Income Tax Appellate Tribunal - Mumbai
Income Tax Officer vs Godrej Soaps Ltd. on 11 December, 2007
Equivalent citations: (2008)114TTJ(MUM)950
ORDER
K.P.T. Thangal, Vice President
1. This appeal by the Revenue is for the asst. yr. 1998-99.
2. First ground of objection taken by the Revenue is directed against the order of the CIT(A) in allowing exemption under Section 10(33) of the IT Act, 1961, even though after reducing the interest and expenses attributable to the dividend income, the net dividend was a negative figure.
3. Facts leading to the dispute, briefly, are as under:
Assessee filed the return on 26th Nov., 1998 declaring loss of Rs. 33,06,04,294 and income under Section 115JA at Rs. 2,30,74,240. The return was processed under Section 143(1)(a) on 13th Sept., 1999 without making any adjustments. Subsequently assessee filed the revised return on 30th March, 2000 declaring same income under Section 115JA and loss at Rs. 34,04,65,648, which was processed on 12th March, 2001 without any adjustments. Notices under Sections 142(1) and 143(2) were issued.
Assessee is engaged in the business of manufacturing and/or trading in consumer products such as soaps, detergents, cosmetics, industrial chemicals, oils, oilseeds, oil palm nursery and plantation, financial operations and letting of properties, having branches and factories all over the country.
4. During the course of assessment proceedings, assessee was asked to justify its claim of dividend of Rs. 569.06 lakhs for exemption under Section 10(33). It was submitted that the assessee claimed dividend receipt as exempt and what is claimed as exempt is dividend income as there is no expenditure whatsoever incurred in earning the dividend income. There is no borrowing attributable to the investments made by the assessee. It was further submitted, in respect of dividend of Rs. 6,34,17,603 received during the year under consideration, Rs. 5,69,06,124 was claimed as exempt under Section 10(33) as dividend of this amount was declared/paid on or after 1st June, 1997 and balance of Rs. 65,11,479 declared/paid prior to 1st June, 1997 was brought to tax.
5. However, the AO did not accept the claim of the assessee. He held, the assessee has not allocated any expenditure incurred for earning the dividend. In common pool of funds, it is very difficult to ascertain whether the investment was made out of internal accruals or from borrowed funds. If the assessee has not made investment in shares/securities, it was not necessary to borrow funds to that extent and consequently the interest burden could have been reduced to same extent. For the above proposition, he relied upon the decision of the Hon'ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P) Ltd. . AO, vide p. 9 of his order, has given the relevant statistics to work out attributable interest and other expenses to dividend receipts. He held, gross receipts of dividend and expenses attributable to same are to be assessed under the head "Income from other sources", as such they are taken out from the head "Income from business and profession". Further, relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. , AO held that the gross dividend receipts received by the assessee is not eligible for exemption under Section 10 and only the income derived from these receipts would be allowed exemption. Aggrieved by the above order, assessee approached the first appellate authority.
6. Before the CIT(A) it was contended that the assessee always borrowed the money for its manufacturing business and made investments out of its surplus funds. Interest has been claimed as expenditure under Section 36 and has been allowed in the past. Assessee was also allowed deduction under Section 80M on the gross dividend received because there was no borrowing for making investment and no such interest was required to be allocated. It was further contended that the action of the AO in notionally allocating interest and expenses is incorrect. Once the interest is claimed under Section 36, the onus is on the AO to show that the expenditure is not allowable under that section. Assessee has not borrowed any money for the purpose of making investments. In fact, the realization from investments exceeded the fresh purchases. Relying upon various judgments of High Courts, it was contended that it is not open to the AO to notionally allocate interest and other expenditure to earning dividend income. It was further contended that interest is allowable under Section 36 and cannot be apportioned in an ad hoc manner to divided. For the above proposition assessee relied upon the decisions of the Hon'ble Calcutta High Court in the cases of CIT v. Anniversary Investments Agencies Ltd. and CIT v. New India Investment Corporation Ltd. and the decision of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Laxmi Agents (P) Ltd. (1980) 125 ITR 227 (Guj).
7. CIT(A) opined that it is not permissible for the AO to allocate interest on ad hoc basis and expenditure on estimate basis, pertaining to dividend income earned by the assessee. He held, the onus has not been discharged by the AO by pointing out any particular item of expenditure or investment has been made out of borrowed funds. It is not permissible to allocate expenditure on ad hoc basis and thereafter reduce exemption Under Section 10(33). For the above proposition, he relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. United Collieries Ltd. . He allowed the claim of the assessee vide paras 2.6 and 2.7 of his order, observing as under:
2.6 I have also perused the assessment orders upto asst. yr. 1994-95 which show that full deduction under Section 80M was allowed as claimed by the appellant. The appellant has at my request, also furnished details of investments made subsequent to that date. It is obvious that its own profits and own funds are adequate for the said purpose. In fact, if one considers the subsequent inflows from sales of investments and dividends together with the subsequent outflows from purchases of investments for the period from asst. yrs. 1995-96 to 1998-99, there is a net inflow of Rs. 34,97,000. In this very year, the sales are Rs. 55 crores as against fresh purchases of Rs. 6 crores. This also shows that the AO has been unable to demonstrate that borrowed funds have been utilised for making purchases.
2.7 For all the reasons mentioned above, I am of the opinion that the AO was in error in allocating interest and other expenditure to the earning of dividend income and consequently reducing the exemption allowable under Section 10(33) of the IT Act as claimed by the appellant.
Aggrieved by the above order, Revenue is in appeal before the Tribunal.
8. Learned Departmental Representative submitted that the observation of the CIT(A) vide para 2.4 of his order is too general and without any basis. Learned Departmental Representative submitted, according to the CIT(A), assessee has borrowed money for the purpose of its business; but he is not mentioning on what ground he has arrived at this conclusion. Learned Departmental Representative reiterated the view of the AO that had the assessee not made the investments, it would not have been required to borrow funds for the purpose of business. He submitted, it is not for the Revenue to prove the nexus but it is for the assessee to establish that the borrowed fund has not been utilised to make such investment. Learned Departmental Representative further submitted, this is first year of introduction of Section 10(33). Subsequently, Section 14A was introduced with retrospective effect, which shows the intention of the legislature.
9. On the other hand, learned Counsel for the assessee relied upon the order of the learned CIT(A) and further submitted that the decisions relied upon by the learned AO are distinguishable on facts. He submitted, in the instant case of the assessee, on perusal of the statements for each and every year, it will be clear that the sale proceeds of investments during the particular financial year far exceed the cost of investments made during the year under consideration. There is no borrowing attributable to the acquisition of shares on which dividend has been received. Surplus realized by the assessee on sale of past investments in each and every year, has been ploughed back into the business activities of the assessee. Factually, there is no borrowing to fund an investment. On the contrary, the surpluses on sale of shares have funded the assessee's manufacturing operations. He further submitted, perusal of share capital and reserves and surplus in the balance sheet at the end of the year would reveal that reserves and surplus amount to Rs. 26206 lakhs and share capital amount to Rs. 6,514 lakhs. Amount in investments aggregates to Rs. 23,179.55 lakhs, which is much lower compared to capital employed, i.e. Rs. 32,720 lakhs and it is more than covered by reserves of the assessee company. Learned Counsel submitted, one cannot notionally and on sheer conjecture ascribe expenses to the earning of dividend income when in actual fact no such expenses had been incurred. The onus is on the Revenue to show that expenses have been actually incurred for earning of dividend income. In support of the above, learned Counsel relied upon the decision of the jurisdictional High Court in the case of CIT v. Mahendra Sobhagchand Shah . Learned Counsel also relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT v. United Collieries Ltd. (supra).
10. Learned Counsel further submitted, even on facts there cannot be any disallowance in the instant case of the assessee. Particularly he brought our attention to the observation of the AO, made at pp. 8 and 9 of his order, which reads as under:
In the common pool of funds, it is very difficult to ascertain whether the investment has been made out of internal accruals or from the borrowed funds. Hence the position has to be judged from overall principal status of the 'assessee', as reflected in the balance sheet. If the assessee had not made investment in these shares/securities, it would not have been required to borrow the funds to that extent and, consequently, the interest burden could have been reduced to the same extent. Viewed from this angle, it is to be held that part of the interest payment pertains to the funds utilized for the purpose of investment in these shares. For this proposition, I rely upon the ratio of Hon'ble Allahabad High Court judgment in the case of CIT v. H.R. Sugar Factory (P) Ltd. .
11. Learned Counsel further submitted, for the subsequent assessment year, on similar set of facts, AO himself has not made any disallowance. In order to support this view, he brought our attention to paper book p. 76, which is assessment order for the asst. yr. 1999-2000, particularly the following observation of the AO (p. 10 of assessment order/paper ' book p. 85):
In the common pool of funds, it is very difficult to ascertain whether the investment has been made out of internal accruals or from the borrowed funds. Hence the position has to be judged from the overall status of the assessee, as reflected in the balance sheet. However, the assessee has given its submissions as above that no part of the borrowing is attributable to the investments made from which it has earned dividend income. Hence, there is no possibility of allocation of any interest expenditure on such dividend income. However, as accepted by the assessee, certain expenditure will most certainly be incurred for earning such dividend income. I estimate such expenditure @ 5 per cent of the dividend of Rs. 43,70,884, which has been claimed exempt under Section 10(33) of the Act. Hence, the expenditure to be disallowed works out to Rs. 2,18,544.
12. Learned Counsel submitted, for the asst. yr. 2000-01, Revenue has accepted the order of the learned CIT(A) on the very same point, which is in favour of the assessee. He further submitted that for the assessment year under consideration the assessee in fact sold investment worth Rs. 55 crores whereas assessee purchased and made investment only to the tune of Rs. 6 crores. On the premises of the above facts, there is no reason and there is no meaning in saying that the assessee had spent borrowed money to make the investment. Assessee is not trading in shares. Assessee had made investment only in assessee's group concerns, where the assessee need not spend any labour for the above purpose. In support of assessee's contention that no disallowance could be made, learned Counsel relied upon the following decisions:
The Hon'ble Bombay High Court in the case of CIT v. General Insurance Corporation of India held : "that the expenses incurred by the assessee on account of salary paid to staff, stamp duty, transfer fee and safe custody charges were not directly relatable to earning of dividend for the purpose of computing special deduction under Section 80M of the IT Act, 1961". Learned Counsel submitted, this decision is squarely applicable in the instant case of the assessee. Learned Counsel also relied upon the Special Bench decision of the Tribunal Chandigarh Bench, in the case of Punjab State Industrial Development Corporation Ltd. v. Dy. CIT for the same proposition.
Learned counsel also relied upon the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT in support of the view that in the subsequent year CIT(A)'s decision which was in assessee's favour has not been challenged and therefore the Revenue is precluded from agitating the issue for the year under consideration. Though strictly resjudicata is not applicable as far as Revenue's case is concerned, yet the learned Counsel submitted that in fairness demands the same, particularly following observation of the Hon'ble Supreme Court, which is the binding decision for all the subordinate Courts and Tribunals, which reads as under:
Strictly speaking, resjudicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
[The Court emphasized that the decision is confined to the facts of the case and may not be treated as an authority on aspects which have been decided for general application.]
13. In reply, learned Departmental Representative submitted that the decision relied upon by the learned Counsel in the case of Radhasoami Satsang v. CIT (supra) cannot strictly be applied because there should be a conscious decision not to appeal. There may be many reasons for not taking a further appeal from the decision of the CIT(A).
14. Considering the rival submissions and the decisions relied upon by the contending parties and also the facts brought on record, we are of the view that the order of the learned CIT(A) does not call for any interference. Assessee is a big conglomerate. It is very difficult to come to a definite conclusion that the assessee has borrowed funds for investment, where assessee will get tax-free returns, particularly in view of the fact that assessee has sold its own assets/shares to the tune of Rs. 55 crores whereas assessee has made investment to the tune of Rs. 6 crores and odd. In the light of the above fact, it is very difficult to come to the conclusion that the assessee has utilised borrowed funds to make investment in the tax-free returns. The appeal by the Revenue on this ground hence fails and it is dismissed.
15. Coming to next ground (ground No. 2) of objection taken by the Revenue it is directed against the order of the CIT(A) in allowing deduction under Section 35D to the tune of Rs. 90,17,700, without giving the AO an opportunity to re-examine the issue.
16. AO observed, in the revised return the assessee had claimed deduction under Section 35D in respect of share issue expenses of Rs. 90,17,700. Assessee was asked to give working in respect of allowable expenditure, especially nature and quantum of capital employed. In the absence of details, and basis for claim of deduction under Section 35D. AO made the impugned addition. Aggrieved, assessee approached the first appellate authority.
17. CIT(A) found that on identical facts in the preceding as well in the subsequent years the claim of the assessee was allowed by the AO himself and therefore he held that there was no reason why one year should be singled out and given a different treatment. Accordingly, CIT(A) allowed the claim of the assessee. Aggrieved, Revenue is in appeal before the Tribunal.
18. Learned Departmental Representative supported the order of the AO.
19. On the other hand, learned Counsel for the assessee submitted that the assessee had submitted all the details before the AO. If the AO had any doubt on any point, he should have clarified it from the assessee. In the absence of this, learned Counsel submitted, CIT(A) was justified in allowing the claim of the assessee.
20. We heard the rival submissions. Considering the fact that for nine years the claim of the assessee had been allowed and the assessment year under consideration being the only year in which the disallowance is made, we find, there is no justification in reversing the order of the CIT(A) on the point. The appeal by the Revenue on this ground hence fails and it is dismissed.
21. The next ground (ground No. 3) of objection taken by the Revenue, is directed against the order of the CIT(A) in treating the interest received of Rs. 424.5 lakhs as business income without considering the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT
22. Assessee was asked by the AO vide his letter dt. 30th Jan., 2001 why the following incomes should not be treated as income from other source:
(a) Interest Rs. 238.90 lakhs
(b) Leave and License Rs. 211.88 lakhs
(c) Misc. income Rs. 612.49 lakhs
(d) Interest Rs. 288.33 lakhs
(e) Lease management fees Rs. 152.27 lakhs
(f) Misc. income Rs. 104.39 lakhs and
(g) Interest Rs. 122.44 lakhs
23. Assessee stated in reply that these incomes are to be treated under the head "Profit and gains of business and profession" as they arise directly from and entitled to various businesses carried on by the assessee. In the absence of specific information regarding receipt of rental income which may be assessed under house property, the following income was assessed under the head "Income from other source":
Nature of Income Amount (Rs.
In lakhs)
(1) Miscellaneous Interest paid on fixed deposits with banks 13.73
(2) Leave and licence fees received from outside parties in 206.21
the nature of rent other than fees received from employees
for staff quarters
(3) interest on inter-corporate deposits 288.33
(4) Interest on investments 1.35
(5) Interest on income-tax refunds 121.09
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Total 630.71
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24. AO has given the detailed reasons, which can be summed up as under:
Firstly he held, computing income under specified heads is not only proper; it is also obligatory on the part of the Revenue to do so. Income cannot be charged under a wrong head merely because the assessee returned it under a wrong head. Computation of income under each head is to be done independently and separately. Interest income on investment of surplus funds is to be taxed under the head "Income from other sources". For the above proposition, AO relied upon the decision of the Hon'ble Rajasthan High Court in the case of Murli Investment Co. v. CIT (1987) 65 CTR (Raj) 5 : (1987) 167 ITR 368 (Raj). AO also relied upon the decision of the jurisdictional High Court in the case of Godavari Sugar Mills Ltd. v. CIT , wherein the Hon'ble High Court held that interest received on loans and advances where there is no evidence that the loans or advances were compulsion in the course of assessee's business, income arising from such advances is to be treated under the head "Income from other source". Further, interest received by the assessee from bank deposit or short-term deposit is to be assessed under the head "Income from other source". For the above proposition, he relied upon various decisions in the cases of CIT v. Derco Cooling C. Oil Ltd. ; United Liner Agencies of India (P) Ltd. v. CIT and CIT v. Bihar Alloys Steels Ltd. , etc. He held, finally the issue has been settled by the Hon'ble Supreme Court in detail in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (supra). Though the decision was regarding interest income prior to commencement of its business, but the ratio of the judgment clarified and settled down the controversy. Hon'ble Supreme Court ruled that interest derived by the assessee from investment in short-term deposits with bank would be chargeable under the head "Income from other source". AO also relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Coromandal Cements Ltd. (1999) 153 CTR (SC) 209 : (1998) 234 ITR 412 (SC) (Larger Bench), wherein it is held that interest would not go to reduce the interest payable by netting out of interest by the assessee on the term loans secured by the assessee from financial institution for the purpose of business.
In the light of the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. cited supra. AO held if the fund of the assessee company is fruitfully utilized instead of being kept idle, the income thus generated will be of revenue nature and chargeable to tax under Section 56 of the IT Act, 1961. He also placed reliance on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corporation , which laid the principles regarding taxability of interest under specified head. On the basis of the discussion contained at pp. 13 to 21, AO treated the income under the head "Income from other source". Aggrieved by the above order, assessee approached the first appellate authority.
25. Before the CIT(A) assessee contended that the assessment order was erroneous and the facts are clearly distinguishable from the decisions relied upon by the AO. Assessee was carrying on several business activities and at the end of the year assessee borrowed Rs. 448 crores and during the year assessee incurred interest expenditure of almost Rs. 66 crores. The finding that the assessee had invested its surplus funds is an erroneous finding. It was submitted from the details of interest earned that the amounts were actually kept as margin money for obtaining guarantees, bonds with statutory authorities, etc. In several cases money had been lent to subsidiary companies and associate companies within the group concerns because assessee is the flagship company of the group. Loans were given to sustain the subsidiaries and to protect investments made by the assessee in those companies. It is not possible nor it is correct to isolate interest earned and interest expended in a general manner.
26. In the light of the above, vide para 6.2 of his order CIT(A) decided the issue in assessee's favour While so doing he held that it was not possible in a large company like the assessee to consider interest received de hors interest expended. He held that interest expenditure is allowable under Section 35 and this has to be reduced from the business income. He further held, assessee is a large multi-activity company, whose interest expenditure is to the tune of Rs. 66 crores and thus it is not possible to hold that receipts in the region of Rs. 4 crores are of different character. Aggrieved by the above order, Revenue is in appeal before the Tribunal.
27. Learned Departmental Representative supported the order of the AO and submitted, relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. Autokast Ltd. (2001) 165 CTR (SC) 16 : (2001) 248 ITR 110 (SC), which followed the decision of the apex Court again in the case of Tuticorin Alkali Chemicals & Fertilizes Ltd. v. CIT (supra), wherein the Hon'ble Supreme Court (Large Bench) held that interest was taxable in the hands of the assessee as income from other sources. Learned Departmental Representative further submitted, the facts were not properly put before the AO by the assessee. CIT(A), while reversing the order, had also not given any cogent reason why he is reversing the order of the AO. Again he placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Coromandal Cements Ltd. (supra), wherein their Lordships, following the decision in the case of Tuticorin Alkali Chemicals & Fertilizes Ltd. (supra), reversed the decision of the Hon'ble Andhra Pradesh High Court in CIT v. Coromandal Cements Ltd. (1999) 153 CTR (AP) 210. Hence, learned Departmental Representative submitted, the order of the CIT(A) is to be reversed.
28. Replying to the above, learned Counsel for the assessee submitted, bringing our attention to paper book p. 73, which is submission of the assessee with regard to disputed interest, wherein the assessee invited the attention of the AO for the immediate preceding year where surplus income was allowed as income from business. If was submitted, assessee was having financial operations, which is one of the objects of the assessee company for the past several years and the income was always treated as income from business. Assessee has earned interest income by giving inter-corporate deposits, placing money on call deposits, etc. It was submitted, assessee had carried on this business of advancing money in an organized and systematic manner and earned such income, which was always treated as income from business. Learned Counsel again brought our attention to paper book pp. 7 to 9, which is statement of facts. It was submitted, AO was wrong in treating the interest received on investment of surplus or idle funds as income from other sources, treating if temporary or short-term in nature and there was no compulsion for making such investment and further no business connection etc. The deposit was not placed with an intention to earn interest but it was in order to obtain securities, guarantees or as margin money with various authorities like customs, excise, etc. as per exigencies of business. Assessee was having no surplus funds, it was submitted. Loans and advances were given to companies so as to sustain them and protect the investment made by the assessee in those companies. It was part of business necessity. Financing was also a part of assessee's business and earning interest was as per the objects clause of the memorandum. Revenue has treated this in the past as business income always.
29. Coming to leave and licence fees received, it was submitted, AO has stated that there was no information provided and in the absence of such information, it was to be treated as income from other sources. It was submitted; this finding of the AO is incorrect. In this connection it was informed that the assessee was engaged in the business of giving properties on leave and licence for the past several years. Assessee used the assets of the company for leave and licence transactions. It was one of the businesses of the assessee to give premises on leave and licence basis and earn fees as per the objects clause of the memorandum. It was further submitted, assessee utilized certain portion of its factory after changing the user with permission of municipality, into a commercial complex and has licenced the premise for use by large multinational corporations. Hence, these are business assets and have been exploited by the assessee as such. It has been subjected to depreciation and depreciation on such buildings has been allowed even by the AO. These premises/assets were reflected as fixed assets in the financial statement. The volume of such activity will show that it was a full-fledged business activity. In view of the above facts, it was submitted that this income is to be treated as business income.
30. Learned Counsel again brought our attention to paper book pp. 76 to 101, assessment order for the asst. yr. 1999-2000, wherein similar income was treated as business income. Learned Counsel hastened to add that he is not disputing the disallowance of two items by the AO, viz. item Nos. (1) and (5), mentioned hereinabove vide para 23 of our order. He further submitted, the decisions relied upon by the AO are distinguishable on facts.
31. Considering the rival submissions, we are of the view that the claim of the assessee is liable to be allowed, as rightly noted by the learned CIT(A), except interest on income-tax refunds. First of all, same items on similar set of facts, have been allowed even by the AO in the subsequent as well in the preceding years. Though of course each year is independent, but on similar set of facts there cannot be divergent views for different years as far as the taxing of the subjects concerned. Regarding leave and licence fees received, assessee has brought on record that assessee had given on rent some of the business assets for better utilization of the same to assessee's advantage. Regarding miscellaneous interest, learned Counsel for the assessee brought our attention to paper book p. 8, which argument has already been mentioned in the preceding para hereinabove. Briefly to repeat, the deposit was not intended to earn interest but to obtain securities, guarantees or was compelled to retain as margin money with customs, excise authorities etc. This item, we are of the view, should be remanded back to the file of AO, so as to verify the facts in detail. AO may allow the claim of the assessee if he is satisfied of the above contention of the assessee. The appeal by the assessee on this ground is allowed in part for statistical purposes. In short, item No. (1) remanded back to the file of AO for verification; item No. (5) is decided in Revenue's favour; and coming to item Nos. (2), (3) and (4), order of the CIT(A) is confirmed.
32. Coming to next ground (ground No. 4) of objection taken by the Revenue, it is against the order of the CIT(A) in directing the AO to tax receipt of Rs. 2,06,21,000 being leave and licence fees as business income instead of income from other sources.
33. This ground is part of ground No. 3, which has already been discussed hereinabove and decided in assessee's favour. Hence, the appeal by the Revenue on this ground fails and it is dismissed.
34. Coming to next ground (ground Nos. 5 and 6) of objection taken by the Revenue, it is against the order of the CIT(A) in directing the AO to allow deduction under Section 80HHC of the IT Act, 1961, while computing the book profit on the basis of profits disclosed in the P&L a/c after making adjustments, though Clause (viii) of Explanation to Section 115JA prescribes deduction under Section 80HHC to be computed under Clause (a), (b) or (c) of Sub-section (3A)of Section 80HHC.
35. Contending parties conceded that this issue now stands covered against the Revenue by the Special Bench decision of the Tribunal in the case of Dy. CIT v. Syncome Formulations (I) Ltd. (2007) 108 TTJ (Mumbai(SB) 105 : (2007) 13 SOT 414 (Mumbai)(SB), wherein the Tribunal held that deduction under Section 80HHC in a case of MAT assessment is to be worked out on the basis of adjusted book profit under Section 115JA and not on the basis of profit computed under regular provisions of law applicable to computation of profits and gains of business or profession. Hence, the appeal by the Revenue on this ground fails and it is dismissed.
36. Next ground (ground No. 7) of objection taken by the Revenue is directed against the order of the CIT(A) in allowing the claim of the assessee to reduce the book profit on account of depreciation on revaluation of assets without appreciating the fact that revaluation reserve cannot be considered to be reserve within the meaning of Expln. (i) to Section 115JA(2) as at the time of creation of revaluation reserve it has not been routed through P&L a/c.
37. AO noticed on going through details that the assessee reduced book profit under Section 115JA by Rs. 242.25 lakhs on account of depreciation on revaluation of assets. He further noticed that the impugned depreciation has not been credited to the P&L a/c, as such the same cannot be reduced from book profit. He held, since the depreciation has been withdrawn from revaluation reserve account from balance sheet, therefore, it needs no adjustment as per provisions of Section 115JA. As such, assessee is not entitled for deduction of Rs. 242.25 lakhs on account of depreciation for revaluation of assets. Aggrieved, assessee approached the first appellate authority.
38. The learned CIT(A) concurred with the submissions advanced on behalf of the assessee and allowed deduction for the said amount.
39. After considering the rival submissions and perusing the relevant material on record, it is apparent from p. 27 of the paper book, being the annual report, that there is depreciation for the year on revaluation components of Rs. 2,42,26,000 transferred to the P&L a/c. The AO has not disputed the fact that the revaluation reserve was created in the financial year 1992-93 without debiting the P&L a/c. From the prescription of Expln. (i) to Section 115JA read with its proviso, it becomes clear that the amount withdrawn from the reserve in the previous year relevant to the assessment year commencing on or after 1st April, 1997 but ending before 1st April, 2001 shall not be reduced from the book profits, unless the book profit of such year has been increased by those results or provisions. It is simple and plain that the provision in the instant case was made in the financial year 1992-93, which is prior to the commencement of asst. yr. 1997-98. We are of the considered opinion that the learned CIT(A) was fully justified in accepting the assessee's claim in allowing the deduction of the said amount from the book profit for the purpose of Section 115JA. This ground of the Revenue's appeal is therefore not allowed.
39. Coming to next ground (ground No. 8) of objection taken by the Revenue, it is against the order of the CIT(A) in directing the AO to delete Modvat addition of Rs. 3,13.44,000 in the closing stock.
40. We heard the rival submissions. This issue has to go in assessee's favour since the learned CIT(A) has followed the decision of the Hon'ble Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. , which has been upheld by the Hon'ble Supreme Court in CIT v. Indo Nippon Chemicals Co. Ltd. . Hence, the appeal by the Revenue on this ground fails and it is dismissed.
41. In the result, appeal of the Revenue stands allowed in part for statistical purposes.