Income Tax Appellate Tribunal - Mumbai
Grindwell Norton Ltd , Mumbai vs Assessee on 12 January, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L",
MUMBAI
BEFORE SHRI P.M.JAGTAP (A.M0) & SHRI N.V.VASUDEVAN(J.M)
ITA NO.5512/MUM/2007(A.Y. 2003-04)
The ACIT, Cir. 1(1), Grindwell Norton Ltd.,
Room No.579, Leela Business Park,
Aaykar Bhavan, MK Road, Vs. 5th Level, Andheri Kurla Road,
Mumbai 400 020. Marol, Andheri (E),
(Appellant) Mumbai - 400 059.
PAN:AAACG 8725B
(Respondent)
ITA NO.5176/MUM/2007(A.Y. 2003-04)
Grindwell Norton Ltd., The DCIT, Rg. 1(1),
Leela Business Park, Mumbai.
5th Level, Andheri Kurla Road,
Marol, Andheri (E), Vs.
Mumbai - 400 059.
PAN:AAACG 8725B
(Appellant) (Respondent)
C.O. NO.230/MUM/2009
(Arising Out of ITA No.5512/Mum/2007, A.Y. 2003-04)
Grindwell Norton Ltd., The DCIT, Rg. 1(1),
Leela Business Park, Mumbai.
5th Level, Andheri Kurla Road,
Marol, Andheri (E), Vs.
Mumbai - 400 059.
PAN:AAACG 8725B
(Cross Objector) (Appellant in Appeal)
Revenue by : Smt. Malathi Sridharan
Assessee by : S/Shri M.M.Golwala /A.A.Khan
2 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009
Date of hearing : 12/01/2012
Date of pronouncement : 20/01/2012
ORDER
PER N.V.VASUDEVAN, J.M,
ITA No.5512/M/07 is an appeal by the revenue while ITA No.5176 is
an appeal by the assessee. Both the appeals are directed against the order of the CIT(A)-1, Mumbai dated 12/6/2007 relating to assessment year 2003-
04. The assessee has also field CO No./230/M/09 against the very same order of the CIT(A).
2. First we shall take up for consideration ITA No.5176/M/07 (Assesee's Appeal). Ground No.1 raised by the assessee reads as follows:
"1. The learned Commissioner of Income-tax (Appeals) erred in confirming that surplus of Rs. 2,32,48,277/- arising on prepayment of deferred sales was a revenue receipt liable to tax u/s. 41(1) of the Income Tax Act. The Appellant submits that the Assessing Officer be directed to delete the said addition."
3. The assessee is a company which is engaged in the business of making abrasives. It also deals in ceramic and plastics. In the preceding assessment years, the Assesseee had availed of the benefits of deferral of sales tax offered by the Government of Maharashtra as an incentive for rapid industrialization of the developing regions of the State of Maharashtra. The Sales tax Incentive Scheme was availed by the Assesseee in respect of its plant at Butibori Industrial Area at Nagpur (Butibori Plant). In accordance with the Sales tax Incentive Scheme, 1993, the sales tax collected in respect of the Butibori Plant was credited separately to Sales tax Account. Set-off, if any, available on the purchases was debited to this account with corresponding credit to purchases. The net Sales tax deferral was then transferred to the Deferred Sales tax liability account grouped under 3 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 "Unsecured Loan" in the Balance Sheet of the Assesseee. The sales tax, payment of which has been deferred under the Incentive scheme, is deemed to have been paid for the purpose of the Bombay Sales Tax Act, 1959 and the Income-tax Act, 1961, in the year in which the amount is so deferred. During the previous year, the Government of Maharashtra announced a scheme of "Premature Repayment of the amount of deferred tax by the eligible Units at Net Present Value (NPV)" on 12th December, 2002 Industries in the State of Maharashtra, who had availed the "Deferred Sales Tax Incentives Scheme", as per "Maharashtra's 1993 Package Scheme of Incentives" were permitted to prematurely repay the deferred Sales tax liability by arriving at a "Net Present Value" by applying a specified discounting rate. With effect from 1st May, 2002, the 4th proviso to Section 38 of the Bombay Sales Tax Act, 1 959 (B.S.T. Act) was amended to provide that an eligible unit which has availed the benefit of Sales Tax Deferral may, at its option, prematurely discharge its liability in respect of any period by payment of such 'reduced amount' as may be prescribed by the Government. The Assesseee availed the benefit of the scheme announced on 12th December, 2002, and made a premature repayment of Its Deferred Sales tax liability:
The Assesseee had treated the surplus arising on prepayment of deferred sales tax as a capital receipt not liable to tax. The Assessing Officer has held that the surplus is liable to tax under section 41(1) of the Act. On appeal by 4 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 the assessee, the CIT(A) confirmed the order of the AO giving rise to the present appeal by the assessee before the Tribunal.
4. It is not in dispute before us that similar issue came up for consideration in assessee's own case in A.Y2004-05 in respect of identical surplus arising on prepayment of deferred Sales Tax and this Tribunal held as follows:-
"4. Learned representatives fairly agree that the issue is now covered in favour of the assessee by Special Bench decision in the case of Sulzer India Ltd Vs JCIT (42 SOT 457) wherein it has been held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). There is no dispute that material facts of the case before us are the same as were the facts before the Special Bench in Sulzer's case. Learned Departmental Representative, however, makes elaborate submission in support of his stand that the Special Bench decision in the case of Sulzer India Limited (supra) calls for a reconsideration and that it is not correct. He submits that even though the issue is covered by the Special Bench decision, we must take independent view of the matter since the Special Bench decision is, what he terms as, per incurium. Broadly, his stand is that what is to be taxed under the head 'profits and gains of business and profession' and if a benefit like part remission of the deferred sales tax liability is not taxable as a profit of the business, it can be taxed as gains of business. It is then pointed out that the circular relied upon by the Special Bench was in the context of Section 43B and it cannot be construed to be of application in all the matters relating to the Income Tax Act. It is also pointed out that sales tax authorities are not in the business of granting loans and the nature of concession received from the sales tax authorities cannot be treated as a simplictor lender borrower transaction. Our attention is then invited to the accounting treatment extended to the sales tax deferral transactions, which, according to the learned Departmental Representative, shows that a taxable benefit did accrue to the 5 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 assessee. Learned counsel for the assessee, on the other hand, takes us through the order of the Special Bench, demonstrates similarity of material facts between Sulzer's case and assessee's case, and points out that all the arguments which are now advanced before us have already been dealt with by the Special Bench. Learned Departmental Representative may not be happy with the conclusions arrived at by the Special Bench and he may still carry on pointing out, what he perceives as errors, this Division Bench is certainly not the forum to adjudicate upon his submissions. We are urged to follow the Special Bench decision and delete the impugned addition.
5. In our considered view, it is useful to remember that, as laid down by the Apex Court in the case of Ambika Prasad Mishra v. State of U.P. AIR 1980 SC 1762 (@ 1764), "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent.... A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned....". A special bench decision of the Tribunal is a binding judicial precedent for the division benches, and we must respectfully follow the binding precedents. Revenue authorities may not be happy with the conclusions arrived at by the Special Bench, and they have every right to make submissions against the same at higher judicial forum but this Division Bench is certainly not the forum to adjudicate upon such submissions. That apart, we are in most respectful and considered agreement with the conclusions arrived at by the Special Bench and we find that all the necessary aspects of the natter have been considered by the Special Bench in a very comprehensive and elaborate order. The findings of the Special Bench in Sulzer's case (supra) can be summarized as follows:
In order to invoke the provisions of section 41(1), the following conditions must be fulfilled :
(i) In the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee.
(ii) The assessee must have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof. In case either of 6 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 these events happen, the deeming provision enacted in closing part of sub-section (1) comes into play.
(iii) The amount obtained by the assessee or the value of benef it accruing to him is deemed to be profit and gain of the business or profession and it becomes chargeable to income-tax as an income of that previous year. [Para 70] Further, on a plain reading of section 41(1), it is also clear that the provisions contained in section 41(1) do not make any distinction between any contractual trading liability or any statutory trading liability. Even if any statutory liability is remitted or ceased of, or any amount, whether in cash or in any other manner, has been obtained in respect of the expenditure incurred by way of statutory liability, the same would be deemed to be the prof it and gain of the business of the assessee and would, accordingly, be chargeable to income-tax as the income of that year in which such benef it or amount is obtained.
[Para 71] On the plain reading of the above provisions of section 38(1), (2), (3), (4), of the Bombay Sales Tax Act, 1959, it provides the manner as to how the payment of tax, penalty and interest, as prescribed, may be made. The first proviso states that the Commissioner may, in respect of any particular dealer or person for the reason to be recorded in writing, extend the date of payment or allow him to pay such an amount by instalments without prejudice to the levy of penalty, interest or both. The second proviso provides that the Commissioner may, in respect of a dealer to whom an eligibility certif icate has been granted, extend the date of payments or grant a moratorium for payment of dues or provide instalments subject to such conditions as may be prescribed. The third proviso says that the State Government or the Commissioner may, by general or special order where a dealer to whom incentive by way of deferment of sales tax or purchase tax or both under 1979 scheme, 1983 scheme or 1988 scheme or as the case may be electronic Scheme or 1988 scheme or 1993 packaging scheme of incentive, have been granted by virtue of eligibility certificate and where a loan liability equal to the amount of any such tax payable by such dealer has been raised by the SICOM or other designated authorities, deem that such tax has, in the public interest, been paid. The fourth proviso provides 7 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 that where an entitlement certif icate has been granted to the eligible unit for availing of the incentives by way of deferment of sales tax, etc., such eligible unit may, in respect of the periods during which the said certificate is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. [Para 73] In the instant case, the assessee had collected total amount of Rs. 752.01 lakhs towards sales tax during the years 1989-90 to 2001-02. It was treated as a loan liability payable after 12 years in six annual/equal instalments and, thus, the assessee treated the said liability as unsecured loans in its books of account. [Para 76] Pursuant to the amendment made to sub-section (4) of section 38 of the Bombay Sales Tax Act, 1959 by substituting the 4th proviso which provides for payment of Net Present Value (NPV) of deferred taxes under the package scheme of incentives, the State Government by Notification No. STR-12.02/CR-102/taxation-1, dated 16- 11-2002, introduced rule 31D in the Bombay Sales Tax Rules, 1959 (BST Rules) laying down the procedure for determination of such NPV. The procedure for determination of NPV of the amount of deferred taxes having been published, the Deferral Units may exercise the option under 4th proviso to sub-section (4) of section 38 of the Bombay Sales Tax Act, 1959 of pre-maturely repaying at NPV, the amount of deferred taxes. Rule 31D of the Bombay Sales Tax Rules has been provided with a table and the notes below it for determination of NPV. For example, the payment of BST Rs. 27,903 and CST Rs.
70,171 due on 1-5-2003 was deposited on 30-12-2002, i.e., four months before the due date, the discounted percentage of deferred tax to be paid as NPV was prescribed in the said table at 96.4955 per cent and, accordingly, the NPV amount of BST and CST was worked out at Rs. 26,925 and Rs. 67,712, respectively, as per certif icate dated 27-12-2002 and the same was paid on 30-12-2002 as per the certificate dated 25-8-2003. This amount was paid by the assessee as per offer made by the State Government who appointed the State Industrial 8 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 & Investment Corporation of Maharashtra Limited (SICOM) for settlement of the deferred sales tax liability by an immediate one-time payment. Accordingly, the assessee had paid an amount of Rs. 337.13 lakhs to SICOM, which according to the assessee represented the NPV as determined by SICOM. The payment was made to SICOM on 30-12-2002 as per certificates dated 25-8-2003. The revenue had placed no material on record to show that the net present value (NPV) of a future sum was not the same or in the process of calculation of present value of a future sum there was any conversion gain to the assessee. It was also not the case of the revenue that there was no such conversion provided under the BST Act, or the Table provided for determination of NPV was not applicable to the case of the assessee. In the absence thereof it was not possible to accept the contention of the revenue that there was a remission or cessation of the trading liability. [Para 77] Having regard to the law laid down by the Supreme Court and by the High Courts in various decided cases, it was found that to invoke the provisions of section 41(1), the first requirement is as to whether in the assessment of the assessee, an allowance or deduction has been made in respect of loss, expenditure or the trading liability incurred by the assessee. In the case of the assessee the revenue's plea was that the assessee had obtained the benef it of deduction of sales tax liability under section 43B as per the CBDT's Circular No. 496, dated 25-9-1987. However, it was found that in the said circular it had been clearly stated vide para 5 that '...the statutory liability shall be treated to have been discharged for the purposes of section 43B' [Emphasis supplied]. Thus, the benefit of deduction was allowed for the purpose of section 43B only and not under any other provisions of the Act. There was no dispute that the Assessing Officer had also applied the aforesaid Board Circular while giving the benefit of deduction under section 43B. It is settled law that the circulars are binding on the department. It is also settled law that the Court cannot add words to statute or read words into it which are not there. This being so, it was to be opined that the first requirement of section 41(1) has not been fulfilled in the facts of the case. [Para 104] 9 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 The other requirement of section 41(1) is that the assessee must have subsequently : (i) obtained any amount in respect of such loss and expenditure, or (ii) obtained any benef it in respect of such a trading liabilities by way of remission or cessation thereof. In the instant case, the sales tax collected by the assessee during the years 1989- 90 to 2001-02 amounting to Rs. 752.01 lakhs was treated by the State Government as a loan liability payable after 12 years in six annual/equal instalments. Subsequently, pursuant to the amendment made to the fourth proviso to section 38(4) of the Bombay Sales Tax Act, 1959 which provides that where an entitlement certif icate has been granted to the eligible unit for availing of the incentives by way of deferment of sales tax, etc., such eligible unit may, in respect of the periods during which the said certif icate is valid, at its option, prematurely pay in place of the amount of tax deferred by it an amount equal to the net present value of the deferred tax as may be prescribed and on making such payments, in the public interest, the deferred tax shall be deemed to have been paid. In the instant case the assessee had opted for the offer of SICOM, an implementing agency of the State Government and repaid an amount of Rs. 337.13 lakhs to SICOM which according to the assessee represented the NPV of the future sum as determined and prescribed by SICOM. The said payment was made to SICOM on 30-12-2002 as per certif icates dated 25-8-2003. It has already been demonstrated that NPV is equivalent to future value of the sum. In other words, what the assessee was required to repay after 12 years in six annual/equal instalments, the same was repaid by the assessee, in the public interest, as NPV is equivalent to the Future Value of the sum.
Further, there was no iota of evidence to show that there had been any remission or cessation of liability by the State Government. Thus, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the f acts of the instant case. [Para 105] Alternatively, it was contended by the revenue that the assessee was required to comply with procedure laid down in clauses 6.21 and 6.22 of the State Government's Resolution. According to the revenue the assessee had, admittedly, f ailed to do so. Therefore, the question of 10 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 conversion of deferred sales tax liability into interest free loan did not arise. Further, there was no modified eligibility certif icate incorporating the change from deferred sales tax liability to interest free loan. However, it was found that the assessee on the basis of letter issued by SICOM to the sales tax authority had passed necessary entries in the books of account claiming the difference of deferral amount as capital receipt. Merely because the sales tax authorities had not issued the modified eligibility certif icate did not mean that the payment of Rs. 337.13 lakhs made by the assessee could not be accepted as having been paid at NPV of the future sum of Rs. 752.01 lakhs towards discharge of full liability. It is settled law that the law does not contemplate or require the performance of an impossible act- lex non cogit ad impossibilia. Further, both the parties had agreed during the course of their arguments that the entries recorded in the books of account were not determinative of the nature of transaction. Even assuming for the sake of argument that the assessee did not get modified eligibility certificate or the repayment of loan paid by the assessee at its NPV of future sum, then in those circumstances, merely because the assessee had passed necessary entries in its books of account, it could not be held that there was any cessation or remission of liability. [Para 106] The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31-10-1996, payments of which were deferred under the scheme, and the amounts were payable af ter twelve years in six equal annual instalments commencing from 1-5-2003, which meant that the liability was payable in future. Later on, the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value immediately. Thus, in this situation, it could not be construed as remission of liability, because the State Government had not waived of any of the liability as given in the illustrations. Had the State Government accepted lesser amount after twelve years or reduced such instalments, then it could have been a case of remission or cessation. However, in the instant case the State Government had chosen to receive the money 11 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 immediately which was receivable from 1-5-2003 to 1-5- 2008. The amount of Rs. 337.13 lakhs was actually paid to SICOM on 30-12-2002. Thus, the amount which was payable from 1-5-2003 to 1-5-2008, had been paid on 30- 12-2002. Thus, it did not satisfy the condition of actual remission in praesenti. It was a simple case of collecting the amount at net present value which was due later on and even the formula for collecting the net present value was also given by the SICOM and the amounts had been paid as per that formula. Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a). [Para 108] For the reasons stated above, it was to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a). [Para 109]
6. As facts of the present case are materially similar to the case in Sulzer's case (supra), and respectfully following the law so laid down by the Special Bench, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance. The assessee gets the relief accordingly."
Respectfully following the aforesaid decision of the Tribunal we allow Ground No.1 raised by the assessee and direct the AO to delete the addition made.
5. Ground No.2 raised by the assessee reads as follows:
"2. The learned Commissioner of Income-tax (Appeals) erred in confirming the allocation of administrative expenses at the rate of 5% of dividend income. The Appellant submits that the allocation is wholly unjustified and the deduction u/s. 80M be granted on the gross dividend income."12 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009
6. The material facts as far as Ground No.2 is concerned are as follows:
The assessee received dividend income of Rs. 30,66,430/-. In A.Y 2003-04 dividend income was taxable. Under section 80M of the Income Tax Act 1961(the Act) the assessee was entitled to claim deduction of the dividend income. Under section 80M deduction is allowed only on the net dividend income i.e. gross dividend income (-) expenses incurred in earning dividend income. According to the assessee it did not incur any expenses in earning dividend income and , therefore, the entire dividend income should be allowed as deduction under section 80M of the Act while computing total income. The AO was however of the view that the assessee had large Corporate Office/Head Office and incurred indirect expenses. He was of the view that the investment portfolio which yielded dividend income had to be monitored and supervised. He was, therefore, of the view that the claim of the assessee that no expenses were incurred to earn dividend income cannot be accepted. The AO estimated 10% of the gross dividend as indirect expenses attributable to the earning of the dividend income and accordingly reduced a sum of Rs. 3,06,643/- while allowing deduction under section 80 M of the Act.
7. On appeal by the assessee the CIT(A) reduced the disallowance from 10% to 5%. The CIT(A) erroneously referred to the provisions of section 14A of the Act. It has to be mentioned here that in A.Y 2003-04 dividend income was taxable and, therefore, the provisions of section 14A could not be applied to make disallowance of expenses incurred in earning dividend income. Aggrieved by the order of the CIT(A), the assessee has raised Ground No.2 before the Tribunal.
8. The ld. Counsel for the assessee drew our attention to the decision of the ITAT Mumbai Bench in the case of M/s. Godrej Agrovet Ltd. vs. ACIT, 13 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 ITA NO.6807/M/06 , wherein this Tribunal in respect of similar adhoc attribution of expenses to earn dividend income observed as follows:
"12.We have heard the rival submissions. Question as to what should be reduced as expenditure for earning the dividend income was considered by Hon'ble Bombay High Court in the case of CIT Vs. Mahendra Sobhagchand Shah, 203 ITR 178 (Born). Hon'ble court first laid down that u/s. 57(iii) of the Act, an expenditure will be considered as deductible while computing income under the head 'income from other sources' only if, it is incurred for the purpose of making or earning such income. The Court further held that the above being wordings of the section, there was no power for the Assessing Officer to allocate expenditure incurred by an assessee amongst income under different heads on pro rata basis. Hon'ble Bombay High court in the case of CIT Vs. Central bank of India, 264 ITR 522 (Born) held as follows:-
Section 18 of the Income Tax Act, 1961 as it stood at the relevant time, refers to computation of income by way of interest on securities. Section 20(2) states, inter alia, that expenses deducted u/s. 20(1) shall not form part of the deductions admissible under section 30 to 37 for the purposes of computing business profits. Section 80M on the other hand, comes under Chapter VI-A of the Income Tax Act. Chapter VI-A refers to special deduction. Chapter VI-A constitutes a separate code dealing with deductions to be made in computing the total income. In order to compute deduction under section 80M, one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The deductions contemplated by section 80M refer to actual expenditure whereas, deductions contemplated by section 20(1) are estimated proportionate expenses and interest. Therefore, one cannot import deduction from interest on securities in the case of a banking company under section 20(1) into the deductions contemplated by section 80M. Section 20(1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, deduction under section SOM is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant otherwise.14 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009 The Special Bench of ITAT Chandigarh in the case of Punjab State Industrial Development Corporation Vs. DCIT 102 ITD 1 (Chd)(SB) has also taken the view that for the purpose of Section 80M only actual expenditure incurred has to be taken into consideration and there was no question of taking expenditure on estimate or presumption basis. Submission of learned counsel for the assessee based on the aforesaid decision supports the plea of the assessee that adhoc estimation of expenses for earning dividend income as made by the revenue authorities was not correct. "
9. The ld. Counsel for the assessee also submitted that provisions of section 14A of the Act, could not be applied when the dividend income was exempt and in this regard referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Kings Export, 318 ITR 100 (P&H). He referred to the provisions of section 14A of the Act and submitted that only expenditure incurred in respect of earning income which does not form part of the total income can be subject matter of disallowance under section 14A of the Act. He referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Williamson Financial Services, 297 ITR 17(SC), wherein it was held that income covered by section 10 & 11 , which are not chargeable to tax does not fall under section 14 and under various computations, under section 15 to 59. It was also laid down that deduction under Chapter VI-A is for income which forms part of the total income but which is free of tax.
10. The ld. D.R relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. United General Trust Ltd., 200 ITR 488 (SC). In the aforesaid case the Hon'ble Supreme Court had held that deduction under section 80M has to be allowed with reference to the net amount of dividend and proportionate management expenses have to be deducted. According to the ld. D.R the Hon'ble Supreme Court has approved the disallowance of 15 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 proportionate management expenses while arriving at the net dividend that has to be computed for allowing deduction under section 80 M of the Act. Further reference was made to decision of the Chandigarh Bench of ITAT in the case of Mahavir Spinning Mills vs. DCIT, 100 TTJ 471 (Chd.), wherein after referring to the decision of the Hon'ble Supreme Court in the case of United General Trust Ltd.(supra) the Chandigarh Bench expressed the opinion that it was open to disallow expenses on proportionate basis while arriving at the net dividend income that has to be allowed as deduction under section 80M of the Act.
10. The ld. Counsel for the assessee in reply pointed out that the decision of the Hon'ble Supreme Court in the case of United General Trust Ltd. (supra) was rendered in an appeal against the order of the Hon'ble Bombay High Court in CIT vs. United General Trust Ltd. , 199 ITR 664 (Bom), wherein the revenue sought to raise the following question before the Hon'ble Bombay High Court.
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in applying the decision of the Bombay High Court in the case of New Great Insurance Co. Ltd. (1973) 90 ITR 348 to the assessment year in question without considering the effect of the amendment operative from 1st April, 1968, and in thus holding that the assessee would be entitled to the deduction under S. 80M on the gross dividend before deduction of the proportionate management expenses?"
The Hon'ble Bombay High Court made the following observation.
"In our view, the question as framed does not really arise out of the Tribunal's " order since the only question which was agitated before the Tribunal was whether the deduction under s. 80M of the Act was to be computed with reference to the gross dividend income without deducting therefrom the proportionate management expenses and the Tribunal, relying on the decision of this Court in Sahu Brothers 16 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 (Saurashtra) Pvt. Ltd. (?) and in the case of New Great Insurance Co. Ltd. (supra), held that the relief under s. 80M was to be computed with reference to the gross dividend income. It appears clear that the aforesaid question seems to be finally concluded by the decision of the Supreme Court in the case of CIT vs. South Indian Bank Ltd. (1966) 59 ITR 763 as also the decision in CIT vs. Industrial Investment Trust Co. Ltd. (1968) 67 ITR 436 (Bom)"
The ld. Counsel for the assessee thus submitted that in the appeal before the Hon'ble Supreme Court the question was only as to whether deduction under section 80M of the Act had to be allowed on a gross basis or net basis. It was submitted by him that the Hon'ble Supreme Court only approved the principle that deduction under section 80M has to be allowed on the net dividend income and it cannot be said that the Hon'ble Supreme Court also held that adhoc disallowance of expenses can be made.
11. We have considered the rival submissions. With regard to the contentions raised on behalf of the revenue by the ld. D.R, we find that the facts of the case before Hon'ble Bombay High Court in the case of United General Trust Ltd. (supra) were that the Tribunal held that the assessee would be entitled to deduction under section 80M of the Act on the gross dividend before deduction of the proportionate management expenses. The question of law sought to be raised by the revenue was as to whether deduction under section 80M of the Act has to be allowed on the gross dividend before deduction of the proportionate management expenses. As already seen the Hon'ble High Court expressed the view that the question before the Tribunal was whether the deduction under section 80M has to be computed with reference to gross dividend income without deduction proportionate management expenses. In the appeal by the revenue against the order of the Hon'ble Bombay High Court the Hon'ble Supreme Court following the decision in the case of Distributors (Baroda) Pvt. Ltd. vs. Union 17 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 of India & Others, 155 ITR 120 allowed the appeal of the revenue. The Hon'ble Supreme Court observed as follows:
"Both the counsel for the Revenue and the assessee are agreed that the only question which was sought to be raised by the Revenue, but which was not allowed by the High Court, is concluded against the assessee and in favour of the revenue by the decision of this Court in Distributors (Baroda) Pvt.Ltd. Vs. Union of India & ors. (1985) 47 CTR (SC)349; (1985) 155 ITR 120(SC). Indeed the same result follows from S.80AA, introduced by the Finance Act, 1980, with retrospective effect from 1st April, 1968.
For the above reason, the appeals are allowed. The application under S.256(2) of the IT Act, made by the revenue shall be deemed to have been allowed, a reference made and answered in the manner indicated above.
(underlining by us for emphasis) It is significant to note that the issue before the Hon'ble Supreme Court in the case of Distributors(Baroda) Pvt. Ltd. (supra) was as to whether deduction under section 80M of the Act had to be allowed on the gross dividend or net dividend. The Hon'ble Supreme Court held that deduction under section 80M is to be calculated with reference to the net dividend i.e. cross dividend (-) expenses incurred in earning the dividend income. The question as sought to be raised by the revenue before the Hon'ble High Court was modified by the Hon'ble Supreme Court as can be seen from the underlined portion of the judgment referred to above and the question was as to whether deduction u/s.80-M was to be allowed on net dividend or gross dividend. It is clear from the judgment of the Hon'ble supreme court that the question whether the adhoc deduction of expenses can be made from the gross dividend while deduction under section 80M of the Act was never an issue either in the case of Distributors (Baroda) Pvt. Ltd. or in the case United General Trust Ltd. (supra). We are, therefore, of the view that the proposition canvassed by the DR cannot be accepted. As far as the decision of the Hon'ble Chandigarh Bench of ITAT is concerned we are of the view that the same is contrary to the law laid down by the Hon'ble Bombay 18 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 High Court in the case of CIT vs. Central Bank of India, 264 ITR 522(Bom), which we have already referred to in the earlier part of this order. Apart from the above, the said decision stands superseded by the decision of the Special Bench of ITAT Chandigarh in the case Punjab State Industrial Development Corporation Vs. DCIT 102 ITD1 (Chnd)(SB). We are also of the view that the decision in the case of Godrej Agrovet Ltd.(supra) will be applicable to the facts of the present case. We, therefore, hold that the adhoc disallowance of expenses for earning dividend income as made by the revenue authorities cannot be sustained. The addition made is accordingly directed to be deleted.
12. Ground No.3 raised by the assessee can be conveniently decided together with Ground No.1 raised by the revenue. These grounds are as follows:
Ground No.3 - Assessee's Appeal:
"The learned Commissioner of Income Tax (Appeals) erred in confirming the computation of deduction u/s. 80 HHC by excluding 90% of the following receipt from the "profits of the business."
a) Interest Income 88,87,950/-
b) Surplus on prepayment of deferred sales tax 2,32,48,277/-
c) Compensation for guarantees 11,11,900/-
d) Royalty 71,030/-
e) Penalty levied on customers for bounced cheques 4,42,000/-
f) Sales Tax refund 27,13,822/-"
Ground No.1- Revenue's Appeal:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to compute the deduction u/s. 80HHC by excluding 90% of the Miscellaneous Income of Rs.7,64,81,198/- from the profits and gains of business."
13. We must clarify that as far as ground No.1 raised by the revenue is concerned, the same is factually incorrect. The AO while allowing deduction under section 80 HHC of the Act reduced from the profits of the business the 19 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 following miscellaneous income which according to the AO did not have any nexus with the export activity of the assessee and, therefore, not in the nature of income under the head "profits and gains of business or profession" within the meaning of explanation- baa of section 80HHC of the Act. Following were the income so considered by the AO.
14. On appeal by the assessee the CIT(A) granted relief in respect of some of the items listed above by treating them as profits and gains of business or profession. In respect the relief granted by the CIT(A) the revenue has raised Ground No.1 before the Tribunal. Therefore, Ground No.1 raised by the revenue has to be read as one challenging the relief allowed by the CIT(A). In respect of items of income which were considered as not income from business by the CIT(A) the assessee has raised Ground No.3.
20 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009
15. We shall take up for consideration Ground No.3 by the assessee.
(a) Interest Income of Rs. 18,87,950/-:
As far as interest income is concered the ld. Counsel for the assessee submitted that out of the interest income which was considered as not income from business as above, a sum of Rs. 69,51,438/- was interest in respect over due payments by the customers and the Hon'ble Bombay High Court in the case of CIT vs.Grindwell Norton Ltd., 318 ITR 172(Bom) (Assessee's own case) was pleased to hold that interest on over due payments from customers was income eligible for deduction under section 80HHC of the Act.
16. The ld. D.R however relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Asian Star Company Ltd., 326 ITR 56 (Bom), wherein the Hon'ble High Court followed the decision of the Hon'ble Supreme Court in the case of Ravindranathan Nair, 295 ITR 228(SC). In the aforesaid decision the Hon'ble Bombay High Court considered the following question of law:
" Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct in holding that net interest on fixed deposits in banks received by the assessee company should be considered for the purpose of working out deduction under section 80HH of the Act and not the gross interest ?"
The Hon'ble Bombay High Court after referring to the proviso below Explanation -baa of section 80 HHC of the Act held that receipts by way of brokerage, commission, interest are to be excluded from business profit for the purpose of computing deduction under section 80 HHC of the Act as these receipts have no nexus with the export activity. Since expenses incurred in earning income by way of interest, brokerage, commission etc. also go into computation of business profit Parliament thought it fit to 21 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 exclude only 90% of the receipts in order to ensure that the expenditure which is incurred by the assessee in earning receipts which have gone into the computation of business profits is taken care of. The Hon'ble Court further held that the Parliament has approved adhoc deduction of 10% from such incomes on account of expenses incurred in earning the receipts. Once the Parliament has so legislated it cannot be said that 90% gross interest received by the assessee has to be reduced from the profits and gains of business for the purpose of computing deduction under section 80HHC and not the net interest. In CIT vs. Ravindranathan Nair (Supra) the Hon'ble Supreme Court equated processing charges derived by the assessee by processing cashew nuts for other exporters was not income of the nature referred to in the proviso to Explanation -baa of section 80 HHC of the Act and cannot be said to be profit derived from the business of export.
17. After considering the rival submissions we are of the view that the decision of the Hon'ble Suprem Court in the case of Ravindranathan Nair was rendered on the theory of independent income unconnected with export activity. Hon'ble Bombay High Court in the case of Asia Star Company Ltd. Followed this theory. In the case of the assessee we are dealing with interest income on account of delayed payment by customers. Such interest income would assume the same character as that of the monies payable for the sale of goods by the assessee. Therefore, such interest income cannot be said to be an independent income not connected with the export business of the assessee. We however, find in the case of the assessee the factual details as to how the interest income of Rs. 69,51,438/- has arisen are not available. We are, therefore, of the view that it would be appropriate to direct the AO to examine this issue. If the AO find that the interest received by the assessee is on account of overdue payments on realization of export sales by the assessee then they have to be considered as business income. The AO is 22 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 directed to examine the issue on the above lines and decide the issue after affording opportunity of being heard to the assessee.
18. (b) Surplus on prepayment of deffered Sales Tax. Rs.2,32,48,277/-:
This ground become infructuous because we have already held that the surplus in question is not chargeable to tax as income. Therefore, this ground is dismissed.
19. (c) & (d) Compensation for guarantees / Royalty.
(c) & (d) were not pressed, therefore, the same are dismissed as not pressed.
20.(e) Penalty levied on customers for bounced cheques -Rs.4,42,000/-
This sum will also stand on the same footing of interest as interest on over due payments from customers. The AO is directed to examine as to whether penalties received by the assessee can be attributed to the payment by customers of the export business of the assessee.
21. (f) Sales Tax refunds:
This can be conveniently decided together with the ground of the revenue as well as the sole ground of Cross Objection raised by the assesse, which reads as follows:
"Without prejudice to the contention of the Respondent and that Ground No.1 in the appeal filed by the Department requires to be dismissed, in any event the Respondent submits that the expenditure required to earn the service receipts must be netted (reduced) before arriving at the figure which is to be reduced from the "profits & Gains of business or profession" under Explanation (baa) below section 80 HHC."23 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009
22. On Gr.No.1 raised by the Revenue in it's appeal, the CIT(A) held as follows:
"8.2. I have carefully considered the material on record. Following the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Ltd. 260 ITR 371 and my own order for A.Y 2002- 03, the scrap sales at Rs. 1,90,60,008, insurance claim at Rs. 1,62,246/- service charges at Rs. 2,22,82,736/- and DVC charges at Rs. 30,000/- are operational receipts which are not covered by explanation baa."
23. This Tribunal however has in assessee's own case taken a contrary view as can be seen at para 38 of the order of the Tribunal extracted above for A.Y 2004-05. As far as sale of scrap, service charges and refund of sales tax are concerned this Tribunal in assessee's own case in ITA No.434/M/09 & 406/M/09 for A.Y. 2004-05 was pleased to consider the issue and held as follows:
"33. In ground no. 3, the Assessing Officer has raised the following grievances:
3(a) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to treat the income from agency commission, service charges, scrap sales and sales tax as a part of business profit for the purpose of working out deduction under section 80 HHC.
3(b) On the facts and circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to adjust the interest receipts against interest paid and consider the net amount as other income for the purpose of working out deduction under section 80 HHC.
34. As far as ground no. 3 (b) is concerned, learned representatives agree that the issue is now covered against the assessee by Hon'ble Bombay High Court's judgment in the 24 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 case of CIT Vs Asian Star Co Ltd (326 ITR 56). Respectfully following Hon'ble Bombay High Court judgment, we vacate the relief granted by the CIT(A). Ground No. 3 (b) is thus allowed.
35. With regard to ground no. 3 (a), learned counsel for the assessee fairly concedes that the income from agency commission cannot be treated as business profit. He points out that assessee has suo motu reduced the agency commission from business profits, as evident from page 7 of the assessment order
36. However, as far as service charges in ground 3(a) are concerned, learned counsel urges us to take up this issue along with grievance raised in the cross objection. Grievance raised in the cross objection is as follows:
Without prejudice to the contention of the respondent that ground 3(a) in the appeal filed by the department requires to be dismissed, in any event the respondent submits that the expenditure required to earn the service receipts must be netted (reduced) before arriving at the figure which is to be reduced from the 'profits and gains from business or profession' under Explanation (baa) below Section 80 HHC.
37. The assessee assembles the effluent treatment plant at customer's site and service charges represent charges received by the assessee in respect of the same. There are direct costs involved in this activity. While Assessing Officer was of the view that service charges are received for services rendered by the assesse, the CIT(A) has granted relief on the ground that since these activities are part and parcel of assessee's business, the service charges receipt cannot be excluded from business profits. The Assessing Officer is aggrieved and is in appeal before us.
38. Having heard the rival contentions and having perused the material on record, we are of the considered view that the service charges receipts are not in respect of export business and should be excluded as such, what is to be excluded is the earnings from service charges, on net basis, because there are direct and clearly identifiable expenses incurred to earn the 25 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 same, and any other approach will result in distortion of results. Accordingly, while we uphold the grievance of the Assessing Officer, we also uphold the grievance of the assessee raised in the cross objection.
39. As regards exclusion of scarp sales and sales tax refund, learned representatives agree that the issues are covered in favour of the assessee by decisions of the coordinate benches in the cases of Kodak India Pvt Ltd (8923/Mum/04) and Diamond Dyechem Ltd ( ITA 3342/Mum/06), copies of which were placed before us. Learned Departmental Representative, however, dutifully relied upon the stand of the Assessing Officer. Consistent with the stand taken by the coordinate benches, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter."
24. As can be seen from the aforesaid order of the Tribunal the grievance projected by the revenue in Ground No.1 of its appeal has to be accepted. It can also be seen from the aforesaid order that the Tribunal has allowed the alternate plea of netting. As we have already seen Hon'ble Bombay High Court in the case of Asian Star Ltd.(supra) has taken a view that netting should not be allowed. The question of law before the Hon'ble Bombay High Court in the case of Asian Star Ltd. (supra) was "Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct in holding that net interest on fixed deposits in banks received by the assessee-company should be considered for the purpose of working out the deduction under section 80HHC and not the gross interest ?"
The facts of the case before the Hon'ble Bombay High Court in the case of Asian Star Ltd. (supra) were that the assessee had debited net interest of Rs.21.46 crores (being interest on borrowings for working capital) in its profit and loss account after setting off Rs.3.25 crores of interest received on Fixed deposits and arrived at the profits of the business for the purpose of computing deduction u/s.80-HHC of the Act. he assessee was called upon 26 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 to explain as to why the deduction under section 80HHC should not be recomputed by excluding ninety per cent. of the interest received in the amount of Rs. 3.25 crores. By its explanation, the assessee submitted that during the year, it received interest on fixed deposits. The assessee stated that it had borrowed monies in order to fulfill its working capital requirements and the bank had called upon it to maintain a fixed deposit as margin money against the loans. The assessee consequently contended that there was a direct nexus between the deposits kept in the bank and the amounts borrowed. The Assessing Officer, while passing an order of assessment dated January 30, 2006, found that the explanation of the assessee could not be accepted since a plain reading of Explanation (baa) to section 80HHC would suggest that ninety per cent of the receipts on account of brokerage, commission, interest, rent, charges or receipts of a similar nature were liable to be excluded while computing the profits of the business. In appeal, the Commissioner of Income-tax (Appeals) held that from the bank and fund flow statements, the assessee has established a direct nexus between interest bearing fixed deposits and the "interest charging" borrowed funds. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the netting of interest income and interest expenses. The view of the Commissioner of Income-tax (Appeals) was confirmed in appeal by the Income-tax Appellate Tribunal. On further appeal the Hon'ble Bombay High Court held as follows:
"The special deduction under section 80HHC of the Income-tax Act, 1961, is available to an assessee engaged in the export of goods or merchandise outside India to the extent of the profits specified in sub- section (1B) of the provision. Clause (a) of sub-section (3) of section 80HHC provides that where the exported goods are manufactured by the assessee, the deduction under sub-section (1) would be in accordance with the formula stated therein. The formula is that the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover 27 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 in respect of such goods bears to the total turnover of the business carried on by the assessee. Explanation (baa) was inserted by the Finance (No. 2) Act of 1991. Under Explanation (baa), the expression "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession"
as reduced by ninety per cent. of (a) any sums referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 ; or (b)any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. The profits of any branch, office, warehouse or any other establishment of the assessee situated outside India have also to be reduced. Since receipts by way of brokerage, commission, interest, rent, charges or other similar receipts have no nexus with the export activity, the Legislature thought it fit, for the purpose of deduction under section 80HHC to exclude such items from business profits. Parliament was, however, conscious of the fact that the expenditure incurred in earning the items which were liable to be excluded had already gone in to the computation of business profits. This was because the computation of business profits under Chapter IV is made by amalgamating the receipts as well as the expenditure incurred in carrying on the business. Since the expenditure incurred in earning the income by way of interest, brokerage, commission rent, charges or other similar receipts had also gone into the computation of business profits, Parliament thought it fit to exclude only ninety per cent. of the receipts received by the assessee in order to ensure that the expenditure which is incurred by the assessee in earning the receipts which has gone into the computation of the business profits is taken care of. In providing a simplified formula in these terms, Parliament evidently adopted a fair and reasonable statutory basis of what may be regarded as expenditure incurred for the earning of the receipts. The distortion of the profits that would take place by excluding the receipts received by the assessee which were unrelated to export turnover and not the expenditure incurred by the assessee in earning those receipts was factored in by Parliament by excluding only ninety per cent. of the receipts received by the assessee. The extent of the exclusion which is statutorily mandated by Parliament is ninety per cent. of the total receipts. This is because the expenditure which is incurred by the assessee in earning these receipts would have gone into the computation of the profits and gains of business or profession and a distortion would be caused if the entirety of the income generated from the receipts alone were to be excluded. It is in order to obviate such a distortion that Parliament mandated that ninety per cent. of the receipts would be excluded. Once Parliament has legislated both in 28 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 regard to the nature of the exclusion and the extent of the exclusion, it would not be open to the court to order otherwise by rewriting the legislative provision. The task of interpretation is to find out the true intent of a legislative provision. Hence for the purpose of Explanation (baa) to section 80HHC the gross interest on fixed deposits in the bank received by the assessee should be considered for the purposes of working out the deduction under section 80HHC and not the net interest.
25. The aforesaid decision of the Hon'ble Bombay High Court has not been brought to the notice of the Tribunal while it decided the case for A.Y 2004-
05. In the light of the aforesaid decision of the Hon'ble Bombay High Court, We, are of the view that the grievance of the assessee as projected in the Cross Objection cannot be accepted. We allow Ground No.1 raised by the revenue to the extent that it relates to insurance claim, service charges, DVC charges and professional service charges.
25. As far as Sales Tax refund which is one of the items of incomes referred in Ground No.3(f) of the Assessee, is concerned the Tribunal in assessee's own case as we have already seen has allowed the claim of the assessee. The ld. D.R however, placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Dresser Rand India Pvt. Ltd., 323 ITR 429(bom), wherein the Hon'ble Bombay High Court was pleased to hold that Sales Tax refund would fall under proviso below clause (baa) of Section 80 HHC of the Act and, therefore, 90% of the same should be excluded while allowing deduction under section 80 HHC of the Act. In view of the above decision we dismiss the grievance projected by the assessee in Ground No. 3(f) of the ground of appeal.
26. At the time of hearing arguments were addressed on sale of Scrap which is the grievance projected in Ground No.1 of the revenue's appeal. As far as sale of scrap is concerned this Tribunal in assessee's own case for A.Y 29 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 2004-05 in ITA No.434/M/09 was pleased to hold that sale of scrap has to be considered as income from business. Following the said decision we reject the ground No.1 of the revenue to this extent regarding scrap sales. Thus Ground No.3 of the Assessee is partly allowed for statistical purposes. Ground raised by the Revenue in Ground No.1 is partly allowed. Ground raised by the Assessee in its cross objection is dismissed.
27. Ground No.4 raised by the Assessee in its appeal reads as follows:
"The learned Commissioner (Appeals) erred in confirming that premium of Rs.65,80,000/- paid on prepayment of Debentures was a capital expenditure. The appellant submits that the Assessing Officer be directed to treat the said sum of Rs. 65,80,000/- as a revenue expenditure and allow the same."
28. The assessee had issued debentures of Rs. 10 Crores to Birla Sunlife Asset Management Company Ltd (Birla MF), on 26th May 1999. The rate of interest was l3.7% p.a., payable quarterly. The tenure of debenture was 5 years. The repayment scheme was as follows:
Date Redemption Instalments 25th May 2002 Rs. 1.75 Cr. 25th May 2003 Rs. 1.75 Cr. 25thMay2004 Rs.6.5Ocr.
During the previous year, the assessee prepaid the above referred debentures in view of surplus funds at its disposa1. According to the assessee it was a conscious business decision to reduce its interest cost for the financial year 2002-03 to 2004-05. By prepaying the debenture the reduction of interest expense of the assessee was as given below:
30 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009 Financial Year Interest Saved (Rs) 2002-03 30,19,150 2003-04 92,59,699 2004-05 13,17,452
-------------
TOTAL 1,35,96,301
=========
The assessee negotiated with Birla MF and convinced the fund manager for early redemption. The fund manager was not ready for early redemption due to the assessee's strong credit record and ability to serve the liability. After holding several meetings with Birla MF from time to time, it was decided to prepay the debentures with a prepayment premium of Rs.65,80,000/-.
29. The prepayment premium of Rs.65,80,000/- was claimed as deduction as revenue expenditure, According to the assessee the expenditure was neither incurred for the initiation of a business, nor for extension of a business, nor for a substantial replacement of equipment. It has not resulted in an advantage for the enduring benefit to the business. It merely reduced the revenue expenditure for the financial year 2002-03 to 2004-05. It has neither brought into existence an asset nor an advantage for the enduring benefit to the business. By prepaying the debenture, the assessee increased its taxable income for the financial years 2003-04 & 2004-05.
30. The AO rejected the plea of the Assessee. He held that premium has been paid for discharge of a liability on capital account because debenture was in the nature of loan. Since the payment was for discharge of capital liability, the same has to be treated as capital expenditure. On appeal by the Assessee, the CIT(A) upheld the order of the AO. Hence, Gr.No.4 by the Assessee before the Tribunal.
31 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009
31. The learned counsel for the Assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd., 233 ITR 468(SC) wherein the Hon'ble Supreme Court laid down the principles applicable in determining in determining whether a particular expenditure is capital or revenue expenditure as follows: (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether; (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.
32. The facts of the case before the Hon'ble Supreme Court in the case of CIT Vs. Associated Cement Companies Ltd. 172 ITR 257(SC) wherein it was laid down that where by incurring an expenditure no capital asset is created but the expenditure enables the Assessee to avoid a recurring revenue expenditure in future, the same would be revenue expenditure. Further reliance was placed on the decision in the case of Madras Auto Service (P) Ltd., was that the assessee was a company carrying on the business of sale of motor parts. Its head office was at Madras. It had a branch at Bangalore. Under an agreement of lease the assessee obtained certain premises for a 32 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 period of thirty nine years at Bangalore. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its own expense the existing premises and appropriate to itself all the material, thereof, without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under clause 2 of the lease deed, the lessee was required to pay a rent of Rs. 1,000 per month for the first fifteen years, Rs. 1,500 per month for the next ten years, Rs. 1,650 per month for the next ten years and Rs. 2,000 per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors; and upon completion of the work of construction the lessee would have only the right to be a tenant for a period of 39 years under the existing lease, subject to the payment of rent and observation of other terms and conditions of the lease. The lessee would not be entitled under any circumstances to any compensation whatsoever on account of its putting up the new construction in place of the old. Acting under the lease agreement, the assessee invested a sum of Rs. 1,62,835 in the previous year relevant to the assessment year 1968-69 and Rs. 50,937 during the succeeding year in constructing a new building on the said land. The assessee claimed before the Income-tax Officer the expenditure of the said sums of Rs. 1,62,835 and Rs. 50,937 in the relevant assessment years as capital loss. In the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, the Income-tax Appellate Tribunal held that the expenditure of the said two amounts for the construction of a new building was in the nature of business expenditure for proper carrying on of the business of the assessee. The Tribunal had, therefore, treated these amounts as revenue expenditure. This was upheld by the High Court. On appeal to the Supreme Court, it was held that right from inception, the building was of 33 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court had, therefore, rightly considered this as obtaining a business advantage. The expenditure was, therefore, to be treated as revenue expenditure. The learned counsel for the Assessee relied on the fact that by paying premium for prepayment of debentures, the Assessee could avoid incurring of recurring interest expenditure in future. According to him the decision of the Hon'ble Supreme Court in the case of Madras Auto Service (supra) would squarely apply to the facts of the Assessee's case. Further reliance was placed on the decision of the Hon'ble Rajasthan High Court and Hon'ble Calcutta High Court in the case of CIT Vs. Shree Rajastan Syntex Ltld. 269 ITR 461 (Raj) and CIT Vs. Tungabhadra Industries Ltd. 207 ITR 563 (Cal) for the proposition that premium payable on redemption of debentures are revenue expenditure.
33. The learned D.R. relied on the order of the CIT(A). Her alternate submission in case the premium on redemption of debentures is held to be revenue expenditure was that the premium paid should be spread over to the tenure of the debenture and cannot be allowed in one lump sum. In this regard reliance was placed by the learned counsel for the Assessee on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802 (SC).
34. We have considered the rival submissions. The nature of expenditure incurred in connection with borrowings on debentures has been explained by the Hon'ble Calcutta High Court in the case of Tungabhadra Industries Ltd. (supra) as follows:
34 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009 "A share is clearly distinct and different from a debenture. It is well- settled that the taking of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purposes for which the loan is utilized, namely, whether for acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. The revenue expenditure should be allowed in the year in which it is incurred. In a case where the assessee follows the mercantile system of accounting the deduction should be allowed for the entire revenue expenditure in the year in which such liability is incurred although the payment is made in later years."
The Hon'ble Court while coming to the above conclusion referred to the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. Vs. CIT 60 ITR 52 (SC). It can thus be safely said that premium paid on premature redemption of debenture would be revenue expenditure. The expenditure was incurred in the previous year and was therefore to be allowed as a deduction. With regard to the submission of the learned D.R. that the expenditure should be spread over to the tenure of the debenture by placing reliance on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. (supra), we are of the view that the same is not acceptable. In the case of Madras Industrial Investment Corpn.(Supra) the facts were that the Assessee issued debentures at a discount and was bound to repay the debentures at face value after a period of 12 years. The question that arose for consideration was as to whether the entire discount had to be paid in the year of redemption or whether the same has to be spread over and claimed as deduction over 12 years, the period for which the debentures were issued. The Hon'ble Supreme Court held :
"It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number 35 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of thecompany over the entire period. The liability should, therefore, be spread over the period of the debentures."
35. In the present case, we are concerned with a case where debentures were redeemed much prior to the period for which they were issued. In other words, the contractual terms of issue of the debentures were not fulfilled and there was a novation of contract between the Assessee and the debenture holders. In such circumstances, we are of the view that the year in which the expenditure in the form of premium on premature redemption of debentures should be allowed. We order accordingly. Gr.No.4 raised by the Assessee is allowed.
36. Gr.No.5 raised by the Assessee reads as follows:
"5. The learned Commissioner (Appeals) erred in confirming the disallowance of Rs.3,66,972/- u/s. 43B in respect of Company's contribution to Provident Fund. The Appellant submits that the disallowance be deleted."
37. In its Return of Income, the Assessee added back to Its Income an amount of Rs.4,00,920/- on account of delay in depositing the Company's contribution to Provident Fund & Labour Welfare Fund. During the course 36 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 of assessment proceedings, the Assessee vide Its letter dated January 30, 2006 requested the Assessing Officer to allow the deduction of R.s.4,00,920/-, as the amount was duly deposited during the year under consideration, albeit late on the following dates:
Company's contribution to Provident Fund (Bangalore) Month Amount Rs. Due Date Payment Date Nov.02 366,972 20th Dec.2002 28th Dec.2002 Company's towards contribution to Labour Welfare Fund (Mumbai) Period Amount (Rs.) Due Date Payment Date Jan.02 to 16,956 15th July, 2002 18th July, 2002 June.02 Jul.02 to Mar.03 16,992 15th Jan.2003 17th Jan.2003 The Assessee submitted that deletion of the second proviso below Section 43B w.e.f. AY 2004-2005 was clarificatory in nature and therefore retrospective in operation. The Assessee requested the Assessing Officer to allow deduction in respect of Rs.4,00,920/- and treat the Return of Income of the Assessee amended to that extent. The Assessing Officer ignored the claim of the Assessee and disallowed the said amount of Rs.4,00,920/-.
38. Before CIT(A), the Assessee submitted that in view of the decision of Special Bench of the Income-tax Appellate Tribunal in the case of Kwality Milk Foods Ltd. (100 ITD 1 99)(Chennai)(SB) wherein it was held that the amendment in proviso to section 43B was made to eliminate unintended consequences that caused undue hardship to the taxpayers and therefore, the amendment was curative in nature and should he applied retrospectively.
37 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009
39. The CIT(A) did not accept the plea of the Assessee. He held that the Assessee made payment of Rs. 3,66,972 after the grace period of 5 days from the due date and therefore hit by the prohibition laid down in Sec. 43B of the I.T.Act, 1961. Accordingly the disallowance of Rs. 3,66,9 72 u/s. 43B was confirmed. Aggrieved by the order of CIT(A), the Assessee has raised ground No.5 before the Tribunal.
40. We have considered the rival submissions. We are of the view that addition sustained deserves to be deleted. The Hon'ble Supreme Court in the case of Alom Extrusions Ltd. 319 ITR 306 (SC) held that deletion of the second proviso below Sec.43-B of the Act w.e.f. 0-1-4-2004 was clarificatory in nature and therefore will have to be applied retrospectively. Admittedly the payment of employer's contribution had been made by the Assessee on or before the due date for filing return of income. Therefore the payment made on or before the due date for filing return of income has to be allowed as deduction as per the first proviso to Sec.43B of the Act. In view of the aforesaid decision, we direct that the addition sustained by the CIT(A) should be delelted. Gr.No.5 raised by the Assessee is accordingly allowed.
ITA No.5512/Mum/07: Revenue's appeal:41. Gr.No.1 raised by the Revenue has already been decided while deciding Gr.No.3 of the Assessee's appeal. For the reasons stated therein, the ground raised by the Revenue is partly allowed.
42. Gr.No.2 raised by the Revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to delete the disallowance of Rs. 3,18,000/- in respect of commission paid."38 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009
40. During the previous year the Assessee paid commission of Rs.3,18,000/- to Saint Gobain Abrasives (Singapore) (SGA Singapore) its Associated Enterprise(AE). In terms of Sec.92 of the Act, the Arm's Length Price (ALP) of the international transaction was referred to Transfer Pricing Officer (TPO). In AY 02-03 also in respect of identical payment of commission to an AE reference was made to TPO. The TPO was of the view that as per the policy of the group all affiliate companies were entitled to commission of 10% on export sales made in their respective countries whereas the Assessee had paid 12% to its AE SGA (Singapore). The commission had been paid to the AE for all sales by the Assessee to customers in South East Asian Countries. The TPO was of the view that payment of commission to entitled located in countries other than the country of sales was not properly explained. The TPO therefore held that the Assessee had not established services rendered for which commission was paid. He therefore determined the ALP at Rs.nil and disallowed the entire payment of commission as an adjustment to ALP.
41. Before CIT(A), the Assessee submitted that the Transfer Pricing Officer erred in disallowing commission paid for the following reasons:
a) Saint Gobain Abrasives Singapore has offices all over South East Asian countries, such as Singapore, Malaysia, Indonesia, Borneo, Philippines, etc. and is responsible for all marketing efforts in the region.
b) The associated enterprise was responsible for procuring the sale and introducing the foreign client.
c) The associated enterprise Is responsible for all marketing efforts, such as, advertising, publicity, etc. 39 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009
d) If such payments were not made, the Assessee would be compelled to open offices in such countries - the cost of maintaining such an office In - the higher cost economies of the world, is prohibitive.
e) By not maintaining such an office, the Assessee saved its office and administrative expenses.
f) Collections In respect of such export sales Is also looked after by the associated enterprise.
g) It is normal policy of the group to pay commission at the rate of 10% on such International sales as against this the Assessee has paid commission at the rate of 12% to its associated enterprise. Letter stating policy was filed in this regard.
h) The reason why the Assessee has paid a higher commission in the case of the Singapore office was because one of its own employees, Parag Kunte is stationed In the office of Saint Gobain Abrasives Singapore and his entire salary Is paid by the Singapore company. The object behind this strategy is to Increase export sales in the Far East region.
I) When the Assessee has rendered Identical services to a German group company, it has itself earned commission at the rate of 10%, totalling Rs.18.35 lakhs.
j) in certain export transactions, the asessee has made higher payment of commission to outside parties at the rate of 12.5%, the party-wise details of commission paid was also furnished.
42. The Assessee also brought to the notice of the CIT(A), that an identical disallowance was made by the Transfer Pricing Officer in the immediately preceding assessment year 2002-2003 and the CIT(A)-I had called for a remand report from the Transfer Pricing Officer. The Transfer Pricing Officer in his remand report fairly conceded that he did not find any rationale for drawing an adverse Inference against export commission payments made by 40 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 the Assessee to its associated enterprises. Accordingly, the learned Commissioner of Income-tax (Appeals), in his appellate order for the Assessment Year 2002-2003 dated 23d March, 2007 has directed that the disallowance in respect of commission be deleted.
43. The Assessee submitted that disallowance identical to the one made In the immediately preceding assessment year has been made by the Transfer Pricing Officer in the current assessment year. The Assessee submitted that Transfer Pricing Officer has merely followed the order passed for the immediately preceding assessment year. It was further submitted that since the Transfer Pricing Officer has in the immediately preceding year, conceded that there was no rationale for drawing any adverse inference against the export commission payments made by the Assessee to its associated enterprises, the same should equally apply in the current year. The Assessee finally submitted that the Assessing Officer should be directed to delete the entire disallowance of R.s.3,18,000/- following the appellate order for the immediately preceding year.
44. The details of lower rate of commission paid to its associate concerns compared to independent enterprises was as under:
S.No. Name & Address of the Party Rate of Amount (Rs.) commission
1. YOUSUF ESSAJEE 12.50% 48400 PO. BOX 1079, INDIA STREET CORNER, DAR ES SALAAM TANZANIA
2. A C W JEYANATHAN 12.50% 15793 SRILANKA
3. NAJMI TRADING COMPANY 12.50% 164811 C/O.YOUSUF ESSAJEE PO. BOX 1079, INDIA STREET CORNER, DAR ES SALAAM TANZANIA 664604 41 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 Details of exports commission paid to associated enterprise S.No. Name & Address of the Party Rate of Amount (Rs.) commission
1. SAINT GOBAIN ABRASIVES 12% 318000 (SINGAPORE), 15, BEACG ROAD, 4-03, BEACH CENTRE, SINGAPORE.
Pointing out to the above facts, the Assessee submitted that the assesse had paid commission at lower rate to its associate enterprises @ 12% compared to the independent enterprises. Therefore, the disallowance u/s. 92C at Rs. 3,18,000/- is not based on correct appreciation on facts.
45. The CIT(A) accepted the above submission of the Assessee and directed the AO to delete the disallowance of Rs. 3,18,000/-. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.2 before the Tribunal.
46. Before us the learned D.R. relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). Having considered the rival submissions and the order of CIT(A), we are of the view that the order of CIT(A) does not call for any interference. Admittedly the addition has been made on the basis of similar addition made in AY 02-03. In that year, the AO admitted in his remand report before CIT(A) that the addition made by way of adjustment to ALP was uncalled for. It is also seen that in AY 04-05 in respect of identical transaction, the TPO has not drawn any adverse inference and has accepted international transaction as at ALP. The main reason for paying 12% commission as against the policy of paying commission at 10% to group companies has been explained by the Assessee as owing to one of its key employee Parag Kunte staying with the AE in 42 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 Singapore and the fact that the AE bears all his salary. The strategy was to increase sales in Far East region by having Assessee's own employee. This explanation justifies payment of higher commission then the policy of paying 10% to group companies. Apart from the above, there are also instances where the Assessee has itself received more than 10% commission and had paid more than 12% commission to non AEs. In these circumstances, we are of the view that the order of the CIT(A) does not call for any intereference. Consequently, Gr.No.2 raised by the revenue is dismissed.
47. Gr.No.3 raised by the Revenue in its appeal reads as follows:
"3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to re-compute the deduction u/s. 80 HHC without making the deduction u/s. 80IB of Rs.42,95,724/- while computing the deduction u/s. 80 HHC."
48. Identical issue was considered in Assessee's own case in AY 04-05 by the Tribunal in ITA No.434/Mum/09 & 406/mum/09 and the Tribunal held as follows:
"17. In ground no. 4, the assessee has raised the following grievance :
The learned CIT(A) erred in confirming the action of the Assessing Officer in reducing deduction allowable under section 80 IB Rs 61,25,635 from the 'adjusted profits of the business' without computing deduction under section 80 HHC. The appellant submits that deduction under section 80HHC be computed without reducing the deduction allowed under section 80 IB.
18. It is sufficient to take note of the fact that this issue was decided against the assessee, by the CIT(A), by relying upon Special Bench decision of this Tribunal in the case of ACIT Vs Rogini Garments ( 108 ITD 49) which has subsequently been approved by the larger bench in the case of ACIT Vs Hindustan Mint Agro Products Pvt Ltd (119 ITD SB 107) and by Hon'ble 43 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 Delhi High Court in the case of Great Eastern Exports Vs CIT ( 196 Taxman 145). These decisions were, however, disapproved by Hon'ble jurisdictional High Court in the case of Associated Capsules Pvt Ltd Vs DCIT (197 Taxman 84), and, while doing so, Hon'ble jurisdictional High Court has observed as follows:
37. Strong reliance was also placed by the Counsel for the revenue on the Special Bench decisions of the Tribunal in the case of Rogini Garments (supra) and Hindustan Mint & Agro Products (P.) Ltd. (supra), which are affirmed by the Delhi High Court in the case of Great Eastern Exports (supra). Reliance is also placed on decision of the Kerala High Court in the case of Olam Exports (India) Ltd. (supra) which supports the case of the revenue.
38. We find it difficult to subscribe to the views expressed by the Delhi High Court in interpreting the provisions of section 80-IA(9). In that case, in fact, the Counsel for the revenue had argued (see para 38 of the judgment) that section 80-IA(9) applies at the stage of allowing deduction and not at the stage of computing deduction under other provisions under heading 'C' of Chapter VI-A. It was argued that in the matter of grant of deduction, the first stage is computation of deduction and the second stage is the allowance of the deduction. Computation of deduction has to be made as provided in the respective sections and it is only at the stage of allowing deduction under section 80-IA(1) and also under other provisions under heading 'C' of Chapter VI-A, the provisions of section 80-IA(9) comes into operation. While accepting the arguments advanced by the Counsel for the Revenue, it appears that the Delhi High Court failed to consider the important argument of the revenue noted in para 38 of its judgment. Moreover, without rejecting the argument of the revenue that section 80-IA(9) applies at the stage of allowing the deduction and not at the stage of computing the deduction, the Delhi High Court could not have held that section 80-IA(9) seeks to disturb the method of computing the deduction provided under other provisions under heading 'C' of Chapter VI-A of the Act. In these circumstances, we find it difficult to concur with the views expressed by the Delhi High Court in the case of Great Eastern Exports (supra). For the same reason, we f ind it difficult to subscribe to theviews 44 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04) C.O. NO.230/MUM/2009 expressed by the Kerala High Court in the case of Olam Exports (India) Ltd. (supra).
39. In the result, we hold that section 80-IA(9) does not affect the computability of deduction under various provisions under heading 'C' of Chapter VI-A, but it affects the allowability of deductions computed under various provisions under heading 'C' of Chapter VI-A, so that the aggregate deduction under section 80-IA and other provisions under heading 'C' of Chapter VI-A do not exceed 100 per cent of the profits of the business of the assessee. Our above view is also supported by the C.B.D.T. Circular No. 772 dated 23-12-1998, wherein it is stated that section 80IA(9) has been introduced with a view to prevent the tax-payers from claiming repeated deductions in respect of the same amount of eligible income and that too in excess of the eligible prof its. Thus, the object of section 80-IA(9) being not to curtail the deductions computable under various provisions under heading 'C' of Chapter, it is reasonable to hold that section 80-IA(9) affects allowability of deduction and not computation of deduction. To illustrate, if Rs. 100 is the profits of the business of the undertaking, Rs. 30 is the profits allowed as deduction under section 80-IA(1) and the deduction computed as per section 80HHC is Rs. 80, then, in view of section 80-IA(9), the deduction under section 80HHC would be restricted to Rs. 70, so that the aggregate deduction does not exceed the prof its of the business.
19. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, we uphold the grievance of the assessee and direct the Assessing Officer to recompute deduction under section 80 HHC, in the light of law so laid down by Their Lordships."
49. Respectfully following the decision of the co-ordinate Bench in Assessee's own case, we confirm the order of CIT(A) and dismiss gr.No.3 raised by the Revenue.
45 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)C.O. NO.230/MUM/2009
50. In the result, the appeal by the Assessee and the Revenue are partly allowed, while the Cross objection by the Assessee is dismissed.
Order pronounced in the open court on the 20th day of Jan.2012.
Sd/- Sd/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 20th Jan.2012.
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"L" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
46 ITA NO.5512 & 5176/MUM/2007(A.Y. 2003-04)
C.O. NO.230/MUM/2009
Details Date Initials Designation
1 Draft dictated on 12/01/2012 Sr.PS/PS
2 Draft Placed before author 16/1/2012 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order