M/S. ESSEL PROPACK LTD ( FORMERLY ESSEL PACKAGING LTD), MUMBAI V. THE ADDL CIT RG 6(2), MUMBAI

ITA 7122/MUM/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8402 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 18-01-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 30-11-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUSUM INGLE
• Assessee Lawyers: K SHIVARAM
• Keywords: Business income; Depreciation; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 80HHC; 80IA; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'J' BENCH, MUMBAI BEFORE SHRI R.V. EASWAR, PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 7122/MUM/2007 (ASSESSMENT YEAR: 2003-04) M/S. ESSEL PROPACK LTD. ADDL. CIT, RANGE 6(2) (FORMERLY ESSEL PACKAGING LTD.) AAYAKAR BHAVAN, M.K. ROAD 135 DR. ANNIEBESAMT ROAD VS. MUMBAI 400020 MUMBAI 400018 PAN - AAACE 1568 L APPELLANT RESPONDENT ITA NO. 7408/MUM/2007 (ASSESSMENT YEAR: 2003-04) ACIT, RANGE 6(2) M/S. ESSEL PROPACK LTD. AAYAKAR BHAVAN, M.K. ROAD 135, DR. ANNIE BESANT ROA D MUMBAI 400020 VS. MUMBAI 400018 PAN - AAACE 1568 L APPELLANT RESPONDENT ASSESSEE BY: SHRI K. SHIVARAM REVENUE BY: SMT. KUSUM INGLE O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REV ENUE AGAINST THE ORDER OF THE CIT(A) VI, MUMBAI DATED 26.06.2007. ITA NO. 7122/MUM/2007 2. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - 1) EXPENSES ON ABANDONMENT OF ASSAN ASSAM PROJECT A) THE LD CIT(A) ERRED IN LAW AND FACTS IN UPHOLDIN G THE DISALLOWANCE OF RS.84,19,311/- BEING EXPENSES ON AS SAM PROJECT ABANDONED. THE REASONS GIVEN BY HIM FOR DOI NG SO ARE WRONG, IMPROPER AND CONTRARY TO THE FACTS OF THE CA SE. ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 2 B) THE LD. CIT(A) FAILED TO APPRECIATE THAT THE EXP ENSES OF RS.84,19,311/- ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE AND ALLOWABLE U/S 36/37 OF THE ACT. 2) MODVAT CREDIT ADDED TO CLOSING STOCK THE HON. CIT(A) ERRED IN LAW AND FACTS IN UPHOLDIN G THE ADDITION TO CLOSING STOCK AND INCOME ON ACCOUNT OF MODVAT CR EDIT TO THE EXTENT OF UNUTILIZED MODVAT CREDIT. THE REASONS GIV EN BY HIM FOR DOING SO ARE IMPROPER AND INSUFFICIENT. 3) DEDUCTION U/S 80HHC: THE HON. CIT(A) ERRED IN LAW AND FACTS IN UPHOLDIN G THE TREATMENT GIVEN BY LD A.O. TO VARIOUS ITEMS OF INCO ME AS PER EXPLN. (BAA) FOR CALCULATION OF DEDUCTION U/S 80HHC OF THE ACT EVEN WHEN THESE INCOMES ARE ASSESSED AS BUSINESS IN COME. REASONS GIVEN BY THE HON. CIT(A) FOR UPHOLDING THE COMPUTATION OF DEDUCTION MADE BY LD A.O. ARE WRONG, IMPROPER AN D CONTRARY TO THE FACTS OF THE CASE AND PROVISIONS OF LAW. (A) (I) THE HON. CIT(A) ERRED IN LAW AND FACTS IN U PHOLDING THE TREATMENT OF DEPB ENTITLEMENT OF RS.1,20,48,520/- A S INCOME COVERED U/S 28(IIIB) OF THE ACT EVEN WHEN DEPB ENTI TLEMENT IS INCOME EARNED IS INCIDENTAL TO EXPORT AND BUSINESS INCOME FURTHER SELF UTILIZATION OF DEPB (NOT TRANSFER OR S ALE OF DEPB REFERRED IN SEC. 28 (IIID) CANNOT BE TREATED UNDER EXPLN. (BAA). (II) THE LD A.O. OUGHT TO HAVE CONSIDERED THE DEPB BENEFIT AND ITS SELF UTILIZATION BY THE ASSESSEE AS BUSINESS IN COME AND NOT THE INCOME OF THE NATURE PRESCRIBED IN EXPLN. (BAA) OF SECTION 80HHC OF THE ACT. (B) THE HON. CIT(A) ERRED IN LAW AND FACTS IN UPHOL DING THE EXCHANGE GAIN RS.1,01,77,389/- AS INCOME OF THE NAT URE SPECIFIED IN EXPLN. (BAA) AND REDUCING 90% THEREOF TO ARRIVE AT PROFIT OF BUSINESS FOR COMPUTING DEDUCTION U/S 80HH C OF THE ACT EVEN WHEN IT IS ASSESSED AS BUSINESS INCOME. (C) THE HON. CIT(A) ERRED IN LAW AND FACTS IN UPHOL DING THE DEEMED INTEREST OF RS.1,64,09,761/- ON SALES TAX LOAN ASSI GNED AS INCOME OF THE NATURE SPECIFIED IN THE EXPLN. (BAA) AND REDUCING 90% THEREOF TO ARRIVE AT PROFIT OF BUSINESS FOR COM PUTING DEDUCTION U/S 80HHC OF THE ACT EVEN WHEN IT IS ASSE SSED AS BUSINESS INCOME. (D) THE HON. CIT(A) ERRED IN LAW AND FACTS IN UPHOL DING THE TREATMENT OF INTEREST INCOME OF RS.13,19,02,562/- A S INCOME SPECIFIED IN EXPLN. (BAA) INSTEAD OF TREATING THE S AME AS TURNOVERABLE INCOME FROM ORGANIZED ACTIVITY AS BUSI NESS INCOME, FOR COMPUTING DEDUCTION U/S 80HHC OF THE ACT (EVEN WHEN IT IS ASSESSED AS BUSINESS INCOME) AS HELD BY MUMBAI HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. LTD.. ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 3 (E) (I) THE HON. CIT(A) ERRED IN LAW AND FACTS IN U PHOLDING THE ACTION OF THE A.O. IN REDUCING THE AMOUNT OF DEDUCT ION ALLOWED U/S 80IA RS. 8,92,72,295/- FROM PROFIT OF T HE BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC, EVEN WH EN THERE IS NO SUCH PROVISIONS IN SEC. 80HHC WHICH IS INDEPENDENT CODE FOR COMPUTING INCOME FROM EXPORTS. (II) THE HON. CIT(A) OUGHT TO HAVE CONSIDERED UNIT WISE 80HHC AND 80IA AND RESTRICTED THE DEDUCTION UNDER ALL SEC TIONS OF 100% OF THE PROFIT OF THE UNIT. (III) THE HON. CIT(A) OUGHT TO HAVE APPLIED ALTERN ATIVE METHOD TO GIVE EFFECT TO SEC. 80IA(9) TO AVOID THE DOUBLE EFF ECT ON COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT. WITH OUT PREJUDICE TO ABOVE THE TURNOVER OF RELEVANT UNITS O UGHT TO HAVE BEEN EXCLUDED FROM TOTAL TURNOVER IF COMPUTED THE DEDUCTION AS DONE BY THE LD. A.O. 3. WE HAVE HEARD THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED D.R. 4. THE ISSUE IN GROUND NO. 1 IS WITH REFERENCE TO DISALLOWANCE OF AN AMOUNT OF ` 84,19,311/- BEING ABANDONMENT OF ASSAM PROJECT. ASS ESSEE IS A MANUFACTURER AND MANUFACTURES PACKING MATERIAL LIKE MULTILAYER COLLAPSIBLE TUBES TO VARIOUS COMPANIES, PARTICULARLY TO HINDUST AN LEVER LTD. (HLL) AND STARTED FROM A.Y. 1985-86. AS PART OF EXPANDING THE BUSINESS, AS IT HAD ALREADY DIFFERENT PLANS AT VARIOUS PLACES IN INDIA AND ALSO OUTSIDE INDIA, ASSESSEE STARTED SETTING UP A CAPTIVE TUBE MAKING P LANT ADJACENT TO HLL FACTORY ON THE LAND THAT WAS TO BE PROVIDED BY HLL. ASSESSEE STARTED INITIAL PROJECT WORK INCLUDING COMMITTING ADVANCE, SURVEY, LICENSING WORK, ETC. AND SPENT VARIOUS AMOUNTS. SUBSEQUENTLY THE HLL DID NOT COMPLY WITH ITS PART OF COMMITMENT AND THE ASSESSEE DECIDED TO STOP THE PROJECT. AFTER RECOVERING AN AMOUNT OF ` 10 LAKHS OUT OF THE TOTAL EXPENDITURE SPENT ON THE ABOVE PROJECT, ASSESSEE CLAIMED AN AMOUNT OF ` 84,19,311/- AS WRITTEN OFF DURING THE YEAR PASSING NECESSARY BOARD RESOLUTIONS. THE A .O. HELD THAT THE EXPENSES ARE CAPITAL IN NATURE AND DISALLOWED THE S AME. AFTER ELABORATELY DISCUSSING THE ISSUE THE CIT(A) ALSO CONFIRMED THE SAME. 5. THE LEARNED COUNSEL REFERRED TO THE PAPER BOOK AND SUBMITTED THE DETAILS OF EXPENSES PLACED IN PAPER BOOKS IN PAGE 3 1 AND BIFURCATION OF EXPENSES AS UNDER: - ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 4 NAME OF PARTY NATURE OF EXPENDITURE EXPENDITURE INCURRED (RS.) GHERZI EASTERN LTD. & A.G. ASSOCIATE LTD. TECHNICAL CONSULTANCY, MARKET SURVEY, CONTOUR SURVEY, VARIOUS REGN & LICENSING ETC. 5,72,965 TIGER STEEL INDUSTRIES LTD. STRUCTURAL-PRE ENGINEER ED BUILDING, COST OF DESIGNS, LAYOUT, ETC. 27,02,315 L.G. CONSTRUCTION WORKS CIVIL WORK (SHED CONSTRUCTI ON) 18,98,871 ANIL BROTHERS & CO. STEEL TOP ROD RTMT BAR 5,51,158 JASCO ENGINEERS PVT. LTD. ELECTRICAL PANEL CONTROL 10,92,121 MISCELLANEOUS PETTY CASH EXPENSES HIRING OF VEHICLES, STATIONERY, GODREJ TABLE CHAIRS, HIRING OF COMPUTER, MAKING OF BAMBOO HOUSE 16,01,881 GRAND TOTAL 84,19,311 IT WAS HIS SUBMISSION THAT THE ASSESSEE HAS AN INTE NTION TO EXPAND THE BUSINESS AND ON THE BASIS OF THE ASSURANCE GIVEN BY THE HLL FOR PROVIDING THE SITE ADJACENT TO THEIR PLANT ASSESSEE HAS START ED THE WORK AND REFERRED TO THE VARIOUS EXPENDITURES INCURRED AS STATED IN PAGE 31. IT WAS HIS SUBMISSION THAT IN ALL THE MAJOR MANUFACTURING ACTI VITIES, THERE IS A PROCESS CALLED INHOUSE MANUFACTURING THE ACCORDINGLY THE AS SESSEE WANTED TO ESTABLISH TUBE MAKING PLANT NEXT TO THE HLL PLANT W ITH WHOM THE ASSESSEE HAD SUPPLIED EARLIER AND REFERRED TO VARIOUS SALES TO HLL PLACED ON RECORD. IT WAS SUBMITTED THAT ON THE BASIS OF THE DECISION OF THE HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. ANJANI KUMAR CO. LTD. 259 ITR 114 THE EXPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE. HE ALSO REFERRED TO THE DECISION OF THE PAN INDIA PARYATAN LTD. VS. JCIT IN ITA NO. 2044/MUM/2001 FOR THE PROPOSITION THAT PRIOR PERIOD EXPENDITURE I NCURRED BY THE ASSESSEE SHOULD BE ALLOWED AS DEDUCTION, SAME HAVING BEEN IN CURRED ONLY FOR THE PURPOSE OF EXPANSION OF EXISTING BUSINESS. HE RELIE D ON THE DECISION OF THE PUNE BENCH OF ITAT IN THE CASE OF KALYANI STEEL LTD . 62 ITD 233. THE LEARNED COUNSEL ALSO RELIED ON THE FOLLOWING CASE L AWS: - I) CIT VS. HINDUSTAN MACHINE TOOLS LTD. (1989) 175 ITR 212 (KAR) II) CIT VS. PRIYA VILLAGE ROADSHOWS LTD. (2010) 228 CTR 271 (DEL) III) ONGC VIDESH LTD. VS. DCIT (2010) 37 SOT 97 (DEL) IT RIB) 110 IV) CIT VS. UNITED BREWERIES LTD. (2010) 321 ITR 546 (K AR) ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 5 V) INDO RAMA SYNTHETICS (I) LTD. VS. CIT (2010) 228 CT R 278 (DEL) 6. AFTER EXAMINING THE DETAILS IN PAGE 21 A SPECIFIC Q UERY WAS MADE WHETHER THE ASSESSEE HAS SHOWN EXPENDITURE INCURRED IN EARLIER YEAR IN THE BOOKS OF ACCOUNT AND IF SO UNDER WHAT HEAD. IT WAS SUBMITTED THAT THE EXPENDITURE INCURRED IN THE EARLIER YEAR WAS SHOWN UNDER THE HEAD WORK-IN- PROGRESS AND THE SAME WAS WRITTEN OFF DURING THE Y EAR AS THE SAID PROJECT WAS ABANDONED. FOR A QUERY WHETHER THE ASSESSEE WOU LD HAVE CLAIMED DEPRECIATION IF THE PROJECT WAS MATERIALISED THE LE ARNED COUNSEL SUBMITTED THAT THE EXPENDITURE IS IN THE NATURE OF CAPITAL EX PENDITURE IF MATERIALISED BUT CAN BE CLAIMED AS REVENUE EXPENDITURE IF THE PR OJECT WAS ABANDONED, ON THE LEGAL PRINCIPLES. 7. THE LEARNED D.R. IN REPLY SUBMITTED THAT THE NATURE OF EXPENDITURE, AS CAN BE SEEN, ARE ONLY CAPITAL EXPENDITURE AND SPECI FICALLY REFERRED TO THE CIVIL WORKS UNDERTAKEN INCLUDING CONSTRUCTION OF SHEDS, P RE-ENGINEERING BUILDING, ETC. TO SUBMIT THAT EXCEPT PROJECT REPORT EXPENDITU RE FOR TECHNICAL CONSULTANCY OF RS,.5,72,964/- THE BALANCE IS FOR BU ILDING, SHOP CONSTRUCTION, STEEL AND ELECTRICAL PANEL INCLUDING PETTY CASH EXP ENSES TOWARDS HIRE OF VEHICLE, ETC. IT WAS HIS SUBMISSION THAT THE INTENT ION OF THE ASSESSEE WAS TO SET UP A NEW PLANT IN ASSAM WHICH WOULD HAVE CREATE D ASSETS AND DEPRECIATION COULD HAVE BEEN CLAIMED HENCE IT IS A CAPITAL EXPENDITURE AND CANNOT BE TERMS AS REVENUE EXPENDITURE. FURTHER IT WAS SUBMITTED THAT THE CASE LAW RELIED UPON BY THE LEARNED COUNSEL RELATE TO THE PRE-OPERATIVE EXPENDITURE WHICH WAS ALLOWED AS REVENUE EXPENDITUR E BUT IN THIS CASE THE ASSESSEE HAS INVESTED SUBSTANTIAL AMOUNT IN PROJECT AND ABANDONMENT OF PROJECT CANNOT BE ALLOWED AS REVENUE EXPENDITURE. 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DETAI LS. AS STATED THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING MULTIL AYER COLLAPSIBLE TUBES FOR FILLING TOOTH PASTE, ETC. IT ALSO HAD VARIOUS PROJE CTS IN AND OUTSIDE INDIA IN THE SIMILAR BUSINESS. AS A PART OF PROVIDING IN-HOU SE FACILITY THE ASSESSEE STARTED SETTING UP OF TUBE MAKING PLANT ADJACENT TO HLL FACTORY ON THE LAND PROVIDED BY THE HLL. ASSESSEE STARTED THE INITIAL P ROJECT WORK AND ALSO EXECUTED THE WORK AS CAN BE SEEN FROM THE NATURE OF EXPENDITURE AS UNDER: - ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 6 NAME OF PARTY NATURE OF EXPENDITURE EXPENDITURE INCURRED (RS.) GHERZI EASTERN LTD. & A.G. ASSOCIATE LTD. TECHNICAL CONSULTANCY, MARKET SURVEY, CONTOUR SURVEY, VARIOUS REGN & LICENSING ETC. 5,72,965 TIGER STEEL INDUSTRIES LTD. STRUCTURAL-PRE ENGINEER ED BUILDING, COST OF DESIGNS, LAYOUT, ETC. 27,02,315 L.G. CONSTRUCTION WORKS CIVIL WORK (SHED CONSTRUCTI ON) 18,98,871 ANIL BROTHERS & CO. STEEL TOP ROD RTMT BAR 5,51,158 JASCO ENGINEERS PVT. LTD. ELECTRICAL PANEL CONTROL 10,92,121 MISCELLANEOUS PETTY CASH EXPENSES HIRING OF VEHICLES, STATIONERY, GODREJ TABLE CHAIRS, HIRING OF COMPUTER, MAKING OF BAMBOO HOUSE 16,01,881 GRAND TOTAL 84,19,311 THE ABOVE TABLE INDICATES THAT STRUCTURAL-PRE ENGIN EERED BUILDING WAS COMPLETED WITH A COST OF ` 27.27 LAKHS AND CIVIL WORK UNDER CONSTRUCTION WAS ` 18,98 LAKHS AND AN ELECTRICAL PANEL WAS ESTABLISHED WITH ` 10.92 LAKHS AND THIS PREMISES WAS FULLY OCCUPATIONAL WITH EXPENDITU RE LIKE TABLES, CHAIRS, COMPUTERS AND THE DETAILS OF EXPENDITURE PLACED IN PAPER BOOK PAGE 31 INDICATES THE COST FOR OBTAINING THE FACTORY LICENC E AS WELL AS POLLUTION CONTROL CERTIFICATE. THESE INDICATE THAT THE ASSESS EE HAS GONE AHEAD NOT ONLY WITH REFERENCE TO THE FEASIBILITY REPORT BUT ALSO I N ESTABLISHING A FACTORY ITSELF IN THE ABOVE SAID PREMISES. THE REASONS FOR ABANDON MENT OF THE PROJECT WAS STATED TO BE THAT THE LAND WAS NOT PROVIDED BY THE HLL BUT THERE IS NOTHING ON RECORD TO INDICATE THAT THE HLL REFUSED PERMISSI ON AFTER HAVING ESTABLISHED A FACTORY BUILDING ON THE SAID PREMISES . THE ASSESSEE HAS NOT PLACED ON RECORD ANY CORRESPONDENCE WITH THE HLL IN THIS REGARD BUT THE STATED SUBMISSIONS ARE THAT THE HLL DID NOT COMPLY WITH ITS PART OF COMMITMENT AND ASSESSEE DECIDED TO STOP THE PROJECT . THE NATURE OF EXPENDITURE WOULD HAVE RESULTED IN AN ASSET AND CER TAINLY AS SEEN FROM THE DETAILS THE ASSESSEE DID CONSTRUCT A SHED AND ESTAB LISHED VARIOUS ELECTRICAL AND FURNITURE ITEMS. THE CASE LAWS RELIED UPON BY T HE ASSESSEE MOSTLY PERTAINS TO THE EXPENDITURE INCURRED ON FEASIBILITY STUDY. FEASIBILITY STUDIES/PROJECTS REPORTS IN THE EXISTING LINE OF BU SINESS OF THE ASSESSEE ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 7 WOULD HAVE CERTAINLY BEEN IN THE NATURE OF REVENUE EXPENDITURE BUT IN THE CASE OF THE ASSESSEE IT IS NOT THE EXPENDITURE ON F EASIBILITY STUDY OR PROJECT REPORTS. IT IS THE EXPENDITURE OF ESTABLISHING A UN IT ITSELF. THE EXISTING CASE LAW ON THIS ISSUE ARE REVIEWED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. PRIYA VILLAGE ROADSHOWS LTD. 228 CTR 271 WH EREIN THE HON'BLE DELHI HIGH COURT NOT ONLY CONSIDERED ITS OWN ORDER IN THE CASE OF TRIVENI ENGINEERING WORKS LTD. VS. CIT 232 ITR 639 AND CIT VS. MODI INDUSTRIES 200 ITR 341 BUT ALSO CONSIDERED THE PRINCIPLES ESTABLIS HED BY THE HON'BLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. V S. CIT 124 ITR 1 AND THE LEADING CASE ON THE ISSUE OF ATHERTON VS. BRITISH I NSULATED & HELSBY CABLES LTD. (1925) 10TC 155 AND CAME TO A CONCLUSION AS UN DER: 10. A HARMONIOUS READING OF THE AFORESAID TWO JUD GMENTS OF THIS COURT, NAMELY, TRIVENI ENG. WORKS LTD. (SUPRA) ON T HE ONE HAND MODI INDUSTRIES (SUPRA) ON THE OTHER, WOULD CLEARLY DEMO NSTRATE THAT ONE HAS TO KEEP IN MIND THE ESSENTIAL PURPOSE FOR WHICH SUCH AN EXPENDITURE IS INCURRED. IF THE EXPENDITURE IS INCU RRED FOR STARTING NEW BUSINESS WHICH WAS NOT CARRIED OUT BY THE ASSESSEE EARLIER, THEN SUCH EXPENDITURE IS HELD TO BE OF CAPITAL NATURE. I N THAT EVENT IT WOULD BE IRRELEVANT AS TO WHETHER PROJECT REALLY MATERIAL ISED OR NOT. HOWEVER, IF THE EXPENDITURE IS INCURRED IN RESPECT OF THE SAME BUSINESS WHICH IS ALREADY CARRIED ON BY THE ASSESSE E, EVEN IF IT IS FOR THE EXPANSION OF THE BUSINESS, NAMELY, TO START NEW UNIT WHICH IS SAME AS EARLIER BUSINESS AND THERE IS UNIT OF CONTR OL AND A COMMON FUND, THEN SUCH AN EXPENSE IS TO BE TREATED AS BUSI NESS EXPENDITURE. IN SUCH CASE WHETHER NEW BUSINESS/ASSET COMES INTO EXISTENCE OR NOT WOULD BECOME A RELEVANT FACTOR. IF THERE IS NO CREA TION OF NEW ASSET, THEN THE EXPENDITURE INCURRED WOULD BE OF REVENUE N ATURE. HOWEVER, IF THE NEW ASSET COMES INTO EXISTENCE WHICH IS OF E NDURING BENEFIT, THEN SUCH EXPENDITURE WOULD BE OF CAPITAL NATURE. AS CAN BE SEEN FROM THE ABOVE, IF THE EXPENDITURE I S INCURRED FOR STARTING NEW BUSINESS WHICH WAS NOT CARRIED OUT BY THE ASSES SEE EARLIER, THEN THE EXPENDITURE IS CAPITAL IN NATURE. IN THAT EVENT IT WOULD BE IRRELEVANT AS TO WHETHER REALLY MATERIALISED OR NOT. HOWEVER, IF THE EXPENDITURE IS INCURRED IN RESPECT OF THE SAME BUSINESS, IN SUCH CASE WHETHER THE NEW BUSINESS/ASSET COMES INTO EXISTENCE OR NOT WOULD BECOME A RELEVANT FACTOR. IF THERE IS NO CREATION OF NEW ASSET THEN THE EXPENDITURE INCURRED WOULD BE REVENUE NATURE. HOWEVER, IF A NEW ASSET COMES INTO EXISTENC E WHICH IS OF ENDURING BENEFIT THEN SUCH EXPENDITURE WOULD BE CAPITAL NATU RE. ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 8 AS SEEN FROM THE FACTS ABOVE, THE ASSESSEE HAS ACCO UNTED THE EXPENDITURE IN WORK-IN-PROGRESS PENDING USE OF THE ASSETS. THE ASS ETS DID COME INTO EXISTENCE AND AFTER REALISING THE SCRAP VALUE OF AB OUT ` 10 LAKHS THE NET AMOUNT UNREALISED WAS TREATED AS LOSS. THIS LOSS IS A CAPITAL LOSS AND THE EXPENDITURE IS OF CAPITAL IN NATURE. IN VIEW OF THI S WE ARE OF THE OPINION THAT THE A.O. AND THE CIT(A) ARE CORRECT IN TREATING THE EXPENDITURE AS CAPITAL IN NATURE. 9. ASSESSEE RELIED ON THE DECISION OF ONGC VIDESH LTD. VS. DCIT 37 SOT 97 (DEL (TRIB) WHEREIN THE EXPENDITURE WAS INCURRED IN THE BUSINESS OF EXPLORATION AND PRODUCTION OF HYDROCARBONS AND IN T HE NATURE OF TRAVEL COST, MEETINGS AND VARIOUS EXPENSES LIKE SALARY AND PROFE SSIONAL FEES. IN THE LIGHT OF THE ABOVE FACTS THE EXPENDITURE WAS CONSIDERED A S REVENUE IN NATURE. LIKEWISE IN THE CASE OF CIT VS. UNITED BREWERIES LT D. 321 ITR 546 (KAR) THE EXPENDITURE WAS ON OBTAINING ADVICE AND CONSULTATIO N AS TO THE FEASIBILITY OF ACQUIRING BREWERY UNIT IN SOUTH AFRICA AND THE AMOU NT SPENT WAS ` 15 LAKHS. ON THE FACTS OF THE ABOVE CASE THE EXPENDITURE WAS CONSIDERED AS REVENUE EXPENDITURE AS NO SUCH ASSET CAME INTO EXISTENCE. E VEN IN THE CASE OF KALYANI STEELS LTD. RELIED UPON BY THE LEARNED COUN SEL, CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF PAN INDIA PARYATAN LTD. IN ITA NOS. 2044 & 2096/ MUM/2001 THE ISSUE IS WITH REFERENCE TO PRE -OPERATIVE EXPENDITURE OF INTEREST ON BORROWED CAPITAL DISALLOWED UNDER SE CTION 36(1)(III) BUT NOT ON ABANDONMENT OF PROJECT. THE CASE LAW RELIED UPON BY THE LD.COUNSEL CAN NOT BE APPLIED TO THE FACTS IN THIS CASE. IN VIEW OF TH IS, WE ARE OF THE OPINION THAT THE EXPENDITURE DISALLOWED ON ABANDONMENT OF THE AS SAM PROJECT IS CAPITAL IN NATURE AND SO THE SAME CANNOT BE ALLOWED AS DEDU CTION. GROUND NO. IS ACCORDINGLY REJECTED. 10. GROUND NO. 2 PERTAINS TO THE ISSUE OF ADDITION UNDER SECTION 14 5A OF UN-UTILISED MODVAT CREDIT OF ` 1,00,13,993/-. THE A.O. MADE AN ADDITION OF ` 1,00,13,993/- BEING CENVAT CREDIT TO THE CLOSING ST OCK OF RAW MATERIALS, PACKING MATERIALS AND STORES AND SPARES. THE CIT(A) CONFIRMED THE SAME. 11. IT WAS SUBMITTED THAT IN ASSESSEES OWN CASE IN A.Y . 1999-2000 IN ITA NO. 4271/MUM/2003 DATED 21.11.2008 THE ASSESSEE CLA IM WAS ALLOWED IN ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 9 THE EARLIER YEAR FOLLOWING THE PRINCIPLES ESTABLISH ED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAHAVIR ALUMINIUM LTD. 297 ITR 77. HOWEVER, IT WAS SUBMITTED THAT THE ISSUE REQUIRES R E-EXAMINATION IN THE LIGHT OF THE DECISION OF EH HON'BLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. MAHALAXMI GLASS WORKS P. LTD. 318 ITR 116. AS PER T HE ABOVE DECISION CONSEQUENTIAL VALUATION IS TO BE GIVEN EFFECT WHILE VALUING THE OPENING STOCK ALSO. SINCE THE ORDERS IN EARLIER YEARS CANNOT BE V ERIFIED TO ARRIVE AT A CONCLUSION, WE DIRECT THE A.O. TO EXAMINE THE RECOR D AND FOLLOW THE PRINCIPLES ESTABLISHED BY THE JURISDICTIONAL HIGH C OURT IN THE ABOVE CASE WHILE CONSIDERING THE ADDITION UNDER SECTION 145A. FOR THIS PURPOSE THE ISSUE IS RESTORED TO THE FILE OF THE A.O. TO EXAMIN E AND DECIDE ACCORDINGLY AS PER THE JUDICIAL PRINCIPLES AND PRINCIPLES OF ACCOU NTANCY BEING FOLLOWED BY THE ASSESSEE. 12. GROUND NO. 3(A) IS WITH REFERENCE TO THE DPEB AMOUNT OF ` 1,20,48,520/-. IT WAS ASSESSEES CONTENTION THAT DE PB IS NOT SOLD BY THE ASSESSEE BUT UTILISED FOR ITS OWN IMPORTS, HENCE TH E CREDIT IS REVERSED IN THE NEXT YEAR WHEN UTILISED AND THUS THE AMENDED SECTIO N 28(IIIB) IS NOT APPLICABLE. 13. IT WAS THE SUBMISSION OF THE LEARNED COUNSEL THAT T HE ISSUE CAN BE RE- EXAMINED IN THE LIGHT OF THE DECISION OF THE HON'BL E BOMBAY HIGH COURT IN THE CASE OF KALPATARU COLURS AND CHEMICALS 232 CTR 313 BUT HOWEVER, REQUIRE A DIRECTION TO BE GIVEN IN THE LIGHT OF THE HON'BLE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT VS. VIJAY SILK HOUSE (B ANGALORE) LTD. IN ITA NO. 1908 OF 2010. THE HON'BLE HIGH COURT IN THE SAID CA SE HAS DIRECTED AS UNDER: - 2. IN THIS VIEW OF THE MATTER, SINCE THE APPEAL IS AGAINST THE ORDER OF REMAND, IN OUR OPINION, IT IS NOT NECESSARY TO E NTERTAIN THE APPEAL FILED BY THE REVENUE, SAVE AND EXCEPT TO DIRECT THE ASSESSING OFFICER TO CONSIDER THE JUDGMENT OF THIS COURT IN THE CASE OF KALPATARU COLOURS AND CHEMICALS (SUPRA) AND ANY OTHER JUDGMEN T OF THIS COURT OR THE APEX COURT, AS MAY BE CITED ON BEHALF OF THE PARTIES. THE APPEAL IS DISPOSED OF ACCORDINGLY WITH NO ORDER AS TO COSTS. 14. ACCORDINGLY, THE A.O. IS DIRECTED TO CONSIDER THE J UDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF KALPATARU COLOURS AND CHEMICALS ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 10 (SUPRA) AND ANY OTHER JUDGEMENT OF THE HON'BLE HIGH COURT OR THE APEX COURT, AS MAY BE CITED ON BEHALF OF THE PARTIES. TH E GROUND IS RESTORED TO THE FILE OF THE A.O. FOR NECESSARY ACTION. 15. GROUND NO. 3(B) PERTAINS TO THE ISSUE OF DEDUCTION UNDER SECTION 80HHC WITH REFERENCE TO THE DEDUCTION ON EXCHANGE G AIN OF ` 1,01,77,389/-. IT WAS SUBMITTED THAT THIS ISSUE WAS ALLOWED IN FAV OUR OF THE ASSESSEE IN ASSESSEES OWN CASE IN ITA NO. 4271/MUM/2003 VIDE P ARA 27 IN A.Y. 19990-2000. HOWEVER, THE LEARNED COUNSEL FAIRLY SUB MITTED THAT THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT GOVERNIN G THIS FOREIGN EXCHANGE ISSUE WERE NOT AVAILABLE AT THAT POINT OF TIME AND THE ISSUE REQUIRED EXAMINATION BY THE A.O. AS THE NATURE OF T HE AMOUNT RECEIVED WAS NOT CLEAR ON RECORD. 16. THE LEARNED D.R. RELIED ON THE JUDGEMENT IN THE CAS E OF CIT VS. SHAH ORIGINALS 327 ITR 19 FOR THE PROPOSITION THAT THE E XCHANGE GAIN OF EEFC ACCOUNT CANNOT BE CONSIDERED. 17. AS SEEN FROM THE GROUNDS RAISED BEFORE THE CIT(A) T HE ASSESSEE HAS GAINED AN AMOUNT OF ` 1,01,77,388/- ON ACCOUNT OF HEDGING TRANSACTION AND REALIGNMENT OF BALANCE OF CURRENT ASSETS AND LIABIL ITIES INCLUDING EEFC ACCOUNT. IT WAS SUBMITTED THAT THE COMPANY IS EXPOS ED TO THE CURRENCY RISK IN THE FOREX MARKET ON ACCOUNT OF ITS IMPORT OF RA W MATERIAL, SPARES, ETC. AND EXPORT OF FINISHED PRODUCTS AND WAS TAKING ADEQ UATE HEDGES IN CROSS CURRENCIES TO MITIGATE THE RISK IN RAW MATERIALS, I MPORTS AND OTHER EXPENSES LIKE ROYALTY, INTEREST ON LOANS AND ACCORDINGLY THE ASSESSEE IS HEDGING AMOUNTS BY WAY OF ENTERING INTO FORWARD CONTRACTS. DURING F.Y. 2002-03 THE COMPANY HAS ENTERED INTO VARIOUS SUCH CONTRACTS TO MITIGATE ITS CURRENCY RISK. HOWEVER, THE BIFURCATION WITH REFERENCE TO TH E EXCHANGE GAIN HEDGING TRANSACTION AND EEFC ACCOUNTS ARE NOT AVAILABLE TO EXACTLY DECIDE THE ISSUE EVENTHOUGH THE CIT(A) HAS EXAMINED IN A.Y. 2001-02 AND ALLOWED THE SAME TO BE CONSIDERED UNDER SECTION 80HHC. SINCE THE FAC TS ARE NOT CLEAR FROM THE RECORD, IT IS NOT ADVISABLE TO DECIDE THE ISSUE ONLY ON LEGAL PRINCIPLES. ACCORDINGLY, WE ARE OF THE VIEW THAT THIS ISSUE CAN BE RE-EXAMINED BY THE A.O. FIRST ON FACTS AND THEN APPLY VARIOUS LEGAL PR INCIPLES WITH REFERENCE TO ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 11 FOREIGN EXCHANGE GAIN FOR THE PURPOSE OF 80HHC. ACC ORDINGLY THE MATTER IS RESTORED TO THE FILE OF THE A.O. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO MAKE ITS SUBMISSIONS. 18. GROUND NO. 3(C) PERTAINS TO THE ISSUE OF TREATING INTEREST OF ` 1,64,09,761/- ON ASSIGNMENT OF SALES TAX LOAN AS IN COME FROM OTHER SOURCES. 19. THE FACTS LEADING TO THE PRESENT ISSUE IS THAT THE ASSESSEE HAS ASSIGNED INTEREST FROM SALES TAX LOAN PAYABLE IN FU TURE TO ANOTHER COMPANY AT A NET PRESENT VALUE IN A.Y. 1998-99 AND CLAIMED DIFFERENCE AS CAPITAL RECEIPT. HOWEVER, THE CIT(A), IN FIRST APPEAL, HELD THAT SUCH DIFFERENCE IS TAXABLE ON ACCRUAL BASIS. ACCORDINGLY THE SAID AMOU NT OF INTEREST PERTAINING TO THIS YEAR WAS OFFERED TO TAX. IT WAS ASSESSEES CONTENTION THAT THE AMOUNT IS TO BE TREATED AS OPERATIVE INCOME PERTAINING TO EXPORT AND ACCORDINGLY DEDUCTION UNDER SECTION 80HHC IS TO BE WORKED OUT. THE A.O., WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC TREATED THE ABOVE AMOUNT AS PART OF PROFITS OF BUSINESS AND EXCLUDED 90% OF THE ABOVE AMOUNT UNDER EXPLANATION (BAA) WHILE COMPUTING 80HHC,. ASSESSEE CONTESTED THAT THIS AMOUNT WAS TREATED BY THE A.O. AS INCOME FROM OTHER SOURCES. THE CIT(A), HOWEVER, HELD THAT INTEREST ON SALE TAX IS AN INCID ENTAL ACTIVITY AND HAS NO CONNECTION WITH THE BUSINESS OF EXPORTS AND ACCORDI NGLY THE ACTION OF THE A.O. IN EXCLUDING 90% WAS CONFIRMED. 20. AFTER HEARING THE ARGUMENTS OF THE LEARNED COUNSEL AND THE LEARNED D.R. WE ARE OF THE VIEW THAT NO INTERFERENCE IS REQ UIRED ON THE ORDERS OF THE CIT(A). FIRST OF ALL THE A.O. HAS NOT EXCLUDED THE AMOUNT ALTOGETHER FROM THE PROFITS OF THE BUSINESS AS THE SAME WAS INCLUDED AS PROFITS OF BUSINESS, SO THE ISSUE THAT IT IS ASSESSED AS OTHER SOURCES DO ES NOT ARISE. MOREOVER THE A.O. HAS RIGHTLY DISALLOWED 90% OF INTEREST ON SALE TAX ASSIGNED UNDER EXPLANATION (BAA) AND INCLUDED NOT ONLY THIS INTERE ST BUT ALSO GROSS INTEREST RECEIVED BY THE ASSESSEE AND OTHER AMOUNTS WHILE WO RKING OUT 80HHC. CONSIDERING THE PROVISIONS OF 80HHC EXPLANATION (BA A) AND ACTION OF THE A.O. AND LEGAL PRINCIPLES ON THE ISSUE OF TREATING INTEREST INCOME, WE SEE NO ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 12 REASON TO INTERFERE WITH THE ORDERS OF THE A.O. AND CIT(A) ON THIS ISSUE. ACCORDINGLY THE GROUND IS REJECTED. 21. GROUND NO. 3(D) PERTAINS TO TREATING THE INTEREST OF ` 13,19,02,565/- AS INCOME UNDER EXPLANATION (BAA). IT WAS ASSESSEE S CONTENTION THAT INTEREST INCOME IS PART AND PARCEL OF BUSINESS AND THE SAID AMOUNT IS OPERATIONAL INCOME OF THE ASSESSEE. ASSESSEE HAS NO T PLACED EXTRA FUNDS TO EARN INTEREST INCOME BUT PLACED THE FUNDS OUT OF BU SINESS EXIGENCIES AND DEDUCTION AT 100% SHOULD BE ALLOWED. AS DISCUSSED I N THE ABOVE GROUND 3(C) THE A.O. TREATED THE INTEREST AS PART OF PROFITS OF BUSINESS AND EXCLUDED 90% OF THE SAME UNDER EXPLANATION (BAA) OF 80HHC. WE SE E NO REASON TO INTERFERE WITH THE ACTION OF THE A.O. HOWEVER, THE ISSUE WITH REFERENCE TO GROSS INTEREST AND NET INTEREST WAS CONTESTED BY TH E REVENUE IN THEIR APPEAL AND THAT ISSUE WILL BE DECIDED IN THAT APPEAL. HOWE VER, GROUND NO. 3(D) ON GIVING 100% DEDUCTION ON INTEREST INCOME AS OPERATI ONAL INCOME CANNOT BE ALLOWED IN VIEW OF THE PROVISIONS OF EXPLANATION (B AA) AND LEGAL PRINCIPLES ON THE ISSUE AS OF NOW. ACCORDINGLY THE GROUND IS REJE CTED. 22. GROUND NO. 3(E) PERTAINS TO THE DEDUCTION UNDER SECTION 80HHC AND 80IA. THE LEARNED COUNSEL, AT THE OUTSET, SUBMITTED THAT THIS ISSUE IS TO BE CONSIDERED IN THE LIGHT OF THE JUDGEMENT OF THE HON 'BLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES PVT. LTD. VS. DC IT IN ITA NO. 3036 OF 2010 DATED 10.10.2011, WHICH IS IN FAVOUR OF THE AS SESSEE. SINCE THE HON'BLE BOMBAY HIGH COURT HAS CONSIDERED AND REVERS ED THE JUDGEMENT OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF HINDUS TAN MINT & AGRO PRODUCTS P. LTD. 119 ITD 107 (DEL), WE ARE OF THE O PINION THAT THIS ISSUE IS TO BE RESTORED TO THE FILE OF THE A.O. TO EXAMINE AND ALLOW THE DEDUCTION UNDER SECTION 80HHC AND 80IA AS PER THE PROVISIONS OF THE ACT AND IN THE LIGHT OF THE PRINCIPLES ESTABLISHED BY THE JURISDICTIONAL HI GH COURT OR ANY OTHER JUDICIAL FORUM/APEX COURT THAT CAN BE CONSIDERED AT THE TIME OF GIVING EFFECT TO THIS ORDER. FOR THIS PURPOSE THIS GROUND IS REST ORED TO THE FILE OF THE A.O. TO CONSIDER IT AFRESH. 23. APPEAL IS CONSIDERED PARTLY ALLOWED. ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 13 ITA NO. 7408/MUM/2007 24. REVENUE HAS RAISED THE FOLLOWING GROUND: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT INTEREST PAID OF RS.4,53,35,570/- IS TO BE REDUCED FROM GROSS INTERE ST RECEIVED AMOUNTING TO RS.17,72,38,132/- FOR THE PURPOSE OF C ALCULATION OF DEDUCTION U/S 80HHC IN TERMS OF CLAUSE (BAA) OF EXP LANATION TO SECTION 80HHC EVEN THOUGH IN PARA 31.11 OF BOARDS CIRCULAR NO. 621 DATED 19.12.1991 CONTAINING EXPLANATORY NOTES I T HAS BEEN CLARIFIED THAT IN CLAUSE (BAA) OF EXPLANATION TO SE CTION 80HHC, 90% DEDUCTION OF INTEREST, RENT, COMMISSION, ETC., IS PROVIDED TO ACCOUNT FOR ESTIMATED 10% EXPENSES INCURRED TO EARN THESE RECEIPTS MEANING THEREBY THAT NO FURTHER NETTING IS REQUIRED AND THIS VIEW FINDS SUPPORT FROM MADRAS HIGH COURT DECI SION IN THE CASE OF CIT VS. CHINNAPANDI (282 ITR 389) (MADRAS). 25. THE ISSUE IN THE ABOVE GROUND IS WITH REFERENCE TO CONSIDERING THE GROSS INTEREST OR NET INTEREST FOR EXCLUSION UNDER EXPLANATION (BAA) OF 80HHC. THE CIT(A) HAS ALLOWED NET INTEREST TO BE EX CLUDED IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF LALSON S ENTERPRISES VS. DCIT 89 ITD 25 (DEL) (SB) AND THE A.O. IS DIRECTED TO RECOM PUTE THE DEDUCTION AFTER EXCLUDING 90% OF NET INTEREST BEING ` 13,19,02,565/- (17,72,38,132 4,53,35,570) FROM THE PROFIT OF BUSINESS. 26. AT THE OUTSET THE LEARNED COUNSEL SUBMITTED THAT TH IS ISSUE IS DECIDED IN THE FAVOUR OF THE DEPARTMENT BY THE ORDER OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ASIAN STAR CO. LTD. 32 6 ITR 56 WHEREIN THIS ISSUE WAS CONSIDERED ELABORATELY AND DECIDED AS UND ER: - READING EXPLN. (BAA) AS IT STANDS, THE COURT IS RE QUIRED TO GIVE A MEANING TO THE PROVISION CONSISTENT WITH THE UNDERL YING SCHEME, OBJECT AND PURPOSE OF THE STATUTORY PROVISION. PARL IAMENT CONSIDERED IT APPROPRIATE TO EXCLUDE FROM THE PURVIEW OF THE D EDUCTION UNDER S. 80HHC, CERTAIN RECEIPTS OR INCOME WHICH DID NOT HAV E A PROXIMATE NEXUS WITH EXPORT TURNOVER. SUCH ITEMS FORM PART OF THE P&L A/C AND FORM A CONSTITUENT ELEMENT IN THE COMPUTATION OF TH E PROFITS OR GAINS OF BUSINESS OR PROFESSION UNDER SS. 28 TO 44D. SINCE R ECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR O THER SIMILAR RECEIPTS HAVE NO NEXUS WITH THE EXPORT ACTIVITY, TH E LEGISLATURE THOUGHT IT FIT, FOR THE PURPOSE OF DEDUCTION UNDER S. 80HHC, TO EXCLUDE SUCH ITEMS FROM BUSINESS PROFITS. PARLIAMENT WAS, H OWEVER, ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 14 CONSCIOUS OF THE FACT THAT THE EXPENDITURE INCURRED IN EARNING THE ITEMS WHICH WERE LIABLE TO BE EXCLUDED HAD ALREADY GONE INTO THE COMPUTATION OF BUSINESS PROFITS. THIS WAS BECAUSE T HE COMPUTATION OF BUSINESS PROFITS UNDER CHAPTER IV IS MADE BY AMALGA MATING THE RECEIPTS AS WELL AS THE EXPENDITURE INCURRED IN CAR RYING ON THE BUSINESS. SINCE THE EXPENDITURE INCURRED IN EARNING THE INCOME BY WAY OF INTEREST, BROKERAGE, COMMISSION, RENT, CHARG ES OR OTHER SIMILAR RECEIPTS HAD ALSO GONE INTO THE COMPUTATION OF BUSI NESS PROFITS, PARLIAMENT THOUGHT IT FIT TO EXCLUDE ONLY NINETY PE R CENT OF THE RECEIPTS RECEIVED BY THE ASSESSEE IN ORDER TO ENSURE THAT TH E EXPENDITURE WHICH IS INCURRED BY THE ASSESSEE IN EARNING THE RE CEIPTS WHICH HAS GONE INTO THE COMPUTATION OF THE BUSINESS PROFITS I S TAKEN CARE OF. PARLIAMENT, THEREFORE, CONFINED THE REDUCTION TO TH E EXTENT OF NINETY PER CENT OF THE INCOME EARNED THROUGH SUCH RECEIPTS SINCE IT WAS COGNIZANT OF THE FACT THAT THE ASSESSEE WOULD HAVE INCURRED SOME EXPENDITURE IN EARNING THOSE INCOMES. PARLIAMENT PR OVIDED AN AD HOC DEDUCTION OF TEN PER CENT FROM SUCH INCOMES TO ACCO UNT FOR THE EXPENSES INCURRED IN EARNING THE RECEIPTS. THE EXPL ANATORY STATEMENT WHICH IS CONTAINED IN THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 1991 HAS ALSO BEEN REFLECTED IN THE EXPLANATORY CIRCULAR NO. 621, DT. 19TH DEC., 1991 ISSUED BY THE CBDT. THE DISTORTION OF THE PROFITS THAT WOULD TAKE PLACE BY EXCLUDING THE RECEIPTS RECEIVED BY THE ASSESSEE WHICH WERE UNRELA TED TO EXPORT TURNOVER AND NOT THE EXPENDITURE INCURRED BY THE AS SESSEE IN EARNING THOSE RECEIPTS WAS FACTORED IN BY PARLIAMENT BY EXC LUDING ONLY NINETY PER CENT OF THE RECEIPTS RECEIVED BY THE ASSESSEE. IN A GIVEN CASE, THE EXPENDITURE INCURRED BY THE ASSESSEE IN EARNING THE RECEIPTS WHICH ARE TO BE EXCLUDED, MAY BE MORE THAN TEN PER CENT O R LESS THAN TEN PER CENT. PARLIAMENT, HOWEVER, THOUGHT IT FIT TO AD OPT A UNIFORM FORMULA ENVISAGING A REDUCTION OF NINETY PER CENT T O MAKE DUE ALLOWANCE FOR THE EXPENDITURE WHICH WOULD HAVE BEEN INCURRED BY THE ASSESSEE IN EARNING THE RECEIPTS. PARLIAMENT REGARD ED THE ELEMENT OF EXPENDITURE COMPUTED AT TEN PER CENT OF THE RECEIPT S TO BE A REASONABLE PARAMETER OF WHAT WOULD HAVE BEEN EXPEND ED BY THE ASSESSEE. IT IS IN THIS BACKGROUND THAT IN EXPLN. ( BAA), PARLIAMENT HAS THOUGHT IT FIT TO EXCLUDE NINETY PER CENT OF THE RE CEIPTS RECEIVED BY THE ASSESSEE WHICH HAVE NO NEXUS WITH THE EXPORT ACTIVI TY. ORDINARILY, THE SUMS, RECEIPTS AND PROFITS SET OUT IN CL. (BAA) WOULD HAVE BEEN REQUIRED TO BE EXCLUDED COMPLETELY FROM THE PROFITS OF THE BUSINESS, BEING UNRELATED TO EXPORT TURNOVER. YET, SINCE THE EXPENDITURE INCURRED IN EARNING SUCH SUMS, RECEIPTS AND PROFITS HAS ALRE ADY BEEN TAKEN INTO ACCOUNT ON THE DEBIT SIDE, IN COMPUTING PROFIT S OF THE BUSINESS, IT IS ONLY NINETY PER CENT OF THESE SUMS, RECEIPTS AND PROFITS REFERRED TO THEREIN WHICH WOULD HAVE TO BE EXCLUDED FROM THE PR OFITS OF THE BUSINESS IN ORDER TO OFF-SET THE EXPENDITURE TAKEN INTO ACCOUNT WHILE COMPUTING THE BUSINESS PROFITS. IN OTHER WORDS, THE DISTORTION IN THE PROFITS OF BUSINESS THAT WOULD TAKE PLACE BY EXCLUD ING ONLY THE SUMS, RECEIPTS AND PROFITS FROM THE CREDIT SIDE, BUT NOT THE EXPENDITURE FROM THE DEBIT SIDE, IS OFF-SET BY EXCLUDING ONLY NINETY PER CENT OF SUCH ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 15 SUMS, RECEIPTS AND PROFITS TO REPRESENT THE EXPENDI TURE INCURRED ON EARNING THEM. AS STATED EARLIER, IT MAY WELL BE THA T THE ACTUAL EXPENDITURE INCURRED IN A CASE MAY BE MORE OR LESS THAN THE STATUTORY FACTOR OF TEN PER CENT ENACTED BY PARLIAMENT, BUT I N ORDER TO SIMPLIFY THE APPLICATION OF THE LAW, PARLIAMENT TREATED A UN IFORM EXPENDITURE COMPUTED AT TEN PER CENT TO BE APPLICABLE IN ORDER TO ENSURE THAT THERE IS NO DISTORTION OF PROFITS BY EXCLUSION OF INCOME WHICH IS NOT RELATABLE TO EXPORT PROFITS. THE SIMILARITY OF THE PROVISIONS OF SS. 80HHC AND 8 0M SHOULD NOT RESULT INTO AN ASSUMPTION THAT THE PROVISIONS ARE I DENTICAL, WHEN THEY ARE NOT. SEC. 80HHC IS A PROVISION WHICH IS INTENDE D TO PROVIDE AN INCENTIVE FOR EXPORT. ONCE PARLIAMENT HAS LEGISLATE D BOTH IN REGARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE E XCLUSION, IT WOULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWR ITING THE LEGISLATIVE PROVISION. THE TASK OF INTERPRETATION IS TO FIND OU T THE TRUE INTENT OF A LEGISLATIVE PROVISION. UNDOUBTEDLY, IN DEALING WITH A PROVISION BY WAY OF AN INCENTIVE, THE COURT MUST ADOPT A BROAD AND L IBERAL INTERPRETATION WHICH WOULD ADVANCE THE PURPOSE. WHI LE DOING SO, THE COURT IS DUTY BOUND TO IRON OUT THE CREASES BUT, IT IS CLEARLY NOT OPEN TO THE COURT TO LEGISLATE BY SUBSTITUTING A FORMULA OR PROVISION OTHER THAN WHAT HAS BEEN LEGISLATED BY PARLIAMENT. AN ASS ESSEE MAY WELL BE ENTITLED TO A DEDUCTION IN RESPECT OF THE EXPEND ITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN THE COMPUTATION OF THE PROFITS AND GAINS OF BUSINESS OR PROFESSION. HOWEVE R, FOR THE PURPOSES OF COMPUTING THE DEDUCTION UNDER S. 80HHC, THE PROVISIONS WHICH HAVE BEEN ENACTED BY PARLIAMENT WOULD HAVE TO BE COMPLIED. A DEDUCTION IN EXCESS OF WHAT IS MANDATED BY PARLIAME NT CANNOT BE ALLOWED ON THE THEORY THAT IT IS AN INCENTIVE PROVI SION INTENDED TO ENCOURAGE EXPORT. THE EXTENT OF THE DEDUCTION AND T HE CONDITIONS SUBJECT TO WHICH THE DEDUCTION SHOULD BE GRANTED, A RE MATTERS FOR PARLIAMENT TO LEGISLATE UPON. PARLIAMENT HAVING LEG ISLATED, IT WOULD NOT BE OPEN TO THE COURT TO DEVIATE FROM THE PROVIS IONS WHICH HAVE BEEN ENACTED IN S. 80HHC. IN THE CIRCUMSTANCES, THE TRIBUNAL WAS NOT JUSTIFIED IN COMING TO THE CONCLUSION THAT THE NET INTEREST ON FIXED DEPOSITS IN THE BANK RECEIVED BY THE ASSESSEE SHOUL D BE CONSIDERED FOR THE PURPOSES OF WORKING OUT THE DEDUCTION UNDER S. 80HHC AND NOT THE GROSS INTEREST. FOLLOWING THE ABOVE PRINCIPLES ESTABLISHED BY THE J URISDICTIONAL HIGH COURT, WE HOLD THAT THE INTEREST THAT HAS TO BE EXCLUDED I S GROSS INTEREST ONLY. THEREFORE WE REVERSE THE ORDER OF THE CIT(A) AND RE STORE THE COMPUTATION MADE BY THE A.O. WHO CORRECTLY EXCLUDED 90% OF THE GROSS INTEREST IN THE COMPUTATION OF 80HHC AND ACCORDINGLY, REVENUE GROUN D IS ALLOWED. APPEAL IS ALLOWED. ITA NOS. 7122 & 7408/MUM/2007 M/S. ESSEL PROPACK LTD. 16 27. IN THE RESULT, ITA NO. 7122/MUM/2007 IS PARTLY ALLO WED THE ITA NO. 7408/MUM/2007 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23RD FEBRUA RY 2011. SD/ SD/ (R.V. EASWAR) (B. RAMAKOTAIAH) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED : 23RD FEBRUARY 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) VI, MUMBAI 4. THE CIT VI, MUMBAI CITY 5. THE DR, J BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.