DCIT CIR. - 6(3), MUMBAI V. M/s. METRO EXPORTERS P. LTD., MUMBAI

ITA 2095/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3929 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-06-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 27-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARESH KUMAR BALODIA
• Assessee Lawyers: H N MOTIWALLA
• Keywords: Capital asset; Business income; Depreciation; Source of fund; Bad and doubtful debts; Revenue expenditure
• Section: 80HHC; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 2027/MUM/2008 (ASSESSMENT YEAR: 2004-05) M/S. METRO EXPORTERS PVT. LTD. ACIT, RANGE 6(3) KAKAD CHAMBERS, 132, DR. A.B. ROAD AAYAKAR BHAVAN, M.K. ROAD WORLI, MUMBAI 400018 VS. MUMBAI 400020 PAN - AABCM 0349 J APPELLANT RESPONDENT ITA NO. 2095/MUM/2008 (ASSESSMENT YEAR: 2004-05) ACIT, RANGE 6(3) M/S. METRO EXPORTERS PVT. LTD. AAYAKAR BHAVAN, M.K. ROAD KAKAD CHAMBERS, 132, DR. A.B. ROAD MUMBAI 400020 VS. WORLI, MUMBAI 400018 PAN - AABCM 0349 J APPELLANT RESPONDENT ASSESSEE BY: SHRI H.N. MOTIWALLA REVENUE BY: SHRI NARESH KUMAR BALODIA O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REV ENUE FOR A.Y. 2004- 05 AGAINST THE ORDER OF THE CIT(A) XXVI, MUMBAI DAT ED 07.12.2007. 2. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D .R. ITA NO. 2027/MUM/2008 3. GROUND NO. 1 PERTAINS TO THE ISSUE OF PRIOR PERIOD EXPENDITURE DISALLOWED BY THE A.O. AT ` 3,32,671/- AND CONFIRMED BY THE CIT(A) AND WITHOUT PREJUDICE THAT GROUND SHOULD HAVE BEEN ALLO WED IN THE YEAR TO WHICH IT PERTAINS TO. 4. THE A.O. NOTICED THAT THE ASSESSEE HAS OFFERED A PR IOR PERIOD INCOME OF ` 3,06,889/- AND CLAIMED AN EXPENSE OF ` 3,19,780/- AND DEBITED NET EXPENDITURE OF ` 12,891/- WHICH HAS CLAIMED AS DEDUCTION. CONSIDERIN G THAT ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 2 THE ASSESSEE IS MAINTAINING MERCANTILE SYSTEM OF AC COUNTING THE A.O. WAS OF THE OPINION THAT THE EXPENDITURE CLAIMED BY THE ASS ESSEE SHOULD HAVE BEEN CLAIMED IN EARLIER YEARS AND SO THE SAME WAS NOT AL LOWED. WHILE DOING SO INSTEAD OF DISALLOWING THE AMOUNT OF ` 3,19,780/-, WHICH WAS THE PRIOR PERIOD EXPENSE, THE A.O. HAS CONSIDERED THE NET DEB IT ALSO AGAIN AND THUS DISALLOWED A TOTAL AMOUNT OF ` 3,32,671/-. FOLLOWING HIS ORDERS FOR A.Y. 2003-04 THE CIT(A) HAS CONFIRMED THE DISALLOWANCE. IT WAS SUBMITTED THAT IN A.Y. 2003-04 THE A.O. HAD DISALLOWED ONLY THE NET A MOUNT OF CLAIM AND NOT THE FULL EXPENSES CLAIMED AS PRIOR EXPENSES. IT WAS SUBMITTED THAT THE ASSESSEE HAS NO OBJECTION IF THE DISALLOWANCE IS RE STRICTED TO THE NET AMOUNT OF ` 12,891/- CLAIMED IN THE P & L ACCOUNT AFTER SETTING OFF THE PRIOR PERIOD INCOME. 5. THE LEARNED D.R., HOWEVER, OBJECTED TO STATING THAT ACCORDING TO THE PRINCIPLES OF ACCOUNTANCY THE EXPENDITURE CLAIM HAS TO BE ALLOWED IN THE YEAR IN WHICH THE EXPENDITURE PERTAINS TO. EVEN WIT H REFERENCE TO INCOME ALSO HIS OBJECTION WAS THAT THE INCOME SHOULD HAVE BEEN CONSIDERED IN THE YEAR OF RECEIPT. ACCORDINGLY HE OBJECTED TO NETTING OF EXPENDITURE AND SUBMITTED THAT THE ORDER OF THE CIT(A) SHOULD BE UP HELD. 6. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDE RS FOR A.Y. 2003- 04 THE A.O. HAS DISALLOWED ONLY THE NET CLAIM AFTER SETTING OFF THE PRIOR PERIOD INCOME. THE CIT(A) HAS CONFIRMED THE DISALLO WANCE TO THE EXTENT OF THE NET AMOUNT ONLY, WHICH WAS CONTESTED. HOWEVER, IN THIS YEAR, WHILE ACCEPTING THE PRIOR PERIOD INCOME, THE A.O. WITHOUT VERIFYING WHETHER THE EXPENDITURE HAS BEEN ACCRUED DURING THE YEAR OR NOT , WHETHER THE LIABILITY HAS CRYSTALLISED DURING THE YEAR OR NOT, SIMPLY DIS ALLOWED THE AMOUNT ON THE BASIS OF THE ACCOUNTING PRINCIPLES. EVENTHOUGH THE A.O. FOLLOWED THE DECISION OF THE ITAT IN EVEREADY INDUSTRIES INDIA L TD. 78 ITD 175 (TM) FOR THE ABOVE PRINCIPLE, IT IS NOT IN DISPUTE THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND UNDER THAT PRIN CIPLE THE EXPENDITURE RELATABLE TO EARLIER YEARS WHEN CRYSTALLISED IN AN YEAR CANNOT BE ALLOWED AS DEDUCTION IN ANY OTHER YEAR. IN THE ABOVE REFERRED CASE THE ISSUE WAS WITH REFERENCE TO THE YEAR OF ALLOWABILITY OF EXPENDITUR E/COMPENSATION PAYABLE IN ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 3 THE BHOPAL GAS LEAK TRAGEDY CASE. EVENTHOUGH THE IN CIDENT OF GAS LEAK OCCURRED IN 1984 THE ISSUE WAS WHETHER THE COMPENSA TION WAS TO BE ALLOWED IN 1989-90 WHEN THE AWARD WAS GRANTED OR IN THE YE AR WHEN THE ORDER REACHED FINALITY ON DISPOSAL OF WRIT PETITION IN A. Y. 1992-93. AFTER ANALYSING THE CASE LAW ON THE ISSUE THE THIRD MEMBER HAS AGRE ED THAT THE LIABILITY HAS TO BE ALLOWED WHEN THE SAME WAS CRYSTALLISED IN A.Y . 1992-93. THIS ALSO INDICATES THAT EVEN IN MERCANTILE SYSTEM OF ACCOUNT ING, YEAR OF CRYSTALLIZATION OF LIABILITY IS IMPORTANT THAN NOME NCLATURE AS PRIOR PERIOD EXPENDITURE. THERE IS NO SUCH FINDING BY THE A.O. W ITH REFERENCE TO THE NATURE OF EXPENDITURE AND THE YEAR OF CRYSTALLIZATI ON. WHILE ACCEPTING THE INCOME THE A.O. NOT ONLY DISALLOWED THE PRIOR PERIO D EXPENDITURE OF ` 3,19,780/- BUT ALSO NET DEBIT OF ` 12,891/- THEREBY MAKING DISALLOWANCE OF ` 3,32,671/- MORE THAN THE AMOUNT INVOLVED, WHICH IN DICATES THAT THE A.O. HAS NOT APPLIED HIS MIND WHILE CONSIDERING THE DISA LLOWANCE. SINCE THE A.O. HAS DISALLOWED ONLY THE NET AMOUNT AFTER ACCEPTING THE PRIOR PERIOD INCOME IN A.Y. 2003-04 AND THE ASSESSEE HAS NO OBJECTION F OR SIMILAR TREATMENT IN THIS YEAR, WE DIRECT THE A.O. TO DISALLOW THE AMOUN T OF ` 12,891/- ONLY, WHICH IS THE NET DEBIT MADE TO THE P & L ACCOUNT. WITH TH IS DIRECTION THE GROUND IS CONSIDERED PARTLY ALLOWED. 7. GROUND NO. 2 PERTAINS TO THE ISSUE OF CLUB MEMBERSH IP FEES. DURING THE YEAR THE ASSESSEE HAS SPENT CLUB MEMBERSHIP FEE S OF ` 1,37,500/- AS CORPORATE MEMBERSHIP. IT WAS ASSESSEES CONTENTION THAT A AMOUNT OF ` ,15,00,000/- WAS PAID ON 27.07.2003 WHICH WAS FOR A PERIOD OF 10 YEARS FOR UTILIZATION OF THE WILLINGDON SPORTS CLUB FACILITIE S AND THE ASSESSEE HAS CLAIMED ONLY PROPORTIONATE AMOUNT OF ` 1,37,500/- PERTAINING TO A.Y. 2004- 05 AND NOT THE ENTIRE AMOUNT. THE A.O. DISALLOWED T HE AMOUNT HOLDING THAT THE SAME WAS CAPITAL IN NATURE AND FOR ENDURING BEN EFIT. THE CIT(A) CONFIRMED. 8. THE LEARNED COUNSEL RELIED ON THE DECISION OF THE H ON'BLE BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVATORS CO. (INDIA) LTD . 195 ITR 682 FOR THE PROPOSITION THAT THE EXPENDITURE IS REVENUE IN NATU RE WHEREAS THE LEARNED D.R. DISTINGUISHED THE CASE STATING THAT THE ISSUE BEFORE THE HONBLE ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 4 BOMBAY HIGH COURT WAS WITH REFERENCE TO SUBSEQUENT FEES REIMBURSEMENT TO THE EMPLOYEES AND NOT ENTRANCE FEES, WHICH IS TH E ISSUE BEFORE THE TRIBUNAL. 9. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE DETA ILS FILED THE CLUB MEMBERSHIP WAS TAKEN IN THE NAME OF THE COMPANY FOR THE BENEFIT OF MRS. SMITA P. BHATIA, JOINT MANAGING DIRECTOR AS SOLE NO MINEE FOR A PERIOD OF 10 YEARS. EVENTHOUGH THE AMOUNT OF ` 15,00,000/- WAS PAID IN LUMP SUM FOR A PERIOD OF 10 YEARS THE ASSESSEE HAS CLAIMED ONLY A PROPORTIONATE AMOUNT DURING THE YEAR CLAIMING ONLY ` 1,37,500/-. THE DISPUTE IS REGARDING ALLOWABILITY OF EXPENDITURE ON ACCOUNT OF ENTRANCE FEES TOWARDS MEMBERSHIP OF A CLUB. THE A.O. AND CIT(A) HAS HELD THE AMOUNT AS CAPITAL IN NATURE, HOWEVER, THERE IS NO FINDING THAT THIS AMOUNT WAS N OT SPENT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN ORDER T O ALLOW THE EXPENDITURE WHAT IS REQUIRED TO BE SEEN IS WHETHER THE EXPENDIT URE HAS RESULTED INTO AN ADVANTAGE IN THE REVENUE FIELD OR IN THE CAPITAL FI ELD. IN CASE THE EXPENDITURE HAS NOT RESULTED IN CREATION OF ANY CAPITAL ASSET O R ANY NEW SOURCE OF INCOME AND IT HAS NOT CHANGED THE CAPITAL STRUCTURE OF THE COMPANY AND HAD BEEN INCURRED ONLY FOR CONDUCT OF THE BUSINESS MORE EFFI CIENTLY AND PROFITABLY THEN IT WILL BE REVENUE EXPENDITURE. THE LEARNED D. R. DISTINGUISHED THE JUDGEMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF OTIS ELEVATORS CO. (INDIA) LTD. 195 ITR 682 WHERE THE ISSUE WAS WITH R EFERENCE TO THE REIMBURSEMENT OF EXPENDITURE SPENT IN THE CLUB AND NOT THE FEE PAID FOR OBTAINING THE MEMBERSHIP. HOWEVER, THERE IS A JUDGE MENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE EXP ORT CORPORATION LTD., 209 ITR 649 IN WHICH THE LUMP SUM ENTRANCE FEES PAI D TOWARDS MEMBERSHIP OF THE CLUB HAS BEEN HELD TO BE REVENUE EXPENDITURE . SIMILAR VIEW WAS ALSO TAKEN IN THE CASE OF CIT VS. SAMTEL COLOR LTD. 180 TAXMAN 82 (DEL) WHEREIN THE HONBLE DELHI HIGH COURT HAS ALLOWED THE EXPEND ITURE HOLDING THAT THE ADMISSION FEE PAID TOWARDS CORPORATE MEMBERSHIP WAS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT TOWARDS CAPITAL ACCOUNT AS IT ONLY FACILITATED SMOOTH AND E FFICIENT RUNNING OF THE BUSINESS ENTERPRISE AND DID NOT ADD TO PROFIT EARNI NG APPARATUS OF THE BUSINESS ENTERPRISE. HOWEVER, THE HONBLE KERALA HI GH COURT IN THE CASE OF ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 5 FRAMATONE CONNECTOR OEN LTD. VS. DCIT 294 ITR 559 C ONSIDERED SIMILAR PAYMENT PAID TO COCHIN YATCH CLUB TOWARDS INSTITUTI ONAL MEMBERSHIP FEE AND HELD THAT THE EXPENDITURE EFFECTED BY THE ASSES SEE WAS CAPITAL IN NATURE. ONCE THE ASSESSEE PAID THE AMOUNT TO A CLUB FOR MEM BERSHIP IT WAS A PAYMENT ONCE AND FOR ALL RESULTING IN AN ENDURING B ENEFIT TO THE INSTITUTION. THE MERE FACT THAT ASSESSEES REPRESENTATIVE, LIKE THE MANAGING DIRECTORS PARTICIPATION IN THE CLUB PROMOTED THE ASSESSES BU SINESS DID NOT CHANGE THE CHARACTER OF THE PAYMENT WHICH WAS MADE ONCE AND FO R ALL. THE HONBLE KERALA HIGH COURT FOLLOWED THE PRINCIPLES ESTABLISH ED BY THE APEX COURT IN PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD . VS. CIT 225 ITR 792 IN ARRIVING AT THE ABOVE DECISION. 9.1 IN THE CASE OF SHAH RUKH KHAN IN ITA NO. 1489/M UM/2006 DATED 23.07.2009 THE COORDINATE BENCH OF THE ITAT HELD TH AT THOUGH THE HONBLE HIGH COURT OF KERALA IN THE CASE OF CONNECTOR OVEN LTD. HAVE TAKEN A DIFFERENT VIEW, WE HAVE TO FOLLOW THE VIEW TAKEN BY HONBLE HIGH COURT OF GUJARAT WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE TAKEN INTO ACCOUNT IN VIEW OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF VEGETABLE PRODUCTS 88 ITR 192. VARIOUS COORDINATE BENCHES IN THE CASE OF SUNITHI CONSULTANCY SERVICES LTD. VS. ACIT IN ITA NO. 3554/ MUM/2007 DATED 06.10.2010 AND JINDAL DYE INTERMEDIATE PVT. LTD. VS . DCIT 1 SOT 243 (MUM) AND VIMAL B. SHAH ITA 1182/MUM/2006 DATED 08. 11.2008 AND ACTI VS. SHRI RAMESH M. DAMANI ITA NO. 5143/MUM/200 6 DATED 13.08.2008 HAVE TAKEN A VIEW THAT THE ADMISSION FEE PAID WAS ALLOWABLE AS REVENUE EXPENDITURE. 9.2 GENERALLY ENTRANCE FEE WAS PAID AS ONETIME PAYM ENT AND THE BENEFIT IS OF ENDURING NATURE. THERE IS NO JURISDICTIONAL HIGH COURT JUDGEMENT ON THIS ISSUE THOUGH THE JUDGEMENT IN THE CASE OF OTIS ELEV ATORS CO. (INDIA) LTD. (SUPRA) IS IN THE CONTEST OF REIMBURSEMENT OF MEMBE RSHIP FEES OF THE EMPLOYEES PAID BY THE COMPANY. EVEN IN THE CASE OF HONBLE DELHI HIGH COURT JUDGEMENT IN THE CASE OF SAMTEL COLOR LTD. 18 0 TAXMAN 82 (DEL) THE FACTS INDICATE THAT THE ASSESSEE COMPANY NOMINATED EMPLOYEES WHO WOULD AVAIL THE BENEFIT OF CORPORATE MEMBERSHIP GIVEN TO THE ASSESSEE. IN THOSE ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 6 CIRCUMSTANCES THE EXPENDITURE WAS ALLOWED UNDER SEC TION 37(1). WE SELDOM COME ACROSS ANY COMPANY ALLOWING THE EMPLOYEES TO E NJOY THE BENEFITS. IN THE PRESENT CASE THE MEMBERSHIP WAS RESTRICTED TO O NLY JT. MANAGING DIRECTOR AND NOT TO ANY OTHER DIRECTORS OR EMPLOYEE S. THIS ISSUE HAS TO BE RESOLVED IN APPROPRIATE CASE BY THE HONBLE BOMBAY HIGH COURT. HOWEVER, IN VIEW OF THE DECISIONS OF THE COORDINATE BENCHES, IT IS TO BE HELD THAT THE MEMBERSHIP FEE PAID TO THE WILLINGDON SPORTS CLUB, MUMBAI DOES NOT RESULT IN ANY ENDURING BENEFIT AND ACCORDINGLY THE SAME IS ALLOWABLE DEDUCTION. THE GROUND OF THE ASSESSEE IS ALLOWED. 10. GROUND 3 PERTAINS TO THE ISSUE OF DISALLOWANCE OF D EPRECIATION ON CAR. ASSESSEE CLAIMED DEPRECIATION OF ` 6,47,794/- ON CARS PURCHASED IN THE NAME OF DIRECTORS. IT WAS ASSESSEES CONTENTION THA T THE BENEFICIAL OWNER IS THE ASSESSEE COMPANY AND ACCORDINGLY FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN MYSORE MINERALS LTD. V S. CIT 239 ITR 775 IT WAS CORRECTLY CLAIMED BY THE ASSESSEE COMPANY. IT WAS SUBMITTED THAT THE ASSESSEE COMPANY PAID THE MONEY AND THE ASSETS BELO NG TO THE COMPANY AND THERE IS NO DISPUTE THAT THE CARS ARE IN USE FO R THE PURPOSE OF BUSINESS. THE LEARNED A.R. PLACED ON RECORD THE ORDER OF THE CIT(A) FOR A.Y. 2005-06 WHEREIN THE DEPRECIATION IS ALLOWED AND THE DEPARTM ENT HAS NOT CONTESTED. 11. THE LEARNED D.R., HOWEVER, OBJECTED TO AND REFERRED TO THE FINDINGS OF THE A.O. THAT THE OWNERSHIP AS WELL AS USAGE ARE DI SPUTED BY THE A.O. 12. WITHOUT GOING INTO THE MERITS OF THE CONTENTIONS WH ETHER THE ASSESSEE HAS BENEFICIAL OWNERSHIP ON THE ASSETS, IT IS TO BE SEEN WHETHER THE SAID CARS HAVE BEEN PURCHASED BY THE DIRECTORS IN THEIR INDIV IDUAL CAPACITY OR AS A REPRESENTATIVE OF THE COMPANY. WHAT IS ALSO REQUIRE D TO BE EXAMINED IS THE SOURCE OF FUNDS, WHETHER THE AMOUNTS ARE PAID FROM THE ACCOUNTS OF THE DIRECTORS FROM THEIR OWN SOURCES AND LATER TRANSFER RED TO THE COMPANY OR THE COMPANY PAID THE AMOUNTS AT THE TIME OF PURCHA SE EVENTHOUGH THEY ARE REGISTERED IN THE NAME OF THE INDIVIDUAL DIRECTORS. THE A.O. SIMPLY DISALLOWED THE DEPRECIATION STATING THAT THE CARS W ERE REGISTERED IN THE NAMES OF THE DIRECTORS. THAT ALONE CANNOT BE A REAS ON FOR DISALLOWANCE UNLESS IT IS EXAMINED WHETHER THE CARS ARE PURCHASE D BY THE COMPANY BUT ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 7 REGISTERED IN THE NAME OF THE DIRECTOR OR IT IS DIR ECTORS VEHICLES PURCHASED FROM THEIR SOURCE TREATED AS COMPANIES ASSETS. FURT HER THE USAGE ALSO HAS NOT BEEN EXAMINED. IT IS ALSO NOTICED THAT THE CIT (A) IN THE LATER YEAR HAS GIVEN FINDINGS THAT THAT ASSETS HAVE BEEN PURCHASED BY THE COMPANY AND ACCORDINGLY THE DEPRECIATION IS ALLOWABLE FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MYSORE MINERAL S LTD. 239 ITR 775. HOWEVER, THERE IS NO FINDING WITH REFERENCE TO THE DETAILS OF PAYMENTS AND OWNERSHIP. FOR THESE REASONS, WE ARE OF THE OPINION THAT THE ISSUE HAS TO BE RE-EXAMINED BY THE A.O. IN THE LIGHT OF THE ABOVE O BSERVATIONS FOR WHICH PURPOSE THE ISSUE IS RESTORED TO THE FILE OF THE A. O. TO RE-EXAMINE THE NATURE OF PURCHASE OF CAR, SOURCE THEREOF AND CLAIM OF EXP ENDITURE, ETC. TO DECIDE WHETHER THE ASSESSEE COMPANY IS A BENEFICIAL OWNER OR NOT. IF THE ASSESSEE HAS BENEFICIARY OWNERSHIP OF THE ASSETS THEN THE A. O. IS DIRECTED TO ALLOW THE DEPRECIATION. THE A.O. IS TO DECIDE ACCORDINGLY AFT ER GIVING PROPER OPPORTUNITY TO THE ASSESSEE. THE GROUND IS RESTORED TO THE FILE OF THE A.O. 13. GROUND NO. 4 PERTAINS TO THE ISSUE OF DISALLOWANCE UNDER SECTION 14A OF ` 7,48,906/-. BOTH THE COUNSELS HAVE AGREED THAT THE ISSUE IS TO BE RESTORED BACK TO THE FILE OF THE A.O. TO DECIDE AFR ESH IN THE LIGHT OF THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE C ASE OF GODREJ AND BOYCE LTD. ACCORDINGLY THE ISSUE IS RESTORED TO TH E FILE OF THE A.O. TO DECIDE AFRESH IN THE LIGHT OF THE HON'BLE BOMBAY HIGH COUR T JUDGEMENT WITH REFERENCE TO THE REASONABLE EXPENDITURE TO BE DISAL LOWED UNDER SECTION 14A. 14. GROUND NO. 5.1 PERTAINS TO THE ISSUE OF CLAIM OF DE DUCTION UNDER SECTION 80HHC IN RESPECT OF DEPB/DFRC. IT WAS ASSES SING OFFICERS CONTENTION THAT THE ASSESSEE HAS NOT JUSTIFIED THE CLAIM BY PLACING EVIDENCES WHICH WAS CONFIRMED BY THE LEARNED CIT(A). IT WAS A SSESSEES CONTENTION THAT THEY ARE ELIGIBLE FOR DEDUCTION OF BOTH DEPB AND DF RC AND REFERRED TO THE RECENT JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT I N THE CASE OF KALPATARU COLOURS AND CHEMICALS 233 CTR 313. IN THE LIGHT OF THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT WE ARE O F THE OPINION THAT THE ISSUE REQUIRES RE-EXAMINATION BY THE A.O. THE ASSES SEE IS FREE TO SUBMIT FURTHER CONTENTIONS/CLAIMS IN THE LIGHT OF THE JUDG EMENT OF THE HON'BLE ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 8 BOMBAY HIGH COURT AND THE A.O. IS DIRECTED TO RE-EX AMINE THE ISSUE AND DECIDE ACCORDINGLY. THE ISSUE IS RESTORED TO THE FI LE OF THE A.O. 15. GROUND NOS. 5.2 & 5.3 WITH REFERENCE TO 10% OF THE INDIRECT EXPENSES AND SUPPORTING MANUFACTURES RESPECTIVELY ARE NOT PR ESSED. THEREFORE THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 16. GROUND NO. 5.4 IS AS UNDER: - 5.4 ERRED IN NOT ADJUDICATING THE FOLLOWING GROUND S OF APPEAL: I) ERRED IN TREATING INTEREST INCOME IN OTHER SOURCES ACCORDINGLY REDUCING THE 100% OF THE INTEREST INCOM E AS AGAINST THE 90% PROVIDED IN EXPLANATION (BAA) TO SE CTION 80HHC; II) ERRED IN NOT ALLOWING THE APPELLANTS CLAIM OF NETTI NG OF INTEREST PAID AND INTEREST INCOME BY CONSIDERING TH E INTEREST INCOME AS INCOME FROM OTHER SOURCES WITHOU T APPRECIATING THE FACT THAT BOTH ARE RELATED TO EXPO RT BUSINESS AND WITHOUT GIVING OPPORTUNITY OF BEING HE ARD IN THIS MATTER; III) ERRED IN TREATING THE TECHNOLOGY TRANSFER AS OTHER SOURCES WITHOUT APPRECIATING THE FACT THAT IT IS THE EXPORT OF THE TECHNOLOGY AND WITHOUT GIVING OPPORTUNITY OF BRING HEARD IN THIS MATTER; IV) ERRED IN TREATING THE INSURANCE CLAIM AS OTHER SOUR CES WITHOUT APPRECIATING THE FACT THAT THE SAME IS BUSI NESS RECEIPTS; V) ERRED IN TREATING THE MISCELLANEOUS INCOME FROM THE BUSINESS OF EXPORTS AS OTHER SOURCES AND ACCORDINGL Y DENIED THE DEDUCTION UNDER SECTION 80HHC WITHOUT APPRECIATING THE FACT THAT THESE ARE FROM EXPORT BU SINESS; VI) WITHOUT PREJUDICE TO THE ABOVE, ERRED NOT APPLYING THE RATIO ESTABLISHED BY THE LEARNED ACIT FOR SECTION 14A/36( 1)(III) WITH RESPECT TO THE ABOVE INCOME; 17. IT WAS THE SUBMISSION OF THE ASSESSEE THAT THESE I SSUES HAVE NOT BEEN ADJUDICATED BY THE CIT(A) AND ACCORDINGLY TO RESTOR E THE ISSUE BACK TO THE FILE OF THE CIT(A). SINCE THESE GROUNDS RAISED BY THE ASSESSEE IN GROUND NO. 5 SUB-GROUND (VI) WITH REFERENCE TO TREATING INTERE ST, TECHNOLOGY TRANSFER, INSURANCE CLAIM AND MISCELLANEOUS INCOME RAISED IN FORM 35 BEFORE THE CIT(A) HAS NOT BEEN ADJUDICATED, THESE ISSUES ARE RESTORED TO THE FILE OF THE ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 9 CIT(A) TO CONSIDER THEM AND PASS NECESSARY ORDERS. GROUND IS CONSIDERED ALLOWED. 18. GROUND NO. 5.5 IS WITH REFERENCE TO WRITE BACK OF A DVANCE FROM DEBTORS FOR THE PURPOSE OF SECTION 80HHC HAS NOT BE EN PRESSED, HENCE, TREATED AS WITHDRAWN. 19. GROUND NO. 5.6 IS WITH REFERENCE TO NON-ADJUDICATIO N OF GROUND OF PROVISION FOR DOUBTFUL DEBTS WRITTEN BACK FROM THE PROFITS OF BUSINESS WITHOUT APPRECIATING THE FACT THAT THE SAME WAS RED UCED WHILE COMPUTING BUSINESS INCOME. EVENTHOUGH THE PRAYER IS THAT THIS ISSUE WAS NOT ADJUDICATED BY THE CIT(A), SINCE THE ISSUE REQUIRE EXAMINATION OF COMPUTATION OF INCOME FILED BY THE ASSESSEE, IN THE INTEREST OF JUSTICE WE RESTORE THIS ISSUE TO THE FILE OF THE A.O. TO EXAMI NE WHETHER THE PROVISION FOR DOUBTFUL DEBTS HAVE ALREADY BEEN ADJUSTED BY THE AS SESSEE AND IF THERE IS ANY DOUBLE ADJUSTMENT IN THE COMPUTATION BY THE A.O . IN THE ASSESSMENT ORDER. IN CASE THE SAME IS ALREADY ADJUSTED BY THE ASSESSEE THERE IS NO NEED FOR CONSIDERING THE AMOUNT AGAIN WHILE COMPUTING TH E PROFITS OF THE BUSINESS. THIS ASPECT REQUIRES EXAMINATION FROM THE RECORD AT THE END OF THE A.O. ACCORDINGLY THIS ISSUE IS RESTORED TO THE FILE OF THE A.O. TO EXAMINE AND DECIDE ACCORDINGLY. 20. APPEAL IS CONSIDERED PARTLY ALLOWED. ITA NO. 2095/MUM/2008 21. REVENUE HAS RAISED THREE GROUNDS OUT OF WHICH GROUN D NOS. 1 & 2 PERTAINS TO THE ISSUE OF FOREIGN EXCHANGE GAIN OF ` 16,05,915/- FROM TOTAL TURNOVER AND ALSO CONSIDERING THE SAME UNDER EXPLAN ATION (BAA) FOR EXCLUSION OF 90% OF THE FOREIGN EXCHANGE GAIN. WHIL E COMPUTING DEDUCTION UNDER SECTION 80HHC THE A.O. EXCLUDED FOREIGN EXCHA NGE GAIN FROM THE TOTAL TURNOVER AND AT THE SAME TIME ALSO EXCLUDED 90% OF EXCHANGE DIFFERENCE UNDER EXPLANATION (BAA) TO SECTION 80HHC THEREBY RE STRICTING THE 80HHC DEDUCTION. THE CIT(A), CONSEQUENT TO DIRECTIONS GIV EN IN A.Y. 2003-04; HAS GIVING SIMILAR INSTRUCTIONS FOR THIS ASSESSMENT YEA R AND ACCORDINGLY THE REVENUE IS IN APPEAL. ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 10 22. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE DIRE CTIONS OF THE LEARNED CIT(A) AS FOREIGN EXCHANGE GAIN IS ON EXPOR T PROCEEDS ONLY AND THE CIT(A) HAS CORRECTLY CONSIDERED THEM AS BUSINESS RE CEIPT AND ALSO DIRECTED TO INCLUDE BOTH EXPORT TURNOVER AS WELL AS TOTAL TU RNOVER BEING OPERATIONAL INCOME. THIS DECISION IS ALSO IN LINE WITH THE DEC ISION OF THE SPECIAL BENCH IN THE CASE OF PRAKASH L. SHAH 115 ITD 167 (MUM) (B ) AND ALSO THE DECISION OF THE ITAT IN THE CASE OF KIRAN EXPORTS 10 SOT 584 . 23. THE LEARNED D.R., HOWEVER, TRIED TO DISTINGUISH THE CLAIM ON THE BASIS OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHAH ORIGINALS 327 ITR 19. THE ISSUE BEFORE THE HONBLE BOMBAY HIGH COURT IN THE ABOVE STATED CASE IS WITH REFERENCE TO RECEIPTS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS ON EEFC ACCOUNT AND INTEREST ON EEFC ACCOUNT. THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THERE IS NO PROXIMATE AND DIRECT NEXUS WITH THE EXPORT TRANSACTIONS AND HENCE DEDUCT ION UNDER SECTION 80HHC DOES NOT ARISE. HOWEVER, THE FACTS IN THIS CA SE ARE DIFFERENT. THE FOREIGN EXCHANGE FLUCTUATION AROSE ON ACCOUNT OF LA TE RECEIPT OF SALE PROCEEDS AND THE ASSESSEE HAS VALUED THE SALE PROCEEDS ON TH E DAY OF SALE AS PER THE EXCHANGE NORMS AND SUBSEQUENTLY THE INCREASE OR DEC REASE IN VALUE RECEIVED HAS BEEN ACCOUNTED AS FOREIGN EXCHANGE GAI N. IN VIEW OF THIS SINCE THERE IS DIRECT PROXIMITY TO THE SALE PROCEEDS THE AMOUNT IS RIGHTLY CONSIDERED FOR DEDUCTION UNDER SECTION 80HHC. WE AR E OF THE OPINION THAT THE SAID PRINCIPLES ESTABLISHED BY THE HONBLE BOMB AY HIGH COURT DOES NOT APPLY TO THE FACTS OF THE CASE. 24. GROUND NO. 3 PERTAINS TO THE ISSUE OF DIRECTING THE A.O. NOT TO EXCLUDE 90% OF SUNDRY CREDIT BALANCE WRITTEN BACK AND PROVI SIONS OF DOUBTFUL DEBTS WRITTEN BACK WITHIN THE MEANING OF EXPLANATION (BAA ) TO SECTION 80HHC. IT WAS THE CONTENTION OF THE ASSESSEE IN ASSESSEES AP PEAL THAT THESE ISSUES HAVE NOT BEEN ADJUDICATED AS PART OF OTHER INCOMES CONSIDERED IN GROUND NO. 5.4 AND ACCORDINGLY THE ISSUE OF SUNDRY CREDIT BALANCE AS PART OF MISCELLANEOUS INCOME IS RESTORED TO THE FILE OF THE CIT(A) FOR ADJUDICATION. WITH REFERENCE TO PROVISIONS OF DOUBTFUL DEBTS WRIT TEN BACK, THIS ISSUE IS RESTORED TO THE FILE OF THE A.O. FOR EXAMINATION OF FACTS VIDE GROUND NO. 5.6 OF ITA NOS. 2027 & 2095/MUM/2008 M/S. METRO EXPORTERS PVT. LTD. 11 THE OTHER APPEAL. ACCORDINGLY, SINCE THESE ISSUES A RE RESTORED TO THE FILE OF THE CIT(A)/A.O. THE GROUND IS CONSIDERED ALLOWED FO R STATISTICAL PURPOSES. 25. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED PARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH NOVEMBER 2010. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 4 TH NOVEMBER 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXVI, MUMBAI 4. THE CIT VI, MUMBAI CITY 5. THE DR, B BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.