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TMI Blog2005 (11) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... (9) TMI 67 - DELHI HIGH COURT] 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. Addition made on account of reduction of the exemption u/s 10A - profits earned from SEEPZ unit at Bombay and STP unit at Bangalore - 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 foundatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 ₹ 20,15,968 for asst. yr. 1992-93, ₹ 8,50,847 for asst. yr. 1995-96 and ₹ 6,37,865 for asst. yr. 1996-97. The AO disallowed the claim of depreciation relying on the provisions of s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant by the Tribunal in ITA No. 4432/Mum/2000. The Tribunal following the decision reported in 84 ITD 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. vs. CIT [2005] 198 CTR (SC) 313 : [2005] 278 ITR 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 ₹ 1,00,852 on digital day celebration for asst. yr. 1992-93 and ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been allowed. The CIT(A) himself has allowed the payment made to clubs relying on the decision in the case of Otis Elevatois Co. (I) Ltd. vs. CIT [1991] 96 CTR (Bom) 14 : [1992] 195 FIR 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 ₹ 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 ₹ 34,62,324 as revenue. Asst. yr. 1995-96 Disallowing on amount of ₹ 22,33,057 being expenses on improvements to leasehold property. 8.1 Brief facts of the issue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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. Kelkar Co. Ltd. vs. Dy. CIT [1994] 49 TTJ (Bom) 262 : [1992] 44 ITD 170 (Bom) and the decision of Tribunal, Calcutta in the case of Berger Paints India Ltd. vs. Dy. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pholding 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 accept 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 exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: Assessment year Claim Allowed under s. 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 s. 10A for yarious assessment years as under: Assessment year Claimed Disallowed under s. 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 s. 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 declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars. 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 s. 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 s. 80-I(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 s. 80-I(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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in s. 80-I(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 s. 10A should be borne in mind while reading s. 10A(6) with s. 80-I(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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int 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 s. 80-I(9). 14.1 Further we are also in agreement with the arguments of Sri Pradeep, on the issue of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 18,16,893 for asst. yr. 1998-99. 16.1 The AO had disallowed a sum of ₹ 18,16,893 on ad hoc basis being 5 per cent of the miscellaneous expenses of ₹ 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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