M/s. SUMMIT SECURITIES LIMITED FORMERLY KEC INTERNATIONAL LTD., MUMBAI V. ACIT Rg. - 8, MUMBAI

ITA 4845/MUM/2004

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79130 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 01-05-2014
• Assessment Year: 2000-2001
• Appeal Filed On: 11-06-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts
• Section: 80HHC; 37

Judgement Text

, VKBZ VKBZ VKBZ VKBZ , INCOME TAX APPELLATE TRIBUNAL MUMBAI - I BENCH MUMBAI , , / , BEFORE S/SH. VIJAY PAL RAO, JUDICIAL MEMB ER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.4845/MUM/2004, ! ! ! ! ' ' ' ' / ASSESSMENT YEAR-2000-01 M/S KEC INTERNATIONAL LTD., CEAT MAHAL, 1 ST FLOOR, 463, DR. ANNIE BESANT ROAD, WORLI, MUMBAI-400030 VS. ACIT RANGE-8, MUMBAI. PAN: AAACK4279J ( #$ / APPELLANT) ( %&#$ / RESPONDENT) #$ ' / APPELLANT BY : SHRI MANISH SHAH %&#$ ( ' / RESPONDENT BY : SHRI O.P. SINGH ! ! ! ! ( (( ( )* )* )* )* / DATE OF HEARING :01-05-2014 +,' ( )* / DATE OF PRONOUNCEMENT : 11 -06- 2014 ! ! ! ! , 1961 ( (( ( 254 )1( )-) )-) )-) )-) . . . . ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) ! ! ! ! PER RAJENDRA,A.M: CHALLENGING THE ORDER DT.29.03.04 OF THE CIT(A)-VII I,MUMBAI,ASSESSEE-COMPANY HAD RAISED FOLLOWING GROUNDS OF APPEAL: GROUND NO. I: DEPRECIATION ALLOWANCE ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VIII, MUMBAI, [CIT(A)] ERRED IN CONFIRMING THE ACTION OF ASSTT COMMISSIONER OF INCOME TAX-VITI, MUMBAI(AO) OF AL LOWING DEPRECIATION ON LOWER W.D.V AS A CONSEQUENCES OF FORCIBLY ALLOWING DEPREC IATION IN THE A.Y 1999-00 WITHOUT CONSIDERING THE FACT THAT THE CLAIM FOR DEPRECIATIO N ALLOWANCE WAS OPTIONAL FOR THAT YEAR IN VIEW OF SUPREME COURT RULING.AS A RESULT , THE DEPR ECIATION ALLOWANCE FOR THE CAPTIONED YEAR SHOULD BE RS 25,90,00,918 INSTEAD OF RS 21,80, 55,063 ALLOWED BY THE A.O. 2. THE APPELLANT PRAYS THAT THE DEPRECIATION ALLOWA NCE SHOULD BE MODIFIED ACCORDINGLY. GROUND NO. II: INTEREST ON BORROWINGS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF AO TO THE EXTENT OF DISALL OWING INTEREST ON BORROWINGS ON PRORATA BASIS EVEN THOUGH A)THE ACTIVITY OF INVESTMENT IS PART AND PARCEL OF ONE COMPOSITE AND INDIVISIBLE BUSINESS AND THERE IS COMPLETE UNITY OF CONTROL AMONGST DIFF ERENT BUSINESS ACTIVITIES. B)THERE IS NO NEXUS BETWEEN FUNDS BORROWED AND INVE STMENTS MADE IN SHARES OF OTHER COMPANIES. C)DIVIDEND ON SHARES IS NOT TAX-FREE IN VIEW OF SEC TION 115-0 AS HELD IN THE DECISION OF HONBLE MUMBAI TRIBUNAL IN CASE OF M/S MAFATLAL HOL DINGS LTD VS ADDL. CIT (ITA NO 2 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. 235/M/02). D)INVESTMENTS ARE SUBJECT TO CAPITAL GAIN TAX LIABI LITY ON THEIR SALES. E)THE APPELLANT HAS COMPLIED THE PROVISION OF SECTI ON 36(1)(III) OF THE ACT. 2.THE APPELLANT PRAYS THAT DISALLOWANCE OF INTEREST ON BORROWINGS MADE DURING THE YEAR BE DELETED. GROUND NO.III: PROVISION FOR BAD AND DOUBTFUL DEBTS OF RS. 1,41,63,253/- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF AO OF DISALLOWING AN AMOUN T OF RS. 1,41,63,253/-DEBITED TO PROFIT AND LOSS ACCOUNT BY INVOKING THE PROVISIONS OF EXPLANATION TO SECTION 36(L)(VII) OF THE ACT ON THE GROUND THAT IT IS A PROVISION AS U NDERSTOOD THERE UNDER. 2.THE APPELLANT PRAYS THAT AN AMOUNT OF RS. 1,41,63,253/- DEBITED TO PROFIT AND LOSS ACCOUNT BE ALLOWED. GROUND NO. IV: DISALLOWANCE OF LICENCE FEES 1.ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF AO OF DISALLOWING RS.7 CRO RES BEING THE LICENSE FEE PAID TO RPG ENTERPRISES LTD FOLLOWING ITS EARLIER YEARS ORDER. 2.THE APPELLANT PRAYS THAT THE DISALLOWANCE OF SAID LICENCE FEES BE DELETED. GROUND NO V: DISALLOWANCE OF LEGAL EXPENSES: 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF AC IN DISALLOWING LEGAL EXPENSES AMOU NTING OF RS 23.53,050 PAID TO THE SOLICITORS. MS KANGA & CO. FOR REPRESENTING, DEFEND ING AND ADVISING THE APPELLANT IN VARIOUS PROCEEDINGS BEFORE JUDICIAL AUTHORITIES 2.THE APPELLANT PRAYS THAT THE WHOLE OF THE LEGAL E XPENDITURE OF RS 23,53,050 BE ALLOWED WHILE COMPUTING BUSINESS EXPENDITURE U/S 37 OR IN T HE ALTERNATIVE, 1/5 TH OF THE EXPENDITURE BE HELD AS ALLOWABLE U/S 35DD OF THE ACT. 3.WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT PRA YS THAT DIRECTION BE GIVEN TO THE A.0 TO ALLOW THE EXPENSES / AMORTISATION IN/WITH EFFECT FR OM THE YEAR IN WHICH THE COURT APPROVAL FOR AMALGAMATION IS RECEIVED. GROUND VI - DEDUCTION U/S. 80HHC 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (A) ERRED IN CONFORMING THE ACTION OF THE AO BY DIRECTING HIM TO INCLUDE TH E SALE OF SCRAP AS PART OF TOTAL TURNOVER FOR THE WORKING OF DEDUCTION U/S 80HHC OF THE ACT. 2.HE FURTHER ERRED IN DIRECTING THE AO TO INCLUDE T HE SALARY OF ALL THE REMAINING DIRECTORS OF THE COMPANY ON A PRO RATA BASIS IN THE WORKING O F INDIRECT COST ATTRIBUTABLE TO THE TRADING EXPORT TO COMPUTE EXPORT TRADING PROFITS. 3.HE FURTHER ERRED IN DIRECTING THE AO IN ADDING TO THE DIRECT COST INTEREST ATTRIBUTABLE TO THE REALISED AMOUNT AS REDUCED BY ADVANCE IF ANY RE CEIVED IN THE WORKING OF EXPORT PROFITS. 4.HE FURTHER ERRED IN CONFORMING THE ACTION OF THE AO IN REDUCING 90% OF THE VARIOUS OTHER INCOME FROM PROFITS OF BUSINESS. 5. WITHOUT PREJUDICE TO (4), THE CIT(A) FURTHER ERRED IN NOT REDUCING THE EXPENDITURE INCURRED FOR EARNING THE INCOME WHICH IS COVERED UN DER CLAUSE (BAA) OF THE EXPLANATION TO SEC 80HHC: 6.THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO CO MPUTE DEDUCTION U/S 80HHC AFTER GRANTING THE ABOVE RELIEF. GROUND NO VII: DEDUCTION U/S 80HHB 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF AC BY DISALLOWING THE DEDU CTION U/S 8OHHB OF THE ACT. 2.THE CIT(A) FURTHER ERRED IN CONFORMING THE ACTION OF THE AC THAT PROFITS OF ALL PROJECTS ARE REQUIRED TO BE CONSOLIDATED FOR THE PURPOSE OF DEDUCTION U/S 8OHHB OF THE ACT. 3. THE APPELLANT PRAYS THAT DEDUCTION U/S 8OHHB OF THE ACT BE HELD AS ALLOWABLE. GROUND NO. VIII: COMPUTATION OF BOOK PROFIT U/S. 11 5JA 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN 3 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. CONFIRMING THE ACTION OF AC IN ADDING BACK THE PROV ISION OF BAD DEBTS AMOUNTING TO RS 1,41,63.253 WHILE COMPUTING BOOK PROFIT U S. 115JA OF THE ACT. 2.THE APPELLANT PRAYS THAT THE FOREGOING ADDITIONS BE DELETED WHILE COMPUTING BOOK PROFIT U/S.115JA OF THE ACT. GROUND NO. IX THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER AND / O R AMEND ALL OR ANY OF THE FOREGOING GROUND OF APPEAL. 2.IT IS A RECALLED MATTER AND GROUNDS OF APPEAL NO. 3 TO 8 ARE TO BE DECIDED,AS SAME REMAINED UNADJUDICATED IN THE ORIGINAL ORDER PASSED BY THE T RIBUNAL ON 13.02.2013.ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURE OF TRANSMISS ION TOWERS,FILED ITS RETURN OF INCOME ON 30.11. 2000 DECLARING NIL INCOME UNDER THE NORMAL PROVISIO NS OF ACT AND AT RS.1.36 CRORES U/S.115JA OF THE ACT.ASSESSING OFFICER (AO)FINALISED THE ASSE SSMENT U/S.143(3) OF THE ACT,ON 28.03 . 2003,DETERMINING THE TOTAL INCOME OF THE ASSESSEE A T RS.26,79,62,660/- UNDER THE NORMAL PROVISIONS OF THE ACT. 3. GROUND NO.3 IS ABOUT PROVISION FOR BAD AND DOUBTFUL DEBTS OF RS.1,41,63,253/-.DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESSEE H AD MADE A PROVISION OF RS.1.41 CRORES UNDER THE HEAD PROVISION FOR BAD AND DOUBTFUL DEBTS.INVOK ING THE PROVISIONS OF EXPLANATION TO SECTION 36(1) (VII)OF THE ACT,HE DISALLOWED THE CLAIM MADE BY THE ASSESSEE. 3.1. AN APPEAL WAS PREFERRED BEFORE THE FAA.AFTER CONSID ERING THE SUBMISSIONS OF THE ASSESSEE, HE HELD THAT DEDUCTION WAS CLAIMED ONLY IN RESPECT OF THE PROVISIONS OF BAD DEBT CREATED,NO ADJUSTMENTS WAS MADE IN THE DEBTORS ACCOUNTS,THAT T HE AMOUNTS CHARGED TO P&L ACCOUNT WERE COVERED IN TERMS OF EXPLANATION TO SECTION 36(1)(VI I) OF THE ACT. 3.2. BEFORE US,AUTHORISED REPRESENTATIVE(AR) STATED THAT AMOUNTS WERE ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNTS,THAT SAME WERE NOT PROVISIONS.HE RELIED UPON CASES OF TAINWALA CHEMICALS & PLASTICS INDIA LTD.(34TAXMANN.COM159),YOKOGAWA INDI A LTD.(204TAXMAN305),KIRLOSKAR SYSTE - MS LTD. (220 TAXMANN 1).HE ALSO REFERRED TO THE MAT TER OF TRF LTD.(323ITR397)DELIVERED BY THE HONBLE SUPREME COURT.HE FURTHER ARGUED THAT IN THE YEAR 1999-2000 SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE.DEPARTMENTAL REPRESENTATIVE STATED THAT THE ASSESSEE HAD MADE ONLY PROVISIONS AND HAD NOT ACTUALLY WRITTEN OFF THE DEB TS. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL.WE ARE OF THE OPINION THAT AFTER THE ABOVE REFERRED DECISION OF THE HONBLE APEX,REL IED UOON BY THE ASSESSEE,THERE IS NO AMBIGUITY ABOUT THE LAW GOVERNING THE PROVISIONS OF SECTION 3 6(1)(VII)OF THE ACT.BUT,IN THE CASE UNDER CONSIDERATION THERE APPEARS TO BE CONFLICT BETWEEN THE ASSESSEE AND THE FAA.IT HAS BEEN CLAIMED BEFORE US,THAT AMOUNT IN QUESTION HAD BEEN WRITTEN OFF,WHEREAS FAA HAS GIVEN A CATEGORICAL FINDING THAT IT WAS ONLY A PROVISION.IT APPEARS THA T THE ASSESSEE HAD NOT FILED ANY APPLICATION U/S.154 OF THE ACT BEFORE THE FAA AND STATED THAT I T HAD ACTUALLY WRITTEN OFF THE AMOUNT IN QUESTION IN THE BOOKS OF ACCOUNTS AND IT WAS NOT ME RELY A PROVISION,AS HELD BY HIM. THEREFORE,WE ARE OF THE OPINION,THAT IN THE INTEREST OF JUSTICE, MATTER SHOULD BE REMITTED BACK TO THE FILE OF THE AO FOR VERIFICATION PURPOSE.HE IS DIRECTED TO AFFOR D A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND ASCERTAIN AS TO WHETHER THE AMOUNT HAV E BEEN ACTUALLY WRITTEN OFF IN THE BOOKS OF THE ACCOUNTS OF THE ASSESSEE OR NOT.IF THE AMOUNT IS WR ITTEN OFF ,LAIM MADE BY THE ASSESSEE SHOULD BE ALLOWED. GROUND NO.3 IS ALLOWED IN FAVOUR OF THE ASSESSEE,IN PART. 4. GROUND NO.4 DEALS WITH DISALLOWANCE OF LICENCE FEES .DURING THE ASSESSMENT PROCEEDINGS,AO FOUND THAT THE ASSESSEE HAD PAID LICENCE FEE (LOGO EXPENSES) OF RS. 7 CRORES TO M/S.RPG ENTERP- RISES(RE).HE HELD THAT THE PAYMENT MADE BY THE ASSE SSEE TO RE WAS OF CAPITAL NATURE AND HENCE NOT ADMISSIBLE. 4.1. BEFORE THE FAA,THE ASSESSEE STATED THAT THE EXPENDI TURE INCURRED BY THE ASSESSEE WAS A CONTRIBUTION TO THE COMMON EXPENSES IN RELATION TO THE COMMON POOL RESOURCES MADE AVAILABLE BY 4 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. RE. FOLLOW -ING THE ORDER OF HIS PREDECESSOR FOR TH E ASSESSMENT YEAR 1999-2000,HE UPHELD THE ACTION OF THE AO. 4.2. BEFORE US,AR ARGUED THAT IN THE AY.S.1998-99 AND 19 99-2000 SIMILAR ISSUE HAD ARISEN BEFORE THE TRIBUNAL,THAT IN THE YEAR 1999-2000 ITAT,HAD RE MANDED THE MATTER TO THE AO,THAT FOR AY. 1998-99,THE AO,WHILE GIVING EFFECT TO THE ITATS OR DER HAD ALLOWED THE LICENSE FEES.HE REFERRED TO THE CASES OF PHILIPS CARBON BLACK LTD. (ITA NO. 1316 (KOL.)/ 2003- DATED 25.04.2005)RPG TRANSMISSIONS LTD.(ITA NOS. 1807-1809/MDS/2005 & IT A NOS. 751, 753 &753/MDS/2005-DATED 23.01.2006), EVERREADY INDUSTRIES LTD. (ITA NO. 959 /KOL/02)AND DUNCAN INDUSTRIES LTD.(ITA NO. 905/KOL./03).DR STATED THAT 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE PASSING ORDER U/S.143(3)R.W.S.254 OF THE ACT,IN PUR SUANCE OF THE ORDER OF THE TRIBUNAL FOR THE YEAR 1997-98,AO HAD ALLOWED THE LICENSE FEE CLAIMED BY T HE ASSESSEE FOR THAT YEAR.AS THE FACT AND CIRCUMSTANCES FOR THE YEAR UNDER APPEAL ARE IDENTIC AL TO THE FACTS OF EARLIER YEAR,SO,WE DECIDE THE GROUND NO.4 IN FAVOUR OF THE ASSESSEE. 5. NEXT GROUND PERTAINS TO DISALLOWANCE OF LEGAL EXPEN SES,AMOUNTING TO RS.23,53,050/-.DURING THE ASSESSMENT PROCEEDINGS,AO FOUND THAT THE ASSESSEE H AD INCURRED THE EXPENDITURE IN QUESTION IN RELATION TO THE PROCEEDINGS BEFORE THE HIGH COURT I N CONNECTION WITH THE PETITION FILED BY THE ASSESSEE-COMPANY AGAINST KAMANI EMPLOYEES UNION AND OTHERS WHO HAD OBJECTED TO THE AMALGAMATION OF THE ASSESSEE WITH ANOTHER COMPANY.T HEREFORE,HE TREATED THE EXPENDITURE AS AN AMALGAMATION EXPENSE AND HELD THAT THE EXPENDITURE HAD NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. 5.1. ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA AND ARG UED THAT THE EXPENDITURE WAS NOT INCURRED FOR THE PURPOSE OF AMALGAMATION BUT THE SAME WAS IN CURRED TO OVERCOME THE OBJECTION RAISED BY THE EMPLOYEESUNION TO THE SAID AMALGAMATION.ALTERN ATIVELY,IT WAS ARGUED THAT THE ASSESSEE WAS ENTITLED FOR DEDUCTION OF THE SUM IN TERMS OF THE P ROVISIONS OF SECTION 35DD OF THE ACT I.E.AT LEAST 1/5TH OF THE AMOUNT.AFTER CONSIDERING THE SUBMISSION,FAA HELD THAT THE OBJECT IONS WAS RAISED BY THE UNION WAS ON ACCOUNT OF THE PROPOSED AMALGAMATI ON OF THE ASSESSEE COMPANY WITH ANOTHER COMPANY OF THE GROUP,THAT SUCH AN AMALGAMATION WAS NOT A NORMAL INCIDENCE TO THE BUSINESS IN SO FAR AS THE ASSESSEE COMPANY IS CONCERNED MAKING IT ELIGIBLE FOR DEDUCTION IN FULL,THAT THE PROCESS OF AMALGAMATION HAD NOT COMPLETED,THAT THE AR OF TH E ASSESSEE HAD ADMITTED THE FACT IN THE COURSE OF THE APPEAL PROCEEDINGS,THAT TILL THAT TIME AMALG AMATION PROCESS WAS NOT COMPLETE,THAT TILL IT WAS NOT ESTABLISHED THAT THE AMALGAMATION WAS NECESSARY FOR THE EFFICIENT CONDUCT OF THE BUSINESS OF THE ASSESSEE COMPANY THE EXPENDITURE WAS NOT ALLOWA BLE U/S.35DD OF THE ACT. 5.2. BEFORE US,AR STATED THAT THE EXPENSE WAS NOT INCURR ED WHOLLY AND EXCLUSIVELY FOR AMALGAMA - TION BUT FOR BUSINESS PURPOSES AND HENCE SHOULD BE ALLOWABLE U/S.37(1) OF THE ACT.HE RELIED UPON THE MATTERS OF BOMBAY DYEING & MFG.CO.LTD.(219 ITR 521),PRIYA VILLAGE ROADSHOW LTD. (185TAXMAN44).ALTERNATIVELY,IT WAS ARGUED THAT 1/5 TH OF THE EXPENSE SHOULD BE ALLOWED U/S.35 DD OF THE ACT.DR SUPPORTED THE ORDER OF THE FAA. 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE HAVE HEARD THE RIVAL SUBMISSIONS.THERE IS NO DOUBT THAT EXPENDITUR E INCURRED BY THE ASSESSEE FOR AMALGAMATION OR DEMERGER OF COMPANY CAN BE ALLOWED AS AN ALLOWABLE EXPENDITURE U/S.35DD OF THE ACT,BUT FOR THAT FACTUM OF AMALGAMATION OR MERGER SHOULD BE EST ABLISHED.AS THE ASSESSEE HAD NOT PROVED THE FACT THAT EXPENDITURE WAS INCURRED FOR AMALGAMATION ,SO,FAA WAS JUSTIFIED IN REJECTING ITS CLAIM FOR THE YEAR UNDER CONSIDERATION.ASSESSEE IS FREE T O CLAIM THE EXPENDITURE RELATED TO AMALGAMA - TION IN THE YEAR AMALGAMATION TOOK PLACE.BUT,FOR IN THE YEAR UNDER APPEAL SAID EXPENDITURE CANNOT BE ALLOWED. GROUND NO.5 IS DECIDED AGAINST THE ASSESSEE. 6. GROUND NO.6 IS ABOUT DEDUCTION U/S. 80HHC.DURING TH E ASSESSMENT PROCEEDINGS,AO HELD THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION UNDER S ECTION 80HHC OF THE ACT AS AGAINST A SUM OF RS.7,75,45,066/ CLAIMED IN THE RETURN OF INCOME,THA T THE ASSESSEE HAD A LOSS IN TERMS OF SECTION 5 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. 80HHC(3)(C) OF THE ACT AFTER THE ADJUSTMENT OF THE EXPORT PROFITS FROM TRADING GOODS AGAINST THE MANUFACTURING LOSS INCURRED BY IT,THAT THE ASSESSEE WAS NOT CORRECT IN TAKING THE PROFIT ARISING FROM THE SALE OF DEPB LICENSE,THAT THE RECEIPT ARISING TO THE ASSESSEE BY WAY OF SALE OF SCRAP AND OTHERS, EXCISE DUTY AND SERVICE OF FOREIGN BRANCHES WERE REQUIRED TO BE TAKEN AS PART OF THE TOTAL TURNOVER,THAT 90% OF THE SALES AND SERVICE OF THE F OREIGN BRANCH WAS REQUIRED TO BE EXCLUDED FROM BUSINESS PROFITS BY THE APPLICATION OF CLAUSE(BAA) OF THE EXPLANATION, THAT 90% OF THE DIVIDE -ND INCOME EXEMPT FROM SECTION 10(33) OF THE ACT TOGETH ER WITH RENTAL INCOME WAS REQUIRED TO BE EXCLUDED FROM THE BUSINESS PROFITS BY THE APPLICATI ON OF THE SAID CLAUSE. 6.1. IN THE APPELLATE PROCEEDINGS FAA HELD THAT THE ASSE SSEE HAD,FOR THE RELEVANT ACCOUNTING YEAR,HAD TAKEN IN ITS COMPUTATION PROFIT FROM THE E XPORT OF TRADING GOODS AMOUNTING TO RS.36,37,07,425/- A LOSS FROM MANUFACTURING EXPORTS AMOUNTING TO RS.2,17,53,265/- AND A SUM OF RS.1,38,35,641/- IN TERMS OF THE PROVISO TO SECTION 80 HHC(3) OF THE ACT,THAT IGNORING THE MANUFACTURING LOSS COMPUTABLE IN TERMS OF SUBCLAUSE (I) OF CLAUSE (C) OF SECTION 80 HHC(3)THE ASSESSEE COMPANY HAD CLAIMED THE DEDUCTION ON THE B ASIS OF POSITIVE FIGURES ARRIVED AT IN TERMS OF SUB CLAUSE(II) OF CLAUSE (C) OF THE SECTION AND THE PROVISION TO SECTION 80HHC(3) OF THE ACT, THAT THE WORKING OF THE ASSESSEE COMPANY WAS INCORRECT,T HAT THE LAW DID NOT PROVIDE FOR EXCLUSION OF ANY LOSS ARISING ON ACCOUNT OF THE EXPORTS IN THE C OMPUTATION OF DEDUCTION UNDER THE SECTION. HE REFERRED TO THE DECISION OF THE APEX COURT IN THE C ASE OF IPCA LABORATORIES LIMITED.HE FURTHER HELD THAT THE ASSESSEE HAD INCLUDED THE TENDER DEPARTMEN T AND EXPORT DEPARTMENT EXPENSES IN WORKING OUT THE INDIRECT COST,THAT ONLY 10% OF THE SALARY O F ONE EXECUTIVE DIRECTOR HAD BEEN TAKEN FOR THAT PURPOSE,THAT THE SALARY OF OTHER DIRECTORS OF THE C OMPANY HAD BEEN TOTALLY EXCLUDED, THAT THE WORKING ADOPTED BY THE ASSESSEE BY EXCLUDING THE RE MUNERATION PAID TO DIRECTORS WAS NOT THE CORRECT METHOD OF WORKING ,THAT ALL THE DIRECTORS SALARY WAS REQUIRED TO BE ALLOCATED PRO RATA IN THE WORKING OF THE INDIRECT COST ATTRIBUTABLE TO TH E TRADING EXPORTS,THAT INTEREST ATTRIBUTABLE TO THE REALISED AMOUNT AS REDUCED BY ADVANCE IF ANY RECEIV ED WAS REQUIRED TO BE TAKEN AS PART OF THE DIRECT COST IN WORKING OUT THE AMOUNT UNDER SUB CL AUSE(II)OF SECTION 80HH(3) OF THE ACT.FAA HELD THAT SALE OF SCRAP WOULD NOT REDUCE THE COST O F MANUFACTURING,THAT ACCRUAL OF RECEIPT WOULD TAKE PLACE ONLY WHEN THE SCRAP WAS ACTUALLY SOLD OU T,THAT THERE WAS NO DOUBT THAT THE GENERATION OF THE SCRAP WAS PART OF THE MANUFACTURING PROCESS, THAT THE ACTUAL REALISATION OF SALE PROCEEDS OF SCRAP COULD NOT BE TAKEN ONLY AS INCIDENTAL TO THE SAID MANUFACTURING ACTIVITIES,THAT THE SALE OF SCRAP AMOUNT WAS REQUIRED TO BE TAKEN SEPARATELY AS PART OF THE TOTAL TURNOVER OF THE ASSESSEE.HE CONFIRMED THE ORDER OF THE AO IN THIS REGARD.IN SO FAR AS THE EXCLUSION OF CERTAIN RECEIPTS FROM THE BUSINESS PROFITS BY THE OPERATION OF CLAUSE (BAA) OF THE EXPLANATION IS CONCERNED,HE HELD THAT THE RECEIPTS THAT WERE ONLY INCIDENTAL TO THE MAIN BUSI NESS ACTIVITY OF THE ASSESSEE;THOUGH MIGHT BE ARISING OUT OF THE SAID ACTIVITY;WERE REQUIRED TO B E TAKEN AS PART OF THE BUSINESS PROFITS FOR THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT,THAT SAME WERE REQUIRED TO BE EXCLUDED BY THE OPERATION OF CLAUSE(BAA) OF THE EXPLANATION. FINALLY,HE HELD THAT TOTAL MISCELLANE -OUS INCOME OF RS.1185.32 LAKHS WERE OF SUCH NATURE THAT COULD ONLY BE HELD AS INCIDENTAL TO THE BUSINESS TO WHICH THE PROVISIONS OF CLAUSE (BAA)WER E APPLICABLE.HE PARTIALLY,UPHELD THE ORDER OF THE AO. 6.2. BEFORE US;WHILE DISCUSSING ABOUT SALE OF SCRAP TO B E CONSIDERED AS PART OF TOTAL TURNOVER;AR STATED THAT IN THE ORDER FOR AY.1998-99 ITAT HAD DE CIDED THE ISSUE IN FAVOUR OF THE ASSESSEE.HE ALSO RELIED UPON THE CASE OF ASHOK LEYLAND (297ITR1 07).ABOUT THE ISSUE OF ADDING TO DIRECT COST INTEREST ATTRIBUTABLE TO REALISED AMOUNT AS REDUCED BY ADVANCE IF ANY RECEIVED,AR STATED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL FOR THE YEAR 1998-99 (ITAT ORDER PARA-56).HE FURTHER STATED THAT IN THE YEAR AY.1998-99,ITAT VIDE ITS ORDER PARA 11 HAD REMANDED THE ISSUE OF REDUCING 90% OF OTHER INC OME FROM PROFITS OF BUSINESS TO THE FILES OF THE AO TO WORK OUT DEDUCTION IN LIGHT OF RATIO OF H ERO EXPORTS(295ITR454) DELIVERED BY THE HONBLE APEX COURT.IN SHORT,HE STATED THAT TRIBUNAL HAD GIVEN CERTAIN INSTRUCTIONS FOR CALCULATING THE ELIGIBLE PROFIT ON ACCOUNT OF SALE OF SCRAP, PA YMENT OF SALARY AND PAYMENT OF INTERESTS, THAT SIMILAR DIRECTIONS SHOULD BE GIVEN TO THE AO FOR TH E YEAR UNDER APPEAL. 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT WHILE 6 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. DECIDING THE APPEAL FOR THE YEAR 1998-99(ITA4862/MU M/2001,DTD.23.09.2011)FILED BY THE ASSESSEE,TRIBUNAL HAD DIRECTED THE AO TO WORK OUT T HE DEDUCTION U/S.80HHC IN LIGHT OF THE RATIO OF THE DECISION OF HERO HONDA(SUPRA).FOLLOWING THE SAME WE ALSO REMIT THE ISSUE OF ALLOCATION OF INDIRECT COST FOR REWORKING AFTER AFFORDING A REASO NABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ABOUT THE SALE OF SCRAP TRIBUNAL HAD,FOLLOWING THE DECISION OF ASHOK LEYLAND (SUPRA),DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE,WHILE PASSING ORDER FOR THE YEAR 1998-99. RESPECTFULLY, FOLLOWING THE SAID ORDER (SUPRA),THE ISSUE OF SALE OF SCRAP IS DECIDED IN FAVOUR OF THE ASSESSEE.WE ALSO FIND THAT IN THE APPEAL FILED BY T HE AO FOR THE AY.1998-99(ITA/5019/2001- DATED 23.09.2011)ISSUE OF TREATING PART OF PERSONAL EXPENSES AND OTHER EXPENSES AS PART OF THE INDIRECT COST,TRIBUNAL HAD HELD THAT THE AO WAS NOT JUSTIFIED IN TAKING THE AMOUNT IN QUESTION AS INDIRECT COST ATTRIBUTABLE TO EXPORT OF TRADING GOO DS.THEREFORE,ISSUE OF INDIRECT COST IS DECIDED IN FAVOUR OF THE ASSESSEE. GROUND NO.6 IS ALLOWED IN FAVOUR OF THE ASSESSEE-CO MPANY,IN PART. 7. NEXT GROUND DEALS WITH DEDUCTION U/S.80HHB.DURING THE ASSESSMENT PROCEEDINGS,AO MADE DISALLOWANCE OF THE CLAIM OF THE ASSESSEE ON THREE- FOLD REASONS VIZ.,I)THAT THE ASSESSEE HAD NOT MAINTAINED PROJECT-WISE ACCOUNT II)THAT IT HAD NOT CREATED THE RESERVE AS REQUIRED UNDER SECTION 80 HHB(3) OF THE ACT III) THAT THERE WAS AN OVERALL LO SS FROM THE EXECUTION OF ALL THE FOREIGN PROJECTS. 7.1. BEFORE THE FAA,IT WAS SUBMITTED THAT THE CLAIM FOR DEDUCTION WAS MADE IN RESPECT OF ONLY ONE PROJECT EXECUTED IN OMAN,THAT THE ASSESSEE HAD CREA TED RESERVE AS REQUIRED UNDER THE SECTION BY REOPENING THE ACCOUNT OF THE RELEVANT ACCOUNTING YE AR IN THE SUBSEQUENT FINANCIAL YEAR 2002-2003 AND TRANSFERRING THE SUM TO THE FOREIGN PROJECT RES ERVE ACCOUNT AS STIPULATED IN THE SECTION FROM THE PROFIT AND LOSS ACCOUNT,THAT SUCH A REOPENING OF AC COUNT OF THE EARLIER COMPLETED YEAR WAS PERMITTED. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,F AA HELD THAT CLAIM FOR DEDUCTION U/S.80HHB WAS MADE ONLY WITH REFERENCE TO THE PROFITS EARNED BY THE ASSESSEE FROM ONE PROJECT AT OMAN,THAT IN RESPECT OF ALL OTHER FOREIGN PROJECTS EXECUTED I T HAD INCURRED LOSS IN THE ACCOUNTING YEAR UNDER CONSIDERATION,THAT THE NET RESULT OF THE PROJECTS E XECUTED ABROAD WAS A LOSS.REFERRING TO THE DECISION OF THE HONBLE APEX COURT DELIVERED IN THE CASE OF IPCA LABORATORIES HE HELD THAT THE DEDUCTION ADMISSIBLE UNDER ANY SECTION FORMING PART OF C OF CHAPTER VIA WAS SUBJECTED TO PROVISIONS OF SECTION 80AB OF THE ACT,THAT FOR THE ALLOWANCE OF ANY DEDUCTION UNDER SECTION 80 HHB OF THE ACT THERE HAD TO BE A PROFIT FROM THE EX ECUTION OF FOREIGN PROJECT TO WHICH THE DEDUCTION WAS ADMISSIBLE,THAT IN THE CASE UNDER CON SIDERATION NO PROFIT WAS AVAILABLE,THAT THE ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION U/S.80HHB.H E DISMISSED THE APPEAL OF THE ASSESSEE. 7.2. BEFORE US,THEAR STATED THAT ASSESSEE HAD PROFIT AND RUNNING PROJECT WHEREAS HE WAS INCURRING LOSSES IN OTHER PROJECTS, THAT ASSESSEE HAD LOSS ON CUMULATIVE BASIS,THAT FOREIGN PROJECT RESERVE A/C.WAS CREATED BY REOPENING ACCOUNTS IN FINANCIAL YEAR 2002-03,THAT THE AMENDED ANNUAL ACCOUNTS WERE PLACED AT PAGE 154 OF THE PB,THAT SEC TION 80HHC WAS IDENTICAL TO SECTION 32(A) OF THE ACT,THAT SECTION 80HHB AND 80HHC DEALT WITH TOT ALLY DIFFERENT CONCEPTS,THAT SECTION 80HHB DEALT WITH PROJECTS.HE RELIED UPON THE CASES OF PRA TAP ROSIN & TURPENTINE FACTORY (179ITR414) AND ORIENT EXPRESS CO. P. LTD.(167 ITR 894).DR SUPP ORTED THE ORDER OF THE FAA. 7.3.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.IT IS A FACT THAT THE ASSESSEE HAD CREATED FOREIGN PROJECT RESERVE A/C.,T HAT IT HAD PROFIT FROM ONE PROJECT.IN OUR OPINION LOSS OF OTHER PROJECT CANNOT BE CONSIDERED FOR ALLOWING 80HHB DEDUCTION.IN THE MATTER OF BHARAT HEAVY ELECTRICALS LTD.(353ITR88)HONBLE DELH I HIGH COURT HAS HELD THAT THE OBJECT OF ENACTING SECTION 80HHB WAS TO EXTEND THE INCENTIVE TO EXPORT OF PROJECT BUSINESS, BY TREATING THE INCOME RECEIVED FROM IT, TO THE EXTENT PROVIDED, DE DUCTIBLE FROM GROSS TOTAL INCOME,THAT THE SECTION 80HHB(1) DEALS WITH THE DEDUCTIONS ALLOWABL E IN COMPUTING THE GROSS TOTAL INCOME OF AN ASSESSEE, IF IT INCLUDES PROFITS AND GAINS OF ANY B USINESS ON THE EXECUTION OF A FOREIGN PROJECT,THAT THE INSULARITY INHERENT IN THE EXECUTION OF A FOREI GN PROJECT IS APPARENT IF ONE CONTEMPLATES A SITUATION WHERE THE ASSESSEE IS ENGAGED IN THE EXEC UTION OR EXPORT OF FOREIGN PROJECTS AS ITS BUSINESS,THAT IF IT DOES SO, THERE