M/s. EXCEL INDUSTRIES LTD., MUMBAI V. DCIT CENT. CIR. - 38, MUMBAI

ITA 1247/MUM/2006

• Counselvise Citation: 124719914 RSA 2006
• Duration Of Justice: 6 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 09-04-2012
• Assessment Year: 1999-2000
• Appeal Filed On: 21-02-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHRIGOLISRINIVASRAO
• Assessee Lawyers: SHRIKIRIT R KAMDAR
• Keywords: Business income; Depreciation; Business expenditure; Earning of tax free income; Retrospective amendment; Notional interest; Commercial expediency; Revised return; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 80HHC; 14A; 37(1); 32; 37; 90; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H : MUMBAI BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI S.S.GODARA, JUDICIAL MEMBER ITA. NO. 3688/MUM/2003 ASSESSMENT YEAR 1998-1999 ITA. NO. 1300/MUM/2006 ASSESSMENT YEAR 1999-2000 DCIT, CC.38 MUMBAI 400 051. VS. M/S. EXCEL INDUSTRIES LTD. MUMBAI 400 102 PAN AAACE2488F (APPELLANT) (RESPONDENT) ITA. NO.4240/MUM/2003 ASSESSMENT YEAR 1998-1999 ITA. NO.1247/MUM/2006 ASSESSMENT YEAR 1999-2000 M/S. EXCEL INDUSTRIES LTD. MUMBAI 400 102 PAN AAACE2488F VS. DCIT, CC.38 MUMBAI 400 051. (APPELLANT) (RESPONDENT) CROSS OBJECTION NO. 231/MUM/2006 ARISING OUT OF ITA. NO. 1300/MUM/2006 ASSESMENT YEAR 1999-2000 M/S. EXCEL INDUSTRIES LTD. MUMBAI 400 102 PAN AAACE2488F VS. DCIT, CC.38 MUMBAI 400 051. (CROSS - OBJECTOR) (RESPONDENT) FOR REVENUE : SHRIGOLISRINIVASRAO (CIT-DR) FOR ASSESSEE : SHRIKIRIT R. KAMDAR DATE OF HEARING : 09-04-2012 DATE OF PRONOUNCEMENT : 04-05-2012 ORDER 2 PER BENCH : 1. THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE IN ASSESSMENT YEAR 1998-99 AND ASSESSMENT YEAR 1999-2000 AND CROSS OBJ ECTION BY ASSESSEE IN ASSESSMENT YEAR 1999-2000. SINCE COMMON ISSUES ARE INVOLVED, THESE ARE HEARD TOGETHER AND DECIDED BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. WE HAVE HEARD LEARNED COUNSEL AND LEARNED D.R. WITH THE HELP OF PAPER BOOK PLACED ON RECORD AND CHART INDICATING TH E SUMMARY OF ISSUES. THE ARGUMENTS AND CONTENTIONS ARE DISCUSSED WHEREVER NE CESSARY. ITA. NO. 4240/MUM/2003- AY 1998-99 : 3. IN THIS APPEAL ASSESSEE RAISED FOLLOWING 12 GRO UNDS. I. TAXABILITY OF ADVANCE LICENCE BENEFIT RECEIVABLE :RS.52.84.6741- 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN U PHOLDING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME -TAX IN INCLUDING ADVANCE LICENCE BENEFIT RECEIVABLE AMOUNT ING TO RS.5284,6741-, IN THE TOTAL INCOME. 1.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (A PPEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN NOT APPRECIATING THE FACT THAT NO INCOME HAD ACC RUED TO THE APPELLANT UNTIL THE IMPORTS WERE MADE AND THE RAW M ATERIALS WERE CONSUMED, WHICH EVENTS TOOK PLACE IN THE SUBSEQUENT YEARS; (B) IN HOLDING THAT THE ADVANCE LICENCE BENEFIT BECOMES RECEIVABLE THE MOMENT EXPORT IS MADE IN SPITE OF THE FACT THAT THE BENEFIT ACCRUED ONLY WHEN THE RAW MATERIALS WERE ACTUALLY I MPORTED AND NOT AT THE TIME OF EXPORT. 3 II. TAXABILITY OF PASS BOOK BENEFIT RECEIVABLE: RS.5,62.63,1271- 2.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME-TAX IN INCLUDING PASS BOOK BENEFIT RECEIVABLE AMOUNTING TO RS.56263127/- IN THE TOTAL INCOME. 2.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN NOT APPRECIATING THE FACT THAT NO INCOME HAD ACC RUED TO THE APPELLANT UNTIL THE CREDIT WAS RECEIVED IN THE PASS BOOK WHICH EVENT TOOK PLACE IN THE SUBSEQUENT YEARS; (B) IN NOT APPRECIATING THE FAD THAT IT WAS A WELL ESTA BLISHED LEGAL PROPOSITION THAT ENTRIES IN THE BOOKS OF ACCOUNT WE RE NOT MATERIAL FOR DETERMINING THETAX LIABILITY AND IF NO INCOME H AD ACCRUED, THE SAME COULD NOT BE TAXEDEVEN THOUGH THE SAID ITEM WA S ACCOUNTED FOR AS INCOME IN THE BOOKS OF ACCOUNT. III. DISALLOWANCE UNDER SECTION 43B IN RESPECT OF EMPLOYER'S CONTRIBUTION TO EMPLOYEE'S STATE INSURANCE SCHEME (ESIC): 3.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE DISALLOWANCE IN RESPECT OF THE EMPLOYEES CONTRIBUTI ON TO ESIC AMOUNTING TO RS.18,891/- UNDER SECTION 43B. 3.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (A PPEALS) ERRED IN NOT APPRECIATING THE FACT THAT CLAUSE (B) OF SECTIO N 43B WAS NOT ATTRACTED TO SUCH CONTRIBUTION FOLLOWING THE RATIO OF THE DECISION OF THE ITAT, COCHIN BENCH IN THE CASE OF DCIT VS. M /S. NM. (ITAT NO.550/COCHIN/88 REPORTED IN BOMBAY CHARTERED ACCOUNTANTS JOURNAL SEPTEMBER 1994 AT PAGE 502). IV. DISALLOWANCE UNDER SECTION 43B IN RESPECT OF ADDITIONAL SALES TAX : RS.39,826/- 4.1 THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT PASSING A SPEAKING ORDER IN RESPECT OF THE DISALLOWANCE UNDER SECTION 43B AMOUNTING TO RS.39,826/- IN RESPECT OF ADDITIONAL S ALES TAX BEING THE DIFFERENCE BETWEEN THE DISALLOWANCE AS PER THE RETURN SHOWN AT RS.7,79,3331- INSTEAD OF RS.7 39 507/- AS COMPUT ED BY THE APPELLANT. 4 4.2 IN VIEW OF THE ABOVE GROUNDS OF APPEAL, THE APP ELLANT PRAYS THAT THE ADDITIONAL COMMISSIONER OF INCOME-TAX BE DIRECT ED TO DELETE THE AFORESAID DISALLOWANCE IN RESPECT OF ADDITIONAL SAL ES TAX AMOUNTING TO RS.39,8261-. V. DISALLOWANCE OUT OF INTEREST PAID:RS.50,57,260/- 5.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME-TAX IN DISALLOWING AN AMOUNT OF RS. 50,57,260/- OUT OF INTEREST PAID. 5.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN OBSERVING THAT DIVERSION OF INTEREST BEARING FUN DS IS QUITE CLEAR CUT; (B) IN NOT APPRECIATING THE FACT THAT NOTIONAL INTEREST @ 16% WAS CONSIDERED FOR DISALLOWANCE WITHOUT GIVING ANY JUST IFICATION OR BASIS FOR THE SAID RATE; (C) IN UPHOLDING THE ADDITIONAL COMMISSIONER OF INCOME- TAX'S ACTION THAT WHENEVER INTEREST IS CHARGED AT LESS TH AN 16%, THE DIFFERENCE BETWEEN INTEREST @16% AND THE INTEREST C HARGED IS TO BE DISALLOWED OUT OF INTEREST PAID AND ADDED TO THE TOTAL INCOME; (D) IN NOT APPRECIATING THE FACT THAT THE LOANS TO THE SUBSIDIARY COMPANIES AND THE LOAN TO AGROCEL PESTICIDES LTD. W ERE MADE FROM THE APPELLANT'S MIXED FUNDS AND NO SPECIFIC BORROWI NGS WERE MADE FOR ADVANCING THE SAID LOANS; AND (E) IN NOT APPRECIATING THE FACT THAT THE ENTIRE IN TEREST PAYMENT WAS ELIGIBLE FORDEDUCTION UNDER SECTION 36(1)(III). VI. PAYMENTS TO CLUB: 6.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONEROF INCOME-TAX (APPEALS) ERRED IN UPHOLD ING THE DISALLOWANCE OF AN AMOUNT OF RS.2,61,668/- IN RESPE CT OF PAYMENTS MADE TO CLUBS FOR MEMBERSHIP FEES, SUBSCRI PTION AND CUSTOMER MEETING EXPENSES. 6.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (AP PEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN HOLDING THAT THE AMOUNT PAID IN RESPECT OF CORPO RATE MEMBERSHIP FEES, YEARLY SUBSCRIPTION AMOUNTING TO RS. 162665/- WAS EXPENDITURE BRINGINGAN ASSET OF AN ENDURING NATURE AND HENCE 5 CAPITAL EXPENDITURE; AND (B) IN NOT APPRECIATING THE FACT THAT THE BALANCE EXPEN DITURE AMOUNTING TO RS.99,003/-, WAS INCURRED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, IT IS ALLOWABLE UN DER SECTION 37(1); VII. DISALLOWANCE OUT OF LEGAL AND PROFESSIONAL EXPENDITURE: RS.7,50.000/- 7.1 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOL DING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME-TAX TO TRE AT THE AMOUNT OF LEGAL AND PROFESSIONAL FEES PAID FOR CONSULTANCY RE GARDING THE JOINT VENTURE WITH NETAFIM AMOUNTING TO RS.7,50,000/- AS BEING CAPITAL EXPENDITURE. 7.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (A PPEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN NOT APPRECIATING THE FACT THAT THE AFORESAID AMO UNT OF RS.7,50,000I- WAS PAID TOWARDS THE CONSULTANCY FEES FOR THE JOINT VENTURE WITH NETAFIM FOR THEBUSINESS OF DRIP IRRIGA TION SYSTEM AND THE SAID BUSINESS WAS A PART OF THE APPELLANTS BUSINESS. (B) IN HOLDING THAT THE AFORESAID EXPENDITURE WAS NOT I NCURRED FOR THE EXISTING BUSINESS BUT WAS INCURRED FOR A NEW LINE O F BUSINESS AND ACCORDINGLY, REPRESENTED CAPITAL EXPENDITURE. VIII. DISALLOWANCE OF EXPENDITURE CONSIDERED AS INCURRED INCONNECTION WITH EXEMPT INCOME 8.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN HOLDI NG THAT EXPENDITURE ESTIMATED @10% OF THE DIVIDEND INCOME AMOUNTING TO RS.92,676/- AS EXPENDITURE INCURRED IN CONNECTION WITH THE EXEMPT INCOME AND THEREBY UPHOLDING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT, PARTICULARLY IN VIEW OF THE FACT THAT NO EXPENDITURE HAD BEEN IN CURRED FOR THE PURPOSE OF EARNING DIVIDEND INCOME AND ACCORDINGLY, NO EXPENDITURE OUGHT TO HAVE BEEN DISALLOWED IN RESPECT OF EARNING EXEMPT INCOME. 6 IX. DISALLOWANCE IN RESPECT OF LOSS ON SALE OF ASSETS:RS. 18,57,210/-. 9.1 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE DISALLOWANCE OF A SUM OF RS. 1 8,57,2101-(NET) BEIN G THE LOSS ON SALE OF ASSETS. 9.2 IN DOING SO, THE COMMISSIONER OF INCOME-TAX (A PPEALS) ERRED IN THE FOLLOWING RESPECTS: (A) IN NOT APPRECIATING THE FACT THAT THE AFORESAI D LOSS WHICH AROSE ON SALE OF ASSETS OTHER THAN FIXED ASSETS I.E . STORES, CAPITAL STORES AND RAW MATERIALS WAS A NORMAL BUSINESS EXPE NDITURE ALLOWABLE UNDER SECTION 37(1) ANDACCORDINGLY, THERE WAS NO QUESTION OF ADJUSTING THE SAME IN THE SCHEDULE OF F IXED ASSETS; (B) IN HOLDING THAT THE SAID LOSS ON SALE OF ASSETS OUGHT TO HAVE BEEN REFLECTED AS CLOSING STOCK IN THE PROFIT AND LOSS A CCOUNT. X. DEDUCTION UNDER SECTION 80HH : 10.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT A PPRECIATING THAT DEDUCTION UNDER SECTION BOHH OUGHT TO HAVE BEEN ALL OWED ON THE PROFITS OF THE CONCERNED UNDERTAKINGS WITHOUT DEDUCTING THE DEPRECIATION ELIGIBLE UNDER SECTION 32 IN VIEW OF THE FACT THAT DEPRECIATION UNDER SECTION 32 IS ALLOWABLE ON THE BASIS OF THE BLOCK O F ASSETS FOR THE COMPANY AS A WHOLE AND NOT IN RESPECT OF INDIVIDUAL ASSETS OF THE CONCERNED INDUSTRIAL UNDERTAKINGS AND ACCORDINGLY, DEPRECIATION CANNOT BE ALLOCATED TO THE DIFFERENT INDUSTRIAL UND ERTAKINGS AS PER THE SCHEME OF THE INCOME-TAX ACT, 1961 IN RESPECT O F ALLOWANCE OF DEPREDATION ON THE CONCEPT OF BLOCK OF ASSETS. 10.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) FURTHER ERRED IN EXCLUDING ITEMS OF OTHER INCOME EXCEPT INCOME FROM SALE OF SCRAP, FROM THE PROFITS OF THE CONCERNED UNDERTAKINGS FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 80HH IN SPITE OF THE FACT THAT THE SA ID ITEMS OF OTHER INCOME WERE PART OF THE BUSINESS INCOME OF THE CONCERNED UNDERTAKINGS AND OUGHT TO HAVE BEEN INCLUDED IN THE PROFITS OF SUCH UNDERTAKINGS FOR THE PURPOSE OF COMPUTING THE DEDUC TION UNDER SECTION 80HH. 7 XI. DEDUCTION UNDER SECTION 80IA : 11.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT A PPRECIATING THAT DEDUCTION UNDER SECTION 80-IA OUGHT TO HAVE BEEN AL LOWED ON THE PROFITS OF THE CONCERNED UNDERTAKINGSWITHOUT DEDUCTING THE DEPRECIATION ELIGIBLE UNDER SECTION 32, IN VIEW OF THE FACT THAT DEPRECIATION UNDER SECTION 32 IS ALLOWABLE ON THE BASIS OF THE BLOCK O F ASSETS FOR THE COMPANY AS A WHOLE AND NOT IN RESPECT OF INDIVIDUAL ASSETS OF THE CONCERNED INDUSTRIAL UNDERTAKINGS AS PER THE SC HEME OF THE INCOME-TAX ACT, 1961 IN RESPECT OF ALLOWANCE OF DEP RECIATION ON THE CONCEPT OF BLOCK OF ASSETS. 11.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) FURTHER ERRED IN EXCLUDING ITEMS OF OTHER INCOME OTHER THAN INCOME EARNED FROM SALE OF SCRAP, FROM THE PROFITS OF THE CONCERNED UNDERTAKING S FOR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 80 -IA IN SPITE OF THE FACT THAT THE SAID ITEMS OF OTHER INCOME WERE PA RT OF THE BUSINESS INCOME OF THE CONCERNED UNDERTAKINGS AND O UGHT TO HAVE BEEN INCLUDED IN THE PROFITS OF SUCH UNDERTAKINGS F OR THE PURPOSE OF COMPUTING THE DEDUCTION UNDER SECTION 80-IA. XII. DEDUCTION UNDER SECTION 80HHC: 12.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOL DING THE ACTION OF THE ADDITIONAL COMMISSIONER OF INCOME-TAX AND CO MPUTING THE DEDUCTION UNDER SECTION 80HHC BY INCLUDING IN THE T OTAL TURNOVER, ITEMS OF OTHER INCOME OTHER THAN DIVIDEND, SUCH AS INTEREST, DISCOUNT, PROFIT ON SALE OF ASSETS, ETC. ALTHOUGH THERE WAS NO ELEMENTO F TURNOVER IN SUCH RECEIPTS. 12.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) FURTHER ERRED IN DISMISSING THE APPELLANTS PLEA THAT FOR THE PURPOSE OF COMPUTING T HE INDIRECT COSTS ATTRIBUTABLE TO THE TRADING GOODS EXPORTED THE EXPE NSES DEEMED TO HAVE BEEN INCURRED FOR EARNING INCOME, WHICH HAS BEEN EX CLUDED FROM PROFITS OF THE BUSINESS, HAVE TO BE REDUCED. XIII. TAX CREDIT IN RESPECT OF TAX PAID AT ANTWERP: 13.1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCOME-T AX (APPEALS) ERRED IN NOT ADMITTING THE ADDITIONAL GROUNDS OF AP PEAL FILED DURING THE APPELLATE PROCEEDINGS. 8 13.2. IN THIS CONNECTION THE APPELLANT SUBMITS THAT THE APPELLANT HAD PRAYED THAT RELIEF UNDER SECTION 90 OUGHT TO BE GRA NTED IN RESPECT OF INCOME TAXED IN BELGIUM, WHICH HAS ALSO BEEN INCLUD ED IN THE TOTAL INCOME FOR THE ABOVE ASSESSMENT YEAR. 3.1. GROUND NO.1& 2 : TAXABILITY OF ADVANCE LICENCE BENEFIT RECEIVABLE RS.52,84,674/- AND PASS BOOK BENEFIT RECEIVABLE RS. 2,98,03,293 (WRONGLY STATED AS RS.5,62,63,127/- IN GROUND OF APPEAL BUT RECTIFIED) IN THE TOTAL INCOME. 3.2. THERE IS A LONG DISCUSSION IN THE ASSESSMENT ORDER IN RESPECT OF THE GROUNDS TAKEN IN THE APPEAL. HOWEVER, BOTH THE GRO UNDS ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER ORDERS OF THE TRIBUN AL IN THE ASSESSEES OWN CASE. SO FAR AS GROUND NO.1 IS CONCERNED, WHICH RELATES T O THE TAXABILITY OF ADVANCE LICENCE BENEFITS RECEIVABLE, THE TRIBUNAL HAS DECID ED THAT NO INCOME ACCRUES UNTIL THE IMPORTS ARE MADE AND THE RAW MATERIALS AR E CONSUMED. IN THE YEAR BEFORE US, IT IS NOT IN DISPUTE THAT THE IMPORTS WE RE MADE AND THE RAW MATERIALS WERE CONSUMED IN THE SUBSEQUENT YEAR. IN SUCH CIRCUMSTANCES THE EARLIER ORDERS OF THE TRIBUNAL IN THE ASSESSEES OW N CASE APPLY. THE FIRST OF SUCH ORDERS WAS PASSED ON 6 TH OCTOBER 2003 IN ITA NO: 4346/MUM/1997 FOR THE ASSESSMENT YEAR 1992-93. IN THIS ORDER THE TRI BUNAL APPLIED AND FOLLOWED THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN JAMSHRIRAJITSINGHJISPG. &WVG. MILLS LTD. VS. IAC (1992) 41 ITD (BOM) 142, I N WHICH IT WAS HELD THAT UNTIL THE GOODS ARE IMPORTED AND THE RAW MATERIALS ARE CONSUMED, NO INCOME BY WAY OF ADVANCE LICENCE BENEFIT ACCRUES TO THE AS SESSEE. THIS ORDER WAS FOLLOWED BY THE TRIBUNAL IN ITS ORDER DATED 27 TH JANUARY 2004 FOR THE ASSESSMENT YEAR 1993-94 IN ITA NO.4145/MUM/1998. F OR THE ASSESSMENT YEAR 1995-96 THE ISSUE AGAIN CAME BEFORE THE TRIBUN AL IN ITA NO.2067/MUM/2000. THIS APPEAL WAS DISPOSED OF BY T HE TRIBUNAL ON 7 TH MARCH 2005. THIS ORDER TOOK THE SAME VIEW AS IN TH E EARLIER YEARS. WHAT IS SIGNIFICANT IN THIS ORDER IS THAT THE DEPARTMENT RE LIED ON THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF UNIT ED PHOSPHORUS LIMITED VS. JCIT (2002) 81 ITD 553 (AHD), IN WHICH A VIEW W AS TAKEN THAT THE ADVANCE LICENCE BENEFIT WAS TAXABLE IN THE YEAR IN WHICH IT WAS RECEIVED, WITHOUT WAITING FOR THE ACTUAL IMPORTS AND THE CONSUMPTION OF THE R AW MATERIAL. THIS ORDER OF THE AHMEDABAD BENCH OF THE TRIBUNAL WAS STRONGLY RE LIED UPON BY THE REVENUE IN THE APPEAL FOR THE ASSESSMENT YEAR 1995-96. THE TRIBUNAL IN ITS ORDER FOR THE ASSESSMENT YEAR 1995-96 HAS DEALT WITH THE ARGU MENTS OF THE REVENUE BASED ON THE AHMEDABAD BENCH OF THE TRIBUNAL IN PAR AGRAPHS 13 ONWARDS. IT 9 WAS HELD BY THE TRIBUNAL THAT EVERY ASPECT HIGHLIGH TED IN THE ORDER OF THE AHMEDABAD BENCH HAS BEEN DULY EXPLAINED ON BEHALF O F THE ASSESSEE. IN FACT THE TRIBUNAL TOOK THE VIEW THAT THERE WAS NO DISTIN CTION BETWEEN THE FACTS OF THE ASSESSEES CASE AND THE FACTS OF THE CASE BEFOR E THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF UNITED PHOSPHORUS LIMIT ED (SUPRA) AND THAT IT WAS IN ORDER FOR THE AHMEDABAD BENCH TO HAVE REFERRED T HE ISSUE TO A LARGER BENCH FOR THE SAKE OF CONSISTENCY, HAVING REGARD TO THE O RDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL IN JAMSHRIRAJITSINGHJISPG. &WVG. MI LLS LTD. (SUPRA). IN THIS VIEW OF THE MATTER AND FINDING NO DIFFERENCE IN THE FACTS RELATING TO THE ASSESSMENT YEAR 1995-96 AND THE FACTS FOR THE EARLI ER ASSESSMENT YEARS, THE TRIBUNAL HELD THAT THERE WAS NO REASON TO TAKE A DI FFERENT VIEW OF THE MATTER ON THE BASIS OF THE ORDER IN THE CASE OF UNITED PHOSPH ORUS LIMITED, AHMEDABAD BENCH. AFTER THIS ORDER OF THE TRIBUNAL, THE TRIBU NAL DISPOSED OF THE APPEALS RELATING TO THE ASSESSEE FOR THE ASSESSMENT YEARS 1 996-97 AND 1997-98 BY ORDER DATED 12 TH JANUARY 2009, IN WHICH THE TRIBUNAL FOLLOWED ITS O WN ORDER FOR THE ASSESSMENT YEAR 1995-96 PASSED ON 7 TH MARCH 2005, TO HOLD THAT THE ADVANCE LICENCE BENEFIT WAS NOT TAXABLE UNLESS THE GOODS HAVE BEEN IMPORTED AND THE RAW MATERIALS ARE CONSUMED. A SIMILAR VIEW WAS TAKEN BY THE TRIBUNAL AGAIN FOR THE ASSESSMENT YEAR 2004-05 IN ITA NO:225 1/MUM/2009, DATED 29 TH JULY 2010. 3.3. THUS, IN A SERIES OF ORDERS PASSED IN THE ASS ESSEES OWN CASE, THE TRIBUNAL HAS TAKEN A CONSISTENT VIEW IN FAVOUR OF T HE ASSESSEE EVEN AFTER CONSIDERING THE ORDER OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF UNITED PHOSPHORUS LIMITED (SUPRA). WE MAY ADD THAT THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1993-94 AND THE ORDER FOR T HE ASSESSMENT YEARS 1996- 97 AND 1997-98 WERE APPEALED AGAINST BY THE REVENUE BEFORE THE HONBLE BOMBAY HIGH COURT BUT SINCE NO STEPS HAD BEEN TAKEN BY THE REVENUE TO CHALLENGE THE FIRST ORDER OF THE TRIBUNAL, THE HON BLE HIGH COURT DID NOT CONSIDER IT FIT TO ADMIT THE APPEALS. COPIES OF AL L THE ORDERS OF THE TRIBUNAL AND THE JUDGMENTS OF THE HIGH COURT HAVE BEEN FILED BEF ORE US. 3.4. IT WAS THE SUBMISSION OF THE LEARNED D.R. THA T IN VIEW OF THE SPECIAL BENCH DECISION OF MUMBAI IN THE CASE OF TOP MAN EXPORTS VS. ITO 124 ITD 1 (MUM.) (S.B.) PARTICULARLY IN PARAS 33 AND 34 OF THE ORDERS, IT WAS SUBMITTED THAT INCOME ON ADVANCED LICENCE WILL ACCR UE TO THE ASSESSEE WHEN THE EXPORTS WERE MADE AND ACCORDINGLY, FOLLOWING TH E PRINCIPLES LAID DOWN BY THE SPECIAL BENCH WHICH WAS IN FACT UPHELD ULTIMATE LY BY THE HONBLE SUPREME COURT, THE ISSUE IS TO BE DECIDED AGAINST THE ASSES SEE HOLDING THAT INCOME ON ADVANCE LICENCE ARISES, THE MOMENT EXPORTS WERE DON E AND APPLICATION WAS 10 MADE AND NOT AT THE TIME OF ACTUAL IMPORTS AS CONTE NDED BY THE ASSESSEE. FURTHER, REFERRING TO THE ORDERS IN ITA. NO. 6969/M UM/2008,IT WAS SPECIALLY SUBMITTED THAT THE ITAT REFERRED TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. KALPATARUCOLOURS& CHEM ICALS 328 ITR 451 (BOM.) TO DISMISS THE REVENUES CONTENTION IN VIEW OF THE THEN EXISTING BOMBAY HIGH COURT JUDGMENT REFERRED ABOVE, WHICH WAS REVERSED B Y THE HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS VS. CIT & OTHER S IN CIVIL APPEAL NO.1699/2012. IN VIEW OF THE ABOVE, IT WAS SUBMITTE D THAT SPECIAL BENCH DECISION GOT APPROVED BY THE HONBLE SUPREME COURT. THEREFORE, THE ISSUE IS TO BE DECIDED IN LINE WITH THE SPECIAL BENCH DECISION THAT INCOME ACCRUES IN THE YEAR IN WHICH EXPORTS WERE MADE AND ASSESSEE GOT EN TITLEMENT FOR ADVANCE LICENSING. 3.5. THE LEARNED COUNSEL, HOWEVER REFERRED TO THE PRINCIPLES LAID DOWN BY THE COORDINATE BENCHES IN ASSESSEES OWN CASE AN D ALSO SUBMITTED THAT THE ISSUE IN TOPMAN EXPORTS WAS WITH REFERENCE TO THE T AXABILITY AND BIFURCATION OF THE DEPB PROCEEDS WHILE COMPUTING DEDUCTION UNDER S ECTION 80HHC AND NOWHERE CONCERNED WITH THE ISSUE BEFORE US WHICH IT SELF WAS UPHELD BY THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE. 3.6. WE HAVE CONSIDERED THE ISSUE AND PERUSED THE RECORD. AS ALREADY STATED ABOVE, THE ISSUES IN ASSESSEES OWN APPEAL I S CONSISTENTLY HELD IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF THE MUMBA I BENCH OF THE TRIBUNAL IN JAMSHRIRAJITSINGHJISPG. &WVG. MILLS LTD. VS. IAC (1 992) 41 ITD (BOM) 142. AS ALREADY STATED, THE ISSUE WAS CONFIRMED BY THE HON BLE JURISDICTIONAL HIGH COURT WHICH DISMISSED THE REVENUES APPEAL VIDE ORD ERS ITA.1183/MUM/2011 DATED 25-11-2011. IN THAT, THE QUESTION REFERRED SP ECIFICALLY IS AS UNDER : WHETHER THE ADVANCE LICENCE AND THE DEPB RECEIVABL E BY THE ASSESSEE ARE LIABLE TO BE ASSESSED TO TAX IN THE YE AR IN WHICH THE LICENCE IS GRANTED TO THE LICENSEE OR LIABLE TO BE TAXED IN THE YEAR IN WHICH THE BENEFITS ACTUALLY ACCRUE AFTER THE IMPORT S ARE EFFECTED, IS THE QUESTION RAISED IN THIS APPEAL. 3.7. THE HONBLE HIGH COURT HELD AS UNDER : 2. THE INCOME TAX APPELLATE TRIBUNAL FOLLOWING IT S DECISION IN THE CASE OF JAMSHRIRAJITSINGHJISPG. &WVG. MILLS LTD . VS. IAC REPORTED IN 41 ITD 142 HELD THAT THE SAID AMOUNTS A RE LIABLE TO BE TAXED IN THE YEAR IN WHICH THE BENEFITS ACTUALLY AC CRUE TO THE 11 ASSESSEE AND NOT IN THE YEAR IN WHICH THE LICENCE I S GRANTED. THIS COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. M/S. MAFATLAL INDUSTRIES LTD, BEING INCOME TAX APPEAL NO. 424 OF 2009 DECIDED ON 22 ND SEPTEMBER, 2009 HAS UPHELD THE DECISION OF THE INC OME TAX APPELLATE TRIBUNAL IN THE CASE OF JAMSHRIRAJITS INGHJISPG. &WVG. MILLS LTD. (SUPRA). 3. IN THIS VIEW OF THE MATTER, WE SEE NO MERIT TO ENTERTAIN THIS APPEAL. THE APPEAL IS ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS. 3.8. THEREFORE, THIS ISSUE IS NO LONGER SURVIVES F OR CONSIDERATION AS FAR AS THE INCOME TAX APPELLATE TRIBUNAL IS CONCERNED A S IT HAS CONSISTENTLY HELD THE ISSUE IN FAVOUR OF THE ASSESSEE AND WAS ALSO UP HELD BY THE HONBLE HIGH COURT. WE MAY ALSO NOTE THAT EVEN THOUGH THE ISSUE OF ACCRUAL OF INCOME ON DEPB WAS DISCUSSED BY THE SPECIAL BENCH IN PARAS 33 AND 34, THE PRESENT ISSUE IS NOT WITH REFERENCE TO DEPB BUT ADVANCE LIC ENCES WHICH IS NOT TRANSFERABLE UNLIKE THE DEPB BENEFITS GRANTED UNDER THE SCHEME. THE HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS VS. CIT , MUMBAI AND OTHERS HAD NOT DEALT WITH ACCRUAL OF INCOME BUT DEALT WITH THE ISSUE OF BRINGING TO TAX THE SALE PROCEEDS OF THE DEPB, PROFIT ON SALE OF DEPB A ND HOW THEY CAN BE CONSIDERED UNDER SECTION 28. THE ISSUE WAS NOT ABOU T THE ACCRUAL OF INCOME BUT BIFURCATION OF PROCEEDS OF DEPB/DFRC INTO FACE VALUE AND PROFIT AND YEAR OF TAXABILITY.. IN VIEW OF THIS, TO THE EXTENT OF A CCRUAL OF INCOME IS CONCERNED, WE ARE OF THE OPINION THAT ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE BY THE HONBLE HIGH COURT IN THE ORDERS RE FERRED (SUPRA). RESPECTFULLY, FOLLOWING THE SAME, WE ALLOW THE GROUNDS RAISED BY THE ASSESSEE. ASSESSING OFFICER IS DIRECTED TO DO THE NEEDFUL IN ACCORDANCE WITH THE ORDERS ON THE ISSUE AS IN THE EARLIER YEARS AND MAKE NECESSARY ADJUSTME NTS, IF ANY REQUIRED IN THE COMPUTATION. WITH THESE DIRECTIONS, GROUNDS ARE CON SIDERED AS ALLOWED. 4. GROUND NO.3 ASSESSEE IS CONTESTING DISALLOWANCE OF RS.18,891 PAYMENT IN RESPECT OF EMPLOYEES CONTRIBUTION TO ESI C THAT HAS BEEN PAID BEFORE FILING OF RETURN. NOW THE ISSUE IS COVERED B Y THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSION S LTD. 319 ITR 306 (S.C.) IN FAVOUR OF ASSESSEE. THE ASSESSING OFFICER IS DIR ECTED TO ALLOW THE AMOUNT IF PAID BY THE TIME OF FILING RETURN OF INCOME. IF ANY DEDUCTION WAS ALLOWED IN LATER YEAR OF THE SAME AMOUNT ON PAYMENT BASIS IN THAT YE AR, THE SAME CAN BE WITHDRAWN. WITH THESE DIRECTIONS THE GROUND IS ALLO WED. 12 5. GROUND NO. 4 DISALLOWANCE IN RESPECT OF ADDITIONAL SALES TAX OF RS.39826/-. IT IS PRAYER FOR DIRECTIONS TO DISPOSE OF THE RECTIFICATION PETITION FILED BEFORE ASSESSING OFFICER. IN THE ORIGINAL RET URN FILED THE ASSESSEE, THE ASSESSEE DISALLOWED AN AMOUNT OF RS.7,79,333/- WHER EAS IN REVISED RETURN, THE AMOUNT ACTUALLY DISALLOWABLE WAS CLAIMED AT RS.7,39 ,507/-. IT SEEMS THE ASSESSING OFFICER CONSIDERED THE ORIGINAL AMOUNT IN THE ORDER. ASSESSEE FILED A PETITION UNDER SECTION 154 ON 21 ST MAY, 2002 BEFORE ASSESSING OFFICER. THE CIT(A) ISSUED DIRECTIONS TO DISPOSE OF THE APPLICAT ION. IT SEEMS THE ASSESSING OFFICER HAS NOT YET DISPOSED OF THE ISSUE. ASSESSIN G OFFICER IS DIRECTED TO EXAMINE AND CONSIDER THE PETITION, IF NOT YET DONE. THE GROUND IS ALLOWED. 6. GROUND NO.5 : DISALLOWANCE OF INTEREST OF RS.50,57,260/-. THE ASSESSING OFFICER HAD DISCUSSED THIS ISSUE IN PAGE NO. 7 AND 8 OF THE ASSESSMENT ORDER WHEREIN IT WAS NOTICED BY T HE ASSESSING OFFICER THAT THE ASSESSEE HAD MADE ADVANCES IN THE FORM OF LOANS TO TWO SUBSIDIARY COMPANIES @ 6%. THE SUBSIDIARY COMPANIES ARE WEST C OAST OXYGEN LTD. AND KAMAL JYOT INVESTMENT PVT. LTD. THE ASSESSEE-COMPA NY PAID INTEREST AT THE AVERAGE RATE OF 16% ON THE BORROWINGS. INTEREST EXP ENSES WERE OF RS.28,39,43,707/-. THE ASSESSING OFFICER REQUIRED T HE ASSESSEE TO EXPLAIN WHY THE DIFFERENCE OF 10% OF INTEREST PAID SHOULD NOT D ISALLOWED. AS PER THE ASSESSMENT ORDER NO SATISFACTORY EXPLANATION WAS FU RNISHED. THE ASSESSING OFFICER RELIED UPON THE DECISION OF ALLAHABAD HIGH COURT IN THE CASE OF SARIA SUGAR MILLS P. LTD. (193 ITR 375) AND ALSO ON THE D ECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF PHALTON SUGAR WORKS LTD. 201 I TR 711. THE DISALLOWANCE MADE IN RESPECT OF THE INTEREST ATTRIBUTABLE TO THE FUNDS LENT TO TWO SUBSIDIARY COMPANIES WAS OF RS.47,84,717/-. IT WAS ALSO NOTICE D BY THE ASSESSING OFFICER THAT INTEREST FREE LOANS WERE ALSO GIVEN TO M/S. AG ROCEL PESTICIDES LTD. RS.17,03,397/- AND M/S. TRULY CREATIVE BUILDERS RS. 20,00,000/-. IT WAS SUBMITTED THAT ADVANCE TO TRULY CREATIVE BUILDERS I S FOR THE PURCHASE OF PROPERTY AND NOT A LOAN. NO SATISFACTORY EXPLANATIO N WAS FURNISHED REGARDING INTEREST FREE LOANS TO M/S. AGROCEL PESTICIDES LTD. INTEREST @ 16% ATTRIBUTABLE TO THE INTEREST FREE LOANS TO M/S. AGROCEL PESTICID ES LTD. WAS ALSO DISALLOWED. IT AMOUNTS TO RS.2,72,543/-. IT WAS SUBMITTED BY ASSES SEE BEFORE CIT(A) THAT THE LOANS TO THE SUBSIDIARY COMPANIES AND THE LOAN TO A GROCEL PESTICIDES LTD. WERE MADE FROM THE ASSESSEES MIXED FUNDS AND NO SPECIFI C BORROWINGS WERE MADE FOR ADVANCING THE SAID LOANS. IT WAS ALSO SUBMITTED THAT THE ENTIRE INTEREST PAYMENT WAS ELIGIBLE FOR DEDUCTION UNDER SECTION 36 (1) (III) OF THE ACT AND THE ASSESSING OFFICER ERRED IN COMPUTING NOTIONAL INTER EST @ 16% AND DISALLOWING THE EXCESS OF THE SAID AMOUNT OVER THE INTEREST REC EIVED OUT OF INTEREST PAID. 13 FURTHER, IT WAS SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, VIDE LETTER DATED 20 TH NOVEMBER, 2000, ASSESSEE SUBMITTED DETAILS OF LOAN S TO SUBSIDIARY COMPANIES EXPLAINING THE SOURCES OF FUND S FROM WHICH THE LOANS WERE GIVEN AND RATE OF INTEREST CHARGED, DETAILS OF ADVANCES RECOVERABLE IN CASH OR IN KIND OR FOR VALUE TO BE RECEIVED ALONG WITH S TATEMENT SHOWING DETAILS OF INTEREST RECEIVED. THE ASSESSEE VIDE LETTER DATED 2 ND MARCH, 2001 ALSO FURNISHED A STATEMENT SHOWING NOTIONAL INTEREST AT THE RATE O F 10% ON LOANS GIVEN TO SUBSIDIARY COMPANIES, AS REQUIRED BY THE ASSESSING OFFICER. ON AN APPEAL BEFORE THE CIT(A), THE LEARNED CIT(A) CONFIRMED THE SAME FOLLOWING THE ORDERS OF HIS PREDECESSORS. 6.1. IT WAS SUBMITTED THAT THE ISSUE WAS RESTORED TO THE ASSESSING OFFICER IN EARLIER YEARS AND THE AMOUNT WAS ALLOWAB LE FOLLOWING THE PRINCIPLES LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF S .A.BUILDERS VS. CIT 288 ITR 1 (S.C.). IT WAS FURTHER SUBMITTED THAT THE AMO UNT OF RS.17,03,397/- IN RESPECT OF AGROCEL PESTICIDES SHOWN AS SUNDRY LOA N WAS NOT A LOAN BUT REPRESENTS OUTSTANDING AMOUNT IN THE ORDINARY COURS E OF BUSINESS AND AMOUNT OF RS.2,72,583/- ON THE ABOVE AMOUNT AT 16% WAS WRO NGLY DISALLOWED. AS THE ISSUE OF DISALLOWANCE OF INTEREST U/S. 36(1)(III) W AS RESTORED TO THE ASSESSING OFFICER IN EARLIER YEARS, WHICH WE WERE INFORMED TH AT NO ORDER HAS BEEN PASSED YET BY THE ASSESSING OFFICER, IN THE INTEREST OF JU STICE, WE RESTORE THE MATTER TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATI ON. ASSESSING OFFICER IS DIRECTED TO CONSIDER THE FACTS, SUBMISSIONS AND CASE LAW REL IED ON THE ISSUE AND DECIDE ACCORDINGLY. THE GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NO.6 . THE ISSUE IN THIS GROUND IS WITH REFERENCE TO PAYMENT TO CLUBS. IN CLAUSE 4 (XI) OF THE TAX AUDIT REPORT FOR THE ASSESSMENT YEAR 1998-99, AN AMOUNT OF RS.1,62,665/- WAS SHOWN AS PAYMENTS TO CLUB. IN NOTE NO.7 OF THE NOTES TO COMPUTATION OF TOTAL INCO ME, IT WAS SUBMITTED THAT THE EXPENDITURE IN RESPECT OF PAYMENT OF CORPORATE MEMBERSHIP FEES WAS NOT CONSIDERED AS DISALLOWABLE IN THE RETURN OF INCOME SINCE THE SAID EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND WAS ALLOWABLE UNDER SECTION 37 (1). DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE ASSESSEE VIDE LETTERS DATED 22 ND FEBRUARY, 2001 AND 27 TH FEBRUARY, 2001 SUBMITTED DETAILS OF THE AFORESAID PAYMENTS AND FUR NISHED AN EXPLANATION IN RESPECT OF THE SAME. AT PAGE 9 OF THE ASSESSMENT OR DER, THE ENTIRE AMOUNT OF RS.2,61,668/- IN RESPECT OF PAYMENTS TO CLUBS HAS B EEN DISALLOWED ON THE GROUND THAT ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH THAT THE EXPENDITURE ON PAYMENTS TO CLUBS HAS BEEN INCURRED WHOLLY AND EXCL USIVELY FOR THE BUSINESS PURPOSES. IT WAS SUBMITTED BEFORE CIT(A) THAT ASSE SSING OFFICER ALSO ERRED IN 14 DISALLOWING AN AMOUNT OF RS.2,61,668/- INSTEAD OF R S.1,62,665/0- SHOWN IN CLAUSE 4 (XI) AS PER THE TAX AUDIT REPORT.CIT(A) UP HELD THE ORDER. 7.1. IT WAS SUBMITTED THAT THE DETAILS OF PAYMENTS TO CLUBS AND PAYMENTS TO CREDIT CARD AGENCIES WERE SUBMITTED TO ASSESSING OFFICER VIDE LETTER DATED 22-2-2001 AND 27-2-2001 (PAGES 63 AND 64 OF P APER BOOK). PAYMENTS TO CLUBS ARE IN THE NATURE OF YEARLY SUBSCRIPTION SO T HE SAME CANNOT BE CONSIDERED AS CAPITAL IN NATURE. THE OTHER AMOUNT O F RS.99,003/- WAS PERTAINING TO CREDIT CARD AGENCIES. IT IS SUBMITTED THAT FOLLOWING THE PRINCIPLES LAID DOWN BY OTIS ELEVATORS CO. INDIA VS. CIT 191 I TR 682 (BOM.) THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ALLOWABLE UNDER SECTION 37(1). ON PRINCIPLES OF LAW LAID DOWN THE EXPENDITURE IS ALLOWABLE AND THE CIT(A) GAVE A FIND ING THAT THE AMOUNT OF RS.1,62,665/- WAS YEARLY SUBSCRIPTION SO THE SAME C ANNOT BE CAPITAL EXPENDITURE. HOWEVER, THE DETAILS ARE NOT EXAMINED BY ASSESSING OFFICER SO THE ISSUE IS REMITTED TO ASSESSING OFFICER TO RE-EXAMIN E THE DETAILS AND ALLOW ACCORDINGLY, FOLLOWING THE PRINCIPLES OF LAW ON THE ISSUE. 8. GROUND NO.7 . THE ISSUE IN THIS GROUND IS WITH REFERENCE TO DISALLOWANCE OF RS.7,50,000/- PAID ON LEGAL AND PRO FESSIONAL FEES ON THE REASON THAT IT WAS INCURRED FOR NEW BUSINESS.DURING THE PR EVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1998-99, THE ASSESSEE INCURRED EXPE NDITURE OF RS.1,50,66,690/- IN RESPECT OF LEGAL AND PROFESSION AL EXPENSES. THE SAID AMOUNT INCLUDED INTER ALIA, AN AMOUNT OF RS.7,50,00 0/- IN RESPECT OF FEES PAID FOR CONSULTANCY REGARDING THE JOINT VENTURE WITH NI TAFIM. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE VIDE LETTER DA TED 9 TH MARCH, 2001 SUBMITTED A COPY OF THE BILL IN RESPECT OF THE SAID EXPENSES AND MADE SUBMISSIONS IN RESPECT OF THE SAID ISSUE. AT PAGE 1 0 OF THE ASSESSMENT ORDER, THE AFORESAID EXPENDITURE OF RS.7,50,000/- HAS BEEN DISALLOWED ON THE GROUND THAT THE SAID EXPENDITURE HAS BEEN INCURRED FOR A N EW LINE OF BUSINESS AND ACCORDINGLY, REPRESENTS CAPITAL EXPENDITURE. IT IS SUBMITTED BY THE ASSESSEE BEFORE CIT(A) THAT THE EXPENDITURE OF RS.7,50,000/- TOWARDS FEES PAID FOR CONSULTANCY REGARDING THE ADDITIONAL VENTURE WITH N ITAFIMWAS FOR THE BUSINESS OF DRIP IRRIGATION SYSTEM IN THE LINE OF BUSINESS, HENCE REVENUE EXPENDITURE. IN RESPECT OF DISALLOWANCE OF RS.21,500/- IT HAS BEEN HELD THAT THIS AMOUNT HAS BEEN DISALLOWED SEPARATELY AND HENCE RESULTED INTO DOUBLE DISALLOWANCE. THE CIT(A) UPHELD THE ORDER TO THE EXTENT OF RS. 7,50,0 00 AS CAPITAL EXPENDITURE ON NEW PROJECT. 8.1. IT WAS SUBMITTED THAT THE AMOUNT WAS PAID TOW ARDS CONSULTANCY FEES FOR THE BUSINESS OF DRIP IRRIGATION SYSTEM WHI CH WAS PART OF EXISTING 15 BUSINESS AND NOT A NEW LINE OF BUSINESS. REFERRING TO NOTES TO ACCOUNTS, IT WAS SUBMITTED THAT ASSESSEE WAS ALREADY IN TRADING OF D RIP IRRIGATION SYSTEM AND JOINT VENTURE WAS FOR MANUFACTURING THE SAME PRODUC T. IT IS SUBMITTED THAT THE EXPENDITURE WAS INCURRED FOR THE SAME LINE OF BUSIN ESS AND RELIED ON THE FOLLOWING CASE LAW. (I) VEECUMSEES VS. CIT 220 ITR 185 (S.C.) (II) CIT VS. TATA CHEMICALS LTD. 256 ITR 395 (BOM.) (III) SPECIAL LEAVE PETITION FILED BY THE DEPARTMENT IN T HE CASE OF TATA CHEMICALS LTD. REJECTED. (IV) KALYANI STEELS LTD. VS. DCIT 62 ITD 233 (PUNE). 8.2. WE HAVE CONSIDERED THE ISSUE. AS NOTED THE AS SESSEE IS ALREADY IN THE BUSINESS OF TRADING DRIP IRRIGATION SYSTEMS APA RT FROM PESTICIDES. THIS BUSINESS IS EXTENSION OF EXISTING LINE OF BUSINESS. SO FOLLOWING THE PRINCIPLES LAID DOWN BY THE ABOVE CASE LAW REFERRED, WE ALLOW THE EXPENDITURE AS REVENUE IN NATURE. ACCORDINGLY, THIS GROUND IS ALLOWED. 9. GROUND NO.8 . THE ISSUE IN THIS GROUND IS DISALLOWANCE OF EXPENDITURE CONSIDERED AS INCURRED IN CONNECTION WI TH EXEMPT INCOME RS.92,674/-. THE ASSESSEE CONTENDED THAT NO EXPENDI TURE OUGHT TO BE DISALLOWED IN RESPECT OF EARNING EXEMPT INCOME AS T HE SAME HAS NOT BEEN INCURRED FOR THE PURPOSE OF EARNING DIVIDEND INCOME AND THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS : (I) GODREJ INDUSTRIES LTD. VS. DCIT ITA.1090/MUM /2009 (II) GODREJ AGROVET LTD. VS. ACIT ITA.1629/MUM/2 009 (III) DCIT VS. PHILIPS CARBON BLACK LTD. (THIRD ME MBER) (IV) DCIT VS. VATICAN COMMERCIAL LTD. ITA.880/KOL/2011 (V) CIVIL ENGINEERS LTD. VS. DCIT ITA .859/KOL/2001 (VI) ITO VS. BPS SECURITIES (P) LTD. ITA.123/KOL /2010 (VII) THIRUMALAI CHEMCIALS LTD. ITA.2072/MUM/2009 9.1 WE HAVE CONSIDERED THE ISSUE. IT IS FAIRLY ADMI TTED THAT THE ISSUE IS COVERED BY THE DECISIONS OF VARIOUS HIGH COURTS IN FAVOUR OF THE ASSESSEE. FURTHER, IT WAS CONSIDERED THAT IN THE ASSESSMENT Y EAR 1995-96 THE TRIBUNAL VIDE PARA NO. 20 AND 21 HAS UPHELD THE DISALLOWANCE TO THE TUNE OF 0 .5% OF THE GROSS INCOME WHICH WAS EARNED TO THE EXTENT OF RS.9 4,81,601/-. IN ASSESSMENT YEAR 1996-97 THE SAME WAS ALSO FOLLOWED DIRECTING T HE ASSESSING OFFICER TO RE- CALCULATE THE DISALLOWANCE AT 0.5% OF THE GROSS DIV IDEND INCOME. IT WAS FAIRLY 16 ADMITTED IN THE CASE OF GODREJ VS. ACIT IN ITA.1629 /MUM/2009 AND GODREJ INDUSTRIES LTD. VS. DCIT ITA.NO.1090/MUM/2009 THAT THE EXPENDITURE ON DIVIDEND INCOME WAS ESTIMATED AT 5% OF THE GROSS DI VIDEND INCOME. CONSIDERING THE FACT THAT IN ASSESSEES OWN CASE 0. 5% WAS ALLOWED IN EARLIER YEARS WHILE CONSIDERING THE AMOUNT OF DIVIDEND EARN ED AT RS.9,26,746/-, AND IN OTHER CASES AT 5%,WE ESTIMATE THE EXPENDITURE RE LATABLE TO EARNING THE EXEMPT INCOME AT 2% OF THE AMOUNT, WHICH IN OUR VIE W IS A REASONABLE AMOUNT CONSIDERING THE INVESTMENT OF RS.13.32 CRORES MADE AND DIVIDEND EARNED THEREON. ACCORDINGLY, THE ASSESSING OFFICER IS DIRE CTED TO RECALCULATE THE DISALLOWANCE AS ABOVE AT 2% OF GROSS DIVIDEND. THE GROUND IS PARTLY ALLOWED. 10. GROUND NO.9 DISALLOWANCE IN RESPECT OF LOSS ON SALE OF ASSET S AT RS.21,75,590/- (WRONGLY SHOWN AS RS.18,57,210/- IN GROUNDS. FROM THE PERUSAL OF THE P & L ACCOUNT OF THE ASSESSEE-COMPAN Y AND THE SCHEDULE OF OPERATING AND OTHER EXPENSES, IT IS SEEN THAT THE A SSESSEE-COMPANY HAS DEBITED AN AMOUNT OF RS.15,60,000/- ON ACCOUNT OF LOSS ON S ALE OF ASSET. HOWEVER, THE SAME HAS NOT BEEN ADDED BACK IN THE COMPUTATION OF TOTAL INCOME. THE ASSESSEE-COMPANY HAS REDUCED THE PROFIT ON SALE OF ASSET FROM THE TAXABLE INCOME IN THE COMPUTATION OF INCOME. THE LOSS ON SA LE OF ASSET HASBE ADJUSTED IN THE SCHEDULE OF FIXED ASSET AND THE SAME CANNOT BE ALLOWED AS A BUSINESS EXPENDITURE TO THE ASSESSEE-COMPANY. HENCE, RS.15,6 0,000/- IS DISALLOWED BY THE ASSESSING OFFICER TO THE ASSESSEE-COMPANY AS LO SS ON SALE OF ASSET DEBITED TO P & L ACCOUNT. ON AN APPEAL BEFORE THE CIT(A), I T IS SUBMITTED BY THE ASSESSEE THAT PROFIT/LOSS ON SALE OF FIXED ASSETS ( NET) AMOUNTING TO RS.2,97,214/- WAS ALREADY REDUCED FROM THE TOTAL IN COME, THAT THE BALANCE LOSS WHICH AROSE ON SALE OF ASSETS OTHER THAN FIXED ASSE TS I.E., STORES, CAPITAL STORES AND RAW MATERIALS WAS A NORMAL BUSINESS EXPENDITURE ALLOWABLE UNDER SECTION 37 (1) AND ACCORDINGLY, THERE WAS NO QUESTION OF AD JUSTING THE SAME IN THE SCHEDULE OF FIXED ASSETS. IN THE P & L ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 1998, AN AMOUNT OF RS. 15.60 LAKHS WAS SHOWN AS LOS S ON SALE OF ASSETS (NET) IN SCHEDULE Q MANUFACTURING AND OTHER EXPENSES. D URING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE VIDE LETTER DA TED 9 TH MARCH, 2001 FURNISHED DETAILS OF THE SAME WHICH IS SUMMARIZED A S FOLLOWS: (RS) (A) PROFIT ON SALE OF FIXED ASSETS (NET) 2,97,213 .38 (B) LOSS ON SALE OF STORES & CAPITAL STORES 2 1,75,590.38 (C) PROFIT ON SALE OF RAW MATERIALS (NET) 3,1 8,380.73 --------------------------- 15,59,996.28 17 IN THE RETURN OF INCOME, THE ASSESSEE HAD REDUCED A N AMOUNT OF RS.2,97,214/- BEING PROFIT ON SALE OF FIXED ASSETS SINCE THE SAME WAS CONSIDERED SEPARATELY IN THE BLOCK OF ASSETS WHILE COMPUTING DEPRECIATION. T HE BALANCE AMOUNT BEING THE NET LOSS ON SALE OF ITEMS OF STORES, CAPITAL ST ORES AND RAW MATERIALS WAS CLAIMED AS A DEDUCTION SINCE IT REPRESENTED A NORMA L BUSINESS LOSS INCURRED ON SALE OF CONSUMABLE ASSETS. IN THE AFORESAID LETTER DATED 9 TH MARCH, 2001, THE ASSESSEE EXPLAINED THAT THE SAID LOSS SHOULD NOT BE ADDED BACK WHILE COMPUTING THE TOTAL INCOME. IN PARA 11 OF THE ASSES SMENT ORDER, THE AMOUNT OF RS.15,60,000/- HAS BEEN DISALLOWED ON THE GROUND TH AT THE LOSS ON SALE OF ASSETS WILL BE ADJUSTED IN THE SCHEDULE OF FIXED AS SETS AND CANNOT BE ALLOWED AS A BUSINESS EXPENDITURE TO THE ASSESSEE. THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE DESERVES RELIEF REGARDING THE AMOUNT OF RS .2,97,214/- FOR THE REASON THAT THE SAME WAS CONSIDERED BY THE ASSESSEE WHILE WORKING OUT WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS FOR THE PURPOSE OF COM PUTING DEPRECIATION. PROFIT ON SALE OF RAW MATERIAL (NET) RS.3,18,381/- IS TAXABLE AS INCOME OF THE ASSESSEE AND THE SAME HAS BEEN OFFERED BY THE ASSESSEE. THE MAIN ISSUE RELATES TO LOSS ON SALE OF STORES AND CAPITAL STORES OF RS.21,75,59 0/-. IT IS SUBMITTED BY THE ASSESSEE THAT STORES AND CAPITAL STORES DO NOT FORM PART OF THE BLOCK OF ASSETS AND, THEREFORE, THE LOSS SHOULD BE ALLOWED AS NORMA L BUSINESS EXPENDITURE. THE ASSESSEE HAD DEBITED THE ADJUSTED FIGURE OF RS.15,5 9,996/- IN THE P & L A/C. THE MOOT POINT IS WHETHER THE ITEMS OF THE STORES A ND CAPITAL STORES WERE REFLECTED AS CLOSING STOCK IN THE PROFIT AND LOSS A CCOUNT. IF THESE ITEMS FORMED PART OF THE CLOSING STOCK, THEN THE LOSS INCURRED O N SALE OF THE SAME IS ADMISSIBLE AS DEDUCTION TO THE ASSESSEE FOR THE REA SON THAT THE SALE PROCEEDS SUBSTITUTE THE VALUE OF CLOSING STOCK AT A LOWER FI GURE. IF THE PURCHASE VALUE OF STORES AND CAPITAL STORES HAS NOT BEEN SHOWN IN THE CLOSING STOCK AND ALLOWED AS DEDUCTION AT THE TIME OF PURCHASE ITSELF, THEN N O DEDUCTION ON ACCOUNT OF LOSS ON SUCH SALE WOULD BE ALLOWED TO THE ASSESSEE. RATHER, THE WHOLE SALE VALUE SHOULD GO IN THE CREDIT SIDE OF THE PROFIT AN D LOSS ACCOUNT. THE ASSESSEE HAS NOT MADE ANY SUBMISSION TO THE EFFECT THAT THE PURCHASE VALUE OF STORES AND CAPITAL STORES WERE REFLECTED IN THE CLOSING ST OCK, EITHER BEFORE THE ASSESSING OFFICER OR DURING THE HEARING OF THE APPE AL. AS THE ASSESSEE HAS NOT PROVED THAT THE STORES WERE REFLECTED IN THE CLOSIN G STOCK, THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED. ACCORDINGLY, TH E LEARNED CIT(A) PARTLY ALLOWED THE CLAIM OF THE ASSESSEE. 10.1. BEFORE US, THE LEARNED COUNSEL CONTENDED THA T THE ASSESSEE HAS REDUCED AN AMOUNT OF RS.2,97,214/- IN THE RETURN OF INCOME BEING PROFIT ON SALE OF FIXED ASSETS SINCE THE SAME WAS CONSIDERED SEPARATELY IN THE BLOCK OF ASSETS WHILE COMPUTING DEPRECIATION. FURTHER, THE B ALANCE LOSS ARISING ON SALE 18 OF ASSETS OTHER THAN FIXED ASSETS I.E., STORES, CAP ITAL STORES AND RAW MATERIALS IS A NORMAL BUSINESS EXPENDITURE AND ACCORDINGLY, IT O UGHT TO BE ALLOWED AS A DEDUCTION UNDER SECTION 37 (1). THE SAID LOSS DID N OT REPRESENT LOSS ON SALE OF DEPRECIABLE FIXED ASSETS AND ACCORDINGLY, COULD NOT BE ADJUSTED IN THE BLOCK OF ASSETS. THE LEARNED CIT(A) UPHELD THE DISALLOWANCE ON THE GROUND THAT THE ASSESSEE HAS NOT PROVED THAT THE PURCHASE VALUE OF THE CAPITAL STORES WAS REFLECTED IN THE CLOSING STOCK WITHOUT TAKING INTO ACCOUNT THE PURCHASE VALUE WOULD EITHER BE IN PURCHASES OR IN THE CLOSING STOC K AS IS EVIDENT FROM THE ANNUAL ACCOUNTS VIDE SCHEDULE G AND Q FORMING P ART OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 1998. THEREFOR E, THE LEARNED COUNSEL CONTENDED THAT THE LOSS ON SALE OF CAPITAL STORES O UGHT TO BE ALLOWED AS A DEDUCTION. ON THE OTHER HAND, THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 10.2. WE HAVE CONSIDERED THE ISSUE. THE LOSS ON CO NSUMABLE STORES IS AN ALLOWABLE LOSS. HOWEVER, THE ASSESSING OFFICER DISA LLOWED ONLY RS.15,60,000/-, WHEREAS, ASSESSEE CONTENDS THAT THE AMOUNT AT RS.21 ,75,590/-. THIS ISSUE REQUIRE RECONCILIATION. THEREFORE, ASSESSING OFFICE R IS DIRECTED TO EXAMINE THE AMOUNT INVOLVED AND ALLOW THE SAME AS LOSS ON CONSU MABLE STORES. ACCORDINGLY, THIS GROUND IS ALLOWED. 11. GROUND NO.10 AND 11 : DEDUCTION UNDER SECTION 80HH/ 80IA. IT WAS CONTENTION THAT DEDUCTION UNDER SECTION 80HH/ 8 0IA OUGHT TO HAVE BEEN ALLOWED ON THE PROFITS OF THE CONCERNED UNDERTAKING S WITHOUT DEDUCTING THE DEPRECIATION ELIGIBLE UNDER SECTION 32 IN VIEW OF T HE FACT THAT DEPRECIATION UNDER SECTION 32 IS ALLOWABLE ON THE BASIS OF THE B LOCK OF ASSETS FOR THE COMPANY AS A WHOLE AND NOT IN RESPECT OF INDIVIDUAL ASSETS OF THE CONCERNED INDUSTRIAL UNDERTAKINGS AND ACCORDINGLY, DEPRECIATI ON CANNOT BE ALLOCATED TO THE DIFFERENT INDUSTRIAL UNDERTAKINGS AS PER THE SC HEME OF THE INCOME-TAX ACT, 1961. IT IS ALSO CONTENTION THAT THE ASSESSING OFFI CER ERRED IN EXCLUDING ITEMS OF OTHER INCOME SUCH AS SALE OF SCRAP ETC., FROM THE PROFITS OF THE CONCERNED UNDERTAKINGS FOR THE PURPOSE OF COMPUTING THE DEDUC TION UNDER SECTION 80HH /80IA .ON AN APPEAL RESPECTFULLY FOLLOWING THE DECI SION OF HIS PREDECESSORS IN ASSESSEES OWN CASE, THE LEARNED CIT(A) CONFIRMED T HE ACTION OF THE ASSESSING OFFICER IN RESPECT OF DEDUCTION UNDER SECTION 80HH/ 80IA. THE LEARNED COUNSEL FAIRLY CONCEDED THAT ISSUE OF DEPRECIATION IS AGAIN ST THE ASSESSEE IN EARLIER YEARS IN VIEW OF THE DECISION IN THE CASE OF PLASTI BENDS INDIA LTD. VS. ADDL. CIT 185 ITR 187 (BOM.). THERFORE, ON THIS ISSUE THAT PA RT OF GROUND ON CLAIM OF DEPRECIATION WAS DISMISSED. 19 11. 2 WITH REGARD TO ITEMS OF OTHER INCOME EXCEPT SALE OF SCRAP ETC., NOT TO BE EXCLUDED FROM PROFITS U/S 80IA, THE LEARNED C OUNSEL SUBMITTED THAT THIS ISSUE WAS SQUARELY COVERED BY THE DECISION IN EARLI ER YEARS IN ASSESSEE FAVOUR, WHERE AS U/S 80HH IT WAS AGAINST. WE DECIDE THIS IS SUE IN FAVOUR OF THE ASSESSEE FOR DEDUCTION U/S 80IA FOLLOWING THE ORDER S IN EARLIER YEARS. ACCORDINGLY, WE REJECT GROUND 10 AND PARTLY ALLOW T HE GROUND 11 OF THE ASSESSEE. 12. GROUND NO 12(A) :DEDUCTION UNDER SECTION 80HHC :THE ASSESSING OFFICER WORKED OUT THE TOTAL TURNOVER INCLUDING CE RTAIN INCOMES. THE DETAILS OF WHICH ARE EXTRACTED IN PARA 24.2 BY THE CIT(A). IT WAS SUBMITTED THAT MANY OF THE ITEMS LIKE DIVIDEND ETC., ARE INCOME FROM OTHE R SOURCES AND THE SAME DOES NOT FORM PART OF TURNOVER AND FURTHER TOTAL TURNOVE R IS TO BE CONSIDERED ONLY IN RESPECT OF GOODS SOLD AND CANNOT INCLUDE THE OTHER INCOME. THE CIT(A) DIFFERED FROM HIS PREDECESSOR ORDER AND CONFIRMED THE INCLUS ION OF OTHER INCOMES LIKE RENT, INTEREST, BROKERAGE, SALES TAX REFUND AS PART OF TOTAL TURNOVER. THE ASSESSEE WHILE CONTESTING THE GROUND HAS RESTRICTED THE ARGUMENTS ONLY TO THE ITEMS OF RENT, INTEREST, BROKERAGE AND SALES TAX RE FUND WHICH ARE INCLUDED IN THE TOTAL TURNOVER WHILE NOT PRESSING FOR THE OTHER ITEMS LIKE MANUFACTURING CHARGES, INSURANCE CLAIM ETC., 12.1. WE HAVE CONSIDERED THE ISSUE AND RIVAL SUBMI SSIONS. AS SEEN FROM THE ORDERS IN EARLIER YEARS, THE CIT(A) GAVE RELIEF FOLLOWING BOARD CIRCULAR NO. 621 DATED 19-12-1991 STATING THAT THE TOTAL TURNOVE R HAS TO BE CONSIDERED ONLY IN RESPECT OF THE GOODS SOLD AND CANNOT INCLUDE OTH ER INCOME. HOWEVER, THE PRESENT CIT(A) DIFFERED FROM THE FINDING IN EARLIER YEARS STATING THAT CLAUSE (BAA) DOES NOT INCLUDE THESE ITEMS AND PROFITS OF BUSINES S, THEREFORE, THEY HAVE TO BE FORM PART OF TURNOVER. WE ARE UNABLE TO UNDERSTAND THE LOGIC OF THE CIT(A) IN DIFFERING FROM HIS PREDECESSOR ORDER WHICH WAS BASE D ON BOARD CIRCULAR. BOARD CIRCULAR WAS BINDING ON REVENUE AUTHORITIES. FURTH ER, REVENUE HAS NOT CONTESTED THE FINDING OF THE LEARNED CIT(A) IN EARL IER YEARS. THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A) ERRED IN DIFFERING FROM TH E PREDECESSOR ORDER AND CONFIRMED CERTAIN OTHER INCOMES AS PART OF TOTAL TU RNOVER. SINCE, THE HONBLE SUPREME COURT ALSO HAS CONFIRMED IN THE CASE OF LAX MI MACHINE WORKS 290 ITR 667 THAT EVEN EXCISE DUTY AND SALES TAX WHICH D O NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER, SI MILAR LOGIC ALSO APPLIES TO THE OTHER INCOMES WHICH DOES NOT HAVE ANY BEARING ON TH E EXPORT TURNOVER AND TOTAL TURNOVER, WHILE WORKING OUT THE DEDUCTION UND ER SECTION 80HHC. THEREFORE, THIS GROUND OF THE ASSESSEE IS ALLOWED A ND ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE AMOUNTS SHOWN IN THE OTHER INCOME UNDER THE HEAD 20 RENT, INTEREST, BROKERAGE AND SALES TAX REFUND AN D ON THE BALANCE ITEMS AS THE GROUND WAS NOT PRESSED, NO DIRECTIONS ARE REQUIRED. GROUND IS PARTLY ALLOWED. 12.2. GROUND NO 12(B) : DEDUCTION U/ 80HHC: THIS GROUND PERTAIN TO NOT REDUCING THE ENTIRE COSTS, THE EXPENSES DEEMED TO BE INCURRED FOR EARNING INCOME WHICH HAS BEEN REDUCED TO ARRIVE AT THE PROF ITS OF THE BUSINESS FOR COMPUTING THE INDIRECT COST ATTRIBUTABLE TO THE TRA DING GOODS EXPORTED. IT IS SUBMITTED THAT THE EXPENDITURE ATTRIBUTABLE TO EARN ING INCOME WHICH HAS REDUCED THE COMPUTE PROFITS OF BUSINESS IS ESTIMATE D AT 10% AS PER BOARD CIRCULAR NO. 621 ISSUED BY CBDT. ACCORDINGLY, 10% O F THE SAID INCOME DEEMED TO BE EXPENSES INCURRED FOR EARNING THE SAID INCOME AND TO BE REDUCED WHILE CALCULATING THE INDIRECT COST. THIS ISSUE IS IN FAV OUR OF THE ASSESSEE FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF HERO EXPORTS 295 ITR 454. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO CONSIDER THE ABOVE WHILE CALCULATING 80HHC IN THE CONSEQUENTIAL ORDERS. THIS GROUND IS CONSIDERED AS ALLOWED. 13. GROUND NO. 13 : TAX CREDIT IN RESPECT OF TAX PAID AT ANTWERP : 13.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCO ME TAX (APPEALS) ERRED IN NOT ADMITTING THE ADDITIONAL GRO UNDS OF APPEAL FILED DURING APPELLATE PROCEEDINGS. 13.2. IN THIS CONNECTION, THE APPELLANT SUBMITS THA T THE APPELLANT HAD PRAYED THAT RELIEF UNDER SECTION 90 OUGHT TO BE GRANTED IN RESPECT OF INCOME TAXED IN BELGIUM, WHICH HAS ALSO BEEN INCLUDED IN THE TOTAL INCOME FOR THE ABOVE ASSESSME NT YEAR. 13.1. WHEN THE GROUND WAS RAISED BEFORE THE LEARN ED CIT(A) AS ADDITIONAL GROUND, THE LEARNED CIT(A) REJECTED THE SAME BY HOLDING AS UNDER : 28.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT. IN MY CONSIDERED OPINION THERE IS NO VALID REASON T O ADMIT THE ADDITIONAL GROUND OF APPEAL TAKEN BY THE APPELLANT. THE PAYMENT OF TAX, IF ANY, WAS NOT MADE DURING THE PREVIOUS YEAR UNDER CONSIDERATION. THE LIABILITY TO PAY SUCH TAX IN BEL GIUM ALSO DID NOT ARISE DURING THE PREVIOUS YEAR UNDER CONSIDERATION. THE CLAIM OF RELIEF DOES NOT ARISE EITHER FROM THE PROFIT AND LO SS ACCOUNT OR FROM 21 THE ASSESSMENT ORDER. THE PAYMENT HAS BEEN ACCOUNTE D FOR THE FIRST TIME IN F.Y. 1999-2000 RELEVANT FOR A.Y. 2000-01. C ONSIDERING THESE FACTORS, ADDITIONAL GROUND OF APPEAL RAISED BY THE APPELLANT IS NOT ADMITTED. 13.2. WE HAVE CONSIDERED THE ISSUE AND RIVAL SUBMI SSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE AND LEARNED DR. SINCE THE ASSESSEE HAS RAISED THIS ISSUE AS ADDITIONAL GROUND BEFORE THE LEARNED CIT(A ), THIS IS NOT AN ADDITIONAL GROUND BEFORE US AND THEREFORE, IT HAS TO BE CONSID ERED ON ITS MERITS. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RAMGOPALGANPATRAI& SONS LTD. VS. CIT 24 ITR 362 (BO M.).IT WAS SUBMITTED THAT THE RELEVANT RELEIF UNDER SEC.90 OF IT ACT OUG HT TO BE GRANTED IN RESPECT OF INCOME TAXED IN BELGIUM WHICH WAS ALSO INCLUDED IN THE TOTAL INCOME IN THE IMPUGNED ASSESSMENT YEAR. IN SUPPORT OF THE SAME, A COPY OF THE NOTE FILED BY BELGIUM ACCOUNTANT FOR PAYMENT OF TAX IN BELGIUM, A COPY OF THE ASSESSMENT NOTE RECEIVED FROM OVERSEAS CONTROL DEPARTMENT, ANT WERP AND PROOF OF PAYMENT OF TAX WERE FILED, IN ADDITION TO WRITTEN S UBMISSIONS FILED BEFORE THE CIT(A). SINCE THE AMOUNTS WERE ALREADY INCLUDED IN THE ASSESSEES INCOME AND STATED IN THE COMPUTATION OF INCOME, THIS ISSUE HAS TO BE EXAMINED BY THE ASSESSING OFFICER AND NECESSARY RELIEF HAS TO BE GR ANTED AS PER THE PROVISIONS OF THE ACT. FOR THIS PURPOSE, WE REMIT THE ISSUE TO TH E FILE OF THE ASSESSING OFFICER FOR DETAILED EXAMINATION OF THE CONTENTIONS AND TAK E NECESSARY DECISION WHILE GIVING CREDIT TO THE AMOUNT OF TAX PAID IN BELGIUM AS PER LAW. WITH THIS DIRECTION, THE GROUND IS CONSIDERED AS ALLOWED. ITA. NO. 3688/MUM/ 2003 : 14. THE REVENUE HAS RAISED FOLLOWING GROUNDS IN IT S APPEAL : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN ALLOWING RS.4,32,563/- AS E XPENSES ON RURAL DEVELOPMENT U/S. 37(1). ON DOING SO, THE LEAR NED CIT(A) FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE HAD FAILED TO ESTABLISH THAT THE EXPENDITURE IN QUESTION HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR PURPOSES OF BUSINESS AS PROVIDED U/S. 37(1). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO WORK-OUT THE DEDUCTION U/S. 80HH, 80I AND 80IA IN RELATION T O EACH OF THE 22 ELIGIBLE UNIT ON THE BASIS OF ITS PROFIT WITHOUT AD JUSTING THE SAME AGAINST THE LOSSES OF OTHER UNITS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO RECALCULATE THE DEDUCTION U/S. 80HHC AFTER EXCLUDIN G EXCISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER OF THE ASSESS EE, OVERLOOKING THE FACT THAT THE DECISION OF THE JURISDICTIONAL HI GH COURT ON THIS ISSUE IN THE CASE OF M/S. SUDARSHAN CHEMICALS INDS. LTD. 245 ITR 769 HAS BEEN CONTESTED BY THE DEPARTMENT BEFORE THE HONBLE SUPREME COURT OF INDIA. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN FOLLOWING THE DECISION OF S UDERSHAN CHEMICALS INDS. LTD. 245 ITR 769 AND IN IGNORING TH E DECISION OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF HINDUS TAN PETROLEUM CORPORATION LTD. 143 ITR 318 ON THE SAME ISSUE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN IGNORING THE FACT THAT ACCO RDING TO THE PRINCIPLES OF PROCEDURE, A DIVISION BENCH OF A HIGH COURT SHOULD FOLLOW THE DECISION OF ANOTHER DIVISION BENCH OF EQ UAL STRENGTH OR A FULL BENCH OF THE SAME HIGH COURT AND THUS THE DE CISION OF THE MUMBAI HIGH COURT IN THE CASE OF HINDUSTAN PETROLEU M CORPORATION LTD. 143 ITR 318 SHOULD HAVE BEEN FOLLO WED. 15. GROUND NO.1 PERTAIN TO ALLOWANCE OF RS.4,32,563/- AS EXPENSES UNDER RURAL DEVELOPMENT BY THE CIT(A). IT WAS CONTE NDED THAT THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT THAT ASSESSEE HAD FAILED TO ESTABLISH THE EXPENDITURE IN QUESTION HAD BEEN INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE LEARNED CIT(A) ALLOWED THA T THE PAYMENTS WERE MADE TO STUDY CLIMATIC CONDITIONS AND USE OF PESTICIDES IN SUCH CLIMATIC CONDITIONS AS WELL AS DETAILED ANALYSIS OF SOIL IN KUTCH DIVIS ION IN THE STATE OF GUJARAT AS THE ASSESSEE-COMPANY IS ENGAGED IN THE MANUFACTURE OF PESTICIDES. THE CIT(A) HELD THAT EXPENDITURE INCURRED IS TO PROMOTE THE BU SINESS. SINCE, THERE ARE NO REASONS GIVEN BY THE ASSESSING OFFICER FOR DISALLOW ING THE EXPENDITURE AS NON- BUSINESS EXPENDITURE, WE AFFIRM THE FINDINGS OF THE LEARNED CIT(A) AND DISMISS THE GROUND. 23 16. GROUND NO.2 PERTAINS TO THE DEDUCTION OF 80HH, 80I AND 80IA IN RELATION TO EACH OF ELIGIBLE UNIT ON THE BASIS OF P ROFIT WITHOUT ADJUSTIING THE SAME AGAINST THE LOSSES OF OTHER UNITS. IT WAS FAIR LY SUBMITTED THAT THIS ISSUE IS ALSO AGAINST THE REVENUE AND IN FAVOUR OF THE ASSES SEE BY THE ORDERS OF THE I.T.A.T. IN ASSESSMENT YEARS 1996-97 AND 1997-98 AN D FURTHER THIS ISSUE IS SUPPORTED BY THE JUDGMENT OF THE HONBLE SUPREME CO URT IN THE CASE OF CIT VS. CANARA WORKSHOPS LTD. 161 ITR 320 (S.C.) AND THE DE CISION OF KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SIDDAGANGAOIL EXTRACTI ONS (P) LTD. 201 ITR 968 (KAR.). RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN THEREIN, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDERS OF THE CIT( A) WHICH IS ACCORDING TO LAW. SINCE THIS ISSUE WAS ALSO CONFIRMED BY THE I.T.A.T. IN EARLIER YEARS, WHICH THE CIT(A) HAS FOLLOWED, THE REVENUE GROUND IS REJECTED . 17. GROUND NOS. 3 TO 5 PERTAIN TO ISSUE OF EXCLUDING EXCISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER OF THE ASSESSEE. THE REVENUE HAS RAISED THE GROUND ON THE REASON THAT JURISDICTIONAL HIGH COURT JUDGMENT IN THE CASE OF M/S. SUDERSHAN CHEMICALS LTD. 245 ITR 769 HAS BEEN CONTESTED BY THE DEPARTMENT BEFORE THE HONBLE SUPREME COURT OF INDI A. NOW, THIS ISSUE IS SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF LAXMI MACHINE WORKS 290 ITR 667 (S.C.) WHEREIN IT WAS HELD THAT EXCISE DUTY AND SALES TAX WOULD NOT HAVE AN ELEMENT OF TURNOVER AND THEY OUGHT NOT TO B E INCLUDED IN THE TOTAL TURNOVER OR EXPORT TURNOVER. IN VIEW OF THE JUDGMEN T OF THE HONBLE SUPREME COURT AFFIRMING THE JURISDICTIONAL HIGH COURT ORDER , WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). GROUND NO. 3 TO 5 ARE REJECTED. 18. IN THE RESULT, APPEAL OF THE REVENUE IS DISMIS SED . ITA. NO. 1247/MUM/2006 :(ASSESSEE APPEAL AY 1999-2000) 19. IN THIS APPEAL FOR ASSESSMENT YEAR 1999-2000 T HE ASSESSEE HAS RAISED 12 GROUNDS WHICH ARE AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN NOT GIVING A DIRECTION TO T HE DEPUTY COMMISSIONER OF INCOME TAX TO ALLOW THE APPELLANTS CLAIM FOR WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF ONE AND ONE FOURTH TIMES OF THE EXPENDITURE INCURRED ON SCIENTIFIC RES EARCH ON IN- HOUSE RESEARCH AND DEVELOPMENT FACILITY AMOUNTING T O RS.4,99,80,124/- ON RECEIPT OF APPROVAL FROM THE PR ESCRIBED AUTHORITY. 24 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ENTIRE MIS CELLANEOUS INCOME OF RS.1,61,02,000/-, OTHER THAN SALE OF SCRA P AMOUNTING TO RS.1,46,82,016/- OUGHT TO BE REDUCED FROM THE P ROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UN DER SECTION 80HHC. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT 90% OF THE GR OSS INTEREST AND OTHER RECEIPTS AND NOT THE NET INTEREST AND OTHE R RECEIPTS OUGHT TO BE CONSIDERED FOR EXCLUSION FROM THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHC. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN DIRECTING THE DEPUTY COMMIS SIONER OF INCOME TAX TO FIND OUT THE AMOUNT OF DEDUCTION GIV EN U/S.80IA FOR THE KHARADPADA AND ROHA UNIT (IN THE FORMER CAS E ELIGIBLE FOR 100% AND IN THE LATER CASE 30% OF DEDUCTION) AND AD JUST THE SAME AMOUNT AS NOT DEDUCTION U/S. 80HHC. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ENTIRE MIS CELLANEOUS INCOME OTHER THAN SALE OF SCRAP OUGHT TO BE EXCLUDE D FROM THE PROFITS OF THE CONCERNED UNDERTAKINGS FOR THE PURPO SE OF COMPUTING THE DEDUCTION UNDER SECTION 80HH. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN REJECTING THE APPELLANTS C LAIM THAT EXPORT INCENTIVES OUGHT NOT TO BE EXCLUDED FROM THE PROFIT S OF THE UNDERTAKINGS WHILE COMPUTING DEDUCTION UNDER SECTIO N 80HH. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ENTIRE MIS CELLANEOUS INCOME OTHER THAN SALE OF SCRAP OUGHT TO BE EXCLUDE D FROM THE PROFITS OF THE CONCERNED UNDERTAKINGS FOR THE PURPO SE OF COMPUTING DEDUCTION UNDER SECTION 80IA. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN REJECTING THE APPELLANTS C LAIM THAT EXPORT 25 INCENTIVES OUGHT NOT TO BE EXCLUDED FROM THE PROFIT S OF THE UNDERTAKINGS WHILE COMPUTING DEDUCTION UNDER SECTIO N 80IA. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E DEPUTY COMMISSIONER OF INCOME TAX IN DISALLOWING A SUM OF RS.49,84,000/- OUT OF INTEREST PAID. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE UNDER SECTION 14A IN RESPECT OF EXPENDITURE INCURRED FOR EARNING TAX FREE INCOME TO THE EXTENT OF 10% OF THE TAX FREE INCOME. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN REJECTING THE CLAIM FOR DED UCTION IN RESPECT OF WEALTH TAX PAID AMOUNTING TO RS.1,72,123/-. 12. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.37,800/- BEING EXPENDITURE ON FINES AND PENALTIE S. OUT OF THE ABOVE GROUNDS THE ASSESSEE HAS NOT PRESS ED GROUND NO. 1, 2 AND 12. HENCE, THEY ARE TREATED AS DISMISSED AS NOT PRESSED 20. GROUND NO.3 PERTAINS TO THE ISSUE OF EXCLUSION OF NET RECEIPTS WHILE COMPUTING THE PROFITS OF BUSINESS UNDER SECTION 80H HC (BAA). IT WAS SUBMITTED THAT INTEREST RECEIVED & CREDITED TO THE P & L ACCO UNT AMOUNTED TORS.388.79 LAKHS WHILE INTEREST PAID AND DEBITED AMOUNTED TO R S.2312.31 LAKHS. ACCORDINGLY, THERE IS NET DEBIT IN THE AMOUNT OF I NTEREST. IT WAS SUBMITTED THAT AS PER EXPLANATION BAA BELOW SECTION 80HHC(IV)(A), THE WORD RECEIPT REFERS THE NET RECEIPTS AND NOT GROSS RECEIPTS. ACCORDINGL Y, IT WAS SUBMITTED THAT NO PORTION OF THE INTEREST INCOME OUGHT TO BE REDUCED WHILE COMPUTING PROFITS OF THE BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SEC TION 80HHC. THIS WAS SUPPORTED BY THE HONBLE SUPREME COURT IN THE CASE OF ALG ASSOCIATES CAPSULES LTD. VS. CIT 67 DTR 205. 20.1. AFTER CONSIDERING THE ISSUE AND EXAMINING TH E RECORD, WE ARE OF THE OPINION THAT ASSESSEES CONTENTION OUGHT TO BE ACCE PTED ON PRINCIPLES. THE HONBLE SUPREME COURT HAS DECIDED THE ISSUE IN FAVO UR OF THE ASSESSEE THAT ONLY NET INTEREST INCOME HAS TO BE EXCLUDED AT 90% WHILE WORKING OUT THE 26 PROFITS OF BUSINESS INVOKING EXPLANATION BAA. HOWEV ER, WE ARE NOT SURE WHETHER THE ENTIRE INTEREST CREDITED AND PAID ARE H AVING NEXUS TO EACH OTHER AND HOW MUCH OF THE AMOUNT HAS TO BE CONSIDERED. TH IS ASPECT OF VERIFICATION OF THE AMOUNT IS RESTORED TO THE FILE OF THE ASSESS ING OFFICER WITH A DIRECTION THAT THE ASSESSING OFFICER SHOULD CONSIDER ONLY THE NET AMOUNTS WHILE WORKING OUT THE RECEIPT OF INTEREST WHILE COMPUTING THE P ROFITS OF BUSINESS. WITH THIS DIRECTION, THE GROUND IS CONSIDERED ALLOWED. 21. GROUND NO.4 PERTAIN TO THE ISSUE OF REDUCING THE ENTIRE DEDUCTI ON UNDER SECTION 80IA FROM THE PROFITS OF BUSINESS WHI LE COMPUTING THE DEDUCTION UNDER SECTION 80HHC. IT WAS THE CONTENTION THAT DED UCTION UNDER SECTION 80HHC AND 80IA ARE SEPARATE AND WHILE CALCULATING T HE AMOUNT OF DEDUCTION, THESE ARE TO BE SEPARATELY CONSIDERED WITHOUT REDUC ING FROM THE ONE FROM THE OTHER. SINCE THE JURISDICTIONAL HIGH COURT IN THE C ASE OF ASSOCIATE CAPITALS PVT. LTD. 332 ITR 42 HELD IN FAVOUR OF THE ASSESSEE, WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE JURISDICTIONAL HIGH COURT ORDER AND R E-WORKOUT THE DEDUCTION ACCORDINGLY. GROUND IS CONSIDERED AND ALLOWED ACCOR DINGLY. 22. GROUND NO.5 PERTAINS TO THE ISSUE OF EXCLUDING OTHER INCOME FR OM PROFITS WHILE COMPUTING DEDUCTION UNDER SECTION 80H H. THIS ISSUE WAS DECIDED AGAINST THE ASSESSEE IN EARLIER ASSESSMENT YEARS 19 96-97 AND 1997-98. SIMILAR ISSUE IS ALSO DECIDED IN APPEAL 4240/MUM/2003. RESP ECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE ASSESSEES GROUND. 23. GROUND NO.6 PERTAINS TO EXPORT INCENTIVES NOT TO BE EXCLUDED F ROM PROFITS OF THE UNDERTAKING WHILE COMPUTING THE DEDU CTION UNDER SECTION 80HH. WHILE ADMITTING THAT THE DECISION IS AGAINST THE AS SESSEE BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT 317 ITR 218, THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY SUBMITTED T HAT ASSESSEE HAS ALREADY EXCLUDED EXPORT INCENTIVE FROM THE PROFITS OF THE I NDUSTRIAL UNDERTAKING FOR COMPUTING THE DEDUCTION UNDER SECTION 80HH. THE ASS ESSING OFFICER IS DIRECTED TO EXAMINE THIS ASPECT AND IF THE ASSESSEE HAS ALRE ADY EXCLUDED THE AMOUNTS, THERE IS NO NEED TO FURTHER EXCLUDE THE AMOUNT. SUB JECT TO THE VERIFICATION, THE ISSUE ON PRINCIPLES DECIDED AGAINST THE ASSESSEE AN D IN FAVOUR OF THE REVENUE FOLLOWING THE PRINCIPLES LAID DOWN BY THE HONBLE S UPREME COURT (SUPRA). 24. GROUND NO.7 PERTAINS TO THE ITEMS OF OTHER INCOME OTHER THAN S ALE OF SCRAP NOT TO BE EXCLUDED FROM PROFITS WHILE COMP UTING DEDUCTION UNDER SECTION 80IA. IT WAS FAIRLY SUBMITTED THAT THIS DEC ISION IS IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF THE ITAT IN ASSE SSMENT YEARS 1996-97 AND 1997-98 AND THE COORDINATE BENCH DECISION IN ACIT V S. MAX LABORATORIES LTD. 27 92 ITD 11 (CUTTACK). RESPECTFULLY FOLLOWING THE ABO VE, WE ALLOW THE GROUND OF THE ASSESSEE. 25. GROUND NO.8 PERTAINS TO EXPORT INCENTIVES NOT TO BE EXCLUDED F ROM THE PROFITS OF THE UNDERTAKING WHILE COMPUTING DEDU CTION UNDER SECTION 80IA. THIS GROUND BECOMES INFRUCTUOUS AS IT WAS SUBMITTED THAT ASSESSEE HAS ALREADY EXCLUDED EXPORT INCENTIVES FROM THE PROFITS OF THE INDUSTRIAL UNDERTAKING FOR COMPUTING THE DEDUCTION UNDER SECTI ON 80IA. THEREFORE,THE GROUND IS REJECTED. ASSESSING OFFICER, IS HOWEVER, DIRECTED TO VERIFY THIS ASPECT WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80IA. 26. GROUND NO.9 PERTAINS TO DISALLOWANCE OUT OF INTEREST PAID OF RS.49,84,000/-. ASSESSING OFFICER CONSIDERED AN AMO UNT OF RS.49,84,000/- AS INTEREST NOT ALLOWABLE UNDER SECTION 36(I)(III) CON SEQUENT TO CERTAIN ADVANCE TO GROUP CONCERNS. IT WAS THE SUBMISSION THAT LOANS WE RE GRANTED OUT OF COMMERCIAL EXPEDIENCY AND RELIED ON THE DECISION OF S.A.BUILDERS LTD. VS. CIT AND ANOTHER 288 ITR 1 (S.C.). FURTHER, IT WAS FAIRL Y ADMITTED THAT THIS ISSUE WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR F RESH CONSIDERATION IN ASSESSMENT YEARS 1996-97 AND 1997-98. WHILE CONSIDE RING THE APPEAL ITA. NO. 4240/MUM/2003 IN ASSESSMENT YEAR 1998-99 AGAINST GR OUND NO. 5 AT PARA 6.1, WE RESTORED THE MATTER TO THE FILE OF THE ASS ESSING OFFICER IN THAT YEAR. SINCE THE FINDINGS HAVE A BEARING IN THIS YEAR, IN THE INTEREST OF JUSTICE, THIS ISSUE IS ALSO RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION. HOWEVER, ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO MAKE NECESSARY SUBMISSIONS. ACCORDINGLY, THIS GROUND IS ALLOWED FO R STATISTICAL PURPOSES. 27. GROUND NO.10 PERTAINS TO DISALLOWANCE OF EXPENDITURE CONSIDERED AS INCOME IN CONNECTION WITH THE EXEMPT INCOME. THE ASSESSEE EARNED AN AMOUNT OF RS.19,65,557/- AS DIVIDEND INCOME AND CLA IMED EXEMPTION UNDER SECTION 10 (33) OF THE ACT. HOWEVER, THE ASSESSING OFFICER NOTICED THE INVESTMENT MADE AND CAME TO THE CONCLUSION THAT AMO UNT OF RS.4.86 CRORES OUT OF INTEREST BEARING FUNDS WERE ESTIMATED AS UTI LIZED FROM MAKING INVESTMENTS AND ACCORDINGLY AN AMOUNT OF RS.77,91,0 00/- WAS DISALLOWED AS EXPENDITURE INCURRED IN CONNECTION WITH THE EXEMPT INCOME. AFTER CONSIDERING THE SUBMISSIONS THE LEARNED CIT(A) HOWEVER ESTIMATE D THE EXPENDITURE AT 10% OF DIVIDEND WHICH THE ASSESSEE IS CONTESTING. THIS ISSUE WAS DECIDED IN EARLIER YEARS AND BY US ALSO IN ITA.NO. 4240/MUM/2003VIDE G ROUND 8 PARA NO. 9.1. FOLLOWING THE REASONS GIVEN THEREIN, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO 2% OF THE GROSS DIVIDEND EARNED WHICH MEETS THE ENDS OF JUSTICE. ACCORDINGLY, THIS GROUND IS PARTLY ALLOWED . 28 28. GROUND NO.11 PERTAINS TO CLAIM OF WEALTH TAX PAYMENT OF RS.1,72,123/-. EVENTHOUGH IT WAS CONTENDED THAT PRO VISIONS OF SECTION 40A(IIA) ARE NOT ATTRACTED ON THE GROUND THAT EXPLANATION TO SECTION 40A(IIA) SPECIFICALLY EXCLUDES ANY TAX CHARGEABLE WITH REFERENCE TO THE V ALUE OF ANY PARTICULAR ASSET OF THE BUSINESS OR PROFESSION, IT WAS FAIRLY CONCED ED THAT THIS ISSUE IS DECIDED AGAINST THE ASSESSEE BY THE COORDINATE BENCH IN THE CASE OF BACHARAJ FACTORIES LTD. VS. ACIT 56 ITD 225 (BOM.). IN VIEW OF THE ABO VE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED BY THE ASS ESSEE. 29. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA.NO.1300/MUM/2006 : (REVENUE APPEAL) 30. IN THE REVENUE APPEAL THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER NOT TO TAX IN THIS YEAR ADVANCE LICENCE BEN EFIT RECEIVABLE OF RS.41,67,174/- AND PASS BOOK BENEFIT RECEIVABLE OF RS.5,33,19,279/-. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO TREAT THE EXPENDITURE AS REVENUE IN RESP ECT OF SOFTWARE EXPENSES CAPITALIZED IN THE ACCOUNTS OF RS.4,97,700/-. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO ALLOW DEDUCTION IN RESPECT OF CONTRIBUTI ON TO APPROVED GRATUITY FUND OF RS.2,49,32,113/- AS PER S ECOND PROVISO TO SECTION 43B TO THE EXTENT OF AMOUNT PAID UPTO THE DATE OF FILING OF THE RETURN. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER NOT TO EXCLUDE 90% OF SALES TAX REFUND, INS URANCE CLAIM, TECHNICAL FEES AND MISCELLANEOUS INCOME FROM THE 29 PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTIN G DEDUCTION U/S. 80HHC. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO COMPUTE THE INDIRECT COST AS PER THE AUD IT REPORT U/S. 80HHC AS WAS BEING FOLLOWED BY ASSESSING OFFICER IN EARLIER YEAR. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO ALLOW 10% OF INCOME BY WAY OF EXPORT INC ENTIVES, INTEREST, RENT ETC., EXCLUDED FROM PROFITS OF THE B USINESS AS PER EXPLANATION (BAA) BELOW SECTION 80HHC (4A) AFTER TA KING INTO ACCOUNT THE DIRECTION GIVEN IN THE APPELLATE ORDER WHILE COMPUTING THE INDIRECT COSTS ATTRIBUTABLE TO EXPORT OF TRADING GOODS. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER NOT TO EXCLUDE INCOME FROM SALE OF SCRAP FR OM OTHER INCOME FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 80HH & 80IA. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO RE-COMPUTE THE DEDUCTION U/S. 80HH IN RE LATION TO EACH OF THE ELIGIBLE UNIT ON THE BASIS OF ITS PROFI TS WITHOUT DEDUCTING LOSSES INCURRED BY OTHER UNITS. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO RECOMPUTED THE DEDUCTION U/S. 80HH ON TH E ELIGIBLE PROFITS OF THE UNIT WITHOUT REDUCING THERE FROM THE BROUGHT FORWARD LOSSES U/S. 80I AND 80IA. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO DISALLOW 10% OF THE TAX FREE INCOME WITH OUT APPRECIATING THE FACT THAT DURING THE RELEVANT YEAR THE ASSESSING OFFICER HAS QUANTIFIED THE INTEREST EXPEN DITURE OF 30 RS.77.91 LAKHS INCURRED IN CONNECTION WITH EXEMPT I NCOME OF DIVIDEND ETC., 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO TREAT THE AMENDMENT WITH RETROSPECTIVE E FFECT FOR SECOND PROVISO TO SECTION 43B WHICH HAS BEEN OMITTE D W.E.F. 1 ST APRIL, 2004. 12. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) WAS NOT RIGHT IN DIRECTING THE A SSESSING OFFICER TO MAKE ADJUSTMENTS U/S. 145A TO OPENING ST OCK. 31. GROUND NO.1 PERTAINS TO THE TAXABILITY OF ADVANCE LICENCE BENE FIT RECEIVABLE AND PASSBOOK BENEFIT RECEIVABLE. THIS IS SUE IS CONSIDERED IN FAVOUR OF THE ASSESSEE IN ITA.NO.4430/MUM/--AT GROUND NO. 1 A ND 2. FOR THE DETAILED DISCUSSION MADE THEREIN, THIS ISSUE IS TO BE HELD A GAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. THE LEARNED CIT(A) FOLLOWED THE ORDER OF THE COORDINATE BENCH WHILE GRANTING RELIEF AND THIS ISSUE HAS ALRE ADY ELABORATELY DISCUSSED AS THE COORDINATE BENCH DECISION HAS BEEN UPHELD BY TH E HONBLE BOMBAY HIGH COURT. ACCORDINGLY, THERE IS NO MERIT IN THE REVENU ES GROUNDS AND HENCE, DISMISSED. 32. GROUND NO.2 PERTAINS TO ALLOWING THE SOFTWARE EXPENSES OF RS.4,97,700/- AS REVENUE EXPENDITURE. DURING THE YE AR THE ASSESSEE INCURRED EXPENDITURE OF RS.4,97,700/- WHICH WAS CAPITALIZED IN THE BOOKS OF ACCOUNT. HOWEVER, IN THE RETURN OF INCOME, THE AFORESAID EXP ENDITURE WAS CLAIMED AS DEDUCTION AS REVENUE ALLOWABLE UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER DID NOT ALLOW THE SAME. WHEREAS, THE LEARNE D CIT(A) AFTER CONSIDERING THE FACTS OF THE EXPENDITURE AND VARIOUS CASE LAW O N THE ISSUE ALLOWED IT WITH A CONCLUSION THAT THE SOFTWARE DOES NOT BELONG TO THE ASSESSEE AND ASSESSEE DOES NOT HAVE ANY RIGHT THEREIN AND IT WAS ONLY AN APPLI CATION AND SO THERE IS NO ENDURING VALUE OR LONG TERM BENEFIT. ACCORDINGLY, H E ALLOWED IT AS REVENUE EXPENDITURE WHICH THE REVENUE IS CONTESTING NOW. 32.1. AFTER CONSIDERING THE ORDER OF THE CIT(A) AN D RIVAL SUBMISSIONS AND CASE LAW RELIED UPON BY THE ASSESSEE, WE UPHOLD THE ORDER OF THE CIT(A). THERE IS NO MERIT IN REVENUE GROUND. ACCORDINGLY, THE SAM E WAS DISMISSED. IN CASE, THE ASSESSING OFFICER ALLOWED ANY DEPRECIATION ON T HE ABOVE AMOUNT WHILE TREATING IT AS CAPITAL EXPENDITURE, THE SAME CAN BE WITHDRAWN. 31 33. GROUND NO. 3 AND 11 PERTAINS TO DISALLOWANCE OF CONTRIBUTION TO APPROVED GRATUITY FUND. ASSESSEE DEBITED AN AMOUNT OF RS.2,49,32,113/- IN RESPECT OF CONTRIBUTION TO APPROVED GROUP GRATUITY INSURANCE SCHEME. THE ASSESSEE SUBMITTED THAT AMOUNT OF RS.1,60,00,000/- WAS PAID ON VARIOUS DATES BEFORE 31 ST MARCH, 1999 AND BALANCE AMOUNT OF RS.89,72,113/- W AS PAID ON 25 TH MAY, 1999. THE ASSESSING OFFICER REJECTED THE SUBM ISSIONS VIDE PARA 6 OF THE ASSESSMENT ORDER AND DISALLOWED THE ENTIRE AMOU NT UNDER SECTION 43B ON THE GROUND THAT ASSESSEE HAS NOT FURNISHED ANY PROO F IN RESPECT OF PAYMENTS. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT ASS ESSEE HAS FURNISHED ALL THE DETAILS AND RELIED ON THE DECISION OF THE DELHI TRI BUNAL IN ACIT VS. R.R. LTD. 93 TTJ 144. THE LEARNED CIT(A) FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ALLIED MOTORS PVT. LTD. VS. CI T 224 ITR 677 (S.C.) HELD THAT OMISSION OF THE SECOND PROVISO WHICH WAS AN EXCEPTI ON TO THE FIRST PROVISO HAS TO BE HELD TO BE RETROSPECTIVE. THEREFORE, THE AMEN DMENT TAKES RETROSPECTIVE EFFECT AND ACCORDINGLY ANY CONTRIBUTION TO APPROVED GRATUITY PAID BEFORE THE FILING OF THE RETURN HAS TO BE ALLOWED AS A DEDUCTI ON. THE REVENUE IS CONTESTING THE SAME. IT WAS FAIRLY SUBMITTED THAT THIS DECISIO N IS AGAINST THE REVENUE BY THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COU RT IN THE CASE OF CIT VS. M/S. ALOM EXTRUSIONS LTD. 319 ITR 306 (S.C.). ACCOR DINGLY, THE ORDER OF THE LEARNED CIT(A) DOES NOT REQUIRE ANY MODIFICATION. T HE REVENUE GROUND IS THEREFORE DISMISSED. 34. GROUND NO.4 PERTAINS TO REDUCING 90% OF THE VARIOUS ITEMS AND OTHER INCOME WHILE COMPUTING THE PROFITS OF BUSINES S UNDER SECTION 80HHC. THE ASSESSING OFFICER HAS INCLUDED SALES TAX REFUND , INSURANCE CLAIMS, TECHNICAL FEES AND MISCELLANEOUS RECEIPTS WHILE CON SIDERING THE AMOUNTS TO BE INCLUDED AS OTHER INCOME IN BAA. LEARNED CIT(A) AFT ER EXAMINING THE NATURE OF THE AMOUNTS HELD THAT THIS AMOUNTS CANNOT BE EXCLUD ED AT 90% AS THEY ARE BUSINESS RECEIPTS. 34.1. AFTER CONSIDERING RIVAL SUBMISSIONS AND PRIN CIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF AFJAL INDIA LT D. 295 ITR 451 AND OTHER CASE LAW RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE ARE OF THE OPINION THAT THE CIT(A) HAS CORRECTLY CONCLUDED THA T THESE RECEIPTS ARE BUSINESS RECEIPTS AND NEED NOT BE EXCLUDED WHILE ARRIVING AT THE PROFITS OF BUSINESS UNDER BAA. ACCORDINGLY, REVENUE GROUND IS REJECTED. 35. GROUND NO. 5 AND 6 PERTAIN TO WORKING OF INDIRECT COST. IT WAS SUBMITTED THAT ASSESSING OFFICER DIFFERED FROM THE WORKING IN EARLIER YEARS AND HAS RE-WORKED OUT THE INDIRECT COST AND THE CIT(A) HAS CORRECTLY ALLOWED THE AMOUNTS. AFTER CONSIDERING THE ORDER OF THE LEARNED CIT(A) AND THE PRINCIPLES 32 LAID DOWN BY THE SPECIAL BENCH OF MUMBAI, I.T.A.T. IN SURENDRA ENGINEERING CORPORATION 86 ITD 121 AND HONBLE SUPREME COURT IN THE CASE OF HERO EXPORTS 295 ITR 454, WE CONFIRM THE ORDER OF THE CI T(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 36. GROUND NO.7 PERTAINS TO THE ISSUE OF NOT EXCLUDING SALE OF SCR AP WHILE COMPUTING DEDUCTION UNDER SECTION 80HH AND 80 IA. IT WAS FAIRLY ADMITTED THAT THIS ISSUE IS IN FAVOUR OF THE ASSESS EE BY THE ORDERS OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSMENT YEAR S 1996-97 AND 1997-98. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDE R OF THE CIT(A) AND DISMISS THE GROUND. 37. GROUND NO. 8 PERTAINS TO THE DEDUCTION UNDER SECTION 80HHC HAS TO BE COMPUTED IN RESPECT OF EACH ELIGIBLE UNIT WIT HOUT TAKING LOSSES INCURRED BY OTHER UNITS. THIS ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN OTHER APPEAL AT GROUND NO.2 I.E., REVENU E APPEAL. THEREFORE, RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THE GRO UND. 38. GROUND NO.9 PERTAINS TO DEDUCTION UNDER SECTION 80HH TO BE ALLOWED ON PROFITS WITHOUT DEDUCTING BROUGHT FORWAR D LOSSES UNDER SECTION 80I AND 80IA. THIS ISSUE IS COVERED IN FAVOUR OF THE AS SESSEE BY THE ORDERS OF I.T.A.T. IN ASSESSMENT YEARS 1996-97 AND 1997-98 AT PARA 70 AND 73. THIS ISSUE WAS DISCUSSED ELABORATELY IN ITA. NO. 2009/MU M/2000 IN ASSESSMENT YEAR 1996-97 VIDE PARA 73 WHICH READS AS UNDER : 73. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL CONTENTIONS. IT IS OBSERVED FROM PARA 12.5 OF THE ORDER OF THE CIT(A) THAT HE HAS FOLLOWED THE DECISION OF THE TRIBUNAL I N ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1986-87 TO HOLD THAT T HE DEDUCTION UNDER SECTION 80HH HAS GOT TO BE CALCULATED WITHOUT ADJUSTING THE SAME AGAINST LOSSES OF OTHER UNITS. IN OUR VIEW, T HERE IS NO INFIRMITY IN THE ORDER OF THE CIT(A) IN ISSUING THE ABOVE DIR ECTION. IN THE CASE OF SYNCO INDUSTRIES LTD. (SUPRA), THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF OIL AND CHEMICALS. IT HAD A UNIT FOR O IL DIVISION IN SIROHI AND A UNIT FOR CHEMICAL DIVISION IN JODHPUR. FOR T HE ASSESSMENT YEARS 1990-91 AND 1991-92 IT HAD EARNED PROFITS IN BOTH THE UNITS. BUT IN THE EARLIER YEARS THE ASSESSEE HAD SUFFERED LOSSES IN THE OIL DIVISION. IN RELATION TO THE DEDUCTION UNDER SECTI ONS 80HH AND 80-I OF THE INCOME-TAX ACT, 1961, IT CLAIMED THAT EACH U NIT SHOULD BE TREATED SEPARATELY AND THE LOSSES SUFFERED IN THE E ARLIER YEARS BY THE OIL DIVISION WERE NOT ADJUSTABLE AGAINST THE PROFIT S OF THE CHEMICAL 33 DIVISION. BUT SINCE THE GROSS TOTAL INCOME WAS NIL THE ASSESSING OFFICER HELD THAT THE ASSESSEE WAS NOT ENTITLED TO THE BENEFIT OF DEDUCTIONS UNDER CHAPTER VI-A. THE TRIBUNAL AND TH E HIGH COURT AFFIRMED THE VIEW OF THE ASSESSING OFFICER. ON APP EAL, THE SUPREME COURT: - HELD, AFFIRMING THE DECISION OF THE HIGH COURT, THAT THE HIGH COURT WAS JUSTIFIED IN HOLDING THAT THE LOSS F ROM THE OIL DIVISION WAS REQUIRED TO BE ADJUSTED BEFORE DET ERMINING THE GROSS TOTAL INCOME AND AS THE GROSS TOTAL INCOM E WAS NIL THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCT IONS UNDER CHAPTER VI-A WHICH INCLUDED SECTIONS 80HH AND 80- I. THE EFFECT OF CLAUSE (5) OF SECTION 80B OF THE INCO ME-TAX ACT, 1961, IS THAT GROSS TOTAL INCOME WILL BE ARRIVED AT AFTER MAKING THE COMPUTATION AS FOLLOWS: (I) MAKING DEDUC TIONS UNDER THE APPROPRIATE COMPUTATION PROVISIONS; (II) INCLUDING THE INCOMES, IF ANY, UNDER SECTIONS 60 TO 64 IN THE TOTAL INCOME OF THE INDIVIDUAL; (III) ADJUSTING INTRA-HEA D AND/OR INTER-HEAD LOSSES; AND (IV) SETTING OFF BROUGHT FOR WARD UNABSORBED LOSSES AND UNABSORBED DEPRECIATION, ETC. ONLY IF THE GROSS TOTAL INCOME SO DETERMINED IS POSITIVE THE QUESTION OF ALLOWING THE DEDUCTIONS UNDER CHAPTER V I-A WOULD ARISE, NOT OTHERWISE. IT IS WELL SETTLED THAT WHERE THE PREDOMINANT MAJOR ITY OF THE HIGH COURTS HAVE TAKEN A CERTAIN VIEW ON THE INTERP RETATION OF CERTAIN PROVISIONS, THE SUPREME COURT SHOULD LEA N IN FAVOUR OF THAT VIEW. THE WORDS INCLUDES ANY PROFITS IN SECTION 80-I(1) ARE IMPORTANT AND INDICATE THAT THE GROSS TOTAL INCOME OF AN ASSESSEE SHALL INCLUDE PROFITS FROM A PRIORITY UNDE RTAKING. WHILE COMPUTING THE QUANTUM OF DEDUCTION UNDER SECT ION 80-I(6) THE ASSESSING OFFICER, NO DOUBT, HAS TO TRE AT THE PROFITS DERIVED FROM AN INDUSTRIAL UNDERTAKING AS T HE ONLY SOURCE OF INCOME IN ORDER TO ARRIVE AT THE DEDUCTIO N UNDER CHAPTER VI-A. HOWEVER, THE NON OBSTANTE CLAUSE IN SECTION 80-I(6) IS APPLICABLE ONLY TO THE QUANTUM OF DEDUCT ION, 34 WHEREAS, THE GROSS TOTAL INCOME UNDER SECTION 80B(5 ) WHICH IS ALSO REFERRED TO IN SECTION 80-I(1) IS REQ UIRED TO BE COMPUTED IN THE MANNER PROVIDED UNDER THE ACT WHICH PRESUPPOSES THAT THE GROSS TOTAL INCOME SHALL BE AR RIVED AT AFTER ADJUSTING THE LOSSES OF THE OTHER DIVISION AG AINST THE PROFITS DERIVED FROM AN INDUSTRIAL UNDERTAKING. TO SAY THAT UNDER SECTION 80-I(6) THE PROFITS DERIVED FROM ONE INDUSTRIAL UNDERTAKING CANNOT BE SET OFF AGAINST LOSS SUFFERED FROM ANOTHER AND THAT THE PROFIT IS REQUIRED TO BE COMPU TED AS IF THE PROFIT MAKING INDUSTRIAL UNDERTAKING WAS THE ON LY SOURCE OF INCOME WOULD ALMOST RENDER THE PROVISIONS OF SECTION 80A(2) OF THE ACT NUGATORY. SECTIONS 80A(2 ) AND 80B(5) ARE DECLARATORY AND APPLY TO ALL THE SECTION S FALLING IN CHAPTER VI-A. THEY IMPOSE A CEILING ON THE TOTA L AMOUNT OF DEDUCTION AND THEREFORE THE NON OBSTANTE CLAUSE IN SECTION 80-I(6) CANNOT RESTRICT THE OPERATION OF SE CTIONS 80A(2) AND 80B(5) WHICH OPERATE IN DIFFERENT SPHERE S. THE GROSS TOTAL INCOME OF THE ASSESSEE HAS FIRST GOT TO BE DETERMINED AFTER ADJUSTING LOSSES ETC., AND IF THE GROSS TOTAL INCOME OF THE ASSESSEE IS NIL THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTIONS UNDER CHAPTER VI-A OF THE AC T. THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF SYNCO INDUSTRIES LTD. (SUPRA) IS IN A DIFFERENT CONTEXT. THE DECISION OF THE SUPREME COURT WILL APPLY IN SUCH CASES WHERE THE GR OSS TOTAL INCOME OF THE ASSESSEE AFTER ADJUSTMENT OF LOSS FROM ANY U NIT OR UNITS IS LESS THAN THE DEDUCTION CALCULATED UNDER SECTION 80HH. IN THE LIGHT OF SEVERAL DECISIONS RELIED UPON BY THE ASSESSEE AND A LSO RELIED UPON BY THE LEARNED DR, THE FOLLOWING PRINCIPLE OF LAW E MERGES: - THE FIRST STEP IS TO CALCULATE THE GROSS TOTAL INCO ME OF THE ASSESSEE. IN WORKING OUT THE GROSS TOTAL INCOME, THE LOSSES I NCURRED IN ANY OF THE UNITS HAS GOT TO BE SET OFF AGAINST THE PROFITS OF THE ELIGIBLE UNIT AS WELL (THIS MAY BE REFERRED TO AS GTI). THE SECO ND STEP IS TO WORK OUT THE PROFITS OF THE ELIGIBLE UNIT. IN WORKING O UT THE PROFITS OF THE ELIGIBLE UNIT, THE LOSS FROM ANY OTHER UNIT IS NOT TO BE SET OFF (SUCH PROFITS HEREINAFTER CALLED AS POEU). THE ASSESSEE IS TO BE ALLOWED DEDUCTION UNDER SECTION 80HH TO THE EXTENT AS CALCU LATED SUBJECT TO THE MAXIMUM OF THE GROSS TOTAL INCOME AS PROVIDED U NDER SECTION 80AB. IN CASE THE GROSS TOTAL INCOME OF THE ASSESS EE IS MORE THAN 35 THE DEDUCTION UNDER SECTION 80HH, THE ASSESSEE WILL GET FULL DEDUCTION WITHOUT ADJUSTMENT OF LOSSES OF THE OTHER UNIT. SO HOWEVER, IF THE GROSS TOTAL INCOME IS LESS THAN THE DEDUCTION CALCULATED UNDER SECTION 80HH, THE ASSESSEE WILL GE T DEDUCTION TO THE EXTENT OF THE GROSS TOTAL INCOME ONLY. SUBJECT TO THE ABOVE CLARIFICATION, THE GROUND OF A PPEAL RAISED BY THE REVENUE IS DISMISSED FOR BOTH THE YEARS UNDER CONSI DERATION. 38.1. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THE REVENUE GROUND. 39. GROUND NO.10 DISALLOWANCE OF EXPENDITURE CONSIDERED AS INCURRED IN CONNECTION WITH EXEMPT INCOME. THIS ISSUE WAS DE CIDED ALREADY IN ASSESSEES APPEAL AT GROUND NO. 10. SINCE, WE UPHE LD THE DISALLOWANCE PARTLY IN ASSESSEES APPEAL, THERE IS NO NEED TO CONSIDER THE REVENUE GROUND WHEREIN THE CIT(A) DELETED THE WORKING OF THE ASSESSING OFF ICER AS DISCUSSED ABOVE. IT IS ALSO NOTICED THAT REVENUE HAS NOT CONTESTED SUCH DE LETION IN ASSESSMENT YEAR 19098-99. THEREFORE, THERE IS ALSO NO MERIT IN THE ISSUE RAISED IN THIS ASSESSMENT YEAR. GROUND IS ACCORDINGLY DISMISSED. 40. GROUND NO. 12 PERTAINS TO CONSEQUENT TO THE ADJUSTMENTS MADE TO THE OPENING STOCK WHILE WORKING OUT THE VALUATION A S PER SECTION 145A. THE ASSESSING OFFICER WHILE COMPUTING ASSESSMENT UNDER SECTION 143(3) IGNORED THE ADJUSTMENTS MADE TO THE VALUE OF OPENING STOCK UNDE R SECTION 145A. ACCORDINGLY, ADDITION OF RS.8,80,97,785/- HAS BEEN MADE TO THE TOTAL INCOME WHICH INCLUDED AN AMOUNT OF RS.4,39,28,468/- ALREAD Y ADDED BY THE APPELLANT. IT WAS THE CONTENTION THAT IT IS A DOUBLE ADDITION IN RESPECT OF THE ADJUSTMENTS MADE. IT WAS ALSO CONTENDED THAT IF ANY CLOSING STO CK VALUATION IS TO BE DONE CORRESPONDING OPENING STOCK VALUATION IS TO BE DONE . CONSIDERING THESE SUBMISSIONS LEARNED CIT(A) HELD AS UNDER : I HAVE PERUSED THE DETAILED SUBMISSIONS MADE BY TH E AR AND THECASE LAWS CITED. IN MY OPINION THERE IS MERIT IN THE APPELLANTS SUBMISSIONS. FIRST OF ALL THE MEMORANDUM EXPLAINING THE PROVISIONS OF SECTION 145A INSERTED BY FINANCE (NO.2) BILL, 19 99 AT PARA 23.12 OF CLAUSE 45 STIPULATED THAT IN ORDER TO ENSURE THE VALUE OF OPENING AND CLOSING STOCK REFLECT THE CORRECT VALUE, IT IS PROPOSED TO INSERT A NEW SECTION TO CLARIFY THAT WHILE COMPUTING THE VAL UE OF INVENTORY AS PER THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, THE SAME SHALL INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEES PAID OR LIABILITY INCURRED FOR THE SAME UNDER ANY L AW IN FORCE. 36 SECONDLY WHETHER THE VALUE OF CLOSING STOCK IN CASE OF INPUTS, WORK- IN-PROGRESS AND FINISHED GOODS MUST NECESSARILY INC LUDE THE MODVAT CREDIT, THERE WAS CONSIDERABLE LITIGATION. FOR AVOI DANCE OF LITIGATION, SECTION 145A HAS BEEN INSERTED. IT IS NOT THE INTEN TION OF THE LEGISLATION TO CREATE ANOTHER SET OF LITIGATION BUT TO STOP ALL LITIGATION AND ENSURE CORRECT VALUE OF OPENING AND CLOSING STO CK. THAT INTENTION CAN BE ACHIEVED IN THE INITIAL YEAR OF AMENDMENT, T HAT IS TO SAY FIRST YEAR WHEN THE PROVISION OF THE ACT TAKES EFFECT THE SAID ADJUSTMENTS ARE TO BE MADE IN THE ENTRIES IN BOOKS OF ACCOUNT B Y THE METHOD REGULARLY ADOPTED BY THE APPELLANT. IN THE INSTANT CASE, I FIND THAT IN A.Y. 1999-2000 IS THE FIRST YEAR IN WHICH PROVISION OF SECTION 145A IS COMING INTO OPERATION AND THERE IS DENIAL OF THE SA ID FACT. AS SUCH THE A.O. IS REQUIRED TO MAKE SUCH ADJUSTMENTS AS PR ESCRIBED IN THE SAID PROVISIONS. BY DOING THAT EXERCISE THE APPELLA NT HAS ITSELF SHOWN CORRESPONDING EFFECT OF 4.40 CRORES BECAUSE O F INCREASE IN OPENING AND CLOSING STOCK BY INCLUDING AMOUNT OF TA X, DUTY, CESS. THEREFORE, THE APPELLANT HAS NOT DERIVED ANY BENEFI T FROM THAT EXERCISE. THIRDLY, AS PER THE ACT INVENTORY WAS TO BE ADJUSTED WHICH INCLUDES OPENING AS WELL AS CLOSING STOCK. AS SUCH ASSESSING OFFICER CANNOT DISCRIMINATE AND ONLY MODIFY THE CLOSING STO CK WITHOUT TOUCHING THE OPENING STOCK. FOURTHLY, THERE ARE PLE THORA OF DECISIONS WHERE IT HAS BEEN HELD THAT THE APPELLANT HAS TO BE TAXED ON REAL INCOME AND NOT ON NOTIONAL INCOME AS OTHERWISE PROV IDED IN THE ACT. IT WORTHWHILE TO DISCUSS THE RATIO OF DECISION IN F OLLOWING CASES. CIT VS. BRITISH PAINTS 188 ITR 44 (S.C.) CIT VS. AGARWAL ENTERPRISES 235 ITR 412 THEREFORE, THIS IS THE TRANSITIONAL YEAR AND BY MA KING AN ADJUSTMENT IN RESPECT OF TAX, DUTY, CESS ETC., SINC E THE APPELLANT ISNOT DERIVING ANY TANGIBLE BENEFIT AND ANY PROFIT OR LOSS DERIVED IN THIS YEAR IS SET OFF IN THE SUBSEQUENT YEAR BECAUSE CLOSING STOCK OF ONE YEAR BECOMES OPENING STOCK OF NEXT YEAR AND IN VIEW OF VARIOUS JUDGMENTS CITED I DIRECT THE A.O. TO MAKE THE ADJUS TMENT BOTH TO OPENING STOCK AND CLOSING STOCK IN THE LIGHT OF AFO RESAID JUDGMENTS. ACCORDINGLY, THE ADDITION MADE BY THE A.O. HAS TO B E RECALCULATED AND THE A.O. IS DIRECTED TO DO THE SAME. 37 40.1. THE REVENUE IS AGGRIEVED ON THE ABOVE. IT WA S FAIRLY SUBMITTED THAT AS PER PROVISIONS OF SECTION 145A INVENTORIES HAVE TO BE VALUED BY INCLUSION OF TAX DUTY ETC., WHILE MAKING THE ADJUSTMENT BOTH OPE NING AS WELL AS CLOSING STOCK. THE DECISION OF THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF MAHALAXMI GLASS WORKS 318ITR 116 (BOM.) AND DELHI H IGH COURT IN THE CASE OF MAHAVIRALUMINIUM297 ITR 77 (DEL.) SUPPORT THE VI EW TAKEN BY THE CIT(A). THEREFORE, THERE IS NO NEED TO DISTURB THE FINDING OF THE CIT(A) WHO ALREADY DIRECTED THE ASSESSING OFFICER TO DO THE NEEDFUL. W ITH THESE OBSERVATIONS, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 41. IN THE RESULT REVENUE APPEAL WAS DISMISSED. CROSS OBJECTION NO. 231/MUM/2006 : 42. THE CROSS OBJECTION IS WITH REFERENCE TO GROUN D NO. 1 RAISED BY THE REVENUE IN AY 1999-2000 IS WITH REFERENCE TO ADVANC E LICENSE BENEFIT RECEIVABLE AND DEDUCTIONS TO BE COMPUTED UNDER SEC TIONS 80IA AND 80HHC. THE GROUNDS OF CROSS OBJECTIONS ARE AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE RESPONDENT SUBMITS THAT IN CASE THE DEPARTMENT SUCCEEDS IN GROUND NO.1 OF ITS APPEAL BEARING ITA.NO.300/M/2 006 THAT ADVANCE LICENCE BENEFIT RECEIVABLE AND PASS BO OK BENEFIT RECEIVABLE ARE TAXABLE ON ACCRUAL BASIS, THEN ONLY THAT PORTION OF ADVANCE LICENCE BENEFIT RECEIVABLE AND PASS BOOK BENEFIT RECEIVABLE THAT HAS ACCRUED DURING THE YEAR OUGHT T O BE INCLUDED IN THE TOTAL INCOME AND NOT THE ENTIRE AMO UNT ACCRUED TILL DATE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE RESPONDENT SUBMITS THAT THE ASSESSING OFFICER E RRED IN REDUCING THE PROPORTIONATE PROFITS ELIGIBLE FOR DED UCTION UNDER SECTION 80IA, FOR THE PURPOSE OF COMPUTING THE DEDU CTION ELIGIBLE UNDER SECTION 80HHC. 43. SINCE ISSUES IN REVENUE APPEAL ARE ALREADY HEL D AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE, THERE IS NO NEED TO CONSIDER THE CROSS OBJECTION. THE CROSS OBJECTION BECOMES ACADEMIC AND THEREFORE, DISMISSED. 38 44. IN THE RESULT, IN AY 1998-99ITA.NO. 4240/MUM/2 003 OF THE ASSESSEE IS PARTLY ALLOWED, ITA.NO.3688/MUM/2003 OF THE REVENUE IS DISMISSED. IN AY 1999-2000 ITA.NO.1247/MUM/2006 OF THE ASSESSEE IS PARTLY ALLOWED AND ITA.NO.1300/MUM/2006 OF THE REVENUE IS DISMISSED AND CONSEQUENTLY C.O.NO.231/MUM/2006 IN ITA.NO.1300/MUM /2006 IS ALSO DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 4 TH DAY OF MAY, 2012. SD/- SD/- (S.S.GODARA) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATE 4 TH MAY, 2012 VBP/- COPY TO 1. M/S. EXCEL INDUSTRIES LTD. 164/167, EXCEL ESTATE, S.V.ROAD, JOGESHWARI (W), MUMBAI 400 102PAN AAACE2488F 2. DCIT, CC.38, 6 TH FLOOR, C - 10, BKC, BANDRA EAST, MUMBAI 400 051. 3. CIT(A), CENTRAL - VI, MUMBAI 4. CIT, CENTRAL - III, MUMBAI 5. DR H BENCH 6. GUARD FILE (TRUE COPY) BY ORDER ASST. REGISTRAR, I.T.A.T. MUMBAI BENCHE S MUMBAI.