ACIT, Bangalore V. M/s. ABB Limited, Bangalore

ITA 755/BANG/2007

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 1913 (ITAT-BANGALORE)
• Duration Of Justice: 13 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 23-02-2021
• Assessment Year: 2001-2002
• Appeal Filed On: 04-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DILIP SR S T ANDING DEPT
• Assessee Lawyers: PERCY PARDIWALLA SR
• Keywords: Business income; Bad and doubtful debts; Revenue expenditure; Capital expenditure; Set aside; Liquidation
• Section: 80HHC; 14A; 80IA; 64; 43; 48; 72; 13; 22; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER I T A NO . 562/ BANG / 2007 ASSESSMENT YEAR : 2001 - 02 M/S. ABB LIMITED (FORMERLY ASEA BROWN BOVERI LIMITED), KHANIJA BHAVAN, RACE COURSE ROAD, IIND FLOOR, EAST WING, BANGALORE 560 001. PAN: AAACA 38348 VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX, CIRCLE 8(1), BANGALORE. APPELLANT RESPONDENT IT A NO . 75 5 / BANG / 2007 ASSESSMENT YEAR : 200 1 - 02 THE ADDITIONAL COMMISSIONER OF INCOME TAX, LTU, BANGALORE. VS. M/S. ABB LIMITED (FORMERLY ASEA BROWN BOVERI LIMITED), KHANIJA BHAVAN, RACE COURSE ROAD, IIND FLOOR, EAST WING, BANGALORE 560 001. PAN: AA ACA 38348 APPELLANT RESPONDENT A SS ES SEE BY : S HRI PERCY PARDIWALLA, SR. COUNSEL RE VENUE BY : SHRI DILIP, SR. S T ANDING COUNSEL FOR THE DEPT. DATE OF HEARING : 2 3. 02.2021 DATE OF PRONOUNCEMENT : 04 .0 3 .202 1 ITA NOS.562 & 755/BANG/2007 PAGE 2 OF 42 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE RE VENUE AGAINST THE ORDER DATED 07.03.2007 OF THE CIT(APPEALS)-1, B ANGALORE RELATING TO ASSESSMENT YEAR 2001-02. 2. GROUND NO.1 OF THE ASSESSEE READS AS FOLLOWS:- 1. THE LEARNED CIT (A) ERRED IN CONFIRMING THAT WH ILE ARRIVING AT BUSINESS INCOME FOR THE PURPOSE OF DEDU CTION U/S 80HHC, 90% OF OTHER INCOME SHOULD BE EXCLUDED UNDER CLAUSE (BAA) OF THE EXPLANATION BELOW SECTION 80 HHC WHICH INCLUDES RECEIPTS LIKE RENTAL INCOME, COMMISSION, NOTICE PAY , INCOME FROM CANCELLED ORDERS AND MISCELLANEOUS/SUNDRY INCOME ET C. WITHOUT PREJUDICE, IT IS FURTHER SUBMITTED THAT SUNDRY INCO ME INCLUDED INSURANCE CLAIM RECEIVED, FEES RECEIVED FOR R & D A CTIVITIES AND THE SAID RECEIPTS WOULD NOT FALL WITHIN THE AMBIT OF TH E SAID CLAUSE. 3. THIS GROUND CO-RELATES TO GROUNDS 1 & 2 RAISED B Y THE REVENUE, WHICH READS AS FOLLOWS:- 1. THE CIT (A) ERRED IN DIRECTING THE AO TO EXCLUD E 90% OF THE 'NET INTEREST INCOME' INSTEAD OF 'GROSS INTERES T RECEIPTS' FROM THE 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' T O ARRIVE AT 'BUSINESS PROFIT' UNDER CLAUSE (BAA) FOR THE PURPOS E OF COMPUTATION OF DEDUCTION U/S 80HHC PARTICULARLY IN VIEW OF USE OF EXPRESSION -RECEIPT- AND NOT 'INCOME' IN THE SAI D CLAUSE. 2. THE CIT(A) ERRED IN DIRECTING THE AO NOT TO EXCL UDE 90% OF THE AMOUNT ON ACCOUNT OF SALE OF SCRAP, CASH DIS COUNT, EXCISE DUTY, OCTROI, C S FEES, COUNTRY MANAGEMENT FEES, SE RVICE CHARGES AND EXCHANGE GAIN, FROM THE 'PROFITS AND GAINS OF B USINESS OR PROFESSION' TO ARRIVE AT 'BUSINESS PROFIT' UNDER CL AUSE (BAA) FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC. 4. THEREFORE, THE ABOVE GROUNDS OF ASSESSEE AND REV ENUE ARE TAKEN UP TOGETHER FOR CONSIDERATION FOR THE SAKE OF CONVE NIENCE AND BREVITY. THE ITA NOS.562 & 755/BANG/2007 PAGE 3 OF 42 FACTS RELATING TO THIS ISSUE IS THAT THE AO REDUCED 90% OF FOLLOWING RECEIPTS FROM THE EXPORT PROFITS UNDER CLAUSE (BAA) OF EXPLA NATION BELOW SECTION 80HHC OF THE INCOME-TAX ACT, 1961 [THE ACT] :- S .NO PARTICULARS AMOUNT RS. 1 DIVIDEND INCOME 686,000 2 INTEREST 8,253,000 3 INTEREST ON BANK DEPOSITS 2,006,000 4 INTEREST ON OTHERS 3,039,000 5 PROFIT ON SALE OF FIXED ASSETS 280,000 6 MISCELLANEOUS INCOME 111,723,000 TOTAL 125,987,000 5. THE CIT(A) OBSERVED THAT 90% NET INTEREST INCOME I. E., AFTER ALLOWING SET OFF OF INTEREST PAID WHICH HAS A NEXUS WITH INT EREST RECEIVED HAS TO BE REDUCED, AND NOT 90% OF THE GROSS INTEREST. WITH REGARD TO DIVIDEND INCOME OF RS.6.86 LAKHS, THE CITJA OBSERVED THAT A SSESSEE HAS ALREADY REDUCED AN AMOUNT OF RS.6,86,190 FROM THE PROFITS & GAINS, HENCE NO FURTHER REDUCTION IS NECESSARY. REGARDING PROFIT O N SALE OF FIXED ASSETS, HE OBSERVED THAT THIS AMOUNT HAS ALREADY BEEN REDUCED FROM THE PROFITS & GAINS OF BUSINESS, NO FURTHER REDUCTION IS REQUIRED . 6. THE MISCELLANEOUS INCOME CONSISTED OF THE FOLLOW ING:- S.NO . PARTICULARS AMOUNT IN RS. 1 RENT RECOVERY 137,843 2 DUTY DRAWBACK ON EXPORTS 11,461,043 3 COMPENSATION IN LIEU OF NOTICE PAY 1,621,235 4 COMMISSION INCOME RECEIVED 25,023,424 5 RENTAL INCOME 6,832,188 6 SCRAP SALES 17,267,001 7 INSURANCE CLAIM 8,323,975 8 CASH DISCOUNT ON PURCHASES 3 1 9 ,860 9 SALE OF MATERIALS 382,844 10 EXCISE DUTY RECOVERED 4,805,403 11 OCTROI DUTY RECOVERED 1,231,688 ITA NOS.562 & 755/BANG/2007 PAGE 4 OF 42 12 OTHERS- SPECIFY:MISCELLANEOUS 5,976,527 13 RESEARCH AND DEVELOPMENT INCOME 3,467,922 14 CS FEES FROM AAP 494,500 15 COUNTRY MANAGEMENT FEES 4,535,650 16 SERVICES FEES FROM DAWEOO POWER INDIA LTD. 1,676,081 17 BONUS FROM SWISSAIR & AMEX 295,750 1 18 FEES FOR EQUIPMENTS UNUS E D 563,292 19 MIS.INCOME 5,552,532 20 EXCHANGE LOSS -47,198,767 21 EXCHANGE GAIN 58,952,904 111,722,895 7. THE CIT(A) OBSERVED THAT AO SHOULD NOT HAVE EXCL UDED 90% OF FOLLOWING INCOME:- 1) SCRAP SALES 17267001 2) CASH DISCOUNT 319860 3) EXCISE DUTY 4805403 4) OCTROI 1231688 5) CS FEES 494500 6) COUNTRY MANAGEMENT FEES 4535650 7) SERVICE CHARGES FROM DAEWOO POWER INDIA LTD. 16 76081 8) EXCHANGE GAIN 58952904 8. AGAINST THESE FINDINGS OF THE CITJA, BOTH THE AS SESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. 9. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OP INION THAT THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN I TA NO.3240/MUM/2004 FOR AY 2000-01 AND THE TRIBUNAL VIDE ORDER DATED 18 .3.2020 OBSERVED AS UNDER:- 10. AS FAR AS GROUND OF APPEAL NO.(I) OF REVENUE I S CONCERNED, IT IS DIRECTED AGAINST THE ACTION OF THE CIT(APPEAL S) IN TREATING OTHER INCOME AS PART OF BUSINESS INCOME OF THE ASSESSEE NOT FALLING WITHIN ITA NOS.562 & 755/BANG/2007 PAGE 5 OF 42 THE AMBIT OF EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT, INSOFAR AS IT RELATES TO OTHER INCOME, EXCEPT RENTAL INCOME , COMMISSION, NOTICE PAY, INCOME FROM CANCELLATION OF ORDERS AND MISCELLANEOUS INCOME. IN RESPECT OF THE GRIEVANCE PROJECTED BY T HE REVENUE IN ITS APPEAL, THE CIT(APPEALS) HAS IN THE IMPUGNED ORDER FOLLOWED HIS OWN ORDER FOR THE AY 1999-2000 DATED 4.3.2004. THE AFO RESAID ORDER OF THE CIT(APPEALS) DATED 4.3.2004 WAS SUBJECT MATTER OF APPEAL BY THE DEPARTMENT IN ITA NO.3958/MUM/2004 FOR THE AY 1999- 2000 AND BY ORDER DATED 5.4.2019, THE TRIBUNAL DECIDED THE I SSUE BY HOLDING AS FOLLOWS:- 20. AS REGARDS THE CONNECTED GROUND OF APPEAL OF REVENUE IS CONCERNED, IT IS SEEN THAT THE CIT(APPEA LS) HAS ADJUDICATED THIS ISSUE AS FOLLOWS:- 4. IN SO FAR AS THE ISSUE AT ITEM NO.(I) IS CONCER NED, THE BASIS OF THE ACTION OF THE ASSESSING OFFICER AS WELL AS THE SUBMISSIONS MADE IN THIS RESPECT HAS BEEN TH E SAME AS IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, EXCEPT THAT, THE APPELLANT'S REPRESENTATIVE H AS ALSO RELIED UPON IN THIS REGARD ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BANGALORE CLOTHING COMPANY 260 ITR 371 (BOM). 5. THE SUBMISSION MADE BY THE APPELLANT'S REPRESENTATIVE HAS BEEN CONSIDERED. A PERUSAL OF TH E HIGH COURT DECISION RELIED UPON REVEAL THAT IN THE SAID DECISION, IT HAS NOWHERE BEEN STATED THAT EVER Y RECEIPT ARISING FROM THE BUSINESS ACTIVITY IS REQUI RED TO BE TAKEN AS PART OF THE BUSINESS PROFITS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER THE SECTION. THE HON'BLE HIGH COURT HELD THAT ONLY THE OPERATIONAL INCOME IS REQUIRED TO BE TAKEN AS PART OF THE BUSINESS PROFITS WHILE THOSE RECEIPTS THAT ARE INCIDENTAL TO THE BUSINESS CAN STILL BE EXCLUDED BY THE OPERATION OF CLAUSE (BAA) TO THE EXPLANATION. THE COURT HAVE FURTHER HELD THAT NO STANDARD TEST CAN B E LAID DOWN FOR DECIDING AS TO WHAT WOULD CONSTITUTE OPERATIONAL INCOME. IN THE CIRCUMSTANCE AND CONSIDERING THE FACT THAT THOUGH THE HON'BLE COURT HAVE TAKEN INTO ACCOUNT THE DECISIONS OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. K. K. ITA NOS.562 & 755/BANG/2007 PAGE 6 OF 42 DOSHI & CO. 245 ITR 849 (BOM) AND CIT VS. KANTILAL CHOTELAL 246 ITR 439 (BORN) BUT NOT OVER RULED THEM , IT CANNOT BE ACCEPTED THAT THE RECEIPTS THAT ARE ON LY INCIDENTAL TO THE MAIN BUSINESS ACTIVITY OF THE APPELLANT COMPANY THOUGH MIGHT BE ARISING OUT OF SAID ACTIVITY ARE STILL REQUIRED TO BE TAKEN AS PAR T OF THE BUSINESS PROFITS FOR THE COMPUTATION OF DEDUCTI ON UNDER SECTION 80HHC OF THE ACT. IN REGARD TO THE SA ID RECEIPTS, THE RATIO OF THE DECISION IN THE CASE OF KANTILAL CHOTELAL (SUPRA) IS STILL APPLICABLE AND H ENCE THESE ARE REQUIRED TO BE EXCLUDED BY THE OPERATION OF CLAUSE(BAA) OF THE EXPLANATION. 6. IF IN THE CIRCUMSTANCE, THE CASE OF THE APPELLAN T IS EXAMINED IN THE LIGHT OF THREE DECISIONS VIZ., BANGALORE CLOTHING COMPANY (SUPRA), K.K. DOSHI & CO. (SUPRA) AND KANTILAL CHOTELAL (SUPRA) OF THE JURISDICTIONAL HIGH COURT, IN SO FAR AS THE APPLIC ATION OF CLAUSE (BAA) OF THE EXPLANATION IS CONCERNED, IT HAS TO BE RESTRICTED IN RESPECT OF THE INTEREST AMOUNT, PROFIT ON SALE OF ASSETS, RENT, NOTICE PAY, INSURAN CE CLAIM, DBK ON EXPORT, INCOME FROM CANCELLATION OF ORDER, SALE OF REP LICENCE, COMMISSION AMOUNT RECEIVED FROM GUJARAT PRIMA AND MISCELLANEOUS RECEIPT. ON THE OTHER HAND, IN THE LIGHT OF THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF BANGALORE CLOTHING CO. (SUPRA), IN RESPECT OF RECEI PTS BY WAY OF SCRAP, SALES, CASH DISCOUNT, EXCISE DUTY RECOVERED, EXCHANGE RATE, SALES-TAX REFUND, IT HAS TO BE HELD THAT THE SAID CLAUSE HAS NO APPLICATION. TH ESE RECEIPTS ARE TO BE TAKEN AS PART OF THE BUSINESS PROFITS AS ALSO AS PART OF THE TOTAL TURNOVER. FURT HER, THE EXCHANGE GAIN IS REQUIRED TO BE TAKEN AS PART O F THE EXPORT TURNOVER AS WELL APART FROM BEING TAKEN AS PART OF BUSINESS PROFITS. IN SO FAR AS OCTROI REFUN D AMOUNT IS CONCERNED, THE SUBMISSION OF THE APPELLANT'S REPRESENTATIVE REVEAL THAT IT IS A REFU ND OF PAYMENT OF OCTROI MADE EARLIER BOTH ON PURCHASES OF RAW MATERIAL AS WELL AS PART OF THE UNITS. WHILE TH E REFUND ON ACCOUNT OF THE PAYMENT OF OCTROI RELATED TO RAW MATERIAL IS REQUIRED TO BE TAKEN AS PART OF THE BUSINESS PROFITS IN RESPECT OF REFUND OF OCTROI PAI D ON ITA NOS.562 & 755/BANG/2007 PAGE 7 OF 42 UNITS, IT HAS TO BE EXCLUDED BY THE APPLICATION OF CLAUSE (BAA). IN RESPECT OF THE INCOME FROM TECHNIC AL SERVICES, IF THE AMOUNT SHOWN BY THE APPELLANT IN SCHEDULE XIII REFERS TO THE INCOME AS ARRIVED AT AF TER THE DEDUCTION OF THE EXPENSES INCURRED IN THAT ACCOUNT, THE SAID INCOME IS REQUIRED TO BE EXCLUDED BY THE APPLICATION OF CLAUSE (BAA). HOWEVER, IF THE AMOUNT ONLY REFLECTS THE RECEIPT, THE SAID INCOME I S REQUIRED TO BE TAKEN AS PART OF THE BUSINESS PROFIT S AS WELL AS THE TURNOVER. THE ASSESSING OFFICER IS DIRE CTED TO VERIFY THIS ASPECT. 21. THE CIT(APPEALS) IN ALLOWING RELIEF TO THE ASSE SSEE HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO., 2 60 ITR 371 (BOM), WHICH IN OUR OPINION IS CORRECT AND CAL LS FOR NO INFERENCE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE CIT(APPEALS). 11. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL, WE UPHOLD THE ORDER OF CIT(APPEALS) AND FIND NO MERIT IN GROUND (I) RAISED BY THE REVENUE. 12. THE SECOND PART OF GROUND NO.(I) RAISED BY THE REVENUE PROJECTS THE GRIEVANCE OF THE REVENUE WITH REGARD TO THE ACT ION OF THE CIT(APPEALS) IN HOLDING THAT INDIRECT EXPENSES ARE REQUIRED TO BE TAKEN FOR THE PURPOSE OF COMPUTATION OF AMOUNT ELIG IBLE FOR DEDUCTION ON ACCOUNT OF EXPORTS DONE BY THE ASSESSEE BY WAY O F TRADING. THE AO WORKED OUT THE DEDUCTION IN TERMS OF SECTION 80H HC(3)(C)(II) OF THE ACT RELATING TO TRADING EXPORTS, BY TREATING AL L EXPENDITURE INCURRED BY THE ASSESSEE, OTHER THAN THOSE DIRECTLY ATTRIBUTABLE TO THE MANUFACTURING ACTIVITY, AS INDIRECT EXPENSES INCURR ED IN EARNING PROFITS OUT OF EXPORTS BY WAY OF TRADING CARRIED OU T BY THE ASSESSEE. ON THIS ASPECT, THE CIT(APPEALS) HELD THAT IT IS ON LY THE INDIRECT COST WHICH WERE INCURRED BY THE UNDERTAKING WHICH HAVE C ARRIED OUT THE EXPORT ACTIVITY AND THE COST INCURRED AT THE HEAD O FFICE THAT SHOULD BE DEDUCTED AS INDIRECT EXPENSES ATTRIBUTABLE TO EXPOR TS BY WAY OF TRADING CARRIED OUT BY THE ASSESSEE. IN DOING SO, THE CIT(APPEALS) FOLLOWED THE APPELLATE ORDER IN ASSESSEES OWN CASE DATED 26.3.2003 FOR AY 1998-99. ITA NOS.562 & 755/BANG/2007 PAGE 8 OF 42 13. THE CONNECTED GRIEVANCE PROJECTED BY THE ASSESS EE IN THIS REGARD IS THE SECOND PART OF GROUND NO.2 IN WHICH THE ASSE SSEE HAS CONTENDED THAT TRADING EXPORTS ARE INDEPENDENT UNITS AND HEAD OFFICE EXPENSES NEED NOT BE ALLOCATED TO THE TRADING EXPORTS UNIT. 14. AS FAR AS THE GRIEVANCE OF THE REVENUE IN 2ND P ART OF GROUND (I) IS CONCERNED, WE ARE OF THE VIEW THAT THE SAID DIRECTI ON OF THE CIT(APPEALS) IS IN ACCORDANCE WITH THE LAWS AND WE FIND NO GROUNDS TO INTERFERE WITH THE ORDER OF CIT(APPEALS). 15. AS FAR AS THE GRIEVANCE PROJECTED BY THE ASSESS EE IN 2ND PART OF GROUND NO.2 IS CONCERNED, WE ARE OF THE VIEW THAT T HE HEAD OFFICE EXPENSES HAS TO BE ALLOCATED TO TRADING EXPORTS ALS O. IN THIS REGARD, WE FIND THAT THERE IS NO MATERIAL ON RECORD TO COME TO THE CONCLUSION THAT TRADING EXPORT IS AN INDEPENDENT UNIT REQUIRIN G NO ASSISTANCE FROM THE HEAD OFFICE. TO THIS EXTENT, THE GRIEVANCE PRO JECTED BY THE ASSESSEE IN 2ND PART OF GROUND NO.2 IN ITS APPEAL I S REJECTED. 16. THAT LEAVES FOR CONSIDERATION ONLY FIRST PART O F GROUND NO.2 RAISED BY THE ASSESSEE VIZ., CONSIDERING RENTAL INCOME, CO MMISSION, NOTICE PAY, INCOME FROM CANCELLATION OF ORDERS AND MISCELL ANEOUS INCOME AS INCOME FALLING WITHIN THE AMBIT OF EXPLANATION (BAA ) OF THE ACT. AS FAR AS NOTICE PAY, RENTAL INCOME, COMMISSION INCOME , INCOME FROM CANCELLATION OF ORDER IS CONCERNED, SIMILAR ISSUE W AS CONSIDERED IN ASSESSEES OWN CASE IN AY 1999-2000 IN ITA NO.3330/ MUM/2004 (SUPRA) AND THE TRIBUNAL HELD AS FOLLOWS:- 12. AS FAR AS RENT IS CONCERNED, IT IS THE PLEA OF THE ASSESSEE THAT IT TAKES ON RENT PREMISES FOR USE OF EMPLOYEES AND RECOVERS A PART OF THE COST FROM THE EMPLOYEES. THE AMOUNT RECOVERED FROM THE EMPLOYEES WAS SHOWN AS RECEIPTS IN THE P&L ACCOUNT AND 90% OF THAT WAS EXCLUDED FROM THE PROFITS OF THE BUSINESS. IT IS THE PLEA OF ASSESSEE THAT ONLY NET INCOME, AFTER REDUCI NG THE EXPENSES, SHOULD BE TAKEN FOR THE PURPOSE OF EXCLUS ION UNDER CLAUSE (BAA) OF THE ACT. WE ARE OF THE VIEW THAT THE RENT EXPENSES WOULD HAVE ALREADY BEEN DEBITED IN TH E P&L ACCOUNT AND WOULD HAVE GONE TO REDUCE THE BUSINESS PROFITS OF THE ASSESSEE. THEREFORE, WHAT HAS TO BE REDUCED UNDER EXPLANATION (BAA) OF THE ACT AND IS ONLY THE NET RENT INCOME AFTER REDUCING THE EXPENSES. WE HOLD AND DI RECT ACCORDINGLY. THE AO IS DIRECTED TO COMPUTE THE AMO UNT TO ITA NOS.562 & 755/BANG/2007 PAGE 9 OF 42 BE EXCLUDED UNDER EXPLANATION (BAA) OF THE ACT ACCORDINGLY. 13. AS FAR AS NOTICE PAY SHOWN AS INCOME BY THE ASS ESSEE IS CONCERNED, IT HAS TO BE REGARDED AS BUSINESS INCOME AND IT CANNOT BE CONSIDERED AS INCOME OF SIMILAR NATURE LI KE INTEREST, RENT, ETC. THEREFORE, THE ACTION OF THE REVENUE AUTHORITIES IN THIS REGARD IS HELD TO BE NOT JUSTIF IED. 14. AS FAR AS INSURANCE CLAIM AND INCOME FROM CANCELLATION OF ORDERS IS CONCERNED, IT HAS BEEN HE LD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PFIZER LTD ., 330 ITR 62 (BOM) THAT NEXUS OF THE INCOME WITH THE BUSI NESS HAS TO BE SEEN. THE LD. COUNSEL FOR THE ASSESSEE P OINTED OUT THAT INSURANCE CLAIM IS RELATABLE TO ITS BUSINE SS AND INCOME FROM CANCELLATION OF CONTRACTS IS ALSO RELAT ABLE TO ITS BUSINESS BEING DAMAGES FOR BREACH OF CONTRACT. 15. WE ARE OF THE VIEW THAT THE PLEA MADE BY THE AS SESSEE DESERVES TO BE ACCEPTED, SUBJECT TO VERIFICATION BY THE AO WITH REGARD TO RECEIPTS ON ACCOUNT OF INSURANCE CLA IM AND INCOME FROM CANCELLATION OF ORDER AND ITS NEXUS WIT H THE BUSINESS OF ASSESSEE. 18. AS FAR AS COMMISSION IS CONCERNED, THE PLEA OF LD. COUNSEL OF THE ASSESSEE IS ONLY FOR NETTING OF THE COMMISSION EXPENSES AGAINST COMMISSION RECEIPTS AND ONLY EXCLUDING 90% OF NET COMMISSION. THE PLEA MAD E IN THIS REGARD IS ACCEPTED, SUBJECT TO VERIFICATION OF THE NEXUS BETWEEN COMMISSION PAYMENT AND COMMISSION RECEIPT. THE LD. COUNSEL DID NOT PRESS FOR ADJUDICATION OF E XCLUSION OF 90% OF MISCELLANEOUS INCOME OF RS.1,41,71,000 UN DER EXPLAN.(BAA) TO SEC.80HHC OF THE ACT BECAUSE OF THE ABSENCE OF BREAK-UP OF THIS ITEM OF INCOME. 17. THE FACTS AND CIRCUMSTANCES IN THE PRESENT A SSESSMENT YEAR BEING SIMILAR, WE DIRECT THAT THE DIRECTIONS GIVEN IN THE ORDER OF TRIBUNAL FOR AY 1999-2000 (SUPRA) SHOULD BE FOLLOWE D AND DEDUCTION U/S. 80HHC BE COMPUTED ACCORDINGLY. 18. AS FAR AS MISCELLANEOUS INCOME IS CONCERNED, IT WAS ADMITTED BY THE PARTIES BEFORE US THAT THE SAID ISSUE WAS DECID ED AGAINST THE ASSESSEE IN THE ORDER OF TRIBUNAL FOR AY 1999-2000 (SUPRA). THE ITA NOS.562 & 755/BANG/2007 PAGE 10 OF 42 GRIEVANCE PROJECTED BY THE ASSESSEE IN THE FIRST PA RT OF GROUND NO.2 IS DECIDED ACCORDINGLY AGAINST THE ASSESSEE. 19. THERE ARE CERTAIN NEW ITEMS OF OTHER INCOME WHICH ARE EXCLUDED BY THE AO UNDER EXPLANATION (BAA) OF SECTI ON 80HHC VIZ., FEES FROM GROUP COMPANIES AND NETWORKING CHARGES. THESE ARE RECEIPTS FOR PROVIDING FACILITIES TO GROUP COMPANIE S AND HAVE TO BE REGARDED AS FALLING WITHIN THE AMBIT OF EXPLANATION (BAA) TO SECTION 80HHC. 20. THERE IS ANOTHER ITEM OF INCOME WHICH IS DRA WBACK ON EXPORT. THIS IS AN ITEM WHICH WILL GET REDUCED UNDER THE PR OVISO TO SECTION 80HHC OF THE ACT AND WILL BE AGAIN ADDED AFTER SUCH EXCLUSION. THEREFORE, THIS CANNOT BE TREATED AS AN ITEM OF INC OME FALLING WITHIN EXPLANATION (BAA) TO SECTION 80HHC. 21. GROUNDS NO.(I) BY THE REVENUE AND GROUND NO. 2 BY THE ASSESSEE ARE DECIDED ACCORDINGLY. 10. BEING SO, TAKING A CONSISTENT VIEW, WE DIRECT A CCORDINGLY AS DIRECTED IN THE TRIBUNAL ORDER FOR THE AY 2000-01. HOWEVER, WE MAKE IT CLEAR THAT WHILE CONSIDERING THE INCOME, THE AO SHALL TAKE NET INCOME AFTER SETTING OFF THE EXPENDITURE INCURRED TO EARN THAT INCOME. THUS , THE GROUND BY THE ASSESSEE IS ALLOWED, WHILE THE GROUNDS OF THE REVEN UE ON THIS ISSUE ARE DISMISSED. 11. THE NEXT GROUND (NO.2) RAISED BY THE ASSESSEE R EADS AS FOLLOWS:- 2. THE LEARNED CIT (A) ERRED IN CONFIRMING THAT HE AD OFFICE EXPENSES IS REQUIRED TO BE ALLOCATED WHILE ARRIVING AT THE PROFIT OF THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF ALLOW ING DEDUCTION U/S 80-I / 80-IA OF THE INCOME TAX ACT. WITHOUT PREJUDICE, IT IS FURTHER SUBMITTED THAT ALL OCATION OF EXPENDITURE IS ON A VERY HIGHER SIDE AND IT SHOULD BE REDUCED SUBSTANTIALLY. ITA NOS.562 & 755/BANG/2007 PAGE 11 OF 42 12. THIS ISSUE ALSO CAME UP FOR CONSIDERATION BEFOR E THE TRIBUNAL ITA NO.3240/BANG/2004 FOR AY 2000-01 WHEREIN THE ISSUE WAS DECIDED AGAINST THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS:- 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSIN ESS OF VARIOUS ENGINEERING FABRICATION, MANUFACTURE AND TR ADING OF MECHANICAL, ELECTRICAL AND OTHER ENGINEERING ITEMS. THE DISPUTE RAISED BY THE ASSESSEE IN GROUND NO.1 IS WITH REGAR D TO DEDUCTION U/S. 80IA OF THE ACT. IT IS NOT IN DISPUTE THAT TH E ASSESSEE WAS ENTITLED TO DEDUCTION U/S. 80IA. THE AO WHILE ALLO WING DEDUCTION U/S. 80IA ALLOCATED HEAD OFFICE EXPENSES ON THE BASIS OF TURNOVER OF THE VARIOUS UNDERTAKINGS OF THE ASSE SSEE. CONSEQUENT TO SUCH ALLOCATION, DEDUCTION U/S. 80IA OF THE ACT WAS ALLOWED AT A MUCH LESSER FIGURE THAN WHAT WAS C LAIMED BY THE ASSESSEE. IT IS NOT IN DISPUTE BEFORE US THAT IDEN TICAL ISSUE CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN AY 1 988-89 IN ITA NO.3809/MUM/2003, ORDER DATED 19.10.2012. IN P ARA 12.4, THE TRIBUNAL FOLLOWED ITS DECISION IN ASSESSEES OW N CASE FOR THE AY 1995-96. THE ISSUE WAS CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AY 1997-98 I N ITA NO.2555/MUM/2003 BY ORDER DATED 05.04.2007 AND ON I DENTICAL ISSUE IT WAS HELD AS FOLLOWS:- THE CASE OF THE ASSESSEE, HOWEVER, IS THAT THE SUB JECT MATTER OF DEDUCTION U/S. 80IA IS THE PROFITS DERIVE D FROM THE BUSINESS OF INDUSTRIAL UNDERTAKINGS AND HENCE I T IS ONLY THAT EXPENDITURE WHICH IS DIRECTLY ATTRIBUTABL E TO THE EARNING OF THE SAID PROFITS THAT CAN BE THE SUBJECT MATTER OF DEDUCTION FOR COMPUTING THE AFORESAID PROFITS AND N OT HEAD OFFICE EXPENSES. WE ARE UNABLE TO AGREE WITH THE AFORESAID SUBMISSION FOR TWO REASONS. FIRST REASON IS THAT IT IS THE PROFIT DERIVED BY THE ASSESSEE FROM THE B USINESS OF INDUSTRIAL UNDERTAKING WHICH HAS BEEN MADE ELIGIBL E FOR DEDUCTION U/S. 80IA D NOT ANY OTHER PROFIT. SECOND REASON IS THAT THE COMPUTATION OF PROFITS ELIGIBLE FOR DED UCTION U/S. 80IA HAS TO BE DONE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 28 TO 43. PERUSAL OF THE AFOR ESAID PROVISIONS REVEALS THAT ALL THOSE EXPENSES, WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE IN DUSTRIAL UNDERTAKING, ARE TO BE ALLOWED WHILE COMPUTING THE BUSINESS PROFIT. IT CANNOT BE SAID THAT HEAD OFFIC E EXPENSES OR COMMON EXPENSES ARE NOT INCURRED OR ARE ITA NOS.562 & 755/BANG/2007 PAGE 12 OF 42 UNCOMMON FOR THE PURPOSES OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. WHAT IS NOW REQUIRED TO BE COMPUTED IS THE PROFITS DERIVED FROM THE BUSINESS O F INDUSTRIAL UNDERTAKING THEREFORE, THERE IS NO WARRA NT FOR THE PROPOSITION THAT ONLY THOSE EXPENSES, WHICH ARE DIRECTLY ATTRIBUTABLE TO EARNING OF PROFITS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING ALONE SHOULD BE CONSIDERED. AS ALREADY STATED ABOVE THE PROFITS EL IGIBLE FOR DEDUCTION U/S. 801A ARE NET PROFITS DERIVED FRO M THE INDUSTRIAL UNDERTAKING AND THEREFORE THEY WILL HAVE TO BE NETTED AFTER ADJUSTING ALL THE EXPENSES ATTRIBUTABL E TO THEM IN TERMS OF THE PROVISIONS CONTAINED IN SECTIO NS 28 TO 43 OF THE I.T. ACT. THEREFORE ALL EXPENSES, WHET HER THEY ARE DIRECT OR INDIRECT OR FIXED, SEMI-FIXED OR VARI ABLE, MUST BE ADJUSTED TO DETERMINE THE PROFITS DERIVED FROM T HE INDUSTRIAL UNDERTAKING. OF COURSE, ANY COMPONENT OF HEAD OFFICE EXPENSES, WHICH HAS BEEN INCURRED EXCLUSIVEL Y FOR THE PURPOSES OF THE BUSINESS OF ANY PARTICULAR UNIT / UNDERTAKING/DIVISION WILL HAVE TO BE ADJUSTED AGAIN ST THE RECEIPTS OF THAT PARTICULAR UNIT/UNDERTAKING/DIVISI ON ONLY. SIMILARLY, HEAD OFFICE EXPENSES OR EXPENSES WHICH A RE COMMON TO ALL THE UNITS/UNDERTAKINGS/DIVISIONS EXPE NSES WILL HAVE TO BE SPREAD OVER AND CHARGED AGAINST THE RECEIPTS OF ALL THE UNITS/ UNDERTAKINGS/DIVISIONS. IF THIS COURSE IS NOT FOLLOWED, THEN WHAT WOULD STAND ALLOW ED U/S 80IA WOULD BE INFLATED PROFITS AND NOT THE NET PROF ITS DERIVED FROM THE INDUSTRIAL UNDERTAKING IN TERMS OF THE PROVISIONS OF SECTIONS 29 TO 43. IN THIS VIEW OF TH E MATTER AND IN THE ABSENCE OF ANY BETTER ALTERNATIVE, THE C IT(A) IS JUSTIFIED IN HOLDING ASSESSEE IS ENTITLED TO DEDUCT ION OF THE ELIGIBLE AMOUNTS IN RESPECT OF THE PROFITS DERIVED FROM THE ELIGIBLE UNDERTAKINGS AFTER THE ALLOCATION OF HEAD OFFICE EXPENSES IN THE RATIO OF TURNOVER. WE SEE NO VALID REASON TO TAKE A VIEW CONTRARY TO THE ONE TAK EN BY THE CIT(A) IN THIS BEHALF. GROUND NO. 5 IS DISMISSE D. 3. THIS TRIBUNAL FOLLOWING THE AFORESAID DECISION UPHELD SIMILAR ALLOCATION OF HEAD OFFICE EXPENSES IN ASSES SEES CASE FOR AY 1999-2000 IN ITA NO.3330/MUM/2004 ORDER DATED 5. 4.2019 WITH THE FOLLOWING OBSERVATIONS:- 7. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE DECISION OF THE TRIBUNAL IN AY 1995-96 WHICH WAS ITA NOS.562 & 755/BANG/2007 PAGE 13 OF 42 EXTRACTED IN THE EARLIER PART OF THIS ORDER IS APPL ICABLE TO THE PRESENT ASSESSMENT YEAR ALSO. WE FIND NO GROUNDS TO TAKE A CONTRARY VIEW. THE DECISION IN T HE CASE OF ZANDU PHARMACEUTICALS WORKS LTD. (SUPRA) IS WITH REFERENCE TO APPORTIONMENT OF R&D EXPENSES AND NO PARITY OF FACTS EXIST WITH THE PRESENT CASE. AS FAR AS THE DECISION OF THE HONBLE MADRAS HIGH COUR T IN THE CASE OF HINDUSTAN LEVER (SUPRA) IS CONCERNED , THAT DECISION RESTS ON THE FACTS OF THAT CASE, WHER E IT WAS FOUND THAT COMMON HEAD OFFICE EXPENSES WERE SIMPLE ADMINISTRATIVE EXPENSES FOR RUNNING THE BUSINESS. IN THAT VIEW OF THE MATTER, WE UPHOLD TH E ORDER OF CIT(APPEALS) AND DISMISS GROUND NO.1 RAISE D BY THE ASSESSEE. 4. IN THE LIGHT OF THE AFORESAID DECISION OF THE T RIBUNAL, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN GROUND NO .1 RAISED BY THE ASSESSEE AND ACCORDINGLY THE SAME IS DISMISSED. 13. FOLLOWING THE TRIBUNAL ORDER FOR AY 2000-01 AND TAKING A CONSISTENT VIEW, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 14. GROUND NO.3 BY THE ASSESSEE IS AS FOLLOWS:- 3. THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLO WANCE OF THE CLAIM FOR DEDUCTION FOR A SUM OF RS. 6,74,600/- BEING DEDUCTION CLAIMED UNDER SECTION 80-0 AT 50% OF FEES RECEIVED FOR SUPPLY OF ENGINEERING DESIGNS AND DRAWINGS. IT IS SUBMITTED THAT THE CLAIM IS FOR FEES RECEIVED FOR DEVELOPING AND PROVIDING DESIGNS AND DRAWINGS, AS PER THE PROVISIO N OF SECTION 80 0 OF THE INCOME TAX ACT DESIGN AND DRAWINGS NEED NO T BE REGISTERED FOR AVAILING THE DEDUCTION UNDER THE AFORESAID SECT ION. IN THE FACTS AND CIRCUMSTANCES OF THE CASE YOUR APPELLANT IS ENT ITLED FOR DEDUCTION U/S 80-0 FOR FEES RECEIVED IN FOREIGN CUR RENCY. 15. THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITA NO.3330/MUM/2004 FOR AY 1999-2000 AND VIDE ORDER DA TED 5.4.2019 IT WAS HELD AS UNDER:- ITA NOS.562 & 755/BANG/2007 PAGE 14 OF 42 28. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. AS FAR AS THE EVIDENCE FILED BY THE ASSESSEE TO SHO W THAT IT HAD SUPPLIED DESIGNS FOR USE OUTSIDE INDIA BY A FOREIGN ENTERPRISE, THE ASSESSEE FILED COPY OF INVOICES AT PAGES 21-23 OF P B. THE SAME IS AS UNDER:- INVOICE (DATED 23.06.98) CONSIGNEE ASEA BROWN BOVERI LTD. (TAIWAN), AIR POLLUTION CONTROL GROUP (PES), 6F, NANHING E ROAD, SEC.4, P.O. BOX 81 54, TAIPEI. TAIWAN R.O.C. DESCRIPTION OF GOODS QUANTITY AMOUNT USD TECHNICAL SERVICE CHARGE CHARGES FOR MECHANICAL DESIGN DRAWING FAA-5*45M-2*24M-150M-A2 1 LOT. TOTAL ORDER VALUE IS USD 45,000.00. 60% AMOUNT ON USD 45,000.00 IS 27,000.00 PAYABLE AGAINST THIS INVOICE THROUGH ABB NETTING ARRANGEMENT. INVOICE (DATED 24.07.98) CONSIGNEE ASEA BROWN BOVERI LTD. (TAIWAN), AIR POLLUTION CONTROL GROUP (PES), 6F, NANHING E ROAD, SEC.4, P.O. BOX 81 54, TAIPEI. TAIWAN R.O.C. DESCRIPTION OF GOODS QUANTITY AMOUNT USD TECHNICAL SERVICE CHARGE CHARGES FOR MECHANICAL DESIGN DRAWING FAA-5*45M-2*24M-150M-A2 1 LOT. TOTAL ORDER VALUE IS USD 45,000.00. ITA NOS.562 & 755/BANG/2007 PAGE 15 OF 42 60% AMOUNT ON USD 45,000.00 IS 27,000.00 RECEIVED. BALANCE 40% AMOUNT NOW PAYABLE 18,000.00 ADDITIONAL CHARGES AS PER MOM DATED 01.07.98 TO 07.07.98 8,500.00 ------------- TOTAL 26,500.00 INVOICE (DATED 28.07.98) CONSIGNEE ASEA BROWN BOVERI LTD. (TAIWAN), AIR POLLUTION CONTROL GROUP (PES), 6F, NANHING E ROAD, SEC.4, P.O. BOX 81 54, TAIPEI. TAIWAN R.O.C. DESCRIPTION OF GOODS QUANTITY RATE AMOUNT USD TECHNICAL SERVICE CHARGE CHARGES FOR MECHANICAL DESIGN DRAWING FAA-5*45M-2*24M-150M-A2 1 LOT. SERVICE CHARGES OF OUR MR S K DATTA WHO VISITED YOUR OFFICE IN CONNECTION WITH CITED BUSINESS AND AS PER YOUR LOTUS NOTE DATED 15.06.98 A) AGREED CHARGES [AS PER ABOVE LN] FOR THE PERIOD FROM 01.07.98-07.07.98 7 DAYS 200/DAY 1,400.00 B) OUT OF POCKET EXPENSE @ USD 25/DAY 7 DAYS 2 5/DAY 175.00 B) AIR TICKET COST INR 33,205.00 - - 786.00 @ USD1 = RS.42.25. ------------- TOTAL 2,361.00 ------------- 29. IT APPEARS FROM THE INVOICES, ESPECIALLY THE T HIRD INVOICE (DT. 28.07.98) THAT ONE MR. S.K. DATTA VISITED TAIW AN IN CONNECTION WITH THE MECHANICAL DESIGN DRAWING. IT THUS APPEARS TO BE A CASE WHERE THE ASSESSEE WAS ONLY RENDERING TECHNICAL SERVICES FOR WHICH IT RECEIVED CONSIDERATION AND DI D NOT SUPPLY ANY DESIGN FOR USE BY THE FOREIGN ENTERPRISE OUTSID E INDIA. IN FACT, ITA NOS.562 & 755/BANG/2007 PAGE 16 OF 42 ON SIMILAR GROUNDS, THE TRIBUNAL IN ITA NO.3089/MUM /2003 IN ASSESSEES OWN CASE FOR THE AY 1998-99, UPHELD THE ORDER OF CIT(APPEALS) WITH THE FOLLOWING OBSERVATIONS:- 10.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. ON A CLOSE OBSERVATION OF THE REASONING OF THE CIT(A) IN REJEC TING THE ASSESSEE'S CLAIM, IT IS OBSERVED THAT THE ASSESSEE' S REPRESENTATIVE WAS SPECIFICALLY ASKED TO FURNISH A COPY OF AGREEMENT ENTERED INTO SWISS COMPANY. HOWEVER, THE LEARNED AR ADMITTED THAT NO SUCH AGREEMENT EXISTED IN RESPECT OF SERVICES RENDERED AND WHAT HAS BEEN CLAI MED AS DEDUCTION WAS MERELY ON THE BASIS OF INVOICES RAISE D FOR THE PURPOSE, THE MAIN CONTENTION OF THE ASSESSEE AL L ALONG WAS THAT IT HAD PROVIDED CERTAIN ENGINEERING DESIGN S FOR THE POWER PLANT(S) WHICH SWISS COMPANY WAS, ACCORDI NG TO THE ASSESSEE, TO SET UP IN INDIA. HOWEVER, NO CO PIES OF ENGINEERING DESIGNS PURPORTED TO HAVE BEEN PROVIDED TO THE FOREIGN COMPANY WERE FURNISHED FOR VERIFICATION/EXAMINATION EVEN AT THIS STAGE. AS ADM ITTED BY THE LEARNED AR BEFORE THE FIRST APPELLATE AUTHOR ITY, NO AGREEMENT WORTH THE NAME HAS BEEN ENTERED INTO WITH SWISS COMPANY TO PROVIDE DESIGNS ETC. IT IS RATHER SURPRISING AS TO HOW THE ASSESSEE - A LIMITED COMPA NY - HAD AGREED TO PROVIDE CERTAIN EXPERTISE SUCH AS ENGINEERING DESIGNS THAT TOO FOR SETTING UP OF POWE R PLANT(S) WITHOUT REDUCING THE TERMS AND CONDITIONS SUCH AS PAYMENT DETAILS ETC., IN WRITING. THE LEARNED A. R'S ARGUMENT THAT WHAT HAS BEEN CLAIMED AS DEDUCTION WA S ON THE BASIS OF INVOICES RAISED FOR THE PURPOSE OF REC EIPT, IN OUR CONSIDERED VIEW, DOESN'T HAVE ARTY MERIT. MEREL Y RAISING INVOICES FOR THE PURPOSE OF HAVING PROVIDED ENGINEERING DESIGNS CANNOT BE A YARDSTICK TO DETERM INE THE EXACT AMOUNTS RECEIVED BY THE ASSESSEE FOR THE SERVICES RENDERED BY IT. MERE RAISING OF INVOICES AND ON TH E BASIS OF WHICH CLAIMING DEDUCTION U/S 80-0 OF THE ACT RUN NING INTO CRORES OF RUPEES CAN NEITHER BE JUSTIFIED NOR ALLOWED WITHOUT ANY SHEER OF DOCUMENTARY PROOF. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE ISSUE, WE INCL INED TO AGREE WITH THE REASONING OF THE CIT (A), WHICH DOES NOT REQUIRE OUR INTERVENTION. IT IS ORDERED ACCORDINGLY . ITA NOS.562 & 755/BANG/2007 PAGE 17 OF 42 30. THE FACTS OF THE CASE IN THE PRESENT ASSESSMEN T YEAR BEING IDENTICAL TO THE FACTS IN THE AFORESAID DECISION OF THE TRIBUNAL FOR AY 1998-99, WE ARE OF THE VIEW THAT THERE IS NO MAT ERIAL BEFORE US IN THE PRESENT AY TO TAKE A CONTRARY VIEW. WE ARE ALSO OF THE VIEW THAT IN VIEW OF THE AFORESAID CONCLUSION, THE QUESTION AS TO WHETHER; TO CLAIM DEDUCTION U/S. 80-O, THE PERSON C LAIMING DEDUCTION SHOULD BE THE OWNER OF THE IPR OR NOT, IS ACADEMIC AND THEREFORE DOES NOT CALL FOR ANY ADJUDICATION IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 31. IN THE RESULT, GROUND NO.3 RAISED BY THE ASSES SEE IS DISMISSED. 16. SINCE THE FACTS IN THE PRESENT ASSESSMENT YEAR ARE SIMILAR TO THOSE CONSIDERED BY THE TRIBUNAL IN AY 1999-2000, THIS GR OUND IS REJECTED. 17. GROUND NO.4 OF THE ASSESSEES APPEAL READS AS F OLLOWS:- 4. THE LEARNED CIT (A) ERRED IN HOLDING THAT EXPEN DITURE OF RS. 18,14,331/- BEING AMOUNT SPEND TOWARDS REPAIRS AND RENOVATION OF LEASEHOLD PREMISES IS CAPITAL EXPENDI TURE. 18. THIS ISSUE ALSO CAME UP FOR CONSIDERATION BEFOR E THE TRIBUNAL IN ITA NO.3330/MUM/2004 FOR AY 1999-2000 WHEREIN SIMILAR G ROUND WAS DISMISSED. SINCE THE CIT(A) IN THE PRESENT CASE F OLLOWED THE EARLIER ORDER OF TRIBUNAL, BEING SO, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CITJA AND THE SAME IS CONFIRMED. 19. GROUND NO.5 READS AS UNDER:- 5. THE LEARNED CIT (A) ERRED IN DISALLOWING A SUM OF RS. 5,72,796/- BEING REVERSAL OF PROVISION MADE FOR THE OBSOLETE STOCK IN EARLIER YEARS. IT IS SUBMITTED THAT LEARNED ASSESSING OFFICER & CI T (A) HAS DISALLOWED THE CLAIM FOR DEDUCTION OF PROVISION MAD E FOR OBSOLETE STOCK. THE REVERSAL THEREOF (WRITE BACK) SHOULD NOT BE TAXED AGAIN. IT IS SUBMITTED THAT IT MAY BE SO HELD NOW. ITA NOS.562 & 755/BANG/2007 PAGE 18 OF 42 20. THIS ISSUE IS WITH REGARD TO PROVISION FOR OBSO LESCENCE. THE AO MADE AN ADDITION OF RS.1,26,08,347/- TO THE INCOME TOWARDS PROVISION FOR STOCK OBSOLESCENCE, CONSISTENT WITH THE STAND OF TH E DEPARTMENT FOR THE AY 2000-01. DURING THE PROCEEDINGS BEFORE THE CIT(A), IT WAS EXPLAINED THAT THE TOTAL VALUE OF CLOSING STOCK AS ON 31/3/01 WAS RS.127,67,60,633/-. THIS FIGURE WAS ARRIVED AT AS UNDER : PARTICULARS YEAR ENDING 31/3/2001 YEAR ENDING 31/3/2000 STORES & MAINTENANCE SP ARES 6,9 56,209 9,258,309 RAW MATERIALS 111,027,513 80,262,682 COMPONENTS 694,422,309 553,494,266 FINISHED GOODS 75,743,881 86,868,628 CONTRACT IN PROGRESS/WIP 499,790,463 363,371,801 PROVISION FOR OBSOLESCENCE ( - )111179742 ( - )111752538 1,276,760,633 981,503,148 21. THE CIT(A) OBSERVED THAT THE ABOVE FIGURES ARE THE AGGREGATE OF THE FIGURES RELATING TO 7 UNITS AT MANEJA ANDHERI, NASIK, FARIDABAD, CHENNAI, KOLKATTA AND PEENYA. FROM THE TOTAL VALUE OF STOCK THE COMPANY HAS REDUCED PROVISION FOR OBSOLESCENCE AT RS.11,11, 79,742/-. THE AO DID NOT ADD BACK THIS AMOUNT AND HAS ADDED A DIFFERENT FIGURE. AFTER EXAMINING THE DETAILS RELATING TO THE PROVISION, THE CIT(A) NOTED THAT AS ON 1/4/00 THE TOTAL VALUE OF CLOSING STOCK WAS RS.98,15,03,14 8/-. AS IN THE CURRENT YEAR FROM THE TOTAL OF INVENTORY IN THE 7 U NITS, THE COMPANY HAD REDUCED THE PROVISION FOR OBSOLESCENCE STANDING AT RS.11,17,52,538/-. IN THE ASSESSMENT ORDER FOR THE AY 2000-01 HE FOUND THAT AN ADDITION OF RS.2,80,33,285/- WAS MADE TO THE CLOSING STOCK O N ACCOUNT OF THE PROVISION FOR OBSOLESCENCE MADE DURING THAT YEAR, W HICH WAS CONFIRMED BY THE CIT(A). ITA NOS.562 & 755/BANG/2007 PAGE 19 OF 42 22. IN THE PRESENT CASE, THE CIT(A) WAS OF THE VIEW THA T THE ONLY ISSUE TO BE SEEN IS WHETHER ANY FRESH PROVISION WAS MADE TOWARDS OBSOLESCENCE IN THE ACCOUNTS FOR THE YEAR UNDER CON SIDERATION. AS MENTIONED EARLIER AS ON 1/4/00 THE TOTAL PROVISION FOR OBSOLESCENCE STOOD AT RS.11,17,52,538/-. AS ON 1/4/01 THE PROVIS ION HAD COME DOWN TO A LOWER FIGURE OF RS.11,11,79,742/-. THUS THERE HAS BEEN A REVERSAL IN THE PROVISION AND NO FRESH PROVISION HAS BEEN MA DE. AN ATTEMPT HAS ALSO BEEN MADE TO SHOW HOW THE AO ARRIVED AT A FIGURE OF RS.1,23,08,347/- AS THE PROVISION FOR STOCK OBSOLES CENCE. IT IS EXPLAINED THAT DETAILS RELATING TO PROVISION CREATE D WERE PROVIDED TO THE AO DURING THE ASSESSMENT PROCEEDINGS. IN THE DE TAILS FILED ON 4/2/04, THE FOLLOWING FIGURES WERE GIVEN. LOCATION AMOUNT ANDHERI 9,660,369 FARIDABAD 5,106,000 MAENJA 1,875,787 NASIK - 987,825 PEENYA - 3,045,984 TOTAL 12,608,347 23. ACCORDING TO THE CIT(A), THERE ARE TWO MISTAKES IN THE DETAILS GIVEN. IN RESPECT OF THE ANDHERI UNIT THE PROVISION MADE D URING THE YEAR WAS SHOWN AT RS.96,60,369/- INSTEAD OF THE CORRECT FIGU RE OF RS.12,85,226/-. LIKEWISE IN RESPECT OF THE FARIDABAD UNIT THE PROVI SION DURING THE YEAR WAS SHOWN AT RS.51,06,000/- AS AGAINST PROVISION OF RS. 3,00,000/-. SUBSEQUENTLY THE CORRECTED FIGURE WAS GIVEN. THE AO PROCEEDED ON THE BASIS OF THE ORIGINAL FIGURES. THE CORRECT POSITION WITH REGARD TO OPENING BALANCE, THE PROVISION MADE DURING THE YEAR AND THE CLOSING BALANCE IN THE OBSOLESCENCE ACCOUNT IS GIVEN BELOW : ITA NOS.562 & 755/BANG/2007 PAGE 20 OF 42 LOCATION OPENING PROVISION FOR OBSOLETE INVENTORY AS ON FRESH PROVISION CREATED/(REVERSED) DURING THE YEAR 1/4/00 TO 31/3/01 CLOSING PROVISION AS ON 31/3/01 ANDHERI 8, 37 5,143 1, 285,226 9,660,369 FARIDABAD 4,806,000 300,000 5,106,000 MANEJA 21,528,121 1,875,787 23,403,908 NASIK 8,479,225 -987,825 7,491,400 CHENNAI 1,613,000 - 1,613,000 PEENYA 66,951,049 -3,045,984 63,905,065 TOTAL 111,752,538 -572,796 111,179,742 24. ON VERIFICATION, THE CIT(A) WAS OF THE VIEW THA T THE MISTAKE HAPPENED IN RESPECT OF ANDHERI AND FARIDABAD UNIT. THE CLOSING BALANCE IN THE PROVISION ACCOUNT WAS SHOWN AS PROVISION MADE D URING THE YEAR IGNORING THE OPENING BALANCE. TO SUM UP THERE IS A REVERSAL IN THE PROVISION ACCOUNT AS UNDER :- UNIT PROVISION MADE/REVERSED ANDHERI RS. 12,85,226/- FARIDABAD RS. 3,00,000/- MANEJA RS. 18,75,787/- NASIK RS. 9,87,825/- } PROVISION PEENYA RS.30,45,984/-} REVERSED NET REVERSAL IN THE PROVISION A/C. : RS. 5,72,7 96/- 25. BEFORE THE CIT(A), IT WAS EXPLAINED THAT THE PR OVISION IS NORMALLY MADE BASED ON THE ACCOUNTING STANDARDS. ON SUBSEQUE NT VERIFICATION, THE CIT(A) FOUND THAT EXCESS PROVISION HAD BEEN MADE IN NASIK AND PEENYA UNITS. THEREFORE, THE EXCESS PROVISION WAS REVERSED . SINCE NO FRESH PROVISION WAS MADE TOWARDS OBSOLESCENCE, THE ADDITI ON DELETED BY THE CIT(A). ITA NOS.562 & 755/BANG/2007 PAGE 21 OF 42 26. NOW THE CONTENTION OF THE LD. AR IS NET REVERSA L OF RS.5,72,796 HAS TO BE ALLOWED AS A DEDUCTION IN THE ASSESSMENT YEAR UNDER CONSIDERATION. IN OUR OPINION, THIS AMOUNT OF RS.5,72,796 WAS ALLO WED AS A DEDUCTION IN THE EARLIER YEARS WHEN THE PROVISION WAS CREATED. NOW NON-TAXING OF THE SAME AMOUNTS TO ALLOWING DOUBLE RELIEF. HENCE REVE RSAL OF PROVISION OF RS.5,72,796 HAS TO BE BROUGHT TO TAX IN THE ASSESSM ENT YEAR UNDER CONSIDERATION. AS SUCH, WE CONFIRM THE ORDER OF CI T(APPEALS) ON THIS ISSUE AND DISMISS THIS GROUND OF APPEAL BY THE ASSESSEE. 27. THE ASSESSEE HAS RAISED GROUND NO.6 AS UNDER:- 6. THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLO WANCE MADE UNDER SECTION 14A OF THE INCOME TAX ACT BEING EXPENSES INCURRED FOR EARNING THE DIVIDEND FROM THE INVESTME NT MADE OUT OF THE INTEREST BEARING FUNDS. IT IS SUBMITTED THAT NO INVESTMENT HAS BEEN MADE OU T OF THE INTEREST BEARING FUNDS AND THEREFORE THE CIT (A) OU GHT TO HAVE HELD AS SUCH. 28. THE COMPANY HAD CLAIMED DIVIDENDS OF RS.6,86,19 0 AS EXEMPT U/S.10(33). BASED ON THE DETAILS GIVEN, IN THE ASSE SSMENT ORDER THE AO ESTIMATED THE EXPENDITURE ATTRIBUTABLE TO THE EARNI NG OF DIVIDENDS AT 8,93,184/-. THE CIT(A) OBSERVED THAT BASICALLY THE FORMULA ADOPTED IS ERRONEOUS, SINCE THE EXPENDITURE ESTIMATED IS MORE THAN THE INCOME. HE NOTED THAT THE AO CONSIDERED THE INVESTMENT MADE IN TAXABLE INVESTMENTS ALSO. THE CIT(A) THEREFORE DIRECTED TO ESTIMATE THE EXPENDITURE ONLY ON THE INVESTMENTS MADE IN TAX FREE DIVIDENDS. 29. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. SIMILAR ISSUE ALSO CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN I TA NO.3330/MUM/2004 FOR AY 1999-2000 WHEREIN THE TRIBUNAL HELD AS UNDER :- 40. FROM A PERUSAL OF THE DETAILS OF OWN FUNDS AVA ILABLE, IT IS CLEAR THAT OWN FUNDS OF THE ASSESSEE WERE MUCH MORE THAN THE ITA NOS.562 & 755/BANG/2007 PAGE 22 OF 42 INVESTMENTS THAT YIELDED TAX-FREE DIVIDEND INCOME. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE REVENUE AUTHORITIES WERE NOT RIGHT IN CONCLUDING THAT THE BORROWED FUND S ON WHICH INTEREST WAS PAID WAS USED FOR THE PURPOSE OF MAKIN G INVESTMENTS THAT YIELDED TAX-FREE DIVIDEND INCOME. IN THAT VIE W OF THE MATTER, WE ARE OF THE VIEW THAT THE ADDITION MADE BY THE RE VENUE AUTHORITIES CANNOT BE SUSTAINED. THE SAME IS DIREC TED TO BE DELETED. 30. THE FACTS IN AY 1999-2000 BEING IDENTICAL IN TH E CASE BEFORE US, WE DELETE THE ADDITION ON SIMILAR REASONING. 31. THE NEXT GROUND (NO.7) BY THE ASSESSEE READS AS UNDER:- 7. THE LEARNED CIT (A) ERRED IN CONFIRMING THE DI SALLOWANCE OF THE SUM OF RS. 20,264,477/- BEING PROVISION MADE FOR LOSS ORDER ON THE GROUND THAT SAME IS CONTINGENT IN NATU RE AND THERE IS NO SCOPE FOR ALLOWANCE OF ANY LIABILITY THAT IS UNA SCERTAINABLE. IT IS SUBMITTED THAT YOUR APPELLANT HAS PROVIDED FO R LOSS LIKELY TO BE INCURRED ON THE EXECUTION OF THE PARTICULAR ORDE R. AS PER THE ACCOUNTING STANDARD ON ACCOUNTING FOR THE CONTRACTS , IT IS MANDATORY TO MADE PROVISION FOR THE LOSS ORDER BASE D ON THE TECHNICAL AND COMMERCIAL EVALUATION OF THE CONTRACT AND IT CANNOT BE CONSIDERED AS CONTINGENT. 32. A PROVISION OF RS.2,02,64,477/- HAS BEEN MADE B Y THE ASSESSEE TOWARDS LOSS ORDERS. THE AO DISALLOWED THIS AS A CO NTINGENT LIABILITY IN LINE WITH THE DECISION TAKEN FOR THE AY 2000-01. THE CIT (APPEALS) FOUND THAT THE ISSUE WAS DECIDED FOR THAT YEAR BY CIT(A) IN PA RA 42 TO 45 OF THE ORDER. ON A DETAILED CONSIDERATION OF THE FACTS AND THE LE GAL POSITION THE CIT(A) UPHELD THE ACTION OF THE AO. THE FACTS BEING THE SA ME THE ADDITION MADE WAS SUSTAINED BY THE CIT(APPEALS). 33. THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITA NO.3240/BANG/2004 FOR AY 2000-01 AND VIDE ORDER DAT ED 18.3.2020 IT WAS HELD AS FOLLOWS:- ITA NOS.562 & 755/BANG/2007 PAGE 23 OF 42 38. AS FAR AS GR.NO.5 IS CONCERNED, THE FACTS ARE THAT THE ASSESSEE WAS ALSO ENGAGED IN CONSTRUCTION OF POWER PLANTS. THE ASSESSEE CLAIMED THAT IT WAS LIKELY TO INCUR LOSS I N THREE CONTRACTS FOR CONSTRUCTION OF POWER PLANTS THAT IT HAD UNDERT AKEN TO CONSTRUCT. THE LOSS SO CLAIMED WAS RS.93,59,927/- AS PER THE ORDER OF THE AO BUT AS PER THE BASIS OF COMPUTATION OF SUCH LOSS AS GIVEN BY THE ASSESSEE AT PAGE-32 OF THE PAPER BO OK, THE LOSS WAS COMPUTED AT RS.81,60,001 AS FOLLOWS:- NAME OF THE CUSTOMER MVA MATERIAL COST MATERIAL O/H PROCESS COST TOTAL COST SALE PRICE PROVISION FOR LOSS ORDER UPSEB 100 9.239,563 461,978 4,315,000 14,016,541 10,198,541 3,818,000 TATA CONSULTING ENGINEERS 90 10,967,067 548,353 3,883,500 15,398,920 12,313,920 3,085,000 ABB THS-SS (MSE B) 25 4,931,667 246,583 1,078,750 6,257,000 5,000,000 1,257,000 TOTAL 8,160,001 39. ACCORDING TO THE AO, THE LOSS IN QUESTION WAS CONTINGENT IN NATURE AND CANNOT BE ALLOWED AS DEDUCTION. ACCO RDING TO THE ASSESSEE, AS PER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE, IT PROVIDES FOR LOSS THAT ARE LIKELY TO B E INCURRED ON EXECUTION OF PARTICULAR ORDER. 40. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRME D THE ORDER OF THE AO HOLDING THAT THE ACCOUNTING STANDAR DS CLAIMED TO HAVE BEEN FOLLOWED IN CLAIMING THE AFORESAID DED UCTION BY THE ASSESSEE CANNOT OVERRIDE THE PROVISIONS OF THE ACT AND THAT AS PER THE ACT ONLY EXPENDITURE OR LOSS THAT HAS ACCRUED O R ASCERTAINED CAN BE ALLOWED AS DEDUCTION AND NOT A LOSS THAT IS LIKELY TO OCCUR IN FUTURE. 41. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL SO UGHT TO PLACE RELIANCE ON ACCOUNTING STANDARD-7 OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) WHICH PROVIDES IN PARAG RAPH-21, 31 AND 35 THAT WHEN IT IS PROBABLE THAT TOTAL CONTRACT COSTS WILL EXCEED TOTAL CONTRACT REVENUE, THE EXPECTED LOSS SH OULD BE ITA NOS.562 & 755/BANG/2007 PAGE 24 OF 42 RECOGNIZED AS AN EXPENSE IMMEDIATELY. IN SO FAR AS THE STATUTORY RECOGNITION OF AS-7 OF ICSI IS CONCERNED, IT IS ADM ITTED POSITION THAT THE SAID AS HAS NOT BEEN NOTIFIED U/S.145 OF T HE ACT AS AN ACCOUNTING STANDARD. THE LEARNED COUNSEL FOR THE A SSESSEE HOWEVER SOUGHT TO ARGUE THAT AS-1 IS AN ACCOUNTING STANDARD NOTIFIED U/S.145 OF THE ACT AS AN AS APPLICABLE FO R AY 2000-01 AND THEREFORE THE PRINCIPLE OF PRUDENCE MENTIONED I N THE SAID AS- 1 WILL BE APPLICABLE WHICH PROVIDES THAT ANTICIPATE D LOSSES SHOULD BE CONSIDERED WHILE ARRIVING AT THE PROFIT OF THE A SSESSEE. HE PLACED RELIANCE ON THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF JACOBS ENGINEERING (INDIA) PVT. LTD. VS. ACIT (2011 ) 14 TAXMANN.COM 186(MUMBAI) IN WHICH IT WAS HELD THAT FORESEEABLE LOSS HAS TO BE ALLOWED AS DEDUCTION PROVIDED THE C ALCULATION AND QUANTIFICATION OF SUCH LOSS IS ACCEPTABLE AND IN TE RMS OF AS-7. THAT CASE RELATED TO AY 2002-03 & 2003-04 WHEN AS-7 HAD NOT BEEN NOTIFIED AS APPLICABLE AS U/S.145 OF THE ACT. RELIANCE WAS ALSO PLACED BY HIM ON THE FOLLOWING OTHER DECISIONS IN SUPPORT OF HIS CONTENTION THAT FORESEEABLE LOSS HAS TO BE ALLO WED AS DEDUCTION:- (1) DREDGING INTERNATIONAL N.V. VS. ADIT (IT) 1 (2). (2011) 48 SOT 430 (MUMBAI) WHEREIN IT WAS HELD THAT FORESEEABLE LOSS HAS TO BE AL LOWED AS DEDUCTION UNDER AS-7 IN A CASE RELATING TO AY 2006- 07. (2) M.N. DASTUR & CO. LTD. VS. DCIT (1997) 61 ITD 167(CAL ) . THIS CASE RELATES TO PERCENTAGE COMPLETION METHOD (POC METHOD) OF RECO GNIZING INCOME FROM THE BUSINESS OF RENDERING CONSULTANCY SERVICES. THE MET HOD WAS ACCEPTED IN THE PAST BUT IN A SUBSEQUENT AY, THE AO REJECTED THE SAID METHOD AND HELD THAT THE POC METHOD WAS CONTRARY TO MERCANTILE SYSTEM OF ACCOUNTING. THE TRIBUNAL HELD THAT SINCE THE POC METHOD WAS CONSISTEN TLY AND REGULARLY EMPLOYED AND WAS A RECOGNIZED METHOD, THE AO WAS NOT JUSTIFIED IN DEPARTING FROM IT. (3) CIT VS. TRIVENI ENGG. & INDUSTRIES LTD. 336 ITR 374 (DELHI) FOR AY 2000-01 , IN WHICH IT WAS HELD THAT WHEN THE ASSESSEE FOLLOWED C OMPLETED CONTRACT METHOD OF ACCOUNTING INCOME FROM PROJECTS, PROVISION F OR EXPENSES TO BE INCURRED UP TO THE STAGE OF COMPLETION OF CONTRACT W AS TO BE ALLOWED AS DEDUCTION AS IT WAS NOT DISPUTED THAT IT WAS NOT A CONTINGENT LIABILITY BUT THE DISPUTE WAS ONLY IN THE YEAR OF ALLOWABILITY, THE CO URT HELD THAT IT WAS ITA NOS.562 & 755/BANG/2007 PAGE 25 OF 42 ALLOWABLE BECAUSE THE RATE OF TAX FOR THE YEAR IN W HICH THE LIABILITY WOULD ACTUALLY ACCRUE AND THE YEAR IN WHICH IT WAS CLAIMED AS DEDUCTION WAS ONE AND THE SAME. 42. THE LEARNED STANDING COUNSEL FOR THE DEPARTMEN T SUBMITTED THAT THERE HAS BEEN NO BASIS GIVEN BY THE ASSESSEE AS TO HOW IT QUANTIFIED THE LOSS IN QUESTION. HE SUBMITT ED THAT IT IS, AT BEST, A PROVISION WHICH CANNOT BE ALLOWED AS DEDUCT ION AND IN THIS REGARD RELIED ON THE OBSERVATIONS OF THE HONB LE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT 314 ITR 62 (SC) WHEREIN IT WAS HELD THAT FOR A PROVISION TO BE RECOGNIZED AS LIABILITY A RELIABLE ESTIMATE HAS TO BE MADE OF LIABILITY, OTHERWISE IT DOES NOT SATISFY THE TEST O F BEING CALLED AS A PROVISION FOR LIABILITY. 43. THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS RE JOINDER SUBMITTED THAT THE BASIS OF QUANTIFICATION HAS NOT BEEN DISPUTED BY THE AO AND THAT HE HAS DISALLOWED ONLY ON THE BA SIS THAT THE LOSS IS CONTINGENT IN NATURE. HE ALSO SUBMITTED TH AT THE DECISION CITED BY THE LEARNED STANDING COUNSEL FOR THE DEPAR TMENT IS IN THE CONTEXT OF PROVISION FOR WARRANT WHICH IS NOT A PPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE IN THIS APPEAL AN D IN THE CONTEXT OF CLAIM FOR ALLOWING ANTICIPATED LOSS. 44. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. IN OUR VIEW WHEN THE AO SAYS THAT THE LOSS IN QUESTION IS CONTINGENT HE IS DEEMED TO HAVE QUESTIO NED THE BASIS ON WHICH THE ASSESSEE HAS QUANTIFIED THE LOSS. WIT HOUT ASSIGNING A BASIS ON WHICH THE LOSS IS SAID TO BE ACCRUED LOS S, THE ASSESSEE CANNOT CLAIM DEDUCTION ON ACCOUNT OF FORESEEABLE LO SS. WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO THE AO FOR FRESH CONSIDERATION WITH A DIRECTION THAT THE ASSESSEE WI LL FURNISH THE BASIS ON WHICH HE CLAIMS THAT THERE WOULD BE LOSS I N THE THREE CONTRACTS, THE DETAILS OF WHICH ARE GIVEN ABOVE. T HE AO WILL CONSIDER THE SAME AND DECIDE THE ISSUE AFRESH IN AC CORDANCE WITH LAW AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING H EARD. 34. ON SIMILAR REASONING AS IN TRIBUNALS ORDER FOR AY 2000-01, WE SET ASIDE THE ISSUE TO THE FILE OF AO FOR RECONSIDERATI ON. ITA NOS.562 & 755/BANG/2007 PAGE 26 OF 42 35. GROUND NO.8 BY THE ASSESSEE IS AS FOLLOWS:- 8. THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLO WANCE OF BAD DEBTS WRITTEN OFF OF RS. 2,18,33,372/- ON THE G ROUND THAT SAID AMOUNT REPRESENT DEBTS, WHICH ARE MORE THAN 5 YEARS OLD AS ON 01/04/2000. IT IS SUBMITTED THAT AS PER PROVISIONS OF SECTION 36 OF THE INCOME TAX ACT YOUR APPELLANT IS ENTITLED FOR T HE DEDUCTION AS AND WHEN THE DEBTS ARE WRITTEN OFF. THE LEARNED CIT (A) FURTHER ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 53,23,247/-. IT IS SUBMITTED TH AT RS. 53,23,247/- INCLUDES RS. 10,41,178/-, WHICH IS ALRE ADY CONSIDERED IN THE DISALLOWANCE OF RS. 2,18,33,372/- ABOVE. TO THIS EXTENT IT WOULD AMOUNTS TO DOUBLE DISALLOWANCE. FURTHER, RS. 53,23,247/- INCLUDES ADVANCES MADE DUR ING COURSE OF BUSINESS AND WRITTEN OFF DURING THE YEAR. IT IS SUB MITTED THAT CONSIDERING THE NATURE OF ADVANCES, LEARNED CIT (A) OUGHT TO HAVE ALLOWED THE DEDUCTION. 36. THE COMPANY MADE A CLAIM OF RS.8,46,74,000/- TO WARDS BAD DEBTS AND ADVANCES WRITTEN OFF. THE COMPANY WAS ASKED TO EXPLAIN THE BASIS FOR WRITING OFF VARIOUS ITEMS AMOUNTING TO RS.8.46 CROR ES. THE COMPANY FILED A LIST SHOWING GENERAL REASONS FOR THE WRITE OFF SUCH AS DISPUTE ABOUT TAXES AND DUES, EXCESS SUPPLIES NOT ACCEPTED, CLAIM FOR D EMURRAGE, DISPUTE RELATING TO FREIGHT, INSURANCE AND DISCOUNT, DISPUT E RELATING TO QUALITY, SPECIFICATION, GUARANTEE AND THE CATEGORY INCLUDING COMPANIES WHICH BECOME SICK OR TRANSACTIONS IN RESPECT OF WHICH REC ORDS ARE NOT AVAILABLE. THE AO TOOK NOTE OF THE FACT THAT THE COMPANY DID N OT EXPLAIN THE EFFORTS MADE TO RECOVER THE SAME. ON BEING GIVEN A FURTHER OPPORTUNITY THE COMPANY REITERATED ITS EARLIER STAND. COPIES OF COR RESPONDENCE WITH VARIOUS PARTIES WERE FILED. THE AO HELD THAT THE SAME ARE N OT ACCEPTABLE AS EVIDENCE. HE FURTHER HELD THAT THE COMPANY WAS UNAB LE TO ESTABLISH HOW IT MADE AN HONEST JUDGEMENT REGARDING THE AMOUNTS WRIT TEN OFF. THE AO ALSO CONCLUDED THAT THE BOOKS OF EARLIER YEARS WERE NOT PRODUCED TO SHOW THAT ITA NOS.562 & 755/BANG/2007 PAGE 27 OF 42 THE AMOUNTS IN QUESTION HAD BEEN PART OF THE COMPUT ATION. THE AO TOOK A VIEW THAT THE DECISION TO IDENTIFY AND WRITE OFF BA D DEBTS SHOULD BE A BONAFIDE JUDGEMENT. HE THEREFORE DISALLOWED THE ENT IRE CLAIM. 37. DURING THE APPELLATE PROCEEDINGS ALL DETAILS WE RE FILED/PRODUCED BEFORE THE CIT(A), WHO SOUGHT A REMAND REPORT FROM THE AO ON THE SUBMISSIONS. IN THE FIRST REMAND REPORT DATED 27.6 .2005 SUBMITTED, THE ACIT SUBMITTED THAT THE COMPANY WAS REQUESTED TO FU RNISH THE DETAILS RELATING TO THE BAD DEBTS AND ALSO INDIVIDUAL DETAI LS IN RESPECT OF DEBTS EXCEEDING RS.2 LAKHS. EXAMINATION OF THE DETAILS RE VEALED THAT THE CLAIM OF BAD DEBTS INCLUDED ADVANCES WRITTEN OFF AND COMMISS ION RECEIVABLE WRITTEN OFF. A MAJOR COMPONENT OF THE BAD DEBT RELATED TO P ENALTY AND LIQUIDATED DAMAGES AS A CONSEQUENCE OF DEFICIENCY AND DELAY IN DELIVERY OF MATERIAL. A TEST CHECK SHOWED THE DEDUCTION HAD BEEN MADE BY THE PARTIES. IN SOME OF THE CASES AMOUNTS HAVE BEEN DUE FOR OVER A DECAD E. THE AO ALSO CONDUCTED DETAILED ENQUIRIES WITH KEB, NOW KPTCL WH O HAD LEVIED TWO PENALTIES AS UNDER : 1) IN RESPECT OF PO NO.9108 DATED 24/6/94 : RS.3,20 ,487/- 2) IN RESPECT OF PO NO.9519 DATED 9/11/94 : RS.1 1, 13,565/- 38. THE AO FOUND THAT KPTCL CONFIRMED THAT THE DEDU CTIONS HAD BEEN MADE AS A PENALTY. HE HOWEVER WAS OF THE VIEW THAT THESE AMOUNTS REPRESENTED LIQUIDATED DAMAGES AND PENALTY RELATING TO TRADE. AT BEST THE SAME CAN BE ALLOWED AS A BUSINESS LOSS. THE AO ALSO POINTED OUT THAT THE FOLLOWING ITEMS CANNOT BE TREATED AS BAD DEBT. : 1) ABL LTD. : RS.7,08,844/- 2) ABL, GERMANY : RS.1,64,660/- 39. THESE AMOUNTS ARE ADVANCES PAID TO GROUP COMPAN IES FOR SERVICES TO BE RENDERED. ADVANCES MADE TO ABL LTD AND ABL, G ERMANY WERE ITA NOS.562 & 755/BANG/2007 PAGE 28 OF 42 WRITTEN OFF SINCE THE COMPANY WAS SOLD TO AN OUTSID ER. THE AO NOTED THAT THE COMPANY WAS SOLD TO ANOTHER GROUP ENTITY. 3) M/S.MMC OF RS.29,44,403/- 40. THE AMOUNT ADVANCED TO THIS COMPANY WAS WRITTE N OFF SINCE IT WENT INTO LIQUIDATION. THE AO NOTED THAT IT WAS AN ADVAN CE PAID AND NOT INCLUDED IN THE PROFITS OF THE COMPANY. 41. IN ADDITION THE AO POINTED OUT IN RESPECT OF A N AGGREGATE AMOUNT OF RS.50,48,446/-. DETAILS WERE NOT FORTHCOMING. DURIN G THE PROCEEDINGS IT WAS CLARIFIED THAT THE AMOUNT OF RS.50,58,446/- REPRESE NTED THE TOTAL WRITE OFF IN RESPECT OF INDIVIDUAL ITEMS BELOW RS.2 LAKHS. 42. IN RESPONSE TO THE REMAND REPORT, THE COMPANY F ILED A REJOINDER IN A REPLY DATED 20/1/06. THE SAME WAS FORWARDED TO THE AO FOR A FURTHER REPORT. IN THE FURTHER REPORT DATED 20/7/06, THE AO HAS MADE THE FOLLOWING SUBMISSIONS. A) BEFORE SENDING THE ORIGINAL REMAND REPORT DETAIL ED ENQUIRIES WERE MADE. B) NO DETAILS WERE FILED IN RESPECT OF AGGREGATE SU M OF RS.50,48,446/-SINCE IT WOULD INCLUDE ITEMS BELOW RS .2 LAKHS. C) IN ADDITION, THE AO HAS PROVIDED A CLASSIFICATIO N OF THE BAD DEBTS IN RESPECT OF 53 ITEMS EXCEEDING RS.2 LAKHS EACH HE HAS SUBMITTED A TABULATION. THE TOTAL CLAIM OF RS.8,46,73,674/- H AS BEEN WRITTEN OFF FOR VARIOUS REASONS AS UNDER : ITA NOS.562 & 755/BANG/2007 PAGE 29 OF 42 ITA NOS.562 & 755/BANG/2007 PAGE 30 OF 42 43. THE CIT(A) NOTICED THAT IN RESPECT OF ITEMS EXC EEDING RS.2 LAKHS EACH WRITE OFF IS SUPPORTED BY DOCUMENTS AND VALID REASONS. DURING THE PROCEEDINGS THE LEARNED REPRESENTATIVES WERE ASKED TO INDICATE THE BASIS FOR IDENTIFICATION OF BAD DEBT AND THE HIERARCHY IN VOLVED IN THE DECISION MAKING. IT WAS CLARIFIED THAT EACH DIVISION HAS ITS OWN MARKETING AND OTHER FUNCTIONS. THE MARKETING DEPARTMENT OF EACH DIVISIO N IS RESPONSIBLE FOR RECOVERY OF DUES. SINCE EACH DIVISION IS TREATED AS A PROFIT CENTRE, THERE IS PRESSURE ON THE MARKETING PERSONS TO REALISE ALL TH E DUES. IN THIS BACKGROUND, IN CASE RECOVERY HAS BECOME DIFFICULT F OR ANY REASON, THE MARKETING GROUP HEAD OF A PARTICULAR DIVISION IDENT IFIES SUCH ITEMS AND SUBMITS A PROPOSAL FOR WRITE OFF. THE PROPOSAL FOR WRITE OFF WAS EXAMINED AT 5 SUBSEQUENT LEVELS ENDING WITH THE MANAGING DIRECT OR AND CEO AS UNDER : ITA NOS.562 & 755/BANG/2007 PAGE 31 OF 42 44. IT WAS THEREFORE SUBMITTED THAT A DECISION FOR WRITE OFF CANNOT BE TAKEN WITHOUT DOCUMENTATION, VALID REASONS AND APPL ICATION OF MIND. AT EVERY LEVEL THE PROPOSAL IS EXAMINED AND VETTED BY A RESPONSIBLE GROUP. IT IS FURTHER POINTED OUT THAT NO DIVISION WOULD LIKE TO SHOW A LOSS BY WRITING OFF DUES SINCE THE PREMIUM IS ON PERFORMANCE. 45. DURING THE APPELLATE PROCEEDINGS THE COMPANY WA S ASKED TO FILE THE LOCATION WISE CHART SHOWING THE VOLUME OF THE DEBTS WRITTEN OFF WHICH WAS PROVIDED AS UNDER:- SUMMARY NATURE TOTAL NOS TOTAL AMOUNT LATE DELIVERY 279 71,398,699 DISPUTE OF TAXES 11 3,285,756 FREIGHT NOT PAID /FREIGHT 3 45,699 OTHERS 12 5,323,047 TECHNICAL DISPUTES 6 2,908,918 LIQUIDITY PROBLEM/CO. DO NOT EXIST 2 1,711,555 TOTAL 313 84,673,674 IT WAS STATED THAT IN RESPECT OF SMALLER BAD DEBTS FULL DETAILS ARE NOT AVAILABLE. 46. ON THE FIRST ISSUE AS TO WHETHER A TAX PAYER CA N WRITE OFF ANY DEBT, THE CIT(A) RELIED ON THE DECISION OF FULL BENCH OF ITAT IN THE CASE OF OMAN INTERNATIONAL BANK CORPORATION 2006-TIOL-118-ITAT-M UM-SB . IN THAT CASE THE ITAT AGREED WITH THE INTERPRETATION THAT EVEN A FTER THE AMENDMENT, ONLY BAD DEBTS CAN BE WRITTEN OFF. THE TAX PAYER HAS TO ESTABLISH THE BONAFIDES OF THE WRITE OFF. THE CIT(A) OBSERVED THAT THE PROP OSAL AND PROCEDURE FOR WRITE OFF INVOLVES AN ELABORATE DECISION MAKING PRO CESS AT VARIOUS LEVELS ITA NOS.562 & 755/BANG/2007 PAGE 32 OF 42 STARTING WITH THE FIELD FORCE AND ENDING WITH THE M ANAGING DIRECTOR. EACH DIVISION DOES THE APPRAISAL INDEPENDENTLY. THERE IS STANDARDISATION SINCE THE PROPOSALS FROM ALL DIVISIONS ARE EXAMINED AT A CENTRAL LEVEL. THE DETAILS FILED ALSO SHOW THAT MANY OF THE DEBTS ARE MORE THA N 2 YEARS OLD. IT IS A BUSINESS JUDGEMENT WHETHER TO ENTER IN TO LITIGATIO N OR TO WRITE OFF THE DEBTS. BULK OF THE CLAIM IS BECAUSE OF DELAY IN DELIVERY. ON ACCOUNT OF DELAY IN DELIVERY ALONE THE COMPANY SUFFERED A RECOVERY OF R S.7,13,98,699/- ON ACCOUNT OF DISPUTE OF TAXES IT SUFFERED A FURTHER S HORTAGE OF -7- RS:32,85,756/-. ON ACCOUNT OF TECHNICAL DISPUTES RE LATING TO SPECIFICATION THERE WAS A FURTHER DEDUCTION OF RS.29,08,918/- AND ON ACCOUNT OF DISPUTE ON FREIGHT OF RS.45,699/-. A WRITE OFF OF RS.17,11, 555/- WAS OCCASIONED BECAUSE OF THE LIQUIDITY PROBLEMS SUFFERED BY THE P URCHASERS. EACH OF THESE FIGURES HAS BEEN QUANTIFIED BY THE AO HIMSELF AFTER GOING THROUGH INDIVIDUAL DETAILS. THERE IS NO QUESTION OR DOUBT ABOUT THE VE RACITY. 47. THE AOS OBJECTION THAT THE COMPANY HAS NOT EST ABLISHED THAT THE AMOUNTS WRITTEN OFF WERE NOT PART OF THE BOOK RESUL TS IN EARLIER PERIODS, THE CIT(A) HELD THAT THIS IS A CLEAR CONTRADICTION IN T ERMS. HAVING QUANTIFIED THE WRITE OFF UNDER VARIOUS HEADS, THE AO CANNOT SAY TH AT THESE SUMS WERE NOT PART OF THE BOOK RESULTS. THE OBJECTION OF THE AO W AS MISPLACED. THE CIT(A) THEREFORE HELD THAT THE COMPANY HAS PRODUCED DETAILS TO SUBSTANTIATE THE CLAIM BY AND LARGE. THE ENTIRE WRI TE OFF WAS A BUSINESS DECISION BASED ON FACTS AND CIRCUMSTANCES EXCEPT IN THE FOLLOWING CASES : I) IN RESPECT OF SMALLER ITEMS A TOTAL CLAIM OF RS. 53,23,047/- HAS BEEN MADE. THE FULL DETAILS OF THE CLAIM ARE NOT AVAILAB LE. II) IT IS SEEN THAT THE ABOVE AMOUNT FURTHER CANNOT BE ALLOWED AS A DEDUCTION- A) THE FOLLOWING ADVANCES WERE MADE TO GROUP CONCERNS : I) RS.7,01,844/- II) RS. 1,64,660/- ITA NOS.562 & 755/BANG/2007 PAGE 33 OF 42 THE ADVANCES WERE WRITTEN OFF ON THE GROUND THAT TH E COMPANIES WHICH HAD RECEIVED THE ADVANCES HAD BEEN SOLD. IT IS FOUND TH AT THE ANOTHER GROUP ENTITY PURCHASED THE COMPANY. THEREFORE THE ASSESSE E WAS NOT JUSTIFIED IN WRITING OFF THE ABOVE AMOUNTS. B) ADVANCES TO MMC : RS.29,44,403/- : THE CIT(A) OB SERVED THAT THIS AMOUNT DOES NOT REPRESENT AN ADVANCE BUT RESENTED A N INTER CORPORATE DEPOSIT. IT IS FAIRLY CONCEDED BY THE REPRESENTATIV ES THE SURPLUS FUNDS WERE DEPLOYED WITH MMC. THE COMPANY WENT INTO LIQUIDATIO N. EVEN THEN THE AMOUNT CANNOT BE WRITTEN OFF BECAUSE THE DEPOSITS W ERE NOT MADE DURING THE COURSE OF BUSINESS AND THE DEPOSITS HAD NOT COM E OUT OF INCOME CHARGED TO TAX IN ANY EARLIER YEAR. THE AO WAS THER EFORE DIRECTED TO DISALLOW THE TOTAL SUM OF RS.53,23,247 WHICH INCLUD ES THE ABOVE SUMS. 48. REGARDING THE AGE OF DEBTS WRITTEN OFF, THE CIT (A) NOTED THAT SOME OF THE DEBTS WRITTEN OFF ARE EXTREMELY OLD DATING B ACK TO THE 1980'S. FOR INSTANCE ON ACCOUNT OF LATE DELIVERY THERE ARE SIX ITEMS RELATING TO TRANSACTIONS PRIOR TO 1982 AMOUNTING TO RS.20,02,22 9/-. LIKEWISE UNDER 'OTHERS', THERE ARE TWO ITEMS RELATING TO THE PERIO D 1980-1982 AGGREGATING RS.10,25,000/-. THE REPRESENTATIVES WERE ASKED TO E XPLAIN THIS UNUSUAL OCCURRENCE IN THE CONTEXT OF THE CLAIM THAT DEBTS A RE REGULARLY REVIEWED AND WRITTEN OFF EVERY YEAR. IT WAS EXPLAINED THAT ONCE SUPPLIES ARE MADE THE BUYER COULD MAKE DEDUCTIONS ON ACCOUNT OF A NUMBER OF FACTORS SUCH AS DEFICIENCY IN QUALITY, LATE DELIVERY ETC. AS A POLI CY, THE COMPANY PURSUES THE MATTER WITH THE BUYER TO RECOVER AS MUCH AS POSSIBL E. IT IS ONLY WHEN ALL HOPES OF RECOVERY STAND ELIMINATED THAT THE DEBT IS EVENTUALLY WRITTEN OFF. WHILE THE CIT(A) WAS OF THE VIEW THAT THIS IS A REA SONABLE EXPLANATION IT WAS STILL FELT THAT THE PROCESS OF NEGOTIATIONS, RE COVERY AND WRITE OFF SHOULD NOT TAKE AS LONG AS 15 YEARS TIME. DURING SUCH A LE NGTH OF TIME MANY FACTORS CAN UNDERGO A CHANGE. SUCH DELAYS ARE ABNOR MAL AND CONTRARY TO ITA NOS.562 & 755/BANG/2007 PAGE 34 OF 42 BUSINESS PRACTICE. A BAD DEBT OCCURS OUT OF A CONTR ACTUAL LIABILITY. UNDER THE CONTRACTS ACT AND THE SALE OF GOODS ACT THERE ARE T IME LIMITS TO INITIATE ACTION. THE ASSESSEE INDICATED THAT THE DEBTS RECEI VED RELATE TO REGULAR TRANSACTION AND THERE IS NO QUESTION OF LITIGATION. THE CIT(A) OBSERVED THAT IN RESPECT OF CONTRACTUAL LIABILITY A CLAIM CAN BE MADE WHEN THE LIABILITY HAS CRYSTALISED. APPLYING T HIS TEST IT WAS HELD THAT WRITE OFF OF DEBTS WHICH ARE LESS THAN 5 YEARS OLD AS ON 1/4/00 IS JUSTIFIED. THIS TAKES INTO ACCOUNT THE BUSINESS PRACTICE AND T HE SYSTEM EMPLOYED FOR WRITE OFF. IN RESPECT OF OLDER WRITE OFF WOULD NOT BE IN CONFORMITY WITH THE SYSTEM EMPLOYED AND THE TREATMENT OF CONTRACTUAL LI ABILITIES. THE DETAILS FILED WERE THEREFORE ANALYSED. IT WAS SEEN THAT 239 ITEMS AMOUNTING TO A TOTAL OF RS.6,28,40,382 REPRESENT DEBTS WHICH ARE L ESS THAN 5 YEARS OLD. 74 DEBTS AGGREGATING RS.2,18,33,372/- REPRESENT DEB TS WHICH ARE MORE THAN 5 YEARS OLD AS UNDER :- NATURE NUMBER OF ITEMS AMOUNT LATE DELIVERY 63 18,563,076 DISPUTE OF TAXES 2 28,432 FRIEGHT NOT PAID/FREIGHT 1 6,097 OTHERS 3 1,041,178 TECHNICAL DISPUTES 3 483,034 LIQUIDITY PROBLEM/COMPANY DO NOT EXIST 2 1,711,555 TOTAL 74 21,833,372 49. THE ASSESSING OFFICER WAS DIRECTED TO DISALLOW THE AMOUNT OF RS.2,18,33,372/- WHICH REPRESENT DEBTS WHICH ARE MO RE THAN 5 YEARS OLD AS ON 1/4/2000. THIS IS OVER AND ABOVE THE DISALLOWANC E OF RS.53,23,247/- TOWARDS SIMILAR ITEMS. THE BALANCE WAS ALLOWED AS A DEDUCTION. ITA NOS.562 & 755/BANG/2007 PAGE 35 OF 42 50. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD ON THIS ISSUE. SECTION 36(1)(VII) PROVIDES AS FOLL OWS:- 36. OTHER DEDUCTIONS. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF TH E MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO I N S.28- ( I ) TO ( VI ) ** ** ** ( VII ) SUBJECT TO THE PROVISIONS OF SUB-S. (2), THE AMOU NT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. 51. THUS, IT IS EVIDENT THAT AFTER 1-4-1989 IT IS N OT NECESSARY FOR THE ASSESSEE TO ESTABLISH THE FACT THAT THE DEBT IN FACT HAD BECOME IRRECOVERABLE AND IT IS SUFFICIENT IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. 52. IN THE FACTS OF THE CASE, TWIN ISSUES VIZ. , ( I ) WHETHER DEBT WHICH WAS WRITTEN OFF DURING THE RELEVANT YEAR WAS OFFERED TO INCOME IN PREVIOUS YEAR OR EARLIER YEARS, ( II ) WHETHER THE ASSESSEE HAS DEBITED THE AMOUNT OF DOUBTFUL DEBT TO PROFIT AND LOSS ACCOUNT AND HAS REDUCED THE SAM E FROM THE ASSET SIDE OF THE BALANCE SHEET REQUIRE DETERMINATI ON TO DECIDE THE CLAIM OF THE ASSESSEE WITH REGARD TO WRITING OFF THE BAD DEBT . THE SUPREME COURT DEALT WITH SECTION 36(1)( VII ) OF THE ACT, WHICH WAS AMENDED WITH EFFECT FROM 1-4-1989 IN SOUTHERN TECHNOLOGIES LTD. 320 ITR 577 (SC) . IT WAS INTER ALIA HELD THAT AFTER 1-4-1989, A MERE PROVISION FOR BAD DEBT WOULD NOT BE ENTITLED TO DEDUCTION UNDER SECTION 3 6(1)( VII ) OF THE ACT. IT WAS FURTHER HELD THAT IF AN ASSESSEE DEBITS AN AMOU NT OF DOUBTFUL DEBT TO PROFIT AND LOSS ACCOUNT AND CREDITS THE ASSET ACCOU NT LIKE SUNDRY DEBTORS ACCOUNT, IT WOULD CONSTITUTE A RIGHT OF AN ACTUAL DEBT . HOWEVER, IF AN ASSESSEE DEBITS 'PROVISION FOR DOUBTFUL DEBIT' TO P ROFIT AND LOSS ACCOUNT AND MAKES A CORRESPONDING CREDIT TO CURRENT LIABILITIES AND PROVISIONS ON THE LIABILITIES SIDE OF THE BALANCE SHEET THEN IT WOULD CONSTITUTE A PROVISION FOR ITA NOS.562 & 755/BANG/2007 PAGE 36 OF 42 DOUBTFUL DEBT . IT WAS THUS HELD THAT IN THE LATTER CASE THE ASSE SSEE WOULD NOT BE ENTITLED TO DEDUCTION AFTER 1-4-1989. THE AF ORESAID DECISION WAS REFERRED TO WITH APPROVAL IN VIJAYA BANK ( SUPRA ). 53. HOWEVER, FROM THE CLOSE SCRUTINY OF THE ORDERS PASSED BY THE LOWER AUTHORITIES, WE FIND THAT AFORESAID ASPECT OF THE M ATTER HAS NOT BEEN EXAMINED. THEREFORE, THE ISSUE IS REMITTED TO THE A SSESSING OFFICER TO ASCERTAIN TWIN QUESTIONS VIZ. , ( I ) WHETHER DEBT WHICH WAS WRITTEN OFF DURING THE RELEVANT YEAR WAS OFFERED TO INCOME IN PREVIOUS YEAR OR EARLIER YEARS, ( II ) WHETHER THE ASSESSEE HAS DEBITED THE AMOUNT OF DO UBTFUL DEBT TO PROFIT AND LOSS ACCOUNT AND HAS REDUCED THE SAME FROM THE ASSET SIDE OF THE BALANCE SHEET. THE MATTER IS REMITTED TO THE AO FOR DE NOVO CONSIDERATION OF THE AFOREMENTIONED ASPECT. 54. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY A LLOWED. 55. COMING TO THE REVENUES APPEAL, GROUND NO.3 REA DS AS FOLLOWS:- 3. THE CIT(A) ERRED IN DIRECTING THE AO TO ALLOW D EDUCTION U/S 80HHB WHEN NO SEPARATE BOOKS IN RESPECT OF FORE IGN PROJECT WERE MAINTAINED. 56. THE AO DID NOT ALLOW DEDUCTION U/S.80HHB IN RES PECT OF SPECIFIED PROJECTS. HE HELD THAT THE ASSESSEE HAS NOT MAINTAI NED SEPARATE BOOKS IN RESPECT OF BUSINESS OF FOREIGN PROJECT. THE CIT(A) NOTED THAT SEPARATE ACCOUNTS WERE MAINTAINED IN RESPECT OF EACH PROJECT AND AUDIT CERTIFICATES IN FORM I0CCAH HAVE ALSO BEEN FURNISHED IN RESPECT OF EACH PROJECT. A SUMMARY OF SUCH PROJECTS HAS BEEN FILED AND IS AVAI LABLE IN THE AUDIT REPORT WHICH HAS ALSO BEEN FILED IN PAGE 56 OF THE PAPER B OOK FILED. IN THE CIRCUMSTANCES, THE CIT(A) OBSERVED THAT THE AO IS I NCORRECT IN HOLDING THAT SEPARATE ACCOUNTS ARE NOT MAINTAINED. FOR AY 1999-2 000 AND 2000-01 THE CIT(A) HAD ALSO TAKEN A SIMILAR VIEW IN RESPECT OF FOREIGN PROJECTS. THE AO ITA NOS.562 & 755/BANG/2007 PAGE 37 OF 42 WAS THEREFORE DIRECTED TO ALLOW DEDUCTION U/S.80HHB IN RESPECT OF THE INCOME OF THE ELIGIBLE FOREIGN PROJECTS. 57. AFTER HEARING BOTH THE PARTIES, WE FIND THAT TH IS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ITA NO.3330/MU M/2004 FOR AY 1999- 2000 WHEREIN THE TRIBUNAL HELD IN FAVOUR OF THE ASS ESSEE AS FOLLOWS:- 57. WE HAVE GIVEN A CAREFUL CONSIDERATION OF THE R IVAL SUBMISSIONS. THE ORDER OF THE CIT(APPEALS) IS BASE D ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CONTINENTAL CONSTRUCTION CO. LTD. (SUPRA) . IN THE DECISION IN THE CASE OF CONTINENTAL CONSTRUCTION LIMITED (SUPRA) , THE HONBLE SUPREME COURT POINTED OUT AS TO HOW SECTION 80HHB OF THE AC T SHOULD BE INTERPRETED. IT WAS HELD THAT SECTION 80HHB OF THE ACT SHOULD NOT BE INTERPRETED IN A NARROW OR PEDANTIC FASHION, AS THE SECTION PROVIDES FOR AN EXEMPTION IN RESPECT OF PROFITS FOR A FOREIGN PROJECT UNDERTAKEN OUTSIDE INDIA IN THE COURSE OF B USINESS . THE HONBLE APEX COURT FURTHER HELD THAT THE EXPRES SIONS BUSINESS OF EXECUTION OF A FOREIGN PROJECT OR WOR K FORMING PART OF IT OR THE PROFITS DERIVED FROM THE BUSINESS, T AKE IN ALL ASPECTS OF A BUSINESS INVOLVING THE ACTIVITIES REFERRED TO IN SUB-SECTION (2)(B) OF SECTION 80HHB OF THE ACT TOGETHER WITH AL L ACTIVITIES, COMMITMENTS AND OBLIGATIONS ANCILLARY AND INCIDENTA L THERETO AND THE PROFITS FLOWING THEREFROM. IT WAS ALSO HELD THA T THE DEFINITION CANNOT BE RESTRICTED TO THE MERE PHYSICAL ACTIVITY OR PUTTING UP THE SUPERSTRUCTURE, MACHINERY OR PLANT, BUT SHOULD BE U NDERSTOOD TO TAKE WITHIN ITS FOLD ALL UTILIZATION OF TECHNICAL K NOWLEDGE OR RENDERING OF TECHNICAL SERVICES NECESSARY TO BRING ABOUT THE CONSTRUCTION, ASSEMBLY AND INSTALLATION. 58. BEARING IN MIND THE ABOVE LEGAL PRINCIPLE, IF W E EXAMINE THE NATURE OF WORK DONE BY THE ASSESSEE IN THE FORE IGN COUNTRY, WE FULLY SUBSCRIBE TO THE FACTUAL FINDING RECORDED BY THE CIT (A). IT HAS TO BE BORNE IN MIND THAT SECTION 80HHB OF TH E ACT IS A PROVISION, WHICH GRANTS INCENTIVE TO THE ASSESSEE F OR GROWTH AND DEVELOPMENT AND AS HELD BY THE HONBLE SUPREME COUR T IN SEVERAL DECISIONS, SUCH PROVISION SHOULD BE LIBERAL LY CONSTRUED, AS IT WILL PROMOTE ECONOMIC GROWTH OF THE COUNTRY. WE THEREFORE ITA NOS.562 & 755/BANG/2007 PAGE 38 OF 42 UPHOLD THE ORDER OF CIT(A) AND FIND NO MERITS IN TH E RELEVANT GROUND OF APPEAL (III) RAISED BY THE REVENUE. 58. ACCORDINGLY, WE REJECT THIS GROUND BY THE REVEN UE. 59. THE NEXT GROUND BY THE REVENUE IS AS UNDER:- 4. THE CIT(A) ERRED IN ALLOWING THE CLAIM OF EXPEN SES TOWARDS ENTRANCE AND THE SUBSCRIPTION FEES PAID BY THE ASSESSEE TO CLUBS HOLDING THEM TO BE REVENUE EXPENDITURE. 60. THE AO HAS DISALLOWED AN AMOUNT OF RS.9,05,227/ -. THIS INCLUDES BOTH ENTRANCE FEES AND SUBSCRIPTION. THIS DISALLOWA NCE WAS DELETED BY THE CIT(A) FOR AY 99-00 AND 2000-01. BESIDES THE ITAT, BANGALORE BENCH IN EAST WEST HOTELS LTD. VS. ACIT 2006 9 SOT 48 HAS ALSO HELD THAT ENTRANCE FEES PAID TO CLUB HAS TO BE ALLOWED AS BUSINESS EXP ENDITURE. FOLLOWING THE DECISION OF THE ITAT THE DISALLOWANCE WAS DELETED B Y THE CIT(APPEALS). 61. THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THI S TRIBUNAL FOR AY 1999-2000 WHEREIN THE TRIBUNAL DECIDED THE ISSUE AG AINST THE DEPARTMENT BY PARA 68 OF THE ORDER WHICH IS AS FOLLOWS:- 68. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE RE VENUE HAS RAISED GROUND (V) BEFORE THE TRIBUNAL. THIS ISSUE IS NO LONGER RES INTEGRA AND HAS BEEN SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. UNITED GLASS MFG. CO. LTD. [CIVIL A PPEAL NOS. 6447 TO 6449 OF 2012, DATED 12-9-2012] WHEREIN IT W AS HELD THAT CLUB MEMBERSHIP FEE PAID BY THE COMPANY IS AN ADMIS SIBLE BUSINESS AND CANNOT BE REGARDED AS CAPITAL EXPENDI TURE. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE SUPREME CO URT, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN GROUND (V) RA ISED BY THE REVENUE. 62. ACCORDINGLY, WE DISMISS THIS GROUND. 63. GROUND NO.5 BY THE REVENUE IS AS FOLLOWS:- ITA NOS.562 & 755/BANG/2007 PAGE 39 OF 42 5. THE CIT(A) ERRED IN ALLOWING THE CLAIM OF THE A SSESSEE AMOUNTING TO RS. 2,85,58,731 BEING R & D EXPENDITUR E U/S 35(I)(IV) WHEN THE ACTIVITY CLAIMED TO BE THE R&D A CTIVITY IS PART OF NORMAL BUSINESS OF THE ASSESSEE. 64. THE ABOVE AMOUNT REPRESENTS CAPITAL EXPENDITURE ON R&D ACTIVITY AND THE CLAIM HAS BEEN MADE U/S.35(1)(IV). CONSISTE NT WITH THE STAND FOR AY 2000-01 THE AO HELD THAT NO RESEARCH ACTIVITY WA S CONDUCTED BY THE ASSESSEE AND THEREFORE DEDUCTION U/S.35(1)(IV) COUL D NOT BE ALLOWED. THE CIT(A) OBSERVED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE CIT(A)-VIII, MUMBAI IN HIS APPELLATE ORDER F OR AY 2000-01. DURING THE PROCEEDINGS ALL THE DETAILS RELATING TO RESEARC H ACTIVITY HAVE BEEN FILED IN THE PAPER BOOK. IT IS SEEN THAT THE R&D DIVISION HAS BEEN APPROVED BY THE DEPARTMENT OF SCIENTIFIC INDUSTRY RESEARCH. THE APPROVAL INITIALLY GRANTED HAS BEEN EXTENDED UP TO 31/3/06. THE DETAIL S AT PAGES 106, 107 RELATE TO THE PROJECTS IN PROGRESS AND THE STATUS O F EACH RESEARCH PROJECT. UNDER COMPANY LAW NECESSARY DISCLOSURE HAS TO BE MA DE IN THE ACCOUNTS. THE ASSESSEE HAS ALSO FILED COPIES OF THE STATUS RE PORTS IN RESPECT OF EACH PROJECT. CONSIDERING THE ABOVE AND FOLLOWING THE DE CISION OF THE CIT(A) FOR AY 2000-01, THE AO WAS DIRECTED TO ALLOW R&D EXPEND ITURE AT RS.2,85,58,731/- BY THE CIT(A). AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 65. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL FOR T HE AY 2000-01 AND DECIDED AGAINST THE REVENUE VIDE PARA 64 OF THE ORD ER DATED 18.03.2020 AS UNDER:- 64. AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NOTICE THAT IDENTICAL ISSUE WAS DECIDED BY THE HONBLE KARNATAK A HIGH COURT IN THE CASE OF TEJAS NETWORK LTD. VS. DCIT (2015) 6 0 TAXMANN.COM 309 (KARN.) AND IT WAS HELD THAT WHERE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 35(2AB) PURSUANT TO CERTIFICATE ISSUED BY PRESCRIBED AUTHORITY, I.E., DEPARTMENT OF SCIENTIFIC & INDUSTRIAL RESEARCH (DSIR), APPROVING SUCH CLAIM, A SSESSING ITA NOS.562 & 755/BANG/2007 PAGE 40 OF 42 OFFICER COULD NOT HAVE DENIED WEIGHTED DEDUCTION UN DER SECTION 35(2AB) IN RESPECT OF SCIENTIFIC EXPENDITURE. IT W AS HELD THAT ASSESSING OFFICER CANNOT SIT IN JUDGMENT OVER REPOR T SUBMITTED BY PRESCRIBED AUTHORITY . IT WAS HELD THAT WHERE ASSE SSING OFFICER DOES NOT ACCEPT CLAIM OF ASSESSEE MADE UNDER SECTIO N 35(2AB), HE SHOULD REFER THE MATTER TO BOARD, WHICH WILL THE N REFER QUESTION TO THE PRESCRIBED AUTHORITY. IN VIEW OF T HE AFORESAID DECISION, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN GROUND NO.(IV) RAISED BY THE REVENUE. 66. ACCORDINGLY, WE REJECT THIS GROUND OF APPEAL BY THE REVENUE. 67. GROUND NO.6 READS AS FOLLOWS:- 6. THE CIT(A) ERRED IN ALLOWING THE CLAIM OF EXPEN SES ON THE BASIS OF PURCHASE OF PACKING MATERIALS, LOOSE TOOLS AND CONSUMABLES IN THE YEAR OF PURCHASE WITHOUT REGARD TO ACTUAL CONSUMPTION THEREOF. 68. THE AO NOTED THAT THE ASSESSEE HAD A PRACTICE OF WRITING OFF PACKING MATERIALS, LOOSE TOOLS AND CONSUMABLES IN T HE YEAR OF PURCHASE IRRESPECTIVE OF THE FACT WHETHER THEY WERE USED FOR THE BUSINESS DURING THE YEAR OR NOT. IN THE ASSESSMENT ORDER FOR THE AY 200 0-01, THE AO REJECTED THIS METHOD ON THE GROUND THAT IT WOULD DISTURB THE PROFITS OF THE COMPANY. CONSISTENT WITH THIS STAND, THE AO HAS TREATED 24% OF THE TOTAL AMOUNT DEBITED (12,60,72,000/-) AS THE VALUE OF PACKING MA TERIALS AND LOOSE TOOLS AND CONSUMABLES IN THE CLOSING STOCK. HE THEREFORE MADE AN ADDITION OF RS.3,02,57,280/-. 69. THE CIT(A) FOUND THAT THE ISSUE IS COVERED BY T HE ORDER OF THE CIT(A) MENTIONED EARLIER FOR THE AY 2000-01 IN PARAS 20 TO 24 WHEREIN IT WAS HELD THAT THE METHOD ADOPTED BY THE AO IS INCORRECT SINC E A REGULAR METHOD ADOPTED BY THE TAX PAYER CAN BE DISTURBED ONLY IF A MORE PROPER FORMULA IS ITA NOS.562 & 755/BANG/2007 PAGE 41 OF 42 FOLLOWED. THERE IS NO CHANGE IN THE FACTS. THAT BEI NG THE CASE FOLLOWING THE DECISION OF THE CIT(A) FOR AY 2000-01 THE ADDITION MADE WAS DELETED FOR THE CIT(APPEALS). AGGRIEVED, THE REVENUE IS IN APP EAL BEFORE US. 70. THE TRIBUNAL DEALT WITH THIS ISSUE FOR THE AY 2 000-01 AND VIDE PARA 72 DECIDED THE ISSUE AGAINST THE REVENUE AS FOLLOWS :- 72. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE ORDER OF T HE CIT(A) ON THIS ISSUE HAS TO BE UPHELD. ADMITTEDLY THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WAS CONSISTENT AND ACCEPTE D IN THE PAST BY THE REVENUE AUTHORITIES. THERE IS NO REASON WHY THE SAME SHOULD BE DISTURBED. THE DECISION IN THE CASE OF A BDUL LATIF (SUPRA) SUPPORTS THE PLEA OF THE ASSESSEE. IN THE SAID DECISION, THE FACTS WERE THAT THE ASSESSEE WAS ENGAGED IN BUS INESS OF MANUFACTURE OF PAPERS. IN RETURN OF INCOME FOR AY 2005-06, ASSESSEE HAD SHOWN, INTER ALIA, PURCHASES OF PACKIN G MATERIAL AS ON 31-3-2005, BUT NO AMOUNT OF PACKING MATERIAL WAS SHOWN IN CLOSING STOCK. THE ASSESSEE SUBMITTED BEFORE ASSES SING OFFICER THAT; (I) PACKING MATERIAL SHOWN AS PURCHASES AS ON 31-3-2005 WAS ACTUALLY PURCHASED IN EARLIER MONTHS AND SUCH P ACKING MATERIAL WAS CONSUMED DURING PROCESS; (II) ON ACCO UNT OF SOME COMPUTER PROBLEM, BILLS WERE POSTED ON 31-3-2005, A ND (III) ENTIRE PACKING MATERIAL LEFT AFTER END OF YEAR BECA ME OBSOLETE AND, THEREFORE, IT WAS NOT SHOWN IN CLOSING STOCK. THE ASSESSING OFFICER REJECTED ACCOUNT BOOKS OF ASSESSEE AND MADE CERTAIN ADDITION TO HIS INCOME. THE TRIBUNAL HELD THAT:- (I) IT WAS NOT CASE OF REVENUE THAT PURCHASES AS DEBITED AS ON 31- 3-2005 WERE NOT GENUINE, AND (II) ASSESSEE WAS FOLLOWING A CONS ISTENT METHOD OF VALUING CLOSING STOCK BY INCLUDING PACKING MATER IAL AS CONSUMED AT TIME OF PURCHASE. REJECTION OF ACCOUNT BOOKS OF ASSESSEE AND ADDITION TO HIS INCOME WAS HELD TO BE NOT JUSTIFIED. WE THEREFORE UPHOLD THE ORDER OF CIT(A) ON THIS ISS UE AND DISMISS GROUND NO.(V) RAISED BY THE REVENUE. ITA NOS.562 & 755/BANG/2007 PAGE 42 OF 42 71. ACCORDINGLY, WE DISMISS THIS GROUND OF APPEAL B Y THE REVENUE. 72. IN THE RESULT, THE REVENUES APPEAL IS DISMISS ED. 73. THUS, THE APPEAL BY THE ASSESSEE IS PARTLY ALLO WED, WHILE THE APPEAL BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF MARCH, 2021. SD/- SD/- ( N V VASUDEV AN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 4 TH MARCH, 2021. / DESAI S MURTHY / COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.