M/s Amartex Industries Limited, Chandigarh v. Addl. CIT, Chandigarh

ITA 1056/CHANDI/2010 | 2006-2007
Pronouncement Date: 30-07-2012 | Result: Partly Allowed

Appeal Details

RSA Number 105621514 RSA 2010
Assessee PAN AABCA2243H
Bench Chandigarh
Appeal Number ITA 1056/CHANDI/2010
Duration Of Justice 1 year(s) 11 month(s) 24 day(s)
Appellant M/s Amartex Industries Limited, Chandigarh
Respondent Addl. CIT, Chandigarh
Appeal Type Income Tax Appeal
Pronouncement Date 30-07-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 30-07-2012
Date Of Final Hearing 01-05-2012
Next Hearing Date 01-05-2012
Assessment Year 2006-2007
Appeal Filed On 05-08-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE MS. SUSHMA CHOWLA JUDICIAL MEMBER AND SHRI MEHAR SINGH ACCOUNTANT MEMBER ITA NO.1056/CHD/2010 (ASSESSMENT YEAR: 2006-07) AMARTEX INDUSTRIES LIMITED VS. THE ADDL.CIT SCO 18 SECTOR 9 RANGE 1 CHANDIGARH. CHANDIGARH. PAN: AABCA2243H ITA NO.1118/CHD/2010 (ASSESSMENT YEAR: 2006-07) THE A.C.I.T. VS. AMARTEX INDUSTRIES LIMITED CIRCLE 1(1) SCO 18 SECTOR 9 CHANDIGARH. CHANDIGARH. PAN: AABCA2243H ITA NO.693/CHD/2011 (ASSESSMENT YEAR: 2007-08) AMARTEX INDUSTRIES LIMITED VS. THE ADDL.CIT SCO 18 SECTOR 9 RANGE 1 CHANDIGARH. CHANDIGARH. PAN: AABCA2243H ITA NO.687/CHD/2011 (ASSESSMENT YEAR: 2007-08) THE D.C.I.T. VS. AMARTEX INDUSTRIES LIMITED CIRCLE 1(1) SCO 18 SECTOR 9 CHANDIGARH. CHANDIGARH. PAN: AABCA2243H AND ITA NO.1116/CHD/2011 (ASSESSMENT YEAR: 2008-09) AMARTEX INDUSTRIES LIMITED VS. THE ADDL.CIT SCO 18 SECTOR 9 RANGE 1 CHANDIGARH. CHANDIGARH. PAN: AABCA2243H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PARIKSHIT AGGARWAL RESPONDENT BY : SHRI MANJIT SINGH DR DATE OF HEARING : 03.05.2012 DATE OF PRONOUNCEMENT : 30.07.2012 2 O R D E R PER SUSHMA CHOWLA J.M : OUT OF THESE FIVE APPEALS TWO ARE CROSS APPEALS FI LED BY THE ASSESSEE AND REVENUE AGAINST THE SEPARATE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) CHANDIGARH DATED 31.5.2010 AN D 1.3.2011 RELATING TO ASSESSMENT YEARS 2006-07 AND 2007-08 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 2. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF C OMMISSIONER OF INCOME TAX (APPEALS) CHANDIGARH DATED 3.10.2011 RE LATING TO ASSESSMENT YEAR 2008-09 AGAINST THE ORDER PASSED U NDER SECTION 143(3) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT). 3. ALL THE FIVE APPEALS RELATING TO THE SAME ASSESS EE ON SIMILAR ISSUES WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY T HIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1056/CHD/2010 :: ASSESSEES APPEAL :: ASSE SSMENT YEAR 2006-07 : 4. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT TH AT GROUND NOS.1 2 5 AND 6 ARE GENERAL IN NATURE AND HENCE THE SAME ARE DISMISSED. THE ONLY EFFECTIVE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THIS APPEAL ARE AS UNDER: 3. THAT THE LD. CIT (A) CHANDIGARH IS NOT JUSTIFI ED IN NOT CONSIDERING THE CORRECT LEGAL POSITION AND SUBMISSI ONS BY THE APPELLANT'S COUNSEL AND RESULTANTLY ERRONEOUSLY CON CURRING WITH THE ORDERS PASSED BY THE A.O. U/S 143(3) OF T HE INCOME TAX ACT 1961 AND THEREBY CONFIRMING THE ACTION OF LD. A.O. IN UPHOLDING AN ADDITION AMOUNTING TO RS.1 23 327/- RE GARDING PAYMENT OF PF AND ESIC BY WRONGLY INVOKING THE PROV ISIONS OF SECTION 43B OF THE INCOME TAX ACT 1961. 3 4. THAT THE LD. CIT (A) CHANDIGARH IS NOT JUSTIFIE D IN NOT CONSIDERING THE CORRECT LEGAL POSITION AND SUBMISSI ONS BY THE APPELLANT'S COUNSEL AND RESULTANTLY ERRONEOUSLY CON CURRING WITH THE ORDERS PASSED BY THE A.O. U/S 143(3) OF T HE INCOME TAX ACT 1961 AND THEREBY CONFIRMING THE ACTION OF LD. A.O. IN REDUCING THE DEDUCTION U/S 80IC OF THE INCOME TAX A CT 1961 BY PARTLY ALLOWING THE PLEAS OF THE APPELLANT COMPANY WHICH FINDINGS OF THE LD. CIT (A) ON THE SAID ISSUE ARE P ERVERSE AND THUS NEEDS TO BE QUASHED AND THE CLAIM OF DEDUCTION U/S 80IC BE ALLOWED IN FULL AS SO CLAIMED BY THE APPELLANT C OMPANY BEING IN CONSONANCE OF STATUTE AS SUPPORTED BY LEGA L PRONOUNCEMENTS. 5. THE ISSUE IN GROUND NO.3 RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE MADE ON ACCOUNT OF EMPLOYEES CONTRIBUT ION TO PF AND ESI AMOUNTING TO RS.1 23 327/-. 6. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT D URING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT EMPLOYEES CONTRIBUTION TOWARDS EPF AND ESI WERE PAID BY THE A SSESSEE BEYOND THE DUE DATE. THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY SUM OF RS.17 92 477/- BEING THE TOTAL AMOUNT PAYABLE FROM APRIL 2005 TO MARCH 2006 AS TABULATED AT PAGE 3 OF THE ASSESSMEN T ORDER BE NOT DISALLOWED. THE ASSESSING OFFICER IN THE SAID TABL E HAS ADOPTED THE DUE DATE OF PAYMENT AS 15 TH OF EACH MONTH AND THE DATES OF PAYMENTS BY THE ASSESSEE ARE ALSO TABULATED IN THE SAID CHART. THE ASSESSEE HAD PAID THE SAID AMOUNT BY 20 TH OF SUCCEEDING MONTH IN RESPECT OF EMPLOYEES SHARE TO PF AND ESI. HOWEVER ONLY IN RESPECT OF ONE PAY MENT OF JUNE THE SAID WAS PAID ON 21.7.2005. THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.17 92 477/- IN THIS REGARD UNDER SECTION 2(24 )(X) R.W.S.36(1)(VA) OF THE ACT. 7. THE CIT (APPEALS) OBSERVED THAT THE PAYMENTS WHI CH WERE MADE WITHIN THE GRACE PERIOD I.E. UPTO 20 TH OF THE NEXT MONTH ARE TO BE ALLOWED AS A DEDUCTION RESTRICTING THE ADDITION OF RS.1 23 327/- I.E. RELATABLE TO MONTH OF JUNE 2005. 4 8. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ADDIT ION OF RS.1 23 327/- WE FIND THE REVENUE IS IN APPEAL AGAINST THE DELETI ON OF ADDITION OF RS.16 06 150/- VIDE GROUND NO.2 RAISED IN ITA NO.11 18/CHD/2010. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE ISSUE STANDS COVERED BY THE ORDER OF THE HON'BLE PUNJAB & HARYANA HIGH C OURT IN CIT VS. M/S NUCHEM LTD. IN ITA NO.323 OF 2009 DATE OF DECISIO N 2.2.2010. 9. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE IN THE PRESENT CASE IS SQUARELY COVERED BY TH E RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN CIT VS. NUCHEM LTD . (SUPRA) UNDER WHICH IT IS PROVIDED THAT WHERE THE EMPLOYEES SHAR E OF CONTRIBUTION TO ESI OR PF IS MADE BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME NO DISALLOWANCE IS WARRANTED ON THIS ACCOUNT. SIMILAR IS THE CASE IN RESPECT OF EMPLOYERS SHARE OF CONTRIBUTION TO PF AND ESI. THE ASSESSEE IN THE PRESENT CASE HAD DEPOSITED THE SAID AMOUNT OF EMPLO YEES SHARE OF PF AND ESI ADMITTEDLY BEFORE THE DUE DATE OF FILING THE RE TURN OF INCOME AND IN MAJORITY OF THE MONTHS EVEN WITHIN THE GRACE PERIOD ALLOWED UNDER THE RESPECTIVE ACTS. ONLY IN RESPECT OF THE MONTH OF JU NE 2005 THE SAID AMOUNT WAS PAID ON 21.7.2005 ONE DAY LATER THAN THE GRACE PERIOD BUT BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME IN THE PRESENT CASE. IN VIEW THEREOF THE TOTAL AMOUNT IS ALLOWABLE AS AN E XPENDITURE IN THE HANDS OF THE ASSESSEE. CONSEQUENTLY WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.1 23 327/- AND ALLOW GROU ND NO.3 RAISED BY THE ASSESSEE. 11. WE ALSO UPHOLD THE ORDER OF THE CIT (APPEALS) I N ALLOWING THE CLAIM OF THE ASSESSEE IN RESPECT OF EMPLOYEES SHARE TO PF AND ESI PAID 5 WITHIN THE GRACE PERIOD. CONSEQUENTLY GROUND NO.2 RAISED BY THE REVENUE IN THIS REGARD IS DISMISSED. 12. THE ISSUE IN GROUND NO.4 RAISED BY THE ASSESSEE IS IN RELATION TO THE COMPUTATION OF DEDUCTION UNDER SECTION 80IC OF THE ACT. 13. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE WAS IN THE BUSINESS OF MANUFACTURING PROCESSING AND TRADING OF ALL KIN DS OF FABRICS AND TEXTILE PRODUCTS. THE HEAD OFFICE OF THE ASSESSEE IS AT PANCHKULA. THE ASSESSEE HAS FIVE MANUFACTURING UNITS AT DERA BASSI GURGAON LUDHIANA PANCHKULA AND BADDI. THE CENTRAL WAREHOUSE OF THE GOODS MANUFACTURED BY THE ASSESSEE IS AT PANCHKULA. THE ASSESSEE CLAI MS TO HAVE RETAIL COUNTERS IN ALL CITIES OF NORTHERN INDIA AND ALSO I N PAN CITIES OF WHOLE OF INDIA. THE ASSESSEE FURTHER CLAIMED THAT IT HAD MAINTAINED SEPARATE BOOKS OF ACCOUNT IN RESPECT OF BADDI UNIT AND ALSO MAINTAINED SEPARATE BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF BADDI UN IT AND HEAD OFFICE BUT CONSOLIDATED INCOME WAS SUBMITTED AT THE CLOSE OF THE YEAR. THE ASSESSEE WAS ELIGIBLE FOR THE CLAIM OF DEDUCTION UN DER SECTION 80IC OF THE ACT IN RESPECT OF BADDI UNIT ONLY. THE ASSESSE E HAD CLAIMED DEDUCTION UNDER SECTION 80IC OF THE ACT AMOUNTING T O RS.66 49 378/-. 14. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER IN ORDER TO VERIFY THE CLAIM OF THE ASSESSEE UNDER SECTION 80IC OF THE ACT ASKED THE ASSESSEE TO FURNISH VARIOUS DETAILS REGAR DING THE SAID DEDUCTION AND ALSO TO JUSTIFY THE EXTENT OF PROFITS ARRIVED F ROM THE SAID UNIT. QUERIES WERE RAISED BY THE ASSESSING OFFICER TO FUR NISH DISTRIBUTION AND COMMON EXPENSES INCURRED BY THE COMPANY FROM ITS HE AD OFFICE AT CHANDIGARH IN ORDER TO WORK OUT ACTUAL PROFITS OF B ADDI UNIT FOR COMPUTING QUANTUM OF DEDUCTION UNDER SECTION 80IC O F THE ACT. THE CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE PURCHASES 6 WERE CENTRALIZED AT THE HEAD OFFICE AND STOCK OF CL OTH WAS SENT TO BADDI UNIT BY THE HEAD OFFICE. THE GARMENTS MANUFACTURED AT BADDI UNIT WERE THEN SENT TO THE HEAD OFFICE AND WERE DISTRIBUTED T O VARIOUS RETAIL OUTLETS OF THE COMPANY THROUGH CENTRAL WAREHOUSE AT PANCHKU LA. THE ASSESSEE ALSO EXPLAINED THAT THE CAPITAL REQUIRED FOR ESTABL ISHING THE UNIT WAS INVESTED BY THE HEAD OFFICE. IT WAS ALSO BROUGHT O N RECORD THAT THERE WERE NO DEBTORS IN THE UNIT. THE ASSESSING OFFICER VIDE ORDER-SHEET ENTRY DATED 8.12.2008 GAVE FINAL OPPORTUNITY TO THE ASSESSEE TO FURNISH DISTRIBUTION AND COMMON EXPENSES INCURRED BY THE CO MPANY FROM ITS HEAD OFFICE AT CHANDIGARH SO THAT ACTUAL PROFITS OF BADDI UNIT COULD BE WORKED OUT. IN RESPONSE THERETO THE ASSESSEE FURNI SHED WORKING WHICH IS ANNEXED AS ANNEXURE A-3 TO THE ASSESSMENT ORDER. T HE TOTAL OF THE EXPENSES DEBITED TO THE HEAD OFFICE OF RS.9 29 04 7 20/- WERE CONSIDERED FOR ALLOCATION BETWEEN BADDI UNIT AND THE REMAINING BUSINESS OF THE ASSESSEE. IT WAS ALSO POINTED OUT BY THE ASSESSEE THAT THE NET SALES OF BADDI UNIT WERE 2.58% OF THE TOTAL SALES OF THE COM PANY. THE ASSESSING OFFICER VIDE PARA 8.2 OBSERVED AS UNDER: 8.2. REPLIES OF THE ASSESSEE HAVE DULY BEEN CONSID ERED. FROM THE DETAILS FURNISHED BY THE ASSESSEE FOLLOWIN G POINTS EMERGE: (I) ASSESSEE HAS NOT MAINTAINED SEPARATE ACCOUNTS FOR THE ELIGIBLE UNIT AND OTHER UNITS. (II) ALL PURCHASES ARE CENTRALIZED AND RELATED EXPENSES ARE DEBITED TO HEAD OFFICE. THEN STOCK IS TRANSFERR ED TO BADDI UNIT: AT COST FOR GARMENT MANUFACTURING WITH OUT TAKING INTO CONSIDERATION THE PURCHASE EXPENSES E.G . PURCHASE COMMISSION FREIGHT ETC. (III) THE MANUFACTURED GOODS FROM THE BADDI UNIT ARE TRANSFERRED TO THE HEAD OFFICE AFTER INCLUDING PROF IT MARGIN AND SALES ARE THEN MADE BY HEAD OFFICE THROU GH ITS VARIOUS RETAIL OUTLETS. NO EXPENSES RELATING TO SALES ARE TAKEN INTO ACCOUNT FOR DETERMINING PROFITS OF T HE BADDI UNIT. THE BASIS OF PROFIT MARGIN HAS NOT BEEN DISCLOSED BY THE ASSESSEE. IT IS NOT KNOWN AS TO AT WHAT RATE SUCH ITEMS ARE FINALLY SOLD IN THE MARKET THRO UGH RETAIL OUTLETS. NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO SHOW THAT THE TRANSACTION BETWEEN ELIGIBLE UNIT AND HEAD OFFICE ARE AT ARMS LENGTH. 7 (IV) THE SOURCE OF ENTIRE CAPITAL USED FOR BADDI UNIT W AS THE HEAD OFFICE AND ALL FINANCIAL EXPENSES WERE DEB ITED TO THE BOOKS OF HEAD OFFICE AND NO SUCH EXPENSE WAS TA KEN INTO CONSIDERATION FOR WORKING PROFITS OF THE BADDI UNIT. (V) NO ADMINISTRATIVE EXPENSES RELATING TO THE MANAGEM ENT & ADMINISTRATIONS OF AFFAIRS OF THE COMPANY WERE TA KEN INTO CONSIDERATION FOR WORKING THE PROFITS OF THE E LIGIBLE UNIT. (VI) ASSESSEE HAS ADMITTED THAT EXPENSES TO THE EXTENT OF RS.23 96 941/- (BEING 2.5% OF RS.9 29 04 720/-) DEB ITED TO HEAD OFFICE SHOULD HAVE BEEN ALLOCATED TO BADDI UNIT AND TO THAT EXTENT PROFITS OF THE BADDI UNIT HAD BEEN OVERSTATED. THIS ALSO IMPLIES THAT ASSESS EE HAS ADMITTED THAT TO THE EXTENT OF RS.23 96 941/- THE CLAIM OF DEDUCTION U/S 80IC WAS EXCESSIVE . 15. THE ASSESSING OFFICER THEREAFTER ANALYZED THE A NNEXURE A-3 AND TABULATED THE EXPENSES TO BE CONSIDERED FOR ALLOCAT ION BETWEEN BADDI UNIT AND OTHER BUSINESS OF THE ASSESSEE. THE SAID LIST OF EXPENSES AS PER TABLES 1 AND 2 ARE TABULATED AT PAGES 25 AND 26 OF THE ASSESSMENT ORDER. THE ASSESSEE HAD EXCLUDED CERTAIN EXPENSES WHICH WE RE RELATABLE TO OTHER UNITS IN ENTIRETY. THE ASSESSING OFFICER REJ ECTED THE EXPLANATION OF THE ASSESSEE OBSERVING AS UNDER: A) VARIOUS OUTLETS OF THE ASSESSEE WERE BEING USED FOR THE BUSINESS OF ENTIRE SALES OF THE ASSESSEE. THE GOOD S MANUFACTURED AT BADDI UNIT WERE SOLD THROUGH VARIOUS RETAIL OUTL ETS. SO THE EXPENDITURE RELATING TO THE SAID OUTLETS AS PER TH E ASSESSING OFFICER HAD TO BE TAKEN INTO ACCOUNT FOR THE PURPO SES OF ALLOCATION OF EXPENSES RELATING TO SELLING OF THE GOODS OF THE ELIGIBLE UNIT. THUS ALL THE EXPENSES IN TABLE-2 I.E. COLUMN-A WERE TO BE CONSIDERED FOR THE PURPOSES OF ALLOCATING OF EXPENS ES TO BADDI UNIT. THE ASSESSING OFFICER ACCEPTED THE PELA OF T HE ASSESSEE WITH REGARD TO EXCLUSION OF SALE TAX OF RS.2.27 CRORES. THE TOTAL EXPENSES AS PER TABLE-2 FOR ALLOCATION WERE THUS TA BULATED AT RS.10 23 54 135/-. 8 B) THE TOTAL PURCHASE EXPENSES DEBITED TO HEAD OFFI CE AMOUNTING TO RS.97 50 89 394/- AS PER THE ASSESSING OFFICER INCLUDED DIRECT EXPENSES RELATING TO PURCHASES WHICH WERE TO THE TU NE OF RS.2.14 CRORES. AS THE PURCHASES WERE BEING MADE BY THE HEA D OFFICE THE SAID EXPENSES AS PER THE ASSESSING OFFICER WERE N OT TRANSFERRED TO BADDI UNIT DURING THE STOCK TRANSFER AND HENCE THE SAME WERE ALSO TO BE INCLUDED FOR ALLOCATION PURPOSES. C) THE ASSESSING OFFICER ALSO INCLUDED THE EXPENDIT URE TABULATED UNDER TABLE-1 ON ACCOUNT OF DIRECTORS SAL ARY AND OTHER EXPENSES I.E. INSURANCE LEGAL AND PROFESSIONAL EXP ENSES FINANCIAL EXPENSES AND DEPRECIATION TOTALING RS.4 24 05 263/ - FOR THE PURPOSES OF ALLOCATING THE SAME TO BADDI UNIT. THU S THE TOTAL AMOUNT FOR ALLOCATION AS PER THE ASSESSING OFFICER WORKED OUT AS FOLLOWS: AS PER TABLE 1 RS.4 24 05 263/- AS PER PARA 8.3(C) RS.10 23 54 135/- TOTAL RS.16 61 72 186/- LESS DISALLOWANCE AS PER PARA 2.1 5.0 6.7 AND 7.1 RS. 10 48 843/- (AS ABOVE) BALANCE RS. 164074500/- 16. THE ASSESSING OFFICER HELD THAT 2.58% OF RS.16 51 23 343/- AMOUNTING TO RS.42 60 180/- RELATED TO BADDI UNIT A ND PROFIT OF BADDI UNIT AFTER THIS ALLOCATION WOULD BE RS.23 89 196/- INSTEAD OF RS.66 49 378/- CLAIMED BY THE ASSESSEE. THE DEDUCT ION UNDER SECTION 80IC OF THE ACT WAS ACCORDINGLY REDUCED AND WAS ALL OWED TO THE EXTENT OF RS.23 89 196/-. THE ASSESSING OFFICER FURTHER H ELD THAT PROFITS OF THE COMPANY OTHER THAN BADDI UNIT WOULD INCREASE BY AN AMOUNT OF RS.42 60 182/-. CONSEQUENTLY DEDUCTION UNDER SECT ION 80IC OF THE ACT WAS ALLOWED AT RS.23 89 196/-. 9 17. THE CIT (APPEALS) VIDE PARA 39 OF THE APPELLATE ORDER ON CONSIDERING THE RIVAL CONTENTION OF THE ASSESSEE OB SERVED THAT SEPARATE BOOKS OF ACCOUNT AND FINANCIAL STATEMENT IN RESPECT OF BADDI UNIT COULD NOT BE RELIED UPON AND THE PROFITS OF BADDI UNIT WE RE REQUIRED TO BE REWORKED. THE CIT (APPEALS) ALLOWED DIFFERENCE IN ALLOCATION OF REPAIRS AND MAINTENANCE EXPENSES AS PER PARA 41. H OWEVER CIT (APPEALS) CONFIRMED THE ORDER OF THE ASSESSING OFFI CER IN REFUSING THE CLAIM OF DEDUCTION UNDER SECTION 80IC OF THE ACT. 18. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT (APPEALS). THE LEARNED A.R. FOR THE ASSESSEE DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 80IA(5) OF THE ACT. THE EXPLANATION OF THE ASSESSEE AGAINST REALLOCATION OF THE EXPENSES WAS THAT NO SUCH APPOR TIONMENT OF EXPENSES WERE BEING MADE BECAUSE THE EXPENSES AT HEAD OFFICE AND RETAIL OUTSETS WERE TAKEN CARE OF BY TRANSFER OF REASONABLE PROFIT S FROM GOODS MANUFACTURED BY ALL UNITS INCLUDING BADDI UNIT. TH E LEARNED A.R. FOR THE ASSESSEE FURTHER SUBMITTED THAT THE HEAD OFFICE AND RETAIL OUTLETS SELLS THE PRODUCTS RECEIVED FROM BADDI UNIT AND OTHER UNI TS AT HIGHER PRICE AND MAKES MARKETING PROFIT. FROM THIS PROFIT THE EXPEN SES OF HEAD OFFICE AND RETAIL OUTLETS ARE BEING MET. EVEN AFTER MEETIN G THESE EXPENSES THERE WERE SURPLUS IN THE ACCOUNTS OF HEAD OFFICE AND RET AIL OUTLETS. SO THE BADDI UNIT WAS ALREADY WORKING AS A SEPARATE PROFIT CENTER AND A SEPARATE SOURCE OF INCOME AND THIS FINANCIAL METHODOLOGY OF THE ASSESSEE WAS IN ACCORDANCE WITH PROVISIONS OF SECTION 80-IA(5) OF T HE ACT. THE LEARNED A.R. FOR THE ASSESSEE DREW OUR ATTENTION TO PAGE 38 OF THE PAPER BOOK AND POINTED OUT THAT THE GOODS WERE TRANSFERRED FRO M HEAD OFFICE TO RETAIL COUNTERS. OUR ATTENTION WAS FURTHER DRAWN TO ITEM NO.13 WHICH WAS PRICED AT RS.195/-. THE LEARNED A.R. FOR THE ASSES SEE POINTED OUT THAT THE SAID ITEM WAS TRANSFERRED FROM BADI UNIT TO HEA D OFFICE AT THE PRICE 10 OF 150/- AS IS EVIDENT FROM THE GOODS RECEIVED NOTE ISSUED BY THE PANCHKULA OFFICE TO BADDI UNIT ENCLOSED AT PAGES 41 AND 42 OF THE PAPER BOOK. THE LEARNED A.R. FOR THE ASSESSEE FURTHER DR EW OUR ATTENTION TO SIMILAR TRANSFER OF GOODS I.E. ITEM NO.27 AT PAGE 3 8 OF THE PAPER BOOK AND ITEM NO.20 AT PAGE 42 OF THE PAPER BOOK. THE E XPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT THE GOODS MANUFACT URED AT BADDI UNIT WERE TRANSFERRED TO THE HEAD OFFICE AT PANCHKULA AN D FROM THERE ON THEIR ON TO VARIOUS RETAIL OUTLETS AND THE DIFFERENCE IN THE PRICING IN THE GOODS ON TRANSFER WAS ABOUT 20% WHICH WAS ATTRIBUTABLE T O THE EXPENSES INCURRED AT HEAD OFFICE AND RETAIL OUTLETS ON THE S ALE OF THE SAID GOODS. THE LEARNED A.R. FOR THE ASSESSEE FURTHER STATED TH AT BOTH THE HEAD OFFICE AND THE RETAIL OUTLETS WERE IN PROFITS AND THE MARG IN IN PROFITS RETAINED WAS REFLECTED IN THE HANDS OF THE HEAD OFFICE AND R ETAIL OUTLETS. THE LEARNED A.R. FOR THE ASSESSEE THUS STATED THAT IN C ASE APPORTIONMENT OF EXPENDITURE OF HEAD OFFICE AND RETAIL COUNTER WAS T O BE MADE TO THE PROFITS OF THE BADDI UNIT SIMILAR EXERCISE SHOULD BE CARRIED OUT IN RESPECT OF THE PROFITS DIVERTED FROM BADDI UNIT TO HEAD OFFICE AND THEN THE PROFITS ELIGIBLE FOR BUSINESS SHOULD BE COMPUTE D TO COMPUTE DEDUCTION UNDER SECTION 80IC OF THE ACT. THE LEARN ED A.R. FOR THE ASSESSEE STRESSED THAT THE MANUFACTURED ITEMS WERE TRANSFERRED BY BADDI UNIT TO THE HEAD OFFICE AT A PRICE WHICH IN TURN WE RE SOLD AT HIGHER PRICE AND THE REASONABLE PROFIT WAS SHARED BETWEEN BADDI UNIT AND HEAD OFFICE. THE SAID WAS CLAIMED TO BE IN COMPLIANCE OF THE PRO VISIONS OF SECTION 80IA(5) OF THE ACT AND CONSEQUENTLY NO ADDITION WAS WARRANTED IN THIS CASE. 19. THE LEARNED A.R. FOR THE ASSESSEE FURTHER POINT ED OUT THAT THERE WAS ANOMALY IN THE ORDER OF THE ASSESSING OFFICER V IS--VIS ADMISSIONS OF THE ASSESSEE. THE OBSERVATIONS IN PARA 8.1 AT P AGE 23 OF THE 11 ASSESSMENT ORDER WHEREIN THE ASSESSING OFFICER HAD RECORDED THAT THE ASSESSEE HAD AGREED TO APPORTIONMENT OF EXPENSES UP TO CERTAIN LEVEL WAS CLAIMED TO BE TOTALLY INCORRECT. THE ASSESSEE AT NO STAGE OF PROCEEDINGS AGREED TO ANY APPORTIONMENT OF EXPENSES OR ADDITION ON THIS ISSUE. ON BEING ASKED TO PROVIDE THE DETAILS OF EXPENSES BOOK ED ON ACCOUNT OF HEAD OFFICE THE ASSESSEE PROVIDED A LIST THEREOF. THE AO APPORTIONED EXPENSES USING THIS INFORMATION PROVIDED BY ASSESSE E. THE ASSESSEE PROVIDED THE DETAILS OF HEAD OFFICE EXPENSES IN A T OTALLY DIFFERENT PERSPECTIVE. THE USAGE OF THIS INFORMATION FOR APPO RTIONMENT COULD BE A GOOD GROUND FOR MAKING ADDITION BUT RECORDING A FAC T THAT THE ASSESSEE AGREED TO THIS ADDITION DURING ASSESSMENT PROCEEDIN GS WAS TOTALLY INCORRECT THIS OBJECTION WAS RAISED BEFORE CIT (A) ALSO WHO AS PER LD. AR FOR THE ASSESSEE HAD ALSO ERRED IN RECORDING SI MILAR FINDINGS. THE LEARNED A.R. FOR THE ASSESSEE STRESSED THAT THE ASS ESSEE DID NOT AGREE TO ANY ADDITION AT THE STAGE OF ASSESSMENT PROCEEDINGS . THE LEARNED A.R. FOR THE ASSESSEE FURTHER REFERRED TO THE LIST OF EXPENSES TABULATED IN TABLE-I AND 2 AND POINTED OUT AS UNDER: A) THAT THE UNIT AT BADDI UNIT WAS ESTABLISHED IN T HE SECOND YEAR OF OPERATION AND NO BORROWED FUNDS WERE UTILIZED FO R ESTABLISHING THE UNIT; B) THE BADDI UNIT HAD NO DEBTORS WHATSOEVER; C) THAT THE EXPENSES TABULATED AT PAGE 25 OF THE AS SESSMENT ORDER IN TABLE 2 WERE SO TABULATED AT THE INSTANCE OF THE ASSESSING OFFICER AND THE SAID TABULATION WAS NOT O N ACCOUNT OF ANY ADMISSION MADE BY THE ASSESSEE FOR APPORTION MENT OF ANY PART OF THE SAID EXPENSES OF HEAD OFFICE TO BAD DI UNIT; 12 D) IN THE ALTERNATIVE IN CASE ANY APPORTIONMENT OF EXPENSES WAS TO BE MADE THEN PROFIT WHICH HAD BEEN TRANSFERRED T O THE HEAD OFFICE SHOULD ALSO BE CONSIDERED IN THE HANDS OF BADDI UNIT FOR COMPUTING THE PROFITS OF ELIGIBLE BUSINESS . 20. THE LEARNED A.R. FOR THE ASSESSEE PLACED RELIAN CE ON THE RATIO LAID DOWN BY MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ECHJAY INDUSTRIES LTD. VS. DCIT (2004) 88 TTJ (MUM) 1089. 21. THE LEARNED D.R. FOR THE REVENUE IN REPLY RELIE D UPON THE OBSERVATIONS OF THE ASSESSING OFFICER AND CIT (APPE ALS) IN THIS REGARD AND POINTED OUT THAT SEPARATE BOOKS OF ACCOUNT MAIN TAINED BY THE ASSESSEE FOR BADDI UNIT COULD NOT BE RELIED UPON BE CAUSE OF THE REASONS MENTIONED IN PARA 8.2 AT PAGE 23 OF THE ASSESSMENT ORDER AND PARA 39 AT PAGE 23 OF THE APPELLATE ORDER. 22. THE LEARNED A.R. FOR THE ASSESSEE IN REJOINDER SUBMITTED THAT THOUGH THE ASSESSEE HAD FURNISHED THE DETAILS AND A LSO THE LIST OF EXPENSES BUT HAD NEVER ADMITTED TO THE APPORTIONMEN T OF EXPENSES OF HEAD OFFICE TO THE BADDI UNIT AND THE SAID PLEA WAS ALSO TAKEN BEFORE THE CIT (APPEALS) AS WAS APPARENT FROM PARA 36 AT PAGE 21 OF THE APPELLATE ORDER BUT NO FINDING IN THIS REGARD HAD BEEN GIVEN BY THE CIT (APPEALS). 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND TRADING OF FABRICS AND GARMENTS. THE HEAD OFFICE OF THE ASSES SEE COMPANY WAS AT CHANDIGARH AND THE CENTRALIZED PURCHASE AND DISTRIB UTION CENTRE WAS AT PANCHKULA. THE ASSESSEE HAD FIVE MANUFACTURING UNI TS AT VARIOUS LOCATIONS I.E. PANCHKULA LUDHIANA BADDI DERABASS I AND GURGAON. THE ASSESSEE CLAIMED THAT THE SEPARATE BOOKS OF ACCOUNT WERE BEING MAINTAINED AT EACH OF THE UNITS WHICH ARE CONSOLIDA TED AT THE END OF THE 13 YEAR AND FINAL BALANCE SHEET WAS DRAWN. THE ASSESS EE HAD CLAIMED DEDUCTION UNDER SECTION 80IC OF THE ACT ON THE PROF ITS OF BADDI UNIT. 24. THE ASSESSEE WAS FOUND TO BE ELIGIBLE BY THE AS SESSING OFFICER FOR CLAIM OF DEDUCTION UNDER SECTION 80IC OF THE ACT IN RESPECT OF BADDI UNIT. THE ASSESSEE CLAIMED TO HAVE DRAWN UP THE PR OFITABILITY STATEMENT OF THE BADDI UNIT SEPARATELY AND SUPPORTED BY THE A UDIT REPORT IN 10CCB THE ASSESSEE HAD COMPUTED QUANTUM OF DEDUCTI ON UNDER SECTION 80IC OF THE ACT. THE ASSESSING OFFICER WHILE REWOR KING THE CLAIM OF DEDUCTION UNDER SECTION 80IC OF THE ACT VIDE PARA 8 .2 ENLISTED VARIOUS POINTS ON WHICH THE ASSESSEE WAS FOUND TO BE IN-ELI GIBLE FOR THE SAID DEDUCTION AND THE SAME WAS REWORKED IN THE HANDS OF THE ASSESSEE. THE FIRST GROUND ON WHICH THE CLAIM OF THE ASSESSEE WAS FOUND TO BE WANTING WAS NON-MAINTENANCE OF SEPARATE ACCOUNTS FOR THE EL IGIBLE UNIT AND OTHER UNITS. WE FIND THAT THE CIT (APPEALS) IN PARA 39 A T PAGE 23 OF THE APPELLATE ORDER HAS GIVEN A FINDING THAT SEPARATE B OOKS OF ACCOUNT HAVE BEEN MAINTAINED FOR BADDI UNIT. HOWEVER IN VIEW O F THE REASONS ELABORATED UPON BY THE CIT (APPEALS) THE SAID FINA NCIAL STATEMENT IN RESPECT OF BADDI UNIT AS PER THE CIT (APPEALS) CO ULD NOT BE RELIED UPON. THE LEARNED D.R. FOR THE REVENUE HAS NOT CON TROVERTED THE FINDINGS OF THE CIT (APPEALS) IN THIS REGARD. ACCO RDINGLY THE CONCLUSION OF THE ASSESSING OFFICER THAT THE ASSESS EE WAS NOT MAINTAINING SEPARATE BOOKS OF ACCOUNT WAS INCORRECT . THE ASSESSEE HAVING PREPARED SEPARATE PROFITABILITY STATEMENT IN RESPECT OF ITS PROFITS OF BADDI UNIT COULD NOT BE DENIED THE SAID DEDUCTIO N ON MERE SURMISES. 25. THE MODUS OPERANDI ADOPTED BY THE ASSESSEE FOR CARRYING ON ITS BUSINESS WAS THAT ALL THE PURCHASES WERE BEING CENT RALLY MADE AT PANCHKULA AND THE STOCK OF RAW MATERIAL WAS TRANSFE RRED TO THE RESPECTIVE UNITS. BADDI UNIT WAS MANUFACTURING PRODUCTS LIKE SHIRTS AND TROUSERS 14 AND FINISHED ARTICLES WERE TRANSFERRED TO PANCHKULA WAREHOUSE AT A NOTIONAL INTER-UNIT TRANSFER PRICE. THE ASSESSEE IN THE BOOKS OF BADDI UNIT TREATED THE SAID TRANSFER PRICE AS IT SALE PRI CE FOR COMPUTING ELIGIBLE PROFITS OF THE BUSINESS. THE MANUFACTURED ITEMS RE CEIVED FROM ALL UNITS BY PANCHKULA CONTROLLING OFFICE WERE TRANSFERRED TO VARIOUS RETAIL OUTLETS SITUATED ACROSS THE COUNTRY AT A PRICE ON WHICH THE SAID PRODUCTS WERE TO BE FINALLY SOLD TO THE END CONSUMER. THE RETAIL OU TLETS SOLD THE FINISHED PRODUCTS TO THE ULTIMATE CONSUMER. THE ELEMENT OF PROFIT EMBEDDED IN SALES EXECUTED BY THE HEAD OFFICE TO ITS RETAIL OUT LETS AND FINALLY TO THE END CONSUMER WAS NOT BEING TRANSFERRED TO BADDI UNI T BUT WAS RETAINED BY THE HEAD OFFICE. THE ASSESSEE HAD PLACED ON REC ORD PURCHASE INVOICES TRANSFER MEMOS AND SALES INVOICES TO PROV E AND ESTABLISH ITS MODUS OPERANDI. AT PAGES 41 AND 42 OF THE PAPER BOO K THE ASSESSEE HAD ENCLOSED GOODS RECEIPT NOTE ISSUED BY THE WAREHOUSE AT PANCHKULA FOR THE GOODS RECEIVED FROM THE BADDI UNIT. ITEM NO.6 WAS GENTS SHIRT FANCY 1644 MIX 38 @ RS.150/- PER PIECE. THE SAID GARMENT HAD BEEN TRANSFERRED BY THE WAREHOUSE TO THE RETAILS COUNTER @ RS.195/- PER PIECE AS IS EVIDENT FROM THE STOCK TRANSFER NOTE PLACED A T PAGE 38 OF THE PAPER BOOK. THE SAID ITEMS WERE SOLD FOR RS. 195/- PER P IECE. THE ABOVE SAID DOCUMENT ENLISTS VARIOUS TYPES OF GARMENTS FIRST B EING TRANSFERRED FROM BADDI UNIT TO WAREHOUSE AND THEN FROM WAREHOUSE TO THE RETAIL OUTLETS. THE ASSESSEE HAD ALSO FURNISHED MANUFACTURING PROFI T & LOSS ACCOUNT OF BADDI UNIT AND TOTAL SALES OF THE COMPANY AT PAGE 4 4 OF THE PAPER BOOK. THE TOTAL SALES OF BADDI UNIT WERE RS.2.94 CRORES A S AGAINST TOTAL SALES OF COMPANY AT RS.116.30 CRORES. THE PERCENTAGE OF THE SALES AT BADDI UNIT TO THE TOTAL SALES OF THE COMPANY WAS 2.54% WHICH IS ADMITTED AND ACCEPTED POSITION. 15 26. THE ASSESSING OFFICER WHILE COMPUTING THE PROFI TS OF THE ELIGIBLE BUSINESS OF THE ASSESSEE OF BADDI UNIT HAD RECOMPUT ED THE SAID PROFITS BECAUSE OF NON ALLOCATION OF EXPENSES OF HEAD OFFIC E TO BADDI UNIT. THE REASONS FOR THE SAID REWORKING OF THE PROFITS OF TH E BUSINESS ARE AS UNDER: (I) ASSESSEE HAS NOT MAINTAINED SEPARATE ACCOUNTS FOR THE ELIGIBLE UNIT AND OTHER UNITS. (II) ALL PURCHASES ARE CENTRALIZED AND RELATED EXPENSES ARE DEBITED TO HEAD OFFICE. THEN STOCK IS TRANSFERR ED TO BADDI UNIT: AT COST FOR GARMENT MANUFACTURING WITH OUT TAKING INTO CONSIDERATION THE PURCHASE EXPENSES E.G . PURCHASE COMMISSION FREIGHT ETC. (III) THE MANUFACTURED GOODS FROM THE BADDI UNIT ARE TRANSFERRED TO THE HEAD OFFICE AFTER INCLUDING PROF IT MARGIN AND SALES ARE THEN MADE BY HEAD OFFICE THROU GH ITS VARIOUS RETAIL OUTLETS. NO EXPENSES RELATING TO SALES ARE TAKEN INTO ACCOUNT FOR DETERMINING PROFITS OF T HE BADDI UNIT. THE BASIS OF PROFIT MARGIN HAS NOT BEEN DISCLOSED BY THE ASSESSEE. IT IS NOT KNOWN AS TO AT WHAT RATE SUCH ITEMS ARE FINALLY SOLD IN THE MARKET THRO UGH RETAIL OUTLETS. NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO SHOW THAT THE TRANSACTION BETWEEN ELIGIBLE UNIT AND HEAD OFFICE ARE AT ARMS LENGTH. (IV) THE SOURCE OF ENTIRE CAPITAL USED FOR BADDI UNIT W AS THE HEAD OFFICE AND ALL FINANCIAL EXPENSES WERE DEB ITED TO THE BOOKS OF HEAD OFFICE AND NO SUCH EXPENSE WAS TA KEN INTO CONSIDERATION FOR WORKING PROFITS OF THE BADDI UNIT. (V) NO ADMINISTRATIVE EXPENSES RELATING TO THE MANAGEM ENT & ADMINISTRATIONS OF AFFAIRS OF THE COMPANY WERE TA KEN INTO CONSIDERATION FOR WORKING THE PROFITS OF THE E LIGIBLE UNIT. (VI) ASSESSEE HAS ADMITTED THAT EXPENSES TO THE EXTENT OF RS.23 96 941/- (BEING 2.5% OF RS.9 29 04 720/-) DEB ITED TO HEAD OFFICE SHOULD HAVE BEEN ALLOCATED TO BADDI UNIT AND TO THAT EXTENT PROFITS OF THE BADDI UNIT HAD BEEN OVERSTATED. THIS ALSO IMPLIES THAT ASSESS EE HAS ADMITTED THAT TO THE EXTENT OF RS.23 96 941/- THE CLAIM OF DEDUCTION U/S 80IC WAS EXCESSIVE . 27. FURTHER IN PARA 8.3 OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HAD TABULATED THE EXPENSES OF THE HEAD OFFICE AND R ETAIL OUTLETS FOR MAKING THE ALLOCATION OF THE EXPENSES OF THE HEAD O FFICE TO THE BADDI UNIT. TABLE-I IS AS UNDER: 16 TABLE-1 PARTICULARS AMOUNT USED IN ALLOCATION DIRECTOR SALARY RS. 24 4 1 226 / - DIRECTOR TRAVELLING & CONVEYANCE EXP. RS. 7 64 146 / - INSURANCE EXP. RS. 9 05 686 / - LEGAL & PROF. EXPENSES RS. 55 84 828/- AUDITORS REMUNERATION RS. 1 98 360/ - NEWSPAPER & PERIODICALS RS. 6 907/- MEMBERSHIP FEE RS. 2 96 650/- FINANCIAL EXP. RS. 2 22 97 826/-* DEPRECIATION RS. 99 09 634/- TOTAL RS. 4 24 05 263/- *EXPENSES DEBITED TO H.O. WERE SLIGHTLY HIGHER. 28. TABLE-2 REFERRED TO BY THE ASSESSING OFFICER IS AS UNDER: TABIE-2 A B PARTICULAR AMOUNT DEBITED TO P& L A/C (H.O.)** AMOUNT USED IN ALLOCATION REMARKS REPAIR & MAINTENANCE 1 15 64 437 83 46 775 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN IN (A) SALARY & WAGES 3 97 34 005 1 29 44 603 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN .IN(A) SELLING & DISTRIBUTION 2 77 11 901 2 19 79 540 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN IN (A) MISC EXP. 709120 238020 ONLY EXPENSES OF HEAD OFFI CE AT CHANDIGARH TAKEN IN (A) PRINTING & STATIONARY 1999645 1738238 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN IN (A) STAFF & LABOUR 3202102 1386170 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN IN (A) TELEPHONE 2093351 1381822 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN TRAVELLING 2093767 1319750 ONLY EXPENSES OF HEAD OFFICE AT CHANDIGARH TAKEN IN (A) RATES TAXES & FEES 36014370 990893 SALES TAX AND RENT OF OUTLETS EXCLUDED IN (B) TOTAL 12 51 22 698 5 03 25 811 *TOTAL EXPENSES OF COMPANY MINUS THAT SHOWN FOR BAD DI UNIT . 17 29. THE CLAIM OF THE ASSESSEE WAS THAT OUT OF THE T OTAL EXPENDITURE OF 12.51 CRORES DEBITED TO THE PROFIT & LOSS ACCOUNT O F THE HEAD OFFICE ONLY RS.5.03 CRORES IF NECESSARY SHOULD BE CONSIDERED FOR ALLOCATION TO THE BADDI UNIT. THE ABOVE SAID CHART THOUGH WAS PREPAR ED BY THE ASSESSEE BUT WAS AT THE INSTANCE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER HOWEVER REJECTED THE BIFURCATION PROPOSED BY THE A SSESSEE AND RECOMPUTED TOTAL EXPENDITURE DEBITED TO THE PROFIT & LOSS ACCOUNT OF HEAD OFFICE AT 12.51 CRORES AND ONLY EXCLUDED THE A MOUNT OF SALES TAX OF RS.2.27 CRORES OUT OF THE TOTAL AMOUNT OF SALES TAX AND FEE OF RS.3.60 CRORES. ACCORDINGLY THE ASSESSING OFFICER CONSIDE RED RS. 10.23 CRORES AS PER TABLE-2 ON ACCOUNT OF OTHER EXPENSES FOR THE PURPOSES OF ALLOCATION OF EXPENSES OF HEAD OFFICE TO BADDI UNIT . 30. THE ISSUE RAISED IN THE PRESENT GROUND OF APPEA L IS WHETHER ANY PART OF THE HEAD OFFICE EXPENDITURE WAS ATTRIBUTABL E TO THE BADDI UNIT FOR DETERMINING ELIGIBLE PROFITS OF THE BADDI UNIT. WE ARE OF THE VIEW THAT COMMON EXPENDITURE IS TO BE ALLOCATED BETWEEN THE H EAD OFFICE AND THE BRANCH OFFICE IN ORDER TO DETERMINE THE ELIGIBLE PR OFITS OF BUSINESS AT BADDI UNIT. IN THE FACTS OF THE PRESENT CASE THE A SSESSEE IS ONE COMPOSITE UNIT CONSISTING OF FIVE MANUFACTURING UNI TS ONE HEAD OFFICE ONE CENTRAL WAREHOUSING UNIT AND MORE THAN 100 RETA IL OUTLETS WITHIN INDIA. THE ASSESSEE IS ENTITLED TO THE BENEFIT OF DEDUCTION UNDER SECTION 80IC OF THE ACT ONLY IN RESPECT OF BADDI UNIT. THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD SHOWN TOTAL TURNOVER OF RS. 116.30 CRORES. THE TOTAL INCOME DECLARED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS RS.3.46 CRORES. THE TOTAL TURNOVER OF BADDI UN IT WAS ONLY RS.2.94 CRORES WHICH WAS 2.54% OF THE TOTAL TURNOVER OF THE ASSESSEE. THE DEDUCTION OF RS.66 49 378/- HAD BEEN CLAIMED BY THE ASSESSEE AGAINST THE ELIGIBLE PROFITS OF BADDI UNIT. THE SAID PROFITS W ERE DECLARED BY THE 18 ASSESSEE BY FOLLOWING THE CONSISTENT METHOD OF ACCO UNTING UNDER WHICH IT HAD RECORDED ITS EARNING I.E. THE SALE VALUE OF THE GOODS SOLD BY IT AT PRE-DETERMINED PRICE WHICH WAS RECORDED IN ITS BOO KS OF ACCOUNT FOR TRANSFER OF GOODS TO THE CENTRAL WAREHOUSING UNIT. THE GOODS THEREFROM ARE TRANSFERRED TO THE RETAIL OUTLETS ON THE TAG PR ICE OF THE GOODS I.E. THE PRICE TO BE CHARGED FROM THE END CONSUMER. THE DIF FERENCE IN THE SALE PRICE SHOWN BY BADDI UNIT AND THE TAG PRICE OF THE GOODS VARIES UP TO 20%. THE SAID GROSS PROFIT WAS REFLECTED IN THE AC COUNT OF HEAD OFFICE AND TAKES CARE OF THE VARIOUS EXPENSES INCURRED BY THE HEAD OFFICE AND THE RETAIL COUNTERS IN ORDER TO ULTIMATELY SELL THE PRODUCTS MANUFACTURED BY THE ASSESSEE. THE ASSESSEE WAS BOOKING ITS SALE S ON THE TRANSFER OF THE GOODS TO THE CENTRAL WAREHOUSING UNITS AT A PRE DETERMINED PRICE IRRESPECTIVE OF THE FACT THAT THE GOODS ARE SOLD IN THE MARKET OR NOT. THE SAID GOODS WERE REFLECTED AS SOLD AT A PREDETERMINE D PRICE IN THE BADDI UNIT AND THE BALANCE PROFITS WERE ACCOUNTED FOR IN THE BOOKS OF ACCOUNT OF THE HEAD OFFICE. THE BADDI UNIT WAS NO SUNDRY D EBTORS. IT IS TO BE KEPT IN MIND THAT THE CONSOLIDATED PROFITS OF THE C OMPANY ARE ASSESSED TO TAX IN THE