Income Tax Appellate Tribunal - Ahmedabad
Matsushita Lakhanpal Battery (I) ... vs Department Of Income Tax on 28 November, 2011
आयकर अपीलीय अिधकरण, अहमदाबाद Ûयायपीठ 'बी', अहमदाबाद
सव[ौी ौी डȣ.
डȣ.के.×यागी,
×यागी Ûयाियक सदःय एवं ौी ए.मोहन
मोहन अलंकामोनी, लेखा सदःय के सम¢
IN THE INCOME TAX APPELLATE TRIBUNAL : 'B' BENCH : AHMEDABAD
Before Shri D.K.Tyagi, J.M. & Hon'ble Shri A.Mohan Alankamony, A.M.)
आयकर अपील सं. ITA No. 982/Ahd./2006 : िनधा[रण वष[ः- 2001-2002
ACIT, Circle-4, Baroda-vs- Matsushita Lakhanpal Battery(I) Ltd., Baroda
(PAN : AAACL 3332K)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
आयकर अपील सं. ITA No. 1001/Ahd./2006 : िनधा[रण वष[ः- 2001-2002
Matsushita Lakhanpal Battery(I) Ltd., Baroda-Vs- ACIT, Circle-4, Baroda
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
आयकर अपील सं. ITA No. 1416/Ahd./2006 : िनधा[रण वष[ः- 2002-2003
ACIT, Circle-4, Baroda-Vs- Matsushita Lakhanpal Battery(I) Ltd., Baroda
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
आयकर अपील सं. ITA No. 1461/Ahd./2006 : िनधा[रण वष[ः- 2001-2002
Panasonic Battery India Co.Ltd., Baroda -Vs- ACIT, Circle-4, Baroda
(formerly Matsushita Lakhanpal Battery(I) Ltd.)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
राजःव कȧ ओर से/ Department By : Shri Alok Johri, CIT(DR)
िनधा[ǐरती कȧ ओर से / Assessee By : Shri Milin Mehta, A.R.
सुनवाई कȧ तारȣख / Date of Hearing : 28/11/2011
घोषणा कȧ तारȣख / Date of Pronouncement : 16/02/2012
आदे श / Order
Per Shri A.Mohan Alankamony, Accountant Member :
These are four appeals - (i) two appeals of the Revenue; and (ii) another two appeals of the assessee for the identical assessment years of 2001-02 and 2002-03 - are directed against the impugned orders of ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 the Ld. CIT (A)-III, Baroda in Appeal Nos: CAB/III/147/2004-05 and CAB/III/31/2005-06 dated 15.2.2006 and 31.3.2006 for the AYs 2001-02 and 2002-03 respectively.
I. ITA NO.982/06 : A.Y. 2001- 2002 - (By the Department):
2. The Revenue had raised the following grounds:
The Ld. CIT (A) erred in -
1&2 allowing the investment allowance of Rs.37,23,126/- on Rs.1,86,15,629/- paid on account of difference in rate of Foreign currency loan obtained for purchase of plant and machinery installed in the AY 1990-91;
3&4 deleting the disallowance of royalty payment of Rs.1,99,85,687/-without making tax deducted at source (TDS);
5&6 holding that sales-tax and excise duty should be excluded from the total turnover for the purpose of calculation of deduction u/s 80HHC of the Act;
7&8 directing that the sale value of scrap discount received against raw materials, interest income earned by the assessee from the clients and sale consideration of old newspapers/scrap were business income eligible for deduction u/s 80HHC of the Act;
9 & 10 allowing deduction u/s 80-IB of the Act in respect of Pithampur Unit of the assessee;
11&12 holding that scrap sale was part of profit from industrial under-taking and, hence, eligible for deduction u/s 80-IB of the Act; & 13 general in nature which requires no adjudication.
II. ITA NO.1001/06 : A.Y. 2001-2002 - (By the assessee):
2.1. The assessee had raised the following grounds:
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 The Ld. CIT (A) erred in -
1&2 confirming the ad-hoc disallowance of Rs.58,860/- and Rs.3,42,940/- out of miscellaneous and welfare expenses being non-business use;
3 confirming the disallowance of Rs.61,800/- being donation;
4 confirming the addition of Rs.40,709/- representing amortization of premium paid for land taken on lease being capital expenditure;
5 erred in confirming the AO's stand in allocating the export expenses of Rs.26,73,000/- in proportion of export turnover of trading goods to export turnover of manufactured goods for the purpose of calculating deduction u/s 80HHC of the Act on export of trading goods;
6 confirming the action of the AO in allocating the indirect expenses of Rs.11,51,103/- instead of Rs.1,73,639/- to export of trading goods for the purpose of calculating deduction u/s 80HHC of the Act on export of trading goods;
7 confirming the AO's action in reducing 90% of Rs.3,22,45,505/-
from the profit of business for the purpose of computing deduction u/s 80HHC of the Act on the ground that they did not constitute business income;
8 confirming the stand of the AO that the gross amount of interest and other income was required to be excluded for the purpose of computing deduction u/s 80 HHC of the Act and no deduction should be granted for expenditure incurred for earning the said income;
9 & 10 confirming the action of the AO in reducing from income eligible for deduction u/s 80IB of the Act of Rs.62,24,820/- on the ground that, that income was not derived from the industrial undertaking; & 11 charging of interest u/s 234B and 234D of the Act.
III. ITA NO.1416/06 : A.Y. 2002-2003 - (By the Department):
2.2. The Revenue had raised the following grounds:
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 The Ld. CIT (A) erred in -
1 & 2 deleting the disallowance of royalty payment of Rs.4,28,40,319/- without payment of TDS on the above sum as required u/s 40(a)(i);
3 & 4 holding that sales-tax and excise duty should be excluded from the total turnover for the purpose of calculation of deduction u/s 80HHC of the Act;
5 6 &7 directing that the sale value of scrap discount received against raw materials, interest income earned by the assessee from the clients and sale consideration of old newspapers/scrap were business income eligible for deduction u/s 80HHC of the Act;
8 & 9 allowing deduction u/s 80-IB of the Act in respect of Pithampur Unit of the assessee;
10 & 11 holding that the scrap sale was part of profit from industrial under-taking and, hence, eligible for deduction u/s 80-IB of the Act; &
12 being general in nature, it does not qualify for adjudication.
