The ACIT, Circle-1, Surat V. M/s. J.K. Paper Ltd., Dist.Surat

ITA 790/AHD/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9200 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2009
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 29-07-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 31-03-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S N SOPARKAR
• Assessee Lawyers: K K VYAWAHARE
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Audit objection; Earning of tax free income; Cost of acquisition; Speculation loss; Bad and doubtful debts; Difference of opinion; Deemed dividend; Capital receipt; Unabsorbed depreciation; Revenue expenditure; Capital expenditure; Rule 8D; Set aside; Capital Gains
• Section: 271(1)(c); 43B; 143(3); 80HHC; 234B; 14A; 115JB; 37(1); 139(5); 10B; 251; 80HH; 207; 64; 147; 37; 10; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, D-BENCH, AHME DABAD. BEFORE :SHRI T K SHARMA, JUDICIAL MEMBER , AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER. ITA NO.790 AND 979/AHD/2006 (ASSESSMENT YEAR 2002-03) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), SURAT. VS. J K PAPER LTD. P.O. CENTRAL PULP MILLS FORT SONGADH 394660 DIST. SURAT(GUJARAT). J K PAPER LTD. P.O. CENTRAL PULP MILLS FORT SONGADH 394660 DIST. SURAT(GUJARAT). THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), SURAT. (APPELLANT) (RESPONDENT) PAN:AAACT6305N ITA NO. 578 AND 738/AHD/2007 (ASSESSMENT YEAR 2003-04) J K PAPER LTD. P.O. CENTRAL PULP MILLS FORT SONGADH 394660 DIST. SURAT(GUJARAT). VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), SURAT. DEPUTY COMMISSIONER OF INCOME-TAX, ROOM NO. 108, AAYAKAR BHAVAN, MAJURA GATE, SURAT. J K PAPER LTD. P.O. CENTRAL PULP MILLS FORT SONGADH 394660 DIST. SURAT(GUJARAT). (APPELLANT) (RESPONDENT) PAN:AAACT6305N ITA NO.346 AND 390/AHD/2008 (ASSESSMENT YEARS 2004-05) J K PAPER LTD. P.O. CENTRAL PULP MILLS FORT SONGADH 394660 DIST. SURAT(GUJARAT). VS. ADDL. COMMISSIONER OF INCOME TAX, CIRCLE1(1), SURAT. THE DEPUTY COMMISSIONER OF INCOME-TAX, M/S. J K PAPER LTD. P.O. CENTRAL PULP MILLS 2 CIRCLE-1, ROOM NO. 108, AAYAKAR BHAVAN, MAJURA GATE, SURAT. FORT SONGADH 394660 DIST. SURAT(GUJARAT). (APPELLANT) (RESPONDENT) PAN:AAACT6305N FOR THE APPELLANT SHRI S.N. SOPARKAR, A.R. FOR THE REVENUE SHRI K K VYAWAHARE, CIT ORDER PER SHRI D.C. AGRAWAL: ITA NOS. 979/AHD/2006 AND ITA NO. 790/AHD/2006 ASSESSMENT YEAR---2002-03 1. THESE ARE TWO APPEALS, ONE FILED BY THE ASSESSEE AND THE OTHER FILED BY THE REVENUE AGAINST THE ORDER OF THE LEARNED COM MISSIONER OF INCOME- TAX (APPEALS) DATED 10.1.2006. SINCE COMMON ISSUES ARE INVOLVED, THEY WERE HEARD TOGETHER AND ARE NOW DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF PAPER AND PULP. THE ASSESSEE FILED I TS RETURN OF INCOME DECLARING TOTAL INCOME AT NIL. THE INCOME WAS COMPU TED UNDER MAT PROVISIONS U/S.115JB. 3. WE WILL FIRST TAKE UP THE ASESSEES APPEAL BEING ITA NOS. 979/AHD/2006. THE GROUNDS RAISED BY THE ASSESSEE A RE UNDER: 1.0 NOT DECIDING APPELLANTS GROUND NO. 1 WHICH WAS TAKEN WHILE FILING APPEAL AGAINST SECTION 143(3) ORDER DATED 28.3.2005 WHICH READ AS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), SURAT ERRED IN HOLDING THAT SUM OF RS. 33511413 WAS NOT OFFERED BY THE APPELLANT AS THE AMOUNT OF PROFIT CHARGEABLE TO TAX U/S 41(1) OF THE ACT/CONTENTION OF THE APPELLANT COMPANY MADE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS WERE GROSSLY ERRONEOUS AND I N NOT APPRECIATING THAT OUT OF THE SAID AMOUNT ONLY RS. 2846154 WAS CLAIMED AS NOT TAXABLE UNDER THE SAID SECTION 3 2.0 UPHOLDING THAT THE DISALLOWANCE OF RS. 12812728 COMPRISING OF RS. 880315 (OVERDUE INTEREST OF DEBTORS WAIVED OFF), RS . 185453 (DISCOUNT ALLOWED TO DEBTORS) RS. 1250481 (GEB AUDIT RECOVERY OF PF FUSE BLOW-UP), RS. 250000 (PROVISION FOR WASTE PAPER WRITTEN OFF), RS. 1100000 (WAREHOUSING CHARGES), RS. 4796479 (BANK GUARANTEE PROVIDED AGAI NST WATER TAX LIABILITY) AND RS. 4350000 (OFDC LABOUR CONTRACT AMOUNT WRITTE N-OFF) AND IN NOT APPRECIATING THAT THESE EXPENSES WERE FULLY ALLOWAB LE. 2.1 UPHOLDING THE DISALLOWANCE OF RS.1270341 COMPRI SING OF RS.1111433 (SUNDRY BALANCES WRITTEN-OFF), RS.107533 (TRANSPORT ERS COMMISSION TWICE DEBITED), RS. 29000 (ERECTION CHARGES OF AC) AND RS . 22375 (DUES OF TALUKA PANCHAYAT) AND IN NOT APPRECIATING THAT THESE EXPEN SES WERE FULLY ALLOWABLE AND IN IGNORING THAT IN THE ASSESSMENT ORDER THE AS SESSING OFFICER HAD NOT GIVEN ANY REASONS FOR DISALLOWING THESE EXPENSES. 3.0 NOT APPRECIATING THAT THE ASSESSING OFFICER WAS NOT CORRECT IN NOT ALLOWING DEDUCTION OF RS. 3280212 BEING THE LIABILI TY FASTENED ON THE APPELLANT ON ACCOUNT OF EXCHANGE FLUCTUATION ON THE OUTSTANDI NG BILLS FOR IMPORT OF MATERIALS AND IN IGNORING THAT NON PROVISIONING OF THE SAID LIABILITY IN THE ACCOUNTS CANNOT BE A GROUND FOR DISALLOWING THE CLA IM AS REPEATEDLY HELD BY THE COURTS. 4.0 UPHOLDING THE DISALLOWANCE OF RS. 27829039 (INC LUDING DEPRECIATION OF RS. 768675) AND IN NOT APPRECIATING THAT THE SAI D EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND THAT THESE WERE NOT RELATED TO AGRICULTURAL ACTIVITIES. 4.1 UPHOLDING THE DISALLOWANCE OF RS. 27829039 (INC LUDING DEPRECIATION OF RS. 768675) AND IGNORING THAT THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT 1961 (HEREINAFTER REFERRED TO AS ACT) ARE NOT APPLICABLE AND THAT THE ASSESSING OFFICER WAS WRONG IN INVOKING THE SAID SE CTION. 5.0 UPHOLDING THE DISALLOWANCE OF RS.1197121 AND IN IGNORING THAT THE ASSESSING OFFICER WRONGLY PROCEEDED IN INVOKING SEC TION 145A OF THE ACT BY COMPARING THE TWO FIGURES REFERRED IN THE ASSESSMEN T ORDER WHICH IS NOT COMPARABLE. 6.0 UPHOLDING THE ASSESSING OFFICERS ACTION ON THE COMPUTATION OF BOOK PROFIT FOR THE PURPOSES OF SECTION 115JB OF THE ACT AND IN IGNORING THAT:- A) THE APPELLANTS QUALIFIED FOR DEDUCTION OF RS. 12 579538 BEING THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT AND IN IGNORING THAT IN VIEW OF APPELLANT FACTS, FOR THE PURPOSES OF COMPUT ING BOOK PROFIT, IT IS NOT THE PROFIT AS COMPUTED UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION THAT HAS TO BE ADOPTED BUT IT IS PROFIT AS PER BOOKS OF ACCOUNT. B) RS.6046960 COMPRISING OF RS. 4796479 AND RS. 125 0481 COULD NOT BE CLASSIFIED AS UNASCERTAINED LIABILITIES. C) RS.11958321 (INCLUDING DEPRECIATION OF RS.768675 ) AMORTIZED IN THE ACCOUNTS WAS NOT RELATABLE TO THE INCOME EXEMPT U/S 10 OF THE ACT. 4 7.0 NOT APPRECIATING THAT THE APPELLANTS TAX PAYABL E WAS COMPUTED UNDER THE PROVISIONS OF SECTION 115IB OF THE ACT AND THER EFORE, THERE WAS NO LIABILITY TO PAY INTEREST U/S 234B OF THE ACT. 8.0 WRONGLY CONCLUDING THAT THE APPELLANTS ACTION O F CHALLENGING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT, INITIATED BY THE ASSESSING OFFICER, COULD NOT BE EXAMINED IN THE QUANTUM APPEAL. 4. GROUND NO.1 IT RELATES TO TAXING A SUM OF RS.3,35,11,413 U/S.41 (1) OF THE INCOME-TAX ACT,1961 (HEREIN AFTER REFERRED TO AS THE ACT). T HIS GROUND WAS NOT PRESSED BY THE LEARNED AR OF THE ASSESSEE AND HENCE , THE SAME IS DISMISSED AS NOT PRESSED. 5. GROUND NO.2 IT RELATES TO SUSTAINING THE ADDITION OF CERTAIN DI SALLOWANCES MADE BY THE ASSESSING OFFICER. THEY ARE DISCUSSED AND ADJUDICAT ED BELOW. 5.1.1. RS.8,80,315 - THIS AMOUNT REPRESENTS OVERDUE INTEREST WHICH WAS DEBITED TO THE RESPECTIVE PARTIES ACCOUNTS STA NDING IN THE BALANCE SHEET AND CLAIMED TO HAVE BEEN CREDITED TO THE INTE REST ACCOUNT. IT WAS ALSO CLAIMED THAT IT WAS OFFERED FOR TAX IN THE REL EVANT A.YRS.. THE ASSESSING OFFICER NOTED THAT IN BALANCE SHEET UNDER SCHEDULE VI, THE ASSESSEE HAS MADE A PROVISION OF DOUBTFUL DEBT OF R S.35 LAKHS WHICH SHOULD HAVE TAKEN CARE OF SUCH WRITE OFF. THE LEARN ED CIT(A) ON PAGE 11, PARA 4.11 TO 4.14 OF HIS ORDER, CONFIRMED THE ADDIT ION BY HOLDING THAT THE ASSESSEE HAS NOT FILED THE DETAILS TO SHOW AS TO WH ICH YEAR THE AMOUNTS PERTAINED INSPITE OF OPPORTUNITIES HAVING BEEN PROV IDED TO THE ASSESSEE DURING THE APPELLATE PROCEEDINGS. 5.1.2. BEFORE US, THE LEARNED AR OF THE ASSESSEE SU BMITTED THAT THIS AMOUNT REPRESENTS OVERDUE INTEREST WHICH WAS EARLIE R OFFERED FOR TAXATION. ON THE OTHER HAND, LEARNED DR SUBMITTED THAT THIS S HOULD BE FIRST DEBITED 5 TO PROVISIONS AND IT SHOULD NOT BE CLAIMED IN ADDIT ION TO THE PROVISIONS FOR BAD DEBT FOR WHICH DEDUCTION HAS ALREADY BEEN ALLOW ED. 5.1.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER SO AS TO FIND OUT WHE THER THE ASSESSEE HAS OFFERED THE AMOUNT OF INTEREST FOR TAXATION IN EARL IER YEARS WHILE DEBITING THE SAME TO THE RESPECTIVE PARTIES ACCOUNTS, AND IF SO, IT WOULD BE ELIGIBLE FOR WRITE OFF IN THE EVENT OF NON-RECOVERY OF THE P RINCIPAL. SECONDLY, THE ASSESSING OFFICER WILL FIND OUT WHETHER DEDUCTION F OR PROVISIONS FOR BAD DEBT HAS BEEN ALLOWED IN THE PAST AND THAT PROVISIO N IS STILL STANDING IN THE BALANCE SHEET IN THE CURRENT YEAR. IF SO, THE ASSES SEE WILL HAVE TO EXPLAIN AS TO WHY THIS WRITE OFF IS NOT DEBITED AGAINST SUC H PROVISION. IF NO PROVISION IS AVAILABLE AND THE AMOUNT HAS BEEN OFFE RED TO TAX IN THE EARLIER YEAR THEN THE ASSESSEE WILL BE ALLOWED DEDUCTION IF THEY ARE WRITTEN OFF IN THE BOOKS. 5.2.1. RS.1,85,453 - IT WAS CLAIMED BEFORE THE ASSESSING OFFICER THAT THIS AMOUNT REPRESENTED VARIOUS SCHEMES UNDER WHICH BUYERS CLAIMED DISCOUNT. THE ACCOUNTS OF THESE BUYERS WERE SETTLED DURING THIS YEAR. EVEN THOUGH THEY RELATED TO SALES MADE IN EARLIER YEARS AND ACCORDINGLY THEY WERE CLASSIFIED AS EARLIER YEARS LIABILITY, BUT TH EY REPRESENTED DISCOUNT SETTLED DURING THIS YEAR AND ACCORDINGLY CLAIMED IN CURRENT YEAR. THE ASSESSING OFFICER HOWEVER, WAS OF THE VIEW THAT THI S AMOUNT IS IN THE NATURE OF DISCOUNT AND SHOULD HAVE BEEN ACCOUNTED F OR AGAINST THE SALES ON ACCRUAL BASIS IN RESPECTIVE YEARS. THIS HAS BEEN DISCUSSED BY THE LEARNED CIT(A) IN PARAGRAPHS 4.15 TO 4.17 OF HIS OR DER. THE LEARNED CIT(A) CONFIRMED THE ADDITION ON THE GROUND THAT NO DETAILS WERE FURNISHED EITHER BEFORE THE ASSESSING OFFICER OR BE FORE HIM SHOWING AS TO FOR WHICH YEAR SUCH DISCOUNTS ALLOWED TO DEBTORS PE RTAINED TO. 6 5.2.2. THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT, BASED ON THE SCHEME ANNOUNCED FROM TIME TO TIME, THE BUYERS HAVE A RIGHT TO MAKE A CLAIM. ONCE THEY QUALIFY FOR THE DISCOUNT, THEN T HE STATEMENT SENT BY THEM IS CHECKED IN THE OFFICE OF THE COMPANY AND TH E CLAIMS ARE SETTLED. THIS SETTLEMENT IS DONE DURING THE YEAR UNDER CONSI DERATION. THEY ARE IN FACT CONTRACTUAL LIABILITY SETTLED DURING THIS YEAR . 5.2.3. AGAINST THIS, THE LEARNED DR RELIED ON TH E ORDER OF THE LEARNED ASSESSING OFFICER AND CIT(A) AND SUBMITTED THAT THE DISCOUNTS HAVE ACCRUED ALONG WITH THE SALES, THEREFORE, THEY SHOUL D HAVE BEEN CLAIMED IN THE RESPECTIVE YEARS OF SALES AND NOT IN THIS YEAR UNDER CONSIDERATION. 5.2.4. AFTER CONSIDERING THE RIVAL SUBMISSIONS, W E ARE OF THE VIEW THAT THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN MAKING T HIS ADDITION. MERE ANNOUNCING THE SCHEME AND MAKING THE BUYERS ELIGIBL E FOR DISCOUNTS DOES NOT CREATE THE LIABILITY AGAINST THE ASSESSEE. WHEN CONDITIONS LAID DOWN IN THE SCHEME ARE FULFILLED AND CLAIM IS MADE BEFORE T HE ASSESSEE AND SUCH CLAIM IS ACCEPTED BY THE ASSESSEE, THE LIABILITY AC CRUES AGAINST THE ASSESSEE. IT BECOMES, IN FACT, A CONTRACTUAL LIABIL ITY SETTLED DURING THE YEAR AND THEREFORE WOULD BE ALLOWABLE DURING THIS YEAR. WE ARE FORTIFIED WITH OUR VIEW BY THE DECISION OF IN THE CASE OF CIT V. RAJ MOTORS 284 ITR ITR 489 (ALL). HONBLE GUJARAT HIGH COURT IN BILESHWAR KHAND UDYOG SAHAKARI MANDLI LTD. VS. COMMISSIONER O F INCOME-TAX (2006) 282 ITR 480 (GUJ) SIMILARLY HELD AS UNDER: A STATUTORY LIABILITY ARISES AS SOON AS THE SPECIF IED EVENT OCCURS OR THE CONDITION STIPULATED BY THE STATUTE GETS FULFIL LED. IN THE CASE OF A CONTRACTUAL LIABILITY, THE LIABILITY ARISES OR ACCR UES ONLY WHEN THE DISPUTE IS FINALLY ADJUDICATED UPON OR IS SETTLED A MICABLY. 7 5.2.5 IT IS UNDISPUTED FACT THAT DECISION TO SETTLE THE CLAIM OF DISCOUNTS WAS TAKEN THIS YEAR, THEREFORE, LIABILITY WILL ACCR UE THIS YEAR. ACCORDINGLY, WE DELETE THE IMPUGNED ADDITION OF RS.1,85,453 MADE ON THIS COUNT. 5.3.1. RS.12,50,481 - THERE WAS A REVENUE AUDIT OBJECTION (BY C&AG) IN THE ACCOUNTS OF GUJARAT ELECTRICITY BOARD (IN SHORT GEB) AS A RESULT OF WHICH THEY CLAIMED A PAYMENT OF RS.12,50, 481 FROM THE ASSESSEE ON ACCOUNT OF UNDER LEVY OF ELECTRICITY DUES. ASSES SEE MADE A PROVISION IN ITS BOOKS OF ACCOUNT AND CLAIMED THE SAME AS LIABIL ITY. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT IT IS A DISPUTED LIABILITY. 5.3.2. THE LEARNED CIT(A) HAS DISCUSSED THE ISSU E IN PARAGRAPH 4.22 TO 4.24 AND CONFIRMED THE DISALLOWANCE ON THE GROUND T HAT IT IS A PROVISION FOR UNASCERTAINED LIABILITY AND IT CANNOT BE ALLOWE D. 5.3.3. BEFORE US, THE LEARNED AR OF THE ASSESS EE SUBMITTED THAT THIS IS AN ASCERTAINED LIABILITY. THE CLAIM HAS BEEN LODGED BY THE GEB. EVEN THOUGH THE ASSESSEE HAS DISPUTED THE SAME BUT IS AL LOWABLE ON THE GROUND OF THE CLAIM MADE. THE LEARNED DR, ON THE OTHER HAN D, SUPPORTED THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. 5.3.4. AFTER CONSIDERING THE RIVAL SUBMISSIONS, W E ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW ARE JUSTIFIED IN DI SALLOWING THE CLAIM. IT IS BECAUSE WHILE MAKING THE CLAIM GEB IS ACTING ONLY A S A SUPPLIER OF GOODS (I.E., ELECTRICITY) AND NOT AS A GOVERNMENT A UTHORITY. IF THE DEMAND IS MADE BY GOVERNMENT BODY IN RESPECT OF CESS OR DU TY, THE SAME CAN BE ALLOWED ON THE BASIS OF SUCH DEMAND EVEN THOUGH IT MIGHT BE DISPUTED BY THE ASSESSEE. BUT WHERE IT IS A CONTRACTUAL CLAIM A ND ASSESSEE DISPUTES THE SAME, THEN IT WOULD BE ALLOWED IN THE YEAR WHEN SUC H DISPUTE IS SETTLED OR THE ASSESSEE ACCEPTS THE CLAIM. WE DERIVE SUPPORT F ROM THE DECISION OF HONBLE GUJARAT HIGH COURT IN BILESHWAR KHAND UDYO G SAHAKARI MANDLI 8 LTD. VS. COMMISSIONER OF INCOME-TAX (2006) 282 ITR 480 (GUJ) REFERRED ABOVE. ACCORDINGLY THIS GROUND OF THE ASS ESSEE IS REJECTED. 5.4.1. RS.2,50,000 - THIS AMOUNT REPRESENTED DEBIT BALANCE IN THE CLIENTS RUNNING ACCOUNT FOR THE TRANSACTIONS PE RTAINING TO PROCUREMENT OF WASTE PAPERS BY THEM FROM THE ASSESSEE. THE LEAR NED ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THIS IS ONL Y A PROVISION FOR EXPENSES FOR BIFR PERIOD AND NOT AN ASCERTAINED L IABILITY. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE IN PARA 4.25 TO 4.2 8. HE CONFIRMED THE ADDITION ON THE GROUND THAT THE ASSESSEE DID NOT FU RNISH THE DETAILS REGARDING ACCOUNTING PERIOD AND NATURE OF SERVICES RENDERED BY THE CLIENTS ON ACCOUNT OF WHICH THE SAID AMOUNT WAS CLAIMED. 5.4.2. THE LEARNED AR OF THE ASSESSEE SUBMITTED BEF ORE US THAT THE AMOUNT WAS NOT FOUND RECOVERABLE AND HENCE, IT WAS WRITTEN OFF. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. 5.4.3. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO FIND OUT WHETH ER SALES MADE TO THOSE PARTIES HAVE BEEN CREDITED IN THE TRADING ACCOUNT A ND HOW THE ASSESSEE CONSIDERS THE AMOUNT IRRECOVERABLE AS PER PRINCIPLE S LAID DOWN BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF DHALL ENT ERPRISES & ENGINEERS (P) LTD., V.CIT 207 CTR (GUJ) 729. IF THE ASSESSEE HAS ACTUALLY WRITTEN OFF THE AMOUNT IN THE BOOKS TREATING AS IRRECOVERA BLE, AND IT IS NOT COVERED BY ANY PROVISION WHICH HAS BEEN ALLOWED AS DEDUCTION, THEN THE CLAIM SHOULD BE ALLOWED. 5.5.1. RS.11,00,000 - THIS AMOUNT WAS CLAIMED AS WARE- HOUSING CHARGES. IT WAS SUBMITTED TO THE ASSESSING OFFICER THAT THE ASSESSEE WAS REQUIRED TO MAKE THE PAYMENT OF WARE-H OUSING CHARGES AT 9 RS.26,42,565 WHICH WAS SETTLED AT RS.11,00,000. THI S AMOUNT PERTAINS TO EXPORT BUSINESS AND THE ASSESSEE HAS BEEN CLAIMING DEDUCTION U/S.80HHC IN EARLIER YEARS. AS NO DETAILS WERE FURNISHED AS T O WHAT TREATMENT ASSESSEE HAS GIVEN TO THESE EXPENSES IN RELATION TO THE EXPORT INCOME, THE ASSESSING OFFICER DID NOT ALLOW THIS CLAIM AND MADE THE ADDITION. THE LEARNED CIT(A) DISCUSSED THIS ISSUE IN PARA 4.33 TO 4.35 OF HIS ORDER. HE CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THE A SSESSEE DID NOT FURNISH THE DETAILS EITHER BEFORE THE ASSESSING OFF ICER OR BEFORE HIM. THE ASSESSEE DID NOT SHOW THAT LIABILITY WAS CRYSTALLIZ ED DURING THE CURRENT YEAR. 5.5.2. BEFORE US, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE FACT IS THAT THE SUM OF RS.26,42,565 WAS SETTLED THIS YEAR AND THUS BECAME A CONTRACTUAL LIABILITY AND THEREFORE, IT SHOULD BE A LLOWED IN THIS YEAR. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 5.5.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO FIND OUT - (A) WHETHER THE SUM OF RS.26,42,565 HAS BEEN CLAIMED AS DEDUCTION IN ANY E ARLIER YEAR. IF YES, THEN NO FURTHER CLAIM IN THIS YEAR WILL BE ALLOWED, AND (B) IF CLAIM PERTAINED TO THE PERIOD WHEN ASSESSEE WAS ALLOWED D EDUCTION U/S.80HHC THEN WHETHER THE SUM OF RS.26,42,565 WAS CONSIDERED AS DEDUCTION WHILE COMPUTING THE PROFITS ELIGIBLE FOR DEDUCTION U/S.80 HHC, THEN NO FURTHER DEDUCTION IN THE CURRENT YEAR IS REQUIRED TO BE ALL OWED. IN OTHER CIRCUMSTANCES, IT SHOULD BE TREATED AS A CONTRACTUA L LIABILITY SETTLED DURING THIS YEAR AND SHOULD BE ALLOWED IN THIS YEAR AS DED UCTION. 5.6.1. RS.47,96,779 - THIS RELATES TO WATER TAX LIABILITY AGAINST BAN K GUARANTEE. THE LEARNED ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT IT IS A DISPUTED LIABILITY AND BANK GUA RANTEE HAS NOT BEEN ENCASHED. THE LEARNED CIT(A) DISCUSSED THIS ISSUE I N PARAGRAPHS 4.36 TO 10 4.38. HE HAS CONFIRMED THE DISALLOWANCE ON THE GROU ND THAT THE WATER TAX RATE IS STILL DISPUTED AND THEREFORE CANNOT BE TERM ED AS ASCERTAINED ONE. THE MATTER WAS TAKEN UP BEFORE THE HONBLE ORISSA H IGH COURT AND AS PER DIRECTION OF HONBLE COURT BANK GUARANTEE WAS PROVI DED IN RESPECT OF THE DISPUTED LIABILITY. ACCORDING TO THE LEARNED CIT(A) THE ORDER OF THE HONBLE ORISSA HIGH COURT NOWHERE MENTIONED ABOU T THE FINAL SETTLEMENT OF THE DISPUTE. THIS LIABILITY IS NOT AS CERTAINED ONE AND THE SAME CANNOT BE ALLOWED. NO DETAILS OF SUCH WATER TA X LIABILITY HAVE BEEN FURNISHED SO AS TO SHOW AS TO WHICH YEAR IT PERTAIN S. 5.6.2. AGAINST THIS, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT WATER TAX IS A STATUTORY LIABILITY AND THEREFORE SHOULD B E ALLOWED. AS AGAINST THIS, THE LEARNED DR SUBMITTED THAT STATUTORY LIABILITY W OULD BE ALLOWED IN THE YEAR WHEN IT IS PAID BY THE ASSESSEE. 5.6.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE CONFIRM THE ORDER OF THE LEARNED CIT(A) WITH THE DIRECTION THAT THE ASSE SSING OFFICER WILL ALLOW THE CLAIM U/S.43B OF THE ACT WHEN THE AMOUNT IS ACTUALLY PAID. A BANK GUARANTEE IS ONLY IN THE NATURE OF A SECURITY OR GUARANTEE WHICH IMPOSES NO OBLIGATION ON THE BANK TO MAKE THE PAYME NT UNLESS ON HAPPENING OF CONTINGENCIES IN TERMS OF THE BANK GUA RANTEE. ON THIS ISSUE HONBLE GUJARAT HIGH COURT IN MUGAT DYEING & PRINTI NG MILLS V/S. ASSTT. CIT (2007) 290 ITR 282 (GUJ) HELD AS UNDER: THE EXPRESSION EMPLOYED IN SECTION 43B OF THE INCOM E-TAX ACT, 1961, IS ACTUALLY PAID. IN VIEW OF THE NON OBSTANTE CLAUSE CONTAINED IN THE SECTION, IT IS NOT PERMISSIBLE TO REFER TO THE EXPRESSION PAID AS DEFINED UNDER SECTION 43(2) OR UNDER ANY OTHER PROVISIONS OF THE ACT. HEN CE, THE PLAIN MEANING OF THE WORDS ACTUALLY PAID IS REQUIRED TO BE TAKEN I NTO CONSIDERATION. THE WORD ACTUAL HAS BEEN DEFINED AS SOMETHING REAL IN OPPOSITION TO CONSTRUCTIVE OR SPECULATIVE. ACTUALLY MEANS REALL Y, TRULY IN FACT. THEREFORE, THE PLAIN MEANING OF THE EXPRESSION ACTUALLY PAID MEANS THAT THE SUM SHOULD HAVE BEEN ACTUALLY PAID TO THE COFFERS OF TH E REVENUE, I.E., REALLY PAID, AND NOT CONSTRUCTIVELY. IMPORTING ANY OTHER MEANING WOULD AMOUNT TO DOING VIOLENCE TO THE PLAIN MEANING OF THE STATUTE. WHEN THE WORDS OF THE STATUTE ARE 11 CLEAR AND UNAMBIGUOUS THERE IS NO NEED TO ADOPT ANY OTHER MEANING OR PROVISION OF THE ACT. A BANK GUARANTEE IS IN THE NATURE OF A SECURITY OR A GUARANTEE, WHICH IMPOSES AN OBLIGATION ON THE BANK TO MAKE PAYMENT IN TERMS OF THE BANK GUARANTEE, UPON THE HAPPENING OF A CONTINGENCY ON THE OCCURREN CE OF WHICH THE GUARANTEE BECOMES ENFORCEABLE. THUS, IN FURNISHING A BANK GUARANTEE TOWARDS EXCISE DUTY LIABILITY, IT CANNOT BE SAID THAT THE A SSESSEE HAD ACTUALLY PAID THE EXCISE DUTY IN TERMS OF SECTION 43B. THE ASSESSEE WAS A PROCESSING HOUSE CARRYING ON THE BUSINESS OF DYEING AND PRINTING OF CLOTH ENTIRELY ON JOB WORK BASIS. BEFOR E THE EXCISE AUTHORITIES, THE ASSESSEE HAD DISPUTED THE PORTION OF EXCISE DUTY AT TRIBUTABLE TO THE VALUE OF GREY CLOTH BELONGING TO THE MERCHANT OWNERS AND PRO CESSED BY IT ON THE GROUND THAT AS A PROCESSOR OF GREY CLOTH ON JOB WOR K BASIS THE ASSESSEE WAS MERELY AN AGENT OF THE MERCHANT OWNER AND HENCE NO EXCISE DUTY COULD BE LEVIED. THE EXCISE AUTHORITIES DID NOT ACCEPT THE C ONTENTION OF THE ASSESSEE. ON A WRIT PETITION FILED BY THE ASSESSEE ALONG WITH OT HER PROCESSORS, THE SUPREME COURT RESTRAINED THE AUTHORITIES FROM LEVYING AND R ECOVERING THE DISPUTED PORTION OF EXCISE DUTY ON THE CONDITION THAT THE AS SESSEE AND OTHER PROCESSORS FURNISHED BANK GUARANTEES TO THE FULL EXTENT IN REG ARD TO THE DIFFERENCE TO THE SATISFACTION OF THE AUTHORITIES. IN COMPLIANCE WITH THE STAY ORDER OF THE SUPREME COURT, THE ASSESSEE DEPOSITED THE EQUIVALEN T AMOUNT OF THE DISPUTED EXCISE DUTY ATTRIBUTABLE TO THE VALUE OF GREY CLOTH WITH THE BANK IN FIXED DEPOSIT AND FURNISHED THE BANK GUARANTEE TO THE EXCISE AUTH ORITIES BUT ULTIMATELY THE SUPREME COURT DECIDED THE MATTER IN FAVOUR OF THE E XCISE AUTHORITIES AND THE EXCISE DUTY WAS DIRECTLY REALISED FROM THE BANK AUT HORITIES BY ENCASHING THE FIXED DEPOSITS. THE TRIBUNAL TOOK THE VIEW THAT FUR NISHING OF BANK GUARANTEE WAS ONLY A SECURITY OR A GUARANTEE GIVEN BY THE BAN K TO PAY THE DISPUTED AMOUNT OF EXCISE DUTY COLLECTED BY THE ASSESSEE, IN THE EVENT OF THE EXCISE DEPARTMENT SUCCEEDING IN THE PENDING LITIGATION, AN D THAT FURNISHING OF A BANK GUARANTEE FOR PAYMENT OF THE ENTIRE DISPUTED AMOUNT OF EXCISE DUTY/ADDITIONAL EXCISE DUTY COLLECTED BY THE ASSESSEE IN THE RELEVA NT YEARS COULD NOT BE CONSIDERED EQUIVALENT TO ACTUAL PAYMENT OF DUTY IN THE RELEVANT YEARS, THAT THE INTEREST INCOME EARNED ON THE FIXED DEPOSITS BELONG ED TO THE ASSESSEE AND THAT THEREFORE GIVING THE BANK GUARANTEE ON THE BASIS OF FIXED DEPOSITS MADE WITH THE BANK COULD NOT BE REGARDED AS ACTUAL PAYMENT OF EXCISE DUTY IN THE RELEVANT YEARS UNDER APPEAL BECAUSE THE ASSESSEE CO NTINUED TO OWN THE SAID FIXED DEPOSITS. THE TRIBUNAL HELD THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION OF EXCISE DUTY LIABILITY OF RS. 58,75,999 FOR THE ASSESSMENT YEAR 1986-87 AND RS. 44,58,378 FOR THE ASSESSMENT YEAR 1 987-88 IN VIEW OF THE PROVISIONS OF SECTION 43B. ON APPEAL : _HELD,_ DISMISSING THE APPEALS, THAT BY FURNISHING THE BANK GUARANTEE PURSUANT TO THE ORDER OF THE SUPREME COURT, THE ASS ESSEE HAD MERELY CREATED A RIGHT IN FAVOUR OF THE EXCISE DEPARTMENT TO ENFORCE THE PAYMENT OF EXCISE DUTY IN THE EVENT OF THEIR SUCCEEDING IN THE PENDING LIT IGATION. THIS WAS NOT EQUIVALENT TO ACTUAL PAYMENT OF TAX OR DUTY BY WAY OF WHICH FUNDS WOULD BE AVAILABLE FOR MEETING THE GOVERNMENT EXPENDITURE. I T DID NOT AMOUNT TO EVEN CONSTRUCTIVE PAYMENT OF THE EXCISE DUTY. THE OWNERS HIP OF THE FUNDS PLACED AS FIXED DEPOSITS FOR OBTAINING BANK GUARANTEE WAS OF THE ASSESSEE AND REMAINED SO TILL THE POINT OF TIME OF ENCASHMENT OF THE BANK GUARANTEE. PAYMENT 12 PRESUPPOSES TRANSFER OF RIGHTS OF OWNERSHIP FROM TH E PAYER TO THE PAYEE. MOREOVER, THE BANK GUARANTEE GIVEN BY THE ASSESSEE WAS PRIMARILY TO AVOID MAKING PAYMENT OF EXCISE DUTY TO THE DEPARTMENT AND HENCE IT COULD NOT BE SAID THAT THE FURNISHING OF BANK GUARANTEE TOWARDS PAYMENT OF EXCISE DUTY LIABILITIES AMOUNTED TO ACTUAL PAYMENT AS ENVISAGED BY THE PROVISIONS OF SECTION 43B. SOMAIYA ORGANICS (INDIA) LTD. V. STATE OF U. P. [20 01] 251 ITR 20 (SC) APPLIED . 5.6.4 SINCE THE ISSUE IS FULLY COVERED BY ABOVE JUD GMENT, RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GROUND OF THE A SSESSEE. 5.7.1. RS.43,50,000 - THIS WAS CLAIMED TO BE AN AMOUNT RECOVERABLE FROM ORISSA FOREST DEVELOPMENT CORPORATION WHICH WA S WRITTEN OFF IN THE BOOKS. THE ASSESSING OFFICER DISALLOWED THE CLA IM ON THE GROUND THAT THIS AMOUNT SHOULD HAVE BEEN SET OFF AGAINST THE IN COME OR LOSS OF THE PRIOR PERIOD. THIS HAS BEEN DISCUSSED BY THE LEARNE D CIT(A) IN PARA 4.39 TO 4.41 OF HIS ORDER. THE DISALLOWANCE WAS CONFIRME D FOR WANT OF DETAILS/EVIDENCE SO AS TO EXPLAIN THE YEARS TO WHIC H THESE AMOUNTS PERTAINED AND HOW THEY ARE NOT RECOVERABLE. 5.7.2. THE LEARNED AR OF THE ASSESSEE SUBMITTED T HAT THE AMOUNT REPRESENTED TRADING ITEM AND HAS BEEN CONSIDERED IN THE TRADING /PROFIT & LOSS ACCOUNT. IT WAS FOUND NON-RECOVERABLE AND HENC E, HAS BEEN WRITTEN OFF. IN THE ALTERNATIVE, THE LEARNED AR OF THE ASSE SSEE SUBMITTED THAT THE AMOUNT SHOULD BE ALLOWED AS TRADING LOSS U/S.28. 5.7.3. AGAINST THIS, THE LEARNED DR SUBMITTED THA T THIS REPRESENTED SOME DEPOSITS WITH THE ORISSA FOREST DEVELOPMENT CORPORA TION AND NOT A TRADING ITEM. 5.7.4. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO FIND OUT (I) - WHETHER THIS AMOUNT HAS BEEN CONSIDERED IN THE TRADING/PROFIT & LOSS ACCOUN T IN SOME EARLIER YEAR AND HOW THE AMOUNT HAS BEEN CONSIDERED AS IRRECOVER ABLE IN TERMS OF THE 13 DECISION IN DHALL ENTERPRISES & ENGINEERS (P) LTD., VS. CIT [( 2007) 295 ITR 481 (GUJ)]. IF IT IS SO THEN THE CLAIM SHOULD BE ALLOWED IN T HIS YEAR WHEN IT IS WRITTEN OFF IN THE BOOKS. (II) -TH E ASSESSING OFFICER WILL FIND OUT WHETHER THE AMOUNT REPRESENTED THE CAPITAL DEPOSITS FOR CARRYING OUT THE BUSINESS OR FOR THE PURPOSE OF RUNNING BUSI NESS AS A SECURITY DEPOSIT TO BE DEPOSITED AGAINST PURCHASES MADE BY T HE ASSESSEE FROM OFDC. IN OTHER WORDS, IT WOULD BE FOUND OUT WHETHER THIS AMOUNT IS A TRADING DEPOSIT OR CAPITAL DEPOSIT. IF IT IS A CAPI TAL DEPOSIT, CLAIM WILL NOT BE ALLOWED AS IT WOULD BE A CAPITAL LOSS. IF IT IS A TRADIE DEPOSIT IT SHOULD BE ALLOWED AS TRADING LOSS. 6. GROUND NO.2.1 - THIS GROUND CONSISTS OF FOUR ITEMS. THEY ARE DISCUSSED AND ADJUDICATED BELOW. 6.1.1. RS.11,11,433 THIS AMOUNT REPRESENTED BALANCES AGAINST PARTIES AND WERE DEBITED IN THE P & L ACCOUNT AFTER WRITI NG OFF IN THE BOOKS. THE LEARNED ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT DETAILS WERE NOT FURNISHED. THE LEARNED CIT(A) EXAM INED THE CLAIM AND FOUND THAT INSPITE OF PROVIDING ADEQUATE OPPORTUNIT IES ASSESSEE DID NOT FURNISH THE DETAILS OF YEAR-WISE BREAKUP OF THE AMO UNT CLAIMED AS DEDUCTION. 6.1.2. THE LEARNED AR OF THE ASSESSEE SUBMITTED T HAT THIS AMOUNT REPRESENTED OLD DEBIT BALANCES LYING IN THE ACCOUNT OF VARIOUS PARTIES FOR MORE THAN THREE YEARS. THESE ARE TRADE DEPOSITS AND CONSIDERING THE PETTY NATURE INVOLVED WERE ACTUALLY WRITTEN OFF. THEREF ORE THE CLAIM SHOULD BE ALLOWED. 6.1.3. THE LEARNED DR ON THE OTHER HAND RELIED ON T HE ORDERS OF THE AUTHORITIES BELOW. 14 6.1.4. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE RESTORE THE MATTER TO FILE OF THE ASSESSING OFFICER BEFORE WHOM THE ASSES SEE WILL FURNISH COPIES OF ACCOUNTS OF RESPECTIVE PARTIES AND SHOW THAT THE SE AMOUNTS WERE CONSIDERED IN THE TRADING AND P&L ACCOUNT IN EARLIE R YEARS AND NOW REPRESENT PETTY BALANCES WHICH ARE WRITTEN OFF ON A CCOUNT OF NON-RECOVERY FROM THE PARTIES AND FOR THE REASON THAT THEY ARE L YING IN THE BOOKS FOR MORE THAN THREE YEARS. IF IT IS SO THE CLAIM WOULD BE ALLOWED. 6.2.1. RS.1,07,533 THIS ADDITION HAS BEEN MADE BY THE ASSESSING OFFICER UNDER THE HEAD TRANSPORT COMMISSION ACCOUN T. IT WAS CLAIMED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER AS WEL L AS BEFORE LD. CIT(A) THAT TRANSPORT COMMISSION WAS DEBITED TWICE IN THE P/L ACCOUNT WITH CORRESPONDING CREDIT TO THE P & L ACCOUNT TWICE. TH E MISTAKE WAS RECTIFIED AND THEREFORE, THIS WAS CLAIMED AS DEDUCT ION IN THIS YEAR. THE LEARNED CIT(A) DISALLOWED THE CLAIM ON THE GROUND T HAT IT PERTAINED TO EARLIER YEAR. 6.2.2. AFTER HEARING THE RIVAL SUBMISSIONS WE DE CLINE TO INTERFERE WITH THE ORDERS OF THE AUTHORITIES BELOW BECAUSE NECESSA RY DETAILS HAVE NOT BEEN FURNISHED. IT IS NOT SHOWN THAT ACTUALLY THERE WAS DOUBLE CREDIT AND FURTHER THAT IT DID NOT RELATE TO THIS YEAR. IF THE RE IS A MISTAKE IN ACCOUNTING AN AMOUNT IN AN EARLIER YEAR, THE NECESSARY RECTIFI CATION SHOULD BE CARRIED OUT IN THAT YEAR ONLY. THERE IS NO REASON TO ALLOW THE PROFITS OF THIS YEAR TO BE REDUCED BY THE RECTIFICATION OF THIS MISTAKE. TH ERE IS NO ACCRUAL OF ANY LIABILITY, NO COURT ORDER, NO SETTLEMENT OF ANY CON TRACTUAL CLAIM, OR NO STATUARY DEMAND RAISED. THEREFORE, THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED EITHER U/S.36 AS BAD DEBT WRITTEN OFF OR U/ S.28 AS TRADING LOSS. THIS PART OF THE GROUND OF THE ASSESSEE IS THEREFORE REJ ECTED. 6.3.1. RS.29,000 - THIS AMOUNT REPRESENTED ERECTION CHARGES OF A IR CONDITIONER. ACCORDING TO THE ASSESSEE, THE CLAIM W AS SETTLED DURING THIS 15 YEAR AND THE SAME SHOULD BE ALLOWED. THE LEARNED CI T(A) CONFIRMED THE ADDITION ON THE GROUND NO EVIDENCE SHOWING SETTLEME NT OF THE CLAIM WAS FURNISHED. 6.3.2. HAVING HEARD BOTH THE PARTIES, WE DECLINE TO INTERFERE AS NO DETAILS HAVE BEEN FURNISHED BEFORE US AS WELL. THIS PART OF THE GROUND IS THEREFORE REJECTED. 6.4.1. RS.22,375 THIS REPRESENTED WRITING OFF OF TALUKA PANCHAYAT SALES TAX DIFFERENCE AND SECURITY DEPOSIT WITH NATIONAL PRINTING AND PAPER LTD AND DEBIT OF THE SAME IN THE P/L ACCOUNT. IN ABSENCE OF DETAILS, THE ASSESSING OFFICER DISALLOWE D THE CLAIM. THE LEARNED CIT(A) CONFIRMED THE ADDITION ON THE SAME G ROUND. 6.4.2. HAVING HEARD BOTH THE PARTIES, WE DECLINE TO INTERFERE BECAUSE THIS PAYMENT RELATED TO SECTION 43B AND ARE ONLY BOOK AD JUSTMENT. THEY CANNOT BE ALLOWED AS THERE IS NO ACTUAL PAYMENT. TH IS PART OF THE GROUND IS THEREFORE REJECTED. 7. GROUNDS NO. 3 7.1 RS.32,80,212--- IT IS LIABILITY ON ACCOUNT OF EXCHANGE FLUCTUATI ON RATE ON THE OUTSTANDING BILLS FOR IMPORT OF MATERIA LS. THIS HAS BEEN DISCUSSED BY THE A.O. ON PAGE 38, PARA 6 OF HIS ORDER. THE ASSESSING OFFICER EXAMINED THE TAX AUDIT REPORT. IT IS MENTIO NED THEREIN THAT IT IS AN ADDITIONAL LIABILITY ON ACCOUNT OF EXCHANGE RATE F LUCTUATION IN RESPECT OF OLD DUES OF FOREIGN SUPPLIERS (PRE- TAKEOVER PERIOD ). FOREIGN EXCHANGE RATE WAS APPLIED AS FOUND APPLICABLE AT THE TIME OF PAYMENT OF SUCH DUES. IT IS NOTED BY THE AUDITOR THAT HAD THE SUM BEEN AC COUNTED FOR IN THE PREVIOUS YEAR, PROFIT OF THAT YEAR WOULD BE DECREAS ED BY THIS AMOUNT DUE TO INCREASE IN UN-PROVIDED LIABILITY. IT WAS CLAIME D THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THERE FORE EXCHANGE RATE 16 FLUCTUATION IS AN ALLOWABLE DEDUCTION. WHEN FOREIGN EXCHANGE RATE VARIES FAVORABLE TO THE ASSESSEE THEN LIABILITY TO MAKE PAYMENT TO FOREIGN SUPPLIERS IS REDUCED THAN SUCH REDUCTION IS CHARGEA BLE TO TAX. THE ASSESSING OFFICER HAD FOUND THAT THE ADDITIONAL LI ABILITY ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AMOUNTING IN TOTAL TO RS. 505 LAKHS AS ON 31.3.2002 ON THE OUTSTANDING BILLS FOR IMPORT OF MA TERIALS MADE IN PRE- TAKEOVER PERIOD HAS NOT BEEN PROVIDED IN THE ACCOUN TS. THE AMOUNT IS NEITHER ASCERTAINED NOR DUE. THIS WAS ACCORDINGLY D ISALLOWED. 7.2. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE ON PAGE 30 PARA 8 OF HIS ORDER. THE LEARNED CIT(A) CONFIRMED THE ADDITIO N ON THE GROUND THAT THE LIABILITY HAS BEEN WORKED OUT ON NOTIONAL BASIS I.E., ON THE BASIS OF AMOUNT OF INITIAL RATE DURING THE YEAR AND IS NOT AN ASCERTAINED LIABILITY. NO PAYMENT HAS BEEN MADE IN RESPECT OF SUCH LIABILI TY DURING THE YEAR AND THEREFORE, NO CHARGE ON THE PROFIT FOR THE YEAR UNDER CONSIDERATION CAN BE CREATED. 7.3. BEFORE US, IT WAS SUBMITTED BY THE LEARNED A R OF THE ASSESSEE THAT FOR IMPORTING RAW MATERIALS, THE ASSESSEE COMPANY H AS AN OBLIGATION NOT ONLY FOR PAYMENT OF PURCHASE PRICE BUT ALSO OF TH E INCREASE DUE TO FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE. THE AS SESSEE COMPANY HAS BEEN OFFERING TO TAX THE REDUCTION IN LIABILITY ON ACCOUNT OF FAVOURABLE EXCHANGE RATE FLUCTUATION. SUCH OFFERING FOR TAX H AS BEEN DONE IN THE AYS 2003-04 AND 2004-05 FOR A SUM OF RS.17,82,038 A ND RS.55,51,128 RESPECTIVELY. FURTHER THE ADDITIONAL LIABILITY ARIS ING ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION IS COVERED BY THE DECISIO N IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. WOODWARD GOVERNOR IN DIA P. LTD (2009) 312 ITR 254 (SC). LD. A.R. FURTHER SUBMITTE D THAT IN THE CASE OF THE ASSESSEE THE LIABILITY OF FOREIGN SUPPLIERS WAS RS.472.20 LA KHS AS ON 31.3.2001 WHICH IS INCREASED TO RS.505.00 LAKHS AS ON 31.3.2002 ON 17 ACCOUNT OF SUCH FLUCTUATION IN THE FOREIGN EXCHANGE RATE. THE DIFFERENCE HAS BEEN CLAIMED IN THE RETURN. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 7.4. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED TO THIS CLAIM. T HE REASONS ARE THAT AT THE TIME OF SUCCESSION, THE ASSESSEE HAS TAKEN OVER THE ASSETS AND LIABILITIES OF EARLIER ENTITY AS A WHOLE. IT HAS BEEN SHOWING LIA BILITIES IN RESPECT OF SUPPLIERS FROM YEAR TO YEAR WHICH INCLUDED LIABILIT Y OF PRE- TAKEOVER PERIOD ALSO. IF THERE IS A FLUCTUATION IN THE FOREI GN EXCHANGE RATE DUE TO WHICH THERE IS AN ADDITIONAL BURDEN IN INDIA RUPEES THEN THE SAME HAS TO BE ALLOWED. THIS VIEW IS SUPPORTED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V S. WOODWARD GOVERNOR INDIA P. LTD (2009) 312 ITR 254 (SC) WHERE IN IT IS HELD AS UNDER: ' LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTU ATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE-SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE INCOME-TAX ACT, 1961. FOR VALUING THE CLOSING STOCK AT THE END OF A PARTI CULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BE CAUSE PROFIT/LOSS IS EMBEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAK EN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLO SING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW IN CREASE IN PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING T HE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWE R. THE EXPRESSION 'ANY EXPENDITURE' HAS BEEN USED IN S ECTION 37 OF THE INCOME- TAX ACT, 1961, TO COVER BOTH 'EXPENSES INCURRED' AS WELL AS AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. PROFITS AND GAINS OF THE PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE RELEVANT ACCOUNTING STANDARD. O N GENERAL PRINCIPLES OF COMMERCIAL ACCOUNTING, THE VALUE OF THE STOCK-IN-TR ADE AT THE BEGINNING AND AT THE END OF THE ACCOUNTING YEAR SHOULD BE ENTERED IN THE PROFIT AND LOSS ACCOUNT AT COST OR MARKET PRICE, WHICHEVER IS LOWER-THE MAR KET VALUE BEING ASCERTAINED ON THE LAST DATE OF THE ACCOUNTING YEAR, NOT AT ANY INTERMEDIATE DATE. NO GAIN OR PROFIT CAN ARISE UNTIL A BALANCE IS STRUCK BETWE EN THE COST OF ACQUISITION AND THE PROCEEDS OF SALE. THE WORD 'PROFITS' IMPLIES A COMPARISON BETWEEN THE 18 STATE OF BUSINESS AT TWO SPECIFIC DATES, USUALLY SE PARATED BY AN INTERVAL OF TWELVE MONTHS. STOCK-IN-TRADE IS AN ASSET : IT IS A TRADING ASSET. THEREFORE, THE CONCEPT OF PROFITS AND GAINS MADE BY A BUSINESS DUR ING THE YEAR CAN ONLY MATERIALIZE WHERE A COMPARISON OF THE ASSETS OF THE BUSINESS AT TWO DIFFERENT DATES ARE TAKEN INTO ACCOUNT. 7.5 SIMILARLY REVENUE WOULD BE ENTITLED TO TAX THE GAIN, THE ASSESSEE MAKES ON ACCOUNT OF FAVORABLE FLUCTUATION RATE OF F OREIGN EXCHANGE. THE ADDITION IS THEREFORE DELETED. 8. GROUNDS NO.4 AND 4.1 8.1 IT RELATES TO DISALLOWANCE OF RS.2,78,29,039/- INCLUDING DEPRECIATION OF RS.7,68,675. THIS ISSUE HAS BEEN DI SCUSSED BY THE ASSESSING OFFICER IN PARA 3 OF HIS ORDER. THE FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF RS.3.16/- LAKHS AGAINST OPERATION FOR GROWING SAPLINGS OF THE TREES. THESE SAPLINGS WERE GIVEN TO THE VILLAGERS FOR GROWING THEM INTO TREES WHICH WER E LATER PURCHASED BY THE ASSESSEE. THE ASSESSEE HAS ACCOUNTED FOR A RECE IPT OF RS.45.52 LAKHS AS SALE PROCEEDS OF SAPLINGS TO THE FARMERS/VILLAGE RS AND THUS CLAIMED EXPENSES OF RS.270.60 LAKHS AS LOSS AGAINST BUSINES S INCOME BOTH UNDER NORMAL PROVISION OF THE ACCOUNT AS WELL AS UNDER TH E MAT PROVISIONS. 8.2 THE ASSESSEE SUBMITTED FOLLOWING P/L ACCOUNT IN RESPECT OF ITS SOCIAL FORESTRY DIVISION WHICH SUPERVISES PLANTATIO N AND GROWTH OF SAPLINGS. SOCIAL FORESTRY DIVISION PROFIT AND LOSS ACCOUNT --------------------------------------------------- -------------------------------------- DR. RS. CR. RS . LABOUR CHARGES 1,29,35,409 SALE OF SAPLINGS 45,52,105 SUPERVISION CHARGES 34,01,995 LOSS 2,70,60,364 MATERIAL 23,23,660 LAND RENT 6,74,002 O.H. EXPS 1,22,77,403 3,16,12,469 3,16,12,469 19 --------------------------------------------------- -------------------------------------- 8.3 IT WAS SUBMITTED TO THE ASSESSING OFFICER THAT THE ASSESSEE IS INVOLVED IN THE MANUFACTURE AND SALE OF PAPER AND B OARD. THE RAW MATERIAL FOR THESE PRODUCTS IS BAMBOO AND HARD WOOD . IN ORDER TO ENSURE CONTINUOUS/UNINTERRUPTED SUPPLY OF BAMBOO AND HARD WOOD ASSESSEE TOOK UP APPROPRIATE ACTIONS IN GROWING SAPLINGS WHICH WE RE SOLD TO FARMERS. IN ADDITION SAPLINGS (YOUNG TREES) WERE ALSO PROCURED FROM FOREST AND GROWN IN THE NURSERY. WHEN THE SAPLINGS ATTAIN CERTAIN HE IGHT, THEY ARE SOLD TO THE FARMERS WITH AN UNDERSTATING THAT THEY WOULD RA ISE TREES WHICH WOULD BE SOLD BY THE FARMERS TO THE ASSESSEE. PAYMENTS T O FARMERS FOR PURCHASE OF TREES ARE MADE ON AN EFFECTUATION OF PURCHASES B UT SAPLINGS SALE PROCEEDS ARE COLLECTED AT THE TIME OF SALE ITSELF. TO DISCHARGE THE LIABILITY OF PURCHASE OF THE SAPLINGS, A TRIPARTITE AGREEMENT WITH THE COMPANY, FARMERS AND THE BANK WERE ENTERED INTO WHEREBY CRED IT IS ALLOWED BY THE BANK FOR MAKING PAYMENT OF SAPLINGS PRICE TO THE AS SESSEE. THIS AGREEMENT ALSO PROVIDES THAT THE RAISED PLANTATION WOULD BE PURCHASED BY THE ASSESSEE COMPANY FROM THE FARMERS. A COPY OF TH IS AGREEMENT WAS PROVIDED TO THE ASSESSING OFFICER. IT WAS CLAIMED T HAT SALE PROCEEDS OF SAPLINGS AMOUNTING TO RS. 45.52 LAKHS ARE NOT AGRI CULTURAL INCOME AND HENCE EXCESS EXPENDITURE AMOUNTING TO RS. 270.60/- LAKHS IS NOT AGRICULTURAL LOSS BECAUSE ASSESSEE IS NOT DOING ANY AGRICULTURAL OPERATION. THE ENTIRE EXERCISE OF GROWING RAW MATERIAL IS FOR ITS ULTIMATE USE IN THE MANUFACTURING OF PAPER AND BOARD. THE ASSESSING OFF ICER SUMMARIZED THE CONTENTION OF THE ASSESSEE AS UNDER: 1. THERE IS NO INCOME DERIVED FROM LAND AS NO BASI C OPERATIONS ARE CARRIED OUT ON LAND FOR CULTIVATION OF LAND; 2. NO SUBSEQUENT OPERATIONS FOR EFFICIENT PRODUCTIO N OF CROP ARE CARRIED OUT; AND 20 3. THE COMPANY IS ENGAGED IN THE MANUFACTURE AND SA LE OF PAPER & BOARD, AND BAMBOO/ HARDWOOD IS THE MAJOR RAW MATERI AL REQUIRED FOR PRODUCTION. SO IT IS NECESSARY TO ENSURE CONTIN UOUS AND UNINTERRUPTED SUPPLY OF RAW MATERIAL. THEREFORE, FO R THIS PURPOSE SAPLING ARE SOLD TO THE FARMERS. 4. THE DETAILS REGARDING THIS ISSUE WERE ALSO FURNI SHED DURING THE EARLIER YEAR I.E. A.Y. 2001-02. 5. THE EXPENSES CLAIMED TO THE EXTENT OF RS.270.60 LAKHS, ARE CONSOLIDATED EXPENSES, WHICH ARE RELATED TO THEIR F ORESTRY DIVISION. 8.4 THE LEARNED ASSESSING OFFICER DID NOT AGREE WIT H THE ASSESSEE. HE FOUND THAT PLANT SAPLINGS ARE RAISED IN THE FOREST OWNED OR CONTROLLED BY THE ASSESSEE COMPANY AND ALSO IN THE LAND BELONGING TO THE FARMERS. THUS THE ASSESSEE IS RUNNING AN ORGANIZED ENTERPRISE FOR RAISING THE PLANT SAPLINGS AT THEIR LAND AND SUPERVISING IN MAINTENAN CE OF PLANTATIONS AT FARMERS LAND. ALL THE EXPENSES INCURRED BY THE ASS ESSEE COMPANY ARE DEBITED UNDER THE HEAD SOCIAL FORESTRY EXPENSES. THOUGH THE ASSESSEE HAS NOT MADE OUT ANY INCOME BUT IT HAS INCURRED LOS S WHICH IS AN AGRICULTURAL LOSS AND CANNOT ALLOWED. HE DERIVED SU PPORT FROM THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF SUDI SHA FARM SURSERY V. ITO (ITA NO.1065/DEL OF 2002); CIT V. SOUNDARYA NUR SERY (241 ITR 530) AND ON THE DEFINITION OF AGRICULTURAL INCOME U /S.2(1A) OF THE ACT. THE ASSESSING OFFICER ALSO DISALLOWED CLAIM OF THE ASSESSEE TO AMORTIZE EXPENSES ON THE SAME GROUND THAT IT IS AGRICULTURAL LOSS. 8.5.1 IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) T HAT EVEN THOUGH THE ACTIVITIES CARRIED OUT ARE IN THE NATURE OF AGRIC ULTURAL BUT THE USE OF LAND IS NOT FOR AGRICULTURAL PURPOSES AND THEREFORE THE INCOME DERIVED CANNOT BE SAID TO BE AGRICULTURAL INCOME. WHAT IS IMPORTAN T FOR THE PRESENT IS THE PURPOSE FOR WHICH THE LAND IS BEING USED. FARMERS A RE OBLIGED TO SELL THE TREES TO THE ASSESSEE AND THEREFORE, GROWING OF SAP LINGS IS AN INTEGRATED ACTIVITY FOR PROCURING RAW MATERIALS. THE FARMERS W ERE GROWING THE TREES 21 AS PER THE SPECIFICATIONS OF THE ASESSEE AND ALSO U NDER ITS SUPERVISION AND CONTROL. THE ASSESSEE HOLDS A CHARGE OVER THE TREES GROWN BY THESE FARMERS. THUS SALE OF SAPLINGS TO THE FARMERS AND P URCHASE OF TREES FROM THEM IS ONE SINGLE ACTIVITY AND THEREFORE THE LOSS INCURRED IS A BUSINESS LOSS. SALE OF SAPLINGS AND LOSS CANNOT BE REGARDED AS AN INDEPENDENT ACTIVITY SO AS TO CONSIDER THE LOSS INDEPENDENTLY A ND DISALLOW THE SAME ON THE GROUND THAT IT IS A RESULT OF AGRICULTURAL ACTI VITIES. THE LEARNED CIT(A) REQUIRED THE ASSESSING OFFICER TO SUBMIT A REMAND R EPORT ON THE EXPLANATION FURNISHED BY THE ASSESSEE. THE ASSESSIN G OFFICER FOUND THAT OUT OF TOTAL LAND AVAILABLE WITH THE ASSESSEE AT 36 0.85 ACRES, 131 ACRES OF LAND WAS USED FOR PLANTATION PURPOSES I.E., MIST CH AMBERS, PLANTATION OF MOTHER PLANTS AND NURSERY. THIS IS AT SONAGADH AREA IN GUJARAT. IN JAYKAYAPUR ORISSA OUT OF TOTAL LAND AREA OF 659.93 ACRES, 150 ACRES OF LAND IS USED FOR GROWING MOTHER PLANTATION, NURSERY, MIS T CHAMBERS AND PLANTATION. THE ASSESSEE COMPANY CARRIES ON VARIOUS ACTIVITIES SUCH AS PREPARATION OF THE LAND FOR SOWING OF SEEDS, PURCHA SE OF SEEDS, MANUARING AND FERTILIZERS ALONG WITH THE PESTICIDES , ARRANGEMENT FOR TOOLS AND IMPLEMENTS, PURCHASE OF SEEDLINGS, NURSERY MAIN TENANCE AND SALARY AND OTHER EXPENSES INCURRED ON THE STAFF FOR SUCH P URPOSES. THE ASSESSEE COMPANY HAS TAKEN LAND ON RENT AND CARRIED OUT THES E ACTIVITIES THEREON .IN ADDITION TO ABOVE ACTIVITIES SITE CLEANING, FE NCING, TILLING, MANUARING AND WATERING ETC. ARE ALSO CARRIED OUT. THE PLANTA TION PROCESS IS CARRIED OUT ON SUCH LAND TILL THE SAPLINGS ARE FOUND READY TO BE HANDED OVER TO THE FARMERS. THUS, ON THE BASIS OF SUBMISSIONS OF THE A SSESSEE AND REMAND REPORT OF THE ASSESSING OFFICER, THE LEARNED CIT(A) CONFIRMED THE ADDITION BY OBSERVING AS UNDER : 9.16. I HAVE PERUSED THE FACTS OF THE CASE AS DIS CUSSED BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER AND THE REMAND REPO RT AND ALSO CAREFULLY WENT THROUGH THE SUBMISSION AS MADE BY THE A.R. BEFORE M E. IT IS SEEN THAT IN RESPECT OF NARRATING THE NATURE OF ACTIVITY AS CAR RIED OUT BY THE APPELLANT 22 COMPANY, SAYING THAT SUCH ACTIVITIES WERE INCIDENTA L TO ITS BUSINESS ACTIVITIES, SUCH AS FACILITATION OF PROCUREMENT OF CONTINUOUS S UPPLY OF RAW MATERIALS FROM THE ADJOINING AREAS (FROM THE FARMERS, WHO GREW PLA NTATION ON THEIR LAND) AND ALSO TO ENSURE THE AVAILABILITY OF GOOD QUALITY OF RAW MATERIALS IN THE FORM OF BAMBOO AND TREES, IT HAD ALSO RELIED UPON VARIOUS J UDICIAL DECISIONS IN SUPPORT OF ITS CONTENTION (AS REFERRED ABOVE). AFTE R THE PERUSAL OF THE DECISIONS AS QUOTED ABOVE, IT IS FOUND THAT IN SUCH DECISIONS , IT HAS BEEN LAID DOWN BY THE COURTS THAT THE NATURE OF INCOME ARISING FROM A PAR TICULAR BUSINESS ACTIVITY DEPENDS UPON THE INTENTION OF THE ASSESSEE IN LEASI NG OUT THE ASSETS. ACCORDING TO THE A.R, IN SUCH DECISIONS, THE COURTS HAVE FURT HER HELD THAT WHERE INCOME IS DERIVED FROM COMMERCIAL EXPLOITATION OF THE ASSETS AND THERE IS ONLY A DIFFERENCE IN THE MANNER OF EXPLOITATION, THAT IS T O SAY, INSTEAD OF USER OF ASSETS BY THE ASSESSEE ITSELF, THE ASSETS ARE EXPLOITED BY ANOTHER PERSON, INCOME DERIVED MUST BE CONSIDERED TO BE OF THE SAME NATURE BUSINESS INCOME. BUT, ON THE OTHER HAND, IF THE INTENTION IN LEASING OUT THE ASSETS IS TO GO OUT OF BUSINESS ALTOGETHER AND EARN RENTAL INCOME, THE INC OME THERE FROM WOULD BE ASSESSABLE AS INCOME FROM OTHER SOURCES. THUS, BA SED ON ABOVE REFERRED FINDINGS OF VARIOUS COURTS, IT HAS BEEN SUBMITTED B Y THE A.R THAT THE INTENTION OF THE APPELLANT COMPANY IN CARRYING OUT SOCIAL FOR ESTRY ACTIVITY WAS TO OBTAIN THE RAW MATERIAL, WHICH WAS OTHERWISE FLJNS2 RTSNJY. ACCORDING TO THE A.R, WHILE CARRYING OUT SUCH ACTIVITY UNDER THE SOC IAL FORESTRY DIVISION, ITS INTENTION WAS NOT TO DERIVE INCOME FROM SALE OF SAP LINGS TO THE FARMERS BUT RATHER IT WAS TOWARDS ATTAINING/IMPROVING THE CORE ACTIVITY I.E TO MAKE ARRANGEMENT FOR THE CONTINUOUS SUPPLY OF GOOD QUALI TY OF RAW MATERIALS IN THE FORM OF BAMBOO AND TREES AND HENCE ITS ACTIVITY MAY NOT BE TREATED AS AGRICULTURAL ACTIVITY. 9.17 WHILE GOING THROUGH THE FINDINGS OF THE ASSE SSING OFFICER, IT IS SEEN THAT HE IS VERY CATEGORICALLY ANALYZED THE ACT IVITY CARRIED OUT BY THE APPELLANT COMPANY UNDER ITS SOCIAL FORESTRY DIVISIO N AND TRIED TO PROVE BEYOND DOUBT THAT SUCH ACTIVITY IS AGRICULTURAL ACT IVITY IN NATURE. IN SUPPORT OF HIS CONTENTION, IT IS FOUND THAT THE ASSESSING OFFI CER HAD RELIED UPON VARIOUS DECISIONS AS QUOTED ABOVE, SUCH AS THE FINDINGS OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS RAJA BENOY SAHAS ROY (2 002-TIOSC-150-SC-IT) ALONG WITH THE FINDINGS OF HONBLE HIGH COURT OF MA DRAS IN THE CASE OF CIT VS SOUNDARYA NURSERY 241 ITR 530, WHEREIN, ACCORDING T O HIM, THE HONBLE COURT HAS CATEGORICALLY HELD THAT ALL THE PRODUCTS OF THE LAND WHICH HAVE SOME UTILITY EITHER FOR SOME CONSUMPTION OR FOR TRADE OR COMMERCE IF THEY ARE BASED ON LAND WOULD BE AGRICULTURAL PRODUCTS. IN THIS CAS E, ON THE SIMILAR SET OF FACTS AS THAT OF THE APPELLANT COMPANY, THE HONBLE COURT HAS HELD THAT THE ACTIVITIES AS CARRIED OUT BY MIS SOUDHARYA NURSERY WERE NOTHING ELSE THAN THE AGRICULTURAL ACTIVITY AND THE INCOME DERIVED FROM S UCH ACTIVITY I.E FROM SALE OF SEEDS AND SAPLINGS WAS NOTHING BUT AGRICULTURAL INC OME. BESIDES THE ABOVE REFERRED JUDGMENTS, THE ASSESSING OFFICER ALSO REFE RRED THE FINDINGS OF HONBLE DELHI ITAT IN THE CASE OF SUDISHA FARM NURSERY VS I TO BEARING ITA 23 NO.1065/DEL OF 2002, WHEREIN, THE HONBLE ITAT ON S IMILAR SET OF FACTS, AFTER RELYING ON THE FINDINGS OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS RAJA BENOY SAHAS ROY (SUPRA) HELD THAT SUCH ACTI VITIES WERE AGRICULTURAL ACTIVITIES AND THE INCOME DERIVED OUT OF SUCH AGRIC ULTURAL OPERATIONS WAS AGRICULTURAL INCOME. 9.18 THE PLEA AS TAKEN BY THE A.R OF THE APPELLAN T COMPANY THAT ITS ACTIVITIES UNDER ITS SOCIAL FORESTRY DIVISION WERE CARRIED OUT TO FACILITATE THE AVAILABILITY OF RAW MATERIALS BY HOLDING OUT THE FA RMERS OF THE ADJOINING AREAS IN THE FORM OF SELLING OF SAPLINGS TO THEM (AS GROW N IN ITS FARM LAND) AT CONCESSIONAL RATE AND ALSO BY ARRANGING FINANCE ON BEHALF OF THESE FARMERS TO HELP THEM TO GROW BAMBOO AND PLANTS AND THEREFORE, THE SAME CANNOT BE TREATED AS AGRICULTURAL, ACTIVITY IS NOT ACCEPTABLE AT ALL. IT IS AN OLD FACT WHERE AND WHENEVER A BIG INDUSTRY SET UP WITH VARIOUS ANC ILLARY UNITS ARE FOUND SET UP BY VARIOUS OTHER PEOPLE IN NEIGHBORING AREAS TO PROVIDE AND SUPPLY VARIOUS ACCESSORIES AND RAW MATERIALS NOTED BY THE SAID COM PANY IN ITS DAY TO DAY BUSINESS ACTIVITIES. THIS IS AN UNIVERSALLY ACCEPTE D FACT AND CANNOT BE DENIED BY ANY PRUDENT MAN, WHO IS AWARE OF THE PROCEDURE O F SETTING UP OF BIG INDUSTRIES AND ITS FUNCTIONING. IN A SITUATION, WHE RE OTHER INDEPENDENT ASSESSEES, WHO HAVE SET UP THEIR SMALL INDUSTRIES T O SUPPLY ACCESSORIES OR RAW MATERIALS TO A BIG COMPANY SET UP IN THE NEIGHBORIN G AREA DOES NOT MEAN THAT THE ACTIVITIES OF SUCH SMALL UNITS ARE PART OF THE BUSINESS ACTIVITY OF THE SAID BIG COMPANY. THE COMPANY DEPENDS UPON SMALL UNITS, WHIC H ARE FOUND SET UP AROUND IT FOR PROCURING VARIOUS USEFUL MATERIAL SUC H AS ACCESSORIES, SPARE PARTS AND SOMETIMES RAW MATERIALS ALSO FOR CARRYING OUT ITS BUSINESS ACTIVITIES BUT INSPITE OF THESE SUPPLIES, SUCH UNITS ARE INDEP ENDENT UNITS. IN THE CASE OF THE APPELLANT COMPANY, IT IS SEEN THAT IT HAS GROWN SAPLINGS ON THE MOTHER BED IN ITS CAMPUS CONSISTING OF OVER 100 ACRES OF LAND AND AFTER GROWING THEM IN PROPER ATMOSPHERE, SOLD THE SAME TO VARIOUS FARMERS . IT IS SEEN THAT THESE FARMERS, AFTER BUYING THESE SAPLINGS FROM THE APPEL LANT COMPANY GROW THE SAME IN THEIR FIELDS BY LOOKING AFTER THESE AND WHE N THESE PLANTS BECAME FIT FOR COMMERCIAL USE, SOLD THE SAME TO THE APPELLANT COMP ANY AS RAW MATERIAL. 9.19. HERE, THE NATURE OF ACTIVITY AS CARRIED OUT BY THE FARMERS ARE INDEPENDENT THAN THAT OF THE ACTIVITIES OF THE APPE LLANT COMPANY AND IN NO WAY CAN BE TREATED AS SAWING OF SEEDS AND GROWING OF SA PLINGS BY THE APPELLANT COMPANY IN ITS NURSERY BY PROVIDING ALL KIND OF CON VENIENT CLIMATE AND BY TAKING THE HELP OF ALL ITS INFRASTRUCTURE, SUCH AS, MAN, MONEY AND MACHINE AND AFTER GROWING THE SAPLINGS TO A REASONABLE HEIGHT, SELLING OF THE SAME ON A MUCH SCALE TO VARIOUS FARMERS IS NOTHING BUT AN AGR ICULTURAL ACTIVITY. IT IS ALSO SEEN THAT FOR THE SAKE OF CONVENIENCE THAT SUCH ACT IVITY SHOULD NOT INTERMINGLE WITH OTHER ACTIVITIES AS CARRIED OUT AT THE DIVISIO N WHICH LOOKED AFTER THESE ACTIVITIES, HAD BEEN NAMED AS SOCIAL FORESTRY. IT I S FURTHER OBSERVED THAT BY GIVING A PARTICULAR NOMENCLATURE/NAME TO AN ACTIVIT Y DOES NOT ALTER ITS CHARACTERISTIC. THE ENTIRE GAMUT OF ACTIVITY AS CAR RIED OUT BY THE APPELLANT 24 COMPANY WAS SOWING AND GROWING OF SAPLINGS AND SELL ING THE SAME TO OUTSIDE PARTIES IS NOTHING BUT A PURE AGRICULTURAL OPERATIO NS BY STRETCH OF IMAGINATION. I, THEREFORE, IN VIEW OF THE FACTS AS DISCUSSED ABO VE AND ALSO KEEPING IN VIEW THE JUDICIAL DECISIONS AS RELIED UPON BY THE ASSESS ING OFFICER, HOLD THAT THE FINDINGS OF THE ASSESSING OFFICER THAT THE ACTIVITI ES AS CARRIED OUT BY THE APPELLANT COMPANY UNDER ITS DIVISION KNOWN AS SOCIA L FORESTRY IS NOTHING BUT AN AGRICULTURAL ACTIVITY, AND THEREFORE, THE ADDITI ON MADE BY THE ASSESSING OFFICER UNDER THIS HEAD AMOUNTING TO RS.2,78,29,039 /- IS HEREBY CONFIRMED. 8.5.2 AGAINST THE ABOVE, THE LEARNED AR OF THE A SSESSEE SUBMITTED THAT THERE ARE TWO ROUTES (SEED ROUTE AND CLONAL ROUTE) THROUGH WHICH SAPLINGS ARE DEVELOPED BY THE ASSESSEE. SEED ROUTE PLANTATION PROCEDURE IN NURSERY IS AS UNDER: 1) LAND IS TAKEN ON LEASE 2) SEED OF EUCALYPTUS ARE OBTAINED FROM SEED ORCHAR DS. 3) SEEDS ARE SOWN IN PRIMARY BEDS WHERE THEY GERMIN ATE IN 5 DAYS AND ARE TRANSPLANTED IN POLYBAGS AFTER ABOUT 20 DAYS FR OM GERMINATION. 4) THEREAFTER THE PLANTS ARE IN THE POLYBAGS FOR NE XT 6 MONTHS I.E. 180 DAYS APPROX WHEREIN THEY ATTAIN A HEIGHT OF 30 CMS AS PER THE REQUIREMENT OF THE FARMERS. CLONAL ROUTE (CLONES OF EUCALYPTUS) PRODUCTION PROC EDURE IS AS UNDER: THE COPPICE SHOOTS (SMALL SHOOTS WHICH ARISE FROM S UJPS OF EUCAIYPTUS TREES) FROM FARMERS FIELDS IS COLLECTED BY OUR STAF F FROM VARIOUS AREAS AWAY FROM THE MILL. THESE COPPICE SHOOTS ARE OF NO USE TO THE FARMERS AND THEY DESTROY IT. IN THE CLONAL TECHNOLOGY THESE SHOOTES ARE UTILIZED BY CUTTING THE SHOOTS IN SMALL PIECES OF 1.5 INCHES TO 2 INCHES. THESE CUTTINGS ARE THEN TREATED IN BAVISTIN FUNGICIDE TO AVOID ANY FUNGAL INFECTION. ONE END IS THEN DIPPED IN A ROOTING HORM ONE AND THEN THESE CUTTINGS ARE PLACED IN ROOT TRAINER BLOCKS HAVING A N ARTIFICIAL MEDIUM CALLED VERMICULITE. SOIL IN ANY STAGE IS NOT USED. THESE CUTTINGS ARE THEN PLACED IN MIST CHAMBERS UND ER CONTROLLED CONDITIONS OF TEMPERATURE ( 38 DEGREES C) &HUMIDITY 85%. FOR A PERIOD OF 45 DAYS IN AFTER WHICH THEY ARE BROUGHT O UT AND KEPT IN HARDENING CHAMBERS FOR A PERIOD OF 15 20 DAYS. HE RE THE PLANTS ARE GRADED P ACE IN EACH BLOCK BY HEALTHY PLANTS. AFTER BEING KEPT FOR 20 DAYS IN THE HARDENING CHAMBER THE PLANTS ARE THEN B ROUGHT TO THE OPEN AND KEPT ON WIRE BENCHES FOR A PERIOD OF 90 DAYS WH EREIN THEY DEVELOP INTO PLANTS READY FOR PLANTING. 25 THESE PLANTS ARE THEN TRANSPORTED TO THE FARMERS FI ELD AS PER REQUIREMENT OF THE FARMERS. ONCE THE SAPLINGS ARE PLANTED IN TH E FIELD OUR FIELD STAFF IS REGULARLY VISITING THE FARMERS FOR IMPARTING THE NE CESSARY AWARENESS ON WHAT NEEDS TO BE FOLLOWED FOR A GOOD CROP TO BE RAI SED. 8.5.3 IT WAS FURTHER SUBMITTED THAT 80% OF SAPLING S ARE DEVELOPED THROUGH SEED ROUTE AND 20% THROUGH CLONAL ROUTE. AS PER THE TERMS OF AGREEMENT SAPLINGS ARE SOLD TO THE FARMERS, PAYMENT IS MADE ON CREDIT BY THE BANK AND TREES ARE FINALLY PURCHASED BY THE ASS ESSEE AND PAYMENT IS MADE TO THE FARMERS THROUGH BANK DEDUCTING THERE FR OM THE SAPLINGS PRICE AND INTEREST. THE LEARNED AR OF THE ASSESSEE THEN R EFERRED TO THE DEFINITION OF AGRICULTURAL INCOME AS DEFINED IN S ECTION 2(1A) OF THE ACT. FROM THIS DEFINITION HE EMPHASIZED THAT AGRICULTURA L INCOME CAN ARISE ONLY IN RESPECT OF INCOME DERIVED FROM LAND WHICH I S USED FOR AGRICULTURAL PURPOSES. THUS, EVEN THOUGH SAPLINGS ARE IN THE NA TURE OF AGRICULTURE BUT IF PURPOSE IS NOT AGRICULTURE THEN INCOME OR LOSS C OULD NOT BE OF AGRICULTURE NATURE. IN THE CASE OF THE ASSESSEE SAP LING PRODUCTION IS NOT FOR THE PURPOSE OF CARRYING OUT AGRICULTURAL ACTIVITY B UT IT IS A PART OF OVERALL ACTIVITIES UNDERTAKEN BY THE ASSESSEE TO ENSURE UNI NTERRUPTED SUPPLY OF RAW MATERIAL FOR THE PURPOSE OF BUSINESS. THE ASSES SEE ONLY PROVIDES ASSISTANCE TO THE FARMERS FOR PLANTATION OF GOOD SA PLINGS. THUS THE USE OF THE LAND IS NOT FOR THE PURPOSE OF AGRICULTURE BUT WITH THE ULTIMATE OBJECTIVE TO PROCURE RAW MATERIAL LIKE BAMBOO AND H ARDWOOD. THE ACTIVITIES OF AGRICULTURE ARE ONLY INCIDENTAL TO TH E ATTAINMENT OF ULTIMATE OBJECTIVE OF THE ASSESSEE FOR RUNNING ITS MANUFACTU RING UNINTERRUPTED. THE INCOME DERIVED FROM THE SALE OF SAPLINGS ONLY REDUC ES THE COST OF RAW MATERIAL AND THEREFORE IT SHOULD NOT BE VIEWED IND EPENDENT OF OTHER ACTIVITIES OF PROCURING RAW MATERIALS FOR ITS MANUF ACTURING ACTIVITIES. THE INTENTION OF THE ASSESSEE IS NOT TO DERIVE INCOME F ROM SUCH SALE BUT TO ENSURE COMMITMENT TO GROW THE TREES IN THE FIELDS O F THE FARMERS FOR ULTIMATE SUPPLY TO THE ASSESSEE. THE LEARNED AR OF THE ASSESSEE SUBMITTED 26 THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE ARE NO T EXCLUSIVELY FOR GROWING SAPLINGS BUT INCLUDE EXPENDITURES INCURRED ON SUPERVISION, MONITORING AND PROCURING TREES AND RELATES EXPENSES . THEREFORE, IT IS UNREASONABLE TO ADOPT THE ENTIRE EXPENSES CLAIMED B Y THE ASSESSEE AS PERTAINING TO GROWING SAPLINGS ALONE. THEREFORE, IN CASE ACTIVITIES OF THE ASSESSEE ARE TREATED AS AGRICULTURAL ACTIVITIES THE N ONLY THOSE EXPENSES ARE REQUIRED TO BE DISALLOWED WHICH WERE SPECIFICALLY I NCURRED ON GROWING SAPLINGS AND NOT WHAT IS INCURRED FOR MONITORING AN D SUPERVISION FOR GROWING TREES BY THE FARMERS. THE LEARNED AR OF THE ASSESSEE FURTHER SUBMITTED THAT THE INTENTION OF THE ASSESSEE IS IMP ORTANT IN DETERMINING THE NATURE OF INCOME. HE SUBMITTED FOLLOWING DETAIL S TO BUTTRESS HIS ARGUMENT THAT ALL THE EXPENDITURE OF RS. 3,16,12,46 9/- INCURRED BY THE FORESTRY DIVISION OF THE ASSESSEE WERE NOT INCURRED ON GROWING SAPLINGS ALONE : 8.5.4 IT WAS FURTHER SUBMITTED BY THE LEARNED AR OF THE ASSESSEE THAT THE ASSESSING OFFICER HAS ACCEPTED THAT THE SOCIAL FORE STRY EXPENSES CLAIMED BY THE APPELLANT ALSO INCLUDED THE EXPENDITURE INCURRE D BY THE APPELLANT SUBSEQUENT TO THE SALE OF SAPLINGS. HOWEVER, THE AS SESSING OFFICER HAS 27 MISINTERPRETED THE OBJECT OF THE INCURRENCE OF THE EXPENDITURE BY THE APPELLANT IN HOLDING THAT THE APPELLANT MAY BE MAKI NG PROFIT FROM PLANT NURSERY ACTIVITY. IN FACT IT HAS MADE AN OVERALL L OSS DUE TO ITS COMMITMENT TO FARMERS IN MAINTENANCE OF PLANTATION. IT IS SUBMITTED THAT THE AFORESAID OBSERVATION OF THE ASSESSING OFFICER IS MISCONCEIVED IN AS MUCH AS INCURRING FORESTRY EXPENSES IS NOT PROMPTED BY ANY COMMITMENT TO HELP THE FARMERS IN MAINTENANCE OF PLANTATION BU T WITH THE SOLE OBJECT TO GET THE DESIRED QUALITY AND QUANTITY OF RAW MATE RIAL NECESSARY FOR THE PRODUCTION OF PAPER AND BOARD IN WHICH THE APPELLAN T IS ENGAGED. THE AMOUNT DISALLOWED BY THE ASSESSING OFFICER IS NOT A LOSS INCURRED IN CARRYING OUT ANY AGRICULTURAL ACTIVITY BUT IS AN EX PENDITURE INCURRED WITH THE SOLE OBJECT OF ENSURING THE TIMELY SUPPLY OF AD EQUATE QUALITY AND QUANTITY OF RAW MATERIAL NECESSARY FOR THE PRODUCTI ON OF PAPER AND BOARD, WHICH IS OTHERWISE NOT AVAILABLE IN ADEQUATE QUANTI TY. 8.5.5 IN THE ALTERNATIVE IT WAS SUBMITTED THAT IF THE SALE OF SAPLINGS IS CONSIDERED BY THE REVENUE TO BE INCOME FROM AGRICUL TURAL ACTIVITIES AND RELATED EXPENDITURE IS DISALLOWABLE, THEN THE EXPEN DITURE INCURRED BY THE APPELLANT SUBSEQUENT TO THE SALE OF THE SAPLINGS CA NNOT BE DISALLOWED AS THE SAME DOES NOT RELATE TO SALE OF SAPLINGS BUT TO THE PROCUREMENT OF TREES BY THE APPELLANT AND FORMS A PART OF THE RAW MATERI AL COST. SIMILARLY, THE COST INCURRED BY THE APPELLANT ON THE PROCUREMENT O F SEEDS FOR GROWING SAPLINGS TO THE EXTENT THE SAME ARE DISTRIBUTED FRE E OF COST TO THE FARMERS CANNOT BE SAID TO BE EXPENDITURE INCURRED ON AGRICU LTURAL OPERATIONS BY THE APPELLANT AND, THUS, CANNOT BE DISALLOWED UNDER SECTION 14A OF THE ACT AS AGRICULTURAL LOSS. 8.5.6 THE LEARNED AR OF THE ASSESSEE SUBMITTED T HAT ONE CONTENTION OF THE ASSESSING OFFICER IS THAT THE EXPENSES CLAIME D BY THE APPELLANT ON ACCOUNT OF SOCIAL FORESTRY SHOULD HAVE BEEN SHOWN A S WORK-IN-PROGRESS IN 28 THE PROFIT & LOSS ACCOUNT AS THE TREES FROM THE SAP LINGS SUPPLIED BY THE APPELLANT TO THE FARMERS WOULD BE AVAILABLE FOR USE BY THE APPELLANT ONLY AFTER THE EXPIRY OF 5 TO 7 YEARS. IN THIS REGARD, I T WAS SUBMITTED BY THE LEARNED AR OF THE ASSESSEE THAT THE EXPENDITURE INC URRED BY THE APPELLANT TOWARDS FORESTRY CANNOT BE REGARDED AS WORK-IN-PROG RESS OF A PROJECT. THE EXPENDITURE HAS BEEN INCURRED IN ORDER TO PURCHASE RAW MATERIAL NECESSARY FOR PRODUCTION OF PAPER AND NOT TO CREATE A CAPITAL ASSET WHICH COULD BE KEPT AS WORK IN PROGRESS. THE EXPENDITURE INCURRED IS PURELY OF REVENUE NATURE. THERE IS NO REQUIREMENT UNDER ACCOUNTING ST ANDARDS OR TAX LAWS TO KEEP SUCH EXPENDITURE ACCUMULATED AS WORK IN PROGRE SS AND CLAIM THE SAME AS EXPENDITURE ONLY AT THE TIME OF PURCHASE OF TREES. THUS, LD. A.R. PRAYED THAT THE ASSESSING OFFICER MAY BE DIRECTED T O ALLOW THE EXPENDITURE INCURRED BY THE APPELLANT TOWARDS FORESTRY. 8.5.7 WHILE ADVANCING ALTERNATIVE CONTENTION, IT W AS SUBMITTED THAT SUCH EXPENDITURE SHOULD BE CONSIDERED AS RELATING TO AGR ICULTURAL OPERATIONS AS THEY WERE INCURRED ON ACTIVITIES PERFORMED ON LAND I.E. UPTO PRIMARY BED STAGE IN SEED ROUTE PLANTATION. IN THE EVENT THIS I S NOT ACCEPTABLE THEN ONLY THE EXPENDITURE INCURRED UP TO THE SALE OF SAPLINGS SHOULD BE CONSIDERED AS RELATING TO AGRICULTURAL ACTIVITIES AS POST SAPL INGS SALE EXPENDITURE HAS NO RELATIONSHIP WITH THE GROWING OF SAPLINGS. T HESE IN ANY CASE SHOULD NOT BE CONSIDERED FOR THE PURPOSES OF COMPUT ING THE DISALLOWABLE AMOUNT. IN THIS REGARD IT WAS SUBMITTED THAT IN THE CLONAL ROUTE PRODUCTION THERE IS NO USE OF SOIL AND THEREFORE, THE EXPENDIT URE INCURRED IN CLONAL PRODUCTION SHOULD NOT BE CONSIDERED AS AGRICULTURAL RELATED EXPENSES. MIST CHAMBERS ARE USED IN CLONAL ROUTE PRODUCTION AND TH EREFORE, THE DEPRECIATION ON ASSETS IN THE MIST CHAMBERS AMOUNTI NG TO RS.768675 (FORMING PART OF TOTAL DISALLOWANCE OF RS.2,78,29,0 39) DISALLOWED IN THE ASSESSMENT ORDER NEEDS TO BE EXCLUDED BESIDES THE E XPENDITURE INCURRED IN CLONAL ROUTE PRODUCTION OF SAPLINGS. 29 8.5.8. AFTER MAKING THE ABOVE SUBMISSIONS, THE LE ARNED AR OF THE ASSESSEE POINTED OUT THAT THE ENTIRE EXPENDITURE OF RS.316.12 LAKHS WAS NOT INCURRED ON AGRICULTURAL ACTIVITIES. PART OF IT WAS INCURRED ON GROWING SEEDS ON LAND, TRANSFERRING THE SMALL SAPLINGS INTO PLASTIC BAGS AND THEN ON SUPERVISION UNDER CONTROLLED CONDITIONS FOR ALLOWIN G THE SAPLINGS TO GROW UP TO 30 CMS BEFORE SALES. IN ADDITION, THESE EXPEN SES ALSO INCLUDED EXPENSES ON SUPERVISION OF TREES GROWN BY THE FARME RS TILL THE TIME OF PURCHASE OF TREES FROM THEM. SEEDS ARE DISTRIBUTED TO THE FARMERS ALSO IN ADDITION TO SALE OF SAPLINGS. TOTAL EXPENDITURE INC URRED ON DISTRIBUTION OF SEEDS TO THE FARMERS AND ON SUPERVISION OF GROWING TREES BY THE FARMERS WAS WORKED OUT AT RS.249.13 LAKHS. ON THE OTHER H AND TOTAL EXPENDITURE INCURRED ON IN-HOUSE GROWING OF SAPLINGS AMOUNTED T O RS.66.99 LAKHS ONLY. THE LEARNED AR OF THE ASSESSEE THEN SUBMITTED THAT SAPLINGS GROWN THROUGH CLONAL ROUT DOES NOT REQUIRE ANY OPERATION ON THE LAND. THE SMALL SHOOTS, CALLED COPPICE SHOOTS, WHICH ARISE FROM STA MPS OF EUCALYPTUS TREES IN FARMERS FIELD, ARE COLLECTED BY THE STAFF OF THE COMPANY FROM VARIOUS AREAS. THESE SHOOTS ARE OF NO USE TO THE FA RMERS AND ARE GENERALLY DESTROYED BY THEM. THE STAFF OF THE COMPANY AFTER C OLLECTING THESE SHOOTS CUT THEM INTO SMALL PIECES. THESE CUTTINGS ARE THEN TREATED IN BAVISTIN FUNGICIDE TO AVOID ANY FUNGAL INFECTION. ONE END IS THEN DIPPED IN A ROOTING HORMONE AND THEN THESE CUTTINGS ARE PLACED IN ROOT TRAINER BLOCKS HAVING AN ARTIFICIAL MEDIUM CALLED VERMICULITE. THE SE COPPICES ARE THEN PLACED IN MIST CHAMBERS UNDER CONTROLLED CONDITIONS OF TEMPERATURE (38 DEGREES C) & HUMIDITY 85% FOR ABOUT 45 DAYS IN WHIC H THE ROOTS AND SHOOTS DEVELOP. THEREAFTER THEY ARE BROUGHT INTO HA RDENING CHAMBERS FOR A PERIOD OF 15 30 DAYS. THESE PLANTS ARE THEN TRA NSPORTED TO THE FARMERS FIELD AS PER THEIR REQUIREMENT AND SALE PROCEEDS AR E COLLECTED THROUGH BANK. THUS CLONAL ROOT IS PURELY A TECHNICAL PROCES S WHERE NO SOIL IS USED AT ANY STAGE. 30 8.5.9 THE LEARNED AR OF THE ASSESSEE SUBMITTED IN ALTERNATIVE THAT THE ENTIRE ACTIVITIES ARE INTEGRAL AND HAS BEEN CARRIED OUT FOR COMMERCIAL EXIGENCIES FOR PROCURING RAW MATERIAL FOR THEIR PLA N. IF IT IS CONSIDERED THAT SOME PART OF THE EXPENDITURE IS INCURRED IN AG RICULTURAL OPERATION THEN A REASONABLE PROPORTION OF SUCH EXPENSES BE ONLY DI SALLOWED AND NOT THE ENTIRE EXPENDITURE OF RS.316.12 LAKHS REDUCED BY SA LE PROCEEDS OF RS.45.52 LAKHS. 8.6. AGAINST THIS, THE LEARNED DR SUBMITTED THAT TH E ASSESSEE HAS BEEN ACTUALLY CARRYING OUT AGRICULTURAL OPERATION OVER T HE LAND TO GROW SAPLINGS. HE REFERRED TO THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF CIT V. RAJA BENOY KUMAR SAHAS ROY (1957) 32 ITR 466(SC) WHEREIN IT IS HELD THAT AGRICULTURAL OPERATION MEAN S TILLING OF THE LAND, SOWING OF THE SEEDS, PLANTING AND SIMILAR OPERATION ON THE LAND. THESE BASIC OPERATIONS REQUIRE THE EXPENDITURE OF HUMAN S KILL UPON THE LAND ITSELF. THUS ACCORDING TO THE LEARNED DR THESE OPER ATIONS ARE ABSOLUTELY NECESSARY FOR THE PURPOSE OF RAISING PRODUCES FROM THE LAND. WHEN THE PRODUCE SPROUTS FROM THE LAND, FURTHER OPERATION SU CH AS WEEDING, DIGGING THE SOIL AROUND THE GROWTH, REMOVAL OF UNDESIRABLE UNDERGROWTH, AND ALL OPERATIONS WHICH FOSTER THE GROWTH ARE CARRIED OUT FOR PRESERVATION OF THE SAME NOT ONLY FROM INSECTS AND PESTS BUT ALSO FROM DEPREDATION FROM OUTSIDE, TENDING, PRUNING, CUTTING, HARVESTING AND RENDERING THE PRODUCE FIT FOR THE MARKET. THEY WOULD ALL BE AGRICULTURAL OPERATIONS WHEN TAKEN IN CONJUNCTION WITH THE BASIC OPERATIONS. WHILE GRO WING SAPLINGS THE ASSESSEE USES THE LAND, CARRIES OUT BASIC OPERATION S AND WHEN SAPLINGS ARE GROWN TO CERTAIN HEIGHTS THEY ARE SOLD TO THE FARME RS. THEREFORE, ENTIRE EXPENDITURE INCURRED RELATES TO AGRICULTURAL INCOME . THEREFORE, THE LOSS INCURRED THEREON SHOULD BE DISALLOWED U/S.14A OF TH E ACT. 31 8.7. IN THE REJOINDER THE LEARNED AR OF THE ASSES SEE SUBMITTED THAT EXPLANATION 3 IN CLAUSE (1A) OF SECTION 2 INTRODUCE D BY THE FINANCE ACT, 2008 PROVIDING THAT ANY INCOME DERIVED FROM SAPLING S OR SEEDLINGS GROWN IN A NURSERY SHALL BE DEEMED TO BE AGRICULTURAL INC OME WOULD BE APPLICABLE W.E.F. 1.4.2009 MEANING THEREBY THAT PRI OR TO THIS THE INCOME EARNED BY THE ASSESSEE FROM SAPLINGS OR SEEDLING GR OWN IN FORESTRY SHALL NOT BE TREATED AS AGRICULTURAL INCOME. 8.8.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE MATERIALS ON RECORD. IN OUR CONSIDERED VIEW, THE AS SESSEE IS CARRYING OUT SEVERAL OPERATIONS INCLUDING OPERATIONS ON THE LAND . THESE OPERATIONS, AS GATHERED FROM THE ASSESSMENT ORDER, ORDER OF THE LE ARNED CIT(A) AND FROM THE SUBMISSIONS OF BOTH THE PARTIES, ARE (I) ASSESSEE IS GROWING SAPLINGS OVER THE LAND OWNE D BY THE ASSESSEE ON WHICH ALL THE BASIC OPERATION LIKE TILL ING OF THE LAND, SOWING OF THE SEEDS, PLANTING AND SIMILAR OPERATION S IN ADDITION TO WEEDING, REMOVAL OF UNDESIRABLE GROWTH, CUTTINGS, MAKING THE SAPLINGS FIT FOR SALE TO THE FARMERS ARE CARRIED OUT. (II) IN ADDITION, THE ASSESSEE IS PROCURING COPPICE SHOOTS FROM THE LAND OF THE FARMERS, CARRYING OUT CHEMICAL PROC ESS AND GROWING THEM UNDER CONTROLLED CONDITIONS. THERE IS NO USE O F LAND FOR THE PURPOSE OF GROWING THESE COPPICE SHOOTS. (III) THE ASSESSEE HAS ALSO SPENT MONEY ON DISTRIBU TING THE SEEDS, CONVEYANCE, SALARIES OF THE STAFF ETC., FOR THE PUR POSE OF SUPERVISION OF GROWING OF TREES BY THE FARMERS. NO BASIC OPERAT ION OVER THE LAND IS CARRIED OUT BY THE ASSESSEE. 32 8.8.2. IT IS HELD IN THE CASE OF CIT V. RAJA BENO Y KUMAR SAHAS ROY (1957) 32 ITR 466 (SC) THAT INCOME GENERATED FROM T HE ACTIVITIES CARRIED OUT ON THE LAND WILL ONLY BE TREATED AS AGRICULTURA L INCOME AND NOT ANY OTHER INCOME GENERATED BY CARRYING OUT SUBSIDIARY O R SUBSEQUENT OPERATIONS NOT CONNECTED WITH THE USE OF THE LAND. THE MOST IMPORTANT ASPECT OF HOLDING AN INCOME AS AGRICULTURAL INCOME IS THAT THE ASSESSEE MUST USE LAND FOR CARRYING OUT BASIC OPERATION RIGH T FROM THE TILLING OF THE LAND UP TO HARVESTING. IN THIS REGARD FOLLOWING OBS ERVATION OF HONBLE SUPREME COURT IS RELEVANT: THE MERE PERFORMANCE OF THESE SUBSEQUENT OPERATIONS ON THE PRODUCTS OF THE LAND, WHERE SUCH PRODUCTS HAVE NOT BEEN RAISED ON T HE LAND BY THE PERFORMANCE OF THE BASIC OPERATIONS, WOULD NOT BE E NOUGH TO CHARACTERISE THEM AS AGRICULTURAL OPERATIONS; IN ORDER TO INVEST THEM WITH THE CHARACTER OF AGRICULTURAL OPERATIONS THESE SUBSEQUENT OPERATIONS MUST NECESSARILY BE IN CONJUNCTION WITH AND IN CONTINUATION OF THE BASIC O PERATIONS WHICH ARE THE EFFECTIVE CAUSE OF THE PRODUCTS BEING RAISED FROM T HE LAND. THE SUBSEQUENT OPERATIONS DIVORCED FROM THE BASIC OPERATIONS CANNO T CONSTITUTE BY THEMSELVES AGRICULTURAL OPERATIONS. ONLY IF THIS INTEGRATED ACTIVITY WHICH CONSTITUTES AGRICULTURE IS UNDERTAKEN AND PERFORMED IN REGARD TO ANY LAND CAN THAT LAND BE SA ID TO HAVE BEEN USED FOR 'AGRICULTURAL PURPOSES' AND THE INCOME DERIVED THER E FROM BE SAID TO BE 'AGRICULTURAL INCOME' DERIVED FROM THE LAND BY AGRI CULTURE, UNDER SECTION 2(1) OF THE INDIAN INCOME-TAX ACT, 1922. AGRICULTURE COMPRISES WITHIN ITS SCOPE THE BASIC AS WELL AS THE SUBSEQUENT OPERATIONS DESCRIBED ABOVE REGARDLESS OF THE NATURE OF THE PRODUCTS RAISED ON THE LAND. XXXXXXXXXXXXXXXXXXXXXXXX THERE IS NO WARRANT AT ALL FOR EXTENDING THE TERM ' AGRICULTURE' TO ALL ACTIVITIES WHICH HAVE SOME RELATION TO THE LAND OR ARE IN ANY WAY CONNECTED WITH THE LAND, FOR THE TERM AGRICULTURE CANNOT BE DISSOCIATE D FROM THE PRIMARY SIGNIFICANCE THEREOF, WHICH IS THAT OF CULTIVATION OF THE LAND. THE EXTENSION OF THE TERM 'AGRICULTURE' TO DEMOTE SUCH ACTIVITIES AS BREEDING AND REARING LIVESTOCK, DAIRY FARMING, BUTTER AND CHEESE-MAKING, AND POULTRY FARMING, IS AN UNWARRANTED DISTORTION OF THE TERM 33 8.8.3. THE ABOVE DECISION IN THE CASE OF CIT V. R AJA BENOY KUMAR SAHAS ROY (SUPRA) WAS FURTHER EXPLAINED BY THE HON BLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX, BIHAR AN D ORISSA V. RAMAKRISHNA DEO (1959) 35 ITR 312 (SC) , WHEREIN IT IS HELD THAT IF FORESTRY ARE SPONTANEOUSLY GROWN AND SOLD THEN INCO ME DERIVED FROM THE SALE OF SUCH TREES WOULD NOT BE AGRICULTURAL INCOME . IN SUCH A CASE HONBLE SUPREME COURT HELD THAT IT IS IMMATERIAL TH AT THE ASSESSEE HAS MAINTAINED A LARGE ESTABLISHMENT FOR THE PURPOSE OF PRESERVING THE FORESTS AND ASSISTING IN THE GROWTH OF THE TREES, BECAUSE EX HYPOTHESI HE PERFORMED NO BASIC OPERATIONS FOR BRINGING THE FORE STS INTO BEING. IN THE CASE OF MAHARAJADHIRAJ SIR KAMESHWAR SINGH VS. COMMISSIONER OF INCOME-TAX (1957) 32 ITR 587 (SC) SIMILAR VIEW WAS HELD THAT WHERE NO BASIC OPERATION IN AGRICULTURE ARE PERFORMED UPON T HE SOIL ITSELF BY THE ASSESSEE, THEN THERE IS NO CULTIVATION OF SOIL AT A LL. EVEN THOUGH OPERATIONS IN THE NATURE OF FORESTRY OPERATION COULD HAVE BEEN PERFORMED BY THE ASSESSEE WHICH MAY HAVE THE EFFECT OF NURSERY AND P ASTURING OF THE GROWTH OF SUCH TREES BUT THEY ARE NOT UNCOMMON IN B ASIC OPERATION OF AGRICULTURE AND CANNOT CONSTITUTE AGRICULTURE OPERA TION UNLESS THEY FORM PART AND PARCEL OF AND INTEGRATED WITH BASIC OPERAT ION. HONBLE SUPREME COURT WAS CONCERNED WITH THE ISSUE WHETHER INCOME F ROM SALE OF FOREST TREES AND SPONTANEOUS GROWTH WOULD CONSTITUTE AGRIC ULTURAL INCOME. IT WAS HELD THAT IT WILL NOT. 8.8.4. IN COMMISSIONER OF INCOME-TAX VS. JYOTIKAN A CHOWDHURANI (1957) 32 ITR 705 (SC) THE ISSUE WAS WHETHER INCOME FROM THE SALE OF SAL TREES FROM THEIR FORESTS WHICH WERE ADMITTED TO BE OF SPONTANEOUS GROWTH, WOULD BE AGRICULTURAL INCOME. IT WAS HELD T HAT WHERE NO BASIC OPERATION ON THE LAND IS CARRIED OUT THEN SUBSEQUEN T OPERATIONS ALONE WILL NOT RESULT INTO AGRICULTURE INCOME. IN THIS REGARD WE REFER TO FOLLOWING PART OF THE HEAD NOTES FROM THE ABOVE JUDGMENT: 34 IT WAS CLAIMED THAT THE INCOME FROM SALE OF SAL TR EES WAS AGRICULTURAL INCOME AS IN ADDITION TO THE MAINTENANCE OF A FOREST ESTAB LISHMENT HUMAN SKILL AND LABOUR WERE EMPLOYED IN THE FOLLOWING OPERATIONS: ( A) RESERVATION OF BLOCKS OF FOREST AND THEIR OPERATION BY ROTATION; (B) MARKING OF TREES FOR FELLING; (C) CREEPER AND CLIMBER CUTTING; (D) THINNING AND REMOV AL OF DISEASED AND UNSOUND TREES; (E) CLEARING OF JUNGLES AND UNDERGRO WTHS; (F) ALLOWING GRAZING IN CERTAIN MONTHS; (G) BURNING UNDERGROWTHS IN CERT AIN MONTHS; (H) PROTECTION FROM FIRE AND MAINTENANCE OF FIRE LINES; (I) CLOSUR E OF FORESTS TO MEN AND CATTLE DURING THE RAINY SEASON; AND (J) PRESERVATION OF MO THER TREES: _HELD,_ (ASSUMING THAT THE OPERATIONS WHICH THE ASS ESSEES CLAIMED HAD BEEN PERFORMED, HAD BEEN PROVED), THE OPERATION IN FORES TRY WERE PERFORMED AFTER THE PRODUCE HAD SPROUTED FROM THE SOIL AND NO HUMAN SKILL AND LABOUR WAS SPENT BY THE ASSESSEES ON THE CULTIVATION OF THE FO REST LAND; NOR WERE ANY OPERATIONS PERFORMED ON THE LAND ITSELF. EVEN THOUG H THE OPERATIONS PERFORMED BY THE ASSESSEES HAD THE EFFECT OF INCREASING THE P RODUCE OF THE FOREST, THE FORESTS REMAINED FORESTS OF SPONTANEOUS GROWTH. NOT ONE OF THOSE OPERATIONS WAS ASSIMILATED TO THE BASIC OPERATIONS IN AGRICULT URE; AND AS THERE WAS NOT EVEN ONE BASIC OPERATION ON THE LAND ITSELF, THE OP ERATIONS PERFORMED COULD NOT BE TACKED ON TO ANY SUCH BASIC OPERATIONS SO AS TO CONVERT THEM INTO AGRICULTURAL OPERATIONS; THE INCOME DERIVED BY THE ASSESSEES FROM THE SALE OF SAL TREES OF SPONTANEOUS GROWTH WAS, THEREFORE, NOT AGRICULTURAL INCOME UNDER SECTIONS 2(I) AND 4(3)(VIII) OF THE INDIAN INCOME-T AX ACT, 1922. COMMISSIONER OF INCOME-TAX V. RAJA BENOY KUMAR SAHA S ROY [1957] 32 I.T.R. 466 APPLIED. 8.8.5. DEVELOPING ABOVE CONCEPT HONBLE RAJASTHAN HIGH COURT IN NARDEO SINGH KURABAD VS. COMMISSIONER OF AGRICULTUR AL INCOME-TAX (ADDL) (1962) 46 ITR 125 (RAJ) HELD AS UNDER: WHERE THE PRODUCTS ON THE LAND HAVE NOT BEEN RAISED BY THE PERFORMANCE OF THE BASIC OPERATIONS SUCH AS PLOUGHING THE LAND, PL ANTING OR SOWING SEEDS, ETC., THE SUBSEQUENT OPERATIONS CANNOT BY THEMSELVE S, BE REGARDED AS AGRICULTURAL OPERATIONS SO AS TO MAKE THE INCOME DE RIVED FROM SUCH PRODUCTS, AGRICULTURAL INCOME; BUT, IF THERE IS EVIDENCE TO S HOW THAT IN SOME AREAS BASIC AGRICULTURAL OPERATIONS HAVE BEEN MADE, FOR INSTANC E, IF THE TREES ARE COPPICED IN SUCH A MANNER THAT THE COPPICED SHOOTS MAY COME UP WITHOUT ANY ASSISTANCE OR THAT AT PLACES WHERE THERE ARE GAPS P LANTING HAS BEEN DONE AFTER EXCAVATION OF PITS AND TRENCHES, TO THAT EXTENT THE INCOME FROM THE PRODUCTS WILL BE AGRICULTURAL INCOME, AND THIS IS A MATTER O F EVIDENCE WHICH WILL HAVE TO BE INVESTIGATED BY THE DEPARTMENT. 35 THUS ONLY TO THE EXTENT THAT PLANTATION IS DONE AFT ER EXCAVATION OF TRENCHES AND PITS INCOME FROM PRODUCE WILL BE AGRIC ULTURE INCOME. 8.8.6. HONBLE ALLAHABAD HIGH COURT IN MAHARAJA VIBHUTI NARAIN SINGH (H.H.) VS. STATE OF UTTAR PRADESH (1967) 65 I TR 364 (ALL) HELD THAT MERELY GROWING PLANTS IN A NURSERY WOULD NOT YIELD AGRICULTURE INCOME. BASIC OPERATION ON THE LAND IS NECESSARY. IT IS HEL D IN THIS CASE AS UNDER: USUALLY, NURSERIES ARE MAINTAINED AND RUN AS BUSINE SS QUITE INDEPENDENTLY OF AGRICULTURAL AND THEY MAY BE NO PROCESS CARRIED ON UPON THE LAND AT ALL IN RUNNING A NURSERY. EVEN IF THE KEEPING OF A NURSERY NECESSARILY INVOLVES THE USE OF SOME LAND AND EARTH FOR THE PURPOSES OF REAR ING PLANTS, THAT WOULD NOT BY ITSELF AMOUNT TO THE CARRYING ON OF A PRIMARY AG RICULTURAL OPERATION IN THE SENSE OF CULTIVATING THE SOIL. HOWEVER CASES MAY AR ISE IN WHICH A NURSERY MAY BE MAINTAINED BY A FARMER AS AN AID OR NECESSARY AD JUNCT TO THE PRIMARY PROCESS OF AGRICULTURAL CARRIED ON BY HIM. [IN THIS CASE IT WAS HELD THAT THE MATERIALS PLACED BEFORE THE AGRICULTURAL INCOME-TAX AUTHORITIES COULD NOT JUSTIFY THE CONCLU SION THAT THE INCOME FROM THE NURSERIES CONSTITUTED AGRICULTURAL INCOME.] 8.8.7. HONBLE A.P. IN ADDITIONAL COMMISSIONER OF INCOME-TAX VS. CHALLAPALLI SUGARS LTD. (1979) 116 ITR 648 (A.P.) H ELD THAT IT IS ONLY THE EXPENSES ACTUALLY INCURRED FOR AGRICULTURAL LIKE TI LLING OF THE LAND, SOWING OF THE SEEDS, PLANTING AND SIMILAR OPERATIONS CARRI ED ON THE LAND, THAT CAN BE DESCRIBED AS EXPENDITURE INCURRED FOR AGRICULTUR E AS A CULTIVATOR. 8.8.8. REGARDING THE ARGUMENT OF THE LEARNED AR O F THE ASSESSEE THAT GROWING SAPLINGS, NURSING THEM AND SELLING TO FARM ERS FOR GROWING TREES IS AN INTEGRAL PART OF BUSINESS OF THE ASSESSEE FOR PROCURING RAW MATERIALS TO BE USED IN THE BUSINESS OF MANUFACTURING AND SAL E OF PAPER AND BOARD, WE ARE OF THE VIEW THAT THE PRINCIPLE OF BUSINESS I NTEGRITY, EXIGENCIES AND PRUDENCE WOULD COME INTO OPERATION ONLY WHEN INCOME GENERATED COMES WITHIN THE STATUTORY PROVISIONS. IF ANY EXPENDITURE IS OTHERWISE ALLOWABLE 36 UNDER THE I.T.ACT,, ONLY THEN THOSE PRINCIPLES WILL COME INTO PLAY. AGRICULTURAL INCOME AND AGRICULTURAL EXPENSES ARE O UTSIDE THE PURVIEW OF THE I.T.ACT. BUSINESS URGENCY OR JUSTIFICATION IN CARRYING OUT FARMING OR GROWING SAPLINGS IS NOT THE ANSWER TO THE CONSTITUT IONAL DEFINITION OF SUBJECT BETWEEN UNION AND STATE LEGISLATURE. IN A S IMILAR CASE ITAT KOCHIN IN THE CASE OF KANCOR FLAVOURS AND EXTRACTS LTD. VS. DEPUTY COMMISSIONER OF INCOME-TAX 312 ITR (AT) 148 (ITAT, COCHIN) HELD AS UNDER: THE PRINCIPLES OF BUSINESS EXPEDIENCY AND BUSINESS PRUDENCE COME INTO PLAY ONLY WHEN THE SCENARIO IS WITHIN THE FRAMEWORK OF T HE CONSTITUTIONAL PROVISIONS. ONLY IF AN EXPENSE IS OTHERWISE ALLOWAB LE UNDER THE INCOME-TAX ACT, 1961 WOULD THESE PRINCIPLES COME INTO PLAY. AG RICULTURAL INCOME AND AGRICULTURAL EXPENSES ARE OUTSIDE THE PURVIEW OF TH E INCOME TAX ACT, 1961. THE BUSINESS URGENCY AND JUSTIFICATION OF THE ASSESSEE IN INCURRING FARMING EXPENSES IS NOT AN ANSWER TO THE CONSTITUTIONAL DIV ISION OF SUBJECTS MADE BETWEEN THE UNION AND STATE LEGISLATURES. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFAC TURING EXTRACTS FROM SPICES. ONE OF THE PRINCIPAL RAW MATERIALS IN THE A SSESSEE'S BUSINESS WAS WHITE CHILLIES. THE STATE OF KARNATAKA WAS THE MAIN SOURC E FOR PROCURING WHITE CHILLIES REQUIRED FOR THE BUSINESS OF THE ASSESSEE. IN ORDER TO PROMOTE THE AVAILABILITY OF WHITE CHILLIES WITHOUT ANY INTERRUP TION, AND TO IMPRESS UPON THE FARMERS IN KARNATAKA TO ADOPT BETTER FARMING PRACTI CES, THE ASSESSEE TOOK AGRICULTURAL LAND ON LEASE FOR THE CULTIVATION OF W HITE CHILLIES AND INCURRED EXPENSES TOWARDS CULTIVATING WHITE CHILLIES, WHICH INCLUDED COST OF SEEDS, LABOUR CHARGES, PURCHASE OF MANURE, PESTICIDES, TIL LING, WEEDING, LAND RENT AND OTHER EXPENSES. THE ASSESSEE DEBITED ALL THESE EXPENSES TO ITS PROFIT AND LOSS ACCOUNT AND CREDITED THE INCOME FROM SALE OF T HE AGRICULTURAL PRODUCE TO THE PROFIT AND LOSS ACCOUNT. IN THE ASSESSMENT YEAR S 1994-95 AND 1996-97 ITS LOSS FROM THE AGRICULTURAL OPERATIONS EXCEEDED THE INCOME FROM SALE OF THE AGRICULTURAL PRODUCE. THE ASSESSING AUTHORITY HELD THAT THE NET FARMING EXPENSES CLAIMED BY THE ASSESSEE WERE IN THE NATURE OF EXPENSES INCURRED FOR AGRICULTURAL OPERATIONS AND NOT DEDUCTIBLE IN COMPU TING ITS TAXABLE INCOME. THIS WAS CONFIRMED BY THE COMMISSIONER (APPEALS). O N APPEAL TO THE APPELLATE TRIBUNAL : _ HELD ,_ DISMISSING THE APPEALS, THAT ALTHOUGH THERE WAS A NEXUS BETWEEN THE FARMING EXPENSES INCURRED BY THE ASSESSEE AND THE B USINESS CARRIED ON BY THE ASSESSEE, THE EXPENSES COULD BE ALLOWED AS A DEDUCT ION UNDER 37 ONLY IF THE EXPENSES WERE OTHERWISE CONSIDERED AS EXPENDITURE I N COMPUTING THE BUSINESS INCOME OF THE ASSESSEE-COMPANY. THE FARMING OPERATI ONS CARRIED ON BY THE ASSESSEE-COMPANY WERE NOTHING BUT AGRICULTURAL OPER ATIONS. IF THERE HAD BEEN A SURPLUS OF AGRICULTURAL INCOME, IT COULD NOT HAVE BEEN CONSIDERED FOR TAXATION AND EXACTLY IN THE LIKE MANNER THE EXPENDI TURE INCURRED FOR FARMING 37 OPERATIONS COULD NOT BE CONSIDERED AS ADMISSIBLE EX PENSES IN COMPUTING THE BUSINESS INCOME OF THE ASSESSEE. THE EXPENSES RELAT ING TO AGRICULTURAL OPERATIONS COULD NOT BE ALLOWED AS EXPENDITURE IN C OMPUTING THE BUSINESS INCOME . THUS EXPENDITURE INCURRED ON COST OF SEEDS, LABOUR CHARGES, PURCHASE OF MANURE, PESTICIDE, TILLING, WEEDING, LA BOUR AND OTHER EXPENSES FOR THE PURPOSE OF GROWING SPICE TO STANDA RD QUALITY AND DEBITED TO THE P & L ACCOUNT BY THE ASSESSEE WHO IS CARRYING OUT THE BUSINESS OF MANUFACTURING OF SPICE EXTRACT, AND FORMING PART OF TOTAL EXPENSES CLAIMED BY THE ASSESSEE WERE IN THE NATURE OF EXPENSES INCURRED FOR AGRICULTURAL OPERATION AND NO T DEDUCTIBLE IN COMPUTING ITS TAXABLE INCOME. IN THE SAME WAY AS SU RPLUS OF AGRICULTURAL INCOME CANNOT BE CONSIDERED FOR TAXATI ON THEN NET LOSS/EXPENSES RELATING TO SUCH AGRICULTURAL OPERATI ON CANNOT BE ALLOWED AS EXPENDITURE FOR COMPUTING THE BUSINESS I NCOME. THEREFORE, WE ARE NOT IMPRESSED WITH THE ARGUMENT O F THE LEARNED AR OF THE ASSESSEE THAT THE ACTIVITIES OF GROWING S APLINGS ON THE LAND SHOULD BE CONSIDERED AS INTEGRAL PART OF OVERA LL BUSINESS ACTIVITIES OF THE ASSESSEE AND ACCORDINGLY BE ALLOW ED AS BUSINESS EXPENSES. 8.8.9. FROM A CARE FULL READING OF ALL ABOVE JUDGME NTS ON THE SUBJECT WE CULL OUT FOLLOWING PRINCIPLES: A. EXPENSES INCURRED WILL NOT BE AGRICULTURE EXPENSES AND INCOME EARNED FROM SALE OF PRODUCE WILL NOT BE AGRICULTURE INCOME--- 1. WHERE OPERATIONS IN FORESTRY ARE PERFORMED AFTER TH E PRODUCE HAD SPROUTED FROM THE SOIL AND NO HUMAN SKILL AND LABOU R IS SPENT BY THE ASSESSEE ON THE CULTIVATION OF THE LAND. 38 2. WHERE THE PRODUCE ON THE LAND HAVE NOT BEEN RAISED BY THE PERFORMANCE OF THE BASIC OPERATIONS SUCH AS PLOUGHI NG THE LAND, PLANTING OR SOWING SEEDS, ETC., 3. ONLY FOR THE REASON THAT THERE IS A BUSINESS EXPE DIENCY AND BUSINESS PRUDENCE ; AND THERE IS A CLOSE CONNECTION OF FARMING OPERATION WITH THE BUSINESS OF THE ASSESSEE; OR THA T PRODUCT IS CLOSELY RELATED WITH THE LAND; OR THAT ULTIMATE SOU RCE OF THE PRODUCT IS LAND OR OPERATION ON THE LAND. 4. WHERE PLANTS ARE GROWN IN A NURSERY AND SOLD AFTER THE USE OF THE EARTH, BUT WITHOUT CARRYING OUT ANY BASIC OPERATION ON LAND. 5. WHERE OPERATIONS ARE CARRIED OUT WITHOUT CONJUNCTI ON WITH AND IN CONTINUATION OF THE BASIC OPERATIONS. THE SUBSEQUEN T OPERATIONS DIVORCED FROM THE BASIC OPERATIONS CANNOT CONSTITUT E BY THEMSELVES AGRICULTURAL OPERATIONS. B. EXPENSES INCURRED WILL BE AGRICULTURAL EXPENSES AND INCOME EARNED FROM THE SALE OF PRODUCE WILL BE AGRICULTURAL INCOM E IF --- 1. BASIC OPERATIONS ON THE LAND ARE CARRIED OUT AND IN CONJUNCTION AND CONTINUATION, SUBSEQUENT OPERATIONS ARE ALSO CARRIED OUT. 2. IF IN ADDITION TO CARETAKING OF SPONTANEOUS GROWTH THE ASSESSEE IN BETWEEN SUCH SPONTANEOUS GROWTH USES TH E LAND FOR SOWING THE SEEDS AFTER TILLING, THEN INCOM E FROM SUCH BASIC OPERATIONS ALONE WILL BE AGRICULTURE INC OME. 8.8.10. ON THE BASIS OF DISCUSSION MADE ABOVE WHEN WE APPLY ABOVE PRINCIPLES WE FIND THAT THE EXPENSES OF RS.249.13 LAKHS BEING EXPENSES INCURRED ON FOREST , SUPERVISION OF GROWING TREES B Y FARMERS, CONVEYANCE, 39 SALARY OF THE STAFF ENGAGED IN THAT PURPOSE COULD N OT BE TREATED AS EXPENDITURE ON AGRICULTURAL OPERATION AND THEREFORE SHOULD BE ALLOWED AS BUSINESS EXPENSES. SIMILARLY EXPENDITURE OF RS.13.4 0 LAKHS INCURRED BY THE ASSESSEE ON GROWING COPPICE SEEDS WITHOUT USING THE LAND BY PRIMARY OPERATION CANNOT BE DISALLOWED. THE ONLY EXPENDITUR E WHICH CAN BE CONSIDERED FOR DISALLOWANCE IS THE SUM OF RS.53.59 LAKHS WHICH INCLUDED A SUM OF RS.8.03 LAKHS INCURRED ON GROWING SAPLINGS ON LAND AND RS.45.56 LAKHS INCURRED ON OPERATIONS ON GROWING SA PLINGS AFTER THEIR REMOVAL FROM THE LAND. IN OUR CONSIDERED VIEW GROWI NG SAPLINGS IN THE POTS/POLYTHENE BAGS AFTER PLUCKING THEM FROM GROUND AND PLANTING THEM IN SUCH POTS IS AN INTEGRATED ACTIVITY WHICH IS IN CONJUNCTION WITH AND IN CONTINUATION OF GROWING SAPLINGS ON THE LAND AND TH EREFORE, EXPENDITURE INCURRED THERE UPON WOULD BE TREATED AS AGRICULTURA L EXPENSES AND THEREFORE HAS TO BE DISALLOWED. ACCORDINGLY, ONLY T HE EXPENSES TO THE EXTENT ON RS. 53.59 LACS WOULD BE CONSIDERED AS AGR ICULTURAL EXPENSES OUT OF TOTAL CLAIM OF EXPANSES AT RS. 316.12 LACS. AND WOULD NOT BE ALLOWED. AGAINST THIS THE ASSESSEE HAS SHOWN SALE OF AGRICUL TURE PRODUCE (RELATABLE TO GROWING OF SAPLINGS THROUGH LAND) AT RS.36.42 LA CS AND SALE OF SAPLINGS NOT RELATABLE TO AGRICULTURAL OPERATIONS AT RS.9.10 LACS. THEREFORE AGRICULTURAL LOSS WOULD BE ONLY RS.53.59 36.42 = 17.17 LACS. THE SALE OF SAPLINGS AT RS.9.10 LACS WOULD BE NON-AGRICULTURAL RECEIPTS AND THEREFORE CANNOT BE ALLOWED TO BE ADJUSTED AGAINST AGRICULTUR E EXPENSES. SO FAR AS THE DEPRECIATION OF RS.7.69 LACS (AS PER ASSESSMENT ORDER PAGE 16) IS CONCERNED THE SAME HAS BEEN CLAIMED ON MIST CHAMBE RS AND OTHER ASSETS USED IN GROWING SAPLINGS THROUGH CLONAL ROUTES WHIC H HAS BEEN TREATED AS NON-AGRICULTURAL OPERATION IN OUR DISCUSSION MADE A BOVE. THUS THE DISALLOWANCE IS RESTRICTED TO RS.17.17 LACS AND ACC ORDINGLY ASSESSEE GETS RELIEF OF RS.(278.29 17.17) = 261.12 LACS. 9. GROUND NO.5: 40 9.1 THIS GROUND RELATES TO UPHOLDING DISALLOWANCE O F RS.11,97,121 BY INVOKING THE PROVISIONS OF SECTION 145A. THE ASSESS ING OFFICER FOUND THAT THE ASSESSEE CARRIED FORWARD CENVAT CREDIT BAL ANCE FOR THE SONAGADH UNIT AT RS.5,57,431/- AND FOR THE JAYKAYPUR UNIT AT RS.8,59,156/-. IT WAS ALSO FOUND THAT THE CENVAT CREDIT AVAILABLE DURING THE YEAR, AS PER EXCISE REGISTER RG 23A ON RAW MATERIAL AND PACKING STORES ETC., WAS RS.2,96,65,636/- WHEREAS THE CORRECT FIGURE OF CEN VAT CREDIT AVAILED ON CONSUMPTION OF RAW MATERIALS AND OTHER INPUTS AMOUN TED TO RS.2,91,99,797/-. THE ASSESSING OFFICER ACCORDINGLY INFERRED THAT AS PER SECTION 145A VALUATION FOR STOCK WILL HAVE TO BE IN CREASED BY RS.11,97,121/-. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT WORKING DONE BY STATUTORY AUDIT WAS JUST TO FIND OUT THE IM PACT OF CENVAT CREDIT AVAILED DURING THE YEAR. THE ASSESSEE HAS KEPT SEP ARATE ACCOUNT OF CENVAT CREDIT AND THEREFORE IT WILL HAVE NO EFFECT ON THE TOTAL INCOME. IT IS BECAUSE IF THE VALUE OF CLOSING STOCK IS INCREASED IN THIS YEAR ON ACCOUNT OF RESIDUARY CENVAT CREDIT, THEN IT WILL HAVE A CON SEQUENTIAL EFFECT ON THE OPENING STOCK OF THE SUBSEQUENT YEAR. THE LEARNED C IT(A) REJECTED THE SUBMISSIONS OF THE LEARNED AR OF THE ASSESSEE . HE UPHELD THE FINDING OF THE ASSESSING OFFICER THAT WHERE THE MANUFACTURER I S PERMITTED TO AVAIL THE CREDIT OF THE DUTY PAID ON THE IMPORTS THEN THE SAME HAS TO BE CONSIDERED FOR THE VALUATION OF THE STOCK BOTH IN T HE OPENING AS WELL AS IN THE CLOSING STOCKS. THE TOTAL DUTY AVAILED BY THE A SSESSEE COMPANY WAS RS.2,91,99,797 ON THE BASIS OF RAW MATERIALS CONSUM ED WHEREAS THE CREDIT UTILIZED FOR FINISHED GOODS WAS RS.3,03,96,918. ACC ORDINGLY, THE DIFFERENCE IS REQUIRED TO BE ADDED AS PROFIT OF THE YEAR. 9.2 THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT I NCLUSION OF TAX DUTIES IN THE VALUE OF RAW MATERIALS OF THE CLOSING STOCK SHOULD NOT HAVE ANY EFFECT ON THE PROFIT & LOSS ACCOUNT BECAUSE THE RE WILL BE 41 CORRESPONDING DEBIT TO THE PROFIT & LOSS ACCOUNT. S INCE THE EFFECT IS NIL, IT IS ONLY ACADEMIC EXERCISE TO INCLUDE THE SAME BOTH IN THE CLOSING AS WELL AS OPENING STOCKS. 9.3 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT QUANTITIES OF OPENING STOCK AND CLOSING STOCK OF RAW MATERIALS VA RIES, THEREFORE, INCIDENCE OF EXCISE DUTY PAID WOULD VARY. IF RAW MA TERIAL IN THE CLOSING STOCK IS MORE THAN ITS VALUATION WOULD BE HIGHER ON ACCOUNT OF INCLUSION OF EXCISE DUTY WHEN ONE COMPARES LESSER QUANTITY OF OPENING STOCK WHICH WILL HAVE LESSER INCIDENCE OF EXCISE DUTY PAID. THE REFORE, PROFIT WILL BE ADVERSELY AFFECTED IF EXCISE DUTY IS EXCLUDED FROM THE VALUATION OF THE CLOSING STOCK. IN THE REJOINDER, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT IF ADDITION OF THE DIFFERENCE IN EXCISE DUTY I S CONSIDERED NECESSARY THEN CORRESPONDING VALUATION OF THE OPENING STOCK I N THE SUBSEQUENT YEAR NEEDED TO BE REVISED. 9.4 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE MATERIALS ON RECORD IN OUR CONSIDERED VIEW, PROVISI ONS OF SECTION 145A ARE REQUIRED TO BE GIVEN EFFECT IRRESPECTIVE OF CON SEQUENCES. WE AGREE WITH THE LEARNED DR THAT IF THE QUANTITIES OF RAW M ATERIALS IN OPENING STOCK AND CLOSING STOCK ARE DIFFERENT, THEN EFFECT OF INCLUSION OF EXCISE DUTY IN THE OPENING AND CLOSING STOCK WOULD NOT BE ZERO. ACCORDINGLY, AS PER SECTION 145A THE EXCISE DUTY PAID ON RAW MATERI AL WOULD BE INCLUDED IN THE OPENING STOCK AS WELL AS IN THE CLOSING STO CK AND CONSEQUENTLY OPENING STOCK OF SUBSEQUENT WERE IS NEEDED TO BE RE VISED FOR ARRIVING AT THE CORRECT PROFIT IN THE SUBSEQUENT YEAR AS WELL. HONBLE DELHI HIGH COURT IN COMMISSIONER OF INCOME-TAX VS. MAHAVIR ALU MINUM LTD. (2008) 297 ITR 77 (DEL) REFERRING TO GUIDANCE NOTE ON TAX AUDIT ISSUED BY ICAI, PARAS 23.8, 23.13, 23.14 HELD THAT WHENEVE R THERE IS A CHANGE IN 42 THE VALUATION AT ONE END, THEN THERE MUST NECESSARI LY BE A CORRESPONDING CHANGE AT THE OTHER END, OTHERWISE, THE TRUE PROFIT WOULD NOT BE REFLECTED. IN THOSE GUIDELINES FOLLOWING STEPS ARE SUGGESTED F OR VALUATION OF CLOSING STOCK: 23.8. SECTION 145A HAS BEEN ENACTED BY THE FINANCE (NO. 2) ACT, 1998, AND HAS COME INTO FORCE FROM THE ACCOUNTING Y EAR 1-4-1998 TO 31-3-1999 (ASSESSMENT YEAR 1999-2000). THIS SECTION PROVIDES THAT THE VALUATION OF PURCHASE AND SALE OF GOODS AND INV ENTORY FOR THE PURPOSE OF COMPUTATION OF INCOME FROM BUSINESS OR P ROFESSION SHALL BE MADE ON THE BASIS OF THE METHOD OF ACCOUNTING REGUL ARLY EMPLOYED BY THE ASSESSEE BUT THIS SHALL BE SUBJECT TO CERTAIN A DJUSTMENTS. THEREFORE, IT IS NOT NECESSARY TO CHANGE THE METHOD OF VALUATION OF PURCHASE, SALE AND INVENTORY REGULARLY IN THE BOOKS OF ACCOUNT. THE ADJUSTMENTS PROVIDED IN THIS SECTION CAN BE MADE WH ILE COMPUTING THE INCOME FOR THE PURPOSE OF PREPARING THE RETURN OF I NCOME. THESE ADJUSTMENTS ARE AS FOLLOWS : (A) ANY TAX, DUTY CESS OR FEE ACTUALLY PAID OR INCU RRED ON INPUTS SHOULD BE ADDED TO THE COST OF INPUTS (RAW MATERIALS, STOR ES, ETC.) IF NOT ALREADY ADDED IN THE BOOKS OF ACCOUNT. (B) ANY TAX, DUTY, CESS OR FEE ACTUALLY PAID OR INC URRED ON SALE OF GOODS SHOULD BE ADDED TO THE SALES, IF NOT ALREADY ADDED IN THE BOOKS OF ACCOUNT. (C) ANY TAX DUTY, CESS OR FEE ACTUALLY PAID OR INCU RRED ON THE INVENTORY (FINISHED GOODS, WORK-IN-PROGRESS, RAW MATERIALS, E TC.) SHOULD BE ADDED TO THE INVENTORIES, IF NOT ALREADY ADDED WHIL E VALUING THE INVENTORY IN THE ACCOUNTS. 23.13 IT MAY BE NOTED THAT WHEN THE ADJUSTMENTS ARE MADE IN THE VALUATION OF INVENTORIES, THIS WILL AFFECT BOTH THE OPENING AS WELL AS CLOSING STOCK. WHATEVER ADJUSTMENT IS MADE IN THE V ALUATION OF CLOSING STOCK, THE SAME WILL BE REFLECTED IN THE OPENING ST OCK ALSO. 9.5 WE ACCORDINGLY UPHOLD THE ADDITION MADE BY THE ASSESSING OFFICER, HOWEVER WITH THE OBSERVATION THAT THE ASSE SSMENT OF SUBSEQUENT YEARS BE REVISED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 145A. AND OBSERVATION MADE ABOVE I.E. MODIFIED VALUE OF CLOSI NG STOCK OF THIS YEAR BE TAKEN AS OPENING STOCK OF THE NEXT YEAR . 10 GROUND NO.6 10.1.1 GROUND NO.6.(A) RELATES TO COMPUTATION OF DEDUCTION U/S.80HHC. THE CASE OF THE ASSESSING OFFICER IS THA T SINCE THERE IS A LOSS IN NORMAL COMPUTATION OF INCOME, NO DEDUCTION U/S.8 0HHC IS PERMISSIBLE 43 AND THEREFORE, NO DEDUCTION U/S 80HHC IN COMPUTING THE BOOK PROFIT WILL ALSO BE ALLOWED. THE CASE OF THE ASSESSEE IS THAT I F BOOK PROFIT IS COMPUTED AS PER PART II AND III OF SCHEDULE VI O F THE COMPANIES ACT, THAN DEDUCTION U/S.80HHC SHOULD ALSO BE COMPUTED AC CORDING TO BOOK PROFIT AS PER COMPANIES ACT. THE ASSESSEE HAS RELIE D ON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. GTN TEXTILES LTD (248 ITR 372) AND UPON THE BOARDS CIRCULAR NO.680 DT.2 1.2.1994. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE DECISION OF HONBLE KERALA HIGH COURT IS IN THE CONTEXT OF SECTION 115J AND TH EREFORE WOULD NOT BE APPLICABLE FOR COMPUTING THE BOOK PROFIT U/S.115JB. THE LEARNED CIT(A) AGREED WITH THE VIEW OF THE ASSESSING OFFICER. 10.1.2 BEFORE US, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THERE ARE TWO MORE JUDGMENTS AFTER THE JUDGMENT IN THE CASE OF GTN TEXTILES LTD.. HONBLE MADRAS HIGH COURT HAS RENDERED SIMILA R JUDGMENT IN TWO CASES SUPPORTING THE SAME PROPOSITIONS. THEY ARE IN CIT V. MEGHNA ELECTRO CASTING LTD (2009) TIOL-212/HC/MAD/IT IN TA X CASE APPEAL NO.247 OF 2009 AND IN CIT, CHENNEI V. FUTURA POLYST ER LTD., (2009) TIOL-199-HC-MAD-IT IN TAX CASE APPEAL NO.216 TO 219 PRONOUNCED ON 16.4.2009. IT HAS BEEN HELD THEREIN THAT THE ASSESS ING OFFICER IS NOT ENTITLED TO TOUCH THE P & L ACCOUNT PREPARED AS PER PROVISIONS OF COMPANIES ACT WHILE ARRIVING AT PROFIT UNDER MAT PR OVISIONS. IN THIS REGARD, THE LEARNED AR OF THE ASSESSEE INVITED OUR ATTENTION TO PARA 6 FROM THE DECISION IN FUTURA POLYESTER LTD (SUPRA) , AS U NDER : 6. THE ISSUE INVOLVED IN THE PRESENT APPEALS IS SQU ARELY COVERED BY THE DECISION OF A DIVISION BENCH OF THIS COURT IN WHICH ONE OF US (K.RAVIRAJA PANDIAN,J) WAS A PARTY IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RAJANIKANT SCHNEIDER AND ASSOCIATES P. LTD., REPORT ED IN 302 ITR 22), WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- 4. WE ARE NOT ABLE TO SUBSCRIBE OUR VIEW TO THE GR OUNDS TAKEN IN THE APPEAL THAT THE DEDUCTION UNDER SECTION 80 HHC IS A LLOWABLE ONLY ON THE PROFITS AND GAINS ARRIVED AT UNDER SECTIONS 28 TO 44B OF THE INCOME 44 TAX ACT. IN THE CASE ON HAND, IT IS THE STAND OF TH E ASSESSEE THAT THE RELIEF UNDER SECTION 8OHHC SHOULD BE BASED ON THE P ROFIT ASCERTAINED UNDER SECTION 115JA ONLY BUT NOT ON INCOME COMPUTED UNDER SECTIONS 28 TO 44 OF THE ACT. THE TRIBUNAL AFTER CONSIDERING THE JUDGMENTS OF THE SUPREME COURT IN THE CASE OF SURANA STEELS P. L TD., VS. DEPUTY CIT (1999) 237 ITR 777 AND IN THE CASE OF APOLLO TYRES LTD., VS. CIT (2002) 255 ITR 273 (SC) AND ANALYZING THE ORDER IMP UGNED FOUND THAT, THE PROVISIONS OF SECTION 115J ARE SIMILAR TO THE P ROVISIONS OF SECTION 115JA OF THE ACT. IN ORDER TO COME TO THE CONCLUSIO N THE TRIBUNAL HAS ALSO TAKEN NOTE OF SUB-SECTION (4) OF SECTION 115JA AND REFERRED TO THE DICTUM LAID DOWN BY THE SUPREME COURT IN THE CASE O F APOLLO TYRES LTD., VS. CIT (2002) 255 ITR 273 WHEREIN IT WAS HEL D THAT THE ASSESSING OFFICER WHILE COMPUTING THE BOOK PROFITS OF A COMPA NY UNDER SECTION 115J OF THE INCOME TAX ACT, 1961, HAS ONLY THE POWE R TO EXAMINE WHETHER SUCH BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINE D IN ACCORDANCE WITH THE COMPANIES ACT. THE ASSESSING OFFICER THERE AFTER HAS THE LIMITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION SECTION 115). THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFITS SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLAN ATION. THE USE OF THE WORDS IN ACCORDANCE WITH THE PROVISIONS OF PAR TS II AND III OF SCHEDULE VI TO THE COMPANIES ACT IN SECTION 115J W AS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING OFFICER TO RELY UPON THE AUTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHI LE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT, WHICH OBLIGATE THE COMPANY TO MAINTA IN ITS ACCOUNTS IN A MANNER PROVIDED BY THAT ACT AND THE SAME TO BE SCRUTINIZED AND CERTIFIED BY THE STATUTORY AUDITORS AND APPROVED BY THE COMPANY IN THE GENERAL MEETING AND THEREAFTER TO BE FILED BEFORE T HE REGISTRAR OF COMPANIES, WHO HAS A STATUTORY OBLIGATION ALSO TO E XAMINE AND BE SATISFIED THAT THE ACCOUNTS OF THE COMPANY ARE MAIN TAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT. SUB-SECTION (1A) OF SECTION 115H DOES NOT EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIE S MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. 5. THE ASSESSING OFFICER IS NOT ENTITLED TO TOUCH T HE PROFIT AND LOSS ACCOUNT PREPARED BY THE ASSESSEE AS PER THE PROVISI ONS CONTAINED IN THE COMPANIES ACT, WHILE ARRIVING AT THE BOOK PROFI T UNDER SECTION 1153 AND THE BOOK PROFIT SO ARRIVED AT SHOULD BE TH E BASIS FOR TAXATION AND THEREFORE,, THE COMPUTATION UNDER SECTION 8OHHC SHOULD BE LIMITED TO THE CASE OF PROFITS OF ELIGIBLE CATEGORY ONLY. THE TRIBUNAL HAS ALSO COME TO THE CONCLUSION THAT IN VIEW OF THE NON OBSTANTE CLAUSE AVAILABLE IN SECTION 115JA IT WAS CLEAR THAT THE PR OVISIONS IS A SELF- CONTAINED ONE AND NO OTHER PROVISION WOULD HAVE EFF ECT ON IT AND THEREBY IT WAS TO BE IMPLEMENTED AS CONTAINED IN TH E SAID PROVISION. THE TRIBUNAL HAS ALSO FURTHER GIVEN A REASON TO THE EFFECT THAT SECTION BOHHC IS CLEAR ABOUT THIS ASPECT THAT PROFIT ONLY I S TO BE TAKEN INTO ACCOUNT BUT NOT INCOME AND SUB-SECTION (3) OF SECTI ON 11SJA ITSELF TOOK CARE OF THE PROVISIONS RELATING TO THE ADJUSTMENT O F LOSS OR DEPRECIATION 45 AND CARRY FORWARD OF THE INCOME. THE FINDING ARRIVE D AT BY THE TRIBUNAL IS CORRECT AND FOLLOWED THE DECISION OF TH E SUPREME COURT. WE ARE OF THE VIEW THAT THE CONCLUSION ARRIVED AT B Y THE TRIBUNAL CANNOT BE COMPLAINED OF. 10.1.3 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THAT THERE CANNOT BE TWO COMPUTATIONS FOR DEDUCTION U/S.80HHC. THIS HAS TO BE DONE ON THE BASIS OF INCOME COMPUTED UNDER THE PROVISIONS OF TH E ACT. IF SOME DEDUCTION U/S.80HHC IS COMPUTABLE THEN THE SAME SHO ULD BE ALLOWED FROM THE BOOK PROFIT. IF NO DEDUCTION IS COMPUTABLE U/S.80HHC ON THE BASIS OF COMPUTATION OF INCOME AS PER I.T. ACT FO R THE REASON THAT THERE IS LOSS IN THE BUSINESS THEN NO DEDUCTION CAN BE AL LOWED WHILE COMPUTATION BOOK PROFIT AS WELL. 10.1.4. WE HAVE HEARD BOTH THE PARTIES AND PERUS ED THE RECORD. IT IS NOT DISPUTED THAT HONBLE KERALA HIGH COURT IN THE CASE OF GTN TEXTILES LTD (SUPRA) HONBLE MADRAS HIGH COURT IN CASE OF MEGHA ELECTRO AND FUTURA POLYSTER LTD (SUPRA) HAVE HELD THAT DEDUCTION U/S.8 0HHC SHOULD BE COMPUTED ON THE BASIS OF BOOK PROFIT COMPUTED AS P ER THE PROVISIONS OF THE COMPANIES ACT AND NOT AS PER NORMAL PROVISIONS OF THE I.T. ACT. THIS IS ALSO UNDISPUTED FACT THAT THOSE JUDGMENTS WERE R ENDERED IN THE CONTEXT OF SECTION 115J AND WE ARE DEALING WITH THE PROVISI ONS OF SECTION 115JB. IN ORDER TO FIND OUT SUBSTANTIVE DIFFERENCE IN THE APPLICABILITY OF TWO PROVISIONS, WE REFER TO CLAUSE (III) OF EXPLANATION TO SECTION 115J AS UNDER AND CLAUSE (4) IN EXPLANATION 1 TO SECTION 11 5JB AS UNDER: CLAUSE (III) OF EXPLANATION TO SECTION 115J: [( III ) THE AMOUNTS [AS ARRIVED AT AFTER INCREASING THE N ET PROFIT BY THE AMOUNTS REFERRED TO IN CLAUSES ( A ) TO ( F ) AND REDUCING THE NET PROFIT BY THE AMOUNTS REFERRED TO IN CLAUSES ( I ) AND ( II )] ATTRIBUTABLE TO THE BUSINESS, THE PROFITS FROM WHICH ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 80HH C OR SECTION 80HHD; SO, HOWEVER, THAT SUCH AMOUNTS ARE COMPUTED IN THE MANN ER SPECIFIED IN SUB- SECTION (3) OR SUB-SECTION (3A) OF SECTION 80HHC OR SUB-SECTION (3) OF SECTION 80HHD, AS THE CASE MAY BE; OR] 46 CLAUSE (IV) IN EXPLANATION TO SECTION115JB: ( IV) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UN DER SECTION 80HHC, COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE ( C) OF SUB-SECTION (3) OR SUB- SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION ; OR 10.1.5 IN BOTH THE PROVISIONS IT IS LAID DOWN TH AT DEDUCTION U/S.80HHC SHOULD BE COMPUTED IN THE MANNER SPECIFIED IN SUB S ECTION (3) OR SUB- SECTION 3(A) OF SECTION 80HHC. IN OTHER WORDS A P RIMA FACIE READING OF THESE WORDS INDICATES THAT COMPUTATION OF DEDUCTION U/S.80HHC SHOULD BE DONE IN ACCORDANCE WITH THE PROVISIONS OF SECTIO N 80HHC. THESE TERMS HAVE BEEN INTERPRETED BY HONBLE KERALA HIGH COURT AND MADRAS HIGH COURT IN THE DECISIONS REFERRED TO ABOVE AND F OR THIS COMPUTATION THE BOOK PROFIT HAS TO BE TAKEN AS BASE AND NOT THE PRO FIT COMPUTED UNDER THE NORMAL PROVISIONS OF ACCOUNT. SINCE THESE ARE THE T WO JUDGMENTS IN FAVOUR OF THE ASSESSEE AND NO CONTRARY DECISION IS CITED OR REFERRED TO BY THE LEARNED DR, WE RESPECTFULLY FOLLOW THE SAME, AS THEY ARE BINDING ON THE TRIBUNAL IN VIEW OF THE DECISION OF HONBLE BOM BAY HIGH COURT IN CIT V. GODAVARI DEVI (1978) 113 ITR 589 (BOM). AS A RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED. 10.2 GROUND NO. 6(B) RELATES TO PROVISION OF RS.60,46,960. IT COMPRISES OF TWO ITEMS. THEY ARE ADJUDICATED AS UND ER: 10.2.1 RS.47,96,479 THIS AMOUNT PERTAINS TO WATE R TAX LIABILITY AGAINST BANK GUARANTEE PROVIDED. THE ASSESSING OFFI CER HAD DISALLOWED THE SAID AMOUNT BY HOLDING THAT THERE WAS A DISPUTE D LIABILITY AND BANK GUARANTEE PROVIDED AGAINST SUCH LIABILITY CANNOT BE ALLOWED U/S.43B. THE DISPUTE HAS TRAVELED TO THE HIGH COURT OF GUJARAT W HICH DIRECTED THE ASSESSEE TO FURNISH BANK GUARANTEE FOR THE DISPUTED AMOUNT. 47 10.2.2 WE HAVE HEARD THE LEARNED AR OF THE ASSE SSEE AND THE LEARNED DR. IT WAS SUBMITTED BY THE LEARNED AR THAT COMP UTATION OF INCOME WAS DONE UNDER THE MAT PROVISION (SECTION 115JB). T HEREFORE, NO ADJUSTMENT IN THE BOOK PROFIT IS PERMISSIBLE EXCEPT THOSE PROVIDED IN THAT SECTION. WE RELY ON THE DECISIONS OF HONBLE SUPREM E COURT IN THE CASE OF APOLLO TYRES (255 ITR 273) AND COMMISSIONER OF INCOME-TAX VS. HCL COMNET SYSTEMS AND SERVICES LTD.(2008) 305 ITR 409 (SC). IN THIS REGARD WE REFER TO FOLLOWING PART OF THE HEAD NOTES FROM THAT JUDGMENT AS UNDER: WHILE RESORTING TO THE PROVISIONS OF SECTION 115JA OF THE INCOME-TAX ACT, 1961, ON THE BASIS THAT THE TOTAL INCOME OF THE COM PANY AS COMPUTED UNDER THE ACT IS LESS THAN 30 PER CENT. OF ITS BOOK PROFITS, THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS MAINTAINED BY THE COMPANY IN ACCORDANCE WITH THE PROVISIONS OF PART II AND PART III OF SCHEDULE VI TO THE COMPANIES ACT, 1956, WHICH ARE CERTIFIED BY THE AUD ITORS AND PASSED BY THE COMPANY IN GENERAL MEETING. THE ASSESSING OFFICER H AS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE DULY CER TIFIED AND WHETHER SUCH BOOKS HAVE BEEN PROPERLY MAINTAINED IN ACCORDANCE W ITH THE COMPANIES ACT. THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTIO N TO GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANATION TO SECTION 115JA. THE EXPLANATION HAS P ROVIDED SIX ITEMS, VIZ., ITEMS (A) TO (F), WHICH IF DEBITED TO THE PROFIT AN D LOSS ACCOUNT CAN BE ADDED BACK TO THE NET PROFIT FOR COMPUTING THE BOOK PROFI T. THE PROVISION FOR BAD AND DOUBTFUL DEBTS CAN BE ADDED BACK TO THE NET PROFIT ONLY IF ITEM (C) OF THE EXPLANATION IS ATTRACTED. ITEM (C) DEALS WITH AMOUN TS SET ASIDE FOR MEETING LIABILITIES OTHER THAN ASCERTAINED LIABILITIES. THE ASSESSEES CASE CAN FALL WITHIN THE AMBIT OF ITEM (C) ONLY IF THE AMOUNT (I) IS SET ASIDE AS A PROVISION, (II) THE PROVISION IS MADE FOR MEETING A LIABILITY, AND (III ) THE PROVISION SHOULD BE FOR OTHER THAN AN ASCERTAINED LIABILITY, I.E., IT SHOUL D BE FOR AN UNASCERTAINED LIABILITY. ITEM (C) OF THE EXPLANATION TO SECTION 115JA IS NOT ATTRACTED TO THE PROVISION FOR BAD AND DOUBTFUL DEBTS. THE PROVISION FOR BAD A ND DOUBTFUL DEBTS IS MADE TO COVER UP PROBABLE DIMINUTION IN THE VALUE OF THE ASSETS, I.E., A DEBT WHICH IS AN AMOUNT RECEIVABLE BY THE ASSESSEE. SUCH A PROVIS ION CANNOT BE SAID TO BE A PROVISION FOR A LIABILITY, BECAUSE EVEN IF THE DEBT IS NOT RECOVERABLE NO LIABILITY CAN BE FASTENED ON THE ASSESSEE. ANY PROVISION MADE TOWARDS IRRECOVERABILITY OF A DEBT CANNOT BE SAID TO BE A PROVISION FOR LIAB ILITY . 10.2.3 THUS THE AMOUNT WHICH COULD BE ADDED BACK WI THIN THE MEANING OF EXPLANATION TO SECTION 115JB IS THE ONE WHICH IS UN ASCERTAINED LIABILITY. 48 AFTER HIGH COURTS ORDER ON THE WATER TAX DISPUTE, LIABILITY IS ASCERTAINED AND THEREFORE THE AUDITORS HAVE CERTIFIED IT TO BE DEDUCTED FROM P & L ACCOUNT. IN THE NORMAL COMPUTATION OF INCOME IT MAY NOT BE ALLOWED AS DEDUCTION BECAUSE OF PROVISION OF SECTION43B AS AMO UNT IS NOT PAID BUT AS PER THE COMPUTATION OF INCOME AS PER PART II AND III SCHEDULE VI OF THE COMPANIES ACT, THE PROVISION OF ASCERTAINED LIABILI TY COULD NOT BE ADDED BACK. ACCORDINGLY, WHILE COMPUTING THE BOOK PROFIT THIS AMOUNT NEED NOT BE ADDED BACK. 10.2.4 RS.12,50,481 THIS AMOUNT RELATES TO THE DEMAND RAISED BY THE GEB( GUJARAT ELECTRICITY BOARD). ACCORDINGLY TH E AMOUNT IS ASCERTAINED LIABILITY AND THEREFORE, CANNOT BE ADDE D BACK IN COMPUTING BOOK-PROFIT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT REFERRED TO ABOVE. 10.3.1 GROUND NO 6( C ) RELATES TO SUM OF RS.1,19,58,321. THE ASSESSING OFFICER HAD DISALLOWED THIS AMOUNT WHILE COMPUTING BOOK PROFIT U/S.115JB BY HOLDING THAT THEY RELATE TO AGRICULTUR AL ACTIVITIES THEREFORE EXPENSES INCURRED ON EARNING EXEMPTED INCOME ARE NO T ALLOWABLE. LEARNED AR OF THE ASSESSEE SUBMITTED THAT NO SUCH D ISALLOWANCE IS CALLED FOR IN COMPUTATION OF BOOK-PROFIT U/S 115JB. 10.3.2 AFTER HEARING BOTH THE SIDES, WE ARE OF TH E CONSIDERED VIEW THAT NO ADJUSTMENT IS REQUIRED TO BE MADE IN COMPUTATION OF INCOME U/S 115JB OF THE I.T.ACT, EXCEPT AS PROVIDED IN THAT SECTION. THERE IS NO PROVISION U/S 115JB OF THE ACT TO CONSIDER ANY EXPENDITURE OR PART THEREOF AS DISALLOWABLE BY VIRTUE OF SECTION 14A OF THE ACT. T HE INCOME COMPUTED U/S 115JB IS ON THE BASIS OF PROFITS WORKED OUT AS PER SCHEDULE VI OF THE COMPANIES ACT. IF THE AUDITORS UNDER THE COMPANIES ACT HAVE CERTIFIED 49 THAT CERTAIN EXPENDITURE HAS BEEN INCURRED FOR BUSI NESS PURPOSES THEN SAME CANNOT BE DISALLOWED BY INVOKING SECTION14A OF THE ACT. THE QUESTION OF INVOKING SECTION 14A WOULD ARISE ONLY W HEN INCOME IS COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE I NCOME TAX ACT. SECTION 115JB IS CODE IN ITSELF FOR WORKING OUT BOO K PROFITS FOR THE PURPOSES OF COMPARING IT WITH INCOME COMPUTED ACCOR DING TO INCOME TAX ACT. THEREFORE WHAT IS APPLICABLE FOR COMPUTING INC OME UNDER THE NORMAL PROVISIONS OF THE I.T. ACT WILL NOT BE APPLICABLE FOR COMPUTING BOOK PROFIT EXCEPT WHERE IT IS SPECIFICALLY SO PROVIDED IN SECTION 115JB. OUR VIEW OF SUPPORTED BY THE JUDGMENT OF HONBLE SUPREM E COURT IN THE CASE OF APOLLO TYRES. THE RELEVANT EXTRACT FROM THE HEAD NOTES OF THE ABOVE JUDGMENT IS AS UNDER: THE ASSESSING OFFICER, WHILE COMPUTING THE BOOK PRO FITS OF A COMPANY UNDER SECTION 115J OF THE INCOME-TAX ACT, 1961, HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE A UTHORITIES UNDER THE COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. THE ASSESSING OFFICER, THEREAFTER, H AS THE LIMITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION TO SECTION 115J. THE ASSESSING OFFICER DOES NOT HAVE THE JURIS DICTION TO GO BEHIND THE NET PROFITS SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANATION. THE USE OF THE WORDS IN ACCORDANCE WI TH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT IN SECTION 115J WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING OFF ICER TO RELY UPON THE AUTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHI LE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT, WHICH OBLIGATE THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A MANNER PROVIDED BY THAT ACT AND THE SAME TO BE SCRUTINIZED AND CERTIFIED BY STATUTORY AUDITORS AND APPROVED BY THE COMPANY IN GENERAL MEETING AND THER EAFTER TO BE FILED BEFORE THE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLI GATION ALSO TO EXAMINE AND BE SATISFIED THAT THE ACCOUNTS OF THE COMPANY A RE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPANIES A CT. SUB-SECTION (1A) OF SECTION 115J DOES NOT EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. _HELD,_ACCORDINGLY, THAT, WHILE DETERMINING THE BO OK PROFITS UNDER SECTION 115J, THE ASSESSING OFFICER COULD NOT RECOMPUTE THE PROFITS IN THE PROFIT AND LOSS ACCOUNT BY EXCLUDING PROVISIONS MADE FOR ARREA RS OF DEPRECIATION. 50 DECISION OF THE KERALA HIGH COURT IN CIT V. APPOLLO TYRES LTD. [1999] 237 ITR 706 REVERSED ON THIS POINT. THE APPELLATE TRIBUNAL HAD FOUND AS A FACT ON MATER IAL ON RECORD THAT THE INVESTMENT BY THE ASSESSEE-COMPANY IN UNITS OF THE UTI WAS IN THE COURSE OF ITS BUSINESS AND ITS BUSINESS OF MANUFACTURE AND SALE O F TYRES AND THE BUSINESS OF PURCHASE AND SALE OF UNITS OF THE UTI WERE COMMON I N NATURE AND BOTH THE BUSINESSES WERE INTERTWINED AND INTERLACED ; AND, T HEREFORE, THE BUSINESS IN PURCHASE AND SALE OF UNITS WAS AN ELIGIBLE BUSINES S WITHIN THE MEANING OF THE DEFINITION OF ELIGIBLE BUSINESS IN SECTION 32 AB(2) AND THE ASSESSEE WAS ENTITLED TO DEDUCTION OF 20 PER CENT. OF THE PROFIT S FROM THAT BUSINESS, THOUGH THE INCOME THEREFROM WAS DECLARED BY THE ASSESSEE-C OMPANY AS INCOME FROM OTHER SOURCES. THE HIGH COURT, ON A REFERENCE, ACC EPTED THE FINDING AND AFFIRMED THE DECISION OF THE APPELLATE TRIBUNAL. ON APPEAL TO THE SUPREME COURT: _HELD,_ AFFIRMING THE DECISION OF THE HIGH COURT, T HAT THE BUSINESS OF THE ASSESSEE-COMPANY OF BUYING AND SELLING OF UNITS WAS AN ELIGIBLE BUSINESS AS CONTEMPLATED UNDER SECTION 32AB, AND THE INCOME EAR NED FROM ITS INVESTMENT IN THE UNITS OF THE UTI HAD TO BE INCLUDED IN COMPU TING THE PROFITS OF ELIGIBLE BUSINESS UNDER SECTION 32AB. THE FACT THAT THE INC OME WAS SHOWN UNDER A DIFFERENT HEAD OF INCOME DID NOT DEPRIVE THE ASSESS EE-COMPANY OF THE BENEFIT UNDER SECTION 32AB SO LONG AS THE INVESTMENT IN THE UNITS WAS IN THE COURSE OF ITS ELIGIBLE BUSINESS. DECISION OF THE KERALA HIGH COURT IN CIT V. APPOLLO TYRES LTD. [1999] 237 ITR 706 AFFIRMED ON THIS POINT. EVEN THOUGH SECTION 32(3) OF THE UNIT TRUST OF INDI A ACT, 1963, CREATES A FICTION TO MAKE THE UTI A DEEMED COMPANY AND DISTRI BUTION OF INCOME RECEIVED BY THE UNIT HOLDER A DEEMED DIVIDEND FOR T HE PURPOSES OF THE INCOME- TAX ACT, BY VIRTUE OF THOSE PROVISIONS IT CANNOT BE SAID THAT THE SECTION ALSO MAKES THE UNIT OF THE UTI A DEEMED SHARE. THE DEEMI NG PROVISION IN SECTION 32(3) SHOULD BE CONFINED ONLY TO DEEMING THE UTI A COMPANY AND THE INCOME FROM UNITS A DIVIDEND. IN THE ABSENCE OF ANY SPECIF IC DEEMING PROVISION IN REGARD TO THE UNITS AS SHARES IT WOULD BE ERRONEOUS TO EXTEND THE PROVISIONS OF SECTION 32(3) FOR THE PURPOSE OF HOLDING THE UNIT A SHARE. _HELD,_ACCORDINGLY, THAT BUYING AND SELLING OF UNIT S BY THE ASSESSEE-COMPANY COULD NOT BE TREATED AS A SPECULATIVE BUSINESS. THE EXPLANATION TO SECTION 73 OF THE INCOME-TAX ACT DID NOT APPLY. LOSS IN BUYING AND SELLING OF UNITS OF THE UTI WAS BUSINESS LOSS NOT SPECULATION LOSS . 51 10.3.3 HONBLE GUJARAT HIGH COURT IN COMMISSIONER O F INCOME-TAX VS. RUBAMIN P. LTD. (2009) 312 ITR 18 (GUJ) HAS FOLLOWE D ABOVE DECISION AND HAS HELD AS UNDER: THE SUPREME COURT IN THE CASE OF APOLLO TYRES V. C IT , HELD THAT THE ASSESSING OFFICER, WHILE COMPUTING THE BOOK PROFITS OF A COMPANY UNDER SECTION 115J OF THE INCOME-TAX ACT, 1961, HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE A UTHORITIES UNDER THE COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT, 1956. THE ASSESSING OFFICER THEREAFT ER HAS THE LIMITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION TO SECTION 115J. THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE LIMITED EXTENT PROVIDED IN THE EXPLANATION. IT WAS FURTHER OBSERVED THAT WHILE LOOKING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFF ICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT, 1956, WHICH OBLIGATE THE COMPANY TO MAINTAIN I TS ACCOUNTS IN A MANNER PROVIDED BY THAT ACT AND THEY ARE TO BE SCRUTINISED AND CERTIFIED BY THE STATUTORY AUDITORS AND APPROVED BY THE COMPANY IN G ENERAL MEETING AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMP ANIES. IT WAS OBSERVED THAT SUB-SECTION (1A) OF SECTION 115J DOES NOT EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRESH INQUIRY IN REGARD TO THE ENTRIE S MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. HELD, ACCORDINGLY, THAT FOR THE PURPOSE OF SECTION 115J OF THE ACT, ONLY THOSE ADJUSTMENTS, WHICH ARE SPECIFIED IN THE EXPLANATION TO SECTION 115J, CAN BE MADE FROM THE BOOK PROFITS AND DEPRECIATION NOT BEI NG ONE OF THEM AND FURTHER THE ACCOUNTS OF THE COMPANY HAVING BEEN PREPARED IN ACCORDANCE WITH SCHEDULE VI TO THE COMPANIES ACT, THE ASSESSING OFF ICER WAS IN ERROR IN DISALLOWING THE DEPRECIATION AS CLAIMED BY THE COMP ANY. 10.3.4 IN VIEW OF UNAMBIGUOUS INTERPRETATION OF SE CTION 115J, NO ADJUSTMENT IN THE COMPUTATION OF BOOK PROFIT CAN BE MADE. THIS INTERPRETATION IS EQUALLY APPLICABLE U/S 115JB OF T HE ACT. THEREFORE NO DISALLOWANCE OR ANY PART OF EXPENDITURE INCURRED ON GROWING SAPLINGS AND DEBITED IN BOOKS OF ACCOUNTS CAN BE MADE. OUR VIE W IS FURTHER SUPPORTED BY INTERPRETATION OF SECTION 14A WHICH READS AS UND ER: 14A. EXPENDITURE INCURRED IN RELATION TO INCOME NO T INCLUDIBLE IN TOTAL INCOME.FOR THE PURPOSES OF COMPUTING THE TOTAL INC OME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 52 2 PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PAS S AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTH ERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR AN Y ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 10.3.5 THIS SECTION STARTS WITH FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER.. SECTION 14A FALLS IN CHAPTER IV WHICH STARTS WITH SECTION 14 AND ENDS WITH SECTION 59. CHAPTER |IV PROVIDES VARIOUS HEADS FOR COMPUTATION OF INCOME SUCH AS SALARIES, INCOME FROM HOUSE PROPERTY, PROFITS AND G AINS OF BUSINESS OR PROFESSION, CAPITAL GAINS AND INCOME FROM OTHER SOU RCES. THUS, WHERE ASSESSEE CLAIMS AN EXPENDITURE IN RELATION TO AN IN COME WHICH DOES NOT FORM PART OF THE TOTAL INCOME (COMPUTED UNDER CHAPT ER-IV) THEN SUCH EXPENDITURE WILL NOT BE ALLOWED AS A DEDUCTION. NO SUCH PROVISION IS MADE IN THE SCHEME OF SECTION 115JB WHICH FALLS IN CH XIIB BEING SPECIAL PROVISIONS RELATING TO COMPANIES. THEREFORE A PRIMA FACIE READING OF SECTION 14A INDICATES THAT IT WILL NOT BE APPLIC ABLE TO AND CANNOT BE INVOKED FOR COMPUTING INCOME UNDER SECTION 115JB . 10.3.6 FOR THE SAKE OF CONTINENCE WE REPRODUCE SEC TION 115JB AS UNDER : 115JB. SPECIAL PROVISION FOR PAYMENT OF TAX BY CERT AIN COMPANIES.(1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PRO VISION OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE, BEING A COMPANY, THE IN COME-TAX, PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON OR AF TER THE 1ST DAY OF APRIL, 2001, IS LESS THAN SEVEN AND ONE-HALF PER CENT. OF ITS BOOK PROFIT, *SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF TH E ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE ON SUCH TOTAL INCOME SHALL BE THE AMOUNT OF INCOME- TAX AT THE RATE OF SEVEN AND ONE-HALF PER CENT. (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SECTION, PREPARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVAN T PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956) : 53 PROVIDED THAT WHILE PREPARING THE ANNUAL ACCOUNTS I NCLUDING PROFIT AND LOSS ACCOUNT, (I) THE ACCOUNTING POLICIES ; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARIN G SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT ; (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURP OSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 210 OF THE COMPANIES ACT, 1956 (1 OF 1956) : PROVIDED FURTHER THAT WHERE THE COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHI CH IS DIFFERENT FROM THE PREVIOUS YEAR UNDER THIS ACT, (I) THE ACCOUNTING POLICIES ; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARIN G SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT ; (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL CORRESPOND TO THE ACCOUNTING POLICIES, ACCOUN TING STANDARDS AND THE METHOD AND RATES FOR CALCULATING THE DEPRECIATION W HICH HAVE BEEN ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS A CCOUNT FOR SUCH FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLING WITHIN THE RELEVANT PREVIOUS YEAR. EXPLANATION.FOR THE PURPOSES OF THIS SECTION, 'BOO K PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB-SECTION (2), AS INCREASED BY (A) THE AMOUNT OF INCOME-TAX PAID OR PAYABLE, AND THE PROVISION THEREFORE ; OR (B) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEV ER NAME CALLED ; OR (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS M ADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES ; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF S UBSIDIARY COMPANIES ; OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PRO POSED ; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 OR SECTION 10A OR SECTION 10B OR SECTION 11 OR SECTION 12 APPLY, 54 IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (F) IS DEBITED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY *(I) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVI SION (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL, 1997 OTHERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT : PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO A N ASSESSEE IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERVES CREATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMME NCING ON OR AFTER THE 1ST DAY OF APRIL, 1997 SHALL NOT BE REDUCED FROM THE BO OK PROFIT UNLESS THE BOOK PROFIT OF SUCH YEAR HAS BEEN INCREASED BY THOSE RES ERVES OR PROVISIONS (OUT OF WHICH THE SAID AMOUNT WAS WITHDRAWN) UNDER THIS EXP LANATION OR EXPLANATION BELOW SECOND PROVISO TO SECTION 115JA, AS THE CASE MAY BE ; OR (II) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVI SIONS OF SECTION 10 OR SECTION 10A OR SECTION 10B OR SECTION 11 OR SECTION 12 APPLY, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT ; OR *(III) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSO RBED DEPRECIATION, WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, (A) THE LOSS SHALL NOT INCLUDE DEPRECIATION ; (B) THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY I F THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION, IS NIL ; OR (IV) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U NDER SECTION 80HHC, COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE ( C) OF SUB-SECTION (3) OR SUB- SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION ; OR (V) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UN DER SECTION 80HHE COMPUTED UNDER SUB-SECTION (3) OR SUB-SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFI ED IN THAT SECTION ; OR (VI) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION U NDER SECTION 80HHF COMPUTED UNDER SUB-SECTION (3) OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION ; OR (VII) THE AMOUNT OF PROFITS OF SICK INDUSTRIAL COMP ANY FOR THE ASSESSMENT YEAR COMMENCING ON AND FROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE SAID COMPANY HAS BECOME A SICK INDUSTRIAL COMPANY UNDER SUB- SECTION (1) OF SECTION 17 OF THE SICK INDUSTRIAL CO MPANIES (SPECIAL PROVISIONS) ACT, 1985 (1 OF 1986), AND ENDING WITH THE ASSESSME NT YEAR DURING WHICH THE ENTIRE NET WORTH OF SUCH COMPANY BECOMES EQUAL TO O R EXCEEDS THE ACCUMULATED LOSSES. 55 EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, 'NET WORTH' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (GA) OF SUB-SECTIO N (1) OF SECTION 3 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (1 OF 1986). (3) NOTHING CONTAINED IN SUB-SECTION (1) SHALL AFFE CT THE DETERMINATION OF THE AMOUNTS IN RELATION TO THE RELEVANT PREVIOUS YEAR T O BE CARRIED FORWARD TO THE SUBSEQUENT YEAR OR YEARS UNDER THE PROVISIONS OF SU B-SECTION (2) OF SECTION 32 OR SUB-SECTION (3) OF SECTION 32A OR CLAUSE (II) OF SUB-SECTION (1) OF SECTION 72 OR SECTION 73 OR SECTION 74 OR SUB-SECTION (3) OF S ECTION 74A. (4) EVERY COMPANY TO WHICH THIS SECTION APPLIES, SH ALL FURNISH A REPORT IN THE PRESCRIBED FORM FROM AN ACCOUNTANT AS DEFINED IN TH E EXPLANATION BELOW SUB- SECTION (2) OF SECTION 288, CERTIFYING THAT THE BOO K PROFIT HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THIS SECTION ALON G WITH THE RETURN OF INCOME FILED UNDER SUB-SECTION (1) OF SECTION 139 OR ALONG WITH THE RETURN OF INCOME FURNISHED IN RESPONSE TO A NOTICE UNDER CLAUSE (I) OF SUB-SECTION (1) OF SECTION 142. (5) SAVE AS OTHERWISE PROVIDED IN THIS SECTION, ALL OTHER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY ASSESSEE, BEING A COMPANY, MEN TIONED IN THIS SECTION.' 10.3.7 IT CLEARLY PROVIDES A SCHEME OF COMPUTATION OF BOOK PROFIT WHICH SHALL BE DEEMED AS TOTAL INCOME OF THE ASSESS EE. THE BASE FOR COMPUTATION OF BOOK PROFIT IS TAKEN AS THE PROFIT D ETERMINED IN THE PROFIT AND LOSS ACCOUNT PREPARED FOR THE RELEVANT PREVIOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF PART-II AND III OF SCHEDULE-VI OF THE COMPANIES ACT, 1956 AND AFTER TAKING INTO ACCOUNT THE ACCOUNTING P OLICIES, ACCOUNTING STANDARDS AND METHOD AND RATES FOR CALCULATING THE DEPRECIATION PROVIDED THEREIN. SUCH BOOK PROFIT, BEING NET PROFIT AS PER PROFIT AND LOSS ACCOUNT WOULD BE ADJUSTED BY SEVERAL ITEMS AS PROVIDED IN E XPLANATION WHICH IS ENUMERATED ABOVE IN THE SECTION. THE EXPENDITURE R ELATING TO EXEMPTED INCOME AS PROVIDED IN SECTION 10, 11 AND 12, IF DEB ITED IN PROFIT AND LOSS ACCOUNT, ARE REQUIRED TO BE ADDED BY VIRTUE OF CL AUSE-F TO EXPLANATION. THIS CLAUSE DOES NOT MENTION SECTION 14A THOUGH I T ALSO RELATES TO DISALLOWANCE OF EXPENDITURE RELATING TO EXEMPTED I NCOME. IF LEGISLATURE HAD INTENDED TO INCREASE THE PROFIT BY THE EXPENDIT URE RELATING TO EXEMPTED INCOME AS PROVIDED IN SECTION 14A, THEY WOULD HAVE SO PROVIDED IN CLAUSE F TO EXPLANATION. THE FACT THAT SECTION 10 , 11 AND 12 ARE 56 MENTIONED IN CLAUSE-F OF EXPLANATION, BUT NOT SECTI ON 14A EVEN THOUGH THEY DEAL WITH SIMILAR TYPE OF EXPENDITURE I.E. REL ATING TO EXEMPTED INCOME, GIVES CLEAR INDICATION THAT LEGISLATURES HA VE NOT INTENDED TO DISALLOW AND CONSEQUENTLY ADD TO THE BOOK PROFIT, E XPENDITURE RELATING TO EXEMPTED INCOME, AND DEBITED IN PROFIT AND LOSS ACC OUNT PREPARED AS PER COMPANIES ACT. 10.3.8 THE ONLY ARGUMENT RAISED BY THE REVENUE IN THIS REGARD IS THAT SUB SECTION-5 OR SECTION 115JB PROVIDES THE AP PLICABILITY OF ALL THE PROVISIONS OF THE ACT AND THEREFORE PROVISION OF SE CTION 14A WOULD ALSO APPLY AND CONSEQUENTLY EXPENDITURE RELATING TO EXEM PTED INCOME WOULD BE REQUIRED TO BE ADDED TO THE BOOK PROFIT. IN OU R CONSIDERED VIEW, THIS ARGUMENT IS NOT TENABLE. SUB SECTION 5 STARTS WITH SAVE AS OTHERWISE PROVIDED IN THE SECTION IT MEANS THAT WHEREVER SECTION 115JB HAS PROVIDED AND OTHER PROVISIONS OF THE ACT ALSO PROVI DE ON THE SAME POINT THEN WHAT IS PROVIDED IN SECTION 115JB WOULD BE APP LICABLE AND NOT THE OTHER PROVISIONS OF THE ACT. IN OUR CONSIDERED VIE W SECTION 115JB IS A COMPLETE CODE IN ITSELF FOR THE PURPOSES OF COMPUTI NG BOOK PROFIT. NO ADDITIONAL ITEM OF ADJUSTMENT IS REQUIRED TO BE BOR ROWED EVEN IF IT IS SO PROVIDED IN OTHER PROVISIONS OF THE ACT. FOR THE P URPOSES OF COMPUTING BOOK PROFIT ONLY THOSE ADJUSTMENTS WHICH ARE SPECIF ICALLY PROVIDED IN SECTION 115JB ARE REQUIRED TO BE MADE AND NO OTHER. THIS IS ALSO THE RATIO OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN APO LLO TYRES CASE (SUPRA) AND OTHER JUDGMENTS RENDERED FOLLOWING APOL LO TYRES. IN OTHER WORDS, WHAT IS TO BE COMPUTED UNDER VARIOUS HEADS O F INCOME AS PER SECTION 14 TO 59 IS REPLACED BY BOOK PROFIT AS PER SCHEDULE-VI OF THE COMPANIES ACT. THEREFORE, NO PROVISION COMPRISING BETWEEN SECTION 14 TO 59 AND ALSO OTHER PROVISION IN THE ACT PROVIDING FOR ADDITION INTO INCOME WILL AFFECT BOOK PROFIT EXCEPT THE STATUARY ADJUSTMENTS PROVIDED 57 UNDER SECTION 115JB. THE INITIAL WORDINGS IN SECTI ON 115JB(1) ALSO MAKES IT CLEAR. IT STARTS WITH NOTWITHSTANDING AN YTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT. THIS NON-OBSTANTE C LAUSE PROHIBITS OPERATION OF ANY OTHER PROVISION OF THE ACT WHICH M AY HAVE EFFECT ON THE BOOK PROFIT. SUB SECTION 5 OF SECTION 115JB ENABLE S THE ASSESSING OFFICER TO INVOKE OTHER PROVISIONS OF THE ACT RELAT ING TO THE FIELD NOT PROVIDED IN SECTION 115JB. THE COMPUTATION OF BOOK PROFIT, WHICH IS TREATED AS TOTAL INCOME IS PROVIDED IN THIS SECTION , THEREFORE, OTHER PROVISIONS RELATING TO COMPUTATION OF INCOME IN OTH ER SECTIONS OF THE ACT WILL NOT BE OPERATIVE IN THIS FIELD. PROVISIONS RE LATING TO OTHER FIELD SUCH AS, PROCEDURE FOR ASSESSMENT, COLLECTION AND RECOVE RY, APPEALS AND REVISION ETC. NOT PROVIDED IN SECTION 115JB WOULD A PPLY IN CASE OF ADOPTING ADJUSTED BOOK PROFIT AS TOTAL INCOME. THE REFORE, DISALLOWANCE OF EXPENDITURE RELATING TO EXEMPTED INCOME AS PER SECT ION 14A, EVEN THOUGH DEBITED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCO UNT, BUT AUDITORS HAVE CERTIFIED IT AS FOR BUSINESS PURPOSES CANNOT BE MAD E. 10.3.9 IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED VIEW THAT EXPENDITURE RELATING TO GROWING OF SAPLINGS, AND SU PERVISION OF GROWING TREES BY THE FARMERS AND DEBITED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT AND A PART OF WHICH HAS BEEN CONSIDERED AS RELATING TO AGRICULTURE OPERATIONS IN OUR DISCUSSIONS ABOVE CANNOT BE ADDED BACK WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB. 10.3.10 AS A RESULT, THIS GROUND OF THE ASSESSEE IS ALLOWED . 11 GROUND NO.7 : 58 11.1 IT RELATES TO CHARGING OF INTEREST UNDER SECTI ON 234B IN RESPECT OF INCOME COMPUTED UNDER SECTION 115JB. HEARD BOTH THE PARTIES. IN OUR CONSIDERED CHARGING OF INTEREST U/S.234B IS CONSEQU ENTIAL AND WOULD BE ON THE TAX DETERMINED U/S.115JB. HONBLE KARNATAKA HIGH COURT HELD IN JINDAL THERMAL POWER CO. LTD. VS. DEPUTY COMMISSION ER OF INCOME-TAX (2006) 286 ITR 182 (KAR) THAT THE PROVISIONS OF SEC TION 115JB AS INTRODUCED BY THE FINANCE ACT, 2000, IMPOSED LIABIL ITY FOR PAYMENT OF ADVANCE TAX AND THE RETROSPECTIVE OPERATION OF SECT ION 115JB(1) WITH EFFECT FROM APRIL 1, 2001, COULD NOT BE SAID TO BE UNREASONABLE, EXCESSIVE OR HARSH SO AS TO DECLARE IT UNCONSTITUTIONAL. IT W AS ALSO HELD THAT SUB- SECTION (5) SPECIFIES THAT SAVE AS OTHERWISE PROVID ED IN THIS SECTION, ALL OTHER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY A SSESSEE, BEING A COMPANY MENTIONED IN THAT SECTION. IN OTHER WORDS, EXCEPT FOR SUBSTITUTION OF THE TAX PAYABLE UNDER THE PROVISION AND THE MANNER OF COMPUTATION OF BOOK PROFITS, ALL THE PROVISIONS OF THE TAX INCLUDING THE PROVISION RELATING TO CHARGE, DEFINITIONS, RECOVERI ES, PAYMENT, ASSESSMENT, ETC., WOULD APPLY IN RESPECT OF THE PROVISIONS OF T HIS SECTION AND IN VIEW OF THE SCHEME OF THE INCOME-TAX ACT. SECTION 4 OF T HE ACT CHARGES TO TAX THE INCOME AT ANY RATE OR RATES WHICH MAY BE PRESCR IBED BY THE FINANCE ACT EVERY YEAR, SECTION 207 DEALS WITH LIABILITY FO R PAYMENT OF ADVANCE TAX, SECTION 209 DEALS WITH ITS COMPUTATION BASED O N THE RATES IN FORCE FOR THE FINANCIAL YEAR, AS ARE CONTAINED IN THE FINANCE ACT AND THE FIRST PROVISO TO SECTION 2(8) OF THE FINANCE ACT, 2001, P ROVIDES THAT THE TAX PAYABLE BY WAY OF ADVANCE TAX IN RESPECT OF INCOME CHARGEABLE UNDER SECTION 115JB AS INTRODUCED BY THE FINANCE ACT, 200 0, SHALL BE INCREASED BY A SURCHARGE OF 2 PER CENT. CONSEQUENTLY THE PROV ISIONS OF SECTIONS 234B AND 234C FOR INTEREST ON DEFAULTS IN PAYMENT O F ADVANCE TAX AND DEFERMENT OF ADVANCE TAX WOULD ALSO BE APPLICABLE T O COMPANIES GOVERNED BY SECTION 115JB, WHERE THE FACTS OF THE C ASE WARRANT. 59 11.2 HOWEVER A.R. HAS REFERRED TO THE JUDGMENT OF H ONBLE BOMBAY HIGH COURT IN SNOWCEM INDIA LTD. VS. DEPUTY COMMISS IONER OF INCOME- TAX (2009) 313 ITR 170 (BOMB). IN OUR CONSIDERED VI EW THIS JUDGMENT WAS RENDERED IN THE CONTEXT OF SECTION 115JA WHICH WAS TREATED AS PARI MATERIA WITH SECTION115J. IN THE CONTEXT OF SECTION 115JB THE ONLY AUTHORITY AVAILABLE IS THE JUDGMENT OF HONBLE KAR NATAKA HIGH COURT IN JINDAL THERMAL POWER CO. LTD. VS. DEPUTY COMMISSION ER OF INCOME-TAX (2006) 286 ITR 182 (KAR). NO CONTRARY JUDGMENT ON SECTION 115JB REGARDING CHARGING OF INTEREST U/S 234B HAS BEEN R EFERRED . HENCE WE RESPECTFULLY FOLLOW JUDGMENT OF HONBLE KARNATAKA H IGH COURT JINDAL THERMAL POWER CO. LTD. (SUPRA). WE THEREFORE, DECL INE TO INTERFERE. 11.3. THIS GROUND IS ACCORDINGLY REJECTED. 12. GROUND NO.8 IS NOT PRESSED AND IS THEREFORE, RE JECTED. ITA NO.790/AHD/2006 (BY REVENUE) (ASSESSMENT YEAR 2002-03) 13.1. THIS APPEAL IS BY THE REVENUE FOR THE ASSES SMENT YEAR 2002-03 BY RAISING THE FOLLOWING GROUNDS : (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) SURAT HAS ERRED IN HOLDING THAT THE ASSESSEES CLAI M FOR NON TAXABILITY OF RS.28,46,154/- MADE IN VIEW OF BIFRS ORDER DATED 1 3.5.92 WAS TIME BOUND RELIEF UNDER SECTION 41(1) OF THE I.T.ACT,1961. (2) ON THE FACTS ID IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) SURAT HAS ERRED IN HOLDING THAT THE ENTIRE LIABILIT Y OFRS.32,12,625 IN RESPECT OF PURCHASE TAX HAD CRYSTALISED DURING THE YEAR WITHOU T BRINGING ANY MATERIAL ON RECORDS. THIS BEING A STATUTORY LIABILITY, IT IS AL LOWABLE ONLY IF IT IS ACTUALLY PAID OTHERWISE IT IS TO BE DISALLOWED U/S.43B OF TH E ACT (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) I SURAT HAS ERRED IN DIRECTING THE A.O. TO D ELETE THE AMOUNT OF RS.35,53,325 IN RESPECT OF : (A) PROVISION FOR PURCHASE TAX .. RS.32,00,000 (B) CLAIM OF SET-OFF OF SALES-TAX REVERSED.. RS. 3,35,325 RS. 35,53,325 60 (4) ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CA SE AND IN LAW, THE LD. CIT(A) I, SURAT OUGHT TO HAVE UPHELD THE ORDER OF T HE A.O. IN RESPECT OF THE ABOVE ISSUES. (5) IT IS THEREFORE, PRAYED THAT THE ORDER OF THE L D.CIT(A)-L, SURAT MAY BE SET- ASIDE AND THAT OF THE A.O. BE RESTORED IN RESPECT O F THE ABOVE ISSUES. 13.2.1. GROUND NO.1. THE ASSESSING OFFICER, DURING THE ASSESSMENT PROCEE DINGS, FOUND THAT THE ASSESSEE HAS DEDUCTED THE SUM OF RS.28,46,154 ON AC COUNT OF LIABILITY PROVISION WRITTEN BACK WHICH WAS CLAIMED EXEMPT U/S .41(1) AS PER RELIEF GRANTED BY THE BIFR ORDER DT.13.5.92. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE HAD OFFERED A SUM OF RS.111 .73 LAKHS ON ACCOUNT OF PROVISIONS OF EARLIER YEAR NO LONGER REQUIRED. T HE DETAILS OF THIS SUM HAVE BEEN GIVEN BY THE ASSESSING OFFICER IN HIS ORD ER ON PAGES 30 AND 31. IT WAS EXPLAINED THAT LIABILITIES AMOUNTING TO RS.2 8,46,154 WERE OUTSTANDING IN CASE OF ASSESSEES FORMER ENTITY I.E ., CPML WHICH SUBSEQUENTLY BECAME J.K.PAPER MILLS. HOWEVER, THIS WILL NOT BE THE INCOME BECAUSE CBDT ORDER DT.22.4.99 PERMITTED THE SICK COMPANIES NOT TO TREAT SUCH WRITING BACK AS INCOME. THE ASSESSEE COMPANY FURNISHED NECESSARY DETAILS GIVEN IN THE CIRCULAR BEFORE THE ASSESSING OFFICER. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE AND TR EATED THE WRITE BACK AS INCOME OF THE ASSESSEE U/S.41(1).THE LEARNED CIT (A) DELETED THE ADDITION HAVING DISCUSSED IN PARA 4.10 OF HIS ORDER . HE RELIED ON THE CBDT CIRCULAR NO.119 DT.22.4.1999. ACCORDING TO HIM , CBDT ALLOWED NOT TO TREAT SUCH WRITE BACK AS INCOME OF THE ASSES SEE. 13.2.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW, THE LEA RNED CIT(A)HAS RIGHTLY RELIED ON THE CIRCULAR ISSUED BY THE CBDT DT.22.4. 1999. A COPY OF THIS ORDER HAS BEEN FURNISHED BY THE ASSESSEE IN ITS PAP ER BOOK . THE SAID CIRCULAR READS AS UNDER: 61 ORDER U/S.119(2)(A) OF THE I.T.ACT,1961. IN EXERCISE OF ITS POWERS UNDER SECTION 119(2)(A) O F THE INCOME-TAX ACT, 1961, THE CENTRAL BOARD OF DIRECT TAXES HEREBY DIRE CTS THAT EFFECT TO ALL ORDERS PASSED BY THE BOARD FOR INDUSTRIAL AND FINAN CIAL RECONSTRUCTION (BIFR) IN APPROVED SCHEME OF RECONSTRUCTION/REHABIL ITATION BE GIVEN DURING THE COURSE OF AN ASSESSMENT AFTER GRANTING A LL THE RELIEFS UNDER THE INCOME-TAX ACT, 1961. WHERE THE ABOVE SAID ORD ER OF THE BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION(BIFR) C ONTAINS A RECOMMENDATION THAT CERTAIN RELIEFS UNDER THE I.T.A CT BE CONSIDERED BY THE CENTRAL GOVERNMENT, IT MEANS THAT AL THOSE RELI EFS BE GRANTED BY THE ASSESSING OFFICER IN VIEW OF THE OVERRIDING NAT URE OF THE SICK INDUSTRIAL COMPANIES ACT (SICA) EVEN IN THE ABSENCE OF ANY ENABLING PROVISION UNDER THE INCOME-TAX ACT,1961 TO THAT EFF ECT. 13.2.3. THE BIFR VIDE ITS ORDER DT.13.5.1992 IN CAS E OF THIS CPML (FORMER NAME OF THE ASSESSEE) PASSED THE FOLLOWING ORDER. THE RELEVANT PORTION OF THE SAID ORDER READS AS UNDER: I) TO SANCTION EXCISE LOAN AS APPLICABLE TO SICK I NDUSTRIAL UNITS AS PER THE SCHEME OF CENTRAL GOVERNMENT. II) TO EXEMPT CPML FROM THE APPLICATION OF THE PROV ISION OF SECTION 4(A) OF PAYMENT OF GRATUITY ACT IN RESPECT OF ARREA RS OF GRATUITY; III) TO EXEMPT CPML UNDER SECTION 41(1) OF THE INCOME TA X ACT,1961; IV) TO EXEMPT J.K. INDUSTRIES AND ASSOCIATES FROM P ROVISIONS OF MRTP ACT, 1969 AND SECTION 10BA, 370, 372 AND OTHER APPLICABLE PROVISIONS OF THE COMPANIES ACT, 1956 FOR ACQUISITI ON OF SHARES IN CPML OR FOR ADVANCING LOANS TO CPML OR FOR FURNISHI NG GUARANTEE(S). 13.2.4. ABOVE IS A BENEFICIAL CIRCULAR AND HAS BEEN PROVIDED TO REDUCE THE HARDSHIP FROM THE RIGOURS OF LAW. HONBLE SUPREME C OURT IN UCO BANK VS. COMMISSIONER OF INCOME-TAX & TAMIL NADU INDUSTR IAL INVESTMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME-TAX (19 99) 237 ITR 889 (SC) HAS HELD THAT THE CENTRAL BOARD OF DIRECT TAXE S UNDER SECTION 119 OF THE INCOME-TAX ACT, 1961, HAS POWER, INTER ALIA, TO TONE DOWN THE RIGOUR OF THE LAW AND ENSURE A FAIR ENFORCEMENT OF ITS PRO VISIONS, BY ISSUING CIRCULARS IN EXERCISE OF ITS STATUTORY POWERS UNDER SECTION 119 OF THE ACT WHICH ARE BINDING ON THE AUTHORITIES IN THE ADMINIS TRATION OF THE ACT. IT IS HELD THEREIN AS UNDER: 62 UNDER SECTION 119(2)(A), HOWEVER, THE CIRCULARS AS CONTEMPLATED THEREIN CANNOT BE ADVERSE TO THE ASSESSEE. THE POWER IS GIV EN FOR THE PURPOSE OF JUST, PROPER AND EFFICIENT MANAGEMENT OF THE WORK OF ASSE SSMENT AND IN PUBLIC INTEREST. IT IS A BENEFICIAL POWER GIVEN TO THE BOA RD FOR PROPER ADMINISTRATION OF FISCAL LAW SO THAT UNDUE HARDSHIP MAY NOT BE CAU SED TO THE ASSESSEE AND THE FISCAL LAWS MAY BE CORRECTLY APPLIED. HARD CASES WH ICH CAN BE PROPERLY CATEGORISED AS BELONGING TO A CLASS, CAN THUS BE GI VEN THE BENEFIT OF RELAXATION OF LAW BY ISSUING CIRCULARS BINDING ON THE TAXING A UTHORITIES. IN ORDER TO AID PROPER DETERMINATION OF THE INCOME OF MONEY LENDERS AND BANKS, THE CENTRAL BOARD OF DIRECT TAXES ISSUED A C IRCULAR DATED OCTOBER 6, 1952, PROVIDING THAT WHERE INTEREST ACCRUING ON DOU BTFUL DEBTS IS CREDITED TO A SUSPENSE ACCOUNT, IT NEED NOT BE INCLUDED IN THE AS SESSEE'S TAXABLE INCOME, PROVIDED THE INCOME-TAX OFFICER IS SATISFIED THAT R ECOVERY IS PRACTICALLY IMPROBABLE. TWENTY-SIX YEARS LATER, ON JUNE 20, 197 8, IN VIEW OF THE JUDGMENT OF THE KERALA HIGH COURT IN STATE BANK OF TRAVANCOR E V. CIT [1977] 110 ITR 336, THE BOARD BY ANOTHER CIRCULAR, WITHDREW WITH I MMEDIATE EFFECT THE EARLIER CIRCULAR . HOWEVER, BY CIRCULAR DATED OCTOBER 9, 1984, THE BOA RD DECIDED THAT INTEREST IN RESPECT OF DOUBTFUL DEBTS CREDITED TO S USPENSE ACCOUNT BY BANKING COMPANIES WOULD BE SUBJECTED TO TAX BUT INTEREST CH ARGED IN AN ACCOUNT WHERE THERE HAS BEEN NO RECOVERY FOR THREE CONSECUTIVE AC COUNTING YEARS WOULD NOT BE SUBJECTED TO TAX IN THE FOURTH YEAR AND ONWARDS. THE CIRCULAR ALSO STATED THAT IF THERE IS ANY RECOVERY IN THE FOURTH YEAR OR LATE R, THE ACTUAL AMOUNT RECOVERED ONLY WOULD BE SUBJECTED TO TAX IN THE RESPECTIVE YE ARS. THIS PROCEDURE WOULD APPLY TO ASSESSMENT YEAR 1979-80 AND ONWARDS. UNDER THE ACCOUNTING PRACTICE, INTEREST WHICH IS TR ANSFERRED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCO UNT OF THE COMPANY IS NOT TREATED AS INCOME. THE QUESTION WHETHER IN A GIVEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATI C. IF, THEREFORE, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GENERAL T EST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRECTED THAT ALL INCOME-TAX OFF ICERS SHOULD TREAT SUCH AMOUNTS AS NOT FORMING PART OF THE INCOME OF THE AS SESSEE UNTIL REALIZED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELING BEYOND THE POWERS OF THE BOARD UNDER SECTION 119 OF THE INCOME -TAX ACT . SUCH A CIRCULAR IS BINDING UNDER SECTION 119 . SUCH CIRCULARS ARE MEANT FOR ENSURING PROPER ADMINISTRATION OF THE STATUTE AND, THEY ARE DESIGNE D TO MITIGATE THE RIGOURS OF THE APPLICATION OF A PARTICULAR PROVISION OF THE ST ATUTE IN CERTAIN SITUATIONS BY APPLYING A BENEFICIAL INTERPRETATION TO THE PROVISI ON IN QUESTION. 13.2.5. THUS THE CIRCULAR ISSUED BY THE CBDT ALLOWI NG TAX PAYERS NOT TO BE TAXED UNDER SECTION 41(1) IF THEY ARE BIFR COMPA NIES IS A BENEFICIAL CIRCULAR AND IS BINDING ON THE INCOME TAX AUTHORITI ES. IN VIEW OF THE 63 ABOVE, WE DO NOT FIND ANY CASE FOR SUSTAINING THE A DDITION MADE BY THE A.O. U/S 41(1). THE LEARNED CIT(A) IS JUSTIFIED IN DELETING THE SAME. THIS GROUND OF REVENUE IS, THEREFORE, REJECTED. 14. GROUND NO.2 14.1 IT RELATES TO LIABILITY OF RS.32,12,625 IN RES PECT OF PURCHASE TAX CRYSTALISED DURING THIS YEAR OUT WHICH RS. 32 LACS WAS ALLOWED BY LD. CIT(A) IN PARA 4.3.2.. THE AO FOUND THAT THE ASSES SEE HAS MADE PROVISION UNDER GUJARAT SALES TAX ACT FOR PURCHASES FROM UNREGISTERED DEALER. DURING THE EARLIER YEAR PROVISION OF RS.32 LAKHS WAS MADE AND IT WAS OFFERED FOR TAX U/S.43B. DURING THIS YEAR, THE LIABILITY WAS WORKED OUT AT RS.32,12,675 FOR WHICH THE ASSESSEE CLAIMED DED UCTION FROM BOOK PROFIT. THE ASSESSING OFFICER WAS OF THE VIEW THAT PROVISION WAS ALREADY MADE FOR A SUM OF RS.32 LAKHS IN THE EARLIER ASSESS MENT YEAR AND WAS REDUCED FROM THE BOOK PROFIT. THEREFORE, THE ASSESS EE COMPANY SHOULD HAVE REDUCED ONLY A SUM OF RS .12,675/- FROM THIS Y EARS BOOK PROFIT AS EXCESS PROVISION. HE ACCORDINGLY HELD THAT THERE CA NNOT BE A DOUBLE DEDUCTION UNDER THE SAME PROVISION. THE ASSESSING O FFICER ACCORDINGLY ADDED A SUM OF RS.32,12,625/- WHILE COMPUTING THE B OOK PROFIT. BEFORE THE LEARNED CIT(A) IT WAS SUBMITTED THAT THE SAID L IABILITY WAS CRYSTALISED DURING THE YEAR UNDER CONSIDERATION AND ACCORDINGLY ON THE BASIS OF ADVISE BY THE AUDITORS, A PROVISION OF RS.32 LAKHS MADE IN THE PREVIOUS YEAR WAS REVERSED BY CREDITING THE CONSUMPTION OF I NVENTORY ACCOUNT AND SIMULTANEOUSLY PROVISION WAS MADE FOR RS.32,12,625 IN THE CURRENT YEAR. THE LEARNED CIT(A) HELD THAT SUM OF RS.32 LAKHS WAS OFFERED FOR TAXATION IN THE ASSESSMENT YEAR 2001-02,THEREFORE,THERE WAS JUSTIFICATION FOR MAKING FULL PROVISION OF RS.32,12,625. 64 14.2 WE HAVE HEARD THE LEARNED DR AND LEARNED AR OF THE ASSESSEE. IN OUR CONSIDERED VIEW A CORRECT VIEW HAS BEEN TAKEN B Y THE LEARNED CIT(A). WHERE THE AMOUNT HAS BEEN WRITTEN BACK BY THE ASSES SEE IN THE EARLIER YEAR THE QUESTION OF HOLDING THAT THERE IS DOUBLE D EDUCTION DOES NOT ARISE. THE PROVISION IS AN ASCERTAINED LIABILITY AND THERE FORE THIS IS FULLY ALLOWABLE WHILE COMPUTING BOOK PROFIT. THERE IS NO APPLICATION OF SECTION 43B. ACCORDINGLY, THIS GROUND OF THE REVENUE IS REJ ECTED. 14.3 HOWEVER, WHILE COMPUTING INCOME/LOSS UNDER THE NORMAL PROVISIONS OF THE ACT THIS LIABILITY OF PURCHASE TA X COULD NOT BE ALLOWED AS DEDUCTION AS IT IS ACTUALLY NOT PAID. TO THIS EXTEN T GROUND OF THE REVENUE IS CONSIDERED AS ALLOWED. 15. GROUND NO.3 15.1 IT RELATES TO DELETION OF THE ADDITION OF RS.32 LAKHS, AND PROVISION FOR PURCHASE TAX AND RS.3,53,325 TOWARDS CLAIM OF SET-O FF OF SALES-TAX REVERSED FOR THE PURPOSES OF COMPUTATION OF BOOK-PROFIT. PRO VISION OF PURCHASE TAX IS AN ASCERTAINED LIABILITY AND IS FULLY ALLOWABLE WHILE COMPUTING BOOK PROFIT U/S 115JB. REGARDING SALES TAX REVERSED AMOU NTING TO RS.3,53,325, THE LEARNED ASSESSING OFFICER MENTIONED THAT IT IS ONLY IN THE NATURE OF CONTRA ENTRY AND IT SHOULD NOT HAVE ANY AFFECT ON T HE BOOK PROFIT, THEREFORE, IT SHOULD NOT HAVE BEEN CLAIMED AS SET OFF. BEFORE THE LEARNED CIT(A), IT WAS SUBMITTED BY THE ASSESSEE THAT THE CLAIM WAS MA DE BY WAY OF RECTIFICATION OF VOUCHERS PASSED IN EARLIER YEARS A ND AFTER DEBITING PREVIOUS YEARS EXPENSES. A CORRESPONDING CREDIT WAS MADE TO THE CONSUMPTION ACCOUNT. THUS, A SUM OF RS.3,53,325 WAS OFFERED FOR TAXATION. ACCORDING TO THE LEARNED AR OF THE ASSESSEE, THIS WILL HAVE NO E FFECT ON COMPUTATION OF INCOME AS PER SCHEDULE VI OF COMPUTATION ACT. (I.E. BOOK PROFIT). 65 ACCEPTING THE ABOVE CONTENTION, THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. 15.2 SINCE THE SAME WAS OFFERED FOR TAXATION IN EA RLIER YEARS WRONGLY, DEDUCTION FROM BOOK PROFIT HAS BEEN CLAIMED IN THIS YEAR. SO FAR AS THE COMPUTATION OF BOOK PROFIT IS CONCERNED, THE AUDITO RS HAVE NOT FOUND ANY FAULT; THEREFORE, THE SAME CANNOT BE REDUCED BY THE ASSESSING OFFICER IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN AP OLLO TYRES (SUPRA). 15.3 AS A RESULT, THE APPEAL FILED BY THE REVENU E IS DISMISSED. ITA 578/AHD/2007 (A.YR.2003-04)(ASSESSEES APPEAL) 16.1. IN THIS APPEAL THE ASSESSEE HAS RAISED FOLLOWING G ROUNDS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE L D. COMMISSIONER OF INCOME TAX (APPEALS)-I, SURAT ERRED IN:- 1.0 HOLDING THAT FOR THE OBSERVATIONS MADE BY THE ASSES SING OFFICER, WHICH HAD NOT LED TO ANY DISALLOWANCE OR ADDITION, THE APPELL ANT COULD NOT HAVE ANY GRIEVANCE AND IN NOT DELETING SUCH OBSERVATIONS WHI CH WERE GROSSLY ERRONEOUS MADE IN THE CONTEXT OF RS.16415002 HELD AS NOT OFFE RED BY THE APPELLANT AS THE AMOUNT OF PROFIT CHARGEABLE TO TAX U/S 41(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT). 2.0 UPHOLDING THAT THE DISALLOWANCE OF RS.41064 92 COMPRISING OF RS.40415 (ADVANCES TO EMPLOYEES NOT RECOVERABLE), RS.178607( DISCOUNTS WRITTEN OFF), RS.1541217 (PROVISION MADE FOR AMOUNT RECOVERABLE F ROM FOREST DEPARTMENT WRITTEN OFF), RS.2197577 (EXPENSES ON TELEPHONE, EL ECTRICITY ETC), RS.148676 (DEBIT BALANCES OF VARIOUS PARTIES WRITTEN OFF) AND NOT APPRECIATING THAT THESE EXPENSES WERE FULLY ALLOWABLE IN THE YEAR UNDER CON SIDERATION. 3.0 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIO N MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSTT. YEAR 2002-03, NOT HOLDING TH AT THE ASSESSING OFFICERS ACTION OF BRINGING TO TAX A SUM OF RS.1782038 BEING REDUCTION IN APPELLANTS LIABILITY ON ACCOUNT OF EXCHANGE FLUCTUATION ON THE OUTSTANDING BILLS FOR IMPORT OF MATERIALS WAS NOT JUSTIFIED SINCE THE ASS ESSING OFFICER HAD IGNORED THAT IN VIEW OF THE FINDINGS RECORDED IN SECTION 14 3(3) FOR THE ASSTT YEAR 2002- 03, THE APPELLANTS CONDUCT OF OFFERING THE SAID AMO UNT IN THE RETURN OF INCOME WAS REQUIRED TO BE IGNORED AND IN MAKING REFERENCE TO THE PROVISIONS OF SECTION 139(5) WHICH ARE NOT APPLICABLE IN THE CONT EXT OF APPELLANTS FACTS. 66 4.0 UPHOLDING THE DISALLOWANCE OF RS.2213118 3 (INCLUDING DEPRECIATION OF RS.576506) AND IN NOT APPRECIATING THAT THE SAID EX PENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND THAT THESE WERE NOT RELATED TO AGRICULTURAL ACTIVITIES. .2 4.1 UPHOLDING THE DISALLOWANCE OF RS.2213118 3 (INCLUDING DEPRECIATION OF RS.576506) AND IN IGNORING THAT THE PROVISIONS OF S ECTION 14A OF THE ACT 1961 ARE NOT APPLICABLE AND THAT THE ASSESSING OFFICER W AS WRONG IN INVOKING THE SAID SECTION. 5.0 UPHOLDING ASSESSING OFFICERS ACTION FOR NOT AL LOWING DEDUCTION OF RS.3125000 CLAIMED BY THE APPELLANT U/S 35(I)(II) FOR CONTRIBU TION OF RS.2500000 MADE TO PUSHPAWATI SINGHANIA RESEARCH INSTITUTE AND ALTERNA TIVELY IN NOT DIRECTING THE ASSESSING OFFICER TO ALLOW THE DEDUCTION FOR THE AB OVE AMOUNT ON APPELLANTS SUBMISSION OF SECTION 35(I)(II) CERTIFICATE WHICH W AS TO BE RECEIVED FROM CENTRAL BOARD OF DIRECT TAXES. 6.0 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTIO N MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSTT YEAR 2001-02, NOT DIRECTING T HE ASSESSING OFFICER THAT THE DEPRECIATION ALLOWANCE FOR THE YEAR UNDER CONSIDERA TION SHOULD BE RECOMPUTED ADOPTING WDV ON THE OPENING DAY OF THE P REVIOUS YEAR RELEVANT TO THE ASSTT YEAR 2003-04 ONCE IT REACHES FINALITY ON DISPOSAL OF APPEAL FOR THE ASSTT.YEAR 2001-02. 7.0 UPHOLDING THE ASSESSING OFFICERS ACTION ON T HE COMPUTATION OF BOOK PROFIT FOR THE PURPOSES OF SECTION 115JB OF THE ACT AND IN IGN ORING THAT:- A) THE APPELLANTS QUALIFIED FOR DEDUCTION OF RS.139721 92 BEING THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT AND IN IGNORING THAT IN VIEW OF APPELLANT FACTS, FOR THE PURPOSES O F COMPUTING BOOK PROFIT, IT IS NOT THE PROFIT AS COMPUTED UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION THAT HAS TO BE ADO PTED BUT IT IS PROFIT AS PER BOOKS OF ACCOUNT. B) RS.15078740 AMORTIZED IN THE ACCOUNTS WAS NOT RELAT ABLE TO THE INCOME EXEMPT U/S 10 OF THE ACT. 8.0 NOT APPRECIATING THAT THE TAX PAYABLE BY THE AP PELLANT WAS COMPUTED UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT AND THER EFORE, THERE WAS NO LIABILITY TO PAY INTEREST U/S 234B OF THE ACT . 16.2. GROUND NO. 1: THIS IS NOT PRESSED BY LD. A.R. AND THE SAME IS TREATED AS REJECTED. 67 16.3. GROUND NO. 2: THIS GROUND CONSISTS OF FOLLOWI NG ITEM OF DISALLOWANCES. THEY ARE ADJUDICATED AS UNDER: 16.3.1. RS. 40,415/- BEING ADVANCES TO EMPLOYEES NOT RECOVERABLE. THE ASSESSING OFFICER DISALLOWED THE CLAIM FOR WANT OF DETAILS. IT WAS CLAIMED THAT THIS AMOUNT REPRESENTS SMALL AMOUNTS N OT RECOVERABLE BEING ADVANCES GIVEN TO VARIOUS EMPLOYEES. DISALLOWANCE WAS MADE ON THE GROUND THAT THEY DID NOT PERTAIN TO THIS YEAR BUT P ERTAINED TO EARLIER YEARS. THE LD. LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THESE EXPENSES HAVE NOT BEEN INCURRED DURING THE RELEVANT YEAR AND THEREFORE CANNOT BE AL LOWED UNDER SECTION 37. FURTHER IF IT IS A LOSS IT WAS NOT INCURRED DU RING THE CURRENT YEAR. THEY ARE ALSO NOT TRADING ADVANCES. IT PERTAINED T O THE EMPLOYEES WHO RETIRED SOMEWHERE BETWEEN 1990-1999. 16.3.2 LD. DR ON THE OTHER HAND SUPPORTED THE ORD ER OF THE AUTHORITIES BELOW. 16.3.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND CAREFULLY GOING THROUGH THE MATERIAL ON RECORD, WE ARE OF THE VIEW THAT THE CLAIM SHOULD BE ALLOWED. FIRSTLY, FOR AN AMOUNT TO BECOME ELIGI BLE FOR WRITING OF IN THE BOOKS, IT IS NOT NECESSARY THAT IT SHOULD BE ONLY A TRADE ADVANCE. WHAT IS NECESSARY, IS THAT ADVANCE IS GIVEN DURING THE NORM AL COURSE OF BUSINESS. ADVANCES ARE GIVEN TO THE EMPLOYEES AS A PART OF BU SINESS POLICY AND ARE RECOVERABLE FROM THEIR SALARIES. THERE IS NO CAPITA L OUTLAY INVOLVED. THEREFORE ADVANCES TO EMPLOYEES WOULD ALSO FALL IN THE CATEGORY AS TRADE ADVANCES. WHAT IS NECESSARY IS THAT COMMERCIAL INT EREST SHOULD BE INVOLVED IN THE ADVANCE AND IT SHOULD NOT BE OF PER SONAL NATURE. ONCE SUCH ADVANCES GIVEN TO EMPLOYEES ARE NOT RECOVERABL E, THEY ARE BAD DEBTS AND IF WRITTEN OF IN THE BOOKS, THEY WOULD BE ALLOW ABLE AS BUSINESS LOSS. ACCORDINGLY, THE CLAIM OF THE ASSESSEE IS ALLOWED. 68 16.3.4 RS. 1,78,607/- IT REPRESENTED DISCOUNT CLAIMED BY 4 PARTIES WHICH WERE SETTLED DURING THE YEAR. THE LD. ASSESS ING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THEY PERTAI NED TO EARLIER YEARS AND SHOULD BE ACCOUNTED FOR IN THE YEAR WHEN SALES TOOK PLACE. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE D ISALLOWANCE ON THE GROUND THAT THE ASSESSEE FAILED TO GIVE THE PRO OF OF CRYSTALLIZATION OF THE CLAIM DURING THIS YEAR. AS THE AMOUNT PERTAINED TO EARLIER YEARS, HE CONFIRMED THE DISALLOWANCE. 16.3.5. THE LD. A.R. HOWEVER SUBMITTED THAT SALES W ERE MADE TO 4 PARTIES AND THEIR ACCOUNTS WERE DEBITED, BUT PART O F THE DUES WAS NOT PAID BY THE PARTIES ON ACCOUNT OF DISPUTE ON QUALITY AND PRICE. SINCE KEEPING IN VIEW THE TURNOVER OF THE SALES MADE TO THESE PAR TIES, SHORT AMOUNT NOT PAID BY THEM WAS WRITTEN OFF AS BAD DEBTS. LD. D.R . ON THE OTHER HAND RELIED ON THE ORDER OF THE AUTHORITIES BELOW. 16.3.6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO SHOW THAT THIS AMOUNT REPRESENTED SALES MADE TO THE CLIENTS. IF THE AMOUNT HAS BEEN OFFERED FOR TAXATION IN THE EAR LIER YEARS AND HAS BEEN ACTUALLY WRITTEN OFF AFTER THE ACCOUNTS ARE SETTLED , THEN THE CLAIM SHOULD BE ALLOWED. SIMILAR ISSUE AROSE AGAIN ASSESSMENT YEAR IN 2002-2003 IN RESPECT OF RS. 2,50,000/-. FOLLOWING OUR DECISION ON THAT ISSUE, WE RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFF ICER TO FIND OUT THE AMOUNT WHICH HAS BECOME IRRECOVERABLE AS PER PRINC IPLES LAID DOWN BY HON'BLE GUJARAT HIGH COURT IN DHAL ENTERPRISES AND ENGINEERS PVT. LTD. VS. CIT (2007) 295 ITR GUJARAT 481(GUJ). AS A RESU LT, THIS GROUND OF THE ASSESSEE IS ALLOWED, BUT FOR THE STATISTICAL PURPOS ES. 16.3.7. RS. 15,41,217/- THIS REPRESENTED PROVISIONS MADE TOWARDS BAMBOO SUPPLIED TO THE FOREST DEPARTMENT. THE ASS ESSEE MADE PROVISION 69 AT A RATE OF RS. 36.72 PER 100 FULL LENGTH BAMBOOS SUPPLIED TO VARIOUS DEPARTMENTS WHO CONFIRMED THAT THEY WOULD PAY ONLY RS. 10 INSTEAD OF RS. 36.72 PER 100 FULL LENGTH BAMBOOS. ACCORDINGLY , THE ASSESSEE HAD REVERSED THE PROVISION AT A RATE OF RS. 26.72 PER 1 00 FULL LENGTH BAMBOOS AND CREDITED TO THE ADJUSTMENT AMOUNT RELATING TO P REVIOUS YEARS. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUN D THAT THE ASSESSEE HAS NOT MADE ANY EFFORT TO CONVINCE THE FOREST DEPA RTMENT REGARDING PRICE ORIGINALLY DECIDED BY THEM. HE ACCORDINGLY MADE AD DITION. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE S AME ON THE GROUND THAT THE ASSESSEE FAILED TO PRODUCE RELEVANT BOOKS OF ACCOUNTS OR THE SALE REGISTER FOR THE EARLIER YEARS TO SHOW THA T THESE AMOUNTS WERE SHOWN AS SALES, IN EARLIER YEARS. SINCE THE ASSESS EE FAILED TO SHOW THAT CONDITIONS OF CLAIMING BAD DEBTS ARE SATISFIED, DIS ALLOWANCE SO MADE WAS CONFIRMED. 16.3.8. BEFORE US LD. A.R. FOR THE ASSESSEE SUBMITT ED THAT ASSESSEE HAS UNDERTAKEN THE JOB OF CUTTING BAMBOO GROWN ON G OVERNMENT LAND WHICH WAS ULTIMATELY PURCHASED BY THE ASSESSEE TO B E USED AS RAW MATERIAL FOR THE MANUFACTURING OF FINAL PRODUCT I.E . PAPER. THE ASSESSEE IS PAID JOB CHARGES WHICH ARE BASED ON LENGTH OF THE B AMBOOS AS PER ASSESSEES OWN CALCULATIONS. CERTAIN AMOUNT WAS DE BITED BY THE ASSESSEE TO THE ACCOUNT OF FOREST DEPARTMENT ON THE BASIS OF LENGTH OF BAMBOOS ESTIMATED BY THE ASSESSEE. HOWEVER, THE FOREST DEP ARTMENT DID NOT AGREE AND DID NOT MAKE FULL PAYMENT AS PER THE BILLS RAIS ED BY THE ASSESSEE. IN THE INTEREST OF ASSESSEES BUSINESS AND FOR MAINTAI NING RELATIONSHIPS WITH THE FOREST DEPARTMENT WHATEVER DEDUCTION THE FOREST DEPARTMENT HAS MADE, WAS ACCEPTED AND UNPAID AMOUNT WAS RETURN OF. 16.3.9. THE LD. D.R. ON THE OTHER HAND RELIED ON TH E ORDERS OF THE AUTHORITIES BELOW. 70 16.3.10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSING THE MATERIAL ON RECORD. WE RESTORE THE MATTER TO THE F ILE OF THE ASSESSING OFFICER TO GIVE AN OPPORTUNITY TO THE ASSESSEE TO S HOW THAT ABOVE AMOUNT HAS BEEN CONSIDERED IN THE SALES IN EARLIER YEAR AN D IS NOT RECOVERABLE, FOLLOWING THE DECISION OF HON'BLE GUJARAT HIGH COUR T IN DHAL ENTERPRISES AND ENGINEERS (SUPRA). THIS GROUND OF THE ASSESSEE IS THEREFORE ALLOWED, BUT FOR STATISTICAL PURPOSES. 16.3.11. RS. 21,97,577/- THIS AMOUNT REPRESENTED TELEPHONE, ELECTRICITY AND TAXI HIRE CHARGES. IT WAS CLAIMED THAT THESE E XPENSES WERE INCURRED BY OTHER GROUP COMPANIES ON BEHALF OF ASSESSEE COMP ANY. DUE TO DIFFERENCE OF OPINION WITH REGARD TO THE SHARE, THE ASSESSEE HAS TO BEAR A SUM OF RS. 21,97,577/- WHICH WAS CONSIDERED AS ASS ESSEES LIABILITY AND WAS CLAIMED AS DEDUCTION. THE ASSESSING OFFICER DI SALLOWED THE SAME ON THE GROUND THAT IT PERTAINS TO EARLIER YEARS. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE SAME ON THE GROU ND THAT NO PROOF OF SETTLEMENT OR CRYSTALLIZATION OF EXPENSES HAS BEEN SUBMITTED. THE SELF MADE VOUCHERS WERE NOT TREATED AS PROOF OF SUCH CRY STALLIZATION. 16.3.12. AGAINST THIS, LD. A.R. SUBMITTED THAT IN O RDER TO REDUCE THE COST UNDER VARIOUS HEADS, THE ASSESSEE AVAILED FACI LITIES OF OTHER GROUP COMPANIES. THE AMOUNTS PAYABLE TO THEM WERE SETTLE D AT PERIODICAL INTERVALS. SUBSEQUENTLY, IT WAS NOTED BY THE ASSES SEE COMPANY THAT ASSESSEE HAS EXCESSIVELY CHARGED FOR CERTAIN SERVIC ES PROVIDED TO OTHER GROUP COMPANIES AND THEREFORE NET BALANCE FOUND IRR ECOVERABLE WAS WRITTEN OFF. 16.3.13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE MATERIAL ON RECORD. WE RESTORE THIS ISSUE TO THE F ILE OF THE ASSESSING OFFICER TO FIND OUT WHETHER THIS SUM HAS BEEN OFFER ED FOR TAXATION IN EARLIER YEARS. IF SO IT WOULD BE FURTHER FOUND WHE THER THERE IS SOME 71 AGREEMENT OR MEMORANDUM THAT FURTHER AMOUNT IS NOT PAYABLE TO ASSESSEE. IF THESE TWO CONDITIONS ARE SATISFIED, TH EN AS PER PRINCIPLES LAID DOWN BY HON'BLE GUJARAT HIGH COURT IN DHAL ENTERPRI SES AND ENGINEERS (SUPRA) THE AMOUNT SO WRITTEN OF SHOULD BE ALLOWED AS REDUCTION. THIS GROUND IS ALLOWED, BUT FOR STATISTICAL PURPOSES. 16.3.14. RS. 1,48,676/- THIS AMOUNT REPRESENTED SMALL AMOUNTS LYING AS DEBIT BALANCE IN RESPECT OF MORE THEN 50 PARTIES. THE ASSESSEE DID NOT GIVE ANY DETAIL TO THE ASSESSING OFFICER. HE THERE FORE DISALLOWED THE CLAIM. THE LEARNED COMMISSIONER OF INCOME TAX(APPE ALS) CONFIRMED THE SAME ON THE GROUND THAT IT IS NOT CLEAR FROM T HE DETAILS FILED WHETHER THEY WERE OFFERED AS INCOME IN AN EARLIER YEAR OR W HETHER THEY ARE PART OF ANY ADVANCE. BEFORE US LD. A.R. SUBMITTED THAT DUR ING THIS YEAR TURNOVER OF THE COMPANY TOUCHED A FIGURE OF RS. 680 CRORES. VARIOUS CLIENTS DID NOT MAKE FULL PAYMENTS TO THE ASSESSEE FOR VARIOUS REASONS SUCH AS PRICE DIFFERENCE ETC. KEEPING IN VIEW THE SMALLNESS OF T HE AMOUNT INVOLVED, IN RESPECT OF EACH PARTY AND TO AVOID ANY STRAINED REL ATION AND DISCONTINUATION OF BUSINESS WITH THEM, THE AMOUNT W AS CONSIDERED AS IRRECOVERABLE AND WAS WRITTEN OFF. 16.3.15. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D CAREFULLY PERUSING THE MATERIAL ON RECORD, WE RESTORE THE MAT TER TO THE FILE OF THE ASSESSING OFFICER BEFORE WHOM THE ASSESSEE WILL FUR NISH COPIES OF ACCOUNTS OF RESPECTIVE PARTIES TO SHOW THAT THESE A MOUNTS WERE CONSIDERED IN THE TRADING AND PROFIT AND LOSS ACCOUNTS IN AN E ARLIER YEAR AND REPRESENTED PETTY-BALANCES WHICH ARE WRITTEN OFF ON ACCOUNT OF NON RECOVERY FROM THE PARTIES AND FOR THE REASON THAT THEY ARE LYING IN THE BOOKS FOR MORE THEN 3 YEARS. SIMILAR ISSUE HAS BEE N DISPOSED OF BY US IN THE ASSESSMENT YEAR 2002-2003, WHICH INVOLVED THE W RITE OFF OF A SUM OF RS. 11,11,433/-. FOLLOWING THE SAME, WE RESTORE THE MATTER TO THE FILE OF 72 THE ASSESSING OFFICER. AS A RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED, BUT FOR STATISTICAL PURPOSES. 17. GROUND NO. 3: 17.1. IT RELATES TO CLAIM OF FOREIGN EXCHANGE RATE FLUCTUATION. IT HAS AFFECT ON ASSESSEES LIABILITY. DURING THE ASSESSMENT YEA R THE ASSESSEE HAD OFFERED A SUM OF RS. 17,82,038/- FOR TAX, BUT DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS SUBMITTED THAT THIS O FFER SHOULD BE IGNORED. THE SUBMISSION OF THE ASSESSEE IN THIS REGARD WAS S UBMITTED TO THE ASSESSING OFFICER VIDE ASSESSEES LETTER DATED 18-0 1-2006 AS UNDER: SONGADH UNIT WAS TAKEN OVER BY THE EXISTING MANAGE MENT AND FOR THE PRE- TAKEOVER PERIOD THERE WERE CERTAIN OUTSTANDING BILL S FOR IMPORT OF MATERIALS. THE SAID LIABILITY (DISPUTED) SINCE IS PAYABLE IN F OREIGN CURRENCY, THE LIABILITY AMOUNT VARIES (INCREASES / DECREASES) DEPENDING UPO N EXCHANGE RATE. THE EFFECT OF INCREASE / DECREASE IN LIABILITY IS NOT B EING CONSIDERED IN THE RESPECTIVE YEAR PROFIT & LOSS ACCOUNT BUT SUITABLE NOTE IS BEING GIVEN IN THE ACCOUNTS (FOR THE YEAR UNDER CONSIDERATION THIS WAS NOTE NO.B-5 UNDER SCHEDULE 20 WHICH APPEARS AT PAGE 54 OF THE RETURN) . WE HAVE BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND THEREFORE, THE EFFECT OF INCREASE/ DECREASE IN THE LIABILITY ON AC COUNT OF EXCHANGE FLUCTUATION IS BEING FACTORED IN THE COMPUTATION OF TOTAL INCOM E I.E. IN THE YEAR:- 1. LIABILITY INCREASES, DEDUCTION IS CLAIMED, AND 2. DECREASES, THE SAME IS BEING OFFERED FOR TAX. WE SUBMIT THAT AS ON 31.3.2002 (ASSTT.YEAR 2002-03 MATTER) FOR THE ADDITIONAL LIABILITY OF RS.3280212 DEDUCTION WAS CLAIMED WHICH WAS NOT ALLOWED IN SECTION 143(3) ORDER AND IS BEING CONTESTED IN APPE AL BEFORE COMMISSIONER (APPEALS). AS ON 31.3.2003 THERE WAS A REDUCTION IN LIABILITY CONSIDERING THE EXCHANGE RATE AS ON 31.3.2003 AND 31.3.2002 AND THEREFORE, T O THE EXTENT OF LIABILITY REDUCTION AMOUNTING TO RS.1782038 THE SAME WAS OFFE RED FOR TAX AS WOULD BE EVIDENT FROM PAGE 1 OF THE RETURN. WITHOUT PREJUDICE TO THE SUBMISSIONS MADE SIMILAR I SSUE IN ASSTT YEAR 2002-03 WE SUBMIT THAT IN VIEW OF THE FINDINGS RECORDED IN SECTION 143(3) ORDER FOR THE ASSTT YEAR 2002-03 THE SAID AMOUNT OF RS.1782038 OF FERED FOR TAX NEEDS TO BE 73 IGNORED IN SECTION 143(3) ORDER WHICH WOULD NOW BE PASSED FOR ASSTT YEAR 2003-04. 17.2. THUS, DUE TO FAVOURABLE FLUCTUATION IN FOREIG N EXCHANGE ASSESSEE HAS GAINED A SUM OF RS. 17,82,038/-. HOWEVER, IT H AD SUFFERED A LOSS IN THE ASSESSMENT YEAR 02-03 FOR A SUM OF RS. 32,80,21 2/- WHICH WAS CLAIMED AS LIABILITY IN THE ASSESSMENT YEAR 2002-03 , BUT WHICH WAS DISALLOWED BY THE ASSESSING OFFICER. ON THAT REASO NING ASSESSEE HAD CLAIMED BEFORE THE ASSESSING OFFICER THAT FAVORABLE FOREIGN EXCHANGE GAIN ON ACCOUNT OF FLUCTUATION OF RATE SHOULD BE IG NORED THIS YEAR. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) DID NO T ACCEPT ASSESSEES CLAIM. IN OTHER WORDS HE DISMISSED THE CLAIM OF THE ASSESSEE TO IGNORE THE OFFERING OF THE ABOVE SUM AS INCOME IN T HE EVENT OF HIS CLAIM IS DISALLOWED IN THE ASSESSMENT YEAR 2002-03. 17.3. WE HAVE HEARD LD. A.R. AND LD. D.R. WHILE DI SPOSING OF THE GROUND NO. 3 IN THE ASSESSMENT YEAR 2002-03 WE HAVE ALLOWED THE CLAIM OF THE ASSESSEE. ACCORDINGLY AS PER SUBMISSIONS OF LD. A.R. THIS GROUND IS TREATED AS NOT PRESSED AND HENCE REJECTED. 18. GROUND NO. 4 18.1.1. THIS RELATES TO DISALLOWANCE OF RS. 2,21,31 ,183/- INCLUDING DEPRECIATION OF RS. 5,76,506/-. THIS EXPENDITURE W AS INCURRED BY THE ASSESSEE ON GROWING OF THE SAPLING THROUGH THREE PR OCESSES. FIRST, DIRECTLY SHOWING THE SEEDS IN THE LAND, GROWING THE PLANTS T HERE AND UPROOTING AND REPLANTING THE SAME IN POLYBAGS/POTS, GROWING THEM TO THE HEIGHT OF 30 CMS, AND THEN SELLING THE SAME TO THE FARMERS. SEC ONDLY, PROCURING COPPICE SHOOTS FROM THE FARMERS, CARRYING OUT CHEMI CAL PROCESS UNDER 74 CONTROLLED CONDITIONS, AND SELLING THEM LATER TO TH E FARMERS FOR GROWING THEM INTO TREES. THIRDLY, SPENDING MONEY ON DISTRI BUTION OF SEEDS TO THE FARMERS ON CONVEYANCE, SALARY ETC. FOR THE PURPOSE OF SUPERVISION OF THE TREES GROWN BY THE FARMERS. THE ISSUE HAS BEEN DIS CUSSED BY US IN THE ASSESSMENT YEAR 02-03. WE HAVE HELD THEREIN THAT O NLY THE EXPENDITURE OVER THE LAND AFTER TILLING, SHOWING OF THE SEEDS, PLANTING THE SAME IN POLYBAGS AND SUBSEQUENT MAINTENANCE THEREOF WOULD A LONE BE TREATED AS AGRICULTURE EXPENDITURE AND WILL NOT BE ALLOWED AGA INST BUSINESS INCOME OF THE ASSESSEE. OTHER EXPENSES WOULD ACCORDINGLY BE ALLOWED. ON OUR ASKING THE ASSESSEE HAS SUBMITTED FOLLOWING DETAILS OF VARIOUS EXPENSES INCURRED BY IT UNDER DIFFERENT HEADS: PLANTATION / RAW MATERIAL EXPENSES A.Y. 2003-04 RS. LACS PARTICULARS SAPLINGS FOREST / TOTAL SEED ROUTE CLONAL TOTAL OTHERS LAND NON-LAND TOTAL ROUTE 1 2 3 (1+2) 4 5 (3+4) 6 7 (5+6) - LABOUR / SEEDING COST 2.48 14.06 16.54 4.82 21.36 84.72 106.08 - SUPERVISION 0.54 3.04 3.58 0.90 4.48 23.10 27.58 - MATERIAL 2.14 12.14 14.28 3.57 17.85 0.42 18.27 - RENT 0.42 2.37 2.79 - 2.79 - 2.79 - SALARY 0.68 3.86 4.54 1.14 5.68 46.04 51.72 - CONVEYANCE 0.12 0.69 0.81 0.20 1.01 10.12 11.13 - MISCELLANEOUS 0.63 3.56 4.19 1.05 5.24 38.65 43.89 - TOTAL 7.01 39.72 46.73 11.68 58.41 203.05 261.46 - SAPPLING SALE 5.51 31.21 36.72 9.19 45.91 - 45.91 - NET EXPENDITURE 1.50 8.51 10.01 2.49 12.50 203.05 215.55 - DEPRECIATION - - - 5.76 5.76 - 5.76 - GRAND TOTAL 1.5 8.51 10.01 8.25 18.26 203.05 221.31 NOTES: 1. EXPENSES INCURRED IN SEED ROUTE SAPPLINGS, KEEPING IN VIEW NUMBER OF DAYS SEEDS REMAIN IN PRIMARY BEDS, 15% OF TOTAL EXPENDITURE HAS BEEN ALL OCATED TO LAND RELATED EXPENDITURE. 2. SAPPLING SALE - 80% HAS BEEN CONSIDERED AS DEVELOPE D THROUGH SEED ROUTE AND BALANCE 20% THROUGH CLONAL ROUTE (MIST CHAMBERS) 75 18.1.2. ACCORDINGLY, ONLY THE EXPENSES TO THE EXTEN T ON RS. 46.73 LACS WOULD BE CONSIDERED AS AGRICULTURAL EXPENSES O UT OF TOTAL CLAIM OF EXPANSES AT RS. 261.46 LACS. AND WOULD NOT BE ALLO WED. AGAINST THIS THE ASSESSEE HAS SHOWN SALE OF AGRICULTURE PRODUCE (REL ATABLE TO GROWING OF SAPLINGS THROUGH LAND) AT RS.36.72 LACS AND SALE OF SAPLINGS NOT RELATABLE TO AGRICULTURAL OPERATIONS AT RS.9.19 LACS. THEREFO RE AGRICULTURAL LOSS WOULD BE ONLY RS.46.73-36.72=10.01 LACS. THE SALE O F SAPLINGS AT RS.9.19 LACS WOULD BE NON-AGRICULTURAL RECEIPTS AND THEREFO RE CANNOT BE ALLOWED TO BE ADJUSTED AGAINST AGRICULTURE EXPENSES. SO FAR AS THE DEPRECIATION OF RS.5.76 LACS IS CONCERNED THE SAME HAS BEEN CLAIM ED ON MIST CHAMBERS OTHER ASSETS USED IN GROWING SAPLINGS THROUGH CLONA L ROUTES WHICH HAS BEEN TREATED AS NON-AGRICULTURAL OPERATION IN OUR D ISCUSSION MADE IN ASSESSMENT YEAR 2002-03 WHILE DISPOSING OF SIMILAR GROUND. THUS THE DISALLOWANCE IS RESTRICTED TO RS.10.01 LACS AND ACC ORDINGLY ASSESSEE GETS RELIEF OF RS.(221.31 10.01) =211.30 LACS. 18.2. GROUND NO. 4.1 18.2.1. THIS IS THE SAME AS GROUND NO. 4, THEREFORE IT IS CONSIDERED AS ADJUDICATED AS PART OF GROUND NO. 4. 19. GROUND NO. 5 19.1. IT RELATES TO DEDUCTION OF RS. 31,25,000/-. CLAIMED BY THE ASSESSEE UNDER SECTION 35(1)(2) FOR THE CONTRIBUTION OF RS. 25 LAC MADE TO PUSHPAWATI SINGHANIA RESEARCH INSTITUTE. THE ASSES SING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT ASSESSEES APPLICATION FOR RENEWAL OF THE APPROVAL WAS PENDING WITH THE CBDT. IN ABSE NCE OF VALID APPROVAL COVERING THE PERIOD UNDER CONSIDERATION, T HE ASSESSING OFFICER DISALLOWED THE CLAIM. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ALSO CONFIRMED THE SAME FOLLOWING THE SAME REASONING. 76 19.2. BEFORE US IT WAS SUBMITTED BY THE LD. A.R. TH AT THE CBDT HAS NOW RENEWED THE APPROVAL. ORDER OF THE CBDT CONTAINS TH E YEAR UNDER CONSIDERATION. HE REFERRED TO PAGE B1 OF THE PAPER BOOK. FOR THE SAKE OF CONVENIENCE WE REPRODUCE THE SAME AS UNDER: (TO BE PUBLISHED IN PART II, SUB-SECTION (II) OF SECTION 3 OF THE GAZETTE OF INDIA) GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) (CENTRAL BOARD OF DIRECT TAXES) NEW DELHI, THE 12 TH APRIL, 2007 NOTIFICATION S.O. IT IS HEREBY NOTIFIED FOR GENERAL INFORMATION THAT THE ORGANIZATION PUSHPAWATI SINGHANIA RESEARCH INSTITUTE FOR LIVER, RENAL AND DIGESTIVE DISEASES, DELHI HAS BEEN APPROVED BY THE CENTRAL GO VERNMENT FOR THE PURPOSE OF CLAUSE (II) OF SUB-SECTION (1) OF SECTION 35 OF THE INCOME-TAX ACT, 1961 (SAID ACT), READ WITH RULES 5O AND 5D OF THE INCOME-TAX R ULES, 1962 (SAID RULES), WITH EFFECT FROM 1.4.2001 IN THE CATEGORY OF OTHER INSTITUTION, PARTY ENGAGED IN RESEARCH ACTIVITIES SUBJECT TO THE FOLLOWING CON DITIONS, NAMELY:- (I) THE SUMS PAID TO THE APPROVED ORGANIZATION SHALL BE UTILIZED FOR SCIENTIFIC RESEARCH; (II) THE APPROVED ORGANIZATION SHALL CARRY OUT SCIENTIFI C RESEARCH THROUGH ITS FACULTY MEMBERS OR ITS ENROLLED STUDENTS; (III) THE APPROVED ORGANIZATION SHALL MAINTAIN BOOKS OF A CCOUNTS AND GET SUCH BOOKS AUDITED BY AN ACCOUNTANT AS DEFIED IN THE EXP LANATION TO SUB- SECTION (2) OF SECTION 288 OF THE SAID ACT AND FURN ISH THE REPORT OF SUCH AUDIT DULY SIGNED AND VERIFIED BY SUCH ACCOUNTANT T O THE COMMISSIONER OF INCOME-TAX OR THE DIRECTOR OF INCOME-TAX HAVING JUR ISDICTION OVER THE CASE, BY THE DUE DATE OF FURNISHING THE RETURN OF I NCOME UNDER-SECTION (1) OF SECTION 139 OF THE SAID ACT; (IV) THE ORGANIZATION SHALL MAINTAIN A SEPARATE STATEMEN T OF DONATIONS RECEIVED AND AMOUNTS APPLIED FOR SCIENTIFIC RESEARC H AND A COPY OF SUCH STATEMENT DULY CERTIFIED BY THE AUDITOR SHALL ACCOM PANY THE REPORT OF AUDIT REFERRED TO ABOVE. 2. THE CENTRAL GOVERNMENT SHALL WITHDRAW THE APPRO VAL IF THE APPROVED ORGANIZATION:- 77 (A) FAILS TO MAINTAIN BOOKS OF ACCOUNTS REFER RED TO IN SUB-PARAGRAPH (III) OF PARAGRAPH 1; OR (B) FAILS TO FURNISH ITS AUDIT REPORT REFERRE D TO IN SUB-PARAGRAPH (III) OF PARAGRAPH 1; OR (C) FAILS TO FURNISH ITS STATEMENT OF THE DON ATIONS RECEIVED AND SUMS APPLIED FOR SCIENTIFIC RESEARCH REFERRED TO IN SUB-PARAGRAPH (I V) OF PARAGRAPH 1; OR (D) CEASES TO CARRY ON ITS RESEARCH ACTIVITI ES OR ITS RESEARCH ACTIVITIES ARE NOT FOUND TO BE GENUINE; OR (E) CEASES TO CONFORM TO AND COMPLY WITH TH E PROVISIONS OF CLAUSE 9II) OF SUB- SECTION (1) OF SECTION 35 OF THE SAID ACT READ WITH RULES 5C OF THE SAID RULES. (RENU JAUHRI) DIRECTOR TO THE GOVERNMENT OF INDIA 19.3 IT IS CLEAR FROM THE ABOVE THAT RENEWAL IS AP PLICABLE WITH EFFECT FROM 01-04-2001. SINCE THE DEFECT ON THE BASIS OF W HICH DISALLOWANCE WAS MADE IS NOW REMOVED THE ASSESSEE IS ENTITLED FO R DEDUCTION. THE ASSESSING OFFICER WILL VERIFY THE SAME AND ALLOW TH E CLAIM. THE GROUND OF THE ASSESSEE IS ALLOWED, BUT FOR STATISTICAL PUR POSES. 20. GROUND NO. 6 IS NOT PRESSED AND IS THEREFORE REJECTED. 21.GROUND NO. 7(A) 21.1. IT IS AGAINST UPHOLDING ASSESSING OFFICERS ORDER ON THE COMPUTATION OF BOOK PROFIT FOR THE PURPOSE OF SECTI ON 115JB BY IGNORING THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION OF RS. 1,39,72,192/- BEING THE PROFIT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC. THE LD. ASSESSING OFFICER DISALLOWED AND LD. LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE DISALLOWANCE ON THE GROU ND THAT DEDUCTION UNDER SECTION 80HHC HAS TO BE COMPUTED IN ACCORDANC E WITH THE PROVISIONS OF THE ACT AND HAS TO BE ALLOWED ONLY IF THERE IS A POSITIVE 78 GROSS TOTAL INCOME. IF GROSS TOTAL INCOME IS NIL A S THERE IS A LOSS, NO SUCH DEDUCTION IS ALLOWABLE. SIMILAR ISSUE AROSE BEFORE US IN THE APPEAL FOR THE ASSESSMENT YEAR 2002-03 IN GROUND NO.6(A).IT HAS BE EN HELD THEREIN, FOLLOWING THE DECISION OF HON'BLE KERALA HIGH COURT IN G.T.N. TEXTILE LIMITED (SUPRA) AND HON'BLE MADRAS HIGH COURT IN CA SE OF MEGHA ELECTRO AND FUTURA POLYSTER LIMITED, THAT THE PROFIT FOR TH E PURPOSES OF DEDUCTION UNDER SECTION 80HHC WOULD BE BOOK PROFIT AND NOT T HE PROFIT AS COMPUTED UNDER THE HEAD PROFIT AND GAINS OF BUSINE SS AND PROFESSION. SINCE FACTS ARE THE SAME THIS YEAR ALSO, WE ALLOW T HE CLAIM OF THE ASSESSEE. THEREFORE THIS GROUND OF ASSESSEE IS ALLOWED. 22. GROUND NO. 7(B) 22.1. THIS RELATES TO UPHELDING THE ASSESSING OFFIC ERS ACTION ON COMPUTATION OF BOOK PROFIT FOR THE PURPOSE OF SECTI ON 115JB OF THE ACT AND IN IGNORING THAT RS. 1,50,78,740/- AMORTIZED IN THE ACCOUNTS WAS NOT RELATABLE TO THE INCOME EXEMPT UNDER SECTION 10 OF THE ACT. SIMILAR ISSUE HAD COME BEFORE US IN GROUND 6C FOR THE ASSESSMEN T YEAR 2002-2003. FOR THE REASONS RECORDED THEREIN THIS GROUND IS ACC ORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 23 GROUND NO. 8: 23.1 IT RELATES TO NOT UPHOLDING THE CLAIM OF THE A SSESSEE THAT INTEREST UNDER SECTION 234B IS NOT PAYABLE WHEN INCOME IS C OMPUTED UNDER THE PROVISIONS OF SECTION 115JB. WE HAVE REJECTED THIS CLAIM IN THE ASSESSMENT YEAR 2002-03 AND ACCORDINGLY IT IS REJEC TED HERE ALSO. 23.2 AS A RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND PARTLY ALLOWED FOR THE STATISTICAL PURPOSE. 79 ITA NO. 738/A/2007 ASSESSMENT YEAR 2003-04 REVENUES APPEAL: 24 . IN THIS APPEAL REVENUE HAS RAISED FOLLOWING GRO UNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE AS SESSEES CLAIM FOR NON TAXABILITY OF RS. 16,12,221/- MADE IN VIEW OF BIFRS ORDER DATED 13-05-1992 WAS TIME BOUND RELIEF U/S. 41(1) O F THE I.T. ACT, 1961. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, LEARNED CIT(A)-I, SURAT OUGHT TO HAVE UPHELD THE OR DER OF THE ASSESSING OFFICER ON THE ABOVE ISSUES. 3. IT IS, THEREFORE, PRAYED THAT THE ORDERS OF THE LEARNED CIT(A) MAY BE SET-ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED TO THE ABOVE EXTENT. 25. GROUND NO.1,2&3. 25.1. WE HAVE HEARD LEARNED DR AND LEARNED AR AND CAREFULLY GONE THOROUGH THE ORDERS OF THE AUTHORITIES BELOW. SIM ILAR ISSUE WAS RAISED BY REVENUE IN THE ASSESSMENT YEAR 2002-03. AS PER OUR DISCUSSION IN THAT YEAR ABOVE, WE HOLD THAT LD. CIT(A) WAS JUSTIFIED I N NOT TREATING THE RIGHT BACK OF THE EXCESS PROVISIONS OF THE PRE-TAKEOVER P ERIOD AS TAXABLE, FOLLOWING CBDTS CIRCULAR DATED 22-04-1999. FOR T HE REASONS RECORDED IN THAT YEAR, WE CONFIRM THE ORDER OF THE LD. CIT(A ) THIS YEAR ALSO ON THIS ISSUE AND DISMISS THE DEPARTMENTAL APPEAL. ITA NO.346/AHD/2008 ASSESSEES APPEAL (A.Y. 2004-05) 26. IN THIS APPEAL ASSESSEE HAS RAISED FOLLOWING GR OUNDS: 1.0 UPHOLDING THAT THE DISALLOWANCE OF RS. 1158593 AND NOT APPRECIATING THAT THESE EXPENSES WERE FULLY ALLOWABLE IN THE YEAR UND ER CONSIDERATION. 2.0 UPHOLDING THE DISALLOWANCE OF RS. 7812884 (INCLUDIN G DEPRECIATION OF RS.432380) AND IN NOT APPRECIATING THAT THE SAID EX PENDITURE WAS INCURRED 80 WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND THAT THESE WERE NOT RELATED TO AGRICULTURAL ACTIVITIES. 3.0 UPHOLDING THE DISALLOWANCE OF RS. 63688608 TO MECKI NSEY & COMPANY FOR ADVISING THE APPELLANTS ON PROFIT IMPROVEMENT MEASU RES ETC IS A CAPITAL EXPENDITURE. 3.1 WITHOUT PREJUDICE TO ABOVE GROUND, IN NOT DIREC TING TO ALLOW DEPRECIATION ON RS. 63688608 AFTER HAVING UPHELD THAT THE SAID EXPE NDITURE IS A CAPITAL EXPENDITURE. 4.0 UPHOLDING THE ADDITION OF RS.14234266 WHICH WAS MAD E BY THE ASSESSING OFFICER BY MAKING REFERENCE TO SEC. 145A AND IN NOT APPRECIATING THAT THE FIGURE OF RS.17486564 SINCE REPRESENTS EXCISE DUTY ON CLOSING STOCK OF RAW MATERIALS THE SAME IS NOT COMPARABLE WITH RS.325229 8 WHICH REPRESENTS THE CLOSING BALANCE OF MODVAT RECOVERABLE AND THAT IN V IEW OF APPELLANTS FACTS/ICWAS GUIDANCE NOTE SEC. 145A HAS NO IMPACT ON THE PROFIT AS SHOWN IN THE P & L ACCOUNT. 5.0 UPHOLDING ADD BACK OUT RS. 2300000 AS INCOME OF THE APPELLANTS AND IN IGNORING THAT THE CLOSING STOCK DECLARED TO BANK WA S VALUED ON THE THEN AVAILABLE COST (OF IMMEDIATELY PRECEDING MONTH) WHE REAS FOR BOOKS IT WAS ON ACTUAL COST WHICH BECOMES AVAILABLE BY THE TIME ACC OUNTS ARE FINALIZED. 6.0 UPHOLDING DISALLOWANCE OF RS. 3462416 BEING PART OF INTEREST PAID ON BORROWED FUNDS/ADMINISTRATIVE EXPENSES AND IN NOT A PPRECIATING THAT INVESTMENT IN SHARES / UNITS ETC WERE MADE OUT OF I NTERNAL ACCRUALS AND FURTHER THAT NO PART OF ADMINISTRATIVE EXPENSES WER E INCURRED IN RELATION TO DIVIDEND INCOME. 7.0 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTION MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSTT. YEAR 2002-03, NOT HOLDING TH AT THE ASSESSING OFFICERS ACTION OF BRINGING TO TAX A SUM OF RS.5551128 BEING REDUCTION IN APPELLANTS LIABILITY ON ACCOUNT OF EXCHANGE FLUCTUATION ON THE OUTSTANDING BILLS FOR IMPORT OF MATERIALS WAS NOT JUSTIFIED SINCE THE ASS ESSING OFFICER HAD IGNORED THAT IN VIEW OF THE FINDINGS RECORDED IN SECTION 14 3(3) FOR THE ASSTT. YEAR 2002-03, THE APPELLANTS CONDUCT OF OFFERING THE SAI D AMOUNT IN THE RETURN OF INCOME WAS REQUIRED TO BE IGNORED AND IN MAKING REF ERENCE TO THE PROVISION OF SECTION 139950 WHICH ARE NOT APPLICABLE IN THE C ONTEXT OF APPELLANTS FACTS. 8.0 WITHOUT PREJUDICE TO THE APPELLANTS CONTENTION MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSTT. YEAR 2001-02, NOT DIRECTING THE AO THAT THE DEPRECIATION ALLOWANCE FOR THE YEAR UNDER CONSIDERATION SHOULD B E RECOMPUTED ADOPTING WDV ON THE OPENING DAY OF THE PREVIOUS YEAR RELEVAN T TO THE ASSTT YEAR 2004- 05 ONCE IT REACHES FINALITY ON DISPOSAL OF APPELLAN TS APPEAL FOR THE ASSTT. YEAR 2001-02 PENDING BEFORE INCOME TAX APPELLANT TRIBUNA L. 9.0 UPHOLDING THE ASSESSING OFFICERS ACTION ON THE COMP UTATION OF BOOK PROFIT THE PURPOSES OF SECTION 115JB OF THE ACT AND IN IGN ORING THAT:- A) THE APPELLANT QUALIFIED FOR DEDUCTION OF RS.1465 0718 BEING THE PROFIT ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT AND IN IGNORING THAT IN VIEW OF APPELLANT FACTS, FOR THE P URPOSES OF COMPUTING BOOK PROFIT, IT IS NOT THE PROFIT AS CO MPUTED UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION TH AT HAS TO BE ADOPTED BUT IT IS PROFIT AS PER BOOKS OF ACCOUNT. 81 B) RS.16385686 AMORTIZED IN THE ACCOUNTS WAS NOT RE LATABLE TO THE INCOME EXEMPT U/S 10 OF THE ACT. C) RS. 472367295 BEING THE LOSS INCURRED ON SALE OF SHARES/UNITS ETC ON WHICH DIVIDEND INCOME WAS ALSO RECEIVED (BEI NG EXEMPT U/S 100 WAS WRONGLY HELD BY THE ASSESSING OFFICER AS EX PENDITURE AND THAT IT RELATES TO EARNING DIVIDEND INCOME EXEMPT U /S 10 AND IN IGNORING THAT COURTS HAVE DRAWN CLEAR DISTINCTION B ETWEEN THE TERM LOSS AND EXPENDITURE AND FURTHER THAT CLAUSE(F) OF EXPLANATION TO SEC. 115JB IS NOT APPLICABLE. D) UPHOLDING ADD BACK OF RS.3462416 BEING INTEREST PAID ON BORROWED FUNDS/ ADMINISTRATIVE EXPENSES AND IN NOT APPRECIATING THAT INVESTMENT IN SHARES / UNITS ETC WERE MADE OUT OF INTERNAL ACCRUALS AND FURTHER THAT NO PART OF ADMINISTRATIVE EXPENSES WERE INCURRED IN RELATION TO DIVIDEND INCOME. 10.0 IGNORING THAT BOOK PROFIT U/S 115JB OF THE ACT CO MPUTED BY THE ASSESSING OFFICER WAS NOT IN ACCORDANCE WITH LAW / TRIBUNALS DECISIONS SINCE PROFIT AS PER PROFIT AND LOSS A/C WAS NOT REDUCED BY THE AMOU NT OF DEFERRED TAX LIABILITY OF RS.218023593 AND DIVIDEND DISTRIBUTION TAX OF RS. 35427490 THE ASSESSED BOOK PROFIT REQUIRED TO BE MODIFIED DOWN WARDS BY THE ABOVE REFERRED TWO AMOUNTS AND IN WRONGLY PLACING RELIANC E ON SEC 139(5) OF THE ACT / DISMISSING ADDITIONAL GROUNDS RAISED AT THE T IME OF HEARING. 11.0 NOT APPRECIATING THAT THE TAX PAYABLE BY THE APPELL ANT WAS COMPUTED UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT AND THER EFORE, THERE WAS NO LIABILITY TO PAY INTEREST U/S 234B OF THE ACT. 27. GROUND NO. 1 27.1. THIS GROUND RELATES TO CONFIRMING DISALLOWANC E OF RS. 11,58,593/- WHOSE DETAILS ARE GIVEN AS UNDER: AMT/RS. I) DEBIT BALANCE OF TRANSPORTERS/SUPPLIERS ETC. 47 0907 II) INSURANCE CHARGES 10311 III) ADDITIONAL DISCOUNT- PRADIP PAPER MART 3599 0 IV) ADDITIONAL DISCOUNT- T.K. RUBY 14737 V) ELECTRICITY EXPENSES GEB VYARA, AUDIT RECOVERY 103733 VI) OVER DUE INTEREST ON SALES KALYAN PAPER MART 270970 VII) ELECTRICITY EXPENSES GEB VYARA, AUDIT RECOVE RY 20871 VIII) PROFESSIONAL TAX 231074 TOTAL 1158593 27.2. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD OFFERED A SUM OF RS.5,0 8,08,394/- AS 82 PROVISIONS OF EARLIER YEARS WRITTEN BACK. OUT OF T HIS IT HAD CLAIMED AN EXPENDITURE OF RS. 11,58,593/- AND OFFERED THE BALA NCE OF RS. 4,96,49,801/- NET AS INCOME. IT WAS CLAIMED THAT T HE SUM AGGREGATING TO RS. 11,58,593/- ARE ALLOWABLE BUSINESS EXPENDITURE WHICH WERE CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER DISALLOWED THE CLAIM THAT THESE EXPENSES PERTAINED TO EARLIER PERIOD AND THEY WERE IN THE NATURE OF PROVISIONS FOR EXPENSES. THE LD. CIT(A) CONFIRMED THE DISALLOWANCE ON THE SAME GROUND. THE LD. A.R. SUBMITTED THAT THE NATURE OF THESE EXPENSES WOULD CLEARLY SHO W THAT THEY WERE INCURRED IN THE NORMAL COURSE OF BUSINESS. THE TUR NOVER OF THE ASSESSEE IS RS. 700 CRORES AND THEREFORE THERE WAS BOUND TO BE A SHORT PROVISION IN THE YEAR WHEN EXPENSES WERE ACTUALLY BOOKED. THE E XACT AMOUNT IS WORKED OUT ON RECONCILIATION WITH THE BUYERS AND SE RVICE PROVIDERS. 27.3. THE LD. D.R. ON THE OTHER HAND SUBMITTED THAT ASSESSEE HAD NOT SUBMITTED ANY DETAILS SO AS TO SHOW THAT LIABILITY RELATING TO THESE AMOUNTS HAVE CRYSTALLIZED DURING THIS YEAR. 27.4. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE C ONFIRM THE ORDER OF THE AUTHORITIES BELOW BECAUSE THE DETAILS AS TO HOW THE SE EXPENSES HAVE BEEN CRYSTALLIZED THIS YEAR ARE NOT AVAILABLE. IT IS AD MITTED POSITION THAT THESE EXPENSES PERTAINED TO EARLIER YEARS, THEREFORE THE ONUS WAS ON THE ASSESSEE TO SHOW THAT LIABILITY CRYSTALLIZED DURING THIS YEA R. HAVING NOT DONE SO, IT IS NOT POSSIBLE TO TAKE A DIFFERENT VIEW THEN WHAT LD. CIT(A) HAS TAKEN. 28. GROUND NO. 2 & 2.1 28.1. THIS RELATES TO DISALLOWANCE OF RS. 78,12,884/- INC LUDING DEPRECIATION OF RS. 4,32,380/- INCURRED ON AGRICULT URAL OPERATIONS, 83 GROWING SAPLINGS AND SUPERVISION OF TREES GROWN BY FARMERS. SIMILAR ISSUE HAS ARISEN BEFORE US IN THE ASSESSMENT YEAR 0 2-03. THIS YEAR ALSO WE HAVE HEARD LD. A.R. AND LD. D.R ON THIS ISSUE. W E NOTICE THAT FACTS AND CIRCUMSTANCES FOR THE ISSUE ARE THE SAME AS IN EARLIER YEAR. THE DETAILS OF EXPENDITURE INCURRED ON VARIOUS ACTIVITI ES AS GIVEN BY THE ASSESSEE ARE AS UNDER: PLANTATION / RAW MATERIAL EXPENSES ASSESSMENT YEAR 2004-05 LAC/RS. PARTICULARS SAPLINGS FOREST/ TOTAL SEED ROUTE CLONAL TOTAL OTHERS LAND NON- LAND TOTAL ROUTE 1 2 3 (1+2) 4 5 (3+4) 6 7 (5+6) - LABOUR / SEEDING COST 0.85 4.79 5.64 1.41 7.05 26.42 33.47 - SUPERVISION 0.15 0.88 1.03 0.26 1.29 7.12 8.41 - MATERIAL/ RENT 0.92 5.21 6.13 1.53 7.66 0.13 7.79 - SALARY 0.17 0.95 1.11 0.28 1.39 14.01 15.40 - CONVEYANCE 0.06 0.31 0.37 0.09 0.46 3.65 4.11 - MISCELLANEOUS 0.13 0.74 0.87 0.22 1.09 10.68 11.17 - TOTAL 2.27 12.88 15.15 3.79 18.94 62.01 80.95 - SAPPLING SALE 0.86 4.86 5.72 1.42 7.14 - 7.14 - NET EXPENDITURE 1.41 8.02 9.43 2.37 11.80 62.01 73.81 - DEPRECIATION - - - 4.3 2 4.32 - 4.32 - GRAND TOTAL 1.41 8.02 9.43 6.69 16.12 62.01 78.13 NOTES: 1. EXPENSES INCURRED IN SEED ROUTE SAPPLINGS, KEEPING IN VIEW NUMBER OF DAYS SEEDS REMAIN IN PRIMARY BEDS, 15% OF TOTAL EXPENDITURE HAS BEEN ALL OCATED TO LAND RELATED EXPENDITURE. 2. SAPPLING SALE - 80% HAS BEEN CONSIDERED AS DEVELOPE D THROUGH SEED ROUTE AND BALANCE 20% THROUGH CLONAL ROUTE (MIST CHAMBERS) 84 28.2. FOLLOWING OUR ORDER FOR THE ASSESSMENT YEAR 2 002-03 ONLY THE EXPENSES TO THE EXTENT ON RS. 15.15 LACS WOULD BE C ONSIDERED AS AGRICULTURAL EXPENSES OUT OF TOTAL CLAIM OF EXPANSE S AT RS. 80.95 LACS. AND WOULD NOT BE ALLOWED. AGAINST THIS THE ASSESSE E HAS SHOWN SALE OF AGRICULTURE PRODUCE (RELATABLE TO GROWING OF SAPLIN GS THROUGH LAND) AT RS.5.72 LACS AND SALE OF SAPLINGS NOT RELATABLE TO AGRICULTURAL OPERATIONS AT RS.1.42 LACS. THEREFORE AGRICULTURAL LOSS WOULD BE ONLY RS.15.15-5.72 = 9.43 LACS. THE SALE OF SAPLINGS AT RS.1.42 LACS WOU LD BE NON-AGRICULTURAL RECEIPTS AND THEREFORE CANNOT BE ALLOWED TO BE ADJU STED AGAINST AGRICULTURE EXPENSES. SO FAR AS THE DEPRECIATION OF RS.4.32 LAC S IS CONCERNED THE SAME HAS BEEN CLAIMED ON MIST CHAMBERS OTHER ASSETS USED IN GROWING SAPLINGS THROUGH CLONAL ROUTES WHICH HAS BEEN TREAT ED AS NON-AGRICULTURAL OPERATION IN OUR DISCUSSION MADE IN ASSESSMENT YEAR 2002-03 WHILE DISPOSING OF SIMILAR GROUND. THUS THE DISALLOWANCE IS RESTRICTED TO RS.9.43 LACS AND ACCORDINGLY ASSESSEE GETS RELIEF O F RS.(78.13 9.43) = 68.70 LACS. 28.3. AS A RESULT THIS GROUND OF ASSESSEE IS PARTLY ALLOW ED. 29. GROUND NO. 3 29.1. THIS RELATES TO UPHOLDING THE PAYMENT OF RS. 6,36,88,608/-PAID TO MECKINSEY & CO. FOR ADVISING THE ASSESSEE ON PROFIT IMPROVEMENT MEASURES WHICH WAS HELD AS CAPITAL EXPENDITURE BY T HE ASSESSING OFFICER. THE LD. ASSESSING OFFICER NOTICED THAT BY CLAIMING DEPRECIATION ON THE AMOUNT THE ASSESSEE HAS TREATED IT AS CAPITAL EXPE NDITURE IN THE BOOKS AND STILL CLAIMED AS REVENUE EXPENDITURE IN THE RETURN OF INCOME. IT WAS EXPLAINED BY THE ASSESSEE THAT M/S. MECKINSEY & CO. WERE ENGAGED TO TAKE UP THE PROJECT OF PROFIT IMPROVEMENT PROGRAMME AND BUILDING DISTINCTIVE INSTITUTIONAL CONTINUOUS IMPROVEMENT CA PABILITY OF THE 85 COMPANY. ENTIRE PROGRAMME WAS DIVIDED INTO THREE P HASES, EACH PHASE CONSISTING OF 3 MONTHS. IT WAS EXPLAINED THAT ENT IRE PROJECT CONSISTED OF ASSESSMENT OF PROFIT IMPROVEMENT OPPORTUNITY ACROSS ALL AREAS OF OPERATIONS LIKE MANUFACTURING, PURCHASING, SALES AN D MARKETING INCLUDING PRICING AND SUPPLY CHAIN. ONE OF THE DELIVERABLE O F THE PROGRAMME WAS TO CONVINCE THE MANAGEMENT THAT A VERY SUBSTANTIAL PROFIT IMPROVEMENT OPPORTUNITY EXISTED WITH J.K. PAPERS. THE SECOND A ND THIRD PHASE CONSISTED OF IDENTIFYING AND LAUNCHING IMPLEMENTATI ON OF IDEAS WITH A TARGET IN EXCESS OF RS. 17 CRORES. IT CONSISTED OF INSTALLING THE IMPLEMENTATION MANAGEMENT MECHANISM FOR IMPLEMENTIN G THESE IDEAS. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT AS A RESULT OF THIS PROJECT IT WAS POSSIBLE TO IDENTIFY AND LAUNCH IMPLEMENTATION OF IDEAS, CAPTURING OF OPERATIONAL IMPROVEMENT OPPORTU NITIES, INSTALLATION OF IMPLEMENTATION MANAGEMENT MECHANISM ETC. ALL THESE ACTIVITIES HELPED THE COMPANY IN INCREASING, SALES, COST REDUCTION AN D FINALLY THE PROFIT. IN THE BOOKS OF ACCOUNTS PART OF THE EXPENDITURE WAS C ONSIDERED AS DEFERRED REVENUE EXPENDITURE AND PARTLY AS INTANGIBLE ASSET AS PER THE ACCOUNTING STANDARDS. HOWEVER, KEEPING IN VIEW OF THE PROVISI ONS OF INCOME-TAX THE ENTIRE EXPENDITURE WAS CLAIMED AS REVENUE EXPENDITU RE FOR THE CURRENT YEAR. 29.2. THE ASSESSING OFFICER HOWEVER, TREATED THE EX PENDITURE AS CAPITAL ON THE GROUND THAT AUDITORS OF THE ASSESSEE COMPANY HAVE TREATED IT AS CAPITAL EXPENDITURE AND ASSESSEE HAS ALSO NOT EXCLU DED THE SAME FROM COMPUTATION OF BOOK PROFIT. FURTHER, THE NATURE OF EXPENDITURE SHOWED THAT IT WAS INCURRED FOR ENDURING BENEFIT AND WERE NOT CONFINED ONLY FOR THE YEAR UNDER CONSIDERATION. 29.3. BEFORE LD. CIT(A) THE ASSESSEE HAS RELIED ON THE DECISION OF ITAT DELHI BENCH IN ACIT VS. MEDICAMEN BIO TECH LTD. 99 TTJ 873 AND OF 86 BOMBAY TRIBUNAL IN CHARAK PHARMACEUTICALS 99 TTJ 12 17 AND OF HONBLE SUPREME COURT IN EMPIRE JUTE COMPANY LTD. V S. COMMISSIONER OF INCOME-TAX ((1980) 124 ITR 001 (SC) AND SUBMIT TED THAT EXPENDITURE INCURRED IS OF REVENUE IN NATURE. THE LD. CIT(A) H OWEVER CONFIRMED THE ORDER OF ASSESSING OFFICER BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPEL LANT AND OBSERVATION OF THE ASSESSING OFFICER. AS STATE D BY THE ASSESSING OFFICER AND AS ADMITTED BY THE APPELLANT THE PROJECT WAS SLATED FOR IMPROVING THE PROFIT OPPORTU NITIES ACROSS ALL AREAS OF OPERATION LIKE MANUFACTURING, PURCHASING, SALES AND MARKETING INCLUDING PRICING A ND SUPPLY. THE PROJECT WAS HANDED OVER WITH ONE OF TH E TERMS THAT THE MECKINSEY & CO. WILL IDENTIFY ANNUALIZED S AVING IN THE RANGE OF RS. 50 CRORES. THE MECKINSEY & CO. WA S REQUIRED TO PROVIDE THE SCHEDULE IN WHICH THE SAVIN G WILL BE CAPTURED, INSTALLING THE IMPLEMENTATION MANAGEMENT MECHANISM TO ENSURE THAT 100% OF THE IDEAS ARE IMPLEMENTED. WHILE IT IS TRUE THAT AS PER THE DECI SION OF SUPREME COURT AND ITAT, BOMBAY CITED BY THE APPELLA NT, BOOK ENTRY IS NOT FINAL FOR DECIDING THE ALLOWABILI TY OR DISALLOWABILITY BUT IT IS A SETTLED POSITION OF LAW THAT WHERE BENEFIT OF ENDURING NATURE ACCRUES TO THE ASSESSEE THEN DEPENDING UPON THE FACTS AND CIRCUMSTANCES OF A CAS E WHETHER A CAPITAL ASSETS IS BROUGHT INTO EXISTENCE OR NOT THE EXPENDITURE INCURRED CAN BE TREATED AS CAPITAL AND NOT REVENUE. IN THE PRESENT POSITION IT IS CLEAR THAT THE EXPENDITURE HAS NOT BEEN INCURRED FOR EFFECTING SAL ES OR ANY OTHER BUSINESS REQUIREMENT. THE EXPENDITURE HAS BE EN INCURRED TO IMPROVE MANUFACTURING PROCESS, TO IMPRO VE THE SALES, MARKETING AS WELL AS PRICING AND SUPPLY ISSU ES. THE PROJECT HAS BEEN A COMPREHENSIVE PROJECT FOR IMPLEM ENTING THE MANAGEMENT MECHANISM OVER VARIOUS AREAS OF OPER ATION. ADMITTEDLY, THE BENEFIT WHICH HAS ACCRUED TO THE AS SESSEE IS OF ENDURING NATURE AND NOT CONFIRMED TO THE CURRENT YEAR OR EVEN TWO OR THREE YEARS. REGARDING ALTERNATIVE GRO UND OF GIVING DEPRECIATION, IT IS STATED THAT NO ASSET ON WHICH DEPRECIATION IS ALLOWABLE HAS COME INTO EXISTENCE. HENCE DEPRECIATION ALSO IS NOT ALLOWED. HENCE THE ASSESS ING OFFICER HAS RIGHTLY TREATED THE EXPENDITURE AS CAPI TAL EXPENDITURE. THIS GROUND OF APPEAL IS THEREFORE DI SMISSED. 87 29.4. BEFORE US LD. A.R. FOR THE ASSESSEE SUBMITT ED THAT ALLOWABILITY OF A PARTICULAR DEDUCTION DEPENDS UPON THE PROVISIONS OF LAW RELATING THERETO AND NOT ON THE BASIS OF ENTRIES MADE IN A BOOKS OF ACCOUNT. THESE ENTRIES ARE NOT DECISIVE OR CONCLUSIVE. BY INCURRING THE E XPENDITURE ASSESSEE HAS IMPROVED THE PROFIT EARNING SYSTEM AND HAS NOT CREA TED ANY CAPITAL ASSET. HE FURTHER SUBMITTED THAT THE ISSUE IS COVERED IN F AVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN COMMISSIONER OF INCOME-TAX VS. JYOTI ELECTRIC MOTORS LTD.(2002)255 ITR 345 (GUJ). 29.5. ON THE OTHER HAND LD. D.R. RELIED ON THE ORDE RS OF THE AUTHORITIES BELOW. 29.6. WE HAVE HEARD THE LD. A.R. AND LD. D.R. AND P ERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE ASSESSEE HAS I NCURRED THE EXPENDITURE ONLY FOR IMPROVING THE PROFIT EARNING SYSTEM WHICH INCLUDED IMPROVEMENT IN PROCEDURE OF MANUFACTURING THE PRODU CT OF THE ASSESSEE, TECHNIQUES OF PRODUCTION OF RAW MATERIALS, SALES ST RATEGY, TO CAPTURE SAVINGS, INSTALLING NEW MANAGEMENT PROGRAMME, PRIC ING AND SUPPLY ISSUES ETC. AND NO CAPITAL ASSET WAS ACQUIRED. I N THIS REGARD WE FURTHER NOTICE THAT (I) THE BUSINESS OF THE ASSESSEE WAS IN EXISTENCE FOR SEVERAL YEARS IN THE PAST. (II) NO NEW BUSINESS WAS SET UP. EXPENDITURE PAID TO AND REPORT OBTAINED FROM MECKINSEY & CO. WAS FOR EXISTING BUSINESS . (III) NO TECHNICAL KNOW-HOW FOR ANY NEW PRODUCT WAS PROVI DED AND (IV) EXPENDITURE SO INCURRED RESULTED ONLY IN IMPROVING ECONOMY AND EFFICIENCY IN BUSINESS AND FACILITATING TRADING OPE RATIONS. THUS EXPENDITURE INCURRED FOR IMPROVING PROFIT EARNING S YSTEM WOULD BE REVENUE IN NATURE. EVEN THOUGH ADVANTAGE OBTAINED BY THE ASSESSEE MAY RUN FOR NUMBER OF YEARS, BUT GETTING ADVANTAGE FOR A LONG TERM IS NOT ALWAYS A DECISIVE FACTOR FOR HOLDING THAT EXPENDITU RE IS CAPITAL IN NATURE. IT MUST BE COUPLED WITH THE FACT THAT ASSESSEE HAS ACQUIRED AN ASSET. IN 88 THE PRESENT CASE, NO ASSET HAS BEEN ACQUIRED BY THE ASSESSEE AND THERE IS NO ADDITION IN THE PROFIT EARNING APPARATUS. IT IS ONLY AN IMPROVEMENT IN THE PROFIT EARNING SYSTEM. THIS ISSUE IS COVERED B Y THE HONBLE GUJARAT HIGH COURT IN JYOTI ELECTRIC MOTORSS CASE (SUPRA). HONBLE GUJARAT HIGH COURT IN THIS CASE OBSERVED AS UNDER: (HEAD NOTES:) WHERE THE ASSESSEE, WHICH WAS MANUFACTURING MOTORS, PAID THE SUM OF RS. 50,000 TOWARDS TECHNICAL REPORT FEES FOR ASCERTAINI NG FEASIBILITY OF MANUFACTURING MOTORS OF KINDS DIFFERENT FROM THOSE MANUFACTURED BY IT : _HELD,_ THAT THE AMOUNT WAS REVENUE EXPENDITURE AND THE ASSESSEE WAS ENTITLED TO DEDUCTION IN RELATION THERETO IN COMPUT ING ITS PROFITS. UNDER AN AGREEMENT DATED SEPTEMBER 1, 1972, WITH JY OTI LTD., THE ASSESSEE WAS GRANTED A NON-EXCLUSIVE LICENCE TO MANUFACTURE ELECTRIC MOTORS WHICH WERE MANUFACTURED BY JYOTI LTD., AND FOR THIS PURPO SE JYOTI LTD. WAS TO RENDER TECHNICAL AND OTHER EXPERIENCED GUIDANCE TO THE ASS ESSEE. JYOTI LTD. RESERVED THE RIGHT TO GRANT SIMILAR LICENCES TO ANY OTHER PA RTIES. THOUGH THE PERIOD OF THE AGREEMENT WAS TEN YEARS AND COULD BE EXTENDED F OR A FURTHER PERIOD AND THE AGREEMENT WAS TO CONTINUE IN FORCE UNTIL IT WAS TERMINATED, THE AGREEMENT WAS LIABLE TO BE TERMINATED EVEN EARLIER THAN THE S TIPULATED DATE, AND UPON TERMINATION THE ASSESSEE WAS REQUIRED TO RETURN TO JYOTI LTD. ALL THE TECHNICAL DOCUMENTATION WITHIN ONE MONTH IN THE EVENT OF TERM INATION OR LAPSE OF THE AGREEMENT. THE ASSESSEE HAD TO SELL ITS PRODUCTS SO LELY THROUGH THE SOLE SELLING AGENT APPOINTED BY JYOTI LTD. THE ASSESSEE WAS TO P AY ROYALTY AT THE RATE OF 7 PER CENT. ON THE NET SALE PRICE OF THE PRODUCTS MAN UFACTURED IN TERMS OF THE AGREEMENT : _HELD,_ THAT THE ASSESSEE DID NOT ACQUIRE ANY ENDUR ING ADVANTAGE : IT HAD MERELY BEEN GRANTED A NON-EXCLUSIVE LICENCE FOR THE USE OF AN ASSET. THE ROYALTY WAS PAYABLE ON THE BASIS OF THE SALES WHICH THE LICENSEE WOULD MAKE AND THE PAYMENT WAS STRICTLY LINKED WITH THE QUANTU M OF SALES AND WOULD VARY WITH THE QUANTUM OF SALES. THE AMOUNT OF ROYALTY PA ID BY THE ASSESSEE WAS REVENUE EXPENDITURE AND ALLOWABLE AS A DEDUCTION IN COMPUTING ITS PROFITS. JYOTI ELECTRIC MOTORS LTD. V. CIT [1999] 237 ITR 28 0 (GUJ) EXPLAINED. _HELD,_ALSO, THAT THE AMOUNT OF KNOW-HOW FEES OF RS . 3 LAKHS AND ROYALTY OF RS. 1,03,068 PAID BY THE ASSESSEE UNDER AGREEMENT J ANUARY 1, 1981, WERE ALLOWABLE AS REVENUE EXPENDITURE. DECISION OF THE GUJARAT HIGH COURT IN INCOME-TAX AP PLICATION NO. 269 OF 1999, DATED NOVEMBER 3, 1999, FOLLOWED . 89 29.7. THERE ARE OTHER AUTHORITIES ON THE SUBJECT LA YING SIMILAR PROPOSITION OF LAW. SOME OF THEM ARE REFERRED HEREUNDER TO SUPP ORT OUR CONCLUSION: 1. COMMISSIONER OF INCOME-TAX VS. MAJESTIC AUTO LTD. (2009) 310 ITR 90 (P&H) EXPENSES TO THE TUNE OF RS. 1,62,93,000 ALLEGEDLY I NCURRED BY THE ASSESSEE AS PAYMENTS MADE TO C AND L, FOR A STUDY AND REPORT ON REORGANIZATION OF CORE BUSINESS OF THE ASSESSEE AND FOR IMPROVING ITS MARK ET SHARE AND PROFITABILITY, WAS TREATED AND DISALLOWED AS A CAPITAL EXPENDITURE . THE TRIBUNAL FOUND, FIRSTLY, THAT THE BUSINESS OF THE ASSESSEE, IN RESP ECT OF WHICH C AND L WAS ENGAGED, WAS IN EXISTENCE FOR A PERIOD OF MORE THAN THREE DECADES, PRIOR TO THE SAID ENGAGEMENT. SECONDLY, THE REPORT GIVEN BY C AN D L ON THE BASIS OF THE STUDY CONDUCTED BY IT, WAS IN REGARD TO THE EXISTIN G BUSINESS OF THE ASSESSEE. THIRDLY, C AND L IN ITS REPORT HAD NOT GIVEN THE AS SESSEE ANY INFORMATION OR TECHNIQUE FOR PRODUCING ANY NEW PARTS (WHICH WERE N OT UNDER THE PRODUCTION OF THE ASSESSEE HERETO BEFORE) NOR DID IT RENDER AN Y TECHNICAL KNOW-HOW IN RESPECT OF ANY MANUFACTURING OR PROCESSING OR PRODU CTION ACTIVITY OF THE ASSESSEE. FOURTHLY, THE REPORT RENDERED BY C AND L RESULTED IN EFFECTING ECONOMY AND EFFICIENCY IN THE WORKING OF THE COMPAN Y FOR MANUFACTURING AND SELLING OF EXISTING ITEMS, WHICH GAVE THE ASSESSEE A BUSINESS ADVANTAGE ; AND, FIFTHLY, THE EXPENDITURE INCURRED BY THE ASSESSEE H AD MERELY FACILITATED THE ASSESSEES TRADING OPERATION AND ENABLED IT TO MANA GE AND CONDUCT THE BUSINESS MORE EFFICIENTLY, WHILE LEAVING THE FIXED CAPITAL UNTOUCHED. THE TRIBUNAL HELD THAT THE EXPENDITURE WAS DEDUCTIBLE. ON APPEAL TO THE HIGH COURT. _HELD,_ DISMISSING THE APPEAL, THAT THE REPORT PERT AINED TO REORGANIZATION OF CORE BUSINESS OF THE ASSESSEE AND IMPROVING ITS MAR KET SHARE AND PROFITABILITY. IT COULD NOT BE TREATED AS AN EXPEN SE INCURRED FOR CONDUCTING MARKET SURVEY OR ANY OTHER SURVEY NECESSARY FOR TH E BUSINESS OF THE ASSESSEE. IT DID NOT FALL WITHIN THE PURVIEW OF SU B-SECTION (2)(A)(III) OF SECTION 35D. IN VIEW OF THE FINDINGS OF FACT BY THE TRIBUNA L THE EXPENSES WERE DEDUCTIBLE AS REVENUE EXPENDITURE . 2. COMMISSIONER OF INCOME-TAX VS. J. K. SYNTHETICS LIMITED (2009) 309 ITR 371 (DEL) (III) THE TEST OF ONCE AND FOR ALL PAYMENT, I.E., A LUMP SUM PAYMENT MADE IN RESPECT OF A TRANSACTION IS AN INCONCLUSIVE TEST. T HE CHARACTER OF PAYMENT CAN BE DETERMINED BY LOOKING AT WHAT IS THE TRUE NATURE OF THE ASSET WHICH IS ACQUIRED AND NOT BY THE FACT WHETHER IT IS A PAYMEN T IN LUMP SUM OR IN AN INSTALLMENT. IN APPLYING THE TEST OF AN ADVANTAGE O F AN ENDURING NATURE, IT WOULD NOT BE PROPER TO LOOK AT THE ADVANTAGE OBTAIN ED, AS LASTING FOREVER. THE DISTINCTION WHICH IS REQUIRED TO BE DRAWN IS, WHETH ER THE EXPENSE HAS BEEN INCURRED TO DO AWAY WITH WHAT IS A RECURRING EXPENS E FOR RUNNING A BUSINESS, AS AGAINST AN EXPENSE UNDERTAKEN FOR THE BENEFIT OF THE BUSINESS AS A WHOLE ; (IV) AN EXPENSE INCURRED FOR ACQUISITION OF A SOURC E OF PROFIT OR INCOME WOULD, 90 IN THE ABSENCE OF ANY CONTRARY CIRCUMSTANCE, BE IN THE NATURE OF CAPITAL EXPENDITURE. AS AGAINST THIS, AN EXPENDITURE WHICH ENABLES THE PROFIT-MAKING STRUCTURE TO WORK MORE EFFICIENTLY LEAVING THE SOUR CE OR THE PROFIT-MAKING STRUCTURE UNTOUCHED, WOULD BE IN THE NATURE OF REVE NUE EXPENDITURE. IN OTHER WORDS, EXPENDITURE INCURRED TO FINE TUNE TRADING OP ERATIONS TO ENABLE THE MANAGEMENT TO RUN THE BUSINESS EFFECTIVELY, EFFICIE NTLY AND PROFITABLY LEAVING THE FIXED ASSETS UNTOUCHED WOULD BE AN EXPENDITURE OF A REVENUE NATURE EVEN THOUGH THE ADVANTAGE OBTAINED MAY LAST FOR AN INDEF INITE PERIOD. TO THAT EXTENT, THE TEST OF ENDURING BENEFIT OR ADVANTAGE C OULD BE CONSIDERED AS HAVING BROKEN DOWN ; 3. DEPUTY COMMISSIONER OF INCOME-TAX VS. CORE HEALTHCARE LTD. (2009) 308 ITR 263 (GUJ) IN CONSIDERING WHETHER A PARTICULAR EXPENDITURE WAS OF THE NATURE OF CAPITAL OR REVENUE EXPENDITURE THE SUPREME COURT DECISIONS IN EMPIRE JUTE CO. LTD. V. CIT [1980] 124 ITR 1 (SC) AND ALEMBIC CHEMICAL W ORKS CO. LTD. V. CIT [1989] 177 ITR 377 (SC) SPECIFICALLY LAID DOWN THAT THE NATURE OF ADVANTAGE HAD TO BE CONSIDERED IN A COMMERCIAL SENSE AND THE TEST OF ENDURING BENEFIT WAS NOT A CERTAIN OR CONCLUSIVE TEST AND COULD NOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. THE EXPRESSION ASSET OR ADVANTAGE OF A N ENDURING NATURE HAD BEEN EVOLVED TO EMPHASISE THE ELEMENT OF A SUFFICIE NT DEGREE OF DURABILITY APPROPRIATE TO THE CONTEXT. THE IDEA OF ONCE FOR A LL PAYMENT AND ENDURING BENEFIT ARE NOT TO BE TREATED AS SOMETHING AKIN TO STATUTORY CONDITIONS. 4. COMMISSIONER OF INCOME-TAX VS. T. E. I. TECHNOLOGIES P. LTD. (2008) 304 ITR 262 (DEL) THE ASSESSEE HAD ENTERED INTO A JOINT VENTURE AGREE MENT WITH T AND E TO CARRY OUT MANUFACTURING OPERATIONS OF CRT SOCKETS, ELECTR ONIC COMPONENTS LIKE TV REMOTE CONTROL, ETC., FOR THE DOMESTIC MARKET AS WE LL AS FOR EXPORTS. THE ASSESSEE PAID AN AMOUNT OF RS. 9,23,733 TO T AS WEL L AS E AS TECHNICAL SUPPORT FEE. ACCORDING TO THE ASSESSING OFFICER, THE BENEFI T RECEIVED BY THE ASSESSEE WAS OF AN ENDURING NATURE AND, THEREFORE, THE AMOUN T WAS TREATED AS CAPITAL EXPENDITURE AND NOT AS REVENUE EXPENDITURE AS CLAIM ED BY THE ASSESSEE. THE COMMISSIONER (APPEALS) AND THE TRIBUNAL HELD THAT T HE EXPENDITURE WAS DEDUCTIBLE. ON APPEAL TO THE HIGH COURT : _HELD,_ DISMISSING THE APPEAL, THAT THERE WAS A FIN DING OF FACT GIVEN BY THE TRIBUNAL THAT ALL THAT THE ASSESSEE RECEIVED WAS TE CHNICAL ASSISTANCE IN THE MANUFACTURE OF THE PRODUCTS. THERE WAS NO TRANSFER OF TECHNOLOGY OR KNOW- HOW, ETC., WHICH WOULD ENABLE THE ASSESSEE TO SET U P ITS PLANT AND MACHINERY. THE EXPENDITURE WAS DEDUCTIBLE. 29.8. FOLLOWING ABOVE DECISIONS, AND FOR THE REASON S DISCUSSED ABOVE, WE HOLD THAT LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMIN G THE ADDITION. THE SAME IS DELETED. 91 29.9. THIS GROUND OF THE ASSESSEE IS THEREFORE ALLO WED. 30. GROUND NO. 4 30.1 THIS RELATES TO CONFIRMING ADDITION OF RS. 1,4 2,34,266/- MADE BY THE ASSESSING OFFICER UNDER SECTION 145A. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 76,67,604/- IN THE TRADING CUM PROFIT AND LOSS ACCOUNT ON ACCOUNT OF EXCISE DUTY ON OPENING STOCK OF RAW MATERIAL. HOWEVER THE ASSESSEE WAS REQUIRED AS NOTED BY THE A . O. AS PER LAW TO MAKE THE FOLLOWING ADJUSTMENTS AND SHOULD HAVE OFFE RED THE INCOME OF EXCISE DUTY ADJUSTMENTS AND SHOULD HAVE ALSO OFFERE D THE INCOME OF EXCISE DUTY INCLUDED IN STOCK OF RAW MATERIAL IN EX CESS OF UNUTILIZED MODVAT/CENVAT CREDIT AT THE END OF THE YEAR ON PURC HASES THE ADJUSTMENT REQUIRED CAN BE REPRESENTED AS UNDER:- A) ADD EXCISE DUTY ON CLOSING STOCK OF RAW MATERIAL RS.1,74,86,564/- B) LESS: UNUTILIZED MODVAT/CENVAT CREDIT AS AT THE YEAR END ON PURCHASES RS. 3 2,52,298/- NET EFFECT RS.1,42,34,266/- SIMILAR ISSUE HAD ARISEN BEFORE US IN THE ASSESSMEN T YEAR 2002-2003 IN GROUND NO.5. FOR THE REASONS MENTIONED WHILE DISPOS ING THAT GROUND IN ASSESSMENT YEAR 02-03 WE UPHOLD THE ADDITION THIS YEAR ALSO SUBJECT TO THE DIRECTION THAT MODIFIED VALUE OF CLOSING STOCK OF THIS YEAR BE TAKEN AS OPENING STOCK OF NEXT YEAR. 30.2. THIS GROUND OF ASSESSEE IS PARTLY ALLOWED ACC ORDINGLY. 92 31. GROUND NO.5 31.1. THIS RELATES TO ADDITION OF RS.23 LACS ON ACC OUNT OF DIFFERENCE IN VALUATION OF STOCK SUBMITTED TO THE BANK AND VALUAT ION OF STOCK TAKEN IN THE BOOKS. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS THE ASSESSING OFFICER NOTICED THAT VALUATION OF PROCESS STOCK AS PER STATEMENT GIVEN TO THE BANK IS MORE BY RS.23 LACS AS COMPARED TO THE S TOCK RECORDED IN THE BOOKS. THE ASSESSEE EXPLAINED THAT STOCK PROVIDED T O BANK WAS VALUED BASED ON IMMEDIATELY PRECEDING MONTHS COST WHEREAS VALUATION FOR THE PURPOSE OF BOOKS WAS DONE ON ACTUAL COST WHICH WAS WORKED OUT AFTER SUBMISSION OF STOCK STATEMENTS TO THE BANKS. THE A .O. GAVE A FINDING THAT THERE IS NOT ONLY A DIFFERENCE IN THE VALUE BU T ALSO IN THE QUANTITIES. THE A.O. RELIED ON THE DECISION OF THE HONBLE KARN ATAKA HIGH COURT IN RECON MACHINE TOOLS PVT. LTD. 286 ITR 637. HE ACCO RDINGLY MADE THE ADDITION. BEFORE THE LD. CIT(A) IT WAS SUBMITTED TH AT VALUATION OF STOCK SUBMITTED TO THE BANK WAS PURELY ON ESTIMATE BASIS WITHOUT PHYSICAL VERIFICATION. IT WAS ALSO SUBMITTED THAT NO QUANTIT ATIVE STOCK STATEMENT WAS SUBMITTED TO THE BANK IN RESPECT OF PROCESS STO CK. THE LD. CIT(A) CONFIRMED THE ADDITION BY OBSERVING AS UNDER:- 10.3 I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND OBSERVATION OF THE AO. THE FACT THAT THERE IS DIFF ERENCE IN THE VALUE SHOWN IN THE STOCK STATEMENT GIVEN TO THE BANK WITH THE BOOK S OF ACCOUNT IS ADMITTED BY THE APPELLANT. THEREFORE, THERE IS NO DISPUTE WITH RESPECT OF THE FACT IN THE CASE OF RECON MACHINE TOOLS PVT.LTD. (SUPRA) THE HONBLE KARNATAKA HIGH COURT STATED THAT NO ACCEPTABLE EVIDENCE WAS PLACED BY TH E ASSESSEE TO DISBELIEVE THE BANK STATEMENT AS RIGHTLY HELD BY THE AUTHORITIES IN THE CASE ON HAND. IN FACT, THE ENTIRE AMOUNT SHOWN PERTAINS ONLY TO THE RAW MA TERIALS. IN SO FAR AS THE RAW MATERIALS ARE CONCERNED, THE SAME ARE REQUIRED TO BE SUPPORTED BY VARIOUS STATUTORY REGISTERS AS RULED BY THE AUTHORI TIES. IN THE CIRCUMSTANCES, IN THE ABSENCE OF ACCEPTABLE MATERIAL, IT IS NOT POSSI BLE FOR THIS COURT TO DISLODGE THE FINDINGS OF THE FACTS, PARTICULARLY IN THE LIGH T OF THE BANKS STATEMENT WHICH IS UNDISPUTED BY THE ASSESSING AUTHORITY. FROM THE ABOVE IT IS CLEAR THAT THE ADDITION MADE BY THE AO IS CORRECT AND THE APPELLAN T HAS FAILED TO SHOW WHY HIGHER STOCK WAS SHOWN TO THE BANK WHEN THE SAME DI D NOT EXIST IN THE BOOKS OF ACCOUNTS. NO MATERIAL EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE APPELLANT TO RECONCILE THE GAP AS STATED BY THE APPELLANT THA T THE ACCOUNTANT DID NOT INCLUDE THE MATERIALS PURCHASED OR SOLD ON THE LAST FRIDAY OF THE MONTH. IN 93 VIEW OF THE ABOVE THE ADDITION MADE BY THE AO IS CO NFIRMED AND THIS GROUND OF APPEAL IS DISMISSED. 31.2 BEFORE US THE LD. A.R. FOR THE ASSESSEE RAISED FOLLOWING ARGUMENTS: - THERE IS NO DISPUTE THAT THE APPELLANT IS MAINTAINI NG THE BOOKS OF ACCOUNTS ON DAY TO DAY PRODUCTION BASIS. - THE APPELLANT HAS TAKEN THE ACTUAL PHYSICAL STOCK F OR THE PURPOSE OF DECLARING CLOSING STOCK IN THE BOOKS OF ACCOUNTS. - THE BOOKS OF ACCOUNTS ARE AUDITED AND THE VALUE OF CLOSING STOCK IN THE BOOKS HAVE BEEN TAKEN IN ACCORDANCE WI TH THE ACCOUNTING STANDARD AND ACCOUNTING POLICIES REGULAR LY FOLLOWED BY THE APPELLANT. - THE PURCHASE AND SALES ARE SUPPORTED BY VOUCHERS AN D THERE IS NO POINT WHATSOEVER OF ANY SUPPRESSION AND SALES OR PURCHASES. - THE VALUE OF STOCK GIVEN TO THE BANK IS ABSOLUTELY IN ESTIMATE BASIS WITHOUT ANY ACTUAL PHYSICAL VERIFICATION AND THE SAME WAS NOT SUPPORTED BY BOOKS ACCOUNTS AND FOR DETERMINING THE VALUE OF STOCK ALSO THE AVERAGE COST OF THE PRECEDING MON TH IS CONSIDERED. 31.3 LD. A.R. FOR THE ASSESSEE DREW THEN OUR ATTENT ION TO PAGES J-1 AND J-4 & J-7 OF THE PAPER BOOK TO EMPHASIZE THAT NO QU ANTITATIVE STATEMENT OF THE STOCK WAS SUBMITTED TO THE BANK. 31.4 AGAINST THIS, THE LD. D.R. RELIED ON THE ORDER S OF THE AUTHORITIES BELOW. 31.5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. IT IS NOT KNOWN ON WHAT BASIS THE ASSESS ING OFFICER AND THE LD. CIT(A) HAVE GIVEN A FINDING THAT THERE IS A DIFFERE NCE IN TERMS OF QUANTITY IN THE STOCK STATEMENT SUBMITTED TO THE BANK AND WH AT IS RECORDED IN THE BOOKS. WE HOWEVER, RESTORE THE MATER TO THE FILE OF THE ASSESSING OFFICER TO VERIFY THE STATEMENTS J-1,J-4 & J-7 AND ANY OTHE R STATEMENT WHICH IS IN POSSESSION OF THE A.O. POINTING OUT DIFFERENCE IN S TOCK IN TERMS OF 94 QUANTITY. IF THERE IS NO SUCH STATEMENT DEPICTING D IFFERENCE IN TERMS OF QUANTITIES, NO ADDITION IS CALLED FOR BUT WHERE THE RE IS ANY DOCUMENT IN POSSESSION OF THE A.O. SHOWING STOCK IN QUANTITY ON A PARTICULAR DATE AND ON COMPARISON WITH THE BOOKS IT RESULTS IN UNFAVORA BLE DIFFERENCE AGAINST THE ASSESSEE, THE SAME WILL BE SHOWN TO THE ASSESSE E AND AFTER CONFRONTING HIM THE DIFFERENCE IN QUANTITIES WILL BE WORKED OUT . STOCK IN TERMS OF QUANTITY WILL BE COMPARED AS ON THE SAME DATE. THER E AFTER, THE DIFFERENCE IF ANY WILL BE VALUED AT COST OR MARKET PRICE WHICH EVER IS LOW AS PER ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE FOR VALU ATION OF STOCK. WITH THESE REMARKS, WE SET ASIDE THIS GROUND TO THE FILE OF THE A.O. 32. GROUND NO.6 32.1 THIS RELATES TO UPHOLDING ADDITION OF RS.34,62 ,416/- WHICH, INTER-ALIA, RS. 18,76,336/- BEING INTEREST PAID ON BORROWED FUNDS ON THE GROUND THAT INTEREST BEARING FUNDS WERE INVESTED IN SHARES WHICH YIELDED DIVIDEND BEING EXEMPTED INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER FOUND THAT ASSESS EE HAS EARNED DIVIDEND INCOME OF RS.48,00,34,582/-. THIS WAS CLAI MED EXEMPT U/S 10. THE A.O. REQUIRED THE ASSESSEE TO GIVE THE DETAILS OF EXPENSES INCURRED TO EARN THE DIVIDEND INCOME, AND SOURCE OF INVESTMENT IN PURCHASE OF SHARES. IT WAS EXPLAINED THAT SHARES WERE HELD ONLY FOR FEW DAYS AND SOLD. THE BROKERAGE AND SECURITY TRANSACTION TAX FORMED PART OF COST OF SHARES. INVESTMENT WAS MADE OUT OF INTERNAL ACCRUALS AND NO PART OF BORROWED FUNDS WAS UTILIZED FOR MAKING INVESTMENT. THE A.O. DID NOT AGREE AND HELD THAT ASSESSEE HAS INVESTED INTEREST BEARING FU NDS IN SECURITIES WHICH WERE HELD ONLY FOR A DAY OR TWO. 32.2 THE ASSESSING OFFICER THEREAFTER CALCULATED DI SALLOWABLE INTEREST AS UNDER: 95 S.NO. NAME OF SECURITY DATE OF PURCHASE AMOUNT OF PURCHASE DATE OF SALE NO. OF DAYS INTEREST @ 12% 1. ING INVESTMENT DIVIDEND OPTION (SWITCH OUT OF TREASURE GROWTH OPTION) 11.12.03 600000000 12.12.03 2 394521 (SWITCH OUT OF TREASURY GROWTH OPTION 11.12.03 126760563 12.12.03 2 83349 2. RELIANCE GROW TH FUND DIVIDEND PLAN (SWITCH OUT RETAIL OPTION) 18.12.03 500000000 19.12.03 2 328767 3 PRUDENTIAL ICICI POWER DIVIDEND (SWITCH OUT LIQUID INSTITUTION) 24.12.03 500000000 26.12.03 3 493151 4. BIRLA MID CAP A DIVIDEND (SWITCH OUT TO C ASH PLUS INSTITUTIONAL) 24.12.03 500000000 26.12.03 3 49315 (SWITCH OUT CASH PLUS INSTITUTION) 24.12.03 500000000 26.12.03 349315 5. IL & FS GROWTH & VALUE SEMI ANNUAL DIVIDEND (SWITCH OUT IN/OUT WITH LIQUID INSTITUTIONAL PLAN) 15.01.04 10023981 16.01.04 2 65769 (SWITCH OUT TO LIQUID INSTITUTIONAL PLAN) 15.01.04 280000000 16.01.04 2 184110 (SWITCH OUT TO LIQUID INSTITUTIONAL PLAN) 15.01.04 93501966 16.01.04 2 61546 6. SBI MAGNUM SECTOR FUND UMBRELLA (SWITCH OUT TO MIIF) 27.01.04 12000 0000 28.01.04 2 78904 (SWITCH IN FROM MICF OUT TO MIIF) 27.01.04 133207416 28.01.04 2 87588 2553593926 25 1876336 96 32.3 THE A.O. FURTHER NOTED THAT ASSESSEE HAD INCUR RED ADMINISTRATIVE EXPENSES OF RS. 7082.04 LACS FOR A TOTAL TURNOVER O F RS.62477.21 LACS INCLUDING TURNOVER OF SECURITIES AT RS. 25535.94 LA CS. THUS, ASSESSING OFFICER DISALLOWED INTEREST TO THE EXTENT OF RS.18, 76,336/- AND ADMINISTRATIVE EXPENSES ON PRORATA BASIS TO THE EXT ENT OF RS.15,86,080/-. THUS, HE MADE AN ADDITION OF RS. 34,62,416/-. THE L D. CIT(A) NOTED THAT ENTIRE TRANSACTION OF PURCHASE AND SALE OF SHARES I S INEXTRICABLY LINKED WITH THE EARNING OF DIVIDEND AND INCURRING OF LOSS. HE NOTED THAT ASSESSEE INVESTED RS.72.67 CRORES ON 11.12.03 FOR TWO DAYS. HE FURTHER INVESTED RS.50 CRORES ON 18 TH DECEMBER. SIMILAR AMOUNT WAS INVESTED SUBSEQUENTLY. HE HELD THAT IF ASSESSEE HAD SURPLUS FUNDS, HE COULD HAVE REPAID THE LOAN SO THAT PAYMENT OF INTEREST COULD B E AVOIDED. HE ACCORDINGLY CONFIRMED ADDITION BY OBSERVING AS UNDE R: 11.4 I HAVE CONSIDERED THE SUBMISSION MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. THERE IS NO DENYING THE FAC T THAT THE APPELLANT HAS INVESTED HUGE AMOUNT OF FUNDS FOR EAR NING THE DIVIDEND AS PER THE CHART PREPARED BY THE AO ON PAG E 35 AND 36. ON 11.12.03 THE APPELLANT HAS INVESTED RS.72.67 CRO RES FOR TWO DAYS. ON 18 TH DECEMBER THE APPELLANT HAS INVESTED RS.60 CRORES. ON 15 TH JANUARY THE APPELLANT HAS INVESTED ALMOST RS.48 CRO RES AND ON 27 TH JANUARY THE APPELLANT HAS INVESTED MORE THAN RS.25 CRORES. MOST OF THESE INVESTMENTS ARE FOR TWO TO THREE DAYS. A HUG E INVESTMENT HAS BEEN MADE BY THE APPELLANT IF SUCH HUGE FUNDS WERE SURPLUS THE APPELLANT COULD HAVE EASILY REPAID ITS LOANS SO THA T THE INTEREST PAID BY THE APPELLANT COULD HAVE BEEN AVOIDED. HENCE, I T IS CLEAR THAT THE INTEREST PAID ON PROPORTIONATE BASIS AS COMPUTED B Y THE AO CAN BE SAID TO BE HAVING NEXUS WITH THE EARNING OF DIVIDEN D INCOME. THEREFORE, THE DECISION OF HONBLE GUJARAT HIGH COU RT RELIED ON BY THE APPELLANT IS NOT APPLICABLE ON THE FACTS OF THE ASSESSEES CASE. SIMILARLY, IT CANNOT BE SAID THAT THE APPELLANT HAS ENTERED INTO SUCH HUGE TURNOVER WITHOUT MAKING ANY ADMINISTRATIVE COS T. IN VIEW OF THESE REASONS THE DISALLOWANCE MADE BY THE AO IS CO NFIRMED AND THIS GROUND OF APPEAL IS DISMISSED. 97 32.4 LD. A.R. OF THE ASSESSEE SUBMITTED BEFORE US T HAT DISALLOWANCE SHOULD BE CALCULATED AS PER RULE 8D. HE REFERRED TO THE DECISION OF I.T.A.T. MUMBAI D BENCH IN DCIT V. CITIZEN HOTELS P VT. LTD. (ITA NO.5371 AND 5803/MUM./2005) 32.5 ON THE OTHER HAND, THE LD. D.R. RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 32.6 AFTER HEARING THE PARTIES WE RESTORE THE MATER TO THE FILE OF THE ASSESSING OFFICER FOR CALCULATING DISALLOWABLE EXPE NSES IN ACCORDANCE WITH RULE 8D. SUBJECT TO DIRECTIONS THAT THE DISAL LOWANCE WOULD NOT EXCEED THE AMOUNT DISALLOWED IN THE IMPUGNED ORDER AS HAS ALSO BEEN DIRECTED BY TRIBUNAL IN THE CASE OF DCIT VS. CITIZE N HOTELS LTD MUMBAI D BENCH IN ITA NO. 5371 & 5830/MUM/2005. IN PRINC IPLE WE UPHOLD THE DECISION OF AUTHORITIES BELOW THAT EXPENDITURE RELATING TO EARNING EXEMPTED INCOME HAS TO BE DISALLOWED AND SINCE ASSE SSEE HAS INVESTED IN SECURITIES WHICH WERE HELD ONLY FOR A COUPLE OF DAY S, DIVIDENDS WERE EARNED AND SECURITIES WERE DISPOSED OF, THE EARNING OF DIVIDEND AND INVESTING IN SECURITIES IS CLOSELY CONNECTED AND TH EREFORE, DISALLOWANCE OF RELATED EXPENDITURE (INCURRED ON EARNING EXEMPTED I NCOME) IS CALLED FOR IN THE COMPUTATION OF INCOME AS PER NORMAL PROVISIO NS OF THE ACT. 32.7 THIS GROUND OF THE ASSESSEE IS, THEREFORE, PAR TLY REJECTED BUT PARTLY ALLOWED FOR CALCULATING DISALLOWABLE AMOUNT OF EXPE NSES 33. GROUND NO.7 33.1 THIS RELATES TO ADDITION ON ACCOUNT OF EXCHANG E RATE FLUCTUATION ON OUTSTANDING BILLS. DURING THIS YEAR, ASSESSEE HAS O FFERED A SUM OF RS.55,51,128/- FOR TAX ON ACCOUNT OF GAIN RESULTING TO THE ASSESSEE DUE TO FAVORABLE FOREIGN EXCHANGE RATE FLUCTUATION. IN THE ASSESSMENT YEAR 02-03 THE ASSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF UN FAVORABLE FOREIGN 98 EXCHANGE RATE FLUCTUATION ON OUTSTANDING BILLS WHIC H WAS DENIED BY THE A.O. ACCORDINGLY, ASSESSEE HAS VIDE HIS LETTER DATE D 9.12.06 SUBMITTED TO THE A.O. TO WITHDRAW THE ABOVE SUM OF RS.55,51,128/ - FROM TAXATION. 33.2 LD. CIT(A) HAD CONFIRMED THE ACTION OF THE A.O . IN NOT IGNORING ABOVE SUM EVEN THOUGH CLAIM FOR DEDUCTION ON ACCOUN T OF UNFAVORABLE FLUCTUATION IN FOREIGN EXCHANGE RATES WAS DENIED BY HIM IN THE ASSESSMENT YEAR 2002-03. 33.3 WE HAVE HEARD LD. A.R. AND LD. D.R. SIMILAR IS SUE HAD ARISEN BEFORE US IN THE ASSESSMENT YEAR 2002-03 AND 2003-04. WE H AVE HELD ABOVE WHILE DISPOSING OF GROUNDS RELATING TO THIS ISSUE T HAT DEDUCTION ON ACCOUNT OF LOSS SUFFERED BY THE ASSESSEE DUE TO UNF AVORABLE FLUCTUATION IN FOREIGN EXCHANGE RATES ON OUTSTANDING BILLS OF PURC HASES HAS TO BE ALLOWED AS A DEDUCTION WHEREAS GAIN ON ACCOUNT OF F AVORABLE FLUCTUATION IN FOREIGN EXCHANGE RATES HAS TO BE TAXED AS BUSINE SS INCOME. FOLLOWING THE SAME WE HOLD THAT OFFERING OF THE INCOME OF RS. 55,51,128/- BY THE ASSESSEE WAS CORRECT. THERE IS NO SUBSTANCE NOW IN THE GROUND RAISED BY THE ASSESSEE. THE SAME IS, THEREFORE, REJECTED. 34. GROUND NO.8: THIS GROUND IS NOT PRESSED AND IS REJECTED. 35.1 GROUND NO. 9(A) 35.1.1 THIS RELATES TO UPHOLDING THE ACTION OF THE A.O. IN IGNORING A SUM OF RS.1,46,50,.718/- CLAIMED AS DEDUCTION U/S 8 0HHC WHILE COMPUTING BOOK PROFIT. SIMILAR ISSUE HAS ARISEN BEF ORE US IN THE ASSESSMENT YEAR 2002-03 WHEREIN WE HAVE, FOLLOWING THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. GTN TEXTILES LTD (248 ITR 372), BOARDS CIRCULAR NO.680 DT.21.2.1994,D ECISION IN CIT V. MEGHNA ELECTRO CASTING LTD (2009) TIOL-212/HC/MAD/I T IN TAX CASE APPEAL NO.247 OF 2009 AND IN CIT, CHENNEI V. FUTURA POLYSTER LTD., 99 (2009) TIOL-199-HC-MAD-IT IN TAX CASE APPEAL NO.216 TO 219 PRONOUNCED ON 16.4.2009, HELD THAT THE COMPUTATION OF DEDUCTION U/S 80HHC HAS TO BE DONE ON THE BASIS OF BOOK PROFIT AN D NOT ON THE BASIS OF TOTAL INCOME COMPUTED IN ACCORDANCE WITH THE PROVIS IONS OF THE ACT ACCORDINGLY, THIS GROUND OF ASSESSEE IS ALLOWED. 35.2 GROUND NO.9(B) 35.2.1 THIS GROUND RELATES TO UPHOLDING THE ACTION OF THE A.O. IN NOT ALLOWING DEDUCTION OF RS.1,63,85,686/- AMORTIZED IN THE ACCOUNTS BY THE ASSESSEE AND CLAIMED AS DEDUCTION IN COMPUTING BOOK PROFIT. THE A.O. DISALLOWED THE CLAIM WHILE COMPUTING BOOK PROFIT U/ S 115JB ON THE GROUND THAT THIS EXPENDITURE RELATED TO EXEMPTED IN COME. THIS EXPENDITURE RELATED TO SOCIAL FORESTRY AND INCURRED ON GROWING SAPLINGS BY THE ASSESSEE IN-HOUSE AND ALSO ON SUPERVISION OF G ROWING TREES BY THE FARMERS FROM THE SEEDS AND SAPLINGS PROVIDED BY THE ASSESSEE AND FINALLY PURCHASED BY IT FROM THE FARMERS. THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.73,80,504/- DURING THIS YEAR AND CLAIMED IN RETURN AND IN THE BOOKS AMORTIZED SUM OF RS.1,63,85.686/-. THE LD. A.O. HELD THAT RAISING OF SAPLINGS IS CONNECTED TO BASIC AGRICULTU RAL OPERATIONS CONNECTED WITH THE LAND. SIMILARLY ACTIVITIES IN HELPING THE FARMERS TO MAINTAIN THE PLANTATIONS ARE ALSO CONNECTED WITH THE OPERATION O N LAND. THUS, ENTIRE EXPENDITURE IS AGRICULTURAL EXPENSES AND, THEREFORE , NOT ALLOWABLE U/S 14A. 35.2.2 THE LD. CIT(A) HAS CONFIRMED THE ORDER OF TH E LD. A.O. 35.2.3 WE HAVE HEARD LD. A.R. AND LD. D.R. SIMILAR ISSUE HAD ARISEN BEFORE US IN THE ASSESSMENT YEAR 2002-03 IN GROUND NO.6 (C ) AND IN THE ASSESSMENT YEAR 2003-04 IN GROUND NO. 7(B). WE HAVE HELD THEREIN THAT COMPUTATION OF BOOK PROFIT WILL NOT BE AFFECTED BY SEC. 14A. FOR THE 100 DETAILED REASONING GIVEN THERE, WE HOLD SIMILARLY A LSO THIS YEAR AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. AS A RESULT, T HIS GROUND OF ASSESSEE IS ALLOWED. 35.3 GROUND NO. 9(C) 35.3.1 THIS GROUND RELATES TO DISALLOWANCE OF LOSS OF RS.47.24 CRORES CLAIMED IN THE BOOK PROFIT COMPUTATION UNDER SECTION 115JB. 35.3.2 DURING THE COURSE OF THE ASSTT. PROCEEDINGS THE ASSESSING OFFICER FOUND THAT LOSS INCURRED BY THE ASSESSEE IN TRADING OF SECURITIES WAS DIRECTLY RELATED TO EARNING OF DIVIDEND INCOME . ACCORDING TO HIM AS PER PROVISION OF CLAUSE (II) OF SEC.115JB AN EX PENDITURE RELATED TO EXEMPTED INCOME ARE TO BE ADDED BACK TO THE NET PRO FIT. HE THEREAFTER INVOKED CLAUSE (F) OF EXPLANATION FOR THE SAME PURP OSE. ACCORDING TO HIM ASSESSEE HAS SUFFERED THE LOSS TO EARN THE DIVI DEND WHICH IS EXEMPT U/S 10 OF THE ACT. THE ASSESSING OFFICER EXA MINED VARIOUS TRANSACTIONS CARRIED OUT BY THE ASSESSEE IN SALE AN D PURCHASES OF THE UNITS AND SUMMARIZED THE LOSS CLAIMED BY THE ASSESS EE IN THE FOLLOWING CHART:- S.NO. NAME OF SECURITY DATE OF PURCHASE AMOUNT OF PURCHASE DATE OF SALE AMOUNT OF SALE AMOUNT OF LOSS DIVIDEND EARNED 1. ING INVESTMENT DIVIDEND OPTION (SWITC H OUT TO TREASURY GROWTH OPTION) 11.12.03 600000000 12.12.03 472816901 127183099 126760563 ( SWITCH OUT TO TREASURY GROWTH OPTION) 11.12..03 126760563 12.12.03 126760563 0 0 2. RELIANCE GROWTH FUND DIVIDEND PLAN 101 (SWITCH OUT RETAIL OPTION) 18.12. 03 500000000 19.12.03 429197080 70802920 72992701 3. PRUDENTIAL ICICI POWER DIVIDEND (SWITCH OUT LIQUID INSTITUTION) 24.12.03 500000000 26.12.03 418310727 81689273 92478422 4. BIRLA MID CAP-A DIVIDEND (SWITCH OUT CASH PLUS INSTITUTIONAL) 24.12.03 500000000 26.12.03 418310727 81689273 32697548 (SWITCH OUT CASH PLUS INSTITUTION) 24.12.03 500000000 26.12.03 33896458 16103542 0 5. IL & FS GROWTH & VALUE SEMI ANNUAL DIVIDEND (SWITCH OUT IN/OUT WITH LIQUID INSTITUTIONAL PLAN) 15.01.04 100023897 1 16.01.04 73564435 26459546 94501966 (SWITCH OUT TO LIQUID INSTITUTIONAL PLAN) 15.01.04 280000000 16.01.04 205931034 74068966 0 ( SWITCH OUT TO LIQUID INSTITUTIONAL PLAN) 15.01.04 93601966 16.01.04 91338389 226357 0 6 SBI MAGNUM SECTOR FUND UMBRELLA (SWITCH OUT TO MIIF) 27.01.04 120000000 28.01.04 92658228 27341773 56561597 (SWITCH IN FROM MICF OUT TO MIIF) 27.01.04 133207416 28.01.04 102856359 30351 - 57 0 253593926 208122663 2 47236729 5 47509279 7 102 35.3.3 THE LD. ASSESSING OFFICER NOTED THAT THOUGH THE ASSESSEE HAD DISALLOWED THIS LOSS IN COMPUTATION OF INCOME U /S 94(7) BUT HAS CLAIMED THE SAME FROM THE BOOK PROFIT. THESE SECUR ITIES WERE PURCHASED AND SOLD WITHIN A DAY OR TWO. FROM THIS HE INFERRED THAT THESE TRANSACTIONS WERE MADE TO EARN THE DIVIDEND A ND CLAIMED EXEMPTION U/S 10 BOTH IN NORMAL COMPUTATION OF INCO ME AS WELL AS COMPUTATION OF BOOK PROFIT U/S 115JB. AS AMOUNT PA ID FOR THE PURCHASE OF THE SECURITIES IS RELATABLE TO DIVIDEND INCOME WHICH IS EXEMPT, THE LOSS SO INCURRED IS ALSO AN EXPENDITURE FOR PURCHASE OF SECURITIES. SINCE WHAT ASSESSEE HAS PAID AS COST O F SECURITIES IS AN EXPENDITURE AND LOSS SUFFERED BY ASSESSEE IS ALSO A PART OF THIS EXPENDITURE, THEREFORE THE NET LOSS SHOWN BY THE AS SESSEE WOULD BE TREATED AS AN EXPENDITURE. HE ACCORDINGLY DISALLOWE D THE CLAIM OF LOSS FROM COMPUTATION OF BOOK PROFIT. 35.3.4 THE LD. ASSESSING OFFICER RELIED ON THE FOLL OWING AUTHORITIES:- I) INDIAN MOLASSES CO. PVT. LTD. [37 ITR 66] (SC) IN THIS CASE THE SUPREME COURT STATED THAT THE E XPENDITURE IS EQUAL TO EXPENSE AND EXPENSE IS MONEY LAID OUT BY CALCULATION AND INTENTION THOUGH IN MANY USES OF TH E WORD THIS ELEMENT MAY NOT BE PRESENT AS WHEN WE SPEAK OF A JO KE AT ANOTHERS EXPENSE. BUT THE IDEA OF SPENDING IN T HE SENSE OF PAYING OUT OR AWAY MONEY IS A PRIMARY MEANING AND IT IS WITH THAT MEANING THAT WE ARE CONCERNED. EXPENDITURE IS THUS WHAT IS PAID OUT OR AWAY AND SOMETHING WHICH IS GONE I RRETRIEVABLY. II) NAINITAL BANK LIMITED [62 ITR 638] (SC) IN THIS CASE THE HONBLE SUPREME COURT STATED AS UNDER : IN ITS NORMAL MEANING, THE EXPRESSION EXPENDITU RE DENOTES SPENDING OR PAYING OUT OR AWAY, I.E., SOMETHING THAT GOES OUT OF THE COFFERS OF THE ASSESSEE. WHEN HE SATISF IES THE OBLIGATION 103 BY DELIVERY OF CASH OR PROPERTY OR BY SETTLEMENT OF ACCOUNTS, THERE IS EXPENDITURE. BUT EXPENDITURE DOES NOT NECESSARI LY INVOLVE ACTUAL DELIVERY OF OR PARTING WITH MONEY OR PROPERT Y. IF THERE ARE CROSS CLAIMS ONE BY THE ASSESSEE WITH MONEY OR PROP ERTY. IF THERE ARE CROSS CLAIMS ONE BY THE ASSESSEE AGAINST A STRA NGER AND THE OTHER BY THE STRANGER AGAINST THE ASSESSEE AND AS A RESULT OF ACCOUNTING THE BALANCE DUE ONLY IS PAID, THE AMOUNT WHICH IS DEBITED AGAINST THE ASSESSEE IN THE SETTLEMENT OF A CCOUNTS MAY APPROPRIATELY BE TERMED EXPENDITURE. III) ATTAR SINGH GURMUKH SINGH [191 ITR 667] (SC) IN THIS CASE THE HONBLE SUPREME COURT STATED AS UNDER: THE WORD EXPENDITURE HAS NOT BEEN DEFINED IN T HE ACT. IT IS A WORD OF WIDE IMPORT. THE EXPENDITURE INCURRED BY T HE ASSESSEE IN RESPECT OF WHICH PAYMENT IS MADE. IT MEANS THAT AL L OUTGOINGS ARE BROUGHT UNDER THE WORD EXPENDITURE. THE EXPE NDITURE FOR PURCHASING STOCK IN TRADE IS ONE OF SUCH OUTGOINGS. THE PAYMENTS MADE FOR PURCHASES WOULD ALSO BE COVERED BY THE WOR D EXPENDITURE IV) SAJOWANLAL JAISWAL [103 ITR 706] (ORISSA) IN THIS CASE THE HONBLE HIGH COURT STATED AS UND ER: EXPENDITURE HAS NO DEFINITION IN THE STATUTE. ALL OUTGOINGS COULD BROADLY COME UNDER THIS HEAD. IN FACT THE CH AMBERS TWENTIETH CENTURY DICTIONARY GIVES THE FOLLOWING ME ANING TO THE WORDS: ACT OF EXPENDING OR LAYING OUT; THAT WHICH IS EX PENDED; THE PROCESS OF USING UP; MONEY SPENT. IF THIS BE THE MEANING OF THE WORD ACCORDING TO C OMMON PARLANCE, AND IN THE ABSENCE OF A STATUTORY DEFINIT ION, THE WORD WOULD TAKE ITS COLOUR ACCORDING TO ITS COMMON PARLA NCE USE, PAYMENT FOR PURCHASE OF GOODS WOULD CERTAINLY BE AN EXPENDITURE. 104 35.3.5 BEFORE LD. CIT(A) ASSESSEE RAISED FOLLOWING ARGUMENTS:- A) IN THE NORMAL COMPUTATION OF INCOME THIS TRANSAC TION WAS COVERED U/S 94(7) AND THEREFORE NO LOSS HAS BEEN CL AIMED IN THE COMPUTATION OF INCOME. THE DIVIDEND INCOME WAS CLAI MED AS EXEMPT U/S 10. B) AS PER CLAUSE (F) OF THE EXPLANATION BELOW SECTI ON 115JB ONLY EXPENDITURE RELATABLE TO EXEMPT INCOME HAS TO BE AD DED BACK AND THIS LOSS CANNOT BE CALLED EXPENDITURE. C) AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. [255 ITR 273] IF THERE ARE NOT AD VERSE REMARKS OR QUALIFICATION BY THE AUDITORS THEN NO ADJUSTMENT CAN BE MADE BY THE AO TO THE BOOK PROFIT. THE AUDITORS HAVE NOT MADE ANY QUALIFICATION OR COMMENT IN RESPECT OF THIS LOSS AN D HENCE THE AO SHOULD NOT MAKE ANY ADJUSTMENT TO THE BOOK PROFIT I N THIS REGARD. D) AS PER THE DEFINITION OF WEBSTER DICTIONARY THE LOSS IS DEFINED AS DAMAGE, DISADVANTAGE, DEPRIVATION ETC. C AUSED BY LOSING SOMETHING. AS PER THE LAW LEXICON BY P.RAMAN ATH LYER LOSS MEANS DEPRIVATION, DETRIMENT OR FORFEITUNE ACC RUING AS A RESULT OF SHRINKAGE IN VALUE; SOMETHING ARISING OUT OF THE EXIGENCIES OF SOME TRANSACTION BY REASON OF THE CIR CUMSTANCES ATTENDING IT, AND NOT A DEPRIVATION OF PROPERTY CAU SED BY A VOLUNTARY AND SPONTANEOUS ACT OF THE PERSON WHO IS DEPRIVED. THE HONBLE SUPREME COURT IN THE CASE OF INDIA MOLASSES CO. PVT. LTD. [37 ITR 66] HAS HELD THAT AN EXPENDITURE IS EQ UAL TO EXPENSE AND EXPENSE IS MONEY LAID OUT BY CALCULATION AND IN TENTION. IT MEANS SPENDING IN THE SENSE OF PAYING OUT OR AWAY O F MONEY. IN THE CASE OF LORD DAIRY FARM LTD. [27 ITR 700] BOMBA Y HIGH COURT HAS STATED THAT EXPENDITURE MUST ARISE OUT OF A VOLUNTARY ACT ON THE ART OF A ASSESSEE WHEREAS LOSS IS ENTIR ELY INVOLUNTARY. IN THE CASE OF S.C. KOTHARI [82 ITR 794] THE HONBL E SUPREME COURT HAS SATED THAT DISBURSEMENT OR EXPENSE OF A T RADER IS SOMETHING WHICH COMES OUT OF HIS POCKET. A LOSS IS SOMETHING DIFFERENT AS IT IS NOT A THING WHICH HE EXPANDS OR DISBURSES. IT IS A THING WHICH COMES UPON HIM AS EXTRA. THE APPELLANT HAS ALSO RELIED ON THE DECISION OF J&K HIGH COURT IN THE CAS E OF CHENAB 105 FOREST CO. PVT. LTD. [96 ITR 568], ANDHRA PRADESH C OURT IN THE CASE OF BIJALA SHIVALINGAM [253 ITR 105]. 35.3.6 THE LD.CIT(A) CONFIRMED THE ORDER OF THE ASS ESSING OFFICER ON THIS GROUND BY ALMOST ADOPTING SAME REAS ONINGS. HIS OBSERVATIONS AND FINDINGS IN THIS REGARD ARE AS UND ER:- 12.21 I HAVE CONSIDERED THE SUBMISSION MADE BY TH E APPELLANT AND OBSERVATION OF THE AO. THE FACTS ARE ADMITTED BY B OTH AO AND APPELLANT. THE CONTENTION OF THE APPELLANT IS NOT ACCEPTABLE FOR THE FOLLOWING REASONS:- THE APPELLANT AGREES THAT THIS IS A CASE OF DIVIDEN D STRIPPING. FURTHER IT IS CLEAR THAT THE TRANSACTIONS HAVE BEEN ENTERED INTO THE APPELLANT BY KEEPING IN MIND THE RECORD DATE WHICH MEANS THAT THE APPELLANT KNEW THAT THE NAV OF THE UNITS HAS DIVIDE ND PREGNANT IN IT. THIS DID NOT CHANGE THE PURCHASE PRICE BECAUSE THE NAV WAS DISCLOSED. BUT THE MOMENT THE RECORD DATE PASSES T HE DIVIDEND WOULD BE DISTRIBUTED TO THE HOLDER OF THE UNIT ON THE RECORD DATE. THE MOMENT THE DIVIDEND IS DISTRIBUTED THE MUTUAL 4 6 FUND LOSES THE MONEY AND THE NAV OF THE UNITS FALL ALMOST IN SUCH A MANNER THAT THE LOSS CAUSED TO THE HOLDER WOULD BE ALMOST THE SAME AS THE DIVIDEND RECEIVED BY HIM. THERE WOULD BE SLIGHT DIFFERENCE IN THE TWO FIGURES. DURING THE F.Y. REL EVANT TO THE CURRENT A.Y. THE APPELLANT WAS AWARE OF THE FACT TH AT SECTION 94(7) PROVIDES FOR DISALLOWANCE OF SUCH A LOSS FROM THE C OMPUTATION OF INCOME. THE APPELLANT WAS ALSO AWARE THAT THE LEGISLATURE C ONSIDERS THE EARNING OF DIVIDEND AND INCURRING OF LOSS ON SUCH T RANSACTIONS AS A COMPOSITE TRANSACTION AND THEREFORE HAD MADE AN AME NDMENT TO THE INCOME-TAX AND PROVIDED FOR SECTION 94(7) SO TH AT THE ASSESSEES DO NOT TAKE THE BENEFIT OF LOSS WHILE NOT OFFERING THE DIVIDEND INCOME FOR TAX BECAUSE THE DIVIDEND INCOME WAS EXEM PT U/S 10. WITH A VIEW TO CONSIDER THESE TWO I.E. DIVIDEND AND THE LOSS TOGETHER THE LEGISLATURE HAD PROVIDED FOR DISALLOWANCE FOR L OSS ALSO U/S 94(7). HENCE IT IS VERY CLEAR THAT THE LOSS IS INCU RRED IN RELATION TO EARNING OF THE DIVIDEND. 106 IN FACT PRIOR TO THE INSERTION OF SECTION 94(7) SUC H A TRANSACTION HAS BEEN HELD TO BE NON-COLLUSIVE BY THE HONBLE ITAT I N THE CASE OF WALFORD SHARES & STOCK BROKERS LTD. [96 ITD 1] AND BY THE DECISION OF HONBLE RAJKOT BENCH OF ITAT, AHMEDABAD IN THE CASE OF BHANUBEN CHIMANLAL MALAVIYA (SUPRA) BUT AFTER TH E INSERTION OF SECTION 94(7) IT IS VERY CLEAR THAT THE APPELLANT I S AWARE THAT THE LEGISLATURE HAS TREATED BOTH THE EFFECT I.E. DIVIDE ND AND LOSS AS RELATING TO EACH OTHER BUT STILL THE APPELLANT HAS ENTERED INTO THIS TRANSACTION THINKING THAT THE LOSS WOULD BE ALLOWED IN THE CALCULATION OF BOOK PROFIT. HENCE THE TRANSACTION IS A COLLUSIVE TRANSACTION. AS STATED BY THE AO IN SEVERAL CASES THE HONBLE SU PREME COURT HAS HELD THAT SOMETIMES THE EXPENDITURE NEED NOT BE SAME AS PHYSICAL DELIVERY OF PAYMENT. IN THE CASE OF NAINIT AL BANK LTD. (SUPRA) THE HONBLE SUPREME COURT STATED THAT IF TH ERE ARE CROSS CLAIMS ONE BY THE ASSESSEE AGAINST A STRANGER AND O THER BY THE STRANGER AGAINST THE ASSESSEE AND AS A RESULT OF AC COUNTING, THE BALANCE DUE ONLY IS PAID. THE AMOUNT WHICH IS DEBI TED AGAINST THE ASSESSEE IN THE SETTLEMENT OF ACCOUNTS MAY APPROPRI ATELY BE TERMED AS EXPENDITURE. FURTHER IN THE CASE OF ATTAR SINGH (SUPRA) THE HONBLE SUPREME COURT STATED THAT THE EXPENDITURE I NCURRED BY THE ASSESSEE IN RESPECT OF WHICH PAYMENT IS MADE MEANS THAT ALL OUTGOINGS ARE BROUGHT UNDER THE WORD EXPENDITURE. THE EXPENDITURE FOR PURCHASE IN STOCK IN TRADE IS ONE O F SUCH OUTGOING. THE PAYMENTS MADE FOR PURCHASES WOULD ALSO BE COVER ED BY THE WORD EXPENDITURE. THEREFORE READING THIS CASE ALONG WITH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF NAINITAL BANK LTD. THE NET OF PURCHASE AND SALE CAN ALSO BE TREATED AS EXPENDITUR E IF THE TRANSACTION APPEARS TO BE COMPOSITE. IN THE PRESE NT CASE IT IS CLEAR THAT THE LEGISLATURE ALSO TREATS THESE TRANS ACTIONS AS COMPOSITE AND THEREFORE INSERTED SECTION 94(7) SO THAT IF THE DIVIDEND IS OUTSIDE THE PURVIEW OF TAXATION TH EN THE LOSS IN RELATION TO THAT SHOULD ALSO BE OUTSIDE THE PURVIEW OF CLAIM. THE DECISION OF THE HONBLE RAJKOT ITAT IN THE CASE OF BHANUBEN CHIMANLAL MALAVIYA (SUPRA) AND THE DECISION OF THE HONBLE BOMBAY ITAT IN THE CASE OF WALFORT SHARES & STOCK B ROKERS LTD. (SUPRA) ARE DISTINGUISHABLE ON FACTS. IN BOTH THES E CASES THE ASSESSEES ENTERED INTO THE TRANSACTIONS WHEN SECTIO N 94(7) WAS NOT PRESENT ON THE STATUTE. THEREFORE, BOTH THE HONBL E ITAT HELD THAT THE TRANSACTIONS CANNOT BE TREATED AS COLOURABLE DE VICE FOR 107 DEFRAUDING THE REVENUE. BESIDES BOTH THESE DECISIO N WERE GIVEN ON APPLICABILITY OF SECTION 14A AND NOT ON THE APPLICA BILITY OF SECTION 115JB. 12.22 IN VIEW OF THE ABOVE IT IS VERY CLEAR THAT THE APP ELLANT HAS DELIBERATELY ENTERED INTO TRANSACTION WHICH IS COLOURABLE DEVICE TO DEFRAUD REVENUE FROM THE VERY INCEPTION O F THE TRANSACTION. THE APPELLANT KNEW VERY WELL THAT THE DIVIDEND INCOME RECEIVED WOULD NOT BE TAXED AND FURTHER IT M AY BE POSSIBLE THAT THE LOSS INCURRED CAN BE CLAIMED AS NOT DISALL OWABLE U/S 115JB. FROM THE VERY BEGINNING IN VIEW OF THE INSE RTION OF SECTION 94(7) THE APPELLANT WAS AWARE THAT BOTH THE DIVIDEN D INCOME AND LOSS INCURRED ON THE DIVIDEND STRIPPING TRANSACTION HAVE BEEN VIEWED AS A COMPOSITE TRANSACTION BY THE LEGISLATUR E WHICH HAS THOUGH IT FIT TO LINK BOTH OF THEM BY THE LOGIC THA T IF DIVIDEND IS NOT TAXED THEN THE LOSS INCURRED IN THE SAME TRANSACTIO N SHOULD ALSO NOT GIVE ANY BENEFIT AND IT SHOULD BE REMOVED FROM THE CALCULATION OF TAXES. CLEARLY, THIS TRANSACTION FALLS WITHIN THE PURVIEW OF THE DECISION OF SUPREME COURT IN THE CASE OF MCDOWELL & CO.[154 ITR 148] WHERE IN THE HONBLE SUPREME COURT HAS STATED THAT THE DEPARTMENT CAN LIFT THE CORPORATE VEIL FOR GOING IN TO THE TRUTH OF THE TRANSACTION. THEREFORE, THE LOSS INCURRED ON THESE TRANSACTIONS IS EXPENDITURE IN RELATION TO THE EARNING OF DIVIDEND AND HENCE THE SAME HAS TO BE REMOVED FROM THE P&L A/C. FOR COMPUT ING THE BOOK PROFIT IN VIEW OF THE PROVISIONS OF CLAUSE (F) OF S ECTION 115JB. IN VIEW OF THESE REASONS THE DISALLOWANCE MADE BY THE AO IS CORRECT AND THIS GROUND OF APPEAL IS DISMISSED . 35.3.7 BEFORE US LD AR FOR THE ASSESSEE SUBMITTED THAT ASSESSEE HAD MADE INVESTMENTS IN UNITS OF MUTUAL FUNDS WHICH WERE SUBSEQUENTLY SOLD AT A LOSS OF RS.47.24 CR. WHICH W AS DEBITED IN THE PROFIT & LOSS ACCOUNT. IN THIS PROCESS ASSESSEE EA RNED DIVIDEND OF RS.47.5 CRS WHICH WAS CREDITED IN THE PROFIT & LOSS ACCOUNT. THOUGH WHILE COMPUTING INCOME AS PER NORMAL PROVISIONS OF THE ACT NO LOSS WAS CLAIMED AS TRANSACTIONS ARE COVERED U/S 94(7) B UT WHILE COMPUTING BOOK PROFIT SUCH LOSS DEBITED IN THE BOOK S WAS CLAIMED AS ALLOWABLE AS PER SECTION 115JB. LD. A.R. SUBMITTED THE ISSUE IS DIRECTLY COVERED IN ITS FAVOUR BY THE DECISION OF H ONBLE MUMBAI 108 SPECIAL BENCH IN WALFORT AND STOCK BROKERS LTD V. I TO (96 ITD 1) WHICH WAS SUBSEQUENTLY AFFIRMED BY THE HONBLE BOMB AY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS P. LTD.(2009) 310 ITR 421 (BOMB). 35.3.8 IN ADDITION LD.AR SUBMITTED FOLLOWING ARGUM ENTS IN SUPPORT OF HIS CONTENTION THAT WHAT HE HAS INCURRED IS LOSS AND NOT EXPENDITURE AND LOSS AS SUCH CANNOT BE ADJUSTED AGAINST BOOK PROFIT COMPUTED AS PER SEC.115JB. HIS ARGUMENTS IN BRIEF ARE AS UNDER:- A) LOSS ON SALE OF SECURITIES OF RS.47.24 CRS IS PURE LY A CAPITAL LOSS FORMING PART OF THE PURCHASE COST OF THE SECURITIES AND THE PURCHASE COST HAVE BEEN CLAIMED AS DEDUCTION FROM THE SALES CONSIDERATION WHILE COMPUTING SHORT TERMS CAPITAL LOSS OF RS.47.2 4 CRS UNDER THE HEAD INCOME FROM CAPITAL GAIN B) LOSS ON SALE OF SECURITIES OF RS.47.24 CRS HAVE ARI SEN ON SALE OF SECURITIES WHICH IS AN INVESTMENT (CAPITAL ASSET) A ND THUS THE LOSS IS DIRECTLY ATTRIBUTABLE TO PURCHASE AND SALE OF SE CURITIES AND IS NOT AT ALL ATTRIBUTABLE TO EARNING OF DIVIDEND INCOME. C) FURTHER DIVIDEND INCOME IS CLASSIFIED AS CHARGEABLE TO INCOME TAX UNDER THE HEAD INCOME FROM OTHER SOURCES AS PER 5 6(2) OF THE INCOME TAX ACT ALTHOUGH THE SAME IS EXEMPT U/S 10(3 4) R.W.S 115O OF THE I.T. ACT. THE ACT FURTHER PROVIDES THA T CERTAIN EXPENDITURE IS ALLOWABLE AS DEDUCTION IN COMPUTING INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S U/S 57 AND IN THAT INVESTMENT MADE FOR EARNING DIVIDEND INCOME IS NEVER CONSIDERED AS EXPENDITURE LEAST TO THINK OF LOSS ON SALE OF INVESTMENT AS ALLOWABLE DEDUCTION FOR EARNING DIVID ENDS. D) AS PER CHAPTER VI OF THE INCOME TAX ACT ON SET OFF AND CARRIED FORWARD OF LOSSES IT HAS BEEN CLEARLY MENTIONED IN SECTION 71 THAT CAPITAL LOSSES CANNOT BE SET OFF AGAINST ANY OTHER HEAD OF INCOME. THE SAID PROVISION CLEARLY INDICATES THE INTENTION OF THE LEGISLATURE CLEARLY BIFURCATING BETWEEN CAPITAL LOSSES AND LOSS ES UNDER OTHER HEAD OF INCOME AND ITS INTENTION OF NOT LETTING CAP ITAL LOSS BEING SET OFF AGAINST ANY OTHER INCOME BEING REVENUE IN NATUR E. THUS IF ONE CONSIDERS THE SAID PROVISION IT IS CLEAR THAT THE S HORT TERM CAPITAL LOSS OF RS.47.24 UNDER NO CIRCUMSTANCES BE SET OFF AGAINST ANY OTHER HEAD OF INCOME IT BEING CAPITAL LOSS AND IS D IRECTLY ATTRIBUTABLE TO PURCHASE AND SALE OF SECURITIES (CA PITAL INVESTMENT). 109 E) THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. VS. ACIT 255 ITR 273 , HAS HELD THAT WHERE THERE IS NO ADVERSE REMARK OR QUALIFICATION BY THE AUDITORS ON THE PROF IT AND LOSS ACCOUNT PREPARED BY THE COMPANY, THE ASSESSING OFFI CER HAS NO POWER TO MAKE ANY ADJUSTMENT IN THE PROFIT AS DISCL OSED IN SUCH PROFIT AND LOSS ACCOUNT EXCEPT FOR THE ADJUSTMENTS SPECIFICALLY ENUMERATED IN THE EXPLANATION TO SECTION 115J OF TH E ACT. 35.3.9 WITH REGARD TO CLAUSE(F) OF EXPLANATION TO S EC.115JB LD. AR SUBMITTED THAT SAID CLAUSE IS INAPPLICABLE TO THE P RESENT CASE BECAUSE LOSS ARISING ON SALE OF UNIT IS NOT EXPENDITURE FOR THE FOLLOWING REASONS:- A) INVESTMENT IN SECURITIES HAS TO BE REFLECTED IN THE BALANCE SHEET AS PER SCHEDULE VI OF THE COMPANIES ACT AND CANNOT BE DEBITED IN PROFIT AND LOSS ACCOUNT NOT BEING AN EXPENDITURE. B) PURCHASE COST OF INVESTMENT IN SECURITIES HAS BEEN REDUCED WHILE CALCULATING SHORT TERM CAPITAL GAIN U/S 111A OF THE INCOME TAX ACT AND THUS UNDER NO CIRCUMSTANCES THE SAID PURCHA SE COST CAN ONCE AGAIN BE CLAIMED AS DEDUCTION U/S 57 RELATING TO INCOME FROM OTHER SOURCES. THUS IF THE SAID PURCHASE COST OF I NVESTMENT IS NOT CONSIDERED AS EXPENDITURE U/S 57 OF INCOME FROM OTH ER SOURCES THEN UNDER NO CIRCUMSTANCES THE LOWER AUTHORITIES C AN CONSIDER THE SAID PURCHASE COST OF INVESTMENT AS EXPENDITURE REL ATED TO EARNING OF DIVIDEND. C) EVEN SECTION 71 DOES NOT ALLOW THE SET OFF OF SHORT TERM CAPITAL LOSS AGAINST ANY OTHER HEAD OF INCOME AS EXPLAINED IN THE FOREGOING PARAGRAPHS. THUS EVEN ON THIS GROUND THE LEARNED ASSESSING OFFICER HAS GROSSLY ERRED IN CONSIDERING THE SHORT TERM CAPITAL LOSS AS EXPENDITURE TOWARDS EARNING OF DIVI DEND. FURTHER THE LEARNED ASSESSING OFFICER IN HIS ORDER WHILE CO MPUTING THE ASSESSED INCOME HAS MADE THE SUBJECT ADDITIONS DIRE CTLY TO THE TOTAL INCOME DECLARED BY THE APPELLANT IN THE ORIGI NAL COMPUTATION OF INCOME AND THUS THE LEARNED ASSESSING OFFICER HA S ACCEPTED THE ORIGINAL COMPUTATION OF INCOME OF THE APPELLANT WHE REIN THE PURCHASE COST OF SECURITIES IS REDUCED FROM THE SAL ES CONSIDERATION OF SECURITIES UNDER THE HEAD CAPITAL GAINS AND THUS THE ASSESSING OFFICER HAS EVEN ACCEPTED THE FACT THAT SHORT TERM CAPITAL LOSS SHOWN UNDER THE HEAD INCOME FROM CAPITAL GAIN CAN U NDER NO CIRCUMSTANCES BE SET OFF AGAINST DIVIDEND INCOME CO NSIDERING THE PROVISIONS OF THE INCOME TAX ACT. D) IN THE INCOME TAX ACT IN SECTION 94(7) THE WORD LOS S HAS BEEN SPECIFICALLY USED WHILE IN SECTION 14A THE WORD EXP ENDITURE HAS 110 BEEN USED. EVEN IN THE CHAPTER VI OF SET OFF AND C ARRIED FORWARD OF LOSSES THE CAPITAL LOSS IS EXPLAINED AS EXCESS O F PURCHASE CONSIDERATION OVER SALES CONSIDERATION. THUS IN VA RIOUS SECTIONS IN THE INCOME TAX ACT ITSELF HAS USED THE TERM LOSS AN D EXPENDITURE AND THIS UNDER NO CIRCUMSTANCES THE LOSS ON SALE OF SECURITIES WHICH IS A CAPITAL LOSS DIRECTLY ATTRIBUTABLE TO PU RCHASE AND SALE OF SECURITY PERTAINING TO THE HEAD INCOME FROM CAPITAL GAIN CAN BE EQUATED AS EXPENDITURE RELATED TO EARNING OF DIVIDE ND. E) EXPENDITURE PAYMENT WOULD BE UNILATERAL ACT OF ONLY OUTFLOW OF FUNDS FROM THE COMPANY WHEREAS IN THE GIVEN CASE TH E LOSS HAS RESULTED DUE TO DIFFERENCE IN THE OUTFLOW OF FUNDS (INVESTMENT) AND INFLOW OF FUNDS (SALE OF INVESTMENT) WHICH IS A BIL ATERAL ACT AND THEREFORE DISTINCT FROM THE TERM EXPENDITURE WHICH IS A UNILATERAL ACT. 35.3.10 SUMMARIZING THE ARGUMENTS LD. A.R. SUBMITTE D THAT SUM OF RS.47.24 CR. IS A LOSS IN THE SALE AND PURCHASE OF SECURITIES. IT IS NOT AN EXPENDITURE THEREFORE, NOT HIT BY SEC.14A, AND SIMI LARLY NOT HIT BY CLAUSE(F) OF EXPLANATION TO SEC.115JB. THIS LOSS HA S BEEN DEBITED IN THE ACCOUNTS AND CANNOT BE DISTURBED IN VIEW OF THE DEC ISION OF HONBLE SUPREME COURT IN APPOLLO TYRES VS. ACIT 255 ITR 273 . FURTHER PROVISIONS OF SEC.94(7) WOULD ONLY BE APPLICABLE W HILE COMPUTING INCOME AS PER NORMAL PROVISIONS OF THE ACT AND NOT WHILE COMPUTING BOOK PROFIT AS PER SEC.115JB. 35.3.11 AS AGAINST ABOVE THE LD.DR SUBMITTED THAT A S PER SUB-SEC.5 OF SEC.115JB ALL THE PROVISIONS OF THE ACT WOULD BE APPLICABLE WHILE COMPUTING BOOK PROFIT ALSO. IT IS INCORRECT TO SAY THAT SEC.94(7) PROVIDING DISALLOWANCE OF SUCH DIVIDEND STRIPPING LOSSES WOUL D NOT BE APPLICABLE WHILE COMPUTING BOOK PROFIT U/S 115JB. THE ASSESSE E HAS ENTERED INTO TRANSACTION KEEPING IN MIND THE RECORD DATE. THUS NEW NAV OF THE UNITS WAS PRACTICALLY KNOWN TO THE ASSESSEE. THEREFORE, ENTERING INTO SUCH TRANSACTION AND INCURRING LOSS AND CLAIMING THE SAM E AGAINST THE PROFIT IS A COLOURABLE DEVICE. SEC.94(7) TREATS DIVIDEND AND L OSS AS A PART OF SAME 111 TRANSACTION AND THEREFORE LEGISLATURE THOUGHT IT PR OPER TO DISALLOW THE SAME BY ENACTING SEC.94(7). THE LOSS IS IN FACT AN OUTGOING AND SO IS THE EXPENDITURE THEREFORE ALL THE OUTGOINGS SHOULD BE T REATED AS SAME AND THEY ARE HIT BY SEC.94(7). THE DECISION IN WALFORD SHAR ES & STOCK BROKERS LTD AND ALSO THE DECISION OF ITAT, RAJKOT BENCH IN BHANUBEN CHIMANLAL MALVIYA VS. ITO 2006 100 TTJ 337 ARE NOT APPLICABLE TO THE FACTS OF THE CASE AS THESE JUDGMENTS WERE RENDERED PRIOR TO INST RUCTION OF SEC.94(7). ONCE THE ASSESSEE KNOWS THAT A PARTICULAR TRANSACTI ON WILL RESULT INTO A LOSS AND WHICH WILL HAVE EFFECT ON TAXABLE INCOME A ND STILL ENTERS INTO SUCH TRANSACTION FOR THE PURPOSES OF AVOIDING TAX T HEN THEY SHOULD BE TREATED AS COLOURABLE DEVICE. IT IS SUBMITTED BY H IM THAT SUCH TRANSACTIONS ARE HIT BY DECISION OF HONBLE SUPREME COURT IN MC DOWELL & COS CASE 154 ITR 148. HE IN THE END RELIED ON THE DECISION THE LD.CIT(A) 35.3.12 WE HAD HEARD THE RIVAL SUBMISSIONS AND CARE FULLY PERUSED THE MATTER ON RECORD. IN OUR CONSIDERED VIEW LOWERE D AUTHORITIES WERE NOT JUSTIFIED IN MAKING THE ADDITION IN THE BOOK PR OFIT BY THE SUM OF RS.47.24 CR. THE ENTIRE ISSUES ARE DIVIDED IN 3 SE GMENTS. THEY ARE:- 1. WHETHER LOSS AND EXPENDITURE CONNOTE THE SAME MEANI NG AND THEREFORE THE WORD EXPENDITURE USED IN SEC.14 A COVERS WITHIN ITS COMPASS WORD LOSS 2. WHETHER THE PROVISIONS OF SEC.14A ARE APPLICABLE TO THE FACTS OF THE PRESENT CASE 3. WHETHER CASE OF THE ASSESSEE IS HIT BY SEC.94(7) RE AD WITH SUB-SEC.5 TO SEC.115JB 35.3.13 THE UNDISPUTED FACTS ARE THAT ASSESSEE ENTE RED INTO SHORT- TERM TRANSACTIONS IN SALE AND PURCHASE OF UNITS OF MUTAL FUNDS. IT PURCHASED THE UNITS A COUPLE OF DAYS BEFORE THE REC ORD DATE AND SOLD IT AFTER THE DECLARATION OF DIVIDEND. IN THE PROCESS T HE ASSESSEE EARNED DIVIDEND OF RS.47.51 CRS AND LOSS OF RS.47.24 CRS. THE DIVIDEND INCOME 112 WAS CLAIMED EXEMPTED U/S 10(33) AND LOSS IN THESE T RANSACTION WAS DEBITED IN THE PROFIT & LOSS ACCOUNT PREPARED AS PE R SCHEDULE VI OF THE COMPANIES ACT. THE REVENUE SOUGHT TO EXCLUDE LOSS FROM THE COMPUTATION OF BOOK PROFIT U/S 115JB AS WELL AS FRO M THE COMPUTATION OF TOTAL INCOME AS PER NORMAL PROVISIONS OF THE ACT BY INVOKING PROVISIONS OF SEC.94(7). IN ADDITION TO THIS THE ALTERNATIVE GROUND FOR DISALLOWANCE OF THE LOSS TAKEN WAS THE PROVISIONS OF SEC. 14A WH ERE AN EXPENDITURE RELATING TO EXEMPTED INCOME IS TREATED AS DISALLOWA BLE. IT IS UNDISPUTED POSITION OF LAW THAT SEC.14A USES THE WORD EXPENDI TURE FOR DISALLOWANCE WHILE COMPUTING INCOME UNDER CHAPTER I V AND NOT LOSS. THE REVENUE HAS CANVASSED THAT EXPENDITURE INCLUDES LOSS AND THEREFORE LOSS INCURRED IN TRANSACTION OF UNITS WOULD BE DISA LLOWED EVEN WHILE COMPUTING BOOK PROFIT. IN OUR CONSIDERED VIEW FIRS TLY THE MEANING, SCOPE AND EFFECT OF THE TERMS LOSS AND EXPENDITURE ARE DI FFERENT AND THEY ARE NOT REPLACEABLE BY EACH OTHER. IT IS UNDISPUTED POSITI ON OF LAW THAT SEC.14A USES THE WORD EXPENDITURE FOR DISALLOWANCE WHILE COMPUTING INCOME UNDER CHAPTER IV AND NOT LOSS. 35.3.14 THE TERM EXPENDITURE RELATES TO DISBURSEM ENTS I.E. SOMETHING A TRADER PAYS VOLUNTARILY FOR CARRYING OU T TRANSACTIONS WHEREAS LOSS IS NOT INCURRED OUT OF ANY VOLITION BUT IS THR UST ON THE ASSESSEE AS A RESULT OF TRANSACTION. AN EXPENDITURE IS INCURRED TO CARRY OUT A TRANSACTION; IT IS PART OF THE ACTIVITIES TO MEET A N END WHEREAS LOSS IS NET RESULT OF THE TRANSACTIONS WHICH IS KNOWN ONLY AT T HE END OF THE TRANSACTIONS. HONBLE SUPREME COURT IN COMMISSIONE R OF INCOME-TAX VS. NAINITAL BANK LTD. (1966) 62 ITR 638 (SC) HELD THAT IN ITS NORMAL MEANING, THE EXPRESSION 'EXPENDITURE' DENOTES 'SPEN DING' OR 'PAYING OUT OR AWAY', I.E., SOMETHING THAT GOES OUT OF THE COFF ERS OF THE ASSESSEE. A MERE LIABILITY TO SATISFY AN OBLIGATION BY AN ASSES SEE IS UNDOUBTEDLY NOT 113 'EXPENDITURE': IT IS ONLY WHEN HE SATISFIES THE OBL IGATION BY DELIVERY OF CASH OR PROPERTY OR BY THE SETTLEMENT OF ACCOUNTS T HAT THERE IS EXPENDITURE. FURTHER IN THE CONTEXT OF SEC.40A(3) HONBLE SUPREM E COURT IN ATTAR SINGH GURMUKH SINGH VS. INCOME-TAX OFFICER (1991) 1 91 ITR 667 (SC) HELD THAT THE WORD EXPENDITURE MEANS ALL OUTGOING S BROUGHT UNDER THE WORD 'EXPENDITURE' FOR THE PURPOSE OF THE SECTION 4 0A(3). THE EXPENDITURE FOR PURCHASING STOCK-IN-TRADE IS ONE OF SUCH OUTGOINGS. HONBLE SUPREME COURT IN MADRAS INDUSTRIAL INVESTME NT CORPN. LTD. VS. COMMISSIONER OF INCOME-TAX (1997) 225 ITR 802 (SC) HELD THAT THE EXPRESSION 'PROFITS OR GAINS' HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE ; AND THERE COULD BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF E ARNING THE RECEIPT IS DEDUCTED THEREFROM, WHETHER THE EXPENDITURE IS ACTU ALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS ACCRUED EVEN THOUG H IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE. THUS, 'EXPENDITURE' IS NOT NECESSARILY CONFINED TO THE MONEY WHICH HAS BEEN ACTUALLY PAID OUT. IT COVERS A LIABILITY WHICH HAS ACCRUED OR WHICH HAS BEEN INCUR RED ALTHOUGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. 35.3.15 FROM THE ABOVE AUTHORITIES WHAT COMES OUT I S THAT AN EXPENDITURE IS AN ESSENTIAL ITEM TO BE DEBITED IN THE PROFIT & LOSS ACCOUNT TO ARRIVE AT PROFIT & GAINS OF THE BUSINESS . THIS PROFIT & GAINS BEING A RESULT OF PROFIT & LOSS ACCOUNT MAY BE A PR OFIT OR MAY BE A LOSS. A BUSINESS EXPENDITURE IS ALLOWABLE IN THE PROFIT & L OSS ACCOUNT IF IT IS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE ASSESSEES BUSIN ESS. THIS IS ALLOWABLE U/S 37(1) IF IT IS NOT PERSONAL OR CAPITAL IN NATUR E. A BUSINESS LOSS IS ALLOWABLE U/S 28 AS A TRADING LOSS OR WHERE ASSESSE E IS CARRYING OUT TWO SEPARATE BUSINESSES, ONE RESULTING IN PROFIT AND OT HER RESULTING IN LOSS THEN ASSESSEE HAS RIGHT TO ADJUST LOSS FROM ONE BUSINESS AGAINST THE INCOME OF 114 OTHER BY VIRTUE OF SEC.70 & 71. U/S 57, COST OF SHA RES / UNITS IS DEDUCTIBLE UNDER CLAUSE III. THE COST OF GOODS IS TREATED AS AN EXPENDITURE BY HONBLE SUPREME COURT IN ABOVE REFERRED CASES. IT I S BECAUSE COST OF THE GOODS IS NECESSARILY REQUIRED TO BE DEDUCTED WHILE ARRIVING AT THE FIGURE OF PROFIT OR LOSS RESULTING FROM THE TRANSACTION OF PURCHASE AND SALE. A LOSS BEING NET RESULT OF A SOURCE OF INCOME CAN ONLY BE ADJUSTED AGAINST NET RESULT OF ANOTHER SOURCE OF INCOME. LOSS IS NOT S OMETHING INCURRED WHOLLY NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. LOSS IS ONLY A RESULT OF BUSINESS. 35.3.16 IN THIS REGARD WE REFER TO A PART OF SUBMIS SIONS OF THE ASSESSEE MADE BEFORE THE LD ASSESSING OFFICER WITH WHICH WE FULLY AGREE AND THEREFORE REPRODUCE THEM BELOW:- THE TERM LOSS IS DEFINED IN WEBSTERS DICTIONARY AS THE DAMAGE, DISADVANTAGE, DEPRIVATIONS ETC. CAUSED BY LOSING SOMETHING. THE LAW LEXICON BY P. RAMANATHA AIYAR ILLUSTRATES LOSS TO MEAN DEPRIVATIO N, DETRIMENT OR FORFEITURE ACCRUING AS A RESULT OF SHRINKAGE IN VALUE SOMETHIN G ARISING OUT OF THE EXIGENCIES OF SOME TRANSACTION BY REASON OF THE CIR CUMSTANCES ATTENDING IT, AND NOT A DEPRIVATION OF PROPERTY CAUSED BY A VOLUNTARY AND SPONTANEOUS ACT OF THE PERSON WHO IS DEPRIVED. THE SUPREME COURT, IN THE CASE OF INDIAN MOLASSES C O (P) LTD. V. CIT: 37 ITR 66, HELD THAT AN EXPENDITURE IS EQUAL TO EXPENSE AND EXPENSE IS MONEY LAID OUT BY CALCULATION AND INTENTION. IT MEANS SPENDI NG IN THE SENSE OF PAYING OUT OR AWAY MONEY. IN LORDS DAIRY FARM LTD. . CIT: 27 ITR 700 (BOM) I T WAS OBSERVED THAT EXPENDITURE MUST ARISE OUT OF A VOLUNTARY ACT ON TH E PART OF THE ASSESSEE, WHEREAS, LOSS IS ENTIRELY INVOLUNTARY. IN CIT V. NEW INDIA ASSURANCE CO. LTD., 71 ITR 761 (BOM) IT WAS AGAIN HELD THAT BUSINESS EXPENDITURE IS VOLUNTARILY INCURRED W HILE A BUSINESS LOSS IS FORTUITOUS OR AB EXTRA. THE TWO TERMS HAVE BEEN CLEARLY DISTINGUISHED BY TH E SUPREME COURT IN THE CASE OF CIT V. S.C.KOTHARI: 82 ITR 794 AS FOLLOWS:2 8 115 DISBURSEMENT OR EXPENSE OF A TRADER IS SOMETHING WHICH COMES OUT OF HIS POCKET. A LOSS IS SOMETHING DIFFERENT AS IT IS NO T A THING WHICH HE EXPENDS OR DISBURSES. IT IS A THING WHICH COMES UPON HIM AB E XTRA. IN THE CASE OF CHENAB FOREST CO (P) TD. V. CIT; 96 ITR (J & K) IT WAS HELD THAT THERE IS A CLEAR DISTINCTION BETWEEN A BUSINESS EXP ENDITURE AND A BUSINESS LOSS. THE FORMER IS INDICATIVE OF A VIOLATION BUT A LOSS COMES SO TO SPEAK AS AB EXTRA. 35.3.17 THUS WE ARE OF THE CONSIDERED VIEW THAT LOS S AND EXPENDITURE DO NOT CONNOTE SAME MEANING AND THEREFORE THEY ARE NOT REPLACEABLE. NOW COMES THE QUESTION WHETHER THE LOSS INCURRED BY THE ASSESSEE IN THE ABOVE REFERRED DIVIDEND STRIPPING TRANSACTIONS CAN BE DISALLOWED U/S 14A. IN OUR CONSIDERED VIEW FIRSTLY SEC.14A DOES NOT USE THE WORD LOSS AND IT CANNOT BE SAID THAT ASSESSEE HAS INCURRED LOSS FOR THE PURPOSES OF EARNING DIVIDEND INCOME. SECONDLY IF SUCH DIVIDEND STRIPPI NG TRANSACTIONS AND LOSS RESULTED THERE FROM COULD BE COVERED BY SEC.14 A, IT WOULD NOT HAVE BEEN NECESSARY FOR THE LEGISLATURE TO ENACT SEC. 94 (7) WHICH SPECIFICALLY DEALS WITH SUCH TYPE OF TRANSACTIONS. THEREFORE SE C.14A CANNOT BE INVOKED TO COVER SUCH TRANSACTIONS. THE DISTINCTIO N OF THE TERMS USED IN SEC.94(7) AND 14A ARE NOTICEABLE. SEC.94(7) USES T HE TERM LOSS WHEREAS SEC.14A USES THE TERM EXPENDITURE. THE DISTINCTI ONS CLEARLY IS MADE WITH UNDERSTANDING THAT SEC.14A ONLY COVERS DISALLO WANCE OF EXPENDITURE INCURRED FOR EARNING EXEMPTED INCOME WHEREAS SEC.94 (7) COVERS LOSS RESULTING FROM EARNING EXEMPTED INCOME SUCH AS DIVI DEND. FINALLY SEC.14A CANNOT BE INVOKED WHILE COMPUTING BOOK PROF IT U/S 115JB AS COMPUTATION OF BOOK PROFIT UNDER THAT SECTION IS CO NFINED TO THE MECHANISM MENTIONED IN THAT SECTION ONLY. WE HAVE HELD WHILE DISPOSING OF GROUND NO.6(C) IN THE APPEAL FOR THE ASSESSMENT YEAR 2002- 03 THAT PROVISIONS OF SEC.14A CANNOT BE INVOKED, WH ILE COMPUTING BOOK PROFIT U/S 115JB, TO DISALLOW ANY EXPENDITURE WHICH IS OTHERWISE HIT BY THIS SEC. IN COMPUTATION OF INCOME UNDER NORMAL PRO VISIONS OF THE ACT. 116 THE REASONS MENTIONED THEREIN WOULD BE APPLICABLE H ERE ALSO. IN OTHER WORDS FIRSTLY SEC.14A IS NOT APPLICABLE FOR DISALLO WING LOSS EVEN IN COMPUTATION OF INCOME UNDER NORMAL PROVISIONS OF TH E ACT AND EVEN OTHERWISE SEC.14A CANNOT BE INVOKED FOR DISALLOWING ANY ITEM OF EXPENDITURE OR SAY LOSS WHILE COMPUTING BOOK PROFIT U/S 115JB. 35.3.18 NOW THE QUESTION COMES WHETHER PROVISIONS O F SEC.94(7) CAN BE INVOKED, AS DONE BY THE LD.CIT(A) FOR DISALLOWIN G SUCH LOSS WHILE COMPUTING BOOK PROFIT U/S 115JB. 35.3.19 IN OUR CONSIDERED VIEW SEC.115JB IS A COMPL ETE CODE IN ITSELF SO FAR AS COMPUTATION OF BOOK PROFIT IS CONCERNED. AS WE HAVE DISCUSSED WHILE DISPOSING OF GROUND NO.6(C) IN THE ASSTT. YEA R 2002-03 SUB-SEC.5 OF SEC. 115JB CAN BE INVOKED ONLY FOR BORROWING PR OVISIONS IN THOSE AREAS OF THE ACT WHICH ARE NOT PROVIDED IN SEC.115J B. THE MECHANISM FOR COMPUTATION OF PROFIT IS COMPLETELY LAID DOWN I N SEC.115JB. IT STARTS WITH PROFIT AS COMPUTED AND CERTIFIED BY THE AUDITO RS AS PER SCHEDULE VI OF THE COMPANIES ACT. TO THIS THE ADJUSTMENTS AS P ROVIDED IN THAT SEC. ALONE ARE MADE AND THE NET RESULT IS TREATED AS TOT AL INCOME FOR THE PURPOSES OF COMPARING WITH TOTAL INCOME COMPUTED UN DER NORMAL PROVISIONS OF THE ACT AND FOR LEVY OF TAXES. NO O THER ADJUSTMENTS WHILE COMPUTING BOOK PROFIT IS PERMISSIBLE, AS HELD BY HO NBLE SUPREME COURT AND OTHER COURTS (SUPRA). THE EFFECT OF SUBSECTION 5 OF SEC.115JB OF THE ACT IS THAT PROVISIONS RELATING TO COLLECTION AND RECOVERY, APPEAL AND PENALTY AS PROVIDED IN OTHER CHAPTER OF THE ACT CA N BE INVOKED AS THEY ARE NOT PROVIDED IN SEC.115JB. SEC.94(7) ON WHICH L D.DR HAS REPEATEDLY EMPHASIZED RELATES TO COMPUTATION OF INCOME ONLY AN D THEREFORE IT IS AT PAR IN EFFECT WITH OTHER PROVISIONS OF THE ACT WHIC H AFFECT COMPUTATION OF INCOME. THEREFORE IN OUR CONSIDERED VIEW SEC.94(7) ALSO CANNOT BE 117 DRAWN TO AFFECT COMPUTATION OF BOOK PROFIT WHICH HA VE TO BE NECESSARILY AND EXCLUSIVELY DONE WITHIN THE PARAMETER LAID DOWN US/ 115JB. IN OTHER WORDS SEC.94(7) HAS NO ROLE TO PLAY IN COMPUTING BO OK PROFIT U/S 115JB . AS A RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED . 35.4 GROUND NO. 9(D) 35.4.1 IT RELATES TO UPHOLDING OF DISALLOWANCE OF INTEREST AND ADMINISTRATIVE EXPENSES TOTALING TO RS.34,62,416, W HILE COMPUTING BOOK PROFIT. ISSUE RELATING TO DISALLOWANCE OF SIMILAR AMOUNT OF EXPENSES INCURRED UNDER THESE TWO HEADS WAS CONSIDERED WHILE COMPUTING INCOME UNDER NORMAL PROVISIONS OF THE ACT AND THE ISSUE HA S BEEN DISCUSSED BY US WHILE DISPOSING OF GROUND NO.6. BUT WHILE COMPUTIN G BOOK PROFIT SIMILAR DISALLOWANCE HAS ALSO BEEN MADE BY THE ASSESSING OF FICER AND HAS BEEN CONFIRMED BY LD.CIT(A). 35.4.2 WE HAVE HEARD LD.A.R. AND LD.D.R. IN OUR C ONSIDERED VIEW NO ADDITION CAN BE MADE IN THE BOOK PROFIT U/S 14A. WE HAVE HELD WHILE DISPOSING OF GROUND NO.6(C) IN THE ASSESSMENT YEAR 2002-03 AND ALSO WHILE DISPOSING OF GROUND 7(B) FOR ASSESSMENT YEAR 2003-04 AND GROUND NO.9(C) IN THE PRESENT ASSESSMENT YEAR THAT PROVISI ONS OF SEC.14A CANNOT BE INVOKED FOR DISALLOWING ANY EXPENDITURE RELATABL E TO ANY EXEMPTED INCOME IF OTHERWISE SUCH EXPENDITURE HAS BEEN DEBIT ED IN THE PROFIT AND LOSS ACCOUNT PREPARED ACCORDING TO SCHEDULE VI OF T HE COMPANIES ACT AND CERTIFIED BY THE AUDITORS. IT HAS ALSO BEEN HE LD THEREIN THAT EVEN IF ANY DISALLOWANCE IS CALLED FOR U/S 14A WHILE COMPUTING INCOME UNDER NORMAL PROVISIONS OF THE ACT, NO DISALLOWANCE OF ANY CLAIM CAN BE DONE BEYOND THE ADJUSTMENTS PROVIDED U/S 115JB. FOLLOWING THE SAME REASONING WE HOLD THAT NO DISALLOWANCE OF ANY INTEREST EXPENSES OR ADMINISTRATIVE EXPENSES CAN BE MADE U/S 115JB EVEN IF THEY ARE HIT BY SEC.14A. AS A RESULT THIS GROUND OF ASSESSEE IS ALLOWED. 118 36. GROUND NO.10: THIS GROUND IS DISMISSED AS NOT P RESSED. 37. GROUND NO.11 37.1 THIS RELATES TO CHARGE OF INTEREST U/S 234B ON THE INCOME COMPUTED U/S 115JB. SIMILAR ISSUE AROSE BEFORE US IN THE AS SESSMENT YEAR 2002-03. WHILE DISPOSING OF GROUND NO. 7 IN THAT YEAR WE HAV E HELD AGAINST THE ASSESSEE. FOLLOWING THE SAME REASONING WE DISMISS THIS GROUND THIS YEAR ALSO. ITA NO. 390/A/08 GROUNDS OF APPEAL: 38. DEPARTMENTAL APPEAL: ASSESSMENT YEAR 2004-05 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS. 30,77, 839/- ON ACCOUNT OF DISALLOWANCE OF CLAIM OF PROVISION WRITTEN BACK U/S 41(1). 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS.76,67,6 04/- MADE ON ACCOUNT OF ADJUSTMENT U/S 145A BEING EXCISE DUTY ON OPENING STOCK OF RAW MATERIALS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS.14,60,7 54/- MADE ON ACCOUNT OF UNEXPLAINED SUNDRY CREDITORS. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 5. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE C IT(A) BE SET- ASIDE AND THAT OF ASSESSING OFFICER BE RESTORED. 39. GROUND NO. 1: 39.1 THE ISSUE IS SIMILAR AS IN GROUND NO. 1 IN DEP ARTMENTAL APPEAL FOR THE ASSESSMENT YEAR 2002-03 AND GROUND NO. 1 IN DEP ARTMENTAL APPEAL FOR THE ASSESSMENT YEAR 2003-04. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE A SSESSEE HAS REDUCED HIS 119 INCOME BY RS. 30,77,839/- WHICH REPRESENTED THE PRO VISION OF LIABILITY WRITTEN BACK IN THE BOOKS OF ACCOUNT, CLAIMING THAT PROVISION OF SECTION 41(1) ARE NOT APPLICABLE IN VIEW OF BIFRS ORDER DA TED 13-05-1992. ON THIS BASIS APPEAL OF THE REVENUE WAS DISMISSED IN T HE ASSESSMENT YEAR 2002-03 AND 2003-04 IN RESPECT OF THIS GROUND. NOW THE ARGUMENT OF THE REVENUE IS THAT THE RELIEF GRANTED BY BIFRS ORDER CANNOT BE STRETCHED INDEFINITELY AND SHOULD LAPSE WHEN COMPANY TURNS PR OFITABLE. IT WAS ALSO CLAIMED THAT THIS YEAR THE COMPANY WAS NOT A SICK C OMPANY. 39.2 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FI ND THAT THERE IS NO DIFFERENCE ON FACTS BETWEEN THE ASSESSMENT YEAR 200 2-03/2003-04 AND PRESENT ASSESSMENT YEAR 2004-05. IN FACT, THIS YEA R ALSO THE ASSESSEE COMPANY HAS DECLARED A LOSS OF RS. 107,72,89,850/- AND TAX WAS LEVIED ON THE BASIS OF BOOK PROFIT UNDER SECTION 115JB. THER EFORE, IT CANNOT BE SAID THAT COMPANY HAS TURNED AROUND. ACCORDINGLY, WE FO LLOW OUR DECISION FOR THE ASSESSMENT YEAR 2002-03 AND 2003-04 AND CON FIRM THE ORDER OF LEARNED CIT(A) ON THIS GROUND. THIS GROUND OF THE REVENUE IS THEREFORE REJECTED. 40. GROUND NO. 2 40.1 IT RELATES TO ADDITION MADE ON ACCOUNT OF ADJU STMENT UNDER SECTION 145A RELATING TO EXCISE DUTY NOT CONSIDERED IN THE STOCK BY THE ASSESSEE. SIMILAR ISSUES HAVE ARISEN BEFORE US IN THE ASSESSM ENT YEAR 2002-03 AND 2003-04. WE HAVE UPHELD DECISION OF AUTHORITIES TO INCLUDE EXCISE DUTY ELEMENT IN THE VALUATION OF CLOSING STOCK, BUT HAVE DIRECTED THAT ENHANCED CLOSING STOCK ON ACCOUNT OF ADDITION BY EXCISE DUTY SHOULD BE CONSIDERED AS OPENING STOCK OF THE SUCCEEDING YEAR. FOLLOWING ABOVE PRINCIPLE, WE RESTORE THE MATTER TO THE FINAL ASSESSING OFFICER F OR TREATING THE CLOSING STOCK INCLUSIVE OF EXCISE DUTY OF THE ASSESSMENT YE AR 2003-04 AS OPENING STOCK OF THE PRESENT ASSESSMENT YEAR AND CLOSING ST OCK INCLUSIVE OF EXCISE 120 DUTY OF THE PRESENT ASSESSMENT YEAR SHOULD BE CONS IDERED AS OPENING STOCK OF SUCCEEDING ASSESSMENT YEAR. AFTER MAKING NECESSARY ADJUSTMENTS ADDITION, IF ANY, IN THE CURRENT ASSESS MENT YEAR SHOULD BE WORKED OUT. IN CASE, AFTER INCLUDING EXCISE DUTY C OMPONENT, THERE IS A BENEFIT TO THE ASSESSEE THEN THE SAME SHOULD BE GR ANTED ON THE PRINCIPLE OF EQUITY. 40.2 AS A RESULT THIS GROUND OF REVENUE IS ALLOWED , BUT FOR STATISTICAL PURPOSES. 41. GROUND NO. 3 41.1 IT RELATES TO DELETING ADDITION OF RS. 14,60,7 54/- MADE ON ACCOUNT OF UNEXPLAINED SUNDRY CREDITORS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE RE ARE SOME CREDITORS WHICH ARE OLD FOR MORE THAN 3 YEARS AND ARE OUTSTAN DING IN THE BALANCE SHEET. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FILE THE CONFIRMATION, BUT ASSESSEE DID NOT FURNISH ANY CONF IRMATION IN RESPECT OF OUTSTANDING CREDIT BALANCES. AS NO COGENT EVIDENCE WAS FURNISHED BEFORE THE ASSESSING OFFICER, HE DOUBTED THE GENUINENESS O F THE CREDIT ENTRIES. THE LD. ASSESSING OFFICER MADE THE ADDITION ON THE GROUND THAT THE ASSESSEE FAILED TO PROVE THE GENUINENESS OF THE CRE DIT ENTRIES. THE LD. CIT(A) DELETED THE SAME ON THE GROUND THAT THESE CR EDIT ENTRIES DID NOT PERTAIN TO THE PRESENT ASSESSMENT YEAR, BUT HAD COM E IN THE BOOKS IN SOME EARLIER YEARS. THEREFORE, ADDITION CANNOT BE MADE IN THE PRESENT ASSESSMENT YEAR. BEFORE US, LD. D.R. SUBMITTED THA T IT IS FOR THE ASSESSEE TO SHOW THAT THESE ENTRIES HAD FIRST TIME APPEARED IN THE BOOKS IN SOME EARLIER YEARS AND SECONDLY THAT THEY WERE NOT TAKEN INTO ACCOUNT WHILE COMPUTING INCOME OF SOME EARLIER YEAR SO AS TO AVOI D TAXABILITY UNDER SECTION 41(1). HE FURTHER SUBMITTED THAT WHERE AMO UNT ORIGINALLY TREATED AS CAPITAL RECEIPT, CAN BE TREATED AS TRADING RECEI PT IN THE YEAR IN WHICH THE 121 AMOUNT CHANGED ITS CHARACTER I.E. WHEN THE AMOUNT B ECAME ASSESSEES OWN MONEY BECAUSE OF LIMITATION OR BY ANY OTHER STA TUARY OR CONTRACTUAL RIGHT. ON THE OTHER HAND LD. A.R. SUBMITTED THAT N O ADDITION CAN BE MADE THIS YEAR BECAUSE THIS AMOUNT DID NOT COME IN THE B OOKS OF ASSESSEE THIS YEAR. 41.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE HAS COME BEFORE US IN THE ASSESSMENT YEAR 2002- 03 AND 2003-04. FOLLOWING THOSE DECISIONS, WE REST ORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR GIVING AN OPPORTU NITY TO THE ASSESSEE TO SHOW (I) WHEN THESE AMOUNTS FIRST TIME APPEARED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE (II) WHETHER THESE AMOUNTS WERE CONSIDERED IN THE TRADIN G/PROFIT AND LOSS ACCOUNT OF SOME EARLIER YEAR I.E. INCOME O F SOME EARLIER YEAR WAS COMPUTED AFTER ADJUSTING THESE AMOUNTS (III) WHETHER THE CREDITORS HAVE DIRECTLY OR BY IMPLICATI ON FORGONE THEIR CLAIM 41.3 IN CASE, AMOUNTS DID NOT APPEAR IN THE BOOKS T HIS YEAR AND THEY HAVE NOT PASSED THROUGH THE PROFIT AND LOSS ACCOUNT AND TRADING ACCOUNT OF SOME EARLIER YEAR, NO ADDITION IS CALLED FOR. W HERE ANY OF THESE AMOUNTS APPEARED IN THE BOOKS IN ANY OF THE EARLIER YEARS AND HAVE NOT PASSED THROUGH THE TRADING CUM PROFIT AND LOSS ACCO UNT, NO ADDITION IS CALLED FOR. WHERE ANY OF THESE AMOUNTS APPEARED IN THE BOOKS OF ACCOUNT IN ANY OF THE EARLIER YEARS AND HAVE PASSED THROUGH THE TRADING ACCOUNT AND PROFIT AND LOSS ACCOUNT, THEN IT HAS TO BE SEEN WHETHER CREDITORS HAVE FORGONE THEIR CLAIM OR BY CONTRACTUAL AGREEMENT OR BY FORCE OF LAW ASSESSEE HAS BECAME THE OWNER OF THE MONEY. ONLY I F IT IS SO, THEN THAT AMOUNT COULD BE TAXED UNDER SECTION 41(1). SO LONG AS THE CLAIM OF THE 122 CREDITORS SURVIVE AND IS NOT EXTINGUISHED BY FORCE OF LAW OR OTHERWISE THERE IS NO REMISSION OR CESSATION OF LIABILITY AND IT CANNOT BE SAID THAT ASSESSEE HAS DERIVED ANY BENEFIT FOR BEING TAXED UN DER SECTION 41(1). 41.4 AS A RESULT THIS GROUND OF THE REVENUE IS ALLO WED, BUT FOR STATISTICAL PURPOSES. 42. AS A RESULT, APPEAL OF THE ASSESSEE FOR THE ASS ESSMENT YEAR 2002-03, 2003-04, AND 2004-05 ARE PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE APPEAL OF THE REVENUE FOR THE ASSESS MENT YEAR 2002-03 AND 2004-05 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES , WHEREAS APPEAL FOR ASSESSMENT YEAR 2003-04 IS DISMISSED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON 4 TH SEPTEMBER, 2009. SD/- SD/- (T K SHARMA) (D. C. AGRAWAL) JUDICIAL MEMBER ACCOUNTA NT MEMBER AHMEDABAD; DATED: 04/09/2009 ANKIT* COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CONCERNED 4. THE CIT, 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, ASSTT. REGISTRAR/ DEPUTY REGISTRAR ITAT, AHMEDABAD BENCHES, AHMEDABAD.