M/s. GODFREY PHILLIPS INDIA LTD., MUMBAI V. ACIT Rg. - 8(1), MUMBAI

ITA 1071/MUM/2007

• Counselvise Citation: 107119914 RSA 2007
• Duration Of Justice: 4 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 20-01-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 05-02-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Wholly owned subsidiary; Valuation report; Commercial expediency; Revenue expenditure; Capital expenditure; Set aside
• Section: 43B; 80HHC; 234B; 14A; 64; 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI R. V. EASWAR, PRESIDENT AND SHRI RAJEN DRA SINGH(AM) ITA NO.1071/M/2007 ASSESSMENT YEAR 2003-04 ITA NO.5569/M/2007 ASSESSMENT YEAR 2004-05 GODFREY PHILIPS INDIA LTD. THE ACIT 8(1), AAYAKAR BHAVAN CHAKALA, ANDHERI (E) M.K.MARG, MUMBAI 400 020. MUMBAI 400 099 PAN : AABCG 4768 K APPELLANT RESPONDENT CO 147/M/2007 ASSESSMENT YEAR 2003-04 GODFREY PHILIPS INDIA LTD. THE DCIT 8(1), MUMBAI APPELLANT IN APPEAL RESPONDENT ITA NO.1301/M/2007 ASSESSMENT YEAR 2003-04 ITA NO.5585/M/2007 ASSESSMENT YEAR 2004-05 THE DY.CIT CIRCLE 8(1), MUMBAI GODFREY PHILIPS IND IA LTD. APPELLANT RESPONDENT ASSESSEE BY : SHRI YOGESH THAR REVENUE BY : SHRI PAWAN VED O R D E R PER RAJENDRA SINGH (AM) THESE CROSS APPEALS AND CROSS OBJECTION OF THE ASS ESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS DATED 27.11.2006 AND 4.6.2 007 OF CIT(A) FOR THE 2 ASSESSMENT YEARS 2003-04 AND 2004-05 RESPECTIVELY. AS GROUNDS OF APPEAL RAISED IN THE APPEALS ARE MOSTLY IDENTICAL, THESE A RE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIEN CE. 2. APPEALS OF THE ASSESSEE IN ITA NOS.1071/M/2007 A ND ITA NO.5569/M/2007 FOR ASSESSMENT YEARS 2003-04 AND 200 4-05. 2.1 THE FIRST DISPUTE RAISED WHICH IS COMMON IN BOT H THE APPEALS IS REGARDING DISALLOWANCE OF PRODUCT DEVELOPMENT EXPENSES. THE A O DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD CLAIMED EXP ENDITURE OF RS.8,43,527/- FOR A.Y.2003-04 AND RS.18,03,831/- FOR A.Y.2004-05 ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENSES. THE EXPENSES INCURRED WERE FO R PRINTING CIGARETTE PACKS THROUGH THIRD PARTIES WHICH IN TURN HAD PROCURED SO ME SPECIFIC PRINTING CYLINDERS/ DYES FOR THE PRINTING. THE PAYMENTS FOR PROCURING THE CYLINDERS/ DYES HAD BEEN MADE BY THE ASSESSEE. THE AO OBSERVED THAT EVEN THOUGH THE ASSETS WERE LYING WITH THIRD PARTIES, THE ASSESSEE WAS HAV ING RIGHT TO USE THE SAME AND EXPENSES WERE OF CAPITAL IN NATURE. HE THEREFOR E DISALLOWED THE SAME. IN APPEAL CIT(A) FOLLOWING THE DECISION IN A.Y.2002-03 CONFIRMED THE DISALLOWANCE AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.1.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE SAME ISSUE HAS A LREADY BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN ITA NO.2793/M/2006. THE TRIBUNAL IN THE SAID YEAR ON PERUSAL OF INVOICE OF M/S. TWENTY-FIRST CENTURY PRINTERS LTD. RELATING TO THE PURCHASES OF CYLINDER S/ DYES NOTED THAT THESE WERE CONSUMABLE STORES USED IN PRINTING. THE ASSESSEE HA D ALSO ISSUED SPECIFIC CERTIFICATE CERTIFYING THAT THE ITEMS WERE CHARGED TO CONSUMABLE STORES. 3 TRIBUNAL ALSO OBSERVED THAT THE LIFE OF SUCH ITEMS USED IN PRINTING JOB WAS SHORT AND THEREFORE THE EXPENDITURE INCURRED COULD NOT BE OF THE NATURE OF CAPITAL. THE TRIBUNAL ACCORDINGLY ALLOWED THE CLAIM OF THE A SSESSEE AS REVENUE EXPENDITURE. FACTS THIS YEAR ARE IDENTICAL AS DISTI NGUISHING FEATURES HAVE BEEN BROUGHT TO OUR NOTICE BY THE LEARNED DR. WE, THEREF ORE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN A.Y.2002-03, SET AS IDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSESSEE. 2.2 THE SECOND DISPUTE IS REGARDING ALLOWABILITY OF ENHANCED DEPRECIATION ON UPS. THE AO NOTED FROM THE DEPRECIATION CHART FILED DURING THE ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD CLAIMED DEPRECIAT ION @ 80% ON ITEMS CATEGORIZED AS ENERGY SAVINGS EQUIPMENT AND RENEWAL ENERGY DEVICES. SUCH HIGHER DEPRECIATION CLAIMED WAS RS.3,58,521/- IN A. Y.2003-04 AND RS.3,85,152/- IN A.Y.2004-05. THE AO OBSERVED THAT THE ENERGY SAVING DEVICES CLAIMED BY THE ASSESSEE WERE NOTHING BUT UNINTERRUP TED POWER SUPPLY (UPS) WHICH ACCORDING TO THE AO WERE NOT ENERGY SAVING DE VICES. AO ALSO OBSERVED THAT IN CASE OF AN ENERGY SAVING DEVICE, A CERTIFIC ATE FROM MINISTRY OF POWER IS GIVEN TO THE MANUFACTURER CERTIFYING THAT A PARTICU LAR ITEM WAS AN ENERGY SAVING DEVICE WHICH HAS NOT BEEN DONE IN THIS CASE. AO THEREFORE REJECTED THE CLAIM OF HIGHER DEPRECIATION AND ALLOWED THE NORMAL DEPRECIATION @ 25%. IN APPEAL CIT(A) FOLLOWING THE DECISION IN A.Y.2002-03 CONFIRMED THE ORDER OF AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.2.1 AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN ITA NO.2792/M/2006. IN THAT YEAR ALSO THE SAME ISSUE OF ALLOWABILITY OF DEPRECIATION AT HIGHER RATE IN CASE OF UPS HAD BEEN RAISED. THE TRIBUNAL NOTED 4 THAT IN THE APPENDIX TO THE INCOME-TAX RULES 1962 AUTOMATIC VOLTAGE CONTROLLER HAD BEEN LISTED UNDER THE HEADING ENER GY SAVING DEVICES AS AN ELECTRICAL INSTRUMENT ELIGIBLE FOR 100% DEPRECIATIO N. THEREFORE THE ISSUE WAS WHETHER UPS COULD BE CONSIDERED AS AUTOMATIC VOLTAG E CONTROLLER. THE TRIBUNAL NOTED THAT UPS AUTOMATICALLY CORRECTED LOW AND HIGH VOLTAGE CONDITIONS AND STEPPED UP LOW VOLTAGE TO SAFE OUTPUT LEVELS. THE T RIBUNAL THEREFORE HELD THAT UPS WAS DOING THE JOB OF VOLTAGE CONTROLLING AUTOMA TICALLY. FOR THE SAID PROPOSITION THE TRIBUNAL PLACED RELIANCE ON THE JAI PUR BENCH OF TRIBUNAL IN CASE OF DCIT VS SERVICE FINISHING EQUIPMENT (2 SOT 232). THE TRIBUNAL ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE. THE FACTS IN THE YEARS UNDER CONSIDERATION ARE IDENTICAL EXCEPT FOR SOME DIFFERENCE IN RATE OF DEPRECIATION. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03, SET ASIDE THE ORDER OF CIT(A) AND ALLO W THE CLAIM OF THE ASSESSEE. 2.3 THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF EDP CHARGES. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS.37. 80 LACS IN A.Y.2003-04 AND RS.37.54 LACS IN A.Y.2004-05 ON ACCOUNT OF EDP CHAR GES I.E FOR PURCHASE OF NEW COMPUTER SOFTWARE. THE AO OBSERVED THAT IN THE DEPRECIATION TABLE, COMPUTER SOFTWARE HAD BEEN LISTED AS A DEPRECIABLE ASSET ON WHICH DEPRECIATION @ 60% WAS ALLOWABLE. HE ALSO REFERRED TO THE JUDGME NT OF HONBLE HIGH COURT OF RAJASTHAN IN CASE OF CIT VS ARAWALI CONSTRUCTION PVT. LTD. (259 ITR 30) IN WHICH COMPUTER SOFTWARE EXPENSES WERE HELD TO BE OF CAPITAL IN NATURE. HE THEREFORE DISALLOWED THE CLAIM OF THE ASSESSEE AS R EVENUE EXPENDITURE AND ALLOWED DEPRECIATION @ 60%. AGGRIEVED BY THE SAID D ECISION THE ASSESSEE IN APPEAL BEFORE THE TRIBUNAL. 5 2.3.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE SAME ISSUE HAD B EEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN I TA NO.2792/M/2006 IN WHICH THE TRIBUNAL NOTED THAT ALLOWABILITY OF EXPENDITURE ON ACCOUNT OF SOFTWARE EXPENSES HAD BEEN EXAMINED IN DETAIL BY THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF AMWAY INDIA ENTERPRISES VS DCIT (111 ITD 11 2) IN WHICH THE SPECIAL BENCH HAD LAID DOWN CERTAIN GUIDELINES TO ASCERTAIN THE TRUE NATURE OF EXPENDITURE. THE TRIBUNAL ACCORDINGLY RESTORED THE MATTER TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY OBSERVATIONS IN THE LIGHT OF DECISION OF THE SPECIAL BENCH (SUPRA) AND AFTER ALLOWING OPPORTUNIT Y OF HEARING TO THE ASSESSEE. FACTS THIS YEAR ARE IDENTICAL. WE THEREFORE RESTORE THIS ISSUE TO THE FILE OF AO FOR FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGH T OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 2.4 THE FOURTH DISPUTE IS REGARDING CLAIM OF DEPREC IATION IN RELATION TO SOFTWARE EXPENSES DISALLOWED EARLIER. THE ASSESSEE HAD RAISED A GROUND BEFORE CIT(A) THAT IN CASE SOFTWARE EXPENSES WERE DISALLOW ED AS CAPITAL EXPENDITURE DEPRECIATION SHOULD ALSO BE ALLOWED IN RESPECT OF S UCH ITEMS DISALLOWED IN THE EARLIER YEAR. CIT(A) HELD THAT SINCE THE ISSUE WAS PENDING BEFORE THE TRIBUNAL NO DIRECTION COULD BE ISSUED FOR ALLOWING DEPRECIAT ION. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBU NAL. 2.4.1 WE HAVE HEARD BOTH THE PARTIES PERUSED THE RE CORDS AND CONSIDERED THE MATTER CAREFULLY. THE ISSUE REGARDING ALLOWABILITY OF THE EXPENSES ON ACQUISITION OF COMPUTER SOFTWARE HAS ALREADY BEEN RESTORED BY T HE TRIBUNAL IN THE EARLIER YEAR TO THE FILE OF AO FOR TAKING A FRESH DECISION AFTER NECESSARY EXAMINATION IN THE LIGHT OF DECISION OF THE SPECIAL BENCH IN CASE OF DCIT VS AMWAY INDIA 6 ENTERPRISES (SUPRA). IN THESE YEARS ALSO WE ARE RES TORING THIS ISSUE TO THE FILE OF AO. IN CASE ON FRESH EXAMINATION THE AO FINDS THAT THE SOFTWARE EXPENSES ARE CAPITAL IN NATURE, THESE EXPENSES WOULD HAVE TO BE CAPITALIZED AND THE ASSESSEE WILL BE ENTITLED TO DEPRECIATION AS PER RULES EVEN IN RESPECT OF SUCH EXPENSES CAPITALIZED IN EARLIER YEARS. THE AO IS DIRECTED TO ACT ACCORDINGLY. 2.5 THE FIFTH DISPUTE IS REGARDING ADDITION ON ACCO UNT OF UNUTILIZED MODVAT CREDIT. DURING THE ASSESSMENT PROCEEDINGS, THE AO N OTED THAT THE ASSESSEE HAD UNUTILIZED MODVAT CREDIT WHICH HAD NOT BEEN ADDED T O THE CLOSING STOCK AS REQUIRED UNDER THE PROVISIONS OF SECTION 145A WHICH WAS APPLICABLE FROM A.Y.1999-2000. THE ASSESSEE SUBMITTED THAT THERE WO ULD BE NO NET EFFECT ON THE PROFIT OF THE ASSESSEE BECAUSE OF ADJUSTMENT ON ACCOUNT OF UNUTILIZED MODVAT CREDIT. AO HOWEVER DID NOT ACCEPT THE CONTEN TIONS RAISED AND MADE ADDITIONS OF RS.88,42,780/- AND RS.1,08,60,116/- RE SPECTIVELY FOR THE TWO YEARS. IN APPEAL CIT(A) CONFIRMED THE ORDERS OF AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.5.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE SAME ISSUE HAS A LREADY BEEN CONSIDERED IN THE ASSESSEES OWN CASE IN A.Y.2002-03 IN ITA NO.27 92/M/2006. THE TRIBUNAL NOTED THAT IN A.Y.2000-01 THE SAME ISSUE HAS BEEN R EMITTED BACK TO THE AO FOR FRESH CONSIDERATION IN THE LIGHT OF DECISION OF HON BLE HIGH COURT OF DELHI IN CASE OF CIT VS MAHAVIR ALUMINUM LTD. (297 ITR 277). THE TRIBUNAL ACCORDINGLY RESTORED THE ISSUE TO THE FILE OF AO. THE FACTS ARE IDENTICAL IN THESE YEARS. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF TR IBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 SET ASIDE THE ORDER OF CIT(A) AND RE STORE THE ISSUE TO THE FILE OF 7 AO FOR FRESH ORDER AFTER NECESSARY EXAMINATION IN T HE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARIN G TO THE ASSESSEE. 2.6 THE SIXTH DISPUTE IS REGARDING DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE INCOME-TAX ACT. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THOUGH THE ASSESSEE WAS PAYING SUBSTANTI AL INTEREST ON THE BORROWINGS MADE, IT HAD ADVANCED INTEREST FREE LOAN S OF RS.342.65 LACS TO THE SUBSIDIARY M/S. KASHYAP METALS AND ALLIED INDUSTRIE S. IT WAS ALSO NOTED BY HIM THAT THE ASSESSEE HAD ALSO ADVANCED LOANS AT SUBSID IZED INTEREST RATE OF 6.5% TO THE SAID SUBSIDIARY AMOUNTING TO RS.847.61 LACS IN A.Y.2003-04 AND 930.37 LACS IN A.Y.2004-05. THE AO FURTHER NOTED THAT THE ASSESSEE WAS PAYING INTEREST AT THE AVERAGE RATE OF 7.45%. HE THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE INTEREST PROPORTIONATE TO THE LOANS GIVEN TO THE SUBSIDIARY SHOULD NOT BE DISALLOWED. THE ASSESSEE EXPLAINED TH AT NO INTEREST HAD BEEN CHARGED ON THE ADVANCES OF RS.342.65 LACS AS THE SA ID LOAN HAD BEEN GIVEN PRIOR TO INSERTION OF SECTION 372A OF THE COMPANIES ACT. IN RESPECT OF THE BALANCE AMOUNT THE INTEREST HAD BEEN CHARGED AT RBI NOTIFIED BANK RATE. THE ASSESSEE ALSO SUBMITTED, IT HAD STRONG FINANCIAL PO SITION TO ADVANCE LOANS FROM INTERNAL GENERATION OF REVENUE AND THEREFORE NO INT EREST WAS REQUIRED TO BE DISALLOWED. AO HOWEVER DID NOT ACCEPT THE CONTENTIO NS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE WAS NOT IN THE BUSINESS OF GIVING LOANS AND THEREFORE THE TRANSACTION WAS NOT FOR THE PURPOSE OF BUSINESS . THE ASSESSEE HAD DIVERTED INTEREST BEARING FUNDS FROM THE BUSINESS WHICH WAS NOT FOR GENUINE BUSINESS PURPOSES. THE AO THEREFORE DISALLOWED THE PROPORTIO NATE INTEREST AFTER MAKING ALLOWANCE FOR RECOVERIES MADE. THE DISALLOWANCE MAD E WAS RS.38.96 LACS IN A.Y.2003-04 AND RS.42.61 LACS IN A.Y.2004-05. 8 2.6.1 IN APPEAL THE ASSESSEE SUBMITTED THAT THE IN TEREST FREE ADVANCES HAD BEEN MADE OUT OF INTERNAL ACCRUALS. IT WAS ALSO SUB MITTED THAT AFTER 31.10.98 INTEREST AT THE SPECIFIED RATE HAD BEEN CHARGED AND IT WAS THE ASSESSEES PREROGATIVE TO DECIDE THE RATE OF INTEREST IN THE I NTEREST OF BUSINESS. IT WAS ALSO SUBMITTED THAT THE LOANS WERE MOSTLY COMING FROM TH E EARLIER YEARS WHEN THERE WAS NO DISALLOWANCE AND THEREFORE NO DISALLOWANCE C OULD BE MADE ION RESPECT OF THE OPENING BALANCES. THE ASSESSEE PLACED RELIAN CE ON THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF CIT VS S RIDEV ENTERPRISES (192 ITR 165) AND SOME OTHER JUDGMENTS. CIT(A) HOWEVER DID N OT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE RE WAS NO DISPUTE THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS TO THE SUBSI DIARY FOR A CERTAIN PERIOD OF TIME AND THEREAFTER AT A SUBSIDIZED RATE. FURTHER T HERE WAS NO EVIDENCE WITH THE ASSESSEE TO SHOW THAT THE LOANS GIVEN TO THE SU BSIDIARY WERE GENERATED INTERNALLY AND NOT FROM THE BORROWED FUNDS. THERE W AS ALSO NO EVIDENCE TO SHOW THAT LOANS GIVEN TO THE SUBSIDIARY HAD ANYTHIN G TO DO WITH THE BUSINESS OF THE ASSESSEE. CIT(A) REFERRED TO THE JUDGMENT OF HO NBLE HIGH COURT OF PUNJAB & HARYANA IN CASE OF CIT VS ABHISHEK INDUSTRIES LTD . (286 ITR 1) IN WHICH IT WAS HELD THAT ONCE THE ASSESSEE CLAIMED DEDUCTION O N ACCOUNT OF INTEREST THE ONUS WAS ON THE ASSESSEE TO SHOW THAT WHATEVER LOAN S WERE TAKEN, WERE USED FOR BUSINESS PURPOSES AND IN CASE THE ASSESSEE ADVA NCED FUNDS TO SISTER CONCERNS OR OTHERS WITHOUT ANY INTEREST, THE ONUS W AS ON THE ASSESSEE TO SHOW THAT DESPITE PENDING LOANS THERE WAS JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON BUSINESS PURPOSES. IN THE PRESENT CASE CIT(A) OBSERVED THAT THERE WAS NO EVIDENCE TO SHOW THAT THE LOANS TAKEN WERE USED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR THAT INTEREST FREE LOANS WERE GIVEN FOR THE PURPOSE OF ITS BUSINESS. CIT(A) ACCORDINGLY CONFIRMED THE 9 DISALLOWANCE MADE BY THE AO IN BOTH THE YEARS AGGRI EVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.6.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE REI TERATED THE SUBMISSIONS MADE BEFORE CIT(A) THAT INTEREST FREE ADVANCES HAD BEEN GIVEN TO THE SUBSIDIARY SINCE F.Y.1992-93 AND FROM F.Y.1998-99 I NTEREST AT SPECIFIED RATE HAD BEEN CHARGED. IN MOST OF THE YEARS WHEN THE NEW ADVANCES WERE GIVEN, THERE WERE NO BORROWINGS AND THEREFORE THE LOANS HA D BEEN GIVEN FROM OWN FUNDS. ANNUAL PROFIT OF THE ASSESSEE WAS ALSO QUITE HIGH RUNNING INTO CRORES TO TAKE CARE OF ALL THE ADVANCES. IT WAS ALSO SUBMITTE D THAT THE ASSESSEE HAD SUBMITTED FUND FLOW STATEMENT BEFORE CIT(A) TO DEMO NSTRATE THE ABOVE POINTS, A COPY OF WHICH HAS BEEN PLACED AT PAGE 64 OF THE P APER BOOK. THERE WERE SUFFICIENT INTEREST FREE FUNDS AND THEREFORE LOANS WERE EXPLAINED OUT OF OWN FUNDS. RELIANCE WAS PLACED ON THE JUDGMENT OF HONB LE HIGH COURT OF MUMBAI IN CASE OF RELIANCE UTILITIES AND POWER LTD. (178 TAXM AN 135). IT WAS ALSO SUBMITTED THAT THE ENTIRE INTEREST FREE LOANS WERE COMING FROM THE EARLIER YEARS AND THERE WERE NO NEW INTEREST FREE LOANS IN THE YE ARS UNDER CONSIDERATION. SIMILARLY THE INTEREST BEARING LOANS WERE ALSO MOST LY COMING FROM THE EARLIER YEARS AND THERE WAS ADDITION OF ONLY RS.1.48 CRORES IN A.Y.2003-04 IN WHICH THE ASSESSEE HAD PROFIT OF RS.17.96 CRORES. IT WAS POINTED OUT THAT IN THE EARLIER YEARS THERE HAD BEEN NO DISALLOWANCE OF INTEREST AN D THEREFORE NO DISALLOWANCE COULD BE MADE IN RESPECT OF OPENING BALANCE OF LOAN S. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF SRIDEV ENTERPRISES (192 ITR 165). IT WAS ALSO ARGUED THAT LOANS AND AD VANCES HAD BEEN GIVEN TO THE COMPANY WHICH WAS A 100% SUBSIDIARY OF THE ASSE SSEE AND THEREFORE THERE WAS COMMERCIAL EXPEDIENCY INVOLVED AND NO DISALLOWA NCE COULD BE MADE EVEN IF THE LOANS AND ADVANCES WERE FROM BORROWED FUNDS. RELIANCE WAS PLACED ON 10 THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF S. A.BUILDERS (288 ITR 1). IT WAS ACCORDINGLY URGED THAT ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST SHOULD BE DELETED. THE LEARNED DR ON THE O THER HAND SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 2.6.