HINDUSTAN COLAS LTD, MUMBAI V. ASST CIT CIR 6(3), MUMBAI

ITA 6829/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8524 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 10-10-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 29-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALA; VASANTIBEN PATEL
• Keywords: Depreciation; Period of limitation; Retrospective amendment; Time period of passing order; Revised return
• Section: 10AA; 80IB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6829/MUM/2010 ASSESSMENT YEAR : 2002-03 ITA NO. 5498/MUM/2008 ASSESSMENT YEAR : 2003-04 ITA NO. 3981/MUM/2008 ASSESSMENT YEAR : 2004-05 M/S. HINDUSTAN COLAS LIMITED 5 TH FLOOR RICHARDSON & CRUDDAS BUILDING, SIR, J.J. ROAD BYCULLA MUMBAI-400 008. PAN NO. AAACH1172 P ASSTT. COMMISSIONER OF INCOME TAX , CIRCLE 6(3) AAYAKAR BHAVAN MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI P.J. PARDIWALA AND MS. VASANTIBEN PATEL RESPONDENT BY : SHRI K.C.P. PATNAIK DATE OF HEARING : 10.10.12 DATE OF PRONOUNCEMENT : 19.10.12 O R D E R PER RAJENDRA SINGH, AM: THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERE NT ORDERS OF CIT(A) DATED 11.3.2010, 1.5.2008 AND 28.3 .2006 RESPECTIVELY FOR ASSESSMENT YEARS 2002-03, 2003-04 AND 200 4-05. THE DISPUTES RAISED IN THESE APPEALS RELATE TO ALLOWABIL ITY OF DEDUCTION UNDER SECTION 80IB AND UNDER SECTION 35AB OF THE INCOME TAX ACT, ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 2 1961. THESE APPEALS WHICH WERE HEARD TOGETHER AND ALSO INVOLVE COMMON ISSUES ARE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.6829/M/10 FOR THE ASSESSMENT YEAR 2002-03 . THE ASSESSEE HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS WHICH RELATE T O DEDUCTION UNDER SECTION 8-IB AND UNDER SECTION 35AB OF THE INCOME TAX ACT. 2.1 WE FIST TAKE UP THE ISSUE RELATING TO ALLOWABILITY OF DEDUCTION UNDER SECTION 80IB OF THE ACT. THE ASSESSEE IS A JOINT VENT URE BETWEEN HINDUSTAN PETROLEUM CORPORATION LTD.(HPCL) AND M/S. CO LAS SA FRANCE FORMED VIDE AGREEMENT DATED 25.11.1994. THE JOINT V ENTURE HAD BEEN CREATED FOR MANUFACTURE OF VARIOUS PRODUCTS SUCH AS BITUMEN EMULSIONS; CUTBACK BITUMEN AND MODIFIED BITUMEN. BITUM EN IS A BY- PRODUCT PRODUCED FROM REFINING OF CRUDE OIL OR CRUDE P ETROLEUM. THE ASSESSEE PURCHASES BITUMEN FROM HPCL AND OTHER PARTIES AND USES THE SAME AS RAW MATERIAL FOR PRODUCTION OF BITUMEN EMULSION S; CUTBACK BITUMEN AND MODIFIED BITUMEN AFTER APPLYING CERTAIN PROCESSES. AFTER JOINT VENTURE AGREEMENT WAS SIGNED, THE ASSESSEE SET UP VA RIOUS UNITS FROM TIME TO TIME DETAILS OF WHICH ARE GIVEN AS UNDER :- ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 3 S. NO. LOCATION DATE OF ESTABLISHMENT 1 BAHADURGARH, HARYANA 26 TH MARCH, 1998 2 IRUGATTUKOTTAI, NEAR CHENNAI 24 TH FEBRUARY, 2000 3 SAVLI, NEAR VADODARA 6 TH FEBRUARY, 2003 4 VISAKH 24 TH JUNE, 2004 5 MANGALORE 31 ST DECEMBER, 2004 2.1.1 THE ASSESSEE FOR THE ASSESSMENT YEAR 2002-03 HAD NOT CLAIMED DEDUCTION UNDER SECTION 80IB OF THE ACT IN THE O RIGINAL ASSESSMENT. THE ASSESSEE MADE CLAIM UNDER SECTION 80IB IN RESP ECT OF BAHADURGARH UNIT AND IRUGATTUKOTTAI UNIT IN APPL ICATION UNDER SECTION 264 BEFORE CIT. CIT IN THE ORDER DATED 12.12. 2007 PASSED UNDER SECTION 264 SET ASIDE THE ASSESSMENT FOR PASSING FRESH ASSESSMENT ORDER TO CONSIDER THE CLAIM UNDER SECTION 80IB. D URING THE FRESH ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE CLAIM O F DEDUCTION HAD BEEN DISALLOWED IN ASSESSMENT YEARS 2003-04 AND 2004-05. THE AO ALSO NOTED THAT FOR CLAIM OF DEDUCTION UNDER SECTION 80IB, THE CONDITIONS MENTIONED IN SECTION 80IB(2) WERE REQUIRED TO BE SATISFIED AS UNDER :- I) THE INDUSTRIAL UNDERTAKING SHOULD NOT BE FORMED BY SP LITTING UP OR RECONSTRUCTION OF A BUSINESS ALREADY IN EXISTENCE; II) IT IS NOT FORMED BY TRANSFER TO A NEW BUSINESS OF MACHI NERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE; III) IT MANUFACTURES OR PRODUCES ANY ARTICLE OR THING NOT BE ING ANY ARTICLE OR THING SPECIFIED IN LIST OF ELEVENTH SCH EDULE OR ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 4 OPERATES ONE OR MORE COLD STORAGE PLANT OR PLANTS IN AN Y PART OF INDIA; IV) IN A CASE WHERE INDUSTRIAL UNDERTAKING MANUFACTURES OR PRODUCES ARTICLES OR THINGS, THE UNDERTAKING EMPLOYEES TEN OR MORE WORKERS IN MANUFACTURING PROCESS CARRIED ON WITH THE AID OF POWER OR EMPLOYEES TWENTY OR MORE WORKERS IN MANUFACTURING PROCESS CARRIED ON WITHOUT AID OF POWER. 2.1.2 THE AO ALSO NOTED THAT THE CLAIM OF DEDUCTION B Y THE ASSESSEE WAS UNDER SECTION 80IB(9) WHICH APPLIES TO MANUFACTURE/PRODUCTION OF MINERAL OIL OR REFINING OF MINERAL OIL. THE SAID PROVISIONS OF SECTION 80IB ARE REPRODUCED BELOW AS R EADY REFERENCE:- THE AMOUNT OF DEDUCTION TO AN UNDERTAKING WHICH BEGINS COMMERCIAL PRODUCTION OR REFINING OF MINERAL OIL SHALL BE HUNDRED PER CENT OF THE PROFITS FOR A PERIOD OF SEVEN CONSECUTIVE ASSESSMENT YEARS INCLUDING THE INITIAL ASSESSMENT YEAR: PROVIDED THAT WHERE THE UNDERTAKING IS LOCATED IN NORTH-EASTERN REGION, IT HAS BEGUN OR BEGINS COMMERCIAL PRODUCTION OF MINERAL OIL BEFORE THE 1 ST DAY OF APRIL, 1997 AND WHERE IT IS LOCATED IN ANY PAR T OF INDIA, IT BEGINS COMMERCIAL PRODUCTION OF MINERAL OIL ON OR AFTER THE 1 ST DAY OF APRIL, 1997 : PROVIDED FURTHER THAT WHERE THE UNDERTAKING IS ENGAGED IN REFINING OF MINERAL OIL, IT BEGINS REFINI NG ON OR AFTER THE 1 ST DAY OF OCTOBER, 1998. 2.1.3 DURING THE ASSESSMENT PROCEEDINGS, THE AO ASKED TH E ASSESSEE TO GIVE JUSTIFICATION FOR TREATING THE ASSESSEE AS I NDUSTRIAL UNDERTAKING PRODUCING/MANUFACTURING MINERAL OIL. THE ASSESSEE ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 5 SUBMITTED THAT IT WAS PRODUCING BITUMEN EMULSIONS; CUTBA CK BITUMEN AND MODIFIED BITUMEN WHICH WERE MIXTURE OF HYDROCARBO NS WHICH HAD TO BE TREATED AS MINERAL OIL IN VIEW OF CIRCULAR NO. 57 DATED 23.3.1971 OF CBDT (F.NO.156(26)/71-TPL). THE ASSESSEE ALSO FILED T HE OPINION DATED 27.11.2006 OF IIT CHENNAI GIVEN IN REFERENCE T O LETTER DATED 23.11.2006 OF THE ASSESSEE IN WHICH IT WAS MENTIONED THAT THE PRODUCTS MANUFACTURED BY THE ASSESSEE WERE A MIXTURE OF HYDROCARBONS. IT WAS ACCORDINGLY SUBMITTED THAT THE PRODU CTS WERE MINERAL OIL ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. THE AO HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT RAW MATERIAL I.E. BITUMEN WAS ALREADY MANUFACTURED FROM CR UDE OIL AND THEREFORE FURTHER PROCESSING OF THIS RAW MATERIAL INTO MODIFIED BITUMEN, BITUMEN EMULSIONS AND CUT BACK BITUMEN WAS NO T ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. THE AO ALSO OBSERVED THAT THE ASSESSEE IN THE LETTER DATED 23.11.2006 HAD REFERRED TO TWO ISSUES TO IIT CHENNAI VIZ. (I) WHETHER BITUMEN EMULSION, CUTBACK B ITUMEN AND MODIFIED BITUMEN WERE MIXTURES OF HYDROCARBONS. (II) A ND WHETHER THE SAME COULD BE CATEGORIZED AS MINERAL OIL. IIT-CHENNAI HOWEVER ANSWERED ONLY THE FIRST ISSUE AND DID NOT REPLY THE SECON D ISSUE WHICH WAS CRUCIAL FOR DECIDING THE ALLOWABILITY OF DEDUCTION. THE AO ALSO REFERRED TO THE JUDGMENT OF HON'BLE HIGH COURT OF BO MBAY IN CASE OF CIT VS. CALTEX (INDIA) LTD.(177 ITR 239) IN WHICH THE COURT HAD TAKEN ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 6 THE VIEW THAT LUBRICATING OIL PRODUCED BY PROCESSING OR BLENDING OF MINERAL BASE OIL COULD NOT BE CONSIDERED AS MINERAL OIL . THE AO, THEREFORE, DID NOT ACCEPT THE CLAIM THAT THE ASSESSEE WAS ENGAGED IN THE COMMERCIAL PRODUCTION OR REFINING OF MINERAL OIL A ND ACCORDINGLY HELD THAT ASSESSEE WAS NOT ELIGIBLE FOR DEDUCTION UNDER SE CTION 80IB. 2.1.4 THE AO FURTHER OBSERVED THAT THE ASSESSEE WAS ALSO NOT ENTITLED FOR DEDUCTION UNDER SECTION-80IB ON ACCOUNT OF NON-FULFILLMENT OF CONDITIONS OF SECTION 80IB(2). HE REFERRED TO THE RE PLY DATED 18.11.2006 OF THE ASSESSEE IN WHICH IT WAS SUBMITTED THAT NUMBER OF EMPLOYEES ENGAGED IN THE MANUFACTURING PROCESS WERE SIX I N CASE OF BAHADURGARH UNIT AND SEVEN IN CASE OF IRUGATTUKOTTAI U NIT. THUS, NUMBER OF EMPLOYEES ENGAGED IN THE MANUFACTURING UNI T WAS LESS THAN 10 WHICH DISENTITLED THE ASSESSEE FOR DEDUCTION UNDER SECTIO N 80IB. THE AO ALSO OBSERVED THAT THE ASSESSEE DID NOT FULFILL TH E CONDITION OF NEW PLANT AND MACHINERY BEING USED FOR THE UNDERTAKIN G. IT WAS OBSERVED BY HIM THAT THE UNITS HAD STARTED PRODUCTION F ROM 1998 TO 2000 AND DEDUCTION HAD NOT BEEN CLAIMED IN THE INITI AL YEARS. THEREFORE IN THE YEAR 2001-02 IN WHICH CLAIM WAS MADE, PLANT AND MACHINERY HAD ALREADY BEEN USED IN INDIA AND THEREFOR E, ASSESSEE DID NOT FULFILL THE CONDITION IN RESPECT OF IRUGATTUKOTTAI UNIT AND BAHADURGARH UNIT. FURTHER, THE BAHADURGARH UNIT WAS ALSO NOT ELIGIBLE FOR DEDUCTION ON THE GROUND THAT IT HAD STARTED COMMER CIAL PRODUCTION ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 7 OF MINERAL OIL FROM 26.3.1998 WHEREAS AS PER SECTION 8 0IB(9), THE REFINING OF MINERAL OIL HAD TO BEGIN AFTER 1.10.19 98. THEREFORE, BAHADURGARH UNIT WAS NOT ELIGIBLE FOR DEDUCTION ON TH IS ADDITIONAL GROUND ALSO. 2.1.5 THE AO FURTHER NOTED THAT THE ASSESSEE HAD ALSO CLAIMED DEDUCTION UNDER SECTION 80IB IN RESPECT OF CERTAIN OTHER INCOME SUCH INTEREST INCOME, FOREIGN EXCHANGE GAIN ETC. IT WAS OBSERV ED BY HIM THAT DEDUCTION UNDER SECTION 80IB WAS AVAILABLE ONLY IN RESPECT OF PROFIT DERIVED FROM BUSINESS OF THE INDUSTRIAL UNDERTAK ING . THESE RECEIPTS WERE NOT INCOME DERIVED FROM INDUSTRIAL UNDERT AKING BUT WERE INCIDENTAL TO BUSINESS OF UNDERTAKING AND WERE THUS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. THE AO PLACED RELIANCE ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF STERLING FOOD (237 ITR 519) AND SOME OTHER JUDGMENTS. HE ACCORDINGLY HELD THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION IN RESPECT OF OTHER INCOME MENTIONED ABOVE. 2.1.6 IN APPEAL CIT(A) AGREED WITH THE FINDING RECO RDED BY THE AO THAT THE ASSESSEE WAS NOT ENGAGED IN PRODUCTION OR MAN UFACTURE OF MINERAL OIL AND ALSO DID NOT SATISFY THE CONDITIONS MENT IONED IN SECTION 80IB(2). CIT(A) ALSO UPHELD THE DISALLOWANCE IN RESPECT OF OTHER ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 8 INCOME. HE, THEREFORE, CONFIRMED THE DISALLOWANCE MADE B Y AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE T RIBUNAL. 2.1.7 BEFORE US, THE LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND ARGUE D THAT THE ASSESSEE WAS IN THE BUSINESS OF PRODUCTION OF MINERAL OIL. T HE ASSESSEE WAS PRODUCING BITUMEN EMULSION, CUTBACK BITUMEN AND MODIFIED BITUMEN BY USING BITUMEN AS RAW MATERIAL. T HESE PRODUCTS WERE A MIXTURE OF HYDROCARBONS AS MENTIONED IN THE REP ORT OF IIT- CHENNAI. THE ASSESSEE WAS THEREFORE PRODUCER OF MINERAL OIL IN TERMS OF CBDT CIRCULAR NO.57 DATED 23.3.1971 AND WAS THUS EN TITLED FOR DEDUCTION UNDER SECTION 80IB(9). THE LD. AR FOR THE ASSE SSEE ALSO SUBMITTED THAT THE WORD PRODUCTION HAD WIDER CONNOTA TION THAN THE WORD MANUFACTURE. PRODUCTION BRINGS INTO EXISTENCE N EW GOODS BY A PROCESS WHICH MAY OR MAY NOT AMOUNT TO MANUFACTURE. HE R EFERRED TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SESA GOA LTD. (271 ITR 331) IN WHICH IT WAS HELD THAT EXT RACTION AND PROCESSING OF ORE WAS PRODUCTION THOUGH THE MINED ORE NE ED NOT NECESSARILY BE A NEW COMMERCIAL PRODUCT. THE SAID JUDGMENT IT WAS POINTED OUT WAS FOLLOWED BY THE HON'BLE SUPREME COURT IN THE CASE OF ITO VS. ARIHANT TILES AND MARBLES P. LTD. (320 ITR 79 ) IN WHICH CUTTING OF MARBLE BLOCKS INTO SLABS AND TILES WAS HELD AS PRODUCTIO N OF GOODS ENTITLED FOR DEDUCTION UNDER SECTION 80IB. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 9 2.1.8 THE LD. AR FURTHER ARGUED THAT THE ASSESSEE HA D CLAIMED DEDUCTION UNDER SECTION 80IB(9) WHICH WAS APPLICABLE TO AN UNDERTAKING AND NOT INDUSTRIAL UNDERTAKING. IT WAS P OINTED OUT THAT ONLY SUB SECTIONS (3), (4) AND (5) OF SECTION 80IB RELATE D TO INDUSTRIAL UNDERTAKINGS. SINCE THE VARIOUS CONDITIONS IMPOSED UNDER SECTION 80IB(2) RELATED TO INDUSTRIAL UNDERTAKINGS, THESE COND ITIONS WERE NOT APPLICABLE IN CASE OF THE ASSESSEE WHICH WAS COVERED BY SECTIO N 80IB(9). THEREFORE, THE DISALLOWANCE OF CLAIM BY AO ON OTHER GROUNDS SUCH AS LESSER NUMBER OF WORKERS OR PLANT AND MACHINERY BE ING OLD WAS NOT JUSTIFIED. HE REFERRED TO THE DECISION OF THE TR IBUNAL IN THE CASE OF ASSTT. COMMISSIONER OF INCOME TAX VS. NIKO RESOURCES L TD IN (123 TTJ 310) FOR ASSESSMENT YEAR 2001-02 AND THE DECISIO N OF THE TRIBUNAL IN THE SAME CASE FOR ASSESSMENT YEAR 2003-04 IN I TA NO.97/AHD./07 IN SUPPORT OF THE ABOVE PROPOSITION. A S REGARDS, THE NUMBER OF WORKERS, IT WAS ALSO POINTED OUT THAT CASUAL WORKERS AND CONTRACT WORKERS WERE REQUIRED TO BE TAKEN INTO ACCOUNT AND NOT ONLY THE REGULAR EMPLOYEES AS HELD BY HON'BLE HIGH COURT OF BOMBAY IN CASE OF CIT VS. JYOTI PLASTIC WORKS PRIVATE LIMITED (339 ITR 491). TAKING INTO ACCOUNT THE CASUAL/CONTRACT WORKERS, THE ASSESSEE DID FULFILL THE CONDITION OF REQUISITE NUMBER OF WORKERS B EING FULFILLED. COMING TO THE ALLOWABILITY OF DEDUCTION IN RESPECT OF OTHER INCOME, IT WAS SUBMITTED THAT MARKET DEVELOPMENT INCENTIVE WAS FIN ANCIAL ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 10 ASSISTANCE PROVIDED BY HPCL AND WAS INTEGRAL PART OF BU SINESS AND SHOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. SI MILARLY INCOME FROM JOB WORK FROM HPCL, INCOME FROM HPCL HOSPITALITY, RECOVERY OF DRUMS AND FOREIGN EXCHANGE GAIN WERE INTEGRAL PART OF THE BUSINESS OF THE UNDERTAKING AND SHOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB . 2.1.9 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RE LIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS THAT THE PROD UCTS PRODUCED BY THE ASSESSEE WERE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB. THE LD. DR ALSO REFERRED TO THE HEADING OF SECTION 80IB WH ICH READS AS :- DEDUCTION IN RESPECT OF PROFIT AND GAINS FROM CERTAIN I NDUSTRIAL UNDERTAKING OTHER THAN INFRASTRUCTURE DEVELOPMENT UN DERTAKINGS WHICH SHOWED THAT THE WORD INDUSTRIAL UNDERTAKING AP PLIED TO ALL SUB SECTIONS AND NOT ONLY TO SUB SECTION (3), (4) AND (5). TH EREFORE, CONDITIONS MENTIONED UNDER SUB SECTION (2) WERE APPLICABL E TO ALL THE BUSINESSES MENTIONED IN OTHER SUB-SECTIONS. SINCE THESE CONDI TIONS WERE NOT FULFILLED IN THE CASE OF THE ASSESSEE, DEDUCTION UNDER SECTION 80IB WAS NOT ALLOWABLE. HE ALSO SUPPORTED THE STAND OF T HE AO THAT ITEMS OF OTHER INCOME WERE NOT DERIVED FROM THE BUSINE SS OF THE UNDERTAKING AND, THEREFORE, NOT ELIGIBLE FOR DEDUCTI ON. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 11 2.1.10 IN REPLY, LD. AR FOR THE ASSESSEE SUBMITTED TH AT MARGINAL NOTE COULD NOT CONTROL INTERPRETATION OF THE SECTION AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF K.P. VARGHESE VS. ITO (131 ITR 597) . IT WAS SUBMITTED THAT IT IS THE ACTUAL USE OF WORDS OR PHRASES IN THE SECTION WHICH WILL BE DECISIVE IN PROPER IN TERPRETATION OF THE SECTION AND NOT THE HEAD NOTE OR MARGINAL NOTE . IT WAS POINTED OUT THAT IN SECTION 80IB, BOTH THE WORDS INDUSTRIAL UN DERTAKING AND UNDERTAKING HAD BEEN USED AND SINCE THE CONDITIONS MEN TIONED IN SECTION 80IB(2) RELATED TO INDUSTRIAL UNDERTAKINGS, THE SAME WOULD NOT APPLY TO UNDERTAKINGS APPEARING IN OTHER SUB SECTIONS SU CH AS SUB SECTION(9) WHICH WAS APPLICABLE TO THE ASSESSEE. 2.1.11 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING A LLOWABILITY OF DEDUCTION UNDER SECTION 80IB OF THE INCOME TAX ACT,1961 (THE ACT). THE ASSESSEE HAS CLAIMED TO MANUFACTURE/PRODUCE PRODUCTS SUCH A S BITUMEN EMULSION, CUTBACK BITUMEN AND MODIFIED BITUMEN USING BITUMEN AS RAW MATERIAL. THE ASSESSEE USED BITUMEN AS RAW MATERIAL AND PRODUCED THE ABOVE PRODUCTS AFTER APPLYING CERTAIN PROCESSES. THE ISSUE IS WHETHER SUCH PRODUCTS CAN BE CONSIDERED AS MINERAL O IL AS THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 80IB(9) WHICH IS AVAILABLE IN RESPECT OF MANUFACTURE/PRODUCTION OF MINER AL OIL OR REFINING OF MINERAL OIL. THE RAW MATERIAL I.E. BITU MEN USED BY THE ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 12 ASSESSEE IS A BY-PRODUCT PRODUCED ON REFINING OF CRUDE OIL OR CRUDE PETROLEUM. THE ASSESSEE HAS REFERRED TO CIRCULAR NO.57 DA TED 23.3.1971 AS PER WHICH MINERAL OIL COVERS BOTH CRUDE OIL OR LIQUID PRODUCTS DERIVED FROM CRUDE PETROLEUM WHICH ARE IN THE NATURE OF MIXTURE OF HYDROCARBONS, NAMELY, MOTOR SPIRIT, KEROSENE AND OTHER ALLIED ARTICLES. THE ASSESSEE HAS ALSO REFERRED TO THE OPIN ION DATED 27.11.2006 GIVEN BY IIT CHENNAI IN WHICH IT HAS BEEN OPINED THAT BITUMEN EMULSION, CUTBACK BITUMEN AND MODIFIED BITUMEN ARE MIXTURE OF HYDROCARBONS. ACCORDINGLY IT HAS BEEN ARGUED THAT PR ODUCTS MANUFACTURED BY THE ASSESSEE ARE MINERAL OIL ELIGIBLE F OR DEDUCTION UNDER SECTION 80IB. 2.1.12 THE WORD MINERAL OIL HAS NOT BEEN DEFINED I N THE INCOME TAX ACT. HOWEVER, THE INTERPRETATION OF THE SAID WORD HAD COME UP FOR CONSIDERATION BEFORE THE HON'BLE HIGH COURT OF BOMBAY I N CASE OF CIT VS. CALTEX INDIA LTD. (177 ITR 239). IN THAT CASE THE ASSESSEE WAS PRODUCING LUBRICATING OIL BY PROCESSING/ BLENDING MINERA L BASE OIL AND ISSUE WAS WHETHER LUBRICATING OIL COULD BE CONSIDERED AS MI NERAL OIL. THE HON'BLE HIGH COURT HELD THAT MINERAL OIL REFERRED TO OIL THAT IS EXTRACTED FROM THE EARTH. IT WAS ALSO HELD THAT ANY AR TICLE PRODUCED USING MINERAL BASE OIL COULD NOT BE CONSIDERED AS MINERA L OIL. IT WAS ACCORDINGLY HELD THAT LUBRICATING OIL WAS NOT MINERAL O IL. IN THAT CASE THE CIRCULAR NO.57 DATED 23.3.1971 HAD BEEN REFERRED BEFORE THE ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 13 HON'BLE HIGH COURT. THE HON'BLE HIGH COURT OBSERVED THAT EVEN THE SAID CIRCULAR DID NOT COME TO THE RESCUE OF THE ASSESSEE AS THE LUBRICATING OIL WAS NOT MIXTURE OF HYDROCARBONS. IT WAS NOT MINERAL OIL AS EXTRACTED OR REFINED. THE CLAIM WAS THUS REJECTED. 2.1.13 IN THE PRESENT CASE, THE ASSESSEE HAD REFERRED TWO ISSUES BEFORE IIT-CHENNAI (I) WHETHER PRODUCTS MANUFACTURED BY THE ASSESSEE WERE MIXTURE OF HYDROCARBONS; (II) WHETHER THESE COULD BE CHARACTERIZED AS MINERAL OIL. IIT-CHENNAI ANSWERED ONL Y THE FIRST QUERY AND HELD THAT THESE PRODUCTS WERE MIXTURE OF HYD ROCARBONS BUT WAS SILENT ON THE OTHER ISSUE. IN TERMS OF THE BOARD CI RCULAR NO.57 DATED 23.3.1971, NOT ONLY CRUDE PETROLEUM BUT ALSO TH E LIQUID PRODUCTS DERIVED FROM CRUDE PETROLEUM I.E. MOTOR SPIRIT, KEROSE NE ETC. WHICH ARE IN THE NATURE OF MIXTURE OF HYDROCARBONS HAVE TO BE CO NSIDERED AS MINERAL OIL. BITUMEN IS THE BASE MATERIAL PRODUCED ON REFINING OF CRUDE PETROLEUM. IT HAS NOT BEEN EXAMINED WHETHER BITUMEN CAN BE CONSIDERED AS LIQUID PRODUCT HAVING VISCOSITY RECOGNIZED F OR LIQUIDS. IF BITUMEN IS NOT FOUND TO BE MINERAL OIL THEN THE PROD UCTS PRODUCED BY ASSESSEE USING BITUMEN CANNOT BE CONSIDERED AS MINERAL OIL A S THESE HAVE NO CONNECTION WITH THE MINERAL BASE OIL. HOWEVER, IN CASE BITUMEN IS FOUND TO BE A MINERAL OIL IN TERMS OF THE DEFINITION GIVEN BY CBDT IN CIRCULAR NO.57 DATED 23.03.1971, IT IS FURTH ER REQUIRED TO BE SEEN WHETHER BITUMEN EMULSION, CUTBACK BITUMEN AND MODI FIED ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 14 BITUMEN PRODUCED FROM BITUMEN CAN BE CONSIDERED AS MINER AL OIL. THESE PRODUCTS HAVE BEEN HELD TO BE MIXTURE OF HYDROCAR BONS IN THE OPINION GIVEN BY IIT CHENNAI BUT IT IS NOT CLEAR WHET HER THESE CAN BE CONSIDERED AS LIQUID PRODUCTS. FURTHER, IN CASE THESE PRO DUCTS ARE FOUND TO BE MINERAL OIL, IT IS FURTHER REQUIRED TO BE EXAMINED WHETHER THESE HAVE BEEN PRODUCED BY REFINING OF MINERAL OIL O R OTHERWISE BECAUSE IN CASE OF REFINING OF MINERAL OIL, DEDUCTION UN DER SECTION 80 IB (9) IS AVAILABLE ONLY WHEN THE REFINING BEGINS ON OR AFTER 1.10.1998. BUT IN CASE OF MANUFACTURE OR PRODUCTION OF MINERAL OIL , DEDUCTION IS AVAILABLE IF COMMERCIAL PRODUCTION BEGINS ON OR AFTER 1.4.1997. THE ASSESSEE HAS CLAIMED THAT IT IS A PRODUCER OF MINERAL OIL AND NOT REFINER OF MINERAL OIL WHICH HAS NOT BEEN EXAMINED. THIS IS A HIGHLY TECHNICAL AREA ON WHICH WE ARE UNABLE TO ARRIVE AT ANY PARTICULAR CONCLUSION AND IN OUR VIEW MATTER IS REQUIRED TO BE RE FERRED TO IIT, AGAIN AS IT FAILED TO GIVE OPINION WHETHER THE PRODU CTS WERE MINERAL OIL, AFTER GIVING NECESSARY DETAILS REGARDING THE RAW MATER IAL, THE PRODUCTS PRODUCED AND PROCESS EMPLOYED. IT IS ALSO REQUIRED TO BE EXAMINED WHETHER THE PROCESS EMPLOYED BY THE ASSESSEE IS REFINING OF BITUMEN OR MANUFACTURE/PRODUCTION OF NEW PRODUCTS USING BITUMEN AS RAW MATERIAL. WE, THEREFORE, SEND BACK THE ISSUE AS TO WHETH ER ASSESSEE IS PRODUCER OR REFINER OF MINERAL OIL TO THE FILE OF CI T(A) FOR PASSING FRESH ORDER AFTER OBTAINING EXPERT OPINION AND AFTER NECESSA RY EXAMINATION. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 15 NEEDLESS TO SAY THAT ASSESSEE WILL BE GIVEN OPPORTUNITY OF HEARING BEFORE TAKING THE FINAL DECISION. 2.1.14 THE AUTHORITIES BELOW HAVE ALSO REJECTED THE CLA IM OF DEDUCTION UNDER SECTION 80IB ON THE GROUND THAT THE AS SESSEE HAD FAILED TO FULFILL THE CONDITIONS PRESCRIBED UNDER SECTIO N 80 IB(2) RELATING TO ENGAGEMENT OF CERTAIN MINIMUM NUMBER OF BROKERS A ND SETTING UP OF INDUSTRY BY USING NEW PLANT AND MACHINERY. THE CO NDITIONS TO BE FULFILLED UNDER SECTION 80IB(2) HAVE BEEN MENTIONED I N PARA 2.1.1 EARLIER. LD. AR FOR THE ASSESSEE ARGUED THAT CONDITIONS UNDER SECTION 80IB(2) ARE REQUIRED TO BE FULFILLED IN CASE OF INDUST RIAL UNDERTAKINGS WHEREAS, THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 8 0IB(9) WHICH APPLIES TO UNDERTAKINGS. THEREFORE, THE CONDITI ONS MENTIONED IN SECTION 80IB(2) ARE NOT APPLICABLE IN THE CASE OF THE ASSE SSEE. RELIANCE HAS BEEN PLACED ON THE DECISION OF THE TRIBUNA L IN THE CASE OF NIKKO RESOURCES LTD. (SUPRA), AND ON THE DECISION OF T HE TRIBUNAL IN THE SAME CASE FOR ASSESSMENT YEAR 2003-04 IN ITA NO.97/AHD /07. 2.1.15 WE HAVE CAREFULLY CONSIDERED THE ISSUE. THE PHRA SE INDUSTRIAL UNDERTAKING HAS NOT BEEN DEFINED IN SECTI ON 80IB. THE PHRASE INDUSTRIAL UNDERTAKING HAS BEEN DEFINED IN THE EXPLANATION TO SECTION 33B AS PER WHICH IT MEANS AN UNDERTAKING WHICH I S MAINLY ENGAGED IN THE BUSINESS OF GENERATION OR DISTRIBUTION OF ELECTRICITY OR ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 16 ANY OTHER FORM OF POWER OR IN THE CONSTRUCTION OF SHIPS OR IN MANUFACTURE OR PROCESSING OF GOODS OR IN MINING. THUS THE PHRASE INDUSTRIAL UNDERTAKING AMONG OTHER THINGS MEANS A N UNDERTAKING MANUFACTURING OR PRODUCING ANY GOODS. SECTION 80IB AP PLIES TO VARIOUS BUSINESSES AS MENTIONED IN SUB SECTION (3) TO SUB SE CTION (11B) SOME OF WHICH RELATE TO INDUSTRIAL UNDERTAKINGS P RODUCING CERTAIN ARTICLE OR GOODS NOT BEING ARTICLE OR THING LIS TED IN THE ELEVENTH SCHEDULE WHILE OTHERS RELATE TO NON-MANUFACTURING BUSI NESSES SUCH AS BUSINESS OF SHIPPING, RUNNING OF HOTEL, MULTIPLEX THEA TRE, SCIENTIFIC RESEARCH ETC. THE SUB- SECTIONS (3) TO SUB SECTION (11B) GIV E RATE OF DEDUCTION DEPENDING UPON STATUS OF THE ASSESSEE, NATURE O F BUSINESS CARRIED ON AND ALSO MENTIONS THE PERIOD FOR WHICH DEDUCT ION IS AVAILABLE. THE SUB-SECTIONS (3) TO (5) ARE APPLICABLE T O INDUSTRIAL UNDERTAKINGS MEANING THEREBY UNDERTAKINGS MANUFACTURIN G OR PRODUCING ARTICLE OR THINGS. IN SUB-SECTION (11) ALSO, THE PHRASE INDUSTRIAL UNDERTAKING HAS BEEN USED AS IT REFERS TO SETTING UP AND OPERATION OF COLD STORAGE PLANT, WHICH HAS BEEN REFERRE D TO AS INDIVIDUAL UNDERTAKING IN SUB-SECTION(2). IN OTHER SUB -SECTIONS, THE WORD INDUSTRIAL UNDERTAKING HAS NOT BEEN MENTIONED. IN SUB-SECTION (9), THE WORD UNDERTAKING HAS BEEN USED AND IN THIS SUB-SECTION RATE OF DEDUCTION AS WELL AS PERIOD FOR WHICH IT IS ALLOWABL E HAS BEEN GIVEN IN RESPECT OF COMMERCIAL PRODUCTION OF MINERAL OIL, NATU RAL GAS OR ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 17 REFINING OF MINERAL OIL. ANY UNDERTAKING PRODUCING M INERAL OIL OR GAS HAS TO BE CONSIDERED AS INDUSTRIAL UNDERTAKING IN TERMS O F THE DEFINITION OF THE TERM DISCUSSED EARLIER. THE ASSESSEE ADM ITTEDLY IS MANUFACTURING/PRODUCING VALUE ADDED PRODUCTS BY USING B ITUMEN AS RAW MATERIAL AFTER APPLYING CERTAIN PROCESSES. THEREFOR E, IT CANNOT BE ACCEPTED THAT THE ASSESSEE IS NOT AN INDUSTRIAL UNDERTAKIN G. THE WORD UNDERTAKING USED IN SUB-SECTION (9) IS A WIDER TERM W HICH ALSO INCLUDES INDUSTRIAL UNDERTAKINGS. THE WORD UNDERTAKI NG HAS BEEN USED BECAUSE SUB-SECTION REFERS NOT ONLY TO PRODUCTION OF MINERAL OIL BUT ALSO REFINING OF MINERAL OIL WHICH MAY NOT BE AN INDUSTRIAL UNDERTAKING. THEREFORE, THE WORD UNDERTAKING USED IN SECTION 80IB(9) HAS TO BE INTERPRETED IN THE CONTEXT OF BUSI NESS BEING DONE. SINCE THE ASSESSEE ITSELF HAS CLAIMED THAT IT IS PRODUCING COM MERCIAL PRODUCTS USING BITUMEN AS RAW MATERIAL THE ASSESSEE IS TO BE CONSIDERED AS INDUSTRIAL UNDERTAKING. THEREFORE, IN OU R VIEW, THE CONDITIONS PRESCRIBED IN SECTION 80IB(2) WILL BE APPLICABL E IN THE CASE OF THE ASSESSEE. THE DECISIONS OF THE TRIBUNAL RELIED UPO N BY THE ASSESSEE CANNOT BE ACCEPTED AS A BINDING PRECEDENT AS VARIOU S ASPECTS MENTIONED ABOVE HAVE BEEN OMITTED TO BE CONSIDER ED IN THE SAID CASES. WE, THEREFORE, HOLD THAT PROVISIONS OF SECTION 80 IB (2) WILL BE APPLICABLE IN CASE THE ASSESSEE IS FOUND TO BE PRODUCER OF MINERAL OIL. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 18 2.1.16 THE AUTHORITIES BELOW HAVE HELD THAT THE ASSESSEE HAD NOT FULFILLED THE CONDITIONS RELATING TO THE MINIMUM ENGA GEMENT OF WORKERS AND USE OF NEW PLANT AND MACHINERY IN SETTING UP OF IN DUSTRIAL UNDERTAKING AS REQUIRED IN SECTION 80IB(2). THE LD. AR FOR THE ASSESSEE HAS ARGUED THAT AUTHORITIES BELOW HAD NOT TAKEN INTO ACCOUNT THE CASUAL WORKERS AND CONTRACT WORKERS WHICH ARE ALSO REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF MINIMUM NUMBER OF WORKER S ENGAGED IN VIEW OF THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF CIT VS. JYOTI PLASTIC WORKS PVT. LTD. (339 ITR 491). IN VIE W OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT, WE HOLD TH AT CASUAL WORKERS / CONTRACT WORKERS IF REGULARLY ENGAGED HAVE ALSO TO B E CONSIDERED. THIS ISSUE IS ALSO RESTORED TO CIT(A) FOR FRESH DECISION AF TER NECESSARY EXAMINATION OF THE CLAIM OF THE ASSESSEE. THE AUTHORIT IES BELOW HAVE ALSO HELD THAT THE BAHADURGARH UNIT AND IRUGATTUKOTT AI UNIT HAD BEEN SET UP IN THE YEARS PRIOR TO 31.3.2000. THEREFORE, I N THE ASSESSMENT YEAR 2002-03 ONWARDS, IN WHICH CLAIM OF DEDUCTION HAS B EEN MADE BY THE ASSESSEE, THE PLANT AND MACHINERY NO LONGER REMAINED NEW. THEREFORE, THERE WAS VIOLATION OF PROVISION OF SECTION 80IB (2). IN OUR VIEW, THE FACT WHETHER NEW PLANT AND MACHINERY HAVE B EEN USED IN SETTING UP THE UNIT HAS TO BE EXAMINED IN THE YEAR I N WHICH UNIT HAD BEEN SET UP AND IN CASE IN THAT YEAR ASSESSEE USED NEW PLAN T AND MACHINERY THE CLAIM HAS TO BE ALLOWED IN ALL SUBSEQUEN T YEARS IN WHICH ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 19 ASSESSEE IS ELIGIBLE. IN THIS CASE, THE ASSESSEE HAD NOT CLAIME D DEDUCTION IN THE EARLIER YEARS AND THEREFORE, THIS ASPE CT COULD NOT BE EXAMINED. SINCE ASSESSEE HAS CLAIMED DEDUCTION IN ASSESSMENT Y EAR 2002-03 ONWARDS IT IS REQUIRED TO BE EXAMINED WHETHER IN THE YEAR OF SETTING UP, ASSESSEE HAD USED NEW PLANT AND MACHINERY. WE, THEREFORE, RESTORE THIS ISSUE ALSO TO CIT(A) FOR NECESSARY EXAMINATION AND FINDING AFTER ALLOWING OPPORTUNITY OF HEARING T O THE ASSESSEE. 2.1.17 THE AUTHORITIES BELOW HAVE ALSO DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 80IB IN RELATION TO OTHER INCOM E SUCH AS INTEREST INCOME AND FOREIGN EXCHANGE GAIN ETC. FULL DET AILS OF OTHER INCOME HAVE NOT BEEN GIVEN. THE ISSUE REGARDING ALLOWA BILITY OF DEDUCTION UNDER SECTION 80IB IS NOW SETTLED BY THE JUDG MENT OF HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA LTD . VS. CIT (317 ITR 218) IN WHICH IT HAS BEEN HELD THAT DEDUCTION IS AL LOWABLE ONLY IN RESPECT OF PROFIT HAVING DIRECT NEXUS WITH THE ELIGIBL E BUSINESS. THE SECTION DOES NOT COVER PROFIT FROM SOURCES BEYOND FIRST DEG REE IN VIEW OF THE WORD DERIVED MENTIONED THEREIN. PROFIT ATT RIBUTABLE TO BUSINESS OR INCIDENTAL PROFIT WILL NOT BE ELIGIBLE FOR DEDUCTI ON UNDER SECTION 80IB. THE SOURCE OF INTEREST INCOME IS FDR AND NOT THE ELIGIBL E BUSINESS OF THE UNDERTAKING AND THEREFORE, INTEREST INCOME EVEN I F RECEIVED FROM FDR PLEDGED FOR THE PURPOSE OF BUSINESS, DEDUCTION UNDER SECTION 80IB WILL NOT BE AVAILABLE. THE ELIGIBILITY OF FOREIGN E XCHANGE GAIN WILL ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 20 DEPEND UP ON THE FACT WHETHER FOREIGN EXCHANGE GAIN I S IN RELATION TO TRANSACTIONS WHICH ARE INTEGRAL PART OF THE OPERATION O F THE ELIGIBLE BUSINESS. THE ELIGIBILITY IN RESPECT OF OTHER ITEMS OF I NCOME DETAILS OF WHICH HAVE NOT BEEN GIVEN IS ALSO REQUIRED TO BE EXAMI NED IN THE LIGHT OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE O F LIBERTY INDIA LTD. (SUPRA). WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF CIT(A) FOR FRESH DECISION AFTER NECESSARY EXAMINATION IN THE LIGHT O F OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARIN G TO THE ASSESSEE. 2.1.18 WE HAVE RESTORED BACK THE VARIOUS ISSUES TO THE FILE OF CIT(A) SO THAT ISSUES CAN BE DECIDED PROMPTLY. CIT(A) M AY OBTAIN REMAND REPORT WHEREVER REQUIRED. 2.2 THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF DEDUCT ION CLAIMED UNDER SECTION 35AB IN RESPECT OF TECHNICAL KNOW-HO W FEES. THE ASSESSEE AS POINTED OUT EARLIER IS A JOINT VENTURE COMPANY BETWEEN HPCL AND COLAS SA FRANCE AND IN TERMS OF JOINT VENTURE AGREEMENT DATED 25.11 1994, THE FRENCH COMPANY HAD MADE TRANSFE R OF TECHNICAL KNOW HOW FOR MANUFACTURING OF CERTAIN PRODUCTS. IN TERM S OF THE SAID AGREEMENT, THE ASSESSEE HAD PAID KNOW HOW FEES IN INSTA LMENTS OVER A PERIOD OF TIME. IN RESPECT OF INSTALMENTS PAID DURIN G THE YEAR, THE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTION 80IB @ 1/6 TH OF THE PAYMENT MADE. THE PAYMENTS HAD BEEN MADE DURING THE FINANCIAL ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 21 YEARS 1998-99 TO 2001-02. DURING THE YEAR UNDER CON SIDERATION, THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.32,99,024/- WHICH HAD BEEN ALLOWED BY THE AO IN THE ORIGINAL ASSESSMENT MADE UNDE R SECTION 143(3)(II) DATED 31.1.2005. IN THE ORIGINAL ASSESSMENT THE ASSESSEE HAD NOT CLAIMED DEDUCTION UNDER SECTION 80IB. THE ASSESSE E THEREFORE FILED PETITION BEFORE CIT UNDER SECTION 264 FOR CLAIMI NG DEDUCTION. CIT VIDE ORDER DATED 12.12.2007 UNDER SECTION 264 HELD TH AT SINCE ASSESSEE HAD MADE FRESH CLAIM UNDER SECTION 80IB(9) IN RELA TION TO BAHADURGARH UNIT AND IRUGATTUKOTTAI UNIT THE SAME WA S SENT TO AO FOR ADJUDICATION IN ACCORDANCE WITH LAW. THE AO IN THE FRE SH ASSESSMENT DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 80IB AND COMPUTED TOTAL INCOME AT RS.2,91,25,510/- I.E. SAME INCOME DETER MINED IN THE ORIGINAL ASSESSMENT. 2.2.1 IN APPEAL CIT(A) SUO MOTO DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 35AB ON THE GROUND THAT THE PA YMENT FOR TECHNICAL KNOW-HOW FEES HAD BEEN MADE AFTER 1.4.1998 W HEREAS UNDER THE PROVISIONS OF SECTION 35AB, DEDUCTION WAS ALLOWABLE O NLY IN RESPECT OF PAYMENTS MADE PRIOR TO 1.4.1998. CIT(A) FOLLOWED THE DECISION TAKEN IN ASSESSMENT YEAR 2004-05. IN ASSESSMENT YEAR 2004-0 5, ASSESSEE HAD ARGUED THAT IN VIEW OF PROVISIONS OF SECTION 4 3(2), THE WORD PAID MEANT ACTUALLY PAID OR INCURRED ACCORDING T O METHOD OF ACCOUNTING ON THE BASIS OF WHICH PROFIT/GAIN WERE COMPUT ED. IT WAS ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 22 ARGUED THAT SINCE LIABILITY HAD BEEN INCURRED IN EARL IER YEARS, DEDUCTION UNDER SECTION 35AB HAD TO BE ALLOWED EVEN IF ACTUAL PA YMENTS WERE MADE AFTER 1.4.1998. THE ASSESSEE ALSO REFERRED TO THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF ACIT VS. BUCKAU W OLF NEW INDIA ENGINEERING WORKS LTD. (157 ITR 75), IN WHICH I T WAS HELD THAT TECHNICAL KNOW-HOW FEE PAID IN INSTALMENTS EVEN IF NOT PROVIDED IN BOOKS OF ACCOUNT WAS ELIGIBLE FOR DEDUCTION. ALTERNATIV ELY, IT WAS ALSO ARGUED THAT ASSESSEE SHOULD BE ALLOWED DEPRECIATION UNDE R SECTION 32(1)(II) TREATING THE AMOUNT AS INTANGIBLE ASSET. CI T(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HI M THAT THE WORDS USED IN SECTION 35AB WERE UNAMBIGUOUS AND CLEAR AN D, THEREFORE, LITERAL MEANING HAD TO BE FOLLOWED AS HEL D BY HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF INDIAN RAYON CORPORA TION LTD. VS CIT (231 ITR 26). IT WAS ACCORDINGLY HELD THAT PAYMENTS M ADE AFTER 1.4.1998 WOULD NOT BE ELIGIBLE FOR DEDUCTION UNDER SECTION 35AB. THE ASSESSEE HAD ALSO CLAIMED DEDUCTION ON ACCOUNT OF FOREIGN EX CHANGE FLUCTUATION WHICH WAS DISALLOWED ON THE GROUND THAT FOR EIGN EXCHANGE FLUCTUATION WOULD ONLY GO TO ADD OR REDUCE COST OF CAPIT AL ASSET UNDER SECTION 43A AND COULD NOT BE ALLOWED AS DEDUCTION. IT WAS ALSO HELD THAT FOREIGN EXCHANGE LOSS WAS NOT ALLOWABLE AS BUSINESS EX PENDITURE. ACCORDINGLY, CLAIM WAS DISALLOWED. AGGRIEVED BY THE SA ID DECISION, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 23 2.2.2 BEFORE US, THE LD. AR SUBMITTED THAT ASSESSMENT HAD BEEN SET ASIDE UNDER SECTION 264 ONLY TO CONSIDER CLAIM OF ASSE SSEE UNDER SECTION 80 IB AND THEREFORE, IN THE FRESH ASSESSMENT, AO H AD JURISDICTION TO CONSIDER ONLY DEDUCTION UNDER SECTION 80 IB. THIS WAS THE REASON, THE AO HAD NOT CONSIDERED ANY OTHER ASPECT. HOWEVER, CIT(A) HAS DISALLOWED THE CLAIM UNDER SECTION 35AB WHICH HAD BEEN ALLOWED BY THE AO IN THE ORIGINAL ASSESSMENT. IT WAS P OINTED OUT THAT THOUGH CIT(A) HAD PLENARY POWER, HE COULD NOT GO BE YOND THE JURISDICTION OF AO TO ASSESS ANY PARTICULAR INCOME. IN THE FRESH PROCEEDINGS, AO HAD NO JURISDICTION TO CONSIDER ANY OTHE R ASPECT. THEREFORE, IN APPEAL CIT(A) COULD NOT CONSIDER DEDUCTIO N UNDER SECTION 35AB. IT WAS ACCORDINGLY ARGUED THAT DENIAL OF DEDU CTION UNDER SECTION 35AB BY CIT(A) WAS BEYOND JURISDICTION AND HAD T O BE SET ASIDE. 2.2.3 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, SUBMITTED THAT CIT(A) HAD PLENARY POWER AND HE COULD ALSO DO WHAT AO HAD OMITTED TO DO AND, THEREFORE, ACTION OF CIT(A ) IN DENYING THE CLAIM OF DEDUCTION UNDER SECTION 35AB WAS JUSTIFIED. HE P LACED RELIANCE ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. NIRBHERAM DALURAM (224 ITR 610). IT WAS POINTED OUT THAT CIT(A) HAD SET ASIDE THE ASSESSMENT FOR MAKING FRESH ASSESSMENT AND, ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 24 THEREFORE, AO WAS ENTITLED TO LOOK INTO CLAIMS OTHER T HAN DEDUCTION UNDER SECTION 80IB. AO HOWEVER FAILED TO DISALLOW THE CLAIM OF DEDUCTION UNDER SECTION 35AB WHICH WAS NOT ALLOWABLE TO THE ASSESSEE AND, THEREFORE, CIT(A) WAS CORRECT IN DISALLOWING THE C LAIM. 2.2.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MA TTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF CLAIM OF DEDUCTION UNDER SECTION 35 AB OF THE ACT IN RESPECT OF TECHNICAL KN OWHOW FEES. THE AO HAD ALLOWED THE CLAIM IN THE ORIGINAL ASSESSMENT. SUBSEQUENTLY, THE ASSESSEE FILED PETITION UNDER SECTION 26 4 OF THE ACT BEFORE CIT MAKING CLAIM OF DEDUCTION UNDER SECTION 80IB WHICH THE ASSESSEE HAD OMITTED TO MAKE IN THE ORIGINAL RETURN. CI T IN THE ORDER DATED 12.12.2007 PASSED UNDER SECTION 264 RESTORED THE I SSUE REGARDING ALLOWABILITY OF CLAIM UNDER SECTION 80IB TO AO BY SETTING ASIDE ASSESSMENT ORDER. CIT IN THE ORDER UNDER SECTION 264 MADE IT CLEAR THAT WHILE PASSING FRESH ASSESSMENT, AO SHALL CONSIDER CLAIM OF DEDUCTION UNDER SECTION 80IB(9). IT IS THUS CLEAR THAT C IT HAD SET ASIDE THE ASSESSMENT ONLY TO CONSIDER CLAIM UNDER SECTION 80 IB. ASSESSMENT HAD NOT BEEN SET ASIDE TO MAKE FRESH ASSESSMENT DEN OVO. IN FACT AS RIGHTLY POINTED OUT BY LD. A.R, CIT UNDER ORDER 264 HAD NO POWER TO PASS ANY ORDER PREJUDICIAL TO THE INTEREST OF THE ASSESSEE. THEREFORE, CIT COULD NOT HAVE PASSED ANY ORDER UNDER SECTION 264 DENYING ANY CLAIM ALREADY ALLOWED TO THE ASSESSEE. WE, THEREFORE, DO ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 25 NOT AGREE WITH THE ARGUMENTS OF THE LD. DR THAT IN T HE FRESH ASSESSMENT PROCEEDINGS AO COULD ALSO CONSIDER MATTERS IN ADDI TION TO CLAIM OF DEDUCTION UNDER SECTION 80 IB. THE JUDGMENT O F HON'BLE SUPREME COURT IN THE CASE OF NIRBHERAM DALURAM (SUPRA) , RELIED UPON BY THE LD. DR IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. AO WAS CORRECT IN NOT CONSIDERING ANY ISSUE OTHER THAN THE CLA IM OF DEDUCTION UNDER SECTION 80 IB MADE BY THE ASSESSEE IN TH E APPLICATION UNDER SECTION 264 BEFORE CIT AS HE HAD NO SUCH JURISDICTION. NO DOUBT IT IS TRUE THAT CIT(A) WHILE DECIDING AN APPEAL HAS PLENARY POWER AND CAN ALSO CONSIDER ANY ISSUE WHICH HAS BEEN OMITTED BY THE AO. BUT HE CAN NOT CONSIDER ANY ISSUE W HICH IS BEYOND THE JURISDICTION OF AO. IN THE FRESH PROCEEDINGS, THE AO HAD NO JURISDICTION TO CONSIDER ANY ISSUE OTHER THAN THE CLAIM OF DEDUCTION UNDER SECTION 80IB AND, THEREFORE, IT CANNOT BE SAID TH AT IN NOT CONSIDERING THE CLAIM UNDER SECTION 35AB, THE AO HAD FA ILED TO DO SOMETHING WHICH WAS NECESSARY IN THE ASSESSMENT. CIT(A) HAS NO POWER TO ACT ON ANY ISSUE ON WHICH AO HAS NO JURISDICTIO N. CIT(A) CAN INTERVENE ONLY IF AO HAD JURISDICTION OF CONSIDERING ANY MATTER WHICH HE HAD FAILED TO DO SO WHICH IS NOT SO IN THE PRESENT CASE . WE ARE THEREFORE, UNABLE TO SUSTAIN THE ORDER OF CIT(A) DISAL LOWING THE CLAIM OF DEDUCTION UNDER SECTION 35AB WHICH HAD ALREADY BEEN ALLOWED IN THE ORIGINAL ASSESSMENT. ORDER OF CIT(A) IS SET ASIDE O N THIS ISSUE. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 26 3. APPEALS OF THE ASSESSEE IN ITA NO.5498/MUM/2008 & ITA NO.3981/MUM/2008 FOR ASSESSMENT YEAR 2003-04 & 2004-05 . IN THESE APPEALS ALSO ASSESSEE HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS WHICH RELATE TO DISALLOWANCE OF CLAIM OF DEDUCTION UNDER SECTION 80IB OF THE ACT AND DISALLOWANCE OF CLAIM U NDER SECTION 35AB OF THE ACT. 3.1 WE FIRST TAKE UP THE DISPUTE RELATING TO ALLOWABI LITY OF CLAIM OF DEDUCTION UNDER SECTION 80IB OF THE ACT. THE CLAIM HAS B EEN MADE IN RESPECT OF ACTIVITY RELATING TO MANUFACTURE AND PRODUC TION OF MINERAL OIL. THE FACTS ARE IDENTICAL TO THE CLAIM IN ASSESSMENT Y EAR 2002-03 WHICH WE HAVE ALREADY DISCUSSED IN THE EARLIER PART OF THIS ORDER. THE ONLY DISTINGUISHING FEATURE IN THESE YEARS IS THAT IN T HESE YEARS THE ASSESSEE HAD NOT MADE CLAIM OF DEDUCTION IN THE RETURN OF INCOME. IN ASSESSMENT YEAR 2003-04, THE ASSESSEE HAD NEITHER MADE CLAI M IN RETURN OF INCOME NOR DURING ASSESSMENT PROCEEDINGS. THE CLAIM WAS MADE ONLY BEFORE CIT(A) BY FILING AN ADDITIONAL GRO UND WHICH WAS NOT ENTERTAINED BY CIT(A) FOR THE DETAILED REASONS GIVE N IN APPELLATE ORDER DATED 1.5.2008 FOR ASSESSMENT YEAR 2003-04. CIT( A) IN ASSESSMENT YEAR 2003-04 ALSO REJECTED THE CLAIM ON MERIT F OLLOWING THE DECISION TAKEN IN ASSESSMENT YEAR 2004-05 VIDE ORDER DATED 28.03.2008. IN ASSESSMENT THE YEAR 2004-05, THE ASSESSE E HAD NOT ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 27 MADE THE CLAIM IN THE ORIGINAL RETURN OF INCOME. THE CLAIM WAS MADE IN THE REVISED RETURN OF INCOME FILED ON 9.11.2006. THE AO NOTED THAT THE REVISED RETURN COULD HAVE BEEN FILED ONLY WITHIN THE STATUTORY TIME LIMIT WHICH EXPIRED ON 31.3.2006. THE AO ALSO EXAMIN ED THE CLAIM ON MERIT AND DISALLOWED THE CLAIM, CIT(A) CONFIRMED THE D ISALLOWANCE FOR DETAILED REASONS WHICH WE HAVE ALREADY DISCUSSED WHILE DE ALING WITH THE APPEAL FOR THE ASSESSMENT YEAR 2002-03. AGGRIEVED BY DECISION OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL IN BOTH THE YEARS. 3.1.1 WE HAVE HEARD BOTH THE PARTIES IN THE MATTER . LD. AR FOR THE ASSESSEE VERY FAIRLY POINTED OUT THAT IN THESE YEARS THE ASSESSEE HAD ALSO TO CROSS AN ADDITIONAL HURDLE CREATED BY THE PROVISIONS OF SUB-SECTION (5) OF SECTION 80A INSERTED BY THE FINANCE ACT , 2009 W.E.F. ASSESSMENT YEAR 2003-04, AS PER WHICH CLAIM OF DEDUCTION CO ULD NOT BE ALLOWED IN CASE ASSESSEE FAILED TO MAKE CLAIM IN THE RE TURN OF INCOME. THE SAID PROVISIONS OF SUB-SECTION (5) OF SECTION 80A ARE REPRODUCED BELOW AS READY REFERENCE: 80A(5) WHERE THE ASSESSEE FAILS TO MAKE A CLAIM IN HIS RETURN OF INCOME FOR ANY DEDUCTION UNDER SECTION 10A OR SECTION 10AA OF SECTION 10B OR SECTION 10BA OR UNDER ANY PROVISIONS OF THE CHAPTER VIA UNDER THE HEADING C --- DEDUCTIONS IN RESPECT OF CERTAIN INCOMES, NO DEDUCTION SHALL BE ALLOWED TO HIM. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 28 3.1.2 PART C OF CHAPTER VI-A RELATING TO DEDUCTIO N IN RESPECT OF CERTAIN INCOMES APPLIES TO SECTIONS STARTING FROM 80 HH TO 80 TTA. THEREFORE, SECTION 80IB WILL FALL UNDER PART C OF C HAPTER VIA. THUS CLAIM OF DEDUCTION UNDER SECTION 80IB WOULD BE HIT BY P ROVISIONS OF SUB-SECTION (5) OF SECTION 80A, WHICH MEANS THAT, IN CASE, A SSESSEE HAS FAILED TO MAKE CLAIM IN RETURN OF INCOME, CLAIM CAN NOT BE APPLIED. 3.1.3 LD. AR ARGUED THAT AT THE TIME OF MAKING THE CLAIM FOR BOTH THE YEARS, THE PROVISIONS OF SUB-SECTION (5) OF SECT ION 80A WERE NOT ON THE STATUTE AND, THEREFORE, ASSESSEE WAS ENTITLED TO MAKE THE CLAIM. THE AMENDMENT, THEREFORE, COULD NOT TAKE AWAY THE VESTED RIGHT OF THE ASSESSEE TO MAKE CLAIM UNDER SECTION 80IB. A CCORDINGLY IT WAS SUBMITTED THAT SINCE CLAIMS WERE MADE PRIOR TO INSERTI ON OF SECTION 80A(5), THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWE D. LD. AR PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COU RT IN THE CASE OF CIT VS. ONKARMAL MEGHRAJ (HUF) (93 ITR 233) IN SUP PORT OF THE CLAIM. 3.1.4 LD. DR ON THE OTHER HAND, STRONGLY SUPPORTED T HE DISALLOWANCE MADE BY AUTHORITIES BELOW. IT WAS SUBMITTE D THAT SINCE SECTION ITSELF DENIED CLAIM IF NOT MADE IN THE RETURN O F INCOME, THE CLAIM COULD NOT BE ALLOWED. ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 29 3.1.5 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWAB ILITY OF CLAIM OF DEDUCTION UNDER SECTION 80IB OF THE ACT FOR ASSESSMENT YEA RS 2003-04 AND 2004-05. THERE IS NO DISPUTE THAT THE ASSESSEE HAD N OT MADE THE CLAIM IN ASSESSMENT YEAR 2003-04 EITHER IN THE ORIGINAL RETURN OR IN THE REVISED RETURN. THE CLAIM HAD BEEN MADE ONLY BEFORE CIT(A) BY FILING ADDITIONAL GROUND. IN ASSESSMENT YEAR 2004-05 ALSO CLAIM WAS NOT MADE IN ORIGINAL RETURN. CLAIM WAS MADE IN THE REVI SED RETURN WHICH WAS FILED AFTER THE LIMITATION PERIOD AND THEREFORE, REVISED RETURN HAS TO BE CONSIDERED AS INVALID. THUS, IN ASSESSMENT YEAR 2004 -05 ALSO, THE ASSESSEE HAD NEITHER MADE THE CLAIM IN THE ORIGINAL RETURN NOR IN REVISED RETURN. THE PROVISIONS OF SECTION 80A(5) INSERTE D BY FINANCE ACT 2009 WHICH ARE APPLICABLE RETROSPECTIVELY FROM ASSESSME NT YEAR 2003-04, CLEARLY PROVIDE THAT IN CASE ASSESSEE FAILS TO MAK E A CLAIM IN THE RETURN OF INCOME, THE CLAIM CANNOT BE ALLOWED. FO R ASSESSMENT YEARS 2003-04 AND 2004-05, THE PROVISIONS OF SECTION 80A (5) WERE APPLICABLE. THEREFORE, IN OUR VIEW, IN VIEW OF THESE PROVISIONS WHICH ARE QUITE UNAMBIGUOUS AND CLEAR, CLAIM OF THE ASSESSEE CANN OT BE ALLOWED. THE LD. AR HAS ARGUED THAT THE ASSESSEE HAD M ADE THE CLAIMS BEFORE THE RELEVANT PROVISIONS OF SECTION 80A(5) W ERE INSERTED IN 2009 AND THEREFORE, THE RIGHT OF THE ASSESSEE TO MAK E CLAIM COULD NOT BE TAKEN AWAY BY THE AMENDED PROVISIONS. WE, ARE HOWEVER, NOT ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 30 CONVINCED BY THE ARGUMENTS ADVANCED. IN OUR VIEW MAKING CLAIM IS DIFFERENT FROM ALLOWING THE CLAIM. NO DOUBT BEFORE T HE NEW PROVISIONS WERE INSERTED IN 2009, THE ASSESSEE WAS ENTITLED TO MAKE THE CLAIM BUT THE CLAIM HAD TO BE CONSIDERED UNDER THE PROVISIONS OF LAW. SINCE PROVISIONS OF SECTION 80A(5) HAVE RETROSPECTIVE APPLICATI ON FROM ASSESSMENT YEAR 2003-04, THESE PROVISIONS WILL APPLY FOR T HE YEARS UNDER CONSIDERATION AND THE CLAIM OF THE ASSESSEE CAN NOT B E ALLOWED. 3.1.6 THE LD. AR FOR THE ASSESSEE HAS PLACED RELIANCE O N THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE O F CIT VS. CIT VS. ONKARMAL MEGHRAJ (HUF) (SUPRA) BUT THE SAID CASE IN O UR VIEW IS DISTINGUISHABLE. THE CASE RELATED TO RE-OPENING OF THE ASSESSMENT UNDER THE OLD ACT. SECTION 34(3) OF THE OLD ACT HAD BE EN AMENDED ON 24.5.1953 WITH RETROSPECTIVE EFFECT FROM 1.4.1952. IT WAS A CASE OF LIMITED RETROSPECTIVE EFFECT AS PER WHICH AMENDMENT DID NOT ENABLE ITO TO TAKE ACTION WHERE THE PERIOD MENTIONED THEREI N HAD EXPIRED BEFORE 1.4.1952. IT WAS ACCORDINGLY HELD THAT THE ACTI ON WAS BARRED BY LIMITATION. THE PRESENT CASE IS DIFFERENT. IN THIS CASE P ROVISIONS OF SECTION 80A(5) ARE APPLICABLE FROM ASSESSMENT YEAR 2003- 04 WITHOUT ANY LIMITATION. MOREOVER, THE PROCEEDINGS FOR ASSESSMENT YEARS 2003- 04 AND 2004-05 ARE STILL ALIVE AND ARE NOT BARRED BY ANY LIMITATION. THEREFORE IN THESE PROCEEDINGS WHICH ARE STILL ALIVE AN D PENDING IN APPEAL, THE PROVISIONS OF SECTION 80A(5) HAVE TO BE APP LIED AND ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 31 FOLLOWING WHICH THE CLAIM OF THE ASSESSEE HAS TO BE DISALL OWED. THE DISALLOWANCE IS THEREFORE, CONFIRMED ON THE LEGAL GROUN D. WE, THEREFORE, DO NOT CONSIDER IT NECESSARY TO GO INTO THE M ERITS OF THE CASE. THE ORDERS OF CIT(A) DISALLOWING THE CLAIM ARE CONF IRMED. 3.2 THE SECOND DISPUTE RAISED IN THESE APPEALS IS REGARD ING CLAIM OF DEDUCTION UNDER SECTION 35AB OF THE ACT RELATING TO TECH NICAL KNOW- HOW FEES. THE TECHNICAL KNOW-HOW FEES HAD BEEN PAID BY THE ASSESSEE IN TERMS OF JOINT VENTURE AGREEMENT DATED 25.11.1994 WITH COLAS SA, FRANCE. THOUGH, TECHNICAL KNOW-HOW HAD BEEN ACQUIRED BY THE ASSESSEE IN THE EARLIER YEAR, PAYMENTS IN TERMS OF AGREEM ENT HAD BEEN MADE IN INSTALLMENTS DURING THE PERIOD 1998-199 9 TO 2001-02. THE DETAILS RELATING TO TECHNICAL KNOW-HOW FEE HAVE AL READY BEEN DISCUSSED EARLIER IN PARA-2.2 OF THIS ORDER. UNDER THE PROVISIONS OF SECTION 35AB WHERE THE ASSESSEE HAS PAID IN ANY PREVIOUS YE AR ANY LUMPSUM CONSIDERATION FOR ACQUIRING ANY KNOW-HOW FOR U SE FOR THE PURPOSE OF BUSINESS, 1/6 TH OF THE AMOUNT SO PAID WILL BE ALLOWED AS DEDUCTION IN THAT PREVIOUS YEAR AND BALANCE AMOUNT IN FIVE IMMEDIATE SUCCEEDING ASSESSMENT YEARS IN EQUAL INSTALLMENTS. SINCE THE ASSESSEE HAD MADE PAYMENTS IN INSTALLMENTS, IN RESPECT OF EACH INSTALLMENT, IT HAD CLAIMED DEDUCTION OVER SIX YEARS UN DER PROVISIONS OF SECTION 35AB. THE PROVISIONS OF SECTION 35AB WERE A MENDED BY ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 32 FINANCE ACT, 1998 W.E.F. ASSESSMENT YEAR 1999-2000 AS PER WHICH DEDUCTION UNDER SECTION 35AB COULD BE ALLOWED ONLY IN CASE AMOUNT IS PAID IN PREVIOUS YEARS RELATING TO ASSESSMENT YEAR 199 8-99 OR IN EARLIER YEARS. FOLLOWING THIS AMENDMENT, THE AUTHORI TIES BELOW HAVE NOT ALLOWED THE CLAIM IN RESPECT OF PAYMENTS MADE AFTER 1.4.1998, WHICH IS SUBJECT MATTER OF DISPUTE IN THESE APPEALS. 3.2.1 THE AUTHORITIES BELOW HAVE HELD THAT THE LAN GUAGE USED IN SECTION 35AB BEING UNAMBIGUOUS AND CLEAR THE LITERAL M EANING HAS TO BE FOLLOWED AS PER WHICH PAYMENTS MADE AFTER 1.04.1998 ARE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 35AB. THE ASSESSEE A RGUED THAT UNDER PROVISIONS OF SECTION 43(2) THE WORD PAID MEAN T AMOUNT ACTUALLY PAID OR INCURRED ACCORDING TO METHOD OF ACCOUNTI NG BASED ON WHICH PROFIT/GAINS WERE COMPUTED AND THEREFORE, PAYMEN TS MADE AFTER 1.4.1998 WERE ALSO ELIGIBLE FOR DEDUCTION AS LIABILIT Y FOR WHICH WERE INCURRED PRIOR TO 1.4.1998. ASSESSEE ALSO REFERRED TO TH E JUDGMENT OF THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF ACIT V S. BUCKAU WOLF NEW INDIA ENGINEERING WORKS LTD.(SUPRA) AS PER WHICH I N CASE ASSESSEE HAD PAID THE TECHNICAL KNOW-HOW FEE IN INSTALLME NTS, THE ASSESSEE IS ENTITLED TO CLAIM OF EXPENDITURE EVEN IF THE SAME WERE NOT PROVIDED IN THE BOOKS OF ACCOUNT. THE ARGUMENTS WERE R EJECTED BY AUTHORITIES BELOW WHO HELD THAT FOLLOWING LITERAL ME ANING, THE CLAIM WAS NOT ALLOWABLE AS PAYMENTS HAD BEEN MADE AFTER 1.4. 1998. THE ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 33 ASSESSEE ALSO RAISED AN ADDITIONAL GROUND THAT IN CASE CLAIM OF DEDUCTION UNDER SECTION 35AB WAS NOT ALLOWED, THE ASSESSEE SHOULD BE ALLOWED DEPRECIATION AS THE TECHNICAL KNOW-HOW WAS AN I NTANGIBLE ASSET UNDER THE PROVISIONS OF SECTION 32(1)(II). THIS ALT ERNATE CLAIM WAS ALSO REJECTED ON THE GROUND THAT PROVISIONS OF SECTIO N 32(10)(II) WERE APPLICABLE ONLY IN RESPECT OF INTANGIBLE ASSETS ACQU IRED ON OR AFTER 1.4.1998, WHEREAS IN CASE OF THE ASSESSEE TECHNICAL KN OW-HOW HAD BEEN ACQUIRED IN THE YEAR 1994. AGGRIEVED BY TH E SAID DECISION OF CIT(A) CONFIRMING THE DISALLOWANCE, THE ASSESSEE IS IN APPE AL IN BOTH THE YEARS. 3.2.2 BEFORE US, THE LD. AR OF THE ASSESSEE ARGUED TH AT THE AMENDMENT TO SECTION 35AB BY THE FINANCE ACT 1998 HAD W ITHDRAWN THE DEDUCTION UNDER SECTION 35AB IN RESPECT OF PAYMENTS MADE AFTER 1.4.1998 AS TECHNICAL KNOW-HOW BY THE FINANCE ACT, 19 98 WAS TREATED AS INTANGIBLE ASSET ON WHICH DEPRECIATION WAS ALLOWABLE UNDER SECTION 32(1)(II) FROM ASSESSMENT YEAR 1999-2000. HOWEVER, AN A NOMALOUS SITUATION HAS BEEN CREATED BECAUSE UNDER SECTION 32(1)(II) DEPRECIATION IN RESPECT OF INTANGIBLE ASSET IS ALLOWABLE ONLY WHEN THE INTANGIBLE ASSET IS ACQUIRED ON OR AFTER 1.4.1998. I N RESPECT OF INTANGIBLE ASSET ACQUIRED PRIOR TO 1.4.1998, DEDUCTIO N UNDER SECTION 35AB IS ALLOWABLE BUT BECAUSE OF AMENDMENT MADE TO SECTI ON 35AB BY FINANCE ACT 1998, DEDUCTION UNDER SECTION 35AB CANNOT BE ALLOWED IN ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 34 CASE INSTALLMENT PAYMENT IS AFTER 1.4.1998. THE INTENT ION OF THE LEGISLATURE WAS TO ALLOW DEDUCTION UNDER SECTION 35AB IN RESPECT OF TECHNICAL KNOW-HOW ACQUIRED BEFORE 1.4.1998 AND TO ALL OW DEPRECIATION IN RESPECT OF TECHNICAL KNOW-HOW ACQUIRED O N OR AFTER 1.4.1998. BUT BECAUSE OF THE LANGUAGE USED IN SECTION 3 5AB, DEDUCTION IN RESPECT OF TECHNICAL KNOW-HOW ACQUIRED PRIOR TO 1.4.1998 CANNOT BE ALLOWED IF THE PAYMENT IS MADE AFTER 1.4.19 98. THE LITERAL INTERPRETATION IS THEREFORE, LEADING TO UNJUST RESUL T WHICH WAS NOT THE INTENTION OF THE LEGISLATURE. IN SUCH CASES, IT WAS ARGUE D, THAT THE LANGUAGE OF THE SECTION IS REQUIRED TO BE MODIFIED SO A S TO ACHIEVE THE DESIRED INTENTION OR TO PRODUCE A RATIONAL RESULT. R ELIANCE FOR THE SAID PROPOSITION WAS PLACED ON THE JUDGMENT OF HONBLE SUPRE ME COURT IN THE CASE OF CIT VS. J.H. GOTLA (156 ITR 326). IT WAS A CCORDINGLY ARGUED THAT IN CASE OF INTANGIBLE ASSETS ACQUIRED PRIOR T O 1.4.1998 ON WHICH DEPRECIATION UNDER SECTION 32(1)(II) WAS NOT ALLOW ABLE, DEDUCTION UNDER SECTION 35AB SHOULD BE ALLOWED EVEN IF PART OF THE PAYMENT IS MADE AFTER 1.4.1998. THE LD. D.R ON THE OTHER HAND, SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RE LIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 3.2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWAB ILITY OF CLAIM OF DEDUCTION ON ACCOUNT OF PAYMENT MADE FOR ACQUISITION OF TECHNICAL ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 35 KNOW-HOW. THE ASSESSEE HAD ACQUIRED THE TECHNICAL KNOW-HO W IN TERMS OF AGREEMENT DATED 25.11.1994 AND PAYMENTS WERE MADE IN INSTALLMENTS OVER THE PERIOD 1998-99 TO 2001-02. UNDE R THE PROVISIONS OF SECTION 35AB, ANY PAYMENT MADE FOR ACQUISITION OF T ECHNICAL KNOW- HOW IS ALLOWABLE AS DEDUCTION IN EQUAL INSTALLMENTS OVER A PERIOD OF SIX YEARS INCLUDING PREVIOUS YEAR IN WHICH THE PAYMENT HAD BEEN MADE. THE FINANCE ACT 1998 AMENDED SECTION 35AB AS PER WHICH PA YMENTS MADE AFTER 1.4.1998 WILL NOT BE ELIGIBLE FOR DEDUCTI ON UNDER SECTION 35AB. THIS AMENDMENT WAS MADE IN VIEW OF THE SIMULTAN EOUS AMENDMENT MADE TO SECTION 32(1) AS PER WHICH TECHNICAL KN OW-HOW WAS TREATED AS AN INTANGIBLE ASSET AND DEPRECIATION WAS A LLOWABLE IN RESPECT OF ANY INTANGIBLE ASSET ACQUIRED ON OR AFTER 1.9 .1998. THE INTENTION OF THE LEGISLATURE FOR MAKING AMENDMENT TO SECTION 35AB WAS TO NOT ALLOW DEDUCTION UNDER SECTION 35AB IN RESPECT OF ANY TECHNICAL KNOW-HOW ACQUIRED ON OR AFTER 1.4.1998 AS THE SAME WAS ENTITLED TO DEPRECIATION. HOWEVER, THE LANGUAGE USED IN SECTION 35A B PROVIDED THAT NO DEDUCTION WILL BE ALLOWABLE IN CASE PAYMENT I S MADE AFTER 1.4.1998. THIS HAS RESULTED INTO AN ANOMALOUS SITUATION AS IN RESPECT OF TECHNICAL KNOW-HOW ACQUIRED PRIOR TO 1.4.1998 ASSESSEE WILL NEITHER BE ELIGIBLE FOR DEDUCTION UNDER SECTION 35AB IN RESPECT OF PAYMENT MADE AFTER 1.4.1998 NOR DEPRECIATION UNDER SECTION 32( 1)(II) CAN BE ALLOWED AS THE ASSET WAS ACQUIRED PRIOR TO 1.4.1998. T HIS WAS NOT THE ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 36 INTENTION OF THE LEGISLATURE. THEREFORE, THE PLAIN AND LITERAL MEANING OF THE AMENDED PROVISIONS OF SECTION 35AB HAS RESULTED INTO MANIFESTLY UNJUST RESULT WHICH WAS NOT THE INTENTION OF THE LEGISL ATURE. IN SUCH CASES AS HELD BY HONBLE SUPREME COURT IN THE CASE OF CIT VS. J.H. GOTLA (SUPRA), THE COURTS ARE ENTITLED TO MODIFY THE LANGUAGE USED BY THE LEGISLATURE SO AS TO ACHIEVE THE INTENTION OF THE LEGISLATURE AND TO PRODUCE A RATIONAL RESULT. THEREFORE, IN OUR VIEW, F OR HARMONIOUS INTERPRETATION OF PROVISIONS OF SECTION 32(1)(II) AND 3 5AB, IT WILL BE REASONABLE TO HOLD THAT IN RESPECT OF TECHNICAL KNOW-HO W ACQUIRED PRIOR TO 1.4.1998, THE EXPENDITURE WILL BE ALLOWED EVEN I F PAYMENT IS MADE AFTER 1.4.1998. SUCH INTERPRETATION IS IN CONFORMITY WITH THE DEFINITION OF THE WORD PAID GIVEN IN SECTION 43(2) AS PER WHICH PAID MEANS ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF A CCOUNTING ON THE BASIS OF WHICH PROFIT AND GAINS ARE COMPUTED. IN THIS CASE THE ASSESSEE HAS INCURRED THE LIABILITY ON ACCOUNT OF TECHNICAL KNOW HOW FEES IN THE YEAR OF SIGNING THE AGREEMENT WHICH WAS BEFORE 1.4.98. NORMALLY AN EXPENDITURE IS ALLOWABLE AS DEDUCTION IN THE YEAR IN WHICH LIABILITY IS INCURRED EVEN IF THE PAYMENT IS MADE LATER, BUT IN CASE OF TECHNICAL KNOW-HOW FEES, THE DEDUCTION HAS BEEN SPREAD OVER A PE RIOD OF SIX YEARS IN VIEW OF SPECIFIC PROVISION OF SECTION 35AB. IN OUR VIEW ON PROPER INTERPRETATION OF THE AMENDED PROVISIONS OF SE CTION 35AB, DEDUCTION UNDER SECTION 35AB WILL BE ALLOWABLE EVEN IN RESPECT OF ITA NO.3981,5498/M/08 & 6829/M/10 A.Y.02-03,03-04 & 04-05 37 PAYMENTS MADE AFTER 1.4.1998 IF THE TECHNICAL KNOW-HOW HAS BEEN ACQUIRED BEFORE 1.4.1998. WE, THEREFORE HOLD THAT D EDUCTION WILL BE ALLOWABLE UNDER SECTION 35AB IN RESPECT OF PAYMENTS MADE AFTER 1.4.1998 AS TECHNICAL KNOW HOW HAD BEEN ACQUIRED PRIOR TO 1.4.1998. THE ORDER OF CIT(A) IS ACCORDINGLY SET ASIDE AND THE CLA IM OF THE ASSESSEE IS ALLOWED. 4. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19.10.2012. SD/- SD/- (VIVEK VARMA ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 19.10.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.