Gujarat Gas Company Ltd., Ahmedabad V. The Income tax Officer,Ward-4(4), Ahmedabad

ITA 4487/AHD/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76822 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-03-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 20-12-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S R SHAH
• Keywords: Capital asset; Depreciation; Business expenditure; Earning of tax free income; Bad and doubtful debts; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 80G; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER ITA NOS.1264/AHD/2006 & 4487/AHD/2007 A.YS.2002-03 & 2003-04 GUJARAT GAS CO. LTD. 2, SHANTISADAN SOCIETY NEAR PARIMAL GARDEN, ELLISBRIDGE, AHMEDABAD. VS THE ACIT, CIRCLE-4, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SUBHASH BAINS, CIT- D.R., ASSESSEE(S) BY : SHRI S.R. SHAH, A.R. / DATE OF HEARING : 31/03/2014 / DATE OF PRONOUNCEMENT: /05/2014 / O R D E R PER SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE A ND FOR THE SAKE OF CONVENIENCE, BEING SOME OF THE ISSUES ARE COMMON , CONSOLIDATED AND HEREBY DECIDED BY THIS SINGLE ORDER. A - A.Y. 2002-03 (ITA NO.1264/AHD/2006) THE GROUND NO.1 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) H AS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.5,17,07,000/- OUT OF INTEREST PAYMENT OF RS.10,14,83,000/- AND AD-HOC DI SALLOWANCE OF RS.3,60,000/- OUT OF THE ADMINISTRATIVE AND OTHER E XPENSES INCURRED BY THE APPELLANT INVOKING PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. YOUR APPELLANT SUBMITS THAT IT WAS HAVING TOTAL INTEREST FREE FUNDS OF MORE THAN RS.270 CRORE AS ON THE DATE OF BALANCE SHEET OUT OF WHICH IT COULD LEND INTEREST FREE FUNDS. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 2 - 1.2 FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDIN G ASSESSMENT ORDER PASSED U/S.143(3), DATED 28.03.2005 WERE THAT THE A SSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROCESSING, DISTRIBUTION AND TRANSMISSION OF NATURAL GAS. IT WAS NOTED BY THE AO IN RESPECT OF A BOVE GROUND THAT THE ASSESSEE HAD MADE TOTAL INVESTMENT IN EQUITY SHARES OF RS.13817.27 LACS. HOWEVER, IT WAS ALSO NOTED THAT DURING THE YEAR UND ER CONSIDERATION THE INVESTMENT IN SHARES AND MUTUAL FUNDS HAD INCREASED FROM RS.7363.45 LACS TO RS.1322.956 LACS. THE ASSESSEE HAD EARNED D IVIDEND INCOME OF RS.10,09,43,566/-. THE ENTIRE INCOME WAS CLAIMED AS EXEMPTED INCOME U/S.10(33) OF IT ACT. THE AO HAS INVOKED THE PROVIS IONS OF SECTION 14A ON THE GROUND THAT EXPENSES INCURRED FOR EARNING TH E EXEMPTED DIVIDEND INCOME COULD NOT BE ALLOWED AS DEDUCTION. ACCORDING TO AO, THE INTEREST EXPENSES INCURRED AGAINST THE INVESTMENT COULD NOT BE ALLOWED BUSINESS EXPENDITURE. LIKEWISE, HE HAS POINTED OUT THAT THE ADMINISTRATIVE EXPENSES HAVE BEEN INCURRED FOR MONITORING THE INVE STMENT IN SHARES AND MUTUAL FUNDS. AFTER DETAILED DISCUSSION, THE AO HAS APPLIED THE FOLLOWING FORMULA; FOR REFERENCE REPRODUCED BELOW FROM PAGE 1 1 OF THE ASSESSMENT ORDER, AND MADE A DISALLOWANCE OF RS.517.70 LACS AS UNDER: INTEREST TO BE DISALLOWED = 1014.23 LACS X 13817.2 7 LACS = 517.07 LACS 27102.06 LACS 3.1 IN RESPECT OF ADMINISTRATIVE EXPENSES, A DISA LLOWANCE OF RS.3,60,000/- HAS ALSO MADE. THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. THE OBSERVATION OF LEARNED CIT (A) WAS THAT AS PER THE BALANCE SHEET FUNDS AVAILABLE INCLUDING LOANS E TC. WERE TO THE TUNE OF RS.27102.06 LACS, WHEREAS THE COMPANY HAD DEBITED I NTEREST OF RS.1014.23 LACS IN THE P&L A/C. THE INVESTMENT WAS MADE IN EQUITY SHARES/MUTUAL FUNDS OF RS.13817.27 LACS. THE ASSESS EES ARGUMENT WAS ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 3 - THAT THE INVESTMENT FOR EARNING DIVIDEND WAS MADE O UT OF THE OWN FUNDS OF THE ASSESSEE. NO BORROWED FUNDS HAVE BEEN INVEST ED IN THOSE SECURITIES FOR EARNING DIVIDEND. HOWEVER, LEARNED CIT(A) WAS N OT CONVINCED. ACCORDING TO HIM, THE ASSESSEE HAD TAKEN LOAN FROM BANKS AND FINANCIAL INSTITUTIONS WHICH WERE INVESTED IN SHARES/BONDS. T HEREUPON, THE GROUND OF THE ASSESSEE WAS DISMISSED. 3.2 WE HAVE HEARD BOTH THE SIDES, WE HAVE BEEN INFO RMED THAT IN ASSESSEES OWN CASE FOR A.Y. 2000-01 ITAT C BENCH AHMEDABAD BEARING ITA NOS.3446 AND 3464/AHD/2004 VIDE AN ORD ER DATED 30 TH OF JANUARY, 2009 HAS RESTORED THE ISSUE BACK TO THE FILE OF THE AO, VIDE PARA 5.7 AS UNDER: 5.7 BEFORE US, THE ASSESSEE HAS NOT REFERRED US TO ANY EVIDENCE, SUGGESTING THAT THE ENTIRE INVESTMENT WAS MADE OUT OF INTEREST FREE FUNDS IN THE EARLIER YEARS. SINCE ADMITTEDLY, INVESTMENTS MADE BY THE AS SESSEE, HAVE YIELDED EXEMPT INCOME, IN THE LIGHT OF AFORESAID DECISION O F THE SPECIAL BENCH, WE ARE OF THE OPINION THAT THE DISALLOWANCE SHOULD BE QUAN TIFIED IN TERMS OF STATUTORY PROCEDURAL PROVISIONS CONTAINED IN THE SUB-SECTIONS (2) AND (3) OF THE SECTION 14A OF THE ACT. FOR THIS PURPOSE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR RE-COMPUTI NG THE DISALLOWANCE IN THE LIGHT OF PROVISIONS OF SUB-SECTION (2) AND (3) OF S ECTION 14A, READ WITH RULE 8D OF THE IT RULES, 1962. THEREFORE, THE GROUND NO. 4 IN THE APPEAL OF THE ASSESSEE AND GROUND NO.VII IN THE APPEAL OF THE REV ENUE ARE DISPOSED OF AS INDICATED HEREINBEFORE. 3.3 WE ARE ALSO OF THE VIEW THAT THE BASIC FACTS AB OUT THE DETAILS OF THE INVESTMENT AS WELL AS THE SOURCE OF THE INVESTMENT IN SHARES AND MUTUAL FUNDS FOR THE PURPOSE OF EARNING EXEMPTED DIVIDEND HAS NOT BEEN PROPERLY EXPLAINED TO THE LOWER AUTHORITIES. OUR AT TENTION HAS ALSO BEEN DRAWN ON ANOTHER ORDER OF ITAT A BENCH IN ASSESSE ES OWN CASE FOR A.Y. 1998-99 AND 2001-02 BEARING ITA NO.2211/AHD/20 04 AND ITA NO.134/AHD/2005 WHEREIN, AS WELL, THE MATTER WAS RESTORED FOR RECONSIDERATION AS PER LAW. IN THE SAID ORDER, THE RESPECTED CO-ORDINATE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 4 - BENCH HAS MENTIONED AN ORDER OF PUNJAB & HARYANA HI GH COURT PRONOUNCED IN THE CASE OF HERO CYCLE, 323 ITR 518 WHEREIN IT WAS OBSERVED THAT DISALLOWANCE U/S.14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE U/S.14A COULD NOT BE MADE. CONSISTENT WITH THE VIEW TAK EN IN THE PAST BY THE TRIBUNAL IN ASSESSEES OWN CASES, WE DEEM IT PROPER TO RESTO RE THIS GROUND BACK TO THE STAGE OF THE AO TO BE DECIDED DENOVO AFTER TAKI NG INTO ACCOUNT THE LATEST DECISIONS ON THE ISSUE OF THE APPLICABILITY PROVISIONS OF SECTION 14A. THE AO IS REQUIRED TO EXAMINE THE BALANCE-SHEE T AND RELATED ACCOUNTS OF THE ASSESSEE SO AS TO SEE WHETHER THERE WAS INVESTMENT IN SHARES / MUTUAL FUNDS OUT OF THE BORROWED FUNDS OR NON BORROWED FUNDS. IN THE LIGHT OF THE ABOVE DIRECTIONS, THIS GROUND O F THE ASSESSEE MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE ONLY. 2 GROUND NO.2 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.36,71,471/- BEING THE AMOUNT OF BAD DEBTS/ ADVANCES WRITTEN OFF. YOUR APPELLANT SUBMITS THAT SUCH BAD DEBTS/ ADVANCES HAVE ARISEN OUT OF TRADE TRANSACTIONS OF T HE APPELLANT EXCEPT TO THE EXTENT OF RS.8,35,000/-IN RESPECT OF F.DS. WRITTEN OFF. THE INCOME CORRESPONDING TO THESE TRADE DEBTS WERE OFFERED FOR TAXATION IN THE EARLIER YEARS. YOUR APPELLANT FURTHER SUBMITS THAT ALL THES E ACCOUNTS HAVE BEEN WRITTEN OFF AS BAD IN THE BOOKS OF THE APPELLANT DU RING THE YEAR UNDER CONSIDERATION AND ARE GENUINE CLAIMS. YOUR APPELLAN T THUS FULFILLS THE CONDITIONS LAID DOWN U/S.36(1)(VII) READ WITH SECTI ON 36(2) FOR GETTING THE DEDUCTION OF THE BAD DEBTS. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANT SUBM ITS THAT THE AMOUNT OF RS.8,35,000/- WHICH IS IN RESPECT OF F.DS. WRITTEN OFF BE CONSIDERED TO BE A TRADING LOSS AND MAY BE ALLOWED U/S.28/29 OF THE I. T. ACT. IT IS SUBMITTED THAT IT BE SO HELD NOW AND THE DISALLOWANCE CONFIRMED BE DELETED. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 5 - 2.1 IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD WR ITTEN-OFF THE DEBT TO THE TUNE OF RS.36,71,471/-. THE AO HAS DISCUSSED TH E PARTY-WISE DETAILS AND GIVEN REASONING FOR THE DISALLOWANCE. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY, IT WAS HELD T HAT THE ASSESSEE HAD FAILED TO SATISFY THE CONDITION AS LAID DOWN IN SEC TION 36(I)(VII) R.W.S 36(2) OF IT ACT. SINCE, THE ACTION OF THE AO WAS UP HELD; HENCE, THE ASSESSEE IS NOW IN APPEAL BEFORE US. PARTIES APPEAR ING BEFORE US HAS INFORMED THAT IN A.Y. 2000-01 IN ASSESSEES OWN CASE VIDE ORDER DATE D 30 TH JANUARY, 2009 (SUPRA) VIDE PARAGRAPH 12.3 THE MATTER WAS RESTORED BACK FOR RECONSIDERATION IN THE FOLLOWING MANNER: 12.3 IN VIEW OF THE FOREGOING, WHEN THE RELEVANT D ETAILS AND EVIDENCE WERE NOT SUBMITTED BEFORE THE AO, IN THE INTEREST OF JUS TICE AND FAIR PLAY, WE VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THE ISSU E BACK TO THE FILE OF THE AO WITH THE DIRECTIONS TO ALLOW ANOTHER OPPORTUNITY TO THE ASSESSEE TO FURNISH THE RELEVANT DETAILS AND EVIDENCE IN SUPPORT OF THEIR C LAIM FOR DEDUCTION OF BAD DEBTS IN TERMS OF PROVISIONS OF SEC.36(1)(VII) OF T HE ACT AND THEREAFTER, ADJUDICATE THE MATTER IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE, KEEPING IN VIEW, INTER ALIA, THE AFORESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DHALL ENTERPRISE AND ENGINEERS P. LTD. (SUPRA). WITH THESE DIRECTIONS, G ROUND NO.V) IN THE APPEAL OF THE REVENUE IS DISPOSED OF. 2.2 WE HAVE ALSO BEEN INFORMED THAT IN A.Y. 2001-02 IN ASSESSEES OWN CASE SUPRA VIDE PARAGRAPH 55.1 THE TRIBUNAL HAS FOLLOWED THE ORDER OF A.Y. 2000-01 AND RESTORED THE MATTER OF BAD DEBT BACK TO THE FILE OF THE AO FOR RE-ADJUDICATION IN TERMS OF THE PROVISIO NS OF LAW. BEING CONSISTENT WITH THE VIEW ALRE ADY TAKEN IN THE PAST, WE DEEM IT PROPER TO RESTORE THIS GROUND AS WELL, BACK TO THE FILE OF THE AO TO BE DECIDED DENOVO AS PER THE PROVISIONS OF LAW APPL ICABLE. THIS GROUND OF THE ASSESSEE MAY BE TREATED AS ALLOWED FOR STATI STICAL PURPOSE ONLY. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 6 - 3. GROUND NO.3 IS REPRODUCED BELOW: 3. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER IN NOT GRAN TING DEPRECIATION OF RS.69,99,834/- BEING THE DEPRECIATION ON THE ASSETS LEASED BACK TO RAJASTHAN STATE ELECTRICITY BOARD (RSEB). IT IS SUBMITTED THAT SINCE THE ENTIRE TRANSACTION OF SALE AND LEASE BACK TO RSEB BEING AT ARM'S LENGTH AND GENUINE ONE, THE AMOUNT OF DEPRECIATION ELIGIBLE ON THE ASS ETS LEASED BACK TO RSEB BE GRANTED TO THE APPELLANT. IT IS SUBMITTED THAT IT B E SO HELD NOW. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THAT IF THE LEASE TRANSACTIONS WITH RSEB ARE NOT ACCEPTED AS GENUINE, THE LEASE RENT RE CEIVED FROM RSEB WHICH HAS OFFERED FOR TAX SHOULD ALSO BE DIRECTED TO BE E XCLUDED WHILE COMPUTING THE INCOME. IT IS SUBMITTED THAT IT BE SO HELD NOW. 3.1 THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS.69, 99,834/- IN RESPECT OF ASSETS COVERED UNDER SALES AND LEASE TRANSACTION WITH RSEB. ACCORDING TO AO, THE TRANSACTION WAS A TOOL FOR TAX AVOIDANCE. THE ASSESSEE HAD NOT DISPUTED THE SALE AND LEASE BACK TRANSACTION. ACCORDING TO AO THE TRANSACTION TOOK PLACE IN EARLI ER YEARS, BUT DEPRECIATION WAS CLAIMED DURING THE CURRENT YEAR AS WELL. THE AO HAS COMMENTED THAT IN A.Y.2001-02 LEARNED CIT(A) HAS AF FIRMED THE ADDITION, THEREFORE, FOLLOWING THE PAST HISTORY, FO R THE YEAR UNDER CONSIDERATION AS WELL, THE AO HAD DISALLOWED THE DE PRECIATION. 3.2 WHEN THE MATTER WAS CARRIED BEFORE THE FIRST AP PELLATE AUTHORITY, LEARNED CIT(A) HAS FOLLOWED THE PAST HISTORY. HOWEV ER, CONSIDERED THE ALTERNATIVE ARGUMENT AS FOLLOWS: 4.2 WITHOUT PREJUDICE TO THE ABOVE, IT WAS ALSO SU BMITTED THAT IF THE TRANSACTIONS ARE CONSIDERED AS FINANCIAL TRANSACTIO NS, THEN DEEMED RECOVERY OF PRINCIPAL AMOUNT OF RS.26,58,740/- SHOULD BE EXC LUDED AND ONLY THE INTEREST PORTION INCLUDED IN THE LEASE RENT SHOULD BE TAXED AND NOT THE ENTIRE LEASE RENT RECEIVED OF RS.36,87,992/- 4.3 THIS ISSUE HAS ALSO BEEN DEALT WITH BY MY PREDE CESSOR IN PARA 7.3 OF THE ABOVE APPELLATE ORDER. FOLLOWING THE DIRECTIONS GIVEN IN THE SAID ORDER, THE AO IS DIRECTED TO RE-COMPUTED THE ALLOWABLE DEP RECIATION / INTEREST INCOME AFTER EXCLUDING PRINCIPAL AMOUNT AFTER PROPE R VERIFICATION. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 7 - 3.3 HEARD BOTH THE SIDES. THIS ISSUE HAD CROPPED UP IN THE PAST YEARS AND FOR A.Y. 2000-01 ITAT A BENCH AHMEDABAD SUPRA HAS DECIDED THIS ISSUE AFTER CONSIDERING THE PAST HISTORY IN TH E FOLLOWING MANNER: 4. GROUND NO.3 RELATES TO CONFIRMATION OF THE ORDE R OF THE AO IN NOT GRANTING DEPRECIATION ON THE ASSETS LEASED TO RAJAS THAN STATE ELECTRICITY BOARD (RSEB) (A STATE GOVERNMENT UNDERTAKING). THE AO, AS OBSERVED IN HIS ORDER, DISALLOWED AND ADDED BACK TO THE TOTAL INCOM E, THE DEPRECIATION OF RS.1,24,44,150/- ON THE ASSETS LEASED TO RSEB AS PE R DETAILED DISCUSSIONS IN THE ASSESSMENT ORDER OF THE AY 1999-2000. ON APPEAL , RELYING UPON HIS OWN ORDER DATED 22.3.2004 FOR THE AY 1995-96 AND THE DE CISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF AVARSALA AUTOMA TION LTD V. CIT (268 ITR 178) AND THE DECISION OF THE MUMBAI SPECIAL BEN CH OF THE ITAT IN THE CASE OF ICICI LTD V. DCIT SR 36, IN ITA NO.3300/MUM /97, THE LEARNED CIT(A) UPHELD THE DISALLOWANCE MADE BY THE AO FOR T HE YEAR UNDER CONSIDERATION. 4.1 BEFORE US, THE LEARNED AR ON BEHALF OF THE ASSE SSEE CONTENDED THAT THERE IS NO JUSTIFICATION IN NOT GRANTING DEDUCTION OF RS.1,24,44,150/- BEING THE DEPRECIATION ON THE ASSETS LEASED TO RAJASTHAN STATE ELECTRICITY BOARD (RSEB). HE SUBMITTED THAT THE ASSESSEE HAD PURCHASE D THE VARIOUS ASSETS FROM RSEB AND LEASED BACK THOSE ASSETS TO THE RSEB UNDER A LEASE AGREEMENT AND IS REGULARLY RECEIVING THE LEASE RENT FROM RSEB. AC CORDING TO THE LEARNED AR, THE ASSESSEE HAS OFFERED THE LEASE RENT SO RECEIVED TO TAX. HE ALSO SUBMITTED THAT THE ASSETS ARE OWNED AND USED FOR THE PURPOSE OF THE BUSINESS AND THEREFORE, THE ASSESSEE IS ENTITLED TO DEPRECIATION . THE LEARNED AR OF THE ASSESSEE FURTHER CONTENDED THAT ON SIMILAR FACTS, T HE ITAT, C BENCH, AHMEDABAD IN ASSESSEE'S OWN CASE FOR THE AYS 2003-0 4 AND 2004-05, FOLLOWING THEIR ORDER FOR THE AY 1995-96, HAVE ALLO WED THE CLAIM OF THE ASSESSEE. THE LEARNED DR, ON THE OTHER HAND, SUPPOR TED THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. AFTER DISCUSSION, BOTH TH E PARTIES AGREED THAT ISSUE IS SQUARELY COVERED BY THE DECISIONS OF THE TRIBUNAL I N THE ASSESSEE'S OWN CASE FOR THE AYS 1995-96, 2003-04 & 2004-05. . 4.4 IN THE LIGHT OF AFORESAID DECISION OF THE HONB LE JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE OF THE A.Y. 1995-9 6 AND DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. RAJASTH AN STATE ELECTRICITY BOARD (SUPRA) AS ALSO DECISION OF THE TRIBUNAL FOR THE A.YS.2003-04 & 2004- 05, FACTS AND ISSUE BEING ADMITTEDLY SIMILAR IN THE ASSESSMENT YEAR UNDER CONSIDERATION, WE SET ASIDE THE IMPUGNED ORDER OF T HE LEARNED CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW THE DEPRECIAT ION AS CLAIMED BY THE ASSESSEE. THEREFORE, GROUND NO.3 IN THE APPEAL OF T HE ASSESSEE IS ALLOWED. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 8 - 3.4 WE HAVE ALSO NOTED THAT LEARNED CIT(A) HAS SIMPLY FOLLOWED THE VERDICT OF HIS PREDECESSOR FOR A.Y.2001-02 HOWE VER THAT VIEW OF LEARNED CIT(A) WAS ALSO REVERSED BY ITAT A BENCH AHMEDABAD (SUPRA) IN THE FOLLOWING MANNER: 4.3 INDISPUTABLY, SINCE THE FACTS OBTAINING IN THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS IN THE ASSESSMENT YEARS 19 95-96, 2000-01, 2003-04 & 2004-05, FOLLOWING THE VIEW TAKEN BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE IN THE A.Y. 1995-96 AND BY THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. RAJASTHAN STATE E LECTRICITY BOARD (SUPRA) A ALSO BY THE ITAT IN THEIR AFORESAID DECISIONS IN TH E ASSSESSEES OWN CASE, WE HAVE NO HESITATION IN ALLOWING THE CLAIM OF THE ASS ESSEE IN THE YEAR UNDER CONSIDERATION. THEREFORE, GROUND NO.3 IN THE APPEAL OF THE ASSESSEE FOR A.Y. 2001-02 IS ALLOWED. 3.5 IN THE LIGHT OF THE PAST BACKGROUND, WE HEREBY HOLD THAT THE DEPRECIATION ON THE ASSETS LEASED BACK TO RAJASTHAN ELECTRICITY BOARD (RSBB) IS TO BE ALLOWED AS PER LAW. THIS GROUND OF THE ASSESSEE IS ALLOWED. 4. GROUND NO.4 IS REPRODUCED BELOW: 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) ERRED IN DISALLOWING BROKERAGE CHARGES OF RS.13,150/- AND RS .46,200/- RESPECTIVELY INCURRED TOWARDS BROKERAGE OF SALE OF SURYA F LATS AND DIRECTOR'S RESIDENCE HOLDING THAT THE NECESSARY EVIDEN CES/DETAILS WERE NOT FILED BEFORE THE LEARNED ASSESSING OFFICER AND HENCE GENU INENESS OF THE CLAIM OF THE APPELLANT IS NOT ESTABLISHED. YOUR APPELLANT SU BMITS THE DISALLOWANCE IS UNJUSTIFIED PARTICULARLY WHEN THE LEARNED ASSESSING OFFICER AS WELL AS THE LEARNED CIT (APPEALS) DO NOT DISPUTE THE FACTUM OF SALE OF SURYA FLATS AND DIRECTOR'S RESIDENCE. IT IS SUBMITTED THAT IT BE SO HELD NOW AND DISALLOWANCE CONFIRMED BE DELETED. 4.1 LEARNED AR HAS EXPRESSED NOT TO CONTEST THIS GR OUND; HENCE, DISMISSED BEING NOT PRESSED. 5. GROUND NO.5 IS REPRODUCED BELOW: ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 9 - THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN CONFIRMING THE DISALLOWANCE OF RS.10,01,542/- BEING THE AMOUNT OF SUNDRY DEBIT BALANCES WRITTEN OFF. YOUR APPELLANT SUBMITS THAT SUCH DEBIT BALANCES RE PRESENT DEPOSITS GIVEN TO VARIOUS GOVERNMENT AUTHORITIES IN CONNECTION WITH THE LAYING OF PIPELINE, ROAD CROSSING AND FOR VARIOUS P ROJECTS UNDERTAKEN BY THE APPELLANT. THE LEARNED COMMISSIONER OF INCOME-TAX ( APPEALS) FURTHER ERRED IN ASSUMING THAT THE APPELLANT MIGHT NOT HAVE PERFO RMED THE WORK TO THE SATISFACTION OF THE GOVERNMENT AND HENCE THESE AMOU NTS OF DEPOSITS MUST HAVE BEEN FORFEITED /ADJUSTED BY THE GOVERNMENT AGAINST THE PAYMENTS DUE FROM THE APPELLANT. YOUR APPELLANT SUBMITS THAT THE AMOUNT O F OLD BALANCES WRITTEN OFF WERE OUTSTANDING SINCE LONG AND MAINLY REPRESENTED ADVANCES GIVEN, SHORTAGES, RETURN OF DEFECTIVE GOODS, CLAIMS ETC. Y OUR APPELLANT SUBMITS THAT THE SAME MAY PLEASE BE ALLOWED EITHER AS BAD DEBTS U/S.36(1)(VII) READ WITH SECTION 36(2) OF ACT OR ALTERNATIVELY, U/S.28/29 OF THE ACT. 5.1 IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD CL AIMED DEDUCTION ON ACCOUNT OF WRITE OFF OF DEBIT BALANCE OF RS.10,01,5 42/-. THE SAID WRITE OFF REPRESENTED NUMBER OF DEPOSITS MADE WITH VARIOUS GO VERNMENT AUTHORITIES. IT WAS FOUND THAT THOSE DEPOSITS WERE MADE WITH THE GOVERNMENT AUTHORITIES WITH THE PURPOSE FOR LAYING PIPELINES AT VARIOUS PROJECTS. AFTER MAKING THE DEPOSITS, THE ASSESSEE W AS ACCEPTING THE APPROVAL FROM THOSE AUTHORITIES FOR LYING OF THE PI PELINE. ACCORDING TO AO, IT REPRESENTED A CAPITAL LOSS. THOSE DEPOSITS H AVE NOT BECOME IRRECOVERABLE AND THE LOSS HAS ALSO NOT BEEN CRYSTA LLIZED. AGAINST THE SAID DISALLOWANCE, THE ASSESSEE HAD GONE IN APPEAL. 5.2 LEARNED CIT(A) HAS UPHELD THE ORDER OF THE AO AS FO LLOWS: I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE FACTS BROUGHT ON RECORD BY THE AO CAREFULLY. I HAVE ALSO PERUSED THE DETAILS OF DEPOSITS SUBMITTED BY THE APPELLANT. THESE DEPOSITS HAVE BEE N GIVEN TO VARIOUS GOVERNMENT AUTHORITIES IN CONNECTION WITH LAYING OF PIPELINE, ROAD CROSSING AND FOR VARIOUS PROJECTS UNDERTAKEN BY THE APPELLAN T. AS THESE DEPOSITS ARE WITH THE GOVERNMENT AUTHORITIES, THEY ARE RECEIVABL E TO THE APPELLANT IF THE WORK IS EXECUTED AS PER GOVT. SPECIFICATION. IN CAS E WORK IS NOT UPTO THE SPECIFICATION, SAME IS ADJUSTED AGAINST PENALTY. TH E APPELLANT HAS NOT SUBMITTED ANY CERTIFICATE FROM GOVERNMENT AUTHORITI ES TO SUBSTANTIATE THE REASONS AS TO WHY THE SECURITY/DEPOSIT IS NOT RECEI VABLE FROM THEM. IN THE ABSENCE OF ANY SUCH CERTIFICATE FROM GOVERNMENT AUT HORITIES, THESE DEPOSITS ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 10 - CANNOT BE CONSIDERED AS NON-RECOVERABLE. CONSIDERIN G THESE FACTS, THE CLAIM OF THE APPELLANT IS NOT JUSTIFIABLE AND AO WAS JUST IFIED IN DISALLOWING THE SAME WHICH IS UPHELD. ACCORDINGLY, THIS GROUND OF THE AP PELLANT IS REJECTED. 5.3 HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDE S AND AFTER PERUSING THE LIST OF THE PARTIES AS APPEARED ON PAG E 122 OF THE PAPER BOOK, GIVING THE DETAILS OF THE DEBIT BALANCE S WRITTEN OFF, WE HAVE NOTED THAT FROM SERIAL NOS.9 TO 13 THE ASSESSE E HAD MADE DEPOSITS TO VARIOUS PARTIES RANGING FROM RS.3 LAC U PTO RS.5 LAC. SINCE, THOSE DEPOSITS WERE IN THE NATURE OF CAPITAL INVOLVEMENT AND IT WAS NOT RELATED TO ANY EXPENDITURE HAVING A CHAR GE ON THE INCOME OF THE ASSESSEE EITHER FOR THE YEAR UNDER CO NSIDERATION OR FOR ANY OF THE PAST YEARS, THEREFORE, WE HOLD THAT IF AT ALL IT WAS A LOSS THEN IT WAS NOT A BUSINESS LOSS BUT IT WAS IN THE NATURE OF CAPITAL LOSS. WE, THEREFORE, APPROVE THE FINDINGS OF THE AO/ CIT(A). AS FAR AS THE TWO AMOUNTS AS PER SERIAL NOS .7 AND 8 ARE CONCERNED THOSE WERE FOUND TO BE IN THE NATURE OF A CCRUED INTEREST OF RS.3229/- AND RS.6812/-. IN RESPECT OF THESE TWO AMOUNTS, WE HEREBY HOLD THAT IF THE SAID ACCRUED INTEREST WAS O FFERED TO TAX IN THE PAST AND IF THAT WAS NOT REALIZED BY THE ASSESS EE THEN ONLY THE SAME CAN BE ALLOWED BEING WRITTEN OFF DURING THE YE AR UNDER CONSIDERATION. FOR REST OF THE PARTIES AS APPEARING AT SERIAL NOS.1 TO 6 WE HEREBY HOLD THAT CONSIDERING THE DETAILS THE S AME APPEARS TO BE A CAPITAL LOSS; HENCE, NOT AN ALLOWABLE DEDUCTIO N FOR THE YEAR UNDER CONSIDERATION. BEFORE WE CONCLUDE, IT IS ALSO WORTH TO MENTION THAT THE ASSESSEE HAD NOT GIVEN ANY LOGICAL EXPLANATION ABOUT THE CRYSTALLIZATION OF THE LOSS FOR THE YEAR UNDER CONSIDERATION. THE DEPOSITS ARE GENERALLY REFUNDABL E, ESPECIALLY, IF THE GOVERNMENT AUTHORITIES ARE INVOLVED; HENCE, IT WAS PREMATURE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 11 - ON THE PART OF THE ASSESSEE TO CLAIM THAT THE LOSS HAD BEEN CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. V IEW TAKEN BY LEARNED CIT(A) IS UPHELD AND THIS GROUND OF THE AS SESSEE IS HEREBY DISMISSED. 6. GROUND NO.6 IS REPRODUCED BELOW: 6. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.3,26, 171/- BEING THE AMOUNT PAID FOR ADDITIONAL STAMP DUTY ON ACCOUNT OF SALE OF LPG BOTTLING PLANT HOLDING THE SAME AS OF CAPITAL NATURE. YOUR APPELLA NT SUBMITS THAT SINCE THE EXPENDITURE ON STAMP DUTY HAS ARISEN BECAUSE OF THE SALE OF LPG PLANT, THE SAME PARTAKES THE CHARACTER OF BUSINESS EXPENDITURE AND NOT THAT OF CAPITAL EXPENDITURE. SINCE THERE IS NO NEW ASSETS ACQUIRED, NOR ADVANTAGE OF ENDURING NATURE IS ASSOCIATED WITH THIS PAYMENT, THE LEARNED ASSESSING OFFICER AS WELL AS THE LEARNED CIT(APPEALS) SHOULD HAVE DIRECTED TO ALLOW SUCH EXPENDITURE AS BUSINESS EXPENDITURE FOR THE YEAR UNDER CONSIDER ATION. IT IS SUBMITTED THAT IT BE SO HELD NOW. 6.1 AS PER THE ASSESSMENT ORDER, THE ASSESSEE HAD C LAIMED AN EXPENDITURE OF RS.3,26,171/- TOWARDS STAMP DUTY FOR SALE OF LPG BOTTLING PLANT AS REVENUE EXPENDITURE. THE ASSESSEE HAS EXPL AINED THAT DURING THE YEAR, THE COLLECTOR HAD ASKED THE ASSESSEE TO PAY A DDITIONAL STAMP DUTY IN CONNECTION WITH ALL SALE OF LPG BOTTLING PLANT. THE AO HAS HELD THAT THE EXPENDITURE IF AT ALL ALLOWABLE, THEN THE SAME SHOU LD HAVE BEEN ALLOWED AGAINST THE GAIN ARISEN ON SALE OF LPG BOTTLING PLA NT. ACCORDING TO HIM, THE STAMP DUTY EXPENDITURE WAS NOT TO BE ALLOWED FO R THE YEAR UNDER CONSIDERATION. BEING AGGRIEVED THE SAID DISALLOWANC E WAS CONTESTED BEFORE THE FIRST APPELLATE AUTHORITY. 6.2 LEARNED CIT(A) HAS HELD THAT THE EXPENDITURE BE ING IN RESPECT OF A SALE OF A CAPITAL ASSET, THEREFORE, COULD BE ADJUST ED ONLY AGAINST THE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 12 - CAPITAL GAIN AND NOT TO BE ALLOWED AS A REVENUE E XPENDITURE U/S.37 OF IT ACT. 6.3 HEARD BOTH THE SIDES. THE ACCEPTED FACTUAL POSITION WAS THAT THE LPG DIVISION WAS SOLD BY THE ASSESSEE IN EARLIER YE ARS AS A SLUMP SALE. WE HAVE BEEN INFORMED THAT ON SALE OF THE SAID LPG DIVISION THE ASSESSEE HAD OFFERED TO TAX A CAPITAL GAIN IN THE PAST. THE ASSESSEES ONLY ARGUMENT IS THAT THE ADDITIONAL STAMP DUTY WAS DEMANDED IN THE YEAR UNDER CONSIDERATION, THEREFORE, THE LIABILITY HAD C RYSTALLIZED DURING THE YEAR; HENCE, ALLOWABLE ONLY IN THIS YEAR. WE ARE NO T CONVINCED WITH THE ARGUMENT OF LEARNED AR BECAUSE UNDER THE PROVISIONS OF SECTION 37 OF IT ACT AN EXPENDITURE WHICH IS INCURRED WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF THE BUSINESS CAN BE ALLOWED AS AN EXPEND ITURE. THE EXPENDITURE OF ADDITIONAL STAMP DUTY BEING NOT AN E XPENDITURE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE BUT PERTAIN ED TO A CAPITAL GAIN WHICH WAS SHOWN IN THE PAST YEARS, THEREFORE, NOT T O BE ALLOWED U/S.37 OF IT ACT FOR THE YEAR UNDER CONSIDERATION. RESULTANTL Y, THIS GROUND OF THE ASSESSEE IS HEREBY DISMISSED. 7. GROUND NO.7 IS REPRODUCED BELOW 7. THE LEARNED COMMISSIONER OF INCOME-TAX ( APPEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.8,30, 017/- BEING FEES PAID FOR CARRYING OUT DUE DILIGENCE ON THE GROUND THAT THE SAME IS CAPITAL EXPENDITURE . THE APPELLANT SUBMITS PROFESSIONAL FEES FOR DUE DIL IGENCE IN CONNECTION WITH EXPLORING THE POSSIBILITY OF LAYING PIPE LINE FOR S UPPLY OF GAS JOINTLY WITH GUJARAT STATE PETRONET LTD. IS THE EXPENDITURE INCU RRED IN THE ORDINARY COURSE OF BUSINESS AND BE ALLOWED TO IT U/S.37 OF THE ACT. 7.1 THE ASSESSEE REQUIRED DUE DILIGENCE OF GSPL, TH EREFORE, INCURRED THE EXPENDITURE WHICH ACCORDING TO ASSESSEE WAS A R EVENUE EXPENDITURE. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 13 - HOWEVER, AO HAS HELD THAT THE EXPENDITURE WAS IN RE SPECT OF A NEW PROJECT, THEREFORE, CAPITAL IN NATURE. RESULTANTLY, CLAIM OF EXPENDITURE OF RS.8,30,017/- WAS DISALLOWED. 7.2 WHEN THE MATTER WAS CARRIED BEFORE THE FIRST AP PELLATE AUTHORITY, IT WAS CLAIMED THAT THE PAYMENT WAS MADE TO PRICE W ATER HOUSE AS A FEES FOR DUE DILIGENCE. HOWEVER, THE LEARNED CIT(A) WAS NOT CONVINCED AND DISMISSED THE GROUND. 7.3 ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, W E HAVE NOTED THAT IN CONNECTION WITH EXPLORING THE POSSIBILITY OF LAY ING PIPELINE FOR SUPPLY OF GAS, JOINTLY WITH GUJARAT STATE PERTRONET LTD. ( GSPL), THE ASSESSEE HAS ENGAGED PRICE WATER HOUSE TO SUBMIT A DUE DILIGENCE REPORT. THE IMPUGNED FEES OF RS.8,30,017/- WAS PAID. WE HEREBY HOLD THAT THE ASSESSEE IS IN THE BUSINESS OF PROCESSING, DISTRIBU TION AND TRANSMISSION OF NATURAL GAS; THEREFORE, A DUE DILIGENCE REPORT WAS REQUIRED WITH THE INTENTION TO EXPLORE THE POSSIBILITY OF LAYING PIPE LINE FOR SUPPLY OF GAS. THEREFORE, THE IMPUGNED EXPENDITURE WAS AN EXPANSIO N OF THE ASSESSEES EXISTING BUSINESS. WHETHER AN EXPENDITURE IS EXPEDI ENT FOR THE PURPOSE OF PROMOTION OF SALES OR THE BUSINESS IS TO BE LOCATED FROM THE VIEW POINT OF THE ASSESSEE THE SAME MEANT FOR THE PURPOSE OF THE BUSINESS. A SUM OF MONEY EXPAND NOT NECESSARILY WITH A VIEW TO HAVE A DIRECT AND IMMEDIATE BENEFIT TO THE TRADE OR BUSINESS. BUT CON SIDERING THE NECESSITY AND ON THE GROUND OF COMMERCIAL EXPEDIENCY, IF THE EXPENDITURE IS INCURRED DIRECTLY TO FACILITATE THE PROMOTION OF TH E BUSINESS; CAN BE HELD TO BE EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPO SE OF BUSINESS. IT IS WORTH TO MENTION THAT THE LANGUAGE OF THE SECTION I S THAT THE EXPENDITURE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 14 - OUGHT TO BE FOR THE PURPOSE OF THE BUSINESS WHICH I S A PHRASE WIDER IN SCOPE THAN THE PHRASE FOR THE PURPOSE OF EARNING P ROFIT. ACCORDING TO US, THE LOWER AUTHORITIES HAVE MISINTERPRETED THIS PROVISION OF THE ACT. UNDISPUTEDLY, THE EXPENDITURE WAS LEGAL/PROFESSIONA L IN NATURE; HENCE, ALLOWABLE U/S.37 OF IT ACT. THE VIEW TAKEN BY THE A UTHORITIES BELOW IS HEREBY REVERSED AND THIS GROUND IS ALLOWED. 8. GROUND NO.8 IS REPRODUCED BELOW: 8(I). THE LEARNED COMMISSIONER OF INCOME-TAX ( APPEALS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.20,90 ,051/- OUT OF RS.22,36,196/- BEING THE EXPENDITURE INCURRED ON SOFTWARE LICENSES AND SOFTWARE DEVELOPMENT. YOUR APPELLANT SUBMITS THAT T HESE EXPENSES BEING OF RECURRING NATURE, THE USE OF LICENSED COPY OF DIFFE RENT PROGRAMMES IN FORM OF SOFTWARE ARE TO BE TREATED AS REVENUE EXPENDITURE. 8(II). THE LEARNED COMMISSIONER OF INCOME-TAX (APPE ALS) ERRED IN HOLDING THAT COMPUTER SOFTWARE ARE ELIGIBLE AS DEPRECIATION @ 25% AND NOT @ 60%. IT IS SUBMITTED THAT COMPUTER SOFTWARE ARE ELIGIBLE @ 60% AND THE SAME MAY BE ALLOWED NOW. 8.1 THE ASSESSEE HAS INCURRED SOFTWARE DEVELOPMENT AND SOFTWARE LICENSE EXPENDITURE OF RS.22,36,196/-, AS PER AO, D EBITED TO P&L A/C. THE ASSESSEE HAS FURNISHED THE DETAILS AND THE EXPL ANATION AS FOLLOWS: A) LICENSE COPY OF MS OFFICE, ANTIVIRUS SOLUTION, ANTIGEN FOR MS EXCHANGE MAIL SERVER, OTHER SOFTWARES, ORACLE SERVE R TOTALING TO RS.1875851/- B) MIGRATION OF APPLICATION FROM POWER BUILDER A ND DATA FROM ORACLE RS.125000/- C) SOFTWARE REQUIREMENT STUDY RS.L08125/- D) COMPUTER SOFTWARE DEVELOPMENT EXPENSES RS. 38,020/- E) POWER BUILDER UPGRADATION IN SYSTEMS RS.5 5000/- F) MS PROJECT 2000 SOFTWARE LICENSE RS.1895 0/- G) MS OFFICE USER LICENSE RS.15250/- 8.2. HOWEVER, THE AO WAS NOT CONVINCED AND HELD AS UNDER: IN VIEW OF UNAMBIGUOUS PROVISION IN THE INCOME TAX ACT, 1961 WITH REGARD TO EXPENDITURE TOWARDS LICENSE THE AFORESAID EXPEND ITURES (EXCLUDING THE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 15 - EXPENDITURE FOR SOFTWARE DEVELOPMENT AND SOFTWARE S TUDY) INCURRED BY THE ASSESSEE COMPANY IS HELD TO BE ELIGIBLE FOR DEPRECI ATION AT THE RATE OF 25%. SUCH EXPENSES ARE NOT ELIGIBLE FOR DEDUCTION AS REV ENUE IN NATURE. THUS THE EXPENDITURE TO THE TUNE OF RS.2090051/- IS DISALLOW ED AS REVENUE EXPENDITURE AND DEPRECIATION AT THE RATE OF 25% IS ALLOWED ON S UCH AMOUNT. IT LEADS TO NET DISALLOWANCE OF RS.1567538/- 8.3 LEARNED CIT(A) HAS CONSIDERED THE NATURE OF THE EXPENDITURE, AS DISCUSSED BY THE AO, BUT HELD THAT THE EXPENDITURE WAS CAPITAL IN NATURE BECAUSE THE ASSESSEE HAS ACQUIRED INTANGIBLE RIGHT FOR USE OF SOFTWARE. BEING AGGRIEVED, THE ASSESSEE IS FURTHER IN APPEAL. 8.4 HEARD BOTH THE SIDES. THE ASSESSEE HAD OBTAINED THE LICENSE FOR USE OF VARIOUS SOFTWARES. FOR THE PURPOSE OF SOFTWARE, IT IS A STATUTORY REQUIREMENT OF PROCUREMENT OF LICENSE. THEREFORE IT IS A RECURRING EXPENDITURE. IT IS NOT A ONE TIME EXPENDITURES. THE SOFTWARE IS REQUIRED FOR RUNNING OF THE BUSINESS; HENCE, THE EXPENDITURE HAS DIRECT NEXUS WITH THE BUSINESS ACTIVITY OF THE ASSESSEE. BEFORE US A DECISION OF HONBLE ITAT AHMEDABAD IN THE CASE OF UB ELECTRICALS PVT. LTD. CITED AS 1997 TAX L.R. 250 IS REFERRED WHEREIN IT WAS HELD THAT THE PURCHASE O F SOFTWARE PROGRAMMES ARE SUBJECT TO CHANGE; THEREFOR E, NOT ENDURING IN NATURE BUT REVENUE IN NATURE, HENCE; AN ALLOWABLE E XPENDITURE. THE ASSESSEE HAS ALSO FURNISHED A DECISION OF HONBLE D ELHI HIGH COURT PRONOUNCED IN THE CASE OF CIT VS. AMWAY INDIA ENTERPRISES, 22 TAXMANN. COM 22 (DELHI) WHEREIN IT WAS PRONOUNCED THAT AN EXPENDITURE FOR ACQUIRING LICENSE TO USE SOFTWARE APPLICATIONS WOULD BE APPLICABLE AS REVENUE EXPENDITURE. RESPECTFULLY FOLLOWING THESE DECISIONS, WE HEREBY HOLD THAT THE EXPENDITURE IN QUESTION IS TO BE ALLOWED IN THE HAN DS OF THE ASSESSEE. THIS GROUND IS, THEREFORE, ALLOWED. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 16 - 9. GROUND NO.9 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.3,15,500/- O UT OF THE PAYMENT OF RS.5,32,500/- MADE TO DIFFERENT ENTITIES AS DONATION. THE LEARNED CIT(APPEALS) ERRED IN HOLDING THAT SUCH AMOUNTS ARE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE, THEY TARE IN THE NATURE OF CHARITIES WHICH HAVE NO NEXUS WITH THE BUSINESS. YOUR APPELLANT SUB MITS THAT THESE EXPENSES ARE INCURRED FOR THE PROMOTION OF THE SOCIAL CAUSE IN RESPECT OF THE PEOPLE AT THE PLACE OF BUSINESS AND ALSO IN RESPECT OF THE EM PLOYEES OF THE APPELLANT WHICH ARE GOOD BUSINESS PRACTICES. YOUR APPELLANT T HEREFORE SUBMITS THAT SUCH PAYMENTS ARE BUSINESS EXPENDITURE AND EVEN THEY ARE TERMED AS CHARITIES ARE INCURRED FOR THE PURPOSE OF THE BUSINESS AND DEDUCT ION U/S.37 BE GRANTED TO THE APPELLANT. 9.1 THE AO HAS NOTICED THAT UNDER THE HEAD DONATIO N THE FOLLOWING EXPENDITURE WAS CLAIMED BY THE ASSESSEE. SR. NO. NAME OF PARTY DESCRIPTION AMOUNT 1. CEPT STUND COUNCIL SPONSORSHIP FOR CEPT ANNUAL FESTIVAL ROOTS 2002 100,000/- 2. ANKELSHWAR PROGRESSIVE EDUCATION TRUST CONSTRUCTION OF COLLEGE 150,000 3. MAHAVIR INTERNATIONAL CULTURAL PROGRAMME 5,000 4. POLICE COMMISSIONER, AHMEDABAD PURCHASE OF TIES FOR POLICE PERSONNEL 20,000 5 BHARUCH MUNICIPALITY FOR TOWN HALL DEVELOPMENT 257,500 532,500 9.2 AFTER EXAMINING THE DETAILS, IT WAS HELD THAT I N THE ABSENCE OF 80G CERTIFICATE AND THAT THE REQUISITE INFORMATION OF T HE EXPENDITURE WAS NOT ALLOWABLE, THE SAME WAS NOT ALLOWABLE. BEING AGGRIE VED THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. THE A SSESSEES ONLY ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 17 - EXPLANATION WAS THAT TO CREATE GOOD IMAGE IN THE SO CIETY THE EXPENDITURE IN QUESTION WAS INCURRED AS A DONATION TO CERTAIN S OCIETIES. LIKEWISE, ONE OF THE AMOUNT WAS CONTRIBUTED TO BHARUCH MUNICIPALI TY WHICH WAS IN THE NATURE OF ADVERTISEMENT EXPENDITURE. HOWEVER, LEARN ED CIT(A) WAS NOT CONVINCED AND GRANTED ONLY PART RELIEF TO THE ASSES SEE IN THE FOLLOWING MANNER: 13.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT AND THE FACTS BROUGHT ON RECORD BY THE AO. I AGREE WITH THE ARGUMENTS OF THE AO THAT THESE AMOUNTS HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR BUSIN ESS PURPOSE. THESE AMOUNTS ARE IN THE NATURE OF CHARITIES WHICH HAVE N O NEXUS WITH THE BUSINESS AND ARE ELIGIBLE FOR DEDUCTION ONLY WHEN REQUISITE CERTIFICATE IS FURNISHED FOR THE SAME, WHICH HAS NOT BEEN SUBMITTED. THEREFORE, THESE EXPENDITURE IS NOT AN ALLOWABLE EXPENDITURE WITHIN THE MEANING OF SECT ION 37 OF THE IT ACT. HOWEVER, I FIND THAT IN THE COMPUTATION OF INCOME T HE APPELLANT HAS SUO MOTO ADDED RS.6,09,221/- OUT OF TOTAL BALANCE IN DONATIO NS OF RS.9,66,721/-. THIS IS SUBJECT TO NOTE 8 OF THE COMPUTATION ON INCOME. FRO M THE DETAILS OF RS.6,09,221/-, I FIND THAT IT INCLUDES AMOUNT OF RS .1,75,000/- GIVEN TO ANKLESHWAR PROGRESSIVE EDUCATION TRUST (RS.1,50,000 ), MAHAVIR INTERNATIONAL (RS.5,000) AND POLICE COMMISSIONER (R S.20,000). THEREFORE, TO THIS EXTENT I.E. RS.1,75,000/-, THERE HAS BEEN DOUB LE ADDITION. ACCORDINGLY, OUT OF TOTAL DISALLOWANCE OF RS.5,32,500/-, THIS AMOUNT OF RS.1,75,000/- IS DELETED AND REMAINING AMOUNT OF RS.3,57,500/- IS HEREBY CON FIRMED. THIS GROUND IS PARTLY ALLOWED. 9.3 BEFORE US, LEARNED AR HAS PLACED RELIANCE AT NAVASARI COTTON AND SILK MILLS, 135 ITR 546 (GUJ.) . HOWEVER, WE HAVE NOTICED THAT IN THE SAID CASE, THE CONTRIBUTION TO MUNICIPALITY WAS FOR THE PURPOSE OF LYING UNDER GROUND PIPELINES IN MUNICIPAL LAND; THEREFORE , TO CREATE A GOOD WILL THE ASSESSEE HAD CONTRIBUTED THE AMOUNT IN QUESTION . ON THOSE FACTS, THE HONBLE COURT HAS HELD THAT THE AMOUNT CONTRIBUTED WAS ALLOWABLE AS BUSINESS EXPENDITURE; HOWEVER, AS AGAINST THAT THE ASSESSEES EXPLANATION IS THAT MERELY TO CREATE GOOD IMAGE IN THE LOCALITY THE EXPENDITURE WAS INCURRED. HOWEVER, THE ASSESSEE HAS NOT ESTABLISHED THAT THE EXPENDITURE WAS INCURRED EITHER IN THE COURSE OF THE BUSINESS O R IN ANY WAY IT WAS INCIDENTALLY TO THE BUSINESS. THE ASSESSEE HAD NOT PROCURED ANY BUSINESS ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 18 - FROM THE CORPORATION. WE HAVE ALSO NOTED THAT THE A SSESSEE HAD FAILED TO PRODUCE THE REQUISITE CERTIFICATE BEFORE THE AO. TH E ASSESSEE HAS SUBMITTED AN ALTERNATIVE PLEA THAT IN THE BUSINESS OF 80G CERTIFICATE THE EXPENDITURE OF DONATION WOULD BE TREATED A BUSINESS EXPENDITURE U/S.37 OF IT ACT. EVEN, THIS ALTERNATIVE PLEA IS NOT ACCEPTAB LE BECAUSE THE ASSESSEE HAS NOT ESTABLISHED THAT THE IMPUGNED EXPENDITURES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. RE SULTANTLY, THIS GROUND IS HEREBY DISMISSED. 10. GROUND NO.10 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ER RED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER I N ESTIMATING PROFIT OF RS. 16,79,700/- AT THE RATE OF 10 PER CENT OF THE WORK IN PROGRESS OF RS. 1,67,97,000/- FOR THE MAHANAGAR GAS PROJECT OF THE APPELLANT. THE LEARNED CIT (APPEALS) ERRED IN HOLDING THAT THE APPELLANT'S METHOD IN SHOWING THE PROFIT IN RESPECT OF THE PROJECT IS NOT AS PER ANY ACCOUNTING STANDARD AND IS NOT IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACC OUNTING. THE LEARNED CIT(APPEALS) HAS ALSO ERRED IN HOLDING THAT THE PRO FIT IN RESPECT OF THIS PROJECT ACCRUES CONTINUOUSLY AND THEREFORE THE APPE LLANT SHOULD HAVE TAKEN CREDIT OF THE SAME AS INCOME ON ACCRUAL BASIS IN RE SPECT OF INVESTMENTS MADE IN THIS PROJECT . 10.1 THE AO HAS NOTED THAT DURING THE YEAR THE COMP ANY HAD DEBITED A SUM OF RS.21,71,975/- ON ACCOUNT OF LOSS FROM MAHAN AGAR GAS PROJECT. THE ASSESSEE WAS ASKED TO FURNISH THE YEAR-WISE DET AILS OF PROJECT INCOME AND EXPENSES. REQUISITE DETAILS WERE FURNISHED. ON THAT BASIS, AO HAD FURTHER NOTED THAT AS PER THE CONTRACT BETWEEN ASSE SSEE AND MAHANAGAR GAS LTD. ALL THE MATERIAL REQUIRED FOR EXECUTION OF THE PROJECTION WAS TO BE SUPPLIED BY THE CONTRACTOR. SO ACCORDING TO AO, THE ASSESSEE WAS BASICALLY BOTH, A DEVELOPER AS WELL AS A CONSTRUCTI ON AGENCY FOR THE PROJECT. AFTER HOLDING SO, IT WAS HELD BY THE AO TH AT THE INCOME WAS REQUIRED TO BE CALCULATED ON THE BASIS OF PERCENTAGE COMPLETION ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 19 - METHOD. ACCORDING TO AO, THE ASSESSEE HAD NOT TAKEN INTO A CCOUNT THE WORK IN PROGRESS. ACCORDING TO HIM, IT WAS JUSTIFIE D TO CALCULATE THE PROFIT @ 10% ON THE PART OF THE PROJECT. AS PER THE BALANC E SHEET, THE PROJECT WORK IN PROGRESS HAD INCREASED FROM RS.50,70,000/- TO RS.1,67,97,000/-. THEREFORE, THE PROJECT WORK IN PROGRESS AS ON 31.03 .2002 WAS RS.1,67,97,000/-. ON THAT WORK IN PROGRESS; ACCORDI NG TO AO, THE ASSESSEE WOULD HAVE EARNED SOME PROFIT FOR THE YEAR UNDER CONSIDERATION. THE AO HAS THUS APPLIED 10% OF PROFIT AND TAXED A S UM OF RS.16,79,700/- IN THE HANDS OF THE ASSESSEE. THE MA TTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY WHO HAS AFFIRM ED THE ACTION OF THE AO. 10.2 HEARD BOTH THE SIDES. THE ASSESSEE HAS FURNISH ED THE COPY OF THE CONTRACT AND ON THAT BASIS TRIED TO EXPLAIN THAT FO LLOWING THE AS7, AS ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS, THE A SSESSEE WAS NOT REQUIRED TO DECLARE PROFIT AT PERCENTAGE COMPLETION METHOD CONSIDERING THE NATURE OF PROJECT IN HAND. ACCORDING TO US, THE AO HAS ESTIMATED A NOTIONAL PROFIT ON WORK IN PROGRESS WITHOUT ANALYZI NG THE SITUATION THAT THE ASSESSEE HAS REGULARLY OFFERED THE TAX, ON EACH PROJECT, AS AND WHEN IT WAS REQUIRED AS PER LAW. WE ARE, THEREFORE, NOT IN FAVOUR TO TINKER WITH THE REGULAR METHOD ADOPTED BY THE ASSESSEE IN THE R EGULAR COURSE OF BUSINESS. THE VIEW TAKEN BY THE LOWER AUTHORITIES I S HEREBY REVERSED AND THIS GROUND IS ALLOWED. 11. GROUND NO.11 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.1,35,557 /- BEING THE EXPENDITURE INCURRED TOWARDS REPLACEMENT OF DEFECTIVE METERS HO LDING SUCH EXPENDITURE AS CAPITAL IN NATURE AND NOT RELATED TO MAINTENANCE OF METERS. YOUR APPELLANT ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 20 - SUBMITS THAT THESE EXPENSES ARE RECURRING EXPENSES INCURRED BY THE APPELLANT AND ARE OF GENERAL REVENUE NATURE. IT IS SUBMITTED THAT THE SAME MAY PLEASE BE ALLOWED TO THE APPELLANT. 11.1 UNDER THE HEAD REPAIRS THE ASSESSEE HAD DEB ITED AN EXPENDITURE OF RS.1,35,557/- FOR REPLACEMENT OF METERS. ACCORDI NG TO AO, THOSE METERS WERE THE PROPERTY OF GUJARAT GAS FINANCIAL S ERVICES LTD. (GGFSL), A SUBSIDIARY OF THE ASSESSEE-COMPANY. FACT S HAVE REVEALED THAT THE METERS WERE GIVEN ON LEASE TO GGFSL. GGFSL HAD CLAIMED THE DEPRECIATION BECAUSE THE OWNERSHIP WAS WITH GGFSL; THEREFORE, IT WAS HELD BY THE AO THAT THERE WAS NO BASIS FOR CLAIMING EXPENDITURE ON ACCOUNT OF REPLACEMENT OF METERS WHICH WERE NOT THE PROPERTY OF THE ASSESSEE. ACCORDING TO AO, IT WAS FOR REPLACEMENT OF METER BUT NOT MAINTENANCE OF METERS. THE CLAIM WAS DISALLOWED. 11.2 LEARNED CIT(A) HAS FOLLOWED HIS PREDECESSORS D ECISION IN ASSESSEES OWN CASE FOR A.Y. 1998-99 AND UPHELD THE ACTION OF THE AO. 11.3 HEARD BOTH THE SIDES. THE AGREED POSITION BEFO RE US IS THAT FOR A.Y.1998-99 SUPRA IN ITA NO.2211/AHD/2004 THE MATTER WAS RESTORED BACK TO THE FILE OF THE AO FOR FRESH APPLICATION VI DE PARAGRAPH 34, REPRODUCED BELOW: 34. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE ID. CIT(A) UPHELD THE DISALLOWANCE OF RS.23,46,862/- MAINLY ON THE GROUND THAT THE ASSESSEE DID NOT FURNISH THE RE LEVANT DETAILS OF REMOVAL OF OLD METERS, PURCHASE OF NEW METERS, FITTING OF NEW METERS AND SALE OF SCRAP IN THE FORM OF OLD METERS OR ANY EVIDENCE OF REPLACEME NT OF OLD METERS BEFORE HIM OR THE AO. NOW WHEN THE ID. AR HAS AGREED TO FU RNISH THE RELEVANT DETAILS AND EVIDENCE, WE CONSIDER IT FAIR AND APPROPRIATE T O SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF TH E AO FOR DECIDING THE ISSUES RAISED IN THE AFORESAID GROUND NOS. 8 &9 OF THE APP EAL RELATING TO REPLACEMENT OF OLD METERS AND SALE THEREOF AS SCRAP, AFRESH IN ACCORDANCE WITH LAW, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. NE EDLESS TO SAY THAT WHILE REDECIDING THE APPEAL, THE AO SHALL BRING OUT CLEAR LY AS TO WHETHER OR NOT THE ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 21 - OLD METERS WERE ACTUALLY REPLACED AND HAD BEEN SOLD AS A SCRAP. WITH THESE OBSERVATIONS, GROUND NOS. 8 & 9 IN THE APPEAL ARE D ISPOSED OFF. 11.4 FOLLOWING THE ABOVE VIEW, THIS GROUND IS HEREB Y RESTORED BACK TO THE FILE OF THE AO TO BE DECIDED ACCORDINGLY. GROUN D MAY BE TREATED AS ALLOWED FOR STATISTICAL PURPOSE ONLY. 12. GROUND NO.12 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ER RED IN LAW AND ON FACTS IN UPHOLDING THE METHOD OF SET OFF OF LONG TE RM CAPITAL LOSSES AS DONE BY THE LEARNED ASSESSING OFFICER WHEREBY THE FIRST SETS OFF THE LONG TERM CAPITAL LOSS AGAINST THE LONG TERM CAPITAL GAIN AS OPPOSED TO THE CLAIM OF THE APPELLANT FOR ADJUSTING THE LONG TERM CAPITAL L OSS FIRSTLY AGAINST THE SHORT TERM CAPITAL GAIN. YOUR APPELLANT SUBMITS THA T IT IS ENTITLED TO THE ABOVE METHOD OF SET OFF AS THERE IS NO BAR IMPLICIT OR EXPLICIT IN THE PROVISIONS OF THE ACT AGAINST THE SAME. YOUR APPELLANT SUBMITS THAT IT BE SO HELD NOW AND THE SET OFF OF THE LONG TERM CAPITAL LOSS OF RS.93, 33,608/- BE ALLOWED FIRST AGAINST SHORT TERM CAPITAL GAIN OF RS.93,33,194/-. 12.1 THE COMPANY HAD SHOWN LONG TERM CAPITAL L OSS OF RS.93,33,608/-. SIMULTANEOUSLY, THE ASSESSEE HAD SH OWN SHORT TERM CAPITAL GAIN OF RS.93,33,194/-. THE COMPANY HAD ADJ USTED THE LONG TERM CAPITAL GAIN AGAINST THE SHORT TERM CAPITAL GAIN. RELIANCE WAS PLACED ON THE PROVISIONS OF SECTION 74 R.W.S. 112 O F IT ACT. ACCORDING TO AO, THE ASSESSEE HAD NOT GIVEN THE CORRECT TREATMEN T IN THE COMPUTATION OF CAPITAL GAIN/CAPITAL LOSS. HE HAS HELD THAT THE LONG TERM CAPITAL LOSS TO THE TUNE OF RS.93,33,608/- WAS REQUIRED TO BE SET OFF AGAINST THE LONG TERM CAPITAL GAIN OF RS.95,04,906/-. THE NET RESULT, AS PER AO, WAS THAT THE LONG TERM CAPITAL GAIN REMAINED AT RS. 1,71,298/- AND THE SHORT TERM CAPITAL GAIN REMAINED UNCHANGED OF RS.93 ,33,194/-. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 22 - 12.2 LEARNED CIT(A) HAS HELD THAT THE METHOD ADOPTE D BY THE AO WAS CORRECT BECAUSE FIRST THE LONG TERM CAPITAL GAIN WI LL BE ADJUSTED AGAINST THE LONG TERM CAPITAL LOSS. THE ACTION OF THE AO WA S AFFIRMED. NOW THE ASSESSEE IS FURTHER IN APPEAL. 12.3 BEFORE US IT IS SUBMITTED THAT THE ASSESSEE H AS REVISED THE COMPUTATION AND WORKED OUT THE LONG TERM CAPITAL GA IN ON THE BASIS OF AN OPTION PROVIDED THAT SALE PRICE OR COST PRICE WH ICHEVER IS BENEFICIAL IS TO BE ADOPTED FOR THE COMPUTATION. HOWEVER, THE ISS UE BEFORE US IS ONLY THAT WHETHER A SHORT TERM CAPITAL GAIN/LOSS CAN BE ADJUSTED AGAINST THE LONG TERM CAPITAL GAIN / LOSS. THE GROUND IS VERY S PECIFIC THAT THE ASSESSEE WANTED SET OFF OF LONG TERM CAPITAL LOSS FIRST TO B E ALLOWED AGAINST SHORT TERM CAPITAL GAIN. WE ARE OF THE VIEW THAT THE LONG TERM CAPITAL GAIN IS TO BE ADJUSTED AGAINST THE LONG TERM CAPITAL LOSS AND LIKEWISE THE SHORT TERM CAPITAL GAIN IS TO BE ADJUSTED FIRST AGAINST THE SH ORT TERM CAPITAL LOSS. THE PROVISIONS OF THE ACT HAS PRESCRIBED THE INTRA-HEAD ADJUSTMENTS, THEREFORE, THE REVENUE AUTHORITIES HAVE CORRECTLY H ELD THAT THE APPELLANT HAD WRONGLY ADOPTED THE METHOD OF ADJUSTMENT OF CAP ITAL GAIN. FURTHER WE HAVE ALSO NOTED THAT, ALTHOUGH NOT IN THE GROUND OF APPEAL, THE QUESTION OF COST AS PER INDEX COST WAS DIRECTED TO BE COMPUTED BY AO AS PER SECTION 48 VIDE PARAGRAPH 16.2.1 OF THE ORDER O F LEARNED CIT(A). THEREFORE, THE ASSESSEE SHOULD NOT HAVE ANY GRIEVAN CE IN THIS REGARD. THIS GROUND OF THE ASSESSEE IS HEREBY DISMISSED. B. A.Y. 2003-04 (ITA 4487/AHD/2007) 13. GROUND NO.1 IS REPRODUCED BELOW: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.3,00,960/ - BEING THE AMOUNT OF BAD ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 23 - DEBTS/ ADVANCES/ DEBIT BALANCES WRITTEN OFF. YOUR A PPELLANT SUBMITS THAT SUCH BAD DEBTS/ ADVANCES HAVE ARISEN OUT OF TRADE TRANSA CTIONS EXCEPT TO THE EXTENT OF RS.2,60,960/- IN RESPECT OF F.DS. MADE WITH VARI OUS GOVERNMENT AUTHORITIES. THE INCOME CORRESPONDING TO THESE TRAD E DEBTS WERE OFFERED FOR TAXATION IN THE EARLIER YEARS. YOUR APPELLANT FURTH ER SUBMITS THAT ALL THESE ACCOUNTS HAVE BEEN WRITTEN OFF AS BAD IN THE BOOKS OF THE APPELLANT DURING THE YEAR UNDER CONSIDERATION AND ARE GENUINE CLAIMS. YO UR APPELLANT THUS FULFILLS THE CONDITIONS LAID DOWN U/S.36(1)(VII) READ WITH S ECTION 36(2) FOR GETTING THE DEDUCTION OF THE BAD DEBTS. WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLAN T SUBMITS THAT THE AMOUNT OF RS.2,60,960/- WHICH IS IN RESPECT OF F.DS. WRITT EN OFF BE CONSIDERED TO BE A TRADING LOSS AND MAY BE ALLOWED U/S.28/29 OF THE I. T. ACT. IT IS SUBMITTED THAT IT BE SO HELD NOW AND THE DISALLOWANCE CONFIRMED BE DELETED. 13.1 WHILE DECIDING GROUND NO.2 IN A.Y. 2002-03 HER EINABOVE, VIDE PARAGRAPH 2.2 WE HAVE RESTORED THE ISSUE OF BAD DEB TS BACK TO THE FILE OF THE AO FOR READJUDICATION. ON THE SAME LINES, IT IS HEREBY DIRECTED TO DECIDE AS PER LAW HENCE THIS GROUND MAY BE TREATED ALLOWED FOR STATISTICAL PURPOSE ONLY. 14. GROUND NO.2 IS REPRODUCED BELOW: 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEA LS) ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN ESTIMATING PROFIT OF RS.5,77,400/- AT THE RATE OF 10 PER CENT OF THE WOR K IN PROGRESS OF RS.57,74,000/- FOR THE MAHANAGAR GAS PROJECT OF THE APPELLANT. THE LEARNED CIT (APPEALS) ERRED IN FOLLOWING HIS PREDECESSOR FO R A.Y.2002-03 IN WHICH HE HELD THAT THE APPELLANT'S METHOD IN SHOWING THE PRO FIT IN RESPECT OF THE PROJECT IS NOT AS PER ANY ACCOUNTING STANDARD AND IS NOT IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING. THE LEARNED CIT(AP PEALS) HAS ALSO ERRED IN HOLDING THAT THE PROFIT IN RESPECT OF THIS PROJECT ACCRUES CONTINUOUSLY AND THEREFORE THE APPELLANT SHOULD HAVE TAKEN CREDIT OF THE SAME AS INCOME ON ACCRUAL BASIS IN RESPECT OF INVESTMENTS MADE IN THI S PROJECT. YOUR APPELLANT SUBMITS THAT THE ACCOUNTING METHOD F OLLOWED BY IT AS WELL AS THE ACCOUNTING TREATMENT GIVEN IN ITS BOOKS OF ACCO UNT IN RESPECT OF THIS PROJECT ARE ABSOLUTELY IN CONSONANCE WITH THE ACCOU NTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND ON THE BASIS OF ACCEPTED ACCOUNTING PRINCIPLES. IT IS SUBMITTED THAT IT BE S O HELD NOW AND THE ADDITION OF RS.5,77,400/- ESTIMATED AS PROFIT IN RESPECT OF THIS PROJECT BE DELETED. ITA NOS.1264/AHD/2006 & 4487/AHD/2007 GUJARAT GAS CO. LTD. VS. ACIT, CIRCLE-4, AHMEDABAD A.Y.2002-03 & 2003-04 - 24 - 14.1 WHILE DECIDING GROUND NO.10 FOR A.Y. 2002-03 ( SUPRA) VIDE PARAGRAPH 10.2, WE HAVE HELD THAT THE ASSESSEE HAS ADOPTED A REGULAR METHOD TO WORK OUT THE PROFIT WHICH IS NOT REQUIRED TO BE DISTURBED. LIKEWISE FOR THE YEAR UNDER CONSIDERATION, THIS GRO UND OF THE ASSESSEE IS ALLOWED. 17. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE HEREBY PARTLY ALLOWED PROTANTO. SD/- SD/- (N.S. SAINI) (MUKUL KR. SHRAWAT) ACCOUNTANT MEMBER JUD ICIAL MEMBER AHMEDABAD; DATED 30/05/2014 PRABHAT KR. KESARWANI, SR. P.S. / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A)-III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE. / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD