M/S. INDIAN RARE EARTHS LTD, MUMBAI V. THE ITO RG 1(2)-1, MUMBAI

ITA 5247/MUM/2007

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8768 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 07-08-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 03-08-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: V MOHAN
• Keywords: Capital asset; Business income; Depreciation; Revenue expenditure; Capital expenditure
• Section: 80HHC; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI I BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM & SHRI N K BILLAIYA, AM ITA NOS. 5247 TO 5249/MUM/2007 (ASST YEARS 2002-03 TO 04-05) INDIAN RARE EARTHS LTD 1207 VEER SAVARKAR MARG NEAR SIDDI VINAYAK TEMPLE PRABHADEVI MUMBAI 28 VS THE INCOME TAX OFICER RANGE 1(2)(1), MUMBAI (APPELLANT) (RESPONDENT) ITA NOS. 5266 TO 5268/MUM/2007 (ASST YEARS 2002-03 TO 04-05) THE DY COMMR OF INCOME TAX RANGE 1(2) MUMBAI VS INDIAN RARE EARTHS LTD 1207 VEER SAVARKAR MARG NEAR SIDDI VINAYAK TEMPLE PRABHADEVI MUMBAI 28 (APPELLANT) (RESPONDENT) PAN NO. AAACI2799E ASSESSEE BY SHRI V MOHAN REVENUE BY SHRI SANJIV DUTT DT.OF HEARING 7 TH AUG 2012 DT OF PRONOUNCEMENT 26 TH , SEPT 2012 PER BENCH: THESE THREE SETS OF CROSS APPEAL ARE DIRECTED AGAI NST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE AYS 2002-03 TO 2004-05. 2 FIRST WE TAKE UP THE APPEALS OF THE ASSESSEE SINC E THE ISSUES IN ALL THE APPEALS OF THE ASSESSEE ARE COMMON; THEREFORE, WE REPRODUCE THE GROUNDS FOR THE ASSESSMENT YEAR 2002-03 AS UNDER: 1. THE LEARNED CIT (A) ERRED IN NOT ALLOWING AS DED UCTION THE RIGHT OFF OF LOSS ON ACCOUNT OF NON-MOVING STORES. INDIAN RARE EARTHS LTD 2 2. THE LEARNED CIT (A) ERRED IN NOT ALLOWING AS DED UCTION THE RIGHT OFF OF AMOUNTS PAID TO ONTRACTORS AS BEING LOSS INCIDENTAL TO TRADE. 3. THE LEARNED CIT (A) ERRED IN NOT ALLOWING THE CO RRECT CLAIM OF RELIEF UNDER SECTION 8OHHC OF THE INCOME TAX ACT APPELLANT IS EN TITLED TO IN RESPECT OF THE FOLLOWING ITEMS: (A) 90% OF THE AMOUNT REPRESENTING PROVISION WRITTE N BACK WAS REDUCED FROM THE PROFITS. (B) LEARNED CIT (A) ERRED IN CONFIRMING PROFITS OF THE BUSINESS BEING REDUCED BY 90% OF THE FOLLOWING ITEMS INCLUDED IN M ISCELLANEOUS RECEIPTS. (C) INTEREST INCOME WAS NOT NETTED FROM INTEREST PA YMENTS. INSTEAD 90% OF THE INTEREST RECEIPT WAS REDUCED FROM BUSINESS P ROFITS. 3 GROUND NO. 1 IS REGARDING DEDUCTION ON ACCOUNT OF NON MOVING STORES WRITTEN OFF. 3.1 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AN D CONSIDERED THE RELEVANT MATERIAL ON RECORD. DURING THE ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS DEBITED TO THE P&L A /C AN AMOUNT OF ` . 2,21,34,799/- INDIAN RARE EARTHS LTD 3 ON ACCOUNT LOSS ON NON-MOVING STORES UNDER THE HE AD GENERAL EXPENDITURE REPRESENTING 95% OF THE COST OF THE SAID STORES AND SPARES. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT FOR THE AY 2001-02, THE ASSESSEE HAS CHANGED THE METHOD OF ACCOUNTING IN RE SPECT OF THE STORES AND SPARES AND WRITTEN OFF 95% OF THE VALUE ON STORES AND SPAR ES WHICH HAVE NOT MOVED FOR THE LAST THREE YEARS AND RETAINED ONLY 5% RESIDUAL VALU E. THE ASSESSING OFFICER HELD THAT A SIMILAR CLAIM MADE IN THE ASSESSMENT YEAR 2001-02 BY THE ASSESSEE WAS DISALLOWED AND THE SAME WAS CONFIRMED BY THE COMMISSIONER OF I NCOME TAX(APPEALS). ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE C LAIM OF THE ASSESSEE. 3.2 ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPEA LS) HAS DIRECTED THE ASSESSING OFFICER TO VERIFY THE DETAILS ON NON MOVI NG STORES OF ` 2,21,34,799/- VIS--VIS THE DETAILS OF STORES FOR WHICH THE ASSESSEE RECEIV ED COMPENSATION OF ` 1,01,90,110/- FROM NEW INDIA ASSURANCE CO LTD. IT WAS OBSERVED T HAT IF THE NEXUS IS ESTABLISHED BETWEEN THE NON-MOVING STORES HAVING TOTALLY DISCAR DED WITH THAT OF THE COMPENSATION RECEIVED FROM THE INSURANCE COMPANY, T HE VALUE OF THE CORRESPONDING NON-MOVING STORES MAY BE ALLOWED AS D EDUCTION DUE TO COMPENSATION HAVING BEEN OFFERED FOR TAXATION BY TH E ASSESSEE. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE PLANT AND MACHINERY USED BY THE ASSESSEE IN THE MANUFACTURIN G PROCESS COMES INTO CONTACT WITH CORROSIVE CHEMICALS AND ALSO LOCATED VERY CL OSE TO THE SEA AND SUCH LOCATION CAUSES HEAVY CORROSION TO THE PLANT AND MACHINERY AS WELL AS TO THE STORES AND SPARES THAT ARE KEPT IN THE WAREHOUSE. THE COMPENS ATION WHICH WAS RECEIVED BY THE ASSESSEE IS ONLY IN RESPECT OF DAMAGE CAUSED BY CYCLONE. HE HAS FURTHER INDIAN RARE EARTHS LTD 4 SUBMITTED THAT THE ISSUE HAS BEEN CONSIDERED AND DE CIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 . 4.1 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ACTUAL SALE HAS NOT BE EN BROUGHT ON RECORD BY THE ASSESSEE. THE LD DR HAS POINTED OUT THAT THE TRIBU NAL HAS DECIDED THE ISSUE FOR THE ASSESSMENT YEAR 2001-02 BY FOLLOWING THE DECISION O F THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ALFA LAVAL INDIA LTD. V. DEPUT Y COMMISSIONER OF INCOME-TAX REPORTED IN 266 ITR 418 (BOM); WHEREAS THE HONBLE SUPREME COURT WHILE DECIDING THE ISSUE IN THE CASE OF COMMISSIONER OF INCOME-TAX V. HINDUSTAN ZINC LTD. REPORTED IN 291 ITR 391 (SC) HAS ALLOWED THE APPEAL OF THE R EVENUE ON THE ISSUE. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CONS IDERED THE RELEVANT MATERIAL ON RECORD. AS FAR AS THE DECISION RELIED UPON BY THE LD DR IN THE CASE OF COMMISSIONER OF INCOME-TAX V. HINDUSTAN ZINC LTD. ( SUPRA), THE SAID DECISION IS ON THE ISSUE OF ESTIMATING THE NET REALISABLE VALUE AS PRE VAILING IN THE INTERNATIONAL MARKET AND BY IGNORING THE DOMESTIC PRICE. THEREFORE, THE SAID DECISION IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE, WHERE THERE IS NO DI SPUTE REGARDING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND THERE IS NO TWO PREVAILING PRICES OF STORES WRITTEN DOWN BY THE ASSESSEE. 6 AT THE OUTSET, WE NOTE THAT FOR THE ASSESSMENT YE AR 2001-02, THE TRIBUNAL HAS CONSIDERED AND DECIDED IDENTICAL ISSUE IN PARA 9 A S UNDER: 9 AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. IT WAS CONTENDED THAT THE ASSESSEE HAS BEEN FOLLOWING THE METHOD OF VALUA TION OF CLOSING STOCK VIZ, COST OR MARKET VALUE WHICHEVER IS LESS. THIS YEAR DU E THE RAVAGES OF CYCLONE, THE STOCK OF MATERIAL WAS VERY MUCH AFFECTED IN QUAL ITY AND COULD NOT EVEN INDIAN RARE EARTHS LTD 5 BE DISPOSED OFF. THE MARKET VALUE OF THE DAMAGED GO ODS WERE VALUED AT 5% OF THE COST AND ACCORDINGLY VALUED AT THE MARKET VAL UE AS IT WAS LOWER THAN THE COST. THE ASSESSEE IS A GOVERNMENT COMPANY AND IS SUBJECT TO AUDIT BY C&AG. THE VALUATION ADOPTED BY THE ASSESSEE HAS BEE N ACCEPTED BY THE C&AG. THE DEPARTMENT HAS ALSO HAS NOT SERIOUSLY DI SPUTED THE VALUE OF THE CLOSING STOCK. THAT BEING SO, THERE IS NO QUESTION RE JECTING THE VALUATION OF CLOSING STOCK BY THE ASSESSEE AT MARKET VALUE WHICH WAS LOWER THAN THE COST ON THE GROUND THAT THERE IS CHANGE IN METHOD OF ACCOU NTING THE METHOD OF ACCOUNTING OF VALUING THE CLOSING STOCK, IN THE UNI VERSALLY ACCEPTED METHOD OF COST OR MARKET VALUE WHICHEVER IS LOWER, HAS BEAN CONSISTENTLY FOLLOWED BY THE ASSESSEE, INCLUDING FOR THIS YEAR, THE DECISION OF THE JURISDICTIONAL HIGH COURT HERDILHA CHEMICALS ( 225 ITR 582) IS DISTINGUI SHABLE ON FACTS. IN THAT CASE THE ASSESSEE HAD PURCHASED A PLANT,. VIZ. PAN CATAL YST WHICH WAS A PLANT HELD AS A STANDBY. AS THE PRODUCTION PROCESS HAD CHAN GED OVER THE YEARS THE PLANT WAS NOT NECESSARY AND THE ASSESSEE CLAIMED OBSOLESCENCE ALLOWANCE U/S 32(L)(III). THE BOMBAY HIGH COURT HEL D THAT OBSOLESCENCE ALLOWANCE CAN BE CLAIMED ONLY IN THE YEAR IN WHICH T HE PLANT WAS SOLD OR DISPOSED OFF. IT IS CLEAR THIS DECISION DOES NOT HE LP THE REVENUE AS THE CASE BEFORE US IS THAT OF VALUATION OF CLOSING STOCK O F RAW MATERIALS AND FINISHED GOODS AND NOT PLANT OF MACHINERY. THE JURISDICTIONA L HIGH COURT IN THE CASE OF ALFA LAVAL LTD VDCIT. (266 ITR 418) HAS HELD THAT THE ASSESSES METHOD OF VALUING THE CLOSING STOCK AT 10% OF THE COST CANNOT CONSIDERED AS UNDERVALUATION OF STOCK (THIS DECISION OF THE BOMBA Y HIGH COURT HAS BEEN CONFIRMED BY THE APEX COURT IN THE CASE OF CIT V AL FA LAVA (INDIA) LTD (295 ITR 451) THE CUTTACK TRIBUNAL IN THE CASE OF NATIONAL AL UMINIUM CO LTD V DCIT IN LTA NO 66-68,459,511-512/2003 DATED 30 11 2005 HAVE ALSO UPHELD THAT DIMINUTION IN VALUATION OF NON MOVING STOCK IS A RE VENUE EXPENDITURE. IN THE CIRCUMSTANCES, WE HOLD. THAT THE LOWER AUTHORITIES E RRED REJECTING THE VALUE OF CLOSING STOCK ADOPTED BY THE ASSESSEE AND DIREC T THE ASSESSING OFFICER TO ADOPT THE VALUE OF THE CLOSING STOCK AS ADOPTED BY THE ASSESSEE. THE APPEAL OF THE ASSESSEE IS ALLOWED ON THIS ISSUE. 6.1 FOLLOWING THE ORDER OF THE TRIBUNAL AS WELL AS IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE NATURE OF ACTIVI TY OF THE ASSESSEE INVOLVING CORROSION OF MACHINERY AND SPARES, WE DECIDE HIS IS SUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 7 WE MAY CLARIFY THAT THE COMPENSATION RECEIVED BY THE ASSESSEE COULD NOT AFFECT THE CLAIM OF THE ASSESSEE WHEN THE SAME WAS OFFERED TO TAX. 8 GROUND NO.2 IS REGARDING DEDUCTION FOR WRITING OF F THE AMOUNT PAID TO THE CONTRACTORS BEING LOSS INCIDENTAL TO TRADE. INDIAN RARE EARTHS LTD 6 8.1 THE ASSESSEE HAS PAID A SUM OF ` 2,03,500/- TO A CONTRACTOR MR H PARAKASH FOR THE CONSTRUCTION OF A BOUNDARY WALL IN THE MINING Z ONE NEAR THE SEA BED AND THE ADVANCE WAS PAID AFTER THE WORK ORDER WAS ISSUED. DUE TO THE PROTEST FROM THE VILLAGERS AGAINST THE CONSTRUCTION OF THE BOUNDARY WALL, THE GOVERNMENT AUTHORITIES HAVE DECIDED TO ABANDON THE WORK. THE ASSESSEE, AC CORDINGLY, WRITTEN OFF THE AMOUNT OF ADVANCE GIVEN TO THE CONTRACTOR FOR CONST RUCTION OF THE BOUNDARY WALL. THE ASSESSING OFFICER HELD THAT THE AMOUNT WRITTEN OFF, BEING ADVANCE PAID TO THE CONTRACTOR REPRESENTED AS CAPITAL LOSS AND THEREFOR E, THE SAME IS NOT AN ALLOWABLE DEDUCTION. ON APPEAL, THE COMMISSIONER OF INCOME T AX(APPEALS) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 9 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR HAS SUBMITTED THAT T HE ADVANCE PAID TO THE CONTRACTOR WAS AS PER THE TRADE PRACTICE AND WORK O RDER; THEREFORE, THE PAYMENT WAS MADE FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E. DUE TO PROTEST OF THE VILLAGERS AND THE INTERVENTION OF THE GOVERNMENT, THE WORK HA D TO BE ABANDONED. SINCE THE WORK HAS ALREADY UNDERTAKEN; THEREFORE, THE CONTRAC TOR REFUSED TO RETURN THE ADVANCE, WHICH RESULTED LOSS INCIDENTAL TO TRADE AN D BUSINESS OF THE ASSESSEE AND THEREFORE, ALLOWABLE U/S 37(1). 9.1 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE DECISION OF THE HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF FANCY CORPORATION LTD. V. COMMISSIONER OF INCOME-TA X REPORTED IN 162 ITR 827 (BOM). 10 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THIS ISSUE IS DIRECTLY COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF FANCY CORPORATION LTD. (SUPRA) WHEREIN THE QUESTION BEFORE THE HIGH COURT IN QUES TION NO.2 WAS DISCUSSED IN PARAS 4, 5 & 7 AS UNDER: INDIAN RARE EARTHS LTD 7 4 AS FAR AS QUESTION NO. (2) IS CONCERNED, THE RELEVA NT PREVIOUS YEAR RELATING TO THE ASSESSMENT YEAR 1967-68 WAS THE FINAN CIAL YEAR ENDING ON MARCH 31, 1967. THE ASSESSEE-COMPANY CARRIES ON THE BUSINESS OF EMBROIDERING COTTON CLOTH AND ART SILK CLOTH, INCLUD ING SARIS, BLOUSE PIECES, ETC. THESE FACTS CAN BE GATHERED FROM THE ORDER OF TH E INCOME-TAX OFFICER. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE ATT EMPTED TO INSTALL A BORE WELL AT ITS NEW FACTORY SITE AT BORIVLI. THE ATTEMPT OF THE ASSESSEE TO BORE THE WELL, HOWEVER, FAILED AND THE DISPUTE RELATES TO THE QUESTION AS TO WHETHER THE AMOUNT OF RS. 12,188 BEING THE EXPENDITURE INCURRED B Y THE ASSESSEE IN ATTEMPTING TO BORE THE WELL WAS A CAPITAL EXPENDITURE OR A REVENUE EXPENDITURE, IT BEING THE AGREED POSITION THAT THE A SSESSEE WOULD BE ENTITLED TO DEDUCT THE SAME IN COMPUTING ITS PROFITS IF IT WA S HELD TO BE A REVENUE EXPENDITURE. 5 IN OUR VIEW, ON A PLAIN CONSIDERATION OF FACTS, I T IS CLEAR THAT THE EXPENDITURE IN QUESTION WAS CAPITAL EXPENDITURE. THE EXPENDITURE WAS INCURRED BY THE ASSESSEE IN TRYING TO BORE A WELL. T HERE CAN BE LITTLE DISPUTE THAT HAD THE WELL BEEN SUCCESSFULLY BORED, IT WOULD HAVE ADDED TO THE FIXED CAPITAL OF THE ASSESSEE AND WOULD HAVE BECOME A PART OF ITS CAPITAL ASSETS. AS THE EXPENDITURE WAS INCURRED IN ATTEMPTING TO OBT AIN A CAPITAL ASSET BY BORING THE WELL, THERE CAN BE LITTLE DOUBT THAT THE EXPENDITURE WAS IN THE NATURE OF CAPITAL EXPENDITURE. 7 MR. MEHTA NEXT RELIED ON THE DECISION OF A DIVISI ON BENCH OF THIS COURT IN CIT V. NATIONAL RAYON CORPORATION [1985] 155 ITR 413, WHERE IT HAS BEEN HELD THAT UNLESS AN EXPENDITURE IS DIRECTLY RELATED TO A C APITAL ASSET, ACQUIRED OR TO BE ACQUIRED IN THE NEAR FUTURE, IT CANNOT BE SAID TO H AVE BROUGHT ABOUT AN ENDURING BENEFIT OF A CAPITAL NATURE. IN THAT CASE, T HE EXPENDITURE RELATED TO THE VISIT ABROAD OF THE MANAGING DIRECTOR AND WORKS MANAGER OF THE ASSESSEE-COMPANY. THE PRINCIPAL PURPOSE OF THE VISI T WAS TO REDUCE THE FOREIGN EXCHANGE COMPONENT IN THE EXPENDITURE TO BE INCURRED IN SETTING UP THE NYLON YARN PLANT. THE DIVISION BENCH TOOK THE V IEW THAT THE EXPENDITURE INCURRED FOR THE AFORESAID VISIT DID NOT RELATE DIREC TLY TO THE SETTING UP OF THE NYLON YARN PLANT BUT TO THE REDUCTION OF FOREIGN EXCHA NGE LIABILITY IN SETTING IT UP AND HENCE IT WAS REVENUE EXPENDITURE. THE PRINCIPLE LAID DOWN IN THAT CASE CAN HAVE NO APPLICATION TO THE CASE BEFORE US, BECAUSE IN THE PRESENT CASE THE EXPENDITURE DIRECTLY RELATED TO AN ATTEMPT TO BORE THE WELL WHICH WOULD HAVE BEEN A CAPITAL ASSET OF THE ASSESSEE HAD THE ATTEMPT SUCCEEDED. 10.1 RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE AND IN FA VOUR OF THE REVENUE. 11 GROUND NO.3 IS REGARDING DEDUCTION U/S 80HHC BY APPLYING CLAUSE (BAA) WITH RESPECT TO VARIOUS ITEMS. INDIAN RARE EARTHS LTD 8 12 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. 12.1 AS REGARDS THE NETTING OF INTEREST INCOME, THE ISSUE IS NOW COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F ACG ASSOCIATED CAPSULES PVT. LTD. V. COMMISSIONER OF INCOME-TAX REPORTED IN 67 D TR 205/ 343 ITR 89 AND ONLY THE NET INTEREST RECEIPT IS TO BE CONSIDERED FOR THE PU RPOSE OF EXPLANATION (BAA) TO SECTION 80HHC. 12.2 AS REGARDS THE OTHER ITEMS, THE REAL NATURE OF INCOME ARE NOT PROPERLY EXAMINED BY THE AUTHORITIES BELOW. IN RESPECT OF TH E SALE OF SCRAP, IF IT IS GENERATED FROM THE MANUFACTURING PROCESS OF THE ASSESSEE, THE N THE SAME WILL BE CONSIDERED AS BUSINESS INCOME. THEREFORE, IT IS REQUIRED TO BE EXAMINED THE REAL NATURE OF THE SCRAP WHETHER IS GENERATED FROM THE PROCESS OF THE MANUFACTURING ACTIVITY OF THE ASSESSEE OR NOT. THE ASSESSING OFFICER IS DIRECTED TO VERIFY THIS ASPECT AND THEN DECIDE THE ISSUE AS PER LAW. 12.3 AS REGARD THE INSURANCE CLAIM IS CONCERNED, IT IS THE COMPENSATION RECEIVED AGAINST THE DAMAGE OF MACHINERY AND SPARES. THEREFO RE, THE SAID CLAIM WILL BE TREATED AS BUSINESS INCOME FOR THE PURPOSE OF EXPLA NATION (BAA) TO SECTION 80HHC. 12.4 AS REGARDS THE OTHER ITEMS OF THE MISCELLANEOU S INCOME WHICH ARE REQUIRED TO BE EXAMINED PROPERLY. ACCORDINGLY, WE SET ASIDE TH E SAME TO THE RECORD OF THE ASSESSING OFFICER FOR PROPER EXAMINATION AND DECIDE THE SAME AS PER LAW. 13 NOW, WE TAKE UP THE APPEAL OF THE REVENUE. SINC E MOST OF THE ISSUES IN THE APPEALS OF THE REVENUE ARE COMMON; THEREFORE, WE RE PRODUCE THE GROUNDS RAISED FOR THE ASSESSMENT YEAR 2002-03 AS UNDER: INDIAN RARE EARTHS LTD 9 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE U/S.43B OF RS.1. 42,53,040/- BEING PAYMENT MADE TOWARDS EMPLOYEES PROVIDENT FUND CONTRIBUTION DE POSITED BEYOND THE DUE DATE. 2. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN NOT CONFIRMING THE DISALLOWANCE OF WRITE OF F OF LOSS ON ACCOUNT OF NON-MOVING STORES AMOUNTING TO RS.2,21 ,34,7991- 3. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING DEDUCTION ON ACCOUNT OF FIXED ASS ETS WRITTEN OFF AMOUNTING TO RS.8,33,3221-. 4. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE 90% OF TH ORIUM SUBSIDY FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO S ECTION 8OHHC FOR THE PURPOSE OF DEDUCTION U/S.8OHHC 5. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE NETTING OF INTEREST INCOME AMOUNTING TO RS.15,66,17,561/- EARNED BY THE ASSESSEE CO. FROM DE PLOYMENT OF ITS SURPLUS FUNDS, THAT THIS MUST BE NETTED OUT FROM INTEREST EXP ENDITURE OF RS.17,61 962/- FOR COMPUTING RELIEF U/S.8OHHC WHEN THERE WAS NO SUCH PROVISION IN THE ACT.. 6. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE 90% OF DE SPATCH MONEY RECEIVED FOR LOADING AT PORT AMOUNTING TO RS.4,93,158 AND RECOVERY OF LOADING CHARGES FROM CUSTOMERS OF RS.16,65,384/-FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 8OHHC FOR THE PURPOSE OF DEDUCTION U/S.8OHHC 7. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE 90% OF TH E RECEIPT FROM MISC.SALES- EXIM SCRIPS AMOUNTING TO RS.12,83,947 FROM THE PROFIT S OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 8OHHC FOR THE PURPOSE OF DEDUCTION U/S.8OHHC 8. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE 90% OF GAIN ON I EXCHANGE FLUCTUATION AMOUNTING TO RS.1,59,098/- FROM THE PROF ITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 8OHHC FOR THE PURPOSE OF DEDUCTION U/S.8OHHC 9. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE 90% OF EXC ESS PROVISION NO LONGER REQUIRED AMOUNTING TO ` 8,68,337/- FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 80HHC FOR THE PURPOSE O F DEDUCTION U/S 80HHC. 14 GROUND NO. 1 IS REGARDING CONTRIBUTION TO PF DIS ALLOWED U/S 43B. 15 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFI CER DISALLOWED THE CLAIM OF INDIAN RARE EARTHS LTD 10 CONTRIBUTION AS THERE WAS A DELAY. ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPEALS) HAS ALLOWED THE CLAIM OF THE ASSESSEE AS THE PAYMENT HAS BEEN MADE WITHIN THE GRACE PERIOD OF 5 DAYS. HOWEVER, THE COM MISSIONER OF INCOME TAX(APPEALS) HAS CONFIRMED THE DISALLOWANCE TO THE EXTENT OF ` . 76,319/- WHICH IS BEYOND THE GRACE PERIOD. 15.1 SINCE NOTHING HAS BEEN BROUGHT BEFORE US TO CO NTROVERT THE FACTUAL FINDINGS OF THE COMMISSIONER OF INCOME TAX(APPEALS), WE DO N OT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE COMMISSIONER OF INCOME TAX(AP PEALS), QUA THIS ISSUE. 16 GROUND NO. 2 IS REGARDING THE DISALLOWANCE OF WR ITTEN OFF LOSS ON ACCOUNT OF NON-MOVING STORES TO THE EXTENT OF COMPENSATION REC EIVED. 17 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THIS ISSUE IS COMMON AS THE IS SUE NO.1 IN THE APPEAL OF THE ASSESSEE; ACCORDINGLY, WE DECIDE THIS ISSUE IN FAVO UR OF THE ASSESSEE AND AGAINST THE REVENUE. 18 GROUND NO.3 IS REGARDING ALLOWING DEDUCTION ON F IXED ASSETS WRITTEN OFF ON THE AMOUNT OF ` 8,33,322/-. 18.1 THE ASSESSEE HAS CLAIMED WRITTEN DOWN VALUE OF THE ASSETS OF THE VALUE OF ` 8,33,322/- THAT WAS AWAITING DISPOSAL. THE ASSESS ING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THERE MUST BE SOME POSITIVE EVIDENCE TO SHOW THAT THE VALUE OF THESE ASSETS WAS TAKEN AT NIL IN THE P ARTICULAR YEAR TO JUSTIFY THE CLAIM FOR REDUCTION IN THAT YEAR. SINCE THE ASSESSEE HAS NOT ACTUALLY DISPOSED OFF THE ASSET; THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW TH AT SUCH TREATMENT AS PER THE NORMAL ACCOUNTING POLICY IS NOT PERMISSIBLE AND ACC ORDINGLY HELD THAT THE CLAIM IS NOT ALLOWABLE DEDUCTION. INDIAN RARE EARTHS LTD 11 18.2 ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPE ALS) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE DECISION OF THE TR IBUNAL IN THE CASE OF INDUCTOTHERM INDIA LTD VS DCIT REPORTED IN 73 ITD 329 (AHD) 19 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPU TE ON THE POINT THAT THE ASSETS IN QUESTION WERE PART OF BLOCK OF ASSETS AND WERE CLAI MED TO BE DISCARDED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE CLA IM OF THE ASSESSEE ON THE GROUND THAT THE ASSETS WERE NOT USED DURING THE YEAR. IT IS SETTLED PROPORTION OF LAW THAT ONCE THE ASSET IS PART OF THE BLOCK OF ASSETS, THE N THE DEPRECIATION IS ALLOWABLE ON THE OPENING BALANCE OF THE WRITTEN DOWN VALUE OF TH E BLOCK OF ASSETS. THE COMMISSIONER OF INCOME TAX(APPEALS) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF INDUCTOTHERM INDIA LTD (SUPRA). THEREFORE, WE DO NOT FIND ANY REASON TO INTERFERE W ITH THE ORDER OF THE CIT(A) ON THIS ISSUE. THIS VIEW IS ALSO SUPPORTED BY THE DECISIO N OF THE HONBLE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. OSWAL AGR O MILLS LTD. REPORTED IN 341 ITR 467. 20 GROUND NO.4 IS REGARDING DEDUCTION U/S 80HHC IN RESPECT OF THORIUM SUBSIDY RECEIVED FROM THE GOVERNMENT. 20.1 THE ASSESSEE EXTRACTED MAINLY ILLIMINITE, ZIRK ON, SILICA, MONOZITE, TRISODIUM PHOSPHATE FROM BEACH SANDS. IN THE PROCESSING OPER ATIONS, THE ASSESSEE HAS ALSO PRODUCED THORIUM WHICH WAS NOT SOLD BY THE ASSESSEE AS IT IS THE ABSOLUTE PROPERTY OF THE GOVERNMENT OF INDIA AS PER THE PROVISIONS ATOMIC ENERGY ACT, 1962. THE GOVERNMENT OF INDIA DEPARTMENT OF ATOMIC ENERGY VI DE ITS LETTER DATED 11.11.1980 INDIAN RARE EARTHS LTD 12 MADE IT CLEAR THAT THE AMOUNT OF REIMBURSEMENT TO T HE ASSESSEE FOR THORIUM HYDROXIDE EVERY YEAR TOWARDS THE PROCESSING COST ALLOCABLE TO THORIUM HYDROXIDE. THE DEPARTMENT OF ATOMIC ENERGY SHALL WORKOUT THE P ROCESSING COST FROM TIME TO TIME. 20.2 IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE RECEIVED THE PROCESSING COST OF THORIUM AT ` 2,19,41,000/-. THE ASSESSING OFFICER DISALLOWED T HE CLAIM OF DEDUCTION U/S 80HHC ON THE AMOUNT RECEIVED BY THE ASSESSEE TO WARDS THORIUM SUBSIDY, BEING PROCESSING COST AND APPLIED CLAUSE (BAA) WHILE COMP UTING THE DEDUCTION U/S 80HHC. 20.3 ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPE ALS) ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE ORDER OF THE COMMISSI ONER OF INCOME TAX(APPEALS) FOR THE ASSESSMENT YEAR 1999-00 AS WELL AS THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO REPORTED IN 260 ITR 370. 21 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD DR HAS SUBM ITTED THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSION ER OF INCOME-TAX V. DRESSER RAND INDIA P. LTD. REPORTED IN 323 ITR 429, AFTER CONS IDERING THE DECISION IN THE CASE OF BANGALORE CLOTHING CO (SUPRA) HAS HELD THAT RECOV ERY OF FREIGHT, INSURANCE AND PACKING RECEIPTS, SALES TAX SET OFF/REFUND AND SER VICE INCOME HAVE NO ELEMENT OF EXPORT PROFIT ARE LIABLE TO BE EXCLUDED IN TERMS OF EXPLANATION(BAA) TO SEC. 80HHC. 21.1 ON THE OTHER HAND, THE LD AR OF THE ASSESSEE H AS SUBMITTED THAT THIS IS NOT AN INCOME RECEIVED BY THE ASSESSEE; BUT ONLY REIMBURSE MENT OF PROCESSING COST OF THORIUM HYDROXIDE, WHICH HAS BEEN TAKEN OVER BY TH E GOVERNMENT OF INDIA AS THE ASSESSEE CANNOT SELL THE SAME OTHER THAN THE DEPART MENT OF ATOMIC ENERGY, GOVT OF INDIAN RARE EARTHS LTD 13 INDIA. THUS, THE LD AR HAS SUBMITTED THAT THE EFF ECT OF REIMBURSEMENT OF COST WOULD INCREASE THE CORRESPONDING PROFIT OF EXPORT. HE H AS RELIED UPON THE LETTER DATED 1.11.1980 OF THE DEPT OF ATOMIC ENERGY AND SUBMITTE D THAT THE PAYMENT ON ACCOUNT OF THE ACQUISITION OF THORIUM HYDROXIDE I S TOWARDS MEETING THE PROCESSING COST OF THORIUM TAKEN OVER ON THORIUM FACTORY AC COUNT PLUS THE CHARGES ON ACCOUNT OF HANDLING, STORAGE, SUPERVISION, DRYING ETC. ON THE REMAINING QUANTITY STORED AT THORIUM FACTORY. THE LD AR PLEADED THAT THE AMOUNT RECEIVED FROM THE GOVT OF INDIA AGAINST THE ACQUISITION OF THORIUM IS ONLY REIMBURSEMENT OF THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE PROCESS ING, HANDLING, STORAGE, SUPERVISION DRYING ETC., AND THEREFORE, THIS HAS T O BE REDUCED FROM THE EXPENSES WHILE COMPUTING THE DEDUCTION U/S 80HHC. 22 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THIS FACT THAT THE A MOUNT RECEIVED BY THE ASSESSEE FROM THE GOVT IS ONLY TOWARDS THE REIMBURSEMENT OF THE EXPENSES INCURRED FOR HANDLING, STORAGE, SUPERVISION, DRYING PROCESSING E TC. THEREFORE, THERE IS NO ELEMENT OF INCOME IN THE AMOUNT RECEIVED BY THE ASSESSEE FR OM THE GOVT AGAINST ACQUISITION OF THORIUM, WHICH IS A BI-PRODUCT OF THE ASSESSEES EXTRACTING ACTIVITY FROM BEACH SANDS. ACCORDINGLY, THE REIMBURSEMENT OF EXPENSES IN RESPECT OF THORIUM, WHICH HAS BEEN ACQUIRED BY THE GOVT ARE LIABLE TO BE REDU CED FROM THE EXPENSES AS BOOKED BY THE ASSESSEE FOR THE PURPOSE OF DEDUCTION U/S 80HHC. 23 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CA SE, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE CIT(A). THE DECI SION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DRESSER RAND INDIA P. LTD(SUPR A) IS IN RESPECT OF THE INDEPENDENT INCOME LIKE RECOVERY OF FREIGHT, INSURANCE AND PA CKING RECEIPTS, SALES TAX ETC, ARE NOT FORMING PART OF THE EXPORT TURNOVER AND HAVE NO ELEMENT OF EXPORT PROFIT, ARE INDIAN RARE EARTHS LTD 14 LIABLE TO BE EXCLUDED IN TERMS OF EXPLANATION (BAA) TO SECTION 80HHC. IN OUR HUMBLE VIEW, THE SAID DECISION IS NOT APPLICABLE IN THE CA SE OF REIMBURSEMENT BY THE GOVT TOWARDS THE EXPENDITURE INCURRED BY THE ASSESSEE FO R HANDLING, STORAGE, SUPERVISION, DRYING PROCESSING COST OF THORIUM HYDROXIDE, WHI CH HAS BEEN ACQUIRED BY THE GOVERNMENT AND THERE IS NO ELEMENT OF INCOME AT AL L MUCH LESS INDEPENDENT INCOME. WHEN IT IS PURELY A REIMBURSEMENT OF THE E XPENDITURE INCURRED BY THE ASSESSEE IN THE PROCESSING OF EXTRACTION AND STORAG E, SUPERVISION ETC., THEREFORE, THE SAID EXPENDITURE, WHICH HAS BEEN INCURRED FOR THE PRODUCT WHICH ARE NOT EXPORTED CANNOT BE BOOKED AGAINST THE EXPORT INCOME FOR THE PURPOSE OF DEDUCTION U/S 80HHC. 24 GROUND NO.5 IS REGARDING NETTING OF INTEREST INC OME FOR THE PURPOSE OF DEDUCTION U/S 80HHC. 25 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE NETTING OF IN TEREST FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC IS NOW NO LONGER RES-INTEGRA AS THE ISSUE HAS BEEN SETTLED BY THE HONBLE SUPREME COURT IN THE CA SE OF ACG ASSOCIATED CAPSULES P LTD REPORTED IN 67 DTR 205/343 ITR89(SC) IN PARA 9 AS UNDER: 9 EXPLANATION (BAA) EXTRACTED ABOVE STATES THAT 'PRO FITS OF THE BUSINESS' MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER T HE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' AS REDUCED BY THE REC EIPTS OF THE NATURE MENTIONED IN CLAUSES (1) AND (2) OF EXPLANATION (BA A). THUS, PROFITS OF THE BUSINESS OF AN ASSESSEE WILL HAVE TO BE FIRST COMPU TED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' IN ACCORDANCE W ITH THE PROVISIONS OF SECTIONS 28 TO 44D OF THE ACT. IN THE COMPUTATION O F SUCH PROFITS OF BUSINESS, ALL RECEIPTS OF INCOME WHICH ARE CHARGEABLE AS PROFITS AND GAINS OF BUSINESS UNDER SECTION 28 OF THE ACT WILL HAVE TO BE INCLUDED . SIMILARLY, IN COMPUTATION OF SUCH PROFITS OF BUSINESS, DIFFERENT EXPENSES WHI CH ARE ALLOWABLE UNDER SECTIONS 30 TO 44D HAVE TO BE ALLOWED AS EXPENSES. AFTER INCLUDING SUCH RECEIPTS OF INCOME AND AFTER DEDUCTING SUCH EXPENSES , THE TOTAL OF THE NET RECEIPTS ARE PROFITS OF THE BUSINESS OF THE ASSESSEE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' FROM WH ICH DEDUCTIONS ARE TO MADE UNDER CLAUSES (1) AND (2) OF EXPLANATION (BAA ). INDIAN RARE EARTHS LTD 15 25.1 FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT, (SUPRA), WE DECIDE THE ISSUE IN FAVOUR OF THE REVENUE AND AGAINST THE ASSE SSEE. 26 GROUND NOS 6 & 7 REGARDING DEDUCTION U/S 80HHC I N RESPECT OF THE INCOME RECEIVED TOWARDS DESPATCH MONEY RECEIVED FOR LOADIN G CHARGES AND RECOVERY OF LOADING CHARGES FROM THE CUSTOMERS. 27 WE HAVE HEARD THE LD DR AS WELL AS LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THIS ISSUE IS DIRECTL Y COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DE SSEER RAND INDIA (P) LTD (SUPRA) IN PARA 13 AS UNDER: 13 WE HAVE DEALT WITH THE OBSERVATIONS OF THE DIV ISION BENCH IN BANGALORE CLOTHING [2003] 260 ITR 371 IN A CONSIDERABLE DEGREE OF DETAIL BECAUSE READING THE JUDGMENT, IT IS EVIDENT THAT THE COURT C ONSIDERED THAT TO BE A CASE WHERE A FINDING OF FACT WHICH WAS ARRIVED AT BY THE TRIBUNAL SHOULD NOT BE DISTURBED. BE THAT AS IT MAY, THE DECISION OF TH E DIVISION BENCH TO THE EXTENT TO WHICH IT LAYS DOWN A PROPOSITION OF LAW I NCONSISTENT WITH THE SUBSEQUENT JUDGMENT OF THE SUPREME COURT IN RAVINDR ANATHAN NAIR'S CASE CANNOT BE REGARDED AS LAYING DOWN A BINDING POSITION IN LAW. IN BANGALORE CLOTHING, THE SPECIFIC CONTENTION OF THE REVENUE WA S THAT ONLY THOSE ITEMS OF INCOME WHICH HAVE RELATION TO EXPORT ACTIVITY ARE LI ABLE TO BE TAKEN INTO ACCOUNT WHILE COMPUTING BUSINESS PROFITS UNDER SECTI ON 80HHC. THE DIVISION BENCH DID NOT FIND ANY MERIT IN THE ARGUMENT ADVANCE D ON BEHALF OF THE REVENUE. IN THIS BACKGROUND WE MUST REITERATE THAT IN RAVINDRANATHAN NAIR'S CASE [2007] 295 ITR 228 (SC) THE SUPREME COURT HAS NOW CATEGORICALLY HELD THAT INDEPENDENT INCOMES LIKE RENT, COMMISSION, BROK ERAGE, ETC., THOUGH THEY FORMED A PART OF THE GROSS TOTAL INCOME HAVE TO BE REDUCED BY 90 PER CENT. AS CONTEMPLATED IN EXPLANATION (BAA) IN ORDER T O ARRIVE AT BUSINESS PROFITS. THE RATIONALE FOR THIS WHICH IS INDICATED I N THE JUDGMENT OF THE SUPREME COURT IS THAT PROFIT INCENTIVES AND ITEMS W HICH CONSTITUTE INDEPENDENT INCOMES HAVE NO ELEMENT OF EXPORT TURNOV ER AND ARE CONSEQUENTLY LIABLE TO BE EXCLUDED TO THE EXTENT TH AT IS STIPULATED IN EXPLANATION (BAA). THE DECISION IN BANGALORE CLOTHI NG, TO THE EXTENT TO WHICH IT LAYS DOWN A PRINCIPLE OF LAW AT VARIANCE WITH THE SUBSEQUENT JUDGMENT OF THE SUPREME COURT IN RAVINDRANATHAN NAIR'S CASE [2007] 295 ITR 228 (SC) WOULD NOT, THEREFORE, HOLD THE FIELD AFTER THE JUDGME NT OF THE SUPREME COURT. INDIAN RARE EARTHS LTD 16 27.1 ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR O F THE REVENUE AND AGAINST THE ASSESSEE. THE ORDER OF THE CIT(A) IS SET ASIDE AND THAT OF ASSESSING OFFICER IS RESTORED ON THIS ISSUE. 28 GROUND NO.8 IS REGARDING DEDUCTION U/S 80HHC ON ACCOUNT OF GAIN ON EXCHANGE FLUCTUATIONS. 29 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE NOTE THAT THE ASSESSING OFF ICER DISALLOWED THE CLAIM OF DEDUCTION U/S 80HHC ON THE GROUND THAT FOR THE AY 2 000-01 SIMILAR CLAIM OF THE ASSESSEE WAS DISALLOWED BY THE CIT(A) IN PARA 9.3. 2 AS UNDER: 9.3.2 THE FOREIGN EXCHANGE FLUCTUATIONS FORMS PART OF TURNOVER AS HELD BY MY PREDECESSOR IN HIS ORDER IN A NO. COMMISSIONER OF INC OME TAX(APPEALS)/I/IT/356/2002-03 DTD 26.12.2003 FOR ASS ESSMENT YEAR 2000-01. CONSIDERING THE ARGUMENTS OF THE APPELLANT THE GAIN ON FOREIGN CURRENCY FLUCTUATIONS IS TO BE TREATED AS OPERATIONAL INCOME F OR DEDUCTION U/S 80HHC OUT OF MISCELLANEOUS INCOME . 29.1 IT IS CLEAR THAT THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THE FOREIGN FLUCTUATIONS FORM PART OF THE TURNOVER OF THE ASSES SEE. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING THE ORDER OF THE CIT(A ) FOR THE AY 2000-01. 30 HAVING CONSIDERED THE FACTS THAT THE FOREIGN FLU CTUATIONS GAIN IS PART OF THE EXPORT TURNOVER OVER OF THE ASSESSEE, THE DEDUCTIO N U/S 80HHC IS ALLOWABLE ON THE SAME. ACCORDINGLY, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A), QUA THIS ISSUE. 31 GROUND NO.9 IS REGARDING DEDUCTION U/S 80HHC IN RESPECT OF EXCESS PROVISION NO LONGER REQUIRED. 32 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE WRITING BACK OF THE EXCESS PROVISION OF INDIAN RARE EARTHS LTD 17 EXPENSES MADE IN THE EARLIER YEAR CANNOT BE TREATED AS EXPORT INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION; THEREFOR E, THE SAME IS LIABLE TO BE REDUCED FROM THE PROFITS AS PER THE PROVISIONS OF C LAUSE (BAA) OF EXPLANATION TO SEC. 80HHC. ACCORDINGLY, THE ORDER OF THE CIT(A) IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED ON THIS ISSUE. 33 THE REVENUE HAS RAISED ANOTHER GROUND AS GROUND NO.4 & 5 FOR THE AY 2003-04 WHICH ARE COMMON TO GROUND NO.3 FOR THE AY 2004-05 AS UNDER: 4. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE THE REBATE OF ELECTRICITY PAYMENT AT ` 41,14,943/- RECEIVED FROM KERALA STATE ELECTRICITY BO ARD FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SEC. 80HHC F OR THE PURPOSE OF DEDUCTION U/S U/S.8OHHC 5 . ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE A.O. NOT TO REDUCE THE REBATE OF ELECTRICITY PAYMENT OF ` 19,19,821/-FROM KERALA STATE ELECTRICITY BOARD AND AL SO THE DESPATCH MONEY RECEIVED OF ` 46,11,200/- FOR LOADING AT PORT AND RECOVERY OF LOA DING CHARGES FROM CUSTOMERS OF ` 7,79,719/- FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SEC. 80HHC FOR THE PURPOSE OF DEDUCTION U/S U/S.8OHHC 33.1 THE ASSESSEE RECEIVED REBATE OF ` . 42,14,943/- FROM THE KERALA ELECTRICITY BOARD DUE TO ADVANCE PAYMENT OF DEPOSIT AS PER T HE AGREEMENT WITH THE KSEB. THE ASSESSEE CLAIMED DEDUCTION U/S 80HHC IN RESPECT OF THE SAID REBATE RECEIVED FROM THE ELECTRICITY BOARD. THE ASSESSING OFFICER A PPLIED CLAUSE (BAA) OF EXPLANATION TO SEC 80HHC TREATING THE SAME AS INDEPENDENT INCOM E. ON APPEAL, THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE. 34 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE REBATE RECEIV ED BY THE ASSESSEE IS ONLY INDIAN RARE EARTHS LTD 18 BECAUSE OF THE ADVANCE PAYMENT OF DEPOSIT AND THERE FORE, THE SAID INCOME IN THE SHAPE OF REBATE IS RELATED TO THE ADVANCE PAYMENT A ND NOT A REBATE OTHERWISE ON THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE IN RESPECT OF CONSUMPTION OF ELECTRICITY. THEREFORE, THIS INCOME FALLS UNDER THE CATEGORY OF INDEPENDENT INCOME AND IN VIEW OF THE DECISION OF THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF DRESSER RAND INDIA LTD (SUPRA), CLAUSE (BAA) OF EXP LANATION TO SECTION 80HHC WAS APPLIED. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE CIT(A) AND THAT OF ASSESSING OFFICER IS RESORTED ON THIS ISSUE WHEREBY 90% OF THE SAID INCOME RECEIVED IS REDUCED BY APPLYING CLAUSE (BAA)OF EXPLANATION TO SEC. 80H HC. 35 IN THE RESULT, THE APPEALS FILED BY BOTH THE ASS ESSEE AS WELL AS THE REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 26 TH , DAY OF SEPT 2012. SD/- SD/- ( N K BILLAIYA ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 26 TH , SEPT 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI