Kirloskar Oil Engines Ltd., Pune V. DCIT Cir.-8, Pune

ITA 257/PUN/2003

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56438 (ITAT-PUNE)
• Duration Of Justice: 8 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 1998-1999
• Appeal Filed On: 26-02-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARESHWAR SHARMA
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Cost of acquisition; Fair market value; Onus to prove
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO 257/PN/03 (ASSTT. YEAR: 1998-99) KIRLOSKAR OIL ENGINES LTD. .. APPELLANT LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE VS. DY. COMMISSIONER OF INCOME-TAX, .. RE SPONDENT CIR.8, PUNE AND ITA NO 342/PN/03 (ASSTT. YEAR: 1998-99) DY. COMMISSIONER OF INCOME-TAX, .. AP PELLANT CIR.8, PUNE VS. KIRLOSKAR OIL ENGINES LTD. .. RESPONDENT LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE ASSESSEE BY : SHRI C.H. NANIWADEKAR DEPARTMENT BY : SHRI HARESHWAR SHARMA ORDER PER G.S.PANNU, A.M: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE D IRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (AP PEALS)-III, PUNE DATED 13.12.2002 WHICH, IN TURN, HAS ARISEN FROM THE ORDER D ATED 23.3.2001 PASSED BY THE ASSESSING OFFICER PASSED UNDER SECTION 143(3) OF THE I NCOME-TAX ACT, 1961 (IN SHORT THE ACT) FOR THE ASSESSMENT YEAR 1998-99. 2 2. WE SHALL FIRST DEAL WITH ASSESSEES APPEAL VIDE ITA NO 257/PN/03. GROUND NO. 1 OF APPEAL RELATES TO DISALLOWANCE OUT O F INTEREST CLAIMED OF RS 68,58,000/-. THE ASSESSING OFFICER DISALLOWED INTEREST OF RS 7,89,06,865/- UNDER SECTION 36(1)(III) OF THE ACT ON THE GROUND THAT THE A SSESSEE HAD NOT DISCHARGED THE BURDEN TO PROVE THAT THE BORROWED FUNDS HAD NOT BEEN UTILISED FOR NON- BUSINESS PURPOSES. IN APPEAL, THE COMMISSIONER OF INCOME- TAX (APPEALS) RESTRICTED THE DISALLOWANCE TO RS 68.58 LAKHS AS AGAINST T HE ADDITION OF RS 7,89,06,865/- MADE BY THE ASSESSING OFFICER. THE RELEVAN T FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AS CONTAINED IN PARA 4.3 OF HIS ORDER ARE WORTHY OF NOTICE, WHICH READ AS FOLLOWS: 4.3 THE SUBMISSIONS OF BOTH SIDES HAVE BEEN CONSID ERED. THIS ISSUE HAS ALREADY BEEN CONSIDERED BY MY PREDECESSOR IN APPELLANTS CA SE IN APPEAL FOR A.Y 1997-98. IN THE APPELLATE ORDER FOR A.Y. 1997-98, MY PREDECESSOR HA D HELD THAT THE SUM OF RS 51 CRORES GIVEN BY THE APPELLANT TO M/S SHIVAJI WORKS LTD (SW L) WAS FOR BUSINESS PURPOSE. THIS YEAR, THE ADVANCE TO SWL IS RS 75.35 CRORES AND THE RE IS AN INCREASE IN THIS ADVANCE OF RS 24 CRORES. IN THE AY 1997-97 THE AO HAD HELD THA T ADVANCE OF RS 3.81 CRORES WAS GIVEN OUT OF BORROWED FUNDS AND APPLYING BANK INTER EST @ 18% ON THIS FUND, THE AO HAD DISALLOWED INTEREST OF RS 68.58 LAKHS WHICH WAS CON FIRMED BY THE CIT(A). IN THIS YEAR, AS EVIDENT FROM THE ASSESSMENT ORDER, THE OPENING BALA NCE OF THE BORROWED FUNDS WAS RS 3,147,311(000) WHEREAS THE CLOSING BALANCE WAS R S 3,082,651(000) WHEREAS THE ADVANCE HAD INCREASED FROM RS 976,927(000) TO RS 1, 280,388(000). THIS CLEARLY SHOWS THAT THERE IS DECLINE IN THE BORROWING OF FUNDS WHE REAS THERE IS INCREASE IN THE ADVANCES. THE OPENING BALANCE OF OWN FUNDS WAS RS 2,000,628(0 00). OUT OF TOTAL AVERAGE ADVANVCE OFRS 1,128,658(000), THE AO HAS AFRRI VED AT RS 67,978,902(000) AS ADVANCES FOR BUSINESS PURPOSE WHEREAS EXCEPT ADVANCES TO SWL AND MYSORE KIRLOSKAR LTD., THE AO HAD NOT DISCUSSED HOW OTHER ADVANCES WERE NOT FO R THE PURPOSE OF BUSINESS. IN THE CASE OF SWL IT HAS ALREADY BEEN HELD BY MY PREDECES SOR THAT THE AMOUNT OF ADVANCE TO SWL WAS TO BE CONSIDERED FOR BUSINESS PURPOSE. IN T HE AY 1997-98, ONLY SUM OF RS 3.81 CRORES WERE HELD AS GIVEN OUT OF BORROWED FUNDS. IN THIS YEAR, THERE IS DECREASE IN THE QUANTUM OF BORROWED FUNDS. THEREFORE, WHATEVER HAS BEEN GIVEN AS ADVANCES FOR NON- BUSINESS PURPOSES, OUT OF BORROWED FUNDS, WOULD BE THE AMOUNT GIVEN IN THE EARLIER YEARS AND NO NEW SUCH ADVANCES OUT OF THE BORROWED FUNDS OF THIS YEAR. THEREFORE, THE AO SHOULD HAVE LIMITED THE DISALLOWANCE ONLY IN RESPEC T OF ADVANCES OF RS 3.81 CRORES GIVEN NOT FOR BUSINESS PURPOSES OUT OF BORROWED FUNDS AS HELD IN THE AY 1997-98. THEREFORE, APPLYING THE RATE OF INTEREST @ 18% ON RS 3.81 CROR ES, THE DISALLOWANCE SHOULD BE LIMITED TO RS 68.58 LAKHS. THEREFORE, THE ADDITION TO THE E XTENT OF RS 68.58 LAKHS IS CONFIRMED AS AGAINST ADDITION OF RS 7,89,06,865/- MADE BY THE AO . THE APPELLANT SHALL GET PART RELIEF. STILL AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFO RE US. 3. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMIT TED THAT IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE PUNE BENCH OF THE TRIBUN AL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1995-96 AND 1996-97 VIDE ITA NOS 1039/PN/00 & 1040/PN/00 AND FURTHER FOR ASSESSMENT YE AR 1997-98 VIDE ITA NO 45, 82/PN/01 AND FOR ALL THESE YEARS, THE ISSUE HAS BEEN RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AND TO A SCERTAIN AS TO WHETHER THE 3 AMOUNT ADVANCED TO THE VARIOUS COMPANIES CLOSED CONNECTED TO THE ASSESSEE WERE MADE OUT OF THE BORROWED FUNDS OR OTHERWISE AND THEN TO DECIDE THE ISSUE AS PER PROVISIONS OF LAW. THE LEARNED COUNSEL FURTHER SU BMITTED THAT THE ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISI ON OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTIL ITIES & POWER LTD. 313 ITR 340 (BOM). ON THE OTHER HAND, THE LEARNED DEPARTMEN TAL REPRESENTATIVE, APPEARING FOR THE REVENUE, HAS RELIED UPON THE ORDE R OF THE ASSESSING OFFICER. 4. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT IDENTICAL ISSUE HAS BEEN RESTORED BACK TO THE FILE OF THE ASSESSING OFF ICER IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS AS STATED A BOVE. FOLLOWING THE PRECEDENT, WE RESTORE BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AND TO ASCERTAIN AS TO WHETHER THE AMOUNT ADVANCED TO THE VARIOUS COMPANIES CLOSELY CONNECTED TO THE ASSESSEE WERE MADE OUT OF THE BORROWED FUNDS OR OTHERWISE AND THEN TO DECIDE THE ISSU E AS PER PROVISIONS OF LAW AFTER PROVIDING ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. THIS GROUND IS DECIDED AS ABOVE. 5. THE NEXT GROUND RELATES TO DISALLOWANCE OUT OF COMMI SSION EXPENSES AMOUNTING TO RS 6,38,067/-. THE ASSESSEE COMPANY HAD CLAI MED INLAND SALES COMMISSION TO THE TUNE OF RS 63,89,670/-. ON PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE, THE ASSESSING OFFICER HELD THAT THE ASSESSEE WA S NOT ABLE TO ESTABLISH AS TO WHETHER THE SERVICES HAVE ACTUALLY BEEN RE NDERED OR NOT AND THUS THE ASSESSEE FAILED TO JUSTIFY THE COMMISSION HE ACCORDINGL Y DISALLOWED UNDER SECTION 37(1) OF THE ACT 10% OF THE TOTAL COMMISSION PAY MENT OF RS 63,89,670/- ON THE GROUND THAT SUCH EXPENDITURE WAS INCURRED FOR N ON-BUSINESS PURPOSES. SUCH DISALLOWANCE CAME TO RS 6,38,067/-. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) CONCURRED WITH THE VIEW OF THE ASSESSI NG OFFICER BY HOLDING AS UNDER: 5.3 THE SUBMISSIONS HAVE BEEN CONSIDERED. IT IS NO TICED THAT THE SAME ISSUE ON SIMILAR GROUND WAS ALSO BEFORE MY PREDECESSOR IN AP PEAL FOR AY 1997-98 AND VIDE 4 APPEAL NO. PN/11/SR-1/250/99-2000 DT. 6.10.2000, TH E MATTER WAS DECIDED AGAINST THE APPELLANT. THE SAME POSITION EXISTS EVEN IN THIS YE AR. THE APPELLANT HAS NOT FURNISHED ANY DETAILS SUBMITTED BY THESE PARTIES, NOR ANY COP IES/CORRESPONDENCE OR AGREEMENTS HAVE BEEN FURNISHED. COMMISSION CANNOT BE ALLOWED M ERELY BECAUSE THE PAYMENT HAS BEEN MADE SINCE THE APPELLANT HAS NOT BEEN ABLE TO PROVE THAT THE SAME COMMISSION WAS NOT FOR THE BUSINESS PURPOSE. FOLLOWING THE ORD ER OF MY PREDECESSOR TO WHICH I AGREE FOR THE AY 1997-98 AND EARLIER YEAR, THE DISALLOWAN CE OF COMMISSION IS CONFIRMED. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 6. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMIT TED THAT IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE PUNE BENCH OF THE TRIBUN AL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96 VIDE ITA NO 103 9/PN/00 WHEREIN SUCH DISALLOWANCE HAS BEEN DELETED BY THE TRIBUNAL. 7. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE FIND THAT THIS ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF OUR CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96. FOLLOWING THE PRECEDENT, THEREF ORE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ASPECT AND DIRE CT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE ON ACCOUNT OF COMMISSION. TH IS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 8. THE NEXT GROUND RELATES TO DISALLOWANCE OUT OF VEH ICLE MAINTENANCE EXPENSES OF RS 1,67,987/-. THE ASSESSEE COMPANY CLAIMED TOT AL VEHICLE EXPENSES AMOUNTING TO RS 60,87,850/-. AS PER THE ASSESSING OFFICER, THE ASSESSEE COULD NOT PRODUCE THE CONCERNED LOG BOOK FOR VERI FICATION OF THE VEHICLE EXPENSES AND IN ABSENCE THEREOF, THE ASSESSING OFFI CER DISALLOWED 2% OF THE VEHICLE EXPENSES, WHICH CAME TO RS 1,21,757/-. C ORRESPONDINGLY, 2% OF THE DEPRECIATION ON VEHICLES AT RS 46,230/-. THUS THE TO TAL DISALLOWANCE AMOUNTED TO RS 1,67,987/-. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS), FOLLOWING THE ORDERS OF HIS PREDECESSOR IN ASSE SSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS 1995-96 TO 1997-98, UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 5 9. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMIT TED THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE PUN E BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1 995-96 VIDE ITA NO 1039/PN/00 AND FOR ASSESSMENT YEAR 1997-98 VIDE ITA NO 45, 82/PN/01. 10 AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE FIND THAT THIS ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF OUR CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96 AND 1997-98. WE FURTHER FIND TH AT THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. KIRLOSKAR FERROUS INDU STRIES LTD., PUNE IN INCOME-TAX APPEAL NO. 622 OF 2010 DATED 04.07.2011 H AS MADE A REFERENCE TO THE ABOVE DECISION OF THE TRIBUNAL IN THE ASSESSEES CASE FOR ASSESSMENT YEARS 1995-96 AND 1996-97 (SUPRA) UPHOLDING THE VIEW THAT IN A CASE OF A LIMITED COMPANY EXPENDITURE INCURRED ON TELEPHONE, VEHICLE ETC. , WHICH ARE CERTIFIED BY THE AUDITORS OF THE COMPANY AS ALSO THE AUDITORS UNDER THE INCOME-TAX ACT CANNOT BE DISALLOWED. FOLLOWING THE PRECEDENT, THEREFO RE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ASPECT AND DIRECT THE A SSESSING OFFICER TO DELETE THE DISALLOWANCE MADE OUT OF VEHICLE MAINTENANCE EXPENS ES. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 11. THE NEXT GROUND RELATES TO DISALLOWANCE OUT OF TEL EPHONE EXPENSES OF RS 50,568/-. FOLLOWING THE REASONING GIVEN IN PARA 10 A BOVE, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) ON THIS ASPECT AND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE OUT OF T ELEPHONE EXPENSES OF RS 50,568/-. 12. THE NEXT GROUND RELATES TO DISALLOWANCE OUT OF FOR EIGN TRAVEL EXPENSES OF RS 68,410/-. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE FIND THAT THIS ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAI NST THE REVENUE BY THE DECISION OF OUR CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1993-94 AND 1994-95, VIDE ITA NO 429/PN /97 & ITA NO 6 606/PN/99 RESPECTIVELY. FOLLOWING THE PRECEDENT, THER EFORE, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ASPECT AND DIRE CT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE ON ACCOUNT OF FOREIGN TRAV EL EXPENSES. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 13. THE NEXT GROUND RELATING TO LEASEHOLD LAND WRITT EN OFF OF RS 44,416/- WAS NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US AND, THUS, STANDS DISMISSED AS SUCH. 14. THE NEXT GROUND RELATES TO DISALLOWANCE OUT OF MISCE LLANEOUS EXPENSES OF RS 2,00,000/-. THE ASSESSEE COMPANY CLAIMED MISCELLANEOUS EX PENSES WHICH INCLUDED RS 64,91,756/- AS GENERAL EXPENSES AND RS 5,25 ,175/- AS GENERAL PHOTOGRAPH EXPENSES. THE ASSESSING OFFICER MADE AN AD HOC DISALLOWANCE OF RS 2,00,000/- FOR WANT OF FURTHER DETAILS HOLDING IT TO BE FOR NON BUSINESS PURPOSES. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (AP PEALS) UPHELD SUCH DISALLOWANCE. 15. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE CO NSIDERED OPINION THAT NO SUCH AD HOC DISALLOWANCE IS CALLED IN THE ASSESSEES CASE, WHICH I S A LIMITED COMPANY AND THE EXPENDITURE INCURRED ARE CERTIFIED BY THE AUDITORS OF THE COMPANY AS ALSO THE AUDITORS UNDER THE INCOME-TAX ACT, FOLLOWING THE PARITY OF REASONING LAID DOWN BY THE HONBLE HIGH COURT IN THE CASE OF KIRLOSKAR FERROUS INDUSTRIES LTD. (SUPRA). IN THIS VIEW OF THE MATTER, W E SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ASPECT AND THE ASSESSING OFFICE R IS DIRECTED TO DELETE THE AD HOC DISALLOWANCE OF RS 2,00,000/- MADE ON THIS COU NT. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 16. THE LAST GROUND PERTAINS TO THE DISALLOWANCE OUT OF AIRCRAFT EXPENSES OF RS 4,65,367/-. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE STANDS DECIDED AGAINST THE ASSESSEE BY THE D ECISION OF PUNE BENCH IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1039/ PN/00 FOR THE ASSESSMENT YEAR 1995-96 AND FURTHER THE SAME ISSUE WAS NOT PRESSED BY THE 7 ASSESSEE IN ITA NO 45, 892/PN/01 FOR THE ASSESSMENT YEAR 19 97-98. IN VIEW OF THIS ADMITTED POSITION, BY FOLLOWING THE PRECEDENT, WE DECIDE THE ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. THIS GROUND O F APPEAL IS THUS DISMISSED. 17. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 18. WE SHALL NOW TAKE UP REVENUES CROSS APPEAL VIDE ITA NO 342/PN/03. GROUND NO. 1 OF THE APPEAL RELATES TO THE ASSESSEES CLAI M FOR EXEMPTIONS UNDER SECTION 54EA AND 54EB OF THE ACT. THE CONTROVERSY IN THIS GROUND RELATES TO REJECTION OF ASSESSEES CLAIM UNDER SECTION 54EA AND 54EB OF A SUM OF RS 48,50,00,000/-. THE ASSESSEE HAD EARNED CAPITAL GAINS ON SALE OF SHARES OF M/S KIRLOSKAR CUMMINS LTD., DURING THE YEAR. IT CLAIMED EXE MPTION FROM CAPITAL GAINS TAX ON THE GROUND THAT IT HAD INVESTED RS 8.50 CRORES A ND RS 40 CRORES IN TERMS OF SECTION 54EA AND 54EB OF THE ACT. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAD INVESTED RS 40 CRORES IN HDFC BONDS AND RS 8.50 CRORES IN ICICI BONDS ON 12/14 TH MARCH, 1998. THE EXEMPTIONS CLAIMED WERE DENIED BY T HE ASSESSING OFFICER FOR THE FOLLOWING REASON. AS PER THE ASSE SSING OFFICER, THE AMOUNT OF RS 40 CRORES AND RS 8.50 CRORES INVESTED IN TH E SPECIFIED BONDS FOR CLAIMING EXEMPTION UNDER SECTION 54EA AND 54EB OF THE ACT WERE INVESTED OUT OF THE BORROWED FUNDS RAISED FROM ICICI BANK AND BANK OF M AHARASHTRA, WHICH WAS CLEAR FROM THE MATERIAL ON RECORD. ACCORDINGLY, IT WAS I NFERRED BY THE ASSESSING OFFICER THAT THE NET CONSIDERATION RECEIVED FROM THE TRANSFER OF CAPITAL ASSET, NAMELY, THE SHARES OF KIRLOSKAR CUMMINS LTD., WAS NOT INV ESTED IN NOTIFIED BONDS AND, THEREFORE, THE ASSESSEE HAD NOT MET WITH THE REQU IREMENTS OF SECTIONS 54EA AND 54EB OF THE ACT. THE ASSESSING OFFICER DISALLOWED THE ASSESSEES CLAIM FOR EXEMPTION UNDER SECTIONS 54EA AND 54EB OF THE ACT AND ADDED THE AMOUNT OF RS 48.50 CRORES AS LONG-TERM CAPITAL GAINS. IN APPEAL, TH E COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTIONS UNDER 8 SECTION 54EA AND 54EB OF THE ACT. AGAINST THIS DECISION, R EVENUE IS IN APPEAL BEFORE US. 19. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIV E DEFENDED THE ORDER OF THE ASSESSING OFFICER IN SUPPORT OF THE CASE OF THE REVENU E. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE JUSTIFIED THE ORDE R OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND SUBMITTED THAT THE ISSUE INVOLV ED IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT V DR P. S. PASRICHA VIDE INCOME TAX APPEAL NO 1 825 OF 2009 DATED 7.10.2009 AND ALSO BY THE MUMBAI BENCH OF THE TRIBUNA L IN THE CASE OF BOMBAY HOUSING CORPORATION V. ACIT 81 ITD 545 (MUM). 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS A ND HAVE ALSO PERUSED THE CASE LAW CITED BY THE ASSESSEE IN SUPPORT OF I TS CASE. THE ONLY CONTROVERSY IN THIS GROUND IS AS TO WHETHER THE ASSESSEE CAN BE SAID TO HAVE COMPLIED WITH THE REQUIREMENTS OF SECTIONS 54EA AND 54 EB OF THE ACT, WHICH PROVIDE EXEMPTION FROM CAPITAL GAIN IF THE NET CONSIDE RATION OR THE AMOUNT OF CAPITAL GAIN RESPECTIVELY HAS BEEN INVESTED IN THE SPECIF IED BONDS AS MANDATED IN SECTIONS 54EA AND 54EB OF THE ACT. THE CASE MADE OUT BY THE REVENUE IS THAT SUCH REQUIREMENTS HAVE NOT BEEN COMPLIED WITH BECAUSE I NVESTMENT IN SPECIFIED ASSETS HAVE BEEN MADE OUT OF BORROWINGS FROM THE BANKS AN D THE SALE PROCEEDS OF THE SHARES GIVING RISE TO CAPITAL GAINS HAS NOT BE EN UTILISED FOR SUCH PURPOSES. THE COMMISSIONER OF INCOME-TAX (APPEALS) OBSERVED, BY R ELYING UPON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT, SR-1, PANAJI V. SHRI V.S. DEMPO & OTHERS IN ITA NOS 1895 TO 1898/PN/ 90 DATED 4.11.1996 THAT EVEN WHERE THE INVESTMENT IN SPECIFIED ASSETS WAS OUT OF L OAN FUNDS, THE EXEMPTION IS AVAILABLE TO THE ASSESSEE. ACCORDING TO THE COMMISSIONER OF INCOME-TAX (APPEALS), SOURCE OF INVESTMENT IN THE SPECIFIE D ASSETS NEED NOT BE THE SAME MONEY WHICH THE ASSESSEE HAS RECEIVED ON SALE OF LONG TERM CAPITAL ASSET. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE HAS RE FERRED TO A DECISION 9 OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT 26(1), MUMBAI V. DR P. S. PASRICHA, MUMBAI, ITA NO 6808/MUM/2003 DATED 11.01 .2008, WHICH HAS UPHELD A SIMILAR PROPOSITION WITH REGARD TO AN INVESTM ENT MADE OUT OF BORROWED FUND FOR THE PURPOSES OF CLAIMING EXEMPTION UNDER SECT ION 54(1) OF THE ACT. ACCORDING TO THE TRIBUNAL, IT IS NOT NECESSARY TO CLAIM EX EMPTION UNDER SECTION 54(1) OF THE ACT THAT ACTUAL SALE PROCEEDS OF THE LONG TERM CAPITAL ASSET BE UTILISED IN PURCHASE OF ANOTHER RESIDENTIAL HOUSE. THE TRIBUNAL OBSERVED THAT THERE WAS NO REQUIREMENT IN LAW THAT THE SAME FUNDS MU ST BE UTILISED FOR THE PURPOSES OF PURCHASE OF ANOTHER RESIDENTIAL HOUSE SO AS T O BE ENTITLED FOR EXEMPTION UNDER SECTION 54(1) OF THE ACT. THIS ORDER O F THE TRIBUNAL HAS ALSO BEEN AFFIRMED BY THE HONBLE BOMBAY HIGH COURT VIDE ITS ORDER DATED 7.10.2009 (SUPRA). 21. IN THE INSTANT CASE, IT IS UNDISPUTABLE THAT THE ASSE SSEE HAS EARNED LONG- TERM CAPITAL GAIN ON SALE OF SHARES OF KIRLOSKAR CUMMIN S LTD., AND IT CLAIMED EXEMPTION UNDER SECTION 54EA AND 54EB OF THE ACT BY M AKING INVESTMENTS IN SPECIFIED ASSETS AS STIPULATED. MERELY BECAUSE SUCH INVESTMEN TS WERE NOT MADE OUT OF THE ACTUAL SALE PROCEEDS OF THE SHARES SOLD, BUT WE RE MADE OUT OF CASH CREDIT ACCOUNTS WITH THE BANKS, THE SAME WOULD NOT DIS-ENT ITLE THE ASSESSEE FROM THE EXEMPTIONS UNDER SECTION 54EA AND 54EB OF THE ACT. SECTIONS 54EA AND 54EB DO NOT CONTAIN ANY SPECIFIC REQUIREMENT THAT THE I NVESTMENTS IN THE SPECIFIED ASSETS HAVE TO BE MADE OUT OF THE ACTUAL SALE PR OCEEDS OF THE LONG TERM CAPITAL ASSET SO S TO AVAIL OF SUCH EXEMPTIONS. IN THE ABSE NCE OF SUCH A SPECIFIC REQUIREMENT, WE FIND THAT THE INSTANT CASE IS ON ALL FO URS WITH THE FACTS IN THE CASE OF DR P.S PASRICHA (SUPRA), WHICH HAS SINCE BEEN AFFIRME D BY THE HONBLE HIGH COURT. AS A RESULT THEREOF, WE FIND NO INFIRMITY IN THE STAND OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THUS ON THIS ASPECT, REVENUE FAILS. 22. GROUND NO. 2 RELATES TO THE COMPUTATION OF CAPIT AL GAINS ON SALE OF 130000 BONUS SHARES OF KIRLOSKAR CUMMINS LTD. THE ASSESSEE WORKED OUT SUCH CAPITAL 10 GAINS AT RS 1,07,69,27,796/-. HOWEVER, THE ASSESSING OFF ICER COMPUTED SUCH GAINS AT RS 1,09,39,24,646/-. IN APPEAL, THE COMMISSION ER OF INCOME-TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO RECOMPUTE THE CAPITAL GAIN ON SALE OF 130000 BONUS SHARES OF KIRLOSKAR CUMMINS LTD. AT RS 1,07,6 9,27,796/- AS AGAINST RS 1,09,39,24,640/-. AGAINST THIS DECISION, REV ENUE IS IN APPEAL BEFORE US. 23. ON THIS POINT, THE RELEVANT FACTS ARE THAT IN THE RETURN OF INCOME, ASSESSEE HAD SHOWN THAT IT HAD SOLD 3576000 EQUITY SHARES OF KIR LOSKAR CUMMINS LTD., AND WHILE WORKING OUT THE CAPITAL GAINS, IT WAS CLAIMED THAT ALL SUCH BONUS SHARES WERE ACQUIRED AFTER 1.4.1981 AND THUS THE COST OF ACQU ISITION WAS TAKEN AT NIL. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE EXPLAINED THAT 130000 SHARES WERE INDEED RECEIVED PRIOR TO 1.4. 1981 AND, THEREFORE, IT SOUGHT TO EXERCISE THE OPTION UNDER SECTION 55(2)(AA) OF THE ACT AND CLAIMED THE FAIR MARKET VALUE AS ON 1.4.1981 AT RS 39.50 PER SHARE AS ITS COST OF ACQUISITION TO COMPUTE THE CAPITAL GAINS. IN THIS MANNER, THE COST OF ACQUISITION OF 130000 SHARES WAS TAKEN AS RS 51,35,000/- AND AFTER INDEXATION, THE INDEXED COST OF ACQUISITION WAS CLAIMED AT RS 1,69,96,850/-. THE SAID AMO UNT WAS CLAIMED AS DEDUCTIBLE IN TERMS OF SECTION 48 OF THE ACT FOR THE PUR POSES OF COMPUTING CAPITAL GAINS. THE ASSESSING OFFICER DID NOT ACCEPT THE AFORESAID CL AIM OF THE ASSESSEE, AS ACCORDING TO HIM, FIRSTLY THERE WAS NO EVIDENCE THAT SU CH SHARES WERE ACQUIRED PRIOR TO 1.4.1981. SECONDLY, EVEN IF IT WAS CONSIDERED THAT SUCH SHARES WERE ACQUIRED PRIOR TO 1.4.1981, THE ASSESSEE WAS NOT EL IGIBLE TO TREAT THE COST OF ACQUISITION OF SUCH SHARES AT RS 39.50 PER SHARE FOR THE DETAILED REASONING GIVEN IN THE ASSESSMENT ORDER FOR THE PRECEDING ASSESSMENT YEAR 1997-98. THE ASSESSING OFFICER ALSO NOTICED THAT IN THE ASSESSMENT YEAR 1 997-98, THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ALSO SUSTAINED T HE STAND OF THE ASSESSING OFFICER. 11 24. IN APPEAL, BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), ASSESSEE CHALLENGED THE DISALLOWANCE ON FACTS AND IN LAW. AFTER C ONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE COMMISSIONER OF INCOME-TAX ( APPEALS) FOUND THAT THE ASSESSEE WAS CORRECT IN ASSERTING THAT 130000 SHARES OF KIRLOSKAR CUMMINS LTD. WERE BONUS SHARES ACQUIRED BY THE ASSESSEE PR IOR TO 1.4.1981 AND, THEREFORE, THE ASSESSEE WAS ENTITLED TO SUBSTITUTE T HE FAIR MARKET VALUE OF SUCH BONUS SHARES AS ON 1.4.1981 TO BE ITS COST OF ACQUISITIO N IN VIEW OF THE PROVISIONS OF SECTION 55(2)(AA) READ WITH SECTION 55(2)( B) OF THE ACT. ACCORDINGLY, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE FAIR MARKET VALUE OF SUCH BONUS SHARES AS ON 1.4.1981 WAS ELIGIBLE TO BE CONSIDERED FOR ARRIVING AT INDEXED COST OF ACQUISITION FOR THE PURPOSES OF COMPUTING CAPITAL GAINS. THE COMMISSIONER OF INCOME-TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO RE- COMPUTE THE CAPITAL GAINS ACCORDINGLY. AGAINST THE AFORE SAID, REVENUE IS IN APPEAL BEFORE US. 25. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE ASSESSEES OWN CASE BY PUNE BENCH OF THE TRIBUNAL IN ITA NOS 45/82 /PN/01 FOR THE ASSESSMENT YEAR 1997-98. IT WAS ALSO SUBMITTED THAT THE MU MBAI BENCHES OF THE TRIBUNAL IN THE CASE OF HEINRICH DE FRIES GMBH V JCIT 9 6 TTJ 864 (MUM) AND ALCAN INC. V.,DCIT 110 ITD 15 (MUM) HAVE DECIDED IDENT ICAL ISSUES IN FAVOUR OF THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, SUPPORTED THE ORDER OF THE ASSESSING OFFICER BY PLACING RELIANCE ON THE SAME. 26. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THIS ISSUE STANDS CONCLUDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENU E BY THE DECISION OF OUR CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE A SSESSMENT YEAR 1997-98 (SUPRA) AS WELL AS BY THE AFORESAID DECISIONS OF T HE MUMBAI BENCHES (SUPRA). THE TRIBUNAL IN ITS ORDER FOR THE ASSESSMENT YE AR 1997-98 (SUPRA) FOLLOWED THE EARLIER DECISION OF ITS CO-ORDINATE BENCH IN THE CASE OF HEINRICH DE 12 FRIES GMBH (SUPRA) IN AFFIRMING THE STAND OF THE ASSESSEE .. FOLLOWING THE PRECEDENT, WE HEREBY AFFIRM THE DIRECTIONS OF THE COMM ISSIONER OF INCOME-TAX (APPEALS) TO RECOMPUTE THE CAPITAL GAINS AND THE REVENU E FAILS ON THIS GROUND. 27. THE NEXT GROUND RELATES TO THE DELETION OF DISALL OWANCE OF RS 7,20,48,865/- MADE BY THE COMMISSIONER OF INCOME-TAX ( APPEALS) OUT OF TOTAL DISALLOWANCE OF RS 7,89,06,865/- MADE BY THE ASSESSING OFF ICER UNDER SECTION 36(1)(III) OF THE ACT. 28. WE FIND THAT AGAINST THE SUSTENANCE OF ADDITION OF RS 68,58,000/- BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS COUNT, THE A SSESSEE HAS COME UP IN APPEAL BEFORE US VIDE ITA NO. 257/PN/03 AND FOR THE REASONS STATED ELSEWHERE IN THIS ORDER, WE HAVE RESTORED THIS ISSUE TO T HE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AND TO ASCERTAIN AS T O WHETHER THE AMOUNT ADVANCED TO THE VARIOUS COMPANIES CLOSED CONNECTED TO THE ASSESSEE WERE MADE OUT OF THE BORROWED FUNDS OR OTHERWISE AND THEN TO DECIDE THE ISSUE AS PER PROVISIONS OF LAW AFTER PROVIDING ASSESSEE A REASONABLE O PPORTUNITY OF BEING HEARD. IN LINE WITH THE SAID DIRECTIONS, WE RESTORE THI S GROUND TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION AS DIR3ECTED ABOVE. THIS GROUND IS ALLOWED, AS ABOVE. 29. THE LAST GROUND RELATES TO THE DELETION OF THE DI SALLOWANCE OF RS 10,36,184/- MADE ON ACCOUNT OF LEGAL AND PROFESSIONAL E XPENSES. THE ASSESSEE CLAIMED EXPENSES OF RS 2,07,23,680/- UNDER THE HEAD L EGAL AND PROFESSIONAL EXPENSES. ON PERUSAL OF DETAILS OF SUCH EXPENSES, THE ASSESSI NG OFFICER NOTICED THAT AGAINST SOME OF THE EXPENSES FULL DESCRIPTION, PURP OSE, ETC., WERE NOT GIVEN AND AS SUCH, IT WAS NOT POSSIBLE TO VERIFY THE NATURE OF EXACT SERVICES RENDERED BY THE RECIPIENTS. THE ASSESSING OFFICER, THEREFORE, DISAL LOWED 5% OF THE TOTAL EXPENSES INCURRED ON SUCH LEGAL AND PROFESSION EXPENSES HOL DING THE SAME AS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF B USINESS. SUCH DISALLOWANCE CAME TO RS 10,36,184/-. IN APPEAL, THE COM MISSIONER OF INCOME- 13 TAX (APPEALS) DELETED THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER AS IN HIS OPINION THE DISALLOWANCE AT 5% OF THE TOTAL EXPENSES AS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS WAS ON AD HOC BASIS A ND WITHOUT IDENTIFYING ANY EXPENSES AS NOT RELATING TO THE BUSINE SS OF THE ASSESSEE. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 30. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. I N OUR CONSIDERED OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER O F THE COMMISSIONER OF INCOME- TAX (APPEALS). AS STATED ABOVE, THE HONBLE BOMBAY HIG H COURT IN THE CASE OF KIRLOSKAR FERROS INDUSTRIES LTD. (SUPRA) HAS APPROVED THE VIEW OF THE PUNE BENCH OF THE TRIBUNAL TAKEN IN THE CASE OF KIRLOSKAR ENGINES L TD. IN ITA NO 1039 & 1040/PN/2000 FOR THE ASSESSMENT YEARS 1995-96 AND 1996-9 7 THAT IN CASE OF A LIMITED COMPANY AD HOC DISALLOWANCE OUT OF EXPENDITURE INCURRED ON TELEPHONE, VEHICLE ETC., WHICH ARE CERTIFIED BY THE AUDITOR OF THE COMPANY AS ALSO THE AUDITORS UNDER THE INCOME TAX ACT CANNOT BE MADE. ON T HE PARITY OF REASONING, WE FIND NO JUSTIFICATION FOR THE AD HOC DISALLOWANCE MA DE LBY THE ASSESSING OFFICER OUT OF LEGAL AND PROFESSIONAL EXPENSE. IN THIS VIEW OF THE MATTER, WE AFFIRM THE DECISION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ASPECT. REVENUE FAILS ON THIS GROUND. 31. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF AUGUST, 2011. SD/- SD/- (I.C. SUDHIR) JUDICIAL MEMBER (G.S. PANNU) ACCOUNTANT MEMBER PUNE: DATED: 30 TH AUGUST, 2011 B COPY OF THE ORDER IS FORWARDED TO : 1. KIRLOSKAR OIL ENGINES LTD., PUNE 2. THE DCIT, CIR. 8 PUNE 3. THE CIT(A)-III, PUNE 4. THE CIT-III,PUNE 5. THE D.R, A BENCH, PUNE 6. GUARD F ILE TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, PUNE BENCHES, PUNE 14