MORGAN STANLEY INDIA SECURITIES PVT.LTD., MUMBAI V. ASST.C.I.T. 1(2), MUMBAI

ITA 6774/MUM/2008

• Counselvise Citation: 677419914 RSA 2008
• Duration Of Justice: 2 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 17-03-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 25-11-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M R
• Assessee Lawyers: ARVIND SONDE; LAXMIKANT KOTHAR I
• Keywords: Business income; Depreciation; Bad and doubtful debts; Capital expenditure
• Section: 143(3); 80HHC; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, G, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER I T A NOS : 5072/MUM/2005 AND 6774/MUM/2008 (ASSESSMENT YEARS : 2001-02 AND 2004-05) MORGAN STANLEY INDIA SECURITIES APPELLANT PRIVATE LIMITED, MUMBAI (PAN: AAACM4048B) VS ASSISTANT COMMISSIONER OF INCOME TAX RESPONDENT CIRCLE 1(2), MUMBAI APPELLANT BY: MR ARVIND SONDE & MR LAXMIKANT KOTHAR I RESPONDENT BY: MR PANAN VED & MR A K MAYAK O R D E R R V EASWAR, PRESIDENT: THESE ARE TWO APPEALS, BOTH FILED BY THE ASSESSEE, FOR THE ASSESSMENT YEARS 2001-02 AND 2004-05. SINCE THEY W ERE HEARD TOGETHER, THEY ARE DISPOSED OF BY A COMMON ORDER. 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF PROVIDING BACK OFFICE SUPPORT SERVICES TO VARIOUS O VERSEAS COMPANIES. THE APPEALS ARISE OUT OF THE ASSESSMENT S MADE UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, BY ORDE RS DATED 12.03.2004 AND 24.11.2006 RESPECTIVELY. 3. THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED C HARTS EXPLAINING THE DISPUTES IN THE APPEALS AND BOTH SID ES HAVE ARGUED ON THE BASIS OF THE CHARTS. THE PAPER BOOKS FILED BY THE ASSESSEE HAVE ALSO BEEN TAKEN INTO CONSIDERATION. ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 2 4. ASSESSMENT YEAR 2001-02 : - THE FIRST GROUND RELATES TO THE DISALLOWANCE OF INTEREST UNDER SECTION 14A OF THE A CT. THIS ISSUE IS DEALT WITH IN PARAGRAPH 1 OF THE ASSESSMENT ORDER A ND PARAGRAPHS 1 TO 5 OF THE ORDER OF THE CIT(A). THE ASSESSEE ITSE LF DISALLOWED INTEREST OF ` 3,40,56,528/- UNDER SECTION 14A OF THE ACT. IN CALCULATING THE DISALLOWANCE, THE ASSESSEE REDUCED THE INTEREST RECEIVED FROM THE INTEREST PAID AND THE DISALLOWANC E WAS ALSO WORKED OUT ON NET BASIS. THE ASSESSING OFFICER TOO K OBJECTION TO THIS. HE ALSO FOUND THAT WHILE CALCULATING THE DIS ALLOWANCE THE ASSESSEE HAS WORKED OUT THE AVERAGE FUNDS AVAILABLE AS ON 31.03.2000 AND 31.03.2001 AND COMPUTED THE DISALLOW ANCE ACCORDINGLY. THE ASSESSING OFFICER ALSO TOOK OBJEC TION TO THIS METHOD OF CALCULATING THE DISALLOWABLE INTEREST. H E TOOK THE VIEW THAT THE AVERAGING OF THE AVAILABLE FUNDS ON THESE TWO DATES WAS NOT PROPER AND PROCEEDED TO CALCULATE THE AVERAGE C OST OF CAPITAL WITH REFERENCE TO THE TOTAL ASSETS AS ON 31.03.2001 , WHICH WAS THE LAST DATE FOR THE ASSESSMENT YEAR UNDER CONSIDERATI ON. ACCORDINGLY THE DISALLOWABLE INTEREST CAME TO ` 3,90,21,257/-. ON APPEAL, THE CIT(A) UPHELD THE METHOD ADOPTED BY THE ASSESSING O FFICER. 5. THE CONTENTION OF THE ASSESSEE IN THE FURTHER AP PEAL BEFORE US IS THAT SINCE THE ACTUAL INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ON NET BASIS, THE DISALLOWANCE UNDER SEC TION 14A WAS ALSO COMPUTED BY IT ON NET BASIS AND THE OBJECTION TAKEN BY THE ASSESSING OFFICER WAS NOT SOUND. AS REGARDS THE AV ERAGING OF THE FUNDS AVAILABLE ON 31.03.2000 AND 31.03.2001, IT WA S SUBMITTED THAT INTEREST WAS PAID ON FUNDS UTILIZED DURING THE ENTIRE PREVIOUS ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 3 YEAR AND NOT ONLY ON THE FUNDS AVAILABLE ON THE LAS T DAY OF THE YEAR, I.E. ON 31.03.2001 AND THAT THE ASSESSING OFFICER W AS NOT RIGHT IN REJECTING THE AVERAGING METHOD ADOPTED BY THE ASSES SEE. IT IS FURTHER SUBMITTED THAT THOUGH RULE 8D OF THE INCOME TAX RULES IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION, THE SAID RULE ALSO RECOGNIZED THE AVERAGING METHOD ADOPTED BY THE ASSE SSEE AND, THEREFORE, IN FAIRNESS THE AMOUNT OF INTEREST DISAL LOWED BY THE ASSESSEE ITSELF IN THE COMPUTATION OF THE INCOME SH OULD BE CONSIDERED ADEQUATE AND APPROPRIATE. 6. ON BEHALF OF THE REVENUE, STRONG RELIANCE WAS PL ACED ON THE DECISION OF THE CIT(A) IN PARAGRAPH 4 OF HIS ORDER AND THE REASONING GIVEN THEREIN. 7. ON A PROPER CONSIDERATION OF THE FACTS AND THE R IVAL CONTENTIONS, WE ARE OF THE VIEW THAT NO STRONG GROU NDS HAVE BEEN ADVANCED BY THE DEPARTMENTAL AUTHORITIES TO DISCARD THE METHOD ADOPTED BY THE ASSESSEE IN DISALLOWING THE INTEREST UNDER SECTION 14A OF THE ACT. THERE CAN BE NO DISPUTE THAT SINCE THE AMOUNT OF INTEREST DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ON NET BASIS, THE DISALLOWANCE OF INTEREST SHOULD ALSO BE MADE ONLY W ITH REFERENCE TO THE NET INTEREST, AS WAS DONE BY THE ASSESSEE. THE RE IS ALSO MERIT IN THE ARGUMENT PUT FORTH ON BEHALF OF THE ASSESSEE THAT IT IS NOT PROPER TO TAKE INTO CONSIDERATION ONLY THE VALUE OF INVESTMENTS AND ASSETS AS ON 31.03.2001 SINCE INTEREST IS PAID ON F UNDS UTILIZED DURING THE ENTIRE PERIOD BETWEEN 31.03.2000 AND 31. 03.2001 AND THE MORE APPROPRIATE METHOD IS TO AVERAGE THE FUNDS POSITION AS ON THESE TWO DATES AND APPLY SECTION 14A WITH REFERENC E TO THE ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 4 AVERAGE VALUE. THE LEARNED COUNSEL FOR THE ASSESSE E IS ALSO RIGHT IN HIS SUBMISSION THAT RULE 8D OF THE INCOME TAX RU LES DOES RECOGNIZE THE AVERAGING METHOD. REFERENCE MAY BE M ADE TO SUB- RULE (2) OF THE SAID RULE, WHICH SPEAKS OF AVERAGE VALUE OF THE INVESTMENT. WE THEREFORE HOLD THAT THE DISALLOWANC E OF THE INTEREST AS MADE BY THE ASSESSEE IS ADEQUATE AND APPROPRIATE AND NO FURTHER DISALLOWANCE IS CALLED FOR. THE GROUND IS THUS ALLOWED. 8. THE SECOND GROUND RELATES TO THE ADHOC DISALLOWA NCE OF ADMINISTRATIVE AND OTHER EXPENSES AMOUNTING TO ` 2,00,000/- UNDER SECTION 14A OF THE ACT. THIS GROUND IS DISMISSED A S NOT PRESSED. 9. THE THIRD GROUND RELATES TO THE DISALLOWANCE OF PROFESSIONAL FEES. THIS ISSUE IS DISCUSSED IN PARAGRAPH 2 OF TH E ASSESSMENT ORDER AND IN PARAGRAPHS 9 TO 14 OF THE IMPUGNED ORD ER OF THE CIT(A). THE ASSESSEE PAID ` 34,00,000/- TO MS NAINA LAL KIDWAI AND CLAIMED THE SAME AS DEDUCTION AS PROFESSIONAL F EES PAID FOR THE PURPOSE OF THE BUSINESS. THE ASSESSING OFFICER CALLED FOR THE DETAILS OF THE PROFESSIONAL SERVICES OFFERED BY MS NAINA LAL KIDWAI BUT THE ASSESSEE WAS UNABLE TO FURNISH THE DETAILS. ACCORDINGLY THE AMOUNT WAS ADDED BACK TO THE ASSESSEES INCOME. BE FORE THE CIT(A) IT WAS SUBMITTED THAT THE FEES WAS PAID TO P ROVIDE THE ASSESSEE WITH SUPPORT, ADVICE AND CONSULTATION IN C ONNECTION WITH ITS BUSINESS ACTIVITIES IN INDIA AND TO KEEP THE AS SESSEE APPRAISED OF ANY EVENTS, DEVELOPMENTS AND OTHER MATTERS RELEV ANT TO THE BUSINESS IN INDIA. A COPY OF THE AGREEMENT FOR PAY MENT OF THE PROFESSIONAL FEES WAS ALSO FILED BEFORE THE CIT(A). IT WAS AGAIN SUBMITTED THAT THE RELEVANT DETAILS REGARDING THE S ERVICES RENDERED ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 5 WERE GIVEN TO THE ASSESSING OFFICER VIDE LETTERS DA TED 28.08.2003 AND 19.02.2004 AND COPIES OF THESE LETTERS WERE FIL ED BEFORE THE CIT(A). IT WAS ALSO POINTED OUT THAT THE PROFESSIO NAL ADVICE WAS HIGHLY CONFIDENTIAL AND SENSITIVE IN NATURE AND WAS MOSTLY RENDERED PERSONALLY OR OVER THE PHONE AND, THEREFORE, IT WAS NOT POSSIBLE TO MAINTAIN DETAILS / EVIDENCE OF THE SERVICES. 10. THE CIT(A) REFERRED TO SOME OF THE CLAUSES OF T HE AGREEMENT IN WHICH THERE WAS REFERENCE TO THE NATURE OF THE S ERVICES TO BE RENDERED BY MS NAINA LAL KIDWAI BUT FOUND THAT THER E WAS NO EVIDENCE TO SHOW THAT SUCH SERVICES WERE ACTUALLY R ENDERED. HE REFERRED TO CERTAIN AUTHORITIES TO HOLD THAT IN THE ABSENCE OF ANY EVIDENCE TO SHOW THE ACTUAL RENDERING OF THE SERVIC ES, THE MERE FACT THAT THERE WAS AN AGREEMENT BETWEEN THE PARTIES DID NOT ADVANCE THE ASSESSEES CASE. IN THIS VIEW OF THE MATTER HE CONFIRMED THE DISALLOWANCE. 11. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. A COPY OF THE AGREEMENT BETWEEN THE A SSESSEE AND MS NAINA LAL KIDWAI IS PLACED AT PAGES 14 AND 15 OF THE PAPER BOOK FILED BY THE ASSESSEE. THE AGREEMENT IS DATED 28.12.2000. CLAUSE 1(A) STATES THAT MS NAINA LAL KIDWAI SHALL P ROVIDE THE ASSESSEE WITH SUPPORT, ADVICE AND CONSULTATION IN C ONNECTION WITH THE ASSESSEES BUSINESS ACTIVITIES IN INDIA AND CLA USE (B) SAYS THAT SHE SHALL UPDATE AND KEEP THE ASSESSEE APPRISED OF ANY EVENTS, DEVELOPMENTS AND OTHER MATTERS RELEVANT TO THE ASSE SSEES BUSINESS IN INDIA. CLAUSE 2 PROVIDES FOR PAYMENT O F FEES OF ` 34,00,000/-. CLAUSE 3 MAKES IT CLEAR THAT THE AGRE EMENT SHALL NOT ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 6 BE CONSTRUED AS GIVING RISE TO A PARTNERSHIP OR AGE NCY BETWEEN THE PARTIES. CLAUSE 4 PROHIBITS ANY MODIFICATION OR AL TERATION OF THE TERMS OF THE AGREEMENT UNLESS MUTUALLY AGREED TO IN WRITING. A PERUSAL OF THE AGREEMENT SHOWS THERE IS PRECIOUS LI TTLE THEREIN TO SHOW EXACTLY WHAT KIND OF SERVICES WERE TO BE SPECI FICALLY RENDERED BY MS NAINA LAL KIDWAI WHICH WOULD BE IN THE INTERE ST OF THE ASSESSEES BUSINESS IN INDIA. CLAUSES 1(A) AND (B) ARE DELIGHTFULLY VAGUE. FURTHER THERE IS ALSO NO EVIDENCE ADDUCED B Y THE ASSESSEE TO SHOW WHAT EXACTLY WERE THE SERVICES RENDERED BY MS NAINA LAL KIDWAI SO AS TO JUSTIFY THE PROFESSIONAL FEES, AS F OUND BY THE CIT(A). THE ASSESSEES PLEA THAT THE SERVICES WERE HIGHLY C ONFIDENTIAL AND SENSITIVE IN NATURE AND WERE MOSTLY RENDERED PERSON ALLY OVER THE PHONE IS NOT ACCEPTABLE SINCE THE BURDEN IS ON THE ASSESSEE TO REVEAL WHAT INFORMATION WAS GIVEN TO IT BY MS NAINA LAL KIDWAI, WHICH WOULD FACILITATE ITS BUSINESS OPERATIONS IN I NDIA. THE RELIANCE PLACED BY THE CIT(A) ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF LACHMINARAYAN MADAN LAL VS. CIT (1972) 86 I TR 439 (SC) IS APPOSITE AND IN THIS CASE IT HAS BEEN HELD THAT THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE PARTIES IS NOT CONCLUSI VE OR DECISIVE OF THE QUESTION WHETHER THE PAYMENT OF COMMISSION OR P ROFESSIONAL FEES IS ALLOWABLE OR NOT AND IT IS FOR THE ASSESSEE TO PROVE THAT THE COMMISSION OR FEES WAS PAID FOR SERVICES WHICH WERE CONNECTED TO THE ASSESSEES BUSINESS AND WHICH WERE ACTUALLY REN DERED. IN THE ABSENCE OF ANY SUCH EVIDENCE IN THE PRESENT CASE WE ARE IN AGREEMENT WITH THE VIEW TAKEN BY THE DEPARTMENTAL A UTHORITIES THAT ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 7 THE ASSESSEE FAILED TO DISCHARGE ITS BURDEN. WE AC CORDINGLY UPHOLD THE DISALLOWANCE AND DISMISS THE GROUND. 12. GROUND NO: 4 RELATES TO THE DEDUCTION ALLOWABLE UNDER SECTION 80HHE OF THE ACT. IT IS CONTENDED BY THE A SSESSEE THAT THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESS ING OFFICER OF CONSIDERING THE PROFITS OF ALL THE BUSINESS ACTIVIT IES OF THE ASSESSEE INSTEAD OF CONSIDERING ONLY THE PROFITS OF THE BACK OFFICE SUPPORT SERVICES FOR THE PURPOSES OF COMPUTING THE DEDUCTIO N UNDER THE SECTION. THE ARGUMENT OF THE LEARNED COUNSEL FOR T HE ASSESSEE RUNS LIKE THIS. THE SECTION PROVIDES FOR DEDUCTION IN RESPECT OF PROFITS FROM EXPORT OF COMPUTER SOFTWARE ETC. IT I S NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED, INTER ALIA, IN SUCH BUSINE SS. IF THE ASSESSEE CARRIES ON THE BUSINESS OF EXPORT OF COMPU TER SOFTWARE, THEN IT SHALL BE ALLOWED, IN COMPUTING THE TOTAL IN COME, A DEDUCTION TO THE EXTENT OF PROFITS, REFERRED TO IN SUB-SECTIO N (1B), DERIVED BY THE ASSESSEE FROM SUCH BUSINESS. UNDER SUB-SECTION (3), FOR THE PURPOSE OF SUB-SECTION (1), PROFITS DERIVED FROM TH E COMPUTER SOFTWARE EXPORT BUSINESS SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE. ACCORDINGLY ONLY THE PROFITS OF THE BACK OFFICE SUPPORT SERVICES SHOULD BE CONSIDERED UNDER SUB-SECTION (3) AND IT IS ONLY THOSE PROFITS WHICH ARE TO BE DIVIDED IN THE PROPOR TION WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER. FROM THE PROFITS ARRIVED AT BY APPLYING THIS FORMULA, 80% THEREOF UNDER CLAU SE (I) OF SUB- SECTION (1B) IS TO BE GIVEN THE EXEMPTION. IN THE PRESENT CASE THE ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 8 PROFITS OF THE BACK OFFICE SUPPORT SERVICES CAME TO ` 80,46,765/-. SO FAR AS THE BACK OFFICE SUPPORT SERVICES ARE CONCERN ED, THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER ARE THE SAME BECAUSE THE ENTIRE COMPUTER SOFTWARE IS EXPORTED. THIS FIGURE COMES TO ` 5,65,44,376/-. SINCE THE EXPORT TURNOVER (NUMERATO R) AND THE TOTAL TURNOVER (DENOMINATOR) ARE THE SAME, 80% OF ` 80,46,765/- WILL ENJOY EXEMPTION. THIS FIGURE COMES TO ` 64,37,412/-. 13. ACCORDING TO THE LEARNED CIT DR AS WELL AS THE DEPARTMENTAL AUTHORITIES, THE METHOD SUGGESTED BY THE ASSESSEE C ANNOT BE ACCEPTED. IN THEIR VIEW, THE ASSESSEE WAS NOT ENTI TLED TO ANY DEDUCTION UNDER SECTION 80HHE BECAUSE OF THE FOLLOW ING WORKING: AS PER THE LEARNED ASSESSING OFFICER AMOUNT AMOUNT RS. RS. BUSINESS INCOME AS PER THE ASSESSMENT ORDER 15,42,52,035 LESS: INTEREST ON FIXED DEPOSITS 46,87 ,831 ----------------- 14,95,64,204 LESS: 90% OF I. COMMISSION, BROKERAGE 41,41,726 AND PROFITS II. MANAGEMENT AND OTHER 15,10,93,708 SUPPORT FEES III. RECOVERY FOR USE OF LONG 2,37,46,4 87 TERM AND OFFICE PREMISES IV.GAIN ON EXCHANGE 1,05 ,041 FLUCTUATION ----------------- 90% OF 17,90,86,962 16,11,78,266 ------------------ (1,16,14,062) ========== SINCE FIGURE OF BUSINESS PROFITS IS NEGATIVE, DEDUCTION UNDER SECTION 80HHE NOT COMPUTED. ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 9 ACCORDING TO THE CIT DR, FOR THE PURPOSE OF SECTION 80HHE COMPUTATION, THE PROFITS OF ALL THE BUSINESSES CARR IED ON BY THE ASSESSEE HAVE TO BE CONSIDERED BECAUSE OF EXPLANATI ON (D) BELOW THE SECTION WHICH DEFINES PROFITS OF THE BUSINESS AS MEANING THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AS REDUCED BY 90% OF ANY RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CH ARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS. HE ACCORDINGLY SUBMITTED THAT THE ASSESSING OFFICER HA D RIGHTLY TAKEN THE FIGURE OF PROFITS AT ` 15,42,52,035/- AND HE WAS ALSO RIGHT IN DEDUCTING THE INTEREST ON FIXED DEPOSITS, COMMISSIO N, BROKERAGE, ETC., TO THE EXTENT OF 90%, WHICH LEFT A NEGATIVE F IGURE OF BUSINESS PROFITS OF ` 1,16,14,062/-, WHICH DID NOT PERMIT ANY DEDUCTION T O BE COMPUTED UNDER SECTION 80HHE OF THE ACT. 14. THE LEARNED CIT DR ALSO REFERRED TO SUB-SECTION (5) OF SECTION 80-IA, WHICH PROVIDED THAT THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE ELIGI BLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING TH E PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMENT YEAR AND TO EVER Y SUBSEQUENT ASSESSMENT YEAR UPTO AND INCLUDING THE ASSESSMENT Y EAR FOR WHICH THE DETERMINATION IS TO BE MADE AND SUBMITTED THAT THERE WAS NO SIMILAR PROVISION IN SECTION 80HHE IN ORDER TO JUST IFY THE ASSESSEES CLAIM THAT UNDER SUB-SECTION (3) OF SECTION 80HHE O NLY THE PROFITS OF THE EXPORT OF COMPUTER SOFTWARE BUSINESS SHOULD BE TAKEN INTO CONSIDERATION. HE ACCORDINGLY CONTENDED THAT THE A SSESSEES PLEA WAS WITHOUT SUBSTANCE. ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 10 15. WE HAVE CAREFULLY CONSIDERED THE PROVISIONS OF SECT ION 80HHE AND THE RIVAL ARGUMENTS. IN SUB-SECTION (1), IT IS PROVIDED THAT THE ASSESSEE SHALL BE ALLOWED A DEDUCTION OF T HE PROFITS FROM THE ELIGIBLE BUSINESS. SUCH DEDUCTION IS TO BE ALL OWED IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE. SUB-SECTION (3) HAS BEEN ENACTED ONLY FOR THE PURPOSES OF SUB-SECTION (1). SUB-SECTION (1) REQUIRES THAT THE PROFITS WHICH ARE ELIGIBLE FOR TH E DEDUCTION SHOULD BE DERIVED BY THE ASSESSEE FROM THE ELIGIBLE BUSINE SS. WHAT ARE THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS IS E XPLAINED IN SUB- SECTION (3). IT SAYS THAT THE PROFITS DERIVED FROM THE ELIGIBLE BUSINESS SHALL BE THE AMOUNT WHICH BEARS TO THE PR OFITS OF THE BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOVE R BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE AS SESSEE. EXPLANATION (D) BELOW THE SECTION DEFINES THE EXPRE SSION PROFITS OF THE BUSINESS AS MEANING THE PROFITS OF THE BUSINES S AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AS R EDUCED BY, INTER ALIA, 90% OF THE RECEIPTS BY WAY OF BROKERAGE, COMM ISSION, ETC. WHICH ARE INCLUDED IN SUCH PROFITS. THE WORKING OF THE ASSESSING OFFICER, WHICH WE HAVE EXTRACTED EARLIER, IS PREMIS ED ON THE ASSUMPTION THAT THE EXPRESSION PROFITS OF THE BUSI NESS APPEARING IN SUB-SECTION (3) READ WITH EXPLANATION (D) MEANS PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. THE ASSESSI NG OFFICER HAS TAKEN THE BUSINESS INCOME AT ` 15,42,52,035/-. THIS FIGURE OF PROFIT REPRESENTS PROFITS OF THE VARIOUS BUSINESSES CARRIE D ON BY THE ASSESSEE INCLUDING THE PROFITS ON EXPORT OF COMPUTE R SOFTWARE (ELIGIBLE BUSINESS). FROM THIS FIGURE OF PROFIT TH E ASSESSING OFFICER ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 11 HAS REDUCED 90% OF THE COMMISSION, BROKERAGE, ETC. AS ALSO INTEREST ON FIXED DEPOSITS WHICH HE HAS CONSIDERED TO BE INCOME FROM OTHER SOURCES AND HAS ARRIVED AT A NEGATIVE FI GURE OF ` 1,16,14,062/-. SINCE THERE IS A NEGATIVE FIGURE, H E HAS STATED THAT THE ASSESSEE IS NOT ELIGIBLE TO ANY DEDUCTION UNDER SECTION 80HHE OF THE ACT. IN PAGE 4 OF THE ASSESSMENT ORDER UNDE R THE HEADING DEDUCTION UNDER SECTION 80HHE OF THE INCOME TAX AC T, 1961, THE ASSESSING OFFICER HAS COMMENTED UPON THE WORKING OF THE ASSESSEE. HE HAS NOTED TWO FEATURES IN THE ASSESSE ES WORKING. THE FIRST IS THAT THE ASSESSEE HAS TAKEN THE TOTAL TURNOVER OF THE BUSINESS AS REPRESENTING THE TURNOVER OF ONLY THE B ACK OFFICE SUPPORT SERVICES. THE SECOND FEATURE NOTICED BY TH E ASSESSING OFFICER IS THAT THE ASSESSEES FIGURE OF PROFIT OF ` 80,46,765/- IS THE PROFIT OF ONLY THE BUSINESS OF BACK OFFICE SUPPORT SERVICES. AFTER NOTICING THESE TWO FEATURES THE ASSESSING OFFICER H AS COMMENTED THAT THE ASSESSEE BELIEVES THAT SINCE IT IS ENGAGED IN D IFFERENT LINES OF BUSINESS, WHICH ARE NOT ELIGIBLE TO A DEDUCTION UNDER SECTION 80HHE OF THE INCOME TAX ACT, 1961, THE TOTAL PROFIT AND THE TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION SHOULD BE RES TRICTED TO THE ELIGIBLE BUSINESS I.E. THE BACK OFFICE SUPPORT SERV ICES IN VIEW OF THE FOLLOWING JUDICIAL PRONOUNCEMENTS: (I) CIT VS. K K DOSHI, 245 ITR 849 (BOM) (II) ACIT VS. SMT SUBHADRA RAVI KARUNAKARAN, 66 IT D 53 (COCH ) . THEREAFTER THE ASSESSING OFFICER HAS PROCEEDED TO O BSERVE THAT THE PROFITS OF THE BUSINESS HAVE TO BE WORKED OUT ON TH E BASIS OF EXPLANATION (D) BELOW SECTION 80HHE AND IN THIS VIE W OF THE MATTER ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 12 HAS PROCEEDED TO TAKE THE FIGURE OF PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE, WHICH HAS BEEN EXPLAINE D EARLIER. SINCE AFTER APPLYING EXPLANATION (D) AND DEDUCTING THE SUM OF ` 16,11,78,266/- FROM THE PROFITS OF ALL THE BUSINESS ES CARRIED ON BY THE ASSESSEE THE ASSESSING OFFICER ARRIVED AT A NEG ATIVE FIGURE OF ` 1,16,14,062/-, HE REJECTED THE ASSESSEES CLAIM FOR THE DEDUCTION AT THAT POINT ITSELF. HE DID NOT THEREFORE CONSIDE R IT NECESSARY TO EXAMINE THE ASSESSEES OTHER CONTENTION THAT THE TO TAL TURNOVER OF ONLY THE ELIGIBLE BUSINESS SHOULD BE TAKEN NOTE OF FOR THE PURPOSE OF APPLYING THE FORMULA LAID DOWN IN SUB-SECTION (3). 16. THE CONTROVERSY BEFORE US THEREFORE IS LIMITED TO THE QUESTION AS TO WHETHER, WHILE APPLYING SUB-SECTION (3) AND T HE FORMULA PRESCRIBED THEREIN, THE EXPRESSION PROFITS OF THE BUSINESS SHOULD MEAN ONLY THE PROFITS OF THE ELIGIBLE BUSINESS OR T HE PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. WHEREAS THE FIGURE OF ` 15,42,52,035/- ADOPTED BY THE ASSESSING OFFICER REP RESENTS THE AGGREGATE PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE, THE FIGURE OF ` 80,46,765/- WHICH FORMS THE BASIS OF THE ASSESSEE S COMPUTATION REPRESENTS ONLY THE PROFITS OF THE ELIG IBLE BUSINESS (BACK OFFICE SUPPORT SERVICES). THE TASK BEFORE US IS TO EXAMINE WHICH OF THE TWO VIEWS IS CORRECT. 17. ACCORDING TO US, THE VIEW CANVASSED ON BEHALF O F THE ASSESSEE IS TO BE PREFERRED OVER THE VIEW PUT FORTH ON BEHALF OF THE INCOME TAX DEPARTMENT. AS ALREADY NOTED, SUB-SECT ION (3) EXISTS ONLY FOR THE PURPOSES OF SUB-SECTION (1) AND IT SAY S THAT PROFITS DERIVED FROM THE BUSINESS REFERRED TO IN SUB-SECTIO N (1), WHICH IS THE ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 13 ELIGIBLE BUSINESS, SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOV ER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E ASSESSEE. IF REGARD IS HAD TO BE USE OF THE DEFINITE ARTICLE TH E, IT SEEMS TO US THAT THE EXPRESSION PROFITS OF THE BUSINESS APPEA RING IN SUB- SECTION (3) REFERS ONLY TO THE PROFITS OF THE ELIGI BLE BUSINESS WHICH IS REFERRED TO IN SUB-SECTION (1). IN OTHER WORDS, IT IS ONLY THE PROFITS OF THE BUSINESS OF BACK OFFICE SUPPORT SERVICES WHICH HAVE TO BE SPLIT IN THE SAME PROPORTION AS THE EXPORT TURNOVER IN TH E SAID BUSINESS BEARS TO THE TOTAL TURNOVER IN THE SAID BUSINESS. EXPLANATION (D), WHICH DEFINES THE EXPRESSION PROFITS OF THE BUSINE SS REFERS TO THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. UNDER THE INCOME TAX ACT, HAVI NG REGARD TO THE PROVISIONS OF CHAPTER IV READ WITH SECTION 70 AND S ECTION 71, IT SEEMS TO US THAT IN THE CASE OF AN ASSESSEE CARRYIN G ON MORE THAN ONE BUSINESS, EACH BUSINESS IS CONSIDERED AS A SEPA RATE SOURCE FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS. THE NET RESULT OF THE COMPUTATION IN RESPECT OF ANY SOURCE OF BUSINESS, IF IT IS A LOSS, CAN BE ADJUSTED AGAINST THE INCOME FROM ANY OTHER BUSINESS AS PROVIDED IN SECTION 70(1). THEREFORE, WHEN EXPL ANATION (D) PROVIDES THAT THE EXPRESSION PROFITS OF THE BUSINE SS MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS, IT MEANS THE PROFITS OF THE ELI GIBLE BUSINESS AS COMPUTED UNDER THE AFORESAID HEAD. IN OTHER WORDS, EXPLANATION (D) DOES NOT EXPAND THE MEANING OF THE EXPRESSION PROFITS OF THE BUSINESS TO INCLUDE PROFITS OF ALL THE BUSINESSES CARRIED ON BY THE ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 14 ASSESSEE. HAVING SAID IN SUB-SECTION (3) THAT THE PROFITS OF THE BUSINESS MEANS THE PROFITS OF THE ELIGIBLE BUSINESS REFERRED TO IN SUB-SECTION (1), IT IS INCONCEIVABLE THAT BY EXPLAN ATION (D) THE EXPRESSION PROFITS OF THE BUSINESS WOULD HAVE BEE N DEFINED TO INCLUDE THE PROFITS OF ALL THE BUSINESSES CARRIED O N BY THE ASSESSEE. THE EXPLANATION CAN ONLY EXPLAIN THE EXPRESSION PR OFITS OF THE BUSINESS APPEARING IN SUB-SECTION (3), BUT IT CANN OT EXPAND THE MEANING OF THE EXPRESSION. EXPLANATION (D) IS CONT ROLLED BY SUB- SECTION (3) AND WHAT IT SAYS IS ONLY DESCRIPTIVE OF WHAT THE PROFITS OF THE BUSINESS ARE. IT ONLY SAYS THAT THE PROFITS OF THE BUSINESS, WHICH MEANS THE ELIGIBLE BUSINESS, ARE THE PROFITS AS COM PUTED IN THE ASSESSMENT ORDER UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. IT HAS POSSIBLY BEEN ENACTED TO CLARIFY OR EXPLAIN THA T THE PROFITS OF THE ELIGIBLE BUSINESS IS NOT WHAT THE BOOKS OF ACCOUNT OF THE ASSESSEE SHOW AND IT CAN ONLY BE WHAT THE ASSESSMENT ORDER S HOWS. IT IS ALSO SIGNIFICANT THAT SUB-SECTION (3) AS WELL AS EX PLANATION (D) REFER ONLY TO PROFITS OF THE BUSINESS AND NOT THE PROFI TS OF ALL THE BUSINESSES CARRIED ON BY THE ASSESSEE. THIS REASON ING ALSO TAKES CARE OF THE ARGUMENT OF THE LEARNED CIT DR BASED ON SECTION 80- IA(5). IN THIS VIEW OF THE MATTER WE ARE UNABLE TO ACCEPT THE CONTENTION ADVANCED ON BEHALF OF THE DEPARTMENT. 18. OUR VIEW IS IN CONFORMITY WITH THE VIEW TAKEN B Y A CO- ORDINATE BENCH IN MUMBAI IN THE CASE OF DATAMATICS LTD. VS. ACIT (2007) 111 TTJ (MUM) 55. PARAGRAPHS 35 AND 36 OF T HIS ORDER DEAL WITH THE QUESTION. THESE PARAGRAPHS ARE AS UNDER: - 35. IT IS THE CASE OF THE ASSESSEE THAT ASSESSEE COMPANY IS EXPORTING THE COMPUTER SOFTWARE MANUFACTURED IN SEEPZ UNIT. ASSESSEE IS ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 15 KEEPING SEPARATE ACCOUNT. THE ENTIRE ACTIVITY OF THE ASSESSEE IN THIS ZONE IS INDEPENDENT FROM ASSESSEES OTHER BUSINESS. THERE IS NO OVERLAPPING AND MINGLING OF THE SERVICES OR ANY LINK BETWEEN THE MANUFACTURING ACTIVITIES OF BOTH. BOTH ARE EXCLUSIVE OF EACH OTHER. 36. AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL, SECTION 80HHC SPEAKS OF DEDUCTION IN RESPECT OF PROFITS DERIVED BY THE ASSESSEE FROM EXPORT OF SUCH GOODS OR MERCHANDISE; WHEREAS SECTION 80HHE SPEAKS OF SUCH BUSINESS. SUCH BUSINESS ONLY COULD MEAN THE BUSINESS OF EXPORT OF COMPUTER SOFTWARE. THE SCOPE OF CONSIDERATION HAS BEEN NARROWED DOWN. IN OTHER WORDS, WHETHER THE ASSESSEE DERIVES INCOME FROM ANY OTHER BUSINESS OR NOT, IS NOT A CRITERIA AND IT IS WHOLLY EXTRANEOUS WHILE GRANTING DEDUCTION UNDER SECTION 80HHE, WHICH IS EXCLUSIVELY FOR COMPUTING DEDUCTION IN RESPECT OF PROFIT FROM EXPORT OF COMPUTER SOFTWARE ETC. FOR THE REASONS STATED HEREINABOVE, WE ALLOW THE CLAIM OF THE ASSESSEE ON THIS GROUND . IN COMING TO THE ABOVE CONCLUSION THE TRIBUNAL HAS REFERRED TO TWO JUDGMENTS OF THE MADRAS HIGH COURT, IN THE CASE OF CIT VS. RATHORE BROTHERS (2002) 254 ITR 656 (MAD) AND IN THE CASE O F CIT VS. MADRAS MOTORS / M M FORGINGS LTD. (2002) 257 ITR 60 (MAD). THESE TWO JUDGMENTS WERE CONCERNED WITH SECTION 80H HC OF THE ACT. HOWEVER, THERE WAS SIMILARITY BETWEEN SECTION 80HHC AND SECTION 80HHE IN THE SENSE THAT WHILE WORKING OUT T HE ELIGIBLE PROFITS ON THE BASIS OF THE RATIO BETWEEN THE EXPOR T TURNOVER AND THE TOTAL TURNOVER, IT WAS HELD BY THE MADRAS HIGH COUR T THAT IT IS ONLY THE PROFITS OF THE EXPORT BUSINESS THAT HAVE TO BE SO APPORTIONED AND THE PROFITS OF BUSINESSES WHICH DID NOT QUALIFY FOR THE DEDUCTION, WHICH WERE ALSO CARRIED ON BY THE ASSESSEE, CANNOT BE HELD ELIGIBLE ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 16 FOR THE DEDUCTION. THE RATIO LAID DOWN IN THESE JU DGMENTS WAS CONSIDERED APPLICABLE TO THE PROVISIONS OF SECTION 80HHE ALSO. 19. THE RESULT OF THE ABOVE DISCUSSION IS THAT THE DEPARTMENTAL AUTHORITIES WERE NOT CORRECT IN TAKING THE PROFITS OF THE ELIGIBLE BUSINESS AT ` 15,42,52,035/-. THEY OUGHT TO HAVE TAKEN THE FIGUR E AT ` 80,46,765/- AS CONTENDED FOR BY THE ASSESSEE, WHICH FIGURE REPRESENTS THE PROFITS OF THE BACK OFFICE SUPPORT S ERVICES, WHICH IN OTHER WORDS ARE THE PROFITS OF THE ELIGIBLE BUSINES S. 20. WE ARE NOT AT PRESENT CONCERNED WITH THE CONTRO VERSY AS TO WHAT WOULD BE THE EXPORT TURNOVER AND THE TOTAL TUR NOVER FOR PURPOSES OF SUB-SECTION (3) OF SECTION 80HHE OF THE ACT. THAT IS A MATTER WHICH THE ASSESSING OFFICER, WHILE GIVING EF FECT TO OUR ORDER, HAS TO ADJUDICATE UPON IN ACCORDANCE WITH LAW AND A FTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE. THE ASSESSIN G OFFICER HAS NOT EXPRESSED ANY OPINION ON THIS POINT BECAUSE ACC ORDING TO HIS CALCULATION THE FIGURE OF BUSINESS PROFITS WAS NEGA TIVE AND, THEREFORE, EVEN AT THE THRESHOLD THE ASSESSEES CLA IM COULD NOT BE ENTERTAINED. THE GROUND TAKEN BY THE ASSESSEE BEFO RE US IS ALSO (GROUND NO: 4) THAT THE ASSESSING OFFICER OUGHT TO HAVE TAKEN ONLY THE PROFITS OF THE BACK OFFICE SUPPORT SERVICES FOR COMPUTING THE DEDUCTION UNDER SECTION 80HHE OF THE ACT. WHAT WOU LD BE THE EXPORT TURNOVER AND THE TOTAL TURNOVER IS NOT THE S UBJECT MATTER OF THE PRESENT APPEAL. THE GROUND AS TAKEN BY THE ASS ESSEE IS ALLOWED. 21. GROUND NOS: 5.1 AND 5.2 ARE DIRECTED AGAINST TH E DECISION OF THE ASSESSING OFFICER TO REDUCE THE 90% OF VARIOUS RECEIPTS SUCH AS ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 17 COMMISSION, BROKERAGE, ETC. FROM THE FIGURE OF PROF ITS. THE CONTENTION OF THE ASSESSEE IS THAT THE ASSESSING OF FICER OUGHT TO HAVE REDUCED 90% OF THE NET RECEIPTS BY WAY OF COMM ISSION, BROKERAGE, ETC. AGGREGATING TO 17,90,86,962/- AND NOT FROM THE GROSS FIGURE OF SUCH RECEIPTS. SINCE WE HAVE UPHEL D THE ASSESSEES CLAIM THAT THE PROFITS OF THE BACK OFFICE SUPPORT S ERVICES SHOULD BE TAKEN AT ` 80,46,765/-, THESE GROUNDS ARE ACADEMIC AND NEED NO T BE DECIDED. 22. THE SIXTH GROUND RELATES TO THE DISALLOWANCE OF EXPENSES RELATING TO STOCK BROKING ACTIVITIES. THE ISSUE IS DISCUSSED AT PAGE 3 OF THE ASSESSMENT ORDER. THE ASSESSEE WROTE OFF BA D DEBTS OF ` 8,40,920/- AND ALSO CLAIMED DEDUCTION IN RESPECT OF PAYMENT OF ` 8,14,330/- AS PROVIDENT FUND PAYMENT. THE ASSESSEE CLAIMED THAT THE BAD DEBTS ARE IN RESPECT OF DISPUTED / LOS T SHARES IN RESPECT OF BUSINESS CARRIED ON BY THE ASSESSEE ON BEHALF OF THE CLIENTS, ACTING AS A BROKER ON THE BSE / NSE. IT WAS ALSO C LAIMED THAT THE EMPLOYEES WHO WERE LOOKING AFTER THE STOCK BROKING ACTIVITY WERE ASSURED CERTAIN RATE OF RETURN BY THE PROVIDENT FUN D, BUT THE INVESTMENTS MADE BY THE PROVIDENT FUND DID NOT GENE RATE THE EXPECTED RATE OF RETURN AND IN ORDER TO MAKE GOOD T HE DEFICIT THE ASSESSEE WAS OBLIGED TO PAY ` 8,14,330/- TO THE PROVIDENT FUND. 23. THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE AFORESAID TWO ITEMS OF EXPENSES SHOUL D NOT BE DISALLOWED BECAUSE THEY RELATED TO THE STOCK BROKIN G ACTIVITIES CARRIED ON BY THE ASSESSEE TILL 31.03.1999 ONLY AND NOT DURING THE RELEVANT ACCOUNTING YEAR. THE ASSESSEE ADMITTED TH AT THE STOCK ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 18 BROKING ACTIVITY WAS DISCONTINUED AFTER THE ABOVE D ATE BUT POINTED OUT THAT THE ACTIVITIES OF RENDERING BACK OFFICE SU PPORT SERVICES, RENDERING SUPPORT SERVICES TO GROUP ENTITIES AND PR OVIDING BUSINESS PREMISES ALONG WITH FACILITIES TO GROUP ENTITIES WE RE CARRIED ON DURING THE RELEVANT YEAR AND THE EXPENSES / WRITE O FF CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED AGAINST THE PROFITS FROM THE AFORESAID BUSINESSES. THE ASSESSING OFFICER WAS HOWEVER OF T HE VIEW THAT SINCE THE BUSINESS OF STOCK BROKING, WITH REFERENCE TO WHICH THE BAD DEBTS AND PAYMENT TO PROVIDENT FUND WERE INCURRED, HAD BEEN STOPPED, THOSE EXPENSES CANNOT BE ALLOWED AGAINST T HE PROFITS OF THE OTHER BUSINESSES CARRIED ON IN THE RELEVANT ACC OUNTING YEAR. THE VIEW OF THE ASSESSING OFFICER WAS UPHELD BY THE CIT(A) AND HENCE THE PRESENT GROUND. 24. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE CONCLUSION OF THE DEPARTMENTAL AUTHORITIES SUFFERED FROM A SERIOUS INFIRMITY IN LAW AND THAT SINCE ALL THE BUS INESSES CARRIED ON BY THE ASSESSEE WERE INTERTWINED AND INTERRELATED, THEY MUST BE CONSIDERED TO BE A SINGLE BUSINESS AGAINST WHICH TH E CLAIM OF BAD DEBTS AND PAYMENT TO THE PROVIDENT FUND WERE ALLOWA BLE. STRONG RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: - (1) B R LTD. VS. V P GUPTA, CIT (1978) 113 ITR 647 (SC) (2) CIT VS. SINGLA TEA & AGRICULTURE INDUSTRIES LT D. (2001) 250 ITR 274 (CAL) (3) CIT VS. P I SIMON (1991) 187 ITR 302 (KER) (4) WEST BENGAL POWER SUPPLY CO. LTD. VS. ITO (1983) 16 TTJ (CAL) 342 ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 19 IN THE ALTERNATIVE IT WAS CLAIMED THAT ONLY THE NET EXPENSES AFTER CONSIDERING THE INCOME OF ` 41,41,726/- IN RESPECT OF THE STOCK BROKING ACTIVITIES SHOULD BE DISALLOWED. ON THE OT HER HAND, THE LEARNED CIT DR CONTENDED THAT THE PROFITS ASSESSED UNDER SECTION 41(1) OF THE ACT WERE ASSESSABLE UNDER THE HEAD BU SINESS, BUT THE SECTION DOES NOT SAY THAT THE BUSINESS IS DEEME D TO HAVE BEEN CONTINUED IN THE RELEVANT ASSESSMENT YEAR. HE POIN TED OUT THAT ONCE THE BUSINESS IS CLOSED, NO EXPENDITURE RELATIN G TO THE SAID BUSINESS CAN BE ALLOWED AS A DEDUCTION. 25. WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT THE CLAIM OF BAD DEBTS AND THE PAYMENT TO THE PROVIDENT FUND WERE RELATED TO THE S TOCK BROKING BUSINESS WHICH WAS DISCONTINUED ON 31.03.1999. THA T BUSINESS WAS NOT CARRIED ON IN THE RELEVANT PREVIOUS YEAR. IT IS WELL SETTLED, AS POINTED OUT BY THE LEARNED CIT DR THAT EXPENDITU RE RELATING TO A BUSINESS WHICH WAS NOT CARRIED ON DURING THE RELEVA NT PREVIOUS YEAR CANNOT BE ALLOWED AS A DEDUCTION AGAINST THE PROFIT S OF THE OTHER BUSINESSES. THIS PRINCIPLE IS HOWEVER CONDITIONED BY THE RIDER THAT IF ALL THE BUSINESSES CONSTITUTED A SINGLE BUSINESS BECAUSE OF THEIR INTERCONNECTION, INTERLACING, INTERTWINING, ETC., T HEN SUCH EXPENSES WILL BE ALLOWABLE AS A DEDUCTION. DURING THE RELEV ANT YEAR THE ASSESSEE HAS RECEIVED COMMISSION, BROKERAGE AND PRO FITS OF ` 41,41,726/-. THE CIT(A) HAS OBSERVED THAT THIS AMO UNT MAY REPRESENT RECOVERIES OF THE BROKERAGE RELATING TO T HE CLOSED BUSINESS WHICH HOWEVER DOES NOT MEAN THAT THE ASSES SEE WAS CARRYING ON THE STOCK BROKING BUSINESS IN THE RELEV ANT YEAR. HE HAS ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 20 ALSO OBSERVED IN PARAGRAPH 25 OF HIS ORDER THAT THE ASSESSEE WAS NOT RESPONSIBLE FOR THE LOSS OF THE SHARES WHILE DE ALING WITH THE CLIENTS AND THAT THE COST OF REPLACING THE SHARES T O THE CLIENTS WOULD REPRESENT CAPITAL EXPENDITURE. WE ARE UNABLE TO AG REE WITH THIS PART OF HIS DECISION BECAUSE EITHER THE ASSESSEE COULD C OMPENSATE THE CLIENT FOR THE LOSS OR COULD PROCURE THE SHARES. W HICHEVER WAY IT IS DONE, IT CANNOT BE SAID TO BE CAPITAL EXPENDITURE B ECAUSE THE LOSS ARISES IN THE COURSE OF THE CARRYING ON OF THE BUSI NESS. THE CIT(A) HAS ALSO HELD THAT THERE WAS NO AGREEMENT BETWEEN T HE ASSESSEE AND THE CLIENTS THAT THE ASSESSEE WAS RESPONSIBLE F OR SUCH LOSSES. IT MAY BE TRUE THAT THERE MAY NOT HAVE BEEN A WRITT EN AGREEMENT BUT SO LONG AS THE ASSESSEE HAS UNDERTAKEN TO COMPE NSATE THE CLIENT FOR THE LOSS OF THE SHARES, THE BONA FIDE AN D THE GENUINENESS OF THE CLAIM CANNOT BE DOUBTED. IN FACT IT WAS NOT DOUBTED BY THE ASSESSING OFFICER. WE ARE UNABLE TO ACCEPT AS CORR ECT THE CONCLUSION OF THE CIT(A) IN THIS REGARD. THE ASSES SEE HAS RECOVERED SOME BROKERAGE IN THE RELEVANT ACCOUNTING YEAR AS PART OF THE AMOUNT OF ` 41,41,726/- CREDITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD COMMISSION, BROKERAGE AND P ROFITS. APPARENTLY SUCH BROKERAGE REPRESENTS RECOVERY OF BR OKERAGE EARLIER ALLOWED AS IRRECOVERABLE, AND BROUGHT TO ASSESSMENT UNDER SECTION 41(1) OF THE ACT. SECTION 41(1)(A) SAYS THAT ANY B ENEFIT ACCRUING TO THE ASSESSEE IN RESPECT OF ANY DEDUCTION ALLOWED IN AN EARLIER YEAR FOR ANY LOSS, EXPENDITURE OR TRADING LIABILITY SHAL L BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS AND ACCORDINGLY CHARG ED TO TAX AS THE INCOME OF THE PREVIOUS YEAR IN WHICH THE BENEFIT IS OBTAINED, ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 21 WHETHER THE BUSINESS IN RESPECT OF WHICH THE ALLOWA NCE OR DEDUCTION WAS MADE IS IN EXISTENCE IN THAT YEAR OR NOT. THE ASSESSMENT OF SUCH RECOVERIES UNDER THE HEAD BUSIN ESS IS UNDER A DEEMING PROVISION. IN CIT VS. RAMPUR TIMBER & TU RNERY CO. LTD. (1973) 89 ITR 150 (ALL), THE ALLAHABAD HIGH COURT H ELD THAT SECTION 41(1) CREATES A LEGAL FICTION AND THE INEVITABLE CO ROLLARY OF THE FICTION WOULD BE THAT THE BUSINESS WOULD BE DEEMED TO HAVE BEEN CARRIED ON IN THAT YEAR. THIS DECISION WAS CITED BY THE LE ARNED COUNSEL FOR THE ASSESSEE. HOWEVER, IN AKOLA ELECTRIC SUPPLY CO . PVT. LTD. VS. CIT (1978) 113 ITR 265 (BOM), THE HONBLE BOMBAY HI GH COURT HAS TAKEN A DIFFERENT VIEW. IT WAS HELD THAT THE LEGAL FICTION ENACTED IN SECTION 41(2) TO THE EFFECT THAT A BUSINESS IS DEEM ED TO BE IN EXISTENCE IS ONLY FOR THE LIMITED PURPOSE OF BRINGI NG THE BALANCING CHARGE TO TAX AND FOR NO OTHER PURPOSE AND IT CANNO T BE EXTENDED SO AS TO PERMIT DEDUCTION OF EXPENSES INCURRED IN T HE BUSINESS. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT, WE HOLD THAT DESPITE THE FACT THAT SOME RECO VERY OF BROKERAGE RELATING TO THE DISCONTINUED STOCK BROKIN G BUSINESS IS BROUGHT TO TAX UNDER SECTION 41(1)(A) OF THE ACT, T HE ASSESSEE IS NOT ENTITLED TO CLAIM ANY EXPENDITURE AGAINST THE SAID RECEIPT. 26. THE OTHER CONTENTION BASED ON THE JUDGMENT OF T HE SUPREME COURT IN THE CASE OF B R LTD. VS. V P GUPTA, CIT (S UPRA) CANNOT APPLY TO THE PRESENT CASE BECAUSE THE ASSESSEE HAS NOT ADDUCED ANY EVIDENCE TO SHOW THAT THERE WAS INTERLACING, IN TERDEPENDENCE, DOVETAILING, ETC. BETWEEN THE DIFFERENT BUSINESSES OF THE ASSESSEE SO THAT THEY CAN CONSTITUTE A SINGLE BUSINESS. APA RT FROM THAT IN ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 22 RELATION TO THE PAYMENT TO THE PROVIDENT FUND IT IS NOT UNDERSTOOD WHY THE ASSESSEE SHOULD MAKE THE PAYMENT BECAUSE IF THE PROVIDENT FUND IS NOT ABLE TO GIVE GUARANTEED RETUR NS TO THE EMPLOYEES, IN THE ABSENCE OF ANY AGREEMENT, IT IS N OT THE OBLIGATION OF THE ASSESSEE TO MAKE GOOD THE DIFFERENCE. THERE IS NO EVIDENCE OF ANY BUSINESS CONSIDERATIONS INVOLVED IN THE ACT OF THE ASSESSEE. WE ARE IN AGREEMENT WITH THE CONCLUSION OF THE CIT( A) ON THIS POINT IN PARAGRAPH 25.1 OF THE IMPUGNED ORDER. THIS IS A PART FROM THE REASONING THAT NO EXPENDITURE CAN BE CLAIMED AGAINS T RECEIPTS ASSESSED AS PROFITS OF THE BUSINESS UNDER SECTION 4 1(1)(A) OF THE ACT. WE THEREFORE UPHOLD THE DISALLOWANCE OF THE C LAIM OF BAD DEBTS OF ` 8,40,920/- AND PAYMENT OF ` 8,14,330/- TO THE PROVIDENT FUND. THE GROUND IS DISMISSED. 27. THE SEVENTH AND LAST GROUND FOR THIS YEAR RELAT ES TO THE DISALLOWANCE OF DEPRECIATION OF ` 31,350/- ON PURCHASE OF FIGUTSU SCANNER. THE EVIDENCE FOR PURCHASE OF THE SCANNER WAS NOT FURNISHED BEFORE THE ASSESSING OFFICER BUT WAS FURN ISHED BEFORE THE CIT(A). THE CIT(A) IN PARAGRAPH 33 OF HIS ORDER HA S NOT ADMITTED THE EVIDENCE ON THE GROUND THAT THE ASSESSING OFFIC ER HAD GIVEN AMPLE OPPORTUNITY TO THE ASSESSEE TO PROVE HIS CLAI M. HAVING REGARD TO THIS FINDING, WE UPHOLD THE DISALLOWANCE AND DISMISS THE GROUND. 28. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 29. ASSESSMENT YEAR 2004-05 : - THE FIRST GROUND, WHICH IS AGAINST THE ADHOC DISALLOWANCE OF ADMINISTRATIVE AN D OTHER ITA NO: 5072/MUM/2005 ITA NO: 6774/MUM/2008 23 EXPENSES AMOUNTING TO ` 2,98,930/- MADE UNDER SECTION 14A IS DISMISSED AS NOT PRESSED. 30. GROUND NO: 2 RELATES TO THE DEDUCTION UNDER SEC TION 80HHE OF THE ACT AND IS IDENTICAL TO GROUND NO: 4 FOR THE ASSESSMENT YEAR 2001-02. IN LINE WITH OUR DECISION FOR THAT YEAR W E ALLOW THE GROUND SUBJECT TO THE SAME REMARKS MADE THEREIN. 31. GROUND NOS: 3.1 AND 3.2 ARE IDENTICAL TO GROUND NOS: 5.1 AND 5.2 FOR THE ASSESSMENT YEAR 2001-02. IN THAT Y EAR THESE GROUNDS HAVE BEEN HELD TO BE ACADEMIC. ACCORDINGLY FOR THIS YEAR ALSO THE GROUNDS ARE REJECTED AS ACADEMIC. 32. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. 33. TO SUM UP, BOTH THE APPEALS FILED BY THE ASSESS EE ARE PARTLY ALLOWED WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH APRIL 2011. SD/- SD/- (PRAMOD KUMAR) (R V EASWAR) ACCOUNTANT MEMBER PRESIDE NT MUMBAI, DATED 13 TH APRIL 2011 SALDANHA COPY TO: 1. MORGAN STANLEY INDIA SECURITIES PRIVATE LIMITED 18 TH / 19 TH FLOOR, B WING, TOWER 2 ONE INDIA BULLS CENTRE, JUPITER MILLS COMPOUND 841, SENAPATI BAPAT MARG ELPHINSTONE ROAD, MUMBAI 400 013 2. ACIT, CIRCLE 1(2), MUMBAI 3. CIT-CITY I, MUMBAI 4. CIT(A)-I, MUMBAI 5. DR G BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI