DCIT, CHENNAI V. Turbo Energy Limited, CHENNAI

ITA 629/CHNY/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4592 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 09-04-2013
• Court: TRIBUNAL
• Assessee Lawyers: PATHLAVATH PEERYA
• Keywords: Business income; Depreciation; Business expenditure; Additional depreciation; Earning of tax free income; Services rendered outside India; Permanent establishment; Non-deduction of tax
• Section: 143(3); 14A; 37(1); 10B; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: CHENNAI . . . , !.. $ , ) BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 /ASSESSMENT YEAR: 2007-08 & AYS 2008-09 & 2009-10 M/S.TURBO ENERGY LTD., 67, CHAMIERS ROAD, CHENNAI-600 028. VS. THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101. [PAN: AAACT 2916 R ] ( + /APPELLANT) ( ,-+ /RESPONDENT) ./ ITA NO.629/MDS/2013 /ASSESSMENT YEAR: 2007-08 THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101. VS. M/S.TURBO ENERGY LTD., 67, CHAMIERS ROAD, CHENNAI-600 028. [PAN: AAACT 2916 R ] ( + /APPELLANT) ( ,-+ /RESPONDENT) ./ ITA NOS.203, 204 & 205/MDS/2014 . . /ASSESSMENT YEARS: 2006-07, 2008-09 & 2009-10 THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101. VS. M/S.TURBO ENERGY LTD., 67, CHAMIERS ROAD, CHENNAI-600 028. [PAN: AAACT 2916 R ] ( + /APPELLANT) ( ,-+ /RESPONDENT) + 0 / APPELLANT BY : MR.VIKRAM VIJAYARAGHAVAN, ADV. ,-+ 0 /RESPONDENT BY : MR.PATHLAVATH PEERYA, CIT 0 /DATE OF HEARING : 11.04.2017 0 /DATE OF PRONOUNCEMENT : 03.05.2017 ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 2 -: / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THESE ARE THE CROSS APPEALS FILED BY THE REVENUE A S WELL AS THE ASSESSEE AGAINST THE ORDERS OF THE CIT(A) FOR THE A.Y 2006-07, 2007-08, 2008-09 AND 2009-10. SINCE THE COMMON ISSUES ARE INVOLVED, ALL THE APPEALS ARE CLUBBED, HEARD TOGETHER AND DISPOSED OF F IN COMMON ORDER FOR THE SAKE OF THE CONVENIENCE AS UNDER: 2.0 ITA NO.203/2014 AY 2006-07: ALL THE GROUNDS OF APPEAL FOR THE AY 2006-07 ARE RELATED TO THE SET OFF OF UNABSORBED BUSINESS LOSSES PERTAINING TO THE ELIGIBLE UNIT OF 10B AGAINST THE PROFITS OF NON ELIGIBLE UNDERTAKING OF 10B UNITS. THE APPEAL WAS FILED BY THE REVENUE. DURING THE ASSESSMENT PR OCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAS INCURRED A LOSS OF RS.2 ,33,61,500/- FROM 100% EXPORT ORIENTED UNITS (EOU) ASTRA TEL, WHICH W AS SET OFF AGAINST THE INCOME OF NON-10B UNITS( I.E. FROM NORMAL TAXABLE I NCOME OF OTHER UNITS). THE AO WAS OF THE VIEW THAT THE UNIT ELIGIBLE FOR D EDUCTION U/S 10B IS A SEPARATE ENTITY FOR THE PURPOSE OF INCOME TAX AND T O BE ASSESSED AS AN INDEPENDENT UNIT AS IF IT IS ONLY THE SOURCE OF INC OME. THE UNABSORBED LOSSES OF ELIGIBLE UNITS OF 10B UNDERTAKING SHOULD BE CARRIED FORWARDED SEPARATELY AND ALLOWED TO BE SET OFF AGAINST THE FU TURE INCOMES OF 10B UNITS ALONE. FURTHER, THE AO OPINED THAT IN CASE, T HE ASSESSEE WISHES TO ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 3 -: AVAIL THE NORMAL PROVISIONS OF THE INCOME TAX ACT, IT SHOULD OPT OUT FROM CLAIMING THE DEDUCTION U/S 10B AND SUBMIT A DECLARA TION AS PER SEC.10B(8) OF IT ACT BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME TREATING THE ELIGIBLE UNIT AS A NON-ELIGIBLE UNIT U /S.10B OF IT ACT. IN THE INSTANT CASE THE ASSESSE HAS NOT FURNISHED ANY SUCH UNDERTAKING HENCE THE AO WAS OF THE VIEW THAT THE PROVISIONS OF SEC.8 0IA AND 10B ARE PARIMETERIA AND ACCORDINGLY, DISALLOWED THE SET OFF OF LOSSES RELATING TO 10B UNIT AGAINST THE PROFITS OF NON-ELIGIBLE UNITS AND COMPUTED THE TOTAL INCOME AT RS.85,25,27,170/- AGAINST THE RETURNED IN COME OF RS.82,91,65,600/-. 2.1 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WEN T ON APPEAL BEFORE THE LD.CIT(A) THE LD.CIT(A) ALLOWED THE ASSE SSESS APPEAL, PLACING RELIANCE ON THE DECISION OF THE CO-ORDINATE BENCH O F ITAT CHENNAI IN THE CASE OF BRAKES INDIA LTD (ITA NO.266/MDS/2012 DATED 22.03.2013 FOR THE AY 2007-08). THE RELEVANT PART OF THE LD.CIT(A) ORD ER IS EXTRACTED AS UNDER: 5.0 SECOND GROUND PERTAINS TO DISALLOWANCE OF SET O FF OF LOSS FROM 10B UNIT AGAINST THE PROFIT OF NON-10B UNITS. WITH REGARD TO THIS ISSUE THE HONBLE ITAT CHENNAI IN THE CASE OF BRAKES INDIA LTD (ITA 266/MDS/2012 DATED 22.03.2013 FOR A.Y. 2007-08) HELD AS UNDER: 34. VIDE ITS GROUND NO.6, REVENUE IS AGGRIEVED THA T THE CIT(APPEALS) ALLOWED SETTING OFF OF LOSS IN 10B UNITS AGAINST PROFITS OF NON-10B UNITS. 35. 36. .. 37. 38. .. 39. .. HERE IT IS A CLAIM FOR SET OFF OF LOSS OF A UNIT ON WHICH CLAIM UNDER SECTION 10B COULD BE PREFERRED WITH THE PROFITS OF A UNIT O N WHICH DEDUCTION UNDER SECTION 10B WAS NOT AVAILABLE. THIS ISSUE, IN OUR OPINION, HAS ALREADY BEEN RESOLVED IN FAVOUR OF ASSESSEE BY HONBLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN UNILEVER LTD (SUPRA). IN THE SAID CASE, ASSESSEE HAD FOUR UNI TS WHICH WERE ELIGIBLE FOR ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 4 -: DEDUCTION UNDER SECTION 10B, OF WHICH, THREE UNITS HAD RETURNED PROFITS, WHEREAS, THE FOURTH UNIT RETURNED A LOSS. DEDUCTION WAS INDE PENDENTLY CLAIMED FOR THE PROFITS OF THE 10B UNITS. LOSS OF THE FOURTH UNIT WAS ALLOW ED TO BE SET OFF AGAINST PROFITS OF THE UNITS ON WHICH THERE WAS NO DEDUCTION AVAILABLE UNDER SECTION 10B. LATER THE ASSESSMENT WAS SOUGHT TO BE REOPENED. THEIR LORDSHI P HELD THE REOPENING DONE FOR DISALLOWING SET-OFF OF THE LOSS OF THE FOURTH UNIT TO BE INVALID. THEIR LORDSHIP OBSERVED THAT ASSESSEE WAS ENTITLED TO CLAIM DEDUCT ION IN RESPECT OF THE PROFITS OF THREE ELIGIBLE UNITS, AND ALSO ENTITLED TO CLAIM SE T-OFF OF LOSS ARISING IN THE FOURTH UNIT AGAINST OTHER BUSINESS INCOME. WE ARE OF THE O PINION THAT THIS DECISION CLEARLY GOES IN FAVOUR OF ASSESSEE. LD. CIT(APPEALS) WAS JUS TIFIED IN DIRECTING THE ASSESSING OFFICER TO ALLOW SET OFF OF LOSS IN THE 10B UNITS W ITH PROFITS IN OTHER NON-10B UNITS. 40. GROUND NO.6 OF THE REVENUE STANDS DISMISSED. RESPECTFULLY FOLLOWING THE ABOVE DECISION, IT IS HE LD THAT THE AO HAS WRONGLY CONCLUDED THAT IT WAS INCORRECT TO SET OFF LOSS OF RS.2,33,61,500/ - INCURRED BY 100% EOU AGAINST THE INCOME OF THE NON-10B UNITS IN A.Y.2006-07. THEREFO RE, THE AO IS DIRECTED TO ALLOW SET OFF OF LOSS OF 10B UNIT FROM THE PROFITS OF NON-10B UNI TS FOR A.Y. 2006-07. ACCORDINGLY, THE GROUND IS ALLOWED. 2.2 AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE DEPAR TMENT IS ON APPEAL BEFORE US. APPEARING FOR THE REVENUE, THE LD .DR ARGUED THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 10B FOR TEN CONSECUTIVE ASSESSMENT YEARS WHICH IS RECOGNIZED AS TAX HOLIDAY PERIOD AND DURING THE TAX HOLIDAY PERIOD UNITS ELIGIBLE TO CLAIM EXEMPTION U/S.10B AR E BEING TREATED AS SEPARATE AND INDEPENDENT UNIT AS IF IT IS ONLY THE SOURCE OF INCOME. THE PROFITS AND GAINS OF THE ELIGIBLE UNIT HAS TO BE CO MPUTED SEPARATELY AND THE DEDUCTION HAS TO BE ALLOWED TO THE EXTENT OF PR OFITS AND IN CASE OF LOSS INCURRED DURING THE TAX HOLIDAY PERIOD THE SAME SHO ULD BE CONSIDERED SEPARATELY AND TO BE CARRIED FORWARDED TO THE NEXT YEAR AND SET OFF AGAINST THE INCOME OF THE ELIGIBLE UNIT IN THE SUBSEQUENT Y EAR. IN CASE ,THE ASSESSEE WANTS TO OPT OUT FROM 10B FOR THE RELEVANT PREVIOUS YEAR, THE ASSESSEE IS FREE TO OPT OUT FROM THE TAX HOLIDAY PE RIOD FOR ANY PREVIOUS YEAR, BY FURNISHING A DECLARATION AS REQUIRED U/S. 10B(8) OF IT ACT TO INCLUDE THE PROFITS OF ELIGIBLE UNITS IN NORMAL PRO VISIONS OF IT ACT. IN THE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 5 -: ASSESSEES CASE, THE ASSESSEE HAS NOT FURNISHED ANY SUCH DECLARATION. THEREFORE, THE LOSSES OF THE ASSESSEE DERIVED FROM THE ELIGIBLE UNDERTAKING CANNOT BE ALLOWED TO BE SET OF AGAINST THE TAXABLE INCOME OF THE OTHER NON-ELIGIBLE UNITS. THE ASSESSEES LOSSES HAVE TO BE COMPUTED SEPARATELY DURING THE TAX HOLIDAY PERIOD AND SHOULD BE SET OF AGAINST THE INCOMES OF THE ELIGIBLE UNITS. BY SETTING UP OF THE LOSSES OF ELIGIBLE UNITS FROM THE TAXABLE INCOME THE ASSESSEE IS REDUCING THE TAXABLE INCOME WHICH IS NOT PERMISSIBLE. THE LD.DR RELIED ON THE FOLLOWING DEC ISIONS VEHEMENTLY OPPOSING THE ORDERS OF THE LD.CIT(A): 1. ITA NO.381/BANG/2012 DATED 12.10.2012 IN THE CASE OF KARELE INTERNATIONAL PVT. LTD. V. ACIT 2. [2014] 48 TAXMANN.CO 357 (SC) IN THE CASE OF HIMAST SINGKA SEIDE LTD. V. CIT 3. [2015] 373 ITR 0574 (DELHI), (2015) 231 TAXMAN 0697 ( DELHI) IN THE CASE OF CIT V. KEI INDUSTRIES LTD. 4. [2017] I 45 DTR 000 1 (SC), (2017) 291 CTR 000 1 (SC) IN THE CASE OF CIT & ANR. VS. YOKOGAWA INDIA LTD. 2.3 ON THE OTHER HAND, THE LD.AR ARGUED THAT THE BENEF IT OF TAX HOLIDAY WAS ORIGINALLY INTRODUCED AS AN ABSOLUTE EXEMPTION UNDER CHAPTER-III OF IT ACT, 1961 AND REMAINED AS EXEMPT FOR MORE THAN T WO DECADES. THE FINANCE ACT WHICH CAME INTO EFFECT FROM APRIL 1, 20 10 ALLOWED SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED 100% ORI ENT EOUS W.E.F. APRIL, 2001 AND THE PROFITS AND GAINS OF THE UNDERTAKING A RE ALLOWED AS A DEDUCTION BUT NOT AS EXEMPTION AS ENVISAGED ORIGINA LLY. HOWEVER, THE SEC.10A & 10B REMAINED IN CHAPTER-III MEANT FOR THE INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME. THEREFORE, THE LD.A R CONTENDED THAT THE INCOME OF 10B UNDERTAKING SHOULD BE ALLOWED AS A DE DUCTION FROM THE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 6 -: SOURCE ITSELF BUT NOT FROM THE GROSS TOTAL INCOME. THE VERY PURPOSE OF PLACING SEC.10A & SEC.10B BEING REMAINED IN CHAPTER -III UNDER THE HEAD INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME IS T O ALLOW THE DEDUCTION FROM THE SOURCE ITSELF. ACCORDINGLY, THE LOSSES OF THE 10B UNITS REQUIRED TO BE ALLOWED SET OFF AGAINST THE PROFITS AND GAINS OF THE BUSINESS BEFORE ARRIVING AT THE GROSS TOTAL INCOME. THE LD.AR ARGU ED THAT THE PROFITS AND GAINS OF THE BUSINESS REQUIRED TO BE COMPUTED AS PE R PROVISIONS OF SEC.28 TO 43 INCLUSIVE OF 10B UNITS AND ALLOW THE DEDUCTIO N U/S.10B FROM THE BUSINESS INCOME ITSELF. THERE IS NO PROVISION IN T HE IT ACT NOT TO ALLOW THE SET OFF OF LOSSES OF 10B ELIGIBLE UNITS FROM THE TO TAL INCOME OF THE ASSESSEE AND CARRY FORWARD IT SEPARATELY. THE LD.AR FURTHER ARGUED THAT THE PROVISIONS OF SEC.80IA CANNOT BE EQUATED WITH THAT OF THE PROVISIONS OF SEC.10B. AS PER SUB SEC.5 OF 80IA, THE PROFITS AND LOSSES OF ELIGIBLE UNITS REQUIRED TO BE COMPUTED SEPARATELY AS A SEPARATE UN IT FOR THE PURPOSE OF CARRY FORWARD AND SET OFF OF LOSSES AND COMPUTATION OF INCOME DURING THE TAX HOLIDAY PERIOD. SUCH PROVISIONS ARE NOT PLACED IN SEC.10B. THEREFORE, THE LD.AR CONTENDED THAT THE LOSSES OF 10B UNITS NE ED NOT SEPARATELY BE CARRY FORWARD AND THE ASSESSEE IS ELIGIBLE FOR SET OFF OF LOSS OF 10B UNITS FROM THE NORMAL TAXABLE UNITS. THE LD.AR ALSO RELI ED ON THE FOLLOWING DECISIONS: 1. LASON INDIA (VETRI SOFTWARE) VS. ITO (301 ITR 306) 2. SCIENTIFIC ATLANTA INDIA TECHNOLOGY VS. CIT (129 TT J 273) (CHENNAI) 3. CIT VS. YOKOGAWA INDIA LTD. (341 ITR 385) (KAR HC) 4. BRAKES INDIA (266/MDS/2012) (CHENNAI) ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 7 -: 2.4 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE ISSUE IS SQUARELY COVERED BY THE HONBLE SUPRE ME COURT JUDGMENT IN THE CASE OF CIT & ANR. V. YOKOGAWA INDI A LTD. [2017] 77 TAXMANN.COM 41 (SC) IN FAVOUR OF ASSESSEE. THE QUESTIONS RAISED BEFORE THE HONBLE APEX COURT ARE UNDER: THE BROAD QUESTION INDICATED ABOVE MAY BE CONVENIEN TLY DISSECTED INTO THE FOLLOWING SPECIFIC QUESTIONS ARISING IN THE CASES UNDER CONSI DERATION. (I) WHETHER SECTION 10A OF THE ACT IS BEYOND THE PU RVIEW OF THE COMPUTATION MECHANISM OF TOTAL INCOME AS DEFINED UNDER THE ACT. CONSEQUENTLY , IS THE INCOME OF A SECTION 10A UNIT REQUIRED TO BE EXCLUDED BEFORE ARRIVING AT THE GROS S TOTAL INCOME OF THE ASSESSEE? (II) WHETHER THE PHRASE 'TOTAL INCOME' IN SECTION 10A OF THE ACT IS AKIN AND PARI MATERIA WITH THE SAID EXPRESSION AS APPEARING IN SECTION 2(45) OF THE ACT? (III) WHETHER EVEN AFTER THE AMENDMENT MADE WITH EFFECT F ROM 1.04.2001, SECTION 10A OF THE ACT CONTINUES TO REMAIN AN EXEMPTION SEC TION AND NOT A DEDUCTION SECTION? (IV) WHETHER LOSSES OF OTHER 10A UNITS OR NON 10A UNITS CAN BE SET OFF AGAINST THE PROFITS OF 10A UNITS BEFORE DEDUCTIONS UNDER SECTION 10A ARE E FFECTED? (V) WHETHER BROUGHT FORWARD BUSINESS LOSSES AND UNABSOR BED DEPRECIATIO N OF 10A UNITS OR NON 10A UNITS CAN BE SET OFF AGAINST THE PROFITS OF ANOTHER 10A UNITS OF THE ASSESSEE. THE HONBLE APEX COURT ANSWERED THE ABOVE QUESTION S IN PARA NO.18 AS UNDER: 18. FOR THE AFORESAID REASONS WE ANSWER THE APPEALS AN D THE QUESTIONS ARISING THEREIN, AS FORMULATED AT THE OUTSET OF THIS ORDER, BY HOLDING THAT THOUGH SECTION 10A, AS AMENDED, IS A PROVISION FOR DEDUCTION, THE STAGE OF DEDUCTION WOULD BE WHILE COMPUTING THE GROSS TOTAL INCOME OF THE ELIGI BLE UNDERTAKING UNDER CHAPTER IV OF THE ACT AND NOT AT THE STAGE OF COMPUTATION OF T HE TOTAL INCOME UNDER CHAPTER VI. ALL THE APPEALS SHALL STAND DISPOSED OF ACCORDI NGLY THE HONBLE APEX COURT HAS HELD THAT AS PER THE AM ENDED PROVISION FOR DEDUCTION, THE STAGE OF DEDUCTION WOULD BE WHIL E COMPUTING THE GROSS TOTAL INCOME OF THE ELIGIBLE UNDERTAKING UNDER CHAP TER-IV OF IT ACT AND NOT ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 8 -: AT THE STAGE OF TOTAL INCOME UNDER CHAPTER-VI. THE REFORE, THE LOSS OF THE ELIGIBLE UNIT WOULD BE ALLOWED AS A DEDUCTION AT SO URCE BEFORE COMPUTING THE TOTAL INCOME UNDER CHAPTER-VI. THEREFORE, WE D O NOT FIND ANY INFIRMITY IN THE ORDER THE LD.CIT(A) AND THE SAME I S UPHELD. THE REVENUES APPEAL IS DISMISSED. AYS 2007-08, 2008-09 AND 2009-10: 3.0 DURING THE ASSESSMENT YEAR 2007-08 , THE ELIGIBLE UNIT DERIVED PROFIT OF RS.3,15,19,439/- AND CLAIMED THE ENTIRE I NCOME AS DEDUCTION U/S.10B OF IT ACT. IN THE COURSE OF ASSESSMENT PRO CEEDINGS, FOR THE A.Y 2006-07 THE ASSESSEE HAD INCURRED A LOSS OF RS.2,33 ,61,500/- RELATING 10B UNIT WHICH WAS CLAIMED SET OFF AGAINST THE INCOME O F NON-ELIGIBLE UNITS. THE AO IN THE ASSESSMENT PROCEEDINGS U/S 143(3) FOR THE A.Y.2006-07 DISALLOWED THE LOSS OF ELIGIBLE UNIT CLAIMED FROM T HE TAXABLE INCOME AND RE-COMPUTED THE TOTAL INCOME OF THE ASSESSEE. DURI NG THE AY UNDER CONSIDERATION, THE AO HAS SET OFF THE BROUGHT FORW ARD UNABSORBED LOSS OF RS.2,33,61,500/- RELATING TO AY 2006-07 OF THE ELIG IBLE UNIT FROM THE PROFIT OF 10B UNITS RS.3,15,19,439/- AND RE-COMPUTED THE D EDUCTION U/S.10B AT RS.18,49,480/- WHICH WAS ALLOWED AS DEDUCTION FROM THE TOTAL INCOME. 3.1 AGGRIEVED BY THE ORDER OF THE AO, THE ASS ESSEE WENT ON APPEAL BEFORE THE LD.CIT(A) AND THE LD.CIT(A) ALLOWED THE ASSESSES APPEAL HOLDING THAT THE DEDUCTION U/S.10B IS ALLOWABLE BEF ORE SETTING OFF OF ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 9 -: BROUGHT FORWARD UNABSORBED BUSINESS LOSSES AND THE DEPRECIATION RELATING TO THE EARLIER AYS. FOR READY REFERENCE, WE EXTRAC T THE RELEVANT PARAGRAPH NO.4.3 FROM LD.CIT(A)S ORDER AS UNDER: 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE SUBMISSIONS MADE BY THE AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED UPON BY THE AO AND AR. I FIND THAT ON THE QUESTION OF FILING OF DECLARATION, THE FILING OF DE CLARATION ENABLES THE APPELLANT TO OPT OUT OF THE PROVISIONS OF SECTION 10B. FURTHER THE FILING O F DECLARATION U/S.10B(8) IS ONLY DIRECTORY AND NOT MANDATORY AS HELD IN A NUMBER OF JUDICIAL D ECISIONS. HENCE THE APPELLANT CAN AT ANY TIME DURING THE ASSESSMENT FILE THE ABOVE DECLA RATION BEFORE THE AO. IN CASE NO DECLARATION IS FILED AT ALL, THE PROVISIONS OF SECT ION 10B WILL BE MADE APPLICABLE TO THE APPELLANT. I FIND THAT THE CONTENTION OF THE AO IS T HAT THE APPELLANT HAD NOT FILED THE DECLARATION IN THE PRECEDING YEAR AND THEREFORE THE . PROVISIONS OF SECTION 10B WAS MADE APPLICABLE AND LOSS OF 10B UNIT (WHICH WAS ALREADY SET OFF AGAINST THE INCOME OF NON-10B UNIT IN THE PRECEDING YEAR) WAS NOTIONALLY BROUGHT F ORWARD IN THE CURRENT YEAR AND SET OFF AGAINST PROFITS OF THE 105 UNIT IN THE CURRENT YEAR . THE APPELLANT SUBMITS THAT THE DECLARATION WAS FILED AT THE TIME OF HEARING BEFORE AO IN THE PROCEEDINGS U/S.147. HOWEVER, I FIND, THAT IN VARIOUS JUDICIAL DECISIONS IT HAS B EEN HELD THAT THE LOSS ARISING FROM A 10B UNIT CAN BE SET OFF AGAINST THE INCOME FROM NON 10B UNIT. THEREFORE, IN MY CONSIDERED OPINION, THE FILING OR DELAYED FILING OF THE DECLAR ATION DOES NOT ADVERSELY AFFECT THE CLAIM OF THE APPELLANT OF SETTING OFF OF THE LOSS OF 10B UNI T AGAINST THE INCOME OF NON 10B UNIT IN THE SAME YEAR. IN VIEW OF THE ABOVE, I AM OF THE CONSID ERED OPINION, THAT NON FILING OF DECLARATION U/S.10B (8) WOULD NOT EMPOWER THE AO TO NO TIONALLY REJECT THE SET OFF OF LOSS OF 10B UNIT AGAINST THE PROFITS OF NON 10B UNIT DONE I N THE EARLIER YEAR AND CARRY FORWARD THE SAID LOSSES AND SET IT OFF AGAINST THE INCOME OF TH E CURRENT ASSESSMENT YEAR. THIS IS BECAUSE THE LOSS WHICH HAS BEEN ALREADY SET OFF AGA INST THE NON 10B UNIT IN THE PREVIOUS YEAR CANNOT BE NOTIONALLY CARRIED FORWARD IN THE CU RRENT YEAR AND SET OFF AGAINST THE PROFITS OF THE 105 UNIT. THE DECISION OF THE HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS (P) LTD V ACIT (340 IT R 477) SUPPORTS THIS VIEW FURTHER, I FIND THAT AS SUBMITTED BY AR, THE HONBLE JURISDICT IONAL ITAT CHENNAI IN THE CASE OF ACIT V CHARON TEC P. LTD (SUPRA) HAD HELD THAT THE EXEMPTIO N U/S. 10B WAS TO BE ALLOWED WITHOUT SETTING OFF BROUGHT FORWARD UNABSORBED LOSS AND DEP RECIATION FROM THE EARLIER ASSESSMENT YEAR. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, I HOLD THAT THE DEDUCTION U/S. 10B HAS TO BE ALLOWED BEFORE SET OFF OF THE BROUGHT FORWARD LO SSES. 3.2 WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEES APPEAL FOR THE AY 2006-07 IS ALLOWED BY US IN THIS APPEAL IN EARLIER PARAGRAPHS HOLDING THAT THE LOSS OF 10B UNIT IS ALLOWED TO SET OFF AT THE SOURCE POINT UNDER CHAPTER-IV OF THE IT ACT BEFORE COMPUTING THE GROSS TOTAL INCOME. THEREFORE, THERE WAS NO UNABSORBED LOSS REMAINED RELATING TO THE ELIGIBLE UNIT U/S.10B FOR THE AY 2006-07 TO ADJUST AGAINST THE PROFITS OF THE ELIGIBLE UNITS IN THE YEAR UNDER CONSIDERATION. THE ISSUE REGARDING THE STAGE OF DE DUCTION U/S.10B WAS ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 10 -: DECIDED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT & ANR. V. YOKOGAWA INDIA LTD. 45 DTR 000 1. THE HONBLE APEX COURT HELD THAT THE DEDUCTION U/S.10B WOULD BE ALLOWED WHILE COMPUTING THE TOTAL INCOME OF THE ELIGIBLE UNDERTAKING AT THE STAGE OF CHAPTER-IV OF THE ACT AND NOT AT THE STAGE OF COMPUTATION OF INCOME UNDER CHAPTER-VI . ACCORDINGLY, THE APPEAL OF THE ASSESSEE FOR THE AY 2006-07 WAS ALLOWED BY THIS TRIBUNAL IN FAVOUR OF THE ASSESSEE AND THERE WAS NO UNABSORB ED BUSINESS LOSSES OF 10B UNITS WHICH REQUIRED TO BE SET OFF AGAINST THE PROFITS OF THE ELIGIBLE UNITS. THEREFORE, WE DO NOT FIND ANY ERROR IN THE ORDER OF LD.CIT(A) AND THE SAME IS UPHELD AND THE REVENUES APPEAL ON THE ISSUE OF SET OFF OF UNABSORBED LOSS OF 10B UNIT FOR THE AY 2007-08 IS DISMISSED. 4.0 THE NEXT ISSUE FOR THE A.Y 2007-08 IS THE EXCLUSION OF FREIGHT FROM THE EXPORT TURN OVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.10B. THE AO NOTICED THAT THE ASSESSEE HAS INCURRED EXPEN DITURE OF RS.68,33,274/- TOWARDS FREIGHT CHARGES OUTSIDE INDI A. WHILE COMPUTING THE DEDUCTION U/S.10B, THE ASSESSEE HAS EXCLUDED TH E EXPENSES INCURRED OUTSIDE INDIA FOR THE PURPOSE OF DEDUCTION U/S.10B. THE AO VIEWED THAT THE AMOUNT OF FREIGHT SHOULD BE EXCLUDED FROM THE E XPORT TURNOVER BUT NOT FROM THE TOTAL TURNOVER AS PER EXPLANATION-2 (IV) O F SEC.10B OF IT ACT AND ACCORDINGLY, EXCLUDED THE FREIGHT CHARGES FOR THE D ELIVER THE GOODS OUTSIDE INDIA TO THE TUNE OF RS.68,33,274/- FROM THE EXPORT TURNOVER AND RE- WORKED THE DEDUCTION U/S.10B. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 11 -: 4.1 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WEN T ON APPEAL BEFORE THE LD.CIT(A) AND THE LD.CIT(A) ALLOWED THE ASSESSES APPEAL IN PARA NO.4.5 OF CIT ORDER AS UNDER: 4.5 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE SUBMISSIONS OF THE AR. I HAVE ALSO GONE THROUGH THE DECISION RELIED UPON BY THE A R. THE HONBLE JURISDICTIONAL ITAT IN THE CASE OF SRA SYSTEMS LTD, (SUPRA) HAD HELD THAT THE E XPENDITURE INCURRED IN FOREIGN CURRENCY HAS TO BE REDUCED BOTH FROM EXPORT TURNOVE R AND TOTAL TURNOVER AS A MATTER OF CONSISTENCY IN APPLYING THE PROVISIONS OF THE ACT. THIS HAS ALSO BEEN FOLLOWED IN THE CASE OF CHARON TECH P. LTD (SUPRA). RESPECTFULLY, FOLLOWING THE ABOVE SAID DECISIONS THE AO IS DIRECTED TO EXCLUDE THE FREIGHT EXPENSES BOTH FROM TOTAL TURNOVER AND EXPORT TURNOVER. THIS GROUND IS ALLOWED. AGAINST THE ORDER OF THE LD.CIT(A), REVENUE IS IN APPEAL BEFORE US. 4.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASS ESSEE IN THE FOLLOWING CASES RELIED UPON BY THE ASSESSEE: 1. ITO VS. SAK SOFT LTD. [2009] 313 ITR (AT) 35 2. TATA ELEXI LTD VS. ACIT 115 TTJ 423 AS PER THE JUDICIAL PRECEDENTS THE EXPENDITURE OF FREIGHT INCURRED IN FOREIGN CURRENCY OUTSIDE INDIA FOR DELIVERY OF GOOD S HAS TO BE REDUCED BOTH FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNO VER I.E. NUMERATOR AND DENOMINATOR. THE LD.CIT(A) FOLLOWED THE SAME PRINC IPLE DECIDED BY THE HONBLE SPECIAL BENCH ,CHENNAI IN THE CASE OF SAK S OFT LTD., AND ALLOWED THE ASSESSES APPEAL. THEREFORE, WE DO NOT FIND AN Y REASON TO INTERFERE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 12 -: WITH THE ORDER OF THE LD.CIT(A) AND THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 5.0 THE NEXT ISSUE FOR THE A.Y 2007-08 IS THE APPORTIONMENT OF R&D EXPENDITURE TO 10B UNITS. THE ASSESSING OFFICER FOU ND THAT THE ASSESSEE CLAIMED WEIGHTED DEDUCTION IN RESPECT OF CAPITAL EX PENDITURE INCURRED TOWARDS IN-HOUSE R&D FACILITY AS PER SEC.35(2AB) OF INCOME TAX ACT. THE EXPENDITURE INCURRED WAS RS.4,95,26,696/- AND THE W EIGHTED DEDUCTION CLAIMED WAS RS.6,72,67,539/-. NO EXPENDITURE WAS A LLOCATED TOWARDS THE ELIGIBLE UNITS. THE AO EXAMINED THE DETAILS AND OB SERVED THAT THE ASSESSEE IS DOING IN-HOUSE RESEARCH OF THE BUSINESS ACTIVITIES CARRIED ON BY THE ASSESSEE AND FURTHER OBSERVED FROM FORM-3CM (ORDER OF APPROVAL OF IN-HOUSE R&D FACILITY THE MINISTRY OF SCIENCE AND T ECHNOLOGY) THAT THE OBJECTIVE OF THE SCIENTIFIC RESEARCH TO BE CONDUCTE D BY THE IN-HOUSE R&D FACILITY WAS MENTIONED AS DESIGN & DEVELOPMENT OF TURBO CHARGES FOR VARIOUS ENGINES MANUFACTURED IN INDIA ULTIMATE OBJE CTIVE OF MANUFACTURING THE TURBO CHARGES TOTALLY AND INDIGENOUSLY. THE SAME OBJECT HAS BEEN REFLECTED IN FORM-3CM SUBMITTED BY THE PRESCRIBED A UTHORITY. THE AO DISTINGUISHED THE CASE LAW RELIED UPON BY THE ASSES SEE IN THE CASE OF M/S.BRAKES INDIA LTD., FOR THE AY 1986-87 AND 1989- 90 VIDE ITA NOS.3190 & 3191/MDS/92 DATED 06.02.2003 AND HELD THAT THE EX PENDITURE INCURRED FOR THE PURPOSE OF R&D IS RELATABLE TO BOTH 10B & NON-10B UNITS AND ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 13 -: ACCORDINGLY, APPORTIONED A SUM OF RS.62,37,997/- FO R THE ELIGIBLE UNIT AND RE-COMPUTED THE DEDUCTION U/S.10B. 5.1 THE LD.CIT(A) ALLOWED THE ASSESSES APPEAL IN PAR AGRAPH NO.5.1 WHICH IS EXTRACTED AS UNDER: 5.1 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE SUBMISSIONS OF THE AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AR . AS SUBMITTED BY THE AR THE SCOPE OF ADJUSTMENTS THAT CAN BE MADE IN COMPUTING THE PROFI TS OF 10B UNIT ARE NARROW SINCE THE SECTION EXEMPTS THE PROFITS DERIVED FROM THE EXPO RT ORIENTED UNITS. FROM THE EVIDENCES FILED IN THE NATURE OF VARIOUS PRODUCTS ARISING OUT OF THE 10B UNDERTAKING VIZ., TURBOCHARGER PARTS, THE APPELLANT HAS CONFIRMED THAT THE R & D F ACILITY IS RELATED TO DEVELOPMENT OF NEW TURBO CHARGER ASSEMBLY, WHEREAS THE EXPORTS RELATED TO TURBO CHARGER PARTS WHERE THE DESIGNING IS DONE BY THE FOREIGN BUYER. THE EXPENDI TURE RELATING TO R & D FOR A FULL ASSEMBLY CANNOT BE ALLOCATED TO THE UNIT WHICH ARE MANUFACTURING AND EXPORTING ONLY COMPONENTS. THE APPELLANT ALSO SUBMITS THAT R&D FAC ILITY IS AN INDEPENDENT UNIT, DISTINCT FROM 10B UNIT. THE HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF BRAKES INDIA LTD, SUPRA, HAD UNDER SIMILAR CIRCUMSTANCES IN THE CONTEXT OF D EDUCTION U/S.80IB HAS HELD THAT NO SUCH APPORTIONMENT IS WARRANTED. ACCORDINGLY, THIS GROUN D OF APPEAL IS ALLOWED. 5.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE LD.CIT(A) DELETED THE ADDITION AND ALLOWED THE ASSESSES APPEAL STATING THAT THE R&D ACTIVITY IS NOT RELATED TO THE 10B UNIT AND THE 10B UNIT IS A SEPARATE AND DISTINCT UNIT. THE LD.CIT(A ) GIVEN A FINDING THAT THE EXPENDITURE RELATED TO R&D IS FOR A FULL ASSEMBLY U NIT WHICH CANNOT BE ALLOCATED TO THE UNITS WHICH ARE MANUFACTURING AND EXPORTING ONLY COMPONENTS. THE LD.CIT(A) ALSO STATED THAT THE ASS ESSEES CASE IS SQUARELY COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF BRAKES INDIA LTD., IN TAX APPEAL NOS.737 TO 739 OF 2005 DATED 17.10.2012 AND ALSO PUNJAB CON CAST STEEL VS. CIT & ORS. 49 I TD 430 CHANDIGARH. DURING THE APPEAL, THE LD.DR VEHEMENTLY ARGUED STAT ING THAT NON- ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 14 -: ALLOCATION OF EXPENDITURE TO 10B UNITS WAS ONLY A D EVICE TO REDUCE THE TAXABLE INCOME BUT NO EVIDENCE HAS BEEN BROUGHT ON RECORD TO CONTROVERT THE SUBMISSIONS OF THE ASSESSEE OR TO ESTABLISH THA T THE IN-HOUSE R&D FACILITY BELONG TO THE ELIGIBLE 10B UNITS ALSO. TH EREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) AND THE ORD ER OF THE LD.CIT(A) IS CONFIRMED. THE APPEAL OF THE REVENUE IS DISMISSED. 6.0 GROUND NO.5 IN REVENUES APPEAL FOR THE AY 2007-08 IS ADDITION OF RS.77.99 LAKHS RELATING TO LOSS ON FORWARD CONTRACT S. THIS ISSUE IS INVOLVED FOR THE A.Y.2007-08 IN APPEAL NO.629/2013 AND FOR T HE A.Y 2008-09 IN ITA NO.204/2014. 6.1 DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND TH AT THE ASSESSEE HAD INCURRED A LOSS OF RS.77.99 LAKHS IN AY2007-08 AND RS.3,99,47,000/- FOR THE AY 2008-09 ON ACCOUNT OF RESTATEMENT OF FOREIGN EXCHANGE CONTRACTS. THE ASSESSEE ARGUED BEFORE THE AO THAT T HE FORWARD CONTRACT WAS THE HEDGING ACTIVITY OF THE ASSESSEE ON THE UND ERLYING TRANSACTION OF EXPORT RECEIVABLES AND IMPORT PAYABLES WHICH DOES N OT FALL UNDER THE PURVIEW OF SPECULATIVE TRANSACTION. THE AO HELD TH AT THE EXCHANGE LOSS ON ACCOUNT OF DERIVATIVE TRANSACTIONS FOR RESTATEMENT OF FORWARD CONTRACTS CANNOT BE ALLOWED AS A DEDUCTION AS PER CBDT INSTRU CTION NO.03/2010 DATED 23.03.2010. ACCORDINGLY, THE AO DISALLOWED T HE FOREIGN EXCHANGE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 15 -: LOSS AMOUNTING TO RS.77.99 LAKHS IN A.Y 2007-08 AND RS.3,99,47,000/- FOR THE A.Y. 2008-09 AND ADDED BACK TO THE TOTAL INCOME. 6.2 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WEN T ON APPEAL BEFORE THE LD.CIT(A) AND THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL FOLLOWING THE APEX COURTS DECISION IN CIT V. WOODW ARD GOVERNER OF INDIA P. LTD.(312 ITR 254) RELEVANT PARAGRAPH NO.6.1 AT P AGE NO.7 OF THE LD.CIT(A)S ORDER EXTRACTED AS UNDER: 6.1 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND THE VARIOUS SUBMISSIONS OF THE AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE AR. IT IS NOT DISPUTED THAT THE APPELLANT HAD SUBSTANTIAL TRANSACTIONS IN FOREIGN E XCHANGE AND THEREFORE IT IS NATURAL THAT IT HAD TO TAKE HEDGE AGAINST POTENTIAL DUE TO EXCHANGE FLUCTUATIONS. THOUGH THE TERM USED WAS DERIVATIVE THE TRANSACTIONS ARE BASICALLY TAK ING FOREIGN EXCHANGE CONTRACT HEDGE AGAINST FLUCTUATIONS. WITH REGARD TO THE LOSS IN RE SPECT OF MARK TO MARKET LOSSES OF DERIVATIVE CONTRACTS, AS EXPLAINED BY THE AR, THESE WERE ENTERED INTO FOR THE PURPOSE OF HEDGING THE CURRENT ASSETS AND CURRENT LIABILITIES WHICH FORM PART OF THE CIRCULATING/ WORKING CAPITAL OF THE APPELLANT. IT WAS HELD BY THE SUPREM E COURT IN THE CASE OF CIT VS CANARA BANK (63 ITR 328) THAT THE LOSS ON ACCOUNT OF FLUCTU ATION OF EXCHANGE WHICH ARISE IN THE COURSE OF BUSINESS OPERATIONS AND WHICH IS INCIDENT AL TO TRADING OPERATIONS IS ALLOWABLE AS DEDUCTION. IN THE INSTANT CASE THE LOSS HAS ARISEN IN THE COURSE OF APPELLANTS TRADING OPERATION ONLY. THIS VIEW IS ALSO SUPPORTED BY THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS BANK OF INDIA (218 ITR 371). FURTHER THE DECISION OF APEX COURT IN CIT V WOODWARD GOVERNOR INDIA P. LIMITED (312 ITR 254) ALS O FORTIFIES THE CASE OF THE APPELLANT. THE HONORABLE COURT IN THAT CASE HAD OBSERVED AS UN DER: LOSS1 SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUC TUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE BALANCE SHEET DATE IS AN ITEM OF EXPENDIT URE UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961. AS CLEARLY LAID DOWN BY THE SUPREME COURT, THE LOSS INCURRED BY THE APPELLANT ON ACCOUNT OF EXCHANGE FLUCTUATIONS HAS TO BE ALLOWED AS DEDUCTIO N. RESPECTFULLY FOLLOWING THE DECISION OF THE SUPREME COURT, THE CLAIM OF THE APPELLANT IS AL LOWED. AGAINST THE ORDERS OF THE LD.CIT(A), THE REVENUE H AS FILED APPEAL BEFORE US. 6.3 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MA TERIAL PLACED ON RECORD. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 16 -: THE LD.DR ARGUED THAT THE FORWARD CONTRACTS LOSS I S A NOTIONAL LOSS WHICH IS CONTINGENT IN NATURE AND NOT ALLOWABLE TO BE SET OFF AGAINST TAXABLE INCOME. THE LOSS WAS ONLY DUE TO RESTATEME NT OF FOREIGN EXCHANGE WHICH SHOULD BE ALLOWED ONLY ON ACTUAL HAP PENING OF THE EVENT. FURTHER, LD.DR STATED THAT THE LOSS WAS BOOKED WITH OUT ACTUAL DELIVERY OF THE COMMODITY AND HENCE THE LOSS SHOULD BE TREATED AS SPECULATIVE TRANSACTION AS PER SEC.43(5) OF INCOME TAX ACT. ON THE OTHER HAND, THE LD.AR ARGUED THAT THE LOSS IS BUSINESS LOSS AND SQU ARELY COVERED BY THE FOLLOWING DECISIONS 1. COTTON BLOSSOM (ITA NO.2032/MDS/2011) (CHENNAI) 2. WHEELS INDIA LTD. ITA NO.91/MDS/2011 (CHENNAI) 3. CIT VS. PANCHMAHAL STEEL LTD. (215 TAXMAN 140) (GUJ HC) AND ALSO RELIED ON THE DECISION OF CIT V. WOODWORD GOVERNOR OF INDIA LTD. 312 ITR 254. 6.4 WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. THE ASSESSE HAS ENTERED INTO FORWARD CONTRACT FOR HEDGING PURPOSES AGAINST THE UNDERLYING RECEIVABLES (EXPORTS) AND PA YABLES (IMPORTS) TRANSACTIONS IN FOREIGN CURRENCIES. AS RIGHTLY EXP LAINED BY THE ASSESSEE DERIVATIVE PRODUCTS ARE INTANGIBLE AND ARE NOT CAPA BLE OF DELIVERY OR TRANSFER. IT WAS ALSO EXPLAINED THAT FOREX DERIVAT IVES ARE NOT TRADED ON SECURITY MARKETS AND THEREFORE HAS NO APPLICATION O F SEC.43(5) OF IT ACT. THE ASSESSE HAS ENTERED INTO FORWARD CONTRACTS FOR THE PURPOSE OF ITS ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 17 -: BUSINESS AND THERE WAS NO DISPUTE ON THIS ISSUE. A S ON THE CLOSING DATE, THE FOREIGN EXCHANGE WAS RESTATED WHICH RESULTED IN TO LOSS AND THE ASSESSEE RELIED ON THE HONBLE APEX COURT JUDGMENT CITED SUPRA WHEREIN IT WAS HELD THAT THE LOSS INCURRED ON ACCOUNT OF RESTA TEMENT OF FOREIGN EXCHANGE AS ON THE BALANCE SHEET DATE IS A BUSINESS LOSS. FOR READY REFERENCE, WE REPRODUCE THE CATCH NOTE OF THE CITED JUDGMENT AS UNDER: I. SECTION 37(1), READ WITH SECTION 145, OF THE INC OME-TAX ACT, 1961 - BUSINESS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 199 8-99 - WHETHER EXPRESSION EXPENDITURE AS USED IN SECTION 37 MAY, IN CIRCUMS TANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHICH IS REALLY A LOSS, EVEN THOUGH SAID A MOUNT HAS NOT GONE OUT FROM POCKET OF ASSESSEE - HELD, YES - WHETHER LOSS SUFFERED BY ASS ESSEE ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE AS ON DATE OF BALANCE SHEET IS AN ITEM O F EXPENDITURE UNDER SECTION 37(1) - HELD, YES - WHETHER ACCOUNTING METHOD FOLLOWED BY AN ASSE SSEE CONTINUOUSLY FOR A GIVEN PERIOD OF TIME NEEDS TO BE PRESUMED TO BE CORRECT TILL ASS ESSING OFFICER COMES TO CONCLUSION FOR REASONS TO BE GIVEN THAT SAID SYSTEM DOES NOT REFLE CT TRUE AND CORRECT PROFITS - HELD, YES - WHETHER AN ENTERPRISE HAS TO REPORT OUTSTANDING LIA BILITY RELATING TO IMPORT OF RAW MATERIAL USING CLOSING RATE OF FOREIGN EXCHANGE AND ANY DIFF ERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF SAID LIABILITY AT CLOSING RATE SHOULD BE RECOGNIZED IN PROFIT AND LOSS ACCOUNT FOR REPORTING PERIOD - HELD, YES. THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL FOLLOW ING THE DECISION OF THE HONBLE APEX COURT CITED SUPRA. THEREFORE, W E DO NOT FIND ANY ERROR IN THE ORDER OF THE LD.CIT(A) AND THE SAME IS UPHEL D. THE REVENUES APPEALS ON THIS ISSUE FOR THE A.Y.2007-08 AND FOR THE A.Y 2008-09 ARE DISMISSED. 7.0 GROUND NO.6 OF REVENUE FOR THE AY 2007-08 IS THE DISALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENT MADE TO NON-RESI DENT EXPORT AGENT M/S.BIGGLESWADE LTD., HONGKONG WITHOUT DEDUCTION OF TAX AT SOURCE. THIS ISUUE IS INVOLVED FOR THE A.Y 2007-08, 2008-09 AND A.Y 2009-10 . ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 18 -: 7.1 THE AO FOUND THAT THE ASSESSEE HAS PAID A COMMISSI ON OF RS.2,21,80,564/- TO M/S.BIGGLESWADE LTD., HONGKONG FOR THE SERVICES RENDERED BY THE FOREIGN AGENT TO THE ASSESSEE AS PE R THE DETAILS GIVEN BELOW: A.Y 2007-08 RS.2,21,80,564/- A.Y 2008-09 RS.2,30,44,518/- A.Y 2009-10 RS.2,00,00,000/- 7.2 THE AO CONSIDERED THE PAYMENT MADE TO THE FOREI GN AGENT WAS IN THE NATURE OF MANAGERIAL SERVICES AS PER EXPLANATIO N-2 OF SEC.9(1)(VII) OF IT ACT AND HELD THE PAYMENT AS FEE FOR TECHNICAL S ERVICES WHICH ATTRACTS THE TDS PROVISIONS OF SEC.195 OF IT ACT AND THE AS SESSEE REQUIRED TO DEDUCT THE TAX AT SOURCE. SINCE THE ASSESSEE FAILE D TO DEDUCT THE TAX AT SOURCE, THE AO HAS BROUGHT THE PAYMENTS MADE TO THE NON-RESIDENT AGENT TO TAX U/S.40(A)(I) OF IT ACT. 7.3 THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL WITH AN OBSERVATION THAT THE SCOPE OF THE WORK UNDERTAKEN BY THE NON-RE SIDENT AGENT IS TO CANVASS THE EXPORTS OF THE ASSESSEE OUTSIDE INDIA, AND NOT IN THE NATURE OF MANAGERIAL SERVICES TO APPLY THE PROVISIONS OF SEC. 9(1)(VII) OF IT ACT. THE LD.CIT(A) RELIED ON THE DECISION OF THE HONBLE SUP REME COURT IN THE CASE OF GE TECHNOLOGICAL CENTRE PVT. LTD. V. CIT 327 ITR 456. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 19 -: 7.4 AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE DEPA RTMENT IS ON APPEAL BEFORE US. 7.5 WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. THE LD.AR ARGUED THAT THE SERVICES RENDERED BY THE FOREIGN AGENT WAS TO CANVASS THE ASSESSEES PRODUCTS OUTSIDE INDI A AND NO MANAGERIAL AND CONSULTANCY SERVICES WERE RENDERED BY THE FOREI GN AGENTS. THE ENTIRE SERVICES WERE RENDERED OUTSIDE INDIA AND THE PARTY DOES NOT HAVE ANY PERMANENT ESTABLISHMENT OR BUSINESS CONNECTION IN I NDIA. THE NATURE OF SERVICES RENDERED WAS EXAMINED BY THE LD.CIT(A) AND GIVEN A FINDING THAT THE SERVICES DO NOT FALL UNDER THE CATEGORY OF MANA GERIAL SERVICES TO BE TAXED U/S 9(1)(VII) OF IT ACT AS FTS. ON SIMILAR F ACTS IN THE CASE OF M/S.BRAKES INDIA LTD., IN ITA NO.266/2012 DATED 22. 03.2013, THE ITAT, CHENNAI HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSE SSEE. THE ASSESSEE HAS RELIED ON THE FOLLOWING DECISIONS ALSO: CIT V. FAIZAN SHOES (TCA NO.789 OF 2013) (MAD HC) ACIT V. FARIDA (ITA NO.359/MDS/2013) DELTA SHOES PVT. LTD. (ITA NO.909/MDS.2013) THE ENTIRE SERVICES WERE RENDERED OUTSIDE INDIA AN D THE PARTY DOES NOT HAVE ANY ESTABLISHMENT OR BUSINESS CONNECTION I N INDIA. THE LD.CIT(A) HAS ALLOWED THE ASSESSEES APPEAL FOLLOWING THE DEC ISION OF THE HONBLE SUPREME COURT AND THE JURISDICTIONAL HIGH COURT IN THE CASE OF FAIZAN ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 20 -: SHOES WHICH SUPPORTS THE ASSESSEES CASE. THEREFORE , WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) AND THE SAME IS UPHELD. 7.6 EVEN OTHERWISE, EXPLANATION TO SEC.9(2) OF IT ACT IS AMENDED BY FINANCE ACT, 2010 W.E.F. 01.04.1976. THE ASSESSMEN T YEAR INVOLVED IS 2007-08 TO 2009-10 AND THERE IS NO PROVISION TO TAX THE PAYMENTS MADE TO THE SERVICES RENDERED OUTSIDE INDIA TO THE FOREIGN AGENTS IN THE INCOME TAX U/S.9(1)(VII) PRIOR TO THE AMENDMENT. TH IS VIEW IS UPHELD BY THE DECISION OF THE HONBLE SUPREME COURT RELIED UP ON BY THE LD.AR IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD VS . DIT (2007) (288 ITR 408) WHICH CLARIFIED THAT DESPITE THE DEEMING F ICTION IN SECTION 9, FOR ANY SUCH INCOME TO BE TAXABLE IN INDIA, THERE MUST BE SUFFICIENT TERRITORIAL NEXUS BETWEEN SUCH INCOME AND THE TERRITORY OF INDI A. IT FURTHER HELD THAT FOR ESTABLISHING SUCH TERRITORIAL NEXUS, THE SERVIC ES HAVE TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA. THE EXPLANATION TO SECTION 9(2) WAS INTRODUCED BY FINANCE ACT 2010 W.E.F.1976 AND AS ON THE DATE OF ASSESSMENT THERE WAS NO SUCH PROVISION TO TAX THE F TS RENDERED OUTSIDE INDIA AND HENCE WE AGREE WITH THE LD.A.R THAT NO TA X IS DEDUCTIBLE U/S 195 AND CONSEQUENT DISALLOWANCE IS NOT CALLED FOR. 7.7 THEREFORE, WE HOLD THAT THE PAYMENT MADE BY THE ASSESSEE FOR THE SERVICES RENDERED OUTSIDE INDIA ARE NOT TAXABLE UND ER SECTION 9(1)(VII) OF I.T. ACT IN THE ASSESSMENT YEARS UNDER CONSIDERATIO N AND THE DISALLOWANCE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 21 -: IS NOT CALLED FOR. WE UPHOLD THE ORDER OF THE LD.CI T(A) AND THE REVENUE APPEALS ON THIS ISSUE FOR THE AYS 2007-08, 2008-09 AND AY 2009-10 ARE DISMISSED. 8.0 GROUND NO.7 OF THE AY 2007-08 IS THE DISALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENT MADE TO SONIMA LOGISTICS, GERMAN Y WITHOUT DEDUCTION OF TAX AT SOURCE. THIS ISSUE IS INVOLVED FOR THE A.YS 2007-08, 2008-09 AND A.Y 2009-10 . THE AO FOUND THAT THE ASSESSEE HAS PAID COMMISSIO N FOR THE AYS 2007-08 TO 2009-10 AS UNDER: AY 2007-08 - RS.5,19,93,634/- AY 2008-09 - RS.6,75,34,886/- AY 2009-10 - RS.5,32,06,430/- THE PAYMENT WAS MADE TO SONIMA LOGISTICS, GERMANY FOR RENDERING THE FOLLOWING SERVICES OUTSIDE INDIA. A) IMPORT CUSTOMS CLEARANCE INCLUDING LIAISON WITH APP ROPRIATE AGENCIES B) TRANSPORTING THE CUSTOM CLEARED CONTAINERS TO WAREH OUSE AND UNLOADING CONTAINERS. C) UNPACKING CASES/CARTONS AND TRANSFERRING CONTENTS TO PALLETS. D) DELIVERING COMPONENTS TO SUPPLIER AS PER SCHEDULE. E) AFTER DELIVERY ACKNOWLEDGEMENTS FROM SUPPLIER TO BE FORWARDED TO TURBO ENERGY LTD F) TO MAINTAIN RUNNING ACCOUNT OF PALLETS RECEIVED FRO M SUPPLIER AND DELIVERED BACK TO THEM AND RECONCILE THESE FIGURES ON MONTHLY BASIS. G) TO PROVIDED IN ALL PALLETS DELIVERED TO SUPPLIER, D ETAILS OF PART NUMBER, QUANTITY AND THE RELATED MASTER CONSIGNMENT REFERENCE H) TO SEND STOCK STATUS REPORT TO TURBO ENERGY LIMITED ON WEEKLY BASIS. 8.1 THE AO HELD THAT THE PAYMENTS WERE MADE FOR MANAGE RIAL SERVICES AND TAXABLE U/S.9(1)(VII) OF IT ACT. SINCE THE ASS ESSEE FAILED TO DEDUCT THE TAX AT SOURCE U/S.195 OF THE IT ACT, DISALLOWED TH E PAYMENTS U/S.40(A)(I) OF IT ACT. THE LD.CIT(A) DELETED THE ADDITION FIND ING THAT THE SERVICES ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 22 -: RENDERED BY NON-RESIDENT DO NOT FALL UNDER MANAGERI AL OR TECHNICAL SERVICES WITHIN THE MEANING OF IT ACT AND THE SERVI CES ARE RENDERED OUTSIDE INDIA AND NON-RESIDENT PARTY HAS NO PERMANE NT ESTABLISHMENT OR BUSINESS CONNECTION IN INDIA. ACCORDINGLY, RELYING ON THE DECISION OF THE HONBLE APEX COURT IN G.E. TECHNOLOGICAL CENTRE PVT . LTD., THE LD.CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE. DURING THE APP EAL, THE LD.AR ARGUED THAT THE SERVICES WERE RENDERED BY THE NON-RESIDENT ARE LIASONING SERVICES BUT NOT THE MANAGERIAL AND TECHNICAL SERVICES. FUR THER, ARGUED THAT EVEN IF THE SERVICES RENDERED OUTSIDE INDIA ARE TO BE TA XABLE, IT IS TAXABLE AS BUSINESS PROFITS IN WHICH CASE, ONLY THE PROFITS RE QUIRED TO BE BROUGHT TO TAX IF THERE IS A PERMANENT ESTABLISHMENT OR BUSINE SS CONNECTION IN INDIA. SINCE THE ASSESSEE HAS NO PERMANENT ESTABLISHMENT, THE APPLICATION OF SEC.9(1)(VII) AND SEC.195 HAS NO APPLICATION. THE ASSESSEE ALSO RELIED ON THE FOLLOWING DECISIONS: BRAKES INDIA LTD. V. DCIT (LTU) (266/MDS/2012) (CHENNAI ) SUN MICRO SYSTEMS INDIA (P) LTD (125 ITD 196) (BANG) G.E. TECHNOLOGY CENTRE PVT. LTD., VS. CIT (327 ITR 456) 8.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE ASSESSEE HAS PRODUCED THE COPY OF THE AGREEMEN T BEFORE THE LD.CIT(A). THE LD.CIT(A) EXAMINED THE EXPLANATION OF THE ASSESSEE AND THE DOCUMENT PLACED BEFORE THE CIT AND CONCLUDED TH AT THE SERVICES RENDERED BY THE NON-RESIDENT DO NOT FALL UNDER THE CATEGORY OF TECHNICAL OR MANAGERIAL SERVICES. LD.CIT(A) FURTHER STATED THAT THE SERVICES ARE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 23 -: RENDERED OUTSIDE INDIA AND THERE IS NO PERMANENT ES TABLISHMENT OR BUSINESS CONNECTION TO THE NON-RESIDENT IN INDIA. THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. THE PROFITS OF THE SERVIC ES RENDERED OUTSIDE INDIA CANNOT BE TAXED IN INDIA UNLESS THE NON-RESID ENT HAS PERMANENT ESTABLISHMENT/OR BUSINESS CONNECTION IN INDIA AS EN VISAGED IN SEC.9(1) OF IT ACT. THE LD.CIT(A) DELETED THE ADDITION RELYING ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF GE TECHNOLOGICAL CENTRE PVT. LTD. V. CIT 327 ITR 456. THE FINDINGS AND CONCLUSIONS ARRIVED I N EARLIER GROUND IN RESPECT OF PAYMENT MADE TO M/S.BIGGLESWADE LTD., AR E SQUARELY APPLICABLE TO THIS GROUND ALSO. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) AND THE SAME IS UPHELD. THE REVENUE S APPEAL ON THIS ISSUE FOR THE A.YS 2007-08, 2008-09 AND A.Y 2009-10 ARE DISMISSED. 9.0 GROUND NO.8 FOR THE A.Y 2007-08 IS RELATED TO THE DISALLOWANCE OF EXPENDITURE AS PER SEC.14A R.W.R.8D OF IT ACT. THE AO DISALLOWED A SUM OF RS.4,85,292/- APPLYING THE PROVISIONS OF RULE 8D OF IT ACT. THE LD.CIT(A) HELD THAT THE RULE 8D IS NOT APPLICABLE FOR AY 2007-08 AND CONFIRMED THE DISALLOWANCE TO THE EXTENT OF 2% OF DIVIDEND INCOME PLACING RELIANCE ON GODREJ & BOYCE 328 ITR 81. 9.1 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 24 -: THE RULE 8D IS INTRODUCED ON 24.03.2008 AND APPLIC ABLE W.E.F. 24.03.2008. THIS TRIBUNAL HAS CONSISTENTLY FOLLOWE D THAT RULE 8D IS APPLICABLE FROM 24.03.2008 BUT NOT TO THE EARLIER P ERIOD. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE LD.CIT(A) HA S CORRECTLY APPLIED THE PROVISIONS OF RULE 8D AND HELD THAT RULE 8D IS NOT APPLICABLE FOR THE AY UNDER CONSIDERATION. PRIOR TO THE INTRODUCTION OF RULE 8D THIS TRIBUNAL HAS CONSISTENTLY UPHELD THE DISALLOWANCE OF EXPENDITURE RELATED TO THE EXEMPT INCOME @ 2% OF EXEMPT INCOME. THE LD.CIT(A) ALSO R ESTRICTED THE DISALLOWANCE TO THE EXTENT OF 2%. THEREFORE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) AND THE S AME IS UPHELD. THE APPEAL OF THE REVENUE ON THIS ISSUE IS DISMISSED. 10.0 THE NEXT ISSUE IS ADDITIONAL DEPRECIATION ON WHIC H THE ASSESSEE HAS FILED THE APPEAL. THE AO DISALLOWED THE ADDITIONAL DEPRECIATION CLAIMED BY THE ASSESSEE U/S.32(1)(IIA) FOR THE AYS 2007-08, 2008-09 & 2009-10 . THE AO DISALLOWED THE ADDITIONAL DEPRECIATION CLAIM ED BY THE ASSESSEE AMOUNTING TO FOR THE AYS 2007-08 TO 2009-10 AS UNDER: AY 2007-08 - RS.55,04,308/- AY 2008-09 - RS.43,47,901/- AY 2009-10 - RS.1,60,96,965/- ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 25 -: THE AO MADE THE DISALLOWANCE STATING THAT THE ADDI TIONAL DEPRECIATION IS ALLOWED ONLY FOR PURCHASE OF NEW PLANT AND MACHINERY ADDED DURING THE YEAR. THE AO FURTHER HELD THAT CON SEQUENT UPON INCLUSION OF THE ASSET IN THE BLOCK OF ASSETS THE R ESIDUAL UNAVAILED ADDITIONAL DEPRECIATION CANNOT BE ALLOWED TO BE CAR RIED FORWARD TO THE SUBSEQUENT ASSESSMENT YEAR AND ACCORDINGLY DISALLOW ED THE SAME. THE CONTENTION OF THE AO IS (I) THE PLANT AND MACHINER Y HAVING PURCHASED IN THE PREVIOUS FINANCIAL YEAR CANNOT BE HELD AS NEW P LANT AND MACHINERY IN THE SUBSEQUENT FINANCIAL YEAR AND NOT ELIGIBLE FOR ADDITIONAL DEPRECIATION. (II) DEPRECIATION IS ALLOWED ON THE PLANT AND MACHI NERY AND INCLUDED IN THE BLOCK OF ASSETS. THERE IS NO PROVISION IN THE BLOCK OF ASSETS TO CARRY FORWARD AND ALLOW THE RESIDUAL ADDITIONAL DEPRECIA TION. 10.1 THE LD.CIT(A) CONFIRMED THE ADDITION MADE BY TH E AO HOLDING THAT ADDITIONAL DEPRECIATION IS ONLY ONE TIME MEASURE IN THE YEAR OF PURCHASE AND IT IS NOT POSSIBLE TO CARRY FORWARD THE UNAVAIL ED/UNABSORBED ADDITIONAL DEPRECIATION TO THE SUBSEQUENT ASSESSMENT YEAR. FOR READY REFERENCE WE EXTRACT THE RELEVANT PART OF THE LD.CIT(A) ORDER IN PARA NO.10 AS UNDER: AS PER THE PROVISIONS OF SECTION 32(1 )(IIA), THE AD DITIONAL DEPRECIATION SHALL BE AVAILABLE ONLY FOR THE NEW ASSETS ADDED DURING THE YEAR. FOR BETTER CLEARANCE, THE RELEVANT PROVISIONS OF SECTION 32(1)(IIA) IS REPRODUCED AS UNDER: 32(1 )(IIA) IN THE CASE OF ANY NEW MACHINERY OR PLAN T (OTHER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AFTER THE 31 ST DAY OF MARCH, 2002, BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING, A FURTHER SUM EQUAL TO FIFTEEN PER CENT OF THE ACTUAL COST OF SUCH MACHINE RY OR PLANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE (II): ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 26 -: BASED ON THE ABOVE LEGAL POSITION, IT IS CLEAR THAT ,, THE ADDITIONAI DEPRECIATION SHALL BE PROVIDED ONLY FOR THE NEW PLANT & MACHINERIES ADDED DURING THE CURRENT YEAR. HENCE, THE SUBMISSION OF THE ASSESSEE CANNOT BE ACCEPTED AND T HE CLAIM OF ADDITIONAL DEPRECIATION RELATED TO THE ASSETS ADDED DURING THE ASSESSMENT Y EAR 2006-07 AMOUNTING TO RS.64,75,668/- IS NOT ALLOWABLE AS DEDUCTION FOR TH E CURRENT YEAR. II. NOTWITHSTANDING TO THE ABOVE FACTS, THE ASSESSE E ALSO NOT ELIGIBLE FOR THE RESIDUAL ADDITIONAL DEPRECIATION CLAIM BASED ON THE FOLLOWIN G REASONS: THE RESIDUAL ADDITIONAL DEPRECIATION CANNOT CARRIED FORWARDED TO THE NEXT ASSESSMENT YEAR: A. IN THE CASE OF PROVISIONS RELATED TO NORMAL DEPR ECIATION, THE COST OF SUCH ASSETS ARE INCLUDED IN THE BLOCK OF ASSETS AND THEREFORE, EVEN IF DEPRECIATION IS ALLOWED AT THE RATE OF 50% DUE TO THE FACT ADDITIONS WERE MADE IN THE SECO ND HALF OF THE YEAR, DEPRECIATION IS ALLOWED ON THE RESIDUAL VALUE IN THE SUBSEQUENT YEA R SINCE SUCH VALUE WILL FORM PART OF THE OPENING WDV IN THE SUBSEQUENT YEAR. THEREFORE, SUCH PROVISIONS ARE COMPLETELY DIFFERENT FROM THE PROVISIONS OF SECTION 32(1)(IIA) WHICH ALLOW S ADDITIONAL DEPRECIATION AS A ONETIME MEASURE ONLY IN THE YEAR. 10.2 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. 10.3 THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASS ESSE BY THE FOLLOWING JUDICIAL PRONOUNCEMENTS: DEVI POLYMERS (ITA NO.165/MDS/2014) (CHENNAI) SIL INVESTMENTS (26 TAXMANN.COM 78) (DEL) MITC ROLLING (ITA NO.2789/MUM/2012) DCIT V. COSMO FILMS (2012) 139 ITD 628 (DELHI) (TRIB. ) THE HONBLE JURISDICTIONAL HIGH COURT IN TCA NO.55 1/2013 IN THE CASE OF M/S.BRAKES INDIA LTD., HELD THAT THE BALANC E ADDITIONAL DEPRECIATION WHICH WAS NOT ALLOWED IN THE YEAR IN W HICH IT WAS PUT TO USE, SHOULD BE ALLOWED IN THE SUBSEQUENT YEAR. 10.4 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT WE SET ASIDE THE ORDERS OF THE LOWER AUTHORIT IES AND DIRECT THE AO TO ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 27 -: ALLOW THE ADDITIONAL DEPRECIATION. ACCORDINGLY, TH E ASSESSEES APPEAL ON THIS GROUND FOR THE AYS 2007-08, 2008-09 & 2009-10 ARE ALLOWED. 11.0 THE NEXT ISSUE IN GROUND NO.2 IS DISALLOWANCE OF DEPRECIATION ON UPS. BOTH THE ASSESSEE AND REVENUE HAVE FILED APPEA L ON THIS ISSUE. THE ASSESSEE FILED APPEAL FOR THE AY 2007-08 AND THE RE VENUE HAS FILED APPEAL FOR THE AY 2008-09 AND 2009-10. THIS ISSUE IS INVO LVED FOR THE AYS2007- 08, 2008-09 & 2009-10. THE AO DISALLOWED A SUM OF R S.1,26,086/- FOR THE A.Y 2007-08, RS.3,75,082/- FOR THE AY 2008-09 AND R S.6,29,235/- FOR THE A.Y 2009-10.THE ASSESSEE CLAIMED THE DEPRECIATION @ 80% ON UPS STATING THE UPS BEING AN AUTOMATIC VOLTAGE CONTROLLER AS WE LL AS POWER SAVING EQUIPMENT IS A ENERGY SAVING DEVICE AND CLAIMED THE DEPRECIATION @80% IN ACCORDANCE WITH APPENDIX-I TO INCOME-TAX RULES. RELIANCE IS ALSO PLACED ON THE DECISION OF 1TATS ORDER IN DCIT V SU RFACE FINISHING EQUIPMENT (2003) 81 TTJ 448. THE AO EXAMINED THE EX PLANATION OF THE ASSESSEE AND HELD THAT THE UPS IS NEITHER A PART OF THE COMPUTER NOR A ENERGY SAVING DEVICE BUT IT IS ONLY AS AN UNINTERRU PTED POWER SUPPLY EQUIPMENT FOR ALL THE ELECTRICAL APPLIANCES. THE AO RELIED ON THE DECISION OF HONBLE ITAT DELHI IN THE CASE OF NESTLE INDIA LIMI TED VS. DCIT [111 TTJ 498], WHEREIN IT WAS HELD THAT UPS IS NOT AN INTEGR AL PART OF COMPUTER AND ALLOWED DEPRECIATION AS A PART OF GENERAL PLANT AND MACHINERY. ACCORDINGLY, THE EXCESS DEPRECIATION CLAIMED BY THE ASSESSEE IS DISALLOWED AND ADDED TO THE TOTAL INCOME. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 28 -: 11.1 DURING THE APPEAL HEARING THE LD.AR OF THE ASSESSE E ARGUED THAT ENERGY SAVING DEVICES BEING AUTOMATIC VOLTAGE CONTR OLLERS ARE THE EQUIPMENT ELIGIBLE FOR CLAIMING DEPRECIATION @80%. IT WAS THE CONTENTION OF THE LD.AR THAT THE UPS HAS INBUILT AUTOMATIC VOL TAGE REGULATOR WHICH IS CAPABLE OF REGULATING THE INCOMING VOLTAGE TO FEED STABILIZER OUTPUT VOLTAGE TO THE CONNECTED INSTRUMENT IN ADDITION TO THE UNINTERRUPTED POWER SUPPLY DURING THE POWER FAILURE WITH THE HEL P OF BATTERIES. THE LD.AR ALSO RELIED ON THE FOLLOWING DECISIONS: SUNDARAM ASSET MANAGEMENT (2013) 145 ITD 17 (CHENNAI ) GODREY PHILLIPS INDIA LTD. DCIT VS. SURFACE FINISHING EQUIPMENT 11.2 THOUGH THERE ARE DECISIONS IN FAVOUR OF ASSESSEE T HE CLAIM OF THE ASSESSEE THAT THE UPS AS AN ENERGY SAVING DEVICE IS NOT ACCEPTABLE. IT IS ONLY AN EQUIPMENT FOR UNINTERRUPTED POWER SUPPLY TO ALL THE ELECTRICAL APPLIANCES AS HELD BY THE LD.AO. HOWEVER ITATC B ENCH, CHENNAI IN ITA NO1774/MDS/2012 IN THE CASE OF SUNDARAM ASSET MANAG EMENT CO.LTD VS DCIT HELD THAT UPS IS AN PART INTEGRAL OF COMPUTER AND ELIGIBLE FOR DEPRECIATION @60%. THEREFORE, WE ARE UNABLE TO ACC EPT THE CONTENTION OF THE LD.AR THAT UPS IS ELIGIBLE FOR 80% DEPRECIATION . FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE CITED (SUPRA) WE UPHOL D THE ORDER OF THE LD.CIT(A) AND DIRECT THE AO TO ALLOW THE DEPRECIATI ON @60%. IN THE RESULT, THE ASSESSEES APPEALS AS WELL AS REVENUES APPEALS ARE DISMISSED. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 29 -: 12.0 NEXT ISSUE FOR THE A.Y.2008-09 IS ADDITION U/S.40(A)(I) FOR SOFTWARE PURCHASE FOR NON-DEDUCTION OF TAX AT SOURC E. THE ASSESSING OFFICER DISALLOWED A SUM OF RS.17,72,916/- FOR NON DEDUCTION OF TAX AT SOURCE U/S 194J OF INCOME TAX ACT. THE REVENUE HAS FILED APPEAL ON THIS ISSUE. THE AO RELIED ON THE DECISIONS OF THE HONBLE DELHI ITAT IN THE CASE OF MICROSOFT CORPORATION V. ADIT & GRACEMAC CORPORA TION V. ADIT IN LTA NOS. 1331 TO 1336 (DEL) OF 2008 FOR AYS 99-2000 TO 2004-05 DATED 26.10.2010 WHEREIN IT WAS HELD THAT THE INCOME FROM SUPPLY OF SHRINK- WRAPPED SOFTWARE IS ASSESSABLE AS ROYALTY. THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL FOLLOWING ITS OWN ORDER FOR THE EARLIER YEAR. THE LD.A.R SUBMITTED THAT SOFTWARE PURCHASES WERE SHELF SOFTWA RE WHICH WERE MERELY COPY OF THE COPY RIGHT AND NOT COPY RIGHT AS SUCH. THE ASSESSEE ALSO PLACED RELIANCE ON M/S.SAMSUNG ELECTRONICS LTD V. I TO (TDS)-1 (94 ITD 91 AND HONBLE SPECIAL BENCH, ITAT IN THE CASE OF MOTO ROLO INX. VS. DCIT REPORTED IN 95 ITD 269. 12.1 WE HEARD THE RIVAL PARTIES AND PERUSED THE MATE RIAL PLACED BEFORE US. THERE IS NO DISPUTE IN FACT THAT THE ASSESSEE H AS PURCHASED THE SOFTWARE AND THE ASSESSING OFFICER HAS ADMITTED THI S FACT IN THE ASSESSMENT ORDER. THE PAYMENT MADE TOWARDS THE PU RCHASE OF SOFTWARE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 30 -: IN CIT VS M/S.VINZAS SOLUTIONS INDIA PVT. LTD. IN I TA NO.861/2016 DATED 04.01.2017 WHEREIN THEIR LORDSHIPS HELD AS UNDER: 4. WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTI ON 9[1][VI] DEALING WITH AND DEFINING ROYALTY CANNOT BE MADE APPLICABLE TO A SITUATION OF OUTRIGHT PURCHASE AND SALE OF A PRODUCT. THE CORPUS JURIS SECUNDUM UNDERSTANDS ROYA LTY THUS: THE WORD ROYALTY MEANS A SHARE OF THE PRODUCT OR PROFIT RESERVED BY THE OWNER FOR PERMITTING ANOTHER TO USE THE PROPERTY, THE SHA RE OF THE PRODUCTION OR PROFIT PAID THE OWNER; A SHARE OF THE PRODUCT OR PROCEEDS THEREFROM RESERVED TO THE OWNER FOR PERMITTING THE ANOTHER TO USE THE PROPERT Y; THE SHARE OF THE PRODUCE RESERVED TO THE OWNER FOR PERMITTING ANOTHER TO EXP LOIT AND USE THE PROPERTY; A SHARE OF THE PROFIT, RESERVED BY THE OWNER FOR PERM ITTING ANOTHER TO USE THE PROPERTY; THE AMOUNT RESERVED OR THE RENTAL TO BE P AID THE ORIGINAL OWNER OF THE WHOLE ESTATE. 5. THE MADRAS HIGH COURT IN CIT VS. NEYVELI LIGNIT E CORPORATION LTD., REPORTED IN 243 ITR 458 STATES THUS EXPLAINING THE CONCEPT OF ROYAL TY:- THE TERM ROYALTY NORMALLY CONNOTES THE PAYMENT M ADE BY A PERSON WHO HAS EXCLUSIVE RIGHT OVER A THING FOR ALLOWING ANOTHER T O MAKE USE OF THAT THING WHICH MAY BE EITHER PHYSICAL OR INTELLECTUAL PROPERTY OR THING. THE EXCLUSIVITY OF THE RIGHT IN RELATION TO THE THING FOR WHICH ROYALTY IS PAID SHOULD BE WITH THE GRANTOR OF THAT RIGHT. MERE PASSING OF INFORMATION CONCERNING THE D ESIGN OF A MACHINE WHICH IS A TAILOR-MADE TO MEET THE REQUIREMENT OF A BURYER DOE S NOT BY ITSELF AMOUNT TO TRANSFER OF ANY RIGHT OF EXCLUSIVE USER SO AS TO RE NDER THE PAYMENT MADE THERE FOR BEING REGARDED AS ROYALTY. 6. COURTS HAVE CONSISTENTLY NOTED THE DIFFERENCE B ETWEEN A TRANSACTION OF SALE OF A COPYRIGHTED ARTICLE AND ONE OF COPYRIGHT ITSELF . SEE TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH [2004] 271 ITR 401 [SC]; SUNDWIGER EMF G [2004] 266 ITR 110; DASSAULT SYSTEMS K.K., IN RE, (2010) 229 CTR 125 [AAR]; ISRO SA TELLITE CENTRE [ISAC], IN RE (2008] 307 ITR 59 [AAR]; AND ASIA SATELLITE TELECOMMU NICATIONS CO. VS. DIT (2011] 332 ITR 340 [DELHI]. 7. THE PROVISIONS OF SECTION 9(1)(VI) AS A WHOLE, WO ULD STAND ATTRACTED IN THE CASE OF THE LATTER AND NOT THE FORMER. EXPLANATIONS 4 AND 7 RELIED BY THE AUTHORITIES WOULD THUS HAVE TO BE READ AND UNDERSTOOD ONLY IN THAT CONTEXT AND CANNOT BE EXPANDED TO BRING WITHIN ITS FOLD TRANSACTION BEYOND THE REALM OF THE PROVISION. THE TRIBUNAL HAS RELIED ON THE DECISION OF THE DIVISION BENCH OF THE DELHI HIGH CO URT IN THE CASE OF THE PRINCIPAL COMMISSIONER OF INCOME TAX-6 V. M.TECH INDIA PVT LT D, WHICH SUPPORTS OUR VIEW AS ABOVE. IT IS BROUGHT TO OUR NOTICE THAT THE DECISION OF TH E DELHI HIGH COURT HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN SLP IS PENDING. BE THAT AS IT MAY, IN VIEW OF THE FACTS AND CIRCUMSTANCES AS OBSERVED ABOVE, WE HAVE NO HESITAT ION IN DISMISSING THE DEPARTMENTAL APPEAL ANSWERING THE QUESTIONS OF LAW IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. NO COSTS. 12.2 RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JUR ISDICTIONAL HIGH COURT WE HOLD THAT THE PAYMENT TOWARDS SOFTWARE PURCHASE IS NOT ROYALTY WITHIN THE MEANING OF NON-TAXABLE U/S.9(1)(VI) OF INCOME T AX ACT AND NOT LIABLE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 31 -: FOR DEDUCTION OF TAX AT SOURCE, ACCORDINGLY, WE UPH OLD THE ORDERS OF THE LD.CIT(A)DISMISS THE REVENUES APPEAL ON THIS ISSUE . 13.1 THE NEXT ISSUE FOR THE A.Y.2008-09 AND 2009-10 IN ASSESSEES APPEAL IS THE DISALLOWANCE U/S.14A R.W.RULE 8D OF I NCOME TAX RULES. THE AO DISALLOWED THE EXPENDITURE RELATING TO THE DIVID END INCOME FOR THE AYS 2008-09 AND 2009-10 AS UNDER: AY 2008-09 RS.5,42,601/- AY 2009-10 RS.10,13,125/- THE AO NOTICED FROM THE P&L ACCOUNT THAT THE ASSESSEE HAS SHOWN INCOME BY WAY OF DIVIDEND FROM THE MUTUAL FUND AND DOMESTIC COMPANIES FOR THE AYS 2008-09 & 2009-10 , BUT THE ASSESSEE HAS NOT DISALLOWED ANY EXPENDITURE IN THE P&L ACCOUNT FOR EARNING THE DIVIDEND INCOME. THE AO ASKED THE ASSESSEE TO EXPLAIN WHY THE EXPENDITUR E FOR EARNING OF THE DIVIDEND INCOME SHOULD NOT BE DISALLOWED BY APPLYIN G RULE 8D W.R.T. SECTION 14A OF THE INCOME-TAX ACT AND THE ASSESSEE S SUBMITTED ITS REPLY STATING THAT THE COMPANY HAS NO BORROWED FUNDS AND HENCE THERE IS NO QUESTION OF INTEREST PAYMENTS AND CONSEQUENTLY NO I NTEREST IS DISALLOWABLE AS ENVISAGED IN RULE 8D. FURTHER IF AT ALL ANY EXPE NDITURE THAT CAN BE RELATED TO INCOME EXEMPT FROM TAX VIZ., DIVIDEND IN COME, THEN THE SAME WOULD ONLY BE THE EXPENDITURE BY WAY OF SALARY PAID TO THE STAFF WHOSE ROUTINE INCLUDED HANDLING INVESTMENT PORTFOLIO AND THE ANNUAL SALARY COST ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 32 -: TO THE ACCOMPANY AMOUNTED TO RS.2,29,436/-. ACCORDI NG TO THE ASSESSEE, OTHER THAN THIS ITEM OF EXPENDITURE, NO AMOUNT IS D ISALLOWABLE UNDER RULE 8D OF THE INCOME-TAX RULES, CONSIDERING THE FACT TH AT NO EXPENDITURE WAS INCURRED IN COLLECTING THIS DIVIDEND. NOT BEING IMP RESSED BY THE REPLY OF THE ASSESSEE THE AO DISALLOWED A SUM OF RS.542601/- FOR THE A.Y 2008- 09 AND RS.10,13,125/- FOR THE A.Y 2009-10 APPLYING TH E RULE 8D OF INCOME TAX RULES. THE AO RELIED ON CBDT INSTRUCTION (F.NO.173/172/2008-ITA-L DATED 4.2.2009, HONORABLE ITAT, NEW DELHI DECISION IN THE CASE OF M/S.CHEMIVEST LTD VS. ITO R EPORTED IN 121 LTD 318, 124 TTJ 577) AND THE HONBLE ITAT SPECIAL BENCH, MU MBAL IN THE CASE OF M/S.DAGA CAPITAL MANAGEMENT PRIVATE LIMITED FOR THE A.Y. 2001-02 VIDE ITA NO.8057/MUMBAI/03 DATED 20.10.2008. 13.2 THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) CONFIRMED THE ORDER OF THE AO. THE LD.CIT(A) DISCUS SED THE ISSUE AT LENGTH IN HIS ORDER FOR READY REFERENCE AND FOR THE SAKE O F CLARITY WE EXTRACT RELEVANT PARAGRAPH NO.10.2 TO 10.2.3 A S UNDER: 10.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BY THE LD.AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIE D ON BY THE AO AND AR. I AM NOT IN AGREEMENT WITH THE CONTENTIONS OF THE LD.AR THAT NO EXPENDITURE WAS INCURRED TO EARN TAX- FREE INCOME. IN THE INSTANT CASE, THE APPELLANT HAS OFFERED A ZERO AMOUNT OF DEDUCTION. NOT ONLY THAT THE AO HAS GIVEN HIS SATISFACTION FOR INVO KING THE PROVISIONS AS SEEN FROM THE ASSESSMENT ORDER WHEREIN AN EXPLANATION WAS ALSO CA LLED FOR FROM THE APPELLANT. THE APPELLANT HAS DEBITED CERTAIN EXPENDITURE TOWARDS E STABLISHMENT AND ADMINISTRATION AND A PORTION OF WHICH CAN BE ATTRIBUTED TOWARDS THE ACTI VITY OF EARNING DIVIDEND INCOME. THE ASSESSEE ALSO INCURRED MANAGERIAL REMUNERATION. THE MANAGERIAL STAFF AND THE DIRECTORS ARE INVOLVED IN MAKING DECISIONS ON INVESTMENTS. SU CH BEING THE CASE, A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION SHOULD ALSO BE ATTRIBUTED TOWARDS THE DIVIDEND EARNED BY THE ASSESSEE, THE A.O REASONS. TH E ARGUMENT OF THE APPELLANT THAT ADMINISTRATIVE EXPENSES WERE INCURRED ONLY FOR MANU FACTURING ACTIVITY BUT NOT FOR EARNING ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 33 -: EXEMPT INCOME WAS ALSO REJECTED BY THE AO SINCE NO B IFURCATION OF SUCH EXPENSES WERE FORTHCOMING FROM THE ACCOUNTS. THEREFORE, THE CONTE NTION OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME IS NOT ACCEPTABLE. FURTHER, THE SECTION 14A(3) ITSELF STATES THAT THE PROVISIONS OF SUB-SEC (2) OF 14A SHALL ALSO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . IN THE CASE OF GODREJ & BOYCE MFG. & CO. V. DCIT, 328 ITR 81, THE BOMBAY HIGH COURT HAS HELD THAT THE RULE 8D IS APPLICABLE FROM A.Y. 2008-09 ONWARDS AND DISALLOWANCE UNDER RU LE 8D R.W.S. 14A(2) IS FAIR AND REASONABLE. THE VERY ACT OF THE AO IN INVOKING THE PROVISIONS SHOW THAT THE AO IS NOT SATISFIED WITH THE WORKING OF THE APPELLANT WITH RE GARD TO EXPENDITURE RELATABLE TO EXEMPT INCOME AND TAXABLE INCOME. THE REASON WHY HE WAS NO T SATISFIED IS PROVED BY THE FACT THAT THE DETAILS RELATABLE TO TAXABLE INCOME AND EXEMPT INCOME AND THE INVESTMENT RELATABLE TO EARNING OF DIVIDEND INCOME AND OTHER INVESTMENTS WA S NOT SEPARATED BY THE APPELLANT IN ITS ACCOUNTS. THEREFORE, IN THE CASE OF THE APPELLA NT INVOKING OF PROVISIONS U/S 14A R.W. RULE 8D ARE NOT OUT OF CONTEXT. 10.2.1 WITH REGARD TO THE ARGUMENT THAT THE APPELLA NT HAD HUGE INTEREST FREE FUNDS AND NO BORROWED FUNDS WERE USED FOR INVESTING IN TAX FREE INVESTMENTS ALSO THE A.O HAS GIVEN HIS REASONING. EVEN THOUGH THE ASSESSEE HAS CLAIMED THA T BORROWED FUNDS WERE NOT UTILIZED FOR MAKING INVESTMENTS, IT COULD NOT CLEARLY ESTABLISH THE SAME. FUNDS FOR A COMPANY COME IN A COMMON KITTY. THEY COMPRISE OF BORROWED FUNDS, SH ARE CAPITAL, AND RETAINED EARNINGS (RESERVES AND SURPLUSES). THEREFORE, TO ARGUE THAT N O PORTION OF THE INTEREST PAID RELATES TO INVESTMENT WHICH EARNED DIVIDEND INCOME IS NOT PROP ER. TO TIDE OVER THIS DIFFICULTY, THE PROVISIONS OF S.14A AND RULE 8D WERE INTRODUCED WHI CH ARE APPLICABLE FROM THE AY 2008-09. THUS THE ARS ARGUMENT THAT THEY HAVE THEIR OWN INT EREST FREE FUNDS AND NO BORROWED FUNDS WERE USED FOR EARNING EXEMPT INCOME IS TOO DE FENSIVE. HAVING SUFFICIENT INTEREST FREE FUNDS WILL NOT AUTOMATICALLY PROVE SUBSTANTIVELY TH AT THE SAME AMOUNT HAS GONE TO INVEST IN DIVIDEND EARNING INVESTMENTS BUT NOT THE OTHER I NVESTMENTS LIKE FIXED ASSETS, CURRENT ASSETS ETC. THE ONUS IS ON THE APPELLANT TO STRIVE A LITTLE HARD TO SEPARATE SUCH AMOUNTS. IN THE EVENT OF NOT PROVIDING SUCH ACCOUNTS BY THE APP ELLANT, THE AO HAS NO OTHER ALTERNATIVE BUT TO WORK OUT THE RATIOS ON THE BASIS OF THE FORM ULA LAID DOWN UNDER RULE 8D. IN FACT THE DECISIONS IN THE CASES OF CIT V RELIANCE UTILITIES AND POWER LTD AND HERO CYCLES LTD ARE NOT APPLICABLE IN THE INSTANT CASE. THE COURTS HAVE NEV ER LAID DOWN ANY FORMULA OR RULE. THEY SIMPLY SAID THAT IT CAN BE PRESUMED THAT THE INV ESTMENTS WERE MADE FROM INTEREST FREE FUNDS. AS LAID DOWN THE ACCOUNTS SHOULD BE CLEAR N OT ONLY WITH REGARD TO EXPENDITURE RELATABLE TO EXEMPT INCOME AND TAXABLE INCOME BUT A LSO WITH REGARD TO INVESTMENTS WHICH HAVE GONE INTO EARNING DIVIDEND INCOME AND THOSE WH ICH HAVE GONE TO OTHER INVESTMENTS SINCE THE S.14A EMPHASIZES ON THE WORDS WITH DUE R EGARD TO THE ACCOUNTS. SINCE THE ACTUAL AMOUNT OF EXPENDITURE INCURRED RELATABLE TO EXEMPT INCOME COULD NOT BE QUANTIFIED BY THE APPELLANT ON ITS OWN, THE AO HAS RIGHTLY INV OKED THE PROVISIONS OF RULE 8D. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MANUFACTURING COMPANY LTD (SUPRA) HAS ALSO HELD THAT THE PROVISIONS OF RULE 8D ARE FAIR AND REASONABLE AND ARE APPLICABLE FROM A.Y.2008-09 ONWARDS. THEREFORE, RUL E 8D IS EXIGIBLE IN THE APPELLANTS CASE AND THE AO HAS INVOKED THE PROVISIONS CORRECTL Y. IT IS TO BE NOTED HERE THAT PRESUMPTIONS HAVE NO ROLE TO PLAY IN CLAIMING ANY EXEMPTIONS. 10.2.2 WITH REGARD TO THE ARGUMENT THAT WHILE TAKIN G AVERAGES OF INVESTMENT, THE ENTIRE INVESTMENTS AS PER BALANCE-SHEET WERE TAKEN INSTEAD OF ONLY THE INVESTMENT ON WHICH TAX- FREE INCOME WAS EARNED, I CANNOT FIND FAULT WITH TH E AO. WHEN IT IS THE DUTY OF THE APPELLANT TO FURNISH THE DETAILS OF THE INVESTMENT RELATABLE TO EARNING OF DIVIDEND INCOME AND INVESTMENT RELATABLE TO OTHERS, AND WHEN SUCH D ETAILS WERE NOT FORTHCOMING FROM THE RECORDS OR ACCOUNTS OF THE APPELLANT, AO WAS LEFT WI TH NO ALTERNATIVE BUT TO INVOKE THE LAID DOWN PROVISIONS OF SEC 14A R.W. RULE 8D. FURTHER, W HEN A LAID DOWN PRINCIPLE IN THE FORM OF RULE 8D IS PRESCRIBED, THE APPELLANTS ARGUMENT THA T AT BEST ONLY THE SALARY PAID TO ONE OFFICER ALONE SHOULD BE TAKEN FOR DISALLOWANCE HAS NO MEANING. 10.2.3 THE APPELLANTS ANOTHER ARGUMENT THAT ONLY 2 % OF TAX-FREE INCOME CAN BE ATTRIBUTED TO EARNING TAX-FREE INCOME ALSO LACKS MERIT, ESPECI ALLY IN THE LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . & CO. V. DCIT (SUPRA) WHEREIN IT WAS HELD THAT RULE 8D IS APPLICABLE FROM A.Y. 2008- 09. WHEN CLEAR-CUT FORMULA IS AVAILABLE TO THE AO ESTIMATING THE DISALLOWANCE IS NOT REQUIR ED. ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 34 -: AGAINST THE ORDER OF THE LD.CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US. 13.3 WE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL PLACED ON RECORD. THE ASSESSEE HAS EARNED THE DIVIDEND INCOME AND THE AO HAS GIVEN A FINDING THAT THE PROFIT & LOSS A/C DOES NOT SHOW ANY DISALLOWANCE OF EXPENDITURE RELATING TO THE DIVIDEND INCOME. TH E AO DISALLOWED THE EXPENDITURE BY APPLYING RULE 8D OF IT ACT. THOUGH THE ASSESSEE CLAIMED THAT SOME AMOUNT OF SALARY WAS INCURRED IT WAS NOT SUPPORTED BY COMPLETE INFORMATION AND THE DOCUMENTATION. AS PER THE P&L ACCOUNT NO EXPENDITURE WAS DEBITED BY THE ASSESSEE AND NO DISA LLOWANCE WAS MADE BY THE ASSESSEE. THEREFORE, THE AO MADE THE DISALL OWANCE PLACING RELIANCE ON CBDT INSTRUCTION (F.NO.173/172/2008-ITA -L DATED 4.2.2009, HONORABLE ITAT, NEW DELHI DECISION IN THE CASE OF M /S.CHEMIVEST LTD VS. ITO REPORTED IN 121 LTD 318, 124 TTJ 577) AND THE H ONBLE ITAT SPECIAL BENCH, MUMBAI IN THE CASE OF M/S.DAGA CAPITAL MANAG EMENT PRIVATE LIMITED FOR THE A.Y. 2001-02 VIDE ITA NO.8057/MUMBA I/03 DATED 20.10.2008.. THE ASSESSEE RELIED ON THE DECISION O F ITAT, CHENNAI IN ITA NO.1609/MDS/2012 WHEREIN ITAT HAS RESTRICTED THE DI SALLOWANCE TO THE EXTENT OF 2%. RULE 8D WAS INTRODUCED W.E.F. 24.03. 2008 AND HENCE THE AD HOC ESTIMATION OF DISALLOWANCE IS NOT APPLICABLE FOR THE AY 2008-09 ONWARDS. THEREFORE, RULE 8DHAS MANDATORY APPLICATI ON. THE ASSESSEE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 35 -: ALSO SUBMITTED THAT THE LOANS FOR SPECIFIC BUSINESS PURPOSES CANNOT BE INCLUDED U/S.14A. NO SUCH DETAILS WERE FURNISHED B Y THE ASSESSEE. WHAT WERE THE LOAN AVAILED FOR SPECIFIC PURPOSES AND WHE THER THE FINANCIAL INSTITUTIONS HAVE DIRECTLY PAID TO THE SUPPLIER OR ACCOUNTED THROUGH COMMON ACCOUNT, ETC., WERE NOT FURNISHED BY THE ASS ESSEE. THEREFORE, THE RELIANCE PLACED BY THE ASSESSEE IN ITA NO.1331/ KOLKATA/2011 IS NOT APPLICABLE IN THIS CASE. THE ASSESSEE ALSO ARGUED THAT INVESTMENT WHICH YIELDED EXEMPT INCOME ALONE SHOULD BE CONSIDERED. THIS ARGUMENT OF THE ASSESSEE ALSO IS NOT ACCEPTABLE SINCE THE ASSESSEE HAS BORROWED FUNDS AND INVESTED ON SHARES AND THE SHARES EARNED THE IN COME WHICH IS EXEMPT. NO DETAILS REGARDING SHARES WHICH EARNED DI VIDEND INCOME WAS PLACED BY THE LD.AR. THIS TRIBUNAL HAS CONSISTENTL Y FOLLOWED THAT INVESTMENTS MADE FROM THE COMMON ACCOUNT ATTRACTS T HE DISALLOWANCE U/S.14A. ONCE, THE ASSESSEE EARNS THE DIVIDEND INC OME, THE APPLICATION OF SEC.14A IS ATTRACTED AND CONSEQUENTLY THE DISALLOWA NCE HAS TO BE MADE APPLYING THE RULE 8D. THEREFORE, WE DO NOT FIND AN Y INFIRMITY IN THE ORDERS OF THE LOWER AUTHORITIES AND THE SAME IS UPH ELD. THE APPEAL OF THE ASSESSEE ON THIS GROUND IS DISMISSED. 14.0 GROUND NO.3 IN ASSESSEES APPEAL FOR THE A.Y 2009-10 IS DISALLOWANCE OF WEIGHTED DEDUCTION FOR SCIENTIFIC R ESEARCH U/S.35(2AB) OF IT ACT. THE AO DISALLOWED A SUM OF RS.1,13,05,335/- OVER AND ABOVE THE EXPENDITURE PRESCRIBED BY THE AUTHORITY WHILE ISSUI NG THE APPROVAL FOR THE ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 36 -: SCIENTIFIC RESEARCH. THE LD.CIT(A) CONFIRMED THE O RDER OF THE AO. THE ASSESSEE ARGUED THAT THE CLAIM WHICH IS OTHERWISE A LLOWABLE CANNOT BE RESTRICTED, MERELY BECAUSE THE AMOUNT IS NOT ORIGIN ALLY INCLUDED IN THE ANNUAL REPORT. THE DUE PROCESS OF APPROVAL BY DSIR REQUIRE THE RECONCILIATION OF AMOUNT OF CLAIM AS CERTIFIED BY A UDITOR AND THE AMOUNT DISCLOSED IN THE ANNUAL REPORT. THE RESTRICTION BY DSIR OVERLOOKING THE RECONCILIATION IS UNJUST AND HENCE THE CLAIM AS MAD E BY THE APPELLANT SHOULD HAVE BEEN ALLOWED. THE LD.A.R RELIED ON THE FOLLOWING DECISIONS: I. CIT VS CLARIS LIFE SCIENCES LTD. 326 ITR 251(GUJ) II. CIT VS.WHEELS INDIA LTD 336 ITR 513 (MAD) III. ELECTRONICS CORPORATION OF INDIA LTD.VS ACIT(ITA NO.1106/HYD/2011 14.1 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS PLACED ON RECORD. THE ACT DOES NOT PLACE ANY RESTRICTIONS TO INCUR THE EXPENDITURE. THE EXPENDITURE INCURRED FOR THE PUR POSE OF SCIENTIFIC RESEARCH REQUIRED TO BE ALLOWED AS DEDUCTION U/S.35 (AB) SUBJECT TO COMPLYING THE CONDITIONS LAID DOWN IN RULE 6. THE EXPENDITURE WAS INCURRED BY THE ASSESSEE WHICH IS CERTIFIED BY THE TAX AUDIT REPORT. THERE IS NO DISPUTE REGARDING THE ACTUAL AMOUNT INCURRE D BY THE ASSESSEE. THE ASSESSEE RELIED ON THE JURISDICTIONAL HIGH COURT DECISION SUPRA. THE DECISIONS RELIED UPON BY THE LD.AR ARE NO T DIRECTLY RELATED TO THE ISSUE OF R&D EXPENDITURE INCURRED OVER AND ABO VE THE SPECIFIED LIMIT OF ITA NO.351/MDS/2013 & ITA NOS.316 & 317/MDS/2014 ITA NO.629/MDS/2013 ITA NOS.203, 204 & 205/MDS/2014 :- 37 -: DSIR. HOWEVER, THE ESSENCE OF THE JUDGMENTS RELIED UPON BY THE LD.AR SUGGESTS TO ALLOW THE ACTUAL EXPENDITURE. THERE IS NO DISPUTE REGARDING THE GENUINENESS OF EXPENDITURE. THEREFORE, WE HOLD THAT THE ASSESSEE IS ENTITLED FOR THE WEIGHTED AVERAGE DEDUCTION ON THE AMOUNT ACTUALLY SPENT. ACCORDINGLY, THE APPEAL OF THE ASSESSEE IS ALLOWED. 15.0 IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE PAR TLY ALLOWED AND THE APPEALS OF THE DEPARTMENT ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD MAY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ! . . $ ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED: 3 RD MAY, 2017. TLN 0 ,$6 76 /COPY TO: 1. + /APPELLANT 4. 8 /CIT 2. ,-+ /RESPONDENT 5. 6 , /DR 3. 8 ( ) /CIT(A) 6. . /GF