ACIT Circle 7 (1), V. Saw Pipes Ltd,

ITA 3328/DEL/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81637 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 11-08-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 13-07-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S N BHATIA
• Assessee Lawyers: BHAVITA KUMAR
• Keywords: Business income; Retrospective amendment; Bad and doubtful debts; Capital receipt
• Section: 80HHC; 14A; 37(1); 10B; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI I.C. SUDHIR : JUDICIAL MEMBER ITA NO. 2990/DEL/2007 ASSTT. YR: 2004-05 JINDAL SAW LTD., VS. ACIT CIR. 7(1), ( FORMERLY KNOWN AS SAW PIPES LTD.) NEW DELHI. 28, NAJAFGARH ROAD, NEW DELHI-15. PAN: AABCS 7280 C AND ITA NO. 3328/DEL/2007 ASSTT. YR: 2004-05 ACIT CIR. 7(1), VS. JINDAL SAW LTD., NEW DELHI. ( FORMERLY KNOWN AS SAW PIPES LTD.) 28, NAJAFGARH ROAD, NEW DELHI-15. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI RUPESH JAIN ADV. SHRI GAURAV JAIN & SHRI BHAVITA KUMAR ADV. REVENUE BY : SHRI S.N. BHATIA DR DATE OF HEARING : 11-08-2014 DATE OF ORDER : 22-08-2014. O R D E R PER S.V. MEHROTRA, A.M: : THESE CROSS APPEALS, PREFERRED BY THE ASSESSEE AS W ELL AS THE REVENUE, ARE DIRECTED AGAINST THE ORDER DATED 16-04-2007 PA SSED BY THE LD. CIT(A)-X, NEW DELHI IN APPEAL NO. 190/06-07, RELATING TO A.Y . 2004-05. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 2 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE COMPAN Y, A MANUFACTURER OF PIPES, HAVING PLANTS AT VARIOUS LOCATIONS I.E. KOSI , MUNDRA, NASIK AND ALSO STAINLESS STEEL COLD ROLLING PLANT AT DELHI, STARTE D OVERSEAS OPERATIONS DURING THE YEAR BY OPENING A BRANCH AT BAY TOWN AT TEXAS I N USA FOR SELLING PIPES AND PLATES. IT HAD FILED ITS RETURN OF INCOME DEC LARING INCOME OF RS. 116,48,97,900/- . THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 117,74,95,570/-, INTER ALIA, MAKING ADDITIONS/ DISA LLOWANCES U/S 14A AND 80HHC. THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT (A), WHO PARTLY ALLOWED THE ASSESSEES APPEAL. BEING AGGRIEVED, WIT H THE ORDER OF LD. CIT(A), BOTH THE ASSESSEE AND DEPARTMENT ARE IN APPEAL BEFO RE US. ASSESSEES APPEAL (ITA NO. 2990/DEL/07) : 3. THE ASSESSEE HAS FILED TWO ADDITIONAL GROUNDS FO R ADMISSION UNDER RULE 11 OF THE ITAT RULES: 1. THAT WITHOUT PREJUDICE, ON THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, THE AMOUNT CREDITED TO THE PROFIT AND LOSS ACCOUNT DURING THE RELEVANT PREVIOUS YEAR IN R ESPECT OF DUTY ENTITLEMENT PASS BOOK (DEPB) LICENCE, BEING NO T RELATED TO SALE OF DEPB LICENCE, 90% OF SAME WAS NO T REQUIRED TO BE REDUCED FROM THE PROFITS WHILE COMPU TING PROFITS OF THE BUSINESS IN TERMS OF EXPLANATION ( BAA) TO THAT SECTION 80HHC OF THE INCOME-TAX ACT, 1961 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE EXCISE DUTY REFUND, AMOUNTING TO RS. 21,84,01,513/- ARISING TO THE APPELLANT IN TERMS OF NOTIFICATION NO. 39/2001- CE DATED 31 ST JULY, 2001, BEING CAPITAL RECEIPT, OUGHT TO BE EXCL UDED IN DETERMINING THE TAXABLE INCOME OF THE APPELLANT FOR THE RELEVANT PREVIOUS YEAR, THE SAME BEING NOT LIABLE TO TAX UND ER THE PROVISIONS OF THE INCOME-TAX ACT, 1961. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 3 4. AS REGARDS THE ADMISSION OF ADDITIONAL GROUND N O. 1, LD. COUNSEL SUBMITTED THAT THE ASSESSEES CLAIM IS SUPPORTED B Y THE FOLLOWING DECISIONS OF ITAT, WHEREIN IT HAS BEEN HELD THAT ONLY THE PRO FIT ON SALE OF DEPB LICENSE IS TO BE EXCLUDED FROM THE PROFITS WHILE CO MPUTING DEDUCTION U/S 80HHC OF THE ACT. - GLENMARK LABORATORIES V. DCIT (ITA NO. 5979/MUM/06) ; - KRBL LTD. V. DCIT (ITA NOS. 4313 TO 4319/DEL/06); - SILVER SEA FOODS V. ACIT (ITA NO. 09/RJT/07). 5. HE POINTED OUT THAT THE AFORESAID DECISIONS HAVE BEEN RENDERED ONLY RECENTLY AND WERE NOT AVAILABLE WHEN THE ASSESSEE F ILED THE APPEAL BEFORE THE TRIBUNAL. 6. LD. COUNSEL FURTHER POINTED OUT THAT THIS ISSUE HAS ALREADY BEEN ADJUDICATED BY THE TRIBUNAL IN A.Y. 2003-04, THE OR DER OF WHICH IS CONTAINED AT PAGE 543 OF THE PB WHEREIN THE TRIBUNAL HAS REST ORED THE MATTER TO THE FILE OF ASSESSING OFFICER FOR ADJUDICATION IN ACCORDANCE WITH LAW. 7. APROPOS ADDITIONAL GROUND NO. 2, LD. COUNSEL SUB MITTED THAT THE SAME DEALS WITH EXCISE REFUND GRANTED TO THE ASSESSEE IN TERMS OF NOTIFICATION NO. 39/2001-CE, BEING CAPITAL RECEIPT, IN VIEW OF THE D ECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. POONI SUGARS AND CHEMICALS LTD. 306 ITR 392. HE SUBMITTED THAT ASSESSEE HAD FILED APPEA L BEFORE THE ITAT ON 15- 6-2007 AND THE DECISION HAS BEEN RENDERED ON 16-9-2 008 AND, THEREFORE, THIS GROUND SHOULD BE ADMITTED. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 4 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE GONE THROUGH THE ENTIRE MATERIAL AVAILABLE ON RECORD. WE FIND THAT AS FAR AS ADDITIONAL GROUND NO. 1 IS CONCERNED, THE SAME DESE RVES TO BE ADMITTED KEEPING IN VIEW THE ORDERS PASSED BY THE TRIBUNAL I N EARLIER YEARS AND VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE. 8.1. WE FIND THAT IN A.Y. 2003-04 THE TRIBUNAL HAS RESTORED THE MATTER TO THE FILE OF ASSESSING OFFICER, OBSERVING AS UNDER: WE FIND THAT DURING HEARING THE LEARNED COUNSEL FO R THE ASSESSEE INVITED OUR ATTENTION TO THE IDENTICAL ADD ITIONAL GROUND RAISED BEFORE THE EARLIER BENCH WHICH WAS ADMITTED ON 25-9- 2008. IT WAS PRAYED THAT THIS ADDITIONAL GROUND MAY ALSO BE SENT TO THE FILE OF THE LEARNED ASSESSING OFFICER. THE CIT, DR HAS NO OBJECTION, THEREFORE, THE ADDITIONAL GROUND ADMI TTED BY THE BENCH ON 25-9-2008 IS ALSO REMANDED BACK TO THE FIL E OF THE LEARNED ASSESSING OFFICER FOR ADJUDICATION IN ACCOR DANCE WITH LAW. 8.2. RESPECTFULLY FOLLOWING EARLIER ORDER OF THE TR IBUNAL, HEREIN ALSO WE REMAND THE ADDITIONAL GROUND NO. 1 TO THE FILE OF A SSESSING OFFICER FOR ADJUDICATION IN ACCORDANCE WITH LAW. IN THE RESULT, GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 9. AS FAR AS ADDITIONAL GROUND NO. 2 IS CONCERNED, THE SAME DESERVES TO BE ADMITTED IN VIEW OF THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF POONI SUGARS AND CHEMICALS LTD. (SUPRA). THE NATURE OF SUBSIDY GRANTED TO ASSESSEE HAS TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH THE SUBSIDY IS MADE. THE ASSESSEES CONTENTION IS THAT PURPOSE OF GRANTING THE EXCISE DUTY WAS TO PROMOTE INDUSTRIAL DEVELOPMENT I N KUTCH DISTRICT OF GUJARAT IN THE WAKE OF MASSIVE DEVASTATION CAUSED B Y EARTHQUAKE IN THE SAID ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 5 REGION AND THE SUBSIDY/ INCENTIVE BY WAY OF EXCISE DUTY REFUND WAS GRANTED TO THE ASSESSEE TO MEET THE LARGER PUBIC INTEREST OF REHABILITATION OF THE PEOPLE AND ECONOMIC ACTIVITY IN THE AFORESAID AFFEC TED REGION. WE, THEREFORE, ADMIT THIS GROUND OF APPEAL. SINCE THE ENTIRE CLAIM IS TO BE EXAMINED TO ARRIVE AT PROPER CONCLUSION, WE RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER FOR DECISION AS PER LAW. IN THE RESULT, THI S GROUND IS ALSO ALLOWED FOR STATISTICAL PURPOSES. 10. THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS OF APP EAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) HAS ERRED IN SUSTAINING ON ESTIMATE BASIS DISALLOWANCE OF RS. 1,80,360/- MADE BY AO BY ATTRI BUTING THE SAME AS INCURRED IN EARNING DIVIDEND INCOME BY INVO KING PROVISIONS OF SECTION 14A, WITHOUT POINTING OUT ACT UAL INCURRENCE OF EXPENDITURE OF A SINGLE RUPEE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LEARNED CIT(A) HAS ERRED IN UPHOLDING AO'S ACT OF D ISALLOWING DEDUCTION TO THE APPELLANT COMPANY UNDER SECTION 80 HHC ON DEPB BENEFIT ON THE CONTENTION :- A. THAT IT DOES NOT SATISFY THE CONDITIONS SPECIFIE D IN THIRD PROVISO TO SUB-SECTION (3) OF SECTION 80HHC. B. THAT SINCE RATES OF DRAWBACK CR5EDIT WERE NOT FIXED IN APPELLANTS CASE IT DOES NOT HAVE THE OPTION AS SPECIFIED IN 3 RD PROVISO TO SUBSECTION (3) OF SECTION 80HHC. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LEARNED CIT(A) HAS ERRED IN UPHOLDING AO'S ACT OF R EDUCING APPELLANT CLAIM OF SECTION 80HHC BENEFIT BY:- A. REDUCING ELIGIBLE PROFIT BY 100% OF INTEREST RECEIPT AS AGAINST 90% PROVIDED IN THE SECTION. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 6 B. REDUCING ELIGIBLE PROFIT BY 90% OF GROSS RENT RECEI PT WITHOUT REDUCING THE EXPENDITURE INCURRED TO EARN T HIS RENT AND STOOD DEBITED IN P&L A/C. 11. BRIEF FACTS, APROPOS GROUND NO. 1, ARE THAT DUR ING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD RECEIVED DIV IDEND INCOME OF RS. 146,74,896/- AND CLAIMED EXEMPTION U/S 10(34). THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE AS TO WHY PROPORTIONATE RELATED EXPENDITURE SHOULD NOT BE DISALLOWED IN THE LIGHT OF PROVISIONS U/S 14A. A FTER CONSIDERING THE ASSESSEES SUBMISSIONS, THE ASSESSING OFFICER OBSER VED THAT ASSESSEE HAD TOTAL CAPITAL OF RS. 30,292 LACS AND IT HAD SHOWN DIVIDEN D INCOME OF RS. 146,74,896/- ON THE INVESTMENT OF RS. 7,909 LACS AN D SINCE NO SPECIFIC EVIDENCE HAD BEEN FURNISHED BY THE ASSESSEE COMPANY TO ESTABLISH THAT NO EXPENSES HAD BEEN INCURRED IN EARNING OF DIVIDEND I NCOME, THE ASSESSING OFFICER MADE THE DISALLOWANCE U/S 14A, INTER ALIA, OBSERVING THAT DISALLOWANCE IS CALLED FOR U/S 14A IN LIGHT OF THE FACT THAT CERTAIN EXPENSES LIKE SALARY, EMPLOYEE WELFARE EXPENSES, POSTAGE/ TE LEGRAM EXPENSES, TRAVELING AND CONVEYANCE EXPENSES, RENT ETC. ARE CO MMON EXPENSES WITH REGARD TO EARNING OF DIVIDEND INCOME AND NORMAL/ RE GULAR BUSINESS ACTIVITY OF THE ASSESSEE COMPANY. THE ASSESSING OFFICER REL IED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. UNITED GENERAL TRUST LTD. 200 ITR 488. HE DISALLOWED 5% OUT OF THE TOTAL EXPE NDITURE OF RS. 77,385.56 LACS AND THUS MADE A DISALLOWANCE OF RS. 7,33,745/- U/S 14A. 11.1. BEFORE LD. CIT(A) THE ASSESSEE HAD SUBMITTED THAT NO EXPENDITURE WAS INCURRED TO EARN DIVIDEND INCOME. IT WAS AUTOMATICA LLY RECEIVED AS AND WHEN DECLARED BY THE INVESTEE COMPANY. IN SUPPORT OF ITS CONTENTION THE ASSESSEE HAD FURNISHED CHART OF DIVIDEND INCOME AND INVESTME NT MADE IN THE ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 7 PRECEDING THREE YEARS, WHICH REVEALED THAT INVESTME NT HAS REMAINED STATIC BUT DIVIDEND INCOME HAS INCREASED FOUR FOLD. NO CHA NGE IN INVESTMENT