ALBRITE & WILSON CHEMICALS INDIA LTD, V. DY CIT CIR 6(1),

ITA 4362/MUM/2003

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6322 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 22-11-2010
• Assessment Year: 1999-2000
• Appeal Filed On: 04-06-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Capital asset; Business income; Depreciation; Opportunity of being heard; Additional evidence; Procedural lapse; Revenue expenditure; Capital expenditure
• Section: 80HHC; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI VIJAY PAL RAO, JM ITA NO.4362/MUM/2003 : ASST.YEAR 1999-2000 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED, RHONE POULENE HOUSE, WING C S.K.AHIRE MARG, WORLI MUMBAI 400 025. PA NO.AAACA3841L. VS. THE DY.COMMISSIONER OF INCOME-TAX CIRCLE 6(1) MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.4880/MUM/2003 : ASST.YEAR 1999-2000 THE DY.COMMISSIONER OF INCOME-TAX CIRCLE 6(1) MUMBAI. VS. M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED, RHONE POULENE HOUSE, WING C S.K.AHIRE MARG, WORLI MUMBAI 400 025. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI AJIT KUMAR SINHA (CIT-DR) ASSESSEE BY : SHRI NITESH JOSHI O R D E R PER R.S.SYAL, AM : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND T HE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 15.11.2002 IN RELATION TO THE ASSESSMENT YEAR 1999- 2000. 2. FIRST GROUND OF THE ASSESSEES APPEAL IS AGAINST THE UPHOLDING OF THE DISALLOWANCE OF BAD DEBT AMOUNTING TO RS.10,064. FI RST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION AMOUNTIN G TO RS.29,39,891 BY THE LD. CIT(A) ON ACCOUNT OF BAD DEBT WRITTEN OFF. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MA NUFACTURING AND SALE OF CHEMICALS. A SUM OF RS.29,49,955 WAS WRITTEN OFF AS BAD DEBT. THE ASSESSING OFFICER NOTED THAT THE DECISION FOR WRITING OFF THE BAD DEBT WAS TAKEN ON 14.07.1999 AND HENCE THERE COULD NOT HAVE BEEN FILED ANY CLAI M FOR BAD DEBT IN THE BOOKS OF ACCOUNT FOR THE YEAR ENDING ON 31.03.1999. HE MADE ADDITION OF RS.29.49 LAKHS. IN ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 2 THE FIRST APPEAL THE LEARNED CIT(A) DELETED THE ADD ITION EXCEPT FOR A SUM OF RS.10,064 WHICH WAS OUTSTANDING FROM M/S ABISHEK TE XTILE ENTERPRISE. 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS SEEN THAT THE ASSESSEES ACCOUNTS WERE FINALIZED ON 14.07.1999 AND ON THE SAME DAY RESOLUTION WAS PASSED BY THE BOARD FOR WRITING OFF THE BAD DEBT AMOUNTING TO RS.29.49 LAKHS. FROM THE ANNUAL ACCOUN TS IT IS SEEN THAT THE ASSESSEE WROTE OFF A SUM OF RS.0.54 LAKH BY REDUCING PROVISI ON MADE IN EARLIER YEARS AMOUNTING TO RS.28.95 LAKHS FROM BAD DEBT WRITTEN O FF AMOUNTING TO RS.29.49 LAKHS. THUS IT IS THE AMOUNT OF BAD DEBT FOR THE Y EAR AT RS29.49 LACS, WHICH HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT AND WAS AD DED BY THE ASSESSING OFFICER. RECENTLY THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. VS. CIT [(2010) 323 ITR 397 (SC)] HAS HELD THAT AFTER 1.4.1989 ANY AMOUNT WRITTEN OF F AS BAD DEBT IN THE BOOKS OF ACCOUNT IS DEDUCTIBLE U/S.36(1)(VII) A ND THERE IS NO NEED TO ESTABLISH THAT THE DEBT HAS BECOME BAD IN THE PREVIOUS YEAR. IN THAT VIEW OF THE MATTER AND RESPECTFULLY FOLLOWING THE JUDGEMENT OF THE HONBLE APEX COURT, WE UPHOLD THE VIEW TAKEN BY THE LEARNED CIT(A) INSOFAR AS THE DEP ARTMENTAL GROUND IS CONCERNED, SINCE THE AMOUNT WAS WRITTEN OFF AS BAD DEBT IN TH E BOOKS OF ACCOUNT FOR THE YEAR AND THE CONDITION LAID DOWN U/S 36(2) IS UNDOUBTEDL Y SATISFIED. AS REGARDS THE SUM OF RS.10,064, WHICH HAS NOT BEEN ALLOWED BY THE LD. CIT(A), IT IS NOTED THAT THE SAME WAS OUTSTANDING DUE TO SHORT PAYMENT ON PART O F THE CUSTOMER BUT DUE TO A PROCEDURAL LAPSE ON ITS PART, THE AMOUNT OF DUTY DRAWBACK BENEFIT COULD NOT BE CLAIMED. THE LEARNED A.R. EXPLAINED THAT AGAINST TH E SUM OUTSTANDING FROM ABISHEK TEXTILE ENTERPRISE, IT REALIZED THE ENTIRE AMOUNT EXCEPT THE AMOUNT OF RS.10,064 WHICH WAS DUTY DRAWBACK CLAIM ACCRUING TO THE SAID PARTY AND TRANSFERRED TO THE ASSESSEE. THUS THE AMOUNT DUE FR OM ABISHEK TEXTILE ENTERPRISE GOT ADJUSTED WITH THE ACTUAL AMOUNT RECEIVED AS WEL L AS THE CLAIM OF DUTY DRAWBACK. THE LEARNED A.R. EXPLAINED THAT THE ASSESSEE COULD NOT FILE THE CLAIM BEFORE CUSTOM DEPARTMENT IN PROPER TIME AS A RESULT OF WHICH IT B ECAME TIME BARRED. WE ARE ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 3 UNABLE TO APPRECIATE AS TO HOW THIS AMOUNT OF RS.10 ,064 CAN BE TREATED AS BAD DEBT IN TERMS OF SECTION 36(1)(VII) R/W SECTION 36(2). O N THE ISSUANCE OF BILL IN FAVOUR OF ABISHEK TEXTILE ENTERPRISE, THE ASSESSEE REALIZED T HE AMOUNT AND ALSO GOT DUTY DRAWBACK BENEFIT REALIZABLE FROM CUSTOM DEPARTMENT. ONCE THE AMOUNT WAS REALIZED FROM ABISHEK TEXTILE ENTERPRISE NOTHING CO ULD BE SAID TO HAVE BEEN DUE FROM THIS PARTY WHICH COULD BE CONSIDERED AS TRADIN G DEBT. ON THE RECEIPT OF THE CLAIM FOR DUTY DRAWBACK, ACCOUNT OF ABISHEK TEXTIL E ENTERPRISE GOT SQUARED UP. IT WAS LATER ON FOR THE ASSESSEE TO LODGE THE CLAIM BE FORE THE CUSTOM AUTHORITIES IN TIME AND ENFORCE THE RECOVERY. HAVING NOT DONE SO, THE SAID AMOUNT OF RS.10,064 CANNOT BE ALLOWED AS BAD DEBT. THE LEARNED A.R. ARG UED, IN ALTERNATIVE, THAT IN CASE THIS AMOUNT WAS NOT CONSIDERED AS BAD DEBT, THEN IT SHOULD BE CONSIDERED AS BUSINESS LOSS. ON A SPECIFIC QUERY, NO DOCUMENTATIO N WAS PLACED ON RECORD TO SUBSTANTIATE THE ASSESSEES CLAIM THAT THE SUM OF R S.10,064 DUE FROM CUSTOM DEPARTMENT TOWARDS DUTY DRAWBACK BENEFIT EXPIRED. I N PRINCIPLE, WE AGREE WITH THE CONTENTION OF THE LEARNED A.R. IF THE SAID AMOUNT O F RS.10,064 WAS NOT REALIZED THEN IT SHOULD HAVE BEEN WRITTEN OFF AS BUSINESS LO SS. HOWEVER IN THE ABSENCE OF ANY DOCUMENTATION TO SUPPORT THIS CLAIM, WE SET ASI DE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF THE A.O. FOR VERI FYING THE VERACITY OF ASSESSEES CLAIM AND THEN DECIDE AS PER LAW. 4. GROUND NO.2 OF THE ASSESSEES APPEAL IS AGAINST THE RE-COMPUTATION OF DEDUCTION U/S.80-IA. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION U/S.80-IA AT RS.59,95,468. THIS CLAIM WAS IN RESPECT OF LABSA PLANT AT ROHA. THE A.O. NOTED THAT FOR THE PURPOSE OF THIS D EDUCTION, THE ASSESSEE HAD TAKEN SALES AND PROCESSING INCOME AT RS.6.49 CROREE, WHIC H WAS CORRECT BUT TOTAL COST OF GOODS SOLD TAKEN AT RS.4.49 CRORES, WAS NOT INCLUS IVE OF INDIRECT LABOUR COST. IT WAS SEEN THAT THE ASSESSEE HAD DEBITED TOTAL EMPLOYMENT COST AT RS.794.82 LAKHS. THE ASSESSEE ADMITTED THAT INDIRECT EMPLOYMENT COST WAS NOT CONSIDERED FOR DETERMINATION OF TOTAL COST FOR THE PURPOSE OF DEDU CTION U/S.80-IA. THE ASSESSEE ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 4 ALSO INFORMED THAT ONLY DIRECT LABOUR IN RESPECT OF ROHA PLANT WAS INCLUDED FOR THIS PURPOSE. IT WAS AGREED THAT OUT OF TOTAL EMPLOYMENT COST DIRECT COST WAS AT 60% AND OTHER EMPLOYEE COST AT 40%. OUT OF THE OTHER EMPLOY MENT COST, 60% PERTAINED TO AMBERNATH UNIT AND 40% TO ROHA UNIT. IT WAS ALSO IN FORMED THAT THERE WERE FOUR PLANTS AT ROHA (INCLUDING LABSA PLANT) AND APPROXIM ATELY COST OF 25% EACH WAS ATTRIBUTABLE TO THE LABSA PLANT AT ROHA. THE ASSESS ING OFFICER WORKED OUT INDIRECT LABOUR COST, AS RELATABLE TO LABSA PLANT AT ROHA, AMOUNTING TO RS.31.79 LAKHS AS UNDER:- TOTAL EMPLOYEE COST 794.82 LAKHS DIRECT LABOUR @ 60% 476.89 LAKHS OTHER EMPLOYEE COST @ 40% 317.93 LAKHS OTHER EMPLOYEE COST FOR AMBERNATH UNIT @ 60% 190. 76 LAKHS OTHER EMPLOYEE COST FOR ROHA UNIT @ 40% 127.17 L AKHS OTHER EMPLOYEE COST FOR LABSA PLANT AT ROHA @25% 31.79 LAKHS 5. IT WAS FURTHER NOTED BY THE A.O. THAT THE ASSESS EE HAD NOT INCLUDED RESEARCH AND DEVELOPMENT EXPENSES AND SALES COMMISSION EXPEN SES IN THE TOTAL COST ATTRIBUTABLE TO LABSA PLANT. THE A.O., THEREFORE, ADDED EMPLOYEE COST OF RS.31.79 LAKHS , R & D AND SALE COMMISSION AT RS. 1.89 LAC TO THE TOTAL COST SHOWN BY THE ASSESSEE AT RS.4.49 CRORES AND WORKED OUT TO TAL COST AT RS.4.83 CRORES. RESULTANTLY THE AMOUNT OF DEDUCTION U/S.80-IA WAS R EDUCED. THE ASSESSEE MADE DETAILED SUBMISSIONS BEFORE THE LEARNED CIT(A) CLAI MING THAT AGGREGATE INDIRECT SALARY AND MISCELLANEOUS FACTORY EXPENSES AMOUNTING TO RS.32.09 LAKHS WERE ALREADY INCLUDED IN MISCELLANEOUS FACTORY OVERHEADS AND MISCELLANEOUS FACTORY EXPENSES AND 20% OF THAT WAS ATTRIBUTABLE TO LABSA . IT WAS CLAIMED THAT THE SAID AMOUNT OF RS.6,41,930 (20% OR RS32.09 LACS) COULD NOT HAVE BEEN FURTHER ADDED B BY THE AO. IT WAS ALSO CLAIMED THAT R & D EXPENSES AND SALES COMMISSION DID NOT RELATE TO LABSA PLANT. IN SUPPORT OF THAT, THE ASS ESSEE FILED SOME ADDITIONAL EVIDENCE. THE LEARNED CIT(A) REFUSED TO ADMIT THE A DDITIONAL EVIDENCE AND UPHELD THE ASSESSMENT ORDER ON THIS ISSUE. ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 5 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS NOTED THAT THE ASSESSEE HAD CLAIMED BE FORE THE LEARNED CIT(A) THAT A PART OF INDIRECT LABOUR COST WAS ALREADY INCLUDED I N THE EMPLOYEE COST SHOWN BY THE ASSESSEE AND MAKING FURTHER ADDITION AMOUNTING TO R S.31.79 LAKHS RESULTED INTO DOUBLE ADDITION TO THAT EXTENT. THE LEARNED CIT(A) REFUSED TO ADMIT THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE IN SUPPORT OF ITS CO NTENTION. IN OUR CONSIDERED OPINION IF THE AMOUNT CLAIMED BY THE ASSESSEE AS RE PRESENTING INDIRECT LABOUR COST WAS ALREADY INCLUDED IN THE SUM OF RS.4.49 CRORES, THERE WAS NO LOGIC IN INCLUDING THE SAME AMOUNT ONCE AGAIN WHICH STOOD EMBEDDED IN THE TOTAL FIGURE OF RS.31.79 LAKHS. SIMILARLY AS REGARDS R & D AND SALES COMMISS ION FOR WHICH THE A.O. HAD MADE ADDITION OF RS.1.89 LAKHS, THE ASSESSEE FILED CERTAIN EVIDENCE BEFORE THE LEARNED CIT(A) IN SUPPORT OF ITS CLAIM THAT THE SAM E DID NOT RELATE TO LBASA UNIT. IN OUR CONSIDERED OPINION THE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE M ATTER IS RESTORED TO THE FILE OF A.O. WE ORDER ACCORDINGLY AND DIRECT HIM TO VERIFY THE CLAIM OF THE ASSESSEE QUA THE INCLUSION OF INDIRECT LABOUR COST IN THE MISCEL LANEOUS FACTORY EXPENSES AND MISCELLANEOUS FACTORY OVERHEADS. IF THE SAME IS NOT FOUND TO BE CORRECT, THEN DEDUCTION BE ALLOWED ACCORDINGLY FROM INDIRECT EMPL OYEE COST WORKED OUT BY THE AO. SIMILARLY AS REGARDS R & D AND SALES COMMISSIO N, THE A.O. NEED TO VERIFY THE RELATION OF SUCH AMOUNT WITH LABSA UNIT AND THEN DE CIDE ACCORDINGLY. 7. GROUND NO.3 OF THE ASSESSEES APPEAL IS AGAINST THE DISALLOWANCE OF ADHOC EXPENSES ON REPAIRS AND MAINTENANCE ON THE GROUND T HAT THE DETAILS WERE NOT SUBMITTED. THE ASSESSEE CLAIMED DEDUCTION OF RS.109 .06 LAKHS UNDER THE HEAD REPAIRS AND MAINTENANCE EXPENSES. ON BEING CALLED UPON TO FURNISH DETAILS OF REPAIRS AND MAINTENANCE TO BUILDING, PLANT AND MACH INERY AND OTHERS ALONG WITH THE NATURE OF WORK CARRIED OUT, THE ASSESSEE DID NOT SU BMIT ANY SUCH DETAILS. THE A.O. NOTED THAT IN ASSESSMENT YEAR 1998-99 THE TOTAL REP AIRS AND MAINTENANCE EXPENSES ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 6 WERE AT RS.137.76 LAKHS, OUT OF WHICH A SUM OF RS. 35.66 LAKHS (25.88% OF TOTAL REPAIR EXPENSES ) WAS HELD TO BE CAPITAL EXPENDITUR E. IN THE ABSENCE OF ANY DETAIL FILED BY THE ASSESSEE OF REPAIRS EXPENSES, APPLYING THE SAME RATIO AS IN THE PRECEDING YEAR, HE HELD THAT THE SUM OF RS.28.22 LA KHS WAS TO BE CONSIDERED AS CAPITAL EXPENDITURE. NO RELIEF WAS ALLOWED IN THE F IRST APPEAL. 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ALLOCATION BETWEEN CAPITAL AND REVENUE EXPENDITURE IN THE CURRENT YEAR ON THE BASIS OF PRECEDING YEAR CANNOT BE ACCEPTED. IN ONE YEAR THERE MAY BE HIGHER CAPITAL EXPENDITURE BUT LOWER REVENUE EXPENDITURE AND IN THE OTHER YEAR, THE POSITION MAY BE QUITE CONVERSE. WHAT IS R EQUIRED TO BE EXAMINED IS THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE IN EACH YEAR FOR ASCERTAINING THE AMOUNT IN THE NATURE OF CAPITAL EXPENDITURE. THE LE ARNED A.R. HAS PLACED ON RECORD COPY OF THE ORDER PASSED BY THE CIT(A) U/S.154 ACCE PTING ASSESSEES CONTENTION TO CERTAIN EXTENT. IN OUR CONSIDERED OPINION THERE CAN NOT BE ANY STRAITJACKET FORMULA FOR DETERMINING THE CAPITAL OR REVENUE EXPENDITURE IN NATURE. THE LEARNED A.R. HAS PLACED CERTAIN DETAILS IN THE PAPER BOOK AT PAGES 7 2 TO 83 SHOWING THE DETAIL OF EXPENDITURE CLAIMED UNDER THE HEAD REPAIRS AND MAIN TENANCE. IN OUR CONSIDERED OPINION IT WOULD BE JUST AND FAIR IF THE IMPUGNED O RDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF A.O. WE ORDER ACCORDINGLY AND DIRECT THE ASSESSING OFFICER TO VERIFY THE DETAIL OF REPAIRS A ND MAINTENANCE EXPENSES AND MAKE ADDITION AFTER SPECIFICALLY POINTING OUT THE AMOUNT OF CAPITAL EXPENDITURE, WITHOUT APPLYING ANY AD HOC PERCENTAGE OF TOTAL EXP ENSES. 9. GROUND NO.4 OF ASSESSEES APPEAL RELATES TO THE COMPUTATION OF DEDUCTION U/S.80HHC. THE FIRST PART OF THE SAME IS TOWARDS CO MMISSION OF RS.64,55,917. FROM THE AUDIT REPORT IN FORM 10CCAC IN WHICH DEDUC TION U/S.80HHC WAS CLAIMED, THE A.O. NOTED THAT THE ASSESSEE HAD REDUC ED A SUM OF RS.64,55,917 AGAINST THE HEAD COMMISSION WHILE COMPUTING THE P ROFITS OF BUSINESS. ON BEING ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 7 CALLED UPON TO EXPLAIN AS TO WHY THE SAID AMOUNT WA S REDUCED, THE ASSESSEE STATED THAT THE CORRECT AMOUNT IN RESPECT OF COMMISSION IN COME WAS RS.4.43 LAKHS BUT IT WAS DUE TO OVERSIGHT THAT THE AUDITOR MENTIONED A S UM OF RS.64.55 LAKHS. AS THE SAID AMOUNT WAS NOT OFFERED FOR TAXATION, THE ASSES SING OFFICER HELD THAT IT WAS LIABLE TO BE ADDED. HE, THEREFORE, MADE ADDITION FO R THE SAID SUM. HOWEVER WHILE COMPUTING DEDUCTION U/S.80HHC, THE ASSESSING OFFICE R HELD THAT INDENTING COMMISSION OF RS.4.43 LAKHS ALONG WITH INTEREST INC OME OF RS.20.71 LAKHS AND MISCELLANEOUS INCOME OF RS.37.02 LAKHS WERE TO BE R EDUCED ON GROSS BASIS AT 90%. AS A RESULT OF THAT DEDUCTION U/S.80HHC WAS COMPUTE D AT RS.42,23,158. THE ASSESSEE COULD NOT CONVINCE THE LEARNED CIT(A) ON T HIS POINT OF VIEW IN THE MATTER OF COMPUTATION OF DEDUCTION U/S.80HHC AS WELL AS AD DITION OF RS.64.55 LAKHS MADE BY THE A.O. ON ACCOUNT OF COMMISSION, ON THE BASIS OF MENTION OF THIS FIGURE IN AUDIT REPORT. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. PAGE NO.17 OF THE PAPER BOOK IS AUDITORS R EPORT IN FORM NO.10CCAC WHICH WAS FILED ALONG WITH THE RETURN OF INCOME. AS PER THIS REPORT, THE AMOUNT OF COMMISSION HAS BEEN SHOWN AT RS.64,55,917, BEING 9 0% OF THE COMMISSION INCOME. 100% OF THE SAID AMOUNT COMES TO RS.71,73,2 41. IT IS SEEN FROM THE SAME AUDIT REPORT THAT BELOW THE ITEM OF COMMISSION, IN TEREST INCOME HAS BEEN SHOWN AT RS.71,73,249 AS REDUCED BY INTEREST EXPENDITURE OF RS.71,26,213. IT IS THIS AMOUNT OF INTEREST RECEIVED OF RS.71.73 LAKHS WHICH WAS IN ADVERTENTLY CONSIDERED BY THE AUDITOR AS COMMISSION INCOME. SUBSEQUENTLY THE AUDI TOR REVISED ITS REPORT IN FORM NO.10CCAC, COPY OF WHICH IS AVAILABLE AT PAGES 14 TO 16 OF THE PAPER BOOK. IT IS NOTICED THAT THE AMOUNT OF COMMISSION HAS BEE N PROMPTLY DISPLAYED AT A CORRECT FIGURE OF RS.4,43,116 IN THE LATER REVISED REPORT. FROM THE ANNUAL ACCOUNTS OF THE ASSESSEE IT CAN BE SEEN THAT THE AMOUNT OF I NDENTING COMMISSION INCLUDED UNDER THE HEAD OTHER INCOME IS RS.4.43 LAKHS. THA T BEING THE POSITION, IT BECOMES ABSOLUTELY CLEAR THAT THE CORRECT FIGURE OF COMMISSION IS RS.4.43 LAKHS ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 8 WHICH WAS INADVERTENTLY CONSIDERED BY THE AUDITOR A S RS.71.73 LAKHS IN THE FIRST INSTANCE BUT SUBSEQUENTLY CORRECTED. WHEN THE ACTUA L COMMISSION INCOME IS RS.4.43 LAKHS, WHICH HAS BEEN REFLECTED IN THE ACCO UNTS AS WELL, THERE IS ABSOLUTELY NO BASIS WITH THE ASSESSING OFFICER IN MAKING THE A DDITION OF RS.64.55 LAKHS SEPARATELY ON ACCOUNT OF UNDISCLOSED COMMISSION REL YING ON THE EARLIER AUDIT REPORT. THIS ISSUE, BEING THE SUBJECT MATTER OF G ROUND NO.8 OF THE ASSESSEES APPEAL, IS ALLOWED. 11. NOW WE AGAIN COME BACK TO GROUND NO.4 WHICH DEA LS WITH THE COMPUTATION OF DEDUCTION U/S.80HHC. WHEN THE EXACT AMOUNT OF CO MMISSION IS FOUND OUT TO BE RS.4.43 LAKHS, IT IS THIS AMOUNT WHICH SHOULD BE CO NSIDERED FOR THE PURPOSE OF REDUCTION FROM THE INCOME UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION FOR THE PURPOSE OF EXPLANATION (BAA) TO SECTION 80HHC. THE LEARNED A.R. DID NOT RIGHTLY PRESS THIS SEGMENT OF THE GROU ND. 12. THE SECOND COMPONENT OF THIS GROUND IS INTEREST INCOME OF RS.20,71,241. THE ASSESSEE EARNED INTEREST OF RS.71.73 LAKHS WHIC H WAS NETTED AGAINST THE INTEREST EXPENDITURE OF RS.71.26 LAKHS AND 90% OF THE NET AM OUNT WAS REDUCED FOR CALCULATING PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 80HHC. THE ASSESSING OFFICER OPINED THAT 90% OF THE GROSS SUM WAS LIABLE TO BE REDUCED FOR COMPUTING PROFITS OF THE BUSINESS AND NOT 90% O F THE NET SUM. WHEN THE MATTER CAME UP BEFORE THE LEARNED CIT(A), HE NOTED THAT OU T OF INTEREST INCOME OF RS.71.73 LAKHS, A SUM OF RS.51.02 LAKHS WAS INTERES T ON TAX FREE BONDS WHICH WAS EXEMPT. HE, THEREFORE, HELD THAT THIS AMOUNT COULD NOT BE TAKEN INTO CONSIDERATION AGAIN BY THE A.O. FOR THE PURPOSES OF EXCLUSION WHI LE COMPUTING THE PROFITS OF THE BUSINESS. THERE IS NO APPEAL OF THE REVENUE ON THIS POINT. AS REGARDS THE REMAINING AMOUNT OF RS.20,71,241, THE LEARNED CIT(A) UPHELD THE VIEW POINT OF THE ASSESSING OFFICER. ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 9 13. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE INTEREST INCOME OF RS.20.71 LAKHS INCLUDED A SUM OF RS.9,31,000, BEIN G INTEREST ON DELAYED PAYMENTS. IT WAS CONTENDED THAT THE SAME AMOUNT SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF EXCLUSION UNDER EXPLANATION (BAA). HE RELIED ON CERTAIN JUDGEMENTS, RENDERED IN THE CONTEXT OF SECTION 80HH/80I ETC., FOR CANVASSI NG THE VIEW THAT INTEREST FROM DEBTORS ON LATE PAYMENT OF SALES BILLS WAS TO BE CO NSIDERED AS INCOME DERIVED FROM EXPORT ON WHICH DEDUCTION WAS ALLOWABLE. IN THE OPP OSITION, THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT SECTION 80HHC IS A FORMULA SECTION AND ONCE AN ITEM OF INCOME FALLS IN A PLACE EARMARK ED FOR THAT ITEM IN THE FORMULA FOR COMPUTING THE AMOUNT OF DEDUCTION U/S.80HHC, TH E SAME HAS TO BE CONSIDERED ACCORDINGLY. IN THIS LIGHT OF FACTS IT WAS CONTENDE D THAT INTEREST INCOME WAS SPECIFICALLY PLACED IN EXPLANATION (BAA) BELOW SECTION 80HHC(4) AND HENCE THE SAME COULD NOT BE CONSIDERED AS PART OF LOCAL SALES AS CONTENDED BY THE LEARNED A.R. WE ARE IN AGREEMENT WITH THE ARGUMENT OF THE L EARNED DEPARTMENTAL REPRESENTATIVE THAT SECTION 80HHC IS A FORMULA SEC TION AND SINCE INTEREST INCOME FALLING UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS BEEN SPECIFICALLY DEALT WITH IN EXPLANATION (BAA) BELOW SECTION 80HHC(4C), THERE IS NO SCOPE FOR APPLYING THE JUDGEMENT REFERRED TO IN SEC TION 80HH/IA FOR HOLDING THAT INTEREST INCOME BE TREATED AS DERIVED FROM INDUSTRI AL UNDERTAKING. IN SECTION 80HHC, THE DEDUCTION IS REQUIRED TO BE COMPUTED STR ICTLY AS PER SUB0SECTION (3) READ WITH THE MEANING GIVEN TO CERTAIN EXPRESSIONS IN EXPLANATION. AS THE INTEREST INCOME FALLING UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS BEEN SPECIFICALLY DEALT WITH IN EXPLANATION (BAA) , WE ARE OF THE CONSIDERED OPINION THAT THE CONTENTION OF THE LEARNED A.R. FOR CONSIDERING INTEREST ON DELAYED PAYMENT AS PART OF `LOCAL TURNOVER CANNOT COUNTENANCED. NO DIRECT PRECEDENT IN THE CONTEXT OF SECTION 80HHC WAS BROUGHT TO OUR NOTICE BY THE LEAR NED A.R. IN SUPPORT OF HIS CONTENTION. ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 10 14. INSOFAR AS OTHER ITEMS OF INTEREST INCOME ARE C ONCERNED, THERE IS NO OBJECTION TO THE LEARNED A.R. THAT THESE BE REDUCED AT THE RA TE OF 90% OF THE GROSS SUM FOR THE PURPOSE OF PROFITS OF THE BUSINESS. THE HONBLE J URISDICTIONAL HIGH COURT IN CIT VS. ASIAN STAR CO. LTD. [(2010) 326 ITR 56 (BOM.)] HAS HELD ACCORDINGLY. WE, UPHOLD THE VIEW POINT OF THE LEARNED CIT(A) ON THIS POINT. 15. THE NEXT ASPECT OF THIS GROUND IS MISCELLANEOUS INCOME OF RS.37.02 LAKHS, 90% OF WHICH HAS BEEN REDUCED BY THE ASSESSING OFFI CER FOR COMPUTING `PROFITS OF THE BUSINESS. FIRST ITEM IS SALE OF MISCELLANEOUS SCRAP AT RS.6,39,722 AND SECOND ITEM IS SALE OF GUNNY BAGS OF RS.2,29,590. THE LEAR NED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE TRIBUNAL HAS DECIDED THIS ISSUE IN ASSESSEES FAVOUR IN THE EARLIER YEARS AND HENCE THE SAME VIEW BE TAKEN. IN THE OPPO SITION THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE IMPUGNED ORDER. 16. HAVING HEARD BOTH SIDES AND PERUSED THE RELEVAN T MATERIAL ON RECORD, WE FIND THAT THE CONTENTION RAISED BY THE ASSESSEE CANNOT B E ACCEPTED IN VIEW OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN CIT VS. K.RAVINDRANATHAN NAIR [(2007) 295 ITR 228 (SC)]. IN THIS CASE IT HAS BEEN HELD BY THE HONBLE SUPRE ME COURT THAT IN TERMS OF CLAUSE (BAA), 90% OF THE IN DEPENDENT INCOME HAD TO BE DEDUCTED FROM THE GROSS TOTAL INCOME TO ARRIVE AT T HE BUSINESS PROFITS TO WHICH THE FRACTION HAS TO BE APPLIED. IN THIS CASE THE DISPUT E WAS ABOUT THE REDUCTION OF 90% OF PROCESSING CHARGES. THE HONBLE SUPREME COURT HE LD THAT SUCH PROCESSING CHARGES WERE INDEPENDENT INCOME AND 90% THEREOF HAD TO BE REDUCED FROM THE GROSS TOTAL INCOME. ADVERTING TO THE FACTS OF THE I NSTANT CASE WE FIND THAT THE SALE OF MISCELLANEOUS SCRAP AND SALE OF GUNNY BAGS ARE ALSO IN THE NATURE OF `INDEPENDENT INCOME AND THE JUDGEMENT OF THE HONBLE SUPREME CO URT WILL SQUARELY APPLY THERETO. THE SAME VIEW HAS BEEN REITERATED BY THE H ONBLE JURISDICTIONAL HIGH COURT IN CIT VS. DRESSER RAND INDIA P. LTD. [(2010) 323 ITR 429 (BOM.)] HOLDING THAT 90% OF PROCESSING CHARGES, SALES TAX REFUND, F REIGHT AND INSURANCE ETC. ARE TO ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 11 BE REDUCED FROM THE PROFITS OF THE BUSINESS. WE, TH EREFORE, UPHOLD THE VIEW TAKEN BY THE LEARNED CIT(A) ON THESE TWO ITEMS. IN SO FAR AS THE RELIANCE OF THE LD. AR ON THE ORDERS OF THE TRIBUNAL IN EARLIER YEARS IS CONC ERNED, WE FIND THAT SUCH ORDERS WERE PASSED BEFORE THE ADVENT OF THE AFORENOTED JUD GMENTS, HAVING BINDING FORCE. SUCH ORDERS, IN CONFLICT WITH THE CONTRARY VIEW TAK EN LATER ON BY THE HONBLE SUPREME COURT AND THAT OF THE HONBLE JURISDICTIONA L HIGH COURT, DO NOT HAVE PRECEDENT VALUE. 17. NEXT AMOUNT IS A SUM OF RS.1,98,021 TOWARDS CLA IM FOR GOODS DAMAGED IN TRANSIT, WHICH WAS REDUCED BY THE AO FOR COMPUTING `PROFITS OF THE BUSINESS. THE LEARNED A.R. HAS PLACED ON RECORD A COPY OF JUDGEME NT OF THE HONBLE JURISDICTIONAL HIGH COURT DATED 18.06.2010 IN CIT VS. PFIZER LTD. IN WHICH IT HAS BEEN HELD THAT THERE IS NO JUSTIFICATION FOR REDUCI NG 90% OF THE INSURANCE CLAIM WHILE COMPUTING ELIGIBLE PROFITS U/S.80HHC. WHILE D ELIVERING THIS JUDGEMENT THE HONBLE HIGH COURT ALSO CONSIDERED THE JUDGEMENT IN K.RAVINDRANATHAN NAIR (SUPRA) AND DRESSER RAND (SUPRA). IN VIEW OF THE DIRECT JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT ON THIS POINT WE HOLD THA T 90% OF RS.1,98,021 CANNOT BE REDUCED FROM PROFITS. 18. NEXT ITEM IS A SUM OF RS.20,00,000 WHICH WAS WR ITTEN BACK AS LIABILITY FOR SALES TAX. THE ASSESSEE ARGUED BEFORE THE LEARNED C IT(A) THAT THE PROVISION FOR SALES TAX WRITTEN BACK WAS NOT CONSIDERED AS INCOME AND HENCE THERE WAS NO QUESTION OF FURTHER REDUCING 90% OF THE SAME FOR TH E PURPOSE OF EXPLANATION (BAA) TO SECTION 80HHC. WE HAVE PERUSED THE COPY OF ACKNO WLEDGEMENT OF INCOME TAX RETURN ALONG WITH COMPUTATION OF TOTAL INCOME. STAR TING POINT OF THIS COMPUTATION IS PROFITS FOR THE YEAR BEFORE TAX AS PER PROFIT A ND LOSS ACCOUNT AMOUNTING TO RS.12,06,37,840. THIS AMOUNT TALLIES WITH THE FIG URE OF PROFITS FOR THE YEAR BEFORE TAX AS PER THE ANNUAL ACCOUNTS. IN THE COMPUTATION OF INCOME THE ASSESSEE HAS REDUCED RS.20 LAKHS UNDER ITEM (K) FROM THE SAID PR OFITS OF RS.12.06 CRORES AND ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 12 REACHED THE BUSINESS INCOME AT RS.9,34,82,696. FROM THE ASSESSMENT ORDER IT CAN BE SEEN THAT THE ASSESSING OFFICER HAS STARTED WITH TH IS FIGURE FOR CALCULATING INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PR OFESSION, TO WHICH CERTAIN ADDITIONS ETC. HAVE BEEN MADE. THOUGH THE ASSESSING OFFICER HAS REFERRED TO IN PARA 5 ABOUT THE AMOUNT OF DEDUCTION U/S.80HHC AT RS.4, 22,158, BUT IT IS NOT COMING UP FROM PARA 5 WHETHER IT WAS THE FIGURE OF PROFITS AFTER REDUCTION OF RS.20 LAKHS WHICH WAS CONSIDERED BY THE A.O. OR NOT. UNDER SUCH CIRCUMSTANCES WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND DIRECT THE ASS ESSING OFFICER TO VERIFY THIS ASPECT. IF THE SAID SUM OF RS.20 LAKHS ALREADY STAN DS EXCLUDED FROM THE FIGURE FOR COMPUTING PROFITS OF THE BUSINESS THEN 90% OF THE SAME SHOULD NOT BE ONCE AGAIN REDUCED. IN THE CONVERSE SITUATION, THE VIEW POINT OF THE LD. CIT(A) IS TO BE UPHELD. 19. NEXT ITEMS ARE WRITE BACK OF LIABILITY RECEIVED FROM CUSTOMERS AT RS.1,58,852 AND WRITE BACK OF A & W SHARE APPLICABLE MONEY DUE TO EXCHANGE DIFFERENCE AT RS1,18,454. THE ASSESSING OFFICER EXCLUDED 90% OF THESE ITEMS FOR COMPUTING PROFITS OF BUSINESS AS PER EXPLANATION (BAA). PRIMARILY WE FIND THAT THESE ITEMS ARE NOT COVERED U/S.41(1) SO AS TO QUALIFY FOR INCLUSIO N IN THE INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE PRIMARY CONDITION FOR APPLICATION OF SECTION 41(1) IS THAT THERE SHOULD BE CESSATION OR REMISSION OF SOME `TRADING LIABILITY. AS THESE AMOUNTS DO NOT REPRESENT ANY T RADING LIABILITY WHICH WAS REMITTED, THESE AMOUNTS COULD NOT HAVE AT ALL INCLU DED UNDER CHAPTER IV-D OF THE ACT. SINCE THE ASSESSING OFFICER HAS PROCEEDED BY I NCLUDING THESE TWO AMOUNTS UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PR OFESSION , WE HOLD THAT 90% OF THE SAME IS LIABLE TO BE INCLUDED ON THE KEN OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN K.RAVINDRANATHAN NAIR (SUPRA) . 20. THE LAST ITEM IS OTHER INCOMES AMOUNTING TO RS. 3,57,477 FOR WHICH NO DETAILS HAVE BEEN GIVEN. WE, THEREFORE, UPHOLD THE VIEW TAK EN BY THE LEARNED CIT(A) ON ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 13 THIS ISSUE AND HOLD THAT IT IS IN THE NATURE OF `IN DEPENDENT INCOME AND 90% OF THE SAME HAS RIGHTLY BEEN EXCLUDED. 21. GROUND NO.5 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS.1,17,82,806 ON ACCOUNT OF MODVAT CREDIT. THE ASSESSING OFFICER NOTED THAT CLOSING MODVAT WAS TO THE TUNE OF RS.1.17 CRORES WH ICH WAS NOT INCLUDED IN THE VALUE OF CLOSING STOCK. HE, THEREFORE, MADE ADDITIO N FOR THE SAME BY HOLDING THAT THIS AMOUNT WAS LIABLE TO BE INCLUDED IN THE VALUE OF CLOSING STOCK. NO RELIEF WAS ALLOWED BY THE LEARNED CIT(A) ON THIS ISSUE. 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. SECTION 145A WAS INSERTED BY THE FINANCE (N O.2) ACT, 1998 WITH EFFECT FROM 1.4.1999. IT PROVIDES THAT THE VALUATION OF PU RCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOM E CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION SHALL BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE AND FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS ETC. PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AS ON THE DATE OF VALUATION. ACCORDING TO THE PRESCRIPTION OF THIS SECTION, WHICH IS APPLICAB LE TO THE YEAR UNDER CONSIDERATION, THE AMOUNT OF TAX, DUTY, CESS ETC. IS LIABLE TO BE INCLUDED IN THE VALUE OF PURCHASES, SALES, OPENING AND CLOSING STOCK. IT IS NOT APPROPR IATE TO INCLUDE THE CLOSING MODVAT IN THE FIGURE OF CLOSING STOCK WITHOUT MODIFYING T HE FIGURES OF PURCHASES, SALES AND OPENING STOCK. THE HONBLE JURISDICTIONAL HIGH COUR T IN CIT VS. MAHALAXMI GLASS WORKS PVT. LTD. [(2009) 318 ITR 116 (BOM.)] AND THE HONBLE DELHI HIGH COURT IN CIT VS. MAHAVIR ALLUMINIUM [(2008) 297 ITR 77 (DEL. )] HAVE HELD TO THIS EXTENT. AS THE AUTHORITIES BELOW HAVE NOT ADJUSTED OTHER FI GURES WITH THE AMOUNT OF TAX, DUTY, CESS ETC., WE SET ASIDE THE IMPUGNED ORDER AN D RESTORE THE MATTER TO THE FILE OF A.O. FOR DECIDING IT AFRESH IN ACCORDANCE WITH THE AFORE-NOTED JUDGEMENTS AND THE PROVISIONS OF SECTION 145A. ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 14 23. GROUND NO.6 IS AGAINST THE CONFIRMATION OF DISA LLOWANCE OF CAPITAL EXPENDITURE INCURRED FOR SCIENTIFIC RESEARCH EXPEND ITURE OF RS.22,34,617. THE ASSESSEE CLAIMED CAPITAL EXPENDITURE ON SCIENTIFIC SEARCH AT RS.22.34 LAKHS. ON BEING CALLED UPON TO JUSTIFY THE DEDUCTION, THE ASS ESSEE FURNISHED A LIST OF CAPITAL ASSETS PURCHASED FOR SCIENTIFIC RESEARCH. THE A.O. NOTED THAT THERE WAS ONLY ONE PERSON WHO HAD PH.D QUALIFICATION AND OTHERS WERE O NLY SCIENCE GRADUATES. IT WAS OPINED THAT THE EQUIPMENTS PURCHASED BY THE ASSESSE E WERE NOT USED FOR ANY SCIENTIFIC RESEARCH AND FURTHER NO SCIENTIFIC RESEA RCH WORK HAVING BEEN DONE WAS BROUGHT TO THE NOTICE OF THE A.O. HE, THEREFORE, DI D NOT ALLOW ANY DEDUCTION FOR THE SAID SUM. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL . 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ASSESSEE VIDE ITS LETTER DA TED 12.11.2002 STATED BEFORE THE LEARNED CIT(A) ABOUT ITS R&D DEPARTMENT HAVING RECO GNITION FROM DSIR (DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH). I T WAS STATED THAT THERE WAS A SEPARATE DEPARTMENT CALLED QUALITY CONTROL WITH DIF FERENT SET OF PERSONS WHICH HAD NO RELATION WITH THE R&D DEPARTMENT. THREE TYPES O F ACTIVITIES WERE ALSO STATED TO HAVE BEEN CARRIED OUT BY R&D SECTION. BEFORE THE AS SESSING OFFICER THE ASSESSEE FILED ITS LETTER DATED 7.6.2000 ADDRESSED TO THE MI NISTRY OF SCIENCE AND TECHNOLOGY FURNISHING ANNUAL REPORT. COPIES OF SUCH LETTERS AR E ALSO AVAILABLE ON RECORD. THESE DOCUMENTS AMPLY EXHIBIT THAT THE ASSESSEE WAS CARRY ING OUT RESEARCH AND DEVELOPMENT ACTIVITIES AND WAS DULY RECOGNIZED BY T HE DSIR VIDE ITS RECOGNITION NO.TU/IU/RD/627/98-99. IT IS NOT THE CASE OF THE AS SESSING OFFICER THAT THE ASSESSEE HAD NOT PURCHASED THESE CAPITAL ASSETS OR HAD NOT UTILIZED FOR SCIENTIFIC RESEARCH PURPOSES. UNDER SUCH CIRCUMSTANCES WE HOLD THAT THE ASSESSEE WAS RIGHT IN CLAIMING DEDUCTION U/S.35(1)(IV) OF THE ACT IN RESP ECT OF EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARCH. THIS GROUND IS ALLOW ED. ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 15 25. GROUND NO.7 IS AGAINST THE CONFIRMATION OF DISA LLOWANCE OF RS.53,15,000 U/S.14A OF THE ACT. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTED THAT THE QUESTION OF MAKING DIS ALLOWANCE U/S 14A IS NO MORE RES INTEGRA IN VIEW OF THE RECENT JUDGMENT DATED 12.08.2010 OF THE HONBLE BOMBAY HIGH COURT IN GODREJ& BOYCE LIMITED VS. ACIT HOLDING THAT THE PROVISIONS OF SECTION 14A ARE APPLICABLE IN CIRCUMSTANCES AS ARE PREVAILING PRESENTLY AND THE DISALLOWANCE HAS TO BE WORKED OUT BY THE AO ON SOME `REASONABLE BASIS AND NOT RULE 8D. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF THE AO FOR DECIDING THE Q UANTUM OF DISALLOWANCE, IF ANY, AS PER THE AFORE NOTED JUDGMENT, AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 27. GROUND NO.9 IS AGAINST THE CONFIRMATION OF DISA LLOWANCE OF NON-COMPETE AMOUNT PAID TO EX-MANAGING DIRECTOR. THE ASSESSEE P AID A SUM OF RS.20 LAKHS TO SHRI I.P.KHANDELWAL, EX-MANAGING DIRECTOR OF THE CO MPANY TOWARDS NON-COMPETE COMPENSATION. ON BEING CALLED UPON TO JUSTIFY THE D EDUCTION THE ASSESSEE REPLIED VIDE ITS LETTER DATED 13.03.2002 THAT SHRI KHANDELW AL SERVED THE COMPANY FOR NEARLY TWENTY FIVE YEARS AND RETIRED AS MANAGING DI RECTOR. HE WAS IN POSSESSION OF COMPANYS TRADE SECRETS AND HAD ACCESS TO CONFIDENT IAL INFORMATION PERTAINING TO COMPANYS BUSINESS AND ACTIVITIES. IN ORDER TO AVOI D ANY COMPETITION FROM HIM AND TO PROTECT THE BUSINESS INTEREST OF THE COMPANY THE SAID SUM WAS PAID AS NON- COMPETE FEES. NOT CONVINCED WITH THE ASSESSEES CLA IM OF SUCH AMOUNT AS DEDUCTIBLE IN FULL, THE ASSESSING OFFICER MADE ADDI TION, WHICH CAME TO BE APPROVED IN THE FIRST APPEAL. 28. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD IT IS NOTICED THAT THE ASSESSEE PAID THE ABO VE SAID SUM OF RS.20 LAKHS TO ITS ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 16 MANAGING DIRECTOR ON HIS RETIREMENT IN ORDER TO AVO ID COMPETITION FROM HIM AS HE HAD THE KNOWLEDGE OF ALL SECRETS OF THE ASSESSEE-CO MPANY. THE LEARNED A.R. HAS RELIED ON THE JUDGEMENT OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. [(2008) 302 ITR 249 (DEL.)]. THE FACTS OF THIS CASE ARE THAT A FULL TIME EMPLOY EE OF THE ASSESSEE ACQUIRED SPECIALIZED KNOWLEDGE OF TECH NOLOGY DURING THE COURSE OF HIS EMPLOYMENT AND ON HIS RETIREMENT, THE COMPANY PAID A SUM OF RS.4 CRORES TO VCPL WHICH WAS PROMOTED BY THE SAID EMPLOYEE. THE H ONBLE DELHI HIGH COURT HELD THAT THE PAYMENT OF NON-COMPETE FEES WAS REVEN UE EXPENDITURE AND NOT A CAPITAL EXPENDITURE. THE FACTS OF THE CASE UNDER C ONSIDERATION ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF EICHER LTD. (SUPRA). HERE ALSO THE ASSESSEE COMPANYS MD WAS PAID NON-COMPETE FEE ON HIS RETIREMENT SO AS TO KEE P HIM AT A BAY IN THE BUSINESS. IT IS RELEVANT TO MENTION THAT THE SLP FILED BY THE DE PARTMENT IN THE CASE OF EICHER LTD. HAS SINCE BEEN DISMISSED BY THE HONBLE SUPREME COU RT IN (2009) 312 ITR 333 (SC). BY MAKING THIS PAYMENT, THE ASSESSEE SIM PLY CARRIED ON ITS BUSINESS MORE EFFECTIVELY WITHOUT ANY ADDITION TO ITS CAPITA L STRUCTURE. THE HONBLE SUPREME COURT IN EMPIRE JUTE COMPANY LIMITED VS. CIT (198 0) 124 ITR 1 (SC) HAS HELD THAT IF ADVANTAGE RECEIVED BY THE ASSESSEE AGAINST THE PAYMENT FACILITIES THE CARRYING ON BUSINESS MORE EFFICIENTLY AND PROFITABL Y LEAVING FIXED CAPITAL UNTOUCHED, THEN IT HAS TO BE HELD AS A REVENUE EXPE NDITURE. 29. THE RELIANCE OF THE LEARNED DEPARTMENTA L REPRESENTATIVE ON THE SPECIAL BENCH ORDER IN TECUMSEH INDIA PRIVATE LIMITED VS. ADDL.CIT [(2010) 127 ITD 1 (DEL.) (SB)] IS MISCONCEIVED FOR THE REASON THAT IN THAT CASE N ON-COMPETE FEE WAS PAID WHILE ACQUIRING BUSINESS. IT WAS IN THAT CONTE XT THAT THE SPECIAL BENCH HELD THAT NON-COMPETE FEES WAS CAPITAL EXPENDITURE. IN O UR CONSIDERED OPINION THE FACTS OF THE INSTANT CASE LIE IN AN ALTOGETHER DIFFEREN T COMPARTMENT INASMUCH AS THERE IS NO ACQUISITION OF BUSINESS BY THE ASSESSEE-COMPANY AND IT IS A SIMPLY PAYMENT TO A FORMER MANAGING DIRECTOR ON HIS RETIREMENT FOR KEEP ING HIM AWAY FROM SIMILAR BUSINESS. RESPECTFULLY FOLLOWING THE CASE OF EICHER LTD. (SUPRA) , THE FACTS OF WHICH ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 17 ARE SIMILAR, WE HOLD THAT THE NON-COMPETE FEES PAID BY THE ASSESSEE IS DEDUCTIBLE AS REVENUE EXPENDITURE. THIS GROUND IS, THEREFORE, AL LOWED. 30. THE ALTERNATE ADDITIONAL GROUND RAISED BY THE A SSESSEE FOR ALLOWING DEPRECIATION ON NON-COMPETE FEES IF IT WAS TO BE HE LD AS CAPITAL EXPENDITURE, HAS THEREFORE, BECOME ACADEMIC. THE SAME IS DISMISSED AS INFRUCTUOUS. 31. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE ASSESSING OFFICER FOR EXCLUDING THE AMOUNT OF SALES TAX AND EXCISE DUTY FROM TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S.80HHC. 32. HAVING HEARD BOTH SIDES AND PERUSED THE RELEVAN T MATERIAL ON RECORD WE FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN CIT VS. LAKSHMI MACHINE WORKS [(2007) 290 ITR 667 ( SC)] IN WHICH IT HAS BEEN HELD THAT EXCISE DUTY AND SALES T AX ARE NOT INCLUDIBLE IN THE TOTAL TURNOVER. RESPECTFULLY FOLLOWING THE PRECEDENT WE U PHOLD THE IMPUGNED ORDER ON THIS ISSUE. 33. LAST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF INTEREST OF RS.14,05,858 ON BORROWED CAPITAL USE D FOR THE PURCHASE OF MACHINERY. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE ACQUI RED CAPITAL ASSET AND INTEREST WAS PAID IN SUCH ACQUISITION. IN THE OPINION OF THE A.O. THE INTEREST ON BORROWED FUNDS UTILIZED FOR ACQUISITION OF THESE ASSETS SHOU LD HAVE BEEN CAPITALIZED. BY APPLYING INTEREST RATE OF 12% ON THE AMOUNT OF ASSE TS PURCHASED, HE MADE DISALLOWANCE OF RS.14.05 LAKHS. THE LEARNED CIT(A), HOWEVER, DELETED THE ADDITION. 34. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ASSESSEE, WHILE CARRYING ON ITS BUSINESS, PURCHASED THESE ITA NOS.4362 & 4880/MUM/2003 M/S.ALBRIGHT & WILSON CHEMICALS INDIA LIMITED. 18 ASSETS IN RESPECT OF WHICH FUNDS WERE BORROWED. SEC TION 36(1)(III) PROVIDES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORRO WED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE AS DEDUCTION. ONCE INTER EST IS PAID IN RESPECT OF BORROWED CAPITAL WHICH BORROWED CAPITAL IS USED FOR THE PURPOSE OF BUSINESS, BE IT REVENUE OR CAPITAL, THE DEDUCTION HAS TO BE ALLOWED TOWARDS INTEREST EXPENDITURE. THERE IS NO DEARTH OF JUDGEMENTS GRANTING DEDUCTION UNDER SUCH CIRCUMSTANCES. IT IS OBSERVED THAT PROVISO TO SECTION 36(1)(III) INSERTE D WITH EFFECT FROM 1.4.2004 PROVIDING THAT NO DEDUCTION OF INTEREST IS TO BE AL LOWED FOR ACQUISITION OF NEW ASSETS FOR EXTENSION OR EXISTING BUSINESS UP TO THE DATE ON WHICH SUCH ASSET IS PUT TO USE, IS PROSPECTIVE, AS HAS BEEN HELD BY THE HONB LE SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. [(2008) 298 ITR 194 (SC)] . WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. 35. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THAT OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 26 TH DAY OF NOVEMBER, 2010. SD/- SD/- ( VIJAY PAL RAO ) ( R.S.SYAL ) JUDICIAL MEMBER ACC OUNTANT MEMBER MUMBAI : 26 TH NOVEMBER, 2010. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - VI, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.