The ACIT, Circle-1(2), Baroda V. M/s. Fortune Infotech Ltd., Baroda

ITA 1385/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6919 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 28-03-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 21-04-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G S SOURYAWANSI
• Assessee Lawyers: M G PATEL
• Keywords: Business income; Depreciation; Commercial expediency; Unabsorbed depreciation; Reassessment proceedings
• Section: 10B; 56; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI MUKUL SHRAWAT,JM & SHRI A N PAHUJA,AM ITA. NO . 1385/AHD/2008 WITH C.O. NO. 105/AHD/2008 (ASSESSMENT YEA R:- 2002-2003) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1(2), AAYAKAR BHAVAN, RACE COURSE CIRCLE, BARODA. V/S M/S. FORTUNE INFOTECH LTD., 160/4,OLD CHHANI ROAD, BARODA PAN: AAACC7460 R [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI G.S. SOURYAWANSI, DR ASSESSEE BY:- SHRI M.G. PATEL., AR ( )/ ORDER A N PAHUJA: THIS APPEAL BY THE REVENUE AND THE CORRESPONDING C ROSS- OBJECTION[CO] BY THE ASSESSEE DIRECTED AGAINST AN O RDER DATED 17-1-2008 OF THE LD. C.I.T.(A)-V, BARODA, RAISE THE FOLLOWING GROUND S::- ITA. NO. 1385/AHD/2008 1(A). ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD CIT(A) ERRED IN ALLOWING THE ASSESSEES CLAIM FO R DEDUCTION OF UNABSORBED DEPRECIATION OF RS.8,93,553/- OF ASSESSM ENT YEAR 2001-02 AGAINST THE INCOME FROM OTHER SOURCES OF RS.8,91,86 6/-. 1(B) THE LD. CIT (A) FAILED TO APPRECIATE THAT AS PER SECTION 57(II) DEDUCTION U/S. 32 IS ADMISSIBLE ONLY IN RESPECT OF ITEM COVERED U/S. 56(2)(II) AND 56(2)(III) AND 56(2)(ID) I.E. INCOME BY WAY OF INTEREST ON SECURITIES. HENCE, DEDUCTION OF DEPRECIATION OF RS.8,93,553/- I S NOT CORRECT. 2. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND O R ALTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 2 CO. NO. 105/AHD/2008 1. THE LD. CIT(A)-V, BARODA HAS ERRED IN LAW AS W ELL AS ON FACTS OF THE CASE BY CONFIRMING THE DISALLOWANCE OF RS.2, 93,266/- OUT OF INTEREST EXPENDITURE MADE BY THE ASSESSING OFFICER ON THE G ROUND THAT BORROWED FUNDS HAVE BEEN TRANSFERRED TO THE ASSOCIATE CONCER N AND SUBSIDIARY COMPANY ON WHICH NO INTEREST HAS BEEN CHARGED. 2. THE RESPONDENT, THEREFORE, PRAYS TO D ELETE DISALLOWANCE OF RS.2,93,266/- OUT OF INTEREST EXPENDITURE. 3. THE RESPONDENT RESERVES THE RIGHT TO ADD ,ALT ER, AMEND AND/OR WITHDRAW ANY OF THE ABOVE GROUNDS OF CROSS OBJECT ION. 2. ADVERTING FIRST TO GROUND NOS.1(A) & (B) OF THE APPEAL OF THE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RE TURN DECLARING NIL INCOME FILED ON 28-10-2002 BY THE ASSESSEE, PROVIDING IT ENABLED S ERVICES, WAS PROCESSED ON 26-2-2003 U/S. 143(1) OF THE INCOME TAX ACT, 1961[H EREINAFTER REFERRED TO AS THE ACT]. THEREAFTER, A NOTICE U/S. 148 WAS ISSUED ON 7 -3-2005 AFTER RECORDING THE FOLLOWING REASONS:- IT IS NOTICED FROM THE CASE RE CORDS FOR A.Y. 2002-03 THAT UNABSORBED DEPRECIATION OF EARLIER YEAR AMOUNTING TO RS.8,93,5 53/- IS ALLOWED AGAINST INCOME FROM OTHER SOURCES. THIS IS TO BE DISALLOWED AND IS TO BE TAXED. 2.1. IN RESPONSE TO THE AFORESAID NOTICE, T HE ASSESSEE REPLIED VIDE LETTER DATED 12-10-2005 THAT RETURN FILED ORIGINALLY ON 28.10.20 02 MAY BE TREATED AS RETURN IN RESPONSE TO NOTICE U/S. 148 OF THE ACT. DURING T HE COURSE OF REASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE SET OFF AN AMOUNT OF RS.8,93,553/- ON ACCOUNT OF UNABSORBED DEPRECIATION OF EARLIER YEARS AGAINST INCOME UNDER THE HEAD OTHER SOURCES FOR T HE YEAR UNDER CONSIDERATION. TO A QUERY BY THE AO, THE ASSESSEE CONTENDED THAT NO LIMIT IS FIXED FOR CARRY- FORWARD OF UNABSORBED DEPRECIATION, WHICH CAN BE SE T OFF AGAINST ANY INCOME WHETHER CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR UNDER ANY OTHER HEAD. HOWEVER, THE AO DID NOT ACCEP T THE SUBMISSIONS OF THE ASSESSEE IN VIEW OF PROVISIONS OF SECTION 57(II) OF THE ACT ,STIPULATING, INTER ALIA, SET OFF OF UNABSORBED DEPRECIATION OF EARLIER YEARS ONL Y AGAINST THE INCOME OF THE NATURE SPECIFIED IN CLAUSE (II) & (III) OF SUB-SECT ION (2) OF SECTION 56 OF THE ACT I.E ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 3 INCOME FROM HIRING OF MACHINERY, PLANT OR FURNITURE IF SUCH INCOME IS NOT CHARGEABLE TO TAX UNDER THE HEAD PROFITS & GAINS O F BUSINESS OR PROFESSION OR INCOME FROM LETTING OF BUILDINGS WHERE LETTING OF S UCH BUILDINGS IS INSEPARABLE FROM HIRING OF MACHINERY, PLANT OR FURNITURE. SINCE INCO ME OF THE ASSESSEE FROM OTHER SOURCES COMPRISED INTEREST ON FD WITH BANK OR INTE REST ON LOAN TO COMPANY AND OTHER INTEREST INCOME, THE AO REJECTED THE CLAIM FO R SET OFF OF UNABSORBED DEPRECIATION AGAINST SUCH INTEREST INCOME ASSESSED UNDER THE HEAD OTHER SOURCES. 3. ON APPEAL, THE LD. C.I.T.(A) ALLOWED TH E CLAIM OF THE ASSESSEE IN THE FOLLOWING TERMS -: I HAVE CONSIDERED THE FACTS O F THE CASE, AND THE ARGUMENTS OF THE A.O. THE APPELLANTS CLAIM HAS TO BE ALLOWED AS THE CARRIED FORWARD DEPRECIATION IS ELIGIBLE TO BE ADJUSTED AGAINST THE INCOME UNDER ANY OTHER HEAD FOR THE CURRENT YEAR. THE ARGUMENT OF THE AO T HAT THIS IS NOT PERMISSIBLE UNDER SECTION 57(2) IS NOT TENABLE. THE CASE HERE IS NOT THAT OF A DEDUCTION, BUT THAT OF AN ADJUSTMENT. THE CASE LA WS CITED BY THE AR AND MORE PARTICULARLY THE CASE OF HIMATSINGHKA SEIDA LTD. VS. ACIT 63 ITD 239 (BANG.) SQUARELY COVERS THIS ISSUE. IN VIEW OF THIS, THE D ISALLOWANCE MADE BY THE A.O IS DELETED AND THE APPEAL ON THIS G ROUND IS ALLOWED. THE APPELLANT HAS CLAIMED SET OFF OF RS.8,93,553 BEING THIS YEARS INCOME AGAINST UNABSORBED DEPRECIATION OF RS.4,67,747 OF A .Y. 2000-01 AND UNABSORBED DEPRECIATION OF RS.4,25,806/- OF A.Y. 2 001-02. HOWEVER, SUB- SECTION 6(II) OF SECTION 10B PROVIDES THAT ANY LOSS OR DEPRECIATION RELATING TO ASSESSMENT YEAR ENDING BEFORE 1 ST DAY OF APRIL, 2001 WILL NOT BE ALLOWED TO BE SET OFF. BECAUSE OF THIS SPECIFIC PROVISIONS THE APPELLANT WILL NOT BE ALLOWED TO SET OFF THIS YEARS INCOME AGAINST CARRI ED FORWARD UNABSORBED DEPRECIATION OF 2000-01 OF RS.4,67,747. INSTEAD THE APPELLANT WILL GET SET OFF AGAINST UNABSORBED DEPRECIATION OF A.Y. 2001-02 . 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LD. CIT (A). THE D.R SUPPORTED THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF THE LD. CIT( A) IN THE LIGHT OF DECISION IN HIMATSINGIKA SEIDA LTD. VS. ACIT 63 ITD 290(BANGALO RE). 5. WE HAVE HEARD BOTH THE PARTIES AND GO NE THROUGH THE FACTS OF THE CASE. INDISPUTABLY, THE ASSESSEE CARRYING ON BUSINESS OF IT ENABLED SERVICES, CLAIMED ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 4 DEDUCTION U/S 10B OF THE ACT. THE LD. CIT(A) DID NOT ALLOW SET OFF OF UNABSORBED DEPRECIATION OF RS.4,67,747/- RELATING TO ASSESSMEN T YEAR ENDING BEFORE 1 ST DAY OF APRIL, 2001 I.E AY 2000-01 IN VIEW OF PROVISIONS O F SEC.10B(6) OF THE ACT AND THE ASSESSEE IS NOT IN APPEAL BEFORE US AGAINST THESE F INDINGS OF THE LD. CIT(A ). THUS, THE AMOUNT OF RS. 8,93.553/- FOR THE AY 2001-02 MEN TIONED IN THE GROUND RAISED BY THE REVENUE, IS ACTUALLY RS.4,25,806/-. AS IS APPARENT FROM THE AFORESAID FACTS, THE ISSUE BEFORE US IS AS TO WHETHER UNABSORBED DEP RECIATION OF RS.4,25,806/- FOR THE AY 2001-02 IS ELIGIBLE FOR SET OFF AGAINST INC OME ON ACCOUNT OF INTEREST ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES . THE AO DISALLOWED THE CLAIM IN VIEW OF SPECIFIC PROVISIONS OF SEC. 57(II ) OF THE ACT WHILE THE LD. CIT(A) ,WITHOUT ASSIGNING ANY REASONS AS TO WHY THE PROV ISIONS OF SEC. 57(II) OF THE ACT ARE NOT APPLICABLE OR HOW THE DECISION OF THE BAN GALORE BENCH IN THE CASE OF HIMATSINGIKA SEIDA LTD. VS. ACIT 63 ITD 290, RELIED UPON BY HIM IS APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, AL LOWED THE CLAIM. BEFORE PROCEEDING FURTHER , WE MAY HAVE A LOOK AT THE RELE VANT PROVISIONS OF SEC. 57(II) AND SEC. 56(2)(II) AND (III) OF THE ACT SO FAR AS R ELEVANT FOR OUR PURPOSES READ AS UNDER: 57. DEDUCTIONS. THE INCOME CHARGEABLE UNDER THE HEAD 'INCOME FROM O THER SOURCES' SHALL BE COMPUTED AFTER MAKING THE FOLLOWING DEDUCTIONS, NAM ELY:- . (II) IN THE CASE OF INCOME OF THE NATURE REFERRED T O IN CLAUSES (II) AND (III) OF SUB- SECTION (2) OF SECTION 56, DEDUCTIONS, SO FAR AS MA Y BE, IN ACCORDANCE WITH THE PROVISIONS OF SUB-CLAUSE (II) OF CLAUSE (A) AND CLA USE (C) OF SECTION 30, SECTION 31 AND SUB-SECTIONS (1) AND (2) OF SECTION 32 AND S UBJECT TO THE PROVISIONS OF SECTION 38 ;. 5.1 THE PROVISIONS OF SEC. 56(2)(II) & (III) REF ERRED TO IN THE AFORESAID SEC. 57(II) OF THE ACT READ AS UNDER: 56. INCOME FROM OTHER SOURCES. (1) INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLUDE D FROM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABLE TO INCOME-TAX UN DER THE HEAD 'INCOME FROM ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 5 OTHER SOURCES', IF IT IS NOT CHARGEABLE TO INCOME-T AX UNDER ANY OF THE HEADS SPECIFIED IN SECTION 14, ITEMS A TO E. (2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GEN ERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOME SHALL BE CHAR GEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES', NAMELY:- .. (II) INCOME FROM MACHINERY, PLANT OR FURNITURE BEL ONGING TO THE ASSESSEE AND LET ON HIRE, IF THE INCOME IS NOT CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'; (III) WHERE AN ASSESSEE LETS ON HIRE MACHINERY, PLA NT OR FURNITURE BELONGING TO HIM AND ALSO BUILDINGS, AND THE LETTIN G OF THE BUILDINGS IS INSEPARABLE FROM THE LETTING OF THE SAID MACHINERY, PLANT OR FURNITURE, THE INCOME FROM SUCH LETTING, IF IT IS NOT CHARGEAB LE TO INCOME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON';. 5.2 HERE , WE MAY ALSO HAVE A LOOK AT THE DEC ISION IN HIMATSINGIKA SEIDA LTD. (SUPRA) FOLLOWED BY THE LD. CIT(A). THE FACTS IN T HE SAID DECISION RELATING TO THE AY 1994-95 WERE THAT THE ASSESSEE, A HUNDRED PER CEN T EXPORT-ORIENTED INDUSTRIAL UNIT ,CLAIMING DEDUCTION IN TERMS OF THE PROVISIONS OF SECTION 10B COMMENCED THEIR INDUSTRIAL OPERATIONS IN THE AY 1988-89 . IN THE AY1994-95, THE ASSESSEE HAD SOME INCOME FROM OTHER SOURCES, WHICH WAS BEYOND TH E PROFITS AND GAINS OF THE EXPORT-ORIENTED INDUSTRIAL UNIT. UNABSORBED DEPRECI ATION AVAILABLE TO THE ASSESSEE IN ASSESSMENT YEAR 1988-89 WAS CARRIED FORWARD TO T HIS YEAR AND WAS CLAIMED BY THE ASSESSEE TO BE ADJUSTABLE AGAINST THE INCOME FR OM OTHER SOURCES, THEREBY REDUCING THE TOTAL INCOME OF THE ASSESSEE FOR ASSES SMENT PURPOSE AT NIL. THE ASSESSING OFFICER, IN THE ASSESSMENT ORDER PASSED O N 17-3-1995 ACCEPTED THE ABOVE CLAIM OF THE ASSESSEE AND ASSESSED THE TOTAL INCOME AT NIL. THE CIT, HOWEVER, EXERCISED HIS POWERS UNDER SECTION 263 OF THE ACT AND PASSED AN ORDER ON 25-3-1996 IN WHICH HE CONSIDERED THE ABOVE ACTIO N ON THE PART OF THE ASSESSING OFFICER OF ADJUSTING THE BROUGHT FORWARD UNABSORBED DEPRECIATION AGAINST THE INCOME FROM OTHER SOURCES OF THE ASSESSEE TO BE WRO NG AND BAD IN LAW AND CAUSING LOSS TO THE REVENUE. ULTIMATELY, HE DIRECTE D THAT THE UNABSORBED DEPRECIATION AND UNABSORBED INVESTMENT ALLOWANCE SH OULD BE ADJUSTED AGAINST THE INCOME OF THE EXPORT-ORIENTED BUSINESS UNDERTAKING AND THE TOTAL INCOME OF THE ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 6 ASSESSEE, ACCORDINGLY ,BE RECOMPUTED AFRESH. ACCOR DING TO THE CIT, SINCE BY VIRTUE OF THE PROVISIONS OF SECTION 32(2), UNABSORB ED DEPRECIATION FORMS A PART OF THE CURRENT YEAR'S DEPRECIATION, IT WOULD BE REQUIR ED TO ADJUST THE SAME FIRST AGAINST THE BUSINESS INCOME OF THE ASSESSEE FROM THE INDUST RIAL UNDERTAKING. HOWEVER, IN COMPUTING THE TOTAL INCOME FROM THE INDUSTRIAL UNDE RTAKING, THE ASSESSEE ADJUSTED THE CURRENT YEAR'S DEPRECIATION UNDER SECTION 32(1) , ALTHOUGH IT DID NOT ADJUST THE UNABSORBED DEPRECIATION AND INVESTMENT ALLOWANCE BR OUGHT FORWARD FROM EARLIER YEARS AGAINST THE SAID INCOME. IN THE LIGHT OF THE SE FACTS, THE ITAT OBSERVED THAT THE DEPRECIATION ALLOWANCE, WHETHER IN RESPECT OF T HE CURRENT YEAR OR IN RESPECT OF THE EARLIER YEAR AND CARRIED FORWARD TO A SUBSEQUEN T YEAR, IS REQUIRED TO BE ADJUSTED AGAINST THE PROFITS AND GAINS OF THE BUSIN ESS CHARGEABLE FOR THAT YEAR. IT WAS FURTHER OBSERVED THAT THE EXPRESSION ' PROFITS AND GAINS ' HAS BEEN USED IN THE SENSE OF GROSS OR TOTAL INCOME OF THE ASSESSEE BEFO RE ALLOWANCE OF EITHER CURRENT YEAR'S OR EARLIER YEAR'S DEPRECIATION BROUGHT FORWA RD TO THE CURRENT YEAR. ACCORDINGLY, IT WAS CONCLUDED THAT THERE WAS NO FOR CE IN THE ARGUMENT THAT WHILE OTHER INCOME IS AVAILABLE FOR ABSORPTION OF EARLIER YEAR'S DEPRECIATION BROUGHT FORWARD TO THIS YEAR, THE SAID DEPRECIATION WILL HA VE TO BE ADJUSTED AGAINST THE PROFITS AND GAINS OF THE EXPORT-ORIENTED UNDERTAKIN G FOR ALLOWING EXEMPTION IN RESPECT OF SUCH PROFITS AND GAINS. THUS, THE CLAIM OF THE ASSESSEE OF ADJUSTMENT OF THE UNABSORBED DEPRECIATION AGAINST THE INCOME OF T HE ASSESSEE FROM OTHER SOURCES WAS UPHELD. 5.3 HOWEVER, WE FIND THAT THE AFORESAID DECISIO N OF THE ITAT FOLLOWED BY THE LD. CIT(A) HAS BEEN REVERSED BY THE HONBLE KARNATAKA H IGH COURT IN CIT VS. HIMATSINGIKA SEIDA LTD.,206 CTR 106. THE HONBLE HI GH COURT HELD THAT SECTION 32(2) PROVIDES FOR ADJUSTMENT FOR SUBSEQU ENT YEARS. IF WE SEE SECTION 10B, IT PROVIDES FOR EXEMPTION OF PAYMENT OF TAX WI TH REFERENCE TO PROFITS AND GAINS DERIVED BY 100 PER CENT, EXPORT-ORIENTED UNDERTAKIN GS. TO ARRIVE AT A PROFIT AND GAIN, ONE HAS TO NECESSARILY TAKE INTO CONSIDERATIO N THE TOTAL INCOME IN TERMS OF THE ACT. TO ARRIVE AT THE INCOME ONE HAS TO TAKE INTO C ONSIDERATION, THE VARIOUS ADDITIONS AND DELETIONS IN TERMS OF THE ACT. IN FAC T, THE PETITIONER KNOWING FULLY WELL HAS CHOSEN TO TAKE INTO CONSIDERATION THE ALLOWABIL ITY OF DEPRECIATION FOR THE PURPOSE OF CALCULATION OF TOTAL INCOME. BUT CURIOUS LY AN ARGUMENT HAS NOW BEEN ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 7 ADVANCED THAT EXEMPTION IN TERMS OF SECTION 10B COU LD ALSO BE ON COMMERCIAL BASIS NOT NECESSARILY IN TERMS OF THE CALCULATION. WE DO NOT ACCEPT THIS SUBMISSION. SECTION 10B CANNOT BE READ IN ISOLATION OF OTHER PR OVISIONS. IT IS ONLY AN EXEMPTION PROVISION. EXEMPTION CANNOT BE FANCIFUL AND IT HAS SOME RATIONALE WITH OTHER PROVISIONS OF THE ACT. THEREFORE, A COMBINED READIN G OF THE DEFINITION OF EXEMPTION, TOTAL INCOME-TAX LIABILITY DEDUCTABILITY, ETC., ONE HAS TO COME TO A CONCLUSION THAT CALCULATION AS FAR AS POSSIBLE IS TO BE IN TERMS OF THE INCOME-TAX ACT. THAT IS EXACTLY WHAT HAS BEEN DONE BY THE ASSESSEE. HAVING CALCULATED IN A PARTICULAR MANNER, NOW IT DOES NOT LIE IN THE MOUTH OF THE ASS ESSEE TO CONTEND CONTRA IN THESE PROCEEDINGS. IT CANNOT BE ARGUED THAT THE CAL CULATION SO PROVIDED IS ON A MISTAKEN BASIS OR THAT COULD BE ON COMMERCIAL BASIS . WE ARE NOT PREPARED TO ACCEPT THIS ARGUMENT ADVANCED BY THE ASSESSEE. EXEM PTION ALSO HAS TO BE SCRUTINIZED BY THE DEPARTMENT AS OTHERWISE THERE IS EVERY CHANCE OF EXEMPTION BEING MISUSED BY AN ASSESSEE. IT MAY BE TRUE THAT E VEN AFTER TAKING INTO CONSIDERATION, THE UNABSORBED DEPRECIATION, THE ASS ESSEE MAY GET EXEMPTION BUT NONE THE LESS HE CANNOT TAKE ONLY A PORTION OF DEPR ECIATION JUST TO SUIT HIS INCOME FOR THE PURPOSE OF NIL LIABILITY AND ADJUST THE BAL ANCE OF UNABSORBED DEPRECIATION FOR OTHER BUSINESS INCOME ONCE AGAIN TO SHOW NIL LIABIL ITY. WHEN THE UNABSORBED DEPRECIATION COULD HAVE BEEN TAKEN FOR ARRIVING AT AN EXEMPTED INCOME, THE ASSESSEE CANNOT PLAY WITH THE FIGURES FOR THE PURPO SE OF SHOWING NIL LIABILITY AS HAS BEEN DONE IN THE CASE ON HAND. THE INTENTION OF THE LEGISLATURE IS ONLY TO PROVIDE 100 PER CENT, EXEMPTION FOR EXPORT INCOME AND NOT F OR OTHER INCOME. THE PETITIONER BY DIVIDING DEPRECIATION CONTRARY TO SECTION 32 HAS VIRTUALLY TAKEN EXEMPTION FROM PAYMENT OF TAX EVEN FOR OTHER BUSINESS INCOME IN TH E CASE ON HAND. THAT CANNOT BE ALLOWED AS RIGHTLY RULED BY THE COMMISSIONER. TH E ALLOWANCE OF THE DEPRECIATION BY THE TRIBUNAL, IN OUR VIEW, IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE AS ARGUED BY THE DEPARTMENT. THE TRIBUNAL HAS TAKEN A NARROW VIEW OF THE MATTER WITHOUT TAKING INTO CONSIDERATION, THE LAUDABLE OBJECT OF E XEMPTION AND AT THE SAME TIME PROVIDING FOR TAX LIABILITY TOWARDS OTHER LIABILITY . THE INTERPRETATION HAS TO BE MEANINGFUL AND ACCEPTABLE AND IT CANNOT BE AGAINST THE INTENTION OF THE LEGISLATION. LEGISLATION NEVER WANTED THE ENTIRE INCOME TO BE EX EMPTED BY TAKING ADVANTAGE OF SECTION 10B OF THE ACT. THE APPROACH OF THE TRIBUNA L TO OUR MIND IS INCORRECT AND, HENCE, WE FIND SUBSTANCE IN THE ARGUMENT OF THE REV ENUE. 5.31 IN THE INSTANT CASE, INDISPUTABLY, THE AS SESSEE IS CLAIMING DEDUCTION U/S 10B OF THE ACT .SECTION 10B CANNOT BE READ IN ISOLA TION OF OTHER PROVISIONS. IT IS ONLY AN EXEMPTION PROVISION. AS HELD BY THE HONBLE KARNATAKA HIGH COURT, EXEMPTION CANNOT BE FANCIFUL AND IT HAS SOME RATION ALE WITH OTHER PROVISIONS OF THE ACT. IT MAY BE TRUE THAT EVEN AFTER TAKING INTO CON SIDERATION, THE UNABSORBED DEPRECIATION, THE ASSESSEE MAY GET EXEMPTION BUT NO NE THE LESS HE CANNOT TAKE ONLY A PORTION OF DEPRECIATION JUST TO SUIT HIS INC OME FOR THE PURPOSE OF NIL LIABILITY AND ADJUST THE BALANCE OF UNABSORBED DEPRECIATION F OR OTHER BUSINESS INCOME ONCE ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 8 AGAIN TO SHOW NIL LIABILITY. WHEN THE UNABSORBED DE PRECIATION COULD HAVE BEEN TAKEN FOR ARRIVING AT AN EXEMPTED INCOME, THE ASSES SEE CANNOT PLAY WITH THE FIGURES FOR THE PURPOSE OF SHOWING NIL LIABILITY AS HAS BEEN DONE IN THE CASE ON HAND. 5.4 IN THE LIGHT OF AFORESAID VIEW TAKEN BY THE H ONBLE KARNATAKA HIGH COURT RELIANCE BY THE LD. AR ON VARIOUS DECISIONS OF THE ITAT REPORTED IN 21 SOT29(MUMBAI) AND 38 SOT 369(COCHIN) IS TOTALLY MIS PLACED. AS REGARDS OTHER DECISIONS LISTED BY THE LD. AR OR IN THE IMPUGNED O RDER , THE LD. AR DID NOT DEMONSTRATE AS TO HOW THE FACTS AND CIRCUMSTANCES I N THOSE DECISIONS ARE PARALLEL WITH THE FACTS AND CIRCUMSTANCES IN THE INSTANT CAS E NOR EVEN WHISPERED AS TO WHETHER OR NOT THESE DECISIONS WERE RENDERED IN THE CONTEXT OF PROVISIONS OF SEC. 10A OR 10B OF THE ACT. 5.5 THE PROVISIONS OF SEC. 32(2) OF THE ACT WERE AMEN DED BY THE FINANCE ACT,2001 W.E.F 1.4.2001 AND THESE ARE SAME AS WERE PREVAILING UP TO THE AY 1996-97.THE CARRIED FORWARD DEPRECIATION OF EARLIER YEARS REMAINING UNABSORBED AS ON 1.4.2001 WOULD ,THUS BE GOVERNED BY THE CURRE NT PROVISIONS AS HELD IN RELIANCE JUTE AND INDUSTRIES LTD. VS. CIT,120 ITR92 1(SC). SINCE THE DECISION OF THE ITAT RELIED UPON BY THE LD. CIT(A) HAS BEEN REV ERSED BY THE HONBLE KARNATAKA HIGH COURT WHILE THE LD. CIT(A) IN THE IMPUGNED OR DER AND EVEN THE LD. AR APPEARING BEFORE US DID NOT DISPUTE THE FINDINGS OF THE AO REGARDING APPLICABILITY OF PROVISIONS OF SEC. 57(II) READ WITH SEC. 56(II) AND (III) OF THE ACT NOR DEMONSTRATED THE APPLICABILITY OF DECISIONS MENTIONED IN THE LI ST FILED BEFORE US , IN THE LIGHT OF VIEW TAKEN BY THE HONBLE KARNATAKA HIGH COURT, WE HAVE NO HESITATION IN VACATING THE FINDINGS OF THE LD. CIT(A).ACCORDINGLY, THEREBE ING NO OTHER PLEA OR ARGUMENT MADE BEFORE US , IT IS CONCLUDED THAT THE CLAIM OF THE ASSESSEE FOR SET OFF OF UNABSORBED DEPRECIATION AGAINST INTEREST INCOME AS SESSED UNDER THE HEAD OTHER SOURCES , HAS RIGHTLY BEEN DISALLOWED BY THE AO . C ONSEQUENTLY, GROUND NOS.1(A) & (B) IN THE APPEAL OF THE REVENUE ARE ALLOWED. ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 9 6. NOW ADVERTING TO GROUND NOS.1 & 2 I N THE CROSS OBJECTION, THE A.O. NOTICED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE ADVANCED RS.55,22,414/- (44,96,064 + 10,26,350) TO ITS SUBSI DIARY AND ASSOCIATE COMPANIES BY WAY OF INTEREST FREE ADVANCES. TO A QUERY BY THE AO, THE ASSESSEE REPLIED THAT LOAN AND ADVANCES WERE GIVEN TO THEIR 100% SUBSIDIA RY COMPANIES IN VIEW OF THE POTENTIAL ASSETS OF THE COMPANY AND TO ASSOCIATE CO NCERNS FOR POTENTIAL BUSINESS OF THE COMPANY AND THE FUNDS WERE ADVANCED FOR BU SINESS PURPOSES. HOWEVER, THE A.O. DID NOT ACCEPT THE SUBMISSIONS OF THE ASSE SSEE ON THE GROUND THAT THE ASSESSEE FAILED TO ESTABLISH THAT LOANS AND ADVANC ES TO ITS SUBSIDIARY AND ASSOCIATE COMPANIES WERE ADVANCED FOR BUSINESS PUR POSES. SINCE THE ASSESSEE WAS PAYING HUGE INTEREST ON LOANS TAKEN FROM VARIOU S PARTIES WHILE NOT CHARGING ANY INTEREST FROM SAID SUBSIDIARY/ASSOCIATE COMPANI ES, THE A.O. DISALLOWED AN AMOUNT OF RS.2,93,266/- OUT OF INTEREST PAID ON BOR ROWED FUNDS ,AS PER FOLLOWING WORKING EXTRACTED FROM THE ASSESSMENT ORDER :- TOTAL LOAN (SECURED + UNSECURED) 1,62,26,825 TOTAL INTEREST CHARGED. 8,61,719 DISALLOWED INTEREST = (5522414 X 861719)/1622682 5 = 2,93,266/- 7. ON APPEAL, THE LD. C.I.T.(A) UPHELD THE DI SALLOWANCE IN THE FOLLOWING TERMS:- 4.2. I FIND THAT THE APPELLANT HAS NOT ADDUCED SUFFICIENT EVIDENCE TO SHOW THAT THIS DIVERSION OF FUNDS IS FOR BUSINES S PURPOSE. IN SEVERAL DECISIONS, HONORABLE HIGH COURTS HAVE ALREADY EXAMI NED THIS ISSUE OF DIVERSION OF FUNDS TO SUBSIDIARY AND ASSOCIATE CONC ERNS AND HAVE HELD THAT INTEREST ON CORRESPONDING LOANS ARE TO BE DISA LLOWED. 4.3. THIS VIEW IS SUPPORTE D BY A PLETHORA OF DECISIONS SUCH AS, PHALTON SUGAR WORKS LTD. 208 ITR 789 (BOM), SARAYA SUGAR MILLS LTD., 201 ITR 181 (ALL), INDIA SHAVING PRODUCTS LTD. 265 ITR 250 (RAJ.) AND H.R. SUGAR FACTORY 187 ITR 363 (ALL). IN VIEW OF TH E FACTS OF THE CASE AND THE LEGAL POSITION, THE ADDITION MADE BY THE AO IS UPHELD AND APPEAL OF THE APPELLANT IS DISMISSED. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE U S AGAINST THE AFORESAID DECISION OF THE LD. C.I.T (A). THE LD. A.R. WHILE RELYING UPON THE DECISION IN THE CASE OF S.A. ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 10 BUILDERS VS.CIT 288 ITR-1)(SC) CONTENDED THAT THE M ATTER MAY BE RESTORED TO THE FILE OF THE A.O. ON THE OTHER HAND LD. D.R. SUPPORT ED THE FINDINGS OF THE LD. CIT (A) 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. WE FIND THAT THE ASSESSEE DID NOT PLACE ANY EVIDENCE BEFORE THE LOWER AUTHORITIES THAT INTEREST FREE FUNDS ADVANCED TO ITS SUBSIDIARY AND ASSOCIATE COMPANIES,WERE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. ADMITTEDLY , THE ASSESSEE PAID HUGE AMOUNT OF INTEREST ON THE BORROWINGS AND ADVANCED F REE OF INTEREST LOAN OF MORE THAN RS. 55 LACS TO ITS SUBSIDIARIES AND ASSOCIATES . DESPITE REQUEST MADE, THE ASSESSEE DID NOT FURNISH ANY EVIDENCE IN RESPECT O F PURPOSE OF THESE INTEREST FREE ADVANCES, BEFORE THE LOWER AUTHORITIES. EVEN IN RE SPONSE TO A QUERY BY THE BENCH, THE LD. AR DID NOT EXPLAIN THE PURPOSE OF SUCH INTE REST FREE ADVANCES/LOANS TO SUBSIDIARIES AND ASSOCIATE CONCERNS NOR ESTABLISHE D THAT THESE ADVANCES WERE HAVING ANY NEXUS WITH THE AMOUNT THE ASSESSEE HAD WITH THEM FREE OF INTEREST. IN MADHAV PRASAD JATIA'S CASE [1979] 118 ITR 200 (SC) ,HONBLE APEX COURT HELD THAT THE BORROWED FUNDS ADVANCED TO A THIRD PARTY S HOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECT ION 36(1)(III) OF THE ACT. IN THE PRESENT CASE, NEITHER BEFORE THE LOWER AUTHORITIES NOR EVEN BEFORE US, ANY MATERIAL, EVIDENCING THAT THE AMOUNT ADVANCED TO THE SUBSID IARIES OR ASSOCIATE CONCERNS WAS BY WAY OF COMMERCIAL EXPEDIENCY, HAS BEEN PLACE D. IN THE ABSENCE OF ANY EVIDENCE OR BASIS , WE ARE NOT PREPARED TO ACCEPT THE PLEA OF THE LD. AR FOR RESTORING THE MATTER BACK TO THE AO. IN VIEW OF THE FOREGOING, WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE LD. CIT(A). CONSEQ UENTLY, GROUND NOS. 1 & 2 IN THE CO ARE DISMISSED. 10. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFOR E US IN TERMS OF RESIDUARY GROUND NO.2 IN THE APPEAL OF THE REVENUE AND GROUND NO. 3 IN THE CO, THESE GROUNDS ARE DISMISSED. 11. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US . ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 11 12. IN THE RESULT, APPEAL OF THE REVENUE IS A LLOWED WHILE THE CO IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 8 -04-2011 SD/- SD/- (MUKUL SHRAWAT) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 8 -04-2011 COPY OF THE ORDER FORWARDED TO: 1. M/S. FORTUNE INFOTECH LTD.,160/4,OLD CHHANI ROA D,BARODA 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 1( 2), AAYAKAR BHAVAN,RACE COURSE CIRCLE,BARODA. 3. CIT CONCERNED 4. CIT(A)-V, BARODA 5. DR, ITAT, AHMEDABAD BENCH-D, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD ITA. NO.1385/AHD/2008 & CO.NO.105/AHD/ 2008 12