IS NO REASON WHY IT CANNOT DERIVE THE VERTICAL BENEFIT OF INSULATIN G 7 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. ITS LOSSES AND CARRYING THEM FORWARD FOR THE NEXT Y EAR, FROM PROFITS DERIVED OUT OF SIMILAR ACTIVITIES, UNDERTAKEN IN OTHER PROJECTS, OR ELSEWH ERE. SUCH A CONSTRUCTION IS IN CONSONANCE WITH PARLIAMENTARY INTENT, PROVIDED THE CONDITIONS ENACT ED BY SECTION 80HHB(3) ARE FULFILLED,THAT THE LOSS OF ONE PROJECT ELIGIBLE FOR DEDUCTION UNDER SE CTION 80HHB COULD NOT BE SET OFF AGAINST THE PROFITS OF OTHER PROJECTS ELIGIBLE UNDER THE SAME P ROVISION. FOLLOWING THE SAME WE DECIDE GROUND NO.7 IN FAVOUR OF THE ASSESSEE. 8. LAST GROUND PERTAINS TO COMPUTATION OF BOOK PROFIT U/S. 115JA.DURING THE ASSESSMENT PROCEED -INGS,THE AO MADE CERTAIN ADJUSTMENT IN THE COMPUTA TION OF BOOK PROFIT AND CONSEQUENTIAL INCOME CHARGEABLE TO TAX UNDER SECTION 115JA OF THE ACT.AS SESSEE PREFERRED AN APPEAL BEFORE THE FAA.IN THE APPELLATE PROCEEDINGS,FAA ALLOWED THE CLAIM OF THE ASSESSEE WITH REGARD TO EXCLUDING DIVIDEND RECEIPT. ABOUT THE CLAIM OF THE ASSESSEE I N RESPECT OF PROVISION FOR DOUBTFUL DEBT THAT WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT; ON THE GROU ND THAT THIS AMOUNTS TO A PROVISION FOR THE DIMINUTION IN THE VALUE OF THE ASSETS (DEBTS);HE HE LD THAT THE CLAIM OF THE ASSESSEE WAS NOT ACCEPTABLE.HE REFERRED TO THE DECISION OF THE MADRA S HIGH COURT DELIVERED IN THE CASE OF BEARDSELL LIMITED(244ITR256). 8.1. BEFORE US,AR CONTENDED THAT THERE WAS AMENDMENT IN SECTION 115JA,THAT ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE.HE RELIED UPON THE CASES OF HCL COMNET SYSTEMS AND SERVICES LTD. (305ITR409),T V.YOKOGAWA INDIA LTD.(204 TAXMAN 305) KIRLOSKAR SYSTEMS LTD. (220 TAXMANN 1) VODAFONE ESSAR GUJARAT LTD. (ITA NO. 1999/AHD/20 08) TAINWALA CHEMICALS & PLASTICS INDIA LTD.(34 TAXMANN. COM 159).DR SUPPORTED THE ORDER OF THE FAA. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ISSUE HAD BEEN DECIDED BY THE HONBLE APEX COURT,IN THE C ASE OF HCL COMNET SYSTEMS AND SERVICES LTD.(SUPRA) AS UNDER: ITEM (C) OF THE EXPLANATION TO SECTION 115JA IS NO T ATTRACTED TO THE PROVISION FOR BAD AND DOUBTFUL DEBTS.THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS M ADE TO COVER UP PROBABLE DIMINUTION IN THE VALUE OF THE ASSETS, I.E., A DEBT WHICH IS AN AMOUN T RECEIVABLE BY THE ASSESSEE.SUCH A PROVISION CANNOT BE SAID TO BE A PROVISION FOR A LIABILITY, B ECAUSE EVEN IF THE DEBT IS NOT RECOVERABLE NO LIABILITY CAN BE FASTENED ON THE ASSESSEE.ANY PROVI SION MADE TOWARDS IRRECOVERABILITY OF A DEBT CANNOT BE SAID TO BE A PROVISION FOR LIABILITY. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HO NBLE COURT,WE DECIDED LAST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE,STAND PARTLY ALLOWED. /)0 !1) ( .)0 3 ( ) 45 . ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH JUNE,2014. . ( +,' 6 7! 11 TWU ,2014 , ( - 8 SD/- SD/- ( /VIJAY PAL RAO ) ( / RAJENDRA ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 7! /DATE: 11.06.2014 SK . . . . ( (( ( %) %) %) %) 9') 9') 9') 9') / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / #$ 2. RESPONDENT / %&#$ 3. THE CONCERNED CIT (A) / : ; , 4. THE CONCERNED CIT / : ; 5. DR I BENCH, ITAT, MUMBAI / <- %)! VKBZ VKBZ VKBZ VKBZ , . . . 8 ITA NO. 4845/MUM/2004 M/S KEC INTERNATIONAL LTD. 6. GUARD FILE/ - / &) &) &) &) %) %)%) %) //TRUE COPY// .! / BY ORDER, = / 4 DY./ASST. REGISTRAR , /ITAT, MUMBAI