M/s. ACIT - 1(3), MUMBAI V. RALLIS INDIA LTD, MUMBAI

ITA 5701/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55100 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 09-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUSUM INGALE
• Assessee Lawyers: SANDEEP CHETIWAL
• Keywords: Capital asset; Depreciation; Additional evidence; Question of law; Cost of acquisition; Fair market value; Bad and doubtful debts; Revenue expenditure
• Section: 37; 143(3); 234B; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI PRAMOD KUMAR (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO.5257/MUM/2008 ASSESSMENT YEAR-2004-05 M/S. RALLIS INDIA LTD., C/O KALYANIWALLA & MISTRY, KALPATARU HERITAGE, 5 TH FLOOR, 127, MAHATMA GANDHI ROAD, FORT, MUMBAI 400 001 PAN-AABCR 2657N VS. THE ADDL CIT, RANGE 1(13), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 (APPELLANT) (RESPONDENT) ITA NO.5701/MUM/2008 ASSESSMENT YEAR-2004-05 THE ADDL CIT, RANGE 1(13), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 VS. M/S. RALLIS INDIA LTD., C/O KALYANIWALLA & MISTRY, KALPATARU HERITAGE, 5 TH FLOOR, 127, MAHATMA GANDHI ROAD, FORT, MUMBAI 400 001 PAN-AABCR 2657N (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI P.J. PARDIWALA SHRI JITENDRA JAIN & SHRI SANDEEP CHETIWAL DEPARTMENT BY: MS. KUSUM INGALE DATE OF HEARING: 15.06.2011 DATE OF PRONOUNCEMENT:30.8.2011 O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS SET OF APPEALS ONE APPEAL FILED BY THE ASSESSE E AND THE OTHER FILED BE THE REVENUE ARE DIRECTED AGAINST THE ORDERS DAT ED 26.6.2008 PASSED BY THE LD. CIT(A)-XXI FOR THE ASSESSMENT YEAR 2004-05. RALLIS INDIA 2 2. THE ASSESSEE FILED THE RETURN OF INCOME ON 29.10 .2004 DECLARING TOTAL LOSS AT RS. 52,87,70,774/- . THE ASSESSMENT WAS COM PLETED U/S 143(3) OF THE I.T. ACT. WHILE COMPLETING THE ASSESSMENT, THE ASS ESSING OFFICER MADE CERTAIN DISALLOWANCE/ ADDITIONS WHICH WAS CONTESTED BEFORE THE LD. CIT(A). THE LD. CIT(A) PARTLY ALLOWED THE APPEAL. 3. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE U S AND RAISED THE FOLLOWING GROUND: 4. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLL OWS: BOTH THE LOWER AUTHORITIES ERRED IN DISALLOWING TH E CORPORATE MEMBERSHIP FEE OF RS 10,00,000/- PAID TO WIAA CLUB. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, THE APP ELLANT SUBMITS THAT THE DISALLOWANCE BE DELETED. 5. THE LD. COUNSEL FOR THE ASSESSEE SHRI. P.J. PARD IWALLA SUBMITTED THAT THE DECISION IN THE CASE OF 209 ITR 649 AND 326 IT R 425 ARE IN FAVOUR OF THE ASSESSEE. THE MUMBAI HIGH COURT IN THE CASE OF OTI S ELEVATORS (I) LTD VS CIT 195 ITR 682(BOM) HAS HELD AS FOLLOWS: PAYMENT OF CLUB FEES MADE TO PROMOTE BUSINESS INTE RESTS AND MEMBERSHIP OF CLUB WOULD PROVIDE OFFICERS BETTER CO NTACT WITH PERSONS IN GOOD POSITION AND WOULD RESULT IN PUBLICITY, CLU B FEES IS ALLOWABLE EXPENDITURE. 6. RESPECTFULLY FOLLOWING THE DECISION OF THE ABOVE CITED DECISION, WE ARE OF THE OPINION THAT MEMBERSHIP IN CLUBS ARE TAKEN W ITH THE EXPECTATION THAT IT WOULD ENABLE THE OFFICERS OF ASSESSEE TO MEET PERSO NS IN HIGH SOCIAL STATUS WHICH WOULD RESULT TO THE GROWTH OF THE BUSINESS OF THE ASSESSEE. THE EXPENDITURE CAN BE SAID TO HAVE BEEN INCURRED IS W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF HIS PROFESSION AND HENCE ALLOWABLE U /S 37(1). THE APPEAL OF THE ASSESSEE ON THIS ISSUE IS ALLOWED. 7. GROUND NO. 2 TO 4 RAISED BY THE ASSESSEE READ AS FOLLOWS: RALLIS INDIA 3 BOTH THE LOWER AUTHORITIES ERRED IN HOLDING THAT T HE CLOSING STOCK OF THE APPELLANT WAS UNDERVALUED TO THE EXTEN T OF PURCHASE TAX RS 25,12,691/- THE APPELLANT SUBMITS THAT THE A DDITION IS UNJUSTIFIED AND IS REQUIRED TO BE DELETED. 3. WITHOUT PREJUDICE. THE ADDITION MADE BY THE AO TO T HE CLOSING STOCK IS EXCESSIVE AND ARBITRARY AND THE SAME REQUI RES TO BE REDUCED SUBSTANTIALLY. 4. WITHOUT PREJUDICE TO GROUND NO.(2) ABOVE, BOTH THE LOWER AUTHORITIES ERRED IN NOT INCREASING THE VALUE OF OP ENING STOCK ON ACCOUNT OF PURCHASE TAX. 8. THE TAX AUDITORS HAD POINTED OUT IN THE TAX AUDI T REPORT UNDER THE HEAD DEVIATION FROM SECTION 145A THAT PURCHASE TA X HAD NOT BEEN LOADED ON CLOSING STOCK OF RAW MATERIALS . THE ASSESSING OFFI CER MADE AN ADDITION TO CLOSING STOCK OF THE ENTIRE AMOUNT OF RS 25,12,591/ - ON THE GROUND THAT THE METHOD FOLLOWED BY THE ASSESSEE IS NOT AS PER ACCOU NTING PRINCIPLES AND THAT DATE WISE DETAILS OF PURCHASES AND CONSUMPTION OF S TOCK HAVE NOT BEEN FURNISHED. 9. THE BREAK UP OF THE PURCHASE TAX PAID IS AS FOLL OWS: A. RS 9,05,948/- BY ANKELSHWAR FACTOR IN GUJARAT STATE . RS. 9.05 LACS IS PAID AS PURCHASE TAX @ 4% ON ALL M ATERIALS ON THE BRANCH TRANSFER RATIO OF FINISHED GOODS TRANSFERRE D OUT OF THE GUJARAT STATE DURING THE YEAR 2003-04. B. RS. 12,44,961/- BY THE LOTE FACTORY IN MAHARASHTRA STATE AND RS. 3,61,782/- BY AKOLA FACTORY IN MAHARASHTRA STATE. LOTE FACTORY & AKOLA FACTORY ARE HOLDING CERTIFICA TE OF ENTITLEMENT FROM SICOM. PURCHASES ARE MADE AGAINST FORM N-15-EC OF THE BST ACT WITHOUT PAYMENT OF SALES TAX. HOWEVER AS PER SEC. 13A, 4% PURCHASE TAX IS TO BE PAID ON ALL PURCHASES MADE DURING THE YEAR. THE ABOVE PAYMENTS REPRESENT THE PURCHASE TAX @ 4% ON ALL PUR CHASES MADE DURING THE YEAR. 10. THE APPELLANT SUBMITTED THAT THE ADDITION IS WH OLLY UNJUSTIFIED FOR THE FOLLOWING REASONS: RALLIS INDIA 4 A) THE ASSESSING OFFICER RELIES ON THE TAX AUDIT RE PORT FOR THIS PURPOSE, BUT IGNORES THE COMMENT OF THE AUDITORS WHICH IS AS UNDER IN POINT NO.12(3)(I)(B) :- (B) STOCKES IN RESPECT OF (II)(A) ABOVE ARE NET OF PURCHASE TAX. THE INCIDENCE OF PURCHASE TAX ON SUCH STOCKS HAS NOT BE EN CALCULATED AS IT IS NOT MATERIAL. (THE RELEVANT EXTRACT OF THE TAX AUDIT REPORT IS GI VEN AT PAGE 99 OF THE COMPILATION) B) THE TOTAL PURCHASES OF RAW MATERIALS DURING THE YEAR UNDER CONSIDERATION WERE RS.217.40 CRORES AND THE PERCENT AGE OF THE INCIDENCE OF PURCHASE TAX ON SUCH PURCHASES AMOUNTS TO ONLY 0.12%. C) THE ASSESSEE HAS FOLLOWED A REGULAR METHOD OF AC COUNTING WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE PA ST. IN THE CONTEXT OF THE RELEVANT FIGURES INDICATED ABOVE, THERE CAN BE NO DISPUTE WITH THE AUDITORS REMARK THAT THE FIGURE THAT WOULD BE R EQUIRED TO BE INCLUDED IN CLOSING STOCK IS NOT MATERIAL. D) THE APPELLANT SUBMITTED THAT IF THE ASSESSING O FFICER WANTS TO RELY ON THE TAX AUDIT REPORT, HE CANNOT ADOPT A PIE CE-MEAL APPROACH AND RELY ON ONE OBSERVATION, IGNORING THE REMARK OF THE AUDITOR ON THE ENTIRE ISSUE. 11. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT V ERY CAREFULLY. THERE IS MERIT IN THE CLAIM OF THE APPEL LANT THAT IF THE ASSESSING OFFICER WANTS TO RELY ON THE TAX AUDIT RE PORT, HE IS REQUIRED TO RELY ON THE SAME IN ITS ENTIRETY. THE T AX AUDITOR HAS CLEARLY INDICATED THAT HE INCIDENCE OF PURCHASE TAX IN CLOSING STOCK IS NOT MATERIAL. THIS IS ALSO APPARENT FROM T HE FACT THAT THE PURCHASE TAX INVOLVED IN THE INSTANT CASE IS RS.25, 12,691/- AS COMPARED TO THE TOTAL PURCHASES OF RAW MATERIALS FO R THE YEAR OF RS.2,17,40,00,000/-. FURTHER, CONSIDERING THAT THE APPELLANT HAD FOLLOWED A REGULAR METHOD OF ACCOUNTING, THE ASSESS ING OFFICER COULD HAVE DONE WITHOUT ADDING THIS AMOUNT TO THE C LOSING STOCK. HE WAS REQUIRED TO AMEND THE OPENING STOCK A S WELL. HOWEVER, MORE IMPORTANT FACT IS THAT PURCHASE TAX I S AN INTEGRAL PART OF THE VALUE OF GOODS. IT IS AN INDIRECT TAX W HICH HAS A DIRECT BEARING ON THE COST OF THE GOODS. THE PRINCI PLE OF CONSISTENCY DOES NOT PREVENT THE ASSESSING OFFICER TO DEPART FROM A PRACTICE, WHICH IS NOT SUPPORTED BY ACCOUNTI NG STANDARD. THE ARGUMENT OF THE LEARNED CIT(A) A.R. THAT SIMILA R ADJUSTMENT WILL BE REQUIRED FOR OPENING STOCK, IS ALSO NOT VAL ID BECAUSE DUE TO INCORRECT ACCOUNTING PRINCIPLE BEING APPLIED, TH E EFFECT HAS RALLIS INDIA 5 ACCUMULATED OVER YEARS. ONCE THE CORRECT VALUATION IS MADE IN CURRENT YEARS CLOSING STOCK, THE SAME WILL BE CARR IED OVER IN THE NEXT YEAR AS OPENING STOCK. THE ADJUSTMENT ENTRY HA S TO BE PASSED ONCE WHICH WLL HAVE THE EFFECT OF INCREASING THE CLOSING STOCK WITHOUT DISTURBING THE OPENING STOCK. THOUGH THE AMOUNT MAY NOT BE MATERIAL IN THE OVERALL CONTEXT OF PURCH ASE OF RAW MATERIAL DURING THE YEAR, THE SAME IS STILL MATERIA L FROM THE POINT OF VIEW OF REVENUE. IT IS INSIGNIFICANT SO FAR AS MA INTENANCE OF RECORD OR ACCOUNTS IS CONCERNED FOR EACH OF THE PUR CHASE. BUT IT DEFINITELY IMPACTS THE VALUE OF STOCK. THEREFORE, T HE ACTION OF THE ASSESSING OFFICER IS UPHELD AND GROUND NO.5 IS DISMISSED 12. WE UPHOLD THE ORDER OF THE LD.CIT(A) IN SO FAR AS HIS CONCLUSION THAT AS PER THE PROVISIONS OF SEC 145A, THE VALUE OF PURCHA SE TAX HAS TO BE TAKEN INTO ACCOUNT WHILE VALUING THE CLOSING STOCK, BUT AT THE SAME TIME, AS HELD BY THE JURISDICTIONAL , HIGH COURT IN THE CASE OF COMMISSI ONER OF INCOME TAX VS MAHALAXMI GLASS WORKS P. LTD (BOM) 318 ITR 116 THE OPENING STOCK VALUATION SHOULD BE CORRESPONDINGLY ADJUSTED. THEREFORE WE S ET ASIDE THIS ISSUE TO THE FILE OF THE AO TO FOLLOW THE DECISION OF THE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT VS M/S MAHALAXMI GLASS WORKS PVT. LTD (SUPRA ) AND REDO THE ASSESSMENT. THE APPEAL OF THE ASSESSEE ON THIS ISSU E IS PARTLY ALLOWED. 13. GROUND NO. 5 RAISED BY THE ASSESSEE READS AS FO LLOWS: THE LD CIT(A) ERRED IN HOLDING THAT DEPRECIATION O N UNINTERRUPTED POWER SUPPLY SYSTEM IS TO BE ALLOWED AT THE NORMAL RATE A PPLICABLE TO PLANT AND MACHINERY INSTEAD OF THE RATE OF 60% CLAIMED BY THE APPELLANT. 14. THE ASSESSEE RELIED ON THE DECISION IN THE CASE OF ORIENT CERAMIC INDUSTRIES 3 ITR (AT) 346 TO 348. ALL THE BILLS HA VE BEEN PRODUCED AT PAGES 10 TO 100 OF THE PAPER BOOK. AS FAR AS THE UNINTERR UPTED POWER SUPPLY SYSTEM (UPS) IS CONCERNED, THE SUBMISSIONS OF THE ASSESSEE IS THAT IT IS PART AND PARCEL OF THE COMPUTER-NEITHER CAN FUNCTION WITHOUT THE OTHER IN TODAYS ENVIRONMENT OF FLUCTUATING POWER SUPPLY. IT IS NECE SSARY TO ADJUNCT TO THE COMPUTER, AND DEPRECIATION IS ALLOWABLE THEREON @ 6 0%. 15. THE LD. CIT(A) HELD AS FOLLOWS: RALLIS INDIA 6 THE UPS SYSTEM IS NOT A PART OF THE COMPUTER SYSTE M AND IS MORE AKIN TO AIR-CONDITIONER OR FURNITURE AND SHOULD NOT BE ENTITLED TO THE SAME RATE OF DEPRECIATION AS THAT PROVIDED ON THE COMPUT ER. IN THE DECISION REPORTED IN ITO VS SAMIRAN MAJUMDAR (280 ITR (AT) 7 4 (KOL), IT HAS BEEN HELD THAT A PRINTER, A SCANNER AND A COLOUR XEROX M ACHINE WERE AN INTEGRAL PART OF THE COMPUTER SYSTEM AND WERE, THEREFORE, EN TITLED TO THE HIGHER RATE OF DEPRECIATION. THE RELIANCE PLACED BY THE A PPELLANT ON THIS DECISION IS DISTINGUISHABLE. A PRINTER OR SCANNER IS ORDINA RILY UTILIZABLE ONLY IN CONJUNCTION WITH THE COMPUTER SYSTEM. UPS, ON THE OTHER HAND, IS MACHINERY WHICH CAN BE UTILIZED FOR UNINTERRUPTED P OWER SUPPLY, MAY BE FOR LIGHTING OR ANY OTHER PURPOSE. JUST BECAUSE IT IS UTILIZED FOR A PARTICULAR PURPOSE IN THIS CASE, DOES NOT MAKE IT AN INTEGRAL PART OF COMPUTER SYSTEM. THE RATIONALE BEHIND HIGHER RATE OF DEPREC IATION BEING AVAILABLE FOR COMPUTERS, IS ALSO THAT IT GETS OUTDATED QUICKL Y AND THUS REQUIRES PERIODICAL REPLACEMENTS. THE SAME IS NOT TRUE FOR UPS, AND WHILE THE COMPUTER SYSTEM IS REPLACED, THE SAME UPS CAN BE CO NTINUED TO BE UTILIZED 16. THE LD. CIT(A) HAS HELD THAT UNINTERRUPTED POWE R SUPPLY SYSTEM CANNOT BE CONSIDERED AS PART OF THE COMPUTER SYSTEM AND CONCLUDED THEY ARE NOT ENTITLED TO THE RATE OF DEPRECIATION APPLICABLE TO COMPUTER . NO DOUBT THE UPS CAN BE USED FOR OTHER PURPOSES, IN THE PRESENT CASE THEY CONSTITUTE AN ESSENTIAL PART OF THE COMPUTER SYSTEM. THE UPS IS N ECESSARY FOR THE COMPUTERS TO FUNCTION SMOOTHLY AND WITHOUT INTERRUP TION. THE DELHI TRIBUNAL IN THE CASE OF DCIT V ORIENT CERAMICS 3 ITR (TRIB) 246 HAS HELD THAT UPS IS AN INTEGRAL PART OF THE COMPUTER AND HENCE IS ENTIT LED TO THE RATE OF DEPRECIATION APPLICABLE TO COMPUTERS. IN FOLLOWIN G THE RATIO OF THE DECISION OF THE DELHI TRIBUNAL WE UPHOLD THE CLAIM OF THE ASSES SEE ON THIS ISSUE. 17. GROUND NO. 6 RAISED BY THE ASSESSEE READS AS FO LLOWS: BOTH THE LOWER AUTHORITIES ERRED IN DISALLOWING RS 5,46,549/- OUT OF DEPRECIATION, ON THE GROUND THAT CERTAIN PLANT AND MACHINERY HAD NOT BEEN PUT TO USE FOR THE FULL YEAR. THE APPELLANT SUBMITS THAT THE DISALLOWANCE IS BASED ON CONJECTURE AND IS UNJUSTIFIED. 18. THE AR OF THE ASSESSEE SUBMITTED AS FOLLOWS: IN GROUND NO.7, THE APPELLANT OBJECTED TO THE DISALL OWANCE OF RS.5,46,549/- OUT OF DEPRECIATION CLAIMED IN RESPEC T OF PURCHASE OF CERTAIN PLANT AND MACHINERY TOTALING RS.43,73,395/- . THE ASSESSING OFFICER APPEARS TO HAVE DISALLOWED THE DEPRECIATION ON THE GROUND THAT THE PURCHASE WAS ON 30 TH SEPTEMBER, 2003. RALLIS INDIA 7 THE ASSESSING OFFICER HAS DISALLOWED HALF OF THE DE PRECIATION OF THOSE ASSETS WHICH WERE CAPITALIZED ON 30.09.2003 ( AS PER TAX AUDIT REPORT) ON THE GROUND THAT ASSESSEE COULD NOT OFFE R ANY SATISFACTORY EXPLANATION ALONG WITH CERTIFICATE FOR PUT TO USE O N 30.09.03 ITSELF. THE APPELLANT SUBMITTED THAT THOUGH THE ASSETS WERE SHOWN TO BE CAPITALIZED ON 30 TH SEPTEMBER, 2003, THE HAD BEEN PUT TO USE LONG BEFORE THAT MANY OF THE PARTS OF THE VARIOUS MACHIN ERIES WERE IN FACT BOUGHT AS EARLY AS MARCH AND APRIL, 2003. THE ONLY REASON FOR CAPITALIZING THESE PARTICULAR PLANTS OR MACHINERIES IN THE MONTH OF SEPTEMBER WAS BECAUSE MINOR ACCESSORIES OR PARTS HA D TO BE ADDED LATER, AND IN SOME CASES MERE FABRICATION WORK WAS PENDING WHICH WAS DULY COMPLETED BEFORE 30.09.03. IT IS COMMON FOR TH E ACCOUNTING ENTRY TO BE PASSED AT THE END OF THE QUARTER, EVEN IF THE ASSET IS PUT TO USE EARLIER. TO DEMONSTRATE THE ABOVE, A LIST OF ALL THE ASSETS CAPITALIZED ON 30.09.2003, (WHICH WERE BOUGHT FOR USE IN THE PLANT AT THE APPELLANTS FACTORY AT ANKLESHWAR AND PATANCHERU) IS GIVEN AT P AGE 100 OF THE COMPILATION. THE APPELLANT ALSO SUBMITTED THE BILLS OF THESE PURCHASES (PAGE 102-189 AND PAGE 191-194 OF THE COMPILATION) WHICH CLEARLY SHOW THAT THE ASSETS WERE PURCHASED MUCH BEFORE SEP TEMBER 2003. FURTHER, THE APPELLANT ALSO SUBMITTED CERTIFICATES FROM THE PLANT MANAGERS AT ANKLESHWAR AND PATANCHERU FACTORIES (PA GE 101 AND PAGE 190 OF THE COMPILATION). THUS, THE CLAIM OF THE ASSESSING OFFICER THAT THE A SSESSEE COMPANY HAD PURCHASED PLANT & MACHINERY AMOUNTING T O RS.43,73,395/- ON 30.09.2003 IS INCORRECT. THE ASSE SSEE COMPANY HAS MERELY PASSED ACCOUNTING ENTRIES ON 30.09.2003. THE APPELLANT SUBMITTED THAT AN ACCOUNTING ENTRY HAS NO RELEVANCE TO WHETHER AN ASSET HAS BEEN PUT TO USE OR NOT. THE ASSESSING OFF ICER HAS RELIED ON CONJECTURE TO MAKE THIS DISALLOWANCE. THE APPELLANT THUS SUBMITTED THAT THE DISALLOWANCE OF HALF THE DEPRECIATION BE D ELETED. THE PLANT & MACHINERY WERE PUT TO USE BEFORE 30.09.2003 AND THE APPELLANTS CLAIM IS CORRECT. 19. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT . NO DOUBT, THE APPELLANT HAS APPENDED CERTIFICATES FROM THE PL ANT MANAGERS, TO THE EFFECT THAT THE PLANT AND MACHINERY HAD BEEN PU T TO USE BY 30 TH SEPTEMBER, 2003. HOWEVER, I AM OF THE VIEW THAT THE APPELLANT SHOULD HAVE PRODUCED FURTHER MATERIAL IN THE NATURE OF EVI DENCE OF PRODUCTION FROM THE SAID MACHINERY TO BE ENTITLED TO ALLOWANCE OF DEPRECIATION FOR THE FULL YEAR. DESPITE SPECIFIC QUERY TO THIS EFFEC T DURING THE APPELLATE RALLIS INDIA 8 PROCEEDINGS, THE APPELLANT WAS NOT ABLE TO GIVE ANY DETAIL IN RESPECT OF SPECIFIC PRODUCTION/SALE UTILIZING THESE ASSETS. IF THE ASSETS HAVE BEEN CAPITALIZED ON 30.09.2003, THERE WAS GREATER ONUS O N THE APPELLANT TO PROVE ITS USE ON THAT DAY OR BEFORE. THE ONUS HAS N OT BEEN DISCHARGED. I, THEREFORE, CONFIRM THE ACTION OF THE ASSESSING OF FICER IN RESTRICTING DEPRECIATION TO HALF THE YEAR ON THE CONCERNED ASSE TS. GROUND NO.7 IS, THUS, DISMISSED. 20. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO P AGE 64 AND 65 OF THE PAPER BOOK TO ESTABLISH THAT THE PARTICULAR ASSET H AS BEEN ALREADY SUPPLIED AND INSTALLED. 21. FROM THE FACTS AND DOCUMENTS FURNISHED WE ARE I NCLINED TO ACCEPT THE SUBMISSIONS OF THE ASSESSEE THAT THE MACHINERY IN Q UESTION WERE PUT TO USE PRIOR TO 30.9.2003. THE CERTIFICATES OF INSTALLATI ON ISSUED BY PLANT MANAGER CANNOT BE IGNORED. THE INVOICE FOR PURCHASE WERE M UCH PRIOR TO 30.9.2003 AND IT APPEARS THAT ONLY THE CAPITALIZATION ENTRY W AS PASSED ON 30.9.03. WE UPHOLD THE CLAIM OF THE ASSESSEE, FOR DEPRECIATION ON THE ASSETS AT THE FULL RATE. 22. GROUND NO. 7 RAISED BY THE ASSESSEE READS AS FO LLOWS: THE LD. CIT(A) ERRED IN CONFIRMING THE TAXATION OF PROFIT ON SALE OF UNDERTAKING RS. 25,02,63,118/- AND PROFIT ON SAL E OF FIXED ASSETS RS. 59,98,02,689/- WHILE COMPUTING BOOK PROF ITS U/S. 115JB. THE APPELLANT SUBMITS THAT THE AO BE DIRECT ED TO EXCLUDE THE SAID TWO ITEMS FROM THE COMPUTATION OF BOOK PROFIT U/S. 115JB. 23. THE AO OBJECTED TO THE ASSESSEE EXCLUDING CAP ITAL PROFITS FROM ITS CALCULATION OF BOOK PROFITS FOR THE YEAR AND HAS AD DED BACK THE SAID PROFITS. 24. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT VERY CAREFULLY AND I AM UNABLE TO AGREE WITH THE CONTENTI ONS RAISED. THE ACCOUNTS OF THE APPELLANT SHOW THAT BOTH THESE ITEM S HAVE BEEN DULY CREDITED TO THE PROFIT AND LOSS ACCOUNT. IN MY OPIN ION, THE JUDGMENT OF THE SUPREME COURT IN CIT VS APOLLO TYRES (255 ITR 2 73) SQUARELY APPLIES. IT WAS HELD BY THE HONBLE APEX COURT THAT THE AO WHILE COMPUTING THE BOOK PROFITS HAS ONLY THE POWER OF EX AMINING WHETHER RALLIS INDIA 9 THE BOOKS OF ACCOUNT HAVE BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. THE AO, THEREAFTER HAS LIM ITED POWER OF MAKING ADDITIONS AND DEDUCTIONS AS PROVIDED FOR IN THE EXPLANATION. THE AO DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFITS SHOWN IN THE PROFIT AND LOSS ACCOUNT, EXCEPT TO THE EXTENT PROVIDED. THE AO HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUN TS, WHICH HAVE BEEN CERTIFIED BY THE STATUTORY AUDITORS, AND APPRO VED IN GENERAL MEETING. HE CANNOT EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIES MADE. 25. WE FIND THAT THE DECISION IN THE CASE OF RAIN C OMMODITIES 41 ITR 449 IS AGAINST THE ASSESSEE, WHATEVER AMOUNT THAT HAVE BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT WILL HAVE TO BE TAKEN INTO ACCOUNT IN DETERMINING THE BOOK PROFITS U/S 115JB AND ONLY ADJUSTMENTS PERMITT ED ARE AS PER EXPLANATION TO THE SECTION 115 JB. (APPOLLO TYRES LTD VS CIT 2 55 ITR 273 (SC) 26. THE GROUND NO.8 RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LD. CIT(A) ERRED IN CONFIRMING THE TAXATION OF PROVISION FOR DIMINUTION IN INVESTMENTS AND PROVISION FOR LOANS A ND ADVANCES WRITTEN BOOK WHILE COMPUTING BOOK PROFIT U/S 115JB. THE AP PELLANT SUBMITS THAT THE AO BE DIRECTED TO EXCLUDE THE SAID TWO ITEMS FR OM THE COMPUTATION OF BOOK PROFIT U/S 115JB. 27. THE LD. CIT(A) HELD AS FOLLOWS: HAVING REGARD TO THE FACT THAT THESE AMOUNTS HAVE BEEN CREDITED TO THE PROFIT & LOSS ACCOUNT, THE ISSUE HAS ALREADY BE EN DECIDED BY ME WHILE ADJUDICATING GROUND NO. 16 ABOVE. THIS GROUND OF A PPEAL IS, THEREFORE, DISMISSED. 28. WE FIND THAT THE LD. CIT(A) HAS NOT CONSIDER ED THE PROVISION OF EXPLANATION (I) TO SEC 115 JB. UNDER THAT EXPLANAT ION ANY AMOUNT WITHDRAWN FROM A RESERVE OR PROVISION HAS TO BE EXCLUDED IN C OMPUTING THE BOOK PROFITS U/S 115JB. THE AMOUNT WITHDRAWN CAN BE EXCLUDED ON LY IF IN THE YEAR IN WHICH RESERVE WAS CREATED OR PROVISION MADE THE BOO K PROFITS WERE INCREASED BY THE AMOUNT OF RESERVES/ PROVISIONS. HOWEVER, IN THIS CASE THE PROVISIONS WERE CREATED IN THE EARLIER FINANCIAL YEAR 2002-03. THE MATTER IS THEREFORE REMITTED TO THE FILES OF THE ASSESSING OFFICER TO C ONSIDER THIS ISSUE IN THE LIGHT OF EXPLANATION (I) TO SEC 115JB. RALLIS INDIA 10 29. GROUND NO.9 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE LD. CIT(A) ERRED IN CONFIRMING THE LEVY OF INT EREST U/S 234B WHEN THE LIABILITY OF THE APPELLANT AROSE ONLY U/S 115JB (MAT). THE APPELLANT SUBMITS THE LD. CIT(A) ERRED IN NOT FOLLOWING THE D ECISION OF THE SUPREME COURT IN KWALITY BISCUITS LTD 284 ITR 434. THE APP ELLANT DENIES ITS LIABILITY TO BE LEVIED INTEREST U/S 234B AND SUBMITS THAT THE SAME BE DELETED. 30. THE LD. CIT(A) HELD AS FOLLOWS: IN MY OPINION, THE DECISION OF THE SUPREME COURT W AS RENDERED UNDER THE PROVISIONS OF SEC. 115J, AND THE SAME CAN NOT BE APPLIED U/S. 115JB IN VIEW OF THE SPECIFIC PROVISIO NS OF SEC. 115JB(5) WHICH STATE AS UNDER: SAVE AS OTHERWISE PROVIDED IN THIS SECTION, ALL OT HER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY ASSESSE E, BEING A COMPANY, MENTIONED IN THIS SECTION. 31. IN VIEW OF THE DECISION OF THE APEX COURT IN T HE CASE OF JCIT VS ROLTA INDIA LTD., 330 ITR 470, WHEREIN IT HAS BEEN HELD A S FOLLOWS: IT IS CLEAR FROM READING SECTIONS 115JA AND 115JB OF THE INCOME-TAX ACT, 1961, THAT THE QUESTION WHETHER A CO MPANY WHICH IS LIABLE TO PAY TAX UNDER EITHER PROVISION DOES NOT A SSUME IMPORTANCE BECAUSE SPECIFIC PROVISION IS MADE IN THE SECTION S AYING THAT ALL OTHER PROVISIONS OF THE ACT SHALL APPLY TO A MAT COMPANY (SECTION 115JA(4) AND SECTION 115JB(5) ). SIMILARLY, AMENDMENTS HAVE BEEN MADE IN THE RELEVANT FINANCE ACTS PROVIDING FOR PAYMENT OF ADVA NCE TAX UNDER SECTIONS 115JA AND 115JB. SECTION 234B IS CLEAR THA T IT APPLIES TO ALL COMPANIES. THE PRE-REQUISITE CONDITION FOR APPLICAB ILITY OF SECTION 234B IS THAT THE ASSESSEE IS LIABLE TO PAY TAX UNDER SEC TION 208 AND THE EXPRESSION 'ASSESSED TAX' IS DEFINED TO MEAN THE TA X ON THE TOTAL INCOME DETERMINED UNDER SECTION 143(1) OR UNDER SEC TION 143(3) AS REDUCED BY THE AMOUNT OF TAX DEDUCTED OR COLLECTED AT SOURCE. THUS, THERE IS NO EXCLUSION OF SECTION 115J / 115JA IN TH E LEVY OF INTEREST UNDER SECTION 234B. THE EXPRESSION 'ASSESSED TAX' I S DEFINED TO MEAN THE TAX ASSESSED ON REGULAR ASSESSMENT WHICH MEANS THE TAX DETERMINED ON THE APPLICATION OF SECTION 115J / 115 JA IN THE REGULAR ASSESSMENT RALLIS INDIA 11 RESPECTFULLY FOLLOWING THE ABOVE, WE DISMISS THE A SSESSEES APPEAL ON THIS ISSUE. 32. THE ASSESSEE HAS NOT PRESSED GROUND NO.10 THEREFORE IT IS DISMISSED AS NOT PRESSED. 32.1 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 5701/MUM/2008 A.Y. 2004-05 33. GROUND NO. 1 RAISED BY THE REVENUE READS AS F OLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW PAYMENTS MADE TO VARIOUS SCIENTIFIC INSTITUTES AS A BUSINESS EXPENDI TURE BY ADMITTING ADDITIONAL EVIDENCE IN VIOLATION OF RULE 46A OF THE I.T. RULES. 34. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT . NO WEIGHTED DEDUCTION CAN BE ALLOWED TO THE APPELLANT BECAUSE THE SAID WEIGHTED DEDUCTION IS ALLOWABLE ONLY IN RESPEC T OF SCIENTIFIC RESEARCH UNDERTAKEN UNDER A PROGRAMME APPROVED BY T HE PRESCRIBED AUTHORITY EVEN IF THE PAYMENT IS VALID B USINESS EXPENDITURE. IT IS FOR THE APPELLANT TO PLACE MATER IAL AND DEMONSTRATE THAT THE SCIENTIFIC RESEARCH WAS UNDERT AKEN UNDER AN APPROVED PROGRAMME. SINCE THE RELEVANT CERTIFIC ATES COULD NOT BE FURNISHED, THE WEIGHTED DEDUCTION U/S. 35(2A A) IS RIGHTLY DISALLOWED BY THE AO. HOWEVER, THERE IS A MERIT IN THE ALTERNATIVE CONTEN TION OF THE APPELLANT TO THE EFFECT THAT THE ACTUAL PAYMENT OF RS. 24,46,700/- SHOULD BE ALLOWED, AS IT IS A VALID BUS INESS EXPENDITURE AND ONLY THE ADDITIONAL WEIGHTED DEDUCT ION PORTION 25% - RS. 6,11,675/- BE DISALLOWED. THE CORRESPOND ENCE BETWEEN THE APPELLANT AND THE INSTITUTIONS SHOWS TH AT THE EXPENDITURE HAS BEEN INCURRED FOR VARIOUS TESTING P ROCEDURES AND FOR OBTAINING EFFICACY CERTIFICATES. FURTHER, THERE IS NO DISPUTE THAT A PESTICIDE CANNOT BE SOLD WITHOUT THE REGULATORY APPROVAL, AND THAT SUCH APPROVALS ARE ISSUED ONLY O N RECEIPT OF REPORTS FROM THE CONCERNED INSTITUTES. THE CHARACT ER OF SUCH RALLIS INDIA 12 EXPENDITURE IN REVENUE IN NATURE AND IS NOT FOR ACQ UISITION OF KNOW HOW. THE AO IS, THEREFORE, DIRECTED TO ALLOW THE AMOUNT EXPENDED OF RS. 24,46,700/- OUT OF THE CLAIM OF RS. 30,58,375 (125%). GROUNDS NO. 1 & 2 ARE, THUS, PARTLY ALLOWE D. 35. THIS ISSUE IS REMITTED BACK TO THE ASSESSING OFFICER FOR VERIFICATION OF THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE BEFORE T HE LD. CIT(A) AND IF FOUND IN ORDER ALLOW THE CLAIM OF THE ASSESSEE. 36. GROUND NO.2 & 3 RAISED BY THE REVENUE READ AS F OLLOWS: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT FEES PAID TO AGENC Y WHICH INSTALLED AND IMPLEMENTED SAP SOFTWARE TO BE PART AND PARCEL OF THE ACQUISITION OF SOFTWARE ITSELF AND THEREBY A LLOWING 60% DEPRECIATION ON THE SAME. 3. WITHOUT PREJUDICE TO THE ABOVE GROUND, THE LD. CITR (A) ERRED IN HOLDING THAT FEES PAID TO AGENCY WHICH INS TALLED AND IMPLEMENTED SAP SOFTWARE TO BE PART AND PARCEL OF T HE ACQUISITION OF SOFTWARE AND THEREBY ALLOWING 60% DEPRECIATION ON THE SAME WHEN THE ASSESSEE HIMSELF SUBMITTED A WORKING OF DISALLOWANCE DURING THE ASSE SSMENT PROCEEDINGS. 37. THE AR SUBMITTED AS FOLLOWS: THE APPELLANT SUBMITTED THAT SAP IS AN ENTERPRISE -WIDE SOFTWARE, WHICH ENABLES AN ORGANIZATION TO HAVE AN INTEGRATED PLATFORM FOR FINANCIAL ACCOUNTING LINKED TO MANUFACTURING OPERAT IONS, STOCK, DEBTORS, FINAL ACCOUNTS ETC. IT ENABLES FINANCIAL ACCOUNTS TO BE MAINTAINED AND AT THE SAME TIME TO GENERATE MANAGEMENT INFORMATION CRITICAL IN THE PRESENT ENVIRONMENT. TCS IS ASSOCIATED WITH SAP AG , GERMANY AS AN IMPLEMENTER TO IMPLEMENT THE ROLL OUT OF THE ENTERP RISE SOFTWARE. A COPY OF THE SERVICE AGREEMENT ENTERED INTO WITH TCS FOR THIS PURPOSE, AND SAMPLE BILLS ARE ENCLOSED AT PAGES 328 TO PAGES 366 OF THE COMPILATION. THE APPELLANT SUBMITTED THAT THE ACTI ON OF THE AO IN HOLDING THAT THE CONSULTANCY SERVICES AMOUNTS TO AC QUISITION OF TECHNICAL KNOW-HOW IS WRONG. THE ASSESSEE HAD HI RED TATA CONSULTANCY SERVICES (TCS) TO INSTALL AND IMPLEMENT THE SOFTWARE DEVELOPED BY SAP AG, GERMANY IN RENDERING SERVICE S FOR INSTALLATION AND IMPLEMENTATION, TCS HAS NOT TRANSFERRED ANY TEC HNICAL KNOW-HOW TO THE APPELLANT. THE SERVICES RENDERED BY TCS ARE SIMILAR TO INSTALLATION CHARGES PAID FOR INSTALLING PLANT & MA CHINERY. JUAST AS RALLIS INDIA 13 INSTALLATION CHARGES WOULD BE ADDED TO THE COST OF PLANT & MACHINERY AND UNIFORM DEPRECIATION TAKEN THEREON, THE IMPLEME NTATION SERVICES FOR INSTALLING THE SOFTWARE ARE ALSO REQUIRED TO BE CONSIDERED AS PART OF THE SOFTWARE. IN LIGHT OF THE ABOVE, THE APPELLANT SUBMITTED THAT THE ACTION OF THE AO IS ERRONEOUS AND HE BE DIRECTED TO ALLOW DEPRECIATION @ 60% ON THE ABOVE ITEMS. 38. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT CAREFULLY AND HAVE PERUSED THE SERVICE AGREEMENT ENTERED INTO BETWEEN TCS AND THE APPELLANT. THE AGREEMENT CLARIFIES THAT RA LLIS IS THE LICENCED USER OF THE SAP SOFTWARE PACKAGE (HEREINAFTER KNOWS AS ERP) DEVELOPED BY SAP AG, GERMANY, AND THE TCS HAS THE R EQUISITE EXPERTISE IN THE IMPLEMENTATION OF ERP, AND HAS OFF ERED ITS SERVICES FOR INSTALLATION AND IMPLEMENTATION OF THE SAID SOFTWAR E ACQUIRED FROM GERMANY. THE SCOPE OF WORK HAS BEEN LISTED IN ANNE XURE 1 TO THE AGREEMENT, DETAILING WHAT MODULES TCS WILL IMPLEMEN T IN A PHASED MANNER, ANNEXURE 2 DETAILS THE RESPONSIBILITIES AND THE TIME TABLE FOR THE ROLL OUT, ANNEXURE 4 DETAILS THE CHARGES, ANNEX URE 5 DETAILS THE INFRASTRUCTURE WHICH RALLIS WILL PROVIDE AT ITS OWN FACTORIES AND OFFICES TO THE TCS CONSULTANTS, WHO ARE DEPLOYED TO RALLIS ON THE PROJECT, ANNEXURE 7 DETAILS THE VARIOUS LOCATIONS COVERED WH ERE IMPLEMENTATION WILL TAKE PLACE, ANNEXURE 8 CONTAINS THE FLOW CHART FOR THE IMPLEMENTATION METHODOLOGY. ON INQUIRY, I WAS INFOR MED THAT THE PAYMENT FOR ACQUISITION OF SOFTWARE WAS RS. 8 CR ORES, WHICH HAS BEEN DULY CAPITALIZED BY THE APPELLANT. I AM OF THE OPINION, HAVING REGARD TO THE NATURE OF SOFTWARE AND THE TERMS OF T HE SERVICE AGREEMENT, THAT THE FEES PAID TO THE AGENCY WHICH I NSTALLS AND IMPLEMENTS THE SAID SOFTWARE HAS TO BE PART AND PAR CEL OF THE ACQUISITION OF THE SOFTWARE ITSELF. THE INSTALLATI ON AND IMPLEMENTATION OF SUCH AN ENTERPRISE WIDE SOFTWARE HAS TO BE CONSI DERED AS PART AND PARCEL OF THE SOFTWARE DELIVERY SYSTEM, AND CANNOT BE DIVORCED IN THE MANNER SUGGESTED BY THE AO. POSSIBLY, THE APPELLAN T MAY HAVE BEEN ABLE TO CONTEND THE ENTIRE EXPENDITURE IS ALLOWABLE AS A REVENUE EXPENDITURE, BUT IT HAS BEEN FAIR TO CAPITALIZE THE SAME TO THE SOFTWARE AND CLAIM DEPRECIATION THEREON. 