The ACIT, Circle-1(2), Baroda V. FAG BEARINGS INDIA LIMITED, Baroda

ITA 1976/AHD/2007

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6018 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 year(s) 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 08-02-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 10-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARIGOVIND SINGH
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Additional evidence; Initiation of penalty proceedings; Bad and doubtful debts; Reason to believe; Revenue expenditure; Capital expenditure
• Section: 143(3); 244A; 92F; 80HHC; 234B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH BEFORE: SHR I R. P. TOLANI , VICE PRESIDENT AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER THE ACIT, CIR. 1(2), BARODA (APPELLANT) VS M/S FAG BEARINGS INDIA LTD, PO: - MANEJA, DIST: BARODA PAN:AAACF3357Q (RESPONDENT) THE DCIT, CIR. 1(2), BARODA (A PPELLANT) VS M/S FAG BEARINGS INDIA LTD, PO: - MANEJA, DIST: BARODA PAN:AAACF3357Q (RESPONDENT) I T A NO . 1976 / A HD/20 07 A SS ESSMENT YEAR 200 3 - 04 ITA NO. 870 /AHD/20 09 ASSESSMENT YEAR 200 3 - 04 ITA NO. 2052 /AHD/20 07 ASSESSMENT YEAR 200 3 - 04 I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 2 M/S FAG BEARINGS INDIA LTD, PO: - MANEJA, DIST: BARODA PAN:AAACF3357Q (APPELLANT) V S THE DCIT, CIR. 1(2), BARODA (RESPONDENT) REVENUE BY : S H RI HARIGOVIND SINGH, CIT - D . R. ASSESSEE BY: S H RI MILIN MEHTA , A.R. DATE OF HEARING : 08 - 02 - 2 017 DATE OF PRONOUNCEMENT : 24 - 04 - 2 017 / ORDER P ER : AMARJIT SINGH, ACCOUNTANT MEMBER : - OUT OF TH ESE THREE APPEALS, TWO FILED BY REVENUE AND ONE FILED BY ASSESSEE FOR A.Y. 2003 - 04 , AR ISE FROM ORDER OF THE CIT(A) - , BARODA DATED 19 - 02 - 2007 & 29 - 12 - 2008 IN APPEAL NOS. CAB/I - 76/06 - 07 & CAB/126/07 - 08 , IN PROCEEDINGS UNDER SECTION 143(3) & 271(1)(C) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . ITA 1976/AHD/2007 (REVENUE S APPEAL) 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: - 1 (A) ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. / CIT(A) ERRED IN ALLOWING RS.19,49,909/ - CAPITALIZED IN THE AUDITED BOOKS OF ACCOUNT AS PLANT AND MACHINERY BUT CLAIMED AS REPAIRS AND MAINTENANCE EXPENSES OF REVENUE NATURE IN THE COMPUTAT ION OF INCOME FILED WITH THE RETURN, WITHOUT TAKING NOTE OF THE CLARIFICATORY AND HENCE RETROSPECTIVE NATURE 'OF THE EXPLANATION I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 3 BELOW SECTION 31 USING THE WORDS 'FOR THE REMOVAL OF DOUBTS', AND IN CONTRAVENTION OF THE LAW LAID DOWN BY THE APEX COURT IN TH E CASE OF BALLIMAL NAVAL KISHOR VS CIT 224 ITR 414 (SC). 1 (B) THE ID. CIT(A) ERRED IN ADMITTING ADDITIONAL EVIDENCE WHILE DECIDING THIS GROUND WITH THE OBSERVATION THAT THE 5 RELEVANT DETAILS ARE 'CLAIMED' TO HAVE BEEN FILED BEFORE THE ASSESSING OFFICER, WHICH CLAIM WAS FACTUALLY INCORRECT, THUS CONTRAVENING THE PROVISIONS OF RULE 46A OF THE INCOME - TAX RULES. 2(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN HOLDING THE PAYMENT OF RS. 632.22 LACS TO - THE ASSOCIATE CONCERNS COVERED BY SECTIN 40A(2)(B), IN THE NAME OF FEE FOR USE OF TECHNICAL KNOWHOW, FOR THE MANUFACTURE OF THE ASSESSEE'S PRODUCTS, AS REVENUE EXPENDITURE, WITHOUT, DETERMINING THE MATTER ON MERITS AND BY SOLELY RELYING ON THE ORDER OF HIS PREDECESSOR F OR THE ASSESSMENT YEAR 2001 - 02, WHICH HAS BEEN CONTESTED BY THE DEPARTMENT AS ERRONEOUS. 2(B) ON MERITS, THE ID. CIT(A) FAILED TO APPRECIATE THE BINDING RATIO OF THE APEX COURT'S DECISION IN THE CASE OF SCIENTIFIC ENGINEERING HOUSE PVT. LIMITED', VS C IT 157 ITR 86 (SC) AND FURTHER FAILED TO TAKE NOTE OF THE FACT THAT HIS PREDECESSOR HAD PLACED UNDUE RELIANCE ON THE FORMAL RECITALS IN THE AGREEMENTS WITH THE ASSOCIATE CONCERNS AT THE COST OF SUBSTANCE OF THE MATTER, PRESENTING THE LUMP SUM PAYMENT FOR A CQUISITION OF TECHNICAL KNOWHOW AS PERIODICAL PAYMENT OF FEE FOR THE USE OF THE SAID KNOWHOW AND SUCH PRESENTATION BEING IMMATERIAL FOR DETERMINING THE BASIC CHARACTER O F PAYMENT AS CAPITAL OR REVENUE AS , SETTLED IN ASSAM BENGAL CEMENT CO. LTD. VS CIT 27 ITR 34 (SC). 3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING THE COST OF MACHINERIES TERMED AS ''HARDNESS TESTER' AND 'SDLC CARD' AS REVENUE EXPENDITURE, WITHOUT APPRECIATING THAT THESE MACHINERIES W ERE PUT TO REPETITIVE USE OVER A NUMBER OF YEARS, GIVING ENDURING BENEFIT TO THE ASSESSEE, AND HENCE CONSTITUTED CAPITAL EXPENDITURE WITHIN THE MEANING OF THE CLARIFICATORY EXPLANATION BELOW SECTION 31 AND AS PER RATIO LAID DOWN BY THE APEX COURT IN THE CA SE OF BALLIMAL NAVAL KISHOR VS CIT 224 ITR 414 (SC). I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 4 4(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(4) ERRED, IN ALLOWING THE DEDUCTION FOR BAD DEBTS AMOUNTING TO RS. 99,48,939/ - WITHOUT APPRECIATING THAT; 0 EVEN THE BASIC C ONDITION OF 'WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR' AS LAID DOWN IN SECTION 36(L)(VII) WAS NOT SATISFIED INASMUCH AS THE AMOUNT WAS NOT WRITTEN OFF IN THE BOOKS OF THIS'YEAR BUT WAS CLAIMED ONLY IN THE COMPUTATI ON OF INCOME PURPORTEDLY OUT OF THE PROVISION FOR BAD DEBTS WRITTEN OFF IN EARLIER YEARS, WITHOUT PASSING ANY ENTRY IN THIS YEAR, AND BY ADMITTING ADDITIONAL EVIDENCE IN THE FORM OF CORRESPONDENCE WITH THE DEBTORS IN CONTRAVENTION OF RULE 46A OF THE INCOME - TAX RULES. 4(B) THE CIT(A) FAILED TO EXAMINE THE OTHER CONDITIONS LAID DOWN IN SECTION 36(2) FOR ALLOWANCE OF THE DEBTS AS BAD DEBTS, NAMELY, THAT THEY WERE TRADE DEBTS AND NOT THE DEBTS OF LOANS AND ADVANCES, THAT THEY WERE REVENUE DEBTS AND NOT THE DE BTS FOR CAPITAL GOODS AND THAT THEY HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF ANY EARLIER PREVIOUS YEAR. 5 ON THE FACTS AND IN THE CIRCUMSTANCES OF - THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING THE ENTIRE DEPRECIATION OF RS.8,45,903/ - ON DATA - PROCESSING MACHINES IN THE COMPUTATION OF INCOME OF THE DTA UNIT, WITHOUT APPRECIATING THAT THE ASSESSEE WAS USING THESE MACHINES ALONG WITH ASP R3 SOFTWARE FOR CONTROLLING THE FUNCTIONS OF ITS ENTIRE ORGANIZATION COMPRISING DTA U NIT AND TAX - FREE EOU UNIT AND HENCE DEPRECIATION ON ALL THE ASSETS USED FOR OFFICE WORK AND ESTABLISHMENT WORK INCLUDING THESE DATA PROCESSING MACHINES HAD TO BE APPORTIONED BETWEEN THE DTA UNIT AND THE EOU UNIT, AS WAS DONE BY THE ASSESSING OFFICER. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING THE ENTIRE ADVERTISEMENT EXPENSES OF RS.41,52,493/ - IN THE COMPUTATION OF DTA UNIT, WITHOUT APPRECIATING THAT THE ADVERTISEMENT EXPENSES HELPED TO CERATE BRAN D AFFINITY IN THE GLOBAL MARKET AND PROMOTED THE SALE OF ALL CATEGORIES OF THE ASSESSEE'S PRODUCTS DIRECTLY OR THROUGH FOREIGN GROUP COMPANIES, THUS REQUIRING APPORTIONMENT OF THESE EXPENSES IN A REASONABLE MANNER BETWEEN THE DTA UNIT AND THE TAX - FREE EOU UNIT, AS WAS DO NE BY THE ASSESSING OFFICER. 7 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING RS.1,00,81,239/ - CLAIMED IN THE NAME I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 5 OF LICENSE USER AND MAINTENANCE FEE FOR SAP R - 3 SOFTWARE AS REVENUE EX PENDITURE, WITHOUT AOPRECIATING THAT THE ACTUAL COST OF THIS SOFTWARE WAS ARTIFICIALLY BIFURCATED INTO TWO COMPONENTS, NAMELY, REIMBURSEMENT OF COST AND LICENSE USER AND MAINTENANCE FEE, WHICH WAS EVIDENT FROM ALMOST EQUAL AMOUNT ATTRIBUTED TO THE TWO UNEQ UAL COMPONENTS, THAT BECAME POSSIBLE ON ACCOUNT OF THE SUPPLIERS BEING ASSOCIATE CONCERNS, AND THE ASSESSING OFFICER HAD ONLY L IFTED THE CORPORATE VEIL IN RESPECT OF THIS COLORABLE TRANSACTION WHICH HE WAS ENTITLED TO UNDER THE PRINCIPLES O F LAW AS SETTLED IN JUGGILAI KAMLAPAT. VS CIT 73 ITR 702 (SC); CIT VS DURGA PRASAD MORE 82 ITR 540 (SC) AND MCDOWELL & CO. LTD. MS CTO 154 ITR 148 (SC) [CONSTITUTION BENCH]. 8(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING ROYALTY @ 1.5% PAID TO THE ASSOCIATE CONCERNS COVERED BY SECTION 40A(2), RESULTING IN A RELIEF OF RS.3,21,94,000/ - , BY IGNORING THE DETAILED REASONS GIVEN BY THE TRANFER PRICING OFFICER AND CONCURRED WITH BY THE ASSESSING OFFI CER AFTER ALLOWING OPPORTUNITY TO THE ASSESSEE, SOLELY ON THE BASIS OF THE FINDING OF HIS PREDECESSOR IN THE ASSESSMENT YEAR 2002 - 03, WHICH WAS IN TURN BASED ON HER FINDING IN THE ASSESSMENT YEAR 2001 - 02 WHERE SHE DID NOT HAVE THE ADVANTAGE OF DETAILED AND ESPECIALIZED ORDER OF THE TRANSFER PRICING OFFICER, AND BY IGNORING THE FACT THAT THE CIT (A)'S ORDER FOR THE ASSESS MENT YEAR 2002 - 03 HAS BEEN CONTESTED BY THE DEPARTMENT AS ERRONEOUS. 8(B) THE CIT(A) FAILED TO APPRECIATE THAT HIS PREDECESS OR WHILE DETERMINING THE MATTER IN THE ASSESSMENT YEAR 2001 - 02 ON HER OWN AFTER TREATING THE ROYALTY AS ALLOWABLE REVENUE EXPENDITURE, HAD HERSELF OBSERVED IN PARA 7.11.2 OF HER ORDER THAT, CONSIDERING THE EXTENT OF TIME FOR WHICH THE ROYALTY HAD BEEN PAID @1.5%, THE TECHNOLOGIES MUST HAVE BEEN ADOPTED BY THE ASSESSEE AND IT WAS NOW PAID ONLY FOR UPDATION OF TECHNOLOGIES AND HENCE, IN THE ARM'S LENGTH TRANSACTION, THE RATE WOULD HAVE BEEN CONSIDERABLY REDUCED AT THE TIME OF RENEWAL OF AGREEMENT, WHICH WAS N OT DONE ONLY IN VIEW OF THE SPECIAL RELATIONSHIP, THUS HAD ALLOWED THE ROYALTY AT THE OLD RATE OF 1.5% DESPITE CHANGE IN THE CIRCUMSTANCES WITHOUT ADEQUATE, SPECIALIZED MATERIAL AT HER DISPOSAL. 9 (A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE ID. CI T(A) ERRED IN ALLOWING THE DEDUCTION OF RS.99,34,479/ - U/S 80HHC IN RELATION TO THE EOU UNIT ELIGIBLE FOR TAX HOLIDAY U/S 10B OF I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 6 THE ACT, WITHOUT APPRECIATING THE HEADING OF CHAPTER III UNDER WHICH THIS SECTION FALLS, I.E. 'INCOMES WHIC H DO NOT FORM PART OF TOTAL INCOME' READ WITH THE MANDATE OF SECTION 80HHC (4B). 9( B) WITHOUT PREJUDICE, THE CIT(A) FAILED TO APPRECIATE THAT, THE EXPRESSION USED IN SECTION 80HHC (4B), I.E. 