M/S. VARUN INDUSTRIES LTD, MUMBAI V. THE ITO 7(3)(1), MUMBAI

ITA 4341/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1846 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 02-03-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 07-06-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Retrospective amendment
• Section: 80HHC; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F,MUMBAI BEFORE SHRI R.K. GUPTA (JM) & SHRI B. RAMAKOTAIAH ( AM) I.T.A.NOS.4341 TO 4344/MUM/07 (A.YS.2001-02 TO 2004-05) & I.T.A. NO.2209/MUM/07 (A.Y . 2002-03) M/S.VARUN INDUSTRIES LTD., 13, SANKESHWAR DARSHAN, A.G.PAWAR CROSS LANE, BYCULLA, MUMBAI-400 027. PAN:AAACV2069F VS. INCOME-TAX OFFICER-7(3)(1), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. APPELLANT RESPONDENT I.T.A.NOS.4466 TO 4469/MUM/07 (A.YS. 2001-02 TO 2004-05) INCOME-TAX OFFICER-7(3)(1), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. VS. M/S.VARUN INDUSTRIES LTD., 13, SANKESHWAR DARSHAN, A.G.PAWAR CROSS LANE, BYCULLA, MUMBAI-400 027. PAN:AAACV2069F APPELLANT RESPONDENT C.O.NOS.262 TO 265/MUM/07 (ARISING OUT OF ITA NOS.4466 TO 4469/MUM/07) (A.YS. 2001-02 TO 2004-05) M/S.VARUN INDUSTRIES LTD., 13, SANKESHWAR DARSHAN, A.G.PAWAR CROSS LANE, BYCULLA, MUMBAI-400 027. PAN:AAACV2069F VS. INCOME-TAX OFFICER-7(3)(1), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. CROSS OBJECTOR RESPONDENT ASSESSEE BY MS. A ARTI VISSANJI. DEPARTMEMT BY SHRI VI RENDRA OHJA. O R D E R PER R.K. GUPTA, JM: THESE ARE 9 APPEALS AND 4 CROSS OBJECTIONS BY THE A SSESSEE AND VARUN INDUSTRIES LTD. 2 DEPARTMENT. THE APPEALS LISTED IN ITA NOS.4466 TO 4 469/MUM/07 ARE BY THE DEPARTMENT AND REST OF THE APPEALS AND CROSS OBJECT IONS ARE BY THE ASSESSEE. THE APPEALS OF THE DEPARTMENT AND ASSESSEE RELATE TO A SSTT. YEARS 2001-02 TO 2004- 05. COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS . THEREFORE, THEY ARE DISPOSED OF TOGETHER. 2. THE LD. COUNSEL OF THE ASSESSEE HAS FILED A CHAR T SHOWING THE ISSUES AND HOW THE ISSUES ARE COVERED BY THE ORDER OF THE TRIB UNAL. WHERE THE ISSUES ARE NOT COVERED, THE COUNSEL OF THE ASSESSEE HAS ADVANCED H ER ARGUMENTS. 3. THE LD. D.R. HAS RELIED UPON THE ORDERS OF THE A O WHERE THE DEPARTMENT IS IN APPEAL AND HAS RELIED UPON THE ORDERS OF CIT(A) WHERE THE ASSESSEE IS IN APPEAL. 4. AFTER CONSIDERING THE ORDERS OF THE AUTHORITIES BELOW AND THE SUBMISSIONS ADVANCED ON BEHALF OF BOTH THE PARTIES, THE APPEALS OF THE DEPARTMENT AND THE ASSESSEE ALONG WITH THE CROSS OBJECTIONS ARE DISPO SED OF IN THE FOLLOWING MANNER. 5. IN THE APPEALS OF THE ASSESSEE, THE FIRST COMMO N ISSUE IN ALL THESE APPEALS IS IN RESPECT OF PROFIT ON TRANSFER OF DEPB BE CONS IDERED FOR COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT. 6. BRIEFLY STATED FACTS OF THE CASE IN THIS REGARD ARE THAT DURING THE ASSESSMENT PROCEEDINGS FOR THE ASST. YEARS 2001-02 TO 2003-04, THE AO NOTICED THAT WHILE CALCULATING DEDUCTION U/S.80HHC THE ASSE SSEE HAS CONSIDERED THE FOLLOWING AS EXPORT INCENTIVES : A.Y. 2001-02 A.Y. 2002-03 A.Y. 2003-0 4 1. DEPB 44,00,19,567 47,45,90,118 190,9 99,774 (STAINLESS STEEL ITEMS) DUTY DRAWBACK 50,717 63,027 21,452 (ON ITEMS OTHER THAN STAINLESS STEEL ITEMS) VARUN INDUSTRIES LTD. 3 SALE OF SIL (LICENCE) 4,95,677 ------ ---------- ------------- ---------- -- ----------- 4,05,65,961 47,46,53,145 19,10,21,226 ========== ========= ========= THE ASSESSEE WAS REQUIRED TO EXPLAIN THE REASONS HO W THE INCENTIVE IS ELIGIBLE FOR DEDUCTION U/S.80HHC. DETAILED SUBMISSIONS WERE FILE D BEFORE THE AO. HOWEVER, THE LD. AO, WHILE REJECTING THE CLAIM OF THE ASSESS EE, OBSERVED THAT EVEN IN THE ASSESSMENT YEAR 2002-03, WHEREIN THE APPEAL IS PEND ING WITH CIT(A), THE ASSESSEE HAS ADMITTED DURING THE REMAND PROCEEDINGS THAT IT IS ENTITLED TO ONLY DEPB AND NOT TO DUTY DRAWBACK VIDE LETTER DATED 22- 06-2006. THEREFORE, THERE IS NO QUESTION OF PROVIDING ANYTHING IN COMPARISON BET WEEN DEPB AND DUTY DRAWBACK. THEREFORE, THE ASSESSEE IS EVEN OTHERWISE NOT ENTITLED TO ANY DEDUCTION SINCE IT FALLS IN THE BRACKET OF EXPORTER OF MORE THAN RS.10 CRORES. THE AO, THEREFORE, DENIED DEDUCTION U/S.80HHC ON EXPORT INCENTIVES. BEFORE THE CIT(A), IT WAS STATED THAT THE SUM REFERRED TO IN C LAUSE (IIID) OF SEC.28 WILL BE ENTITLED FOR DEDUCTION OF ANY PROFIT ON THE TRANSFE R ON ACCOUNT OF DEPB SCHEME WHICH MEANS THAT ONLY PROFIT ELEMENT, IF ANY, OVER FACE VALUE OF DEPB GRANTED WILL BE A SUM REFERRED TO IN CLAUSE (IIID) OF SEC. 28. DETAILED WRITTEN SUBMISSIONS WERE ALSO FILED BEFORE THE CIT(A) EXPLAINING THE RE ASONS FOR CLAIMING DEDUCTION. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, THE CIT(A) ALLOWED THE ISSUE IN PART IN FAVOUR OF THE A SSESSEE AND IN PART IN FAVOUR OF THE DEPARTMENT. THE FINDING OF THE CIT(A) HAS BEEN RECORDED IN PARAS 8 TO 8.2 AT PAGE 11 TO 13 OF CIT(A)S ORDER AS UNDER : 8. I HAVE CAREFULLY CONSIDERED THE ABOVE SUBMISSI ONS OF THE APPELLANT AND ALSO PERUSED THE ORDER OF THE ASSESSI NG OFFICER. I FIND THAT THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 80HHC TO EXTENT OF RS.25,89,85,898/- FOR A.Y. 2001- 02 IN ITS ENTIRETY ON THE GROUND THAT THE TRIBUNAL HAS DECIDED THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION UNDER SEC TION 80HHC IN VIEW OF RETROSPECTIVE AMENDMENT TO THIS SECTION BY FINANCE ACT 2005 TO WHICH THE ASSESSEES COUNSEL FAIRLY CONCEDE D. EVEN IN ASSESSMENT YEAR 2002-03 WHEREIN APPEAL IS PENDING W ITH CIT(A) THE VARUN INDUSTRIES LTD. 4 ASSESSEE DURING THE REMAND PROCEEDINGS HAD ADMITTED THAT IT IS ENTITLED ONLY TO DEPB AND NOT TO DUTY DRAWBACK. THE REFORE, THERE IS NO QUESTION OF PROVING ANYTHING IN COMPARISON BETWE EN THE DEPB AND DUTY DRAWBACK. THEREFORE EVEN OTHERWISE THE ASS ESSEE IS NOT ENTITLED TO DEDUCTION SINCE IT FALLS UNDER THE BRAC KET OF EXPORT OF MORE THAN RS.10 CRORES. SIMIARLY FOR THE ASSESSMENT YEARS 2002-03 AND 2003-04, THE CLAIM OF DEDUCTION UNDER SECTION 8 0HHC OF RS.3,97,61,819/- AND RS.97,72,095/- RESPECTIVELY WE RE ALSO DISALLOWED FOR THE REASONS DISCUSSED DETAIL IN THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2001-02. 8.1 DURING THE APPELLATE PROCEEDI NGS, THE APPELLANT FILED THE COPIES OF THE ORDERS OF THE HONORABLE ITAT MUMBAI BENCH B IN ITA NO.5939 AND 5940/MUMBAI/03 DATED 12.9.2006 FOR ASSE SSMENT YEARS 2000-01 AND 2001-02 AND ALSO THE ORDER OF THE ITAT I BENCH MUMBAI IN ITA NO.6606 AND 6607/MUM/2003 FOR ASSESSM ENT YEARS 2000-01 AND ITAT I BENCH, MUMBAI. ON GOING THROUG H THESE ORDERS I FIND THAT THE FIRST ORDER OF THE HONOURABLE ITAT IS RELATED TO THE APPELLANTS APPEAL AGAINST THE ORDER OF THE CIT(A) FOR NOT GRANTING THE ENTIRE DEDUCTION CLAIMED BY THE APPELLANT AND D IRECTING THE ASSESSING OFFICER TO GRANT THE DEDUCTION AFTER NETT ING THE LOSSES FROM TRADING EXPORT AND MANUFACTURING EXPORT AGAINST THE EXPORT INCENTIVES AND ALLOW THE DEDUCTION AS PER THE THIRD PROVISO TO SECTION 80HHC. THUS IT IS AGAINST THIS GROUND OF APPELLANT OF THE APPELLANT, THE LEARNED COUNSEL OF THE APPELLANT IS STATED TO H AVE CONCEDED SIN VIEW OF AMENDED PROVISIONS OF SECTION 80HHC. BUT IN THE SUBSEQUENT DECISION, WHICH IS ON THE APPEAL BY THE DEPARTMENT AGAINST CIT(A)S ORDER , ON THE GROUND RAISED WHICH FOR THE SAME OF CLARITY IS REPRODUCED AS UNDER : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFF ICER TO ALLOW DEDUCTION UNDER SECTION 80HHC IGNORING THE FACT THA T TRADING GOODS EXPORTW HAD RESULTED IN A LOSS AND THE ONLY GAIN WA S OF EXPORT INCENTIVES AND ERRED IN IGNORING THE FACT THAT THE EXPORT INCENTIVES CANNOT BE SAID TO BE DERIVED FROM THE EXPORT BUSINE SS OF THE ASSESSEE BUT ARE DERIVED FROM THE GOVERNMENT POLICY (RELIANCE IS PLACED UPON THE DECISION OF THE HONOURABLE SUPREME COURT IN THE CASE OF M/S. STERLING FOODS LIMITED (237 ITR 579) A ND THE DECISION OF THE HONORABLE ITAT (MADRAS) IN THE CASE OF M/S.K RISLARS DIESEL ENGINES (P) LTD. VS. ACIT (74 ITD 414), THE HONOUR ABLE ITAT I BENCH, MUMBAI VIDE ORDER DATED 4.10.2006 HAS HELD A S UNDER: AT THE TIME OF HEARING, BOTH THE PARTIES AGREED TH AT THE AFORESAID ISSUE NEEDS TO BE DECIDED IN THE LIGHT OF THE RECEN TLY AMENDED PROVISIONS OF SECTION 80HHC AND THAT THE MATTER SHO ULD THEREFORE BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR D OING THE NEEDFUL IN ACCORDANCE WITH LAW. WE ORDER ACCORDINGLY. THE ASSE SSING OFFICER SHALL EXAMINE AND DECIDE THE MATTER AFRESH IN ACCOR DANCE WITH THE RECENTLY AMENDED PROVISIONS OF SECTION 80HHVC AFTER GIGING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. VARUN INDUSTRIES LTD. 5 8.2 EVIDENTLY I FIND THAT THE ASSESSING OFFIC ER HAS IGNORED THE DIRECTIVE ISSUED BY THE HONORABLE ITAT I BENCH, M UMBAI, WHICH OBVIOUSLY IS AS PER SUBSEQUENT ORDER. AS THE ASSESS ING OFFICER HAS NOT MADE ANY REFERENCE OF THE AFORESAID DIRECTION I N HIS ASSESSMENT ORDER, I FIND SOME FORCE IN THE CONTENTION OF THE A PPELLANT. THUS UNDER THE AFORESAID FACTS AND THE BACKGROUND OF THE CASE OF THE APPELLANT, THE CLAIM OF DEDUCTION UNDER SECTION 80H HC IS CERTAINLY NEEDED TO BE ANALYZED AS PER THE AMENDED PROVISIONS OF THIS SECTION. IN THIS REGARD I FIND MERIT IN THE CONTENT ION OF THE APPELLANT THAT AS PER AMENDED PROVISIONS ONLY PROFIT ON TRANS FER OF DEPB ARE TO BE CONSIDERED FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC, WHICH IS CLAIMED TO BE AMOUNTING TO RS.2,18,94,059/ -, 2,15,41,685 AND RS.2,19,050/-. ON THE TRANSFER OF DEPB BENEFIT OF RS.41,81,25,508/-,BEING FACE VALUE AND SUCH FAC E VALUE HAS TO BE REDUCED FROM COST OF GOODS EXPORTED. AS THIS ISSUE HAS BEEN DECIDED BY ME IN THE APPELLANTS OWN CASE FOR ASSES SMENT YEARS 2002-03 AND 2003-04, AND ACCORDINGLY BY FOLLOWING T HOSE ORDERS, THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE PR OFIT ON TRANSFER OF DEPB NENEFITS AMOUNTING TO RS.2,18,94,059/-, 2,15,4 1,685/- AND RS.2,19,050/- AND NOT THE ENTIRE VALUE OF DEPB BENE FIT SHOWN AS EXPORT INCENTIVES FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC. CONSEQUENTLY, FACE VALUE OF DEPB BEN EFIT HAS TO BE TREATED , AS PART OF IMPORT EXPORT AND THUS HAS TO BE REDUCED FROM THE COST OF GOODS EXPORTED. HOWEVER, AS THE APPELLA NT HAS NO OPTION TO CHOOSE EITHER THE DUTY DRAWBACK OR DEPB SCHEME A ND ITS TURNOVER EXCEEDS RS.10 CRORES, THE APPELLANT IS NOT ENTITLED TO BENEFIT OF SECTION 80HHC ON THE PROFIT OF TRANSFER OF DEPB BENEFIT. IN THE LIGHT OF THE AFORESAID FINDINGS, THE ASSESSING OFFICER IS DIRECTED RECOMPUTED THE DEDUCTION UNDER SECTION 80HHC. THE A PPELLANT THROUGH THIS GROUND, THEREFORE, GETS PARTIAL RELIEF . 7. AGAINST ORDERS OF LD. CIT(A), NOW BOTH THE ASSES SEE AND THE DEPARTMENT ARE IN APPEAL HERE BEFORE THE TRIBUNAL. 8. THE CONTENTIONS RAISED BEFORE THE LD. CIT(A) WER E REITERATED BY THE LD. A.R. BEFORE US. IT WAS FURTHER SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S WESTERN DRUGS PVT.L TD. DECIDED IN ITA NO.2079/MUM/07 DATED 24-4-2008. COPY OF THE SAME IS ALSO FILED IN THE COMPILATION. 9. ON THE OTHER HAND, THE LD. D.R. HAS STRONGLY PLA CED RELIANCE ON THE ORDERS OF AO WHERE THE CIT(A) HAS DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE AND ON THE ORDERS OF CIT(A) WHERE THE ISSUE HAS BEEN DECID ED AGAINST THE ASSESSEE. VARUN INDUSTRIES LTD. 6 10. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRI BUNAL IN THE CASE OF WESTERN DRUGS P.LTD. (SUPRA). THE FINDING OF THE TRIBUNAL H AS BEEN REPRODUCED IN PARAS 2.4 TO 2.9 AT PAGES 2 TO 4 OF ITS SAID ORDER AS UND ER : 2.4 WE HAVE PERUSED THE ORDER OF THE AUTHORITIE S AND SUBMISSIONS MADE. THERE IS NO DISPUTE ON THE FOLLOW ING FACTS VIZ. (I) ASSESSEES TURNOVER EXCEEDED RS.10 CRORE S. (II) DURING THE RELEVANT PREVIOUS YEAR THERE WA S NO OPTION AVAILABLE TO THE ASSESSEE TO CHOOSE BETWEEN DUTY DRAW BACK & DEPB. 2.5 RELEVANT PROVISO TO SEUBSECTION (3) OF SECTION 80HHC RUNS AS UNDER :- S.80HHC (3).. PROVIDED. PROVIDED FURTHER.. PROVIDED ALSO. PROVIDED ALSO THAT IN THE CASE OF AN ASSESSEE HAV ING EXPORT TURNOVER EXCEEDING RUPEES TEN CRORES DURING THE PREVIOUS YEAR, THE PROFITS COMPUTED UNDER CLAUSE (A) OR CLAU SE (B) OR CLAUSE (C) OF THIS SUB-SECTION OR AFTER GIVING EFFECT TO THE FIRST PROVISO, AS THE CASE MAY BE SHALL BE FURTHER INCREASED BY THE A MOUNT WHICH BEARS TO NINETY PER CENT OF ANY SUCH REFERRED TO IN CLAUSE (IIIE) OF SECTION 28, THE SAME PROPORTION AS THE EXPORT TURNO VER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE AS SESSEE, IF THE ASSESSEE HAS NECESSARY AND SUFFICIENT EVIDENCE TO PROVE THAT (A) HE HAD AN OPTION TO CHOOSE EITHER THE DUTY DRA W BACK OR THE DUTY FREE REPLENISHMENT CERTIFICATE, BEING THE DUTY REMISSION SCHEME, AND (B) THE RATE OF DRAWBACK CREDIT ATTRIBUTABLE TO TH E CUSTOMS DUTY WAS HIGHER THAN THE RATE OF CREDIT ALLOWABLE U NDER THE DUTY FREE REPLENISHMENT CERTIFICATE, BEING THE DUTY REMI SSION SCHEME. EXPLANATION FOR THE PURPOSE OF THIS CLAUSE, RATE OF CREDIT ALLOWABLE MEANS THE RATE OF CREDIT ALLOWABLE UNDER THE DUTY FREE REPLENISHMENT CERTIFICATE, BEING THE DUTY REMISSION SCHEME VARUN INDUSTRIES LTD. 7 CALCULATED IN THE MANNER AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT. PROVIDED ALSO THAT. 2.6 A BARE READING OF THE ABOVE CLEARLY BRINGS OU T A SITUATION WHERE AN ASSESSEE HAS AN OPTION TO CHOOSE BETWEEN D UTY DRAW BACK AND DEPB. IT MEANS THAT ANY AMONG THESE SHOULD NOT HAVE BEEN THRUSTED UPON HIM. OR, IN OTHER WORDS, IT VISUALIZE S A POSITION WHERE BOTH THESE BENEFITS ARE AVAILABLE AND A PERSON IS N OT FORCED TO OPT ONE AMONG THESE. THIS AGAIN IS QUALIFIED BY THE SEC OND CONDITION THAT RATE OF DUTY DRAW BACK ATTRIBUTABLE TO CUSTOMS DUTY SHOULD BE HIGHER THAN DEPB BENEFITS, ONCE THE OPTION WAS EXER CISED BY THE ASSESSEE. HOWEVER IN A CASE WHEN THERE WAS NO OPTIO N FOR AN ASSESSEE IN ANY YEAR, DUE TO THE REASON THAT NO SUC H DUTY DRAW BACK WAS AVAILABLE, IT WILL BE TRAVESTY OF JUSTICE TO DE NY THE BENEFIT FOR THE SALE REASONS THAT IT COULD NOT EXERCISE SUCH OPTION . 2.7 IN ANY CASE, A PROVISION GIVING A DEDUCTION NEEDS TO BE INTERPRETED LIBERALLY, REASONABLY AND IN FAVOUR OF THE ASSESSEE AS RULED BY HONBLE SUPREME COURT IN A PLETHORA OF DEC ISIONS STARTING FROM CIT V/S. SOUTH ARCOT SOCIETY (176 ITR 117) TO CIT V/S. PURUSHOTHAM (247 ITRRE 516). IN THE CASE OF MYSORE MINERALS VS. CIT (239 ITR 575), HONBLE SUPREME COURT HAS HELD T HAT A PROVISION GIVING A DEDUCTION SHOULD BE ASSIGNED SUCH MEANING AS WOULD ENABLE THE ASSESSEE TO SECURE THE BENEFIT INTENDED TO BE GIVEN BY THE LEGISLATION. 2.8 IN ANY CASE, LAW DOES NOT REQUIRE A PERSON TO DO OR PROVE AN IMPOSSIBLE THING. ASSESSEE, UNDISPUTEDLY NEVER HAD DUTY DRAW BACK FACILITY AVAILABLE IN THE IMPUGNED PREVIOUS YEAR AN D HENCE THE OPTION GOT NATURALLY LIMITED TO THE DEPB BENEFITS. HENCE, IN OUR OPINION ASSESSEE CANNOT BE DEEMED TO HAVE NOT COMPLIED WITH THE CONDITIONS SPECIFIED IN FOURTH PROVISO TO SUBSECTIO N (3) OF SECTION 80HHC. 2.9 HENCE WE SET ASIDE THE ORDERS OF C IT(A) AN D ASSESSING OFFICER AND DIRECT ASSESSING OFFICER THAT ASSESSEE HAD GIVEN DEDUCTION UNDER SECTION 80HHC IN RESPECT OF ITS DEP B BENEFIT OF RS.1,30,35,950/-. NO CONTRARY DECISION HAS BEEN POINTED OUT BY TH E PARTIES, THEREFORE, IN VIEW OF THE PRECEDENT, WE DIRECT THE AO TO MODIF Y HIS ORDER AFTER TAKING INTO CONSIDERATION THE RATIO OF THE DECISION OF THE TRIB UNAL. WE ORDER ACCORDINGLY. 11. THIS GROUND COVERS THE ISSUE RAISED IN APPEALS FOR ALL THE YEARS OF THE ASSESSEE AND CROSS OBJECTIONS OF THE ASSESSEE. 12. THE NEXT ISSUE RAISED IN THE APPEALS OF THE ASS ESSEE FOR ALL THE YEARS IS AGAINST CONFIRMING AD HOC DISALLOWANCE OUT OF PURCH ASES FROM UNVERIFIABLE PARTIES. VARUN INDUSTRIES LTD. 8 13. THIS ISSUE IS ALSO INVOLVED IN ALL THE APPEALS OF THE DEPARTMENT AS THE LD. CIT(A) HAS ALLOWED THE ISSUE PARTLY IN FAVOUR OF THE ASSESSEE AND PARTLY IN FAVOUR OF THE DEPARTMENT. 14. SINCE THIS GROUND IS CROSS GROUND, THEREFORE, THE SAME IS DISPOSED OF TOGETHER. 15 DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT THE ASSESSEE HAD MADE PURCHASES FOR THE PURPOSE OF EXPORT SALES. THE AO WANTED TO EXAMINE THE GENUINENESS OF THE PURCHASES. THE ASSESSEE WAS DIRE CTED TO FILE THE DETAILS OF PURCHASES AND CONFIRMATIONS OF THE PARTIES. THE ASS ESSEE PROVIDED ADDRESSES OF THE RESPECTIVE PARTIES AND BANK ACCOUNT NUMBER OF A LMOST ALL THE PARTIES FROM WHOM PURCHASES WERE MADE. IT WAS EXPLAINED THAT PUR CHASES HAVE BEEN INVARIABLY MADE BY WAY OF ACCOUNT PAYEE CHEQUES ONL Y. COPIES OF REGISTERS, PURCHASE BILLS, DELIVERY CHALLANS AND BANK STATEMEN TS EVIDENCING PAYMENTS TO THE PARTIES, STOCK REGISTER, SHIPPING BILLS AND BILL OF LADING ETC. WERE FILED. THE AO, AFTER EXAMINING THE DETAILS, NOTED THAT THOUGH THE PURCHASES ARE IDENTIFIABLE, HOWEVER, THERE IS A VARIATION IN RATES OF PURCHASES FROM DIFFERENT PARTIES. THE AO NOTED THAT IN PURCHASES THERE ARE FREQUENT RATE DIF FERENCES. THE AO FURTHER OBSERVED THAT COMPARISON OF THESE RATES OF DIFFERE NT ITEMS OF STOCKS WITH THE PURCHASES OF STOCK FROM OTHER PARTIES SHOWS AN OVER ALL UPWARD DIFFERENCE IN THE RATES OF THE SAME ITEMS ALLEGEDLY PURCHASED FROM TH E LISTED PARTIES BY 0.3%. THE AO FURTHER OBSERVED THAT THIS DIFFERENCE IS ON A RA NDOM CHECK BASIS AS EACH AND EVERY PURCHASE COULD NOT BE VERIFIED BECAUSE OF PAU CITY OF TIME. THEREFORE, THE AO, TAKING INTO CONSIDERATION THE DIFFERENCE IN RAT ES AND OTHER DISCREPANCIES, 0.40% PURCHASES WERE TREATED AS INFLATED PURCHASES. THIS RESULTED IN AN AD HOC ADDITION OF RS.40,28,108/-, RS.82,86,178/- AND RS.2 3,75,977/- FOR ASST. YEARS 2001-02 TO 2003-04 RESPECTIVELY. SIMILAR ADDITION W AS MADE FOR ASST. YEAR 2004- 05 ALSO. THE ASSESSEE PREFERRED APPEALS BEFORE THE CIT(A), BEFORE WHOM IT WAS VARUN INDUSTRIES LTD. 9 SUBMITTED THAT ALL THE PURCHASES ARE VOUCHED AND CO MPLETE DETAILS HAVE BEEN FILED BEFORE THE AO. IT WAS FURTHER SUBMITTED THAT NOT A SINGLE INSTANCE OF INFLATED PURCHASE HAS BEEN BROUGHT ON RECORD BY BRINGING ANY POSITIVE MATERIAL ON RECORD. IT WAS FURTHER SUBMITTED THAT AGAINST THE PURCHASES MADE BY THE ASSESSEE, THE ASSESSEE HAS MADE EXPORT SALES WHICH HAVE BEEN ACCE PTED BY THE AO. ALTERNATIVELY, IT WAS SUBMITTED THAT IF THE ADDITIO NS ON ACCOUNT OF INFLATED PURCHASES ARE TO BE SUSTAINED, THEN ON INCREASED PR OFIT, DEDUCTION U/S.80HHC HAS TO BE ALLOWED. AFTER CONSIDERING THE SUBMISSION S AND PERUSING THE MATERIAL ON RECORD, THE CIT(A) WAS OF THE VIEW THAT THE AD HOC DISALLOWANCE ON ACCOUNT OF INFLATED PURCHASES ARE ON HIGHER SIDE. ACCORDINGLY , HE REDUCED THE DISALLOWANCES TO 0.30% AGAINST 0.40% MADE BY THE AO. THE ALTERNA TIVE GROUND THAT DEDUCTION U/S.80HHC IS ALLOWABLE ON THE AD HOC DISALLOWANCES WAS ALSO REJECTED BY THE CIT(A). AS STATED ABOVE, NOW BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. 16. DETAILED ARGUMENTS WERE ADVANCED BY THE LD. A.R . THE CONTENTIONS RAISED BEFORE THE LOWER AUTHORITIES WERE REITERATED HERE BEFORE THE TRIBUNAL. THE ATTENTION OF THE BENCH WAS DRAWN ON STATEMENT OF PU RCHASES ALONG WITH COMPARABLE CASES WHICH IS ENCLOSED ALONG WITH THE O RDER AS ANNEXURE 2. IT WAS EXPLAINED THAT IN SOME CASES WHERE THE PURCHASES MA DE ON HIGHER RATE THE AO HAS ACCEPTED THE SAME AND WHERE PURCHASES MADE ON L OWER RATES HAVE BEEN REJECTED BY THE AO. ATTENTION IN SUPPORT OF THIS CO NTENTION WAS INVITED TO PAGE 1 OF ANNEXURE 2 OF THE ASSESSMENT ORDER. IT WAS EXPLA INED THAT EVEN OTHERWISE THE ASSESSEE IS ENTITLED TO DEDUCTION U/S.80HHC ON THE INCREASED PROFIT BY WAY OF AD HOC DISALLOWANCES AS HELD BY VARIOUS COURTS. 17. ON THE OTHER HAND, THE LD. D.R. HAS PLACED RELI ANCE ON THE ORDERS OF AO AND CIT(A) WHERE DEDUCTIONS HAVE BEEN REDUCED AND S USTAINED RESPECTIVELY. VARUN INDUSTRIES LTD. 10 18. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE DESERVES TO SUCCEED ON THIS GROUND IN TOTO. THERE IS NO DISPUTE THAT THE ASSESSEE HAS MAINTAINED COMPLETE P URCHASE VOUCHERS AND THEY HAVE BEEN ENTERED IN THE BOOKS OF ACCOUNT AND STOCK REGISTER HAS BEEN MAINTAINED. AGAINST THE PURCHASES, THE ASSESSEE HAS MADE EXPORT SALES. THUS, THE SALES COMPONENT HAS BEEN ACCEPTED BY THE AO FOR ALL THE YEARS. BY MERELY OBSERVING THAT THERE IS DIFFERENCE IN RATES OF THE SAME ITEM FROM DIFFERENT PARTIES, IN OUR CONSIDERED VIEW, IS NOT A SOLID REASON FOR M AKING AD HOC DISALLOWANCE ON ACCOUNT OF INFLATED PURCHASES. THERE IS NOT A SINGL E EVIDENCE WITH THE AO WHICH PROVES THAT THE ASSESSEE HAD MADE PAYMENTS OF PURCH ASES FOR SHOWING INFLATED PURCHASES. THERE MAY BE SO MANY REASONS TO MAKE PUR CHASES AT DIFFERENT RATES. ONE OF THE REASONS MAY BE THAT AT THAT POINT OF TIM E THE SAME ITEMS MAY NOT BE AVAILABLE AT LOWER RATE AS PURCHASED EARLIER. A PRU DENT BUSINESSMAN KNOWS HOW TO RUN HIS BUSINESS ACTIVITIES. FOR HOLDING THAT TH ERE ARE INFLATED PURCHASES, SOME CONCRETE MATERIAL SHOULD HAVE BEEN BROUGHT ON RECOR D WHICH THE AO FAILED TO DO SO. EVEN OTHERWISE, IF BY ANY REASON THE PROFITS AR E INCREASED ON ACCOUNT OF INFLATED PURCHASES, THEN DEDUCTION U/S.80HHC HAS TO BE ALLOWED TO THE ASSESSEE AS HELD BY VARIOUS COURTS. IN VIEW OF THESE FACTS A ND CIRCUMSTANCES, WE HOLD THAT THE AO WAS NOT JUSTIFIED IN MAKING AD-HOC DISALLOWA NCES ON ACCOUNT OF INFLATED PURCHASES. THE LD. CIT(A) WAS ALSO NOT JUSTIFIED I N NOT ACCEPTING THE EXPLANATION OF THE ASSESSEE IN FULL. ACCORDINGLY, WE DELETE THE AD HOC DISALLOWANCES MADE AND CONFIRMED BY THE LOWER AUTHORITIES FOR ALL THE YEAR S INVOLVED BEFORE US. THIS GROUND OF THE ASSESSEE IS ALLOWED AND THE GROUND OF THE DEPARTMENT FAILS FOR ALL THE YEARS. 19. THERE IS ONE MORE GROUND IN THE APPEALS OF THE ASSESSEE FOR ASST. YEAR 2001-02 AND OTHER YEARS I.E. AGAINST INITIATION OF PROCEEDINGS U/S.147. VARUN INDUSTRIES LTD. 11 20. SINCE WE HAVE DISPOSED OF THE APPEALS OF THE A SSESSMENT FOR THE ASST. YEAR 2001-02 AND OTHER YEARS ON MERITS, WE DECLINE TO ADJUDICATE THIS GROUND AT THIS POINT OF TIME. 21. THERE IS ONE MORE EXTRA GROUND IN THE CROSS OBJ ECTION OF THE ASSESSEE FOR THE ASST. YEAR 2001-02 I.E. AGAINST UPHOLDING LEVY OF INTEREST 234B AND 234D AS OTHER GROUNDS IN CROSS OBJECTIONS ARE SIMILAR TO TH E GROUNDS IN THE REGULAR APPEALS OF THE ASSESSEE. 22. THE ISSUE IN RESPECT OF LEVY OF INTEREST U/S.23 4D IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE O F EKTA PROMOTERS (113 ITD 719). ACCORDINGLY, THE AO IS DIRECTED TO ALLOW THE RELIEF IN VIEW OF THE DECISION OF THE SPECIAL BENCH (SUPRA). 23. IN RESPECT OF CHARGING OF INTEREST U/S.234B, TH E LD. CIT(A) HAS ALREADY GIVEN DIRECTIONS TO THE AO TO CONSIDER THE CBDT CIR CULAR NO.2 OF 2006 AND THEN RECALCULATE THE INTEREST ACCORDINGLY. THE LD. A.R. HAS RELIED ON THE DECISION OF MADRAS HIGH COURT IN 298 ITR 67. THE AO IS FURTHER DIRECTED TO CONSIDER THIS DECISION AND THEN PASS ORDER. 24. FOR THE ASST. YEARS 2002-03 AND 2003-04, THERE IS ONE MORE GROUND I.E. CONFIRMING THE DISALLOWANCE OF INTEREST ON ACCOUNT OF EEFC INTEREST AND OTHER INTEREST RECEIVED ON LOANS. 25. AFTER CONSIDERING THE SUBMISSIONS, WE FIND THAT THE ORDER OF CIT(A) IS LIABLE TO CONFIRMED IN THIS RESPECT. THE LD. A.R. HAS STAT ED THAT IN EARLIER YEAR THE INTEREST INCOME HAS BEEN HELD AS BUSINESS INCOME BY THE LD. CIT(A) AND THE DEPARTMENT HAS NOT FILED ANY APPEAL AGAINST THAT. FOR A MOMENT, IF THE ARGUMENT OF THE ASSESSEE IS ACCEPTED, BUT IN VIEW OF THE DEC ISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ASIAN STAR LTD. ITA 200/2009 D T.18/19 MARCH 2010, THE CONTENTION OF LD. A.R. IS LIABLE TO DISMISSED AS TH E HONBLE BOMBAY HIGH COURT HAS VARUN INDUSTRIES LTD. 12 HELD THAT NETTING OF INTEREST CANNOT BE ALLOWED. UN DER THE CIRCUMSTANCES, WE CONFIRM THE ORDER OF CIT(A) AND REJECT THIS GROUND. 26. THERE IS ONE MORE GROUND IN THE APPEALS OF THE ASSESSEE FOR THE ASST. YEARS 2002-03 TO 2004-05 RELATING TO CHARGING OF I NTEREST U/S.234D. 27. THIS ISSUE HAS TO BE DECIDED IN THE LIGHT OF TH E DECISION OF THE SPECIAL BENCH DECISION OF TRIBUNAL IN THE CASE OF EKTA PROM OTERS (SUPRA). ACCORDINGLY, WE DIRECT THE AO TO MODIFY HIS ORDERS IN THE LIGHT OF THE SAID DECISION OF THE SPECIAL BENCH. 28. THERE IS NO OTHER GROUND IN THE APPEALS AND CRO SS OBJECTIONS OF THE ASSESSEE. 29. NOW, WE WILL TAKE UP THE REMAINING GROUNDS IN T HE APPEALS OF THE DEPARTMENT. 30. THE FIRST ISSUE RELATES TO TREATING THE ENTIRE DEPB TO BE EXCLUDED FOR CALCULATION OF DEDUCTION U/S.80HHC. 31. THIS ISSUE HAS TO BE DECIDED IN VIEW OF THE DE CISION OF THE TRIBUNAL IN THE CASE OF TOPMAN EXPORTS (125 TTJ 289). ACCORDINGLY, WE SET ASIDE THE ISSUE TO THE FILE OF AO TO DECIDE THE SAME AFRESH IN THE LIGHT O F THE DECISION IN THE CASE OF TOPMAN EXPORTS (SUPRA). 32. THE NEXT ISSUE RELATES TO ALLOWING THE NETTING OF INTEREST RECEIVED ON BANK F.D. RELATING TO EXPORT CREDIT FACILITY. 32. THIS ISSUE HAS TO BE DECIDED IN FAVOUR OF THE DEPARTMENT AND AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE HONBLE BOM BAY HIGH COURT IN THE CASE OF ASIAN STAR (SUPRA). . 33. THE LD. COUNSEL OF THE ASSESSEE HAS ALSO FAIRLY CONCEDED THAT IN VIEW OF THE SAID DECISION OF THE BOMBAY HIGH COURT, THIS ISSUE CAN BE DECIDED AGAINST THE ASSESSEE FOR ALL THE YEARS INVOLVED BEFORE THE TRIB UNAL. ACCORDINGLY, WE SET ASIDE VARUN INDUSTRIES LTD. 13 THE ORDERS OF CIT(A) AND RESTORE THOSE OF AO IN THI S RESPECT FOR ALL THE YEARS INVOLVED HERE BEFORE US. 34. THE NEXT ISSUE IN APPEAL OF THE APPEAL IS AGAIN ST NOT TO ALLOW 10% OF EXPORT INCENTIVE TO BE REDUCED FROM INDIRECT EXPENS ES. 35. THIS ISSUE IS COVERED BY THE DECISION OF THE AP EX COURT IN THE CASE OF HIRO EXPORTS (295 ITR454) IN FAVOUR OF THE ASSESSEE. THE REFORE, WE SEE NO REASON TO INTERFERE WITH THE FINDING OF CIT(A) IN THIS RESPEC T. ACCORDINGLY, THE ORDERS OF THE LD. CIT(A) ARE UPHELD FOR ALL THE YEARS. 36. THE REMAINING ISSUE IN APPEAL OF THE DEPARTMENT IS AGAINST NOT TO ALLOW REDUCTION OF DISALLOWANCE OUT OF PURCHASES FROM UNV ERIFIABLE PARTIES. 37. WE HAVE ALREADY DISPOSED OF THIS ISSUE WHILE DI SPOSING THE GROUNDS RAISED IN THE APPEALS OF THE ASSESSEE. ACCORDINGLY, THIS G ROUND OF THE DEPARTMENT ALSO FAILS. 38. IN THE RESULT, THE APPEALS & CROSS OBJECTIONS O F THE ASSESSEE AND THE APPEALS OF THE DEPARTMENT ARE ALLOWED IN PART. ORDER PRONOUNCED ON THE 30TH DAY OF APRIL, 2010. SD/- SD/- (B. RAMAKOTAIAH) (R.K. GUPTA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 30TH APRIL, 2010. NG: VARUN INDUSTRIES LTD. 14 COPY TO : 1. ASSESSEE. 2.DEPARTMENT. 3 CIT(A)-XXX,MUMBAI. 4 CIT-7,MUMBAI. 5.DR,F BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. VARUN INDUSTRIES LTD. 15 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 27-4-2010 SR.PS/ 2 DRAFT PLACED BEFORE AUTHOR 28-4-2010 SR.PS/ 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER