M/s Sri Krishna Drugs Limited, Hyderabad V. DCIT, Hyderabad

ITA 45/HYD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 6299 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-08-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 09-01-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA SINHA
• Assessee Lawyers: S RAMA RAO
• Keywords: Notional interest; Capital expenditure
• Section: 43B; 80HHC; 145; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B , HYDERABAD BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO. ASST YEAR APPELLANT RESPONDENT ITA NO.174/HYD/2006 2002-03 M/S SHRI KRISHNA DRUGS LTD., HYDERABAD DCIT, CIRCLE 3 (2), HYDERABAD ITA NO.41/HYD/2007 2003-04 DCIT, CIRCLE 3 (2), HYDERABAD M/S SHRI KRISHNA DRUGS LTD., HYDERABAD ITA NO.487/HYD/2006 2004-05 M/S SHRI KRISHNA DRUGS LTD., HYDERABAD DCIT, CIRCLE 3 (2), HYDERABAD ITA NO.505/HYD/2007 2004-05 DCIT, CIRCLE 3 (2), HYDERABAD M/S SHRI KRISHNA DRUGS LTD., HYDERABAD ITA NO.45/HYD/2007 2003-04 M/S SHRI KRISHNA DRUGS LTD., HYDERABAD DCIT, CIRCLE 3 (2), HYDERABAD ITA NO.537/HYD/2009 2005-06 M/S SHRI KRISHNA DRUGS LTD., HYDERABAD DCIT, CIRCLE 3 (2), HYDERABAD ITA NO.665/HYD/2009 2005-06 DCIT, CIRCLE 3 (2), HYDERABAD M/S SHRI KRISHNA DRUGS LTD., HYDERABAD APPELLANT BY : SHRI S. RAMA RAO RESPONDENT BY : SMT. VASUNDHARA SINHA, DR O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEM BER: THESE SEVEN APPEALS PREFERRED BY THE ASSESSEE AS WELL AS REVENUE ARE DIRECTED AGAINST DIFFERENT ORDERS PASS ED BY THE CIT(A)-IV, HYDERABAD DATED AND PERTAINS TO ASSESSMENT YEARS 20 02-03 TO 2005-06. SINCE CERTAIN ISSUES INVOLVED IN THESE APPEALS ARE COMMON, THEY ARE M/S SRI KRISHNA DRUGS LTD., HYDERABAD 2 2 CLUBBED TOGETHER, HEARD TOGETHER AND DISPOSED OFF V IDE THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FIRST COMMON GROUND ASSESSEES APPEALS IN ITA N.174/HYD/2006, 45/H/2007, 487/HYD/2007 & 537/HYD/2 007 ARE AS FOLLOWS. THE CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST WORKED OUT ON THE INVESTMENT MADE BY THE ASSESSEE IN M/S SUVISION INF OTECH LTD. THE CIT(A) OUGHT TO HAVE SEEN THAT THE AMOUNT INVES TED WITH SUVISION INFOTECH LTD., REPRESENTS OWN FUNDS OF THE ASSESSEE AND THEREFORE, NO PART OF THE INTEREST IS DISALLOWED. 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSE E MADE INVESTMENTS OF RS.1.95 CRORES IN THE SHARES OF M/S SUVISION INF OTECH LTD. IN THE FINANCIAL YEAR 2000-01 AND RS.56.35 LAKHS IN THE FI NANCIAL YEAR 2001-02 TOTALING OF RS.251.35 LAKHS. THE ASSESSING OFFICER HELD THAT THE ASSESSEE USED THE INTEREST BEARING FUNDS TO MAKE THIS INVEST MENT. AS SUCH, THE ASSESSING OFFICER DISALLOWED THE PROPORTIONATE INTE REST ATTRIBUTABLE TO THE INVESTMENT MADE IN THE SUBSIDIARY COMPANY. ALTERNA TIVELY, THE ASSESSING OFFICER HAS ALSO HELD THAT DISALLOWANCE IS ALSO AS PER PROVISIONS OF SEC.14A OF THE IT ACT, AS THE ASSESSEE DID NOT RECEIVE RETU RN IN THE FORM OF DIVIDEND AGAINST WHICH THE INTEREST EXPENSES ARE DEDUCTIBLE. ON APPEAL, THE CIT(A) CONFIRMED THE DISALLOWANCE. BEFORE US THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE INVESTMENT HAS BEEN MADE FROM THE OWN FUNDS WHICH IS IN THE FORM OF SHA RE CAPITAL AND RESERVES AND SURPLUS INCLUDING PROFIT DERIVED IN TH E ASSESSMENT YEARS UNDER CONSIDERATION WHICH IS HAVING NO COST AND THE PURPOSE OF MAKING INVESTMENT IS TO HAVE CONTROLLING INTEREST IN THE S AID SUBSIDIARY COMPANY AND IT IS AN ANCILLARY BUSINESS ACTIVITY OF THE ASS ESSEE AND THE INVESTMENT IS IN THE FIELD OF COMMERCIAL EXPENDENCY. HE RELIE D ON THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SA BUI LDER (288 ITR 1) AND ALSO ACIT VS. E.I. DUPONT INDIA LTD. (298 ITR 298 ). HE DREW OUR M/S SRI KRISHNA DRUGS LTD., HYDERABAD 3 3 ATTENTION RELEVANT BALANCE SHEET TO EXPLAIN FUND FL OW POSITION WHICH IS PLACED ON RECORD. 4. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL R EPRESENTATIVE SUBMITTED THAT THE ASSESSEE IS NOT IN A BUSINESS OF SOFTWARE AND IT IS IN THE BUSINESS OF MANUFACTURING OF BULK DRUGS AND THE IMP UGNED INVESTMENT OF M/S SUVISION INFOTECH LTD. NO WAY HELPS THE ASSESSE E TO INCREASE ITS PRESENT BUSINESS. THERE IS NO COMMERCIAL EXPENDANC Y TO INVEST SUCH AN AMOUNT IN A SUBSIDIARY COMPANY. THERE IS NO NECESS ITY TO USE ITS OWN FUND IN THIS INVESTMENT AND THEN BORROW FUND FOR IT S OWN BUSINESS PURPOSE. HAD THE ASSESSEE USED OWN FUND FOR ITS BU SINESS, THERE IS NO NECESSITY OF PAYING HEAVY INTEREST TO BANK WHICH WA S BORROWED FOR THE PURPOSE OF BUSINESS. THE LEARNED DEPARTMENTAL REPR ESENTATIVE RELIED ON THE FOLLOWING JUDGMENT: 1. CIT VS. V.I. BABY & CO. (254 ITR 248) (KER.) (HC) 2. CIT VS. ABHISHEK INDUSTRIES LTD. (286 ITR 1) (P&H) (HC) 3. CIT VS. SHAH ENGINEERING (P) LTD. (208 ITR 986) (RA J. HC) 4. INSALLAH INVESTMENTS LTD. ITO 23 SOT 130 (N. DELHI) 5. FURTHER, SHE RELIED ON THE ORDER OF THE CO- ORDINATE BENCH IN THE CASE OF SHRI SURENDRA REDDY IN ITA NO.1491/H/20 08 FOR THE ASSESSMENT YEAR 2004-05 WHEREIN THE TRIBUNAL VIDE I TS ORDER DATED 6.2.2009 HELD THAT EVEN THE CAPITAL HAS A COST AND THAT ELEMENT OF COST IS REPRESENTED BY INTEREST. THEREFORE, THE CLAIM OF T HE ASSESSEE THAT BORROWED FUNDS WERE NOT UTILIZED IS NOT CORRECT. THE PROPOR TIONATE INTEREST ON BORROWED FUNDS TO THE EXTENT OF INVESTMENT MADE IN THE OTHER COMPANY TO BE DISALLOWED. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL ON RECORD. IF THE ASSESSEE DIVERTED ITS INTEREST BEAR ING FUNDS TO THE SISTER M/S SRI KRISHNA DRUGS LTD., HYDERABAD 4 4 CONCERN FOR ANY PURPOSE OTHER THAN BUSINESS PURPOSE , THEN THIS IMPUGNED INTEREST TO BE DISALLOWED. IN OTHER WORDS, IF THE ASSESSEE USED THE SISTER CONCERN AS A CONDUIT TO DIVERT INTEREST BEARING FUN DS TO THE PERSONAL ADVANTAGE ANY DIRECTOR OR RELATIVE OF DIRECTORS OF THE ASSESSEE COMPANY, THEN THIS INTEREST TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THE PAYMENT OF INTEREST IS GENUINE. FURTHER, ONCE IT IS BORNE OUT OF THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN F UNDS ON WHICH LIABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITH OUT CARRYING ANY INTEREST OR LESS INTEREST WITHOUT ANY BUSINESS PURP OSE, THE INTEREST TO THAT EXTENT ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED U/S 36(1)(III) OF THE ACT. SUCH BORROWI NGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FO R SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF I T. IN SUCH CIRCUMSTANCES, THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON THE BORROWINGS TO THE EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS OR OTHER PERSONS WITHOUT INTEREST. THE ES TABLISHMENT OF NEXUS OF FUNDS BORROWED VIS.A.VIS THE FUNDS DIVERTED TOWARDS SISTER CONCERNS ON INTEREST FREE BASIS IS CONCERNED, IN OUR VIEW, THA T THE ONUS OF PROVING THE NEXUS OF FUNDS AVAILABLE WITH THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTEREST IS ON THE ASSESSEE. THE PROVISIONS OF SEC.36(1)(III) OF THE ACT PROVIDES FOR DEDUCTION OF INTEREST ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE C LAIMS ANY SUCH DEDUCTION HE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAIS ED BY THE ASSESSEE, THE SAME WERE USED FOR BUSINESS PURPOSE. IF IN THE PRO CESS OF EXAMINATION OF GENUINENESS OF SUCH DEDUCTION, IT TRANSPIRES THAT T HE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERN AT NO INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON F RESH BORROWINGS AND PENDING LOANS ON WHICH THE ASSESSEE INCURRING INTER EST LIABILITY, STILL THERE M/S SRI KRISHNA DRUGS LTD., HYDERABAD 5 5 IS A JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCE RNS FOR NON BUSINESS PURPOSE AND ACCORDINGLY, SUCH INTEREST PAYMENT CANN OT BE ALLOWED AS A DEDUCTION. HOWEVER, IN THE PRESENT CASE, AS SEEN FROM FINANCIAL STATEMENT OF ASSESSEES, THERE IS AVAILABILITY OF OWN FUND AN D RESERVE AND SURPLUS IN THE IMPUGNED ASSESSMENT YEARS. THESE FUNDS ARE MOR E THAN SUFFICIENT TO MAKE INVESTMENT IN THE SUBSIDIARY COMPANY. THIS CA N BE SEEN FROM THE FOLLOWING TABLE: A) FINANCIAL YEAR 2000-01 2001-0 2002-03 B) FUNDS AVAILABLE FOR UTILIZATION AFTER CONSIDERING THE IMPUGNED INVEST- MENT (RS.IN LAKHS) 151.21 135.66 29.27 C) LOANS FROM BANKS 109.58 84.96 D) INVESTMENT MADE IN FIXED ASSETS 236.38 179 .74 18.94 E) INVESTMENT MADE IN M/S SUVISION 195.00 5 6.35 7. IN OUR OPINION, THE ASSESSEE USED ITS OWN NO N INTEREST BEARING FUNDS AND THERE IS NO COST TO THE ASSESSEE AND IT I S A BUSINESS DECISION TAKEN BY THE ASSESSEE TO MAKE AN INVESTMENT IN SUBS IDIARY COMPANY AND THAT EVEN IF IT IS RESULTED IN NO INCOME TO THE ASS ESSEE, THE NOTIONAL INTEREST CANNOT BE DISALLOWED ON THE REASON THAT THE ASSESSE E SHOULD HAVE USED ITS NON INTEREST BEARING FUNDS FOR THE PURPOSE OF ITS O WN BUSINESS PURPOSE INSTEAD USING BORROWED FUNDS FOR ITS BUSINESS. THE ASSESSING OFFICER CANNOT SIT IN THE ARM CHAIR OF THE BUSINESS MEN AND DECIDE WHAT THE ASSESSEE HAS TO DO TO MAXIMIZE HIS PROFIT. IN OUR OPINION, THE JUDGEMENT RELIED BY THE ASSESSEES COUNSEL IN THE CASE OF M/S SA BUILDER CITED SUPRA SUPPORTS THE ASSESSEES CLAIM. ACCORDINGLY THIS GR OUND TAKEN BY THE ASSESSEE IS ALLOWED. 8. THE NEXT COMMON GROUND IN ASSESSEES APPEAL I N ITA NOS.174/HYD/2006 FOR THE ASSESSMENT YEARS 2002-03 A ND IN ITA NO.45/HYD/2007 FOR THE ASSESSMENT YEARS 2003-04 IS WITH REGARD TO EXCLUSION OF MISCELLANEOUS INCOME (FOREIGN EXCHANGE FLUCTUATION) FOR THE M/S SRI KRISHNA DRUGS LTD., HYDERABAD 6 6 PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC. IN THE ASSESSMENT YEARS 2002-03, THE LOWER AUTHORITIES EXCLUDED FOREIGN EXC HANGE FLUCTUATION AT RS.2,39,098/- FROM EXPORT INCOME AND TREATED THE SA ME INCOME FROM OTHER SOURCES AND THEREBY NOT CONSIDERED FOR DEDUCTION U/ S 80HHC. IN OUR OPINION, THIS ISSUE HAS BEEN SQUARELY COVERED IN FA VOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL IN THE CASE OF SMT. SUJA THA GROVER VS. DCIT (74 TTJ 347) (DELHI BENCH) WHEREIN IT WAS HELD THAT FOR EIGN EXCHANGE FLUCTUATION GAIN PERTAINING TO EXPORTS EFFECT IN EA RLIER YEARS CANNOT BE SAID TO BE ANY OTHER RECEIPTS OF A SIMILAR NATURE IN T ERMS OF EXPLANATION (BAA) TO SECTION 80HHC FOR CALCULATING PROFITS OF THE BUS INESS. THESE GROUND IN ITA NO.174/HYD/2006 FOR THE ASSESSMENT YEARS 2002-0 3 IS ALLOWED. 8.1. REGARDING EXCLUSION OF MISCELLANEOUS INCOM E FOR THE PURPOSE OF ARRIVING RELIEF U/S 80HHC IN THE ASSESSMENT YEAR S 2003-04 THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTE D THAT THE NET INCOME TO BE TAKEN. WE ARE NOT ABLE TO AGREE WITH THIS PR OPOSITION. IN OUR OPINION, THE MISCELLANEOUS INCOME HAVE NO NEXUS WIT H THE EXPORT EARNINGS OF THE ASSESSEE AND THE SAME CANNOT BE CONSIDERED F OR THE PURPOSE OF DETERMINATION OF DEDUCTION U/S 80HHC AS EXPORT INCO ME IN THESE ASSESSMENT YEARS. ACCORDINGLY, THIS GROUND IN ITA N O.45/HYD/2007 IS DISMISSED. 9. THE ASSESSEE HAS RAISED ONE MORE GROUND IN IT A NO.45/HYD/2007 FOR THE ASSESSMENT YEARS 2003-04 AND ITA NO.487/HYD/2007 FOR THE ASSESSMENT YEARS 2004-05 RE GARDING THE INCLUSION OF OTHER RECEIPTS VIZ., MISCELLANEOUS REC EIPTS, INTEREST RECEIVED, JOB CHARGES AND INSURANCE CLAIM RECEIVED IN THE TOT AL TURN OVER WHILE WORKING OUT THE DEDUCTION U/S 80HHC. THE ABOVE IMP UGNED INCOME CANNOT FORM PART OF NEITHER TOTAL TURNOVER NOR EXPO RT TURNOVER AS THEY WERE INDEPENDENT INCOME HAVING NO NEXUS WITH THE EXPORT EARNINGS OF THE ASSESSEE AS HELD BY THE HONBLE SUPREME COURT IN TH E CASE OF CIT VS. K. M/S SRI KRISHNA DRUGS LTD., HYDERABAD 7 7 RAVINDRANATHAN NAIR (295 ITR 228)(SC). ACCORDINGLY , THIS GROUND OF THE ASSESSEE IS ALLOWED. 10. THE NEXT GROUND IN ITA NO.174/HYD/2006 FOR T HE ASSESSMENT YEARS 2002-03 IS WITH REGARD TO CONFIRMING THE ADDI TION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXCISE DUTY CLAIM A S ON 31.3.2001 WITHOUT CONSIDERING THE FACT THAT NO INCOME ACCRUED TO THE ASSESSEE IN THE SAID ENTRY. BRIEF FACTS OF THE ISSUE ARE THAT THERE WAS AN AMOUNT OF RS.1,01,35,470/- RECEIVABLE BY THE ASSESSEE AS EXCI SE DUTY CLAIM AS ON 31.3.2001. ACCORDING TO THE ASSESSEE THE AMOUNT SH OWN AS RECEIVABLE WAS TO BE ACTUALLY APPROVED AND RECEIVED DURING THE FIN ANCIAL YEAR AS ON 31.3.2002 I.E. ASSESSMENT YEARS 2002-03. THE ASSES SING OFFICER OBSERVED THAT THIS A CASH REBATE AND IT IS IN THE NATURE OF OUTSIDE PAYMENT MADE TO THE ASSESSEE AS AN INCENTIVE IN CONNECTION WITH THE EXPORTS OF GOODS. FURTHER, U/S 28 (III) (B) OF THE IT ACT, CASH INCEN TIVE BY WHATEVER NAME CALLED RECEIVED OR RECEIVABLE BY ANY PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVT. OF INDIA IS CHARGEABLE TO INCOM E TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS PROFESSION. MOREOVER , U/S 28(III)(C ) ALSO ANY DUTY OF CUSTOMS OF EXCISE REPAID/REPAYABLE AS DRAWN BACK TO ANY PERSON AGAINST EXPORTS IS ALSO CHARGEABLE TO INCOME TAX. ALTERNATIVELY, THE ASSESSING OFFICER HAS ALSO HELD THAT THE RECEIPTS A RE BROUGHT TO TAX IN TERMS OF THE PROVISIONS OF SECTION 41(1) OF THE IT ACT. ON APPEAL, THE CIT(A) CONFIRMED THE SAME. 11. THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON THE ORDER OF THIS TRIBUNAL DATED 26.3.2010 IN THE CASE OF M/S SR INI PHARMACEUTICALS IN ITA NO.26/HYD/2006 FOR THE ASSESSMENT YEARS 2002-03 WHEREIN THE TRIBUNAL HELD THAT THE INCORPORATION OF THE EXCISE DUTY ACCOUNTS WITH P&L ACCOUNTS BOTH AT THE CREDIT AS WELL AS THE DEBIT SI DES IS THE CORRECT METHOD OF ACCOUNTING AND DIRECTED THE ASSESSING OFFICER TO VERIFY THE REVISED P&L ACCOUNT PREPARED AFTER MERGING THE CENTRAL EXCISE D UTY WITH THE P&L M/S SRI KRISHNA DRUGS LTD., HYDERABAD 8 8 ACCOUNT AND ADOPT THE PROFIT AS PER THE REVISED P&L ACCOUNT FOR THE PURPOSE OF COMPUTATION OF TAX AFTER VERIFYING THE S AME AND WITH THE BOOKS OF ACCOUNTS. HE ALSO SUBMITTED THAT FOR THE ASSESS MENT YEARS 2003-04 A SIMILAR WAS DECIDED IN FAVOUR OF THE ASSESSEE AND T HE DEPARTMENT HAS NOT FILED ANY APPEAL AGAINST THE ORDER, BEING SO THE IS SUE TO BE DECIDED IN FAVOUR OF THE ASSESSEE. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE REL IED ON THE JUDGEMENT OF JURISDICTIONAL HIGH COURT IN RC NO.23 OF 1995 DATED 2.2.2006 IN THE CASE OF CIT VS. SHRI KRISHNA BOTTLE RS LTD. WHEREIN THE HONBLE HIGH COURT WHILE DECIDING THE ISSUE RELATIN G TO THE TAXING OF EXCISE DUTY REFUND UNDER THE PROVISIONS O0F SECTION 41(1) OF THE IT ACT, IT WAS HELD THAT THE EXCISE DUTY AND SALES TAX ARE NOT DEBITED TO THE P&L ACCOUNT SINCE A SEPARATE ACCOUNT IS ALREADY OPENED FOR THE PURPOSE OF SHOWING THE PAYMENTS AND RECEIPTS UNDER THE HEAD. BY THIS METH OD, THE ASSESSEE CANNOT TAKE THIS STAND THAT THE P&L ACCOUNT IS NOT BURDENED WITH EXCISE DUTY COMPONENT AND SALES TAX. INSTEAD OF SHOWING T HE GROSS SALES INCLUDING THE EXCISE DUTY AND SALES TAX COLLECTED O N THE CREDIT SIDE OF THE P&L ACCOUNT AND DEBITING THE P&L ACCOUNT THE EXCISE DUTY AND SALES TAX PAID THE ASSESSEE HAS TAKEN OUT OF THE P&L ACCOUNT EXCISE DUTY AND SALES TAX COLLECTED AND PAID. IT IS ONLY SHOWED THE NET SALES EXCLUDING THE EXCISE DUTY AND SALES TAX. THEREFORE, THE IMPUGNED AMOUN T IS LIABLE FOR TAX U/S 41(1) OF THE IT ACT. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIALS AVAILABLE ON RECORD. IN OUR OPINION, THIS ISSUE WA S SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL CITED SUPRA. RESPECTFULLY, F OLLOWING THE ABOVE ORDER WE DIRECT THE ASSESSING OFFICER TO TAKE NET EFFECT OF THE DEBIT AND CREDIT OF EXCISE DUTY ACCOUNT TO DETERMINE THE INCOME OF THE ASSESSEE. M/S SRI KRISHNA DRUGS LTD., HYDERABAD 9 9 14. THE NEXT GROUND IN ITA NO.45/HYD/2007 FOR TH E ASSESSMENT YEARS 2003-04 IS WITH REGARD TO LINKING THE ADDITIO N OF RS.14,45,303/- TO THE REWORKING OF THE PROFIT AS PER THE PROFIT AND L OSS ACCOUNT WITHOUT GIVING ANY CLEAR DIRECTION BY THE CIT(A) THAT THE SAID ADD ITION CANNOT BE MADE. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAS ADDED CENTRAL EXCISE DUTY OF RS.14,45,303/- TO VALUE OF CLOSING STOCK OF THE FINISHED GOODS NOT CLEARED FROM THE FACTORY AS REQUIRED BY SECTION 145 A OF THE IT ACT. FURTHER, THE SAME AMOUNT WAS CLAIMED AS EXPENDITURE DEBITED TO THE P&L ACCOUNT UNDER THE HEAD MANUFACTURING EXPENSES. T HE ASSESSING OFFICER HELD THAT THE ASSESSEE HAD DEBITED THE SAID AMOUNT ONLY TO NULLIFY THE EFFECT TO THE ADDITION OF THE SAME TO THE VALUE OF CLOSING STOCK AND THEREFORE, THE EXCISE DUTY DEBITED OF THE SAME AMOU NT IS NOT ADMISSIBLE TO THE ASSESSEE. THE ASSESSING OFFICER HAS ALSO REFER RED TO THE CBDTS CIRCULAR REGARDING NON INCLUSION OF CENTRAL EXCISE DUTY IN THE CLOSING STOCK OF FINISHED GOODS. ON APPEAL, THE CIT(A) OBS ERVED THAT THIS CLAIM IS ALLOWABLE DEDUCTION U/S 43B PROVIDED THAT THE EXCI SE DUTY ACCOUNTS ARE MERGED WITH THE PROFIT AND LOSS ACCOUNT AND IF THE ASSESSEE REVISED THE P&L ACCOUNT BY CONSIDERING EXCISE DUTY IS RECEIVED AND RECEIVABLE. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL AVAILABLE ON RECORD. THE CIT(A) HAS GIVEN A DIRECT ION THAT IT IS ALLOWABLE IN ACCORDANCE WITH THE PROVISIONS OF SEC.43B. IF EXCI SE DUTY IS ACTUALLY PAID WITHIN THE DUE DATE AS PER PROVISIONS OF SECTION 43 B, IT IS ALLOWABLE DEDUCTION. IT NEEDS NO INTERFERENCE FROM OUR SIDE. THE ORDER OF THE CIT(A) IS CONFIRMED AND THIS GROUND TAKEN BY THE ASSESSEE STANDS DISMISSED. 16. THE ASSESSEE RAISED ONE MORE GROUND IN ITA NO.537/HYD/2009, IS WITH REGARD TO CIT(A) CONFIRMIN G THE ACT OF ASSESSING OFFICER IN ADDITION OF RS.16,80,298/- AS REPRESENTI NG DIFFERENCE IN THE PAYMENT AND RECEIPTS OF THE EXCISE DUTY. M/S SRI KRISHNA DRUGS LTD., HYDERABAD 10 10 16.1 BRIEF FACTS OF THE ISSUE ARE THAT THE EXCIS E DUTY CLAIMS RECEIVABLE HAD BEEN SHOWN BY THE ASSESSEE AT RS.41, 95,496/- UNDER THE HEAD LOANS AND ADVANCES IN THE BALANCE SHEET. WH EN HE PROPOSED TO BRING THE SAME TO TAX, THE ASSESSEE FURNISHED A DET AILED EXPLANATION CLAIMING THAT IT WAS PAYING EXCISE DUTY AS PART OF PURCHASE OF MATERIALS AND THE SAME WAS DEBITED TO CENVAT ACCOUNT BY REDUC ING THE COST OF GOODS PURCHASED AND ONLY THE NET AMOUNT EXCLUDING E XCISE DUTY WAS BEING CLAIMED AS EXPENDITURE BY DEBITING TO THE PROFIT AN D LOSS ACCOUNT. IT WAS SUBMITTED THAT THE AMOUNT WAS CREDITED TO PURCHASE ACCOUNT AND DEBITED TO SEPARATE ACCOUNT I.E. EXCISE DUTY ACCOUNT. THE ASSESSEE FURTHER EXPLAINED THAT SO CREDIT CENVAT WAS UTILIZED TO PAY EXCISE DUTY ON GOODS EXPORTED AND A SEPARATE EXCISE DUTY RECEIVABLE ACCO UNT IS OPENED. WHEN THE REFUND IS RECEIVED ON ACCOUNT OF EXPORT OF GOOD S, THE SAID ACCOUNT IS CREDITED. SIMILAR ISSUE WAS CONSIDERED IN THE EARL IER PARA NO.11 WHEREIN WE HAVE DIRECTED TO FOLLOW THE ORDER OF THIS TRIBUN AL IN THE CASE OF M/S SRINI PHARMACEUTICALS CITED SUPRA. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE SAID ORDER OF THIS TRIBUNAL O N THIS ISSUE ALSO. 17. IN THE RESULT, ITA NOS.174/HYD/2006 AND ITA NO.45/HYD/2007 ARE PARTLY ALLOWED. ITA NO.487/HYD/ 2007 AND ITA NO.537/HYD/2009 ARE ALLOWED. 18. NOW WE WILL TAKE UP THE REVENUE APPEAL. THE FIRST COMMON GROUNDS IN ITA NO.41/HYD/2007, 505/HYD/2007 AND 665 /HYD/2009 ARE WITH REGARD TO DELETION OF THE ADDITION ON ACCOUNT OF LIC PAYMENT TOWARDS GROUP GRATUITY SCHEMES OF EMPLOYEES. 19. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT THIS ISSUE HAS BEEN SQUARELY COVERED BY THE ORDER OF THI S TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03, THE TRIB UNAL VIDE ORDER DATED M/S SRI KRISHNA DRUGS LTD., HYDERABAD 11 11 15.2.2008 IN ITA NO.349/HYD/2006, THE TRIBUNAL DECI DED THE ISSUE IN FAVOUR OF THE ASSESSEE IN PARA 4 & 5 AS FOLLOWS: 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE GROUP GRATUITY SCHEME WAS NOT RECOGNIZED BY THE COMMISSIONER OF INCOME TAX. THIS FACT IS NOT IN DISPUTE. WE HAVE CAREFULLY GONE THROUGH T HE PROVISIONS OF SEC.36(1)(V) OF THE INCOME TAX ACT SEC.36(1)(V) READS AS FOLLOWS: SEC.36(1). THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF GTHE MATTER DEA LT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28. . (V) ANY SUM PAID BY THE ASSESSEE AN AN EMPLOYER BY WAY OF CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND CREATED BY HIM FOR THE EXCLUSIVE BENEFIT OF HIM EMPLOYEES UNDER THE IRREVOCABLE TRUST. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS O F SECTION 37 OF THE INCOME TAX ACT. SEC.37 PROVIDES FO R DEDUCTION FO EXPENDITURE NOT BEING IN THE NATURE DESCRIB ED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE, BU T LAID OUT AND EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, WHILE COMPUTING INCOME CHARGEABLE TO TAX. THE MAIN CONTENTION OF T HE REVENUE IS THAT U/S 36(1)(V), THE PAYMENT MADE BY THE ASSESSEE AS EMPLOYER COULD BE ALLOWED ONLY IN RESPECT OF APPROVED GRATUITY FUND. SINCE GROUP GRATUITY SCHEME IS NOT APPROVED BY THE CIT, ACCORDING TO THE REVENUE, IT CANNOT BE ALLOWED. HOWEVER, THE CONTENTION OF THE ASSESSEE IS THAT IN VIEW OF THE JUDGEMENT OF THE MADR AS HIGH COURT IN THE CASE OF PREMIER COTTON SHIPPING MIL LS LTD. AND THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA) IT HAS TO BE ALLOWED. M/S SRI KRISHNA DRUGS LTD., HYDERABAD 12 12 5. WE HAVE CAREFULLY GONE THROUGH THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF WARNER HINDU STAN LTD. (SUPRA). IN THE CASE THEREFORE THE JURISDICTIONAL HIGH COURT, THE PROVIDENT FUND WAS APPROVED BY THE CIT. TH E ANDHRA PRADESH HIGH COURT, AFTER REFERRING TO THE JUDGEMENT OF THE BOMBAY HIGH COURT IN TATA IRON AND S TEEL CO. LTD., VS. D.V. BAPAT ITO (1975) 101 ITR 292, AND TH E JUDGEMENT OF THE SUPREME COURT IN METAL BOX COMPANY OF INDIA LTD. THEIR WORKMEN (1969) 73 ITR 53, HELD THAT THE AMOUNT PAID TOWARDS AN UNAPPROVED GRATUITY FUND CAN BE DEDUCTED U/S 37 OF THE IT ACT, THOUGH NOT U/S 36(1)(V) . IN VIEW OF THIS JUDGEMENT OF THE JURISDICTIONAL HIGH COU RT, IN OUR OPINION, EVEN IF ANY PAYMENT IS MADE TO AN UNAPPROV ED GRATUITY FUND, IT HAS TO BE ALLOWED U/S 37. BY RESPE CTFULLY FOLLOWING THE BINDING JUDGEMENT OF THE ANDHRA PRADESH HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA ), WE UPHOLD THE ORDER OF THE CIT(A). 19.1. RESPECTFULLY, FOLLOWING THE ABOVE ORDER OF THIS TRIBUNAL, WE DISMISS THE GROUND TAKEN BY THE REVENUE. 20. THE NEXT COMMON GROUND IN THE ABOVE REVENUE APPEAL IS WITH REGARD TO DELETION OF ADDITION ON ACCOUNT OF EXCISE DUTY ON CLOSING STOCK WHICH WAS PAID WITHIN THE TIME AS STIPULATED BY PRO VISIONS OF SECTION 43B. 21. AFTER HEARING BOTH THE PARTIES WE ARE OF THE OPINION THAT THIS ISSUE WAS SQUARELY COVERED IN FAVOUR OF THE ASSESSE E BY THE JUDGEMENT OF MADHRA PRADESH HIGH COURT IN THE CASE OF ACIT VS. D &H SECHERON ELECTRODES (P) LTD. (173 TAXMAN 188) (MP) WHEREIN H ELD THAT UNPAID EXCISE DUTY ON GOODS IN STOCK THAT HAD NOT LEFT THE PREMIS ES COULD NOT BE ADDED TO THE VALUE OF CLOSING STOCK BY RECOURSE TO SEC.14 5A. WE ALSO OBSERVED THAT SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE VIDE ORDER DATED 30.4.2008 FOR THE ASSESSMENT YEARS 2001-02 IN ITA M/S SRI KRISHNA DRUGS LTD., HYDERABAD 13 13 NO.40/HYD/2007 IN FAVOUR OF THE ASSESSEE. ACCORDIN GLY THIS GROUND OF THE REVENUE STANDS DISMISSED. 22. THE NEXT COMMON GROUND IN ITA NO.41/HYD/2007 AND 505/HYD/2007 IS WITH REGARD TO EXCLUSION OF THE EXC ISE DUTY AND SALES TAX FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTIN G THE DEDUCTION U/S 80HHC. 23. THIS ISSUE COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL DATED 15.2.2008 IN ASSESSEES OWN CAS E IN ITA NO.349/HYD/2006 FOR THE ASSESSMENT YEARS 2002-03 WH EREIN THE TRIBUNAL FOLLOWED THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS (2007) 290 ITR 667 AND HELD T HAT EXCISE AND SALES DO NOT HAVE THE ELEMENT OF PROFIT, THEREFORE THEY CANNOT BE INCLUDED IN THE TOTAL TURNOVER. RESPECTFULLY, FOLLOWING THE ABOVE RATIO, WE DISMISS THIS GROUND OF THE REVENUE IN THESE APPEALS. 24. IN THE RESULT, ASSESSEE APPEALS IN ITA NOS.1 74/HYD/2006 AND ITA NO.45/HYD/2007 ARE PARTLY ALLOWED, ITA NO.487/ HYD/2007 AND ITA NO.537/HYD/2009 ARE ALLOWED. THE REVENUE APPEALS I N ITA NO.41/HYD/2007, 505/HYD/2007 AND 665/HYD/2009 ARE D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT 30.9.2010. SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 30 TH SEPTEMBER, 2010 M/S SRI KRISHNA DRUGS LTD., HYDERABAD 14 14 COPY FORWARDED TO: 1. SHRI S. RAMA RAO, ADVOCATE, 103, INDIRADEVI NILA YAM, 3-6- 542/4, ST.7, HIMAYATNAGAR, HYDERABAD-29. 2. DCIT, CIRCLE 3(2), HYDERABAD 3. ACIT, CIRCLE 3(2), HYDERABAD. CIT(A) IV, HYDERABAD 4. CIT, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. NP