IV. ITA NO.1461/06 : AY 2002-03 - (By the assessee):
2.3. The assessee had raised the following grounds:
The Ld. CIT (A) erred in -
1 confirming the ad-hoc disallowance of Rs.3,21,377/- made by the AO by invoking the provisions of s.14A of the Act on the ground that it represented expenditure incurred for earning income which did not form part of total income;
2 confirming the disallowance of employer's contribution to ESI fund of Rs.6163/- made by the AO;
3 confirming the addition of Rs.40709/- representing amortization of premium paid for land taken on lease on the ground that the same represents capital expenditure;
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 4&5 confirming the ad-hoc disallowance of Rs.71469/- & Rs.2,63,290/- out of miscellaneous and welfare expenses respectively on the ground of non-business use;
6 considering Rs.19,96,499/- under soft-ware expenses, repairs to building/machinery etc., as capital expenditure;
without prejudice, the CIT (A) erred in confirming the stand of the AO in allowing depreciation on soft-ware only for half year on the assumption that software was put to use for a period of less than 180 days;
7 Adjustment in total turnover:
Confirming the stand of the AO in including Rs.57,89,392/- in total turnover for computing deduction u/s 80HHC of the Act;
8 Adjustment in profit of business:
Confirming the AO's action in reducing Rs.2,70,92,999/- from the profit of the business for computation of deduction u/s 80HHC of the Act as they did not constitute business income;
9 Confirming the AO's stand that gross amount of interest and other income was required to be excluded from the profits for the purpose of computing deduction u/s 80HHC of the Act and that no deduction should be granted for expenses incurred for earning the said income;
10 Adjustment in direct cost of export of trading goods:
Confirming the AO's stand in allocating export expenses of Rs.16.92 lakhs in proportion of export turnover of trading goods to export turnover of manufactured goods for the purpose of calculating deduction u/s 80HHC of the Act on export of trading goods;
11 Adjustment in indirect cost of export of trading goods:
Conforming the AO's action in allocating Rs.16,89,839/- as against Rs.2,50,874/- to export of trading goods for the purpose of deduction u/s 80HHC of the Act on export trading goods;
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 Also in confirming the stand of the AO in not reducing indirect expenses by 10% of other income and interest income for working out deduction u/s 80HHC of the Act on export of trading goods;
12 Deduction u/s 80-IB of the Act:
Confirming the AO's stand in reducing from income eligible for deduction u/s 80-IB of the Act of Rs.52,67,300/- on the ground that those incomes were not derived from the industrial undertaking;
Without prejudice, the CIT (A) erred in sustaining the AO's action in excluding various incomes from profits derived from industrial undertaking for computing the deduction u/s 80-IB of the Act on the basis of 'gross receipts' thereof and in not allowing any expenditure incurred for earning the respective incomes;
13 Charging of interest u/s 234B and 234D of the Act;
14 Confirming the initiation of penal proceedings u/s 271(1)(c) of the Act; & 15 General in nature which doesn't survive for adjudication.
3. As the issues raised by the rival parties were pertaining to the same assessee, for the sake of convenience and clarity, they were heard, considered together and disposed off in this common order.
4. The submissions made by the either party were duly considered, carefully perused the relevant case records as well as the case laws relied on by both the parties. The issues agitated by the respective parties are adjudicated in the following manner:
I. ITA NO.982/Ahd/06 : A.Y. 2001-2002 - (By the Department):
5. (i) With regard to disallowance of the assessee's claim of investment allowance at 20% on foreign currency loan on exchange rate fluctuation (ground Nos: 1 & 2); it has been observed that the Hon'ble ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 jurisdictional High Court in the assessee's own case for the AY 1983-84 in Tax Appeal No.279 of 1999 [Lakhanpal National Ltd v. ITO] on 24.10.2002 had held that the assessee is entitled to investment allowance in respect of additional cost suffered by it due to exchange rate fluctuation.
5.1 Since the outcome of the SLP appears to have been filed by the Revenue before the Hon'ble Apex Court against the ruling of the Hon'ble High Court is not forth-coming, we are in agreement with the finding of the CIT (A) on this issue.
(ii) In respect of disallowance of royalty payment of Rs.1,99,85,687/- [ground Nos: 3 & 4] in the absence of effecting TDS, our attention was drawn to the fact that a similar issue had cropped up before the earlier Bench in the assessee's own case for the AYs 1997-98 and 1998-99 wherein the Hon'ble Bench in its finding [in ITA Nos: 3945/A/2002 & 3949/A/2002 dated: 21.11.2008] remitted back the issue to the file of the AO with a direction to decide the issue afresh [Para 3 of its order].
5.2 In conformity with the finding of the earlier Bench on an identical issue, we remit back the issue to the file of the AO with a specific direction to look into the matter afresh and to take appropriate action in accordance with the provisions of the Act. He shall, however, keep in view the directions of the earlier Bench on the matter while deciding the present issue.
(iii) With regard to inclusion of excise duty and sales-tax (ground Nos.5 & 6), it appears that following the findings of the Hon'ble earlier Bench in the case of Gujarat Alkalies & Chemicals Ltd., [ITA No.1188/Ahd/2000 dated 13.12.2001] and the Hon'ble Apex Court in ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 Chowringhee Sales Bureau [87 ITR 542 (SC)], the AO, perhaps, included these receipts in the total income.
5.3 However, the CIT (A), taking shelter in the findings in the cases of
(i) IFB Agro Industries Ltd v. CIT [83 ITD 96 (Cal)(SB)] and (ii) CIT v. Chloride India Ltd [256 ITR 625 (Cal)] directed the AO not to include sales-tax and excise duty in the total turnover for the purpose of computation of deduction u/s 80-HHC of the Act.
5.4 This has, however, been hotly objected to by the Revenue before us with the submission that -
"(Submission dt:1.11.11) Deduction u/s 80HHC: Hon'ble Supreme Court on its land mark judgment in the case of Laxmi Machine Works sand K Ravindranathan Nair has made categorical observation that on account of frequent amendment of section 80HHC of the Act, it is no more a cord in itself and the judgment is related to the laws as applicable for that particular AY. The assessment year in those two cases is AY 1993-94. Further, in the case of Laxmi Machine Works, it was argued that unpaid Central Excise Duty and unpaid Sales-tax has to be treated as revenue following the Hon'ble Supreme Court judgment in the case of Chaurangilane. This is clearly reflecting that appellant was having a separate account where duties collected in the form of sales-tax and Central Excise duty paid are maintained which was prescribed at that particular time. This account was not mandatory to be part of trading or P & L account even by Accounting Standard.
After the introduction of section 145A of the Act, where basic issue was settled related to value of closing stock on account of modvat credit. It was made compulsory to include the duties in the ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 form of sales-tax, Central Excise, Octroi etc., not only in the opening, purchase of raw material but also in the closing stock of such goods. It is, therefore, with due regard to ratio of Laxmi Machine Works and K Ravindranathan Nair in respect of exclusion of such duties that to only from turnover is not applicable in the present context. Either both side of trading account and P & L A/c should be included with such duties or else excluded. The account of reducing Central Excise from total turnover is given distorting picture particular with concept of modvat credit.
The profit element is, therefore, crept in the 'business profit' of the appellant on account of modvat credit, is benefit given appellant out of the total collection of Central Excise for the Central Excise paid on raw material and capital goods. The ratio of Laxmi Machine Works and R. Nair is specified that since in the year of consideration of those cases, no element of business profit was involved by collection of such duties, therefore, same were directly to be excluded from total turn over. Now, the appellant is getting more deduction u/s 80HHC on the inflated profit on account of modvat credit which not the intention of Legislature."
5.5 The Ld. AR present was heard. We have duly considered the rival submissions on the issue.
5.6 At this juncture, we are inclined to recall the ruling of the Hon'ble highest judiciary of the land in the case of CIT v. Laxmi Machine Works reported in 290 ITR 667(SC) and the relevant portion of its verdict is extracted as under:
"16. We do not find any merit in the above contentions advanced on behalf of the Department. It is important to note that tax under the Act is upon income, profits and gains. It is not ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 a tax on gross receipts. Under s. 2(24) of the Act the word 'income' includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to 'The Law and Practice of Income-tax', by Kanga and Palkhivala, the word 'profits' in s.28 should be understood in normal and proper sense. However, subject to special requirement of income-tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income-tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income-tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business through such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act.[See : Page p. 455 of 'The Law and Practice of Income-tax' by Kanga and Palkhivala]. Therefore, schematic interpretation for making the formula in s. 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of s. 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of 'turnover' even though commission and interest emanated from exports. We have to read the works 'total turnover' in s. 80HHC as part of the formula which sought to segregate the 'export profit' from the 'business profits'. Therefore, we have to read the formula in entirety. In that formula, the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover + total turnover which constitute 80HHC concession (deduction). Income in the nature of 'business profits' was, therefore, apportioned. The above formula fixed a ratio in which 'business profits' under s.28 of the Act had to be apportioned. Therefore, one has to give weight-age not only to the words 'total turnover' but also to the words 'export turnover', total export turnover' and 'business profits'. That is the reason whyc we have quoted hereinabove extensively the illustration from the Direct Taxes (Income-tax) Ready Reckoner of the relevant word.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 In the circumstances, we cannot interpret the words 'total turnover' in the above formula with reference to the definition of the word 'turnover' in other laws like Central Sales-tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the P & L a/c., however, they were not eligible for deduction under s. 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income-tax, profits and gains were required to be computed with reference to the books of accounts of the assessee. However, as can be seen from the IT Rules and from the above Form No.10CCAC in the case of deduction under s. 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing s. 80HHC deduction was 'business profits' as computed under s.28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Sec.80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits Tax Act; it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of 'turnover', excise duty and sales-tax also cannot form part of the 'turnover'. Similarly, 'interest' emanates from exports and yet 'interest' does not involve an element of turnover. The object of the legislature in enacting s.80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, 'turnover' was the requirement, commission, rent, interest etc., did not involve any turnover. Therefore, 90 per cent of such commission, interest etc., was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in s. 80HHC (3) for the simple reason that it did not emanate from the 'export turnover', much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the 'turnover'. Just as ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 interest, commission etc., did not emanate from the 'turnover', so also excise duty sand sales-tax did not emanate from such turnover. Since excise duty and sales-tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc., do yield profits, but, they do not partake of the character of turnover and, therefore, they were not includible in the 'total turnover'. The above discussion shows that income from rent, commission etc., cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the AO [See: Page No.24 of the paper book], if so, then excise duty and sales-tax also cannot be form part of the 'total turnover' under s.80HHC(3), otherwise, the formula becomes unworkable. In our view, sales-tax and excise duty also do not have any element of 'turnover' which is the position even in the case of rent, commission, interest etc., it is important to bear in mind that excise duty and sales-tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under s. 80HHC would become unworkable. The view which we have taken is in the light of amendments made to s. 80HHC from time to time.
17. Before concluding, we may state that profits are of three types, namely, book-profits, statutory profits and actual profits. The amendments to s.80HHC (3) indicate exclusion of books profits. For example, commission, interest etc., do form part of the P & L a/c but for the purposes of calculation of profits derived from local sales and exports, they stand excluded. The difficulty arises because the formula is based on the hybrid system of profits, namely, actual and statutory profits. Therefore, this judgment should be reads in the context of the above parameters. Our reasoning in this judgment is confined to the workability of the formula in s.80HHC (3) of the Act as it stood at the material time."
5.7 In conformity with the ruling of the Hon'ble Supreme Court cited supra and also there was no change in formula being adopted, we are inclined to agree with the stand of the CIT (A) on this issue. It is ordered accordingly.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
(iv) With regard of 90% of interest and other income from profits of business for deduction u/s 80HHC of the Act (Ground No.7 & 8), the same are dealt with as under:
(a) Sale value of scrap of Rs.17,26,860/-: A similar issue came up for adjudication before the earlier Bench in the assessee's own case for the AYs 1998-99 (supra) and after considering rival submissions, the Bench had observed thus:
"5............it is noticed that scrap sale form part of sale of scrap generated during the manufacturing process of the assessee and this being an integral part of the manufacturing activity, the income there-from is to be considered for the purpose of working out deduction u/s 80HH of the Act. However, as regards to the claim of deduction u/s 80HHC, this income does not come within the purview of export income. Hence, in view of the latest decision of the Hon'ble Apex Court in the case of CIT v. K. Ravindranathan Nair (2007) 295 ITR 228 (SC), the assessee is not eligible for deduction u/s 80HHC of the Act. However, this will be included in the formula for the purposes of computation of deduction u/s 80HHC of the Act as profit of the business. In view of these directions, the assessing officer will re-compute the income with regard to deduction u/s 80HH and 80HHC of the Act."
In conformity with observation of the earlier Bench, the AO is directed to re-compute the income with regard to deduction u/s 80HH and 80HHC of the Act. Accordingly, this issue goes in favour of the assessee
(b) Discount received against the raw material:
Incidentally, the earlier Bench in its finding for the AY 1998-99 (supra) in an identical issue had observed thus:
"6...........After hearing the rival contentions, it is observed that the discount received on early payment to suppliers and the ld counsel for the assessee admitted that it is in fact does not amount to income and it only reduces the costs, therefore, the same cannot be reduced for computing ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 profit of business. But, we are of the view that when this does not amount to income and it only reduces the cost, the assessee is not entitled for deduction u/s 80HHC of the Act on this amount and, accordingly, in view of this direction, the assessing officer will re-compute the deduction u/s 80HHC of the Act.
Thus, this issue goes against the assessee.
(c) Interest income earned from customer of Rs.9,575/-
The assessee during the course of hearing conceded that this issue goes against the assessee [Refer: Appendix III of its brief]. On his part, the CIT (A) had stated that for the reasons recorded in his impugned order under the head 'Interest received from debtors', he had directed the AO not to exclude this income from profits of business. Accordingly, we confirm the CIT(A)'s stand on this issue.
(d) Sale consideration of old newspaper/scrap of Rs.1,89,585/-
Following the findings of various Tribunals as listed out in his findings, the CIT (A) sustained the AO's action of including those receipts in the total turnover as the assessee itself included those receipts in its business income. On perusal of the observations of the CIT (A) as well the contentions of the assessee, we find force in the CIT (A)'s observation which requires no intervention by this Bench at this stage
v) Ground Nos.9 & 10 pertain to the Revenue's stand that the CIT (A) erred in allowing deduction u/s 80-IB of the Act in respect of Pithampur Unit of the assessee. The origin of the issue was that the assessee had claimed deduction u/s 80-IB of the Act of Rs.1,03,08,002/- in respect of its new 3D line Unit at Pithampur on the plea that the said Unit was established during the AY 1995-96 and commenced commercial production in February, 1995; that in the absence of profit, ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 no deduction u/s 80-IA was claimed till the AY 1997-98; and when such a claim was put-forth for the AY 1998-99, the same was turned down by the Revenue on the ground that the assessee had not established any new industrial undertaking, but, only expanded its existing plant. The assessee got a breather in the first appeal; however, the Revenue had challenged the issue in the second appeal. At the time of concluding the assessment proceedings the issue was still undecided at the appellate stage, the AO took a stand that the assessee was not eligible to claim deduction of Rs.1,03 crores u/s 80IB of the Act for its Pithampur Unit.
5.8 After due consideration of the assessee's contentions as recorded in his impugned order under challenge, the CIT (A) had directed the AO to allow the claim for the AY under consideration as similar claims of the assessee were allowed in the earlier years.
5.9 During the course of hearing before us, it was contended by the Revenue that the AO had rightly disallowed the claim of the assessee u/s 80-IB of the Act as the assessee had not established any new unit in Pithampur, but, only expanded its existing plant for which the provisions of s.80-IB have no application.
5.10 Incidentally, almost similar issues in the assessee's own case for the AYS 1998-99 and 1997-98 came up for adjudication before the earlier Bench. After due consideration of the assessee's submissions as well as the reasoning of the CIT (A) in acceding to the assessee's claim as recorded in its finding, the Hon'ble Bench had concluded as under:
"7........................................................................... We find from the finding of CIT(A) that the assessee has double the capacity after installation of new plant and machinery. As against the total capacity of manufacturing 120 million batteries, the capacity doubled to 240 million batteries. There is ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 substantial rise in the addition to plant and machinery and accordingly, it can be safely said that new unit have come into existence. We are of the view that the assessee is entitled for deduction u/s 80IA and the CIT (A) has rightly allowed the claim of the assessee. ......."
5.11 In conformity with the ratio laid down by the earlier Bench cited supra, we are of the considered view that similarly the assessee is entitled to claim deduction u/s 80-IB of the Act for its Prithampur New Plant too. It is ordered accordingly.
(vi) Scraps sale (ground No.11 & 12) : The AO in his impugned order had stated that -
"12.1. Without prejudice to the above, it is to be mentioned that in its computation of deduction under section 80IB, the assessee has not excluded interest and similar income, which are not derived from industrial undertaking. As such, deduction under section 80IB is available only in respect of income derived from industrial undertaking. Therefore, interest and other income is to be excluded for this purpose. Reliance is placed in this regard a decision of Supreme Court in the case of Sterling Foods Ltd. (237 ITR 579) and ITAT, Ahmedabad in the case of Mira Industries (ITA No.4085/Ahd/1996) and others. Therefore, if at the appellate stage, the assessee is found to be entitled for deduction under section 80IB, the same is to be allowed only after excluding interest and other income etc.,"
5.12 The CIT (A) observed briefly that "[Para 15.3.(iv) This issue has been decided in favour of the appellant in earlier years. I am inclined to follow the same finding."
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 5.13 During the course of hearing, the Revenue had not contested the finding of the CIT (A), but, merely submitted that the CIT (A) ought to have upheld that scrap sale is not profit derived from industrial undertaking and, as such, not eligible for deduction u/s 80-IB of the Act.
5.14 On the other hand, the Ld A R submitted that the scrap sales were integral part of the business as the same were generated from manufacturing activities.
5.15 We have given due weight-age to the rival submissions. As could be seen from the Revenue's contention, it was being general without pin- pointing any specific reason as to why the scrap sale was not a profit derived from the industrial under-taking. On the other hand, there is a considerable force in the claim of the assessee that the scrap scale was an integral part of its business since scraps are bound to arise while indulging in manufacturing activities.
5.16 As no concrete evidence was forth-coming to refute the stand of the CIT (A), we sustain the finding of the first appellate authority on this issue.
5.17 No specific issue is involved in ground No.13 and, thus, it becomes inconsequential.
II. ITA NO.1001/06 - AY 2001-02 - (By the assessee):
6. Ground Nos. 1 & 2: The CIT (A) had confirmed the disallowance of miscellaneous expenses of Rs.58,860/- and welfare expenses of Rs.3,42,940/- on the premise that the assessee itself conceded that both the issues have been decided against it for the AYs 1999-00 and 2000-01 for the reasons recorded therein.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 6.1 With regard to welfare expenses' claim of Rs.34,29,400/- , the AO observed that no full details of break-up of expenses were furnished for verification and, therefore, he resorted to treat 1/10th of total expenses amounting to Rs.3,42,940/- as non-verifiable expenses.
6.2 In consistence with the finding of his predecessor, the CIT (A) confirmed the twin disallowance made by the AO.
6.3 During the course of hearing before us, though it was claimed by the Ld. A R that complete details were provided to the AO, no such details were furnished even this stage for verification. In the absence of such details, we are unable to justify the assessee's claim. Accordingly, both the grounds are decided against the assessee.
7. Ground No.3: The assessee was allowed deduction u/s 80G of the Act to the extent of Rs.1,77,843/- as against Rs.2.04,516/- claimed and the balance of Rs.61,800/- was disallowed for want of proof.
7.1 It was contended before the CIT (A) that there was no requirement in law to furnish original receipts for claiming deduction u/s 80G of the Act. It was also submitted that in any case, the deduction was allowable u/s 37 of the Act.
7.2 On consideration of the assessee's contentions, the CIT (A) had observed as under:
"11.2...............No doubt, there is no provision in the Act to file the original receipts of donation for claiming deduction. However, the assessee is duty bound to produce the original receipts, if the assessing officer calls for the same for verification. In the present case, the assessee did not furnish such receipts before the assessing officer for verification. Further, it appears that the issue is not of production of original receipts but of evidence that these trusts are eligible for deduction u/s 80G of the Act. Before me, in the paper book, the ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 assessee filed copy of receipt of Rs.15,000/- from Dhar Sukha Rahat and Rs.11,800/- from Champion Educational Society. These receipts do not indicate that these trusts were approved u/s 80G for the year under consideration. Further, the assessee has not been able to show as to how these payments were incurred wholly sand exclusively for the purposes of business. As the assessee has failed to discharge the onus, the disallowance made by the assessing officer is confirmed....."
7.3 The same set of argument was repeated before this Bench too. It is a legal parlance that for claiming any deduction under the provisions of any Act for that matter, the claimant was required to furnish the original receipt(s) to avail such a claim and that it was for the authority to verify the authenticity or otherwise of such a claim before acceding to the claimant's request. It goes without saying that no claim whatsoever could be admitted in the absence of any documentary proof. Since the assessee was unable to furnish any documentary evidence even at this stage for verification, we do not find any infirmity in the stand of the CIT (A) on this point.
8. Ground No. 4: Disallowance of Rs.40,709/- was made by the AO with regard to amortization of premium paid for land taken on lease. The CIT (A), relying on the ruling of Hon'ble Supreme Court in the case of Govind Sugar Mills Limited v. CIT reported in 232 ITR 319 (SC) held that the expenditure related to acquisition of lease hold rights of the land was capital in nature.
8.1 During the course of hearing, the Ld. A R drew our attention to the ruling of the Hon'ble jurisdictional High Court in the case of DCIT v. Sun Pharmaceutical India Ltd reported in (2009) 227 CTR (Guj) 206 which has been held in favour of the assessee.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 8.2 We have duly heard the either party on the issue. With due regards, we have perused the ruling of the Hon'ble jurisdictional Court cited supra. The issue before the Hon'ble Court was that the assessee had acquired land on lease for a period of 99 years and making payment of advance rent in the sum of Rs.48 crores and paying nominal monthly rent of Rs.40 per month. After analyzing the issue, the Hon'ble Court concluded that "the assessee acquiring land on lease for a period of 99 years making payment of advance rent in the sum of Rs.48 crores and paying nominal monthly rent of Rs.40 per month, advance rent paid was allowable revenue expenditure."
8.3 Incidentally, the Hon'ble Supreme Court in the case of the CIT v. Madras Auto Service Pvt. Ltd reported in 233 ITR 468 (SC) had ruled thus:
"All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure."
8.4 In conformity with the rulings of the Hon'ble jurisdictional High Court as well as the Hon'ble Supreme Court cited supra, we direct the AO to treat Rs.40,709/- as revenue expenditure. It is ordered accordingly.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
9. Ground No.5: There was an enhancement of direct cost of Rs. 1,44,075/- while computing deduction u/s 80HHC of the Act. It was the view of the AO that while computing the direct cost of trading goods at Rs.32,51,965/-, the assessee did not consider the expenses of Rs.26.73 lakhs included in manufacturing and other expenses, the same should be considered as direct cost and should be reduced proportionately out of export turnover of trading goods in the ratio of export turnover of trading goods and manufacturing goods. Accordingly, Rs.1,44,075/- was added to the direct cost of trading goods of Rs.32.51 lakhs.
9.1 After due consideration of the assessee's contentions, the CIT (A) took a view that since his predecessor for the reasons recorded in his impugned order for the AY 1998-99 rejected the claim of the assessee and in conformity with his reasoning, he confirmed the AO's action in allocating the export expenses towards direct cost of export, and, thus, rejecting the assessee's claim.
9.2 However, we have noticed that the earlier Bench in its finding for the AY 1998-99 in the assessee's own case on a similar issue observed that "11......The assessee claimed before us that it has already considered the export expenses as part of indirect cost of exports while computing deduction u/s 80HHC on profit of exports of trading goods. We find that the assessee's claim that these direct expenses are already included as part of indirect cost of export, this fact is emanating from the orders of the lower authorities and need fresh examination at the level of the assessing officer, accordingly, this issue is set aside to the file of the assessing officer."
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 9.3 As the issue before us is similar to the issue which has been reverted back to the file of the AO for a fresh look for the AY 1998-99 by the earlier Bench, we are of the considered view that the issue before us also requires to be remitted back to the file of the AO for fresh examination, in consistency with the earlier Bench's finding. It is ordered accordingly.
10. Ground No.6: Rejecting the assessee's claim that for computation of deduction u/s 80HHC, it had allocated the indirect cost of Vadodara Unit only, instead of indirect cost of the entire business of the assessee on the plea that the entire export of trading goods was from Baroda Unit and as per s.80HHC (3), profit derived from such export shall be the export turnover of trading goods as reduced by direct and indirect cost attributed to such exports, the AO took a view that as per s.80HHC, no computation is to be made on the basis of trading of separate units even if separate books of accounts were maintained for each unit. It was, further, observed by the AO that in accordance with s. 80HHC, all costs other than the direct costs were required to be allocated as indirect cost.
10.1 After considering the assessee's submission, the CIT (A) had observed that similar issue was involved in the previous assessment years too and for the reasons recorded in his appellate order, his predecessor rejected the assessee's claim for the AYs 1998-99 to 2000-
01. Following his predecessor's reasoning, he held that the AO was justified in considering the indirect cost of the entire business and not only the indirect cost of Vadodara Unit for the purpose of computation of deduction u/s 80HHC of the Act in respect of traded goods.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 10.2 Before us, the Ld. AR had magnanimously conceded that similar issue for the earlier assessment years has been decided against the assessee by the earlier Bench.
10.3 We have, with due regards, perused the findings of the earlier Bench on a similar issue wherein, it has been observed:
"10............We are of the view that section 80HHC (3)(c)(ii) provides a formula for calculating the profit derived from export of trading goods and the profit from such exports shall be the export turn in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods. Indirect costs has been defined in Explanation (e) to the said sub-section which means, not being direct cost, allocated in the ratio of the export turnover in respect of trading goods to the total turnover. It means that for determining the indirect cost attributable to the export of trading goods all the cost except the direct cost has to be allocated in the ratio of export turnover in respect of trading goods to the total turnover. In view of the formula, when the total turnover of the business is considered for the computation of deduction u/s 80HHC of the Act, why the indirect expenses relatable to only that unit which export trading goods, has to be considered. In view of these findings, we uphold the finding of CIT (A) and this issue of the assessee's appeal is dismissed."
10.4 In conformity with the finding of the earlier Bench referred above, we decide the issue against the assessee. It is ordered accordingly.
11. Ground No.7: The AO had reduced 90% of the following amounts from the profit of the business for the purposes of computing deduction u/s 80HHC of the Act on the ground that they did not constitute business income:
(a Interest income on amounts over due from customers Rs.2,44,65,000
(b) Interest on staff loan 2,89,730 (c) Interest on NSC 742
(d) Interest on SBI Bonds 95,000
(e) Interest on income-tax refund 63,97,986
(f) Royalty 6,37,177
(g) Shortages/damages claim from suppliers 1,31,421
(h) Unclaimed credit written off 2,28,449 ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 3,22,45,505 11.1 The CIT (A), after considering the assessee's submission, had more or less sustained/confirmed the stand of the AO.
11.2 During the course of hearing before us, the Ld. AR fairly conceded that almost all the issues raised in ground No.7 has been decided against the assessee by the earlier Bench in the assessee's own case for the Asst. years 1998-99 and 1997-98[source: Appendix-I.].
11.3 On a perusal of the CIT (A)'s finding, we observe that the issues of interest income on amounts overdue from customers and also royalty, among others, have been decided against the assessee, following his predecessor's findings. The assessee had also not brought any evidence to support its claim that royalty was not in the nature of brokerage, commission, interest, rent or charges. We, therefore, agree with the reasoning of the CIT (A) on these two issues.
11.4 With regard to other issues, we have duly perused the finding of the earlier Bench wherein it has been observed that -
"14.........We have heard the rival submissions and noticed that the assessee has filed complete details of items excluded from profit of business/industrial undertaking on account of staff loan, NSC, FDR, SBI Bonds, income-tax refund, others, insurance claim, misc. income, unclaimed credit written off, export incentives and dividend. The Ld. Counsel for the assessee on these only made submissions that netting should be allowed in view of decision of Hon'ble Delhi High Court in the case of Shri Ram Honda Power Equipment (2007) 289 ITR 475 (Del). On query from the Bench, the Ld. Counsel could not explain any nexus with export of these other incomes like income-tax refunds, NSC interest, interest on SBI Bonds, insurance claim, Misc. income and unclaimed credit written off. Also, the Ld. Counsel for the assessee made alternative plea that only netting should be allowed and for this common ground was raised in these two appeals of the assessee. In view of this, ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 we are of the view that the assessee is not entitled to any netting off on these other incomes as well as 90% will be excluded from the gross amount of other incomes. Accordingly, this issue of the assessee's appeal is dismissed."
11.5 In consonance with the finding of the earlier Bench (supra) and also in lieu of the assessee's averment (See: Appendix-I), we decide this ground against the assessee.
12. Ground No.8: With regard to the CIT (A)'s stand in confirming the action of the AO that the gross amount of interest and other income was required to be excluded for the purpose of computing deduction u/s 80 HHC of the Act and no deduction should be granted for expenditure incurred for earning the said income etc., we find that this ground also goes against the assessee in view of the earlier Bench's finding recorded in Para 14 of its order which is extracted supra. This fact has also been fairly conceded by the assessee [source: Appendix I]. Accordingly, this issue is decided against the assessee.
13. Ground No.9 & 10: The CIT(A) had confirmed the action of the AO in reducing form income eligible for deduction u/s 80-IB the following amounts on the ground that these incomes were not derived from the industrial undertaking:
(a) Interest income on amounts overdue from customers Rs.53,16,627
(b) Insurance claim on FG and RM 4,98,562
(c) Interest on staff loan 47,122
(d) Sales of old newspaper/scrap 1,50,997
(e) Discount received against RM 1,54,307
(f) Unclaimed credit written off 57,205 Total 62,24,820 13.1 In respect of (a) i.e., interest income on amounts overdue from customers of Rs.53.16 lakhs, the Hon'ble jurisdictional High Court in its ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 ruling in the case of Nirma Industries Ltd v. DCIT reported in 283 ITR 402 (Guj) had observed that:
"The Tribunal was, therefore, not justified in holding that while computing deduction under section 80-I of the Act, interest received from trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking."
13.2 In conformity with the ruling of the Hon'ble jurisdictional High Court, the AO is directed not to include the interest received from the trade debtors towards late payment of sale consideration from the profits of the industrial undertaking.
13.3 With regard to (b) insurance claim of finished goods and raw material amounting to Rs.4,98,562/-, the CIT (A) had directed the AO to verify whether these receipts were on account of loss of finished goods or raw material or capital goods. If the receipts were on account of loss of finished goods or raw material, the same may be treated as business income and not to be excluded to the extent of 90%. Since the issue has already been remitted back to the AO for verification, the assessee is directed to furnish the required details before the AO for his verification.
13.4 With regard to (c) interest on staff loan, we find that the same was in the nature of income from other sources and was not profit from the business and, therefore, it was to be fully excluded from the business profit.
13.5 In respect of (d) sale of old newspapers, we find that this was the recovery against the expenses incurred for the purpose of business and, thus, there was no element of income involved. The AO is directed not to exclude this receipt from the profits of the business.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 13.6 With regard to (e) discount received against raw materials of Rs.1,54,307/-, it was the contention of the assessee that it was reduction in purchase price and not in the nature of income. There is force in the contention of the assessee on this score. The AO is, therefore, directed not to exclude this income from the profits of the business.
13.7 However, the assessee's claim for the (f) unclaimed credit written off was a small balance of parties which were written off has been turned down by the CIT (A) following his predecessor's finding. The assessee's contention that those were incurred in the normal course of business is not convincing without any proof. We, therefore, confirm the CIT (A) stand on this issue.
14. Ground No.11:
(i) Charging of interest u/s 234B of the Act is mandatory and consequential in nature and, therefore, this part of the ground is dismissed as not maintainable; &
(ii) Interest u/s 234D of the Act cannot be charged for the assessment year under consideration in lieu of the finding of the Hon'ble Delhi 'E' Bench in the case of ITO v. Ekta Promoter Pvt. Ltd. Reported in 117 TTJ 289 wherein it has been that 'interest under section 234D could not be charged in respect of assessment years falling prior to assessment year 2004-05'.
III. ITA NO.1416/Ahd/06 : A.Y. 2002-2003 - (By the Department):
15. After careful consideration of the submissions of the Revenue as well as the assessee, thorough perusal of the relevant case records and also documentary evidences produced by the Ld. A R along with various case laws, we have adjudicated the appeal as under:
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
16. Ground Nos. l & 2: Royalty disallowance of Rs.4.28 crores:
This issue has been dealt with in the Revenue's appeal in the assessee's own case for the AY 2001-02 [Ground Nos.3 & 4] supra. The findings recorded therein hold well for this AY also. It is ordered accordingly.
17. Ground Nos.3 & 4: Exclusion of Sales tax & Excise duty:
Incidentally, this issue has also been covered in the Revenue's appeal for the AY 2001-02 referred above. The findings of this Bench for the AY 2001-02 hold well for this AY under challenge. It is ordered accordingly.
18. Ground Nos.5, 6 & 7:
Deduction of 90% of interest and other income for deduction u/s 80HHC of the Act:
(1) Sale of value of scrap:
18.1 The earlier Bench in the assessee's own case for the AYs 98-99 and 97-98 in ITA Nos.3945/2002-03 & 2911/2003-04 dated 21.11.2008 had observed thus:
"5............it is noticed that scrap sale form part of sale of scrap generated during the manufacturing process of the assessee and this being an integral part of the manufacturing activity, the income there-from is to be considered for the purpose of working out deduction u/s 80HH of the Act. However, as regards to the claim of deduction u/s 80HHC, this income does not come within the purview of export income. Hence, in view of the latest decision of the Hon'ble Apex Court in the case of CIT v. K. Ravindranathan Nair (2007) 295 ITR 228 (SC), the assessee is not eligible for deduction u/s 80HHC of the Act. However, this will be included in the formula for the purposes of computation of deduction u/s 80HHC of the Act as profit of the business. In view of these directions, the assessing officer will re-compute the income with regard to deduction u/s 80HH and 80HHC of the Act."
18.2 Accordingly, this issue goes in favour of the assessee.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 (2) Discount received against raw materials:
18.3 This issue has been decided against the assessee by the earlier Bench (for the A.Ys 1998-99 & 1997-98) in the assessee's own case. The finding of the Bench is as follows:
"6...........After hearing the rival contentions, it is observed that the discount received on early payment to suppliers and the ld counsel for the assessee admitted that it is in fact does not amount to income and it only reduces the costs, therefore, the same cannot be reduced for computing profit of business. But, we are of the view that when this does not amount to income and it only reduces the cost, the assessee is not entitled for deduction u/s 80HHC of the Act on this amount and, accordingly, in view of this direction, the assessing officer will re-compute the deduction u/s 80HHC of the Act.
18.4 Thus, this issue goes against the assessee.
(3) Interest income earned from clients:
18.5 Incidentally, the CIT (A) had, in fact, favoured the Revenue with reasoning that the AO was justified in excluding this income from profits of business. The assessee has also conceded during the course of hearing that this issue goes against it (Refer: Appendix IV).
(4) Sale consideration of old newspaper/scrap:
18.6 As these were recoveries against the expenses incurred for the purpose of business and rightly observed by the CIT (A), there was no element of income involved. The CIT (A) was, therefore, justified in directing the AO not to exclude those receipts from the profits of the business. We, therefore, find no infirmity to meddle with the finding of the CIT (A). Accordingly, this issue goes against the Revenue.
19. Ground Nos.8 & 9: Disallowance of deduction u/s 81-B (Pithampur Plant):
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
19.1 By the by, a similar issue to that of the present one has been considered elaborately in the Revenue's appeal for the AY 2001-02 in the assessee's own case (supra). The findings recorded therein are squarely applicable for this assessment year too. It is ordered accordingly.
20. Ground Nos.10 & 11:
Scrap sale included in the profit from industrial. u/t while computing deduction u/s 80-IB:
20.1 The AO in his impugned order had stated that -
"12.1. Without prejudice to the above, it is to mention here that the assessee in its computation of deduction u/s 80IB, the assessee has not excluded interest and similar income, which are not derived from industrial undertaking. As such, deduction under section 80IB is available only in respect of income derived from industrial undertaking Reliance is placed in this regard on the decision of Honourable Supreme Court in the case of Sterling Foods Ltd. (237 ITR 579) and of the ITAT, Ahmedabad in the case of Mira Industries (ITA No.4085/Ahd/1996) and others.
Further, the assessee is not maintaining any separate books of account for the purpose of so called new industrial under-taking and is claiming deduction on the basis of working provided by some cost accountant. Therefore, if at the appellate stage, the relief is granted to the assessee, the interest and other income should be excluded while grating the relief and direction to examine the quantum of deduction u/s 80IB should be given"
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 20.2 On appeal, the CIT (A) observed briefly that "[Para 18.5 (iv) This issue has been decided in favour of the appellant in earlier years. I am inclined to follow the same finding."
20.3 During the course of hearing, the Revenue had not contested the finding of the CIT (A), but, merely submitted that the CIT (A) ought to have upheld that scrap sale is not profit derived from industrial undertaking and, as such, not eligible for deduction u/s 80-IB of the Act.
20.4 On the other hand, the Ld A R submitted that the scrap sales were integral part of the business as the same were generated from manufacturing activities.
20.5 We have given due weight-age to the rival submissions. As could be seen from the Revenue's contention, it was being general without pin- pointing any specific reason as to why the scrap sale was not a profit derived from the industrial under-taking. On the other hand, there is a considerable force in the claim of the assessee that the scrap scale was an integral part of its business since scraps are bound to arise while indulging in manufacturing activities.
20.6 As no concrete evidence was forth-coming to refute the stand of the CIT (A) from the Revenue's angle, we sustain the finding of the first appellate authority on this issue.
IV. ITA NO.1461/Ahd/06 : A.Y. 2002-2003 - (By the assessee):
21. Ground No.1: With regard to the disallowance of Rs.3,212,377/- by invoking the provisions of s.14A of the Act, it has been observed that during the year, the assessee received dividend income of Rs.32.13 lakhs and claimed the same as exempt u/s 10(33) of the Act on gross ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 basis without allocating any expenditure. The AO estimated the expenses on account of infrastructural facilities, services of the employees etc., at 10% of dividend income and allowed exemption on net dividend income thereby disallowing expenditure of Rs.3,21,377/-.
21.1 After considering the assessee's contention, broadly deliberating the provisions of s. 115-O, Explanatory Memorandum of the Finance Act, 1997, extensively quoting the rulings of various judiciaries, chiefly:
(i) CWT v. Muthu Zulaikha (2000) 245 ITR 800 (Mad)9FB);
(ii) CBDT v. Cochin Goods Transport Assn. (1999) 236 ITR 993(Ker)
(iii) V.M.Dakshinamurthy Mudaliar v. TRO 202 ITR 946 (Mad);
(iv) ACIT v. Dakesh S Shah 90 ITD 519; & (v) Harish Krishna kant Bhatt v. IOT 91 ITD 311 (Ahmd) 21.2 The CIT (A) observed thus:
"5.2.9. The appellant argued that borrowed funds were not used for the purpose of purchase of shares and therefore, no disallowance on account of interest can be made. A perusal of the assessment order show that no disallowance on account of interest expenditure relatable to the acquisition of shares was made by the assessing officer and, therefore, this argument of the assessee is irrelevant. As regards quantum of disallowance, the assessee has not made any submission as to how the disallowance is unreasonable. It has been held by the Hon'ble Supreme Court in the case of United General Trust 200 ITR 488 (SC) that the proportionate management expenses can be allocated to the earning of dividend income. The assessee did not furnish any details or estimate of expenses incurred on earning of dividend income. The disallowance of Rs.3,21,377/-
for earning dividend income of Rs.32,13,766/- appears to be reasonable and is confirmed...."
21.3 After giving due weight-age to the assessee's contentions, perusal of the observations of the CIT (A) referred above and also various judicial views on a similar issue and above all the assessee did not choose to furnish any details or estimate of expenses incurred on ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 earning of dividend income, we are of the considered view that the CIT (A) was justified in confirming the AO's action in disallowing of Rs.3.21 lakhs on this count. It is ordered accordingly.
22. Ground No.2: Disallowance of employer's contribution to ESI Fund:
It was the case of the case of the AO that the payments towards employer's & employees contributions to ESI were not made within the stipulated due dates as prescribed under the relevant statute. On an appeal, the CIT (A), following his findings for the AY 2001-02 wherein the issue has been dealt with at length, confirmed the AO's stand.
22.1 Before us, it was briefly submitted that all the payments were made within the due date of filing of income, but, no proof has been adduced. In consonance with the principles of natural justice, this issue is remitted back to the file of the AO to verify the claim of the assessee which shall be furnished by it and to take appropriate action in accordance with the provisions of Act prevalent at that relevant time.
The AO, shall, however, keep in view the judicial pronouncements on similar issue while dealing with the matter.
23. Ground No.3: Disallowance of amortization lease payments for land:
A similar issue came up for adjudication for the AY 2001-02 in the assessee's own case and findings recorded by this Bench (supra) is squarely applicable for this A.Y also.
24. Ground Nos.4 & 5: The issues of disallowance of ad-hoc miscellaneous and welfares expenses were agitated before this Bench by the assessee for the AY 2001-02 and our findings recorded therein hold well for this assessment year too. It is ordered accordingly.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
25. Ground No.6:
(a) Software expenses of Rs.2,21,640/-:
25.1 At the outset, we would like to recall the ruling of Hon'ble Apex Court in the case of A.R. Krishnsamurthy & Another V. CIT (176 ITR 417 (SC) that 'the license to use or right to use is also a capital asset';
Yet another ruling the Hon. Supreme Court has, in the case of Scientific Engineering House, in its wisdom ruled that 'the right to use a technical know-how is a capital asset in the nature of plant.' In the present case, the assessee had obtained license to use the tally software and that the license was in the nature of capital asset. Therefore, the CIT (A) was within his realm to disallow the claim of the assessee. The finding of Mumbai Tribunal's findings in the case of JCIT v. Citicrop Overseas Software Ltd (85 TTJ 87) canvassed by the assessee cannot come to its rescue since the assessee had not brought any documentary proof on record to assert that the software had become obsolete so as to avail the claim as revenue expenditure. Thus, this issue goes against the assessee.
25.2 With regard to the assessee's claim that allowing depreciation on software only half-year was wrong on the assumption that the software was put to use only for a period of less than 180 days etc., the assessee is at liberty to approach the AO with relevant proof at its possession to claim that the software was put to use for more than 180 days to avail full depreciation. The AO is directed to look into the grievance of the assessee and to take remedial measure, if the assessee comes forward with a documentary proof as detailed above and also the claim is within the stipulated time frame.
(b) Repairs to buildings of Rs.15,56,706/-:
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 25.3 It was the contention of the assessee that the expenses were incurred for repairing of the floor in the factory building and of roof in the shop floor; that the expenses were incurred to keep the asset in a working condition and that no new asset came into existence. It was, further, claimed that all expenses were incurred for replacement of old items which were worn out etc. This has been countered by the CIT (A) that the assessee had incurred expenditure on PVC Carpet flooring, repairing and replacement of white tiles, concreting of LPG area etc., Such extensive replacement of existing flooring, according to the CIT (A), cannot be termed in the nature of 'current repairs.' 25.4 Admittedly, in the immediately preceding year, the expenditure claimed on repairs to the building was Rs.9.46 lakhs whereas for the current years, it has been a whopping Rs.22.18 lakhs. As rightly pointed out by the CIT (A), as per s.31(1) only the expense incurred on 'current repairs' was an allowable deduction The word 'current repair' connotes an expenditure for the perseverance and maintenance of already existing asset only. However, in the present case, the assessee went with a spending spree on renewal and restoration of the factory flooring with extensive replacement of the existing one. This expenditure, no doubt, gives an enduring advantage to the assessee which cannot be termed as revenue expenditure. The CIT (A) was, therefore, justified in his stand. This issue is decided against the assessee.
(c) Repairs to machinery of Rs. 2,18,153/-:
25.5 It was the contention of the assessee that the items of machinery repairs could not be used independently as they were attached to the main manufacturing plant; and that it was the replacement of old worn ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 out parts of main machinery and, therefore, require to be allowed as revenue expenditure.
25.6 However, the assessee's contention was disputed by the CIT (A) that on perusal of details of repairs, he noticed that the expenditure incurred towards replacement of old casting drum, wet chamber, electric work and ducting. According to the CIT (A), the assessee had not detailed as to how the expenditure was in the nature of current repairs.
25.7 We have carefully considered the submission of the assessee as well as the reasoning of the CIT (A). As the assessee could not able to identify and rather establish that the expenditure so claimed was in the nature of current repairs. In the absence of such details, we confirm the expenses claimed towards casting drum, wet chamber and ducting of AC plant as they do not fall within the category of 'current repairs'.
However, the assessee had claimed a sum of Rs.14,450/- being electric work. This electric work appears to have been executed for the up- keeping of the machinery. Therefore, in our considered view, the assessee was entitled to claim the sum of Rs.14,450/- under the head 'repairs to machinery'. It is ordered accordingly.
26. Ground No.7: Inclusion of other incomes in total turnover:
As could be seen from the discussion of these issues in an exhaustive manner in the impugned order of the CIT (A) and also taking into account the submissions of the assessee on these issues, the issues are dealt with as under:
(a) Shortages/damages claim from suppliers - Rs.3,44,382/-:
26.1 The reasoning of the assessee being that all those items were in the nature of other income and in no way included in the total turnover of the assessee. However, we find, there is a force in the reasoning of the ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 CIT (A) in upholding the action of the AO. We, therefore sustain the stand of the CIT (A) on this issue.
(b) Insurance claim on finished goods and raw materials:
Taking cue from the findings of the Mumbai Tribunal reported in Patel Cotton Company Ltd v. ACIT reported in 64 ITD 273 (Mum), the CIT (A) had directed the AO to verify as to whether those receipts were on account of loss of finished goods and raw materials, if that was so they should be included in 'total turnover'. Since the AO has been directed to look into the aspect, we decline to interfere with the matter at this point of time.
(c) Scrap sales of Rs.15,16,994/-:
Relying on the finding of the Calcutta Tribunal in the case of Rectkitt & Colman of India Ltd v. DCIT reported in 77 ITD 198, the CIT (A) observed that those receipts arose out of sale of goods manufactured by the assessee and were rightly included in 'total turnover'. We have perused the said finding of the Hon'ble Tribunal wherein it has been observed that "we are unable to accept the contention of the assessee that all the items as considered by the Assessing Officer as parts of the total turnover of business of the assessee, should be excluded in computation of its export profit in this year...." In view of the above, we sustain the stand of the CIT (A) on this issue.
d) Sale of old newspapers/scrap:
Following the findings of various Tribunals as listed out in his findings, the CIT (A) sustained the AO's action of including those receipts in the total turnover as the assessee itself included those receipts in its business income. On perusal of the observations of the ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 CIT (A) as well the contentions of the assessee, we find force in the CIT (A)'s observation which requires no intervention by this Bench at this stage.
(e) Discount received against raw materials-:
We find that the Hon'ble Mumbai Tribunal in its finding in the case of Patel Cotton Company Ltd v. ACIT reported in 64 ITD 273 (Mum) had held that the total turnover would include all receipts of business not necessarily in regard to sale of goods. Therefore, the CIT (A)'s stand in confirming the AO's action in including those receipts in 'total turnover' in the present case is sustainable. It is ordered accordingly.
27. Ground No.8:
Deduction of 90% of interest & other income from profits of business of deduction u/s 80HHC of the Act:
(a) Interest income on amounts overdue from customers Rs.32,13,766
(b) Dividend 2,13,014
(c) Interest on staff loan, NSC Bond 2,029
(d) interest on income-tax refund 32,500
(e) Interest from suppliers 20,58,148
(f) Unclaimed credit written off 10,124
(g) Brokerage of investments 3,971 27.1 It has been noticed that incidentally, the earlier Bench in the assessee's own case for the AYs 1998-99 and 97-98 (supra) had observed thus:
"14........We are of the view that the assessee is not entitled to any netting off on these other incomes as well as 90% will be excluded from the gross amount of other incomes........"
27.2 In conformity with the above finding of the earlier Bench, this issue goes against the assessee for this AY too. It is ordered accordingly.
27.3 Royalty of Rs.59,895: It was the contention of the assessee that royalty was not in the nature of brokerage, commission, interest, rent or charges and therefore should not be excluded for the purpose of ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 calculating deduction u/s 80HHC. To strengthen his contention, the Ld. A R had roped in the finding of the Delhi Tribunal's finding in the case of Glaxo Smithkline Asia (P) Ltd v. ACIT reported 97 TTJ 108 (Del). On a perusal, it has been noticed that the Hon'ble Bench observed thus:
"35. We have considered the submissions of the learned counsel for the assessee and the learned D R. "Profits of the business" has been defined in Expln. (baa) of s. 80HHC of the Act, which reads as under:
"(baa) 'profits of business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by-
(1) ninety per cent of any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and............."
In view of the said Explanation for computing "profits of the business", 90 per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature has to be reduced from the income computed under the head 'profits and gains of business or profession'.
From a reading of the aforesaid provisions, it is clear that royalty income is not income of the nature of brokerage, commission, interest, rent or charges. The royalty income is clearly in the nature of profits and gains of business. The royalty income is not receipt of a similar nature as that of brokerage, commission, etc. The expression "of any other receipt of a similar nature" occurring in cl. (1) of Expln. (baa) has to be construed ejusdem generis with the words appearing immediately preceding that expression. The plea of the assessee also finds support from the decision of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom) and the Delhi Bench of the Tribunal in the case of Smt. Sujatha Grover vs. DCIT (2002) 74 TTJ (Del) 347. The action of the Revenue authorities in excluding 90 per cent of royalty income cannot, therefore, be sustained. The AO is, therefore, directed to re- compute the income under s. 80HHC by considering the royalty income as profits of the business."
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 27.4 In conformity with the finding of the Hon'ble Delhi Bench, the AO is directed to re-compute the income u/s 80HHC of the Act considering the royalty income as profits of the business. It is ordered accordingly.
28. Ground No.9: Reduction of gross amount of incomes in stead of net income:
28.1 It was the urge of the assessee that netting off may be allowed in view of the ruling of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equip (289 ITR 475).
28.2 Incidentally, a similar issue was raised for the AY 2001-02 in the assessee's own case wherein the assessee itself conceded that this issue is covered and decided against the assessee by the earlier Bench [Refer: Assessee's brief for 2001-02]. Moreover the earlier Bench in its finding in the assessee's own case for the AYs 1998-99 referred above has recorded that "14........We are of the view that the assessee is not entitled to any netting off on these other incomes as well as 90% will be excluded from the gross amount of other incomes........"
28.3 In conformity with the finding of the jurisdictional earlier Bench, the issue is decided against the assessee.
29. Ground No.10: An identical issue to that of the present one was raised by the assessee for the AY 2001-02 (ground No.5). After considering the assessee's contentions and also in conformity with the findings of the earlier Bench (supra) the issue was remitted back to the AO for verification of the assessee's claim and to take appropriate action. The findings recorded for the AY 2001-02 also hold well for this AY also. It is ordered accordingly.
ITA Nos.982, 1001, 1416 & 1461/Ahd/2006
30. Ground No.11:
Diff. in basis of allocation of indirect cost to export of trading goods:
By the by, a similar issue to that of the present one came up before this Bench for the AY 2001-02 supra (Ground No.6) wherein the issue was decided, in conformity with the findings of the earlier Bench, against the assessee. Therefore, the findings recorded therein hold good for this assessment year also. It is ordered accordingly.
31. Ground No.12:
Deduction of interest and other income from the income eligible for deduction u/s 81-IB of the Act.
31.1 The issues i.e., (i) Interest income on amounts over due from the customers of Rs.46,78,717/-; (ii) Interest on staff loan of Rs.40,035/-; (iii) Interest claim on finished goods and raw materials of Rs.1,52,429/-; (iv) discount received against raw materials of Rs.3,85,995/-; and (v) unclaimed credit written off of Rs.10,124/- raised now have come up for adjudication for the assessment year 2001-02 in the assessee's own case supra wherein this Bench had adjudicated the same after due deliberations. The issues being identical, the findings recorded therein hold well for this assessment year also. It is ordered accordingly.
32. Ground No.13:
(i) Charging of interest u/s 234B of the Act is mandatory and consequential in nature and, therefore, this part of the ground is dismissed as not maintainable; &
(ii) Interest u/s 234D of the Act cannot be charged for the assessment year under consideration in lieu of the finding of the Hon'ble Delhi 'E' Bench in the case of ITO v. Ekta Promoter Pvt. Ltd. Reported in 117 TTJ ITA Nos.982, 1001, 1416 & 1461/Ahd/2006 289 wherein it has been that 'interest under section 234D could not be charged in respect of assessment years falling prior to assessment year 2004-05'.
33. Ground No.14: When the assessment proceedings were concluded, initiation of penal proceeding u/s 271(1)(c) of the Act was in its infancy and it had not reached its finality at the filing of this appeal. Moreover, initiation and finalization of penal proceedings u/s 271(1)(c) of the Act has separate entity which cannot be agitated with the quantum appeal. Therefore, this ground raised by the assessee is dismissed as not maintainable.
34. In the result, the Revenue's appeals for the assessment years 2001-02 and 2002-03 are partly allowed and the assessee's appeals for the assessment years 2001-02 and 2002-03 are partly allowed.
इस आदे श कȧ घोषणा Ǒदनांकः 16/02/2012 को Ûयायालय मɅ कȧ गई ।
Sd/- Sd/-
(D.K.Tyagi) (A.Mohan Alankamony)
Judicial Member Accountant Member
DATED : 16/02/2012
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Talukdar/ Sr. P.S. ITA Nos.982, 1001, 1416 & 1461/Ahd/2006