ACIT, Chandigarh V. M/s Smithkline Beecham Consumer Health Care Ltd., Nabha

ITA 475/CHANDI/2002

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0134 (ITAT-CHANDIGARH)
• Duration Of Justice: 13 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-08-2015
• Assessment Year: 1997-1998
• Appeal Filed On: 19-06-2002
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: ROHIT JAIN
• Keywords: Capital asset; Depreciation; Business expenditure; Opportunity of being heard; Fair market value; Valuation report; Capital receipt
• Section: 43B; 80HHC; 234B; 37; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES, CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT & MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO. 475/CHD/2002 ASSESSMENT YEAR: 1997-98 THE ACIT, CIRCLE 4(1), VS. M/S SMITHKLINE BEECHAM CONSUMER CHANDIGARH HEALTH CARE, LTD., PATIALA ROAD, NABHA (APPELLANT) (RESPONDENT) APPELLANT BY : SH. S.K. MITTAL RESPONDENT BY : SH. ROHIT JAIN DATE OF HEARING : 08.01.2016 DATE OF PRONOUNCEMENT : 05.04.2016 ORDER PER H.L.KARWA, VP THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF CIT(A)- II, CHANDIGARH DATED 06.03.2002 RELATING TO ASSESS MENT YEAR 1997-98. 2. GROUND NO.1 OF THE APPEAL, READS AS UNDER :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 4.5 CRORE MADE ON ACCOUNT OF COMPENSATION RECEIVED ON ACCOUNT OF TERMINATION OF TRADE MARK ENO AND FRUIT SALT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS AN INDIAN SUBSIDIARY OF M/S SMITHKLINE BEECHAM PLC, A COMPANY INCORPORATED IN UNITED 2 KINGDOM. M/S SMITHKLINE BEECHAM PLC. IS THE OWNER O F TRADE MARK ENO AND FRUIT SALT. ON 28.6.1979, A TRADEMARK USER AGREE MENT WAS ENTERED INTO BETWEEN BEECHAM GROUP PLC. AND THE ASSESSEE COMPANY . M/S SMITHKLINE BEECHAM PLC. U.K. HAD SOLE RIGHT TO MANUFACTURE, P ACK AND SELL GOODS IN RESPECT OF THESE TRADE MARKS GRANTED THE RIGHT TO USE THESE TRADEMARKS TO THE ASSESSEE COMPANY. THE U.K. COMPANY ALSO GRANTED OTH ER TRADEMARKS TO THE ASSESSEE, WHICH ARE AS UNDER:- TRADE MARK 1. ENO (WORD) 2. FRUIT SALT 3. SIL VIKRIN (WORD) 4. SIL VIKRAN (BRAND) 5. MACLEAN (BRAND) 6. MACLEANS (WORD) 7. MACLEANS SIGNATURE 8. MACLEANS (TOOTH PASTE CARTON) 9. BRYLCREEM (WORD) 10.BRYLCREEM (LABEL) THE ASSESSING OFFICER NOTED THAT ON RE-ORGANIZATION OF ITS BUSINESS, M/S SMITHKLINE BEECHAN PLC. TRANSFERRED THE TRADE MARK USE OF ENO AND FRUIT SALT OUT OF THE ABOVE ITEMS TO M/S SMITHKLINE BEEC HAM ASIA(P) LTD, NEW DELHI. THE AGREEMENT TERMINATING THE ENO AND FRUIT SALT TRADE MARK LICENCE AGREEMENT READS AS UNDER:- I REFER TO THE TRADE MARK USER AGREEMENT BETWEEN B EECHAM GROUP PLC AND SMITHKLINE BEECHAM CONSUMER HEALTHCARE DATE D 28 JUNE 1979 AS SUBSEQUENTLY AMENDED FROM TIME TO TIME (AG REEMENT). THE RIGHTS RELATING TO THE TRADE MARK ENO & FRUIT S ALT, AND ALL OTHER RIGHTS AND OBLIGATIONS SPECIFIED IN THE AGREE MENT, WERE 3 TRANSFERRED BY BEECHAM GROUP PLC TO SMITHKLINE BEEC HAM PLC (SB) THE MARKS ENO AND FRUIT SALT HAVE BEEN LICENSED TO SMITHKLINE BEECHAM ASIA PVT LTD NOW BY SMITHLINE BEECHAM PLC. THEREFORE, , AS AGREED BY AND BETWEEN US, ENO AND F RUIT SALT SHALL BE DELETED FROM THE SCHEDULE TO THE AGREEMENT DATED 28 JUNE 1979 WITH EFFECT FROM 22 SEPTEMBER 1996 AND THEREFO RE, YOU WILL HAVE NO RIGHT TO MANUFACTURE AND SELL THE PRODUCTS UNDER THE SAME TRADE MARK FROM THAT DATE. ALL REMAINING TERMS OF T HE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT. WOULD YOU KINDLY SIGN AND RETURN THE ENCLOSED DUPLI CATE COY OF THIS LETTER AS EVIDENCE OF YOUR AGREEMENT TO AN ACCEPTAN CE OF THE ABOVE. YOURS FAITHFULLY AGREED AND ACCEPTED FOR OR AND ON BEHALF OF AND ON BEHALF OF SMITHKILINE BEECHAN PLC. SMITHKLINE BEECHAM CONSUM ER HEALTHCARE LIMITED SD/- SD/- POSITION DEPUTY SECRETARY DIRECTOR LEGAL & CORP . AFFAIRS POSITION 13 TH JUNE 1996 DATE AS A CONSEQUENCE OF THIS AGREEMENT, THE ASSESSEE RE CEIVED A SUM OF RS.4.5 CRORES FROM MS SMITHKLINE BEECHAM ASIA PVT. LTD. THE RELEVANT DOCUMENTS SHOWING THE AGREEMENT ON THIS BE HALF IS GIVEN BELOW:- 'AS YOU ARE AWARE, SMITHKLINE BEECHAM PIC (SB PIC) HAS LICENCED THE USE OF THE MARKS 'ENO' AND 'FRUIT SALT' TO OUR COMPANY VIDE AGREEMENT DATED JANUARY 18, 1996 AND SB PIC'S LETTE R OF MAY 30, 1996. WE ALSO UNDERSTAND THAT, SB PLC HAD EARLIER L ICENCED THE USE OF THE SAID MARKS TO SMITHKLINE BEECHAM CONSUMER HE ALTHCARE LTD.(SBCH) ON A NON-EXCLUSIVE BASIS, WHICH LICENCE HAS SINCE BEEN REVOKED BY SB PIC. WE RECOGNISE THAT SBCH HAS BEEN RESPONSIBLE FOR DEV ELOPING THE BRAND OVER A LONG PERIOD AND THAT SBCH HAS INVESTED CONSIDERABLE EFFORT AND EXPENSE IN THIS REGARD. WE ALSO RECOGNIS E THAT THIS DEVELOPMENT HAS GENERATED SIGNIFICANT GOODWILL AND VALUABLE MARKETING, ADVERTISING AND BRAND RELATED INFORMATIO N AND THAT OUR 4 COMPANY WOULD BENEFIT FROM SUCH GOODWILL AND INFORM ATION IN THE MANUFACTURE AND DISTRIBUTION OF THESE BRANDS IN IND IA AND NEPAL BY YOU COMPANY. IN ORDER TO ARRIVE AT A FAIR MARKET VALUE FOR THE G OODWILL AND THE MARKETING AND ADVERTISING RELATED INFORMATION ASSOC IATED WITH SBCH'S DEVELOPMENT EFFORT, A VALUATION REPORT FROM AN INDEPENDENT AND INTERNATIONAL FIRM OF ACCOUNTANTS HAS BEEN OBTA INED. THE SAID INDEPENDENT VALUATION REPORT RECOMMENDS A ONE-TIME LUMP-SUM CONSIDERATION OF RS.45 MILLION AS A FAIR AND REASON ABLE COMPENSATION FOR THE SAID GOODWILL, AND FOR TRANSFE R OF ALL THE MARKETING, ADVERTISING AND BRAND RELATED INFORMATIO N GENERATED BY SBCH IN ITS DEVELOPMENT EFFORT. ACCORDINGLY WE PROP OSE TO PAY SBCH A ONE-TIME LUMP SUM CONSIDERATION OF RS.45 MIL LIONS FOR THE SAID GOODWILL AND FOR TRANSFER OF ALL INFORMATION A SSOCIATED WITH SBCH'S DEVELOPMENT EFFORT. WE WOULD REQUEST YOU TO SIGNIFY YOUR CONSENT TO THE ABOVE TERMS BY SIGNING AND RETURNING A COPY OF THIS LETTER TO US A T THE EARLIEST. YOURS FAITHFULLY FOR AND ON BEHALF OF AGREED AND ACCEPTED FOR AND ON BEHALF OF SMITHKLINE BEECHAM ASIA SMITHKLINE BEECHAM PRIVATE LIMITED CONSUMER HEALTHCARE LIMITED SD/- NANDAN DASGUPTA SD/- ALTERNATE DIRECTOR S.J. SCARFF MANAGING DIRECTOR THE ASSESSING OFFICER OBSERVED THAT IN THE RETURN OF INCOME, THE ASSESSEE HAD TREATED RS. 4.5 CRORES AS NON TAXABLE CAPITAL RECEI PT IN ITS HANDS. IN THAT BACKGROUND, THE ASSESSING OFFICER REQUIRED THE ASSE SSEE TO SHOW CAUSE AS TO HOW THE AMOUNT OF RS. 4.5 CORES WAS A CAPITAL RECEIPT N OT LIABLE TO TAX. IN RESPONSE TO THE ABOVE QUERY, THE ASSESSEE CONTENDED THAT THE ENO AND FRUIT SALT TRADE MARK WERE INCOME PRODUCING ASSETS IN ITS HANDS. AC CORDINGLY, THE ASSESSEE 5 CONTENDED THAT THE COMPENSATION RECEIVED ON TERMINA TION OF AN INCOME PRODUCING ASSETS IS A CAPITAL RECEIPT NOT LIABLE TO TAX. HOWEVER, THE ASSESSING OFFICER OBSERVED THAT AS PER THE AGREEMENT DATED 28 .6.1979 BETWEEN BEECHAM GROUP LTD AND THE ASSESSEE, IT WAS EVIDENT THAT THE ASSESSEE COMPANY WAS GRANTED A NON EXCLUSIVE LICENCE TO USE TRADE MARK O WNED BY ITS PATENT COMPANY. ACCORDING TO ASSESSING OFFICER, THE U.K. COMPANY DI D NOT TAKE AWAY FROM THE ASSESSEE ALL THE TRADE MARKS GRANTED TO IT VIDE AG REEMENT DATED 28.6.1979. AS PER THE TERMINATION AGREEMENT DATED 30.5.1996, THE ASSESSEES POWER TO USE TRADE MARK OF ONLY ENO AND FRUIT SALT HAS BEEN TAKEN AWAY. THE ASSESSING OFFICER HAS CATEGORICALLY MENTIONED THAT ALL THE RE MAINING TRADE MARKS USER AGREEMENTS ARE INTACT AND ALL THE REMAINING TERMS O F THE AGREEMENT BETWEEN THE ASSESSEE AND THE U.K COMPANY REMAINED IN FULL FORCE AND EFFECT. THE ASSESSING OFFICER TOOK THE VIEW THAT THE AGREEMENT ENTERED IN TO BY THE ASSESSEE WITH ITS PATENT COMPANY WITH REGARD TO THE ENO AND FRUIT SALT WAS AN AGREEMENT WHICH WAS UNDERTAKEN BY IT IN ITS REGULAR COURSE OF BUSINESS. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE PLEA OF THE ASSES SEE WAS THAT THE ENO AND FRUIT SALT TRADE MARKS WERE INCOME PRODUCING ASSE TS IN ITS HANDS WAS ALSO MISPLACED. ACCORDING TO ASSESSING OFFICER, THESE TR ADEMARKS NEVER VESTED WITH THE ASSESSEE. HE FURTHER OPINED THAT ITS RIGHT TO U SE THESE TRADE MARKS WAS ALSO A NON EXCLUSIVE RIGHT. THE ASSESSING OFFICER FURTHER POINTED OUT THAT THE LANGUAGE OF THE TERMINATION AGREEMENT DATED 30.5.1996 ALSO M ADE IT CLEAR THAT IT IS MERELY AN AGREEMENT TRANSFERRING TO USE THE RIGHTS OF THES E TRADEMARKS FROM THE ASSESSEE COMPANY TO M/S SMITHKLINE BEECHAM ASIA (P) LTD, NEW DELHI IN THE COURSE OF REGULAR BUSINESS TRANSACTIONS OF M/S SMITHKLINE BEE CHAM PLC U.K. THE ASSESSING OFFICER CONCLUDED THAT THE COMPENSATION R ECEIVED BY THE ASSESSEE WAS NOT FOR TERMINATION OF THE BUSINESS ITSELF BUT IT W AS A PAYMENT RECEIVED FOR TERMINATION OF A CONTRACT / AGREEMENT ENTERED INTO BY THE ASSESSEE IN THE REGULAR COURSE OF BUSINESS. HE THEREFORE, HELD THAT THE COM PENSATION RECEIVED BY THE 6 ASSESSEE IS S TAXABLE REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. HE, THEREFORE, HELD THAT RECEIPT OF RS. 4.5 CORES IS A TAXABLE INCOME OF THE ASSESSEE. 4. ON APPEAL, THE CIT(A) DELETED THE ADDITION FOR THE REASONS STATED IN PARA 3 OF THE IMPUGNED ORDER, WHICH READS AS UNDER:- 3. THE SUBMISSIONS MADE BY THE APPELLANT HAVE BE EN GIVEN CAREFUL CONSIDERATION AND I HAVE ALSO GONE THROUGH THE VARIOUS DECISIONS CITED BY THE ASSESSING OFFICER AS WELL AS LEARNED COUNSEL FOR THE ASSESSEE. I HAVE ALSO PERUS ED THE AGREEMENTS ENTERED INTO BY THE APPELLANT. THE ASSES SING OFFICER HAS HELD THAT THE SOLATIUM OF RS.4.5 CRORE WAS RECEIVED BY THE APPELLANT FOR TERMINATION OF CONTRA CT AND WAS DURING THE REGULAR COURSE OF BUSINESS, THEREFORE, I T REPRESENTS A REVENUE RECEIPT, WHEREAS THE APPELLANT'S CONTENTI ON IS THAT BY VIRTUE OF TRANSFER AND ASSIGNMENT OF THE TRADEMA RK OF 'ENO' AND 'FRUIT SALT', THE APPELLANT HAD LOST THE VALUABLE BUSINESS OF MANUFACTURING AND MARKETING THE SAID PR ODUCTS, AND THEREFORE, IT WAS A LOSS OF THE SOURCE ITSELF, HENCE THE COMPENSATION RECEIVED REPRESENTED A CAPITAL RECEIPT . WHETHER A COMPENSATION RECEIVED REPRESENTS A REVENUE RECEIP T OR CAPITAL RECEIPT DEPENDS ENTIRELY UPON THE PECULIARI TY OF THE FACTS AND CIRCUMSTANCES OF EACH CASE. THE HON'BLE S UPREME COURT IN THE CASE OF CIT VS BEST & COMPANY, 6O ITR 11 HAS LAID DOWN CERTAIN GUIDELINES, WHICH FACILITATE IN DETERMINATION OF THE NATURE OF A RECEIPT. THE COURT HAS OBSERVED AS UNDER:- WHETHER THE COMPENSATION RECEIVED BY AN ASSCSSEE FO R THE LOSS OF AGENCY IS CAPITAL RECEIPT OR A REVENUE RECEIPT DEPENDS ON THE CIRCUMSTANCES OF EACH CASE. BEFORE COMING TO A CONCLUSION ONE WAY OR OTHER, MAN Y QUESTIONS HAVE TO BE ASKED AND ANSWERED; WHAT WAS T HE SCOPE OF THE EARNING APPARATUS OR STRUCTURE FROM PHYSCIAL, FINANCIAL COMMERCIAL AND ADMINISTRATIVE STANDPOINT. WHAT WAS THE IMPACT OF GIVING UP OF AN 7 AGENCY ON THE STRUCTURE OF (LIE ENTIRE BUSINESS. DI D IT AMOUNT TO A LOSS OF AN ENDURING ASSET CAUSING AN UNABSORBED SHOCK, DISLOCATING THE ENTIRE OR PART OF THE EARNING APPARATUS OR STRUCTURE OR WAS IT A LOSS DUE TO AN ORDINARY INCIDENT IN THE COURSE OF BUSINESS. THE ANSWERS TO THESE QUESTIONS WOULD ENABLE ONE TO COME TO A CONCLUSION WHETHER THE LOSS OF A PARTICULAR AGENC Y WAS INCIDENTAL TO THE BUSINESS OR WHETHER IT AMOUNT ED TO THE LOSS OF AN ENDURING ASSET. IF IT WAS THE FOR MER, THE COMPENSATION PAID WOULD BE A REVENUE RECEIPT; I F IT WAS THE LATTER IT WOULD BE A CAPITAL RECEIPT'. THE QUESTION WHICH MERITS CONSIDERATION IS WHETHER A SOLARIUM RECEIVED BY VIRTUE OF AN AGREEMENT WHEREBY A PERSON AGREES TO REFRAIN FROM MANUFACTURING A PRODU CT OR FORGIVE AN ACTIVITY, WHICH WAS THE PRIMARY ACTIVITY , REPRESENTS A CAPITAL OR REVENUE RECEIPT. THE BOMBAY HIGH COURT IN THE CASE OF KHUSHALBHAI PATEL & SONS, 118 ITR 656, HAS OBSERVED THAT THE QUESTION WHETHER A PARTICULAR RECEIPT A CAPITAL RECEIPT OR A REVENUE RECEIPT ULTIMATELY DEP ENDS UPON THE FACTS OF THE PARTICULAR CASE, AND THE AUTHORITI ES BEARING ON THE QUESTION ARE VALUABLE ONLY AS INDICATING THE MATERIAL THAT THEY HAD TAKEN INTO ACCOUNT IN REACHING THE DE CISION. IN ONE OF THE DECISIONS OF THE PRIVY COUNCIL, IN THE C ASE OF CIT VS. SHAW WALLACE & CO. REPORTED IN AIR 1932 PC 138, IT WAS OBSERVED THAT WHEREIN THE COMPANY WAS PAID A CERTAI N SUM BY WAY OF COMPENSATION, A SORT OF SOLATIUM, FOR TERMIN ATION OF ITS AGENCY WITH TWO OTHER COMPANIES, THE RECEIPT HA S TO BE REGARDED AS A CAPITAL RECEIPT NOT CHARGEABLE TO INC OME TAX. THE COUNCIL ALSO HELD THAT THE EXPRESSION 'RECEIPT ARISING FROM BUSINESS' MUST MEAN RECEIPTS ARISING FROM THE CARRYING ON OF BUSINESS, IN THE CASE OF C1T V. THE MILLS STO RE CO., 9 ITR 642. IT WAS HELD THAT A RESTRICTIVE COVENANT, W HEREBY A PERSON UNDERTAKES, FOR CERTAIN CONSIDERATION TO ABS TAIN FROM DOING A PARTICULAR ACT OR FROM FOLLOWING A PARTICUL AR COURSE OR CONDUCT, IS SOMETHING QUITE OUTSIDE AN ORDINARY CONTRACT OF EMPLOYMENT AND THE RECEIPT IS NOT TAXABLE BEING A C APITAL RECEIPT. FURTHER THE HON'BLE SUPREME COURT IN THE C ASE OF CIT VS. BEST & CO. LTD, SUPRA HELD THAT THE COMPENS ATION 8 AGREED TO BE PAID WAS NOT ONLY IN LIEU OF THE LOSS OF THE AGENCY BUT ALSO FOR THE RESPONDENT ACCEPTING A REST RICTIVE COVENANT FOR A SPECIFIED PERIOD AND THE RESTRICTIVE COVENANT WAS AN INDEPENDENT OBLIGATION WHICH CAME INTO OPERATION ONLY WHEN THE AGENCY WAS TERMINATED AND THAT PART O F ME COMPENSATION WHICH WAS ATTRIBUTABLE TO THE RESTRICT IVE COVENANT WAS A CAPITAL RECEIPT AND HENCE NOT TAXABL E. FURTHER IN THE CASE OF GILLIINDERS ARBUTHNOT AND CO. LTD. V S. CIT, 53 ITR 283 IT WAS HELD THAT THE COMPENSATION PAID FOR AGREEING TO REFRAIN FROM CARRYING ON COMPETITIVE BUSINESS IN THE COMMODITIES IN RESPECT OF AGENCY TERMINATED OR FOR LOSS OF GOODWILL IS PRIMA FACIE OF THE NATURE OF THE CAPITA L RECEIPT. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS . SARASWATI PUBLICATIONS, REPORTED IN 132 ITR 207 HAS HELD THAT THE RECEIPT REFERABLE TO THE RESTRICTIVE COVEN ANTS WAS A CAPITAL RECEIPT NOT LIABLE TO TAX. THE MADRAS HIGH COURT IN ANOTHER CASE OF BLAZE & CENTRAL PVT. LTD, VS. CIT M ADRAS, 120 ITU 33 HAS ALSO HELD THAT THE AMOUNT PAID FOR A CQUIRING THE BUSINESS OF A COMPANY AND REFRAINING THAT COMPA NY TO CARRY ON THE SAID BUSINESS FOR A SPECIFIED LIME IS A CAPITAL RECEIPT AND NOT A BUSINESS EXPENDITURE. FURTHER THE HON'BLE SUPREME COURT IN KETTEWELL BULLUN & CO LTD VS. CIT, 53 ITR 261 HELD THAT THE PAYMENT FOR CANCELLATION OF THE A GENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. ON ANALYSIS OF THE ABOVE CASES, IT FOLLOWS THAT NOR MALLY ANY AMOUNT RECEIVED IN THE CASE OF BUSINESS OR PROFESSI ON IRRESPECTIVE OF ITS NATURE, WOULD BE TAXABLE AS INC OME FROM BUSINESS OR PROFESSION, AS THE CASE MAY BE. HOWEVER , IF A PARTICULAR RECEIPT DOES NOT ARISE IN THE REGULAR CO URSE OF BUSINESS, BUT IT IS FOR, NOT TO CARRY ON THE BUSINE SS OR PROFESSION, THE SAME IS NOT TAXABLE, BEING CAPITAL IN NATURE. IF A RECEIPT ARISES NOT OUT OF A SOURCE BUT FOR EXTING UISHMENT OF THE SOURCE ITSELF, THE SAME WILL BE A CAPITAL RECEI PT. IN THE LIGHT OF ABOVE, IT IS SEEN THAT THE APPELLAN T HAD TRANSFERRED ITS DEBARRING THE ASSESSEE TO MANUFAC TURE AND MARKET ''ENO AND FRUIT SALT. THEREFORE THE APPELLAN T HAD LOST AN INCOME EARNING APPARATUS WHICH TANTAMOUNTS TO LO SS OF AN 9 'ENDURING ASSET. FURTHER, THE AGREEMENT HEDGED THE BUSINESS ACTIVITIES OF THE APPELLANT WITH SO MANY RESTRICTIO NS THAT THE APPELLANT WAS COMPLETELY OUSTED FROM THE BUSINESS O F MANUFACTURE OF ENO AND FRUIT SALT. HENCE, THERE I S NO DOUBT THAT THE AMOUNT RECEIVED BY WAY OF SOLATIUM I S A CAPITAL RECEIPT. THE APPELLANT HDD LOST A SOURCE OF INCOME AND HAD BEEN DEPRIVED OF AN INCOME EARNING APPARATU S, THEREFORE, IT AMOUNTS TO LOSS OF AN ENDURING NATURE . THEREFORE, HI VIEW OF THE TESTS LAID DOWN BY THE VA RIOUS DECISIONS CITED ABOVE, THERE CAN NOT DOUBT THAT THE COMPENSATION RECEIVED IS IN THE NATURE OF A CAPITA! RECEIPT. IN. VIEW OF THE FOREGOING DISCUSSION, IT IS HELD TH AT THE APPELLANT HAD LOST THE SOURCE ITSELF AND THE INCOME EARNING APPARATUS AND HAD ABROGATED THE RIGHT TO CARRY ON A LIKE BUSINESS FOR ALL LIMES, THEREFORE, THE LOSS WAS OF AN ENDURING NATURE. THE COMPENSATION RECEIVED, THEREFORE, IS IN THE NATURE OF A CAPITAL RECEIPT. 5. WE HAVE HEARD SHRI S.K .MITTAL, LD. DR AND SHRI ROHIT JAIN, LD. COUNSEL FOR THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE AGREEMENT WITH U.K. COMPANY ENTERED INTO ON 28.6.19 79 WHEREBY THE ASSESSEE WAS GRANTED LICENCE TO USE, INTER ALIA, THE TRADE M ARKS ENO AND FRUIT SALT. SHRI ROHIT JAIN, LD. COUNSEL FOR THE ASSESSEE VEHE MENTLY ARGUED THAT THE ASSESSEE FORMED THE FOUNDATION OF CARRYING ON OF AN OTHER LINE OF BUSINESS VIZ. PRODUCING AND MARKETING ENO AND FRUIT SALT. ACC ORDING TO LD. COUNSEL FOR THE ASSESSEE, TERMINATION OF AGREEMENT DATED 28.6. 1979 IN PART BY U.K. COMPANY RESULTED IN CESSATION OF THAT LINE OF BUSI NESS AND THE ABOVE SUM OF RS. 4.5 CRORES RECEIVED BY THE ASSESSEE UNDER THE ARRA NGEMENT OF THE AFORESAID COMPANY WAS TOWARDS COMPENSATION OF SUCH LOSS OF BU SINESS / SOURCE OF INCOME. SHRI JAIN FURTHER SUBMITTED THAT IT HAS BEEN HELD BY THE COURTS THAT COMPENSATION RECEIVED ON TERMINATION OF AN INCOME P RODUCING ASSET IS A CAPITAL RECEIPT, AND HENCE IS NOT LIABLE TO TAX. BEFORE US, THE ASSESSMENT YEAR INVOLVED IS 1997-98 . IT IS WORTHWHILE TO MENTION HERE THAT CLAUSE (VA) T O SECTION 28 HAS 10 BEEN INSERTED BY FINANCE ACT, 2002 W.E.F. 1.4.2003, WHICH PROPOSE TO TAX COMPENSATION PAID WHETHER PAID IN CASH OR KIND UNDE R AN AGREEMENT ENTERED INTO BY TAX PAYER WHEREBY HE GIVES UP HIS RIGHT NOT CARR YING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS; NOT SHARING ANY KNOW HOW, PATENT, COPYRIGHT, TRADE MARK, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES THUS , IT IS CLEAR THAT THE NEWLY ADDED PROVISIONS OF SECTION 28 ARE APPLICABLE W.E.F . 1.4.2003 AND NOT BEFORE THE SAID PERIOD. IN OUR OPINION, THE LD. CIT(A) HAS CO RRECTLY OBSERVED THAT PRIOR TO 1.4.2003, SUCH PAYMENTS WERE TO BE TREATED AS CAPIT AL RECEIPT AND WAS NOT LIABLE TO TAX. IT IS APPARENT FROM THE RECORDS THAT THE A SSESSEE WAS USING THE TRADEMARKS OF TWO PRODUCTS NAMELY ENO AND FRUIT SALT FROM THE YEAR 1979 ONWARDS AND / OR IN THE YEAR 1996 BY VIRTUE OF THE TRANSFER OF THE TRADE MARK OF TWO PRODUCTS, THE ASSESSEE COMPANY HAD LOST AN INCO ME EARNING APPARATUS WHICH CERTAINLY AMOUNTS TO LOSS OF AN ENDURING ASSET. IN OUR OPINION, THE ASSESSEE HAD LOST A SOURCE OF INCOME AND HAD ALSO BEEN DEPRIVED OF INCOME EARNING APPARATUS; THEREFORE, THE LOSS INCURRED BY THE ASSESSEE IS OF ENDURING NATURE. IT IS CRYSTAL CLEAR FROM THE TERMINATION AGREEMENT THAT THE ASSES SEE HAD LOST THE RIGHT TO MANUFACTURE, MARKET AND SELL THE PRODUCTS NAMELY E NO AND FRUIT SALT. SHRI ROHIT JAIN LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS EARNING CRORES OF RUPEES YEARLY FROM THE SALE OF TH ESE TWO PRODUCTS. THE U.K. COMPANY HAD TRANSFERRED ITS TRADEMARKS DEBARRING TH E ASSESSEE TO MANUFACTURE AND MARKET ENO AND FRUIT SALT. THUS, IT CAN B E SAFELY HELD THAT ASSESSEE HAD COMPLETELY LOST AN EARNING APPARATUS WHICH TANT AMOUNT TO LOSS OF AN ENDURING ASSET. AT THIS STAGE, WE MAY REFER TO A DE CISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KETTLEWELL BULLEN AND CO. LTD V CIT (1964) 53 ITR 261 (SC), WHEREIN THEIR LORDSHIP OF SUPREME COURT ON T HE FACTS OF THE SAID CASE OBSERVED THAT THE ARRANGEMENT WITH MUGNEERAM BANGUR WAS NOT IN THE NATURE OF TRADING TRANSACTION BUT WAS ONE IN WHICH APPELLANT -ASSESSEE PARTED WITH AN ASSET 11 OF AN ENDURING VALUE. THE HON'BLE SUPREME COURT HEL D THAT WHAT THE ASSESSEE WAS PAID WAS TO COMPENSATE IT FOR LOSS OF A CAPITAL ASSET AND WAS NOT, THEREFORE, IN THE NATURE OF THE REVENUE RECEIPT. THE HON'BLE S UPREME COURT AT PAGE 262 (HEAD NOTE) HELD AS UNDER: - HELD, ON THE FACTS, THAT THE ARRANGEMENT WITH MUG NEERAM BANGUR AND CO. WAS NOT IN THE NATURE OF A TRADING TRANSACTION, BUT WAS ONE IN WHICH THE APPELLANT PAR TED WITH AN ASSET OF AN ENDURING VALUE. WHAT THE ASSESSEE WA S PAID WAS TO COMPENSATE IT FOR LOSS OF A CAPITAL ASSET AN D WAS NOT, THEREFORE, IN THE NATURE OF A REVENUE RECEIPT. IT M ATTERED LITTLE THAT THE APPELLANT DID CONTINUE TO CONDUCT THE REMA INING MANAGING AGENCIES AFTER THE DETERMINATION OF ITS AG ENCY WITH THE FORT WILLIAM JUTE CO. IT CANNOT BE SAID AS GENERAL RULE THAT WHAT IS DETE RMINATIVE OF THE NATURE OF A RECEIPT ON THE CANCELLATION OF A CO NTRACT OF AGENCY OR OFFICE IS EXTINCTION OR COMPULSORY CESSAT ION OF THE AGENCY OR OFFICE. WHERE PAYMENT IS MADE TO COMPENSA TE A PERSON FOR CANCELLATION OF A CONTRACT WHICH DOES NO T AFFECT THE TRADING STRUCTURE OF HIS BUSINESS OR DEPRIVE HI M OF WHAT IN SUBSTANCE IS HIS SOURCE OF INCOME, TERMINATION OF T HE CONTRACT BEING A NORMAL INCIDENT OF THE BUSINESS, AND SUCH CANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE (FREED FROM THE CONTRACT TERMINATED), THE RECEIPT IS REVENUE: WHERE BY THE CANCELLATION OF AN AGENCY THE TRADING STRUCTURE OF THE ASSESSEE IS IMPAIRED, OR SUCH CANCELLATION RESULTS IN LOSS OF WHAT MAY BE REGARDED AS THE SOURCE OF THE ASSESSEE' S INCOME, THE PAYMENT MADE TO COMPENSATE FOR CANCELLA TION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. (EMPHASIS SUPPLIED) 6. IN THE ABOVE DECISION, THE HON'BLE SUPREME COURT HAS LAID DOWN THE RATIO THAT WHEREBY THE CANCELLATION OF AN AGENCY THE TRAD ING STRUCTURE OF THE ASSESSEE IS IMPAIRED, OR SUCH CANCELLATION RESULTS IN LOSS O F WHAT MAY BE REGARDED AS THE SOURCE OF THE ASSESSEE'S INCOME, THE PAYMENT MADE T O COMPENSATE FOR CANCELLATION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. IN THE INSTANT 12 CASE, THE AGREEMENT WITH U.K. COMPANY TO MANUFACTUR E ENO IN INDIA FORMED THE VERY FOUNDATION OF THE BUSINESS OF THE ASSESSEE OF PRODUCING AND MARKETING ENO. THE CONTRACT WITH U.K. COMPANY VESTED VALUABLE TRADE MARK RIGHTS IN THE ASSESSEES COMPANY, WHICH FORMED THE VERY BASIS OF BUSINESS OF MANUFACTURING AND MARKETING ENO; AND IS OF THE NATURE OF CAPIT AL ASSET. THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KETTLEWELL BU LLEN AND CO. LTD V CIT (SUPRA) IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THEREFORE, WE HOLD THAT THE COMPENSATION OF RS. 4.5 CRORES RECEIV ED BY THE ASSESSEE COMPANY FOR TERMINATION OF THE AGREEMENT FOR USE OF TRADEMA RK OF ENO AND FRUIT SALT, WITH U.K. COMPANY IS A CAPITAL RECEIPT NOT LIABLE T O TAX. 7. AT THIS STAGE, IT WOULD BE WORTHWHILE TO REFER TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. VAZIR SULTAN & SONS (1959) 36 ITR 175 (SC). THE FACTS OF THE SAID CASE ARE THAT T HE ASSESSEE HAD APPOINTED SOLE SELLING AGENT IN THE STATE OF HYDERABAD, AND THEREA FTER ALSO EXTENDED TO OTHER STATES. SUBSEQUENTLY, AGENCY OF OTHER STATES CANCEL LED AND THE ASSESSEE WAS PAID COMPENSATION FOR LOSS OF AGENCY. THE HON'BLE SUPRE ME COURT HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS CAPITAL RECEIPT. THE HON'BLE SUPREME COURT CATEGORICALLY HELD THAT IT WAS IMMATERIAL THAT ONL Y ONE OF THE AGENCY WAS CANCELLED. SIMILARLY, IN THE CASE OF CIT VS. BOMBA Y BURMAH TRADING CORPORATION (1986) 161 ITR 386 (SC), THE ASSESSEE H ELD ABOUT 15 FOREST LEASES. THE FOREST LEASES WERE TERMINATED BY THE UNION OF B URMA AND THE ASSESSEE WAS PAID COMPENSATION FOR THE SAME. THE HON'BLE SUPREME COURT HELD THAT THE FOREST LEASES AFFECTED THE VERY STRUCTURE OF THE OPERATION S AND, THEREFORE, CONSTITUTED CAPITAL ASSETS AND PAYMENT MADE FOR CANCELLATION OR STERILIZATION OF THE RIGHT WOULD BE CAPITAL RECEIPT. IT IS ALSO RELEVANT TO MENTION HERE THAT THE HON'BLE SUPREME COURT IN THE CASE OF OBEROI HOTEL (P) LIMIT ED (1999) 236 ITR 903 (SC) HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE FOR G IVING UP RIGHT TO PURCHASE HOTEL AND / OR TO OPERATE THE HOTEL RESULTING IN L OSS OF SOURCE OF INCOME IS 13 CAPITAL RECEIPT. IN VIEW OF THE ABOVE, WE FULLY A GREE WITH THE FINDINGS OF THE CIT(A) THAT THE COMPENSATION RECEIVED BY THE ASSESS EE AMOUNTING TO RS. 4.5 CRORES IS CAPITAL RECEIPT NOT EXIGIBLE TO TAX. 8. BEFORE PARTING, WE MAY ALSO OBSERVE THERE THAT I N THIS CASE THE RIGHT TO PRODUCE, MARKET AND SELL THE PRODUCTS UNDER EACH TR ADE MARK / BRAND NAME LICENCE GIVEN BY U.K. COMPANY TO THE ASSESSEE CONS TITUTED A SEPARATE SOURCE OF INCOME AND THE COMPENSATION RECEIVED ON TERMINAT ION OF THE LICENCE AGREEMENT IN RESPECT OF EVEN ONE OF THE SAID TRADE MARKS CONSTITUTED A CAPITAL RECEIPT NOT LIABLE TO TAX IN THE HANDS OF THE ASSES SEE IN OUR OPINION, THE LD. CIT(A) HAS CORRECTLY DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AFTER ANALYZING AND CONSIDERING THE FACTS OF THE CASE AND ALSO THE SETTLED LEGAL POSITION. THEREFORE, WE DO NOT SEE ANY VALID GROUND IN INTERF ERING WITH THE FINDINGS OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, WE UPHOLD THE O RDER OF CIT(A) AND DISMISS GROUND NO.1 OF THE APPEAL. 8. GROUND NO.2 OF THE APPEAL, READS AS UNDER:- 2. ON THE FACTS AND IN LAW THE LD. CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO RECOMPUTE THE DEDUCTION U/S 80HHC AFTER EXCLUDING EXCISE DUTY, OCTROI AND SALES-TAX ETC FROM THE TOTAL TURNOVER. 9. THE ASSESSEE CLAIMED DEDUCTION OF RS. 1,46,29,795/- U/S 80HHC OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). WHILE C OMPUTING THE DEDUCTION, THE ASSESSEE EXCLUDED EXCISE DUTY, OCTROI, SALES TAX, F REIGHT AND INSURANCE FROM THE TOTAL TURNOVER OF THE BUSINESS. HOWEVER, THE ASSES SING OFFICER WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT AT RS. 1,63,28,928/- TOOK INTO ACCOUNT SALES TAX, 14 OCTROI AND EXCISE DUTY AS PART OF THE TOTAL TURN OV ER. ON APPEAL, THE CIT(A) RELYING ON THE DECISION OF HON'BLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. SUDERSHAN CHEMICAL INDUSTRIES LTD VS (2000) 245 IT R 769 (BOM.), DIRECTED THE ASSESSING OFFICER TO COMPUTE THE DEDUCTION U/S 80HH C AFTER EXCLUDING EXCISE DUTY, OCTROI, SALES TAX ETC. 10. AFTER HEARING THE LD. REPRESENTATIVES OF BOTH T HE PARTIES, WE OBSERVE THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSE SSEE AND AGAINST THE REVENUE BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V LAXMI MACHINE WORKS (2007) 290 ITR 667 (SC), WHEREIN THE HON'BLE SUPREME COURT HELD (HEAD NOTE) AS UNDER:- THE PRINCIPAL REASON FOR ENACTING A FORMULA IN SEC TION 80HHC OF THE INCOME-TAX ACT, 1961, IS TO DISALLOW A PART OF THE CONCESSION THEREUNDER WHEN THE ENTIRE DEDUCTION CLAIMED CANNOT BE REGARDED AS RELATING TO EXPORTS. THEREFOR E, WHILE INTERPRETING THE WORDS TOTAL TURNOVER IN THE FORM ULA IN SECTION 80HHC ONE HAS TO GIVE A SCHEMATIC INTERPRET ATION. THE VARIOUS AMENDMENTS MADE THEREIN SHOW THAT RECEI PTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, ETC., DO NOT FORM PART OF BUSINESS PROFITS AS THEY HAVE NO NEXUS WITH THE ACTIVITY OF EXPORT. THE AMENDMENTS MADE FROM TIME T O TIME INDICATE THAT THEY BECAME NECESSARY IN ORDER TO MAK E THE FORMULA WORKABLE. IF SO, EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80H HC(3) : OTHERWISE THE FORMULA BECOMES UNWORKABLE. 11. RESPECTFULLY FOLLOWING THE JUDGEMENT OF THE HON 'BLE SUPREME COURT IN THE CASE OF CIT V LAKSHMI MACHINE WORKS (SUPRA), WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE CIT(A) ON THIS ISSUE. ACCORDING LY, WE UPHOLD THE ORDER OF CIT(A) ON THIS ISSUE AND REJECT GROUND NO.2 OF THE APPEAL. 12. GROUND NO.3 OF THE APPEAL READS AS UNDER:- 15 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO ALLOW 1 00% DEPRECIATION ON EFFLUENT TREATMENT PLANT 13. THE FACTS RELATING TO THIS ISSUE ARE THAT THE A SSESSEE HAD CLAIMED 100% DEPRECIATION ON EFFLUENT TREATMENT PLANT (ETP), INS TALLED AT RAJMUNDRY ON 15.3.1997. THE ASSESSING OFFICER DISALLOWED THE CLA IM OF THE ASSESSEE STATING THAT THE ETP WAS NOT INSTALLED AND COMMISSIONED BEF ORE 31.3.1997. WHILE HOLDING SO, THE ASSESSING OFFICER REFERRED TO THE E NQUIRY MADE FROM M/S ENVIRAD PROJECT (P) LTD, THE PARTY WHO HAD SUPPLIED AND INSTALLED THE ETP STATED THAT MOST OF THE WORK RELATING TO ETP WAS COMPLETE D IN THE FINANCIAL YEAR 1997- 98. THE ASSESSING OFFICER OBSERVED THAT AS AGAINS T THE TOTAL ETP CONTRACT VALUE OF 53 LAKHS ONLY, A SUM OF RS. 37,60,000/- WAS PAID UPTO 31.3.1997 AND THE FINAL BILL OF EPT WAS RAISED ON 16.4.1998. THE ASSESSEE D URING THE COURSE OF ASSESSMENT PROCEEDINGS, HAD SUBMITTED A COPY OF CER TIFICATE FROM ITS MANAGER CERTIFYING THAT ETP WAS IN OPERATION ON FROM 15.3.1 997. THE ASSESSING OFFICER HAS ALSO CONDUCTED INQUIRIES FROM M/S ENVIRAD PROJE CT (P) LTD AND THE PARTY INFORMED THAT IT HAD CONSTRUCTED THE ETP FOR THE AS SESSEE AND THE ORDER FOR THE PLANT HAD BEEN PLACED ON 6.5.1996 AND MOST OF THE W ORK WAS COMPLETED IN FINANCIAL YEAR 1997-98 AND FINAL BILL WAS RAISED ON 16.4.1998. ON A PERUSAL OF THE SCHEDULE OF PAYMENT MADE BY THE ASSESSEE TO M/S ENVIRAD PROJECT (P) LTD, THE ASSESSING OFFICER NOTICED THAT THE BILLS WERE S PREAD FROM 20.5.1995 TO 21.1.1999. THE ASSESSING OFFICER THEREFORE, WAS OF THE OPINION THAT THE ETP WAS NOT INSTALLED AND COMPLETED BEFORE 31.3.1997. 14. ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE, OBSERVING AS UNDER:- 5.3 THE SUBMISSIONS MADE BY THE APPELLANT HAVE BEE N GIVEN CAREFUL CONSIDERATION AND I HAVE ALSO GONE THROUGH THE FACTS OF THE CASE. ON GOING THROUGH THE VARIOUS DOCUMENTS FI LED, IT IS SEEN THAT THE M/S ENVIRAD PROJECT (P) LIMITED WAS G IVEN A PROJECT ON TURNKEY BASIS AND FINAL BILL WAS TO BE R AISED AFTER 16 THE PLANT WAS COMMISSIONED/OPERATED. ON PERUSAL OF THE VARIOUS DOCUMENTS, BILLS AND CORRESPONDENCE RESTING WITH THE ASSESSING OFFICER AND M/S ENVIRAD PROJECT (P) LIMIT ED, IT IS SEEN THAT M/S ENVIRAD PROJECT (P) LIMITED HAS RAISE D A BILL FOR RS.52.90,000/-. 80% OF .ME PAYMENT WAS TO BE PAID W ITH THE PURCHASE ORDER AND THE BALANCE WAS TO BE PAID AFTE R COMPLETION OF THE PROJECT. FINAL BILL WAS ISSUED ON 16.4.1998 FOR RS. 53 LAKHS. AS PER THE MINUTES OF MEETING WITH M/S ENVIRAD PROJECT (P) LIMITED HELD ON 19.3.1997, IT I S CLEAR THAT EFFLUENT TREATMENT PLANT HAD BEEN PUT ON CONTINUOUS OPERATION ON 15.3.1997. THE MINUTES OF THE MEETING READ AS UN DER- L) AN ASSURED DURING THE PREVIOUS MINUTES MR. VENK AT OF M/S ENVIRAD REACHED THE SITE ON 15.3.97 AND AFTE R A REVIEW PUT THE ETP ON CONTINUE OPERATIONS AT 11AM, 15.3.97 2) THE PLAN IS BEING OPERATED CONTINUOUSLY SINCE 11 AM, 15.3.97 BARRING A COUPLE HOURS I B ETWEEN OWING TO INEVITABLE CIRCUMSTANCES . 3) INSTEAD OF GRAB SAMPLES, COMPOSITE SAMPL ES (2 NOS.) ARE BEING COLLECTED FOR EVALUATION SINCE 17.3 .97. 4) THE RESULT OF COMPOSITE SAMNPLES (2NOS) HAVE SHOWN COD LEVELS TO BE 245 AND 243 MG/LT AT FINAL O UT LETS RESPECTIVELY. THE BOD RESULTS ARE AWAITED AS T HE SAME TAKE LONGER TIME. 5) THE EIP PLANT SHALL BE UNDER CONTINUOUS OPERATION AND MANNED BY THE STAFF OF M/S ENVIRAD, O NCE THE DESIRED OUTPUT RESULTS ARC ACHIEVED THE PLANT S HALL BE FURTHER OPERATED UNDER STEADY STATE CONDITION FOR A DURATION OF 2-3 WEEKS. 6) DURING THIS PERIOD M/S SBCH LTD. S HALL DESIGNATE PLANT PERSONNEL IN ALL THE THREE SH IFTS TO CHECK AND ALSO TRAIN. THEMSELVES FOR ETP OPE RATION. 7) AFTER STEADY STATE PERFORMANCE THE ETP S HALL BE TAKEN OVER BY M/S SBCH LTD. 17 8) IN CASE M/S SBCH LTD, DESIRE THAT EN TIRE PLANT BE RE-COMMISSIONED (TO GAIN CONFIDENCE LEV EL FOR RESTART THE PLANT) THE ENTIRE EXP/UASB SHALL BE SLU SHED AND RECHARGED. THIS RE-COMMISSIONING SHALL BE DONE BY M/S SBCH LTD., UNDER THE SUPERVISION/GUIDANCE OF M/ S ENVIRAD TILL THEY GEL (HE DESIRED RESULTS AND CONFI DENCE. AFTER PUTTING THE PLANT INTO OPERATION, CERTAIN DEFECTS WERE NOTICED AND FACTS FAX WAS SENT ON 20 TH MARCH, 1997. THE FOLLOWING DEFECTS WERE BROUGHT TO THE NOTICE TO MR . VENTAK, MANAGING DIRECTOR OF M/S ENVIRAD PROJECT (P) LIMITE D, KANPUR. THE FAX MESSAGE SENT POINTING OUT CERTAIN D EFECTS IN THE OPERATION OF PLANT IS REPRODUCED:- ' EFFULENT TREATMENT PLANT COMMISSIONG YOU HAD PLEASANT BACK JOURNEY TO KANPUR. I AM WRITI NG BELOW THE FEEDBACK ON EFFLUENT TREATMENT PLANT WORKING FO R YOUR FURTHER ACTION. FULL EFFLUENT IS BEING TAKEN IN TO ETP WITH EFFECT FROM 15.3.97 AFTERNOON. PH AND COD RESULTS ARE ALREADY FAXED TO YOU UP TO 2 3.3.97. FOR THE BENEFIT I AM GIVING BELOW THE DAY'S AVERAGE BOD RESULTS OF WITH EFFECT FROM 17.3.1997. COD BOD MG/LIT ..3/97 73 ..3/97 122 ..3/97 149 ..3/97 263 ..3/97 383 ..3/97 520 AERATION TANK WATER HAS BECOME BLACK IN COLOUR AND DISSOLVED . NIL W.E.F. 20.3,97 AFTERNOON. 4) ONE OF YOUR CHEMIST LEFT THE SITE ON 24.3.97 . ONLY ONE CHEMIST IS PRESENT. 18 5) ABOVE DALE OF COD AND BOD COUPLED WITH DISSO LVED OXYGEN IN AERATION TANK WATER INDICATES THAT THE PERFORMANCE OF THE ETP IS UNSATISFACTORY AND FAR AWAY FROM THE DES IRED AGREED LIMITS OF DISCHARGED EFFLUENT. THIS IS FOR YOUR NECESSARY URGENT ACTION,' IT APPEARS THAT WHEN THE ASSESSING OFFICER MADE INQ UIRY FROM M/S ENVIRAD PROJECT'' (P) LIMITED REGARDING EFFLUEN T TREATMENT PLANT, WITHOUT UNDERSTANDING THE IMPLICAT ION. M/S ENVIRAD PROJECT (P) LIMITED GAVE A GENERIC REPLY ST ATING THAT THEY HAD COMMISSIONED THE PLANT AND THE FINAL AMOUN T WAS DELIVERED IN FINANCIAL YEAR 1997-98. HOWEVER, THE S UBSEQUENT REPLY FROM M/S ENVIRAD PROJECT (P) LIMITED CLARIFIE D THAT THE PLANT HAD BEEN PUT INTO OPERATION AND STARTED FUNCT IONING W.E.F. FJ 15.3.1997 AND AS PER THE ARRANGEMENTS, TH E FINAL PAYMENT WAS TO BE MADE AFTER ALL MODIFICATION/COMPL ETION OF ALL OBLIGATION OF ORDER AND FULL SATISFACTION OF TH E CLIENT I.E . APPELLANT. IT IS ONLY WHEN THE PLANT WAS PUT INTO O PERATION, CERTAIN DEFECTS WERE NOTICED AND AS PER AGREEMENT W ITH M/S ENVIRAD PROJECT (P) LIMITED FINAL PAYMENT WAS TO BE MADE AFTER ALL THE DEFECTS WERE REMOVED AND PLANT WAS PU T INTO PERFECT SHAPE. THEREFORE, THERE IS NO DOUBT THE APP ELLANT WAS OWNER OF THE PLANT AND THAT IT WAS COMMISSIONED BEF ORE 15.3.1997. SOME OF THE PAYMENTS MAY HAVE BEEN MADE SUBSEQUENT TO THE FINANCIAL YEAR UNDER CONSIDERATIO N BUT THAT CANNOT HAVE THE EFFECT OF NEGATING THE APPELLANT'S CLAIM FOR DEPRECIATION. IN THE FACTS AND CIRCUMSTANCE OF THE CASE, IT IS HELD THAT THE EFFLUENT TREATMENT PLANT HAD BEEN COMMISSIONED AND PUT TO USE DURING THE YEAR UNDER REFERENCE, AND THE APPELLANT IS ENTITLED TO DEPRECIATION THEREON. THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO ALLOW DEPRECIATI ON ON EFFLUENT TREATMENT PLANT AS PER RULES. THUS THIS GROUND OF APPEAL IS, THEREFORE, ALLOWED. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS APPARENT FROM THE RECORD THAT THE ASSESSEE HAD PRODUCED THE MINUTES OF MEETI NG HELD WITH ENVIRAD ON 19.3.1997, WHICH REVEALED THAT THE ETP WAS BEING OP ERATED CONTINUOUSLY SINCE 19 15.3.1997. THE SAID MINUTES WERE GIVEN BY ONE MR VENKAT OF ENVIRAD. THE MINUTES OF MEETING ARE AVAILABLE AT PAGE 136 OF THE ASSESSEES PAPER BOOK. THE ASSESSEE HAD ALSO PRODUCED THE COPIES OF FAX MASSAG ES DATED 24.3.1997 AND 28.3.1997 SENT BY THE ASSESSEE TO MR VENKAT OF ENVI RAD INTIMATING HIM ABOUT THE RESULTS OBTAINED UNDER OPERATION OF THE ETP ON THE VARIOUS DATES. THE COPIES OF FAX MESSAGES DATED 24.3.1997 AND 28.3.1997 ARE AVAI LABLE AT PAGES 137 TO 140 OF THE ASSESSEES PAPER BOOK. BESIDES ABOVE DOCUMENTS , THE ASSESSEE HAD ALSO SUBMITTED A CERTIFICATE OF THE ASSESSEES MANAGER (ENGG.), ASSET INSTALLATION FORM OF THE ASSESSEE, RUNNING INVOICE DATED 12.11.1 996 OF ENVIRAD, AND COPY OF THE PURCHASE ORDER DATED 6.5.1996 ISSUED BY THE ASS ESSEE TO ENVIRAD. WE FIND THAT THE LD. CIT(A) HAS DULY CONSIDERED THE DOCUMEN TARY EVIDENCE PRODUCED BY THE ASSESSEE AND RIGHTLY REACHED AT THE CONCLUSION ON THE BASIS OF THE EVIDENCE BROUGHT ON RECORD THAT THE ASSESSEE WAS THE OWNER O F THE ETP AND IT WAS COMMISSIONED BEFORE 15.3.1997. THE ASSESSING OFFICE R DENIED THE CLAIM OF THE ASSESSEE MERELY ON THE GROUND THAT FINAL BILL WAS R AISED BY M/S ENVIRAD PROJECT (P) LIMITED ON 16.4.1998. IN THIS REGARD, THE SUB SEQUENT REPLY SUBMITTED BY M/S ENVIRAD PROJECT (P) LIMITED TO THE ASSESSING O FFICER CLARIFIED THAT THE PLANT HAD BEEN PUT IN THE OPERATION AND STARTED FUNCTIONI NG W.E.F. 15.3.1997 AND AS PER THE ARRANGEMENT, FINAL PAYMENT WAS TO BE MADE AFTE R ALL MODIFICATIONS / COMPLETION OF ALL OBLIGATION OF ORDER AND FULL SATI SFACTION OF THE ASSESSEE. IT IS TRUE THAT SOME OF THE BILLS WERE MADE SUBSEQUENT TO THE FINANCIAL YEAR UNDER CONSIDERATION BUT THAT CANNOT BE A GROUND FOR REJEC TING THE CLAIM OF THE ASSESSEE. THUS, CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCE S OF THE PRESENT CASE, WE ARE OF THE OPINION THAT THE CIT(A) HAS PASSED A WELL RE ASONED ORDER AFTER APPRECIATING THE FACTS OF THE CASE AND ALSO THE REL EVANT DOCUMENTARY EVIDENCE SUBMITTED BY THE ASSESSEE, THEREFORE, WE DO NOT SEE ANY VALID GROUND IN INTERFERING WITH THE FINDINGS OF THE CIT(A) ON THIS ISSUE. CONSEQUENTLY, WE REJECT GROUND NO.3 OF THE APPEAL RAISED BY THE REV ENUE. 20 16. GROUND NO.4 OF THE APPEAL, READS AS UNDER:- 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) HAS ERRED IN ALLOWING ASSESSEE CLAIM OF DEDUCTION U/S 80-I OF THE ACT, 1961. 17. THE ISSUE RELATES TO DEDUCTION U/S 80-I OF THE ACT AMOUNTING TO RS. 7,08,59,578/-. THE ASSESSING OFFICER DENIED THE CLA IM OF THE ASSESSEE. ON APPEAL, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESS EE FOR THE REASONS STATED IN PARA 6.3 OF THE ORDER. 18. AFTER HEARING LD. REPRESENTATIVES OF BOTH THE P ARTIES WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE TRIBUNAL DATED 31.1.2005 PASSED IN ASSESSEES CASE IN ITA NOS. 301/CHANDI/2001, 17, 274 & 1243/CHANDI/98 & 2 33/CHANDI/99 AND 302/CHD/2001 RELATING TO ASSESSMENT YEARS 1991-92, 92-93, 93-94, 94-95 & 95- 96 AND 1996-97. A SIMILAR VIEW HAS ALSO BEEN TAKEN BY THE TRIBUNAL IN REVENUES APPEAL IN ITA NO. 345/CHANDI/2001 IN ASSE SSEES OWN CASE RELATING TO ASSESSMENT YEAR 1996-97 VIDE ITS ORDER DATED 28. 2.2005. THE TRIBUNAL FOLLOWING ITS EARLIER ORDERS PASSED IN ASSESSEES C ASE HELD AS UNDER:- THE SECOND GROUND OF APPEAL OF THE REVENUE IS AS UNDER:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) ALLOWING THE CLAIM OF DEDUCTION U/S 80-I OF THE INCOME-TAX ACT, 1961 AFTER VERIFICATION OF F ACTS IN VIEW OF ITATS ORDER PASSED IN ASSESSEES CASE FOR EARLIER YEARS. THE RELEVANT FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 80-1 OF RS.6,32,90. 368/- WHICH WAS DISALLOWED BY THE ASSESSING OFFICER ON THE BASIS OF ASSESSMENT ORDER FOR ASSESSMENT YEAR 1989-90 TO 1995-96. IN THE SAID ASSESSMENT YEARS, THE CLAIM WAS DISALLOWED ON THE GROUND THAT ALL THE MACHINES WERE INSTALLED IN THE EXISTING FACTORY PREMISES AND ACCORDING TO THE 21 ASSESSING OFFICER THE SAME COULD BE TREATED AS ROUT INE REPLACEMENTS WITH BETTER CAPACITY. THE ASSESSING OFFICER ALSO ME NTIONED THAT NEITHER IN THE ANNUAL REPORT OF THE COMPANY, THERE WAS ANY MENTION ABOUT THE EXPANSION OF BUSINESS OF THE ASSESSEE, NO R WAS ANY PROJECT REPORT' PREPARED FOR THE SAME AND THAT THE ASSESSEE ALSO DID NOT MAINTAIN SEPARATE ACCOUNTS OR OTHER DETAILS FOR THE NEW UNIT. SIMILAR CLAIM HAD BEEN DISALLOWED U/S 80-1 IN-ASSES SMENT YEAR 1979- 80 AND WHEN THE MATTER CAME UP BEFORE THE TRIBUNAL, DEDUCTION UNDER SECTION 80-J WAS HELD TO BE PERMISSIBLE TO TH E ASSESSEE. THE MATTER AGAIN TRAVELED UPTO THE TRIBUNAL IN ASSESSME NT YEARS 1989-90 AND IN 1991-92 TO 1995-96 AND THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. SINCE THE BASIS FOR THE DISALLOWANCE ARE SAME AS IN EARLIER YEARS, WE RESPECTFULLY FOLLOWING THE ORDERS OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEARS 1991-92-TO 1995-96 (SUPRA) DISMISS THIS GROUND OF APPEAL RAISED BY THE REVENUE . 19. THE FACTS OF THE PRESENT YEAR ARE SIMILAR TO TH AT OF EARLIER YEARS REFERRED TO ABOVE. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIB UNAL, WE REJECT GROUND NO.4 OF THE APPEAL. 20. GROUND NO.5 OF THE APPEAL, READS AS UNDER:- 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT HAS ERRED IN DELETING THE ADDITION OF RS. 1,41,58,5 49/- BY EXCLUDING THE EXCISE DUTY IN THE VALUATION OF CLOSI NG STOCK. 21. AFTER HEARING LD. REPRESENTATIVES OF BOTH THE P ARTIES, WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF TRIBUNAL DATED 31.1.2005 FOR ASSESS MENT YEARS 1991-92 TO 1995- 96 REFERRED TO ABOVE. WHILE DECIDING A SIMILAR ISS UE, THE TRIBUNAL HELD AS UNDER:- 15. THE RELEVANT FACTS RELATING TO THIS ISSUE ARE THAT ASSESSEE HAD BEEN INCLUDING EXCISE DUTY PAID IN THE VALUE OF THE CLOSING STOCK UP 22 TO ASSESSMENT YEAR 82-83. THE TRIBUNAL HAD ALSO DI RECTED THE INCLUSION OF THE EXCISE DUTY IN THE VALUATION OF CL OSING STOCK. HOWEVER, FROM ASSESSMENT YEAR 83-84, THE ASSESSEE E XCLUDED THE EXCISE DUTY PAID IN RESPECT OF GOODS LYING IN THE C LOSING STOCK FROM THE VALUATION OF SUCH STOCK ON DIRECT COST BASIS. T HE AO AS WELL AS THE CIT(A) DID NOT ACCEPT THE CONTENTION OF THE ASS ESSEE FOR THE ASSESSMENT YEARS 83-84 & 85-86. THE TRIBUNAL ALSO C ONFIRMED THE VIEW OF THE REVENUE THAT THE EXCISE DUTY PAID HAS N ECESSARILY TO BE INCLUDED IN THE VALUATION OF CLOSING STOCK ON DIREC T COST BASIS. IN ASSESSMENT YEAR 85-86, THE ASSESSEE HAD RAISED AN A LTERNATE SUBMISSION THAT IF EXCISE DUTY PAID HAD TO BE INCLU DED AS PART OF THE VALUATION OF CLOSING STOCK, THE SAME HAD TO BE EXCL UDED AFTER THE INSERTION OF SECTION 43B W.E.F. 1.4.84, IN ORDER TO GIVE FULL EFFECT TO THE SAID PROVISIONS. THE TRIBUNAL IN ASSESSMENT YEA R 85-86, WHILE DECIDING THE ISSUE, IN PRINCIPLE, AGAINST THE ASSES SEE DIRECTED THE AO TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH TH E DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL CONSTITUTED IN THE CA SE OF INDIAN COMMUNICATION NETWORK LTD. SUBSEQUENTLY, THE SPECIA L BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. FOOD SPECIALTIES LT D.. 206 ITR (AT) 119, HELD THAT EXCISE DUTY PAID IS NOT A PART OF DI RECT COST WHILE VALUING THE CLOSING STOCK IN THE CASE OF INDIAN COM MUNICATIONS NETWORK P. LTD. VS I A C 206 ITR (AT) 96, THE SPECI AL BENCH HELD THAT IT WAS NECESSARY TO REMOVE THE AMOUNT OF EXCIS E DUTY FROM THE VALUE OF THE CLOSING STOCK IN ORDER TO GIVE FULL EF FECT TO THE PROVISIONS OF SECTION 438 OF THE ACT. 16. IN ASSESSMENT YEAR 86-87 IN 1 T A NO........ , THE TRIBUNAL RELYING UPON THE SPECIAL BENCH DECISION IN THE CASE OF FOOD SPECIALTIES LTD AND INDIAN COMMUNICATIONS NETW ORK (P) LTD (SUPRA) HELD THAT (I) CHANGE IN THE METHOD OF VALUA TION OF CLOSING STOCK TO EXCLUDE EXCISE DUTY PAID FROM THE COST WAS BONA FIDE &( II) IN ANY CASE, EXCISE DUTY PAID HAD TO BE REDUCED FRO M THE VALUE OF THE CLOSING STOCK IN ORDER TO GIVE FULL EFFECT TO T HE PROVISIONS OF SECTION 43B OF THE ACT THE TRIBUNAL FOLLOWED ITS OW N DECISION FOR THE ASSESSMENT YEAR 86-87 IN ASSESSMENT YEARS 87-88 & 88-89 17. IN THE MEANWHILE, SECTION 145A HAS BEEN INSERT ED BY THE FINANCE (NO. 2) ACT, 1998 W.E.F 1.499 THE SAID SECT ION READS AS UNDER - 23 '145A NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 145, THE VALUA TION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; AN D (B) FURTHER ADJUSTED TO INCLUDE THE AM OUNT OF ANY TAX DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSE SSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUATION. EXPLANATION. - FOR THE PURPOSES OF THIS SECTION, AN Y TAX. DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) UN DER ANY LAW FOR THE TIME BEING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT.' IT IS EVIDENT FROM THE PROVISIONS OF SECTION 145A T HAT EXCISE DUTY IS TO BE INCLUDED TN THE VALUATION OF CLOSING STOCK THE SAID SECTION, HOWEVER, HAS BEEN HELD TO BE APPLICAB LE ONLY W.E.F. 1 4.99 BY THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDO NIPPON CHEMICAL CO.L TD., 245 ITR 384 THE SAID DECISION OF THE BOMBAY HIGH COURT HAS BEEN AFFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF C1T VS. INDO N IPPON CHEMICALS LTD., 261 ITR 275. IN ASSESSMENT YEAR 89- 90, THE TRIBUNAL RELYING UPON THE DECISION OF THE BOMBAY H IGH COURT IN THE CASE OF INDO NIPPON CHEMICALS LTD. (SUPRA), DIRECTED THE AO TO EXCLUDE EXCISE DULY M VALUATION OF CLOSIN G STOCK 18. SINCE THE ASSESSMENT YEARS INVOLVED BEFORE US A RE PRIOR TO 1 .4.99 AND SECTION 145A NOT BEING APPLICABLE, WE D O NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) IN DIRECTI NG TO EXCLUDE THE EXCISE DUTY COMPONENT FROM THE VALUATIO N OF CLOSING STOCK WE, THEREFORE, FIND NO JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE CIT(A). THE GROUNDS OF APPEAL S RAISED BY THE REVENUE IN THE RESPECTIVE ASSESSMENT YEARS A RE ACCORDINGLY DISMISSED. 24 22. THE ABOVE DECISION IS SQUARELY APPLICABLE TO TH E FACTS OF THE PRESENT CASE AND THEREFORE, WE DO NOT SEE ANY MERIT IN THIS GROU ND OF APPEAL. ACCORDINGLY, THE SAME IS DISMISSED. 23. GROUND NO.6 OF THE APPEAL, READS AS UNDER:- 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) HAS ERRED IN ALLOWING RELIEF OF RS. 83,97,89 9/- BY DIRECTING THE ASSESSING OFFICER TO VALUE THE CLOSIN G STOCK ON THE DIRECT COST METHOD AS ADOPTED BY THE ASSESSEE S UBJECT TO INCLUSION OF CERTAIN EXPENSES. 24. AFTER HEARING LD. REPRESENTATIVES OF BOTH THE P ARTIES, WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE TRIBUNAL FOR ASSESSMENT YEARS 1 991-92 TO 1995 & 1996-97 REFERRED TO ABOVE. WHILE DECIDING A SIMILAR ISSUE I N EARLIER YEARS, THE TRIBUNAL HELD AS UNDER:- 3. THE RELEVANT FACTS RELATING TO THE ABOVE-MENTI ONED GROUNDS OF APPEALS ARE THAT IN ASSESSMENT YEAR 1982 -83, THE ASSESSEE HAD CHANGED THE METHOD OF VALUATION OF CLO SING STOCK FROM 'TOTAL COST BASIS' TO 'DIRECT COST BASIS '. IT WAS CLAIMED ON BEHALF OF THE ASSESSEE THAT IT HAD VALUE D THE FINISHED GOODS IN HAND AT TOTAL COST TILL ASSESSMEN T YEAR 1981- 82 NOT REALIZING THE FACT THAT THERE ARE VARIOUS EX PENSES INCURRED AFTER THE FINISHED GOODS HAD COME INTO ITS PRESENT FORM AND LOCATION. ACCORDING TO THE ASSES SEE IT WAS THOUGH PROPER TO LIMIT THE VALUATION OF CLOSING STOCK OF THE FINISHED GOODS TO 'THE EXTENT OF THE COST THAT WAS INCURRED IN PRODUCING THEM AND BRINGING THESE TO THE PRESE NT STAGE OF COMMODITY READY FOR SALE. THE TRIBUNAL DECIDED T HE ISSUE PARTLY IN FAVOUR AND PARTLY AGAINST TH E ASSESSEE. THE OPERATIVE PORTION OF THE ORDER OF THE TRIBUNA L DATED 18.6.93 FOR THE ASSESSMENT YEAR 82-83 IN I.T.A.NO.986/CHANDI/87 AS CONTAINED IN PARA 15 & 16 OF THE ORDER IS REPRODUCED AS UNDER :- 25 '15. THE RIVAL CONTENTIONS IN REGARD TO THE ABO VE ISSUE HAVE BEEN VERY CAREFULLY CONSIDERED IN SO FAR AS THE PRINCIPLE OF VALUATION OF STOCK BY OR UNDER THE DIRECT COST IS CONCERNED, SO LONG AS IT WAS A PROPER METHOD AND COULD BE TERMED AS DIRECT COST AND INCLUDED ALL ELEMENTS OF DIRECT COST, THE SYSTE M OR THE CHANGE OF THE SYSTEM FOR ADOPTION OF THE DIRECT COST HAS TO BE NECESSARILY HELD AS FOR BONA FIDE REASO NS. THE AO WOULD BE JUSTIFIED TO ENQUIRE INTO THE VALUATION I.E WHETHER IT COULD BE TRULY STAT ED TO BE VALUE UNDER THE DIRECT COST BASIS, BECAUSE THE ULTIMATE OBJECTIVE IS TO DEDUCE THE PROPER AND RIG HT TAXABLE INCOME. THE BASIS OF VALUATION OF THE STOC KS IS BASICALLY DEPENDENT ON THE FACTOR THAT CONTRIBUTES TO BRINGING THE STOCK TO ITS PRESENT CONDITION AND LOCATION THE EXPENSES THAT ARE INCURR ED ON ADMINISTRATION, SALES, DISTRIBUTION ETC. DO NO T HAVE ANY HAND IN BRINGING INTO EXISTENCE OF THE PRO DUCT ITSELF, BUT THESE ELEMENTS ARE USED SUBSEQUEN T TO THE PRODUCTS BEING MANUFACTURED. THEREFORE, T HE EXPENSES THAT ARE INCURRED AFTER COMING INTO EXISTENCE OF THE PRODUCT IN THE CONDITION IT WAS SALEABLE OR MARKETABLE, HAVE NECESSARILY TO BE TREATED AS EXPENSES INCURRED AFTER THE PRODUCTS ARE MANUFACTURED AND, THEREFORE, C OULD NOT BE MADE PART OF THE VALUE OF THE STOCKS, ESP ECIALLY WHEN THEY ARE TO BE VALID AT COST OR MARKET PRICES, WHICHEVER IS LOWER. THE - PRODUCT- THAT IS MANUFACTURED BY THE ASSESSEE IS EXTR ACTED OUT OF MILK AND MILK IS THE MAIN RAW MATERIAL FOL LOWED BY MALT EXTRACT, WHEAT FLOUR, COCA POWDER ETC. TH E FRESH MILK IS COLLECTED AT VARIOUS MILK COLLECTION CENTRES LOCATED IN THE STATE OF PUNJAB. THEREAFTER IT IS PROCESSED AND MADE INTO A PRODUCT CALLED HORLICKS AND OTHER PRODUCTS WHICH A RE PACKED IN DRUMS AND DISPATCHED TO VARIOUS PACKING STATIONS THAT ARE LOCATED IN DIFFERENT 26 REGIONS. AT THESE PACKING STATIONS, WHICH HA VE THEIR OWN MACHINES REQUIRED FOR PACKING, FILLING TH E PRODUCT IN VARIOUS BOTTLES, PLACING OF COCKS, FIXIN G OF LIDS AND LABELS. THE COMPONENTS OF DIRECT COST ACCORDING TO THE ASSESSEE, ARE PRIME COS T COMPRISING OF RAW-MATERIALS, PACKING MATER IALS, DIRECT LABOUR OF FACTORY WORKERS CONCERNED WI TH THE PRODUCTION AND THE PACKING STATIONS, DIRECT EXPE NSES -OF (HE FACTORY AND OF THE PACKING STAT IONS. THE DIRECT OVERHEAD COMPRISING OF WORKERS, ELECTRICITY, COAL, OIL AND LUBRICANTS, OTHE R OILS AND WATER ARE TAKEN INTO CLOSING STOCK ON THE BASIS OF TONNAGE OF STOCK ON HAND, DIVIDED BY THE TOTAL TON NAGE PRODUCED IN THE YEAR, APPLYING THAT RATIO TO THE TOTAL TONNAGE DIRECT, OVERHEADS AS STATED A BOVE. SIMILARLY, THE MILK COLLECTION CENT4RES HAV E DIRECT OVERHEADS AN WAGES, VEHICLES, DEPRECI ATION ON MILK CHILLING PLANTS, TRUCK HIRE, ICE EXPENSES, ICE EXPENSES, PENSION COST OF THE STAFF IN THE FACTORY, ARE ALSO CONSIDERED IN THE SAME PROPORTION AS THE TONNA GE IN HAND TO THE TOTAL TONNAGE PRODUCED. THE ELEMENTS OF EXCISE DUTY ON THE STOCKS IS TAKEN INTO ACCOUNT AND THE TOTAL OF THE ABOVE IS TREATED AS THE VALUE OF THE F INISHED GOODS AS WELL AS THE WORK IN PROGRESS WHICH WOULD ALSO INCLUDE THE VALUE OF GHEE THAT IS TAKEN AT THE SELLING PRICE. IN THE ABOVE VALUATION, IDLE TIME OF THE MACHINERY, WHICH IS DUE TO THE STAGES OF PRODUCTION IS TREATED AS PART OF THE DIRECT COST. MACHINERY FOR REGULAR MAINTENANCES WHEN IT IS SHUT DOWN, THE EXPENSES THEREON ARE EXCLUDED FROM THE CONSIDERATION OF THE DIRECT COST BUT TREATED AS IN DIRECT OVERHEADS. THE INDIRECT LABOUR AT WORKS, WATCH AND WARD THAT OF STORES ETC ARE STATED TO BE O N EMPLOYEES WHO ARE KEPT IN READINESS IN CASE OF ANY SHORT FALL IN THE AVAILABLE STAFF FOR WORK. SIMILA RLY, THE MILK TRANSPORTATION EXPENSES ON DIRECT STAFF LIKE ACCOUNTANTS, MANAGERS ETC. ARE EXCLUDED. T HE STAFF IN THE LABORATORY CONCERNED WITH THE QUALITY 27 CONTROL, THOSE FOR THE PURPOSES OF ADMINISTRATION, ARE CONSIDERED AS INDIRECT OVERHEADS COST. SIMILARLY , IN THE WORKS, THERE ARE FACTORY MANAGER, P ERSONAL AND ADMINISTRATION STAFF, PRODUCTION MANAGER, MILK PROCUREMENT DEVELOPMENT MANAGER , PURCHASE MANAGER, STORES MANAGER AND THE ACCOUNTS MANAGER TOGETHER WITH THE FIELD EXECUTIVES, COVERING ALL THE ABOVE, AND VETERINARY EXECUTIVES AND OTHER GENERAL STAFF COVERI NG ASSISTANTS, SUPERVISORS, CENTRE INCHARGE OF MILK COLLECTION CENTRE, CLERK, PEON ETC. HAVE B EEN EXCLUDED FROM THE CONSIDERATION OF DIRECT LABOUR. THE INSURANCE OF THE MACHINERY IS TREATED AS INDIRECT OVERHEAD COST. THE TRAVELLING THAT IS RELATED TO MI LK COLLECTION IS TREATED AS DIRECT COST, BUT TRAVELLI NG RELATING TO OTHER SUPPLIERS AND FAR OTHER FACTORY W ORK IS TREATED AS INDIRECT OVERHEADS. THE MATERIA L HANDLING EXPENSES AGGREGATING TO RS.1 ,68,000/- INCURRED ON DIRECT LABOUR FOR SHIFTING OF RAW MATERIALS, PACKING MATERIALS, STORES, CAPITAL ITEM S, COAL ETC. FROM STORES TO PRODUCTION SITE, FROM PRODUCTION SITE TO DESPATCH BAY OR STORES, UNLO ADING THEM WITHIN THE FACTORY AND. SHIFTING OF VARIOUS O THER RECORD ARE TREATED AS INDIRECT OVERHEADS. THE ASS ESSEE HAD STATED THAT THE ABOVE IS PROPER DIRECT COST, VALUATION OF THE PRODUCTS, THE SELLING OVERHEA DS, DISTRIBUTION OVERHEADS, MARKET OVERHEADS, ADMINISTRATION AND THAT RELATING TO EXPORTS HAVE BEEN TOTALLY EXCLUDED FROM THE ABOVE VALUATI ON BECAUSE THEY HAVE NO CONTRIBUTION, WHATSOEVER, TOWA RDS THE BRINGING THE PRODUCT TO ITS P-PHYSICAL CONDITIO N AND LOCATION. 16. IN OUR VIEW, IN THE ABOVE CLASSIFICATION, EXCLUSION OF MANAGERIAL STAFF OF THE FACTORY I.E. V ARIOUS MANAGERS, EXECUTIVE AND OTHER STAFF AND ALSO EXCLUSION OF WORKS, MAINTENANCE, WATCH AND WA RD STAFF THAT ARE KEPT IN READINESS IS N OT PROPER, BECAUSE THEY DIRECTLY 'ARE RELATE D TO THE 28 PRODUCTION AS SUCH, AS THEY ARE INVOLVED IN THE PLANNING, PROCUREMENT, ACTUAL PRODUCTION, MANNER OF PRODUCTION AND THE LIKE. THEY ALSO ARE CONCERNE D WITH THE QUALITY OF THE MILK AS SUCH FOR WHICH VETERINARY EXECUTIVES ARE ALSO MADE PART . THEREFORE, THE ENTIRE DIRECT LABOUR SHOULD BE INCLUDED OF NOT ONLY OF THE WORKERS OPERAT ING THE MACHINES BUT ALSO THE MANAGERS OF FACTORY, PERSONNE L AND ADMINISTRATION WHO CONTROL LAW AND ORDER AS FAR AS THE STAFF GOES, PRODUCTION MANAGERS CONCERNED WITH THE QUALITY PRODUCED, MILK PROCUREMENT DEVELOPMENT MANAGER, PURCHASE MANAGER, STORES AND ACCOUN TS MANAGER ARE INSEPARABLE IN SO FAR AS THE PRODUCTION OF PRODUCT IS CONCERNED. THE SAME IS THE CASE OF THE STAFF, SUCH AS SUPERVISORS. CEN TRE INCHARGE. THE CONCEPT OF DIRECT LABOUR AS IS UNDERSTOOD BY THE ASSESSEE, TO MEAN ONLY T HAT COST OF LABOUR WHICH IS INVOLVED IN ACTUAL PRODUCTION, IN OUR VIEW, IS RESTRICTING IT TO A SMALL SECTION WHILE THE PRODUCTION INVOLVES THE MANAGERIAL, SUPERVISORY AND OTHER EXEC UTIVES WHO CONTROL THE ENTIRE PRODUCTION ACTIVITY. THE MAINTENANCE STAFF, STATED TO BE KEPT IN READINESS IN OTHER WORDS, ARE ALWAYS NECESSARY FOR PRODUCT ION AND. THEREFORE, THEIR COST CANNOT BE EXCLUDED. THE COST OF QUALITY CONTROL IS A VERY SMALL ELEME NT AND INCLUDING IT WOULD REQUIRE CONSIDERABLE CALCULATION AND, THEREFORE, FOR THE SAKE OF CONVENIENCE, THEY COULD BE TAKEN AS INDIRECT COST. IN SO FAR AS THE MILK TRANSPORTATION, THAT IS CONCERNE D WITH THE PROCUREMENT AND TRANSPORTATION OF THE MILK TO THE FACTORY, IS STATED TO HAVE BEEN INCLU DED. BUT THERE ARE OTHER INDIRECT LABOUR FOR MOVEM ENT ETC STRICTLY SPEAKING, WHICH FORM PART OF T HE DIRECT COST THE AO IS, THEREFORE, DIR ECTED TO CHECK UP THE CALCULATION OF THE DIRECT COST OF THE PRODUCTS TO INCLUDE THE FOLLOWING ELEMENTS- 29 A) COST OF RAW MATERIALS, B) COST OF PACKING MATERIALS C) DIRECT LABOUR OF THE FACTORY WITH NO EXCEP TION, I.E. MANAGERIAL STAFF, OTHER EXECUT IVES ATTACHED TO THE FACTORY AND OTHER SUPERVISORY AND OTHER STAFF DIRECTLY CONCERNED WITH FA CTORY ALREADY DIRECTLY ATTACHED. D) DIRECT LABOUR ON PACKING STATIONS INCLU DING MANAGERS AND OTHER SUPERVISORY STAFF. E) DIRECT EXPENSES OF THE FACTORY AND PACKI NG STATIONS. F) OVERHEADS - DIRECT -- EXPENSES INCURRED ON THE FACTORY, MILK COLLECTION CENTERS, PACKING STATIO NS, APPOINTMENT-ON THE BASIS OF TONNAGE PRODUCED I.E. QUANTITY IN HAND DIVIDED BY TOTAL QUANTITY PRODUCED AND THE RESULTANT FIGURE MULTIPLIED BY THE TOTAL DIRECT OVERHEADS. G) DIRECT OVERHEADS OF MILK COLLECTION CEN TRES COVERING WAGES, VEHICLE DEPRECIATION HIRE, ICE EXPENSES. H) ELEMENT OF EXCISE DUTY I) GHEE AT SELLING PRICE' 4. THE CIT(A) HAS DECIDED THE ISSUE IN ACCORD WIT H THE DIRECTION OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 82-83 (SUPRA) WE RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 82-83 (SUPRA), UPHOLD THE ORDER OF THE CLT(A) IN REGARD TO VALUATION OF CLOSING STOCK AND DISMISS THE ABOVE COMMON GROUNDS OF APPEALS RAISED BY THE ASSES SEE AS WELL THE REVENUE. 25. THE FACTS OF THE PRESENT YEAR ARE SIMILAR TO TH AT OF EARLIER YEARS. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL PA SSED IN ASSESSEES CASE FOR EARLIER YEARS, WE DO NOT SEE ANY INFIRMITY IN THE F INDINGS OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) A ND DISMISS GROUND NO.6 OF THE APPEAL. 30 26. GROUND NO.7 OF THE APPEAL, READS AS UNDER:- 7. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE THE LD. CIT(A) HAS ERRED IN DELEING THE ADDITION OF RS. 54, 74,522/- ON ACCOUNT OF MODVAT ELEMENT NOT REFLECTED IN THE VALU E OF CLOSING STOCK. 27. THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASS ESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE TRIBUNAL PASSED IN A SSESSEES CASE FOR EARLIER YEARS REFERRED TO ABOVE. WHILE DECIDING A SIMILAR ISSUE, THE TRIBUNAL HELD AS UNDER:- 25. THE RELEVANT FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSING OFFICER HAD INCLUDED THE MODVAT CREDIT IN THE VALUA TION OF CLOSING STOCK. THE CIT(A) HAS RECORDED A FINDING OF FACT TH AT THE ASSESSEE HAD DECIDED THE PURCHASES NOT OF MODVAT CREDIT AND ACCORDINGLY HAS NOT INCLUDED THE MODVAT CREDIT IN THE VALUATION OF CLOSING STOCK AND HAS ACCORDINGLY DELETED THE ADDITION FOR THE RESPEC TIVE ASSESSMENT YEAR. 26. THE PARTIES BEFORE US AGREED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'B LE SUPREME CURT IN THE CASE OF INDO NIPPON 261 ITR 271. RESPECTFUL LY FOLLOWING THE SAID DECISION OF THE HON'BLE SUPREME COURT IN THE C ASE OF INDO NIPPON, THIS COMMON GROUND RAISED BY THE REVENUE IN RESPECTIVE ASSESSMENT YEARS IS HEREBY DISMISSED. 28. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNA L REFERRED TO ABOVE, WE REJECT GROUND NO.7 OF THE APPEAL. 29. GROUND NO.8 OF THE APPEAL READS AS UNDER:- 8. ON THE FACTS AND IN LAW, THE LD. CIT(A) HAS ERRE D IN DELETING THE ADDITION OF RS. 11,94,97,875/- MADE ON ACCOUNT OF 31 DISALLOWANCE OF ASSESSEES CLAIM OF DEDUCTION OF AD VANCE EXCISE DUTY PAID. 30. AT THE VERY OUTSET, SH. SHRI ROHIT JAIN, LD. CO UNSEL FOR THE ASSESSEE ALSO POINTED OUT THAT A SIMILAR ISSUE HAS ALREADY BEEN C ONSIDERED BY THE ITAT CHANDIGARH BENCH (SPECIAL BENCH) IN ASSESSEES CASE RELATING TO ASSESSMENT YEAR 2001-02 AND THE DECISION IS REPORTED IN (200 7) 107 ITD 343 (CHD) (SB), WHEREIN THE QUESTION RAISED WAS AS UNDER:- WHETHER DEDUCTION FOR TAX, DUTY ETC. IS ALLOWABLE UNDER SECTION 43B OF THE INCOME-TAX ACT, 1961, ON PAYMENT BASIS BEFORE INCURRING THE LIABILITY TO PAY SUCH AMOUNTS? 31. THE TRIBUNAL, ON CONSIDERATION (MAJORITY VIEW) HELD (HEAD NOTE) AS UNDER:- AS REGARDS THE FIRST QUESTION RELATING TO DEDUCTIO N ON PAYMENTS OF EXCISE DUTY, IT COULD BE SEEN THAT PROV ISIONS SECTION 43B HAS BROUGHT IN A CHANGE IN THE NORMAL R ULE OF DEDUCTION OF EXPENSE BASED ON THE ACCOUNTING METHOD FOLLOWED BY AN ASSESSEE. THE NORMAL PRINCIPLES AND PRACTICES ARE DONE AWAY. ACCORDINGLY, THERE IS NO FORCE IN TH E ARGUMENT OF THE REVENUE THAT THE DEDUCTION CAN BE GRANTED ON LY IF THE LIABILITY HAS INCURRED DURING THE PREVIOUS YEAR, EV EN WHEN THE PAYMENT WAS MADE BY THE ASSESSEE. THE POINT COMING OUT OF THE ABOVE DISCUSSION IS THAT THE RULE OF DEDUCTION UNDER SECTION 43B IS THE ACTUAL PAYMENT OF THE LIABILITY. THE NATURE OF THE ACCOUNT-CURRENT ALREADY EXAMINED BRINGS HOME THE POINT THAT THE ADVANCE PAYMENT OF EXCISE DUTIES ARE ACTUAL PAYMENTS OF DUTIES. THEREFORE, WHEN THE PAYMENTS AR E UNDERSTOOD AS ACTUAL PAYMENTS, THOSE PAYMENTS EVEN IF MENTIONED AS ADVANCE PAYMENTS NEED TO BE ALLOWED AS DEDUCTION UNDER SECTION 43B. THE ABOVE POSITION IS EMERGING OUT OF THE LANGUAGE OF THE STATUTE ITSELF. SECTION 43B PROVIDES FOR THE DEDUCT ION OF SUMS PAYABLE MENTIONED IN CLAUSES (A) TO (F), ONLY IF AC TUALLY PAID; 32 BUT SHALL BE ALLOWED IRRESPECTIVE OF THE PREVIOUS Y EAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE. THE INTENTION OF THE LEGISLATURE IS APPAR ENT IN THE ABOVE LANGUAGE USED IN SECTION 43B, THAT THE DEDUCT ION IN RESPECT OF TAX OR DUTY, WHICH WAS ACTUALLY PAID BY THE ASSESSEE HAS TO BE ALLOWED AS DEDUCTION WITHOUT LOO KING INTO THE YEAR OF INCURRING LIABILITY. FURTHER THE EXPRESSION IRRESPECTIVE OF THE PREVIOU S YEAR DISPENSES WITH THE CONCEPT OF PREVIOUS YEAR, IN THE MATTER OF THE SUMS COVERED BY SECTION 43B. THE EXPRESSION IRRESPECTIVE MEANS LACKING RELATION, REGARDLESS O F WHAT IS MENTIONED. HERE THE SUBJECT-MENTIONED IS PREVIOUS YEAR. IT MEANS THE DEDUCTION HAS TO BE ALLOWED REGARDLESS OF THE PREVIOUS YEAR. ANY REFERENCE TO THE TIME OF INCURRI NG OR ACCRUING OF THE LIABILITY IS DISPENSED WITH BY THE STATUTE WHILE CONCENTRATION IS MADE ON THE POINT OF ACTUAL PAYMEN T OF THE SUM TO THE TREASURY OF THE GOVERNMENT. THE SUPREME COURT HAD AN OCCASION TO CONSIDER THE VERY SAME ISSUE OF PAYMENT OF DUTY VIS-A-VIS DEDUCTION U NDER SECTION 43B IN BERGER PAINTS (INDIA) LTD. V CIT [20 04] 255 ITR 99/135 TAXMAN 586 (SC). IN FACT THE DECISION O F THE SUPREME COURT IN THE CASE OF BERGER PAINTS (INDIA) LTD. (SUPRA), SETTLES THE ISSUE RAISED BEFORE THE SPECIA L BENCH WHICH HAS UPHELD THE VIEW ADVANCED BY THE ASSESSEE THAT DEDUCTION ON PAYMENT BASIS SHOULD BE ALLOWED UNDER SECTION 43B IRRESPECTIVE OF THE PREVIOUS YEAR TO WHICH THE CORRESPONDING LIABILITY RELATED TO. THE SUPREME COU RT HAS APPROVED THE JUDGMENTS OF THE HIGH COURTS OF GUJARA T, MUMBAI AND MADRAS NOT ONLY ON THE RULE OF CONSISTEN CY BUT ALSO ON THE MERITS OF THE ISSUE. THE SUPREME COURT HAS HELD THAT THE ENTIRE AMOUNT OF EXCISE DUTY/CUSTOMS DUTY PAID BY THE ASSESSEE IN A PARTICULAR ACCOUNTING YEAR IS ALLOWAB LE UNDER SECTION 43B OF THE INCOME-TAX ACT, 1961, AS A DEDUC TION IN RESPECT OF THAT YEAR, IRRESPECTIVE OF THE AMOUNT OF EXCISE DUTY/CUSTOMS DUTY INCLUDED IN THE VALUATION OF THE ASSESSEES CLOSING STOCK AT THE END OF THE ACCOUNTING YEAR. 33 THE REVENUE HAD ALSO RELIED ON CIRCULAR NO. 550, D ATED 1-1- 1990 ISSUED BY CBDT IN THE CONTEXT OF EXPLANATION 2 TO SECTION 43B. THE FINANCE ACT, 1989 HAS BROUGHT IN T HE EXPLANATION 2 TO SECTION 43B, ACCORDING TO WHICH A NY SUM PAYABLE SHALL MEAN ANY SUM, LIABILITY FOR WHICH HA S BEEN INCURRED BY THE TAXPAYER DURING THE PREVIOUS YEAR IRRESPECTIVE OF THE DATE BY WHICH SUCH SUM IS STATU TORILY PAYABLE. IN FACT, THE CIRCULAR DEALS WITH THE SHORT QUESTION OF THE DISTINCTION BETWEEN LIABILITY INCURRED AND PAYM ENT DUE. IT CLARIFIES THAT EVEN IF THE SUM IS NOT DUE FOR PAYME NT DURING THE PREVIOUS YEAR DEDUCTION WOULD BE AVAILABLE. IT CREATED A DIFFICULT SITUATION FOR ASSESSEES; ESPECIALLY LIKE PAYMENTS OF SALES TAX ETC. IN ORDER TO REMOVE THE DIFFICULTIES, EXPLANATION 2 WAS BROUGHT IN, ALONG WITH PROVISO TO SECTION 43B . PROVISO HAS MADE THE EXPLANATION PRACTICABLE AND WORKABLE B Y STATING THAT THE PAYMENTS MADE EVEN AFTER THE CLOSE OF THE PREVIOUS YEAR BUT MADE BEFORE THE DUE DATE OF FILIN G OF THE RETURN, WILL BE DEDUCTIBLE. IT COULD BE SEEN THAT T HE CIRCULAR DEALS WITH THE EXTENDED PERIOD OF TIME BY WHICH CER TAIN BELATED PAYMENTS COULD BE CLAIMED BY THE ASSESSEE A S DEDUCTION. THE CIRCULAR NOWHERE DEALS WITH THE PATE NT QUESTION OF ADVANCE PAYMENT OF DUTIES AND TAXES AND DEDUCTION THEREOF. GENERALLY THE ADVANCE PAYMENTS OF EXCISE DUTY ARE N OT PROVISIONAL OR REFUNDABLE. THEY ARE ACTUALLY PAYMEN TS OF CENTRAL EXCISE DUTY. WE HAVE EXAMINED THE LEGISLATI VE INTENT AND PURPOSE OF SECTION 43B. THE ASSESSEES IN THE PA ST WERE NOT PAYING TAXES, DUTIES AND OTHER DUES TO THE GOVE RNMENT IN TIME. AT THE SAME TIME, THEY WERE BOOKING THOSE ITE MS AS EXPENSES IN THEIR ACCOUNTS ON ACCRUAL BASIS ON THE GROUND THAT THEY ARE FOLLOWING MERCANTILE SYSTEM OF ACCOUN TING. BY DOING SO, THEY WERE CLAIMING DEDUCTION AND REDUCING THE TAXABLE INCOME. CONCURRENTLY IN MANY CASES, THE ASS ESSEES WERE CHALLENGING THE VERY LIABILITY ITSELF BEFORE T HE COURTS AND TRIBUNALS, FINALLY RESULTING THE PAYMENTS BELAT ED, DEFERRED, AND SOMETIMES NEVER MADE. IN ORDER TO STO P SUCH EXPLOITATION PRACTISED BY THE ASSESSEES, SECTION 43 B HAS BEEN BROUGHT IN THE STATUTE DECLARING THAT WELL YOU CLA IM THE 34 DEDUCTION, BUT ONLY ON ACTUAL PAYMENT. THE LAW HAS MADE IT CLEAR THAT SUCH PAYMENTS ARE TO BE ALLOWED AS DEDUC TIONS IN THE YEAR OF PAYMENT. SECTION 43B DOES NOT LAY DOWN ANY SEQUENCE OR ORDER OF EVENTS IN WHICH THE LIABILITY HAS TO BE INCURRED AND THE PAYMENT HAS TO BE MADE BY THE ASSE SSEE. SECTION 43B DOES NOT LAID DOWN ANY RULE THAT THE LI ABILITY TO PAY THE DUTY MUST INCUR FIRST AND ONLY THEREAFTER T HE PAYMENT OF SUCH DUTY TO BE MADE SO AS TO CLAIM THE DEDUCTIO N UNDER SECTION 43B. BUT THE REVENUE TRIES TO MAKE OUT A CA SE THAT THE STATUTE HAS PRESCRIBED SUCH AN ORDER OF EVENTS. IN FACT THERE IS NO SUCH PRESCRIPTION IN THE STATUTE. WE HAVE SEE N THAT THE EXPRESSION OTHERWISE ALLOWABLE REFERS TO A DECLAR ATION OF PERMISSION IN LAW THAT WHICH ARE AVAILABLE AS DEDUC TIONS ON PAYMENT UNDER SECTION 43B, ARE THOSE EXPENSES WHICH ARE USUALLY ALLOWED BY THE INCOME-TAX ACT FOR THE PURPO SE OF COMPUTING INCOME. FURTHER THE EXPRESSION ANY SUM PAYABLE DOES NOT MEAN PAYMENT OUTSTANDING. THEREFORE,FOR THE PURPOSE OF SECTION 43B THE PROVIS O THERE- UNDER AND EXPLANATION 2 HAVE TO BE READ AN D CONSTR UED TOGETHER. THEREFORE, THE DEDUCTION FOR TAX, DUTY ETC. IS ALLO WABLE UNDER SECTION 43B OF THE INCOME-TAX ACT, 1961 ON PAYMENT BASIS BEFORE INCURRING THE LIABILITY TO PAY SUCH AMOUNTS. 32. IN VIEW OF THE DECISION OF THE ITAT, CHANDIGARH BENCH (SPECIAL BENCH) REFERRED TO ABOVE, WE SET ASIDE THE ORDER THE ORDER OF CIT(A) ON THIS ISSUE AND REMAND THE MATTER TO THE ASSESSING OFFICER WITH A D IRECTION TO DECIDE THE ISSUE AFRESH IN VIEW OF THE DECISION OF THE ITAT, CHANDI GARH BENCH (SPECIAL BENCH) PASSED IN ASSESSEES CASE RELATING TO ASSESSMENT Y EAR 2001-02, REFERRED TO ABOVE. THE ASSESSING OFFICER IS ALSO DIRECTED TO GI VE AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS GROUND OF APPEAL IS ALL OWED FOR STATISTICAL PURPOSES. 33. GROUND NO. 9 OF THE APPEAL, READS AS UNDER:- 35 9. ON THE FACTS AND IN LAW, THE LD. CIT(A) HAS ERRE D IN ALLOWING THE EXPENDITURE OF RS. 1,89,000/- ON ACCOU NT OF RENT PAID FOR GUEST HOUSE. 34. AT THE VERY OUTSET, SHRI ROHIT JAIN, LD. COUNSE L FOR THE ASSESSEE POINTED OUT THAT THE ISSUE IS COVERED ASGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BRITANNIA INDUSTRIES LTD. V CIT AND ANOTHER (2005) 278 ITR 546 (SC), WHEREIN THE HON'BLE SUPREM E COURT HAS HELD THAT THE INTENTION OF THE LEGISLATURE WAS TO EXCLUDE FROM D EDUCTION THE EXPENSES TOWARDS RENTS, REPAIRS AND ALSO MAINTENANCE OF PREM ISES/ACCOMMODATION USED FOR THE PURPOSE OF A GUEST HOUSE OF THE NATURE INDICATE D IN SUB-SECTION (4) OF SECTION 37. THE HON'BLE SUPREME COURT FURTHER HELD THAT IF THE LEGISLATURE HAD INTENDED THAT DEDUCTION WOULD BE ALLOWABLE IN RESPECT OF ALL TYPES OF BUILDINGS/ACCOMMODATION USED FOR THE PURPOSE OF THE BUSINESS OR PROFESSION, THEN THE LEGISLATURE WOULD NOT HAVE FELT THE NEED T O AMEND THE PROVISIONS OF SECTION 37 SO AS TO MAKE A DEFINITE DISTINCTION WIT H REGARD TO BUILDINGS USED AS GUEST HOUSES AS DEFINED IN SECTION 37(5) AND THE PR OVISIONS OF SECTIONS 31 AND 32 WOULD HAVE BEEN SUFFICIENT FOR THAT PURPOSE. IN VIEW OF THE JUDGEMENT OF THE HON'BLE SUPREME COURT, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. RESULTANTLY, THIS GROUND OF APPEAL IS ALLOWED. 35. GROUND NO. 10 OF THE APPEAL, READS AS UNDER:- 10. ON THE FACTS AND IN LAW, THE LD. CIT(A) HAS ERR ED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE INTER EST CHARGES U/S 234B OF THE ACT. 36. AT THE TIME OF HEARING OF THE APPEAL, SHRI ROHI T JAIN, LD. COUNSEL FOR THE ASSESSEE WAS FAIR ENOUGH TO CONCEDE THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF CIT V M/S 36 BHAGAT CONSTRUCTION IN CIVIL APPEAL NO. 1169 OF 20 06 DATED 6.8.2015 REPORTED IN 235 TAXMAN 135, WHEREIN THE HON'BLE SUPREME COUR T HAS OBSERVED AS UNDER:- WE ARE OF THE VIEW THAT THE FACTS OF THE PRESENT CASE ARE SQUARELY COVERED BY THE DECISION CONTAINED IN KALYA NKUMAR RAYS CASE IN AS MUCH AS IT IS UNDISPUTED THAT FORM I.T.N.S. 150 CONTAINED A CALCULATION OF INTEREST PAYABLE ON THE TAX ASSESSED. THIS BEING THE CASE, IT IS CLEAR THAT AS PER THE SAID JUDGMENT, THE FORM MUST BE TREATED AS PART OF THE A SSESSMENT ORDER IN THE WIDER SENSE IN WHICH THE EXPRESSION HA S TO BE UNDERSTOOD IN THE CONTEXT OF SECTION1 43, WHICH IS REFERRED T IN EXPLANATION1 TO SECTION 234B. THIS BEING THE CASE, WE SET ASIDE THE JUDGEMENT OF THE HIGH COURT AND ALLOW THE APPEAL OF THE REVENUE. 37. IN VIEW OF THE JUDGEMENT OF THE HON'BLE SUPREME COURT REFERRED TO ABOVE, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE. CONSEQUE NTLY, WE ALLOW THIS GROUND OF APPEAL OF THE REVENUE. 38. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED PARTLY AND PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 05.04.2016. SD/- SD/- (ANNAPURNA MEHROTRA) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 5 TH APRIL, 2016 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR