ACIT, New Delhi V. M/s NIIT Technologies Ltd., New Delhi

ITA 5492/DEL/2013

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7704 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 20-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 07-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRAMITA M BISWAS
• Keywords: Capital asset; Business income; Depreciation; Rule of consistency; Earning of tax free income; Proportionate interest; Retrospective amendment; Additional evidence; Bad and doubtful debts; Unabsorbed depreciation; Revenue expenditure; Capital expenditure; Rule 8D; CHAPTER IV
• Section: 143(3); 14A; 260A; 37(1); 10B; 201; 143(2); 43; 48; 72; 13; 32; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E, NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NOS. 5491 & 5492/DEL/2013 ASSESSMENT YEAR: 2007-08 & 2008-09 ACIT, CIRCLE-13(1), NEW DELHI VS. M/S. NIIT TECHNOLOGIES LTD., 8, BALAJI ESTATE, 1 ST FLOOR, GURU RAVI DAS MARG, KALKAJI, NEW DELHI PAN :AAACN0332P (APPELLANT) (RESPONDENT) AND ITA NO.5524 & 5525/DEL/2013 ASSESSMENT YEAR: 2007-08 & 2008-09 M/S. NIIT TECHNOLOGIES LTD., 8, BALAJI ESTATE, 1 ST FLOOR, GURU RAVI DAS MARG, KALKAJI, NEW DELHI VS. ACIT, CIRCLE-13(1), NEW DELHI PAN : AAACN0332P (APPELLANT) (RESPONDENT) DEPARTMENT BY MS. PRAMITA M. BISWAS, CIT(DR) ASSESSEE BY MR. ROHIT JAIN, ADV. MR. TEJASVI JAIN, CA MS. SOMYA JAIN, CA DATE OF HEARING 06.11.2019 DATE OF PRONOUNCEMENT 28.01.2020 2 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 ORDER PER O.P. KANT, AM: THE APPEALS HAVING ITA NO.5524/DEL/2013 AND ITA N O. 5491/DEL/2013 FILED BY THE ASSESSEE AND THE REVENUE RESPECTIVELY ARE DIRECTED AGAINST ORDER DATED 30/7/ 2013 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) -XVI, DELHI [IN SHORT THE LD. CIT(A)] FOR ASSESSMENT YEAR 200 7-08. SIMILARLY, THE APPEALS HAVING ITA NO. 5525/DEL/2013 AND ITA NO . 5492/DEL/2013 FILED BY THE ASSESSEE AND REVENUE RES PECTIVELY ARE DIRECTED AGAINST ORDER DATED 13/07/2013 PASSED BY THE LEARNED CIT(APPEALS) FOR ASSESSMENT YEAR 2008-09. I DENTICAL ISSUES PERMEATING FROM SAME SET OF FACTS AND CIRCUM STANCES ARE INVOLVED IN THESE APPEALS, THUS, SAME WERE HEARD TO GETHER AND DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER FOR CONVENIENCE. 2. FIRST, WE TAKE UP THE APPEALS FOR ASSESSMENT YEAR 2007-08. THE GROUNDS RAISED BY THE ASSESSEE AND THE REVENUE IN ITA NO. 5524/DEL/2013 AND ITA NO. 5491/DEL/2013 FOR ASSESSM ENT YEAR 2007-08 ARE REPRODUCED AS UNDER: GROUNDS OF APPEAL OF THE ASSESSEE: 1. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE OF RS. 44,00,739/- , CLAIMED UNDER SECTION 35DD OF THE INCOME TAX ACT, 1961 (TH E ACT) IN RESPECT OF 1/5* OF DEMERGER EXPENSES INCURRED BY TH E APPELLANT. 1. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN HOLDING THAT IN TERMS OF SECTION 35DD OF THE ACT, DEMERGER EXPENSES ARE ALLOWABLE ONLY IN THE HANDS O F THE DEMERGED COMPANY AND NOT IN THE HANDS OF THE RESULT ANT COMPANY. 1.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) F AILED TO APPRECIATE THAT THE CLAIM OF APPELLANT WAS SUSTAINA BLE IN LAW 3 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 INASMUCH AS THE APPELLANT HAD FULFILLED ALL THE CON DITIONS FOR CLAIMING DEDUCTION UNDER SECTION 35DD OF THE ACT. 2. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN SUSTAINING DISALLOWANCE TO THE EXTENT OF RS. 82,05,031/- UNDER SECTION 14A OF THE ACT, COMPRISING OF RS.37,3 3,490/- TOWARDS INDIRECT INTEREST EXPENDITURE INCURRED IN R ELATION TO INTEREST INCOME AND RS. 44,71,541/- TOWARDS ADMINIS TRATIVE EXPENSES ALLEGEDLY INCURRED IN RELATION TO EXEMPT I NCOME. 2.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING INDIRECT INTEREST EXPENDITURE TO THE TUNE OF RS. 37,33,490/- WITHOUT APPRECIATING THAT INVESTMEN T IN MUTUAL FUNDS WERE MADE OUT OF INTEREST FREE/SURPLUS FUNDS AVAILABLE WITH THE APPELLANT. 2.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN HOLDING THAT SHARES IN NUT GIS LTD. AND NIIT SMARTSERVE LTD . WERE ACQUIRED OUT OF FUNDS RECEIVED BY THE APPELLANT ON THE ISSUE OF NON-CONVERTIBLE DEBENTURES, WITHOUT APPRECIATING TH AT THE SAID SHARES ALONGWITH THE DEBENTURES WERE ACQUIRED BY TH E APPELLANT AS PART OF THE DEMERGED GLOBAL SOFTWARE BUSINESS UN DERTAKING THAT VESTED IN THE APPELLANT W.E.F 01.04.2003. 2.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING, ON AN AD-HOC BASIS, ADMINIST RATIVE EXPENSES TO THE TUNE OF RS.44,71,541/, WITHOUT APPR ECIATING THAT THE EXPENDITURE OFFERED FOR DISALLOWANCE WAS REASON ABLE. 2.4 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN OBSERVING THAT THE APPELLANT FAILED TO DI SCHARGE ITS ONUS IN SUBSTANTIATING THAT NO EXPENDITURE IN ADDITION T O EXPENDITURE SUO MOTU OFFERED BY DISALLOWANCE WAS INCURRED IN RE LATION TO EARNING TO EXEMPT INCOME. 3. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSESSING OFF ICER IN DISALLOWING BAD DEBTS WRITTEN OFF AMOUNTING TO RS.3 ,59,27,941 IN RESPECT OF AMOUNT DUE FROM GOVERNMENT AGENCIES AND OTHER PARTIES. 3.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN DISALLOWING THE CLAIM OF THE APPELLANT ON THE GROUND THAT THE APPELLANT HAD NOT BEEN ABLE TO DEMONSTRATE THAT THE BAD DEBTS WRITTEN OFF DURING THE CAPTIONED YEAR FORMED PART OF THE SUNDRY DEBTORS OFFERED TO TAX IN THE PRECEDING YEAR S. 3.2 WITHOUT PREJUDICE, THE CIT(A) FAILED TO APPREC IATE THAT DEDUCTION OF AMOUNTS WRITTEN OFF DURING THE RELEVANT PREVIOUS YE AR WAS ALTERNATIVELY ALLOWABLE AS TRADING LOSS UNDER SECTI ONS 28/37(1) OF THE ACT. 4 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 GROUNDS OF APPEAL OF THE REVENUE: 1. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) HAS ERRED IN ALLOWING THE DEDUCTION CLA IMED BY THE ASSESSEE U/S 10B OF THE ACT BY NOT APPRECIATING THE FACT THAT ALL THE DIFFERENT UNITS OF THE ASSESSEE COMPANY ARE NOT OPERATING IN ISOLATION AS ALLEGED BY THE ASSESSEE, BUT AS DIFFER ENT BRANCHES OF THE SAME TREE. 1.1 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID.CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT TH AT THE ASSESSEE IS MAINTAINING SINGLE BOOKS OF ACCOUNTS FOR ALL UNI TS I.E. THOSE WHICH ARE COVERED FOR DEDUCTION, AS WELL AS THOSE W HICH ARE NOT COVERED FOR DEDUCTION. IT IS ONLY FOR THE PURPOSE O F COMPUTING DEDUCTION U/S 10B THAT THE ASSESSEE HAS TRIED TO AL LOCATE THE EXPENSES BETWEEN THESE UNITS AND COMPUTE THEIR PROF ITS. 1.2 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID.CIT(A) HAS ERRED BY HOLDING THAT INDEPENDENT BOO KS OF ACCOUNTS ARE NOT REQUIRED TO BE MAINTAINED UNDER THE PROVISI ONS OF SECTION 10B OF THE I T ACT, SINCE THE LANGUAGE OF FORM 56G STARTS WITH ' I/WE HAVE EXAMINED THE ACCOUNTS AND RECORDS ' WHICH MAKES IT CLEAR THAT THE ASSESSEE HAS TO MAINTAIN SEPARATE BO OKS OF ACCOUNTS. THE ANNEXURE 'A' OF FORM 56G ALSO REQUIRE S THE DETAILS OF TOTAL PROFIT OF THE BUSINESS ETC. & KEEPING IN V IEW OF THE AFORESAID FACTS, IT IS CLEAR THAT THE ASSESSEE WAS REQUIRED TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 1.3 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID.CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT TH AT ANNEXURE A' OF FORM 56G ALSO REQUIRES THE DETAILS OF TOTAL PROF IT OF THE BUSINESS ETC. WHICH MAKES IT CLEAR THAT THE ASSESSEE WAS REQ UIRED TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 1.4 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID. CIT(A) HAS ERRED IN NOT CONSIDERING THE WHOLE PROVI SIONS LAID DOWN BY THE BOARD IN PARA 2(V) OF THE CIRCULAR 1/20 13 DATED 17.01.2013, WHERE IN IT IS SPECIFICALLY MENTIONED T HAT THE AO, IF REQUIRES CAN CALL FOR THE SEPARATE BOOKS OF ACCOUNT S OF ALL THE UNITS FOR WHICH DEDUCTION U/S 10B IS CLAIMED. 1.5 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID.CIT(A) HAS ERRED BY IGNORING THE FACT THAT UNDER THE AMENDED PROVISIONS EFFECTIVE FROM 01.04.2001, THE CLAIM U/S 10B HAS BEEN DECLARED AS DEDUCTION AND NOT EXEMPTION, THEREFORE, ONE CANNOT EXCLUDE DEPRECIATION ALLOWANCE WHILE COMPUTING PROF ITS DERIVED FROM A NEWLY ESTABLISHED UNDERTAKING. 2. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT THE CLAIM OF THE ASSESSEE WHICH IS CONTRARY TO SECTION 32 HAS VIRTUA LLY TAKEN EXEMPTION FROM PAYMENT OF TAX EVEN FOR OTHER BUSINE SS AS WELL AS NON BUSINESS INCOMES, WHICH SHOULD NOT BE ALLOWED. 5 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 3. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID.CIT(A) HAS ERRED BY IGNORING THE FACT THAT THE A SSESSEE HAD MADE 'ONE TIME LEASE RENTAL CHARGES' WHICH SHOWS TH AT THE TRANSACTION/LEASE AGREEMENT WAS A FINANCIAL LEASE T RANSACTION AND THE ASSESSEE IS AN ANTICIPATED OWNER OF THE LAN D/PROPERTY, HENCE TO ACQUIRE THE ANTICIPATED OWNERSHIP THE PAYM ENT MADE IS TERMED TO BE CAPITAL IN NATURE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) HAS ERRED BY NOT APPRECIATING THE FACT T HAT THE ONE TIME PAYMENT MADE IN ACQUIRING THE LEASED PROPERTY IS A PREMIA OR SALAMI WHICH IS CAPITAL IN NATURE. 5. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FR ESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUNDS OF APPEAL. 3. BRIEFLY STATED FACTS OF THE CASE THAT THAT THE ASS ESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEV ELOPMENT AND SERVICES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 30/10/2007 DECLARING TOTAL INCO ME OF 1,03,47,201/- AFTER CLAIMING DEDUCTION OF 106,43,88,624/- UNDER SECTION 10B OF INCOME-TAX ACT, 1961 (IN SHORT THE ACT). THE CASE WAS SELECTED FOR THE SCRUTINY ASSESSMENT A ND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED AND COMP LIED WITH. THE SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT WAS C OMPLETED ON 30/12/2010 AFTER MAKING CERTAIN ADDITIONS/DISALLOWA NCES. ON FURTHER APPEAL, THE LD. CIT(A) PARTLY ALLOWED THE A PPEAL OF THE ASSESSEE. AGGRIEVED WITH THE FINDING OF THE LD. CIT (A), BOTH ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE THE T RIBUNAL RAISING RESPECTIVE GROUNDS REPRODUCED ABOVE. ITA NO.5524/DEL/2013 (ASSESSEES APPEAL) 4. THE GROUND NOS. 1 TO 1.2 OF THE APPEAL OF THE ASSE SSEE RELATE TO DISALLOWANCE OF 44,00,739/-, WHICH WAS CLAIMED BY THE ASSESSEE AS DEDUCTION UNDER SECTION 35DD OF THE ACT . 6 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 4.1 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE M/ S. NIIT LTD. WAS DEMERGED PURSUANT TO A SCHEME OF DEMERGER APPROVED BY THE HONBLE HIGH COURT OF DELHI WITH EFFECT FROM 01/04/2003. AS A RESULT OF THAT DEMERGER, THE UNITS OF NIIT LT D. NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT WERE VESTED WITH THE ASSESSEE. IT WAS CLAIMED THAT THE ASSESSEE HAD INCU RRED EXPENDITURE AGGREGATING TO 2,20,03,694/- ON LEGAL AND PROFESSIONAL EXPENSE IN ASSESSMENT YEAR 2004-05 FOR PURSUING THE AFORESAID SCHEME OF DEMERGER OF NIIT LTD. AND CLAIMED DEDUCTION OF 1/5 TH OF THE AFORESAID EXPENDITURE, AMOUNTING TO 44,00,739/- FOR FIRST-TIME IN ASSESSMENT YEAR 2004- 05 AND SUBSEQUENTLY 1/5 TH EACH IN ASSESSMENT YEARS 2005-06; 2006-07; 2007-08 AND 2008-09. ACCORDING TO THE ASSESSING OFF ICER, IN VIEW OF THE PROVISIONS OF SECTION 35DD OF ACT, THE DEDUC TION OF RS.44,00,739/- FOR DEMERGER EXPENSES IS TO BE ALLOW ED IN THE HANDS OF THE ORIGINAL COMPANY AND NOT IN THE COMPAN Y RESULTED OUT OF DEMERGER. ACCORDINGLY, HE DISALLOWED THE CLA IM OF ASSESSE OF DEDUCTION OF RS.44,00,739/- UNDER SECTION 35DD O F THE ACT. THE LD. CIT(A) ALSO SUSTAINED THE DISALLOWANCE. ACC ORDING TO THE LD. CIT(A), THE LANGUAGE OF THE PROVISIONS OF SECTI ON 35DD ARE CLEAR THAT DEMERGER EXPENSES ARE ALLOWABLE ONLY IN THE HANDS OF THE PARENT COMPANY NIIT LTD. THE LD. CIT(A) RELIE D ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF OR ISSA STATE WAREHOUSING CORPORATION VS CIT (SC) 237 ITR 589 AND DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CI T VS GAUTAM SARABHAI TRUST (GUJ.) 173 ITR 216 TO SUPPORT THAT T HE WORDS OF A STATUTE ARE FIRST UNDERSTOOD IN THEIR NATURAL, ORDI NARY OR POPULAR SENSE AND PHRASES AND SENTENCES CONSTRUED ACCORDING TO THEIR 7 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 GRAMMATICAL MEANING UNLESS THAT LEADS TO SOME ABSUR DITY. HE HELD THAT IN VIEW OF THE CLEAR PROVISIONS OF SECTIO N 35DD OF THE ACT, THE EXPENSES CLAIMED BY THE ASSESSEE ARE NOT A LLOWABLE AS THE UNDERTAKING ARE NOT DEMERGED FROM THE ASSESSEE COMPANY BUT ONLY VESTED WITH IT. 4.2 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE FILE D A PAPER BOOK IN TWO VOLUMES, CONTAINING PAGES 854 AND SUBMIT TED THAT THE LOWER AUTHORITIES HAVE NOT APPRECIATED FACTS AN D LAW PROPERLY. THE LEARNED COUNSEL REFERRED TO THE SCHEME OF DEMER GER APPROVED BY THE HONBLE DELHI HIGH COURT AVAILABLE ON PAGES 14 TO 16 OF THE PAPER-BOOK AND SUBMITTED THAT SECTION 35DD OF THE A CT PROVIDES FOR ALLOWABILITY OF THE EXPENDITURE INCURRED IN REL ATION TO DEMERGER. ACCORDING TO HIM, THERE IS NOTHING IN TH E LAW WHICH DEBARS THE RESULTANT COMPANY FROM CLAIMING SUCH EXP ENDITURE. THE LEARNED COUNSEL REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS BOMBAY DYEING A ND MANUFACTURING COMPANY LTD., REPORTED IN 219 ITR 521 , WHICH WAS RENDERED PRIOR TO THE INSERTION OF SECTION 35DD OF THE ACT. THE LD. COUNSEL ALSO SUBMITTED THAT THE CBDT CIRCUL AR NO. 779 DATED 14/09/1999 HAS EXPLAINED THE SCOPE AND LEGISL ATIVE INTENT BEHIND INSERTION OF THE AFORESAID PROVISION. ACCORD ING TO HIM, IN THE SAID CIRCULAR ALSO NOWHERE THE RESULTANT COMPAN Y HAS BEEN DEBARRED FROM CLAIMING SUCH EXPENDITURE UNDER SECTI ON 35DD OF THE ACT. THE LEARNED COUNSEL SUBMITTED THAT THE ASS ESSING OFFICER/CIT(A) HAS FAILED TO APPRECIATE THAT THE WO RD ASSESSEE REFERS TO EITHER OR BOTH THE COMPANIES I.E. THE DEM ERGED COMPANY/RESULTANT COMPANY, BEING INDIAN COMPANIES W HO INCUR ANY EXPENDITURE IN RELATION TO SUCH MERGER/DEMERGER . ACCORDING 8 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 TO HIM, THE EXPRESSION ASSESSEES HAS NOT BEEN USE D BY THE LEGISLATURE DUE TO THE FACT THAT IN THE EVENT OF TH E MERGER, THE AMALGAMATING COMPANY GETS AUTOMATICALLY DISSOLVED A ND LOSES ITS INDEPENDENT IDENTITY AND BOTH THE AMALGAMATED AND, AMALGAMATING COMPANIES NEVER EXIST TOGETHER POST TH E MERGER, SO AS TO CLAIM 1/5 TH OF THE DEDUCTION OF THE DEMERGER/MERGER EXPENSES. THE USES OF THE WORD ASSESSEEES WOULD H AVE RESULTED IN AMBIGUITY IN LAW AND THEREFORE TO AVOID SUCH CON FUSION, THE EXPRESSION ASSESSEE HAS BEEN USED IN THE SAID SE CTION. 4.3 THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE DED UCTION SHOULD HAVE ALSO BEEN ALLOWED IN THE YEAR FOLLOWING THE RULE OF CONSISTENCY BECAUSE THE DEPARTMENT HAS ALLOWED THE DEDUCTION SINCE ASSESSMENT YEAR 2004-05 ONWARDS AND IN THE YE AR UNDER CONSIDERATION, FOR THE FIRST TIME, THE DEDUCTION HA S BEEN DISALLOWED BY THE ASSESSING OFFICER/CIT(A). THE LEA RNED COUNSEL REFERRED TO PAGES 2, 7 AND 11 OF THE PAPER-BOOK TO SUBSTANTIATE THAT SAID DEDUCTION UNDER SECTION 35DD OF THE ACT W AS ALLOWED TO THE ASSESSEE IN ASSESSMENT AT 2004-05; 2005-06 AND 2006-07. TO SUPPORT THE RULE OF CONSISTENCY, THE LEARNED COUNSE L RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS RAJASTHAN BEREWERIES LTD. (ITA 889/2009) . 4.4 THE LEARNED DEPARTMENT REPRESENTATIVE, RELIED ON TH E FINDING OF THE LOWER AUTHORITIES AND SUBMITTED THAT IN VIEW OF THE EXPRESS PROVISION OF THE ACT, ONLY THE DEMERGED/PAR ENT ENTITY WAS ENTITLED FOR THE DEDUCTION AND NOT THE RESULTANT CO MPANY. 4.5 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. AS A RESUL T OF DEMERGER OF UNITS OF PARENT COMPANY M/S NIIT LTD , FEW UNITS WERE MERGED 9 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 WITH THE ASSESSEE COMPANY. IT IS THE CLAIM OF THE A SSESSEE THAT LEGAL AND PROFESSIONAL EXPENSES TOWARDS THE DEMERGE R OF THE UNITS OF PARENT COMPANY M/S NIIT LTD HAS BEEN INCURRED BY THE ASSESSEE IN ASSESSMENT YEAR 2004-05 AND 1/5 TH OF SAID EXPENSES HAS BEEN CLAIMED DEDUCTION UNDER SECTION 35DD OF TH E ACT SINCE ASSESSMENT YEAR 2004-05 FOR CONSECUTIVE FIVE ASSESS MENT YEARS. ACCORDING TO THE REVENUE, THE SAID DEDUCTION UNDER SECTION 35DD OF THE ACT IS ALLOWABLE ONLY TO THE PARENT DEMERGED COMPANY AND NOT TO THE RESULTANT COMPANY I.E. THE ASSESSEE COMP ANY. FOR READY REFERENCE, THE SAID PROVISIONS OF SECTION 35D D OF THE ACT ARE REPRODUCED AS UNDER: AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER. 35DD. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY, IN CURS ANY EXPENDITURE, ON OR AFTER THE 1ST DAY OF APRIL, 1999 , WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF AMALGAMATION OR DEM ERGER OF AN UNDERTAKING, THE ASSESSEE SHALL BE ALLOWED A DEDUCT ION OF AN AMOUNT EQUAL TO ONE-FIFTH OF SUCH EXPENDITURE FOR E ACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIO US YEAR IN WHICH THE AMALGAMATION OR DEMERGER TAKES PLACE. (2) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB-SECTION (1) UNDER ANY OTHER PROVIS ION OF THIS ACT. 4.6 IN THE ABOVE SECTION THE DEDUCTION HAS BEEN ALLOWE D TO THE ASSESSEE FOR EXPENDITURE INCURRED WHOLLY AND EXCL USIVELY FOR DEMERGER OF AN UNDERTAKING. SINCE DEMERGER OF THE U NDERTAKING(S) IN THE INSTANT CASE HAS TAKEN PLACE FROM THE PARENT COMPANY M/S NIIT LTD, THE WORD ASSESSEE HERE REFERS TO M/S N IIT LTD. AND NOT THE TARGET COMPANY M/S NIIT TECHNOLOGIES LTD. I.E. THE ASSESSEE, WITH WHOM THE UNDERTAKINGS OF M/S NIIT LTD. GOT MER GED. IN OUR OPINION THE LANGUAGE OF THE SECTION IS CLEAR AND TH ERE IS NO 10 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 AMBIGUITY, AS WHO IS ENTITLED TO CLAIM THE SAID DED UCTION. IN CASE OF DEMERGER, WHERE THE UNDERTAKING(S) WHICH GET DEM ERGED, MAY RESULT IN NEW ENTITY AND IN SAID CIRCUMSTANCES, THE RESULTANT COMPANY CANNOT INCUR EXPENDITURE BEFORE ITS BIRTH. IT IS THE PARENT ENTITY, WHO INITIATES DEMERGER OF THE UNDERT AKING(S) AND INCUR EXPENDITURE FOR LEGAL AND PROFESSIONAL EXPENS ES IN RELATION TO SUCH DEMERGER. THE RESULTANT COMPANY, COME INTO EXISTENCE AS A RESULT OF DEMERGER ONLY, THE WORD ASSESSEE IN S ECTION 35DD OF THE ACT CANNOT MEAN TO INCLUDE THE RESULTANT COMPAN Y. THE DECISION RELIED UPON BY THE ASSESSEE IN THE CASE OF CIT VS BOMBAY DYEING AND MANUFACTURING COMPANY LIMITED (SU PRA) RELATES TO PERIOD PRIOR TO INSERTION OF SECTION 35D D OF THE ACT, WHEREIN THE EXPENSES RELATED TO AMALGAMATION WERE A LLOWED TO THE ASSESSEE AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE.. IN THE SAID CASE THE ISSUE WAS OF WHETHER THE LEGAL AND PROFESSIONAL EXPENSES INCURRE D IN RELATION TO THE AMALGAMATION WERE REVENUE OR CAPITAL IN NATU RE. THE RATIO OF THE SAID DECISION CANNOT BE APPLICABLE OVER THE FACTS OF THE INSTANT CASE IN VIEW OF THE SPECIFIC PROVISION OF S ECTION 35DD OF THE ACT INTRODUCED. 4.7 AS FAR PLEA OF RULE OF CONSISTENCY IS CONCERNED, W E MAY LIKE TO REFER TO THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF DISTRIBUTORS (BARODA) P. LTD. VS. UNION OF INDIA & ORS. REPORTED IN 155 ITR 120, WHERE IT IS OBSERVED IF ANY WRONG HAS BEEN COMMITTED, SAME SHOULD NOT BE PERPETUATED. THE RELEVANT OBSERVATIONS OF THE HONBLE SUPREME COURT ARE REPRO DUCED AS UNDER: 11 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 28. BUT, EVEN IF, IN OUR VIEW, THE DECISION IN CLO TH TRADERS' CASE (SUPRA) IS ERRONEOUS, THE QUESTION STILL REMAINS WH ETHER WE SHOULD OVERTURN IT. ORDINARILY, WE WOULD BE RELUCTANT TO O VERTURN A DECISION GIVEN BY A BENCH OF THIS COURT, BECAUSE IT IS ESSEN TIAL THAT THERE SHOULD BE CONTINUITY AND CONSISTENCY IN JUDICIAL DE CISIONS AND LAW SHOULD BE CERTAIN AND DEFINITE. IT IS ALMOST AS IMP ORTANT THAT THE LAW SHOULD BE SETTLED PERMANENTLY AS THAT IT SHOULD BE SETTLED CORRECTLY. BUT THERE MAY BE CIRCUMSTANCES WHERE PUBLIC INTERES T DEMANDS THAT THE PREVIOUS DECISION BE REVIEWED AND RECONSIDERED. THE DOCTRINE OF STARE DECISIS SHOULD NOT DETER THE COURT FROM OVERR ULING AN EARLIER DECISION, IF IT IS SATISFIED THAT SUCH DECISION IS MANIFESTLY WRONG OR PROCEEDS UPON A MISTAKEN ASSUMPTION IN REGARD TO TH E EXISTENCE OR CONTINUANCE OF A STATUTORY PROVISION OR IS CONTRARY TO ANOTHER DECISION OF THE COURT. IT WAS JACKSON, J., WHO SAID IN HIS DISSENTING OPINION IN MASSACHUSETTS VS. UNITED STATES (333 US 611) : 'I SEE NO REASON WHY I SHOULD BE CONSCIOUSLY WRONG TODAY BECA USE I WAS UNCONSCIOUSLY WRONG YESTERDAY'. LORD DENNING ALSO S AID TO THE SAME EFFECT WHEN HE OBSERVED IN OSTIME VS. AUSTRALI AN MUTUAL PROVIDENT SOCIETY (1960) AC 459, 480 : 'THE DOCTRINE OF PRECEDENT DOES NOT COMPEL YOUR LOR DSHIPS TO FOLLOW THE WRONG PATH UNTIL YOU FALL OVER THE EDGE OF THE CLIFF.' HERE WE FIND THAT THERE ARE OVERRIDING CONSIDERATIONS WHICH COMP EL US TO RECONSIDER AND REVIEW THE DECISION IN CLOTH TRADERS ' CASE (SUPRA). IN THE FIRST PLACE, THE DECISION IN CLOTH TRADERS' CAS E (SUPRA) WAS RENDERED BY THIS COURT ON 4TH MAY, 1979, AND IMMEDI ATELY THEREAFTER, WITHIN A FEW MONTHS, PARLIAMENT INTRODU CED S. 80AA WITH RETROSPECTIVE EFFECT FROM 1ST APRIL, 1968, WITH A V IEW TO OVERRIDING THE INTERPRETATION PLACED ON S. 80M IN CLOTH TRADER S' CASE (SUPRA). THE DECISION IN CLOTH TRADERS' CASE (SUPRA) DID NOT , THEREFORE, HOLD THE FIELD FOR A PERIOD OF MORE THAN A FEW MONTHS AN D IT COULD NOT BE SAID THAT ANY ASSESSEE WAS MISLED INTO ACTING TO IT S DETRIMENT ON THE BASIS OF THAT DECISION. THERE WAS NO DECISION OF TH IS COURT IN REGARD TO THE INTERPRETATION OF SUB- S. (1) OF S. 80M PRIO R TO THE DECISION IN CLOTH TRADERS' CASE (SUPRA) AND THERE WAS THEREFORE NO AUTHORITATIVE PRONOUNCEMENT OF THIS COURT ON THIS QUESTION OF INT ERPRETATION ON WHICH AN ASSESSEE COULD CLAIM TO RELY FOR MAKING IT S FISCAL ARRANGEMENTS. THE ONLY DECISION IN REGARD TO THE IN TERPRETATION OF SUB-S. (1) OF S. 80M GIVEN BY ANY HIGH COURT PRIOR TO THE DECISION IN CLOTH TRADERS' CASE (SUPRA), WAS THAT OF THE GUJARA T HIGH COURT IN ADDL. CIT VS. CLOTH TRADERS P. LTD. (SUPRA) AND THA T DECISION TOOK PRECISELY THE SAME VIEW WHICH WE ARE INCLINED TO AC CEPT IN THE PRESENT CASE. IT IS, THEREFORE, DIFFICULT TO SEE HO W ANY ASSESSEE CAN LEGITIMATELY COMPLAIN THAT ANY HARDSHIP OR INCONVEN IENCE WOULD BE CAUSED TO IT IF THE DECISION IN CLOTH TRADERS' CASE WAS OVERTURNED BY US. IF DESPITE THE DECISION OF THE GUJARAT HIGH COU RT IN ADDL. CIT VS. CLOTH TRADERS P. LTD. (SUPRA), THE ASSESSEE PROCEED ED ON THE ASSUMPTION, NOW FOUND TO BE ERRONEOUS, THAT THE GUJ ARAT HIGH COURT 12 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 DECISION WAS WRONG AND THE DEDUCTION PERMISSIBLE UN DER SUB- S. (1) OF S. 80M WAS LIABLE TO BE CALCULATED WITH REFERENC E TO THE FULL AMOUNT OF DIVIDEND RECEIVED BY THE ASSESSEE, THE AS SESSEE CAN HAVE ONLY ITSELF TO BLAME. KNOWING FULLY WELL THAT THE G UJARAT HIGH COURT HAD DECIDED THE QUESTION OF INTERPRETATION OF SUB-S . (1) OF S. 80M IN FAVOUR OF THE REVENUE AND THERE WAS NO DECISION OF THIS COURT TAKING A DIFFERENT VIEW, NO PRUDENT ASSESSEE COULD HAVE PR OCEEDED TO MAKE ITS FINANCIAL ARRANGEMENTS ON THE BASIS THAT THE DE CISION OF THE GUJARAT HIGH COURT WAS ERRONEOUS. MOREOVER, WE FIND , FOR REASONS WE HAVE ALREADY DISCUSSED, THAT THE DECISION IN CLO TH TRADERS' CASE IS MANIFESTLY WRONG BECAUSE IT HAS FAILED TO TAKE I NTO ACCOUNT A VERY VITAL FACTOR, NAMELY, THAT THE DEDUCTION REQUIRED T O BE MADE UNDER SUB-S. (1) OF S. 80M IS NOT FROM THE GROSS TOTAL IN COME BUT FROM 'SUCH INCOME BY WAY OF DIVIDENDS'. THERE IS AL SO ANOTHER CIRCUMSTANCE WHICH MAKES IT NECESSARY FOR US TO REC ONSIDER AND REVIEW THE DECISION IN CLOTH TRADERS' CASE AND THAT IS THE DECISION IN CAMBAY ELECTRIC SUPPLY CO.'S CASE (SUPRA). THE DECI SION IN CLOTH TRADERS' CASE IS INCONSISTENT WITH THAT IN CAMBAY E LECTRIC SUPPLY CO.'S CASE. BOTH CANNOT STAND TOGETHER. IF ONE IS C ORRECT, THE OTHER MUST LOGICALLY BE WRONG AND VICE VERSA. IT IS, THER EFORE, NECESSARY TO RESOLVE THE CONFLICT BETWEEN THESE TWO DECISIONS AN D HARMONISE THE LAW AND THAT NECESSITATES AN INQUIRY INTO THE CORRE CTNESS OF THE DECISION IN CLOTH TRADERS' CASE. IT IS FOR THIS REA SON THAT WE HAVE RECONSIDERED AND REVIEWED THE DECISION IN CLOTH TRA DERS' CASE AND ON SUCH RECONSIDERATION AND REVIEW, WE HAVE COME TO THE CONCLUSION THAT THE DECISION IN CLOTH TRADERS' CASE IS ERRONEO US MUST BE OVERTURNED . 4.8 IN VIEW OF THE ABOVE DECISION OF THE HONBLE SUPRE ME COURT, WE REJECT THE CONTENTION OF THE LEARNED COUNSEL OF THE ASSESSEE TO ALLOW THE DEDUCTION UNDER SECTION 35DD OF THE ACT, FOLLOWING RULE OF THE CONSISTENCY. 4.9 IN VIEW OF THE ABOVE DISCUSSION, WE UPHOLD THE FIN DING OF THE LD. CIT(A) ON THE ISSUE IN DISPUTE. ACCORDINGLY, TH E GROUNDS NO. 1 TO 1.2 OF THE APPEAL OF THE ASSESSEE ARE DISMISSED. 5. THE GROUND NOS. 2 TO 2.4 OF THE ASSESSEE RELATES TO DISALLOWANCE OF RS. 82,05,031/- UNDER SECTION 14A O F THE ACT, WHICH INCLUDE DISALLOWANCE OF RS.37,33,490/- TOWARD S INDIRECT 13 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 INTEREST EXPENDITURE AND 44,71,541/- TOWARDS ADMINISTRATIVE EXPENSES. 5.1 THE FACTS QUA THE ISSUE IN DISPUTE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE SHOWN INVESTMENT IN MUTUAL FUNDS AT 144,42,73,807/- AND RECEIVED DIVIDEND INCOME AMOUNTING TO 1,66,74,318/- IN RESPECT OF THE UNITS HELD IN VARIOUS MUTUAL FUNDS, WHICH WAS CLAIMED AS EXEMPT U NDER SECTION 10(33)/10(34) OF THE ACT. IN THE RETURN OF INCOME FILED, THE ASSESSEE DID NOT MAKE SUO MOTU DISALLOWANCE UNDER S ECTION 14A OF ACT FOR EXPENSES INCURRED TOWARDS EARNING EXEMPT INCOME. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED FOR EARNING EXEMPT I NCOME. ACCORDING TO HIM, INCOME WHETHER EXEMPT OR NOT CANN OT BE EARNED WITHOUT MAKING SOME EXPENDITURE AND OFTEN SU CH EXPENDITURE FOR EARNING EXEMPTED INCOME ARE NOT SEG REGATED IN THE ACCOUNTS OF THE ASSESSEE AND REMAIN CLUBBED WIT H ADMINISTRATIVE/FINANCIAL AND OTHER EXPENSES OF THE BUSINESS AS A WHOLE, AND THUS IT BECOMES DUTY OF THE ASSESSING OF FICER TO REASONABLY ALLOCATE EXPENSES RELATABLE TO SUCH INC OME AND DISALLOW THE SAME. THE ASSESSING OFFICER PLACED REL IANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF ITO VS DAGA CAPITAL MANAGEMENT PRIVATE LIMITED, REPROVED I N (2009) 117 ITD 169 AND COMPUTED THE DISALLOWANCE AGGREGATING T O 1,79,17,211/-UNDER SECTION 14A OF THE ACT AS PER ME THOD PRESCRIBED UNDER RULE 8D OF INCOME TAX RULES, 1962 (IN SHORT THE RULES) IN FOLLOWING MANNER: 14 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 SL. NO. PARTICULARS AMOUNT (IN RS.) A DIRECT EXPENDITURE IN RELATION TO EXEMPT INCOKE [(REFER RULE 8D(2)(II)] NIL B INTEREST EXPENDITURE NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME [(REFER RULE 8D(2)(II)] 1,02,88,677 C % OF AVERAGE INVESTMENTS [(REFER RULE 8D(2)(III)] 76,28,534 TOTAL 1,79,17,211 5.2 ON FURTHER APPEAL, THE LD. CIT(A) OBSERVED THAT IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ AND BOYCE MANUFACTURING COMPANY LIMITED VS. DCIT, 234 CTR 1 AND DECISION OF THE HONBLE DELHI HIGH CO URT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT 15 TAXMAN.CO M 390 , THE RULE 8D WAS NOT OPERATING RETROSPECTIVELY BUT IT IS APPLICABLE PROSPECTIVELY WITH EFFECT FROM 24/03/2008. BEFORE T HE LD. CIT(A), THE ASSESSEE FILED LETTER DATED 25/11/2010 THAT DIS ALLOWANCE UNDER SECTION 14A OF THE ACT SHOULD NOT EXCEED 5,62,842/-BEING 20% PROPORTIONATE COST OF RUNNING THE TREASURY OPER ATIONS OF THE ASSESSEE, WHICH WAS ARRIVED AT ON THE PROPORTIONATE BASIS OF SALARIES AND COMMON EXPENSES ALLOCATED TOWARDS THE STAFF INVOLVED IN THE TREASURY DIVISION. THE LD. CIT(A) F OUND THAT WORKING PROVIDED BY THE ASSESSEE IN THE SAID LETTER WAS ADHOC WITHOUT ANY BASIS FOR ADOPTING 20% OF THE EXPENSES FOR DISALLOWANCE AND ACCORDINGLY, HE REJECTED THE WORKI NG PROVIDED BY THE ASSESSEE. THE LD. CIT(A) ALSO REJECTED THE COMP UTATION OF THE ASSESSING OFFICER ON THE GROUND THAT THE ASSESSING OFFICER CONSIDERED THE AVERAGE OF THE ENTIRE INVESTMENT INC LUDING THE 15 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 INVESTMENT MADE IN FOREIGN SUBSIDIARY COMPANIES. TH E LD. CIT(A) COMPUTED THE DISALLOWANCE RELATED TO INTEREST EXPEN DITURE AT RS.37,33,490/- AFTER EXCLUDING THE INTEREST INCURRE D ON VEHICLE LOANS ETC. OBSERVING AS UNDER: 8.6.5 THE EXEMPT DIVIDEND INCOME ARE EARNED FROM M UTUAL FUND INVESTMENTS WHICH HAD GONE UP FROM RS. 20.30 CRORES TO RS. 83.59 CRORES DURING THE YEAR. THE SECURED LOANS ARE FOR V EHICLE LOAN AND NON-CONVERTIBLE DEBENTURES ONLY. UNSECURED LOANS BO RROWED WERE REPAID DURING THE YEAR. THE INTEREST EXPENDITURES A RE INCURRED ON VEHICLE LOAN (INTEREST RS. 13,05,415/-), BORROWING REPAID DURING THE YEAR (INTEREST RS. 6,82,740/-) AND NON-CONVERTIBLE DEBENTURES (INTEREST RS. 1,77,19,178/-). VEHICLE LOAN BEING FO R SPECIFIC PURPOSE FOR VEHICLES, THEREFORE, ITS INTEREST IS NOT ATTRIB UTABLE TO THE INVESTMENTS FROM WHICH THE EXEMPT DIVIDEND INCOME I S EARNED. AS SUCH, THE AO IS NOT JUSTIFIED IN CONSIDERING THE EN TIRE INTEREST EXPENDITURE WHICH INCLUDES THE VEHICLE LOAN INTERES T ALSO FOR THE PURPOSE OF DISALLOWANCE U/S 14A. 8.6.6 THE NON-CONVERTIBLE DEBENTURES OF RS. 50 CROR ES WERE ISSUED IN THE AY 2004-05, THE YEAR IN WHICH THE SHARES IN NII T GIS LTD. (RS. 89 LAKH), NIIT SMARTSERVE LTD. (RS. 9.99 CRORES) AND M UTUAL FUNDS (RS. 9.60 CRORES) (TOTAL RS. 20.87 CRORES) WERE ALSO ACQ UIRED. THEREFORE, IT IS CLEAR THAT DEBENTURES HAVE CONTRIBUTED TO THE CO MMON POOL OF FUND WHICH WERE UTILIZED TO ACQUIRE THE SHARES IN NIIT G 1S LTD., NUT SMARTSERVE LTD. & THE MUTUAL FUNDS. THE DEBENTURES ARE ALSO NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR R ECEIPT. AS SUCH INTEREST EXPENDITURE INCURRED DURING THE PREVIOUS Y EAR ON ACCOUNT OF DEBENTURES ARE INDIRECTLY ATTRIBUTABLE TO THE INVES TMENT FROM WHICH TAX FREE INCOME IS EARNED OR WILL BE EARNED IN FUTU RE. FURTHER, IN THE ABSENCE OF ANY SEPARATE ACCOUNTS, THE SUBMISSION OF THE APPELLANT THAT BORROWED FUNDS WERE NOT UTILIZED FOR INVESTMEN T IN MUTUAL FUNDS AND SHARES, IS WITHOUT ANY MERIT. SINCE THE I NVESTMENTS IN AY 2004- 05 WAS RS. 20.87 CRORES, THEREFORE, INTEREST ON DEBENTURES UPTO RS. 20.87 CRORES NEEDS TO BE CONSIDERED FOR DI SALLOWANCE AS INDIRECT INTEREST EXPENDITURE INCURRED DURING THE R ELEVANT PREVIOUS YEAR IN RELATION TO THE EXEMPT INCOME. THE AVERAGE VALUE OF DEBENTURES REMAINING IN AY 2007- OS I.E. AVERAGE OF OPENING BALANCE AND CLOSING BALANCE (40 CRORES + 25 CRORES) /2 IS RS. 32.5 CRORES AND THE INTEREST PAID ON DEBENTURES DURING T HE AY 2007-08 IS RS. 1.77 CRORES. THEREFORE, IN THE ABSENCE OF ANY S EPARATE ACCOUNT OF INTEREST EXPENDITURE AND CONSIDERING THE ORIGINAL I NVESTMENT OF RS. 20.87 CRORES OF AY 2004-05 IN WHICH THE DEBENTURES WERE ALSO 16 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 ISSUED, 65% INTEREST EXPENDITURE OF RS. 1.77 CRORES (65% OF 1.77 CRORES = 1,15,17,465/-) INCURRED ON DEBENTURE DURIN G THE AY 2007- 08 NEEDS TO BE CONSIDERED FOR DISALLOWANCE, AS ORIG INAL INVESTMENT IS 65% OF THE DEBENTURES REMAINING. 8.6.7 UNSECURED LOAN BORROWINGS REPAID DURING THE Y EAR HAVE CONTRIBUTED TO THE COMMON MIXED POOL OF FUND WHICH WERE UTILIZED FOR INVESTMENT DURING THE YEAR IN NUT SMARTSERVE LTD. ( RS. 25 CRORES) AND MUTUAL FUNDS (RS. 63.25 CRORES). THEREFORE, THE INTEREST EXPENDITURES (RS. 6.82 LAKHS) ON SUCH BORROWING NEE DS TO BE CONSIDERED FOR DISALLOWANCE AS INDIRECT INTEREST EX PENDITURE INCURRED DURING THE RELEVANT PREVIOUS YEAR IN RELATION TO TH E EXEMPT INCOME. KEEPING IN VIEW OF THE ABOVE, INDIRECT INTEREST EXP ENDITURE ON ACCOUNT OF DEBENTURE INCURRED DURING THE PREVIOUS Y EAR IN RELATION TO THE EXEMPT INCOME IS WORKED OUT ON PROPORTIONATE AN D REASONABLE BASIS AS UNDER: A: PROPORTIONATE INTEREST EXPENDITURE ON ACCOUNT OF DEBENTURE (65% OF RS. 1 77 CRORES) + 6,82,740/- = RS. 1,15,17 ,465/- + 6,82,740/- = 122,00,205/- B: AVERAGE VALUE OF INVESTMENT (EXCLUDING INVESTMEN T FOREIGN COMPANIES) INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME = (133,55,97,392 + C: AVERAGE TOTAL ASSETS = RS. 292,23,98,024/- THEREFORE, THE INDIRECT INTEREST EXPENDITURE INCUR RED DURING THE PREVIOUS YEAR IN RELATION TO INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME IS = A X B/C = 122,00,205 X 89,43,08,292 / 292,23,98,024 - RS. 37,33,490/- 5.3 WITH REGARDS TO ADMINISTRATIVE EXPENSES AND MANAGE MENT EXPENSES, THE LEARNED CIT(A) SUSTAINED THE DISALLOW ANCE OF 44,71,541 AT THE RATE OF 0.5% OF THE AVERAGE VALUE OF THE INVESTMENT EXCLUDING INVESTMENT IN FOREIGN SUBSIDIA RY COMPANIES OBSERVING AS UNDER: 8.6.8 WITH REGARD TO ADMINISTRATIVE AND MANAGEMENT EXPENSES DURING THE RELEVANT PREVIOUS YEAR MUTUAL FUNDS INVE STMENTS HAVE INCREASED FROM RS. 20.30 CRORES AS ON 31/03/2006 TO RS. 83.54 CRORES AS ON 31/03/2007 INVESTMENT IN FULLY PAID EQ UITY SHARES IN NUT SMARTSERVE LTD. HAVE INCREASED FROM RS. 25 CROR ES TO RS. 50 CRORES FROM WHICH TAX FREE DIVIDEND INCOME WILL ARI SE. THEREFORE, IT IS 17 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 CLEAR THAT THERE WAS SUBSTANTIAL INVESTMENT ACTIVIT Y DURING THE YEAR. IT CANNOT BE INVESTMENTS DECISIONS WHETHER TO BUY, SALE OR RETAIN THE INVESTMENTS, INVOLVING MULTI- CRORE INVESTMENTS AND DIVIDEND INCOME, ARE MADE BY STAFF MEMBERS WITHOUT ANY VETTING BY TH E BOARD AND WITHOUT ANY INVOLVEMENT OF THE TOP LEVEL MANAGEMENT . CONSIDERING THE INVESTMENT IN MUTUAL FUNDS AND FULLY PAID EQUIT Y SHARES OF N1IT GIS LTD, NI1T SMARTSERVE LTD, AND OTHER COMPANIES I T IS EVIDENT THAT TOP LEVEL MANAGEMENT AND THE BOARD IS INVOLVED IN T HESE IMPORTANT MERGER AND ACQUISITION DECISIONS. IT IS EVIDENT THA T TOP LEVEL MANAGEMENT AND THE BOARD ARE INVOLVED IN THE ADMINI STRATION AND MANAGEMENT OF THESE EQUITY HOLDING IN NIIT GIS LTD. , NIIT SMART SERVE LTD. AND NEW COMPANIES FROM WHICH TAX FREE DI VIDEND INCOME HAS ARISEN AND WILL ALSO ARISE IN FUTURE. AS SUCH I T IS ALSO EVIDENT THAT OFFICIAL MACHINERY IS UTILIZED BY THE TOP LEVE L MANAGEMENT AND BOARD. THERE CANNOT BE ANY DISPUTE THAT DIVIDENDS W ILL ARISE IN FUTURE OUT OF INVESTMENTS IN EQUITY SHARES IN NIIT GIS LTD, NIIT SMARTSERVE LTD. AND OTHER COMPANIES. THEREFORE, ADM INISTRATION AND MANAGEMENT EXPENSES ON ACCOUNT OF USE OF OFFICIAL M ACHINERY CALLS FOR DISALLOWANCE U/S 14A. 8.6.9 HONBLE SPECIAL BENCH OF ITAT IN CHEMINVEST L TD. V. ITO [2009] 121 ITD 318 (DELHI)(SB) HELD THAT WHERE ANY EXPENDI TURE HAS BEEN INCURRED BY AN ASSESSEE IN RELATION TO AN INCOME, T HAT DOES NOT FORM PART OF TOTAL INCOME DISALLOWANCE U/S 14A COULD BE MADE EVEN IF NO INCOME HAS RESULTED OR MADE OR EARNED BY THE ASSESS EE IN THE YEAR UNDER CONSIDERATION. 8.6.10 THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE APPELLANT BY WITHOUT ANY DETAIL, IS FOUND TO BE NOT SATISFACTORY. IN VIEW OF THE ABOVE, EVEN THOUGH RULE 8D IS NOT APPLI CABLE IN RESPECT OF AY 2007-08, HOWEVER FOR THE PURPOSE OF DISALLOWA NCE OF ADMINISTRATION AND MANAGEMENT EXPENSES U/S 14A, 0.5 % OF AVERAGE VALUE OF INVESTMENTS, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS PROVIDED IN RULE 8D APP EARS TO BE A VERY REASONABLE BASIS. IN VIEW OF THE ABOVE 0.5% OF RS. 89.43,08,292/- [133,55,97,392 + 45,30,19,192/2 EXCLUDING THE INVES TMENTS IN FOREIGN SUBSIDIARY COMPANIES] = 44,71,541/-, CALLS FOR DISALLOWANCE U/S 14A ON ACCOUNT OF ADMINISTRATIVE AND MANAGEMENT EXPENSES. THEREFORE, THE TOTAL DISALLOWANCE U/S 14A ON ACCOUN T OF FINANCIAL, ADMINISTRATIVE AND MANAGEMENT EXPENSES WORKS OUT TO RS. 82,05,031/- (44,71,541 + 37,33,490). CONSIDERING TH E ABOVE THE DISALLOWANCE MADE BY THE AO U/S 14A IS REDUCED FROM RS. 1,79,17,211 /- TO RS. 82,05,031/-. 5.4 BEFORE US, THE COUNSEL OF THE ASSESSEE REFERRED TO VARIOUS DECISION OF THE HONBLE COURTS AND SUBMITTED THAT F OR MAKING 18 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 DISALLOWANCE UNDER SECTION 14A OF THE ACT TILL ASSE SSMENT YEAR 2007-08, THE ASSESSING OFFICER MUST SATISFY FOLLOWI NG: (A) THERE MUST BE SOME ACTUAL EXPENDITURE INCURRED (B) SUCH EXPENDITURE MUST BE INCURRED IN RELATION TO EA RNING EXEMPT INCOME, WHICH MEANS THAT THERE MUST BE SOME NEXUS BETWEEN THE ACTUAL EXPENDITURE AND ACTUAL EXE MPT INCOME AND (C) THE ASSESSING OFFICER MUST ON THE FACTS, RECORD SATISFACTION THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE SUMO DISALLOWANCE IF ANY UNDER SECTION 14A OF THE ACT IS NOT CORRECT. 5.5 THE LEARNED COUNSEL SUBMITTED THAT NO DISALLOWANCE UNDER SECTION 14A IS WARRANTED IN THE PRESENT CASE AS THE ASSESSING OFFICER HAS NOT RECORDED PROPER SATISFACTION AS MAN DATED UNDER SECTION 14A OF THE ACT. 5.6 REGARDING THE DISALLOWANCE OUT OF INTEREST EXPENDI TURE, THE LEARNED COUNSEL SUBMITTED THAT NO PORTION OF THE BO RROWED FUNDS WAS UTILIZED IN MAKING INVESTMENT IN SHARES/MUTUAL FUNDS THAT RESULTED IN THE EARNING OF EXEMPT DIVIDEND INCOME A ND INVESTMENTS HAD BEEN MADE OUT OF OWN FUNDS. THE LD. COUNSEL REFERRED TO THE PAGES OF THE BALANCE SHEET AS ON 31 /03/2006 AND 31/03/2007 TO DEMONSTRATE THAT INVESTMENT WAS MADE OUT OF OWN FUNDS. THE LD. COUNSEL RELIED ON THE DECISION O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UT ILITIES AND POWER LTD. 313 ITR 340 (BOM) AND DECISION OF HONBL E GUJARAT HIGH COURT IN THE CASE OF CIT VS UTI BANK LTD REPOR TED IN 32 TAXMANN.COM 370 TO SUPPORT THE CONTENTION THAT WHER E THE 19 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 APPELLANT HAD SUFFICIENT FUNDS/DEPOSITS FOR ADVANCI NG INTEREST FREE LOANS OR MAKING INVESTMENT IN SHARES ETC. AND THERE IS NOTHING ON RECORD TO SHOW THAT BORROWED FUNDS HAVE BEEN DIRECTLY UTILIZED FOR SUCH PURPOSES, A PRESUMPTION IN FAVOUR OF THE ASSESSEE CAN BE DRAWN WITH RESPECT TO UTILIZATION O F THE INTEREST FREE FUNDS TOWARDS INVESTMENT IN SHARES AND NO DIS ALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE ACT. 5.7 THE LEARNED COUNSEL FURTHER WITHOUT PREJUDICE TO T HE ARGUMENTS ABOVE SUBMITTED THAT IF DISALLOWANCE FOR INTEREST IS MADE, FIRST THE INTEREST EXPENDITURE SHOULD BE NETT ED AGAINST THE INTEREST INCOME AND ANY NET EXPENDITURE SHOULD ONL Y BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A OF TH E ACT. 5.8 REGARDING DISALLOWANCE OUT OF ADMINISTRATIVE EXPEN SES, THE LEARNED COUNSEL PROVIDED DETAIL OF THE EXPENSES CLA IMED IN THE PROFIT AND LOSS ACCOUNT AND CLAIMED THAT NO EXPENSE S HAVE BEEN INCURRED TOWARD EARNING OF THE EXEMPT INCOME. THE S UBMISSION OF THE ASSESSEE IN THIS REGARD IS REPRODUCED AS UNDER: (B) DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE KIND ATTENTION IS INVITED TO THE AUDITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 2007. ON PERUSAL OF THE SAME , IT WILL BE KINDLY NOTICED THAT THE APPELLANT HAD, DURING THE Y EAR UNDER CONSIDERATION, CLAIMED THE FOLLOWING EXPENDITURE (R EFER PAGE NO. 592 OF PB VOL-2): PARTICULARS AMOUNT (RS.) PERSONNEL 116.83 CRORES DEVELOPMENT AND BOUGHT OUT 10.34 CRORES ADMINISTRATION, FINANCE AND OTHERS 44.19 CRORES MARKETING 3.06 CRORES DEPRECIATION AND AMORTIZATION 21.78 CRORES 20 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 RE (A): PERSONNEL EXPENSES WITH REGARD TO PERSONNEL EXPENSES, IT IS RESPECTFUL LY SUBMITTED THAT NO SEPARATE MANPOWER HAS BEEN EMPLOYED/ ENGAGED TO LOOK AFTER THE INVESTMENT IN SHARES OF DOMESTIC SUBSIDIARIES/ MUTUAL FUNDS, INCOME WHEREFROM IS RECEIVED DIRECTLY IN THE BANKS. FURTHER, THE ASSESSING OFFICER HAS NOT BEEN, IT IS SUBMITTED, AB LE TO POINT OUT ANY SPECIFIC EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. RE (B): DEVELOPMENT AND BOUGHT EXPENSES AS REGARDS DEVELOPMENT AND BOUGHT OUT EXPENSES, KIN D ATTENTION IS INVITED TO NOTE- 15 OF THE AUDITED ANNUAL ACCOUNTS FOR THE RELEVANT ASSESSMENT YEAR 2007-08(REFER PAGE NO. 600 OF PB VO L-II). ON THE PERUSAL OF THE SAME, IT MAY KINDLY BE APPRECIATED T HAT THESE EXPENSES INCLUDES BOUGHT OUT ITEMS, PROFESSIONALS C HARGES, EQUIPMENT HIRING, CONSUMABLES AND OTHERS, WHICH HAS NO RELATION TO THE EARNING OF EXEMPT INCOME AND ARE PURELY IN THE NATURE OF DAY TO DAY EXPENSES. RE (C): ADMINISTRATION AND OTHER EXPENSES AS REGARDS OTHER EXPENSES, VIZ., ADMINISTRATIVE AND OPERATING EXPENSES, KIND ATTENTION IS INVITED TO NOTE-16 OF T HE AUDITED ANNUAL ACCOUNTS FOR THE RELEVANT ASSESSMENT YEAR (REFER PA GE 601 OF THE PB - VOL-II). ON PERUSAL OF THE SAME, MAY KINDLY BE AP PRECIATED THAT ALL EXPENSES ARE IN THE NATURE OF DAY-TO-DAY EXPENSES A ND THE SAME CANNOT BE HELD TO BE RELATABLE, DIRECTLY OR INDIREC TLY, TO THE EXEMPT INCOME EARNED BY THE APPELLANT. SUCH EXPENSES HAVE TO BE INCURRED, WHETHER OR NOT, THERE IS ANY EXEMPT INCOME AND HENC E SUCH INCOME IS NOT RELATED TO THE EARNING OF EXEMPT INCOME. KIND ATTENTION, IN THIS REGARD, IS INVITED TO THE D ECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SIL INVESTMENT LTD. V. ACIT: 148 TTJ 213 (DEL.), WHEREIN THE TRIBUNAL HAS HELD THAT NO DISALLOWANCE COULD BE MADE UNDER SECTION 14A OF THE ACT OUT OF A UDIT FEES, NORMAL TRAVELLING EXPENSES, ETC. THE PERTINENT OBSERVATION S OF THE TRIBUNAL ARE REPRODUCED AS UNDER: 33 THERE IS ABSOLUTELY NOTHING ON RECORD TO SHOW T HAT ANY PART OF THE EXPENDITURE WAS INCURRED TO EARN THE E XEMPT INCOME. AND NOT ONLY THIS, AS RIGHTLY CANVASSED, TH IS EXPENDITURE OF RS. 16,54,531/- EVEN INCLUDED EXPENDITURE TOWARDS REMUNERATION TO DIRECTOR AND AUDIT FEES. NO W THIS KIND OF EXPENDITURE, IRRESPECTIVE OF THE FACT WHETHER OR NOT INTOME NOT FORMING PART OF THE TOTAL INCOME IS EARNED, HAS TO BE INCURRED. THEREFORE ALS O, THESE EXPENSES CANNOT, IN ANY MANNER, BE SAID TO BE 21 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 RELATABLE TO EARNING OF EXEMPT INCOME BY THE ASSESSE E COMPANY (EMPHASIS SUPPLIED) REFERENCE IN THIS REGARD IS MADE TO THE DECISION OF AMRITSAR BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. JAMMU AND KASHM IR BANK LTD: 152 TTJ 522 WHEREIN IT WAS HELD AS UNDER: 16. THE ARGUMENTS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE AND SUBMISSIONS MADE BEFORE THE AUTHORITIE S BELOW BY HIM ARE CONVINCING TO THE BENCH THAT ADMINISTRAT IVE AND OTHER EXPENSES ARE FIXED IRRESPECTIVE OF THE FACT W HETHER OR NOT TAX-FREE INCOME IS EARNED AND THEREFORE, THESE EXPE NSES CANNOT BE SAID TO BE RELATABLE TO EXEMPT INCOME. EV ERY YEAR IS AN INDEPENDENT YEAR AND IN THE PRESENT CASE, AS HEL D BY US THERE IS NOTHING ON RECORD BROUGHT OUT BY THE AO TH AT THE ASSESSEE HAS ACTUALLY INCURRED ANY COST OR EXPENDIT URE IN RELATION TO THE EXEMPT INCOME, THEREFORE, NO DISALL OWANCE ON ACCOUNT OF INTEREST, MANAGEMENT OR ADMINISTRATIVE C OST CAN BE MADE BY THE AO. THEREFORE, THE LEARNED CIT(A) HAS R IGHTLY ALLOWED THE APPEAL OF THE ASSESSEE IN RELATION TO D ELETING THE ADDITION OF RS. 7.05 CRORES BEING THE PROPORTIONATE DISALLOWANCE ON ACCOUNT OF INTEREST EXPENSES. THERE FORE, THE LEARNED CIT(A) IS NOT JUSTIFIED IN RETAINING DISALL OWANCE EVEN OF RS.8.10 LACS OUT OF RS.2.26 CRORES DISALLOWED BY THE AO. THE AO IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESS EE ACCORDINGLY. THUS, ALL THE GROUNDS OF THE REVENUE A RE DISMISSED AND SOLITARY GROUND OF THE ASSESSEE IN CR OSS- OBJECTION IS ALLOWED RE (D): MARKETING WITH REGARD TO MARKETING EXPENSES, IT IS RESPECTFUL LY SUBMITTED THAT NO ADVERTISING AND PUBLICITY EXPENSES WERE INCURRED IN RELATION TO EXEMPT INCOME EARNED FROM INVESTMENT AS THE BUSINES S OF THE APPELLANT IS TO PROVIDE SOFTWARE SERVICES AND SOLUT IONS & SYSTEMS INTEGRATION AND SUCH AMOUNT HAD BEEN INCURRED AS TH E NORMAL DAY TO DAY BUSINESS OPERATIONS. THE SAME, THEREFORE, CA NNOT BE HELD TO BE RELATABLE, DIRECTLY OR INDIRECTLY, TO THE EXEMPT INCOME EARNED BY THE APPELLANT. RE (E): DEPRECIATION AND AMORTIZATION EXPENSES INSOFAR AS DEPRECIATION/AMORTIZATION IS CONCERNED, IT IS RESPECTFULLY SUBMITTED THAT THE SAME IS NON-CASH EXPENDITURE AND IS BASICALLY IN THE NATURE OF CHARGE ON THE FIXED ASSETS UTILIZED F OR BUSINESS PURPOSES, WHICH CANNOT BE SUBJECT MATTER OF DISALLO WANCE UNDER SECTION 14A OF THE ACT. 22 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 REFERENCE IN THIS REGARD MAY BE MADE TO THE DECISIO N OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF VISHNU ANANT M AHAJAN VS ACIT: 137 ITD 189 HELD THAT DEPRECIATION CANNOT BE DISALL OWED UNDER SECTION 14A OF THE ACT. THE PERTINENT OBSERVATIONS OF THE TRIBUNAL READ AS UNDER: 8. COMING TO THE QUESTION REGARDING DEPRECIATION BEING AN EXPENDITURE OR NOT, IT HAS BEEN HELD IN THE CASE OF HOSHANE D. NANAVATI (SUPRA) THAT SECTION 14A DEALS O NLY WITH THE EXPENDITURE AND NOT ANY STATUTORY ALLOWANCE ADMISSIBLE TO THE ASSESSEE. THE DECISION HAS BEEN ARRIVED AT AFTER CONSIDERING THE DECISION IN THE CASE OF NE CTAR BEBVERAGES PVT. LTD. VS. DCIT (2009) 314 ITR 314. THE ID. CIT (DR) HAS NOT BEEN ABLE TO DISPLACE THE RATIO OF THESE CASES. THUS, ON CONSIDERATION, WE FIND THAT SECTION 14A USES THE WORDS 'EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME A STATUTORY ALLOWANCE UNDER SECT ION 32 IS NOT AN EXPENDITURE. THEREFORE, WE ARE IN AEREEMENT WITH THE DECISION OF THE DIVISION BENCH I N THE CASE OF HOSHANE D. NANAVATI. (EMPHASIS SUPPLIED) IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMIT TED THAT DEPRECIATION/AMORTIZATION COULD NOT BE DISALLOWED U NDER SECTION 14A OF THE ACT. 5.9 THE LEARNED COUNSEL ALSO SUBMITTED THAT FOR COMPUT ATION OF DISALLOWANCE UNDER RULE 8D(2)(III) INVESTMENT WHICH HAS YIELDED EXEMPT INCOME SHOULD ONLY BE CONSIDERED FOR THE PUR POSE OF DISALLOWANCE. IN SUPPORT OF THE CLAIM THE LEARNED C OUNSEL RELIED ON THE DECISION OF THE JURISDICTIONAL DELHI HIGH CO URT IN THE CASE OF ACB INDIA LTD VS ACIT 374 ITR 108 AND SPECIAL BE NCH TRIBUNAL DECISION IN THE CASE OF ACIT VS VIREET INVESTMENTS P LTD 165 ITD 27. 5.10 THE LD. COUNSEL SUBMITTED THAT IN VIEW OF THE ARGU MENTS ABOVE, THE DISALLOWANCE UNDER SECTION 14A OF THE AC T MIGHT BE DELETED. 5.11 ON THE OTHER HAND, THE DEPARTMENT REPRESENTATIVE ( DR) RELIED ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED AT LD. CIT(A) 23 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 HAS NOT STRICTLY FOLLOWED THE RULE 8D OF THE RULES AND HE HAS SUSTAINED THE DISALLOWANCE FOR THE INTEREST AND ADM INISTRATIVE EXPENSES FOR EXEMPT INCOME FOLLOWING A REASONABLE M ETHOD. FURTHER, THE LD DR SUBMITTED THAT THE ASSESSING OFF ICER WAS NOT SATISFIED WITH THE CLAIM OF ASSESSEE OF NO EXPENSES INCURRED AND ACCORDINGLY NOT BEING SATISFIED, HE COMPUTED THE DI SALLOWANCE UNDER SECTION 14A OF THE ACT AND THUS THE CONTENTIO N OF THE LEARNED COUNSEL OF THE ASSESSEE OF NO DISSATISFACTI ON OF CLAIM OF ASSESSEE WAS RECORDED, WAS NOT CORRECT. THE LD DR S UPPORTED COMPUTATION OF DISALLOWANCE OF INTEREST EXPENDITURE AND ADMINISTRATIVE EXPENSES MADE BY THE LD. CIT(A). 5.12 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN THE INS TANT CASE, THE ASSESSING OFFICER HAS EXPRESSED DISSATISFACTION ON THE CLAIM OF THE ASSESSEE THAT NO EXPENSES WERE INCURRED FOR EARNING THE EXEMPT INCOME, WHICH IS EVIDENT FROM FOLLOWING PARAGRAPH O F THE ASSESSMENT ORDER: 5.2. NO INCOME, WHETHER EXEMPT OR NOT, CAN BE EARN ED WITHOUT MAKING SOME EXPENDITURE. OFTEN TIMES SUCH EXPENDITU RE ARE NOT SEGREGATED IN THE ACCOUNTS OF THE ASSESSEE AND REMA IN CLUBBED WITH OVERALL ADMINISTRATIVE/FINANCIAL AND OTHER EXPENSES FOR THE BUSINESS AS A WHOLE. IT THUS BECOMES THE DUTY OF THE AO TO R EASONABLY ALLOCATE EXPENSES RELATABLE TO SUCH INCOME AND DISA LLOW THE SAME. SECTION 14A OF THE ACT (INSERTED BY THE FINANCE ACT . 2001 WITH RETROSPECTIVE EFFECT FROM 1.4 1962) SPECIFICALLY AD DRESSES THIS ISSUE BY PROVIDING THAT 'NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. FURTHER, SUB-S ECTION (2) OF SECTION 14A EMPOWERS THE AO TO DETERMINE THE AMOUNT OF EXPE NDITURE INCURRED IN RELATION TO EXEMPT INCOME IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. THE METHOD HAS SINCE BEEN PRE SCRIBED BY INSERTION OF RULE 8 D OF THE I T RULES. 1962 W.E.F. 24.3.2008. SUB SECTION (3) OF SECTION 14A MANDATES THAT THE ABOVE PROVISIONS OF SUB- SECTION (2) SHALL ALSO APPLY TO A CASE WHERE AN ASS ESSEE CLAIMS THAT 24 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO EXEMPT INCOME. 5.13 THE HONBLE DELHI HIGH COURT IN THE CASE OF INDIAB ULLS FINANCIAL SERVICES LTD VS DCIT 395 ITR 292 (DELHI) THAT EVEN AN IMPLIED DISSATISFACTION ON THE CLAIM OF THE DISALLO WANCE UNDER SECTION 14A BY THE ASSESSEE IS SUFFICIENT TO MEET T HE REQUIREMENT OF SECTION 14A(2) OF THE ACT. THE RELEVANT FINDING OF THE HONBLE DELHI HIGH COURT IS REPRODUCED AS UNDER: 7. UNDOUBTEDLY, THE LANGUAGE OF SECTION 14A PRESU PPOSES THAT THE AO HAS TO ADDUCE SOME REASONS IF HE IS NOT SATISFIE D WITH THE AMOUNT OFFERED BY WAY OF DISALLOWANCE BY THE ASSESS EE. AT THE SAME TIME SECTION 14A (2) AS INDEED RULE 8D(I) LEAV E THE AO EQUALLY WITH NO CHOICE IN THE MATTER INASMUCH AS THE STATUT E IN BOTH THESE PROVISIONS MANDATES THAT THE PARTICULAR METHODOLOGY ENACTED SHOULD BE FOLLOWED. IN OTHER WORDS, THE AO IS UNDER A MAND ATE TO APPLY THE FORMULAE AS IT WERE UNDER RULE 8D BECAUSE OF SECTIO N 14A(2). IF IN A GIVEN CASE, THEREFORE, THE AO IS CONFRONTED WITH A FIGURE WHICH, PRIMA FACIE, IS NOT IN ACCORD WITH WHAT SHOULD APPR OXIMATELY BE THE FIGURE ON A FAIR WORKING OUT OF THE PROVISIONS, HE IS BUT BOUND TO REJECT IT. IN SUCH CIRCUMSTANCES THE AO ORDINARILY WOULD EXPRESS HIS OPINION BY REJECTING THE DISALLOWANCE OFFERED AND T HEN PROCEED TO WORK OUT THE METHODOLOGY ENACTED. 8. IN THIS INSTANCE THE ELABORATE ANALYSIS CARRIED OUT BY THE AO AS INDEED THE THREE IMPORTANT STEPS INDICATED BY HIM I N THE ORDER, SHOWS THAT ALL THESE ELEMENTS WERE PRESENT IN HIS M IND, THAT HE DID NOT EXPRESSLY RECORD HIS DISSATISFACTION IN THESE C IRCUMSTANCES, WOULD NOT PER SE JUSTIFY THIS COURT IN CONCLUDING T HAT HE WAS NOT SATISFIED OR DID NOT RECORD COGENT REASONS FOR HIS DISSATISFACTION TO REJECT THE AOS CONCLUSION. TO INSIST THAT THE AO S HOULD PAY SUCH LIP SERVICE REGARDLESS OF THE SUBSTANTIAL COMPLIANCE WI TH THE PROVISIONS WOULD, IN FACT, DESTROY THE MANDATE OF SECTION 14A. 5.14 IN VIEW OF ABOVE DECISION OF THE HONBLE DELHI H IGH COURT, IN CASE OF INDIABULL FINANCIAL SERVICES LTD. (SUPRA ), WE REJECT THE CONTENTION OF THE ASSESSEE THAT NO DISSATISFACTION WAS RECORDED BY 25 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 THE ASSESSING OFFICER WHILE INVOKING SECTION 14A OF THE ACT FOR COMPUTING DISALLOWANCE TOWARDS EARNING THE EXEMPT I NCOME. 5.15 THE SECOND CONTENTION OF THE ASSESSEE IS THAT NO DISALLOWANCE SHOULD BE MADE FOR INTEREST EXPENDITUR E IN VIEW OF SUFFICIENT OWN FUNDS AVAILABLE WITH THE ASSESSEE. T HE DETAILS OF POSITION OF THE FUNDS OF THE ASSESSEE AS ON 31/03/2 006 AND 31/03/2007 FILED BY THE ASSESSEE IN PAPER-BOOK IS R EPRODUCED AS UNDER: PARTICULARS 2007 RS. IN MILLION 2006 RS. IN MILLION LIABILITIES SHARE CAPITAL 395 400 RESERVES 2,575 1,770 LOAN 267 438 CURRENT AND OTHER LIABILTIES 748 569 TOTAL 3,985 3,177 ASSETS RS. IN MILLION RS. IN MILLION FIXED ASSETS 602 591 INVESTMENTS IN SUBS 1,132 881 INVESTMENT IN MUTUAL FUNDS 835 203 5.16 IN THE CASE OF THE ASSESSEE SHARE CAPITAL AND RESE RVE FUNDS AVAILABLE ARE IN FAR ACCESS TO INVESTMENT MADE BY T HE ASSESSEE IN MUTUAL FUNDS I.E. INVESTMENT IN ASSETS YIELDING EXE MPT INCOME. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V S RELIANCE UTILITIES AND POWER LTD. IN (2009) 313 ITR 340 HAS HELD AS UNDER : 10. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN AS SESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVES TMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE. IN OUR OPIN ION THE SUPREME 26 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPR A) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA H IGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHERE A SIMILAR I SSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOU LD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAX ES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THES E CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORC E, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BE EN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS CASE (SUPRA) THE CALCUTTA HIGH COURT H AD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVE RDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUM ED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIA L AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH C OURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUND S AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CA SE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT(A) AND TRIBUNAL 5.17 WHEN WE APPLY THE RATIO OF THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF RELANCE UTILITIES AND POWER LTD (SUPRA) OVER THE FACTS OF THE INSTANT CASE, WE FIND THAT THE INSTANT CASE ALSO THERE ARE SUFFICIENT INTEREST-FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AVAILABLE TO EXPLAIN THE INVESTMENT IN MUTUAL FUNDS. IN VIEW OF NO INTEREST EXPENDITURE RE LATABLE TO INVESTMENT IN ASSETS YIELDING EXEMPT INCOME, THE DI SALLOWANCE OF 37,33,490/- SUSTAINED BY THE LD. CIT(A) IS DELETED . 6. REGARDING THE ADMINISTRATIVE EXPENSES FOR EARNING THE EXEMPT INCOME IS CONCERNED, WE FIND THAT HONBLE DE LHI IN THE CASE OF ACB INDIA LTD. (SUPRA) AND THE SPECIAL BENC H IN THE CASE OF ACIT VS VIREET INVESTMENT PRIVATE LIMITED (SUPRA) HAS HELD IT 27 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 FOR CONSIDERING DISALLOWANCE TOWARDS ADMINISTRATIVE EXPENSES, THE INVESTMENT WHICH HAS YIELDED EXEMPT INCOME DURING T HE YEAR UNDER CONSIDERATION SHOULD ONLY BE CONSIDERED. 6.1 THE ASSESSEE BEFORE THE LD. CIT(A) HAS ACCEPTED 20 % OF THE CERTAIN EXPENSES TOWARDS SALARY ETC. OF EMPLOYEES E NGAGED IN INVESTMENT ACTIVITY. THUS, THE CONTENTION OF THE AS SESSEE THAT NO EXPENSES HAVE BEEN INCURRED FOR EARNING THE EXEMPT INCOME IS NOT ACCEPTABLE AND SOME EXPENSES ON SALARY, RENT A ND OTHER OFFICE EXPENSES DEFINITELY GOES TOWARD EARNING OF T HE EXEMPT INCOME. IN ABSENCE OF ANY BIFURCATIONS OF THE EXPEN SES, A REASONABLE ESTIMATE HAS TO BE MADE FOR SUCH DISALLO WANCE. RESPECTFULLY, FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ACB INDIA LTD (SUPRA) AND SPE CIAL BENCH TRIBUNAL IN THE CASE OF VIREET PRIVATE LIMITED (SUP RA), WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE AT 0.5 % OF THE VALUE OF ASSETS WHICH HAS YIELDED EXEMPT INCOME DUR ING THE YEAR UNDER CONSIDERATION. THE GROUND OF THE APPEAL OF TH E ASSESSEE IS ACCORDINGLY PARTLY ALLOWED. 6.2 THE GROUND NOS. 3 TO 3.2 THE APPEAL OF THE ASSESSE E RELATE TO BED DEBT CLAIM OF 3,59,27,941/- IN RESPECT OF THE AMOUNT DUE FROM GOVERNMENT AGENCIES AND OTHER PARTIES. 6.3 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE AS SESSING OFFICER OBSERVED CLAIM OF BED DEBT IN RESPECT OF AM OUNT DUE FROM GOVERNMENT AGENCIES AND OTHER PARTIES. A LIST OF SU CH PARTIES WITH AMOUNT WRITTEN OFF IS AVAILABLE ON PAGE 532 OF THE PAPER- BOOK VOLUME II, WHICH IS REPRODUCED AS UNDER: 28 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 6.4 THE ASSESSING OFFICER REJECTED THE CLAIM ON TWO CO UNTS. FIRSTLY, THAT THE ASSESSEE DID NOT PROVIDE DETAILS WHETHER THE DEBT 29 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 WAS TAKEN INTO CONSIDERATION AS INCOME IN THE EARLI ER OR IN THE CURRENT YEAR. SECONDLY, THE ASSESSEE DID NOT ESTABL ISH THAT THE DEBT BECOME BAD. IN VIEW OF NO EVIDENCE PRODUCED, T HE ASSESSING OFFICER DISALLOWED THE ENTIRE CLAIM OF BAD DEBT OF RS. 3,59,27,971/-. 6.4 THE LD. CIT(A) IN VIEW OF THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF TRF LTD VS CIT 323 ITR 397 AND DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS AUTOMETERS LTD 292 ITR 345 (DELHI) HELD THAT ONCE T HE DEBT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE AS SESSEE AS IRRECOVERABLE, THE CLAIM OF BAD DEBT IS ALLOWABLE A ND IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT HAS BECOME IRRECOVERABLE. HOWEVER, THE LD. CIT(A) ASKED THE ASSESSEE TO ESTABLISH THAT THE DEBT UNDER DISPUTE WAS APPEAR ING IN THE BALANCE SHEET AS ON 31/03/2006. IN ABSENCE OF ANY D OCUMENTARY EVIDENCE FILED BY THE ASSESSEE, THE LD. CIT(A) CONF IRMED THE DISALLOWANCE OBSERVING AS UNDER: 8.7.4 FROM THE ABOVE IT IS CLEAR THAT WHILE IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS B ECOME IRRECOVERABLE AND THE BED DEBT CLAIMED BY THE ASSESSEE WOULD BE A LLOWABLE IN THE YEAR IN WHICH THE DEBT WAS WRITTEN OFF AS IRRECOVER ABLE IN THE BOOKS OF ACCOUNTS, HOWEVER, THE BAD DEBTS MUST BE SHOWN A S GOOD DEBTS IN THE BOOKS DURING THE PREVIOUS YEAR. THE APPELLAN T IN THE COURSE OF APPELLATE PROCEEDINGS PLACED ON RECORD THE YEAR-WIS E DETAILS AS TO WHEN THE BAD DEBTS CLAIMED WERE OFFERED TO TAX. HOW EVER, THE APPELLANT FAILED TO FURNISH THE PARTICULARS TO SUBS TANTIATE THAT SUNDRY DEBTORS SHOWN IN THE BALANCE SHEET AS ON 31/ 03/2006 ALSO INCLUDES THE AMOUNTS SHOWN AS BAD DEBTS WRITTEN OFF IN THE RELEVANT AY 2007-08. IN OTHER WORDS, IT CANNOT BE ASCERTAINE D THAT THE BAD DEBTS WRITTEN OFF IN AY 2007-08 AS IRRECOVERABLE WE RE SHOWN AS GOOD DEBTS AS ON 31/03/2006. IN VIEW OF THE ABOVE T HE CLAIM OF BAD DEBTS ARE NOT ALLOWABLE. THE ALTERNATIVE SUBMISSION OF THE APPELLANT IS THAT THE BAD DEBTS WRITTEN OFF SHOULD HAVE BEEN ALLOWED AS TRADING LOSS. THE ABOVE SUBMISSION IS ALSO NOT SUST AINABLE BECAUSE NO SUCH CLAIM FOR DEDUCTION AS TRADING LOSS WAS MAD E IN THE PROFIT & 30 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 LOSS ACCOUNT. THE CLAIM MADE IN THE P&L ACCOUNT WAS AS BAD DEBTS WHICH IS NOT SUSTAINABLE BECAUSE AS STATED EARLIER, THE APPELLANT FAILED TO FURNISH THE PARTICULARS TO SUBSTANTIATE T HAT BAD DEBTS WERE SHOWN AS GOOD DEBTS AS ON 31/03/2006. IN VIEW OF TH E ABOVE, THE DISALLOWANCE OF BAD DEBTS OF RS. 3.59 CRORES MADE B Y THE AO IS JUSTIFIED AND AS SUCH CONFIRMED. THE APPEAL FAILS I N THIS GROUND. 6.5 BEFORE US THE LEARNED COUNSEL OF THE ASSESSEE SUBM ITTED THAT IF OPPORTUNITY IS PROVIDED TO THE ASSESSEE, AL L THE DETAILS AS REQUIRED BY THE LD. CIT(A) SHALL BE PROVIDED AND IS SUE MAY BE DECIDED AFRESH. 6.6 THE LEARNED DR RELIED ON THE ORDER OF THE LD. CIT( A) AND SUBMITTED THAT IN ABSENCE OF THE INFORMATION WHETHE R THE DEBT IN RESPECT OF THE PARTIES WAS IN EXISTENCE AS ON 31/03 /2006, THE LD. CIT(A) WAS JUSTIFIED IN SUSTAINING THE DISALLOWANCE . 6.7 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE FINDING OF THE ASS ESSING OFFICER OF REQUIREMENT OF ESTABLISHING WHETHER THE DEBT BECOME BAD HAS ALREADY BEEN REJECTED BY THE LD. CIT(A) AND REVENUE IS NOT AN APPEAL ON THAT ISSUE. THE LD. CIT(A) HAS SUSTAINED THE DISALLOWANCE IN ABSENCE OF THE INFORMATION PROVIDED BY THE ASSESSEE REGARDING EXISTENCE OF THE DEBT IN RESPECT OF THE PARTIES AS ON 31/03/2006. NOW, THE ASSESSEE HAS GIVEN UNDER TAKING TO PROVIDE ALL THE DETAILS IN RESPECT OF THE EXISTENCE OF THE DEBT AS ON 31/03/2006. IN THE INTEREST OF JUSTICE, WE FEEL IT APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF THE LD. CIT(A) FO R DECIDING A FRESH WITH THE DIRECTION TO THE ASSESSEE TO PROVIDE ALL R EQUIRED DETAILS IN RESPECT OF THE DEBTS. BOTH THE PARTIES I.E THE ASSE SSEE AND THE ASSESSING OFFICER SHALL BE AFFORDED ADEQUATE OPPORT UNITY OF BEING 31 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 HEARD. THE GROUND NOS. 3 TO 3.2 OF THE APPEAL OF TH E ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 5491/DEL/2013 (REVENUES APPEAL) 7. NOW WE TAKE UP THE APPEAL OF THE REVENUE HAVING IT A NO. 5491/DEL/2013. THE GROUND NOS. 1 TO 1.5 AND 2 OF TH E APPEAL OF THE REVENUE RELATE TO DISALLOWANCE OF DEDUCTION UND ER 10B OF THE ACT BY THE ASSESSING OFFICER, WHICH HAS BEEN DELETE D BY THE LD. CIT(A). 7.1 THE FACTS QUA THE ISSUE IN DISPUTE ARE THAT THE AS SESSEE CLAIMED DEDUCTION UNDER SECTION 10B OF THE ACT IN R ESPECT OF PROFIT DERIVED FROM ITS 100% EXPORT-ORIENTED UNDERT AKING/UNITS, NAMELY, NTL SALT LAKE, KOLKATA (UNIT-II), (RS. 8,16 ,72,880/-); NTL BANERGHATTA ROAD, BANGALORE (RS.5,23,90,061/-) AND NTL ATHENA, NEW DELHI (RS.93,03,25,683/-), TOTALING TO RS.106,4 3,88,624/-. IN RESPECT OF THESE UNITS, DEDUCTION UNDER SECTION 10B OF THE ACT WAS CLAIMED IN ASSESSMENT YEAR 2006-07 ALSO WHICH W AS DISALLOWED BY THE ASSESSING OFFICER, HOWEVER SAME W AS ALLOWED BY THE LD. CIT(A). THE ASSESSING OFFICER OBSERVED THAT THE DIFFERENT UNITS OF THE ASSESSEE COMPANY ARE NOT OPERATING IN ISOLATION BUT THEY ARE OPERATING AS DIFFERENT BRANCH OF THE SAME TREE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE WAS MA INTAINING SINGLE BOOKS OF ACCOUNTS FOR ALL ITS UNITS, INCLUDI NG THE UNITS COVERED BY THE DEDUCTION UNDER SECTION 10B OF ACT A ND THE ASSESSEE HAS ALLOCATED THE EXPENSES BETWEEN THE DIF FERENT UNITS FOR COMPUTING DEDUCTION UNDER SECTION 10B OF ACT. A CCORDING TO THE ASSESSING OFFICER, THE BASIS OF APPROPRIATION W AS NOT EXPLAINED BY THE ASSESSEE. IN ABSENCE OF ANY SPECIF IC METHOD, THE 32 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 ONLY LAWFUL BASIS OF ALLOCATING THE EXPENSES TOWARD S DIFFERENT UNIT HAS TO BE ON THE BASIS OF THE REVENUE GENERATED BY THE SAID UNITS. THE LEARNED ASSESSING OFFICER MENTIONED THAT AS PER SUBSECTION (4) OF SECTION 10B OF THE ACT, FIRST THE PROFIT OF THE BUSINESS HAS TO BE COMPUTED UNDER THE HEAD PROFIT AND GAINS OF THE BUSINESS OR PROFESSION AND IN THEN PROFIT IS TO BE APPORTIONED BETWEEN THE EXPORT TURNOVER AND THE LOCAL TURNOVER. ACCORDINGLY , THE ASSESSING OFFICER COMPUTED THE DEDUCTION UNDER SECTION 10B OF THE ACT ALLOWABLE TO THE ASSESSEE AT 89,68,09,126/- AS FOLLOWS: TOTAL PROFIT OF THE BUSINESS X EXPORT TURNOVER/TOTAL TURNOVER =113,86,62,502/- X 234,04,66,797 297,16,48,815 =RS.89,68,09,126/- 7.2 THE LD. CIT(A) FOLLOWED THE FINDING OF HIS PREDECE SSOR IN ASSESSMENT YEAR 2006-07 AND ALLOWED THE DEDUCTION U NDER SECTION 10B OF THE ACT CLAIMED BY THE ASSESSEE WITH FOLLOWING OBSERVATIONS: 8.1.3 THE AO ALLOWED THE DEDUCTION U/S 10B WITH R EFERENCE TO THE GLOBAL PROFITS OF THE ASSESSEE AS A WHOLE AND NOT WITH REFERENCE TO THE PROFITS OF THE ELIGIBLE UNDERTAKING. THE ABOVE VIEW OF THE AO IS ERRONEOUS BECAUSE THE ISSUE WHETHER DEDUCTION UNDER SECTION 10A/10B OF THE ACT HAS TO BE ALLOWED QUA PROFITS OF THE ELIGIBLE UNDERTAKING(S) OR THE GLOBAL PROFITS OF THE ASSESSE E AS A WHOLE, IS NO LONGER RES INTEGRA. HONBLE APEX COURT IN THE CASE OF CIT VS. CANARA WORKSHOPS (P) LTD.: 161 ITR 320 HELD THAT DEDUCTION UNDER SECTION 80E OF THE ACT WAS TO BE ALLOWED WITH REFERENCE TO PROFITS OF THE ELIGIBLE UNDERTAKINGS. HONBLE DELHI HIGH COURT IN CIT VS. DEWAN KRAFT SYSTEM (P) LTD, : 297 ITR 305 (DELHI) HAVE TA KEN THE VIEW THAT DEDUCTION UNDER SECTION 801/801A HAS TO BE COMPUTED WITH REFERENCE TO PROFITS OF THE ELIGIBLE BUSINESS / UND ERTAKING, UNAFFECTED BY THE PROFITS / LOSSES SUFFERED IN OTHER ELIGIBLE/ INELIGIBLE BUSINESS OWNED BY THE ASSESSEE. HONBLE KARNATAKA HIGH COURT IN THE CIT V. YOKOGAWA INDIA LTD. 314 ITR 385/ 246 CTR 226 WHILE DEALING WITH THE ISSUE OF DEDUCTION U/S 10A OF THE ACT, OBSERVED THAT THE RELIEF UNDER THIS SECTION IS WITH REFERENCE TO THE STP UND ERTAKINGS AND NOT 33 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 TO THE ASSESSEE. IT WAS HELD THAT THE PHRASE TOTAL INCOME USED IN SEC 10A(1) IS TO BE UNDERSTOOD AS THE TOTAL INCOME OF THE STP UNIT. SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SCIENT IFIC ATLANTA INDIA TECHNOLOGY PVT. LTD. 38 SOT 252 OBSERVED THAT ASSES SEE MAY HAVE MORE THAN ONE UNDERTAKING AND IN SUCH A CASE, ONE H AS TO CONSIDER THE PROFITS AND GAINS OF THAT 'PARTICULAR UNDERTAKI NG' WHICH QUALIFY FOR DEDUCTION UNDER S. 10A. IT WAS HELD THAT IN COM PUTING DEDUCTION UNDER S. 10A, WE HAVE TO ASCERTAIN THE TOTAL INCOME AS PER THE PROVISIONS OF THE ACT IN RESPECT OF 'THAT UNDERTAKI NG' AND THE AMOUNT SO DETERMINED IS TO BE REDUCED FROM THE TOTAL INCOM E. THEREFORE, IT IS A SETTLED ISSUE THAT THE DEDUCTION U/S 10A/10B OF T HE ACT HAS TO ALLOWED WITH REFERENCE TO THE PROFITS OF THE ELIGIB LE UNDERTAKING AND NOT WITH REFERENCE TO THE APPELLANTS BUSINESS AS A WHOLE. 8.1.4 THE AO DID NOT ALLOW THE DEDUCTION WITH REFER ENCE TO THE PROFITS OF THE ELIGIBLE UNDERTAKING BECAUSE HE OBSE RVED THAT APPELLANT WAS MAINTAINING CONSOLIDATED BOOKS OF ACC OUNTS. HOWEVER IN VIEW OF THE DECISIONS IN THE CASE OF DCIT V. ARA BIAN EXPORTS LTD. : 109 TTJ 440 (MUM), CIT V. FUSION SOFTWARE ENGG. PVT . LTD. : 1TA NO. 952 AND 953 OF 2006 (KAR HC) & JOT V. GEBBS INFOTEC H LTD. : ITA NO. 3370/MUM/2007 (MUM) AND IN VIEW OF CBDT CIRCULA R NO. 1/201.3 DT. 17.01.2013 IT IS A SETTLED ISSUE THAT I T IS NOT MANDATORY FOR AN ELIGIBLE UNDERTAKING TO MAINTAIN SEPARATE BO OKS OF ACCOUNTS AND THE CLAIM FOR DEDUCTION U/S I0A/10B CANNOT BE D ENIED TO ANY ASSESSEE ON THIS GROUND. 8.1.5 EVEN IN THE INSTANT AY 2007-08 THE THREE UNIT S IN RESPECT OF WHICH DEDUCTION U/S I0B HAVE BEEN CLAIMED VIZ NTL-S ALT LAKE - KOLKATA, NTL-BANNERGHATTA ROAD, BANGALORE & NTL- AT HENA, NEW DELHI ARE THE SAME UNITS WHICH WERE ALSO CLAIMING T HE DEDUCTION U/S 10B IN AY 2006-07. EACH OF THE UNITS HAVE GOT SEPAR ATE APPROVALS FROM THE STP1 AUTHORITY FOR CLAIMING EXEMPTION U/S 10B OF THE ACT AND THEY HAVE ALSO BEEN ISSUED SEPARATE LICENSES FO R CUSTOM BONDED WAREHOUSE UNDER 100% LOU STP SCHEME BY THE C USTOMS AUTHORITIES. THESE UNITS HAVE SEPARATE LOCATIONS IN FAR-FLUNG AREAS SUCH AS KOLKATA, BANGALORE & NEW DELHI AS IS INDICA TED FROM THEIR RESPECTIVE ADDRESSES. THEREFORE, THERE CANNOT BE AN Y DISPUTE THAT THESE ARE INDEPENDENT & SEPARATE UNITS AND AS SUCH EACH OF THE UNITS HAVE TO BE TREATED AS THE ELIGIBLE UNDERTAKIN GS FOR THE PURPOSES OF DEDUCTION U/S 10B OF THE ACT. 8.1.6 THE APPELLANT HAS EXPLAINED THAT IN THE ERP S OFTWARE ACCOUNTING SYSTEM IMPLEMENTED BY THEM, EACH AND EVE RY TRANSACTION OF EACH UNIT IS SEPARATELY CODED AND, T HEREFORE, ALL THE TRANSACTIONS ARE IDENTIFIABLE AS IN THE CASE OF SEP ARATE BOOKS. THE APPELLANT ALSO EXPLAINED THAT IN THE ERP BASED ACCO UNTING SOFTWARE SYSTEM ALL THE EXPENSES ARE CAPTURED INTO 3 CATEGOR IES: I) DIRECT EXPENSES WHICH ARE CHARGEABLE TO INDIVIDUAL BUSINES S GROUP/ UNIT, 34 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 II) SERVICE GROUP (CORP) EXPENSES SUCH AS FINANCIAL SERVICE ORGANIZATION (FSO)/ COMMERCIAL SERVICE ORGANIZATION (CSO)/ COMMUNICATING AND MARKEING ORGANIZATION (CMO) EXPEN SES ALLOCATED BASED ON THE RESPECTIVE REVENUE OF THE EO US AND NON- EOUS AND III) EXPENSES LIKE RENT, ELECTRICITY, WAT ER, REPAIRS AND MAINTENANCE, ETC., THAT ARE BUILDING RELATED AND CO MMON IN NATURE ARE ALLOCATED TO THE RESPECTIVE BUSINESS GROUPS/ SE RVICE GROUPS/ EOUS BASED ON THE AREA OCCUPIED. THE ANNUAL REPORT OF THE COMPANY ALSO SPECIFIES THE ERP SYSTEM OF ACCOUNTS M AINTAINED BY THE COMPANY. THE DEDUCTION HAS BEEN CLAIMED BY THE APPELLANT IN RESPECT OF EACH OF THE THREE EOUS ON THE BASIS OF T HE PRESCRIBED AUDIT REPORT IN FORM NO. 56G. THE FACTS AND CIRCUMS TANCES ARE IDENTICAL IN AY 2007-08 AS IN AY 2006-07, AND AO HA D ALSO RECOMPUTED THE DEDUCTION U/S 10B ON THE BASIS OF RE COMPUTATION OF DEDUCTION ADOPTED IN AY 2006-07. THEREFORE, IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION, AND FOLLOWING THE DECIS ION OF ID. CIT(A)-32 OF AY 2006-07 IT IS HELD THAT PROFITS ARISING FROM EACH OF THE ELIGIBLE UNDERTAKING HAVE BE TO ALLOWED AS DEDUCTION UNDER S ECTION 10B OF THE ACT SEPARATELY AS CERTIFIED BY THE AUDIT REPORT IN FORM 56G. ACCORDINGLY, THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 7.3 ON THE ISSUE OF ADJUSTMENT OF BROUGHT FORWARD LOSE S UNABSORBED DEPRECIATION OF EARLIER YEARS ALSO, THE LD. CIT(A), FOLLOWING THE FINDING OF HIS PREDECESSOR IN ASSESSM ENT YEAR 2006- 07, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 7.4 BEFORE US, LEARNED DR RELIED ON THE ASSESSING OFFI CER AND SUBMITTED THAT IN ABSENCE OF SEPARATE BOOKS OF ACCO UNTS MAINTAINED FOR ELIGIBLE UNIT, THE ASSESSING OFFICER IS JUSTIFIED IN COMPUTING THE PROFIT DERIVED FROM THE EXPORT UNDERT AKING AS PROFIT OF THE BUSINESS OF THE ASSESSEE IN PROPORTIO N TO EXPORT TURNOVER TO THE TOTAL TURNOVER. SHE ALSO SUPPORTED THE ACTION OF THE ASSESSING OFFICER IN NOT ALLOWING THE UNOBSERVE D LOSSES AND DEPRECIATION. 7.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E RELEVANT MATERIAL ON RECORD. IT IS UNDISPUTED THAT BOTH THE ASSESSING OFFICER AND THE LD. CIT(A) HAS FOLLOWED R ESPECTIVE 35 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 FINDING OF THEIR PREDECESSORS IN ASSESSMENT YEAR 20 06-07. WE FIND THAT THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 IN ITA NO. 3076/DEL/2012 HAS DISMISSED THE GROUNDS OF THE APPE AL OF THE REVENUE AGAINST THE DEDUCTION UNDER SECTION 10B ALL OWED BY THE LD. CIT(A). THE FINDING OF THE TRIBUNAL IS REPRODUC ED AS UNDER: 5. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE EN TIRE MATERIALS ON RECORD AND WE FIND THAT THE LD. CIT(A) HAS DEALT WITH THE ISSUE IN THE IMPUGNED ORDER IN RIGHT PERSPECTIV E AND WE DO NOT FIND ANY JUSTIFICATION TO DISCARD THE FINDINGS REAC HED BY HIM. FOR READY REFERENCE, THE FINDINGS OF THE LD. CIT(A) ARE REPRODUCED HEREUNDER : 2.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE, THE ARGUMENTS OF THE APPELLANT, THE OBSERVATIONS MADE B Y THE AO IN HIS REMAND REPORT AND THE REJOINDER OF THE APPEL LANT. FIRST OF ALL, I WOULD LIKE TO DECIDE THE ISSUE OF THE ADM ISSION OF THE ADDITIONAL EVIDENCE AS SOUGHT TO BE ADDUCED BY THE APPELLANT. IN THEIR APPLICATION FOR ADMISSION OF ADDITIONAL EV IDENCE, THE APPELLANT HAVE TAKEN THE FOLLOWING GROUNDS: (I) THAT THE AFORESAID ADDITIONAL EVIDENCE ONLY SEE K TO FURTHER CORROBORATE/SUBSTANTIATE THE CONTENTION OF THE APPE LLANT THAT ALL THE ELIGIBLE EOU'S ARE SEPARATE AND INDEPENDENT UNITS, WHICH IS ALSO SUPPORTED BY THE DOCUMENTS ALREADY ON RECORD. (II) THAT THE APPELLANT WAS PREVENTED BY A SUFFICIE NT CAUSE FROM PRODUCING EVIDENCE BEFORE THE A.O. AS THE APPE LLANT WAS NEVER ISSUED ANY NOTICE OR AFFORDED ANY OPPORTUNITY TO DEMONSTRATE THAT THE VARIOUS UNITS OPERATING DURING THE YEAR UNDER CONSIDERATION HAVE INDEPENDENT AND SEPARATE E XISTENCE AND COULD NOT BE TREATED AS ONE COMMON BUSINESS. (III) THAT THE ASSESSMENT WAS COMPLETED IN HASTE WI THOUT RAISING SPECIFIC QUERY BASED ON WHICH FINAL ORDER H AS BEEN PASSED THEREBY DENYING SUFFICIENT AND ADEQUATE OPPO RTUNITY TO THE APPELLANT TO ADDUCE THE ENTIRE EVIDENCES. (IV) THAT THE EVIDENCE BEING- PRODUCED ARE CRITICAL AND MATERIAL FOR ADJUDICATION OF THE GROUNDS RAISED IN APPEAL. 2.4.1 THE AO, ON THE OTHER HAND, HAS VEHEMENTLY OPP OSED ADMISSION OF THE ADDITIONAL EVIDENCE ON THE GROUND THAT THE APPELLANT WAS GIVEN DUE OPPORTUNITIES DURING THE AS SESSMENT PROCEEDINGS. HOWEVER, NO SPECIFIC OBSERVATIONS GIVI NG DATES AND DETAILS OF SUCH OPPORTUNITIES HAS BEEN MADE BY THE AO IN HIS REMAND REPORT. FURTHER, THE AO HAS NOT CONTROVE RTED THE APPELLANT'S CONTENTION THAT NO SPECIFIC SHOW CAUSE NOTICE WAS ISSUED TO THE APPELLANT TO DEMONSTRATE AS TO HOW TH E VARIOUS EXPORT ORIENTED UNITS OPERATING DURING THE YEAR WER E HAVING 36 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 INDEPENDENT AND SEPARATE EXISTENCE AND WHY THEY SHO ULD NOT BE TREATED AS A SINGLE BUSINESS UNIT. THEREFORE, I AM OF THE VIEW THAT SPECIFIC OPPORTUNITY WAS NOT GRANTED TO T HE APPELLANT FOR CLARIFYING THE ISSUE AS TO WHY ALL TH E UNITS OF THE APPELLANT COMPANY MAY NOT BE CONSIDERED AS ONE UNIT FOR THE PURPOSE OF DEDUCTION U/S 108 OF THE ACT. THE DOCUME NTS THAT THE APPELLANT SEEKS TO ADMIT AT THIS LEVEL ARE MAIN LY DOCUMENTS RELATING TO CUSTOMS LICENSES ISSUED TO EA CH OF THE ELIGIBLE UNITS AND THE REGISTERS MAINTAINED BY THOS E UNITS UNDER THE CUSTOMS RULES, DETAILS OF FIXED ASSETS PU RCHASED AT THE TIME OF FORMATION OF THE EOUS AND SEPARATE MONT HLY PERFORMANCE REPORTS OF THE EOUS. THE ASSESSING OFFI CER HAS RAISED THE ISSUE OF SOME OF THESE DOCUMENTS BEARING THE NAME OF 'M/S NIIT LTD.' INSTEAD OF 'M/S NIIT TECHNOLOGI ES LTD.', WHICH HAS BEEN EXPLAINED BY THE APPELLANT STATING T HAT ALL THE ELIGIBLE UNITS WERE INITIALLY PART OF NIIT LTD AND WERE DEMERGED INTO THE APPELLANT COMPANY THROUGH THE COU RT APPROVED SCHEME OF DEMERGER, APPROVED BY THE HON'BL E HIGH COURT OF DELHI WITH EFFECT FROM 1.04.2003. THAT IS WHY THE DOCUMENTS RELATING TO THE DEMERGED ELIGIBLE UNITS, EXECUTED PRIOR TO THE EFFECTIVE DATE, I.E., 4.06.2004, ARE I N THE NAME OF THE DEMERGED COMPANY, I.E., NIIT LTD. TO MY MIND, T HESE DOCUMENTS ARE MATERIAL TO DECIDE THE QUESTION AS TO WHETHER THE EOUS ARE TO BE TREATED AS SEPARATE UNDERTAKINGS OR THEY ARE IN FACT EXPANSION OF THE BUSINESS OF THE APPELL ANT COMPANY AS HELD BY THE ASSESSING OFFICER. THE HON. JURISDICTIONAL HIGH COURT IN THE CASE CIT VS. TEXT HUNDRED INDIA PVT. LTD.: 239- CTR 263, HELD THAT RU LE 29 ENABLES THE TRIBUNAL TO ADMIT ANY ADDITIONAL EVIDEN CE WHICH WOULD BE NECESSARY TO DO SUBSTANTIAL JUSTICE IN THE MATTER. THEIR LORDSHIPS FURTHER OBSERVED THAT THE VARIOUS P ROCEDURES, INCLUDING THAT RELATING TO FILING OF ADDITIONAL EVI DENCE, IS HANDMADE FOR JUSTICE AND JUSTICE SHOULD NOT BE ALLO WED TO BE CHOKED ONLY BECAUSE OF SOME INADVERTENT ERROR OR OM ISSION ON THE PART OF ONE OF THE PARTIES TO LEAD EVIDENCE. IN THE CASE OF CIT V. VIRGIN SECURITIES & CREDITS (P) LTD.: 332 IT R 396 (DEL), THE HON. JURISDICTIONAL HIGH COURT HELD THAT THE CI T(A) MAY ADMIT ADDITIONAL EVIDENCE, AFTER OBTAINING A REMAND REPORT FROM THE ASSESSING OFFICER, IF THE EVIDENCE SOUGHT TO BE ADDUCED BY THE APPLICANT IS CRUCIAL TO THE DISPOSAL OF THE APPEAL. HON'BLE ITAT DELHI HAVE ALSO HELD IN THE CA SE OF ELECTRA (JAIPUR) (P) LTD. VS. LAC (26 ITO 236) THAT IF THE EVIDENCE IS GENUINE, RELIABLE, PROVES THE ASSESSEE' S CASE, THEN THE ASSESSEE SHOULD NOT BE DENIED THE OPPORTUNITY. SIMILARLY IT WAS HELD IN DWARKA PRASAD VIS ITO 63 ITD 1 (TM) THA T ADDITIONAL EVIDENCE IF IN THE INTEREST OF JUSTICE, AND RENDERS ASSISTANCE TO THE AUTHORITY IN PASSING ORDER, MAY B E ADMITTED. OTHER SIMILAR RULINGS ARE 68 TTJ 722, 231 ITR 1, 21 SOT 37 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 218,293 ITR 53, 941TD 79 ETC. IN VIEW OF THE GUIDAN CE AVAILABLE IN THE AFORE-CITED JUDICIAL PRONOUNCEMENT S, 1 HOLD THAT THE ADDITIONAL EVIDENCE AS MENTIONED IN PARA 2 .3 ABOVE ARE ADMISSIBLE U/R 46A AND ARE TAKEN ON RECORD. 2.4.2 HAVING DECIDED THE QUESTION OF ADMISSION OF A DDITIONAL EVIDENCE, NOW THE SUBSTANTIVE ISSUES ARE TO BE DECI DED. THE SAME ARE DISCUSSED IN THE FOLLOWING PARAGRAPHS. 2.4.3 THE FIRST SUBSTANTIVE ISSUE IS WHETHER THE AP PELLANT WAS CORRECT IN CLAIMING DEDUCTION UNDER SECTION 108 OF THE ACT WITH REFERENCE TO SEPARATE AND INDEPENDENT PROFITS OF EA CH OF THE ELIGIBLE UNITS AS AGAINST THE ACTION OF THE ASSESSI NG OFFICER IN COMPUTING SUCH DEDUCTION WITH REFERENCE TO BUSINESS PROFITS OF THE APPELLANT COMPANY AS A WHOLE. THE AO HAD OBSERV ED THAT ALL THE UNITS WERE IN FACT EXPANSION OF THE SAME BU SINESS AS THEY WERE ENGAGED IN, THE SAME LINE OF BUSINESS AS THE COMPANY AND NO SEPARATE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED FOR THESE UNITS. HE HAD ALSO RAISED DOUB TS ABOUT THE ALLOCATION OF EXPENSES TO THESE UNITS TO 'ARRIV E AT THE CONCLUSION THAT DEDUCTION COULD NOT BE CALCULATED I N RESPECT OF THE UNITS SEPARATELY AND THEREFORE HE CALCULATED TH E DEDUCTION U/S 108 BY AGGREGATING ALL THE PROFITS OF ELIGIBLE AND NON ELIGIBLE UNITS AND APPLYING THE-FORMULA AS GIVEN IN SECTION 108(4) TO THE. ENTIRE PROFITS OF THE BUSINESS OF TH E APPELLANT COMPANY THEREBY REDUCING THE DEDUCTION SUBSTANTIALL Y. THE APPELLANT HAS MADE DETAILED SUBMISSIONS ON THIS GRO UND AS SUMMARISED/EXTRACTED HEREINABOVE. VARIOUS EVIDENCES TO ESTABLISH SEPARATE 'IDENTITY AND INDEPENDENT EXISTE NCE OF THE ELIGIBLE EOUS HAVE BEEN FURNISHED FROM WHICH IT APP EARS THAT THESE UNITS ARE INDEPENDENT OF EACH OTHER AS WELL A S OF THE NON-ELIGIBLE UNITS IN RESPECT OF THEIR LICENCES, LO CATION AND RESOURCES ETC. THEY HAVE GOT SEPARATE APPROVALS FRO M THE- STPI AUTHORITY FOR CLAIMING EXEMPTION ILLS 108 OF T HE ACT AS NEWLY SET UP 100% EOU AND THEY HAVE ALSO BEEN ISSUE D SEPARATE EXPORT LICENCES BY THE CUSTOMS AUTHORITIES . THESE UNITS HAVE SEPARATE LOCATIONS AS IS INDICATED FROM THEIR RESPECTIVE ADDRESSES. THE APPELLANT HAS ALSO PRODUC ED EVIDENCES TO ESTABLISH THAT THEY HAVE SEPARATE FIXE D ASSETS, PLANTS & MACHINERY AND FURNITURE AND FIXTURES ETC. EACH OF THE EOUS HAVE INDEPENDENT, SEPARATE AND DISTINCT OPERAT IONS AS INDICATED IN THE EVIDENCES PRODUCED IN THE FORM OF COPIES OF SOFTEX FORMS, COPIES OF THE INVOICES, COPIES OF FOR EIGN INWARD REMITTANCE CERTIFICATES, COPIES OF CUSTOM BONDED RE GISTER MAINTAINED BY EACH UNIT AND COPIES OF MONTHLY PERF ORMANCE REPORTS ON SAMPLE BASIS. THOUGH SEPARATE BOOKS OF A CCOUNTS IN RESPECT OF UNITS HAVE NOT BEEN MAINTAINED IN THE TRADITIONAL SENSE, THE APPELLANT HAS EXPLAINED THAT IN THE ERP SOFTWARE ACCOUNTING SYSTEM IMPLEMENTED BY THEM EACH AND EVER Y TRANSACTION OF EACH UNIT IS SEPARATELY CODED AND TH EREFORE ALL 38 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 THE TRANSACTIONS ARE IDENTIFIABLE AS IN THE CASE OF SEPARATE BOOKS. MOREOVER, THE DEDUCTION HAS BEEN CLAIMED' IN RESPECT OF THE EOUS ON THE BASIS OF THE PRESCRIBED AUDIT REPOR T IN FORM NO.56G WHICH ALSO REQUIRES THE CERTIFYING CHARTERED ACCOUNTANT TO CERTIFY THE AMOUNT CLAIMED AS DEDUCTI ON U/S 10B ON THE BASIS OF EXAMINATION OF THE ACCOUNTS AND RECORDS OF THE ASSESSEE RELATING TO THE BUSINESS OF THE ELI GIBLE UNDERTAKING. THIS REPORT ALSO DOES NOT REFER TO ANY SEPARATE BOOKS TO BE MAINTAINED OR REQUIRED TO BE MAINTAINED BY THE ELIGIBLE EOU. THIS ISSUE IS ALSO DIRECTLY COVERED I N THE CASE OF DCIT V. ARABIAN EXPORTS LIMITED: 109 TTJ 440 (MUM.) AS CITED BY THE APPELLANT HEREINABOVE, WHEREIN THE TRIBUNAL, UPHELD THE FOLLOWING DECISION OF THE CIT(A) : '2.4 IN VIEW 'OF THE ABOVE PROVISIONS OF S10B, ANY PROFITS AND GAINS WHICH ARE DERIVED BY AN ASSESSEE FROM A 100 PER CENT EXPORT-ORIENTED UNDERTAKING SHALL NOT BE INCLUDED I N THE TOTAL INCOME OF THE ASSESSEE, IF THE CONDITIONS IN SUB-S. (2) OF THIS SECTION ARE FULFILLED. LOOKING TO THESE CONDITIONS AS MENTIONED IN SUB-S.(2) OF THIS SECTION, IT IS NOT SEEN THAT SEPARATE BOOKS OF ACCOUNTS ARE THE REQUIREMENT OF CLAIMING DEDUCTI ON FROM THE TOTAL INCOME OF ANY ASSESSEE RELATING TO THE PROFIT S AND GAINS DERIVED BY THAT ASSESSEE FROM A 100 PER CENT EXPORT -ORIENTED UNDERTAKING ................ ... THIS KOREGAON UNIT IS FULFILLING ALL THE CONDITIONS AS PER SUB-S. (2) OF S..10B OF THE A CT AND THEREFORE, IT. IS ENTITLED FOR THAT EXEMPTION .. TH IS GROUND 'OF APPEALS IS ALLOWED. ' REFERENCE, IN THIS REGARD HAS ALSO BEEN MADE TO THE FOLLOWING DECISIONS OF THE COURT / TRIBUNAL WHERE IT HAS BEEN HELD THAT THERE IS NO REQUIREMENT TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS AS A NECESSARY PRECONDITION FOR CLAIMING T HE BENEFIT OF RELIEF UNDER SECTIONS 1OA/10B OF THE ACT:- CIT V. FUSION SOFTWARE ENGG. (P.) LTD.: ITA NO. 9 52 AND 953 OF 2006 (KAR HC) JCIT V GEBBS INFOTECH LTD.: ITA NO. 3370/MUM/2007 (MUM.) 2.4.4 IN VIEW OF THE EVIDENCE PLACED AND THE EXPLAN ATIONS FURNISHED, IT IS HELD THAT THE ELIGIBLE UNITS OF TH E APPELLANT COMPANY IDENTIFIED AS THE FOLLOWING: NTL-SALT LAKE - KOLKATA EM4/1, 2 ND FLOOR, NORTH WING SECTOR-V, SALT LAKE ELECTRONICS COMPLEX, KOLKATA NTL-SAFED POOL, MUMBAI ADITYA TEXTILE COMPOUND, CAROUROY BUILDING SAFED POOL, ANDHERI KURLA ROAD, 39 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 ANDHERI (E), MUMBAI NTL-PRETORIA STREET, KOLKATA 6B, PRETORIA STREET, K OLKATA NTL-BANNERGHATTA ROAD, BANGALORE NO.39/2,BANNERGHATTA ROAD, BANGALORE 560029 NTL-ATHENA, NEW DELHI A-44, MOHAN CO-OPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. ARE-SEPARATE 100% EOUS OF THE APPELLANT COMPANY FOR THE PURPOSES OF CLAIMING DEDUCTION U/S 10 B OF THE ACT AND THEY CANNOT BE TREATED AS ONE WITH THE APPELLANT COMPA NY JUST BECAUSE THEY CARRY OUT THE SAME NATURE OF BUSINESS. AS HAS BEEN HELD IN THE CASES OF CIT V MAHAN FOODS LTD. 21 6 CTR 148 AND CIT V GEDORE TOOLS (INDIA) P.LTD. 126 ITR 6 13 BY THE HON. JURISDICTIONAL HIGH COURT, JUST BECAUSE THE NE W UNDERTAKING CARRIES EN THE SAME NATURE OF BUSINESS AS THE OLD UNIT, IT CANNOT BE TREATED AS ONE WITH THE OLD UNIT UNLESS IT HAS BEEN FORMED BY SPLITTING UP OR RECONSTRUCTION OF TH E OLD UNIT. IT IS NOT THE CASE OF THE AO THAT IN THE INSTANT CASE, THE ELIGIBLE UNITS HAVE BEEN FORMED BY SPLITTING UP OR RECONSTRU CTING THE OLD .OR NON-ELIGIBLE UNITS. SINCE THERE IS ENOUGH E VIDENCE IN THE APPELLANT'S CASE THAT THE EXPERT ORIENTED UNITS WER E FORMED INDEPENDENTLY OF THE EXISTING UNITS FOR THE PURPOSE OF EXPORT OF SOFTWARE AND THEY WERE APPROVED AS SUCH BY THE RELE VANT AUTHORITIES, AND THAT THEY HAVE FUNCTIONED INDEPEND ENTLY OF EACH OTHER FOR THE PURPOSES OF THE BUSINESS OF EXPE RT OF SOFTWARE, THESE UNITS HAVE TO BE TREATED AS THE ELI GIBLE UNDERTAKINGS FOR THE PURPOSES OF DEDUCTION U/S 10B OF THE ACT AND PROFITS ARISING THEREFROM HAVE TO BE ALLOWED AS DEDUCTION UNDER THAT SECTION SEPARATELY AS CERTIFIED BY THE A UDIT REPORT IN FORM 56G, THE FIRST SUBSTANTIVE ISSUE IS THEREFO RE DECIDED IN FAVOUR OF THE APPELLANT AND THE AO IS DIRECTED T O RE-COMPUTE THE DEDUCTION U/S 10B ACCORDINGLY. 2.4.5 THE SECOND SUBSTANTIVE ISSUE IN THIS APPEAL I S AS TO THE STAGE OF ALLOWANCE OF DEDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSING OFFICER HAS TAKEN THE VIEW THAT THE D EDUCTION U/S 10B WAS ALLOWABLE AFTER DEDUCTING UNABSORBED BR OUGHT FORWARD DEPRECIATION FROM THE PROFITS OF BUSINESS O F THE APPELLANT COMPANY. HE HAS PLACED RELIANCE MAINLY ON THE JUDGMENT OF THE HON. KARNATAKA HIGH COURT IN THE CA SE OF CIT VS. HIMMATSINGIKE SEIDE LTD. 286 ITR 255 FOR THE AB OVE PROPOSITION. THE CASE OF THE APPELLANT IS THAT DEDU CTION IS ALLOWABLE FROM PROFITS OF THE ELIGIBLE BUSINESS AS COMPUTED UNDER THE HEAD 'BUSINESS INCOME'. AS A NECESSARY CO ROLLARY, SUCH PROFITS ARE THE INDIVIDUAL PROFITS OF THE ELIG IBLE UNITS COMPUTED BEFORE SETTING OFF OF BROUGHT FORWARD UNA BSORBED LOSSES DEPRECIATION, IF ANY, OF NON-ELIGIBLE UNDERT AKINGS, 40 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 REQUIRED TO BE SET OFF, SUBSEQUENTLY AT THE STAGE O F COMPUTING GROSS TOTAL INCOME, UNDER CHAPTER VI OF THE ACT. AC CORDING TO THE APPELLANT, ON ONE HAND, THE FACTS OF THE CASE O F CIT VS. HIMMATSINGIKE SEIDE LTD. 286 ITR 255 ARE CLEARLY DISTINGUISHABLE FROM THE FACTS OF THE INSTANT CASE AND ON THE OTHER, THE. AFORESAID ISSUE IS SQUARELY COVERED BY THE DECISION OF THE-SPECIAL BENCH OF THE' TRIBUNAL IN THE CASE OF SCIENTIFIC ATLANTA INDIA (P) LIMITED: 38 SOT 252/129 TTJ 273 W HEREIN THE TRIBUNAL HAS HELD THAT DEDUCTION UNDER SECTION 10A OF THE ACT HAS TO BE INDEPENDENTLY COMPUTED IN RELATION TO THE PROFITS OF THE ELIGIBLE UNIT WITHOUT ADJUSTING THE SAME AGA INST- UNABSORBED DEPRECIATION RELATING TO THE NON-ELIGIBL E UNIT(S). RELIANCE HAS ALSO BEEN PLACED BY THE APPELLANT ON T HE DECISION OF BANGALORE BENCH OF TRIBUNAL IN THE CASE OF ACIT V. YOKOGAWA INDIA LTD. 111 TTJ 548, WHEREIN IT WAS HEL D THAT DEDUCTION UNDER SECTION 10A SHALL BE ALLOWED FROM T HE PROFITS OF ELIGIBLE UNDERTAKING WITHOUT SETTING OFF THE LOS SES /CARRIED FORWARD LOSSES OF OTHER NON-ELIGIBLE DIVISIONS. OTH ER CASES RELIED UPON BY THE APPELLANT ARE AS UNDER: CHANGEPOND TECHNOLOGIES (P.) LTD. V. ACIT: 119 T TJ 18 (CHENN.) KPIT CUMMINS INFOSYSTEMS (BANGALORE) (P) LTD. V. ACIT: (2008) 26 SOT 529 (BANG,) RELIQ SOFTWARE (P) LIMITED V. ITO: 125 ITO 101 (B ANG.) BESIDES THE ABOVE DECISIONS CITED IN THEIR WRITTEN SUBMISSIONS, THE APPELLANT'S AR ALSO BROUGHT TO MY ATTENTION THE JUDGEMENT OF HON. KARNATAKA HIGH COURT IN THE C ASE OF YOKOGAWA INDIA LTD. : 246 CTR 226 (KAR), WHEREIN TH IS ISSUE HAS BEEN EXAMINED BY THE HON. HIGH COURT AND DECID ED IN THE FAVOUR OF THE ASSESSEE. THE AR HAS ARGUED SINCE THE PROVISIONS OF SECTION 10A ARE ANALOGOUS TO THE PROV ISIONS OF SECTION 10B THE RATIO LAID DOWN BY THE ABOVE SAID JUDICIAL PRONOUNCEMENTS ARE APPLICABLE TO THE APPELLANT'S CA SE ALSO. 2.4.5.1 I HAVE PERUSED THE JUDICIAL PRONOUNCEMENTS AS RELIED UPON BY THE ASSESSING OFFICER AND THE APPELLANT. IN THE CASE OF CIT VS. HIMMATSINGIKE SEIDE LTD. 286 ITR 255, TH E ASSESSEE HAD 100% EXPORT ORIENTED UNDERTAKING ELIGI BLE FOR DEDUCTION UNDER SECTION 10B OF THE ACT. THE UNDERTA KING WAS SET UP IN THE ASSESSMENT YEAR 1988-89. THE ASSESSEE , HOWEVER, CLAIMED DEDUCTION FOR FIVE CONSECUTIVE YEA RS FROM ASSESSMENT YEAR 1992-93. THE YEAR UNDER CONSIDERATI ON BEFORE THE HON COURT WAS ASSESSMENT YEAR 1994-95. T HE ASSESSEE HAD UNABSORBED DEPRECIATION RELATING, TO T HE 100% EXPORT ORIENTED UNDERTAKING CARRIED FORWARD FROM AS SESSMENT YEAR 1988-89 TO THE YEAR UNDER CONSIDERATION. THE SAID UNABSORBED_ DEPRECIATION WAS ADJUSTED BY THE ASSESS EE AGAINST CERTAIN INCOME FROM 'OTHER SOURCES' AND NOT AGAINST THE ELIGIBLE PROFITS OF THE 100% EXPORT ORIENTED UN DERTAKING 41 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 AND THE ENTIRE PROFITS FROM THE EXPORT ORIENTED UND ERTAKING WAS CLAIMED AS EXEMPT FROM TAX. THE ASSESSEE, BY DO ING SO WAS ABLE TO SET OFF THE UNABSORBED DEPRECIATION OF THE EXPORT ORIENTED UNDERTAKING AGAINST THE TAXABLE PROFITS FR OM 'OTHER SOURCES', WHICH HAD THE EFFECT OF REDUCING THE TAXA BLE INCOME TO NIL. THE HON HIGH COURT, AFTER ANALYZING THE ENT IRE SCHEME HELD THAT THE UNABSORBED DEPRECIATION OF THE EXPORT ORIENTED UNDERTAKING HAD TO BE ADJUSTED AGAINST THE ELIGIBLE PROFITS BEFORE ALLOWING EXEMPTION/DEDUCTION UNDER SECTION 1 08 OF THE ACT. THE HON. COURT OBSERVED THAT BY CLAIMING SET O FF OF UNABSORBED DEPRECIATION OF THE ELIGIBLE UNDERTAKING AGAINST 'INCOME FROM OTHER SOURCES', THE ASSESSEE HAD VIRTU ALLY TAKEN EXEMPTION FROM PAYMENT OF TAX EVEN IN RESPECT OF OT HER BUSINESS INCOME, WHICH WAS CLEARLY NOT PERMISSIBLE. APPLIED TO THE PRESENT CASE, IT IS IMMEDIATELY DISCERNIBLE THAT THE FACTS OF THE PRESENT CASE ARE TOTALLY OPPOSITE OF THE FAC TS OF THE CITED CASE. THERE IS NO BROUGHT FORWARD UNABSORBED DEPREC IATION IN RESPECT OF THE 100% EOUS IN THE PRESENT CASE. IN TH E PRESENT CASE, IT IS NOTICED THAT THE QUESTION OF SET OFF OF UNABSORBED DEPRECATION BROUGHT FORWARD FROM EARLIER YEAR(S) PR IOR TO CLAIMING DEDUCTION UNDER SECTION 108 OF THE ACT WOU LD NOT ARISE SINCE THE UNABSORBED DEPRECIATION OF RS.13,90 ,60,056 CARRIED FORWARD FROM ASSESSMENT YEAR 2005-06 RELA TED TO UNDERTAKINGS NOT ELIGIBLE FOR DEDUCTION UNDER SECTI ON 10B OF THE ACT DURING THE YEAR UNDER CONSIDERATION. THIS F ACT CLEARLY ESTABLISH THAT UNABSORBED DEPRECIATION BROUGHT FORW ARD ACTUALLY PERTAINED TO THE NON-ELIGIBLE UNIT AND NOT TO THE ELIGIBLE UNIT(S) AND THEREFORE, THE QUESTION OF SET OFF OF SUCH UNABSORBED DEPRECIATION PRIOR TO CLAIMING DEDUCTION UNDER SECTION 10B OF THE ACT IN MY VIEW DOES NOT ARISE AT ALL. I AGREE WITH THE CONTENTION OF THE APPELLANT THAT FACTS OF THE INSTANT CASE ARE DISTINGUISHABLE FROM THE FACTS OF THE CITE D CASE AND HOLD THAT THE DECISION OF HON. KARNATAKA HIGH COURT IN THE CASE OF HIMMATSINGKIE SIEDE UD.(SUPRA) IS NOT APPLI CABLE IN THE PRESENT CASE AND THAT THE RELIANCE PLACED BY TH E ASSESSING OFFICER ON THAT CASE IS SOMEWHAT MISPLACE D. 2.4.5.2 IN THE CASE OF SCIENTIFIC ATLANTA INDIA TEC HNOLOGY (P) LIMITED: 38 SOT 252 I 129 TTJ 273 AS RELIED UPON BY THE APPELLANT, IT HAS BEEN HELD BY THE SPECIAL BENCH OF THE TRIBUNAL AS UNDER: UNDER THE SCHEME OF THE ACT THE PROFITS OF THE UN IT ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT,' WOULD FOR M PART OF THE INCOME COMPUTED UNDER THE HEAD 'PROFITS AND GAI NS OF BUSINESS AND PROFESSION'. HOWEVER, IN ORDER THE SAM E WILL NOT SUFFER TAX DEDUCTION WILL HAVE TO BE MADE -IN RESPE CT OF SUCH PROFITS WHILE COMPUTING THE INCOME UNDER THE HEAD ' PROFITS AND GAINS OF BUSINESS AND PROFESSION'. IN OTHER WOR DS, A DEDUCTION IN RESPECT OF PROFITS ELIGIBLE UNDER SECT ION 10A IS 42 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 REQUIRED TO BE MADE AT THE STAGE OF COMPUTING THE INCOME UNDER THE HEAD' 'PROFITS AND GAINS OF BUSINESS OR P ROFESSION'. THUS, WE FIND THAT WHAT IS CONTEMPLATED BY THE LEGI SLATURE IS THAT PROFITS AND GAINS OF THE UNDERTAKINGS FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE ARE TO. BE DEDUCTED COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROF ESSION (AT HUNDRED PER CENT UPTO ASSESSMENT YEAR 2002-03 AND N INETY PER CENT THEREAFTER). EVEN THOUGH IT IS A DEDUCTION TO BE GIVEN, IT IS TO BE DEDUCTED WHILE ARRIVING AT THE PROFITS OF BUSINESS AND PROFESSION AND NOT FROM THE GROSS TOTAL INCOME AS ENVISAGED UNDER CHAPTER VI-A. THUS,-WE HOLD THAT DE DUCTION UNDER SECTION 10A UNDER CHAPTER III OF THE IT. ACT IS TO BE GRANTED WHILE COMPUTING THE PROFITS AND GAINS OF BU SINESS AND PROFESSION ITSELF AND NOT FROM THE GROSS TOTAL INCOME . 25. HAVING HELD THAT THE CLAIM UNDER SECTION 10A IS ONLY DEDUCTION AND THE SAME IS NOT SUBJECTED TO SECTION 80AB OF CHAPTER VI-A, NOW, LET US CONSIDER WHETHER THE DED UCTION SO TO BE GIVEN UNDER SECTION 10A IS UNDERTAKING SPECIF IC OR OTHERWISE. 26. IT CAN BE NOTICED FROM THE LANGUAGE OF SECTION 10A(1) THAT A DEDUCTION OF SUCH PROFITS AND GAINS THAT AS ARE D ERIVED BY 'AN' UNDERTAKING 'QUALIFIES UNDER SECTION 10A IS TO BE GIVEN FROM THE TOTAL INCOME. INTERESTINGLY, THE LEGISLATU RE HAS MENTIONED THE PROFITS AND GAINS AS ARE DERIVED BY A N UNDERTAKING. IT MEANS THAT. THE ASSESSEE MAY HAVE M ORE THAN ONE UNDERTAKING AND IN SUCH A CASE, ONE HAS TO CONS IDER THE PROFITS AND GAINS OF THAT 'PARTICULAR UNDERTAKING' WHICH QUALIFIES FOR DEDUCTION UNDER SECTION 10A. ACCORDIN G TO SECTION 10A(4), THE DEDUCTION IS TO BE COMPUTED IN THE SAME PROPORTION WHICH BEARS TO THE PROFITS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTA L TURNOVER. IT MAY BE NOTICED THAT AGAIN THE WORDS USED ARE 'PROFI TS AND GAINS OF BUSINESS OF THE UNDERTAKING'. IN ANY CASE, THIS IS NOT THE TOTAL PROFITS OF THE BUSINESS OF THE ASSESSEE. THUS IN COMPUTING DEDUCTION UNDER SECTION 10A WE HAVE TO AS CERTAIN THE TOTAL INCOME AS PER THE PROVISIONS OF THE ACT I N RESPECT OF 'THAT UNDERTAKING' AND THE AMOUNT SO DETERMINED IS TO BE REDUCED FROM THE TOTAL INCOME . 27. HAVING HELD THAT THE DEDUCTION UNDER SECTION -1 0A IS NOT AN EXEMPTION BUT ONLY A DEDUCTION UNDER CBEPTER III OF THE INCOME-TAX ACT AND THE PROVISIONS OF SECTION 8OAB O F CHAPTER VIA WOULD NOT BE APPLICABLE TO SUCH DEDUCTION UNDER SECTION 10A, AND ALSO THAT THE DEDUCTION UNDER SECTION 10A IS UNDERTAKING SPECIFIC, WE HAVE TO ANSWER THE QUESTIO N POSED BEFORE US BY HOLDING THAT THE BUSINESS LOSSES ARE N ON-ELIGIBLE UNIT, WHOSE INCOME IS NOT ELIGIBLE FOR DEDUCTION UN DER SECTION 10A OF THE ACT, CANNOT BE SET OFF AGAINST THE PROFI TS OF THE 43 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 UNDERTAKING ELIGI61E FOR DEDUCTION UNDER SECTION 10 A FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION UNDE R SECTION 10A OF THE ACT. OF COURSE, IF THERE ARE MORE THAN O NE UNDERTAKING WHICH IS ELIGIBLE FOR DEDUCTION UNDER S ECTION 10A AND IF SOME OF THE UNITS HAVE PROFIT AND OTHER UNIT S HAVE LOSS, IT WOULD BE AN ENTIRELY DIFFERENT CASE WHICH IS BEF ORE US. HENCE, THE DECISION RENDERED IN THIS APPEAL WOULD N OT-BE APPLICABLE TO SUCH CASES WHERE THERE ARE MORE THAN ONE ELIGIBLE UNDERTAKING CLAIMING DEDUCTION UNDER SECTI ON 1OA. IN THIS CASE, THERE IS ONLY ONE ELIGIBLE UNIT CLAIMING DEDUCTION UNDER SECTION 10A AND HENCE, THE LOSS FROM NON-ELIG IBLE UNIT CANNOT BE SET OFF AGAINST THE PROFITS OF THE ELIGIB LE UNIT WHILE DETERMINING DEDUCTION UNDER SECTION 1OA.II (EMPHASI S SUPPLIED) 2.4.5.3 IN THE CASE OF ACIT V. YOKOGAWA INDIA LTD.: 111 TTJ 548 THE BANGALORE BENCH OF TRIBUNAL HELD THAT DEDUC TION UNDER SECTION 10A SHALL BE ALLOWED FROM THE PROFITS OF ELIGIBLE UNDERTAKING WITHOUT SETTING OFF THE LOSSES OR CARRY FORWARD LOSSES OF OTHER NON-ELIGIBLE DIVISIONS. THIS DECISI ON WAS SUBJECTED TO APPEAL U/S 260A BY THE REVENUE AND THE HON. HIGH COURT OF KARNATAKA HAS GIVEN ITS VERDICT IN IT A NO. 78/2011 DATED 9TH AUGUST 2011, REPORTED IN 246 CTR 226(KAR) IN A COMBINED ORDER IN RESPECT SEVERAL OTH ER CASES, A COPY OF WHICH HAS BEEN FURNISHED BY THE AR OF THE A PPELLANT. FROM A PERUSAL OF THIS JUDGEMENT, IT IS SEEN THAT T HE HON. HIGH COURT HAS ANSWERED THE QUESTION AS TO WHETHER THE P ROFIT OF ELIGIBLE UNDERTAKING FOR THE PURPOSE OF ALLOWING DE DUCTION U/S 10A OF THE ACT (WHICH IS ANALOGOUS TO SECTION 108) AT THE SOURCE ITSELF OR AFTER DEDUCTION OF UNABSORBED BROU GHT FORWARD DEPRECIATION, IN FAVOUR OF THE ASSESSEE. THE HON. C OURT WHILE UPHOLDING THE CONTENTION OF THE ASSESSEE THAT DEDUC TION U/S 1OAWAS TO BE ALLOWED AT THE SOURCE ITSELF OBSERVED AS UNDER: '12. A LITERAL READING OF THE ABOVE PROVISION REQUI RES DEDUCTION FROM THE TOTAL INCOME. THERE CAN BE DEDUCTION IN CO MPUTING THE 'TOTE! INCOME. HOWEVER, THERE CANNOT BE DEDUCTION F ROM THE TOTAL INCOME WHICH IS THE FINAL RESULT OF THE COMPU TATION PROCESS. THE LANGUAGE ADOPTED IN SECTION 1O-A IS DI FFERENT FROM THE ONE ADOPTED IN SECTION 80 -A. SECTION 10 - A PROVIDES FOR DEDUCTION FROM THE TOTAL INCOME. IN THE SCHEME OF THE ACT, WHILE- VARIOUS DEDUCTIONS ARE ALLOWED IN COMPUTING THE TOTAL INCOME ONCE THE TOTAL INCOME IS COMPUTED, NO FURTH ER ADJUSTMENTS TO THE TOTAL INCOME IS ENVISAGED. THE S CHEME OF THE ACT PROVIDES FOR DEDUCTIONS IN COMPUTING THE TO TAL INCOME BUT NO MECHANISM FOR ANY DEDUCTION FROM THE TOTAL I NCOME ALREADY COMPUTED IS PROVIDED UNDER THE ACT. ONCE TH E TOTAL INCOME IS COMPUTED, THE NEXT STEP IS DETERMINATION OF THE TAX BY APPLYING APPLICABLE RATES ON THE TOTAL INCOME .. ...... . . 44 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 14. THE PHRASE 'TOTAL INCOME' HAS BEEN USED IN THE INCOME TAX ACT IN SEVERAL PLACES WITH DIFFERENT CONNOTATION AN D SHADES. THE PHRASE TOTAL INCOME USED IN SECTION I0-A IS ONE SUCH VARIANT. THE PHRASE NEED NOT NECESSARILY MEAN THE T OTAL INCOME AS COMMUTED IN ACCORDANCE WITH THE PROVISION OF THE ACT. THE RELIEF UNDER THIS SECTION IS WITH REFERENC E TO THE STP UNDERTAKING AND NOT TO THE ASSESSEE. IN OTHER WORDS , THE RELIEF TRAVELS WITH THE UNDERTAKING IRRESPECTIVE OF WHO OW NS THE SAME. THE COMPUTATION OF RELIEF AS PROVIDED IN SECT ION 10-A (4) IS ALSO WITH REFERENCE TO THE UNDERTAKING. A BUSINE SS MIGHT HAVE SEVERAL UNDERTAKING AND SECTION 28 DOES NOT EN VISAGE COMPUTATION .OF INCOME OF EACH SUCH UNDERTAKING. IN OTHER WORDS, THE PROFIT OF THE BUSINESS OF THE UNDERTAKIN G CANNOT BE COMPUTED IN ISOLATION. THE PROFITS ARE COMPUTED UND ER THE HEAD 'PROFITS AND GAINS FROM BUSINESS OR PROFESSION ' AS UNDER THE ABOVE HEAD, THE INCOME FROM BUSINESS AS A WHOLE HAS TO BE COMPUTED. THE PHRASE 'TOTAL INCOME' USED IN SECT ION 1O-A (1) IS, THEREFORE TO BE UNDERSTOOD AS THE TOTAL INC OME OF THE STP UNIT. THIS IS CLEAR FROM THE FIRST PROVISO TO SECTI ON 10-A (1) WHICH MAKE REFERENCE TO THE TOTAL INCOME OF THE UND ERTAKING AND NOT THE TOTAL INCOME OF THE ASSESSEE, THE DEFIN ITION OF ANY TERM GIVEN IN SECTION 2 WILL ONLY APPLY WHEN THE CO NTEXT DOES NOT OTHERWISE REQUIRE. - THE PLACEMENT LANGUAGE AN- D SETTING OF SECTION 10-A MEANS PROFITS AND GAINS OF THE STP UNDERTAKING AS UNDERSTOOD IN ITS COMMERCIAL SENSE. 15. AS RELIEF UNDER SECTION 10-A IS IN THE NATURE O F EXEMPTION ALTHOUGH TERMED AS DEDUCTION AND THE SAID RELIEF IS IN RESPECT OF COMMERCIAL PROFITS, SUCH INCOME IS NEITHER SUBJE CT TO CHARGE OF INCOME TAX NOR INCLUDIBLE IN THE TOTAL INCOME. T HEREFORE THE TWIN PROVISIONS OF SECTION 14 ARE NOT EXISTING .IN THE CASE OF INCOME OF STP UNDERTAKING AND ACCORDINGLY SUCH INCO ME IS NOT LIABLE TO BE COMPUTED UNDER CHAPTER IV. THEREFORE T HE CORRECT VIEW WOULD BE THAT THE RELIEF UNDER SECTION 10-A WI LL HAVE TO BE GIVEN BEFORE CHAPTER IV THE DEDUCTION SHALL BE G IVEN FIRST AND PROCESS OF COMMUTATION OF 'PROFITS AND GAINS FR OM BUSINESS OR PROFESSION BEGINS THEREAFTER. .THIS PRO POSITION IS IN THE LINE WITH THE FORM OF RETURN ---ALLOWING D EDUCTION AT THE EARLIEST STAGE OF BUSINESS INCOME, COMPUTATIO N ALMOST BLURS THE DIFFERENCE BETWEEN THE COMMERCIAL PROFITS AND TAX PROFITS. 16. THE SUBSTITUTED SECTION 10-A CONTINUES TO REMAI N IN CHAPTER LII. IT IS TITLED AS 'WHICH DO NOT FORM PAR T OF THE TOTAL INCOME'. IT MC1Y BE NOTED THAT WHEN SECTION 10-AWAS RECAST BY THE FINANCE ACT, 2001 THE PARLIAMENT WAS AWARE O F THE CHARACTER OF RELIEF GIVEN IN CHAPTER III. CHAPTER 1 11 DEALS WITH INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME. IF THE PARLIAMENT INTENDED THAT THE RELIEF UNDER SECTION 1 0-A SHOULD BE BY WAY OF DEDUCTION IN THE NORMAL COURSE OF COMP UTATION OF 45 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 TOTAL INCOME, IT COULD HAVE PLACED THE SAME IN CHAP TER- VL(A) WHICH HOUSES THE SECTION LIKE 80-HHC 80-IA.ETC. THE PARLIAMENT WAS AWARE OF THE VARIOUS RESTRICTION AND LIMITING PROVISIONS LIKE SECTION 8OA AND SECTION 80AB WHICH WAS IN CHAPTER VI-A WHICH DO NOT APPEAR IN CHAPTER-III. TH E FACT THAT EVEN AFTER ITS RECAST THE RELIEF HAS BE-EN RETAINED IN CHAPTER 11/ INDICATES THAT THE INTENTION OF PARLIAMENT IS T O REGARD IT AS AN EXEMPTION AND NOT A DEDUCTION. THE ACT OF THE PA RLIAMENT IN CONSCIOUSLY RETAINING THE SECTION IN CHAPTER 11/ INDICATES ITS INTENTION THAT THE NATURE OF RELIEF CONTINUES T O BE AN EXEMPTION. THE PARLIAMENT DESPITE BEING CONVERSANT WITH THE IMPLICATIONS OF THIS CHAPTER HAS CONSCIOUSLY CHOSEN TO RETAIN SECTION 10A IN CHAPTER III. 17. IF SECTION 10A IS TO BE GIVEN EFFECT TO AS A DE DUCTION FROM THE TOTAL INCOME AS DEFINED IN SECTION 2(45), IT WO ULD MEAN THAT SECTION 10A IS TO BE CONSIDERED AFTER CHAPTER VI-A DEDUCTIONS HAVE BEEN EXHAUSTED. THE DEDUCTIONS UNDE R CHAPTER VI-A ARE TO BE GIVEN FROM OUT OF THE GROSS TOTAL INCOME. THE TERM 'GROSS TOTAL INCOME' IS DEFINED IN SECTION 80B(5) TO MEAN THE TOTAL INCOME COMPUTED IN ACCORDANCE WITH T HE PROVISIONS OF THE ACT, BEFORE MAKING ANY DEDUCTION UNDER THIS CHAPTER. AS PER THE DEFINITION THE GROSS TOTAL INCO ME, THE OTHER PROVISIONS OF THE ACT WILL HAVE TO BE FIRST GIVEN E FFECT TO. THERE IS NO REASON WHY REFERENCE TO THE PROVISIONS OF THE ACT SHOULD NOT INCLUDE SECTION IDA. IN OTHER WORDS, THE GROSS TOTAL INCOME WOULD BE ARRIVED AT AFTER CONSIDERING SECTION 10A D EDUCTION ALSO. THEREFORE, IT WOULD BE INAPPROPRIATE TO CONCL UDE THAT SECTION 10A DEDUCTION IS TO BE GIVEN EFFECT TO AFTE R CHAPTER VIA DEDUCTIONS ARE EXHAUSTED. 18. IT IS AFTER THE DEDUCTION UNDER CHAPTER VI-A TH AT THE TOTAL INCOME OF AN ASSESSEE AS ARRIVED AT. CHAPTER VI-A D EDUCTIONS ARE THE LAST STAGE OF GIVING EFFECT TO ALL TYPES OF DEDUCTIONS PERMISSIBLE UNDER THE ACT. AT THE END OF THIS EXERC ISE, THE TOTAL INCOME IS ARRIVED AT. TOTAL INCOME IS THUS, A FIGUR E ARRIVED AT, AFTER GIVING EFFECT TO ALL DEDUCTIONS UNDER THE ACT . THERE CANNOT BE ANY FURTHER DEDUCTIONS FROM THE TOTAL INC OME AS THE TOTAL INCOME IS ITSELF ARRIVED AT AFTER ALL DEDUCTI ONS. 19. FROM THE AFORESAID DISCUSSION, IT IS CLEAR THAT THE INCOME OF 10A UNIT HAS TO BE EXCLUDED BEFORE ARRIVING AT T HE GROSS TOTAL INCOME OF THE ASSESSEE. THE INCOME OF 10A UN IT HAS TO BE DEDUCTED AT SOURCE ITSELF AND NOT AFTER COMPUTIN G THE GROSS TOTAL INCOME. THE TOTAL INCOME, USED IN''THE PROVIS IONS OF SECTION IDA IN THIS CONTEXT MEANS THE GLOBAL INCOM E OFF THE ASSESSEE AND NOT THE TOTAL INCOME AS DEFINED IN SE CTION 2(45). . 27. FORM NO.1 READ WITH RULE 12 OF THE INCOME TAX R ULES, 1962 PROVIDES FOR RETURN OF INCOME AND RETURN OF FR INGE BENEFITS. 46 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 28. IN SCHEDULE NO.9 AT COLUMN NO.7 IT IS CLEARLY M ENTIONED THE AMOUNT CLAIMED DEDUCTIBLE UNDER SECTION 1OA/1OA A/10B OR 1DBA. DEALING WITH THE SCHEME OF THE FORM IT IS STATED THAT SCHEME OF THIS FORM FOLLOW THE SCHEME OF TILE LAW A S OUTLINED ABOVE IN ITS BASIC FORM AND WITH REFERENCE TO SCHED ULE 1, 9, 3 AND 13 IT IS STATED THAT FILL OUT SCHEDULE 9 IF YOU ARE CLAIMING DEDUCTION UNDER SECTION 10A, 10AA, 10B OR 10BA IN R ESPECT OF SOME SPECIFIC BUSINESS'. ITEM 7 OF SCHEDULE 1 IS TO ELIMINATE SUCH INCOME FROM COMPUTATION OF PROFITS AND LOSS AN D NO SEPARATE DECLARATION UNDER SECTION 10A(8) OR 10B(8) IF ANY IS REQUIRED TO BE MADE. 29. AFTER MAKING ALL SUCH COMPUTATIONS THE ASSESSEE WOULD BE ENTITLED TO THE BENEFIT OF SET OFF OR CARRY FORWARD OF LOSS AS PROVIDED UNDER SECTION 72 OF THE ACT. THIS IS THE B ENEFIT WHICH IS GIVEN TO THE ASSESSEE UNDER THE ACT IRRESPECTIVE OF THE NATURE OF BUSINESS WHICH HE IS CARRYING ON. THE SAI D BENEFIT IS AVAILABLE EVEN TO UNDERTAKINGS UNDER SECTION 10B OF THE ACT. THE EXPRESSION 'DEDUCTION OF SUCH PROFITS AND GAINS AS DERIVED BY AN UNDERTAKING SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE', HAS TO BE UNDERSTOOD IN TH E CONTEXT WITH WHICH THE SAID PROVISION IS INSERTED IN CHAPTE R III OF THE ACT. SUB-SECTION (4) OF SECTION 10A CLARIFIED THIS POSITION. IT PROVIDES THAT THE PROFITS DERIVED FROM EXPORT OF AR TICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHI CH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLE OR THING OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNO VER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THEREFORE, IT IS CLEAR THAT THOUGH THE ASSESSEE MAY BE HAVING MORE THAN ON E UNDERTAKING FOR THE PURPOSE OF SECTION 10A IT IS TH E PROFIT DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR CO MPUTER SOFTWARE FROM THE BUSINESS OF THE UNDERTAKING ALONE THAT HAS TO BE TAKEN INTO CONSIDERATION AND SUCH PROFIT IS N OT TO BE INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. IT IS ONLY AFTER THE DEDUCTION OF THE SAID PROFITS AND GAINS, THE INCOME OF THE ASSESSEE HAS TO BE COMPUTED. (EMPHASIS SUPPLIED) 2.4.5.4 IN VIEW OF THE ABOVE DISCUSSION AND CONSID ERING THE GUIDANCE AVAILABLE IN THE AFORESAID JUDICIAL PRONOU NCEMENTS ESPECIALLY IN-THE ABOVE-CITED DECISION OF THE HON. KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA INDIA LTD.: 246 CTR 226(KAR) AND OTHERS, AS GIVEN WITH REFERENCE TO TH E PROVISIONS OF SECTION 10A WHICH ARE ANALOGOUS PROVISIONS OF SE CTION 1DB, IT IS HELD THAT THE DEDUCTION U/S 1DB IS ALLOWABLE AT THE SOURCE ITSELF AND NOT AFTER COMPUTATION OF GROSS T OTAL INCOME AS PER THE PROVISIONS OF THE ACT. THE SECOND SUBSTA NTIVE ISSUE IS, THEREFORE, ALSO DECIDED IN FAVOUR OF THE APPELL ANT AND THE ASSESSING OFFICER IS HEREBY .DIRECTED TO RE-COMPUTE THE 47 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 DEDUCTION U/S 10B ACCORDINGLY. THIS DISPOSES OFF GR OUND NOS. 1, 2 & 3. (ALLOWED) 6. FINDING NO INFIRMITY IN THE DETAILED ORDER OF TH E LD. CIT(A) WE FIND NO MERIT IN THE APPEAL OF THE REVENUE. ACCORDI NGLY, THE REVENUES APPEAL DESERVES TO BE DISMISSED SANS MERI T. 8.5 WE FIND THAT FOLLOWING GROUNDS WERE RAISED IN ASSES SMENT AT 2006-07: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT THAT ALL THE DIFFERENT UNITS OF THE ASSESSEE COMPANY ARE NOT OPERATING IN ISOLATION AS ALLEGED BY THE ASSESSEE, BUT AS DIFFERENCE BRANCHES OF THE SAME TREE. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN NOT NOTING THE FACT THAT THE AS SESSEE IN MAINTAINING SINGLE BOOKS OF ACCOUNTS FOR ALL ITS UN ITS, I.E. THOSE WHICH ARE COVERED BY DEDUCTION, AS WELL AS THOSE WHICH AR E NOT COVERED FOR DEDUCTION. IT IS NOT ONLY FOR THE PURPOSE OF COMPUT ING DEDUCTION U/S 10B THAT THE ASSESSEE HAS TRIED TO ALLOCATE THE EXP ENSES BETWEEN THESE UNITS AND COMPUTE THEIR PROFITS. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT RAISE D THROUGH REMAND REPORT THAT INSPITE OF NUMBER OF OPPORTUNITIES PROV IDED TO THE ASSESSEE, THE ADDITIONAL EVIDENCES WERE FILED ONLY DURING THE APPELLATE PROCEEDINGS. 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)S STAND THAT INDEPENDENT BOOKS OF ACCOUNT AR E NOT REQUIRED TO BE MAINTAINED UNDER THE PROVISIONS OF SECTION 10B O F THE IT ACT, IS NOT CORRECT SINCE THE LANGUAGE OF FORM 56G STARTS W ITH I/WE HAVE EXAMINED THE ACCOUNTS AND RECORDS WHICH MAKES IT CLEAR THAT THE ASSESSEE HAS TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS . THE ANNEXURE A TO FORM 56G ALSO REQUIRES THE DETAILS OF TOTAL PROFIT OF THE BUSINESS ETC. IN VIEW OF THE AFORESAID FACTS, IT IS CLEAR THAT THE ASSESSEE WAS REQUIRED TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 5. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS, THE LD. CIT(A) HAS ERRED NOT APPRECIATING THE FACT THAT THE ASSESSEE BY CLAIMING DEPRECIATION CONTRARY TO SECTION 32 HAS VI RTUALLY TAKEN EXEMPTION FROM PAYMENT OF TAX EVEN FOR OTHER BUSINE SS AS WELL AS NON BUSINESS INCOMES, WHICH SHOULD NOT BE ALLOWED. 48 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 6. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IGNORING THE FACT THAT UNDER THE A MENDED PROVISIONS EFFECTIVE FROM 01.04.2001, THE CLAIM U/S 10B HAS BE EN DECLARED AS DEDUCTION AND NOT EXEMPTION. SINCE PROFITS ARE REQU IRED TO BE COMPUTED AS PER THE PROVISIONS OF THE IT ACT, VIZ., SECTION 29 TO SECTION 43A, THIS INCLUDES SECTION 32(2). THEREFORE , ONE CANNOT EXCLUDE DEPRECIATION ALLOWANCE WHILE COMPUTING PROF ITS DERIVED FROM A NEWLY ESTABLISHED UNDERTAKING. 8.6 IN VIEW OF THE IDENTICAL GROUNDS RAISED IN THE YEA R UNDER CONSIDERATION AND IDENTICAL FACTS AND CIRCUMSTANCES , WE ALLOW THE CLAIM OF THE DEDUCTION OF THE ASSESSEE UNDER SECTIO N 10B OF THE ACT AND DISMISS THE GROUND NO. 1 TO 1.5 AND 2 OF TH E APPEAL OF THE REVENUE. 9. THE GROUND NOS. 3 AND 4 OF THE APPEAL OF THE REVEN UE RELATE TO ONE-TIME LEASE RENTAL CHARGES PAID BY THE ASSESS EE TO GREATER NOIDA INDUSTRIAL DEVELOPMENT AUTHORITIES (GNIDA) FO R TAKING PLOT OF LAND ON LEASE FOR DEVELOPMENT OF IT PARK FOR A P ERIOD OF 90 YEARS. 9.1 THE FACTS QUA THE ISSUE IN DISPUTE THAT THE ASSESS EE HAD TAKEN ON LEASE PLOT NO. 2A AT SECTOR TECHZONE (IT P ARK) SITUATED IN GNIDA, GAUTAM BUDDHNAGAR (UP). THE DEED OF LEASE WA S EXECUTED ON 12/01/2007 FOR THE PURPOSE OF CONSTRUCT ION OF THE PROJECT WITH INTEGRATED, READY TO USE OFFICE SPACE AND LAND AND SOCIAL INFRASTRUCTURE SO AS TO DEVELOP IT INDUSTRIE S AND IT ENABLED SERVICES (I.E. SEZ) IN GREATER NOIDA. THE ASSESSEE WAS OBLIGED UNDER THE LEASE DEED TO COMPLETE THE CONSTRUCTION O F THE WHOLE PROJECT AND FACILITIES WITHIN SEVEN YEARS FROM THE DATE OF THE EXECUTION OF THE LEASE DEED ACCORDING TO THE LAYOUT IN THE BUILDING PLAN TO BE APPROVED BY THE GNIDA. THE LEASE TERM IS OF 90 YEARS COMMENCING FROM 12/01/2007 WITH THE RIGHT OF THE GN IDA 49 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 RESERVED. IN ACCORDANCE WITH THE TERMS OF LEASE AGR EEMENT DATED 12/01/2007 ENTERED INTO BETWEEN THE ASSESSEE AND TH E GNIDA , THE ASSESSEE HAD OPTION TO EITHER PAY (A) THE ADVAN CED ANNUAL RENT ON YEARLY BASIS OR (B) COMMUTED ONE TIME LEASE FOR THE PERIOD OF THE LEASE, AND NO LEASE RENT WOULD BE PAYABLE BY THE ASSESSEE DURING THE LEASE PERIOD AS CHARGEABLE FROM THE DATE OF EXECUTATION OF THE LEASE DEED. THE ASSESSEE OPTED SECOND OPTION AND PAID COMMUTED ONE TIME LEASE RENT OF 77,98,042/- AND CLAIMED THE SAME AS REVENUE EXPENDITURE. 9.2 ACCORDING TO THE ASSESSING OFFICER, THE SAID LEASE RENTAL CHARGES BEING OF ENDURING NATURE, ARE CAPITAL EXPEN DITURE NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT. 9.3 ON FURTHER APPEAL, THE LD. CIT(A) HELD THAT THE EX PENDITURE INCURRED IS NOT IN THE CAPITAL FIELD, THEREFORE FOL LOWING THE JUDICIAL PRECEDENT ON THE ISSUE , ALLOWED THE CLAIM OF THE A SSESSEE 9.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT LEASE R ENTALS HAS BEEN PAID FOR THE PERIODS OF 90 YEARS, AND THIS EXPENDI TURE BEING OF ENDURING NATURE, THE ASSESSING OFFICER WAS JUSTIFIE D IN TREATING THE EXPENDITURE AS CAPITAL EXPENDITURE. 9.5 THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LD. CIT(A) AND THE JUDIC IAL PRECEDENTS RELIED UPON BY HIM. THE LD. COUNSEL ALSO RELIED ON THE DECISION OF THE HONBLE, KARNATAKA HIGH COURT IN THE CASE OF CI T VS HMT, 203 ITR 820 WHERE THE PREMIUM OF 12,09,200/- PAID BY THE ASSESSEE TO ACQUIRE LAND ON LEASE FOR 95 YEARS WAS HELD AS REVENUE EXPENSES BECAUSE THE ANNUAL RENT WAS ONLY O NE RUPEE AND THE PREMIUM PAID WAS NOTHING BUT ADVANCE RENT . THE 50 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 LANDED COUNSEL OF THE ASSESSEE ALSO RELIED ON THE D ECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS GEM INI ARTS (P) LTD 254 ITR 201 . 9.6 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS FILED A COPY OF THE LEASE DEED UNDER REFERENCE. IN TERMS OF THE LEASE D EED, THE ASSESSEE HAS MADE FOLLOWING PAYMENTS TO GNIDA: (A) ONE-TIME LEASE PREMIUM OF 2,83,56,515/- (B) COMMUTED ONE TIME LEASE RENT OF 77,98,042/- 9.7 AS FAR AS PAYMENT OF ONE-TIME LEASE PREMIUM IS CON CERNED, THE ASSESSEE HAS CAPITALIZED THE SAID AMOUNT IN ITS BOOKS OF ACCOUNTS. THE GROUND NO. 4 OF THE APPEAL OF THE REV ENUE IS FACTUALLY INCORRECT BECAUSE THE PREMIUM HAS ALREADY BEEN CAPITALIZED BY THE ASSESSEE AND THE ISSUE IN DISPUT E IS ONLY IN RESPECT OF THE COMMUTED ONE TIMELY LEASE RENT. 9.8 THE LD. CIT(A) AFTER CONSIDERING THE DECISIONS ON THE ISSUE OF WHEN A PARTICULAR EXPENDITURE HAS TO BE CONSIDERED AS CAPITAL EXPENDITURE, IN THE CASE OF EMPIRE JUTE CO. VS CIT 1 24 ITR 1 (SC); LAKSHMIJI SUGAR MILLS CO P LTD VS CIT 82 ITR 376 (SC) AND MADRAS AUTO SERVICES (P) LTD 233 ITR 468 (SC) ALLOW ED THE CLAIM OF THE ASSESSEE OBSERVING AS UNDER: 8.5.2 THE APPELLANT SUBMITTED THAT IT HAD CLAIME D DEDUCTION OF RS.77,98,042 ON ACCOUNT OF PAYMENT OF COMMUTED L EASE RENTALS TO GREATER NOIDA AUTHORITY FOR PLOT NO. 2A TAKEN ON LE ASE SITUATED IN GREATER NOIDA INDUSTRIAL DEVELOPMENT AREA DISTRICT, GAUTAM BUDH NAGAR. THE APPELLANT HAD THE OPTION TO EITHER PAY ( A) THE ADVANCE ANNUAL RENT ON YEARLY BASIS ; OR (B) COMMUTED ONE T IME LEASE RENT FOR THE PERIOD OF LEASE AND NO LEASE RENT WOULD BE PAYA BLE BY THE APPELLANT DURING THE LEASE PERIOD. THE APPELLANT OP TED FOR OPTION (B). THE DEED OF LEASE WAS EXECUTED ON 12TH JANUARY, 200 7. THE LEASE TERM IS OF 90 YEARS COMMENCING FROM 12TH JANUARY, 2 007, WITH THE RIGHT OF THE GREATER NOIDA INDUSTRIAL DEVELOPMENT A UTHORITY 51 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 RESERVED. IT IS SUBMITTED THAT THE APPELLANT UNDER THE LEASE DEED WITH THE GREATER NOIDA INDUSTRIAL DEVELOPMENT AUTHO RITY HAS AGREED TO DEVELOP SEZ IN GREATER NOIDA BY CONSTRUCTING THE PROJECT WITH INTEGRATED, READY TO USE OFFICE SPACE AND LAND AND SOCIAL INFRASTRUCTURE, ETC. THE APPELLANT IS OBLIGATED UND ER THE LEASE DEED TO COMPLETE THE CONSTRUCTION OF THE WHOLE PROJECT A ND FACILITIES WITHIN 7 YEARS. IT IS SUBMITTED THAT THE OBJECT AND PURPOS E OF SUCH LEASE DEED, IS ONLY TO FACILITATE IT INDUSTRIES AND IT EN ABLED SERVICES AND EXPANSION OF THE BUSINESS OF THE APPELLANT. THAT AP ART FROM THE AFORESAID BENEFIT, WHICH IS IN THE REVENUE FIELD, T HERE IS NO ADVANTAGE IN THE CAPITAL FIELD AS THERE IS NO ACQUI SITION OF ANY CAPITAL ASSET INASMUCH THE PLOT OF LAND IS NOT UNDE R THE OWNERSHIP OF THE APPELLANT AND REMAINS THE PROPERTY OF GREATER N OIDA INDUSTRIAL DEVELOPMENT AUTHORITY. IT IS SUBMITTED THAT PAYMENT OF COMMUTED LEASE RENTALS DID NOT RESULT IN CREATION OF A CAPIT AL ASSET HAVING ENDURING BENEFIT IN THE CAPITAL FIELD. THE AMOUNT I N QUESTION WAS ESSENTIALLY REVENUE EXPENDITURE ALLOWABLE DEDUCTION . 8.5.3 HONBLE SUPREME COURT IN THE CASE OF EMPIRE J UTE CO. V CIT: 124 ITR 1, HELD THAT THE TEST OF ENDURING BENEFIT I S NOT CERTAIN OR CONCLUSIVE TEST IN DETERMINING WHETHER THE EXPENDIT URE IS CAPITAL OR REVENUE IN NATURE AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMST ANCES OF A GIVEN CASE. THE SUPREME COURT FURTHER LAID DOWN THAT WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMER CIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE A SSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT O F THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENT LY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHE D, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANT AGE MAY ENDURE FOR AN INDEFINITE FUTURE. 8.5.4 IN THE CASE OF LAKSHMIJI SUGAR MILLS CO. P. L TD. V. CIT : 82 ITR 376, HONBLE SUPREME COURT HELD THAT THE CONTRIBUTI ON MADE BY THE ASSESSEE UNDER A STATUTORY OBLIGATION FOR THE DEVEL OPMENT OF ROADS WHICH WERE ORIGINALLY THE PROPERTY OF THE GOVERNMEN T AND REMAINED SO EVEN AFTER THE IMPROVEMENT HAD BEEN DONE, BEING EXPENDITURE INCURRED FOR RUNNING OF THE BUSINESS EFFICIENTLY AN D CONVENIENTLY AND NOT FOR ACQUIRING A CAPITAL ASSET WAS OF REVENUE NA TURE AND NOT OF A CAPITAL NATURE. 8.5.5 IN THE CASE OF MADRAS AUTO SERVICE (P) I IMIT ED (233 ITR 468) THE ASSESSEE TENANT HAD SPENT THE AMOUNTS IN QUESTI ON IN ORDER TO CONSTRUCT A NEW BUILDING AFTER DEMOLISHING THE OID BUILDING. THE NEW BUILDING, HOWEVER, FROM INCEPTION WAS TO BELONG TO THE LESSOR AND NOT TO THE ASSESSEE. THE ASSESSEE, HOWEVER, HAD THE BEN EFIT OF THE 52 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 EXISTING LEASE IN RESPECT OF THE NEW BUILDING AT TH E AGREED RENT FOR A PERIOD OF 39 YEARS THE ASSESSEE CLAIMED DEDUCTION F OR THE ENTIRE AMOUNT SPENT ON CONSTRUCTION OF THE BUILDING AS REV ENUE EXPENDITURE. HONBLE SUPREME COURT IN THE SAID CASE OBSERVED: IN ORDER TO DECIDE WHETHER THIS EXPENDITURE IS REV ENUE EXPENDITURE OR CAPITAL EXPENDITURE, ONE HAS TO LOOK AT THE EXPENDITURE FROM A COMMERCIAL POINT OF VIEW. WHAT ADVANTAGE DID THE ASSESSEE GET BY CONSTRUCTING A BU ILDING WHICH BELONGED TO SOMEBODY ELSE AND SPENDING MONEY FOR SUCH CONSTRUCTION? THE ASSESSEE GOT A LONG LEASE OF A NEWLY CONSTRUCTED BUILDING SUITABLE TO ITS OWN BUSINESS A T A VERY CONCESSIONAL RENT. THE EXPENDITURE, THEREFORE, WAS MADE IN ORDER TO SECURE A LONG LEASE OF NEW AND MORE SUITAB LE BUSINESS PREMISES AT A LOWER RENT. IN OTHER WORDS, THE ASSESSEE MADE SUBSTANTIAL SAVINGS IN MONTHLY RENT F OR A PERIOD OF 39 YEARS BY EXPENDING THESE AMOUNTS. THE SAVING IN EXPENDITURE WAS A SAVING IN REVENUE EXPENDITURE IN THE FORM OF RENT. WHATEVER SUBSTITUTES FOR REVENUE EXPE NDITURE SHOULD NORMALLY BE CONSIDERED AS REVENUE EXPENDITUR E. MOREOVER, THE ASSESSEE IN THE PRESENT CASE DID NOT GET ANY CAPITAL ASSET BY SPENDING THE SAID AMOUNTS THE ASSE SSEE, THEREFORE, COULD NOT HAVE CLAIMED ANY DEPRECIATION. LOOKING TO THE NATURE OF THE ADVANTAGE WHICH THE ASSESSEE O BTAINED IN A COMMERCIAL SENSE, THE EXPENDITURE APPEARS TO B E REVENUE EXPENDITURE. 8.5.6 THE ABOVE DECISIONS OF APEX COURT ARE SQUAREL Y APPLICABLE IN THE CASE OF THE APPELLANT. IN THE CASE OF THE APPEL LANT, ALSO IT DID NOT ACQUIRE TITLE / OWNERSHIP OF ANY CAPITAL ASSET. THE PLOT OF LAND ON WHICH CONSTRUCTION WOULD BE CARRIED ON BY THE APPEL LANT UNDER THE LEASE DEED OF 99 YEARS, WOULD REMAIN THE PROPERTY O F GREATER NOIDA INDUSTRIAL DEVELOPMENT AUTHORITY AT ALL TIMES. IN L IEU OF INCURRING THE EXPENDITURE, THE APPELLANT WOULD BE ENTITLED TO ENJ OY THE PROPERTY AS A TENANT UNDER LONG TERM LEASE. SUCH AN ADVANTAGE E VEN THOUGH, ENDURING IN NATURE, COULD NOT BE REGARDED AS IN THE CAPITAL FIELD AS THE EXPENDITURE ONLY FACILITATES THE CARRYING OUT O F BUSINESS MORE EFFICIENTLY AND PROFITABLY BY MAKING AVAILABLE SUIT ABLE PREMISES FOR THE BUSINESS OF THE APPELLANT. THE EXPENDITURE ON A CCOUNT OF COMMUTED LEASE RENTALS PAID BY THE APPELLANT COMPAN Y HAS BEEN INCURRED IN RESPECT OF PREMISES USED WHOLLY AND EXC LUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE COMPANY; AND THE SA ME REPRESENTS COMMUTED PAYMENT IN LIEU OF REGULAR LEASE RENTAL AN D HENCE IS IN THE NATURE OF REVENUE EXPENDITURE. IN VIEW OF THE ABOVE , THE AO HAS ERRED IN MAKING THE DISALLOWANCE OF THE COMMUTED LE ASE RENTALS. THE APPEAL IS ALLOWED IN THIS GROUND NO. 7 OF APPEA L. SINCE APPEAL IS ALLOWED IN GROUND NO. 7 OF APPEAL, THEREFORE, THE P LEA OF THE 53 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 APPELLANT IN GROUND NO. 8 OF APPEAL IS INFRUCTUOUS AND NOT NECESSARY TO BE ADJUDICATED. 9.9 WE FIND THAT THE LD. CIT(A) HAS DISTINGUISHED THE EXPENDITURE IN THE CAPITAL FIELD AND EXPENDITURE IN CURRED ONLY TO FACILITATE THE CARRYING OF THE BUSINESS MORE EFFICI ENTLY AND PROFITABLY, WHICH IS REVENUE IN NATURE. THE ONE-TIM E PREMIUM PAID BY THE ASSESSEE HAS ALREADY BEEN CONSIDERED BY THE ASSESSEE AS CAPITAL EXPENDITURE. THE ASSESSEE HAD THE OPTION TO PAY THE LEASE RENTAL ON YEAR-TO-YEAR BASIS OR AS A ONE-TIME EXPENDITURE. THE ASSESSEE HAS SUBSTITUTED THE REVENUE EXPENDITUR E WHICH WAS TO BE PAID ON YEAR-TO-YEAR BASIS AND THE NATURE OF THE EXPENDITURE REMAINED SAME THOUGH IT HAS BEEN PAID AS A COMPOSIT E PAYMENT. THUS, IT IS CLEAR THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT CAPITAL EXPENDITURE. THE EXPENDITURE WAS TO BE INCURRED ON YEAR TO YEAR BASIS FOR THE PERIOD OF LEASE OF 90 YE ARS. THE LESSER GAVE THE ASSESSEE TWO OPTION. THE FIRST OPTION WAS TO PAY ON YEAR TO YEAR BASIS AND CLAIM THE SAME AS REVENUE EXPENDI TURE. THE SECOND OPTION WAS PROVIDED BY THE LESSOR WAS TO PAY A COMPOSITE AMOUNT FOR THE PERIOD OF LEASE AS ONETIME PAYMENT. THE LESSOR PROVIDED SOME BENEFIT FOR MAKING ONETIME PAYMENT. T HE ASSESSEE HAS CHOSEN THE SECOND OPTION AND PAID THE ENTIRE LE ASE RENT OF 90 YEARS AS COMPOSITE ONETIME PAYMENT. THUS, IN OUR OP INION, THE LIABILITY OF 90 YEARS HAS BEEN PAID IN ONE YEAR ONL Y. IN SUCH CIRCUMSTANCES, THE LIABILITY OF LEASE RENT RELATABL E TO YEAR UNDER CONSIDERATION WOULD BE 1/90 TH OF THE AMOUNT PAID AND BALANCE AMOUNT WOULD BE PRE-PAID ADVANCE RENT ONLY. THE ASS ESSEE IS ENTITLED TO CLAIM 1/90 TH OF THE AMOUNT EVERY YEAR TILL THE PERIOD OF LEASE OF 90 YEARS AS REVENUE EXPENDITURE. EVEN ACCO RDING TO THE 54 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 MATCHING PRINCIPLES OF INCOME AND EXPENDITURE THE E NTIRE EXPENDITURE IS NOT JUSTIFIED FOR ALLOWANCE IN ONE Y EAR (I.E. THE YEAR UNDER CONSIDERATION) WHEN THE INCOME CORRESPONDING TO EXPENDITURE OF SUBSEQUENT YEARS WILL BE REFLECTED I N RELEVANT YEAR ONLY. THE EXPENDITURE NOT BEING RELATABLE TO THE YE AR UNDER CONSIDERATION CANNOT BE ALLOWED AS REVENUE EXPENDIT URE IN THE INSTANT YEAR. FOR THE YEAR UNDER CONSIDERATION, ONL Y 1/90 TH OF THE AMOUNT OF RS.77,98,042/- HAS BEEN INCURRED WHOLLY A ND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS FOR TH E YEAR UNDER CONSIDERATION. ACCORDINGLY, WE ALLOW 1/90 TH OF RS.77,98,042/- AS REVENUE EXPENDITURE IN THE YEAR AND BALANCE BE CHAR ACTERIZED AS ADVANCE RENT IN THE FINANCIAL STATEMENT AS ON 31.03 .2007. ACCORDINGLY, THE GROUND NOS. 3 & 4 OF THE APPEAL OF THE REVENUE ARE PARTLY ALLOWED. 10. NOW, WE TAKE UP THE APPEAL OF THE ASSESSEE AND REV ENUE FOR ASSESSMENT YEAR 2008-09 BEARING ITA NO. 5525/DEL/20 13 & 5492/DEL/2013 RESPECTIVELY. 11. THE GROUNDS RAISED BY THE ASSESSSEE AND THE REVENU E IN THEIR RESPECTIVE APPEALS ARE REPRODUCED AS UNDER: GROUNDS OF APPEAL OF THE ASSESSEE: 1. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE OF RS. 44,00,739/- , CLAIMED UNDER SECTION 35DD OF THE INCOME TAX ACT, 1961 (TH E ACT) IN RESPECT OF 1/5 TH OF DEMERGER EXPENSE INCURRED BY THE APPELLANT. 1.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT IN TERMS OF SECTION 35DD OF THE ACT, DEMERGER EXPENSES ARE ALLOWABLE ONLY IN THE HANDS O F THE DEMERGED COMPANY AND NOT IN THE HANDS OF THE RESULT ANT COMPANY. 1.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) F AILED TO APPRECIATE THAT THE CLAIM OF APPELLANT WAS SUSTAINA BLE IN LAW INASMUCH AS THE APPELLANT HAD FULFILLED ALL THE CON DITIONS FOR CLAIMING DEDUCTION UNDER SECTION 35DD OF THE ACT. 55 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 2. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN SUSTAINING DISALLOWANCE TO THE EXTENT OF RS. 91,18,132/- UNDER SECTION 14A OF THE ACT BY INVOKING THE METHOD OLOGY PRESCRIBED UNDER RULE 8D OF THE INCOME TAX RULES, 1 962 (THE RULES). 2.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING INDIRECT INTEREST EXPENDITURE TO THE TUNE OF RS. 36,85,740/- WITHOUT APPRECIATING THAT INVESTMEN T IN MUTUAL FUNDS WERE MADE OUT OF INTEREST FREE/SURPLUS FUNDS AVAILABLE WITH THE APPELLANT. 2.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN HOLDING THAT SHARES IN NIIT GIS LTD. AND NIIT SMARTSERVE LT D. WERE ACQUIRED OUT OF FUNDS RECEIVED BY THE APPELLANT ON THE ISSUE OF NON-CONVERTIBLE DEBENTURES, WITHOUT APPRECIATING TH AT THE SAID SHARES ALONGWITH THE DEBENTURES WERE ACQUIRED BY TH E APPELLANT AS PART OF THE DEMERGED GLOBAL SOFTWARE BUSINESS UN DERTAKING THAT VESTED IN THE APPELLANT W.E.F 01.04.2003. 2.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING ADMINISTRATIVE EXPENSES TO TH E TUNE OF RS.62,11,454/, WITHOUT APPRECIATING THAT THE SUO MO TO DISALLOWANCE, AMOUNTING TO RS. 7,79,069/-, MADE BY THE APPELLANT WAS REASONABLE. 2.4 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN OBSERVING THAT THE APPELLANT FAILED TO DI SCHARGE ITS ONUS IN SUBSTANTIATING THAT NO EXPENDITURE IN ADDITION T O EXPENDITURE SUO MOTO OFFERED BY DISALLOWANCE WAS INCURRED IN RE LATION TO EARNING TO EXEMPT INCOME. GROUNDS OF APPEAL OF THE REVENUE: 1. ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) HAS ERRED IN ALLOWING THE DEDUCTION CLA IMED BY THE ASSESSEE U/S 10B OF THE ACT BY NOT APPRECIATING THE FACT THAT ALL THE DIFFERENT UNITS OF THE ASSESSEE COMPANY ARE NOT OPERATING IN ISOLATION AS ALLEGED BY THE ASSESSEE, BUT AS DIFFER ENT BRANCHES OF THE SAME TREE. 1.1 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID.CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT TH AT THE ASSESSEE IS MAINTAINING SINGLE BOOKS OF ACCOUNTS FOR ALL UNI TS I.E. THOSE WHICH ARE COVERED FOR DEDUCTION, AS WELL AS THOSE W HICH ARE NOT COVERED FOR DEDUCTION. IT IS ONLY FOR THE PURPOSE O F COMPUTING DEDUCTION U/S 10B THAT THE ASSESSEE HAS TRIED TO AL LOCATE THE EXPENSES BETWEEN THESE UNITS AND COMPUTE THEIR PROF ITS. 1.2 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID.CIT(A) HAS ERRED BY HOLDING THAT INDEPENDENT BOO KS OF ACCOUNTS ARE NOT REQUIRED TO BE MAINTAINED UNDER THE PROVISI ONS OF SECTION 56 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 10B OF THE I T ACT, SINCE THE LANGUAGE OF FORM 56G STARTS WITH 'I/WE HAVE EXAMINED THE ACCOUNTS AND RECORDS ' WHIC H MAKES IT CLEAR THAT THE ASSESSEE HAS TO MAINTAIN SEPARATE BO OKS OF ACCOUNTS. THE ANNEXURE 'A' OF FORM 56G ALSO REQUIRE S THE DETAILS OF TOTAL PROFIT OF THE BUSINESS ETC. & KEEPING IN V IEW OF THE AFORESAID FACTS, IT IS CLEAR THAT THE ASSESSEE WAS REQUIRED TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 1.3 ON THE FACTS & IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ID. CIT(A) HAS ERRED IN NOT CONSIDERING THE WHOLE PROVI SIONS LAID DOWN BY THE BOARD IN PARA 2(V) OF THE CIRCULAR 1/20 13 DATED 17.01.2013, WHERE IN IT IS SPECIFICALLY MENTIONED T HAT THE AO, IF REQUIRES CAN CALL FOR THE SEPARATE BOOKS OF ACCOUNT S OF ALL THE UNITS FOR WHICH DEDUCTION U/S 10B IS CLAIMED. 12. THE GROUND NOS. 1 TO 1.3 OF THE APPEAL OF THE ASSE SSEE FOR AY 2008-09 ARE IDENTICAL TO THE GROUND NOS. 1 TO 1. 2 RAISED IN AY 2007-08. RESPECTFULLY FOLLOWING OUR FINDING IN AY 2 007-08, THE GROUNDS OF THE ASSESSEE ARE DISMISSED. 13. THE GROUND NOS. 2 TO 2.4 OF THE PRESENT APPEAL OF THE ASSESSEE ARE IDENTICAL TO GROUNDS NO. 2 TO 2.4 OF T HE APPEAL OF THE ASSESSEE FOR AY 2007-08, EXCEPT THE CHANGE THAT W.E .F. AY 2008- 09 THE RULE 8D OF THE RULES HAS BEEN OPERATIVE. FOL LOWING OUR FINDING IN AY 2007-08, THE INDIRECT INTEREST EXPENS ES UNDER RULE 8D(2)(II) ARE DELETED AND DISALLOWANCE UNDER RULE 8 D(2)(III) ARE RESTRICTED TO 0.5 % OF THE ASSETS WHICH HAS YIELDED EXEMPTED INCOME DURING THE YEAR UNDER CONSIDERATION. ACCORDI NGLY, THE GROUNDS NO. 2 TO 2.4 ARE PARTLY ALLOWED. 14. THE GROUNDS RAISED IN THE APPEAL OF THE REVENUE AR E IDENTICAL TO THE GROUNDS RAISED IN APPEAL OF THE RE VENUE FOR AY 2007-08, THUS FOLLOWING OUR FINDING IN AY 2007-08, THE GROUNDS NO. 1 TO 1.3 OF THE APPEAL OF THE REVENUE ARE DISMI SSED. 15. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE AR E PARTLY ALLOWED AND THE APPEAL OF REVENUE FOR ASSESSMENT YE AR 2007-08 57 ITA NO. 5491 & 5491/DEL/2013 & ITA NOS. 5524 & 5525/DEL/2013 IS PARTLY ALLOWED BUT THE APPEAL OF REVENUE FOR ASS ESSMENT YEAR 2008-09 IS DISMISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 2020. SD/- SD/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH JANUARY, 2020. RK/-(D.T.D.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI