MAHINDRA & MAHINDRA LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 7074/MUM/2011

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8065 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-08-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 19-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: M P MAHAJANI
• Keywords: Business income; Cost of acquisition; Bad and doubtful debts; Set aside
• Section: 43B; 143(3); 2(14); 80HHC; 37(1); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B , MUMBAI BE F ORE SHRI G.S.PANNU, VICE - PRESIDENT AND SHRI SANDEEP GOSAIN , JUDICIAL MEMBER ITA NO . 7074 /MUM/201 1 , ( ASSESSMENT YEAR 20 04 - 05 ) MAHINDRA & MAHINDRA LIMITED, MAHINDRA TOWERS, GROUND FLOOR, CORPORATION TAXATION, WORLI ROAD NO.13, WORLI, MUMBAI 400 0 18 PAN:AAACM 3025E ...... APPELLANT VS. DEPUTY COMM. OF INCOME - TAX, CIRCLE - 2(2), AAYKAR BHAVAN, M.K.ROAD, MUMBAI 400 0 20 . ..... RESPONDENT A PP ELLANT BY : SHRI M .P.MAHAJAN I RESPONDENT BY : SHRI T. KIPGEN & SHRI MANOJ KUMAR SINGH DATE OF HEARING : 03/04/2019 DATE OF PRONOUNCEMENT : 01 /07/2019 O RDER PER G.S.PANNU, VICE - PRESIDENT THE CAPTIONED APPEAL FILED BY THE ASSESSEE PERTAINING TO ASSESSMENT YEAR 2004 - 0 5 IS DIRECTED AGAINST AN ORDER PASSED BY CIT(A) - 5 , 2 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) MUMBAI DATED 01 . 08 . 2011 , WHICH IN TURN ARISE S OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER UNDER S ECTION 143(3) R.W.S. 263 OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 21 . 12 . 2009 . 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER : - 1. DEDUCTION IN RESPECT OF WAIVER OF ADVANCES OF RS. 15 , 11 , 1 5 , 380/ - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX (D.C.I.T.) IN NOT ALLOWING THE WAIVER OF ADVANCES CLAIMED AS DEDUCTION. THE APPELLANT CONTENDS THAT THE DEDUCTION OF THE SAID WAIVER OF ADVANCE SHOULD HAVE BEEN ALLOWED UNDER SECTION 36(L)(VII) / 37(L) / 28 AND/OR OTHER PROVISIONS OF INCOME TAX ACT, 1961 (THE ACT). 2. CLAIM OF SHORT TERM CAPITAL LOSS (RS. 6 , 93 , 040) AND LONG TERM CAPITAL LOSS (RS. 1,29 , 78,811) ON SALE OF R & D ASSETS : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE D.C.I.T IN DISALLOWING CLAIM OF SHORT TERM CAPITAL LOSS OF RS. 6,9 3,040/ - AND LONG TERM CAPITAL LOSS OF RS. 1,29,78,811/ - ON SALE OF ASSETS USED FOR R & D PURPOSE. THE APPELLANT CONTENDS THAT THOUGH THE ENTIRE COST OF SUCH ASSETS WAS ALLOWED AS DEDUCTION U/S. 35 OF THE ACT, SUCH ASSETS CONTINUED TO BE THE APPELLANT'S 'CA PITAL ASSET' AS DEFINED U/S. 2(14) OF THE ACT AND THEREFORE THE COMPUTATION OF CAPITAL LOSS WAS IN LINE WITH THE PROVISIONS OF SECTION 45 OF THE ACT. 3. CLAIM OF SPECIAL PENSION LIABILITY BASED_ON ACTUARIAL VALUATION OF 1,27,75,558/ - : ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE D.C.I.T IN DISALLOWING CLAIM OF RS. 1,27,75,558/ - ON ACCOUNT OF SPECIAL PENSION LIABILITY. THE D.C.I.T. SHOULD HAVE ACCEPTED THE APPELLANT'S CLAIM CONSIDERING THE FACT THAT DEDUCTION FOR SUCH LIABILITY ON THE BASIS OF ACTUARIAL VALUATION HAS BEEN UPHELD BY HIGH COURT IN THE APPELLANT'S OWN CASE. THE D.C.I.T. ERRED IN CONCLUDING THAT THE PROVISIONS ARE BASICALLY 'CONTRIBUTION TO AN INTERNAL CORPUS' WHICH THE APPELLANT HAS PROVIDED IN ITS BOOKS OF ACCOUNTS. 3 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) [WITHOUT PREJUDICE TO THE AFORESAID CLAIM, THE APPELLANT CONTENDS THAT THE D .C.I.T. SHOULD HAVE ALLOWED DEDUCTION FOR PROP ORTIONATE UNDER SECTION 35DDA OF THE ACT. THE D.C.I.T. ALSO ERRED IN DISALLOWING THE PROVISION U/S. 43B OF THE ACT. 4. A DDITION ON ACCOUNT OF UNUTILISED MODVAT CREDIT OF RS. 17,13.97,0887 - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE D.C.I.T IN ADDING THE AMOUNT OF RS. 17,13,97,088 / - IN VALUE OF CLOSING STOCK U / S.145A. THE APPELLANT CONTENDS THAT THE MODVAT CREDIT ON UN - CONSUMED MATERIAL IN RESPECT OF CLOSING STOCK CANNOT BE OFFERED TO TAX SINCE SECTION 145 A DEALS ONLY WITH VALUATION PART WHEREA S CHARGING SECTION 4 DEALS WITH TAX PART AND SCOPE OF INCOME IS DETERMINED UNDER SECTION 5. THE UN - UTILISED MODVAT CREDIT IS IN FACT A DEBIT BALANCE CANNOT PARTAKE THE CHARACTER OF INCOME AND THE ADDITION TO TAXABLE INCOME WAS CONTRARY TO THE FACTS OF THE CASE AND THE SCHEME OF THE ACT. 5. CLAIM OF DEDUCTION U/S. 80HHC ON CERTAIN RECEIPTS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE D.C.I.T IN NOT CONSIDERING FOLLOWING RECEIPTS IN COMPUTING DEDUCTION U / S. 80HHC. A) INCOME FROM SERVICES RENDERED - RS. 4065.22 LAKHS B) PROPERTY DEVELOPMENT ACTIVITY - RS. 1720.27 LAKHS C) INCOME FROM SCRAP AND ROYALTY - RS. 2743.94 LAKHS APPELLANT CONTENDS THAT THE C.I.T. SHOULD HAVE ACCEPTED THE APP ELLANT'S CLAIM THAT THE AFORESAID RECEIPTS WERE PART OF THE BUSINESS INCOME OF THE APPELLANT AND ACCORDINGLY THE DEDUCTION WAS RIGHTLY ALLOWED ON SUCH INCOME IN THE ASSESSMENT. 3 . THE ASSESSEE BEFORE US IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND , I S INTER - ALIA , ENGAGED IN THE BUSINESS OF MANUFACTURE OF AUTOMOTIVE TRACTORS, ETC. FOR THE ASSESSMENT 4 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) YEAR UNDER CONSIDERATION, IT FILED THE RETURN OF INCOME DECLARING A TOTAL INCOME OF ` 123,94,95,060 / - , WHICH WAS SUBJECT TO SCRUTINY ASSESSMENT UNDER S ECTION 143(3) OF THE ACT DATED 08 . 12 . 2006, WHERE BY THE TOTAL INCOME WAS DETERMINED AT ` 2,43,31,62,607/ - . SUBSEQUENTLY, THE ASSESSMENT WAS SET ASIDE BY THE COMMISSIONER OF INCOME TAX UNDER S ECTION 263 OF THE ACT AND CONSEQUENTLY, THE IMPUGNED ASSESSMENT UNDER S ECTION 143(3) R.W.S. 263 OF THE ACT HAS BEEN FINALIZED, WHEREBY THE TOTAL INCOME HAS BEEN DETERMINED AT ` 278,64,36,170/ - . THE PRESENT APPEAL BEFORE US IS WITH RESPECT TO THE GRIEVANCE OF THE ASSESS EE AGAINST CERTAIN ADDITIONS MADE IN THE IMPUGNED ASSESSMENT ORDER, WHICH HAVE SINCE BEEN AFFIRMED BY THE CIT(A). 4 . INS O FAR AS THE GROUND OF APPEAL NO.1 IS CONCERNED, THE SAME RELATES TO A CLAIM MADE BY THE ASSESSEE IN THE RETURN OF INCOME OF ` 15,11,15,3 80/ - REPRESENTING WRITE - OFF OR WAIVER OF ADVANCE GIVEN TO ITS SUBSIDIARY MAHINDRA GESCO DEVELOPERS LTD. ( HEREINAFTER REFERRED TO AS MGDL). THE FACTS RELEVANT IN THIS CONTEXT CAN BE SUMMARIZED AS FOLLOW. THE ASSESSEE HAD A PROPERTY DEVELOPMENT DIVISION , WHICH WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND SALE OF RESIDENTIAL AND COMMERCIAL PROPERTIES. AS A PART OF THIS ACTIVITY IN THE NINETIES, ASSESSEE ACQUIRED LAND BANKS AT VARIOUS PLACES IN MUMBAI AND PUNE WHICH WERE HELD AS STOCK - IN - TRADE BEING A PART OF THE PROPERTY DEVELOPMENT BUSINESS ACTIVITY OF THE COMPANY. AS A PART OF ITS DEVELOPMENT ACTIVITIES, ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH NEW GREAT EASTERN WEAVING COMPANY LTD. (HEREAFTER REFERRED TO AS NGE) FOR DEVELOPMENT/REDEVELOPMENT O F A PORTION OF NGES PROPERTY FOR RESIDENTIAL CUM COMMERCIAL COMPLEX. IN 5 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) PURSUANCE TO SUCH AGREEMENT NGE AVAILED FROM THE ASSESSEE VARIOUS TYPES OF SERVICES FOR THE JOINT DEVELOPMENT FROM TIME TO TIME AND MADE ON ACCOUNT OF PAYMENT BY WAY OF ADVANCES TO N GE AGGREGATING TO ` 42 CRORES FOR PURCHASING DEVELOPMENT RIGHTS IN RESPECT OF THE LAND. IN MARCH, 1996, SOME PROJECTS OF THE PROPERTY DEVELOPMENT DIVISION OF THE ASSESSEE COMPANY WERE TRANSFERRED TO ITS SUBSIDIARY NAMELY , MAHINDRA REALTY AND INFRASTRUCTURE DEVELOPERS LTD. (HEREINAFTER REFERRED TO AS MRIDL), IN FACT, THE PROJECTS SO TRANSFERRED INCLUDED THE AFORESAID NGE PROJECTS. MRIDL ALSO AGREED TO REPAY THE ADVANCES GIVEN TO NGE IN RESPECT OF THE NGE PROJECTS AND ALSO COMPENSATED THE ASSESSEE TO THE TUNE OF ` 10.45 CRORES FOR THE SERVICES RENDERED BY ASSESSEE TO NGE TILL THEN IN PURSUANCE OF THE DEVELOPMENT AGREEMENT. AS A CONSEQUENCE OF SUCH TRANSFER, THE AMOUNTS DUE FROM NGE BECOME DUE TO MRIDL. SIMILARLY, THE ADVANC ES PAID BY THE ASSESSEE FROM TIME TO TIME TO NGE FOR ACQUIRING DEVELOPMENT RIGHTS BY WAY OF STOCK - IN - TRADE IS RECOVERABLE FROM MRIDL. IT TRANSPIRES THAT IN APRIL, 2001 THE REAL ESTATE DIVISION OF MRIDL DEMERGED. AS A RESULT , THE RIGHTS IN THE NGE LAND BE C O ME PART OF THE STOCK - IN - TRADE OF MGDL PURSUANCE TO THE SCHEME OF DEMERGER. THUS, THE AFORESAID SUMS OWED BY MRIDL NOW BECOME DEBTS DUE BY MGDL TO THE ASSESSEE. 5 . AT THIS POINT, IT WOULD ALSO BE RELEVANT TO NOTE THAT ASSESSEE EARNED INTEREST ON THE ENT IRE SUM IN RESPECT OF NGE PROJECTS FROM YEAR TO YEAR, FIRST FROM MRIDL AND THEREAFTER FROM MGDL. ON THIS COUNT , ASSERTIONS MADE BY THE ASSESSEE BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE CIT(A) REVEAL THAT BETWEEN 1992 AND 2003 A SUM OF ` 37 CRORES WE RE EARNED BY ASSESSEE BY WAY OF INTEREST DUE FROM MRIDL/MGDL. THE ASSESSEE ALSO 6 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) BROUGHT TO THE NOTICE OF THE LOWER AUTHORITIES THAT SUCH INTEREST INCOME HAD BEEN OFFERED TO TAX FROM YEAR TO YEAR AS PROFITS AND GAINS OF BUSINESS. 6 . IN THIS BACKGROUND COM ING TO THE INSTAN T CLAIM OF RIGHT OFF/WAIVER OF ` 15,11,15,380/ - DUE FROM MGDL IS CONCERNED, ASSESSEE EXPLAINED THAT GETTING THE CLEARANCE FOR PROPER ASSIGNMENT OF THE TITLE TO LAND, ETC. TO MRIDL AND/OR MGDL WAS THE RESPONSIBILITY OF THE ASSESSEE. AS IT TOOK A VERY LONG TIME FOR GETTING CLEARANCES , MGDL MAD E A CLAIM BEFORE THE ASSESSEE WHICH WAS DULY CONSIDERED. THIS RESULTED IN , INTER - ALIA , WAIVER OF ` 15,11,15,380/ - REPRESENTING AMOUNTS RECEIVABLE BY ASSESSEE FROM MGDL. IN THE RETURN OF INCOME, ASSESSEE CLAIMED THAT THE AFORESAID AMOUNT OF WAIVER WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 36(1)(VII) OR UNDER S ECTION 37(1) OF THE ACT OR ALTERNATIVELY AS A BUSINESS LOSS UNDER S ECTION 28 OF THE ACT. 7 . THE ASSESSING OFFICER WAS NOT SATISFIED WITH ANY OF THE AFORESAID CLAIMS PUT FORTH BY THE ASSESSEE. FIRSTLY, WITH REGARD TO ASSESSEES CLAIM OF DEDUCTION AS BAD DEBT UNDER S ECTION 36(1)(VII) OF THE ACT, THE ASSESSING OFFICER OBSERVED THAT THE REQUISITE CONDITIONS CONTAINED IN S ECTION 36(2) OF THE ACT WERE NOT FULFILLED, AS MUCH AS, THE INSTANT AMOUNT REPRESENTED MERELY AN ADVANCE, WHICH HAD NOT BEEN OFFERED AS INCOME IN ANY PRECEDING YEARS. SECONDLY, AS PER ASSESSING OFFICER THE CLAIM WAS MADE BY THE ASSESSEE IN HIS COMPUTATION OF INCOME ATTACHED WITH THE RETURN OF INCOME AND, THEREFORE, IT WAS NOT WRITTEN - OFF IN THE BOOKS OF ACCOUNT. THIRDLY, AS PER THE ASSESSING OFFICER ASSESSEE DID NOT FURNISH COPY OF ANY BOARD RESOLUTION TO SHOW THAT THE WAIVER WA S AUTHORIZED BY THE BOARD OF 7 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) DIRECTORS. FOURTHLY, THE ASSESSING OFFICER NOTED THAT IT WAS NOT A TRADING DEBT SINCE THE IMPUGNED SUM FORMED PART OF THE COST OF THE TRANSFER OF BUSINESS. FOR ALL THE SAID REASONS, THE CLAIM MADE UNDER S ECTION 3 6 (1)(VII) OF THE ACT WAS FOUND AS UNTENABLE. WITH REGARD TO ASSESSEES CLAIM FOR DEDUCTION AS EXPENDITURE UNDER SECTION 37(1) OF THE ACT IS CONCERNED, THE ASSESSING OFFICER REJECTED THE SAME AS ACCORDING TO HIM IT WAS CAPITAL IN NATURE. THE ASSESSING OFFICER REFERRED TO THE FACT THAT THE CLAIM WAS ON ACCOUNT OF A DEMERGER EXERCISE, WHICH RESULTED IN LONG TERM BENEFITS TO THE ASSESSEE AND WAS, THEREFORE, CAPITAL IN NATURE, WHICH COULD NOT BE ALLOWED AS DEDUCTION UNDER S ECTION 37(1) OF THE ACT. SO FAR AS THE CLAIM OF B USINESS LOSS UNDER S ECTION 28 OF THE ACT I S CONCERNED, THE ASSESSING OFFICER REJECTED THE SAME ON THE GROUND THAT THE SAME DID NOT CRYSTALL I ZE DURING THE YEAR. F OR THE AFORESAID REASONS , THE CLAIM OF THE ASSESSEE WAS REJECTED ON ALL THE COUNTS . 8 . THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A), WHO HAS ALSO CONFIRMED THE DISALLOWANCE FOR THE VERY SAME REASONS ADVANCED BY THE ASSESSING OFFICER, WHICH WE HA VE ALREADY NOTED IN THE EARLIER PARAS. AGAINST THE DECISION OF THE CIT(A) SUSTAINI NG THE DISALLOWANCE, ASSESSEE IS IN FURTHER APPEAL BEFORE US. 9 . BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE PRIMARY CLAIM OF THE ASSESSEE WAS THAT THE IMPUGNED DEDUCTION WAS ALLOWABLE UNDER SECTION 36(1)(VII) OF THE ACT . IT HAS BEEN POINTED OUT THAT THE IMPUGNED WAIVER/W RITE - OFF WAS OF A SUM, WHICH WAS TRANSACTED IN THE NORMAL COURSE OF BUSINESS OF PROPERTY DEVELOPMENT. REFERRING TO THE 8 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) FACTS, WHICH HAVE BEEN BRIEFLY NOTED BY US IN THE EARLIER PARAS, THE LD. REPRESENTATIVE F OR THE ASSESSEE POINTED OUT THAT THE MONIES WERE ADVANCE D TO NGE IN THE NORMAL COURSE OF THE BUSINESS OF PROPERTY DEVELOPMENT AND THE SAME WAS TOWARDS COST OF ACQUISITION OF STOCK - IN - TRADE. IT WAS ALSO POINTED OUT THAT IN THE COURSE OF ADVANCING MONIES FO R TRADE, IT IS A NORMAL INSTANCE THAT AN ADVANCE MA Y BEC O ME BAD ON ACCOUNT OF VARIOUS EXIGENCIES. THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT A SUM OF ` 10,45,00,000/ - AS WELL AS ` 39,00,00,000/ - ON ACCOUNT OF SERVICE CHARGES AND INTEREST RESPE CTIVELY WERE EARNED BY THE ASSESSEE FROM THE IMPUGNED TRANSACTION OF DEVELOPMENT OF NGE LAND, WHICH HAVE BEEN OFFERED TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. IT WAS THEREFORE, CONTENDED THAT THE AMOUNT OF ` 15,11,15,380/ - W AS WRITTEN - OFF/WAI VED OUT OF SUCH ADVANCES AND, THEREFORE, IT WAS TO BE UNDERSTOOD AS A PART OF DEBT WITHIN THE MEANING OF S ECTION 36(1)(VII) OF THE ACT. IT WAS SUBMITTED THAT EVEN OTHERWISE THE WAIVER WAS TO BE SEEN AS A MATTER OF BUSINESS DECISION WHICH FACILITATED REC OVERY OF THE BALANCE AMOUNT FROM MGDL IN JUNE, 2005 . I.E. IN THE SUBSEQUENT YEAR. IT WAS POINTED OUT THAT A SUM OF ` 22,72,00,000/ - CRORES WAS RECEIVED IN FULL AND FINAL SETTLEMENT OF THE OUTSTANDING DUES FROM MGDL IN JUNE 2005. SO HOWEVER, AS FAR AS THE WAIVER OF ` 15,11,15,380/ - IS CONCERNED, THIS HAD OCCURRED IN THE INSTANT YEAR AND, THEREFORE, THE ASSESSEE HAD CLAIMED THE DEDUCTION IN THE INSTANT YEAR. 1 0 . REPUDIATING THE CLAIM THAT THE SAID AMOUNT WAS ACTUALLY NOT WRITTEN - OFF IN THE BOOKS OF ACCOUNT, THE LD. REPRESENTATIVE FOR THE ASSESSEE DREW OUR ATTENTION TO P AGES 26 & 33 OF THE PAPER BOOK, WHICH 9 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) ARE A PART OF THE ANNUAL ACCOUNTS OF THE ASSESSEE, TO POINT OUT THAT THE AMOUNTS HAVE ACTUALLY BEEN WRITTEN - OFF. THE LD. REPRESENTATIVE FOR THE ASSESSEE P OINTED OUT THAT WHILE DEBITING IT IN THE PROFIT & LOSS ACCOUNT, AN EQUIVALENT AMOUNT WAS TRANSFERRED TO THE CREDIT OF THE PROFIT & LOSS ACCOUNT FROM AN ACCOUNT STYLED INVESTMENT FLUCTUATION RESERVE ACCOUNT, WHICH HAD NO IMPACT ON THE PROFIT FOR THE YEAR. IT IS FOR THIS REASON , THAT THE CLAIM WAS EFFECTIVELY MADE IN THE COMPUTATION OF INCOME WHILE DETERMINING THE TOTAL INCOME WHILE FILING THE RETURN OF INCOME. SO HOWEVER, THE ACCOUNT OF MGDL WAS ACTUALLY CREDITED BY THIS AMOUNT AND THE AMOUNT DUE FROM MG DL STOOD REDUCED TO THIS EXTENT, WHICH SHOWED THAT THE IMPUGNED SUM IS ACTUALLY WRITTEN - OFF IN THE BOOKS OF ACCOUNT. IN SUPPORT OF THE CLAIM THAT THE IMPUGNED SUM IS ALLOWABLE AS A DEDUCTION UNDER S ECTION 36(1)(VII) OF THE ACT , RELIANCE HAS BEEN PLACED ON THE FOLLOWING DECISIONS: - 1. CIT VS. SHREYAS S MORAKHIA, 342 ITR 285(BOM) 2. MAHINDRA ENGINEERING & CHEMICAL PRODUCTS LTD. (ITA NO. 2947/ MUM /2010 DATED 30/10/2016. (MUM TRIBUNAL) 3. M/S. KYATI REALTORS PVT. LTD., ITA NO.129/MUM/2014 DATED 04/03/2016 (MUM TRIBUNAL) 4. PUDU MJEE PULP & PAPER MILLS LIMITED ( ITA NO.1590 OF 2013 DATED 05/08/2018 (BOM) ON THE OTHER HAND, THE LD. DR HAS DEFENDED THE ACTION OF THE LOWER AUTHORITIES. THE LD. DR HAS REITERATED THE ARGUMENTS TAKEN BY THE ASSESSING OFFICER IN T HE ASSESSMENT ORDER, WHICH WE HAVE ALREADY 10 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) ADVERTED TO, IN PARA 7 ABOVE, AND THE SAME ARE NOT BEING REPEATED FOR THE SAKE OF BREVITY. 11 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE LIMITED CONTROVERSY BEFORE US IS WHETHER THE WAIVER OF ADVANCES OF ` 15,11,15,380/ - BY THE ASSESSEE IS ALLOWABLE AS DEDUCTION UNDER SECTION 36(1)(VII)/ 37(1)/ 28 AND/OR ANY OTHER PROVISION OF THE ACT. WE HAVE EXTENSIVELY NOTED THE FACTS RELEVANT TO THE DISPUTE IN THE EARLIER PART OF THIS ORDER , AND THE SAME ARE NOT REPEATED FOR THE SAKE OF BREVITY. FIRST, WE SHALL EXAMINE THE PLEA OF THE ASSESSEE IN THE CONTEXT OF SEC. 36(1)(VII) OF THE ACT. 1 2 . SECTION 36(1)(VII) OF THE ACT PROVIDES FOR DEDUCTION WITH RESPECT TO BAD DEBTS O R PART THEREOF WHICH IS WRITTEN - OFF IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. FURTHER, SECTION 36(2) OF THE ACT STATES THAT NO DEDU CTION UNDER SECTION 36(1)(VII) OF THE ACT SHALL BE ALLOWED UNLESS SUCH DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR. THUS, WE FIND THAT TWIN CONDITIONS, NAMELY, (I) BAD DEBTS SHOULD BE WRITTEN - OFF IN THE BOOKS OF ACCOUNT; AND, (II) DEBT OR PART THEREOF SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF PREVIOUS YEAR OR EARLIER PREVIOUS YEARS, SHOULD BE SATISFIED IN ORDER TO ALLOW THE DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT. AS REGARDS THE FIRST CONDITION, WE FIN D THAT THE ASSESSEE HAS DEBITED THE IMPUGNED SUM OF ` 15,11,15,380/ - IN ITS PROFIT & LOSS ACC OUNT ; AND, T HE ACCOUNT OF MGD L HAS BEEN ACTUALLY CREDITED BY THE 11 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) SAID AMOUNT AND THUS THE AMOUNT DUE FROM MGDL STOOD ABATED OR WRITTEN - OFF TO THE SAID EXTENT. WE SHALL NOW EXAMINE THE FULFILMENT OF THE SECOND CONDITION, I.E., WHETHER THE DEBT OR PART THEREOF WAS OFFERED TO TAX BY THE ASSESSEE IN PREVIOUS YEAR OR ANY OF THE EARLIER PREVIOUS YEARS. IN THIS REGARD, WE FIND THAT ASSESSEE HAS ONLY OFFERED THE INTEREST INCOME PERTAINING TO SUCH ADVANCES IN ITS BOOKS OF ACCOUNT AND THE ACTUAL ADVANCES WAS NEVER CREDITED TO THE PROFIT & LOSS ACCOUNT IN ANY OF THE YEARS. THE LD. REPRESENTATIVE FOR THE ASSESSEE HAS POINTED OUT THAT THE WORDS USED IN SECTION 36(2) OF THE ACT ARE DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME . AS PER THE APPELLANT, THE SIGNIFICANCE O F THE LATER PART OF THE WORDS DEBT OR PART THEREO F BEING PART THEREOF , SHOULD ALSO BE APPRECIATED WHILE INTERPRETING THE PROVISIONS OF SECTION 36(2) OF THE ACT ; KEEPING THAT IN MIND, I T WAS ARGUED THAT INTEREST BEING THE PART OF THE DEBT WAS VERY WELL OFFERED TO TAX BY THE ASSESSEE IN ITS RETURN OF INCOME AND THUS, IT CAN BE SAID THAT PART OF THE DEBT WAS OFFERED TO TAX AND, THEREFORE, THE REQUIREMENT OF SECTION 36(2) OF THE ACT STOOD SATISFIED. IN THIS REGARD, THE LD. REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHREYAS S MORAKHIA (SUPRA) TO CLAIM THAT THE ADVANCES WAIVED BY THE ASSESSEE IS ALLOWABLE U/S 36(1)(VII) OF THE ACT. THE ASSESSEE IN THAT CASE WAS A SHARE BRO KER WHO COULD NOT RECOVER THE AMOUNT FROM ITS CLIENTS IN RESPECT OF TRANSACTIONS EFFECTED BY HIM ON BEHALF OF HIS CLIENTS APART FROM THE COMMISSION EARNED BY HIM , WHICH WAS OFFERED TO TAX. THE AMOUNT WHICH COULD NOT BE RECOVERED FROM CLIENTS WAS CLAIMED A S DEDUCTION U/S 36(1)(VII) OF THE ACT. IN THIS CONTEXT, THE FOLLOWING OBSERVATIONS OF THE HON'BLE HIGH COURT ARE WORTHY OF NOTICE : - 12 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) 14. THE VALUE OF THE SHARES TRANSACTED BY THE ASSESSEE AS A STOCK BROKER ON BEHALF OF ITS CLIENT IS AS MUCH A PART OF THE DEBT AS IS THE BROKERAGE WHICH IS CHARGED BY THE ASSESSEE ON THE TRANSACTION. THE BROKERAGE HAVING BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, IT IS EVIDENT THAT A PART OF THE DEBT IS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASS ESSEE. THE FACT THAT THE LIABILITY TO PAY THE BROKERAGE MAY ARISE, AS CONTENDED BY THE REVENUE, AT A POINT IN TIME ANTERIOR TO THE LIABILITY TO PAY THE VALUE OF THE SHARES TRANSACTED WOULD NOT MAKE ANY MATERIAL DIFFERENCE TO THE POSITION. BOTH CONSTITUTE A PART OF THE DEBT WHICH ARISES FROM THE VERY SAME TRANSACTION INVOLVING THE SALE OR AS THE CASE MAY BE PURCHASE OF SHARES. SINCE BOTH FORM A COMPONENT PART OF THE DEBT, THE REQUIREMENTS OF SECTION 36(2)(I) ARE FULFILLED WHERE A PART THEREOF IS TAKEN INTO A CCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE . THE HONBLE HIGH COURT IN THE ABOVE CASE HAS ANALYSED THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. T. VEERABHADRA RAO , 155 ITR 152 AND OBSERVED THAT WHEN ONLY THE INTEREST INCOME WAS OFFERED TO TAX BY THE ASSESSEE AND NOT THE LOAN ITSELF, THE REQUIREMENT OF SECTION 36(2)(I) OF THE ACT IS SATISFIED EVEN THOUGH THE PRINCIPAL AMOUNT OF LOAN WAS NOT OFFERED TO TAX AS THE INTEREST REPRESENTS THE PART OF THE DEBT AND SECTION 36(2)(I) OF THE ACT STATES THAT DEBT OR PART THEREOF SHALL BE OFFERED TO TAX. APPLYING THE AFORESAID JUDGMENT OF THE HON'BLE SUPREME COURT, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHREYAS S. MORAKHIA (SUPRA) HELD THAT WHEN THE ASSESSEE, A S HARE BROKER , OFFERED TO TAX THE COMMISSION INCOME EARNED ON ACCOUNT OF EFFECTING THE SHARE TRANSACTION ON BEHALF OF THE CLIENT AND THE CLIENT FAILED TO PAY THE TRANSACTION AMOUNT, SINCE THE ASSESSEE HA D OFFERED THE COMMISSION INCOME TO TAX, WHICH IS THE PA RT OF THE ENTIRE DEBT, THE REQUIREMENT OF SECTION 36(2) OF THE ACT STOOD 13 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) FULFILLED. T HE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF SHREYAS S MORAKHIA (SUPRA) WAS FOLLOWED BY THE HONBLE HIGH COURT IN THE CASE OF CIT VS. PUDUMJEE PULP & PAPER MIL LS LTD. ITA NO. 1590 OF 2013 ALSO . 1 3 . IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE EARNED INTEREST INCOME OF ` 39,00,00,000/ - AND ASSIGNMENT CHARGES OF ` 10,45,00,000/ - FROM THE TRANSACTION OF DEVELOPMENT OF NGE LAND. FOLLOWING THE RATIO LAID DO WN BY THE HONBLE SUPREME COURT IN THE CASE OF T. VEERABHADRA RAO (SUPRA) , WHICH HAS BEEN APPLIED BY THE HONBLE BOMBAY HIGH COURT IN SHREYAS S MORAKHIA (SUPRA) , WE FIND THAT THE INCOME OFFERED BY THE ASSESSEE IN THE FORM OF INTEREST AND ASSIGNMENT CHARGES FORMED PART OF THE ENTIRE DEBT OWNED BY THE ASSESSEE FROM NGE AND SINCE THE ASSESSEE HAD OFFERED TO TAX A PART OF THE DEBT, THE REQUIREMENT OF SECTION 36(2) OF THE ACT STOOD SATISFIED AND THE ASSESSEE IS ELIGIBLE TO CLAIM THE DEDUCTION O F ` 15,11,15,380/ - UNDER SECTION 36(1)(VII) OF T HE ACT. WE HOLD SO. 1 4 . SINCE WE HAVE ACCEPTED THE PLEA OF THE ASSESSEE FOR DEDUCTION OF THE SAID SUM IN TERMS OF SEC. 36(1)(VII) OF THE ACT, THE ALTERNATE PLEA S MADE BY THE ASSESSEE FOR DEDUCTIBILITY OF THE SAID SUM IN TERMS OF SEC. 37(1) OF THE ACT OR AS A BUSINESS LOSS IN TERMS OF SEC. 28 OF THE ACT, ARE RENDERED ACADEMIC AND ARE NOT BEING ADJUDICATED FOR THE PRESENT. ACCORDINGLY, GROUND OF APPEAL NO. 1 OF THE ASSESSEE IS ALLOWED, AS ABOVE. 1 5 . INSOFAR AS GROUND OF APPEAL NO. 2 IS CONCERNED, IT PERTAINS TO DISALLOWANCE OF CLAIM OF SHORT TERM CAPITAL LOSS AND LONG TERM CAPITAL 14 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) LOSS CLAIMED BY THE ASSESSEE ON SALE OF ASSETS USED FOR RESEARCH & DEVELOPMENT ACTIVITIES FOR WHICH DEDUCTION UNDER SECTIO N 35 OF THE ACT WAS ALREADY CLAIMED BY THE ASSESSEE HOLDING IT TO BE DOUBLE DEDUCTION. 1 6 . IN THE COURSE OF HEARING IT WAS POINTED OUT THAT THE ABOVE ISSUE IS DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN ITA NO. 8597/MUM/2010 IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006 - 07 HOLDING THAT THE CLAIM OF SHORT TERM AND LONG TERM LOSS WILL AMOUNT TO DOUBLE DEDUCTION, WHICH IS NOT PERMISSIBLE. 1 7 . SINCE THERE IS NO CHANGE IN FACTS, FOLLOWING THE DECISION OF OUR CO - ORDINATE BENCH IN ASSESSEES OWN CASE, TH IS GROUND OF APPEAL IS DECIDED AGAINST THE ASSESSEE. 1 8 . INSOFAR AS THE GROUND OF APPEAL NO. 3 IS CONCERNED, IT PERTAINS TO DISALLOWANCE OF CLAIM OF SPECIAL PENSION LIABILITY BASED ON ACTUARIAL VALUATION OF ` 1,27,75,558/ - . IN THE COURSE OF HEARING, THE LD . REPRESENTATIVE FOR THE ASSESSEE DID NOT PRESS FOR ALLOWANCE OF THE ENTIRE CLAIM OF SPECIAL PENSION LIABILITY AND ONLY PRESSED THE ALTERNATIVE GROUND WITH RESPECT TO PROPORTIONATE AMOUNT ALLOWABLE UNDER SECTION 35DDA OF THE ACT. IT WAS SUBMITTED THAT THE ASSESSING OFFICER HIMSELF HAS ALLOWED DEDUCTION UNDER SECTION 35DDA OF THE ACT ON THE ABOVE PAYMENTS IN SUBSEQUENT YEARS. IT WAS SUBMITTED THAT THERE WAS AMENDMENT IN S ECTION 35DDA OF THE ACT AND AFTER THE AMENDMENT, ANY PAYMENT MADE IN CONNECTION WITH A VOLUNTARY RETIREMENT SCHEME ( VRS ) WAS ALLOWED AS DEDUCTION OVER A PERIOD OF 5 YEARS IN EQUAL INSTALMENTS. IT HAS BEEN 15 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) POINTED OUT THAT THIS ASPECT HAS BEEN ACCEPTED BY THE ASSESSING OFFICER IN THE ORDER GIVING EFFECT TO THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2006 - 07. 19 . SINCE THE ASSESSING OFFICER HIMSELF HAS ALLOWED THE CLAIM OF THE ASSESSEE UNDER SECTION 35DDA OF THE ACT IN SUBSEQUENT YEARS, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM UNDER SECTION 35DDA OF THE ACT FOR THE YEAR UNDER CONSIDERATION AS THE NATURE OF PAYMENT IN ALL THE YEARS IS THE SAME, THERE BEING NO CHANGE IN FACTS. THUS, ON THIS GROUND, ASSESSEE PARTLY SUCCEEDS. 2 0 . INSOFAR AS GROUND OF APPEAL NO. 4 IS CONCERNED, IT RELATES TO THE ADDITION MADE BY THE ASSESSING OFF ICER AND CONFIRMED BY THE CIT(A) TO THE VALUE OF CLOSING STOCK ON ACCOUNT OF UNUTILISED MODVAT CREDIT OF ` 17,13,97,088/ - BY APPLYING THE PROVISIONS OF SECTION 145A OF THE ACT. THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD UNUT I LISED MODVAT CREDIT OF ` 17 ,13,97,088/ - AT THE CLOSE OF THE PREVIOUS YEAR. THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SAME SHOULD NOT BE ADDED TO THE VALUE OF CLOSING STOCK UNDER SECTION 145A OF THE ACT I N VIEW OF THE FACT THAT SECTION 145A OF THE ACT PROVIDES FOR INCLUSION OF ALL T AX, DUTY, CESS IN THE VALUATION OF CLOSING STOCK. T HE ASSESSING OFFICER PROCEEDED TO ADD THE UNUTILISED MODVAT CREDIT IN THE HANDS OF THE ASSESSEE. ON APPEAL, CIT(A) FOLLOWING THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF KAIRA CAN COMP ANY LTD VS. DCIT (2009) 32 DTR 485 (MUM) AND DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS. MAHAVIR ALUMINIUM LTD 214 ITR 45 (DEL) HELD THAT SECTION 145A OF THE ACT PROVIDES FOR ADJUSTMENT NOT 16 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) ONLY WITH RESPECT TO CLOSING STOCK, BUT ALS O WITH RESPECT TO OPENING STOCK, PURCHASES AND SALES AND DIRECTED THE ASSESSING OFFICER TO RE - COMPUTE THE PROFITS OF THE ASSESSEE AFTER MAKING ADJUSTMENT IN OPENING STOCK, PURCHASES AND SALES. AS PER THE CIT(A), I F THE AFORESAID ADJUSTMENT RESULTS INTO AN ADDITION, THEN THE SAME SHOULD BE SUSTAINED. AGGRIEVED BY THE SAID DECISION, THE ASSESSEE IS IN APPEAL BEFORE US. 2 1 . BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT ASSESSEE FOLLOWS E XCLUSIVE METHOD OF VALUATION OF PURCHASES, SALES, AND INVENTORY. SECTION 145A OF THE ACT PROVIDES FOR INCLUSIVE METHOD OF ACCOUNTING. IT PROVIDES THAT THE INVENTORY, PURCHASE AND SALE SHOULD BE VALUED AT GROSS. A SIMILAR ADDITION WAS MADE BY THE ASSESSING OFFICER IN ASSESSEES OWN CASE FOR ASSESSMENT Y EAR 2006 - 07 WHEREIN THE TRIBUNAL DIRECTED THE ASSESSING OFFICER TO RE - COMPUTE THE OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK SO AS TO INCLUDE THE EXCISE DUTY AND DETERMINE IF THERE WAS ANY IMPACT ON THE INCOME UNDER SECTION 145A OF THE ACT. IT HAS BEEN CANVASSED BEFORE US THAT W HILE GIVING EFFECT TO THE ORDER OF THE TRIBUNAL, THE ASSESSING OFFICER ACCEPTED THE FACT THAT IMPACT OF SECTION 145A OF THE ACT IS TAX NEUTRAL AND DELETED THE ADDITION MADE IN THE ORDER UNDER SECTION 143(3) OF THE ACT IN RESPECT OF UNUTILISED CENVAT. SINCE THE ASSESSING OFFICER HIMSELF HAS ACCEPTED THE FACT THAT SECTION 145A OF THE ACT IS TAX NEUTRAL IN ASSESSMENT YEAR 2006 - 07, THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER SHOULD BE DIRE CTED TO DELETE THE ADDITION MADE FOR THE INSTANT YEAR ALSO ; A COPY OF ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) R.W.S. 254 OF THE ACT FOR ASSESSMENT YEAR 2006 - 07 WAS ALSO FURNISHED BEFORE US. 17 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) 2 2 . IT HAS BEEN POINTED THAT THE ABOVE ISSUE I S COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DIAMOND DYE CHEM LTD. IN ITA 146 OF 2015 WHEREIN THE DEPARTMENT HA D FILED AN APPEAL BEFORE THE HONBLE HIGH COURT AGAINST THE DECISION OF THE TRIBUNAL D ELETING THE ADDITION MADE BY THE ASSESSING OFFICER TO CLOSING STOCK ON ACCOUNT OF UNUTILISED CENVAT CREDIT. THE HON'BLE HIGH COURT IN THAT CASE HAS DISMISSED THE APPEAL OF THE DEPARTMENT. 2 3 . PER CONTRA, THE LD. DR RELIED ON THE ORDERS OF LOWER AUTHORIT IES TO SUBSTANTIATE THE ACTION OF THE ASSESSING OFFICER. WITH RESPECT TO THE DECISION CITED BY THE LD. REPRESENTATIVE FOR THE ASSESSEE , THE LD. DR DID NOT CITE ANY ADVERSE DECISION. 2 4 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S . WE FIND THAT AS RIGHTLY POINTED OUT BY THE LD. REPRESENTATIVE FOR THE ASSESSEE, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIAMOND DYE CHEM LTD. (SUPRA) HAS ALREADY DEALT WITH THE ISSUE WHETHER ADDITION ON ACCOUNT OF MODVAT CREDIT IS WARRANTED OR NOT. THE HONBLE HIGH COURT RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. INDO NIPPON CHEMICALS CO. LTD., 261 ITR 275 HELD THAT THE UNUTILISED CREDIT CANNOT BE DIRECTLY ADDED TO THE INCOME OF THE ASSESSEE. THE RELEVANT PARA OF TH E SAID DECISION IS REPRODUCED HEREUNDER: - 5. WE HAVE CONSIDERED THE SUBMISSIONS. IT IS NOT DISPUTED THAT THE ASSESSEE WAS LIABLE TO EXCISE DUTY. THE ASSESSEE GOT CREDIT IN THE EXCISE DUTY ALREADY PAID ON THE RAW MATERIALS PURCHASED BY IT AND UTILIZED IN THE MANUFACTURING OF EXCISABLE GOODS. THE ASSESSEE WAS 18 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) ADOPTING THE EXCLUSIVE METHOD I.E. VALUING THE RAW MATERIALS ON THE PURCHASE PRICE MINUS ( - ) THE MODVAT CREDIT. THE SAME WOULD BE PERMISSIBLE. THE APEX COURT IN THE CASE OF INDO NIPPON CHEMICALS C O. LTD. (SUPRA) WHILE AFFIRMING THE ORDER OF HIGH COURT, HAS OBSERVED THAT THE INCOME WAS NOT GENERATED TO THE EXTENT OF MODVAT CREDIT OR UNCONSUMED RAW MATERIAL. MERELY BECAUSE THE MODVAT CREDIT WAS IRREVERSIBLE CREDIT OFFERED TO MANUF ACTURERS UPON PURCHASE OF DUTY PAID RAW MATERIALS, THAT WOULD NOT AMOUNT TO INCOME WHICH WAS LIABLE TO BE TAXED UNDER THE ACT. IT IS ALSO HELD THAT WHICHEVER METHOD OF ACCOUNTING IS ADOPTED, THE NET RESULT WOULD BE THE SAME. 6. CONSIDERING THE ABOVE, THE AMOUNT OF THE UN UTILIZED CENVAT CREDIT COULD NOT HAVE BEEN DIRECTLY ADDED TO THE CLOSING STOCK. THE TRIBUNAL HAS NOT COMMITTED ANY ERROR . ( UNDERLINED FOR E MPHASIS BY US ) IT IS EVIDENT FROM THE ABOVE THAT IRRESPECTIVE OF THE METHOD OF ACCO UNTING FOLLOWED BY THE ASSESSEE, I.E. I NCLUSIVE METHOD , WHEREIN THE TAXES ARE INCLUDED IN THE OPENING STOCK, PURCHASES, ETC. OR THE E XCLUSIVE METHOD , THE MODVAT CREDIT DOES NOT HAVE ANY IMPACT ON THE PROFIT OF THE ASSESSEE. THUS, FOLLOWING THE RATIO L AID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF INDO NIPPON CHEMICALS CO. LTD. (SUPRA) AND FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIAMOND DYE CHEM LTD. (SUPRA) , WE SET - ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION MADE ON ACCOUNT OF UNUTILISED MODVAT CREDIT. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 2 5 . INSOFAR AS GROUND OF APPEAL NO. 5 IS CONCERNED, THE SAME RELATES TO THE MANNER OF COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 19 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) THE GRIEVANCE OF THE ASSESSEE IS THAT THE LOWER AUTHORITIES HAVE WRONGLY CONSIDERED THE FOLLOWING RECEIPTS AS EXCLUDIBLE FROM THE PROFITS OF BUSINESS IN TERMS OF EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT : - A. INCOME FROM SERVICES RENDERED ` 4065.22 LAKHS B. PROPERTY DEVELOPMENT ACTIVITY ` 1720.27 LAKHS C. INCOME FROM SCRAP ` 2198.94 LAKHS D. ROYALTY ` 545 LAKHS 2 6 . INSOFAR AS INCOME FROM SERVICES RENDERED AND PROPERTY DEVELOPMENT ACTIVITY IS CONCERNED, THE PLEA OF THE LD. REPRESENTAT IVE WAS THAT THE SAME ARE A PART OF REGULAR OPERATIONS , AND SAME HA VE BEEN ACCEPTED AS PROFITS OF BUSINESS FOR THE PURPOSE OF SEC. 80HHC OF THE ACT IN THE PAST YEARS ALSO. IT IS CONTENDED THAT THE SAME CANNOT BE EXCLUDED BY APPLYING EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT. IT HAS ALSO BEEN POINTED OUT THAT THE SAID RECEIPTS HAVE BEEN CONSIDERED BY THE ASSESSING OFFICER AS PART OF THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION UNDER SECTION 80HHC OF THE ACT AND, THEREFORE, THE SAME OUGHT TO BE CONSI DERED AS A PART OF PROFITS OF BUSINESS WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. EVEN WITH REGARD TO THE INCOME FROM SCRAP, IT IS POINTED OUT THAT THE SAME REPRESENTS THE SCRAP GENERATED DURING THE PROCESS OF PRODUCTION AND, THEREFORE, IT OUGHT TO BE TAKEN AS A PART OF PROFITS OF BUSINESS . IT IS POINTED OU T THAT THE SAID INCOME MERELY REPRESENTS RECOUPMENT OF THE COST OF RAW MATERIALS. THE LD. REPRESENTATIVE POINTED OUT THAT THESE ELEMENTS OF RECEIPT HAVE I NDEED BEEN INCLUDED IN THE TOTAL TURNOVER OF THE ASSESSEE ESTABLISHING ITS NATURE AS OPERATIONAL INCOME. INSOFAR AS THE ELEMENT OF RECEIPT BY WAY OF ROYALTY IS CONCERNED, THE LD. REPRESENTATIVE CONCEDED THE POSITION THAT 20 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) THE SAME FALLS WITHIN THE EXCLUS ION S PRESCRIBED IN EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT. ON THIS ASPECT, HIS LIMITED PLEA WAS THAT ONCE EXPLANATION (BAA) TO SEC. 80HHCA OF THE ACT IS APPLIED ON SUCH RECEIPTS, THE SAME MAY ALSO BE EXCLUDED FROM THE TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. 2 7 . THE LD. DR APPEARING FOR THE REVENUE DEFENDED THE ACTION OF THE LOWER AUTHORITIES AND CONTENDED THAT THE AFORESAID RECEIPTS HAVE BEEN RIGHTLY EXCLUDED TO THE EXTENT OF 90% FROM THE PROFITS OF BUSINESS AS R EQUIRED BY EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT. 28 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. INSOFAR AS THE RECEIPTS BY WAY OF INCOME FROM S ERVICES RENDERED AND PROPERTY DEVELOPMENT ACTIVITY IS CONCERNED, UNDOUBTEDLY THE SAME ARE IN RES PECT OF ACTIVITIES WHICH FALL WITHIN THE AMBIT OF INCOME FROM BUSINESS, A TREATMENT WHICH HAS BEEN ACCEPTED BY THE REVENUE IN THE PAST YEARS ALSO. THE ASSESSING OFFICER HAS EXCLUDED 90% OF THE ABOVE ITEMS BY APPLYING EXPLANATION (BAA) TO SEC. 80HHC OF T HE ACT ON THE PREMISE THAT SAID RECEIPTS ARE NOT DIRECTLY RELATED TO EXPORTS. PERTINENTLY, THE SAID POSITION TAKEN BY THE ASSESSING OFFICER IS IN VARIANCE WITH HIS STAND IN THE EARLIER ASSESSMENT YEARS, AS CONTENDED BY THE LD. REPRESENTATIVE FOR THE ASSES SEE. MOREOVER, EARNINGS BY WAY OF S ERVICES RENDERED AND PROPERTY DEVELOPMENT ACTIVITY AS WELL AS INCOME FROM SCRAP IS AN INTEGRAL PART OF DIVERSE ACTIVITIES BEING CARRIED OUT BY THE ASSESSEE AND THE INCOME HA S OTHERWISE ALSO BEEN ASSESSED FROM SUCH ACTIVITIES AS BUSINESS INCOME. IN FACT, THE LD. REPRESENTATIVE POINTED OUT, WITHOUT CONTROVERSION, THAT SUCH 21 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) RECEIPTS DO FIGURE AS A PART OF TOTAL TURNOVER OF BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80HHC OF THE ACT. WE ARE ALSO I N AGREEMENT WITH THE LD. REPRESENTATIVE THAT SO FAR AS SCRAP INCOME IS CONCERNED, SINCE IT HAS BEEN GENERATED FROM PRODUCTION PROCESS AND ASSESSEE IS NOT IN THE BUSINESS OF SALE OF SCRAP, ANY INCOME FROM SUCH SCRAP TANTAMOUNT S TO RECOUPMENT OF COST OF RAW MATERIAL/PRODUCTION AND, THEREFORE, IS INCLUDIBLE IN THE PROFITS OF BUSINESS FOR THE PURPOSE OF SEC. 80HHC OF THE ACT. THE REQUIREMENT OF REDUCING 90% OF SUCH RECEIPTS FROM THE PROFITS OF BUSINESS AS CONTAINED IN EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT, IN OUR VIEW, IS NOT RELEVANT QUA THE AFORESAID THREE RECEIPTS, SINCE SAME ARE IN THE NATURE OF OPERATIONAL INCOMES. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. INSOFAR AS RECEIPT FROM ROYALTY IS CONCERNED, THE SAME HAS BEEN RIGHTLY EXCLUDED AS REQUIRE D BY EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT BY THE ASSESSING OFFICER, WHICH IS HEREBY AFFIRMED. INSOFAR AS THE ALTERNATE PLEA OF THE ASSESSEE FOR EXCLUSION OF THE SAME FROM THE FIGURE OF TOTAL TURNOVER IS CONCERNED, THE ASSESSING OFFICER SHALL VERIFY THE SAME AND THEREAFTER DECIDE ON THE PLEA OF THE ASSESSEE AFRESH. THUS, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 29 . RESULTANTLY, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST JULY, 2019. SD/ - S D/ - (SANDEEP GOSAIN) (G.S. PANNU) JUDICIAL MEMBER VICE - PRESIDENT MUMBAI, DATED 1 ST JULY, 2019 VM , SR. PS 22 ITA NO. 7074 /MUM/201 1 , (ASSESSMENT YEAR 20 04 - 05 ) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI