ACIT, Cir-9, Pune, Pune V. Kirloskar Oil Engines Ltd., Pune

ITA 543/PUN/2012

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7519 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 5 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-11-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 15-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Depreciation; Business expenditure; Reasonable cause; Speculation loss; Bad and doubtful debts; Scheme of amalgamation; Capital receipt; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 14A; 115JB; 37(1); 148; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 857 /P U N/20 06 / ASSESSMENT YEAR : 2001 - 02 M/S.KIRLOSKAR OIL ENGINES LTD. LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / APPELLANT PAN: AAACP3590P VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE - (8 ), PUNE . / RESPONDENT . / ITA NO. 884 /P U N/20 06 / ASSESSMENT YEAR : 2001 - 02 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - (9), PUNE . / APPELLANT VS. M/S.KIRLOSKAR OIL ENGINES LTD. LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / RESPONDENT PAN: AAACP3590P . / ITA NO. 1593 /P U N/20 11 / ASSESSMENT YEAR : 2002 - 03 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 9 , PUNE. . / APPELLANT VS. M/S.KIRLOSKAR OIL ENGINES LTD. 13, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / RESPONDENT PAN: AAACP3590P 2 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. . / ITA NO. 1641 /P U N/20 11 / ASSESSMENT YEAR : 2002 - 03 M/S.KIRLOSKAR OIL ENGINES LTD. LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / APPELLANT PAN: AAACP3590P VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 8, PUNE . / RESPONDENT . / ITA NO. 456 /P U N/20 12 / ASSESSMENT YEAR : 2003 - 04 M/S.KIRLOSKAR OIL ENGINES LTD. LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / APPELLANT PAN: AAACP3590P VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 8, PUNE . / RESPONDENT . / ITA NO. 542 /P U N/20 12 / ASSESSMENT YEAR : 2003 - 04 THE ASST. COMMISSIONER OF INCOME TAX, RANGE - 9, PUNE . / APPELLANT VS. M/S.KIRLOSKAR OIL ENGINES LTD. 13, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / RESPONDENT PAN: AAACP3590P 3 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. . / ITA NO. 543 /P U N/20 12 / ASSESSMENT YEAR : 2003 - 04 THE ASST. COMMISSIONER OF INCOME TAX, RANGE - 9, PUNE . / APPELLANT VS. M/S.KIRLOSKAR OIL ENGINES LTD. 13, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / RESPONDENT PAN: AAACP3590P . / ITA NO. 877 /P U N/20 12 / ASSESSMENT YEAR : 2004 - 05 M/S.KIRLOSKAR OIL ENGINES LTD. LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / APPELLANT PAN: AAACP3590P VS. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE - 9 , PUNE . / RESPONDENT . / ITA NO. 950 /P U N/20 12 / ASSESSMENT YEAR : 2004 - 05 THE A SST. COMMISSIONER OF INCOME TAX, CIRCLE - 9, PUNE . / APPELLANT VS. M/S.KIRLOSKAR OIL ENGINES LTD. 13, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411 003 . / RESPONDENT PAN: AAACP3590P 4 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ASSESSEE BY : SHRI C.H.NAN I W ADEKAR REVENUE BY : SHRI RAJEEV KUMAR , CIT / DATE OF HEARING : 06 .0 6 .2017 / DATE OF PRONOUNCEMENT: 01 .0 9 .2017 / ORDER PER SUSHMA CHOWLA, JM: OUT OF T HIS BUNCH OF APPEALS , FOUR CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE AGAINST SEPARATE ORDER S OF COMMISSIONER OF INCOME TAX (APPEALS) II I /V , PUNE, RELATING TO ASSESSMENT YEAR S 2001 - 02 TO 2004 - 05 AGAINST THE RESPECTIVE ORDERS PASSED UNDER SECTION 143(3) OF INCOME TAX ACT 1961 (IN SHORT THE ACT). THE REVENUE HAS ALSO FILED AN APPEAL AGAINST THE ORDER OF CIT(A) - V, PUNE, DATED 28.12.2011, RELATING TO ASSESSMENT YEAR 2003 - 04 AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 147 OF T HE ACT. 2 . FIRST, WE SHALL TAKE UP CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE IN ASSESSMENT YEAR 2001 - 02. 3. THE ASSESSEE IN ITA NO. 857 /PUN/20 06 , RELATING TO 2001 - 02 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1.0 DISALLOWANCE OF EXPENSES U/S 14A - RS. 25,000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING RS. 25,000 OUT OF THE DIVIDEND INCOME U/S 14A. - HE FAILED TO APPRECIATE THAT THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ATTRIBUTABLE FOR EARNING DIVIDEND. 2.0 DISALLOWANCE OUT OF AIRCRAFT EXPENSES RS. 3,01,008/ - THE LEARNED CIT (A) ERRED IN HOLDING THAT THE AIRCRAFT WERE USED FOR NON BUSINESS PURPOSES WHEN IT WAS AVERRED BEFORE HIM THAT THE AIRCRAFT ARE 5 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. JOINTLY OWNED WITH OTHER COMPANIES AND THERE IS O ELEMENT OF PERSONAL USE AT ALL. THE DETAILS OF FLIGHTS (LOGBOOK) WERE SUBMITTED AT THE TIME OF ASSESSMENT. 3.0 PRIOR PERIOD EXPENSES RS. 42,70,888/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION OF RS .42,70,888/ - ON ACCOUNT OF EXPENSES RELATED TO EARLIER YEAR RIGHTFULLY CLAIMED BY THE ASSESSEE. HE FAILED TO APPRECIATE THAT THE LIABILITY FOR THESE EXPENSES CRYSTALLIZED DURING THE YEAR. ALTERNATELY, HE SHOULD HAVE ALLOWED THE EXPENSES IN RESPECTIVE YEA RS. 4.0 BAD DEBTS AND IRRECOVERABLE BALANCES WRITTEN OFF RS. 93,66,115/ - I ) AVIATION DEBTORS WRITTEN OFF RS.19,02,884/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DIRECTING A.O. TO VERIFY WRITE OFF OF RS.19,02,884/ - DUE FROM MYSORE KIRLOSKAR LTD. (MKL), A SICK COMPANY REFERRED TO BIFR. HE FAILED TO APPRECIATE THAT THE COMPANY RAISED DEBIT NOTES ON MKL FOR RECOVERY OF COMMON AVIATION POOL EXPENSES, WHICH WAS OFFERED AS INCOME IN EARLIER YEARS. II ) DEBIT BALANCES WRITTEN OFF RS.93,66,115/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING IRRECOVERABLE DEBIT BALANCED AS WRITTEN OFF UNDER SECTION 28 / 36(1)(VII) OF THE ACT. HE FAILED TO APPRECIATE THE WRITTEN AND ORAL ARGUMENTS PUT BEFORE HIM. 5.0 DISALLOWANCE OUT OF CLUB EXPENSES RS.1,00 ,000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN TREATING ENTRANCE FEES PAID TO PYC HINDU GYMKHANA AS A CAPITAL EXPENDITURE. 6.0 DISALLOWANCE OUT OF VEHICLE EXPENSES RS.1,31,691/ - THE LEARNED CIT (A) ERRED IN DISALLOWING 2% OF THE VEHICLE EXPE NSES U/S 37(1) ON ACCOUNT OF NON - BUSINESS EXPENDITURE AND PERSONAL USE OF COMPANYS VEHICLES BY OFFICERS OF THE COMPANY. HE FAILED TO APPRECIATE THAT AS PER SERVICE CONDITIONS APPLICABLE TO SENIOR OFFICERS, COMPANY ALLOWS THEM TO USE COMPANYS VEHICLES FO R OFFICE WORK AND ANY INCIDENTAL PERSONAL USE IS TREATED AS PERQUISITES IN THE HANDS OF OFFICERS AS PER INCOME - TAX RULES, 1962. HE FURTHER FAILED TO APPRECIATE THE SYSTEM FOLLOWED BY THE COMPANY FOR USE OF COMPANY VEHICLES. 7.0 DISALLOWANCE OUT OF LEASE RENT ON CARS RS.92,399/ - THE LEARNED CIT (A) ERRED IN DISALLOWING 2% OF THE LEASE RENT ON CARS ON ACCOUNT OF ALLEGED USE OF CARS BY EXECUTIVE AND EMPLOYEES FOR OTHER THAN BUSINESS PURPOSES. HE FAILED TO APPRECIATE THAT AS PER SERVICE CONDITIONS APPLIC ABLE TO SENIOR OFFICERS, COMPANY ALLOWS THEM TO USE COMPANYS VEHICLES FOR OFFICE WORK AND ANY INCIDENTAL PERSONAL USE IS TREATED AS PERQUISITES IN THE HANDS OF OFFICERS AS PER INCOME - TAX RULES, 1962. HE FAILED TO APPRECIATE THAT THE LEASE RENT WAS PAID A S PER COMMERCIAL TERMS. 8.0 DISALLOWANCE OUT OF TELEPHONE EXPENSES RS.1,00,000/ - THE LEARNED CIT (A ) ERRED IN ARBITRARILY DISALLOWING RS.1,00,000/ - OUT OF THE TOTAL EXPENSES ON TELEPHONES AS NON - BUSINESS EXPENDITURE. HE FAILED TO APPRECIATE PROCEDURE FOLLOWED BY THE COMPANY FOR REIMBURSEMENT OF TELEPHONE EXPENSES AND CONSIDER THE SUBMISSIONS MADE IN THESE REGARDS. HE OUGHT TO HAVE FOLLOWED EXECUTIVE INSTRUCTIONS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES REGARDING USE OF TELEPHONES BY EMPLOYEES. 6 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 9.0 REPAIRS EXPENDITURE TREATED AS CAPITAL EXPENDITURE RS.44,27,538/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING EXPENDITURE IN NATURE OF REPAIRS AND MAINTENANCE AS CAPITAL EXPENDITURE. HE FAILED TO APPRECIATE THAT NEITHER NEW ASSET WAS ACQUIRED NOR THERE WAS ANY ENDURING BENEFIT. THE EXPENDITURE FOR RENOVATION AND INTERIOR DECORATION OF THE EXISTING OFFICE PREMISES CONSTITUTE REPAIRS AND MAINTENANCE EXPENDITURE AND IS ALLOWABLE AS DEDUCTIBLE REVENUE EXPENDITURE U/S 30 AND 31 OF THE INCO ME TAX ACT, 1961. 10.0 LOSS ON FORWARD CONTRACT CANCELLATION LOSS RS.46,583/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING LOSS INCURRE D ON CANCELLATION OF FORWARD CONTRACT RELATING TO FOREIGN EXCHANGE LIABILITY AS A SPECULATION LOSS. HE FAILED TO APPRECIATE THE COMMON PRACTICE PREVALENT IN THE BUSINESS. THE LEARNED CIT (A) ALSO MISDIRECTED HIMSELF AND FAILED TO PROPERLY APPRECIATE THE ISSUE. 11.0 DISALLOWANCE OUT OF ADVERTISEMENT AND PUBLICITY RS.29,77,787/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN REMITTING BACK FOR AOS VERIFICATION THE ENTIRE EXPENDITURE ON PRODUCT ADVERTISEMENT AND SALES PROMOTION WHEN HE HIMSELF IS CONVINCED THAT MAJOR PORTION OF THE EXPENDITURE IS OF REVENUE NATURE. HE FURTHER E RRED IN CONFIRMING THE ARBITRARY DISALLOWANCE @ 5% OF GUEST EXPENSES, PRESENTATION ARTICLES AND GENERAL EXPENSES AS NOT BEING WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. HE OUGHT TO HAVE APPRECIATED THAT AUDITORS OF THE COMPANY IN THEIR R EPORTS UNDER THE MANUFACTURING AND OTHER COMPANIES (AUDITORS REPORT) ORDER AS WELL AS THE TAX AUDIT REPORT U/S 44AB OF THE INCOME TAX ACT, 1961 HAVE CATEGORICALLY REMARKED THAT NO PERSONAL EXPENSES HAVE BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE CI T (A) ERRED IN CONFIRMING BACK DOOR DISALLOWANCE MADE BY A.O. WHEN SECTION 37(2A) SPECIFICALLY DEALING WITH DISALLOWANCES OF ADVERTISEMENT, SALES PROMOTION HAS BEEN DELETED FROM THE STATUTE. 12.0 LIQUIDATED DAMAGES RS.33,56,236/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING LIQUIDATED DAMAGES PAID FOR BREACH OF CONTRACT AS PENAL CHARGES. HE FAILED TO APPRECIATE THAT THESE CHARGES WERE PAID ON COMMERCIAL TERMS OF CONTRACT IN THE COURSE OF BUSINESS AND WERE NOT PAID FOR ANY INFRACTION O R BREACH OF LAW. 13.0 DISALLOWANCE OUT OF SALES AND SERVICE CHARGES RS.18 , 85,000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING DAMAGES PAID TO VARIOUS CUSTOMERS FOR DEFICIENCY IN COMMERCIAL TRANSACTION BEING PENAL IN NATURE. HE FAILE D TO DISTINGUISH BETWEEN PENALTY FOR INFRACTION OR BREACH OF LAW AND PENALTY FOR BREACH OF COMMERCIAL CONTRACTS. HE OUGHT TO HAVE ALLOWED SUCH EXPENDITURE FOR THE PURPOSE OF BUSINESS U/S 37(1). 14.0 OUT OF LEGAL AND PROFESSIONAL FEES RS.33,60,000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN ENHANCING DISALLOWANCE MADE BY THE A.O. OUT OF FEES PAID TO KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES (RS. 1,200,00) ON THE GROUND OF LACK OF BUSINESS NEXUS. HE FURTHER ERRED IN HOLDING ONLY 560% O F FEES PAID TO KIRLOSKAR CONSULTANTS LTD. (RS.8,000,000) AS ALLOWABLE EXPENDITURE. 7 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 15.0 PROVISION FOR LEAVE ENCASHMENT RS.2,11,90,000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING DEDUCTION FOR LEAVE ENCASHMENT LIABILITY ACCRUING DURING THE YEAR. HE OUGHT TO HAVE APPRECIATED THAT ALTHOUGH THE COMPANY CHANGED ITS METHOD OF ACCOUNTING FOR LEAVE ENCASHMENT LIABILITY DURING THE YEAR, IT DID NOT CLAIM EXPENDITURE OF RS.12.11 CRS, WHICH IS RELATABLE TO EARLIER YEARS. THE LIABILITY OF RS.2.12 CRS HAS CLEARLY CRYSTALLIZED DURING THE YEAR AND IS AN EXPENSE FOR THE YEAR. HE OUGHT TO HAVE FOLLOWED THE DECISION OF THE APEX COURT IN BHARAT EARTH MOVERS CASE (245 ITR 428). 16.0 PROFIT U/S 115JB: THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN COMPUTING PROFIT U/S 115JB. HE FAILED TO APPRECIATE THAT AS PER THE SCHEME OF AMALGAMATION OF THE COMPANY WITH SHIVAJI WORKS LTD. (SEL) SANCTIONED BY THE BIFR, THE COMPANY IS NOT LIABLE TO PAY MINIMUM ALTERNATES TAX TILL ALL THE CARRIED - FORWARD UNABSORBED LOSSES OF SWL ARE FULLY ABSORBED. HE FAILED TO APPRECIATE THAT THE ORDER OF THE BIFR IS DIRECTORY AND IS NOT A MERE RECOMMENDATION AND AS PER CBDT NOTIFICATION IT IS BINDING ON HIM. HE FURTHER FAILED TO APPRECIATE THAT UNDER SECTION 32(1) OF THE SICA, ORDERS PASSED BY THE BIFR HAVE OVERRIDING EFFECT OVER THE INCOME TAX ACT. HE FAILED TO APPRECIATE THE ARGUMENTS ADVANCED BY THE ASSESSEE. THE LEARNED CIT FURTHER FAILED TO APPRE CIATE THAT THE MATTER IS NO LONGER WITHIN THE PURVIEW OF CBDT . HE ALSO FAILED TO APPRECIATE THE CORRECT INTERPRETATION OF AND INTENTIONS BEHIND THE CBDTS ORDER DATED 16 - 2 - 2000 U/S 119(2)(A). WITHOUT PREJUDICE TO ABOVE, THE CIT (A) ERRED IN NOT GOING INTO MERITS O F ASSESSEES GRIEVANCE AGAINST FOLLOWING ADDITIONS MADE BY THE A.O. TO THE BOOK PROFITS: - PROVISION FOR LEAVE ENCASHMENT RS.14,23,10,000 PROVISION FOR PREMIUM PAYABLE ON REDEMPTION OF DEBENTURES RS. 3,18,000 PROVISION OF GRATUITY RS. 2,04,32,786 PROVISION FOR EXPENSES RS. 5,59,52,323 PROVISION FOR ROYALTY RS. 23,64,994 EXPENSES RELATABLE TO INCOME EXEMPT U/S 10(33) ( A ) REMU NERATION OF DIRECTORS RS. 29,51,493 ( B ) OVERHEAD EXPENSES RS. 18,17,821 ( C ) INTEREST RELATABLE TO INVESTMENTS RS. 2,82,93,638 THE LEARNED CIT (A) ALSO ERRED ON FACTS AND IN LAW IN NOT CONSIDERING ASSESSEES GRIEVANCE AGAINST THE A.O. ON TREATMENT OF THE AMOUNTS WITHDRAWN FROM CONTINGENCY RESERVES AND CREDITED TO THE P & L ACCO UNT (RS.36,78,38,000) FOR THE PURPOSES OF COMPUTATION OF BOOK PROFITS UNDER CLAUSE (I) OF EXPLANATION TO SEC. 115 JB(2). 17.0 THE ASSESSEE CRAVES LEAVE, TO ADD, TO ALTER, TO MODIFY ANY OF THE ABOVE GROUNDS OF APPEAL. 8 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 4. THE FIRST GROUND OF APPEAL RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT IS NOT PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 5. THE ISSUE RAISED VIDE GROUND OF APPEAL NO.2 IS AGAINST THE DISALLOWANCE OUT OF AIRCRAFT EXPENSES OF RS.3,01,008/ - . 6. BRIEFLY, IN THE FACTS OF THE CASE, 50% OF THE EXPENSES WERE DISALLOWED OUT OF AIRCRAFT EXPENSES FOR USING THE SAME FOR NON - BUSINESS PURPOSES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FAIRLY POINTED OUT THAT THE ISSUE IS DE CIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN EARLIER YEARS STARTING FROM ASSESSMENT YEARS 1995 - 96 TO 1998 - 99. THE TRIBUNAL IN ASSESSMENT YEAR 1998 - 99 IN ITA NO.257/PN/2003, VIDE ORDER DATED 30.08.2011 VIDE PARA 16 HAD UPHELD THE DISALLOWANCE AT 15% . IT IS AN ADMITTED POSITION THAT THE ISSUE IS IDENTICAL AS IN THE EARLIER YEARS AND FOLLOWING THE SAME PARITY OF REASONING, WE UPHOLD THE DISALLOWANCE OF 15% OUT OF AIRCRAFT EXPENSES. 7. THE ISSUE RAISED VIDE GROUND OF APPEAL NO.3 IS AGAINST THE DISALLOWANCE OF DEDUCTION ON ACCOUNT OF PRIOR PERIOD EXPENSES TOTALING RS.42,70,888/ - . 8. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD CLAIMED DEDUCTION ON ACCOUNT OF PRIOR PERIOD EXPENSES TO THE EXTENT OF RS.65,74,160/ - . THE ASSESSING OFFICER ASKED THE ASSESSEE TO ESTABLISH THAT THE LIABILITY IN RESPECT OF SAID EXPENDITURE HAD GOT CRYSTALLIZED DURING THE YEAR. THE ASSESSING OFFICER HELD THAT IN THE ABSENCE OF ANY DOCUMENTARY PROOF OR ANY COGENT EVIDENCE, NONE OF THE LIABILITIES COULD BE SAID TO HAVE GOT CRYSTALLIZED DURING THE YEAR ENDING 31.03.2001 . THE ASSESSEE HAD CLAIMED TDS OF RS.9 LAKHS AND SALES TAX OF 9 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. RS.1,41,890/ - WHICH WAS HELD TO BE NOT ALLOWABLE DEDUCTION. THE ASSESSING OFFIC ER WAS OF THE VIEW THAT WHERE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, ALL THESE EXPENSES SHOULD HAVE BEEN DEBITED IN THE RESPECTIVE YEARS. 9. THE CIT(A) ALLOWED PRIOR PERIOD EXPENSES OF RS.23,03,270/ - . IN RESPECT OF REMAINING PRIOR PE RIOD EXPENSES WHICH INCLUDED TDS OF RS.9 LAKHS, SALES TAX OF RS.1,41,890/ - AND OCTROI OF RS.4,010/ - AND OTHER EXPENSES, THE CIT(A) UPHELD THE DISALLOWANCE AT RS.42,70,880/ - . 10. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF CIT(A). 11. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE 100 OF THE PAPER BOOK AT WHICH THE DETAILS OF PRIOR PERIOD EXPENSES ARE PROVIDED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TOTAL PRIOR PERIOD EXPENSES WORKED OUT TO RS.12,76,98,372/ - , OUT OF WHICH LEAVE ENCASHMENT PROVIDED FOR EARLIER YEARS WAS NOT CLAIMED I.E. AMOUNT TOTALING RS.12.11 CRORES AND ONLY THE BALANCE OF RS.65,74,160/ - WAS CLAIMED AS DEDUCTION. HE FURTHER POINTED OUT THAT SUM OF RS. 23,03,272/ - HAS BEEN ALLOWED BY THE CIT(A) . HE FURTHER POINTED OUT THAT THE SALES TAX AMOUNT OF RS.70,945/ - + RS.70,945/ - , TOTALING RS. 1,41,890/ - , RS.9 LAKHS ON ACCOUNT OF TDS, IS NOT ALLOWABLE IN THE HANDS OF ASSESSEE. HOWEVER, IN RESPECT OF BALANCE EXP ENDITURE, THE ASSESSEE EXPLAINED THAT THE SAID EXPENDITURE HAD CRYSTALLIZED DURING THE YEAR AND HENCE, WERE BOOKED DURING THE YEAR UNDER CONSIDERATION ITSELF. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE ORDER OF CIT(A). 10 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE PERUSAL OF THE DETAILS OF PRIOR PERIOD EXPENSES AT PAGE 100 OF THE PAPER BOOK REFLECTS THAT VARIOUS CLAIMS HAVE MADE BY THE ASSESSEE I.E. ON ACCOUNT OF ARCHITECTURE FEES PAYABLE AT RS.4,72,3 18/ - AND SHORT PROVISION OF GRR FOR RAW MATERIAL IN MEDIUM ENGINES DIVISION. FURTHER, IN THE LARGE ENGINES, NASHIK DIVISION, RAW MATERIAL I NDG COMPONENT S OF RS.7 , 22 , 426 / - AND DISCOUNT & COMMISSION ON SPARES AT RS.8,16,000/ - AND RAW MATERIAL IMPORTED OF RS.5,57,521/ - HAS BEEN PROVIDED, REST ARE EXPENSES BOOKED BY THE ASSESSEE ON ACCOUNT OF VARIOUS HEADS UNDER DIFFERENT DIVISIONS. THE EXPLANATION OF ASSESSEE WAS THAT ALL THESE EXPENSES HAVE BEEN BOOKED IN THE INSTANT ASSESSMENT YEAR AS THE BILLS WERE RECE IVED DURING THE YEAR OR THEY CRYSTALLIZED DURING THE YEAR. HE FAIRLY ADMITTED THAT THE COMMISSION AND DISCOUNT HAD BEEN PAID TO THE DEALER AND ACCORDINGLY, THERE IS MERIT IN THE CLAIM OF ASSESSEE. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES , WE HOLD THAT OUT OF SUM OF RS.42,70,888/ - , THE ASSESSEE HIMSELF HAD WITHDRAWN THE CLAIM IN RESPECT OF RS.1,41,890/ - ON ACCOUNT OF SALES TAX AND TDS ON CONTRACTUAL PAYMENT OF RS.9 LAKHS AND HENCE, THE SAME IS ADDED IN THE HANDS OF ASSESSEE . THE REST OF E XPENDITURE BEING RELATABLE TO THE BUSINESS CARRIED ON BY THE ASSESSEE, THOUGH BOOKED AS PRIOR PERIOD EXPENSES, MERITS TO BE ALLOWED IN THE HANDS OF ASSESSEE. ACCORDINGLY, THE GROUND OF APPEAL NO.3 IS PARTLY ALLOWED. 14. THE ISSUE IN GROUND OF APPEAL NO.4 IS ON ACCOUNT OF TWO ACCOUNTS I.E. UNDER THE HEAD BAD DEBTS AND IRRECOVERABLE BALANCES WRITTEN OFF OF RS.93,66,115/ - . THE FIRST SUB - HEAD IS BAD DEBITS WRITTEN OFF OF RS.19,02,884/ - AND THE SECOND IS DEBIT BALANCES WRITTEN OFF OF RS.93,66,115/ - . IN RESPE CT OF FIRST SUB - ISSUE, THE ASSESSEE HAD WRITTEN OFF SUM OF RS. 19,02,884/ - WHICH WAS DUE FROM MYSORE KIRLOSKAR LTD. (MKL) SICK COMPANY, WHICH WAS REFERRED TO BIFR . THE 11 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ASSESSEE HAD RAISED DEBIT NOTES ON THE SAID CONCERN FOR RECOVERY OF COMMON AVIATION POOL EXPENSES AND SINCE THE SAME WERE NOT RECOVERED, IT WAS WRITTEN OFF AS THE SAID INCOME WAS OFFERED TO TAX IN EARLIER YEARS. THE ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF ASSESSEE. THE CIT(A) HOWEVER, RESTORES THIS ISSUE BACK TO THE FILE OF ASSESS ING OFFICER TO VERIFY WHETHER THE AMOUNT HAS BEEN WRITTEN OFF. 15. T HE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FAIRLY POINTED OUT THAT THE ISSUE HAS BEEN RESTORED BACK TO THE FILE OF ASSESSING OFFICER BUT THE ASSESSING OFFICER TILL DATE HAS NOT ALLOWED THE APPEAL EFFECT. WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE IN CASE THE SAID AMOUNT HAS BEEN WRITTEN OFF ; THEN THE ASSESSEE IS ENTITLED TO CLAIM THE DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT. 16. NOW, COMING TO THE SECOND PART OF THE SAID EXPENDITURE I.E. DEBIT BALANCES WRITTEN OFF TOTAL ING RS.93,66,115/ - . 17. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD WRITTEN OFF BALANCES TOTALING RS.93,66,115/ - IN THE CORPORATE DIVISION. THE ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF ASSESSEE, IN VIEW OF THE NATURE OF EXPENSES. TH E CIT(A) DURING THE COURSE OF APPELLATE PROCEEDINGS, ASKED THE ASSESSEE TO CLARIFY WITH EVIDENCES IF THE ABOVE DEBIT BALANCES / RECEIVABLE WERE ADMITTED AS INCOME IN THE EARLIER YEARS. HOWEVER, THE REQUISITE DETAILS WERE NOT FILED AND THE CIT(A) HELD THAT NO PART OF THE SAID BALANCES WRITTEN OFF IN THE CORPORATE DIVISION CAN BE ALLOWED AS DEDUCTION. 18. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 12 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 19. THE LE ARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO THE DETAILS OF DEBIT BALANCES WRITTEN OFF AT PAGE 102 OF THE PAPER BOOK AND POINTED OUT THAT OUT OF TOTAL AMOUNT, IT WAS PRESSING ONLY SUM OF SALES TAX WRITTEN OFF AT RS.65,23,340/ - . T HE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE SALES TAX PAYMENT MADE BY THE ASSESSEE AND OUR ATTENTION WAS DRAWN TO THE CHALLAN PLACED AT PAGE 117 OF THE PAPER BOOK. THE ASSESSEE HAD PAID ONLY RS.30 LAKHS ON 30.01.2000 . THE LEARNE D AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REVISED ITS CLAIM TO RS.30 LAKHS AND FAIRLY ADMITTED THAT THE BALANCE AMOUNT NEEDS TO BE ADDED IN THE HANDS OF ASSESSEE. 20. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE ORDER OF CIT(A) AND POINTED OUT THAT IN CASE RS.30 LAKHS HAS BEEN PAID, THEN THE SAME MERITS TO BE ALLOWED. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD CLAIMED THE EXPENDITURE ON ACCOUNT OF SUNDRY DEBIT BALANCES IN THE CORPORATE DIV ISION TOTALING RS.93,66,115/ - . THE SAID DETAILS INCLUDED VARIOUS DEBIT BALANCES WRITTEN OFF BY THE ASSESSEE BUT IN THE ABSENCE OF THE ASSESSEE HAVING ESTABLISHED THAT THE SAID AMOUNTS WERE SHOWN AS INCOME IN EARLIER YEARS, THE CLAIM OF ASSESSEE WAS NOT AL LOWED. THE ASSESSEE ALSO MADE A PLEA UNDER SECTION 28 OF THE ACT, WHICH WAS ALSO REJECTED. NOW, BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS RESTRICTED ITS CLAIM IN RESPECT OF SALES TAX AMOUNT PAID ON 30.01.2000. THE LEARNED AUT HORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID AMOUNT WAS PAID IN EARLIER YEARS AND THE CLAIM HAS BEEN WRITTEN OFF DURING THE YEAR AND THE SAME MERITS TO BE ALLOWED. IN VIEW OF THE CONTENTION OF ASSESSEE, WHERE THE CLAIM IS WRITTEN OFF , WE ALLOW THE 13 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. DEDUCTION ON ACCOUNT OF RS.30 LAKHS AND THE BALANCE DISALLOWANCE IS CONFIRMED IN THE HANDS OF ASSESSEE. THE GROUND OF APPEAL NO.4 IS THUS, PARTLY ALLOWED. 22. THE NEXT ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.5 IS THE DISALLOWANCE OUT OF CLUB EXPENSES OF RS.1 LAKH. 23. TH E AUTHORITIES BELOW HAD TREATED THE ENTRANCE FEES PAID TO THE PYC HINDU GYMKHANA AS CAPITAL EXPENDITURE. 24. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT THE SAID ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF HONBLE HIGH COURT OF GUJARAT IN GUJARAT STATE EXPORT CORPORATION LTD. VS. CIT (1994) 209 ITR 649 (GUJ ) . 25. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF GUJARAT, WHEREIN ENTRANCE FEES TO THE GUJARAT GOVERNMENT CLUB WAS ALLOWED AS DEDUCTION IN THE SAID CASE. FOLLOWING THE SAME PARITY OF REASONING, WE HO LD THAT THE PAYMENT OF ENTRANCE FEES FOR BECOMING THE MEMBER OF CLUB , CANNOT BE TERMED AS CAPITAL EXPENDITURE AND IS TO BE ALLOWED AS REVENUE EXPENDITURE IN THE HANDS OF ASSESSEE. THE GROUND OF APPEAL NO.5 IS THUS, ALLOWED. 26. THE ISSUE IN GROUNDS OF AP PEAL NO.6, 7 AND 8 IS ON ACCOUNT OF DISALLOWANCE OUT OF VEHICLE EXPENSES OF RS.1,31,691/ - , LEASE RENT OF CARS OF RS.92,399/ - AND TELEPHONE EXPENSES OF RS.1 LAKH FOR NON - BUSINESS EXPENDITURE AND PERSONAL USE. THE ASSESSEE IS A LIMITED COMPANY AND THERE IS NO MERIT IN 14 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE AFORESAID DISALLOWANCE MADE ON ACCOUNT OF NON - BUSINESS EXPENDITURE AND PERSONAL USE OF THE FACILITY. 27. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ISSUE IS SQUARELY COVERED BY THE ORDERS OF TRIBUNAL IN ASSESSMENT YEAR 1999 - 2000 IN ITA NO.181/PN/2004, ORDER DATED 27.06.2012 . HE FURTHER POINTED OUT THAT THE DISALLOWANCE OUT OF VEHICLE EXPENSES AND TELEPHONE EXPENSES HAS BEEN DELETED BY THE TRIBUNAL AND THE LEASE RENT ON CARS WAS IN THE SAME LINE, WHEREIN LEASED CARS WERE BEING USED BY THE E XECUTIVES AND EMPLOYEES. WE HOLD THAT THERE IS NO MERIT IN THE DISALLOWANCE MADE ON ACCO UNT OF PERSONAL USE OUT OF VEHICLE EXPENSE AND TELEPHONE EXPENSES. SIMILARLY, THE LEASED VEHICLES WHICH ARE BEING USED BY THE EXECUTIVES AND OTHER EMPLOYEES OF THE ASSESSEE COMPANY, THEN THERE IS NO MERIT IN DISALLOWING ANY PART OF THE LEASE RENT OF CARS FOR PERSONAL USE IN THE HANDS OF ASSESSEE COMPANY, WHICH IS A LIMITED COMPANY. CONSEQUENTLY, THE GROUNDS OF APPEAL NO.6, 7 AND 8 ARE ALLOWED. 28. THE ISSUE IN GROUND OF APPEAL NO.9 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OUT OF REPAIRS EXPENDITUR E OF RS.44,27,538/ - . 29. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE CLAIMS DEDUCTION OF SUM OF RS.5.11 CRORES UNDER THE SUB - HEAD OTHER REPAIRS APPEARING UNDER THE HEAD SELLING EXPENSES. THE ASSESSING OFFICER FOUND CERTAIN EXPENSES TO BE CAPITAL IN NATURE TOTALING RS.44,27,537/ - . THE DETAILS OF ITEMS OF EXPENDITURE ARE TABULATED AT PAGE 14 OF THE ASSESSMENT ORDER. THE PLEA OF ASSESSEE WAS THAT THE EXPENDITURE WAS MAINLY FOR RENOVATION, ALTERNATION AND MODIFICATION AND WERE IN THE NATURE OF REPAIRS AND MAINTENANCE. THE ASSESSEE ALSO CLAIMS THAT NO NEW ASSETS ALTOGETHER HAD COME INTO EXISTENCE AND HENCE, THE EXPENDITURE WAS NOT 15 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. CAPITAL IN NATURE. THE ASSESSING OFFICER ON THE OTHER HAND, OBSERVED THAT THE EXPENSES HAD CREATED A NUMBER OF N EW ASSETS AND ALSO THERE WAS SUBSTANTIAL OVERHAULING AND RENOVATION. THE ASSESSING OFFICER HELD THE EXPENSES TO BE CAPITAL IN NATURE AS THE SAID EXPENDITURE WAS NOT RECURRING EXPENDITURE IN THE NATURE OF NORMAL REPAIRS AND MAINTENANCE. 30. THE CIT(A) UPH ELD THE ORDER OF ASSESSING OFFICER, AGAINST WHICH THE ASSESSEE IS IN APPEAL. 31. THE PERUSAL OF DETAILS WHICH ARE REPRODUCED AT PAGE 14 OF THE ASSESSMENT ORDER REFLECTS RENOVATION AND INTERIOR DECORATION OF VARIOUS PORTIONS BEING CARRIED OUT BY THE ASSESSEE INCLUDING PROVIDING OF FURNITURE WORK IN BOARD ROOM, VIDEO CONFERENCE ROOM, VISITORS ROOM, ETC. THE ASSESSEE ALSO PROVIDED AUTOMATIC GATES AND SECURITY CABIN S. THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE REFLECTS THE SAME TO BE IN THE NATURE OF REPAIRS AND MAINTENANCE AND MERITS TO BE ALLOWED IN THE HANDS OF ASSESSEE . THE EXPENDITURE INCURRED ON SECURITY CABINS AND ALSO CABIN FOR COMPUTER GATE PASS SY STEM ARE TEMPORARY IN NATURE AND ARE ALSO TO BE ALLOWED AS REVENUE IN NATURE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.44,27,537/ - . THE GROUND OF APPEAL NO.9 IS THUS, ALLOWED. 32. THE ISSUE IN GROUND OF APPEAL NO.10 RAIS ED BY THE ASSESSEE IS AGAINST NON - ALLOWANCE OF LOSS ON FORWARD CONTRACT CANCELLATION OF RS.46,583/ - . THE ASSESSEE HAD DEBITED NET FOREIGN EXCHANGE LOSS OF RS.1,25,73,787/ - WHICH INCLUDED FORWARD CONTRACT CANCELLATION LOSS OF RS.46,583/ - . THE CONTRACT WAS FOR PURCHASE OF FOREIGN EXCHANGE FOR ACTUAL DELIVERY OF FOREIGN EXCHANGE ON SPECIFIC DATE, DIFFERENCE WAS PAID BY THE ASSESSEE TO THE BANKERS. THE CLAIM OF 16 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ASSESSEE WAS THAT THE SAME WAS DUE TO FLUCTUATION IN FOREIGN EXCHANGE RATE AND RELATED TO THE TRAD ING RELATED TRANSACTIONS AND IS TO BE ALLOWED AS REVENUE EXPENDITURE. THE ASSESSING OFFICER AND THE CIT(A) DISALLOWED THE SAME BEING SPECULATION LOSS. 33. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ISSUE STANDS SQUARELY C OVERED BY THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (2009) 312 ITR 254 (SC). IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT, WE ALLOW THE CLAIM OF ASSESSEE IN ENTIRETY BEING REVENUE EXPENDIT URE. THE GROUND OF APPEAL NO.10 IS THUS, ALLOWED. 34. THE NEXT ISSUE BY WAY OF GROUND OF APPEAL NO.11 IS AGAINST THE DISALLOWANCE MADE OUT OF ADVERTISEMENT & PUBLICITY EXPENSES OF RS.29,77,787/ - . THE ASSESSING OFFICER ON VERIFICATION OF EXPENDITURE, WAS OF THE VIEW THAT CERTAIN EXPENDITURE REQUIRES TO BE DISALLOWED AS IT WAS NOT LAID OUT EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSESSING OFFICER HAD DISALLOWED 5% OF TOTAL EXPENDITURE AS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 35. THE CIT(A) WAS OF THE VIEW THAT THE ADVERTISEMENT & PUBLICITY EXPENSES INCURRED ON PUBLICITY IN NEWSPAPERS, DISPLAY IN TV CHANNELS, MARKETING CAMPAIGNS, ETC. HAVE TO BE ALLOWED IN THE YEAR OF INCURRENCE. HOWEVER, HE NOTED THAT SOME OF EXPENSES MAY HAVE TO BE CAPITALIZED, FOR INSTANCE THERE WAS AN INVOICE TOWARDS COST OF 25 VAN CYCLES OF 30 DAYS EACH. EACH VAN CYCLE COST AT RS.1,15,200/ - AND THERE WERE SOME INVOICES FOR PURCHASE OF COLOUR TV, WASHING MACHINES, ETC. THE ASSESSEE HAD NOT FURNISHED ALL THE D ETAILS AND THE ASSESSING OFFICER WAS DIRECTED TO CALL FOR ALL THE BILLS AND EXAMINE THE PRODUCT ADVERTISEMENT 17 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. AND PUBLICITY EXPENSES INCLUDED ANY EXPENDITURE OF CAPITAL IN NATURE. THE REMAINING EXPENDITURE NOT BEING OF CAPITAL IN NATURE, WOULD BE ALLOWED. ACCORDINGLY, DIRECTIONS WERE ISSUED BY THE CIT(A). 36. THE ASSESSEE IS AGGRIEVED BY NON - PASSING OF CONSEQUENT ORDER BY THE ASSESSING OFFICER AND HENCE, IN APPEAL. THE SECOND PART OF EXPENSES W AS FOR PRESENTATION EXPENSES, GUEST EXPENSES AND GENERAL E XPENSES AND HE UPHELD THE DISALLOWANCE @ 5% MADE BY THE ASSESSING OFFICER. HOWEVER, IN RESPECT OF LICENCE EXPENSES, THE CIT(A) HELD THAT THE SAME ARE TO BE ALLOWED IN ENTIRETY. THE ASSESSEE BEFORE US HAS POINTED OUT THAT THE CIT(A) HAS ERRED IN REMITTING THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION OF ENTIRE EXPENDITURE ON PRODUCT ADVERTISEMENT AND SALES PROMOTION WHEN HE HIMSELF CONVINCED WITH THE MAJOR PORTION OF EXPENDITURE WAS REVENUE IN NATURE . F URTHER, THE ASSESSEE IS ALSO IN AP PEAL AGAINST 5% DISALLOWANCE MADE OUT OF GUEST EXPENSES, PRESENTATION OF ARTICLES AND GENERAL EXPENSES BEING NOT WHOLLY AND EXCLUSIVELY WERE INCURRED FOR THE PURPOSE OF BUSINESS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS AGGRIEVED BY THE S AID ORDER OF CIT(A); IN THE FIRST INSTANCE, FOR NO APPEAL EFFECT BE ALLOWED TILL NOW AND ALSO AGAINST THE DISALLOWANCE MADE @ 5%. 37. FIRST OF ALL, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE NATURE OF EXPENSES DEBITED UNDER THE HEAD PRODUCT ADVERTISE MENT AND PUBLICITY EXPENSES AND IN CASE THE SAID EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF BUSINESS, THEN THE SAME IS TO BE ALLOWED AS BUSINESS EXPENDITURE . T HE BALANCE IF ANY, WHICH IS CAPITAL IN NATURE NEEDS TO BE DISALLOWED IN THE HANDS OF ASSES SEE. IN RESPECT OF 5% OUT OF GUEST EXPENSES, PRESENTATION EXPENSES AND GENERAL EXPENSES, WE FIND NO MERIT IN THE PLEA OF ASSESSEE AND THE SAME IS DISMISSED. ACCORDINGLY, THE 18 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. DISALLOWANCE IS UPHELD TO THAT EXTENT. IT MAY BE POINTED OUT THAT THE MARGIN OF 5% IS TO BE APPLIED ONLY TO NET GENERAL EXPENSES ONLY AS REFERRED BY THE CIT(A) IN PARA 20.2.2 AT PAGE 67 OF THE APPELLATE ORDER. THE GROUND OF APPEAL NO.11 IS THUS, PARTLY ALLOWED. 38. THE ISSUE IN GROUND OF APPEAL NO.12 IS AGAINST THE DISALLOWANCE OF LIQUIDATED DAMAGES OF RS.33,56,236/ - . 39. THE ASSESSEE HAD MADE A CLAIM UNDER THE SAID HEAD TO THE TUNE OF RS.1,99,10,567/ - . AS PER THE ASSESSEE, THE LIQUIDATED DAMAGES REPRESENT THE PAYMENTS FOR LATE DELIVERY, DEFICIENCY IN QUALITY OF GOODS / MATERIAL SUPPLIED VIS - - VIS SPECIFICATIONS / REQUIREMENTS, ETC. THE ASSESSEE EXPLAINED THAT THE LIQUIDATED DAMAGES HAD NOTHING TO DO WITH ANY INFRACTION OF LAW. THE MAJOR RECOVERY WAS OF RS. 1,56,62,034/ - EFFECTED BY M/S. OIL INDIA LTD., WHO HAD MADE THE SAID RECO VERY AS THE ASSESSEE HAD FAILED TO COMPLETE INSTALLATION AND COMMISSIONING WITHIN THE AGREED CONTRACT SCHEDULE. THE ASSESSING OFFICER HELD THE SAME TO BE IN THE NATURE OF PENALTY AND DISALLOWED THE SAME. IN THIS REGARD, HE PLACED RELIANCE ON THE RATIO LA ID DOWN BY THE HONBLE HIGH COURT OF DELHI IN ROHTAK TEXTILES MILLS VS. CIT (1997) 226 ITR 485 (DEL) , WHEREIN PAYMENT OF LIQUIDATED DAMAGES WERE HELD AS NON - DEDUCTIBLE. AS REGARDS THE OTHER LIQUIDATED DAMAGES, SINCE THE ASSESSEE HAD ONLY GIVEN GENERAL SUB MISSIONS, THE SAME WAS NOT ACCEPTED AND THE ENTIRE CLAIM TOWARDS LIQUIDATED DAMAGES WAS DISALLOWED. 40. BEFORE THE CIT(A), THE ASSESSEE POINTED OUT THAT IN THE PURCHASE ORDER PLACED BY M/S. OIL INDIA LTD., THERE WAS CLEAR STIPULATION OF COMPLETION DATES AND ALSO PROVISION OF LIQUIDATED DAMAGES TO BE PAID AT SPECIFIC RATES ON ACCOUNT OF DEFAULT IN DELIVERY. THE DAMAGES WERE THUS, IN THE NATURE OF BREACH OF CONTRACT. 19 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE ASSESSEE ALSO FILED A COPY OF LETTER DATED 20.01.2001 OF M/S. OIL INDIA LTD., WHEREIN DAMAGES OF RS.1.56 CRORES HAD BEEN WORKED OUT AND DEMANDED. THE ASSESSEE ALSO FURNISHED THE COPIES OF VOUCHERS, STATEMENTS, CORRESPONDENCE WITH THE CONCERNED PARTIES IN RESPECT OF BALANCE LIQUIDATED DAMAGES PAID BY THE ASSESSEE. THE CIT(A) IN VIEW OF TH E LETTER RECEIVED FROM M/S. OIL INDIA LTD., WHEREIN THE ACTUAL LIQUIDATED DAMAGES WERE OF THE ORDER OF RS.1,49,97,482/ - , HELD THE SAME AS ADMISSIBLE AND THE DISALLOWANCE TO THAT EXTENT WAS DELETED. THE REMAINING AMOUNT OF RS.6,64,552/ - REPRESENTED INTERES T ON MOBILIZATION ADVANCE. THE CIT(A) NOTED THAT AS PER PURCHASE ORDER, MOBILIZATION ADVANCED WAS INTEREST FREE AND IT HAD TO BE SEEN AS TO WHY M/S OIL INDIA LTD. DEMANDED INTEREST ON THE SAID MOBILIZATION ADVANCE. IN THE ABSENCE OF COMPLETE DETAILS BEIN G FILED BY THE ASSESSEE, THE MATTER WAS RESTORED TO THE FILE OF ASSESSING OFFICER TO CALL FOR RELEVANT PARTICULARS AND DECIDE THE SAME. 41. IN RESPECT OF BALANCE LIQUIDATED DAMAGES, THE ASSESSEE FILED EVIDENCES IN RESPECT OF CERTAIN ITEMS AND THE CIT(A) HELD THAT IN VIEW OF THE EVIDENCES FILED FOR RS. 3,41,724/ - , RS.5,44,987/ - , 1,45,072/ - AND RS.5,25,067/ - , ALLOWABILITY TOWARDS THE PAYMENT OF LIQUIDATED DAMAGES HAD ARISEN DURING THE RELEVANT PREVIOUS YEAR AND THE SAME WAS HELD TO BE ALLOWABLE. IN RESPECT OF LAST ITEM I.E. OF RS.20,82,140/ - , THE ASSESSEE HA D ONLY MADE THE PROVISION , EVEN BEFORE ANY DEMAND WAS RAISED BY THE CONCERNED PARTY. SINCE IT WAS NOT KNOWN AS TO WHETHER THE DEMANDS WERE ACTUALLY RECEIVED OR NOT, THE CIT(A) HELD THAT THE ASSESSEE WAS NOT JUSTIFIED IN MAKING THE CLAIMS TOWARDS LIQUIDATED DAMAGES MERELY ON THE BASIS OF PROVISION. HENCE, OUT OF LIQUIDATED DAMAGES OF RS.36,38,990/ - , CLAIM TO THE EXTENT OF RS.20,82,139/ - WAS HELD AS INADMISSIBLE AND THE DISALLOWANCE WAS CONFIRMED TO THAT EXTENT. 20 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 4 2 . THE ASSESSEE IS IN APPEAL VIDE GROUND OF APPEAL NO.12. THE REVENUE IS ALSO IN APPEAL AGAINST THE ORDER OF CIT(A) IN ALLOWING LIQUIDATED DAMAGES OF RS.1,49,97,483/ - PAID TO M/S. OIL INDIA LTD. VIDE GROUND OF APPEAL NO.7. 4 3 . THE LEARNED AUT HORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT OUT OF LIQUIDATED DAMAGES PAID TO M/S. OIL INDIA LTD., SUM OF RS.1.49 CRORES WAS ALLOWED BY THE CIT(A), AGAINST WHICH THE REVENUE IS IN APPEAL. HOWEVER, BALANCE SUM OF RS.6,64,552/ - PAYABLE TO M/S. OIL INDIA LTD. WAS TO BE VERIFIED BY THE ASSESSING OFFICER. HOWEVER, TILL DATE, NO SUCH APPEAL EFFECT HAS BEEN ALLOWED. HE REFERRED TO PAGE 19 0 OF PAPER BOOK AND POINTED OUT THAT CLAUSE (III) RELATED TO CHARGING OF INTEREST AS PER PURCHASE ORDER AND HE F URTHER REFERRED TO PAGE 199 OF THE PAPER BOOK TO ESTABLISH THAT THE AMOUNT HAS BEEN RECOVERED BY M/S. OIL INDIA LTD. AND HENCE, THERE IS NO DISCREPANCY IN THE CLAIM OF ASSESSEE. HE THEN, REFERRED TO THE PROVISION MADE ON ACCOUNT OF OTHER PARTY I.E. RS.20, 82,140/ - . HE STRESSED THAT THE SAID PROVISION WAS MADE IN RESPECT OF SALES EFFECT ED DURING THE YEAR WHICH WAS CUSTOMER - WISE AND THE SAID PRINCIPLE WAS FOLLOWED IN RESPECT OF ALL THE PARTIES AND THE AMOUNTS WERE PAID IN THE SUCCEEDING YEAR AND IN CASE THOS E ARE NOT DEMANDED, THEN THE PROVISION WAS REVERSED. HE FURTHER STATED THAT OUT OF TOTAL SUM OF RS. 20,82,140/ - , RS. 6,09,543/ - WAS ALREADY PAID DURING THE YEAR BY THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE ISSUE RAISED IN THE PRESENT APPEAL IS COVERED BY THE ORDER OF PUNE BENCH OF TRIBUNAL IN THERMAX BABCOCK & WILCOX LTD. VS. ADDL.CIT (2 008) 7 DTR (PUNE) (TRIB) 162 . 4 4 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, RELIED ON THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN HAJI AZIZ AND ABDUL SHAKOOR BROS. VS. CIT (1961) 41 ITR 350 (SC), WHEREIN LIQUIDATED 21 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. DAMAGES PAID WERE NOT ALLOWED. HE ALSO PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELHI IN ROHTAK TEXTILES MILLS VS. CIT (SUPRA), WHICH WAS RELIED ON BY THE ASSESSING OFFICER . 4 5 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS IN RESPECT OF LIQUIDATED DAMAGES PROVIDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THE CASE OF ASSESSEE BEFORE US IS THAT IN VIEW OF IT TAKING UP TURNKEY PROJECTS AND AS PER THE CONDITIONS OF PURCHASE ORDER PLACED, THE PROJECT HAS TO BE COMPLETED WITHIN STIPULATED PERIOD AND IN CASE THE SAME IS NOT SO COMPLETED, THEN THE ASSESSEE IS LIABLE TO PAY LIQUIDATED DAMAGES. FURTHER, IN CASE OTHER CONDITIONS OF THE PURCHASE ORDER ARE NOT COMPLIED WITH BY THE ASSESSEE, THEN ALSO AS PART OF PURCHASE ORDER ITSELF, THERE IS A CLAUSE THAT THE PURCHASER MAY AT HIS DISCRETION WITHHOLD ANY PAYMENTS UNTIL THE WHOLE OF STORES HAS BEEN SUPPLIED AND HE MAY ALSO DEDUCT RECOVERY FROM THE SUPPLIER LIQUIDATED DAMAGES. THE MAJOR ITEM OF EXPENDITURE RELATES TO DAMAGES OF RS.1.56 CRORES CLAIMED BY AND PAID TO M/S. OIL INDIA LTD. THE ASSESSEE WAS DUTY BOUND TO COMPLETE THE SAID PROJECT WITHIN STIPULATED PERIOD AND SINCE THE ASSESSEE COULD NOT FULFILL THE SAME, M/S. OIL IN DIA LTD. VIDE LETTER DATED 20.01.2001 DEMANDED DAMAGES OF RS.1.49 CRORES. IN VIEW OF THE UNDERSTANDING BETWEEN THE PARTIES, THE CLAIM OF RS.1.49 CRORES ON ACCOUNT OF LIQUIDATED DAMAGES BEING RELATABLE TO CARRYING ON OF BUSINESS OF ASSESSEE, IS DULY ALLOWA BLE AS EXPENDITURE IN THE HANDS OF ASSESSEE. ACCORDINGLY, UPHOLDING THE ORDER OF CIT(A), WE DISMISS THE GROUND OF APPEAL NO.7 RAISED BY THE REVENUE. 4 6 . NOW, COMING TO THE BALANCE EXPENDITURE OF RS.6,64,552/ - , WHICH WAS THE INTEREST PAID ON MOBILIZATIO N ADVANCES. CLAUSE (III) OF CONTRACT COPY, WHICH IS PLACED AT PAGE 190 OF THE PAPER BOOK AND THE EVIDENCE OF HAVING PAID THE SAID 22 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. AMOUNT AS PER DOCUMENT AT PAGE 199 OF THE PAPER BOOK, WE FIND THAT THE SAID CLAIM OF RS.6,64,552/ - IS ALSO TO BE ALLOWED IN T HE HANDS OF ASSESSEE. IN VIEW OF THE FACTS AND CIRCUMSTANCES AND THE EVIDENCES WHICH ARE AVAILABLE ON RECORD , WE FIND NO MERIT IN THE ORDER OF CIT(A) IN REMITTING THE ISSUE TO THE FILE OF ASSESSING OFFICER TO CALL FOR RELEVANT PARTICULARS. ACCORDINGLY, W E REVERSE THE FINDINGS OF CIT(A) IN THIS REGARD AND DELETE THE ADDITION OF RS.6,64,552/ - . 4 7 . NOW, COMING TO BALANCE LIQUIDATED DAMAGES OF RS.20,82,140/ - FOR WHICH THE ASSESSEE HAD MADE THE PROVISION IN ITS BOOKS OF ACCOUNT. THE ASSESSEE POINTS OUT THAT AFTER EFFECTING SALES DURING THE RELEVANT YEARS, PROVISIONS ARE MADE DURING THE YEAR CUSTOMER - WISE AND THE SAID PRINCIPLE HAS BEEN FOLLOWED BY THE ASSESSEE FROM YEAR TO YEAR. IN OTHER WORDS, THE ASSESSEE IS FOLLOWING THE METHOD OF ACCOUNTING, UNDER WHICH PROVISION IS MADE ON ACCOUNT OF ANY LIQUIDATED DAMAGES, WHICH THE ASSESSEE MAY HAVE TO PAY . I N CASE THE SAME ARE PAID IN THE NEXT YEAR, THEN THE SAME ARE DEBITED TO PROVISION AND IF NOT PAID, THEN THE PROVISION IS REVERSED. THE ASSESSEE HAVING FOLLOWED T HE SAID SYSTEM OF ACCOUNTING PERSISTENTLY AND IN VIEW OF THE FACT THAT THE SALES HAVE BEEN EFFECTED DURING THE YEAR, THEN WHERE THE ASSESSEE IS AWARE OF ITS DEFICIENCIES AND HAVING MADE THE PROVISIONS AS PER PURCHASE ORDER, THEN SUCH PROVISION OF LIQUIDATE D DAMAGES MERITS TO BE ALLOWED IN THE HANDS OF ASSESSEE IN ENTIRETY. WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN ALLOWING THE LIQUIDATED DAMAGES ONLY TO THE EXTENT WHERE THE AMOUNT HAS BEEN PAID AND IN NOT ALLOWING THE BALANCE. IN ANY CASE, THE SAID LIQUI DATED DAMAGES ARE RELATABLE TO THE BUSINESS UNDERTAKEN BY THE ASSESSEE AND ARE NOT FOR INFRACTION OF LAW. HENCE, THERE IS NO MERIT IN DISALLOWING ANY PART OF EXPENDITURE. RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR T HE REVENUE ON THE DECISIONS OF HON'BLE SUPREME COURT ARE MISPLACED AS IN BOTH THE CASES, DAMAGES WERE PAID ON 23 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ACCOUNT OF INFRACTION OF LAW AND HENCE, WERE HELD TO BE NOT ALLOWABLE AS EXPENDITURE IN THE HANDS OF SAID ASSESSEE. HOWEVER, IN THE PRESENT CASE, LIQUIDATED DAMAGES ARE PAID BY THE ASSESSEE ON ACCOUNT OF VIOLATION OF TERMS OF CONTRACT ENTERED INTO WITH THE PARTIES TO WHOM THE GOODS HAVE BEEN SUPPLIED BY THE ASSESSEE . T HERE IS NO INFRACTION OF LAW IN SUCH CASES AND ACCORDINGLY, WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN THIS REGARD. REVERSING TH E ORDER OF CIT(A), WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE ALSO ON ACCOUNT OF PROVISION MADE OF RS.20,82,139/ - . THE GROUND OF APPEAL NO.12 RAISED BY THE ASSESSEE IS THUS, ALLOWED AND THE GROUND OF APPEAL NO.7 RAISED BY THE REVENUE IS DISMISSED. 4 8 . NOW, COMING TO GROUND OF APPEAL NO.13 RAISED BY THE ASSESSEE WHICH IS AGAINST THE DISALLOWANCE OUT OF SALES AND SERVICE CHARGES OF RS.18,85,000/ - . 4 9 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT, THE ASSESSEE HAD DEBITED PROVISION FOR EXPENSES IN RESPECT OF ITS NASHIK UNIT UNDER THE HEAD SALES AND SERVICE CHARGES TOTALING RS.18,85,000/ - . THE ASSESSEE POINTED OUT THAT THE SAID CHARGES WERE FOR LATE DELI VERY OF GOODS. HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAME WERE IN THE NATURE OF PENALTY PAYABLE TO FOUR PARTIES I.E. (I) LUPIN CHEMICALS LTD. OF RS.2,00,000/ - , (II) HIND SYNTEX LTD. OF RS.3,50,000/ - , (III) ORIENT SYNTEX LTD. (APM) OF RS. 5,75,000/ - AND (IV) CARBON EVERFLOW LTD. OF RS.7,60,000/ - . 50 . BEFORE THE CIT(A), THE ASSESSEE FILED COPIES OF AGREEMENTS IN ORDER TO SHOW THAT IN VIEW OF GUARANTEE CLAUSE ON POWER QUALITY AND AVAILABILITY AND ALSO IN RESPECT OF FUEL CLAUSES, PENALTY PROV ISIONS WERE MADE IF THE FUEL CONSUMPTION EXCEEDED THE GUARANTEED EFFICIENCY, THEN THE ASSESSEE WAS OBLIGED TO REIMBURSE 24 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE VALUE OF SUCH EXCESS TO THE PARTIES AT ACTUAL LANDED COST. SIMILARLY, THERE WERE CLAUSES FOR CONSUMPTION OF OIL. THE CIT(A) ON PE RUSAL OF AGREEMENT OBSERVED THAT THE ASSESSEE HAD NOT GIVEN ANY DETAILS TO SHOW THAT IT HAD VIOLATED THE TERMS AND CONDITIONS OF THE CONTRACT. AS PER THE CIT(A), THE ASSESSEE HAD FAILED TO ESTABLISH THE VERY FACTUM OF LIABILITY HAVING ARISEN. THE ASSESSE E DURING THE APPELLATE PROCEEDINGS WAS ALSO ASKED TO CLARIFY AS TO WHEN THE REIMBURSEMENT WAS ACTUALLY MADE, BUT NO SAID DETAILS WERE FURNISHED BY THE ASSESSEE. THE CIT(A) WAS OF THE VIEW THAT BECAUSE OF SAID REASONS AND ALSO OF THE FACT THAT PENAL PROVIS ION IN AN AGREEMENT NORMALLY DO NOT COME INTO FORCE AUTOMATICALLY, UNLESS ENFORCED BY THE OTHER PARTY, T HE DISALLOWANCE MADE TO THE EXTENT OF RS.18,85,000/ - WAS CONFIRMED IN THE HANDS OF ASSESSEE ON GROUND OTHER THAN FOR WHICH THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER. 5 1 . THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF CIT(A) AND HAS POINTED OUT THAT WHILE CONDUCTING ITS BUSINESS OF IC ENGINES, THE ASSESSEE ALSO UNDERTOOK TO MANAGE THESE ENGINES, WHEREIN COMPENSATION WAS PAYABLE AS PER THE UNDERSTANDING / CONTRACTS. THE ASSESSEE CLAIMS THAT IT HAD REIMBURSED THE EXCESS COST OF FUEL CONSUMPTION AND ALSO NON - AVAILABILITY OF POWER. 5 2 . THE LEARNED DEPARTMENTAL REPRESENTATI VE FOR THE REVENUE RELYING ON THE ORDER OF ASSESSING OFFICER AT PAGE 22 OF ASSESSMENT ORDER ALSO REFERRED TO THE OBSERVATIONS OF CIT(A) IN PARA 22 OF THE APPELLATE ORDER. 5 3 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING I N THE PRESENT APPEAL IS AGAINST THE DISALLOWANCE MADE ON ACCOUNT OF AMOUNTS DEBITED UNDER THE HEAD SALES AND SERVICE CHARGES OF RS.18,85,000/ - . THE ASSESSEE HAD DEBITED THE PROVISION FOR EXPENSES IN RESPECT OF ITS UNIT AT 25 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. NASHIK. THE ASSESSEE CLAIMED T HAT AS PER CONTRACT / AGREEMENT, IT WAS OBLIGED TO REIMBURSE THE VALUE OF CERTAIN EXCESS I.E. ON ACCOUNT OF FUEL CONSUMPTION AND / OR CONSUMPTION OF LUBE OIL. THE ASSESSEE ADMITTEDLY, HAS FILED THE AGREEMENT BUT THE FINDINGS OF CIT(A) ARE THAT THE ASSESSE E HAD FAILED TO GIVE ANY DETAILS TO SHOW THAT IT HAD VIOLATED THE SAID TERMS AND CONDITIONS. FURTHER , THE ASSESSEE WAS ASKED TO CLARIFY AS TO WHEN THE REIMBURSEMENTS WERE ACTUALLY MADE BUT THE SAID DETAILS WERE ALSO NOT FURNISHED. THE CIT(A) HAS CHALLENG ED THE VERY FACTUM OF LIABILITY HAVING BEEN DISCHARGED AND HAS CONFIRMED THE DISALLOWANCE ON THIS COUNT. THE ASSESSING OFFICER HAD DISALLOWED THE SAME TO BE ON ACCOUNT OF INFRACTION OF LAW. WE FIND MERIT IN THE ORDER OF CIT(A), WHEREIN THE ASSESSEE HAS N OT ESTABLISHED ITS CASE WITH REGARD TO PROVISIONS MADE IN THE BOOKS OF ACCOUNT ON ACCOUNT OF SALES AND SERVICE CHARGES. THE SAID LIABILITY ARISES FROM THE TERMS OF CONTRACT ENTERED INTO BUT THE ONUS IS ON THE ASSESSEE TO ESTABLISH THE FACTUM OF LIABILITY , WHICH IT CLAIMS IT HAD TO FULFILL. THE ASSESSEE HAD ALSO NOT CLARIFIED AS TO WHEN THE SAID REIMBURSEMENTS WERE ACTUALLY MADE AND CONSEQUENTLY, WE UPHOLD THE ORDER OF CIT(A) IN DISALLOWING OF RS.18,85,000/ - . THE CIT(A) HAD NOT DISALLOWED THE AMOUNT ON THE ACCOUNT THAT THE S E W ERE PENAL IN NATURE BUT ON ACTUAL FACTUM OF LIABILITY ARISING ON WHICH ACCOUNT AND WHETHER ANY DEMAND WAS MADE FROM THE OPPOSITE PARTY VIS - - VIS SO - CALLED PENALTY CLAUSES AND ALSO WHEN THE REIMBURSEMENT WAS MADE BY THE ASSESSEE AGAI NST THE PROVISION MADE. UPHOLDING THE SAME, THE GROUND OF APPEAL NO.13 RAISED BY THE ASSESSEE IS DISMISSED. 5 4 . THE ISSUE IN GROUND OF APPEAL NO.14 I.E. DISALLOWANCE OUT OF LEGAL AND PROFESSIONAL CHARGES OF RS.33,60,000/ - HAS NOT BEEN PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 26 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 5 5 . THE GROUND OF APPEAL NO.15 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF PROVISION MADE FOR LEAVE ENCASHMENT OF RS.2,11,90,000/ - . 5 6 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD MADE THE PROVISION OF RS. 2,11,90,000/ - TOWARDS LEAVE ENCASHMENT EXPENSES. THE ASSESSEE UPTO PRECEDING ASSESSMENT YEAR WAS CLAIMING THE PRIVILEGED LEAVE ENCASHMEN T ONLY ON THE BASIS OF ACTUAL PAYMENTS. HOWEVER, DURING THE YEAR UNDER CONSIDERATION, THE METHOD OF ACCOUNTING WAS CHANGED AS A RESULT OF DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (2000) 245 ITR 428 (SC). THE AUDITO R IN CLAUSE 11(B) OF THE STATUTORY AUDIT REPORT HAD MENTIONED ABOUT THE SAID CHANGE. THE ASSESSING OFFICER PROPOSED TO DISALLOW THE ASSESSEES CLAIM ON THE GROUND THAT THE SAME WAS CONTRARY TO THE METHOD WHICH WAS FOLLOWED CONSISTENTLY BY THE ASSESSEE. T HE ASSESSEE IN REPLY, POINTED OUT THAT IT HAD CLAIMED DEDUCTION OF RS.2.11 CRORES ONLY AFTER ADDING BACK THE LIABILITY OF RS.12,11,24,580/ - , WHICH HAD APPROVED UPTO 01.04.2000. THE SAID LIABILITY TOWARDS ENCASHMENT OF EARNED LEAVE HAD ARISEN IN THE ACCOUN TING PERIOD ITSELF AND THE ASSESSEE CLAIMED THE SAME TO BE ALLOWABLE AS BUSINESS EXPENDITURE NOTWITHSTANDING THE FACT THAT THE SAME WOULD BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. AS PER ACCOUNTING STANDARD 15, IT WAS MANDATORY TO MAKE THE SAID PROVI SION. HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE FACTS IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) WERE AT VARIANCE AND WHERE THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE FUND AND EVEN HAD NOT CREDITED THE PROVISION AMOUNT TO THE INDIVIDUAL EM PLOYEES ACCOUNT, THEN THE LIABILITY TO PAY THE LEAVE ENCASHMENT TO THE EMPLOYEES COULD BY NO MEANS BE RECORDED AS HAVING ACCRUED. THE ASSESSING OFFICER RELIED ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF KARNATAKA IN CIT VS. MOTOR INDUSTRIES CO. LTD. (1998) 229 ITR 137 (KAR), WHEREIN 27 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. IT WAS HELD THAT THE PROVISION FOR LEAVE ENCASHMENT WAS A COMPONENT LIABILITY AND HENCE, NOT DEDUCTIBLE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE ALSO REFERRED TO THE PROVISIONS OF SECTION 43B OF THE ACT WHICH HAD BEEN AMENDED W.E.F. ASSESSMENT YEAR 2002 - 03 TO ALLOW DEDUCTION ON ACCOUNT OF LEAVE ENCASHMENT ONLY ON ACTUAL PAYMENT BASIS. ACCORDINGLY, DISALLOWANCE OF RS.2.11 CRORES. 5 7 . THE C IT(A) NOTED THAT THE ASSESSEE WAS CLAIMING DEDUCTION ONLY ON ACTUAL BASIS AND WHERE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND WHERE THE ASSESSEE WAS RECOGNIZING ITS LIABILITY TOWARDS LEAVE ENCASHMENT AS ACCRUING ONLY IN THE YEAR OF PAY MENT AND NOT EARLIER, THEN THE ONUS WAS ON ASSESSEE TO JUSTIFY THE SHIFT FROM CONSISTENTLY FOLLOWED PRACTICE TO THE CLAIM MADE IN THE INSTANT ASSESSMENT YEAR. THE CIT(A) REJECTED THE CLAIM OF ASSESSEE AND UPHELD THE ORDER OF ASSESSING OFFICER IN THIS REGA RD. SINCE THE PLEA OF ASSESSEE WAS REJECTED, THE CIT(A) DID NOT GO INTO APPLICABILITY OF PROVISIONS OF SECTION 43B OF THE ACT W.E.F. ASSESSMENT YEAR 2002 - 03. 5 8 . THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 5 9 . THE LEARNED AUTHORIZED REPRESE NTATIVE FOR THE ASSESSEE POINTED OUT THAT IT HAD INSTITUTED A SCHEME FOR ALL THE EMPLOYEES FOR ALL THE PAST YEARS OF SERVICE AND DUE TO THE CHANGE WHICH WAS DUE TO THE CHANGE IN ACCOUNTING PRINCIPLES I.E. INTRODUCTION OF AS 15, HE POINTED OUT THAT IN THE Y EAR UNDER CONSIDERATION, THE ASSESSEE MADE A PROVISION FOR LEAVE ENCASHMENT FOR EARLIER YEARS AT ABOUT RS.12 CRORES, WHICH WAS NOT CLAIMED AS DEDUCTION IN ANY OF THE YEARS . HOWEVER, THE DEDUCTION CLAIMED WAS ONLY RELATABLE TO THE PROVISION MADE FOR LEAVE ENCASHMENT FOR THE YEAR UNDER CONSIDERATION TO THE EXTENT OF RS.2.11 CRORES. 28 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. OUR ATTENTION WAS DRAWN TO THE NOTE OF BALANCE SHEET AT PAGE 42 OF THE PAPER BOOK. HE FURTHER POINTED OUT THAT THE ISSUE RAISE D IS SQUARELY COVERED BY THE ORDER OF HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT (SUPRA) AND THE DECISION OF PUNE BENCH OF TRIBUNAL IN KIRLOSKAR PNEUMATIC CO. LTD. VS. DCIT IN ITA NO.618/PN/1996 AND IN DCIT VS. KIRLOSKAR PNEUMATIC CO. LTD. IN ITA NO.589/PN/1996, RELATING TO ASSESSMENT YEAR 1992 - 93, ORDER DATED MARCH, 2006 . 60 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 6 1 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IN LINE WITH AS 15 OF ACCOUNTING POLICIES HAD MADE THE PROVISION FOR LEAVE ENCASHMENT. AS PER THE ASSESSEE, IT HAD INSTITUTED THE SAID SCHEME FOR ALL THE EMPLOYEES FOR AND TAKING INTO CONS IDERATION THE PAST YEARS OF SERVICE AND HAD MADE THE PROVISION FOR LEAVE ENCASHMENT IN ITS BOOKS OF ACCOUNT. HOWEVER, THE PROVISION MADE FOR EARLIER YEARS WAS NOT CLAIMED AS DEDUCTION IN THE PROFIT AND LOSS ACCOUNT WHICH TOTALED TO ABOUT RS.12 CRORES. TH E ASSESSEE ONLY CLAIMED THE PROVISION MADE FOR LEAVE ENCASHMENT DUE TO THE EMPLOYEES ONLY FOR THE YEAR UNDER CONSIDERATION AT RS.2.11 CRORES. THE CASE OF ASSESSEE WAS THAT THE SAID PROVISION WAS MADE IN RESPECT OF AMOUNTS DUE TO THE EMPLOYEES FOR THE YEAR UNDER CONSIDERATION ITSELF AND HENCE, WAS TO BE ALLOWED AS DEDUCTION IN ITS HANDS UNDER SECTION 37(1) OF THE ACT. THE REVENUE ON THE OTHER HAND, NOTED THAT THE ASSESSEE IN EARLIER YEARS WAS MAKING THE PAYMENTS OF LEAVE ENCASHMENT AND WAS CLAIMING THE SAI D EXPENDITURE ON ACTUAL BASIS. THE AUTHORITIES BELOW REJECTED THE CLAIM OF ASSESSEE IN THIS REGARD AND HELD THAT WHERE NO AMOUNT HAS BEEN PAID BY THE ASSESSEE ON ACCOUNT OF LEAVE ENCASHMENT, THERE IS NO MERIT IN MAKING THE PROVISION FOR LEAVE 29 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ENCASHMENT. THE ASSESSEE HAD DECLARED THE SAID CHANGE IN PRACTICE IN ITS BALANCE SHEET FILED FOR THE YEAR UNDER CONSIDERATION. AS PER NOTE 18 OF SCHEDULE 21, THE ASSESSEE HAD DECLARED THAT ACCRUED LIABILITY OF RS.142.31 MILLIONS ON ACCOUNT OF PRIVILEGED LEAVE ENCASHM ENT (AFTER INCLUDING RS.121.12 MILLIONS AS PER PRIOR PERIOD ADJUSTMENT) HAS BEEN RECOGNIZED FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT (SUPRA) AS AGAINST THE PAST PRACTICE OF ACCOUNTING THE SAME IN THE YEAR OF AVAILMENT OF ENCASHMENT ; AS A RESULT OF THIS, PROFIT FOR THE YEAR IS LOWER BY RS.21.19 MILLIONS. ADMITTEDLY, THE ASSESSEE WAS FOLLOWING MERC ANTILE SYSTEM OF ACCOUNTING AND HAS MADE THE PROVISION. THE CIT(A) ON THE OTHER HAND, HAD OBSERVED THAT WHERE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BUT WAS ONLY DEBITING THE ACTUAL EXPENDITURE ON ACCOUNT OF LEAVE ENCASHMENT PAYMENT, THEN THE DATE OF ENCASHMENT WAS THE DATE OF ACCRUAL OF SAID EXPENDITURE AND HENCE, TO BE AL LOWED AS DEDUCTION IN THE HANDS OF ASSESSEE. WE FIND NO MERIT IN THE STAND OF CIT(A) IN THIS REGARD, WHEREIN AS PER MERCANTILE SYSTEM OF ACCOUNTING, EXPENDITURE RELATING TO THE YEAR UNDER CONSIDERATION WHETHER ACCRUED OR PAID IS TO BE RECOGNIZED AS EXPEND ITURE AND DEBITED TO THE BOOKS OF ACCOUNT. 6 2 . WE FURTHER FIND THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS VS. CIT (SUPRA), WHEREIN THE PROPOSITION HAS BEEN LAID DOWN IN RESPECT OF PROVISION FOR LIABI LITY TOWARDS ENCASHMENT OF EARNED LEAVE AND IT HAS BEEN HELD THAT WHERE THE BUSINESS LIABILITY HAD DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THEN THE DEDUCTION IS ALLOWABLE ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. THE HON'BLE SUPREME COURT HELD THAT THE LIABILITY INCURRED BY THE ASSESSEE UNDER LEAVE ENCASHMENT SCHEME PROPORTIONATE TO THE ENTITLEMENT 30 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. EARNED BY ITS EMPLOYEES, SUBJECT TO CEILING OF ACCUMULATION WAS NOT A CONTINGENT LIABILITY. 6 3 . THE PUNE BENCH OF TRI BUNAL IN KIRLOSKAR PNEUMATIC CO. LTD. VS. DCIT (SUPRA) FOLLOWING THE PRINCIPLE LAID DOWN BY THE HON'BLE SUPREME COURT (SUPRA) DIRECTED THE ASSESSING OFFICER TO ALLOW THE CLAIM ACCORDINGLY. 64. FOLLOWING THE SAME PARITY OF REASONING, WE ALSO DIRECT THE A SSESSING OFFICER THAT THE PROVISION MADE BY THE ASSESSEE COMPANY FOR MEETING INCREMENTAL LIABILITY OF THE YEAR , UNDER LEAVE ENCASHMENT SCHEME, PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF ASSESSEE COMPANY, SUBJECT TO CEILING OF ACCUMULATIO N AS APPLICABLE ON THE RELEVANT DATE, IS ENTITLED FOR DEDUCTION IN THE HANDS OF ASSESSEE. THE ASSESSING OFFICER SHALL ACCORDINGLY, ALLOW THE SAME. THE GROUND OF APPEAL NO.15 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 6 5 . NOW, COMING TO THE NEXT GROUND OF APPEAL I.E. 1 6 WHICH IS AGAINST DETERMINATION OF BOOK PROFITS UNDER SECTION 115JB OF THE ACT. 6 6 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD IN THE RETURN OF INCOME NOT COMPUTED THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT THOUGH THE FINAL RESULT AS PER PROFIT AND LOSS ACCOUNT WAS INCOME OF RS.41,33,26,000/ - . THE ASSESSEE HAD NOT MADE THE SAID COMPUTATION ON THE GROUND THAT IN VIEW OF OVERRIDING DIRECTIONS OF THE BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR) UNDER THE SCHE ME OF AMALGAMATION OF M/S. SHIVAJI WORKS LTD. (CWL) , LOSS MAKING COMPANY, OBSERVED THAT THE ASSESSEE WAS UNDER NO OBLIGATION TO PAY MINIMUM ALTERNATE TAX (MAT) UNTIL BROUGHT FORWARD LOSSES OF THE AMALGAMATION 31 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. COMPANY HAD NOT BEEN FULLY SET OFF. THE ASSESSING OFFICER ON THE OTHER HAND, OBSERVED THAT SECTION 115J OR 115JB OF THE ACT DID NOT ALLOW ANY EXCEPTION WITH REFERENCE TO TAKE OVER OF LOSS MAKING CONCERN, HENCE HE PROPOSED TO COMPUTE THE ADJUSTED BOOK PROF ITS AT RS.41.50 CRORES. IN RESPONSE THERETO, THE ASSESSEE RELIED ON THE SCHEME SANCTIONED BY BIFR AND POINTED OUT THAT THE SAME WOULD HAVE OVERRIDING EFFECT ON THE PROVISIONS OF ANY OTHER ACT EXCEPT FOREIGN EXCHANGE REGULATION ACT OR THE URBAN LAND CEILIN G ACT. REFERENCE WAS MADE TO SECTION 32(1) OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (SICA) . REFERENCE WAS MADE TO THE ORDER OF BIFR, WHEREIN IT WAS SPECIALLY SANCTIONED THAT THE ASSESSEE SHALL BE EXEMPTED FROM PAYMENT OF MAT UNDER THE INCOME TAX ACT TILL AMALGAMATED LOSSES OF SWL WERE SET OFF. THE ASSESSEE CLAIMED THAT IT COULD NOT BE MADE LIABLE TO TAXES ON BOOK PROFITS UNDER SECTION 115JB OF THE ACT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ORDER OF BIFR GIVEN IN ASSESSEES CA SE WAS NOT BINDING ON HIM SINCE THE DEPARTMENT WAS NOT MADE A PARTY WHILE FINALIZING THE SCHEME OF RECONSTRUCTION. THE ASSESSING OFFICER ALSO REFERRED TO THE EXPLANATION TO SECTION 115JB OF THE ACT, AS PER WHICH THE AMOUNT BY WAY OF PROVISION FOR LOSSES O F SUBSIDIARY COMPANY WERE REQUIRED TO BE ADDED TO THE NET PROFIT, IN ORDER TO QUANTIFY THE BOOK PROFITS. ACCORDINGLY, HE COMPUTED THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT AND MADE CERTAIN ADJUSTMENTS. 6 7 . BEFORE THE CIT(A), THE ASSESSEE REFERRED TO THE APPELLATE ORDER FOR ASSESSMENT YEAR 1999 - 2000, WHEREIN THE CIT(A), PUNE HAD DEALT WITH THE ISSUE AND HAD HELD THAT IN VIEW OF OVERRIDING EFFECT OF SICA, THE ORDER OF BIFR WAS BINDING UPON THE DEPARTMENT. THE CIT(A) NOTED THAT THE SCHEME APPROVED BY BIFR WAS IN THE NATURE OF ORDER CONTAINING DIRECTIONS. THE CBDT HAD ASKED FOR REVIEW OF ORDER OF BIFR AND THEREAFTER, BIFR HAS PASSED ANOTHER ORDER DATED 32 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 19.08.2003 WITHOUT IN ANY MANNER RECTIFYING OR MODIFYING THE SANCTION GIVEN IN THIS MATTER I.E. EXEMPTING THE ASSESSEE FROM MAT UNTIL ACCUMULATED LOSSES OF SWL HAD NOT BEEN FULLY SET OFF AS PER THE ORIGINAL ORDER DATED 16.10.1999. THE CIT(A) AFTER DELIBERATING UPON VARIOUS FACETS OF BIFR SCHEME AND THE PROPOSA L MADE BY THE CBDT AND THEREAFTER THE ORDER PASSED BY BIFR HELD THAT THE ORDER OF BIFR DID NOT AUTOMATICALLY EXEMPT THE ASSESSEE FROM GRANT OF INCOME TAX RELIEF AND CONCESSIONS, INCLUDING EXEMPTION FROM PAYMENT OF MAT UNTIL BROUGHT FORWARD LOSSES RELATING TO SWL, THE AMALGAMATING COMPANY HAD NOT BEEN FULLY SET OFF AND IN THE ABSENCE OF ANY EXEMPTION HAVING BEEN SPECIFICALLY GRANTED BY THE CBDT, THE STAND OF ASSESSING OFFICER WAS CONFIRMED BY THE CIT(A). 6 8 . THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF CIT(A). 6 9 . AFTER TAKING US THROUGH THE FACTUAL ASPECTS OF CASE , RELIANCE WAS PLACED ON THE ORDER OF TRIBUNAL RELATING TO ASSESSMENT YEAR 1999 - 2000 WITH SPECIAL REFERENCE TO PARA 16 AND IT WAS POINTED OUT THAT THE ISSUE NOW STANDS COVERED BY THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE. 70 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, RELIED ON THE ORDER OF CIT(A). 71 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO TOOK US THROUGH THE CALCULATION OF BOOK PROFITS FROM ASSESSMENT YEAR 1999 - 2000 ONWARDS AND THE ADJUSTMENT TO BE MADE ON ACCOUNT OF LOSSES OF AMALGAMATING COMPANY. HE ALSO POINTED OUT THAT IN CASE THIS ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE, THE OTHER ISSUES R AISED ON STRICTLY WITHOUT PREJUDICE WOULD BECOME ACADEMIC IN NATURE. 33 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 7 2 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE LIMITED ISSUE WHICH ARISES FOR ADJUDICATION UNDER THIS GROUND OF APPEAL IS WHETHER THE ASSESSEE IS LIABLE TO BE ASSESS ED ON THE BOOK PROFITS DETERMINED AS PER SECTION 115JB OF THE ACT. THE CASE OF ASSESSEE IS THAT IT HAD TAKEN OVER THE LOSSES OF AMALGAMATING COMPANY M/S. SHIVAJI WORKS LTD. THE AMALGAMATION WAS PURSUANT TO THE ORDER OF BIFR, UNDER WHICH THE LOSSES WERE A LSO TAKEN OVER BY THE ASSESSEE. IN RESPECT OF BIFR PROCEEDINGS, IT MAY BE POINTED OUT THAT IN THE INITIAL ORDER DATED 19.08.2001, IT WAS HELD THAT THE ASSESSEE WOULD NOT BE LIABLE TO PAY TAXES ON THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT TILL THE LO SSES OF SWL ARE ADJUSTED. THE SAID ORDER WAS PASSED WITHOUT GIVING AN OPPORTUNITY OF HEARING TO CBDT. THEREAFTER, THE PROCEEDINGS WERE CONDUCTED AND NOTICE WAS GIVEN TO CBDT, WHO FAILED TO APPEAR BEFORE BIFR NOR FILED ANY COMMUNICATION. CONSEQUENTLY, BI FR PASSED ANOTHER ORDER DATED 19.08.2003, WHEREIN SIMILAR PROPOSITION WAS AGAIN MADE BY BIFR. 7 3 . WE FIND THAT SIMILAR ISSUE OF DETERMINATION OF BOOK PROFITS AROSE IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 1999 - 2000 AND THE TRIBUNAL HELD THAT NO TAXES O N BOOK PROFITS UNDER SECTION 115JB OF THE ACT ARE TO BE CHARGED IN THE HANDS OF ASSESSEE TILL THE LOSSES OF SWL ARE ADJUSTED. THE REVENUE WENT IN APPEAL AGAINST THE ORDER OF TRIBUNAL BEFORE THE HONBLE HIGH COURT AND THE HONBLE HIGH COURT OF BOMBAY IN I N COME TAX APPEAL (LODGING) NO.1924 OF 2012, VIDE JUDGMENT DATED 11.02.2013 CONSIDERED THE ISSUE THAT WHETHER THE TRIBUNAL WAS JUSTIFIED IN GRANTING RELIEF PERTAINING TO INCOME TAX TO THE ASSESSEE FOLLOWING THE ORDER OF BIFR WHERE NEITHER THE INCOME TAX DEPARTMENT WAS MADE PARTY BY THE BIFR NOR ANY OPPORTUNITY WAS GRANTED OR CONSENT TAKEN BEFORE FINALIZATION. THE HONBLE BOMBAY HIGH COURT IN THIS REGARD OBSERVED THAT THE REVENUE CHOSE NOT TO APPEAR BEFORE BIFR IN SPITE OF HAVING GIVEN AN OPPOR TUNITY AND SOUGHT 34 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ADJOURNMENTS. THE TRIBUNAL IN SUCH CIRCUMSTANCES HELD THAT IT WOULD NOT BE CORRECT TO STATE THAT THE REVENUE WAS NOT GIVEN ANY OPPORTUNITY TO APPEAR BEFORE BIFR. THE HONBLE HIGH COURT FURTHER HELD THAT SINCE THE ORDER OF BIFR DATED 19. 08.2003 HAD NOT BEEN DISTURBED BY ANY HIGHER FORUM AND WHERE IT WAS NOT DISPUTED THAT THE REVENUE HAD IN TERMS OF CIRCULAR DATED 16.02.2000 ISSUED BY CBDT TO GIVE EFFECT TO THE ORDER PASSED BY BIFR UNDER APPROVED SCHEME OF RECONSTRUCTION / REHABILITATION, THEREFORE, THE SAME HAS TO BE FOLLOWED. 74. IN VIEW OF THE ABOVE SAID PROPOSITION LAID DOWN BY THE HONBLE HIGH COURT IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 1999 - 2000 WHICH WAS ALSO CONSIDERING THE SAID SCHEME OF BIFR AS BEFORE US, WE HOLD THAT THE O RDER OF BIFR IS BINDING UPON THE REVENUE AUTHORITIES AND EFFECT OF THE SAME IS TO BE ALLOWED IN THE HANDS OF ASSESSEE. ACCORDINGLY, THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT CANNOT BE TAXED TILL UNABSORBED LOSSES OF SWL ARE ADJUSTED. IN THIS REGARD , THE ASSESSEE HAS FILED THE CALCULATION SHEET BEFORE US. HOWEVER, FOR THE LIMITED PURPOSE OF VERIFYING THE STAND OF ASSESSEE, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR LIMITED PURPOSE OF DETERMIN ING THE AVAILABILITY OF LOSSES AND TILL THE SAME ARE NOT FULLY ADJUSTED, THEN THE ASSESSEE CANNOT BE TAXED ON BOOK PROFITS UNDER SECTION 115JB OF THE ACT. THE ASSESSING OFFICER IS DIRECTED TO ALLOW REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE IN THIS REGARD AND PASS THE ORDER WITHIN PERIO D OF SIX MONTHS. ACCORDINGLY, THE BALANCE ISSUES RAISED ON WITHOUT PREJUDICE BASIS BECOME ACADEMIC. IN VIEW THEREOF, THE GROUND OF APPEAL NO.16 IS ALLOWED. 75. THE REVENUE IN ITA NO.884/PUN/2006 , RELATING TO ASSESSMENT YEAR 2001 - 02 HAS RAISED THE FOLLOW ING GROUNDS OF APPEAL: - 35 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.29,51,493/ - WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WORKED OUT REMUNERATION ON TAX FREE DIVIDENDS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.17,92,821/ - MADE ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES FOR EARNING TAX FREE DIVIDEND U/S.14(A). 3. ON THE FACTS AND IN THE CIRCUMST ANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.1,03,342/ - MADE ON ACCOUNT OF PENAL INTEREST IN VIEW OF THE DECISIONS OF THE SUPREME COURT REPORTED IN THE CASE OF MEDDI VENKATARAMAN & CO. PVT. LTD. VS. CIT (229 ITR 534). 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.19,20,000/ - AS INTEREST PAID WAS NOT FOR THE PURPOSE OF BUSINESS. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.2,82,93,638/ - ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENT MADE IN BONDS AND SHARE WHICH ARE EXEMPT U/S.10(33). 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.18,576/ - TREATING IT AS A LICENSE FEE WHEN IN FACT IT IS A CLAIM OF LIAISON EXPENSES. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.149,97,483/ - ON ACCOUNT OF LIQUIDATED DAMAGES. THE AO HAS RELIED ON THE DECISION OF ROHTAK TEXTILES MILLS VS. CIT (1997) 226 ITR 485 DELHI WHEREIN PAYMENT OF LIQUIDATED DAMAGES HAS BEEN HELD AS NON DETECTABLE AND IN THE NATURE OF PENALTY. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.7,20,000/ - PAID TO SMT.AARTI KIRLOSKAR BY TREATING AS REMUNERATION WHEN IT WAS ACTUALLY CLAIMED AS LEGAL AND PROFESSIONAL EXPENSES. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.787500/ - ON ACCOUNT OF DEBENTURE RELATED EXPENSES THOUGH THE EXPENDITURE ARE IN THE NATURE OF CAPITAL EXPENSES. 10. THE ORDER OF THE CIT (A) MAY BE VACATED AND THAT OF THE AO BE RESTORED. 76 . THE ISSUE IN GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS AGAINST DELETION OF ADDITION OF RS.29,51,493/ - . 77 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT, THE ASSESSEE HAD WORKED OUT THE REMUNERATION / COMMISSION WHICH COULD BE PAID TO THE DIRECTORS AT 11% OF THE PROFITS DETERMINED UNDER SECTION 349 OF THE COMPANIES ACT AT RS.3,46,48,000/ - . 36 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE SAME WAS HOWEVER, RESTRICTED TO RS.2,81,28,000/ - BEING THE AMOUNT ACTUALLY PAID. THE ASSESSING OFFICER FOUND THAT THE PROFIT OF RS.34,64,80,000/ - DETERMINED UNDER SECTION 349 OF THE COMPANIES ACT, WHICH WAS THE BASIS FOR CALCULATING ELIGIBLE REMUNERATION / COMMISSION, INCLUDED TAX FREE DIVIDEND OF RS.3,63,56,418/ - , WHICH WAS CLAIMED AS EXEMPT UNDER SECTION 10(33) OF THE ACT. HENCE, THE ASSESSING OFFICER PROPOSED TO DISALL OW THE CLAIM TOWARDS REMUNERATION / COMMISSION IN THE SAME RATIO AS THE TAX FREE DIVIDENDS BORE TO THE PROFIT. THE ASSESSEE POINTED OUT THAT THERE WAS NO BAR UNDER THE INCOME TAX ACT TO CLAIM REMUNERATION / COMMISSION, ETC. WHERE THE SAME WAS WITHIN THE L IMITS PRESCRIBED UNDER THE COMPANIES ACT. HE ALSO POINTED OUT THAT THE ACTUAL PAYMENTS WERE LESS THAN THE ELIGIBLE AMOUNTS. HOWEVER, THE ASSESSING OFFICER REJECTED THE SAME AND OUT OF CLAIM TOWARDS REMUNERATION / COMMISSION OF RS.2.81 CRORES, HE MADE DIS ALLOWANCE OF RS.29,51,493/ - . 78 . THE CIT(A) HELD THAT IT WAS NOT DISPUTED BY THE ASSESSING OFFICER THAT THE ASSESSEES CLAIM OF REMUNERATION / COMMISSION PAID TO THE DIRECTORS WAS WITHIN THE LIMITS LAID DOWN UNDER THE COMPANIES ACT. HE FURTHER NOTED THAT REMUNERATION / COMMISSION PAID TO THE DIRECTORS WAS LESS THAN 11% OF THE NET TAXABLE PROFITS I.E. EVEN AFTER EXCLUDING THE TAX FREE DIVIDENDS. HE THUS, HELD THAT THE QUESTION WHETHER OR NOT TAX FREE DIVIDENDS OUGHT TO BE EXCLUDED FROM THE PROFITS FOR THE PURPOSE OF ARRIVING AT THE ADMISSIBLE REMUNERATION / COMMISSION BECOMES MERELY ACADEMIC. HE ACCORDINGLY, DELETED THE ADDITION OF RS.29,51,493/ - . 79 . THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A). HOWEVER, WE FIND NO MERIT IN THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE, WHERE THE CIT(A) HAS OBSERVED THAT THE REMUNERATION / COMMISSION IN ANY CASE WAS LESS THAN 11% 37 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. OF THE NET TAXABLE PROFITS, AFTER EXCLUDING THE TAX FREE DIVIDENDS ALSO. ACCORDINGLY, THE GROUND OF APPEAL NO.1 RAISED BY THE REVEN UE IS DISMISSED. 80 . THE ISSUE IN GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS AGAINST DELETION OF ADDITION OF RS.17,92,821/ - MADE ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES FOR EARNING TAX FREE DIVIDENDS. 81 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT, THE ASSESSEE HAD RECEIVED GROSS DIVIDEND OF RS.3,63,56,418/ - WHICH CONSISTED OF DIVIDEND OF RS.3.31 CRORES RECEIVED FROM DOMESTIC COMPANY AND DIVIDEND OF RS.32,30,084/ - RECEIVED FROM UNIT TRUST OF INDIA. THE ENT IRE GROSS DIVIDEND WAS CLAIMED AS EXEMPT UNDER SECTION 10(33) OF THE ACT. THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE TO EXPLAIN AS TO WHY PART OF ADMINISTRATIVE AND MANAGERIAL EXPENSES SHOULD NOT BE CONSIDERED TO HAVE INCURRED FOR EARNING TAX FREE DIV IDENDS AND WHY SUCH PART SHOULD NOT BE DISALLOWED UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICER FURTHER NOTED THAT THE TOTAL INVESTMENTS WERE OF THE ORDER OF RS.118.77 CRORES OF WHICH RS.25.63 CRORES REPRESENT ACCRETION DURING THE YEAR. HENCE, THE PLEA OF ASSESSEE IN THIS REGARD WAS REJECTED AND THE ASSESSING OFFICER ESTIMATED THE ATTRIBUTABLE EXPENDITURE AT 5% OF DIVIDENDS AMOUNT AND DISALLOWED THE SAME AT RS.18,17,821/ - . THE PLEA OF ASSESSEE BEFORE THE CIT(A) WAS THAT NO PART OF EXPENDITURE WAS A TTRIBUTABLE TO EARNING OF DIVIDEND INCOME AND HENCE, NO EXPENSES MERITS TO BE ALLOWED. THE CIT(A) RELYING ON EARLIER YEARS, MADE DISALLOWANCE OF RS.25,000/ - AND ALLOWED RELIEF TO THE ASSESSEE OF RS.18,17,821/ - . THE REVENUE IS IN APPEAL AGAINST THE SAID R ELIEF GRANTED BY THE CIT(A) AND POINTED OUT THAT DISALLOWANCE AT RS.25,000/ - WAS VERY LOW. WE FIND NO MERIT IN THE PLEA OF LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN THIS REGARD, WHERE THE ASSESSEE HAS RECEIVED ONLY 20 - 21 DIVIDENDS WARRANTS DU RING THE 38 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. RELEVANT YEAR. IN THE ENTIRETY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE. 82 . THE ISSUE IN GROUND OF APPEAL NO.3 IS AGAINST DELETION OF ADDITION OF RS.1,0 3,342/ - MADE ON ACCOUNT OF PENAL INTEREST. THE ASSESSEE HAD CLAIMED TO HAVE PAID THE SAID INTEREST ON ACCOUNT OF DELAY IN PAYMENT OF INTEREST ON SECURED DEBENTURES TO UTI AND CLAIMED THE SAME TO BE COMPENSATORY IN NATURE. THE ASSESSING OFFICER HOWEVER, H ELD THE PAYMENTS TO BE PENAL IN NATURE AS THERE WAS NO REASONABLE CAUSE IN THE SAID DELAY. BEFORE THE CIT(A), THE ASSESSEE EXPLAINED THAT IT HAD ISSUED 4 LAKH SHARES (19% SECURED REDEEMABLE NONCONVERTIBLE DEBENTURES ON PRIVATE PLACEMENT TO LIC, UTI, ETC.) . THE SAID SECURITIES IN RESPECT OF DEBENTURES WERE REQUIRED TO BE CREDITED ON OR BEFORE 31.12.1992 . BUT THEY WERE CREDITED ON 10.03.1993 AND 01.09.1993. THE INSTITUTIONS INVOKED THE PENAL INTEREST CLAUSE IN THE AGREEMENT AND HELD THE ASSESSEE LIABLE TO PAY 2% PER ANNUM AS PENAL INTEREST FOR DELAY IN CREATION OF SECURITIES. HOWEVER, LATER THE SAID RATE OF INTEREST WAS REDUCED TO 1%, WHICH WAS PAID ON 23.05.1994 AND ON REDEMPTION OF DEBENTURES ON 01.01.2000 WHEN THE ASSESSEE SOUGHT NO OBJECTION LETTERS F ROM THE INSTITUTIONS FOR SATISFACTION OF THE CHARGES, UTI ASKED THE ASSESSEE TO PAY FURTHER SUM OF RS.1,03,342/ - . THE SAID PAYMENT WAS MADE BY THE ASSESSEE TO UTI. THE ASSESSEE CLAIMED THAT IT WAS ONLY COMPENSATORY IN NATURE AS IT WAS NOT INCURRED FOR AN Y OFFENCE PROHIBITED BY LAW. THE CIT(A) ON PERUSAL OF THE DETAILS FILED, HELD THE SAID PAYMENT TO BE COMPENSATORY IN NATURE AS IT HAD NOTHING TO DO WITH ANY INFRINGEMENT OF LAW. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE HAS FAILED TO CONTRO VERT FINDINGS OF CIT(A). WE FIND NO MERIT IN THE GROUND OF APPEAL NO.3 RAISED BY THE 39 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. REVENUE IN THIS REGARD AND UPHOLDING THE FINDINGS OF CIT(A), WE DISMISS THE GROUND OF APPEAL NO.3 RAISED BY THE REVENUE. 83 . THE ISSUE IN GROUND OF APPEAL NO.4 IS AGAINS T DELETION OF ADDITION OF RS.19,20,000/ - OUT OF INTEREST PAID BY THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD GIVEN AN ADVANCE OF RS.1.20 CRORES TO M/S. KIRLOSKAR CONSULTANT LTD. , GROUP COMPANY AND HAD ALSO MADE TAX FREE INVESTMENTS IN BONDS, EQUITY SHARES AND PREFERENTIAL SHARES OF GROUP COMPANIES. THE ASSESSING OFFICER HELD THAT THERE WAS DIVERSION OF INTEREST BEARING FUNDS AND INTEREST ATTRIBUTABLE TO THE SAME WERE DISALLOWED IN THE HANDS OF ASSESSEE, RESULTING IN ADDITION OF RS.19,2 0,000/ - . THE PLEA OF ASSESSEE THAT THE ADVANCES WERE GIVEN FOR BUSINESS NEEDS, WAS NOT ACCEPTED BY THE ASSESSING OFFICER. THE PLEA OF ASSESSEE THAT NO FURTHER BORROWINGS WERE MADE DURING THE RELEVANT PREVIOUS YEAR AND ALSO THAT THE BORROWINGS AS ON 31.03 .2001 HAD COME DOWN BY RS.50 CRORES AS COMPARED TO THE BORROWINGS IN PREVIOUS YEAR WAS ALSO NOT ACCEPTED. THE CIT(A) NOTED THAT THE ASSESSEE HAD MADE THE SAID ADVANCE IN LINE WITH THE ASSIGNMENT TO M/S. KIRLOSKAR CONSULTANT LTD. FOR ALLOWING RANGE PLANS A ND WAS A BUSINESS. THE CIT(A) REFERRED TO THE AGREEMENTS SIGNED ON 20.03.2001, 30.06.2000 AND ALSO ANOTHER AGREEMENT ON 30.06.2000, AS PER WHICH THE ASSESSEE HAD PAID RS.1.16 CRORES AS ADVANCE, TOTAL ADVANCE PAID BY THE ASSESSEE WAS RS.1.20 CRORES. THE C IT(A) OBSERVED THAT WHERE THE ASSESSEE HAD GIVEN THE ASSIGNMENT TO M/S. KIRLOSKAR CONSULTANT LTD. TO EXPLORE AVENUES FOR AND POSSIBILITY OF ENHANCING ITS BUSINESS AND MARKET PROSPECTS, THEN THE SAME IS BUSINESS ADVANCE AND NO PART OF INTEREST IS TO BE DISA LLOWED. THE CIT(A) THUS, DELETED THE DISALLOWANCE OF RS.19,20,000/ - . 40 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 84. THE ISSUE RAISED VIDE PRESENT GROUND OF APPEAL IS SQUARELY STANDS COVERED BY THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN SA BUILDERS LTD. VS. CIT(A) & ANR. (2007) 288 ITR 001 (SC), WHEREIN IT HAS BEEN HELD THAT IN CASE THE ASSESSEE MAKES ADVANCES FOR BUSINESS PURPOSES, THEN NO PART OF INTEREST ON INTEREST BEARING FUNDS IS TO BE DISALLOWED. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT WHERE THE ASSESSEE HAD ENTERED INTO SPEC IFIC AGREEMENTS WITH M/S. KIRLOSKAR CONSULTANTS LTD. IN ORDER TO EXPLORE NEW AVENUES TO ENHANCE ITS BUSINESS AND ALSO TO INCREASE ITS MARKET CONDITIONS AND HAD MADE THE SAID ADVANCES IN LINE WITH THE AGREEMENT, THEN THE SAID ADVANCE HAVING BEEN MADE DURING THE COURSE OF CARRYING ON OF ITS BUSINESS AND AGAINST SUCH ADVANCES, NO PART OF INTEREST RELATABLE TO INTEREST BEARING FUNDS MERITS TO BE DISALLOWED. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) IN THIS REGARD AND DISMISS THE GROUND OF APPEAL NO.4 RAISED B Y THE REVENUE. 85 . THE ISSUE IN GROUND OF APPEAL NO.5 RAISED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION OF RS.2,82,93,638/ - ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENTS MADE IN BONDS AND SHARES WHICH ARE EXEMPT UNDER SECTION 10(33) OF THE ACT. THE ASSESSING OFFICER NOTED THAT TOTAL INVESTMENTS DURING THE YEAR AMOUNTED TO RS.75.44 CRORES AND SINCE THE ASSESSEE HAD TAKEN SECURED AND UNSECURED LOANS AGGREGATING RS.115.38 CRORES AS ON 31.03.2001 AND HAD CLAIMED THE DEDUCTION TOW ARDS INTEREST ON THE SAME, THE ASSESSING OFFICER MADE DISALLOWANCE IN THE HANDS OF ASSESSEE SINCE THE FUNDS WERE IN COMMON HOTCHPOTCH. ANOTHER POINT NOTED BY THE ASSESSING OFFICER WAS THAT THE ASSESSEE HAD MADE BORROWALS FROM BANK OF BARODA OF RS.669.32 L AKHS DURING THE YEAR AND IN CASE IT HAD SUFFICIENT FUNDS, THEN THERE WAS NO NEED TO BORROW FUNDS. THE ASSESSING OFFICER CONSIDERING THE FACT THAT THE ASSESSEE HAD CAPITAL AND RESERVES AS WELL AS BORROWINGS, GAVE BENEFIT OF DOUBT TO THE EXTENT OF 50% OF 41 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. IN VESTMENTS AND ONLY THE REMAINING 50% WAS TREATED AS HAVING BEEN MET FROM OUT OF INTEREST BEARING BORROWALS. APPLYING THE RATE OF 15% ON 50% OF TOTAL INVESTMENT COST, THE ASSESSING OFFICER COMPUTED THE DISALLOWANCE OF INTEREST AT RS.2.82 CRORES. 86. THE PLEA OF ASSESSEE BEFORE THE CIT(A) WAS THAT THE PERUSAL OF BALANCE SHEET WOULD REVEAL THAT BORROWINGS AS ON 31.03.2000 WERE RS.165 CRORES, WHICH HAD GONE DOWN TO RS.115 CRORES ON 31.03.2001 I.E. THERE WAS NET DECREASE OF RS.60 CRORES IN THE BORROWINGS. TH E ASSESSEE EXPLAINED THAT NO FRESH BORROWINGS HAD BEEN MADE AND HENCE, NO MERIT IN THE DISALLOWANCE. THE CIT(A) NOTED THAT THE ASSESSING OFFICER HAD MADE THE DISALLOWANCE SOLELY WITH REFERENCE TO FRESH INVESTMENT OF RS.75.44 CRORES MADE DURING THE YEAR, O N THE PRESUMPTION THAT THE SAME HAS BEEN MADE PARTLY OUT OF INTEREST BEARING BORROWALS . I N THE ABSENCE OF ANY NEXUS BEING ESTABLISHED AND BECAUSE THE BORROWALS IN FACT HAD COME DOWN WHICH WERE NOT NOTED BY THE ASSESSING OFFICER , T HE CIT(A) DELETED THE DIS ALLOWANCE MADE BY THE ASSESSING OFFICER. HE ALSO NOTED THE CONTENTION OF ASSESSEE THAT THE INVESTMENTS IN KIRLOSKAR FERROUS INDUSTRIES LTD. OF RS.23.42 CRORES WERE MADE PARTLY OUT OF RIGHTS ISSUE OF ASSESSEES SHARES (IN 1993) AND PARTLY AS A PART OF AMAL GAMATION SCHEME OF SHIVAJI WORKS LTD.; FURTHER INVESTMENT IN KIRLOSKAR POWER SUPPLY COMPANY LTD. OF RS.14.49 CRORES, BONDS OF RS.8 CRORES WAS OUT OF LONG TERM CAPITAL GAINS UNDER SECTION 54EA OF THE ACT. ACCORDINGLY, HE FOUND NO MERIT IN THE ORDER OF ASSE SSING OFFICER. 87 . THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) AND THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER. 42 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 88 . THE ASSESSEE POINTED OUT THAT THE INVESTMENTS DURING THE YEAR WER E ONLY RS.25 CRORES AND NOT RS.75 CRORES AS NOTED BY THE ASSESSING OFFICER. OUR ATTENTION WAS DRAWN TO THE LIST OF INVESTMENTS, WHEREIN IT HAS INCREASED FROM RS.163 CRORES TO RS.188 CRORES. HE FURTHER POINTED OUT THAT WHERE THE BORROWINGS HAD COME DOWN B Y ABOUT RS.50 CRORES, THEN HOW IT COULD BE INFERRED THAT BORROWED FUNDS WERE UTILIZED FOR MAKING THE SAID INVESTMENTS. OUR ATTENTION WAS DRAWN TO THE BALANCE SHEET AT PAGES, 20, 24 AND 25 OF THE PAPER BOOK. 89 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PER USED THE RECORD. THE SOLE BASIS FOR MAKING THE AFORESAID DISALLOWANCE OF INTEREST EXPENSES IN THE HANDS OF ASSESSEE IS ON ACCOUNT OF INTEREST BEARING FUNDS UTILIZED BY THE ASSESSEE. THE ASSESSING OFFICER WAS OF THE VIEW THAT IN CASE THE ASSESSEE HAD ENOU GH RESERVES AND SURPLUS, WHERE WAS THE NEED TO BORROW FUNDS. WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER, WHEREIN THE ASSESSEE IS THE BEST PERSON TO CARRY ON ANY OF ITS BUSINESS IN THE MANNER IT SO LIKES AND IN CASE HE THINKS IT FIT TO MAKE CERTAIN BORROWALS, THEN MERELY BECAUSE THE BORROWALS HAVE BEEN MADE DOES NOT WARRANT THE DISALLOWANCE OF INTEREST IN THE HANDS OF ASSESSEE IN THE SAID ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2001 - 02. THE COURTS HAVE TIME AND AGAIN HELD THAT NEXUS HAD TO BE ESTABLIS HED BETWEEN THE BORROWINGS MADE BY THE ASSESSEE AND INTEREST FREE INVESTMENTS MADE BY THE ASSESSEE. IN THE ABSENCE OF THE SAME AND IN VIEW OF THE FACT THAT WHERE THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT, THEN NO DISALLOWANCE OUT O F INTEREST EXPENDITURE IS TO BE MADE UNDER SECTION 36(1)(III) OF THE ACT. THE ASSESSEE HAS EXPLAINED THE INVESTMENTS MADE AND CLAIMS THAT THE ASSESSING OFFICER WAS INCORRECT IN ADOPTING THE FIGURE OF RS.75 CRORES AND WORKING OUT THE DISALLOWANCE. WE HAVE VERIFIED THE STAND OF ASSESSEE AND FIND THAT THE TOTAL INCREMENT IN INVESTMENTS DURING THE YEAR WAS ONLY RS.25 CRORES AND NOT RS.75 CRORES AS HELD BY THE 43 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ASSESSING OFFICER. FURTHER, THE BORROWINGS MADE BY THE ASSESSEE FROM THE PERUSAL OF BALANCE SHEET CL EARLY SHOW THAT THE SAME HAVE GOT DOWN BY RS.50 CRORES WHEN COMPARED TO BORROWINGS AS ON 31.03.2000. ACCORDINGLY, WE FIND NO MERIT IN THE GROUND OF APPEAL RAISED BY THE REVENUE IN THIS REGARD AND UPHOLDING THE ORDER OF CIT(A), WE DISMISS THE SAME. 90 . TH E GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS AGAINST DELETION OF ADDITION OF RS.18,576/ - . THE ASSESSING OFFICER HAD DISALLOWED THE SAME BEING LIAISON EXPENSES, WHEREAS THE CIT(A) HAS ALLOWED THE SAME ON ACCOUNT OF LICENCE FEES. THE REVENUE IS AGGRIEV ED WITH THE FINDING OF CIT(A). 9 1. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID EXPENSES WERE PART OF ADVERTISEMENT EXPENSES AND THE ASSESSING OFFICER MAY VERIFY THE SAME. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE NATURE OF EXPENSES AND IN CASE THEY ARE LIAISON EXPENSES PAID BY THE ASSESSEE, THEN THE SAME MERITS TO BE DISALLOWED IN THE HANDS OF ASSESSEE. THE GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 92 . T HE ISSUE IN GROUND OF APPEAL NO.7 RAISED BY THE REVENUE IS AGAINST DELETION OF PART OF LIQUIDATED DAMAGES. THE SAID ISSUE HAS ALREADY BEEN ADJUDICATED BY US ALONG WITH THE ASSESSEES GROUND OF APPEAL NO.12 AND ACCORDINGLY, THE GROUND OF APPEAL NO.7 IS DIS MISSED. 93 . THE ISSUE IN GROUND OF APPEAL NO.8 IS AGAINST DELETION OF ADDITION OF RS.7,20,000/ - PAID TO SMT. AARTI KIRLOSKAR FOR THE WORK DONE OF DEVELOPMENT OF INT ERNE T. THE SAID INT ERNET DEVELOPED BY SMT. AARTI KIRLOSKAR WAS MEANT FOR 44 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. COMMUNICATION AMO NGST THE EMPLOYEES, DEALERS, CUSTOMERS. IT WAS A MEDIUM FOR SHARING INFORMATION ON PRODUCTS, SERVICES PURPOSES, ETC. FURTHER, THE ASSESSEE CLAIMED THAT REMUNERATION PAYABLE TO HER AS CONSULTANT WAS APPROVED BY THE COMPANY LAW BOARD AT RS.60,000/ - PER MON TH. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE SAID CLAIM OF ASSESSEE AND ALLOWED ONLY TO THE EXTENT OF 1/5 TH . THE CIT(A) NOTED THAT THE ASSESSEE HAD ENGAGED SMT. AARTI KIRLOSKAR AS THE CONSULTANT SINCE 01.04.1998. HE ALSO NOTED THAT SHE WAS TO S ET UP A WEB INITIATIVE DEPARTMENT WITH AN OBJECTIVE TO DIGITIZE INFORMATION AND MOVE TOWARDS E - BUSINESS. THE CIT(A) HELD THAT THERE WAS NO SCOPE FOR AMORTIZING THE REMUNERATION AND ALLOWED THE CLAIM IN ENTIRETY IN THE HANDS OF ASSESSEE. THE REVENUE IS IN APPEAL AGAINST THE SAME. 94 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID PROFESSIONAL FEES WAS BEING PAID SINCE 1998 AND EVEN THE COMPANY LAW BOARD HAD APPROVED VIDE LETTER DATED 15.03.2001 TO PAY REMUNERATION OF RS.60,000/ - PER MONTH. IN THE TOTA LITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WHERE REMUNERATION WAS BEING PAID TO SMT. AARTI KIRLOSKAR FOR THE PAST SO MANY YEARS AND IN VIEW OF THE WORK ALLOCATED TO HER, THERE IS NO MERIT IN ALLOWING THE SAID EXPENDITURE PARTLY . THE ASSESSEE HAS INCU RRED THE SAID EXPENDITURE DURING THE YEAR AND HENCE, IS ENTITLED TO CLAIM AS BUSINESS EXPENDITURE IN THE YEAR UNDER APPEAL ITSELF. THE GROUND OF APPEAL NO.8 IS THUS, DISMISSED. 95 . THE ISSUE IN GROUND OF APPEAL NO.9 IS AGAINST DELETION OF ADDITION OF RS. 7,87,500/ - ON ACCOUNT OF DEBENTURE RELATED EXPENSES. THE ASSESSEE PAID SUM OF RS.7,87,500/ - BEING RATING EXPENSES AND THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAME WERE IN THE NATURE OF CAPITAL EXPENDITURE AND HENCE, IT WAS DISALLOWED IN THE HANDS O F ASSESSEE. THE CIT(A) NOTED THAT RATING FEES WAS PAID 45 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. TO M/S. DUFF & PHELPS CREDIT RATING INDIA PVT. LTD. & M/S. FITCH RATING INDIA PVT. LTD. THE CIT(A) HELD THAT WHERE THE EXPENDITURE WAS INCURRED FOR GETTING CREDIT RATING, COULD NOT BE DISALLOWED AS C APITAL EXPENDITURE. WE FIND MERIT IN THE ORDER OF CIT(A) HOLDING THAT GETTING OF CREDIT RATING WAS AKIN TO ISO CERTIFICATION AND WAS LINKED TO BUSINESS CARRIED ON BY THE ASSESSEE AND HENCE, TO BE ALLOWED AS BUSINESS EXPENDITURE. ACCORDINGLY, WE HOLD SO. THE GROUND OF APPEAL NO.9 IS THUS, DISMISSED. 96 . THE ASSESSEE IN ITA NO.1641/PUN/2011, RELATING TO ASSESSMENT YEAR 2002 - 03 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1.0 DISALLOWANCE OF AIRCRAFT EXPENSES RS.4,26,466/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN HOLDING THAT THE AIRCRAFT WERE USED FOR NON BUSINESS PURPOSES WHEN IT WAS AVERRED BEFORE HIM THAT THE AIRCRAFT WAS JOINTLY OWNED WITH OTHER COMPANIES AND THERE IS NO ELEMENT OF PERSONAL USE AT ALL. THE DETAILS OF FLIGHTS (LOGBOOK) WERE SUBMITTED AT THE TIME OF ASSESSMENT. 2.0 PRIOR PERIOD EXPENSES RS 11,51,176/ - THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN NOT ALLOWING OF RS.11,51,176/ - ON ACCOUNT OF EXPENSES RELATED TO EARLIER YEARS RIGHTFULLY CLAIMED BY THE ASSESSEE. HE FAIL ED TO APPRECIATE THAT THE LIABILITY FOR THESE EXPENSES CRYSTALLIZED DURING THE YEAR. ALTERNATIVELY, HE SHOULD HAVE ALLOWED THE EXPENSES IN THE RESPECTIVE YEARS. 3.0 BAD DEBTS AND IRRECOVERABLE BALANCES WRITTEN OFF RS.55,55,487. THE LEARNED CIT (A) ERR ED ON FACTS AND IN LAW IN DISALLOWING IRRECOVERABLE DEBIT BALANCES AS WRITTEN OFF UNDER SECTION 36(1)(VII) OF THE ACT WHEN THE ASSESSEE HAS CLAIMED AMOUNT OF RS.54,55,487/ - UNDER SECTION 28 OF THE ACT. THE LEARNED AO FURTHER ERRED IN ALLOWING HIMSELF TO B E MISGUIDED WITH NATURE OF CLAIM U/S 28 AND BAD DEBTS U/S 36. HE FAILED TO APPRECIATE THE WRITTEN AND ORAL ARGUMENTS PUT BEFORE HIM. 4.0 VEHICLE EXPENSES RS.113862 THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN ARBITRARILY DISALLOWING 2% OF THE EXPENDITURE INCURRED ON VEHICLES UNDER SECTION 37(1) AMOUNTING TO RS.5693115/ - AS NON BUSINESS EXPENDITURE. HE FAILED TO APPRECIATE THAT AS PER SERVICE CONDITIONS APPLICABLE TO SENIOR OFFICERS, COMPANY ALLOWS THEM TO USE COMPANYS VEHICLES FOR OFFICE WORK AND ANY INCIDENTAL PERSONAL USE IS TREATED AS PERQUISITES IN THE HANDS OF OFFICERS AS PER INCOME TAX RULES, 1962. HE FURTHER FAILED TO APPRECIATE THE SYSTEM FOLLOWED BY THE COMPANY FOR USE OF COMPANY VEHICLES. 46 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 5.0 LEASE RENT ON CARS RS.32398/ - THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN ARBITRARILY DISALLOWING 2% OF THE EXPENDITURE INCURRED ON VEHICLE AMOUNTING TO RS.16,19,872/ - AS NON BUSINESS EXPENDITURE. HE FAILED TO APPRECIATE THAT AS PER SERVICE CONDITIONS APPLICABLE TO SENIOR OFFICERS, COMPANY ALLOWS THEM TO USE COMPANYS VEHICLES FOR OFFICE WORK AND ANY INCIDENTAL PERSONAL USE IS TREATED AS PERQUISITES IN THE HANDS OF OFFICERS AS PER INCOME TAX RULES, 1962. HE FAILED TO APPRECIATE THAT THE LEASE RENT WAS PAID AS PER COMMERCIAL TERMS. 6.0 TELEPHONE EXPENSES RS.200000/ - THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN ARBITRARILY DISALLOWING RS.200000/ - ON THE EXPENDITURE INCURRED ON TELEPHONE AS NON BUSINESS EXPENDITURE. HE FAILED TO APPRECIATE PROCEDURE FOLLOWED BY THE COMPANY FO R REIMBURSEMENT OF TELEPHONE EXPENSES AND CONSIDER THE SUBMISSIONS MADE IN THESE REGARDS. HE OUGHT TO HAVE FOLLOWED EXECUTIVE INSTRUCTIONS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES REGARDING USE OF TELEPHONES BY EMPLOYEES. 7.0 ADVERTISEMENT AND PUBLICI TY DETERMINATION OF CAPITAL EXPENDITURE BY AO AND GUEST EXPENSES, PRESENTATION ARTICLES AND GENERAL EXPENSES RS.649391/ - A ) THE LEARNED CIT (A) ERRED IN FACTS AND IN LAW IN SENDING BACK TO AO TO DETERMINE WHETHER EXPENDITURE INCURRED ON PRODUCT ADVERTISE MENT CONTAINS ANY EXPENDITURE OF CAPITAL NATURE. B ) THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN ARBITRARILY DISALLOWING 5% OF THE TOTAL EXPENDITURE ON LIAISON EXPENSES, GUEST EXPENSES, PRESENTATION AND ARTICLES AND GENERAL EXPENSES AS NOT BEING WHOLLY A ND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. HE OUGHT TO HAVE APPRECIATED THAT AUDITORS OF THE COMPANY IN THEIR REPORTS UNDER THE MANUFACTURING AND OTHER COMPANIES (AUDITORS REPORT) ORDER AS WELL AS THE TAX AUDIT REPORT U/S 44AB OF THE INCOME TAX , 1961 HAVE CATEGORICALLY REMARKED THAT NO PERSONAL EXPENSES HAVE BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT 8.0 LIQUIDATED / LATE DELIVERY CHARGES RS.3229975/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING THE PROVISION MADE FOR LIQUID ATED DAMAGES/ LATE DELIVERY CHARGES AS UNASCERTAINED LIABILITY. HE FAILED TO APPRECIATE THAT THESE CHARGES WERE PAID OR PROVIDED ON COMMERCIAL TERMS OF CONTRACT IN THE COURSE OF BUSINESS AND WERE NOT PAID FOR ANY INFRACTION OR BREACH OF LAW. 9.0 LEGAL & PROFESSIONAL EXPENSES RS.480000/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN HOLDING THAT OUT OF LEGAL & PROFESSIONAL FEES, FEES PAID TO KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES (RS.6,00,000/ - ) ARE IN THE NATURE OF DEFERRED REVENUE EXPEN DITURE. HE FURTHER ERRED IN SPREADING THE EXPENDITURE OVER A PERIOD OF FIVE YEARS INSTEAD OF ALLOWING IT IN THE CURRENT YEAR WITHOUT APPRECIATING THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE, THE TREATMENT GIVEN IN THE ACCOUNTS AND PARTI CULARLY WHEN ADMITTEDLY THERE IS NO PROVISION IN THE ACT TO DEFER THE EXPENDITURE. HE THUS EXCEEDED HIS AUTHORITY BY GOING BEYOND THE STATUTE BOOKS. THE 47 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. DISALLOWANCE IS ALSO BASED ON ESTIMATES, SURMISES, CONJECTURES AND IS WITHOUT ANY BASIS AND IS UNTENA BLE IN LAW. 10.0 DISALLOWANCE OUT OF REPAIRS RS.2,07,728/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN TREATING THE EXPENSES ON FENCING AS CAPITAL EXPENDITURE. HE FAILED TO APPRECIATE THAT WE HAD ALREADY CAPITALIZED THE COST OF COMPOUND WALL IN E ARLIER ASSESSMENT YEARS AND DURING THE CURRENT YEAR NO NEW ASSET HAS COME INTO EXISTENCE WITH THE EXPENSES OF RS.2,07,728/ - . 11.0 DISALLOWANCE OUT OF MISCELLANEOUS EXPENSES RS.4,75,207/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING 5% O F GENERAL EXPENSES AND MISCELLANEOUS EXPENSES AS NON - BUSINESS EXPENDITURE. HE OUGHT TO HAVE APPRECIATED THAT IN CASE OF CORPORATE ASSESSEE THERE CANNOT BE ANY NON BUSINESS EXPENDITURE WHEN AUDITORS OF THE COMPANY IN THEIR REPORTS UNDER THE MANUFACTURING A ND OTHER COMPANIES (AUDITORS REPORT) ORDER AS WELL AS THE TAX AUDIT REPORT U/S 44AB OF THE INCOME TAX ACT, 1961 HAVE CATEGORICALLY REMARKED THAT NO PERSONAL EXPENSES HAVE BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. 12.0 APPLICABILITY OF SECTION 115JB & NATURE OF PROVISION FOR EXPENSES A) EXEMPTION FROM MAT AS PER BIFR ORDER. THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN APPLICABILITY OF SECTION 115JB. HE FAILED TO APPRECIATE THAT AS PER THE SCHEME OF AMALGAMATION OF THE COMPANY WITH SHIVAJI WORKS LTD. (SWL) SANCTIONED BY THE BIFR, THE COMPANY IS NO LIABLE TO PAY MINIMUM ALTERNATE TAX TILL ALL THE CARRIED - FORWARD UNABSORBED LOSSES OF SWL ARE FULLY ABSORBED. HE FAILED TO APPRECIATE THAT THE ORDER OF THE BIFR IS DIRECTORY AND IS NOT A MERE RECOMMEN DATION AND AS PER CBDT NOTIFICATION IT IS BINDING ON HIM. HE FURTHER FAILED TO APPRECIATE THAT UNDER SECTION 32(1) OF THE SICA, ORDERS PASSED BY THE BIFR HAVE OVERRIDING EFFECT OVER THE INCOME TAX ACT. B) PROVISION FOR EXPENSES AO TO VERIFY THE NATUR E OF LIABILITIES WHICH WERE ADDED BACK FOR THE PURPOSES OF COMPUTATION OF BOOK PROFIT U/S 115JB. THE LEARNED CIT (A) ERRED IN LAW AND IN FACTS IN SENDING BACK TO ASSESSING OFFICER TO VERIFY WHETHER PROVISION FOR EXPENSES AND ROYALTY ARE IN THE NATURE OF A SCERTAINED EXPENSES. THESE EXPENSES WERE ADDED BY AO IN THE COMPUTATION OF PROFITS U/S 115JB, CONSIDERING THESE AS UNASCERTAINED LIABILITIES. 97 . THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF AIRCRAFT EXPENSES TO THE EXTENT OF 15%. WE HAVE ALREADY DECIDED THIS ISSUE IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.1. FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THIS GROUND OF APPEAL AGAINST THE ASSESSEE. 48 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 98 . THE SECOND ISSUE RAISED BY THE ASSESSEE IS IN RESPECT OF PRIOR PERIOD EXPENSES FOR WHICH, THE DETAILS HAVE BEEN FILED AT PAGE 99 OF THE PAPER BOOK. THE PERUSAL OF SAID DETAILS REFLECT CERTAIN EXPENSES TO BE BOOKED ON ACCOUNT OF RAW MATERIAL IMPORTED , ONM EXPENSES AND ITS TESTING ANALYSIS CHARGES, ETC. THE ASS ESSEE CLAIMED THAT THE BILLS FOR THE SAME WERE RECEIVED DURING THE YEAR UNDER CONSIDERATION AND HENCE, THE SAME WERE BOOKED ACCORDINGLY. WE HAVE ALREADY DECIDED THIS ISSUE IN ASSESSMENT YEAR 2001 - 02 AND FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT SINCE THE LIABILITY FOR EXPENSES WA S CRYSTALLIZED DURING THE YEAR, THEN THE SAID EXPENSES ARE TO BE ALLOWED AS PRIOR PERIOD EXPENSES IN THE HANDS OF ASSESSEE. 99 . THE ISSUE IN GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS NOT PRESSED AND HENCE, THE SAM E IS DISMISSED AS NOT PRESSED. 100 . THE ISSUE IN GROUNDS OF APPEAL NO.4, 5 AND 6 IS AGAINST DISALLOWANCE OUT OF VEHICLE EXPENSES, LEASE RENT ON CAR AND TELEPHONE EXPENSES. THE ASSESSEE HAD RAISED SIMILAR GROUNDS OF APPEAL NO.6, 7 AND 8 IN ASSESSMENT YEAR 2001 - 02, WHEREIN WE HAVE ALLOWED THE CLAIM OF ASSESSEE HOLDING THAT NO DISALLOWANCE WAS TO BE MADE ON ACCOUNT OF PERSONAL USE IN THE HANDS OF ASSESSEE COMPANY. FOLLOWING THE SAME PARITY OF REASONING, WE ALLOW GROUNDS OF APPEAL NO.4, 5 AND 6 RAISED BY THE ASSESSEE. 101 . THE GROUND OF APPEAL NO.7 IS ALSO LINKED TO THE ISSUE RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.11. FOLLOWING THE SAME PARITY OF REASONING, WE REMIT THIS ISSUE ALSO BACK TO THE FILE OF ASSESSING OFFICER TO CARRY VERIFICATION EXERCISE TO WORK OUT THE EXPENDITURE WHICH IS INCURRED ON PRODUCT ADVERTISEMENT AND WE UPHOLD THE DISALLOWANCE OF 5% OUT 49 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. OF TOTAL EXPENDITURE ON GUEST EXPENSES, PRESENTATION EXPENSES AND ARTICLE & GENERAL EXPENSES. ACCORDINGLY, THE G ROUND OF APPEAL NO.7 IS PARTLY ALLOWED. 102 . THE NEXT ISSUE IS IN RESPECT OF LIQUIDATED DAMAGES OR LATE DELIVERY CHARGES OF RS.32,29,975/ - . THE EASE HAS FURNISHED THE DETAILS OF SAID EXPENSES AT PAGE 143 OF THE PAPER BOOK WHICH ARE VOUCHER - WISE AND CUSTOMER - WISE. THE ASSESSEE AT PAGE 144 OF THE PAPER BOOK HAS FURNISHED THE DETAILS OF EXPENSES TOTALING RS.30,39,000/ - IN RESPECT OF LARGE DIVISION WHICH IS SUPPORTED BY CUSTOMER - WISE DETAILS AT PAGE 145 OF THE PAPER BOOK ONWARDS. HOWEVER, THE ASSESSEE HAS FAILED TO FURNISH THE DETAILS IN RESPECT OF AUTO DIVISION TOTALING RS.1,90,975/ - . SIMILAR ISSUE OF LIQUIDATED DAMAGES AROSE VIDE GROUND OF APPEAL NO.12 IN ASSESSMENT YEAR 2001 - 02 AND FOLLOWING THE SAME PARITY OF REASONING, WHERE THE ASSESSEE IS CONSIS TENTLY FOLLOWING THE PRACTICE, WE HOLD THAT THE SAID LIQUIDATED DAMAGES FOR WHICH THE PROVISION IS MADE OR HAS BEEN ACTUALLY INCURRED TO BE ALLOWED IN THE HANDS OF ASSESSEE. ACCORDINGLY, WE ALLOW THE CLAIM TO THE EXTENT OF RS.30,39,000/ - . HOWEVER, IN RES PECT OF AUTO DIVISION, THE ASSESSEE HAS FAILED TO FURNISH ANY DETAILS OF RS.1,90,975/ - AND HENCE, THE SAME IS DISALLOWED IN THE HANDS OF ASSESSEE, IN THE ABSENCE OF ANY DETAILS. 103 . THE GROUND OF APPEAL NO.9 IS AGAINST DISALLOWANCE OUT OF LEGAL AND PRO FESSIONAL CHARGES OF RS.44,50,000/ - IS NOT PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 104 . THE ISSUE IN GROUND OF APPEAL NO.10 IS DISALLOWANCE OUT OF REPAIRS OF RS.2,03,728/ - . 50 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 105 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POIN TED OUT THAT THE EXPENSES WERE ON FENCING, WHEREIN THE COST OF COMPOUND WALL WAS CAPITALIZED IN EARLIER ASSESSMENT YEARS AND DURING THE YEAR, NO NEW ASSET HAD COME INTO EXISTENCE. WE FIND MERIT IN THE PLEA OF ASSESSEE AND EXPENDITURE IS HELD TO BE REVENUE IN NATURE INCURRED FOR THE PURPOSE OF BUSINESS AND HENCE, IS TO BE ALLOWED IN THE HANDS OF ASSESSEE. THE GROUND OF APPEAL NO.10 IS THUS, ALLOWED. 106 . NOW, COMING TO GROUND OF APPEAL NO.11, WHEREIN THE DISALLOWANCE IS MADE OUT OF MISCELLANEOUS EXPENSES FOR NON - BUSINESS EXPENSES. THE CIT(A) HAD DISALLOWED 5% OF THE SAID MISCELLANEOUS EXPENSES FOR NON - BUSINESS PURPOSES. WE FIND NO MERIT IN THE ORDER OF CIT(A), WHERE THE ASSESSEE IS A LIMITED COMPANY AND NO DISALLOWANCE CAN BE MADE FOR PERSONAL USE. ACCO RDINGLY, WE REVERSE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF EXPENDITURE OF RS.4,75,207/ - . 107 . THE GROUND OF APPEAL NO.12 IS IN RESPECT OF APPLICABILITY OF SECTION 115JB OF THE ACT I.E. EXEMPTION FROM MAT AS PER BIFR ORDER. THE FIRST ISSUE RAISED VIDE GROUND OF APPEAL NO.12A IS IDENTICAL TO THE ISSUE RAISED IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.16 (FIRST PART) AND FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE THAT THE LOSSES FROM A MALGAMATING COMPANY ARE STILL AVAILABLE IN ITS HANDS AND IF THAT IS SO, THEN NO TAX IS TO BE CHARGED ON THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT. THE OTHER GROUND OF APPEAL NO.12B BECOME ACADEMIC IN NATURE AND HENCE, THE SAME IS DISMISSED. 51 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 108. TH E REVENUE IN ITA NO.1593/PUN/2011, RELATING TO ASSESSMENT YEAR 2002 - 03 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD. CIT (A) ERRED IN DELETING THE ADDITION OF RS.42,45,425/ - WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE WORKED OUT REMUNERATION ON TAX FREE DIVIDENDS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT (A) ERRED IN DELETING THE ADDITION OF RS.20,88,126/ - MADE ON ACCOUNT OF ADMINISTRATIVE AND MANAGER IAL EXPENSES FOR EARNING TAX FREE DIVIDENDS U/S. 14A. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.31,85,000/ - AS INTEREST PAID WAS NOT FOR THE PURPOSE OF BUSINESS. 4. ON THE FACTS AND CIRCU MSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,07,61,723/ - ON ACCOUNT OF INTEREST RELATABLE TO INVESTMENT MADE IN BONDS AND SHARES WHICH ARE EXEMPT U/S.10(33) OF THE ACT. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE , AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.12,17,229/ - ON ACCOUNT OF LIQUIDATED DAMAGES. THE A.O. HAS RELIED ON THE DECISION OF ROHTAK TEXTILES MILLS VS. CIT (1997) 226 ITR 485 DELHI WHEREIN PAYMENT OF LIQUIDATED DAMAGES HAS BEEN HEL D AS NON DEDUCTIBLE AND IN NATURE OF PENALTY. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.7,20,000/ - PAID TO SMT. ARTI KIRLOSKAR BY TREATING AS REMUNERATION, WHEN IT WAS ACTUALLY CLAIMED AS LEGAL AND PROFESSIONAL EXPENSES. 7. THE ORDER OF THE LD. CIT (A) MAY BE VACATED AND THAT OF THE A.O BE RESTORED. 109. THE ISSUE RAISED VIDE GROUND OF APPEAL NO.1 AGAINST DISALLOWANCE OF REMUNERATION, COMMISSION, ETC. PAID TO DIRECTORS IS IDENTICAL TO THE ISSUE RAISED VIDE GROUND OF APPEAL NO.1 IN ASSESSMENT YEAR 2001 - 02 AND FOLLOWING THE SAME PARITY OF REASONING, WE ALLOW THE CLAIM OF ASSESSEE AND GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS DISMISSED. 110. THE ISSUE IN GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS AGAINST THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT, WHEREIN THE CIT(A) HAD DELETED THE ADDITION OF RS.20,88,126/ - AND CONFIRMED THE ADDITION OF RS.1 LAKH ON ACCOUNT 52 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. OF ADMINISTRATIVE AND MANAGERIAL EXPENSES FOR EARNING TAX FREE DI VIDENDS UNDER SECTION 14A OF THE ACT. SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE AND FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.2 RAISED BY THE REVENU E. 111. THE ISSUE IN GROUND OF APPEAL NO.3 IS AGAINST DELETION OF ADDITION OF RS.31,85,000/ - WHICH WAS DISALLOWED BY THE ASSESSING OFFICER BEING INTEREST FREE ADVANCES MADE TO SISTER CONCERN. SIMILAR ISSUE HAS BEEN DECIDED BY US IN ASSESSMENT YEAR 2001 - 0 2 VIDE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE AND FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.3 RAISED BY THE REVENUE. 112. THE ISSUE IN GROUND OF APPEAL NO.4 IS AGAINST DELETION OF ADDITION OF RS.1,07,61,723/ - ON ACCOU NT OF INTEREST RELATABLE TO INVESTMENT MADE IN BONDS AND SHARES WHICH WERE EXEMPT UNDER SECTION 10(33) OF THE ACT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD, POINTED OUT THAT THERE WAS NO OUTGO OF MONEY AS THE FRESH INVESTMENTS WERE BECAUSE OF RE - STRUCTURING. FURTHER, THE ASSESSEE HAD SOLD SHARES AND MADE THE INVESTMENTS UNDER SECTION 54EA OF THE ACT. HE STRESSED THAT FRESH BORROWINGS MADE DURING THE YEAR WERE ALSO BECAUSE OF RE - STRUCTURING ALTHOUGH, THE LOAN LIABILITY HAD RED UCED FROM RS.115 CRORES TO RS.108 CRORES AT THE END OF YEAR. WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL VIDE GROUND OF APPEAL NO.5 IN ASSESSMENT YEAR 2001 - 02 AND FOLLOWING THE SAME PARITY OF REASONING AND IN VIEW OF THE FACTS AND CIRCUMSTANCES B EING SIMILAR, WE FIND NO MERIT IN THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE AND THE SAME IS THUS, DISMISSED. 53 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 113. THE GROUND OF APPEAL NO.5 RAISED BY THE REVENUE IS RELATED TO GROUND OF APPEAL NO.8 RAISED BY THE ASSESSEE ON ACCOUNT OF LIQUIDATED DAMAGES AND WE HAVE ALREADY DECIDED THE SAME. HENCE, THE GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS DISMISSED. 114. THE ISSUE IN GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS ON ACCOUNT OF DISALLOWANCE OUT OF LEGAL AND PROFESSIONAL FEES OF RS.7,20,0 00/ - PAID TO SMT. AARTI KIRLOSKAR. SIMILAR CLAIM HAS BEEN ALLOWED IN THE HANDS OF ASSESSEE IN ASSESSMENT YEAR 2001 - 02 AND THE REVENUE HAD RAISED THE ISSUE VIDE GROUND OF APPEAL NO.8 WHICH HAS BEEN DISMISSED. FOLLOWING THE SAME PARITY OF REASONING, THE GR OUND OF APPEAL NO.6 RAISED BY THE REVENUE IS DISMISSED. 115 . THE ASSESSEE IN ITA NO.456/PUN/2012, RELATING TO ASSESSMENT YEAR 2003 - 04 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1.0 LIQUIDATED DAMAGES DISALLOWED IN AY 2002 - 03 & REVERSED / PAID IN AY 200 3 - 04 THE LEARNED CIT (A) HAD ERRED ON FACTS AND IN LAW IN NOT DISCUSSING ANYTHING IN THE ORDER ABOUT ADDITIONAL GROUND FILED AGAINST LIQUIDATED DAMAGES. HE FURTHER ERRED IN NOT EXCLUDING THE AMOUNT OF RS.30,39,000 FROM THE TOTAL INCOME BEING REVERSAL/PAY MENT MADE DURING THE YEAR OUT OF PROVISION FOR LIQUIDATED DAMAGES. THIS AMOUNT WAS DISALLOWED ON THE GROUND THAT IT WAS IN THE NATURE OF AN UNASCERTAINED LIABILITY AND WAS MADE EVEN BEFORE ANY CLAIM WAS MADE BY THE CUSTOMERS. 2.0 CENVAT CREDIT RS.18,90,099/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING RS.18,90,099/ - ON ACCOUNT OF UN - UTILIZED CENVAT CREDIT AT THE END OF YEAR. HE FAILED TO APPRECIATE THE METHOD OF ACCOUNTING OF CENVAT CONSISTENTLY FOLLOWED BY THE COMPANY. HE FU RTHER FAILED TO APPRECIATE THAT CENVAT CREDIT IS NOTHING BUT A DEPOSIT OF DUTY WITH THE GOVT. TO BE UTILIZED AGAINST FUTURE LIABILITY. HE ALSO FAILED TO APPRECIATE THAT THE LAW IN THIS REGARD IS SETTLED BY THE SUPREME COURT IN INDO NIPPON CHEMICAL CO.S C ASE. 3.0 I SSUES RELEVANT FOR COMPUTATION OF INCOME U/S 115JB OF THE ACT THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN COMPUTING PROFIT U/S 115JB ON FOLLOWING GROUNDS : 3.1 UNABSORBED DEPRECIATION OF SHIVAJI WORKS LTD. - RS.14,81,51,440/ - 54 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE LEARNED CIT (A) FAILED TO APPRECIATE THAT AS PER THE SCHEME OF AMALGAMATION OF THE COMPANY WITH SHIVAJI WORKS LTD. (SWL) SANCTIONED BY THE BIFR, THE COMPANY IS NOT LIABLE TO PAY MINIMUM ALTERNATE TAX TILL ALL THE CARRIED - FORWARD UNABSORBED LOSSES OF SWL ARE FULLY ABSORBED. HE FAILED TO APPRECIATE THAT THE ORDER OF THE BIFR IS DIRECTORY AND IS NOT A MERE RECOMMENDATION AND AS PER CBDT NOTIFICATION IT IS BINDING ON HIM. HE FURTHER FAILED TO APPRECIATE THAT THAT UNDER SECTION 32(1) OF THE SICA, ORDERS PASSED BY TH E BIFR HAVE OVERRIDING EFFECT OVER THE INCOME TAX ACT. THE CIT (A), THEREFORE, ERRED IN DISALLOWING UNABSORBED DEPRECIATION OF SWL WHILE COMPUTING PROFIT U/S 115JB OF THE ACT. 3.2 CAPITAL RECEIPTS CREDITED TO PROFIT & LOSS ACCOUNT RS.32,95,359/ - WITHO UT PREJUDICE TO THE ABOVE, WHILE COMPUTING PROFIT U/S 115JB OF THE ACT, THE LEARNED CIT (A) FAILED TO APPRECIATE THAT THE AMOUNT OF RS.32,95,359/ - INCLUDED IN OPERATING INCOME IS OF CAPITAL NATURE AND IS TO BE EXCLUDED. 11 6. THE LEARNED AUTHORIZED REPRES ENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE BECOME ACADEMIC IN CASE THE LIQUIDATED DAMAGES DISALLOWED IN EARLIER YEARS ARE ALLOWED IN THE HANDS OF ASSESSEE. WE FIND THAT THE ISSUE IS LINKED TO GROU ND OF APPEAL NO.8 IN ASSESSMENT YEAR 2002 - 03 AND SINCE WE HAVE ALREADY ALLOWED THE CLAIM OF ASSESSEE ON ACCOUNT OF LIQUIDATED DAMAGES, THE GROUND OF APPEAL NO.1 IS DISMISSED AS ACADEMIC. 117 . THE ISSUE IN GROUND OF APPEAL NO.2 IS IN RESPECT OF CENVAT CREDIT, WHEREIN DISALLOWANCE WAS MADE ON ACCOUNT OF UN - UTILIZED CENVAT AT THE END OF YEAR AT RS. 18,90,099/ - . THE ASSESSEE CLAIMS TO HAVE FOLLOWED CONSISTENT METHOD OF ACCOUNTING I.E. BY FOLLOWING THE EXCLUSIVE METHOD WHICH DID NOT AFFECT ITS PROFIT AND HE NCE, THERE IS NO NEED TO ADD CENVAT CREDIT TO THE VALUE OF STOCK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD REFERRED TO THE CALCULATION FILED AS PART OF AUDIT REPORT WHICH WAS BEFORE THE ASSESSING OFFICER AND THE CIT(A). THE A SSESSING OFFICER AND THE CIT(A) HOWEVER, DID NOT ACCEPT THE CLAIM OF ASSESSEE AND DISALLOWED SUM OF RS.18,90,099/ - WHICH REMAINED TO BE UN UTILIZED AT THE END OF YEAR ON ACCOUNT OF CENVAT CREDIT. THE LEARNED 55 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN TH IS REGARD REFERRED POINTED OUT THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF HON'BLE SUPREME COURT IN CIT VS. INDO NIPPON CHEMICALS LTD. (2003) 261 ITR 27 5 (SC), WHICH HAS BEEN FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. MAHALAXMI GLASS WORK S P. LTD. (2009) 318 ITR 116 (BOM). 11 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE PERUSAL OF STATEMENTS OF PARTICULARS FILED ALONG WITH AUDIT REPORT IN FORM NO.3CB REFLECT THE ADJUSTMENTS, IF ANY, REQUIRED TO BE MADE UNDER SECTION 145A OF THE ACT, THE AUDITOR HAS REPORTED THAT EVEN AFTER THE ADJUSTMENT, THERE IS NO IMPACT ON THE PROFIT FOR THE YEAR. THE HONBLE BOMBAY HIGH COURT IN CIT VS. MAHALAXMI GLASS WORKS P. LTD. ( SUPRA) HAS HELD THAT IN CASE ANY ADJUSTMENT IS MADE IN THE CLOSING STOCK, THEN THE SIMILAR ADJUSTMENT IS TO BE MADE IN THE OPENING STOCK ALSO AND THE SAME WOULD NOT HAVE ANY IMPACT ON THE PROFIT FOR THE YEAR . 11 9. IN VIEW OF THE PROPOSITION LAID DOWN BY THE HON BLE BOMBAY HIGH COURT AND THE ISSUE BEING SETTLED BY THE HON'BLE SUPREME COURT IN CIT VS. INDO NIPPON CHEMICALS LTD. (SUPRA) , WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW, WHERE THE ASSESSEE IS CONSISTENTLY FOLLOWING EXCLUSIVE METHOD OF VALUING ITS STOCK, WHICH IN TURN, IS NOT AFFECTING ITS PROFIT, THEN THERE IS NO MERIT IN MAKING ANY ADJUSTMENT ON ACCOUNT OF UN - UTILIZED CENVAT CREDIT AT THE END OF YEAR. ACCORDINGLY, WE REVERSE THE FINDINGS OF CIT(A) IN THIS REGARD AND DELETE THE ADDITION OF RS.18, 90,099/ - . THE GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 12 0. THE ISSUE IN GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS AGAINST COMPUTATION OF BOOK PROFITS UNDER SECTION 115JB OF THE ACT . T HE ISSUE ARISING IS 56 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. AS IN EARLIER YEARS. HOWEVER, CHANGE IN THE YEAR UNDER CONSIDERATION AS AGAINST UNABSORBED LOSSES, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAS POINTED OUT TH E AVAILABILITY OF UNABSORBED DEPRECIATION OF SWL TO THE EXTENT OF RS.14.81 CRORES. FOLLOWING OUR PARITY OF REASONING AS IN THE PARAS HEREINABOVE IN RELATION TO THE GROUND OF APPEAL NO.16 DECIDED IN ASSESSMENT YEAR 2001 - 02 , WE REMIT THIS ISSUE ALSO BACK TO THE FILE OF ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE IN THIS REGARD. THE GROUND OF APPEAL NO.3 .1 IS THUS, ALLOWED FOR STATISTICAL PURPOSES . THE GROUND OF APPEAL NO.3.2 IS DISMISSED. 121. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) IN ITA NO.542/PUN/2012, RELATING TO ASSESSMENT YEAR 2003 - 04 AGAINST THE ASSESSMENT COMPLETED UNDER SECTION 143( 3) OF THE ACT AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT DISCOUNT OF RS.32,95,359/ - RECEIVED ON PRE - PAYMENT OF LIABILITY UNDER THE SALES TAX DEFERRAL SCHEME, AS NOT A REMISSION OR CESSATION OF LIABILITY U/S 41(1)? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) WAS JUSTIFIED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE COMPANY HAD RENTED OUT ITS PLANT AND MACHINERY AND HENCE ENTITLED TO RECEIVE RENTAL INCOME DURING THE YEAR, WHICH THE ASSESSEE HAD NOT ACCOUNTED FOR AND HENCE THE A.O. HAD RIGHTLY ADDED THE LEASE RENTAL INCOME OF RS.3,50,44,140/ - . 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS.3,502,44,140/ - ON ACCOUNT OF LEASE RENTAL INCOME WITHOUT CONSIDERING THAT THE AGREEMENT BETWEEN THE FINANCIAL INSTITUTION AND KFL, THE SISTER CONCERN OF THE ASSESSEE, WAS SET ACCORDING TO THE CONVENIENCE OF THE RELATED PARTIES. 122. THE FIRST ISSUE RAISED VIDE GROUND OF APPEAL NO.1 IS AGAINST DELETION OF ADDITION MADE ON ACCOUNT OF DISCOUNT OF RS.32,95,359/ - RECEIVED ON PREPAYMENT OF LIABILITY UNDER SALES TAX DEFERRAL SCHEME . 57 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 123. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER NOTED THAT SUM OF RS.32,95,359/ - WAS CREDITED AND WAS REFERRED AS CAPITAL SURPLUS ARISING OUT OF PREMATURE REPAYMENT OF OBLIGATION OF SALES TAX DEFERRED LOAN INCENTIVE. THE ASSESSEE HAD COLLECTED THE SALES TAX FROM THE CUSTOMERS AND RETAINED THE SAME FOR PRESCRIBED PERIOD OF TIME. THIS WAS SHOWN AS SALES TAX DEFERRED LOAN PAYABLE TO THE SALES TAX DEPARTMENT AFTER SPECIFIED PERIOD. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAME COULD NOT BE TREATED AS LOAN BECAUSE THE GOVERNMENT HAD MERELY PERMITTED RETENTION OF SALES TAX COLLECTED FOR SPECIFIED PERIOD OF TIME AND WAS THEREFORE, DEFERRED SALES TAX LIABILITY. HE ALSO OBSERVED THAT ANY PAYMENT OF SALES TAX LIABILITY WAS OF REVENUE ACCOUNT AND THEREFORE, ANY REDUCTIO N IN SUCH LIABILITY COULD ALSO RESULT IN REVENUE RECEIPT. THE ASSESSING OFFICER THUS, TREATED THE SAME AS REVENUE RECEIPT. 124. THE CIT(A) ALLOWED THE CLAIM OF ASSESSEE HOLDING AS UNDER: - 6. I CONSIDERED THE APPELLANTS EXPLANATION AND MATERIAL AVAILABL E ON RECORD. IT IS CONTENDED BY THE APPELLANT THAT IT WAS ONLY THE PAYMENT AT DISCOUNT AT NET PRESENT VALUE (NPV) OF THE FUTURE LIABILITY TO PAY THE OUTSTANDING SALES TAX AMOUNT. IT IS STATED THAT SUCH PAYMENT AT A DISCOUNTED VALUE CANNOT BE TREATED AS R EMISSION OR CESSATION OF LIABILITY SO AS TO ATTRACT THE PROVISIONS OF SECTION 41(1). IN FACT, IT WAS ONLY A PREMATURE PAYMENT OF THE SALES TAX OUTSTANDING AMOUNT WHICH WAS TREATED AS LOAN. THE APPELLANT HAS CITED THE SPECIAL BENCH DECISION IN THE CASE OF SULZER INDIA LTD. (2010) 134 TTJ (MUMBAI)(SB) 385 IN ITS SUPPORT. IT IS NOTED THAT IN THIS DECISION OF THE SPECIAL BENCH, IT WAS HELD THAT SUCH PREMATURE PAYMENT OF THE DEFERRED SALES TAX LIABILITY AT ITS DISCOUNTED VALUE OR AT NPV CANNOT BE TREATED AS R EMISSION OR CESSATION OF LIABILITY U/S.41(1). THIS WAS BECAUSE IT CANNOT BE SAID THAT THE ASSESSEE HAD OBTAINED THE BENEFIT OF DEDUCTION OF SALES TAX LIABILITY SIMPLY BECAUSE THE DEDUCTION WAS ALLOWED FOR THE PURPOSES OF SECTION 43B INITIALLY, BY APPLYING THE CBDT CIRCULAR NO.496 DATED 25/09/1987, AND THIS CIRCULAR ONLY STATED THAT THE STATUTORY LIABILITY WAS TO BE TREATED TO HAVE BEEN DISCHARGED FOR THE PURPOSES OF SECTION 43B. I HAVE CAREFULLY PERUSED THE RATIO OF THIS DECISION AND I AM OF THE OPINION T HAT THIS SQUARELY COVERS THE APPELLANTS CASE. THEREFORE, THE APPELLANTS CONTENTION IS HELD TO BE TENABLE IN LAW AND THIS GROUND OF APPEAL IS ALLOWED. 125. AFTER HEARING BOTH THE LEARNED AUTHORIZED REPRESENTATIVES, WE FIND THAT IN THE LARGE UNIT ENGINE HAVING MANUFACTURING FACILITY AT NASHIK, THE ASSESSEE HAD AVAILED INCENTIVE AS PER SALES TAX DEFERRAL SCHEME, 1988. AS PER ELIGIBILITY 58 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. CERTIFICATE, DEFERRAL OF SALES TAX LIABILITY WAS GRANTED FOR THE PERIOD FROM 18.01.1992 TO 17.01.1996. THE SALES TAX A MOUNT ELIGIBLE FOR DEFERRAL WAS RS.2,05,90,500/ - . T HE PERIOD OF DEFERRAL WAS 10 YEARS. THE LARGE UNIT AVAILED THE BENEFIT UNDER THE SCHEME FOR FINANCIAL YEARS 1992 - 93, 1993 - 94, 1994 - 95 AND 1995 - 96. ON 12.12.2002, THE COMMISSIONER OF SALES TAX ISSUED CIR CULAR NO.39T OF 2002 FOR PREMATURE REPAYMENT OF AMOUNT OF DEFERRAL TAXES BY THE ELIGIBLE UNITS AT NET PRESENT VALUE. THE ASSESSEE WAS GIVEN AN OPTION TO PREMATURELY PAY IN PLACE OF AMOUNT OF TAX DEFERRED, BY AN AMOUNT EQUAL TO THE NET PRESENT VALUE, AS MA Y BE PRESCRIBED, AND ON MAKING SUCH PAYMENT, THE DEFERRED TAX SHALL BE DUE TO HAVE BEEN PAID. BASED ON THE SAME, THE ASSESSEE DECIDED TO REPAY THE DEFERRED SALES TAX LIABILITY IN THE INSTANT ASSESSMENT YEAR FOR LARGE ENGINE UNIT . T HE LIABILITY WAS PAID O N 27.02.2003, AGAINST WHICH CERTIFICATE WAS ISSUED BY THE DY. COMMISSIONER. SIMILARLY, IN THE CASE OF CASTING UNIT LOCATED AT SOLAPUR, SALES TAX DEFERRAL SCHEME, 1983 WAS APPLICABLE. THE SALES TAX DEFERRED WAS FOR CURRENT YEAR, 1985, 1986 AND FOR THE PER IOD 01.04.1989 TO 31.03.1990. THE ASSESSEE BASED ON THE CIRCULAR PAID THE DEFERRED SALES TAX LIABILITY ON 24.03.2003. SINCE THE PERIOD OF DEFERMENT WAS FOR TEN YEARS, THE ASSESSEE HAD TREATED THE SALES TAX PAYABLE AS UNSECURED LOAN IN ITS BOOKS OF ACCOUN T. IT IS ALSO THE CASE OF ASSESSEE THAT SECTION 43B OF THE ACT GRANTS DEDUCTION ONLY ON ACTUAL PAYMENT OF SALES TAX AND THE SAME WAS NOT PAID BY THE ASSESSEE, HENCE, NO MERIT IN THE ORDER OF ASSESSING OFFICER IN TREATING THE DIFFERENCE AS REMISSION BETWEE N LOAN AND THE ACTUAL PAYMENT AS TAXABLE UNDER SECTION 41(1) OF THE ACT. THE PAYMENT AT NET PRESENT VALUE OF FUTURE LIABILITY CANNOT BE TREATED AS REMISSION OR CESSATION OF LIABILITY UNDER SECTION 41(1) OF THE ACT , AT BEST IT IS PREMATURE PAYMENT OF SALES TAX OUTSTANDING AMOUNT, WHICH WAS TREATED AS LOAN BY THE ASSESSEE. 59 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 126. WE FIND T HE ISSUE RAISED IN THE PRESENT APPEAL IS ALSO COVERED BY THE ORDER OF SPECIAL BENCH DECISION IN THE CASE OF SULZER INDIA LTD. VS. JCIT (2010) 134 TTJ (MUMBAI) (SB) 385 , WH ICH HAS BEEN CONFIRMED BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. SULZER INDIA LTD. (2014) 369 ITR 717 (BOM) AND ALSO BY THE DECISION OF HONBLE HIGH COURT OF DELHI IN CIT VS. VIRTUAL SOFT SYSTEMS LTD. IN ITA NO S .216/2011, 398/2011, 403/2011, 404/2011 AND 680/2011. FOLLOWING THE SAME PARITY OF REASONING, WE FIND NO MERIT IN THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 127. NOW, COMING TO THE SECOND ISSUE WHICH IS RAISED BY WAY OF GROUNDS OF APPEAL NO.2 AND 3 I.E. AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF LEASE RENTAL INCOME OF RS.3,50,44,140/ - . 128. BRIEF FACTS RELATING TO THE ISSUE ARE THAT, THE ASSESSING OFFICER NOTED FROM NOTE NO.16 FORMING PART OF ACCOUNTS, THAT T HE ASSESSEE IN TERMS OF FINANCIAL RESTRUCTURING PACKAGE SANCTIONED BY IDBI IN RESPECT OF KIRLOSKAR FERROUS INDUSTRIES LTD. (KFIL), A COMPANY PROMOTED BY THE ASSESSEE, WAS NOT ENTITLED TO RECEIVE LEASE RENT IN RESPECT OF ASSETS LEASED TO KFIL FOR THE PERIOD FROM 01.04.2001 TO 31.03.2011. THE SAID ASPECT WAS BECAUSE THE RENTAL TO THE ASSESSEE WAS SUBORDINATE TO THE DUES OF FINANCIAL INSTITUTIONS. CONSEQUENTLY, THE AUDITOR STATED THAT THE LEASE RENT AMOUNTING TO RS.3,50,44,140/ - HAD NOT ACCRUED. CONSEQUENTL Y, THERE WAS AN ADVERSE IMPACT ON CURRENT YEARS PROFITS TO THE EXTENT OF RS.6,19,81,757/ - INCLUDING THE LEASE EQUALIZATION OF RS.2,69,37,617/ - . THE ASSESSING OFFICER REJECTED THE CONTENTION OF ASSESSEE STATING THAT THE FINANCIAL RESTRUCTURING PLAN WAS OF ASSOCIATE CONCERN I.E. KFIL, WHICH WAS A SEPARATE LEGAL ENTITY AND THEREFORE, THE ASSESSEE NEED NOT HAVE BEEN A PARTY TO IT. AS PER THE ASSESSING OFFICER, ACCRUAL OF LEASE RENT WAS AUTOMATIC AND WAS DUE FOR THE YEAR 60 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. UNDER CONSIDERATION. THE ASSESSING OF FICER FURTHER OBSERVED THAT THE ASSESSEE BECAME A PARTY TO THE AGREEMENT BETWEEN IDBI AND KFIL ON ITS OWN WILL, WHICH BORE NO SIGNIFICANCE SO FAR AS ACCRUAL OF LEASE RENT WAS CONCERNED. THE ASSESSING OFFICER ALSO DID NOT GIVE ANY SIGNIFICANCE TO THE FACT THAT SIMILAR NON - ACCOUNTING OF LEASE RENTAL IN ASSESSMENT YEAR 2002 - 03 BY THE ASSESSEE WAS ACCEPTED IN THE ASSESSMENT ORDER. 129. BEFORE THE CIT(A), THE ASSESSEE FILED WRITTEN EXPLANATION WHICH IS REPRODUCED AT PAGES 9 TO 12 OF THE APPELLATE ORDER. THE CIT(A) VIDE PARA 11 AFTER CONSIDERING THE PLEA OF ASSESSEE ON THE LEASE EQUALIZATION AMOUNT THAT THE SAME WAS ONLY AN ACCOUNTING ENTRY IN ACCORDANCE WITH GUIDANCE NOTE OF ICAI , HELD AS UNDER: - 11. I HAVE CONSIDERED THE FACTS AND APPELLANT S EXPLANATION IN THIS REGARD. THE ASSESSING OFFICER HAS ADDED THE AMOUNT OF RS.6,19,81,757/ - FOR LEASE RENTAL INCOME, WHICH INCLUDED ACTUAL LEASE RENT OF RS.3,50,44,140/ - AND THE LEASE EQUALIZATION AMOUNT OF RS.2,69,37,617/ - . SO FAR AS LEASE EQUALIZATION AMOUNT IS CONC ERNED, IT HAS BEEN EXPLAINED BY THE APPELLANT THAT THIS WAS ONLY AN ACCOUNTING ENTRY IN ACCORDANCE WITH THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. IT WAS NOT ACTUALLY THE PART OF LEASE RENTAL INCOME. IT WAS EXPLAINED THAT THE SAME WAS ONLY A BOOK ENTRY TO ENSURE THAT THE LEASE INCOME WAS ACCOUNTED ON A UNIFORM BASIS OVER THE LEASE - PERIOD, THE SAME BEING THE DIFFERENCE BETWEEN THE CAPITAL RECOVERY COMPONENT CONSIDERED IN THE LEASE RENTALS AND DEPRECIATION. THE APPELLANT HAS ALSO STATED THAT IN THE EARLIER A.Y. 2001 - 02 ALSO, IT WAS NOT CONSIDERED AS INCOME, WHEREAS IN THE A.YRS. 99 - 2000 AND 2000 - 01 WHEN IT WAS HAVING A DEBIT BALANCE, IT WAS NOT CLAIMED AS DEDUCTION. IT WAS THUS STATED THAT ACTUALLY ONLY THE LEASE RENTAL AMOU NT OF RS.3,50,44,140/ - WAS IN FACT RECEIVABLE FROM K F IL AS PER AGREEMENT BUT IT WAS NOT ACCOUNTED FOR DURING THE YEAR. THE APPELLANT HAS CITED THE ITAT DELHI BENCH DECISION IN THE CASE OF GOODWILL INDIA LTD VS DCIT (2008) 114 ITD 665 WHICH IS ALSO ON THE S AME RATIO THAT THE LEAS EQUALIZATION CHARGES AS PER ICAI GUIDELINE ARE NOT TO BE CONSIDERED FOR COMPUTING LEASE RENTAL INCOME UNDER THE I.T. ACT. THE TRIBUNAL OBSERVED THAT EVEN THE ICAI WAS OF THE VIEW THAT THIS METHOD WAS MEANT ONLY FOR RECOGNIZING THE N ET INCOME IN RESPECT OF A FINANCE LEASE AT CONSTANT PERIODIC RATE OF RETURN, ON THE LESSOR'S NET INVESTMENT OUTSTANDING IN THE LEASE AND ARE NOT TO BE CONSIDERED FOR DETERMINING THE TAXABLE INCOME IN ACCORDANCE WITH THE I.T. ACT. NEITHER A DEBIT UNDER THI S HEAD IS TO BE ALLOWED AS DEDUCTION NOR ANY CREDIT IS TO BE TREATED AS INCOME. THEREFORE THERE IS NO JUSTIFICATION FOR TREATING THE SAME AS INCOME AND ACCORDINGLY , IS DIRECTED TO BE DELETED. 61 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 130. IN RESPECT OF SECOND ISSUE OF ACTUAL LEASE RENTAL OF RS.3.50 CRORES, WHICH WAS NOT ACCOUNTED FOR BY THE ASSESSEE AS PART OF PROFIT AND LOSS ACCOUNT, EVEN IN THE BOOKS OF ACCOUNT , THE CIT(A) NOTED THE CONTENTION OF ASSESSEE THAT BECAUSE OF FINANCIAL RESTRUCTURING PACKAGE SANCTIONED BY IDBI FOR KFIL, A COMPANY WHICH WAS PROMOTED BY THE ASSESSEE, THE CONDITION WAS THAT KFIL WOULD NOT PAY THE LEASE RENTAL TO THE ASSESSEE, TILL THE DUES OF FINANCIAL INSTITUTIONS ARE REPAID BY IT. THE ASSESSEE POINTED OUT THAT SIMILAR PRACTICE WAS ADOPTED IN ASSESSMENT YEAR 2002 - 0 3 WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT. HOWEVER, THE INCOME HAS BEEN OFFERED FOR TAXATION IN ASSESSMENT YEAR 2004 - 05, WHEN KFIL PAID ALL THE DUES OF FINANCIAL INSTITUTIONS AND THE ASSESSEE BECAME LIABLE TO RECEIVE THE OUTSTANDING LEASE RENTAL FROM AS SESSMENT YEARS 2001 - 02 TO 2003 - 04 DURING ASSESSMENT YEAR 2004 - 05 . THE CIT(A) VIDE PARAS 13 AND 14 OBSERVED AS UNDER: - 13. THE APPELLANT'S CONTENTION HAS BEEN CAREFULLY CONSIDERED AND FOUND TO BE REASONABLE AND ACCEPTABLE IN VIEW OF THE CONDITION IMPOSED BY FINANCIAL INSTITUTIONS ON KFIL. DUE TO THE OUTSTANDING LOANS FROM THEM, THE DUES ON ACCOUNT OF THESE RENTALS WAS SUBORDINATE TO THE DUES OF THE FINANCIAL INSTITUTIONS. THUS, THE APPELLANT DID NOT ACCOUNT FOR THE LEASE RENTAL IN THIS YEAR. IT IS FURTHER NOTICED THAT THE TOTAL ASSESSED INCOME OF THE APPELLANT COMPANY AS PER NORMAL COMPUTATION OF INCOME FOR THIS YEAR WAS ONLY RS.88,45,760/ - AFTER INCLUDING THE LEASE RENTAL OF RS.3,50,44,140/ - AS WELL AS THE LEASE EQUALIZATION, CHARGES OF RS.2,69,37,617/ - . ACTUALLY, THE RETURNED INCOME FROM BUSINESS IN ACCORDANCE WITH THE NORMAL COMPUTATION OF INCOME FOR THIS YEAR WA S A LOSS OF RS.96,46,606/ - AND THERE WAS ALSO HUGE BROUGHT FORWARD LOSSES OF EARLIER YEARS TO THE TUNE OF RS.14,18,51,440/ - , FOR WHICH SET OFF WAS ALLOWED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. ACCORDINGLY, THE ACTUAL ASSESSMENT, WAS MADE AT THE BOOK PROFIT U/S. 11 5JB AT RS.37,48,48,466/ - IN THIS YEAR. ON THE OTHER HAND, IN A.Y. 2004 - 05, THE RETURNED INCOME WAS RS.82,40,49,730/ - AS PER NORMAL COMPUTATION, AND THE ASSESSMENT WAS COMPLETED AT THE TOTAL INCOME AS PER NORMAL COMPUTATION ITSELF, AT RS.97,73,78,448/ - THE RETURNED INCOME OF RS.82.40 CRORES FOR A.Y. 2004 - 05 WAS INCLUSIVE OF THE LEASE RENTAL INCOME FOR A.Y. 2001 - 02 TO 2003 - 04 W HICH WAS NOT ACCOUNTED FOR IN THESE YEARS; BUT HAS BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THIS TOTAL INCOME IN A.Y. 2004 - 05. 14. HAVING CAREFULLY CONSIDERED THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED ABOVE, I FIND NO REASON FOR ADDING THE LEASE RENTAL INCOME OF RS.3,50,44,140/ - IN THIS YEAR AND THE SAME IS DIRECTED TO BE DELETED. GROUND NO.3 IS THEREFORE, HELD AS ALLOWED. 62 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 131. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) AND HAS POINTED OUT THAT WHERE THE INCOME HAD ACCRUED DURING THE YEAR, THEN THE SAME MERITS TO BE ADDED IN THE HANDS OF ASSESSEE. 132. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE OTHER HAND, REFERRED TO THE NOTES TO ACCOUNTS, SR.NO.16 AT PAGE 49 OF PAPER BOOK ATTACHED TO THE BALANCE SHEET, WHEREIN IT WAS POINTED OUT THAT BECAUSE OF FINANCIAL RESTRUCTURING PACKAGE, THE ASSESSEE WAS NOT ENTITLED TO THE SAID RENT DUE FROM KFIL AS PER UNDERTAKING BY THE SAID CONCERN WITH IDBI. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE TERMS OF THE SAID RESTRUCTURING PACKAGE, COPY OF WHICH IS PLACED AT PAGE 132 OF THE PAPER BOOK. HE FURTHER STATED THAT THE ASSESSEE HAD SUBSTANTIAL INTEREST IN KFIL AND ACCORDINGLY, DID NOT OFFER THE INCOME IN THE HANDS OF ASSESSEE. THE LEARNED AUTHORIZED REPRES ENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT NO INCOME WAS OFFERED IN THE FIRST TWO YEARS AND THE RENT WAS OFFERED IN ASSESSMENT YEAR 2004 - 05 AND THE TAXES WERE PAID ON THE SAME. IN CASE THE AMOUNT IS TAXED IN THE INSTANT ASSESSMENT YEAR, THEN CONSE QUENTIAL EFFECT IS TO BE ALLOWED IN ASSESSMENT YEAR 2004 - 05. 133. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED BY THE REVENUE IS IN RELATION TO THE ASSESSABILITY OF LEASE RENTAL OF RS.3,50,44,140/ - . THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS NOT ACCOUNTED FOR THE SAID LEASE RENTAL IN ITS BOOKS OF ACCOUNT BECAUSE OF FINANCIAL RESTRUCTURING PACKAGE SANCTIONED BY IDBI FOR KFIL, WHICH IS A COMPANY PROMOTED BY THE ASSESSEE. AS PER THE PACKAGE OFFERED BY IDBI, KFIL WOULD NOT PAY THE LEASE RENTAL TO THE ASSESSEE, TILL THE DUES OF FINANCIAL INSTITUTIONS WERE REPAID BY KFIL AS LEASE RENTALS WERE SUBORDINATE TO THE OUTSTANDING DUES OF FINANCIAL 63 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. INSTITUTIONS. THE ASSESSEE THUS, EXCLUDED THE SAID IN COME BOTH FROM BOOK PROFITS AS WELL AS TAXABLE INCOME DURING THE YEAR. SIMILARLY, LEASE RENTAL FOR ASSESSMENT YEARS 2001 - 02 AND 2002 - 03 WERE NOT RECOGNIZED BY THE ASSESSEE, FOR WHICH SIMILAR DISCLOSURE WAS MADE. HOWEVER, THE ASSESSING OFFICER DID NOT MAK E ANY ADDITION ON THIS COUNT IN ASSESSMENT YEARS 2001 - 02 AND 2002 - 03. THE ASSESSEE HAS RECEIVED THE LEASE RENTAL FOR THESE YEARS IN ASSESSMENT YEAR 2004 - 05 AND THE AMOUNT HAS BEEN OFFERED TO TAX IN THE SAID YEAR. IN THE TOTALITY OF THE ABOVE SAID FACTS A ND CIRCUMSTANCES AND FOLLOWING THE PRINCIPLES OF CONSISTENCY SINCE SIMILAR AMOUNT DUE TO THE ASSESSEE ON ACCOUNT OF LEASE RENTALS HAS NOT BEEN TAXED IN THE HANDS OF ASSESSEE IN ASSESSMENT YEARS 2001 - 02 AND 2002 - 03, THERE IS NO MERIT IN MAKING THE ADDITION IN THE INSTANT ASSESSMENT YEAR. ANOTHER ASPECT WHICH HAS BEEN NOTED BY THE CIT(A) WA S THAT AS PER NORMAL COMPUTATION OF INCOME FOR THIS YEAR , T HE TOTAL ASSESSED INCOME OF THE ASSESSEE AFTER INCLUSION OF LEASE RENTAL OF RS.3.50 CRORES AS WELL AS LEASE EQUA LIZATION CHARGES OF RS.2.69 CRORES WAS ONLY RS.88,45,760/ - , BECAUSE OF BROUGHT FORWARD LOSSES FOR WHICH, SET OFF WAS ALLOWED BY THE ASSESSING OFFICER IN THE ASSESSMENT YEAR. THE ASSESSMENT WAS MADE AT BOOK PROFIT UNDER SECTION 115JB OF THE ACT AT RS.37.48 CRORES IN ASSESSMENT YEAR 2003 - 04, ON THE OTHER HAND, IN ASSESSMENT YEAR 2004 - 05, THE RETURNED INCOME WAS RS.82,40,49,730/ - , A S PER NORMAL COMPUTATION OF INCOME AND THE ASSESSMENT WAS COMPLETED ON TOTAL INCOME OF AS PER NORMAL COMPUTATION ITSELF. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WHERE THE ASSESSEE HAS PAID TAXES IN ASSESSMENT YEAR 2004 - 05 ON THE SAID LEASE RENTALS ON RECEIPT BASIS, WE FIND NO MERIT IN THE GROUNDS OF APPEAL NO.2 AND 3 RAISED BY THE REVENUE AND THE SAME ARE DISMISS ED. 64 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 134 . THE REVENUE IS ALSO IN APPEAL AGAINST THE ORDER OF RE - ASSESSMENT PASSED UNDER SECTION 147 OF THE ACT VIDE ITA NO.543/PUN/2012, RELATING TO ASSESSMENT YEAR 2003 - 04 AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN DIRECTING THE A.O. TO DELETE THE AMOUNT OF LEASE EQUALIZATION CHARGES OF RS.2,69,37,617/ - AND LEASE RENTAL INCOME OF RS.3,50,44,140/ - FROM THE BOOK PROFIT COMPUTED U/S 115JB BY IGNORING THE FACT THAT THE AUDITORS HAVE SPECIFICALLY REMARKED IN COL.3(G) OF THE AUDITORS REPORT THAT NON RECOGNITION OF LEASE RENT AND LEASE EQUALIZATION CHARGES RESULTED INTO LOWER PROFITS BY RS.6,19,81,757/ - THEREBY NOT FOLLOWING THE PRINCIPLE LAID DOWN IN 325 ITR 565 (DELHI). 135. THE APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 147 OF THE ACT AND THE ISSUE WHICH HAS BEEN RAISED BY THE REVENUE IS AGAINST DELETION OF ADDITION MADE TO THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT ON ACCOUNT OF LEASE RENTAL INCOME AND LEASE EQUALIZATION CHARGES OF RS.6,19,81,757/ - . THE ASSESSING OFFICER WAS OF THE VIEW THAT ACCRUAL OF LEASE RENT WAS AUTOMATIC AND WAS DUE FOR THE YEAR UNDER CONSIDERATION AND HENCE, THE SAME IS TO BE ADDED TO THE BO OK PROFITS UNDER SECTION 115JB OF THE ACT. THE ASSESSING OFFICER RECORDED REASONS FOR REOPENING WHICH WERE SUPPLIED TO THE ASSESSEE AND HAD OBJECTED TO THE REOPENING ON THE GROUND THAT THE ASSESSMENT PROCEEDINGS WERE INVALID AS INITIATED BEYOND THE PERIOD OF SIX YEARS. FURTHER, THERE WAS NO FAILURE ON THE PART OF ASSESSEE TO DISCLOSE FULLY ALL MATERIAL FACTS AND HENCE, THE ASSESSMENT COULD NOT BE REOPENED BEYOND FOUR YEARS. ON MERITS, IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. CIT (2002) 255 ITR 273 (SC), THE SAID ASSESSMENT COULD NOT BE REOPENED. THE ASSESSING OFFICER WAS OF THE VIEW THAT WHERE THERE WAS FAILURE ON THE PART OF ASSESSEE TO MAKE TRUE DISCLOSURE, THEN THE REOPENING IS ABSOLUTELY JUSTIFIED. IT WAS FURTHER HELD BY THE ASSESSING OFFICER AS UNDER: - 8. IT IS NOTICED THAT ASSESSEE COMPANY HAS IN THE NOTES OF ACCOUNT ACCOMPANYING THE RETURN HAS COMMENTED THAT NON RECOGNITION OF LEASE RENT AND NON LEASE EQUALIZATION RESULTED IN THE PROFITS BEEN LOWER RS. 6,19,81,757/ - ON THIS 65 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. ISSUE, THE ASSESSEE HAS NOT POINTED OUT WHY THE SAID AMOUNT HAS NOT BEEN DISCLOSED. THERE IS A CLEAR ADMISSION ON THE AUDIT REPORT THAT PROFITS ARE UNDERSTATED TO THAT EXTENT AS PER THE COMPANYS ACT. THEREFORE THIS AMOUNT OUGHT TO HAVE BEEN ADDED BY THE ASSESSEE IN THE COMPUTATION U/S 115B. IN VIEW OF THE ABOVE AMOUNT OF RS.6,19,81,757/ - IS ADDED TO THE AMOUNT U/S 115JB. 136. THE CIT(A) HELD THAT HE HAD ALREADY DECIDED THE ISSUE ON ACCOUNT OF LEASE RENTAL AND LEASE EQUALIZATION C HARGES VIDE HIS ORDER DATED 22.12.2011 AND HAS HELD THAT NEITHER LEASE EQUALIZATION OF RS.2.69 CRORES NOR THE LEASE RENTAL OF RS.3.50 CRORES WERE LIABLE TO BE ADDED TO THE INCOME OF THIS YEAR. CONSEQUENTLY, THE SAME COULD NOT BE ADDED TO THE BOOK PROFITS FOR THE YEAR UNDER CONSIDERATION AS NOT HAVING BEEN ACCOUNTED FOR AS INCOME IN THIS YEAR. CONSEQUENTLY, THE CIT(A) HELD THAT THERE IS NO NEED TO ADJUDICATE THE ISSUE OF REOPENING UNDER SECTION 147/148 OF THE ACT. 137. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 138. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELHI IN CIT VS. SAIN PROCESSING & WEAVING MILLS (P) LTD. (2010) 325 ITR 565 (DEL) , THE SAID ITEMS OF INCOME THOUGH NOT CONSIDERED IN THE PROFIT AND LOSS ACCOUNT BUT THE SAME NEEDS TO BE ADDED TO THE PROFIT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFITS UNDER SECTION 115JB OF THE ACT IN THE RE - ASSESSMENT PROCEEDINGS. 139. THE LEARNED AUTHORIZED REPRESE NTATIVE FOR THE ASSESSEE ON THE OTHER HAND, POINTED OUT THAT THE LEGAL ISSUE OF REOPENING OF ASSESSMENT NEEDS TO BE ADJUDICATED IN FAVOUR OF THE ASSESSEE, WHERE THE NOTICE UNDER SECTION 148 OF THE ACT WAS ISSUED ON 31.03.2010 I.E. BEYOND PERIOD OF FOUR YEA RS. SINCE ALL MATERIAL FACTS WERE ON RECORD I.E. AUDIT REPORT, NOTES TO ACCOUNTS, PROFIT AND LOSS ACCOUNT AND ALSO THERE WAS DISCUSSION IN THE ASSESSMENT ORDER, THEN THE PRINCIPLE LAID 66 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. DOWN BY THE HONBLE HIGH COURT OF DELHI IN CIT VS. SAIN PROCESSING & W EAVING MILLS (P) LTD. (SUPRA) CANNOT BE APPLIED IN RE - ASSESSMENT PROCEEDINGS . ON MERITS, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IT COULD NOT BE SAID THAT THE ACCOUNTS OF ASSESSEE WERE NOT CORRECT. 140. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, RELIED ON THE ORDER OF ASSESSING OFFICER WITH SPECIAL REFERENCE TO PARAS 4 TO 7. 141. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL FILED BY THE REVENUE IS AGAINST REOPENING OF ASSESSMENT AND THE ADDITION MADE BY THE ASSESSING OFFICER TO THE BOOK PROFITS OF THE ASSESSEE UNDER SECTION 115JB OF THE ACT ON ACCOUNT OF LEASE EQUALIZATION CHARGES AND LEASE RENTALS . WE HAVE IN THE PARAS HERE INABOVE DECIDED THAT BOTH THESE A MOU NTS DO NOT ARISE AS INCOME IN THE HANDS OF ASSESSEE IN THE YEAR UNDER CONSIDERATION. CONSEQUENTLY, THE SAID INCOME IS NOT TO BE INCLUDED IN THE BOOK PROFITS OF ASSESSEE AS THE INCOME HAS NOT ACCRUED TO THE ASSESSEE IN T HE YEAR UNDER CONSIDERATION. THE HONBLE HIGH COURT OF DELHI IN CIT VS. SAIN PROCESSING & WEAVING MILLS (P) LTD. (SUPRA) HAS HELD THAT DEPRECIATION THOUGH NOT CHARGED TO THE PROFIT AND LOSS ACCOUNT, IS TO BE CONSIDERED AS EXPENDITURE WHILE DETERMINING THE BOOK PROFITS THOUGH NOT CLAIMED IN NORMAL COMPUTATION. HOWEVER, WE HAVE HELD IN THE PARAS HEREINABOVE THAT INCOME DO NOT ACCRUE TO THE ASSESSEE IN THE INSTANT ASSESSMENT YEAR. HENCE, THERE IS NO MERIT IN THE PLEADINGS OF LEARNED DEPARTMENTAL REPRESENTAT IVE FOR THE REVENUE AND THE SAME ARE REJECTED. UPHOLDING THE ORDER OF CIT(A), WE DISMISS THE GROUNDS OF APPEAL RAISED BY THE REVENUE. 142. THE ASSESSEE IN ITA NO.877/PUN/2012, RELATING TO ASSESSMENT YEAR 2004 - 05 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 67 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 1. DISALLOWANCE OF EXPENSES U/S 14A RS.50,000/ - THE LEARNED CIT (A) HAD ERRED ON FACTS IN LAW IN DISALLOWING THE EXPENSES RELATING TO DIVIDEND INCOME ON AN AD - HOC BASIS U/S 14A. HE FAILED TO APPRECIATE THAT THE INVESTMENTS ON WHICH DIVIDEND W ERE RECEIVED WERE VERY OLD AND WERE NOT ACQUIRED OUT OF BORROWING. THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ATTRIBUTABLE FOR EARNING DIVIDEND. THE CIT (A) COULD NOT POINT OUT ANY EXPENDITURE DIRECTLY ATTRIBUTABLE FOR EARNING THE TAX FREE INCOME AND ARBITRARILY MADE AD - HOC DISALLOWANCE OF RS.50,000/ - AND NO NEXUS OF THE EXPENDITURE WITH THE TAX FREE INCOME WAS ESTABLISHED. 2.0 DISALLOWANCE OUT OF AIRCRAFT EXPENSES RS.4,25,448/ - THE LEARNED CIT (A) ERRED IN HOLDING THAT THE AIRCRAFT WERE USED FOR NON - BUSINESS PURPOSES WHEN IT WAS AVERRED BEFORE HIM THAT THE AIRCRAFT ARE JOINTLY OWNED WITH OTHER COMPANIES AND THERE IS NO ELEMENT OF PERSONAL USE AT ALL. THE DETAILS OF FLIGHTS (STATEMENT IN LIEU OF LOGBOOK) WERE SUBMITTED AT THE TIME OF ASSESSMEN T. 3.0 BAD DEBTS AND IRRECOVERABLE BALANCES WRITTEN OFF RS.53,18,440/ - THE LEARNED CIT (A) ERRED ON FACTS AND N LAW IN DISALLOWING IRRECOVERABLE DEBIT BALANCES AS WRITTEN OFF UNDER SECTION 36(1)(VII) OF THE ACT WHEN THE ASSESSEE HAS CLAIMED AMOUNT OF RS.53,18,440/ - UNDER SECTION 28 OF THE ACT. THE LEARNED CIT (A) FURTHER ERRED IN ALLOWING HIM TO BE MISGUIDED WITH NATURE OF CLAIM U/S 28 AND BAD DEBTS U/S 36. HE FAILED TO APPRECIATE THE WRITTEN AND ORAL ARGUMENTS PUT BEFORE HIM. 4.0 DISALLOWANCE OUT O F ADVERTISEMENT AND PUBLICITY RS.47,86,632/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING 5% OF THE TOTALS EXPENDITURE ON PRODUCT ADVERTISEMENT AND SALES PROMOTION, LIAISON EXPENSES, GUEST EXPENSES, PRESENTATION AND ARTICLES AND GENERAL EXPENSES AS NOT BEING WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. HE OUGHT TO HAVE APPRECIATED THAT AUDITORS OF THE COMPANY IN THEIR REPORTS UNDER THE MANUFACTURING AND OTHER COMPANIES (AUDITORS REPORT) ORDER AS WELL AS THE TAX AUDIT REP ORT U/S 44AB OF THE INCOME TAX ACT, 1961 HAVE CATEGORICALLY REMARKED THAT NO PERSONAL EXPENSES HAVE BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE CIT (A) HAS TRIED TO MAKE BACK DOOR DISALLOWANCES WHEN SECTION 37(2A) SPECIFICALLY DEALING WITH DISALLOWAN CES OF ADVERTISEMENT, SALES PROMOTION HAS BEEN DELETED FROM THE STATUTE. 5.0 LIQUIDATED DAMAGES RS.24,23,145/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING LIQUIDATED DAMAGES AS A CONTINGENT LIABILITY. HE FAILED TO APPRECIATE THAT THE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND EXPENSES RELATING THE PREVIOUS YEAR HAVE BEEN PROPERLY PROVIDED FOR TO ARRIVE AT THE CORRECT PROFIT DURING THE YEAR. 6.0 CLUB EXPENSES RS.1,33,666/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DI SALLOWING CLUB EXPENSES OF RS.1,33,666/ - BEING PERSONAL IN NATURE. HE FAILED TO APPRECIATE THAT CLUB MEMBERSHIPS WERE GIVEN TO EXECUTIVES OF THE COMPANY IN THE INTEREST OF COMPANYS BUSINESS. VARIOUS MEETINGS WITH 68 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. THE CUSTOMERS AND OTHER BUSINESS PARTNER S AND ALSO INTERNAL MEETINGS OF THE OFFICERS OF THE COMPANY ARE HELD AT THE CONVENIENT LOCATIONS OF THE CLUBS. HE ALSO FAILED TO APPRECIATE THAT THE AUDITORS HAVE CATEGORICALLY STATED THAT THERE ARE NO PERSONAL EXPENSES. 143. THE ISSUE IN GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2004 - 05 IS AGAINST THE DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE ACT IN RESPECT OF TAX FREE DIVIDEND INCOME EARNED BY THE ASSESSEE . WE HAVE ALREADY UPHELD SIMILAR DISALLOWANCE MADE IN EARLIER Y EARS AND FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE. 144. THE ISSUE IN GROUND OF APPEAL NO.2 IS AGAINST DISALLOWANCE OUT OF AIRCRAFT EXPENSES OF RS.4,25,448/ - . SIMILAR ISSUE HAS ARISEN IN ASSESSMEN T YEARS 2001 - 02 AND 2002 - 03 VIDE GROUND OF APPEAL NO.1 AND FOLLOWING THE SAME PARITY OF REASONING, THIS GROUND OF APPEAL IS DECIDED AGAINST THE ASSESSEE. 145. THE ISSUE IN GROUND OF APPEAL NO.3 IS AGAINST ALLOWABILITY OF DEBIT BALANCES WRITTEN OFF OF RS.5 3,18,440/ - IS NOT PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 146. THE NEXT ISSUE RAISED VIDE GROUND OF APPEAL NO.4 IS AGAINST DISALLOWANCE OUT OF ADVERTISEMENT AND PUBLICITY EXPENSES OF RS.47,86,632/ - . WE FIND SIMILAR ISSUE HAS BEEN ADDRESSED BY US VIDE GROUND OF APPEAL NO.11 IN ASSESSMENT YEAR 2001 - 02 AND GROUND OF APPEAL NO.7 IN ASSESSMENT YEAR 2002 - 03. FOLLOWING THE SAME PARITY OF REASONING, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO CARRY OUT VERIFICATION EXERCI SE. HOWEVER, WE UPHOLD THE DISALLOWANCE OF 5% OUT OF EXPENDITURE ON GUEST EXPENSES, PRESENTATION EXPENSES AND ARTICLE & GENERAL EXPENSES . NO DISALLOWANCE IS TO BE MADE OUT OF LIAISON EXPENSES. THE 69 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. GROUND OF APPEAL NO.4 RAISED BY THE ASSESSEE IS THUS, AL LOWED FOR STATISTICAL PURPOSES. 147. THE NEXT ISSUE VIDE GROUND OF APPEAL NO.5 ON ACCOUNT OF DISALLOWANCE OF LIQUIDATED DAMAGES OF RS.24,23,145/ - IS ALSO COVERED BY OUR ORDER IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.12 AND ALSO VIDE GROUND OF A PPEAL NO.8 IN ASSESSMENT YEAR 2002 - 03. SINCE THE ASSESSEE IS FOLLOWING CONSISTENT METHOD OF RECOGNIZING LIQUIDATED DAMAGES, ACCORDINGLY, WE ALLOW THE CLAIM OF ASSESSEE. THE GROUND OF APPEAL NO.5 IS THUS, ALLOWED. 148. THE GROUND OF APPEAL NO.6 IS IN RES PECT OF CLUB EXPENSES OF RS.1,33,600/ - . SIMILAR ISSUE IS DECIDED BY US IN RESPECT OF GROUND OF APPEAL NO.5 IN ASSESSMENT YEAR 2001 - 02 AND FOLLOWING THE SAME PARITY OF REASONING, WE ALLOW THE CLAIM OF ASSESSEE. 1 49 . THE REVENUE IN ITA NO.950/PUN/2012 , R ELATING TO ASSESSMENT YEAR 2004 - 05 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD.CIT (A) ERRED IN DELETING THE ADDITION OF RS.10,00,000/ - MADE U/S.40A(2)(B) OUT OF REMUNERATION / COMMISSION PAID TO DIRECTORS WITHOUT JUSTIFYING THE REASONABLENESS OF THE PAYMENT TO DIRECTORS. 2. ON FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE CIT (A) ERRED IN DELETING THE ADDITION OF RS.59,66,782/ - MADE U/S.14A OF THE ACT ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES INCURRED FOR EARNING TAX FREE DIVIDENDS. 150. THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS AGAINST DELETION OF ADDITION MADE ON ACCOUNT OF REMUNERATION / COMMISSION PAID TO THE DIRECTORS. THE SAID ISSUE HAS BEEN DECIDED BY US I N ASSESSMENT YEAR 2001 - 02 IN THE APPEAL FILED BY THE REVENUE VIDE GROUND OF APPEAL NO.1. FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE. 70 ITA NO.857/PUN/2006 ITA NO.884/PUN/2006 & ORS. KIRLOSKAR OIL ENGINES LTD. 151. THE ISSUE IN GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS A GAINST DELETION OF ADDITION MADE UNDER SECTION 14A OF THE ACT ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES. SIMILAR ISSUE HAS BEEN ADJUDICATED BY US IN ASSESSMENT YEAR 2001 - 02 VIDE GROUND OF APPEAL NO.2 AND FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE. 152. IN THE RESULT, APPEALS OF ASSESSEE ARE PARTLY ALLOWED AND THE APPEALS OF REVENUE ARE DISMISSED. ORDER PRONOUNCED ON THIS 1 ST DAY OF SEPTEMBER , 201 7 . SD/ - SD/ - (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 1 ST SEPTEMBER , 201 7 . G G C C V V S S R R / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - II I /V , PUNE ; 4. / THE CIT - V , PUNE ; 5. , , / DR A , ITAT, PUNE; 6. / GUARD FILE. / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE