Appeal Details
Counselvise Citation
25224514 RSA 2001
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
10 year(s) 4 month(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-06-2011
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Assessment Year
1995-1996
Appeal Filed On
12-02-2001
Judgement Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YAD AV, JUDICIAL MEMBER AND SHRI G S PANNU, ACCOUNTANT MEMBER ITA NO 252 & 482/PN/01 (ASSTT. YEAR: 1995-96 & 1996-97) THERMAX LTD., .. APPELLANT 4 BOMBAY PUNE ROAD, SHIVAJINAGAR, PUNE PAN CV 2338 VS. JT. COMMISSIONER OF I.T, .. RESPONDENT SPL. RANGE-3, PUNE AND ITA NO 157 & 508/PN/01 (ASSTT. YEAR: 1995-96 & 1996-97) ADDL. COMMISSIONER OF I.T, .. APPELLANT SPL. RANGE-3, PUNE VS. THERMAX LTD., .. RESPONDEN T PUNE ASSESSEE BY : SHRI M P MAHAJANI DEPARTMENT BY: SHRI HARESHWAR SHARMA ORDER PER G.S. PANNU, AM THE CAPTIONED FOUR CROSS-APPEALS, TWO BY THE ASSE SSEE AND TWO BY THE REVENUE PERTAINING TO SAME ASSESSEE, WERE HE ARD TOGETHER AND ARE BEING DISPOSED OFF BY A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. WE SHALL FIRST TAKE UP ASSESSEES APPEAL IN ITA NO 252/PN/01 PERTAINING TO THE ASSESSMENT YEAR 1995-96, WHICH IS DIRECTED AGAINST THE 2 ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-I , PUNE DATED 6.10.2000, WHICH IN TURN, HAS ARISEN FROM AN ORDER UNDER SECTION 143(3) PASSED BY THE ASSESSING OFFICER PERTAINING TO THE A SSESSMENT YEAR 1995- 96. 3. GROUND NO. 1 OF THE APPEAL RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LEARNED CIT (APPEALS) ERRED IN NOT ACCEPTING T HE CONTENTION OF THE APPELLANT THAT INDIVIDUAL INSTANCES OF EXPENDITURE ON ENTERTA INMENT IN EXCESS OF RS.10,000/- ALONE FELL WITHIN THE AMBIT OF SECTION 37(2) OF THE I.T. ACT, 1961. THE LEARNED CIT (APPEALS) ACCORDINGLY OUGHT TO HAVE DIRECTED INCLUS ION OF ONLY SUCH INDIVIDUAL INSTANCES OF EXPENSES ON ENTERTAINMENT, AS WERE IN EXCESS OF RS.10,000/- FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 37(2). 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THE ABOVE GROUND, AND, THEREFORE, THE SAI D GROUND STANDS DISMISSED. 5. GROUND NO. 2 RAISED BY THE ASSESSEE IS AS FOLLO WS: WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A PPEALS) ERRED IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT AT LEAST 60% O F THE TOTAL EXPENDITURE ON ENTERTAINMENT RELATED TO EMPLOYEES PARTICIPATING IN THE EXTENSION OF HOSPITALITY AND INSTEAD CONFIRMING EXCLUSION OF ONLY 15% THEREO F WHILE COMPUTING DISALLOWANCE U/S 37(2). 6. AT THE TIME OF HEARING, IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT SIMILAR ISSUE HAD COME UP FOR CONSIDER ATION BEFORE OUR CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE A SSESSMENT YEAR 1994-95 AND THE TRIBUNAL VIDE ORDER DATED 29.1.2009 IN ITA NO 855/PN/2000 HAS CONFIRMED THE ORDERS OF THE LOWER A UTHORITIES IN THIS REGARD. SINCE THE ACTION OF THE LOWER AUTHORITIES I S IN CONFORMITY WITH THE PRECEDENT IN THE ASSESSEES OWN CASE, THEREFORE, WE DISMISS THE GROUND OF APPEAL RAISED BY THE ASSESSEE. 7. GROUND NO 3 RAISED BY THE ASSESSEE READ S AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF A SUM OF RS.1,98,775/-, BEIN G PROPORTIONATE PREMIUM ON 3 LEASEHOLD LAND AMORTISED AND CHARGED TO THE PROFIT & LOSS ACCOUNT OF THE YEAR IN QUESTION. 8. AT THE TIME OF HEARING, IT WAS COMMON GR OUND BETWEEN THE PARTIES THAT THIS GROUND IS COVERED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MUKUND LIMITED 106 ITD 231 (BOM) (SB). IT WAS ALSO NOTICED THAT SIMILAR GROUND HAS BEEN DE CIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1994-95, VIDE ORDER DATED 29.1.2009 (SUPRA). I N VIEW OF THE ABOVE ADMITTED POSITION, THIS GROUND OF APPEAL IS DECIDED AGAINST THE ASSESSEE. 9. GROUND NO. 4 READS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF A SUM OF RS.16,34,000/- BEIN G PREMIUM ON LEASEHOLD LAND PAID DURING THE YEAR UNDER APPEAL. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELL ANT THAT THE AMOUNTS IN QUESTION WERE REVENUE IN NATURE AND WERE ALLOWABLE AS SUCH IN COMPUTING THE APPELLANTS BUSINESS INCOME FOR THE YEAR UNDER APPE AL. FURTHER, ALTERNATIVELY, THE LEARNED CIT (APPEALS) O UGHT TO HAVE DIRECTED ALLOWANCE OF DEDUCTION FOR AT LEAST THE PROPORTIONA TE AMOUNT OF PREMIUM, OUT OF THE SAID SUM OF RS.16,34,000/-, RELATABLE TO THE YE AR UNDER APPEAL. 10. BEFORE US, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THIS GROUND IS SIMILAR TO GROUND NO. 3 ABOVE, THE ONLY DIFFERENCE BEING THAT IT DEALS WITH PREMIUM PAID ON LEASE HOLD LAND TAKEN ON LEASE DURING THE YEAR UNDER CONSIDERATION. NEVERTHELESS, IT WAS ADMI TTED THAT THIS GROUND IS ALSO COVERED AGAINST THE ASSESSEE IN VIEW OF THE DE CISION OF THE SPECIAL BENCH IN THE CASE OF MUKUND LIMITED (SUPRA). IN VI EW OF THE ABOVE ADMITTED POSITION, THIS GROUND IS ALSO DECIDED AGAI NST THE ASSESSEE. 11. GROUND NO 5 RAISED BY THE ASSESS EE READS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION FOR THE FULL AMOUNT OF RS.1,84 ,28,945/- CLAIMED BY THE APPELLANT, BEING PROCESS KNOW-HOW FEES. 4 THE LEARNED CIT (APPEALS) OUGHT TO HAVE HELD THAT T HE AMOUNT IN QUESTION WAS `NOT COVERED BY THE PROVISIONS OF SECTION 35AB OF T HE INCOME-TAX ACT 1961 AND, BEING OF REVENUE NATURE, THE WHOLE OF IT WAS ALLOWA BLE UNDER SEC.37. 12. THE FACTS, IN BRIEF, ARE THAT AS PER THE COMPUT ATION OF THE INCOME, THE ASSESSEE CLAIMED DEDUCTION OF RS.1,84,28,945/- BEING FEES TOWARDS PROCESS KNOW-HOW, THOUGH IN THE BOOKS OF ACCOUNT, S UCH COST WAS TREATED AS DEFERRED REVENUE EXPENDITURE AND AMORTIZED IN EQ UAL INSTALLMENTS OVER A PERIOD OF SIX YEARS. AS PER THE ASSESSEE, TH E ENTIRE EXPENDITURE OF RS. 1,84,28,945 WAS REVENUE IN NATURE SINCE IT HAD ONLY OBTAINED USE OF PROCESS KNOW-HOW AND THE EXPENDITURE WAS THE REFORE NOT GOVERNED BY THE PROVISIONS OF SECTION 35AB OF THE A CT, BUT WAS ALLOWABLE U/S 37(1) OF THE ACT. HOWEVER, THE ASSESS ING OFFICER AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS) BY FOLL OWING THEIR STAND IN THE EARLIER ASSESSMENT YEARS, HELD THAT THE ASSESSE E COMPANY WAS ENTITLED FOR 1/6 TH DEDUCTION AS ENUMERATED IN SECTION 35AB OF THE ACT . 13. BEFORE US, THE CASE OF THE DEPARTMENT A ND AS MADE OUT BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IS THAT E XPENDITURE ON KNOW- HOW, IRRESPECTIVE OF WHETHER IT IS REVENUE OR CAPIT AL IN NATURE, WOULD BE GOVERNED ONLY BY SECTION 35AB AND NOT BY SECTION 37 (1) OF THE ACT. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS THAT THE EN TIRE EXPENDITURE IS REVENUE IN NATURE AND HENCE ALLOWABLE U/S 37(1) OF THE ACT. QUITE FAIRLY, BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE CONT ENDED THAT THE SAID DISPUTE IN THE PAST YEARS HAS BEEN DECIDED BY THE T RIBUNAL AGAINST THE ASSESSEE, AND IN THIS REGARD REFERENCE WAS MADE TO THE ORDERS OF THE TRIBUNAL IN ITA NO 768/PN/98 DATED 23.06.2006 AND I TA NO 855/PN/00 DATED 29.1.2009 FOR ASSESSMENT YEARS 1993-94 AND 19 94-95 RESPECTIVELY. WHILE DECIDING THE APPEAL FOR THE ASSESSMENT YEAR 1 994-95 (SUPRA) THE TRIBUNAL, HAS FOLLOWED THE ORDER FOR ASSESSMENT YEA R 1993-94 AND 5 DISMISSED THE GROUND OF THE ASSESSEE OBSERVING AS F OLLOWS: WITH THIS BRIEF BACKGROUND WE HAVE HEARD BOTH THE SIDES. AT THE OUTSET IT IS PERTINENT TO MENTION THAT IN ASSESSEE'S OWN CASE FO R A.Y. ; 993-94 ITAT B BENCH PUNE, IN APPEAL NO.ITA768/PN/98 (AT SR.NO. 6 IN THE BUNCH OF 6 APPEALS) VIDE AN ORDER DATED 23/6/2006 VIDE PARA 36.7 HAS HELD AS UN DER - 'FROM THE ABOVE, IT WILL BE SEEN THAT FOR ANY CONSI DERATION TO BE TAKEN AS ROYALTY, IT SHOULD NOT BE CHARGEABLE IN THE HAND S OF RECIPIENT AS INCOME UNDER THE HEAD `CAPITAL GAINS'. THE LEARNED COUNSEL HAS NOT STATED HIS CASE ON THE ISSUE WHETHER THE AMOUNT REC EIVED IN THE NATURE OF A CAPITAL RECEIPT. IN VIEW THEREOF, WE ARE OF TH E VIEW THAT THE LEARNED COUNSEL HAS NOT MADE OUT ANY CASE BEFORE US AS TO W HETHER THE IMPUGNED AMOUNT WAS ROYALTY. IT IS ALSO SEEN THAT I N PAST, THE ASSESSEE HAS BEEN CLAIMING SUCH PAYMENT AS PAYMENTS OF TECHNICAL KNOW-HOW FEES. AS WILL BE SEEN FROM THE ORDER IN IT A NO 515/PN/01(SUPRA), SUCH PAYMENTS WERE CLAIMED TO BE PAYMENTS FOR TECHNICAL KNOW-HOW AND THE PAYMENTS WERE CLAIMED ON REVENUE ACCOUNT. SUCH CLAIMS HAVE ALSO BEEN ALLOWED IN FAVO UR OF THE ASSESSEE AS IN THE RELEVANT ASSESSMENT YEAR PROVISI ONS OF SECTION 35AB WERE NOT EXISTING ON THE STATUE BOOK. THEREFOR E, WE DO NOT FIND ANY REASON TO DIGRESS FROM THOSE DECISIONS AND TAKE A TOTALLY CONTRARY VIEW IN THIS YEAR. IT MAY ALSO BE MENTIONED THAT EV EN ON THE BASIS OF STATUTORY LANGUAGE IT CANNOT BE SAID THAT IF THE AM OUNT IS HELD TO BE PAYMENT OF ROYALTY, IT FOLLOWS AUTOMATICALLY THAT T HE EXPENDITURE WOULD BE REVENUE IN NATURE. THERE IS CORRESPONDING SECTIO N FOR ROYALTY A SECTION 35AB IN RESPECT OF AMORTIZATION OF THE CONS IDERATION PAID FOR ACQUIRING TECHNICAL KNOW-HOW. THE LEARNED COUNSEL H AS ALSO NOT STATED HIS CASE AS TO HOW THE AMOUNT WOULD BE ADMISSIBLE I N FULL IF IT IS HELD TO BE PAYMENT OF ROYALTY. THUS, WE ARE OF THE VIEW THA T LOOKING TO PAST HISTORY, THE PAYMENT WAS IN THE NATURE OF THE PAYME NT OF TECHNICAL KNOW-HOW FEES. WE HAVE ALREADY REFERRED TO THE CASE LAWS IN RESPECT OF TREATMENT TO BE GIVEN TO SUCH PAYMENTS AFTER INS ERTION OF SECTION 35AB IN THE IT ACT, NAMELY, THAT ALL HIGH COURT DEC ISIONS TILL NOW HAVE HELD THAT THE AMOUNT HAS TO BE TREATED ONLY U/S. 35 AB. THUS, WE ARE OF THE VIEW THAT IN RESPECT OF PAYMENT PERTAINING TO T HIS YEAR, THE ASSESSEE IS ENTITLED TO DEDUCTION OF 1/6FN OF THE A MOUNT ONLY. ACCORDINGLY, THIS GROUND IS DISMISSED.' 7.4 SINCE THE RESPECTED CO-ORDINATE BENCH HAS HELD THAT THE PAYMENT PERTAINING TO THE YEAR UNDER CONSIDERATION IS ENTIT LED FOR DEDUCTION ONLY TO THE .EXTENT OF THE 1/6TH OF THE AMOUNT AS PRESCRIBED U/ SEC.35AB OF THE ACT, THEREFORE, THE CLAIM OF THE ENTIRE EXPENDITURE WAS DISMISSED. SINCE ON IDENTICAL FACTS A VIEW HAS ALREADY BEEN TAKEN THEREFORE WE FIND NO REASON TO DEVIATE FROM THE SAME BUT RESPECTFULLY FOLLOW THE SAME. THERE IS ONE MORE DEC ISION PLACED FOR OUR CONSIDERATION OF THE HON. APEX COURT IN THE CASE OF SWARAJ ENGINES 309 ITR 447 WHEREIN, AN OBSERVATION WAS THAT IF AN EXPENDITURE IS REVENUE NATURE THEN SEC.35AB HAS NO ROLE TO PLAY. IT WAS FURTHER OBSERV ED THAT IF IT IS FOUND THAT AN EXPENDITURE IS CAPITAL IN NATURE THEN THE QUESTION OF AMORTISATION AND SPREAD OVER AS CONTEMPLATED BY SEC.35AB WOULD COME INTO PLAY. N OW BEFORE US ID. AR IS TRYING TO IMPRESS THAT THE EXPENDITURE IN QUESTION WAS REV ENUE NATURE HENCE THE PROVISION OF SEC.37(1) OF I.T. ACT WOULD APPLY, BUT THIS PLEA DING IS NOW VERY LATE IN THE DAY CONSIDERING THE PAST HISTORY OF THE CASE AND THE NA TURE OF EXPENDITURE ALREADY BEING CONSIDERED BY THE VARIOUS AUTHORITIES IN ASSESSEE'S OWN CASE. IN OUR CONSIDERED OPINION THERE IS NO SCOPE LEFT TO RESTART READING T HE CLAUSES OF AGREEMENT AS SUGGESTED BY HIM ONCE THE ISSUE IS SQUARELY COVERED BY THE PAST PRECEDENTS. IN THE RESULT THIS GROUND IS HEREBY DISMISSED. 6 14. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT IN RESPECT OF THE NEW PROCESS KNOW-HOW AGREEME NTS ENTERED INTO DURING THE INSTANT YEAR (PLACED AT PAGES 56-111 OF THE PAPER BOOK), IN THE INTERESTS OF JUSTICE, THE MATTER SHOULD BE RESTORED TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE SAME IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V SWARAJ E NGINES LTD. 309 ITR 443 (SC) IN WHICH A VIEW HAS BEEN EXPRESSED THAT E XPENDITURE FOR ACQUIRING MERE USE OF KNOW-HOW WOULD BE REVENUE IN NATURE AND WOULD NOT BE HIT BY SECTION 35AB OF THE ACT. IT IS CONTENDED THAT AS PER THE HONBLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (S UPRA) BEFORE DECIDING WHETHER THE EXPENDITURE ON TRANSFER OF TECHNOLOGY K NOW-HOW IS CAUGHT BY SECTION 35AB, IT HAS TO BE DETERMINED WHETHER IT IS OF REVENUE OR CAPITAL IN NATURE. IT IS THUS CONTENDED THAT IN SO FAR AS THE NEW PROCESS KNOW-HOW AGREEMENTS ARE CONCERNED, PLACED AT PAGES 56-111 OF THE PAPER BOOK, THE MATTER MAY BE RESTORED BACK TO THE FILE OF THE ASSE SSING OFFICER TO BE EXAMINED IN THE LIGHT OF THE JUDGMENT OF THE HONBL E SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (SUPRA). ACCORDING TO T HE ASSESSEE, PROCESS KNOW HOW FEES PAID UNDER AGREEMENTS ENTERED INTO IN EARLIER YEARS MAY CONTINUE TO BE GOVERNED BY SECTION 35AB AS HELD BY THE TRIBUNAL IN ASSESSMENT YEARS 1993-94 AND AY 1994-95. 15. HOWEVER, THE LEARNED DEPARTMENTAL REPRESENTATIV E HAS OPPOSED THE ABOVE PLEA OF THE ASSESSEE BY POINTING OUT THAT NO DIFFERENT FACTS HAVE BEEN NOTICED BY THE LOWER AUTHORITIES IN THIS YEAR AND, THEREFORE, FOLLOWING THE PRECEDENT IN THE ASSESSEES OWN CASE, THE MATTE R DOES NOT REQUIRE ANY RE-EXAMINATION, EVEN FOR THE NEW PROCESS KNOW-HOW A GREEMENTS. 7 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. BEFORE ADJUDICATING ON THE DISPUTE RAISED BY THE ASSESSEE, A BRIEF REFERENCE TO THE BACKGROUND IS NECESSARY. IN THE IMPUGNED ASSESSMENT YEAR, THE ASSESSING OFFICER NOTICED THAT IN THE COMPUTATION OF INCOME A NNEXED TO THE RETURN OF INCOME, THE ASSESSEE HAD CLAIMED A DEDUCTION OF RS 1,84,28,945/- ON ACCOUNT OF FEES PAID TOWARDS PROCESS KNOW-HOW. HOWE VER, IN THE BOOKS OF ACCOUNT SUCH EXPENDITURE INCURRED ON IMPORTED TECHN ICAL KNOW-HOW (INCLUDING PROCESS KNOW-HOW) WAS TREATED AS A DEFER RED REVENUE EXPENDITURE AND AMORTIZED IN EQUATED INSTALMENTS OV ER A PERIOD OF SIX YEARS. ACCORDINGLY, IN THE BOOKS OF ACCOUNT AN AMOU NT OF RS 62,31,302/- WAS WRITTEN OFF, WHILE IN THE COMPUTATION OF INCOM E SUCH AMOUNT WAS ADDED BACK AND THE FULL PAYMENT MADE DURING THIS YE AR ON THIS COUNT AMOUNTING TO RS 1,84,28,945/- WAS CLAIMED AS A DEDU CTION. THE ASSESSING OFFICER SHOW-CAUSED THE ASSESSEE TO EXPLAIN AS TO H OW FULL AMOUNT OF RS 1,84,28,945/- WAS ALLOWABLE AS DEDUCTION WHEN THERE IS A SPECIFIC PROVISION CONTAINED IN SECTION 35AB TO THE EFFECT THAT ONLY 1 /6 TH OF THE TECHNICAL KNOW- HOW EXPENDITURE WAS ALLOWABLE. THE CLAIM OF THE ASS ESSEE BEFORE THE ASSESSING OFFICER WAS THAT PAYMENT IS MADE FOR MERE ACQUISITION OF USE OF PROCESS KNOW-HOW AND THE SAME WAS DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT AND TO SUCH EXTENT SECTION 35AB OF THE ACT WAS NOT APPLICABLE. IN SUPPORT, THE ASSESSEE ALSO RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V CIBA OF INDIA LT D. 69 ITR 692 (SC). THE ASSESSING OFFICER DID NOT AGREE WITH THE ASSESSEE A ND, ACCORDING TO HIM, HAVING REGARD TO THE INSERTION OF SECTION 35AB WITH EFFECT FROM THE ASSESSMENT YEAR 1985-86, THERE WAS NO SCOPE FOR INT ERPRETATION THAT A PARTICULAR PAYMENT WAS CAPITAL OR REVENUE IN NATURE AND AS LONG AS THE PAYMENT WAS TOWARDS TECHNICAL KNOW-HOW, IT WOULD FA LL UNDER SECTION 35AB 8 OF THE ACT, IRRESPECTIVE AS TO WHETHER IT IS CAPITA L IN NATURE OR REVENUE IN NATURE. THE ASSESSING OFFICER ALSO NOTICED THAT THE ASSESSEE HAS ON ITS OWN CONDUCT, TREATED THE AMOUNT AS A DEFERRED REVEN UE EXPENDITURE, THUS THE PROVISIONS OF SECTION 35AB WERE APPLICABLE. THE ASSESSING OFFICER ALSO NOTICED THAT IDENTICAL DISPUTE WAS INVOLVED IN THE ASSESSMENT YEARS 1993- 94 AND 1994-95 AND FOLLOWING THE STAND OF THE REVEN UE IN THE SAID YEARS, HE ULTIMATELY HELD THAT THE CLAIM OF THE ASSESSEE W AS MAINTAINABLE ONLY IN TERMS OF SECTION 35AB OF THE ACT, I.E. 1/6 TH OF CURRENT YEARS PAYMENT AS WELL AS EARLIER YEARS PAYMENT WAS TO BE ALLOWED AS A DE DUCTION AND NOT THE ENTIRE AMOUNT OF RS 1,84,28,945/- PAID DURING THE Y EAR ON PROCESS KNOW- HOW FEE. 17. BEFORE US, IT IS NOT IN DISPUTE THAT THE TRIB UNAL IN THE RESPECTIVE ORDERS DATED 23.6.2006 (SUPRA) AND 29.1.2009 (SUPRA ) FOR THE ASSESSMENT YEARS 1993-94 AND 1994-95 HAS UPHELD THE STAND OF T HE ASSESSING OFFICER THAT THE CLAIM OF THE ASSESSEE WAS TO BE GOVERNED B Y SECTION 35AB OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE DOES NOT DISPUTE THIS POSITION, BUT IT IS SUBMITTED THAT THE SAID PRECEDENT IS APPL ICABLE TO SUCH PAYMENTS WHICH HAVE BEEN MADE IN TERMS OF PROCESS KNOW-HOW A GREEMENTS EXAMINED AND CONSIDERED IN THE COURSE OF THE PROCEE DINGS FOR THE ASSESSMENT YEARS 1993-94 AND 1994-95. IT IS SOUGHT TO BE MADE OUT THAT IN SO FAR AS THE EXPENDITURE INCURRED IN TERMS OF THE AGREEMENTS ENTERED DURING THE YEAR UNDER CONSIDERATION, THE CLAIM BE R EVISITED IN TERMS OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F SWARAJ ENGINES LTD. (SUPRA). 18. IN THIS CONTEXT, WE HAVE CAREFULLY EXAMINED THE RIVAL STANDS. IN THE CASE BEFORE THE HONBLE SUPREME COURT, THE ASSESSEE SWARAJ ENGINES LTD. 9 HAD ENTERED INTO AN AGREEMENT OF TRANSFER OF TECHNO LOGY KNOW-HOW AND TRADE MARK IN TERMS OF WHICH ROYALTY WAS PAYABLE BY IT AS A PERCENTAGE OF NET SELLING PRICE OF THE LICENSED PRODUCTS. THE SAI D EXPENDITURE WAS CLAIMED AS A REVENUE EXPENDITURE BY THE ASSESSEE. A QUESTION ALSO AROSE AS TO WHETHER SUCH EXPENDITURE WAS LIABLE TO BE CON SIDERED IN TERMS OF SECTION 35AB OF THE ACT OR NOT? AS PER THE HONBLE SUPREME COURT BEFORE DECIDING THE APPLICABILITY OF SECTION 35AB OF THE A CT, IT WAS TO BE DECIDED WHETHER THE EXPENDITURE INCURRED IS REVENUE OR CAPI TAL IN NATURE AND DEPENDING ON THE ANSWER TO THAT QUESTION, APPLICABI LITY OF SECTION 35AB OF THE ACT WAS REQUIRED TO BE ADDRESSED. IN THE PRESEN T CASE, WE FIND THAT THE CLAIM OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES HAS ALL ALONG BEEN THAT THE IMPUGNED EXPENDITURE IS REVENUE IN NATURE. IN T HE INSTANT ASSESSMENT YEAR AS WELL AS IN THE PAST, THE CLAIM OF THE DEPAR TMENT HAS BEEN THAT SUCH DEDUCTION IS GOVERNED BY SECTION 35AB OF THE ACT IR RESPECTIVE OF THE FACT WHETHER THE EXPENDITURE WAS REVENUE OR CAPITAL IN N ATURE. QUITE CLEARLY, THE SAID APPROACH IS CONTRARY TO WHAT HAS BEEN ELUCIDAT ED BY THE HONBLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (S UPRA) WHEREIN IT HAS BEEN HELD THAT IN ORDER TO DECIDE THE APPLICABILITY OF SECTION 35AB OF THE ACT, IT HAS TO BE DECIDED WHETHER THE EXPENDITURE I S REVENUE OR CAPITAL IN NATURE AND DEPENDING ON THE ANSWER TO THAT QUESTION , THE ISSUE OF SECTION 35AB IS LIABLE TO BE ADDRESSED. IN THIS CONTEXT, WE FIND AMPLE FORCE IN THE PLEA NOW SET UP BY THE ASSESSEE THAT BEFORE PROCEED ING TO APPLY SECTION 35AB OF THE ACT, THE NATURE OF THE EXPENDITURE, I.E . WHETHER IT IS CAPITAL OR REVENUE IN NATURE HAS TO BE DECIDED. AT THIS POINT, WE ARE QUITE CONSCIOUS OF THE PRINCIPLE OF CONSISTENCY WHICH MANDATES THAT THE DECISION IN THE ASSESSEES OWN CASE RENDERED BY OUR CO-ORDINATE BEN CH IN THE EARLIER YEARS IS REQUIRED TO BE FOLLOWED AND WE HAVE NO REA SON TO DISTRACT FROM THE 10 SAID PRINCIPLE. THEREFORE, IN SO FAR AS THE PAYMENT S MADE IN TERMS OF PROCESS KNOW-HOW AGREEMENTS ENTERED IN THE EARLIER YEARS IS CONCERNED, CLAIMS THEREON WOULD CONTINUE TO BE GOVERNED BY THE DECISION OF THE TRIBUNAL IN THE PAST YEARS AND TO THAT EXTENT, ASSE SSEE HAS TO FAIL. EVEN IN THE ASSESSMENT YEAR 1994-95, THE TRIBUNAL CLEARLY O BSERVED THAT THE NATURE OF EXPENDITURE HAS BEEN CONSIDERED IN THE PAST AND THE CLAUSES OF THE AGREEMENTS CANNOT BE RE-READ IN THE CONTEXT OF THE NEW PLEA BEING SET-UP BY THE ASSESSEE. THEREFORE, IN SO FAR AS THE KNOW-H OW AGREEMENTS WHICH HAVE BEEN THE SUBJECT-MATTER OF CONSIDERATION IN TH E PAST, THE SAME CANNOT BE REVISITED AT THIS STAGE. SO HOWEVER, IN SO FAR A S THE NEW PROCESS KNOW- HOW AGREEMENTS ARE CONCERNED, I.E. AGREEMENTS WHICH HAVE BEEN ENTERED DURING THE YEAR, THE LAW AS ENUMERATED BY THE HONB LE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (SUPRA) SHALL GOVER N THE EFFICACY OF ASSESSEES CLAIM FOR DEDUCTION AND IT SHALL HAVE TO BE DECIDED, HAVING REGARD TO ITS TERMS AND CONDITIONS WHETHER THE SAM E ARE DIFFERENT THAN THE EARLIER AGREEMENTS AND AS TO WHETHER THE EXPENDITUR E IS REVENUE OR CAPITAL IN NATURE, AND DEPENDING ON THE ANSWER TO THE SAID QUESTION, THE APPLICABILITY OF SECTION 35AB OF THE ACT SHALL BE D ECIDED. IN NUTSHELL IN SO FAR AS PROCESS KNOW-HOW FEE PAID IN TERMS OF THE AGREEM ENT ENTERED INTO EARLIER YEARS, THE DEDUCTION THEREON SHALL BE GOVER NED BY THE PROVISIONS OF SECTION 35AB, AS HELD BY THE TRIBUNAL IN ASSESSMENT YEARS 1993-94 AND 1994-95 (SUPRA). IN SO FAR AS THE FEES PAID UNDER T HE PROCESS KNOW-HOW AGREEMENTS ENTERED DURING THE YEAR UNDER CONSIDERAT ION IS CONCERNED, IN ORDER TO TEST THE EFFICACY OF SECTION 35AB ON SUCH CLAIM, IT WOULD BE IMPERATIVE TO EXAMINE AS TO WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NATURE AND DEPENDING ON THAT ANSWER, THE ASSESSI NG OFFICER SHALL DECIDE THE APPLICABILITY OF SECTION 35AB OF THE ACT. ON TH IS LIMITED ASPECT, WE DEEM 11 IT FIT AND PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICATED AFRESH, OF-COURSE AFTER A LLOWING ASSESSEE REASONABLE OPPORTUNITY OF BEING HEARD. IN THIS MANN ER, ON THIS GROUND ASSESSEE PARTLY SUCCEEDS. 19. GROUND NO 6 RAISED BY THE ASSESSE E IS AS FOLLOWS: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING DISALLOWANCE OF A SUM OF RS.1,50,462/- UNDER RULE 6B OF THE I.T. RUL ES, 1962. THE LEARNED CIT (APPEALS) OUGHT TO HAVE HELD THAT T HE PROVISIONS OF THE SAID RULE WERE NOT APPLICABLE TO THE EXPENDITURE IN QUESTION AND THAT THE APPELLANT HAD NOT FAILED TO DISCHARGE THE ONUS CAST UPON IT, TO PROVE THAT THE EXPENDITURE IN QUESTION HAD NO ADVERTISEMENT VA LUE AND THAT THE EXPENDITURE IN QUESTION WAS IN FACT INCURRED FOR NO N-BUSINESS PURPOSES. THE LEARNED CIT(APPEALS) ERRED IN CONFIRMING DISALL OWANCE UNDER RULE 6B REJECTING THE CONTENTION OF THE APPELLANT THAT THE ENTIRE AMOUNT OF THE EXPENDITURE WAS ALLOWABLE AS A BUSINESS EXPENDITURE .' 20. AFTER HEARING BOTH THE PARTIES ON THIS GROUND, WE FIND THAT AS THE ASSESSEE COULD NOT PROVIDE THE NAMES OF THE PER SONS TO WHOM ARTICLES OF GIFTS WERE PRESENTED, THE AUTHORITIES BELOW HELD THAT THE ASSESSEE HAS FAILED TO DISCHARGE ITS ONUS, AND THUS DISALLOWED THE IMPUGNED EXPENDITURE, UNDER RULE 6B OF THE INCOME-T AX RULES, 1962 HOLDING THE EXPENDITURE IS NOT FOR THE PURPOSE OF T HE BUSINESS OF THE ASSESSEE. BEFORE US, ALTHOUGH THE LEARNED COUNSEL F OR THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF ALLANA SONS 216 ITR 690 (BOM), BUT FAIR LY CONCEDED THAT THE DISALLOWANCE MADE IN SIMILAR CIRCUMSTANCES HAS BEEN AFFIRMED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1994-95 VIDE ITA NO 855/PN/2000 DATED 29.1.2009 (SUPRA). FACTUAL LY SPEAKING, THE DISALLOWANCE HAS BEEN MADE BY THE AUTHORITIES BELOW FOR THE REASON THAT THE ASSESSEE HAS NOT FURNISHED THE ADEQUATE DE TAILS. SIMILAR SITUATION HAS ALSO CONTINUED BEFORE US AND, THEREFO RE, WE AFFIRM THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) S USTAINING THE 12 DISALLOWANCE MADE BY THE ASSESSING OFFICER. AS A RE SULT, THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISMISSED. 21. GROUND NO 7 READS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING DISALLOWANCE PROVISION OF RS.1,20,73,791/- MADE BY THE APPELLANT IN RESPECT O F WARRANTY OBLIGATIONS. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN VIEW OF THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLANT A ND ACCEPTED BY THE DEPARTMENT IN THE PAST, THE LEARNED CIT (APPEALS) O UGHT NOT TO HAVE HELD THAT THE LIABILITY IN QUESTION WAS OF A CONTINGENT NATURE WH ICH DID NOT ACCRUE AT THE TIME WHEN THE APPELLANT MADE A PROVISION FOR IT. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRMI NG THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LIABILITY ON ACCOUNT OF WARRANTY OBLIGATION ACCRUED ONLY WHEN A CLAIM IS MADE BY THE CUSTOMER AND ACCEPTED B Y THE APPELLANT. 22. THE ASSESSEE HAD MADE A PROVISION OF AN AM OUNT OF RS.1,20,73,791/- TOWARDS WARRANTY OBLIGATIONS IN RE SPECT OF PRODUCTS/PROJECTS SOLD/EXECUTED BY IT, WHICH FORMED PART OF RS.2,61,82,607/- DEBITED IN THE PROFIT & LOSS ACCOU NT TOWARDS FOC EXPENSES. BOTH THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS), FOLLOWING THEIR ORDERS FOR AS SESSMENT YEARS 1993- 94 AND 1994-95, DECIDED THE ISSUE AGAINST THE ASSES SEE HOLDING THE SAID PROVISION TO BE CONTINGENT IN NATURE. 23. IT IS NOW SUBMITTED BY THE ASSESSEE THAT SIN CE IN PARA 8 OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1995-96 TH E ASSESSING OFFICER HIMSELF HAS RECORDED A FINDING ON WRITE BAC K OF EARLIER YEARS PROVISION BY STATING THAT HOWEVER, THE ADDITION MADE IN ASSESSMENT YEAR 1994-95 WHICH PROVISION HAS BEEN WRITTEN BACK DURING THIS YEAR IS ALLOWED AMOUNTING TO RS. 95,48,089. THEREFORE A NET ADDITION OF RS. 25,25,702 IS BEING MADE ON THIS ACCOUNT, THERE IS NO JUSTIFICATION FOR RESTORING THE MATTER TO THE ASSESSING OFFICER EVEN ON THE PRINCIPLE OF CONSISTENCY AND, THEREFORE, THE CLAIM OF THE ASSESS EE FOR DEDUCTION OF 13 PROVISION OF RS.1,20,73,791/- SHOULD BE ALLOWED FOR THWITH. 24. IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE TRIBUNAL IN THE IMMEDIATELY PRECEDING ASSESSMENT YE AR OF 1994-95 FOLLOWED ITS OWN ORDER FOR THE ASSESSMENT YEAR 1993 -94 ON THIS ISSUE AND IN PRINCIPLE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE RELEVANT DISCUSSION IN THE ORDER OF THE TRIBUNAL FO R ASSESSMENT YEAR 1994-95 DATED 29.1.2009 (SUPRA) IS AS UNDER: ON HEARING THE SUBMISSIONS OF THE BOTH THE SIDES, WE HAVE FOUND THAT THIS TRIBUNAL HAS ALREADY CONSIDERED THIS ISSUE IN APPELLANT'S OW N CASE IN THE A.Y.1993-94 IN APPEAL NO. ITA 768/PN/2000 VIDE AN ORDER DATED 30/5 /2008 (ONE OF US I.E. JM IS THE AUTHOR OF THE SAID ORDER), WHEREIN VIDE PARA 2 & 4. 1 THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE SUBJECT TO CERTAIN DIRECTION, REPRO DUCED BELOW : '2. FACTS IN BRIEF PERTAINING TO THIS GROUND AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S 143(3) DATED 27/03/1996 FOR A.Y 1993-94 WERE THAT THE APPELLANT WAS IN THE BUSINESS OF MANUFACTURING OF STEAM BOILERS, HEAT EXCHANGERS, WATER TREATMENT PLANT ETC. VIDE PARA 11 IT WAS OBSERVED BY THE A.O. THAT THE COMPANY HAS DEBITED A SUM OF RS, 33, 84,26 2/TOWARDS PROVISION FOR 'FOC EXPENSES' (FOC STANDS FOR FREE OF COST AS PER ASSES SEE'S VERSION).1T WAS FOUND BY THE A.O. THAT THE LAST YEAR'S FOC PROVISION HAD ALREADY BEEN REVERSED DURING THE YEAR. THE BASIS FOR PROVISION WAS FOUND TO BE 1% ON THE COST OF THE MATERIAL OF THE YEAR. A FINDING WAS GIVEN THAT THE LIABILITY HAD NO T BEEN INCURRED BUT IT WAS A CONTINGENT PROVISION MADE DURING THE YEAR. IT WAS R ECORDED BY THE A.O. THAT THE ASSESSEE HAD ADMITTED THAT THE PROVISION HAD BEEN M ADE A ESTIMATE BASIS FOR THE MATERIAL TO BE SUPPLIED FREE OF COST DURING THE PER IOD OF WARRANTY. SO THE A.Q. HAS HELD THAT SINCE THE PROVISION WAS MADE ON ESTIMATE BASIS AND NOT ON ACCRUAL BASIS THUS HAVE TO BE DISALLOWED. RESULTANTLY, THE SAME W AS ADDED TO THE INCOME OF THE ASSESSEE. 4.1 SINCE THE RESPECTED CO-ORDINATE BENCH HAS ALR EADY TAKEN A VIEW IN THE ASSESSEE'S FAVOUR AND THERE IS NO CHANGE AS FAR AS THE FACTS OF THAT YEAR AND ALSO THE FACTS IN THE FOLLOWING YEARS THEREAFTER, THEN I N SUCH A SITUATION A CONSISTENCY HAS TO BE MAINTAINED IN DECIDING THIS APPEAL AS WEL L. MOREOVER, LEARNED A.R. HAS MADE A STATEMENT AT BAR THAT REVEN UE DEPARTMENT HAS ALL ALONG ACCEPTED THE ACCOUNTING ME THOD OF THIS ASSESSEE AND THE MATTER NEVER TRAVELED FURTHER IN APPEAL. FURTHER, AS IS CLEAR FRO THE PARA REPRODUCED HEREIN ABOVE, THE RESERVATION OF LEARNED CIT(A) HAS ALSO BEEN DEALT W ITH BY THE '-RESPECT CO-ORDINATE BENCH IN RESPECT OF THE MARGI NAL DIFFERENCE A ,EXPRESSED BY THE LEARNED CIT(A) AND AUTHENTICALL Y OBSERVED THAT\IT MAY BE THAT THERE WAS MARGINAL DIFFERENCE I N RESPECT OF THE ESTIMATE AND ACTUALS. BUT THE ACCOUNTING METHOD FOLLOWED BY TH'E ASSESSEE ENSURES THAT SUCH EXCESS OR SHORTF ALL BE MADE GOOD IN SUBSEQUENT YEAR. IT WAS THUS, CONCLUDED THA T THERE WAS NO LOSS FOR THE DEPARTMENT EITHER IN DISALLOWING TH E AMOUNT THIS YEAR OR TAXING THE EXCESS NEXT YEAR. AS FAR AS THIS ISSUE OF ALLOWABILITY OF DEDUCTION IS CONCERNED, THE SAME.' HAS BEEN SETTLED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS, SONY INDIA (P) LTD. [2007] 160 TAXMAN 397 (DEL) AND HELD THAT AMOUNT SET APART BY THE ASSESSEE TO MEET THE CLAIMS ARISING OUT OF WARRANTIES ISSUED BY IT TO ITS CUSTOMERS COULD BE TAKEN AS A P ERMISSIBLE DEDUCTION U/S 37(1) OF I. T. ACT. NOW THE ONLY QUESTION AS ALSO THE APPREH ENSION AS RAISED BY THE REVENUE 14 DEPARTMENT BEFORE US REMAINS TO BE VERIFIED THAT WH ETHER THE SAID SHORTFALL WAS MADE GOOD IN THE SUBSEQUENT YEAR. IN THE ABSENCE OF THE DETAILS OF THE WRITE BACK OF THE PROVISIONS SO MADE IN THE NEXT FOLLOWING YEA R WE CANNOT GIVE A CATEGORICAL FINDING AS IT WAS GIVEN BY THE RESPECTE D CO ORDINATE BENCH IN THE AFORE CITED DECISION, THEREFO RE, IN THE INTEREST OF THE JUSTICE WE HEREBY DIRECT THE ASSESS EE TO FILE THE REQUIRED DETAILS BEFORE THE A.O., SO THAT HE CAN EX AMINE THAT THE SAME METHOD OF ACCOUNTING WAS FOLLOWED AND ALSO CAN ENSURE THAT SUCH EXCESS IF ANY MAD, WAS MADE GOOD I N THE SUBSEQUENT YEAR, SO THAT THERE SHOULD NOT BE ANY LO SS TO THE REVENUE DEPARTMENT, CONSEQUENTLY BY TAXING THE SAID EXCESS IN THE FOLLOWING YEAR. WITH THESE DIRECTIONS WE ALLOW THE GROUND OF THE ASSESSEE.' 9.4 AT THIS JUNCTURE SINCE THE LEGAL AS WELL AS FACTUAL ASPECT HAVE ALREADY BEEN CONSIDERED BY A CO-ORDINATE BENCH, THEREFORE, FOLLO WING THE RULE OF CONSISTENCY AS ALSO KEEPING IN MIND THE JUDICIAL PROPRIETY; WE DEE M IT PROPER TO RESTORE THIS GROUND BACK TO THE A.O. TO BE .DECIDED ACCORDINGLY. THIS G ROUND IS ALLOWED FOR STATISTICAL PURPOSE. 25. WE HAVE CAREFULLY CONSIDERED THE RIVAL STANDS A ND FIND THAT THE PRECEDENT IN THE ASSESSEES OWN CASE FULLY COVERS T HE CONTROVERSY AND ACCORDINGLY THE ASSESSING OFFICER IS DIRECTED TO GI VE EFFECT TO THE ABOVE PRECEDENT. ACCORDINGLY, THE ASSESSEE SUCCEEDS ON TH IS GROUND AS ABOVE. 26. GROUND NO.8 IS AS FOLLOWS: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING THE ASSESSING OFFICERS ACTION OF BRINGING TO TAX A SUM OF RS.1,27,751/- TR EATING THE SAME AS A CASUAL AND NON-RECURRING RECEIPT. 27 THE ASSESSEE HAD RECEIVED A SUM OF RS 1,32,751/- AS MESNE PROFIT IN TERMS OF AN OUT OF COURT SETTLEMENT OF LEASED PREMISES WITH ONE OF ITS EX-EMPLOYEE, THE SAME WAS TREATED AS A CAPITAL RECEIPT. THE ASSESSING OFFICER TREATED THE SAME AS CASUAL AND NON-RECURRING RECEIPT AND AFTER ALLOWING A DEDUCTION OF RS 5000/- UNDER SECTION 10(3), THE BALANCE OF RS 1,27,751/- WAS TAXED. WE FIND THAT THE ISSUE WHETHER THE AMOUNT OF RS.1,3 2,751/-, RECEIVED IN TERMS OF AN OUT OF COURT SETTLEMENT IN RESPECT OF LEASE 15 PREMISES OCCUPIED BY AN EX-EMPLOYEE OF THE COMPANY WAS IN THE NATURE OF M ESNE PROFITS AND HENCE A CAPITAL RECEIPT, HAS BEEN DECIDED AGAI NST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSMENT YEAR 1994-95 (SUPRA). SIMILAR CLAIM HAS BEEN MADE BY THE ASSESSEE FOR THE YEAR UNDER APPEAL. FOLLOWING THE PRECEDENT IN THE ASSESSEES O WN CASE, THIS GROUND IS DECIDED AGAINST THE ASSESSEE AND IS ACCOR DINGLY DISMISSED. 28. GROUND NO. 9 READS AS FOLLOWS: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF AN AMOUNT OF RS.25,55,407/- REPRESENTING ADDITIONAL PAYMENT MADE TO THE INCOME-TAX DEPARTMENT ON ACCOUN T OF TAX ALLEGEDLY SHORT DEDUCTED AT SOURCE FROM PAYMENT OF SALARIES ETC. TO ITS EMPLOYEES. THE LEARNED CIT (APPEALS) OUGHT TO HAVE HELD THAT T HE AMOUNT IN QUESTION WAS EITHER ALLOWABLE AS A BUSINESS EXPENDITURE UNDER SE C.37 OF THE ACT OR ALTERNATELY AS A BUSINESS LOSS UNDER SEC.28 OF THE ACT. 29. THE RELEVANT FACTS IN RELATION TO THIS ARE THAT THE INCOME TAX DEPARTMENT HAD CARRIED OUT A SURVEY AND RECOVERED R S. 25,55,407/- FROM THE COMPANY BEING THE AMOUNT OF INCOME-TAX SHORT DE DUCTED BY IT FROM ITS EMPLOYEES. THE ASSESSEE CLAIMED DEDUCTION FOR THE A MOUNT SO PAID UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER DIS ALLOWED THE CLAIM OF THE ASSESSEE HOLDING THAT THIS PAYMENT COULD NOT BE SAI D TO BE EXPENDITURE INCURRED IN CARRYING OUT THE BUSINESS OF THE ASSESS EE. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) SUSTAINED THE DISALLOWANCE BY RELYING ON THE DECISION OF THE HONBLE SUPREME COUR T IN THE CASE OF INDIAN ALUMINIUM CO. LTD. V CIT 79 ITR 514 (SC). 30. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT A SIMILAR ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL WHILE DECIDING THE CASE OF A GROUP COMPANY THERMAX BABC OCK & WILCOX LTD IN ITA NO. 671/PN/00 FOR ASSESSMENT YEAR 1995-96 DATED 30.9.2005. FOR THE SAKE OF CONVENIENCE AND BREVITY, WE REPRODUCE THE R ELEVANT PORTION OF THE 16 AFORESAID ORDER OF THE TRIBUNAL BELOW: 9. THE ASSESSEE'S CLAIM FOR AN AMOUNT OF RS 5,44,3 15/- ON ACCOUNT OF INTEREST PAID FOR NON-DEDUCTION OF TAX FROM EMPLOYEES' REMUNERATI ON AND FOR NONPAYMENT OF TAX WAS DISALLOWED BY THE AO BY OBSERVING THAT THIS IS NOT ELIGIBLE FOR DEDUCTION U/S 37(1) OF THE ACT BEING NOT RELATED TO THE CARRYING ON OF THE BUSINESS ACTIVITIES OF THE ASSESSEE, THE CIT(A) CONFIRMED THE AO'S ACTION BY O BSERVING THAT THE AMOUNT PAID BY THE ASSESSEE IS NOT A BUSINESS EXPENDITURE. THE CIT (A) FURTHER STATED THAT THE ISSUE IS COVERED BY THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF INDIAN ALUMINIUM CO. LTD V CIT (1971) 79 ITR 514. 10. THE ID COUNSEL FOR THE ASSESSEE CONTENDED THAT THE PAYMENT OF. RS 5,44,315/- ON ACCOUNT OF SHORT DEDUCTION OF TAX AT SOURCE AND INTEREST PAYABLE THEREUPON IS TO BE TREATED AS ADDITIONAL AMOUNT PAID TO THE EMPLOYE ES AND AS SUCH, IT SHOULD BE DEEMED TO BE ADDITIONAL EMPLOYEE COST BEING DEDUCTI BLE U/S 37 OF THE ACT HAVING BEEN INCURRED FOR THE PURPOSE OF BUSINESS. 11. THE ID DR, ON THE OTHER HAND, SUPPORTED THE ORD ERS OF THE AUTHORITIES BELOW AND CONTENDED THAT THE SAID EXPENDITURE CAN, BY NO STRE TCH OF IMAGINATION, BE SAID TO HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FORK THE PURPOSE OF BUSINESS, INASMUCH AS IT IS NOT AT ALL RELATED OR INCIDENTAL TO THE CA RRYING ON BUSINESS ACTIVITIES OF THE ASSESSEE COMPANY. 12. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THERE IS NO DISPUTE IN THE PROPOSITION THAT IF THE EXPENDITURE IS REALLY INCIDENTAL TO THE CARRYING ON OF ASSESSEE'S BUSINESS AND HAS BEEN LAID OUT BY THE ASSESSEE IN HIS CAPACI TY AS A TRADER, IT IS ALLOWABLE. IN EACH CASE, IT WILL DEPEND ON THE NATURE OF THE BUSI NESS AND THE NATURE OF THE DEDUCTION. IN THE PRESENT CASE, IT WAS THE STATUTOR Y DUTY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE FROM THE EMPLOYEES FROM THE SALARY OR WAGES OR REMUNERATION OR ANY OTHER BENEFITS PAID TO THE EMPLOYEES AND THAT STATU TORY OBLIGATION OF THE ASSESSEE WAS NOT COMPLIED WITH BY THE ASSESSEE AND AS SUCH, THE ASSESSEE WAS ULTIMATELY REQUIRED TO PAY THE AMOUNT DEDUCTIBLE AT SOURCE ALO NG WITH THE INTEREST THEREUPON. IN THE CASE OF INDIAN ALUMINIUM CO LTD (SUPRA), THE HON'BLE SUPREME COURT HAS HELD THAT THE PAYMENT MADE UNDER A STATUTORY OBLIGA TION BECAUSE THE ASSESSEE WAS IN DEFAULT COULD NOT CONSTITUTE EXPENDITURE LAID OU T FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS WITHIN THE MEANING OF SEC. 10 ( 2) (XV) OF THE INCOME-TAX ACT, 1922, CORRESPONDING TO SEC. 37 (1) OF THE INCOME-TA X-ACV, 1961. IN THE CASE BEFORE US, THE AMOUNT OF TAX PAID BY THE ASSESSEE ALONG-WI TH THE INTEREST THEREUPON WAS ON ACCOUNT OF THE FAULT OF THE ASSESSEE FOR NOT DED UCTING THE TAX AT SOURCE AND NOT DEPOSITING THE-SAME WITHIN THE TIME AS PRESCRIBED U NDER THE INCOME-TAX ACT AND RULES. IN THIS VIEW OF THE MATTER, IT IS THEREFORE CLEAR THAT THE PAYMENT OF TAX ALONG- WITH INTEREST 'THEREUPON MADE BY THE ASSESSEE UNDER A STATUTORY OBLIGATION BECAUSE THE ASSESSEE WAS IN DEFAULT COULD NOT CONSTITUTE EX PENDITURE LAID OUT FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS WITHIN THE MEANI NG OF SEC. 37 (1) OR ANY OTHER PROVISIONS OF THE ACT. WE MAY FURTHER REFER TO THE CASE OF CIT V GHATKOPAR ESTATE & FINANCE CORPORATION (P) LTD (1989) 177 ITR 222 (BOM ) WHERE IT HAS BEEN HELD BY THE HON'BLE BOMBAY HIGH COURT THAT THE INTEREST PAI D BY THE ASSESSEE ON DELAYED PAYMENT OF INCOME-TAX IS PERSONAL AND THE INTEREST CANNOT BE ALLOWED AS DEDUCTION UNDER THE PROVISIONS OF SEC. 28 OR SEC. 37 OF THE A CT. IN THE CASE OF ASSAM FOREST PRODUCTS (P) LTD V CIT (1989) 180 ITR 478 ((GAU), I T IS HELD BY THE HON'BLE GAUHATI HIGH COURT THAT THE INTEREST PAID FOR DELAY IN FILI NG THE RETURN, SHORTFALL IN PAYMENT OF ADVANCE TAX AND FAILURE TO MAKE ESTIMATE OF ADVANCE TAX UNDER THE INCOME-TAX ACT ARE NOT DEDUCIBLE AS AN EXPENDITURE U/S 37 OF THE ACT. SIMILARLY IN THE CASE OF ORISSA CEMENT 17 LTD V CIT (1993) 200 ITR 636 (DEL), IT IS HELD BY T HE HON'BLE DELHI HIGH COURT THAT INTEREST PAYABLE U/S 220(2) OF THE ACT FOR DELAYED PAYMENT OF A DEMAND OF INCOME-TAX IS NOT ALLOWABLE AS BUSINESS EXPENDITURE U/S 28 AND 37 OF THE ACT. SINCE THE ABOVE PAYMENT WAS NOT RELATED TO THE DAY TO DAY ACTIVITIE S OF THE ASSESSEE'S BUSINESS OR WAS NOT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND SINCE THE PAYMENT WAS MADE BECAUSE THE ASSESSEE WAS IN DEFAULT FOR NOT DEDUCTI NG TAX AT SOURCE AND NOT PAYING THE TAX WITHIN TIME, THE CLAIM OF THE ASSESSEE CANN OT BE ALLOWED, INASMUCH AS IT COULD NOT CONSTITUTE AN EXPENDITURE LAID OUT FOR TH E PURPOSE OF THE ASSESSEE'S BUSINESS WITHIN THE MEANING OF SEC. 28 AND 37 OF TH E ACT. WE, THEREFORE, UPHOLD THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE. THIS GROUND FAILS. ON THE SIMILAR PARITY OF REASONING, FOLLOWING THE P RECEDENT, WE UPHOLD THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE AND T HUS, THE ASSESSEE FAILS ON THIS GROUND. 31. GROUND NO.10 IS AS FOLLOWS : IN THE MATTER OF APPELLANTS CLAIM FOR DEDUCTION OF EXPENSES ON PUBLIC ISSUE OF EQUITY SHARE, THE LEARNED CIT (APPEALS) ERRED IN CONFIRMIN G A) REJECTION OF THE CONTENTION OF THE APPELLANT T HAT THE ENTIRE EXPENDITURE OF RS.4,44,46,017/- WAS ALLOWABLE AS A BUSINESS EXPENDITURE UNDER SEC.37(1) OF THE ACT. B) REJECTION OF THE APPELLANTS ALTERNATE CLAIM THAT AT LEAST RS.23,45,301/- BE ALLOWED AS A REVENUE EXPENDITURE. C) REJECTION OF THE APPELLANTS OTHER ALTERNATE CLAIM THAT A SUM OF RS.21,55,462/-SHOULD BE ALLOWED AS AN EXPENDITURE U NDER SEC.35 OF THE ACT. D) & E) THAT ONLY EXPENDITURE OF RS.1,92,33,047/- AN D RS.56,83,300/-WILL QUALIFY FOR DEDUCTION UNDER SEC.35D, REJECTING THE CONTENTI ON OF THE APPELLANT THAT THE REMAINING EXPENDITURE OUT OF RS.4,44,46,017/-, IF IT WAS NOT ALLOWABLE UNDER THE PROVISIONS OF ANY OTHER SECTION OF THE AC T, WAS ALLOWABLE U/S 35D OF THE ACT. F) THAT THE CEILING OF 2.5% OF CAPITAL EMPLOYED AS PROVIDED FOR IN SEC.35D WAS TO BE CALCULATED WITH REFERENCE TO THE SHARE APPL ICATION MONEY RELATABLE TO THE UTILIZATION OF FUNDS CONSIDERED BY HIM TO BE EL IGIBLE FOR DEDUCTION UNDER SEC.35D, REJECTING THE CONTENTION OF THE APPELLANT THAT THE SAID CEILING OF 2.5% OUGHT TO BE CALCULATED WITH REFERENCE TO THE C APITAL EMPLOYED IN THE BUSINESS OF THE ASSESSEE TAKEN AS A WHOLE. 32. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE MADE A PUBLIC ISSUE OF EQUITY SHARES AND INCURRED AN EXPENDITURE OF RS. 4,44,46,017 IN CONNECTION WITH THE SAME. THE ASSESSEE, WITHOUT PRE JUDICE TO ITS CONTENTION THAT THE ENTIRE SAID EXPENDITURE WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 18 37(1), CLAIMED BEFORE THE ASSESSING OFFICER THAT RS . 3,40,12,791/- WAS ALLOWABLE UNDER SECTION 35D OF THE ACT OVER A PERIO D OF 10 YEARS. FURTHER, IT WAS CONTENDED THAT SINCE PART OF THE PROCEEDS OF TH E PUBLIC ISSUE WERE TO BE UTILISED FOR (I) A RESEARCH CENTRE, AND, (II) F OR REPAYMENT OF LOANS/FIXED DEPOSITS, PROPORTIONATE AMOUNTS OF RS. 21,55,462/- AND RS. 23,45,301/- RESPECTIVELY WERE ALLOWABLE AS DEDUCTION UNDER SECT IONS 35 AND 37(1) OF THE ACT RESPECTIVELY. 33. THE ASSESSING OFFICER, BY APPLYING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD 225 ITR 798 (SC) AND PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD 225 ITR 792(SC) REJECTED THE BASIC CLAIM THAT THE ENTIRE EXPENDITUR E WAS ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. AS TO THE ALTERNATE CLAIMS FOR DEDUCTION OF PROPORTIONATE PUBLIC ISSUE EXPENSES UN DER SECTION 35 AND 37(1) IN SO FAR AS THE ISSUE PROCEEDS WERE TO BE UT ILIZED FOR PUTTING UP A RESEARCH CENTRE AND FOR REPAYMENT OF LOANS/FIXED DE POSITS RESPECTIVELY, THE ASSESSING OFFICER DISALLOWED THE SAME ALSO. THE CLAIM UNDER SECTION 37(1) WAS DISALLOWED BY OBSERVING THAT THE BASIC OB JECTIVE OF INCURRING THE EXPENDITURE WAS TO RAISE SHARE CAPITAL AND THEREFOR E, IN VIEW OF THE AFORESAID DECISIONS OF THE HONBLE SUPREME COURT, T HE EXPENDITURE WAS CAPITAL IN NATURE. THE ASSESSING OFFICER ALSO REJEC TED THE CLAIM FOR DEDUCTION UNDER SECTION 35, AS ACCORDING TO HIM, TH E EXPENDITURE ON RESEARCH AND DEVELOPMENT CAN ONLY BE THAT WHICH HAS BEEN USED ONLY FOR SUCH PURPOSE. IN APPEAL, THE COMMISSIONER OF INCOME -TAX (APPEALS) UPHELD THE DISALLOWANCES MADE BY THE ASSESSING OFFI CER. 34. BEFORE US, THE SUB-GROUNDS (A), (D) AND (E) WE RE NOT PRESSED BY THE LEARNED COUNSEL FOR THE APPELLANT. AS REGARDS T HE DISALLOWANCE OF 19 RS.21,55,462/- CONTAINED IN SUB-GROUND(C), THE LEA RNED COUNSEL SUBMITTED THAT THOUGH EXPENDITURE ON ISSUE OF SHARE CAPITAL I S CAPITAL IN NATURE, SINCE UNDER SECTION 35 EVEN CAPITAL EXPENDITURE IS ALLOWA BLE IN THE YEAR OF INCURRENCE, PROPORTIONATE EXPENDITURE IS ALLOWABLE UNDER SECTION 35 OF THE ACT. FOR THIS PROPOSITION, RELIANCE WAS PLACED ON T HE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SANDOZ (I) LTD. 20 6 ITR 385 (BOM), WHERE THE EXPENDITURE INCURRED ON APPROACH ROAD TO RESEARCH LABORATORY WAS HELD ENTITLED TO DEDUCTION UNDER SECTION 35 OF THE ACT. THE LEARNED COUNSEL ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF BHARAT RAM CHARAT RAM (P) LTD 157 ITR 199(DEL) WHERE RENT PAID FOR R & D BUILDING WAS HELD ALLOWAB LE UNDER SECTION 35 OF THE ACT. 35. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS OPPOSED THE PLEA OF THE ASSESSEE BY POINTING OUT TH AT THE EXPENDITURE ON PUBLIC ISSUE CANNOT BE CONSTRUED AS AN EXPENDITURE ON SCIENTIFIC RESEARCH SO AS TO QUALIFY FOR DEDUCTION UNDER SECTION 35 OF THE ACT. 36. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE SHORT CONTROVERSY BEFORE US IS WHETHER THE EXPENDITURE ON PUBLIC ISSUE OF EQUITY SHARES, WHICH HAS BEEN HELD TO BE A CAPITAL EXPENDI TURE, CAN IT BE SAID TO BE INCURRED ON SCIENTIFIC RESEARCH SO AS TO BE ELIG IBLE FOR DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT, BECAUSE A PART OF THE PROCEEDS OF THE PUBLIC ISSUE WERE TO BE UTILIZED FOR SETTING UP OF A RESEA RCH AND DEVELOPMENT CENTRE. SECTION 35 GRANTS DEDUCTION IN RESPECT OF E XPENDITURE INCURRED ON SCIENTIFIC RESEARCH AND IT ALSO COVERS EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE MOOT QUESTION IS AS TO WHETHER THE IMPUGNED EXPENDI TURE CAN BE CLASSIFIED 20 AS A CAPITAL EXPENDITURE INCURRED OR LAID OUT ON SC IENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. AS PER THE ASSESSEE, SINCE A PART OF THE EQUITY CAPITAL RAISED BY WAY OF PUBIC ISSUE OF SHARES IS UTILIZED FOR SETTING UP A RESEARCH CENTRE, THE COST OF RAISING O F SUCH EQUITY SHARES CAN BE SAID TO HAVE BEEN EXPENDED ON SCIENTIFIC RESEARC H. IN OUR CONSIDERED OPINION, WE DO NOT FIND ANY MERIT IN THE SAID PLEA OF THE ASSESSEE, INASMUCH AS THE SAID EXPENDITURE IS DIRECTLY LINKED TO THE RAISING OF PUBLIC ISSUE OF SHARES. THE UTILIZATION OF THE PROCEEDS OF THE PUBLIC ISSUE FOR SETTING UP A RESEARCH CENTRE CAN AT BEST PROVIDE A REMOTE CONNECTION BETWEEN THE COST OF ISSUE OF SHARES AND THE EXPENDI TURE ON SCIENTIFIC RESEARCH. THE EXPENDITURE INCURRED ON RAISING OF PU BLIC ISSUE OF SHARES CANNOT BE TREATED AT PAR WITH SAYING THAT SUCH EXPE NDITURE HAS BEEN INCURRED ON SCIENTIFIC RESEARCH WITHIN THE MEANING OF SECTION 35 OF THE ACT. IN OUR CONSIDERED OPINION, THE EXPENDITURE QUALIFYI NG UNDER SECTION 35 MUST HAVE AN IMMEDIATE NEXUS WITH THE SCIENTIFIC RESEARC H CARRIED ON BY THE ASSESSEE AND NOT A REMOTE CONNECTION AS IN THE PRES ENT CASE. IN SUPPORT OF HIS PLEA, THE LEARNED COUNSEL HAS RELIED UPON THE J UDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SANDOZ INDIA LTD., (SUPRA). IN THE CASE BEFORE THE HONBLE HIGH COURT, THE ASSESSEE HAD INC URRED EXPENDITURE ON CONSTRUCTION OF AN APPROACH ROAD TO ITS RESEARCH AN D DEVELOPMENT LABORATORY AND THE SAME WAS HELD ELIGIBLE FOR DEDUC TION UNDER SECTION 35(1)(IV) OF THE ACT, AS IT WAS CONSIDERED AS AN EX PENDITURE OF CAPITAL NATURE INCURRED ON SCIENTIFIC RESEARCH RELATED TO T HE BUSINESS OF THE ASSESSEE. IN OUR CONSIDERED OPINION, THE JUDGMENT I N THE CASE OF SANDOZ INDIA LTD. (SUPRA) STANDS ON A DIFFERENT FOOTING, I NASMUCH AS THE HONBLE HIGH COURT APPLIED THE FUNCTIONALITY TEST AND OBSER VED THAT THE APPROACH ROAD TO THE RESEARCH LABORATORY OF THE ASSESSEE WAS NECESSARY ADJUNCT TO 21 RESEARCH LABORATORY AND, THEREFORE, THE EXPENDITURE INCURRED ON THE CONSTRUCTION THEREOF HAD TO BE TREATED AT PAR WITH THE EXPENDITURE ON CONSTRUCTION OF RESEARCH LABORATORIES THEMSELVES. C LEARLY, THE FUNCTIONALITY TEST APPLIED BY THE HONBLE BOMBAY HIGH COURT DEMON STRATED THE EFFICACY OF THE EXPENDITURE ON CONSTRUCTION OF APPROACH ROAD AS BEING TREATED AT PAR WITH THE EXPENDITURE ON CONSTRUCTION OF RESEARCH LA BORATORIES SO AS TO QUALIFY FOR DEDUCTION UNDER SECTION 35 OF THE ACT. IN THE PRESENT CASE, THE EXPENDITURE INCURRED ON RAISING OF PUBLIC ISSUE OF SHARES IS IN NO WAY ADJUNCT TO THE CONSTRUCTION OF THE RESEARCH AND DEVELOPM ENT CENTRE OF THE ASSESSEE. THEREFORE, THE PARITY OF REASONING ENUNCI ATED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SANDOZ INDIA LTD. (SUPRA) DOES NOT HELP THE CASE OF THE ASSESSEE. SIMILARLY, THE JUDGMENT O F THE HONBLE DELHI HIGH COURT IN THE CASE OF BHARAT RAM CHARAT RAM (SUPRA) RELIED UPON BY THE ASSESSEE ALSO DOES NOT HELP IN THE PRESENT CASE, AS IT IS ON DIFFERENT FACTS. IN THE CASE BEFORE THE HONBLE DELHI HIGH COURT, TH E ISSUE PERTAINED TO THE RENT PAID BY THE ASSESSEE ON BEHALF OF AN INSTITUTI ON CARRYING ON RESEARCH AND THE SAME WAS HELD TO BE QUALIFYING FOR DEDUCTIO N UNDER SECTION 35(1)(III) OF THE ACT. THE FACTS OF THE PRESENT CAS E ARE ADMITTEDLY QUITE DIFFERENT. THEREFORE, IN TERMS OF THE AFORESAID DIS CUSSION, WE FIND NO JUSTIFICATION TO ALLOW THE ALTERNATE PLEA OF THE AS SESSEE THAT THE SUM OF RS 21,55,462/- IS ALLOWABLE UNDER SECTION 35 OF THE AC T. THUS, ON THIS GROUND ALSO THE ASSESSEE FAILS. 37. AS REGARDS FUNDS UTILIZED FOR REPAYMENT OF LOA NS/FIXED DEPOSITS (SUB GROUND B), IT WAS SUBMITTED THAT NO ENDURING B ENEFIT ACCRUED FROM SUCH REPAYMENT AND, THEREFORE, PROPORTIONATE EXPEND ITURE IS REVENUE IN NATURE. 22 38 ON THIS ASPECT ALSO, WE FIND NO JU STIFICATION FOR THE PLEA OF THE ASSESSEE THAT SUCH EXPENDITURE IS ALLOWABLE UNDER S ECTION 37(1) OF THE ACT. QUITE CLEARLY, SECTION 37(1) DOES NOT PERMIT DEDUCT ION FOR ANY EXPENDITURE OF CAPITAL NATURE AND ADMITTEDLY SUCH EXPENDITURE H AS BEEN ACCEPTED BY THE ASSESSEE TO BE CAPITAL IN NATURE. THUS, ON GROU ND NO. 10, THE ASSESSEE FAILS . 39. GROUND NO.11 OF THE APPEAL REA DS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING DISALLOWANCE OF A SUM OF RS.13,02,400/- UNDER SEC.43B OF THE I.T. ACT, 1961. 40. THE BRIEF FACTS RELATING TO THIS GROUND ARE THAT EM PLOYERS CONTRIBUTION TO PROVIDENT FUND AND FAMILY PENSION F UND WAS DEPOSITED LATE (MARCH 1995 CONTRIBUTION PAID IN APRIL 1995) B UT WITHIN THE FIVE DAY GRACE PERIOD ALLOWED BY THE PROVIDENT FUND AUTHORIT IES. ACCORDING TO THE ASSESSEE, IN SUCH CIRCUMSTANCES, THERE SHOULD BE NO DISALLOWANCE UNDER SECTION 43B OF THE ACT. FOR THIS PROPOSITION, RELI ANCE WAS PLACED ON THE FOLLOWING JUDGMENTS: I) SHRI GANAPATHY MILLS CO. 243 ITR 879(MAD); II) ALUM EXTRUSIONS LTD. 319 ITR 206 (SC); AND, III) HONSUR PLYWOOD WORKS 54 ITD 394(BANG.) 41. ON THIS ASPECT, FOLLOWING THE PARI TY OF REASONING OF THE DECISION CITED ON BEHALF OF THE ASSESSEE, WE HOLD T HAT THE ASSESSING OFFICER SHALL RE-WORK THE DISALLOWANCE UNDER SECTION 43B, I F ANY, BY CONSIDERING THE PAYMENTS MADE WITHIN THE GRACE PERIOD AS BEING ALLO WABLE AS DEDUCTION. THUS ON THIS ASPECT, THE ASSESSEE SUCCEEDS AND THE GROUND IS ALLOWED. 42. GROUND NO.12 READS AS FOLLOWS: 23 IN THE MATTER OF APPELLANTS CLAIM FOR DEDUCTION U NDER SEC.80-I, THE LEARNED CIT APPEALS) FURTHER ERRED A. IN CONFIRMING THAT THE FOLLOWING ITEMS OF INCOME WE RE NOT IN THE NATURE OF INCOME DERIVED FROM CONCERNED INDUSTRIAL UNDERTAKIN GS SO AS TO BE ELIGIBLE FOR DEDUCTION UNDER SEC.80-I. I) CHILLER / HEAT PUMP RS. 1.52 LACS II) COMBIMAX / FLUIDISED BED BOILER RS.20.79 LACS B. IN CONFIRMING DENIAL OF DEDUCTION UNDER SEC.80-I I N RESPECT OR PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING STYLED WATER MISSION. 43. IT WAS A COMMON POINT BETWEEN THE PART IES THAT THE ISSUES INVOLVED IN GROUND 12(A)(I) OF FLUCTUATION IN EXCHA NGE RATE (RS. 1.52 LACS) AND IN GROUND NO. 12(A)(II) RELATING TO INTEREST U NDER IDBI SCHEME RS. 91 LAKHS HAD BEEN SUBJECT-MATTER OF CONSIDERATION BY T HE TRIBUNAL IN ASSESSMENT YEAR 1994-95 (SUPRA) AND THE TRIBUNAL H AS RESTORED THE MATTERS TO THE FILE OF THE ASSESSING OFFICER TO FO LLOW THE DIRECTIONS GIVEN THEREIN. FOLLOWING THE SAME, WE HOLD SO AND RESTORE THE ISSUES TO THE FILE OF THE ASSESSING OFFICER TO ADJUDICATE THE ISSUES AFRE SH IN THE LIGHT OF PRECEDENT REFERRED TO ABOVE. 44. IN SO FAR AS THE ISSUE RELATING TO WAREHOUSING CHARGES RECOVERED OF RS 1,85,000/- CONTAINED IN GROUND NO 1 2(A)(II) IS CONCERNED, THE SAME IS DECIDED AGAINST THE ASSESSEE BY FOLLOWI NG THE FINDINGS IN THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1994- 95 (SUPRA). THUS, THE ASSESSEE FAILS ON THIS ISSUE. THE ISSUE RELATING TO MISCELLANEOUS RECEIPTS OF RS 17.97 LAKHS CONTAINED IN GROUND NO. 12(A)(II) AL SO STANDS DISMISSED, AS IT WAS NOT PRESSED BY THE LEARNED COUNSEL AT THE TI ME OF HEARING BEFORE US. THUS, ON GROUND NO. 12(A), ASSESSEE PARTLY SUCCEEDS . 45. THE ISSUE INVOLVED IN GROUND NO. 12(B) IS WHET HER THE PROFITS DERIVED BY THE ELIGIBLE INDUSTRIAL UNDERTAKING CALL ED WATER MISSION WAS ENTITLED TO DEDUCTION UNDER SECTION 80-I OF THE ACT , EVEN THOUGH THE INCOME 24 DURING THE YEAR UNDER CONSIDERATION WAS IN THE FORM OF SERVICE INCOME FOR OPERATION AND MAINTENANCE OF DESALINATION PLANTS EA RLIER MANUFACTURED BY THE ELIGIBLE INDUSTRIAL UNDERTAKING AND INSTALLED B Y THE UNDERTAKING AT VARIOUS SITES. WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL VIDE ITS ORDER IN ITA NO. 854/PN/2000 DATED 30.09.2008 FOR THE ASSESSMENT YEAR 1993-94. FOLLOWI NG THE PRECEDENT, THEREFORE, WE DECIDE THIS ISSUE IN FAVOUR OF THE AS SESSEE. THUS, ON GROUND NO. 12, ASSESSEE PARTLY SUCCEEDS. 46. GROUND NO.13 RAISED BY THE ASSESSEE IS AS FOLL OWS : THE LEARNED CIT (APPEALS) FURTHER ERRED IN NOT ACC EPTING THE APPELLANTS CONTENTION THAT RETENTION MONEY FORMING PART OF S ALES, OUGHT TO BE EXCLUDED WHILE COMPUTING THE APPELLANTS BUSINESS INCOME FOR THE YEAR UNDER APPEAL INASMUCH AS, TO THAT EXTENT, INCOME HAD NOT ACCRUED TO THE APPELLANT. THE APPELLANTS BUSINESS INCOME BE, ACCORDINGLY REDUCED BY THE AMOUNT OF RETENTION MONEY INCLUDED IN SALES. 47. AT THE TIME OF HEARING BEFORE US, THE LEARNED COUN SEL FOR THE ASSESSEE DID NOT PRESS FOR THIS GROUND AND, THEREFO RE, THE SAME STANDS DISMISSED. 48. GROUND NO.14 OF ASSESSEES APPEAL READS THUS : IN THE MATTER OF DEDUCTION UNDER SEC.80-HHC, THE C IT (APPEALS) ERRED IN CONFIRMING A) REDUCTION FROM PROFITS DERIVED FROM EXPORT OF MANUFACTURED GOODS THE LOSS SUFFERED FROM EXPORT OF TRADING GOODS. THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED TH E CONTENTION OF THE APPELLANT THAT SUCH LOSS FROM EXPORT OF TRADING GOO DS HAD TO BE IGNORED FOR THE PURPOSE OF SEC.80-HHC AND DEDUCTION THERE UNDER OUG HT TO HAVE BEEN ALLOWED ONLY WITH REFERENCE TO THE PROFITS DERIVED FROM EXP ORT OF MANUFACTURED GOODS. B) TREATMENT OF THE FOLLOWING ITEMS AS FORMING PAR T OF TOTAL TURNOVER - I)EXCISE DUTY COLLECTED 16,67,18,940 II)SALES-TAX COLLECTED 12,85,72,320 III)INSURANCE CLAIM 10,34,195 IV)BAD DEBTS 18,83,822 25 RECOVERED V)AMOUNT WRITTEN BACK 44,59,146 VI)CLAIM FROM CUSTOM 10,08,137 VII)CLAIMS & REFUND - EXCISE 3,18,029 VIII)SALES TAX REFUND 12,77,939 IX)ORDER CANCELLATION 2,50,000 X)FLUCTUATION IN RATE OF EXCHANGE 8,41,888 XI)CREDIT BALANCE APP. 60,82,491 XII)SALE OF SCRAP 1,38,95,629 XIII)EXPORT RECEIPTS U/S 80(O) 66,16,279 THE LEARNED CIT (APPEALS) OUGHT TO HAV E ACCEPTED THE CONTENTION OF THE APPELLANT THAT NONE OF THE AFORESAID ITEMS HAD T HE CHARACTER OF TURNOVER IN THE CONTEXT OF SECTION 80-HHC. C) EXCLUSION OF 90% OF THE FOLLOWING ITEMS FOR THE PURPOSES OF COMPUTING PROFITS OF THE BUSINESS IN TERMS OF SECTION 80HHC : DISCOUNT RECEIVED RS 1,61,312 LEASE RENTAL RECEIPT RS 69,600 WAREHOUSING CHARGES RECOVERED RS 1,85,810 MISC. RECEIPTS RS 81,78,420 MISC. INCOME RS 29,94,255 MESNE PROFIT RS 1,32,751 FRANCHISEE FEES RS 1,500 ------------------ RS 1,17,23,648 ============= D) THAT RS 8,03,716/- AND RS 48,46,188 WERE NOT ELI GIBLE FOR INCLUSION IN PROFITS OF BUSINESS FOR THE PURPOSES OF SECTION 8 0-HHC. 49. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY . SO FAR AS GROUND NO. 14 (A) IS CONCERNED, THE ISSUE IS LIABLE TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF IPCA LABORATORIES LTD 266 ITR 521 (SC). WE HOLD SO. 50. THE ISSUES RELATING TO EXCLUSION OF EXCISE DUT Y AND SALES TAX COLLECTED FROM TOTAL TURNOVER CONTAINED IN GROUND N O. B(I) AND (II) RESPECTIVELY ARE CONCERNED, THEY ARE DECIDED IN FAV OUR OF THE ASSESSEE IN 26 VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS 290 ITR 667 (SC). 51. THE ISSUES RELATING TO INSURANCE CLAIM OF RS 1 0,34,195 (SUB- GROUND (III); BAD DEBTS RECOVERED OF RS 18,83,822/- (SUB-GROUND (IV); AMOUNT WRITTEN BACK RS 44,59,146 (SUB-GROUND (V); C LAIM FOR CUSTOM RS 10,08,137 (SUB-GROUND VI); CLAIMS & REFUND EXCISE RS 3,18,029 (SUB- GROUND VII); SALES-TAX REFUND RS 12,77,939 (SUB-GRO UND (VIII); CREDIT BALANCE APPROPRIATED RS 60,82,491/- (SUB-GROUND XI); SALE O F SCRAP RS 1,38,95,629 (SUB-GROUND XII) ARE DECIDED IN FAVOUR OF THE ASSES SEE IN VIEW OF THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1994-95 (SU PRA). 52. THE ISSUE IN SUB-GROUND (XIII) RELATING TO EXP ORT RECEIPTS OF RS 66,16,279/- ELIGIBLE FOR DEDUCTION UNDER SECTION 80 -O OF THE ACT IS DISMISSED, AS THE SAME WAS NOT PRESSED BY THE LEARN ED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING. 53. AS REGARDS THE ISSUE INVOLVED IN SUB-GROUND (I X) OF ORDER CANCELLATION OF RS 2,50,000/-, THE LEARNED COUNSEL SUBMITTED THAT THE ORDER CANCELLATION IS COMPENSATION RECEIVED FROM CUSTOMER FOR CANCELLATION OF AN ORDER AND CANNOT REPRESENT VALUE OF GOODS SOLD OR S ERVICES RENDERED. WE FIND MERIT IN THE PLEA SET-UP BY THE ASSESSEE, AND ACCORDINGLY ASSESSEE SUCCEEDS. 54. AS FOR THE ISSUE AT SUB-GROUND (X) OF FLUCTUA TION IN RATE OF EXCHANGE OF RS 8,41,888/-, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT EXCHANGE FLUCTUATION IN SO FAR AS EXP ORTS ARE CONCERNED IS ALREADY INCLUDED IN VALUE OF EXPORT TURNOVER SINCE IN TERMS OF SECTION 80HHC THE SAME IS TO BE TAKEN AT FOB VALUE OF EXPO RTS. IN OUR VIEW, ONLY COMPONENT OF FLUCTUATION WHICH IS ON SALES IS LIABL E TO BE INCLUDED IN TOTAL 27 TURNOVER AND NOT THE BALANCE, IF ANY. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT ACCORDINGLY. 55. IN SO FAR AS THE ISSUES INVOLVED IN GROUND NO. 14(C) ARE CONCERNED, THE SAME RELATE TO EXCLUSIONS FROM THE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) FOR THE PURPOSES OF SECTION 80HHC OF THE ACT. THE PLEA SET-UP BY THE ASSESSEE IS THAT THE AFORESAID ITEMS OF INCOME ARE NOT EXCLUDIBLE IN TERMS OF EXPLANATION (BAA), INASMUCH AS THE SAME ARE NOT INDEPENDENT INCOMES, BUT ARE OTHERWISE INEXTRICABLY RELATED TO THE MAIN BUSINESS OF THE ASSESSEE. QUITE FAIRLY THE LEARNED COUNSEL POINTED OUT THAT AT BEST INCOME BY WAY OF LEASE RENTAL RS 69,600/- , MESNE PROFIT RS 1,32,751/- AND FRANCHISEE FEES 1,500/- MAY CONSTI TUTE INDEPENDENT INCOMES EXCLUDIBLE IN TERMS OF EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT THAT THE ISSUE MAY BE DECIDED IN THE LIGHT OF THE RECENT JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. PFIZER LTD. 233 CTR 52 1 (BOM). 56. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS DEFENDED THE ORDERS OF THE AUTHORITIES BELOW. 57. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE DEE M IT FIT AND PROPER TO SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OF FICER TO BE ADJUDICATED IN THE LIGHT OF THE JUDGMENT OF THE HONBLE BOMBAY HIG H COURT IN THE CASE OF PFIZER LTD., (SUPRA) EXCEPT TO THE EXTENT OF LEASE RENTAL, MESNE PROFITS AND FRANCHISEE FEES, WHICH ARE LIABLE TO BE EXCLUDED IN TERMS OF EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. THE ASSESSING OF FICER SHALL RE- ADJUDICATE THE CONTROVERSY AFTER ALLOWING THE ASSES SEE AN OPPORTUNITY OF BEING HEARD IN THE MATTER. 28 58. THE VARIOUS ISSUES INVOLVED IN GROUND 14(D), W ERE NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AND, THEREF ORE, THEY ARE DISMISSED AS NOT PRESSED. ACCORDINGLY, GROUND NO. 14 IS PARTLY ALLOWED. 59. GROUND NO.15 READS AS UNDER : THE LEARNED CIT (APPEALS) ERRED IN HOLDING THAT TH E ISSUE OF LEVY OF INTEREST UNDER SECTION 234B WAS NOT APPEALABLE. THE LEARNED CIT (APPEALS) OUGHT TO HELD THAT THE ISSUE WAS VERY MUCH APPEALABLE AND TH AT, IF AT ALL, INTEREST UNDER SECTION 234B OUGHT TO BE HAVE BEEN LEVIED ONLY WITH REFERENCE TO INCOME SHOWN IN THE RETURN OF INCOME AND NOT ASSESSED INCOME 60. THE LEVY OF INTEREST IS CONSEQUENTIAL IN NATURE AND THEREFORE NEEDS NO ADJUDICATION. 61. IN THE RESULT, ASSESSEES APPEAL IN ITA NO 252 /PN/01 IS PARTLY ALLOWED. 62. WE SHALL NOW TAKE UP REVENUES APPEAL IN I TA NO 507/PN/01 FOR THE ASSESSMENT YEAR 1995-96. 63. GROUND NO.1 RAISED BY THE REVENUE IN ITS APPEA L READS AS FOLLOWS : ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(A) ERRED IN DIRECTING THE DELETION OF THE ADDITION OF MISCELLANEOUS PROFI T OF RS. 1,27,751 ON THE GROUND THAT SIMILAR RELIEF WAS ALLOWED BY HIM VIDE HIS ORD ER NO. PN/CIT(A)I/JT CIT SR- 3/ITA 98/99-2000 DATED 22/3/2000, IN THE ASSESSEES CASE FOR AY 1994-95 WHEN IN FACT THE CIT(A) HAD SPECIFICALLY UPHELD THE AOS ACTION IN BRINGING TO TAX THE AMOUNT RECEIVED ON ACCOUNT OF COURT SETTLEMENT OF L EASED PREMISES BY ONE OF THE EMPLOYEES OF THE COMPANY' 64. WE HAVE GONE THROUGH THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ASPECT. IT IS NOTICED THAT WHILE DECIDING ISSUE OF MESNE PROFITS THE COMMISSIONER OF INCOME-T AX (APPEALS) HAD INADVERTENTLY DIRECTED THAT THE GROUND IS ALLOWED, WHEN IN FACT HE HAD DECIDED THE ISSUE AGAINST THE ASSESSEE FOLLOWING TH E ORDER FOR EARLIER YEAR. IN VIEW OF THIS ADMITTED POSITION, WE ALLOW T HIS GROUND OF THE REVENUE. 65. GROUND NO. 2 RAISED BY THE REVENUE IS AS FOLLO WS: 29 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEA RNED CIT(A) ERRED IN HOLDING THAT THE EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH IN THE FORM OF CIVIL WORK IN PROGRESS WAS ELIGIBLE FOR DEDUCTION U/S 35 ALTHOUGH THE CONSTRUCTION WAS IN PROGRESS AND WAS YET TO PUT UP FOR RESEARCH AND DEVELOPMENT PURPOSES. 66 THE FACTS, IN BRIEF, RELATING TO THIS ISSUE ARE THAT ASSESSEE COMPANY WAS IN THE PROCESS OF SETTING UP OF A R & D CENTRE, CONSTRUCTION OF WHICH WAS IN PROGRESS DURING THE YE AR UNDER CONSIDERATION. THE ASSESSING OFFICER HAS DENIED ASS ESSEES CLAIM FOR DEDUCTION UNDER SECTION 35 OF THE ACT, SINCE IN HIS OPINION, THE BUILDING WAS NOT COMPLETE AND THEREFORE NOT PUT TO USE FOR T HE PURPOSES OF RESEARCH & DEVELOPMENT. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE EXPENDITURE INCURRED ON SCI ENTIFIC RESEARCH IN THE FORM OF CIVIL WORK IN PROGRESS WAS ELIGIBLE FOR DEDUCTION UNDER SECTION 35 IRRESPECTIVE OF THE FACT THAT THE CONSTR UCTION WAS IN PROGRESS, SINCE ACCORDING TO HIM, THE EXPENDITURE H AS BEEN ACTUALLY INCURRED TOWARDS THE PART COMPLETION OF THE PROJECT FOR RESEARCH AND DEVELOPMENT. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US ON THIS ASPECT. 67. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTA TIVE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER IN S UPPORT OF THE CASE OF THE REVENUE. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THAT SECTION SECTION 35(1)( IV) REFERS ONLY TO 'CAPITAL EXPENDITURE' AND DOES NOT FURTHER REQUIRE THAT THE ASSET BROUGHT INTO EXISTENCE BY INCURRING SUCH EXPENDITURE SHOULD HAVE BEEN COMPLETE IN ALL RESPECTS OR THAT THE ASSET SHOULD HAVE BEEN PUT TO USE DURING THE YEAR AND THAT IT IS NOT IN DISPUTE THAT THE BUILDIN G UNDER CONSTRUCTION WAS INDEED MEANT TO BE USED FOR R & D. IT WAS FURTHER S TATED THAT THE 30 ASSESSING OFFICER HAS HIMSELF ALLOWED DEDUCTION U/S 35 IN RESPECT OF THE COST OF THE R & D CENTRE IN ASSESSMENT YEAR 1996-97 . RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: (I) RANE BRAKE LININGS LTD 255 ITR 395 (MAD); (II) GUJARAT ALLUMINIUM EXTRUSIONS (P) LTD. 263 ITR 453 (GUJ.) (III) HMT LTD 199 ITR 235(KAR), AND (IV) CHEMOSYN P. LTD 42 ITD 1 (SB). 68. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY. IN THIS GROUND, THE ONLY ISSUE THAT ARISES FOR OUR CONSIDERATION IS AS TO WHETHER THE ASSESSEE IS ELIGIBLE FOR CLAIM OF DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT IN RELATION TO EXPENDITURE INCURRED ON RESEARCH & DEVELOPMENT WHICH IS STILL UNDER IMPLEMENTATION STAGE. SECTION 35(1)( IV) PROVIDES THAT IN RESPECT OF ANY EXPENDITURE OF CAPITAL NATURE ON SCI ENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE, THE DED UCTION IS ADMISSIBLE UNDER THE PROVISIONS OF SECTION 35(2) OF THE ACT. T HE OBJECTION RAISED BY THE REVENUE IS THAT THE IMPUGNED CAPITAL EXPENDITURE HA S NOT RESULTED IN BRINGING INTO EXISTENCE ANY ASSET, SINCE THE SAME W AS STILL UNDER WORK-IN- PROGRESS. ON THIS ASPECT, THE HONBLE MADRAS HIGH C OURT IN THE CASE OF RANE BRAKE LININGS LTD. (SUPRA) HAS HELD THAT SECTI ON 35(1)(IV) REFERS TO CAPITAL EXPENDITURE AND DOES NOT FURTHER REQUIRE THAT THE ASSET BROUGHT INTO EXISTENCE BY INCURRING SUCH EXPENDITURE SHOULD BE COMPLETE IN ALL RESPECTS. ACCORDING TO THE HONBLE HIGH COURT, EVEN AN EXPENDITURE INCURRED ON ON-GOING CONSTRUCTION OF A BUILDING DES IGNED FOR HOUSING RESEARCH WING WAS DEDUCTIBLE UNDER SECTION 35(1)(IV ) OF THE ACT. APPLYING THE AFORESAID REASONING TO THE FACTS OF THE PRESENT CASE, IT IS NOT DENIED THAT WORK-IN-PROGRESS IN QUESTION IS TOWARDS RESEARCH AN D DEVELOPMENT ACTIVITY 31 AND, THEREFORE, MERELY BECAUSE THE ASSET WAS NOT CO MPLETE IN ALL RESPECTS, THE IMPUGNED EXPENDITURE CANNOT BE DENIED DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT. THEREFORE, ON THE AFORESAID B ASIS, WE FIND NO ERROR IN THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) DELETING THE ADDITION. THUS, APPEAL OF THE REVENUE ON THIS ASPEC T IS DISMISSED, SUBJECT TO OUR OBSERVATIONS IN GROUND NO. 3 OF THE APPEAL O F THE REVENUE IN SUBSEQUENT PARAGRAPHS. 69. GROUND NO. 3 RAISED BY THE REVENUE IS AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LE ARNED CIT(A) WHILE ALLOWING FULL RELIEF U/S 35 FAILED TO APPRECIATE THAT THE AO HAS ALSO COME TO THE ALTERNATE CONCLUSION THAT 10% OF THE BUILDING, FURNITURE AND OFFICE EQUIPMENT WAS BEING USED FOR TRAINING AND NOT FOR RESEARCH AND DEVELOP MENT PURPOSE 70. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. WE FIN D THAT WHEN THE CLAIM FOR DEDUCTION UNDER SECTION 35 IN RESPECT OF THE RESEARCH & DEVELOPMENT CENTRE WAS ADJUDICATED BY THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 1996-97, WHEREIN HE HAD DISALLOWED 10% OF THE TOTAL EXPENDITURE ON THE GROUND THAT A PART OF THE RESEAR CH & DEVELOPMENT CENTER WAS USED FOR TRAINING OF EMPLOYEES WHICH HAS BEEN ACCEPTED BY THE ASSESSEE IN THAT YEAR. IN VIEW OF THIS ADMITTED POS ITION, THIS GROUND OF THE REVENUE IS ALLOWED AND WE HOLD THAT THE AMOUNT ALLO WABLE UNDER SECTION 35 PURSUANT TO GROUND NO. 2 ABOVE WOULD BE CONFINED TO 90% THEREOF. THIS GROUND OF APPEAL IS ALLOWED. 71. BEFORE PARTING, WE MAY REFER TO AN ADDITIONAL GROUND RAISED BY THE REVENUE VIDE APPLICATION DATED 25.4.2001, WHICH READS AS UNDER: WHETHER WHILE COMPUTING INDIRECT COSTS ATTRIBUTABL E TO EXPORT OF TRADING GOODS ALL INDIRECT COSTS THAT ARE NOT RELEVANT/ATT RIBUTABLE TO TRADING ACTIVITY SHOULD BE IGNORED. 32 72. AT THE TIME OF HEARING, THE LEARNED COUNSEL FO R THE RESPONDENT- ASSESSEE SUBMITTED THAT ASSESSEE HAS NO OBJECTION T O THE ADMISSION OF THE SAID ADDITIONAL GROUND. IN THIS VIEW OF THE MATTER AND, ALSO NOTICING THAT THE SAID GROUND RAISED BY THE REVENUE ARISES FROM THE O RDERS OF THE AUTHORITIES BELOW AND BEING A LEGAL ISSUE WITH ATTENDANT PRIMA RY FACTS AVAILABLE ON RECORD, THE SAID ADDITIONAL GROUND IS ADMITTED FOR ADJUDICATION. 73. IN THIS VIEW OF THE MATTER, RIVAL SUBMISSIONS W ERE HEARD. QUITE CLEARLY THE ISSUE RAISED IN THE ADDITIONAL GROUND RELATES T O THE MANNER OF COMPUTING INDIRECT COST OF TRADING GOODS FOR THE PU RPOSES OF DETERMINING QUANTUM OF DEDUCTION UNDER SECTION 80HHC OF THE ACT . 74. THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD, FOLLOWING HIS ORDER IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1994-95, THAT INDIRECT COSTS WHICH HAD NO NEXUS WITH THE EXPORT OF TRADING GOODS, WERE LIABLE TO BE EXCLUDED WHILE CALCULATING INDIRECT COST OF TRAD ING GOODS FOR THE PURPOSES OF SECTION 80HHC(3) OF THE ACT. THE SAID D IRECTION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS BEEN CHALL ENGED BY THE REVENUE BY WAY OF AFORESAID GROUND. 75. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTAT IVE HAS SUBMITTED THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS E RRED IN DIRECTING THE RE-COMPUTATION OF INDIRECT COST OF TRADING GOODS. O N THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT T HE ASSESSING OFFICER, WHILE GIVING EFFECT TO THE DIRECTION OF THE COMMISS IONER OF INCOME-TAX (APPEALS), HAS ACCEPTED THE COMPUTATION OF INDIRECT COST ATTRIBUTABLE TO TRADING EXPORTS EXCLUDING THE COSTS THAT HAD NO NEX US WITH SUCH TRADING EXPORTS. THE LEARNED COUNSEL FOR THE ASSESSEE POINT ED OUT THAT IN THE ASSESSMENT YEAR 1994-95, THE TRIBUNAL HAD ALSO SET ASIDE THE MATTER TO 33 THE ASSESSING OFFICER AND IN DOING SO, A REFERENCE WAS ALSO MADE TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F HERO EXPORTS V. CIT 295 ITR 454(SC). DWELLING FURTHER ON THIS ASPECT, I T WAS POINTED OUT THAT THE ISSUE BEFORE THE HONBLE SUPREME COURT WAS CONF INED TO COSTS WHICH WERE NOT TO BE ATTRIBUTED TO EXPORT TRADE, BECAUSE SUCH COSTS WERE CLAIMED TO BE ATTRIBUTABLE TO EXPORT INCENTIVES. WHILE IN T HE CASE OF THE ASSESSEE THE ISSUE EXTENDS TO COSTS THAT WERE ATTRIBUTABLE T O MANUFACTURING AND OTHER SIMILAR OPERATIONS OF THE ASSESSEE SO AS TO HAVE NO NEXUS WITH THE TRADING EXPORTS AND THUS THE SAME WERE EXCLUDIBLE FROM THE COSTS ATTRIBUTABLE TO TRADING EXPORTS. IT IS POINTED OUT THAT THE ASSESSE E IS A MULTI-DIVISIONAL COMPANY AND MAINTAINS INDEPENDENT BOOKS OF ACCOUNT FOR EACH DIVISION AND IN THIS REGARD, REFERRED TO THE FOLLOWING DECIS IONS IN SUPPORT OF THE PROPOSITION ADVANCED BY THE COMMISSIONER OF INCOME- TAX (APPEALS): (I) SNOWCEM INDIA LTD. 12 SOT 333 (MUM); (II) KHIMJI VISHRAM & SONS 1 SOT 618 (MUM); (III) MMTC LTD. 112 TTJ 15 (DEL); AND, (IV) GLAXO SMITHKLINE ASIA 6 SOT 113 (DEL). 76. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FI ND THAT IN PRINCIPLE THE DIRECTION OF THE COMMISSIONER OF INCOME-TAX (AP PEALS) DOES NOT REQUIRE ANY INTERFERENCE. WE ALSO HAVE TAKEN NOTE OF THE ST ATEMENT MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE AT BAR THAT WHILE GIVING EFFECT TO THE DIRECTION OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) FOR THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER HAD ACCEPTED T HE COMPUTATION OF INDIRECT COSTS ATTRIBUTABLE TO TRADING EXPORTS EXCL UDING COSTS THAT HAD NO NEXUS WITH SUCH TRADING EXPORTS. IN OUR VIEW, IT WO ULD BE IN THE FITNESS OF THINGS THAT THE ASSESSING OFFICER REVIEWS THE WORKI NG ALREADY ACCEPTED BY 34 HIM SO AS TO BE IN CONFORMITY WITH THE AFORESAID DE CISIONS AND ALSO DIRECTIONS OF THE TRIBUNAL CONTAINED IN ITS ORDER F OR THE ASSESSMENT YEAR 1994-95 (SUPRA). AS A RESULT THEREOF, ON THIS GROUN D, THE REVENUE SUCCEEDS FOR STATISTICAL PURPOSES ONLY. 77. WE SHALL NOW TAKE UP ASSESSEES APPEAL I N ITA NO.482/PN/2001 RELATING TO ASSESSMENT YEAR 1996-97. GROUND NO. 1 READS AS FOLLOWS: THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE CONTE NTION OF THE APPELLANT THAT INDIVIDUAL INSTANCES OF EXPENDITURE ON ENTERTAINMEN T IN EXCESS OF RS.10,000/- ALONE FELL WITHIN THE AMBIT OF SECTION 37 (2) OF THE I.T. ACT, 1961. THE LEARNED CIT(A) ACCORDINGLY OUGHT TO HAVE DIRECTED INCLUSION OF ONLY SUCH INDIVIDUAL INSTANCES OF EXPENSES ON ENTERTAINMENT, AS WERE IN EXCESS OF RS.10,000/- FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 37(2 ). 78. THE GROUND RAISED BY THE ASSESSEE HAS NOT BEEN PRESSED AND CONSEQUENTLY IT IS DISMISSED AS NOT PRESSED. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT ATLEAST 60% OF THE TOTAL EXPENDITURE ON ENTERTAINMENT RELATED TO EMPLOYEES PARTICIPATING IN THE EXTENSION OF HOSPITALITY AND INSTEAD CONFIRMING EXCLUSION OF ONL Y 15% THEREOF WHILE COMPUTING DISALLOWANCE U/S 37(2). 79. SIMILAR GROUND RAISED BY THE ASSESSEE IN THE A SSESSMENT YEAR 1995-96 HAS BEEN DISMISSED AND FOLLOWING THE R EASONING GIVEN THEREIN, WE DISMISS THIS GROUND OF APPEAL. 80. GROUND NO. 2 RAISED BY THE ASSESSEE R EADS AS FOLLOWS: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING REJ ECTION OF THE APPELLANT'S CLAIM FOR DEDUCTION OF PROPORTIONATE PREMIUM ON LEA SEHOLD LAND AMORTISED AND CHARGED TO THE PROFIT & LOSS ACCOUNT OF THE YEAR IN QUESTION. 81. SIMILAR GROUND RAISED BY THE ASSESSEE FOR THE A SSESSMENT YEAR 1995-96 HAS BEEN DECIDED BY US AGAINST THE ASSESSEE IN VIEW OF THE 35 DECISION OF THE SPECIAL BENCH IN THE CASE OF MUKUND LIMITED ( 106 ITD 231) (BOM) AND FOLLOWING THE SAME, WE DISMISS THIS GROUN D OF APPEAL RAISED BY THE ASSESSEE. 83. GROUND NO. 3 RAISED BY THE ASSESSEE I S AS FOLLOWS: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING REJE CTION OF THE APPELLANT'S CLAIM FOR DEDUCTION FOR THE F ULL AMOUNT OF RS.48,74,315/- CLAIMED BY THE APPELLA NT, BEING PROCESS KNOW-HOW FEES. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE AMOUNT IN QUESTION WAS NOT COVERED BY THE PROVISIONS OF SECTION 35AB OF THE INCOME-TAX ACT 1961 AND BEING OF REVENUE NATURE THE WHOLE OF I T WAS ALLOWABLE UNDER SEC.37. 84. SIMILAR GROUND WAS RAISED BY THE ASSESSEE FOR T HE ASSESSMENT YEAR 1995-96, WHEREIN WE HAVE HELD AS FOLLOWS: IN SO FAR AS PROCESS KNOW-HOW FEE PAID IN TERMS OF THE AGREEMENT ENTERED INTO EARLIER YEARS, THE DEDUCTION THEREON SHALL BE GOVERNED BY THE PROVISIONS OF SECTION 35AB, AS HELD BY THE TRIBUNAL IN ASSESSMENT YEARS 1993-94 AND 1994-95 (SUPRA). IN SO FAR AS THE FEES PAID UNDER THE PROCE SS KNOW-HOW AGREEMENTS ENTERED DURING THE YEAR UNDER CONSIDERATION IS CONC ERNED, IN ORDER TO TEST THE EFFICACY OF SECTION 35AB ON SUCH CLAIM, IT WOULD BE IMPERATIVE TO EXAMINE AS TO WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NA TURE AND DEPENDING ON THAT ANSWER, THE ASSESSING OFFICER SHALL DECIDE THE APPL ICABILITY OF SECTION 35AB OF THE ACT. ON THIS ASPECT, WE DEEM IT FIT AND PROPER TO R ESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICATED AFRESH, OF-COURSE AFTER ALLOWING ASSESSEE REASONABLE OPPORTUNITY OF BEING HEARD. IN THIS MANNER, ON THIS GROUND ASSESSEE PARTLY SUCCEEDS. ON SIMILAR PARITY OF REASONING, THE ISSUE IS DECIDE D ACCORDINGLY. ON THIS GROUND, ASSESSEE PARTLY SUCCEEDS. 85. GROUND NO. 4 READS AS FOLLOWS: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING DIS ALLOWANCE OF A SUM OF RS.1,52,909/- UNDER RULE 6B OF THE I.T. RULES, 1962 . THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE PROV ISIONS OF THE SAID RULE WERE NOT APPLICABLE TO THE EXPENDITURE IN QUESTION AND THAT THE APPELLANT HAD NOT FAILED TO DISCHARGE THE ONUS CAST UPON IT, TO P ROVE THAT THE EXPENDITURE IN QUESTION HAD NO ADVERTISEMENT VALUE AND THAT THE EX PENDITURE IN QUESTION WAS IN FACT INCURRED FOR NON-BUSINESS PURPOSES. 86. ON SIMILAR GROUND RAISED BY THE ASSESSEE IN ITS APPEAL FOR THE 36 ASSESSMENT YEAR 1995-96, WE HAVE AFFIRMED THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) SUSTAINING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. FOR THE DETAILED REA SONS GIVEN THEREIN, THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISM ISSED. 87. GROUND NO. 5 READS AS FOLLOWS: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING DIS ALLOWANCE PROVISION OF RS.1,53,06,754/- MADE BY THE APPELLANT IN RESPECT O F WARRANTY OBLIGATIONS. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN VIEW OF THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLAN T AND ACCEPTED BY THE DEPARTMENT IN THE PAST, THE LEARNED CIT(A) OUGHT NO T TO HAVE HELD THAT THE LIABILITY IN QUESTION WAS OF A CONTINGENT NATURE WH ICH DID NOT ACCRUE AT THE TIME WHEN THE APPELLANT MADE A PROVISION FOR IT. THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LIABILITY ON ACCOUNT OF WARRANTY OBLIGATION ACCRUED ONLY WHEN A CLAIM IS MADE BY THE CUSTOMER AND ACCEP TED BY THE APPELLANT. 88. SIMILAR GROUND WAS SUBJECT-MATTER OF CONSIDERA TION BEFORE US FOR THE ASSESSMENT YEAR 1995-96 WHEREIN BY FOLLO WING THE PRECEDENT IN THE ASSESSEES OWN CASE, THE ASSESSING OFFICER W AS DIRECTED TO GIVE EFFECT TO THE PRECEDENT. ON SIMILAR PARITY OF REASO NING, ASSESSEE SUCCEEDS ON THIS GROUND. 89. GROUND NO. 6 READS AS UNDER: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ASSESSING OFFICER'S ACTION OF BRINGING TO TAX A SUM OF RS.1,50,375/- TREATING THE SAME AS A CASUAL AND NON RECURRING RECEIPT. SIMILAR GROUND WAS SUBJECT-MATTER OF CONSIDERATION BEFORE US FOR THE ASSESSMENT YEAR 1995-96 WHEREIN FOLLOWING T HE PRECEDENT IN THE ASSESSEES OWN CASE, THIS GROUND HAS BEEN DECIDED A GAINST THE ASSESSEE. ON SIMILAR PARITY OF REASONING, THIS GROU ND IS DISMISSED. 90. GROUND NO. 7 RAISED BY THE ASSESS EE IS AS UNDER: THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANC E OF PROVISION FOR LEAVE ENCASHMENT OF RS.48,00,000/- REJECTING THE CONTENTI ON OF THE APPELLANT THAT SUCH ACTUARIALLY DETERMINED LIABILITY WAS A CRYSTALLIZED LIABILITY WHICH WAS ALLOWABLE IN THE YEAR UNDER APPEAL. 37 91. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LOWER AUTHORITIES HAVE ERRED IN NOT ALLOWING THE CLAIM OF THE ASSESSEE IN VIEW OF THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. 245 ITR 42 8 (SC). IN ANY CASE, IT IS POINTED OUT THAT THE LIABILITY FOR THE CURREN T YEAR BE ALLOWED. 92. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE, HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND HAS POINTED OUT THAT THE LOWER AUTHORITIES HAVE BRO UGHT OUT THAT FACTS OF THE PRESENT CASE ARE DIFFERENT FROM THAT OF BHARAT EARTH MOVERS LTD. (SUPRA) AND, THEREFORE, IT COULD NOT BE SAID THAT T HE LIABILITY TOWARDS LEAVE ENCASHMENT HAD ACCRUED IN THE HANDS OF THE AS SESSEE. 93. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN THIS CASE, THE ASSESSEE HAD ANNEXED A NOTE ALONGWIT H THE RETURN OF INCOME STATING THAT IT HAD MADE A PROVISION OF RS 4 8 LAKHS BEING ACTUARIALLY DETERMINED VALUE OF LIABILITY ON ACCOUN T OF LEAVE ENCASHMENT. THE ASSESSING OFFICER DID NOT CONSIDER IT AN ASCERT AINED AND ACCRUED LIABILITY AND, THEREFORE, HE DISALLOWED THE SAME. B EFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE RELIED UPON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F BHARAT EARTH MOVERS LTD. (SUPRA) AND POINTED OUT THAT SUCH LIABI LITY HAD ARISEN DURING THE YEAR UNDER CONSIDERATION, THOUGH IT MAY BE QUAN TIFIED AT A FUTURE DATE. THE COMMISSIONER OF INCOME-TAX (APPEALS) CONS IDERED THE PLEA OF THE ASSESSEE IN THE CONTEXT OF THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LT D. (SUPRA) AND FOUND FIVE DISTINGUISHING FEATURES WHICH HAVE BEEN ENUMERATED IN PARA 11.2 OF THE IMPUGNED ORDER. ON THE BASIS OF SUCH DI STINCTION, THE 38 COMMISSIONER OF INCOME-TAX (APPEALS) HAS HELD THAT THE IMPUGNED PROVISION DOES NOT REFLECT ANY ACCRUED LIABILITY AN D, THEREFORE, THE RATIO OF THE JUDGMENT OF THE HONBLE SUPREME COURT IS NOT ATTRACTED. FOLLOWING DISCUSSION BY THE COMMISSIONER OF INCOME- TAX (APPEALS) IS WORTHY OF NOTICE: (I) IN THAT CASE THAT COMPANY HAD ALLOWED E NCASHMENT OF LEAVE, ANYTIME, SUBJECT TO FULFILLMENT OF ELIGIBILITY CONDITION. IN THE INSTANT CASE, THE ENTITLEMENT OF LEAVE ENCASHMENT ARISES TO AN EMPLOY EE ONLY AT THE TIME OF TERMINATION OF HIS EMPLOYMENT EITHER ON HIS RETIREMENT OR OTHERWISE. (II) SECONDLY IN THAT CASE, THE AMOUNT OF L EAVE ENCASHMENT PROVIDED ON THE 31 ST MARCH OF THE RELEVANT ACCOUNTING YEAR IS ACTUALLY PAID TO THE CONCERNED EMPLOYEE(S) IN THE NEXT FOLLOWING YEAR EI THER AS LEAVE ENCASHMENT OR AS LEAVE SALARY OUT OF SEPARATE RESER VE FUND CREATED FOR THIS PURPOSE. IN THE APPELLANTS CASE ADMITTEDL Y NO SUCH SEPARATE RESERVE FUND IS ACTUALLY CREATED BY SETTING APART T HE AMOUNT TILL DATE. (III) THIRDLY IT IS NOT CONTESTED IN THAT C ASE AS TO WHAT WAS THE DATUM POINT AT WHICH THE LIABILITY BY WAY OF LEAVE ENCASH MENT AROSE IN THAT CASE, BECAUSE THE PAYMENT WAS MADE IN THE NEXT FOLL OWING YEAR. IN THE INSTANT CASE THERE IS NO SUCH ACTUAL PAYMENT IN THE NEXT FOLLOWING YEAR OR ANY TIME THEREAFTER. THE LIABILITY OF LEAVE ENCASHMENT IN THE HANDS OF THE APPELLANT IS AT ONCE, THE ENTITLEMENT AS A RIGHT IN THE HANDS OF EACH INDIVIDUAL EMPLOYEE - IN BOTH CASES AS REMUNERATION TO THE EMPLOYEES. THUS IF AT ALL THERE IS ANY EXPENDI TURE ACCRUED IN THE HANDS OF THE EMPLOYER, NECESSARILY AT THE SAME MOME NT INCOME BY WAY OF SALARY (IN THE FORM OF LEAVE ENCASHMENT ACCR UES TO EACH INDIVIDUAL EMPLOYEE. THE APPELLANT SHOULD HAVE THER EFORE CREDITED SUCH AMOUNT TO EACH INDIVIDUAL EMPLOYEES ACCOUNT A ND SHOULD HAVE DEDUCTED TAX THEREFROM. ADMITTEDLY, THE APPELLANT C OMPANY; HAS NOT DEDUCTED ANY TAX ON THIS ACCOUNT. THIS CLEARLY INDI CAGT3ES THAT EVEN THE APPELLANT COMPANY ITSELF DOES NOT CONSIDER THAT ANY SUCH LIABILITY HAD ACCRUED DURING THE RELEVANT ACCOUNTING YEAR ELS E IT SHOULD HAVE DEDUCTED TAX AT SOURCE. (IV) FOURTHLY THIS (THE ABOVE) OBSERVATIO N IS CONFIRMED BY FURTHER EVIDENCE THAT IN ITS BOOKS OF ACCOUNTS THE APPELLA NT COMPANY HAS NOT DEBITED THIS AMOUNT TO PROFIT AND LOSS ACCOUNT ALS O NOR HAS IT BEEN CREDITED THE SAME TO INDIVIDUAL EMPLOYEES ACCOUNT . THE DEDUCTION IS CLAIMED ONLY IN THE STATEMENT OF TOTAL INCOME FILE D ALONG WITH THE RETURN OF INCOME. AN OUTGOING OR EXPENDITURE M UST HAVE BEEN EITHER (INCURRED) EXPENDED OR LAID OUT IN ORDER THAT IT CAN BE ALLOWED AS A DEDUCTION. EXPENDED (INCURRED) MEANS DIRECTLY OR INDIRECTLY PAID/SETTLED AND LAID OUT MEANS ADJUSTED IN ACCOUNTS AND SHO WN AS OUTSTANDING IN THE BALANCE SHEET BY A DEBITING P&L ACCOUNT. IN THE CASE OF BHARAT EARTH MOVERS IT WAS STATED BEFORE THE COURT THAT S UCH AMOUNT WAS KEPT IN SEPARATE ACCOUNT AS RESERVE AND IN THE NEXT Y EAR THE AMOUNT OF LEAVE ENCASHMENT OF LEAVE SALARY (IF THE LEAVE WAS ACTUA LLY AVAILED BY EMPLOYEES WAS PAID ONLY OUT OF SUCH RESERVE ACCOUN T. THUS, THE EXPENDITURE WAS CLEARLY LAID OUT IN THAT CASE, W HEREAS THE FACTS ARE OPPOSITE IN THE APPELLANTS CASE. (V) FIFTHLY DEDUCTION OF AN EXPENDITURE CAN EITHER BE ALLOWED ON BEING ACTUALLY EXPENDED OR BEING LAID OUT OR OTHER WISE AS SPECIFICALLY PROVIDED IN THE ACT. IN THE APPELLAN TS CASE IT 39 IS NEITHER EXPENDED NOR LAID OUT NOR IS THERE ANY SPECIFIC PROVISION IN THE INCOME-TAX ACT TO ALLOW THE SAME. IN THE CASE OF BHARAT EARTH MOVERS, THE MONEY WAS SEPARAT ELY KEPT OUT OF THE BUSINESS OF THAT COMPANY, WHEREAS IN THE INSTANT CASE THE APPELLANT DOES NOT PROVE THAT SU CH AMOUNT CLAIMED AS DEDUCTION WAS KEPT OUT OF THE BU SINESS OF THE APPELLANT. ON THE CONTRARY AS OBSERVED EARL IER, IT SEEMS THAT THE APPELLANT COMPANY HAS UTILIZED THIS AMOUNT IN ITS BUSINESS. THUS THE APPELLANTS CASE IS DISTINGUISHABLE FOR AB OVE MENTIONED FIVE REASONS. 94. BEFORE US, THE ASSESSEE HAS NOT BROUGHT OUT ANY MAT ERIAL TO NEGATE THE REASONING MADE OUT BY THE COMMISSIONE R OF INCOME-TAX (APPEALS) AND, THEREFORE, WE ARE INCLINED TO AFFIRM THE CONCLUSION DRAWN BY THE COMMISSIONER OF INCOME-TAX (APPEALS). AS PER THE COMMISSIONER OF INCOME-TAX (APPEALS), HAVING REGARD TO THE FEATURES IN THE CASE OF THE ASSESSEE, THE IMPUGNED PROVISION IS NOT BACKED BY A DEBT EXISTING ON THE DATE OF FINALIZATION OF ACCOUN TS AND, THEREFORE, THE SAME WAS NOT ALLOWABLE AS AN ACCRUED LIABILITY. ACC ORDINGLY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER HAS BEEN AFFIRMED. IN THE ABSENCE OF ANY SPECIFIC REASONING ADVANCED TO NEGAT E THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), WE ARE UN ABLE TO ACCEPT THE AFORESAID GROUND OF THE ASSESSEE AND ACCORDINGLY, T HE SAME IS DISMISSED. 95. GROUND NO. 8 RAISED BY THE ASSESSEE R EADS AS FOLLOWS: IN THE MATTER OF APPELLANT'S CLAIM FOR DEDUCTION OF EXPENSES ON PUBLIC ISSUE OF EQUITY SHARE, THE LEARNED CIT(A) ERRED IN CONFRMING A) REJECTION OF THE CONTENTION OF THE APPELLANT THA T THE ENTIRE EXPENDITURE OF RS.60,88,700/- WAS ALLOWABLE AS A BUSINESS EXPENDIT URE UNDER SEC.37(1) OF THE ACT. B) REJECTION OF THE APPELLANT'S OTHER ALTERNATE CLA IM THAT THE AMOUNT SHOULD BE ALLOWED AS AN EXPENDITURE UNDER SEC.35 OF THE ACT. 96. BEFORE US, SUB-GROUND (A) WAS NOT PRESSED B Y THE LEARNED COUNSEL FOR THE ASSESSEE AND, THEREFORE, THE SAME STANDS DI SMISSED. 40 97. AS REGARDS SUB-GROUND (B), SIMILAR ISSUE WAS SUBJECT-MATTER OF CONSIDERATION BEFORE US FOR THE ASSESSMENT YEAR 199 5-96, WHEREIN THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE. ON SIM ILAR PARITY OF REASONING, THIS GROUND IS DISMISSED. 98. GROUND NO. 9 RAISED BY THE ASSESSEE IS AS FOLLOWS: IN THE MATTER OF APPELLANT'S CLAIM FOR DEDUCTION U NDER SEC.80-I, THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THAT THE FOLLOWI NG ITEMS OF INCOME WERE NOT IN THE NATURE OF INCOME DERIVED FROM CONCERNED INDUSTR IAL UNDERTAKINGS SO AS TO BE ELIGIBLE FOR DEDUCTION UNDER SEC.80-1. A) INTEREST UNDER IDBI SCHEME RS. 0.31 LACS B) COMMISSION FROM FRANCHISEES RS. 27.81 LACS C) PREMIUM ON FORWARD CONTRACTS RS. 17.83 SACS 99. AS REGARDS THE ISSUE INVOLVED IN SUB-GROUND (A ), SIMILAR ISSUE RAISED FOR ASSESSMENT YEAR 1995-96 HAS BEEN R ESTORED BACK TO THE FILE OF THE ASSESSING TO ADJUDICATE AFRESH IN T HE LIGHT OF PRECEDENT AND, ON THE SIMILAR PARITY OF REASONING, THIS ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO BE DECIDED AFRESH IN AC CORDANCE WITH LAW. AS REGARDS THE ISSUES INVOLVED IN SUB-GROUNDS (B) & (C), THE SAME WERE NOT PRESSED AND ARE, THEREFORE, DISMISSED. 100. GROUND NO. 10 IS AS FOLLOWS: THE LEARNED CIT(A) FURTHER ERRED IN NOT ACCEPTING THE APPELLANT'S CONTENTION THAT 'RETENTION MONEY' FORMING PART OF SALES, OUGHT TO BE EXCLUDED WHILE COMPUTING THE APPELLANT'S BUSINESS INCOME FOR THE Y EAR UNDER APPEAL INASMUCH AS, TO THAT EXTENT, INCOME HAD NOT ACCRUED TO THE A PPELLANT. THE APPELLANT'S BUSINESS INCOME BE, ACCORDINGLY REDUCED BY THE AMOU NT OF RETENTION MONEY INCLUDED IN SALES. AT THE TIME OF HEARING BEFORE, THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND AND, THEREFORE, THE SAME STAN DS DISMISSED. 101. GROUND NO. 11 READS AS FOLLOWS: 41 IN THE MATTER OF DEDUCTION UNDER SEC.80-HHC, THE C IT(A) ERRED IN CONFIRMING I. REDUCTION FROM PROFITS DERIVED FROM EXPORT OF MA NUFACTURED GOODS, THE LOSS SUFERED FROM EXPORT OF TRADING GOODS THE LEARNED CIT(A) OUGHT TO HAVE ACCEPTED THE CONTE NTION OF THE APPELLANT THAT SUCH LOSS FROM EXPORT OF TRADING GOO DS HAD TO BE IGNORED FOR THE PURPOSE OF SEC.80-HHC AND DEDUCTION THEREUNDER OUGHT TO HAVE BEEN ALLOWED ONLY WITH REFERENCE TO T HE PROFITS DERIVED FROM EXPORT OF MANUFACTURED GOODS. II. TREATMENT OF CERTAIN ITEMS OF INCOME AS FORMING PART OF TOTAL TURNOVER RS. A) EXCISE DUTY COLLECTED 26,98,08,773/- B) SALES-TAX COLLECTED 18,77,01,033/- C) INSURANCE CLAIM 1,65,615/- D) BAD DEBTS RECOVERED 2, 86, 297/- E) AMOUNT WRITTEN BACK 56,60,864/- F) CLAIM & REFUND - CUSTOM 2,44, 896/- 9) SALES TAX REFUND 21, 04, 597/- H) FLUCTUATION IN RATE OF EXCHANGE 1 5,25,779/- I) CREDIT BALANCE APP. 54,37,075/- J) SALE OF SCRAP 2,08,29,743/- THE LEARNED CIT(A) OUGHT TO HAVE ACCEPTED THE CONTE NTION OF THE APPELLANT THAT NONE OF THE AFORESAID ITEMS HAD THE CHARACTER OF TURNOVER IN THE CONTEXT OF SECTION 80-HHC. 102. SO FAR AS SUB-GROUND (A) IS CONCERNED, THE IS SUE IS DECIDED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. 266 ITR 521 (SC). 103. THE ISSUES RELATING TO EXCLUSION OF EXCISE DU TY AND SALES TAX COLLECTED FROM TOTAL TURNOVER CONTAINED IN SUB-GROU ND B(I) AND (II) RESPECTIVELY ARE CONCERNED, THEY ARE DECIDED IN FAV OUR OF THE ASSESSEE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS 290 ITR 667 (SC). 42 104. THE ISSUES RELATING TO INSURANCE CLAIM OF RS 1,65,615/- (SUB- GROUND (C); BAD DEBTS RECOVERED OF RS 2,86,297/- SU B-GROUND (D); AMOUNT WRITTEN BACK RS 56,60,864/- SUB-GROUND (E); CLAIM & REFUND FOR CUSTOM RS 2,44,896/- SUB-GROUND (F); SALES-TAX REFUND RS 21,04,597/- SUB- GROUND (G); CREDIT BALANCE APPROPRIATED RS 54,37,07 5/- (SUB-GROUND I); SALE OF SCRAP RS 2,08,29,743/- (SUB-GROUND J) ARE D ECIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE ORDER OF THE TRIBUNAL FOR T HE ASSESSMENT YEAR 1994- 95 AND 1995-96(SUPRA). 105. AS FOR THE ISSUE AT SUB-GROUND (H) OF FLUCTU ATION IN RATE OF EXCHANGE OF RS 8,41,888/-, IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT EXCHANGE FLUCTUATION IN SO FAR AS EXP ORTS ARE CONCERNED IS ALREADY INCLUDED IN VALUE OF EXPORT TURNOVER SINCE IN TERMS OF SECTION 80HHC THE SAME IS TO BE TAKEN AT FOB VALUE OF EXPO RTS. SIMILAR ISSUE HAS BEEN ADJUDICATED BY US IN THE ASSESSMENT YEAR 1995- 96 AND FOLLOWING THE SAME, THE SAID GROUND IS ACCORDINGLY DISPOSED OFF. III. EXCLUSION OF 90% OF THE FOLLOWING ITEMS FOR TH E PURPOSES OF COMPUTING 'PROFITS OF THE BUSINESS' IN TERMS OF SECTION 80-HH C. DISCOUNT RECEIVED RS. 6,35,377 MISCELLANEOUS RECEIPTS RS. 15,26,608 MISCELLANEOUS INCOME RS. 77,47,017 MESNE PROFIT RS. 1,50, 375 FRANCHISEE FEES RS. 40,580 TOTAL RS. 1,00,99,957 106. THE VARIOUS ISSUES INVOLVED IN SUB-GROUND (II I), HAVE BEEN CONSIDERED IN THE APPEAL FOR THE ASSESSMENT YEAR 19 95-96 AND FOLLOWING THE SAME, THE SAID GROUND IS ACCORDINGLY DISPOSED O FF. IV) IN ANY EVENT THE LEARNED CIT(A) OUGHT TO HAVE DIRECTED THAT 43 THE 'PROFITS OF THE BUSINESS' SHOULD BE INCREASED B Y 10% OF ALL INCOME ASSESSED UNDER THE HEAD 'OTHER SOURCES' INAS MUCH AS TO THAT EXTENT, EXPENDITURE MUST BE DEEMED TO HAVE BEEN INCURRED FOR EARNING SUCH INCOME, RESULTING IN A PR O TANTO REDUCTION IN EXPENDITURE ATTRIBUTABLE TO 'PROFITS & GAINS OF BUSINESS'. V THAT RS.1,82,39,000/- AND RS.6,49,851/- WERE NOT ELIGIBLE FOR INCLUSION IN PROFITS OF BUSINESS' FOR THE PURPOSES OF SECTION 80- HHC 107. BOTH THE SUB-GROUNDS (IV) AND (V) WERE NOT PRESSED AND, THEREFORE, THEY STAND DISMISSED. 108. IN THE RESULT, ASSESSEES APPE AL IN ITA NO 482/PN/01 IS PARTLY ALLOWED. 109. WE SHALL NOW TAKE UP REVENUES APPEAL IN ITA NO 508/PN/01 FOR THE ASSESSMENT YEAR 1996-97. 110. GROUND NO. 1 RAISED BY THE REVENUE IS AS FOLL OWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A) ERRED IN HOLDING THAT THE EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH IN THE FORM OF CIVIL WORK IN PROGRESS WAS ELIGIBLE FOR DEDUCTION U/S 35 ALTHOUGH THE CONS TRUCTION WAS IN PROGRESS AND WAS YET TO BE PUT UP FOR RESEARCH AND DEVELOPME NT PURPOSES. 111. SIMILAR GROUND HAS BEEN RAISED BY THE REVEN UE IN ITS APPEAL FOR THE ASSESSMENT YEAR 1995-96, WHEREIN WE HAVE DE CIDED THIS ISSUE AGAINST THE REVENUE, SUBJECT TO CERTAIN OBSERVATION S. ON THE SIMILAR PARITY OF REASONING, THE APPEAL OF THE REVENUE ON T HIS ASPECT IS DISMISSED. 112. GROUND NO. 2 READS AS FOLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A)-I, PUNE ERRED IN HOLDING THAT FOR THE PURPOSES OF DEDUCTION U/S 80HHC WHILE COMPUTING INDIRECT COST ATTRIBUTABLE TO EXPORT OF TRADING GOODS ALL INDIREC T COST WHICH ARE NOT RELEVANT / ATTRIBUTABLE TO TRADING ACTIVITIES HOULD BE IGNOR ED. 113. SIMILAR GROUND HAS BEEN RAISED BY THE REVE NUE IN ITS APPEAL FOR THE ASSESSMENT YEAR 1995-96 BY WAY OF AN ADDITI ONAL GROUND, 44 WHEREIN IN PRINCIPLE THE ISSUE HAS BEEN DECIDED AGA INST THE REVENUE, SUBJECT TO CERTAIN OBSERVATIONS. ON SIMILAR PARITY OF REASONING, THE SAID GROUND OF APPEAL OF THE REVENUE IS DISPOSED OFF. 114. IN THE RESULT, REVENUES APPEAL VI DE ITA NO 508/PN/2001 IS PARTLY ALLOWED. 115. AS A RESULT, ALL THE CAPTIONED AP PEALS OF THE ASSESSEE VIDE ITA NOS 252/PN/01 & 482/PN/01 AND REVENUES CROSS APPE ALS VIDE ITA NOS 157/PN/01 & 508/PN/01 ARE PARTLY ALLOWED. DECISION WAS PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF JUNE, 2011. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE: DATED: 30 TH JUNE, 2011 B COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-I, PUNE 4. THE CIT-I,PUNE 4. THE D.R, A BENCH, PUNE 5. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, PUNE
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