GHCL Limited, Ahmedabad V. The ACIT., Circle-4, Ahmedabad

ITA 1290/AHD/2006

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51115 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-12-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 19-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KARTAR SINGH
• Assessee Lawyers: S N SOPARKAR SRAR
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Proportionate interest
• Section: 80HHC; 14A; 115JB; 10B; 12; 28; 10; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH BEFORE SHRI G.C.GUPTA, VICE-PRESIDENT (AZ) AND SHRI B.P. JAIN, ACCOUNTANT MEMBER ITA NO.1290/AHD/2006 ASSESSMENT YEAR:2002-03 GHCL LTD., GHCL HOUSE, OPP. PUNJABI HALL, NR. NAVARANGAPURA BUS STAND, NAVRANGPURA, AHMEDABAD PAN NO. AAACG5609C / V/S . ASST. COMMISSIONER OF INCOME-TAX, CIRCLE- 4, NAVJIVAN TRUST BULDING, NAVJIVAN PRESS, AHMEDABAD- 380 009 / APPELLANT .. / RESPONDENT APPELLANT BY SHRI S.N.SOPARKAR, SR-AR RESPONDENT BY SHRI KARTAR SINGH, CIT-DR / DATE OF HEARING 14-12-2001 / DATE OF PRONOUNCEMENT 30-12-2001 ! ! ! ! / / / / ORDER PER B.P. JAIN, ACCOUNTANT MEMBER:- THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER OF LD. COMMISSIONER OF INC- TAX (APPEALS)-VIII, AHMEDABAD DATED 29-03-2006 FOR THE ASSESSMENT YEAR 2002-03. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL. 1.1 THE LEARNED CIT(A) ERRED IN UPHOLDING DISALLOW ANCE OF APPEAL IGNORING / NOT CONSIDERING ARGUMENTS SUBMISSIONS AND JUDICIAL AUTHORITIES PLACED BY APPELLANT BEFORE HIM FOR ARRIVING AT HIS CONCLUSION . 1.2 THE LEARNED CIT(A) GROSSLY ERRED IN LAW AND IN FACTS IN UPHOLDING DISALLOWANCE U/S.14A, EVEN THOUGH TWO OF HIS PREDEC ESSOR CIT(A) DELETED THE DISALLOWANCE IN A DETAILED SPEAKING ORDER, WITHOUT GIVING ANY REASON FOR DISSENTING EVEN WHEN THERE IS NO CHANGE IN LAW OR F ACTS DURING THE YEAR UNDER CONSIDERATION. ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 2 1.3 THE LEARNED CIT(A) ERRED IN UPHOLDING DISALLOWA NCE OF PRORATE INTEREST EXPENSES OF RS.53.95 LACS UNDER SECTION 14A ESTIMAT ED TO HAVE BEEN INCURRED TO EARN TAX-FREE DIVIDEND INCOME OF RS.7.5 9 LACS, THOUGH THE ASSESSEE HAS HUGE OWNED FUNDS AND HUGE CASH PROFITS FAR IN EXCESS OF TAX- FREE INVESTMENT, EVEN SO HELD BY PREDECESSOR LEARNE D CIT(A) IN THE PRECEDING YEAR. 1.4 THE LEARNED CIT(A) ERRED IN UPHOLDING DISALLOWA NCE OF PRORATE ADMINISTRATIVE EXPENSES WORKED OUT AT RS.1.20 LACS UNDER SECTION 14A ESTIMATED TO HAVE BEEN INCURRED TDO EARN THE AFORES AID TAX-FREE DIVIDEND INCOME OF RS.7.59 LACS. 1.5 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT IN VESTMENT IN SHARES IS AN INTEGRAL PART OF COMPOSITE BUSINESS OPERATIONS CARR IED ON BY THE ASSESSEE AND FURTHER THE ASSESSEE DOES NOT PREPARE SEPARATE FINA NCIAL STATEMENTS; NOR MAINTAIN EARMARKED BANK ACCOUNT FOR TRANSACTING TAX -FREE INVESTMENT; NO TAX- FREE INCOME SO ARISING THEREFROM IS REQUIRED TO BE SHOWN AS SEGMENTAL DIVISION BY THE STOCK EXCHANGE; BY THE SEBI; OR UND ER THE COMPANIES ACT. 1.6 IT IS SUBMITTED THAT ALLOWANCES AND EXPENSES UN DER FIVE HEADS OF INCOME (INCLUDING THE BUSINESS PROFITS) HAVE NOT BEEN MA DE SUBJECT TO SECTION 14A; NOR SECTION 14A CAN BE CONSTRUED TO ME AN THAT ANY EXPENDITURE, OTHERWISE ALLOWABLE IN COMPUTING THE TOTAL INCOME, WOULD NOT BE ALLOWABLE THEREUNDER. IT IS SUBMITTED THAT THE INTEREST AND A DMINISTRATIVE EXPENSES, SOUGHT TO BE CO-RELATED, DOES NOT HAVE ANY DIRECT N EXUS WITH OR INCURRED IN RELATION TO TAX-FREE DIVIDEND INCOME SO AS TO BE HI T BY SECTION14A. 1.7 IT IS SUBMITTED THAT SECTION 14A DEALS WITH DIS ALLOWANCE OF EXPENDITURE IN RELATION TO EXEMPT INCOME AND NOT EXPENDITURE IN RE LATION TO TAXABLE INCOME; NOR SECTION 14A PROVIDES FOR ANY FICTION OR A MODE AND MANNER OF DIVIDING THE ACTIVITIES INTO TAXABLE AND NON-TAXABLE COMPONENTS . 1.8. IT IS FURTHER SUBMITTED THAT LEARNED CIT(A) FA ILED TO APPRECIATE THAT INTEREST-BEARING FUNDS, BEING SECURED AND UNSECURED LOANS, ARE STRICTLY FOR SPECIFIED USES/APPLICATIONS AND ARE NOT AVAILABLE W HATSOEVER FOR MAKING INVESTMENT IN SHARES ETC; NOR THE LOANS HAVE BEEN S O UTILIZED. 1.9 IT IS FURTHER SUBMITTED THAT AGGREGATE DISALLOW ANCES WORKED OUT AT RS.555.15 LACS ON TAX-FREE DIVIDEND INCOME OF RS.7. 59 LACS IS HIGHLY EXCESSIVE, IRRATIONAL AND UNREALISTIC AND OUGHT TO BE SUBSTANTIALLY REDUCED. 1.10 WITHOUT PREJUDICE TO ABOVE IT IS SUBMITTED THA T THE LEARNED ASSESSING OFFICER BE DIRECTED TO EXCLUDE RS.313.57 LACS (OUT OF INVESTMENT OF S.1285.09 LACS) REPRESENTING INVESTMENT IN TAXABLE DEBENTURES , NSC AND SHARES OF CO- OPERATIVE SOCIETIES, MUTUAL FUND THE INCOME WHEREOF ARE NOT TAX-FREE UNDER SECTION 10. 1.11 WITHOUT PREJUDICE TO ABOVE IT IS FURTHER SUBMI TTED THAT THE LEARNED ASSESSING OFFICER BE DIRECTED TO EXCLUDE RS.901.21 LACS AND RS.198 LACS (BOTH ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 3 OUT OF INVESTMENT OF RS.1285.09 LACS) REPRESENTING INVESTMENT IN UNQUOTED SHARES AND INVESTMENT IN UNITS OF MUTUAL FUNDS YIEL DING NO DIVIDEND INCOME. 2.1 THE LEARNED CIT(A) ERRED IN CONFIRMING ENHANCEM ENT OF BOOK PROFIT UNDER SECTION 115J BY THE AFORESAID QUANTUM DISALLOWANCES OF RS.55.15 LACS UNDER SECTION 14A UNDER NORMAL PROVISION ESTIMATED TO HAV E BEEN EXPENDED TO EARN THE TAX-FREE DIVIDEND INCOME OF RS.7.59 LACS. 3.1 THE LEARNED CIT(A) ERRED IN LAW IN CONFIRMING D ISALLOWANCE OF DEDUCTION OF RS.3,37,78,429 UNDER SECTION 80HHC IN SPITE OF HON. ANDHRA PRADESH HIGH COURT DIRECT JUDGMENT IN THE CASE OF GOGINENI TOBACCO LIMITED 238 ITR 970 (AP). IT IS FURTHER SUBMITTED THAT THIS JUDGMENT IN 238 ITR 970 (AP) WAS NOT REQUIRED TO BE CONSIDERED; AND IN ANY CASE NOT REVE RSED OR DISSENTED BY HON/ APEX COURT IN IPCA LABORATORIES LIMITED 266 ITR 521 (SC) RELIED UPON BY THE DEPARTMENT. 3.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT EX PLANATION (BAA) TO SECTION 80HHC REFERS TO THE BUSINESS PROFITS COMPUTED IN ACCORDANCE WITH SECTION 28 TO 44D AND THUS SPECIFICALLY EXCLUDE SET OFF OF LOSSES UNDER SECTION 72 FOR THE PURPOSE OF SECTION 80HHC. 4.1 THE LEARNED CIT(A) ERRED IN LAW IN CONFIRMING T HAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION OF THE AMOUNT OF PROFITS ELIG IBLE FOR DEDUCTION UNDER SECTION 80HHC OF RS.4,82,54,898 IN COMPUTING THE BO OK PROFIT UNDER CLAUSE (IV) TO SECTION 115JB(2). 4.2 WITHOUT PREJUDICE TO ABOVE IT IS ALTERNATIVELY SUBMITTED THAT THE LEARNED ASSESSING OFFICE OUGHT TO HAVE ALLOWED DEDUCTION UN DER CLAUSE (IV) TO SECTION 115JB(2) BASED ON NET PROFIT AS PER PROFIT AND LOS S ACCOUNT OF THE ASSESSEE AS HELD IN THE CASE OF G.T.N. TEXTILES LIM ITED 248 ITR 372 (KER) AND OTHER JUDICIAL AUTHORITIES. 2. THE BRIEF FACTS IN GROUND NO.1.1 TO 1.11 OF ASSE SSEES APPEAL THAT THE ASSESSEE-COMPANY HAS MADE TOTAL INVESTMENT TO THE T UNE OF RS.1285.09 LAKHS IN VARIOUS MUTUAL FUNDS AND EQUITY SHARES FROM WHICH I NCOME IN THE FORM OF DIVIDEND IS NOT TAXABLE U/S.10(33) OF THE INCOME-TAX ACT, 1961. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY NOT INTEREST AND ADMI NISTRATIVE EXPENSES FOR MAKING INVESTMENT IN SHARES AND MUTUAL FUNDS BE NOT DISALL OWED U/S.14A OF THE ACT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE INVESTMEN TS HAVE BEEN MADE DURING THE VARIOUS YEARS AND THE ASSESSEE HAS GENERATED CASH S URPLUS BETWEEN RS.3639.82 LAKHS TO RS.5592.18 LAKHS DURING THE A.YS. 1996-97 TO 2002-03. PARTICULARLY CUMULATIVE CASH GENERATION DURING A.YS 1996-97 AND 1997-98 WAS APPROXIMATELY RS.11057.88 LAKHS, AS AGAINST WHICH THE TOTAL CUMUL ATIVE INVESTMENT DURING THE A.YS. 1996-97 AND 1997-98 WAS ONLY RS.648.44 LAKHS. FURTHER, INVESTMENT DURING ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 4 THE A.Y. 2002-03 IS RS.315.14 LAKHS ONLY AGAINST CA SH PROFIT OF RS.5151.14 LAKHS. THEREFORE, IT WAS ARGUED BEFORE THE AO THAT THE ABO VE INVESTMENTS HAVE BEEN MADE OUT OF CAPITAL RESERVE AND SURPLUS OF THE ASSESSEE. HOWEVER, NOT BEING CONVINCED WITH THE REPLY OF THE ASSESSEE, THE AO HAS MENTIONE D THAT THE ASSESSEE-COMPANY SHOULD HAVE PROVED THAT ONLY INTEREST FREE FUNDS WE RE USED FOR MAKING SUCH INVESTMENTS BY PRODUCING THE EVIDENCE THAT THE INVE STMENT IN SHARES/MUTUAL FUNDS WAS MADE FROM SEPARATE ACCOUNTS. THE ASSESSEE-COMPA NY DID NOT PRODUCE ANY EVIDENCE BEFORE THE AO THAT INTEREST BARING FUNDS W ERE NOT USED AT ALL FOR MAKING SUCH INVESTMENTS. THE AO NOTED THAT THESE ARE CASES OF MIXED FUNDS WHICH KEEP ON GETTING TRANSFERRED FROM ONE- ACCOUNT-TO-ANOTHER AN D IN SUCH CIRCUMSTANCES THE ASSESSEE-COMPANY WAS REQUIRED TO SPECIFICALLY PROVE THAT THESE INVESTMENTS WERE MADE OUT OF INTEREST FREE FUNDS ONLY. THE AO RELIED ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF CIT V. RAJASTHAN STATE WAREHOUSING CORPORATION 242 ITR 450 (SC), WATERFALL ESTATES LTD. V. CIT 129 ITR 563, KOTA CO-OP. MARKETING SOCIETY LTD. V. CIT 219 ITR 276 (RAJ) AND S.G. INVESTMENTS (INDIA) LTD. V. DCIT 89 ITD 44 (KOL). IT WAS FURTHER OBSERVED THAT SINCE IT IS CASE OF MI XED ACCOUNTING, THE INTEREST RELATING TO TAX EXEMPT INCOME WILL HAVE TO BE WORKED OUT AND THE SAME WILL BE DISALLOWED IN VIEW OF ITAT AHMEDABAD BENCH DECISION IN THE CASE O F H.K.BHATT V. ITO 91 ITD 311 (AHD). THE AO ALSO CONSIDERED THAT THE CLAIM OF INT EREST WILL HAVE TO BE WORKED OUT IN RESPECT OF WHOLE OF THE INVESTMENT AND NOT ONLY ON THE INVESTMENT WHICH HAS BEEN MADE DURING THIS YEAR, RELYING ON THE DECISION OF H ONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT V. H.R. SUGAR FACTORY PVT. LTD. 187 ITR 363 (ALL). ACCORDINGLY, THE AO DISALLOWED PROPORTIONATE INTEREST OF RS.53.95 LAKHS ON THE TOTAL INVESTMENT. IT WAS ALSO MENTIONED BY THE AO THAT CERTAIN ADMINISTRATIV E EXPENSES WOULD ALSO HAVE BEEN INCURRED FOR MAKING, MONITORING AND SELLING SU CH INVESTMENTS FOR WHICH HE SEPARATELY MADE DISALLOWANCE OF RS.1.20 LAKH. THUS, TOTAL DISALLOWANCE OF RS.55.15 LAKH WAS MADE U/S 14A OF THE ACT. THE LD. CIT(A) CO NFIRMED THE ACTION OF ASSESSING OFFICER. 3. MR. S.N.SOPARKAR, SR-ADVOCATE APPEARING FOR THE ASSESSEE RELIED UPON THE DECISION IN ASSESSEES OWN CASE IN ITA NO.473 AND 492/AHD/2005 DATED 23-01- 2009 FOR ASSESSMENT YEAR 2001-02 DECIDED BY ITAT AH MEDABAD B BENCH, WHERE ON IDENTICAL ISSUE THE ASSESSEE HAD BEEN GIVEN THE RELIEF. LD.ADVOCATE, SHRI SOPARKAR PLACED ON RECORD THE JUDGMENT OF HONBLE K ERAL HIGH COURT DECIDED IN THE ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 5 CASE OF CIT V. CATHOLIC SYRIAN BANK LTD. & OTRS. (2011) AS REPORTED IN 237 CTR 164 (KER) ON THE IDENTICAL ISSUE WHO RELIED UPON THE SA ID JUDGMENT. MR. SOPARKAR INVITED OUR ATTENTION TO THE BALANCE-SHEET OF THE ASSESSEE- COMPANY FOR THE YEAR ENDING ON 31 ST MARCH, 2002 THAT THE ASSESSEE IS HAVING HUGE PROFI T DURING THE YEAR AND THE RESERVE AND SURPLUS WHICH ARE INTEREST FREE AND THE REFORE FOLLOWING THE SAID JUDGMENT MR. SOPARKAR PRAYED TO GIVE THE DIRECTIONS FOR DELE TION OF ADDITION CONFIRMED BY LD. CIT(A). 4. MR. KARTAR SINGH, LD. CIT-DR ON THE OTHER HAND A RGUED THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR THE IN VESTMENT WHICH ARE EARNING TAX- FREE INCOME. THE ASSESSEE COULD HAVE MAINTAINED SUC H ACCOUNT WHICH HAS NOT BEEN DONE. THEREFORE, HE SUPPORTED THE ORDERS OF LOWER A UTHORITIES AND PRAYED TO CONFIRM THE ORDER OF LD. CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. FOR IDENTICAL ISSUE, THE ASSESSEE HAD BEEN ALLOWED THE RELIEF IN ASSESSMENT YEAR 2001- 02 BY ITAT IN ITS ORDER IN ITA NO.473 & 492/AHD/2005 (SUPRA). AT THE SAME TIME THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE O F KATHOLIC SYRIAN BANK LTD. & OTRS. (SUPRA) CANNOT BE IGNORED AND THE RELEVANT PARA OF THE SAID JUDGMENT FOR THE SAKE OF CLARITY ARE REPRODUCED HEREUNDER:- 3. THE QUESTION, THEREFORE, TO BE CONSIDERED IS WH ETHER S.14A PRIOR TO THE INTRODUCTION OF SUB-SS. (2) AND (3) ENTITLES THE DE PARTMENT TO MAKE DISALLOWANCE OF EXPENDITURE INCURRED FOR EARNING TA X FREE INCOME IN CASES WHERE ASSESSEE LIKE THE BANKS DO NOT MAINTAIN SEPAR ATE ACCOUNTS FOR THE INVESTMENTS AND OTHER EXPENDITURE INCURRED FOR EARN ING TAX FREE INCOME. SENIOR COUNSEL APPEARING FOR THE REVENUE RELIED ON OUR JUDGMENT IN IT APPEAL NO.1784 OF 2009 DT. 14 TH JUNE, 2010 IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN [REPORTED AT (2010) 235 CTR (KER) 512 : (2010) 45 DTR (KER) 312 ED.] FOR THE PROPOSITION THAT ESTIMATED DISAL LOWANCE UNDER S. 14A IS PERMISSIBLE. ANOTHER DECISION CITED BY THE REVENUE IN SUPPORT OF THEIR CONTENTION IS THE RECENT DECISION OF THE SUPREME CO URT IN CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC)233 : (2010) 326 ITR 1 (SC). BOTH COUNSEL APPEA RING FOR ASSESSEE-BANKS RELIED ON DECISION OF THE SUPREME COURT IN CIT VS. INDIAN BANK LTD. (1965) 56 ITR 77 (SC) AND CONTENDED THAT WHERE SEPARATE ACCOU NTS ARE NOT AVAILABLE WITH THE BANK WITH REGARD TO EXPENDITURE INCURRED I ON EARNING TAX FREE INCOME, THERE IS NO SCOPE FOR DISALLOWANCE UNDER S. 14A AT ALL. ACCORDING TO BOTH COUNSEL FOR THE ASSESSEES PROPORTIONATE DISALLOWANC E IS CALLED FOR ONLY UNDER SUB-S. (2) R/W.R 8D OF THE IT RULES WHICH CAME INTO FORCE FROM 2007-08 ONWARDS AND THE SAME CANNOT BE APPLIED FOR ANY EARL IER ASSESSMENT YEAR. WE ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 6 DO NOT THINK MUCH RELIANCE CAN BE PLACED ON THE DEC ISION OF THE SUPREME COURT IN THE CASE OF INDIAN BANK LTD. (SUPRA) BECAU SE THE SAID DECISION WAS RENDERED MUCH PRIOR TO THE INTRODUCTION OF S. 14A A ND THE PURPOSE OF S. 14A ITSELF IS TO GET OVER JUDGMENTS OF THE SUPREME COUR T AND HIGH COURTS DECLARING ASSESSEE'S ELIGIBILITY FOR DEDUCTION OF B USINESS EXPENDITURE INCURRED FOR EARNING THE INCOME IRRESPECTIVE OF WHETHER SUCH INCOME IS TAXABLE OR NOT. IN OUR VIEW, THE OBJECT OF S. 14A IS TO ENSURE THAT SO MUCH OF THE EXPENDITURE INCURRED FOR EARNING INCOME THAT DO NOT CONSTITUTE TOTAL INCOME OF THE ASSESSEE, SHOULD NOT BE ALLOWED. IN OTHER WORDS,, W HEN INCOME IS OUTSIDE THE TAX NET, EXPENDITURE INCURRED FOR EARNING SUCH INCO ME ALSO SHOULD NOT BE ALLOWED TO BE SET OFF IN THE COMPUTATION OF TAXABLE INCOME. THEREFORE, THE SHORT QUESTION TO BE CONSIDERED IS WHETHER NON-MAIN TENANCE OF SEPARATE ACCOUNTS BY THE ASSESSEE WITH REGARD TO EXPENDITURE INCURRED FOR EARNING NON- TAXABLE INCOME IS JUSTIFICATION FOR THEM TO CLAIM I MMUNITY FROM THE OPERATION OF S. 14A. IN FACT, THE SUBSEQUENT LEGISLATION I.E. IN TRODUCTION OF SUB-S. (2) AND THE PRESCRIPTION OF R. 8D THEREUNDER, MAKE IT CLEAR THA T THERE MAY BE -CASES WHERE IT WOULD BE DIFFICULT FOR ASSESSEES TO MAINTAIN SEP ARATE ACCOUNTS FOR EARNING TAXABLE AS WELL AS NON-TAXABLE INCOME. HOWEVER, WHA T WE FEEL IS THAT SUCH DIFFICULTY MAY BE EXPERIENCED IN THE CASE OF OVERHE AD EXPENDITURE AND ADMINISTRATIVE EXPENDITURE INCURRED BY THE ASSESSEE -BANKS. SO FAR AS INVESTMENTS IN SECURITIES AND BONDS AND ALSO IN SHA RES, THE INCOME WHEREFROM IS TAX FREE ARE CONCERNED, WE SEE NO REAS ON WHY ASSESSEE COULD NOT HAVE MAINTAINED SEPARATE ACCOUNTS FOR THE SOURC ES OF FUNDS UTILISED FOR SUCH INVESTMENTS WHICH, IN OUR VIEW, IF THE ASSESSE E-BANKS WANTED, THEY COULD HAVE MAINTAINED. IN OTHER WORDS, IF THE ASSES SEE-BANKS HAD A CASE THAT SURPLUS FUNDS AVAILABLE OR FUNDS SOURCED OTHER THAN THROUGH BORROWING ONLY WERE UTILISED FOR INVESTING IN SECURITIES, BONDS AN D SHARES WHICH YIELD TAX FREE INCOME, THEY COULD HAVE MAINTAINED SUCH ACCOUNTS AN D PRODUCED THE SAME BEFORE THE AO WHEN PROPORTIONATE DISALLOWANCE WAS P ROPOSED BY THE AO. BY SUBSEQUENT AMENDMENT, THROUGH SUB-S. (2} AND BY PRE SCRIBING R. 8D THEREIN WHAT IS ACHIEVED IS PRESCRIBING SPECIFIC GUIDELINE FOR DISALLOWANCE IN CASES WHERE SEPARATE ACCOUNTS ARE NOT AVAILABLE ON THE EX PENDITURE INCURRED FOR EARNING TAX FREE INCOME. THESE ARE, THEREFORE, ONLY CLARIFICATORY PROVISIONS AND IN OUR VIEW, THE MAIN CLAUSE OF S. 14A APPLY FOR AL L PERIODS AFTER THE INTRODUCTION OF THE SAME IN THE STATUTE WHICH AUTHO RISES THE OFFICER TO MAKE DISALLOWANCE OF THE EXPENDITURE INCURRED FOR EARNIN G TAX FREE INCOME, IRRESPECTIVE, OF WHETHER ASSESSEE MAINTAINED SEPARA TE ACCOUNTS OR NOT. CONSIDERING THE SIGNIFICANT AMOUNT OF TAX FREE INCO ME EARNED BY THE ASSESSEE-BANKS FOR ALL THE YEARS INVOLVED, WE ARE O F THE VIEW THAT THE INVESTMENT FOR EARNING TAX FREE INCOME IS SUBSTANTI AL AND IF ASSESSMENT IS MADE WITHOUT MAKING DISALLOWANCE UNDER S.14A, THE S AME WILL RENDER A DISTORTED FIGURE OF TAXABLE INCOME WHICH IS NOT PER MISSIBLE UNDER THE ACT. IF THE ASSESSEE DOES NOT MAINTAIN SEPARATE ACCOUNTS, IT IS FOR THE AO TO ESTIMATE THE SAME BY ADOPTING A RATIONAL BASIS. IN PRINCIPLE, WE , THEREFORE, UPHOLD THE DISALLOWANCE MADE BY THE AO UNDER S. 14A. WE, THERE FORE, UPHOLD THE ORDER OF THE TRIBUNAL IMPUGNED IN IT APPEAL NO. 40 OF 201 0 WHEREIN THEY .HAVE FOLLOWED A SPECIAL BENCH DECISION OF THE MUMBAI BEN CH OF THE TRIBUNAL IN /TO VS. DAGA CAPITAL MANAGEMENT (P) LTD. (2008) 119 TTJ (MAMBAI)(SB) 289 : (2008) 15 DTR (MUMBAI)(SB)(TRIB) 68 : (2009) 312 IT R 1 (MUMBAI)(SB)(AT) ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 7 AND REVERSE THE ORDERS OF THE TRIBUNAL AND THAT OF THE FIRST APPELLATE AUTHORITY IN ALL OTHER SEVEN APPEALS. 4. THE NEXT QUESTION TO BE CONSIDERED IS WHETHER TH E METHOD ADOPTED BY THE AO IN ESTIMATING AVERAGE COST OF DEPOSIT AND MAKING THE DISALLOWANCE BY WORKING OUT AVERAGE INTEREST COST ON THE INVESTMENT S MADE FOR EARNING THE TAX FREE INCOME IS CORRECT. AFTER HEARING BOTH SIDES, W E FEEL THE MATTER REQUIRES RECONSIDERATION BECAUSE IN THE FIRST PLACE, FACTS A ND FIGURES ARE NOT AVAILABLE. FURTHER, THE ASSUMPTION OF THE AO THAT THE ENTIRE I NVESTMENTS IN BONDS, SHARES AND SECURITIES FOR EARNING TAX FREE INCOME I S FROM OUT OF BORROWED FUNDS (DEPOSITS) IS ALSO NOT JUSTIFIED. ASSESSEE-BA NKS HAVE A SPECIFIC CASE THAT THEY HAVE FUNDS AVAILABLE WITH THEM WHICH ARE NEITHER BORROWALS NOR INTEREST-BEARING DEPOSITS AND SUCH FUNDS ALSO HAVE BEEN UTILISED IN MAKING INVESTMENTS FOR EARNING TAX FREE INCOME. WE FIND FO RCE IN THIS CONTENTION BECAUSE WHEN ACCOUNTS ARE NOT AVAILABLE, THE DISALL OWANCE COULD BE MADE ONLY ON THE EXPENDITURE INCURRED FOR EARNING THE TA X FREE INCOME WHICH IS TO BE ESTIMATED ON A RATIONAL BASIS. IN FACT, IN OUR VIEW , THE AO COULD HAVE TAKEN THE FOLLOWING FORMULA TO ARRIVE AT THE INTEREST LIABILI TY INCURRED BY THE ASSESSEE- BANKS TO EARN INTEREST (SICTAX) FREE INCOME : TOTAL INTEREST LIABILITY X TAX FREE INCOME EARNED BY THE ASSESSEE TOTAL INCOME 5. WHAT WE HAVE STATED ABOVE IS ONLY A REASONABLE S UGGESTION FOR THE AO TO ADOPT WHICH ARISES ONLY IF ASSESSEE IS NOT ABLE TO ESTABLISH MORE ACCURATELY THE INTEREST SPENT ON EARNING TAX FREE INCOME. WE, THEREFORE, LEAVE THIS MATTER TO BE DECIDED BY THE AO WITH REFERENCE TO THE ACCOU NTS OF THE ASSESSEE- BANKS FOR EACH YEAR. SINCE WE FIND THAT THE RATIONA L ADOPTED BY THE AO TO ESTIMATE THE EXPENDITURE FOR THE PURPOSE OF DISALLO WANCE UNDER S. 14A IS NOT TENABLE, WE FEEL THE MATTER SHOULD BE RESTORED TO T HE AO FOR MAKING DISALLOWANCE UNDER S. 14A BY REASONABLY ESTIMATING AS NEARLY AS POSSIBLE THE EXPENDITURE INCURRED FOR EARNING THE TAX FREE INCOM E. THIS SHOULD BE DONE AFTER GIVING OPPORTUNITY TO THE ASSESSEE-BANKS TO S UGGEST THEIR OWN FORMULA WITH REFERENCE TO ACCOUNTS FOR THE PURPOSE OF ARRIV ING AT THE ACTUAL AMOUNT OR NEAR ACTUAL AMOUNT. THE DISALLOWANCE ON ESTIMATED B ASIS HAS TO BE DONE AS ABOVE UNTIL R. 8D WAS FRAMED AND THEREAFTER IT IS F OR THE AO TO MAKE DISALLOWANCE BY FOLLOWING SUB-S. (2) OF S. 14A AND R. 8D OF THE IT RULES. 6. SO FAR AS THE DISALLOWANCE OF ADMINISTRATIVE EXP ENDITURE IS CONCERNED, WE FEEL CONSIDERING THE .FACT THAT THERE IS NO PRECISE FORMULA FOR PROPORTIONATE DISALLOWANCE, NO DISALLOWANCE IS CALLED FOR, FOR PR OPORTIONATE ADMINISTRATIVE COST ATTRIBUTABLE TO EARNING OF TAX FREE INCOME UNT IL R. 8D CAME INTO FORCE. WE, THEREFORE, DISPOSE OF THE APPEALS BY SETTING ASIDE THE ORDERS OF THE TRIBUNAL AND THAT OF THE FIRST APPELLATE AUTHORITY ON THIS I SSUE AND REMAND ALL THE ASSESSMENTS BACK TO THE AO FOR REWORKING DISALLOWAN CE UNDER S. 14A IN THE CASE OF EACH ASSESSEE FOR EACH ASSESSMENT YEAR. THE PROPORTIONATE DISALLOWANCE UNDER S. 14A SHOULD BE LIMITED TO ONLY INTEREST LIABILITY AND NOT OVERHEADS OR ADMINISTRATIVE EXPENDITURE, WHICH SHOU LD BE CONSIDERED FOR DISALLOWANCE UNDER R. 8D FROM 2007-08 ONWARDS. ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 8 THE SAID JUDGMENT WAS NOT AVAILABLE WITH THE ITAT A HMEDABAD BENCH WHILE DECIDING THE IDENTICAL ISSUE FOR ASSESSMENT YEAR 20 01-02 MENTIONED HEREINABOVE AND THEREFORE WE ARE FOLLOWING THE JUDGMENT OF HON BLE KERALA HIGH COURT IN THE CASE OF CATHOLIC SYRIAN BANK LTD. & OTRS. (SUPRA) DECIDED BY HONBLE HIGH COURT WHICH IS DIRECTLY APPLICABLE ON THE ISSUE BEFORE US AND WE A RE OF THE VIEW THAT IN THE PRESENT CASE, THE ASSESSEE HAS NOT MAINTAINED SEPARATE ACCO UNTS FOR THE INVESTMENT MADE, INTEREST AND ADMINISTRATIVE EXPENDITURE INCURRED. T HE RULE 8D CAME INTO FORCE WITH EFFECT FROM 24-03-2008 R/W.R WITH SUB-SECTION 2 OF SECTION14A OF THE ACT WHICH CAME INTO FORCE BY THE FINANCE ACT, 2006 WITH EFFECT FRO M 1-4-2007. IN THE PRESENT CASE, WE ARE CONVINCED WITH THE ARGUMENT OF LD. CIT-DR TH AT THE ASSESSEE COULD HAVE MAINTAINED SEPARATE ACCOUNTS AND PRODUCED THE SAME BEFORE ASSESSING OFFICER WHICH HAS NOT BEEN DONE. THEREFORE FOLLOWING THE JU DGMENT OF HONBLE KERALA HIGH COURT IN THE CASE OF CATHOLIC SYRIAN BANK LTD. & OTRS. (SUPRA) INVESTMENT IN THE PRESENT CASE, FOR EARNING TAX FREE INCOME IS SUBSTA NTIAL AND IF THE ASSESSMENT IS MADE WITHOUT MAKING DISALLOWANCE U/S 14A, THE SAME WILL RENDER ARE DISTORTED FIGURE OF TAXABLE INCOME WHICH IS NOT PERMISSIBLE OF THE A CT IF THE ASSESSEE DOES NOT MAINTAIN SEPARATE ACCOUNT. IT IS FOR THE AO WHO EST IMATE THE SAME BY ADOPTING A RATIONAL BASIS. WITH REGARD TO ESTIMATING THE AVERA GE COST OF DEPOSIT AND MAKING THE DISALLOWANCE BY WORKING OUT AVERAGE INTEREST COST O N THE INVESTMENT MADE FOR EARNING TAX FREE INCOME CANNOT BE SAID TO BE OUT OF THE BORROWED FUNDS AND THIS APPROACH OF THE AUTHORITIES BELOW IS NOT JUSTIFIED AS ARGUED BY MR. SOPARKAR, LD. COUNSEL FOR THE ASSESSEE AND AS IS EVIDENT FROM THE BALANCE-SHEET AND PROFIT AND LOSS ACCOUNT AS PLACED ON RECORD BEFORE THE BENCH. THERE ARE FREE RESERVE AND PROFIT OUT OF WHICH THE ASSESSEE COULD HAVE MADE THE SAID INVESTMENT EARNING TAX FREE INCOME. THEREFORE, SUCH DISALLOWANCE HAS TO BE ON R ATIONALE BASIS BY THE AO FOR REASONABLY ESTIMATING AS NEARLY AS POSSIBLE THE EXP ENDITURE INCURRED FOR EARNING THE TAX FREE INCOME KEEPING IN VIEW THE RESERVE AND SUR PLUS AND THE PROFIT WHICH ARE INTEREST FREE AND ACCORDINGLY MAKE THE DISALLOWANCE ON ESTIMATE BASIS IF AT ALL DISALLOWANCE IS POSSIBLE TO BE MADE, FOLLOWING THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF KATHOLIC SYRIAN BANK LTD. & OTRS. (SUPRA). THE MATTER IS RESTORED TO THE FILE OF THE AO WHO IS DIRECTED TO GIVE AN OP PORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THE ISSUE. ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 9 6. AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EX PENDITURE THERE IS NO PRECISE FORMULA FOR PROPORTIONATE DISALLOWANCE AND THEREFOR E NO DISALLOWANCE CAN BE CALLED FOR BEFORE INSERTION OF RULE 8D WHICH PRESCRIBED TH E PRECISE FORMULA SINCE THE PRESENT ASSESSMENT IS FOR A.Y 2002-03 AND THEREFORE THE ASSESSING OFFICER CANNOT MAKE ANY DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENDITURE AND SAME IS DIRECTED TO BE DELETED. THUS, GROUND NO.1.1 TO 1.11 OF THE ASSESSEES APPEAL ARE PARTLY ALLOWED. 7. NOW WE TAKE UP THE GROUND NO.2.1 OF THE ASSESSEE . THE FACTS ARE THAT ASSESSING OFFICER HAD ENHANCED THE BOOK PROFIT U/S 115JB. IT WAS ALSO SUBMITTED THAT ENHANCEMENT OF QUANTUM DISALLOWANCE U/S.14A TO THE BOOK PROFIT FOR CHARGING OF MAT U/S.115JB IS CONTRARY TO THE PROVISIONS AND SCH EME OF THE ACT AND IN ANY CASE THE LEGISLATIVE INTENT. THEREFORE MR. SOPARKAR, LEA RNED COUNSEL FOR THE ASSESSEE PRAYED TO REVERSE THE DECISION OF LD. CIT(A) WHO HA S CONFIRMED THE ACTION OF AO. ON THE OTHER HAND, MR. KARTAR SINGH, LD. CIT-DR RELIED UPON THE DECISION OF BOTH THE AUTHORITIES BELOW. 8. WE ARE CONVINCED WITH THE ARGUMENTS OF LD. CIT-D R THAT THE LD. CIT(A) IN PARA-3.2 OF HIS ORDER HAS RIGHTLY DISMISSED THE ASS ESSEES APPEAL BY HOLDING AS UNDER:- AS PER EXPLANATION (F) TO SECTION 115JB, THE BOOK PROFIT MEANS NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVA NT PREVIOUS YEAR PREPARED UNDER SUB-SECTION 2 AS INCREASED BY AN AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME OF WHICH SECTION 10 OR SECT ION 10A OR SECTION 10B OR SECTION 11 OR SECTION 12 APPLY. THE DIVIDEND INCOME OF THE APPELLANT HAS BEEN CLAIMED U/S.10(33) OF THE ACT AND THEREFORE EXPENDI TURE WHICH IS RELATABLE TO THIS INCOME WILL HAVE TO BE ADDED TO THE BOOK PROFI T AS PER EXPLANATION TO SECTION 115JB AND ACCORDINGLY AO WAS JUSTIFIED IN A DDING THE SAME UNDER THE BOOK PROFIT FOR THE COMPUTATION OF SECTION 115JB OF THE ACT. THEREFORE THIS GROUND IS ALSO WITHOUT ANY BASIS AND ACCORDINGLY DI SMISSED. THEREFORE IN THE CIRCUMSTANCES OF THE FACTS OF THE CASE, WE FIND NO INFIRMITY IN THE ORDER OF LD CIT(A), WHO HAS RIGHTLY CONFIRMED THE A CTION OF ASSESSING OFFICER. THUS, GROUND NO.2.1 OF ASSESSEES APPEAL IS DISMISSED. 9. AS REGARDS TO GROUND NO.3.1 TO 3.2 OF THE ASSESS EE THE BRIEF FACTS AS APPEARING IN THE ORDER OF ASSESSING OFFICER AT PAGE 2-7 VIDE PARA-3 ARE THAT THE ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 10 ASSESSEE HAS SHOWN PROFIT AND GAINS FROM BUSINESS DURING THE YEAR UNDER CONSIDERATION AT RS.50,56,85,425/- AND HAS CLAIMED DEDUCTION UD/S.80HHC AMOUNTING TO RS.3,37,78,429/-. THE TOTAL INCOME AFT ER CLAIMING DEDUCTION HAS BEEN SET OFF AGAINST BROUGHT FORWARD UNABSORBED BUSINESS LOSS, THUS SHOWING THE TOTAL INCOME AFTER SET OFF AT RS. NIL. HOWEVER, FOR THE P URPOSE OF COMPUTATION OF BOOK PROFIT U/S 115JB, THE ASSESSEE-COMPANY HAS CLAIMED DEDUCTI ON OF RS.4,82,54,898/- U/S 80HHC. HOWEVER, THE AO NOTED THAT PROFIT AND GAINS OF THE BUSINESS AFTER SET OFF OF UNABSORBED BUSINESS IS BASICALLY NIL. THEREFORE PRO FIT OF THE BUSINESS AS COMPUTED UNDER EXPLANATION (BAA) OF SECTION 80HHC COMES TO R S. NIL LEADING TO NO DEDUCTION U/S.80HHC. THE AO HAS DISCUSSED THIS ISSUE THREADBA RE IN THE ASSESSMENT ORDER AND HAS HELD THAT THE CLAIM OF DEPRECIATION IS NOT JUSTIFIED IN VIEW OF HONBLE SUPREME COURT DECISION IN THE CASE OF IPCA LABORATORY LTD. V. DCIT (2004) AS REPORTED IN 266 ITR 521 (SC), WHERE THE HONBLE SUPREME COURT HAS C LEARLY HELD THAT THE CLAIM U/S. 80HHC IS TO BE GOVERNED BY SECTION 80AB OF THE ACT WHICH WILL HAVE OVERRIDING EFFECT ON THE COMPUTATION U/S.80HHC. THEREFORE SECT ION 72 BECOMES APPLICABLE FOR THE PURPOSE OF COMPUTATION OF PROFIT AND GAINS OF B USINESS OR PROFESSIONS. THE HONBLE SUPREME COURT HAS ALSO TAKEN INTO CONSIDERA TION THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF SHIRKE CONSTRUCTION LTD. (2000) AS REPORTED IN 246 ITR 429 (SC) WHILE DELIVERING THE JUDGMENT OF IPCA LABORATORY LTD. THE AO ALSO MENTIONED IN THE ORDER THAT AS THE CASE OF SHIRKE CONSTRUCTION LTD. (SUPRA) CITED BY THE ASSESSEE HAS BEEN TAKEN INTO CONSIDERATION BY T HE HONBLE SUPREME COURT, THE DECISION OF ANDHRA PRADESH HIGH COURT IN THE CASE O F GOGINENI TOBACCO AS ALSO BECOMES INAPPLICABLE AND THEREFORE IN VIEW OF IPCA LABORATORIES, PROFIT ON BUSINESS U/S.80HHC IS TO BE CALCULATED AFTER SET OFF OF BROU GHT FORWARD UNABSORBED LOSS. SINCE IN THE PRESENT CASE AFTER SET OFF OF UNABSORBED LOS S THE PROFIT AND GAINS OF BUSINESS BECOMES NIL, THE PROFIT OF THE BUSINESS AS COMPUTED AS PER EXPLANATION (BAA) TO SECTION 80HHC ALSO BECOMES NIL. HENCE, AO AFTER CON SIDERING SUBMISSION AND ALL THE JUDGMENTS OF THE ASSESSEE AND THE FACTS OF THE CASE, HELD THAT DEDUCTION U/S.80HHC IS NIL. LD. CIT(A) CONFIRMED THE ACTION O F ASSESSING OFFICER. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE FINDINGS OF LD. CIT(A) THAT VIDE PA RA-4.2 THAT PROVISION OF SECTION 80AB WILL OVER-RIDE THE COMPUTATION MADE U/S.80HHC IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. (SUPRA), THEREFORE IN ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 11 THE PRESENT CASE THE CLAIM OF U/S.80HHC AFTER SET O FF OF BUSINESS LOSS AS PER THE PROVISION OF SECTION 72 TERMS OUT TO BE NIL. NO NEW FACTS HAVE BEEN BROUGHT BEFORE LD CIT(A) OR EVEN BEFORE US. THEREFORE, IN THE CIR CUMSTANCES AND FACTS OF THE CASE, WE FIND NO INFIRMITY IN THE ORDER OF LD CIT(A) WHO HAS RIGHTLY CONFIRMED THE ACTION OF AO. THUS, GROUND 3.1 AND 3.2 OF ASSESSEES APPEAL A RE DISMISSED. 11. AS REGARDS GROUND NO.4.1 AND 4.2. THE BRIEF FAC TS AS EMANATING FROM THE ORDER OF ASSESSING OFFICER AT PAGE-6 PARA-3.4 ARE T HAT THE ASSESSEE HAS SUBMITTED BEFORE CIT(A) THAT IN THE EXPLANATION (IV) OF SECTI ON 115JB, THE PHRASE THE AMOUNTS OF PROFITS ELIGIBLE FOR DEDUCTION U/S.80HHC IMPLIE S THAT THE PROFIT COMPUTED U/S.80HHC, NOT THE DEDUCTION COMPUTED U/S.80HHC SHO ULD BE DEDUCTED FROM THE NET PROFIT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFI T. IT WAS NOTED BY AO THAT THE CONTENTION OF THE ASSESSEE WAS NOT SUPPORTED BY THE LANGUAGE OF EXPLANATION (IV) ITSELF. THE AO HELD THAT IT IS EVIDENT FROM THE LAN GUAGE THAT WHOLE OF THE PROFITS COMPUTED U/S.80HC IS NOT ELIGIBLE FOR DEDUCTION. TH E AMOUNT OF THE PROFIT WHICH IS ELIGIBLE FOR DEDUCTION U/S.80HHC IS TO BE REDUCED F ROM THE BOOK PROFIT. THEREFORE, AO HELD THAT AS NONE OF THE PROFIT IS ELIGIBLE FOR DED UCTION U/S.80HHC IN VIEW OF THE OVERRIDING PROVISIONS OF SECTION80AB, THE SAME WAS NOT REQUIRED TO BE DEDUCTED UNDER THE PROVISIONS OF MAT ALSO. ANOTHER ARGUMENT OF THE ASSESSEE THAT FOR THE PURPOSE OF SECTION 115JB, THE DEDUCTION U/S.80HHC S HOULD BE COMPUTED TAKING THE PROFIT AS PER THE ACCOUNTS PUT BEFORE ANNUAL GENERA L MEETING AND SUBMITTED TO ROC WAS ALSO CONSIDERED BY THE AO AND IT WAS HELD THAT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT, DEDUCTION U/S.80HHC HAS TO BE COMPU TED TAKING PROFITS OF THE BUSINESS AS PER INCOME-TAX PROVISIONS AND NOT AS PE R THE ACCOUNTS PUT BEFORE THE AGM. IN VIEW OF THE DETAILED DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORDER, THE CONTENTION OF THE ASSESSEE WAS REJECTED. THE LD . CIT(A) CONFIRMED THE ACTION OF ASSESSING OFFICER. 12. BEFORE US MR. SOPARKAR ADVOCATE FOR THE ASSESSE E PLACED ON RECORD THE JUDGMENT OF HONBLE SUPREME COURT IN THE SPECIAL LE AVE PETITION NO.33750/ 2009 DATED 20-10-2011 IN THE CASE OF CIT V. BHARI INFORMATION TECH SYS. P. LTD. IN WHICH THE HONBLE SUPREME COURT OF INDIA APPLYING THE DEC ISION OF ITAT SPECIAL BENCH IN THE CASE OF DCIT V. SYNCOME FORMULATIONS (I) LTD. (2007) 106 ITD 193 FOLLOWING THE VIEW TAKEN UP SPECIAL BENCH IN THE CASE OF SYNCOME FORMULATIONS (I) LTD. (SUPRA) ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 12 HAS HELD THAT THE DEDUCTION CLAIMED BY THE ASSESSEE U/S.80HHC HAS TO BE WORKED OUT ON THE ADJUSTED BOOK PROFIT U/S.115JA AND NOT O N THE PROFIT COMPUTED UNDER REGULAR PROVISIONS OF LAW APPLICABLE TO COMPUTATION OF PROFITS AND GAINS OF BUSINESS. FOR THE SAKE OF CLARITY, THE RELEVANT JUDGMENT WHIC H IS AT PRESENT UNREPORTED IS REPRODUCED AS UNDER;- ASSESSEE FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2000-01. ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80HHE TO THE EXTENT OF RS.1,56,33,719/- AGAINST NET PROFIT AS PER PROFIT AND LOSS ACCOUNT A MOUNTING TO RS.3,07,84,105/- TO ARRIVE AT THE BOOK PROFIT OF RS.1,51,50,386/- UN DER SECTION 115JA OF THE INCOME-TAX ACT, 1961 [SEE: VOL.R/1 OF I.A. PAPER BO OK PAGE 6]. THIS CLAIM FOR DEDUCTION MADE BY THE ASSESSEE WAS REJECTED BY THE A.O. SAYING THAT SINCE IN NORMAL COMPUTATION THERE IS NO PROFIT AFTER CARRY-F ORWARD LOSS, DEDUCTION UNDER SECTION 80HHE TO THE EXTENT OF RS.1,56,33,719/- FOR COMPUTING BOOK PROFIT UNDER SECTION 115JA WAS NOT ADMISSIBLE. ACCORDING TO THE A.O. SINCE IN THE PRESENT CASE IN NORMAL COMPUTATION NO NET PROFIT WAS LEFT AFTER THE BROUGHT-FORWARD LOSSES OF THE EARLIER YEARS GOT ADJUSTED AGAINST THE CURRENT YEAR'S PROFIT, THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 80HHE TO THE EXTENT OF RS.1,56,33,719 /-. IN APPEAL, THE CIT (A) UPHELD THE ORDER OF THE A.O. THE ASSESSEE WENT IN APPEAL, AGAINST THE ORDER OF T HE CIT(A), BEFORE THE TRIBUNAL WHICH, FOLLOWING THE JUDGMENT OF THE SPECI AL BENCH OF THE TRIBUNAL IN THE CASE OF DEPUTY COMMISSIONER OF INCOME TAX, RANG E 8(3) V. SYNCOME FORMULATIONS (I) LIMITED (2007) 106 ITD 193, TOOK T HE VIEW THAT THE MAT SCHEME WHICH INCLUDES SECTION 115JA DID NOT TAKE AW AY THE BENEFITS GIVEN UNDER SECTION 80HHE. THE SAID JUDGMENT OF THE SPECI AL BENCH WAS WITH REGARD TO COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC WHICH, LIKE SECTION 80HHE, FALLS UNDER CHAPTER VI-A OF THE INCOME TAX A CT, 1961. IN THE SAID JUDGMENT OF SPECIAL BENCH, WHICH SQUARE LY APPLIES TO THE FACTS OF THE PRESENT CASE, THE TRIBUNAL HELD THAT THE DEDUCT ION UNDER SECTION 80HHC (SECTION 80HHE ALSO FALLS IN CHAPTER VI-A) IS TO BE WORKED OUT NOT ON THE BASIS OF REGULAR INCOME TAX PROFITS BUT IT HAS TO B E WORKED OUT ON THE BASIS OF THE ADJUSTED BOOK PROFITS IN A CASE WHERE SECTION 1 15JA IS APPLICABLE. IN THE SAID JUDGMENT THE DICHOTOMY BETWEEN REGULAR INCOME TAX PROFITS AND ADJUSTED BOOK PROFITS UNDER SECTION 115JA IS CLEARLY BROUGHT OUT. THE TRIBUNAL IN THE SAID JUDGMENT RIGHTLY HELD THAT IN SECTION 115JA RE LIEF HAS TO BE COMPUTED UNDER SECTION 80HHC(3)/(3A). ACCORDING TO THE TRIBU NAL, ONCE THE LAW ITSELF DECLARES THAT THE ADJUSTED BOOK PROFIT IS AMENABLE FOR FURTHER DEDUCTIONS ON SPECIFIED GROUNDS, IN A CASE WHERE SECTION 80HHC (8 0HHE IN THE PRESENT CASE) IS OPERATIONAL, IT BECOMES CLEAR THAT COMPUTA TION FOR THE DEDUCTION UNDER THOSE SECTIONS NEEDS TO BE WORKED OUT ON THE BASIS OF THE ADJUSTED BOOK PROFIT [SEE: PARA 61 OF THE JUDGMENT OF THE TR IBUNAL IN SYNCOME FORMULATIONS (SUPRA)]. IN THE PRESENT CASE WE ARE CONCERNED WIT H SECTION 80HHE WHICH IS REFERRED TO IN THE EXPLANATION TO SE CTION 115JA, CLAUSE (IX). IN OUR VIEW, THE JUDGMENT OF THE SPECIAL BENCH OF THE TRIBUNAL IN SYNCOME FORMULATIONS (SUPRA) SQUARELY APPLIES TO THE PRESENT CASE. FOLL OWING THE VIEW ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 13 TAKEN BY THE SPECIAL BENCH IN SYNCOME FORMULATIONS (SUPRA), THE TRIBUNAL IN THE PRESENT CASE CAME TO THE CONCLUSION THAT DEDUCT ION CLAIMED BY THE ASSESSEE UNDER SECTION 80HHE HAS TO BE WORKED OUT O N THE BASIS OF ADJUSTED BOOK PROFIT UNDER SECTION 115JA AND NOT ON THE BASI S OF THE PROFITS COMPUTED UNDER REGULAR PROVISIONS LAW APPLICABLE TO COMPUTAT ION OF PROFITS AND GAINS OF BUSINESS. THE JUDGMENT OF THE TRIBUNAL HAS BEEN UPHELD BY THE HIGH COURT. WE SEE NO REASON TO INTERFERE WITH THE IMPUGNED JUDGMENT. WE AGREE WITH THE VIEW TAKEN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SYNCOME FORMULATIONS (SUPRA) VIDE PARA 61 OF THE JUDGMENT. ACCORDINGLY, THE SPECIAL LEAVE PETITION FILED BY TH E DEPARTMENT STANDS DISMISSED WITH NO ORDER AS TO COSTS. WE ALSO REPRODUCE THE ORDER OF LD. CIT(A) VIDE PARA -5.3 OF HIS ORDER FOR THE SAKE OF CLARITY WHICH IS AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE ARGUMENT PUT FORTH IN THIS REGARD AND I FIND THAT THE ANALYSIS O F THE AO IN NOT ALLOWING ANY BENEFIT U/S.80HHC FROM THE BOOK PROFITS IS FULLY JU STIFIABLE AS NONE OF THE PROFITS WAS ELIGIBLE FOR DEDUCTION U/S.80HHC IN VIE W OF PROVISION OF SECTION 80AB AND THEREFORE THE DEDUCTION ELIGIBLE U/S.80HHC AS PER EXPLANATION (IV) TO SECTION 115JB NIL. SIMILARLY, FOR THE PURPOSE OF CALCULATION OF 80HHC, THE PROFITS AS PER THE ACCOUNTS PRESENTED BEFORE THE AG M OR ROC CANNOT BE CONSIDERED BECAUSE AS PER CLAUSE (VIII) OF THE EXPL ANATION, THE BOOK PROFIT MEANS THE NET PROFIT AS SHOWN BY THE PROFIT AND LOS S ACCOUNT PREPARED UNDER SUB-SECTION 1 OR SUB SECTION 2 AS REDUCED BY AMOUNT S OF PROFIT ELIGIBLE FOR DEDUCTION U/S.80HHC COMPUTED UNDER CLAUSE (A), (B) OR (C) OF SUBSECTION 3 OR SECTION 3(A) AS THE CASE MAY BE, OF THAT SECTION AN D SUBJECT TO THE CONDITIONS SPECIFIED IN SUB-SECTION (4) & (4A) OF THAT SECTION . THE BOOK PROFIT WILL HAVE TO BE TAKEN AS PER THE ACCOUNTS PREPARED FOR THE PURPO SE OF THE COMPANY BUT BENEFIT OF SECTION 80HHC WILL HAVE TO BE COMPUTED A S PER CLAUSES (A), (B) OR (C) OF SUB-SECTION 3 ON THE BASIS OF REGULAR ACCOUN TS MAINTAINED BY T THE APPELLANT. ACCORDINGLY, THE PROFIT CAN NOT BE TAKEN FROM THE ACCOUNTS PREPARED FOR ROC BUT THE SAME WILL HAVE TO BE TAKEN AS PER B OOKS OF ACCOUNTS AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 80HHC(3) ONLY. THEREFORE THE AO WAS JUSTIFIED IN GRANTING NIL DEDUCTION U/S.80HHC F ROM THE BOOK PROFITS. ACCORDINGLY, THIS GROUND OF THE APPELLANT IS DISMIS SED. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE AS PER THE JUDGMENT OF HONBLE SUPREME COURT OF INDIA IN T HE CASE OF SYNCOME FORMULATIONS (I) LTD. (SUPRA) MENTIONED HEREINABOVE, IT IS CLEARLY MENTI ONED BY THE HONBLE SUPREME COURT OF INDIA THAT THE DEDUCTION C LAIMED BY THE ASSESSEE U/S. 80HHC HAS TO BE WORKED OUT ON THE BASIS OF ADJUSTED BOOK PROFIT U/S.115JA AND NOT ON THE BASIS OF PROFIT COMPUTED UNDER REGULAR PROVI SIONS OF LAW APPLICABLE TO COMPUTATION OF PROFIT AND GAINS OF BUSINESS. THE DE CISION OF HONBLE SUPREME COURT ITA NO.1290/AHD/2006 A.Y. 2002-03 GHCL LTD. V. ACIT CIR-4 ABD PAGE 14 IN THE CASE OF SYNCOME FORMULATIONS (I) LTD. BY ITAT SPECIAL BENCH (SUPRA) IN PARA 61 OF THE SAID DECISION HAS BEEN FOLLOWED BY THE HO NBLE SUPREME COURT OF INDIA. IN THE PRESENT CASE AMOUNT REFERRED IN CLAUSE (A) TO ( G) OF THE EXPLANATION 2 SECTION 115JA HAS TO BE REDUCED BY CLAUSE (VIII) OF THE SAI D EXPLANATION, WHEREAS DEDUCTION U/S.80HHC HAS TO BE REDUCED UNDER CLAUSE (IX) OF TH E SAID EXPLANATION. IN THE CASE OF CIT V. M/S BHARI INFORMATION TECH. SYS. P. LTD. (SUPRA) THE SLP OF THE DEPARTMENT HAS BEEN DISMISSED AND FOLLOWING THE SAME WE DIRECT THE ASSESSING OFFICER THAT THE DEDUCTION CLAIMED BY THE ASSESSEE U/S.80HHC BE WORK ED OUT ON THE BASIS OF ADJUSTED BOOK PROFIT U/S115JA AND NOT ON THE BASIS OF PROFIT UNDER REGULAR PROVISIONS OF LAW APPLICABLE TO THE COMPUTATION OF PROFIT AND GAINS OF THE BUSINESS. THEREFORE, THE MATTER IS RESTORED TO THE FILE OF AO WHO WILL C OMPUTE THE DEDUCTION U/S.80HHC AS DIRECTED BY US HEREINABOVE, FOLLOWING THE DECISION OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF M/S. BHARI INFORMATION TECH. SYS. P. LTD. (SUPRA) AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS, GROUND NO.4.1 AND 4.2 IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ' ! #$% 30 / 12 /2011 ) * + , THIS ORDER PRONOUNCED IN OPEN COURT ON 30/12/ 2011 . SD/- SD/- ( G.C.GUPTA ) ( B.P. JAIN ) (VICE PRESIDENT) (ACCOUNTANT MEMBER) #$%- 30/12/2011 . , DKP* ! ! ! ! //0 //0 //0 //0 1 0 1 0 1 0 1 0 / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. $$/4 5 / CONCERNED CIT 4. 5- / CIT (A) 5. 08+ ///4, /4, . / DR, ITAT, AHMEDABAD 6. +;< =' / GUARD FILE. BY ORDER/ ! , /TRUE COPY/ >/. $? /4, . ,