSESSING OFFICER. INCIDENTALLY, WHILE DISPOSING OFF OF THE REVENUES A PPEAL FOR THE ASSESSMENT YEAR UNDER CONSIDERATION [AY 2005-06] (ITA NO.1385/B ANG/2010 DT.29.9.2011) ON THE SAME ISSUE, THE HONBLE EARLIE R BENCH HAS OBSERVED THUS: 2.2 AT THE TIME OF HEARING, LEARNED COUNSEL FOR THE ASS ESSEE FILED BEFORE US THE COPIES OF THE ORDERS OF THE TRI BUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSME NT YEARS. WE FIND THAT THE ISSUE HAS BEEN CONSIDERED B Y THE CIT (A) AND, ACCORDINGLY, HAS ISSUED SUITABLE DIRECTION TO THE AO. MERELY BECAUSE AN APPEAL HAS B EEN FILED IN THE HIGH COURT THE ORDER OF THE TRIBUNAL D OES NOT LOST ITS PRECEDENTIAL VALUE. THE CIT (A) HAS R IGHTLY PAGE 32 OF 33 ITA NO.1/BANG/2011 32 FOLLOWED THE SAME. IN VIEW OF THE SAME, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE CIT ( A). 3. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . 10.6 ON QUERY FROM THE BENCH AS TO WHY THIS APPEAL (ASSESSEES APPEAL) WAS NOT CLUBBED WITH THE REVENUES APPEAL, BOTH THE LEARNED AR AND THE LEARNED DR SUBMITTED THAT THEY WERE NOT AWARE OF THE PENDENCY OF ASSESSEES APPEAL WHEN THE DEPARTMENTS APPEAL WAS DISPOSED OFF ON 29.9.2011. 10.7 AFTER CONSIDERING THE RIVAL CONTENTION AND T AKING INTO ACCOUNT ALL THESE FACTS AND CIRCUMSTANCES OF THE MATTER INT O CONSIDERATION; WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE REQUIRES RE-E XAMINATION. THE CIT(A) HAD SET ASIDE THE ASSESSMENT GIVING SPECIFIC DIRECT ION TO ASSESSING OFFICER TO DISALLOW THE 80JJAA CLAIM IN RESPECT OF PERMANEN T EMPLOYEES SALARY WHO HAVE WORKED FOR LESS THAN 300 DAYS IN THE CONCERNED PREVIOUS YEAR. THE CIT(A) HAS NOT CONSIDERED THE ASSESSEES ELABORATE SUBMISSION IN RESPECT OF THE ISSUE (PARA 6.2) (SUPRA). THEREFORE, IN THE IN TEREST OF JUSTICE AND EQUITY, THE MATTER IS REMANDED TO THE CIT(A) FOR FRESH CONS IDERATION. IT IS ORDERED ACCORDINGLY. 11. IN THE RESULT , THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PAGE 33 OF 33 ITA NO.1/BANG/2011 33 THE ORDER PRONOUNCED ON THE 7 TH DAY OF SEPTEMBER, 2012 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.