DCIT circle 6 (1), V. Maruti Udyog Ltd,

ITA 3090/DEL/2007

• Counselvise Citation: 309020114 RSA 2007
• Duration Of Justice: 5 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-07-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 22-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DK MISHR A
• Assessee Lawyers: ROHIT JAIN
• Keywords: Business expenditure; Double taxation relief; Services rendered outside India; Additional evidence; Non-deduction of tax; Capital receipt; Commercial expediency
• Section: 43B; 37; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) SHRI D.K. TYAGI , JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.3090/DEL./2007 (ASSESSMENT YEAR : 2004-05) DCIT, CIRCLE 6 (1), VS. M/S. MARUTI UDYOG LIMITED , NEW DELHI. 11 TH FLOOR, JEEVAN PRAKASH BUILDING, KASTURBA GANDHI MARG, NEW DELHI. (PAN : AAACM0829Q) CO NO.193/DEL/2008 (IN ITA NO.3090/DEL./2007) (ASSESSMENT YEAR : 2004-05) M/S. MARUTI UDYOG LIMITED, VS. DCIT, CIRCLE 6 (1) , 11 TH FLOOR, JEEVAN PRAKASH BUILDING, NEW DELHI. KASTURBA GANDHI MARG, NEW DELHI. (PAN : AAACM0829Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, ADVOCATE AND SHRI R OHIT JAIN, CA REVENUE BY : SHRI D.K. MISHRA, DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THE REVENUE HAS FILED THIS APPEAL WHEREAS ASSESSEE FILED THE CROSS OBJECTION AGAINST THE ORDER OF CIT (APPEALS)-IX, NE W DELHI DATED 28.03.2007 FOR THE ASSESSMENT YEAR 2004-05. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 2 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF A PPEAL :- 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN DELETING THE DISALLOWACNES MADE BY THE ASSESSING OFFICER U/S.43B (ACTUAL PAYMENT CL AUSE) OF THE FOLLOWING :- A) PLA BALANCE OF EXCISE DUTY ON VEHICLES RS. 59 ,91,461/- B) PLA BALANCE OF R&D CESS ON VEHICLES RS. 70,881/- C) PLA BALANCE OF EXCISE DUTY ON SPARE PARTS RS. 16,63,325/- D) CUSTOMS DUTY PAID ON IMPORT OF COMPONENTS RS.36, 01,36,219/- E) CUSTOMS DUTY ON INVENTORY IN CLOSING STOCK RS.23 ,89,60,314/- 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF DISALLOWING VRS PAYMENT U/S 35DDA THOUGH THE SCHEME WAS NOT AS PER GUIDELINES / LAID DOWN IN RULE 2BA. 3. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN GIVING RELIE F TO THE ASSESSEE BY ALLOWING AMOUNTS WHERE HE HAS NOT DEDUCTED TAX BEFO RE MAKING MORE PAYMENTS TO NON-RESIDENTS U/S 40A. 4. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN ALLOWING EXP ENSES INCURRED BY THE ASSESSEE FOR ENTERTAINMENT IN PRIVATE CLUBS AS BUSI NESS EXPENDITURE WITHOUT THERE BEING REASON TO SHOW THAT THE EXPENDI TURE WAS ADMISSIBLE IN LAW. 5. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LEARNED CIT (APPEALS) WAS JUSTIFIED IN DELETING DIS ALLOWANCES MADE BY THE A.O. ON GROUNDS OF FORESEEN PRICE INCREASE ON I NPUTS BOTH AS PROVISION AND AS ACTUAL PAYMENT. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, OR AME ND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME OF HEARING. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS IN THE CROSS OBJECTION :- THAT AN AMOUNT OF RS.27,68,35,744/- REPRESENTING T HE CAPITAL RECEIPT IS PRAYED TO BE REDUCED FROM THE TOTAL INCOME, DESPITE THE SAME WAS ERRONEOUSLY OFFERED AS INCOME IN THE RETURN OF INCO ME FILED BY THE APPELLANT COMPANY. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 3 3. GROUND NO.1(A) TO 1(C) IN REVENUES APPEAL IS AG AINST DELETING THE DISALLOWANCE OF (A) PLA BALANCE OF EXCISE DUTY ON V EHICLES OF RS.59,91,461/-, (B) PLA BALANCE OF R&D CESS ON VEHICLES OF RS.70,88 1/- AND (C) PLA BALANCE OF EXCISE DUTY ON SPARE PARTS OF RS.16,63,3 25. THE CIT (A) HAS DECIDED THIS ISSUE IN PARAS 6 & 7 OF HIS ORDER WHIC H READ AS UNDER :- 6. PLA BALANCES: A) PLA BALANCE OF EXCISE DUTY ON VEHICLES RS.59,91, 461/- B) PLA BALANCE OF R&D CESS ON VEHICLES RS. 70, 881/- C) PLA BALANCE OF EXCISE DUTY ON SPARE PARTS RS.16 ,63,325/- THE AO HAS FOLLOWED THE VIEW TAKEN BY HER PREDECESS OR AO FOR A.Y. 2003-04. IN A.Y. 2003-04, THE THEN AO OBSERVED THAT THE PLA BALANCES ARE ADVANCE PAYMENTS FOR GOODS YET TO BE MANUFACTUR ED. IT WAS STATED THAT THESE BALANCES ARE REDUCED WHEN THE GOODS ARE MANUF ACTURED. IT WAS FURTHER OBSERVED THAT SECTION 43B ALLOWED DEDUCTION IN RESPECT OF EXPENSES THAT WERE 'OTHERWISE ALLOWABLE' AND THEREF ORE, NO DEDUCTION FOR .PLA BALANCES WAS ALLOWABLE SINCE IT WAS IN RESPECT OF GOODS YET TO BE MANUFACTURED. IT WAS ALSO STATED THAT EVEN IF THE P LA BALANCES RELATED TO ALREADY MANUFACTURED, THEN LOADING OF THE PLA BALAN CES IN THE CLOSING STOCK AS PROVIDED IN SECTION 145A WOULD MAKE THE CL AIM REVENUE NEUTRAL AND HENCE, NO DEDUCTION WOULD BE ALLOWABLE. THIS IS SUE HAS COME UP IN APPEAL BEFORE MY PREDECESSOR FOR A.Y. 2001-02 AND 2 002-03. HE HAS PLACED RELIANCE ON THE ORDER OF THE HON'BLE ITAT FO R A.Y. 1999-00 WHEREIN IT HAS BEEN HELD THAT IF GOODS HAVE BEEN MA NUFACTURED THEN LIABILITY TO PAY EXCISE DUTY HAD BEEN INCURRED AND SUCH SUMS WERE ALLOWABLE U/S 43B OF THE ACT. THE ITAT OBSERVED THA T MERELY BECAUSE PAYMENT WAS TO BE ADJUSTED ON THE DATE OF REMOVAL O F GOODS, IT COULD NOT BE SAID THAT LIABILITY HAD NOT BEEN INCURRED. RELIA NCE WAS PLACED UPON THE SUPREME COURT JUDGMENT IN THE CASE OF BERGER PAINTS (INDIA) LTD. VS CIT : 266 ITR 99. WITH REGARD TO THE AO'S REMARK THAT L OADING OF EXCISE DUTY LIABILITY IN THE CLOSING STOCK AS PER SECTION 145A OF THE ACT MADE THE CLAIM REVENUE NEUTRAL, THE SUPREME COURT IN THE BER GER PAINT CASE (SUPRA) HAS HELD THAT THE ENTIRE AMOUNT OF EXCISE DUTY/CUST OM DUTY PAID BY THE ASSESSEE IN A PARTICULAR YEAR IS ALLOWABLE U/S 43B OF THE ACT, AND WILL QUALIFY AS A DEDUCTION IN THAT YEAR IRRESPECTIVE OF THE EXCISE DUTY/CUSTOM DUTY INCLUDED IN THE VALUATION OF THE ASSESSEE'S CL OSING STOCK AT THE END OF THE ACCOUNTING YEAR. THE QUESTION THAT WOULD ARISE HERE WOULD BE TO DETERMINE AND WHETHER THE GOODS HAD ACTUALLY BEEN M ANUFACTURED AND WHETHER LIABILITY OF EXCISE DUTY THEREON HAS BEEN I NCURRED. THE LEARNED ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 4 AR SUBMITTED THAT THE APPELLANT HAD CLOSING STOCK O F MANUFACTURED VEHICLES AMOUNTING TO RS.128.50 CRORES WHICH SUM IN CLUDED THE ACCRUED LIABILITY OF EXCISE DUTY AND R&D CESS AMOUNTING TO RS.17.7 CRORES. IT WAS STATED THAT THIS AMOUNT OF ACCRUED LIABILITY ST OOD DEBITED TO THE P & L ACCOUNT FOR THE RELEVANT PREVIOUS YEAR AND HAD BEEN INCLUDED IN THE VALUATION OF CLOSING STOCK. 7. I HAVE CONSIDERED THE MATTER. THE ISSUE STANDS D ECIDED IN FAVOUR OF THE ASSESSEE BY THE HON'BLE ITAT IN ITS OWN CASE FO R A.Y. 1999-00 AND BY MY PREDECESSOR CIT(A) FOR A.YS 2001-02 AND 2002- 03. MOREOVER THE SUPREME COURT HAS CLEARLY HELD IN THE BERGER PAINT CASE (SUPRA) THAT THE CLAIM U/S 43B OF THE ACT WOULD BE ALLOWABLE IRRESPE CTIVE OF THE FACT THAT THE CUSTOM DUTY/EXCISE DUTY HAD BEEN INCLUDED IN TH E VALUE OF THE CLOSING STOCK. THE LEARNED AR ALSO DREW ATTENTION TOWARDS T HE ALLAHABAD HIGH COURT DECISION IN THE CASE OF CIT VS C. L. GUPTA : 259 ITR 530. IN THIS CASE THE HON'BLE JUDGES HELD THAT FOR THE PURPOSE O F CLAIMING DEDUCTION U/S 43B OF THE ACT, THE YEAR OF PAYMENT IS RELEVANT AND IS ONLY TO BE TAKEN INTO ACCOUNT. IT WAS STATED THAT THE YEAR IN WHICH THE ASSESSEE INCURRED THE LIABILITY TO PAY SUCH TAX/DUTY HAD NO RELEVANCE AND COULD NOT BE LINKED WITH THE MATTER OF GIVING BENEFIT U/S 43B OF THE AC T. IN VIEW OF THE ABOVE FACTS AND IN LIGHT OF THE DECISION OF THE ITAT AND THE CIT(A) DISCUSSED ABOVE, I AM OF THE OPINION THAT THE ASSESSEE'S CLAI M IS ALLOWABLE AND THEREFORE, THE ASSESSEE GETS RELIEF OF RS.77/25/667 /- IN RESPECT OF ITS CLAIM OF DEDUCTION U/S 43B OF THE ACT WITH REGARD TO THE PLA BALANCES OF EXCISE DUTY. 4. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER. LD. AR HAS SUBMITTED THAT IN THE RETURN OF INCOME, THE ASSESSEE CLAIMED DEDUCTION OF DUTY PAID AMOUNTING TO RS.77.25.667/- BEING BALANCE IN THE PL A, UNDER SECTION 43B OF THE ACT. HE SUBMITTED THAT THE AFORESAID AMOUNT WA S PAID BY THE ASSESSEE UNDER RULE 4 OF THE EXCISE RULES, 2002 IN ORDER TO COVER THE DUTY REQUIRED TO BE PAID ON THE GOODS TO BE REMOVED FROM BONDED WARE HOUSE. LD. AR FURTHER SUBMITTED THAT AT THE TIME OF REMOVAL OF THE GOODS, EXCISE DUTY/R&D CESS PAYABLE ON THE GOODS IS DEBITED TO THE PLA. LD. AR SUBMITTED THAT AS PER THE MANDATE OF SECTION 43B OF THE ACT, THE AFORESAID AM OUNT WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. HOWEVER, THE AS SESSING OFFICER DISALLOWED ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 5 THE SAME. LD. AR SUBMITTED THAT IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 1999-2000, THE ITAT ALLOWED THE CLA IM SUBJECT TO INCURRING OF LIABILITY ON MANUFACTURED GOODS. LD. AR SUBMITT ED THAT IN AY 2004-05, THE ASSESSEE HAD A CLOSING STOCK OF MANUFACTURED VE HICLES AMOUNTING RS.128.50 CRORES WHICH SUM INCLUDES THE ACCRUED LIA BILITY OF EXCISE DUTY AND R&O CESS AMOUNTING RS.17.70 CRORES AND THIS FACTUAL POSITION IS NOT DISPUTED BY A.O. LD. AR SUBMITTED THAT FOLLOWING THE DIREC TIVES OF HON'BLE ITAT FOR AY 1999-2000, THE PLA BALANCE OF RS.77,25,667/- IS AN ALLOWABLE DEDUCTION AS THE EXCISE DUTY LIABILITY AS ON 31.03.2004 EXCEE DED THE PLA BALANCE. HE SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF A SSESSEE BY ITAT ORDER IN ASSESSEES OWN CASE FOR AY 1999-2000 (REPORTED IN 9 2 ITD 119) AND AY 2000-01. HE ALSO SUBMITTED THAT SIMILAR VIEW HAS BEEN HELD BY THE DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FO R THE ASSESSMENT YEARS 1994-95, 1995-96 AND 1996-97, 1999-00, 2000-01 AND 2005-06. FURTHER RELIANCE PLACED ON THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V GLAXO SMITH KLINE CONSUMER HEALTH CARE LTD. REPORTED IN 107 ITD 343 (SB)(CHD.), WHEREIN IT HAS BEEN HELD THAT PLA B ALANCE IS AN ALLOWABLE DEDUCTION. HE ALSO SUBMITTED THAT THE ISSUE ALSO STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MODIPON LTD. (NO. 2) - 334 ITR 106. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 6 5. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. THI S ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1999-00, 2001-02 AND 2005-06. THE RELEVANT PARAS 14 TO 16 OF THE ORDER FOR ASSESSMENT YEAR 2005-06 ARE REP RODUCED BELOW :- 14. THE FIRST GROUND IN THE REVENUES APPEAL R ELATES TO THE DISALLOWANCE OF ` 25,73,919 COMPRISING OF PLA BALANCES OF R&D CESS ON VEHICLES OF ` 24,57,035/- AND PLA BALANCE OF EXCISE DUTY ON SPARE PARTS TO THE EXTENT OF ` 1,16,884/-. ACCORDING TO THE AO, PLA BALANCES ARE NOTHIN G BUT ADVANCE PAYMENTS MADE TOWARDS GOODS WHICH ARE YET TO BE MANUFACTURED OR CLEARED FROM THE FACTORY. ACC ORDING TO HIM, THESE ARE ADVANCE PAYMENTS MADE TOWARDS GOODS, WHICH ARE MANUFACTURED/CLEARED FROM THE FACTOR Y. IT IS CLAIMED THAT THE AMOUNT REPRESENTING PLA BALA NCES SHOULD BE ALLOWED AS DEDUCTION IN THE LIGHT OF THE HON BLE SUPREME COURT DECISION IN THE CASE OF BERGER PAINTS INDI A LTD. VS CIT 266 ITR 99 (SC); INDIAN COMMUNICATION NETWORK PVT. LTD. VS IAC 48 TTJ 604 (DEL); ITO VS FOOD SPECIALTIES 48 TTJ 621 (SPECIAL BENCH, DEL), HONDA SIEL POWER PRODUCTS LTD . VS DCIT 77 ITD 123 (DEL) AND A RECENT DECISION IN THE CASE OF DCIT V GLAXO SMITHKLINE CONSUMER HEALTHCARE LTD. 107 ITD 343 (SB)(CHD). THE LD. CIT(A) HAVING FOUND THAT THE I TAT IN THE ASSESSEES OWN CASE FOR AY 1990-00 AND 2000-01 AND 2001-02 AS ALSO FOR THE AY 2002-03 AND 2004-05, ACC EPTED THE CONTENTION OF THE ASSESSEE. THE REVENUE IS AGGR IEVED. 15. WE HAVE HEARD BOTH THE PARTIES AND FIND THAT THE ISSUE IS CONCLUDED IN FAVOUR OF THE ASSESSEE: (A) BY THE ORDER OF THE ITAT FOR AY 1999-00 VIDE DISCUSSIONS IN PARA 2 8, (B) BY THE ITAT ORDER FOR AY 2000-01 VIDE DISCUSSION IN PARAS 4 AND 5 AND; (C) BY THE ITAT ORDER FOR AY 1994-95, 1995-96 AND 1996-97 AT PARA 8. 16. THE LD. CIT(A), IN THE IMPUGNED ORDER, AS WE MAY SEE, HAS ONLY FOLLOWED THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE ON IDENTICAL ISSUE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER. WE MAY POINT OUT THAT THE DECISION OF T HE ITAT SPECIAL BENCH OF CHANDIGARH IN THE CASE OF DCIT VS GLAXO ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 7 SMITHKLINE CONSUMER HEALTH CARE LTD. REPORTED IN 10 7 ITD 343(SB) IS DIRECTLY ON THE ISSUE OF BALANCES IN PLA AND IS ALLOWABLE DEDUCTION U/S 43B OF THE ACT AND, THEREFO RE, IN THE LIGHT OF THESE, WE DECLINE TO INTERFERE. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF REVENUES APPEAL. 6. GROUND NO.1(D) IN REVENUES APPEAL IS AGAINST DE LETING THE DISALLOWANCE OF CUSTOMS DUTY PAID ON IMPORT OF COMP ONENTS. THE CIT (A) HAS DECIDED THIS ISSUE IN PARA 9 OF HIS ORDER WHICH READ AS UNDER :- 9. CUSTOM DUTY PAID ON IMPORT OF COMPONENT IN RES PECT OF WHICH EXPORT HAS BEEN MADE - RS.36,01,36,219/-. THE AO DISALLOWED THE CLAIM FOLLOWING THE ASSESSMEN T ORDER FOR A.Y. 2003-04. IN THE ORDER FOR A.Y. 2003-04, TH E AO OBSERVED THAT AS REGARDS CUSTOM DUTY PAID ON IMPORT OF COMPONENT IN RESPECT OF WHICH EXPORT HAS BEEN MADE, THE ASSESSEE IS ENTITLED FOR DUTY DRAWBACK ON ACCRUAL B ASIS AND THE AMOUNT IS, THEREFORE, REVENUE NEUTRAL AND HENCE, NO DEDUCTION WOULD BE ALLOWABLE. THE LEARNED ARS STATED THAT THE DUTY DRAWBACK CANNOT BE CONSIDERED TO HAVE BEEN ACCRUED TO THE ASSESSEE MERELY BECAUSE THE APPELLANT HAD COMPLETED THE EXPORT OF VEHICLES IN QUESTION. IT WAS STATED THAT THERE WERE MANY REQUIREMENTS TO BE FULFILLED BEFORE THE ASSESS EE BECAME ENTITLED FOR DUTY DRAWBACK. IT WAS STATED THAT THE ISSUE WAS COVERED BY THE ITAT DECISION IN THE ASSESSEE'S OWN CASE FOR A.Y. 1999-00 AND 2000-01. THE ITAT HAD REMANDED THE MATTER BACK TO THE AO FOR VERIFICATION WHETHER THE CLAIMS HAVE BEEN ACCEPTED IN THE YEAR OF EXPORT AND HAD DIRECTE D THAT DISALLOWANCE WOULD ACCORDINGLY BE MADE. THE LEARNED AR ALSO SUBMITTED THAT MY PREDECESSOR CIT(A) HAD ALLOWED TH E CLAIM IN A.Y. 2001-02 AND 2002-03. I HAVE CONSIDERED THE MATTER. THIS ISSUE HAS COME UP IN APPEAL BEFORE ME IN ASSES SEE'S OWN CASE FOR THE A.Y. 1999-00. I HAVE DISCUSSED THE ISS UE AT LENGTH IN PARAGRAPHS 17, 18 AND 19 OF MY ORDER DATED 28.12 .2006 IN APPEAL NO.55 / 06-07. THERE I HAVE HELD THAT THE A CCEPTANCE OF THE DUTY DRAWBACK CLAIM WAS AUTOMATIC AND ACCRUE D TO THE ASSESSEE AS SOON AS THE EXPORT WAS MADE. I HAVE, TH EREFORE, NOT ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 8 ALLOWED THE CLAIM OF DEDUCTION IN THAT YEAR. FOLLOW ING MY FINDINGS FOR THAT YEAR, I HOLD THAT THE AO HAS RIGH TLY NOT ALLOWED DEDUCTION IN RESPECT OF THE CUSTOM DUTY AMO UNTING TO RS.36,01,36,219/- PAID ON IMPORT OF COMPONENT IN RE SPECT OF WHICH EXPORT HAD BEEN MADE. 7. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER. LD. AR HAS SUBMITTED THAT THIS GROUND OF APPEAL IS WRONGLY RAISED BY REV ENUE AS THIS ISSUE WAS DECIDED AGAINST THE ASSESSEE BY HON'BLE CIT(A). THE HON'BLE CIT(A) IN ITS ORDER HAS HELD THAT :- '9 ..... FOLLOWING MY FINDINGS FOR THAT YEAR, I HOL D THAT THE AO HAS RIGHTLY NOT ALLOWED DEDUCTION IN RESPECT OF THE CUSTOMS DUTY AMOUNTING TO RS.36,01,36,219/- PAID ON IMPORT OF CO MPONENT IN RESPECT OF WHICH EXPORT HAD BEEN MADE.' IN VIEW OF THIS, LD. AR SUBMITTED THAT THIS ISSUE M AY BE DISMISSED AS INFRUCTUOUS. 8. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. SIN CE CIT (A) HAD NOT GRANTED RELIEF TO THE ASSESSEE ON THIS ISSUE THE GR OUND BECOMES INFRUCTUOUS. IN VIEW OF THIS, THIS GROUND STANDS DISMISSED. 9. GROUND NO.1(E) IN REVENUES APPEAL IS AGAINST DE LETING THE DISALLOWANCE OF CUSTOMS DUTY ON INVENTORY IN CLOSIN G STOCK OF RS.23,89,60,314/-. THE CIT (A) HAS DECIDED THIS ISS UE IN PARA 11 OF HIS ORDER WHICH READ AS UNDER :- ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 9 11. CUSTOM DUTY INCLUDED IN CLOSING STOCK - RS.23,89,60,314/-. THE AO DISALLOWED THE APPELLANT'S CLAIM U/S 43B OF THE ACT FOLLOWING THE ORDER OF EARLIER YEAR I.E. A.Y. 2003- 04. IN THAT YEAR THE AO HAD OBSERVED THAT THE ASSESSEE HAD ALRE ADY RECEIVED A DEDUCTION AS THERE WAS A DEBIT ON THIS A CCOUNT IN THE P & L ACCOUNT WITH A ,CORRESPONDING INCREASE IN THE VALUE OF THE CLOSING STOCK. IT WAS STATED THAT SINCE THE AMO UNT STOOD INCLUDED IN THE CLOSING STOCK AS PER SECTION 145A O F THE ACT, AN ADDITIONAL DEDUCTION U/S 43B COULD NOT BE GRANTED. THE LEARNED AR STATED THAT EVEN IF THE AMOUNT STOOD DEBITED TO THE P & L ACCOUNT AND WAS INCLUDED IN THE CLOSING STOCK BY VI RTUE OF SECTION 145A, THE SAID AMOUNT WOULD BE SEPARATELY D EDUCTIBLE U/S 43B AS PER THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BERGER PAINTS (SUPRA). THE LEARNED AR A LSO STATED THAT THIS ISSUE HAD COME UP BEFORE THE ITAT IN A.Y. 1999-00 AND 2000-01 WHERE THE ITAT HAD HELD THAT THE REASON ING GIVEN BY THE CIT(A) THAT CLAIM OF ASSESSEE U/S 43B OF THE ACT ALREADY STOOD ALLOWED BY WAY OF DEBIT TO P & L ACCO UNT WAS NOT CORRECT. THE ITAT OBSERVED THAT SUCH REASONING GIVEN BY THE CIT(A) ALREADY STOOD ,REJECTED IN VIEW OF VARIO US DECISIONS OF THE HIGH COURT, SUPREME COURT AND THE TRIBUNAL. THE ITAT DELETED THE DISALLOWANCE ON THIS GROUND. I HAVE CON SIDERED THE MATTER. MY PREDECESSOR CIT(A) FOR A.Y. 2001-02 AND 2002-03 HAS FOLLOWED THE ORDER OF THE ITAT IN THIS REGARD A ND HAS GRANTED RELIEF. I HAVE GONE THROUGH THE ORDER OF TH E ITAT AND FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR O F THE ASSESSEE. THIS DISALLOWANCE IS, THEREFORE, DELETED AND ASSESS EE GETS A RELIEF OF RS.23,89,60,314/-. 10. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . LD. AR HAS SUBMITTED THAT IN RESPECT OF CUSTOM DUTY PAID ON IMPORT OF RA W MATERIAL/INPUTS, THE ASSESSEE FOLLOWED INCLUSIVE METHOD OF ACCOUNTING AN D ACCORDINGLY, THE AMOUNT OF CUSTOM DUTY PAID ON IMPORTED INPUTS/ RAW MATERIAL IS INCLUDED IN THE PURCHASE PRICE, WHICH IS DEBITED TO THE PROFIT & LOSS ACCOUNT. HE SUBMITTED THAT THE SAID DUTY IS ALSO INCLUDED AND C ONSIDERED AS PART OF THE ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 10 VALUE OF CLOSING STOCK, WHICH IS SHOWN IN THE CREDI T SIDE OF THE PROFIT & LOSS ACCOUNT. CUSTOM DUTY OF RS.23,89,60,314/- REPRESENT S CUSTOM DUTY ON IMPORT OF RAW MATERIAL/INPUTS, WHICH IS INCLUDED IN THE VA LUE OF CLOSING STOCK AS PER THE AFORESAID INCLUSIVE METHOD OF ACCOUNTING FOLLOW ED BY THE ASSESSEE. LD. AR FURTHER SUBMITTED THAT THE SAID METHOD IS ALSO I N LINE WITH THE PROVISIONS OF SECTION 145A OF THE ACT. HE SUBMITTED THAT INCL USION OF CUSTOM DUTY, BOTH IN THE VALUE OF PURCHASE AS WELL AS IN THE VALUE OF CLOSING STOCK, IS TAX NEUTRAL INASMUCH AS THE VERY SAME AMOUNT IS BOTH DEBITED AN D CREDITED TO THE PROFIT & LOSS ACCOUNT. HE SUBMITTED THAT HOWEVER, AS PER TH E MANDATE UNDER SECTION 43B OF THE ACT, THE CUSTOM DUTY SO ACTUALLY PAID BY THE ASSESSEE IS SEPARATELY CLAIMED AS DEDUCTION ON PAYMENT BASIS IN THE RETURN OF INCOME. LD. AR SUBMITTED THAT IN THE EARLIER YEARS, THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE AFORESAID AMOUNT HOLDING THE SAME TO MERELY ADV ANCE PAYMENT, LIABILITY IN RESPECT OF WHICH HAS NOT CRYSTALLIZED AND THEREF ORE, NOT ALLOWABLE AS DEDUCTION UNDER SECTION 43B OF THE ACT. LD. AR SU BMITTED THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORD ER OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR A.Y 1999-00, 2000-01, 2001- 02 AND 2005-06 WHEREIN THE TRIBUNAL HAS HELD THAT, SINCE THE DUTY IS PAID, DEDUCTION CLAIMED U/S 43B OF THE ACT HAS TO BE ALLOWED. HE PRAYED THAT THE G ROUND TAKEN BY THE REVENUE MAY BE DISMISSED. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 11 11. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. TH IS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1999-00, 2000-021, 2001-02 AND 200 5-06. THE RELEVANT PARAS 21 & 22 OF THE ORDER FOR ASSESSMENT YEAR 2005 -06 ARE REPRODUCED BELOW :- 21. THE NEXT DISPUTE IN THE REVENUES APPEAL R ELATES TO CUSTOMS DUTY ON INVENTORY HELD IN CLOSING STOCK TO THE EXTENT OF ` 23,68,09,186/-. ACCORDING TO THE AO, THE ASSESSEE HAS ALREADY DEBITED THE SAID SUM TO THE PROFIT & LOSS ACCOUNT AND CORRESPONDINGLY INCLUDED IN CLOSING STOCK AND THE A SSESSEE IS NOT ENTITLED FOR ANY FURTHER DEDUCTION. HOWEVER, THE C LAIM OF THE ASSESSEE IS THAT ALTHOUGH THE AMOUNT STOOD DEBITED TO THE PROFIT AND LOSS ACCOUNT AND WAS INCLUDED IN THE CLOSIN G STOCK, THE SAID AMOUNT WOULD STILL BE SEPARATELY DEDUCTI BLE UNDER SECTION 43B IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BERGER PAINTS (CITED SUPRA). ACCORDING TO HIM, IDENTICAL CLAIMS HAVE BEEN ACCEPTED BY THE TR IBUNAL IN THE AYS 1999-00 AND 2000-01 AND 2001-02. IN THE LIGHT OF THOSE ORDERS OF ITAT ON IDENTICAL ISSUE, THE CIT(A) ACCEPTED ALL THESE CONTENTIONS AND REVENUE IS AGGRI EVED. 22. WE HAVE HEARD BOTH THE SIDES AND CAREFULLY G ONE THROUGH THE ORDERS REFERRED TO INCLUDING THE DISCUSSION IN THE IMPUGNED ORDERS. WE HAVE ALSO CAREFULLY GONE THROUGH TH E REASONING GIVEN BY THE AO IN MAKING THE DISALLOWANCE. WE DO NOT THINK THAT THE CONTENTION OF THE REVENUE DESERVES ACCEPTANCE IN THE LIGHT OF THE AUTHORITATIVE PRONOUNCEMENT BY THE SUPREME COURT IN THE CASE OF BERGER PAINTS (CITED SUPRA). WE ACCORDINGLY DECLINE TO INTERFERE AND CONFIRM THE FINDING OF TH E CIT(A) ON THIS GROUND. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF REVENUES APPEAL. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 12 12. GROUND NO.2 IN REVENUES APPEAL IS AGAINST DELE TION OF DISALLOWANCE OF VRS EXPENSES U/S 35DDA OF THE ACT OF RS.38,63,64,34 8/-. THE CIT (A) HAS DECIDED THIS ISSUE IN PARAS 16 & 17 OF HIS ORDER WH ICH READ AS UNDER :- 16. GROUNDS 5 TO 5.9 ARE WITH REGARD TO DISALLOWA NCE OF DEDUCTION U/S 35BDA AMOUNTING TO RS.38,63,64,348/-. THE A.O. OBSERVED THAT ASSESSEE HAD CLAIMED DEDUCTION O F RS.38,63,64,348/- U/S 35DDA OF THE ACT BEING 1/5TH OF THE V.R.S. AMOUNTING TO RS.73,60,47,559/- FOR F.Y. 2001 -02 AND FOR 1/5TH OF THE AMOUNT OF RS.119,57,74,181/- FOR T HE F.Y. 2003-04. THE AD ASKED FOR THE ASSESSEE'S EXPLANATIO N IN THE MATTER. THE ASSESSEE FILED A REPLY IN WHICH RELIANC E WAS PLACED ON CIRCULAR NUMBER 14 OF 2001 ISSUED BY THE CBDT EX PLAINING THE PROVISIONS OF SEC.35DDA. THE ASSESSEE ALSO STAT ED THAT LJ5TH OF THE VRS EXPENDITURE AMOUNTING TO RS.73.63 CRORES HAD BEEN ALLOWED IN A.Y. 2002-03 AND THAT THE A.O. COULD NOT TAKE A DIFFERENT VIEW IN THIS YEAR. HOWEVER, THE A. D. WAS NOT CONVINCED BY THIS ARGUMENT. SHE STATED THAT A DETAI LED DISCUSSION ABOUT THIS ISSUE HAD BEEN DONE IN THE AS SESSMENT ORDER FOR A.Y.-2003-04 WHERE THE CLAIM HAD BEEN DIS ALLOWED. IT WAS STATED THAT SINCE THE FACTS WERE SIMILAR IN THIS YEAR, THE CLAIM WAS BEING DISALLOWED ON SIMILAR GROUNDS. 17. ON PERUSAL OF THE ASSESSMENT ORDER FOR A.Y. 200 3-04, IT IS SEEN THAT THE GROUND FOR NOT ALLOWING THE CLAIM IS THAT THE VOLUNTARY RETIREMENT SCHEME WAS NOT IN ACCORDANCE W ITH THE RULE 2BA READ WITH SEC. 10(10C) OF THE ACT. AS PER SEE. 10(10C) ANY AMOUNT RECEIVED AS VRS PAYMENT WOULD NO T BE TAXABLE IN THE HANDS OF THE EMPLOYEE TO THE EXTENT OF RS.5 LAKHS IF THE SCHEME WAS IN ACCORDANCE WITH THE GUID ELINES AS PRESCRIBED IN RULE 2BA. THE AD WAS OF THE OPINION T HAT SINCE THE SCHEME WAS NOT AS PER THE GUIDELINES AS LAID DO WN IN RULE 2BA, IT WOULD NOT BE AN ALLOWABLE DEDUCTION U/S 35D DA. DURING COURSE OF THE APPEAL PROCEEDINGS, THE LEARNE D AR STATED THAT VRS PAYMENT UNDER ANY SCHEME WAS ALLOWA BLE TO THE EXTENT OF THE 1/5TH EVERY YEAR UNDER THE PROVIS IONS OF SECTION 35DDA. IT WAS STATED THAT THE DEDUCTION U/S SEC. 35DDA WAS NOT IN ANY WAY CONNECTED TO RULE 2BA READ WITH SEC.10(10C). IT WAS ARGUED THAT THE GUIDELINES IN R ULE 2BA WHERE FOR THE PURPOSES OF DETERMINING THE TAXABILIT Y OF THE ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 13 VRS PAYMENT IN THE HANDS OF THE INDIVIDUAL EMPLOYEE S AND HAD NOTHING TO DO WITH THE ALLOWABILITY OF DEDUCTIO N OF THE VRS PAYMENT U/S 35DDA IN THE HANDS OF THE EMPLOYER. REFERENCE WAS INVITED TO CIRCULAR 14 OF 2001 IN THI S REGARD. I HAVE CONSIDERED THE MATTER. THE LEARNED AR'S CONTEN TION IN THIS REGARD IS CORRECT. SEE. 10(10C) READ WITH RULE 2BA WILL NOT IMPACT UPON THE ALLOWABILITY OF DEDUCTION U/S 3 5DDA. AS PER THE LANGUAGE OF SEE. 35DDA, THE DEDUCTION IS AL LOWABLE IN RESPECT OF ANY VRS SCHEME AND NO CONDITIONS REGARDI NG THE SCHEME ARE LAID DOWN. UNDER THE CIRCUMSTANCES, I HO LD THAT THE DEDUCTION AMOUNTING TO RS.38,63,64,348/- WOULD BE A LLOWABLE AND THE ASSESSEE GETS RELIEF TO THIS EXTENT. THE LD . ARS SUBMITTED THAT THERE WAS AN ALTERNATIVE CLAIM ALSO U/S 37 FOR THE WHOLE OF THE AMOUNT OF RS.119.57 CRORES BEING THE A MOUNT PAID ON ACCOUNT OF VRS IN THE PREVIOUS YEAR RELEVAN T TO THE A.Y. UNDER APPEAL. THIS ALTERNATIVE CLAIM HAS NO ME RIT IN VIEW OF THE PROVISIONS OF SECTION 35DDA OF THE ACT WHICH HAVE COME INTO EFFECT FROM 1.4.2001. 13. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . LD. AR HAS SUBMITTED THAT THE ASSESSEE COMPANY HAD, DURING THE ASSESSMEN T YEAR 2004-05, CLAIMED DEDUCTION OF RS.38,63,64,348/- U/S 35DDA OF THE ACT , BEING THE AGGREGATE OF:- (I) 1/5 TH OF THE PAYMENT OF RS.73.60 CRORES MADE BY THE ASSE SSEE COMPANY DURING AY 2002-03 TO ITS EMPLOYEES UNDER VR S SCHEME - RS.14.72 CRORES; AND (II) 1/5 TH OF THE PAYMENT OF RS.119.58 CRORES MADE BY THE AS SESSEE COMPANY DURING AY 2004-05 TO ITS EMPLOYEES UNDER VR S SCHEME - RS.23.91 CRORES. HE SUBMITTED THAT THE A.O. HAD DISALLOWED THE AFORE SAID CLAIM OF RS.38.63 CRORES ON THE GROUND THAT THE VRS SCHEME WAS NOT IN ACCORDANCE WITH RULE ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 14 2BA OF THE INCOME TAX RULES, 1962. LD. AR SUBMITT ED THAT THE AFORESAID ISSUE OF CLAIM U/S 35DDA IS COVERED IN FAVOUR OF AS SESSEE BY THE ORDER OF THE ITAT FOR AY 2004-05 AND A Y 2005-06. HE PRAYED THA T THE GROUND TAKEN BY THE REVENUE MAY BE DISMISSED. 14. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. TH IS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2004-05 AND 2005-06. THE RELEVANT PARAS 35 TO 38 OF THE ORDER FOR ASSESSMENT YEAR 2005-06 ARE REPRODUCED BE LOW :- 35. THE NEXT DISPUTE IN THE REVENUES A PPEAL RELATES TO THE DISALLOWANCE MADE BY THE AO U/S 35DDA OF THE ACT AMOUNTING TO ` 38,63,64,348/-. 36. THE FACTS ARE THAT THE ASSESSEE COMP ANY HAD OFFERED TWO VOLUNTARY RETIREMENT SCHEMES TO ITS EMPLOYEES . THE SCHEME WAS OFFERED IN THE PREVIOUS YEAR 2001-02 WHEREIN THE TOTAL PAYMENT MADE TO EMPLOYEES WAS ` 73,60,47,559/-. THE SECOND SCHEME WAS OFFERED IN T HE FINANCIAL YEAR 2003-04 WHEREIN THE TOTAL PAYMENT M ADE TO THE EMPLOYEES WAS ` 119,57,74,181/-. THE ASSESSEE COMPANY CLAIMED DEDUCTION FOR THESE VRS PAYMENTS U/S 35DDA OF THE ACT. DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEES CLAIM OF PAYMENT OF ` 38,63,64,348/- WORKS OUT AS FOLLOWS:- 1/5 TH OF THE VRS PAYMENT OF ` 73,60,47,559/- MADE IN FY 2001-02 : ` 14,72,09,512/- 1/5 TH OF THE VRS PAYMENT OF ` 119,57,74,181/- MADE IN FY 2003-04 : ` 23,91,54,836/- TOTAL DEDUCTION CLAIMED U/S 35DDA DURING AY 2005-06 37. THE AO DISALLOWED THE AFORESAID CLAIM FOR T HE AY 2004- 05 ON THE BASIS OF HIS OWN STAND TAKEN IN THE EARL IER ASSESSMENT YEARS WHEREIN HE HELD THE SAME TO BE VIOLATIVE OF PROVISIONS ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 15 OF SECTION 35DDA OF THE ACT. THE LD. CIT( A), HOWEVER, WAS OF THE VIEW THAT THE PAYMENTS UNDER THE VRS SCH EME ARE ALLOWABLE AS DEDUCTION. FOR THIS PURPOSE, HE RELIE D UPON THE ORDER OF THE ITAT FOR AY 2004-05. THE REVENUE IS AGGRIEVED. 38. WE HAVE HEARD BOTH THE SIDES AND ARE UNABLE TO FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). THE PROVISIONS OF SECTION 35DDA ARE SPECIFIC PROVISIONS FOR AMORTIZATION OF EXPENDITURE INCURRED UNDER VOLUNTARY RETIREMENT SCHEME. THE PROVISIONS AS CONSTRUED BY THE TRIBUNA L IN THE AY 2004-05 ARE CLEAR AND THE PAYMENTS MADE BY THE ASSE SSEE ARE CLEARLY COVERED UNDER THE AFORESAID PROVISIONS. W HEN ONCE THE PAYMENT IS TO BE PROCESSED UNDER THESE PROVISIONS, THE SAME PAYMENTS CANNOT BE CONSIDERED AND ALLOWED U/S 37( 1) OF THE ACT. THE RELIANCE OF AO ON RULE 2BA FOR DISALLOWING THE ASSESSEES CLAIM U/S 35DDA WAS CLEARLY MISPLACED. THOSE RULES ARE RELEVANT AND CONTAIN GUIDELINES FOR THE PURPOS ES OF SECTION 10(10C) AND THE SAME ARE NOT RELEVANT WHILE PROCES SING THE CLAIM FOR DEDUCTION U/S 35DDA OF THE ACT. THE ASS ESSEES GROUND IN THE LIGHT OF THESE DISCUSSIONS WAS ACCEPT ED. THE ISSUE AND FACTS OF THE YEAR UNDER CONSIDERATION REMAINING THE SAME, WE FOLLOW OUR OWN EARLIER ORDER AND CONFIRM THE ORDER OF THE CIT(A). RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF REVENUES APPEAL. 15. GROUND NO.3 IN REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF PAYMENTS MADE OUTSIDE INDIA U/S 40(A)(I) OF THE ACT OF RS.9,08,31,518/-. THE CIT (A) HAS DECIDED THIS ISSUE IN PARAS 19 & 20 OF HIS ORDER WHICH READ AS UNDER:- 19. GROUNDS 7 TO 7.7 ARE WITH REGARD TO DISALLOWAN CE OF FOREIGN PAYMENTS AMOUNTING TO RS.9,08,31,518/-. THE AO OBSERVED THAT THIS AMOUNT REPRESENTED PAYMENTS MADE TO NON- RESIDENTS AS COMMISSION ON EXPORT SALES AS WELL AS PAYMENT MADE FOR SALES PROMOTION AND ADVERTISEMENT EXPENSES INCURRED ABROAD. THE ASSESSEE EXPLAINED THAT THESE PAYMENTS WOULD NOT FALL WITHIN THE AMBIT OF SECTION 40A(1) OF THE ACT AS THESE ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 16 SUMS WERE NOT CHARGEABLE TO TAX IN INDIA. HOWEVER, THE AO DID NOT ACCEPT THIS CONTENTION AND STATED THAT AS PER T HE PROVISIONS OF SECTION 40A(1), THE ASSESSEE WAS REQUIRED TO DED UCT TAX ON PAYMENTS MADE TO NON-RESIDENTS OUTSIDE INDIA AND SI NCE THIS HAD NOT BEEN DONE, THE PAYMENTS COULD NOT BE ALLOWE D AS DEDUCTIONS. IT WAS ALSO STATED THAT THE ASSESSEE HA D NOT SOUGHT ANY NO-OBJECTION CERTIFICATE FROM THE CONCERNED OFF ICER FOR NON-DEDUCTION OF TAX OR DEDUCTION AT A LOWER RATE. 20. DURING THE COURSE OF APPEAL PROCEEDINGS, THE LE ARNED AR REITERATED THAT THE PROVISIONS OF SECTION 40A(1) OF THE ACT WOULD ONLY BE ATTRACTED WHERE THERE WAS ANY PAYMENT MADE TO A NON-RESIDENT OR A FOREIGN COMPANY WHICH WAS CHARG EABLE UNDER THE ACT TO TAX. IT WAS STATED THAT THE PAYMEN T WAS NOT CHARGEABLE TO TAX IN INDIA AS THEY WERE PAID FOR SE RVICES RENDERED OUTSIDE INDIA OR FOR REIMBURSEMENT OF OUT OF POCKET EXPENSES INCURRED OUTSIDE INDIA. IT WAS STATED THAT WHILE MAKING THE PAYMENT, THE COMPANY HAD COMPLIED WITH T HE PROVISIONS OF SUB-SECTION 2 OF SECTION 195 READ WIT H 'CIRCULAR NUMBER 759 DATED 18.11.1997. THIS CIRCULAR STATES T HAT THE REQUIREMENT FOR AN NOC FROM THE INCOME TAX DEPARTME NT FOR REMITTING MONEY ABROAD HAD BEEN DONE AWAY WITH AND REMITTANCE COULD BE MADE BY FURNISHING OF AN ACCOUN TANT'S CERTIFICATE TO THE RBI WHICH WOULD IN TURN FORWARD THE CERTIFICATE TO THE AO. REFERENCE WAS ALSO MADE TO C IRCULAR NUMBER 93 DATED 23.7.1969 WHEREIN THE CBDT HAS STAT ED THAT WHERE A FOREIGN AGENT OF AN INDIAN EXPORTER OPERATE S IN HIS OWN COUNTRY AND COMMISSION IS DIRECTLY REMITTED TO HIM AND IS NOT RECEIVED BY HIM OR ON HIS BEHALF IN INDIA, THE FORE IGN AGENT WOULD NOT BE LIABLE TO PAY INCOME TAX ON THE COMMIS SION. RELIANCE WAS ALSO PLACED ON THE SUPREME COURT DECIS ION IN THE CASE OF COLLECTOR OF CENTRAL EXCISE VS. DHIREN CHEM ICAL INDUSTRIES 2002 (143) E.L.T. 19(5C). I HAVE GONE TH ROUGH THE AFORESAID CIRCULARS AND FIND THAT THE CONTENTION OF THE LEARNED AR IN THIS REGARD IS CORRECT. FURTHER, IT IS SETTLE D LAW THAT DEPARTMENTAL CIRCULARS ARE BINDING ON THE AO (K.P. VARGHESE VS. ITO : 131 ITR 597). I AM ALSO IN AGREEMENT WITH THE SUBMISSION THAT THE PROVISIONS OF SECTION 40A(1) WO ULD NOT APPLY TO PAYMENTS WHICH WERE NOT CHARGEABLE TO TAX IN INDIA. THE PAYMENTS IN QUESTION HAVE BEEN MADE OUTSIDE IND IA TO NON-RESIDENTS OR FOREIGN COMPANIES FOR SERVICES REN DERED OUTSIDE INDIA. IT WOULD, THEREFORE, BE CLEAR THAT T HERE WAS NO ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 17 REQUIREMENT FOR TAX TO BE DEDUCTED AT SOURCE ON THE PAYMENTS IN QUESTION. FURTHER, IT MAY ALSO BE MENTIONED THAT THE ASSESSEE WAS GRANTED RELIEF WITH REGARD TO THE SAME ISSUE BY MY PREDECESSOR CIT(A) IN THE ASSESSEE'S OWN CASE IN TH E A.Y. 2001-02 AND 2002-03. KEEPING ALL THE ABOVE FACTS IN VIEW, I AM OF THE OPINION THAT THE DISALLOWANCE IS NOT SUST AINABLE AND THE ASSESSEE GETS RELIEF OF RS.9,08,31,518/- ON THI S ACCOUNT. 16. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . LD. AR HAS SUBMITTED THAT THE ASSESSEE COMPANY HAS INCURRED THE AGGREGAT E EXPENDITURE OF RS.9,08,31,518/- COMPRISING OF RS.7,55,03,472/- INC URRED ON ACCOUNT OF COMMISSION PAID TO AGENTS OUTSIDE INDIA FOR MAKING SALES OF VEHICLES AND RS.1,53,28,046/- ON ACCOUNT OF REIMBURSEMENT OF ADV ERTISEMENT EXPENSES INCURRED OUTSIDE INDIA. HE SUBMITTED THAT THE ASSES SING OFFICER, HOWEVER, DISALLOWED THE AFORESAID EXPENSES BY INVOKING THE P ROVISIONS CONTAINED IN SECTION 40(A)(I) OF THE ACT READ WITH SECTION 195 O F THE ACT HOLDING THAT THE ASSESSEE FAILED TO OBTAIN NO OBJECTION CERTIFICATE FROM THE ASSESSING OFFICER. LD. AR SUBMITTED THAT THE ASSESSING OFFICER FURTHER HELD THAT SINCE TAX WAS NOT DEDUCTED AT SOURCE, THE AMOUNT PAID WAS DISALLOWABL E UNDER SECTION 40(A)(I) OF THE ACT. HE SUBMITTED THAT THE CIT(A), FOLLOWING THE EARLIER YEAR'S ORDER, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER. LD. AR FURTHER SUBMITTED THAT UNDER SECTION 195 OFF THE ACT, THE L IABILITY TO DEDUCT TAX ARISES ONLY IF THE AMOUNT PAID IS CHARGEABLE TO TAX IN IND IA AND NOT OTHERWISE. HE PLACED RELIANCE, IN THIS REGARD, ON THE DECISION OF THE SUPREME COURT IN THE CASE OF G E INDIA TECHNOLOGY CEN. P. LTD. V. CIT: 3 27 ITR 456 (SC) ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 18 WHEREIN, AFTER CONSIDERING THE EARLIER DECISION OF SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATION OF INDIA:239 ITR 587, IT H AS BEEN HELD THAT THE PAYER IS REQUIRED TO DEDUCT TAX AT SOURCE UNDER SEC TION 195 OF THE ACT ONLY IF THE PAYMENT MADE OR ANY PORTION THEREOF IS CHARGEAB LE TO TAX IN INDIA AND NOT OTHERWISE. HE SUBMITTED THAT IT HAS BEEN SIMILARLY HELD IN THE FOLLOWING CASES: ESTEL COMMUNICATIONS (P) LTD.: 217 CTR 102 (DEL.). VAN OORD ACZ INDIA LTD. V. CIT : 230 CTR 265 (DEL.) CIT V. ICL SHIPPING LTD.: 315 ITR 195 (MAD.) JINDAL THERMAL POWER : 182 TAXMAN 252 (KAR.) CIT V. MANAGER, STATE BANK OF INDIA : 226 CTR 310 ( RAJ) NQA QUALITY SYSTEMS REGISTRAR LTD. V. DCIT : (2005) 2 SOT 249 (DEL.) ACIT V. MODICON NETWORK (P) LTD.: (2007) 14 SOT 204 (DEL.) PRASAD PRODUCTION LTD. : 129 TT J 641 (CHENN.)(SB) MAHINDRA & MAHINDRA LTD. V. DY.CIT: 122 TTJ 577(MUM ) (SB) AS REGARDS INCOME DOES NOT ACCRUE OR ARISE IN INDIA , LD. AR SUBMITTED THAT COMMISSION PAID TO EXPORT DEALERS WAS IN RESPECT OF SERVICES RENDERED BY THEM OUTSIDE INDIA AND THE SAME WAS, THEREFORE, NOT LIABLE TO BE TAXED IN THE HANDS OF NON RESIDENT UNDER THE PROVISIONS OF THE A CT. RELIANCE, IN THIS REGARD, IS PLACED ON THE FOLLOWING DECISIONS WHEREI N PAYMENTS MADE IN ORDER TO EARN INCOME FROM A SOURCE OUTSIDE INDIA WAS HELD TO BE NOT TAXABLE IN INDIA UNDER SECTION 9(1) OF THE ACT : CIT V. A. KUHNLE KOPP AND KAUSCH: 262 ITR 513 (MAD. ) LUFTHANSA CARGO LTD. V. DCIT: 91 ITO 13, (DEL) TITAN INDUSTRIES LTD. VS. ITO: (2007) 11 SOT 206 (B ANG.) ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 19 FURTHERMORE, THE PAYMENT OF COMMISSION MADE TO FORE IGN AGENTS DOES NOT EVEN ACCRUE OR ARISE IN INDIA IN TERMS OF SECTION 9 (1)(I) OF THE ACT, SINCE NO SERVICES WERE RENDERED BY THE EXPORT AGENTS, MUCH L ESS IN THE TERRITORY OF INDIA. LD. AR SUBMITTED THAT THE FOREIGN AGENTS HAV E NO OPERATIONS IN INDIA AND, THEREFORE NO OPERATIONS CARRIED ON IN INDIA CA N BE HELD TO BE ATTRIBUTABLE, DIRECTLY OR INDIRECTLY, TO THE EARNING OF COMMISSIO N BY THE FOREIGN AGENTS. THE ASSESSEE COMPANY AND, FOREIGN AGENTS HAVE PRINCIPAL -TO-PRINCIPAL RELATIONSHIP AND, FOREIGN AGENTS HAVE AN INDEPENDENT STATUS IN T HE ORDINARY COURSE OF THEIR BUSINESS AND, IN VIEW THEREOF, IT IS SUBMITTED THAT , THERE EXISTS NO BUSINESS CONNECTION OF FOREIGN AGENTS, WHICH COULD HAVE RESU LTED INTO EARNING OF INCOME OUTSIDE INDIA AND, THEREFORE NO INCOME OF FO REIGN CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA. RELIANCE, IN THIS REGARD , IS PLACED ON THE FOLLOWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT WHERE NO S ERVICES ARE RENDERED IN INDIA PAYMENT MADE OUTSIDE CANNOT BE SAID TO ACCRUE D OR ARISE IN INDIA: CIT V. TOSHOKU LTD.: 125 ITR 525 (SC) CIT V. ARDESHI B. CURSETJEE & SONS LTD. : 115 TTJ 9 16 (MUM.) INDOPEL GARMENTS (P) LTD. VS DCIT : 86 ITD 102 (BAN G) IND. TELESOFT PVT. LTD. : 267 ITR 715 (AAR) ADIT V. WIZCRAFT INTNL : ITA NO. 3208/MUM./2003 (MU M.) LD. AR ALSO RELIED ON THE FOLLOWING CIRCULARS ISSUE D BY CBDT WHICH ALSO ENDORSES THE AFORESAID VIEW : CIRCULAR NO.786 DATED 07.02.2000 REPORTED IN 241 I TR 132 (ST), CIRCULAR NO. 23 DATED 23-07-1969 ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 20 HE SUBMITTED THAT THE AFORESAID CIRCULARS HAVE BEEN WITHDRAWN BY THE CBDT, VIDE CIRCULAR NO.7 OF 2009. HOWEVER, THE WITHDRAWAL OF THE AFORESAID CIRCULARS DOES NOT, IPSO FACTO, LEAD TO THE INFEREN CE THAT COMMISSION PAID TO OVERSEAS AGENTS IS PER SE TAXABLE IN INDIA. LD. AR FURTHER SUBMITTED THAT THE SUPREME COURT IN THE CASE OF CIT VS TOSHUKU LTD : 1 25 ITR 525 (SUPRA), INDEPENDENT OF THE ABOVE CIRCULAR, HELD THAT THE CO MMISSION AMOUNTS WHICH WERE EARNED BY THE NON-RESIDENTS FOR SERVICES RENDE RED OUTSIDE INDIA COULD NOT BE DEEMED TO BE INCOME WHICH HAD EITHER ACCRUED OR ARISEN IN INDIA IN TERMS OF SECTION 9(1)(I) OF THE ACT. HE ALSO INVITE OUR A TTENTION TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DDIT V. SIEMENS AKTIENGESELLSCHAFT : 2010-TIOL-102-ITAT-MUM WHEREIN IT HAS BEEN HELD THAT THE WITHDRAWAL OF CIRCULAR IS PROSPECTIVE FROM 2009 AND NOT FOR EARLIER ASSESSMENT YEARS WHEN THE CIRCULAR WAS APPLICABLE. RELIANCE IS FURTHER PLACED ON THE FOLLOWING DECISIONS WHEREIN IT WAS HELD THAT PAYMENTS MADE TO FOREIGN AGENTS FOR SERVICES RENDERED OUTSIDE INDIA IS NOT L IABLE FOR DEDUCTION OF TAX AT SOURCE AND CANNOT BE DISALLOWED UNDER SECTION 40(A) (I): DCIT V. DIVI'S LABORATORIES LTD.: 131 ITO 271 (HY D.) JCIT V. GEORGE WILLIAMSON (ASSAM) LTD.: 305 ITR 4 22 (GAU.) DCIT V. EON TECHNOLOGY (P) LTD.: LEX DOC ID: 4090 96(OEL. ) IN VIEW OF THE AFORESAID, HE SUBMITTED THAT THE PAY MENTS MADE DID NOT GIVE RISE TO AN INCOME CHARGEABLE TO TAX IN INDIA UNDER THE PROVISIONS OF THE ACT ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 21 AND, THEREFORE, NO TAX WAS DEDUCTIBLE IN RESPECT TH EREOF. THEREFORE, NO DISALLOWANCE OF ANY PART OF THIS AMOUNT UNDER SECTI ON 40 (A)(I) OF THE ACT WAS WARRANTED. HE ALSO SUBMITTED THAT THE AFORESAID IS SUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2001-02. 17. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. TH IS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02. THE RELEVANT PARAS 29 & 3 0 OF THE ORDER FOR ASSESSMENT YEAR 2001-02 ARE REPRODUCED BELOW :- 29. IN REGARD TO GROUND NO.14, WHICH WAS AGA INST THE DELETION OF DISALLOWANCE OF THE PAYMENT MADE OUTSID E INDIA BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) IT WAS SUBMITTED THAT THE ASSESSEE HAD INCURRED THE EXPENDITURE ON ACCOUN T OF THE COMMISSION PAID TO AGENTS OUTSIDE INDIA FOR MAKING SALE OF VEHICLES AND REIMBURSEMENT OF ADVERTISEMEN T EXPENSES INCURRED OUTSIDE INDIA. IT WAS THE SUBMI SSION THAT THE COMMISSION AS PAID DID NOT CONSTITUTE O R GIVE RISE TO ANY INCOME CHARGEABLE IN INDIA BOTH UNDER THE PROVI SIONS OF THE ACT OR THE PROVISIONS CONTAINED IN DTAA AND, THEREF ORE, NO TAX WAS DEDUCTIBLE IN RESPECT THEREOF U/S 195 OF THE AC T AND CONSEQUENTLY NO DISALLOWANCE COULD BE MADE BY INVOK ING THE PROVISIONS OF SECTION 40(A)(I) OF THE A CT. LD. AR ALSO RELIED UPON THE CIRCULAR NO.786 DATED 07.02.2 000 AND CIRCULAR NO.23 DATED 23.07.69 WHEREIN IT HAS BEEN H ELD THAT THE COMMISSION PAID TO NON-RESIDENT FOR SERVICES RENDER ED OUTSIDE INDIA ARE NOT CHARGEABLE TO TAX IN INDI A. IN REPLY, THE LD. DR SUBMITTED THAT THE ASSESSEE WAS DUTY BOUND TO MAKE THE NECESSARY CLAIM U/S 195 BEFORE THE ASSESSING OF FICER AND OBTAINED THE NECESSARY CERTIFICATE FOR NIL DEDUCTIO N AND THIS HAVING NOT BEING DONE, THE PROVISIONS OF SECTION 40 (A) (I) OF THE ACT APPLY. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 22 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PERUSAL OF THE PROVISIONS OF SECTION 195 CLEARLY SHOWS THAT THE DEDUCTION OF TAX IS LIABLE TO BE MADE BY A PERSON RESPONSIBLE FOR PAYING TO THE NON-RESIDENT ANY SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT. THE WORDS CHARGE ABLE UNDER THE PROVISIONS OF THIS ACT CLEARLY SHOWS THAT THE PAYMENT WHICH IS MADE BY THE ASSESSEE TO THE NON-RESIDENT IS LIABLE TO BE TAXED IN INDIA IN THE HANDS OF THE NON -RESIDENT. HERE IT IS NOTICED THAT THE COMMISSION HAS BEEN PAID TO THE AGENTS FOR THE SALE OF THE VEHICLES AND RE-IMBURSEMENT OF ADVERTISEMENT EXPENSES INCURRED OUTSIDE INDIA. O BVIOUSLY, THESE EXPENDITURES INCURRED OUTSIDE INDIA DOES NOT MAKE THEM TAXABLE IN INDIA UNDER THE ACT AND TH E NON-RESIDENT ITSELF IS NOT TAXABLE IN INDIA. IN THE CIRCUMSTANCE S, WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 195 WILL NOT BE ATTRACTED IN THE CASE OF THESE PAYMENTS AND THE CIT (A) WAS RIGHT IN DELETING THE DISALLOWANCES MADE. IN THE CIRCUMSTANCES, GROUND NO.14 OF THE REVENUE S APPEAL STANDS DISMISSED AND THE FINDINGS OF THE CIT (A) STANDS UPHELD. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF REVENUES APPEAL. 18. GROUND NO.4 IN REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF EXPENDITURE INCURRED ON CLUB MEMBERSHIP OF RS.1, 78,905/-. THE CIT (A) HAS DECIDED THIS ISSUE IN PARA 21 OF HIS ORDER WHIC H READ AS UNDER:- 21. GROUNDS 8 TO 8.5 ARE WITH REGARD TO DISALLOWAN CE OF CLUB MEMBERSHIP FEE AMOUNTING TO RS.1,78,905/-. THIS AMO UNT REPRESENTS EXPENDITURE INCURRED FOR CLUB MEMBERSHIP FEE FOR EXECUTIVES OF THE COMPANY. THE AO HAS DISALLOWED TH E CLAIM ON THE GROUND THAT THE PAYMENTS WERE MADE FOR PERSO NAL BENEFIT OF THE DIRECTORS AND WAS HENCE, NOT FOR BUS INESS PURPOSE. THIS ISSUE HAD COME UP IN APPEAL BEFORE MY PREDECESSOR CIT(A) IN THE ASSESSEE'S OWN CASE FOR A .Y. 2001- 02 AND 2002-03. HE HAS GRANTED RELIEF HOLDING THAT THE EXPENDITURE WAS FOR BUSINESS PURPOSE. I AM IN AGREE MENT WITH THE DECISION AND ALLOW THIS GROUND FOR REASONS MENT IONED THEREIN. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 23 19. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . LD. AR HAS SUBMITTED THAT THE ASSESSEE COMPANY HAS DEBITED RS.1,78,905/- ON ACCOUNT OF CLUB MEMBERSHIP FEES TO PROFIT & LOSS ACCOUNT. HE SUBMI TTED THAT THE SAID EXPENDITURE IS INCURRED ON SUBSCRIPTION TO CLUBS PR OVIDED TO VARIOUS EMPLOYEES AND DIRECTORS. HE SUBMITTED THAT THE AO IN THE ASSESSMENT ORDER DISALLOWED THE SAID EXPENDITURE OF RS.1,78,905/- BY HOLDING THAT THE SAME CANNOT BE CONSIDERED AS BUSINESS EXPENDITURE. AT TH E OUTSET, HE SUBMITTED THAT THE ASSESSEE COMPANY WISHES TO CLARIFY THAT THE AFO RESAID EXPENDITURE HAS BEEN INCURRED FOR BUSINESS PURPOSES ON THE GROUNDS OF COMMERCIAL EXPEDIENCY AND THERE IS NO ELEMENT OF ANY PERSONAL BENEFIT BEING GRANTED EITHER TO THE EMPLOYEE OR DIRECTOR. LD. AR FURTHER SUBMITTED THAT THE TAX AUDITORS HAVE AMPLY CLARIFIED THIS POSITION IN THE TAX AUDIT REPORT ALSO AND THE AFORESAID EXPENDITURE THUS ALLOWABLE AS DEDUCTI ON. HE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS : OTIS ELEVATORS CO. (INDIA) LTD V CIT 195 ITR 682 (B OM) AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT 258 ITR 601 (BOM) CIT V SUNDHARAM INDUSTRIES LTD 240 ITR 335 (MAD) NESTLE INDIA LIMITED: 296 ITR 682 (DEL.) CIT V. SAMTEL COLOR LTD.: 326 ITR 425 (DEL.) DCIT V MAX INDIA LTD : (2007) 112 TTJ (ASR.) 726 LD. AR FURTHER SUBMITTED THAT THE AFORESAID ISSUE I S COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF THE TRIBUNAL IN THE AS SESSEE'S OWN CASE FOR THE ASSESSMENT YEARS 2001-02 AND 2005-06 ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 24 20. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. TH IS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2001-02 AND 2005-06. THE RELEVANT PARAS 39 & 40 OF THE ORDER FOR ASSESSMENT YEAR 2005-06 ARE REPRODUCED BE LOW :- 39. THE NEXT DISPUTE RELATES TO THE DISALLOWANCE O F EXPENDITURE INCURRED BY THE ASSESSEE ON CLUB MEMBERSHIP FEE TO THE EXTENT OF ` 15,95,844. THE ASSESSEE HAS INCURRED THESE EXPENDITURE ON SUBSCRIPTION TO CLUBS PROVIDED TO V ARIOUS EMPLOYEES AND DIRECTORS. THE EXPENDITURE IS CLAIME D TO HAVE BEEN INCURRED FOR BUSINESS PURPOSES ON GROUND S OF COMMERCIAL EXPEDIENCY. ACCORDING TO THE ASSES SEE, THERE WERE CONTRACTUAL OBLIGATIONS INCURRED ON ACCEP TED BUSINESS PRACTICES PREVAILING IN THE BUSINESS. IT WAS CLAI MED THAT THERE IS NO ELEMENT OF ANY PERSONAL BENEFIT BEING GRANTED EITHER TO THE DIRECTOR OR ASSESSEE. THESE AMOUNTS WERE INCURRED OUT OF BUSINESS NECESSITY. IDENTICAL CLAIMS HAVE BEEN ACCEPTED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR A Y 2001-02, BY RELYING UPON THE FOLLOWING JUDGEMENTS:- OTIS ELEVATORS CO. (INDIA) LTD. VS CIT 195 ITR 682 (BOM) AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT 258 ITR 601 (BOM) CIT VS SUNDHARAM INDUSTRIES LTD. 240 ITR 335 (MAD) DCIT V MAX INDIA LTD (2007) 112 TTJ (ASR.) 726 40. AFTER HEARING BOTH THE PARTIES AND GOING TH ROUGH THE RECORDS, WE HAVE NO REASON TO INTERFERE WITH THE O RDER OF THE LD. CIT(A) WHO HAS JUST FOLLOWED THE TRIBUNAL ORDER AN D THE BINDING DECISION OF THE DELHI HIGH COURT IN RESPECT OF THE ISSUE IN QUESTION. THE ORDER OF THE CIT(A) ON THIS ISSUE IS THEREFORE CONFIRMED BY HOLDING THAT THE EXPENDITURE IN QUESTION WAS INCURRED FOR BUSINESS PURPOSES OF THE ASSESSEE AN D WARRANTED BY BUSINESS NECESSITIES AND EXIGENCIES, SUCH EXPENSES CANNOT BE SUBJECT TO ANY ARBITRARY DISALLOWANCE. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GR OUND OF REVENUES APPEAL. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 25 21. GROUND NO.5 IN REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE ON GROUNDS OF FORESEEN PRICE INCREASE ON INPUTS BOT H AS PROVISION AND AS ACTUAL PAYMENT OF RS.92,42,17,677/-. THE CIT (A) H AS DECIDED THIS ISSUE IN PARA 25 OF HIS ORDER WHICH READ AS UNDER:- 25. GROUNDS 11 TO 11.4 ARE WITH REGARD TO CLAIM FO R PAYMENT OF FORESEEN PRICE INCREASE AMOUNTING TO RS.92,42,17 ,677/-. THE FACTS OF THE MATTER ARE THAT THE ASSESSEE WAS C REATING LIABILITY IN RESPECT OF FORESEEN PRICE INCREASE ON INPUTS ON ACCRUAL BASIS SINCE INCEPTION AND HAD BEEN ALLOWED DEDUCTION FOR THE SAME IN ALL THE YEARS EXCEPT FOR THE A.Y. 2 003-04 WERE THE PROVISION AMOUNTING TO RS.108,18,31,688/- WAS D ISALLOWED. IT WAS FURTHER STATED THAT OUT OF THE AFORESAID AMO UNT OF RS.108,18,31,688/- ALREADY TAXED IN A.Y. 2003-04, T HE APPELLANT HAD ACTUALLY PAID A SUM OF RS.68,24,06,32 8/- TO ITS VENDORS ON ACCOUNT OF FORESEEN PRICE INCREASE. IN A DDITION TO THIS, AN ADDITIONAL LIABILITY OF RS.24,18,11,349/- HAD BEEN OFFERED TO TAX BY THE APPELLANT COMPANY AND HAD BEE N TAXED ACCORDINGLY IN THE A.Y. UNDER CONSIDERATION I.E. A. Y. 2004-05. THE LEARNED AR STATED THAT THESE FACTS WERE BROUGHT TO THE ATTENTION OF THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE LETTER DATED 18.12.06 WITH A REQUE ST THAT THE APPELLANT SHOULD BE ALLOWED A DEDUCTION OF RS.92,42 ,17,677/- ( I.E. RS.68,24,06,328/- + RS.24,18,11,349/-) IN A. Y. 2004-05 OUT OF THE TOTAL AMOUNT OF RS.108,18,31,688/- WHICH HAD BEEN DISALLOWED BY THE AO IN A.Y. 2003-04. IT WAS STATED THAT THE AO DID NOT ALLOW THE CLAIM NOR WAS ANY FINDING GIVE N IN THE ASSESSMENT ORDER. THE LEARNED AR SUBMITTED THAT RE JECTION OF THIS CLAIM HAD RESULTED IN DEDUCTION NOT BEING ALLO WED IN THE YEAR IN WHICH THE PROVISION WAS CREATED NOR IN THE YEAR IN WHICH IT WAS ACTUALLY PAID OR WRITTEN BACK. I HAVE CONSIDERED THE MATTER. IT IS TRUE THAT THE CLAIM WOULD BE ALLO WABLE IN EITHER ONE OF THE YEARS. HOWEVER, THE ASSESSEE IS IN APPEA L AGAINST THE DISALLOWANCE MADE IN THE EARLIER YEAR I.E. A.Y. 200 3-04. THEREFORE, ANY RELIEF CAN ONLY BE GRANTED AFTER THE APPEAL FOR THAT YEAR ACHIEVES FINALITY. IN CASE THE ADDITION M ADE BY THE AD IS CONFIRMED BY THE CIT(A) AND THE ITAT IN A.Y. 2003- 04, THE ASSESSEE WOULD BE ENTITLED TO THE CLAIM OF RS.92,42,17,677/- MADE IN THIS YEAR. HOWEVER, IF TH E ASSESSEE'S ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 26 APPEAL IS ALLOWED FOR A.Y. 2003-04, THE CLAIM IN TH IS YEAR WOULD BECOME INFRUCTUOUS. THE AO IS ACCORDINGLY DIR ECTED TO TAKE APPROPRIATE ACTION IN THE MATTER AFTER THE DIS POSAL OF APPEAL FOR A.Y. 2003-04. 19. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . LD. AR HAS SUBMITTED THAT THIS ISSUE HAS ALREADY BEEN ADJUDICATED IN THE ASSESSEE APPEAL TO ITAT FOR AY 2003-04 AND HON'BLE ITAT HAS REMANDED THE MATTER TO AO TO GRANT APPROPRIATE RELIEF TO THE ASSESSEE ON THIS ISSUE AF TER CONSIDERING ALL THE RELEVANT FACTS AND AFTER GIVING OPPORTUNITY TO THE ASSESSEE. HE SUBMITTED THAT THE ITAT HAS ALSO MENTIONED THAT A CONSISTENT APPRO ACH SHOULD BE ADOPTED BY THE DEPARTMENT BY ALLOWING THE DEDUCTION IN QUESTIO N TO THE ASSESSEE EITHER IN AY 2003-04 OR IN AY 2004-05. HE SUBMITTED THAT IN AY 2003-04 CIT(A) HAS GRANTED RELIEF ON ABOVE DISALLOWANCE, HOWEVER D EPARTMENT HAS FILED AN APPEAL AGAINST THE SAME BEFORE ITAT. HE SUBMITTED T HAT IN CASE ITAT OR ANY HIGHER AUTHORITY TAKES A DIFFERENT VIEW ON THE AFOR ESAID ISSUE THEN APPROPRIATE RELIEF SHOULD BE GRANTED TO THE ASSESSEE IN THE YEA R UNDER CONSIDERATION. 20. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. SI NCE ISSUE IS ALREADY ADJUDICATED IN APPEAL FOR ASSESSMENT YEAR 2003-04, HENCE WE DISMISS THIS GROUND OF REVENUES APPEAL. 21. GROUND NO.6 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY ADJUDICATION, HENCE DISMISSED. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 27 CROSS OBJECTION NO.193/DEL/2008 22. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUND IN THE CROSS OBJECTION :- THAT AN AMOUNT OF RS.27,68,35,744/- REPRESENTING T HE CAPITAL RECEIPT IS PRAYED TO BE REDUCED FROM THE TOTAL INCO ME, DESPITE THE SAME WAS ERRONEOUSLY OFFERED AS INCOME IN THE RETUR N OF INCOME FILED BY THE APPELLANT COMPANY. 23. WHILE PLEADING ON THE CROSS OBJECTION ON BEHALF OF THE ASSESSEE, THE LD. AR SUBMITTED AS UNDER :- THE APPLICANT HAD UNDERTAKEN SUBSTANTIAL EXPANSION OF THE EXISTING INDUSTRIAL UNIT IN TERMS OF RULE 28C OF THE HARYANA GENERAL SALES TAX RULES, 1975. THE HIGH POWERED COMMITTEE, IN THE MEE TING HELD ON 14.06.2001, THEREFORE, GRANTED SALES TAX CONCESSION TO THE APPLICANT COMPANY WHEREBY THE APPLICANT WAS TO PAY 50% OF THE SALES TAX COLLECTED ON SALE OF FINISHED PRODUCTS FROM EXPANDED UNIT AND RETAIN 50% SUBJECT TO THE MAXIMUM BENEFIT PERMISSIBLE OF RS.564.35 CRORES . PURSUANT TO THE AFORESAID, THE APPLICANT DURING THE RELEVANT ASSESSMENT YEAR, RECEIVED SALES TAX CONCESSION AMOUNTING TO RS.27,68 ,35,744/-, WHICH WAS CREDITED AS INCOME UNDER THE HEAD 'SALES TAX BENEFI T' AS WOULD BE EVIDENT FROM SCHEDULE 17 (OTHER INCOME) TO THE PROFIT AND L OSS ACCOUNT FOR THE YEAR ENDING 31.03.2004. FURTHER THE FACTUM OF RECEI PT OF SUBSIDY WAS ALSO DISCLOSED IN THE NOTES TO ACCOUNTS FORMING PART OF THE BALANCE SHEET IN NOTE NO.1 0 AS UNDER: '10. THE COMPANY WAS GRANTED SALES TAX BENEFIT IN A CCORDANCE WITH THE PROVISIONS OF RULE 28C OF HARYANA GENERAL SALES TAX RULES'1975 FOR THE PERIOD 01ST AUGUST,2001 TO 31ST JULY,2015. THE CEILING AMOUNT OF CONCESSION TO BE AVAILED OF DURIN G THE ENTITLEMENT PERIOD IS RS. 5,644 MILLION. TILL 31ST MARCH, 2004, THE COMPANY HAS AVAILED OF SALES TAX BENEFIT AMOUNTING TO RS. 667 M ILLION.' THOUGH, THE AFORESAID AMOUNT REPRESENTED CAPITAL RE CEIPT, NOT LIABLE TO TAX UNDER THE PROVISIONS OF THE INCOME TAX ACT, 1961 (' THE ACT'), THE APPLICANT ERRONEOUSLY INCLUDED THE SAME IN THE GROSS TOTAL IN COME WHILE FILING THE RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. IN VIEW OF THE SUBSEQUENT DECISION OF HON'BLE SUPRE ME COURT IN THE CASE OF CIT VS. PONNI SUGARS AND CHEMICALS LTD: 306 ITR 392 , THE APPLICANT HAS, WHILE THE PRESENT APPELLATE PROCEEDINGS ARE PENDING BEFORE THE HON'BLE TRIBUNAL, RAISED THE ADDITIONAL GROUND THAT THE AMO UNT OF SUBSIDY RAISED BY THE APPLICANT IS IN THE NATURE OF A CAPITAL RECEIPT NOT EXIGIBLE TO TAX. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 28 SINCE THE AFORESAID CLAIM IS BEING MADE FOR THE FIR ST TIME BEFORE THE HON'BLE TRIBUNAL, THE AFORESAID DOCUMENTS ARE ALSO BEING FI LED IN SUPPORT OF THE SAID CLAIM. IT IS RESPECTFULLY SUBMITTED THAT IT IS A SETTLED L AW THAT NATURE OF THE SUBSIDY RECEIVED HAS TO BE DECIDED ON THE BASIS OF THE OBJE CTIVE BEHIND THE GRANT OF SUCH SUBSIDY. IT IS, THUS, A MERE QUESTION OF APPLY ING OF 'PURPOSE TEST' AS HAS BEEN LAID DOWN RECENTLY BY THEIR LORDSHIPS OF THE S UPREME COURT IN THE CASE OF PONNI SUGAR (SUPRA) TO THE OBJECT STATED IN THE RELEVANT POLICY UNDER WHICH THE SUBSIDY/INCENTIVE IS GRANTED. THE CONTENTION CLAIM OF THE APPLICANT IS, THEREFORE , REQUIRED TO BE TESTED BY APPLYING THE AFORESAID LEGAL POSITION IN THE LIGHT OF THE RELEVANT PROVISIONS OF THE HARYANA GENERAL SALES TAX ACT, 1973 AND THE INDUSTRIAL POLICY, 1999 ISSUED BY THE GOVERNMENT OF HARYANA. IT WILL KINDLY BE APPRECIATED THAT THE AFORESAID DO CUMENTS (AT S. NO.1 TO 3) ARE PRIMARILY IN THE NATURE OF THE RELEVANT STATUE, RULE AND THE APPLICABLE POLICY, WHICH ARE DOCUMENTS IN PUBLIC DOMAIN AND AR E, THEREFORE, STRICTLY NOT IN THE NATURE OF ADDITIONAL EVIDENCE. STILL, HO WEVER, THE APPLICANT, TO ERR ON THE SIDE OF CAUTION, IS FILING THIS APPLICATION FOR ADMISSION OF THE SAID DOCUMENTS AS ADDITIONAL EVIDENCE UNDER RULE 29 OF T HE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963. AS REGARDS THE OT HER DOCUMENTS (S1. NO.4 TO 7 ABOVE), THE SAME ARE MERELY SPECIFIC ORDE RS/ CERTIFICATES ISSUED BY THE RELEVANT AUTHORITIES UNDER THE AFORESAID PRO VISIONS OF THE HARYANA SALES TAX ACT AND THE RELEVANT INDUSTRIAL POLICY. IT IS FURTHER RESPECTFULLY SUBMITTED THAT THE ISSUE OF TAXABILITY OF THE SUBSIDY RECEIVED BY THE APPLICANT IS A FUNDAMENTAL QUESTION REQUIRED TO BE DECIDED IN ORDER TO DETERMINE THE CORRECT TAX LIABILITY OF THE APPLICANT. IT MAY ALSO BE PERTINENT TO MENTION HERE THAT ALL T HE AFORESAID DOCUMENTS WERE FILED BEFORE THE CIT(A) IN THE ASSESSMENT YEAR S 2005-06 AND 2003-04 AND BEFORE THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2006-07 AND 2007- 08. IT WILL THUS KINDLY BE APPRECIATED THAT THE ENT IRE AFORESAID DOCUMENTS ARE VERY MUCH ON RECORDS OF THE LOWER AUTHORITIES, EXCEPT THAT THE SAID DOCUMENTS ARE NOT TECHNICALLY AVAILABLE IN THE RECO RDS FOR THE RELEVANT ASSESSMENT YEAR 2004-05. THE ASSESSING OFFICER, IT MAY ALSO BE PERTINENT TO MENTION HERE, HAS ALSO GIVEN A FINDING ON THE MERIT ON THE AFORESAID CLAIM IN THE ASSESSMENT YEARS 2006-07 AND 2007-08 AND THE CIT(A) HAS ADJUDICATED THE SAID ISSUE IN THE ASSESSMENT YEARS 2005-06 AND 2003-04. IN THE AFORESAID PECULIAR FACTS AND CIRCUMSTANCES O F THE CASE, IT IS RESPECTFULLY PRAYED THAT THE AFORESAID DOCUMENTS MA Y KINDLY BE ADMITTED IN TERMS OF RULE 29 OF THE INCOME-TAX (APPELLATE TRIBU NAL) RULES, 1963. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 29 REFERENCE, IN THIS REGARD, MAY BE MADE TO THE RECEN T DECISION OF THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF CIT VS. TEXT HUNDRED INDIA PVT. LTD.: ITA NO'S 2077, 2061 AND 2065/ 2010 DATED 14.1.2011. IN THAT CASE, THEIR LORDSHIPS HELD THAT RULE 29, PERMITTING THE TRIBUNAL TO ADMIT ADDITIONAL EVIDENCE IS MADE TO ENABLE THE TRIBUNAL TO ADMIT ANY ADDITIONAL EVIDENCE WHICH WOULD BE NECESSARY TO DO SUBSTANTIAL JUSTICE IN THE MATTER. THEIR LORDSHIPS FURTHER OBSERVED THAT THE VARIOUS P ROCEDURES, INCLUDING THAT RELATING TO FILING OF ADDITIONAL EVIDENCE, IS HANDM ADE FOR JUSTICE AND JUSTICE SHOULD NOT BE ALLOWED TO BE CHOKED ONLY BECAUSE OF SOME INADVERTENT ERROR OR OMISSION ON THE PART OF ONE OF THE PARTIES TO LE AD EVIDENCE. THE RELEVANT OBSERVATIONS OF THE COURT ARE REPRODUC ED HEREUNDER: '13. THE AFORESAID CASE LAW CLEARLY LAYS DOWN A NEA T PRINCIPLE OF LAW THAT DISCRETION LIES WITH THE TRIBUNAL TO ADMIT ADDITIONAL EVIDENCE IN THE INTEREST OF JUSTICE ONCE THE TRIBUN AL AFFIRMS THE OPINION THAT DOING SO WOULD BE NECESSARY FOR PROPER ADJUDICATION OF THE MATTER. THIS CAN BE DONE EVEN WHEN APPLICATION IS FILED BY ONE OF THE PARTIES TO THE APPEAL AND IT NEED NOT TO BE A SUO MOTTO ACTION OF THE TRIBUNAL. THE AFORESAID RULE IS MADE ENABLIN G THE TRIBUNAL TO ADMIT THE ADDITIONAL EVIDENCE IN ITS DISCRETION IF THE TRIBUNAL HOLDS THE VIEW THAT SUCH ADDITIONAL EVIDENCE WOULD BE NEC ESSARY TO DO SUBSTANTIAL JUSTICE IN THE MATTER. IT IS WELL SETTL ED THAT THE PROCEDURE IS HANDMADE OF JUSTICE AND JUSTICE SHOULD NOT BE AL LOWED TO BE CHOKED ONLY BECAUSE OF SOME INADVERTENT ERROR OR OM ISSION ON THE PART OF ONE OF THE PARTIES TO LEAD EVIDENCE AT THE APPROPRIATE STAGE. ONCE IT IS FOUND THAT THE PARTY INTENDING TO LEAD E VIDENCE BEFORE THE TRIBUNAL FOR THE FIRST TIME WAS PREVENTED BY SUFFIC IENT CAUSE TO LEAD SUCH AN EVIDENCE AND THAT THIS EVIDENCE WOULD HAVE MATERIAL BEARING ON THE ISSUE WHICH NEEDS TO BE DECIDED BY THE TRIBU NAL AND ENDS OF JUSTICE DEMAND ADMISSION OF SUCH AN EVIDENCE, THE T RIBUNAL CAN PASS AN ORDER TO THAT EFFECT.' (EMPHASIS SUPPLIED) IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY PRAYED THAT THE AFORESAID DOCUMENTS MAY KINDLY BE ADMITTED AS ADDITIONAL EVID ENCE BY EXERCISING THE DISCRETION CONFERRED ON THIS HON'BLE TRIBUNAL UNDER RULE 29 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963. AT THE COST OF DUPLICITY, IT IS RESPECTFULLY REITER ATED THAT THE AFORESAID DOCUMENTS ARE CRUCIAL FOR ADJUDICATION OF THE CLAIM MADE BEFORE THE HON'BLE TRIBUNAL ON THE ISSUE OF TAXABILITY OF SUBS IDY RECEIVED, WHICH IS ONE OF THE FUNDAMENTAL ISSUE FOR DETERMINING THE CO RRECT TAXABLE INCOME OF THE APPLICANT. IN THE LIGHT OF THE AFORESAID, THE DOCUMENTS MAY KI NDLY BE ADMITTED AND TAKEN INTO ACCOUNT BY THE HON'BLE TRIBUNAL WHILE DI SPOSING THE APPEAL TO DO SUBSTANTIAL JUSTICE IN THE MATTER. ITA NO.3090/DEL./2007 CO NO.193/DEL/2008 30 24. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH IS ADDITIONAL GROUND IS TAKEN FIRST TIME BEFORE THE ITAT, THEREFORE, IT SHO ULD NOT BE ENTERTAINED AND ALSO THE ADDITIONAL EVIDENCES SUBMITTED SHOULD NOT BE ADMITTED. 25. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. IN THE INTEREST OF JUSTICE AND EQUITY, WE ALLOW THE GROUND TAKEN IN THE CROSS OBJECTION BY THE ASSESSEE AND ALSO ADMIT THE ADDITIONAL EVIDENCES AS THESE AD DITIONAL EVIDENCES ARE NECESSARY TO DO THE SUBSTANTIAL JUSTICE IN THE MATT ER. SIMILAR ISSUE HAS ALSO BEEN TAKEN BY US IN ITA NO.1063/DEL./2006 FOR ASSES SMENT YEAR 2002-03 AND WE RESTORED THE MATTER TO THE FILE OF THE ASSES SING OFFICER FOR DECIDING AS PER LAW. ACCORDINGLY, IN THIS YEAR ALSO, WE RESTOR E THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING AS PER LAW. 26. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 7 TH DAY OF NOVEMBER, 2012. SD/- SD/- (D.K. TYAGI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 7 TH DAY OF NOVEMBER, 2012/TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A), MUZAFFARNAGAR. 5.CIT(ITAT), NEW DELHI. AR, ITAT, NEW DELHI.