IN LAST 3 YEARS WAS THERE. THE ASSESSEE SUBMITTED THAT ONLY ACTUAL EXPENDITURE INCURRED SHOULD BE DISALLOWED U/S 14A. 11.2. LD. CIT(A) DID NOT AGREE WITH THE ASSESSEES SUBMISSION THAT NO EXPENDITURE WAS INCURRED IN EARNING DIVIDEND INCOME . HE POINTED OUT THAT A COMPANY CANNOT EARN DIVIDEND WITHOUT ITS EXISTENCE AND MANAGEMENT. THE LD. CIT(A) SUSTAINED THE DISALLOWANCE AT RS. 1,80,3 60/-, INTER ALIA, OBSERVING AS UNDER: AS PER UNIT WISE P&L ACCOUNT FURNISHED BY THE APPE LLANT, IT IS NOTICED THAT APPELLANT HAS SHOWN HEAD OFFICE EXPENS ES WHICH ARE NOT SPECIFICALLY ALLOCABLE TO DIFFERENT UNITS F OR PERSONNEL AT RS. 3,12,85,259/- AND ADMINISTRATIVE & OTHER EXPENS ES AT RS. 6,47,97,131/- TOTALING TO RS. 9,60,82,390/-. THE TO TAL TURNOVER INCLUDING DIVIDEND HAS BEEN SHOWN BY THE APPELLANT AT RS. 80,995.43 LACS. THE GROSS DIVIDEND RECEIPT WAS AT R S. 152.04 LACS. ON THIS CASE, THE PROPORTIONATE DISALLOWANCE WORKS OUT AT RS. 1,80,360/-[152.04/80995.43 X 960.80 (RS. IN LAC S)]. THEREFORE, ACCORDINGLY THE DISALLOWANCE OF RS. 1,80 ,360/- IS CONFIRMED AND THE BALANCE DISALLOWANCE IS DELETED. THE APPELLANT GETS A RELIEF OF RS. 5,53,385/- [RS. 7,33 ,745-RS. 1,80,360]. 11.3. LD. COUNSEL FOR THE ASSESSEE REITERATED THE S UBMISSIONS MADE BEFORE LD. CIT(A) AND POINTED OUT THAT DIVIDEND WAS DIRECT LY CREDITED TO ASSESSEES BANK ACCOUNT AND NO EXPENDITURE HAD BEEN INCURRED. 12. LD. DR SUBMITTED THAT LD. CIT(A) HAS ALLOWED SU BSTANTIAL RELIEF TO ASSESSEE CONSIDERING THE DIVIDEND EARNED BY IT. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 8 13. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. IT IS NOT DISPUTED THAT NO FRESH INVESTMENTS WERE MADE DURING THE YEAR. THE DECISION OF LD. CIT(A) WA S PARTLY INFLUENCED BY THE MARKET RESEARCH AND DAY TO DAY ANALYSIS OF MARK ET TRENDS FOR TAKING INVESTMENT DECISIONS. SINCE NO FRESH INVESTMENT DEC ISION HAS BEEN TAKEN, THEREFORE, CONSIDERING THE ROLE OF ADMINISTRATIVE M ACHINERY IN COLLECTION OF DIVIDEND, WE CONSIDER IT IN THE INTEREST OF JUSTICE THAT DISALLOWANCE OF RS. 1,50,000/- WOULD MEET THE ENDS OF JUSTICE. WE DIRE CT ACCORDINGLY. IN THE RESULT GROUND IS PARTLY ALLOWED. 14. GROUND NO. 2: AS WE HAVE ALREADY RESTORED ADDIT IONAL GROUND NO. 1 TO THE FILE OF ASSESSING OFFICER, THIS GROUND IS ALSO RESTORED TO THE FILE OF ASSESSING OFFICER FOR ADJUDICATION AFRESH IN ACCOR DANCE WITH LAW. GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 15. BRIEF FACT, APROPOS GROUND NO. 3(A) ARE THAT AS SESSING OFFICER NOTICED THAT WHILE COMPUTING DEDUCTION U/S 80HHC, THE ASSES SEE HAD DEDUCTED 90% OF RS. 59,84,488/- OUT OF INTEREST INCOME. HE REDUC ED 100 % INTEREST INCOME WHILE COMPUTING DEDUCTION U/S 80HHC. 15.1. LD. CIT(A) RELYING ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. HONDA POWER EQUIP 289 ITR 475, WHEREIN IT WAS HELD THAT INTEREST EARNED ON FIXED DEPOSITS FOR THE PURPOSES OF AVAILING FACILITIES FROM THE BANK, HAS TO NECESSARILY BE TRE ATED AS INCOME FROM OTHER SOURCES AND NOT AS BUSINESS INCOME, UPHELD THE ASS ESSING OFFICERS ACTION. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 9 16. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT INT EREST REALIZED FROM CUSTOMERS ON DELAYED PAYMENT IS TO BE TREATED AS IN COME FROM BUSINESS AS HELD IN FOLLOWING DECISIONS: CIT VS. GOVINDA CHOUDHURY & SONS 203 ITR 881 CIT VS. MADRAS MOTORS LTD. 257 ITR 60 (MAD) CIT VS. RANE (MADRAS) LTD. 238 ITR 377 17. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. WE FIND THAT NATURE OF INTE REST RECEIPT HAS NOT BEEN EXAMINED BY LEARNED AUTHORITIES AND, THEREFORE, KEE PING IN VIEW THE VARIOUS DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSESS EE AND THE DECISION RELIED UPON BY LD. CIT(A), THE NATURE OF INTEREST RECEIVED IS TO BE EXAMINED BY ASSESSING OFFICER AND TO THE EXTENT THE INTEREST IN COME IS TO BE TREATED AS INCOME FROM BUSINESS, IN VIEW OF THE DECISIONS RELI ED UPON LD. COUNSEL FOR THE ASSESSEE, ONLY 90% OF THE SAID INTEREST IS TO B E EXCLUDED WHILE COMPUTING DEDUCTION U/S 80HHC, TREATING THE SAME AS BUSINESS INCOME AND NOT 100%. IN VIEW OF THIS, WE, THEREFORE, RESTORE THIS MATTER TO THE FILE OF ASSESSING OFFICER TO DECIDE THE ISSUE DE NOVO KEEPING IN VIEW THE AFOREMENTIONED OBSERVATIONS. 18. APROPOS GROUND NO. 3(B), BRIEF FACTS ARE THAT A SSESSEE HAS RESIDENTIAL COLONIES FOR STAFF WHICH WAS ALLOTTED TO EMPLOYEES FOR RESIDENTIAL PURPOSES. RENT WAS RECOVERED FROM THE EMPLOYEES. ASSESSEES C ONTENTION WAS THAT RENT WAS FOR MEETING THE EXPENSES INCURRED IN THEIR MAIN TENANCE. NO MARKET RENT WAS CHARGED FROM EMPLOYEES. THE ASSESSING OFFICER E XCLUDED 90% OUT OF RENTAL INCOME WHILE COMPUTING DEDUCTION U/S 80HHC. LD. CIT(A) UPHELD THE ASSESSING OFFICERS ACTION. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 10 19. HAVING HEARD BOTH THE PARTIES WE DO NOT FIND AN Y REASON TO INTERFERE IN THE ORDER OF LD. CIT(A), BECAUSE OF THE SPECIFIC PR OVISION CONTAINED UNDER EXPLANATION (BAA) MANDATING EXCLUSION OF 90% OF THE RENTAL INCOME. IN THE RESULT THIS GROUND IS DISMISSED. 20. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. REVENUES APPEAL ( ITA NO. 2990/DEL/2007) : 21. THE REVENUE HAS TAKEN FOLLOWING GROUNDS OF APP EAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT O F EMPLOYEES CONTRIBUTION TOWARDS PF AND ESI AMOUNTING TO RS. 12 ,29,159/- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT O F COMMISSION PAID OF RS. 1,02,12,436/-. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S 14A OF RS. 5,53,385/-. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE ADDITION U/S 10B OF R S. 1,05,47,032/-. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE DEDUCTION U/S 80HHC A MOUNTING TO RS. 42,70,758/-. 22. APROPOS GROUND NO. 1, BRIEF FACTS ARE THAT DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS OBSERVED THAT THE ASS ESSEE COMPANY HAD PAID ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 11 EMPLOYEE/ EMPLOYER CONTRIBUTION OF PF/VPF/ESI BEYON D THE DUE DATE AS MENTIONED IN THE RESPECT ACT. THE ASSESSING OFFICER AT PAGE 16 AND 17 OF HIS ORDER HAS GIVEN THE DATES OF PAYMENT. AFTER CONSIDE RING THE ASSESSEES REPLY THE ASSESSING OFFICER DISALLOWED RS. 12,30,490/- (P F RS. 1229159 + ESI RS. 1331) TOWARDS EMPLOYEES CONTRIBUTION. HE ALSO DISAL LOWED EMPLOYERS CONTRIBUTION TO PF/ESI TO THE EXTENT OF RS. 7,01,39 9/- BEING PAID BEYOND THE DUE DATE. THUS, TOTAL DISALLOWANCE OF RS. 19,31,839 /- WAS MADE. 22.1. LD. CIT(A) AFTER CONSIDERING THE DATES OF PAY MENTS DELETED THE DISALLOWANCE TAKING NOTE OF THE FACT THAT THERE WAS NO DELAY IN DEPOSIT OF THESE AMOUNTS AS PER THE SUBMISSIONS MADE BY ASSESS EE. 23. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. THE SUBMISSIONS MADE BY LD. COUNSEL FOR THE ASSESSEE BEFORE THE LD. CIT(A) HAVE NOT BEEN CONTROVERTED BY THE DEPARTMENT. HOWEVER, IN ANY VIEW OF THE MATTER, IT IS NOT DISPU TED THAT BEFORE THE DUE DATE OF FILING OF THE RETURN, THE AMOUNTS WERE PAID . THEREFORE, WE SEE NO REASON TO INTERFERE IN THE ORDER OF CIT(A), DELETIN G THE DISALLOWANCE IN QUESTION. GROUND IS DISMISSED. 24. BRIEF FACTS APROPOS TO GROUND NO. 2 ARE THAT AS SESSING OFFICER NOTICED THAT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION ASSESSEE COMPANY HAD INCURRED RS. 187,66,712/- AS COMMISSION ON SALES OU T OF WHICH HE PAID COMMISSION OF RS. 109,82,874/- FOR ITS 100% EXPORT ORIENTED UNIT (EOU). HE NOTED FROM THE DETAILS THAT ASSESSEE COMPANY HAD PA ID A SUM OF RS. 102,12,436/- TO M/S INDUS PIPE LINES (MUMBAI), OUT OF WHICH RS. 47,94,745/- PERTAINED TO 100% EOU. SINCE THE COMMIS SION AMOUNTING TO ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 12 RS. 1.02 CRORES PERTAINED TO SALES TO THE GOVERNME NT DEPARTMENTS, ASSESSEE WAS REQUIRED TO EXPLAIN WHY THE PAYMENT SHOULD NOT BE DISALLOWED IN VIEW OF THE PROVISIONS OF EXPLANATION TO SECTION 37(1). THE ASSESSEE POINTED OUT THAT THE SAID EXPLANATION WAS NOT APPLICABLE BECAUS E IN THIS CASE PARTIES TO WHOM COMMISSION HAD BEEN PAID WERE IDENTIFIABLE; PA YMENTS HAD BEEN MADE BY A/C PAYEE CHEQUES; ALL THE PARTIES WERE ASS ESSED TO TAX; AND PAYMENTS WERE IN CONSIDERATION OF SERVICES RENDERED BY THESE PARTIES AS SPECIFIED IN THE AGREEMENT. THEREFORE, THE PAYMENT HAD ARISEN OUT OF THE CONTRACTUAL OBLIGATION AND WAS NOT FOR ANY STRANGE CONSIDERATION. THE ASSESSING OFFICER, AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, DISALLOWED THE SUM OF RS. 1.02 CRORES , INTER ALIA, OBSERVING THAT POLICY OF GOVERNMENT IS NOT TO ALLOW ANY INTERMEDIARY FOR ANY REASON WHAT -SO-EVER MAY BE FOR THE PROCUREMENT OF ITS PURCHASES. 24.1. BEFORE LD. CIT(A) THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE ASSESSING OFFICER AND FURTHER POINTED OUT THAT M/S INDUS PIPE LINES WAS AN ENTERPRISE, HAVING DEEP KNOWLEDGE OF THE TRADE AND WAS NOT A PARTY, WHICH WAS STRANGER TO THE TRADE. THE PARTY ITSELF WAS SUP PLIER OF PIPES AND CONNECTORS TO ONGC ALONG WITH SISTER CONCERN VIZ. M/S P.J. PIPES. THE PARTY LATER ON ALSO MADE JOINT SUPPLIES TO ONGC AL ONG WITH ASSESSEE. IT WAS ALSO STATED THAT THE ASSESSEE OWED ITS RISE IN THE INDUSTRY TO A GREAT EXTENT TO M/S INDUS PIPE LINES AND ITS ASSOCIATE CONCERN M/S P.J. PIPES. ASSESSING OFFICER HAD NO WHERE CONTRADICTED ANY OF THE EVIDEN CES FILED BY ASSESSEE REGARDING COMMISSION PAID. IT WAS FURTHER SUBMITTED THAT IN CASE OF ONGC ORDERS WERE OBTAINED THROUGH INTERNATIONAL BIDDING WHICH INCLUDED OBTAINING OF TENDER DOCUMENTS IN TIME AND SUBMISSION OF BIDS . THERE WERE TWO PARTS OF BIDS, ONE PART WAS TECHNO COMMERCIAL OFFER WHERE ALL THE TECHNICAL AND ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 13 COMMERCIAL DETAILS WERE PROVIDED AND THE SECOND PAR T WAS A PRICE BID AND WAS SUBMITTED IN A SEALED ENVELOPE. 24.2. LD. CIT(A) OBSERVED THAT ASSESSING OFFICER HA D FOLLOWED ORDER FOR A.Y. 2000-01 WHICH WAS PASSED AS A SEQUEL TO ORDER U/S 263. HOWEVER, THE SAID ORDER HAD BEEN QUASHED BY TRIBUNALS ORDER IN ITA NO. 2309/DEL/2004 DATED 20-4-2005. THE SUBSEQUENT ORDERS FOR ASSESSME NT YEAR 2002-03 AND 2003-04 WHERE SUCH COMMISSION PAYMENTS WERE ADDED, WERE ALSO DELETED IN APPEAL BY LD. CIT(A). ON MERITS, HE OBSERVED THAT A SSESSING OFFICER DID NOT DISPUTE THE GENUINENESS OF THE AGREEMENT OF THE PAR TY. THE ASSESSEE HAD ALSO FILED CONFIRMATION OF THE RECEIPT OF COMMISSION OF THE AFORESAID PARTY. PAYMENTS WERE MADE THROUGH A/C PAYEE CHEQUES. THE P ARTY WAS A REGULAR INCOME-TAX ASSESSEE AND ITS INCOME TAX PARTICULARS WERE ALSO AVAILABLE ON RECORD. HE ALSO OBSERVED THAT PARTY HAD SHOWN TOTAL RECEIPT OF RS. 2.94 CRORES. IT HAD SHOWN SUBSTANTIAL COMMISSION INCOME AND FILED ITS RETURN OF INCOME DECLARING INCOME OF ABOUT RS. 36 LAKHS ON WH ICH IT HAD PAID TAX OF RS. 11.93 LACS. CONSIDERING ALL THE FACTUAL ASPECTS CIT(A) CONCLUDED THAT THESE TRANSACTIONS COULD NOT BE CALLED SHAM AND THE PARTY WAS GENUINE. HE FURTHER OBSERVED THAT M/S INDUS PIPE LINES HAD REND ERED FOLLOWING SERVICES: THE PIPES SUPPLIED TO ONGC WERE MADE OF LOW CARBON STEEL. QUANTITY OF STEEL WAS A VERY KEY FACTOR AS THE PIPE S HAD TO WITHSTAND THE HIGH PRESSURE AND TEMPERATURE IN TRAN SPORTATION OF OIL. THE SAME WERE IMPORTED AS STEEL OF THAT QUA LITY IS NOT MANUFACTURED IN THE COUNTRY. THE PARTY INFORMED THE APPELLANT ABOUT RELIABLE SOURCES OF SUCH MATERIAL AT MOST ECO NOMICAL PRICES. TO PROVIDE TIME SCHEDULE FOR PLACEMENT OF PURCHASE ORDER SO THAT TIMELY MATERIAL IS RECEIVED TO AVOID ANY DELAY IN ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 14 EXECUTION OF ORDER. THIS ALSO OPTIMIZES INVENTORY C OST IF THE MATERIAL IS PURCHASED IN ADVANCE ITS COST OF PURCHA SE INCREASES. THESE SAVINGS ALSO PROVIDE CAUTION FOR M AKING TENDER BID MORE COMPETITIVE. THAT THE PARTY WAS SUPPLY MATERIAL TO ONGC SINCE LO NG, IN THE PROCESS IT ACQUIRED KNOWLEDGE ABOUT FOREIGN SUPPLIE RS. THE PARTY WAS ABLE TO PROVIDE THE APPELLANT WITH VITAL INPUTS ON COMPETITORS TECHNICAL COMPETENCE, PRICING STRATEGY ETC. IT WAS THE SAID PARTY WHO GUIDED THE APPELLANT TO S UPPLY PIPES TO ONGC AND MADE IT A FIRST INDIAN COMPANY TO SUPPL Y PIPES TO THEM. PRIOR TO THIS ALL SUPPLIERS OF PIPES TO ON GC WERE FOREIGN COMPANIES. THE COMMISSION WAS PAID ON SUPPLY OF CONNECTOR CASI NG PIPES. THIS LINE OF BUSINESS FOR APPELLANT WAS DEVE LOPED BY THE PARTY AND ITS ASSOCIATES CONCERN. PRIOR TO THIS , THE APPELLANT WAS IN THE BUSINESS OF SUPPLYING LINE PIPES ONLY. T HE PARTY WAS IN THE BUSINESS OF TRADING CONNECTORS AND WAS S UPPLYING THE SAME TO THE ONGC. IT HAD VAST KNOWLEDGE OF CONN ECTORS. LINE PIPES ARE USED IN TRANSPORTATION OF OIL, GAS & WATER WHEREAS CONNECTOR CASING PIPES ARE USED IN OIL EXPL ORATION. THE PIPES ARE PUSHED HORIZONTALLY IN SEABED AND ARE JOINED WITH THE HELP OF CONNECTORS. IT MAY BE NOTED THAT T HE PIPES ARE LAID AT DEPTH LEVEL RANGING FROM 600 METERS TO 3000 METERS. THE CONNECTORS QUALITY AND PRICE CHANGES FOR EVERY 500 METERS DEPTH. THE PARTY GAVE ENTIRE INPUT ON SELECT ION OF CONNECTOR. 24.3. CONSIDERING ALL THE FACTS LD. CIT(A) DELETED THE ADDITION. 25. LD. DR SUBMITTED THAT M/S INDUS PIPE LINES HAD FILED THE RETURN AT RS. 36 LACS AS AGAINST THE CONSIDERABLE COMMISSION INCO ME EARNED BY IT. HE SUBMITTED THAT THIS CLEARLY SHOWS THAT THERE IS DIV ERSION OF INCOME IN THE FORM OF COMMISSION. ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 15 26. LD. COUNSEL FOR THE ASSESSEE REFERRED TO TRIBU NALS ORDERS FOR A.Y. 2002-03, CONTAINED AT PAGES 1 TO 72, AND FOR A.Y. 2003-04 CONTAINED AT PAGES 73 TO 87 OF THE PB IN ASSESSEES OWN CASE. HE FURTHER POINTED OUT THAT THE DECISION FOR AY 2002-03 HAS BEEN APPROVED BY TH E HONBLE DELHI HIGH COURT, CONTAINED AT PAGE 542 OF THE PB, HOLDING TH AT THERE WERE NO QUESTIONS OF LAW. LD. COUNSEL REFERRED TO PAGE 13 OF THE ORD ER FOR A.Y. 2002-03 AND POINTED OUT THAT HERE ALSO THE PAYMENT OF COMMISSIO N WAS MADE TO M/S INDUS PIPE LINES. 26.1. LD. COUNSEL REFERRED TO PAGE 88 OF THE PB TO POINT OUT THAT IN A.Y. 2003-04 ALSO THE HONBLE DELHI HIGH COURT FOLLOWED THE ORDER FOR AY 2002- 03 AND DISMISSED THE REVENUES APPEAL. 27. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN EARLIER ASSESSMENT YEARS AND THE TRIBU NAL HAS OBSERVED AS UNDER: AT THE TIME OF HEARING BEFORE US, THE LEARNED REPR ESENTATIVES OF BOTH THE SIDES HAVE AGREED THAT THE ISSUE UNDER CON SIDERATION INVOLVED IN GROUND NO. 1 OF THE REVENUES APPEAL IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE BY THE DECISION RENDERED BY DELHI I BENCH OF THIS TR IBUNAL FOR AY 2002-03 VIDE AN ORDER DATED 4.7.2008 PASSED IN ITA NO. 3879/DEL/2005. A COPY OF THE SAID ORDER IS ALSO PAS SED ON RECORD BEFORE US BY THE LEARNED COUNSEL FOR THE ASS ESSEE AND A PERUSAL OF THE SAME SHOWS THAT A SIMILAR EXPENDITUR E CLAIMED BY THE ASSESSEE COMPANY ON PAYMENT OF COMMISSION TO PROCURE ORDERS FROM GOVERNMENT UNDERTAKINGS WAS DISALLOWED BY THE AO IN AY 2002-03 INVOKING EXPLANATION TO SECTION 1 7(1). THE SAID DISALLOWANCE WAS SUBSEQUENTLY DELETED BY THE L EARNED ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 16 CIT(A) AND WHEN THE MATTER CAME BEFORE THE TRIBUNAL , THE SCOPE AND AMBIT OF EXPLANATION TO SECTION 37(1) WAS CONSIDERED BY THE TRIBUNAL IN THE LIGHT OF THE FACT S OF THE CASE IN DETAIL IN PARAGRAPH NO. 5(I) TO 5(III) BEFORE FINAL LY CONCLUDING IN PARAGRAPH NO. 5(IV) THAT THE AO WAS NOT CORRECT IN INVOKING THE SAID EXPLANATION TO DISALLOW THE IMPUGNED COMMI SSION PAID BY THE ASSESSEE COMPANY. THE LEGISLATIVE INTENTION OF THE SAID EXPLANATION INSERTED IN THE STATUTE BY THE FINANCE (NO.2) ACT, 1998 WITH RETROSPECTIVE EFFECT FROM 1.4.1962 WAS AL SO CONSIDERED BY THE TRIBUNAL IN THE LIGHT OF BUDGET S PEECH OF THE FINANCE MINISTER AS WELL AS CIRCULAR NO. 772 DATED 23.12.1998 ISSUED BY THE BOARD AND ON SUCH CONSIDERATION, IT W AS HELD THAT THE SAID EXPLANATION WAS NOT APPLICABLE TO THE FACT S OF THE ASSESSEES CASE. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS ALL THE MATERIAL FACTS REL EVANT THERETO ARE SIMILAR TO THAT OF AY 2002-03, WE RESPECTFULLY FOLLOW THE DECISION RENDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2002-03 AND UPHOLD THE IMPUGNED ORDER OF THE LEA RNED CIT(A) DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PAYMENT OF COMMISSION AMOUNTING TO RS. 47,84,365/- BY INVOKING EXPLANATION TO SECTION 37(1). 27.1. RESPECTFULLY FOLLOWING THE EARLIER ORDER THIS GROUND IS DISMISSED. 28. GROUND NO. 3 WHILE DEALING WITH GROUND NO. 1 OF ASSESSEES APPEAL WE HAVE RESTRICTED THE DISALLOWANCE U/S 14A TO THE EXTENT OF RS. 1,50,000/-. IN THIS VIEW OF THE MATTER, GROUND TAKEN BY THE REV ENUE ON THIS COUNT IS DISMISSED. 29. GROUND NO. 4: THE ASSESSING OFFICER NOTICED THA T ASSESSEE COMPANY HAD VARIOUS UNITS DOING THE MANUFACTURE/ JOB WORK RELATING TO SUBMERGED ARC WELDED (SAW) PIPES. ITS SAW PIPE MANUFACTURING UNIT AT MUNDRA, GUJARAT WAS A 100% EXPORT ORIENTED UNIT (EOU). HE N OTED THAT IN THE RETURN ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 17 OF INCOME ASSESSEE HAD CLAIMED DEDUCTION OF RS. 7,9 8,15,323/- U/S 10B IN RESPECT OF PROFITS OF THIS UNIT WHICH WAS REVISED T O RS. 9,13,20,34/-. THE ASSESSING OFFICER ALLOCATED THE HEAD OFFICE EXPENSE S AS UNDER: H.O. EXPENSES X TURNOVER OF EOU TOTAL TURNOVER OF INDIAN OPERATION OF THE COMPANY 39,63,67,959 X 5,13,92,33,991 = RS. 24,72,5,81/- 8,23,75,41,425 29.1. LD. CIT(A) AFTER CONSIDERING THE ASSESSEES C ONTENTIONS DIRECTED THE ASSESSING OFFICER TO ALLOW THE REVISED CLAIM OF DED UCTION U/S 10B. 29.2. AT THE OUT SET LD. COUNSEL SUBMITTED THAT THI S IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE EARLIER DECISION OF THE TRIB UNAL IN ASSESSEES OWN CASE FOR A.Y, 2003-04, OBSERVING AS UNDER: ON MERITS, IT IS OBSERVED THAT THE CLAIM OF THE AS SESSEE COMPANY FOR HIGHER DEDUCTION U/S 10B MADE ON THE BA SIS OF NEW METHOD OF ALLOCATION OF INTEREST EXPENSES INCUR RED AT HO LEVEL TO DIFFERENT UNITS WAS REJECTED BY THE AO AS THE NEW METHOD SO ADOPTED BY THE ASSESSEE COMPANY, ACCORDIN G TO HIM, WAS NOT APPROPRIATE IN THE FACTS AND CIRCUMSTA NCES OF THE CASE. HE ALSO DOUBTED THE BONA FIDE OF THE ASSESSEE IN ADOPTING THE NEW METHOD. THE LEARNED CIT(A), ON THE OTHER HAND, FOUND THE SAID NEW METHOD ADOPTED BY THE ASSE SSEE TO BE MORE APPROPRIATE AND ALSO AGREED WITH THE STAND OF THE ASSESSEE COMPANY THAT THE CHANGE ADOPTED BY IT WAS BONA FIDE. AFTER HAVING PERUSED THE ORDERS OF AO AS WEL L AS THE LEARNED CIT(A) AND KEEPING IN VIEW THE SUBMISSIONS MADE BY THE LEARNED REPRESENTATIVES OF BOTH THE SIDES BEFOR E US, WE ARE INCLINED TO AGREE WITH THE DECISION OF THE LEARNED CIT(A) ON THIS ISSUE. AS EXPLAINED ON BEHALF OF THE ASSESSEE COMPANY BEFORE THE LEARNED CIT(A) AS WELL AS BEFORE US AND ACCEPTED BY THE LEARNED CIT(A) IN HIS IMPUGNED ORDER BY GIV ING AN ILLUSTRATION, THE METHOD ADOPTED BY THE ASSESSEE CO MPANY ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 18 EARLIER FOR ALLOCATION OF INTEREST EXPENSES INCURRE D AT HO LEVEL TO RESPECTIVE UNITS ON THE BASIS OF THEIR TUR NOVER WAS CAPABLE OF GIVING A VERY MISLEADING AND DISTORTED P ICTURE FAR AWAY FROM THE REALISTIC POSITION ESPECIALLY WHEN TH E CAPACITY OF ANY UNIT IS UNDER UTILIZED RESULTING INTO ITS TU RNOVER BEING NOT IN PROPORTION WITH THE INVESTMENT MADE THEREIN. ON THE OTHER HAND, THE ALLOCATION OF BORROWED FUNDS ON THE BASIS OF ACCRUAL CAPITAL EMPLOYED IN THE RESPECTIVE UNITS AN D ACCORDINGLY TO WORK OUT THE INTEREST ATTRIBUTABLE T O SUCH FUNDS FOR ALLOCATION IN OUR OPINION, WAS MORE APPROPRIATE METHOD AS IN THE SAID METHOD, THE ACTUAL UTILIZATION OF BO RROWED FUNDS FOR RESPECTIVE UNITS WAS BEING TAKEN INTO ACCOUNT. THE SAID METHOD INVOLVING ALLOCATION OF INTEREST EXPENDITURE ON THE BASIS OF ACTUAL UTILIZATION OF BORROWED FUNDS THUS WAS A PROPER METHOD AND A PERUSAL OF THE WORKING PREPARED AND FURNISHED BY THE ASSESSEE COMPANY BEFORE THE AUTHOR ITIES BELOW AND AS GIVEN ON PAGE NO. 19 TO 21 OF THE IMPU GNED ORDER OF THE LEARNED CIT(A) SHOW THAT THE ALLOCATIO N OF INTEREST EXPENDITURE TO RESPECTIVE UNITS WAS MADE B Y THE ASSESSEE COMPANY BY IMPLEMENTING THE SAID METHOD P ROPERLY AND CORRECTLY. IN THE FIRST PLACE, THE ACTUAL FIXED ASSETS AND CUR RENT ASSETS INSTALLED IN THE RESPECTIVE UNITS FOR THE PURPOSE O F MANUFACTURING WERE TAKEN BY THE ASSESSEE COMPANY AN D THE VALUE OF SIMILAR ASSETS INSTALLED IN HO WERE ALLOCA TED TO THE SAID UNITS IN THE PROPORTION OF TOTAL MANUFACTURING ASSETS INSTALLED IN THE SAID UNITS. AFTER ALLOCATION AND A DDITION OF THESE HO ASSETS TO THE TOTAL ASSETS INSTALLED IN TH E RESPECTIVE UNITS, THE VALUE OF TOTAL ASSETS INSTALLED IN THE E OU AND NON EOUS WAS WORKED OUT AND THE AMOUNT OF TOTAL LOANS BORROWED WAS ALLOCATED TO THE RESPECTIVE UNITS IN T HE RATIO OF TOTAL MANUFACTURING ASSETS SO WORKED OUT. FROM THE AMOUNT OF BORROWED FUNDS SO ALLOCATED TO THE RESPECTIVE UNITS , LOANS DIRECTLY BORROWED FOR THE RESPECTIVE UNITS WERE RED UCED AND ACCORDINGLY, THE COMMON BORROWED FUNDS ALLOCABLE TO EOU AND NON-EOUS WERE WORKED OUT AT RS. 111.52 CRORES A ND RS. 148.82 CRORES RESPECTIVELY GIVING A RATIO OF 57.16% AND 42.84%. THE TOTAL INTEREST PAID ON SUCH BORROWED FU NDS AMOUNTING TO RS. 3,612.10 LAKHS THEN WAS BIFURCATED AND ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 19 ALLOCATED TO THE RESPECTIVE UNITS IN THE AID RATIO BEING THE RATIO IN WHICH THE COMMON BORROWED FUND WERE ACTUAL LY UTILIZED IN THE RESPECTIVE UNITS. THE INTEREST EXPE NDITURE INCURRED ON COMMON BORROWED FUNDS THUS WAS ALLOCATE D TO DIFFERENT UNITS ON THE BASIS OF ACTUAL UTILIZATION OF BORROWED FUNDS AND AS SUCH UTILIZATION WAS WORKED OUT SCIENT IFICALLY BY TAKING THE ACTUAL FACTS AND FIGURES, WE ARE OF THE VIEW THAT THE LEARNED CIT(A) WAS QUITE RIGHT IN ACCEPTING THE SAI D WORKING. IT IS PERTINENT TO NOTE HERE THAT EVEN THE AO ALSO COULD NOT FIND ANY FAULT WITH THE SAID WORKING PREPARED AND F URNISHED BY THE ASSESSEE AS POINTED OUT BY THE LEARNED CIT(A ) IN HIS IMPUGNED ORDER AND FURTHER EMPHASIZED BY THE LEARNE D COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BE FORE US. AS REGARDS THE OBJECTION RAISED BY THE AO INITIALLY IN HIS ORDER AND FURTHER REITERATED BY THE LEARNED DR BEFO RE US THAT MAJOR AMOUNT OF LOAN WAS UTILIZED FOR WORKING CAPIT AL, WE FIND THAT EVEN THE CURRENT ASSETS OF THE RESPECTIVE UNITS WERE TAKEN INTO ACCOUNT BY THE ASSESSEE COMPANY WHILE WO RKING OUT THE CAPITAL EMPLOYED IN THE SAID UNITS MAKING THE O BJECTION RAISED IN THIS REGARD BY THE DEPARTMENT TOTALLY UNS USTAINABLE. AS REGARDS THE DOUBT RAISED BY THE AO AS WELL AS BY THE LEARNED DR ABOUT THE BONA FIDES OF THE ASSESSEE COM PANY IN CHANGING THE METHOD OF ALLOCATION OF INTEREST EXPEN DITURE INCURRED AT HO LEVEL TO DIFFERENT UNITS, WE ARE OF THE VIEW THAT ONCE THE NEW METHOD ADOPTED BY THE ASSESSEE IS FOUN D TO BE MORE SCIENTIFIC AND APPROPRIATE, THE BONA FIDE OF T HE ASSESSEE TO ADOPT SUCH A METHOD CANNOT BE DOUBTED MERELY BEC AUSE THE SAME IS RESULTING INTO MORE BENEFITS TO IT. MOREOVE R, THE ENTIRE ISSUE HAD CROPPED UP AS A RESULT OF AO'S REFUSAL TO ALLOW THE CLAIM OF THE ASSESSEE COMPANY FOR NETTING OF THE IN TEREST INCOME AGAINST INTEREST EXPENDITURE AND SINCE THE A SSESSEE COMPANY HAS FINALLY GIVEN UP THE SAID CLAIM OF NETT ING BEFORE THE LEARNED CIT(A) WHILE ADOPTING THE NEW METHOD OF ALLOCATION OF INTEREST EXPENSES INCURRED AT HO LEVE L, WE ARE OF THE VIEW THAT THERE IS NO REASON TO DOUBT THE BONA FIDE OF THE ASSESSEE COMPANY IN ADOPTING THE NEW METHOD. AS SUC H, CONSIDERING ALL THE FACTS OF THE CASE, WE HOLD THAT THERE IS NO INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED CIT( A) ALLOWING THE REVISED CLAIM OF THE ASSESSEE FOR HIG HER ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 20 DEDUCTION U/S 10B ON THE BASIS OF NEW METHOD OF ALL OCATION OF INTEREST EXPENDITURE INCURRED AT HO LEVEL TO DIFFER ENT UNITS AND UPHOLDING THE SAME ON THIS ISSUE. 30. RESPECTFULLY FOLLOWING THE EARLIER ORDER OF THE ITAT WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) ON THE ISSUE I N QUESTION. GROUND IS DISMISSED. 31. GROUND NO. 5: THE ASSESSING OFFICER NOTICED THA T WHILE COMPUTING DEDUCTION U/S 80HHC, THE ASSESSEE HAD INCLUDED FOLL OWING OTHER INCOMES: INSURANCE CLAIM RECEIVED 11,74,569 OLD STORE ITEMS 7,23,604 DISCOUNT ON PURCHASE OF DEPB FOR IMPORTING GOODS 4,29,251 BALANCES WRITTEN BACK 33,16,076 NOTICE SALARY FROM EMPLOYEES 51,994 CASH DISCOUNT 2,30,429 LOADING CHARGES 1,78,306 GUEST HOUSE RECEIPTS 1,32,723 SERVICES PROVIDED BY HYDRA & EOT CRANE 1,35,822 OTHER 2,46,378 TOTAL 66,19,152 31.1. THE ASSESSING OFFICER OBSERVED THAT ON THESE ITEMS ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 80HHC. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS THE ASSESSING OFFICER OBSERVED THAT ASS ESSEE HAD NOT PLACED ANY DOCUMENT WHICH WOULD ESTABLISH AS TO HOW THE ABOVE RECEIPTS COULD BE TREATED AS ITS BUSINESS INCOME U/S 28 OF THE I.T. A CT. HE POINTED OUT THAT IF THE ASSESSEE HAD RECEIVED CERTAIN INCOME WHICH HAD NO NEXUS WITH ITS EXPORT ACTIVITY AND EVEN IF THE SAME FALL UNDER THE HEAD BUSINESS INCOME, THE SAME COULD NOT BE TAKEN AS PART OF PROFIT OF THE BUSINES S FOR THE PURPOSES OF DEDUCTION U/S 80-HHC. HE POINTED OUT THAT NO WHERE ASSESSEE PROVED THAT ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 21 THE INSURANCE RECEIPTS WERE DERIVED FROM THE INDUST RIAL UNDERTAKING. THE ASSESSEE HAD FAILED TO ESTABLISH THE NEXUS BETWEEN RENTAL INCOMES, OLD STORE ITEMS, DISCOUNT ON DEPB, CASH DISCOUNT, GUEST HOUSE RECEIPT SERVICES PROVIDED BY HYDRA & EOT CRANE AND OTHER INCOMES WIT H REFERENCE TO ITS EXPORT BUSINESS. 31.2. AS REGARDS BALANCES WRITTEN BACK ALSO, THE AS SESSEE HAD FAILED TO BRING ON RECORD ANY EVIDENCE THAT THIS WAS IN RESPECT OF ITS TURNOVER OF THE ITEMS IN WHICH THE ASSESSEE WAS CARRYING OUT EXPORT BUSINESS . THE ASSESSEE HAD NOT ESTABLISHED THAT THE BALANCE WRITTEN BACK PERTAINED TO THE YEAR UNDER CONSIDERATION. HE POINTED OUT THAT THE RIGHT TO REC EIVE THESE AMOUNTS HAD ALREADY ACCRUED ON THE DATE OF SALE ITSELF. THE REC EIPT OF MONEY ON ACCOUNT OF WRITE OFF AND THEN SETTLEMENT LATER ON WAS ONLY CON SEQUENTIAL. HE, ACCORDINGLY, EXCLUDED THE ABOVE ITEMS FROM THE PROF IT FOR THE PURPOSE OF DEDUCTION U/S 80HHC. 31.3. BEFORE LD. CIT(A) THE ASSESSEE SUBMITTED THAT ALL THESE INCOMES WERE BUSINESS INCOME AND AROSE IN NORMAL COURSE OF CARRY ING BUSINESS ACTIVITY OF BUSINESS EXPORT. IT WAS FURTHER STATED THAT EXPENDI TURE RELATING TO ALL THESE INCOME HAD BEEN DEBITED IN THE P&L A/C AND IF INCOM E WAS EXCLUDED THEN EXPENDITURE RELATING TO THEM SHOULD ALSO BE EXCLUDE D FROM ELIGIBLE PROFITS. IT WAS SUBMITTED THAT DEFINITION OF BUSINESS PROFIT HAD BEEN GIVEN IN SECTION 80HHC AND, THEREFORE, THERE WAS NO SCOPE FOR ASSESS EE TO ENLARGE ITS MEANING OR FOR ASSESSING OFFICER TO NARROW DOWN ITS MEANING. 31.4. LD. CIT(A) OBSERVED THAT TOTAL AMOUNT EXCLUDE D FROM ELIGIBLE PROFITS WAS RS. 66,19,152/-. THIS WAS BASED ON A CONSIDERAT ION OF OTHER INCOME OF ALL THE UNITS OF THE COMPANY. HOWEVER, CONSIDERING THE OTHER INCOME OF UNIT ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 22 MANUFACTURING EXPORTED GOODS, THE AMOUNT WORKED OUT TO RS. 59,31,385/- AS PER DETAILS GIVEN AT PAGE 27 OF HIS ORDER, WHICH IS REPRODUCED HEREUNDER: INSURANCE CLAIM RECEIVED 11,61,986 OLD STORE ITEMS 6,55,942 DISCOUNT ON PURCHASE OF DEPB LICENSE 2,75,975 BALANCES WRITTEN BACK 33,16,076 NOTICE SALARY FROM EMPLOYEES 22,960 CASH DISCOUNT 2,30,429 LOADING CHARGES 1,78,306 GUEST HOUSE RECEIPTS - SERVICES PROVIDED BY HYDRA & EOT CRANE - OTHERS 89,711 TOTAL 59,31,385 31.5. AS REGARDS THE BALANCE WRITTEN BACK OF RS. 33 ,16,076/-, LD. CIT(A) OBSERVED THAT THE SAME REPRESENTED MONEY RECEIVED F ROM ONGC PURSUANT TO ARBITRATION AWARD IN FAVOUR OF ASSESSEE. HE POINTED OUT THAT IN THE PRECEDING YEARS CERTAIN AMOUNTS WERE WITHHELD BY ONGC AGAINST SUPPLIES OF PIPES MADE TO THEM UNDER VARIOUS CONTRACTS BY ASSESSEE. T HE ASSESSEE HAD IN THE IMMEDIATELY PRECEDING YEAR WRITTEN OFF THESE AMOUNT S AS BAD DEBTS IN ITS BOOKS. CONSEQUENTLY, IN THE PRECEDING YEAR PROFITS COMPUTED FOR 80HHC DEDUCTIONS WERE REDUCED. NOW ON THEIR REALIZATION, ON EQUITABLE BASIS THE SAME SHOULD BE ADDED IN BUSINESS PROFITS. HE POINTE D OUT THAT THESE AMOUNTS WERE EVEN OTHERWISE CHARGEABLE U/S 41(1) AND AS PER EXPLANATION (BAA), THE SAME FALL IN THE DEFINITION OF PROFITS AS COMPUTED UNDER THE HEAD PROFITS & GAINS OF BUSINESS I.E. AS COMPUTED AS PER THE PROVI SIONS OF SECTION 28 TO 43D. HE, ACCORDINGLY, HELD THAT THE SAME FORMED PART OF PROFITS AND GAINS COMPUTED FOR THE PURPOSES OF COMPUTING DEDUCTION U/ S 80HHC. HOWEVER, HE ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 23 CONFIRMED THE EXCLUSION OF RS. 89,711/- FROM THE EL IGIBLE PROFITS AS ASSESSEE HAD NOT GIVEN ANY DETAILS. 31.6. IN REGARD TO OTHER ITEMS, THE LD. CIT(A) OBSE RVED THAT THE SAME SHOULD BE INCLUDED IN THE ELIGIBLE PROFITS AS THE SAME REP RESENTED INCOME EARNED DURING MANUFACTURING OF EXPORT PRODUCTS AND WERE NO T INDEPENDENT SOURCE OF INCOME. HE, ACCORDINGLY, DIRECTED THE ASSESSING OFF ICER TO EXCLUDE ONLY RS. 89,711/- OUT OF OTHER INCOME OF RS. 59,31,385/- OF UNIT ENGAGED IN MANUFACTURE AND EXPORT OF GOODS WHILE DETERMINING E LIGIBLE PROFITS FOR 80HHC COMPUTATION. 32. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER . 33. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN AY 2003-04, LD. CIT(A) HAS ALLOWED THE ASSESSEES CLAIM AND NO APPE AL WAS FILED BY THE DEPARTMENT. HE SUBMITTED THAT ALL ARE BUSINESS INCO MES COVERED UNDER EXPLANATION (BAA) TO SECTION 80HHC. 34. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. EXPLANATION (BAA) TO SECTIO N 80HHC SPECIFICALLY DEFINES PROFITS OF THE BUSINESS AND, THEREFORE, ONL Y THOSE PROFITS OF BUSINESS CAN QUALIFY FOR DEDUCTION U/S 80HHC AS ARE CONTEMPL ATED IN THE SAID EXPLANATION. AS PER THE DEFINITION, THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION FORMS THE BASIS OUT OF WHICH THE ITEMS MENTIONED IN CLAUSE (1) & (2 ) ARE TO BE EXCLUDED. LD. CIT(A) HAS GIVEN SPECIFIC FINDINGS REGARDING BALANC E WRITTEN BACK AND IN REGARD TO OTHER ITEMS HE HAS OBSERVED THAT THE ITEM S COME UNDER THE ELIGIBLE ITA 2990 & 3328/DEL/2007 JINDAL SAW PIPE 24 PROFITS AS CONTEMPLATED IN EXPLANATION (BAA). WE SE E NO REASON TO INTERFERE IN THE FINDING OF LD. CIT(A) ON THE ISSUE IN QUESTION. GROUND IS DISMISSED. 35. IN THE RESULT ASSESSEES APPEAL (ITA NO. 2990/D EL/2007) IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL (ITA NO. 3328/DEL/2007) IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 22-08-2014. SD/- SD/- ( I.C. SUDHIR ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 22-08-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR