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TMI Blog2012 (9) TMI 826X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee during the relevant year was at Rs.23,60,08,729/- on total secured and unsecured loan of Rs.173,97,86,825/-, which includes the interest payment on Debentures of Rs.11 crores at the rate of 19%. The assessee before the Assessing Officer submitted that the loans were given out of the funds generated by the company from the profits for the earlier years and, therefore, no differential interest should be added in respect of the loans given to the subsidiary companies. The Assessing Officer however rejected the explanation and held that the similar addition made in the earlier assessment also, wherein the difference of 13% interest was added. Learned CIT(A) relying upon the earlier orders for the assessment years 1995-96 and 1998-99 also confirmed the said disallowance. 3. Both the parties fairly agreed that this issue has come up for consideration before the ITAT in the assessment year 1996-97, 1997-98, 1998-99 and 1999-2000, wherein this issue has been restored back to the Assessing Officer. The relevant observation of the ITAT in order dated 4-5-2012 for the assessment year 1998-99 and 1999-2000, are as under :- "6. Ground No.5 : Disallowance of interest of Rs.50,57,260/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng with statement showing details of interest received. The assessee vide letter dated 2nd March, 2001 also furnished a statement showing notional interest at the rate of 10% on loans given to subsidiary companies, as required by the Assessing Officer. On an appeal before the CIT(A), the learned CIT(A) confirmed the same following the orders of his predecessors. 6.1. It was submitted that the issue was restored to the Assessing Officer in earlier years and the amount was allowable following the principles laid down by Hon'ble Supreme Court in the case of S.A.Builders vs. CIT 288 ITR 1 (S.C.). It was further submitted that the amount of Rs.17,03,397/- in respect of Agrocel Pesticides shown as 'sundry loan' was not a loan but represents outstanding amount in the ordinary course of business and amount of Rs.2,72,583/- on the above amount at 16% was wrongly disallowed. As the issue of disallowance of interest u/s. 36(1)(iii) was restored to the Assessing Officer in earlier years, which we were informed that no order has been passed yet by the Assessing Officer, in the interest of justice, we restore the matter to the file of Assessing Officer for fresh consideration. Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able amount considering the investment of Rs.13.32 crores made and dividend earned thereon. Accordingly, the Assessing Officer is directed to recalculate the disallowance as above at 2% of gross dividend. The ground is partly allowed." Thus, respectfully following the aforesaid decision for the earlier assessment year, we hold that disallowance should be restricted to 2% of the gross dividend. In the result, ground No.2 is partly allowed. 5. Ground No.3 relates to disallowance of Rs.61,49,373/- under Section 43B. In the return of income the assessee has claimed deduction under Section 43B being payments made in respect of items shown as prepaid expenses. Before the Assessing Officer, following note was given in this regard :- "During the previous year relevant to assessment year 2000-01, the company has paid an aggregate amount of Rs.61,49,373/- in respect of items covered under section 43B. The aforesaid amount has been considered as prepaid and has not been debited to the Profit and Loss Account. Accordingly, the said amount has been deducted while computing the total income since it has been paid during the previous year and is allowable under section 43B." The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 43B and have actually been paid during the year. Thus, the sum which is actually paid irrespective of the year in which the liability to pay such sum had incurred even according to the method of accounting regularly employed by the assessee, has to be allowed in view of the provisions of Section 43B. Further, it has also been clarified by the learned AR that these amounts which has been debited in the profit and loss account has not been claimed in the subsequent year and has been accepted by the department as well as by the assessee. Thus, we hold that the assessee is entitled for deduction for the sums paid during the year under Section 43B and the disallowance made at Rs.61,49,373/- is uncalled for. In the result, ground No.3 is allowed. 8. In ground No.4, the assessee has challenged the disallowance of Rs.3,27,823/- in respect of claim of deduction of Wealth Tax Payment. The assessee fairly admitted that this issue is covered against the assessee in the assessee's own case for the assessement year 1998-1999 and 1999-2000 by the order of ITAT and also the decision of Mumbai Bench in the case of Bachcharj Factories Ltd. Vs ACIT (56 ITD 225) (Bom). The relevant observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit receivable, it was submitted by the assessee that no income accrued to the assessee until the imports were made and the raw materials were consumed, which had taken place in the subsequent year. The entries made by the assessee in the profit and loss account are notional in nature as the same represents the notional value of benefits under import and export policy, which the appellant accepted to receive in respect of free raw materials. With regard to taxability of pass book benefit receivable amounting to Rs.3,09,13,702/-, it was submitted that in the accounts for the year ending 31-3-2000, an amount of Rs.11,24,52,060/- being the net benefit under the Pass Book Scheme as per the Import and Export Policy was shown under the head 'Incentives on Exports. Out of the aforesaid amount, the pass book benefit in respect of which credit had not been received upto 31st March, 2000 amounted to Rs.3,09,13,702/-. Though in the return of income, the entire aforesaid amount was offered for tax out of abundant caution, it was also contended that income in respect of Pass Book benefit does not accrue until credit is received in the Pass Book and accordingly, the said amount cannot be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment. Accordingly, the addition made on this score is deleted. Thus, ground No.1 of the department is dismissed. 14. Ground No.2 relates to disallowance of 10% of expenditure in connection with, the exempt income of Rs.61,62,317/-. This issue has already been dealt with in the assessee's appeal in the ground No.2, wherein we have followed the decision of the Tribunal for the assessment year 1998-1999 & 1999-2000, that the disallowance should be restricted to 2% of dividend income. In view of the finding given in the assessee's appeal in the ground No.2, the department ground is treated as dismissed. 15. Ground No.3, relates to disallowance of employees contribution to Provident Fund under Section 43B in respect of employers contribution to the Provident Fund and employees contribution to the Provident Fund and EPF, on the ground that the same was paid beyond the due date but before the end of the previous year. The said amount was disallowed under Section 43B read with Section36(1)(va). The CIT(A) had deleted both the additions made on account of employees contribution to Provident Fund and EPF as the same was paid within the grace period and also employer contribution as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Duty and Sales Tax from the total turnover for the purpose of deduction under Section 80HHC. It has been admitted by both the parties that this issue stands covered by the decision of the ITAT in the earlier assessment years 1998-1999 & 1999-2000(supra), wherein the ITAT following the judgment of the Hon'ble Supreme Court in the case of Laxmi Machine Works, reported in 290 ITR 667 (SC), has rejected the department's ground. The relevant finding of the ITAT is reproduced herein below :- "17. Ground Nos. 3 to 5 pertain to issue of excluding excise duty and sales tax from the total turnover of the assessee. The Revenue has raised the ground on the reason that jurisdictional High Court Judgment in the case of M/s. Sudershan Chemicals Ltd. 245 ITR 769 has been contested by the department before the Hon'ble Supreme Court of India. Now, this issue is settled by the Hon'ble Supreme Court in the case of Laxmi Machine Works 290 ITR 667 (S.C.) wherein it was held that excise duty and sales tax would not have an element of turnover and they ought not to be included in the total turnover or export turnover. In view of the Judgment of the Hon'ble Supreme Court affirming the jurisdictional High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (baa) does not include these items and profits of business, therefore, they have to be form part of turnover. We are unable to understand the logic of the CIT(A) in differing from his predecessor order which was based on Board Circular. Board Circular was binding on Revenue authorities. Further, Revenue has not contested the finding of the learned CIT(A) in earlier years. Therefore, we are of the view that the CIT(A) erred in differing from the predecessor order and confirmed certain other incomes as part of total turnover. Since, the Hon'ble Supreme Court also has confirmed in the case of Laxmi Machine Works 290 ITR 667 that even excise duty and sales tax which do not have any element of profit cannot be included in the total turnover, similar logic also applies to the other incomes which does not have any bearing on the export turnover and total turnover, while working out the deduction under section 80HHC. Therefore, this ground of the assessee is allowed and Assessing Officer is directed to exclude the amounts shown in the other income under the head 'rent, interest, brokerage and sales tax refund' and on the balance items as the ground was not pressed, no directions are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to reducing 90% of the various items and other income while computing the profits of business under section 80HHC. The Assessing Officer has included sales tax refund, insurance claims, technical fees and miscellaneous receipts while considering the amounts to be included as other income in baa. Learned CIT(A) after examining the nature of the amounts held that this amounts cannot be excluded at 90% as they are business receipts. 34.1. After considering rival submissions and principles laid down by the Hon'ble Supreme Court in the case of Afjal India Ltd. 295 ITR 451 and other case law relied upon by the learned counsel for the assessee, we are of the opinion that the CIT(A) has correctly concluded that these receipts are business receipts and need not be excluded while arriving at the profits of business under baa. Accordingly, Revenue ground is rejected." Thus, respectfully following the aforesaid decision, ground No.7 as raised by the department is dismissed. 23. Ground No.8, relates to reducing the profits of foreign branch while computing the profits of business for the purpose of computing the deduction under Section 80HHC. The Assessing Officer while computing the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 (supra), wherein it has been observed and held as under :- "16. Ground No.2 pertains to the deduction of 80HH, 80I and 80IA in relation to each of eligible unit on the basis of profit without adjusting the same against the losses of other units. It was fairly submitted that this issue is also against the Revenue and in favour of the assessee by the Orders of the I.T.A.T. in assessment years 1996-97 and 1997-98 and further this issue is supported by the Judgment of the Hon'ble Supreme Court in the case of CIT vs. Canara Workshops Ltd. 161 ITR 320 (S.C.) and the decision of Karnataka High Court in the case of CIT vs. Siddaganga Oil Extractions (P) Ltd. 201 ITR 968 (Kar.). Respectfully following the principles laid down therein, we do not see any reason to interfere with the Orders of the CIT(A) which is according to law. Since this issue was also confirmed by the I.T.A.T. in earlier years, which the CIT(A) has followed, the Revenue ground is rejected." Thus, in view of the above, ground No.10 of the department is dismissed. 27. Ground No.11, relates to deduction of Rs.6,73,258/- being penalty levied under Section 45(6) of the Gujarat Sales Tax Act. The Assessee has claimed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of adding back the book depreciation of demerged entity. The relevant facts are that the assessee has debited depreciation in profit loss account amounting to Rs.8,17,14,918/- as under :- Particulars (Rs.in lacs) Depreciation Less: Transferred from Revaluation Reserve: Less: Depreciation allocated to Excel Crop Care Limited on commonly used assets pursuant to the Scheme of Arrangement TOTAL 9,67.91 89.59 8,78.32 61.17 8,17.15 In the computation of income, the assessee has added back Rs.8,17,14,918/- and claimed depreciation as per Income Tax Rules on the full value of the own assets. The facts as noted by the Assessing Officer are that there was Scheme of arrangement of demerger of Excel Crop Care Limited with assessee company was w.e.f. 1-9-2003 in pursuance of order of the Hon'ble High Court dated 18-7-2003. In pursuance thereof, the account was prepared by bifurcation of the income and expenses of the two entities according to the scheme of the arrangement. Some of the assets have been put to common use but under the scheme of arrangement, was belong to the assessee from the appointed date. This was because of the fact that approval was granted on 18-7-2003 but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to Rs.8,17,14,918/- (8,78,32,142 - 61,17,224), which was arrived by deducting depreciation allocated to Excel Crop Care Limited on commonly used assets. Thus, the profit was higher to the extent of Rs.61,17,224/- since the assessee had debited a lower amount to depreciation to the Profit and Loss account. 29.2 The Learned CIT(A) rejected the contention of the assessee by observing and holding as under :- "6.7 I have considered the facts of the issue and the submissions made by the AR. In the first blush, the submissions of the A.R. appear convincing since whatever amount of depreciation was charged to the profit and loss account, the same had been added back in the computation of income to arrive at the taxable income. Obviously, on the face of it, the argument of the A.R. appears correct. However, when the facts of the issue in its entirely are considered, the order passed by the A.O. has to be upheld. The A.O. has clearly brought out the fact that the de-merged entity filed a revised return and claimed the said amount of depreciation as deduction from its chargeable income. It needs to be clearly brought out here that although the depreciation component relating to the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation Reserve: Less: Depreciation allocated to Excel Crop Care Limited on commonly used assets pursuant to the Scheme of Arrangement TOTAL 9,67.91 89.59 8,78.32 61.17 8,17.15 As per the computation of income, the assessee has proceeded with net profit as per profit loss account at Rs.3,16,37,448/- and thereafter has added the depreciation of Rs.8,17,14,918/-. The assessee has already reduced the depreciation of Rs.61,17,224/- from Rs.8,78,32,142/- and net depreciation of Rs.8,17,14,918/- was debited the profit loss account. This, inter alia, means that in the computation of income, the assessee has proceeded from the net profit which includes claim of depreciation of Rs.8,17,14,918/- and from this net income it has further added the depreciation of the same amount. Thus, apparently there does not seem to be any question of further enhancing the book depreciation or writing back again to the total income. The amount of Rs.61,17,224/- was not debited at all to the profit loss account and accordingly, the question of adding back the same to the total income does not arise. In view of these facts, we do not find any reason to concur with the finding of the CIT(A). According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the nature of expenses are not borne out from the records. 33. We have carefully considered the rival submissions and also gone through the material placed on record. So far as the other advances given to various parties other than UPEXCEL Ltd., the same has not been pressed by the AR and, therefore, out of Rs.55,55,000/- a sum of to Rs.7,78,000/- is treated as dismissed as not pressed. Now, the issue before us is regarding the advances written off for sum of Rs.47,77,000/- relating to UPEXCEL Ltd. The said company was a joint sector company which was formed with the intention of creating manufacturing facilities to produce phosphorus and its compounds. However, before the project could start or the plants and machinery could be installed, the entire project was abandoned due to its non-viability. As per the contention of the learned AR, the expenses incurred were mostly revenue in nature relating to travelling, salary and other administrative expenses. If these are the expenses the same cannot be said to be have incurred on capital assets or creation of any capital asset. The decision of the Tribunal in the case of DCIT Vs. Mukand Ltd (supra) as relied upon by the AR is squarel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hetics (I) Ltd (supra) vide paragraph 10 and 11 has held as under : "10. A harmonious reading of the aforesaid two judgments of this Court, namely, Triveni Engineering Works Ltd (supra) on the one hand and Modi Industries (supra) on the other, would clearly demonstrate that one has to keep in mind the essential purposes for which such an expenditure is incurred. If the expenditure is incurred for starting new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialized or not. However, if the expenditure incurred is in respect of the same business which is already carried on by the assessee, even if it is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unity of control and common fund, then such an expense is to be treated as business expenditure. In such a case whether new business/asset comes into existence or not would become a relevant factor. If there is no creation o f new asset, then the expenditure incurred would be of revenue nature. However, if the new asset comes into existence wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee's case before the Assessing Officer as well as the CIT(A) has been that in the accounts of the years ending 31-3-2003 and 31-3-2004, demerger expenses amounting to Rs.6,81,525/- and Rs.25,82,884/- respectively, have been debited to the profit and loss account. In the revised return of income for the relevant assessment year, the aforesaid amount of Rs.6,81,525/- incurred for lthe period relevant to assessment year 2003-2004 was claimed being 1/5th of the demerger expenses of Rs.32,64,410/- (which includes to Rs.25,82,884/-) as deduction under Section 35DD. The Assessing Officer did not grant deduction under Section 35DD in respect of amount of Rs.5,16,577/- being 1/5th pertaining to the assessment year 2004-2005 on the ground that the said expenses were not debited in accounts for the assessment year 2003-2004. 35.1 Before the CIT(A), it was submitted that 1/5th of the expenditure incurred should be allowed for each of the five successive previous years beginning with the previous year for which amalgamation or demerger takes place. Learned CIT(A) dully appreciated the contention of the assessee and the provisions of law and allowed the deduction by observing and ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2000-2001 in ITA No.2825/2007, wherein following the decision of the earlier order of ITAT, it has been held that disallowance should be restricted to 2% of the dividend income. In view of the above, in this year also, we hold that the disallowance should be restricted to 2% of the dividend income and accordingly ground No1 is partly allowed. 38. In ground No.2, the assessee has challenged the disallowance of sum of Rs.67,48,000/- out of interest paid. This issue has been dealt with in the assessee's appeal for the assessment year 2000-2001 in ITA No.2825/2007, wherein the matter has been restored back to the file of the Assessing Officer following the decision of the earlier order of the ITAT. In view of this fact, this issue is restored back to the file of the Assessing Officer for fresh adjudication. In the result, ground No.2 is allowed for statistical purpose. 39. Ground No.3 relates to disallowance of interest of Rs.2,24,000/- out of interest paid on other loans. This issue too has been restored back to the file of the Assessing Officer in the earlier orders and following the same, this ground is also set aside and sent back to the file of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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