DCIT CENT. CIR. - 9, MUMBAI V. M/s. UNIFLEX CABLES LTD., MUMBAI

ITA 1199/MUM/2007

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7589 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 19-09-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 08-02-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Business income; Double taxation relief; Bonafide belief; Retrospective amendment; Non-deduction of tax; Revenue expenditure
• Section: 69C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L,MUMBAI BEFORE SHRI R.S. SYAL (AM) & SHRI N.V. VASUDEVA N (JM) I.T.A. NO.7019/MUM/2006 (A.Y. 2002-03) M/S. UNIFLEX CABLES LTD., CHANDRA MAHAL, 1ST FLOOR, 241, PRINCESS STREET, MUMBAI-400 002. PAN: AAACU0571F VS. DY.COMMR. OF INCOME-TAX, CENTRAL CIRCLE 9, MUMBAI. APPELLANT RESPONDENT I.T.A. NOS.1198 & 1199/MUM/2007 (A.YS. 1999-2000 & 2002-03) DY.COMMR. OF INCOME-TAX, CENTRAL CIRCLE 9, MUMBAI. VS. M/S. UNIFLEX CABLES LTD., CHANDRA MAHAL, 1ST FLOOR, 241, PRINCESS STREET, MUMBAI-400 002. PAN: AAACU0571F APPELLANT RESPONDENT ASSESSEE BY SHRI RAJAN VORA. DEPARTMENT BY SHRI JITENDRA YADAV. DATE OF HEARING 21-03-2012 DATE OF PRONOUNCEMENT 28 -03-2012 O R D E R PER N.V. VASUDEVAN, JM : ITA NO.7019/MUM/2006 IS AN APPEAL BY THE ASSESSEE, WHILE ITA NO. 1199/MUM/2007 IS AN APPEAL BY THE REVENUE. BOTH THESE APPEALS ARE DIREC TED AGAINST THE ORDER DATED 23-11-2006 OF CIT(A), CENTRAL-VII, MUMBAI, RELATING TO ASSESSMENT YEAR 20 02-03. ITA NO.1198/MUM/2007 IS AN APPEAL BY 2 THE REVENUE DIRECTED AGAINST THE ORDER DATED 22-11- 2006 OF CIT(A), CENTRAL-VII, MUMBAI, RELATING TO ASSESSMENT YEAR 1999-2000. 2. FIRST, WE SHALL TAKE UP FOR CONSIDERATION THE APPEAL BY THE ASSESSEE. GROUND NOS.1 TO 3 RAISED BY THE ASSESSEE READ AS UNDER : ON THE FACT AND CIRCUMSTANCES OF THE CASE, THE LEA RNED COMMISSIONER OF INCOME-TAX (APPEAL) CENTRAL VII (CIT(A)) I. ERRED IN CONFIRMING THE DISALLOWANCE THE PAYMENT OF RS.18,31,162/- U/S. 40(A)(I) BEING INTEREST PAID TO UNION BANK OF INDIA FOR LATE PAYMENT TO FOREIGN SUPPLIER FOR IMPORTED NEW RAW MA TERIAL DUE TO NON DEDUCTION OF TAX AT SOURCE. II. FAILED TO APPRECIATE THAT AS PER DTTA BETWEEN INDIA AND COUNTRY FROM WHICH RAW MATERIAL ARE IMPORTED, SUCH PAYMENT DOES NOT AMOUNT TO INTEREST ON LOAN BUT IT IS TOWARDS COST O F RAW MATERIAL AND HENCE THERE IS NO REQUIREMENT OF ANY TDS HENCE DISA LLOWANCE U/S.49(A)(I) IS NOT JUSTIFIED. III. FAILED TO APPRECIATE THAT ASSESSEE HAS PAID THE SO CALLED INTEREST TO UNION BANK OF INDIA AGAINST L.C. DUE TO LATE PAYMEN T FROM DUE DATE TILL THE DATE THE BILL IS FINALLY SETTLED HENCE THE PAYMENT TO BANK IS SNOT REQUIRED ANY T.D.S. AND NOT JUSTIFIES IN DISAL LOWING U/S. 40(A)(I). THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUS INESS OF MANUFACTURING OF CABLES OF DIFFERENT TYPES . THE ASSESSEE PURCHASED RAW MATERIAL FROM VARIOUS PA RTIES WHO WERE ALL NON-RESIDENTS. AS PER THE TERMS OF SUPPLY BY THE NON-RESIDENTS, THE ASSESSEE HAD FU RNISHED IRREVOCABLE LETTER OF CREDIT PAYABLE 180 DA YS FROM THE DATE OF BILL OF LADING. FOR THE PERIOD OF 180 DAYS FOR WHICH THE ASSESSEE AVAILED CREDIT, THE ASSESSEE HAD TO PAY FINANCE CHARGES OR WHAT IS KNOW N IN BUSINESS PARLANCE AS USANCE INTEREST. THE ASSESSEE HAD DURING THE PREVIOUS YEAR PAID THE FOLLOWING FINANCE CHARGES TO THE VARIOUS SUPPLIERS OF RAW MATERIAL : SR.NO. PARTY FROM WHOM GOODS ARE PURCHASED FINANCE CHARGES COUNTRY 1 HANWHA CORPORATION 1002830 SOUTH KOR EA 2 OUTOKOMPU SWEDEN 178649 SWEDEM 3 SHIRAISHI 62673 JAPAN 3 4 UNIVERSAL CABLE MALAYSIA 2292 MALAYSIA 5 ASHLEY POLYMERS 113039 USA 6 TAIHAN ELECTRIC WIRE 122908 TAIWAN 7 ELSON IT CO. 231724 TAIWAN PROVISIONS 117320 USA TOTAL 1831435 THE INDIVIDUAL TRANSACTIONS IN RESPECT OF WHICH FIN ANCE CHARGES/USANCE INTEREST WAS PAID IS GIVEN AS ANNEXURE-1 TO THIS ORDER. THE NATURE OF USANCE INT EREST CAN BE EXPLAINED BY TAKING ONE OF THE TRANSACTION WITH OUTOKUMPU OF SWEDEN, ONE OF THE NO N-RESIDENT FROM WHOM THE ASSESSEE PURCHASED RAW MATERIAL. OUTOKUMPU OF SWEDEN RAISED AN INVOIC E DT.15.6.2001 ON THE ASSESSEE FOR SHIPMENT OF 10 M.TONS OF HIGH CONDUCTIVITY ELECTROLYTIC COPPER TAPES C.I.F. MUMBAI. THE VALUE OF THE CONSIGNMENT WAS 28874.80 US $ EQUIVALENT TO RS.13,87,145/-. TH E TERMS OF PAYMENT WAS THAT THE ASSESSEE HAS TO FURNISH IRREVOCABLE LETTER OF CREDIT PAYABLE 180 DA YS FROM DATE OF BILL OF LADING WITH SWEDISH BANKERS . ANOTHER INVOICE DATED 20.6.2001 WAS RAISED BY OUTOK UMPU, SWEDEN FOR INTEREST FOR THE PERIOD OF 180 DAYS FOR US $ 626.58 EQUIVALENT TO RS.30,101/-. TH E ASSESSEE FURNISHED LETTER OF CREDIT ISSUED BY DEVELOPMENT CREDIT BANK LTD., FORT, BOMBAY, DATED 1 8.5.2001 BEARING LC NO.235 FAVOURING OUTOKUMPU, SWEDEN. ON 12.12.2001, THE DEVELOPMEN T CREDIT BANK LTD., FORT, BOMBAY MADE PAYMENT OF RS.14,17,246/- ON THE DUE DATE. THE ASS ESSEE ACCOUNTED FOR RS.30,101 AS FINANCE CHARGES OR USANCE INTEREST AND CLAIMED IT AS DEDUCTION WHIL E COMPUTING INCOME. 3. ACCORDING TO THE AO, THE FINANCE CHARGES WERE IN NATURE OF INTEREST AND WERE CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE NON-RESIDENTS BECAUSE THE INTEREST INCOME HAD ACCRUED OR ARISEN IN INDIA . THE AO WAS OF THE FURTHER VIEW THAT THE ASSESSEE OU GHT TO HAVE DEDUCTED TAX AT SOURCE AT THE TIME OF MAKING PAYMENT TO THE NON-RESIDENTS. SINCE THE ASSE SSEE HAD NOT DEDUCTED TAX AT SOURCE AS AFORESAID, THE AO WAS OF THE VIEW THAT THE SUM OF RS.18,31,162 /- CLAIMED AS FINANCE CHARGES BY THE ASSESSEE HAS 4 TO BE DISALLOWED IN VIEW OF THE PROVISIONS OF SEC. 40(A)(I) OF THE INCOME TAX ACT, 1961 (THE ACT). THE AO ACCORDINGLY DISALLOWED A SUM OF RS.18,31,162/- C LAIMED AS FINANCE CHARGES AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT THE FINANCE CHARGES ARE NOTHING BUT PAYMENT FOR DELAYED PAYMENT OF PURCHASE OF RAW MATERIAL AND WOU LD PARTAKE THE CHARACTER OF MONEY PAID FOR PURCHASE PRICE OF RAW MATERIAL AND, THEREFORE, THER E WAS NO NECESSITY TO DEDUCT TAX AT SOURCE. THE ASSESSEE FURTHER SUBMITTED THAT AS PER THE PROVISIO NS OF DTAA ENTERED INTO BETWEEN INDIA AND THE RESPECTIVE COUNTRIES WHERE THE SUPPLIERS OF RAW MAT ERIAL WERE TAX RESIDENTS, THE AMOUNT IN QUESTION IS NOT CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE SUPPLIERS OF RAW MATERIALS AND, THEREFORE, THERE NO OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT TA X AT SOURCE WHILE MAKING PAYMENT. THE ASSESSEE IN THIS REGARD RELIED ON THE DECISION OF THE HONBLE A NDHRA PRADESH HIGH COURT IN THE CASE OF VISAKHAPATNAM PORT TRUST 144 ITR 146 (AP). 5. THE CIT(A), HOWEVER, DID NOT ACCEPT THE PLEA O F THE ASSESSEE AND HE HELD AS FOLLOWS : I HAVE CONSIDERED THE SUBMISSIONS AS WELL AS PERUS ED THE DECISION AND THE DOUBLE TAXATION AVOIDANCE AGREEMENT. THE AO IS JUSTIFIED IN DISALLOWING THE INTEREST/FINANCE CHARGES PAID TO TH E FOREIGN SUPPLIERS AS THE ASSESSEE HAS FAILED TO DEDUCT TAX U/S.195. THE ASSESSEE HAS MADE PAYMENT TO THE FOREIGN SUPPLIERS FOR DELAYED PAYMEN T FOR AND BY WAY OF INTEREST AND THEREFORE, IN MY CONSIDERED OPINION, I T IS CHARGEABLE TO TAX IN INDIA. ACCORDINT TO SEC. 195, THE ASSESSEE SHOULD H AVE DEDUCTED TAX AT SOURCE BEFORE MAKING INTEREST PAYMENT TO THE FOREIG N SUPPLIER. SINCE THE ASSESSEE HAS NOT DEDUCTED TAX AS PER THE PROVISIONS OF SEC. 195, THE AO IS JUSTIFIED IN MAKING DISALLOWANCE OF RS.18,31,182/-. RELIANCE IS PLACED IN THE JUDGMENT PASSED BY THE HONBLE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF A.P. LTD. V/S. CIT (REP ORTED AT 239 ITR 587) (SC). 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE HAS RAISED GROUND NOS. 1 TO 3 BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT FINANCE CHARGES/ USANCE INTEREST ARE NOT IN THE NATURE OF INTEREST WITHIN THE MEANING OF SEC.2(28A) OF THE ACT. ACCORDING TO HIM, INTEREST AS PER THE DEFINITION UNDER THE ACT WOULD MEAN INTEREST PAYABL E IN RESPECT OF MONIES BORROWED OR DEBT INCURRED. 5 ACCORDING TO HIM, THE USANCE INTEREST WAS NOT A PAY MENT IN RESPECT OF MONIES BORROWED OR DEBT INCURRED. IT WAS SUBMITTED BY HIM THAT THE PAYMENT OF INTEREST FOR THE TIME GRANTED BY THE FOREIGN SUPPLIER OF RAW MATERIAL FOR MAKING OF PAYMENT OF P URCHASE PRICE CANNOT BE CONSIDERED AS A PAYMENT IN RESPECT OF MONEY BORROWED OR A DEBT INCURRED BY THE ASSESSEE AND, THEREFORE, THE PAYMENT IN QUESTION WOULD NOT PARTAKE THE CHARACTER OF INTEREST WITHIN THE MEANING OF SEC. 2(28A) OF THE ACT. HE REITERATE D THE SUBMISSIONS OF THE ASSESSEE BEFORE THE REVENUE AUTHORITIES THAT THE FINANCE CHARGES/USANCE INTERES T WAS NOTHING BUT A PAYMENT FOR COST OF RAW MATERIAL PURCHASED. THE LD. COUNSEL PLACED RELIANCE ON THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN TH E CASE OF VISAKHAPATNAM PORT TRUST (SUPRA). RELIANCE WAS ALSO PLACED ON THE DECISION OF THE MAD RAS HIGH COURT IN THE CASE OF INDIA PISTONS LTD. [282 ITR 632 (MAD)] WHEREIN IT WAS HELD THAT PAYMEN T FOR PURCHASE OF GOODS FROM NON-RESIDENT BY INSTALLMENTS AND INTEREST PAID ON SUCH INSTALLMENTS WAS TO BE TREATED AS A PAYMENT OF PURCHASE PRICE O F THE GOODS AND NOT INTEREST. IT WAS HELD IN THE AFOR ESAID DECISION THAT THE OUTSTANDING INSTALLMENTS FO R WHICH THE INTEREST WAS PAID CANNOT BE SAID TO BE A PAYMENT FOR DEBT INCURRED AND THEREFORE NOT IN THE NATURE OF INTEREST. FURTHER, RELIANCE WAS PLACED ON THE FOLLOWING OTHER DECISIONS OF VARIOUS BENCHES O F TRIBUNALS, VIZ., DECISION OF HYDERABAD BENCH OF ITA T IN THE CASE OF VIJAY ELECTRICALS LTD. (ITA NO.1072/HYD/2004) DATED 22-07-2011, DELHI DEVELOPMN T AUTHORITY 52 TTJ 107 (DEL), ORIENTAL INSURANCE COMPANY 96 TTJ 589), CARGILL GLOBAL T RADING (I) (P) LTD. 56 DTR 188 (DEL). RELIANCE WAS ALSO PLACED ON THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF GOVINDA CHOUDHURY & SONS (203 ITR 881 (SC) AND AAR IN THE CASE OF ABC INT ERNATIONAL INC. (2011) 55 DTR 393. FURTHER, RELIANCE WAS PLACED ALSO PLACED ON THE FOLLOWING DE CISIONS : 1. ISLAMIC INVESTMENT CO. VS. UNION OF INDIA & ANR. 265 ITR 254(BOM). 2. BOMBAY STEAM NAVIGATION CO.(1953) PVT. LTD. VS. CIT 56 ITR 52 (SC). 3. VIJAY SHIP BREAKING CORPORATION V. DCIT 86 ITD 497 (RAJKOT). ALL THE AFORESAID DECISIONS WERE REFERRED TO IN THE CONTEXT OF WHEN A PAYMENT CAN BE SAID TO BE A PAYMENT FOR A DEBT INCURRED OR AMOUNT BORROWED. 6 8. THE LD. DR SUBMITTED THAT THE QUESTION WHETHER PAYMENT MADE TOWARDS USANCE INTEREST COULD BE TREATED AS PART OF THE PURCHASE PRICE OR HAS TO BE TREATED AS INTEREST WAS CONSIDERED BY THE HONBL E GUJARAT HIGH COURT IN THE CASE OF CIT VS. VIJAY SHI P BREAKING CORPORATION & ORS. AND THE HONBLE GUJARAT HIGH COURT WAS PLEASED TO HOLD THAT USANCE INTEREST PAID IN CONNECTION WITH THE PURCHASE OF SHIPS WAS NOT PART OF THE PURCHASE PRICE BUT WAS IN TEREST AND THE ASSESSEE MAKING PAYMENT TO THE NON- RESIDENT OF USANCE INTEREST WAS OBLIGED TO DEDUCT T AX AT SOURCE ON SUCH PAYMENT. THE LD. DR FURTHER BROUGHT TO OUR NOTICE THAT AS AGAINST THE DECISION OF THE HONBLE GUJARAT HIGH COURT, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE HONBLE SUPREME COUR T AND THE HONBLE SUPREME COURT REVERSED THE DECISION OF THE GUJARAT HIGH COURT FOR THE REASON T HAT THERE WAS A STATUTORY AMENDMENT BY WHICH USANCE INTEREST PAID TO A NON-RESIDENT FOR PURCHASE OF SHIP WAS NOT IN THE NATURE OF INTEREST. BECAUS E OF THIS RETROSPECTIVE LAW, THE HONBLE SUPREME COURT R EVERSED THE DECISION OF THE HONBLE GUJARAT HIGH COURT. IT WAS HIS SUBMISSION THAT THE DECISION OF T HE HONBLE GUJARAT HIGH COURT WOULD HOLD GOOD IN THE CASE OF ASSESSEES WHO WERE NOT IN THE BUSINESS OF BREAKING OF SHIPS. IT WAS HIS SUBMISSION THAT TH E ASSESSEE WAS NOT IN THE BUSINESS OF BREAKING OF SHI PS AND THEREFORE THE DECISION OF THE HONBLE GUJARA T HIGH COURT WOULD BE APPLICABLE TO HIM. 9. IN THE COURSE OF HEARING, THE FOLLOWING OTHER D ECISIONS WERE ALSO REFERRED TO : 1. BIKRAM SINGH & ORS. VS. LAND ACQUISITION COLLECTOR & ORS. 224 ITR 551 (SC). 2. BRITISH BANK OF MIDDLE EAST VS CIT 233 ITR 251 (BOM ). 3. A & M AGENCIES VS. CIT (239 ITR 136 (MAD). 4. SHREE ANNAPURNA FINANCING CO. (P) LTD. VS. CIT (273 ITR 284) 5. BHURA EXPORTS LTD. VS. ITO [202 TAXMAN 88 (CAL.) BESIDES THE ABOVE, CICULARS OF THE CBDT DATED 02-09 -1971, NAMELY, CIRCULAR NO. 65 AND CIRCULAR NO. 647 DATED 22-03-1992 WERE ALSO REFERRED TO. BESIDES THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE REFERR ED TO THE PROVISIONS OF DTAA AND SUBMITTED THAT UNDER THE DTAA THE PAYMENT BY THE ASSESSEE IS NOT CHARGEABLE TO TAX. LASTLY, IT WAS SUBMITTED THAT EV EN ASSUMING THAT THE PAYMENT IN QUESTION IS CHARGEABLE TO TAX, SINCE THERE WAS CONFLICTING VIEW S ON THE ISSUE, THE ASSESSEE WAS UNDER THE BONA FID E BELIEF THAT THERE WAS NO OBLIGATION TO DEDUCT TAX A T SOURCE. THE LD. COUNSEL RELIED ON THE DECISION OF THE 7 HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. K OTAK SECURITIES LTD. ITA NO.3111 OF 2009 ORDER DATED 21.10.2012 AND SUBMITTED THAT AS LAID DOWN IN THE AFORESAID DECISION, IF NON-DEDUCTION OF TAX AT SOURCE IS ON ACCOUNT OF BONA FIDE BELIEF OF THE ASS ESSEE THAT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE, THEN THERE CANNOT BE A DISALLOWANCE U/S.40( A)(I) OF THE ACT. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE FOLLOWING THREE ISSUES ARISE FOR CONSIDERATION: 1. WHETHER THE PAYMENT IN QUESTION, NAMELY, USANCE INT EREST, CAN BE SAID TO BE INTEREST WITHIN THE MEANING OF SEC. 2(28A) OF THE ACT ? IF THE ANSW ER TO THIS QUESTION IS IN THE AFFIRMATIVE, THEN THE SAME WOULD BE DEEMED TO HAVE ACCRUED AND ARISEN IN INDIA IN VIEW OF THE PROVISIONS OF SEC. 9(1)(V)(B) OF THE ACT. 2. IF THE SUM IN QUESTION IS TREATED AS INTEREST UNDER THE ACT, WHETHER THE SAME IS LIABLE TO TAX IN INDIA IN VIEW OF THE DTAA BETWEEN INDIA AND THE COUNTRIES OF WHICH THE PERSONS WHO SUPPLIED RAW MATERIAL TO THE ASSESSE WERE TAX RESID ENTS? 3. WHETHER THE DISALLOWANCE U/S.40(A)(I) CANNOT BE MAD E IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF KOTAK MAHI NDRA SECURITIES (SUPRA)? 11. WE WILL TAKE UP FOR CONSIDERATION THE FIRST ISS UE AS TO WHETHER THE PAYMENT IN QUESTION CAN BE CONSIDERED AS INTEREST WITHIN THE MEANING OF SEC.2( 28A) OF THE ACT. SEC.2(28A) OF THE ACT WAS INTRODUCED BY THE FINANCE ACT, 1976, W.E.F 1-4-1976 AND IT READS AS UNDER: (28A) 'INTEREST' MEANS INTEREST PAYABLE IN ANY MAN NER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOSIT, CLA IM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER C HARGE IN RESPECT OF THE MONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CRED IT FACILITY WHICH HAS NOT BEEN UTILISED ; PERUSAL OF THE ABOVE DEFINITION OF INTEREST WOULD S HOW THAT USANCE INTEREST PAID BY THE ASSESSEE IN TH E PRESENT CASE, CANNOT BE CONSIDERED AS INTEREST PAID ON MONEYS BORROWED OR SERVICE FEE OR OTHER CHARGE IN RESPECT OF MONEYS BORROWED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILISED. THE QUESTION THAT WOULD ARISE FOR CONSIDERATION IN THE CASE OF THE ASSESSEE, IS WHETHER USANCE INTEREST PAID BY THE ASSESSEE CAN BE SAID TO BE INTEREST PAI D IN RESPECT OF DEBT INCURRED OR SERVICE FEE OR O THER CHARGE IN RESPECT OF DEBT INCURRED. 8 12. THE ISSUE WHETHER THE ASSESSEE IS LIABLE TO DED UCT TAX AT SOURCE ON USANCE INTEREST UNDER SECTION 195(1) OF THE ACT ON THE CREDIT AVAILED BY IT FOR P URCHASING SHIP FROM A NON-RESIDENT UNDER LETTER OF CREDIT OPENED BY A RESIDENT BANK IN FAVOUR OF THE N ON-RESIDENT SELLER OF SHIP CAME UP FOR CONSIDERATIO N BEFORE THE RAJKOT BENCH OF THE ITAT IN THE CASE OF VIJAY SHIP BREAKING CORPN. VS. DCIT 86 ITD 497 (RAJKOT). THE TRIBUNAL ANALYSED THE AGREEMENT BETW EEN THE PARTIES AND HELD THAT THE SAME IS FOR THE PURCHASE OF A SHIP. ALTHOUGH THE PURCHASE PRICE OF THE SHIP AND INTEREST FOR 180 DAYS FROM THE DATE O F NOTICE OF READINESS ( NOR) ARE SEPARATELY MENTIONED IN THE AGREEMENT, NONETHELESS, IT REMAINS A SINGLE TRANSACTION OF PURCHASE AND SALE OF SHIP. THE TRIBU NAL HELD THAT THE AGREEMENT CATEGORICALLY PROVIDED THAT THE TOTAL AMOUNT SHALL BE PAYABLE BY MEANS OF 100% CONFIRMED IRREVOCABLE 180 DAYS USANCE LETTER OF CREDIT. THIS ACCORDING TO THE TRIBUNAL CLEARLY I NDICATED THAT INTEREST, THOUGH SEPARATELY MENTIONE D IN THE MOA, IS PART OF THE SAME TRANSACTION AND CANNOT BE METED OUT A SEPARATE TREATMENT ALTOGETHER FROM THE MAIN COMPONENT I.E. THE PURCHASE PRICE. THE T RIBUNAL ALSO FOUND THAT THERE WAS NO RIGHT OF PRE- PAYMENT BY THE BUYER TO THE SELLER, THAT IS TO SAY, IRRESPECTIVE OF THE POINT OF TIME WHEN THE BUYER MAKES PAYMENT WITHIN 180 DAYS, THE BUYER SHALL HAVE TO PAY THE INTEREST COMPONENT AS SPECIFIED IN THE MOA. THE TRIBUNAL THEREFORE CONCLUDED THAT BY ENTER ING INTO THE MOA, BUYER DID NOT INCUR ANY DEBT IN THE SENSE THAT ANY LOAN OR ADVANCE HAD BEEN RAISED TO BE INDEBTED TO THE SELLER. ON APPEAL BY THE REVENUE, THE HONBLE HIGH COURT REVERSED THE DECISI ON OF THE TRIBUNAL IN CIT VS. VIJAY SHIP BREAKING CORPN. 261 ITR 113 (GUJ). THE HONBLE COU RT HELD THAT THE INTENTION OF THE PARTIES TO THE CONTRACT WAS CLEAR AND THE PRICE OF THE SHIP WAS CO NSIDERED TO BE SEPARATE AS CERTIFIED IN THE INVOICE , WHICH REFLECTED ITS PRICE AGREED IN THE MEMORANDUM OF AGREEMENT, AND THE BUYER IN LIEU OF THE CREDIT FACILITY OF 180 DAYS FROM THE DATE OF THE NOTICE OF READINESS WAS REQUIRED TO PAY INTEREST AT THE RATE STIPULATED IN THE MEMORANDUM OF AGREEMENT AND WORKE D OUT THEREUNDER FOR WHICH A SEPARATE INVOICE WAS PREPARED. THERE WAS NO NEXUS BETWEEN THE INTERE ST AMOUNT AND FIXATION OF THE PRICE OF THE SHIP WHICH WAS ON TONNAGE BASIS. THE NEXUS OF INTEREST W AS ONLY WITH THE PERIOD FROM WHICH THE PURCHASE PRICE OF THE SHIP BECAME DUE ON NOTICE OF READINESS OR DELIVERY. THE STIPULATION IN THE MEMORANDUM OF AGREEMENT SHOWED THAT THE PURCHASE PRICE BECAME PAY ABLE ON THE DELIVERY BEING EFFECTED AS PER THE NOTICE OF READINESS WHEN THE RISK PASSED TO THE BUY ER. THESE WERE NOT CASES WHERE THE TOTAL AMOUNT PAYABLE UNDER THE MEMORANDUM OF AGREEMENT INCLUDED A MERE ESTIMATE OF INTEREST LOSS MADE AS AN INTEGRAL PART OF THE PURCHASE PRICE ON INCREMENTAL BASIS. THESE WERE CASES IN WHICH THERE EXISTED 9 CONSCIOUS AND DELIBERATE STIPULATIONS OF PURCHASE P RICE OF THE SHIP AND THE INTEREST AMOUNT SPECIFICAL LY CALCULATED AT THE AGREED RATE FOR THE PERIOD FIXED. THUS, THERE WAS NO SCOPE FOR CONTENDING THAT THE OUTSTANDING PRICE OF THE SHIP WAS NOT A DEBT INCUR RED WITHIN THE MEANING OF SECTION 2(28A) OF THE ACT OR NOT A DEBT CLAIM UNDER THE ARTICLE CONCERN ING TAXATION OF INTEREST IN THE DOUBLE TAXATION AVOIDANCE AGREEMENTS, ON THE DATE OF DELIVERY OR TH AT THE INTEREST PAYABLE THEREON UNDER THE CONTRACT WAS PART OF THE PURCHASE PRICE OR INCREMENTAL PRICE OF THE SHIP. THE USANCE INTEREST PAID BY THE ASSESSEES WAS NOT ANY PART OF THE PURCHASE PRICE OF THE SHIPS AND WAS INTEREST WITHIN THE MEANING OF T HE DEFINITION OF THE TERM INTEREST UNDER SECTION 2(2 8A). 13. THE ASSESSEE FILED APPEAL BEFORE THE HONBLE S UPREME COURT AGAINST THE ORDER OF THE HONBLE GUJARAT HIGH COURT. PENDING DISPOSAL OF SUCH APPEA L BY THE HONBLE SUPREME COURT, BY THE TAXATION LAWS (AMENDMENT) ACT, 2003, EXPLB.2 TO SEC.10(15)(I V)( C) WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1.4.1983. UNDER SEC.10(15)(IV)(C) INTEREST P AYABLE BY AN INDUSTRIAL UNDERTAKING IN INDIA ON ANY MONEYS BORROWED OR DEBT INCURRED BY IT BEFORE THE 1 ST DAY OF JUNE 2001 IN A FOREIGN COUNTRY IN RESPECT OF THE PURCHASE OUT-SIDE INDIA OF RAW MATERIALS OR COMPONENTS OR CAPITAL PLANT AND MACHINERY, TO THE EXTENT TO WHICH SUCH INTEREST DOES NOT EXCEED THE A MOUNT OF INTEREST CALCULATED AT THE RATE APPROVED B Y THE CENTRAL GOVERNMENT IN THIS BEHALF, HAVING REGAR D TO THE TERMS OF THE LOAN OR DEBT AND ITS REPAYMEN T WAS HELD NOT TO FORM PART OF THE TOTAL INCOME UNDER THE ACT, WILL NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. EXPLN.2 INSERTED IN THE ACT AS ABOV E, PROVIDED THAT FOR THE REMOVAL OF DOUBTS, IT IS B EING DECLARED THAT THE USANCE INTEREST PAYABLE OUTSIDE I NDIA BY AN UNDERTAKING ENGAGED IN THE BUSINESS OF SHIP-BREAKING IN RESPECT OF PURCHASE OF A SHIP FROM OUTSIDE INDIA SHALL BE DEEMED TO BE THE INTEREST PAYABLE ON A DEBT INCURRED IN A FOREIGN COUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA. 14. ONE OF THE QUESTION FOR CONSIDERATION BEFORE TH E HONBLE SUPREME COURT WHEN THE ABOVE STATUTORY AMENDMENT TO THE LAW CAME INTO FORCE WAS AS TO WHETHER USANCE INTEREST' PARTAKES OF THE CHARACTER OF PURCHASE PRICE AND, THEREFORE, NOT LI ABLE TO DEDUCTION AT SOURCE UNDER SECTION 195(1) O F THE INCOME-TAX ACT, 1961 ? THE HONBLE SUPREME COU RT ON THE ABOVE QUESTION HELD AS FOLLOWS: AS REGARDS THE SECOND QUESTION, WE MAY STATE THAT IN THIS CASE, THE CONTROVERSY WHICH AROSE FOR DETERMINATION WAS WHETHER THE ASSESSEE WAS BOU ND TO DEDUCT TDS UNDER SECTION 195(1) OF THE 1961 ACT IN RESPECT OF USANCE INTEREST PAID FO R PURCHASE OF THE VESSEL FOR SHIP BREAKING ? 10 ACCORDING TO THE DEPARTMENT, TDS WAS DEDUCTIBLE UND ER SECTION 195(1) WHEREAS, ACCORDING TO THE ASSESSEE, SUCH INTEREST PARTOOK OF THE CHARACTE R OF THE PURCHASE PRICE AND, THEREFORE, TDS WAS NOT DEDUCTIBLE. THEREFORE, THE KEY QUESTION WHI CH AROSE FOR DETERMINATION WAS WHETHER THE ASSESSEE WAS IN DEFAULT FOR NOT DEDUCTING TDS UNDE R SECTION 195(1) OF THE 1961 ACT. IT MAY BE MENTIONED THAT WE ARE NOT REQUIRED TO EXA MINE THIS QUESTION IN THE LIGHT OF THE IMPUGNED JUDGMENT BECAUSE AFTER THE IMPUGNED JUDGME NT WHICH WAS DELIVERED ON MARCH 20, 2003, THE INCOME-TAX ACT WAS AMENDED ON S EPTEMBER 18, 2003, WITH EFFECT FROM APRIL 1, 1983. BY REASON OF THE SAID AMENDMENT, EXPLANATION 2 WAS ADDED TO SECTION 10(15)(IV)(C), WHICH READS AS UNDER : ' EXPLANATION 2.-FOR THE REMOVAL OF DOUBTS, IT IS H EREBY DECLARED THAT THE USANCE INTEREST PAYABLE OUTSIDE INDIA BY AN UNDERTAKING E NGAGED IN THE BUSINESS OF SHIP- BREAKING IN RESPECT OF PURCHASE OF A SHIP FROM OUT SIDE INDIA SHALL BE DEEMED TO BE THE INTEREST PAYABLE ON A DEBT INCURRED IN A FOREIGN C OUNTRY IN RESPECT OF THE PURCHASE OUTSIDE INDIA.' ON READING THAT EXPLANATION 2, IT IS CLEAR THAT USA NCE INTEREST IS EXEMPT FROM PAYMENT OF INCOME-TAX IF PAID IN RESPECT OF SHIP BREAKING ACTI VITY. THIS AMENDMENT CAME INTO FORCE ONLY AFTER THE IMPUGNED JUDGMENT. IT WAS NOT THERE WHEN THE IMPUGNED JUDGMENT WAS DELIVERED. FOR THE AFORESTATED REASONS, QUESTION NO. 2 AS TO W HETHER THE ASSESSEE WAS BOUND TO DEDUCT TDS UNDER SECTION 195(1) IS ANSWERED IN FAVO UR OF THE ASSESSEE AND AGAINST THE DEPARTMENT. THE ASSESSEE WAS NOT BOUND TO DEDUCT TAX AT SOURCE ONCE EXPLANATION 2 TO SECTION 10(15)(IV)(C) STOOD INSERTED AS TDS ARISES ONLY IF THE TAX IS ASSESSABLE IN INDIA. SINCE TAX WAS NOT ASSESSABLE IN INDIA, THERE WAS NO QUES TION OF TDS BEING DEDUCTED BY THE ASSESSEE. THEREFORE, QUESTION NO. 2 IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT. (UNDERLINING BY US FOR EMPHASIS) 15. IT CAN BE SEEN FROM THE ABOVE OBSERVATIONS OF THE HONBLE SUPREME COURT THAT THE HONBLE COURT DID NOT EXPRESS ANY OPINION ON THE CORRECTNES S OR OTHERWISE OF THE VIEW OF THE HONBLE GUJARAT HIGH COURT ON THE QUESTION WHETHER USANCE INTEREST HAS TO BE CONSIDERED AS PART OF THE PURCHASE PRICE BUT DECIDED THE ISSUE ON THE BASIS OF THE AMENDED P ROVISIONS OF LAW THAT WERE APPLICABLE ONLY TO COMPANIES ENGAGED IN THE BUSINESS OF SHIP BREAKING. WE ARE THEREFORE OF THE VIEW THAT AS A PRECEDENT, THE DECISION OF THE HONBLE GUJARAT HIGH COURT HAS FORCE. THOUGH THE SAID DECISION MIGHT HAVE LOST IT S ABSOLUTE BINDING FORCE IT MIGHT OTHERWISE HAVE HAD, BUT IT REMAINS AN AUTHORITY WHICH MAY BE FOLLOWED BY A COURT THAT THINKS THE PARTICULAR POINT TO HAVE BEEN RIGHTLY DECIDED. 16. AS WE HAVE ALREADY NOTICED THE FACTS OF THE PR ESENT CASE GO TO SHOW THAT THE INTENTION OF THE PARTIES TO THE CONTRACT WAS CLEAR AND THE PRICE OF THE MATE RIAL TO BE SUPPLIED WAS REFLECTED IN A SEPARATE INV OICE AND THE BUYER IN LIEU OF THE CREDIT FACILITY OF 180 DAYS FROM THE DATE OF BILL OF LADING WAS REQUIRED TO PAY INTEREST AT STIPULATED RATE FOR WHICH A SEPARAT E INVOICE WAS PREPARED. THERE WAS NO NEXUS BETWEEN 11 THE INTEREST AMOUNT AND FIXATION OF THE PRICE OF TH E RAW MATERIALS PURCHASED. THE NEXUS OF INTEREST WA S ONLY WITH THE PERIOD FROM WHICH THE PURCHASE PRICE OF THE RAW MATERIAL BECAME DUE VIZ., THE DATE OF BI LL OF LADING. THUS, THERE WAS NO SCOPE FOR CONTENDING THAT THE OUTSTANDING PRICE WAS NOT A DEBT INCURRED WITHIN THE MEANING OF SECTION 2(28A) OF THE ACT. 17. HAVING REACHED THE ABOVE CONCLUSION, WE WILL NO W DEAL WITH THE VARIOUS CASES CITED BY THE PARTIES BEFORE US, ON THE ISSUE. THE LEARNED COUNS EL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE A.P.HIGH COURT IN THE CASE OF VISAKHAPA TNAM PORT TRUST (SUPRA). THE ASSESSE IN THAT CASE VIZ., VISAKHAPATNAM PORT TRUST, EXPORTED A LARGE AM OUNT OF IRON ORE. IN ORDER TO SPEED UP EXPORT OPERATIONS IT DECIDED TO INSTALL A PLANT KNOWN AS ' BUCKET WHEEL RECLAIMER'. A GERMAN COMPANY TENDERED THE CONTRACT FOR THE SUPPLY OF THE EQUIPME NT. AN AGREEMENT WAS ENTERED INTO BETWEEN THE GERMAN COMPANY AND THE PORT TRUST WHEREBY THE GERMA N COMPANY UNDERTOOK TO SUPPLY THE EQUIPMENT AND TO DELEGATE AN ENGINEER TO SUPERVISE ITS INSTAL LATION. UNDER CL.12(A) OF THE CONTRACT, THE PURCHAS E PRICE FOR THE EQUIPMENT WAS PAYABLE IN GERMAN CURRE NCY IN GERMANY. PART OF IT WAS PAYABLE ON CONCLUSION OF THE CONTRACT AND THE BALANCE WAS PAYA BLE IN TWENTY SEMIANNUAL INSTALLMENTS. FOR THE CREDIT REMAINING AFTER PAYMENT OF EACH OF THE INSTA LLMENTS INTEREST WAS TO BE PAID BY THE PORT TRUST A T 6% PER ANNUM. THE PORT TRUST PAID THE INSTALLMENTS OF THE PRICE AS THEY FELL DUE IN GERMAN CURRENCY IN GERMANY. THE ITO HELD THAT THE PORT TRUST SHOULD HA VE DEDUCTED TAX AT SOURCE ON THE INTEREST UNDER S. 195(2). THE HONBLE HIGH COURT HELD THAT THE PROV ISIONS OF ART. III OF THE INDO-GERMAN AGREEMENT INDICATED THAT WHILE 'INDUSTRIAL OR COMMERCIAL INCO ME' OF THE FOREIGN ENTERPRISE WAS NOT TAXABLE IN INDIA, THE RENTS, ROYALTIES, INTEREST, DIVIDENDS, E TC, DERIVED BY THE FOREIGN ENTERPRISE FROM SOURCES IN INDIA WERE TAXABLE. THE ITEMS, RENTS ROYALTIES DIVI DENDS, INTERESTS, ETC., WERE TAXABLE ONLY IF THEY SATISFIED THE CONDITIONS MENTIONED FOR THEIR LIABIL ITY TO TAX AS ENVISAGED IN THE VARIOUS SPECIFIC ART ICLES. ARTICLE VIII OF THE TREATY BETWEEN INDIA AND GERMAN Y READ DEFINED INTEREST AS INTEREST ON BONDS, SECURITIES, NOTES, DEBENTURES OR ANY OTHER FORM OF INDEBTEDNESS DERIVED BY A RESIDENT OF ONE OF THE TERRITORIES FROM SOURCES IN THE OTHER TERRITORY MAY BE TAXED IN BOTH COUNTRIES. INTEREST WOULD BE TAX ABLE IF IT AROSE OUT OF INDEBTEDNESS. THE HONBLE COURT HELD THAT THE WORDS 'ANY OTHER FORM OF INDEBTEDNESS ' FROM SOURCES IN THE OTHER TERRITORY COULD ONLY MEAN INTEREST ARISING OR ACCRUING AS A SEPARATE 'SOURCE ' OF INCOME. IT WOULD NOT INCLUDE INTEREST PAYABLE ON THE UNPAID PURCHASE MONEY AGREED TO BE PART OF THE 12 SALE CONSIDERATION. THERE WAS NOTHING IN THE INITIA L CONTRACT BY WAY OF NOVATION CONVERTING THE BALANC E OF CONSIDERATION INTO A LOAN. HENCE, THE INTEREST R ECEIVED BY THE SELLER CANNOT BE REGARDED AS INTERES T ON MONEY LENT NOTWITHSTANDING THE NOMENCLATURE ADOPTED BY THE PARTIES. THE AFORESAID DECISION CANNOT HELP THE CASE OF THE ASSESSEE. THE DECISION WAS RE NDERED IN THE CONTEXT OF THE DEFINITION OF INTEREST UNDER THE DTAA. THE DEFINITION OF INTEREST U/S.2(2 8A) OF THE ACT AND THE DTAA ARE MATERIALLY DIFFERENT. THE DTAA REFERS TO EXISTENCE OF A SEPAR ATE SOURCE FROM WHICH INTEREST INCOME WAS EARNED. THE DECISION IN THE CASE OF VISAKAPATNAM PORT TRUST (SUPRA) WOULD BE RELEVANT WHEN EXAMINING WHETHER THE SUM IN QUESTION CAN BE REGARDED AS INTE REST UNDER RELEVANT DTAA DEPENDING ON THE WORDINGS OF THE RELEVANT CLAUSES OF DTAA . 18. THE NEXT DECISION RELIED UPON BY THE LEARNED CO UNSEL FOR THE ASSESSEE WAS THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF INDIA PIST ONS LTD.(SUPRA). THE ASSESSING OFFICER DISALLOWED THE INTEREST ON FOREIGN BILLS UNDER SECTION 40(A)(I ) AS NO TAX WAS DEDUCTED AT SOURCE. THE HONBLE HI GH COURT HELD THAT THE INTEREST PERTAINED TO FOREIGN B ILLS AND CANNOT BE CONSIDERED AS INTEREST PAID ON L OAN. THE HONBLE COURT FOUND THAT THE CONDITIONS FOR SUP PLY OF GOODS BY THE NONRESIDENT TO THE ASSESSEE WERE THAT THE PAYMENT OF PURCHASE PRICE IN INSTALLM ENTS WAS TO BE MADE WITH THE CONDITION THAT THE ASSESSEE WILL COMPENSATE THE SUPPLIER BY MEANS OF I NTEREST ON THE UNPAID INSTALLMENTS. THE UNPAID INSTALLMENT WAS NOT THE SAME AS LOAN AND THEREFORE, INTEREST PAID COULD NOT BE TREATED AS PAID ON THE LOAN AND HENCE, DEDUCTION OF TAX AT SOURCE WAS NOT ATTRACTED. THE HONBLE COURT THEREFORE HELD THAT IT WAS NOT THE CASE OF THE REVENUE THAT INTEREST WAS P AID WITH REFERENCE TO LOAN SO THAT THE REQUIREMENT OF TAX DEDUCTION AT SOURCE WOULD HAVE BEEN ATTRACTED, NO DISALLOWANCE UNDER SECTION 40(A)(I) CAN BE MADE. THUS IT WAS A CASE OF PURCHASE WHERE THE PURCHASE P RICE WAS TO BE PAID IN INSTALLMENTS WITH AN INBUILT CLAUSE FOR PAYMENT OF INTEREST. THE HONBLE COURT HELD THAT THE PAYMENT WAS PART OF PURCHASE PRICE AND DID NOT HAVE ANY OCCASION TO EXAMINE THE QUESTI ON AS TO WHETHER THE PAYMENT OF INTEREST WAS IN RELATION TO DEBT INCURRED. IN THE PRESENT CASE, WE ARE CONCERNED WITH THE QUESTION AS TO WHETHER TH E PAYMENT OF INTEREST BY THE ASSESSEE WAS IN RESPECT OF A DEBT INCURRED. THIS DECISION IS THEREFORE O F NO ASSISTANCE TO THE PLEA OF THE ASSESSEE BEFORE US . 13 19. THE NEXT DECISION RELIED UPON BY THE LEARNED CO UNSEL FOR THE ASSESSEE IS THE DECISION OF THE ITAT HYDERBAD BENCH IN THE CASE OF M/S.VIJAY ELECTR ICALS LTD. (SUPRA). THE ASSESSEE IN THAT CASE WAS NOT IN THE BUSINESS OF SHIP BREAKING AND WAS IN THE BUSINESS OF MANUFACTURING AND SALE OF TRANSFORMERS BESIDES EXECUTING WORKS ON CONTRACT. HE INCURRED INTEREST EXPENDITURE IN THE FORM OF USANCE INTEREST IN RESPECT OF SUPPLIES FROM NON-RES IDENT. THE QUESTION THAT CAME UP FOR CONSIDERATION WAS WHETHER THE DEDUCTION OF INTEREST EXPENSES COUL D BE DISALLOWED U/S.40(A)(IA) FOR NON-DEDUCTION OF TAX AT SOURCE. THE TRIBUNAL FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT RENDERED IN THE CASE VIJAY SHIP BREAKING CORPN. (SUPRA) AND HELD THAT TH E INTEREST WAS PART OF THE PURCHASE PRICE AND THEREFORE WAS NOT A PAYMENT OF INTEREST ON DEBT IN CURRED. WE HAVE ALREADY SEEN THAT THE HONBLE SUPREME COURT DID NOT EXPRESS ANY OPINION ON THE AB OVE ISSUE AND DECIDED THE CASE APPLYING THE AMENDED PROVISIONS OF LAW WHICH WAS APPLICABLE ONLY TO ASSESSEES MAKING PAYMENT OF USANCE INTEREST FOR PURCHASE OF SHIPS TO NON-RESIDENTS. T HE TRIBUNAL HAS FURTHER RELIED ON THE DECISION IN T HE CASE OF THE HONBLE A.P. HIGH COURT IN THE CASE OF VISAKHAPATNAM PORT TRUST (SUPRA) BUT HAS NOT CONSIDERED ANY DTAA BETWEEN INDIA AND THE FOREIGN S UPPLIERS AND THE DEFINITION OF INTEREST UNDER SUCH DTAA. WE ARE THEREFORE OF THE VIEW THAT THE D ECISION OF THE ITAT HYDERBAD BENCH HAS BEEN DECIDED ON THE FACTS OF THE CASE AND AGREEMENT BETW EEN THE PARTIES AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 20. THE NEXT DECISION IS THAT OF THE DELHI BENCH OF THE ITAT IN THE CASE OF DELHI DEVELOPMENT AUTHORITY VS. ITO (SUPRA). IT WAS A CASE WHERE THE DDA PAID INTEREST ON DELAY IN CARRYING OUT CONSTRUCTIONS. IT WAS HELD THAT THE PAYMENT WAS A COMPENSATION FOR DELAY IN DELIVERING POSSESSION AND CANNOT BE REGARDED AS INTEREST PAID ON DEBT INCURRE D OR AMOUNTS BORROWED WITHIN THE MEANING OF SEC.2(28A) OF THE ACT. THIS DECISION IS NOT RELEVA NT AS IT WAS CASE OF PAYMENT OF COMPENSATION FOR DELAY WITH NO BORROWING OR INCURRING OF DEBT. THE NEXT DECISION RELIED UPON BY THE LEARNED COUNSEL FO R THE ASSESSEE IS THE CASE OF ORIENTAL INSURANCE CO.L TD. (SUPRA), WHERE THE QUESTION AROSE AS TO WHEN T HE INSURANCE COMPANY MAKES PAYMENT OF DECRETAL AMOUNT COMPRISING OF INTEREST ON COMPENSATION AWARDED BY MOTOR ACCIDENTS CLAIMS TRIBUNAL, IT WAS AKIN TO PAYMENT OF INTEREST BY THE INSURANCE COMPANY NECESSITATING TAX DEDUCTION AT SOURCE U/S.1 94A OF THE ACT. THE ITAT DELHI HELD THAT THE AMOUNT PAID BY THE INSURANCE COMPANY WAS DECRETAL A MOUNT AWARDED BY THE TRIBUNAL AND NOT INTEREST. 14 THIS DECISION IS THEREFORE RENDERED ON THE BASIS TH AT AS FAR AS THE INSURANCE COMPANY IS CONCERNED THE PAYMENT IS OF A DECRETAL AMOUNT AND NOT INTEREST. THE SAME IS THEREFORE NOT RELEVANT OR APPLICABLE TO THE FACTS OF THE PRESENT CASE. FOR THE VERY SAME R EASON GIVEN ABOVE, THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ISLAMIC INVESTMENT CO. (SUPRA) IS NOT RELEVANT TO THE PRESENT CASE AS THE ISSUE INVOLVED IN THE SAID CASE WAS ALSO INTERE ST ON JUDGMENT DEBT CAN BE REGARDED AS INTEREST ON WHICH TAX HAD TO BE DEDUCTED AT SOURCE WHEN MAKING PAYMENT. 21. THE NEXT DECISIONS RELIED UPON BY THE LEARNED C OUNSEL FOR THE ASSESSEE IS THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CARGILL GLO BAL TRADING (I) (P) LTD. (SUPRA) AND THAT OF THE AAR IN THE CASE OF ABC INTERNATIONAL INC. IN RE.(SU PRA). BOTH THE CASES RELATED TO A CASE WHERE THE QUESTION WAS AS TO WHETHER THE DISCOUNTING CHARGES PAID TO A NON-RESIDENT WHILE DISCOUNT EXPORT SALE BILLS CAN BE TREATED AS INTEREST AND THEREFORE THE RESIDENT DISCOUNTING BILLS WAS OBLIGED TO DEDUCT TA X AT SOURCE. IT WAS HELD THAT DISCOUNTING CHARGES WAS N EITHER MONEY BORROWED NOR DEBT INCURRED AND THEREFORE THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE. REFERENCE WAS ALSO MADE TO THE CBDT CIRCULAR NO.65 DATED 2 ND SEPT. 1971 AND CIRCULAR NO.647 DT.22.3.1993 WHEREI N CBDT HAD CLARIFIED THAT DISCOUNTING CHARGES WERE NOT IN THE NATURE OF INTER EST. BOTH THESE DECISIONS ARE NOT RELEVANT FOR THE PRESENT CASE AS THEY RELATE TO DISCOUNTING CHARGES. 22 THE NEXT DECISION RELIED UPON BY THE LEARNED COU NSEL FOR THE ASSESSEE IS THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOVINDA CHOUD HURY & SONS (SUPRA). IT WAS A CASE WHERE THE DISPUTE WAS AS TO WHETHER THE INTEREST AWARDED BY T HE ARBITRATORS TO A CONTRACTOR EXECUTING GOVERNMENT CONTRACTS HAS TO BE ASSESSED AS BUSINESS INCOME OR INCOME FROM OTHER SOURCES. THE HONBLE SUPREME COURT HELD THAT INTEREST PAID WAS FOR DELAY IN MAKI NG PAYMENT AND WOULD GO TO INCREASE THE RECEIPTS FROM THE CONTRACT AND WOULD PARTAKE THE SAME CHARAC TER AS THE CONTRACT RECEIPTS AND WAS THEREFORE ASSESSABLE AS BUSINESS INCOME AND NOT INCOME FRO M OTHER SOURCES. THE SAID DECISION IS NOT RELEVANT FOR THE PRESENT CASE WHERE THE DISPUTE IS AS TO WHETHER PAYMENT IN QUESTION IS INTEREST OR PA RT OF PURCHASE PRICE. THE DECISION OF THE AHMEDABAD B ENCH OF ITAT IN THE CASE OF MAYANK ELECTRO LTD. VS. ITO 71 TTJ 612 (AHD.) IS ALSO NOT RELEVANT AS T HE DISPUTE IN THAT CASE WAS AS TO WHETHER INTEREST FOR 15 DELAYED PAYMENT OF GOODS CAN BE CONSIDERED AS BUSIN ESS INCOME ON WHICH DEDUCTION U/S.80-IA HAS TO BE ALLOWED. 23. THE LAST DECISION REFERRED TO BY THE LEARNED CO UNSEL FOR THE ASSESSEE IS THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATIO N CO. (1953) (P) LTD. (SUPRA). THE QUESTION THAT AROSE FOR CONSIDERATION IN THE AFORESAID CASE WAS AS TO WHETHER INTEREST PAID ON UNPAID PURCHASE PRICE WAS INTEREST PAID ON MONIES BORROWED WHICH CO ULD BE ALLOWED AS DEDUCTION U/S.10(2)(III) OF THE INCOME TAX ACT, 1922 EQUIVALENT TO SEC.36(1)(III) O F THE ACT. THE HONBLE COURT HELD THAT UNPAID PURCHASE PRICE CANNOT BE SAID TO BE MONIES BORROWE D FOR THE PURPOSE OF BUSINESS AND THEREFORE DEDUCTION CLAIMED CANNOT BE ALLOWED U/S.10(2)(III) OF THE INCOME TAX ACT, 1922. THE DECISION WAS RENDERED ON TOTALLY DIFFERENT FACTS AND THE HONBLE COURT NEVER HAD ANY OCCASION TO EXAMINE WHETHER PROVISIONS OF SEC. 2(28A) OF THE ACT, WHICH WERE NE VER PART OF THE ACT TILL 1-4-1976. 24. THE LEARNED DR PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BRITISH BANK OF MIDDLE EAST (SUPRA) WHERE IT WAS HELD THAT THE DEFINITION OF INTEREST U/S.2(28A) OF THE ACT IS A WORD OF WIDE IMPORT. IT MEANS 'INTERES T PAYABLE IN ANY MANNER' IN RESPECT OF MONEYS BORROWED OR DEBT INCURRED AND INCLUDES EVEN SERVICE FEES OR OTHER CHARGES IN RESPECT OF THE MONEYS BORROWED. THE OTHER DECISIONS RELIED UPON BY THE L EARNED DR ARE NOT BEING REFERRED TO IN GREATER DETA IL FOR THE REASON THAT ON THE FACTS OF THE PRESENT CAS E, WE HAVE COME TO THE CONCLUSION THAT THE USANCE INTEREST IS IN THE NATURE OF INTEREST WITHIN THE ME ANING OF SEC.2(28A) OF THE ACT. 25. WE THEREFORE HOLD THAT ON THE FACTS OF THE PR ESENT CASE, THE PAYMENT IN QUESTION, NAMELY, USANCE INTEREST, IS INTEREST WITHIN THE MEANING OF SEC. 2(28A) OF THE ACT. SINCE THE SAME IS INTEREST WITHIN THE MEANING OF THE ACT, THE SAME WOULD BE DE EMED TO HAVE ACCRUED AND ARISEN IN INDIA IN VIEW OF THE PROVISIONS OF SEC. 9(1)(V)(B) OF THE ACT. 26. THE NEXT ISSUE WHETHER UNDER THE DTAA BETWEEN I NDIA AND THE RESPECTIVE COUNTRIES IN WHICH THE RECIPIENTS ARE TAX RESIDENTS, THE PAYMENT CANNO T BE REGARDED AS INTEREST. ON THIS ISSUE, WE FIND NEITHER THE AO NOR THE CIT(A) HAD DISCUSSED THE ISS UE IN THE LIGHT OF THE RELEVANT DTAA. IN THOSE 16 CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE FIT AND PROPER TO REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION. AS FAR AS THE THIRD ISSUE IS CONCERNED, WE ARE OF THE VIEW THAT THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF KOTAK SECU RITIES (SUPRA) WAS RENDERED IN THE CONTEXT OF PAYMENT TO A RESIDENT WHERE THERE WAS AN AMENDMENT TO THE LAW CLARIFYING OBLIGATION TO DEDUCT TAX AT SOURCE ON TRANSACTION CHARGES COLLECTED BY STOCK EX CHANGE FROM BROKERS. THERE WAS NO DISALLOWANCE FOR NON-DEDUCTION OF TAX AT SOURCE ON SIMILAR PAYME NTS IN THE PAST. IT WAS IN THOS THOSE CIRCUMSTANC ES THAT THE ASSESSEE PLEADED BONAFIDE BELIEF WHICH WAS ACCEPTED BY THE HONBLE COURT. THE PAYMENT IN DISPUTE IN THIS APPEAL IS PAYMENT TO NON-RESIDENTS AND IN THE EVENT OF DOUBT THE ASSESSEE OUGHT TO HAV E APPROACHED THE AO FOR APPROPRIATE CERTIFICATE U/S.1 95 OF THE ACT. HE CANNOT PLEAD BONAFIDE BELIEF AN D ON THAT BASIS SEEK TO STAND OUT OF THE PROVISIONS O F SEC.40(A)(IA) OF THE ACT. WE THEREFORE REJECT T HE PLEA OF THE ASSESSEE IN THIS REGARD. THUS GROUND N O.I TO III ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 27. GROUND NOS.IV & V RAISED BY THE ASSESSEE READ AS FOLLOWS : IV. ERRED IN CONFIRMING HE UN-UTILIZED MODVAT CRED IT IN VALUE OF CLOSING STOCK WITHOUT APPRECIATING THE METHOD OF AC COUNTING FOLLOWED BY THE APPELLANT. IV. FAILED TO APPRECIATE THAT PAYMENT OF EXCISE DUTY SH OULD BE ALLOWED U/S.43B OF INCOME-TAX ACT AS THE CLOSING STOCK WERE CLEARED AND SAID EXCISE DUTY WERE PAID BEFORE THE DUE DATE OF F ILING OF RETURNS. 28. THE AO NOTICED THAT THERE WAS UNUTILIZED MODVA T CREDIT OF RS.2,51,713/- AS ON 31-3-2002. IN VIEW OF THE PROVISIONS OF SEC. 145A OF THE ACT, THE AO WAS OF THE VIEW THAT THE UNUTILIZED MODVAT CREDIT SHOULD BE ADDED TO THE VALUE OF THE CLOSING STOCK AND THE CLOSING STOCK SHOULD BE VALUED ACCORDINGLY. THE AO ACCORDINGLY ADDED THE UNUTILIZE D MODVAT CREDIT TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL BY THE ASSESSEE, THE CIT(A) HEL D AS FOLLOWS : I HAVE CONSIDERED THE SUBMISSIONS AS WELL AS THE AMENDED PROVISIONS OF SEC. 145A. THE ACTION OF THE AO IN MA KING ADDITION OF RS.2,51,713/- BEING UNUTILIZED MODVAT CREDIT TO THE INCOME IS JUSTIFIED. HOWEVER, THE ASSESSING OFFICER MAY CONSIDER THE ALT ERNATE SUBMISSION OF THE ASSESSEE THAT IF THE MODVAT CREDIT HAS BEEN SUB SEQUENTLY UTILIZED IN NEXT YEAR UPTO-THE DUE DATE OF FILING OF RETURN, TH E SAME MAY BE ALLOWED U/S.43B AFTER VERIFICATION. SUBJECT TO THE ABOVE, T HIS GROUND IS PARTLY ALLOWED. 17 29. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE HAS RAISED GR.NO.IV AND V BEFORE THE TRIBUNAL. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE ADDITION MADE BY THE AO AS MODIFIED BY THE CIT(A) HAS TO BE SUSTAINED BUT T HE AO SHOULD BE DIRECTED TO ALLOW CORRESPONDING ADJUSTMENT TO THE OPENING STOCK IN RESPECT OF UNUTI LIZED MODVAT CREDIT AS LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS P. LTD.[318 ITR 116 (BOM)]. WE ORDER ACCORDINGLY AND THE GROUNDS OF APPEAL ARE ACC ORDINGLY TREATED AS PARTLY ALLOWED. 30. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1199/MUM/2007 (REVENUES APPEAL): 31. THE ONLY GROUND OF APPEAL RAISED BY THE REVENUE READS AS FOLLOWS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO TO ALLOW THE E XPENSES OF RS.32,00,939/- IN A.Y. 2001-02 IF THESE EXPENSES AR E RELATED TO THAT YEAR AFTER VERIFICATION. THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDING S, FOUND THAT THE ASSESSEE HAD DEBITED A SUM OF RS.32,00,939/- AS PRIOR PERIOD EXPENSES. ACCORDING TO THE AO, UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, ONLY EXPENSES WHICH HAVE ACCRUED OR ARI SEN DURING THE PREVIOUS YEAR CAN BE ALLOWED AS DEDUCTION AND PRIOR PERIOD EXPENSES CANNOT BE ALLOW ED AS DEDUCTION WHILE COMPUTING THE TOTAL INCOME. ACCORDINGLY, THE PRIOR PERIOD EXPENSES WERE ADDED T O THE TOTAL INCOME OF THE ASSESSEE. 32. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD AS FOLLOWS : I HAVE GONE THROUGH THE FINDINGS OF THE AO AND ALS O THE SUBMISSIONS MADE BY THE ASSESSEES COUNSEL AND HAVE ALSO PERUSED THE APPELLATE ORDERS FOR A.Y. 1998-99 (VIDE APPEAL NO.CIT(A)C-VII/C9/ROT.290 DATED 29.4.2004) AND A.Y. 1999-00 (VIDE APPEAL NO.CIT(A)C-VII/C9/IT.36 DATED 30.6.200 3). I AM IN AGREEMENT WITH THE ACTION OF THE AO THAT SINCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THE EXPENDITURE CLASSIFIED AS PRIOR PERIOD EXPENSES OF RS.32,00,939 /- CANNOT BE ALLOWED AS EXPENDITURE OF THE YEAR. SIMILAR VIEW WA S TAKEN IN THE ASSESSEES OWN CASE BY MY PREDECESSOR. RESPECTFULLY FOLLOWING THE SAME, I UPHOLD THE ACTION OF THE AO IN DISALLOWANCE OF THE EXPENSES UNDER THE HEAD PRIOR PERIOD EXPENSES. HO WEVER, I 18 AGREE WITH THE ALTERNATE SUBMISSIONS MADE BY THE AS SESSEES COUNSEL. AS HAS BEEN HELD IN EARLIER YEARS, I DIREC T THE AO TO ALLOW THE EXPENDITURE OF RS.32,00,939/- IN THE YEAR A.Y. 2001-02 IF THE ASSESSEE IS ABLE TO ESTABLISH THAT THESE EXPENSES R ELATE TO THAT YEAR. REGARDING THE ALLOWABILITY OF THE EXPENDITURE OF RS .953,064/- TREATED AS PRIOR PERIOD IN AY 2003-04, IT WILL BE A DJUDICATED WHILE DECIDING THE APPEAL FOR AY 2003-04. 33. IT IS NOT IN DISPUTE BEFORE US THAT IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION IN THE ASSESSEES OWN CASE AND THIS TRIBUNAL HAD UPHELD SI MILAR DIRECTION GIVEN BY THE CIT(A) IN ASSESSMENT YEAR 1999-2000 AND 2003-04. IN ITA NO.6407/MUM/2003 FOR ASSESSMENT YEAR 1999-2000, THIS TRIBUNAL IN ASSESSEES OWN CASE HELD AS FOLLOWS : 2.2.2 WE HAVE HEARD BOTH THE PARTIES PERUSED THE R ECORDS AND CONSIDERED THE MATTER CAREFULLY. THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT IN CASE THE ASSESSEE WAS ALLOWED REL IEF AS GRANTED BY THE CIT(A) AMOUNTING TO RS.37,53,810/-, THE ASSESSEE WI LL NOT PRESS THE ADDITION OF RS.44,19,279/-. THE LEARNED DR ON THE O THER HAND PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER. WE HAVE CONSIDERED THE MATTER CAREFULLY. THERE IS NO DISPUTE THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE EXPENDITURE INCURRE D IN THE EARLIER YEAR CANNOT BE ALLOWED AS DEDUCTION IN THIS YEAR. THE OR DER OF CIT(A) CONFIRMING THE ADDITION OF RS.44,19,270/- IS THEREF ORE UPHELD. AS REGARDS THE RELIEF GRANTED BY THE CIT(A) AMOUNTING TO RS.37 ,53,810/- WE FIND THAT THE ASSESSING OFFICER IN A.Y. 2000-01 HAS HIMSELF G IVEN A FINDING THAT THE EXPENSES TO THE ABOVE EXTENT RELATED TO THIS ASSESS MENT YEAR I.E. 1999- 2000. IN VIEW OF THE MERCANTILE SYSTEM OF ACCOUNTIN G BEING FOLLOWED BY THE ASSESSEE, DEDUCTION IN RESPECT OF EXPENSES TO T HE ABOVE EXTENT HAS THEREFORE TO BE ALLOWED THIS YEAR. WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE TO THE AB OVE EXTENT AND THE SAME IS THEREFORE UPHELD. 34. IN ASSESSMENT YEAR 2003-04 IN ITA NO.1200/MUM/ 2007 IN ASSESSEES OWN CASE, THIS TRIBUNAL ACCEPTED A SIMILAR ORDER OF THE CIT(A) AS CORRECT. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY GROUND TO INTERFERE WITH THE ORDER OF THE CIT(A). CONSEQUENTL Y, THE GROUND OF APPEAL IS DISMISSED. 35. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. ITA NO.1198/MUM/2007: (REVENUES APPEAL): 19 36. THIS IS AN APPEAL BY THE REVENUE AGAINST THE OR DER OF CIT(A) DATED 22-11-2006 OF CIT(A), CENTRAL-VII, MUMBAI, RELATING TO ASSESSMENT YEAR 19 99-2000. IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE ORDER OF CIT(A) WHEREBY THE CIT(A) C ANCELLED THE ORDER OF THE AO IMPOSING PENALTY ON THE ASSESSEE. 37. THE FACTS AND CIRCUMSTANCES UNDER WHICH PENALTY WAS IMPOSED ON THE ASSESSEE BY THE AO ARE AS FOLLOWS. WHILE COMPLETING THE ASSESSMENT U/S.14 3(3) OF THE ACT, THE AO MADE THE FOLLOWING ADDITIONS TO THE TOTAL INCOME DECLARED BY THE ASSES SEE : DISALLOWANCE OF RS.69,493/- ON ACCOUNT OF WRITE OFF OF LEASEHOLD PREMIUM. DISALLOWANCE OF RS.44,19,270/- ON ACCOUNT OF P RIOR PERIOD EXPENSES. DISALLOWANCE OF RS.51,000/- ON ACCOUNT OF PROV ISION FOR GRATUITY. DISALLOWANCE OF RS.26,00,000/- O N ACCOUNT OF UNEXPLAINED EXPENSES UNDER SECTION 69C OF THE ACT. 38. IT IS NOT IN DISPUTE BEFORE US THAT THE DISALL OWANCE ON ACCOUNT OF UNEXPLAINED EXPENSES U/S.69C HAS ALREADY BEEN DELETED BY THE HONBLE ITA T IN THE APPEAL FILED BY THE ASSESSEE IN THE QUANTUM PROCEEDINGS. IT IS ALSO FURTHER SEEN THAT I N RESPECT OF DISALLOWANCE OF RS.44,19,270/- ON ACCOUNT OF PRIOR PERIOD EXPENSES, THE ITAT IN THE Q UANTUM PROCEEDINGS HAD SET ASIDE THE ORDER OF CIT(A) AND REMANDED THE ISSUE TO THE AO TO ALLOW DE DUCTION IN THE YEAR TO WHICH THE PRIOR PERIOD EXPENSES PERTAINED TO. IT HAS BEEN BROUGHT TO OUR N OTICE THAT THE AO HAS HIMSELF ALLOWED THE DEDUCTION IN RELEVANT PRIOR PERIOD AS DEDUCTION. THEREFORE, N O ADVERSE INFERENCE CAN BE DRAWN FOR IMPOSING PENALTY ON THE ASSESSEE ON ACCOUNT OF THIS ADDITION . IN RESPECT OF DISALLOWANCE OF RS.69,493/- ON ACCOUNT OF WRITE OFF OF LEASEHOLD PREMIUM, THE ADDI TION HAS BEEN CONFIRMED IN THE QUANTUM PROCEEDINGS. HOWEVER, IT IS SEEN THAT THE STAND TAK EN BY THE ASSESSEE IN CLAIMING THE WRITE OFF OF LEASEHOLD PREMIUM AS A DEDUCTIBLE REVENUE EXPENDITU RE WAS BASED ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HMT LTD. (203 I TR 820) WHEREIN A VIEW WAS TAKEN THAT THE LEASE PREMIUM PAID IN LUMP-SUM WAS EQUIVALENT TO RENT PAI D IN ADVANCE AND SHOULD BE TREATED AS REVENUE EXPENDITURE. IT IS ALSO NOT IN DISPUTE BEFORE US TH AT THE ISSUE AS TO WHETHER THE WRITE OFF OF LEASEHO LD PREMIUM IS REVENUE EXPENDITURE OR CAPITAL EXPENDITU RE WAS SUBJECT MATTER OF DEBATE AND WAS ULTIMATELY SETTLED BY A DECISION OF THE SPECIAL BENCH OF ITAT IN THE CASE OF MUKAND LTD. [109 TTJ 172 (BOM)] 20 WHEREIN IT WAS HELD THAT THE SAME WAS CAPITAL EXPE NDITURE AS IT GIVES ENDURING BENEFIT TO AN ASSESSEE . IT IS NOT IN DISPUTE BEFORE US THAT WHEN THE ASSESSEE FILED THE RETURN FOR ASSESSMENT YEAR 1999-2000 THE ISSUE WAS DEBATABLE AND THEREFORE NO PENALTY COULD BE IMPOSED IN RESPECT OF THIS ADDITION. ANOTHER ADDITION IN RESPECT OF WHICH PENALTY WAS IMPOSED ON THE ASSESSEE BY THE AO WAS DISALLOWANCE OF RS.51,000/- ON ACCOUNT OF PROVISION FOR GRATUITY. I N RESPECT OF THIS ADDITION, THE ASSESSEE ACCEPTED T HE ADDITION MADE BY THE AO. THE CLAIM WAS MADE BY THE ASSESSEE FOR DEDUCTION AFTER DULY DISCLOSING ALL PARTICULARS. IN THE CASE OF RELIANCE PETROPRODUCTS (P) LTD. (322 ITR 158), THE HONBLE SUPREME COURT HAS TAKEN THE VIEW THAT MERE REJECTION OF A CLAIM F OR DEDUCTION MADE BY THE ASSESSEE WILL NOT GIVE RIS E TO IMPOSITION OF PENALTY FOR CONCEALMENT. 39. WE ARE THUS OF THE VIEW THAT NONE OF THE ADDIT IONS IN RESPECT OF WHICH PENALTY WAS IMPOSED BY THE AO CALLS FOR IMPOSITION OF PENALTY U/S.271(1)(C ) OF THE ACT. THE CIT(A) HAS ACCEPTED THE PLEA OF THE ASSESSEE AND HAS DELETED THE PENALTY IMPOSED BY THE AO. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE DOES NOT CALL FOR ANY INTERFER ENCE. CONSEQUENTLY, THE SAME IS CONFIRMED AND THE APPEAL BY THE REVENUE IS DISMISSED. 40. IN THE RESULT, ITA NO.7019/MUM/2006 BY THE ASSE SSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, ITA NO.1199/MUM/2007 BY THE REVENUE IS DI SMISSED AND ITA NO.1198/MUM/2007 BY THE REVENUE IS ALSO DISMISSED. ORDER PRONOUNCED ON THE 28TH DAY OF MARCH, 2012. SD/- SD/- (R.S. SYAL) (N.V. VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 28TH MARCH , 2012. NG: COPY TO : 1. ASSESSEE. 2 DEPARTMENT. 21 3 CIT(A), CENTRAL-VII, MUMBAI. 4 CIT, CENTRAL-I,MUMBAI. 5.DR,L BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST. REGISTRAR, ITAT, MUMBAI. 22 DETAILS DATE INITIALS DESIGNA TION 1. DRAFT DICTATED ON 21-03-2012 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 22-03-2012 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/ AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER *