The ACIT,Bharuch Circle, Bharuch V. Gujarat Insecticides Limited, Ankleshwar

ITA 498/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8807 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-02-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 11-02-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SR MALIK
• Assessee Lawyers: M G PATEL
• Keywords: Gift; Business income; Depreciation; Opportunity of being heard; Corroborative evidences; Notional interest; Revenue expenditure; Capital expenditure; TDS; Set aside
• Section: 80HHC; 80IB; 205; 195; 80IA; 37; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B, AHMEDABAD BEFORE SHRI BHAVNESH SAINI,JM & SHRI A.N. PAHUJA, A M ITA NO.459/AHD/2008 (ASSESSMENT YEAR 2000-01) GUJARAT INSECTICIDES LTD VS ACIT, BHARUCH CIRCLE PLOT NO.805/806 BHARUCH GIDC ESTATE, ANKLESHWAR [PAN : AAACG8436D] (APPELLANT) (RESPONDENT) ITA NO.498/AHD/2008 (ASSESSMENT YEAR 2000-01) DY.CIT, BHARUCH CIRCLE VS M/S GUJARAT INSECTICIDE S LTD BHARUCH ANKLESHWAR (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MG PATEL, AR REVENUE BY : SHRI SR MALIK, DR O R D E R A.N. PAHUJA : THESE CROSS APPEALS DIRECTED AGAINST AN ORDER DA TED 12-11-2007 OF THE LD. CIT(A)-VI, BARODA, RAISE THE FOLLOWING GROUNDS: ITA NO.459/AHD/2008[ASSESSEE] 1. THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS)-VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING DISALLOWANCE OF RS.19,35,500/- MADE BY THE ASSESSIN G OFFICER IN RESPECT OF COMMISSION. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING DISALLOWANCE OF RS.10,39,594/- MADE BY THE ASSESSIN G OFFICER U/S 40A(2)(B) IN RESPECT OF REIMBURSEMENT OF SALARY TO GHARDA CHEMICALS LTD. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING THE DISALLOWANCE OF RS.91,04,865/- MADE BY THE ASSESSIN G OFFICER IN RESPECT OF REIMBURSEMENT OF MARKETING EXPENSES TO G HARDA CHEMICALS LTD., AFTER INVOKING PROVISIONS OF SECTIO N 40A(2)(B) OF THE INCOME TAX ACT, 1961 AND HOLDING THAT THE EXPENDITU RE IN QUESTION IS UNREASONABLE AND EXCESSIVE. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 2 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING DISALLOWANCE OF RS.39,20,000/- MADE BY THE ASSESSIN G OFFICER AFTER HOLDING THAT EXPENDITURE ON ERP SOFTWARE IS O F CAPITAL NATURE. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ALSO ERRED IN CONFIRMING DISALLOWANCE OF RS.10, 80,000/- MADE BY THE ASSESSING OFFICER IN RESPECT OF TRAINING EXP ENSES FOR OPERATION OF ERP SYSTEM PAID TO THE HOLDING COMPANY . 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING ADDITION OF NOTIONAL INTEREST OF RS.38,81,250/- MADE BY THE ASS ESSING OFFICER IN RESPECT OF ICD PLACED WITH NIPUN INVESTMENTS PVT LT D. 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING DISALLOWANCE OF RS.27,56,291/- MADE BY THE ASSESSIN G OFFICER HOLDING THAT REPLACEMENT OF ITEMS TO THE PLANT AND MACHINERY IS IN NATURE OF CAPITAL. 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING DISALLOWANCE OF RS.6,67,492/- OUT OF TOTAL SALES PR OMOTIONAL EXPENDITURE OF RS.37,62,633/- MADE BY THE ASSESSING OFFICER AFTER HOLDING THAT THE ENTIRE STOCK OF SILVER COINS WAS N OT EXHAUSTED DURING THE YEAR. 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING THE FINDINGS OF THE ASSESSING OFFICER THAT INCOME FROM OTHER SOU RCES IS TO BE EXCLUDED FROM ELIGIBLE PROFIT ON WHICH DEDUCTION U/ S 80IA IS ALLOWABLE. 10. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-VI, BARODA HAS ERRED IN LAW AND ON FACTS OF THE CASE BY CONFIR MING THE FINDINGS OF THE ASSESSING OFFICER THAT 100% DEPRECIATION ON CIVIL STRUCTURES FOR WATER CONTROL EQUIPMENT IS NOT ELIGIBLE AND ACC ORDINGLY HAS ERRED IN ALLOWING DEPRECIATION AT THE RATE OF 25% T HEREON. 11. YOUR APPELLANT PRAYS FOR THE FOLLOWING : (I) TO ALLOW COMMISSION OF RS.19,35,500/-. (II) TO DELETE THE DISALLOWANCE MADE U/S 40A(2)(B) (A) OUT OF SALARY RS.10,39,594/- ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 3 (B) OUT OF MARKETING EXPENSES RS. 91,04,865/- (III) TO ALLOW ERP SOFTWARE EXPENSES RS.39,20,000/- (IV) TO ALLOW RS.10,80,000/- EXPENSES IN RESPECT OF TRAINING EXPENDITURE. (V) TO DELETE NOTIONAL INTEREST OF RS.38,81,250/-. (VI) TO ALLOW EXPENDITURE ON REPLACEMENT OF ITEMS O F PLANT AND MACHINERY OF RS.27,56,291/- (VII) TO DELETE THE DISALLOWANCE OF RS.6,67,492/- M ADE OUT OF SALES PROMOTION EXPENSES. (VIII) TO ALLOW DEDUCTION U/S 80IA ON OTHER INCOME. (IX) TO ALLOW DEPRECIATION ON CIVIL STRUCTURE WORK FOR WATER POLLUTION CONTROL EQUIPMENT AT 100%. 12. YOURE APPELLANT RESERVES THE RIGHT TO ADD, ALT ER, AMEND AND / OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL. ITA NO.498/AHD/2008[REVENUE] 1. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LA W IN DELETING THE DISALLOWANCE OF COMMISSION OF RS.37,44,780/- PA ID TO HOUSE HOLD REMEDIES PVT LTD AND RS.8,28,000/- PAID TO MERCURY ENTERPRISES. 2. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THE FACT THAT NO DETAILS WERE MAINTAIN ED BY THE ASSESSEE FOR COMMISSION PAYMENT AND THERE WAS NO AGREEMENT OR COPIES OF ACCOUNTS FOR SUCH PAYMENT W AS PRODUCED BEFORE THE AO. THE LD. CIT(A ALSO ERRED I N NOT APPRECIATING THE FACT THAT THE ASSESSEE HAD FAILED TO ESTABLISH THE BUSINESS EXPEDIENCY WITH JUSTIFICATIO N FOR PAYING SUCH COMMISSION. 3. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW , THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.34,88,000/- MADE BY THE AO ON ACCOUNT OF LOWER S ALE PRICE OF GILOQUIN. 4. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW , THE LD.CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT T HE ASSESSEE HAD DIRECTLY SOLD GILOQUIN AT PRICE LOWER THAN THE PRICE AT WHICH THE GILOQUIN WAS SOLD BY THE ASSESSE E THROUGH GHARDA CHEMICALS. THE DIRECT SALE WAS MADE AT RS.1 21.72 PER KG AS AGAINST THE SALE AT RS.157.84 THROUGH GHA RDA CHEMICALS. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 4 5. THE LEARNED CIT(A) HAS ERRED ON FACTS AND IN LAW IN DIRECTING RECOMPUTATION OF DEDUCTION U/S 80IA. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW,THE LEARNED CIT(A) ERRED IN NOT APPRECIATING TH E FACT THAT THE ASSESSEE WAS SYSTEMATICALLY MANIPULATING THE PR OFITS OF SEPARATE UNITS TO MAXIMIZE DEDUCTION U/S 80IA. THE LD.CIT(A) THEREFORE ALSO ERRED IN DIRECTING THE AO TO EXCLUDE THE PROFIT FROM THE TRADING ACTIVITY WHILE WORKING OUT THE ELIGIBLE PROFIT FOR DEDUCTION U/S 80IA . 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL OF THE ASSESSEE AND GROUND NOS. 1 & 2 IN THE APPEAL OF THE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.19,75,260/- UND ER THE NORMAL PROVISIONS AND BOOK PROFITS OF RS.44,26,487/-IN TERMS OF PROVISION S OF SEC. U/S 115JA OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E ACT ) FILED ON 30-11-2000 BY THE ASSESSEE, ENGAGED IN THE BUSINESS OF MANUFACTUR ING AND SELLING INSECTICIDES, AFTER BEING PROCESSED ON 26-03-2001 U /S 143(1)(A) OF THE ACT, WAS TAKEN UP FOR SCRUTINY WITH THE ISSUE OF A NOTICE U /S 143(2) OF THE ACT ON 29-11- 2001. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE DEBITED A SUM OF R S.89,60,266/- ON ACCOUNT OF COMMISSION PAID TO DIFFERENT PARTIES ON THE SALES E FFECTED BY THEM. THE SAID AMOUNT COMPRISED LOCAL SALES COMMISSION - RS.65,38, 280/- AND EXPORT SALES COMMISSION- RS.24,21,986/-.THE DETAILS OF LOCAL SA LES COMMISSION EXTRACTED IN THE ASSESSMENT ORDER ARE AS UNDER: (IN RS.) I) M/S HOUSEHOLD REMEDIES PVT LTD 37,44,7 80/- II) M/S NIPUN FINVEST PVT LTD 15,13,500/ - 2,50,000/- III)M/S MERCURY ENTERPRISES 10,00,000/- TO A QUERY BY THE AO, SEEKING COPIES OF AGREEMENT W ITH THE AFORESAID PARTIES AND DETAILS OF SALES EFFECTED THROUGH THE SAID COMM ISSION AGENTS AS ALSO DETAILS OF RECOVERY OF SALES CONSIDERATION FROM THEM ALONG WITH COPY OF ACCOUNTS, THE ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 5 ASSESSEE MERELY FURNISHED DETAILS OF COMMISSION PAI D AND COPIES OF CREDIT NOTES ISSUED BY THE ASSESSEE IN FAVOUR OF THE AFORESAID C OMMISSION AGENTS. ON PERUSAL OF CREDIT NOTE RAISED ON 5.3.2000 ON ACCOUNT COMMIS SION PAID TO M/S HOUSEHOLD REMEDIES PVT. LTD., THE AO NOTICED THAT THE ASSESS EE CREDITED THE ACCOUNT OF HOUSEHOLD REMEDIES PVT LTD. TOWARD COMMISSION @7% O N TOTAL SALES OF CARBENDAZIM WORTH RS.5,34,96,850/-. SINCE THE ASSES SEE DID NOT MAINTAIN ANY ACCOUNT OF THE AFORESAID COMMISSION AGENT AND SIMPL Y CREDITED THE COMMISSION AT THE END OF THE YEAR WHILE THE ASSESSEE ADOPTED R ATE OF R. 165 PER KG./LITRE AS AGAINST ACTUAL AVERAGE SALE RATE OF RS.259.75 AS PE R PRODUCT WISE DETAILS SUBMITTED BY THE ASSESSEE AND IF 7% COMMISSION PAY ABLE IS DEDUCTED FROM THE AVERAGE RATE, NET AVERAGE SALES CONSIDERATION PER K G / LTR RECEIVED BY THE ASSESSEE WORKED OU TO RS.153.45, THE AO DOUBTED THE GENUINENESS OF THE CLAIM AND ACCORDINGLY, DISALLOWED. 2.1. AS REGARDS COMMISSION OF RS.15,13,500/- TO NIPUN FINVEST PVT. LTD.,ON VERIFICATION OF CREDIT NOTE NO.GIL/203/2000 DATED 3 1.03.2000, THE AO NOTICED THAT IN THE PARTICULARS COLUMN OF CREDIT NOTE ISSUE D IN FAVOUR OF M/S NIPUN FINVEST PVT LTD, IT WAS MENTIONED AS UNDER: BEING AMOUNT OF COMMISSION PAYABLE TO YOU FOR THE FOLLOWING BUSINESS SECURED DURING THE YEAR IN TERMS OF LETTER NO.GIL/101/99 DATED 19 TH MAY 1999. IN THE DEBIT NOTE DATED 31.03.2000 THE DETAILS OF PAYMENTS REVEALED AS UNDER: CHQ. 615706 - 20.4.99 5,00,000 CR.NO. 615715 - 4.6.99 5,00,000 203/2000 - 15, 13,500 615727 - 19.8.99 7,50,000 218/2000 - 2,50,000 615856 - 12.5.2000 13,500 ------------ 17,63,500 2.11 ON PERUSAL OF THE AFORESAID DETAILS, THE A O OBSERVED THAT THOUGH THE TERMS FOR PAYMENT OF COMMISSION WERE FIXED VIDE LET TER DATED 19 TH MAY 1999, THE DETAILS OF PAYMENT GIVEN IN THE DEBIT NOTE SHOWED T HAT PAYMENT OF RS.5 LAC ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 6 TOWARDS COMMISSION WASE MADE ON 20.4.99 I.E. BEFORE FINALISATION OF TERMS & CONDITIONS VIDE LETTER DATED 19.5.1999. IT WAS FUR THER NOTED THAT THE ASSESSEE HAD GIVEN LOAN OF RS.4,50,00,000/- TO NIPUN INVESTM ENT PVT. LTD, AN ASSOCIATE CO. OF NIPUN FINVEST PVT LTD. HAVING THEIR OFFICES IN T HE SAME COMMERCIAL COMPLEX AT MUMBAI AND THE ASSESSEE CLAIMED THAT IT WAS NOT IN A POSITION TO RECOVER LOAN AMOUNT ALONG WITH INTEREST FROM NIPUN INVESTMENT PV T. LTD.. IN THESE CIRCUMSTANCES, HOW THE ASSESSEE EFFECTED SALE THRO UGH NIPUN FINVEST PVT LTD. AND ALSO RELIED UPON SUCH CO. FOR REALIZATION OF SA LE CONSIDERATION, WAS NOT EXPLAINED. FURTHER COMMON DEFECTS WERE NOTICED, AS NOTICED IN THE CASE OF HOUSE HOLD REMEDIES PVT LTD. MOREOVER, IN THE CREDI T NOTE NO.218 DATED 31.3.2000, THE ASSESSEE CREDITED LUMP SUM COMMISSIO N OF RS.2,50,000/-, BEING THE AMOUNT FOR BUSINESS WITH GUJARAT GOVT. DURING APRIL 1999 TO MARCH 2000. HOWEVER, SINCE THE ASSESSEE DID NOT FURNISH ANY SUP PORTING EVIDENCE AND JUSTIFICATION NOR EVEN THE NAMES OF THE PARTIES TO WHOM SALES WERE EFFECTED , THE AO DISALLOWED THE ENTIRE CLAIM. 2.2 AS REGARDS COMMISSION TO M/S MERCURY ENTER PRISES OF 10,00,000/-, THE AO FOUND ON VERIFICATION OF CREDIT NOTE RAISED BY THE ASSESSEE COMPANY BEARING NO.219 DATED 31.3.2000 FOUND THAT THE AMOUNT OF COM MISSION MENTIONED WAS RS.10,35,000/- AND THE RATE OF COMMISSION WAS RS.12 PER KG FOR THE QUANTITY OF 49000 KG./LTR OF CARBENDAZIM TECH AND 20000 KGS OF CARBENAZIM 50%. CONSIDERING THIS RATE, THE TOTAL COMMISSION PAYAB LE TO MERCURY ENTERPRISES WORKED OUT TO RS.8,28,000/- FOR WHICH THE ASSESSEE DID NOT FILE ANY JUSTIFICATION OR EXPLANATION . HOWEVER, THE AO DISALLOWED THE ENT IRE AMOUNT IN THE ABSENCE OF ANY EVIDENCE OF SERVICES RENDERED AND GENUINENESS O F THE CLAIM. 2.3. IN VIEW OF VARIOUS DISCREPANCIES IN PAYMENT C OMMISSION AS DISCUSSED ABOVE, THE AO DISALLOWED THE CLAIM FOR THE AFORESA ID COMMISSION OF RS.65,08,260/-, INTER ALIA, RELYING UPON THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO LTD 154 ITR 148 . ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 7 3. ON APPEAL, THE ASSESSEE SUBMITTED THAT THEY HAD PAID COMMISSION @7% ON BASE PRICE TO HOUSEHOLD REMEDIES PVT. LTD WHEREA S THE TOTAL INVOICE VALUE WAS INCLUSIVE OF SALES TAX AND EXCISE DUTY AND OTHE R INCIDENTAL EXPENSES, ON WHICH NO COMMISSION IS PAYABLE. MERELY BECAUSE THE COMMISSION WAS ACCOUNTED FOR BY THE YEAR END BY RAISING CREDIT NOT E, COULD NOT BE A GROUND FOR DISALLOWANCE OF THE COMMISSION AMOUNT, THE ASSESSEE PLEADED. IN RESPECT OF COMMISSION OF RS.15,13,500 TO NIPUN FINVEST PVT LTD ., IT WAS STATED THAT NIPUN FINVEST WAS A REGULAR AGENT OF APPELLANT COMPANY AN D MERELY BECAUSE THE PAYMENT WAS MADE EARLIER THAN FIXING OF THE TERM NO DISALLOWANCE CAN BE MADE. AS REGARDS PAYMENT OF RS.2,50,000 IN MARCH, 2000 I T WAS STATED THAT THE SALE WERE TO GOVERNMENT OF GUJARAT AND THEREFORE, THEREF ORE NO FURTHER DETAILS WERE REQUIRED TO BE FURNISHED. REGARDING COMMISSION TO MERCURY ENTERPRISES IT WAS STATED THAT THERE WAS AN ERROR IN THE CREDIT NOTE A ND THAT THE ACTUAL COMMISSION AMOUNT WAS RS.10,00,000/- AS AGAINST RS.8,28,000 ST ATED BY THE AO. IN THE LIGHT OF THESE SUBMISSIONS, THE LD.CIT(A) WHILE ALLOWING THE COMMISSION OF RS.37,44,780 PAID TO M/S HOUSEHOLD REMEDIES PVT LTD AND RS. 8,28,000/- IN RESPECT OF MERCURY ENTERPRISES, UPHELD THE DISALLOW ANCE OF COMMISSION TO M/S NIPUN FINVEST PVT LTD IN THE FOLLOWING TERMS: 4.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE ASSESSMENT ORDER.AS REGARDS THE COMMISSION TO HOUSEHOLD REMEDY PVT LTD. THE CONTENTION OF THE APP ELLANT IS THAT THE COMMISSION IS PAID ON BASE PRICE AND ACCORDINGL Y THE COMMISSION ON THE SALES EFFECTED WERE MADE WAS FOUN D TO BE CORRECT. MERELY BECAUSE THE COMMISSION ENTRY IS PAS SED AT THE YEAR END WILL NOT RENDER THE TRANSACTION NON GENUINE. TH E ASSESSING OFFICER HAS NOT BROUGHT OUT ANY INSTANCE TO JUSTIFY THAT THE COMMISSION PAYMENTS WERE BOGUS. ACCORDINGLY THE COM MISSION PAYMENT OF RS.37,44,780/- TO M/S HOUSEHOLD REMEDIES IS DIRECTED TO BE DELETED. HOWEVER IN RESPECT OF COMMISSION PA YMENT TO M/S MERCURY ENTERPRISE ON THE BASIS OF DETAILS FILED, O NLY THE COMMISSION OF RS.8,28,000 IS JUSTIFIED AS PER THE T ERMS OF THE AGREEMENT. THE APPELLANT HAS NOT BEEN ABLE TO POIN T OUT ANY ERROR IN THE CREDIT NOTE AS INDICATED. THUS, THE DISALLO WANCE OF BALANCE COMMISSION OF RS.1,72,000 IS SUSTAINED. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 8 4.3.1 IN REGARD TO COMMISSION PAYMENT OF RS.17,63, 500 IT IS NOTICED THAT THE DETAILS OF PAYMENT OF NIPUN FINVES T PVT LTD IS AS UNDER: CHQ. 615706 - 20.4.99 5,00,000 CR.NO. 615715 - 4.6.99 5,00,000 203/2000 - 15, 13,500 615727 - 19.8.99 7,50,000 218/2000 - 2,50,000 615856 - 12.5.2000 13,500 ------------ 17,63,500 ======= 4.3.2 HOWEVER, IN APPEAL NO DETAILS WERE SUBMITTED TO JUSTIFY THE COMMISSION. IT IS ALSO SEEN THAT THE APPELLANT HAD GIVEN LOAN OF RS.4.5 CRORES TO NIPUN INVESTMENT AN ASSOCIATE COMP ANY OF NIPUN FINVEST PVT LTD. AND THE APPELLANT HAD CLAIMED ITS INABILITY TO RECOVER LOAN ALONGWITH INTEREST FROM NIPUN INVESTME NT PVT LTD. THUS UNDER THE FACTS AND CIRCUMSTANCES IT APPEARS D OUBTFUL THAT THE COMMISSION PAYMENT TO NIPUN FINVEEST PVT LTD. ARE N OT GENUINE. I AM ALSO IN AGREEMENT WITH ASSESSING OFFICER THAT WH ILE TERMS AND CONDITIONS OF COMMISSION PAYMENT WAS FIXED BY LETTE R DATED 19.05.1999, RS.5,00,000 WAS PAID TO NIPUN FINVEST V IDE LETTER DATED 20.4.1999. FURTHER ALL THE COMMISSION PAYMEN TS WERE IN ROUND FIGURES SUCH AS RS.5 LACS, RS.7 LACS , ETC. WHEREAS IF IT IS WORKED OUT AT PERCENTAGE OF SALES IT IS NOT LIKELY TO BE IN ROUND FIGURES.ACCORDINGLY, THE DISALLOWANCE OF COMMISSION OF RS.17,63,500 IS CONFIRMED. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE PORTION OF AMOUNT CONFIRMED BY THE LD. CIT(A) WHILE THE REVENUE IS IN APPEAL AGAINST THE AMOUNT DELETED BY HIM. THE LD. AR ON BEHALF OF THE ASSESSE E WHILE REITERATING THEIR CONTENTIONS IN THEIR APPEAL FOR THE AY 1999-2000 IN VITED OUR ATTENTION TO PAGE NO.11 OF THE PAPER BOOK WHEREIN DETAILS OF SELLING COMMISSION AMOUNTING TO RS.89,60,266/- ARE PLACED AS ALSO TO PAGE 50 OF THE PAPERBOOK, WHEREIN A COPY OF CREDIT NOTE DATED 31.3.2000 IS PLACED. IN THE L IGHT OF THESE DOCUMENTS, THE LD. AR PLEADED THAT THE LD. CIT(A) WAS NOT JUSTIFIED I N UPHOLDING THE DISALLOWANCE OF COMMISSION. ON THE OTHER HAND, THE LD. DR WHILE PLE ADING THAT THE SAID CREDIT NOTE NO.219 PLACED AT PAGE 50 OF THE PAPER BOOK WAS NEVER PLACED BEFORE THE AO OR THE LD. CIT(A) NOR HAVE THEY REFERRED TO THE SAID DOCUMENT IN THEIR IMPUGNED ORDER. WHILE SUPPORTING THE FINDINGS OF TH E AO, THE LD. DR ARGUED THAT ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 9 THE ASSESSEE DID NOT ADDUCE ANY EVIDENCE IN SUPPORT OF SERVICES RENDERED BY THE AFORESAID PARTIES FOR WHICH COMMISSION HAD BEEN PAI D TO THEM. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. WE FIND THAT IN THE PRECEDING YEAR ALSO DISALLOWANC E OF RS.5 LAKHS ON SALES COMMISSION TO NIPUN FINVEST PVT. LTD. WAS MADE AND ON APPEAL , THE LD. CIT(A) DISMISSED THE APPEAL OF THE ASSESSEE. IN THE YEAR UNDER CONSIDERATION, AS POINTED OUT BY THE AO, THOUGH TERMS AND CONDITIONS OF COMMISSION PAYMENT WERE FIXED VIDE LETTER DATED 19. 05.1999, RS.5,00,000 WAS PAID TO M/S NIPUN FINVEST P LTD. ON 20.4.1999. FUR THER ALL THE COMMISSION PAYMENTS WERE IN ROUND FIGURES SUCH AS RS.5 LACS, R S.7 LACS, ETC. WHEREAS IF IT WAS WORKED OUT AT PERCENTAGE OF SALES IT WAS NOT L IKELY TO BE IN ROUND FIGURES. THE ONUS IS ON THE ASSESSEE CLAIMING DEDUCTION FOR PAYMENT OF COMMISSION TO ESTABLISH THAT PAYMENTS HAD BEEN MADE FOR SERVICES RENDERED. THERE IS NOTHING TO SUGGEST IN THE IMPUGNED ORDERS THAT THE AFORESA ID PARTY HAD RENDERED ANY SERVICES TO THE ASSESSEE NOR THE LD. AR APPEARING O N BEHALF OF THE ASSESSEE REFERRED US TO ANY SUCH EVIDENCE. MERE EXISTENCE OF AN AGREEMENT, WITHOUT ANYTHING MORE, IS NOT ENOUGH FOR ALLOWANCE OF DEDUC TION[ LACHMINARAYAN MADAN LAL VS. CIT,86 ITR 439(SC),PRECISION INSTRUMENT MFG . CO. VS. CIT,137 ITR 5(DEL.). THE BURDEN OF PROVING THAT THE AMOUNT OF COMMISSION WAS ACTUALLY EXPENDED AS COMMISSION FOR THE PURPOSE OF BUSINESS LIES ON THE ASSESSEE AS HELD IN GOODLAS NEROLAC PAINTS LTD. VS. CIT,137 ITR 58(BOM.). SINCE IN THE INSTANT CASE NOT EVEN AN IOTA OF EVIDENCE HAS BEEN BROUGHT TO OUR NOTICE THAT THE AFORESAID PARTY HAD INDEED RENDERED SERVICES TO THE ASSESSEE NOR GENUINENESS OF PAYMENT OF COMMISSION HAS BEEN ESTABLISHED, WE A RE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). ACCORDINGLY, THE DISALLOWANCE OF COMMISSION OF RS.17,63,500 IS CONFIRMED. 5.1 AS REGARDS PAYMENT OF COMMISSION OF RS.37,44, 780/- TO M/S HOUSEHOLD REMEDIES , SAME PARTY HAD BEENPAID COMMISSION IN THE PRECED ING YEAR ALSO. WHILE DECIDING THE APPEAL FOR THE PRECEDING ASSESSM ENT YEAR, WE HAVE THROUGH ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 10 OUR ORDER DATED 12.3.2010 IN ITA NO. 1438/AHD./200 7 DISMISSED THE APPEAL OF THE REVENUE IN RESPECT OF PAYMENT OF COMMISSION T O THE SAID PARTY. UNDISPUTEDLY, THE FACTS AND CIRCUMSTANCES OF THE CA SE IN THE YEAR UNDER CONSIDERATION ARE SIMILAR TO THE FACTS IN THE PRECE DING YEAR. THEREFORE, FOLLOWING THE REASONING GIVEN IN THE PRECEDING ASSESSMENT YEA R, ESPECIALLY WHEN NO MATERIAL HAS BEEN PLACED BEFORE US BY THE REVENUE I N ORDER TO CONTROVERT THE FINDINGS OF THE LD. CIT(A), THE APPEAL OF THE REVEN UE ON THE ISSUE OF PAYMENT OF COMMISSION TO THE AFORESAID PARTY IS DISMISSED. 5.2 IN RESPECT OF COMMISSION OF 10,00,000/- PAID TO M/S MERCURY ENTERPRISES , WE FIND THAT THE SAME PARTY HAD BEEN PAID COMMISSION IN THE PRECEDING YEAR ALSO. WHILE DECIDING THE APPEAL FOR THE PRECEDING ASSESSMENT YEAR, WE HAVE THROUGH OUR ORDER DATED 12.3.2010 I N ITA NO. 1438/AHD./2007 DISMISSED THE APPEAL OF THE REVENUE. UNDISPUTEDLY, THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE YEAR UNDER CONSIDE RATION ARE SIMILAR TO THE FACTS IN THE PRECEDING YEAR. THEREFORE, FOLLOWING THE REA SONING GIVEN IN THE PRECEDING ASSESSMENT YEAR, ESPECIALLY WHEN NO MATERIAL HAS BE EN PLACED BEFORE US BY THE REVENUE IN ORDER TO CONTROVERT THE FINDINGS OF THE LD. CIT(A), THE APPEAL OF THE REVENUE ON THE ISSUE OF PAYMENT OF COMMISSION TO TH E AFORESAID PARTY IS DISMISSED. HOWEVER, IN THE APPEAL OF THE ASSESSEE , CLAIM FOR FURTHER DEDUCTION OF RS.1,72,000 HAS BEEN RAISED. WE FIND THAT THE LD. CIT(A) RESTRICTED THE DISALLOWANCE TO RS. 1,72,000/- ON THE BASIS OF CR EDIT NOTE NO.219 DATED 31.3.2000, WHEREIN RATE MENTIONED WAS RS.12 PER KG HOWEVER, THE LD. AR ON BEHALF OF THE ASSESSEE INVITED OUR ATTENTION TO ANO THER CREDIT NOTE BEARING SM NO. 219 PLACED AT PAGE 50 OF THE PAPERBOOK ,WHEREIN RAT E MENTIONED IS RS. 15 PER KG. THOUGH THE LD. AR CLAIMED THAT THE SAID CREDIT NOTE WAS SUBMITTED BEFORE THE AO AND THE LD. CIT(A), THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT THE AO AND THE LD. CIT(A) CONSIDERED THE SAID CREDIT NOTE NOR THERE ARE ANY FINDINGS ON THE SAID CREDIT NOTE IN THE IMPUGNED ORDERS.IN THES E CIRCUMSTANCES, WE CONSIDER IT FAIR AND APPROPRIATE TO RESTORE THE MATTER TO TH E FILE OF THE LD. CIT(A) WITH THE DIRECTIONS TO EXAMINE AS TO WHETHER OR NOT THE SAID CREDIT NOTE WAS FURNISHED ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 11 BEFORE HIM AND THEREAFTER, READJUDICATE THE ISSUE I N ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIE S. 5.3 IN VIEW OF THE FOREGOING, GROUND NO.1 IN THE APPEAL OF THE ASSESSEE AND GROUND NOS. 1 & 2 IN THE APPEAL OF THE REVENUE ARE DISPOSED OF. 6. GROUND NO.2 IN THE APPEAL OF THE ASSESSEE RELATE S TO DISALLOWANCE U/S 40A(2)(A) OF THE ACT IN RESPECT OF REIMBURSEMENT O F SALARY OF RS.10,39,594/- TO M/S GHARDA CHEMICALS LTD. THE AO NOTICED FROM THE A UDIT REPORT (PAGE 93) THAT THE ASSESSEE HAD MADE FOLLOWING PAYMENTS TO ITS HOL DING COMPANY, M/S GHARDA CHEMICALS LTD.[GCL]: DESCRIPTION A.Y. 1999-2000 AY 2000-2001 SALARY 22,74,745 10,39,594 RENT 90,000 1,20,000 MARKETING EXPENSES 72,76,000 91,04,865 TRAVELLING EXPENSES 760 0 STORES & PACKING MATERIAL 22,10,471 1,88,000 / 2, 59,964 IMPORT LICENCE FEES 0 15,02,074 ERP SOFTWARE 0 50,00,000 THE SALARY PAYMENTS WERE STATED TO HAVE BEEN MADE TO DR. BOMI P PATEL & MR. U.A.MAROO AND WERE 45% OF THE SIMILAR SALARY PAYMEN TS TO THESE PERSONS IN THE PRECEDING YEAR. RELYING UPON HIS OWN FINDINGS FOR T HE AY 1999-2000 , THE AO DISALLOWED THE CLAIM IN THE ABSENCE OF ANY EVIDENCE OF SERVICES RENDERED BY THESE TWO PERSONS TO THE ASSESSEE. 7. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLO WANCE IN THE FOLLOWING TERMS: 5.3 I HAVE GONE THROUGH THE CONTENTIONS OF THE APP ELLANT AS WELL AS THE ARGUMENT OF THE ASSESSING OFFICER. IT IS TRUE THAT THE APPELLANT HAS FAILED TO FURNISH THE DETAILS AND SUBSTANTIATE SPECIFIC SERVI CES RENDERED BY THE TWO PROFESSIONALS TO THE APPELLANT COMPANY IN THE YEAR UNDER CONSIDERATION AN THAT ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 12 THE ONUS HAS NOT BEEN DISCHARGED BY THE APPELLANT C OMPANY. IN THE CASE OF L.H.UGAR FACGORIES AND OIL MILLS PVT LTD CXIT-125 I TR 293 (SC) IT IS HELD THAT WHEN AN ASSESSEE CLAIM A DEDUCTION THE ONUS IS ON H IM TO BRING MATERIAL FACTS TO SUBSTANTIATE HIS CLAIM. FURTHER IN THE CASE OF CIT VS. CHANDRAVILAS HOTEL-CIT 164 ITR 102 (GUJARAT) IT IS HELD THAT MERE PRODUCTION OF VOUCHER IN SUPP ORT OF THE CLAIM FOR DEDUCTION OF EXPENDITURE DID NOT AMOUNT T O BRINGING ANY MATERIAL EVIDENCE. IN THE CASE OF SABALGARH INDUSTRIES LTD. VS. CIT-46 ITR 978 (ALL) IT WAS HELD THAT IF AN EXPENDITURE IS PARTLY DEDUCTIBL E AND PARTLY NON DEDUCTIBLE IT IS FOR THE ASSESSEE TO SHOW WHICH PART IS NOT DEDUCTIB LE AND, IF HE FAILS, THE WHOLE PART OF THE EXPENDITURE IS DISALLOWABLE. IN THE IN STANT CASE THE APPELLANT HAS FAILED TO DISCHARGE ITS ONUS AS TO THE NATURE OF SE RVICES RENDERED. THEREFORE THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING THE C LAIM OF PAYMENT OF 10,39,594/-. THE GROUND THEREFORE FAILS. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US. BOTH THE PARTIES AGREED THAT ISSUE MAY BE ADJUDICATED IN THE LIGHT OF DECISION O F THE ITAT FOR THE AY 1999- 2000. WE HAVE IN OUR ORDER DATED 12.3.2010 IN ITA NO. 1438/AHD./2007 IN THE ASSESSEES OWN CASE FOR THE AY 1999-2000 HELD ON T HIS ISSUE AS UNDER 10.2 WE HAVE CONSIDERED RIVAL SUBMISSIONS AND M ATERIAL AVAILABLE ON RECORD. THE FINDINGS OF THE ASSESSING OFFICER SHOW THAT ASS ESSEE EXPLAINED THIS ISSUE BEFORE ASSESSING OFFICER BY PRODUCING THE RESOLUTIO N OF THE BOARD. IT WOULD THEREFORE, SHOW THAT ASSESSEE WAS AWARE OF THE MATT ER IN ISSUE. THEREFORE, IT WAS DUTY OF THE ASSESSEE TO PRODUCE SUFFICIENT MATERIAL TO SUBSTANTIATE THE CLAIM FOR THE DEDUCTION OF THE EXPENDITURE. THE ONUS IS UPON ASSE SSEE TO PROVE THE EXPENDITURE LAID OUT FOR THE PURPOSE OF BUSINESS BECAUSE, ASSES SEE CLAIMED DEDUCTION ON THIS HEAD. THE ASSESSING OFFICER HAS SPECIFICALLY NOTED THAT ABOVE PROFESSIONALS WERE FULL TIME EMPLOYEES OF M/S. GHARDA CHEMICALS LTD., THEREFORE, THERE WERE NO REASON FOR THEM TO CLAIM SALARY FROM THE ASSESSEE. THIS ITSELF CAST A DOUBT IN THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE EXPENDIT URE. THE ASSESSING OFFICER ALSO NOTED THAT THAT ASSESSEE COMPANY HAS NOT ADDUCED AN Y EVIDENCE REGARDING THE SERVICES RENDERED BY THESE TWO PERSONS FOR THE ASSE SSEE. THE ASSESSING OFFICER ALSO NOTED THAT ASSESSEE HAS NOT GOT ANY NEW PRODUC T FOR EXPANDING THE BUSINESS IN THIS YEAR THEREFORE, THE ASSESSEE SHOULD HAVE EX PLAINED THE JUSTIFICATION OF THE SERVICES AND ADVICE RECEIVED FROM THESE PROFESSIONA LS. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ALSO NOTED THA T ASSESSEE HAS NOT PRODUCED ANY DETAILS AND SUBSTANTIATED SPECIFIC SER VICES RENDERED BY THESE TWO PROFESSIONALS. THE ASSESSEE HAS THUS, FAILED TO DIS CHARGE ONUS UPON IT TO PROVE THE GENUINENESS OF THE PAYMENT OF THE SALARY. THE SAME IS THE POSITION BEFORE THE TRIBUNAL. HONBLE KARNATAKA HIGH COURT IN THE CASE OF DCIT VS. MCDOWELL AND CO. LTD. 291 ITR 107 HELD THAT NO EVIDENCE TO PROVE COM MISSION AGAINST RENDERED SERVICES TO THE ASSESSEE, NOT ENTITLED TO DEDUCTION OF THE EXPENDITURE. HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF SMT. B IMLAVANTI 257 ITR 191 CONFIRMED THE DISALLOWANCE OF SALARY PAID TO THE DA UGHTER IN LAW OF THE ASSESSEE ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 13 BECAUSE NO EVIDENCE OF SERVICES RENDERED BY DAUGHTE R IN LAW WAS FILED. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE , WE ARE OF THE VIEW THAT ASSESSEE FAILED TO DISCHARGE ONUS LAID UPON IT TO P ROVE THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS, THEREFORE, WE DO NOT FIND ANY JUSTIFICATION EVEN TO REMAND THE MATTER TO THE FILE OF ASSESSING OFFICER FOR FURTHER VERIFICATION. WE ACCORDINGLY CONFIRM THE FINDINGS OF AUTHORITIES BELOW AND DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 9. IN THE LIGHT OF OUR AFORESAID DECISION IN T HE APPEAL FOR THE AY 1999-2000 AND UNDISPUTEDLY FACTS IN THE YEAR UNDER CONSIDERAT ION BEING SIMILAR, WE CONFIRM THE FINDINGS OF THE LD. CIT(A) AND ACCORDINGLY, GRO UND NO. 2 IN THE APPEAL OF THE ASSESSEE IS DISMISSED. 10. GROUND NO.3 IN THE APPEAL OF THE ASSESSEE REL ATES TO DISALLOWANCE OF RS. 91,04,865/- ON ACCOUNT OF REIMBURSEMENT OF MARKETI NG EXPENSES, INVOKING THE PROVISIONS OF SEC. 40A(2)(B) OF THE ACT. THE AO NOT ICED THAT THE ASSESSEE RE- IMBURSED EXPENSES ON SALES PROMOTION[25%], TRAVELLI NG[15%], CONVEYANCE[20%], TRUNK, TELEPHONE & POSTAGE[30%] & VEHICLE MAINTENAN CE[10%] TO GHARDA CHEMICALS LTD.[GCL] FOR SALE OF RS.9,10,48,683/- EF FECTED BY IT. THE GCL CLAIMED REIMBURSEMENT OF EXPENSES OF RS.91,04,865/-I.E 10% OF THE SALES EFFECTED THROUGH IT. SINCE THE ASSESSEE DID NOT FURNISH ANY EVIDENCE AND JUSTIFICATION IN SUPPORT OF THEIR CLAIM, RELYING UPON HIS OWN FINDIN GS IN THE AY 1999-2000,THE AO DISALLOWED THE SAID CLAIM. 11. ON APPEAL, THE LD.CIT(A) UPHELD THE DISALLOWA NCE IN THE FOLLOWING TERMS: 6.3 I HAVE GONE THROUGH THE CONTENTIONS OF TH E APPELLANT AND THE ARGUMENT OF THE ASSESSING OFFICER. THE MAI N GROUNDS ON WHICH THE EXPENDITURE WERE DISALLOWED BY THE ASSESS ING OFFICER WERE AS UNDER: I) THAT THE APPELLANT HAS NOT PRODUCED ANY DETAILS REGARDING EXPENSES INCURRED UNDER VARIOUS HEAD BY THE MARKETI NG AGENT. II) THAT THE AGREEMENT IS MERELY A DEBIT NOTE AND I T WAS ENTERED AT THE FAG END OF THE YEAR. III) THAT THE AGREEMENT IS NOTHING BUT DIVERSION OF PROFIT. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 14 6.3.1 IN APPEAL NO SUBMISSIONS WERE MADE AS REGARDS JUSTIFIABILITY OF THE EXPENDITURE UNDER VARIOUS HEADS SUCH AS SALE S PROMOTION, TRAVELING, CONVEYANCE EXPENSES, TRUNK, TELEPHONE & POSTAGE AND VEHICLE MAINTENANCE. IT IS ALSO SEEN THAT THE APPE LLANT HAS CLAIMED EXPENSES AND REIMBURSEMENT OF THE EXPENSES INCURRED BY GHARDA CHEMICALS LTD. AND THAT ALL THESE EXPENSES UNDER EA CH HEAD ARE EXACT PERCENTAGES OF THE SALES. TOTAL EXPENDITURE WHICH IS SHOWN AS UNDER: SALES PROMOTION 25% TRAVELLING 15% CONVEYANCE 20% TELEPHONE 30% VEHICLE MAINTENANCE 10% 6.3.2 IT IS ALSO INTERESTING TO NOTE THAT THE EXPEN DITURE OF RS.91,04,865/- IS EXACTLY 10% OF THE TOTAL SALE OF RS.9.104 CRORES CLAIMED TO BE EFFECTED THROUGH THE HOLDING COMPANY GHARDA CHEMICALS LTD. IN CASE IT IS CLAIMED THAT SUCH EXP ENDITURE ARE REIMBURSEMENT IT WOULD BE DIFFICULT TO BELIEVE THAT THE EXPENSES UNDER VARIOUS HEADS WOULD BE EXACT PERCENTAGE OF TO TAL AMOUNT EXPENDED. IT IS ALSO SEEN FROM THE ASSESSMENT RECO RDS THAT NO DETAILS OF EXPENDITURE UNDER VARIOUS HEADS FOR SALE S EFFECTED THROUGH GHARDA CHEMICALS LTD. WERE AVAILABLE. NEIT HER ANY DETAILS WERE SUBMITTED IN APPEAL. THE JUSTIFICATION NOTE W AS ALSO PERUSED BY ME AND THE DOCUMENT APPEARS TO BE ONLY SELF SERV ING WITHOUT CONTAINING EXACT DETAILS OF SUCH EXPENDITURE BEING INCURRED UNDER VARIOUS HEADS. IN MY VIEW THE ASSESSING OFFICER WA S FULLY JUSTIFIED IN COMING TO A CONCLUSION THAT SUCH AN AGREEMENT AN D HANDWRITTEN DEBIT NOTE SUBMITTED REFLECTED NOTHING BUT DIVERSIO N OF PROFIT IN FAVOUR OF HOLDING COMPANY. IN VIEW OF THE ABOVE TH E ASSESSING OFFICERS ACTION OF DISALLOWING RS.91,04,865/- U/S 40A(2)(B) R.W.S. 40A(2)(B) IS CONFIRMED. 12. THE ASSESSEE IS NOW IN APPEAL BEFORE US. BOTH THE PARTIES AGREED THAT ISSUE MAY BE ADJUDICATED IN THE LIGHT OF DECISION O F THE ITAT FOR THE AY 1999- 2000. WE HAVE IN OUR ORDER DATED 12.3.2010 IN ITA NO. 1438/AHD./2007 IN THE ASSESSEES OWN CASE FOR THE AY 1999-2000 HELD ON TH IS ISSUE AS UNDER: 14. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND M ATERIAL AVAILABLE ON RECORD. LEARNED COUNSEL FOR ASSESSEE REFERRED TO AGREEMENT DATED 7.04.1997 (PB-131) EXECUTED BETWEEN ASSESSEE AND THE HOLDING COMPANY T HROUGH WHICH THE HOLDING COMPANY M/S. GHARDA CHEMICAL COMPANY LTD. WAS APPOI NTED AS MARKETING AGENT FOR THE ASSESSEE TO CARRY OUT THE TASK OF MARKETING OF THE PRODUCTS OF THE ASSESSEE. IN THIS AGREEMENT, IT IS MENTIONED THAT THE MARKETI NG EFFORTS AND FOR THE PRODUCT ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 15 DEVELOPMENTS EFFORTS BY THE MARKETING AGENT, THE AS SESSEE BEING MANUFACTURER SHALL COMPENSATE THE MARKETING AGENT/ HOLDING COMPA NY BY WAY OF PAYMENT OF ONE TIME FEES OF RS.2 CRORES (CLAUSE-8). THIS PAYMENT S HALL BE MADE AFTER SUCCESSFUL PLACEMENT OF THE PRODUCT IN CONCERNED STATE. THE AS SESSEE SHALL KEEP THE ABOVE AMOUNT AS SECURITY DEPOSIT AND THE AMOUNT WILL BE A DJUSTED AGAINST THE FEES OF MARKETING AGENT AND MARKETING AGENT SHALL PAY INTE REST @ 13.5% PER ANNUM TO THE ASSESSEE FROM THE DATE OF RECEIPT TO THE DATE O F ADJUSTMENT. WE MAY MENTION THAT NONE OF THE CLAUSES IN THIS AGREEMENT HAVE EXP LAINED REIMBURSEMENT OF ANY MARKETING EXPENDITURE BY THE ASSESSEE TO THE HOLDIN G COMPANY. THE ASSESSEE EXPLAINED THAT AFTER THIS AGREEMENT, ANOTHER SUPPLE MENTARY AGREEMENT WAS EXECUTED ON 9.10.1998 FOR PAYMENT ON MARKETING EXPE NSES @10% OF SALES OF FORMULATION (TOLLPACK). HOWEVER, SUCH A SUPPLEMENT ARY AGREEMENT OR THE JUSTIFICATION TO ENTER INTO SUCH AGREEMENT, WHICH I S CONTRARY TO THE MAIN AGREEMENT DATED 7.04.1997 IS NOT EXPLAINED BEFORE THE AUTHORI TIES BELOW AND DID NOT FIND MENTION IN THE IMPUGNED ORDERS. BY SUPPLEMENTARY AG REEMENT DATED 9.10.1998, THE ASSESSEE HAS COMPLETELY CHANGED THE EARLIER AGR EEMENT DATED 7.04.1997. DURING THE COURSE OF THE AGREEMENT, THE LEARNED COU NSEL FOR ASSESSEE HAS NOT POINTED OUT ANY JUSTIFICATION FOR EXECUTING SUCH A SUPPLEMENTARY AGREEMENT BY WHICH ENTIRE MAIN AGREEMENT WAS REVIEWED/CHANGED EX CEPT THAT IT WAS MENTIONED IN THE NOTE ON MARKETING COMMISSION PB-167. ONLY D EBIT NOTE WAS PRODUCED BEFORE THE AUTHORITIES BELOW TO SHOW THAT THE PAYME NT IS MADE TO THE HOLDING COMPANY. LEARNED COMMISSIONER OF INCOME TAX (APPEA LS) SPECIFICALLY NOTED THE OBSERVATION OF THE ASSESSING OFFICER THAT ASSESSEE IS AN INDEPENDENT COMPANY ENGAGED IN ITS MANUFACTURING, SALE AND EXPORT OF TH E PRODUCTS FOR WHICH IT HAS OWN MARKETING NETWORK. LEARNED COUNSEL FOR ASSESSEE DID NOT DISPUTE THE ABOVE FINDINGS OF THE AUTHORITIES BELOW DURING THE COURSE OF THE ARGUMENT. IT IS THEREFORE, CLEAR THAT ASSESSEE WAS DOING THE SAME MARKETING AC TIVITIES OF ITS PRODUCT WHICH WORK WAS ASSIGNED TO THE HOLDING COMPANY THROUGH TH E SUPPLEMENTARY AGREEMENT. IN THE MAIN AGREEMENT, NO SUCH PAYMENT WAS AGREED F OR REIMBURSEMENT OF MARKETING EXPENSES. LEARNED COUNSEL FOR ASSESSEE T HOUGH REFERRED TO NOTE ON MARKETING COMMISSION PB-167, BUT NO SUBMISSIONS ARE MADE AS REGARDS JUSTIFIABILITY OF THE EXPENDITURE UNDER THE HEAD SA LES PROMOTION, TRAVELLING, CONVEYANCE, TELEPHONE ETC. AND VEHICLE MAINTENANCE, BECAUSE THESE ARE THE COMMON EXPENDITURE, WHICH IS TO BE SPENT BY THE HOL DING COMPANY FOR ITS BUSINESS ALSO. THEREFORE, ASSESSEE WAS REQUIRED TO FILE SUFF ICIENT EVIDENCE BEFORE THE AUTHORITIES BELOW TO CLAIM THAT SOME SERVICES ARE R ENDERED BY THE HOLDING COMPANY FOR THE ASSESSEE IN THIS WAY TO CLAIM REIMBURSEMENT OF THE EXPENDITURE BUT NO SUCH EFFORTS HAVE BEEN MADE. EVEN NO SUCH EVIDENCES WERE FILED BEFORE THE TRIBUNAL. IT IS ALSO NOT EXPLAINED AS TO WHY THE 10% OF THE SALE S HAVE BEEN CLAIMED AS REIMBURSEMENT OF THE EXPENDITURE ON THE ABOVE EXPEN SES ONLY. IT IS ALSO NOT EXPLAINED WHETHER HOLDING COMPANY HAS EXACTLY INCUR RED THE SAME EXPENDITURE ON THE ABOVE HEADS AT 10% OF THE SALES FOR AND ON BEHA LF OF THE ASSESSEE. THE EXPLANATION OF THE ASSESSEE IS THUS, NOT BELIEVABLE THAT THE HOLDING COMPANY EXACTLY SPENT EXPENDITURE OF 10% OF THE SALES ON TH E ABOVE EXPENDITURE. AS NOTED ABOVE, THE NATURE OF THE EXPENSES SHOWS THAT THE SA ME WOULD BE SPENT BY THE HOLDING COMPANY FOR ITS OWN PURPOSES THEREFORE, IN THE ABSENCE OF SPECIFIC ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 16 EVIDENCE THAT THE AMOUNT IS SPENT BY THE HOLDING CO MPANY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, THE EXPLANATION OF THE AS SESSEE COULD NOT HAVE BEEN ACCEPTED. THE ASSESSEE HAS FAILED TO PROVE ANY NEX US BETWEEN THE PAYMENT TO THE HOLDING COMPANY AND THE EXPENDITURE INCURRED FO R THE PURPOSE OF BUSINESS OF THE ASSESSEE. WE THEREFORE DO NOT FIND ANY JUSTIFIC ATION TO INTERFERE WITH THE ORDERS OF AUTHORITIES BELOW. THE DECISION CITED BY LEARNE D COUNSEL FOR ASSESSEE AND THE CIRCULAR OF THE BOARD, WOULD NOT ADVANCE THE CASE O F THE ASSESSEE IN VIEW OF THE FACTS AND CIRCUMSTANCES NOTED BY THE AUTHORITIES BE LOW. WE ACCORDINGLY, CONFIRM THE FINDINGS OF AUTHORITIES BELOW AND DISMISS THIS GROUND OF APPEAL OF THE ASSESSEE. 13. IN THE LIGHT OF OUR AFORESAID DECISION IN THE APPEAL FOR THE AY 1999-2000 AND UNDISPUTEDLY FACTS IN THE YEAR UNDER CONSIDERAT ION BEING SIMILAR, WE CONFIRM THE FINDINGS OF THE LD. CIT(A) AND ACCORDINGLY, GRO UND NO. 3 IN THE APPEAL OF THE ASSESSEE IS DISMISSED 14. GROUND NOS. 4 & 5 PERTAIN TO REIMBURSEMENT OF E XPENSES OF RS. 39,20,000/- ON ERP SOFTWARE AND RS.10.80 LAKHS IN R ELATION TO THE TRAINING FOR ERP SOFTWARE TO M/S GHARDA CHEMICALS LTD.[GCL]. DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASS ESSEE CLAIMED DEDUCTION FOR AN AMOUNT OF RS.50 LAKHS TOWARDS ERP SOFTWARE E XPENSES, WHICH INCLUDED RS. 10.80 LACS FOR TRAINING FOR OPERATION OF THE SOFTWARE. TO A QUERY BY THE AO, THE ASSESSEE FURNISHED A COPY OF AGREEMENT ENTERED INTO BY GCL WITH RAMCO SYSTEMS LTD FOR SYSTEM FINALIZATION, WHEREFROM THE AO NOTICED THAT RS.25.20 LAKHS WERE TO BE PAID BY GCL TO RAMCO ON BEHALF OF THE ASSESSEE COMPANY. FURTHER A SUM OF RS.14 LAC HAD BEEN REIMBURSED AS P ROFESSIONAL SERVICES RENDERED BY RAMCO AS PER AGREEMENT DATED 09-07-1997 . THE BALANCE OF RS.10.80 LAKHS WERE FOUND TO BE ADHOC CHARGES LEVIE D BY GCL WITHOUT ANY BASIS WHATSOEVER. SINCE THE ASSESSEE NEITHER FURNISHED ANY DETAILS/EVIDENCE OF SERVICES RENDERED BY GCL TO ASSESSEE NOR ESTABLISH ED THE GENUINENESS OF EXPENDITURE TO THE TUNE OF RS.10.80 LAKHS, THE AO D ISALLOWED THE SAME. AS REGARDS REMAINING AMOUNT , SINCE THE EXPENDITURE W AS STATED TO HAVE BEEN INCURRED FOR DEVELOPING SOFTWARE SYSTEM FOR IMPROV ING THE IN HOUSE MANAGEMENT EFFICIENCIES AND PROFITABILITY OF THE ASSESSEE, THE AO INFERRED THAT THE SAID EXPENDITURE WAS FOR ENDURING BENEFIT AND, THEREFORE , THE EXPENDITURE CANNOT BE ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 17 TREATED AS CURRENT REVENUE EXPENDITURE. ACCORDINGL Y , THE AO TREATED THE EXPENDITURE CAPITAL IN NATURE WHILE ALLOWING 1/4 TH OF THE EXPENDITURE, HOLDING THAT THAT THE EXPENDITURE CONFERRED DEFERRED CAPITAL B ENEFIT IN THE SUCCEEDING YEARS ALSO. SINCE THE EXPENDITURE INCURRED WAS FOR DEVEL OPING SYSTEM ON PROFESSIONAL BASIS, IT WAS CONSIDERED AS DEFERRED CAPITAL EXPEND ITURE WHICH IS REQUIRED TO BE WRITTEN OFF OVER A PERIOD OF FOUR YEARS. ACCORDING LY, THE AO DISALLOWED A SUM OF RS.39.20 LAKHS WHILE ALLOWING 1/4 TH OF THE SAME . 15 ON APPEAL, THE ASSESSEE SUBMITTED THAT IT H AD EXPLAINED TO THE AO THAT ERP EXPENDITURE OF RS.50,00,000/- HAD BEEN PAID BY THE ASSESSEE TO GHARDA CHEMICALS LTD., WHO HAD ENTERED INTO AN AGREEMENT W ITH RAMCO SYSTEM. AS PER THE SAID AGREEMENT, THE ASSESSEE WAS REQUIRED T O PAY RS.25,20,000/- BY WAY OF LICENCE FEE FOR THE USE OF SAID SOFTWARE. IN AD DITION, THE ASSESSEE HAD REIMBURSED A SUM OF RS.14,00,000/- FOR IMPLEMENTATI ON OF SOFTWARE IN TERMS OF THE SAID AGREEMENT AND RS.10,80,000/- HAS BEEN PAID FOR TRAINING GIVEN BY GHARDA CHEMICALS LTD TO THE STAFF OF ASSESSEE COMPA NY FOR THE OPERATION OF SAID SOFTWARE. RELYING UPON THE DECISIONS IN THE CASE OF BUSINESS INFORMATION PROCESSING SERVICES VS ACIT (1999) 106 TAXMAN 116 ( MAG)/(2000) 73 ITD 304 (JP),BANK OF PUNJAB LTD VS JT.CIT (2002) 122 TAXMAN 235 (CHD)(MAG),MEDIA VIDEO LTD VS JT.CIT (2002) 122 TAXMAN 28 (DEL)(MAG) ,ITC CLASSIC FINANCE LTD VS DY.CIT 112 TAXMAN 155 (CAL)(MAG),NAVEEN PROJECTS LTD VS DY.CIT (2005) 1 SOT 232 (DEL), AJITKUMAR C KAMDAR VS DY.CIT (2005) 1 SOT 183 (MUM),SUMITOMO CORPORATION INDIA (P) LTD VS ADDL CI T 1 SOT 91 (DEL) AND CIT VS K & CO 181 CTR 378, THE ASSESSEE CLAIMED THE ENT IRE EXPENDITURE REVENUE IN NATURE. HOWEVER, THE LD. CIT(A) REJECTED THE CLAIM OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: 7.3 I HAVE GONE THROUGH THE RIVAL CONTENTIONS. I AGREE WITH THE ARGUMENTS OF THE ASSESSING OFFICER THAT THE ERP SOF TWARE IS A MAJOR APPLICATION SOFTWARE PURCHASED BY THE PARENT COMPANY FOR ALL ITS SUBSIDIARY COMPANIES. EXPENDITURE OF RS.10,80, 000 ON TRAINING PAID TO GARDA CHEMICALS LTD IS NOT SUBSTANTIATED BY ANY EVIDENCE OF SUCH EXPERTISE IS AVAILABLE WITH PARENT COMPANY TO IMPART SUCH TRAINING TO STAFF OF THE APPELLANT. THE TRAINING I S ACTUALLY RENDERED ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 18 BY RAMCO SYSTEMS LTD AS PART OF LICENSING THE SOFTW ARE. FURTHER THE EXPENDITURE OF RS.39,20,000 PROVIDES BENEFIT FO R NEXT FOUR YEARS AND HAS BEEN RIGHTLY HELD AS DEFERRED REVENUE EXPEN DITURE TO BE WRITTEN OFF OVER A PERIOD OF NEXT FOUR YEARS. SUPP ORT IS DRAWN FROM DECISION OF HONBLE SUPREME COURT IN THE CASE OF MA DRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS CIT 225 ITR 802 (SC ). 16. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS THE LD. CIT(A). THE LD AR ON BEHALF FOR THE ASSESSE E WHILE RELYING ON THE DECISIONS IN THE CASE OF BANK OF PUNJAB LTD VS JT C IT (2002) 122 TAXMANN 235 (CHD),MEDIA VIDEO LTD VS JT CIT (2002) 122 TAXMANN 28 (DEL),ITC CLASSIC FINANCE LTD VS DY.CIT (2000) 112 TAXMANN 155 (CAL)( MAG),SUMITOMA CORP INDIA P LTD VS ADDL CIT (2005) 1 SOT 91 (DEL) SUBMI TTED THAT AFORESAID EXPENDITURE MAY BE ALLOWED. TO A QUERY BY THE BENCH , THOUGH THE LD. AR ASSURED TO SUBMIT AS TO HOW THE EXPENDITURE ON SO FTWARE HAS BEEN TREATED IN THE CASE OF GHARDA CHEMICALS LTD., NO SUCH REPLY HAS BEEN SUBMITTED SO FAR. ON THE OTHER HAND, THE LD. DR SUPPORTED THE FINDING S OF THE LD. CIT(A) WHILE ARGUING THAT THE SAID EXPENDITURE CONFERRED ENDURIN G BENEFIT ON THE ASSESSEE AND IS, THEREFORE, CAPITAL IN NATURE. 17. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. AS REGARDS CLAIM FOR DEDUCTION OF EXPENDITURE OF RS.10,80,000, THE AO FOUND THAT THESE WERE ADHOC CH ARGES LEVIED BY GCL WITHOUT ANY BASIS WHATSOEVER. SINCE THE ASSESSEE N EITHER FURNISHED ANY DETAILS/EVIDENCE OF SERVICES RENDERED BY GCL TO T HE ASSESSEE NOR ESTABLISHED THE GENUINENESS OF EXPENDITURE TO THE TUNE OF RS.1 0.80 LAKHS, THE AO DISALLOWED THE SAME. BEFORE THE LD. CIT(A), THE ASSESSEE CLAIM ED THAT EXPENDITURE IS ON TRAINING FOR OPERATION OF THE AFORESAID SOFTWARE A ND HAD BEEN REIMBURSED TO GHARDA CHEMICALS LTD . HOWEVER, THE LD. CIT(A) OBSE RVED THAT THIS STATEMENT WAS NOT SUBSTANTIATED BY ANY EVIDENCE OF SUCH EXPER TISE AVAILABLE WITH PARENT COMPANY TO IMPART SUCH TRAINING TO STAFF OF THE ASS ESSEE AND THAT THE TRAINING WAS ACTUALLY RENDERED BY RAMCO SYSTEMS LTD AS PART OF L ICENSING THE SOFTWARE. EVEN BEFORE US, SITUATION IS NO BETTER. NOT AN IOTA OF E VIDENCE HAS BEEN BROUGHT TO OUR ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 19 NOTICE THAT THE EXPENDITURE OF RS.10.80 LACS REIM BURSED TO TO GCL TOWARDS TRAINING OF EMPLOYEES OF THE ASSESSEE FOR OPERATING THE AFORESAID SOFTWARE. IN THE ABSENCE OF ANY BASIS FOR TAKING A DIFFERENT VIEW IN THE MATTER, WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). T HEREFORE, GROUND NO. 5 IN THE APPEAL OF THE ASSSESSEE IS DISMISSED. 18. AS REGARDS REMAINING EXPENDITURE OF RS. 39.20 LACS REIMBURSED TO GCL, THOUGH THE ASSESSEE RELIED UPON A NUMBER OF JUDGME NTS IN THEIR SUPPORT, THE LD. AR DID NOT INFORM US AS TO HOW THE SAID EXPENDITUR E INITIALLY INCURRED BY GCL HAS BEEN TREATED IN THE ASSESSMENT OF GCL. MOREOVER, EX PENDITURE ON SOFTWARE IS CAPITAL OR REVENUE ,DEPENDS UPON A NUMBER OF FACTOR S. IN THEIR DETAILED JUDGMENT IN THE CASE OF AMWAY INDIA ENTERPRISES VS . DCIT,111 ITD 112(SB)(DELHI)., THE SPECIAL BENCH HELD THAT SINC E SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHI N A SHORT SPAN OF TIME, IT CAN BE SAID THAT WHERE LIFE OF THE COMPUTER SOFTWAR E IS SHORTER(SAY LESS THAN TWO YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. I T WAS FURTHER HELD THAT NATURE OF ADVANTAGE OF COMPUTER SOFTWARE HAS TO BE SEEN IN A COMMERCIAL SENSE. IF THE ADVANTAGE IS IN THE CAPITAL FIELD THEN THE SAME WOU LD BE CAPITAL EXPENDITURE. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE A SSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY, WHILE LEAVI NG THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT. HOWEVE R, IF ASSETS/ADVANTAGE IS PART OF PROFIT EARNING APPARATUS, IT IS CAPITAL. WH ETHER OR NOT EXPENDITURE ON SOFTWARE IS IN REVENUE FILED, THE SPECIAL BENCH IN THE AFORESAID CASE SUMMARIZED THEIR FINDINGS IN FOLLOWING TERMS: 59. OUR CONCLUSIONS ON THE ISSUE UNDER CONSIDERATI ON THUS CAN BE SUMMARIZED AS UNDER:- (I) WHEN THE ASSESSEE ACQUIRES A COMPUTER SOFTWARE OR FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRES A TANGIBL E ASSET AND BECOMES OWNER THEREOF AS HELD ABOVE RELYING ON THE DECISION OF HO N'BLE SUPREME COURT IN THE CASE OF TCS. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 20 (II) HAVING REGARD TO THE FACT THAT SOFTWARE BECOME S OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF T IME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAV ING ITS UTILITY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSIDERED AS ACCRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, THAT BY ITSELF WILL NOT M AKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATURE AND THE FUNCTIONAL TE ST AS DISCUSSED ABOVE ALSO NEEDS TO BE SATISFIED. (III) ONCE THE TESTS OF OWNERSHIP AND ENDURING BENE FIT ARE SATISFIED, THE QUESTION WHETHER EXPENDITURE INCURRED ON COMPUTER SOFTWARE I S CAPITAL OR REVENUE HAS TO BE SEEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUSINESSMAN AND HOW IMPORTANT AN ECONOMIC OR FUNCTIONAL ROLE IT PLAYS IN HIS BUSI NESS. IN OTHER WORDS, THE FUNCTIONAL TEST BECOMES MORE IMPORTANT AND RELEVANT BECAUSE OF THE PECULIAR NATURE OF THE COMPUTER SOFTWARE AND ITS POSSIBLE US E IN DIFFERENT AREAS OF BUSINESS TOUCHING EITHER CAPITAL OR REVENUE FIELD O R ITS UTILITY TO A BUSINESSMAN WHICH MAY TOUCH EITHER CAPITAL OR REVENUE FIELD. 60. HAVING LAID DOWN THE CRITERIA FOR DETERMINING T HE NATURE OF EXPENDITURE INCURRED ON ACQUISITION OF SOFTWARE, WHETHER CAPITA L OR REVENUE, WE ARE OF THE VIEW THAT THESE CRITERIA NEED TO BE APPLIED TO DETE RMINE THE EXACT NATURE OF EXPENDITURE INCURRED BY THE ASSESSEES IN THE PRESEN T CASES FOR ACQUIRING DIFFERENT SOFTWARES. SINCE THIS EXERCISE IS REQUIRE D TO BE DONE IN RESPECT OF EACH AND EVERY SOFTWARE INDEPENDENTLY HAVING REGARD TO T HE CRITERIA LAID DOWN ABOVE, WE ARE OF THE VIEW THAT THE MATTER NEEDS TO BE REST ORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR DOING SUCH EXERCISE. THE ASSE SSING OFFICER SHALL EXAMINE THE QUESTION WHETHER EXPENDITURE ON COMPUTER SOFTWA RE IS CAPITAL OR REVENUE IN THE LIGHT OF THE CRITERIA LAID DOWN ABOVE AFTER GIV ING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEES. IF ON SUCH EXAMINATION, THE ASSES SING OFFICER COMES TO THE CONCLUSION THAT THE EXPENDITURE IS CAPITAL EXPENDIT URE, THEN THE QUESTION REGARDING ALLOWING DEPRECIATION WILL BE DECIDED IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN IN THE SUBSEQUENT PARAGRAPHS. 18.1 SINCE IN THE INSTANT CASE, NEITHER THE A O NOR THE LD. CIT(A) HAD BENEFIT OF THE AFORESAID DECISION OF THE SPECIAL BENCH NOR THEY ANALYSED THE NATURE OF EXPENDITURE REIMBURSED TO GCL IN THE MANNER ANALYS ED BY THE SPECIAL BENCH WHILE THE LD. AR DID NOT INFORM US AS TO HOW THE S AID EXPENDITURE INITIALLY INCURRED BY GCL HAS BEEN TREATED IN THE ASSESSMENT OF GCL,WE ARE OF THE OPINION THAT THE MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR DOING NECESSARY EXERCISE AS LAID DOWN IN THE AFORESAID DE CISION. THE ASSESSING OFFICER SHALL EXAMINE THE QUESTION WHETHER EXPENDITURE ON C OMPUTER SOFTWARE IS CAPITAL OR REVENUE IN THE LIGHT OF THE CRITERIA LAID DOWN I N THE AFORESAID DECISION, AFTER ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 21 ALLOWING SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE AND THEREAFTER PASS APPROPRIATE ORDERS IN ACCORDANCE WITH LAW, KEEPING IN VIEW THE PRINCIPLES LAID DOWN IN THE AFORESAID DECISION. WITH THESE OBSERVAT IONS GROUND NO. 4 IN THE APPEAL OF THE ASSESSE IS DISPOSED OF. 19. GROUND NO. 6 IN THE APPEAL OF THE ASSESSEE REL ATES TO ADDITION ON ACCOUNT OF NOTIONAL INTEREST OF RS.38,81,250/- IN RESPECT O F ICD GIVEN TO NIPUN INVESTMENTS PVT LTD. THE AO NOTICED THAT THOUGH T HE ASSESSEE IN ITS ACCOUNTS HAD PROVIDED INTEREST INCOME FOR FYS 1997-98 & 199 8-99 IN RESPECT OF THE FOLLOWING INTER CORPORATE DEPOSITS PLACED WITH M/S NIPUN INVESTMENT PVT LTD: DATE OF DEPOSIT AMOUNT OF DEPOSIT RATE OF INTEREST INTEREST AMOUNT FOR THE AY 2000- 01 20-08-1997 RS.2,00,00,000 17.25% RS. 34,50,000 23-01-1998 RS.2,50,00,000 17.25% RS. 4,31,250 TOTAL RS.4,50,00,000 RS. 38,81,250 IT DID NOT PROVIDE ANY SUCH INTEREST INCOME IN TH E YEAR UNDER CONSIDERATION. TO A QUERY BY THE AO, THE ASSESSEE EXPLAINED THAT NEITH ER INTEREST NOR CAPITAL HAS BEEN RECEIVED DURING THE YEAR UNDER CONSIDERATION. SINCE THE ASSESSEE DID NOT PLACE ON RECORD ANY DETAILS/EVIDENCE AS TO WHETHER THE SAID AMOUNT OF PRINCIPAL AND INTEREST ACCRUED THEREON WERE NOT RECOVERABLE O R DOUBTFUL, DRAWING STRENGTH FROM THE ACCOUNTING STANDARD 9 ISSUED BY ICAI, THE AO ADDED ACCRUED INTEREST OF RS.38,81,250/- TO THE TOTAL INCOME OF THE ASSESS EE. 20. ON APPEAL, THE ASSESSEE CONTENDED THAT THEY H AD PLACED CORPORATE DEPOSIT OF RS.4,50,00,000/- WITH NIPUN INVESTMENT P VT LTD DURING THE PERIOD RELEVANT TO THE AY 1997-98. AS THE SAID COMPANY WA S NEITHER REPAYING THE DEPOSIT NOR THE INTEREST, THE ASSESSEE DID NOT PROV IDE INTEREST ON THE SAID ICD FOR THE YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMI TTED THAT UNDER THE SCHEME OF THE ACT, THE REAL INCOME IS TO BE TAXED WHILE AS PE R ACCOUNTING POLICIES FOLLOWED BY THE COMPANY, THE INTEREST ON INTER-CORPORATE DEP OSITS IS ACCOUNTED FOR AND ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 22 RECOGNIZED AS REVENUE ON REALIZATION BASIS ON ACCOU NT OF UNCERTAINTY OF ITS COLLECTION. IT WAS POINTED OUT THAT DURING THE AY 1994-95, THE ASSSSEE CHANGED THE METHOD OF ACCOUNTING FOR INTEREST RECEIVED FROM DEBTORS FROM MERCANTILE TO CASH SYSTEM AND THE ADDITION MADE BY THE THEN ASSES SING OFFICER ON THE BASIS OF MERCANTILE ACCOUNTING SYSTEM WAS DELETED BY THE CIT(A), ON APPEAL BY THE DEPARTMENT, THOUGH THE ITAT REVERSED THE DECISION OF THE CIT(A), ON FURTHER APPEAL, HONBLE GUJARAT HIGH COURT, VIDE THEIR ORDE R DATED 27-12-2005 REVERSED THE DECISION OF THE ITAT AND UPHELD THE DECISION OF THE CIT(A), APPROVING THE CHANGE IN THE METHOD OF ACCOUNTING OF INTEREST ON L ATE REALIZATION OF SALES FROM MERCANTILE TO CASH SYSTEM. IN THE LIGHT OF THESE SU BMISSIONS, THE LD.CIT(A) AFTER HAVING A REMAND REPORT FROM THE AO AND COMMENTS OF THE ASSESSEE THEREON AND WHILE DISTINGUISHING THE JUDGMENTS IN THE CASE OF S ARABHAI CHEMICALS PVT LTD VS CIT 257 ITR 355 (GUJ); AND CIT VS SHIV PRAKASH JANA K RAJ & CO PVT LTD 222 ITR 583 (SC) AS ALSO DECISION OF THE HONBLE JURISDICTI ONAL HIGH COURT IN THE ASSESSEES OWN CASE FOR THE AY 1994-95, UPHELD THE ADDITION IN THE FOLLOWING TERMS: 8.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AS WELL AS PERUSED THE DECISIONS CITED BY THE APPELLANT. IT I S A FACT THAT TILL A.Y. 1999-2000 THE INTEREST INCOME WAS SHOWN ON ACCRUAL BASIS. THE APPELLANT HAS UNILATERALLY DECIDED NOT TO ACCOUNT F OR THE INTEREST ON THE GROUND THAT SUCH RECEIPTS IS UNCERTAIN AND ON T HE GROUND OF PRUDENT ACCOUNTING POLICIES SUCH INCOME WAS NOT CON SIDERED. IT IS ALSO PERTINENT TO NOTE THAT OUT OF TOTAL INTER-CORP ORATE DEPOSIT OF RS.4.5 CRORES PLACED WITH NIPUN INVESTMENT PVT LTD. IN A.Y. 1997- 98, RS.160 LACS HAS ALREADY BEEN RECOVERED TOWARDS PRINCIPAL AS ON 31.3.2006. THERE APPEARS TO BE THUS CONTRADICTI ON IN THE STAND OF APPELLANT WHEN ON ONE HAND IT IS ARGUED THAT THE RECOVERY FROM NIPUN INVESTMENT IS UNCERTAIN ON THE OTHER HAND AMO UNTS HAVE BEEN RECEIVED IN THE COMING YEARS. IT WOULD ALSO B E NOT OUT OF PLACE TO MENTION HERE THAT A SISTER CONCERN OF NIPU N INVESTMENT PVT LTD HAS BEEN REGULARLY CREDITED WITH THE SALES COMM ISSION INCOME WHEREAS IT IS ADMITTED THAT THE DIRECTORS / HOLDING S OF BOTH THE COMPANIES ARE INTERRELATED. UNDER THE CIRCUMSTANCE S, IT IS NOT CLEAR AS TO WHY IT IS DECIDED BY THE APPELLANT THAT THERE WOULD BE NO RECOVERY FROM NIPUN INVESTMENT PVT LTD. IN MY HUMB LE VIEW THERE DOES NOT APPEAR TO BE ANY MAJOR CHANGE IN CIRCUMSTA NCES TO AVOID DECLARING SUCH ACCRUAL OF INTEREST INCOME. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 23 21. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGA INST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. AR WHILE INVITING OUR ATTEN TION TO PAGES 4, 81 TO 85,171, 440 & 441 OF THE PAPER BOOK SUBMITTED THAT ICD GIV EN HAS BEEN REPAID AS ON 31.3.2007WHILE INTEREST HAS NOT BEEN RECEIVED. THE LD. AR ARGUED THAT INTEREST HAVING NOT BEEN RECEIVED IS NOT TAXABLE. ON THE OTH ER HAND, THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A) . 22. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE FACTS OF THE CASE. UNDISPUTEDLY THE ASSESSEE IS CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND AS POINTED OUT BY THE LD. CIT(A) THE ASSESSEE HAD SHOWN INTEREST ON ICDS ON ACCRUAL BASIS UNTIL THE PERIOD RELEVANT TO THE AY 1999-2000. HOWEVER IN THE YEAR UNDER CONSIDERATION, SUCH INTER EST HAS NOT BEEN SHOWN ON THE GROUND OF UNCERTAINTY OF ITS COLLECTION . IN F ROM 3CD [PG. 123 OF PAPER BOOK] IN COL.11(A), THE AUDITORS HAVE MENTIONED THAT INT EREST INCOME ON DOUBTFUL ICDS IS RECOGNIZED ON REALIZATION BASIS. BEFORE THE AO, THE ASSESSEE DID NOT PLACE ANY MATERIAL ,SUGGESTING THAT THE PRINCIPAL OR INT EREST ACCRUED THEREON WERE NOT RECOVERABLE OR DOUBTFUL. HOWEVER, THE LD. CIT(A) FOUND THAT AN AMOUNT OF RS. 160 LACS HAD ALREADY BEEN RECOVERED UNTIL 31.3.2006 . BEFORE US, THE ASSESSEE SUBMITTED THAT ENTIRE AMOUNT ON ACCOUNT OF ICDS HAS BEEN RECOVERED UNTIL 31.3.2007.OF THIS RS. 50 LACS WAS RECOVERED IN JAN UARY,2004,RS. 1 CRORE IN APRIL,2004,RS. 60 LACS IN JULY,2005 & REMAINING RS. 15 LACS IN MARCH,2007. HOWEVER, THE ASSESSEE IS SILENT ON RECOVERY OF INTE REST. THERE IS NOTHING TO SUGGEST THAT THE FINANCIAL CONDITION OF NIPUN INVES TMENT P LTD. WAS SUCH THAT IT WAS UNABLE TO PAY ITS DEBTS OR THAT THE SAID COMPAN Y WAS INSOLVENT. NOT AN IOTA OF EVIDENCE HAS BEEN PLACED BEFORE US EITHER FOR THE VIEW TAKEN BY THE ASSESSEE THAT ACCRUED INTEREST WAS NOT RECOVERABLE NOR THE RELEVANT TERMS AND CONDITIONS OF THE ICDS WERE PLACED BEFORE US. IT IS WELL SETTLED THAT TAXABILITY OF INCOME IS ATTRACTED NOT ONLY WHEN INCOME IS ACTUAL LY RECEIVED BUT ALSO WHEN IT ACCRUES. INCOME ACCRUES WHEN IT FALLS DUE, THAT IS TO SAY WHEN IT BECOMES LEGALLY RECOVERABLE, IRRESPECTIVE OF WHETHER IT IS ACTUALLY RECEIVED OR NOT AND ACCRUED ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 24 INCOME IS THAT INCOME WHICH THE ASSESSEE HAS A LEGA L RIGHT TO RECEIVE. SINCE THE ASSESSEE HAD BEEN CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND ACCORDINGLY, HAD SHOWN INTEREST ACCRUED ON ICDS AS ITS INCOME UNTIL THE AY 1999-2000 WHILE THERE WAS NO MATERIAL BEFORE THE L OWER AUTHORITIES NOR EVEN BEFORE US, SUGGESTING THAT RECOVERY OF PRINCIPAL AM OUNT OR INTEREST ACCRUED THEREON WAS DOUBTFUL, WE ARE OF THE OPINION THAT IN COME HAD ACCRUED TO THE ASSESSEE AND THAT THE AFORESAID AMOUNT WAS NOT A S TICKY DEBT, HAVING ALREADY BEEN RECOVERED. THIS VIEW WHICH WE HAVE TAKEN FIND S SUPPORT FROM THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAG NUM POWER GENERATION LTD. VS. ADDL. CIT,311 ITR 332(DELHI). IN THESE CIRCUMST ANCES, ESPECIALLY WHEN THERE IS NO MATERIAL BEFORE US FOR TAKING A DIFFERENT VIE W IN THE MATTER, WE ARE NOT INCLINED TO INTERFERE. THEREFORE, GROUND NO. 6 IN T HE APPEAL OF THE ASSESSEE IS DISMISSED. 23. GROUND NO.7 IN THE APPEAL OF THE ASSESSEE RELA TES TO EXPENDITURE OF RS.27,56,291/- ON REPLACEMENT OF PLANT AND MACHINE RY. THE AO NOTICED THAT EXPENDITURE OF RS. 2.42.04.611/- ON ACCOUNT OF REPA IRS TO PLANT AND MACHINERY INCLUDED EXPENSES AMOUNTING TO RS.36,75,055/- IN RE SPECT OF THE FOLLOWING: I) THERMAX GAS BURNER ASSEMBLY RS. 2,00,909/- II) GAS BURNER GAS TRAIN RS.14,90,849/- III) CONTROL PANEL RS. 1,77,883/- IV) CUSTOM DUTY ON (II) & (III) ABOVE RS. 7,67,5 14/- IV) OTHER ALLIED ACCESSORIES FOR HEAT RESISTANCE FOR ABOVE RS.10,37,900/- -------------------- TOTAL RS.36,75,055/- -------------------- THE AO WAS OF THE OPINION THAT THE ABOVE EXPENSES W ERE IN THE CAPITAL FIELD, YIELDING ENDURING BENEFIT WHILE THE ASSESSEE DID NO T FURNISH ANY SUPPORTING EVIDENCE / JUSTIFICATION IN FAVOUR OF ITS CLAIM THA T THE SAME WERE REVENUE IN NATURE. ACCORDINGLY, THE AO DISALLOWED THE EXPENDI TURE OF RS.36,75,055/-, ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 25 HOLDING IT TO BE CAPITAL IN NATURE AND ALLOWED DEP RECIATION @25% THEREON AMOUNTING TO RS.9,18,764/-. 24. ON APPEAL, THE ASSESSEE SUBMITTED THAT THE A FORESAID EXPENDITURE WAS INCURRED ON REPLACEMENT OF THERMAX GAS BURNER ASSEM BLY, GAS BURNER-GAS TRAIN, CONTROL PANEL, OTHER ACCESSORIES FOR HEAT RE SISTANCE ETC. AT A COST OF RS.36,75,055/-. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD VIDE LETTER DATED 31-01-2003 EXPLAINED TO THE AO THAT TH E TERMAX GAS BURNER ASSEMBLY, GAS BURNER-GAS TRAIN, CONTROL PANEL, OTHE R ACCESSORIES FOR HEAT RESISTANCE ETC. WERE PART AND PARCEL OF THE PROCESS ING PLANT AND WERE NOT INDEPENDENT ITEMS OF EQUIPMENT / MACHINERY ITSELF. EARLIER, THE BOILER WAS RUN ON OIL FUEL WHICH WAS SUPPLIED BY REFINERY AND WAS BRO UGHT TO THE PLANT THROUGH TANKER, WHICH TOOK SUBSTANTIAL TIME TO REACH THE PL ANT. DURING THE YEAR, THE SAID SYSTEM HAD BEEN REPLACED BY GAS BASED FUEL SYSTEM , WHICH RESULTED IN CONTINUOUS AND TIMELY SUPPLY OF FUEL, SMOOTHENING T HEREBY MANUFACTURING PROCESS. INTER ALIA, THE ASSESSEE RELIED ON DECISIO NS IN THE CASE OF ADDL.CIT, GUJARAT VS DESAI BROS, 108 ITR 14 (GUJ), HANUMAN MO TOR SERVICE VS CIT 66 ITR (MYSORE),CIT VS SRI RAMA SUGAR MILLS LTD 21 ITR 191 (MAD), AHMEDABAD MFG & CALICO PTG. CO VS CIT (162 ITR 800)(GUJ), PERMALI W ALLACE LTD VS CIT, BHOPAL 151 ITR 43 (MP),CIT DELHI VS EAGLE THEATRES 165 ITR 93 (DEL),CIT VS SHREE HARI INDUSTRIES (161 ITR 249)(RAJ),ADDL CIT VS INDI A UNITED MILLS LTD 141 ITR 399 (BOM),CIT S CPA YOOSUF (113 ITR 225),CIT VS CHOWGUL E & CO PVT LTD (214 ITR 523,CIT VS SHRI RAMA SUGAR MILLS LTD (21 ITR 191)(M AD),CIT VS MAHALAKSHMI TEXTILE MILLS LTD (66 ITR 710)(SC),CIT VS ATHERTON WEST & CO LTD (82 ITR 352)(ALL),MADRAS CEMENT LTD VS CIT ITAT MADRAS (42 TTJ 175),CIT VS SRI NARSIMHA TEXTILES P LTD (238 ITR 351)(MAD),CIT VS T UTOCORIN SPINNING MILLS LTD (249 ITR 694) AND AMBIKA COTTON MILLS LTD VS. JCIT ITAT MADRAS-71 TTJ 871.IT WAS FURTHER SUBMITTED THAT SIMILAR DISALLOWANCE MAD E BY THE AO IN THE AYS 1992-93, 1993-94 & 1994-95 HAD BEEN DELETED BY HOLD ING THAT THE EXPENDITURE OF REPLACEMENT OF PART OF PLANT & MACHINERY IS REVENUE EXPENDITURE AND THE LD. CIT(A), WHILE DECIDING THE APPEALS FOR ASSESSMENT Y EARS 1995-96, 1996-97 AND ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 26 1997-98, FOLLOWED THE ITAT ORDER AND ALLOWED THE AP PEALS. HOWEVER, THE LD. CIT(A) UPHELD THE DISALLOWANCE IN THE FOLLOWING TER MS: 9.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND ALSO PERUSED THE DETAILS OF VARIOUS EXPENDITUR E. WHETHER A PARTICULAR EXPENDITURE FALLS IN THE REALM OF CAPITA L OR REVENUE FIELD, IT IS TO BE EVALUATED IN TERMS OF THE NATURE OF THE IN DIVIDUAL ITEM. IT IS ALSO TO BE SEEN WHETHER AN ITEM IS CAPABLE OF FUNCT IONING INDEPENDENTLY AND PROVIDING ENDURING BENEFIT. IN T HE DECISIONS OF THE AHMEDABAD TRIBUNAL RELIED UPON BY THE APPELLANT FOR A.Y. 1992- 93, 1993-94 AND 1994-95 IT WAS HELD THAT REPLACEMEN T OF REACTORS AND STEAM DRIERS WAS REVENUE EXPENDITURE. IN THE I NSTANT CASE IT IS SEEN THAT GAS BURNER AND OTHER ACCESSORIES PROVIDE ALTERNATE ENERGY SOURCE FOR MANUFACTURING OPERATIONS OF THE A PPELLANT AND BRING INTO EXISTENCE CAPABLE OF PROVIDING BENEFIT I N COMING YEARS. 9.3.1 THE EXPENDITURE ALLOWABLE AS CURRENT REPAIRS U/S.31 IS THE EXPENDITURE ON DAY-TO-DAY REPAIRS OR MAINTENANCE. IN THE CASE OF NEW SHORROCK SPINNING & MANUFACTURING CO. LTD. 30 I TR 338, THE HONBLE BOMBAY HIGH COURT EXPLAINED THE MEANING OF CURRENT REPAIRS AS EXPENDITURE WHICH IS NOT FOR THE PURPOS E OF RENEWAL OR RESTORATION BUT IS FOR THE PURPOSE OF PRESERVING OR MAINTAINING AN ASSET. IN THE CASE OF BALLIMAL NAVALKISHORE 224 IT R 114, THE HONBLE SUPREME COURT OBSERVED THAT EXPENDITURE ON RENEWAL OR RESTORATION OR EXTENSIVE REPAIRS TO BUILDINGS IS NO T CURRENT REPAIRS. IT WAS ALSO HELD THAT, THE ASSESSEE INCURRED SUBSTANTI AL EXPENDITURE ON RENEWAL AND RESTORATION IS ALSO A RELEVANT FACT FOR DECIDING CAPITAL OR REVENUE NATURE OF THE EXPENDITURE. 9.3.2. IN VIEW OF THE FOREGOING THE ASSESSING OFFIC ER WAS JUSTIFIED IN TREATING THE EXPENDITURE OF RS.36,75,055/- AS CAPIT AL IN NATURE AND ALLOWING DEPRECIATION THEREOF. IN SUMMARY THE DISA LLOWANCE OF RS.27,56,291/- IS CONFIRMED. 25. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. AR ON BEHALF OF THE ASSESSE E WHILE CARRYING US THROUGH PAGE 13 AND 441 OF THE PAPER BOOK AND RELYING ON TH E ORDER OF THE ITAT FOR THE AY 1998-99 CONTENDED THAT EXPENDITURE IS REVENUE IN NATURE. ON THE OTHER HAND, THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A ). ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 27 26. WE HAVE HEARD BOTH THE PARTIES AND GONE T HROUGH THE FACTS OF THE CASE . AT THE OUTSET, WE FIND THAT RELIANCE BY THE ASSESS EE ON THE DECISION OF THE ITAT IN THEIR OWN CASE FOR THE AY 1998-99 IS TOTALLY MIS PLACED SINCE IN THE AY 1998-99 EXPENDITURE WAS INCURRED ON REPLACEMENT OF CRATES A ND STEAM INJECTOR SYSTEM. THE EXPENDITURE ON EJECTOR SYSTEM WAS ALLOWED, FOL LOWING THE DECISION OF THE ITAT FOR THE AY 1992-93 & 1993-94 WHILE THE ISSUE OF EXPENDITURE ON CRATES HAD BEEN RESTORED TO THE FILE OF THE AO. IN THE INSTA NT CASE, THE BOILER IN THE PROCESSING PLANT WAS HITHERTO BEING RUN ON OIL FUEL . IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE INCURRED EXPENDITURE ON IMPORTED THERMAX GAS BURNER ASSEMBLY, GAS BURNER-GAS TRAIN, CONTROL PANE L, OTHER ACCESSORIES FOR HEAT RESISTANCE ETC IN ORDER TO REPLACE OIL BASED F UEL SYSTEM WITH THE GAS BASED FUEL SYSTEM . WE FIND FROM THE IMPUGNED ORDER S THAT NOWHERE THE ASSSESSEE CLAIMED THAT THE SAID EXPENDITURE AMOUNTE D TO 'CURRENT REPAIRS' UNDER S. 31 OF THE ACT. RATHER, THE CLAIM IS THAT EXPENDI TURE IS REVENUE IN NATURE. THE ISSUE BEFORE US IS AS TO WHETHER THE REPLACEMENT O F OIL BASED FUEL SYSTEM WITH THE GAS BASED FUEL SYSTEM ,AMOUNT TO REPAIR OF PLAN T AND MACHINERY, AS CONTENDED ON BEHALF OF THE ASSESSEE. IN BALLIMAL N AVAL KISHORE & ANOTHER VS. CIT,224 ITR 414(SC), HONBLE APEX COURT HELD 'CURRE NT REPAIRS' UNDER THE ACT MEANS EXPENDITURE ON MACHINERY, PLANT OR FURNITURE WHICH IS NOT FOR THE PURPOSE OF RENEWAL OR RESTORATION BUT WHICH IS ONLY FOR THE PURPOSE OF PRESERVING OR MAINTAINING AN ALREADY EXISTING ASSET AND THAT DOES NOT BRING A NEW ASSET INTO EXISTENCE OR DOES NOT GIVE TO THE ASSESSEE A NEW OR DIFFERENT ADVANTAGE. AGAIN IN CIT VS. SARAVANA SPINNING MILLS (P) LTD.,293 IT R 201(SC) , HONBLE APEX COURT LAID DOWN THAT IN ORDER TO DETERMINE WHETHER A PARTICULAR EXPENDITURE AMOUNTS TO 'CURRENT REPAIRS' THE TEST IS 'WHETHER T HE EXPENDITURE IS INCURRED TO 'PRESERVE AND MAINTAIN' AN ALREADY EXISTING ASSET A ND NOT TO BRING A NEW ASSET INTO EXISTENCE OR TO OBTAIN A NEW ADVANTAGE. FOR 'C URRENT REPAIRS' DETERMINATION, WHETHER EXPENDITURE IS REVENUE OR CAPITAL IS NOT TH E PROPER TEST. IN A RECENT DECISION IN THE CASE OF CIT VS. SRI MANGAYARKARASI MILLS PVT. LTD.,315 ITR 114(SC), HONBLE APEX COURT OBSERVED THAT REPLACEM ENT OF AN OLD MACHINE WITH A NEW ONE WOULD CONSTITUTE THE BRINGING INTO EXISTE NCE OF A NEW ASSET IN PLACE OF ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 28 THE OLD ONE AND NOT REPAIR OF THE OLD AND EXISTING MACHINE. WHILE REFERRING TO OBSERVATIONS IN SARAVANA SPINNING MILLS (P) LTD. CA SE THAT IF REPLACEMENT WAS HELD TO BE 'CURRENT REPAIR' IN SUCH CASES, S. 31(I) WILL BE COMPLETELY REDUNDANT AND ABSURDITY WILL CREEP IN BECAUSE REPAIR IMPLIES EXIS TENCE OF A PART OF THE MACHINE WHICH HAS MALFUNCTIONED, WHICH IS IMPOSSIBLE IN THE CASE OF SUCH REPLACEMENT, HONBLE APEX COURT HELD THAT REPLACEMENT EXPENDITUR E CANNOT BE SAID TO BE 'CURRENT REPAIRS'., IN THE INSTANT CASE, AS THE FA CTS ON RECORD REVEAL, THE ASSESSEE GOT A NEW AND DIFFERENT ADVANTAGE WHILE REPLACING O LD OIL BASED FUEL SYSTEM WITH IMPORTED GAS BASED FUEL SYSTEM. AS HELD BY THE HON BLE APEX COURT IN THE CASE OF TRAVANCORE COCHIN CHEMICALS LTD. VS. CIT 1977 CT R (SC) 148 : (1997)(SIC- 1977) 2 SCC 20, EXPENDITURE IS OF A CAPITAL NATURE WHEN IT AMOUNTS TO AN ENDURING ADVANTAGE FOR THE BUSINESS AND REPAIR IS D IFFERENT FROM BRINGING A NEW ASSET FOR THE BUSINESS. FURTHER, IN LAKSHMIJI SUGAR MILLS (P) CO. VS. CIT AIR 1972 SC 159 IT HAS BEEN HELD THAT BRINGING INTO EXISTEN CE A NEW ASSET OR AN ENDURING BENEFIT FOR THE ASSESSEE AMOUNTS TO CAPITAL EXPENDI TURE. SINCE THE AFORESAID REPLACEMENT IN THE INSTANT CASE AMOUNTS TO BRINGING INTO EXISTENCE A NEW ASSET & ADVANTAGE, AND THEREBY AN ENDURING BENEFIT FOR THE ASSESSEE, IT IS CLEAR THEN THAT EXPENDITURE OF THE ASSESSEE HERE IS NOT OF REVENUE NATURE AND THUS, CANNOT BE CLAIMED AS A DEDUCTION EVEN UNDER S. 37 OF THE ACT. IN VIEW THEREOF, ESPECIALLY WHEN THERE IS NO MATERIAL BEFORE US FOR TAKING A DI FFERENT VIEW IN THE MATTER , WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NO. 7 IN THE APPEAL OF THE ASSESSEE IS DISM ISSED. 27. GROUND NO. 8 IN THE APPEAL OF THE ASSESSEE PERT AINS TO DISALLOWANCE OF RS.6,67,492 MADE OUT OF SALES PROMOTION EXPENSES. THE AO NOTICED THAT THE ASSESSEE INCURRED SALES PROMOTION EXPENSES OF RS.37 ,62,633/- VIS--VIS RS.33,19,680/-IN THE PRECEDING YEAR. THE SAID AMOUN T INCLUDED EXPENDITURE OF RS.26,69,968/- TOWARDS PAYMENT FOR PURCHASE OF SILV ER COINS AND ARTICLES FROM M/S JK JEWELLERS & M/S PRATAP JEWELLERS, MUMBAI FOR DISTRIBUTING THE SAME TO THE CUSTOMERS. SINCE THE ASSESSEE FURNISHED SAME JUST IFICATION AS IN THE PRECEDING ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 29 YEAR ,RELYING UPON HIS OWN FINDINGS IN THE AY 1999- 2000, THE AO DISALLOWED 25% OF THE TOTAL EXPENDITURE RESULTING IN AN ADDITION OF RS.6,67,492/-. 28. ON APPEAL, THE LD. CIT(A) UPHELD THE DISALLOWAN CE WITH THE FOLLOWING OBSERVATIONS: 12.3 I HAVE GONE THROUGH THE CONTENTIONS OF THE AP PELLANT AND THE ARGUMENT OF THE ASSESSING OFFICER. IT IS COMMON BU SINESS PRACTICE TO GIVE INCENTIVE / GIFTS TO CUSTOMERS TO PROMOTE T HE BUSINESS. THE ASSESSING OFFICER HAS DISALLOWED 1/4 TH OF THE EXPENSES ON THE GROUND THAT THE PURCHASE WAS IN DECEMBER AND IN THE REMAINING THREE MONTHS OF THE FINANCIAL YEAR ENTIRE STOCK MIG HT NOT HAVE BEEN EXHAUSTED. I FIND THAT THIS IS A VALID PRESUMPTION AND THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING 25% OF THE SAID EXPENDITURE. THE DISALLOWANCE IS THEREFORE CONFIRMED. 29. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). BOTH THE PARTIES AGREED THAT IS SUE MAY BE ADJUDICATED IN THE LIGHT OF DECISION OF THE ITAT FOR THE AY 1999-2000. WE HAVE IN OUR ORDER DATED 12.3.2010 IN ITA NO. 1438/AHD./2007 IN THE ASSESSEE S OWN CASE FOR THE AY 1999-2000 HELD ON THIS ISSUE AS UNDER: 9. AFTER HEARING RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT ADDITION IS CLEARLY UNJUSTIFIED. THE ASSESSING OFFICER MADE PART OF THE ADDITION BY PRESUMING THAT THE ENTIRE STOCK WOULD NOT HAVE BEEN ADJUSTED UPTO MARC H 1999. THE ASSESSING OFFICER ON THE PRESUMPTION WITHOUT POINTING OUT ANY INADMISSIBLE ITEM, MADE THE AD-HOC ADDITION WHICH IS NOT PERMISSIBLE IN LAW. T HE ASSESSING OFFICER HAS NOT DISPUTED THE GENUINENESS OF THE EXPENDITURE LAID OU T WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS BY THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE PRESUMPTION OF THE ASSESSIN G OFFICER ON MAKING THE PART ADDITION BY HOLDING IT TO BE A VALID PRESUMPTION OF THE ASSESSING OFFICER IN DISALLOWING PART ADDITION. IT THEREFORE, APPEARS T HAT THE AUTHORITIES BELOW HAVE MADE THE ADDITION ON THIS ISSUE ON MERE PRESUMPTION WITHOUT BRINGING ANY ADVERSE MATERIAL AGAINST THE ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DELETE THE ENTIRE ADDITION. THIS GROUND OF APPEAL OF ASSESSEE IS ALLOWED. 30. IN THE LIGHT OF OUR AFORESAID DECISION I N THE APPEAL FOR THE AY 1999-2000 AND UNDISPUTEDLY FACTS IN THE YEAR UNDER CONSIDERAT ION BEING SIMILAR, WE SET ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 30 ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY, ALLOW GROUND NO. 8 IN THE APPEAL OF THE ASSESSEE . 31. GROUND NO.9 IN THE APPEAL OF THE ASSESSEE AND GROUND NOS. 5 & 6 IN THE APPEAL OF THE REVENUE RELATE TO DEDUCTION U/S 80IA OF THE ACT. THE AO NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION OF RS.94,67,651 /- U/S 80IA OF THE ACT FOR ITS UNIT V AND VI ON PROPORTIONATE BASIS OF THE TOTAL T URNOVER AND PROFIT THEREON. THE COMPANY HAD SHOWN TOTAL SALES OF RS.137.99 CRORE A ND TAXABLE PROFIT OF RS.1.40 CRORE THE AO FURTHER FOUND THE PROFITABILITY OF EACH OF THE UNITS AS UNDER: UNIT NO.I THIS UNIT IS NOT ELIGIBLE FOR DEDUCTION U /S 80IA AND THE ASSESSEE HAS SHOWN SALES OF RS.28.73 CRORE AND ARRI VED AT LOSS OF RS.1.36 CRORE. UNIT NO.II THIS UNIT IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA AND THE ASSESSEE HAS SHOWN SALES OF RS.6.75 CRORE AND ARRIV ED AT LOSS OF RS.0.72 CRORE UNIT NO.III THIS UNIT IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA AND THE ASSESSEE HAS SHOWN SALES OF RS.35.32 CRORE AND ARRI VED AT LOSS OF RS.3.77 CRORE UNIT NO.IV THIS UNIT IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA AND THE ASSSSEE HAS SHOWN SALES OF RS.30.90 CRORE AND ARRIV ED AT PROFIT OF RS.1.61 CRORE UNIT NO.V THIS UNIT IS ELIGIBLE FOR DEDUCTION U/S 8 0IA AND THE ASSESSEE HAS SHOWN SALES OF RS.16.85 CRORE AND ARRIVED AT PR OFIT OF RS.1.15 CRORE UNIT NO.VI THIS UNIT IS ELIGIBLE FOR DEDUCTION U/S 80IA, AND THE ASSESSEE HAS SHOWN SALES OF RS.4.80 CRORE AND ARRIVED AT PRO FIT OF RS.2.00 CRORE UNIT NO.VII THIS UNIT IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA, AND THE ASSESSEE HAS SHOWN SALES OF RS.14.63 CRORE AND ARRI VED AT PROFIT OF RS.2.49 CRORE. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 31 IN THE LIGHT OF AFORESAID FACTS, THE AO WAS OF THE VIEW THAT THE ASSESSEE TRIED TO MANIPULATE THE PROFITS OF THE INDUSTRIAL UNITS-V & VI BY APPORTIONING COST OF PRODUCTION AND NET PROFIT TO VARIOUS UNITS ON AN AD HOC BASIS IN ORDER TO MAXIMIZE THE CLAIM OF DEDUCTION U/S 80IA OF THE ACT. THE A O FURTHER POINTED OUT THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE CLAIMED THAT ALL ITS UNITS WERE INTEGRATED AND CANNOT BE DIFFERENTIATED FROM ONE ANOTHER. WHILE CLAIMING REPLACEMENT OF SPARE PARTS AS REVENUE EXPE NDITURE, THE ASSESSEE STATED THAT IT WAS AN INTEGRATED UNIT AND ONE UNIT CAN NOT BE SEPARATED WITH THE OTHER UNITS. IT WAS A CHAIN PROCESS FROM ONE UNIT TO ANOTHER UNIT TO GET FINISHED GOODS / PRODUCT. MOREOVER, THE ASSESSEE DID NOT MA INTAIN SEPARATE BOOKS OF ACCOUNTS FOR EACH OF THE UNITS NOR THE ASSESSEE R EDUCED NON-MANUFACTURING INCOME SUCH AS INTEREST ON INVESTMENT, INTEREST ON DEPOSIT AND MISCELLANEOUS INCOME WHILE COMPUTING DEDUCTION U/S 80IA OF THE AC T . WITH THE AFORESAID OBSERVATIONS, THE AO COMPUTED THE PROFITS FROM TRA DING ACTIVITIES AS UNDER: SALES TREATED PRODUCTS RS. 2,56,43,000 LESS: MATERIAL COST PURCHASES RS. 2,85,18,000 (-) CLOSING STOCK RS. 87,26,000 --------------------- RS. 1,97,92,000 GROSS PROFIT FROM TRADING RS. 58,51,000 LESS:EST.TRADING EXP.@12% OF SALES RS. 30,77,000 NET PROFIT FROM TRADING RS. 27,44,000 ACCORDINGLY, WHILE DETERMINING DEDUCTION U/S 80IA O F THE ACT, THE AO REDUCED AFORESAID PROFIT FROM TRADING BESIDES 1. INTEREST ON INVESTMENT RS. 1,91,000 INTEREST ON DEPOSIT RS. 56,01,000 2. MISC.INCOME RS. 35,36,000 ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 32 3. PROFIT ON SALE OF FIXED ASSETS RS. 13,00,0 00 SINCE WHILE ALLOCATING THE COST BETWEEN VARIOUS M ANUFACTURING UNITS ON AN ADHOC BASIS, THE ASSESSEE IGNORED THE AFORESAID AM OUNTS, THE AO AFTER REDUCING THE AFORESAID AMOUNTS FROM THE TAXABLE PRO FITS, ALLOWED A DEDUCTION OF RS.17,48,570/- U/S 80IA OF THE ACT AS AGAINST THE C LAIM OF RS. 94,67,651/-. 32. ON APPEAL, THE ASSESSEE SUBMITTED THAT THE D EDUCTION U/S 80IA HAS BEEN CLAIMED ON THE BASIS OF DETAILED WORKING DUL Y CERTIFIED BY THE CHARTERED ACCOUNTANT IN ACCORDANCE WITH METHOD ACCEPTED IN EARLIER YEARS. WHILE POINTING OUT THAT AN IDENTICAL ISSUE INVOLVED IN A.Y. 1985-8 6 HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT, THE ASSESSEE CO NTENDED THAT THEY DID NOT EFFECT SALES OF TRADING GOODS IN UNIT V AND VI , E LIGIBLE FOR DEDUCTION U/S 80IA. THEREFORE, THE QUESTION OF QUANTIFYING AND EXCLUDIN G TRADING PROFIT FROM ELIGIBLE PROFIT DOES NOT ARISE AT ALL. INTER ALIA, THE ASSE SSEE RELIED UPON DECISIONS IN THE CASE OF CIT VS AHMEDABAD ELECTRICITY CO LTD 203 ITR 521 (BOM), CAMBAY ELECT.SUPPLY INDL. CO LTD CIT 113 ITR 84 (SC),CIT V S HINDUSTAN ANTIBIOTICS LTD 137 ITR 42 (BOM) AND PHILIPS CARBON BLACK LTD VS CI T 136 ITR 205 (CAL). IN THE LIGHT OF THESE SUBMISSIONS, THE LD. CIT(A) CONC LUDED AS UNDER: 15.3 I HAVE GONE THROUGH THE CONTENTIONS OF THE AP PELLANT CAREFULLY AND ALSO THE ARGUMENTS OF THE ASSESSING O FFICER. IN VIEW OF THE FACT THAT IN PAST THE COMPUTATION FOR 80IA D EDUCTIONS WERE ACCEPTED BY THE DEPARTMENT AND THE FACT THE SEPARAT E ACCOUNTS WERE MAINTAINED IN RESPECT OF ALL THE UNITS THE ASS ESSING OFFICER WAS NOT JUSTIFIED IN ALLOCATING THE PROFIT IN THE R ATIO OF TURNOVER. THE ARGUMENT OF ASSESSING OFFICER THAT THE COST OF ALLO CATION BETWEEN VARIOUS UNITS WAS ON ADHOC BASIS SO AS TO MAXIMIZE THE CLAIM OF DEDUCTION DOES NOT APPEAR TO BE CORRECT. IN THE LA ST 8 YEARS THE PROFIT / LOSS OF VARIOUS UNITS WERE AS UNDER: (RS.IN LACS) A.Y. UNIT 1 UNIT II UNIT III UNIT IV UNIT V UNIT V I 92-93 230 (-) 29 343 108 - - 93-94 547 (-) 34 465 77 - - 94-95 542 (-) 45 342 81 10 (-)13 ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 33 95-96 195 (-) 33 513 547 22 51 96-97 351 (-) 40 157 1060 46 135 97-98 495 (-) 92 282 929 20 198 98-99 440 (-) 53 53 509 6 171 99-00 141 (-) 73 148 428 167 333 00-01 (-) 137 (-) 73 (-) 377 162 115 200 FROM ABOVE IT IS CLEAR THAT VARIOUS UNITS HAVE DE CLARED PROFIT AND LOSS FOR THE PAST SEVERAL YEARS AND IT DOES NOT APPEAR THAT THE MOMENT THE CLAIM PERIOD UNDER 80IA WAS OVER THE UNI T STARTED MAKING LOSSES. UNIT-IV HAS ALWAYS DECLARED PROFIT. HOWEVER I AM IN AGREEMENT WITH THE VIEW OF ASSESSING OFFICER THA T OTHER INCOME OF RS.10628000 AND INCOME FROM TRADING ACTIVITIES I F THEY ARE RELATING TO UNIT V & VI SHOULD NOT FORM PART OF THE ELIGIBLE PROFIT FOR PURPOSES OF DEDUCTION UNDER 80IA. THE ASSESSING OF FICER IS DIRECTED TO RECOMPUTED THE DEDUCTION UNDER SECTION 80IA IN RESPECT OF UNIT V & VI AFTER EXCLUDING THE INCOME FROM OTHE R SOURCES AND TRADING PROFITS, IF ANY RELATING TO THESE UNITS. T HE GROUND IS THUS PARTLY ALLOWED. 33. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAIN ST THE AFORESAID FINDINGS OF THE LD. CIT(A) IN EXCLUDING INCOME FROM OTHER SOURC ES FORM THE PROFITS ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT WHILE THE REVENUE IS IN APPEAL AGAINST THE FINDINGS OF THE LD. CIT(A) IN DIRECTING THE AO TO EXCLUDE P ROFIT FROM TRADING ACTIVITY WHILE WORKING OUT ELIGIBLE PROFITS FOR THE PURPOSE OF DED UCTION U/S 80IA OF THE ACT. THE LD. AR ON BEHALF OF THE ASSESSEE WHILE INVITING OUR ATTENTION TO PAGE 20 OF THE THIRD PAPER BOOK AND REFERRING TO ORDER OF THE ITAT FOR THE AY 1998-99 CONTENDED THAT THEIR CLAIM FOR SIMILAR DEDUCTION U/S 80IA H AS BEEN ALLOWED IN RESPECT OF AMOUNT OF NOTICE PAY AND MISCELLANEOUS SALES WHILE IN RESPECT OF DIVIDEND, PROFIT ON SALE OF ASSETS, MISCELLANEOUS INCOME AND PENALTY FROM SUPPLIERS, HAD BEEN REJECTED. AS REGARDS INTEREST ON FD , INTEREST FROM OTHERS-ICD AND INSURANCE CLAIM, ISSUE HAD BEEN RESTORED TO THE AO BY THE IT AT. REGARDING INTEREST ON MARGIN MONEY FD, THE ASSESSEE RELIED ON DECISIONS I N THE CASE OF INDUCTOTHERM INDIA LTD. VS. DCIT,75 TTJ 728,CIT VS. CHINANACHMUT HU CONST, 297 ITR 70(KAR) AND CIT VS. TAMLNADU DIARY DEVELOPMENT CORPORATION LTD.,216 ITR 535(MAD.). AS FOR CLAIM FOR DEDUCTION U/S 80IA ON SALE OF SCRA P, THE LD. AR RELIED UPON THE DECISION IN THE CASE OF DCIT VS. CORE HEALTHCARE LT D.,308 ITR 263(GUJ) AND IN ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 34 RESPECT OF INTEREST FROM DEBTORS, RELIED ON THE DE CISIONS IN THE CASE OF HERO CYCLES LTD. VS. ACIT,84 TTJ 485,NIRMA INDUSTRIES LT D VS. CIT,283 ITR 420(GUJ) AND CARBON CO. LTD.,286 ITR 201(MAD.). FOR THE AMOU NT OF LIQUIDATED DAMAGES FROM SUPPLIERS, CREDIT BALANCE WRITTEN OFF, SALES T AX REFUND, PROFIT ON SALE OF RAW MATERIAL, INTEREST ON NSC/BONDS AND PROFIT ON SALE OF RAW MATERIAL, THE LD. AR DID NOT MAKE ANY SEPARATE SUBMISSIONS . ON THE OTHER HA ND, THE LD. DR SUPPORTED THE FINDINGS OF THE AO. 34. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. WE FIND THAT THE A O IN HIS ASSESSMENT ORDER OBSERVED THAT THE ASSESSEE CLAIMED DEDUCTION OF RS. 94,67,651/- U/S 80IA OF THE ACT FOR ITS UNIT V AND VI ON PROPORTIONATE BASIS OF THE TOTAL TURNOVER AND PROFIT THEREON. A CURSORY GLANCE ON PAGES 115 TO 117 OF T HE PAPER BOOK REVEAL THAT THAT THE ASSESSEE ALLOCATED OTHER INCOME TO VARIOUS UNITS ON THE BASIS OF THEIR SALES INCOME BESIDES ALLOCATING VARIOUS EXPENSES. T HE AO ALSO NOTICED THAT THE ASSESSEE WAS NOT MAINTAINING SEPARATE BOOKS OF ACCO UNTS FOR EACH OF ITS UNITS. ACCORDING TO THE AO, THE ASSESSEE HAD NOT WORKED OU T THE PROFITS OF UNIT-V & VI CORRECTLY. IN THESE CIRCUMSTANCES, THE AO EXCLUDED TRADING INCOME AND OTHER INCOME WHILE DETERMINING DEDUCTION U/S 80IA OF THE ACT IN RESPECT OF PROFITS OF UNITS-V & VI. ON APPEAL, THE LD. CIT(A) OBSERVED THAT SINCE THE COMPUTATION FOR 80IA DEDUCTION WAS ACCEPTED BY THE DEPARTMENT IN T HE PAST AND SEPARATE ACCOUNTS WERE MAINTAINED IN RESPECT OF ALL THE UNIT S, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN ALLOCATING THE PROFIT IN THE RATIO OF TURNOVER. IT WAS FURTHER OBSERVED THAT THE ARGUMENT OF ASSESSING OFFICER THAT THE COS T OF ALLOCATION BETWEEN VARIOUS UNITS WAS ON ADHOC BASIS SO AS TO MAXIMIZE THE CLAI M OF DEDUCTION DOES NOT APPEAR TO BE CORRECT. AS IS APPARENT FROM THE IMPUG NED ORDERS, THE AO PROCEEDED ON THE BASIS THAT THE ASSESSEE WAS NOT MA INTAINING SEPARATE BOOKS OF ACCOUNTS FOR EACH OF ITS UNITS WHILE THE LD. CIT(A) OBSERVED THAT THE ASSESSEE MAINTAINED SEPARATE ACCOUNTS IN RESPECT OF ALL ITS UNITS. NEITHER THE LD. AR ON BEHALF OF THE ASSESSEE NOR THE LD. DR THREW ANY LIG HT ON THIS ASPECT. THE FACTS AS REVEALED FROM PAGES 115 TO 117 OF THE PAPER BOOK AR E THAT OTHER INCOME HAS ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 35 BEEN ALLOCATED ON THE BASIS OF SALES INCOME. THE B ASIS FOR ALLOCATING VARIOUS EXPENSES IS NOT EVIDENT NOR EXPLAINED BEFORE US BY THE LD. AR. IF SEPARATE ACCOUNTS WERE MAINTAINED FOR EACH OF THE UNITS, THE RE COULD BE NO REASON TO ALLOCATE OTHER INCOME ON THE BASIS OF SALE INCOME. SECTION 80IA OF THE ACT GRANTS DEDUCTION IN RESPECT OF PROFITS AND GAINS 'D ERIVED FROM' AN INDUSTRIAL UNDERTAKING. UNLESS INCOME IS DERIVED FROM THE ACTI VITIES OF THE INDUSTRIAL UNDERTAKING UNITS V & VI OF THE ASSESSEE IN THE IN STANT CASE, PROFITS OF THESE TWO UNITS CAN NOT BE ELIGIBLE FOR DEDUCTION U/S 80IA O F THE ACT AS HELD IN THE CASE OF CIT VS. STERLING FOODS,237 ITR 579(SC) &, PANDIAN C HEMICALS LTD. VS. CIT,262 ITR 278(SC).HONBLE DELHI HIGH COURT IN THEIR DECIS ION DATED 25.10.2007 IN THE CASE OF HONDA SIEL POWER PRODUCTS LTD. VS. CIT IN ITA NO. 995/2007 HELD THAT PROFITS AND GAINS FROM TRADING ACTIVITY CAN NOT BE HELD TO BE DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING. IN THE LIGHT O F VIEW TAKEN IN THE SAID DECISION, WE DO NOT FIND ANY INFIRMITY IN THE DIRECTIONS OF THE LD. CIT(A) TO RECOMPUTE THE DEDUCTION UNDER SECTION 80IA IN RESPECT OF UNIT V & VI AFTER EXCLUDING THE INCOME FROM TRADING PROFITS , IF ANY RELATING TO THESE UN ITS . CONSEQUENTLY SALE PROCEEDS OF RAW MATERIAL IN UNIT-V & VI WOULD NOT BE ELIGIB LE FOR DEDUCTION U/S 80IA OF THE ACT. AS REGARDS INCOME FROM OTHER SOURCES, WE FIND THAT THAT THE NEITHER THE AO NOR THE LD. CIT(A) ANALYSED AS TO WHETHER OR NOT EA CH OF THE ITEMS OF RECEIPTS COMPRISED IN OTHER INCOME RELATED TO THE BUSINES S OF THE INDUSTRIAL UNDERTAKINGS IN THE UNITS V & VI OF THE ASSESSEE. 34.1 WE FURTHER FIND THAT THE ITAT IN THEIR ORDE R DATED 20.11.2009 IN THE ASSESSEES OWN CASE FOR THE AY 1998-99 IN IT NO. 15 22 & 1594/AHD./2005 CONCLUDED THAT THE AO HAVING NOT GIVEN ANY REASON FOR NOT ACCEPTING THE COMPUTATION OF DEDUCTION AS PER AUDIT CERTIFICATE WHILE THE INCOME FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 80IA WORKED OUT S EPARATELY HAVING NOT BEEN FOUND TO BE INCORRECT OR REFUTED BY THE AO BEFORE T HE LD. CIT(A) NOR ANY JUSTIFICATION HAVING BEEN GIVEN FOR MAKING A DEPART URE FROM THE PAST PRACTICE , THE ASSESSEES METHOD OF COMPUTING ELIGIBLE PROFITS IN RESPECT OF UNITS-V & VI HAS TO BE UPHELD SUBJECT TO THEIR DECISION IN RESPECT OF ELIGIBILITY OF INCOME. ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 36 34.2 AS REGARDS RECEIPTS INCLUDED IN OTHER INCOM E, WE FIND THAT THE ITAT IN THEIR AFORESAID ORDER DATED 20.11.2009, FOLLOWING THE O RDER DATED 22.11.1997 OF THE ITAT IN ITA NOS.2979&3267/AHD./2003 IN THE ASSESSE ES OWN CASE FOR THE AY 1997-98 HELD THAT DIVIDEND INCOME, PENALTY FROM SUP PLIERS, PROFIT ON SALE OF FIXED ASSETS AND MISC. INCOME WERE NOT ELIGIBLE FOR DEDUC TION U/S 80IA OF THE ACT WHILE NOTICE PAY RECOVERY AND SALES(MISC.) WERE SO ELIGIB LE. AS REGARDS INSURANCE RECEIPT , THE NATURE OF RECEIPT BEING NOT AVAILABLE AND INTEREST ON FIXED DEPOSITS, THE MATTER WAS RESTORED TO THE FILE OF THE AO WITH NECESSARY DIRECTIONS. LIKE WISE IN RESPECT OF INTEREST FOR LATE PAYMENT OF SALE P RICE, WHICH WAS STATED TO BE ARISING OUT OF SALE OF PRODUCTS MANUFACTURED BY THE INDUSTRIAL UNDERTAKINGS IN UNITS-V & VI, THE MATTER WAS RESTORED TO THE FILE OF THE AO IN THE LIGHT OF DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CA SE OF NIRMA INDUSTRIES LTD. VS. DCIT,283 ITR 402(GUJ) 34.3 IN THE YEAR UNDER CONSIDERATION, 14 ITEMS OF RECEIPTS AMOUNTING TO RS.1,06,28,124/- ARE MENTIONED ON PAGE 20 OF THE TH IRD PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. UNDISPUTEDLY , DIVIDEND IN COME & PROFIT ON SALE OF FIXED ASSETS, WERE NOT ELIGIBLE OR DERIVED BY THE IND USTRIAL UNDERTAKING IN UNITS-V & VI FROM ANY BUSINESS CARRIED ON BY THESE INDUSTRIAL UNDERTAKINGS AND THEREFORE, THESE WERE NOT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT , AS CONCLUDED BY THE ITAT IN THEIR AFORESAID ORDER FOR THE AY 1998-99. FOLLOWING THIS ORDER, CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 80IA ON THE ACT ON T HE AMOUNT OF DIVIDEND INCOME & PROFIT ON SALE OF FIXED ASSETS IS REJECTED. 34.4 . AS REGARDS CLAIM FOR DEDUCTION U/S 80IA O F THE ACT IN RESPECT OF BANK INTEREST ON FIXED DEPOSITS KEPT FOR MARGIN MONEY, T HE LEADING DECISION IS THAT OF THE HON'BLE SUPREME COURT IN TUTICORIN ALKALI CHEMI CALS AND FERTILIZERS LTD. [1997] 227 ITR 172 WHICH HOLDS THAT INTEREST EARNED ON DEPOSITS PLACE D FOR THE PURPOSES OF OBTAINING LOANS FOR BUSINESS CANNOT BE TREATED AS BUSINESS INCOME ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 37 BUT ONLY AS INCOME FROM OTHER SOURCES. IT WAS FURTHER HELD THAT THE ASSESSEE CANNOT CLAIM ADJUSTMENT OF EXPENDITURE AGAINST INT EREST ASSESSABLE UNDER SECTION 56. SECTION 57 OF THE ACT SETS OUT IN ITS C LAUSES (I) TO (III) THE EXPENDITURES WHICH ARE ALLOWABLE AS DEDUCTION FROM INCOME ASSESS ABLE UNDER SECTION 56. IT IS NOT THE CASE OF THE ASSESSEE THAT THE INTEREST PAYA BLE BY IT ON TERM LOANS IS ALLOWABLE AS DEDUCTION UNDER SECTION 57 OF THE ACT. . THE DECISION IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 ITR 172 , WHICH WAS RENDERED IN THE CONTEXT OF SECTIONS 56 AND 57, HAS BEEN FOLLOWE D IN CIT V. AUTOKAST LTD. [2001] 248 ITR 110 (SC). LIKEWISE, IN CIT V. DR. V. P. GOPINATHAN [20 01] 248 ITR 449 (SC) INTEREST ON FIXED DEPOSITS WAS HELD NOT TO QU ALIFY FOR SETTING OFF AGAINST INTEREST ON LOANS BORROWED. THE OTHER DECISIONS ON THE SAME LINES, IN THE CONTEXT OF SECTION 80HHC ARE CIT V. STERLING FOODS [1999] 237 ITR 579 (SC) AND PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 (SC). IN THESE DECISIONS, THE HON'BLE SUPREME COURT REITERATED THE NEXUS THEORY A ND DECLINED TO TREAT SUCH INTEREST EARNED AS BUSINESS INCOME. THE DECISION OF THE HONBLE MADRAS HIGH COURT IN SOUTH INDIA SHIPPING CORPORATION LTD. V. C IT [1999] 240 ITR 24 WAS ALSO RENDERED IN THE CONTEXT OF TREATING CERTAIN RECEIPT S NOT AS BUSINESS INCOME BUT INCOME FROM OTHER SOURCES FOR THE PURPOSES OF SECTI ON 56 READ WITH SECTION 57(III) OF THE ACT. IN CASES WHERE THE ASSESSEE IS REQUIRED TO MANDATORILY KEEP MONIES IN FIXED DEPOSIT IN ORDER TO AVAIL OF CREDIT FACILI TY FOR THEIR BUSINESS, THE ARGUMENT ON BEHALF OF THE ASSESSEES IS THAT BUT FOR SUCH A S TIPULATION BY THE BANK THERE WAS NO NEED FOR THE ASSESSEE TO KEEP THE MONEY IN F IXED DEPOSIT AND THEREFORE, THE INCOME EARNED FROM SUCH FIXED DEPOSITS BEARS A DIRECT NEXUS TO THE BUSINESS ACTIVITY ITSELF. GIVEN THE REPEATED AFFIRMATION BY THE HON'BLE SUPREME COURT IN THE VARIOUS CASES, THE INTEREST EARNED FROM THE BANK, DOES NOT HAVE AN IMMEDIATE NEXUS WITH THE BUSINESS OF THE ASSESSEE AND THEREF ORE, CAN NOT BE SAID TO BE DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING . HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF NAHAR EXPORTS VS . CIT,288 ITR 494 UPHELD DISALLOWANCE OF CLAIM FOR DEDUCTION U/S 80IB OF THE ACT ON THE INTEREST INCOME, IN THE LIGHT OF AFORESAID DECISIONS OF THE APEX COURT . ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 38 34.41 FOR THE PURPOSE OF CLAIMING DEDUCTION UND ER S. 80-IA OF THE ACT, THE ASSESSEE IS NOT ONLY REQUIRED TO ESTABLISH THAT IT WAS BUSINESS PROFIT OF THE INDUSTRIAL UNDERTAKING, BUT ALSO TO ESTABLISH THAT THIS WAS A PROFIT 'DERIVED FROM' THE BUSINESS ACTIVITY OF AN INDUSTRIAL UNDERTAKING, WH ICH MEANS A DIRECT NEXUS BETWEEN THE PROFITS AND INDUSTRIAL UNDERTAKING. THE MERE FACT THAT SUCH INCOME WAS A BUSINESS INCOME WOULD NOT ENTITLE THE ASSESSE E FOR DEDUCTION UNDER S. 80- IA OF THE ACT. THOUGH THE ASSESSEE MAY NECESSARILY HAVE TO MAKE TH E DEPOSIT WITH THE BANK FOR CERTAIN GUARANTEES OR WARRANTIE S , THE INCOME ON ACCOUNT OF INTEREST FROM SUCH DEPOSITS WITH THE BANK CANNOT B E SAID TO HAVE BEEN DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. TH E IMMEDIATE SOURCE OF INTEREST IS THE DEPOSIT ITSELF, AND THE EFFECTIVE SOURCE OF THE GENEALOGY OF THE SOURCE OF THE INTEREST INCOME IS THE DEPOSIT AND NOT BUSINESS, AS THE INDUSTRIAL UNDERTAKING IS REMOVED BY ONE STEP FROM THE SOURCE OF INCOME FOR T HE INTEREST. IN OTHER WORDS, THE IMMEDIATE AND EFFECTIVE SOURCE OF THE INTEREST IS THE DEPOSIT AND NOT THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. AS HELD BY THE HONBLE SUPREME COURT IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. V. CIT [ 1978] 113 ITR 84 , THE PROFITS OR GAINS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IA OF THE ACT MUST BE DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS, AND UNLESS THE PROFITS OR GAINS ARE DERIVED FROM THE ACTUAL CONDUCT OF THE BUSINESS, IT CANNOT BE STATED THAT THE INTEREST IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTA KING. IN OTHER WORDS, THE INDUSTRIAL UNDERTAKING MUST DIRECTLY YIELD THE PROF IT, AND IT CANNOT BE THE MEANS TO YIELD THE INCOME. THE DEPOSIT MIGHT BE AN INCIDENTA L INVESTMENT WITH THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND THAT WOU LD NOT BE SUFFICIENT TO RENDER THE INTEREST INCOME AS PROFITS AND GAINS DERIVED FR OM THE INDUSTRIAL UNDERTAKING. THE FACT THAT THE AMOUNT WAS ASSESSED AS BUSINESS I NCOME ITSELF WOULD NOT BE SUFFICIENT TO HOLD THAT THE INTEREST INCOME WAS DER IVED FROM THE ACTUAL CONDUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHE R WORDS, IT IS NOT ALL BUSINESS RECEIPTS THAT WOULD QUALIFY FOR THE DEDUCTION AND T HE LEGISLATURE HAS APPARENTLY NOT INTENDED TO GIVE THE BENEFIT OF DEDUCTION TO AL L BUSINESS INCOME. IF THE INTENTION OF THE LEGISLATURE WAS TO GRANT RELIEF TO ALL BUSINESS INCOME, IT COULD ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 39 HAVE USED THE EXPRESSION, 'PROFITS AND GAINS OF IND USTRIAL UNDERTAKING', THE FACT THAT THE LEGISLATURE HAS USED THE EXPRESSION 'PROFI TS AND GAINS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING' HAS SOME SIGNI FICANCE AND IT CONNOTES THAT THE IMMEDIATE AND EFFECTIVE SOURCE OF INCOME ELIGIB LE FOR GRANT OF RELIEF UNDER SECTION 80IA OF THE ACT MUST BE THE INDUSTRIAL UNDE RTAKING ITSELF AND NOT ANY OTHER SOURCE. THE MANDATE OF LAW IS THAT UNLESS THE SOURC E OF THE PROFIT IS THE UNDERTAKING, THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 80IA OF THE ACT. MERE COMMERCIAL CONNECTION BETWEEN THE INC OME AND THE INDUSTRIAL UNDERTAKING WOULD NOT BE SUFFICIENT. THE DERIVATION OF THE INCOME MUST BE DIRECTLY CONNECTED WITH THE BUSINESS IN THE SENSE THAT THE I NCOME IS GENERATED BY THE BUSINESS. IT WOULD NOT BE SUFFICIENT IF IT IS GENER ATED BY THE EXPLOITATION OF A BUSINESS ASSET. 34.42 HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS.GASKETS AND RADIATORS DISTRIBUTORS, 296 ITR 440(GUJ) IN THE CON TEXT OF DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF INCOME ON ACCOUNT OF INTER EST ON FIXED DEPOSITS HELD IDENTICAL QUESTION CAME TO BE CONSIDERED BY THE HO N'BLE SUPREME COURT IN PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 AND THE QUESTION, WHICH WAS POSED FOR CONSIDERATION BEFORE THE APEX COURT WAS W HETHER THE INTEREST ON DEPOSITS WITH THE TAMIL NADU ELECTRICITY BOARD SHOU LD BE TREATED AS INCOME DERIVED BY THE INDUSTRIAL UNDERTAKING FOR THE PURPO SE OF SECTION 80HH OR NOT, AND THE HON'BLE SUPREME COURT HAS OBSERVED THAT SECTION 80HH OF THE INCOME-TAX ACT GRANTS DEDUCTION IN RESPECT OF PROFITS AND GAIN S 'DERIVED FROM' AN INDUSTRIAL UNDERTAKING AND THE WORDS 'DERIVED FROM' IN SECTION 80HH OF THE INCOME-TAX ACT, 1961, MUST BE UNDERSTOOD AS SOMETHING WHICH HAS A D IRECT OR IMMEDIATE NEXUS WITH THE ASSESSEE'S INDUSTRIAL UNDERTAKING. THE SUP REME COURT HELD THAT INTEREST DERIVED BY THE INDUSTRIAL UNDERTAKING OF THE ASSESS EE ON DEPOSITS MADE WITH THE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELEC TRICITY FOR RUNNING THE INDUSTRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UNDERTAKING ITSELF AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTA KING FOR THE PURPOSE OF THE SAID DEDUCTION UNDER SECTION 80HH. IN G.T.N. TEXTIL ES LTD. V. DY. CIT [2005] 279 ITR 72 , THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FROM EXPORT OF GOODS. THE KERALA HIGH COURT HAS FURTHER HELD THAT THE INTEREST EARNED BY THE ASSESSEE ON FIXED DEPOSITS, COMMISSION RECEIVED ON SALE OF MACHINERY, ETC., WERE NOT BUSINESS INCOME AND CO NSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO COMPUTATION OF ELIGIBLE DEDUCTI ON UNDER SECTION 80HHC OF THE ACT BY INCLUDING THOSE RECEIPTS UNDER BUSINESS INCO ME. THEREFORE, CONSIDERING THE AFORESAID TWO DECISIONS, WE MUST HOLD THAT THE TRIBUNAL AS WELL AS THE ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 40 COMMISSIONER OF INCOME-TAX (APPEALS), BOTH COMMITTE D AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCOME' AND GRANT ING THE ASSESSEE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT.. 34.5 AS REGARDS SALE OF SCRAP, THOUGH THE ASSESSE E RELIED UPON A DECISION IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD.,308 ITR 263(GUJ.) NOT AN IOTA OF EVIDENCE HAS BEEN PLACED BEFORE US THAT THESE SCRAP RESULTED FROM THE BUSINESS ACTIVITIES OF THE UNIT-V & VI NOR ANY FINDINGS ON T HIS ASPECT HAVE BEEN RECORDED BY THE AO AND THE LD. CIT(A). 34.6 LIKEWISE THERE IS NO EVIDENCE ON RECORD NOR IT HAS BEEN PLACED BEFORE US BY THE LD. AR THAT INTEREST RECEIVED FROM DEBTOR S ON ACCOUNT OF LATE PAYMENT OF SALE PRICE ARISES OUT OF SALE OF PRODUCTS MANUFA CTURED BY THE INDUSTRIAL UNDERTAKINGS IN UNITS-V & VI. IN THE AY 1998-99 SIM ILAR ISSUE WAS RESTORED TO THE FILE OF THE AO IN THE LIGHT OF DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD. VS. DCIT,283 ITR 402( GUJ). FOLLOWING THIS DECISION OF THE ITAT, MATTER IS ACCORDINGLY RESTORED TO THE FILE OF THE AO WITH SIMILAR DIRECTIONS 34.7 AS REGARDS INTEREST EARNED FROM OTHERS-ICD , LIQUIDATED DAMAGES FROM SUPPLIERS, CREDIT BALANCES WRITTEN OFF, SALES TAX R EFUND, INTEREST RECEIVED ON STAFF HOUSING LOANS AND NSC/BONDS, THE AO AND THE LD. CI T(A) DID NOT ANALYSE THE NATURE OF RECEIPTS NOR RECORDED ANY FINDINGS AS TO WHETHER OR NOT THESE WERE DERIVED BY THE INDUSTRIAL UNDERTAKINGS IN UNIT-V & VI FROM ANY BUSINESS CARRIED ON IN THESE UNDERTAKINGS 34.8 IN VIEW OF THE FOREGOING, ESPECIALLY WHEN NEITHER THE AO NOR THE LD. CIT(A) ANALYSED AS TO WHETHER OR NOT THE AFORESAID ITEMS OF RECEIPTS ( OTHER THAN DIVIDEND, PROFIT ON SALE OF FIXED ASSETS & SALE OF RAW MATERIAL) COMPRISED IN OTHER INCOME WERE DERIVED BY THE INDUSTRIAL UNDERTAKINGS IN UNIT-V & VI FROM ANY BUSINESS CARRIED ON IN THESE UNDERTAKINGS, WE HAVE NO ALTERNATIVE BUT TO VACATE THE FINDINGS OF THE LD. CIT(A) IN RESPECT OF AFORE SAID ITEMS OF RECEIPTS ( OTHER THAN ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 41 DIVIDEND , PROFIT ON SALE OF FIXED ASSETS & SALE O F RAW MATERIAL) AND RESTORE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO ANALYSE EACH OF THE SAID ITEMS AS TO WHETHER OR NOT THESE WERE DERIVED BY THE INDU STRIAL UNDERTAKINGS UNIT-V & VI FROM ANY BUSINESS CARRIED ON IN THESE UNDERTAKIN GS AND THEREAFTER, ADJUDICATE THE ISSUE IN ACCORDANCE WITH LAW THE LIGHT OF OUR AFORESAID OBSERVATIONS AND VARIOUS JUDICIAL PRONOUNCEMENTS, INCLUDING THOSE RE FERRED TO ABOVE AND AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. 34.9. IN VIEW OF THE FOREGOING, GROUND NO.9 IN T HE APPEAL OF THE ASSESSEE AND GROUND NOS. 5 & 6 IN THE APPEAL OF THE REVENUE ARE DISPOSED OF. 35. GROUND NO. 10 IN THE APPEAL OF THE ASSESSEE RE LATES TO DEPRECIATION ON CIVIL STRUCTURE WORK FOR FOUNDATION OF WATER POLLUT ION CONTROL EQUIPMENT AT 100%. RELYING ON HIS FINDINGS FOR THE AY 1999-2000,THE A O ALLOWED DEPRECIATION @25% ON THE ADDITIONS TOWARDS THE POLLUTION CONTROL EQUIPMENTS OF RS.5,93,971/- AS AGAINST 100% DEPRECIATION CLAIMED BY THE ASSES SEE.. ON APPEAL, THE LD..CIT(A) FOLLOWING HIS PREDECESSORS ORDER FOR A SSESSMENT YEAR 1999-2000 , UPHELD THE ACTION OF THE AO. 36 THE ASSESSEE IS NOW IN APPEAL BEFORE US. BOTH THE PARTIES AGREED THAT ISSUE MAY BE ADJUDICATED IN THE LIGHT OF DECISION O F THE ITAT FOR THE AY 1999- 2000. WE HAVE IN OUR ORDER DATED 12.3.2010 IN ITA NO. 1438/AHD./2007 IN THE ASSESSEES OWN CASE FOR THE AY 199-2000 HELD AS UND ER 3.2 WE HAVE CONSIDERED RIVAL SUBMISSIONS. THE ASSE SSEE IN THE REPLY BEFORE ASSESSING OFFICER SPECIFICALLY PLEADED THAT WATER P OLLUTION EQUIPMENT AND ENERGY SAVING DEVICE SYSTEMS INCLUDES COST OF THE CIVIL ST RUCTURE TO MAINTAIN THE ABOVE EQUIPMENTS. THE CIVIL STRUCTURE WAS EXPLAINED TO TH E FOUNDATION OF THE ABOVE ITEMS WITHOUT WHICH THE WATER POLLUTION EQUIPMENT A ND ENERGY SAVING DEVICE WOULD NOT HAVE WORKED. THE PROPER CERTIFICATE TO T HAT EFFECT WAS ALSO FILED CERTIFYING THE ABOVE FACTS. SINCE, THE STRUCTURE WA S PART OF THE SAME ITEMS, THEREFORE, IT COULD NOT BE EXCLUDED FROM THE 100% D EPRECIABLE ITEMS. THE AUTHORITIES BELOW INSTEAD OF BRINGING ANY ADVERSE M ATERIAL AGAINST THE ASSESSEE ON THE EXPLANATION OF THE ASSESSEE WITHOUT ANY BASI S CONSIDERED IT TO BE A ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 42 DIFFERENT ITEM. HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. R.G.ISPAT LTD. (SUPRA) HELD THERE MAY BE HEAVY STRUCTURES ON WHICH THE MACHINE RY IS INSTALLED WITH WHICH THE ACTIVITIES OF A MANUFACTURING CONCER N ARE CARRIED ON. THAT STRUCTURE COULD BE COVERED WITHIN THE TERM PL ANT. IF THE BUILDING OR STRUCTURE OR PART THEREOF IS SUCH BY WHICH THE B USINESS ACTIVITIES ARE CARRIED ON THEN IT WOULD AMOUNT TO PLANT BUT WH ERE THE STRUCTURE PLAYS NO PART IN CARRYING ON THE BUSINESS ACTIVITIE S AND IS USED AS THE PLACE FOR CARRYING ON THE BUSINESS, IT WILL FALL WI THIN THE CATEGORY OF A BUILDING AND IT CANNOT BE CALLED AS PLANT. WHERE PA RT OF THE CONSTRUCTION OF THE BUILDING IS SPECIALLY DESIGNED AND MEANT FOR CARRYING ON THE MECHANICAL PROCESS, IT WILL BE PLAN T AND WHERE PART OF IT IS USED FOR VARIOUS ACTIVITIES LIKE RESEARCH, OF FICE OR THE LIKE, SUCH CONSTRUCTION WOULD NOT BE TREATED AS PLANT. THE FUN CTIONAL TEST IS WHETHER A STRUCTURE IS USED FOR CARRYING ON THE BUS INESS AND HENCE A TOOL OF THE TRADE OR WHETHER IT IS ONLY THE PLACE O F BUSINESS IN WHICH THE BUSINESS IS CARRIED ON. THEREFORE, WHERE PORTIO NS OF A STRUCTURE ARE REQUIRED TO MAKE THE CRANES OPERATIVE AND IN TH E ABSENCE OF WHICH IT IS NOT POSSIBLE TO OPERATE THE CRANES AND THE CONSTRUCTION OF SUCH STRUCTURE WAS SPECIALLY DESIGNED FOR THAT PURP OSE, THE STRUCTURE WOULD FALL WITHIN THE DEFINITION OF PLANT. THE E XTRA STRUCTURE WHICH IS IN ADDITION TO SUCH STRUCTURE CANNOT BE CONSIDERED AS PLANT. THEREFORE, THE MASSIVE REINFORCED CONCRETE STRUCTUR E SPECIALLY DESIGNED TO TAKE UP LOADS CONSTITUTES PLANT WITHI N THE MEANING OF SECTION 43(3) OF THE ACT. 3.3 CONSIDERING THE FACTS OF THE CASE AND MATERIAL ON RECORD IN THE LIGHT OF THE ABOVE JUDGEMENT, IT IS CLEAR THAT THE CIVIL STRUCTU RE WAS PART OF WATER POLLUTION EQUIPMENT AND ENERGY SAVING DEVICE WITHOUT WHICH TH E ABOVE ITEMS COULD NOT HAVE WORKED PROPERLY. THE ABOVE ITEMS HAVE FOUNDATION ON CIVIL STRUCTURE, THEREFORE, IT BEING PART AND PARCEL OF THE SAME SHOULD BE TREATED AS WITHIN THE DEFINITION OF PLANT, AND THE AUTHORITIES BELOW SHOULD HAVE ALLOWE D DEPRECIATION @ 100%. IN THIS VIEW OF THE MATTER, WE SET ASIDE THE ORDERS OF AUTH ORITIES BELOW AND DELETE THE ADDITION. ASSESSING OFFICER IS DIRECTED TO ALLOW DE PRECIATION ON CIVIL STRUCTURE ALSO @ 100%. AS A RESULT, GROUND NO.1 OF THE APPEAL OF T HE ASSESSEE IS ALLOWED. 37. IN THE LIGHT OF OF OUR AFORESAID DECISION, THE AO IS DIRECTED TO ALLOW DEPRECIATION @ 100% ON THE CIVIL STRUCTURE FOR THE POLLUTION CONTROL EQUIPMENT. THEREFORE, GROUND NO. 10 IN THE APPEAL OF THE ASSES SEE IS ALLOWED 38. GROUND NOS. 3 & 4 IN THE APPEAL OF THE REVENUE RELATE TO ADDITION OF RS.34,88,000/- ON ACCOUNT OF LOWER SALE PRICE OF GI LOQUIN. THE AO NOTICED MUCH ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 43 DIFFERENCE IN THE AVERAGE SALE PRICE OF ASSESSEE CO MPANY IN THE SALES EFFECTED THROUGH ITS ASSOCIATE COMPANY GHARDA CHEMICALS LTD. AND THE SALES MADE DIRECTLY. THE RELEVANT DETAILS REVEAL AS UNDER: GILOQUIN QTY.MT. VALUE AVERAGE RATE / KG TOTAL SALES 359.97 48647579 135.14 LESS:SALES THROUGH GCL 133.77 21114259 157.84 DIRECT SALE BY ASSESSEE 226.20 27533320 121.72 TO A QUERY BY THE AO, THE ASSESSEE EXPLAINED VIDE L ETTER DATED 28-03-2003 THAT : THE PESTICIDE INDUSTRY WORKS ON VARIETY OF SALES MODELS. THE SALE OF TECHNICAL GOODS TO FORMULATORS AND THES E SALES ARE AT THE PREVAILING COMMERCIAL PRICES. KINDLY NOTE THAT TECHNICALS GOODS CAN NOT BE USED BY THE END CONSUMER WITHOUT FORMULA TION. THE TWO IMPORTANT COMPONENTS OF SALE OF BRANDED FORMULATION PRODUCTS ARE (1) AVAILABILITY OF MARKET ING INFRASTRUCTURE / ARRANGEMENT AND (2) ESTABLISHED BRAND IMAGE. YOU W ILL ALSO NOTE THAT A CO. CAN NOT SELL FORMULATIONS UNLESS IT HAS PRODUCT REGISTRATION FOR LABELS, ETC. THE QUANTUM SALE OF ONES OWN BRAN DED PRODUCT IS DEPENDENT ON THE MARKET REACH, MARKETING EXPENDITUR E, ETC. THE VALUE ADDITION HOWEVER IS MUCH HIGHER WHEN A COMPAN Y SELLS ITS OWN BRANDED PRODUCTS. GUJARAT INSECTICIDES LTD DOE S SELL ITS OWN BRANDED PRODUCT THROUGH A DISTRIBUTION NETWORK. TO AUGMENT ITS SALE AND CAPACITY UTILIZATION, GUJA RAT INSECTICIDES LTD HAS ALSO SOLD PRODUCTS, WHICH ARE NOT GUJARAT INSECTICIDES LTDS OWN BRANDS. THIS SALES WILL OBV IOUSLY BE AT PRICES, WHICH ARE LOWER THAN THE ONE REALIZED FOR I TS OWN PRODUCTS. THIS IS ON ACCOUNT OF THE FACT THAT GUJARAT INSECTI CIDES LTD DOES NOT HAVE TO INCUR ANY MARKETING EXPENSES. YOU MUST ALS O APPRECIATE THAT THESE SALES ARE UNDER A PURCHASE ORDER AND ARI SE OUT OF LABELS AND REGISTRATIONS AND BRANDS BELONGING TO THE CUSTO MER. THE PRICING OF SUCH SALES IS BASED ON COMMERCIAL PRICE OF THE TECHNICAL GRADE PRODUCTS AND COST OF ADJUVENTS, ETC. AND PROF IT ON ACCOUNT OF PROCESSING CHARGES. 38.1 HOWEVER, THE AO DID NOT ACCEPT THE AFORESAI D SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT AS PER DETAILS GIVEN FO R CLOSING STOCK QUANTITY AND VALUE OF WIP AND FINISHED GOODS AS ON 31.03.2000, R S.121.72 PER KG. WAS THE GROSS REALIZATION PRICE FROM SALE OF GILOQUIN PRODU CT WHILE AS PER COMPANYS ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 44 OWN COST SHEETS, THE COST OF FINISHED GOODS OF THIS PRODUCT WITHOUT EXCISE DUTY AND SALES TAX WAS RS.113.68 PER KG. AND ADDING THER ETO EXCISE DUTY AT THE RATE OF 16% AND GST/CST AT THE RATE OF 4% THE PRODUCT, COST WORKED OUT TO RS.137.14 PER KG. AND THE ASSESSEE DID NOT GIVE ANY JUSTIFICA TION FOR SELLING THEIR 226.20 MT OF THIS MATERIAL AT A LOSS RS.15.42 PER KG. ACCOR DINGLY, THE AO ADDED A SUM OF RS.34,88,000/-TO THE GROSS PROFIT, BEING THE DIFFER ENCE BETWEEN THE COST (WITHOUT CONSIDERING ANY PROFIT ELEMENT) OF RS.137.14 AND GR OSS SELLING PRICE PURPORTED TO BE REALIZED BY THE CO. OF RS.121.72 PER KG. 39. ON APPEAL, THE LD.CIT(A) CALLED FOR A REMAND RE PORT FROM THE AO ON THE SUBMISSION OF THE ASSESSEE THAT THE AO COMPARED THE COST PRICE OF THE PRODUCT, WHICH WAS INCLUSIVE OF EXCISE DUTY AND SALES TAX AN D THAT IF THE NET COST PRICE WAS COMPARED TO THE NET SALE PRICE, THERE WAS PROFIT . IT WAS POINTED OUT THAT THE DIRECT SALE PRICE INCLUSIVE OF EXCISE DUTY WAS RS.1 46.85 PER KG AS AGAINST COST PRICE OF RS.137.14, INCLUSIVE OF EXCISE DUTY LEADIN G TO PROFIT OF RS.9.71 PER KG. THE AO IN HIS REPORT DATED 02-08-2007 REITERATED HI S FINDINGS IN THE ASSESSMENT ORDER. IN THESE CIRCUMSTANCES, THE LD. CIT(A) DELET ED THE ADDITION WITH THE FOLLOWING OBSERVATIONS: 13.3 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS AND I AM IN AGREEMENT WITH THE CONTENTIONS OF THE APPELLANT THA T THE COMPARISON IS NOT BASED ON THE CORRECT FACTS AND IF LIKES ARE COMPARED WITH THE LIKES THERE IS NO LOSS IN THE TRA NSACTIONS. NO ASSERTIONS WERE MADE BY THE ASSESSING OFFICER IN RE MAND REPORT TO COUNTER THE SUBMISSIONS OF THE APPELLANT. IN VIEW THEREOF THE ADDITION OF RS.34,88,000 IS DIRECTED TO BE DELETED. 40. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR SUPPORTED THE FINDINGS O F THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE IMPUGNED ORD ER OF THE LD. CIT(A) 41. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. THE LD. DR DID NOT DISPUTE THE SUBMISSIONS OF THE A SSESSEE BEFORE THE LD. CIT(A) THAT THE DIRECT SALE PRICE INCLUSIVE OF EXCISE DUTY WAS RS.146.85 PER KG AS AGAINST ITA NO.459/AHD/2008 ITA NO.498/AHD/2008 45 COST PRICE OF RS.137.14, INCLUSIVE OF EXCISE DUTY L EADING TO PROFIT OF RS.9.71 PER KG. NOR ANY MATERIAL WAS PLACED BEFORE US, CONTRA RY TO THE AFORESAID FINDINGS OF FACTS RECORDED BY THE LD. CIT(A). IN THESE CIRCUMST ANCES, WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LD. CIT(A). THERE FORE, GROUND NOS. 3 & 4 IN THE APPEAL OF THE REVENUE ARE DISMISSED. 42. GROUND NO. 11 IN THE APPEAL OF THE ASSESS EE, BEING A MERE PRAYER WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED IN TE RMS OF RESIDUARY GROUND NO.12 , BOTH THESE GROUNDS ARE DISMISSED. 43. IN THE RESULT, BOTH THESE APPEALS ARE PARTLY ALLOWED, BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT, ON THIS 19TH D AY OF MARCH, 2010. SD/- SD/- (BHAVNESH SAINI) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD, DATED : 19 TH MARCH, 2010 COPY TO: 1. THE ASSESSEE 2. ACIT, BHARUCH CIRCLE, BHARUCH 3. CIT(A)-VI, BARODA 4. CIT-CONCERNED, BARODA BY ORDER 5. DR, B BENCH DEPUTY REGISTRAR, ITAT, AHMEDABAD