Income Tax Appellate Tribunal - Bangalore
Digital Equipment India Ltd. vs Deputy Commissioner Of Income Tax on 25 November, 2005
Equivalent citations: (2006)103TTJ(BANG)329
ORDER
Deepak R. Shah, A.M.
1. These cross-appeals by assessee as well as by Revenue are directed against various orders of learned CIT(A)-XVI, Mumbai and learned CIT(A)-I, Bangalore dt. 28th March, 1996, 30th Nov., 1999, 28th March, 1996, 26th Sept., 2002, 30th Nov., 1999 and dt. 3rd Aug., 2000 respectively. All these appeals are disposed off by this common order as several common and identical issues are involved in these appeals.
1.1. We shall first dispose of the appeals of the assessee.
2. The assessee is a listed public limited company and engaged in the manufacture, sale and service of various kinds of computers, development, sale and export of computer software, etc.
3. The first issue in appeal is against the disallowance of depreciation on technical know-how for asst, yrs. 1992-93, 1995-96 and 1996-97:
3.1. The appellant had claimed depreciation on technical know-how of Rs. 20,15,968 for asst. yr. 1992-93, Rs. 8,50,847 for asst. yr. 1995-96 and Rs. 6,37,865 for asst. yr. 1996-97. The AO disallowed the claim of depreciation relying on the provisions of Section 35AB. The CIT(A) confirmed the findings of the AO by relying on the decision of the CIT(A) for the earlier years. Aggrieved, the appellant is in appeal before us. It is brought to our notice that a similar issue for the asst. yr. 1989-90 in the appellant's own case in ITA No. 6622/Bom/1995 has been decided in its favour and a copy of the said decision is furnished to us. On going through the order we find that the issue is squarely covered in favour of the appellant and respectfully following the said order we reverse the orders of the authorities below and direct the AO to allow depreciation on technical know-how of Rs. 20,15,968. Further similar issue is involved for asst. yrs. 1995-96 and 1996-97 for which the appellant is in appeal before us. The same findings and directions would hold for these two assessment years also. We direct the AO to allow the depreciation on technical know-how as claimed by the appellant.
4. The next issue is against the disallowance of travelling expenses under Rule 6D for asst. yrs. 1995-96 and 1996-97.
4.1. The appellant had calculated the disallowance under Rule 6D taking the total trips made by employee. As per provisions of Rule 6D the disallowance has to be made on trip basiswise and not on the basis of total trips undertaken by the employee, accordingly the AO made disallowance on the basis of each trip. In appeal the CIT(A) confirmed the disallowance made by the AO on each trip basis. Aggrieved by orders of authorities below the appellant is in appeal before us. It is submitted by the appellant that a similar issue for asst. yr. 1997-98 in ITA No. 4432/Mum/2000 in the appellants own case has been decided against it. We have gone through the records and the order of Tribunal and respectfully following the said order we uphold the orders of authorities below and dismiss the grounds of the appellant on this issue.
5. The next issue is against disallowance of guest house expenses for asst. yrs. 1992-93, 1995-96 and 1996-97:
5.1. The appellant had incurred expenditure on rent, repairs and depreciation with reference to the guest house and claimed that these expenses are allowable under Sections 30 to 36 of the IT Act. The explanation of the appellant was not accepted for the reason that these expenses are covered by the provisions of Section 37(4) and therefore AO disallowed the same in the assessments for the above assessment years. In appeal the CIT(A) confirmed the action of the AO. During the course of hearing it is submitted that a similar issue for asst. yr. 1997-98 has been confirmed against the appellant by the Tribunal in ITA No. 4432/Mum/2000. The Tribunal following the decision reported in 84 LTD 69 (sic) has confirmed the disallowance made by the AO.
5.2. We have heard both the sides and find that similar issue came up for consideration before the Tribunal in assessee's own case and the Tribunal has confirmed the disallowance made by the AO and dismissed the ground of the appellant on this issue. In view of the latest decision of Hon'ble Supreme Court in case of Britannia Industries Ltd. v. CIT (2005) 198 CTR (SC) 313 : (2005) 278 HR 546 (SC), the orders of the CIT(A) is upheld and the grounds of the appellant on this issue is dismissed.
6. The next issue is against disallowance of entertainment expenditure for asst. yrs. 1992-93 and 1995-96.
6.1. The appellant had incurred Rs. 1,00,852 on digital day celebration for asst. yr. 1992-93 and Rs. 1,00,000 on conference expenses for each of the asst. yr. 1992-93 and asst. yr. 1995-96 and claimed it as allowable revenue expenditure. In the assessment order passed by the AO, he has held the above expenditure as entertainment expenditure and disallowed the entire amount. The appellant challenged the said disallowance before the CIT(A). The CIT(A) while disposing the issue restricted the disallowance to 50 per cent of the above expenditure. Aggrieved by the orders of the authorities below the appellant is in appeal before us.
6.2. Sri K.R. Pradeep submitted that the expenditure incurred on digital day celebration is for the exclusive benefit of the employees and no part of the expenditure is incurred on guest or visitors. That the expenditure is in the nature of staff welfare and it can no way be treated as entertainment expenditure. As regards the conference expenses he submitted that the expenditure is incurred on employee training, orientation and motivation programme, etc. and it is not incurred on any visitors or guests and it cannot be classified as entertainment expenditure coming under Section 37(2A). In reply Smt. Swati Patil supported the orders of the authorities below and prayed for confirmation of the disallowance.
6.3. We have heard the arguments of both sides and have gone through the records. We are in agreement with the submissions of Sri Pradeep, that expenditure incurred on digital day celebrations is for the benefit of the employees and is in the nature of staff welfare. It can no way be classified as entertainment expenditure. The CIT(A) after considering the facts ought to have deleted the entire addition instead of restricting the disallowance to 50 per cent of the expenditure on an ad hoc basis. There is no rational to hold 50 per cent of expenses towards entertainment and balance 50 per cent towards staff welfare. We are, therefore, of the view that the digital day celebration expenses and conference expenses incurred for benefit of the employees cannot be classified as entertainment expenditure coming under Section 37(2A) and accordingly we delete the addition made on the above issues and direct the AO to allow the entire expenditure incurred on digital day celebrations and conference expenses.
7. The next issue in appeal is against disallowance of payments made to clubs for asst. yr. 1992-93.
7.1. The appellant had made payments to clubs amounting to Rs. 10,387 and the AO disallowed the same holding it as entertainment expenditure. The CIT(A) confirmed the disallowance made by the AQ. Before us Sri K.R. Pradeep submitted that the Department is not consistent in its stand on the above issue as for the same assessment year the said expenditure has been allowed. The CIT(A) himself has allowed the payment made to clubs relying on the decision in the case of Otis Elevators Co. (I) Ltd v. CIT (1991) 96 CTR (Bom) 14 : (1992) 195 FTR 682 (Bom) and prayed for deletion of the addition. Smt. Swati Patil fairly submitted that the issue has been decided in favour of the appellant by the CIT(A) in his order for the asst. yr. 1992-93.
7.2. We find from the records and the orders of the CIT(A), he has allowed the payments made to clubs as revenue expenditure following the decision of the Bombay High Court mentioned supra. Accordingly we decide the issue in favour of the appellant and direct the AO to delete the addition of Rs. 10,387.
8. The next issue is against disallowance of expenses to leasehold improvements for asst. yr. 1992-93 and asst. yr. 1995-96.
The grounds of the appellant on the above issue is extracted hereunder Asst. yr. 1992-93 The learned CIT(A) has erred in disallowing DEIL's claim of additions to leasehold improvements amounting to Rs. 34,62,324 as revenue."
Asst. yr. 1995-96 Disallowing on amount of Rs. 22,33,057 being expenses on improvements to leasehold property."
8.1. Brief facts of the issue are that the appellant had incurred certain expenditure like electrical works, civil works, air conditioning wooden partitions and fixtures, etc, on the leasehold properties and claimed it as revenue expenditure. The AO called for the details and justifications for the claim of such expenditure. The appellant furnished all the details called for and the same is mentioned in the assessment order. It was submitted that the expenditure incurred were on leased properties and do not give any benefit of enduring nature. The amounts paid were for business purposes and not for acquisition of a capital asset. The AO is of the view that they are certainly of enduring nature and should have been treated as capital expenditure. Accordingly he disallowed the expenditure on leasehold properties as being capital in nature for the above assessment years. The CIT(A) agreed with the findings of the AO and confirmed the disallowance made for both the assessment years. Being aggrieved by the orders of authorities below, the appellant is in appeal before us.
8.2. Sri K.R. Pradeep, chartered accountant, Authorised Representative appearing for the appellant submitted that the expenditure incurred by the appellant on redesigning and restructuring the leasehold premises by providing better fittings, electrical work, civil work, wood work, etc., is to make the premises suitable for business needs and for carrying on the business more profitably and efficiently. The advantage obtained was advantage in commercial sense, i.e., for the purpose of business and not for the acquisition of capital assets and no benefit of enduring nature was obtained by the appellant. He relied on the decision of the Delhi High Court in the case of Instalment Supply (P) Ltd. v. CIT , the relevant portion is extracted hereunder:
The question of the repairs had to be considered in the larger context of business necessity or expediency. If the expenditure incurred by the assessee was so related to the carrying on or to the conduct of the business that it might be regarded as an integral part of the profit-earning process, then it was not for purpose of securing to the assessee a capital asset. The possession of premises in the shape of a big hall by converting a large number of small rooms into it would make it more suitable for office purpose. It was a condition of carrying on business more profitably and efficiently by the assessee. In such a case, the expenditure could be regarded as a revenue expenditure. The expenditure on the repairs of the building which ultimately belonged to the owners and not to the assessee could not be said to be in the nature of capital expenditure. The structural changes made by the assessee and the conversion of small rooms into one big hall could not be in the nature of creation of a capital asset. The assessee had obtained an advantage in a commercial sense by redesigning the premises and providing better fittings, better material and marble flooring. The advantage obtained by the assessee was for the purpose of the business of the assessee and not for the acquisition of the capital asset.
In view of the above facts and circumstances, he prayed for issuing necessary directions to the AO for treating the expenditure on leasehold properties as revenue expenditure.
8.3. Smt. Swati Patil, CIT, Departmental Representative submitted that there is no infirmity in the findings of the AO and CIT(A) and they have rightly held the expenditure incurred by the appellant on the leasehold properties as capital in nature as it brought enduring benefit to the appellant. That it is apparent from the assessment orders, the details of expenditure mentioned therein are all in the nature of capital expenditure and it can in no way be allowed as revenue expenditure. Further the appellant cannot be aggrieved, as the CIT(A) has directed to allow depreciation on the amount spent on leasehold properties and prayed for upholding the orders of the authorities below and for dismissal of the grounds of the appellant on this issue.
8.4. We have heard arguments on both the sides and have gone through the records. We find that the authorities below erred in treating the above expenditure claimed as revenue expenditure by the appellant as capital in nature and it brought enduring benefit to the appellant. We agree with the arguments of Sri K.R. Pradeep, that the expenditure incurred on redesigning and restructuring the leasehold premises by providing better fittings, electrical work, civil work, wood work, etc., to make the premises suitable for business needs and for carrying on the business more profitably and efficiently are all in the nature of repairs and revenue expenditure and it does not bring any benefit of enduring nature to the appellant. The advantage obtained by the appellant is advantage in commercial sense, i.e., for the purpose of business and not for the acquisition of capital assets. The issue is covered by the decision of the Delhi High Court in mentioned supra. Accordingly, we hold the above expenditure as revenue in nature and reverse the orders of the authorities below on this issue and direct the AO to allow the entire expenditure as revenue as claimed by the appellant. The appellant succeeds on this issue.
We shall now deal with the appeals of Revenue.
9. The first issue is against deletion of disallowance of travelling expenses under Rule 6D for asst. yr. 1992-93 9.1. The ground of the Department on the above issue is extracted hereunder:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in restricting the disallowance under Rule 6D to Rs. 23,57,257 from total disallowance of Rs. 26,59,745 worked out on the total trip basis and not individual trip without appreciating the fact that disallowance was made strictly in accordance with Rule 6D of IT Rules.
9.2. We have decided similar issue in the assessee's appeal in favour of the Department for asst. yrs. 1995-96 and 1996-97 in this order supra. The finding given there equally applies to this year also. Accordingly we reverse the orders of the CIT(A) and uphold the orders of the AO. The Department succeeds on this issue.
10. The next issue is against deletion of addition of Modvat Credit to closing stock for the asst. yrs. 1992-93, 1995-96, 1996-97, 1997-98 and 1998-99.
10.1. Brief facts of the issue are that the AO rejected the appellant's method of accounting for Modvat Credit. It is contended by the AO that the appellant has not treated excise duty as an expense to the extent it is set off against Modvat credit available to it, Hence, the opening stock and closing stock does not include Modvat credit. Although this method of accounting is approved by the Institute of Chartered Accountants of India, the AO has added back the Modvat credit to the closing stock. The CIT(A) following the decision of the Tribunal, Bombay in the case of S.H. Kelkai & Co. Ltd. v. Dy. CIT (1994) 49 TTJ (Bom) 262 : (1992) 44 TTD 170 (Bom) and the decision of Tribunal, Calcutta in the case of Berger Paints India Ltd. v. Dy. CIT (1992) 42 YTD 546 (Cal) deleted the addition on account of Modvat. The Department is in appeal against the orders of the CIT(A) on this issue.
10.2. We find a similar issue of Modvat has been decided by this Tribunal in the appellant's own case for the asst. yr. 1998-99 in ITA No. 1689/Bom/2002 and MP No. 171/Bom/2005 in favour of the assessee relying on the decision of the Supreme Court in the case of Beigei Paints India Ltd. v. CIT (2004) 187 CTR (SC) 193 : (2004) 266 FTR 99 (SC), a copy of which is furnished to us during the course of hearing. Since the facts involved in the appeals before us is identical to the issue decided by the Tribunal, Bangalore, mentioned supra, we do not find any infirmity in the orders of the CIT(A) in deleting the additions made on account of Modvat to the closing stock and uphold the same and dismiss the grounds of the Department on this issue for all the assessment years in appeal before us.
11. The next issue is against deletion of addition of write off of obsolete and slow moving items and issue of deletion of addition made on account of buyback for asst. yr. 1992-93.
11.1. The assessee had claimed write off of obsolete and slow moving items amounting to Rs. 1,70,11,736 and write off of buyback of slow moving items of Rs. 4,68,500. The appellant furnished detailed explanation for write off and break-up of items written off, which are found mentioned in the assessment order. The AO allowed 100 per cent on user guides and customs duty paid on software licence, disallowed 100 per cent on customs duty on parts removed from factory for maintenance and service machines and allowed 50 per cent on ad hoc basis on other items of obsolescence, thus disallowing to the extent of Rs. 58,74,107. The assessee in appeal before the CIT(A) succeeded on this issue and the Department is in appeal before us.
11.2. Smt. Swati Patil CIT, Departmental Representative submitted that the AO where he found that the items had become completely obsolete had allowed 100 per cent and on certain other items he has rightly allowed only 50 per cent deduction as even the items which have become obsolete has a market in India and there is scope for recovery from the sale of such items. Certain goods can be sold in the replacement market though obsolete and has definite value which is required to be accounted for. Accordingly she prayed for upholding the orders of the AO by reversing the decision of the CIT(A) on this issue.
11.3. Sri K.R. Pradeep, learned chartered accountant, Authorised Representative submitted that even the AO in his order accepts that there exists high rate of obsolescence in the computer business due to the changes in the technology. He submits that the items written off are all obsolete and slow moving items which does not have a market and do not have even scrap value due to the fast changing technological developments in the computer field. He further submitted that the disallowance made by AO is without any basis, purely on surmise and for unsustainable reasons. Accordingly, he prayed for upholding the orders of the CIT(A) and dismissal of the grounds of the Department.
11.4. We have heard the arguments on both the sides and have also gone through the records, We agree with the findings of the CIT(A) and the arguments of Sri Pradeep on this issue. The AO though he accepts there exists high rate of obsolescence in the computer market yet he has disallowed 100 per cent and 50 per cent on certain items without any cogent reasons for doing so or bringing any evidence on record to show that there exists market for the products written off by the assessee. The assessee is a multinational company and it cannot sell its products to all and sundry as suggested by the Revenue, as it has to safeguard its brand, reputation and image in the market. In view of the above findings, we do not find any infirmity in the order of the GIT(A) in deleting the additions made by the AO and accordingly dismiss the ground of the Department on this issue.
12. The next issue is against deletion of disallowance of subscription to the clubs for the asst. yrs. 1992-93, 1995-96 and 1996-97.
12.1. Grounds No. 6 in the appeal for asst. yr. 1992-93 is extracted hereunder:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the subscription and membership fees of the clubs amounting to Rs. 1,76,900 cannot be treated as entertainment expense for the purpose of disallowance under Section 37(2A).
Ground No. 2 in the appeal for asst. yrs. 1995-96 and 1996-97 is extracted hereunder:
On the facts and circumstances of the case and in law the learned CIT(A) has erred in deleting the disallowance of Rs. 55,554 and Rs. 6,40,870 being the payments for subscriptions to the clubs.
12.2. We have decided a similar issue in favour of the assessee while deciding the appeal of assessee for the asst. yr. 1992-93 supra. The finding given there equally applies to this year also as the facts and issue being similar. Further we do not find any infirmity in the orders of the CIT(A) in deleting the addition made by the AO relying on the decision in (supra). Accordingly we uphold the orders of the CIT(A) and dismiss the grounds of the Department on this issue for all the assessment years.
13. The next issue is against deletion of addition made on account of reduction of the exemption under Section 10A.
13.1. The assessee herein had made a claim under Section 10A on the profits earned from SEEPZ unit at Bombay and STP unit at Bangalore. These units were established in the year 1989 and September, 1993 respectively. The assessment years and the profits for which deduction under Section 10A were claimed are as under:
Assessment year Claim under Section 10A 1995-96 8,53,17,084 1996-97 7,64,99,385 1997-98 7,67,94,987 1998-99 19,27,29,225
As against the above claim of the appellant the AO has allowed the claim under Section 10A as under:
Assessment year Claim Allowed under Section 10A 1995-96 3,53,08,658 1996-97 3,11,14,774 1997-98 4,28,06,481 1998-99 5,56,59,232
Thus the appellant was aggrieved by the reduction of the eligible claim under Section 10A for yanous assessment years as under:
Assessment year Claim Allowed under Section 10A 1995-96 5,00,08,426 1996-97 4,53,84,611 1997-98 3,39,88,506 1998-99 13,70,69,993
The AO has discussed in detail his conclusion for reducing the claim under Section 10A in the assessment order for asst. yr. 1995-96. And for the same reasons subsequent years' claim was also reduced. Hence we examine in detail the claim for the asst. yr. 1995-96.
13.2. The facts pertaining to the issue are that the appellant-company is a listed Indian company. The appellant-company is a joint venture between Digital Equipment (Holdings) b.v. (DEHbv) a company incorporated in the Netherlands and which is a wholly owned subsidiary of Digital Equipment Corporation, USA (Digital) and Hinditron Group of companies, India. The appellant had turnover from sale of computer hardware products and it has also earnings from computer software services and product development from its SEEPZ and STP units. The profit declared by the appellant consisted of earnings from these activities. The software services were essentially rendered to Digital Group world-wide. The profits earned from these activities were claimed as exempt under Section 10A and in support the assessee had furnished the requisite P&L a/c and the audit report. The percentage of profit earned from the software activities, etc., as found mentioned by the AO in p. 11 of his assessment order for asst. yr. 1995-96 is extracted hereunder:
SI. No. Total Turnover Profit shown Rate of profit Profit of SEEPZ Unit 7,69,49,886 1,86,38,204 24.22% Profits of STP Unit 34,54,02,490 6,66,78,880 19.30% Profits of the company as a 157,12,77,172 13,15,03,732 8.36% whole including the profits of the above two units Profits of the company 114,89,24,796 4,61,18,648 4.01% excluding profits of these two units
On finding the above financial performance, the AO was of the view that the profit from software activities was unreasonably high in comparison to the profit of the company as a whole. He was of the view that such an unreasonably high profit was due to the close connection between the appellant-company and buyer of services, i.e., digital group worldwide. He was of the view that transactions were so arranged which resulted in unreasonably high profit. Further he also held that books maintained by appellant was not so separate so as to deduce the correct profit earned from software activities without any ambiguity, Thus invoking Section 10A(6) r/w Section 80-1(9), he restricted the claim under Section 10A at 8.36 per cent of the turnover of SEEPZ and STP units, thereby restricting the deduction to Rs. 3,53,08,658 as against the claim made by the appellant of Rs. 8,53,17,084.
13.3. In appeal, learned CIT(A), decided the above issue by reversing the view taken by the AO on the premise that though there exists a close connection with the receiver of services, yet there was no existence or evidence of arrangement to show unreasonably high profits. Further CIT(A) also compared the profit margins earned by other assessees in the same industry. He found that the profit earned by the appellant from SEEPZ and STP units as reasonable and thus he concluded that in the absence of any unreasonably high profit the results declared by the appellant has to be accepted. Accordingly he directed the AO to accept the results declared by the appellant for all the years. He also held that the books of account maintained by the appellant were not only separate but not defective in any manner. Hence he felt that the test under Section 145 was not satisfied by the AO for rejecting the books. Consequently he chose to rely on the books maintained by the appellant and the addition made by the AO was deleted. The Department is in appeal before us against the deletion of the addition by the CIT(A).
13.4. Before us, Smt. Swati Patil, CIT, Departmental Representative argued that the findings given by AO in the assessment order for asst. yr. 1995-96 were unassailable and similar position holds good for subsequent assessment years also. She submitted that Section 80-1(9) starts with the wording "where it appears to the AO" thus the onus on the AO is very light and mere examination is enough to draw adverse conclusion and there was no need for the AO to adduce any adverse evidence to invoke Section 80-1(9). The above words 'where it appears' is distinct from the words 'where the AO has reason to believe'. It is only in cases the word belief is used that AO must have a reason for disturbing the results. The words used in this section is light on burden of proof, consequently the discussion by the AO in the assessment order would suffice to support the addition. Smt. Patil further submitted that the CIT(A) erred in placing the onus on AO to produce positive evidence, such as existence of arrangement for earning unreasonably high profits. She argued at length that there is no requirement for the AO to produce any evidence and that mere earning of high profit is evidence, sufficient to invoke Section 80-1(9). She further argued Section 145 is inapplicable to judge the validity of any addition made by invoking Section 80-1(9) r/w Section 10A(6). Learned GIT(A) has also held that arrangement is with persons closely connected, which is not disputed. Thus she prayed for confirming of the addition made by AO by reversing the order of CIT(A).
13.5. Sri K.R. Pradeep, Authorised Representative submitted that Section 80-1(9) is inapplicable to the present issue having regard to the facts and law on record. He submitted that AO has not established any close connection with appellant and buyers of software services. The facts in this case are that the appellant-company is joint venture between Indian and overseas partner. Further there were large numbers of Indian shareholders, thus these facts do not give rise to any finding that there is a close connection in the manner that is required for invoking Section 80-1(9). The digital group holding in the share capital is not 100 per cent, thus any attempt to give more profit with a view to enjoy a high exemption would not entirely benefit the digital group. These facts themselves prove that there could be no arrangement for giving higher profits. The comparison of profits earned by other companies in similar line of business also establishes that the profits earned by the appellant is in line with industry and that there is no case for any presumption that more than ordinary profits were earned by the appellant-company. Moreover there is no evidence contrary to suggest otherwise. The reasons given by the assessee and evidence adduced all point to genuinity of the claim of the appellant.
On the issue of onus, Sri Pradeep, submitted that Section 80-1(9) as in any other case requires adverse evidence and substantive reasons for rejecting the books of account and evidences produced by the appellant. The words 'where it appears' should be understood as requiring the AO to examine the case objectively and words in Section 80-1(9) can no way be read as surmise and suspicion substituting evidence and reason. The interpretation by the Department, if accepted, leads to arbitrariness, in as much, the AO will be empowered to act on whims and fancies without any adverse evidence in his possession. While interpreting statute it is an accepted rule that mischief should be eschewed and object should be furthered. This rule is known as Hayden's Rule of Mischief. The object of legislature in giving exemption under Section 10A should be borne in mind while reading Section 10A(6) with Section 80-1(9). Exemption of legitimate profits earned cannot be denied by a subjective view of the AO.
On the issue of maintenance of separate books of account he submitted the books maintained by the appellant satisfies the functional test, i.e., the books and evidence is enough to arrive at the profits earned by the unit. The test of separate books should be judged from the point whether such books maintained enable computation of profit from the activities in a fair, unambiguous and reliable manner. He submitted that such test in this case stands established as found by the CIT(A). Thus he sought for confirmation of the order of CIT(A) and dismissal of the grounds of the Department.
14. We have perused the facts and circumstances obtaining on record. Section 80-1(9) is extracted hereunder, to understand the controversy.
(9) Where it appears to the AO that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft, the AO shall, in computing the profits and gains of the industrial undertaking or the hotel or the ship or the business of repairs to ocean-going vessels or other powered craft for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
The requirements under the section are:
(a) There must be a close connection between the appellant and other person.
(b) The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business.
To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s, 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition. Further there is no evidence of existence of any arrangement as contemplated under Section 80-1(9).
14.1. Further we are also in agreement with the arguments of Sri Pradeep, on the issue of separate books. On this issue one has to see whether the books maintained by the appellant enables computation of profits from the activity, if it is so, such records meet the test of separate books. Separate books do not mean it should be a separate daybook or ledger. It means such books or records from which profits can be computed. If the unit books are combined with other activities, the appellant should make efforts to cull out or separate the entries pertaining to the unit and maintain and produce records or statement separating the results. Such an effort would be sufficient to comply with the condition. In fact Section 80-1(9) nowhere mentions maintenance of separate books. We find that the addition made by AO in invoking 10A(6) r/w 80-1(9) is not well founded. For these reasons we uphold the order of the CIT(A) deleting the additions made by AO for asst. yr. 1995-96. Since the facts and circumstances are similar for asst. yrs. 1996-97, 1997-98 and 1998-99, the same findings and directions would hold good for these years also. Accordingly the grounds of the Department on the above issue are dismissed.
15. The next issue is against deletion of addition of bad debts of Rs. 1,22,272 for asst. yr. 1992-93.
15.1. The appellant-company had written off bad debts totalling to Rs. 2,17,018 out of this write off a sum of Rs. 1,22,272 pertained to Hinditron Group of Companies. In response to the query of the AO, the appellant has submitted that it had invoiced Hinditron Group for the services with applicable taxes, The taxes were charged separately. However, Hinditron has paid only for the services and refused to pay the tax portion as the contract price was an all inclusive price. The AO disallowed the claim on the ground that the appellant-company is joint venture of Hinditron group, therefore there is no question of non-recovery of the amount. The CIT(A) in appeal has held that the AO has ignored the fact that the two entities are separate legal entities and the transaction was at arms length. The appellant has fully declared the entire sum including the taxes as its income in the relevant year and also the fact that the balance sum was still outstanding, the appellant was justified in writing off the amount and accordingly deleted the disallowance of bad debt of Rs. 1,22,272. The Department is in appeal before us on the deletion of the addition by the CIT(A).
15.2. Smt. Swati Patil, relied on the findings of the AO and prayed for reversing the orders of the CIT(A) and upholding of the orders of the AO. Learned Counsel for the assessee relied upon the appellate order.
15.3. We have gone through the records and we agree with the finding of the CIT(A) and we see no reason to reverse the decision of the CIT(A) in deleting the disallowance of bad debts amounting to Rs. 1,22,272 as he has rightly held that the amount is not recoverable and the appellant is justified in writing off the same. Accordingly the ground of the Department on this issue is dismissed.
16. The next issue is against deletion of disallowance of miscellaneous expenses of Rs. 18,16,893 for asst. yr. 1998-99.
16.1. The AO had disallowed a sum of Rs. 18,16,893 on ad hoc basis being 5 per cent of the miscellaneous expenses of Rs. 3,63,36,777 without pointing out any mistakes/defects in the maintenance of books of account. Aggrieved by the said disallowance, the assessee went in appeal before the CIT(A), who after considering the explanations and details furnished by the appellant deleted the additions made on ad hoc basis. The Department is in appeal before us.
16.2. Smt. Swati Patil, relied on the findings of the AO and prayed for reversing the orders of the CIT(A) and upholding of the orders of the AO. Learned Counsel for the assessee relied upon the appellate order.
16.3. We find from the records that the AO has disallowed the above sum on an ad hoc basis without any cogent reasons nor has brought any evidence on record for making such disallowance. We are in agreement with the findings given by the CIT(A) in deleting the additions made by the AO on ad hoc basis. The assessee's accounts are audited by a qualified auditor and they have not pointed any inadmissible expenses. In absence of any adverse material or evidence, no disallowance of any genuine expenditure on ad hoc or notional basis can be made. For the reasons mentioned above, we do not find any infirmity in the orders of the CIT(A) in deleting the disallowance made on ad hoc basis. Accordingly, the ground of the Department is dismissed.
In the result the appeals of assessee are partly allowed. The appeal of Revenue for asst. yr. 1992-93 is partly allowed and for other years are dismissed.