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF INTEREST PAID BY THE ASSESSEE ON ACCOUNT OF ADVANCES GIVEN TO THE SUBSIDIARY OF T HE ASSESSEE COMPANY. THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN OF RS.342. 65 LACS. IT HAD ALSO ADVANCED FURTHER LOANS AT CONCESSIONAL RATE. THE AS SESSEE HAD ALSO MADE BORROWINGS ON WHICH SUBSTANTIAL INTEREST WAS BEING PAID. THE AUTHORITIES BELOW HAVE DISALLOWED PART OF THE INTEREST PROPORTIONATE TO INTEREST FREE ADVANCES AND ADVANCES GIVEN ON CONCESSIONAL RATE ON THE GROUND T HAT THERE WAS NO MATERIAL TO SHOW THAT THE LOANS TAKEN BY THE ASSESSEE WERE U SED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR THAT THESE LOANS AND ADVANCES WERE GIVEN OUT OF OWN FUNDS. THE CASE OF THE ASSESSEE IS THAT THE INT EREST FREE ADVANCES HAD BEEN GIVEN SINCE FINANCIAL YEAR 1992-93 AND LOANS O N CONCESSIONAL RATE HAD BEEN GIVEN FROM FINANCIAL YEAR 1998-99. THESE HAD B EEN GIVEN OUT OF OWN FUNDS AS THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AND PROFIT EARNED DURING THE RELEVANT YEARS RELIANCE HAS BEEN PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF RELIANCE UTILITIES AND POWER (SUPRA). IT HAS ALSO BEEN ARGUED THAT MOST OF THE LOANS/ ADVANCES W ERE COMING FROM THE EARLIER YEARS IN WHICH THERE WERE NO DISALLOWANCES AND THEREFORE NO DISALLOWANCE COULD BE MADE IN RESPECT OF OPENING BA LANCES. THE ASSESSEE HAS ALSO RAISED PLEA OF COMMERCIAL EXPEDIENCY ON THE GR OUND THAT LOANS AND ADVANCES HAD BEEN GIVEN TO THE CONCERN WHICH WAS A 100% SUSBSIDIARY OF THE 11 ASSESSEE COMPANY AND THEREFORE THE SAME HAD TO BE T REATED FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE. 2.6.4 WE HAVE CAREFULLY CONSIDERED THE VARIOUS ASP ECTS OF THE MATTER. WE FIND SUBSTANCE IN THE SUBMISSION OF THE ASSESSEE THAT NO DISALLOWANCE COULD BE MADE IN RESPECT OF THE OPENING BALANCES OF LOANS AN D ADVANCES WHICH WERE COMING FROM EARLIER YEARS AND IN WHICH THERE WERE N O DISALLOWANCE. THE PLEA OF THE ASSESSEE IS SUPPORTED BY THE JUDGMENT OF HONBL E HIGH COURT OF KARNATAKA IN CASE OF SRIDEV ENTERPRISES (SUPRA) IN WHICH IT W AS HELD THAT IN CASE LOANS AND ADVANCES WERE BEING CARRIED FORWARD FROM EARLIER YE ARS IN WHICH THERE WAS NO DISALLOWANCE, NO DISALLOWANCE COULD BE MADE IN RESP ECT OF THE OPENING BALANCE IN THE CURRENT YEAR AS THE NATURE AND STATUS OF THE ADVANCES ON THE FIRST DAY OF THE CURRENT YEAR REMAINED THE SAME AS THE NATURE AN D STATUS OF THE ADVANCES ON THE LAST DAY OF PRECEDING YEAR. IN THE EARLIER Y EAR THERE WERE NO DISALLOWANCES WHICH MEANT THAT THE REVENUE WAS SATI SFIED THAT LOANS AND ADVANCES WERE GIVE FROM OWN FUNDS. THEREFORE RESPEC TFULLY FOLLOWING THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF SRIDEV ENTERPRISES (SUPRA) WE HOLD THAT NO DISALLOWANCE OF INTEREST WI LL BE MADE IN RESPECT OF THE OPENING BALANCES AS ON THE FIRST DAY OF ASSESSMENT YEAR INVOLVED. AS REGARDS THE LOANS/ ADVANCES GIVEN IN THE CURRENT YEAR, THE ASSESSEE IS REQUIRED TO SHOW THAT ON THE DATE OF GIVING LOANS/ ADVANCES THE ASSE SSEE HAD SUFFICIENT OWN FUNDS AVAILABLE WHICH HAS NOT BEEN SHOWN IN THIS CA SE. THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF S.A.BUILDERS (SUPRA). IN THE SAID CASE, HONBLE SUP REME COURT HELD THAT INTEREST ON MONEY BORROWED CANNOT BE ALLOWED ON COM MERCIAL EXPEDIENCY IN ALL CASES OF LOANS AND ADVANCES GIVEN TO THE SISTER CON CERN. IT WAS ALSO OBSERVED BY THE HONBLE SUPREME COURT THAT IN CASE THE HOLDI NG COMPANY ADVANCED 12 BORROWED FUNDS TO THE SUBSIDIARY IN WHICH IT HAD DE EP INTEREST, IT WOULD ORDINARILY BE ENTITLED FOR DEDUCTION AND THAT IT WI LL DEPEND UPON FACTS AND CIRCUMSTANCES OF EACH CASE. WE FIND THAT IN THE PRE SENT THESE ASPECTS HAVE NOT BEEN EXAMINED AND IT IS NOT CLEAR HOW THE INTEREST FREE LOANS AND ADVANCES TO THE SISTER CONCERNS WOULD HAVE PROMOTED THE INTERES T OF THE ASSESSEE. WE ALSO NOTE THAT THE ASSESSEE HAD FILED THE FUND FLOW STAT EMENT AVAILABLE ON PAGE 64 OF THE PAPER BOOK BUT THE SAME WAS FILED ONLY BEFOR E CIT(A) AND WAS NOT AVAILABLE BEFORE THE AO. THEREFORE THE ASPECTS AS T O WHETHER AND HOW MUCH LOANS AND ADVANCES WERE COMING FROM EARLIER YEARS I S REQUIRED TO BE VERIFIED BY THE AO. THE ASSESSEE HAS ALSO FILED COPY OF THE BOA RD RESOLUTION DATED 10.8.92 AVAILABLE AT PAGE 61 OF THE PAPER BOOK AS PER WHICH SOME LOANS HAD BEEN GIVEN TO THE SUBSIDIARY COMPANY FOR DEVELOPMENT OF THE PR OPERTY WITH UNDERSTANDING THAT THE ASSESSEE WOULD ACQUIRE PART OF THE PROPERT Y FOR THE PURPOSE OF BUSINESS. THERE WAS THUS COMMERCIAL EXPEDIENCY INVO LVED. THIS RESOLUTION WAS HOWEVER NOT AVAILABLE BEFORE THE AO. IN OUR VIEW MA TTER REQUIRES FRESH CONSIDERATION AFTER EXAMINATION OF THE ADDITIONAL E VIDENCES FILED BEFORE CIT(A) AS MENTIONED ABOVE AND AFTER CONSIDERING THE JUDICI AL PRONOUNCEMENTS DISCUSSED EARLIER. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLO WING OPPORTUNITY OF HEARING TO THE ASSESSEE. 2.7 THE SEVENTH DISPUTE IS REGARDING DISALLOWANCE O F EXPENDITURE UNDER SECTION 14A OF THE INCOME-TAX ACT. AT THE TIME OF H EARING OF THE APPEAL THE LEARNED AR FOR THE ASSESSEE DID NOT PRESS THE GROUN D DUE TO ITS SMALLNESS OF AMOUNT INVOLVED. THE GROUNDS RAISED BY THE ASSESSEE IN BOTH THE YEARS ARE DISMISSED AS NOT PRESSED. 13 2.8 THE DISPUTE RAISED IN THE GROUND NO.8 IS REGARD ING DISALLOWANCE OF LEAVE ENCASHMENT EXPENSES. THE AO NOTED THAT THE ASSESSEE HAD BEEN CLAIMING EXPENSES ON ACCOUNT OF LEAVE ENCASHMENT ON THE BASI S OF ACTUARIAL VALUATION REPORT BUT FROM A.Y.2003-04 THE ASSESSEE STARTED CL AIMING DEDUCTION ON THE ACTUAL PAYMENT BASIS. THE AO OBSERVED WHEN THE ASSE SSEE HAD MADE CLAIM ON THE BASIS OF ACTUARIAL VALUATION IN THE EARLIER YEA R, THE CLAIM NOW BEING MADE ON THE BASIS OF ACTUAL PAYMENT COULD LEAD TO DOUBLE DE DUCTION. AS PER THE AO THE ASSESSEE WAS NOT ABLE TO FURNISH THE DETAILS OF DOU BLE DEDUCTION. HE THEREFORE PROCEEDED TO MAKE DISALLOWANCE ON ESTIMATE BASIS. I T WAS OBSERVED BY HIM THAT AN EMPLOYEE ON AVERAGE WORKED IN PRIVATE SECTO R FOR 20 25 YEARS. SINCE THE ASSESSEE HAD BEEN MAKING CLAIM ON THE BASIS OF ACTUARIAL VALUATION FOR THE LAST 7 YEARS HE ESTIMATED THAT 1/3 RD OF ACTUAL PAYMENT MAY HAVE BEEN CLAIMED ON THE BASIS OF ACTUARIAL VALUATION. ACCORDINGLY DI SALLOWANCES TO THE EXTENT OF 1/3 RD AMOUNTING TO RS.20 LACS AND RS.12.33 LACS RESPECTI VELY FOR THE TWO YEARS. IN APPEAL CIT(A) CONFIRMED THE ORDERS OF AO AGGRIEV ED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.8.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOW ANCE OF PART OF THE CLAIM RELATING TO LEAVE ENCASHMENT. THE ASSESSEE HAD BEE N MAKING THE CLAIM EARLIER ON THE BASIS OF ACTUARIAL VALUATION BUT CONSEQUENT TO THE AMENDMENT OF SECTION 43B THE CLAIM WAS BEING MADE ON PAYMENT BASIS FROM A.Y.2003-04. THE AO HAS MADE ESTIMATED DISALLOWANCE OUT OF THE CLAIM MA DE ON PAYMENT BASIS ON THE GROUND THAT PART OF THE PAYMENTS MADE MAY RELAT E TO EARLIER YEAR WHEN THESE WERE ALLOWED ON ACTUARIAL BASIS. THE AO HAS M ADE DISALLOWANCE ON ESTIMATE WHICH CANNOT BE SUSTAINED. ONLY THE PAYMEN T WHICH HAD ACTUALLY BEEN 14 ALLOWED EARLIER CAN BE DISALLOWED. IN OUR VIEW MAT TERS REQUIRE FRESH EXAMINATION AND DISALLOWANCE HAS TO BE RESTRICTED T O THE AMOUNTS ALLOWED IN THE EARLIER YEAR. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE ISSUE TO THE FILE OF AO FOR PASSING A FRESH ORDER A FTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE AS SESSEE. 2.9 THE DISPUTE RAISED IN GROUND NO.9 IS REGARDING CLAIM OF DEDUCTION UNDER SECTION 80HHC IN RESPECT OF DEPB INCOME. THE AO NOT ED THAT THE ASSESSEE HAD RECEIVED DEPB INCOME OF RS.2,88,41,387/- AND RS.5,0 1,03,898/- FOR A.YRS. 2003-04 AND 2004-05 RESPECTIVELY. THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 80HHC IN RESPECT OF DEPB INCOME ALSO. THE A O HOWEVER OBSERVED THAT THE ASSESSEE HAD NOT SATISFIED THE CONDITIONS MENTI ONED IN THIRD PROVISO TO SECTION 80HHC(3) AS THE ASSESSEE COULD NOT SHOW THA T THE DUTY DRAWBACK RATE ON THE DATE OF EXPORT WAS HIGHER THAN THE DEPB RATE . THE AO THEREFORE DISALLOWED THE CLAIM OF DEDUCTION IN RELATION TO DE PB INCOME. IN APPEAL CIT(A) OBSERVED THAT DEPB INCOME WAS NOT COVERED BY ANY OF THE CLAUSES I.E. (IIIA), (IIIB) (IIIC) OF SECTION 28 AND THEREFORE THE SAME WAS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC. IT WAS ALSO OBSERVED BY HIM TH AT PROFIT ON SALE OF DEPB WOULD ALSO NOT BE ELIGIBLE FOR DEDUCTION. ACCORDIN GLY HE CONFIRMED THE ORDER OF AO REJECTING THE CLAIM OF THE ASSESSEE. AGGRIEVED B Y THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.9.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUB MITTED THAT IN VIEW OF THE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF CIT VS KALPATARU COLOURS & CHEMICALS (328 ITR 451) THE ENTIRE DEPB INCOME HA VE TO BE TAKEN AS COVERED UNDER SECTION 28(IIID) AND THEREFORE THE TU RNOVER OF THE ASSESSEE BEING MORE THAN RS.10 CRORES THE BENEFIT OF DEDUCTION UND ER SECTION 80HHC COULD BE 15 GIVEN TO THE ASSESSEE IF THE FOLLOWING TWO CONDITIO NS MENTIONED IN THE THIRD PROVISO TO SECTION 80HHC (3) WERE FULFILLED. (A) HE HAD AN OPTION TO CHOSE EITHER THE DUTY DRAWBACK OR THE DUTY ENTITLEMENT PASS BOOK SCHEME BEING DUTY REMISSION C LAIMED AND (B) THE RATE OF DRAWBACK CREDIT ATTRIBUTABLE TO THE CUS TOM DUTY WAS HIGHER THAN THE RATE OF CREDIT ALLOWABLE UNDER THE DUTY ENTITLEMENT PASS BOOK SCHEME BEING THE DUTY REMISSION SCHEME. 2.9.2 THE LEARNED AR POINTED OUT THAT THE AUTHORITI ES BELOW HAVE DISALLOWED THE CLAIM ON THE GROUND THAT THE ABOVE TWO CONDITIO NS WERE NOT FULFILLED IN CASE OF THE ASSESSEE. IT WAS ARGUED THAT IN THE CASE OF THE ASSESSEE DUTY DRAWBACK SCHEME WAS NOT APPLICABLE AT ALL AND THEREFORE IT W AS ELIGIBLE ONLY FOR THE CREDIT UNDER THE DEPB SCHEME. IT WAS SUBMITTED THAT WHEN N O OPTION WAS AVAILABLE, QUESTION OF PROVIDING NECESSARY AND SUFFICIENT EVID ENCE DID NOT ARISE. THEREFORE THE SAID CONDITIONS CANNOT BE MADE APPLICABLE IN CA SE OF THE ASSESSEE AND THE ASSESSEE SHOULD BE ENTITLED TO DEDUCTION UNDER SECT ION 80HHC IN RESPECT OF DEPB CREDIT. HE PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN CASE OF M/S. WESTERN DRUGS PVT. LTD. VS ACIT IN ITA NO.2079/A/20 07. THE LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE JUDGMENT OF H ONBLE HIGH COURT OF MUMBAI IN CASE OF KALPATARU COLOURS & CHEMICALS LTD . (SUPRA). 2.9.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF DEDUCTION UNDE R SECTION 80HHC IN RESPECT OF DEPB INCOME. THERE IS NO DISPUTE THAT THE ENTIRE DE PB INCOME INCLUDING THE FACE VALUE AS WELL AS THE PROFIT ON SALE IS REQUIRE D TO BE CONSIDERED AS PROFIT OF BUSINESS UNDER SECTION 28(IIID) IN VIEW OF THE JUDG MENT OF HONBLE HIGH COURT OF 16 MUMBAI IN CASE OF CIT VS KALPATARU COLOUR AND CHEMI CALS (SUPRA). ONCE THE ENTIRE INCOME IS CONSIDERED UNDER SECTION 28(IIID) THE DEDUCTION UNDER SECTION 80HHC COULD BE ALLOWED ONLY IF THE TWO CONDITIONS M ENTIONED IN THE 3 RD PROVISO TO SECTION 80HHC(3) ARE FULFILLED AS THE TURNOVER I N RESPECT OF THE ASSESSEE EXCEEDED RS.10 CRORES. THE TWO CONDITIONS REFERRED TO ABOVE HAVE BEEN REPRODUCED IN PARA 2.9.1 IN THIS ORDER EARLIER. THE CASE OF THE ASSESSEE IS THAT IN CASE OF THE ASSESSEE, THE DUTY DRAW BACK SCHEME WAS NOT APPLICABLE AT ALL AND THEREFORE THERE WAS NO WAY, THE CONDITIONS COUL D BE FULFILLED AND THEREFORE THE SAID CONDITIONS COULD NOT BE MADE APPLICABLE IN CASE OF THE ASSESSEE AND DEDUCTION COULD BE ALLOWED WITHOUT FULFILLING THOSE CONDITIONS. RELIANCE HAS BEEN PLACED ON THE DECISION OF THE TRIBUNAL IN CASE OF M/S. WESTERN DRUGS PVT. LTD. VS ACIT (SUPRA) IN SUPPORT OF THE ABOVE PROPOS ITION. IN THE SAID DECISION, THE TRIBUNAL HELD THAT IN CASE THE CONDITIONS ARE N OT APPLICABLE IN CASE OF THE ASSESSEE, THE SAME HAVE TO BE IGNORED WHILE COMPUTI NG DEDUCTION IN RESPECT OF DEPB INCOME. HOWEVER, WE FIND THAT THE SAME ISSUE H AD ALSO BEEN CONSIDERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CASE OF CIT VS KALPATARU COLOR AND CHEMICAL (SUPRA) IN WHICH IT WAS HELD THAT IN CASE THE TURNOVER EXCEED RS.10 CRORES AND THE TWO CONDITIONS WERE NOT SATISFIED, T HE DEDUCTION UNDER SECTION 80HHC IN RESPECT OF DEPB INCOME COULD NOT BE ALLOWE D. THE SAID JUDGMENT WAS NOT AVAILABLE AT THE TIME OF PASSING THE ORDER BY T HE TRIBUNAL. WE THEREFORE RESPECTFULLY FOLLOWING THE SAID JUDGMENT HOLD THAT THE ASSESSEE WILL NOT BE ENTITLED TO DEDUCTION UNDER SECTION 80HHC IN RESPEC T OF DEPB INCOME AS THE TWO CONDITIONS MENTIONED IN THE 3 RD PROVISO TO SECTION 80HHHC(3) ARE NOT SATISFIED. 2.10 THE NEXT DISPUTE WHICH IS RELEVANT ONLY FOR AS SESSMENT YEAR 2004-05 IS REGARDING LEVY OF INTEREST UNDER SECTION 234D. THE LEARNED AR FOR THE ASSESSEE 17 SUBMITTED THAT THE ISSUE WAS ONLY CONSEQUENTIAL. TH E AO IS THEREFORE DIRECTED TO RE-COMPUTE THE INTEREST AT THE TIME OF GIVING EF FECT TO THIS ORDER. 2.11 THE GROUND NO.11 IS AN ADDITIONAL GROUND RAISE D BY THE ASSESSEE ONLY FOR THE ASSESSMENT YEAR 2003-04. THE ASSESSEE HAD MADE A CLAIM OF DEDUCTION ON ACCOUNT OF LEGAL AND PROFESSIONAL FEES TO M/S. DUA ASSOCIATES IN A.Y.2002-03 WHICH WAS DISALLOWED ON THE GROUND THAT THE BILL DA TED 19.4.2002 RELATED TO A.Y.2003-04. THE DISALLOWANCE IN A.Y.2002-03 WAS CO NFIRMED BY THE TRIBUNAL IN ITA NO.2792/M/2006. THE ASSESSEE HAS THEREFORE RAIS ED THE ADDITIONAL GROUND AND BEING A LEGAL GROUND AND THE FACTS ALREADY BEEN BEING ON RECORD, THE SAME WAS ADMITTED BY THE TRIBUNAL FOR ADJUDICATION. 2.11.1 WE HAVE HEARD BOTH THE PARTIES PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. THE ASSESSEE HAS M ADE A CLAIM OF DEDUCTION OF RS.2,06,815/- ON ACCOUNT OF LEGAL AND PROFESSIONAL FEES DUE TO M/S. DUA ASSOCIATES IN A.Y.2002-03. THE CLAIM WAS DISALLOWED AND THE DISALLOWANCE WAS CONFIRMED BY THE TRIBUNAL IN ITA NO.2792/M/2006. TH E TRIBUNAL NOTED THAT THE BILL FROM M/S. DUA ASSOCIATES OF RS.2,06,815/- WAS DATED 19.4.2002 AND THEREFORE THE LIABILITY HAD CRYSTALLIZED ONLY DURIN G THE ASSESSMENT YEAR 2003- 04. IN VIEW OF THE FINDING OF THE TRIBUNAL IN A.Y.2 002-03 THAT BILL WAS DATED 19.4.2002 WHICH RELATED TO A.Y.2003-04 THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED IN A.Y.2003-04. WE ACCORDINGLY ALLOW THE CL AIM OF THE ASSESSEE THIS YEAR. 3. APPEALS OF THE REVENUE IN ITA NO.1301/M/2007 (ASSESSMENT YEAR 2003-04) AND ITA NO.5585/M/2007 (ASSESSMENT YEAR 2004-05). IN THESE 18 APPEALS OF THE REVENUE, DISPUTES HAVE BEEN RAISED O N SIX DIFFERENT GROUNDS WHICH ARE MOSTLY COMMON. 3.1 THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF CONTRIBUTION TO LABOUR WELFARE FUND. THIS DISPUTE IS RELEVANT ONLY FOR A.Y .2003-04. THE AO NOTED THAT THE ASSESSEE HAD DEPOSITED AN AMOUNT OF RS.360/- TO WARDS COMPANYS CONTRIBUTION TO LABOUR WELFARE FUND BUT THE SAME HA D NOT BEEN REALIZED WITHIN 15 DAYS AS POINTED OUT BY THE AUDITORS. THE ASSESSE E EXPLAINED THAT THE AMOUNT HAD BEEN DEPOSITED WITHIN THE DUE DATE BUT T HE SAME WAS NOT REALIZED WITHIN 15 DAYS FOR NO FAULT OF THE ASSESSEE. AO HOW EVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE DEDUCTION COULD BE ALLOWED UNDER SECTION 43B ONLY IF THE PAYMENTS WERE MADE WI THIN THE TIME PERMITTED. SINCE THE AMOUNT HAD NOT BEEN REALIZED WITHIN THE D UE DATE, AO DISALLOWED THE SUM OF RS.360/-. IN APPEAL CIT(A) FOLLOWING THE DEC ISION IN EARLIER YEAR ALLOWED THE CLAIM OF THE ASSESSEE AGGRIEVED BY WHICH THE RE VENUE IS IN APPEAL. 3.1.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE AT THE VERY OUTSET POINTED OUT THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSE E BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN I TA NO.2792/M/2006. THE LEARNED DR FAIRLY CONCEDED THAT THE ISSUE WAS COVER ED. 3.1.2 WE FIND THAT THE SAME ISSUE HAD BEEN CONSIDE RED BY THE TRIBUNAL IN ASSESSMENT YEAR 2002-03 IN WHICH IT WAS HELD THAT I N CASE THE CHEQUE WAS DEPOSITED WITHIN DUE DATE, THE PAYMENT WOULD RELATE BACK TO THE DATE OF DEPOSIT EVEN IF THE CHEQUE WAS DISHONOURED AND CLEA RED LATER. THE TRIBUNAL PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS OGALE GLASS WORKS LTD. (25 ITR 429). THE CLAIM WAS ACCORDINGLY ALLOWED. THIS 19 YEAR ALSO THE ASSESSEE HAS CLAIMED THAT THE DEPOSIT HAD BEEN MADE WITHIN THE DUE DATE AND THIS CLAIM HAS NOT BEEN CONTROVERTED B EFORE US. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 WE CONFIRM THE ORDER OF CIT(A) ALLOWING THE CLAIM. 3.2 THE SECOND DISPUTE WHICH IS RELEVANT TO BOTH TH E YEARS IS REGARDING CLAIM OF DEPRECIATION ON MOTOR CARE AT A HIGHER RATE. THE AO NOTED THAT THE ASSESSEE HAD CLAIMED DEPRECIATION AT HIGHER RATE IN RESPECT OF CERTAIN CARS. DEPRECIATION HAD BEEN CLAIMED AT 40% IN SOME CASES AND IN RESPEC T OF CARS ACQUIRED AFTER 1.4.2001 DEPRECIATION HAD BEEN CLAIMED AT 50%. THE ASSESSEE HAD CLAIMED HIGHER DEPRECIATION AS SPECIFIED IN APPENDIX I OF THE INCOME-TAX RULES TREATING THE SAME AS COMMERCIAL VEHICLE. THE AO OBSERVED THA T THE COMMERCIAL VEHICLES ARE USED IN THE BUSINESS OF HIRING. SINCE THE ASSES SEE WAS NOT IN THE BUSINESS OF HIRING OF CARS, THE AO DID NOT TREAT THE CARS AS COMMERCIAL VEHICLES AND REJECTED THE CLAIM OF HIGHER DEPRECIATION. HE ALLOW ED DEPRECIATION ONLY @ 20% BEING THE NORMAL DEPRECIATION. IN APPEAL CIT(A) FOL LOWING THE DECISION IN THE EARLIER YEAR, ALLOWED THE CLAIM OF THE ASSESSEE AGG RIEVED BY WHICH THE REVENUE IS IN APPEAL. 3.2.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE SAME ISSUE HAD B EEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN W HICH CASE ALSO THE ASSESSEE HAD CLAIMED DEPRECIATION AT HIGHER RATE TREATING TH E CARS AS COMMERCIAL VEHICLE. THE TRIBUNAL NOTED THAT THERE WAS NO DISPUTE THAT T HE CARS WERE USED IN THE BUSINESS OF THE ASSESSEE THOUGH THE BUSINESS WAS NO T OF PLYING OF VEHICLES ON HIRE. THE TRIBUNAL ALSO NOTED THAT NOTE IIIA UNDER THE APPENDIX I DEFINED COMMERCIAL VEHICLES WHICH ALSO INCLUDED A LIGHT MOT OR VEHICLE. FURTHER LIGHT 20 MOTOR VEHICLE HAD BEEN DEFINED IN SECTION 2 OF MOTO R VEHICLES ACT WHICH IN ADDITION TO OTHER VEHICLES ALSO INCLUDED A MOTOR CA R WITH UNLADEN WEIGHT NOT EXCEEDING 7500 KG. THUS THE MOTOR CARS WITH UNLADEN WEIGHT NOT EXCEEDING 7500 KGS WILL BE COVERED BY THE DEFINITION OF COMME RCIAL VEHICLES. THE TRIBUNAL THEREFORE HELD THAT THE ASSESSEE WAS ENTITLED HIGHE R RATE OF DEPRECIATION. FACTS THIS YEAR ARE IDENTICAL AS NO DISTINCTIVE FEATURES HAVE BEEN BROUGHT TO OUR NOTICE BY THE LEARNED DR. WE THEREFORE SEE NO INFIR MITY IN THE ORDER OF CIT(A) ALLOWING THE RATE OF HIGHER DEPRECIATION AND THE SA ME IS THEREFORE UPHELD. 3.3 THE THIRD DISPUTE WHICH IS ALSO RELEVANT FOR BO TH THE YEARS IS REGARDING DEPRECIATION ON BUILDING. THE AO NOTED THAT THE BUI LDING ON WHICH DEPRECIATION HAS BEEN CLAIMED BY THE ASSESSEE WAS YET TO BE REGI STERED IN THE NAME OF THE ASSESSEE. THE LETTER FROM THE CORPORATION OBTAINED BY THE ASSESSEE ALSO MADE IT CLEAR THAT THE PROPERTY WAS MUTATED IN THE NAME OF THE ASSESSEE FOR LIMITED PURPOSE OF PAYMENT OF PROPERTY TAX. THE ASSESSEE WA S HAVING ONLY A POWER OF ATTORNEY GIVEN BY THE OWNER OF THE PROPERTY. AO THE REFORE HELD THAT THE ASSESSEE WAS NOT THE OWNER OF THE PROPERTY AND ACCO RDINGLY DISALLOWED THE CLAIM OF DEPRECIATION. IN APPEAL CIT(A) FOLLOWING T HE DECISION IN A.Y.2002-03 ALLOWED THE CLAIM OF THE ASSESSEE AGGRIEVED BY WHIC H THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3.3.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN I TA NO.2792/M/2006. IN THAT YEAR ALSO THE DEPRECIATION HAD BEEN CLAIMED IN RESP ECT OF THE SAME BUILDING. THE TRIBUNAL NOTED THAT THOUGH THE CONVEYANCE HAD N OT BEEN EXECUTED IN THE NAME OF THE ASSESSEE, THE ASSESSEE HAD PAID THE FUL L CONSIDERATION IN A.Y.1996- 21 97 AND WAS IN FULL POSSESSION OF THE PROPERTY WHICH WAS BEING USED AS A CORPORATE OFFICE. THE TRIBUNAL REFERRED TO THE JUDG MENT OF HONBLE SUPREME COURT IN CASE OF MYSORE MINERALAS VS CIT (239 ITR 7 25) IN WHICH IT WAS HELD THAT THE TERM OWNED OCCURRING IN SECTION 32(1) HA D TO BE ASSIGNED A WIDER MEANING AND ANYBODY EXERCISING DOMINION OVER A PROP ERTY AS WOULD ENABLE OTHERS BEING EXCLUDED THERE-FROM AND WHO OCCUPIES I T IN ITS OWN RIGHT WOULD BE AN OWNER. AS THE ASSESSEE WAS EXERCISING THE RIGHT OF OWNERSHIP IN THE PROPERTY WHICH WAS IN ITS POSSESSION AND USE AND EN TIRE CONSIDERATION HAD BEEN PAID, THE TRIBUNAL ALLOWED THE CLAIM OF DEPRECIATIO N. THE FACTS THIS YEAR ARE IDENTICAL. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN A.Y.2002-03 (SUPRA) CONFIRM THE ORDER OF CIT(A). 3.4 THE FOURTH DISPUTE IS REGARDING DISALLOWANCE OF CIGARETTE SAMPLING EXPENSES. AO NOTED THAT THE ASSESSEE HAD CLAIMED EX PENSES OF RS.8,63,814/- IN A.Y.2003-04 AND RS.8,73,088/- IN A.Y.2004-05 ON ACCOUNT OF CIGARETTE SAMPLES. WHEN ASKED TO EXPLAIN THE JUSTIFICATION FO R SUCH CLAIM, THE ASSESSEE SUBMITTED THAT CIGARETTE SAMPLES WERE GIVEN TO POTE NTIAL VISITORS AND SOME WERE SENT FOR TEST IN THE LABORATORIES. THESE EXPEN SES HAD BEEN INCURRED TO CREATE AWARENESS ABOUT THE COMPANYS BRANDS AND TO HELP CREATE MARKET FOR THE COMPANY. AO HOWEVER OBSERVED THAT THE ASSESSEE HAD FAILED TO SUBSTANTIATE THE BUSINESS NECESSITY. HE THEREFORE D ISALLOWED THE CLAIM. CIT(A) FOLLOWING THE DECISION IN A.Y.2002-03 ALLOWED THE C LAIM OF THE ASSESSEE AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3.4.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUB MITTED THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03 IN ITA NO.2792/M/2006 AND I N A.Y.2005-06 IN 22 6692/M/2008 IN WHICH SIMILAR SAMPLE EXPENSES HAVE B EEN ALLOWED BY THE TRIBUNAL. THE LEARNED DR FAIRLY CONCEDED THAT THE I SSUE WAS COVERED. 3.4.2 WE HAVE PERUSED THE SAID ORDERS OF TRIBUNAL. THE TRIBUNAL IN A.Y.2002- 03 NOTED THAT THE SAMPLE DISTRIBUTION EXPENSES WERE MINISCULE CONSIDERING THE TURNOVER OF OVER RS.600 CRORES. THE ASSESSEE HAD PR ODUCED ALL NECESSARY DETAILS AND VOUCHERS. THE CLAIM WAS THEREFORE ALLOW ED. THIS YEAR ALSO THE FACTS ARE IDENTICAL. THERE IS NO CASE MADE OUT BY THE DEP ARTMENT THAT DETAILS AND VOUCHERS WERE NOT AVAILABLE. THE DISALLOWANCE HAS B EEN MADE ON THE GROUND THAT THE ASSESSEE FAILED TO SUBSTANTIATE THE BUSINE SS NECESSITY. SAMPLE DISTRIBUTION EXPENSES ARE THE NORMAL BUSINESS EXPEN SES OF ANY COMPANY DEALING WITH FAST MOVING CONSUMER PRODUCTS. THE CLA IM HAS ALREADY BEEN ALLOWED BY THE TRIBUNAL IN THE EARLIER YEAR. WE THE REFORE SEE NO JUSTIFICATION FOR DISALLOWING THE CLAIM IN THESE YEARS. ORDERS OF CIT (A) ALLOWING THE CLAIM ARE THEREFORE UPHELD. 3.5 THE FIFTH DISPUTE IS REGARDING NATURE OF INCOME EARNED BY THE ASSESSEE FROM INTEREST AND RENT. THE AO NOTED THAT THE ASSES SEE HAD SHOWN INCOME FROM RENT AND HIRE CHARGES AS WELL AS INTEREST ON LOANS, BANK DEPOSITS AND INCOME TAX REFUND AGGREGATING RS.3,64,16,000/- IN A.Y.2003 -04. SIMILAR INCOME OF RS.493.62 LACS HAD BEEN SHOWN FOR A.Y.2004-05. THE ASSESSEE HAD DECLARED THE ENTIRE INCOME AS BUSINESS INCOME. THE ASSESSEE EXPLAINED THAT IT HAD RECEIVED RENT FROM SUBLETTING OF THE PROPERTY AND H IRE CHARGES FROM HIRING OF FURNITURE, MACHINERY AND EQUIPMENTS AS WELL AS INTE REST INCOME WHICH WAS OF THE NATURE OF BUSINESS. THE AO HOWEVER DID NOT ACCE PT THE CLAIM AS BUSINESS AND TREATED THE ENTIRE INCOME AS INCOME FROM OTHER SOURCES. IN APPEAL CIT(A) 23 FOLLOWING THE DECISION IN A.Y.2002-03 ALLOWED THE C LAIM OF THE ASSESSEE AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3.5.1 WE HAVE HEARD BOTH THE PARTIES IN THE MATTER. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT THE ISSUE WAS PARTLY COVERE D BY THE DECISION OF THE TRIBUNAL IN A.Y.2002-03 IN ITA NO.2792-2632/M/2006 IN WHICH RENT AND HIRE CHARGES HAD BEEN HELD ASSESSABLE AS BUSINESS INCOME . THE LEARNED DR PLACED RELIANCE ON THE ORDER OF AO. 3.5.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED T HE MATTER CAREFULLY. THE DISPUTE IS REGARDING THE NATURE OF RENTAL INCOME RE CEIVED FROM SUBLETTING OF THE OFFICE SPACE, HIRE OF FURNITURE, MACHINERY AND EQUI PMENTS ETC AND INCOME FROM INTEREST ON LOAN, DEPOSITS AND INCOME-TAX REFUND. W E FIND THAT THE ISSUE REGARDING THE NATURE OF INCOME FROM SUBLETTING OF T HE PREMISES OR HIRING OF THE MACHINERY/EQUIPMENTS ETC HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.2002-03. THE TRIBUNAL IN THAT YEAR NOTED THAT SUBLET, LEASE RENTALS HAD BEEN RECEIVED FROM ITC. BOTH THE COMPA NIES WERE IN THE SAME BUSINESS AND THERE WERE MUTUAL AGREEMENTS FOR USING THEIR SPARE CAPACITIES SUBJECT TO AVAILABILITY WITHOUT INVOLVING ANY HANDI NG OVER OF POSSESSION. THE RENTAL INCOME WAS THEREFORE FROM EXPLOITATION OF CO MMERCIAL ASSETS. THE TRIBUNAL, THEREFORE HOLD THAT SUCH LEASE RENTAL INC OME WAS OF THE NATURE OF BUSINESS. THE TRIBUNAL ALSO HELD THAT WHILE COMPUTI NG DEDUCTION UNDER SECTION 80HHC SUCH INCOME HAD TO BE TREATED AS OTHER INCOME COVERED BY THE EXPLANATION (BAA) AND 90% OF THE SAME WAS REQUIRED TO BE DEDUCTED FROM THE PROFIT OF BUSINESS. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE TRIBUNAL, WE HOLD THAT RENTAL INCOME FROM SUBLETTING OF SPARE OF FICE SPACE AS WELL AS PLANT AND MACHINERY AND EQUIPMENTS WILL BE OF THE NATURE OF BUSINESS INCOME AND 24 WILL BE CONSIDERED AS PER EXPLANATION (BAA) WHILE C OMPUTING DEDUCTION UNDER SECTION 80HHC. AS REGARDS THE INTEREST INCOME FROM LOANS, DEPOSITS AND INCOME-TAX REFUND THERE IS NO MATERIAL PRODUCED BEF ORE US TO SHOW THAT THE LOANS AND DEPOSITS HAD ANY NEXUS WITH THE BUSINESS OF THE ASSESSEE. THEREFORE WE AGREE WITH THE FINDING OF THE AO THAT INTEREST I NCOME FROM LOANS DEPOSITS AND INCOME-TAX REFUND HAS TO BE TREATED AS INCOME F ROM OTHER SOURCES. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) ON THIS P OINT AND UPHOLD THE ORDER OF AO. 3.6 THE SIXTH DISPUTE IS REGARDING EXCLUSION OF EXC ISE DUTY FROM TOTAL TURNOVER. THE AO HAD ADDED EXCISE DUTY TO THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. IN APPEAL CIT(A) EXC LUDED THE SAME FROM THE TOTAL TURNOVER. AGGRIEVED BY THE SAID DECISION THE REVENUE IS IN APPEAL. 3.6.1 AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE ISSUE IS COVERED BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS LAXMI MACHINE WORKS (290 ITR 667) IN WHICH IT HAS BEEN HELD THAT EXCISE DUTY DOES NOT CONTAIN AN ELEMENT OF TURNOVER AND THEREFORE HAS TO BE EXCLUDE D FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. RESP ECTFULLY FOLLOWING THE SAID JUDGMENT OF HONBLE SUPREME COURT WE CONFIRM T HE ORDER OF CIT(A) AND DISMISS THE GROUND RAISED BY THE REVENUE. 4. THE CROSS OBJECTION OF THE ASSESSEE IN CO NO.147/M/2007 FOR A.Y.2003-04 . THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THE CR OSS OBJECTION IS REGARDING LEVY OF INTEREST UNDER SECTION 234B AND 2 34C. THE LEARNED AR FOR THE ASSESSEE AT THE TIME OF THE HEARING SUBMITTED THAT LEVY OF INTEREST WAS ONLY CONSEQUENTIAL. HE DID NOT DISPUTE THE LIABILITY ON ACCOUNT OF LEVY OF INTEREST. WE 25 THEREFORE DISMISS THE CROSS OBJECTIONS RAISED BY TH E ASSESSEE. THE AO, HOWEVER, WILL RECOMPUTE THE INTEREST AT THE TIME OF GIVING EFFECT TO THIS ORDER. 5. IN THE RESULT THE CROSS APPEALS FOR BOTH THE YEA RS ARE PARTLY ALLOWED WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IS DISM ISSED. 6. ORDER WAS PRONOUNCED IN THE OPEN COURT 20.04.201 1. SD/- SD/- ( R. V. EASWAR ) (RAJENDR A SINGH) PRESIDENT ACCOUNTANT MEMBER DATE : 20.04.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR G BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK