Polyplex Corporation Ltd., V. ACIT, Circle-14(1),

ITA 116/DEL/2005

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0482 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 27-03-2014
• Assessment Year: 2001-2002
• Appeal Filed On: 10-01-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: STEPHEN GEORGE
• Assessee Lawyers: MADHVI SWARUP; ROOPESH J AIN
• Keywords: Business income; Depreciation; Earning of tax free income; Capital receipt; Unabsorbed depreciation; Revenue expenditure; Capital expenditure; Set aside
• Section: 80HHC; 234B; 37; 12; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI I. P. BANSAL, JM & SHRI K. D. RA NJAN, AM I. T. APPEAL NO. 116 (DEL) OF 2005. ASSESSMENT YEARS : 200102. M/S. POLYPLEX CORPORATION LTD., ASSTT. COMMISSIONER OF INCOME-TAX, 40-NEW MANDAKANI, VS. C I R C L E : 14 (1), GREATER KAILASH - IV, N E W D E L H I. N E W D E L H I. PAN/GIR NO. AAACP 0278J. ( APPELLANT ) ( RESPONDE NT ) ASSESSEE BY : SHRI ROOPESH J AIN, ADV.; & MS. MADHVI SWARUP, ADV.; DEPARTMENT BY : SHRI STEPHEN GEORGE [CIT] - D. R.; O R D E R PER K. D. RANJAN, AM : THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 20 01-02 ARISES OUT OF ORDER OF THE LD. CIT (APPEALS)-XVII, NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE REPRODUCED AS UNDER:- ' 1. THAT THE CIT (APPEALS) ERRED ON FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING UNABSOR BED DEPRECIATION OF RS.1,42,080,695/- WHILE CALCULATING 'PROFITS OF THE BUSINESS' FOR THE PURPOSE OF COMPUTING DEDUCTION 80-HHC OF THE INCOME -TAX ACT (THE ACT); 1.1 THAT THE CIT (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT UNABSORBED DEPRECIATION IS NOT TO BE TAKEN INTO ACCOUNT FOR COMPUTING PROFITS AND GAINS OF BUSINESS OR PROF ESSION FOR COMPUTING DEDUCTION UNDER SECTION 80-HHC(3) OF THE ACT; 1.2 THAT THE CIT (APPEALS) ERRED ON FACTS AN D IN LAW IN HOLDING THAT IN ABSENCE OF ANY BROUGHT FORWARD BUSINESS LOSSES THER E WAS NO RIDER PLACED ON SETTING OFF OF THE UNABSORBED DEPRECIATION; 2 I. T. APPEAL NO. 116 (DEL) OF 2005. 2.0 THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN HOLDING INTEREST INCOME OF RS.1,131,088/- BEING INTEREST RE CEIVED ON FIXED DEPOSIT AS 'INCOME FROM OTHER SOURCES' AND NOT AS BUSINESS INCOME; 2.1 THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN HOLDING THAT INTEREST RECEIVED EVEN ON FIXED DEPOSITS MADE UNDER BUSINESS COMPULSIONS COULD NOT BE REGARDED AS BUSINESS INCOME; 2.2 THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN HOLDING THAT THE CHARACTER OF INTEREST INCOME ON FIXED DEPOSITS WOULD NOT CHANGE MERELY BECAUSE THEY WERE GIVEN AS BANK GUARANTEE; 3. THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN ASSESSING RS.75, 995,210 CREDITED IN THE BOOKS OF ACCOUNT BEING DUTY ENTITLEMENT PASS BOOK ( 'DEPB') RECEIVED OR RECEIVABLE, AS INCOME CHARGEABLE TO TAX UNDER SECTI ON 28(IV) OF THE ACT; 3.1 THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THAT THE EXPORT INCENTIVE GRANTED BY W AY OF DEPB CREDIT CONSTITUTED 'CAPITAL RECEIPT' AND WAS NOT CHARGEABL E TO TAX UNDER THE ACT; 3.2 WITHOUT PREJUDICE THAT THE CIT (APPEALS ) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE DEPB CREDIT WAS ONLY A NOTIONAL SUM / INCOME AND WAS NOT CHARGEABLE TO TAX DURING T HE ASSESSMENT YEAR UNDER CONSIDERATION; 3.3 WITHOUT PREJUDICE THAT THE CIT (APPEALS ) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICE R IN REDUCING 90 PER CENT OF THE RECEIPT ON ACCOUNT OF SALE OF DEPB LICENCE I N TERMS OF EXPLANATION (BAA) TO SECTION 80-HHC OF THE ACT, TREATING THE SA ME AS 'OTHER RECEIPTS'; 3.4 WITHOUT PREJUDICE THAT THE CIT (APPEALS ) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFFICE R IN NOT ADDING BACK DEPB CREDITS AMOUNTING TO RS.75,995,210/- ALLOCATED IN THE RATIO OF THE EXPORT TURNOVER TO TOTAL TURNOVER, IN TERMS OF PROV ISO TO SUB-SECTION (3) OF SECTION 80-HHC OF THE ACT, WHILE COMPUTING THE DEDU CTION UNDER THAT SECTION; 4. THAT THE CIT (APPEALS) ERRED ON FACTS AN D IN LAW IN SUSTAINING DISALLOWANCE TO THE EXTENT OF 10 PER CENT OF THE TO TAL DIVIDEND INCOME INVOKING SECTION 14-A OF THE ACT ON ACCOUNT OF THE ALLEGED EXPENSES ATTRIBUTED TOWARDS EARNING OF SUCH EXEMPT INCOME; 5. THAT THE CIT (APPEALS) ERRED ON FACTS AND IN LAW IN SUSTAINING DISALLOWANCE OF EXPENDITURE OF RS.1,95,420/- INCURR ED ON OBTAINING FEASIBILITY REPORT FOR THE PROPOSED POLYFILM PLANT IN DUBAI AND INSTEAD 3 I. T. APPEAL NO. 116 (DEL) OF 2005. ALLOWING DEDUCTION TO THE EXTENT OF 1/5 TH THEREOF UNDER SECTION 35-D OF THE ACT HOLDING THE SAME TO BE CAPITAL EXPENDITURE; 6. THAT THE CIT (APPEALS) ERRED ON FACTS AN D IN LAW IN CONFIRMING DISALLOWANCE OF RS.50,000/- BEING EXPENDITURE INCUR RED ON PREPARATION OF FEASIBILITY STUDY FOR INCREASE IN CAPACITY OF TH E PLANT AND INSTEAD ALLOWING DEDUCTION TO THE EXTENT OF 1/5 TH OF THE SAME UNDER SECTION 35-D OF THE ACT; 7. THAT THE CIT (APPEALS) ERRED ON FACTS AN D IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN NOT REDUCING FROM THE NET PROFIT AS PER THE PROFIT AND LOSS ACCOUNT, WHILE COMPUTING B OOK PROFIT UNDER SECTION 115-JB, UNDER SECTION 80-HHC OF THE ACT AMO UNTING TO RS.60,282,198/-; 7.1 THAT THE CIT (APPEALS) ERRED ON FACTS A ND IN LAW IN REDUCING THE NET PROFIT AS PER PROFIT AND LOSS ACCOUNT BY AN AMO UNT OF RS.55,700/- BEING PROPORTIONATE AMOUNT OF PROFESSIONAL, MANAGERIAL AN D FINANCIAL EXPENSES DISALLOWED UNDER SECTION 14-A WHILE COMPUTING NET P ROFITS UNDER SECTION 115-JB OF THE ACT; 8. THAT THE CIT (APPEALS) ERRED ON FACTS AN D IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN LEVYING INTE REST UNDER SECTION 234-B, 234-C AND 234-D OF THE ACT. 3. GROUND NO. 4 RAISED BY THE ASSESSEE WAS NOT PRES SED. THIS GROUND IS, THEREFORE, DISMISSED, AS NOT PRESSED. 4. THE FIRST ISSUE FOR CONSIDERATION RELATES TO RED UCING UN-ABSORBED DEPRECIATION OF RS.14,20,80,695/- WHILE CALCULATING PROFITS OF BUSI NESS UNDER CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC FOR THE PURPOSE OF COMPUTING DEDUC TION UNDER SECTION 80-HHC OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS THE ACT]. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE WHILE COMPUTING PROFITS OF BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80-HHC HAD SET OFF BROUGHT FORWARD DEPRECIATION. THE ASSESSING OFFICER HELD THAT IN COMPUTING DEDUCTION UNDER SECT ION 80-HHC THE UNABSORBED DEPRECIATION OF RS.14,20,80,694/- WILL BE FIRST SET OFF FROM THE BUSINESS INCOME OF THE YEAR AND ON BALANCE BUSINESS INCOME THE DEDUCTION U /S 80HHC WILL BE ALLOWABLE. ON APPEAL THE LD. CIT (APPEALS) OBSERVED THAT IN THE C ASE OF THE ASSESSEE THERE WAS NO UNABSORBED LOSS AND, THEREFORE, THERE WAS NO RIDER PLACED ON SECTION 32(2) AND IT WOULD 4 I. T. APPEAL NO. 116 (DEL) OF 2005. COME INTO PLAY AS IT WAS AT THE RELEVANT TIME. AS FAR AS THE APPLICATION OF PROVISIONS OF SECTION 80A AND 80AB WERE CONCERNED, THE SAME WERE APPLICABLE TO DEDUCTION UNDER SECTION 80-HHC AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES 266 ITR 521 (SC). IN VIEW OF THESE FACTS, THE LD. C IT (A) HELD THAT THE AO WAS JUSTIFIED IN EXCLUDING UNABSORBED DEPRECIATION OF RS.14,20,80 ,695/- FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION FOR WORKING OUT PROFITS OF BUSINESS UNDER CLAUSE (BAA) AND THEN THE EXPORT PROFITS UNDER SECTION 80HHC(3). HE ACCO RDINGLY UPHELD THE ORDER OF THE LD. ASSESSING OFFICER. 5. BEFORE US THE LD. AR OF THE ASSESSEE FAIRLY CONC EDED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF SHIRKE CONSTRUCTION & EQUIPMENT LTD. 291 ITR 320 (SC). O N THE OTHER HAND, THE LD. SR. DR SUPPORTED THE ORDER OF THE LD. CIT (A). 6.1 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. DEDUCTION U/S 80HHC IS TO BE ALLOWED FROM GROSS TOT AL INCOME WHICH INCLUDES EXPORT PROFITS. GROSS TOTAL INCOME IS ARRIVED AT BY SETTIN G OFF OF BROUGHT FORWARD BUSINESS LOSS AS WELL AS BROUGHT FORWARD DEPRECATION AS PER RELEVANT PROVISIONS OF LAW. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBL E SUPREME COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENT LTD. (SUPRA). HO NBLE SUPREME COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENT LTD. (SUPRA) HAS HELD AS UNDER (HEAD NOTES):- SECTION 80-AB OF INCOME-TAX ACT, 1961, SPECIFYING THAT PROFITS ARE THOSE AS DETERMINED FOR THE PURPOSE OF THE ACT, WILL APPLY F OR DETERMINING PROFITS FROM EXPORT BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80-HHC. IN DETERMINING BUSINESS PROFITS OR DEDUCTION UNDER SEC TION 80-HHC THE UNABSORBED BUSINESS LOSS FOR EARLIER YEARS UNDER SECTION 72 SH OULD BE SET OFF. THEREFORE, THE UNABSORBED DEPRECIATION FOR THE YEAR UNDER CONSIDER ATION HAS TO BE SET OFF, BEFORE ALLOWING DEDUCTION UNDER CHAPTER VI-A. 5 I. T. APPEAL NO. 116 (DEL) OF 2005. 6.2 SINCE THE ISSUE IS COVERED BY THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENT LTD. (SUPR A) RESPECTFULLY FOLLOWING THE SAME IT IS HELD THAT DEPRECIATION IS TO BE REDUCED FROM PROFITS OF BUSINESS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE L D. CIT (APPEALS) CONFIRMING THE DISALLOWANCE OF RS.14,20,80,695/- IN COMPUTING THE GROSS TOTAL INCOME OF THE ASSESSEE. 7. THE NEXT ISSUE FOR CONSIDERATION RELATES TO TREA TING THE INCOME OF RS.11,31,088/- BEING INTEREST RECEIVED ON FIXED DEPOSITS AS INCOME FROM OTHER SOURCES AND NOT AS BUSINESS INCOME. THE AO DURING THE COURSE OF ASSES SMENT PROCEEDINGS TREATED THE INTEREST INCOME FROM FDRS. AS INCOME FROM OTHER SO URCES. THE CLAIM OF THE ASSESSEE THAT THE INTEREST INCOME EARNED ON FDRS WAS BUSINES S INCOME WAS REJECTED BY AO AS THE SAME WAS NOT DERIVED FROM THE ACTIVITIES OF ASSESSE E FROM EXPORT OUT OF INDIA QUALIFYING DEDUCTION UNDER SECTION 80-HHC OF THE ACT. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED THAT THE ASSESSEE RECEIVED INTEREST ON FD RS. FOR BANK GUARANTEE AT RS.1.90 LAKHS, INTEREST ON FDRS. BY LC MARGIN RS.0.52 LAKHS , AND INTEREST ON FDRS PLEDGED WITH THE BANK AT RS.8.86 LAKHS. THE CONTENTION OF THE A SSESSEE BEFORE THE LD. CIT (A) WAS THAT THE EARNING OF INTEREST IN THE COMMERCIAL SENSE WAS NOT THE INTENTION OF THE ASSESSEE, BUT THE FDRS HAVE BEEN MADE WITH THE BANK FOR THE PURPO SE OF COMPLYING OF CERTAIN LEGAL REQUIREMENTS AND, THEREFORE, THE SAME WAS ASSESSABL E AS BUSINESS INCOME. THE LD. CIT (APPEALS) AFTER EXAMINATION OF THE CONTENTION OF TH E ASSESSEE WAS OF THE OPINION THAT MONEY LENDING WAS NOT BUSINESS ACTIVITY OF THE ASSE SSEE. THE INTEREST EARNED FROM FIXED DEPOSITS REMAINED INCOME ASSESSABLE UNDER THE HEAD OTHER SOURCES ON THE GROUND THAT THE NATURE COULD NOT BE CHANGED BY ANY COMPULSIONS OR REQUIREMENTS OF BUSINESS. HE PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY H IGH COURT IN THE CASE OF RAVI RATTAN EXPORTS LTD. 246 ITR 443 (BOM.) WHEREIN IT HAS BEEN HELD THAT THE INTEREST RECEIVED FROM FIXED DEPOSITS WAS ASSESSABLE UNDER THE HEAD OTHER SOURCES AND ACCORDINGLY THE INTEREST RECEIVED FROM FIXED DEPOSITS WAS ASSESSABLE UNDER T HE HEAD OTHER SOURCES. 6 I. T. APPEAL NO. 116 (DEL) OF 2005. 8. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT TH IS ISSUE IS COVERED BY THE DECISION OF HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT V S. SRI RAM HONDA POWER EQUIP. (DELHI) 289 ITR 475 (DEL.) WHEREIN IT HAS BEEN HELD THAT THE INTEREST RECEIVED FROM FIXED DEPOSITS WAS ASSESSABLE UNDER THE HEAD OTHER SOURC ES. SINCE THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SRI RAM HONDA POWER EQUIP (SUPRA) WE DO NOT FIND ANY INFIRM ITY IN THE ORDER PASSED BY THE LD. CIT (A) CONFIRMING THE STAND OF THE ASSESSING OFFIC ER. 9. THE NEXT ISSUE FOR CONSIDERATION RELATES TO TREA TING THE DEPB RECEIPTS OF RS.7,59,95,210/- AS INCOME CHARGEABLE TO TAX UNDER SECTION 28(IV) OF THE ACT. THE ASSESSING OFFICER TREATED THE DEPB RECEIPTS THE INC OME UNDER SECTION 28(IV) RELYING ON THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF AGRA CHAIN MANUFACTURING CO. 114 ITR 840 (ALL.) WHEREIN PROFITS ARISING OUT OF SALE OF IMPORT ENTITLEMENTS WERE HELD TO BE REVENUE RECEIPTS AND WAS LIABLE TO BE AS SESSED UNDER SECTION 28(IV) F THE ACT. BEFORE THE LD. CIT (A) IT WAS ARGUED THAT THE DEPB CREDITS COULD NOT BE TREATED UNDER CLAUSES (IIIA), (IIIB) OR (IIIC) OF THE ACT. IT CA NNOT BE TREATED AS REVENUE RECEIPTS UNDER SECTION 28(IV) OF THE ACT. THE LD. CIT (A) AFTER C ONSIDERING THE VARIOUS PROVISIONS HELD THAT THE DEPB RECEIPTS WERE REVENUE RECEIPTS, BUT N OT PART OF THE EXPORT INCOME. THEREFORE, IT WAS TO BE TREATED AS ANY OTHER RECEIP T. THE LD. CIT(A) HAS ALSO OBSERVED THAT SINCE DEPB RECEIPTS DO NOT FALL UNDER CLAUSE (IIIA) , (IIIBA) OR (IIIC) OF SECTION 28, IT COULD NOT BE CONSIDERED AS PART OF PROVISO AND HENCE, THE SAME COULD NOT BE TREATED AS EXPORT INCENTIVES. THEREFORE, THE ACTION OF THE AO IN TRE ATING THE DEPB RECEIPT AS REVENUE RECEIPT UNDER SECTION 28(IV) OF THE ACT AND THEN TR EATING THE SAME AS ANY OTHER RECEIPT IN RELATION TO EXPLANATION (BAA) TO SECTION 80-HHC AND DENYING THE BENEFIT OF PROVISO TO SECTION 80-HHC WAS JUSTIFIED AND ACCORDINGLY HE UPH ELD THE STAND OF THE ASSESSING OFFICER. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS KALPATARU COLOURS & CHEMICALS (SUPRA). IN THIS CASE HONBLE BOMBAY 7 I. T. APPEAL NO. 116 (DEL) OF 2005. HIGH COURT HAS HELD THAT THE AMOUNT RECEIVED ON TRA NSFER OF DEPB CREDIT INCLUDING THE FACE VALUE OF THE DEPB CREDIT WOULD CONSTITUTE PROF ITS OF BUSINESS UNDER SECTION 28(IIID) OF THE ACT AND, THEREFORE, THE ENTIRE AMOUNT OF DEP B RECEIVED HAS TO BE EXCLUDED UNDER CLAUSE (BAA) OF EXPLANATION TO SECTION 80-HHC OF TH E ACT. HONBLE HIGH COURT WHILE ARRIVING AT THIS DECISION OBSERVED THAT WHEN SECTI ON 28(IIID) SPECIFICALLY DEALS WITH PROFITS REALIZED ON TRANSFER OF DEPB CREDIT, IT WOU LD BE IMPERMISSIBLE AS A MATTER OF FIRST PRINCIPLE TO BIFURCATE THE FACE VALUE OF THE DEPB AND THE AMOUNT RECEIVED IN EXCESS OF FACE VALUE OF DEPB. SINCE THE ISSUE IS NOW COVERED BY THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS KALPATARU COLOURS & CHE MICALS (SUPRA) WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD CIT(A) CONFIRMING THE STAND OF THE ASSESSING OFFICER IN EXCLUDING DEPB FOR THE DEDUCTION U/S 80HHC OF THE ACT. 11. THE NEXT ISSUE FOR CONSIDERATION RELATES TO CON FIRMING THE DISALLOWANCE OF EXPENDITURE OF RS.1.95,420/- INCURRED ON FEASIBILIT Y REPORT FOR THE PROPOSED POLYFILM PLANT IN DUBAI AND RS.50,000/- INCURRED ON FEASIBILITY ST UDY FOR INCREASE IN CAPACITY OF THE PLANT. THE FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED EXPENDITURE OF RS.2,44,275/- AS REVENUE EXPENDITURE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD INCURRED EXPENDITURE OF RS.2,44,275/- FOR PAYMENT TO M/S. MC DONALD FOR PREPARING A FEASIBILITY STUDY TO START A POLYFILM PLANT AND EXPENSES WERE I NCURRED FOR THE EXISTING PURPOSE AND WAS CLEARLY COVERED UNDER SECTION 35-D OF THE ACT. THE AO, THEREFORE, TREATED THE AMOUNT OF RS.2,44,275/- AS CAPITAL EXPENDITURE AND ALLOWED 1/5 TH OF THE AMOUNT UNDER SECTION 35-D(1(II) OF THE ACT. ON APPEAL THE LD. C IT (A) UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 12. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED THAT AS PER THE JUDICIAL PRONOUNCEMENTS ANY EXPENDITURE INCURRED FOR THE PUR POSE OF CONDUCTING FEASIBILITY STUDY FOR THE PROJECTS, WHICH ARE LATER ABANDONED ARE ALL OWABLE AS REVENUE EXPENDITURE. ON THE OTHER HAND LD SR DR SUPPORTED THE ORDER OF CIT(A). 8 I. T. APPEAL NO. 116 (DEL) OF 2005. 13. WE HAVE HEARD BOTH THE PARTIES. THERE IS NO DI SPUTE THAT THE EXPENDITURE OF RS.244275/- WAS INCURRED FOR FEASIBILITY STUDY AT D UBAI TO START POLYFILM PLANT, WHICH WAS LATER ON ABANDONED. THEREFORE, THE EXPENDITURE INC URRED HAS NOT RESULTED INTO CREATION OF ANY ASSET OF ENDURING NATURE. IN THE CASE OF INDO RAMA SYNTHETICS INDIA LTD. VS. CIT 228 CTR 278 (DEL.) THE PROPOSED UNIT WAS NOT AN INDIVID UAL BUSINESS, BUT HAD INEXTRICABLE UNITS WITH THE EXISTING BUSINESS OF THE ASSESSEE. THE SAID BUSINESS WAS PROPOSED TO BE ESTABLISHED UNDER THE COMMON CONTROL OF THE BOARD O F DIRECTORS OF THE ASSESSEE COMPANY AND OUT OF SURPLUS FUNDS GENERATED BY THE EXISTING BUSINESS OPERATIONS. THUS, THE TEST OF EXISTING BUSINESS WITH COMMON ADMINISTRATION AND CO MMON FUND WAS SATISFIED. FURTHER SINCE THE PROJECT WAS ABANDONED, NO NEW ASSET CAME TO BE CREATED. THEREFORE, THE EXPENDITURE IN THE NATURE OF SALARY, WAGES, REPAIRS , MAINTENANCE, DESIGN AND ENGINEERING FEE ETC. INCURRED ON THE PROPOSED UNIT CONSTITUTED REVENUE EXPENDITURE. IN THE CASE OF CIT VS. PRIYA VILLAGE ROAD SHOW LTD. (SUPRA) THE EXPEND ITURE WAS INCURRED FOR PREPARATION OF FEASIBILITY OF NEW PROJECT WHICH WAS IN RESPECT OF SAME BUSINESS ALREADY CARRIED ON BY THE ASSESSEE AND, THERE WAS USE OF COMMON FUND AND THE EXPENDITURE WAS TREATED AS REVENUE EXPENDITURE. IN THIS CASE THE PROJECT WAS NOT ABAN DONED. IN THE CASE OF DCIT VS. ASSAM ASBESTOS LTD. (SUPRA) THE EXPENDITURE WAS INCURRED ON FEASIBILITY REPORT. THE EXPENDITURE IN CONNECTION WITH SURVEY AND FEASIBILITY REPORT WA S ALLOWED AS REVENUE EXPENDITURE ON THE GROUND THAT THE MAIN BUSINESS OF THE ASSESSEE W AS TO MANUFACTURE ASBESTOS SHEETS AND THE NEW PLANT WAS TO FEED THE EXISTING NEED OF THE ASBESTOS PLANT BUT THE GOVT. HAD NOT GRANTED PERMISSION FOR THE MINI CEMENT PLANT. HON BLE GAUHATI HIGH COURT HELD THAT THE PREPARATION OF FEASIBILITY REPORT WAS TO FIND OUT T HE VIABILITY OF ESTABLISHING THE MINI PLANT, WHICH IN TURN WOULD SUPPLY AND MAINTAIN THE CONSIST ENT SUPPLY OF RAW MATERIAL TO THE ALREADY ESTABLISHED ASBESTOS PLANT OF THE ASSESSEE. THE EXPENSES INCURRED BY THE ASSESSEE FOR PREPARATION OF THE FEASIBILITY REPORT WAS TO BR ING INTO EXISTENCE THE MINI CEMENT PLANT WOULD BE REVENUE IN NATURE. IN THE CASE BEFORE US, NEITHER THE AO NOR THE LD. CIT (A) HAS EXAMINED WHETHER THE FEASIBILITY STUDY CONDUCTED AT DUBAI FOR A POLYFILM PLANT WAS FOR THE EXTENSION OF THE EXISTING BUSINESS OR IT WAS FO R NEW BUSINESS. IN THE ABSENCE OF ANY SUCH FINDING OF FACT ON RECORD, WE FEEL IT PROPER T O SET ASIDE THIS MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO EXAMINE THE FACTS OF THE CASE AND DECIDE THE ISSUE AFRESH AS PER THE JUDICIAL PRONOUNCEMENTS. 9 I. T. APPEAL NO. 116 (DEL) OF 2005. 14. ANOTHER DISALLOWANCE SUSTAINED RELATES TO FEASI BILITY STUDY FOR INCREASE IN THE CAPACITY OF THE PLANT. THE AO OBSERVED THAT RS.50, 000/- WERE PAID TO M/S. G. R. CONSULTANTS FOR PROCURING A PROPOSAL REPORT FOR INC REASE IN THE CAPACITY FROM 40 TO 50 MT. TONNES OF A CHIP PLANT. THE AO MADE DISALLOWANCE O F THE ENTIRE EXPENSES TREATING THE SAME AS CAPITAL EXPENDITURE. ON APPEAL THE LD. CIT (A) HELD THAT THE EXPENDITURE WAS INCURRED FOR EXTENSION OF THE EXISTING BUSINESS AND , THEREFORE, THE EXPENSES INCURRED UNDER SECTION 35-D(1)(II) OF THE ACT AND, THEREFORE, 1/5 TH OF THE EXPENDITURE WAS ALLOWABLE AS DEDUCTION. 15. WE HAVE HEARD BOTH THE PARTIES. THERE IS NO DI SPUTE THAT THE EXPENDITURE HAD BEEN INCURRED ON REPORT FOR INCREASE OF CAPACITY OF THE EXISTING PLANT FROM 40 TO 50 MT. TONNES OF CHIP PLANT. UNDER SECTION 35-D(1)(II) OF THE AC T ANY EXPENDITURE SPECIFIED IN SUB- SECTION (2) INCURRED AFTER THE COMMENCEMENT OF BUSI NESS IN CONNECTION WITH SETTING UP OF A NEW UNIT, A DEDUCTION OF AN AMOUNT EQUAL TO 1/5 TH OF THE EXPENDITURE SHALL BE ALLOWED. THE EXPENDITURE SPECIFIED IN SUB SECTION (2) INTER- ALIA, INCLUDES PREPARATION OF A FEASIBILITY REPORT AS ALSO PREPARATION OF A PROJECT REPORT. SINCE THE EXPENDITURE IS SPECIFICALLY COVERED BY PROVISIONS OF SECTION 35-D( 1)(II) IT CANNOT BE CONSIDERED UNDER GENERAL PROVISIONS OF SECTION 37 OF THE ACT. IN OUR CONSIDERED OPINION, THE LD. CIT (A) IS JUSTIFIED IN CONFIRMING THE STAND TAKEN BY THE AO I N ALLOWING 1/5 TH OF THE EXPENSES IN THE YEAR UNDER CONSIDERATION. 16. THE NEXT ISSUE FOR CONSIDERATION RELATES TO RED UCING FROM NET PROFIT AS PER PROFIT AND LOSS ACCOUNT, THE AMOUNT OF RS.6,02,82,198/- ON ACCOUNT OF DEDUCTION UNDER SECTION 80-HHC WHILE COMPUTING THE BOOK PROFIT UNDER SECTIO N 115-JB OF THE ACT. THE LD. CIT(A) ALSO UPHELD THE STAND OF THE ASSESSING OFFIC ER IN REDUCING THE NET PROFIT AS PER P&L ACCOUNT BY AN AMOUNT OF RS.55,700/- BEING PROPO RTIONATE AMOUNT OF PROFESSIONAL, MANAGERIAL AND FINANCIAL EXPENSES, DISALLOWED UNDER SECTION 14-A OF THE ACT WHILE COMPUTING BOOK PROFITS UNDER SECTION 115-JB OF THE ACT. THE LD. CIT (A) HAS HELD THAT THE CLAIM OF DEDUCTION UNDER SECTION 80-HHC COMPUTE D BY AO AS PER PROVISIONS OF 10 I. T. APPEAL NO. 116 (DEL) OF 2005. SECTION 80HHC IS TO BE ALLOWED AS REDUCTION FROM THE BOOK PROFIT. SINCE IN THE INSTANT CASE, THE DEDUCTION UNDER SECTION 80-HHC COMPUTED B Y THE AO WAS REDUCED FROM BOOK PROFITS, THE LD. CIT (A) UPHELD THE STAND OF THE AO . 17. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115-JB OF THE ACT CALCULATED THE DEDUCTION UNDER SECTION 80-HHC ON TH E BASIS OF COMPANIES ACT. UNDER SECTION 115-JB, IN THE CASE OF A COMPANY, WHERE THE INCOME-TAX PAYABLE ON TOTAL INCOME AS COMPUTED UNDER THE ACT IN RESPECT OF ANY PREVIOU S YEAR RELEVANT TO ASSESSMENT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2001 I S LESS THAN SEVEN AND A HALF PER CENT OF ITS BOOK PROFIT, THE TAX PAYABLE FOR THE RELEVANT P REVIOUS YEAR SHALL BE DEEMED TO BE SEVEN AND A HALF PER CENT OF SUCH BOOK PROFIT. EXPLANATI ON 1 TO SECTION 115-JB(2) DEFINES THE SCOPE OF 'BOOK PROFIT' AND MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR UNDER SUB-SECTION (2 ) AS INCREASED BY THE AMOUNTS SPECIFIED IN CLAUSE (A) TO CLAUSE (H) IF ANY SUCH AMOUNT IS D EBITED TO PROFIT AND LOSS ACCOUNT AND AS REDUCED BY THE AMOUNT, INTER ALIA, THE AMOUNT OF PR OFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80-HHC OF THE ACT COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OR SUB- SECTION (3) OR SUB-SECTION (3A) AS THE CASE MAY BE OF THAT SECTION AND SUBJECT TO CONDITIONS SPECIFIED IN THAT SECTION. FROM A PLAIN READING OF PROVISIONS OF CLAUSE (IV) OF EXPLANATION 1 TO SECTION 115-JB(2) IT IS CLEAR THAT THE AMOUNT OF PROFIT ELIGIBLE FOR DEDUCTION IS TO BE REDUCED AS COMPUTED AS PER PROVI SIONS OF SECTION 80-HHC(3) / (3A) OF THE ACT. SUB SECTION (3) IS MACHINERY SECTION FOR COMPUTATION OF DEDUCTION U/S 80 HHC(1) OF THE ACT. THE DEDUCTION U/S 80HHC IS NIL. THEREFORE, WHILE COMPUTING THE INCOME UNDER MAT PROVISIONS, UNDER SECTION 115-JB O F THE ACT, THE GROSS PROFIT AS PER PROFIT AND LOSS ACCOUNT CANNOT BE REDUCED BY THE DE DUCTION OF 80-HHC COMPUTED ON THE BASIS PROVISIONS OF COMPANIES ACT. HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. AJANTA PHARMA LTD. (SUPRA) HAS HELD THAT FOR THE PURPOSE OF CALCULATING BOOK PROFIT UNDER SECTION 115-JB OF THE ACT UNDER EXPLANATION ( 1), CLAUSE (IV) THE EXPORT PROFITS TO BE EXCLUDED FROM THE BOOK PROFITS WOULD BE THE EXPORT PROFITS ALLOWED AS A DEDUCTION UNDER SECTION 80-HHC AFTER RESTRICTING THE DEDUCTION AS P ER THE PROVISIONS OF SUB-SECTION (1B) 11 I. T. APPEAL NO. 116 (DEL) OF 2005. OF SECTION 80-HHC AND NOT THE EXPORT PROFITS CALCUL ATED AS PER SUB-SECTIONS (3) AND (3A) OF SECTION 80-HHC BEFORE APPLYING THE RESTRICTION C ONTAINED IN SUB-SECTION (1B) OF SECTION 80-HHC OF THE ACT. THEREFORE, IN OUR CONSI DERED VIEW, THE AMOUNT OF DEDUCTION UNDER SECTION 80-HHC WOULD BE THE DEDUCTION ALLOWED UNDER SECTION 80-HHC (1) OF THE ACT. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN TH E ORDER PASSED BY LD CIT(A) CONFIRMING THE STAND OF THE ASSESSING OFFICER. 18. AS REGARDS PROPORTIONATE DISALLOWANCE OF EXPENS ES RELATING TO EXEMPT INCOME, THE LD. CIT (APPEALS) HAS REDUCED RS.55,700/- FROM PROF ITS FOR THE PURPOSE OF COMPUTATION BOOK PROFITS AS AGAINST THE DISALLOWANCE MADE BY TH E AO AT RS.1,53,234/-. THE ASSESSEE HAS NOT PRESSED GROUND OF APPEAL NO 4 IN WHICH PROP ORTIONATE DISALLOWANCE WAS CHALLENGED. THEREFORE, DISALLOWANCE OF RS.55,700/- MADE UNDER SECTION 14-A OF THE ACT STANDS CONFIRMED. CLAUSE (F) OF EXPLANATION 1 TO S ECTION 115-JB(2) PROVIDES THAT THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY I NCOME TO WHICH SECTION 10 (OTHER THAN PROVISIONS CONTAINED IN CLAUSE 38 THEREOF) OR SECTION 10-A OR 10-B OR SECTION 11 OR SECTION 12 APPLY WILL BE INCREASED IF SUCH EXPENDIT URE IS DEBITED TO PROFIT AND LOSS ACCOUNT. SINCE THE LD. CIT (A) HAS DISALLOWED THE PROPORTIONATE EXPENDITURE RELATING TO EXEMPT INCOME UNDER SECTION 14-A, IN OUR CONSIDERED OPINION THE LD. CIT (A) WAS JUSTIFIED IN REDUCING THE AMOUNT OF RS.55,700/- FOR THE PURPOSE OF COMPUTING BOOK PROFIT UNDER SECTION 115-JB OF THE ACT. HENCE NO INTERFER ENCE IS CALLED FOR. 19. THE LAST ISSUE FOR CONSIDERATION RELATES TO CHA RGING OF INTEREST UNDER SECTIONS 234- B, 234-C AND 234-D OF THE ACT. THE CONTENTION OF T HE ASSESSEE IS THAT WHERE INCOME IS COMPUTED UNDER SECTION 115-JB OF THE ACT, INTEREST UNDER SECTION 234-B AND 234-C IS NOT CHARGEABLE. AS REGARDS INTEREST UNDER SECTION 234- D AS PER THE DECISION OF EKTA PROMOTERS P. LTD. 113 I.T.D. 719 (DEL.) (SB) THE IN TEREST WILL BE CHARGEABLE FROM ASSESSMENT YEAR 2004-05 AND NOT FROM ASSESSMENT YEA R 2001-02. 12 I. T. APPEAL NO. 116 (DEL) OF 2005. 20. WE HAVE HEARD BOTH THE PARTIES. THE LD. CIT (A PPEALS) HAS DIRECTED LEVY OF INTEREST UNDER SECTIONS 234-B, 234-C AND 234-D AFTE R GIVING APPEAL EFFECT. IN THE INSTANT CASE THE ASSESSING OFFICER HAS COMPUTED INCOME UNDE R NORMAL PROVISIONS OF THE ACT AND HAS CHARGED INTEREST UNDER SECTION 234B, 234C AND 2 34D AS PER PROVISIONS OF LAW ON TOTAL INCOME OF RS.1,46,84,800/-. THEREFORE, THE CONTENT ION OF THE ASSESSEE THAT INTEREST UNDER SECTION 234-B AND 234-C OF THE ACT HAVE BEEN CHARGE D WHILE COMPUTING THE INCOME UNDER SECTION 115-JB OF THE ACT IS CONTRARY TO THE FACTS. CHARGING OF INTEREST U/S 234B & 234C BEING MANDATORY IN NATURE HAS TO BE CHARGED A S PER PROVISIONS OF LAW AND ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE DIR ECTION GIVEN BY LD CIT(A). AS REGARDS CHARGING OF INTEREST UNDER SECTION 234D OF THE ACT, THE PROVISIONS OF SEC. 234-D ARE APPLICABLE FROM ASSESSMENT YEAR 2004-05 AS HELD BY ITAT (SB) DELHI IN THE CASE OF EKTA PROMOTERS (SUPRA) AND SINCE IN THIS CASE THE ASSESS MENT YEAR INVOLVED IS 2001-02, THE PROVISIONS OF SECTION 234D WOULD NOT BE APPLICABLE. THE DECISION OF SPECIAL BENCH HAS BEEN UPHELD BY HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. JACABS CIVIL INCORPORATIVE / MITSUBISHI CORPORATION 194 TAXMAN 4 95 (DEL). FOLLOWING THE DECISION OF EKTA PROMOTERS (SUPRA) AS UPHELD BY HONBLE DELHI H IGH COURT, IT IS HELD THAT INTEREST UNDER SECTION 234-D OF THE ACT IS NOT LEVIABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE AO IS DIRECTED ACCORDINGLY. 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 28 TH JANUARY, 2011. SD/- SD/-. [ I. P. BANSAL ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28 TH JANUARY, 2011. *MEHTA * 13 I. T. APPEAL NO. 116 (DEL) OF 2005. COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT RE GISTRAR, ITAT.