DCIT, CHENNAI V. M/s. Aban Offshore Ltd., CHENNAI

ITA 1543/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4748 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 11-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: I VIJAYAKUMAR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Depreciation; Bonafide belief; Earning of tax free income; Deemed to accrue or arise in india; Revised return; Revenue expenditure
• Section: 5(2); 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C CHENNAI (BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER) .. I.T.A. NOS. 1542 & 1543/MDS/10 ASSESSMENT YEARS : 2005-06 & 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(1), CHENNAI 600 034. (APPELLANT) V. M/S ABAN OFFSHORE LTD., JANPRIYA CREST, NO. 113, PANTHEON ROAD, CHENNAI 600 008. PAN : AAACA3012H (RESPONDENT) I.T.A. NOS. 1381 & 1382/MDS/10 ASSESSMENT YEAR : 2005-06 & 2006-07 M/S ABAN OFFSHORE LTD. (FORMERLY KNOWN AS ABAN LOYD CHILES OFFSHORE LTD.), JANPRIYA CREST, NO. 113, PANTHEON ROAD, CHENNAI 600 008. (APPELLANT) V. THE ADDL. / DEPUTY COMMISSISONER OF INCOME TAX, COMPANY RANGE I, CHENNAI 600 034. (RESPONDENT) REVENUE BY : SHRI I. VIJAYAKUMAR, CIT-DR ASSESSEE BY : SHRI R. V IJAYARAGHAVAN & SHRI SAROJKUMAR PARIDA O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THE FIRST TWO APPEALS ARE FILED BY THE DEPARTMENT , WHEREAS, OTHER TWO APPEALS ARE FILED BY THE ASSESSEE. APPEA LS FILED BY THE DEPARTMENT ARE TAKEN FIRST FOR DISPOSAL. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 2 I.T.A. NO. 1542/MDS/10 (ASSESSMENT YEAR 2005-06) REVENUE HAS TAKEN SIX GROUNDS OUT OF WHICH, GROUND S NO.1 AND 6 ARE GENERAL NEEDING NO ADJUDICATION. VIDE ITS GR OUND NO.2, GRIEVANCE OF THE REVENUE IS THAT LD. CIT(APPEALS) D ELETED DEPRECIATION ALLOWANCE OF ` 4,67,74,780/- MADE BY THE A.O. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE HAD CLAIME D DEPRECIATION IN RESPECT OF ITS WINDMILLS. DISALLOWANCE WAS MADE BY THE A.O. FOR A REASON THAT WINDMILLS WERE PURCHASED BY THE ASSESSE E AFTER COMPLETION OF A LEASE, ON RESIDUAL VALUE AND DEPREC IATION WAS DENIED IN EARLIER ASSESSMENT YEARS 2003-04 AND 2004-05. 3. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ASSESSEE POINTED OUT THAT THIS TRIBUNAL IN ITS ORDER DATED 26.3.2008 IN I.T.A . NO. 1964/MDS/2006 FOR ASSESSMENT YEAR 2003-04, HAD DECIDED THIS ISSUE IN FAVOUR OF ASSESSEE AND HELD THAT ASSESSEE WAS ELIGIBLE FOR CL AIMING SUCH DEPRECIATION. 4. NOW BEFORE US, THE ONLY CONTENTION RAISED BY THE LEARNED D.R. IS THAT THE ABOVE REFERRED DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04 HAS NOT BEEN ACCEP TED. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 3 5. PER CONTRA, LEARNED A.R. POINTED OUT THAT THE MA TTER STOOD DECIDED IN FAVOUR OF ASSESSEE BY THE TRIBUNAL. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. THE DISALLOWANCE WAS DELETED BY LD. CIT(APPEALS) RE LYING ON TRIBUNAL ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 20 03-04 MENTIONED SUPRA. NOTHING HAS BEEN BROUGHT ON RECOR D TO TAKE A CONTRARY VIEW FOR IMPUGNED ASSESSMENT YEAR. THEREF ORE, GROUND NO.2 APPEAL OF THE REVENUE STANDS DISMISSED. 7. VIDE ITS GROUND NO.3, REVENUES GRIEVANCE IS THA T LD. CIT(APPEALS) DELETED DISALLOWANCE OF ` 30,12,454/- MADE BY THE A.O. UNDER SECTION 14A OF INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 8. ASSESSEE HAD CLAIMED ENTIRE AMOUNT OF DIVIDEND I NCOME RECEIVED BY IT AS EXEMPT UNDER SECTION 10(34) OF TH E ACT. ASSESSING OFFICER WAS OF THE OPINION THAT ATLEAST A PART OF T HE EXPENDITURE INCURRED FOR MAINTAINING ITS ESTABLISHMENT AND ADMI NISTRATION, WOULD BE ATTRIBUTABLE TO THE ACTIVITY OF EARNING DIVIDEND . AS PER THE A.O., THE MANAGEMENT AND STAFF WOULD HAVE ALSO BEEN INVOLVED IN THE DECISION MAKING PROCESS WITH REGARD TO THE INVESTMENTS RESUL TING IN DIVIDENDS. ASSESSEE REPLIED TO THE A.O. THAT IT HAD DEPLOYED O NLY SURPLUS FUNDS GENERATED FROM ITS BUSINESS AND FURTHER, RULE 8D OF INCOME-TAX I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 4 RULES, 1962 COULD NOT BE APPLIED RETROSPECTIVELY. A.O., HOWEVER, RELYING ON THE DECISION OF SPECIAL BENCH IN THE CAS E OF ITO V. DAGA CAPITAL MANAGEMENT PVT. LTD. (117 ITD 169) HELD THA T RULE 8D HAD TO BE RETROSPECTIVELY APPLIED AND SECTION 14A(2) AND 1 4A(3) WERE PROCEDURAL. DISALLOWANCE MADE CAME TO ` 30,12,454/-. 9. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT THE INVESTMENTS GIVING RAISE TO THE DIVIDE ND WERE NOT OUT OF BORROWED FUNDS, BUT MADE OUT OF INTEREST FREE FUNDS AVAILABLE TO IT. ASSESSEE ALSO RELIED ON CASH FLOW STATEMENT FOR THE RELEVANT PREVIOUS YEAR FOR SUBSTANTIATING ITS CONTENTION THAT FRESH B ORROWINGS WERE UTILIZED ONLY FOR PURCHASING ASSETS AND NO PART THE REOF WAS USED FOR MAKING ANY INVESTMENTS. RELIANCE WAS ALSO PLACED O N THE DECISION OF HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CAS E OF HERO CYCLES LTD. V. CIT (323 ITR 518) FOR ARGUING THAT U NLESS THERE WAS A FINDING REGARDING INCURRING OF EXPENDITURE FOR EARN ING EXEMPT INCOME, DISALLOWANCE UNDER SECTION 14A COULD NOT BE MADE. LD. CIT(APPEALS) WAS OF THE OPINION THAT THE AUDITED AC COUNTS AND CASH FLOW STATEMENT FILED BY THE ASSESSEE DID SHOW THAT OUT OF ` 18,99,26,740/- INCURRED AS INTEREST EXPENDITURE, A SUM OF ` 18,25,99,371/- WAS USED FOR ACQUISITION OF RIGS AND WINDMILLS. IN SO FAR AS BALANCE AMOUNT OF ` 73,27,369/- WAS CONCERNED, LD. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 5 CIT(APPEALS) WAS OF THE OPINION THAT ASSESSEES CON TENTION REGARDING USE OF SUCH AMOUNT TOWARDS WORKING CAPITAL REQUIREM ENTS WAS NOT DISPROVED BY THE A.O. FURTHER, AS PER LD. CIT(APPE ALS), IT COULD NOT ALWAYS BE CONSIDERED THAT DIRECT OR INDIRECT EXPEND ITURE WAS INCURRED AND DISALLOWANCE UNDER SECTION 14A WAS REQUIRED TO BE MADE IN EVERY CASE. HE, THEREFORE, DELETED THE AND MADE BY THE A.O. 10. NOW BEFORE US, LEARNED D.R. SUBMITTED THAT HON' BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. V. DCIT (328 ITR 81) THOUGH HAD HELD THAT RULE 8D OF INCOME-TAX RULES, 1962 COULD NOT BE APPLIED RETROSPECTIVELY, THERE WAS A C LEAR RULING THAT SECTION 14A OF THE ACT HAD TO BE APPLIED EVEN IN EA RLIER YEARS AND A.O. WAS NOT PRECLUDED FROM MAKING APPORTIONMENT OF EXPENDITURE BETWEEN EXEMPT AND NON-EXEMPT INCOME FOR DISALLOWAN CE, EVEN WITHOUT INVOKING RULE 8D OR SUB-SECTION (2) AND (3) OF SECTION 14A OF THE ACT. 11. PER CONTRA, THE LEARNED A.R. SUBMITTED THAT ASS ESSEE COULD NOT BE FASTENED WITH A DISALLOWANCE WHERE NO BORROWED F UNDS WERE USED FOR THE PURPOSE OF INVESTMENTS GIVING RAISE TO DIVI DEND. 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THE ASSESSING OFFICER MADE THE DISALLOWANCE RELYING ON THE DECISION I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 6 IN DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) AND AP PLIED RULE 8D. HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO. LTD.S CASE (SUPRA) HAD OVERTURNED THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL ON THIS ASPECT AND HELD THAT RULE 8D COULD BE APPLIED ONLY PROSPECTIVELY FROM 24 TH MARCH, 2008 WHEN IT CAME TO BE NOTIFIED. NEVERTHELESS, BOMBAY HIGH COURT ALSO HELD THAT THE A.O. WAS NOT PRECLUDED FROM MAKING AN APPORTIONMENT OF EXPENSES EVEN IN THE ABSENCE OF RULE 8D IN THE EARLIER YEARS. IF THE AS SESSEE COULD SHOW THAT NO EXPENDITURE WHATSOEVER WAS INCURRED, DIRECT LY OR INDIRECTLY IN RELATION TO EARNING OF DIVIDEND INCOME FOR PERIODS PRIOR TO APPLICABILITY OF RULE 8D, THERE COULD NOT HAVE BEEN ANY DISALLOWA NCE UNDER SECTION 14A OF THE ACT. WE ARE OF THE OPINION THAT THESE ASPECTS HAVE NOT BEEN VERIFIED BY THE A.O. OR LD. CIT(APPEA LS). HENCE, WE SET ASIDE THE ORDERS OF LOWER AUTHORITIES IN THIS R EGARD AND REMIT THE ISSUE BACK TO THE FILE OF THE A.O. FOR CONSIDERATIO N AFRESH DE NOVO IN ACCORDANCE WITH LAW. GROUND NO.3 IS ALLOWED FOR ST ATISTICAL PURPOSES. 13. VIDE ITS GROUND NO.4, GRIEVANCE OF THE REVENUE IS THAT LD. CIT(APPEALS) DELETED THE DISALLOWANCE OF ` 62,21,744/- MADE BY THE A.O. RELYING ON SECTION 40(A)(IA) OF THE ACT FOR NO N DEDUCTION OF TAX ON PAYMENTS MADE TO CATERING CONTRACTORS. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 7 14. SHORT FACTS APROPOS ARE THAT DURING THE RELEVAN T PREVIOUS YEAR, ASSESSEE PAID A SUM OF ` 1,99,53,399/- TO ITS CATERING CONTRACTORS. OUT OF SUCH TOTAL CATERING CHARGES OF ` 1,99,53,399/-, A SUM OF ` 75,09,911/- WAS REIMBURSED BY ONGC WITH WHICH ASSES SEE HAD A DRILLING CONTRACT. EXPLANATION OF THE ASSESSEE FOR DEDUCTING TAX ONLY AT 1% AND NOT 2% ON THE PAYMENTS, WAS THAT IT HAD G IVEN THE CATERING CONTRACT ONLY AS A SUB-CONTRACT OF ITS MAIN CONTRAC T WITH ONGC. AS PER THE ASSESSEE, IT HAD UNDERTAKEN A CONTRACT FOR DRILLING WITH ONGC AND IT WAS PURSUANT TO SUCH CONTRACT IT HAD ENTERED INTO SUB-CONTRACT FOR GIVING CATERING FACILITIES TO THE MEMBERS AND S TAFF. AS PER THE ASSESSEE, UNDER THE CONTRACT WITH ONGC, IT WAS OBLI GED TO DO THE DRILLING WORK USING ITS EQUIPMENT, PERSONS AND STAF F. THEREFORE, THE PURSUANT CONTRACTS ENTERED BY IT, FOR SATISFYING TH E REQUIREMENT OF THE MAIN CONTRACT, WERE ALL IN THE NATURE OF SUB-CONTRA CTS AND HENCE, AS PER THE ASSESSEE, IT HAD RIGHTLY DEDUCTED 1% TDS. HOWEVER, THE A.O. WAS OF THE OPINION THAT ASSESSEES EXPLANATION REGARDING SUB- CONTRACTS COULD BE ONLY ACCEPTED TO THE EXTENT OF T HE AMOUNT REIMBURSED BY ONGC FOR CATERING SERVICES DONE TO IT S EMPLOYEES. THEREFORE, AS PER THE A.O., THE BALANCE AMOUNT WHIC H CAME TO ` 1,24,43,488/- REPRESENTED CATERING CHARGES DIRECTLY SPENT BY THE ASSESSEE AND TDS OUGHT HAVE BEEN DEDUCTED AT 2% ON SUCH AMOUNT I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 8 AND NOT 1%. HE, THEREFORE, MADE PRO RATA DISALLOWA NCE OF ` 62,21,744/-, RELYING ON SECTION 40(A)(IA) OF THE AC T. 15. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT IT HAD PROVIDED CATERING FACILITIES FOR PU RSUANT TO THE MAIN DRILLING CONTRACT WITH ONGC. AS PER THE ASSESSEE, I T WAS ITS RESPONSIBILITY TO PROVIDE CATERING FACILITIES FOR E NSURING DUE PERFORMANCE OF THE MAIN CONTRACT AND THE SUB-CONTRA CT ENTERED INTO WITH THE CATERING SERVICES COMPANY WAS ONLY FOR THI S PURPOSE. WITH REGARD TO THE OBSERVATION OF THE ASSESSING OFFICER THAT THERE WAS NOTHING MENTIONED IN THE AGREEMENT WITH ONGC REGARD ING BOARDING AND LODGING OR TO WHOM THE CATERING WORK SHOULD BE ENTRUSTED, ARGUMENT OF THE ASSESSEE WAS THAT PRIMARY OPERATION OF THE ASSESSEE WAS PROVIDING DRILLING SERVICE UNDER CONTRACTS WITH OIL COMPANIES AND BUT FOR SUCH CONTRACTS, THERE WAS NO QUESTION OF GI VING ANY CATERING FACILITIES TO ANYBODY. RELIANCE WAS ALSO PLACED ON CERTAIN PARAS OF ITS AGREEMENT WITH ONGC AND ALSO THE SCHEDULE OF RESPON SIBILITIES IN SUPPORT OF THESE CONTENTIONS. LD. CIT(APPEALS) WAS APPRECIATIVE OF THESE CONTENTIONS. HE HELD THAT IT WAS NECESSARY F OR ASSESSEE TO ENTER INTO SEPARATE CONTRACTS FOR EACH AREA OF WORK UNDERTAKEN BY IT AS PER ITS AGREEMENT WITH ONGC AND IT COULD ENTER I NTO SUB-CONTRACTS FOR VARIOUS AREAS OF WORK ON WHICH IT WAS OBLIGED T O RENDER SERVICES I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 9 UNDER THE MAIN CONTRACT WITH ONGC. ACCORDING TO LD . CIT(APPEALS), EVEN IF A PART OF THE WORK UNDERTAKEN BY THE MAIN C ONTRACTOR WAS ENTRUSTED TO A THIRD PARTY, EVEN THEN SUCH CONTRACT WITH THE THIRD PARTY COULD BE CONSIDERED AS A SUB-CONTRACT. HE, THEREFO RE, HELD THAT ASSESSEE HAD RIGHTLY DEDUCTED TDS AT 1%, AND DELETE D THE DISALLOWANCE MADE BY THE A.O. 16. NOW BEFORE US, LEARNED D.R. SUBMITTED THAT THE CATERING CONTRACT WAS AN INDEPENDENT CONTRACT, AND NOT RELAT ED TO THE CONTRACT ASSESSEE HAD WITH ONGC. ACCORDING TO LEARNED D.R., ASSESSEE WAS CATERING NOT ONLY TO ONGC EMPLOYEES BUT ALSO ITS OW N EMPLOYEES THROUGH SUCH FACILITIES. LEARNED D.R. SUBMITTED TH AT A.O. HAD CORRECTLY EXCLUDED FROM THE DISALLOWANCE THE AMOUNT REIMBURSED BY ONGC FOR CATERING SERVICE DONE BY THE ASSESSEE TO T HE EMPLOYEES OF ONGC. THE ASSESSEE WAS OBLIGED TO DEDUCT TAX AT 2% ON THE BALANCE AMOUNT AND HAVING NOT DONE SO, THE A.O. WAS RIGHT IN MAKING A PRO RATA DISALLOWANCE. 17. PER CONTRA, LEARNED A.R. STRONGLY SUPPORTED THE ORDER OF LD. CIT(APPEALS). 18. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. ASSESSEE WAS RENDERING DRILLING SERVICE AND SUCH DR ILLING SERVICE WAS I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 10 RENDERED TO MAJOR OIL COMPANIES UNDER CONTRACTS WIT H SUCH OIL COMPANIES. ASSESSEE WOULD NEVER BY ITS OWN DO A DR ILLING FOR FINDING AND EXTRACTING OIL, SINCE ITS BUSINESS WAS OFFSHORE DRILLING ONLY. UNLESS ASSESSEE WAS GIVEN CONTRACTS FOR EXPLORATION BY ONGC OR SIMILAR COMPANIES WHO HAD LICENCE FROM THE GOVERNME NT, IT COULD NOT OPERATE A RIG ON ITS OWN NOR EXTRACT ANY OIL FROM T HE WELLS DRILLED BY IT. THUS, THE RIGS EMPLOYED BY THE ASSESSEE IN OFFSHORE DRILLING WERE ALL BASED ON ITS CONTRACT WITH ONGC AND SIMILAR COMPANI ES LICENCED BY THE GOVERNMENT TO DO SO. HENCE, IT COULD NOT BE CO NSIDERED THAT THE ASSESSEE HAD ENTERED INTO A CATERING CONTRACT AS AN INDEPENDENT CONTRACT HAVING NO RELATION WHATSOEVER WITH MAIN CO NTRACT IT HAD WITH OIL COMPANIES. IF WE LOOK AT SECTION 195C(2) OF TH E ACT, IT READS AS UNDER:- ANY PERSON (BEING A CONTRACTOR AND NOT BEING AN INDI VIDUAL OR A HINDU UNDIVIDED FAMILY) RESPONSIBLE FOR PAYING ANY SUM TO ANY RESIDENT (HEREAFTER IN THIS SECTION REFERRED TO AS THE SUB- CONTRACTOR) IN PURSUANCE OF A CONTRACT WITH THE SUB -CONTRACTOR FOR CARRYING OUT, OR FOR THE SUPPLY OF LABOUR FOR CAR RYING OUT, THE WHOLE OR ANY PART OF THE WORK UNDERTAKEN BY THE CONTR ACTOR OR FOR SUPPLYING WHETHER WHOLLY OR PARTLY ANY LABOUR WHICH THE CONTRACTOR HAS UNDERTAKEN TO SUPPLY SHALL, AT THE TI ME OF CREDIT OF SUCH SUM TO THE ACCOUNT OF THE SUB-CONTRACTOR OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT AN AMOU NT EQUAL TO ONE PER CENT OF SUCH SUM AS INCOME-TAX ON INCOME CO MPRISED THEREIN I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 11 WHAT IS REQUIRED IS THAT THE PERSON WHO IS MAKING P AYMENTS TO ANY RESIDENT SHOULD BE DOING SO IN PURSUANCE OF A CONTR ACT WITH A SUB- CONTRACTOR AND SUCH CONTRACT SHALL BE FOR SUPPLY OF LABOUR OR FOR CARRYING OUT ALL OR ANY PART OF WORK UNDERTAKEN BY THE ASSESSEE. WE CANNOT SAY THAT THE CATERING SERVICES GIVEN BY THE ASSESSEE WHETHER TO ITS EMPLOYEES ENGAGED IN RIG OPERATION OR TO ONG C EMPLOYEES DID NOT FORM PART OF THE WORK UNDERTAKEN BY THE ASSESSE E THROUGH THIS MAIN CONTRACT WITH ONGC. ASSESSEE AGREEMENT WITH O NGC AT EXHIBIT A(II)(5) WHICH GIVES THE SCHEDULE OF RESPON SIBILITIES, RUN AS UNDER:- DESCRIPTION PROVIDED BY AT COST OF COMPANY CONTRACTOR COMPANY CONTRACTOR 15. (I) CATERING INCLUDING MEALS, ACCOMMODATION FOR COMPANY/COMPANYS THIRD PARTY PERSONNEL AT US$ 15 PER DAY PER PERSON FOR BOARDING AND LODGING OR IN THE CASE THE PERSON DOES NOT STAY OVERNIGHT ON RIG AND TAKES ONLY MEAL(S), US$ 6 FOR INDIVIDUAL MEAL. DRY FRUIT PACKETS (40 GRAM ALMONDS, 40 GRAM CASHEW NUTS & 20 GRAM RASINS PER PERSON PER DAY FOR X X X X I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 12 STAY ON BOARD RIG TO COMPANY PERSONNEL. ASSESSEE WAS THUS OBLIGED TO PROVIDE CATERING SERVI CES NOT ONLY TO ONGC PERSONNEL BUT ALSO THIRD PARTY PERSONNEL. FOR THIS PURPOSE, ASSESSEE HAD ENTERED INTO A CONTRACT WITH ANOTHER P ERSON AND SUCH PERSON, IN OUR OPINION, CAN ONLY BE CONSIDERED AS A SUB-CONTRACTOR ENGAGED FOR CARRYING OUT A PART OF THE WORK UNDERTA KEN BY THE ASSESSEE. WE ARE, THEREFORE, OF THE OPINION THAT A SSESSEE HAD CORRECTLY DEDUCTED 1% FROM ITS PAYMENT MADE ON CATE RING CONTRACT CONSIDERING SUCH CATERING CONTRACT TO BE A SUB-CONT RACT. LD. CIT(APPEALS) WAS, THEREFORE, JUSTIFIED IN DELETING THE PROPORTIONATE DISALLOWANCE MADE BY THE A.O. WE, THEREFORE, DISMI SS GROUND NO.4 OF THE REVENUE. 19. VIDE ITS GROUND NO.5, GRIEVANCE OF THE REVENUE IS THAT LD. CIT(APPEALS) HAD DELETED DISALLOWANCE OF ` 2,11,02,509/- MADE BY THE A.O. RELYING ON SECTION 40(A)(I) OF THE ACT FOR PAYMENTS MADE TO NON-RESIDENTS WITHOUT DEDUCTION OF TDS. 20. SHORT FACTS APROPOS ARE THAT ASSESSEE HAD, DURI NG THE RELEVANT PREVIOUS YEAR, PAID FOR OFFSHORE DRILLING SERVICES AND MACHINERY REPAIRS/RENTALS, VARYING AMOUNTS TO M/S INTERNATION AL TUBULAR F2E AND I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 13 INTERNATIONAL OFFSHORE MANAGEMENT BOTH OF WHICH WER E NON-RESIDENT ENTITIES. ON SUCH PAYMENTS, ASSESSEE DEDUCTED TAX AT 4%. ASSESSEE ARRIVED AT 4% BY CONSIDERING THE SERVICES RENDERED BY THE NON-RESIDENT ENTITIES TO FALL UNDER SECTION 44BB OF THE ACT. THEREFORE, AS PER THE ASSESSEE, ONLY 10% OF THEIR RECEIPTS COU LD BE DEEMED AS INCOME AND 40% OF SUCH 10% WORKED OUT TO 4%. HOWEV ER, THE A.O. WAS OF THE OPINION THAT ASSESSEE WAS REQUIRED TO DE DUCT TAX AT 40% ON THE GROSS SUM PAID TO SUCH ENTITIES UNDER SECTIO N 195 OF THE ACT. THEREFORE, AS PER THE A.O., ASSESSEE HAD FAILED TO DEDUCT TAX AS PRESCRIBED UNDER THE ACT AND MADE A DISALLOWANCE OF ` 2,11,02,509/- UNDER SECTION 40(A)(I) OF THE ACT. 21. BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESS EE WAS THAT IT HAD CORRECTLY DEDUCTED THE TAX AS PRESCRIBED UNDER THE ACT. ACCORDING TO THE ASSESSEE, THE SERVICES RENDERED BY THE NON-RESIDENT ENTITIES WERE IN CONNECTION WITH PROSPECTING AND EX TRACTING OR PRODUCTION OF MINERAL OILS IN INDIA. HENCE, UNDER SUB-SECTION (2) OF SECTION 44BB, PROFIT OF SUCH ENTITIES COULD BE CONS IDERED AT 10% OF THEIR RECEIPTS. ASSESSEE ALSO BROUGHT TO THE NOTIC E OF THE LD. CIT(APPEALS) THAT SECTION 44BB OF THE ACT STARTED W ITH A NON- OBSTANTE CLAUSE AND, THEREFORE, PREVAILED OVER OTHE R PROVISIONS OF THE ACT. AS FOR THE CONTENTION OF THE A.O. THAT ASSESS EE HAD NOT FOLLOWED I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 14 THE PROCEDURE PRESCRIBED UNDER SUB-SECTION (2) OF S ECTION 195 OF THE ACT, ARGUMENT OF THE ASSESSEE WAS THAT THE WORD USE D IN SUB-SECTION (2) OF SECTION 195 WAS MAY AND HENCE, IT WAS NOT MANDATORY IN NATURE. RELIANCE WAS ALSO PLACED ON CBDT CIRCULAR NO.759 DATED 18 TH NOVEMBER, 1997 AND ALSO CIRCULAR NO.10 DATED 9 TH OCTOBER, 2002. AS PER THE ASSESSEE, ITS CHARTERED ACCOUNTAN T HAD CERTIFIED THAT THE DEDUCTION WAS REQUIRED TO BE MADE AT 4% ON LY. THEREFORE, AS PER THE ASSESSEE, IT WAS UNDER BONAFIDE BELIEF T HAT THE DEDUCTION WAS CORRECTLY DONE. AS FOR THE RELIANCE PLACED BY THE A.O. ON THE DECISION OF CHENNAI BENCH OF THIS TRIBUNAL IN THE C ASE OF FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. V. DCIT (118 ITD 494), CONTENTION OF THE ASSESSEE WAS THAT THE SAID DECISION WAS CONSIDE RED BY SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF ITO V. PRASAD PRODUCTIONS LTD. (125 ITD 263) AND THE DECISION OF SPECIAL BENCH MEN TIONED SUPRA WAS IN ITS FAVOUR. LD. CIT(APPEALS) WAS APPRECIATI VE OF THESE CONTENTIONS. ACCORDING TO HIM, SECTION 44BB WAS A SPECIAL PROVISION DEALING WITH COMPUTATION OF PROFITS AND GAINS OF BU SINESS OF THE NON- RESIDENTS ENGAGED IN PROVIDING SERVICES AND FACILIT IES IN CONNECTION WITH SUPPLYING PLANT AND MACHINERY ON HIRE OR TO BE USED IN PROSPECTING FOR OR EXTRACTION OF OR PRODUCTION OF M INERAL OILS. ACCORDING TO HIM, THE SAID SECTION STARTED WITH NON -OBSTANTE CLAUSE I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 15 AND IN THE EARLIER YEARS, CERTIFICATES WERE ISSUED BY THE A.O. UNDER SECTION 195(2) FOR EFFECTING REMITTANCES WITH DEDUC TION OF TAX AT LOWER RATE ON IDENTICAL PAYMENTS. THEREFORE, AS PER THE LD. CIT(APPEALS), ASSESSEE HAD TAKEN A BONAFIDE DECISION TO MAKE A DE DUCTION ONLY AT THE RATE OF 4% BASED ON ITS PAST EXPERIENCE. LD. C IT(APPEALS) ALSO NOTED THAT SPECIAL BENCH IN THE CASE OF PRASAD PROD UCTIONS LTD. (SUPRA) HAD TAKEN INTO CONSIDERATION VARIOUS OTHER DECISIONS ON THE SAME ISSUE INCLUDING THAT OF FRONTIER OFFSHORE EXPL ORATION (INDIA) LTD. (SUPRA), TRANSMISSION CORPORATION OF A.P. LTD. V. C IT (239 ITR 587)(SC), CIT V. SAMSUNG ELECTRONICS CO. LTD. (320 ITR 209) (KAR.) AND VAN OORD ACZ INDIA (P) LTD. V. CIT 323 ITR 130. HE, THEREFORE, DELETED THE DISALLOWANCE MADE BY THE A.O. 22. NOW BEFORE US, LEARNED D.R. SUBMITTED THAT ASSE SSEE COULD NOT BY ITSELF DECIDE WHETHER SECTION 44AB WAS TO BE APP LIED TO THE CONCERNED NON-RESIDENTS. ACCORDING TO LEARNED D.R. , WHEN THE ASSESSEE WAS OF THE BELIEF THAT A LOWER DEDUCTION O NLY WAS WARRANTED, IT HAD TO FOLLOW THE PROCEDURE LAID DOWN IN SUB-SECTION (2) OF SECTION 195 OF THE ACT. LEARNED D.R. STRESSED T HAT SPECIAL BENCH IN THE CASE OF PRASAD PRODUCTIONS LTD. (SUPRA) HAD CLEARLY OBSERVED THAT AN ASSESSEE HAD TO TAKE RECOURSE TO SECTION 19 5(2) WHERE IT WAS OF THE OPINION THAT PART OF AMOUNT TO BE PAID WOULD BE INCOME OF THE I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 16 NON-RESIDENTS AND IF IT WANTED A DEDUCTION AT A RAT E LOWER THAN WHAT WAS PRESCRIBED. RELIANCE WAS ONCE AGAIN PLACED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF VAN OORD AC Z INDIA (P.) LTD. (SUPRA). 23. PER CONTRA, THE LEARNED A.R. PLACING RELIANCE O N AN ORDER OF CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF FRON TIER OFFSHORE EXPLORATION (INDIA) LTD. V. DCIT IN I.T.A. NO. 200/ MDS/2009 DATED 4 TH FEBRUARY, 2011, SUBMITTED THAT THE DECISIONS RELIED ON BY THE A.O. AS WELL AS LD. CIT(APPEALS) AND ALSO LEARNED D.R. WERE ALL CONSIDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL AND ON SIMIL AR SET OF FACTS IT WAS HELD THAT THERE WAS NO VIOLATION OF PROVISIONS OF SECTION 195 OF THE ACT WARRANTING DISALLOWANCE UNDER SECTION 40(A) (IA) OF THE ACT. FURTHER, RELIANCE WAS ALSO PLACED ON THE DECISION O F HON'BLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT . LTD. V. CIT (327 ITR 456). 24. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THE PAYMENTS WERE MADE BY THE ASSESSEE TO NON-RESID ENTS. THE PAYMENT MADE TO INTERNATIONAL TUBULAR F2E WAS FOR R ENTAL AND REPAIRS TO MACHINERY AND PAYMENT MADE TO INTERNATIONAL OFFS HORE MANAGEMENT WAS FOR DRILLING SERVICES. THIS HAS BEE N MENTIONED BY I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 17 THE ASSESSING OFFICER AT PARA 6 OF HIS ASSESSMENT O RDER. HOWEVER, AS PER THE ASSESSING OFFICER, IT WAS NOT FOR THE AS SESSEE TO DECIDE WHETHER SECTION 44BB COULD BE APPLIED TO SUCH NON-R ESIDENT ENTITIES. ASSESSING OFFICER RELIED ON THE DECISION OF FRONTIE R OFFSHORE EXPLORATION (INDIA) LTD. V. DCIT (118 ITD 495) WHIC H WAS FOR ASSESSMENT YEAR 2003-04 FOR MAKING THE DISALLOWANCE FOR SHORT DEDUCTION OF TAX AT SOURCE. ASSESSEE ADMITTEDLY WA S ENGAGED IN EXPLORATION OF OIL ON OFFSHORE BASINS AND DRILLING WAS UNDERTAKEN ON CONTRACTS RECEIVED FROM ENTITIES LIKE ONGC. SUCH O FFSHORE DRILLING WAS FOR CRUDE OIL AND CRUDE OIL IS DEFINITELY A MIN ERAL OIL. THEREFORE, SERVICES RENDERED BY A NON-RESIDENT ENTITY FOR RENT AL AND REPAIRS TO MACHINERY USED IN OFFSHORE DRILLING AND ALSO FOR DR ILLING SERVICES CAN ONLY BE CONSIDERED AS SERVICES OR FACILITIES IN CON NECTION WITH PROSPECTING FOR, OR EXTRACTION OR PRODUCTION OF MIN ERAL OIL. HENCE ASSESSEE HAD SUFFICIENT REASON TO HAVE A BONAFIDE B ELIEF THAT SECTION 44BB OF THE ACT WOULD APPLY TO M/S INTERNATIONAL TU BULAR F2E AND M/S INTERNATIONAL OFFSHORE MANAGEMENT. SUBSEQUENT TO THE DECISION IN THE CASE OF FRONTIER OFFSHORE EXPLORATION (INDIA ) LTD. V. DCIT ( 118 ITD 495) FOR ASSESSMENT YEAR 2003-04, WHICH HAS BEE N HEAVILY RELIED ON BY THE A.O. FOR MAKING THE DISALLOWANCE, THERE W AS A DECISION BY ANOTHER CO-ORDINATE BENCH IN I.T.A. NO. 200/MDS/200 9 FOR I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 18 ASSESSMENT YEAR 2004-05 WHERE ALSO ONE OF THE PARTY WAS SAME FRONTIER OFFSHORE EXPLORATION (INDIA) LTD. A VERY S IMILAR ISSUE WAS INVOLVED IN THAT CASE. TRIBUNAL EXAMINED THE ASPEC T OF DEDUCTION OF TAX AT SOURCE ON PAYMENTS MADE TO A NON-RESIDENT, F ALLING UNDER SECTION 44BB OF THE ACT AND WHETHER AN ASSESSEE COU LD MAKE DEDUCTION AT LOWER RATE TAKING 10% AS THE INCOME OF SUCH NON- RESIDENT ENTITY. AFTER CONSIDERING ITS EARLIER DEC ISION FOR ASSESSMENT YEAR 2003-04, IT WAS HELD AT PARAS 6 AND 7 OF THE O RDER DATED 4 TH FEBRUARY, 2011, AS UNDER:- 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT TH E OUTSET WE ARE PRIMARILY TO DECIDE AS TO WHETHER TO FOLLOW T HE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSES SEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04, SUPRA, OR TO DIFFER FROM THE SAME. AFTER A PERUSAL OF THE DECISION OF THE HON'B LE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD. AS ALSO TAKING INTO CONSIDERATION THE VIEWS EXPRESSED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF HI TECH AR AI REPORTED IN 321 ITR 477 (MAD) WE ARE OF THE VIEW THAT THE DECIS ION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2003-043 WOULD NO MORE CONSTITUT E GOOD LAW. TO ERR IS HUMAN. TO CONTINUE THE ERROR IS NOT BRAVERY. IF WE ARE TO ACCEPT THE CONTENTION OF THE REVENUE THAT TH E PROVISIONS OF SEC. 44BB IS RELATING ONLY TO THE NON-RESIDENT FO R THE PURPOSE OF HIS ASSESSMENT, THEN ONE SHOULD ALSO KEEP IN MIN D THAT THE NON-RESIDENTS ASSESSMENT COMES INTO PLAY WHEN HE FI LES HIS RETURN. THE NON-RESIDENT WOULD FILE HIS RETURN ONL Y WHEN THE ASSESSEE HAS MADE THE PAYMENT AND IF THE ASSESSEE HA S MADE THE PAYMENT TO THE NON-RESIDENT, WHERE IS THE QUESTION T HAT THE ASSESSEE IS TO DEDUCT TDS AT A LOWER RATE AFTER THE ASSESSMENT HAS BEEN DONE ON THE NON-RESIDENT? SECTION 44BB IS A SPECIAL PROVISION AS IT IS MENTIONED IN THE CAUSE TITLE TO THE SAID PROVISION I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 19 ITSELF. AS PER THE PROVISIONS OF SEC. 44BB(1) A SU M EQUAL TO 10% OF THE AGGREGATE OF THE AMOUNT SPECIFIED IN SUB-SEC TION (2) IS DEEMED TO BE THE PROFITS AND GAINS OF SUCH BUSINESS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION. IT IS BECAUSE THE PROVISION OF SEC.44 BB HAS QUANTIFIED THE DEEMED INCOME OF THE NON-RESIDENT AS SESSEE AT 10%, IT HAS OPENED WITH THE CLAUSE NOTWITHSTANDIN G ANYTHING TO THE CONTRARY CONTAINED IN SECTIONS 28 TO 41 AND SEC TIONS 43 AND 43A. THE AGGREGATE AMOUNTS ARE QUANTIFIED IN SUB-S ECTION (2) OF SEC. 44BB TO BE THE AMOUNT PAID OR PAYABLE, RECEIVED OR DEEMED TO BE RECEIVED ETC. AS PER THE SUB-SECTION (3) OF SEC. 44BB THE NON-RESIDENT CAN CLAIM A LOWER PROFIT. IT IS FOR T HE PURPOSE OF CLAIMING LOWER PROFITS THAT THE NON-RESIDENT MUST F ILE A RETURN AND PROVE THE SAME WITH SUPPORT OF HIS REGULAR BOOK S OF ACCOUNTS AND OTHER DOCUMENTS AND BY COMPLYING WITH OTHER CONDI TIONS SPECIFIED THEREIN. IF NO RETURN IS FILED, SECTIO N 44BB(1) DEEMS THAT THE PROFITS AND GAINS OF THE BUSINESS OF THE N ON-RESIDENT AT 10% OF THE GROSS RECEIPTS. A PERUSAL OF THE DECISI ON OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHN OLOGY CENTRE (P) LTD., REFERRED TO SUPRA, CLEARLY SHOWS TH AT THE HON'BLE SUPREME COURT HAS CATEGORICALLY HELD THAT THE OBLIGA TION TO DEDUCT TDS IS LIMITED TO THE APPROPRIATE PORTION OF INCOME CHARGEABLE UNDER THE ACT FORMING PART OF THE GROSS SUMS OF MONEY PAYABLE TO THE NON-RESIDENT. THE HON'BLE SUPRE ME COURT WHILE DECIDING THE ISSUE HAD CATEGORICALLY RECOGNIZE D THAT AS PER THE PROVISIONS OF SEC. 195 THE WORDS USED WERE ANY OTHER SUMS CHARGEABLE UNDER THE PROVISIONS OF THIS ACT AS AGA INST THE TERM ANY SUM USED IN THE OTHER PROVISIONS FALLING IN CH APTER XVII OF THE INCOME TAX ACT, 1961. OBVIOUSLY, WHAT THE ASSES SING OFFICER IS DEMANDING IS THAT TDS IS LIABLE TO BE MA DE UNDER THE PROVISIONS OF SECTION 195 OF THE ACT. IF THE PROVIS IONS OF SEC. 195 ARE TO BE INVOKED, IT IS ONLY SUCH SUM WHICH IS CHAR GEABLE TO TAX UNDER THE INCOME-TAX ACT, 1961 ON WHICH TDS CAN BE MADE. A QUESTION NOW ARISES AS TO HOW MUCH OF THE AMOUNTS P AID BY THE ASSESSEE TO THE NON-RESIDENT IS THE INCOME CHARGEAB LE TO TAX UNDER THE INCOME TAX ACT, 1961 FOR THE PURPOSE OF S ECTION 195. IT IS TRUE THAT THE ASSESSEE CANNOT QUANTIFY THE INC OME OF THE NON-RESIDENT. THIS IS WHERE THE SPECIAL PROVISION OF SEC. 44BB COMES INTO PLAY. WHERE THE STATUTE HAS PROVIDED A S PECIAL PROVISION FOR DEALING WITH A SPECIAL TYPE OF INCOME SUCH A I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 20 PROVISION WOULD EXCLUDE A GENERAL PROVISION DEALING WITH THE INCOME ACCRUING OR ARISING OUT OF ANY BUSINESS CONNE CTION. THIS VIEW OF OURS FINDS SUPPORT FROM THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF COPES VULC AN INC., REFERRED TO SUPRA. SECTION 44BB IS A SPECIAL PROV ISION TO THE EXCLUSION OF ALL THE CONTRARY PROVISIONS PROVIDED IN SECTIONS 28 TO 41 AND 43 AND 43A OF THE ACT. ONCE THE PROVISIONS OF SECTIONS 28 TO 41 AND SECTIONS 43 & 43A STAND EXCLUDED, THE METHOD OF COMPUTING THE BUSINESS INCOME OF THE NON-RESIDENT O N THE BASIS OF THE BOOKS OF ACCOUNTS GOES OUT OF THE PICTURE. THEN IT IS ONLY THE PROVISIONS OF SECTION 44AD, 44AE & 44AF WHICH C OULD BE APPLIED AND THE SAME OBVIOUSLY DO NOT APPLY TO THE IN COME OF THE NON-RESIDENT COMPANIES. THE HON'BLE SUPREME COURT WHILE DEALING WITH ITS OWN DECISION IN THE CASE OF TRANSM ISSION CORPORATION OF A.P. LTD., REFERRED TO SUPRA, HAS CA TEGORICALLY EXPLAINED THAT THE TAX WAS LIABLE TO BE DEDUCTED BY THE PAYER OF THE GROSS AMOUNT IF SUCH PAYMENT INCLUDED IN IT AN A MOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. THIS IS NOT SO IN T HE PRESENT CASE. HERE ON ACCOUNT OF THE SPECIAL PROVISIONS OF SEC. 4 4BB, 10% OF THE GROSS AMOUNT PAYABLE TO THE NON-RESIDENTS DEEMED AS THE INCOME CHARGEABLE TO TAX IN INDIA. IN THE PRESENT CASE IT IS NOTICED THAT THE ASSESSEE HAS DEDUCTED TAX AT THE S PECIFIED RATE ON THE 10% OF THE BARE BOAT CHARGES PAID TO THE NOR WAY COMPANY WHO IS THE NON-RESIDENT, COMPUTED AS PER THE PROVIS IONS OF SEC. 44BB. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THA T THERE IS NO VIOLATION OF THE PROVISIONS OF SECTION 195 IN THE A SSESSEES CASE WHICH CALLS FOR A DISALLOWANCE BY INVOKING THE PROVI SIONS OF SECTION 40(A)(I) OF THE ACT. IN THE CIRCUMSTANCES, THE FINDING OF THE LEARNED CIT(A) AND THAT OF THE ASSESSING OFFICE R STANDS REVERSED. 7. WE MAY ALSO MENTION HERE THAT WE ARE NOT IN AGREE MENT WITH THE SUBMISSION OF THE LEARNED AUTHORISED REPRE SENTATIVE THAT THE PROVISIONS OF SEC. 40(A)(I) POSTULATES AN ABSOLUTE FAILURE AND NOT SHORT DEDUCTION. THIS IS BECAUSE A READING OF SECTION 201 CLEARLY SHOWS THAT THE PORTION THE WHOLE OR ANY PART OF THE TAX IS IN CONNECTION WITH THE WORDS AFTER SO DEDUCTING FAILS TO PAY. IT IS NOT IN CONNECTION WITH THE WORDS DOES NOT DE DUCT. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 21 25. WE ARE, THEREFORE, OF THE VIEW THAT ASSESSEE WA S RIGHT IN EFFECTING DEDUCTION OF TAX AT SOURCE CONSIDERING SE CTION 44BB OF THE ACT. THE DISALLOWANCE WAS RIGHTLY DELETED BY LD. C IT(APPEALS). NO INTERFERENCE IS CALLED FOR. GROUND NO.5 OF THE REV ENUE STANDS DISMISSED. 26. IN THE RESULT, APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2005- 06 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 1543/MDS/10 (ASSESSMENT YEAR 2006-07) 27. THE GROUNDS RAISED BY THE REVENUE IN THIS APPEA L ARE PARI- MATERIA TO ITS GROUNDS FOR ASSESSMENT YEAR 2005-06. FOR THE SAME REASON GIVEN ABOVE, WE DISMISS GROUNDS 2, 4 AND 5 A ND ALLOW GROUND NO.3 FOR STATISTICAL PURPOSES. WE MAY ALSO MENTION THAT WITH REGARD TO GROUND NO.3, THE A.O. SHALL CONSIDER THE ISSUE D E NOVO IN ACCORDANCE WITH LAW AS DIRECTED AT PARA 12 ABOVE. 28. IN THE RESULT, APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2006- 07 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 1381/MDS/10 (ASSESSMENT YEAR 2005-06) 29. IN THIS APPEAL, ASSESSEE HAS TAKEN TWO EFFECTIV E GROUNDS. IN ITS FIRST GROUND, GRIEVANCE OF THE ASSESSEE IS THAT A.O . CONSIDERED LETTING I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 22 OUT OF BUILDING AS INCOME FROM HOUSE PROPERTY AGA INST INCOME FROM BUSINESS SHOWN BY IT, AND THIS TREATMENT WAS CONFIR MED BY LD. CIT(APPEALS). 30. ASSESSEE HAD, DURING THE RELEVANT PREVIOUS YEAR , LET OUT A PORTION OF ITS BUILDING, BUT THE RENTAL INCOME THER EFROM WAS SHOWN UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS. THIS TREATMENT WAS NOT ALLOWED BY THE A.O. ACCORDING TO WHOM, SUCH REN TAL INCOME COULD BE CONSIDERED ONLY UNDER THE HEAD INCOME FROM HOUS E PROPERTY. 31. IN ITS APPEAL BEFORE LD. CIT(APPEALS), SUBMISSI ON OF THE ASSESSEE WAS THAT THE BUILDING WAS PURCHASED IN ORD INARY COURSE OF BUSINESS AND WAS RENTED OUT TO GENERATE ADDITIONAL REVENUE. HENCE, AS PER THE ASSESSEE, THE RENTAL INCOME SHOULD BE AS SESSED AS ITS BUSINESS INCOME. HOWEVER, THE CIT(APPEALS) WAS NOT IMPRESSED. ACCORDING TO HIM, DECISION OF HON'BLE APEX COURT IN THE CASE OF SHAMBU INVESTMENTS PVT. LTD. V. CIT (263 ITR 143) A ND THAT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V. CHENNAI PROPERTIES LTD. (266 ITR 685) (MAD) DID NOT ALLOW A NY OTHER TREATMENT FOR RENTAL INCOME RECEIVED FROM LETTING OUT OF BUIL DING. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 23 32. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT LETTING OUT WAS IN THE COURSE OF ASSESSEES BUSINESS. 33. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). 34. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. WHAT WAS LET OUT WAS BUILDING AND NOT PLANT, MACHIN ERY OR ANY OTHER ASSET. IT IS SETTLED LAW THAT WHEN A BUILDING IS L ET OUT, THE INCOME HAS TO BE COMPUTED AS INCOME FROM HOUSE PROPERTY. IT W AS NOT LETTING OUT OF A COMPLEX NATURE INVOLVING MACHINERY AND SERVICE S. IN OUR OPINION, LD. CIT(APPEALS) RIGHTLY APPLIED THE DECIS ION OF HON'BLE APEX COURT IN THE CASE OF SHAMBU INVESTMENTS PVT. LTD. ( SUPRA) AND THAT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CH ENNAI PROPERTIES LTD. (SUPRA). EVEN IF LETTING OUT OF PROPERTY ON R ENT, WAS THE OBJECT OF THE ASSESSEE-COMPANY, DECISION OF HON'BLE APEX COUR T IN THE CASE OF EAST INDIA HOUSING & LAND DEVELOPMENT TRUST LTD. V. CIT (42 ITR 49) WOULD STILL GO AGAINST IT. WE ARE, THEREFORE, OF T HE OPINION THAT THE VIEW TAKEN BY THE LOWER AUTHORITIES DO NOT REQUIRE ANY INTERFERENCE. ASSESSEES GROUND IN THIS REGARD IS DISMISSED. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 24 35. SECOND GROUND TAKEN BY THE ASSESSEE IS THAT LD. CIT(APPEALS) CONFIRMED DISALLOWANCE OF ` 91,423/- MADE UNDER SECTION 94(7) OF THE ACT. 36. THE A.O., DURING THE COURSE OF ASSESSMENT PROCE EDINGS, NOTED THAT ASSESSEE HAD CLAIMED SHORT TERM CAPITAL LOSS A RISING OUT OF SALE OF UNITS OF MUTUAL FUNDS WHICH WERE HELD FOR A PERI OD OF LESS THAN THREE MONTHS. THE DETAILS OF SUCH TRANSACTIONS FOR WHICH DISALLOWANCE UNDER SECTION 94(7) OF THE ACT WAS MAD E BY THE A.O., ARE REPRODUCED AS UNDER:- PARTICULARS DATE OF SALE COST RS. SALE VALUE RS. PROFIT/LOSS RS. DIVIDEND RS. DISALLOWANCE U/S 94(7) RS. DSP ML FLOATING FUND 02.04.04 22806018.32 22798962.46 (-)7055.86 15318.07 7055.86 GRINDLAY FLOATING RATE FUND 26.10.04 5010658.00 5010133.83 (-)524.17 10658 524.17 GRINDLAY FLOATING RATE FUND 07.04.04 95202348.91 95202348.29 (0.62) 75433.18 0.62 KOTAK FLOATING RATE FUND 05.05.04 12912708.13 12903753.62 (-)8954.51 42957.41 8954.51 KOTAK FLOATING RATE FUND 29.9.04 15141314.07 15137071.24 (-)4242.83 141314.07 4242.83 PRUDENTIAL FLOATING RATE FUND 16.9.04 2523047.90 2516229.35 (-)6818.55 19798.90 6818.55 PRUDENTIAL FLOATING RATE FUND 29.9.04 35569181.12 35511480.83 (-)57700.29 524610 57700.29 TEMPLETON FLOATING RATE INCOME FUND 29.9.04 52981129 52975003.25 (-)6125.75 481129 6125.75 91422.58 I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 25 THE A.O. DISALLOWED CLAIM OF SHORT TERM CAPITAL LOS S TO THE EXTENT OF DIVIDEND RECEIPT. 37. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ASSESSEE ARGUED THAT THERE WAS NO RECORD DATE FOR RELEVANT SCHEMES FOR W HICH IT HAD RECEIVED DIVIDEND. THE INVESTMENTS WERE ALL FIXED INCOME YIELDING DEBT SCHEMES, THOUGH RELEVANT PARTICULARS IN THIS R EGARD COULD NOT BE PRODUCED. THOUGH IN AN EARLIER YEAR, IN ASSESSEES OWN CASE IT WAS HELD THAT WHEN THERE WAS NO CONCEPT OF RECORD DATES , DISALLOWANCE UNDER SECTION 94(7) OF THE ACT COULD NOT BE MADE, L D. CIT(APPEALS) DECIDED TO CONFIRM THE VIEW OF A.O. SINCE ASSESSEE COULD NOT FURNISH DETAILS OF THE SCHEMES IN THE RELEVANT PREVIOUS YEA R. 38. NOW BEFORE US, LEARNED A.R., ASSAILING THE ORDE R OF LD. CIT(APPEALS), SUBMITTED THAT RELEVANT INVESTMENTS O N WHICH DIVIDENDS WERE RECEIVED ON SHORT TERM CAPITAL LOSS CLAIMED HAD NO RECORD DATE. NEVERTHELESS, HE ADMITTED THAT ASSESS EE WAS UNABLE TO PRODUCE ANY EVIDENCE IN THIS REGARD. 39. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 26 40. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS FOR THE ASSESSEE TO SHOW THAT THE SHORT TERM CAP ITAL LOSS CLAIMED BY IT WERE ALL ON MUTUAL INVESTMENTS, FOR WHICH THERE WAS NO RECORD DATE. ASSESSEE COULD NOT PRODUCE ANY DETAILS. IN FACT, N OTHING WAS BROUGHT ON RECORD TO SHOW HOW THE COMPUTATION MADE BY THE A SSESSING OFFICER REPRODUCED AT PARA 36 ABOVE WAS NOT ACCEPTA BLE. WE ARE, THEREFORE, OF THE OPINION THAT THE DISALLOWANCE WAS RIGHTLY DONE. NO INTERFERENCE IS REQUIRED. GROUND NO.2 IS DISMISSED . 41. IN THE RESULT, APPEAL OF THE ASSESSEE FOR ASSES SMENT YEAR 2005- 06 IS DISMISSED. I.T.A. NO. 1382/MDS/10 (ASSESSMENT YEAR 2006-07) 42. IN THIS APPEAL, FOUR GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE IN WHICH, GROUND NO.4 IS GENERAL NEEDING NO ADJUDIC ATION. 43. GROUND NOS.1 AND 2 ARE SIMILAR TO GROUND NOS.1 AND 2 TAKEN BY THE ASSESSEE IN ITS APPEAL FOR ASSESSMENT YEAR 2005 -06 IN I.T.A. NO. 1381/MDS/10. 44. WE HAVE ALREADY DECIDED IN PARAS 34 AND 40 ABOV E THAT INCOME FROM LETTING OUT OF BUILDING WAS RIGHTLY ASS ESSED AS INCOME FROM HOUSE PROPERTY AND DISALLOWANCE UNDER SECTION 94(7) OF THE ACT I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 27 WAS RIGHTLY DONE BY THE LOWER AUTHORITIES. FOR THE SAME REASONS MENTIONED THEREIN, GROUND NOS.1 AND 2 FOR THE IMPUG NED ASSESSMENT YEAR ARE ALSO DISMISSED. 45. VIDE ITS GROUND NO.3, GRIEVANCE OF THE ASSESSEE IS THAT LD. CIT(APPEALS) CONFIRMED ASSESSING OFFICERS STAND OF NOT ALLOWING AMORTIZATION OF PREFERENCE SHARE ISSUE EXPENSES OF ` 4,13,25,000/-, UNDER SECTION 35D OF THE ACT. 46. SHORT FACTS APROPOS ARE THAT ASSESSEE HAD, DURI NG THE RELEVANT PREVIOUS YEAR, ISSUED NON-CONVERTIBLE CUMULATIVE PR EFERENCE SHARES FOR ` 150 CRORES. THE ISSUE EXPENSES CAME TO ` 4,13,25,000/-. THE SAID EXPENSES WERE CLASSIFIED UNDER THE HEAD OTHER EXPENSES CLAIMED IN FULL AS REVENUE OUTGO BY THE ASSESSEE IN ITS RETURN OF INCOME. THE A.O., DURING THE COURSE OF ASSESSMENT PROCEEDINGS, PUT THE ASSESSEE ON NOTICE THAT DECISION OF HON'BLE APE X COURT IN THE CASE OF BROOKE BOND INDIA LIMITED V. CIT (225 ITR 7 98) AND IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORA TION LIMITED V. CIT (225 ITR 792) WENT AGAINST IT AND SUCH SHARE IS SUE RELATED EXPENSES COULD ONLY BE CONSIDERED AS CAPITAL EXPEND ITURE. ASSESSEE SUBMITTED THAT THE EXPENDITURE IF NOT ALLOWED AS RE VENUE, SHOULD BE CONSIDERED FOR AMORTIZATION UNDER SECTION 35D OF TH E ACT. ASSESSING I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 28 OFFICER AFTER GOING THROUGH PROVISIONS OF SECTION 3 5D OF THE ACT, HELD THAT ASSESSEE COULD NOT CLAIM SUCH AMORTIZATION ON ACCOUNT OF TWO REASONS. FIRST WAS THAT ASSESSEE WAS NOT AN INDUST RIAL UNDERTAKING AS DEFINED UNDER SECTION 72A OF THE ACT. SECOND RE ASON WAS THAT EVEN IF IT WAS CONSIDERED AS AN INDUSTRIAL UNDERTAK ING, THE OIL RIG FOR THE PURCHASE OF WHICH SUCH PREFERENCE SHARE CAPITAL PROCEEDS WERE USED, HAVING NOT BEEN PUT TO USE DURING RELEVANT PR EVIOUS YEAR, AND ASSESSEE HAVING ITSELF CLASSIFIED IT AS CAPITAL WOR K IN PROGRESS, DEDUCTION UNDER SECTION 35D COULD NOT BE ALLOWED. 47. IN ITS APPEAL BEFORE CIT(APPEALS), CONTENTION O F THE ASSESSEE WAS THAT ASSESSEE WAS ENGAGED IN THE BUSINESS OF OI L DRILLING AND RIGS HIRED AND PURCHASED WERE USED BY THE ASSESSEE FOR D RILLING AND OTHER OIL FIELD SERVICES. THEREFORE, ACCORDING TO ASSESS EE, SUCH EXPLORATION OF OIL CAME WITHIN THE MEANING OF MINING AND THER EFORE, CLAUSE (AA) OF SUB-SECTION (7) OF SECTION 72A CLEARLY APPLIED A ND IT WAS AN INDUSTRIAL UNDERTAKING. FURTHER, AS PER THE ASSESS EE, THE OIL RIG PURCHASED, THOUGH NOT PUT TO USE DURING THE YEAR, S UCH PURCHASE WAS ONLY AN EXTENSION OF INDUSTRIAL UNDERTAKING AND THE MOMENT THE PURCHASE WAS COMPLETE, THE EXTENSION OF INDUSTRIAL UNDERTAKING WAS ALSO COMPLETE. THOUGH LD. CIT(APPEALS) ACCEPTED TH E CONTENTION OF THE ASSESSEE THAT IT WAS AN INDUSTRIAL UNDERTAKING, HE WAS OF THE I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 29 OPINION THAT ASSESSEE THOUGH IT HAD PURCHASED THE O IL RIG, HAD NEVER PUT IT TO USE IN RELEVANT PREVIOUS YEAR. ACCORDING TO LD. CIT(APPEALS), EXTENSION OF INDUSTRIAL UNDERTAKING COULD NOT BE TR EATED AS COMPLETE JUST BY EFFECTING A PURCHASE. HE WAS, THEREFORE, O F THE OPINION THAT SECTION 35D HAD NO APPLICATION IN THE RELEVANT PREV IOUS YEAR. 48. NOW BEFORE US, LEARNED A.R. SUBMITTED THAT LD. CIT(APPEALS) HAD GIVEN A CLEAR FINDING ON THE DISPUTE AS TO WHET HER ASSESSEE WAS AN INDUSTRIAL UNDERTAKING AND THIS HAS NOT BEEN CHA LLENGED BY THE REVENUE. THEREFORE, ACCORDING TO HIM, THE ONLY ARE A OF CONTENTION WAS WHETHER ASSESSEE HAD COMPLETED THE EXTENSION OF THE INDUSTRIAL UNDERTAKING ON PURCHASE OF THE NEW OIL RIG. AS PER THE LEARNED A.R., WHEN THE OIL RIG WAS PURCHASED, THE EXTENSION WAS C OMPLETE. TREATMENT GIVEN BY THE ASSESSEE IN THE BOOKS OF ACC OUNTS WAS NOT DECISIVE IN THIS REGARD. ASSESSEE WAS ALREADY IN T HE FIELD OF OFFSHORE DRILLING OWNING A NUMBER OF RIGS AND THEREFORE, PUR CHASE OF ANOTHER OIL RIG WAS DEFINITELY AN EXTENSION OF INDUSTRIAL UNDER TAKING. HENCE, ACCORDING TO HIM, SECTION 35D OF THE ACT CLEARLY AP PLIED AND IF NOT FOR THE RELEVANT PREVIOUS YEAR, AMORTIZATION OF PREFERE NCE SHARE ISSUE EXPENSES SHOULD BE ALLOWED, IN THE YEAR IN WHICH OI L RIG WAS ACTUALLY PUT TO USE. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 30 49. PER CONTRA, LEARNED D.R. SUBMITTED THAT ASSESSE E HAD NEVER MADE ANY CLAIM FOR AMORTIZATION OF ISSUE EXPENSES I N THE ORIGINAL RETURN OF INCOME. IT HAD CHOSEN TO FILE A LETTER F OR CLAIMING AMORTIZATION UNDER SECTION 35D OF THE ACT WHEN THE ASSESSING OFFICER PUT IT ON NOTICE THAT ITS CLAIM FOR SHARE I SSUE RELATED EXPENSES AS A REVENUE OUTGO COULD BE ALLOWED. ACCORDING TO LEARNED D.R., IN VIEW OF THE DECISION OF HON'BLE APEX COURT IN THE C ASE OF GOETZE (INDIA) LTD. V. CIT (284 ITR 323) (SC), SUCH A CLAI M COULD NEVER HAVE BEEN CONSIDERED. IN ANY CASE, ACCORDING TO HIM, EX TENSION OF THE INDUSTRIAL UNDERTAKING COULD NOT BE CONSIDERED AS C OMPLETE, JUST BY THE PURCHASE OF A RIG. 50. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT A SUM OF ` 4,13,25,000/- WAS EXPENSES RELATED TO ISSUE OF PREFERENCE SHARE CAPITAL OF ` 150 CRORES. THERE IS NO DISPUTE THAT THE SAID AMOUNT WAS UTILIZED FOR PU RCHASE OF AN OIL RIG. THERE IS NO DISPUTE THAT THE SAID RIG WAS NOT PUT T O USE DURING THE RELEVANT PREVIOUS YEAR, BUT WAS SHOWN BY THE ASSESS EE AS CAPITAL WORK IN PROGRESS. ASSESSEE HAD NEVER MADE A CLAIM FOR AMORTIZATION OF PREFERENCE SHARE ISSUE EXPENSES IN ITS RETURN OF INCOME, BUT HAD CHOSEN TO MAKE SUCH A CLAIM WHEN PU T ON NOTICE THAT THE SAID AMOUNT COULD NOT BE ALLOWED AS REVENU E EXPENDITURE. IN I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 31 SO FAR AS CONTENTION OF LEARNED D.R. THAT ASSESSEE COULD NOT PREFER SUCH A CLAIM, BUT THROUGH A REVISED RETURN, NO DOUB T, IN THE CASE OF GOETZE (INDIA) LTD. (SUPRA), HON'BLE APEX COURT HEL D THAT AN A.O. COULD NOT ENTERTAIN A CLAIM MADE OTHERWISE THAN BY WAY OF REVISED RETURN. HOWEVER, HERE THE ASSESSEE HAD CLAIMED THE WHOLE OF THE AMOUNT AS REVENUE EXPENDITURE. THE LETTER FILED BY THE ASSESSEE WAS ONLY AN ALTERNATIVE CLAIM THAT AMOUNT IF NOT ALLOWE D IN ONE GO, IT SHOULD BE CONSIDERED AMORTIZATION UNDER SECTION 35D OF THE ACT. ASSESSEE MIGHT HAVE MADE A CLAIM UNDER A PARTICULAR SECTION, BUT IF THE CLAIM THOUGH NOT ALLOWABLE UNDER THAT SECTION, BUT WAS ALLOWABLE UNDER ANOTHER SECTION, THEN IT CANNOT BE CONSIDERED AS A FRESH CLAIM, THOUGH THE ALLOWANCE UNDER THE LATTER SECTION COULD BE GIVEN ONLY IN A GRADATED MANNER. THE CLAIM, NEVERTHELESS, WAS ALWA YS THERE AND WE CANNOT CONSIDER IT AS CLAIM OF ALLOWANCE MADE FOR T HE FIRST TIME. IN ANY CASE, ASSESSING OFFICER HIMSELF HAD CONSIDERED THE CLAIM OF THE ASSESSEE UNDER SECTION 35D OF THE ACT. HE DID NOT ALLOW THE CLAIM FOR TWO REASONS. PRIMARY REASON WAS THAT ASSESSEE, ACCORDING TO HIM, WAS NOT AN INDUSTRIAL UNDERTAKING AND SECOND R EASON WAS THAT ASSESSEE HAD NOT COMPLETED EXTENSION OF ITS INDUSTR IAL UNDERTAKING BY PURCHASE OF RIG. ASSESSING OFFICER NEVER DECLINED TO CONSIDER THE CLAIM FOR A REASON IT WAS MADE OTHERWISE THAN THROU GH A REVISED I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 32 RETURN. ASSESSING OFFICER HAD REFUSED TO CONSIDER THE CLAIM UNDER SECTION 35D FOR DIFFERENT REASONS. 51. NOW COMING TO MERITS, REVENUE HAS NOT ASSAILED THE FINDING OF LD. CIT(APPEALS) THAT ASSESSEE WAS AN INDUSTRIAL UN DERTAKING. THIS LEAVES ONLY WITH QUESTION WHETHER THE PURCHASE OF A RIG COULD BE CONSIDERED AS SUFFICIENT TO SATISFY THE CONDITION P RESCRIBED UNDER SECTION 35D OF THE ACT. SUB-SECTION (1) THEREOF WH ICH ALLOWS AMORTIZATION OF EXPENSES RELATED TO ISSUE OF SHARE CAPITAL, AS IT STOOD AT THE RELEVANT POINT OF TIME IS REPRODUCED HEREUND ER:- 35D. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) WHO IS RESIDENT IN IND IA, INCURS, AFTER THE 31 ST DAY OF MARCH, 1970, ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2), - (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS, IN CONNECTION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR E ACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMENCES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING IS COMPLETED OR THE NEW UNIT COMMENCES PRODUCTION OR OPERATION: I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 33 [ PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 31 ST DAY OF MARCH, 1998, ANY EXPENDITURE SPECIFIED IN SUB-SE CTION (2), THE PROVISIONS OF THIS SUB-SECTION SHALL HAVE EFFECTS AS IF FOR THE WORDS AN AMOUNT EQUAL TO ONE-TENTH OF S UCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS, THE WORDS AN AMOUNT EQUAL TO ONE-FIFTH OF S UCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOU S YEARS HAD BEEN SUBSTITUTED.] THE PURCHASE OF A RIG MIGHT RESULT IN EXTENSION OF ITS INDUSTRIAL UNDERTAKING. BUT, THE DEDUCTION UNDER SECTION 35D OF THE ACT WOULD BE ALLOWABLE FOR TEN SUCCESSIVE YEARS BEGINNING WIT H THE YEAR IN WHICH EXTENSION OF INDUSTRIAL UNDERTAKING IS COMPLE TE. CAN WE SAY THAT BY PURCHASE A RIG, THE EXTENSION OF INDUSTRIAL UNDERTAKING IS COMPLETE? IT IS AN ADMITTED POSITION THAT THE RIG WAS UNDER REFURBISHMENT AND WAS NOT PUT TO USE. IT IS ALSO A N ADMITTED POSITION THAT ASSESSEE ITSELF HAD SHOWN IT AS A PART OF CAPI TAL WORK IN PROGRESS. NO ARTICLE CLASSIFIED AS WORK-IN-PROGRESS CAN BE CO NSIDERED AS A COMPLETED ITEM. BE IT A RIG OR BE IT ANY OTHER THI NG. HENCE, EXTENSION OF THE INDUSTRIAL UNDERTAKING CANNOT BE CONSIDERED AS COMPLETE IN THE RELEVANT PREVIOUS YEAR. LD. CIT(APPEALS) WAS JUSTI FIED IN DENYING ASSESSEE CLAIM UNDER SECTION 35D OF THE ACT FOR THE IMPUGNED ASSESSMENT YEAR. WE DO NOT FIND ANY REASON TO INTE RFERE. GROUND NO.3 OF THE ASSESSEE STANDS DISMISSED. I.T.A. NOS. 1542 & 1543/MDS/10 I.T.A. NOS. 1381 & 1382/MDS/10 34 52. IN THE RESULT, APPEAL OF THE ASSESSEE FOR ASSES SMENT YEAR 2006- 07 IS DISMISSED 53. TO SUMMARIZE THE RESULTS, APPEALS OF THE REVENU E IN I.T.A. NO. 1542/MDS/10 AND 1543/MDS/10 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS, APPEALS OF THE ASSESSEE IN I.T.A . NO. 1381/MDS/10 AND 1382/MDS/10 ARE DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 15 TH JULY, 2011. SD/- SD/- (U.B.S. BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 15 TH JULY, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-III, CHENNAI (4) CIT, CHENNAI-I, CHENNAI (5) D.R. (6) GUARD FILE