ADDL CIT 5(1), MUMBAI V. CADBURY INDIA LTD, MUMBAI

ITA 3726/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92664 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 13-11-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 09-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PADNABHAN
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Earning of tax free income; Retrospective amendment; Cost of acquisition; Valuation report; Scheme of amalgamation
• Section: 80HHC; 14A; 37(1); 32

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE S/SHRI VIJAY PAL RAO ( JM ) AND D. KARUNAKAR RAO, (AM) , . , ./ I.T.A. NO . 3510 / MUM/20 11 ( / ASSESSMENT YE A R : 200 3 - 04 ) MONDELEZ INDIA FOODS PVT.LTD, (FORMERLY KNOWN AS M/S MONDELEZ INDIA FOODS LTD), MONDELEZ HOUSE, UNIT NO.2001, 20 TH FLOOR, TOWER NO.3(WING - C) INDIA BULLS FINANCE CENTRE, PAREL, M UMBAI - 400013 / VS. ADDL. COMMISSIONER OF INCOME TAX RANGE 5(1), MUMBAI . ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO .3726/ MUM/20 11 ( / ASSESSMENT YE A R : 2003 - 04 ) A SSTT. COMMISSIONER OF INCOME TAX - 5(1) , ROOM NO.568, 5 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400020 / VS. MONDELEZ INDIA FOODS PVT.LTD, ( M/S CADBURY INDIA LIMITED ) M/S MONDELEZ INDIA FOODS LTD), MONDELEZ HOUSE, UNIT NO.2001, 20 TH FLOOR, TOWER NO.3(WING - C) INDIA BULLS FINANCE CENTRE , PAREL, MUMBAI - 400013 ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO .4205/ MUM/20 11 ( / ASSESSMENT YE A R : 2004 - 05 ) MONDELEZ INDIA FOODS PVT.LTD, (M/S CADBURY INDIA LIMITED) M/S MONDELEZ INDIA FOODS LTD), MONDELEZ HOUSE, UNIT NO.2001, 20 TH FLOOR, TOWER NO.3(WING - C) INDIA BULLS FINANCE CENTRE, PAREL, MUMBAI - 400013 / VS. ADDL. COMMISSIONER OF INCOME TAX RANGE 5(1), MUMBAI. ( / APPELLANT ) .. ( / RESPONDENT ) ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 2 ./ I.T.A. NO .4451/ MUM/20 11 ( / ASSESSMENT YE A R : 2004 - 05 ) DY . COMMISSIONER OF INCOME TAX - 5(1), ROOM NO.568,5 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400020 / VS. MONDELEZ INDIA FOODS PVT.LTD, (M/S CADBURY INDIA LIMITED) M/S MONDELEZ INDIA FOO DS LTD), MONDELEZ HOUSE, UNIT NO.2001, 20 TH FLOOR, TOWER NO.3(WING - C) INDIA BULLS FINANCE CENTRE, PAREL, MUMBAI - 400013 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAACC0460H / ASSES SEE BY S/SHRI JASMIN AMALSADWALA, J D MISTRY,NISHANT, MS.MEGHA BANSAL, THAKKAR / REVENUE BY S HRI PADNABHAN / DATE OF HEARING : 5.5.2015 / DATE OF PRONOUNCEMENT : 13 .5. 2015 / O R D E R PER VIJAY PAL RAO ( JM ) THESE TWO SET OF CROSS - APPEALS ARE DIRECTED AGAINST THE TWO SEPARATE ORDER OF THE LD. CIT(A) FOR THE ASSESSMENT YEARS 2003 - 04 AND 2004 - 05 RESPECTIVELY. 2. ITA NO.3510/MUM/2011 (AY - 2003 - 04) (BY - ASSESSEE) THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF NOT TREATING INTE REST INCOME OF RS. 6,98,44,651 AS BUSINESS INCOME BUT ASSESSING AS INCOME FOR OTHER SOURCES FOR COMPUTING THE DEDUCTION U/S 80 - HHC OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF NOT EXCLUDING NET INTEREST FOR COMPUTING THE DEDUCTION U/S 80 - HHC OF THE ACT. FOR THE PURPOSES OF SECTION 80HHC, IT IS 90% OF NET INTEREST THAT HAS TO BE EXCLUDED INSTEAD OF 90% OF GROSS INTEREST R ECEIVED. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 3 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF TREATING PROFIT OF FOREX OF RS 8,86,972 AND MISCELLANEOUS SCRAP SALES OF RS.97 ,98,752 AS ADDITION TO THE TOTAL TURNOVER FOR COMPUTING THE DEDUCTION U/S. 80 - HHC OF THE ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRED IN NOT CONSIDERING AND DIRECTING THE ASSESSING O FFICER TO ALLOW THE DEDUCTION OF RS. 23,99,610/ - BEING PROVISION TOWARDS LIABILITY OF CONTRACTUAL OBLIGATION TO THE THIRD PARTY MANUFACTURERS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRE D IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE DEPRECIATION AMOUNTING TO RS. 23,11,625/ - ON THE MARKETING KNOWHOW CAPITALIZED, ON ACCOUNT OF ACQUISITION OF NON - CHOCOLATE CONFECTIONARY BUSINESS OF M/S. WARNER LAMBERT (I) PVT. LTD 3. GROUND NOS.1 AND 2 ARE REGARDING THE DISALLOWANCE OF DEDUCTION UNDER SECTION 80HHC OF THE INCOME TAX ACT, 1961 (THE ACT) ON INTEREST INCOME. 4. WE HAVE HEARD THE SHRI J.D.MISTRY, THE LD. SR.COUNSEL ON BEHALF OF THE ASSESSEE AND SHRI PADNABHAN, LD.D R AND CONSIDERED THE RELEVANT MATERIAL ON RECORD . AT THE OUTSET, WE NOTICE THAT THE ISSUE RAISED IN THESE GROUNDS HAS BEEN CONSIDERED BY THIS TRIBUNAL IN THE ASSESSEES OWN CASE IN CADBURY INDIA LIMITED V/S ADDL.CIT IN ITA NO.975/MUM/2005 (AY - 2001 - 02) DA TED 25.5.2012 AND ITA NO.7408/MUM/2010 (AY - 2002 - 03) DATED 13.11.2013. FOR THE ASSESSMENT YEAR 2001 - 02, VIDE PARA 7, THE ISSUE HAS BEEN SET ASIDE BY THE TRIBUNAL TO THE FILE OF THE AO BY OBSERVING AS UNDER (PARA 7): 7 . THE SIXTH DISPUTE IS REGARDING RED UCTION OF 90% OF INTEREST FROM PROFIT OF BUSINESS AS PER EXPLANATION (BAA) WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC. ASSESSEE HAD RECEIVED INTEREST ON FDRS, ICDS AND OTHERS AGGREGATING TO RS.5,21,04,545/ - . THE AO EXCLUDED 90% OF THE SAME FROM THE PRO FIT OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC WHICH IN APPEAL WAS CONFIRMED BY CIT(A). ASSESSEE HAS DISPUTED THE DECISION OF AUTHORITIES BELOW TO EXCLUDE 90% OF THE GROSS INTEREST AND NOT NET INTEREST INCOME. 