M/s Maral Overseas Ltd., V. The JCIT, S. R. 2,

ITA 415/IND/2000

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2562 (ITAT-INDORE)
• Duration Of Justice: 9 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 15-12-2009
• Assessment Year: 1997-1998
• Appeal Filed On: 29-09-2000
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K K SINGH
• Keywords: Business expenditure
• Section: 143(3); 80HHC; 37(1); 10B; 251; 208; 263; 12

Judgement Text

PAGE 1 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI V.K. GUPTA, ACCOUNTANT MEMBER PAN NO. : N.A. I.T.A.NO. 415/IND/2000. A.Y 1997-1998 MARAL OVERSEAS LTD. C/O ARORA BANTHIA & TULSIYAN, CA 6 TH FLOOR, SILVER ARC PLAZA, 20/1, NEW PALASIA, INDORE JOINT COMMISSIONER OF INCOME TAX, INDORE VS APPELLANT RESPONDENT I.T.A.NO. 451/IND/2000 A.Y :1997-1998 JOINT COMMISSIONER OF INCOME TAX, INDORE MARAL OVERSEAS LTD. C/O ARORA BANTHIA & TULSIYAN, CA 6 TH FLOOR, SILVER ARC PLAZA, 20/1, NEW PALASIA, INDORE VS APPELLANT RESPONDENT I.T.A.NO. 206/IND/2003 A.Y. 1999-2000 MARAL OVERSEAS LTD. C/O ARORA BANTHIA & TULSIYAN, CA 6 TH FLOOR, SILVER ARC PLAZA, 20/1, NEW PALASIA, INDORE JOINT COMMISSIONER OF INCOME TAX, INDORE PAGE 2 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II VS APPELLANT RESPONDENT I.T.A.NO340/IND/2003 A.Y 1999-2000 JOINT COMMISSIONER OF INCOME TAX, INDORE MARAL OVERSEAS LTD. C/O ARORA BANTHIA & TULSIYAN, CA 6 TH FLOOR, SILVER ARC PLAZA, 20/1, NEW PALASIA, INDORE VS APPELLANT RESPONDENT ASSESSEE BY : SH AJAY TULSIYAN, CA DEPARTMENT BY : SHRI K.K.SINGH, CIT, DR DATE OF HEARING : 15.12.2009 O R D E R PER V.K. GUPTA, A.M. THESE CROSS APPEALS BELONG TO THE SAME ASSESSEE AND INVOLVE COMMON ISSUES, HENCE, THESE WERE HEARD TOGETHER AND THESE ARE BEING DISPOSED OF THROUGH THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE SHALL TAKE UP ASSESSEES APPEAL IN I.T.A. NO. 415/IND/2000. 3. GROUND NO. 1 READS AS UNDER:- THAT THE LEARNED CIT(A) IN MAINTAINING THE DISALLOW ANCE OF RS. 10,00,000/- BEING AMOUNT PAID BY THE APPELLA NT TO A PAGE 3 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II SCHOOL AND CLAIMED AS DEDUCTION UNDER THE HEAD STAF F WELFARE EXPENSES. IT IS SUBMITTED THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE SAID CLAIM OF THE AP PELLANT BEING LEGAL AND PROPER THE SAME, THEREFORE, NOW REQ UIRES TO BE ALLOWED. 4. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THI S ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY ORDER OF THE T RIBUNAL IN ASSESSEE OWN CASE FOR ASSESSMENT YEAR 95-96 AND 96-97 IN ITA NO. 251 & 252/IND/2001 ORDER DATED 26.11. 2009 AND DREW OUR A TTENTION ON PARA 9 OF THE SAID ORDER. THE LD DR ALSO AGREED. ACCORDINGLY, WE DECIDE THIS GROUND IN FAVOUR OF THE ASSESSEE AND FOR THE SAKE O F READY REFERENCE, WE REPRODUCE THE RELEVANT FINDINGS OF THE SAID ORDER O F THE TRIBUNAL AS UNDER :- WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS O F THE AUTHORITIES BELOW. IT IS NOTED THAT THE ASSESSEES FACTORY IS SITUATED 90 KMS. AWAY FROM INDORE IN A VILLAGE IN DISTRICT KHARGONE. IT IS ALSO NOTED THAT THE SOCIETY HAS BEE N FORMED TO RUN A SCHOOL WITH THE HELP OF TWO OTHER CORPORATE ENTITIES, HAVING FACTORY AT THE SAME LOCATION. IT IS ALSO NOTED THAT THE FACT THAT CHILD REN OF THE ASSESSEES EMPLOYEES ARE STUDYING IN THIS SCHOO L IS NOT IN DOUBT. IT IS FURTHER NOTED THAT THE GENUINEN ESS OF PAGE 4 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II INCURRENCE OF THIS EXPENDITURE IS ALSO NOT IN DISPU TE. IT IS ALSO NOTED THAT C.M.D. OF THIS COMPANY AND OTHER TWO STAFF OFFICIALS ARE HOLDING PROMINENT POSITION IN THE GOVERNING BODY OF THE SAID SCHOOL. IN THIS FACT UAL BACKGROUND, WE FIND THAT THE IMPUGNED SUM HAS NOT BEEN ALLOWED AS EXPENDITURE FIRSTLY FOR THE REASON THAT NO EXCLUSIVITY IS ATTACHED WITH THE ASSESSEE EITHER IN GOVERNING THE SCHOOL OR IN ADMISSION OF CHILDREN OF ITS EMPLOYEES I.E. THE CHILDREN OF OTHER PERSONS CAN AL SO STUDY. THE OTHER REASON IS THAT SCHOOL IS NOT SITUA TED IN THE FACTORY CAMPUS OF THE ASSESSEE. IN OUR VIEW, BO TH THESE REASONS ARE DEVOID OF ANY MERITS FOR DISALLOW ING SUCH EXPENDITURE AS IF THE SCHOOL WOULD HAVE BEEN SITUATED IN THE FACTORY PREMISES AND THE CHILDREN O F OTHER PERSONS WERE NOT STUDYING THEREIN, HOW THIS F ACT WOULD HAVE ENTITLED THE ASSESSEE TO CLAIM THE DEDUCTION. FURTHER, IF THE ENTRY OF THE OTHER PERSO NS WOULD HAVE BEEN RESTRICTED, THEN THE EXPENDITURE OF BURDEN ON THE ASSESSEE WOULD HAVE BEEN MUCH MORE AND IF THAT BE SO, THE ASSESSEE WOULD HAVE CLAIMED MORE EXPENDITURE AS BUSINESS EXPENDITURE. IT IS ALS O A SETTLED JUDICIAL PRINCIPLE THAT THE TERM WHOLLY AN D EXCLUSIVELY USED IN SECTION 37(1) CANNOT BE INTERPRETED IN A MANNER SO AS TO DISALLOW A GENUINE BUSINESS EXPENDITURE, IF THIRD PARTIES ARE ALSO BENEFITED THEREBY SO LONG SUCH EXPENDITURE HAS BEEN INCURRED IN THE COURSE OF CARRYING OF THE BUSINESS OF PAGE 5 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II THE ASSESSEE. HAVING STATED SO, WE ALSO FIND THAT T HE DECISIONS RELIED ON BY THE CIT(A) ARE TOTALLY OUT O F CONTEXT, HENCE, NOT RELEVANT. WE ARE FURTHER OF THE VIEW THAT IF A PAYMENT IS ELIGIBLE FOR DEDUCTION U/ S 80- G, THE SAME CANNOT BE DISALLOWED U/S 37(1) MERELY F OR THIS REASON IF SUCH EXPENDITURE SATISFIES THE OTHER CONDITIONS ATTACHED TO ALLOWABILITY OF A GENUINE BUSINESS EXPENDITURE, AS THESE PROVISIONS OPERATE I N DIFFERENT FIELDS. HOWEVER, AN ASSESSEE WOULD NOT BE ENTITLED TO CLAIM BENEFIT UNDER BOTH THESE SECTIONS SIMULTANEOUSLY ON THE SAME PAYMENT I.E. IF AN ASSES SEE HAS INCURRED AN EXPENDITURE OF CHARITABLE NATURE AN D GETS DEDUCTION OF 50% IN COMPUTING GROSS TOTAL INCOME U/S 80G, THEN, HE CANNOT CLAIM THE BALANCE 50% AS BUSINESS EXPENDITURE, AS ACTION OF THE ASSES SEE OF CLAIMING A DEDUCTION U/S 80-G RAISES A PRESUMPTI ON THAT SUCH EXPENDITURE HAS BEEN INCURRED AS A MATTER OF CHARITY AND NOT AS A BUSINESS EXPENDITURE. EQUALLY, THE REVENUE AUTHORITIES CANNOT DISALLOW A GENUINE BUSINESS EXPENDITURE, AS STATED EARLIER, MERELY FOR THE REASON THAT THE ASSESSEE COULD HAVE AVAILED DEDUCTI ON U/S 80-G, WHICH IT COULD NOT AVAIL, BECAUSE OF ABSE NCE OF POSITIVE PROFITS (I.E. GROSS TOTAL INCOME) . WE ARE FURTHER OF THE VIEW THAT WHEN THE CHILDREN OF ASSESSEES EMPLOYEES STUDY IN THIS SCHOOL, THE EMPLOYEES ARE FREE FROM THE BURDEN OF MAKING ARRANGEMENTS FOR THE EDUCATION OF THEIR CHILDREN, PAGE 6 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II WHICH RESULTS INTO HIGHER EFFICIENCY AND MOTIVATION , HAVING A POSITIVE EFFECT ON THE BUSINESS ACTIVITIES CARRYING ON BY AN ASSESSEE AND, THEREFORE, SUCH ACT OF AN ASSESSEE HAS TO BE CONSIDERED AS UNDERTAKEN IN T HE COURSE OF ITS BUSINESS ACTIVITIES AND FOR THE PURPO SE OF ITS BUSINESS. ACCORDINGLY, WE ACCEPT THIS CLAIM OF THE ASSESSEE AND DIRECT THE A.O. TO ALLOW THIS EXPENDIT URE AS BUSINESS EXPENDITURE. WE ARE FURTHER OF THE VIE W THAT JUDICIAL DECISIONS CITED BY THE ASSESSEE ALSO STRONGLY SUPPORT THE CLAIM OF THE ASSESSEE. THUS, T HIS GROUND OF THE ASSESSEE STANDS ALLOWED. 5. RESPECTFULLY FOLLOWING THE ABOVE DECISION IN THE CA SE OF THE ASSESSEE , WE ALLOW THIS GROUND OF THE ASSESSEE. 6. GROUND NO. 2 READS AS UNDER:- THAT THE LEARNED CIT (A) ERRED IN HOLDING THAT THE CLAIM OF THE APPELLANT FOR DEDUCTION U/S 35 D O F RS. 19,01,458/- WAS RIGHTLY RESTRICTED BY THE LEARN ED AO TO RS. 10,43,309/-. IT IS SUBMITTED THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE APPELLANT IS LEGALLY ENTITLED TO CLAIM DEDUCTION OF RS. 19,01,45 8 U/S 30 D AND THE SAME, THEREFORE, NOW REQUIRES TO B E ALLOWED IN FULL. 7. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT TWO ISSUES WERE INVOLVED IN THIS GROUND I.E FIRSTLY CALCULATION OF QUANTUM OF PRELIMINARY PAGE 7 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II EXPENSES COMPRISING OF SHARE ISSUE EXPENSES IN RESP ECT OF SHARE CAPITAL RAISED IN A.Y 92-93 & 95-96, SECONDLY, THE ELIGIBIL ITY OF ASSESSEE FOR WRITE OFF OF PRELIMINARY EXPENSES RELATING TO SHARE CAPITAL RAISED IN 95-96. HE FURTHER CONTENDED THAT BOTH THESE ISSUES WERE CO VERED BY THE SAID DECISION OF THE TRIBUNAL AND REFERRED TO PARA 16 & 17 OF THE SAID ORDER. THE LD DR, HOWEVER, PREFERRED TO RELY ON THE ORDER OF LD. CIT. 8. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH TH E SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 9. WE FIND THAT BOTH THE ISSUE INVOLVED IN THIS GROUN D ARE COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEE OWN CAS E CITED SUPRA. HENCE, WE REPRODUCE THE RELEVANT FINDINGS OF THIS ORDER AS UNDER :- WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS O F THE AUTHORITIES BELOW. AT THE VERY OUT-SET, IT IS NOTED THAT THE A.O. HAS REJECTED THE CLAIM OF ASSESSEE U/S 35-D FOR ADDITIO NAL AMOUNT OF RS. 6,89,501/- ON THE GROUND THAT THE TOT AL SHARE ISSUE EXPENSES HAD ALREADY BEEN QUANTIFIED IN ASSESSMENT YEAR 1992-93 FOR THE REASON THAT THE PROVISIONS OF SECTION 35-D ITSELF PROVIDE THAT IF A N PAGE 8 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II ASSESSEE INCURS PRELIMINARY EXPENSES OF THE NATURE SPECIFIED THEREIN, IN CONNECTION WITH EXTENSION OR DIVERSIFICATION OF ASSESSEES BUSINESS, THEN, AS PE R THE PROVISIONS OF SECTION 35-D(1)(II), THE ASSESSEE SHA LL BE ENTITLED FOR WRITE OFF OF SUCH EXPENSES PROVIDED OT HER CONDITIONS SPECIFIED IN THAT SECTION ARE SATISFIED. AS REGARDS TO THE SATISFACTION OF THIS CONDITION, IT I S NOTED THAT IN THE DIRECTORS REPORT AT THE BACK OF PAGE 9 2 OF THE PAPER BOOK, IT IS MENTIONED THAT THE COMPANY PRIVATELY PLACED SHARES OF RS. 10/- EACH AT THE PREMIUM OF RS. 60/-. THE FACT OF EXPANSION/BIFURCAT ION BY THE ASSESSEE COMPANY IS ALSO MENTIONED THEREIN. THUS, CONDITIONS OF SECTION 35-D(1) ARE SATISFIED. WE HOLD THAT THE ASSESSEE IS ENTITLED FOR WRITE OFF OF PRELIMINARY EXPENSES INCURRED BY IT IN THIS YEAR. T HE SECOND ISSUE IS REGARDING COMPUTATION OF CAPITAL EMPLOYED TO WORK OUT ELIGIBLE AMOUNT, WHICH COULD B E WRITTEN OFF U/S 35-D OF THE ACT. IN THIS REGARD, IT IS NOTED THAT IN THE ASSESSMENT YEAR 1992-93, WHEN THI S ISSUE WAS DECIDED BY THE TRIBUNAL AGAINST THE ASSESSEE, THE DECISION OF THE HON'BLE GUJARAT HIGH PAGE 9 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 206 & 340/IND/2003 MARAL OVERSEAS LIMITED - II COURT IN THE CASE OF DY. CIT VS. CORE HEALTH CARE LIMITED AS REPORTED IN 308 ITR 263, HAD NOT BEEN PRONOUNCED, THOUGH THE MATTER HAD BEEN UNDER CONSIDERATION OF THE HON'BLE GUJARAT HIGH COURT. NOW, THIS DECISION HAS BEEN PRONOUNCED AND THE RELEVANT FINDINGS ARE AS UNDER :- UNDER THE EXPLANATION, CLAUSE (A) DEFINES COST OF PROJECT, CLAUSE (B) DEFINES CAPITAL EMPLOYED IN THE BUSINESS OF THE COMPANY, AND CLAUSE (C) DEFINES LON G- TERM BORROWINGS. IN CASE OF THE ASSESSEE THE FACTOR OF COST OF PROJECT IS NOT RELEVANT AND ONLY CAPITAL EMPLOYED IN THE BUSINESS OF THE COMPANY IS REQUIRED TO BE CONSIDERED, THAT ALSO AS DEFINED IN SUB-CLAUS E(II) OF CLAUSE (B) OF THE EXPLANATION WHICH TALKS OF AGGREGATE OF ISSUED SHARE CAPITAL, DEBENTURES AND LONG-TERM BORROWINGS AS ON THE LAST DAY OF THE PREVIOUS YEAR. LONG-TERM BORROWINGS MEANS UNDER SUB-CLAUSE (I) OF CLAUSE (C) OF THE EXPLANATION ANY MONEY BORROWED BY THE COMPANY FROM GOVERNMENT, OR THE INDUSTRIAL FINANCE CORPORATION OF INDIA OR T HE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF IND IA PAGE 10 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II OR ANY OTHER FINANCIAL INSTITUTION, WHICH IS FOR TH E TIME BEING APPROVED BY THE CENTRAL GOVERNMENT OR ANY BANKING INSTITUTION. THEREFORE, ON A PLAIN READING IT BECOMES APPARENT THAT THE BORROWING HAS TO BE FROM ANY OF THE FOUR ENTITIES MENTIONED IN SUB-CLAUSE (I ) OF CLAUSE (C) OF THE EXPLANATION. NO TIME LIMIT FOR TH E PURPOSE OF BORROWING IS LAID DOWN IN THE PROVISION. THIS ASSUMES SIGNIFICANCE WHEN ONE COMPARES THE SAME WITH SUB-CLAUSE (II) OF CLAUSE (C) OF THE EXPLANATION WHEREIN IT IS SPECIFIED THAT IT SHOULD BE A PERIOD OF NOT LESS THAN SEVEN YEARS. THUS, ONCE IT IS ESTABLISHED THAT THE BORROWING IS FROM ANY ONE OF THE FOUR ENTITIES AS SPECIFIED, THE SAME WOULD BE TREAT ED AS LONG-TERM BORROWINGS FOR THE PURPOSE OF WORKING OUT THE AGGREGATE OF CAPITAL EMPLOYED IN THE BUSINESS O F THE COMPANY. IN THE PRESENT CASE, AS FOUND BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL HAVE RIGHTL Y COME TO, THE CONCLUSION THAT THE AMOUNT IN QUESTION WAS REQUIRED TO BE INCLUDED FOR THE PURPOSE OF CAPI TAL EMPLOYED IN THE BUSINESS AND THE DIRECTION TO PAGE 11 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II RECOMPUTED THE DEDUCTION U/S 35-D OF THE ACT WAS PERFECTLY JUSTIFIED. WE ARE FURTHER OF THE VIEW THAT IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT WORKING CAPITAL HAS BEEN TAKEN FROM THE BANKING INSTITUTION AND THOUGH THE NOMENCLATURE AND ACTUAL NATURE IS OF WORKING CAPITA L, BUT IN REAL BUSINESS SITUATION, SUCH WORKING CAPITA L FACILITIES ARE CONTINUOUSLY ENJOYED BY THE ASSESSEE AND IN THE PRESENT CASE ALSO, IT IS NOT IN DISPUTE THAT , AT ANY POINT OF TIME, SUCH FACILITIES WERE REVOKED BY THE BANKING INSTITUTION. THUS, FOR ALL PRACTICAL PURPOS ES, THESE ARE OF THE NATURE OF LONG TERM FINANCE AVAILA BLE TO A BUSINESS CONCERN DEPENDING UPON THE LEVEL OF I TS OPERATION AND EXPENDITURE OF PRIMARY/COLLATERAL SECURITIES PROVIDED TO THE BANKING INSTITUTION. ACCORDINGLY, THIS ASPECT OF THE ISSUE IS ALSO DECID ED IN FAVOUR OF THE ASSESSEE. HAVING STATED SO, WE ARE OF THE VIEW THAT SINCE COMPOSITION OF EXPENDITURE AND ELIGIBILITY THEREOF IN TERMS OF PROVISIONS OF SECTI ON 35D(2) AND IN PARTICULAR OF SECTION 35D(2)(C)(IV), AS IT APPEARS TO BE A CASE OF PRIVATE PLACEMENT OF SH ARES PAGE 12 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II AND NOT OF PUBLIC SUBSCRIPTION OF SHARES, HAVE NOT BEEN EXAMINED. HENCE, WE RESTORE THIS ISSUE TO THE FILE OF A.O. FOR EXAMINATION OF THESE ASPECTS AND DECISION THEREON AS PER LAW. IT IS NEEDLESS TO MENTION THAT THE A.O. SHALL GRANT AN ADEQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE IN DOING SO. THUS, GROUND NO. 2 OF THE ASSESSEES APPEAL IS PARTLY ALLOWED IN TERMS INDICA TED ABOVE. 10. ACCORDINGLY, WE HOLD THAT WORKING CAPITAL BORROWIN GS SHOULD BE CONSIDERED AS PART OF CAPITAL EMPLOYED. THE OTHE R ISSUE REGARDING ALLOWABILITY OF SHARE ISSUE EXPENSES INCURRED IN AS SESSMENT YEAR 1995-96 INVOLVED IN THIS GROUND IS RESTORED TO THE FILE OF AO TO BE DISPOSED OFF ON THE SIMILAR LINES. THUS, THIS GROUND OF THE ASSESSE E IS PARTLY ALLOWED IN TERMS INDICATED ABOVE. 11. GROUND NO. 3 READS AS UNDER:- THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT INTEREST EARNED BY THE APPELLANT DO NOT QUALIFY FOR EXEMPTION U/S 10B. IT IS SUBMITTED THAT ON THE FACT S AND IN THE CIRCUMSTANCES OF THE CASE, THE TOTAL INT EREST EARNED BY THE APPELLANT REQUIRES TO BE ADJUSTED AGA INST INTEREST PAID BY THE APPELLANT. SINCE THE SAID CLAI M OF PAGE 13 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II THE APPELLANT, BEING LEGAL AND PROPER, THE SAME REQUIRES TO BE ALLOWED. 12. THIS GROUND WAS NOT PRESSED, HENCE, DISMISSED AS N OT PRESSED. 13. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PAR TLY ALLOWED. 14. NOW, WE SHALL TAKE UP REVENUES APPEAL IN I.T.A.NO. 451/IND/2000. 15. GROUND NO. 1 READS AS UNDER :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS. 4,08,775 MADE BY THE ASSESSING OFFICER ON ACCOU NT OF EXPENDITURE ON VISITS OF FOREIGN BUYERS, THEIR REPRESENTATIVES AND BANK OFFICERS. 16. THE FACTS RELATING TO GROUND NO.1, IN BRIEF, ARE T HAT THE ASSESSEE IS 100 % EXPORT ORIENTED UNDERTAKING. THE ASSESSEE INCURRED A SUM OF RS. 10,25,216/- IN RESPECT OF VISITS OF FOREIGN BUYERS. A SUM OF RS. 53,461/- WAS SIMILARLY SPENT ON THE VISITS OF BANK OFFICIALS . THE A.O. FORMED A PRIMA FACIE VIEW THAT SUCH EXPENSES WERE IN THE NAT URE OF ENTERTAINMENT EXPENSES AS THE TAX AUDITORS HAD ALSO OBSERVED THAT EXPENSES WORTH RS. 2,60,728/- AND RS. 400/- RESPECTIVELY WERE OF THE N ATURE OF ENTERTAINMENT EXPENSES WHICH WERE DISALLOWED BY THE ASSESSEE SUO- MOTU. THE A.O. FURTHER NOTED THAT THE EXPENSES ON TRAVELING OF FOR EIGN BUYERS AND OTHERS PAGE 14 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II HAD NOT BEEN DISALLOWED UNDER RULE 6-D. THE A.O. AL SO HELD THAT THE ASSESSEE DID NOT PROVE THAT ALL THE BUYERS WHO HAD VISITED THE FACTORY WERE NEW CUSTOMERS. ACCORDINGLY, HE DISALLOWED 50 % OF R EMAINING EXPENSES AND MADE ADDITION OF RS. 4,08,075/- TO THE TOTAL IN COME OF THE ASSESSEE. 17. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER INTO APPEAL BEFORE THE LD. CIT(A), WHEREIN THE ASSESSEE NARRATE D THE OPERATIONAL PROCEDURE INVOLVED. HENCE, HE CONTENDED THAT SUCH E XPENDITURE WAS BUSINESS NECESSITY. IT WAS ALSO CONTENDED THAT WHAT EVER EXPENSES WERE OF THE NATURE OF THE ENTERTAINMENT EXPENDITURE, THE SA ME HAD BEEN DISALLOWED SUO MOTU. HENCE, NO FURTHER DISALLOWANCE WAS WARRANTED. THE LD. CIT(A) FOLLOWING THE APPELLATE ORDER FOR ASSESS MENT YEAR 1993-94 DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. 18. THE LD. DEPARTMENTAL REPRESENTATIVE NARRATED THE FA CTS AND CONTENDED THAT IN THE YEAR UNDER CONSIDERATION PRO VISIONS OF SECTION 37(2) WERE APPLICABLE AND, THEREFORE, THE EXPENSES INCURRED BY THE ASSESSEE ON THE HOSPITABILITY PROVIDED TO ANY OTHER PERSONS WERE TO BE DISALLOWED TO THE EXTENT OF 50 % THEREUNDER. 19. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, BESIDES REITERATING THE SUBMISSIONS MADE BEFORE THE LD. CIT (A) DREW OUR ATTENTION TO PAGE 49 TO 51A OF THE PAPER BOOK TO SH OW THE BIFURCATION OF PAGE 15 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II THESE EXPENSES. ACCORDINGLY, HE CONTENDED THAT THES E EXPENSES COMPRISED OF HOTEL CHARGES, TAXI CHARGES, LUNCH/DINNER EXPENS ES, TRAVELING EXPENSES AND LUNCH/DINNER EXPENSES WERE ALREADY DISALLOWED A ND THE REMAINING EXPENSES COULD NOT BE CONSIDERED AS OF THE NATURE O F ENTERTAINMENT EXPENSES. HE FURTHER CONTENDED THAT TRAVELING EXPEN SES WERE ALSO DISALLOWED UNDER RULE 6-D. HOWEVER, WHEN CONFRONTED WITH THE OBSERVATIONS OF THE A.O. IN THIS REGARD AND THE QUA NTUM OF DISALLOWANCE UNDER RULE 6-D VIS--VIS TOTAL TRAVELING EXPENSES, THE LEARNED COUNSEL COULD NOT GIVE ANY EFFECTIVE REPLY. THEREAFTER, HE DREW OUR ATTENTION TO THE LETTER OF THE BANK REQUIRING THE ASSESSEE TO BEAR T HE EXPENSES ON TRAVELING , LOCAL CONVEYANCE, LODGING, BOARDING IN CONNECTION WITH THE INSPECTIONS AND STOCK VERIFICATION TO BE CARRIED OUT BY THE BA NK. HENCE, SUCH EXPENSES, BEING INCURRED IN TERMS OF AN AGREEMENT, COULD NOT BE DISALLOWED AT ALL. HE FURTHER DREW OUR ATTENTION TO PAGE 44 TO 48 OF THE PAPER BOOK CONTAINING COPIES OF APPELLATE ORDER FOR ASSESSMENT YEAR 1993-94, WHEREIN THE LD. CIT(A) HAD DECIDED THIS IS SUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING VARIOUS JUDICIAL DECISIONS. T HE LEARNED COUNSEL REFERRED TO THE DECISION OF THE HON'BLE ANDHRA PRAD ESH HIGH COURT IN THE CASE OF ACIT VS. HADDI VENKAT RATNAM & CO. PRIVATE LIMITED, AS REPORTED IN 119 ITR 514, WHICH WAS SUBSEQUENTLY CON FIRMED BY THE HON'BLE SUPREME COURT BY DISMISSAL OF S.L.P. AS REP ORTED IN 187 ITR 66 PAGE 16 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II (STATUTE) AND ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF KIRLOSKAR OIL ENGINE LIMITED AS REPORTED IN 157 ITR 762. HE FURTHER DREW OUR ATTENTION TO PAGE 8 OF THE PAPER B OOK CONTAINING REPLY OF THE ASSESSEE TO THE JT. CIT DATED 11 TH MARCH,2000, WHEREIN IT HAD BEEN STATED THAT SUCH EXPENDITURE COMPRISED OF EXPENDITU RE INCURRED AS PER TERMS AND CONDITIONS OF AGREEMENT WITH THE TECHNICI AN FOR REPAIRS AND MAINTENANCE OF EQUIPMENTS, HENCE, PART AND PARCEL O F THEIR CHARGES AND, THEREFORE, NOTHING COULD BE DISALLOWED. 20. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 21. IT IS NOTED THAT THE ASSESSEE IS A 100 % E.O.U. IT IS FURTHER NOTED THAT THE ASSESSEE IS ALSO AVAILING FACILITIES FROM BANKING INSTITUTIONS. IT IS ALSO NOTED THAT VISITS OF VARIOUS FOREIGNERS BEING CUSTOMERS TAKE PLACE SO AS TO ASSESS THE ASSESSEES CAPABILITIES TO MEET TH E OBLIGATIONS AND ALSO TO SEE THE QUALITY PROCESSES FOLLOWED BY THE ASSESSEE. IT IS FURTHER NOTED THAT BANKING AUTHORITIES ALSO CARRIED OUT INSPECTIONS FR OM TIME TO TIME AND AS PER AGREEMENT WITH SUCH BANKING INSTITUTIONS, THE A SSESSEE IS TO PROVIDE HOSPITALITY. IT IS ALSO NOTED THAT ASSESSEES PLANT & MACHINERY ALSO REQUIRE REPAIRS AND MAINTENANCE WITH THE HELP OF FOREIGN SE RVICE ENGINEERS AND AS PER TERMS AND CONDITIONS OF CONTRACT WITH THEM, THE ASSESSEE IS PROVIDING ACCOMMODATION AND TRAVELLING ARRANGEMENTS TO THEM I N ADDITION TO PAGE 17 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II CHARGES PAYABLE TO THEM FOR THEIR SERVICES. THUS, I N REGARD TO SUCH ENGINEERS, THERE COULD BE A POSSIBILITY THAT THE AS SESSEE WOULD HAVE PAID GROSS AMOUNT AND SUCH ENGINEERS WOULD HAVE INCURRED THESE EXPENSES ON THEIR OWN, MEANING THEREBY THAT SUCH GROSS PAYMENTS WOULD HAVE BEEN ALLOWED TO THE ASSESSEE AS A BUSINESS EXPENDITURE A ND, THEREFORE, EXPENSES OF HOSPITABILITY INCURRED IN THIS CONNECTION CANNOT BE ALLOWED U/S 37(2). SIMILAR WOULD BE THE CASE WITH THE EXPENSES INCURRE D IN CONNECTION WITH THE VISITS OF BANKING PERSONNEL. AS REGARDS TO THE EXPENSES INCURRED IN CONNECTION WITH THE VISITS BY OTHER FOREIGN CUSTOME RS, WHAT IS TO BE SEEN IS THAT SUCH EXPENSES ARE INCURRED AS PER NORMAL BU SINESS COURTESY, ACCORDING TO THEIR STATUS, WHICH MAY BE ON HIGHER S IDE, BUT, IN OUR VIEW, SUCH EXPENSES HAVE TO BE ALLOWED HAVING REGARD TO T HE ABOVE FACTS. WE ALSO FIND SOME FORCE IN THE CONTENTION OF THE ASSES SEE THAT EXPENSES INCURRED ON TRAVELLING ETC. SHOULD NOT FALL WITHIN THE NATURE OF ENTERTAINMENT EXPENSES AS FOR THE PROVISIONS OF SEC TION 37(2) OF THE ACT. THUS, TAKING INTO CONSIDERATION ENTIRE FACTS, WE HO LD THAT THE ORDER OF THE LD. CIT(A) IS CORRECT IN LAW. HENCE, WE DISMISS THI S GROUND OF THE REVENUE. 22. GROUND NO. 2 READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS. PAGE 18 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 3,35,199/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DUE TO EXCESS/SHORT PROVISIONS MADE IN EARLIER YEARS. 23. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE CREDITED A SUM OF RS. 4,35,466/- IN THE PROFIT AND LOSS ACCOUNT ON ACCOUN T OF PROVISIONS WRITTEN BACK, WHICH WERE NOT REQUIRED. IN DOING SO, THE ASS ESSEE HAD REDUCED A SUM OF RS. 3,35,199/- FROM THE GROSS VALUE OF PROVI SIONS NO LONGER REQUIRED. HOWEVER, HE MADE AN ADDITION OF RS. 3,35 ,199/- FOR THE REASON THAT IT WAS RELATED TO EARLIER YEARS. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER INTO APPEAL BEFORE THE LD. CIT(A), WHERE IN THE ASSESSEE CONTENDED THAT SUCH SHORT PROVISIONS CRYSTALLIZED I N THE YEAR UNDER CONSIDERATION, HENCE ALLOWABLE IN THIS YEAR. THE AS SESSEE ALSO SUBMITTED THAT IN SOME CASES, A PROVISION WAS MADE ANTICIPATI NG THE RATE OF FLUCTUATION IN THE FOREIGN CURRENCY. HOWEVER, DUE T O MORE FLUCTUATION IN THE RATE OF CURRENCY ADDITIONAL PROVISION HAD TO BE MADE AND, THEREFORE, THE SAME WAS ALSO ALLOWABLE IN THE YEAR UNDER CONSI DERATION. THE LD. CIT(A) AGREEING WITH THIS CONTENTION DIRECTED THE A .O. TO MAKE THE ADJUSTMENT OF THE IMPUGNED SUM AGAINST THE AMOUNT O F RS. 7,69,664/- WRITTEN BACK AND CREDITED TO THE PROFIT AND LOSS AC COUNT. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. PAGE 19 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 24. THE LD. DR NARRATED THE FACTS AND PLACED RELIANCE O N THE ORDER OF THE AO. 25. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND , PLACED STRONG RELIANCE ON THE ORDER OF THE LD. CIT(A) AND ALSO SUBMITTED THAT THE ASSESSEE COMPANYS TURNOVER WAS AROUND RS. 144 CROR ES AND EXPENSES CLAIMED IN THE YEAR UNDER CONSIDERATION WERE TO THE TUNE OF RS. 125 CRORES AND DUE TO SUCH LEVEL OF BUSINESS OPERATIONS AND HA VING REGARD TO EXPORT TRANSACTIONS AS WELL, THESE SORTS OF ADJUSTMENTS WE RE NORMAL. 26. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 27. IT IS NOTED THAT THE ASSESSEE IS FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING. IT HAS MADE PROVISIONS OF EXPENSES/ LIA BILITIES BASED UPON THE FACTUAL SITUATION AS ON THE DATE OF THE CLOSING OF THE YEAR. HOWEVER, SUCH PROVISION, IN SOME CASES, IS SHORT OR, IN SOME CASE S IT IS IN EXCESS OF ACTUAL AMOUNT PAYABLE. SOME PROVISIONS, MADE EARLIER, ARE NO MORE REQUIRED. THUS, HAVING REGARD TO THESE FACTS, WE HOLD THAT TH E LD. CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE MADE BY THE ASSESS ING OFFICER. HENCE, THIS GROUND OF THE REVENUE IS DISMISSED 28. GROUND NO.3 READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS. PAGE 20 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 20,885/- MADE BY THE ASSESSING OFFICER ON ACCOUNT O F DEBIT BALANCE WRITTEN OFF. 29. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE WROTE OF F A SUM OF RS. 20,885/- COMPRISING OF AMOUNT DUE FROM STAFF, INTER EST ON WORKING CAPITAL AND AMOUNT DUE FROM M/S. SHILPUTSI CONSULTANTS. THE A.O., HOWEVER, REJECTED SUCH CLAIM OF THE ASSESSEE. IN APPEAL, THE ASSESSEE SUBMITTED THAT THESE DEBIT BALANCES WERE WRITTEN OFF DUE TO NO CHA NCES OF RECOVERY. IT WAS ALSO SUBMITTED THAT THESE AMOUNTS HAD BEEN ADVA NCED OR INCURRED IN THE COURSE OF CARRYING OF ITS BUSINESS ACTIVITIES, HENCE, ALLOWABLE AS BUSINESS LOSS. THE LD. CIT(A) ACCEPTED THESE CONTEN TIONS OF THE ASSESSEE AND DELETED SUCH DISALLOWANCE. AGGRIEVED BY THIS, T HE REVENUE IS IN APPEAL BEFORE US. 30. THE LD. DR NARRATED THE FACTS AND PLACED RELIANCE O N THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, PLACED STRONG RELIANCE ON THE ORDER OF THE LD. CIT(A). 31. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 32. IT IS NOTED THAT THE AMOUNT GIVEN TO STAFF IS NOT R ECOVERABLE DUE TO THE REASON THAT SUCH EMPLOYEES ARE NOT WITH THE ASSESSEE. IT IS ALSO NOTED THAT THE AMOUNT GIVEN TO M/S. SHILPUTSI CONSU LTANTS IS IN PAGE 21 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II CONNECTION WITH RECRUITMENT OF MAIN POWER FOR ASSES SEES BUSINESS. SIMILARLY, INTEREST ON WORKING CAPITAL IS ALSO CONN ECTED WITH THE ASSESSEES BUSINESS. HENCE, SUCH AMOUNTS HAVE GOT A NEXUS WITH THE ASSESSEES BUSINESS OPERATIONS AND, THEREFORE, NON- RECOVERY THEREOF IS A CASE OF LOSS INCIDENTAL TO BUSINESS, HENCE, ALLOWAB LE AS BUSINESS LOSS. ACCORDINGLY, WE CONFIRM THE DECISION OF THE LD. CIT (A). THUS THIS GROUND OF THE REVENUE IS ALSO DISMISSED. 33. GROUND NO. 4 READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE INCOME DERIVED FROM SPECIAL IMPORT LICENSES, DUTY DRAW BACK AND PREMIUM ON SALE OF SPECIAL IMPORT LICENSE ARE THE INCOME DERIVED FROM 100% EOU AND ARE ELIGIBLE FOR EXEMPTION U/S 10B OF INCOME TAX ACT. 34. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE IS 100 % EXPORT ORIENTED UNIT. THE A.O., IN THE COURSE OF ASSESSMEN T PROCEEDINGS NOTED THAT THE ASSESSEE HAD INCLUDED FOLLOWING INCOMES IN THE PROFIT OF THE EXPORT ORIENTED UNDERTAKING WHILE CLAIMING EXEMPTIO NS U/S 10B OF THE ACT :- (I) PREMIUM ON SALE OF SPECIAL IMPORT LICENCE RS. 1,19,05,617/- (II) DUTY DRAW BACK RS. 6,03,977/- PAGE 22 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II (III) SALE OF QUOTA RS. 9,66,650/- 35. THE A.O. HELD THAT SUCH INCOMES COULD NOT BE CONSID ERED AS DERIVED FROM EXPORT ORIENTED UNDERTAKING. HENCE, HE RELYING ON THE DECISION OF SC IN THE CASE OF CIT VS. STERLING FOOD S AS REPORTED IN 237 ITR 579 EXCLUDED THE SAME, WHILE COMPUTING EXEMPTIO N U/S 10-B OF THE ACT. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MA TTER INTO APPEAL BEFORE THE LD. CIT(A), WHEREIN IT WAS CONTENDED THAT THE A SSESSEE COMPANY WAS CLAIMING EXEMPTION U/S 10-B SINCE ASSESSMENT YEAR 1 992-93. HOWEVER, IN THE YEAR UNDER CONSIDERATION ONLY THE ASSESSEES CL AIM OF SUCH EXEMPTION WAS DENIED. THE ASSESSEE ALSO RELIED ON THE LANGUAG E OF THE PROVISIONS OF SECTION 10B. THE LD. CIT(A) HELD THAT THERE WAS A C LOSE AND DIRECT PROXIMITY BETWEEN 100 % E.O.U. AND RECEIPT OF DUTY DRAW BACK. HENCE, THE ASSESSEE WAS ELIGIBLE FOR EXEMPTION THEREON U/S 10B OF THE ACT. THE LD. CIT(A) ALSO HELD THAT IMPORT LICENCES ISSUED BY THE DESIGNATED AUTHORITY OF GOVERNMENT OF INDIA AS PER THE EXPORT IMPORT POLICY AND WHEN SUCH IMPORT LICENSES WERE SOLD, IT WAS A CASE OF SELLING SCRAP/WASTE AND, THEREFORE, IT WAS ALSO AN INTEGRAL PART OF E.O .U. OPERATIONS. AS REGARDS THE PROFIT OF SPECIAL IMPORT LICNECES, THE LD. CIT(A) HELD THAT SPECIAL IMPORT LICNECES WERE LIKE IMPORT ENTITLEMEN TS AVAILABLE TO THE ASSESSEE AS A RESULT OF EXPORT ACTIVITIES CARRIED O UT BY THE ASSESSEE. THE PAGE 23 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II LD. CIT(A) FURTHER HELD THAT THERE WAS A QUOTA SYST EM FOR MAKING EXPORTS AND IF AN ASSESSEE WAS HAVING AN ORDER, BUT NO QUOT A FOR THAT COUNTRY THEN HE COULD MAKE EXPORT TO THAT COUNTRY BY PURCHASING QUOTA FROM ANOTHER EXPORTER AND ,SIMILARLY, THE ASSESSEE COULD SELL IT S QUOTA TO NEEDY EXPORTER AND, THEREFORE, PROFIT ON SALE OF QUOTA EARNED BY T HE UNDERTAKING ON EXPORTS, WAS ALSO ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. IN DOING SO, THE LD. CIT(A) ALSO HELD THAT THE A.O. WRONGLY APPL IED THE RATIO OF THE DECISION OF STERLING FOODS (SUPRA) AS THE PROVISION S OF SECTION 10B STOOD ON DIFFERENT FOOTINGS AS COMPARED TO THE PROVISIONS OF SECTION 80HHC. THE LD. CIT(A), IN DOING SO, ALSO RELIED ON THE DEC ISION OF THE ALLAHBAD BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. PRATI BHA SYNTEX LIMITED, AS REORTED IN 108 TAXMAN (MAGAZINE) PAGES 32 & 34. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. 36. THE LD. DEPARTMENTAL REPRESENTATIVE NARRATED THE FA CTS, PLACED RELIANCE ON THE ORDER OF THE A.O. AND ALSO ON THE D ECISION OF HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA AS REPOR TED IN 317 ITR 208 ( S.C.). 37. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, FIRSTLY REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT( A), THEREAFTER, HE CONTENDED THAT THE ASSESSEE HAD NO OTHER SOURCE OF INCOME DURING THE YEAR UNDER CONSIDERATION, HENCE, WHATEVER INCOME WAS EAR NED OR RECEIVED HAD PAGE 24 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II TO BE TREATED AS DERIVED FROM THE SUCH EXPORT ORIEN TED UNDERTAKING. HE FURTHER CONTENDED THAT UP TO ASSESSMENT YEAR 2000-0 1, EVEN PROFITS EARNED IN RESPECT OF DOMESTIC SALES WERE ELIGIBLE FOR EXEM PTION U/S 10B UP TO ASSESSMENT YEAR 2000-01. HENCE, LEGISLATIVE INTENT OF COMPLETE TAX HOLIDAY IN CASE OF ENTIRE INCOME OF 100 % E.O.U. WA S CLEARLY MANIFEST. HE FURTHER CONTENDED THAT ASSESSMENT FOR THE ASSESS MENT YEAR 1995-96 WAS COMPLETED U/S 143(3) WHEREIN SUCH INCOMES WERE GRANTED EXEMPTIONS U/S 10B OF THE ACT. SUBSEQUENTLY, WHEN T HE LD CIT PASSED ORDER U/S 263 WITHDRAWING SUCH EXEMPTIONS, THE TRIB UNAL VIDE ITS ORDER DATED 28.12.2001 IN I.T.A.NO. 249/IND/2000 QUASHED SUCH ORDER AND AFTER CONSIDERING THE DECISION OF HON'BLE SUPREME C OURT IN THE CASE OF STERLING FOODS ( SUPRA ) HELD THAT THE ASSESSEE WAS ELIGIBLE FOR EXEMPTION U/S 10B ON ALL SUCH RECEIPTS AND, THEREFORE, THE MA TTER WAS COVERED IN FAVOUR OF THE ASSESSEE. HE FURTHER CONTENDED THAT S ECTION 10B FELL UNDER CHAPTER III AND, THEREFORE, PROVISIONS OF SECTION 1 0B HAD TO BE GIVEN A WIDER AND A LIBERAL INTERPRETATION AS COMPARED TO I NCENTIVE PROVISIONS FALLING UNDER CHAPTER VIA OF THE ACT. THE LEARNED C OUNSEL ALSO CONTENDED THAT THE LEGISLATIVE INTENT BEHIND SECTIO N 80HH/80I WAS TO PROMOTE INDUSTRIES. HOWEVER, SECTION 10A & 10B HAD BEEN INCORPORATED TO PROMOTE EXPORTS AND, HENCE, ALL INCOMES DERIVED AS A RESULT OF EXPORT ACTIVITIES WERE ELIGIBLE FOR EXEMPTION, THOUGH THES E MIGHT NOT EMANATE PAGE 25 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II FROM THE INDUSTRIAL ACTIVITIES, BECAUSE THEIR SOURC E WAS EXPORT ULTIMATELY. IN THIS REGARD, HE FURTHER CONTENDED THAT UNLESS EX PORTS WERE MADE, THESE INCOME WOULD NOT HAVE ACCRUED AND, THEREFORE, THESE INCOMES WERE INEXTRICABLY DERIVED FROM THE EXPORT ACTIVITIES, HE NCE, ELIGIBLE FOR EXEMPTION U/S 10B. IN THIS REGARD, HE FURTHER PLACE RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CASE OF WIPRO LIMIT ED VS. DY. CIT, AS REPORTED IN (2005) 96 TTJ ( BANG ) 211, WHEREIN THE TRIBUNAL HAD HELD THAT THE PREMIUM ON SALE OF SPECIAL IMPORT LICENSE WAS TO BE CONSIDERED AS EXEMPT U/S 10A. HE FURTHER CONTENDED THAT THE PROVI SIONS OF SECTION 10A WERE PARI-MATERIA WITH THE PROVISIONS OF SECTION 10 B. HE FURTHER PLACED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE ASSESSEE OF B. DESHRAJ VS. CIT, AS REPORTED IN 301 ITR 439, WHE REIN THE HON'BLE SUPREME COURT HAD HELD THAT DUTY DRAW BACK AND CASH COMPENSATORY WERE TO BE INCLUDED IN THE BUSINESS PROVISIONS FOR COMPUTING THE DEDUCTION U/S 80HHC. 38. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 39. IT IS NOTED THAT THE ASSESSEE IS 100 % EXPORT ORIEN TED UNDERTAKING. IT IS MANUFACTURING AND EXPORTING THE PRODUCTS, WHICH ARE ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. AT THE R ELEVANT POINT OF TIME AS PER THE PROVISIONS OF SECTION 10-B(1), AN ASSESSEE WAS ENTITLED FOR PAGE 26 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II EXEMPTION U/S 10-B ANY PROFITS AND GAINS DERIVED B Y AN ASSESSEE FROM A 100 % E.O.U.. SUBSEQUENTLY, THE PROVISIONS OF SECT ION 10B AS APPLICABLE WITH EFFECT FROM 1.4.2001 PROVIDED FOR A DEDUCTION OF SUCH PROFIT AND GAINS AS ARE DERIVED BY A 100 % EXPORT O RIENTED UNDERTAKING. THUS, IN LIEU OF WORD ANY, THE WO RD SUCH WAS SUBSTITUTED, WHICH MEANS THAT SCOPE OF EARLIER PROV ISIONS WAS WIDE AS THE TERM ANY HAS BEEN INTERPRETED IN A NUMBER OF JUDI CIAL DECISION TO MEAN ALL. THUS, WHAT IS REQUIRED IS THAT THERE MUST B E SOME IMMEDIATE/DIRECT NEXUS BETWEEN SUCH PROFITS/GAINS AND THE EXPORT OR IENTED UNDERTAKING. IF IN THIS LEGAL BACKGROUND, THE FACTS OF IMPUGNED ITE MS ARE ANALYZED, THEN, IT IS EVIDENT THAT ALL THE ITEMS HAVE ACCRUED TO SU CH UNDERTAKING DUE TO EXPORT ACTIVITY BEING UNDERTAKEN BY SUCH UNDERTAKIN G. HENCE, IN OUR OPINION, THE LD. CIT(A) HAS RIGHTLY HELD THAT THE A SSESSEE IS ENTITLED TO EXEMPTION U/S 10B ON THESE ITEMS. WE ALSO FIND THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF WIPRO LIMITED (SUPRA ) ALSO SUPPORTS THE CLAIM OF THE ASSESSEE. BEFORE PARTING, WE MAY ALSO ADD THAT THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA IS IN THE CONTEXT OF DIFFERENT PROVISIONS, HENCE, IN OUR HUMBLE OPINION NOT APPLICABLE. WE FURTHER FIND THAT THE DECISION OF THE TRIBUNAL IN A SSESSEES OWN CASE FOR ASSESSMENT YEAR 1995-96, WHEREIN THE ORDER PASSED U /S 263 WAS QUASHED ALSO SUPPORTS THE CLAIM OF THE ASSESSEE. THUS, THIS GROUND OF THE REVENUES APPEAL IS ALSO DISMISSED. PAGE 27 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 40. GROUND NO. 5 READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT ONLY THE FINAL AMO UNT AFTER SETTING OFF THE INTEREST EXPENDITURE SHOULD BE TREATED AS T HE AMOUNT NOT BEING EXEMPT U/S 10B OUT OF THE TOTAL INTEREST INCO ME WITHOUT APPRECIATING THE SOURCE AND NATURE OF INCOME WITHOU T APPRECIATING THE SOURCE AND NATURE OF INCOME AND DIFFERENTIATING EXPENDITURE WITH THE INCOME. 41. THE FACTS, IN BRIEF, ARE THAT THE A.O. TREATED THE INTEREST INCOME AS NOT DERIVED FROM E.O.U. AND HELD THAT IT WAS NOT ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT. THE LD. CIT(A), ON APPEAL, BY T HE ASSESSEE HELD THAT SUCH INTEREST INCOME COULD NOT BE CONSIDERED AS DER IVED FROM THE EXPORT ORIENTED UNDERTAKING. HOWEVER, THE ASSESSEE WAS ELI GIBLE FOR SETTING OFF OF INTEREST PAID TO EARN SUCH INTEREST INCOME, PROVIDE D THERE WAS A DIRECT NEXUS BETWEEN THE INTEREST BEARING FUNDS AND INVEST MENT YIELDING SUCH INTEREST INCOME. THE ASSESSEE SUBMITTED THE DETAILS OF BANK ACCOUNT DULY CERTIFIED BY THE BANKERS, WHEREBY SUCH NEXUS WAS E STABLISHED IN A SUBSTANTIAL MANNER. THE LD. CIT(A), THEREAFTER, ANA LYZED THE AVERAGE COST OF INTEREST AND FOUND THAT THE ASSESSEE HAD PAID IN TEREST ON SUCH BORROWED PAGE 28 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II FUNDS AT AN AVERAGE RATE OF 13 % AND, ACCORDINGLY, HE DIRECTED THE A.O. TO SET OFF A SUM OF RS. 26,99,309/- FROM THE INTEREST INCOME EARNED BY THE ASSESSEE ON ACCOUNT OF INTER CORPORATE DEPOSIT. AS REGARDS TO BALANCE INTEREST OF EXPENDITURE OF RS. 12,79,463/-, THE LD. CIT(A) DIRECTED THE A.O. TO VERIFY THE DIRECT NEXUS BETWEEN THE INTERE ST BEARING FUNDS AND FUNDS DEPLOYED TO EARN SUCH INTEREST INCOME AND TO SET-OFF THE INTEREST SO PAID WITH THE INTEREST INCOME. THE LD. CIT(A) ALSO DIRECTED THE A.O. TO EXCLUDE ONLY NET INTEREST INCOME WHILE COMPUTING EX EMPTION U/S 10B OF THE ACT. AGGRIEVED BY THIS, THE REVENUE IS IN APPEA L BEFORE US. 42. THE LD. DR NARRATED THE FACTS AND PLACED RELIANCE O N THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, PLACED STRONG RELIANCE ON THE ORDER OF THE LD. CIT(A) AND ALSO ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF SHREE RAM H ONDA EQUIP AS REPORTED IN 289 ITR 475. 43. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES THAT THE LD. CIT(A) HAS ALLOWED THE NETTING OF INTE REST PAID WITH INTEREST EARNED AND HAS DIRECTED TO, EXCLUDE ONLY SUCH NET I NTEREST IN COMPUTING THE QUANTUM OF EXEMPTION U/S 10B OF THE ACT. IN OUR VIEW, SUCH ACTION OF THE LD. CIT(A) IS CORRECT IN LAW AS THIS PRINCIPLE IS NOW JUDICIALLY SETTLED. WE FURTHER FIND THAT THE LD. CIT(A) HAS ALSO EXAMIN ED THE ASPECT OF THE NEXUS BETWEEN THE INTEREST BEARING FUNDS AND FUNDS DEPLOYED FOR EARNING PAGE 29 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II SUCH INTEREST INCOME AND WHETHER THE DETAILS WERE N OT BEFORE HIM. HE HAS DIRECTED THE A.O. TO DO SO. IN OUR VIEW, THESE FIND INGS OF LD. CIT(A) ARE CORRECT IN LAW. HENCE, WE CONFIRM THE SAME. THUS, T HIS GROUND OF THE REVENUE IS DISMISSED. 44. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STAN DS DISMISSED. 45. NOW, WE SHALL TAKE UP ASSESSEES APPEAL IN I.T.A.NO . 206/IND/2003 FOR ASSESSMENT YEAR 1999-2000. 46. GROUND NO. 1 READS AS UNDER :- THAT THE LD. CIT(A) ERRED IN MAINTAINING THE DISAL LOWANCE OF RS. 10,00,000/- AS MADE BY THE LD. A.O. BEING, AMOUNT PAID BY THE APPELLANT TO, A SCHOOL AND CLAIMED AS DEDUCTION UNDER THE HEAD STAFF WELFARE EXPENSES. IT IS SUBMIT TED THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE SAID CLAIM OF DEDUCTION BY THE APPELLANT BEING LEGAL AN D PROPER, THE SAME, THEREFORE, NOW REQUIRES TO BE ALLOWED. 47. BOTH THE PARTIES AGREED THAT THIS ISSUE WAS IDEN TICAL TO THE ISSUE RAISED IN GROUND NO.1 OF I.T.A.NO. 415/IND/20 00, HENCE, FOLLOWING THE SAME REASONS, WE ALLOW THIS GROUND OF THE ASSES SEE. 48. GROUND NOS. 2 & 3 READ AS UNDER :- 2. THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE CLAIM OF THE APPELLANT FOR DEDUCTION U/S 35-D OF RS. PAGE 30 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 12,11,957/- IN RESPECT OF SHARE ISSUE EXPENSES INCURRED IN THE ASSESSMENT YEAR 1992-93 WAS RIGHTLY RESTRICTED BY THE LD. A.O. TO RS. 10,43,309/-. IT IS SUBMITTED THAT ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE THE APPELLANT IS LEGALLY ENTITLED TO CL AIM DEDUCTION OF RS. 12,11,957/- U/S 35D AND THE SAME, THEREFORE, NOW REQUIRES TO BE ALLOWED IN FULL. 3. THAT THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 6,89,501/- MADE BY THE ASSESSIN G OFFICER IN RESPECT OF ADDITIONAL EXPENSES INCURRED IN THE ASSESSMENT YEAR 1995-96 AND CLAIMED U/S 35-D. I T IS SUBMITTED THAT THE SAID CLAIM, BEING LEGAL AND PROPER, ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE SAME MAY NOW BE ALLOWED. 49. BOTH THE PARTIES AGREED THAT THE ISSUE RAISED IN TH ESE GROUNDS WERE IDENTICAL TO ISSUE RAISED IN GROUND NO.2 OF I. T.A.NO. 415. FOLLOWING THE SAME REASONS, GROUND NO.2 OF THE ASSESSEE IS AL LOWED AND THE ISSUE RAISED IN GROUND NO. 3 IS RESTORED TO THE FILE OF A .O. TO BE DISPOSED OF ON SIMILAR LINES. THUS, GROUND NO.2 IS ALLOWED AND GRO UND NO.3 STANDS ALLOWED FOR STATISTICAL PURPOSES. 50. GROUND NOS. 4, 5, 6 & 7 READ AS UNDER :- PAGE 31 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 4. THAT THE LD. CIT(A) ERRED IN HOLDING THAT GROSS INTEREST RECEIVED BY THE APPELLANT OF RS. 23,22,16 8/- DO NOT QUALIFY FOR EXEMPTION U/S 10B. IT IS SUBMITT ED THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND AS PER THE DECISION OF HON'BLE I.T.A.T. IN THE APPLICANTS OWN CASE, THE TOTAL INTEREST RECEIVED B Y THE APPELLANT REQUIRES TO BE ADJUSTED AGAINST INTEREST PAID BY THE APPELLANT. SINCE THE SAID CLAIM OF THE APPELLANT, BEING LEGAL AND PROPER, THE SAME REQUIRE S TO BE NOW ALLOWED. 5. THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE EXPOR T TRANSACTIONS IN RESPECT OF TRADING MERCHANDISE CANN OT BE ATTRIBUTED TO THE EOU. IT IS SUBMITTED THAT ON T HE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS P ER THE CLEAR PROVISIONS OF LAW, TRADING EXPORT TRANSACTIONS ARE ALSO ELIGIBLE FOR EXEMPTION U/S 10 B AND THE SAID CLAIM, NOW REQUIRES TO BE ALLOWED. 6. THAT THE LD. CIT(A) ERRED IN CONFIRMING THE TREATME NT GIVEN BY THE ASSESSING OFFICER TO LOSS FROM EXPORT OF TRADING GOODS OF RS. 5,96,214/-. IT IS SUBMITTED TH AT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE PAGE 32 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II SAID LOSS REQUIRES TO BE IGNORED FOR CALCULATING DEDUCTION ALLOWABLE U/S 80HHC. THAT THE SAID CLAIM BEING LEGAL AND PROPER, THE A.O. MAY NOW BE VERY KINDLY DIRECTED ACCORDINGLY. 7. THAT THE LD. CIT(A) ERRED IN DIRECTING THE A.O. TO EXCLUDE 90 % OF NET INTEREST RECEIPT OF JAMMU UNIT FROM PROFITS OF THE BUSINESS, FOR WORKING OUT THE DEDUCTION U/S 80HHC. IT IS SUBMITTED THAT ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE NO EXCLUSION I S CALLED FOR, OUT OF THE PROFITS OF THE BUSINESS, FOR CALCULATING DEDUCTION ALLOWABLE U/S 80HHC. IT IS PRAYED THAT NECESSARY DIRECTIONS BE NOW GIVEN TO ALLOW DEDUCTION U/S 80HHC WITHOUT EXCLUDING 90 % OF NET INTEREST RECEIPT. 51. THESE GROUNDS WERE NOT PRESSED, HENCE, THE SAME ARE DISMISSED AS NOT PRESSED. 52. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. 53. NOW, WE SHALL TAKE UP REVENUES APPEALS IN I.T.A.NO . 340/IND/2003 PAGE 33 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 54. IN GROUND NO.(I), THE REVENUE IS AGGRIEVED BY THE DECISION OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS. 1 LA KH MADE BY THE ASSESSING OFFICER OUT OF BUSINESS PROMOTION EXPENSE S. 55. THE FACTS, IN BRIEF, ARE THAT THE A.O. DISALLOWED A SUM OF RS. 1 LAKH OUT OF BUSINESS PROMOTION EXPENSES OF RS. 10,6 6,999/- CLAIMED BY THE ASSESSEE TO HAVE BEEN INCURRED ON THE VISITS OF FOREIGN BUYERS AND OF BANK OFFICIALS. THE A.O. DISALLOWED THIS SUM AS HE WAS OF THE OPINION THAT ALL THESE EXPENSES COULD NOT BE CONSIDERED AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IN APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED THAT IT WAS A 100% E.O.U. AND, THEREFORE, THE EXPENSES INCURRED ON THE VISITS OF THE FOREIGN BUYERS WERE IN THE COURSE OF FOREIGN BUSINESS. AS REGARDS TO VISITS OF BANK OFFICIALS, THE ASSESSEE STATED THAT THESE EXPENSES WERE INCURRED AS PER TERMS AND CONDITIONS OF AGREEMENT WITH THE BANK, HE NCE, INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE LD. CIT(A) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEV ED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. 56. THE LD. DR NARRATED THE FACTS AND PLACED RELIANCE O N THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, PLACED STRONG RELIANCE ON THE ORDER OF THE LD. CIT(A). PAGE 34 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 57. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 58. IT IS NOTED THAT THE ASSESSEE IS 100 % EXPORT ORIEN TED UNITS AND HAS ALSO BORROWED FUNDS FROM BANK AND IS ENJOYING O THER BANKING FACILITIES. HENCE, EXPENDITURE INCURRED ON THE VISI T OF FOREIGN CUSTOMERS AND BANK OFFICIALS IS A BUSINESS EXPENDITURE. ACCOR DINGLY, WE DISMISS THIS GROUND OF THE REVENUE. 59. GROUND NO.(II) READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE FOLLOW ING NOT ELIGIBLE FOR EXEMPTION U/S 10B OF THE ACT : (A) SALE OF EXPORT ENTITLED RS. 52,04,300/-, (B) DUTY DRAW BACK RS. 22,48,211/- (C) PREMIUM ON SALE OF SPECIAL IMPORT LICENSES RS. 48,945/- (D) GROSS INTEREST RECEIPT RS. 23,22,168/- 60. THE FACTS, IN BRIEF, ARE THAT THE THAT THE LD. CI T(A) HAS TREATED FIRST THREE RECEIPTS BEING ELIGIBLE FOR EXEMPTION U /S 10-B ON THE BASIS OF APPELLATE ORDER FOR ASSESSMENT YEAR 1997-98 AND ORD ER OF THE TRIBUNAL IN THE RESPECTIVE APPEAL FILED BY THE ASSESSEE AGAINST ORDER OF LD. CIT U/S 263 FOR ASSESSMENT YEAR 1995-96. THE OTHER FACT AS REGARDS TO INTEREST PAGE 35 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II RECEIPT, IT IS NOTED THAT THE LD. CIT(A) HAS DIRECT ED THE A.O. TO VERIFY THE NEXUS BETWEEN THE INTEREST BEARING FUNDS AND INVES TMENT MADE OUT OF SUCH FUNDS YIELDING INTEREST INCOME AND THEN TO EXC LUDE NET INTEREST FROM THE PROFITS OF THE EOU WHILE COMPUTING QUANTUM OF E XEMPTIONS U/S 10B OF THE INCOME-TAX ACT, 1961. 61. BOTH THE PARTIES SUBMITTED THAT THESE ISSUES WERE I NVOLVED IN ASSESSMENT YEAR 1997-98, HENCE, A SIMILAR VIEW COUL D BE TAKEN AND REITERATED THE SAME SUBMISSIONS. 62. FOLLOWING THE SAME REASONS TAKEN IN 1997-98, WE CON FIRM THE FINDINGS OF THE LD. CIT(A). 63. IN GROUND NO. (III), THE REVENUE IS AGGRIEVED BY TH E DECISION OF LD. CIT(A) IN EXCLUDING EXPENDITURE BY THE ASSESSEE ON QUOTA AMOUNTING TO RS. 2,21,477/-. THE A.O. WHILE WORKING OUT THE E XEMPTION U/S 10B EXCLUDED PROFIT EARNED ON MERCHANDISE EXPORTS FROM QUANTUM OF PROFITS ELIGIBLE FOR SUCH EXEMPTION. ON APPEAL, THE LD. CIT (A) HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE TO ACQUIRE QUO TAS IN MAKING SUCH TRADING EXPORTS HAD TO BE EXCLUDED I.E. THE ONLY NE T PROFIT FROM MERCHANDISE EXPORT HAD TO BE EXCLUDED WHILE COMPUTI NG QUANTUM OF EXEMPTIONS U/S 10B. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US. PAGE 36 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II 64. THE LD. DR NARRATED THE FACTS AND PLACED RELIANCE O N THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, PLACED STRONG RELIANCE ON THE ORDER OF THE LD. CIT(A). 65. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUTHORITIE S BELOW. 66. IT IS A CASE OF NETTING OF GROSS INCOME AND DIRECT EXPENDITURE INCURRED IN CONNECTION THEREWITH FOR EXCLUDING ONLY NET PROFIT ON MERCHANDISE EXPORTS IN COMPUTING PROFITS OF 100 % E XPORT ORIENTED UNIT ELIGIBLE FOR EXEMPTION U/S 10B. NOW, IT IS A SETTLE D PRINCIPLE THAT IN COMPUTING QUANTUM OF AMOUNT ELIGIBLE FOR SUCH EXEMP TIONS, ONLY NET INCOME, WHICH IS NOT FOUND TO HAVE BEEN DERIVED FRO M SUCH UNDERTAKING, SHOULD BE EXCLUDED. HENCE, WE HOLD THAT THE FINDING S OF THE LD. CIT(A) ARE CORRECT IN LAW. THUS, THIS GROUND OF THE REVENU E IS DISMISSED. 67. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISS ED. 68. TO SUM UP, APPEAL OF THE ASSESSEE IN I.T.A.NO. 415/ IND/2000 IS PARTLY ALLOWED, APPEAL OF THE REVENUE IN I.T.A.NO. 451/IND/2000 IS DISMISSED, ASSESSEES APPEAL IN I.T.A.NO. 206/IND/2 003 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND REVENUES APPEAL IN I. T.A.NO. 340/IND/2003 IS DISMISSED. PAGE 37 OF 37 I.T.A.NOS. 415 & 451/IND/2000 AND 20 6 & 340/IND/2003 MARAL OVERSEAS LIMITED - II THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 29 TH DECEMBER, 2009. SD/- SD/- (JOGINDER SINGH) (V. K. GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :29 TH DECEMBER, 2009. CPU* 182212