9911796707
TMI Blog2009 (9) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses to the extent on 53.59 lacs would be considered as agricultural expenses out of total claim of expanses at 316.12 Lacs. and would not be allowed. Against this the assessee has shown sale of agriculture produce (relatable to growing of saplings through land) at 36.42 lacs and sale of saplings not relatable to agricultural operations at 9.10 lacs. Therefore agricultural loss would be only 53.59 36.42 = 17.17 lacs. The sale of saplings at 9.10 lacs would be non-agricultural receipts and therefore cannot be allowed to be adjusted against agriculture expenses. So far as the depreciation of 7.69 lacs is concerned the same has been claimed on mist chambers and other assets used in growing saplings through clonal routes which has been treated as non-agricultural operation in our discussion made above. Thus the disallowance is restricted to 17.17 lacs and accordingly assessee gets relief of Rs.(278.29 17.17) = 261.12 lacs Valuation of stock taken in the books - It is not known on what basis the Assessing Officer and the ld. CIT(A) have given a finding that there is a difference in terms of quantity in the stock statement submitted to the bank and what is recorded in the books. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct and this ground of appeal is dismissed. In our considered view lowered authorities were not justified in making the addition in the book profit by the sum. The entire issues are divided in 3 segments given below - Investments in units of Mutual funds - Applicability of provisions of sec.14A - Whether loss and expenditure connote the same meaning and therefore the word expenditure used in sec.14A covers within its compass word loss - dividend income - exemption u/s 10(33) - We are of the considered view that loss and expenditure do not connote same meaning and therefore they are not replaceable. Now comes the question whether the loss incurred by the assessee in the above referred dividend stripping transactions can be disallowed u/s 14A. In our considered view firstly sec.14A does not use the word loss and it cannot be said that assessee has incurred loss for the purposes of earning dividend income. Secondly if such dividend stripping transactions and loss resulted there from could be covered by sec.14A, it would not have been necessary for the legislature to enact sec. 94(7) which specifically deals with such type of transactions. Therefore sec.14A cannot be invoked to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not provided in sec.115JB. Sec.94(7) on which ld. DR has repeatedly emphasized relates to computation of income only and therefore it is at par in effect with other provisions of the Act which affect computation of income. Therefore in our considered view sec.94(7) also cannot be drawn to affect computation of book profit which have to be necessarily and exclusively done within the parameter laid down us/ 115JB.In other words sec.94(7) has no role to play in computing book profit u/s 115JB . As a result this ground of the assessee is allowed. Disallowance of interest and administrative expenses - No addition can be made in the book profit u/s 14A. We have held while disposing of ground No.6(c) in the assessment year 2002-03 and also while disposing of ground 7(b) for assessment year 2003-04 and Ground No.9(c) in the present assessment year that provisions of sec.14A cannot be invoked for disallowing any expenditure relatable to any exempted income if otherwise such expenditure has been debited in the profit and loss account prepared according to Schedule VI of the Companies Act and certified by the auditors. It has also been held therein that even if any disallowance is called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n off), Rs. 1100000 (Warehousing charges), Rs. 4796479 (Bank Guarantee provided against Water Tax liability) and Rs. 4350000 (OFDC Labour Contract amount written-off) and in not appreciating that these expenses were fully allowable. 2.1 Upholding the disallowance of Rs. 1270341 comprising of Rs. 1111433 (Sundry Balances Written-off), Rs. 107533 (Transporters commission twice debited), Rs. 29000 (Erection charges of AC) and Rs. 22375 (Dues of Taluka Panchayat) and in not appreciating that these expenses were fully allowable and in ignoring that in the assessment order the Assessing Officer had not given any reasons for disallowing these expenses. 3.0 Not appreciating that the Assessing Officer was not correct in not allowing deduction of Rs. 3280212 being the liability fastened on the appellant on account of Exchange Fluctuation on the outstanding bills for import of materials and in ignoring that non provisioning of the said liability in the accounts cannot be a ground for disallowing the claim as repeatedly held by the Courts. 4.0 Upholding the disallowance of Rs. 27829039 (including depreciation of Rs. 768675) and in not appreciating that the said expenditure was incurred w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount. It was also claimed that it was offered for tax in the relevant A. Yrs.. The Assessing Officer noted that in balance sheet under Schedule VI, the assessee has made a provision of doubtful debt of ₹ 35 lakhs which should have taken care of such write off. The learned CIT(A) on page 11, para 4.11 to 4.14 of his order, confirmed the addition by holding that the assessee has not filed the details to show as to which year the amounts pertained inspite of opportunities having been provided to the assessee during the appellate proceedings. 5.1.2. Before us, the learned AR of the assessee submitted that this amount represents overdue interest which was earlier offered for taxation. On the other hand, learned DR submitted that this should be first debited to provisions and it should not be claimed in addition to the provisions for bad debt for which deduction has already been allowed. 5.1.3. After considering the rival submissions, we restore the matter to the file of the Assessing Officer so as to find out whether the assessee has offered the amount of interest for taxation in earlier years while debiting the same to the respective parties accounts, and if so, it would be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. When conditions laid down in the scheme are fulfilled and claim is made before the assessee and such claim is accepted by the assessee, the liability accrues against the assessee. It becomes, in fact, a contractual liability settled during the year and therefore would be allowable during this year. We are fortified with our view by the decision of in the case of CIT v. Raj Motors 284 ITR ITR 489 (All). Hon'ble Gujarat High Court in Bileshwar Khand Udyog Sahakari Mandli Ltd. Vs. Commissioner of Income-tax (2006) 282 ITR 480 (Guj) similarly held as under: "A statutory liability arises as soon as the specified event occurs or the condition stipulated by the statute gets fulfilled. In the case of a contractual liability, the liability arises or accrues only when the dispute is finally adjudicated upon or is settled amicably." 5.2.5 It is undisputed fact that decision to settle the claim of discounts was taken this year, therefore, liability will accrue this year. Accordingly, we delete the impugned addition of ₹ 1,85,453 made on this count. 5.3.1. Rs. 12,50,481 - There was a Revenue audit objection (by C&AG) in the accounts of Gujarat Electricity Board (in short GEB) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and hence, it was written off. The learned DR, on the other hand, supported the impugned orders of the authorities below. 5.4.3. Having considered the rival submissions, we restore the matter to the file of the Assessing Officer to find out whether sales made to those parties have been credited in the trading account and how the assessee considers the amount irrecoverable as per principles laid down by the Hon'ble Gujarat High Court in the case of Dhall Enterprises & Engineers (P) Ltd., v. CIT 207 CTR (Guj) 729. If the assessee has actually written off the amount in the book streating as irrecoverable, and it is not covered by any provision which has been allowed as deduction, then the claim should be allowed. 5.5.1. Rs. 11,00,000 -This amount was claimed as warehousing charges. It was submitted to the Assessing Officer that the assessee was required to make the payment of ware-housing charges at ₹ 26,42,565 which was settled at ₹ 11,00,000. This amount pertains to export business and the assessee has been claiming deduction u/s.80HHC in earlier years. As no details were furnished as to what treatment assessee has given to these expenses in relation to the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore should be allowed. As against this, the learned DR submitted that statutory liability would be allowed in the year when it is paid by the assessee. 5.6.3. After considering the rival submissions, we confirm the order of the learned CIT(A) with the direction that the Assessing Officer will allow the claim u/s.43B of the Act when the amount is actually paid. A bank guarantee is only in the nature of a security or guarantee which imposes no obligation on the bank to make the payment unless on happening of contingencies in terms of the bank guarantee.On this issue Hon'ble Gujarat High Court in Mugat Dyeing & Printing Mills v/s. Asstt. CIT (2007) 290 ITR 282 (Guj) held as under: The expression employed in section 43B of the Income-tax Act, 1961, is "actually paid". In view of the non obstante clause contained in the section, it is not permissible to refer to the expression "paid" as defined under section 43(2) or under any other provisions of the Act. Hence, the plain meaning of the words "actually paid" is required to be taken into consideration. The word "actual" has been defined as something real in opposition to constructive or speculative. "Actually" means really, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pending litigation, and that furnishing of a bank guarantee for payment of the entire disputed amount of excise duty/additional excise duty collected by the assessee in the relevant years could not be considered equivalent to actual payment of duty in the relevant years, that the interest income earned on the fixed deposits belonged to the assessee and that therefore giving the bank guarantee on the basis of fixed deposits made with the bank could not be regarded as actual payment of excise duty in the relevant years under appeal because the assessee continued to own the said fixed deposits. The Tribunal held that the assessee was not entitled to claim deduction of excise duty liability of Rs. 58,75,999 for the assessment year 1986-87 and Rs. 44,58,378 for the assessment year 1987-88 in view of the provisions of section 43B. On appeal : Held,_ dismissing the appeals, that by furnishing the bank guarantee pursuant to the order of the Supreme Court, the assessee had merely created a right in favour of the Excise Department to enforce the payment of excise duty in the event of their succeeding in the pending litigation. This was not equivalent to actual payment of tax or duty b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten off in the books.(ii) -The Assessing Officer will find out whether the amount represented the capital deposits for carrying out the business or for the purpose of running business as a security deposit to be deposited against purchases made by the assessee from OFDC. In other words, it would be found out whether this amount is a trading deposit or capital deposit. If it is a capital deposit, claim will not be allowed as it would be a capital loss. If it is a tradie deposit it should be allowed as trading loss. 6. Ground No. 2.1 - This ground consists of four items. They are discussed and adjudicated below. 6.1.1. Rs. 11,11,433 - This amount represented balances against parties and were debited in the P & L account after writing off in the books. The learned Assessing Officer disallowed the claim on the ground that details were not furnished. The learned CIT(A) examined the claim and found that inspite of providing adequate opportunities assessee did not furnish the details of year-wise breakup of the amount claimed as deduction. 6.1.2. The learned AR of the assessee submitted that this amount represented old debit balances lying in the account of various parties for more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as no details have been furnished before us as well. This part of the ground is therefore rejected. 6.4.1.Rs.22,375 - This represented writing off of Taluka Panchayat Sales Tax difference and security deposit with National Printing and Paper Ltd and debit of the same in the P/L account. In absence of details, the Assessing Officer disallowed the claim. The learned CIT(A) confirmed the addition on the same ground. 6.4.2. Having heard both the parties, we decline to interfere because this payment related to Section 43B and are only book adjustment. They cannot be allowed as there is no actual payment. This part of the ground is therefore rejected. 7. Grounds No. 3 7.1 ₹ 32,80,212---It is liability on account of exchange fluctuation rate on the outstanding bills for import of materials. This has been discussed by the A.O. on page38, para 6 of his order. The Assessing Officer examined the tax audit report. It is mentioned therein that it is an additional liability on account of exchange rate fluctuation in respect of old dues of foreign suppliers (pre-takeover period). Foreign Exchange rate was applied as found applicable at the time of payment of such dues. It is noted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter considering the rival submissions, we are of the considered view that the assessee is entitled to this claim. The reasons are that at the time of succession, the assessee has taken over the assets and liabilities of earlier entity as a whole. It has been showing liabilities in respect of suppliers from year to year which included liability of pre-takeover period also. If there is a fluctuation in the foreign exchange rate due to which there is an additional burden in India rupees then the same has to be allowed. This view is supported by the decision of Hon'ble Supreme Court in the case of Commissioner of Income-tax Vs. Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC) wherein it is held as under: "Loss" suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as well as under the MAT provisions. 8.2 The assessee submitted following P/L account in respect of its social forestry division which supervises plantation and growth of saplings. Social forestry Division Profit and Loss Account Dr Rs. Cr. Rs. Labour charges 1,29,35,409 Sale of Saplings 45,52,105 Supervision charges 34,01,995 Loss 2,70,60,364 Material 23,23,660 Land Rent 6,74,002 6,74,002 O.H. Exps 1,22,77,403 3,16,12,469 3,16,12,469 8.3 It was submitted to the Assessing Officer that the assessee is involved in the manufacture and sale of paper and board. The raw material for these products is bamboo and hard wood. In order to ensure continuous/uninterrupted supply of bamboo and hard wood assessee took up appropriate actions in growing saplings which were sold to farmers. In addition Saplings (young trees) were also procured from forest and grown in the nursery. When the saplings attain certain height, they are sold to the farmers with an understating that they would raise trees which would be sold by the farmers to the assessee. Payments to farmers for purchase of trees are made on an effectuation of purchases but saplings sale proceeds are collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural income u/s.2(1A) of the Act. The Assessing Officer also disallowed claim of the assessee to amortize expenses on the same ground that it is agricultural loss. 8.5.1 It was submitted before the learned CIT(A) that even though the activities carried out are in the nature of agricultural but the use of land is not for agricultural purposes and therefore the income derived cannot be said to be agricultural income. What is important for the present is the purpose for which the land is being used. Farmers are obliged to sell the trees to the assessee and therefore, growing of saplings is an integrated activity for procuring raw materials. The farmers were growing the trees as per the specifications of the asessee and also under its supervision and control. The assessee holds a charge over the trees grown by these farmers. Thus sale of saplings to the farmers and purchase of trees from them is one single activity and therefore the loss incurred is a business loss. Sale of saplings and loss cannot be regarded as an independent activity so as to consider the loss independently and disallow the same on the ground that it is a result of agricultural activities. The learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome is derived from commercial exploitation of the assets and there is only a difference in the manner of exploitation, that is to say, instead of user of assets by the assessee itself, the assets are exploited by another person, income derived must be considered to be of the same nature "business income". But, on the other hand, if the intention in leasing out the assets is to go out of business altogether and earn rental income, the income there from would be assessable as 'income from other sources'. Thus, based on above referred findings of various courts, it has been submitted by the A.R that the intention of the appellant company in carrying out Social Forestry activity was to obtain the raw material, which was otherwise fljns2rtsnJy. According to the A.R, while carrying out such activity under the Social Forestry Division, its intention was not to derive income from sale of saplings to the farmers but rather it was towards attaining/improving the core activity i.e to make arrangement for the continuous supply of good quality of raw materials in the form of Bamboo and trees and hence its activity may not be treated as agricultural activity. 9.17 While going through the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in its day to day business activities. This is an universally accepted fact and cannot be denied by any prudent man, who is aware of the procedure of setting up of big industries and its functioning. In a situation, where other independent assessees, who have set up their small industries to supply accessories or raw materials to a big company set up in the neighboring area does not mean that the activities of such small units are part of the business activity of the said big company. The company depends upon small units, which are found set up around it for procuring various useful material such as accessories, spare parts and sometimes raw materials also for carrying out its business activities but inspite of these supplies, such units are independent units.In the case of the appellant company, it is seen that it has grown saplings on the mother bed in its campus consisting of over 100 acres of land and after growing them in proper atmosphere, sold the same to various farmers. It is seen that these farmers, after buying these saplings from the appellant company grow the same in their fields by looking after these and when these plants became fit for commercial use, sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r staff from various areas away from the Mill. These coppice shoots are of no use to the farmers and they destroy it. In the Clonal Technology these shootes are utilized by cutting the shoots in small pieces of 1.5 inches to 2 inches. These cuttings are then treated in bavist in fungicide to avoid any fungal infection. One end is then dipped in a rooting hormone and then these cuttings are placed in Root trainer blocks having an artificial medium called Vermiculite. Soil in any stage is not used. These cuttings are then placed in Mist chambers under controlled conditions of Temperature ( 38 degrees C) &Humidity 85%. For a period of 45 days in after which they are brought out and kept in Hardening chambers for a period of 15 - 20 days. Here the plants are graded p ace in each block by healthy plants. After being kept for 20 days in the hardening chamber the plants are then brought to the open and kept on wire benches for a period of 90 days wherein they develop into plants ready for planting. These plants are then transported to the farmers field as per requirement of the farmers. Once the saplings are planted in the field our field staff is regularly visiting the farmers for im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed which were specifically incurred on growing saplings and not what is incurred for monitoring and supervision for growing trees by the farmers. The learned AR of the assessee further submitted that the intention of the assessee is important in determining the nature of income. He submitted following details to buttress his argument that all the expenditure of ₹ 3,16,12,469/-incurred by the forestry division of the assessee were not incurred on growing saplings alone: 8.5.4 It was further submitted by the learned AR of the assessee that the assessing officer has accepted that the social forestry expenses claimed by the appellant also included the expenditure incurred by the appellant subsequent to the sale of saplings. However, the assessing officer has misinterpreted the object of the incurrence of the expenditure by the appellant in holding that the appellant may be making profit from plant nursery activity. In fact it has made an overall loss due to its commitment to farmers in maintenance of plantation. It is submitted that the aforesaid observation of the assessing officer is misconceived in as much as incurring forestry expenses is not prompted by any commitm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low the expenditure incurred by the appellant towards forestry. 8.5.7 While advancing alternative contention, it was submitted that such expenditure should be considered as relating to agricultural operations as they were incurred on activities performed on land i.e. upto primary bed stage in seed route Plantation. In the event this is not acceptable then only the expenditure incurred up to the sale of saplings should be considered as relating to agricultural activities as post saplings sale expenditure has no relationship with the growing of saplings. These in any case should not be considered for the purposes of computing the disallowable amount. In this regard it was submitted that in the clonal route production there is no use of soil and therefore, the expenditure incurred in clonal production should not be considered as agricultural related expenses. Mist Chambers are used in clonal route production and therefore, the depreciation on assets in the Mist Chambers amounting to ₹ 768675 (forming part of total disallowance of ₹ 2,78,29,039) disallowed in the assessment order needs to be excluded besides the expenditure incurred in clonal route production of saplings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed and not the entire expenditure of ₹ 316.12 lakhs reduced by sale proceeds of ₹ 45.52 lakhs. 8.6. Against this, the learned DR submitted that the assessee has been actually carrying out agricultural operation over the land to grow saplings. He referred to the decision of Hon'ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466(SC) wherein it is held that agricultural operation means tilling of the land, sowing of the seeds, planting and similar operation on the land. These basic operations require the expenditure of human skill upon the land itself. Thus according to the learned DR these operations are absolutely necessary for the purpose of raising produces from the land. When the produce sprouts from the land, further operation such as weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the growth are carried out for preservation of the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. They would all be agricultural operations when taken in conjunction with the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the land up to harvesting. In this regard following observation of Hon'ble Supreme Court is relevant: The mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations; in order to invest them with the character of agricultural operations these subsequent operations must necessarily be in conjunction with and in continuation of the basic operations which are the effective cause of the products being raised from the land. The subsequent operations divorced from the basic operations cannot constitute by themselves agricultural operations. Only if this integrated activity which constitutes agriculture is undertaken and performed in regard to any land can that land be said to have been used for "agricultural purposes" and the income derived there from be said to be "agricultural income" derived from the land by agriculture, under section 2(1) of the Indian Income-tax Act, 1922. Agriculture comprises within its scope the basic as well as the subsequent operations described above rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then subsequent operations alone will not result into agriculture income. In this regard we refer to following part of the head notes from the above judgment: It was claimed that the income from sale of sal trees was agricultural income as in addition to the maintenance of a forest establishment human skill and labour were employed in the following operations: (a) reservation of blocks of forest and their operation by rotation; (b) marking of trees for felling; (c) creeper and climber cutting; (d) thinning and removal of diseased and unsound trees; (e) clearing of jungles and under growths; (f) allowing grazing in certain months; (g) burning under growths in certain months; (h) protection from fire and maintenance of fire lines; (i) closure of forests to men and cattle during the rainy season; and (j) preservation of mother trees: Held,_(assuming that the operations which the assessees claimed had been performed, had been proved), the operation in forestry were performed after the produce had sprouted from the soil and no human skill and labour was spent by the assessees on the cultivation of the forest land; nor were any operations performed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes of rearing plants, that would not by itself amount to the carrying on of a primary agricultural operation in the sense of cultivating the soil. However cases may arise in which a nursery may be maintained by a farmer as an aid or necessary adjunct to the primary process of agricultural carried on by him. [In this case it was held that the materials placed before the agricultural income-tax authorities could not justify the conclusion that the income from the nurseries constituted agricultural income.] 8.8.7.Hon'ble A.P. in Additional Commissioner of Income-tax Vs. Challapalli Sugars Ltd. (1979) 116 ITR 648 (A.P.) held that it is only the expenses actually incurred for agricultural like tilling of the land, sowing of the seeds, planting and similar operations carried on the land, that can be described as expenditure incurred for agriculture as a cultivator. 8.8.8. Regarding the argument of the learned AR of the assessee that growing saplings, nursing them and selling to farmers for growing trees is an integral part of business of the assessee for procuring raw materials to be used in the business of manufacturing and sale of paper and board, we are of the view that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultural operations and not deductible in computing its taxable income. This was confirmed by the Commissioner (Appeals). On appeal to the Appellate Tribunal : Held, dismissing the appeals, that although there was a nexus between the farming expenses incurred by the assessee and the business carried on by the assessee, the expenses could be allowed as a deduction under 37 only if the expenses were otherwise considered as expenditure in computing the business income of the assessee-company. The farming operations carried on by the assessee-company were nothing but agricultural operations. If there had been a surplus of agricultural income, it could not have been considered for taxation and exactly in the like manner the expenditure incurred for farming operations could not be considered as admissible expenses in computing the business income of the assessee. The expenses relating to agricultural operations could not be allowed as expenditure in computing the business income. Thus expenditure incurred on cost of seeds, labour charges, purchase of manure, pesticide, tilling, weeding, labour and other expenses for the purpose of growing spice to standard quality and debited to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, then income from such basic operations alone will be agriculture income. 8.8.10. On the basis of discussion made above when we apply above principles we find that the expenses of ₹ 249.13 lakhs being expenses incurred on forest , supervision of growing trees by farmers, conveyance, salary of the staff engaged in that purpose could not be treated as expenditure on agricultural operation and therefore should be allowed as business expenses. Similarly expenditure of ₹ 13.40 lakhs incurred by the assessee on growing coppice seeds without using the land by primary operation cannot be disallowed. The only expenditure which can be considered for disallowance is the sum of ₹ 53.59 lakhs which included a sum of ₹ 8.03 lakhs incurred on growing saplings on land and ₹ 45.56 lakhs incurred on operations on growing saplings after their removal from the land. In our considered view growing saplings in the pots/polythene bags after plucking them from ground and planting them in such pots is an integrated activity which is in conjunction with and in continuation of growing saplings on the land and therefore, expenditure incurred there upon would be treated as agri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He upheld the finding of the Assessing Officer that where the manufacturer is permitted to avail the credit of the duty paid on the imports then the same has to be considered for the valuation of the stock both in the opening as well as in the closing stocks. The total duty availed by the assessee company was ₹ 2,91,99,797 on the basis of raw materials consumed whereas the credit utilized for finished goods was ₹ 3,03,96,918. Accordingly, the difference is required to be added as profit of the year. 9.2 The learned AR of the assessee submitted that inclusion of tax duties in the value of raw materials of the closing stock should not have any effect on the Profit & Loss account because there will be corresponding debit to the Profit & Loss account. Since the effect is nil, it is only academic exercise to include the same both in the closing as well as opening stocks. 9.3 The learned DR, on the other hand, submitted that quantities of opening stock and closing stock of raw materials varies, therefore, incidence of excise duty paid would vary. If raw material in the closing stock is more than its valuation would be higher on account of inclusion of excise duty when on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred on inputs should be added to the cost of inputs (raw materials, stores, etc.) if not already added in the books of account. (b) Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account. (c) any tax duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts. 23.13 It may be noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adjustment is made in the valuation of closing stock, the same will be reflected in the opening stock also." 9.5 We accordingly uphold the addition made by the Assessing Officer, however with the observation that the assessment of subsequent years be revised in accordance with the provisions of Section 145A. and observation made above i.e. modified value of closing stock of this year be taken as opening stock of the next year . 10 Ground No.6 10.1.1 Ground No.6.(a) relates to computation of deduction u/s.80HHC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on income computed under Sections 28 to 44 of the Act. The Tribunal after considering the Judgments of the Supreme Court in the case of Surana Steels P. Ltd., vs. Deputy CIT (1999) 237 ITR 777 and in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 (SC) and analyzing the order impugned found that, the provisions of Section 115J are similar to the provisions of Section 115JA of the Act. In order to come to the conclusion the Tribunal has also taken note of sub-section (4) of section 115JA and referred to the dictum laid down by the Supreme Court in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 wherein it was held that the Assessing Officer while computing the book profits of a company under Section 115J of the Income Tax Act, 1961, has only the power to examine whether such books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation Section 115). The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions for deduction u/s.80HHC. This has to be done on the basis of income computed under the provisions of the Act. If some deduction u/s.80HHC is computable then the same should be allowed from the book profit. If no deduction is computable u/s.80HHC on the basis of computation of income as per I.T. Act for the reason that there is loss in the business then no deduction can be allowed while computation book profit as well. 10.1.4.We have heard both the parties and perused the record. It is not disputed that Hon'ble Kerala High Court in the case of GTN Textiles Ltd (supra) Hon'ble Madras High Court in case of Megha Electro and Futura Polyster Ltd (supra) have held that deduction u/s.80HHC should be computed on the basis of book profit computed as per the provisions of the Companies Act and not as per normal provisions of the I.T. Act. This is also undisputed fact that those judgments were rendered in the context of Section 115J and we are dealing with the provisions of Section 115JB. In order to find out substantive difference in the applicability of two provisions, we refer to clause (iii) of Explanation to Section 115J as under and clause (4) in Explanation 1 to Section 115JB as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR.It was submitted by the learned AR that computation of income was done under the MAT provision (Section 115JB). Therefore, no adjustment in the book profit is permissible except those provided in that Section. We rely on the decisions of Hon'ble Supreme Court in the case of Apollo Tyres (255 ITR 273) and Commissioner of Income-tax Vs. HCL Comnet Systems and Services Ltd.(2008) 305 ITR 409 (SC). In this regard we refer to following part of the head notes from that judgment as under: While resorting to the provisions of section 115JA of the Income-tax Act, 1961, on the basis that the total income of the company as computed under the Act is less than 30 per cent. of its book profits, the Assessing Officer has to accept the authenticity of the accounts maintained by the company in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956, which are certified by the auditors and passed by the company in general meeting. The Assessing Officer has only the power of examining whether the books of account are duly certified and whether such books have been properly maintained in accordance with the Companies Act. The Assessing Officer doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,58,321. The Assessing Officer had disallowed this amount while computing book profit u/s.115JB by holding that they relate to agricultural activities therefore expenses incurred on earning exempted income are not allowable. Learned AR of the assessee submitted that no such disallowance is called for in computation of book-profit u/s 115JB. 10.3.2 After hearing both the sides, we are of the considered view that no adjustment is required to be made in computation of income u/s 115JB of the I.T. Act, except as provided in that section. There is no provision u/s 115JB of the Act to consider any expenditure or part thereof as disallowable by virtue of section 14A of the Act. The income computed u/s 115JB is on the basis of profits worked out as per schedule VI of the Companies Act. If the Auditors under the companies Act have certified that certain expenditure has been incurred for business purposes then same cannot be disallowed by invoking section14A of the Act. The question of invoking section 14A would arise only when income is computed in accordance with the provisions of the Income Tax Act. Section 115JB is code in itself for working out Book Profits for the purposes of comparin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 reversed on this point. The Appellate Tribunal had found as a fact on material on record that the investment by the assessee-company in units of the UTI was in the course of its business and its business of manufacture and sale of tyres and the business of purchase and sale of units of the UTI were common in nature and both the businesses were intertwined and interlaced ; and, therefore, the business in purchase and sale of units was an "eligible business" within the meaning of the definition of "eligible business" in section 32AB(2) and the assessee was entitled to deduction of 20 per cent. of the profits from that business, though the income therefrom was declared by the assessee-company as "income from other sources". The High Court, on a reference, accepted the finding and affirmed the decision of the Appellate Tribunal. On appeal to the Supreme Court: Held, affirming the decision of the High Court, that the business of the assessee-company of buying and selling of units was an "eligible business" as contemplated under section 32AB, and the income earned from its investment in the units of the UTI had to be included in computing the profits of "eligible business" under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in a manner provided by that Act and they are to be scrutinised and certified by the statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies. It was observed that sub-section(1A) of section115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. Held, accordingly, that for the purpose of section115J of the Act, only those adjustments, which are specified in the Explanation to section 115J, can be made from the book profits and depreciation not being one of them and further the accounts of the company having been prepared in accordance with Schedule VI to the Companies Act, the Assessing Officer was in error in disallowing the depreciation as claimed by the company. 10.3.4 In view of unambiguous interpretation of section 115J, no adjustment in the computation of book profit can be made. This interpretation is equally applicable u/s 115JB of the Act. Therefore no disallowance or any part of expenditure incurred on growing saplings and debited in books of accounts can be made. Our view is further supported by interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts including profit and loss account ; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts including profit and loss account ; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r unabsorbed depreciation, is nil; or (iv) the amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or subsection (3A), as the case may be, of that section, and subject to the conditions specified in that section ; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section ; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section ; or (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under subsection (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.-For the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that Section 10, 11 and 12 are mentioned in clause-f of Explanation, but not Section 14A even though they deal with similar type of expenditure i.e. relating to exempted income, gives clear indication that legislatures have not intended to disallow and consequently add to the book profit, expenditure relating to exempted income, and debited in profit and loss account prepared as per Companies Act. 10.3.8 The only argument raised by the revenue in this regard is that Sub Section-5 or Section 115JB provides the applicability of all the provisions of the Act and therefore provision of Section 14A would also apply and consequently expenditure relating to exempted income would be required to be added to the book profit. In our considered view, this argument is not tenable. Sub Section 5 starts with "save as otherwise provided in the Section ……"It means that wherever Section 115JB has provided and other provisions of the Act also provide on the same point then what is provided in Section 115JB would be applicable and not the other provisions of the Act. In our considered view Section 115JB is a complete code in itself for the purposes of computing book profit. No a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 234B in respect of income computed under section 115JB. Heard both the parties. In our considered charging of interest u/s. 234B is consequential and would be on the tax determined u/s. 115JB. Hon'ble Karnataka High Court held in Jindal Thermal Power Co. Ltd. Vs. Deputy Commissioner of Income-tax (2006) 286 ITR 182 (Kar) that the provisions of section 115JB as introduced by the Finance Act, 2000, imposed liability for payment of advance tax and the retrospective operation of section 115JB(1) with effect from April 1, 2001, could not be said to be unreasonable, excessive or harsh so as to declare it unconstitutional. It was also held that Sub section (5) specifies that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company mentioned in that section. In other words, except for substitution of the tax payable under the provision and the manner of computation of book profits, all the provisions of the tax including the provision relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions of this section and in view of the scheme of the Income-tax Act. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is actually paid otherwise it is to be disallowed u/s.43B of the Act (3) On the facts and in the circumstances of the case and in law, the ld. CIT(A) I Surat has erred in directing the A.O. to delete the amount of Rs. 35,53,325 in respect of : (a) Provision for purchase tax ₹ 32,00,000 (b) Claim of set-off of sales-tax reversed. ₹ 3,35,325 ₹ 35,53,325 (4) On the facts and in the circumstance of the case and in law, the ld. CIT(A) I, Surat ought to have upheld the order of the A.O. in respect of the above issues. (5) It is therefore, prayed that the order of the Ld.CIT(A)-l, Surat may be set aside and that of the A.O. be restored in respect of the above issues." 13.2.1.Ground no.1. The Assessing Officer, during the assessment proceedings, found that the assessee has deducted the sum of ₹ 28,46,154 on account of liability provision written back which was claimed exempt u/s.41(1) as per relief granted by the BIFR order dt.13.5.92. The Assessing Officer further noted that the assessee had offered a sum of ₹ 111.73 lakhs on account of provisions of earlier year no longer required. The details of this sum have been given by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CPML under section 41(1) of the Income Tax Act,1961; iv) To exempt J.K. Industries and associates from provisions of MRTP Act, 1969 and Section 10BA, 370, 372 and other applicable provisions of the Companies Act, 1956 for acquisition of shares in CPML or for advancing loans to CPML or for furnishing guarantee(s)." 13.2.4. Above is a beneficial circular and has been provided to reduce the hardship from the rigours of law. Hon'ble Supreme Court in UCO Bank Vs. Commissioner of Income-tax & Tamil Nadu Industrial Investment Corporation Ltd. Vs. Commissioner of Income-tax (1999) 237 ITR 889 (SC) has held that the Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, inter alia, to tone down the rigour of the law and ensure a fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under section 119 of the Act which are binding on the authorities in the administration of the Act. It is held therein as under: Under section 119(2)(a), however, the circulars as contemplated therein cannot be adverse to the assessee. The power is given for the purpose of just, proper and efficient management of the work of assessment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute and, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question. 13.2.5. Thus the circular issued by the CBDT allowing tax payers not to be taxed under section 41(1) if they are BIFR Companies is a beneficial circular and is binding on the Income Tax Authorities. In view of the above, we do not find any case for sustaining the addition made by the A.O. u/s 41(1). The learned CIT(A)is justified in deleting the same. This ground of Revenue is, therefore, rejected. 14. Ground No. 2 14.1 It relates to liability of ₹ 32,12,625 in respect of purchase tax crystalised during this year out which ₹ 32 lacs was allowed by ld. CIT(A)in para 4.3.2.. The AO found that the assessee has made provision under Gujarat Sales Tax Act for purchases from unregistered dealer. During the earlier year provision of ₹ 32 lakhs was made and it was offered for tax u/s. 43B. During this year, the liability was worked out at ₹ 32,12,675 for which the assessee claimed deduction from book profit. The Assessing Officer was of the view that provision w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim was made by way of rectification of vouchers passed in earlier years and after debiting previous years expenses. A corresponding credit was made to the consumption account. Thus, a sum of ₹ 3,53,325 was offered for taxation. According to the learned AR of the assessee, this will have no effect on computation of income as per Schedule VI of Computation Act. (i.e. book Profit). Accepting the above contention, the learned CIT(A) allowed the claim of the assessee. 15.2 Since the same was offered for taxation in earlier years wrongly, deduction from book profit has been claimed in this year. So far as the computation of book profit is concerned, the auditors have not found any fault; therefore, the same cannot be reduced by the Assessing Officer in view of the decision of Hon'ble Supreme Court in Apollo Tyres (supra). 15.3 As a result, the appeal filed by the Revenue is dismissed. ITA 578/AHD/2007 (A.Yr.2003-04)(Assessee's Appeal) 16.1. In this appeal the assessee has raised following grounds: On the facts and in the circumstances of the case Ld. Commissioner of Income Tax (Appeals)-I, Surat erred in:- 1.0 Holding that for the observations made by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board of Direct Taxes. 6.0 Without prejudice to the appellants contention made in the previous year relevant to the Asstt Year 2001-02, not directing the Assessing Officer that the depreciation allowance for the year under consideration should be recomputed adopting WDV on the opening day of the previous year relevant to the Asstt Year 2003-04 once it reaches finality on disposal of appeal for the Asstt. Year 2001-02. 7.0 Upholding the Assessing Officers action on the computation of Book Profit for the purposes of Section 115JB of the Act and in ignoring that:- a) The appellants qualified for deduction of Rs. 13972192 being the profit eligible for deduction u/s 80HHC of the Act and in ignoring that in view of appellant facts, for the purposes of computing Book Profit, it is not the profit as computed under the head "Profits & Gains of Business or Profession" that has to be adopted but it isprofit as per books of account. b) Rs.15078740 amortized in the accounts was not relatable to the income exempt u/s 10 of the Act. 8.0 Not appreciating that the tax payable by the appellant was computed under the provisions of Section 115JB of the Act and therefore, there was no li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the claim during this year. As the amount pertained to earlier years, he confirmed the disallowance. 16.3.5. The Ld. A.R. however submitted that sales were made to 4 parties and their accounts were debited, but part of the dues was not paid by the parties on account of dispute on quality and price. Since keeping in view the turnover of the sales made to these parties, short amount not paid by them was written off as bad debts. Ld. D.R. on the other hand relied on the order of the authorities below. 16.3.6. After considering the rival submissions, we restore the matter to the file of the Assessing Officer to give an opportunity to the assessee to show that this amount represented sales made to the clients .If the amount has been offered for taxation in the earlier years and has been actually written off after the accounts are settled, then the claim should be allowed. Similar issue arose again assessment year in 2002-2003 in respect of ₹ 2,50,000/-.Following our decision on that issue, we restore the matter to the file of the Assessing Officer to find out the amount which has become irrecoverable as per principles laid down by Hon'ble Gujarat High Court in Dhal Enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year and is not recoverable, following the decision of Hon'ble Gujarat High Court in Dhal Enterprises and Engineers (supra).This ground of the assessee is therefore allowed, but for statistical purposes. 16.3.11. ₹ 21,97,577/- This amount represented telephone, electricity and Taxi hire charges. It was claimed that these expenses were incurred by other group companies on behalf of assessee company. Due to difference of opinion with regard to the share, the assessee has to bear a sum of ₹ 21,97,577/-which was considered as assessee's liability and was claimed as deduction. The Assessing Officer disallowed the same on the ground that it pertains to earlier years. The Learned Commissioner of Income Tax (Appeals) confirmed the same on the ground that no proof of settlement or crystallization of expenses has been submitted. The self made vouchers were not treated as proof of such crystallization. 16.3.12. Against this, Ld. A.R. submitted that in order to reduce the cost under various heads, the assessee availed facilities of other group companies. The amounts payable to them were settled at periodical intervals. Subsequently, it was noted by the assessee company that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of the assessee is allowed, but for statistical purposes. 17.Ground No. 3: 17.1. It relates to claim of foreign exchange rate fluctuation. It has affect on assessee's liability. During the assessment year the assessee had offered a sum of ₹ 17,82,038/- for tax, but during the course of assessment proceedings it was submitted that this offer should be ignored. The submission of the assessee in this regard was submitted to the Assessing Officer vide assessee's letter dated 18-01-2006 as under: "Songadh unit was taken over by the existing Management and for the pre takeover period there were certain outstanding bills for import of materials. The said liability (disputed) since is payable in foreign currency, the liability amount varies (increases / decreases) depending upon exchange rate. The effect of increase / decrease in liability is not being considered in the respective year Profit & Loss Account but suitable note is being given in the Accounts (for the year under consideration this was Note No.B-5 under Schedule 20 which appears at Page 54 of the return). We have been following mercantile system of accounting and therefore, the effect of increase/ decrease in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing them to the height of 30 cms, and then selling the same to the farmers. Secondly, procuring coppice shoots from the farmers, carrying out chemical process under controlled conditions, and selling them later to the farmers for growing them into trees. Thirdly, spending money on distribution of seeds to the farmers on conveyance, salary etc. for the purpose of supervision of the trees grown by the farmers. The issue has been discussed by us in the assessment year 02-03.We have held therein that only the expenditure over the land after tilling, showing of the seeds, planting the same in polybags and subsequent maintenance thereof would alone be treated as agriculture expenditure and will not be allowed against business income of the assessee. Other expenses would accordingly be allowed. On our asking the assessee has submitted following details of various expenses incurred by it under different heads: 18.1.2. Accordingly, only the expenses to the extent on ₹ 46.73 lacs would be considered as agricultural expenses out of total claim of expanses at ₹ 261.46 Lacs. and would not be allowed. Against this the assessee has shown sale of agriculture produce (relatable to grow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he category of 'other Institution', party engaged in research activities subject to the following conditions, namely:- (i) The sums paid to the approved organization shall be utilized for scientific research; (ii) The approved organization shall carry out scientific research through its faculty members or its enrolled students; (iii) The approved organization shall maintain books of accounts and get such books audited by an accountant as defied in the explanation to subsection (2) of section 288 of the said Act and furnish the report of such audit duly signed and verified by such accountant to the Commissioner of Income-tax or the Director of Income-tax having jurisdiction over the case, by the due date of furnishing the return of income under-section (1) of section 139 of the said Act; (iv) The organization shall maintain a separate statement of donations received and amounts applied for scientific research and a copy of such statement duly certified by the auditor shall accompany the report of audit referred to above. 2. The Central Government shall withdraw the approval if the approved organization:- (a) fails to maintain books of accounts referred to in sub-paragrap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 115JB of the Act and in ignoring that ₹ 1,50,78,740/- amortized in the accounts was not relatable to the income exempt under section 10 of the Act. Similar issue had come before us in Ground "6c" for the assessment year 2002-2003. For the reasons recorded therein this ground is accordingly decided in favour of the assessee. 23 Ground No. 8: 23.1It relates to not upholding the claim of the assessee that interest under section 234B is not payable whenincome is computed under the provisions of section 115JB.We have rejected this claim in the assessment year 2002-03 and accordingly it is rejected here also. 23.2 As a result, appeal of the assessee is partly allowed and partly allowed for the statistical purpose. ITA No. 738/A/2007 Assessment Year 2003-04 Revenue's appeal: 24. In this appeal Revenue has raised following grounds: "1.On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the assessee's claim for non taxability of Rs. 16,12,221/- made in view of BIFR's order dated 13-05-1992 was time bound relief u/s. 41(1) of the I.T. Act, 1961. 2. On the facts and circumstances of the case and in law, learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost which becomes available by the time accounts are finalized. 6.0 Upholding disallowance of ₹ 3462416 being part of interest paid on borrowed funds/Administrative Expenses and in not appreciating that investment in shares / units etc were made out of internal accruals and further that no part of Administrative Expenses were incurred in relation to dividend income. 7.0 Without prejudice to the appellants contention made in the previous year relevant to the Asstt. Year 2002-03, not holding that the Assessing Officer's action of bringing to tax a sum of ₹ 5551128 being reduction in appellants liability on account of Exchange Fluctuation on the outstanding bills for import of materials was not justified since the Assessing Officer had ignored that in view of the findings recorded in Section 143(3) for the Asstt. Year 2002-03, the appellants conduct of offering the said amount in the return of income was required to be ignored and in making reference to the provision of Section 139950 which are not applicable in the context of appellants facts. 8.0 Without prejudice to the appellants contention made in the previous year relevant to the Asstt. Year 2001-02, not direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No. 1 27.1. This ground relates to confirming disallowance of ₹ 11,58,593/- whose details are given as under: Amt/Rs. i) Debit balance of transporters/suppliers etc. 470907/- ii) Insurance Charges 10311/- iii) Additional Discount- Pradip Paper Mart 35990/- iv) Additional discount- T.K. Ruby 14737/- v) Electricity expenses - GeB Vyara, Audit recovery 103733/- vi) Over due interest on sales - Kalyan Paper mart 270970/- vii) Electricity expenses - GEB Vyara, Audit recovery 20871/- viii) Professional Tax 231074/- Total 1158593/- 27.2. During the course of assessment proceedings, the Assessing Officer noted that the assessee had offered a sum of ₹ 5,08,08,394/- as provisions of earlier years written back. Out of this it had claimed an expenditure of ₹ 11,58,593/- and offered the balance of Rs. 4,96,49,801/- net as income. It was claimed that the sum aggregating to ₹ 11,58,593/- are allowable business expenditure which were crystallized during the year under consideration. The Assessing Officer disallowed the claim that these expenses pertained to earlier period and they were in the nature of provisions for expenses. The Ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowing saplings through clonal routes which has been treated as non-agricultural operation in our discussion made in assessment year 2002-03 while disposing of similar ground.Thus the disallowance is restricted to ₹ 9.43 lacs and accordingly assessee gets relief of Rs. (78.13 - 9.43) = 68.70 lacs. 28.3. As a result this ground of assessee is partly allowed. 29. Ground No. 3 29.1. This relates to upholding the payment of ₹ 6,36,88,608/-paid to Meckinsey & Co. for advising the assessee on profit improvement measures which was held as capital expenditure by the Assessing Officer.The Ld. Assessing Officer noticed that by claiming depreciation on the amount the assessee has treated it as capital expenditure in the books and still claimed as revenue expenditure in the return of income. It was explained by the assessee that M/s. Meckinsey & Co. were engaged to take up the project of profit improvement programme and building distinctive institutional continuous improvement capability of the company. Entire programme was divided into three phases, each phase consisting of 3 months. It was explained that "entire project consisted of assessment of profit improvement opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Meckinsey & Co. will identify annualized saving in the range of ₹ 50 crores. The Meckinsey & Co. was required to provide the schedule in which the saving will be captured, installing the implementation management mechanism to ensure that 100% of the ideas are implemented. While it is true that as per the decision of Supreme Court and ITAT, Bombay cited by the appellant, book entry is not final for deciding the allowability or disallowability but it is a settled position of law that where benefit of enduring nature accrues to the assessee then depending upon the facts and circumstances of a case whether a capital assets is brought into existence or not the expenditure incurred can be treated as capital and not revenue. In the present position it is clear that the expenditure has not been incurred for effecting sales or any other business requirement. The expenditure has been incurred to improve manufacturing process, to improve the sales, marketing as well as pricing and supply issues. The project has been a comprehensive project for implementing the management mechanism over various areas of operation. Admittedly, the benefit which has accrued to the assessee is of endurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning apparatus. It is only an improvement in the profit earning system. This issue is covered by the Hon'ble Gujarat High Court in Jyoti Electric Motors's case (supra).Hon'ble Gujarat High Court in this case observed as under: (Head Notes:) Where the assessee, which was manufacturing motors, paid the sum of ₹ 50,000 towards technical report fees for ascertaining feasibility of manufacturing motors of kinds different from those manufactured by it : _Held,_ that the amount was revenue expenditure and the assessee was entitled to deduction in relation thereto in computing its profits. Under an agreement dated September 1, 1972, with Jyoti Ltd., the assessee was granted a non-exclusive licence to manufacture electric motors which were manufactured by Jyoti Ltd., and for this purpose Jyoti Ltd. was to render technical and other experienced guidance to the assessee. Jyoti Ltd. reserved the right to grant similar licences to any other parties. Though the period of the agreement was ten years and could be extended for a further period and the agreement was to continue in force until it was terminated, the agreement was liable to be terminated even earlier than the stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fourthly, the report rendered by C and L resulted in effecting economy and efficiency in the working of the company for manufacturing and selling of existing items, which gave the assessee a business advantage ; and, fifthly, the expenditure incurred by the assessee had merely facilitated the assessee's trading operation and enabled it to manage and conduct the business more efficiently, while leaving the fixed capital untouched. The Tribunal held that the expenditure was deductible. On appeal to the High Court. _Held,_ dismissing the appeal, that the report pertained to "reorganization of core business of the assessee and improving its market share and profitability". It could not be treated as an expense incurred for conducting "market survey or any other survey necessary for the business of the assessee." It did not fall within the purview of sub-section (2)(a)(iii) of section 35D. In view of the findings of fact by the Tribunal the expenses were deductible as revenue expenditure. 2. Commissioner of Income-tax Vs. J. K. Synthetics Limited (2009) 309 ITR 371 (DEL) (iii) the test of "once and for all" payment, i.e., a lump sum payment made in respect of a transaction is an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint venture agreement with T and E to carry out manufacturing operations of CRT sockets, electronic components like TV remote control, etc., for the domestic market as well as for exports. The assessee paid an amount of ₹ 9,23,733 to T as well as E as technical support fee. According to the Assessing Officer, the benefit received by the assessee was of an enduring nature and, therefore, the amount was treated as capital expenditure and not as revenue expenditure as claimed by the assessee. The Commissioner (Appeals) and the Tribunal held that the expenditure was deductible. On appeal to the High Court : _Held,_ dismissing the appeal, that there was a finding of fact given by the Tribunal that all that the assessee received was technical assistance in the manufacture of the products. There was no transfer of technology or knowhow, etc., which would enable the assessee to set up its plant and machinery. The expenditure was deductible. 29.8. Following above decisions, and for the reasons discussed above, we hold that ld. CIT(A) was not justified in confirming the addition.The same is deleted. 29.9. This ground of the assessee is therefore allowed. 30. Ground No. 4 30.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock statement was submitted to the bank in respect of process stock. The ld. CIT(A) confirmed the addition by observing as under:- "10.3 I have considered the submission made by the appellant and observation of the AO. The fact that there is difference in the value shown in the stock statement given to the bank with the books of account is admitted by the appellant. Therefore, there is no dispute with respect of the fact in the case of Recon machine Tools Pvt. Ltd. (supra) The Hon'ble Karnataka High Court stated that no acceptable evidence was placed by the assessee to disbelieve the bank statement as rightly held by the Authoritiesin the case on hand. In fact, the entire amount shown pertains only to the raw materials. In so far as the raw materials are concerned, the same are required to be supported by various statutory registers as ruled by the authorities. In the circumstances, in the absence of acceptable material, it is not possible for this court to dislodge the findings of the facts, particularly in the light of the bank's statement which is undisputed by the assessing authority. From the above it is clear that the addition made by the AO is correct and the appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, the same will be shown to the assessee and after confronting him the difference in quantities will be worked out. Stock in terms of quantity will be compared as on the same date. There after, the difference if any will be valued at cost or market price whichever is low as per accounting policy followed by the assessee for valuation of stock. With these remarks, we set aside this ground to the file of the A.O. 32. Ground No.6 32.1 This relates to upholding addition of ₹ 34,62,416/- which, inter-alia, ₹ 18,76,336/- being interest paid on borrowed funds on the ground that interest bearing funds were invested in shares which yielded dividend being exempted income. During the course of assessment proceedings the Assessing Officer found that assessee has earned dividend income of ₹ 48,00,34,582/-. This was claimed exempt u/s 10. The A.O. required the assessee to give the details of expenses incurred to earn the dividend income, and source of investment in purchase of shares. It was explained that shares were held only for few days and sold. The brokerage and security transaction tax formed part of cost of shares. Investment was made out of internal accrua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trative cost. In view of these reasons the disallowance made by the AO is confirmed and this ground of appeal is dismissed." 32.4 Ld. A.R. of the assessee submitted before us that disallowance should be calculated as per Rule 8D. He referred to the decision of I.T.A.T. Mumbai D Bench in DCIT v. Citizen Hotels Pvt. Ltd. (ITA No.5371 and 5803/Mum./2005) 32.5 On the other hand, the ld. D.R. relied on the orders of the authorities below. 32.6 After hearing the parties we restore the mater to the file of the Assessing Officer for calculating disallowable expenses in accordance with Rule 8D.subject to directions that the disallowance would not exceed the amount disallowed in the impugned order as has also been directed by Tribunal in the case of DCIT Vs. Citizen Hotels Ltd Mumbai "D" Bench in ITA No. 5371 & 5830/MUM/2005. In principle we uphold the decision of authorities below that expenditure relating to earning exempted income has to be disallowed and since assessee has invested in securities which were held only for a couple of days, dividends were earned and securities were disposed of, the earning of dividend and investing in securities is closely connected and therefore, disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olyster Ltd., (2009) TIOL-199-HC-Mad-IT in tax case appeal NO.216 to 219 pronounced on 16.4.2009, held that the computation of deduction u/s 80HHC has to be done on the basis of book profit and not on the basis of total income computed in accordance with the provisions of the Act Accordingly, this ground of assessee is allowed. 35.2 Ground No. 9(b) 35.2.1This ground relates to upholding the action of the A.O. in not allowing deduction of ₹ 1,63,85,686/- amortized in the accounts by the assessee and claimed as deduction in computing book profit. The A.O. disallowed the claim while computing book profit u/s 115JB on the ground that this expenditure related to exempted income. This expenditure related to social forestry and incurred on growing saplings by the assessee in-house and also on supervision of growing trees by the farmers from the seeds and saplings provided by the assessee and finally purchased by it from the farmers. The assessee had incurred an expenditure of ₹ 73,80,504/- during this year and claimed in return and in the books amortized sum of ₹ 1,63,85.686/-. The ld. A.O. held that raising of saplings is connected to basic agricultural operations con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly disallowed the claim of loss from computation of book profit. 35.3.4 The ld. Assessing Officer relied on the following authorities:- i) Indian Molasses Co. Pvt. Ltd. [37 ITR 66] (SC) In this case the Supreme Court stated that the "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present as when we speak of a joke at another's expense." But the idea of spending" in the sense of "paying out or away" money is a primary meaning and it is with that meaning that we are concerned. "Expenditure" is thus what is "paid out or away" and something which is gone irretrievably. ii) Nainital Bank Limited [62 ITR 638] (SC) In this case the Hon'ble Supreme Court stated as under : "In its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. When he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross claims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age, deprivation etc. caused by losing something. As per the law lexicon by P. Ramanath Lyer loss means deprivation, detriment or for feitune accruing as a result of shrinkage in value; something arising out of the exigencies of some transaction by reason of the circumstances attending it, and not a deprivation of property caused by a voluntary and spontaneous act of the person who is deprived. The Hon'ble Supreme Court in the case of India Molasses Co. Pvt. Ltd. [37 ITR 66] has held that an expenditure is equal to expense and expense is money laid out by calculation and intention. It means spending in the sense of paying out or away of money. In the case of Lord Dairy Farm Ltd. [27 ITR 700] Bombay high Court has stated that expenditure must arise out of a voluntary act on the art of a assessee whereas lossis entirely involuntary. In the case of S.C. Kothari [82 ITR 794] the Hon'ble Supreme Court has sated that disbursement or expense of a trader is something which comes out of his pocket. A loss is something different as it is not a thing which he expands or disburses. It is a thing which comes upon him as extra. The appellant has also relied on the decision of J&K High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant is aware that the legislature has treated both the effect i.e. dividend and loss as relating to each other but still the appellant has entered into this transaction thinking that the loss would be allowed in the calculation of book profit.Hence the transaction is a collusive transaction. As stated by the AO in several cases the Hon'ble Supreme Court has held that sometimes the expenditure need not be same as physical delivery of payment. In the case of Nainital Bank Ltd. (supra) the Hon'ble Supreme Court stated that if there are cross claims one by the assessee against a stranger and other by the stranger against the assessee and as a result of accounting, the balance due only is paid. The amount which is debited against the assessee in the settlement of accounts may appropriately be termed as expenditure. Further in the case of Attar Singh (supra) the Hon'ble Supreme Court stated that the expenditure incurred by the assessee in respect of which payment is made means that all outgoings are brought under the word expenditure. The expenditure for purchase in stock in trade is one of such outgoing. The payments made for purchases would also be covered by the word expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause (f) of section 115JB.In view of these reasons the disallowance made by the AO is correct and this ground of appeal is dismissed. 35.3.7 Before us ld AR for the assessee submitted that assessee had made investments in units of Mutual funds which were subsequently sold at a loss of ₹ 47.24 cr. which was debited in the profit & loss account. In this process assessee earned dividend of ₹ 47.5 crs which was credited in the profit & loss account. Though while computing income as per normal provisions of the Act no loss was claimed as transactions are covered u/s 94(7) but while computing book profit such loss debited in the books was claimed as allowable as per section 115JB. Ld. A.R. submitted the issue is directly covered in its favour by the decision of Hon'ble Mumbai special Bench in Walfort and Stock Brokers Ltd v. ITO (96 ITD 1) which was subsequently affirmed by the Hon'ble Bombay High Court in Commissioner of Income tax Vs. Walfort Share and Stock Brokers P. Ltd.(2009) 310 ITR 421 (Bomb). 35.3.8 In addition ld.AR submitted following arguments in support of his contention that what he has incurred is loss and not expenditure and loss as such cannot be adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.3.9 With regard to clause(f) of Explanation to Sec.115JB ld. AR submitted that said clause is inapplicable to the present case because loss arising on sale of unit is not expenditure for the following reasons:- a) Investment in securities has to be reflected in the Balance Sheet as per Schedule VI of the Companies Act and cannot be debited in profit and loss account not being an expenditure. b) Purchase cost of investment in securities has been reduced while calculating short term capital gain u/s 111A of the Income Tax Act and thus under no circumstances the said purchase cost can once again be claimed as deduction u/s 57 relating to Income from Other Sources. Thus if the said purchase cost of investment is not considered as expenditure u/s 57 of Income from other sources then under no circumstances the lower authorities can consider the said purchase cost of investment as expenditure related to earning of dividend. c) Even section 71 does not allow the set off of Short term capital loss against any other head of income as explained in the foregoing paragraphs. Thus even on this ground the learned Assessing Officer has grossly erred in considering the short term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be applicable while computing book profit also.It is incorrect to say that sec.94(7) providing disallowance of such dividend stripping losses would not be applicable while computing book profit u/s 115JB.The assessee has entered into transaction keeping in mind the record date.Thus new NAV of the units was practically known to the assessee.Therefore, entering into such transaction and incurring loss and claiming the same against the profit is a colourable device.Sec.94(7) treats dividend and loss as a part of same transaction and therefore legislature thought it proper to disallow the same by enacting sec.94(7).The loss is in fact an outgoing and so is the expenditure therefore all the outgoings should be treated as same and they are hit by sec.94(7).The decision in Walford Shares & Stock Brokers Ltd and also the decision of ITAT, Rajkot Bench in Bhanuben Chimanlal Malviya vs. ITO 2006 100 TTJ 337 are not applicable to the facts of the case as these judgments were rendered prior to instruction of sec.94(7). Once the assessee knows that a particular transaction will result into a loss and which will have effect on taxable income and still enters into such transaction for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents i.e. something a trader pays voluntarily for carrying out transactions whereas loss is not incurred out of any volition but is thrust on the assessee as a result of transaction. An "expenditure" is incurred to carry out a transaction; it is part of the activities to meet an end whereas loss is net result of the transactions which is known only at the end of the transactions. Hon'ble Supreme Court in Commissioner of Income-tax Vs. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) held that in its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure": it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts that there is expenditure. Further in the context of Sec.40A(3) Hon'ble Supreme Court in Attar Singh Gurmukh Singh Vs. Income-tax Officer (1991) 191 ITR 667 (SC) held that the word "expenditure" means all outgoings brought under the word "expenditure" for the purpose of the section 40A(3). The expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the damage, disadvantage, deprivations etc. caused by losing something. The Law Lexicon by P. Ramanatha Aiyar illustrates loss to mean deprivation, detriment or forfeiture accruing as a result of shrinkage in value something arising out of the exigencies of some transaction by reason of the circumstances attending it, and not a deprivation of property caused by a voluntary and spontaneous act of the person who is deprived. The Supreme Court, in the case of Indian Molasses Co (P) Ltd. V. CIT: 37 ITR 66, held that an 'expenditure' is equal to 'expense' and expense is money laid out by calculation and intention. It means' spending' in the sense of 'paying out or away' money. In Lord's Dairy Farm Ltd. . CIT: 27 ITR 700 (Bom) it was observed that expenditure must arise out of a voluntary act on the part of the assessee, whereas, loss is entirely involuntary. In CITV. New India Assurance Co. Ltd., 71 ITR 761 (Bom) it wasagain held that business expenditure is voluntarily incurred while a business loss is fortuitous or ab extra. The two terms have been clearly distinguished by the Supreme Court in the case of CIT V. S.C.Kothari: 82 ITR 794 as follows:28 "Disbursement or expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes whether provisions of sec. 94(7) can be invoked, as done by the ld.CIT(A) for disallowing such loss while computing book profit u/s 115JB. 35.3.19 In our considered view sec.115JB is a complete code in itself so far as computation of book profit is concerned. As we have discussed while disposing of ground No.6(c) in the Asstt. Year 2002-03 sub-sec.5 of sec. 115JB can be invoked only for borrowing provisions in those areas of the Act which are not provided in sec.115JB.The mechanism for computation of profit is completely laid down in sec.115JB.It starts with profit as computed and certified by the Auditors as per Schedule VI of the Companies Act. To this the adjustments as provided in that sec. alone are made and the net result is treated as total income for the purposes of comparing with total income computed under normal provisions of the Act and for levy of taxes. No other adjustments while computing book profit is permissible, as held by Hon'ble Supreme Court and other courts (supra).The effect of subsection 5 of sec.115JB of the Act is that provisions relating to collection and recovery, appeal and penalty as provided in other chapter of the Act can be invoked as they a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee.Following the same reasoning we dismiss this ground this year also. ITA No. 390/A/08 Grounds of Appeal: 38. Departmental Appeal: Assessment Year 2004-05 1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of ₹ 30,77,839/- on account of disallowance of claim of provision written back u/s 41(1). 2. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of ₹ 76,67,604/- made on account of adjustment u/s 145A being Excise duty on opening stock of raw materials. 3. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of ₹ 14,60,754/- made on account of unexplained sundry creditors. 4. In the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the CIT(A) be setaside and that of Assessing Officer be restored. 39. Ground No. 1: 39.1 The issue is similar as in Ground No. 1 in departmental appeal for the assessment year 2002-03 and Ground No. 1 in departmental appeal for the assessment year 2003-04.During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l purposes. 41. Ground No. 3 41.1 It relates to deleting addition of ₹ 14,60,754/- made on account of unexplained sundry creditors. During the course of assessment proceedings, the Assessing Officer noticed that there are some creditors which are old for more than 3 years and are outstanding in the balance sheet. The Assessing Officer required the assessee to file the confirmation, but assessee did not furnish any confirmation in respect of outstanding credit balances. As no cogent evidence was furnished before the Assessing Officer, he doubted the genuineness of the credit entries. The Ld. Assessing Officer made the addition on the ground that the assessee failed to prove the genuineness of the credit entries. The Ld. CIT(A) deleted the same on the ground that these credit entries did not pertain to the present assessment year, but had come in the books in some earlier years. Therefore, addition cannot be made in the present assessment year. Before us, ld. D.R. submitted that it is for the assessee to show that these entries had first time appeared in the books in some earlier years and secondly that they were not taken into account while computing income of some earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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