39. EXPENDITURE INCURRED IN INSTALLATION/COMMISSION ING AN ASSET SHOULD BE CONSIDERED AS PART OF COST OF ACQUISITION OF ASSET AND DEPRECIATION ALLOWED THEREON. THE LD. CIT(A) HAD CORRECTLY ALLOWED DEPRE CIATION AT 60% ON THE EXPENDITURE ON INSTALLATION TREATING IT AS PART OF COST OF ACQUISITION OF SOFTWARE. HENCE, REVENUES APPEAL ON THIS ISSUE IS DISMISSED. 40. GROUND NO.4 RAISED BY THE REVENUE READS AS FOLL OWS: RALLIS INDIA 14 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS 1,7 0,822/- MADE U/S 40A(9) OF THE I.T. ACT. 41. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT . IN THE MODERN CONTEXT, SUCH EXPENDITURE CAN ONLY BE BY WAY OF STAFF WELFARE EXPENSES. THE EXPENSES OF THE CLUB ARE MET BY VAR IOUS COMPANIES WHICH CONSTITUTE THE TATA GROUP, AND SUCH PAYMENTS ARE NOT HIT BY SEC. 40A(9), AS ALSO HELD BY THE BOMBAY HIGH COURT IN CIT VS BHARAT PETROLEUM CORPN. LTD. (252 ITR 43) AND CASES OF THE TATA GROUP ITSELF IN TRIBUNAL DECISIONS SUCH AS DCIT VS VOLTAS LTD. ( ITA NO. 8239/M/95) AND TATA INVESTMENT CORPN. LTD. VS ACIT (ITA NO. 14 82/M/02). THE DISALLOWANCE IS DIRECTED TO BE DELETED FOLLOWING TH E RATIO OF THESE JUDGEMENTS. GROUND NO. 8 IS ACCORDINGLY, ALLOWED. 42. THE BOMBAY HIGH COURT IN THE CASE OF CIT VS BH ARAT PETROLEUM CORPN. LTD. (252 ITR 43) O N THE QUESTION WHETHER THE DEPARTMENT WAS RIGHT IN DISALLOWING THE ASSESSEES CLAIM FOR DEDUCTION OF RS. 2,60,283 /- BEING STAFF SPORTS AND WELFARE EXPENSES UNDER SECTION 40A(9) OF THE INCOME-TAX AC T ?, HELD AS FOLLOWS: BHARAT PETROLEUM CORPORATION IS A CENTRAL GOVERNME NT UNDERTAKING. IT HAS INCORPORATED A CLUB, ESSENTIALLY TO CARRY O N STAFF WELFARE ACTIVITIES. UNDER CLAUSE 28, BHARAT PETROLEUM CORPORATION LIMIT ED HAD A RIGHT TO ISSUE DIRECTIVES TO THE CLUB WHICH WERE BINDING ON THE CL UB. AT TIMES, THE MEMBERS OF THE CLUB, WHO WERE THE EMPLOYEES OF BHARAT PETRO LEUM CORPO- RATION, TOOK PART IN TOURNAMENTS HELD OUTSIDE THE CLUB PREMISES LIKE TIMES SHIELD IN CRICKET. ON SUCH OCCASIONS, THE ASSESSEE-CORPORATIO N USED TO RE- IMBURSE EXPENSES INCURRED BY THE CLUB. THIS IS THE FINDING OF FACT RECORDED BY THE TRIBUNAL. IN THE CIRCUMSTANCES, SECTION 40A(9) IS N OT APPLICABLE. NO SUBSTANTIAL QUESTION OF LAW ARISES. HENCE, OUR ANSW ER TO THE AFORESTATED QUESTION NO. 2 IS IN THE NEGATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT. ACCORDINGLY, THE INCOME-TAX APPEAL IS DISPOSED OF. NO ORDER AS TO COSTS. RESPECTFULLY FOLLOWING THE JURISDICTIONAL HIGH COUR T WE DISMISS THIS GROUND RAISED BY THE REVENUE. 43. GROUND NO.5 RAISED BY THE REVENUE READS AS FOLL OWS: (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 58,10, 379/- MADE TO THE RALLIS INDIA 15 TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF CENVAT C REDIT OBTAINED FROM RALCHEM LTD DURING THE AMALGAMATION. (II) WITHOUT PREJUDICE TO THE ABOVE GROUND, THE LD. CIT( A) ERRED IN DELETING THE ADDITION OF RS 58,10,379/- MADE TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF CENVAT CREDIT OBTAINED F ROM RALCHEM LTD DURING THE AMALGAMATION BY ADMITTING ADDITIONAL EVIDENCE IN VIOLAION OF RULE 46A OF THE I.T. RULES. 44. THE ASSESSEE SUBMITTED AS FOLLOWS: THE RELEVANT FACTS ARE THAT A SUBSIDIARY BY NAME O F RALCHEM LTD. WAS MERGED WITH RALLIS INDIA LTD UNDER ORDERS O F THE BOMBAY HIGH COURT FROM 1 ST APRIL, 2003. RALCHEM LTD. HAD A CLOSING CENVAT CR EDIT BALANCE OF RS. 58,10,379/- (RELEVANT EXTRACT OF CLO SING TAX AUDIT REPORT OF RALCHEM LTD. IS GIVEN AT PAGE 196-197 OF THE COM PILATION). THIS CENVAT CREDIT BALANCE WAS TREATED AS AN OPENING CEN VAT CREDIT BALANCE IN THE BOOKS OF THE ASSESSEE POST MERGER. THE USAGE OF THE CENVAT CREDIT OF RALCHEM LTD. HAS ENABLED THE ASSES SEE TO PAY LESSER EXCISE DUTY. IF THE AO HAD SEEN THE AUDITORS CHART CAREFULLY, HE WOULD HAVE OBSERVED THAT THE CENVAT CREDIT AVAILABLE AND UTILIZED RESULTS IN AN INCREASE IN PROFIT. THEREFORE, MERELY BECAUSE O F THE AMALGAMNATION, THERE IS NO REDUCTION IN THE TAXABLE INCOME. THIS PRESUMPTION OF THE AO IS WHOLLY ERRONEOUS IN FACT A ND IN LAW. THE UTILIZATION OF CENVAT CREDIT IS COMPLETELY REVENUE NEUTRAL AND THERE IS NO ADDITION CALLED FOR TO THE PROFIT AND LOSS. 45. AS HELD BY THE LD. CIT(A) AS A RESULT OF GROSSI NG UP U/S. 145A, THERE IS AN INCREASE IN THE CLOSING STOCK FOR A.Y. 2003-04 I N THE SAID COMPANY OF RS. 58,10,379/-. THIS INCREASE IN CLOSING STOCK HAS RE SULTED IN INCREASE IN THE OPENING STOCK FOR THE CURRENT A.Y. WHICH HAS BEEN B ROUGHT OUT BY THE TAX AUDITOR. THE INCREASE IN OPENING STOCK CONSEQUENT TO INCREASE IN CLOSING STOCK IN THE PREVIOUS YEAR DOES NOT RESULT IN ANY R EDUCTION IN THE INCOME. THE AUDITOR HAS ALSO CLARIFIED IN THE TAX AUDIT REPORT THAT CONSEQUENT TO THE APPLICATION OF SEC. 145A THERE IS NO IMPACT ON THE PROFIT BEFORE TAXATION. THE AO HAS WRONGLY PRESUMED THAT DUE TO AMALGAMATION TH ERE HAS TO BE A TAXABLE INCOME AND WE CONFIRM THE FINDING OF THE LD . CIT(A) THAT THE UTILIZATION OF CENVAT CREDIT IS COMPLETELY REVENUE NEUTRAL AND DOES NOT CALL FOR ADDITION TO THE PROFIT AND LOSS ACCOUNT. FURTH ER WE FIND THAT NO ADDITIONAL RALLIS INDIA 16 EVIDENCE HAS BEEN ADMITTED AND THEREFORE GROUND NO. 5(II) IS DISMISSED. THE REVENUES APPEAL IS DISMISSED ON THIS ISSUE. 46. GROUND NO.6 RAISED BY THE REVENUE READS AS FOLL OWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 70 ,00,000/- PAID TO TATA SONS LTD. BY WAY OF BRAND EQUITY CONTRIBU TION 47. THE FACT IS THAT THE ASSESSEE HAS PAID RS. 70 LAKHS AS ITS CONTRIBUTION TOWARDS THE BRAND EQUITY AND BUSINESS PROMOTION SCH EME TO TATA SONS. THE ASSESSEE UTILIZED THE TATA LOGO ON ALL ITS PRODUCTS AND IS PART OF THE TATA GROUP. 48. THE ASSESSEE SUBMITTED THAT THERE IS IMMENSE GO ODWILL AND BRAND AWARENESS ATTACHED TO THE TATA NAME/MARK, WHICH TAT A SONS LTD. FURTHER PROPOSES TO SYSTEMATICALLY DEVELOP, PROMOTE AND ENH ANCE WITH THE MAIN OBJECT OF PROVIDING COLLECTIVE STRENGTH OF THE TATA S TO THE BUSINESS OF INDIVIDUAL TATA COMPANIES AND ADD VALUE TO THEIR BU SINESS AS WELL AS LEGALLY PROTECT THE TATA BRAND. FOR THE PURPOSE OF MEETING THE ABOVE MENTIONED OBJECTIVES, TATA SONS LTD HAS FORMULATED A SCHEME K NOWN AS THE TATA BRAND EQUITY & BUSINESS PROMOTION (BEBP) SCHEME (PA GE 240 TO 268 OF COMPILATION) BY WHICH IT AGREES TO INITIATE CERTAIN MEASURE AND UNDERTAKES SPECIFIC OBLIGATIONS AND RESPONSIBILITIES AS STATE D AT PARA 13.1.2 OF LD. CIT(A)S ORDER. 49. THE AO STATED THAT THE COMPANY HAS MADE HUGE BU SINESS LOSSES AND SINCE THERE IS NO PROFIT BEFORE TAX THE BRAND EQUIT Y PAYMENT WAS DISALLOWED BY HIM. 50. THE AR OF THE ASSESSEE SUBMITTED THAT THE ACCOU NTS OF THE ASSESSEE REVEAL PROFIT BEFORE TAX AT RS. 26,18,63,000/- AND THE AO HAS COMPLETELY IGNORED THE FACT. FURTHER THE BRAND EQUITY HAD TO BE PAID BY THE ASSESSEE COMPANY AS PER THE AGREEMENT AND IT HAS DONE SO. RALLIS INDIA 17 51. THE LD. CIT(A) DISCUSSED ELABORATELY IN HIS ORD ER AND FINALLY CONCLUDED AS FOLLOWS: THE ACCOUNTS OF THE APPELLANT FOR THE RELEVANT YEA R WHICH HAVE BEEN APPENDED IN THE COMPILATION DISCLOSE PROFIT BE FORE TAXATION OF RS. 26.18 CRORES, AND PROFIT AFTER TAXATION OF RS. 25.5 4 CRORES. I FIND THAT THE PAYMENT OF RS. 70,00,000/- DOES NOT CONTRAVENE PARAGRAPH 12.2 OF THE AGREEMENT BECAUSE IT DOES NOT EXCEED 5% OF THE ANNUAL PROFITS BEFORE TAX. FURTHER, THE CALCULATION REPRODUCED BY THE AO IN THE ASSESSMENT ORDER ITSELF SHOWS THAT THE PERCENTAGE P RESCRIBED IN THE AGREEMENT HAS BEEN DULY ADHERED TO. IN THE LIGHT O F THE RELEVANT FIGURES, IT CANNOT BE SAID THAT THE SUBSCRIBERS BU SINESS IS BECOMING UNPROFITABLE. IN THE LIGHT OF THESE CRUCIAL FACTS, THERE IS NO OPTION, BUT TO CONCLUDE THAT THE FINDING OF THE AO IS WHOLLY ER RONEOUS ON FACTS. NO DOUBT, THE APPELLANT DID NOT HAVE A TAXABLE BUSINES S INCOME FOR THE YEAR IN THE INCOME TAX COMPUTATION, BECAUSE OF SET OFF OF BROUGHT FORWARD LOSSES, BUT THAT IS AN IRRELEVANT FACTOR FO R THE PURPOSES OF DECIDING WHETHER THERE WAS PROFIT BEFORE TAX IN ITS ACCOUNTS. QUITE CLEARLY, THE AGREEMENT MEANS ANNUAL PROFIT BEFORE T AX AS PER THE ACCOUNTS OF THE APPELLANT. IT IS ALSO NECESSARY TO BEAR IN MIND THE CHANGING ECONOMIC REALITIES OF DOING BUSINESS. POS T LIBERALIZATION IN 1990, INDIAN COMPANIES WERE REQUIRED TO RESPOND PRO ACTIVELY IN ORDER TO COMPETE WITH OTHER WORLD CLASS COMPANIES AND SUR VIVE. THE PAYMENT IN QUESTION NOT ONLY PERMITS THE USE OF THE TATA NAME, BUT GIVES AN OPPORTUNITY TO INFORM THE BUSINESS WORLD T HAT THE APPELLANT IS HAVING THE BACK UP OF EXCELLENCE, WITH A CODE OF CO NDUCT AND A PROMISE OF QUALITY. THERE CAN BE NO TWO OPINIONS A BOUT THE FACT THAT THE TATA GROUP WAS ALREADY HAVING AN INFRASTRUCTURE AND BRAND EQUITY AND BY MAKING SUCH A CONTRIBUTION, A COMPANY SUCH A S THE APPELLANT COULD ONLY BENEFIT IN ITS DAY TODAY BUSINESS. THE PAYMENT IS INCURRED ON GROUNDS OF BUSINESS EXPEDIENCY, AND IS, THEREFOR E ALLOWABLE. I FIND THAT THERE IS NO JUSTIFICATION FOR THIS DISALLOWANC E, AND THE SAME IS HEREBY DELETED. GROUND NO. 12 IS THUS, ALLOWED. 52. WE FIND THAT THE ISSUE IS COVERED BY THE DECISI ON IN THE CASE OF HARRISONS MALAYALAM 19 SOT 363WHEREIN THE FACTS AR E THAT THE ASSESSEE COMPANY ENTERED INTO AN AGREEMENT WITH RPGEL TO AC QUIRE NON-EXCLUSIVE LICENCE TO USE LOGO OWNED BY RPGEL FOR PURPOSE OF BUSINESS. IN ACCORDANCE WITH SAID AGREEMENT, THE ASSESSEE MADE CERTAIN PAYM ENT TO RPGEL AND THE SAID PAYMENT WAS DISALLOWED BY AO. ON THE QUESTION WHETHER SINCE RPGEL WAS HAVING INFRASTRUCTURE WHICH WAS USED BY ASSESSE E FOR DEVELOPMENT OF ITS BUSINESS THE PAYMENT MADE TO RPGEL WAS AN ALLOWABLE EXPENDITURE U/S. 37(I) RALLIS INDIA 18 IT WAS HELD THAT SEC. 37 PROVIDES THAT ANY EXPENDIT URE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS, BUT IT DOES N OT MEAN THAT THE SAID EXPRESSION CONTEMPLATES THE SAID EXPENDITURE MUST B E INCURRED NECESSARILY FOR THE PURPOSE OF BUSINESS AND THEREFORE HELD THAT PAYMENTS MADE BY THE ASSESSEE TO RPGEL WAS ALLOWABLE EXPENDITURE U/S. 37 (I). RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION IN THE CASE OF HARRISONS MALAYALAM (SUPRA) WE DISMISS THE REVENUES APPEAL ON THIS ISSUE. 53. GROUND NO. 7 RAISED BY THE REVENUE READS AS FOL LOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS. 1,09,22,869/- PAID AS BROKERAGE TO TATA SONS LTD. 53. THE ASSESSEE OBJECTED TO THE DISALLOWANCE OF RS . 1,09,22,869/- BEING BROKERAGE PAID TO TATA SONS LTD. THE ASSESSEE SUBM ITTED THAT THE AO HAS DISALLOWED CERTAIN PAYMENTS MADE TO TATA SONS LTD. BY RELYING ON CONJECTURES AND SURMISES WHICH ARE UNJUSTIFIED IN FACT AND IN LAW. TATA SONS HAS A SEPARATE FULL FLEDGED DIVISION CALLED TATA FINANCI AL SERVICES. THIS DIVISION ARRANGES LOANS FOR GROUP COMPANIES, AS ALSO FUNDS I NFUSION IN TIMES OF NEED, TEMPORARY ACCOMMODATION IN THE FORM OF ICDS, ETC. AN D CHARGES A BROKERAGE FOR CARRYING OUT THE SAID ACTIVITIES. THE ASSESSEE FURTHER SUBMITTED THAT THE AO HAS GIVEN A WRONG FINDING THAT LOANS AND BORROWI NGS FROM INTERNATIONAL CORPORATE MARKETS CAN BE OBTAINED WITHOUT INCURRING EXPENSES FOR BROKERAGE. THE ASSESSEE POINTED OUT THAT IN ORDER TO OBTAIN A HIGH VALUE LOAN (RS. 75 CRORES IN THE INSTANT CASE) FROM STANDARD CHARTERED BANK, ADEQUATE SECURITY MUST BE OFFERED. THIS SECURITY HAS BEEN GIVEN BY T HREE TATA GROUP COMPANIES NAMELY TATA TEA LTD., TATA CHEMICALS LTD. AND TATA SONS LTD. BY WAY OF COMFORT LETTERS. THESE LETTERS INDEMNIFY THE BANK AGAINST ANY DEFAULT COMMITTED BY RALLIS INDIA LTD. THE ARRANGEM ENT FOR THIS GUARANTEE AND OTHER RELATED WORK FOR OBTAINING THE LOAN FROM STANDARD CHARTERED BANK WAS DONE ENTIRELY BY TATA FINANCIAL SERVICES, A DIV ISION OF TATA SONS LTD. TATA FINANCIAL SERVICES HAS BEEN CONSULTED ON VARIO US FINANCIAL AND TECHNICAL RALLIS INDIA 19 ASPECTS OF ARRANGING FUNDS. THERE IS NO DISPUTE TH AT TATA FINANCIAL SERVICES CHARGES COMMISSION ON THIS BASIS TO OTHER GROUP COM PANIES AS WELL. THE BROKERAGE PAID OF HALF PERCENT AND QUARTER PERCENT IS LESS THAN WHAT ANY OUTSIDE BROKER WOULD HAVE CHARGED. UNDER THE CIRCU MSTANCES, SUCH A DISALLOWANCE MERELY ON THE BASIS OF CONJECTURE IS U NCALLED FOR. 54. THE LD. CIT(A) OBSERVED THAT THE DEBIT NOTES RA ISED BY TATA FINANCIAL SERVICES INDICATE THE NATURE OF WORK DONE. HE FURT HER OBSERVED THAT THE RATE OF BROKERAGE CHARGE AT % AND % IS REASONABLE AND THE MARKET REALITY IS SUCH THAT LOANS AND BORROWING CANNOT BE OBTAINED WI THOUT BROKERAGE EXPENSES. 55. WE FIND THAT THE LD. CIT(A) WAS CORRECT IN HOLD ING THAT THE ASSESSEE HAS PLACED MATERIAL TO DEMONSTRATE HOW IN ORDER TO LOAN OF RS. 75 CRORES FROM STANDARD CHARTERED BANK, TATA FINANCIAL SERVICES WA S INVOLVED AND CARRIED OUT THE WORK FOR OBTAINING THE LOAN. THE PAYMENTS HAVE BEEN MADE FOR SERVICES RENDERED TO THE ASSESSEE AND DUE TO COMMER CIAL EXPEDIENCY HENCE ALLOWABLE AS A DEDUCTION IN THE HANDS OF THE ASSESS EE. THIS GROUND OF THE REVENUE IS DISMISSED. 56. GROUND NO. 8 RAISED BY THE REVENUE READS AS FOL LOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE BAD DEBTS OF RS. 5,54, 19,503/- WHEN THE ASSESSEE HAS NOT PROVED THEM TO BE ACTUALL Y BAD. 57. WE FIND THAT THE ISSUE IS COVERED BY THE DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF TRF LTD. VS CIT, RANCHY (2010 ) TIO-15-SC-IT WHEREIN IT HAS BEEN HELD AS FOLLOWS: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1ST AP RIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT I S WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. RALLIS INDIA 20 58. IN THE INSTANT CASE THERE IS NO CONTROVERSY ABOU T THE WRITE OFF. THEREFORE RESPECTFULLY FOLLOWING THE DECISION IN TH E CASE OF TRF LTD. (SUPRA), WE ALLOW THE APPEAL OF THE ASSESSEE. 59. THE LAST GROUND RAISED BY THE REVENUE READS AS FOLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ADOPT RS. 4,50, 50,775/- AS COST OF ACQUISITION OF RALLI HOUSE INSTEAD OF RS. 1,20,71,8 00/- AS COMPUTED BY THE AO. 61. THE AO HAS TAKEN A BARE PLOT OF LAND ON 1160.75 SQ. MTR AND APPLIED THEREON THE RATE ADOPTED BY THE REGD. VALUER. 62. ON FURTHER APPEAL BEFORE THE LD. CIT(A), THE LD . CIT(A) OBSERVED THAT THE ASSET WHICH HAVE BEEN SOLD FOR WHICH CONSIDERAT ION HAS BEEN RECEIVED AMOUNTING TO RS. 56 CRORES, WAS A PLOT OF LAND ON W HICH STANDS AN EXISTING BUILDING HAVING A BUILT UP AREA OF 62,139 SQ.FT. A ND THEREFORE THE AO IS REQUIRED UNDER SECTION 55 (2)(B) TO VALUE THE SAME ASSET WHICH HAS BEEN SOLD. 60. THE LD. CIT(A) FURTHER HELD AS FOLLOWS: THE SECTION MAKES IT CLEAR THAT IT IS THE SAME ASS ET, WHICH IS BEING SOLD, WHICH IS REQUIRED TO BE VALUED AS AT 1 ST APRIL, 1981 OTHERWISE GIVING THE ASSESSEE THIS BENEFIT HAS NO M EANING, IF THE AO WERE ALLOWED TO CHANGE THE CHARACTER OF THE ASSET. FURTHER, AS COMPARED TO THE REALIZED SALE PRICE, THE VALUE ADOP TED BY THE REGISTERED VALUER OF RS. 4,50,50,775/- AS AT 1 ST APRIL, 1981 APPEARS FAIR AND REASONABLE. THE AOS VALUE APPEARS UNREASONABL Y LOW. FOR ALL THE ABOVE REASONS, I AM OF THE OPINION THAT THE AO ERRED IN ARRIVED AT HIS OWN ESTIMATE AT THE FAIR MARKET VALUE OF THE PROPER TY SOLD AS AT 1 ST APRIL, 1981. THE AO IS DIRECTED TO ADOPT THE VALUE AT RS. 4,50,50,775/- AS PER THE REPORT OF THE REGISTERED VALUER AND INDE X THE SAME. GROUND NO. 15 OF APPEAL IS ACCORDINGLY ALLOWED. RALLIS INDIA 21 61. THE ASSESSEE SOLD RALLIS HOUSE WHICH IS A PLOT OF LAND HOLDING A BUILDING OF 62139 SQ.FT AND HENCE THIS ASSET IS TO BE VALUED AS ON 1 ST APRIL, 1981. SEC. 55 (2)(B)(I) READS AS FOLLOWS: (B) IN RELATION TO ANY OTHER CAPITAL ASSET, (I) WHERE THE CAPITAL ASSET BECAME THE PROPERTY OF THE ASSESSEE BEFORE THE 1 ST DAY OF APRIL, 1981, MEANS THE COST OF ACQUISITION OF THE ASSET TO THE ASSESSEE OR THE FAIR MARKET VALUE OF THE ASSET ON THE 1 ST DAY OF APRIL, 1981, AT THE OPTION OF THE ASSESSEE. 62. THE VALUE ADOPTED BY THE REGD. VALUER OF RS. 4, 50,50,775/- AS ON 1 ST APRIL, 1981 IS TO BE ADOPTED AND THE SAME IS TO BE INDEXED. WE FIND NO INFIRMITY IN THE ORDER OF THE LD. CIT(A), HENCE WE CONFIRM THE SAME. 62. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF AUGUST, 2011. SD/- SD/- (PRAMOD KUMAR) (A SHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH AUGUST,2011. COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI RALLIS INDIA 22 DATE INITIALS 1. DRAFT DICTATED ON: 10.8.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 12.08.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: