Matrix Laboratories Limited, Secunderabad V. DCIT, Hyderabad

ITA 939/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61942 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-02-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 21-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D D GOYAL
• Assessee Lawyers: RAJA PRATURI
• Keywords: Reopening of assessment; Capital asset; Depreciation; Search and seizure; Retrospective amendment; Tangible material; Bad and doubtful debts; Difference of opinion; Assessment record; Reason to believe; Unabsorbed depreciation; Change of opinion; Revenue expenditure
• Section: 43B; 143(3); 80HHC; 115JB; 147; 148; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 835/HYD/2005 A.Y. 2001-02 I.T.A. NO. 836/HYD/2005 A.Y. 2002-03 I.T.A. NO. 837/HYD/2005 A.Y. 2003-04 M/S. MATRIX LABORATORIES LTD., SECUNDERABAD PAN: AAACH2780D VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-2(2), HYDERABAD ASSESSEE RESPONDENT I.T.A. NO. 938/HYD/2010 A.Y. 2002-03 I.T.A. NO. 939/HYD/2010 A.Y. 2003-04 M/S. MATRIX LABORATORIES LTD., SECUNDERABAD PAN: AAACH2780D VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 16(2) HYDERABAD ASSESSEE RESPONDENT I.T.A. NO. 930/HYD/2005 A.Y. 2001-02 I.T.A. NO. 931/HYD/2005 A.Y. 2002-03 I.T.A. NO. 932/HYD/2005 A.Y. 2003-04 I.T.A. NO. 895/HYD/2010 A.Y. 2002-03 I.T.A. NO. 896/HYD/2010 A.Y. 2003-04 THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-16(2), HYDERABAD VS. M/S. MATRIX LABORATORIES LTD., SECUNDERABAD PAN: AAACH2780D ASSESSEE RESPONDENT ASSESSEE BY: SHRI K.A. SAI PRASAD, SHRI K.V.S. BHASKAR RAO AND SHRI RAJA PRATURI REVENUE BY: SHRI D.D. GOYAL DATE OF HEARING: 25/05/2012 DATE OF PRONOUNCEMENT: 02/07/2012 I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 2 O R D E R PER CHANDRA POOJARI, AM: THESE ARE APPEALS BOTH BY THE ASSESSEE AS WELL AS BY THE REVENUE DIRECTED AGAINST DIFFERENT ORDERS OF DIFFER ENT CIT(A)S, HYDERABAD. 2. THE FIRST COMMON GROUND IN ASSESSEE'S APPEALS IN I. T.A. NOS. 835 & 836/HYD/2005 IS THAT THE CIT(A) ERRED IN HOLDING THAT THE ASSESSING OFFICER WAS CORRECT IN ISSUING N OTICE U/S 148 AND MAKING RE-ASSESSMENT U/S 147 THOUGH IN TERMS OF THE REASONS AS FURNISHED BY THE ASSESSING OFFICER INCOM E HAS NOT ESCAPED ASSESSMENT. 3. ACCORDING TO THE LEARNED AR, THERE IS NO TANGIBLE M ATERIAL IN THE POSSESSION OF THE ASSESSING OFFICER TO COME TO THE CONCLUSION FOR REOPENING OF ASSESSMENTS. ACCORDING TO THE ASSESSEE TO COMPUTE DEDUCTION U/S. 80HHC R.W.S. 115 JB, ALL THE MATERIAL FACTS AVAILABLE ON RECORD AND THE ASSE SSING OFFICER IN THE RE-ASSESSMENT PROCEEDINGS HAS SIMPLY TAKEN A COMPUTATION FILED BY THE ASSESSEE AS THE BASIS AND REWORKED OUT THE DEDUCTION U/S 80HHC OF THE INCOME-TAX ACT, 1961 AND WORKED OUT THE BOOK PROFIT U/S 115JB OF THE ACT. H E SUBMITTED THAT THERE IS NO FRESH MATERIAL CAME TO THE POSSESS ION OF THE ASSESSING OFFICER. THE ASSESSEE DULY FILED A CERTI FICATE FROM THE CHARTERED ACCOUNTANT IN FORM 10CCAC FOR CLAIMING DE DUCTION U/S 80HHC OF THE ACT. ACCORDING TO THE AR FROM THE DATE OF THE ASSESSMENT ORDER TILL THE DATE OF ISSUE OF NOTICE U /S 148 OF THE ACT, NO NEW MATERIAL CAME TO THE POSSESSION OF THE ASSESSING OFFICER. BEING SO, THERE IS NO QUESTION OF REOPENI NG OF THE ASSESSMENTS. HE SUBMITTED THAT THE RE-ASSESSMENT IS NOT COVERED BY SUB-CLAUSE (IV), CLAUSE (C) OF EXPLANATI ON TO SECTION 147 SINCE THE MAIN INGREDIENT SHOULD BE 'REASON TO BELIEVE'. EVEN TO FORM THIS REASON, THERE SHOULD BE TANGIBLE MATERIAL. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 3 THE EXISTENCE OF TANGIBLE MATERIAL IS EXACTLY THE R EQUISITE CONDITION LAID DOWN BY THE SUPREME COURT IN THE CAS E OF CIT VS. KELVINATOR (INDIA) LTD. (320 ITR 561). THE SUPREME COURT DISCUSSED AT LENGTH ON VARIOUS ISSUES INCLUDING THE PROVISIONS AS AMENDED BY FINANCE ACT, 1989 AND THE BOARD CIRCU LAR NO. 549 DATED 312.10.1989 AND UPHELD THE FULL BENCH DEC ISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. KELVINA TOR OF INDIA LTD. (256 ITR 1) (DEL) WHEREIN IT WAS HELD AS UNDER : ' THEREFORE, POST APRIL 1, 1989, POWER TO REOPEN IS MUCH WIDER. HOWEVER, ONE NEED TO GIVE A SCHEMATIC INTERPRETATION TO THE WORDS 'REASON TO BELIEVE' FAI LING WHICH, WE ARE AFRAID, SECTION 147 WOULD GIVEN ARBITRARY POWERS TO THE ASSESSING OFFICER TO REOPEN ASSESSMENTS ON THE BASIS OF 'MERE CHANGE OF OPINION ', WHICH CANNOT BE PER SE REASON TO REOPEN. WE MUST ALSO KEEP IN MIND THE CONCEPTUAL DIFFERENCE BETWEEN POWER TO REVIEW AND POWER TO REASSESS. THE ASSESSING OFFICER HAS NO POWER TO REVIEW, HE HAS TH E POWER TO REASSESS. BUT RE-ASSESSMENT HAS TO BE BASED ON FULFILMENT OF CERTAIN PRECONDITION AND IF THE CONCEPT OF CHANGE OF OPINION IS REMOVED, AS CONTENDED ON BEHALF OF THE DEPT., THEN, IN THE GARB OF REOPENING THE ASSESSMENT REVIEW WOULD TAKE PLACE. ONCE MUST TREAT THE CONCEPT OF 'CHANGE OF OPINION' AS AN INBUILT TEST TO CHECK ABUSE OF POWER BY THE ASSESSING OFFICER. HENCE, AFTER 1 ST APRIL, 1989 THE ASSESSING OFFICER HAS POWER TO REOPEN, PROVIDED THERE IS 'TANGIBLE MATERIAL' TO COME TO THE CONCLUS ION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF.' 4. ACCORDING TO THE AR UNLESS SOME FRESH MATERIAL INDI CATING ESCAPEMENT OF INCOME HAS COME TO THE NOTICE OF THE ASSESSING OFFICER NO NOTICE U/S. 147 OF THE ACT CAN BE ISSUED . THIS IS SO EVEN IN CASES WHERE SIMPLY AN INTIMATION U/S. 143(1 )(A) OF THE ACT WAS SENT ACCORDING TO THE LATEST DECISION OF MU MBAI BENCH IN THE CASE OF H.V. TRANSMISSIONS LTD. VS. ACIT IN ITA NOS. 2230 AND 2476/MUM/2010 DATED 7.10.2011. ACCORDING TO TH E ASSESSEE'S COUNSEL THE JUDGEMENT OF SUPREME COURT I N THE CASE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 4 OF RAJESH JHAVERI STOCK BROKERS (P) LTD., 291 ITR 5 00 IS NOT APPLICABLE TO THE FACTS OF THE CASE. MORE SO, THE SAME WAS CONSIDERED BY THE MUMBAI BENCH WHILE ADJUDICATING S IMILAR ISSUE IN THE CASE OF H.V. TRANSMISSIONS LTD. (SUPRA ). HE RELIED ON THE JUDGEMENT OF DELHI HIGH COURT IN THE CASE OF P.C. PURI VS. CIT, 151 ITR 584. ACCORDING TO THE LEARNED AR, THE RE IS NO TANGIBLE MATERIAL JUSTIFYING THE REOPENING OF ASSES SMENT TO SAY THAT THERE IS ESCAPEMENT OF INCOME. HE RELIED ON T HE ORDER OF THE TRIBUNAL IN THE CASE OF TELCO DADAJI DHAKJEE LT D. VS. DCIT IN I.T.A. NO. 4613/MUM/05 DATED 12 TH MAY, 2010. 5. ON THE OTHER HAND, THE LEARNED DR STRONGLY OPPOSED THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE AN D SUBMITTED THAT THERE WAS NO ASSESSMENT IN THIS CASE U/S. 143( 3) OF THE ACT. BEING SO, THERE IS NON CONSIDERATION OF ISSUE RELATING TO DEDUCTION U/S. FOR EXPORT PROFITS UNDER 115 JB OF THE ACT. HE RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CAS E OF RAJESH JHAVERI STOCK BROKERS (P) LTD. (SUPRA). FURTHER HE RELIED ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF AREVA T. AND D INDIA LTD. VS. ACIT (294 ITR 233) FOR THE PROPOSITI ON THAT IF THERE IS ANY PROCEDURAL IRREGULARITIES IN COMPLETING THE RE-ASSESSMENT IT DOES NOT INVALIDATE THE ASSESSMENT ORDER. HE AL SO RELIED ON THE JUDGEMENT P & H HIGH COURT IN THE CASE OF SUNIL BHASEEN VS. CIT (179 TAXMAN 148) FOR THE PROPOSITION THAT T HE DEPARTMENT WAS UNDER NO OBLIGATION TO DISPOSE OF OB JECTION OF THE ASSESSEE TO THE INITIATION OF PROCEEDINGS, BY W AY OF SEPARATE AND INDEPENDENT ORDER UNLESS THE FINDINGS OF THE AS SESSING OFFICER ARE NOT PERVERT IN ANY MANNER. HE ALSO R ELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF ELEGANT CHEMIC ALS ENTERPRISES VS, ACIT ( 271 ITR 56 (AT)(HYD) WHEREIN HELD THAT REOPENING I S ALID IN LAW WHERE THE RETURN OF INCOM E WAS MERELY PROCESSED UNDER SECTION 143(1) OF THE ACT AND WHEN THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 5 ASSESSING OFFICER IS OF THE OPINION THAT INCOME CHA RGEABLE TO TAX HAS ESCAPED ASSESSMENT. 6. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. IN THIS CASE THERE I S NO ASSESSMENT U/S. 143(3) OF THE ACT AND ONLY THE RETU RN WAS PROCESSED U/S. 143(1) OF THE ACT. THE REOPENING OF THE ASSESSMENT IS WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. AS PER CLAUSE (B) OF EXPLANATION 2 TO PROVISO TO SECTION 147 WHERE A RETURN OF INCOME HAS BEEN FU RNISHED BY THE ASSESSEE BUT NO ASSESSMENT HAS BEEN MADE AND IT IS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS UNDE RSTATED THE INCOME OR HAS CLAIMED EXCESSIVE LOSS, DEDUCTION, AL LOWANCE OR RELIEF IN THE RETURN, THE ASSESSING OFFICER IS ENTI TLED TO REOPEN THE ASSESSMENT. FURTHER IN THE CASE OF ACIT VS. RA JESH JHAVERI STOCK BROKERS (P) LTD. (SUPRA), IT WAS HELD THAT TH E ASSESSING OFFICER IS HAVING JURISDICTION TO ISSUE NOTICE U/S. 148 FOR BRINGING TO TAX INCOME ESCAPING ASSESSMENT ON THE G ROUND THAT THE ASSESSEE CLAIMED EXCESSIVE RELIEF OR DEDUCTION. IN THE PRESENT CASE CONSIDERING THE EXCESSIVE CLAIM OF THE ASSESSEE U/S. 80HHC WHILE COMPUTING THE BOOK PROFIT U/S 115J B OF THE ACT, THE ASSESSING OFFICER INITIATED THE REOPENING OF ASSESSMENT TO BRING THE INCOME TO TAX WHICH IS ESCAPED FROM AS SESSMENT. BEING SO, WE ARE OF THE OPINION THAT REOPENING OF A SSESSMENT IS VALID. 7. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF TH E MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF H.V. TRANSMISSIONS LTD. (SUPRA). IN THIS CASE THE ASSES SEE INCURRED EXPENSES TOWARDS ENTERPRISE RESOURCE PLANNING SOFTW ARE AMOUNTING TO RS. 95.14 LAKHS. IN THE ACCOUNTS THE ASSESSEE HAS DEBITED 25% OF THIS AMOUNT I.E., RS. 23,78,500 WHEREAS IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS CLAIMED THE ENTIRE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 6 AMOUNT OF RS. 95.14 LAKHS AS DEDUCTION. THE EXPENS ES INCURRED BY THE ASSESSEE IS PAYMENT FOR ACQUISITION OF SOFTW ARE WHICH IS CAPITAL IN NATURE. HENCE THE ASSESSMENT IS REOPENE D TO DISALLOW THE SAME. ON APPEAL TO THE TRIBUNAL, IT WAS HELD T HAT THERE WAS NO MATERIAL COMING TO THE POSSESSION OF THE ASSESSI NG OFFICER ON THE BASIS OF WHICH THE ASSESSMENT COMPLETED U/S. 14 3(1) WAS REOPENED AND THIS POSITION HAS NOT BEEN DISPUTED EV EN BY THE DR. BEING SO, IN THE PRESENT CASE WE ARE NOT IN A POSITION TO APPLY THE RATIO LAID DOWN BY THAT DECISION BECAUSE CLAUSE (B) TO EXPLANATION 2 TO PROVISO 2 OF SECTION 147 CLEARLY A UTHORISES THE ASSESSING OFFICER TO REOPEN THE ASSESSMENT. THIS P ROVISION IS TO BE CONSIDERED FOR THE PURPOSE OF ADJUDICATING THIS ISSUE. THIS GROUND RELATING TO REOPENING OF ASSESSMENT IS DECID ED AGAINST THE ASSESSEE. 8. THE NEXT GROUND IN I.T.A. NOS. 835 AND 836/HYD/2005 IS THAT THE CIT(A) FURTHER ERRED IN HOLDING THAT THE R E-ASSESSMENT ORDER UNDER SECTION 147 IS IN ORDER THOUGH THE ASSE SSING OFFICER DID NOT FOLLOW THE PROCEDURE LAID DOWN BY THE SUPRE ME COURT IN THE CASE OF GKN DRIVE SHAFTS (INDIA) LTD. (2003)(25 9 ITR 19) THEREBY RENDERING THE PROCEEDINGS AND THE ORDER DEF ECTIVE, ON THE GROUND THAT THE BREACH MADE BY THE ASSESSING OF FICER IS A MERE PROCEDURAL ERROR. THIS GROUND IS NOT PRESSED BEFORE US AND THE SAME IS DISMISSED AS NOT PRESSED. 9. THE NEXT COMMON GROUND IN ASSESSEES APPEALS IN ITA NOS. 835, 836 AND 837/HYD/2005 FOR A.YS. 2001-02 TO 2003-04 IS THAT THE CIT(A) ERRED IN NOT ALLOWING 100% DEDUC TION IN RESPECT OF EXPORT PROFITS UNDER CLAUSE (IV) OF EXPL ANATION TO SECTION 115JB WHILE COMPUTING BOOK PROFITS BY HOLDI NG THAT THE PROVISIONS OF SUBSECTION (1B) OF SECTION 80HHC WITH REGARD TO PHASING OUT OF BENEFITS ARE APPLICABLE EVEN IN RESP ECT OF DEDUCTION UNDER CLAUSE (IV) OF EXPLANATION TO SECTI ON 115JB. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 7 THE REVENUE ALSO RAISED THE GROUND IN ITA NOS. 930 TO 932/HYD/05 WITH REGARD TO DIRECTION OF CIT(A) APPEA L TO ASSESSING OFFICER TO COMPUTE THE DEDUCTION U/S. 80H HC BY ADOPTING THE BOOK PROFIT IN PLACE OF THE PROFITS OF THE BUSINESS WHILE COMPUTING THE CHARGEABLE BOOK PROFIT U/S. 115 JB. 10. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THIS ISSUE IS COMMON IN ALL THESE APPEALS. WHILE THE ASSESSE E CONTESTS THE CIT (A)'S ORDER FOR NOT ALLOWING DEDUCTION UNDE R CLAUSE (IV) OF' EXPLANATION ON THE ENTIRE AMOUNT OF EXPORT PROF ITS COMPUTED FROM THE BASE OF BOOK PROFITS BUT INSTEAD RESTRICTI NG THE DEDUCTION IN TERMS OF THE PHASING OUT PER SUB-SECTI ON (1B), THE DEPARTMENT IS DISPUTING THE ORDER OF THE CIT(A) FOR COMPUTING THE DEDUCTION BASED ON BOOK PROFITS INSTEAD OF THE AMOUNT AS COMPUTED UNDER SECTION 80HHC BASED ON PROFITS OF TH E BUSINESS UNDER CLAUSE (BAA). THE ASSESSEE RELIES ON THE RECENT DECISION OF THE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD V CIT (2010) (327 ITR 305). THE ASSESSEE SUBMITTED THAT THE APEX COURT HAS APPROVED THE SPECIAL BENCH DECISION OF ITAT IN DCIT V SYNCOM FORMULATIONS (I) LTD. (2007) (106 ITD 193). 11. THE DR FAIRLY CONCEDED THAT THE DECISION OF THE SUP REME COURT IN THE CASE OF AJANTA PHARMA (SUPRA) IS AGAINST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. THE APEX COURT LAID DOWN THE LAW THAT FOR PURPOSES OF COMPUTING BOOK PR OFIT, THE DEDUCTION TO BE ALLOWED UNDER CLAUSE (IV) OF EXPLAN ATION IS THE EXPORT PROFITS AS COMPUTED WITH REFERENCE TO BOOK P ROFITS. SEC. 115JB IS A SEPARATE CODE FOR COMPANY ASSESSEES' FOR COMPUTING MINIMUM TAX PAYABLE IN THE ABSENCE / INADEQUACY OF NORMAL TAXABLE INCOME FALLING UNDER THE 5 HEADS OF INCOME. THE MINIMUM TAX IS TO BE COMPUTED WITH REFERENCE TO BOO K PROFITS AS PER THE AUDITED ACCOUNTS OF THE COMPANY. CONSEQU ENTLY THE EXPORT PROFITS COMPUTED UNDER THE PROVISIONS OF SEC . 80HHC I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 8 BASED ON 'PROFITS OF BUSINESS OR PROFESSION' CANNOT BE SUBSTITUTED INTO THE COMPUTATION SCHEME AS PRESCRIB ED IN SEC. 115JB WHICH IS AN ALTERNATIVE COMPUTATION TO THE NO RMAL COMPUTATION OF INCOME. THE COURT ALSO HELD THAT THE DEDUCTION UNDER CLAUSE (IV) OF EXPLANATION FOR THE EXPORT PRO FITS SHOULD NOT BE PHASED OUT AS PROVIDED IN SUB-SECTION (1B) OF SE C. 80HHC BECAUSE, 115JB IS AN INDEPENDENT CODE AND IT COVERS FULL EXPORT PROFITS AS THE ELIGIBLE PROFITS FOR THE PURPOSES OF BOOK PROFITS TAX AND NO PHASING IS REQUIRED TO BE CARRIED OUT. THIS VIEW HAS BEEN REITERATED BY THE APEX COURT IN THE RECENT CASE OF CIT V BHARI INFORMATION TECH. SYS. P. LTD IN CIVIL APPEAL NO. 3 3750/2009 RENDERED ON 20.10.2011. THUS, THIS GROUND IN ASSESSEES APPEALS ITA NOS. 835 TO 837/HYD/05 IS ALLOWED AND R ELATED GROUND IN REVENUE APPEALS IN ITA NOS. 930 TO 932/HY D/05 IS DISMISSED. 