7.1 WE HAVE HEARD BOTH TH E PARTIES, PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. EARLIER THE HON'BLE HIGH COURT OFA.Y.01 - 02 BOMBAY IN CASE OF CIT VS. ASIAN STAR CO. LTD. (326 ITR 56) HAD HELD THAT 90% OF GROSS INTEREST HAS TO BE REDUCED FROM THE PROFIT OF BUSINESS AS P ER EXPLANATION (BAA). HOWEVER THE SAID DECISION OF THE HON'BLE HIGH COURT ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 4 HAS NOT BEEN UP HELD BY THE HON'BLE SUPREME COURT WHO IN THE CASE OF ACG ASSOCIATED CAPSULES LTD. (343 ITR 89), HAVE RECENTLY HELD THAT 90% OF NET RECEIPTS HAVE TO BE REDUCED AS PER EXPLANATION (BAA). WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND HOLD THAT 90% OF NET INTEREST INCOME IS REQUIRED TO BE REDUCED AFTER DEDUCTING EXPENSES INCURRED HAVING NEXUS WITH EARNING OF INTEREST INCOME. THE ISSUE IS THUS RESTORED TO AO FOR WORKING OUT 90% OF NET INTEREST INCOME AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. WE FURTHER NOTE THAT FOR THE ASSESSMENT YEAR 2003 - 04, THE TRIBUNAL HAS AGAIN CONSIDER ED THIS ISSUE AND SET ASIDE TO THE RECORD OF THE AO WITH SIMILAR DIRECTIONS. ACCOR DINGLY, FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL, THE ISSUE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC IN RESPECT OF INTEREST INCOME IS SET ASIDE TO THE FILE OF THE AO WITH THE IDENTICAL DIRECTIONS AS GIVEN IN THE EARLIER ORDERS OF THE TRIBUNAL . 5. GROUND NO.3 IS REGARDING THE EXCLUSION OF PROFIT ON FOREIGN EXCHANGE AND MISCELLANEOUS SALES OF SCRAP AND COCOA SHELLS FO R COMPUTATION OF DEDUCTION U/S 80HHC. 6. WE HAVE HEARD THE SHRI J.D.MISTRY, THE LD. SR.COUNSEL ON BEHALF OF THE ASSESSEE AND SHR I PADNABHAN, LD.DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE S IN CADBURY INDIA LIMITED V/S JCIT IN ITA NO S .2298/MUM/2000 ,256/MUM/2003,4135/MUM/2003 AND 34 50/MUM/2004 (AY S - 1995 - 96 TO 1998 - 99 ) DATED 8.10.2010 BY HOLDING AS UNDER (PARA 41 AND 42): 41. GROUND NO.6 IS IN RESPECT OF COMPUTATION OF THE ALLOWABLE DEDUCTION U/S.80HHC. 42. THE ASSESSEE HAS TAKEN TWO SUB - GROUNDS. IN GROUND NO.6(A), THE ASSESSEE HA S RAISED THE GRIEVANCE THAT THE A.O. WAS NOT JUSTIFIED IN INCLUDING MISCELLANEOUS INCOME OF RS.56,21,100/ - WHILE COMPUTING THE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S.80HHC. WHILE COMPUTING THE DEDUCTION U/S.80HHC, THE ASSESSEE HAS INCLUDED THE MIS CELLANEOUS INCOME, WHICH ARE HAVING FOLLOWING ITEMS I.E. (I) SCRAP SALES RS.37,68,893/ - (II) SALE OF COCOA SHELL RS.11,85,933/ - (III) SALE OF AGRICULTURAL PRODUCTS RS.54,620/ - (IV) SALE OF SPENT GRAIN RS.150/ - (V) SALE OF COCOA SEEDLINGS RS.3,67,306/ - , (VI ) SALE OF FLOATS AND BEANS RS.10,218/ - (VII) SALE OF OLD NEWSPAPER RS.4,705/ - , FOREIGN EXCHANGE GAIN RS.2,29,275/ - . SO FAR AS PROCEED OF SALE OF SCRAP, COCOA SHELL, COCOA SEEDLINGS, FLOATS AND BEANS ARE CONCERNED, IN OUR OPINION, AS IT HAS GOT DIRECT NEXUS WITH THE ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 5 PRODUCT MANUFACTURED BY THE ASSESSEE AS IT HAS GENERATED OUT OF THE MANUFACTURING ACTIVITY AND HENCE, THE A.O. HAS RIGHTLY INCLUDED THE SAME FOR COMPUTING THE TOTAL TURNOVER FOR THE PURPOSE OF SECTION 80HHC. SO FAR AS THE SALE PROCEED OF THE AG RICULTURAL PRODUCT, SALE OF NEWSPAPER, THE SAME CANNOT BE TREATED AS HAVING ANY NEXUS WITH THE EXPORT OF GOODS BY THE ASSESSEE HENCE, THEY CANNOT FORM AS A PART OF TOTAL TURNOVER. THE A.O., IS THEREFORE, DIRECTED TO EXCLUDE THE SALE PROCEEDS OF THE AGRICUL TURAL PRODUCT AS WELL AS SALE OF OLD NEWSPAPER FROM THE TOTAL TURNOVER. SO FAR AS THE ELEMENT OF THE FOREIGN EXCHANGE GAIN IS CONCERNED, NOTHING IS CLEAR FROM THE DISCUSSION OF THE A.O. AS WELL AS CIT (A) WHETHER THE FOREIGN EXCHANGE GAIN IS IN RESPECT OF THE EXPORT SALE MADE BY THE ASSESSEE. NOTHING IS ALSO PLACED BEFORE US TO SHOW THE NATURE OF THE FOREIGN EXCHANGE GAIN. THE A.O. HAS PROBABLY INCLUDED THIS AMOUNT ON THE REASON THAT THE FOREIGN EXCHANGE GAIN IS ON ACCOUNT OF THE EXPORT SALE OF SALE PROCEED S. IN OUR OPINION, THE SAME HAS BEEN RIGHTLY INCLUDED IN THE TOTAL TURNOVER BY THE A.O. WITH THE ABOVE FINDINGS, THE ISSUE OF THE TREATMENT OF THE MISCELLANEOUS INCOME TO THE EXTENT OF THE DETERMINING THE TOTAL TURNOVER IS DECIDED AND ACCORDINGLY, GROUND N O.6(A) IS PARTLY ALLOWED. 7. THUS IT IS CLEAR FROM THE FINDINGS OF THE TRIBUNAL IN ASSESSEES OWN CASES FOR THE ASSESSMENT YEARS AYS - 1995 - 96 TO 1998 - 99 THAT THE MISCELLANEOUS INCOME ON ACCOUNT OF SCRAP SALES AND COCOA SHELLS WERE FOUND TO HAVE DIRECT NEXUS WITH THE PRODUCT MANUFACTURED BY THE ASSESSEE AS IT HAS GENERATED OUT OF MANUFACTURING ACTIVITIES OF THE ASSESSEE, THEREFORE, THE SAME IS ELIGIBLE FOR DEDUCTION U/S 80HHC. 8. AS REGARD FOREIGN EXCHANGE GAIN, THE TRIBUNAL HAS DECIDED THIS ISSUE AGAI NST THE ASSESSEE. FOLLOWING THE EARLIER YEARS ORDER OF THIS TRIBUNAL, THE INCOME ON ACCOUNT OF MISCELLANEOUS SALE AND SCRAP OF COCOA SHELLS IS ALLOWED AS ELIGIBLE FOR DEDUCTION U/S 80HHC, WHEREAS THE ISSUE OF DEDUCTION U/S 80HHC IN RESPECT OF FOREIGN EX CHANGE GAIN IS DECIDED AGAINST THE ASSESSEE. HENCE, THE GROUND NO.3 OF THE ASSESSEES APPEAL IS ALLOWED IN PART. 9. THE GROUND NO.4 IS REGARDING DEDUCTION IN RESPECT OF PROVISION OF ADDITIONAL DUTY PAYABLE TO THIRD PARTY MANUFACTURES (TPM). 10. WE HAVE HEARD THE SHRI J.D.MISTRY, THE LD. SR.COUNSEL ON BEHALF OF THE ASSESSEE AND SHRI PADNABHAN, LD.DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASES IN CADBURY INDIA LIMITED (SUPRA) VIDE PARA 33 AS UNDER: ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 6 33. WE HAVE HEARD THE PARTIES. THIS ISSUE IS ALSO A REPETITIVE ISSUE AND SAME HAS BEEN ADJUDICATED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSEES APPEAL FOR A.Y. 1994 - 95. THIS ISSUE HAS ALSO BEEN ADJUD ICATED IN THE A.Y. 1995 - 96. THE LD. COUNSEL SUBMITTED THAT THE A.O. HAD NOT CONSIDERED THE AMOUNT REIMBURSED TO THE THIRD PARTY MANUFACTURER BY THE ASSESSEE AS DEPOSITS GIVEN BY THEM TO THE EXCISE DEPARTMENT OF RS. 13,10,000/ - . THE LD. CIT (A) HAS CONSIDERE D THE CLAIM OF THE ASSESSEE IN RESPECT OF THE AMOUNT ACTUALLY PAID TO THE THIRD PARTY MANUFACTURER AT RS. 13,10,000/ - AND ONLY ISSUE FOR CONTROVERSY IS IN RESPECT OF THE AMOUNT OF RS. 48,82,788/ - . AS DISCUSSED HEREINABOVE, THIS ISSUE HAS ALREADY BEEN DECIDED AGAINST THE ASSESSEE AND FOLLOWING THE REASONS GIVEN BY THE TRIBUNAL IN THE A.Y. 1994 - 95 ON THIS ISSUE, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE AND ACCORDINGLY, GROUND NO.2 IS DISMISSED. 11. THIS ISSUE HAS ARISEN DUE TO THE DISPUTE OF EXCISE DUTY PA YABLE BY THE ASSESSEE ON THE PRODUCT GOT MANUFACTURED FROM THIRD PARTY MANUFACTURE. THE ASSESSEE CLAIMED THAT THE EXCISE DUTY PAYABLE ON SUCH PRODUCTS SHOULD BE COMPUTED ON THE PRICE ON WHICH THE ASSESSEE RECEIVED THE PRODUCT FROM THE MANUFACTURES AND NOT ON THE SALE PRICE. ACCORDINGLY, THE ASSESSEE MADE THE PROVISIONS IN RESPECT OF DIFFERENCE BETWEEN THE DEMAND MADE BY THE EXCISE DEPARTMENT AND T HE CLAIM OF THE ASSESSEE. THE TRIBUNAL IN THE EARLIER YEAR HAS DECIDED THIS ISSUE BY HOLDING THAT THE ASSES SEE IS ENTITLED FOR DEDUCTION ONLY IN RESPECT OF ACTUAL EXCISE DUTY P IAD BY THE ASSESSEE. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE AS THE ASSESSEE IS ENTITLED FO R DEDUCTION ONLY IN RESPECT OF ACTUAL PAYMENT O F EXCISE DUTY. 12. THE GROUND NO. 5 IS REGARDING DISALLOWANCE OF DEPRECIATION ON MARKETING KNOWHOW. 13. THE ASSESSEE ACQUIRED ON GOING NON - CHOCOLATE CONFECTIONARY BUSINESS OF M/S. WARNER LAMBERT (I) PVT. LTD IN PURSUANCE OF WORLDWIDE STOCK AND ASSET P URCHASE AGREEMENT BETWEEN PFIZER AND CADBURY SCHWEPPES PLC OF UK , THE RESPECT IVE PARENT COMPAN IES OF THE PARTIES . T HE ASSESSEE HAS PAID TOTAL CONSIDERATION OF RS. 33,35,00,000/ - . IN THE VALUATION REPORT SUBMITTED BY THE ASSESSEE OUT OF THE TOTAL CONSIDERATI ON , THE ASSESSEE HAS ALLOCATED A SUM OF RS.18,49,30,000/ - TOWARDS MARKET KNOW HOW. THE ASSESSEE CLAIMED DEPRECIATION ON THE MARKET KNOW HOW BEING TANGIBLE ASSETS. THE AO HAS QUESTIONED THE CLAIM OF THE ASSESSEE AND HELD THAT IT IS NOT ACCEPTABLE. THE AO ACCORDINGLY, ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 7 DISALLOWED THE CLAIM OF THE DEPRECIATION ON THE MARKETING KNOW HOW. ON APPEAL, THE LD. CIT(A) HAS CONFIRMED THE ACTION OF THE AO. 14. BEFORE US, THE LD.SR. COUNSEL OF THE ASSESSEE HA S SUBMITTED THAT THE ISSUE IS NOW COVERED BY THE SERIES OF JUDGMENT S INCLUDING THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V/S HINDUSTAN COCO COLA BEVERAGES P. LTD [2011] 331 ITR 192 (DEL) WHEREIN THE H ONBLE HIGH COURT AFTER CONSIDERING THE FACTS THAT THE SPECIFIC PAYMENT FOR GOODWILL REP RESENTS THE CONSIDERATION FOR MARK ET ING AND TRADING REPUTATION, TRADE STYLE AND NAME, MARKETING AND DISTRIBUTION, TERRITORIAL KNOW - HOW, INCLUDING INFORMATION OF THE TERRITORY AND ALLOWED THE DEPRECIATION ON SUCH PAYMENT ON INTANGIBLE ASSETS . H E HAS ALSO RELIED UP ON THE DECISION OF THE TRIBUNAL IN THE CASE OF DCIT V/S WEIZMANN FOREX LTD. [2012] 51 SOT 525 (ITAT ) [MUM]) AS WELL AS THE SERIES OF OTHER DECISIONS OF THIS TRIBUNAL, WHEREIN THE TRIBUNAL HELD THAT MARKETING STRATEGIES AND DISTRIBUTION NETWORK, C USTOMER LISTS , MARKETING S TRATEGIES, AND SOFTWARE AS INTANGIBLE ASSETS ELIGIBLE FOR DEPRECIATION U/S 32(1)(II) OF T HE ACT . THE SR.COUNSEL FURTHER SUBMITTED THAT THE AO HAS DISALLOWED THE DEPRECIATION ON THE MARKETING KNOWHOW ON THE GROUND THAT THE AMOUNT IS CONSIDERED TOWARDS GOODWILL AND NO DEPRECIATION IS ALLOWED ON THIS. HE HAS ALSO RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V/S SMIFS SECURITIES LTD.[2012] 348 ITR 302 (SC) AND SUBMITTED THAT THE HONBLE SUPREME COURT HA S HELD THAT GOODWILL IS AN ASSET U/S 32 OF THE ACT AND ELIGIBLE FOR DEDUCTION UNDER SECTION 32 OF THE ACT. 1 5 . ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDERS OF AUTHORITIES BELOW. 1 6 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERI AL AVAILABLE ON RECORD. THE AO HAS DENIED THE CLAIM OF DEPRECIATION ON MARKETING KNOWHOW . THE CONCLUDING PARAGRAPH OF THE ASSESSMENT ORDER IS REPRODUCED FOR THE SAKE OF CONVENIENCE AS UNDER: 11.6 WITH REGARD TO THE ASSESSEES SUBMISSION THAT THE MARK ET KNOWHOW IS A MARKETABLE RIGHT WHICH CAN BE VALUED AND ON WHICH DEPRECIATION MAY BE CLAIMED IT IS TO BE NOTED THAT EVEN LIST OF TELEPHONE NUMBERS MAY BE A MARKETABLE COMMODITY. HOWEVER, WHEN SOMETHING HAS TO BE A RIGHT THEN IT CONNOTES MUCH MORE THAN A M ERE COMMODITY. THE SAID OBJECT SHOULD BE IN EXCLUSIVE POSITION OF THE RIGHT HOLDER AND AT THE EXCLUSION OF OTHERS. THE ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 8 ASSESSEE HAS NOT SHOWN ANY EVIDENCE THAT IT HAS ACQUIRED ANYTHING FROM WARNER LAMBERT TO THIS EFFECT. SECONDLY, THE REPORT OF BANSI MEHTA AND & CO,ALSO STATES THAT MARKET VALUE CAN BE TAKEN AS 3 MONTHS ADVERTISING COST. THIS ALSO SHOWS THAT THIS KNOW HOW IS GENERAL IN NATURE AND NOT IN EXCLUSIVE POSSESSION OF' ANYBODY. MOREOVER, IT CAN BE AN INTANGIBLE ASSET WHICH WOULD DEPRECIATE IN VALUE WITH USAGE AND TIME. IN VIEW OF THIS THE ASSESSEES STAND IS NOT ACCEPTED AND ALLOCATION OF 184.93 LAKHS UNDER THE HEAD INTANGIBLE ASSET VIZ. MARKET KNOW HOW IS REJECTED. THIS AMOUNT IS CONSIDERED AS TOWARDS GOODWILL AND NO DEPRECIATION IS ALLOWED ON THIS. HENCE, DEPRCITION @12.5% (FOR LESS THAN 180 DAYS) CLAIMED BY THE ASSESSEE ONTHIS ASSET IS DISALLOWED. THE DISALLOWANCE WORKS OUT TO RS.23,11,625 (EMPHASIS IS OURS) 1 7 . IT IS CLEAR THAT THE AO HAS DENIED THE CLAIM OF DEPRECIATION BY TREATING THE AMOU NT PAID BY THE ASSESSEE AS CONSIDERATION TOWARDS GOODWILL . THUS, THE AO HAS TREATED THE SAID PAYMENT TOWARDS GOODWILL. ONCE, THE PAYMENT IS ACCEPTED FOR GOODWILL THEN THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF M/S SMIFS SECURITIES LTD (SUPRA) I S APPLICABLE ON THE ISSUE. THE HONB L SUPREME COURT HAS DECIDED THE ISSUE OF DEPRECIATION ON GOODWILL AS UNDER : 'WHETHER GOODWILL IS AN ASSET WITHIN THE MEANING OF SECTION 32 OF THE INCOME - TAX ACT, 1961, AND WHETHER DEPRECIATION ON 'GOODWILL' IS ALLOWAB LE UNDER THE SAID SECTION ?' ANSWER IN THE PRESENT CASE, THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.54,85,430 AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING, THE EXPLANATION REGARDING THE ORIGIN OF SUCH GOODWILL WAS GIVEN AS UNDER : 'IN ACCORDANCE WIT H THE SCHEME OF AMALGAMATION OF YSN SHARES AND SECURITIES (P.) LTD. WITH SMIFS SECURITIES LTD. (DULY SANCTIONED BY THE HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1998, ASSETS AND LIABILITIES OF YSN SHARES AND SECU RITIES (P.) LTD. WERE TRANSFERRED TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COMPANY.' IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND S ECURITIES P. LTD. (AMALGAMATING COMPANY) SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAMATION. IT WAS CLAIMED THAT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIEN TELE. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 9 THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME - TAX ACT, 1961 ('THE ACT', FOR SHORT). WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT : 'EXPLANATION 3. FOR THE PURPOS ES OF THIS SUB - SECTION, THE EXPRES SIONS 'ASSETS' AND 'BLOCK OF ASSETS' SHALL MEAN (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE ; (B) INTANGIBLE ASSETS, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY O THER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE :' EXPLANATION 3 STATES THAT THE EXPRESSION 'ASSET' SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SI MILAR NATURE. A READING THE WORDS 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION 'ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT 'GOODWILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PRESENT CASE, THE ASSESSING OFFICER, AS A MATTER OF FACT, CAME TO THE CONCLUSION THAT NO AMOUNT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. THIS IS A FACTUAL FINDING. THE COMMISSIONER OF INCOME - TAX (APPEALS) ('THE CIT(A)', FOR SHORT) HAS COME TO THE CONCLUSION THAT THE AUTHORISED REPRESENTATIVES HAD FILED COPIES OF THE ORDERS OF THE HIGH COURT ORDERING AMALGAMATION OF THE ABOVE TWO COMPANIES ; THAT THE ASSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES P. LTD. WERE TRANSF ERRED TO THE ASSESSEE FOR A CONSIDERATION ; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTED GOODWILL AND THAT THE ASSESSEE - COMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE ASSESSEE - COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY THE INCOME - TAX APPELLATE TRIBUNAL ('THE ITAT', FOR SHORT). WE SEE NO REASON TO INTERFERE WITH THE FACTUAL FINDING. ONE MORE ASPECT WHICH NEEDS TO BE MEN TIONED IS THAT, AGAINST THE DECISION OF THE INCOME - TAX APPELLATE TRIBUNAL, THE REVENUE HAD PREFERRED AN APPEAL TO THE HIGH COURT IN WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHETHER GOODWILL IS AN ASSET UNDER SECTION 32 OF THE ACT. IN THE CIRCUMSTANCES, BEFORE THE HIGH COURT, THE REVENUE DID NOT FILE AN APPEAL ON THE FINDING OF FACT REFERRED TO HEREINABOVE. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 10 FOR THE AFORE - STATED REASONS, WE ANSWER QUESTION NO. (B) ALSO IN FAVOUR OF THE ASSESSEE. QUESTION NO. (C) WITHOUT GOING INTO THE CONTROVERSY OF ALLOW BILITY OF DEPRECIATION ON OTHER TANGIBLE ASSETS WHEN THE AO HAS ACCEPTED THE PAYMENT IN QUESTION FOR GOODWILL THEN IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF M/S SMIFS SECURITIES LTD (SUPRA), THE DEPRECIATION IS ALLOWABLE ON THE MARKETING KNOWHOW. HENCE, WE ALLOW THE CLAIM OF THE ASSESSEE. 1 8 . I.T.A. NO.3726/MUM/2011(AY - 2003 - 04) (BY REVENUE) 1 9 . THE REVENUE HAS RAISED FOLLOWING GROUNDS : 1. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN ALLOWING DEDUCTION U/S 54EC AMOUNTING TO RS.81.05 LACS ON THE SHORT TERM CAPITAL GAINS DERIVED FROM 'DEPRECIABLE ASSET' AS COMPUTED U/S 50, DESPITE THE EXPRESS PROVISION OF THE SECTION 54EC WHICH ALLOWS DEDUCTION FOR ONLY LONG TERM CAPI TAL GAINS.' 2. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN HOLDING THAT SECTION 234D IS APPLICABLE FOR AY 2004 - 05 ONWARDS.' 3. ' WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, WAS THE LD.CIT(A) JUSTIFIED IN CONCLUDING THAT M/S. CADBURY INDIA LIMITED HAS RECEIVED SEVERAL BENEFITS ON ACCOUNT OF PAYMENT OF TECHNICAL KNOWHOW ROYALTY AND WHETHER THE LD.CIT (A) WAS JUSTIFIED IN CONCLUDING THAT ROYALTY FOR TRADEMARK AT 1% AND T ECHNICAL KNOWHOW AT 1.25% FOR THE ENTIRE FY 2002 - 03 IS AT ARM'S LENGTH. 20 . GROUND NO.1 IS REGARDING DEDUCTION UNDER SECTION 54EC ON CAPITAL GAIN ARISING ON SALE OF DEPRECIA BLE ASSETS. THE ASSESSEE SOLD FLAT ON WHICH THE DEPRECIATION WAS CLAIMED AND ALL OWED TO THE ASSESSEE AND CLAIM ED DEDUCTION U/S 54EC ON THE GROUND THAT THE ASSESSEE HAS INVESTED THE PROCEEDS OF CAPITAL GAIN IN THE PRESCRIBED CAPITAL BONDS. THE AO TREATED THE GAIN ARISING OUT OF SALE OF DEPRECIABLE ASSETS AS SHORT TERM CAPITAL GAIN AND ACCORDINGLY, REJECTED THE CLAIM OF THE ASSESSEE U/S 54EC . ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 11 2 1 . ON APPEAL, THE LD. CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V/S ACE BUILDERS PVT. LTD [2006] 281 ITR 210 (B OM) 2 2 . WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTICE THAT THIS IS COVERED BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ACE BUILDERS (SUPRA). THE HONBLE HIGH COURT HAS HELD AS U NDER(PG:217 TO 220): 20.. . SECTION 50 IS A SPECIAL PROVISION FOR COMPUTING THE CAPITAL GAINS IN THE CASE OF DEPRECIABLE ASSETS AND THE SAME BEING RELEVANT FOR THE PURPOSE HEREIN, IS QUOTED HEREINBELOW : 50. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS. NOTWITHSTANDING ANYTHING CONTAINED IN CLAUSE (42A) OF SECTION 2, WHERE THE CAPITAL ASSET IS AN ASSET FORMING PART OF A BLOCK OF ASSETS IN RESPECT OF WHICH DEPRECIATION HAS BEEN ALLOWED UNDER THIS ACT OR UNDER THE INDIA N INCOME - TAX ACT, 1922 (11 OF 1922), THE PROVISIONS OF SECTIONS 48 AND 49 SHALL BE SUBJECT TO THE FOLLOWING MODIFICATIONS : (1) WHERE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE ASSET TOGETHER WITH THE FULL VALUE OF SUCH CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF ANY OTHER CAPITAL ASSET FALLING WITHIN THE BLOCK OF THE ASSETS DURING THE PREVIOUS YEAR, EXCEEDS THE AGGREGATE OF THE FOLLOWING AMOUNTS, NAMELY : (I) EXPENDITURE INCURRED WHO LLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER OR TRANSFERS ; (II) THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR ; AND (III) THE ACTUAL COST OF ANY ASSET FALLING WITHIN THE BLOCK OF ASSETS ACQUIRED DURING THE P REVIOUS YEAR, SUCH EXCESS SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT - TERM CAPITAL ASSETS ; (2) WHERE ANY BLOCK OF ASSETS CEASES TO EXIST AS SUCH, FOR THE REASON THAT ALL THE ASSETS IN THAT BLOCK ARE TRANSFERRED DURING THE PREVIOUS YEAR, THE COST OF ACQUISITION OF THE BLOCK OF ASSETS SHALL BE THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR, AS INCREASED BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK OF ASSETS, ACQUIRED BY THE AS SESSEE DURING THE PREVIOUS YEAR AND THE INCOME RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER OR TRANSFERS SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT - TERM CAPITAL ASSETS. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 12 21. ON A PERUSAL OF THE AFORESAID PROVISIONS, IT IS SEEN THAT SECTION 45 IS A CHARGING SECTION AND SECTIONS 48 AND 49 ARE THE MACHINERY SECTIONS FOR COMPUTATION OF CAPITAL GAINS. HOWEVER, SECTION 50 CARVES OUT AN EXCEPTION IN RESPECT OF DEPRECIABLE ASSETS AND PROVIDES THAT WHERE DEPRECIATION HAS BEEN CL AIMED AND ALLOWED ON THE ASSET, THEN, THE COMPUTATION OF CAPITAL GAIN ON TRANSFER OF SUCH ASSET UNDER SECTIONS 48 AND 49 SHALL BE AS MODIFIED UNDER SECTION 50. IN OTHER WORDS, SECTION 50 PROVIDES A DIFFERENT METHOD FOR COMPUTATION OF CAPITAL GAIN IN THE CA SE OF CAPITAL ASSETS ON WHICH DEPRECIATION HAS BEEN ALLOWED. 22. UNDER THE MACHINERY SECTIONS THE CAPITAL GAINS ARE COMPUTED BY DEDUCTING FROM THE CONSIDERATION RECEIVED ON TRANSFER OF A CAPITAL ASSET, THE COST OF ACQUISITION, THE COST OF IMPROVEMENT AND THE EXPENDITURE INCURRED IN CONNECTION WITH THE TRANSFER. THE MEANING OF THE EXPRESSIONS COST OF IMPROVEMENT AND COST OF ACQUISITION USED IN SECTIONS 48 AND 49 ARE GIVEN IN SECTION 55. AS THE DEPRECIABLE CAPITAL ASSETS HAVE ALSO AVAILED OF DEPRECIATION ALLOWANCE UNDER SECTION 32, SECTION 50 PROVIDES FOR A SPECIAL PROCEDURE FOR COMPUTATION OF CAPITAL GAINS IN THE CASE OF DEPRECIABLE ASSETS. SECTION 50(1) DEALS WITH THE CASES WHERE ANY BLOCK OF DEPRECIABLE ASSETS DOES NOT CEASE TO EXIST ON ACCOUNT OF TRAN SFER AND SECTION 50(2) DEALS WITH CASES WHERE THE BLOCK OF DEPRECIABLE ASSETS CEASES TO EXIST IN THAT BLOCK ON ACCOUNT OF TRANSFER DURING THE PREVIOUS YEAR. IN THE PRESENT CASE, ON TRANSFER OF A DEPRECIABLE CAPITAL ASSET THE ENTIRE BLOCK OF ASSETS HAS CEAS ED TO EXIST AND, THEREFORE, SECTION 50(2) IS ATTRACTED. THE EFFECT OF SECTION 50(2) IS THAT WHERE THE CONSIDERATION RECEIVED ON TRANSFER OF ALL THE DEPRECIABLE ASSETS IN THE BLOCK EXCEEDS THE WRITTEN DOWN VALUE OF THE BLOCK, THEN THE EXCESS IS TAXABLE AS A DEEMED SHORT - TERM CAPITAL GAINS. IN OTHER WORDS, EVEN THOUGH THE ENTIRE BLOCK OF ASSETS TRANSFERRED ARE LONG - TERM CAPITAL ASSETS AND THE CONSIDERATION RECEIVED ON SUCH TRANSFER EXCEEDS THE WRITTEN DOWN VALUE, THE SAID EXCESS IS LIABLE TO BE TREATED AS CAP ITAL GAIN ARISING OUT OF A SHORT - TERM CAPITAL ASSET AND TAXED ACCORDINGLY. 23. THE QUESTION REQUIRED TO BE CONSIDERED IN THE PRESENT CASE IS, WHETHER THE DEEMING FICTION CREATED UNDER SECTION 50 IS RESTRICTED TO SECTION 50 ONLY OR IS IT APPLICABLE TO SECT ION 54E OF THE INCOME - TAX ACT AS WELL ? IN OTHER WORDS, THE QUESTION IS, WHERE THE LONG - TERM CAPITAL GAIN ARISES ON TRANSFER OF A DEPRECIABLE LONG - TERM CAPITAL ASSET, WHETHER THE ASSESSEE CAN BE DENIED EXEMPTION UNDER SECTION 54E MERELY BECAUSE, SECTION 50 PROVIDES THAT THE COMPUTATION OF SUCH CAPITAL GAINS SHOULD BE DONE AS IF ARISING FROM THE TRANSFER OF SHORT - TERM CAPITAL ASSET ? 24. SECTION 54E OF THE INCOME - TAX ACT GRANTS EXEMPTION FROM PAYMENT OF CAPITAL GAINS TAX, WHERE THE WHOLE OR PART OF THE NET CONSIDERATION RECEIVED FROM THE TRANSFER OF A LONG - TERM CAPITAL ASSET IS INVESTED OR DEPOSITED IN A SPECIFIED ASSET WITHIN A PERIOD OF SIX MONTHS AFTER THE DATE OF SUCH TRANSFER. IN THE PRESENT CASE IT IS NOT IN DISPUTE THAT THE ASSESSEE FULFILS ALL THE CO NDITIONS SET OUT IN SECTION 54E TO AVAIL OF THE EXEMPTION, BUT THE EXEMPTION IS SOUGHT TO BE DENIED IN VIEW OF FICTION CREATED UNDER SECTION 50. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 13 25. IN OUR OPINION, THE ASSESSEE CANNOT BE DENIED EXEMPTION UNDER SECTION 54E, BECAUSE, FIRSTLY, THERE IS NOTH ING IN SECTION 50 TO SUGGEST THAT THE FICTION CREATED IN SECTION 50 IS NOT ONLY RESTRICTED TO SECTIONS 48 AND 49 BUT ALSO APPLIES TO OTHER PROVISIONS. ON THE CONTRARY, SECTION 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTION CREATED IN SUB - SECTIONS (1) AND (2) OF SECTION 50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATION OF CAPITAL GAINS CONTAINED IN SECTIONS 48 AND 49. SECONDLY, IT IS WELL ESTABLISHED IN LAW THAT A FICTION CREATED BY THE LEGISLATURE HAS TO BE CONFINED TO THE PURPOSE FOR WHICH IT IS CREAT ED. IN THIS CONNECTION, WE MAY REFER TO THE DECISION OF THE APEX COURT IN THE CASE OF STATE BANK OF INDIA V. D. HANUMANTHA RAO REPORTED IN [1998] 6 SCC 183. IN THAT CASE, THE SERVICE RULES FRAMED BY THE BANK PROVIDED FOR GRANTING EXTENSION OF SERVICE TO TH OSE APPOINTED PRIOR TO JULY 19, 1969. THE RESPONDENT THEREIN WHO HAD JOINED THE BANK ON JULY 1, 1972, CLAIMED EXTENSION OF SERVICE BECAUSE HE WAS DEEMED TO BE APPOINTED IN THE BANK WITH EFFECT FROM OCTOBER 26, 1965, FOR THE PURPOSE OF SENIORITY, PAY AND PE NSION ON ACCOUNT OF HIS PAST SERVICE IN THE ARMY AS SHORT SERVICE COMMISSIONED OFFICER. IN THAT CONTEXT, THE APEX COURT HAS HELD THAT THE LEGAL FICTION CREATED FOR THE LIMITED PURPOSE OF SENIORITY, PAY AND PENSION CANNOT BE EXTENDED FOR OTHER PURPOSES. APP LYING THE RATIO OF THE SAID JUDGMENT, WE ARE OF THE OPINION, THAT THE FICTION CREATED UNDER SECTION 50 IS CONFINED TO THE COMPUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. THIRDLY, SECTION 54E DOES NOT MAKE ANY DISTINCTION BETWEEN DEPRE CIABLE ASSET AND NON - DEPRECIABLE ASSET AND, THEREFORE, THE EXEMPTION AVAILABLE TO THE DEPRECIABLE ASSET UNDER SECTION 54E CANNOT BE DENIED BY REFERRING TO THE FICTION CREATED UNDER SECTION 50. SECTION 54E SPECIFICALLY PROVIDES THAT WHERE CAPITAL GAIN ARISI NG ON TRANSFER OF A LONG - TERM CAPITAL ASSET IS INVESTED OR DEPOSITED (WHOLE OR ANY PART OF THE NET CONSIDERATION) IN THE SPECIFIED ASSETS, THE ASSESSEE SHALL NOT BE CHARGED TO CAPITAL GAINS. THEREFORE, THE EXEMPTION UNDER SECTION 54E OF THE INCOME - TAX ACT CANNOT BE DENIED TO THE ASSESSEE ON ACCOUNT OF THE FICTION CREATED IN SECTION 50. 26. IT IS TRUE THAT SECTION 50 IS ENACTED WITH THE OBJECT OF DENYING MULTIPLE BENEFITS TO THE OWNERS OF DEPRECIABLE ASSETS. HOWEVER, THAT RESTRICTION IS LIMITED TO THE COMPU TATION OF CAPITAL GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WHERE THE LONG - TERM CAPITAL ASSET HAS AVAILED OF DEPRECIATION, THEN THE CAPITAL GAIN HAS TO BE COMPUTED IN THE MANNER PRESCRIBED UNDER SECTION 50 AND THE CAPITAL GAINS TAX WILL BE CHARGED AS IF SUCH CAPITAL GAIN HAS ARISEN OUT OF A SHORT - TERM CAPITAL ASSET BUT IF SUCH CAPITAL GAIN IS INVESTED IN THE MANNER PRESCRIBED IN SECTION 54E, THEN THE CAPITAL GAIN SHALL NOT BE CHARGED UNDER SECTION 45 OF THE INCOME - TAX ACT. TO PUT IT SIMPLY, THE BENEFIT OF SECTION 54E WILL BE AVAILABLE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE COMPUTATION OF CAPITAL GAINS IS DONE EITHER UNDER SECTIONS 48 AND 49 OR UNDER SECTION 50. THE CONTENTION OF THE REVENUE THAT BY AMENDMENT TO SECTION 50 THE LONG - TERM CAPITAL ASSET HAS BEEN CONVERTED INTO A SHORT - TERM CAPITAL ASSET IS ALSO WITHOUT ANY MERIT. AS STATED HEREINABOVE, THE LEGAL FICTION CREATED BY THE STATUTE IS TO DEEM THE CAPITAL GAIN AS SHORT - TERM CAPITAL GAIN AND NOT TO DEEM THE ASSET AS SHORTTERM CAPITAL ASSET. THEREFORE, IT CANNOT BE SAID THAT SECTION 50 CONVERTS A LONG - TERM CAPITAL ASSET INTO A SHORT - TERM CAPITAL ASSET. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 14 2 3 . THUS, THE HONBLE HIGH COURT HELD THAT THE GAIN ARISING FROM THE SALE OF BUSINESS ASSET HELD BY THE ASSESSEE FOR MORE THAN THREE YEARS WOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 54EC OF THE ACT. FOLLOWING THE JUDGEMENT OF THE JU RISDICTIONAL HIGH COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND REJECT GROUND NO.1 OF REVENUE S APPEAL. 2 4 . GROUND N O.2 OF THE REVENUES APPEALS IS IN RESPECT OF INTEREST U/S 234D OF THE ACT. 2 5 . WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE RELEVANT MATERIAL ON RECORD . AT THE OUTSET, WE NOTE THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE JUDGMENT OF THE J URISDICTIONAL HIGH COURT IN THE CASE OF CIT V/S INDIAN OIL CORPN. LTD.[2012] 210 TAXMAN 466 (BOM) . WE FURTHER NOTE THAT THE SIMILAR ISSUE HAS BEEN DECIDED BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V/S GUJARAT STATE FINANCIAL SERVICES LTD (2 014) 49 TAXMANN.COM 221(GUJARAT) (270 CTR 83). FOLLOWING THE JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF INDIAN OIL CORPN. LTD. (SUPRA), WE SET ASIDE THE ORDER OF LD. CIT(A) ON THIS ISSUE AND RESTORE THE ORDER OF THE AO THAT SECTI ON 234D IS APPLICABLE TO THE YEAR UNDER CONSIDERATION. 2 6 . GROUND NO.3 IS REGARDING PAYMENT OF TECHNICAL KNOWHOW ROYALTY. 2 7 . THE AO PROPOSED THE ADJUSTMENT OF PAYMENT OF ROYALTY B Y RESTRICTING THE AMOUNT OF ROYALTY FOR TECHNICAL KNOWHOW TO 1% AS AGAINST 1.2 5 % CLAIMED BY THE ASSESSEE AND ON TRADE MARKET AMOUNT PRESCRIBED BY PRESS NOTE 1(2002) OF RBI . ON APPEAL, THE LD. CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE AND DELETED THE ADDITION BY FOLLOWING THE ORDERS FOR THE ASSESSMENT YEAR 2002 - 03. 2 8 . WE HA VE HEARD THE LD. DR AND LD.SR.COUNSEL FOR THE ASSESSEE AND CONSIDERED THE MATERIAL ON RECORD. WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE IN M/S CADBURY INDIA LIMITED V/S CIT IN ITA NO.7641/MUM/2010 (AY - 2 002 - 03) DATE 13.11.2013 AND VIDE PARAGRAPHS 37 TO 44 OF THE ORDER, THE TRIBUNAL HAS HELD AS UNDER : 37. WE HAVE HEARD THE DETAILED ARGUMENTS FROM BOTH THE SIDES. THE BASIC ISSUE IS THE CORRECTNESS OF ALP ON THE ROYALTY PAYMENTS MADE BY THE ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 15 ASSESSEE COMPA NY TO ITS PARENT AE ON ACCOUNT OF TECHNICAL KNOWHOW AND TRADEMARK USAGE. 38. FROM THE ARGUMENTS OF THE DR, MADE ON BEHALF OF THE TPO, THE AGREEMENT FOR PAYING ROYALTY ON TECHNICAL KNOW HOW AT 1.25% AND TRADEMARK USAGE AT 1.25%, WERE OVERLAPPING AND THUS, T NMM METHOD USED BY THE ASSESSEE WAS INCORRECT. ACCORDING TO THE TPO, THE BEST METHOD TO ASCERTAIN ALP IN THE INTEREST CASE WAS CUP, AS THE TRANSACTIONS WERE CONTROLLED. THIS WAS REASONABLE, AS NO DATA WAS AVAILABLE FROM INDEPENDENT SOURCE TO BENCHMARK THE TRANSACTIONS. 39. ON GOING THROUGH THE RECORDS AND THE ORDERS OF THE REVENUE AUTHORITIES, WE FIND THAT IN SO FAR AS THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW CONCERNED, THE ASSESSEE HAS BEEN PAYING TO ITSPARENT AE RIGHT FROM 1993, AS, OTHER GROUP COMPAN IES ARE PAYING ACROSS THE GLOBE. IT HAS BEEN ACCEPTED BY THE TPO THAT THE PAYMENT DOES NOT EFFECT THE PROFITABILITY OF THE ASSESSEE, IF WE ARE TO EXAMINE THE ISSUE FROM THAT ANGLE AS WELL. IN ANY CASE THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW IS AT PAR W ITH THE SIMILAR PAYMENTS FROM THE GROUP COMPANIES IN OTHER COUNTRIES & REGION. BESIDES THIS, THE PAYMENT IS MADE AS PER THE APPROVAL GIVEN BY THE RBI AND SIA, GOVERNMENT OF INDIA. HENCE THERE CANNOT BE ANY SCOPE OF DOUBT THAT THE ROYALTY PAYMENT ON TECHNIC AL KNOWHOW IS NOT AT ARMS LENGTH. 40. COMING TO THE ISSUE OF ROYALTY PAYMENT ON TRADEMARK USAGE, WE FIND THAT THE ASSESSEE, IN FACT IS PAYING A LESSER AMOUNT, IF THE PAYMENTS ARE COMPARED WITH THE PAYMENTS TOWARDS TRADEMARK USAGE, BY THE OTHER GROUP COMPA NIES USING THE BRAND CADBURY IN OTHER PARTS OF THE WORLD. ON THE OTHER HAND, IF WE EXAMINE THE ARGUMENT TAKEN BY THE TPO WITH REGARD TO OECD GUIDELINES. ON THIS POINT THE ASSESSEES PAYMENT IS COMING TO A LESSER FIGURE, AS DISCUSSED IN DETAIL BY THE CIT(A) . 41. WE ARE NOT GOING INTO THE ARGUMENTS ADVANCED BY THE DR/TPO ON GEOGRAPHICAL DIFFERENCES, AND PAYMENTS MADE TO HARSHEY, AS THESE ARGUMENTS GETS MERGED IN THE INTERPRETATION AND DETAILS AVAILABLE IN THE TABLE SUPPLIED BY THE ASSESSEE AND TAKEN NOTE OF BY THE TPO AND THE CIT(A). 42. WE ARE ALSO NOT REFERRING TO THE CASE OF MARUTI SUZUKI LTD. AS WE FIND THAT IN SO FAR AS THE INSTANT CASE IS CONCERNED, THERE IS REALLY NO RELEVANCE. 43. ON THE BASIS OF THE ABOVE OBSERVATIONS, WE ARE OF THE OPINION THAT TH E ROYALTY PAYMENT ON TRADEMARK USAGE IS WITHIN THE ARMS LENGTH AND DOES NOT CALL FOR ANY ADJUSTMENT. 44. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) AND REJECT THE GROUNDS AS CLAIMED BY THE DEPARTMENT. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 16 2 9 . FOLLOWING THE EARLIER ORDER OF THE TRIBUN AL, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE LD. CIT(A) AND ALLOWED THIS GROUND. 30 . I . T.A. NO.4205/MUM/2011(AY:2004 - 05)(BY ASSESSEE) 3 1 . THE ASSESSEE HAS RAISED FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF NOT TREATING INTEREST INCOME OF RS. 4,04,75,130/ - AS BUSINESS INCOME BUT ASSESSING AS INCOME FOR OTHER SOURCES FOR COMPUTING THE DEDUCTION U/S 8 0 - HHC OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF NOT EXCLUDING NET INTEREST FOR COMPUTING THE DEDUCTION U/S 80 - HHC OF THE ACT. FOR THE PURPOSES OF SECTION 80HHC, IT IS 90% OF NET INTEREST THAT HAS TO BE EXCLUDED INSTEAD OF 90% OF GROSS INTEREST RECEIVED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF TREATING SCRAP SALES OF RS.86,59,448, SALE OF OLD NEWSPAPER AMOUNTING TO RS.4998/ - AND SALE OF COCOA BEANS AMOUNTING TO RS.38,13,165/ - AS ADDITION TO THE TOTAL TURNOVER FOR COMPUTING THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRED IN NOT CONSIDERING AND DIRECTING THE ASSESSING OFFICER TO ALLOW THE DEDUCTION OF RS.11,66,296/ - BEING PROVISION TOWA RDS LIABILITY OF CONTRACTUAL OBLIGATION TO THE THIRD PARTY MANUFACTURERS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING TH E DEPRECIATION AMOUNTING TO RS.40,45,344/ - ON THE MARKETING KNOWHOW CAPITALIZED, ON ACCOUNT OF ACQUISITION OF NON - CHOCOLATE CONFECTIONARY BUSINESS OF M/S. WARNER LAMBERT (I) PVT. LTD 3 2 . AS , IT IS CLEAR FROM THE GROUNDS FOR THE ASSESSMENT YEAR 2004 - 05, T HAT THESE GROUNDS ARE IDENTICAL AND COMMON TO THAT OF ASSESSMENT YEAR 2003 - 04 . ACCORDINGLY, IN VIEW OF OUR FINDINGS IN RESPECT OF APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2003 - 04, THE GROUNDS FOR THE ASSESSMENT YEAR 2004 - 05 STAND DISPOSED OFF. ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 17 3 3 . I.T.A. NO.4451/MUM/2011 (AY: 2004 - 05) (BY REVENUE) 3 4 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN ALLOWING THE LOSS ON EXCHANGE FLUCTUATION ON A CCOUNT OF VALUATION OF BALANCE LYING IN THE EXPORT EARNERS FOREIGN CURRENCY ACCOUNT AMOUNTING TO RS. 10.74 LACS, DESPITE THE FACT THAT THE LOSS INCURRED WAS 'NOTIONAL' AND THE SAME HAD NOT CRYSTALLIZED DURING THE YEAR UNDER CONSTRUCTION.' 2. 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT (A) JUSTIFIED IN ALLOWING RELIEF FOR THE DISALLOWANCE MADE U/S 14A, DESPI TE THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE WHERE IT WAS HELD THAT DIVIDEND INCO ME IS TO BE CONSIDERED FOR MAKING DISALLOWANCE U/S 14A AND THE AO WAS DUTY BOUND TO DETERMINE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO THE INCOME WHICH DID NOT FORM PART OF TOTAL INCOME UNDER THE ACT BY ADOPTING A REASONABLE BASIS CONSISTENT WITH ALL RELEVANT FACTS & CIRCUMSTANCES. ' 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WAS THE LD. CIT(A) JUSTIFIED IN CONCLUDING THAT M/S. CADBURY INDIA LIMITED HAS RECEIVED SEVERAL BENEFITS ON ACCOUNT OF PAYMENT OF TECHNICAL KNO WHOW ROYALTY AND WHETHER THE LD. CIT(A) WAS JUSTIFIED IN CONCLUDING THAT ROYALTY FOR TRADEMARK AT 1% AND TECHNICAL KNOWHOW AT 1.25% FOR THE ENTIRE FY 2001 - 02 IS AT ARM'S LENGTH?' 3 5 . THE GROUND NO.1 IS REGARDING DEDUCTION OF LOSS ON EXCHANGE FLUCTUATION IN RESPECT OF EXPORT EARNERS FOREIGN CURRENCY ACCOUNT. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE LD. SR.COUNSEL SUBMITTED THAT THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX V/S WOODWARD GOVERNOR INDIA P. LTD.[2009] 312 ITR 254 (SC). 3 6 . AT THE OUTSET, WE NOTE THAT TJHE LD. CIT(A) HAS RE CORDED THE FACTS AND FINDING ON THIS ISSUE IN PARA 5.7 AND 5.8 OF THE ORDER WHICH ARE REPRO D UCED BELOW: ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 18 5.7 IT WAS EMPHASIZED THAT IF THE LOSS ON DEVALUATION WAS ON ACCOUNT OF TRADING ASSET, IT WOULD BE TRADING LOSS, DEDUCTIBLE UNDER SEC 28 OR SECTION 37(1) OF THE ACT. IN THE PRESENT CASE, THE AMOUNT LYING IN EEFC ACCOUNT REPRESENTS THE EXPORT PROCEEDS WHICH ARE CREDITED TO THE SAID ACCOUNT. THUS, THE AMOUNT REALISED ON EXPORT SALES ARE CREDITED TO EEFC ACCOUNT AND THEREFORE BASED ON THE TEST LAID DOWN BY THE HON BLE SUPREME COURT IN COMMISSIONER OF INCOME - TAX VS WOODWARD GOVERNOR INDIA P LTD (SUPRA), THE LOSS OF REVALUATION OF TRADING ASSET IS A TRADING LOSS AND IS ALLOWABLE ASDEDUCTION WHILE COMPUTING BUSINESS INCOME. 5.8 I HAVE CONSIDERED THE FACTS AND SUBMISSIONS OF THE APPELLANT.THERE IS MERIT IN THE CLAIM OF THE APPELLANT THAT THE BALANCE OF FOREIGN CURRENCY I.E USD LYING IN ITS BANK ACCOUNT AT THE END OF THE FINANCIAL IS REQUIRED TO REVALUED BASED ON THE EXCHANGE RATE PREVAILING AT END OF THE YEAR. IN THE CASE OF THE APPELLANT, THE BALANCE IN THE EEFC ACCOUNT WAS ON ACCOUNT OF REA LISATION OF EXPORT PROCEEDS. THUS, THE LOSS ARISING ON REVALUATION OF FOREIGN CURRENCY BALANCE IN THE EEFC ACCOUNT IS ON THE TRADING ACCOUNT. THE HON BLE SUPREME COURT HAS HELD IN THE CASE OF WOODWARD GOVERNOR INDIA P LTD, SUPRA, AS WELL AS ONGC LTD., TH AT EXCHANGE LOSS ARISING ON TRADING ACCOUNT IS REVENUE IN NATURE AND HENCE, ALLOWABLE. I THEREFORE DIRECT THE AO TO DELETE THE DISALLOWANCE OF RS.10,74,639 BEING EXCHANGE FLUCTUATION LOSS ARISING ON ACCOUNT OF YEAR END VALUATION OF THE BALANCE LYING IN EEF C ACCOUNT. 3 7 . IT IS CLEAR FROM THE FACTS RECORDED BY THE LD.CIT(A) THAT THE AMOUNT LYING IN EEFC ACCOUNT REPRESENTS EXPORT PROCEEDS, CREDITED TO THE SAID ACCOUNT. THE LD.CIT(A) HAS DECIDED THIS ISSUE BY FOLLOWING THE JUDGMENT OF THE HONBLE SUPREME C OURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD(SUPRA) . H AVING REGARD TO THE UNDISPUTED FACTS THAT TH E BALANCE IN THE SAID ACCOUNT REPRESENTS THE AMOUNT REALISED ON EXPORT SALE PROCEED, THEREFORE, THE JUDGMENT OF THE HONBLE SUPREME COURT IS APPLICABL E TO THE FACTS OF THE PRESENT CASE. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE LD. CIT(A) QUA THIS ISSUE. 3 8 . GROUND NO.2 IS REGARDING DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 3 9 . THE ASSESSEE HAS RECEIVED DIVIDEND INCOME FROM MUTUAL FUNDS AMOUNTING TO RS.3,64,10,101/ - AND INTEREST ON US64 BONDS AMOUNTING TO RS.1,09,093/ - ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 19 AND CLAIMED THE SAME EXEMPT UNDER SECTION 10(35) OF THE ACT. THE AO DISALLOWED THE HEAD OFFICE EXPENSE AMOUNTING TO RS.1,57,00,000/ - U/S 14A O F T HE ACT BY ALLOCATING IN PROPORTION OF EXEMPT INCOME AND NET PROFIT. ON APPEAL, THE ASSESSEE HAS CONTENDED THAT FOR MANAGING SUCH INVESTMENTS IN THE MUTUAL FUNDS PERIODICALLY TWO EXECUTIVES IN THE TREASURY DEPARTMENT SPEND AN HOUR EVERY DAY ON AN AVERAG E FOR MONITORING SUCH INVESTMENTS. ACCORDINGLY, THE ASSESSEE CLAIMED THAT 10% OF SALARY OF THE MANAGER AND 20% OF SALARY OF FINANCE OFFICER MAY BE CONSIDERED AS ALLOWABLE FOR EARNING THE EXEMPT INCOME. THE LD. CIT(A) HAS ACCEPTED THE CONTENTION OF THE ASSESSEE AND RESTRICTED THE DISALLOWANCE TO 10% OF SALARY OF MANAGER AND 20% OF FINANCE OFFICER RESPECTIVELY AMOUNTING TO RS.1,76,271/ - U/S 14A OF THE ACT . 40 . WE HAVE HEARD THE LD.DR AS WELL AS LD.SR.COUNSEL FOR THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE AO HAS ALLOCATED HEAD OFFICE EXPENSES IN THE RATIO OF NET PROFIT AND EXEMPT INCOME WHICH CANNOT BE ACCEPTED AS THERE IS NO BASIS OF SUCH ALLOCATION OF THE HEAD OFFICE EXPENSES IN PROPORTIONATE OF THE INCOME THE ADMINISTRATIVE EXP ENSES CANNOT BE APPORTIONED EQUALLY ON THE REGULAR BUSINESS INCOME AND EXEMPT INCOME BECAUSE THE EXEMPT INCOME IS EARNED FROM MERE INVESTMENT WHICH DOES NOT REQUIRE THE SAME DEGREE OF ATTENTION AND REGULAR ADMINISTRATIVE MANAGEMENT AS IN THE CASE OF REGUL AR BUSINESS ACTIVITY OF THE ASSESSEE . T HEREFORE, WE DO NOT FIND ANY BASIS OF ALLOCATION ADOPTED BY THE AO. AT THE SAME TIME, THE LD. CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESSEE ON THE BASIS OF THE SUBMISSIONS WITHOUT TAKING INTO CONSIDERATION ANY RECORD OR MATERIAL IN SUPPORT OF THE CLAIM THAT ONLY ONE HOUR IS SPENT BY THE OFFICERS OF THE ASSESSEE IN THE TREASURY DEPARTMENT FOR TH IS PURPOSES . ACCORDINGLY , IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE INTEREST OF JUSTICE AS WELL AS CONSIS TENT WITH THE VIEW TAKEN BY THIS TRIBUNAL IN SERIES OF DECISIONS THAT REASONABLE BASIS SHOULD BE ADOPTED FOR MAKING DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A , WE ARE OF THE OPINION THAT THE REASONABLE DISALLOWANCE WOULD BE 2% OF THE EXEMPT INCOME . ACCORDINGLY, WE MODIFY THE ORDERS OF AUTHORITIES BELOW. 4 1 . GROUND NO.3 IS REGARDING ADJUSTMENT MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ROYALTY PAYMENT FOR TECHNICAL KNOWHOW AND FOR T RADE ITA NO S . 3510/ M/11, 372 6 /M/11 , 4205/M/11 AND 4561 /M/201 1 20 M ARKS. THIS GROUND IS SIMILAR TO THAT OF THE G ROUND NO.3 O F THE REVENUE S APPEAL FOR THE ASSESSMENT YEAR 200 2 - 03 . IN VIEW OF OUR FINDINGS THEREIN FOR THE ASSESSMENT YEAR 200 2 - 03 , THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 4 2 . IN THE RESULT, THE ASSESSEES APPEALS AS WELL AS REVENUES APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH MAY, 2015 SD SD ( . / D. KARUNAKAR RAO) ( / VIJAY PAL RAO ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI: 13TH MAY , 2015 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPE LLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRU E COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI