M/s. RELIANCE INDUSTRIES LTD., MUMBAI V. ADDL. CIT Rg. - 3(3), MUMBAI

ITA 3082/MUM/2006

• Counselvise Citation: 308219914 RSA 2006
• Duration Of Justice: 6 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 30-04-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 17-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: ARVIND SONDE
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Source of fund; Proportionate interest; Retrospective amendment; Bad and doubtful debts; Corroborative evidences; Capital receipt; Revised return; Revenue expenditure; Capital expenditure
• Section: 92C; 43B; 143(3); 80HHC; 14A; 115JB; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI B.R.MITTAL (J.M) AND SHRI J.SUDHAKA R REDDY (A.M) ITA NO.3082/MUM/06(A.Y.2002-03) RELIANCE INDUSTRIES LTD., MAKER CHAMBER IV, 3 RD FLOOR, 222, NARIMAN POINT, MUMBAI - 400 021. PAN: AAACR 5055K (APPELLANT) VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 3(3), AAYKAR BHAVAN, ROOM NO.617, M.K. ROAD, MUMBAI - 400 020. (RESPONDENT) ITA NO.3420/MUM/06(A.Y.2002-03) DY. COMMISSIONER OF INCOME TAX, RANGE 3(3), AAYKAR BHAVAN, ROOM NO.605, M.K. ROAD, MUMBAI - 400 020. (APPELLANT) VS. RELIANCE INDUSTRIES LTD., MAKER CHAMBER IV, 3 RD FLOOR, 222, NARIMAN POINT, MUMBAI - 400 021. PAN: AAACR 5055K (RESPONDENT) ASSESSEE BY : SHRI ARVIND SONDE DEPARTMENT BY : SHRI AJEET KUMAR JAIN DATE OF HEARING : 11/05/2012 DATE OF PRONOUNCEMENT : 28 /05/2012 ORDER PER BENCH, THESE CROSS APPEALS ARE FILED BY THE ASSESSEE AND DEPARTMENT FOR ASSESSMENT YEAR 2002-03 AGAINST ORDER OF LD. CIT(A) DATED 24/3/2006 DISPUTING THE CONFIRMATION OF ADDITIONS AND / OR DELETION OF ADDITIONS MADE BY THE AO. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 2 2. THE RELEVANT FACTS GIVING RISE TO THESE APPEALS ARE THAT THE ASSESSEE IS A PUBLIC LIMITED COMPANY. DURING THE RELEVANT ASS ESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN THE BUSI NESS OF OIL EXPLORATION AND REFINING CRUDE OIL, MANUFACTURE AND TRADING OF PETROCHEMICALS AND FIBRES, TEXTILES ETC. THE ASSESSEE FILED THE RET URN OF INCOME ON 31/10/2002 DECLARING TOTAL INCOME OF RS. NIL UNDER NORMAL PROV ISIONS OF THE INCOME TAX ACT, 1961(THE ACT) AND INCOME OF RS.2429,04,33,473/ - UNDER SECTION 115JB OF THE ACT. SUBSEQUENTLY THE ASSESSEE REVISED THE RETURN ON 8/3/2004 DECLARING LOSS OF RS. 117.03 CRORES UNDER THE NORMA L PROVISIONS AND OF RS.2429,04,33,473/- UNDER SECTION 115JB OF THE ACT . THE AO COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT ON 2 8/3/2005 DETERMINING TAXABLE INCOME AT RS. 475,83,23,696/- AFTER DEDUCTI ON UNDER CHAPTER VIA AND SET OFF OF BROUGHT FORWARD LOSSES AND INCOME UN DER SECTION 115JB OF THE ACT WAS COMPUTED AT RS. 3670,41,60,500/-. BEING AG GRIEVED THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A) DISPUTING THE VARIOUS ADDITIONS/ DISALLOWANCES MADE BY THE AO WHILE COMPUTING THE IN COME. THE LD. CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE IN PART. HENCE, THE ASSESSEE AS WELL AS THE DEPARTMENT ARE IN APPEAL BEFORE THE TRIBUNAL. 3. FIRST WE SHALL TAKE UP THE APPEAL FILED BY THE ASSESSEE BEING ITA NO.3082/MUM/06 FOR OUR CONSIDERATION. SINCE THERE ARE CERTAIN GROUNDS IN THE APPEAL OF THE DEPARTMENT CONNECTED WITH GROUNDS OF APPEAL OF THE ASSESSEE, WE SHALL ALSO DISPOSE OFF THOSE GROUNDS A S WELL WITH THE APPEAL OF THE ASSESSEE. 4. GROUND NO.1 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S-III) (HEREINAFTER REFERRED TO AS CIT(A)) ERRED IN NOT ADJUDICATING O N THE APPELLANTS ALTERNATIVE PLEA THAT THERE IS A DEEMED PAYMENT OF SALES TAX AND THEREFORE, THE AMOUNT OF RS. 1024,34,61,999/- IS AL LOWABLE AS PER THE PROVISIONS OF SECTION 43B OF THE INCOME TAX ACT, 19 61. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 3 THE APPELLANT SUBMITS THAT THERE IS A DEEMED PAYMEN T OF SALES TAX WHICH IS ALLOWABLE U/S. 43B OF THE ACT AND THE CIT( A) OUGHT TO HAVE GIVEN A DECISION ON THIS ISSUE IN FAVOUR OF THE APP ELLANT. 4.1 THIS GROUND OF APPEAL OF THE ASSESSEE IS CONNEC TED WITH GROUND NO.1 OF THE APPEAL OF THE DEPARTMENT, WHICH READS AS UND ER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION ON THE NOTION AL SALES TAX OF RS.10,24,34,61,999/- WHICH HAS BEEN TREATED AS REVE NUE RECEIPT BY THE ASSESSING OFFICER. 4.2 THE ASSESSEE CLAIMED DEDUCTION OF NOTIONAL SALE S TAX OF RS. 1024,34,61,999/- AS CAPITAL RECEIPT WHICH WAS RECEI VED UNDER VARIOUS SCHEMES OF GOVERNMENT OF MAHARASHTRA AND GOVERNMENT OF GUJARAT IN RESPECT OF ASSESSEES PROJECT AT PATALGANGA, JAMNAG AR AND HAZIRA. THE SAID NOTIONAL SALES TAX SO RECEIVED BY THE ASSESSEE WAS TREATED AS CAPITAL RECEIPT NOT LIABLE TO TAX. THE AO RELYING UPON THE DECISI ON OF ITAT, MUMBAI BENCH IN THE CASE OF BAJAJ AUTO LTD., IN ITA NO.49 & 1101 /BOM/91 FOR ASSESSMENT YEAR 1987-88 TREATED THE SAID NOTIONAL SALES TAX AS REVENUE RECEIPT LIABLE TO TAX ON THE GROUND THAT SUCH SALES TAX SUBSIDY IS A N OPERATIONAL SUBSIDY. THE AO ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SAHANI STEEL AND PRESS WORKS LTD. 228 ITR 2 53. BEING AGGRIEVED THE ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 4.3 ON BEHALF OF THE ASSESSEE IT WAS CONTENDED THAT THE SALES TAX EXEMPTION GIVEN UNDER THE SCHEMES BY THE GOVERNMENT OF MAHARASHTRA AND GOVERNMENT OF GUJARAT ARE TOWARDS THE OBJECTIVE OF DISPERSAL OF INDUSTRY, DEVELOPMENT OF BACKWARD AREA AND GENERATING EMPLOYM ENT OPPORTUNITIES, HENCE, THE SAME IS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. IT WAS CONTENDED THAT THE SUBSIDY IS NOT IN THE NATURE OF OPERATIONAL SUBSIDY INTENDED AND SUPPLEMENTING PROFIT OF THE ASSESSEE NOR IT IS IN THE NATURE OF GRANT FOR MEETING THE COST OF PLANT AND MACHINERY. SUCH SUBSIDY IS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. IT WA S CONTENDED THAT THE SAID ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 4 ISSUE WAS CONSIDERED BY SPECIAL BENCH OF ITAT, MUMB AI IN ASSESSEES OWN CASE FOR A.Y 1986-87 REPORTED AT 88 ITD 273(SB) AND THE TRIBUNAL CONFIRMED ITS EARLIER DECISION IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1984-85 AND 85-86 THAT THE SALES TAX SUBSIDY GRANTED TO THE ASSESSEE IS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. IT WAS CONTE NDED THAT THE TRIBUNAL ALSO CONSIDERED THE DECISION OF THE HONBLE APEX COURT I N THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD.(SUPRA). HE SUBMITTED TH AT THE SPECIAL BENCH WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE ALSO CONSIDERED THE DECISION OF ANOTHER BENCH OF ITAT MUMBAI IN THE CAS E OF BAJAJ AUTO LIMITED (SUPRA) WHICH HAD TAKEN A CONTRARY VIEW THAT THE SU BSIDY IS REVENUE RECEIPT. IT WAS CONTENDED THAT IN SUBSEQUENT ASSESSMENT YEAR S ITAT HAS ALLOWED SIMILAR CLAIM OF THE ASSESSEE AND EVEN IN THE JUST PRECEDING ASSESSMENT YEAR 2001-02 THE CLAIM FOR DEDUCTION OF NOTIONAL SALES T AX WAS HELD IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. THE LD. CI T(A) ACCEPTED THE ABOVE CONTENTION OF THE ASSESSEE AND HELD THAT THE CLAIM FOR DEDUCTION OF NOTIONAL SALES TAX OF RS. 1024,34,61,999/- SHOULD BE ALLOWED AS DEDUCTION AS IT IS IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. 4.4 THE ASSESSEE HAS ALSO TAKEN AN ALTERNATIVE SUBM ISSION BEFORE THE LD. CIT(A) THAT IF THE AMOUNT OF SUBSIDY IS REGARDED A S REVENUE RECEIPT THEN SUCH SALES TAX INCENTIVES RECEIVED SHOULD BE ALLOWE D AS A DEDUCTION UNDER SECTION 43B OF THE ACT WHILE COMPUTING THE TOTAL IN COME OF THE ASSESSEE. IT IS RELEVANT TO STATE THAT THE LD. CIT(A) HAS STATED TH AT THE MAIN CONTENTION OF THE ASSESSEE REGARDING NOTIONAL SALES TAX BEING CA PITAL RECEIPT NOT LIABLE TO TAX HAS BEEN ALLOWED, IT IS NOT CONSIDERED NECESSAR Y TO GO INTO THE ALTERNATIVE PLEA OF THE ASSESSEE CLAIMING NOTIONAL SALES TAX AS DEDUCTIBLE UNDER SECTION 43B OF THE ACT. HE HAS ALSO STATED THAT A SIMILAR ALTERNATIVE PLEA TAKEN BY THE ASSESSEE IN A.Y 2001-02 HAD BEEN REJECTED BY HI S PREDECESSOR FOR THE REASON THAT CBDT CIRCULAR NO.496 DATED 25/9/1987 CL ARIFIED THE POSITION REGARDING APPLICABILITY OF THE PROVISIONS OF SECTIO N 43B ONLY TO SALES TAX ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 5 DEFERRAL SCHEME. THIS CIRCULAR DID NOT APPLY TO TH E SALES TAX EXEMPTION SCHEME AVAILED BY THE ASSESSEE. 4.5 HENCE, THE ASSESSEE AS WELL AS DEPARTMENT ARE IN APPEAL BEFORE THE TRIBUNAL. 4.6 AT THE TIME OF HEARING OF THE APPEAL, THE LD. R EPRESENTATIVES OF BOTH THE PARTIES CONCEDED THAT DELETION OF ADDITION ON ACCO UNT OF SALES TAX INCENTIVES HOLDING THE SAME TO BE A CAPITAL RECEIPT IS COVERED IN FAVOUR OF THE ASSESSEE BY THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN AS SESSEES OWN CASE REPORTED IN 88 ITD 273. IN THE LIGHT OF THE SAID D ECISION OF THE SPECIAL BENCH IN ASSESSEES OWN CASE, THE ORDER OF LD. CIT(A) TO HOLD THAT THE CLAIM OF DEDUCTION OF THE ASSESSEE OF NOTIONAL SALES TAX OF RS. 1024,34,61,999/- IS TO BE HELD AS CAPITAL RECEIPT NOT LIABLE TO TAX. 4.7 RESPECTFULLY FOLLOWING THE ABOVE DECISION OF T HE SPECIAL BENCH OF ITAT IN ASSESSEES OWN CASE WE UPHOLD THE ORDER OF LD. CIT(A) THAT THE CLAIM FOR TREATMENT OF NOTIONAL SALES TAX OF RS. 1024,34,61,9 99/- IS CAPITAL RECEIPT. HENCE, WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS I SSUE AND GROUND NO.1 OF THE APPEAL TAKEN BY THE DEPARTMENT IS REJECTED. SI NCE GROUND NO.1 IN ASSESSEES APPEAL IS AN ALTERNATIVE GROUND, WE HO LD THAT LD. CIT(A) HAS RIGHTLY HELD THAT IT IS NOT NECESSARY TO GO INTO T HE ALTERNATIVE PLEA OF THE ASSESSEE AS CLAIMING THE NOTIONAL SALES TAX AS DEDU CTIBLE UNDER SECTION 43B OF THE ACT. THEREFORE, GROUND NO.1 OF THE APPEAL T AKEN BY THE ASSESSEE IS REJECTED. 5. IN GROUND NO.2 OF THE APPEAL OF THE ASSESSEE, TH E ASSESSEE HAS DISPUTED THE ORDER OF LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS.11,19,382/- BEING INTEREST REFERABLE TO INTEREST FREE LOANS AND ADVANCES GIVEN TO SUBSIDIARY COMPANIES. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 6 5.1 THE AO HAS STATED THAT ASSESSEE HAS ADVANCED IN TEREST FREE LOANS TO ITS SUBSIDIARY COMPANIES. THE AO HAS STATED THAT ASSES SEE WAS ASKED TO PROVE THE NEXUS BETWEEN SOURCE OF FUNDS OUT OF WHICH ADVA NCES WERE GIVEN TO ITS SUBSIDIARY COMPANIES AND INTEREST FREE OR OWN FUNDS AVAILABLE WITH THE ASSESSE. THE ASSESSEE FILED DETAILS AND STATED THA T THE ASSESSEE HAD GIVEN LOANS AND ADVANCES OF RS.2988.98 CRORES TO ITS SUBS IDIARIES AS ON 31/3/2002, OUT ITS OWN FUNDS AND INTERNAL ACCRUALS EXCEPT TO HE EXTENT OF RS.9,89,04,473/-. THE AMOUNT OF INTEREST ON THE AD VANCES OF RS. 9.89 CRORES GIVEN OUT OF OTHER THAN OWN FUNDS WORKED OUT TO RS. 11,19,382/-. THE AO RELYING UPON THE DECISION OF HONBLE KERALA HIGH CO URT IN THE CASE OF V.I. BABY & COMPANY, 254 ITR 248 AND DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF PHALTON SUGAR WORKS LTD., 208 ITR 989 DISALLOWED THE SAID INTEREST OF RS. 11,19,382/-. BEING AGGRIEVED THE ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 5.2 IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT ASSESSEES OWN FUNDS WERE FAR IN EXCESS OF THE INTEREST FREE LOANS GIVEN TO ITS SUBSIDIARIES. IT WAS CONTENDED THAT AS PER AUDITED ACCOUNTS, ASSESSEES OWN FUNDS AS ON 31/3/2002 STOOD AT RS.25,136.76 CRORES AND, THEREFO RE, INTEREST FREE LOANS GIVEN TO ITS SUBSIDIARIES SHOULD BE CONSIDERED AS H AVING BEEN GIVEN OUT OF ITS OWN FUNDS. IT WAS CONTENDED THAT ASSESSEE HAD NOT TAKEN ANY SPECIFIC INTEREST BEARING LOANS FOR ADVANCING INTEREST FREE LOANS TO ITS SUBSIDIARIES. IT WAS SUBMITTED THAT IN VIEW OF THE FUNGIBILITY OF T HE FUNDS AVAILABLE, IT CAN BE LEGITIMATELY PRESUMED THAT THE INTEREST FREE LO ANS GIVEN TO THE SUBSIDIARIES HAD BEEN GIVEN OUT OF OWN FUNDS OF THE ASSESSEE COMPANY DEPLOYED IN THE BUSINESS. IT WAS ALSO CONTENDED TH AT THE NET PROFIT AFTER TAX AND BEFORE DEPRECIATION DURING THE YEAR STOOD AT RS .7054.84 CRORES. THUS, THE NET PROFIT FOR THE YEAR UNDER CONSIDERATION EXC EEDED NOT ONLY THE INCREMENTAL LOANS GIVEN TO THE SUBSIDIARIES DURING THE YEAR BUT EVEN ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 7 EXCEEDED THE TOTAL INTEREST FREE LOANS OF RS.2988 .98 CRORES GIVEN TO THE SUBSIDIARIES AS ON 31/3/2002. IT WAS ALSO CONTENDE D THAT IN THE ABSENCE OF ANY NEXUS BETWEEN THE INTEREST BEARING BORROWED FU NDS AND THE INTEREST FREE LOANS GIVEN TO SUBSIDIARIES AND CONSIDERING TH E FUNGIBILITY OF FUNDS AND THE FACT THAT OWN FUNDS FAR EXCEEDED SUCH LOANS, IT HAS TO BE PRESUMED THAT SUCH INTEREST FREE LOANS HAD BEEN GIVEN OUT OF OWN FUNDS. 5.3 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE AND CASES RELIED UPON ON BEHALF OF THE ASSESSEE, DETA ILS GIVEN AT PAGE 18 OF THE IMPUGNED ORDER , HELD THAT BORROWED FUNDS TO THE EXTENT OF RS. 9.8 9 CRORES WAS ACTUALLY UTILIZED FOR ADVANCING INTEREST FREE A DVANCES TO SUBSIDIARIES. THEREFORE, LD. CIT(A) CONFIRMED THE ACTION OF THE A O IN DISALLOWING INTEREST ON ACCOUNT OF DIVERSION OF FUNDS FOR NON-BUSINESS PURP OSES, WHICH COMES TO RS. 11,19,382/-. HENCE, THE ASSESSEE IS IN APPEAL BEFO RE THE TRIBUNAL. 5.4 DURING THE COURSE OF HEARING THE LD. A.R REITER ATED THE SUBMISSIONS AS WERE MADE BEFORE THE FIRST APPELLATE AUTHORITY THAT THE ASSESSEE HAD ITS OWN FUNDS FAR MORE THAN THE INTEREST FREE LOANS AND AD VANCES GIVEN TO ITS SUBSIDIARY COMPANY. THE LD. A.R RELYING ON THE DEC ISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIE S & POWER LTD., VS. CIT 313 ITR 340 SUBMITTED THAT NO DISALLOWANCE OUT OF INTEREST EXP ENDITURE IS TO BE MADE IF INTEREST FREE FUNDS WERE SUFFICIENT TO M EET THE INVESTMENT MADE. HE FURTHER SUBMITTED THAT THE HONBLE APEX COURT H AS ALSO HELD IN THE CASE OF S.A.BUILDERS LTD., VS. CIT, 288 ITR 1 THAT WHEN LOAN TO ITS SUBSIDIARY IS GIVEN IN THE COURSE AND FOR THE PURPOSE OF BUSINESS OF ITS BUSINESS, NO DISALLOWANCE OF INTEREST HAS TO BE MADE. HE SUBMIT TED THAT IN VIEW OF ABOVE DECISIONS, THE DISALLOWANCE OF INTEREST IS NO T JUSTIFIED AND THE SAME SHOULD BE DELETED. 5.5 ON THE OTHER HAND, LD. D.R RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 8 5.6 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTIES AND ORDERS OF THE AU THORITIES BELOW. WE HAVE ALSO CONSIDERED THE CASES RELIED UPON BY THE AUTHOR ITIES BELOW AS WELL AS THE CASES CITED BY LD. A.R (SUPRA). THERE IS NO DISPU TE TO THE FACT THAT THE ASSESSEES OWN FUNDS ARE FAR IN EXCESS OF THE INTE REST FREE LOANS AND ADVANCES GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY CO MPANIES . THE HONBLE BOMBAY HIGH COURT HAS HELD IN THE CASE OF RELIANCE UTILITIES & POWER LTD.(SUPRA) THAT IF THERE WERE FUNDS AVAILABLE BO TH INTEREST FREE AND OVERDRAFT / OR LOANS TAKEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AV AILABLE WITH THE COMPANY. IT WAS HELD THAT IF INTEREST FREE FUNDS WERE SUFFIC IENT TO MEET THE INVESTMENTS MADE, IN THAT CASE A PRESUMPTION IS ESTABLISHED THA T THE BORROWED CAPITAL WAS USED FOR THE PURPOSE OF BUSINESS AND THE INTERE ST EXPENDITURE IS DEDUCTIBLE UNDER SECTION 36(1)(III) OF THE ACT. TH E SIMILAR VIEW HAS ALSO BEEN CONSIDERED BY THE HONBLE CALCUTTA HIGH COURT IN WOOL COMBERS OF INDIA LTD., 134 ITR 219 (CAL), WHEREIN IT WAS HELD THAT I F THERE WERE SUFFICIENT PROFITS AVAILABLE TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE; IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF PROFIT S OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BU SINESS. CONSIDERING SUBSEQUENT DECISION OF THE HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD.(SUPRA), WHEREIN IT WAS SPECIFICALLY HELD THAT IF INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE IS SUF FICIENT TO MEET ITS INVESTMENT, IT CAN BE PRESUMED THAT THE INVESTMENT S WERE MADE FROM THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. T HEREFORE, CONSIDERING THE FACT THAT THE ASSESSEE HAD ITS OWN FUNDS MORE THAN THE LOANS GIVEN TO ITS SUBSIDIARIES AND ALSO IN THE ABSENCE OF ANY NEXUS E STABLISHING THAT THE INTEREST BEARING BORROWED FUNDS WERE GIVEN AS INTER EST FREE TO ITS SUBSIDIARIES, WE HOLD THAT THE DISALLOWANCE OF INTE REST IS NOT JUSTIFIED. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 9 THEREFORE, INTEREST IS ALLOWABLE UNDER SECTION 36( 1)(III) OF THE ACT. HENCE, GROUND NO.2 OF THE APPEAL TAKEN BY THE ASSESSEE IS ALLOWED. 6. GROUND NO.3 OF THE APPEAL OF THE ASSESSEE RELATE S TO CONFIRMATION OF THE ADDITIONS MADE BY THE AO OF RS. 9,30,61,010/- O N ACCOUNT OF INTEREST ON INCOME TAX REFUND GRANTED TO THE ASSESSEE. 6.1 AT THE TIME OF HEARING LD. A.R CONCEDED THAT I DENTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1996-97 AND 1997-98 AND THE TRIBUN AL VIDE ITS ORDER DATED 23/3/2007 IN ITA NO.3430/M/01 & 4401/M/02 DEC IDED THE ISSUE AGAINST THE ASSESSEE. HE CONCEDED THAT SIMILAR I SSUE AGAIN CAME UP BEFORE THE TRIBUNAL IN ASSESSSEES OWN CASE IN A.Y 2001-02 AND THE TRIBUNAL VIDE ITS ORDER DATED 30/4/2008 BY FOLLOWING ITS EARLIER ORDER DECIDED THE ISSUE AGAINST THE ASSESSEE BY REVERSING THE ORDER OF THE LD. CIT(A). 6.2 IN VIEW OF THE ABOVE WE REJECT GROUND NO.3 OF THE APPEAL TAKEN BY THE ASSESSEE BY CONFIRMING THE ORDER OF THE CIT(A). 7. IN GROUND NO.4 THE ASSESSEE HAS DISPUTED THE ORD ER OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF AN ESTIMATED EXPENSE S OF RS. 2,56,58,887/- OUT OF ADMINISTRATIVE EXPENSES UNDER SECTION 14A O F THE ACT BEING EXPENDITURE INCURRED IN RELATION TO EARNING THE DI VIDEND INCOME EXEMPT UNDER SECTION 10(33) AND INTEREST INCOME EXEMPT UND ER SECTION 10(23G) OF THE ACT WHILE COMPUTING BOOK PROFIT AS WELL AS UNDE R THE NORMAL PROVISIONS OF THE ACT. 7.1 THIS GROUND OF APPEAL OF THE ASSESSEE IS CONN ECTED WITH GROUND NO.4 OF THE APPEAL OF THE DEPARTMENT WHICH READS AS UND ER: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANC E OF EXPENDITURE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 10 INCURRED FOR EARNING EXEMPT INCOME FROM RS. 66,71,0 5,360/- TO 1% OF THE EXEMPTED INCOME. 7.2 THE RELEVANT FACTS ARE THAT ASSESSEE EARNED DIV IDEND INCOME OF RS. 23,77,75,384/- AND INTEREST INCOME OF RS.232,81,13, 284/-, WHICH WERE CLAIMED EXEMPT UNDER SECTION 10(33) AND 10(23G) OF THE ACT RESPECTIVELY. THE ASSESSEE STATED THAT IT HAD NOT INCURRED ANY EX PENDITURE TOWARDS EARNING OF THE SAID EXEMPT INCOME. HOWEVER, THE A O ESTIMATED RS.62.34 CRORES BEING PROPORTIONATE INTEREST ON BORROWED FUN DS AND RS. 3.97 CORES BEING PROPORTIONATE ADMINISTRATIVE AND OTHER EXPENS ES TOWARDS EARNING EXEMPT INCOME AND DISALLOWED THE SAME UNDER SECTION 14A OF THE ACT. BEING AGGRIEVED ASSESSEE FILED APPEAL BEFORE THE FIRST AP PELLATE AUTHORITY. 7.3 ON BEHALF OF THE ASSESSEE IT WAS CONTENDED THAT INTEREST, ADMINISTRATIVE AND OTHER EXPENSES WERE INCURRED BY THE ASSESSEE IN THE NORMAL COURSE OF CARRYING ON ITS BUSINESS AND FOR M AINTAINING ITS CORPORATE STATUS. IT WAS ALSO CONTENDED THAT THE AO HAS NOT DEMONSTRATED ANY NEXUS BETWEEN INCURRING OF THE SAID EXPENSES AND EARNING OF EXEMPT INCOME. IT WAS ALSO CONTENDED THAT ASSESSEES OWN FUNDS WERE FAR GREATER THAN ITS INVESTMENTS AND INTEREST FREE ADVANCES GIVEN, AND I T CANNOT BE SAID THAT PART OF THE BORROWED FUNDS WERE UTILIZED FOR MAKING INVE STMENTS. IT WAS CONTENDED THAT NO PART OF INTEREST AND ADMINISTRATI VE AND OTHER EXPENSES CAN BE DISALLOWED. 7.4 HOWEVER, THE LD. CIT(A) HAS HELD THAT THE AO HA S NOT BROUGHT ON RECORD ANY EVIDENCE TO SHOW THAT THE EXPENDITURE HA D ACTUALLY BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT INCOME. HE HAS FURTHER STATED THAT IT HAS NOT BEEN SHOWN THAT BORROWED FUNDS HAD BEEN EMPLOYE D FOR MAKING INVESTMENT WHICH YIELDED THE INTEREST INCOME AND I N ABSENCE OF ANY NEXUS, DISALLOWANCE MADE OUT OF THE INTEREST EXPENSES CAN NOT BE SUSTAINED, PARTICULARLY WHEN OWN FUNDS OF THE ASSESSEE COMPANY WERE FAR IN EXCESS OF ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 11 THE TOTAL AMOUNT OF INVESTMENT MADE. LD. CIT(A) HA S HELD THAT THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT OU T OF THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE IS DELETED. H OWEVER, THE LD. CIT(A) HAS HELD THAT WHILE EARNING EXEMPT INCOME SOME ADMINIST RATIVE EXPENDITURE MUST INEVITABLY BE INCURRED ON THE MANAGEMENT OF PORTFOLIO, TAPING SKILLS FOR TAKING INVESTMENT DECISIONS, BANK COLLECTION CHARGES ETC. THE LD. CIT(A) HAS STATED THAT FROM THE RECORDS OF THE PRECEDING YEARS THE AMOUNT OF DISALLOWANCE HAS BEEN RESTRICTED BY HIS PREDECESSO R TO RS. 20.00 LACS FOR A.Y 2000-01 AND RS. 40.00 LACS FOR THE A.Y 2001-02, WHI CH WORKS OUT TO ABOUT 1% OF THE EXEMPT INCOME. THEREFORE, LD. CIT(A) ON THE SAME BASIS, HAS RESTRICTED THE DISALLOWANCE @1% OF THE EXEMPT INCOM E OF RS.256,858,88,668/- WHICH WORKS OUT TO RS.2,56,58,8 87/-. HENCE LD. CIT(A) RESTRICTED DISALLOWANCE UNDER SECTION 14A TO RS. 2, 56,58,887/- FOR THE PURPOSE OF COMPUTATION OF INCOME UNDER NORMAL PROVI SIONS OF THE ACT AND ALSO FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. THEREFORE, THE ASSESSEE AS WELL THE DEPARTMENT ARE IN APPEAL B EFORE THE TRIBUNAL. 7.5 AT THE TIME OF HEARING LD. A.R SUBMITTED THAT GROUND NO.4 OF THE APPEAL TAKEN BY IT IS NOT PRESSED FOR. HOWEVER, IN RESPECT OF THE GROUND NO.4 OF THE APPEAL TAKEN BY THE DEPARTMENT, LD. A.R MADE HIS SUBMISSIONS ON THE LINES OF THE SUBMISSIONS MADE BEFORE THE AUTHORITIE S BELOW AND ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD.(SUPRA). 7.6 ON THE OTHER HAND, LD. D.R RELIED ON THE ORDER OF THE A.O. 7.7 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTIES. IN RESPECT OF G ROUND NO.4 OF THE APPEAL TAKEN BY THE ASSESSEE, LD. A.R SUBMITTED THAT TH IS GROUND IS NOT PRESSED FOR AND IT IS REJECTED. HOWEVER, IN RESPECT OF GROUND NO.4 OF THE APPEAL OF ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 12 THE DEPARTMENT, WE FOR THE REASONS GIVEN HEREIN ABO VE IN PARA 5.6 WHILE CONSIDERING GROUND NO.2 OF THE APPEAL OF THE ASSESS EE THAT ITS OWN FUNDS ARE FAR IN EXCESS THAN THE INVESTMENTS MADE BY THE ASSESSEE GIVING EXEMPT INCOME, THE DISALLOWANCE OF THE INTEREST MADE BY TH E A.O IS NOT JUSTIFIED AS IT HAS TO BE PRESUMED THAT THE INVESTMENTS HAD COM E FROM THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE HENCE, GROUND N O.4 OF THE APPEAL OF THE DEPARTMENT IS ALSO REJECTED. 8. GROUND NO.5 OF THE APPEAL COMPRISED OF FOUR PART S. FURTHER IT IS ALSO CONNECTED WITH GROUND NOS.5,6 & 7 OF THE APPEAL OF THE DEPARTMENT. 8.1 THE RELEVANT FACTS GIVING RISE TO THESE GROUNDS OF APPEAL OF THE ASSESSEE AS WELL AS THE DEPARTMENT ARE THAT THE AS SESSEE CLAIMED DEDUCTION UNDER SECTION 80 HHC OF THE ACT AT NIL UNDER NORMA L PROVISIONS OF THE ACT AND RS.1123,39,00,259/- FOR COMPUTING BOOK PROFIT U NDER SECTION 115JB OF THE ACT IN ITS REVISED RETURN OF INCOME. THE AO WO RKED OUT THE CLAIM FOR DEDUCTION UNDER SECTION 80 HHC OF THE ACT AT NIL UN DER NORMAL PROVISIONS OF THE ACT AS WELL AS FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 8.2 THE ASSESSEE COMPUTED THE CLAIM UNDER SECTION 80 HHC OF THE ACT AS UNDER : (FROM PAGE 24 OF CIT(A) ): (A) COMPUTING PROFITS OF THE BUSINESS BY EXCLUDI NG: (I) 90% OF RENT RECEIPT OF RS.8104.63 LACS I NCLUDED IN OTHER INCOME AND (II) DEDUCTION U/S. 80IA/80IB ALLOWABLE OF O NLY THREE EXPORTING UNITS. I.E. HDPE-1, MEG AND PVC WORKED OUT IN PROPO SITION OF EXPORT TURNOVER TO TOTAL TURNOVER OF THE PARTICULAR UN IT. (B) CONSIDERING SALES EXCLUDING EXCISE DUTY AND SA LES TAX. HOWEVER, THE AO HAS COMPUTED THE CLAIM U/S. 80 HHC BY: A) (I) EXCLUDING 90% OF THE FOLLOWING OTHER INCOME (1) INTEREST 54111.11 LACS (2) RENT 8104.63 LACS (3) ADHOC MISCELLANEOUS INCOME 1000.00 LACS ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 13 TOTAL 63215.74 LACS 90% OF ABOVE 56894.17 LACS (II) EXCLUDING TOTAL DEDUCTION ALLOWABLE UNDE R SECTION 80IA/80IB OF THE INCOME TAX ACT, 1961 RELATING TO ALL THE UNITS AGGREGATING TO RS. 68020.84 LACS ( AS AGAINST THE CLAIM OF THE APPELLANT OF RS. 63461.26 LACS.) B) CONSIDERING SALES INCLUDING EXCISE DUTY AND SAL ES TAX. 8.3 IN RESPECT OF EXCLUSION OF 90% OF INTEREST BY THE A.O, THE ASSESSEE CONTENDED THAT INTEREST INCOME IS EARNED IN THE NO RMAL COURSE OF BUSINESS AND IT FORMS PART OF THE BUSINESS DEFINED UNDER SEC TION 80IA OF THE ACT . IT WAS ALSO CONTENDED THAT INTEREST INCOME IS TO BE SE T OFF AGAINST INTEREST PAID AND ONLY IF THERE IS SURPLUS INTEREST INCOME, THE S AME NEEDS TO BE CONSIDERED WHILE WORKING OUT THE FIGURE OF PROFIT OF BUSINESS IN ACCORDANCE WITH PROVISIONS OF SECTION 80 HHC OF THE ACT. IT WAS CO NTENDED THAT INTEREST PAID EXCEEDED THE INTEREST RECEIVED AND HENCE, NO DEDUCT ION @90% OF INTEREST RECEIVED IS REQUIRED TO BE MADE WHILE COMPUTING C LAIM FOR DEDUCTION U/S. 80 HHC OF THE ACT. 8.4 IT WAS ALSO CONTENDED THAT 90% OF ONLY NET INTE REST RECEIVED SHOULD BE CONSIDERED FOR REDUCING FROM THE PROFIT OF BUSIN ESS FOR COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. 8.5 FURTHER AO CONSIDERED ON AN ADHOC BASIS 90% OF RS. 10 CRORES OUT OF TOTAL MISCELLANEOUS INCOME AS DISALLOWABLE UNDER EX PLANATION (BAA) TO SECTION 80 HHC OF THE ACT FOR COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. 8.6 WITH REFERENCE TO EXCLUSION OF PROFIT UNDER SEC TION 80IA/ 80IB THE ASSESSEE CONTENDED THAT IT SHOULD BE RESTRICTED TO ONLY THOSE UNITS WITH REFERENCE TO WHICH U/S. 80 HHC CLAIM IS WORKED OUT. THE AO IS NOT JUSTIFIED TO REDUCE THE PROFIT ALLOWED AS DEDUCTION UNDER SE CTION 80IA / 80 IB WITH ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 14 REFERENCE TO ALL UNITS I.E. EXPORTING AND NON-EXPOR TING UNITS. IT IS RELEVANT TO STATE THAT THE ASSESSEE HAS 12 UNITS AND HAS CLAIM ED DEDUCTION U/S. 80 IA AND 80 IB OF THE ACT WITH REFERENCE TO ALL THE 12 UNITS. HOWEVER, THERE ARE ONLY THREE EXPORTING UNITS I.E. HDPE-1, MEG AND P VC AGAINST WHICH THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 80 HHC OF THE ACT. THE AO WHILE WORKING OUT THE CLAIM OF DEDUCTION UNDER SECT ION 80 HHC REDUCED THE PROFIT ALLOWED AS DEDUCTION U/S. 80 IA AND 80 IB WI TH REFERENCE TO ALL THE 12 UNITS I.E. THREE EXPORTING AND NINE NON-EXPORTING UNITS. THEREFORE, THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT RESTRICTI ON WITH REFERENCE TO DEDUCTION OF THE CLAIM CONTAINED IN SUB-SECTION (9) OF SECTION 80IA APPLIES ONLY TO COMPUTATION OF DEDUCTION OF THESE THREE U NITS I.E. EXPORTING UNITS AND THAT TOO TO THE EXTENT OF SUCH PROFIT WHICH H AVE BEEN ALLOWED UNDER SECTION 80 HHC OF THE ACT SUBJECT TO THE CONDITION THAT THE TOTAL DEDUCTION UNDER CHAPTER-VA IN NO CASE SHALL EXCEED THE PROFIT OF THE UNDERTAKING. THEREFORE, THE CLAIM UNDER SECTION 80 HHC IS TO BE WORKED OUT AS PROVIDED IN SECTION 80 HHC OF THE ACT AND THEREAFTER, WHILE GIVING DEDUCTION SUCH PROFIT HAS TO BE REDUCED BY THE PROPORTIONATE PROF IT ALLOWED AS DEDUCTION UNDER SECTION 80IA/ 80IB WITH REFERENCE TO EXPORT T URNOVER. IN OTHER WORDS, THE DEDUCTION UNDER SECTION 80 IA /80IB BE ALLOWED WITH REFERENCE TO EXPORTING UNITS ONLY SHOULD BE REDUCED FROM THE PRO FITS OF THE BUSINESS UNDER SECTION 80 HHC OF THE ACT OF THESE EXPORTING UNITS AND THAT TOO IN PROPORTION OF EXPORT TURNOVER TO TOTAL TURNOVER. I T WAS CONTENDED THAT AO HAS WRONGLY REDUCED THE TOTAL CLAIM ALLOWED UNDER S ECTION 80 IA RELATING TO EXPORTING AND NON-EXPORTING UNITS WHILE WORKING OUT U/S. 80 HHC CLAIM OF THE EXPORTING UNITS. 8.7 IT WAS ALSO CONTENDED THAT THE TOTAL TURNOVER FOR COMPUTATION OF SEC. 80 HHC CLAIM DOES NOT INCLUDE EXCISE DUTY AND SALE S TAX. THE TOTAL TURNOVER SHOULD BE CONSIDERED EXCLUSIVE OF EXCISE DUTY AND SALES TAX AND ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 15 RELIANCE WAS PLACED ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF SUDARSHAN CHEMICAL INDUSTRIES LTD., VS. CIT 245 ITR 769. 8.8 IT WAS ALSO CONTENDED THAT THE CLAIM FOR DEDU CTION UNDER SECTION 80 HHC IS TO BE WORKED OUT ON THE BASIS OF BOOK PROFI T AS PROFITS OF THE BUSINESS AND AO WAS NOT JUSTIFIED TO HOLD THAT THE AMOUNT OF DEDUCTION UNDER SECTION 80 HHC BE COMPUTED ON THE BASIS OF PR OFITS OF THE BUSINESS AS PER NORMAL PROVISIONS OF THE ACT AND TO ALLOW T HE DEDUCTION WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE AC T. HENCE, AO RESTRICTED THE CLAIM FOR DEDUCTION UNDER SECTION 80HHC FOR COM PUTING BOOK PROFIT AT NIL. 8.9 THE LD. CIT(A) CONSIDERED THE SUBMISSIONS OF TH E ASSESSEE AND HELD AS UNDER: (A) AO HAS CORRECTLY EXCLUDED INTEREST RECEIPT FROM T HE PROFIT OF THE BUSINESS WHILE CONSIDERING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. HE HAS FURTHER STATED THAT AO HAS RIGHTLY RED UCED THE PROFITS OF THE BUSINESS BY 90% OF THE GROSS INTEREST RECEIPT. THEREFORE, LD. CIT(A) HAS NOT AGREED WITH THE CONTENTION OF THE ASSESSEE THAT INTEREST RECEIVED SHOULD BE SET OFF AGAINST THE INTEREST PAI D AND 90% OF ONLY NET INTEREST RECEIPT SHOULD BE REDUCED FROM THE PROFIT OF THE BUSINESS. (B) ACTION OF AO TO ESTIMATE TO REDUCE 90% RS. 10.00 C RORES FROM MISCELLANEOUS INCOME IS FAIR AND REASONABLE WHIL E CONSIDERING ELIGIBLE DEDUCTION UNDER SECTION 80 HHC OF THE ACT . THE LD. CIT(A) HAS STATED THAT ASSESSEE HAS NOT FURNISHED COMPLETE DETAILS OF THE NATURE OF OTHER INCOME AND HAD NOT EXPLAINED PROXI MATE NEXUS OF THE OTHER INCOME WITH THE EXPORT BUSINESS OF THE AS SESSEE. (C) AS REGARDS REDUCTION OF PROFIT ALLOWED AS DEDUCTION UNDER SECTION 80IA / 80IB WHILE COMPUTING CLAIM UNDER SECTION 80 HHC, THE LD. CIT(A) ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 16 HAS HELD THAT THE RESTRICTION CONTAINED IN SUB-SEC TION (9) OF SECTION 80 IA IS REFERABLE TO THE SPECIFIC UNDERTAKING, THE P ROFITS OF WHICH ARE DEDUCTIBLE UNDER SECTION 80 IA /80IB AND ALSO QUALI FY FOR DEDUCTION UNDER ANOTHER SECTION. THUS THE SAME UNIT MUST QUA LIFY FOR BOTH DEDUCTION UNDER SECTION 80 IA AND SOME OTHER DEDUCT ION. THAT THE RESTRICTION UNDER SUB-SECTION (9) OF SECTION 80 IA WILL NOT APPLY WHERE ONE UNIT GETS DEDUCTION UNDER SECTION 80 IA AND SOM E OTHER UNITS GETS ANOTHER DEDUCTION. THE LD. CIT(A) HAS STATED THAT THE DEDUCTION UNDER SECTION 80 HHC HAS BEEN CLAIMED AND ALLOWED T O THE ASSESSEE ONLY WITH REFERENCE TO THREE EXPORTING UNITS I.E. H DPE-1, MEG AND PVC UNITS AT HAZIRA, WHEREAS UNDER SECTION 80 IA / 80 IB DEDUCTION HAS BEEN ALLOWED WITH REFERENCE TO THESE THREE UNIT S AND ALSO NINE OTHER UNITS ENGAGED IN POWER GENERATION AND INFRAS TRUCTURE ACTIVITIES. THEREFORE, THE RESTRICTIVE CLAUSE IN SECTION 80 IA( 9) WILL OPERATE ONLY WITH REFERENCE TO THOSE THREE EXPORTING UNITS ALO NE. HE HAS HELD THAT HE AGREES WITH THE ASSESSEE FOR COMPUTING THE DEDUC TION UNDER SECTION 80 HHC, WITH REFERENCE TO THE EXPORTING UNITS, THE PROFIT ALLOWED AS DEDUCTION UNDER SECTION 80 IA/ 80 IB WITH REFERENCE TO THOSE THREE EXPORTING UNITS ALONE SHOULD BE REDUCED AND NOT THE ENTIRE 80 IA / 80 IB UNITS OF THE ASSESSEE IN RESPECT OF ALL UNITS. FURTHER LD. CIT(A) HAS NOT AGREED WITH THE CONTENTION OF THE ASSESSEE AS WELL AS THE ORDERS OF HIS PREDECESSORS IN THE IMMEDIATELY PRECEDING ASSES SMENT YEAR THAT RESTRICTION UNDER SECTION 80 IA(9) WOULD MEAN TO TH E EXTENT OF THE PROFITS WHICH ARE ALLOWED AS DEDUCTION UNDER SECTIO N 80 HHC. HE HAS HELD THAT THE ENTIRE DEDUCTION ALLOWED UNDER SECTIO N 80 IA/ 80 IB OF THE ACT OF THE EXPORTING UNITS SHOULD BE REDUCED WH ILE COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. (D) THE LD. CIT(A) HAS ACCEPTED THE CONTENTION OF THE A SSESSEE TO EXCLUDE EXCISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER W HILE COMPUTING DEDUCTION ALLOWABLE UNDER SECTION 80 HHC OF THE ACT BY FOLLOWING THE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 17 DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SUDARSHAN CHEMICAL INDUSTRIES LTD. (SUPRA). (E) THE LD. CIT(A) HAS AGREED WITH THE CONTENTION OF T HE ASSESSEE THAT FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB OF TH E ACT, AMOUNT OF DEDUCTION TO BE REDUCED UNDER SECTION 80 HHC IS TO BE WORKED OUT ON THE BASIS OF BOOK PROFITS AND NOT ON THE BASIS OF P ROFITS & GAINS OF BUSINESS AS COMPUTED UNDER NORMAL PROVISIONS OF TH E ACT. 8.10 IN VIEW OF THE ABOVE FINDINGS OF LD. CIT(A), THE ASSESSEE AS WELL AS DEPARTMENT ARE IN APPEALS BEFORE THE TRIBUNAL. 8.11 IN RESPECT OF ORDER OF LD. CIT(A) TO REDU CE 90% OF THE GROSS INTEREST RECEIVED WHILE COMPUTING DEDUCTION UNDER S ECTION 80 HHC OF THE ACT, LD. A.R SUBMITTED THAT ABOVE ISSUE IS NOW COVE RED BY THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF M/S. ACG ASSOCIAT ES CAPSULES PVT. LTD. VS. DCIT BY ORDER DATED 8/2/2012 IN CIVIL APPEAL NO .1914 OF 2012 (ARISING OUT OF SLP (C) NO.32450 OF 2010), COPY FILED AT THE TIME OF HEARING, IN FAVOUR OF THE ASSESSEE. IN THE SAID CASE, HONBLE APEX COU RT HAS HELD THAT 90% OF NET RECEIPTS ARE TO BE EXCLUDED UNDER EXPLANATION (BAA) TO SECTION 80 HHC OF THE ACT FOR DETERMINING THE PROFITS OF BUSINESS THE LD. D.R HAS NOT DISPUTED THE ABOVE CONTENTION OF THE LD. A.R. 8.12 IN VIEW OF THE ABOVE SUBMISSION THAT ISSUE I S COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF HONBLE APEX COURT ( SUPRA), WE REVERSE THE ORDERS OF AUTHORITIES BELOW AND ACCORDINGLY GROUND NO.5 (A) & (B) OF THE APPEAL TAKEN BY THE ASSESSEE ARE ALLOWED IN FAVOUR OF THE ASSESSEE BY DIRECTING THAT 90% OF NET INTEREST EXPENSES HAVE TO BE CONSIDERED WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT . ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 18 8.13 IN RESPECT OF GROUND NO.5(C) OF THE APPEAL DISPUTING THE ORDER OF LD. CIT(A) IN CONFIRMING THE REDUCTION OF PROFIT OF THE ASSESSEE BY 90% OF ADHOC DISALLOWANCE OF RS. 10.00 CRORES OUT OF OTHER INCOME WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT, LD. A.R SUBMITTED THAT THIS GROUND IS NOT PRESSED FOR. HENCE, GROUND NO.5(C) OF THE APPEAL TAKEN BY THE ASSESSEE IS REJECTED. 8.14 IN RESPECT OF GROUND NO.5(D) OF THE APPEAL DI SPUTING THE ORDER OF CIT(A) THAT ENTIRE DEDUCTION ALLOWED UNDER SECTIO N 80 IA / 80 IB OF THE ACT OF EXPORTING UNIT SHOULD BE REDUCED WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT, LD. A.R MADE HIS SUBMISS IONS ON THE LINES OF THE SUBMISSIONS MADE BEFORE THE CIT(A) AS MENTIONED HER EIN ABOVE. HE SUBMITTED THAT SUB-SECTION (9) OF SECTION 80 IA PRO VIDES THAT WHERE PROFITS AND GAINS OF AN UNDERTAKING OR AN ENTERPRISE IS ALL OWED AS DEDUCTION UNDER SECTION 80 IA OF THE ACT, DEDUCTION TO THAT EXTENT FOR SUCH PROFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIONS OF THIS CHAPTER I.E. CHAPTER VA UNDER THE HEAD C- DEDUCTION IN RESPECT OF CERTA IN INCOMES AND IN NO SUCH CASE THE TOTAL DEDUCTION SHALL EXCEED THE PROF IT OF THE UNDERTAKING OR ENTERPRISE AS THE CASE MAY BE. HE SUBMITTED THAT C LAIM UNDER SECTION 80 HHC IS REQUIRED TO BE WORKED OUT AS PER SECTION 80 HHC OF THE ACT AND THEREAFTER WHILE GIVING DEDUCTION, SUCH PROFIT HAS TO BE REDUCED BY PROPORTIONATE PROFIT ALLOWED AS DEDUCTION UNDER SEC TION 80 IA /80 IB OF THE ACT WITH REFERENCE TO EXPORT TURNOVER. HE SUBMITT ED THAT DEDUCTION UNDER SECTION 80 IA / 80 IB OF THE ACT WITH REFERENCE T O EXPORTING UNITS SHOULD BE REDUCED IN PROPORTION OF EXPORT TURNOVER TO TOTA L TURNOVER FOR EXCLUDING PROFIT ON EXPORT. THE LD. D.R RELIED ON THE ORDER OF LD. CIT(A) WITHOUT MAKING ANY FURTHER SUBMISSION ON THE ABOVE ISSUE. 8.15 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTIES AND THE ORDERS OF TH E AUTHORITIES BELOW AS WELL ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 19 AS PROVISIONS OF SUB-SECTION (9) OF SECTION 80 IA O F THE ACT. SUB-SECTION (9) OF SECTION 80 IA READS AS UNDER: WHERE ANY AMOUNT OF PROFITS AND GAINS OF AN UNDERT AKING OR.. IN THE CASE OF AN ASSESSEE IS CLAIMED AND ALLOWED UNDE R THIS SECTION FOR ANY ASSESSMENT YEAR, DEDUCTION TO THE EXTENT OF SUC H PROFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIONS OF THIS CHAPTER UNDER THE HEADING C- DEDUCTIONS IN RESPECT OF CERTAIN IN COME, AND SHALL IN NO CASE EXCEED THE PROFITS AND GAINS OF SUCH ELIGIB LE BUSINESS OF UNDERTAKING OR ENTERPRISE, AS THE CASE MAY BE. ON CONSIDERING THE ABOVE SUB-SECTION (9) OF SECTION 80 IA OF THE ACT IN THE CONTEXT OF THE CLAIM TO BE ALLOWED UNDER SECTION 80 HHC OF THE ACT OF THE EXPORTING UNIT WE FIND MERIT IN THE CONTENTION OF L D. A.R THAT DEDUCTION UNDER SECTION 80 HHC OF THE ACT IS COMPUTED IN PROP ORTION OF EXPORT TURNOVER TO TOTAL TURNOVER. FURTHER SUB-SECTION (9 ) OF SECTION 80 IA PROVIDES THAT WHEN AN AMOUNT OF PROFITS AND GAINS OF AN UNDE RTAKING IS CLAIMED AND ALLOWED AS DEDUCTION UNDER SECTION 80 IA OF THE ACT FOR ANY ASSESSMENT YEAR, DEDUCTION TO THE EXTENT OF SUCH PROFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIONS OF THIS CHAPTER UNDER THE HEAD C- DEDUCTION IN RESPECT OF CERTAIN INCOMES AND SUBJECT TO THE CONDITION T HAT THE TOTAL DEDUCTION SHOULD NOT EXCEED PROFITS AND GAINS OF SUCH ELIGIB LE BUSINESS OF UNDERTAKING OR ENTERPRISE, AS THE CASE MAY BE. THIS PROVISION HAS BEEN INSERTED WITH A VIEW TO AVOID DOUBLE BENEFIT UNDER THE ACT ON THE S AME PROFIT OF AN UNDERTAKING OR ENTERPRISE. HENCE, SEC.80 IA (9) RE LATES TO DEDUCTION AND NOT TO COMPUTATION OF DEDUCTION. IT DOES NOT REFER TO METHOD OF COMPUTING DEDUCTION UNDER OTHER PROVISIONS UNDER HEADING C O F CHAPTER VI-A. HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULE S P. LTD. VS. DY. CIT , 332 ITR 42 HAS HELD THAT SEC. 80 IA(9) IS NOT APPLI CABLE AT THE STAGE OF COMPUTATION OF DEDUCTION UNDER SEC. 80 HHC (3) BUT IS APPLICABLE AT THE STAGE OF ALLOWING DEDUCTION U/S. 80 HHC(1). THE HO NBLE HIGH COURT IN PARA 41 HAS GIVEN AN ILLUSTRATION THAT IF RS. 100 IS THE PROFIT OF THE BUSINESS OF THE UNDERTAKING, RS. 30 IS THE PROFITS ALLOWED AS D EDUCTION U/S. 80 IA(1) AND ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 20 THE DEDUCTION COMPUTED AS PER SECTION 80 HHC IS RS. 80, THEN, IN VIEW OF SEC. 80 IA (9) THE DEDUCTION U/S. 80 HHC WOULD BE R ESTRICTED TO RS.70, SO THAT THE AGGREGATE DEDUCTION DOES NOT EXCEED THE PR OFITS OF THE BUSINESS. HENCE, WE ARE OF THE CONSIDERED VIEW THAT WHEN THE DEDUCTION UNDER SECTION 80 HHC OF THE ACT IS TO BE CONSIDERED, IT IS TO BE ALLOWED IN PROPORTION TO EXPORT TURNOVER TO THE TOTAL TURNOVER OF AN UNDERTA KING AND ACCORDINGLY THAT PROPORTION OF THE DEDUCTION ALLOWED UNDER SECTION 8 0 HHC IS TO BE CONSIDERED AND REDUCED WHILE ALLOWING DEDUCTION UND ER SECTION 80 IA OF THE ACT OF THOSE THREE EXPORTING UNITS SUBJECT TO THE CONDITION THAT TOTAL DEDUCTION WILL NOT EXCEED THE ELIGIBLE PROFITS OF T HE UNDERTAKING. HENCE, WE HOLD THAT THE ENTIRE DEDUCTION ALLOWED UNDER SECTIO N 80 IA / 80 IB OF THE ACT SHOULD NOT BE REDUCED WHILE COMPUTING DEDUCTION UND ER SECTION 80 HHC OF THE ACT. ON THE OTHER HAND, THE CLAIM OF EXPORT P ROFITS OF THESE THREE UNITS UNDER SECTION 80 HHC SHOULD BE REDUCED WHILE ALLOWI NG DEDUCTION UNDER SECTION 80 IA OF THE ACT IN PROPORTION OF EXPORT T URNOVER TO TOTAL TURNOVER. ACCORDINGLY GROUND NO.5 (D) OF THE APPEAL OF THE AS SESSEE IS ALLOWED. 8.16 IN RESPECT OF GROUND NO.5 OF THE APPEAL OF THE DEPARTMENT DISPUTING ORDER OF LD. CIT(A) TO EXCLUDE PROFIT ALLOWED AS DEDUCTION UNDER SECTION 80 IA / 80 IB OF THE ACT OF THOSE THREE EXP ORTING UNITS ONLY FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT AND NOT EXCLUDING THE AMOUNT OF DEDUCTION ALLOWED UNDER SEC TION 80 IA / 80 IB OF THE ACT FOR ALL THE UNITS OF THE ASSESSEE, WE HOL D THAT THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF THE HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES PVT. LTD. VS. DC IT(SUPRA) AS DISCUSSED HEREIN ABOVE AND ALSO THE DECISION OF ITAT MUMBAI BENCHES IN THE CASE OF ACIT VS. GRASIM INDUSTRIES LTD., (2010) 35 SOT 249. HENCE, WE CONFIRM THE ORDER OF LD. CIT(A) AND REJECT GROUND NO.5 OF THE APPEAL TAKEN BY THE DEPARTMENT. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 21 8.17 IN RESPECT OF GROUND NO.6 OF THE APPEAL OF THE DEPARTMENT TO DISPUTE THE ORDER OF LD. CIT(A) IN DELETING THE INCLUSION O F EXCISE DUTY AND SALES TAX IN THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DED UCTION UNDER SECTION 80 HHC OF THE ACT, IT WAS CONCEDED THAT ABOVE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE NOT ONLY BY THE DECISION OF THE HONBLE JU RISDICTIONAL HIGH COURT ON WHICH RELIANCE HAS BEEN PLACED BY THE LD. CIT(A) ( SUPRA) BUT IS ALSO COVERED BY THE DECISION OF THE HONBLE APEX COURT IN THE C ASE OF CIT VS. LAXMI MACHINE WORKS, 290 ITR 667. THE HONBLE APEX COURT IN THE CASE OF LAXMI MACHINES WORKS (SUPRA), HAS BEEN HELD THAT EXCISE DUTY HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. FURTHER THE HON BLE JURISDICTIONAL HIGH COURT AS HELD IN THE CASE OF SUDARSHAN CHEMICAL IND USTRIES LTD.(SUPRA) THAT SALES TAX IS NOT TO BE INCLUDED IN THE TOTAL TURNOV ER FOR COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT. HENCE, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND REJECT GROUND NO.6 OF THE APPEAL TAKEN B Y THE DEPARTMENT. 8.18 IN RESPECT OF GROUND NO.7 OF THE APPEAL OF THE DEPARTMENT DISPUTING THE ORDER OF LD. CIT(A) IN DIRECTING THE AO TO COMP UTE THE DEDUCTION UNDER SECTION 80 HHC OF THE ACT UNDER THE PROVISIONS OF S ECTION 115JB WITH REFERENCE TO THE PROFITS AS WORKED OUT ON THE BASIS OF ADJUSTED BOOK PROFITS, IT WAS SUBMITTED BY LD. A.R THAT THIS ISSUE IS NOW CO VERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. BHARI INFORMATION TEX SYSTEM PVT. LTD., 340 ITR 549 AND LD. D.R HAS NOT DISPUTED THE ABOVE CONTENTION OF LD. A.R. 8.19 WE AGREE WITH THE LD. A.R THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AS THE HONBLE APEX COURT IN THE CASE OF BHARI INFORMATION TEX SYSTEM PVT. LTD. (SUPRA), AFTER CONSIDERING THE DE CISION OF THE SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE OF DCIT VS. SYNCOME FOR MULATIONS (INDIA) LTD. 108 TTJ 105 AND HAS HELD THAT DEDUCTION UNDER C HAPTER VIA OF I.T ACT HAS ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 22 TO BE WORKED OUT NOT ON THE BASIS OF REGULAR INCOM E TAX PROFITS BUT IT HAS TO BE WORKED OUT ON THE BASIS OF THE ADJUSTED BOOK PRO FITS IN A CASE WHERE SECTION 115JA IS APPLICABLE. SINCE SECTION 115JA I S IN PARA MATERIA TO SECTION 115JB, WE UPHOLD THE ORDER OF LD. CIT(A) OF REJECTING GROUND NO.7 OF THE APPEAL TAKEN BY THE DEPARTMENT. 9. GROUND NO.6 OF THE APPEAL OF THE ASSESSEE IS IN REGARD TO DISPUTING THE ORDER OF LD. CIT(A) IN CONFIRMING THE DISALLOWA NCE OF EXPENSES ON ACCOUNT OF TRAVELING OF SPOUSE OF EXECUTIVES AT R S. 80,57,477/-. 9.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO ASKED THE ASSESSEE TO SUBMIT DETAILS OF THE EXPENSES INCURRED ON SPOUSES OF THE EXECUTIVES WHO HAD ACCOMPANIED THEM ON TOUR, ALONG WITH DETAILED REASONING FOR CLAIMING THESE EXPENSES AS BUSINESS E XPENSES. THE ASSESSEE STATED VIDE A LETTER DATED 15/1/2005 THAT THE EXPE NSES INCURRED ON SPOUSES ACCOMPANYING FAMILY MEMBERS ARE AT RS.80,57 ,477/- DURING THE YEAR. THE AO HAS STATED THAT NO COMMERCIAL EXPEDIE NCY OR BUSINESS PRUDENCE CAN BE ATTRIBUTED TO THE TRAVELING OF SPO USES WITH THE EXECUTIVES SPECIALLY WITH THE TRIP OF THE EXECUTIVE IS PURELY IN CONNECTION WITH THE BUSINESS AFFAIRS OF THE ASSESSEE COMPANY. THE A.O MADE DISALLOWANCE OF RS.80,57,477/- ON THE GROUND THAT THE EXPENDITURE I NCURRED ON THE WIVES WHO ACCOMPANIED HER HUSBAND ON THE FOREIGN TOUR CA NNOT BE REGARDED AS EXPENDITURE ALLOWED WHOLLY AND EXCLUSIVELY FOR BUSI NESS PURPOSES AS THE WIFE COULD NOT BE SAID TO HAVE ATTRIBUTED DIRECTLY TO TH E BUSINESS OF THE ASSESSEE CONCERNED. IN THE FIRST APPEAL LD. CIT(A) HAS CONF IRMED THE ACTION OF THE AO. HENCE, THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 9.2 DURING THE COURSE OF HEARING LD. A.R STATED THAT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE O N IDENTICAL FACTS AND CIRCUMSTANCES IN ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 30/04/2008 IN ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 23 ITA NO.5971/M/04, COPY PLACED AT PAGES 221 TO 229 O F THE PAPER BOOK AGAINST THE ASSESSEE AND CONFIRMED THE DISALLOWANCE MADE BY THE LD. CIT(A). 9.3. IN VIEW OF THE ABOVE SUBMISSIONS OF LD. A.R AND THE FACT THAT ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THAT ABOVE EXPENSE S PERTAINING TO WIVES/FAMILY MEMBERS OF THE EXECUTIVES WAS NECESSAR Y FOR THE PURPOSE OF THE BUSINESS, WE UPHOLD THE ORDER OF LD. CIT(A) BY REJE CTING GROUND NO.6 OF THE APPEAL TAKEN BY THE ASSESSEE. 10. IN GROUND NO.7 OF THE APPEAL THE ASSESSEE IS DISPUTING THE ORDER OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF AN AMOUNT OF RS. 36,75,561/- OUT OF PRIOR PERIOD EXPENSES OF RS. 4,2 3,69,309/- ACCOUNTED IN PREVIOUS YEAR RELEVANT TO A.Y 2003-04, ON THE GROUN D THAT SUPPORTING EVIDENCE HAS NOT BEEN FURNISHED IN RESPECT OF THE S AME. 10.1 THE A.O FOR MAKING THE ABOVE DISALLOWANCE OF R S. 36,75,561/- HAS STATED AS UNDER:- IN THE REVISED RETURN OF INCOME FILED, THE ASSES SEE COMPANY HAS REDUCED THE INCOME PERTAINING TO ASSTT. YEAR 2001- 02, WHICH HAS BEEN ASSESSED AS INCOME IN A.Y 2001-02, AND INCOME PERTAINING TO A.Y 2003-04 AND OFFERED FOR TAXATION IN THAT ASSESSMENT YEAR. SIMILARLY, THE ASSESSEE HAS ADDED BACK THE EXPENSES PERTAINING TO A.Y 2001-02 AND REDUCED THE EXPENSES PERTAINING TO THE CURRENT ASSESSMENT YEAR BUT BOOK IN A.Y 2003-04 AS PER THE TAX AUDIT REPORT AND COMPUTATION OF INCOME FOR A.Y. 2003-04. IN RESPECT OF THE EXPE NSES PERTAINING TO THE CURRENT ASSESSMENT YEAR BUT BOOKED IN A.Y 2003- 04, THE ASSESSEE COULD NOT PRODUCE THE RELEVANT VOUCHERS AMOUNTING T O RS. 36,75,561/-. 10.2 IN THE FIRST APPEAL THE LD. CIT(A) HAS CONFIRM ED THE ACTION OF THE A.O TO MAKE ABOVE DISALLOWANCE BY OBSERVING THAT DURING T HE APPELLATE PROCEEDINGS THE ASSESSEE ONLY FILED AN EXTRACT OF T HE TAX AUDIT REPORT OF THE SUBSEQUENT YEAR GIVING DETAILS OF SUCH EXPENSES AND THE ASSESSEE FAILED TO SUBSTANTIATE WITH ANY ORIGINAL EVIDENCE THAT THES E EXPENSES PERTAINED TO ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 24 THE YEAR UNDER CONSIDERATION. BEING AGGRIEVED THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 10.3 AT THE TIME OF HEARING LD. A.R SUBMITTED THAT IDENTICAL ISSUE WAS CONSIDERED IN THE ASSESSEES OWN CASE FOR A.Y 1994 -95, 1996-97 AND 1997- 98 AND THE TRIBUNAL RESTORED THE MATTER TO THE FIL E OF THE AO WITH DIRECTION TO DECIDE THE ALLOWABILITY OF THE SAME IN THE YEAR IN WHICH EXPENDITURE WAS ACTUALLY GOT CRYSTALLIZED. THE LD. A.R SUBMITTED T HAT THE TRIBUNAL FOLLOWING ITS EARLIER ORDER IN THE ASSESSMENT YEAR 2001-02 BY ITS ORDER DATED 30/4/2008 IN ITA NO.5971/M/04 ALSO RESTORED THE MAT TER BACK TO THE FILE OF THE AO WITH DIRECTION TO ALLOW THE SAID EXPENDITURE AS DEDUCTION IN THE YEAR IN WHICH THEY GOT CRYSTALLIZED. HE SUBMITTED THAT THE MATTER MAY BE RESTORED TO THE AO WITH DIRECTION TO ALLOW THE EXPENDITURE IN THE YEAR IN WHICH IT HAS ACTUALLY GOT CRYSTALLIZED. THE LD. D.R SUBMITTED T HAT HE HAS NOT OBJECTION TO RESTORED THE MATTER TO THE FILE OF THE AO WITH ABOV E DIRECTION. 10.4 AFTER HEARING THE LD. REPRESENTATIVES OF THE P ARTIES AND RESPECTFULLY FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 (SUPRA), WE RESTORE THIS IS SUE BACK TO THE FILE OF AO WITH A DIRECTION TO ALLOW THE SAID EXPENDITURE AS DEDUCTION IN THE YEAR IN WHICH IT GOT CRYSTALLIZED. HENCE, GROUND NO.7 OF T HE APPEAL TAKEN BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 11. GROUND NO.8 OF THE APPEAL TAKEN BY THE ASSESSEE IS AS UNDER:- 8. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACT ION OF THE AO OF TAKING THE TOTAL CONSIDERATION RECEIVED ON SALE OF SHARES OF LARSEN & TOUBRO FOR COMPUTING CAPITAL GAINS. THE APPELLANT SUBMITS THAT 25% OF SALE CONSIDERATI ON PERTAINING TO RESTRICTIVE COVENANT AS PER THE SALE AGREEMENT SI GNED WITH GRASIM INDUSTRIES LIMITED IS IN THE NATURE OF CAPITAL RECE IPT NOT LIABLE TO TAX. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 25 THE APPELLANT SUBMITS THAT THE AO SHALL BE DIRECTE D TO RECOMPUTE TAXABLE CAPITAL GAIN AFTER REDUCING 25% OF THE SALE CONSIDERATION RELATABLE TO THE RESTRICTIVE COVENANT. 11.1 THE RELEVANT FACTS ARE THAT THE ASSESSEE COMPA NY AND ITS SUBSIDIARIES ARE HOLDING 2.5 CRORE EQUITY SHARES OF M/S. LARSEN & TOUBRO LTD. (HEREIN AFTER TO BE REFERRED IN SHORT L&T) AS PART OF THEIR INVESTMENT. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE SOLD THE SAID 2.5 CRORE EQUITY SHARES OF L&T @ 306.60 PER SHARE FOR A TOTAL SALES CONSIDERATION OF RS.766.50 CRORES TO M/S. GRASIM INDUSTRIES LTD AND ENTERED INTO AN AGREEMENT DATED 18/11/20 01, WHICH CONTAINED INTER ALIA RESTRICTIVE COVENANT IMPOSING RESTRICTIO N UPON ASSESSEE NOT TO ACQUIRE ANY EQUITY SHARES OF L&T OR ANOTHER INSTRU MENT THAT PROVIDES VOTING RIGHTS OF L&T TO ASSESSEE OR TO ANY PERSON ON ITS B EHALF FOR A PERIOD OF FIVE YEARS. THE ASSESSEE COMPANY FILED REVISED RETUR N OF INCOME ON 8/3/2004 AND COMPUTED THE LONG TERM / SHORT TERM CAPITAL GAI N IN RESPECT OF SALE OF SAID L&T SHARES BY EXCLUDING 25% OF SALE CONSIDE RATION IN THE NATURE OF CAPITAL RECEIPT AS RELATABLE TO RESTRICTIVE COVEN ANT IN SALE AGREEMENT DATED 18/11/2001. THE AO ASKED THE ASSESSEE TO SU BMIT THE DETAILS OF THE COMPUTATION OF CAPITAL GAIN AND ALSO THE BASIS FOR EXCLUDING 25% OF SALE CONSIDERATION AS PERTAINING TO RESTRICTIVE COVENANT AND ASSESSEE FILED ITS SUBMISSION DATED 21/2/2005, INTER ALIA STATING A S UNDER : (PAGE 30 OF ASSESSMENT ORDER) (A) THAT ASSESSEE COMPANY ENTERED INTO AN AGREEMEN T DATED 18/11/2001 WITH M/S. GRASIM INDUSTRIES LTD., WHEREBY THE ASSES SEE COMPANY AGREED TO SELL ITS TOTAL EQUITY SHARE HOLDING OF 2.5 CRORES EQUITY SHARES @ RS.306.60 PER SHARE FOR AGGREGATE CONSIDERATION OF RS. 766.50 CORES. BESIDES OTHER TERMS AND CONDITIONS FOR SALE OF SHARES OF L&T, THE ASSESSEE COMPANY ALSO AGREED FOR A RESTRICTIVE COVENANT IMPOSING RESTRI CTION UPON ITSELF NOT TO ACQUIRE ANY EQUITY SHARE OF L&T AT LEAST FOR A PERI OD OF FIVE YEARS. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 26 (B) THAT THE ASSESSEE COMPANY AND ITS SUBSIDIARIE S, AFFILIATES OR ASSOCIATES WILL NOT ACQUIRE ANY EQUITY SHARES OF L&T OR ANY OT HER INSTRUMENT THAT WOULD CONFER A RIGHT TO ACQUIRE ANY EQUITY SHARES OF L&T. (C) THAT THE ASSESSEE COMPANY FURTHER UNDERTAKES N OT TO DEAL IN SHARES OF L&T AND/OR ANY OTHER INSTRUMENT THAT WOULD CONFER A RIGHT TO ACQUIRE ANY EQUITY SHARES OF L&T OR ANY OTHER INSTRUMENT THAT PROVIDES VOTING RIGHTS. (D) THAT THE ASSESSEE COMPANY WILL BE OBLIGED W ITH THESE OBLIGATIONS TO COMPLY THE SAME FOR A MINIMUM PERIOD OF 5 YEARS FRO M THE DATE HERE OF I.E. 18/11/2001. (E) THAT NO SEPARATE CONSIDERATION RELATABLE TO THE RESTRICTIVE COVENANT IS SPECIFICALLY STATED IN THE AGREEMENT DATED 18/11/2 001. HOWEVER SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) R EGULATIONS 1997 DEALING WITH TAKE OVER REGULATIONS IN CLAUSE 20(8) PROVIDES THE GUIDELINES THAT 25% OF THE OFFER PRICE MAY BE CONSIDERED TO BE ATTRIBUTABL E TO THE RESTRICTIVE COVENANT ACCEPTED AS PART OF THE SALE CONSIDERATI ON. 11.2 THE A.O HAS STATED THAT THIS IS UNIVERSAL REST RICTION WHICH HAS BEEN CONSIDERED BY THE COMPANY ON SALE OF SUBSTANTIAL NU MBER OF SHARES HELD BY IT IN L&T. THE RESTRICTIVE COVENANT INCORPORATED IN THE SALE AGREEMENT DOES NOT IN ANY WAY RESTRICT OR PLACE ANY KIND OF RESTR ICTION ON THE RIGHT TO CARRY ON NORMAL BUSINESS OF THE ASSESSEE. THE AO STATE D THAT THE ASSESSEES RELIANCE ON CLAUSE 20(8) OF SEBI REGULATIONS 1997 IS NOT CORRECT. SEBI IS THE REGULATORY AUTHORITY IN DEALING IN SHARES AND S ECURITIES IN STOCK EXCHANGES. SEBI REGULATIONS DO NOT APPLY TO THE IN COME TAX ACT EITHER IN ITS INTERPRETATION OR IMPLEMENTATION. HE HAS FURTH ER STATED THAT CLAUSE 20 DEALS WITH THE COMPUTATION OF OFFER PRICE TO BE MADE TO THE PUBLIC WHEN THERE IS SUBSTANTIAL ACQUISITION OF SHARE AS PART OF TAKE OVER BID AND ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 27 VARIOUS MODALITIES OF WORKING OUT THE OFFER PRICE ARE DEALING IN CLAUSE 20 WITH VARIOUS SITUATIONS WHICH MAY ARISE CONCERNING TAKE OVER BIDS, AO HAS STATED THAT CLAUSE 20 (8) DOES NOT IN ANY MANNER LE T OUT THAT 25% OF THE SALE CONSIDERATION IS TO TREATED AS PAYMENT TOWARDS NO N COMPETE AGREEMENT AS CAPITAL RECEIPT UNDER THE INCOME TAX ACT. THEREFO RE, NO PART OF SALE CONSIDERATION IS TO BE ATTRIBUTED TO RESTRICTIVE CO VENANT FOR COMPUTING CAPITAL GAINS. THE AO BY REJECTING THE CONTENTION OF THE ASSESSEE AND HAS COMPUTED THE SHORT TERM CAPITAL GAIN AT RS.178,50,2 8,235/-. BEING AGGRIEVED THE ASSESSEE FILED THE APPEAL BEFORE FI RST APPELLATE AUTHORITY. 11.3 ON BEHALF OF THE ASSESSEE, THE SUBMISSIONS MA DE BEFORE THE AO WERE REITERATED BEFORE LD. CIT(A). IT WAS CONTENDED THA T HARMONIOUS READING OF THE PROVISIONS OF THE AGREEMENT DATED 18/11/2001 A ND THE RELEVANT SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) R EGULATIONS 1997 BRINGS OUT THE FACT THAT THE ASSESSEE COMPANY HAS ACCEPTE D THE RESTRICTIVE COVENANT AND 25% OF THE AGREED SALE CONSIDERATION ASCRIBABLE FOR ACCEPTING SUCH RESTRICTIVE COVENANT. IT WAS SUBMITTED THAT A SUM OF RS. 191.62 CRORE BEING 25% OF THE SALE CONSIDERATION OF RS. 766.50 C RORES IS TO BE CONSIDERED AS ATTRIBUTABLE TO THE RESTRICTIVE COVENANT. IT WA S CONTENDED THAT CLAUSES 3.2 & 3.3 OF THE AGREEMENT DATED 18/11/2001 WITH M/S. G RASIM INDUSTRIES LTD. STIPULATE THAT THE ASSESSEE COMPANY WILL NOT ACQUI RE SHARES OR ANY OTHER SECURITY CARRYING VOTING RIGHTS OF L&T FOR A MINIM UM PERIOD OF FIVE YEARS. THE ASSESSEE BY AGREEING THESE RESTRICTIONS HAS FOR EGONE ITS RIGHT TO ACQUIRE THE SHARES OF L&T AND, THEREFORE, THE CONSIDERATION FOR FOREGOING THE SAID RIGHT CONSTITUTE A CAPITAL RECEIPT NOT LIABLE TO TA X. IT WAS CONTENDED THAT THE AO HIMSELF HAS STATED THAT CLAUSE 20 OF THE SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS 1997 PROVIDES FO R THE COMPUTATION OF OFFER PRICE AFTER TAKING INTO CONSIDERATION THE RES TRICTIVE COVENANT. THEREFORE, ONCE THE OFFER PRICE IS DETERMINED IN PURSUANCE OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS 19 97 , THE SAME HAS TO BE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 28 TAKEN INTO ACCOUNT FOR COMPUTING CAPITAL GAIN FOR I NCOME TAX PURPOSES ALSO. ON BEHALF OF THE ASSESSEE RELIANCE WAS ALSO PLACED BEFORE LD. CIT(A) ON THE FOLLOWING DECISIONS: 1. GILLANDERS ARBUTHNOT & CO. LTD. VS. CIT (1964) (53 ITR 283 ) (SC) 2. CIT VS. BEST & CO. (PRIVATE) LTD. (1966) 60 ITR 11 (SC) 3. CIT VS. SARASWATHI PUBLICITIES 132 ITR 207 (MAD ) 4. CIT VS. LATE G.D.NAIDU 165 ITR 63 (MAD) 5. CIT VS. AUTOMOBILE PRODUCTS OF INDIA LTD. (140 ITR 159) (BOM) 6. ADDL. CIT VS. DR. K.P.KARANTH ( 139 ITR 479)(AP ) 7. M/S. PARRY AND CO. LTD. VS. DCIT (269 ITR 177)( MAD) 8. K.S.S.MANI VS. ITO 54 ITD 76 (MAD) 9. M.N.KARANI VS. ACIT, 64 ITD 119 (BOM) 11.4 THE LD. CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE HAS HELD THAT HE AGREES WITH THE AO THAT THE CLAIM OF THE ASSESEE IS NOT TENABLE. HE HAS FURTHER STATED THAT THE DECISIONS CITED BY THE ASSESSEE ARE MAINLY IN THE CONTEXT OF NON COMPETE AGREEMENT. THE LD. CI T(A) HAS STATED THAT IN THE CASE OF THE ASSESSEE IT HAS NOT BEEN SHOWN THAT THE RESTRICTIVE COVENANT INVOLVED A VALUABLE RIGHT, THE SURRENDER OF WHICH BY THE ASSESSEE RESULTED IN GIVING A REAL AND ENDURING BENEFIT TO M/S. GRAS IM INDUSTRIES LTD., THE MERE ACCEPTANCE OF RESTRICTION CANNOT INVEST IT WIT H PECUNIARY VALUE. HE FURTHER STATED THAT REFERENCE TO 25% SALE CONSIDER ATION UNDER SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) R EGULATIONS 1997 IS FOR THE PURPOSE OF TAKE OVER CODE WHICH REQUIRES THE MA KING OF A PUBLIC OFFER FOR PURCHASE OF SHARES AT A PARTICULAR PRICE. ACCORDI NGLY THE LD. CIT(A) HAS CONFIRMED THE ACTION OF THE A.O THAT TOTAL CONSIDER ATION RECEIVED ON SALE OF SHARES OF L&T HAS TO BE CONSIDERED FOR COMPUTING CA PITAL GAIN LIABLE TO TAX. HENCE, THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 29 11.5 DURING THE COURSE OF HEARING BEFORE US, THE LD. A.R REITERATED THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW AN D ALSO REFERRED TO PAGE 519 OF THE PAPER BOOK WHICH IS AN ANNEXURE OF LETTE R DATED 21/2/2005 ADDRESSED TO THE AO AND SUBMITTED THAT CLAUSE-3 OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH M/S. GRASIM INDUSTRIES LT D., THE BUYER OF L&T SHARES; THE ASSESSEE UNDERTOOK THE OBLIGATION BY W AY OF RESTRICTIVE COVENANT NOT TO ACQUIRE ANY EQUITY SHARES OF L&T OR ANY OTHE R INSTRUMENT THAT WOULD CONFER A RIGHT TO ACQUIRE ANY EQUITY SHARES OF L&T. HE SUBMITTED THAT THE ASSESSEE COMPANY I.E. THE SELLER MADE THE SAID COV ENANT AND BOUND ITSELF, ITS AFFILIATES, ASSOCIATES OR ANY PERSON ACTING AT THEIR BEHEST. HE SUBMITTED THAT THE SAID RESTRICTIVE COVENANT HAS A MINIMUM PERIOD OF FIVE YEARS FROM THE DATE OF THE AGREEMENT ENTERED INTO. THE LD. A. R SUBMITTED THAT THE ASSESSEE COMPANY ALONGWITH ITS SUBSIDIARIES WAS HOL DING 7.7% OF L&T SHARES AND WAS THE BIGGEST SHAREHOLDER OF L&T. THE REFORE, THE ASSESSEE COMPANY HAD SAY IN THE MANAGEMENT OF L&T. THE LD . A.R REFERRED TO SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) R EGULATION 1997 AND SUBMITTED THAT AS PER CLAUSE 20(8) IT IS SPECIFICAL LY PROVIDED IN THE GUIDELINES THAT 25% OF THE OFFER PRICE MAY BE CONSIDERED AS A TTRIBUTABLE TO THE RESTRICTIVE COVENANT ACCEPTED AS PART OF SALE CONS IDERATION. THEREFORE, 25% OF THE SALE CONSIDERATION OF RS. 766.50 CRORES WHIC H COMES TO RS.191.625 CRORES IS THE CONSIDERATION RECEIVED BY THE ASSESSE E COMPANY TOWARDS RESTRICTIVE COVENANT AND THEREFORE, IT IS CAPITAL RECEIPT, NOT LIABLE TO TAX. THE LD. A.R SUBMITTED THAT UPTO ASSESSMENT YEAR 2002-03 , THE ASSESSMENT YEAR UNDER CONSIDERATION, THE CAPITAL RECEIPT FOR RESTRI CTIVE COVENANT WAS NOT LIABLE TO TAX. HE SUBMITTED THAT SUB-SECTION (VA) TO SECTION 28 HAS BEEN INTRODUCED BY THE FINANCE ACT 2002 W.E.F. 1/4/2003 TO TREAT IT AS TAXABLE BUSINESS RECEIPT. HE, FURTHER, SUBMITTED THAT SECT ION 55(2)(A) OF THE ACT WAS ALSO AMENDED BY THE FINANCE ACT 2002 TO INCLUDE AND PROVIDE THAT COST OF A RIGHT TO CARRY ON BUSINESS SHALL BE NIL. HE SUBM ITTED THAT PRIOR TO ASSESSMENT YEAR 2003-04 THE NON COMPETE FEE OR RIG HT TO CARRY ON ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 30 BUSINESS WAS NEITHER A REVENUE RECEIPT IN THE NA TURE OF BUSINESS RECEIPT NOR WAS A CAPITAL RECEIPT CHARGEABLE TO TAX AS CAPI TAL GAIN. THE LD. A.R SUBMITTED THAT THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE TO THE EXTENT OF 25% CANNOT BE CONSIDERED AS CAPITAL GAIN IN THE ASSESSMENT YEAR UNDER CONSIDERATION AS THE SAME WAS TOWARDS RESTRICTIVE C OVENANT AS PER AGREEMENT DATED 18/11/2001. TO SUBSTANTIATE HIS SU BMISSION LD. A.R REFERRED TO THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF GUFFIC CHEM P. LTD. VS. CIT 332 ITR 602 AND SUBMITTED THAT IT W AS HELD BY THEIR LORDSHIP THAT THE NON COMPETE FEE RECEIVED DURING THE ASSESSMENT YEAR 1997-98 WAS A CAPITAL RECEIPT AND PRIOR TO APRIL 20 03 SUCH PAYMENT WAS IN THE NATURE OF CAPITAL RECEIPT. THE LD. A.R FURTHER SUBMITTED THAT THE CASES REFERRED BEFORE THE LD. CIT(A), MENTIONED HEREIN A BOVE IN PARA 11.3 ARE ALSO APPLICABLE TO THE CASE OF THE ASSESSEE. HE SUBMIT TED THAT THE SUM OF RS. 191.625 CRORES BE CONSIDERED AS CAPITAL RECEIPT TO WARDS RESTRICTIVE COVENANT NOT LIABLE TO TAX. 11.6 ON THE OTHER HAND, LD. D.R IN HIS SUBMISSIONS RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE LD. CIT(A) HAS RIGHTLY CONSIDERED TOTAL CONSIDERATION RECEIVED ON SALE OF SHARES OF L&T FOR COMPUTING CAPITAL GAINS LIABLE TO TAX. 11.7 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTIES AND THE ORDERS OF TH E AUTHORITIES BELOW. WE HAVE ALSO CAREFULLY CONSIDERED THE CASES CITED BEF ORE US(SUPRA). 11.8 WE OBSERVE THAT THE ASSESSEE COMPANY ALONGW ITH ITS SUBSIDIARIES WAS HOLDING 2.5 CRORES EQUITY SHARES OF L&T AS PART OF ITS INVESTMENT. THE SAID SHARES WERE SOLD BY THE ASSES SEE TO M/S. GRASIM INDUSTRIES LTD. UNDER AN AGREEMENT DATED 18/11/2001 @ RS. 306.60 PER SHARE FOR AN AGGREGATE CONSIDERATION OF RS. 766.50 CRORES. THERE IS NO ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 31 DISPUTE THAT UNDER THE SAID AGREEMENT DATED 18/11 /2001, THERE WAS COVENANT AND AS PER CLAUSE 3.2 THEREOF THE ASSESS EE AND ITS SUBSIDIARIES, AFFILIATES OR ASSOCIATES AGREED NOT TO ACQUI RE ANY EQUITY SHARES OF L & T OR ANY OTHER INSTRUMENT THAT PROVIDES VOTING RIGHTS . DURING THE COURSE OF HEARING IT WAS SUBMITTED BEFORE US THAT THE ASSESSE E COMPANY ALONGWITH ITS SUBSIDIARIES WAS HOLDING 7.7% OF L & T SHARES AND WAS THE BIGGEST SHAREHOLDERS AT THE RELEVANT TIME. THEREFORE, THE ASSESSEE COMPANY WAS HAVING A SAY IN THE MANAGEMENT OF L&T AT THE RELEV ANT TIME. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE COMPANY AND I TS SUBSIDIARIES SOLD ALL THE SHARES TO ONE COMPANY NAMELY M/S. GRASIM INDUST RIES LTD. AND ENTERED INTO AN AGREEMENT DATED 18/11/2001. THEREFORE, IT IS EVIDENT THAT M/S. GRASIM INDUSTRIES LTD. ALSO BECAME THE BIGGEST SHA RE HOLDERS OF L&T AFTER ACQUIRING THE SHARES FROM THE ASSESSEE COMPANY AND ITS SUBSIDIARIES. SEBI IS A REGULATORY AUTHORITY AND ALSO KEEP A WATCH WH EN THERE IS SUBSTANTIAL ACQUISITION OF SHARES OR THERE IS AN ATTEMPT TO TAK E OVER OF A PUBLIC LIMITED COMPANY. IN THIS REGARD SEBI HAS LAID DOWN REGULAT IONS WHICH ARE KNOWN AS SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKE OVERS) REGULATIONS 1997AND CLAUSE 20(8) OF THE SAID REGULATION WHICH READS AS UNDER:- (8) ANY PAYMENT MADE TO THE PERSONS OTHER THAN THE TARGET COMPANY IN RESPECT OF NON COMPETE AGREEMENT IN EXCESS OF T WENTY FIVE PERCENT OF THE OFFER PRICE ARRIVED AT UNDER SUB-REGULATIONS (4) OR (5) OR (6) SHALL BE ADDED TO THE OFFER PRICE. ON PERUSAL OF ABOVE CLAUSE OF SEBI (SUBSTANTIAL A CQUISITION OF SHARES AND TAKEOVERS)REGULATIONS 1997 IT IS EVIDENT THAT IF TH ERE IS SUBSTANTIAL ACQUISITION OF SHARE AND THERE IS A NON COMPETE AG REEMENT, THE PAYMENT MADE TO THE CONCERNED PERSONS COULD BE CONSIDERED TO THE EXTENT OF 25% OF THE SALE CONSIDERATION, TOWARDS CONSIDERATION FOR A CCEPTING SUCH RESTRICTIVE COVENANT. IN THE CASE BEFORE US THERE IS NO DISPUT E THAT THE ASSESSEE ENTERED INTO RESTRICTIVE COVENANT NOT TO DEAL IN TH E SHARES OF L&T OR ANY OTHER L & T INSTRUMENT WHICH WOULD PROVIDE VOTING R IGHTS TO THE ASSESSEE AND ITS SUBSIDIARY COMPANIES OR TO ANY PERSON ACTIN G ON ITS BEHEST FOR A ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 32 MINIMUM PERIOD OF 5 YEARS. THEREFORE, THE SAID SAL E OF 2.5 CRORES EQUITY SHARES OF L&T BY THE ASSESSEE TO M/S. GRASIM INDUS TRIES LTD. COULD NOT BE CONSIDERED AS SIMPLE SALE AND IF IT IS SO, THEN TH ERE WAS NO NEED TO ENTER INTO ANY SUCH KIND OF RESTRICTIVE COVENANT. WE ARE OF THE CONSIDERED VIEW THAT THE SAID OBLIGATION IN THE NATURE OF A RESTRI CTION HAD BEEN UNDERTAKEN BY THE ASSESSEE WITH M/S. GRASIM INDUSTRIES LTD., THE PURCHASER OF THE SHARES, TO ENSURE THAT THE BUYER MAY HAVE CONTROLLI NG INTEREST IN THE AFFAIRS OF L&T BEING THE BIGGEST SHAREHOLDER WITHOUT ANY THREAT FROM THE ASSESSEE OR ITS ASSOCIATE. THEREFORE, WE ARE OF THE CONSIDE RED VIEW THAT A PART OF THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE ON SAL E OF SHARES COMPRISED OF TOWARDS RESTRICTIVE COVENANT/OBLIGATIONS FOR A MINI MUM PERIOD OF FIVE YEARS AS PER AGREEMENT ENTERED INTO. WE ALSO OBSERVE THAT THE AO HIMSELF HAS STATED THAT CLAUSE 20 OF SEBI (SUBSTANTIAL ACQUISI TION OF SHARES AND TAKEOVERS) REGULATIONS 1997 PROVIDES OF COMPUTATIO N OF OFFER PRICE AFTER TAKING INTO CONSIDERATION THE RESTRICTIVE COVENANT. SINCE CLAUSE 20(8) OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVE RS) REGULATION 1997 PROVIDES THAT PAYMENT TO THE EXTENT OF 25% OF THE AGREED SALE CONSIDERATION COULD BE IN RESPECT OF RESTRICTIVE COVENANT I.E. NON COMPETE AGREEMENT, WE FIND MERIT IN THE CONTENTION OF LD. A.R THAT 25% OF THE OFFER PRICE RECEIVED WAS FOR NON COMPETE AGREEMENT FOR SALE OF SHARES BY THE ASSESSEE TO M/S. GRASIM INDUSTRIES LTD AS PER AGREEMENT ENTERED INTO . 11.9 NOW THE QUESTION ARISES AS TO WHETHER 25% OF RS.766.50 CRORES WHICH COMES TO RS.191.625 CRORES IS TAXABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION AS BUSINESS RECEIPT OR CAPITAL RECEIP T. 11.10 DURING THE COURSE OF HEARING OUR ATTENTION W AS DRAWN TO THE FACT THAT THE CONSIDERATION RECEIVED UNDER AN AGREEMENT FOR NOT CARRYING OUT ANY ACTIVITY IN ANY RELATION TO ANY BUSINESS IS TAXABLE AS BUSINESS INCOME ONLY FROM ASSESSMENT YEAR 2003-04 AS CLAUSE (VA) TO SECT ION 28 HAS BEEN INSERTED ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 33 BY THE FINANCE ACT 2002 W.E.F. 1/4/2003. THE QUEST ION ARISES AS TO WHETHER THE SAID SECTION I.E. SECTION 28(VA) IS RETROSPECTI VE OR IS APPLICABLE FROM A.Y 2003-04 ONWARDS. THE SAID ISSUE HAD BEEN CONSIDERE D BY THE HONBLE APEX COURT IN THE CASE OF GUFFIC CHEM PVT. LTD. (SUPRA) AND IT HAS BEEN HELD BY THEIR LORDSHIPS THAT THE COMPENSATION RECEIVED BY T HE ASSESSEE UNDER NON COMPETITION AGREEMENT WAS A CAPITAL RECEIPT NOT T AXABLE UNDER THE ACT PRIOR TO ASSESSMENT YEAR 2003-04. IT HAS BECOME T AXABLE W.E.F. 1/4/2003. WE CONSIDER IT PRUDENT TO REPRODUCE PARA-7 AT PA GE PAGE 607 OF THE SAID ORDER WHICH READS AS UNDER: TWO QUESTIONS AROSE FOR DETERMINATION, NAMELY, WHE THER THE AMOUNTS RECEIVED BY THE APPELLANT FOR LOSS OF AGENCY WAS IN NORMAL COURSE OF BUSINESS AND THEREFORE WHETHER THEY CONSTITUTED REV ENUE RECEIPT? THE SECOND QUESTION WHICH AROSE BEFORE THIS COURT WAS WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE (COMPENSATION) ON THE COND ITION NOT TO CARRY ON A COMPETITIVE BUSINESS WAS IN THE NATURE OF CAPITA L RECEIPT? IT WAS HELD THAT THE COMPENSATION RECEIVED BY THE ASSESSEE FOR LOSS OF AGENCY WAS A REVENUE RECEIPT WHEREAS COMPENSATION RECEIVED F OR REFRAINING FROM CARRYING ON COMPETITIVE BUSINESS WAS A CAPITAL REC EIPT. THIS DICHOTOMY HAS NOT BEEN APPRECIATED BY THE HIGH COURT IN ITS IMPUGNED JUDGMENT. THE HIGH COURT HAS MISINTERPRETED THE JUDGMENT OF T HIS COURT IN GILLANDERS CASE (SUPRA). IN THE PRESENT CASE, THE DEPARTMENT HAS NOT IMPUGNED THE GENUINENESS OF THE TRANSACTION. IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE HIGH COURT HAS ERRED IN IN TERFERING WITH THE CONCURRENT FINDINGS OF FACT RECORDED BY THE COMMISS IONER OF INCOME-TAX (APPEALS) AND THE TRIBUNAL. ONE MORE ASPECT NEEDS T O BE HIGHLIGHTED. PAYMENT RECEIVED AS NON-COMPETITION FEE UNDER A NEG ATIVE COVENANT WAS ALWAYS TREATED AS A CAPITAL RECEIPT TILL THE A SSESSMENT YEAR 2003- 04. IT IS ONLY VIDE FINANCE ACT, 2002 WITH EFFE CT FROM APRIL 2003 THAT THE SAID CAPITAL RECEIPT IS NOW MADE TAXABLE (SEE SECTION 28(VA)). THE FINANCE ACT, 2002 ITSELF INDICATES THAT DURING THE RELEVANT ASSESSMENT YEAR COMPENSATION RECEIVED BY THE ASSESSEE UNDER NO N-COMPETITION AGREEMENT WAS A CAPITAL RECEIPT, NOT TAXABLE UNDER THE 1961 ACT. IT BECAME TAXABLE ONLY WITH EFFECT APRIL, 2003. IT IS WELL SETTLED THAT A LIABILITY CANNOT BE CREATED RETROSPECTIVELY. IN TH E PRESENT CASE, COMPENSATION RECEIVED UNDER THE NON-COMPETITION AGR EEMENT BECAME TAXABLE AS A CAPITAL RECEIPT AND NOT AS A REVENUE R ECEIPT BY SPECIFIC LEGISLATIVE MANDATE VIDE SECTION 28(VA) AND THAT TO O WITH EFFECT FROM APRIL1, 2003. HENCE, THE SAID SECTION 28(VA) IS AM ENDATORY AND NOT CLARIFICATORY. LASTLY, IN CIT V. RAI BAHADUR JAIRA M VALJI REPORTED IN ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 34 (1959) 35 ITR 148 IT WAS HELD BY THIS COURT THAT IF A CONTRACT IS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS, ANY COMPEN SATION RECEIVED FOR ITS TERMINATION (LOSS OF AGENCY) WOULD BE A REVENUE RECEIPT. IN THE PRESENT CASE, BOTH THE COMMISSIONER OF INCOME TAX ( APPEALS) AS WELL AS THE TRIBUNAL, CAME TO THE CONCLUSION THAT THE AGREE MENT ENTERED INTO BY THE ASSESSEE WITH RANBAXY LED TO LOSS OF SOURCE OF BUSINESS ; THAT PAYMENT WAS RECEIVED UNDER THE NEGATIVE COVENANT AN D THEREFORE THE RECEIPT OF RS. 50 LAKHS BY THE ASSESSEE FROM RANBAX Y WAS IN THE NATURE OF A CAPITAL RECEIPT. IN FACT, IN ORDER TO PUT AN E ND TO THE LITIGATION, PARLIAMENT STEPPED IN TO SPECIFICALLY TAX SUCH RECE IPTS UNDER NON- COMPETITION AGREEMENT WITH EFFECT FROM APRIL 1, 200 3. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT PRIOR TO A.Y 2003-04 I.E. IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE 25% OF THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE IS THE CONSIDERATION RECEI VED TOWARDS RESTRICTIVE COVENANT AND IS A CAPITAL RECEIPT. 11.11 THE HONBLE APEX COURT HAS ALSO HELD IN THE CASE OF GILLANDERS ARBUTHNOT & CO. LTD. (SUPRA) THAT COMPENSATION PAID FOR AGREEING TO REFRAIN FROM CARRYING ON COMPETITIVE BUSINESS IN THE COMMOD ITIES IN RESPECT OF THE AGENCY TERMINATED OR FOR LOSS OF GOODWILL, IS PRIM A FACIE OF THE NATURE OF CAPITAL RECEIPT. SINCE IN THE CASE BEFORE US THE A SSESSEE ENTERED INTO A RESTRICTIVE COVENANT NOT TO DEAL IN THE SHARES OF L&T FOR A PERIOD OF FIVE YEARS FROM THE DATE OF AGREEMENT, THE ASSESSEE HAS REFRAINED ITSELF UNDER A RESTRICTIVE COVENANT TO COMPETE WITH THE PURCHASE R OF SHARES, WE ARE OF THE CONSIDERED VIEW THAT A PART OF THE SAME PROCEEDS H AS RIGHT BEEN CONSIDERED TOWARDS RECEIPT ON ACCOUNT OF RESTRICTIVE COVENAN T AND SAME IS IN THE NATURE OF CAPITAL RECEIPT. 11.12 THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. G.D.NAIDU (SUPRA) ALSO HELD THAT THE COMPENSATION R ECEIVED BY THE ASSESSEE FOR THE RESTRICTIVE COVENANT IS CAPITAL RECEIPT NOT LIABLE TO TAX. IN THE SAID CASE THE ASSESSEE WAS A PARTNER IN A FIRM. HE RET IRED FROM THE FIRM W.E.F. 1/4/1963 AND AGREED NOT TO ENTER INTO THE BUSINES S FOR PLYING BUSES WHICH ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 35 WAS CARRIED ON BY THE FIRM IN WHICH HE WAS A PARTNE R. THUS THE ASSESSEE AGREED NOT TO ENTER INTO COMPETITION WITH FIRM FOR A PERIOD OF FIVE YEARS TO PLY BUSES ON THE DESIGNATED ROUTES. THE FIRM PAID RS. 15,95,000/- IN CONSIDERATION OF THIS NON-COMPETITION. THE AO HEL D THAT THE COMPENSATION RECEIVED IS REVENUE IN CHARACTER. THE FIRST APPELL ATE AUTHORITY ALSO HELD IT TO BE A REVENUE RECEIPT. HOWEVER, THE TRIBUNAL HELD T HAT THE COMPENSATION RELATABLE TO THE RESTRICTIVE COVENANT IS CAPITAL RE CEIPT. THE HONBLE HIGH COURT HELD THAT THE COMPENSATION RECEIVED BY THE AS SESSEE FOR THE RESTRICTIVE COVENANT WAS A CAPITAL RECEIPT NOT LIABLE TO INCOM E TAX. FURTHER IN THE CASE OF K.S.S.MANI (SUPRA) THE TRIBUNAL HELD THAT THE A GREEMENT CONTAINS PROHIBITIVE COVENANT IN CONSIDERATION OF WHICH TH E ASSESSEE, WHO WAS A DIRECTOR OF COMPANY RECEIVED A SUM OF RS. 2.00 LAC S FROM THE COMPANY FOR AGREEING NOT TO CARRY ON ANY ACTIVITY OR EMPLOYMENT FOR A PERIOD OF THREE YEARS WHICH COULD BE PREJUDICIAL TO THE INTEREST OF THE COMPANY WAS A CAPITAL RECEIPT AND THE LD. CIT(A) WAS NOT JUSTIFIED TO H OLD THAT THE SAID COMPENSATION OF RS. 2.00 LACS WAS PROFIT IN LIEU OF SALARY UNDER SECTION 17(3)(I) OR (II) OF THE ACT AND DIRECTED THE AO TO EXCLUDE THE COMPENSATION WHICH IS A CAPITAL RECEIPT. 11.13 IN VIEW OF ABOVE, WE HOLD THAT THE AMOUNT TO THE EXTENT OF 25% OF THE TOTAL CONSIDERATION RECEIVED BY THE ASSESSEE ON SALE OF SHARES OF L&T IS IN THE NATURE OF CAPITAL RECEIPT TOWARDS RESTR ICTIVE COVENANT. 11.14 FURTHER THE QUESTION ARISES AS TO WHETHER TH E SAID CONSIDERATION RECEIVED FOR RESTRICTIVE COVENANT WHICH IS A CAPITA L RECEIPT IS TAXABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION OR NOT. SECTIO N 55(2)(A) HAS ALSO BEEN AMENDED BY THE FINANCE ACT 2002 TO INCLUDE AND PROV IDE THAT RIGHT TO CARRY ON ANY BUSINESS SHALL BE NIL. THEREFORE, PRIOR TO ASSESSMENT YEAR 2003-04 NON COMPETE FEE WHICH IS RECEIVED AS RESTRICTIVE CO VENANT FOR RIGHT TO CARRY ON BUSINESS WAS A CAPITAL RECEIPT NOT LIABLE TO TA X. WE HOLD ACCORDINGLY. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 36 11.15 ACCORDINGLY, WE ALLOW GROUND NO.8 OF THE APPEAL OF THE ASSESSEE THAT 25% OF SALE CONSIDERATION RECEIVED ON SALE OF SHARE S OF L&T IS IN THE NATURE OF CAPITAL RECEIPT AND IN THE ASSESSMENT YEAR 2002 -03 NOT LIABLE TO TAX. 12. GROUND NO.9 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE U/ S. 92C OF THE ACT OF RS.1,85,24,385/- OUT OF THE CHARTER HIRE CHARGES PA ID TO ITS ASSOCIATE ENTERPRISE M/S. RELIANCE EUROPE LIMITED (REL) BY YOUR APPELLANT. THE APPELLANT SUBMITS THAT THE CHARTER HIRE CHARGES PAID BY THE APPELLANT TO REL IS AT ARMS LENGTH PRICE AND NO AD JUSTMENT IS CALLED FOR TO SUCH PAYMENTS. 12.1 THIS GROUND IS CONSIDERED ALONGWITH GROUND NO .9 OF THE APPEAL FIELD BY THE DEPARTMENT, WHICH IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADJUSTMENT OF RS. 4,28,81,833/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTERNA TIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES. 12.2 THE RELEVANT FACTS IN RESPECT OF THE GROUND O F APPEAL TAKEN BY THE ASSESSEE ARE THAT THE ASSESSEE ENTERED INTO A TIME CHARTER PARTY AGREEMENT (C/P) DATED 20/10/1993 IN TERMS OF WHICH RELIANCE EUROPE LTD. ( HEREINAFTER TO BE REFERRED IN SHORT REL) GAVE IT S VESSEL, RELCHEM ISHA TO THE ASSESSEE ON TIME CHARTER HIRE FOR CARRYING OF CARGO S AS PER TERMS OF THE SAID C/P AT US$ 6,000 PDR. ASSESSEE HOLDS MORE THAN 2 6% OF THE VOTING POWER IN REL AND THUS AN ASSOCIATED ENTERPRISES OF THE AS SESSEE. THE VESSEL RELCHEM ISHA IS SEMI-REFRIGERATED LPG/ CHEMICALS CARRIER AND IS EQUIPPED TO CARRY LIQUEFIED GASES AT MINUS 48 DEGREE CELSIUS TEMPERATURE AS WELL AS CHEMICAL PRODUCTS. THE CAPACITY OF SUCH VESSEL IS 3,256 DWT. IT IS FITTED WITH TWO STAINLESS STEEL TANKS HAVING TOTAL CAPACIT Y OF 2,242 CUBIC METERS. THE ASSESSEE PAID TO REL OF RS. 10,52,88,711/- THE AO MADE A REFERENCE TO TPO UNDER SECTION 92CA(1) OF THE ACT FOR DETERMI NATION OF ARMS LENGTH PRICE(ALP). THE TPO VIDE HIS ORDER DATED 25/3/2005 HAS STATED THAT THE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 37 ASSESSEE WAS REQUESTED TO DETERMINE ALP OF INTERN ATIONAL TRANSACTION BEING CHARTER HIRE CHARGES IN ACCORDANCE WITH ANY ONE OF THE METHODS PRESCRIBED UNDER INCOME TAX ACT. THE ASSESSEE WAS ALSO REQUES TED TO PROVIDE DETAILS OF THE COST INCURRED BY THE ASSOCIATE ENTITY ON A REGULAR BASIS ON THE SAID VESSEL HIRED TO THE ASSESSEE. THE TPO HAS STATED THE ASSESSEE EXPLAINED THAT THE SAID VESSEL IS USED FOR TRANSFER OPERATION OF CHEMICALS AND PETROCHEMICALS AND LIQUEFIED GASES. THE ASSOCIATE ENTITIES HAD TO CARRY OUT VARIOUS SPECIFIC MODIFICATIONS IN THE VESSEL IN OR DER TO MEET THE REQUIREMENT OF THE ASSESSEE. IT WAS ALSO STATED THAT THE CHA RTER HIRE CHARGES PAYABLE BY THE ASSESSEE ARE APPROVED BY THE DIRECTOR GENERAL O F SHIPPING WHICH IS THE APEX BODY OF THE GOVERNMENT OF INDIA AND THE SAID A PPROVAL IS A COMPARABLE UNCONTROLLED PRICE (CUP) FOR THE INTERN ATIONAL TRANSACTION. HENCE THE CHARTER HIRE CHARGES MAY BE CONSIDERED T O BE AN ARMS LENGTH COMPENSATION. THE ASSESSEE VIDE ITS LETTER DATE D 28/10/2004 SUBMITTED THAT THE ASSOCIATED ENTITY HAD INCURRED AN EXPENSES US$ OF 2.50 MILLION FOR IMPROVEMENT OF THE SAID VESSEL. THE TPO STATED T HAT THE ASSESSEE HAS NOT FURNISHED THE ORIGINAL COST AND DAY TO DAY MAINTEN ANCE EXPENSES. HOWEVER, THE ASSESSEE FURNISHED AN EXTRACT FROM THE DREWRY MONTHLY REPORT APRIL, 2003 ISSUE WHICH IS STATED TO BE A REPUTED SHIPPIN G WEEKLY PUBLISHED BY DREWRY SHIPPING CONSULTANTS LTD. UK AND THE MONTHL Y CHARTER HIRE RATES AS PER THE WEEKLY REPORT IS INDICATED AS US$ 195000 FOR A VESSEL HAVING CARRYING CAPACITY OF 3000 CUBIC METERS. THE VES SEL PROVIDED BY THE ASSOCIATE ENTITY I.E. REL HAS A LESSER CARRYING CAP ACITY AND HENCE UD$ 180000 IS REASONABLE. IT WAS STATED THAT THE GENER AL RATES PREVAILING IN MARKET NEEDS TO BE FURTHER ADJUSTED TO TAKE INTO A CCOUNT THE SPECIFIC TECHNICAL CAPABILITIES OF THE VESSEL HIRED TO THE ASSESSEE AND ITS ABILITY TO OPERATE UNDER TIDAL CONDITIONS IN ORDER TO MAKE THE M COMPARABLE. THE ASSESSEE CONTENDED THAT APPROVAL GIVEN BY THE DIRE CTOR GENERAL OF SHIPPING SHOULD BE CONSIDERED AS AN ARMS LENGTH COMPENSATIO N. HOWEVER, THE TPO STATED THAT THE APPROVAL OF DIRECTOR GENERAL OF SHI PPING IN THE CONTEXT OF ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 38 REMITTANCE OF FOREIGN EXCHANGE DOES NOT TAKE INTO ACCOUNT THE TRANSFER PRICING PROVISIONS. THE TPO HAS STATED THAT THE AL P OF THIS INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED NOR HAS IT BENC H MARKED IN ACCORDANCE WITH TRANSFER PRICING PROVISIONS. THE TPO CONSIDERED OF TWO COMPARABLE PRICES AS PUBLISHED IN THE SHIPPING PUBL ICATIONS - THE SHIPPING INTELLIGENCE WEEKLY- ISSUE 639 DATED 1 ST OCTOBER, 2004, WHICH IS PUBLISHED BY CLARKSON RESEARCH STUDIES AND THE DREWRY MONTHL Y, APRIL 2009- ISSUE PUBLISHED BY THE DREWRY SHIPPING CONSULTANTS LTD. U K, AND DETERMINED ARMSS LENGTH PRICE BY TAKING AVERAGE THEREFROM. HE ADJUSTED THE RATE FOR THE CAPACITY AND COMPUTED ARMS LENGTH PRICE OF T HE CHARTER HIRE CHARGES AT THE RATE OF US$ 3819, AS AGAINST THE RATE OF US$ 6000 PAID BY THE ASSESSEE. THUS THE TPO VIDE HIS ORDER DATED 25/3/2 005 SUGGESTED ADJUSTMENT OF RS.3,78,13,087/-. BEING AGGRIEVED TH E ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 12.3 LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS TAKEN THE MEAN OF THE ALP DETERMINED BY THE TPO AND PRIC ES ACTUALLY PAID BY THE ASSESSEE. THUS OUT OF THE ADJUSTMENT OF RS. 3,78 ,13,087/- MADE BY TPO HE CONFIRMED THE ADJUSTMENT OF RS. 1,85,24,376/- A ND DELETED THE BALANCE AMOUNT. HENCE, THE ASSESSEE IS IN APPEAL BEFORE T HE TRIBUNAL. 12.4 RELEVANT FACTS IN RESPECT OF THE GROUND OF APPEAL TAKEN BY THE DEPARTMENT VIZ. GROUND NO.9 ARE THAT THE THE TPO, IN HIS ORDER DATED 25TH MARCH 2005, PASSED UNDER SECTION 92CA(3) OF THE ACT , HAS DEALT WITH THE ISSUE VIDE PARA-12 AT PAGE-6 OF HIS ORDER. THE ASSE SSEE PAID CONSULTANCY CHARGES OF RS.17,62,68,906, TO REL. THE ASSESSEE S CLAIM HAS BEEN BROUGHT OUT BY THE TPO AS FOLLOWS: A) IN THIS CONNECTION THE ASSESSEE HAS SUBMITTED A COPY OR AN AGREEMENT DTD. 19.4.1997 ENTERED INTO BETWEEN THE A SSESSEE AND THE ASSOCIATED ENTERPRISE. THE ASSESSEE HAS ALSO FURNIS HED THE APPROVAL OF ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 39 P81 DTD. 24.9.2001 FOR REMITTANCE OF THE FEES UNDER THE SAID AGREEMENT. B) AS PER THE AGREEMENT THE ASSOCIATED ENTITY IS RE QUIRED TO PROVIDE THE FOLLOWING SERVICES. O COMPETITIVE INFORMATION AND MARKET INTELLIGENCE O N PRODUCTS PROCESS AND TECHNOLOGY RELATING TO THE ASSESSEE. O SHORT LISTING OF PROFESSIONAL EXPERTS SUCH AS SCI ENTISTS, ENGIHEERS, CONSULTANTS ETC. O MAINTAINING AN ONGOING INDUSTRIAL ACTIVITY. O SELECTING POTENTIAL SUPPLY OF EQUIPMENT. O DEALING WITH INTERNATIONAL BANKERS, INSURANCE COM PANIES FOR RAISING OF FINANCIAL RESOURCES. O ATTENDING TO AND DEALING WITH INTERNATIONAL STOCK EXCHANGES WHERE THE ASSESSES SECURITY ARE DEALT WITH. O PROVIDING IN FORMATION ABOUT LATEST ECONOMIC, POL ITICAL & OTHER DEVELOPMENTS IN EUROPE, MIDDLE EAST ETC. O NEGOTIATING AND SECURING CRITICAL RAW MATERIALS. C) AS PER THE AGREEMENT THE ASSESSEE HAS RECEIVED S ERVICE FEES OF USD 3.75 MILLION FOR THE RELEVANT PREVIOUS YEAR. THE FI XED LUMPSUM FEE HAS BEEN FIXED IN THE AGREEMENT ITSELF AND IS PAYABLE I N FOUR EQUAL INSTALLMENT. 12.5 THE TPO CALLED FOR INFORMATION ON THE RESOUR CES AVAILABLE WITH REL. THE ASSESSEE REPLIED VIDE LETTER DATED 31ST JANUARY 2005. THE ASSESSEE HAD EXPLAINED THAT THE SERVICES RENDERED BY REL WERE EX AMINED BY TWO LEADING MANAGEMENT CONSULTANCY FIRMS WHO ARE RENDERING SIMI LAR SERVICES. THESE MANAGEMENT CONSULTANTS WERE MACKINZY & CO. AND THE D GROUP. THESE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 40 QUOTATIONS WERE BENCH MARKED AGAINST THE CONSULTANC Y CHARGES PAID TO THE A.E. AND CUP METHOD WAS APPLIED. 12.6 THE TPO REJECTED THE CONTENTIONS OF THE AS SESSEE ON THE GROUND THAT A QUOTATION GIVEN BY THIRD PARTY DO NOT CONSTITUTE COMPARABLE UNCONTROLLED TRANSACTIONS. HE HELD THAT BOTH THE LETTERS SUBMIT TED BY THE ASSESSEE WERE ISSUED MUCH AFTER THE END OF THE PREVIOUS YEAR AND DID NOT CONSTITUTE ACTUAL TRANSACTIONS AND, HENCE, CANNOT BE REGARDED AS COMP ARABLE UNDER THE CUP METHOD. HE FURTHER HELD THAT THE ESTIMATION O N VALUATION OF SERVICES ATTEMPTED BY THE ASSESSEE THROUGH THIRD PARTIES DO NOT FALL WITHIN ANY OF THE PRESCRIBED METHODS FOR DETERMINATION OF ALP. HE HEL D THAT THE A.E. HAD MINIMAL RISK AND WHEREAS THE RISK OF MACKINZY & CO. , AND THE D GROUP HAVE GRATER RISK AS THEY OPERATE AT GLOBAL LEVEL AN D ALSO THAT NO FOREIGN EXCHANGE FLUCTUATION RISK IS INVOLVED; AS FOR DIFFERENCE IN THE REASONS SUCH AS BASIS OF ESTIMATION, ETC., BY THE D GROUP AND MACKINZY & CO. THE TPO APPLIED COST PLUS METHOD WITH 5% MARK-UP. HE MADE CERTAIN ADJUSTMENTS. 12.7 ON APPEAL, THE FIRST APPELLATE AUTHORITY, VIDE PARA-3.20/PAGE-61 OF HIS ORDER, ACCEPTED THE CONTENTIONS OF THE ASSESSEE . HE HELD THAT IN THE ABSENCE OF COMPARABLE INSTANCES, AN ESTIMATE OF REA SONABLE MARK-UP CAN ONLY BE MADE AFTER TAKING INTO ACCOUNT ALL MATERIAL FACTORS AND INDICES. HE HELD THAT THE CONSIDERATION PAID BY THE ASSESSEE TO REL DURING THE YEAR UNDER CONSIDERATION TOWARDS CONSULTANCY SERVICES IS REASONABLE HAVING REGARD TO THE NET PROFIT DISCLOSED BY REL AND ALSO THE FACT THAT THE NET PROFIT OF REL INCLUDES INCOME FROM TIME CHARTER OF RELCHE M ISHA WHERE A TRANSFER PRICING ADJUSTMENT HAD BEEN MADE. THE COMMISSIONER (APPEALS) HAS NOT APPLIED ANY METHOD PRESCRIBED UNDER THE ACT AND THE RULES. HE HAS NOT FOUND FAULT WITH THE METHODS EMPLOYED BY THE ASSESS EE OR T.P.O. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 41 12.8 DURING THE COURSE OF HEARING OF THE APPEAL BE FORE US LD. A.R SUBMITTED THAT THE VESSEL RELCHEM ISHA IS FITTED W ITH SEVERAL SOPHISTICATED EQUIPMENTS SO THAT IT IS IN A POSITION TO CARRY LP G AS WELL AS CHEMICALS AND PETROCHEMICALS AT THE JETTIES IN LOW DRAFT OF 2.8 METERS TO 3.5 METERS. HE SUBMITTED THAT ASSESSEE SUBMITTED RELEVANT EXTRACT OF TWO COMPARABLE PUBLICATIONS WHICH GAVE TIME CHARTER HIRE CHARGES FOR VESSELS OF DIFFERENT CAPACITY OF SIMILAR CATEGORIES NAMELY OF THE SHIPPI NG INTELLIGENCE WEEKLY ISSUE 639 DATED 1/10/2004, PUBLISHED BY CLARKSON RE SEARCH STUDIES, COPY PLACED AT PAGE 596 TO 601 OF PAPER BOOK AND DREWRY MONTHLY APRIL 2003, PUBLISHED BY DREWRY SHIPPING CONSULTANTS LTD. U.K, COPY PLACED AT PAGES 602 TO 603 OF PAPER BOOK. HE SUBMITTED THAT TPO DE TERMINED ALP BY TAKING AVERAGE OF THE TWO COMPARABLE PRICES AS PUBL ISHED IN ABOVE MENTIONED PUBLICATION AND THIS WAS PRORATED FOR A VESSEL OF 2250 CUBIC METER CAPACITY, WHICH IS HIRED BY THE ASSESSEE. AC CORDINGLY TPO WORKED OUT ALP OF THE CHARTER HIRE CHARGES @ UD$ 3819 PER DA Y. HE SUBMITTED THAT LD. CIT(A) ACCEPTED THE FACT THAT DETERMINATION OF RAT ES ON THE BASIS OF PROPORTIONATE ADJUSTMENT OF TANK CAPACITY IS MISLEA DING BECAUSE RATES DEPEND UPON MANY TECHNICAL AND COMMERCIAL FACTORS. DURING THE COURSE OF HEARING LD. A.R WAS ASKED TO POINT OUT THE SAID SPE CIAL FACTOR WHICH COULD BE SAID TO WEIGHT IN FAVOUR OF THE ASSESSEE. IT IS RELEVANT TO STATE THAT THE ASSESSEE STATED FACTORS HEREIN AFTER STATED AND C ONTENDED THAT THEY ARE TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF PAYM ENT OF HIGHER CHARTER HIGHER CHARGES BY THE ASSESSEE TO REL. LD. A.R PO INTED OUT THAT REL MADE MAJOR AND COSTLY MODIFICATIONS TO MAKE THE VESSEL S UITABLE FOR SPECIFIC OPERATIONAL REQUIREMENT OF THE ASSESSEE BY INCURRI NG EXPENSES OF US$ 2.5 MILLION. HE SUBMITTED THAT IF THE INTEREST COST I S WORKED OUT IN RESPECT OF SAID CAPITAL EXPENDITURE INCURRED BY REL BY CONSID ERING THE OFFICIAL RATE OF INTEREST @ 5.94% PER ANNUM PREVAILING IN UK THE AN NUAL INTEREST COST WILL COMES TO US$ 1,48,000 AND PER DAY INTEREST CO ST GOES TO US$ 407 . HE SUBMITTED THAT A REASONABLE PERCENTAGE TO BE CO NSIDERED FOR ADDITIONAL ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 42 CAPITAL COST. LD. A.R FURTHER SUBMITTED THAT REL HAS INCURRED EXPENSES TO MEET COST OF DEPLOYMENT, INSURANCE ETC. WHICH H AD NOT BEEN CONSIDERED BY TPO. LD. A.R FURTHER SUBMITTED THAT TPO ALSO DID NOT CONSIDER THE COST TOWARDS MOBILIZATION AND DEMOBILIZATION OF SUCH U NIQUE VESSEL. HE FURTHER SUBMITTED THAT NO CONSIDERATION HAS BEEN GIVEN TOW ARDS REPAIR AND MAINTENANCE OF SUCH UNIQUE VESSEL, THEREFORE, THE A DJUSTMENT OF PREVAILING CHARTER HIGHER RATES IN PROPORTION TO CARRYING CAPA CITY OF THE VESSEL WAS MISLEADING. THE LD. A.R FILED A CHART AT THE TIME OF HEARING OF THE APPEAL GIVING THE ADJUSTMENT TO ALP BY STATING THAT BESIDE THE INTEREST COST PER DAY TOWARDS CAPITAL EXPENDITURE INCURRED BY REL, ADJUST MENT ON ACCOUNT OF FOLLOWING FACTORS TO THE EXTENT OF 25% OF CHARTER R ATE PER DAY HAVE TO BE CONSIDERED WHICH COMES TO US$ 1190 . THE ASSESSEE HAS LISTED OUT THE FOLLOWING SPECIAL FACTORS TO JUSTIFY HIS SUBMISSION FOR ENHANCEMENT REQUIRED TO BE MADE WHILE DETERMINING ALP OF THE CHARTER HI RE CHARGES VIS--VIS THE MARKET RATE GIVEN IN THE TWO PUBLICATION WHICH ARE AS UNDER:- THE ALP OF CHARTER HIRE CHARGES IS ARRIVED AT WIT HOUT CONSIDERING THE FOLLOWING FACTORS FOR WHICH AN ENHANCEMENT IS REQUI RED TO THE MARKET RATES GIVEN IN THE 2 PUBLICATIONS TO DETERMINE AN A RMS LENGTH CONSIDERATION 1. UNIQUE VESSEL: CHARTER HIRE RATES IS TO BE INCRE ASED FOR VESSEL RELCHEM ISHA CARRYING BOTH LIQUEFIED GAS AS WELL AS CHEMICALS AND PETROCHEMICALS, SINCE THE RATES GIVEN IN THE PUBLIC ATION ARE ONLY FOR LPG. 2. ADDITIONAL COST TOWARDS CERTIFICATION OF VESSEL RELCHEM ISHA WHICH WAS USED FOR CARRYING GAS AS WELL AS CHEMICALS. FUR THER, OFFICERS AND CREW HOLDING BOTH GAS AND CHEMICAL ENDORSEMENTS COM MAND A PREMIUM AS COMPARED TO THEIR COUNTERPARTS, SINCE AVAILABILI TY OF SUCH OFFICERS AND CREW FOR MANNING THE VESSEL IS SCARCE. 3. COST TOWARDS MOBILIZATION AND DE-MOBILIZATION OF SUCH VESSEL, ON ACCOUNT OF UNAVAILABILITY OF SUCH CUSTOM BUILT VESS EL IN INDIA WHICH IS CAPABLE OF LIFTING UPTO 1500 TONNES AT A DRAFT OF 3 .5 METERS. IN THE EVENT OF RELCHEM ISHA NOT BEING CHARTERED, THE ASSESSEE WOULD HAVE TO PAY SUBSTANTIAL COST FOR MOBILIZATION AND DEMOBILIZATIO N OF ALTERNATE VESSEL FROM FAR EAST/ EUROPEAN REGION. 4. DUE TO CLOSE WATER NAVIGATION IN A NARROW CHANNE L, FREQUENT SHIP TO SHIP TRANSFER & SPONSON TANKS (OUTSIDE PROJECTIONS) , MORE WEAR & TEAR ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 43 TAKES PLACE THAN NORMAL. THIS RESULTS IN ADDITIONAL CHARGES TOWARDS REPAIR AND MAINTENANCE OF THE VESSEL. 5. DUE TO THE FACTORS LISTED OUT IN SR 4 ABOVE, THE OFFICERS & CREW ARE WORKING UNDER STRESSFUL CONDITIONS FOR LONGER PERIO DS OF TIME AND MAY REQUIRE TO WORK OVERTIME. THIS RESULTS IN PAYMENT O F OVERTIME CHARGES WHICH ADDS TO THE NORMAL DAILY OUTGO TOWARDS SALA RY OF OFFICERS AND CREW. LD. A.R SUBMITTED THAT IF THE PROFIT ADJUSTMENT TO ALP IS MADE THEN THE TOTAL COST GOES TO US$ 6358 PER DAY WHICH IS MORE THAN THE PAYMENT MADE BY THE ASSESSEE AND ACCORDINGLY NO ADJUSTMENT ON ACCO UNT OF ALP IS REQUIRED. LD. D.R IN HIS SUBMISSION WHILE JUSTIFYING ORDERS O F THE AUTHORITIES BELOW SUBMITTED THAT THE ADJUSTMENT CLAIMED BY THE ASSE SSEE ON ACCOUNT OF INTEREST AND OTHER FACTORS MENTIONED HEREIN ABOVE, WERE NOT FURNISHED BEFORE THE TPO AND, THEREFORE, SAME HAVE NOT BEEN EXAMINE D BY HER WHILE DETERMINING ALP. HE SUBMITTED THAT THE DETAILS NOW FURNISHED BY THE ASSESSEE COULD BE EXAMINED BY TPO IF THE MATTER IS RESTORED TO TPO TO DETERMINE THE ALP. LD. A.R SUBMITTED THAT HE HAS NO OBJECTION IF THIS ISSUE IS RESTORED TO TPO FOR CONSIDERATION AND AS TO WHET HER THE VESSEL HIRED BY THE ASSESSEE FROM REL CONTAINS SPECIAL FEATURES AN D MODIFICATIONS THAT WAS REQUIRED BY THE ASSESSEE AND FOR WHICH THE REL IN CURRED AN EXPENSES OF US$ 2.50 MILLION FOR MAKING THE IMPROVEMENTS AND ALSO THE OTHER FACTORS WHICH HAS BEEN STATED BY THE ASSESSEE BEFORE US AT THE TIME OF HEARING, AS MENTIONED HEREIN, ABOVE DUE TO WHICH AN ADJUSTMENT IS REQUIRED FOR DETERMINING THE CHARTER RATE PER DAY FOR THE VESSEL RELCHEM ISHA. 12.9 NEITHER THE ASSESSEE, NOR THE TPO, NOR THE ASS ESSING OFFICER OR THE COMMISSIONER (APPEALS) HAS FOLLOWED ANY OF THE METH OD PRESCRIBED IN THE ACT AND RULES, FOR ARRIVING AT THE ARMS LENGTH PRICE. THE ASSESSEES CASE WAS THAT THE CHARTER HIRE CHARGES WERE APPROVED BY THE D.G. (SHIPPING) AND, HENCE, IT IS A COMPARABLE UNDER THE CUP METHOD. T HE TPO TOOK THE AVERAGE OF THE RATE PUBLISHED BY THE SHIPPING INTELLIGENCE WEEKLY AND DREWRY MONTHLY, WHICH IS THE RATES IN THE PUBLIC DOMAIN AN D WITHOUT MAKING ANY ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 44 ADJUSTMENT FOR VARIATION IN CAPACITY, COST, FINANCE , RISK, ETC., COMPUTED THE ARMS LENGTH PRICE. THE COMMISSIONER (APPEALS) TOOK THE MEAN OF THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND PRICE ACTUAL LY PAID BY THE ASSESSEE AND DETERMINED THE ARMS LENGTH PRICE. THUS, THE AS SESSEE AS WELL AS THE AUTHORITIES HAVE NOT COMPUTED THE ARMS LENGTH PRIC E IN ACCORDANCE WITH LAW. HENCE, WE HAVE TO QUASH THE ARMS LENGTH PRICE DETERMINED BY ALL THE PARTIES. 12.10 BOTH THE PARTIES AGREED BEFORE US THAT THE CUP METHOD SHOULD BE FOLLOWED. AS THERE IS NO COMPARABLE TRANSACTIONS, I N VIEW OF THE FACT THAT REICHEM ISHA, IS A UNIQUE VESSEL, WITH NO COMPARA BLE SHIP AVAILABLE, AS SUGGESTED BY BOTH THE PARTIES, WE SET ASIDE THE ISS UE TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF RECOM PUTING THE ARMS LENGTH PRICE BY TAKING THE DATE AVAILABLE IN THE PUBLIC DO MAIN IN THE FORM OF PUBLICATION OF SHIPPING INTELLIGENCE WEEKLY AND DRE WRY MONTHLY AS A COMPARABLE PRICE, AND THEREAFTER TO MAKE VARIOUS ADJUSTMENTS TOWARDS WEIGHT, CAPITAL COST, RISK, ETC., AND THEN ARRIVE A T THE ARMS LENGTH PRICE. THE ASSESSEE HAS FURNISHED ITS CALCULATION. THE ASSESSI NG OFFICER SHALL EXAMINE THIS CALCULATION OF ARMS LENGTH PRICE GIVEN BY THE ASSESSEE WHEREIN VARIOUS ADJUSTMENTS ARE CLAIMED ON ACCOUNT OF VARIATION AND ARRIVE AT THE ARMS LENGTH PRICE. NEEDLESS TO SAY, OPPORTUNITY OF BEING HEARD SHOULD BE GIVEN TO THE ASSESSEE. 12.11 THEREFORE, WE CONSIDER IT PRUDENT AND REASO NABLE TO RESTORE THIS ISSUE TO THE FILE OF THE A.O TO MAKE A REFERENCE TO THE TPO TO DETERMINE THE ALP AFRESH IN RESPECT OF THE HIRE CHARTERED VESSEL RELCHEM ISHA BY A SPEAKING ORDER AFTER CONSIDERING SUCH DOCUMENTS FIL ED BY THE ASSESSEE AND AFTER GIVING DUE OPPORTUNITY OF HEARING AFTER CONSI DERING THE ABOVE SPECIAL FEATURES AND CAPITAL COST INCURRED BY REL . HENCE, GROUND NO.9 OF THE APPEAL TAKEN BY THE ASSESSEE IS ALLOWED FOR STATIST ICAL PURPOSES. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 45 12.12 IN RESPECT OF GROUND NO.9 OF THE APPEAL OF THE DEPARTMENT THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED BEFOR E US THAT THE THIRD PARTY QUOTATIONS CANNOT BE CONSIDERED AS WHAT IS CO NTEMPLATED UNDER RULE- 1OB(1), IS PRICE CHARGED OR PAID. HE SUBMITTED TH AT THE QUOTATION IS NOT A PRICE CHARGED OR PAID AND, HENCE, CUP METHOD CANN OT BE APPLIED. HE ALSO RELIED ON THE PROVISIONS OF RULE-1O(B)(1). HE POINT ED OUT TO THE ASSESSEES PAPER BOOK PAGES-712 AND 713, AND SUBMITTED THAT TH E TWO QUOTATIONS HAVE THE SAME WORDING AND DOUBTED THE GENUINENESS OF THE SAME. HE WONDERED AS TO HOW THE QUOTATION CAN BE SIMILARLY WORDED WHE N THEY HAVE BEEN TAKEN FROM TWO DIFFERENT REPUTED PARTIES WHO ARE LOCAT ED AT TWO DIFFERENT PLACES . HE SUBMITTED THAT OBTAINING RBI APPROVAL, IS NO GRO UND ON WHICH THE COMMISSIONER (APPEALS) CAN GRANT RELIEF. HE ARGUED THAT THE ORDER OF THE COMMISSIONER (APPEALS) IS PERVERSE AND HAS TO BE RE VERSED. 12.13 THE LEARNED COUNSEL FOR THE ASSESSEE, ON T HE OTHER HAND, SUBMITTED THAT THE ASSESSEE IS NOT DISPUTING THE APPLICATION OF COST PLUS METHOD. HE ONLY SAYS THAT THE WORKING IS WRONG. HE FILED A CHA RT AND SUBMITTED THAT IF THE CORRECT FIGURES WERE TAKEN, THEN EVEN UNDER THE COST PLUS METHOD, NO ADJUSTMENT WOULD BE CALLED FOR. 12.14 IN REPLY, THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUBMITTED THAT THE WORKING CAN ALWAYS BE VERIFIED IF THERE IS NO DISPUTE ON THE METHOD APPLIED. 12.15 AFTER HEARING RIVAL CONTENTIONS AND ON A CA REFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSA L OF THE PAPERS ON RECORD, WE FIND THAT THE TPO HAS RIGHTLY APPLIED THE COST PLUS METHOD. THE CIT(A) HAS GRANTED RELIEF FOR REASONS WHICH CA NNOT BE SUSTAINED. NO METHOD WAS FOLLOWED. ANY HOW, THE TPO HAS COMMITT ED AN ERROR IN ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 46 COMPUTING COST UNDER THE COST PLUS METHOD. THE W ORKING OF THE TPO AS WELL AS THE ASSESSEE, ARE AS FOLLOWS: WORKING BY THE TPO PARTICULARS U.S. DOLLAR RUPEES TOTAL COST 45,22,947 LESS: COST IN RESPECT OF ACTIVITIES OTHER THAN CONSULTANCY SERVICES 22,61,474 COST RELATING TO CHARTER HIRE ACTIVITY (ESTIMATED @ 50% OF TOTAL COST) 22,61,474 COST (ESTIMATED) RELATING TO CONSULTANCY ACTIVITY (1-2) 1,13,074 OPTIMAL OPERATING PROFIT EARNED @ 5% OF SR.3 10,15,849 ACTUAL OPERATING PROFIT EARNED 9,02,775 4,28,81 ,828 ADJUSTMENT DUE TO TRANSFER PRICING (5-4) 17,62,68, 906 VALUE OF INTERNATIONAL TRANSACTION 13,33,87,078 ARMS LENGTH PRICE WORKING BY THE ASSESSEE TOTAL COST 45,22,947 LESS: COST IN RESPECT OF ACTIVITIES OTHER THAN CONSULTANCY SERVICES COST RELATING TO CHARTER HIRE ACTIVITY (AT ACTUAL AS PER CIT(A) ORDER 4,58,284 COST RELATING TO EXPORT COMMISSION 9ESTIMATED @ 10% OF TOTAL COST - AS ADOPTED FOR A.Y 2003-04 BY TPO 4,52,295 9,10,578 COST RELATING TO CONSULTANCY ACTIVITY (1-2) 36,12,369 OPTIMAL OPERATING PROFIT EARNED @ 5% OF SR.3 1,80,618 ACTUAL OPERATING PROFIT EARNED 10,15,859 LESS: OPERATING PROFIT EARNED FROM ACTIVITIES OTHER THAN CONSULTANCY SERVICES CHARTER HIRE CHARGES RECEIVED 21,50,000 (-) EXPENSES INCURRED 4,54,284 16,91,717 EXPORT COMMISSION 7,14,668 (-) ESTIMATED EXPENSES 4,52,295 2,62,373 19,54,090 BALANCE OPERATING PROFIT EARNED FROM CONSULTANCY SERVICES (9,38,241) ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 47 ADJUSTMENT DUE TO TRANSFER PRICING NIL NIL A PERUSAL OF THE ABOVE WORKINGS CLEARLY DEMONSTRATE S THAT THE TPO HAS TAKEN THE COST RELATING TO CHARTER HIRE ACTIVITY AS 50% OF TOTAL COST AND WHEREAS THE ASSESSEE HAS TAKEN THE ACTUAL COST RELATING TO CHA RTER HIRE ACTIVITY. THIS HAS MADE A DIFFERENCE TO THE CALCULATION OF COST. ACTUALS HAVE TO BE TAKEN TO ARRIVE AT THE CORRECT COST AND ONLY THEN COST PLUS METHOD CAN BE APPLIED. COST PLUS METHOD DOES NOT CONTEMPLATE ESTIMATION OF COST. WHEN ACTUAL FIGURES ARE REPLACED IN THE CALCULATION MADE BY THE TPO, THEN, NO ADJUSTMENT IS CALLED FOR AS THE PAYMENT IS AT ARMS LENGTH PRI CE. AS WE ARE CONVINCED WITH THE WORKING OF THE ASSESSEE, WE HOLD THAT NO A DJUSTMENT IS CALLED FOR UNDER THE TRANSFER PRICING PROVISIONS. CONSEQUENTL Y, WE UPHOLD THE CONCLUSIONS OF LD. CIT(A) ON THIS ISSUE FOR DIFFER ENT REASONS AS MENTIONED ABOVE AND DISMISS GROUND NO.9 OF THE APPEAL RAISED BY THE REVENUE. 13. NOW WE TAKE UP GROUND NO.2 OF THE APPEAL OF THE DEPARTMENT DISPUTING THE ORDER OF LD. CIT(A) IN RESTRICTING THE ALLOWANC E OF DEPRECIATION OF RS. 4331,32,16,746/- AS AGAINST ASSESSEES CLAIM OF RS. 5798,16,03,243/- AND ACCORDINGLY DISALLOWING RS. 1446,83,86,497/-. 13.1 IN THE RETURN FILED, THE ASSESSEE HAD NOT BEEN CLAIMING DEPRECIATION ON THE POWER PLANT AT HAZIRA, STG, GTG- V& VI AT PA TALGANGA AND CPP-II. THE ASSESSEE HAD ALSO NOT BEEN CLAIMING DEPRECIATIO N AT CRACKER UNIT AT HAZIRA, OIL & GAS DIVISION, SBM & POLYPROPYLENE & P ARAXYLENE COMPLEX AT JAMNAGAR. THE AO ALLOWED DEPRECIATION IN THE EA RLIER YEAR HOWEVER, LD. CIT(A) DELETED THE SAID ALLOWANCE OF DEPRECIATION O F THE EARLIER YEARS BUT DEPARTMENT FILED APPEALS BEFORE THE TRIBUNAL. ACCORDINGLY THE AO CONSIDERED THE CLAIM OF DEPRECIATION BY CONSIDERING THE WRITTEN DOWN VALUE AND WORKED OUT AT RS.4331,32,16,746/- AS AGAINST THE CLAIM OF RS. 5798,16,03,243/-. IN THE FIRST APPEAL LD. CIT(A) CONSIDERING THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. MAH INDRA MILL & OTHERS, 243 ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 48 ITR 56 AND VARIOUS OTHER DECISIONS, STATED THAT P RIOR TO INSERTION OF EXPLANATION-5 TO SECTION 32 OF THE ACT THE CLAIM OF DEPRECATION WAS OPTIONAL. THEREFORE, THE DEPRECIATION COULD NOT BE THRUST UPO N THE ASSESSEE. ACCORDINGLY LD. CIT(A) ALLOWED THE CLAIM OF DEPREC IATION OF RS. 5798,16,03,243/- ON THE BASIS OF WRITTEN DOWN VALUE OF THE YEAR AND DIRECTED THE AO TO RECOMPUTE THE DEPRECIATION ON THE BASIS O F THE WRITTEN DOWN VALUE ARRIVED AT AFTER GIVING EFFECT TO THE ORDERS OF THE PRECEDING YEARS. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. 13.2 DURING THE COURSE OF HEARING LD. D.R RELIED ON THE ORDER OF THE AO, WHEREAS LD. A.R SUBMITTED THAT LD. CIT(A) IS JUSTIF IED TO RESTORE THE WRITTEN DOWN VALUE TO ITS ORIGINAL FIGURE I.E. BEFORE CLAIM ING DEPRECIATION. HE SUBMITTED THAT PRIOR TO ASSESSMENT YEAR 2002-03, CLAIM FOR DEPRECATION WAS OPTIONAL AS PER THE DECISION OF HONBLE APEX CO URT IN THE CASE OF MAHINDRA MILLS (SUPRA). HE SUBMITTED THAT THE WRIT TEN DOWN VALUE SHOULD BE CONSIDERED CONSIDERING CONSEQUENTIAL ORDERS OF THE EARLIER YEARS AND THE DEPRECIATION SHOULD BE ALLOWED ACCORDINGLY. 13.3 WE AGREE WITH LD. A.R THAT CLAIM OF DEPRECI ATION PRIOR TO INSERTION OF CLAUSE 5 TO SECTION 32(1) OF THE ACT, INSERTED W.E .F. 1/4/2002 AS APPLICABLE FROM A.Y 2002-03, THE CLAIM FOR DEPRECIATION WAS OP TIONAL IN VIEW OF DECISION OF THE HONBLE APEX COURT IN THE CASE OF M AHINDRA MILLS(SUPRA). THEREFORE, THE WRITTEN DOWN VALUE OF THE ASSETS AS ON 31/3/2001 HAS TO BE TAKEN FOR CONSIDERING THE DEPRECIATION TO BE ALLOWE D TO THE ASSESSEE. 13.4 IN VIEW OF ABOVE, WE HOLD THAT AO WHILE GIVI NG EFFECT TO THIS ORDER WILL CONSIDER THE WDV AS ON 31/3/2001 AND ALLOW THE DEPR ECIATION CLAIM ACCORDINGLY. SUBJECT TO ABOVE, GROUND NO.2 OF THE APPEAL OF THE DEPARTMENT IS REJECTED. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 49 14. IN GROUND NO.3 OF THE APPEAL THE DEPARTMENT HAS DISPUTED THE ORDER OF LD. CIT(A) IN DELETING DISALLOWANCE OF PRE-OPERATIV E EXPENSES OF RS.1,81,48,738/-. 14.1 THE ASSESSEE CAPITALIZED IN ITS BOOKS OF A CCOUNT PRE-OPERATIVE EXPENSES OF RS. 1,81,48,738/- BUT CLAIMED AS REVENU E IN COMPUTATION OF TOTAL INCOME. AO DISALLOWED THE CLAIM FOR DEDUCTIO N ON THE GROUND THAT SUCH EXPENSES WAS INCURRED FOR THE ERECTION OF PLANT AND MACHINERY IN UNITS WHICH HAD NOT BEEN COMMISSIONED DURING THE YEAR UND ER CONSIDERATION. THEREFORE, THESE EXPENSES WERE NOT LAID OUT OR EX PENDED FOR THE PURPOSE OF BUSINESS OPERATION OF THE EXISTING UNITS. HE FURTH ER STATED THAT IN THE BOOKS OF ACCOUNT EXPENSES IN THE NATURE OF SALARY, TRAVEL LING ETC. WERE CAPITALIZED AS COST OF ASSETS ON THE BASIS THAT THESE EXPENSES HAD BEEN INCURRED ON THOSE ASSETS WHICH WENT INTO THE ERECTION OF PLANT AND MACHINERY. THE AO RELIED ON VARIOUS DECISIONS, AS MENTIONED AT PAGES 38 TO 41 OF THE ASSESSMENT ORDER IN PARA 10.11 AND 10.12 INCLUDING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHELLAPALLY SUGAR MILLS LTD., 98 ITR 167, WHEREIN IT WAS HELD THAT ACCOUNTING STANDARDS AND ACCOUNTING PRACTICE REGARDING ACCOUNTING OF INCOME AND EXPENDITURE ETC. HAVE TO BE FOLLOWED AND ACCEPTED SO LONG AS SAME ARE NOT CONTRARY TO ANY L AW. ACCORDINGLY AO DISALLOWED THE EXPENSES OF RS. 1,81,48,738/- AND HE LD THAT IT IS A CAPITAL EXPENDITURE. BEING AGGRIEVED, THE ASSESSEE FILED A PPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 14.2 ON BEHALF OF THE ASSESSEE IT WAS CONTENDED THAT THOUGH THE SAID EXPENDITURE AGGREGATING RS. 1,81,48,738/- WAS CAPIT ALIZED IN THE BOOKS ACCOUNT BUT IS CLAIMED AS DEDUCTIBLE REVENUE EXPEND ITURE AS THE ASSESSEE IS ALREADY IN THE MANUFACTURE OF FIBER YARN. IT WAS CONTENDED THAT FOLLOWING THE STRATEGY OF BACKWARD INTEGRATION THE ASSESSEE COMPANY VENTURED IN THE PRODUCTION OF PFY AND PSF, THE RAW MATERIALS REQ UIRED FOR THE ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 50 MANUFACTURE OF YARN AND FABRICS. THE PLANTS FOR THE MANUFACTURE OF PSF AND PFY WERE PUT UP AT PATALGANGA. ONE OF THE RAW MATERIALS REQUIRED FOR THE MANUFACTURE OF PSF & PFY IS PTA AND POLYESTE R CHIPS. ASSESSEE WENT FOR PRODUCTION OF PTA BY PUTTING UP A PLANT AT PATA LGANGA. PURSUANT TO THE SAME STRATEGY THE ASSESSEE PUT UP A PLANT FOR MANUF ACTURE OF LAB. THEREAFTER ASSESSEE WENT FOR THE GAS CRACKER PLANT WHICH MANUFACTURES ETHYLENE, MEG AND POLYPROPYLENE WHICH ARE RAW MA TERIALS FOR PFY AND PSF. THUS VARIOUS MANUFACTURING ACTIVITIES OF THE ASSESSEE ARE FULLY COORDINATED, INTER CONNECTED, INTER LACED AND INTER -WOVEN. IT WAS CONTENDED THAT FOR STORING VARIOUS LIQUID RAW MATERIALS THE A SSESSEE VENTURED INTO A3 TANKFARM PROJECT, WHEREBY THE STORING CAPACITY OF V ARIOUS LIQUID MATERIALS AND THEIR PRODUCTION IS INCREASED SUBSTANTIALLY. THEREFORE, THE PROJECTS UNDER COMMISSIONING IN RESPECT OF WHICH THE ABOVE EXPENSES WERE INCURRED HAVE TO BE REGARDED AS AN INTEGRAL PART OF THE EXIS TING BUSINESS OF THE ASSESSEE. IT WAS ALSO CONTENDED THAT THE QUESTION WHETHER THESE ARE SEPARATE ACTIVITIES OF THE ASSESSEE OR COULD BE CO NSIDERED TO BE ONE AND THE SAME HAD COME BEFORE THE VARIOUS COURTS INCLUDING THE HONBLE SUPREME COURT IN A NUMBER OF CASES, AND IT HAS BEEN HELD TH AT EXPANSION OF BUSINESS OR SETTING UP OF SEPARATE UNIT CONSTITUTE ONE AND T HE SAME BUSINESS. THE ASSESSEE RELIED FOLLOWING CASES DETAILS GIVEN AT PAGE 13 OF CIT(A)S ORDER TO SUBSTANTIATE ITS SUBMISSION. THESE ARE AS UNDER: (I) CIT VS. PRITHVI INSURANCE CO. LTD. (63 ITR 6 32) (SC) (II) PRODUCE EXCHANGE CORPORATION LTD. VS. CIT (7 7 ITR 739) (SC) (III) B.R. LTD. V. V.P.GUPTA, CIT (113 ITR 647) (S C) (IV) ADDL. CIT V. ANILINE DYESTUFFS AND PHARMA P. LTD. (138 ITR 843)-BOM) (V) CIT VS. ALEMBIC GLASS INDUSTRIES LTD. GUJ (103 ITR 715) (VI) KSB PUMPS LTD. VS. CIT (64 ITD 377) (VII) BANSIDHAR (PVT) LTD. VS. CIT (127 ITR 65) (GU J) (VIII)VEECUMSEES V. CIT (220 ITR 185) (SC) (IX) STANDARD REFINERY & DISTILLERY LTD. VS. CIT ( 79 ITR 589) (SC) ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 51 (X) GRASIM INDUSTRIES LTD. VS. DCIT (ITA NO.1523/MU M/97) (XI) TATA CHEMICALS LTD. VS. DCIT (72 ITD 01)MUM 14.3 IT WAS CONTENDED THAT PRE-OPERATIVE EXPENSES IN QUESTION HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E AND THE EXPENDITURE WAS INCURRED FOR EXPANSION OF ITS EXISTING ACTIVITI ES. HENCE, THESE PRE- OPERATIVE EXPENSES REPRESENT REVENUE EXPENDITURE IN CURRED FOR THE PURPOSE OF BUSINESS AND BE ALLOWED AS DEDUCTION UNDER SEC TION 37 OF THE ACT. LD. CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE A ND ALSO CONSIDERING THAT SIMILAR ISSUE HAD BEEN CONSIDERED IN THE ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR AND HELD THAT THE PRE-OPE RATIVE EXPENSES OF RS.1,81,48,738/- ARE ALLOWABLE AS REVENUE EXPENDITU RE. IT IS ALSO RELEVANT TO STATE THAT LD. CIT(A) HAS ALSO CONSIDERED SPECIFI CALLY THE CASE OF ITAT PUNE BENCH IN THE CASE OF KALYANI STEEL LTD., VS. DCIT, 62 ITD 233. HE HAS HELD THAT WHERE THERE IS COMMON MANAGEMENT, COMMON OFF ICE AND COMMON CONTROL, THEN EXPENDITURE INCURRED ON EXPANSION / E XTENSION OF THE EXISTING BUSINESS IS OF REVENUE NATURE. HENCE, DEPARTMENT I S IN APPEAL BEFORE THE TRIBUNAL. 14.4 AT THE TIME OF HEARING LD. D.R RELIED ON THE ORDER OF THE AO, WHEREAS LD. A.R BESIDES SUPPORTING THE ORDER OF LD. CIT(A) SUBMITTED THAT IDENTICAL ISSUE ON SIMILAR FACTS CAME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1997-98 IN ITA NO.6118/M/2003 AND T HE TRIBUNAL BY ITS ORDER DATED 19/12/2006 AFTER DISCUSSING ALL THE CA SE LAWS, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. HE SUBMITTED THA T COPY OF SAID ORDER IS PLACED AT PAGES 336 TO 363 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT THIS ISSUE AGAIN CAME UP BEFORE THE TRIBUNAL IN PRE CEDING ASSESSMENT YEAR IN THE APPEAL FILED BY THE DEPARTMENT IN ITA NO.626 9/M/2004 AND THE TRIBUNAL BY ITS ORDER DATED 30/4/2008 BY FOLLOWING ITS ORDER DATED 19/12/2006 CONFIRMED THE ORDER OF LD. CIT(A) TO AL LOW PRE-OPERATIVE EXPENSES BY REJECTING THE GROUND OF APPEAL TAKEN BY THE DEPARTMENT. TO ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 52 SUBSTANTIATE HIS SUBMISSIONS HE REFERRED TO PAGES 2 21 TO 229 OF THE PAPER BOOK, COPY OF SAID ORDER OF THE TRIBUNAL PLACED AT. 14.5 WE HAVE CAREFULLY CONSIDERED THE ORDERS OF T HE AUTHORITIES BELOW, SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTI ES AND EARLIER ORDERS OF THE TRIBUNAL. WE OBSERVE THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER ORDER OF THE TRIBUNAL DATED 19/12/2006 AND 30/4/2008 (SUPRA) AND FOLLOWING THE REASONS GIVEN IN THE ORDER OF A.Y 1997-98 (SUPRA) WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). HENCE, WE UPHOLD HIS ORDER BY REJECTING GROUND NO.3 OF THE AP PEAL TAKEN BY THE DEPARTMENT. 15. NOW WE TAKE GROUND NO.8 OF THE APPEAL OF THE DE PARTMENT WHICH IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U/S. 115JB OF THE INCOME TAX ACT, 1961 IN RESPECT OF PROVISION OF DOUBTFUL DEBT OF RS.51,65,21,352/-.( CORRECT FIGURE IS RS.51,67,21, 352/-) 15.1 THE A.O OBSERVED WHILE COMPUTING BOOK PROFIT U/S.115JB OF THE ACT THE ASSESSEE COMPANY HAD NOT ADDED PROVISION FOR D OUBTFUL DEBTS AND ADVANCES, THOUGH THE PROVISION FOR DOUBTFUL DEBTS A ND ADVANCES ADDED BACK IN THE COMPUTATION OF INCOME UNDER NORMAL PROVISIO NS. THE AO STATED THAT THE PROVISION MADE BY THE ASSESSEE FOR DOUBTFUL DEB TS AND ADVANCES IS UNCERTAIN LIABILITY AND ACCORDINGLY ADDED THE SUM OF RS. 51,67,21,352/- IN THE COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB OF THE ACT. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE FI RST APPELLATE AUTHORITY. 15.2 LD. CIT(A) DELETED THE SAID ADDITION MADE BY THE AO BY ACCEPTING THE CONTENTIONS OF THE ASSESSEE. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. ITA NO.3082 & 3420/MUM/06(A.Y.2002-03) 53 15.3 AT THE TIME OF HEARING LD. D.R SUBMITTED THA T IN VIEW OF THE AMENDMENT MADE BY THE FINANCE (NO.2) ACT 2009 WITH RETROSPECTIVE EFFECT FROM 1/4/2001 BY INSERTING CLAUSE I IN EXPLANA TION -1 TO SECTION 115JB OF THE ACT THE ISSUE IS TO BE DECIDED AGAINST THE ASSESSEE AND THUS THE ACTION OF THE AO IS TO BE CONFIRMED. LD. A.R HAS N OT DISPUTED THE ABOVE CONTENTION. 15.4 IN VIEW OF ABOVE SUBMISSIONS OF THE LD. REPR ESENTATIVES OF THE PARTIES AND CONSIDERING THE AMENDMENT MADE BY FINANCE (NO. 2) ACT 2009 WITH RETROSPECTIVE EFFECT BY INSERTING CLAUSE I OF EXPLANATION - 1 TO SECTION 115 JB OF THE ACT WE REVERSE THE ORDER OF LD. CIT(A), BY CONFIRMING ACTION OF THE AO TO MAKE THE SAID ADDITION OF RS. 51,67,21,352/- WHILE COMPUTING DEDUCTION UNDER SECTION 115JB OF THE ACT. HENCE, GROUND NO.8 TAKEN BY THE DEPARTMENT IS ALLOWED. 16. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE AS WELL AS DEPARTMENT FOR ASSESSMENT YEAR 2002-03 ARE ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON THE 28 TH DAY OF MAY 2012 SD/- SD/- (J.SUDHAKAR REDDY ) (B.R.MITTAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 28 TH 4 MAY 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.