12. THE NEXT GROUND IN ITA NO. 837/HYD/2005 FOR A.Y. 20 03- 04 IS THAT THE CIT(A) ERRED IN HOLDING THAT DEFERRE D TAX PROVISION MADE PURSUANT TO ACCOUNTING STANDARD 22 IS AN UNASC ERTAINED LIABILITY AND HENCE WARRANTS ADJUSTMENTS BY WAY OF ADDITION TO THE BOOK PROFITS IN TERMS OF CLAUSE (C) AS WELL AS CLAUSE (A) OF THE EXPLANATION TO SECTION S. 115JB OF THE ACT. 13. BRIEF FACTS OF THE ISSUE ARE THAT WHILE ARRIVING AT THE BOOK PROFITS, THE ASSESSEE DID NOT ADD BACK DEFERRED TAX OF RS. 14,72,44,834 TO THE NET PROFIT AS PER PROFIT AND LO SS ACCOUNT, WHICH ACCORDING TO THE ASSESSING OFFICER IS REQUIRE D TO BE ADDED BACK IN TERMS OF CLAUSE (A) OF EXPLANATION TO SECTI ON 115JB. IN SUPPORT OF ITS STAND, THE AR HAS, BOTH BEFORE THE C IT(A) AND DURING THE ASSESSMENT PROCEEDINGS ARGUED THAT EXPLA NATION (A) TO SECTION 115JB REQUIRES ADDITION OF THE AMOUNT OF INCOME-TAX PAID OR PAYABLE AND PROVISION THEREFOR. SECTION 2( 43) OF THE ACT DEFINES 'TAX' TO MEAN INCOME TAX CHARGEABLE UNDER T HE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 9 PROVISIONS OF THIS ACT. SINCE SECTION 2(43) SPECIF ICALLY USES THE WORD 'MEANS' THE DEFINITION OF TAX IS EXHAUSTIVE AN D CANNOT BE INTERPRETED BEYOND THE SCOPE OF THE DEFINITION AS S PECIFIED IN THE ACT. THUS A JOINT READING OF SECTION 2(43) AND SEC TION 115JB CLEARLY SPECIFIES TAX TO MEAN TAX AS PER THE ACT ON LY. THEREFORE, THE WORDS 'PROVISION' APPEARING IN EXPLANATION (A) TO SECTION 115JB(2) HAS TO BE CONSTRUED ONLY AS PROVISION IN R ELATION TO INCOME-TAX AS DEFINED UNDER SECTION 2(43) OF THE AC T. FURTHER, PROVISION FOR DEFERRED TAX IS NOT PAYABLE AND, THER EFORE, CANNOT BE ROPED IN CLAUSE (A) OF THE EXPLANATION. THE AR FURTHER ARGUED THAT CBDT WHILE ISSUING EXPLANATORY NOTES TO FINANCE ACT, 2000 VIDE CIRCULAR NO. 794 DATED 9 TH AUGUST, 2000 CLARIFIED THAT 'THE NEW PROVISIONS FURTHER PROVIDE THAT FOR P URPOSES OF MAT, THE COMPANY SHALL FOLLOW SAME ACCOUNTING POLIC IES AND STANDARDS AS ARE FOLLOWED FOR PREPARING ITS STATUTO RY ACCOUNT'. PROVISION FOR DEFERRED TAX IS MADE IN TERMS OF ACCO UNTING STANDARD-22, A MANDATORY REQUIREMENT IN TERMS OF SE CTION 211(3C) OF THE COMPANIES ACT, 1956 FOR COMPUTING BO OK PROFITS'. THE ASSESSING OFFICER REJECTED THE STAND TAKEN BY T HE ASSESSEE ON THE FOLLOWING REASONS: 13.1 THE PROVISION FOR DEFERRED TAX COMES AFTER THE PROFIT HAS BEEN DETERMINED IN ACCORDANCE WITH PARTS-II AND III OF SCHEDULE- VI TO COMPANIES ACT, 1956 AND NO ADJUSTMENT BY WAY OF REDUCTION OF SUCH A PROVISION FROM THE NET PROFIT H AS BEEN PROVIDED FOR IN SECTION 115JB. IN RESPONSE, THE AR ARGUED THAT ACCOUNTING STANDARD-22 CLEARLY SPECIFIES THAT TAX E XPENSE FOR THE PERIOD COMPRISING CURRENT TAX AND DEFERRED TAX SHOULD BE INCLUDED IN THE DETERMINATION OF THE NET PROFIT OR LOSS FOR THE PERIOD. THEREFORE, ONCE THE DEFERRED TAX IS INCLUDED IN THE NET PROFIT FOR THE PERIOD, ONE CANNOT GO BEY OND NET PROFIT AS PER PROFIT AND LOSS ACCOUNT AND MAKE ADJUSTMENTS FOR THE SAME WHEN NOT SPECIFICALLY PROVIDED FOR BY THE EXPL ANATION TO I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 10 SECTION 115JB. RELIANCE IS PLACED ON THE DECISION O F THE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT (255 ITR 273). 13.2 THE ASSESSING OFFICER FURTHER STATED THAT THE ASSE SSEE IN ITS OWN CASE FOR EARLIER ASST YEARS HAS ADOPTED THE FIGURE OF PROFIT BEFORE TAX AS THE STARTING POINT FOR COMPUTA TION AND DID NOT REDUCE THE PROVISION FOR DEFERRED TAX FOR COMPU TATION OF TAXABLE BOOK PROFIT U/S 115JB. IN RESPONSE, THE AR ARGUED THAT T HE ASSESSING OFFICER HAS FAILED TO APPRECIATE THAT THE CONCEPT OF RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS, MORE SO WHEN THE ISSUE INVOLVED IS RELATED TO DEDUCTIBILITY OR OTHERWISE OF AN ITEM OF EXPENDITURE. 13.3 THE ASSESSING OFFICER ARGUED THAT THE DEFERRED TAX LIABILITY IS SUBJECT TO FUTURE UNCERTAINTIES BOTH IN TAXING S TATUTES AS WELL AS THE ACCOUNTING POLICIES TO BE ADOPTED BY THE COM PANY IN FUTURE AND, THEREFORE, IS AN UNASCERTAINED LIABILIT Y COVERED BY CLAUSE (C) OF EXPLANATION TO SECTION 115JB. IN RESP ONSE, THE AR ARGUED THAT T HE ASSESSING OFFICER'S CONTENTION THAT THE PROVISION FOR DEFERRED TAX IS AN UNASCERTAINED LIABILITY IS FAR FROM TRUTH. ACCOUNTING STANDARD- 22 ' ACCOUNTING FOR TAXES ON INCOME' DETAILS A COMPREHENSIVE METHODOLOG Y WITH REGARD TO COMPUTATION OF DEFERRED TAX ARISING FROM TIMING DIFFERENCES ON ACCOUNT OF TAXABLE INCOME AND ACCOUNTING INCOME. BY NO STRETCH OF IMAGINATION CAN ONE CONCLUDE THAT THE PROVISION IS UNASCERTAINED. 13.4 THE ASSESSING OFFICER ARGUED THAT THE ADJUSTMENT IN TERMS OF EXPLANATION TO SECTION 115JB REQUIRES NOT ONLY ADDING THE AMOUNTS PERTAINING TO PROVISION FOR INCOME TAX FOR THE CURRENT YEAR BUT ALSO FUTURE INCOME TAX LIABILITIES ARISING OUT OF THE TIMING DIFFERENCES BETWEEN THE I NCOME-TAX I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 11 ACT AND REGULAR ACCOUNTING POLICY FOLLOWED BY THE A SSESSEE. THE AR SUBMITTED BEFORE THE CIT(A) THAT IN TERMS OF THE ACCOUNTING STANDARD-22, THE PROVISION FOR CURRENT T AX IS INDEPENDENT OF PROVISION FOR DEFERRED TAX. THE STAN DARD REQUIRES SEPARATE COMPUTATION UNDER EACH I.E., PROV ISION FOR CURRENT TAX AND DEFERRED TAX AS WELL AS SEPARATE DI SCLOSURE OF EACH. CURRENT TAX IS ALWAYS WORKED OUT ON THE T AXABLE PROFITS OF THE YEAR UNDER CONSIDERATION AND HAS NO BEARING WHATEVER ON THE QUANTUM OF DEFERRED TAX. DEFERRED TAX CHARGED/CREDITED TO THE PROFIT AND LOSS ACCOUNT IS AN ACCOUNTING ENTRY TO ADHERE TO THE PRINCIPLE OF MATC HING CONCEPT. THE DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 14. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE AND PE RUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR OPINION, AFTER INSERTION OF CLAUSE (H) IN THE EXPLANATION-1 TO SECTION 115JB WITH RETROSPECTIVE EFFECT VIDE FINANCE ACT, 2008 WITH EF FECT FROM 1.4.2001, THIS ISSUE HAS TO BE DECIDED AGAINST THE ASSESSEE AS THIS CLAUSE READS AS FOLLOWS: '(H) THE AMOUNT OF DEFERRED TAX AND THE PROVISION THEREFOR.' 15. IN VIEW THIS CLAUSE THE BOOK PROFIT SHOWN IN THE PR OFIT AND LOSS ACCOUNT IN THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB- SECTION (2) OF SECTION 115JB TO BE INCREASED, INTER ALIA BY THE AMOUNT OF DEFERRED TAX AND THE PROVISIONS THEREFOR. HENCE THIS GROUND IS REJECTED. 16. THE FIRST GROUND IN ITA NOS. 938 & 939/HYD/2010 IS AS UNDER: 'THE CIT(A) ERRED IN REJECTING THE APPELLANT'S CONTENTION THAT THE RE-ASSESSMENT U/S 147 OF THE INCOME-TAX ACT, 1961 TO REDUCE THE ENTIRE BROUGHT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 12 FORWARD BUSINESS LOSS & ALLOWANCES FOR COMPUTING RELIEF U/S. 80HHC OF THE ACT IS INVALID AND TIME BARRED AS THERE IS NO FAILURE ON THE PART OF THE APPELLANT TO DISCLOSE ALL MATERIAL FACTS RELEVANT F OR ASSESSMENT.' 17. THE LEARNED AR SUBMITTED THAT I N THIS CASE, THE ORIGINAL ASSESSMENT WAS COMPLETED U/S 143(3) ON 31.03.2005 A ND NOTICE U/S 148 WAS ISSUED ON 05/02/2008 TO RE-COMPUTE THE DEDUCTION U/S 80HHC, IN THE COMPUTATION U/S 115JB, WITHOUT ANY FRESH TANGIBLE MATERIAL WARRANTING THE INITIATION OF PROCEEDINGS U/S 148. IT IS A MERE CHANGE OF OPIN ION. AS HELD BY THE APEX COURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA LTD (320 ITR 561), THE ACTION OF THE ASSESSING OFFICER IS NOT JUSTIFIED, EVEN THOUGH THE NOTICE U/S 148 WAS I SSUED BEFORE EXPIRY OF 04 YEARS FROM THE END OF THE RELEV ANT ASSESSMENT YEAR. THE FACTS OF THE CASE OF THE ASSES SEE ARE EXACTLY SIMILAR TO THE FACTS OF THE CASES OF CIT VS KELVINATOR OF INDIA LTD (SUPRA) AND THE ASIAN PAINTS LTD, (308 ITR 195). THEREFORE, IT IS PRAYED THAT THE HON'BLE ITAT BE PL EASED TO HOLD THAT THE PROCEEDINGS U/S 147 OF THE ACT INITIATED ON 06.02.2008 FOR THE ASSESSMENT YEAR 2003- 04 ARE INV ALID FOLLOWING THE RATIO LAID DOWN BY THE SUPREME COURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA LTD (SUPRA). 17.1 IT IS FURTHER SUBMITTED THAT FOR ASSESSMENT YEARS 2 001-02, 2002-03 AND 2003-04, THE ASSESSMENTS WERE RE-OPENED TO RE- COMPUTE EXPORT PROFITS UNDER CLAUSE (IV) OF EXPLANA TION TO SECTION 115JB BY ADOPTING PROFITS OF THE BUSINESS U NDER CLAUSE (BAA) OF SECTION 80HHC IN PLACE OF BOOK PROFITS. AF TER RE-OPENING THE ASSESSMENT, THE ASSESSING OFFICER HAS MADE SOME . OTHER ADDITIONS AND DISALLOWANCES WHICH HAVE COME TO HIS KNOWLEDGE IN THE COURSE OF RE-ASSESSMENT PROCEEDINGS. THE ACT ION OF THE ASSESSING OFFICER IN COMPUTING DEDUCTION UNDER CLAU SE (IV) OF EXPLANATION TO SECTION 115JB BY ADOPTING THE PROFIT S OF I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 13 BUSINESS UNDER CLAUSE (BAA OF SECTION 80HHC IS NO L ONGER CORRECT AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF AJANTHA PHARMA PVT. LTD VS CIT (327 ITR 305). THIS DECISION OF THE APEX COURT WAS FOLLOWED BY THE FIRST APPELLATE AUTHORITY AND RE-COMPUTATION WORKED OUT BY THE ASSESSING OFFICER WAS HELD AS INVALID BY THE FIRST APPELLATE AUTHORITY. HENCE, IT HAS NOW BECOME FINAL THAT THE REASONS FOR RE-OPENING THE AS SESSMENT NO LONGER SURVIVE. IN SUCH CIRCUMSTANCE, IT IS HUMBLY SUBMITTED THAT THE OTHER ADDITIONS AND DISALLOWANCES MADE BY THE ASSESSING OFFICER IN THE CASE OF RE-ASSESSMENT PROC EEDINGS DO NOT SURVIVE EQUALLY. 17.2 HE DREW OUR ATTENTION TO THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF RANBAXY LABORATORIES LIMITED V S. CIT (336 ITR 136), WHEREIN IT WAS HELD THAT THE ASSESSING OF FICER WAS NOT JUSTIFIED WHEN THE REASONS FOR INITIATION OF THE PR OCEEDINGS CEASED TO SURVIVE. SIMILAR VIEW WAS TAKEN BY THE BO MBAY HIGH COURT IN THE CASE OF CIT VS. JET AIRWAYS (331 ITR 2 36) (BOM). AS HELD BY THE BOMBAY HIGH COURT IN THE CASE OF RALLIS INDIA LTD VS ACIT (323 ITR 54 BOMBAY) IT IS WELL SETTLED THAT , LAW AS LAID DOWN BY THE SUPREME COURT IS DECLARATORY OF THE POS ITION AS IT ALWAYS STOOD. DECISION OF SUPREME COURT IN THE CASE OF AJANTA PHARMA P LTD (SUPRA) IS A POSITION DEEMED AS IT ALW AYS WAS. HENCE, THE MAIN REASON TO REOPEN I.E., REWORKING DE DUCTION U/S 80HHC R.W.S 115JB IS NOT PERMISSIBLE AT ANY TIME AN D THEREFORE THE OTHER ISSUES IN THE RE ASSESSMENT PROCEEDINGS A UTOMATICALLY FAIL AND CANNOT SURVIVE. 17.3 PLACING RELIANCE ON THE ABOVE THREE DECISIONS, WE H UMBLY SUBMIT THAT SINCE THE VERY REASON FOR RE-OPENING TH E ASSESSMENT CEASES TO SURVIVE, THE OTHER ADDITIONS AND DISALLOW ANCES MADE ARE NOT JUSTIFIED AND MAY BE CANCELLED. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 14 18. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 19. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THESE ASSESSMENT YEARS, ASSESSMENTS H AVE BEEN REOPENED AFTER FOUR YEARS FROM THE EXPIRY OF THE AS SESSMENT YEAR, THOUGH THE ORIGINAL ASSESSMENTS HAVE BEEN COM PLETED U/S 143(3) OF THE ACT. THE ASSESSING OFFICER HAS CONSID ERED ALL THE MATERIALS AVAILABLE ON THE RECORD AT THE TIME OF CO MPLETING THE ORIGINAL ASSESSMENT AND GRANTED DEDUCTION U/S 80HHC OF THE ACT. THE ASSESSMENTS WERE REOPENED ON ACCOUNT OF E XCESS GRANT OF DEDUCTION U/S 80HHC OF THE I.T ACT BY VIRTUE OF NON DEDUCTION OF BROUGHT FORWARD BUSINESS LOSSES. THE A SSESSEE HAVING FURNISHED THESE DETAILS OF BROUGHT FORWARD BUSINESS LOSSES AT THE TIME OF ORIGINAL ASSESSMENT AND THERE IS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE THESE FACTS TO THE ASSESSING OFFICER FOR THE PURPOSE OF COMPLETION OF ORIGINAL ASSESSMENT. THE ASSESSING OFFICER IS PRECLUDED TO RECONSIDER THE SAME AFTER FOUR YEARS FROM THE EPXIRY OF THE ORIGIN AL ASSESSMENT YEAR TO CONSIDER THE SAME TO BRING THE ESCAPED INCO ME INTO TAXATION. HAD IT BEEN WITHIN FOUR YEARS, THE ASSES SING OFFICER COULD HAVE REOPENED THE ASSESSMENT UNDER CLAUSE (B) TO EXPLANATION 2 TO PROVISO 2 OF SECTION 147 OF THE I. T. ACT. IN THESE ASSESSMENT YEARS, THE ASSESSMENT WAS REOPENED AFTER FOUR YEARS, IN OUR OPINION, THE REASSESSMENT IS BAD IN L AW. EVEN OTHERWISE, EVEN ON MERIT THE ISSUE RAISED IN THE RE ASSESSMENT IS DECIDED BY VARIOUS COURTS IN FAVOUR OF THE ASSESSEE WHICH IS EVIDENT FROM THE VARIOUS CASE LAWS CITED BY THE LEA RNED AR IN EARLIER PARAS NARRATED. FURTHER, DELHI HIGH COURT I N ITS LATEST JUDGMENT IN THE CASE OF CIT VS. PUROLATOR INDIA LTD . (343 ITR 155) (DELHI) WHEREIN HELD AS FOLLOWS: IN THE INSTANT CASE EXPLANATION 1 TO SECTION 147 DOES NOT HELP THE REVENUE. THE EXPRESSION MATERIA L FACTS IN EXPLANATION 1 REFERS TO PRIMARY FACTS. T HE TERM PRIMARY FACTS OR MATERIAL FACTS ARE THOSE FACTS WHICH ARE MATERIAL AND RELEVANT FOR THE DECISION OF I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 15 THE QUESTION BEFORE THE ASSESSING OFFICER AND NON- DISCLOSURE OF WHICH WOULD HAVE A MATERIAL BEARING ON THE QUESTION OF ESCAPEMENT OF INCOME FROM ASSESSMENT. WHETHER OR NOT PRIMARY FACTS HAVE BEEN DISCLOSED IS NORMALLY A QUESTION OF FACT AND DEPENDS UPON THE FACTS AND CIRCUMSTANCES OF EACH CASE. THE REQUIREMENT OF EXPLANATION 1 TO SECTION 147 IS THAT THERE SHOULD BE FULL AND TRUE DISCLOSUR E OF THE PRIMARY OR MATERIAL FACTS AND NOT BEYOND THAT. IT IS THE OBLIGATION OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY THE PRIMARY FACTS. IT IS NOT THE OBLIGATION OF THE ASSESSEE TO INDICATE THE STATE WHAT LEGAL INFERENCE CAN BE DRAWN FROM THE PRIMARY FACTS. (PARA 8). IN THE INSTANT CASE, THERE IS NO INDICATION THAT TH E ASSESSEE HAD FAILED OR OMITTED TO DISCLOSE THE MATERIAL OR PRIMARY FACTS. THESE WERE AVAILABLE ON RECORD. THE ASSESSING OFFICER HAD FAILED TO DRAW CORRECT LEGAL INFERENCE AT THE TIME OF ORIGINAL ASSESSMENT FROM THE SAID PRIMARY FACTS. THIS IS NO T AN ERROR OR OMISSION ON THE PART OF THE X. IT IS N OT ALLEGED THAT THE ASSESSEE HAD SUPPRESSED, MISREPRESENTED OR FALSIFIED THE RECORD/FACTS. IT I S NOT ALLEGED THAT THERE WAS ANY SUBSEQUENT FACTUAL INFORMATION ON THE BASIS OF WHICH IT WAS FOUND THAT THE ASSESSEE HAD NOT FULLY DISCLOSED THE PRIMARY FACTS OR HAD FALSIFIED OR DISCLOSED INCORRECT PRIMA RY FACTS (PARA 10). IN VIEW OF ABOVE, THE TRIBUNAL HAS CORRECTLY UNDERSTOOD THE FACTS AND RIGHTLY APPRECIATED THE LA W AND APPLIED THE SAME TO THE FACTUAL MATRIX OF THE INSTANT CASE. THERE IS NO REASON TO ENTERTAIN THE INSTANT APPEAL AND THUS, THE SAME IS TO BE DISMISSED.. 20. BEING SO, WE INCLINED TO CANCEL THE REASSESSMENT O RDER IN THESE TWO ASSESSMENT YEARS. THIS GROUND OF THE APP EAL IS ALLOWED IN ASSESSEE APPEAL 938/HYD/10 AND 939/HYD/2 010 FOR THE ASSESSMENT YEARS 2002-03 & 2003-04 RESPECTIVELY . 21. THE NEXT GROUND IN ITA NOS. 938 & 939/HYD/2010 IS T HAT THE CIT(A) ERRED IN UPHOLDING THAT THE ENTIRE BROUG HT FORWARD LOSSES AND ALLOWANCE SHOULD BE REDUCED WHILE COMPUT ING DEDUCTION TOWARDS EXPORT PROFITS U/S 80HHC; AS AGAI NST THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 16 ASSESSEE'S CLAIM FOR PRO-RATA REDUCTION OF THE SAME BASED ON PROPORTION OF PREVIOUS YEARS' LOSSES AND ALLOWANCES ATTRIBUTABLE TO THOSE YEARS' EXPORT TURNOVER. 22. THE LEARNED AR SUBMITTED THAT THE ASSESSEE CONTENDE D THAT BROUGHT FORWARD LOSSES & DEPRECIATION ALLOWANC E SHOULD FIRST BE PRORATED AS BETWEEN EXPORT BUSINESS AND OT HER BUSINESS OF EACH OF THE ASSESSMENT YEARS TO WHICH SUCH LOSS RELATES, AND ONLY THEN TO REDUCE SUCH PRORATED EXPORT LOSS / ALL OWANCE FROM THE PROFITS OF THE EXPORT BUSINESS FOR THE CURRENT ASSESSMENT YEAR BEFORE COMPUTING DEDUCTION UNDER SEC. 80HHC IN TERMS OF SUB-SECTION (1) OF SEC. 80HHC AN ASSESSEE ENGAGED I N THE BUSINESS OF EXPORT OF ANY GOODS OR MERCHANDISE OTHE R THAN THOSE SPECIFIED IN SUB-SEC (2) THEREOF IS PERMITTED DEDUCTION OF EXPORT PROFITS AS PER THE GRADING SPECIFIED IN SUB- SECTION (1 B). THE EXPORT PROFITS ARE COMPUTED IN ACCORDANCE WITH THE METHODOLOGY PRESCRIBED IN SUB-SECTION (3). CLAUSE ( B) OF SUB- SECTION (3) STATES THAT WHERE EXPORT RELATES TO TRA DING GOODS, THE PROFIT WOULD BE COMPUTED BY DEDUCTING FROM THE SALE PROCEEDS OF SUCH TRADED GOODS OR MERCHANDISE, THE COST OF SU CH GOODS AS WELL AS OTHER DIRECT AND INDIRECT COSTS. FOR OTHER CASES, CLAUSE (C) OF SUB-SECTION (3) STATES THAT FROM OUT OF THE TOTAL PROFITS OF THE BUSINESS, THE PROFITS FROM TRADING GOODS ARE RE DUCED TO ARRIVE AT THE ADJUSTED PROFITS AND THE PROPORTION O F EXPORT TURNOVER (EXCLUDING TRADED EXPORT TURNOVER) TO THE TOTAL TURNOVER (EXCLUDING TRADED EXPORT TURNOVER) IS MULTIPLIED WI TH THE ADJUSTED PROFITS TO ARRIVE AT THE EXPORT PROFITS WH ICH ARE REFERRED TO IN SUB-SECTION (1). THE EXPORT PROFITS SO DERIVE D ARE SUBJECTED TO THE YEARLY GRADING AS SPECIFIED IN SUB-SECTION ( 1 B). CLAUSE (BAA) OF EXPLANATION DECLARES THAT THE PROFITS OF T HE BUSINESS FOR THE PURPOSE OF ARRIVING AT THE PRO-RATA EXPORT PROF ITS IS THE PROFIT AS COMPUTED UNDER THE HEAD 'INCOME FROM BUSINESS OR PROFESSION' (SEC. 28 TO 44D OF THE ACT). SECTION 80 HHC CARRIES I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 17 PROVISION FOR CERTAIN OTHER ASPECTS OF EXPORT BUSIN ESS LIKE SUPPORTING MANUFACTURERS, DEPB SCHEME, DUTY DRAWBAC KS, CASH ASSISTANCE SCHEME ETC, WHICH ARE NOT RELEVANT FOR THE ASSESSEE'S CASE IN HAND. A. SECTION 80HHC IS CONTAINED IN CHAPTER VIA. SECTION 80AB GOVERNS THE COMPUTATION OF DEDUCTIONS SPECIFIE D UNDER THE HEAD 'C- DEDUCTIONS IN RESPECT OF CERTAIN INCOMES' OF CHAPTER VIA. IN TERMS OF THE PROVISIONS OF SEC 80AB, IT IS CLEAR THAT FOR THE PURPOSE OF CLAIMING/ ALLOWING DEDUCTION UNDER ANY OF THE SECTIONS (INCLUDING SEC. 80HHC) INCLUDED IN CHAPTER VIA: PROVISIONS OF, SECTION 80AB SHALL OVERRIDE / PREVAI L OVER THE PROVISIONS OF EACH AND EVERY ONE OF THE SECTIONS UNDER THE HEADING 'C- DEDUCTIONS IN RESPECT OF CERTAIN INCOMES' THE LEGISLATURE INTENDED TO RESTRICT THE DEDUCTION UNDER EACH OF THE RELEVANT SECTIONS TO THE INCOME O F THE NATURE SPECIFIED IN THAT SECTION ALONE TO THE EXCLUSION OF INCOME FROM ANY OTHER NATURE. THE SPECIFIED NATURE OF INCOME SHALL BE DEEMED TO BE THE ONLY AMOUNT OF INCOME AND COMPUTED IN THE SAME MANNER AS THE GROSS TOTAL INCOME OF THE ASSESSEE IS COMPUTED. IN OTHER WORDS, THE SPECIFIED NATURE OF INCOME WOULD BE ARRIVED AT BY ADOPTING THE SCHEMA OF THE COMPUTATIONAL SECTIONS OF THE ACT WITH REFERENCE TO THAT SPECIFIED NATURE OF INCOME ALONE. THE RELIEF TO BE GRANTED UNDER EACH OF THE SECTIONS AS CONTAINED IN CHAPTER VIA SHALL BE WITH REFERENCE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 18 TO THE INCOME SO COMPUTED IN THE EARLIER STEP IN RESPECT OF THAT NATURE OF INCOME ALONE AND NOT INCOME OF ANY OTHER NATURE. B. FROM THE ABOVE, IT FOLLOWS THAT, DEDUCTIONS UNDER EACH OF THE RELEVANT SECTIONS OF THE CHAPTER SHALL BE COMPUTED WITH REFERENCE TO INCOME DERIVED FROM THE SPECIFIED NATURE TO BE THE ONLY AMOUNT OF INCOME AN D THE ASSESSEE CANNOT CLAIM A HIGHER DEDUCTION THAN WHAT IS RELATED TO THE SPECIFIED NATURE OF INCOME BY INCLUD ING INCOMES OF ANY OTHER NATURE. LIKEWISE, IT ALSO FOLL OWS THAT AN ASSESSEE IS NOT BOUND TO INCLUDE NEGATIVE INCOME OF ANY OTHER NATURE, WHICH WOULD RESULT IN HE BEING EN TITLED TO A DEDUCTION WHICH IS LESS THAN THE AMOUNT OF DED UCTION RELATED TO THE SPECIFIED NATURE OF INCOME. FURTHER, INCOME FOR EACH NATURE HAS TO BE INDEPENDENTLY COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, MEANING THEREBY THAT THE PROVISIONS OF THE ACT RELATING TO COMPUTATION INCLUDING SET OFF ARE TO BE APPLIED IN RESPECT OF EACH SPECIFIED INCOME OF SUCH NATURE SEPARATELY. C. THE HON. SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD V DCIT (266 ITR 521) (2004) HELD T HAT THE DEDUCTION UNDER SEC. 80HHC IS WITH REFERENCE TO EXPORT PROFITS ALONE AND THAT FOR THE PURPOSES OF A RRIVING AT THE SAID EXPORT PROFITS, THE PROFITS EARNED FROM SELF- MANUFACTURING AS WELL AS TRADING OF GOODS HAVE TO B E COMBINED AND LOSSES FROM ONE HAVE TO BE ADJUSTED AG AINST PROFITS OF THE OTHER. THE COURT SAID THAT SEC. 80AB OVERRIDES THE PROVISIONS OF SEC. 80HHC AND THAT THE LATTER IS NOT A COMPLETE CODE BY ITSELF. THE APEX COURT IN THE CASE OF ITO V INDOFLUX PRODUCTS P. LTD (280 ITR 1) (2006) DECLARED THAT THE SOLE OBJECTIVE OF SEC. 80HHC IS T O I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 19 PROVIDE INCENTIVE FOR THE EXPORT BUSINESS OF THE AS SESSEE WHETHER FROM EXPORT OF SELF-MANUFACTURED GOODS OR TRADING OF GOODS, PROVIDED THE BUSINESS RESULTS IN PROFITS. THE UNDERLYING THEME IN BOTH THESE DECISIONS BEING THAT THE DEDUCTION UNDER SEC. 80HHC IS ONLY FOR THE PROF ITS DERIVED FROM EXPORT ACTIVITY. THE BOARD VIDE ITS CI RCULAR NO. 621 DATED 19-12-1991 WHILE EXPLAINING THE PROVI SIONS RELATING TO FINANCE (NO. 2) ACT, 1991 AT PARAGRAPH 32.5 CLARIFIED THAT UNDER THE PROVISIONS OF SUB-SECTION (3) OF SEC. 80HHC PROFIT DERIVED FROM THE EXPORT OF GOODS IS COMPUTED BY MULTIPLYING THE PROFITS OF THE BUSINESS WITH THE PROPORTION OF EXPORT TURNOVER OVER TOTAL TURNOV ER. D. THE HON. SUPREME COURT VIDE ITS DECISION REPORTED AS CIT V SHIRKE CONSTRUCTION CO. LTD, (2911TR 380) (2007) REVERSED THE DECISION OF BOMBAY HIGH COURT W HILE EXAMINING THE REFERENCE IN RELATION TO (A) SEC. 80H HC IS NOT GOVERNED BY THE PROVISIONS OF SEC. 80AB AND (B) WHETHER FOR DETERMINATION OF PROFITS UNDER SEC. 80H HC UNABSORBED BUSINESS LOSSES OF EARLIER YEARS UNDER S EC. 72 SHOULD BE SET OFF? THE COURT RELYING ON ITS OWN DEC ISIONS IN IPCA AND INDOFLUX ALLOWED THE REVENUE APPEAL ON BOTH THE GROUNDS BUT DID NOT DEAL AT LENGTH WITH THE ASP ECT OF EXTENT OF BROUGHT FORWARD LOSSES THAT NEED TO BE SE T OFF FROM THE EXPORT PROFITS FOR COMPUTING THE RELIEF. T HE ASSESSEE SUBMITS THAT THE HON. COURT WAS NOT CALLED UPON .TO DECIDE WHETHER FOR THE PURPOSES OF COMPUTING RE LIEF UNDER EXPORT PROFITS, THE ENTIRE BROUGHT FORWARD LO SSES SHOULD BE DEDUCTED OR MERELY THOSE BROUGHT FORWARD LOSSES THAT RELATE TO EXPORT ACTIVITY SHOULD BE DED UCTED. E. IT IS NOT THE CASE OF THE ASSESSEE THAT BROUGHT FORWARD LOSSES / ALLOWANCE SHOULD NOT BE DEDUCTED F ROM I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 20 THE GROSS TOTAL INCOME. THERE IS NO DISPUTE THAT FO R THE PURPOSES OF ARRIVING AT THE GROSS TOTAL INCOME UNDE R THE ACT, THE INCOMES UNDER EACH OF THE 5 HEADS SHOULD B E AGGREGATED AND THE BROUGHT FORWARD LOSSES / ALLOWAN CES SHOULD BE REDUCED TO ARRIVE AT THE GTI. IF GROSS T OTAL INCOME IS NOT POSITIVE, THEN THE ASSESSEE HAS NO CL AIM FOR BENEFITS UNDER CHAPTER VIA IN TERMS OF SUB-SEC (2) OF SEC. 80A OF THE ACT. IF THE GROSS TOTAL INCOME IS POSIT IVE AND PROVIDED THAT THE ASSESSEE HAS THE INCOME OF THE NA TURE AS SPECIFIED IN EACH OF THE SECTIONS UNDER THE HEAD C OF CHAPTER VIA, HE WOULD BE ELIGIBLE TO CLAIM DEDUCTIO N AS CONCEIVED BY THE SAID SECTION. REFERENCE IS INVITE D TO THE DECISION OF THE SUPREME COURT IN THE CASE OF SYNCO INDUSTRIES LTD V AO (299 ITR 444) WHICH HAS LAID DOWN THE ABOVE RATIONALE. DIVISION BENCH OF ITAT, MUMBAI IN THE CASE OF MEERA COTTON AND SYNTHETIC MILLS P. LTD V ACIT (318 ITR (AT) 64) (2009) GAVE A DETAILED INTERPRETATION (IN PARAGRAPH 10 AT PAGE 69 OF THE ITR(AT)) WHICH SUPPO RTS THE POSITION DETAILED ABOVE BY THE ASSESSEE. F. IT IS SUBMITTED THAT THE INCOME ELIGIBLE FOR DEDUCTION UNDER SEC. 80HHC TO BE CONSIDERED IS ONLY IN RESPECT OF THAT DERIVED FROM EXPORT OF ELIGIBLE GOO DS OR MERCHANDISE. THE EMPHASIS IN THE SECTION IS ON INCO ME DERIVED FROM EXPORT OF ELIGIBLE GOODS OR MERCHANDIS E CLEARLY DIFFERENTIATING IT FROM INCOME DERIVED FROM DOMESTIC SALES OF ELIGIBLE GOODS OR MERCHANDISE. ON A READING OF SEC. 80AB WHICH APPLIES TO ALL THE SECTI ONS UNDER CHAPTER VIA-C, THE DEDUCTION UNDER SECTION 80HHC SHALL BE RESTRICTED TO THE INCOME OF THE SPEC IFIED NATURE, SUCH INCOME BEING COMPUTED IN ACCORDANCE WI TH THE PROVISIONS OF THE ACT. THEREFORE, ALL THE PROVI SIONS OF THE ACT AS ARE APPLICABLE TO THE COMPUTATION OF 'PR OFITS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 21 AND GAINS OF BUSINESS' INCLUDING THOSE RELATING TO SET OFF AND CARRY FORWARD OF BUSINESS LOSS AND UNABSORBED DEPRECIATION, SHALL BE CONSIDERED WHILE COMPUTING T HE INCOME OF THE SPECIFIED NATURE, DEEMING IT TO BE TH E ONLY NATURE OF INCOME. IN THE PRESENT CASE, THE INCOME R ELATES TO EXPORT OF ELIGIBLE GOODS OR MERCHANDISE. CONSEQU ENTLY, FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER SEC. 80HHC IT IS ONLY THE PROFITS AND GAINS OF BUSINESS PERTAINING TO EXPORT OF GOODS SHALL BE CONSIDERED A ND BROUGHT FORWARD LOSS INCLUDING DEPRECIATION PERTAIN ING TO EXPORT BUSINESS SHALL ONLY BE SET OFF FOR ARRIVING AT THE PROFITS AND GAINS. ANY OTHER BUSINESS LOSS INCLUDIN G BROUGHT FORWARD LOSS / DEPRECIATION OF THE ASSESSEE BUT PERTAINING TO INCOME OF DIFFERENT NATURE SHALL NOT BE CONSIDERED. G. SECTION 80HHC PERMITS DEDUCTION OF EXPORT PROFITS DERIVED BY AN ASSESSEE SUBJECT TO CONDITIONS STIPUL ATED THEREIN. SUB-SECTION (3) THEREOF PROVIDED A MECHANI SM TO COMPUTE SUCH EXPORT PROFITS. SUB-SECTION MANDATES T HAT SUCH EXPORT PROFITS SHALL BE COMPUTED BY PRORATING THE TOTAL PROFITS OF THE BUSINESS IN PROPORTION TO EXPO RT TURNOVER BY TOTAL TURNOVER. ONCE THE EXPORT PROFITS ARE COMPUTED, THE DOMESTIC PROFITS ARE COMPLETELY IGNOR ED AND THE ASSESSEE IS ENTITLED TO DEDUCTION OF SUCH E XPORT PROFITS IN TERMS OF SUB-SECTION (1) READ WITH SUB-S ECTION (1 B). INTERPRETING THE PROVISIONS OF 80AB AND 80HHC O NE CAN HARMONIOUSLY DEDUCE THAT THE INCOME OF THE ASSE SSEE IS DERIVED FROM TWO DIFFERENT NATURES, ONE BEING FR OM EXPORT SALES AND OTHER BEING FROM DOMESTIC SALES. T HE PROFITS DERIVED FROM EXPORT ACTIVITY ALONE ARE ENTI TLED TO DEDUCTION U/S 80HHC. IN VIEW OF THE ABOVEMENTIONED PROVISIONS OF SECTION 80AB, FOR THE PURPOSE OF ARRI VING AT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 22 THE QUANTUM OF DEDUCTION U/S 80HHC, THE PROFITS/ LO SSES DERIVED FROM DOMESTIC TURNOVER CANNOT BE CONSIDERED , SINCE THE SAID SECTION REQUIRES THAT DEDUCTION TO B E CONFINED ONLY TO PROFITS / LOSSES DERIVED FROM EXPO RTS BEING THE NATURE OF INCOME AS IS SPECIFIED IN THE R ELEVANT SECTION. H. IT IS FURTHER SUBMITTED THAT SEC. 80HHC DEALS EXCLUSIVELY WITH EXPORT PROFITS WHETHER FROM SALE O F SELF- MANUFACTURED GOODS OR FROM TRADING OF GOODS. ONCE T HE FORMULA AS GIVEN IN SUB-SECTION (3) OF THE SECTION IS APPLIED, THE DOMESTIC PROFITS ARE ISOLATED. THEREFO RE, IT DOES NOT CONCERN ITSELF WITH DOMESTIC PROFITS. IF T HE ASSESSEE EARNED HUGE PROFITS UNDER THE HEAD 'PROFIT S AND GAINS OF BUSINESS' BUT IF THE PROPORTION OF EXPORTS IS LOWER AS COMPARED TO TOTAL SALES, THE EXPORT PROFITS FOR THE PURPOSES OF SEC. 80HHC WOULD BE COMPUTED AT A LOWER FIGURE AND VICE VERSA. MADRAS HIGH COURT IN THE CAS E OF CIT V M. GANI AND CO. (301 ITR 381) (2008) WHILE APPROVING ITS OWN DECISIONS IN THE CASE OF CIT V RATHORE BROTHERS (254 ITR 656) AND CIT V MACMILLAN INDIA LIMITED (295 ITR 67) HELD THAT WHERE SEPARATE ACCOUNTS ARE MAINTAINED BY AN ASSESSEE FOR EXPORT AND DOMEST IC ACTIVITIES, THE PROFITS I LOSSES FROM DOMESTIC ACTIVITIES WOULD BE OMITTED FOR THE PURPOSES OF ARRIVING AT TH E BENEFIT UNDER SEC. 80HHC. IN THE PRESENT CASE TOO, THE FORMULA PRESCRIBED UNDER CLAUSE OF SUB-SEC (3) IS MERELY TO FACILITATE THE DERIVATION OF EXPORT PROFITS, IF ASSESSEE MAINTAINED COMPOSITE ACCOUNTS FOR BOTH ACTIVITIES. IT IS SUBMITTED THAT THE LAW WOULD NOT DISTINGUISH IN THE QUANTUM OF RELIEF TO BE GRANTED UNDER A SECTION OF THE ACT, AS BETWEEN AN ASSESSEE WHO MAINTAINED SEPARATE BOOK S AND ANOTHER WHO MAINTAINED COMPOSITE BOOKS. THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 23 FORMULA AS SPECIFIED IN CLAUSE IS MERELY TO ADDRE SS THE SITUATION WHERE COMPOSITE ACCOUNTS ARE MAINTAINED. ON APPLICATION OF THE ABOVE FORMULA TO THE 'PROFITS OF BUSINESS' AS PER CLAUSE (BAA) AFTER SUBJECTING THEM TO CERTAIN EXCLUSIONS TOWARDS PASSIVE INCOME LIKE RENT , INTEREST ETC., THE EXPORT PROFITS ARE COMPUTED ON T HE BASIS OF WHICH DEDUCTION UNDER SEC. 80HHC IS ALLOWED. I. SINCE DEDUCTION U/S 80HHC IS ALLOWED ONLY IN RESPECT OF PROFITS DERIVED FROM EXPORTS (BEING SPEC IFIED NATURE OF INCOME TO WHICH SECTION 80HHC APPLIES), T HE QUANTUM OF SUCH PROFITS SHOULD BE ARRIVED AT BY DEDUCTING FROM THE EXPORT PROFITS OF THE BUSINESS S O MUCH AMOUNT OF BROUGHT FORWARD LOSS I DEPRECIATION AS IS ATTRIBUTABLE TO EXPORT TURNOVER OF THE RELEVANT ASS ESSMENT YEAR TO THE TOTAL TURNOVER OF THE RELEVANT ASSESSME NT YEAR. IN OTHER WORDS THE AMOUNT OF BROUGHT FORWARD LOSS I DEPRECIATION THAT HAS TO BE SET OFF FROM EXPORT PRO FITS OF THE CURRENT YEAR SHALL BE AN AMOUNT WHICH BEARS THE SAME PROPORTION AS THE EXPORT TURNOVER OF THE RELEV ANT PREVIOUS YEAR BEARS TO THE TOTAL TURNOVER OF THE SA ID PREVIOUS YEAR(S). J. AS A COROLLARY, ONLY THE BROUGHT FORWARD LOSSES RELATING TO EXPORT ACTIVITY SHOULD BE DEDUCTED AND NOT THE ENTIRE BROUGHT FORWARD LOSSES FROM THE EARLIER YEAR . THIS VIEW IS ALSO CONSISTENT WITH THE PROVISIONS OF SEC. 80AB WHICH DECLARE THAT DEDUCTION UNDER EACH OF THE SECT IONS OF CHAPTER VIA SHOULD BE COMPUTED WITH REFERENCE TO THE NATURE OF PROFITS DEALT IN THE SAID SECTION. SECTIO N 80HHC DEALS WITH EXPORT PROFITS AND THEREFORE, FOR THE PU RPOSES OF COMPUTING EXPORT PROFITS, THE EXTENT OF EXPORT LOSS ES ONLY BE DEDUCTED AND NOT THE TOTAL LOSSES. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 24 K. HE TRIED TO EXPLAIN THE ISSUE WITH AN EXAMPLE AS FOLLOWS: IN THE EXAMPLE, THE ASSESSEE HAS MADE BUSINESS LOSS I TAX DEPRECIATION OF RS. 20 IN THE FIRST YEAR (YEAR 1) ON A TURNOVER OF RS. 100 WHILE IN THE NEXT YEAR (YE AR 2) HE MADE A PROFIT OF RS. 60 ON A TURNOVER OF RS. 125. S INCE HIS EXPORT TURNOVER IS RS. 50 IN THE SECOND YEAR AND AS HE HAS A GROSS TOTAL INCOME OF RS. 40 (RS. 60 LESS B/F LOSS OF RS. 20) HE SOUGHT TO CLAIM DEDUCTION UNDER SEC. 80 HHC. YEAR 1 (RS) YEAR 2 (RS) 1 TOTAL TURNOVER 100 125 2 EXPORT TURNOVER 30 50 3 PROFITS / LOSS FOR THE YEAR (20) 60 4 INCOME FROM THE HEAD 'INCOME FROM BUSINESS/ PROFESSION' 60 5 GROSS TOTAL INCOME OF THE YEAR 40 = (60-20) 6 80HHC DEDUCTION ALLOWED BY AO (BY VIRTUE OF ARRIVING AT THE INCOME UNDER HEAD 'INCOME FROM BUSINESS I PROFESSION' AT RS. 40 INSTEAD OF RS. 60 ADOPTED BY ASSESSEE) 16 = ((60- 20)*50/125) 7 EXPORT PROFIT UNDER SUB-SECTION (3) OF SEC. 80HHC AS PER ASSESSEE 24 = (60X50/125) 8 LOSS TO BE REDUCED FOR 80HHC AS CONTENDED BY ASSESSEE (BY COMPUTING PRO- RATA LOSS OF THE PRECEDING YEAR ON THE BASIS OF ET/TT OF YEAR 1 AND REDUCING IT FROM 'INCOME FROM THE (6) = (20X30/100) 9 80HHC DEDUCTION CLAIMED BY ASSESSEE (7-8) 18 L. IF THE WORKING AS ADOPTED BY THE AO IS CONSIDERED THE DEDUCTION UNDER SEC. 80HHC WORKS OUT TO RS. 16. THE AO ADOPTED THE YEAR 2 PROPORTION OF ET/TT FOR REDUC ING THE BROUGHT FORWARD BUSINESS LOSS OF RS. 20. ON THE OTHER HAND THE ASSESSEE SUBMITS THAT THE CORRECT METHOD T O BE ADOPTED IS TO FIRST ARRIVE AT THE PROFITS OF THE BU SINESS OF THE YEAR IN TERMS OF CLAUSE (BAA) AND THEREAFTER AR RIVE AT THE EXPORT PROFITS OF THE YEAR IN TERMS OF SUB-CLAU SE (C) OF I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 25 SUB-SECTION (3) OF SEC. 80HHC. LASTLY, IN TERMS OF SEC. 80AB THE EXPORT PROFITS SO ARRIVED SHOULD BE REDUCE D NOT BY THE ENTIRE BROUGHT BUSINESS LOSS OF RS. 20 BUT O NLY THAT WHICH IS IN PROPORTION TO EXPORT TURNOVER / TOTAL T URNOVER OF THE YEAR 1. M. THE ASSESSEE DRAWS SUPPORT FROM THE LANDMARK JUDGMENT OF ITAT MUMBAI BENCH IN THE CASE OF SKF BEARINGS INDIA LTD., V JCIT (REPORTED IN VOL 4 OF SELECTED ORDERS OF ITAT AT PAGE 534)(2005) WHICH HAS DISCUSSED THE APEX COURT JUDGMENT OF IPCA LABS AS W ELL AS THE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF SH IRKE CONSTRUCTION EQUIPMENT LTD, (246 ITR 429) AT LENGTH AND AFTER INTERPRETING THE PROVISIONS OF SEC. 80HHC REA D WITH SEC. 80AB HELD AS UNDER: (RELEVANT EXTRACTS): 23. AFTER THIS DECISION HON'BLE SUPREME COURT IN IPCA LABORATORIES LTD. CASE (SUPRA) CONSIDERED THE QUESTION OF APPLICABILITY OF SECTION 80AB. THEY OBSERVED AS UND ER:- 'SECTION 80AB IS ALSO IN CHAPTER VI-A. IT STARTS WI TH THE WORDS 'WHERE ANY DEDUCTION IS REQUIRED TO BE MADE OR ALLOWED UNDER ANY SECTION OF THIS CHAPTER'. THIS WOULD INCLUDE SECTION 80HHC. SECTION 80AB FURTHER PROVIDES THAT 'NOTWITHSTANDING ANYTHING CONTAINED IN THAT SECTION'. THUS SECTION 80AB HAS BEEN GIVEN AN OVERRIDING EFFECT OVER ALL OTHER SECT IONS IN CHAPTER VI-A. SECTION 80HHC DOES NOT PROVIDE THA T ITS PROVISIONS ARE TO PREVAIL OVER SECTION 80AB OR OVER ANY OTHER PROVISION OF THE ACT. SECTION 80HHC WOULD THUS BE GOVERNED BY SECTION 80AB. THE DECISIONS OF THE BOMBAY HIGH COURT AND THE KERALA HIGH COURT TO THE CONTRARY CANNOT BE SAID TO BE THE CORRECT LAW. SECTION 80AB MAKES IT CLEAR THAT THE COMPUTATION HAS TO BE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IF THE INCOME HAS TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, THEN NOT ONLY PROFI TS BUT ALSO LOSSES HAVE TO BE TAKEN INTO CONSIDERATION .' I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 26 24. THUS ACCORDING TO HON'BLE SUPREME COURT SECTION 80A B HAS BEEN GIVEN AN OVERRIDING EFFECT OVER THE SECTIO NS IN CHAPTER VI-A INCLUDING SECTION 80HHC. SECTION 80HHC DOES NO T PROVIDE THAT ITS PROVISIONS WILL PREVAIL OVER SECTION 80AB. HON'BLE SUPREME COURT CONSIDERED THAT THE DECISIONS OF HON' BLE BOMBAY HIGH COURT IN SHIRKE CONSTRUCTION EQUIPMENTS LTD.'S CASE (SUPRA) AND KERALA HIGH COURT DECISION IN SMT. T C. USHE'S CASE (SUPRA) WHICH WERE CITED BY THE LD. COUNSEL FO R THE ASSESSEE IN IPCA LABORATORIES LTD.'S CASE (SUPRA) A ND AS MENTIONED IN THE REPORT ON PAGE 528 IN THE ABOVE DE CISION, THEY ARE NOT THE CORRECT LAW. EVEN THOUGH THE DECISION I N IPCA LABORATORIES LTD. 'S CASE (SUPRA) WAS ON THE QUESTI ON AS TO WHETHER PROFIT IN EXPORT OF GOODS MANUFACTURED BY T HE ASSESSEE CAN BE ADJUSTED AGAINST LOSS IN EXPORT OF TRADING G OODS, IN THE SAME YEAR AND THUS RESULTING IN NET LOSS AND THEREB Y NOT ALLOWING DEDUCTION U/S 80HHC OF THE ACT, HON'BLE SU PREME COURT HAD SAID THAT PROVISIONS OF SECTION 80AB WOUL D PREVAIL OVER ALL THE SECTION IN CHAPTER VI-A. IT MEANS THAT DEDUCTION U/S 80HHC WILL BE ALLOWED ON THE BASIS OF NET PROFIT AF TER ADJUSTMENT OF LOSSES OF EXPORT AGAINST PROFITS OF A NOTHER EXPORT BUSINESS. THUS, WHEREAFTER SUCH ADJUSTMENT OF LOSSE S FROM ONE EXPORT BUSINESS AGAINST PROFIT OF ANOTHER EXPORT BU SINESS IN THE SAME YEAR, THERE IS A LOSS, THEN NO DEDUCTION U/S 80HHC CAN BE ALLOWABLE. THE QUESTION REGARDING SET OFF OF BROUGH T FORWARD LOSS AGAINST CURRENT YEAR'S PROFIT WAS NOT, IN FACT, BEF ORE HON'BLE SUPREME COURT IN IPCA LABORATORIES LTD.'S CASE (SUP RA) BUT A CLEAR DECISION IS GIVEN BY THE APEX COURT THAT HON' BLE BOMBAY HIGH COURT'S DECISION IN SHIRKE CONSTRUCTION EQUIPM ENT LTD. 'S CASE (SUPRA) AND KERALA HIGH COURT'S DECISION IN SM T. TC. USHA'S CASE (SUPRA), WHICH HELD THAT SECTION 80HHC IS A COMPLETE CODE IN ITSELF AND SECTION 80AB CANNOT OVE RRIDE SECTION 80HHC IS NOT A CORRECT LAW. THEREFORE, WE ARE BOUND BY THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 27 DECISION OF SUPERIOR COURT IN IPCA LABORATORIES LTD . 'S CASE (SUPRA) IE, HON'BLE SUPREME COURT. HON'BLE M.P. HIG H COURT IN VIPPY SOLVER PRODUCTS LTD. CASE (SUPRA), ANALYSED I PCA LABORATORIES LTD. 'S CASE (SUPRA) AS UNDER: - 'IN OUR OPINION, THE QUESTION IN SO FAR AS THE ASSESSMENT YEAR 1986-87 IS CONCERNED; IT IS SQUAREL Y COVERED BY THE DECISION OF THE SUPREME COURT RENDERED IN THE CASE OF IPCA LABORATORY LTD. (2004) 266 ITR 521 AGAINST AN ASSESSEE. INDEED ONCE IT IS HELD THAT THE LOSS HAS TO BE ADJUSTED AGAINST THE PROFIT THEN IT LOGICALLY FOLLOWS THAT LOSS OF EARLI ER YEAR HAS GOT TO BE SET OFF AGAINST THE CURRENT YEAR PROF IT EVEN FOR THE PURPOSE OF DEDUCTIONS U/S 80HHC.' THUS, RELYING ON THE ABOVE DECISIONS, WE HOLD THAT BROUGHT FORWARD LOSSES HAVE TO BE ADJUSTED TO ARRIV E AT PROFIT FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC. IN THIS CONNECTION, ONE MORE, INTRICATELY CONNECTED ISSUE HAS BEEN RAISED BY LEARNED COUNSEL FOR THE ASSESSEE, I.E., WHETHER ALL TYPES OF LOSSES FROM BUSINESS BROUGHT FORWARD FROM EARLIER YEAS HAS TO BE ADJUSTED AGAINST EXPORT PROF IT OF CURRENT YEAR, OR ONLY BROUGHT FORWARD LOSSES FRO M EXPORT BUSINESS ALONE HAVE TO BE CONSIDERED FOR SET OFF AGAINST EXPORT PROFIT OF CURRENT YEAR. THE ANSW ER TO THIS QUESTION CAN ALSO BE FOUND IN IPCA LABORATORIES LTD. 'S CASE (SUPRA). HON'BLE SUPREME COURT OBSERVED IN IPCA LABORATORIES LTD. 'S CASE (SUPRA) (PAGE 531 OF THE REPORT) THAT: 'ANOTHER REASON WHY THE ARGUMENTS OF MR. DASTUR CANNOT BE ACCEPTED IS THAT EVEN U/S 80HHC(3)(C)(I), THE PROFIT IS TO BE THE ADJUSTED AGAINST PROFIT OF BUSINESS. THE ADJUSTED PROFIT OF THE BUSINESS MEANS A PROFIT AS REDUCED BY THE PROFIT DERIVED FROM BUSINESS OF EXPORTS OUT OF INDIA OF TRADING GOODS. THUS, IN CALCULATING THE PROFITS, UNDER SUB-SECTION (3) (II) , ONE NECESSARILY HAS TO REDUCE BY PROFITS UN DER SUB-SECTION (3)(II) AS SEEN ABOVE, THE TERM 'PROFI T' MEANS POSITIVE PROFIT. THUS, IF THERE IS LOSS THEN THOSE LOSSES IN EXPORT OF TRADING GOODS HAVE TO BE ADJUST ED. THEY CANNOT BE IGNORED. WE, THEREFORE, HOLD THAT A PLAIN READING OF SECTION 80HHC MAKES IT CLEAR THAT IN ARRIVING AT THE PROFITS EARNED FROM EXPORT OF BOTH SELF MANUFACTURED GOODS AND TRADING GOODS, THE PROFITS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 28 AND LOSSES IN BOTH THE TRADES HAVE TO BE TAKEN INTO CONSIDERATION. IF AFTER SUCH ADJUSTMENTS THERE IS A POSITIVE PROFIT, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION U/S 80HHC(1). IF THERE A LOSS, HE WILL NOT BE ENTITLED TO ANY DEDUCTION.' 21. THUS, WHAT IS TO BE ADJUSTED AGAINST EXPORT PROFIT IS LOSS FROM ANOTHER EXPORT. IF IN CURRENT YEAR, ON LY THE LOSSES FROM TRADING IN EXPORT HAS TO BE ADJUSTE D AGAINST PROFITS FROM ANOTHER EXPORT (I.E. MANUFACTURING ACTIVITY) AS PER IPCA LABORATORIES LT D. 'S CASE (SUPRA), IT FOLLOWS THAT ONLY BROUGHT FORWARD LOSSES FROM EXPORT ACTIVITY ALONE CAN BE ADJUSTED AGAINST EXPORT PROFITS IN THE CURRENT YEAR. SECTION 80HHC REFERS TO COMPUTATION OF PROFITS FROM EXPORT ACTIVITY ONLY. THEREFORE, NON-EXPORT LOSSES WHETHER OF CURRENT YEAR OR OF EARLIER YEAR'S BROUGHT FORWARD O NE, CANNOT BE CONSIDERED. SECTION 72 ALSO PROVIDES THAT BROUGHT FORWARD LOSSES OF THE BUSINESS WILL BE TREATED AS CURRENT YEAR'S LOSS FOR THE PURPOSES OF SET OFF AGAINST CURRENT YEAR'S INCOME FROM THE SAME BUSINESS. THIS WILL ALSO BE CONSISTENT WITH SECTION 80HHC 3 WHICH PROVIDES FOR COMPUTATION OF 'PROFITS DERIVED FROM SUCH EXPORT'. IN WORKING OUT PROFITS DERIVED FROM EXPORT ONE CAN ONLY ADJUST LOSSES FROM THE EXPORT ACTIVITY, WHETHER OF THE CURRENT YEAR OR BROUGHT FORWARD FROM EARLIER YEAR. THERE IS NO SCOP E TO ADJUST NON-EXPORT BROUGHT FORWARDED LOSS AGAINST EXPORT PROFITS OF CURRENT YEAR U/S 80HHC. 23. IN VIEW OF THE ABOVE, WE HOLD THAT BROUGHT FORWARD LOSS FROM EXPORT ACTIVITIES ALONE CAN BE SE T OFF AGAINST EXPORT PROFITS OF THE CURRENT YEAR. THE ASSESSING OFFICER IS DIRECTED TO COMPUTE DEDUCTION U/S 80HHC ACCORDINGLY.' 25. ACCORDING TO AR, THE LOWER AUTHORITIES WITHOUT CONS IDERING THE ASSESSEE'S ARGUMENTS FOR REDUCING ONLY PRO-RATA BROUGHT FORWARD LOSSES, SIMPLY RELIED ON THE DECISION OF IT AT, PUNE IN THERMAX SURFACE COATINGS LTD. V JCIT (1041TD 199){2 006). IT IS SUBMITTED THAT THE PUNE BENCH DID NOT GO INTO TH E MERITS OF THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF SKF BEARINGS LTD (SUPRA). H IS SUBMITTED THAT THE MUMBA I BENCH OF ITAT IN SKF BEARINGS LTD., CASE HAS DISCUSSED ALL T HE ASPECTS OF I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 29 IPCA LABS CASE AND DISTINGUISHED THE SUPREME COURT DECISION FROM THE CLAIM OF THE ASSESSEE IN SKF BEARINGS CASE . AFTER A DETAILED REVIEW OF MUMBAI HC JUDGMENT IN THE CASE O F SHIRKE AS WELL AS THE SUPREME COURT DECISION IN THE IPCA CASE , THE BENCH BY RELYING ON THE PROVISIONS OF SEC. 80AB HELD THAT ONLY PRO-RATA EXPORT LOSSES AND NOT THE ENTIRE BROUGHT FORWARD LO SSES SHOULD BE DEDUCTED WHILE WORKING OUT THE BENEFIT UNDER SEC . 80HHC. 26. THE AR SUBMITTED THAT FOR THE PURPOSE OF COMPUTING ELIGIBLE EXPORT PROFITS UNDER SEC. 80HHC READ WITH SEC. 80AB, THE 'PROFITS OF THE BUSINESS' UNDER CLAUSE (BAA) SH OULD BE REDUCED NOT BY THE ENTIRE AMOUNT OF BROUGHT FORWARD LOSS / DEPRECIATION OF THE EARLIER YEARS BUT ONLY THAT POR TION OF THE BROUGHT FORWARD LOSS / DEPRECIATION AS CAN BE ATTRIBUTED TO THE EXPORT ACTIVITY OF THE PRECEDING RELEVANT ASSESSMEN T YEAR. OTHERWISE, THE ASSESSEE SUBMITS THAT BROUGHT FORWAR D LOSSES/ ALLOWANCES RELATING TO THE DOMESTIC ACTIVIT Y WOULD ALSO BE REDUCED FROM THE EXPORT PROFITS OF THE YEAR WHICH IS NOT THE INTENT OF THE LEGISLATURE. 27. IT IS THE SUBMISSION OF THE AR THAT ASSESSING OFFIC ER SHALL DIRECTED TO ALLOW THE APPELLANTS CLAIM OF PRO RATA REDUCTION OF BROUGHT FORWARD LOSSES AND ALLOWANCES. 28. THE LEARNED DR RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. (266 IT R 521) (SC) AND ALSO ON THE ORDER OF THE TRIBUNAL IN THE CASE O F THERMAX SURFACE COATINGS LTD. V JCIT (104 ITD 199). 29. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THIS GROUND DOESNT REQUIRED A DJUDICATION AS WE HAVE ALREADY HELD IN EARLIER PARAS THAT THE R EOPENING IS BAD IN LAW IN THESE ASSESSMENT YEARS. BEING SO, WE REFRAIN OURSELVES FROM ADJUDICATING THIS ISSUE. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 30 30. THE NEXT ALTERNATE GROUND IN ITA NO. 939/HYD/2010 IS AS FOLLOWS: 'ALTERNATIVE TO GROUND NO. 3, THE COMMISSIONER ERRE D IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER I N REDUCING THE ENTIRE BROUGHT FORWARD LOSSES/ UNABSORBED DEPRECIATION ALLOWANCE OF AMALGAMATING COMPANIES ELIGIBLE FOR SET OFF UNDER SEC. 72A WHILE COMPUTING RELIEF U/S 80HHC.' 31. THE LEARNED AR SUBMITTED THAT THIS APPEAL OF THE AS SESSEE IS AGAINST THE SECOND REASSESSMENT AFTER COMPLETION OF THE FIRST RE-ASSESSMENT. THE SECOND NOTICE U/S 148 WAS ISSUED ON 18/03/08 I.E., AFTER EXPIRY OF 4 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. THE REASONS FOR RE-OPENI NG ARE TO REDUCE THE ENTIRE BROUGHT FORWARD LOSSES WHILE COMP UTING DEDUCTION U/S 80HHC UNDER MAT PROVISIONS. HERE ALS O, THE ASSESSING OFFICER IS NOT HAVING ANY FRESH TANGIBLE MATERIAL AND IT IS SIMPLY A MERE CHANGE OF OPINION. A REFERENCE TO MAIN COMPUTATION AT PAGE 14 OF THE ASSESSMENT ORDER DT 3 1/03/05 U/S 143 R.W.S 147 (I.E., FIRST REASSESSMENT) AS WEL L AS THE DEDUCTION U/S 80HHC COMPUTATION AT PAGE 17 OF THE S AID ORDER WOULD REVEAL THAT THE ASSESSING OFFICER WHO COMPLET ED THE FIRST RE-ASSESSMENT PROCEEDINGS AGREED WITH THE CONTENTIO N OF THE ASSESSEE THAT FOR COMPUTING DEDUCTION U/S 80HHC MER ELY THE BROUGHT FORWARD DEPRECIATION U/S 32(2) NEED TO BE R EDUCED AND NOT THE BROUGHT FORWARD BUSINESS LOSSES. HOWEVER, T HE ASSESSING OFFICER ON A CHANGE OF OPINION ISSUED 2 ND NOTICE U/S 148 WITHOUT ANY FRESH TANGIBLE MATERIAL THAT TOO AF TER EXPIRY OF 04 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YE AR. THIS IS NOT VALID. 32. HE SUBMITTED THAT SINCE THE ORDER OF THE CIT ON THI S ISSUE IS AGAINST THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF KELVINATOR OF INDIA LTD, (320 ITR 561), IT IS PRAYE D TO ALLOW I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 31 GROUND NO. 2 HOLDING THAT THE PROCEEDINGS INITIATED ON 18/03/2008 FOR THE ASSESSMENT YEAR 2002-03 I.E., AF TER THE EXPIRING OF 4 YEARS ARE INVALID AND THE ORDER DATED 29/08/2008 PASSED U/S 143(3) R.W.S. 147 OF THE ACT MAY BE ANNU LLED. IT IS FURTHER SUBMITTED THAT ALL FACTS RELATING TO RESPEC TIVE DATES ARE BEFORE THE APPELLATE TRIBUNAL AND CIT HAS ALREADY E XAMINED THIS ISSUE AND GAVE HIS DECISION WHICH AS SUBMITTED EARL IER IS AGAINST THE LAW LAID DOWN BY THE SUPREME COURT. 33. THE ASSESSEE SUBMITTED THAT AS PER CLAUSE (BAA) OF THE EXPLANATION TO SEC. 80HHC THE TERM 'PROFITS OF THE BUSINESS' WOULD MEAN THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. IT IS TO BE NOTED THAT IN TERMS OF SEC. 14 OF THE ACT, ALL THE INCOME CHARGEABLE TO TAX HAS TO BE CLASSIFIED UNDER 5 HEAD S OF INCOME NAMELY, A-SALARIES, C-INCOME FROM HOUSE PROPERTY, D -PROFITS AND GAINS OF BUSINESS OR PROFESSION, E-CAPITAL GAIN S AND F- INCOME FROM OTHER SOURCES. CHAPTER IV OF THE ACT UN DER '0' PROVIDED THE METHODOLOGY FOR COMPUTING 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' WHICH INCLUDES SECTIONS 28 TO 44DA. SEC. 72A STIPULATES THAT BROUGHT FORWARD DEPRECIATI ON AND BUSINESS LOSS OF AMALGAMATING COMPANIES ARE DEEMED TO BE THE BROUGHT FORWARD DEPRECIATION AND BUSINESS LOSS OF A MALGAMATED COMPANY (THE APPELLANT) IN THE YEAR OF AMALGAMATION (THE APPOINTED DATE OF AMALGAMATION IS 1 ST JAN 2004). SECTION 32(2) DEEMS THE BROUGHT FORWARD DEPRECIATION TO BE A PART OF CURRENT DEPRECIATION. ACCORDINGLY, FOR THE PURPOSES OF ARRI VING AT THE ELIGIBLE PROFITS AS PER THE STATUTORY DEFINITION GI VEN IN CLAUSE (BAA) OF EXPLANATION TO SEC. 80HHC, IT IS ONLY THE BROUGHT FORWARD DEPRECIATION WHICH SHOULD BE DEDUCTED FROM THE PROFITS AND GAINS OF BUSINESS FOR COMPUTING THE EXPORT RELI EF AND THE AMOUNT OF BROUGHT FORWARD BUSINESS LOSS COVERED BY SECTION 72 READ WITH SECTION 72A SHOULD NOT BE REDUCED FOR ARR IVING AT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 32 PROFITS AND GAINS OF BUSINESS BOTH FOR PURPOSES OF CLASSIFYING UNDER SEC. 14 AS WELL AS FOR CLAUSE (BAA) OF SEC. 8 0HHC. 34. HE SUBMITTED THAT THE CIT (A) AT PARAGRAPH 7.1 OF H IS ORDER MERELY REFERRED TO THE ORDER OF HIS PREDECESS OR IN THE SUBSEQUENT ASSESSMENT YEAR (AY 2004-05) AND DECIDED AGAINST THE ASSESSEE. HE HAS NOT CONSIDERED THE LEGAL PROPO SITION PUT UP BY THE ASSESSEE BEFORE HIM. ACCORDINGLY THE ASS ESSEE PLEADED TO ALLOW GROUND 4 IN ITA NO. 939/HYD/10. 35. THE DR RELIED ON THE ORDER OF THE CIT(A). 36. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THIS GROUND DOESNT REQUIRED A DJUDICATION AS WE HAVE ALREADY HELD IN EARLIER PARAS THAT THE R EOPENING IS BAD IN LAW IN THESE ASSESSMENT YEARS. BEING SO, WE REFRAIN OURSELVES FROM ADJUDICATING THIS ISSUE. 37. IN THE RESULT, ASSESSEES APPEAL IN ITA NO. 835/HYD /2005, 836/HYD/2005 & 837/HYD/2005 ARE PARTLY ALLOWED AND 938/HYD/2010 & 939/HYD/2010 ARE ALLOWED. 38. NOW WE WILL TAKE UP DEPARTMENTAL APPEAL IN ITA NO. 930/HYD/2005, 931/HYD/2005, 932/HYD/2005, 895/HYD/ 2005 & 896/HYD/2005 FOR ADJUDICATION. 39. THE DEPARTMENTAL APPEALS IN ITA NO.895/HYD/2005 & 896/HYD/2005 FOR THE ASSESSMENT YEAR 2002-03 & 2003 -04 ARE DISMISSED AS INFRUCTUOUS AS WE HAVE HELD IN ASSESSE E APPEALS IN ITA NO. 938/HYD/2005 & 939/HYD/2005 THAT THE REOPEN ING IS BAD IN LAW AND CANCEL THE ASSESSMENTS ITSELF. BEING SO, ITA NO. 895/HYD/2005 & 896/HYD/2005 ARE DISMISSED AS INFRUC TUOUS. 40. THE COMMON GROUNDS IN I.T.A. NOS. 930, 931 & 932/HYD/2005 (DEPARTMENTAL APPEALS) ARE AS FOLLOWS: I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 33 3(A) THE LEARNED CIT(A) ERRED IN HOLDING THAT THE I NTEREST INCOME OF RS. 18,46,700 (A.Y. 2001-02), RS. 23,85,326 (A.Y. 2002-03) AND RS. 38,90,000 (A.Y. 2003-04) IS PART OF BUSINESS PROFITS ASSESSABLE U/S 28 TO 44. 3(B) THE LEARNED CIT(A) OUGHT TO HAVE FOLLOWED THE DECISION OF THE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS (262 ITR 278) FOR THE PURPOSE OF DECIDING THE HEAD OF INCOME UNDER WHICH THE INTEREST INCOME IS ASSESSABLE. 3(C) THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE INTEREST INCOME EARNED ON MARGIN MONEY WAS A RECEIPT OF THE NATURE MENTIONED IN EXPLANATION (BAA) TO SECTION 80HHC. 41. THE LEARNED AR SUBMITTED THAT FOR ASSESSMENT YEARS 2001-02, 2002-03 AND 2003-04, THE ASSESSMENTS WERE RE- OPENED TO RE-COMPUTE EXPORT PROFITS UNDER CLAUSE (I V) OF EXPLANATION TO SECTION 115JB BY ADOPTING PROFITS OF THE BUSINESS UNDER CLAUSE (BAA) OF SECTION 80HHC IN PLA CE OF BOOK PROFITS. AFTER RE-OPENING THE ASSESSMENT, THE ASSES SING OFFICER HAS MADE SOME. OTHER ADDITIONS AND DISALLOWANCES WH ICH HAVE COME TO HIS KNOWLEDGE IN THE COURSE OF RE-ASSESSMEN T PROCEEDINGS. THE ACTION OF THE ASSESSING OFFICER IN COMPUTING DEDUCTION UNDER CLAUSE (IV) OF EXPLANATION TO SECTI ON 115JB BY ADOPTING THE PROFITS OF BUSINESS UNDER CLAUSE (BAA OF SECTION 80HHC IS NO LONGER CORRECT AS HELD BY THE HON'BLE S UPREME COURT IN THE CASE OF AJANTHA PHARMA PVT. LTD VS CIT (327 ITR 305). THIS DECISION OF THE APEX COURT WAS FOLLOWED BY THE FIRST APPELLATE AUTHORITY AND RE-COMPUTATION WORKED OUT B Y THE ASSESSING OFFICER WAS HELD AS INVALID BY THE FIRST APPELLATE AUTHORITY. HENCE, IT HAS NOW BECOME FINAL THAT THE REASONS FOR RE-OPENING THE ASSESSMENT NO LONGER SURVIVE. IN SUC H CIRCUMSTANCE, IT IS HUMBLY SUBMITTED THAT THE OTHER ADDITIONS AND DISALLOWANCES MADE BY THE ASSESSING OFFICER IN THE CASE OF RE-ASSESSMENT PROCEEDINGS DO NOT SURVIVE EQUALLY. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 34 42. HE INVITED OUR ATTENTION TO THE DECISION OF THE DEL HI HIGH COURT IN THE CASE OF RANBAXY LABORATORIES LIMITED V S. CIT (336 ITR 136), WHEREIN IT WAS HELD THAT THE ASSESSING OF FICER WAS NOT JUSTIFIED WHEN THE REASONS FOR INITIATION OF THE PR OCEEDINGS CEASED TO SURVIVE. SIMILAR VIEW WAS TAKEN BY THE BO MBAY HIGH COURT IN THE CASE OF CIT VS. JET AIRWAYS (331 ITR 2 36) (BOM). AS HELD BY THE BOMBAY HIGH COURT IN THE CASE OF RALLIS INDIA LTD VS ACIT (323 ITR 54 BOMBAY) IT IS WELL SETTLED THAT , LAW AS LAID DOWN BY THE SUPREME COURT IS DECLARATORY OF THE POS ITION AS IT ALWAYS STOOD. DECISION OF SUPREME COURT IN THE CASE OF AJANTA PHARMA P LTD (SUPRA) IS A POSITION DEEMED AS IT ALW AYS WAS. HENCE, THE MAIN REASON TO REOPEN I.E., REWORKING DE DUCTION U/S 80HHC R.W.S 115JB IS NOT PERMISSIBLE AT ANY TIME AN D THEREFORE THE OTHER ISSUES IN THE RE ASSESSMENT PROCEEDINGS A UTOMATICALLY FAIL AND CANNOT SURVIVE. 43. PLACING RELIANCE ON THE ABOVE THREE DECISIONS, IT W AS SUBMITTED BY THE AR THAT SINCE THE VERY REASON FOR RE-OPENING THE ASSESSMENT CEASES TO SURVIVE, THE OTHER ADDITIO NS AND DISALLOWANCES MADE ARE NOT JUSTIFIED AND MAY BE CANCELLED. 44. THE LEARNED DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. 45. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE DEPOSIT MADE BY THE ASSESSEE IN THE BANK AND INTEREST EARNED ON IT CANNOT BE CONSIDERED AS INCOM E FROM BUSINESS MUCH LESS INCOME FROM EXPORT EARNING, IT C ANNOT BE CONSIDERED AS INCOME FROM EXPORT EARNINGS, AS THERE IS NO NEXUS BETWEEN EXPORT BUSINESS AND INTEREST INCOME. INTER EST INCOME WAS EARNED FROM THE DEPOSITS MADE BY THE ASSESSEE W ITH THE BANK AND NOT FROM EXPORT BUSINESS. PLACING RELIANC E ON THE JUDGEMENT OF MADRAS HIGH COURT IN THE CASE OF DOLLA R APPARELS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 35 VS. ITO, 294 ITR 484 WHEREIN PLACING RELIANCE ON TH E JUDGEMENT OF THE SAME HIGH COURT IN THE CASES OF CIT VS. A.S. NIZAR AHMED & CO. (259 ITR 244) (MAD), K. S. SUBBAIAH PILLAI & CO. INDIA PVT. LTD. (260 ITR 304) (MAD) IT WAS HELD THAT INTEREST INCOME CANNOT BE CONSIDERED AS INCOME FROM BUSINESS. IN VIEW OF THE ABOVE JUDGEMENTS WE ARE INCLINED TO HOLD THAT INTEREST IN COME CANNOT BE CONSIDERED AS BUSINESS PROFIT OF THE ASSESSEE U/ S. 28 TO 44 OF THE IT ACT. THIS GROUND IN REVENUE APPEALS IS ALL OWED. 46. THE NEXT COMMON GROUND IN REVENUE APPEALS IN ITA N OS. 930 & 931/HYD/05 IS AS UNDER: 'THE LEARNED CIT(A) ERRED IN HOLDING THAT CONVERSIO N CHARGES OF RS. 7,10,63,870 (A.Y. 2001-02) RS. 1,70,88,345 (A.Y. 2002-03) WERE PART OF ELIGIBLE PROFITS FOR COMPUTING DEDUCTION U/S 80HHC AS WELL AS EXPORT PROFITS UNDER CLAUSE (IV) OF EXPLANATION TO SEC. 115JB.' 47. THE LEARNED AR SUBMITTED THAT THIS ISSUE DOES NOT S URVIVE IN VIEW OF THE NOTICE U/S. 148 BEING BAD IN LAW. W ITHOUT PREJUDICE, HE SUBMITTED THAT THE ASSESSEE HAS EARNE D CONVERSION CHARGES FOR A.YS. 2001-02 AND 2002-03 AT RS. 7,10,63,870 AND RS. 1,70,88,345, RESPECTIVELY. THE CONVERSION INCOME IS EARNED BY CARRYING OUT THIRD PARTY JOB WO RK AT ITS MANUFACTURING BLOCKS. IT USED THE SAME EQUIPMENT AN D PERSONNEL FOR EARNING THIS INCOME. THE COMPANY'S MA IN OBJECTS INCLUDE MANUFACTURE AND SALE OF BULK DRUG AS WELL A S CARRY OUT CONVERSION WORKS. THE DIFFERENCE BETWEEN NORMAL MANUFACTURING ACTIVITY AND CONVERSION JOB WORK IS T HAT IN THE LATTER CASE, THE THIRD PARTY SUPPLIES RAW MATERIALS . THE AO OBJECTED TO THE INCLUSION OF THESE RECEIPTS AS PART OF ELIGIBLE PROFITS ON THE GROUND THAT CONVERSION IS AN INCIDEN TAL ACTIVITY AND BEING SEASONAL HAS NO RELEVANCE TO THE EXPORT A CTIVITIES OF THE ASSESSEE. THE LEARNED CIT (A) CALLED FOR THE MA IN OBJECTS OF THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE COMPA NY AND I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 36 FOUND THAT THEY INTER ALIA INCLUDED MANUFACTURE OF BULK DRUGS ON BEHALF OF OTHERS. HE STATED IN HIS ORDER THAT AF TER EXAMINING THE ISSUE HE FOUND THAT PLANT AND MACHINERY USED FO R THE CONVERSION BUSINESS IS THE SAME AS USED FOR OTHER B USINESS AND THE SAME SKILLS ARE INVOLVED. ON THIS BASIS HE DIRE CTED THE AO TO INCLUDE THE CONVERSION INCOME WITHOUT DEDUCTING 90% THEREOF FROM THE PROFITS OF BUSINESS UNDER CLAUSE (BAA) OF SEC. 80HHC. THE DEPARTMENT NOT BEING SATISFIED WITH THIS, IS BE FORE THE TRIBUNAL. 48. THE ASSESSEE RELIED ON THE DECISION OF BOMBAY HIGH COURT IN CIT V BANGALORE CLOTHING (2003)(260 ITR 371) AS WELL AS THE DECISION OF HYDERABAD BENCH OF ITAT IN ACIT V BIOTE CH MEDICAL (2009)(119 ITD 143). THE ASSESSEE ALSO RELIED ON TH E DECISION OF KARNATAKA HIGH COURT IN THE CASE OF CIT V MITTAL CR EATIONS (2011)(13 TAXMANN.COM 237) RENDERED ON 12-04-2011 W ITH SIMILAR FACTS AND IN RELATION TO DEDUCTION UNDER SE C. 80HHC. THE OR ON THE CONTRARY RELIED ON THE APEX COURT JUD GMENT IN RAVINDRANATHAN (2007) (295 ITR 228) WHICH DECLARED THAT RECEIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS TO BE REDUCED FROM BUSINESS PROFITS UNDER C LAUSE (BAA) FOR COMPUTATION OF EXPORT PROFITS. THE ITAT DECISIO N IN BIOTECH MEDICAL IS RENDERED IN THE CONTEXT OF SEC. 80LB WHI CH STANDS ON A DIFFERENT FOOTING AND THEREFORE CLEARLY DISTINGUI SHABLE. THOUGH BANGALORE CLOTHING AND MITTAL CREATIONS ARE RENDERE D IN THE CONTEXT OF SEC. 80HHC, BOMBAY HIGH COURT IN THE REC ENT CASE OF CIT V DRESSER RAND INDIA PVT. LTD. (2010)(323 ITR 4 29) HELD THAT THE DECISION IN BANGALORE CLOTHING TO THE EXTENT TO WHICH IT LAYS DOWN A PRINCIPLE OF LAW AT VARIANCE WITH THE SUBSEQ UENT JUDGEMENT OF THE SUPREME COURT IN RAVINDRANATHAN NA IR'S CASE WOULD NOT THEREFORE HOLD THE FIELD AFTER THE JUDGME NT OF THE SUPREME COURT. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 37 49. ALTERNATIVELY, THE AR PLEADED THAT THE CONVERSION CHARGES THAT SHOULD BE DEDUCTED FROM THE PROFITS OF THE BUS INESS IN TERMS OF CLAUSE (BAA) SHOULD BE NET CONVERSION INCO ME AFTER REDUCING ALL EXPENDITURE INCURRED FOR THE PURPOSES OF EARNING THE SAID CONVERSION INCOME AND NOT GROSS CONVERSION RECEIPTS. IN THIS CONNECTION, THE ASSESSEE ONCE AGAIN CANVASS ES SUPPORT FROM THE VERY RECENT DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE 'OF ACG ASSOCIATED CAPSULES PVT. LTD. V CI T IN CIVIL APPEAL NO. 1914 OF 2012 RENDERED ON 8-02-2012 WHERE IN THE COURT CLARIFIED THAT FOR THE PURPOSES OF CLAUSE (BA A) WHAT IS TO BE DEDUCTED FROM THE PROFITS OF THE BUSINESS IS, 90% O F THE RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CH ARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OF AN COULD BE DEDUCTED UNDER CLAUSE (1) OF EXPLANATION ( BAA) AND NOT 90% OF THE QUANTUM OF ANY OF THE AFORESAID RECEIPTS WHICH ARE ALLOWED AS EXPENSES AND THEREFORE NOT INCLUDED IN T HE PROFITS OF BUSINESS OF THE ASSESSEE. IN OTHER WORDS, THE APEX COURT HELD THAT 90% DEDUCTION SHOULD BE MADE FROM THE NET INCO ME OF ANY OF THE RECEIPTS MENTIONED IN CLAUSE (BAA) AND NOT T HE GROSS RECEIPTS. 50. IT IS NOT IN DISPUTE THAT THE CONVERSION CHARGES AR E INCLUDED IN THE PROFITS OF THE BUSINESS OF THE ASSE SSEE. THEREFORE 90% OF THE SAID RECEIPTS ARE TO BE DEDUCTED FOR COM PUTING THE EXPORT PROFITS. BUT THE, ASSESSEE SUBMITS THAT SUCH EXCLUSION SHOULD BE ONLY TO THE EXTENT OF 90% OF THE NET RECE IPTS VIZ., AFTER DEDUCTING ALL EXPENDITURE IN RELATION TO EARNING TH AT INCOME. 51. IT IS THEREFORE PLEADED THAT WHILE ALLOWING THE GRO UND NO. 4 OF THE DEPARTMENT IN ITA NO. 930/05 & 931/05 , THE ASSESSEE MAY BE ALLOWED RELIEF BY DIRECTING THAT ONLY THE NE T CONVERSION CHARGES BE DEDUCTED FROM THE PROFITS OF BUSINESS FO R THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 38 PURPOSES OF CLAUSE (BAA) AND NOT THE GROSS CONVERSI ON CHARGES RECEIVED. SINCE THE EXTENT OF EXPENDITURE INCURRED ON THE EARNING OF CONVERSION CHARGES HAS NOT BEEN QUANTIFI ED THE ASSESSEE PLEADS FOR REVERTING THE MATTER TO THE AO FOR QUANTIFYING THE EXTENT OF 90% OF THE NET CONVERSION INCOME THAT SHOULD BE REDUCED FROM THE ELIGIBLE PROFITS FOR COM PUTING 80HHC IN TERMS OF CLAUSE (BAA). 52. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. THIS ISSUE IS COVERED BY THE JUDGEMENT OF SUPREME COURT IN THE CASE OF RAVINDRANATHAN NAIR (2 95 ITR 228) WHEREIN THE APEX COURT HELD AS UNDER: IN SECTION 80HHC OF THE INCOME-TAX ACT, 1961, AS ORIGINALLY INSERTED IN 1983, THE MARGINAL NOTE SAID DEDUCTION IN RESPECT OF EXPORT TURNOVER. THE MARGINAL NOTE WAS LATER CHANGED TO DEDUCTION IN RESPECT OF PROFITS RETAINED FOR EXPORT BUSINESS. THEREFORE, THE VERY BASIS OF THE EXEMPTION UNDER SECTION 80HHC SHIFTED FROM EXPORT TURNOVER TO RETENTION OF PROFITS FOR EXPORT BUSINESS. UNDER THE LAW AS IT STOOD DURING THE ASSESSMENT YEAR 1993-94, SECTION 80HHC(3) CONSTITUTED A CODE BY ITSELF. SUBSEQUENT AMENDMENTS HAVE IMPOSED RESTRICTIONS/QUALIFICATIONS BY WHICH SECTION 80HHC(3) HAS CEASED TO BE A CODE BY ITSELF. THE FORMULA IN SECTION 80HHC(3) PROVIDED FOR A FRACTION OF EXPORT TURNOVER DIVIDED BY THE TOTAL TURNOVER TO BE APPLIED TO BUSINESS PROFITS CALCULAT ED AFTER DEDUCTING 90 PER CENT. OF THE SUMS MENTIONED IN CLAUSE (BAA) OF THE EXPLANATION. PROFIT INCENTIVES LIKE RENT, COMMISSION, BROKERAGE CHARGES, ETC., THOUGH THEY FORMED PART OF THE GROSS TOTAL INCOME, HAD TO BE EXCLUDED AS THEY WERE INDEPENDENT INCOMES WHICH HAD NO ELEMENT OF EXPORT TURNOVER. ALL THE FOUR VARIABLES IN THE SECTION WERE REQUIRED TO BE KEPT I N MIND. IF ALL THE FOUR VARIABLES ARE KEPT IN MIND, I T BECOMES CLEAR THAT EVERY RECEIPT IS NOT INCOME AND EVERY INCOME WOULD NOT NECESSARILY INCLUDE THE ELEMENT OF EXPORT TURNOVER. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 39 CLAUSE (BAA) OF THE EXPLANATION STATES THAT 90 PER CENT. OF THE INCENTIVE PROFITS OR RECEIPTS BY WAY O F BROKERAGE, COMMISSION, INTEREST, RENT CHARGES OR AN Y OTHER RECEIPT OF LIKE NATURE INCLUDED IN BUSINESS PROFITS HAVE TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D. IN OTHER WORDS, RECEIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WERE REQUIRED TO BE DEDUCTED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAUSE (BAA)(1) INDICATES THAT RECE IPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT CHARGES, ETC., FORMED PART OF THE GROSS TOTAL INCOM E BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTORTION IN ARRIVING AT THE EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFI TS AND INDEPENDENT INCOMES CONSTITUTED PART OF THE GROSS TOTAL INCOME, THEY HAD TO BE EXCLUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER. PROCESSING CHARGES, WHICH ARE PART OF GROSS TOTAL INCOME, FORM AN ITEM OF INDEPENDENT INCOME LIKE REN T, COMMISSION, BROKERAGE, ETC., AND, THEREFORE, 90 PER CENT. OF THE PROCESSING CHARGES HAS ALSO TO BE REDUCED FROM THE GROSS TOTAL INCOME TO ARRIVE AT TH E BUSINESS PROFITS AND, THEREFORE, IT HAS ALSO TO BE INCLUDED IN THE TOTAL TURNOVER IN THE FORMULA FOR ARRIVING AT THE BUSINESS PROFITS IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC(3). WHILE ARRIVING AT THE EXPORT PROFITS UNDER SECTION 80HHC(3) AS IT STOOD IN THE ASSESSMENT YEAR 1993- 94 PROCESSING CHARGES ARE TO BE INCLUDED IN THE TOT AL TURNOVER. DECISION OF THE KERALA HIGH COURT IN CIT V. K. RAJENDRANATHAN NAIR [2004] 265 ITR 35 REVERSED. HELD , _ALSO, THAT IN ARRIVING AT THE PROFIT EARNED FROM EXPORT OF SELF-MANUFACTURED GOODS AND TRADING GOODS, THE PROFITS AND LOSSES IN BOTH TRADES HAVE T O BE TAKEN INTO CONSIDERATION. IF AFTER THE ADJUSTMEN T THERE WAS A POSITIVE PROFIT, THE ASSESSEE WOULD BE ENTITLED TO THE DEDUCTION UNDER SECTION 80HHC(1). I F THERE WAS A LOSS THE ASSESSEE WOULD NOT BE ENTITLED TO ANY DEDUCTION.' I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 40 53. IN VIEW OF THE ABOVE JUDGEMENT OF SUPREME COURT, 9 0% OF CONVERSION CHARGES HAS TO BE REDUCED FROM THE GROSS TOTAL INCOME TO ARRIVE AT THE BUSINESS PROFIT AND IT HAS TO BE INCLUDED IN THE TOTAL TURNOVER IN THE FORMULA OF ARRIVING AT THE BUSINESS PROFIT IN TERMS OF CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC(3) OF THE ACT. ACCORDINGLY, THE ASSESSING OF FICER IS DIRECTED TO RECOMPUTE THE DEDUCTION U/S. 80HHC OF T HE ACT IN THE LIGHT OF THE JUDGEMENT OF SUPREME COURT CITED S UPRA. THIS GROUND OF THE REVENUE IS PARTLY ALLOWED. 54. THE NEXT GROUND IN ITA NOS. 930, 931 & 932/HYD/2005 IS THAT THE CIT(A) ERRED IN DIRECTING TO DELETE SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FOR COMPUTING DEDUCTIO N U/S. 80HHC OF THE ACT. 55. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. L AKSHMI MACHINE WORKS (290 ITR 667) WHEREIN THE APEX COURT HELD AS UNDER: 'SECTION 80HHC OF THE INCOME-TAX ACT, 1961, IS A BENEFICIAL SECTION: IT WAS INTENDED TO PROVIDE INCENTIVE TO PROMOTE EXPORTS. THE INTENTION WAS TO EXEMPT PROFITS RELATABLE TO EXPORTS. JUST AS COMMISSION RECEIVED BY THE ASSESSEE IS RELATABLE TO EXPORTS AND YET IT CANNOT FORM PART OF TURNOVER F OR THE PURPOSES OF SECTION 80HHC, EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF TURNOVER. JUST AS INTEREST, COMMISSION, ETC., DO NOT EMANATE FROM THE TURNOVER SO ALSO EXCISE DUTY AND SALES TAX DO NOT EMANATE FROM SUCH TURNOVER. SINCE EXCISE DUTY AND SALES TAX DID NOT INVOLVE ANY SUCH TURNOVER SUCH TAXES HAD TO BE EXCLUDED. COMMISSION, INTEREST, REN T, ETC., DO YIELD PROFITS, BUT THEY DO NOT PARTAKE OF THE CHARACTER OF TURNOVER AND THEREFORE THEY ARE NOT INCLUDIBLE IN THE TOTAL TURNOVER. IF SO, EXCISE D UTY AND SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3). ONE CANNOT INTERPRET THE WORDS TOTAL TURNOVER WIT H REFERENCE TO THE DEFINITION OF THE WORD TURNOVER IN I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 41 OTHER LAWS LIKE THE CENTRAL SALES TAX OR AS DEFINED IN ACCOUNTING PRINCIPLES. EXCISE DUTY AND SALES TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. BY THE COURT : THE PRINCIPAL REASON FOR ENACTING A FORMULA IN SECTION 80HHC OF THE INCOME-TAX ACT, 1961, IS TO DISALLOW A PART OF THE CONCESSION THEREUNDER WHEN THE ENTIRE DEDUCTION CLAIMED CANNOT BE REGARDED AS RELATING TO EXPORTS. THEREFORE, WHIL E INTERPRETING THE WORDS TOTAL TURNOVER IN THE FORM ULA IN SECTION 80HHC ONE HAS TO GIVE A SCHEMATIC INTERPRETATION. THE VARIOUS AMENDMENTS MADE THEREIN SHOW THAT RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, ETC., DO NOT FORM PART OF BUSINESS PROFITS AS THEY HAVE NO NEXUS WITH THE ACTIVITY OF EXPORT. THE AMENDMENTS MADE FROM TIME TO TIME INDICATE THAT THEY BECAME NECESSARY IN ORDE R TO MAKE THE FORMULA WORKABLE. IF SO, EXCISE DUTY AN D SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNO VER UNDER SECTION 80HHC(3) : OTHERWISE THE FORMULA BECOMES UNWORKABLE. DECISIONS OF THE MADRAS HIGH COURT IN CIT V. SUNDARAM CLAYTON LTD. [2006] 281 ITR 425 (MAD) AND CIT V. SRI JAYAJOTHI AND CO. LTD. [2007] 290 IT R 660 (MAD) AFFIRMED. [THE SUPREME COURT MADE IT CLEAR THAT THE REASONING IN THIS CASE IS CONFINED TO THE WORKABILITY OF THE FORMULA IN SECTION 80HHC AS IT STOOD IN THE ASSESSMENT YEAR 1 993-94.] 56. THIS GROUND IN REVENUE APPEALS IS DISMISSED. 57. THE NEXT GROUND IN ITA NOS. 931 AND 932/HYD/05 IS A S FOLLOWS: '6. THE LEARNED CIT(A) ERRED IN ALLOWING THE INTERE ST CLAIM FOR RS. 26,47,050 (A.Y. 2002-03) AND RS. 35,28,126 (A.Y. 2003-04) BY HOLDING THAT INTEREST RELATABLE TO AN ACQUISITION OF CAPITAL ASSET WOULD ALSO BE A PERMISSIBLE DEDUCTION U/S 36(1)(III).' I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 42 58. THE LEARNED AR NARRATED THE FACTS THAT THE ASSESSIN G OFFICER REJECTED THE CLAIM OF THE ASSESSEE IN RESPE CT OF INTEREST EXPENDED FOR ACQUISITION OF THE CAPITAL ASSET FOR T HE PURPOSE OF THE BUSINESS ON THE GROUND THAT INTEREST INCURRED P RIOR TO COMMISSION OF THE ASSET IS TO BE CAPITALISED IN TER MS OF EXPLANATION (8) TO SECTION 43(1) OF THE ACT. THE A MOUNT CLAIMED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2002-03 AT RS. 26,47,050 AND FOR THE ASSESSMENT YEAR 2003-04, RS. 35,28,126. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE PLACIN G RELIANCE ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD., 298 ITR 194 (SC). 59. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. (298 ITR 194) WHEREIN THE APEX COU RT HELD AS UNDER: 'SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961, HA S TO BE READ ON ITS OWN TERMS : IT IS A CODE BY ITSELF. IT MAKES NO DISTINCTION BETWEEN MONEY BORROWED TO ACQUIRE A CAPITAL ASSET OR A REVENUE ASSET. ALL THA T THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORR OW CAPITAL AND THE PURPOSE OF THE BORROWING MUST BE FO R BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE IN THE YEAR OF ACCOUNT. UNLIKE SECTION 37 WHICH EXPRESSLY EXCLUDES AN EXPENSE OF A CAPITAL NATURE, SECTION 36(1)(III) EMPHASISES THE USER OF THE CAPITAL AND N OT THE USER OF THE ASSET WHICH COMES INTO EXISTENCE AS A RESULT OF THE BORROWED CAPITAL. THE LEGISLATURE HAS , THEREFORE, MADE NO DISTINCTION IN SECTION 36(1)(III ) BETWEEN CAPITAL BORROWED FOR A REVENUE PURPOSE AND CAPITAL BORROWED FOR A CAPITAL PURPOSE. AN ASSESSEE IS ENTITLED TO CLAIM INTEREST PAID ON BORROWED CAPITAL PROVIDED THAT THE CAPITAL IS USED FOR BUSINESS PURPOSE IRRESPECTIVE OF WHAT MAY BE THE RESULT OF USING THE CAPITAL WHICH THE ASSESSEE HAS BORROWED. ACTUAL COST OF AN ASSET HAS NO RELEVANC Y IN RELATION TO SECTION 36(1)(III). I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 43 THE PROVISO INSERTED IN SECTION 36(1)(III) BY THE FINANCE ACT, 2003, WITH EFFECT FROM APRIL 1, 2004, WILL OPERATE PROSPECTIVELY. HELD, ACCORDINGLY, THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III) PRIOR TO ITS AMENDMENT BY THE FINANCE ACT, 2003, IN RELATION TO MONEY BORROWED FOR PURCHASE OF MACHINERY EVEN THOUGH THE ASSESSEE HAD NOT USED THE MACHINERY IN THE YEAR OF BORROWING. DECISION OF THE GUJARAT HIGH COURT IN DEPUTY CIT V. CORE HEALTHCARE LTD. [2001] 251 ITR 61 AFFIRMED ON THIS POINT. HELD , ALSO, REMANDING THE MATTERS TO THE HIGH COURT, THAT THE QUESTIONS : (A) WHETHER ADVERTISEMENT EXPENSES INCURRED BY THE ASSESSEE TO CREATE A BRAND IMAGE WITH ENDURING BENEFIT ARE ALLOWABLE AS REVENUE EXPENDITURE, (B) WHETHER THE TRIBUNAL HAD ERRED IN GRANTING DEDUCTION UNDER SECTION 35D REGARDING SHORT-TERM LOAN, IN VIEW OF THE EXPLANATI ON TO SECTION 35D(3) WHICH REFERS ONLY TO LONG-TERM BORROWINGS, AND (C) WHETHER THE TRIBUNAL HAD ERRED IN DIRECTING DEDUCTION UNDER SECTIONS 80HH AND 80-I ON THE MISCELLANEOUS INCOME OF RS. 26,64,113 BEING INCOME ON SALE OF EMPTY CONTAINERS, WERE SUBSTANTIA L QUESTIONS OF LAW AND THE HIGH COURT ERRED IN DISMISSING THE APPLICATION OF THE DEPARTMENT ON THOSE QUESTIONS AND THE HIGH COURT HAD TO DECIDE THEM.' 60. IN VIEW OF THE ABOVE JUDGEMENT OF SUPREME COURT WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE ASSES SEE AND AGAINST THE REVENUE. THIS GROUND OF THE REVENUE IS REJECTED. 61. THE NEXT GROUND IN ITA NOS. 931 & 932/HYD/2005 IS T HAT THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE PROV ISIONS FOR UNASCERTAINED LIABILITIES I.E., PROVISION FOR DIMIN UTION IN VALUE OF INVESTMENTS, PROVISION FOR GRATUITY, PROVISION FOR LEAVE ENCASHMENT AND PROVISION FOR RS. 63,36,246 (A.Y. 20 02-03) AND RS. 1,75,88,677 (A.Y. 2003-04) ATTRACTED THE PROVIS IONS OF CLAUSE (C) OF EXPLANATION TO SEC. 115JB(2) OF THE A CT. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 44 62. THE LEARNED AR SUBMITTED THAT THIS GROUND AUTOMATIC ALLY FAILS IN VIEW OF THE REOPENING OF ASSESSMENTS BEING BAD IN LAW. IN ADDITION TO THIS, HE ALSO SUBMITTED THAT THE ASS ESSING OFFICER DISALLOWED THE FOLLOWING AMOUNTS IN EACH OF A.Y. 20 02-03 & 2003-04 WHILE COMPUTING BOOK PROFITS FOR THE PURPOS ES OF LEVY OF BOOK PROFIT TAX UNDER SEC. 115JB: S. NO. ITEM ASST. YEAR 2002-03 ASST. YEAR 2003-04 1 PROVISION FOR BAD AND DOUBTFUL DEBTS 20,08,352 2 PROVISION FOR GRATUITY 32,66,350 60,86,994 3 PROVISION FOR LEAVE ENCASHMENT 10,50,840 44,61,584 4 PROVISION FOR BONUS 18,76,556 50,31,747 5 PROVISION FOR DIMINUTION IN VALUE OF INVESTMENT 1,42,500 TOTAL 63,36,246 1,75,88,677 63. THE ASSESSEE DEBITED THE ABOVE AMOUNTS IN ITS PROFI T AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH PART 11 AN D PART III OF SCHEDULE VI TO THE COMPANIES ACT, 1956. THE PROVISI ON FOR BONUS IS MADE UNDER THE PAYMENT OF BONUS ACT, WHILE THE GRATUITY AND LEAVE ENCASHMENT LIABILITIES ARE CREAT ED ON THE BASIS OF ACTUARIAL VALUATION AS CERTIFIED BY AN IND EPENDENT PERSON. PROVISION FOR DOUBTFUL DEBTS AND VALUE OF I NVESTMENT ARE SPECIFIC TO CERTAIN ITEMS AND UNDER NO STRETCH COUL D BE CALLED TO BE UNASCERTAINED. THE AO DID NOT DISPUTE ANY OF THI S BUT CONTENDED THAT THE ABOVE AMOUNTS FALL UNDER CLAUSE OF THE EXPLANATION TO SEC. 115JB. HE DISTINGUISHED THE DEC ISION RENDERED BY BOMBAY HIGH COURT IN THE CASE OF CIT V ECHJAY FORGINGS P LTD (2001 )(251 ITR 15). THE CIT (A) DIR ECTED ALLOWANCE OF THE ABOVE MOUNTS BY FOLLOWING THE DECI SION OF BOMBAY HIGH COURT. AS REGARDS LEAVE ENCASHMENT THE CIT(A) DECLARED THAT SINCE IT IS MADE PURSUANT TO THE ACCO UNTING STANDARD - 15 AND QUANTIFIED ON THE BASIS OF ACTUAR IAL SCIENCE THERE ARGUMENT THAT IT IS NOT ASCERTAINED IS THEREF ORE NOT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 45 CORRECT. PROVISION FOR DOUBTFUL DEBTS AND DIMINUTIO N IN VALUE OF INVESTMENT ARE NOT IN RESPECT OF LIABILITIES BUT IN RESPECT OF ASSETS WHICH CANNOT BE ROPED IN UNDER CLAUSE (C) OF EXPLANATION. 64. THE LEARNED DR HAS ARGUED THAT THE PROVISION FOR DO UBTFUL DEBTS OF RS. 20,08,3521 AND PROVISION FOR DIMINUTIO N IN VALUE OF INVESTMENTS OF RS. 142,5001- ARE HIT BY THE RETROSP ECTIVE AMENDMENT TO SEC. 115JB VIDE FINANCE (NO.2)ACT, 200 9 WHEREBY CLAUSE (I) IS INSERTED WITH EFFECT FROM 1-4-2001. E XCEPTING THIS, THE DR CONCEDED THAT THE CLAIM IS SQUARELY COVERED BY THE DECISION OF BOMBAY HIGH COURT IN CIT V ECHJAY FORGI NGS P LTD. (2001)(251 ITR 15). 65. THE BOMBAY HIGH COURT'S DECISION IS RENDERED UNDER SEC. 115J BUT IT HAS EQUAL FORCE FOR THE PURPOSES OF SEC . 115JB AS BOTH ARE PARI MATERIA. THE COURT ALLOWED DEDUCTION OF PROVISION FOR BONUS, GRATUITY AND DOUBTFUL DEBTS FOR COMPUTIN G BOOK PROFITS. DELHI HIGH COURT IN CIT V ILPEA PARAMOUNT (P.) LTD., (2010) (192 TAXMAN 65) HAS PERMITTED DEDUCTION OF GRATUITY LIABILITY FOR COMPUTING THE BOOK PROFITS. THE CO-OR DINATE VISAKHAPATNAM BENCH OF ITA T IN EASTERN POWER DISTRIBUTION CO. LTD. V ACIT (2011)(10 TAXMANN.COM 282) RENDERED ON 14-3- 2011 HAS HELD THAT GRATUITY AND LEAVE ENCASHMENT ARE ASCERTAINED LIABILITIES. THE ASSESSEE THEREFORE PLEADS FOR DISMISSING THE DEPARTMENT GROUNDS AT NO 5 IN ITA NO . 931/05 AND AT NO. 6 IN ITA NO. 932/05 AND CONFIRMING THE CIT (A) ORDER EXCEPT TO THE EXTENT OF PROVISION FOR DOUBTFUL DEBT S OF RS. 20,08,352/- AND DIMINUTION IN INVESTMENTS RS. 1 ,42,500/-. 66. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN VIEW OF THE RETROSPECTIVE AMENDMENT VIDE FINANCE ACT, 2009 WHEREIN THERE IS AN INSERTION OF CLAUSE ( I) WITH I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 46 RETROSPECTIVE AMENDMENT FROM 1.4.2001 WHEREIN THE A MOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN TH E VALUE OF REVENUE ASSETS HAS TO BE ADDED TO THE BOOK PROFIT. IN VIEW OF THIS, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. THE GROUND RAISED BY THE REVENUE IS ALLOWED. 67. THE NEXT GROUND IN ITA NOS. 931 & 932/HYD/2005 IS THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT THE D EPB BENEFITS OF RS. 71,47,521 (A.Y. 2002-03) AND RS. 96,90,979 ( A.Y. 2003- 04) ACCRUED TO THE ASSESSEE COULD NOT BE DEDUCTED F OR COMPUTING EXPORT PROFITS BOTH U/S 80HHC AND CLAUSE (IV) OF EXPLANATION TO SEC. 115JB. 68. THE LEARNED AR SUBMITTED THAT THE ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF BULK DRUGS HAS MADE EXPORTS OF ITS PRODUCTS AND CONSEQUENT TO THE SAME ENTITLED TO DEPB (DUTY ENTITLEMENT PASS BOOK) BENEFITS UNDER FO REIGN TRADE POLICY. THE ENTITLEMENT FOR A.Y. 2002-03 IS R S. 71,47,521 AND FOR A.Y. 2003-04 IS RS. 96,90,979. THE AO NOTED THAT THE DEPB BENEFITS ACCRUE ON EXPORT OF SPECIFIC BULK DRU GS AND A CERTIFICATE IS ISSUED WHICH CAN EITHER BE SOLD IN T HE MARKET TO OTHER EXPORTERS OR CAN BE UTILIZED BY THE COMPANY F OR ITS OWN IMPORTS. IN THE LATTER CASE, THE CUSTOMS DUTY TO TH E EXTENT OF DEPB CERTIFICATE WOULD BE REDUCED. THE AO ALSO NOTE D THAT THE AMOUNT OF BENEFIT SO AVAILED FOR IMPORTS IS CREDITE D TO RAW MATERIALS ACCOUNT. THE AO REJECTED THE ASSESSEE'S C ONTENTION THAT THE BENEFIT IS AN ABATEMENT IN THE COST OF GOO DS AND SHOULD THEREFORE FORM PART OF PROFITS OF THE BUSINESS FOR THE PURPOSES OF DEDUCTION UNDER SEC. 80HHC. AO STATED THAT THE DEPB BENEFIT COMES UNDER THE PURVIEW OF CLAUSE (IIIB) OF SEC. 28 AND THEREFORE 90% THEREOF HAS TO BE EXCLUDED FOR THE PURPOSES OF CLAUSE (BAA) BECAUSE WHETHER THE DEPB BENEFITS ARE SOLD OR UTILI ZED FOR SELF THE CHARACTERISTIC OF THE RECEIPT OF THE NATURE OF AN ASSISTANCE AS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 47 PER CLAUSE (IIIB) OF SEC. 28 REMAINS. THE CIT(A) AL LOWED THE CLAIM OF THE ASSESSEE BY RELYING ON THE DECISION OF DELHI TRIBUNAL IN P&G ENTERPRISES P LTD V DCIT (93 TTJ 150). 69. THE HON'BLE SUPREME COURT RECENTLY IN THE CASE OF TOPMAN EXPORTS V CIT (CIVIL APPEAL NO. 1699 OF 2012 ) RENDERED ON 8-02-2012 WHILE OVERTURNING THE DECISION OF BOMB AY HIGH COURT I CIT V KALPATARU COLOURS AND CHEMICALS (ITA( L) 2887 OF 2009) ADJUDICATED UPON THE NATURE OF DEPB BENEFITS. IN PARAGRAPH 12 OF THE JUDGMENT THE APEX COURT HELD TH AT DEPB IS A KIND OF ASSISTANCE GIVEN BY THE GOVT., OF INDIA T O AN EXPORTER TO PAY CUSTOMS DUTY ON ITS IMPORTS AND IT IS RECEIVABL E ONCE EXPORTS ARE MADE AND AN APPLICATION IS MADE BY THE EXPORTER FOR DEPB. THE COURT THEREFORE HELD THAT DEPB IS 'CASH A SSISTANCE' AND FALLS UNDER CLAUSE (IIIB) OF SEC. 28 EVEN BEFOR E IT IS TRANSFERRED BY THE ASSESSEE. IN THIS CASE, THE COUR T WAS REQUIRED TO OPINE WHETHER THE FACE VALUE AND THE PROFIT REAL IZED FROM SALE OF DEPB IS TO BE ASSESSED IN THE YEAR OF TRANSFER U NDER CLAUSE (IIID) WHICH WOULD DEPRIVE AN EXPORTER WITH OVER RS . 10 CRORE TURNOVER FROM CLAIMING PRO-RATA DEDUCTION IN RESPEC T OF SUCH BENEFITS UNDER THIRD PROVISO UNDER SUB-SECTION (3) OF SEC. 80HHC, UNLESS HE FULFILS CERTAIN CONDITIONS SPECIFI ED THEREIN. AFTER EXAMINING THE ISSUE IN DETAIL, THE COURT WHIL E AGREEING WITH THE VIEW OF THE SPECIAL BENCH OF THE MUMBAI TR IBUNAL IN TOPMAN EXPORTS V ITO (318 ITR 87) (AT)) HELD THAT T HE FACE VALUE WOULD BE ASSESSABLE UNDER 28(IIIB) AND THE PR OFIT UNDER 28(IIID) AND IN CASE THE EXPORTER (HAVING EXPORT TU RNOVER IN EXCESS OF RS 10 CRORES) IS UNABLE TO FULFIL THE CON DITIONS SPECIFIED IN THIRD PROVISO IT IS ONLY THE PROFITS EARNED ON T HE SALE OF DEPB THAT WOULD BE DEPRIVED OF HIGHER PRO-RATA DEDUCTION . THE COURT HELD THAT THE DEPB BENEFITS TO THE EXTENT OF FACE V ALUE SHOULD BE ALLOWED TO THE ASSESSEE IN TERMS OF FIRST PROVIS O UNDER SUB- I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 48 SECTION (3) WITHOUT APPLYING THE CONDITIONS STIPULA TED IN THIRD PROVISO. 70. IT IS SUBMITTED THAT WHILE AT THE FIRST INSTANCE, 9 0% OF THE VALUE OF DEPB BENEFITS WOULD BE REDUCED FROM THE PR OFITS OF THE BUSINESS IN TERMS OF SUB-CLAUSE (1) OF CLAUSE (BAA) THE BENEFIT UNDER SEC. 80HHC WOULD ONCE AGAIN BE RESTORED BACK TO THE ASSESSEE IN TERMS OF THE FIRST PROVISO UNDER SUB-SE CTION (3) OF SEC. 80HHC TO THE EXTENT OF THE 90% VALUE OF SUCH B ENEFITS AS A PROPORTION OF EXPORT TURNOVER/TOTAL TURNOVER. SINCE DEPB IS SELF- UTILIZED BY THE ASSESSEE THE ENHANCEMENT OF DEDUCTI ON UNDER SEC. 80HHC UNDER FIRST PROVISO OF SUB-SECTION (3) S HOULD BE MADE WITHOUT ANY RECOURSE TO THE RIGORS OF CONDITIO NS STIPULATED UNDER THIRD PROVISO. 71. THE AR SUBMITTED THAT THE MATTER MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER TO COMPUTE WITH RESPE CT TO DEPB BENEFITS, THE DEDUCTION THAT IS ALLOWABLE UNDER FIR ST PROVISO OF SUB-SEC (3) AND ENHANCE THE CLAIM U/S. 80HHC. 72. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR OPINION THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF THE SUPREME COURT IN T HE CASE OF TOPMAN EXPORT (SUPRA) WHEREIN THEY HAVE CONFIRMED THE ORDER OF THE TRIBUNAL IN THE CASE OF TOPMAN EXPORTS VS. I TO (318 ITR 87) WHEREIN THE APEX COURT HELD THAT THE FACE VALUE WOULD BE ASSESSABLE UNDER 28(IIIB) AND THE PROFIT UNDER 28(I IID) AND IN CASE THE EXPORTER (HAVING EXPORT TURNOVER IN EXCESS OF RS. 10 CRORES) IS UNABLE TO FULFIL THE CONDITIONS SPECIFIE D IN THIRD PROVISO IT IS ONLY THE PROFITS EARNED ON THE SALE O F DEPB BENEFITS TO THE EXTENT OF FACE VALUE SHOULD BE ALLOWED TO TH E ASSESSEE IN TERMS OF FIRST PROVISO UNDER SUBSECTION (3) WITHOUT APPLYING THE I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 49 CONDITIONS STIPULATED IN THIRD PROVISO. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. REVENUE GROUND IS DISMISSE D. 73. THE NEXT GROUND IN ITA NO. 932/HYD/2005 IS THAT THE LEARNED CIT(A) ERRED IN HOLDING THE DISALLOWANCE OF DEPRECIATION OF RS. 10,40,050 ON THE DEMOLISHED ASSETS DEHORSE T HE PROVISIONS OF SECTION 32(1) R.W.S. 43(6)(C)(I)(B) O F THE ACT. 74. THE LEARNED AR SUBMITTED THAT THE ASSESSEE, DURING THE YEAR, DEMOLISHED CERTAIN ASSETS AT ITS MANUFACTURIN G UNIT BUT DID NOT REDUCE THE WRITTEN DOWN VALUE OF THESE ASSE TS FROM THE BLOCK OF ASSETS BECAUSE IT COULD NOT ASCERTAIN 'MON EYS PAYABLE' IN RESPECT OF THESE ASSETS. THE ASSESSEE CONTENDED THAT IN TERMS OF SUB-CLAUSE (I)(B) OF CLAUSE (C) OF SEC. 43(6) TH E BLOCK OF ASSETS IS REQUIRED TO BE REDUCED ONLY BY THE AMOUNT OF 'MO NEYS PAYABLE' IN RESPECT OF ASSETS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THE PREVIOUS YEAR TOGETHER WITH SC RAP VALUE, IF ANY. THE ASSESSING OFFICER REJECTED THE CLAIM ON TH E GROUND THAT EVEN IN A SITUATION OF 'BLOCK OF ASSETS', THE DEPRE CIATION IS PERMISSIBLE ONLY IF THE TWIN CONDITIONS OF OWNERSHI P AND ACTUAL USER IS SATISFIED. HE, THEREFORE, REDUCED THE ENTI RE WRITTEN DOWN VALUE OF SUCH DEMOLISHED ASSETS FROM THE RELEVANT ' BLOCK OF ASSETS'. THE AMOUNT SO REDUCED BY HIM UNDER THE RE SPECTIVE BLOCKS IS AS UNDER: BUILDINGS RS. 48,38,792 ELECTRICAL INSTALLATIONS RS. 21,96,683 PLANT & MACHINERY RS. 28,097 75. BY SUCH AN ADJUSTMENT HE REDUCED THE DEPRECIATION C LAIM OF THE ASSESSEE BY RS. 10,4O,050. ON APPEAL, THE C IT(A) DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEPRECI ATION AND FOR THIS PURPOSE HE RELIED ON THE JURISDICTIONAL TRIBUN AL'S DECISION IN THE CASE OF NATCO EXPORTS V DCIT (2003) (86 ITD 445) (HYDERABAD). I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 50 76. THE LEARNED DR ARGUED AGAINST THE RELIEF ALLOWED BY THE CIT(A) AND RELIED ON DELHI TRIBUNAL'S DECISION IN G AURAV KHULLAR V ACIT( 2007) (110 TTJ 914) AS WELL AS THE CHENNAI TRIBUNAL DECISION IN THE CASE OF RANE BRAKE LINING LTD V JCI T (2007) (107 TTJ 475). THE ASSESSEE SUBMITS THAT IN BOTH THESE C ASES CITED BY THE DR, THERE IS A TRANSFER OF ASSET FOR A CONSI DERATION BUT THE SAID SALE PRICE HAS NOT BEEN REDUCED BY THOSE A SSESSEES FOR THE PURPOSES OF COMPUTING THE WRITTEN DOWN VALUE OF THE 'BLOCK OF ASSETS'. IT IS SUBMITTED THAT THESE CASES ARE CL EARLY DISTINGUISHABLE ON FACTS. IN THE CASE OF THE PRESEN T ASSESSEE, THERE IS NO TRANSFER OF ASSETS. THE ASSETS OF THE A SSESSEE ARE MERELY DEMOLISHED. CONSEQUENTLY THE ASSESSEE IS UNA BLE TO QUANTIFY / DETERMINE THE SUM OF 'MONEYS PAYABLE' WI TH REGARD TO ASSETS DISCARDED OR DEMOLISHED OR DESTROYED IN TERM S OF THE STIPULATIONS LAID DOWN IN SUB-CLAUSE (I)(B) OF CLAU SE (C) OF SEC. 43(6). 77. ON THE OTHER HAND, THE ASSESSEE RELIED ON THE ORDER OF THE CIT (A) AND THE DECISION OF HYDERABAD BENCH IN NATC O EXPORTS V DCIT (2003) (86 ITD 445). IN THE LATTER CASE, THE A SSESSEE CARRYING ON THE BUSINESS OF FARMING AND TRADING OF SHRIMPS CONSTRUCTED PONDS FOR SHRIMP FARMING ON LEASED LAND S AND HAD INCURRED CERTAIN EXPENDITURE. FOR THE ASSESSMENT YE AR 1996-97, THE ASSESSEE HAD TREATED THE COST OF THOSE PONDS AS 'PLANT' AND CLAIMED DEPRECIATION AT THE RATE OF 25 PER CENT WHI CH WAS ALLOWED BY THE ASSESSING OFFICER. DURING THE ASSESS MENT YEAR 1997-98, THE ASSESSEE HAD GIVEN BACK THE LEASED LAN DS TO THE FARMERS AND HAD, THUS, DISCARDED THE PONDS SO CONST RUCTED WITHOUT ANY CONSIDERATION. THE ASSESSEE CONTINUED T O CLAIM DEPRECIATION ON THE PONDS SO SURRENDERED EVEN THOUG H IT HAD WRITTEN OFF THE SAME IN ITS BOOKS OF ACCOUNT ON THE GROUND THAT THE COST OF THOSE PONDS FORMED PART OF BLOCK OF ASS ETS OF 'PLANT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 51 AND MACHINERY' ON WHICH DEPRECIATION AT THE RATE OF 25 PER CENT HAD ALREADY BEEN ALLOWED AND THAT THE BLOCK OF ASSE TS UNDER THE NEW CONCEPT CONTINUE ESPECIALLY IN VIEW OF THE FACT THAT THE BLOCK CONTAINED OTHER ASSETS AS VEHICLE, MACHINERY, ETC. 78. THE AR SUBMITTED THAT THE HYDERABAD TRIBUNAL IN THE ABOVE CASE, AFTER A DETAILED DISCUSSION HELD THAT I N SO FAR AS DISCARDED ASSETS ARE CONCERNED, THE ADJUSTMENT I.E. REQUIRED TO BE MADE UNDER THE CONCEPT OF 'BLOCK OF ASSETS' FOR THE PURPOSES OF ALLOWING DEPRECIATION IS TO REDUCE THE MONIES RE CEIVABLE CONSEQUENT TO SUCH DISCARDING FROM THE BLOCK. IN TH E CASE OF THE ASSESSEE, AS NO MONEY WHATSOEVER WAS PAYABLE TO HIM ON HANDING OVER THE PONDS CONSTRUCTED ON LEASED LAND T O THE OWNERS OF LAND, THERE CAN BE NO AMOUNT WHATSOEVER T HAT CAN BE REDUCED FROM THE BLOCK OF ASSETS. HENCE, THE BLOCK CONTINUES AT ITS WRITTEN DOWN VALUE. ONCE AN ASSET HAS BEEN INCL UDED IN THE BLOCK, IT LOSES ITS INDIVIDUAL IDENTITY AND WHAT IS RELEVANT IS ONLY THE WDV OF THE BLOCK AND NOTHING ELSE. TO BE CONSIS TENT WITH THIS VIEW, THE ASSESSEE DID NOT CLAIM REVENUE LOSS FOR ASSETS SURRENDERED, NOR SHORT-TERM CAPITAL LOSS UNDER SECT ION 50(2). ACCORDINGLY IT ALLOWED THE CLAIM OF THE ASSESSEE FO R DEPRECIATION IN RESPECT OF DISCARDED ASSETS FOR WHICH 'MONEYS PAYABLE' CANNOT BE ASCERTAINED. 79. THE AR SUBMITTED THAT SINCE THE CASES CITED BY THE DR ARE CLEARLY DISTINGUISHABLE AND THE CASE' OF THE ASSESS EE IS ON ALL FOURS WITH THAT OF THE CASE BEFORE THE HON'BLE HYDE RABAD BENCH IN NATCO EXPORTS, THE ASSESSEE PLEADS THAT THE GROU ND NO. 2 OF THE DEPARTMENT IN ITA NO. 932/05 BE DISMISSED AND THE ORDER OF THE CIT(A) IN THIS BEHALF BE CONFIRMED. 80. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A) AN D ALSO RELIED ON THE JUDGMENT OF CALCUTTA HIGH COURT IN TH E CASE OF CIT I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 52 VS. ORIENTAL COAL CO. LTD. (206 ITR 682 ) WHEREIN HELD THAT THE WHERE THE FACTORY OF THE ASSESSEE REMAINED CLOSED T HROUGHOUT THE PREVIOUS YEAR, THE PLANT AND MACHINERY HAD NOT BEEN ACTUALLY USED FOR THE PURPOSE OF BUSINESS, THE DEPR ECIATION U/S 32 OF THE ACT WAS NOT ALLOWABLE UNDER SUCH PLANT AN D MACHINERY. FURTHER, HE RELIED ON THE JUDGMENT OF T HE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN CHEMICAL WORKS LTD. VS. CIT (124 ITR 561) FOR THE SAME PROPOSITION. 81. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF CO-ORDINATE BENCH IN THE CASE OF NATCO EXPORTS VS. DCIT (86 ITD 445) WHEREIN HELD THAT INSOFAR AS DISCARDED ASSETS ARE CONCERNED, THE ADJU STMENT I.E. REQUIRED TO BE MADE UNDER THE CONCEPT OF 'BLOCK OF ASSETS' FOR THE PURPOSES OF ALLOWING DEPRECIATION IS TO REDUCE THE MONIES RECEIVABLE CONSEQUENT TO SUCH DISCARDING FROM THE B LOCK. IN THE CASE OF THE ASSESSEE, AS NO MONEY WHATSOEVER WAS PA YABLE TO HIM ON HANDING OVER THE PONDS CONSTRUCTED ON LEASED LAND TO THE OWNERS OF LAND, THERE CAN BE NO AMOUNT WHATSOEV ER THAT CAN BE REDUCED FROM THE BLOCK OF ASSETS. HENCE, THE BLO CK CONTINUES AT ITS WRITTEN DOWN VALUE. ONCE AN ASSET HAS BEEN I NCLUDED IN THE BLOCK, IT LOSES ITS INDIVIDUAL IDENTITY AND WHA T IS RELEVANT IS ONLY THE WDV OF THE BLOCK AND NOTHING ELSE. IN VIE W OF THE ABOVE ORDER THE TRIBUNAL WE ARE INCLINED TO DISMISS THE GROUND TAKEN BY THE REVENUE. 82. THE NEXT GROUND IN REVENUE APPEAL IN ITA NO. 932/HYD/2005 IS THAT THE LEARNED CIT(A) HAS ERRED I N DELETING THE ADDITION OF IMPORTED ENTITLEMENTS FOR RS. 1,76, 10,180 FOR A.Y. 2003-04 BY HOLDING THAT THE REAL INCOME IS TAX ABLE IN SPITE OF THE FACT THAT THE ASSESSEE COMPANY FOLLOWS MERCA NTILE SYSTEM OF ACCOUNTING AND THAT THE ASSESSEE HAS BEEN CONSIS TENTLY I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 53 ADMITTING THE IMPORTED ENTITLEMENTS AS INCOMES TILL THE A.Y. 2002-03. 83. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS ENGAG ED IN THE BUSINESS OF MANUFACTURE AND SALE OF BULK DRUGS (ACTIVE PHARMACEUTICAL INGREDIENTS) AND DURING THE COURSE O F ITS BUSINESS IT EXPORTS ITS PRODUCTS OUT OF INDIA. FOR THIS PURPOSE, IT SOMETIMES IMPORTS RAW MATERIALS FROM OUTSIDE INDIA. THE COMPANY IS REQUIRED TO PAY CUSTOMS DUTY ON ITS IMPO RTS BUT IN TERMS OF THE FOREIGN TRADE POLICY OF THE GOVT., OF INDIA, THE COMPANY CAN AVAIL CUSTOMS DUTY EXEMPTION UNDER 'ADV ANCE LICENSE SCHEME' ON INPUTS / RAW MATERIALS IMPORTED FROM OUTSIDE INDIA WHICH ARE UTILIZED IN MANUFACTURE OF EXPORTED GOODS. 84. THE AR SUBMITTED THAT THE ADVANCE LICENSE SCHEME IS APPLICABLE ONLY IN RESPECT OF RAW MATERIALS USED FO R SPECIFIC GOODS EXPORTED. A COMPANY IS NOT PERMITTED TO IMPOR T RAW MATERIALS FOR PRODUCT 'B' WHEN EXPORTS ARE OF PRODU CT 'A'. INTERNAL SWAPPING OF RAW MATERIAL PRODUCTS IS ALSO NOT PERMITTED. SIMILARLY THE ENTITLEMENT CANNOT BE TRAD ED IN THE MARKET FOR MONEY OR MONEY'S WORTH. IT IS ONLY AN AC TUAL USER LICENSE TO IMPORT SPECIFIED RAW MATERIAL INPUTS AGA INST THE LICENSE. THE ENTITLEMENT LAPSES BUT CANNOT BE TRADE D OR SOLD IN THE MARKET FOR A PROFIT. UNDER THE ADVANCE LICENSE SCHEME, THERE IS NO DUTY DRAW BACK OR CASH ASSISTANCE WHICH THE GOVERNMENT WILL PAY TO THE EXPORTER. UNLIKE DEPB SC HEME, THE LICENSE IS ALSO NOT TRADABLE. THE ADVANCE LICENSE S CHEME IS AN ACTUAL USER SCHEME AND WOULD LAPSE IF THE IMPORTS A RE NOT AVAILED. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 54 85. ACCORDING TO AR, UNDER THE ADVANCE LICENSE SCHEME T HE EXPORTS CAN PRECEDE THE IMPORTS OR VICE VERSA. UNDE R EACH OF THE TWO CASES, THE ENTITLEMENT OR OBLIGATION IS AS UNDE R: (A) IF THE ENTITLEMENT IS AWARDED AGAINST AN EXPORT ALR EADY MADE, THE COMPANY SHOULD IMPORT BEFORE THE LICENSE EXPIRES. I N THE INTERREGNUM PERIOD, SEVERAL CONTINGENCIES CAN ARISE, WHICH IN T HE END MAY RESULT IN NOT IMPORTING THE SPECIFIED INPUT THUS DEPRIVING TH E MONETARY VALUE OF THE ENTITLEMENT. FOR INSTANCE IF, THE DOMESTIC PRICES FOR THE SPECIFIC INPUT FALL DUE TO SLUMP IN DEMAND, OR THE INTERNATIONAL PRICES FOR THE SPECIFIC INPUT EXC EED THE DOMESTIC PRICE, OR THE GOVT., TRADE POLICY MAY ALLOW IMPORT AT A LOWER DUTY, OR ALTERNATE SUPPLY SOURCES CAN DEVELOP IN INDIA, OR THE DEMAND FOR END PRODUCT CAN DISAPPEAR, IN ALL THE ABOVE CASES, THERE IS NO LONGER A NEED T O IMPORT. THE BUSINESSMAN WOULD IN THE ABOVE CASES, FOREGO THE RI GHT TO IMPORT AND INSTEAD MAXIMIZE HIS RETURNS BY BUYING THE RAW MATE RIALS LOCALLY OR ALTERNATIVELY IF THERE IS NO DEMAND FOR THE PRODUCT , DISCONTINUE ITS MANUFACTURE. THE ENTITLEMENT THEREFORE, IS VERY TRA NSIENT AND MAYOR MAY NOT CRYSTALLIZE. THE CERTAINNESS OF THE ENTITLE MENT CAN BE ASCERTAINED / CRYSTALLIZED ONLY AFTER THE ACTUAL IM PORT OF THE CONCERNED INPUTS. TILL SUCH TIME THAT THE ACTUAL IMPORT IS MA DE, THE BENEFIT OF THE ENTITLEMENT IS ONLY CONTINGENT AND IS IN THE REALM OF FUTURE. SINCE THE BENEFIT IS DEPENDENT ON THE HAPPENING OF AN ACTUAL IMPORT WHICH IS TOTALLY DEPENDENT ON THE VAGARIES OF BUSINESS, THE SAME IS CONTINGENT AND IS NOT TO BE RECOGNIZED. (B) IN CASE, THE LICENSE IS OBTAINED FOR IMPORT OF INPUTS PRIOR TO ACTUAL EXPORT OF PRODUCT, THERE IS NO ENTITLEMENT, BUT ONL Y AN OBLIGATION TO EXPORT WHICH IS FIXED AND IF EXPORTS ARE NOT CARRIE D OUT WITHIN THE GIVEN TIME, THE COMPANY IS REQUIRED TO MAKE PAYMENT OF CU STOMS DUTY I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 55 TOGETHER WITH INTEREST. HERE TOO, THE OBLIGATION HA S NOT CRYSTALLIZED UNTIL AFTER THE DATE FOR SHIPMENT OF EXPORTS HAS EXPIRED. TILL SUCH TIME, THE OBLIGATION IS CONTINGENT AND IS DEPENDENT ON THE VA GARIES OF BUSINESS. FURTHER UNDER SEC. 43B OF THE ACT, CUSTOMS DUTY PRO VISION IS ALLOWABLE ONLY IN THE YEAR OF PAYMENT. 86. HE SUBMITTED THAT SINCE THE ENTITLEMENT AND OBLIGAT ION IS BOTH CONTINGENT UNTIL AFTER THE ACTUAL IMPORT OF IN PUTS / EXPORT OF GOODS, THE COMPANY HAS DECIDED NOT TO RECOGNIZE THE SAME IN ITS BOOKS FROM ASST. YEAR 2003-04 WHICH PRACTICE HA S BEEN CONSISTENTLY FOLLOWED IN THE SUBSEQUENT ASSESSMENT YEARS. THIS METHOD DOES NOT DISTURB THE PROFITS OF THE ASSESSEE BECAUSE IN THE YEAR OF AVAILING THE ENTITLEMENT BY ACTUAL IMPO RT OF GOODS, THE DUTY BENEFIT WOULD ACCRUE WHICH WOULD INCREASE THE PROFIT. SIMILARLY IF AN OBLIGATION CRYSTALLIZES FOR NON-EXP ORT OF GOODS WITHIN THE STIPULATED TIME, THE DUTY PAYMENT WOULD BE ACCOUNTED ON CASH BASIS UNDER SEC. 43B. THEREFORE, THERE IS NO DISTORTION OF PROFITS. CONSEQUENTLY, IT IS SUBMITTE D THAT THE METHOD FOLLOWED BY THE ASSESSEE IN NOT ACCOUNTING F OR CONTINGENT BENEFITS AND OBLIGATIONS IS IN LINE WITH THE PROVISIONS OF INCOME TAX ACT, 1961 FOR CHARGING REAL INCOME TO TAX AS AGAINST NOTIONAL INCOME. THE INCOME TAX DEPARTMENT HAS ACCEPTED THE SAID TREATMENT IN ALL THE SUBSEQUENT Y EARS AND THERE IS NO DISPUTE IN THIS REGARD. 87. THE AR FURTHER SUBMITTED THAT UNDER THE INCOME TAX ACT, WHAT IS TAXED IS A REAL INCOME. IF AN INCOME DOES N OT ARISE OR A DEBT IS NOT CREATED IN FAVOUR OF THE ASSESSEE, THEN NO INCOME CAN BE RECOGNIZED EVEN UNDER MERCANTILE METHOD OF A CCOUNTING. IN THE PRESENT CASE, NO DEBT IS CREATED IN FAVOUR O F THE COMPANY. CONTRASTING ADVANCE LICENSE SCHEME (AS APPLICABLE T O ASSESSEE) WITH THE DEPB SCHEME, IT IS SUBMITTED THAT IN THE L ATTER, THE GOVT. ISSUES A TRADABLE PAPER WHICH CAN BE USED ACR OSS ALL I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 56 MATERIALS AS WELL AS TRADED FOR PROFIT. THE ASSESSE E HAS NO DISPUTE WITH REGARD TO DEPB BENEFITS, WHICH IT HAS ACCRUED IN THE BOOKS OF ACCOUNT AND OFFERED TO TAX (PLEASE REF ER TO ANNEXURE 12 - SUPRA). WHAT THE ASSESSEE HAS NOW DONE IN THE RELEVANT PREVIOUS YEAR IS THAT IT HAS DECIDED TO FOLLOW THE REAL INCOME BASIS AND THEREFORE, IT HAS NOT RECOGNIZED THE IMPO RT ENTITLEMENTS ARISING FROM ADVANCE LICENSE SCHEME. I T IS SO, BECAUSE THE ENTITLEMENTS DO NOT 'BESTOW ANY RIGHT O N THE ASSESSEE AS THEY ARE CONTINGENT AND DEPENDENT ON WH ETHER THE ASSESSEE IMPORTS THE GOODS OR NOT. UNLIKE DEPB, THE ENTITLEMENTS ARE NEITHER TRADABLE NOR ENFORCEABLE ( EXCEPT IN CASE OF OBLIGATION). IF THERE IS NO IMPORT, THEN THE ENT ITLEMENT LAPSES AND THE BENEFIT IS NOT AVAILED. 88. HE SUBMITTED THAT THE ADVANCE LICENSE SCHEME IS NOT COVERED BY ANY OF THE PROVISIONS OF CLAUSE (IIIA) ( IIIB) AND (IIIC) OF SEC. 28 OF THE ACT. SEC. 28(IIIA) RELATES TO PROFIT ON SALE OF A LICENSE. HOWEVER, THE LICENSE UNDER ADVANCE LICENSE SCHEME IS NOT SALEABLE. SEC. 28(IIIC) RELATES TO DUTY DRAWBAC K A DUTY REMISSION SCHEME WHILE THE PRESENT ISSUE RELATES TO ADVANCE LICENSE SCHEME. IN DUTY DRAWBACK, THE EXPORTER IS R EFUNDED THE DUTY IT PAID. ON THE CONTRARY, IN THE ADVANCE LICEN SE SCHEME THERE IS NO REFUND BUT A MERE ENTITLEMENT TO IMPORT IF IT SUITS THE BUSINESS. THEREFORE, THE PROVISIONS OF SEC 28(I IIA) AND 28(IIIC) ARE NOT APPLICABLE. SEC. 28(IIIB) RELATES TO CASH A SSISTANCE RECEIVED OR RECEIVABLE BY ANY PERSON AGAINST EXPORT S. THE LICENSE UNDER ADVANCE LICENSE SCHEME DOES NOT ENTITLE THE C OMPANY TO RECEIVE ANY MONEY OR MONEY'S WORTH. IT MERELY ALLOW S IT TO IMPORT GOODS DUTY FREE. IT THEREFORE, DOES NOT FALL UNDER SEC. 28(IIIB) AS CASH ASSISTANCE. THE DEPB BENEFITS WHIC H THE ASSESSEE RECEIVES UNDER THE DUTY REMISSION SCHEME A RE ALREADY ACCOUNTED AS BENEFITS RECEIVABLE IN THE BOOKS OF AC COUNT SOON AFTER THE DEPB CERTIFICATES ARE ISSUED BY THE CONCE RNED I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 57 AUTHORITY. IN TERMS OF CHAPTER 4 OF THE FOREIGN TRA DE POLICY, WHILE ADVANCE LICENSE SCHEME FALLS UNDER DUTY EXEMP TION SCHEME, THE DEPB FALLS UNDER DUTY REMISSION SCHEME. THE DEPB BENEFITS ARE TRADABLE WHILE THE IMPORT ENTITLE MENT UNDER ADVANCE LICENSE SCHEME ARE USER SPECIFIC AND DO NOT PERMIT ANY TRANSFER OR SALE. IN THE RECENT CASE OF TOPMAN EXPORTS V CIT, IN CIVIL APPEAL NO. 1699 RENDERED ON 8-02-2012 , THE HON'BLE SUPREME COURT HAS HELD THAT DEPB BENEFITS A RE IN THE NATURE OF CASH ASSISTANCE UNDER 28(IIIB). THE ASSES SEE HAS BEEN FOLLOWING THE SYSTEM APPROVED BY SUPREME COURT IN R ESPECT OF ITS DEPB BENEFITS. SINCE THE ENTITLEMENTS UNDER ADV ANCE LICENSE SCHEME ARE NOT TRADABLE / TRANSFERABLE AND USER SPECIFIC AND THE AVAILMENT IS CONTINGENT UPON ACTUA L IMPORT OF THE INPUTS AND IF THERE IS NO IMPORT, THE ENTITLEME NT EVAPORATES. ON THESE FACTS, THE ASSESSEE CONTENDS THAT THERE IS NO REAL INCOME SINCE NO DEBT HAS BEEN CREATED IN FAVOUR OF THE ASSESSEE UNLIKE A DEPB CERTIFICATE. 89. THE AR CONTENDED THAT THE BENEFITS CANNOT ACCRUE UN DER THE SCHEME UNTIL THE ACTUAL IMPORT OF RAW MATERIALS . IF THE SAME ARE ACCOUNTED PRIOR TO THAT DATE, AS THE CASE IN EA RLIER PERIODS, TAX IS NOT BEING LEVIED ON REAL INCOME BUT ON CONTI NGENT INCOME. AS AT THE YEAR END, THE ENTITLEMENTS DID NOT ACCRUE TO THE ASSESSEE SINCE NO DEBT IS CREATED IN FAVOUR OF THE ASSESSEE TO TREAT THE AMOUNT AS INCOME. ACCRUAL IN THE LEGAL SE NSE OCCURS ONLY WHEN A RIGHT TO RECEIVE THE AMOUNT HAD ARISEN DURING THE YEAR. WHEN SUCH A RIGHT IS NOT PRESENT, THE AMOUNT HAS NOT ACCRUED. THEREFORE, EVEN UNDER MERCANTILE METHOD OF ACCOUNTING THE AMOUNT WOULD NOT ACCRUE FOR IT TO BE TAXED AS I NCOME. IN THIS CONNECTION, THE ASSESSEE RELIES ON THE DECISIO NS OF HON. SUPREME COURT IN THE CASES OF GODHRA ELECTRICITY CO . LTD. (1997) (225 ITR 746). I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 58 90. THE AR SUBMITTED THAT THE APEX COURT IN THE LATER C ASE HELD THAT THE QUESTION WHETHER THERE WAS ACCRUAL OF INCOME HAS TO BE CONSIDERED BY TAKING THE PROBABILITY OR IMPRO BABILITY OF REALIZATION IN A REALISTIC MANNER. IN THIS CASE, TH E ASSESSEE WAS AN ELECTRICITY SUPPLY COMPANY. IT ENHANCED THE RATE S OF POWER BY A CERTAIN DATE. THE STATE GOVT. DIRECTED NOT TO REC OVER THE ENHANCED RATES FOR 6 MONTHS. BEFORE THE EXPIRY OF T HE SAID SIX MONTHS THE CONSUMER CHALLENGED THE ENHANCEMENT BY F ILING A SUIT. BEFORE THE SUIT WAS DECIDED THE BUSINESS WAS TAKEN OVER BY THE GOVERNMENT. THE SUPREME COURT HELD THAT NO REAL INCOME ON ACCOUNT OF ENHANCEMENT OF RATES HAD ACCRUED TO T HE ASSESSEE. THE ENTRIES IN THE BOOKS OF ACCOUNTS REPR ESENTED ONLY HYPOTHETICAL INCOME AND THE IMPUGNED AMOUNTS AS BRO UGHT TO TAX BY THE INCOME-TAX OFFICER DID NOT REPRESENT THE INCOME WHICH HAD REALLY ACCRUED TO THE ASSESSEE-COMPANY DU RING THE RELEVANT PREVIOUS YEARS. 91. FURTHER AR SUBMITTED THAT IMPORT ENTITLEMENT DOES N OT CREATE A DEBT IN FAVOUR OF THE COMPANY. THE COMPANY HAS NO RIGHT TO SUE THE GOVERNMENT OR ANY PARTY FOR CLAIMI NG THE BENEFIT. THE BENEFIT IS MERELY A NOTIONAL AND HYPOT HETICAL ENTRY WHICH CRYSTALLIZES ONLY IF IMPORTS ARE MADE. SINCE ON THE DATE OF PREPARING THE FINAL ACCOUNTS, SUCH ENTITLEMENTS DO NOT CREATE ANY RIGHT IN FAVOUR OF THE COMPANY, THE RESULTANT B ENEFITS BEING NOTIONAL ARE IGNORED. THE APEX COURT IN UNITED COMM ERCIAL BANK V CIT (1999)(240 ITR 355) AGREED THAT THE CONC EPT OF REAL INCOME SHOULD BE APPLIED TO DETERMINE WHETHER INCOM E IS REAL OR NOT FOR THE PURPOSES OF TAXATION AND ONLY TAX RE AL INCOME. THE ASSESSING OFFICER DID NOT DISPUTE THE FACT THAT THE ENTITLEMENT IS CONTINGENT. HE MERELY ALLUDED TO THE FACT OF EXPORT S HAVING BEEN MADE BUT DID NOT APPRECIATE THE OTHER LIMB I.E., WH ETHER THE ASSESSEE HAS IMPORTED THE INPUTS DURING THE PREVIOU S YEAR. UNTIL THE TIME THE INPUTS ARE IMPORTED, THE ASSESSE E SUBMITS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 59 THAT THE ENTITLEMENT IS MERELY NOTIONAL AND ON PAPE R. THE AO'S CONTENTION THAT IT HAS ACCRUED ON EXPORT IS THEREFO RE, TOTALLY INCORRECT AND FAR FROM THE TRUTH WITHOUT APPRECIATI ON OF THE GOVERNMENT'S SCHEME IN THIS REGARD. THE AO HAS NO W HERE DISPUTED THAT THE LICENSE IS ONLY TO THE ACTUAL USE R AND IT IS NOT TRADABLE OR INTER-CHANGEABLE. 92. ACCORDING TO AR, THE ASSESSEE CONTINUES TO FOLLOW MERCANTILE METHOD OF ACCOUNTING IN RESPECT OF ACCOU NTING FOR IMPORT ENTITLEMENTS. WHAT IT HAS DONE MERELY IS THA T AS AGAINST THE NOTIONAL ENTRIES PASSED BY IT IN ITS BOOKS, IT HAS CHOSEN TO RECOGNIZE THE BENEFITS ONLY WHEN THEY ACCRUE. IT SU BMITS THAT THE ENTITLEMENTS ACCRUE AT THE TIME OF IMPORT OF RA W MATERIAL AND NOT EARLIER. CONSEQUENTLY, THE IMPORT ENTITLEME NTS ARISING FROM ADVANCE LICENSING SCHEME ARE ACCRUED IN THE BO OKS OF ACCOUNT ON IMPORT OF RAW MATERIALS AT THE TIME OF A CTUAL PAYMENT OF DUTY. THE ASSESSEE SUBMITS THAT FOLLOWIN G THE JUDICIAL PRONOUNCEMENTS OF THE APEX COURT THERE IS NO ACCRUAL OF INCOME PRIOR TO ACTUAL IMPORT OF THESE RAW MATERIAL S. THE EARLIER ACCOUNTING WAS NOTIONAL AND THE SAME IS SOUGHT TO B E CHANGED. IN THE TRUE SENSE, IT IS NOT A CHANGE IN METHOD OF ACCOUNTING BUT TO BRING IN THE CORRECT AND REAL PROFITS TO TAX. CO NSEQUENTLY, THE ASSESSEE DID NOT INCLUDE AN ESTIMATED VALUE OF RS.1 76,1 0,180 TOWARDS THE IMPORT ENTITLEMENTS IT IS ENTITLED UNDE R ADVANCE LICENSE SCHEME, IF IMPORTS ARE MADE IN THE SUBSEQUE NT YEARS, AS A RECEIVABLE AMOUNT WHILE FINALIZING THE ACCOUNT S FOR THE YEAR ENDED 31 ST MARCH 2003. THE HON'BLE CIT(A) HAS, AFTER A DETAIL ED EXAMINATION OF THE CASE, AND AFTER OBTAINING FURTHE R INFORMATION FROM THE ASSESSEE, HELD THAT THE IMPORT ENTITLEMENT S ARE CONTINGENT AND ACCRUE ONLY IN THE YEAR OF ACTUAL IM PORT OF RAW MATERIALS. HE THEREFORE HELD THAT EVEN UNDER MERCAN TILE SYSTEM, NO INCOME CAN ACCRUE UNTIL AN ENFORCEABLE CLAIM / D EBT IS CREATED. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 60 93. THE LEARNED DR DURING THE COURSE OF THE HEARING D ID NOT DISPUTE THE ABOVE FACTS. HE MERELY CONTENDED THAT A DVANCE LICENSE SCHEME IS SAME AS DEPB. HE HOWEVER, DID NOT APPRECIATE THE DIFFERENCES BETWEEN THE TWO. THE ASS ESSEE INVITES THE KIND ATTENTION OF THE BENCH TO THE FACT THAT TH E OEPB IS A TRADABLE CERTIFICATE AND ISSUED AFTER THE EXPORT WH ICH CAN BE SOLD AND MONEY ENCASHED BY THE EXPORTER. BUT THAT I S NOT THE CASE WITH THE ADVANCE LICENSE SCHEME. HERE THE ENTI TLEMENT IS AFTER EXPORT BUT THE BENEFIT IS SECURED ONLY IF THE IMPORT IS MADE. THE ASSESSEE SUBMITS THAT THE BENEFIT ACCRUES ONLY IN THE YEAR OF IMPORT AND NOT EARLIER. SO ACCOUNTING THE B ENEFIT ON THE BASIS OF EXPORT IS ONLY ADDRESSING ONE LIMB AND IGN ORING THE OTHER. EVEN UNDER MERCANTILE METHOD THE ENTITLEMENT IS TO BE ACCOUNTED ONLY ON ACTUAL IMPORT AND NOT BEFORE. TIL L SUCH TIME THE IMPORT TAKES PLACE THE ENTITLEMENT IS ONLY NOTI ONAL AND CONTINGENT. 94. WITHOUT PREJUDICE TO OUR ARGUMENTS THAT THERE IS NO CHANGE IN THE METHOD OF ACCOUNTING BUT ONLY A CHANG E TO AFFORD ASSESSMENT OF TAXES ON THE TRUE AND REAL INCOME, TH E AR SUBMITTED AS FOLLOWS: (A) THE COMPANY HAS DURING THE ASSESSMENT YEAR 20 03-04 RELEVANT TO ACCOUNTING YEAR 2002-03 CHANGED THE MET HOD OF ACCOUNTING FOR IMPORT ENTITLEMENTS FOLLOWING THE REAL INCOME BASIS OF ACCOUNTING AND CONSEQUENTLY ACCOUNT ING THE IMPORT ENTITLEMENTS ONLY IN THE YEAR OF ACTUAL IMPORT OF INPUTS FOR WHICH LOWER CUSTOMS TARIFF IS APPLICA BLE. SIMILARLY THE OBLIGATION IS ACCOUNTED ONLY IN CASES WHERE CUSTOMS DUTY IS PAID IN TERMS OF SEC. 438 OF THE AC T. THIS CHANGE ACCOUNTING TREATMENT HAS BEEN MENTIONED IN N OTE NO. 14 OF SCHEDULE 3.01 RELATING TO NOTES ON ACCOUN TS IS I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 61 ALSO REFERRED TO IN TAX AUDIT REPORT VIDE CLAUSE 11 (B) & (C). THE REASON FOR CHANGE IS DUE TO FACT THAT THE IMPOR T ENTITLEMENTS ACCRUE ONLY WHEN THE SAME IS UTILIZED FOR THE PROCUREMENT OF THE SPECIFIED INPUTS. IF THE REQUIRE D INPUTS ARE NOT PROCURED THEN SUCH IMPORT ENTITLEMENTS CEAS E TO EXIST. IT IS TO BE NOTED THAT IMPORT ENTITLEMENTS I S A CONTINGENT ASSET WHICH CAN ACCRUE ONLY WHEN THE SAM E IS BEEN UTILIZED. (B) IT IS SUBMITTED THAT AN ASSESSEE IS ENTITLED TO CHANGE THE METHOD OF ACCOUNTING PROVIDED THE SAME IS FOLLOWED CONSISTENTLY AND IS BONA FIDE. IT IS SUBMITTED THAT THE ASSESSING OFFICER DID NOT MAKE ANY ADVERSE FINDING IN THIS BEHALF. THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE REVISED BASIS WITH REGARD TO ACCOUNTING FOR ENTITLEMENTS UN DER ADVANCE LICENSE SCHEME IN THE SUBSEQUENT YEARS IN T ERMS OF THE ASSESSMENT RECORD. (C) THE CHANGE IS BONA FIDE SINCE THE EARLIER SYS TEM WAS INEFFICIENT AND CONSIDERED CONTINGENT BENEFITS IN R ESPECT OF WHICH THE ASSESSEE IS UNABLE TO LEGALLY ENFORCE THE DEBT. THE BENEFIT WOULD LAPSE IF THE IMPORT OF RAW MATERI ALS DOES NOT TAKE PLACE. THE REASONS FOR NOT IMPORTING COULD BE SEVERAL LIKE (A) PHASING OUT OF THE END PRODUCT DUE TO CHANGE IN DEMAND (B) LOWER DOMESTIC PRICES (C) INFE RIOR QUALITY (D) FAVOURABLE TERMS OF SUPPLY AND CREDIT. SINCE THESE ARE ALL RELEVANT AND IMPORTANT FACTORS CONSID ERED BY A BUSINESSMAN AT THE TIME OF ACTUAL IMPORT, THE IMP ORT ENTITLEMENT, MANY A TIME REMAINS UNUTILIZED AND ALL OWED TO LAPSE. CONSEQUENTLY, THE ASSESSEE DECIDED NOT TO FOLLOW THIS BASIS FOR ACCOUNTING OF IMPORT ENTITLEMENTS UN DER ADVANCE LICENSE AND CHOSE TO ACCOUNT FOR THE BENEFI T ONLY WHEN ACTUAL IMPORTS ARE MADE AS ABATEMENT IN COST O F I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 62 IMPORT DUTY. THE PRESENT METHOD RECOGNIZES THE EXPE NSE IN THE YEAR OF INCURRENCE WITHOUT NOTIONAL ENTRIES. HENCE THIS METHOD IS BONA FIDE AND FOLLOWS THE CONCEPT OF REAL INCOME, ACCRUING AMOUNTS THAT ARE LEGALLY DUE TO TH E ASSESSEE. 95. THE AR RELIED ON THE RECENT DECISION OF HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT V HP STATE CI VIL SUPPLIES CORPORATION LTD (2009)(307 ITR 102) WHERE IN IT PER MITTED THE CHANGE OF STOCK VALUATION FROM FIFO METHOD TO AVERA GE COST METHOD ON THE GROUND OF PRACTICAL DIFFICULTIES FACE D. THE COURT SAID THAT THERE IS NO LEGAL BAR FOR CHANGE IN THE M ETHOD OF ACCOUNTING AND IF ANY TEMPORARY DIP RESULTS IN TAXA BLE INCOME CONSEQUENT TO THE SAME, THE SAME IS MADE GOOD IN TH E SUBSEQUENT YEARS. THE COURT THEREFORE ACCEPTED THE CHANGE IN METHOD OF ACCOUNTING AS BONA FIDE. 96. THE LEARNED AR SUBMITTED THAT SINCE THE CASE RELI ED UPON BY THE DR IS CLEARLY DISTINGUISHABLE AS BEING NOT RELEVANT FOR THE PRESENT ISSUE, AND THE ASSESSEE'S CASE FOR ASSESSMENT ON REAL INCOME IS BASED ON THE HON'BLE SUPREME COURT'S DECISIONS, IT IS PLEADED THAT THE GROUND NO. 3 OF THE DEPARTME NT IN ITA NO. 932/05 BE DISMISSED AND THE ORDER OF THE CIT(A) IN THIS BEHALF BE CONFIRMED. 97. THE LEARNED DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. 98. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. WE ARE AGREEING WITH THE FINDINGS OF TH E CIT(A) THAT THE IMPORT ENTITLEMENTS ARE CONTINGENT IN NATURE AN D ACCRUE ONLY IN THE YEAR OF ACTUAL IMPORT OF RAW MATERIALS AND REAL INCOME TO BE TAXED EVEN THOUGH IN BOOK KEEPING, AN ENTRY IS MADE ABOUT HYPOTHETICAL INCOME WHICH DOESNT MATERI ALIZE. I.T.A. NO. 835/HYD/2005 & ORS M/S. MATRIX LABORATORIES LTD. ======================= 63 THIS VIEW OURS FORTIFIED BY THE JUDGEMENT OF SUPREM E COURT IN THE CASE OF GODHRA ELECTRICAL CO. LTD. VS. CIT (225 ITR 746) (SC). ACCORDINGLY, WE REJECT THE GROUND TAKEN BY THE REVE NUE. THIS GROUND IN ITA NO. 932/HYD/2005 IS DISMISSED. 99. IN THE RESULT ASSESSEE APPEALS IN ITA NO. 835, 836 & 837/HYD/2005 ARE PARTLY ALLOWED, ITA NOS. 938 & 939/HYD/2010 ARE ALLOWED, DEPARTMENTAL APPEALS IN ITA NOS. 895 & 896/HYD/2005 ARE DISMISSED, 930/HYD/2005 IS P ARTLY ALLOWED FOR STATISTICAL PURPOSE, ITA NO.931 & 932/H YD/2005 ARE PARTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND JULY, 2012. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 2 ND JULY, 2012. COPY FORWARDED TO: 1. M/S. MATRIX LABORATORIES LTD., 1-1-151/1, IV FLO OR, SAIRAM TOWER, ALEXANDER ROAD, SECUNDERABAD-3. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2(2), AAYAKAR BHAVAN, HYDERABAD. 3. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 16 (2), AAYAKAR BHAVAN, HYDERABAD. 4. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-16( 2), HYDERABAD. 5. THE CIT(A)-III, HYDERABAD. 6. THE CIT(A)-V, HYDERABAD 7. THE CIT-IV, HYDERABAD 8. THE CIT-II, HYDERABAD. 9. THE DR B BENCH, ITAT, HYDERABAD TPRAO