'INCOME NOT CHARGED TO TAX UNDER THIS ACT' IS MUCH WIDER THAN TH E EXPRESSION 'INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME' AND HENCE IT ALSO COVERS THE INCOME DEDUCTIBLE UNDER SECTION 10B AS AMENDED W.E.F. 1 - 4 - 2001. GR. 1(A) 3. D URING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER NOTICED THAT AS PAR T COMPUTATION OF INCOME , ASSESSEE CLAIMED RS.89 , 95 , 198 ON ACCOUNT OF MO D IFICATION OF VARIOUS MACHINERIES AS UNDE R : - ITEM AMOUNT (RS.) MODIFICATION OF - IRR - 115105 DR 997649 JUNG E10 GRINDING MACHINE 2566357 LOADING BOX ALS MACHINE 10094 02 TRACK GRINDING MACHINE - IRR 348542 GRINDING BORE & TRACK MACHINE WNS 479112 CONVERSION OF OLD SYSTEM IN NEW 1876155 COOLANT TANK 680097 CINCINATI GRINDING MACHINE 646383 VARIOUS OTHER MACHINES SUCH AS INTERNAL GRINDING ETC. 391501 I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 7 T OTAL 8995198 T HE ASSESSING OFFICER TREATED THESE EXPENSES AS CAPITAL EXPENDITURES ON THE GROU ND THAT THE SE EXPENSES BROUGHT IN TO EXISTENCE AN ASSET OR ADVANTAGE OF ENDURING NATURE TO THE ASSESSEE. HE STATED THAT THESE MO DIFICATION OF EXPENSES HAVE RESULT ED INT O QUALITY IMPROVEMENT AND OTHER ADVANTAGES AS MENTIONED AT PAGE FOUR OF THE ASSESSMENT ORDER. 4. AGGRIEVED AGAINST THE DECISION OF THE ASSESSING OFFICER, THE ASSESSEE FILED A N APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (A). THE LEARNED CO MMISSIONER OF INCOME TAX APPEAL HAS DELETED PART OF THE EXPENSES AND CONF I RM THE REMAINING EXPENSES BY OBSERVING AS UNDER: - 8. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED FROM THE ASSESSMENT ORDER THAT THE FOLLOWING ITEMS OF PLANT AND MACHIN ERY HAVE BEEN INSTALLED AS REPLACEMENT TO THE OLD PLANT IN ORDER TO TAKE CARE OF THE NORMAL WEAR AND TEAR: ITEM AMOUNT (RS.) MODIFICATION OF - IRR - 115105 DR 997649 JUNG E10 GRINDING MACHINE 2566357 LOADING BOX ALS MACHINE 1009402 TR ACK GRINDING MACHINE - IRR 348542 I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 8 GRINDING BORE & TRACK MACHINE WNS 479112 CONVERSION OF OLD SYSTEM IN NEW 1876155 COOLANT TANK 680097 CINCINATI GRINDING MACHINE 646383 VARIOUS OTHER MACHINES SUCH AS INTERNAL GRINDING ETC. 391501 TOTA L 8995198 FROM THE DETAILS FURNISHED ON PAGE - 125 & 126 OF THE PAPER BOOK, WHICH ARE CLAIMED TO HAVE BEEN FILED BEFORE THE ASSESSING OFFICER, IT IS OBSERVED THAT THE EXPENDITURE IN RESPECT OF THE FIRST ITEM IN THE TABLE WAS ON THE RECONDITIONING OF THE M ACHINE BY WAY OF REPLACING THE SINGLE POINT DRESSING SYSTEM TO DIAMOND ROLL DRESSING SYSTEM FOR RS. 9,97,649/ - WITH A VIEW TO ACHIEVING BETTER QUALITY OF INNER RING TRACK AND REDUCING THE CONSUMPTION OF GRINDING WHEE. IT IS CLEAR THAT IT WAS A MAJOR REPLAC EMENT OF A PARTICULAR DRESSING SYSTEM WHICH YIELDED BENEFITS OF ENDURING NATURE BOTH QUALITATIVELY AND QUANTITATIVELY. IT WAS MORE IN THE NATURE OF INSTALLING A NEW COMPLETE SYSTEM. UNDER THE CIRCUMSTANCES, THE SAME FOR RS. 9,97,649/ - IS HELD TO BE CAPITAL IN NATURE. AS REGARDS ITEM 2 ABOVE, IT IS SEEN FROM THE DETAILS THAT THE EXISTING ELECTRICAL AND HYDRAULIC SYSTEM WAS REPLACED WITH ELECTRONIC OPERATING SYSTEM AND MECHANICAL BALL SYSTEM OF RS. 25,66,357/ - WHICH YIELDED BENEFITS OF IMPROVED QUALITY AND SAV ING OF CYCLE TIME AND DOWN TIME. IT IS CLEAR THAT HERE ALSO, A COMPLETE NEW SYSTEM - ELECTRONIC OPERATING SYSTEM AND MECHANICAL BALL SYSTEM WAS BROUGHT INTO EXISTENCE WHICH PROVIDED BENEFIT OF ENDURING NATURE BOTH QUALITATIVELY AND QUANTITATIVELY. UNDER THE CIRCUMSTANCES, THE SAME OF RS. 25,66,357/ - IS HELD TO BE OF CAPITAL NATURE. AS REGARDS THE THIRD ITEM, THE EXISTING LOADING BOX OF RS. 10,09,402/ - WAS RECONDITIONED BY REPLACING STANDARD PARTS LIKE CYLINDERS, PIPINGS AND CONNECTOR AND THIS RESULTED IN RED UCTION IN THE INTERRUPTIONS OF THE RUNNING OF THE MACHINE. THE EXPENDITURE IS IN THE NATURE OF ROUTINE REPLACEMENT OF PARTS LIKE CYLINDERS, PIPINGS AND CONNECTOR ETC. THE SAME FOR RS. 10,09,402/ - IS HELD TO BE IN THE NATURE OF CURRENT REPAIRS AND OF REVENU E IN NATURE. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 9 AS REGARDS THE FOURTH ITEM, THE DIAMOND ROLLER DRESSING SYSTEM OF RS. 3,48,542/ - WAS RECONDITIONED TO PREVENT CHATTER MARK DURING DRESSING. SINCE IT WAS ONLY RECONDITIONING OF THE DRESSING SYSTEM AND NOT A COMPLETE REPLACEMENT, THE EXPENDITURE OF RS. 3,48,542/ - IS HELD TO BE OF REVENUE NATURE. AS REGARDS THE FIFTH ITEM, THE EXISTING OPERATING PANEL OF RS. 4,79,112/ - WAS MODIFIED WITH NEW PIC SYSTEM TO PREVENT FREQUENT BREAKDOWNS. SINCE IT WAS ONLY IN THE NATURE OF MODIFICATION OF THE EXISTING PANEL, THE EXPENDITURE OF RS. 4,79,112/ - IS HELD TO BE OF REVENUE IN NATURE. AS REGARDS THE SIXTH ITEM, THE OLD HYDRAULIC AND ANALOG SYSTEM OF RS. 18,76,155/ - WAS REPLACED WITH A COMPLETELY NEW PIC OPERATING SYSTEM WITH MECHANICAL RE - BUILDING AND THIS RESU LTED IN PRODUCTIVITY IMPROVEMENT. IT IS THUS SEEN FROM THE NATURE OF THIS ITEM THAT A COMPLETE NEW OPERATING SYSTEM WAS BROUGHT INTO EXISTENCE BY REPLACING THE OLD SYSTEM AND THIS RESULTED IN PRODUCTIVITY IMPROVEMENT. CLEARLY, THIS IS A LONG TIME BENEFIT R ESULTING FROM THE EXPENDITURE AND, THEREFORE, THIS EXPENDITURE OF RS. 18,76,155/ - IS HELD TO BE CAPITAL IN NATURE. AS REGARDS THE LAST THREE ITEMS, IT IS SEEN THAT NO PARTICULAR BREAK UP OF DETAILS HAVE BEEN FURNISHED IN THIS REGARD. HOWEVER, IT APPEARS TH AT THE COOLANT TANK AND CINCINATI GRINDING MACHINE HAVE BEEN REPLACED WITH THE NEW ITEMS. IT IS, THEREFORE, HELD THAT THESE TWO ITEMS OF RS. 6,80,097/ - & RS. 6,46,383/ - HAVE RESULTED IN PROVIDING A BENEFIT OF ENDURING NATURE TO THE APPELLANT AND ARE, THERE FORE, HELD TO BE CAPITAL IN NATURE, IT IS FURTHER OBSERVED THAT THE LAST ITEM APPEARS TO BE ON ACCOUNT OF VARIOUS SMALL MACHINES. UNDER THESE CIRCUMSTANCES, RS. 3,91,501/ - IS HELD TO BE OF REVENUE IN NATURE. AS REGARDS THE GRANT OF DEPRECIATION ON THE ELIG IBLE ITEMS IN VIEW OF THE FINDINGS GIVEN ABOVE, IT IS OBSERVED THAT THE APPELLANT HAS FURNISHED DATES OF CAPITALIZATION AND THERE IS NO AMBIGUITY ABOUT IT. THIS INFORMATION HAD BEEN FILED WITH THE ASSESSING OFFICER. UNDER THE CIRCUMSTANCES, THE ASSESSING O FFICER IS DIRECTED TO GRANT DEPRECIATION ON THE ELIGIBLE ITEMS OF PLANT & MACHINERY AS DISCUSSED ABOVE ACCORDING TO THESE DATES OF INSTALLATION AND NOT AT HALF OF THE ELIGIBLE RATE ON A FLAT - BASIS. THE ASSESSING OFFICER IS DIRECTED TO RE - WORK THE AMOUNT OF DEPRECIATION. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 10 5. W E HAVE HEARD THE RIVAL CONTENTIONS. AFTER CONSIDERING THE DETAIL FINDINGS OF THE CIT(A ), ELABORATING REVENUE NATURE OF EXPENDITURE ON REPLACEMENT OF PARTS ETC , W E DO NOT FIND ANY REASON TO INTERFERE IN THE FINDING OF THE COMMISSIONE R OF INCOME TAX APPEAL. GR.1(B) 6. T HE REVENUE HAS CONTENDED THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) HAS ERRED IN ADMITTING ADDITIONAL EVIDENCE WHILE DECIDING THIS GROUND WITH THE OBSERVATION THAT THE RELEVANT DETAILS ARE CLAIMED TO HAVE BEEN FIL ED BEFORE THE ASSESSING OFFICER WHICH CONTRAVENE THE PROVISION OF RULE 46(A) OF THE ACT. WE DO NOT FIND ANY MERIT IN THE GROUND OF APPEAL OF THE REVENUE BECAUSE THE SIMILAR DETAILS WERE ALSO SUBMITTED TO THE ASSESSING OFFICER VIDE A NNEXURE AK. GR.2(A)& (B) 7. THE ASSESSING OFFICER OBSERVED DURING THE ASSESSMENT PROCEEDING THAT ASSESSEE HAS DEBITED RS.632.22 LAC ON ACCOUNT OF FEES FOR USE OF TECHNOLOGY OUT OF WHICH RS.4 76.01 LAKHS PERTAINED TO THE DTA UNIT AND RS.156.21 LAKHS PERTAINED TO THE EOU UNIT. HE FURTHER OBSERVED THAT THE ASSESSEE HAD ENTERED INTO AGREEMENTS WITH DIFFERENT SUPPLIERS OF TECHNICAL KNOW LIKE FAG KUGULFISCHER, GERMANY, FAG OEM UND HANDEL AG GERMANY. THE ASSESSING OFFICER HELD THAT THESE EXPENDITURES WAS OF CAPITAL NATURE AS THE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 11 ASSESSEE HAD ACQUIRED INDUSTRIAL INFORMATION OR TECHNICAL ASSISTANCE IN THE MANUFACTURING. AGGRIEVED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE FILED APPEAL E BEFORE THE COMMISSIONER OF INCOME TAX APPEAL AND THE COMMISSIONER OF INCOME T AX DECIDED THE APPEAL IN FAVOR OF THE ASSESSEE BY STATING THAT THE SAID EXPENDITURE WAS OF THE REVENUE NATURE AFTER FOLLOWING THE DECISION OF HIS PREDECESSOR IN THE A.Y 2001 - 02. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECOR D AND FIND THAT THE IDENTICAL ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH OF THE ITAT FOR ASSESSMENT YEAR 2001 - 02 IN FAVOR OF THE ASSESSEE AT PARA 24 TO 24.2 OF ITAT ORDER . RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE ITAT WE DO N OT FIND ANY REASON TO INTERFERE IN THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. GR.3 9. D URING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER'S HAS NOTICED THAT ASSESSEE HAS CLAIMED THE FOLLOWING EXPENDITURE UNDER THE HEAD R EPAIR AND MAINTENANCE : - I. PROFESSIONAL FEES FOR RENOVATION WORK - RS.497877/ - II. RENOVATION WORK IN RECEIPTION AREA - RS.635408/ - III. HARDNEST TESTER - RS.129431/ - IV. SDLC CARD - RS.110042/ - T HE ASSESSING OFFICER WAS STATE D THAT IN THE CASE OF THE ASSESSEE THE NATURE OF THESE EXPENSES CLEARLY INDICATES THAT IT BROUGHT INTO I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 12 EXISTENCE AN ASSET OR ADVANTAGES OF ENDURING NATURE ,THEREFORE, HE CAPITALIZED THESE EXPENDITURES AFTER ALLOWING DEPRECIATION TO THE ASSESSEE. AGGRIEV ED AGAINST THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (A) AND THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER EXCEPT EXPENDITURE OF RS.1,29,431 ON HARDNESS TESTER AND OTHER EXPENDITURE OF RS.1 , 01 , 042 ON SDLC CARD BY OBSERVING AS UNDER: - 23. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE GROUNDS ON WHICH THE FIRST TWO ADDITIONS O F RS. 4,97,877/ - AND RS. 6,35,408 / - HAVE BEEN MADE BY THE ASSESSING OFFICER IS THAT HE HAD HELD THE MAJOR RENOVATION WORK IN THE RECEPTION AREA TO BE OF CAPITAL NATURE AND, THEREFORE, ANY OTHER EXPENDITURE RELATING TO THE SAME RENOVATION WORK WOULD ALSO BE OF CAPITAL NATURE. THE APPELLANT H AS ALSO ARGUED THAT SINCE IT IS OF THE VIEW THAT THE EXPENDITURE ON THE MAJOR RENOVATION WORK IS CLAIMED TO BE OF REVENUE NATURE, THIS EXPENDITURE PERTAINING TO THE SAID RENOVATION WORK SHOULD ALSO BE HELD TO BE OF REVENUE NATURE. I AM ALSO OF THE VIEW THA T THE NATURE AND FATE OF THESE EXPENSES IS TIED UP WITH THE NATURE OF THE EXPENSES INCURRED ON THE RENOVATION WORK OF THE RECEPTION AREA, BOARD ROOM AREA ETC. AS DISCUSSED IN THE EARLIER GROUND OF APPEAL. I HAVE HELD THAT EXPENDITURE TO BE OF CAPITAL NATUR E. UNDER THE CIRCUMSTANCES, THESE TWO ITEMS OF EXPENDITURE OF RS. 4,97,877/ - AND RS. 6,35,408/ - ARE HELD TO BE OF CAPITAL NATURE. AS REGARDS THE GRANT OF DEPRECIATION, THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE DATES ON WHICH THE SAID EXPENDITURE HAS BEEN INCURRED AND ALLOW DEPRECIATION AT THE ELIGIBLE RATE. AS REGARDS THE HARDNESS TESTER, IT IS OBSERVED THAT IT IS A CONSUMABLE ITEM AND CANNOT BE CONSIDERED AS A CAPITAL EXPENDITURE AND, THEREFORE, THE EXPENDITURE OF RS. 1,29,431/ - ON H ARDNESS TESTER IS HELD TO BE OF REVENUE NATURE. THE ASSESSING OFFICER IS DIRECTED TO REVERSE THE DEPRECIATION ALLOWED ON THIS AMOUNT WHILE TREATING IT AS OF CAPITAL NATURE IN THE ASSESSMENT ORDER. AS REGARDS THE SDLC CARD, THERE IS NOTHING ON RECORD TO SHO W THAT ANY BENEFIT OF ENDURING NATURE HAS ACCRUED BY WAY OF THIS EXPENDITURE OF RS. 1,01,042/ - . UNDER THE CIRCUMSTANCES, THE SAME IS HELD TO BE OF REVENUE NATURE. THE ASSESSING OFFICER IS I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 13 DIRECTED TO REVERSE THE DEPRECIATION ALLOWED ON THIS AMOUNT WHILE TR EATING IT AS OF CAPITAL NATURE IN THE ASSESSMENT ORDER. 10. WE HAVE CONSIDERED THE ARRIVAL CONTENTION AND THE MATERIAL ON RECORD AND NOTICED THAT BOTH THESE EXPENDITURE ARE OF THE NATURE OF THE REVENUE EXPENDITURE. BECAUSE WE FIND THAT HARDNESS TESTER IS A CONSUMABLE ITEM AND IT CANNOT BE TREATED AS REVENUE EXPENDITURE. FURTHER WE FIND THAT AS SDLC CARD IS OFTEN THE NATURE OF REPLACEMENT OF PART AND THEREFORE REVENUE IN NATURE. IN VIEW OF THE DETAIL FINDINGS OF THE LEARNED COMMISSIONER OF INCOME TAX APPEA L WE DISINCLINED TO INTERFERE IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. GR NO.4(A ) & 4(B) 11. D URING THE COURSE OF ASSESSMENT PROCEEDING THE ASSESSING OFFICER OBSERVED THAT AN AMOUNT OF RS.99, 48, 954/ HAS BEEN WRITTEN OFF AS BAD DEBTS THEREFORE THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN THE JUSTIFICATION REGARDING THE CLAIM OF BAD DEBT. THE ASSESSEE HAS EXPLAINED THAT THESE AMOUNTS HAD BEEN EARLIER CREDITED TO THE PROFIT AND LOSS ACCOUNT WHICH HAD BECOME DOUBTFUL IN THE R ECOVERY SO THESE AMOUNTS HAVE BEEN WRITTEN OFF IN THE BOOKS AS A BED THAT DURING THE YEARS. THE ASSESSEE FURTHER STATED THAT THE R EQUIRED CONDITION FOR THE CLAIM OF BED THAT HAS BEEN FULFILLED. THE ASSESSING OFFICER HAS NOTE ACCEPTED THE EXPLANATION OF THE ASSESSEE AND DIS ALLOWED THE TOTAL AMOUNT OF RS.9 , 33 , 4 , 555/ BY STATING THAT ASSESSEE HAD FAILED TO SHOW HOW THESE DEBT HAD BECOME BAD. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 14 AGGRIEVED AGAINST THE DECISION OF THE ASSESSING OFFICER, THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED COMMISSIONER O F INCOME TAX APPEAL. THE LD. COMMISSIONER OF INCOME TAX(A) HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING THAT THE PROVISION OF THE ACT FOR DIS ALLOWANCE OF BAD DEBT HAD UNDERGONE QUALITATIVE CHANGE AFTER THE AMENDMENT CAME INTO FORCE WITH EFFECT FROM 01 - 04 - 1989 IT IS NO LONGER A NECESSARY TO PROVE THAT THE DEBTS HAD BECOME BAD. HE FURTHER STATED THAT THE CONDITIONS REQUIRED FOR CLAIMING BAD DEBTS DURING THE YEARS HAVE BEEN SATISFIED AS PER THE EXISTING PROVISIONS OF LAW. 25. I HA VE CONSIDERED THE RIVAL SUBMISSIONS. IT IS PERTINENT TO UNDERSTAND THAT THE GOVERNING PROVISIONS OF THE ACT FOR ALLOWANCE OF BAD DEBT HAD UNDERGONE QUALITATIVE CHANGE AFTER THE AMENDMENT CAME INTO FORCE W.E.F. 1 - 4 - 1989. IT IS NO LONGER NECESSARY TO PROVE T HAT THE DEBTS HAD BECOME BAD IN THAT CLASSICAL SENSE OF THE PRE - AMENDMENT REQUIREMENTS. THE OBSERVATIONS OF THE ASSESSING OFFICER THAT IF THE LEGISLATURE INTENDED TO ALLOW THE WRITE OFF OF 'ANY DEBT WRITTEN OFF' IT WOULD NOT HAVE USED THE WORD 'BAD' IN THE SECTION. IN THIS REGARD, THE APPELLANT'S ARGUMENTS HAVE MERITS THAT IT WAS OBVIOUS THAT A DEBT WHICH HAD NOT BECOME BAD WAS NOT ENTITLED FOR DEDUCTION; EVERY DEBT IS NOT CLAIMED FOR WRITE OFF. IN FACT, ANY DEBT OR PART THEREOF WHICH IS NOT BAD CANNOT BE C LAIMED AS A DEDUCTION EVEN IF WRITTEN OFF AS IRRECOVERABLE. IT WAS IN THIS CONTEXT THAT IT WAS NECESSARY FOR THE LEGISLATURE TO QUALIFY THE WORD 'DEBT'. UNDER THE CIRCUMSTANCES, THE EXPRESSION BAD BEFORE THE WORD 'DEBT' HAS TO BE UNDERSTOOD WITHOUT ATTRIBU TING ANY OTHER UNINTENDED IMPLICATION OF THE SAME. THE APPELLANT'S FURTHER ARGUMENT HAS FORCE WHEN IT SAYS THAT IF FOR ANY REASON IT WAS TO BE ACCEPTED THAT THE WRITE OFF WAS NOT BONAFIDE AND DEBT HAS NOT BECOME BAD IN THE PREVIOUS YEAR IN WHICH IT IS SO W RITTEN OFF, THEN, THE ASSESSEE WILL GET DENIED THE DEDUCTION IN THE YEAR OF WRITE OFF IN ANY SUBSEQUENT YEAR WHEN THE DEPT. MAY REACH THE CONCLUSION IN ITS WISDOM THAT THE DEBT HAD ACTUALLY BECOME BAD BECAUSE THE AMENDMENT IN SECTION 36(2)(III) AND (IV) WH ICH REQUIRED THE RECTIFICATION U/S. 155 OF THE ACT ARE NOT APPLICABLE TO THE PROVISIONS OF POST AMENDED PERIOD. COGNIZANCE IS ALSO TAKEN I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 15 OF THE APPELLANT'S RELIANCE ON THE THIRD MEMBER DECISION IN THE CASE OF ANIL H. RASTOGI (SUPRA). IT IS NOTEWO RTHY THAT THE APPELLANT COMPANY HAS WRITTEN BACK CREDIT BALANCES OF RS. 95,16,876/ - TO THE P & L ACCOUNT DURING THE YEAR AND OFFERED THE SAME TO TAX. UNDER THE CIRCUMSTANCES, I AM CONVINCED THAT THE CONDITIONS REQUIRED FOR CLAIMING OF BAD DEBTS DURING THE YEAR HAVE BEEN SATISFIED AS PER THE EXISTING PROVISIONS OF LAW. IT IS PERTINENT TO NOTE THAT THE WRITE OFF OF BAD DEBT HAD BEEN DISALLOWED BY THE CIT(A) IN ASSESSMENT YEAR 2001 - 02 FOR THE REASON THAT NO DETAILS HAVE BEEN FURNISHED BY THE APPELLANT DURING THAT YEAR. HOWEVER, THE PARTY - WISE DETAILS HAVE BEEN FURNISHED BEFORE THE ASSESSING OFFICER AND A COPY OF THE SAME HAS BEEN PLACED BEFORE ME ALSO VIDE LETTER DATED 21 - 12 - 2006. FROM THE DETAILS FURNISHED ON RECORD BEFORE ME, ALONG WITH THE LIST OF TH E BAD DEBTS WRITTEN OFF, IT IS NOTICED THAT COMPLETE CORRESPONDENCE, PROPOSING LEGAL ACTION ETC., AND INFORMATION REGARDING THE BIFR CASES, WINDING UP CASES IN RESPECT OF PARTICULAR INSTANCES HAVE BEEN FURNISHED LIKE HMT ENGG. LTD., NGEF LTD., SUSSEN ASI A LTD., TELCO LTD. FROM THE LIST IT IS OBSERVED THAT THERE ARE SOME MORE CASES ALSO WHERE EITHER THE CASES ARE UNDER BIFR OR WINDING UP PROCEEDINGS ARE UNDER WAY. THERE ARE CASES WHERE DEDUCTIONS HAVE BEEN MADE BY THE PARTIES ON ACCOUNT OF SHORT DELIVERI ES. IN SUCH INSTANCES, NO RECOVERIES ARE POSSIBLE AND THE AMOUNTS CAN ONLY BE WRITTEN OFF. THERE ARE CASES WHERE AMOUNTS HAVE BEEN DEDUCTED TOWARDS REJECTION, FREIGHT CHARGES. THERE ARE INTEREST ON SUCH AMOUNTS WHICH AGAIN WOULD BE IRRECOVERABLE ONCE THE P RINCIPAL AMOUNT ITSELF IS DISPUTED AND IS NOT PAID. UNDER THE CIRCUMSTANCES, THE CLAIM OF WRITE OFF OF BAD DEBTS AMOUNTING TO RS. 99,48 , 954/ - IS ALLOWED AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CANCELLED. 12. WE HAVE HEARD THE RIVAL CONTENTI ONS OF THE PARTIES. WE FIND THAT THE ASSESSEE HAS SUBMITTED PARTY - WISE DETAILS ALONG WITH THE LIST OF THE BAD DEBTS LIKE, COMPLETE CORRESPONDENCE, PROPOSED LEGAL ACTION ETC., INFORMATION REGARDING THE BIF FOR CASES, WINDING UP PROCEEDINGS REGARDING BAD DEBT CASES BEFORE THE ASSESSING OFFICER. WE HAVE ALSO OBSERVED THAT THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS GIVEN COMPLETE FINDINGS IN HIS ORDER AT PARA 24 TO 25 OF HIS I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 16 ORDER. AFTER CONSIDERING THE FACTS AND LEGAL FINDINGS PROVIDED IN THE ORDE R OF THE COMMISSIONER OF INCOME TAX APPEAL WE DO NOT FIND ANY REASON TO INTERFERE IN THE DECISION OF LEARNED COMMISSIONER OF INCOME TAX APPEAL . GR. 5&6 13. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT THE DEPRECIATION CLAIMED ON DATA PROCESSING MACHINES, HAD NOT BEEN APPORTIONED BY THE ASSESSEE BETWEEN THE DTA UNIT AND EOU UNIT ALTHOUGH THESE ASS ETS HAS BEEN USED BY THE PEOPLE WORKING IN BOTH THE UNITS. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW CAUSE WHY THE DEPR ECIATION ON THIS ASSET AND ALSO THE ADVERTISEMENT EXPENSES BE NOT APPORTIONED BETWEEN THESE TWO UNITS IN THE RATIO OF THEIR TURNOVER. THE ASSESSEE HAS EXPLAINED THAT NONE OF THE DATA PROCESSING EQUIPMENT WAS USED FOR ITS EOU UNIT AND THERE WAS NO NEED FOR ANY ADVERTISEMENT OR MARKETING OF ITS P RODUCT WITH THOSE GROUP CONCERNS. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE AND HE HAD APPORTIONED THESE EXPENSES BETWEEN THE TWO UNITS IN THE RATIO OF THEIR TURNOVER. AGGRIEVED AGAINST THE DECISION OF THE ASSESSING OFFICER, THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 28. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT IF IT CAN BE SHOWN THAT EXPENSES COVERED UNDER ANY PARTICULAR HEAD HAVE BEEN INCURRED FOR BOTH THE UNITS, THAN THERE WOULD BE A I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 17 JUSTIFICATION AND, THEREFORE, A GROUND FOR APPORTIONING THE SA ME BETWEEN THE DTA & THE EOU UNIT IN THE RATIO OF THEIR TURNOVER. IT IS SEEN THAT THE APPELLANT HAS CATEGORICALLY MENTIONED THAT NONE OF THE RESIDENTIAL QUARTERS HAVE BEEN USED BY THE OFFICER / STAFF WORKING IN THE EOU UNIT. IT IS ALSO SEEN THAT THE ASSESS ING OFFICER HAS NOT BROUGHT OUT ANY MATERIAL EITHER FROM THE RECORD OR BY WAY OF A FIELD SURVEY REPORT BY THE INSPECTOR OR BY WAY OF ANY STATEMENT BY ANY EMPLOYEE TO SHOW THAT THE RESIDENTIAL QUARTER HAVE BEEN USED BY ANY OFFICER / STAFF WORKING IN THE EOU UNIT. UNDER THE CIRCUMSTANCES, THERE CAN BE NO GROUND FOR THE APPORTIONMENT OF THE EXPENSES UNDER THIS HEAD. AS A RESULT, THE ACTION OF THE ASSESSING OFFICER WITH REGARD TO THE INTERFERENCE WITH THE CLAIM OF DEPRECIATION OF RS. 43,380/ - IN RESPECT OF THE RESIDENTIAL BUILDINGS IS CANCELLED. AS REGARDS THE DTA PROCESSING MACHINES, THERE IS NOTHING ,ON RECORD TO SHOW THAT THE DTA PROCESSING MACHINES HAVE ACTUALLY BEEN USED FOR THE EOU UNIT. IN FACT, THERE IS NO REASON TO BELIEVE THAT THE DTA PROCESSING MACHIN ES CAN BE OF ANY USE IN THE EOU UNIT IN VIEW OF THE FACT THAT THE EOU IS FULLY COMPUTERIZED UNIT NOT REQUIRING ANY EXTERNAL SUPPORT OF DTA PROCESSING MACHINE. UNDER THE CIRCUMSTANCES, THE ACTION OF THE ASSESSING OFFICER WITH REGARD TO THE INTERFERENCE WITH THE CLAIM OF DEPRECIATION IN RESPECT OF THE DTA PROCESSING MACHINE OF RS. 8,45,903/ - IS CANCELLED. AS REGARDS THE USE OF MOTOR CARS AND THEIR RELATED CLAIM OF DEPRECIATION OF RS. 3,70,478/ - , IT IS OBSERVED THAT THE APPELLANT HAS ONLY MADE A BALD CLAIM THA T THE VEHICLES ARE ONLY USED FOR THE DTA UNIT. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE APPELLANT IN SUPPORT OF THIS CLAIM. UNDER THE CIRCUMSTANCES, THE ACTION OF THE ASSESSING OFFICER WITH REGARD TO THE CLAIM OF DEPRECIATION OF RS. 3,70,478/ - IN RESP ECT OF THE MOTOR CARS IN APPORTIONING BETWEEN THE DTA & EOU UNITS IS CONFIRMED. 14. W E HAVE HEARD THE RIVAL CONTENTIONS. WE FIND THAT THERE IS NOTHING ON RECORD TO SHOW THAT THE DTA PROCESSING MACHINES HAVE ACTUALLY BEEN USED FOR THE EOU UNIT. WE ALSO FI ND MERIT IN THE CONTENTION OF THE LEARNED CONSUL THAT THE ASSESSEE WAS NOT REQUIRED TO MARKET ITS PRODUCT TO THE EOU UNIT AS THE ENTIRE PRODUCTION WAS SOLD TO F AG GERMANY WHICH WAS RESPONSIBLE FOR THE MARKETING AND SELLING OF THE PRODUCT IN FOREIGN MARKET S. IN VIEW OF THE ABOVE FACTS I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 18 AND AFTER TAKING INTO CONSIDERATION THE DETAILED FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. GR.NO.7 15. D URING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER'S OBSERVED THAT THE ASSESSEE HAD CLAIMED RS.1,00,81,239/ ON ACCOUNT OF LICENSE FEES F O R SAP R3 AS REVENUE EXPENDITURE. THE ASSESSING OFFICER OBSERVED THAT THE COMPLETE DETAILS OF TDS HAD NOT BEEN FURNISHED IN RESPECT OF THIS PAYMENT WHICH ARE COVERED UNDER SECTION 40( A) OF THE ACT. HE A SKED THE ASSESSEE TO FURNISH THE COMPLETE DETAIL IN RESPECT OF TDS COMPLIANCE AND ALSO EXPLAIN WHY THIS EXPENDITURE MAY NOT BE TREATED AS CAPITAL EXPENDIT URE. IN THIS CONNECTION THE ASSESSING HAD FURNISHED THE REQUIRED DETAIL OF DEDUCTION AND PAYMENT OF TDS ON THE SAID PAYMENT BUT THE ASSESSING OFFICER WAS NOT AGREED WITH THE ASSESSEE AND TREATED THESE EXPENDITURE OF THE NATURE OF CAPITAL EXPENDITURE A ND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE FILED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS ALLOWED THE APPEAL OF THE AS SESSEE BY THE OBSERVING AS UNDER: - 36. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. I HAVE ALSO PERUSED THE ORDER OF THE CIT(A) - III, BARODA FOR ASSESSMENT YEAR 2001 - 02 & ASSESSMENT YEAR 2002 - 03. IT IS SEEN THAT THE ISSUE HAS BEEN I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 19 DISCUSSED IN DETAIL BY HER. T HE CIT(A) - III HAS HELD THAT THE LICENCE FEE PAYABLE IS REVENUE IN NATURE WHILE THE ANNUAL REIMBURSEMENT OF SAP R3 COST HAS BEEN HELD TO BE OF CAPITAL NATURE. I AM IN AGREEMENT WITH HER VIEWS. AS REGARDS THE ALTERNATE PLEA OF THE ASSE SSING OFFICER FOR REJECTING THE APPELLANT'S CLAIM THAT IDS DETAILS HAD NOT BEEN PROVIDED, IT IS OBSERVED THAT THE TDS DETAILS HAD BEEN SUBMITTED VIDE LETTER DATED 26 - 10 - 2005 AND 16 - 11 - 2005. UNDER THE CIRCUMSTANCES, IT IS HELD THAT THE LICENCE USER FEE P AYABLE OF RS. 1,00,81,239/ - IS OF REVENUE NATURE AND IS FULLY ALLOWED. IT IS ALSO HELD THAT THE REIMBURSEMENT OF RS. 1,01,94,983/ - ON ACCOUNT OF SAP R3 COST IS CAPITAL IN NATURE. THE ASSESSING OFFICER IS DIRECTED TO ALLOW DEPRECIATION ON THIS CAPITALIZED AM OUNT AS PER RULES AFTER VERIFYING THE APPELLANT'S CLAIM FOR DEPRECIATION @ 60%. 16. WE HAVE HEARD THE RIVAL CONTENTIONS. WE HAVE ALSO NOTICED FROM THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL THAT ASSESSEE HAS MADE COMPLIANCE WITH THE TD S PROVISION AND THIS PARTICULAR PAYMENT HAS ALSO BEEN CONSIDERED AS REVENUE EXPENDITURE IN THE PAST IN THE CASE OF THE ASSESSEE. WE FIND THAT THE IDENTICAL ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH OF THE ITAT IN THE CASE OF THE ASSESSEE FOR ASSESS MENT YEAR 2001 - 02 IN FAVOR OF THE ASSESSEE AT PARA 26 TO 27 OF ITAT ORDER . AFTER GOING THROUGH THE COMPLETE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL WE ARE DISINCLINED TO INTERFERE IN THE DECISION OF THE LEARNED COMMISSIONER OF INCOME TAX A PPEAL. GR. NO. 8(A) & 8(B) 17. D URING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERVED THAT A REFERENCE HAD BEEN MADE TO THE TRANSFER I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 20 PRICING OFFICER UNDER SECTION 92CA OF THE ACT ,WHO GAVE A FINDING IN HIS ORDER UNDER SECTION 92CA(3) OF THE ACT THAT AN UPWARD ADJUSTMENT OF RS.6.7292 CRORE WAS REQUIRED TO BE MADE IN THE ASSESSEE'S INCOME SO THAT THE INTERNATIONAL TRANSACTION CONFORMED TO THE PRINCIPLE OF ARMS LENGTH. HE FURTHER OBSERVED THAT CONSIDERING THE PROVISIONS OF SECTION 92 C (4) NO DEDUCTION UNDER SECTION 10A OR 10 B OR CHAPTER - VIA OF THE ACT WAS REQUIRED TO BE GIVEN TO THE ASSESSEE. AS PER THE DETAILS OF ADDITION MADE BY THE TPO ON PAGES TWO OF HIS ORDER ARE AS UNDER: - ROYALTY WORKING : ( RS. IN LACS) DTA EOU TOTAL UNDER AGREEMENT DATED 21.12.2000 RECURRING ROYALTY (FAG OEM UND HANDEL AG, GERMANY) 401.59 79.93 481.52 UNDER AGREEMENT DATED 30.8.96 / 24.06.2002 RECURRING ROYALTY (FAG KUGELFISCHER GEORG SCHAEFFER AG) 0.00 69.35 69.35 TAX ON RE CURRING ROYALTY 0.00 6.93 6.93 UNDER AGREEMENT DATED 30.03.2000 RECURRING ROYALTY (FAG AUTOMOBILTECHNIK, AG) 65.98 0.00 65.98 TAX ON RECURRING ROYALTY 6.60 0.00 6.60 LICENSE FEES TO FAG HANWHA 1.60 0.00 1.60 TAX ON LICENSE FEES TO FAG HANWHA 0.24 0.00 0.24 I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 21 LUMPSUM KNOW HOW FEES (FAG AT, AG) TRANSFER FROM DEFERRED REVENUE EXPENSE 40.15 TOTAL 476.01 156.21 672.37 LESS : AMOUNT CAPITALISED IN BOOKS IN ' FIXED 40.15 ASSSETS ' AND DEPRECIATION THEREON ADDED IN THE ' COMPUTATION OF INCOME ' NET AMOUNT CHARGED TO P & L A/C 476.01 156.21 632.22 THE TPO HAS HELD THAT NO PAYMENTS FOR THE ROYALTY/KNOW HOW FEES/ LICENSE FEES WAS TO BE ALLOWED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAS ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE AMOUNT OF RS.6 32.22 LOCKS TOWARDS FEES FOR USE OF TECHNOLOGY AS DEBITED TO THE PROFIT AND LOSS ACCOUNT SHOULD NOT BE TREATED AS CAPITAL EXPENDITURES IN VIEW OF THE NATURE OF TRAN SACTIONS. THE ASSESSEE HAS OPPOSED THE PROPOSED ADDITION TO BE MADE BY THE ASSESSING OFFICER ON THE GROUND THAT THE TRANSFER PRICING OFFICERS HAD SUGGESTED AN ADDITION ON THE GROUND THAT THE PAYMENT OF ROYALT Y WAS NOT AT A RMS LENGTH AND FURTHER SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME TAX APPEAL IN HIS ORDER OF ASSESSMENT YEAR 2002 - 03 HAS OBSERVED THAT ONCE AN ADDITION WAS MADE UNDER SECTION 92 TO 90F, THE SAME CANNOT BE DISALLOWED ALL OVER AGAIN UNDER SECTION 40A(2)(B) AS IT WOULD LEAD TO DOUBL E DISALLOWANCE OF THE SAME AMOUNT. HOWEVER, THE ASSESSING OFFICER'S HAS NOT ACCEPTED THE SUBMISSION OF THE ASSESSEE AND TREATED RS.632.22 LOCKS AS CAPITAL EXPENDITURES AS HELD IN THE EARLIER YEARS. AGGRIEVED AGAINST THE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 22 DECISION OF ASSESSING OFFICER THE A SSESSEE HAS PREFERRED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS STATED THAT HIS PREDECESSOR IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2002 03 HAS ALLOWED RO Y ALTY PAYMENT AT A RATE OF 1.5% AND THE BALANCE AMOUNT OF ROYALTY WAS DISALLOWED UNDER SECTION 40A(2)(B) OF THE ACT. THE LEARNED CIT (A) FURTHER HELD THAT IN AGREEMENT WITH THE VIEWS OF HIS PREDECESSOR HE UPHELD THE PAYMENT OF ROYALTY AT A RATE OF 1.5% , THE PAYMENT OF B ALANCE AMOUNT OF ROYALTY WAS DISALLOWED UNDER SECTION 40A(2)(B) OF THE ACT. THE RELEVANT PART OF THE ORDER OF THE LEARNED CIT APPEAL IS REPRODUCED AS UNDER: - 42. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED IN THIS BEHALF THAT THE C IT(A) - III, BARODA IN HER ORDER FOR ASSESSMENT YEAR 2002 - 03 WITH REFERENCE TO PAYMENT OF ROYALTYIN CONTEXT OF THE A.L.P. HAS HELD THAT THIS PAYMENT IS COVERED U/S. 40A(2)(B) SINCE THESE PROVISIONS ARE SIMILAR TO THE PROVISIONS OF SEC. 92 TO 92F OF THE ACT. WHILE HOLDING THAT ROYALTY PAYMENT @ 1.5% WOULD BE EQUAL TO A.L.P., SHE HELD THAT THE BALANCE AMOUNT OF ROYALTY WOULD BE DISALLOWED U/S. 40A(2)(B) IN CASE HER VIEW ABOUT THE UPWARD ADJUSTMENT ON ACCOUNT OF ROYALTY WAS DELETED IN FURTHER APPEAL. A S I AM IN AGREEMENT WITH HER VIEWS AND HAVE UPHELD PAYMENT OF ROYALTY @ 1.5%, THE PAYMENT OF BALANCE AMOUNT OF ROYALTY IS DISALLOWED U/S. 40A(2)(B) OF THE ACT. THE ASSESSING OFFICER IS DIRECTED TO WORK OUT THESE FIGURES FOR THE SAID PURPOSE. UNDER THE CIRC UMSTANCES, GROUND NO.(18) BECOMES INFRUCTUOUS AND IS DISMISSED. 18. WE HAVE HEARD THE RIVAL CONTENTION S OF THE PARTIES. WE FIND THAT LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS NOT ELABORATED THE COMPLETE SIMILARITY OF THE FACT OF THE CASE IN THE CASE OF THE ASSESSEE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 23 DURING THE YEAR UNDER CONSIDERATION WITH THE FACTS PREVAILING IN THE CASE OF THE ASSESSEE PERTAINING TO ASSESSMENT YEAR 2002 03. WE CONSIDERED IT APPROPRIATE TO SET ASIDE THIS ISSUE TO THE FILE OF LEARNED COMMISSIONER OF INCOME TAX APPEAL TO ADJUDICATE IT S A FRESH AFTER CONSIDERING THE PARTICULAR FACTS PREVAILING DURING THE YEAR UNDER CONSIDERATION ON THIS ISSUE AND ANY DISSIMILARITY OF FACTS PREVAILING DURING THAT ASSESSMENT YEAR 2003 - 03 ADJUDICATED BY HIS PREDECESSOR. GR.9(A)(B) 19. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED FROM THE COMPUTATION OF INCOME THAT THE ASSESSEE HAS CLAIMED RS.99 , 34,479/ ON ACCOUNT OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE DEDUCTION UNDER SECTION 80HHC IN RESPECT OF THE PROFIT OF 100%EOU SHOULD NOT BE EXCLUDED FROM THE COMPUTATION. IN THIS RESPECT THE ASSESSEE EXPLAINED THAT THE AMENDMENT BROUGHT IN SECTION 10 B OF THE ACT WITH EFFECT FROM ASSESSMENT YEA R 2001 - 02, AT NO PLACE IT IS MENTIONED THAT THE TURNOVER OR PROFIT OF HUNDRED PERCENT EOU IS TO BE EXCLUDED FROM THE COMPUTATION. THE ASSESSING OFFICER HAS NOT ACCEPTED THE EXPLANATION FURNISHED BY THE ASSESSEE AND REJECTED THE CLAIM OF THE ASSESSEE. AGGRI EVED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE HAS FILED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX APPEAL. THE COMMISSIONER OF INCOME I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 24 TAX APPEAL HAS ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER 46. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE APPELLANT'S ARGUMENT IS THAT NOTHING U/S. 80HHC OR SEC. 10B EXPRESSLY PROHIBITS THE GRANT OF DEDUCTION UNDER BOTH THESE SECTIONS SIMULTANEOUSLY. THERE IS MERIT IN THE APPELLANT'S ARGUMENT THAT AFTER THE AMENDMENT IN SEC. 10B, THE INTENTION OF THE LEGISLATURE STAND CLEAR THAT IT IS NO LONGER IN THE NATURE OF INCOME THAT IS NOT TO BE INCLUDED IN TOTAL INCOME. UNDER THE CIRCUMSTANCES, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THIS BEHALF IS CANCELLED. 20. W E HAVE HEARD THE RIVAL CONT ENTIONS. WE HAVE ALSO PERUSE D THE JUDICIAL PRONOUNCEMENT REFERRED BY THE LEARNED DR IN THE CASE OF TATA BP SOLAR INDIA LIMITED VERSUS A DDITIONAL COMMISSIONER OF INCOME TAX OF ITA NO. 3381 MUMBAI/2009/A.Y. 2004 - 05. WE FIND THAT IN THIS CASE IT WAS HELD THAT EXPORT TURNOVER OF THE EOU WHICH WAS ENJOYING DEDUCTION UNDER SECTION 10B WAS TO BE INCLUDED IN THE TOTAL TURNOVER BUT NOT IN THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC(3)(A). THE RELEVANT PART OF THIS JUDICIAL PRONOUNCEMENT IS REPRODUCED AS UNDER: - ' WE HAVE ALREADY SEEN THE PROVISIONS OF S. 80HHC(3)(A) OF THE ACT, WHICH REFERS TO PROFITS DERIVED FROM EXPORT OF GOODS MANUFACTURED THEN THE PROFIT DERIVED FROM SUCH EXPORT SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS THE SAME PR OPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH GOODS BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE. THE EXPRESSION 'SUCH' BEFORE THE EXPRESSION EXPORT TURNOVER ONLY MEANS THAT THE EXPORT TURNOVER R EFERRED TO IS THE TURNOVER OF THE GOODS MANUFACTURED WHOSE PROFITS ARE BEING COMPUTED UNDER S. 80HHC(3)(A). WE CANNOT THEREFORE IGNORE THE INTENTION OF THE LEGISLATURE EXPRESSED IN SUCH CLEAR TERMS. WITH REGARD TO THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE PROFITS OF BUSINESS SHOULD BE INCREASED BY ADDING PROFITS OF S. 10B UNITS ALSO, WE ARE OF THE VIEW THAT THE PROFITS OF S. 10B UNIT FALL UNDER CHAPTER III OF THE ACT UNDER THE HEAD INCOME WHICH DO NOT FORM PART OF THE TOTAL INCOME. THEREFORE, THE PROFITS OF S. 10B UNIT WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AT ALL. THE SAID PROFITS CANNOT THEREFORE FORM PART OF THE PROFITS UNDER THE HEAD 'PROFITS AND I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 25 GAINS OF BUSINESS OR PROFESSION'. FOR ALL THE ABOVE REASONS WE ARE OF THE VIEW THAT THE ORDER OF CIT DIRECTIN G THE AO TO INCLUDE EXPORT TURNOVER ALSO AS PART OF THE TOTALTURNOVER WAS CORRECT AND DOES NOT CALL FOR ANY INTERFERENCE . ' WE FIND THAT THE FACTS IN THE CASE OF THE ASSESSEE ARE IDENTICAL TO THE FAC TS OF THE CASE DECIDED BY THE MU MBAI ITAT IN THE CASE RE FERRED SUPRA IN THIS ORDER. WE ALSO CONSIDER THAT THE EXPRESSION 'SUCH' BEFORE THE EXPRESSION EXPORT TURNOVER ONLY MEANS THAT THE EXPORT TURNOVER REFERRED TO IS THE TURNOVER OF THE GOODS MANUFACTURED WHOSE PROFITS ARE BEING COMPUTED UNDER S. 80HHC(3)(A). T H EREFORE, WE FIND THAT WHILE COM P UTING DEDUCTION UNDER SECTION 80HH C THE PROFITS OF S. 10B UNIT WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AT ALL. IN VIEW OF ABOVE FACTS AND LEGAL FINDINGS, WE REVERSE THE DECISION OF THE LD.CIT(A) AND CONFIRM THE F INDINGS OF THE ASSESSING OFFICER AND DIRECT TO COMPUTE THE DEDUCTION U/S 80HHC ACCORDINGLY AS PER THE DIRECTION GIVEN IN THE JUDICIAL PRONOUNCEMENT OF ITAT MUMBAI IN THE CASE OF TATA BP SOLAR INDIA LIMITED VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX OF ITA NO. 3381 MUMBAI/2009/A.Y. 2004 - 05. I TA 2052/A/2007 (ASSSESSEE'S APPEAL) 21 . THE ASSSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: - 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) I, BARODA ['THE CIT(A)'] ERRED IN FACT AND IN LAW IN CONFIRMIN G THE ADDITION OF RS. 23,91,140/ - ON ACCOUNT OF INTEREST RECEIVED BY THE APPELLANT ON INCOME TAX REFUND DESPITE THE FACT THAT THE SAID INTEREST HAD NOT BECOME FINAL DURING THE YEAR UNDER CONSIDERATION. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 26 2. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMI NG THE ACTION OF ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), BARODA ['THE AO'] IN TREATING FOLLOWING REPAIRING EXPENSES TO PLANT AND MACHINERY AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE AS CLAIMED BY THE APPELLANT. ITEMS AMOUNT(RS.) IRR - 1 15105 DR 9,97,649 JUNG E10 GRINDING MACHINE 25,66,357 CONVERSION OF OLD SYSTEM IN NEW SYSTEM 18,76,155 COOLANT TANK 6,80,097 CINCINATI GRINDING MACHINE 6,46,383 TOTAL 67,66,641 3. THE CIT (A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING SOFTWARE EXPENSES OF RS. 3,36,90,184 AS CAPITAL EXPENDITURE. 3A. THE CIT (A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING SOFTWARE EXPENSES ON ACC OUNT OF SAP R3 CHARGES OF RS. 1,01,94, 983 AS CA PITAL EXPENDITURE. 4. THE C1T(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING REPAIRS TO BUILDING AMOUNTING TO RS. 97,30,696 AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE CLAIMED BY THE APPELLANT. 5. THE C1T(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING EXPENSES ON REPLACEMENT OF ELECTRIC WIRE / CABLE AMOUNTING TO RS. 5,05,593 AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE DESPITE THE FACT THAT NO NEW ASSET HAS CO ME INTO EXISTENCE AND THEREFORE THE SAME ARE NOT CAPITAL EXPENDITURE. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 27 6. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING LUMP SUM PAYMENT OF RS. 49,06,357 ON ACCOUNT OF RIGHT TO USE TECHNICAL KNOWHOW AS CAPITA L EXPENDITURE. 7. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING THE FOLLOWING AMOUNTS AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE AS CLAIMED BY THE APPELLANT DESPITE THE FACT THAT NO NEW ASSET OR B ENEFIT OF ENDURING NATURE HAS COME INTO EXISTENCE: A. PROFESSIONAL FEES FOR REPAIRING WORK RS. 4,97,877 B. REPAIRING WORK A T RECEPTION AREA RS. 6,35,408 8. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING ARCHITECT FEES AMOUNTING TO RS. 6,75,700 ON THE GROUND THAT THE SAID EXPENDITURE IS A CAPITAL EXPENDITURE AND NOT A REVENUE EXPENDITURE . 9. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN ALLOCATING THE DEPRE CIATION ON MOTOR CAR BETWEEN DTA UNIT AND EOU UNIT IN THE RATIO OF THEIR RESPECTIVE TURNOVER DESPITE THE FACT THAT THE APPELLANT HAD MADE ALLOCATION OF THESE EXPENSES AS PER ACTUAL USAGE AND ACCORDINGLY REDUCING THE PROFIT AS T HE EOU BY A SUM OF RS. 3,70,4 58/ - . 10. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ADDITION OF THE AO IN NOT CONSIDERING THE FOLLOWING ITEMS AS ADDITION MADE IN THE YEAR UNDER CONSIDERATION MERELY ON THE GROUND THAT THESE ASSETS WERE PUT TO USE IN THE YEAR PRIOR TO THE A.Y. UNDER CONSIDERATION PARTICULARS TOTAL AMOUNT (RS.) MESH BELT FURNACE 13,78,652 M1G GRINDING MACHINE 8,50,000 CNC LIP MACHINE 15,22,000 TOTAL 37,50,652 I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 28 11. THE CIT(A) ERRED IN FACT AND IN LAW IN PARTIALLY CONFIRMING THE ADJUSTMENT PROPOSED BY THE TPO / AO U/S. 92 C R.W.S. 92 (1) [ AND ALTERNATIVELY U/S 40A(2)(A) OF THE ACT] IN RESPECT OF INTERNATIONAL TRANSACTION IN AS MUCH AS IT PERTAINED TO PART OF THE ROYALTY PAID AMOUNTING TO RS. 350.98 LACS AND THUS CONFIRMING THE ENHANCEMENT TO THE IN COME OF THE APPELLANT AGGREGATING TO RS. 350.98 LACS. A. THE CIT(A) ALSO ERRED IN FACT AND IN LAW IN HOLDING THAT ONLY ROYALTY AND FEES FOR TECHNICAL SERVICES PAID @ 1.5 % OF THE SALES VALUE MAY BE TREATED AS ARM'S LENGTH PRICE AND BALANCE WAS REQUIRED TO BE ADJUSTED UNDER CHAPTER X OF THE ACT [ AND ALTERNATIVELY ADDED U/S 40A(2)(A) OF THE ACT ] AND THUS CONFIRMING THE ADJUSTMENT/ADDITION TO THE EXTENT OF RS. 350.98 LACS. 12. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING DISALLOWANCE OF RS. 1. 82 LACS MADE BY THE AO ON ACCOUNT OF INTEREST PAID ON FOREIGN SUPPLY CREDIT ON THE GROUND THAT TDS U/S. 195 OF THE ACT HAS NOT BEEN DEDUCTED. 13. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE DISALLOWANCE OF COMPUTER EXPENSES OF RS. 11,67,803 MADE BY THE AO BY TREATING IT AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE CLAIMED BY THE APPELLANT. THE CIT(A) ALSO ERRED IN FACT AND IN LAW IN NOT ADJUDICATING THE GROUND WITH RESPECT TO THE DEPRECIATION ALLOWABLE @ 60 % ON COMPUTERS INSTEAD OF 25 % ALLOWED BY THE AO. THE CI T(A) ALSO ERRED IN FACT AND IN LAW IN NOT ADJUDICATING THE GROUND WITH RESPECT TO ALLOWING DEPRECIATION TO THE EXTENT OF 50 % OF THE ELIGIBLE RATE. 14. THE C1T(A) ALSO ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CHARGING INTEREST U/S. 234B OF THE INCOME TAX ACT, 1961. 15. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CHARGING INTEREST U/S. 234D OF THE INCOME TAX ACT, 1961. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 29 16. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN WITHDRAWING INTEREST U/S. 244A OF THE INCOME TAX ACT, 1961. 17. THE CIT(A) ERRED IN FACT AND IN LAW IN CONFIRMING THE INITIATION OF PENALTY PROCEEDINGS U/ S. 271(1 )(C) OF THE ACT. GR.1 22 . D URING THE YEAR AN D THE CONSIDERATION THE ASSESSING OFFICER HAS FOUND THAT ASSESSEE HAS RECEIVED TOTAL AMOUNT OF INTEREST ON REFUND OF RS. 2 3 , 91 , 140/ . THE ASSESSING OFFICER FURTHER NOTICED THAT ASSESSEE HAD NOT CONSIDERED THIS AMOUNT AS PART OF HIS TAXABLE INCOME THEREFOR E HE WAS ASKED TO EXPLAIN AS TO WHY THIS INCOME SHOULD NOT BE CONSIDERED AS AS INCOME FROM OTHER SOURCES. THE ASSESSEE HAS STATED THAT THIS ISSUE WAS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE COMMISSIONER OF INCOME TAX APPEAL FOR THE EARLIER PERI OD AND THE ADDITION WAS MADE BY THE ASSESSING OFFICER ACCORDINGLY. THE ASSESSEE HAS FILED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL AGAINST THE DECISION DECISION OF ASSESSING OFFICER. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAD SUST AINED ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 5. AS REGARDS THE FIRST, GROUND OF APPEAL, THE APPELLANT FAIRLY ADMITTED THAT THE ISSUE OF INTEREST ON INCOME - TAX REFUND IS DECIDED BY THE CIT(A) FOR ASSESSMENT YEAR 2001 - 02 AND ASSESSME NT YEAR 2002 - 03 AGAINST IT. A COPY EACH OF THE CIT(A) - III, BARODA ORDER HAS BEEN FILED BY THE APPELLANT. I HAVE PERUSED THE SAID ORDER FOR ASSESSMENT YEAR 2001 - 02 PARTICULARLY PARA - 9 OF THE ORDER AT PAGE - 46 TO PAGE - 50. THE INTEREST ON INCOME - TAX REFUND REC EIVED BY THE APPELLANT HAS BEEN HELD TO BE TAXABLE. I AM IN AGREEMENT WITH THE DECISION OF CIT(A) - III, BARODA ON THIS ISSUE. UNDER THESE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 30 CIRCUMSTANCES, THE ADDITION OF RS. 23,91,140/ - IS CONFIRMED AND THIS GROUND IS DISMISSED. 23 . W E HAVE HEARD THE RIVAL CONTENTIONS OF THE PARTIES. WE FIND THAT LEARNED COMMISSIONER OF INCOME TAX APPEAL IS JUSTIFIED IN UPHOLDING THE ADDITION M ADE BY THE ASSESSING OFFICER BY OBSERVING THAT THE INTEREST ON INCOME TAX REFUND RECEIVED BY THE ASSESSEE HAS BEEN HELD TO BE TAXAB LE. GR 2 24 . THIS GROUND OF APPEAL IS CONNECTED TO THE GROUND NUMBER ONE OF THE REVENUES APPEAL. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. I N VIEW OF THE DETAILED FINDING GIVEN BY THE LEARNED COMMISSIONER OF INCOME TAX A PPEAL WE DO NOT FIND ANY REASON TO INTERFERE IN THE DECISION OF LEARNED COMMISSI ONER OF INCOME TAX APPEAL BY TREATING THE SAID EXPENDITURES AS CAPITAL EXPENDITURES ON THE GROUND THAT THE NATURE OF THESE EXPENDITURES HAS RESULTED IN ACHIEVING BETTER QUALI TY, REDUCING CONSUMPTION, AND PROVIDED BENEFIT OF ENDURING NATURE BOTH QUANTITATIVELY AND QUALITATIVELY. GR.3 25 . DURING THE COURSE OF ASSESSMENT PROCEEDING THE ASSESSING OFFICER'S HAS NOTICED THAT ASSESSEE HAS CLAIMED RS.33 , 69 , 0184/ ON ACCOUNT OF OPERA TING/DEVELOPMENT OFR EXISTING SAP R3 SOFTWARE. THE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 31 ASSESSING OFFICER HAS DISALLOWED THESE EXPENDITURES BY TREATING THEM AS CAPITAL EXPENDITURE ON ACCOUNT OF INTANGIBLE ASSETS. THE COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THIS DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER : - 11. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED IN THIS REGARD THAT A SIMILAR EXPENDITURE HAD BEEN INCURRED BY THE. APPELLANT IN A.Y. 2002 - 03 ALSO AND A DISALLOWANCE HAD BEEN MADE BY THE ASSESSIN G OFFICER HOLDING IT AS OF CAPITAL NATURE. CIT(A) - III, BARODA IN HER APPEAL ORDER HAD DEALT WITH THE ISSUE ON PARA - 9 OF PAGE - 8 OF HER ORDER DATED 27 - 1 - 2006. I HAVE PERUSED THE ORDER. IT IS SEEN THAT A TOTAL AMOUNT OF RS. 1,89,23,999/ - HAD BEEN CLAIMED BY T HE APPELLANT. IT HAD BEEN NOTED BY THE CIT(A) - III THAT THE SAID EXPENDITURE CONSISTED OF RS. 84,24,564/ - AS SAP R3 LICENCE USER FEE PAID TO IBB GERMANY AND RS. 1,04,99,435/ - FOR UP - GRADATION OF SAP R3 AND ITS PROTOTYPING AND CUSTOMIZATION PAID TO FAG AG, GERMANY. THE CIT(A) - III HAD EXAMINED THE ISSUE AT LENGTH. IT IS OBSERVED FROM THE DETAILS DISCUSSED IN THE SAID ORDER AND AS PREVAILING IN THE APPEAL BEFORE ME THAT THE FACTS WITH REGARD TO THE PAYMENT ON ACCOUNT OF UP - GRADATION, PROTOTYP ING AND CUSTOMIZATION OF SAP R3 ARE IDENTICAL. OBSERVING THE FACTS, SHE RECORDED 'REGARDING THE PAYMENT OF RS. 1,04,99,435/ - , THE ASSESSEE SUBMITTED THAT IT HAD ENTERED INTO AN AGREEMENT WITH FAG, GERMANY ON 12 - 10 - 2001 FOR ORGANIZING SERVICES FROM IBB INFORMATION SYSTEM, GERMANY FOR UP - GRADATION OF SAP R3 AND ITS PROTOTYPING AND CUSTOMIZATION. THE COMPUTERIZED SYSTEM OF SAP R3 WAS INSTALLED AND IMPLEMENTED IN THE YEAR 1998 AND IT WAS UP - GRADED AND CUSTOMIZED DURING THE CURRENT A.Y. KEEPING IN MIND THE CHAN GES IN VARIOUS STATUTORY LAWS OF INDIA AND VARIOUS REQUIREMENTS OF ASSESSEE COMPANY................,'. THE CIT(A) III IN HER ORDER HAD HELD THAT SAID EXPENDITURE TO BE OF CAPITAL NATUR E BY OBSERVING THAT EXPENDITURE IS TOWARDS DEVELOPMENT OF ADDITIONAL / NEW FUNCTIONS AND, THEREFORE, IT 'AMOUNTS TO OBTAINING ADDITIONAL SOFTWARE. THE ASSESSEE HAS THUS OBTAINED AN ADVANTAGE OF ENDURING NATURE. BY INCURRING THE EXPENDITURE THE APPELLANT HAS OBTAINED RIGHT TO USE THE SOFTWARE AND HAS, THUS, OBTAINED ADVANTAGE OF ENDURING NATURE. FOR CONSTITUTING AN EXPENDITURE AS CAPITAL EXPENDITURE, IT IS NOT ALWAYS NECESSARY THAT THE EXPENDITURE S HOULD NECESSARILY RESULT IN ABSOLUTE OWNERSHIP OF A CAPITAL ASSET. THE LICENCE TO USE OR RIGHT TO USE IS ALSO A CAPITAL ASSET..................'. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 32 SHE RELIED UPON THE DECISIONS IN THE CASE OF A.R. KRISHNAMURTI &. OTHERS, 176 ITR 417 (SC) AND SCIENTIFIC ENGG. HOUSE, 157 ITR 66 (SC) AND MARUTI UDHYOG LTD., 92 ITD 119 (DEL. ITAT). SHE CONCLUDED THAT THE APPELLANT HAD OBTAINED ADVANTAGE OF ENDURING NATURE AND HELD THE EXPENDITURE AS CAPITAL IN NATURE. I AM IN AGREEMENT WITH HER VIEWS. UNDER THE CIRCUMSTANCES , THE EXPENDITURE OF RS. 3,36,90,184/ - IS HELD TO BE OF CAPITAL IN NATURE. THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CORRECT RATE OF DEPRECIATION APPLICABLE TO THE COMPUTER SOFTWARE AS PER THE RULES AND WHILE DOING SO, HE IS DIRECTED TO CONSIDER THE A PPELLANT'S SUBMISSION THAT THE CORRECT RATE OF DEPRECIATION APPLICABLE IS 60% W.E.F. 1 - 4 - 2003. 26 . W E HAVE HEARD THE RIVAL CONTENTIONS. THE LEARNED COUNSEL OF THE ASSESSEE HAS CONTENDED TH AT THIS ISSUE WAS COVERED IN FAVOR OF ASSESSEE BY THE ORDER OF ITA T COORDINATE BENCH FOR THE ASSESSMENT YEARS 2002 - 03 AT PARA 16 TO 21 OF THAT ORDER IN THIS CONNECTION WE CONSIDERED IT MORE APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT A FRESH AFTER CONSIDERING THE DIRECTION OF TH E ITAT IN THE ABOVE REFERRED JUDICIAL PRO NOUNCEMENTS DECIDED IN THE CASE OF THE ASSESSEE . GR. 3A 27 . SIMILARLY TO THE GROUND NUMBER 3 OF THE ASSESSEE AS MENTIONED ABOVE THIS ISSUE IS ALSO RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT A FRESH AS PER THE DIRECTION ISSUED BY THE ORDER OF ITAT COORDINATE BENCH IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2002 - 03. GR. NO . I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 33 28 . THE ASSESSING OFFICER NOTICED FROM THE COMPUTATION OF INCOME THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS.9 ,73,0,696/ TOWARDS BUILDING RENOVATION/MODERNIZATION. HE ALSO OBSERVE THAT MAJOR PART OF THESE EXPENSES WERE INCURRED ON RENOVATION OF ITS GUESTHOUSE. HE FURTHER OBSERVED THAT ALL THESE EXPENSES WERE ON ACCOUNT OF COMMON FACILITIES USED BY BOTH THE DTA AND THE EOU UNITS, HE, THEREFORE, APPORTIONED THE SAID EXPENSES BETWEEN THE EOU AND THE DTA IN THE RATIO OF THEIR TURNOVER. THE ASSESSING OFFICER HAS CAPITALIZED THESE EXPENDITURES BY OBSERVING THAT IT WAS AIMED AT REPLACING AN EXISTING PART OF THE BUILDI NG. AGGRIEVED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE HAS FILED APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THE ADDITION MADE BY THE ASSESSING OF SUCH BY OBSERVING AS UNDER: - 13. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS REGARDS THE BASIC ISSUE OF WHETHER THE SAID EXPENDITURE IS OF CAPITAL NATURE OR OF REVENUE NATURE, IT IS OBSERVED THAT THE IMPUGNED ADDITION IS ON ACCOUNT OF EXPENDITURE EXPENDED ON THE RENOVATIO N - OF THE GUEST HOUSE, REPLACEMENT OF THE' FALSE CEILING OF THE RECEPTION AREA, TECHNICAL AREA, TOOL ROOM AREA, BOARD ROOM AREA AND, FOR THE MODERNIZATION OF THE BOARD ROOM. IT IS ALSO NOTED THAT EXPENSES OF SIMILAR NATURE HAD BE EN ALLOWED AS REVENUE EXPENDITURE BY THE CIT(A) IN ASSESSMENT YEAR 1998 - 99. IT IS ALSO NOTED THAT SIMILAR EXPENSES IN ASSESSMENT YEAR 2002 - 03 HAVE BEEN HELD BY THE CIT(A) TO BE OF CAPITA! NATURE WHO OBSERVED '....................... THE ASSESSEE HAS INCURRED THIS EXPENDITURE ON REPLACEMENT OF OLD FALSE CEILING. THE EXPENDITURE IS NOT ON PRESERVATION OR MAINTENANCE OF EXISTING ASSETS. BY INCURRING THE EXPENDITURE, THE ASSESSEE HAS OBTAINED AN ADVANTAGE OF ENDURING NATURE. IN THE CASE OF ASSAM BENG AL CEMENT CO. 27 ITR 34, THE HON'BLE SUPREME COURT LAID DOWN THAT IF THE EXPENDITURE IS MADE FOR ACQUIRING AN ASSET OR AN ADVANTAGE OF ENDURING NATURE, IT IS IN THE NATURE OF CAPITAL I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 34 EXPENDITURE. IN THE CASE OF BALLIMAL NAVAL KISHORE & ANOTHER V. CIT 224 I TR 414, THE HON'BLE SUPREME COURT OBSERVED THAT 'HAVING REGARD TO THE CONTEXT IN WHICH THE EXPRESSION 'CURRENT REPAIRS' OCCURS IN SEC. 10(2)(V) OF INDIAN INCOME - TAX ACT, 1922, THE EXPRESSION 'CURRENT REPAIRS' MEANS EXPENDITURE ON BUILDINGS, MACHINERY, PLAN T OR FURNITURE WHICH IS NOT FOR THE PURPOSE OF PRESERVING OR MAINTAINING AND ALREADY EXISTING ASSETS AND WHICH DOES NOT BRING A NEW ASSET INTO EXISTENCE OR DOES NOT GIVE TO THE ASSESSEE A NEW OR DIFFERENT ADVANTAGE.' 'SINCE IN THE PRESENT CASE, THE EXPENDI TURE ON REPLACEMENT OF FALSE CEILING IS ON RENOVATING AND REPLACING AN ASSET AND NOT FOR PRESERVING OR MAINTAINING AN EXISTING ASSET, IT WAS RIGHTLY TREATED AS CAPITAL EXPENDITURE BY THE ASSESSING OFFICER.' IN THE FACTS OF THE APPEAL BEFORE ME, IT IS SEEN THAT A NEW FALSE CEILING HAS BEEN CREATED BY REPLACING THE EARLIER ONE, WHICH WAS HELD TO BE A CAPITAL ASSET. I AM IN AGREEMENT WITH THE DECISION OF THE CIT(A) FOR A.Y. 2002 - 03. UNDER THE CIRCUMSTANCES, THE EXPENDITURE INCURRED ON THE FALSE CEILING OF IS H ELD TO BE OF CAPITAL NATURE. SIMILARLY AND FOR THE SAME REASONS, THE EXPENDITURE ON THE BOARD ROOM AREA AND ON THE MODERNIZATION OF BOARD ROOM AND OTHER AREAS IS ALSO HELD TO BE OF CAPITAL NATURE. UNDER THE CIRCUMSTANCES, IT IS HELD THAT A NEW ASSET HAS CO ME INTO EXISTENCE. AS A RESULT, IT IS HELD THAT THE EXPENDITURE OF RS, 97,30,696/ - WAS RIGHTLY HELD AS CAPITAL EXPENDITURE BY THE ASSESSING OFFICER. AS REGARDS THE ELIGIBLE RATE OF DEPRECIATION, IT IS SEEN THAT THE ASSESSING OFFICER HAS HELD THAT THESE BUI LDINGS WERE MAINLY USED FOR RESIDENTIAL PURPOSES AND ALLOWED DEPRECIATION @ 5%. HOWEVER, IT IS SEEN THAT NO JUSTIFICATION HAS BEEN GIVEN BY THE ASSESSING OFFICER. IT IS NOT UNDERSTOOD AS TO HOW THE RECEPTION AREA, TECHNICAL AREA, TOOL ROOM AREA, BOARD ROOM AREA, GUEST HOUSE ETC. CAN BE SAID TO BE USED FOR RESIDENTIAL PURPOSES / MAINLY FOR RESIDENTIAL PURPOSES. UNDER THE CIRCUMSTANCES, THE APPELLANT'S CLAIM FOR GRANT OF DEPRECIATION @ 10% IS UPHELD AND THE ASSESSING OFFICER IS DIRECTED TO PROVIDE DEPRECIATIO N ON THIS CAPITALIZED EXPENDITURE ACCORDINGLY. AS REGARDS THE DATE OF CAPITALIZATION, IT IS SEEN FROM THE DETAILS, WHICH HAD ALSO BEEN FURNISHED BEFORE THE ASSESSING OFFICER, THAT THE DATE OF CAPITALIZATION HAS BEEN CLEARLY INDICATED. IT IS OBSERVED THAT A SSETS WORTH RS. 59,89,415/ - HAVE BEEN USED FOR MORE THAN 180 DAYS AND ASSETS WORTH RS. 37,41,280/ - HAVE BEEN USED FOR LESS THAN 180 DAYS. THE ASSESSING OFFICER IS DIRECTED TO I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 35 ALLOW DEPRECIATION @ 10% ACCORDINGLY AS PE R THE PERIOD OF UTILIZATION. AS REGAR DS THE APPORTIONMENT OF THESE EXPENSES, IT IS OB SERVED FROM ABOVE THAT THE APP ELLANT HAS NOT MADE ANY SUBMISSIONS IN THIS REGARD OF APPORTIONMENT OF RS. 97,30,696/ - BETWEEN DTA AND EOU IN THE RATIO OF THEIR TURNOVER. HOWEVER, IT IS OBSERVED FROM THE GROUNDS OF APPEAL THAT THE APPELLANT HAS TAKEN UP THE ISSUE OF APPORTIONMENT ON A CONSOLIDATED BASIS IN GROUND NO.(11) SEPARATELY AND INDEPENDENTLY. THERE ALSO, IT IS OBSERVED THAT THE APPELLANT HAS NOT TAKEN UP APPORTIONMENT OF RS. 97, 30,696/ - SEPARATELY. DURING THE APPEAL PROCEEDINGS, THE APPELLANT HAD SUBMITTED A TABULATED SUMMARY OF GROUNDS OF APPEAL. THERE, THE APPELLANT HAD STATED UNDER GROUND NO.(11) IN THE REMARKS COLUMN 'SINCE THE AMOUNTS ARE NEGLIGIBLE, NO SUBMISSIONS ARE MADE' . IT IS, THEREFORE, CONCLUDED THAT THE APPELLANT HAS NO SUBMISSIONS TO MAKE IN THIS BEHALF. UNDER THE CIRCUMSTANCES, THE ~' ACTION OF THE ASSESSING OFFICER IN APPORTIONING THESE EXPENSES BETWEEN THE DTA AND THE EOU IN THE RATIO OF THEIR TURNOVER IS CONFIRM ED. 29 . W E HAVE HEARD THE RIVAL CONTENTIONS. THE LEARNED COUNSEL HAS STATED THAT THIS ISSUE WAS COVERED IN FAVOR OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1998 99 VIDE ORDER OF ITAT AHMEDABAD IN ITA NO. 1943/8/2001 VIDE PARA 5 OF THE ORDER. WE CONSIDER I T TO BE MOST APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT AFTER TAKING INTO CONSIDERATION THE DIRECTION OF THE ITAT IN THE ABOVE REFERRED JUDICIAL PRONOUNCEMENT MADE IN THE CASE OF THE ASSESSEE IN THE EARLIER YEARS . GR.5 30 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAD CLAIMED RS.5, 05,593/ TOWARDS REPLACEMENT OF ELECTRIC WIRES /CABLE DURING THE RENOVATION I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 36 WORK. AFTER ALLOWING THE DEPRECIATION ON THESE EXPENS ES THE ASSESSING OFFICER HELD THAT THESE EXPENDITURES WERE OF THE NATURE OF CAPITAL EXPENDITURE. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THIS ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 15. I HAVE CONSIDERED THE R IVAL SUBMISSIONS. IT IS OBSERVED THAT THE IMPUGNED ADDITION IS ON ACCOUNT OF REPLACEMENT OF ELECTRIC WIRES / CABLES USED DURING THE RENOVATION OF THE RECEPTION AREA, GUEST ROOM, BOARD ROOM, RENOVATION OF CIP ETC. FROM THE DETAILS OF EXPENSES PLACED ON RECO RD, IT IS OBSERVED THAT THE EXPENSES HAVE BEEN INCURRED ON THE REPAIRING OF AC WIRING, TUBE LIGHT WIRING AND ELECTRICAL WIRING. IT IS OBSERVED THAT SINCE THE MAIN EXPENDITURE ON THE RENOVATION OF THESE AREAS HAS BEEN HELD AS CAPITAL EXPENDITURE, T HE RELATE D EXPENDITURE ON ELECTRIC WIRING OF THE SAME AREA IS ALSO HELD TO BE OF CAPITAL NATURE FOR TH E SAME REASONS. UNDER THE CIRCUMSTANCES, THE EXPENDITURE OF RS. 5,05,S93/ - IS HELD TO BE OF CAPITAL NATURE. AS REGARDS THE GRANT OF DEPRECIATION ON THIS CAPITALIZ ED AMOUNT, IT IS OBSERVED THAT THE APPELLANT HAD FURNISHED REQUISITE DETAILS BEFORE THE ASSESSING OFFICER. IT IS OBSERVED FROM THE SAME THAT AN EXPENDITURE OF RS. 3,13,509/ - HAD BEEN SPENT IN THE FIRST 1 /2 OF THE YEAR AND THE BALANCE AMOUNT OF RS. 1,92,084 / - WAS SPENT IN THE SECOND 1 /2 OF THE YEAR. THE ASSESSING OFFICER IS DIRECTED TO GRANT DEPRECIATION ACCORDINGLY. AS REGARDS THE ISSUE OF APPORTIONMENT OF THESE EXPENSES BETWEEN THE DTA & EOU UNIT, IT IS OBSERVED THAT UNDER THE HEAD THE APPELLANT HAD NOT ME NTIONED ANYTHING IN THE SUBMISSIONS MADE BY IT IN RESPECT OF GROUND NO.(5). SIMILARLY, UNDER GROUND NO.(11) ALSO, WHERE THE ISSUE OF APPORTIONMENT OF EXPENSES HAS BEEN TAKEN UP ON A CONSOLIDATED BASIS, IT HAS NOTED 'SINCE THE AMOUNTS ARE NEGLIGIBLE, NO SUB MISSIONS ARE MADE'. FOR THE REASONS DISCUSSED IN THIS BEHALF AT THE END OF PARA - 13 ABOVE, THE ACTION OF THE ASSESSING OFFICER IN THIS REGARD IS CONFIRMED. 31 . W E HAVE HEARD THE RIVAL CONTENTIONS AND OBSERVED THAT AS PER THE DETAILED FINDI NG GIVEN BY THE LEARNED CIT(A), THE ASSESSING OFFICER I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 37 HAS RIGHTLY TREATED THESE EXPENDITURES AS CAPITAL EXPENDITURES AND WE DON'T FIND ANY REASON TO INTERFERE IN THE FINDING S OF LD. CIT(A) GR.6 32 . D URING THE COURSE OF ASSESSMENT PROCEEDING THE ASSESSING OFFICER OBSER VED THAT AN AMOUNT OF RS.49 , 06 , 357/ HAD BEEN CLAIMED IN THE COMPUTATION OF INCOME AS A FEES FOR TECHNICAL SERVICES TO F AG AT GERMANY . THE ASSESSING OFFICER F URTHER OBSERVED FROM THE AGREEMENT THAT THESE PAYMENT WAS MADE ON ACQUIRING AN ASSET OR ADVANTAG ES OF ENDURING NATURE WHICH WAS A KIND OF CAPITAL EXPENDITURE. AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE HAS PREFERRED APPEAL BEFORE THE LD. COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THE A DDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 19. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. I HAVE PERUSED THE ORDER OF THE CIT(A) - III, BARODA ALSO. IT IS SEEN THAT THE CIT(A) HAS DEALT WITH THE ISSUE AT LENGTH WITH REFERENCE TO THE VARIOUS CLAUSES OF THE AGREEMENT AND AFTER EXAMINING THE VARIOUS JUDGMENTS RELIED UPON BY BOTH THE SIDES, SHE HAS UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER AT PARA - 7.7.4, PAGE - 26 OF THE ORDER BY HOLDING THE EXPENDITURE AS CAPIT AL EXPENDITURE. I AM IN AGREEMENT WITH HER VIEWS. UNDER THE CIRCUMSTANCES, THE ADDITION OF RS. 49,06,357/ - IS CONFIRMED AS CAPITAL EXPENDITURE. AS REGARDS DEPRECIATION, THE ASSESSING OFFICER HAS ALREADY ALLOWED THE SAME ON THIS AMOUNT WHICH IS NOT IN DISPU TE. 3 3 . W E HAVE HEARD THE RIVAL CONTENTIONS. THE LEARNED COUNSEL CONTENDED THAT THIS ISSUE WAS COVERED IN FAVOR OF THE ASSESSEE IN I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 38 ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2001 02 BY THE ORDER OF ITAT WIDE PARA 6.4 AND 6.5. WE CONSIDER ED IT TO BE MOST APPRO PRIATE TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT AFTER TAKING INTO CONSIDERATION THE DIRECTION OF THE ITAT IN THE ABOVE REFERRED JUDICIAL PRONOUNCEMENT MADE IN THE CASE OF THE ASSESSEE IN THE EARLIER YEARS. GR. 7 34 . DU RING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER TREATED EXPENDITURE RELATING TO PROFESSIONAL FEES FOR RENOVATION WORK OF RS.4,97,877/ AND EXPENDITURE OF RS.6 , 35 , 408/ TOWARD RENOVATION WORK IN THE RECEPTION AREA OF CAPITAL NATURE. AGGRIEV ED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE HAS PREFERRED APPEAL BEFORE THE LD. COMMISSIONER OF INCOME TAX APPEAL. THE LEARNED COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 23. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE GROUNDS ON WHICH THE FIRST TWO ADDITIONS OF RS. 4,97,877/ - AND RS. 6,35,408/ - HAVE BEEN MADE BY THE ASSESSING OFFICER IS THAT HE HAD HELD THE MAJOR RENOVATION WORK IN THE RECEPTION AREA T O BE OF CAPITA! NATURE AND, THEREFORE, ANY OTHER EXPENDITURE RELATING TO THE SAME RENOVATION WORK WOULD ALSO BE OF CAPITAL NATURE. THE APPELLANT HAS ALSO ARGUED THAT SINCE IT IS OF THE VIEW THAT THE EXPENDITURE ON THE MAJOR RENOVATION WORK IS CLAIMED TO BE OF REVENUE NATURE, THIS EXPENDITURE PERTAINING TO THE SAID RENOVATION WORK SHOULD ALSO BE HELD TO BE OF REVENUE NATURE. I AM ALSO OF THE VIEW THAT THE NATURE AND FATE OF THESE EXPENSES IS TIED UP WITH THE NATURE OF THE EXPENSES INCURRED ON THE RENOVATION WORK OF THE RECEPTION AREA, BOARD ROOM AREA ETC. AS DISCUSSED IN THE EARLIER .GROUND OF APPEAL. I HAVE HELD THAT EXPENDITURE TO BE OF CAPITAL NATURE. UNDER THE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 39 CIRCUMSTANCES, THESE TWO ITEMS OF EXPENDITURE OF RS. 4,97,877/ - AND RS. 6,35,408/ - ARE HELD TO B E OF CAPITAL NATURE. AS REGARDS THE GRANT OF DEPRECIATION, THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE DATES ON WHICH THE SAID EXPENDITURE HAS BEEN INCURRED AND ALLOW DEPRECIATION AT THE ELIGIBLE RAT E. AS REGARDS THE HARDNESS TESTER, IT IS OBSERVED TH AT IT IS A CONSUMABLE ITEM AND CANNOT BE CONSIDERED AS A CAPITAL EXPENDITURE AND, THEREFORE, THE EXPENDITURE OF RS. 1,29,431/ - ON HARDNESS TESTER IS HELD TO BE OF REVENUE NATURE. THE ASSESSING OFFICER IS DIRECTED TO REVERSE THE DEPRECIATION ALLOWED ON THIS AMOUNT WHILE TREATING IT AS OF CAPITAL NATURE IN THE ASSESSMENT ORDER. AS REGARDS THE SDLC CARD, THERE IS NOTHING ON RECORD TO SHOW THAT ANY BENEFIT OF ENDURING NATURE HAS ACCRUED BY WAY OF THIS EXPENDITURE OF RS. 1,01,042/ - . UNDER THE CIRCUMSTANCES, THE SAME IS HELD TO BE OF REVENUE NATURE. THE ASSESSING OFFICER IS DIRECTED TO REVERSE THE DEPRECIATION ALLOWED ON THIS AMOUNT WHILE TREATING IT AS OF CAPITAL NATURE IN THE ASSESSMENT ORDER. 35 . W E HAVE HEARD THE RIVAL CONTENTIONS. WE FIND THAT THESE EXPEND ITURES WERE INCURRED ON A ROUTINE BASIS , THEREFORE , WE ALLOW THE APPEAL OF THE ASSESSEE BY TREATING THESE EXPENDITURES OF REVENUE IN NATURE. GR . 8 36 . THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD CLAIMED RS.6,75,700/ ON ACCOUNT OF ARCHITECTURAL FE ES FOR DESIGNING WORK FOR RENOVATION/MODERNIZATION OF THE OFFICE. THE ASSESSING OFFICER TREATED THESE EXPENDITURES AS CAPITAL EXPENDITURE . ON APPEAL FILED BY THE ASSESSEE BEFORE THE LEARNED CO MMISSIONER OF INCOME TAX APPEAL, HE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 40 HAS SUSTAINED THE ADDITION M ADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 30. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE MAJOR EXPENDITURE ON RENOVATION / MODERNIZATION OF THE OFFICE HAS BEEN HELD TO BE CAPITAL IN NATURE. UNDER THE CIRCUMSTANCES, THE ARC HITECTURAL FEE FOR THE DESIGNING OF THE SAID WORK IS ALSO HELD TO BE OF CAPITAL NATURE. THE DISALLOWANCE OF RS. 6,75,700/ - IS, THEREFORE, CONFIRMED. AS REGARDS THE GRANT OF DEPRECIATION THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE DATE OF INSTALLATION / PUT TO USE IN RESPECT OF THIS EXPENDITURE FROM THE APPELLANT AND ALLOW DEPRECIATION ACCORDINGLY. THIS ISSUE APPARENT TO BE CONNECTED TO THE ISSUE OF REPAIR/RENOVATION TO THE BUILDING AS MENTIONED IN GR. NO. 4 OF THE ASSESSEE. SIMILARLY WE CONSIDER ED IT TO BE MOST APPROPRIATE TO RESTORE THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER TO DECIDE IT AFTER T AKING INTO CONSIDERATION THE DIRECTION OF THE ITAT IN JUDICIAL PRONOUNCEMENT MADE IN THE CASE OF THE ASSESSEE AS STATED IN THE IN GR.NO. 4 OF T HE ASSESSEE. GR . 9 37 . T HE ASSESSING OFFICER HAS ALLOCATED THE DEPRECIATION ON MOTOR CAR BETWEEN THE DTA UNIT AND EOU UNIT OF RS.3,70,458 . THE LEARNED COMMISSIONER OF INCOME TAX HAS CONFIRMED THE ACTION OF THE ASSESSING OFFICER AS ASSESSEE HAS NOT PR ODUCED ANY MATERIAL TO PROVE THAT THE VEHICLES WERE ONLY USED FOR DTA UNITS. WE HAVE HEARD THE RIVAL CONTENTIONS AND WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDING OF THE LD.CIT(A). I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 41 GR . 10 38 . THE ASSESSING OFFICER HAS NOTICED FROM THE DETAILS OF ADDITION TO FIXED ASSETS MESH BELT FURNACE,MIG GRINDING MACHINE,CNC LIP MACHINE THE DATE S OF INSTALLATION OF THESE ASSETS W ERE PRIOR TO FINANCIAL YEAR 2002 03. THE ASSESSEE COULD NOT EXPLAIN THAT THESE ASSETS WERE TRANSFERRED TO THE RESPECTIVE ASSETS HE AD PRIOR TO THE FINANCIAL YEAR 2002 0 3 AND THEY WERE ALREADY PART OF OPENING WDV AS ON FIRST 1.4. 2002. ACCORDINGLY THE DEPRECIATION OF RS.1 8,87,828/ CLAIMED IN RESPECT OF THE ADDITION TO FIXED ASSETS WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE LEA RNED COMMISSIONER OF INCOME H AS SUSTAINED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 32. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE APPELLANT HAD CLAIMED THAT THE ASSETS WERE TRANSFERRED T O THE RESPECTIVE HEAD OF FIXED ASSETS ON THE BASIS OF PUT TO USE / INSTALLATION CERTIFICATE. IT IS FURTHER OBSERVED THAT THE ASSESSING OFFICER HAS NOTED THAT THE APPELLANT HAD SHOWN DATES OF INSTALLATION IN RESPECT OF ALL THE ASSETS, BEING THE SUBJECT MATT ER OF THIS GROUND OF APPEAL AS PRIOR TO FY 2002 - 03. UNDER THE CIRCUMSTANCES, THE ASSESSING , OFFICER WONDERED THAT WHEN THESE DATES HAD BEEN MENTIONED ON THE BASIS OF THE PUT TO USE / INSTALLATION CERTIFICATE, THEN HOW COME THESE ASSETS WERE NOT TRANSFERRE D TO THE RESPECTIVE ASSETS HEAD. THIS BASIC OBJECTION BY THE ASSESSING OFFICER HAS NOT BEEN CLEARLY MET BY THE APPELLANT OR REBUTTED. UNDER THE CIRCUMSTANCES, THE ACTION OF THE ASSESSING OFFICER WITH REGARD TO THIS GROUND OF APPEAL IS CONFIRMED EXCEPT IN R ESPECT OF THE EXCHANGE RATE FLUCTUATION WHICH HAS TO BE ALLOWED ON THE BASIS OF PROVISIONS OF SEC. 43A OF THE ACT. THE APPELLANT HAS ALSO PRAYED FOR THE SAME TREATMENT IN RESPECT, OF ITS CLAIM FOR EXCHANGE RATE FLUCTUATION. THE ASSESSING OFFICER IS DIRECTE D TO ALLOW DEPRECIATION IN RESPECT OF THE AMOUNT ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IN THE CURRENT YEAR I.E. ASSESSMENT YEAR 2003 - 04. I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 42 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF THE DETAILED FINDINGS AND R EASONING GIVEN AS ABOVE BY THE LD.CIT(A), WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF THE LD.CIT(A). GR.11 & 11(A) 39 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAS NOTICED FROM THE FORM NO. 3CEB THAT THE ASSESSEE H AD ENTERED INTO INTERNATIONAL TRANSACTIONS AND THE AGGREGATE VALUE OF SUCH TRANSACTIONS EXCEEDS RS.5 CRORES. THEREAFTE R, THE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER AFTER OBTAINING APPROVAL OF THE COMMISSIONER OF INCOME TAX U/S 92CA OF THE ACT. AFTER CONSIDERING THE REPORT OF THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER HAS MADE UPW A RD ADJUSTMENT OF RS.6.7292 CRORE TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED AGAINST THE DECISION OF ASSESSING OFFICER THE ASSESSEE HAS PREFERRED APPEAL B EFORE THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. THE COMMISSIONER OF INCOME TAX APPEAL HAS PARTLY CONFIRM ED THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS ISSUE BY OBSERVING AS UNDER: - 40. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. I HAVE ALSO PERUS ED THE ORDER OF THE CIT(A) - III FOR ASSESSMENT YEAR 2002 - 03 WHERE SHE HAS HELD ROYALTY @ 1.5% REPRESENTING THE ARMS LENGTH PRICE. CONSEQUENTLY, IN ASSESSMENT YEAR 2002 - 03, AGAINST THE APPELLANT'S CLAIM OF TOTAL ROYALTY OF RS. 638.26 LAKHS ONLY AN AMOUNT OF RS. 262.35 LAKHS AS ROYALTY REPRESENTING THE CORRECT ARMS LENGTH PRICE WAS ALLOWED. IT IS OBSERVED THAT SHE HAS DISCUSSED THE ISSUE AT: GREAT LENGTH. I AM IN AGREEMENT WITH HER ON THIS ISSUE. UNDER THE CIRCUMSTANCES, ROYALTY @ 1.5% IS ALLOWED. THE ASSESSIN G I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 43 OFFICER IS DIRECTED IO RE - WORK THE DISALLOWANCE ON THIS BASIS AND CHECK THE ARITHMETICA ACCURACY OF THE APPELLANT'S SUBMISSIONS IN THIS BEHALF THAT THE DISALLOWANCE WOULD WORK OUT TO RS. 350.98 LAKHS. AFTER RECHECKING, THE CORRECT AMOUNT WILL BE ALLOWED BY THE ASSESSING OFFICER. AS REGARDS THE OTHER AMOUNT OF RS. 40.15 LAKHS AS LUMP SUM KNOW HOW FEES PAID TO FAG, THIS ISSUE ALSO HAD BEEN DECIDED BY THE CIT(A) - III, BARODA IN HER ORDER FOR ASSESSMENT YEAR 2002 - 03 AGAINST THE APPELLANT AS AT PARA - 10.7.19 ON PAGE - 62 OF HER ORDER. AGREEING WITH HER VIEWS, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS COUNT OF RS.40.15 LAKHS IS CONFIRMED. 40 . W E HAVE HEARD THE RIVAL CONTENTIONS. THE LEARNED COUNSEL OF THE ASSESSEE HAS CONTENDED THAT FOR ASSESSMENT YEA RS 2002 - 03, THE ITAT AHMEDABAD IN THE CASE OF THE ASSESSEE VIDE PARA 29 AND 29.1 HELD THAT ROYALTY CANNOT BE BENCHMARKED USING CUP METHOD INSTEAD TRANSACTION OF ROYALTY HAS TO BE BENCHMARKED USING TNMM. AFTER PERUSAL OF MATERIAL ON RECORD AND SUB MISSION OF THE REPRESENTATIVES , WE CONSIDERED IT WILL BE MORE APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER TO DECIDE AS A FRESH AFTER TAKING INTO CONSIDERATION THE DIRECTION ISSUED BY THE ITAT IN THE CASE OF THE ASSESSEE AS REFERRED SUPRA IN THIS ORDER. GR. 12 41 . THE ASSESSING OFFICER'S NOTICED THAT THE ASSESSEE HAD CLAIMED RS.1 82,000/ ON ACCOUNT OF INTEREST ON FOREIGN SUPPLY CREDIT AND THE ASSESSEE HAD NOT MADE ANY TDS UNDER SECTION 195 OF THE ACT THEREFORE, THE ASSESSING OF FICER DISALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING THAT PROVISION OF SECTION 195 WAS ATTRACTED IN THIS CASE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 44 FOR NOT DEDUCTING TDS ON THE PAYMENT MADE TO NON RESIDENTS. ON APPEAL THE COMMISSIONER OF INCOME TAX APPEAL HAS SUSTAINED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: - 44. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED IN THIS R EGARD THAT THE ISSUE STANDS DECIDED AGAINST THE APPELLANT BY THE JURISDICTIONAL GUJARAT HIGH COURT IN THE CASE OF CIT V. VI JAY SHIPBREAKING CORPN., 261 ITR 113. UNDER THE CIRCUMSTANCES, THE DISALLOWANCE OF RS. 1.82 LAKHS MADE BY THE ASSESSING OFFICER IS CONFIRMED. 42 . DURING THE COURSE OF APPELLANT PROCEEDINGS THE LEARNED COUNSEL HAS STATED THAT THIS ISSUE WAS DECIDED AGAINS T THE ASSESSEE BY THE DECISION OF ITAT AHMEDABAD IN THE ASSESSMENT YEAR 2002 03.AT PAGE 45 TO 49 OF THAT ORDER. IN VIEW OF THESE FINDING WE DISMISS THE APPEAL OF THE ASSESSEE ON THIS ISSUE. GR.13 43 . THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED COMPUTER EXPENSES AND IN THE ABSENCE OF ANY DETAILS OF THESE EXPENSES OF RS.11,67,803/ THE ASSESSING OFFICER TREATED THE SAME AS CAPITAL EXPENDITURE . THE LEARNED COMMISSIONER OF INCOME TAX HAD SUSTAINED THE ADDITION MADE BY THE ASSESSING OFFIC ER ON THE SAME REASONING BY TREATING THESE EXPENDITURE AS CAPITAL EXPENDITURES. WE HAVE HEARD THE RIVAL CONTENTIONS. WE OBSERVED THAT THE ASSESSEE HAS NOT PROVIDED THE BREAKUP OF THESE EXPENDITURE NOT BEFORE THE LD.CIT(A) NOR BEFORE US DURING THE COURSE OF APPELLATE PROCEEDINGS TO DISPROVE THE FINDING OF THE ASSESSING OFFICER, THEREFORE WE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 45 DISINCLINED TO INTERFERE IN THE FINDING OF THE LEARNED COMMISSIONER OF INCOME TAX APPEAL. GR NO.14 TO 17 44 . THESE GROUNDS OF APPEALS ARE OF GENERAL NATURE NOT REQU IRED ADJUDICATION THEREFORE, SAME ARE DISMISSED . ITAT 870/A HD /09 (REVENUE S APPEAL) 45 . THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: - 1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CANCELING THE PENA LTY OF RS. 1,54,00,000/ - LEVIED ON THE FOLLOWING ADDITIONS CONFIRMED BY THE LD. CIT(A). (I) ADDITION OF INTEREST ON INCOME TAX REFUND. (II) ADDITION ON ACCOUNT OF APPORTIONMENT OF EXPENSES BETWEEN THE EOU AND DTA UNIT. (III) DISALLOWANCE OF DEPRECIATION ON PLANT & MACHIN ERY, (IV) IV) FEES FOR MANAGEMENT WORKSHOP, (V) V) TRANSFER PRICING ADDITION, (VI) VI) DISALLOWANCE OF INTEREST ON FOREIGN SUPPLY CREDIT. (VII) 1(B) THE CIT(A) FAILED TO APPRECIATE THE FACTS AND POSITION OF LAW RELIED UPON THE BY THE A.O. IN THE ORDER U/ S. 271(1)(C) OF THE ACT. 1(C) THE CIT(A) ALSO FAILED TO APPRECIATE THE RATIO OF THE RECENT DECISION OF THE HON. SUPREME COURT IN THE CASE OF DHARMENDRA TEXTILES 306 ITR 227 (SC), ACCORDING TO WHICH THERE IS NO ONUS UPON THE DEPARTMENT TO ESTABLISH 'MENS REA'. GR.NO.1(A) TO 1(C) 46 . THESE GROUNDS OF APPEAL OF THE REVENUES ARE INTERCONNECTED RELATING TO CANCELLATION OF THE PENALTY OF RS .1, 54,00,000/ - BY THE I.T.A NO S . 1976, 2052 / AHD/2007 & 870/AHD/2009 A.Y. 2003 - 04 PAGE NO ACIT VS. FAG BEARING INDIA LTD. 46 LEARNED COMMISSIONER OF INCOME TAX APPEAL WHICH WERE LEVIED ON THE ADDITIONS CONFIRMED BY THE LEA RNED COMMISSIONER OF INCOME TAX APPEAL ON DIFFERENT ISSUES. T HE QUANTUM APPEAL IN THE CASE OF THE ASSESSEE HAD BEEN DECIDED AS SUPRA IN THIS ORDER, MAJOR PART OF THE ISSUES HAS BEEN RESTORED TO THE ASSESSING OFFICER FOR DECIDING A FRESH, THEREFORE THE GR OUND OF PENALTY AT THIS STAGE HAS BECO ME INFRUCTUOUS. THEREFORE, THIS GROUND OF REVENUE IS DISMISSED. 47. IN THE RESULT, THE APPEAL ITA 1976/AHD/2007 FILED BY REVENUE AND THE APPEAL ITA 2052/AHD/2007 FILED BY ASSESSEE ARE PARTLY ALLOWED. THE APPEAL ITA 870/AHD/2009 FILED BY REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN C OURT ON 24 - 04 - 201 7 SD/ - SD/ - ( R.P. TOLANI ) ( AMARJIT SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD : DATED 24 /04 /2017 / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / , A.K