HANDS OF THE ASSESSEE AND ONLY IN RESPEC T OF PART OF THE TURNOVER OF BADDI UNIT THE ASSESSEE HAD CLAIMED DE DUCTION UNDER SECTION 80IC OF THE ACT ON THE NET PROFITS OF THE SAID UNIT . IN THE ENTIRETY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES OF THE CASE WHER E THE ASSESSEE HAS COMPUTED THE PROFITS OF ITS BUSINESS UNITS NOT ON T HE SALE PRICE OF THE GOODS MANUFACTURED BY THE UNIT BUT AT A PREDETERMI NED PRICE ON WHICH THE GOODS ARE TRANSFERRED TO ITS HEAD OFFICE WITHO UT ACCOUNTING FOR THE MARGIN OF PROFITS WHICH ARE BEING REFLECTED IN THE HANDS OF THE HEAD OFFICE AND RETAIL COUNTERS WHICH IN TURN ACCOUNTS FOR THE EXPENSES OF THE HEAD OFFICER & RETAIL OUTLETS THERE IS NO MERIT FO R ALLOCATION OF EXPENSES OF THE HEAD OFFICE TO THE BADDI UNIT FROM TABLE 2 ESPECIALLY BECAUSE THE HEAD OFFICE HAD SHOWN PROFITS AT THE CL OSE OF THE YEAR. 19 31. IN VIEW THEREOF WHERE THE ASSESSEE HAD DECLARED PROFITS OF THE ELIGIBLE BUSINESS ON THEIR TRANSFER TO WAREHOUSE O N A PREDETERMINED PRICE AND COMPUTED THE INCOME IRRESPECTIVE OF THE FACT WHETHER THE GOODS WERE SOLD OR NOT THE EXPENSES AS TABULATED I N TABLE-2 ARE NOT TO BE TAKEN INTO ACCOUNT FOR APPORTIONMENT OF EXPENSES OF THE HEAD OFFICE TO THE BADDI UNIT. IN ANY CASE THE AMOUNTS DEBITED T O THE PROFIT & LOSS ACCOUNT OF THE HEAD OFFICE WERE TOTAL EXPENSES OF T HE COMPANY I.E. ALL ITS UNITS MANUFACTURING FACILITIES AND RETAIL OUTLETS MINUS THE AMOUNT SHOWN FOR THE BADDI UNIT. THE EXPENSES CONSIDERED IN TAB LE-2 AS REPRODUCED UNDER PARA 27 OF THIS ORDER ARE REPAIR & MAINTENAN CE SALARY & WAGES SELLING AND DISTRIBUTION EXPENSES PRINTING & STATI ONARY STAFF WELFARE TELEPHONE TRAVELING AND RATES TAXES AND FEES. THE ABOVE SAID EXPENDITURE EXCEPT SELLING & DISTRIBUTION ARE THE E XPENSES ATTRIBUTABLE TO DIFFERENT UNITS BEING RUN BY THE ASSESSEE AND NO PA RT OF THE SAID EXPENDITURE COULD BE HELD TO BE ATTRIBUTABLE TO THE BADDI UNIT EVEN TO THE EXTENT OF ITS TURNOVER TO THE TOTAL TURNOVER. T HE DIRECT EXPENSES OF OTHER UNITS IN NO MANNER CAN BE ATTRIBUTED TO BADD I UNIT. SIMILARLY THE SELLING AND DISTRIBUTION EXPENSES ARE NOT TO BE CON SIDERED IN VIEW OF THE FACT THAT THE BADDI UNIT IS COMPUTING ITS INCOME BY REFLECTING SALES OF ITS MANUFACTURED ITEMS AT PREDETERMINED PRICE AND TRANS FERRING PART OF ITS MARGIN OF PROFITS TO THE HEAD OFFICE AND RETAIL UNI TS WHICH AT THE END OF YEAR HAD DECLARED PROFITS WHICH ARE ASSESSABLE IN THE HANDS OF ASSESSEE ITSELF. IN CASE THESE MARGIN OF PROFITS ARE EXCLUDE D FROM HEAD OFFICE AND INCLUDED IN THE HANDS OF BADDI UNIT THE RESULTANT FIGURE AFTER DEBITING EVEN THE ALLOCATED EXPENDITURE ON SELLING AND DISTR IBUTION WOULD BE ELIGIBLE FOR THE BENEFITS OF DEDUCTION U/S 80IC OF THE ACT. 32. NOW COMING TO TABLE-1 THE EXPENSES CONSIDERED ARE THE DIRECTORS SALARY DIRECTORS TRAVELING AND CONVEYANCE EXPENSES INSURANCE LEGAL 20 AND PROFESSIONAL AUDITORS REMUNERATION MEMBERSHIP FEE FINANCIAL EXPENSES AND DEPRECIATION. THE PLEA OF THE ASSESSE E WAS THAT OUT OF THE TOTAL EXPENDITURE OF 4.24 CRORES SUM OF RS.2.22 CR ORES WAS ATTRIBUTABLE TO THE FINANCIAL EXPENSES. THE LEARNED A.R. FOR TH E ASSESSEE POINTED OUT THAT NO PART OF THE BORROWED FUNDS WERE UTILIZED FO R SETTING UP THE UNIT AT BADDI AND CONSEQUENTLY THE SAID FINANCIAL EXPENSES COULD NOT BE APPORTIONED BETWEEN THE HEAD OFFICE AND BADDI UNIT TO COMPUTE THE PROFITS OF BADDI UNIT. WE FIND MERIT IN THE PLEA O F THE ASSESSEE THAT WHERE NO PART OF THE BORROWED FUNDS WERE UTILIZED F OR SETTING UP OF BADDI UNIT THE SAID FINANCIAL EXPENDITURE COULD NO T BE ATTRIBUTED TO THE RUNNING OF BADDI UNIT. THE ASSESSING OFFICER HAS FA ILED TO BRING ON RECORD ANY EVIDENCE TO THE CONTRARY. SIMILARLY DE PRECIATION CLAIMED ON ASSETS WHICH ARE INSTALLED AT DIFFERENT UNITS OF TH E ASSESSEE AND THEIR USER COULD NOT BE ATTRIBUTED TO THE BADDI UNIT. THE ONL Y EXPENSES TO BE CONSIDERED FOR ALLOCATION ARE DIRECTORS SALARY DI RECTORS TRAVELING & CONVEYANCE LEGAL & PROFESSIONAL EXPENSES AND AUDIT ORS REMUNERATION. IN VIEW OF THE ORDERS OF THE AUTHORITIES BELOW IN ACCEPTING THE CONTENTION OF THE ASSESSEE THAT THE TURNOVER OF BAD DI UNIT WAS 2.54% OF THE TOTAL TURNOVER WE DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE DISALLOWANCE UNDER SECTION 80IC OF THE ACT BY EXCLU DING 2.54% OF THE TOTAL EXPENDITURE OF DIRECTORS SALARY DIRECTORS TRAVELING & CONVEYANCE EXPENSES LEGAL & PROFESSIONAL EXPENSES AND AUDITOR S REMUNERATION BEING ATTRIBUTABLE TO BADDI UNIT. THE BALANCE DEDUC TION U/S 80IC IS ALLOWABLE IN THE HANDS OF ASSESSEE. THE ASSESSING O FFICER SHALL AFFORD REASONABLE OPPORTUNITY OF HEARING TO ASSESSEE. WE F IND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW THAT THE SAID ADDITION WERE MADE ON AGREED BASIS IN VIEW OF SUBMISSIONS OF THE LD. AR FOR THE ASSESSEE BEFORE US AND WRITTEN SUBMISSIONS FILED BEFORE CIT(A). MERE P ROVIDING THE DETAILS AT THE BEHEST OF ASSESSING OFFICER DOES NOT IMPLY T O AGREED ADDITION. 21 GROUND NO.4 RAISED BY THE ASSESSEE IS THUS PARTLY A LLOWED. THIS PLEA OF THE ASSESSEE IS THUS ALLOWED. ITA NO.1118/CHD/2010 (REVENUES APPEAL): (ASSESSMENT YEAR 2006-07) 33. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APP EAL: 1. THAT ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW LD.CIT (A) HAS GRAVELY ERRED IN DELETING THE ADDITI ON MADE BY THE A.O. IN DISALLOWING & CAPITALIZING INTEREST AMOUNTING TO RS.6 50 911/- AS PER PROVISIONS OF SEC TION 36(I)(III) OF THE INCOME TAX ACT 1961 . 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) HAS GRAVELY ERRED IN DELETING THE A DDITION MADE BY THE A.O BY TREATING EMPLOYEES CONTRIBUTION TOWARDS EPF AMOUNTING TO RS.1792477/- AS INCOME AS PER PROVISIONS OF SECTION 2(24) (X) AND NOT ALLOWING DE DUCTION OF THE SAME AS PER SECTION 36(L)(III) OF THE INCOME TA X ACT 1961. 3. WHETHER OF THE FACTS AND CIRCUMSTANCES OF THE CASE CIT(A) WAS RIGHT IN HOLDING THAT ASSESSEE WAS NOT LIABLE T O DEDUCT THE TDS AS THERE WAS NO WRITTEN OR ORAL AGREEMENT BETWEEN THE ALLEGED PARTIES EVEN IN THE LIGHT OF AM ENDMENT IN STATUTE W.E.F. 01-10-2004 IN SECTION 194C(3) WHEREB Y IT IS AMENDED TO COVER INSTANCE!) WHERE TOTAL PAYMENTS MA DE TO A PERSON DURING A FINANCIAL YEAR FOR WORK CONTRACT EXCEEDS RS.50 000/- IN SUCH A CASE IT WILL NOT MATTER WHETH ER THERE IS SINGLE CONTRACT OR MULTIPLE CONTRACT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) HAS GRAVELY ERRED IN DELETING THE A DDITION MADE BY THE A.O BY DISALLOWING PROPORTIONATE INTERE ST AMOUNTING TO RS.3 39 642/- AS NON BUSINESS EXPENSES OUT OF FINANCIAL EXPENDITURE CLAIMED IN RELATION TO INT EREST BEARING LOANS. 22 34. THE ISSUE IN GROUND NO.1 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION MADE UNDER SECTION 36(1)(III) OF THE ACT AMOUNTING TO RS.6 50 911/-. 35. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER VIDE PARA 2 NOTED THAT THE ASSESSEE HAD MADE ADVANC E PAYMENT FOR PURCHASE OF LAND. THE ASSESSEE WAS ASKED TO EXPLAI N AS TO WHETHER THE INTEREST PAID UP TO THE DATE WHEN THE SAID ASSETS W ERE PUT TO USE HAD BEEN CAPITALIZED OR NOT. IN REPLY THE ASSESSEE SUBMITT ED THAT THE FIXED ASSETS WERE PURCHASED IN CONNECTION WITH THE EXISTING BUSI NESS AND WERE BY WAY OF EXPANSION. FURTHER IT WAS EXPLAINED BY THE ASSE SSEE THAT THE RESERVE AND SURPLUS OF THE ASSESSEE COMPANY HAD INCREASED F ROM RS.4.82 CRORES TO RS.8.39 CRORES AND ALSO THE ASSESSEE HAD SOLD CO MMERCIAL SITE FOR RS.6 CRORES AND MONEY WAS UTILISIED FOR PURCHASE OF FIXE D ASSETS. THE ASSESSING OFFICER OBSERVED THAT AS THE ASSESSEE HAD MADE ADVANCE PAYMENT FOR PURCHASE OF LAND BUT SINCE THE LAND WAS NOT PUT TO USE DURING THE YEAR UNDER CONSIDERATION THE PROPORTION ATE INTEREST WAS REQUIRED TO BE CAPITALIZED. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED SUM OF RS.6 50 911/- UNDER SECTION 36(1) (III) OF THE ACT. 36. THE CIT (APPEALS) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER IN THE ABSENCE OF ANY NEXUS BEING ESTABLISH ED BETWEEN THE PAYMENT MADE FOR PURCHASE OF LAND HAVING DIRECT BEA RING WITH THE SECURED OR UNSECURED LOANS OBTAINED BY THE ASSESSEE . 37. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF T HE CIT (APPEALS). THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 23 38. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT UNDER THE PROVISO TO SECTION 36(1)(III) OF THE ACT WHERE THE BORROWED FUNDS WERE UTILIZED FOR THE INVESTMENT IN THE ASSETS AND WHER E THE ASSETS WERE NOT PUT TO USE DISALLOWANCE IS TO BE MADE; BUT IN THE ABSENCE OF ANY NEXUS OF BORROWED FUNDS BEING UTILIZED NO DISALLOWANCE I S WARRANTED. 39. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. UNDER THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT WH ILE COMPUTING THE INCOME FROM THE PROFITS AND GAINS OF BUSINESS DEDUC TION IS ALLOWED ON ACCOUNT OF AMOUNT OF INTEREST PAID IN RESPECT OF CA PITAL BORROWED FOR THE PURPOSES OF BUSINESS OR PROFESSION. THE PROVISO UN DER THE SAID SUB- SECTION FURTHER PROVIDES THAT THE INTEREST RELATABL E TO THE CAPITAL BORROWED FOR ACQUISITION OF ASSETS FOR EXPANSION OF EXISTING BUSINESS OR PROFUSION FOR ANY PERIOD BEGINNING FROM THE DATE O F WHICH CAPITALS WERE BORROWED TILL THE DATE ON WHICH THE SAID ASSETS WER E PUT TO USE SHALL NOT BE ALLOWED AS DEDUCTION. 40. AS PER THE PROVISO TO SECTION 36(1)(III) OF THE ACT THE FIRST STEP TO BE SEEN IS WHETHER ANY CAPITAL BORROWED FOR THE ACQ UISITION OF AN ASSET FOR EXPANSION OF THE EXISTING BUSINESS AND INTEREST PAID ON SUCH BORROWED FUNDS IS TO BE DISALLOWED FOR THE PERIOD U P TO THE DATE ON WHICH THE ASSET IS FIRST PUT TO USE. IN THE ABSENC E OF ANY BORROWED BORROWALS FOR THE PURCHASE OF THE LAND ON WHICH INT EREST IS BEING PAID NO DISALLOWANCE IS WARRANTED WHERE NO PART OF THE B ORROWED FUNDS ARE UTILIZED FOR THE PURPOSES OF INVESTMENT IN SUCH ASS ETS. IN THE FACTS OF THE PRESENT CASE BEFORE US THE ASSESSEE HAD MADE INVEST MENT IN LAND. THE CLAIM OF THE ASSESSEE WAS THAT THE POSSESSION OF TH E LAND WAS VERY MUCH WITH THE ASSESSEE COMPANY DURING THE YEAR UNDER CON SIDERATION AND ALL THE DOCUMENTS RELATING TO THE OWNERSHIP AND POSSESS ION OF LAND WERE 24 FURNISHED BEFORE THE ASSESSING OFFICER DURING THE C OURSE OF ASSESSMENT PROCEEDINGS. THE SAID LAND WAS CLAIMED TO BE BUSIN ESS ASSET OF THE ASSESSEE AND WAS DECLARED IN THE SCHEDULE OF FIXED ASSET AT SR.NO.1. 41. THE NEXT PLANK OF ARGUMENT OF THE ASSESSEE WAS THAT IT HAD SUFFICIENT FUNDS OF ITS OWN FOR THE PURPOSES OF INV ESTMENT IN THE SAID ASSETS. THE ASSESSEE CLAIMS TO HAVE SOLD ONE COMME RCIAL SITE IN SECTOR 43B CHANDIGARH FOR RS.6 CRORES DURING THE YEAR UND ER CONSIDERATION AND THE SAID MONEY WAS SAID TO BE UTILIZED FOR PURCHASE OF THE FIXED ASSETS. THE TOTAL INVESTMENT IN THE LAND REFLECTED BY THE A SSESSEE WAS AT RS.2.12 CRORES. IN ADDITION DURING THE YEAR UNDER CONSIDE RATION THE RESERVE SURPLUS OF ASSESSEE COMPANY HAD INCREASED FROM RS.4 .81 CRORES TO RS.8.39 CRORES IMPLYING THEREBY GENERATION OF FUNDS BY THE ASSESSEE COMPANY ITSELF OUT OF ITS BUSINESS ACTIVITIES. THE ASSESSING OFFICER HAS FAILED TO BRING ON RECORD ANY EVIDENCE TO JUSTIFY T HE DISALLOWANCE UNDER THE PROVISO TO SECTION 36(1)(III) OF THE ACT. THE ASSESSING OFFICER HAS FAILED TO REFER TO ANY BORROWED FUNDS UTILIZED FOR THE PURPOSES OF INVESTMENT IN THE SAID FIXED ASSET AND IN THE ABSEN CE OF THE SAME AND IN VIEW OF THE FACTS OF THE PRESENT CASE WHERE THE ASS ESSEE HAD SUFFICIENT SELF GENERATED FUNDS WE FIND NO MERIT IN GROUND NO .1 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 42. THE ISSUE IN GROUND NO.2 RAISED BY THE REVENUE HAS BEEN ADJUDICATED BY US ALONGWITH GROUND NO.3 RAISED BY T HE ASSESSEE IN ITA NO.1956/CHD/2010 IN THE PARAS HEREINABOVE. FOLLOWI NG THE SAME WE DISMISS GROUND NO.2 RAISED BY THE REVENUE. 43. THE ISSUE IN GROUND NO.3 RAISED BY THE REVENUE IS IN RELATION TO THE PAYMENT OF FREIGHT IN AND FREIGHT OUT. THE ASS ESSING OFFICER FROM THE DETAILS FURNISHED BY THE ASSESSEE NOTED THAT PA YMENT EXCEEDING 25 RS.50 000/- WERE PAID TO TWO PERSONS I.E. M/S CANTE R TRANSPORT OPERATORS UNION OF RS.4 38 415/- AND M/S BHARAT MOT ORS PVT. CO. OF RS.95 048. THE ASSESSEE EXPLAINED THAT M/S CANTER TRANSPORT OPERATORS UNION WAS A BOOKING AGENT WHICH USED TO PROVIDE TRU CKS AS PER REQUIREMENT. THE PAYMENT OF FREIGHT WAS CLAIMED TO BE MADE ON VOUCHERS TO THE TRUCK OWNER AND NO PAYMENT TO A TRU CK OWNER WAS MORE RS.50 000/- AND HENCE NOT LIABLE TO TDS. THE ASSES SING OFFICER HELD THE ASSESSEE LIABLE TO DEDUCT TAX AT SOURCE ON THE PAYM ENT RELATED TO TRANSPORTATION OF GOODS AND IN THE ABSENCE OF THE S AME THE ASSESSING OFFICER DISALLOWED A SUM OF RS.5 33 463/- UNDER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 44. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSE SSEE FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIG H COURT IN BHAGWATI STEELS IN ITA NO.693 OF 2009- DATE OF DECI SION 21.12010. 45. THE LEARNED D.R. FOR THE REVENUE PLACING RELIAN CE ON THE ORDER OF THE ASSESSING OFFICER FAIRLY ADMITTED THAT THE AFOR ESAID AMOUNT WAS FULLY PAID AND NOTHING WAS PAYABLE AT THE CLOSE OF THE YE AR. 46. THE LEARNED A.R. FOR THE ASSESSEE PLACED RELIAN CE ON THE RATIO LAID DOWN IN CIT VS. BHAGWATI STEELS [326 ITR 108 (P&H)] AND ALSO IN CIT VS. TRUCK OPERATORS UNION ITA NO.865 OF THE ACT 20 10 DATE OF DECISION 23.3.2011. 47. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION CLAIME D TO HAVE MADE FREIGHT PAYMENTS DIRECTLY TO THE TRUCK OWNERS WHIC H WERE BOOKED THROUGH M/S CANTER TRANSPORT OPERATORS UNION PANCH KULA. THE SAID CONCERN WAS A BOOKING AGENT WHICH WAS PROVIDING TRU CKS AS PER THE 26 REQUIREMENT OF THE ASSESSEE. HOWEVER THE PAYMENT OF FREIGHT AMOUNT WAS BEING PAID TO THE TRUCK OWNER AND TO NONE OF TH E SAID TRUCK OWNERS THE CUMULATIVE PAYMENT EXCEEDED RS.50 000/- DURING THE YEAR. THE REQUIREMENT OF SECTION 194C OF THE ACT ARE THAT WHE RE THE ASSESSEE HAS PAID FREIGHT TO A PERSON TOTALING MORE THAN RS.50 0 00/- IN A YEAR OR MORE THAN RS.20 000/- PER TRANSACTION IS LIABLE TO DEDU CT TAX AT SOURCE. IN CASE OF NON-DEDUCTION OF TAX AT SOURCE IN VIEW OF THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT SUCH AMOUNT ON WHICH THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE AND THE SAME HAVING NOT BEEN DEDUCTED BY THE ASSESSEE SUCH AMOUNT IS DISALLOWABLE IN THE HA NDS OF THE ASSESSEE. HOWEVER WHERE THE CUMULATIVE PAYMENT MADE TO A PAR TICULAR PERSON DURING THE YEAR UNDER CONSIDERATION IS LESS THAN RS .50 000/- NO DISALLOWANCE IS WARRANTED FOR NON DEDUCTION OF TAX AT SOURCE. IN THE FACTS OF THE PRESENT CASE BEFORE US THE ASSESSEE CL AIMED THAT IT HAS NOT VIOLATED PROVISIONS OF SECTION 194C OF THE ACT BECA USE THE TOTAL PAYMENTS DURING THE YEAR TO THE INDIVIDUAL TRUCK OW NER WAS LESS THAN RS.50 000/-. WE ALSO FIND THAT IN RELATION TO THE DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT THE SPECIAL BENCH OF VISHAKHAPATNAM REPORTED IN ACIT VS. MERILYN SHIPPING & TRANSPORTS[ 140 TTJ 1(SB)(VISHAKHAPATNAM)] HAS LAID DOWN THE PROPOSITIO N THAT WHERE THE AMOUNT PAYABLE TO THE PAYEE HAS BEEN PAID DURING TH E YEAR UNDER CONSIDERATION ITSELF AND NO AMOUNT IS PAYABLE AT TH E CLOSE OF THE YEAR NO DISALLOWANCE IS WARRANTED UNDER SECTION 40(A)(IA) O F THE ACT FOR NON- DEDUCTION OF TAX AT SOURCE. IN THE FACTS OF THE PR ESENT CASE AND AS ADMITTED BY BOTH THE AUTHORIZED REPRESENTATIVES TH E TOTAL AMOUNT ON ACCOUNT OF FREIGHT HAS BEEN PAID DURING THE YEAR IT SELF AND NOTHING IS PAYABLE AT THE CLOSE OF THE YEAR; CONSEQUENTLY NO D ISALLOWANCE IS WARRANTED UNDER SECTION 40(A)(IA) OF THE ACT. WE D ISMISS GROUND NO.3 RAISED BY THE REVENUE. 27 48. GROUND NO.4 RAISED BY THE REVENUE IS AGAINST TH E DELETION OF ADDITION OF RS.3 39 642/- BEING INTEREST RELATABLE TO THE INTEREST FREE LOANS AND ADVANCE GIVEN BY THE ASSESSEE TO PERSONS UNDER SECTION 40A(2)(B) OF THE ACT. THE ASSESSING OFFICER NOTED THAT THOUGH THE ASSESSEE HAD MADE ADVANCE TO ITS SISTER CONCERN M/S SHIVAM INDUSTRIES AND M/S ALFA FABRICS PVT. LTD. NO INTEREST WAS CHA RGED FROM THE SAID CONCERN THOUGH THE ASSESSEE WAS UTILIZING INTEREST BEARING FUNDS FOR RUNNING ITS BUSINESS. THE EXPLANATION OF THE ASSES SEE WAS THAT THE SAID AMOUNTS WERE BEING ADVANCED IN THE COURSE OF CARRYI NG ON THE BUSINESS AS THE ASSESSEE WAS MAKING BOTH THE PURCHASE/SALE T RANSACTIONS WITH THE SAID CONCERNS. THE EXPLANATION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER AND DISALLOWANCE OF RS.3 39 642/- WAS MADE. 49. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSE SSEE BOTH ON ACCOUNT OF AVAILABILITY OF FUNDS AND BY WAY OF INCR EASE IN RESERVE SURPLUS AND ALSO THE ASSESSING OFFICER HAVING FAIL ED TO GIVE CREDIT FOR THE AMOUNT DEDUCTED IN THE ACCOUNT OF SHIVAM INDUST RIES ON ACCOUNT OF SALE/PURCHASE TRANSACTIONS. 50. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE ORDER OF THE ASSESSING OFFICER. 51. THE LEARNED A.R. FOR THE ASSESSEE VEHEMENTLY OP POSED AND POINTED OUT THAT THE SAID CONCERNS WERE NOT RELATED PERSONS AS PER THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND THE AMOUNTS OUT STANDING WERE IN THE COURSE OF REGULAR BUSINESS BETWEEN THE ASSESSEE AND THE SAID CONCERNS AND CONSEQUENTLY APPLICATION OF PROVISIONS OF SECTI ON 36(1)(III) OF THE ACT WAS INCORRECT. THE LEARNED A.R. FOR THE ASSESS EE PLACED RELIANCE ON THE RATIO LAID DOWN IN S.A. BUILDERS VS CIT [288 IT R 1 (SC)] AND IN CIT VS. ROCKMAN CYCLE INDUSTRIES [176 TAXMAN 21 (P&H)]. 28 52. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE CONTENTION OF THE ASSESSEE BEFORE US WAS THAT THE P ARTIES WERE NOT RELATED PARTIES UNDER SECTION 40A(2)(B) OF THE ACT AND THE SAID POINT HAD BEEN RAISED DURING THE PROCEEDINGS BEFORE THE AUTHORITIE S BELOW AND HAVE NOT BEEN CONSIDERED BY THEM. THOUGH THE PLEA OF THE AS SESSEE BEFORE THE AUTHORITIES BELOW WAS THAT THE ADVANCES MADE TO THE SAID PARTIES WERE NOT LOAN ACCOUNTS AND THE ASSESSEE WAS HAVING PURCH ASE/SALE TRANSACTIONS WITH THESE CONCERNS DURING THE YEAR UNDER CONSIDERA TION THE CIT (APPEALS) HAD ALLOWED THE CLAIM OF THE ASSESSEE BOT H ON ACCOUNT OF AVAILABILITY OF FUNDS WITH THE ASSESSEE AND ALSO TH E NON-CONSIDERATION OF THE ENTRIES DEBITED TO THE ACCOUNT OF M/S SHIVAM IN DUSTRIES. WE ARE OF THE VIEW THAT THE ISSUE RAISED BY THE ASSESSEE NEED S TO BE RELOOKED BY THE ASSESSING OFFICER BY CONSIDERING THE PLEA OF THE AS SESSEE AND IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN S.A.BUILDERS VS. CIT (SUPRA) THAT IN CASE THE ADVANCES BETWEEN THE A SSESSEE COMPANY AND TWO CONCERNS WERE ON ACCOUNT OF BUSINESS TRANSACTIO NS NO DISALLOWANCE WAS WARRANTED UNDER SECTION 36(1)(III) OF THE ACT. WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER AFFORDING REASONABLE OPPO RTUNITY OF HEARING TO THE ASSESSEE. THE ASSESSING OFFICER SHALL ALSO CON SIDER THE PLEA OF THE ASSESSEE IN RESPECT OF THE ENTRIES IN THE RESPECTIV E ACCOUNTS OF THE PARTIES ON ACCOUNT OF PURCHASE/SALE TRANSACTION AND ALLOW CREDIT FOR THE SAME TO COMPUTE THE BALANCES DUE BETWEEN THE PARTIE S. THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE IS PARTLY ALLOWED . ITA NO.693 /CHD/2011(ASSESSEES APPEAL): (ASSESSMENT YEAR 2007-08) 53. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF AP PEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT (APPEALS) CHANDIGARH IN APPEAL NO. 595 /P/09-10 THROUGH 29 ORDER DATED 31.03.2011 HAS ERRED IN CONFIRMING THE ADDITION OF RS. 2 87 500/- MADE BY ADDL. COMMISSIONER OF INCOME TAX RANGE - I CHANDIGARH AS DISALLOWANCE OF EXPENDITURE INCURRED FOR INCREASE IN AUTHORISED CAPITAL OF THE COMPANY BY TREATING THE S AME CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE ALLOWABL E U/S 37 (1) OF THE INCOME TAX ACT 1961. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT (APPEALS) CHANDIGARH HAS ERRED IN APPL YING THE PROVISIONS OF SECTION 14 A OF THE INCOME TAX ACT 1961 AND CONFI RMING THE ADDITION OF RS. 2 00 750/- MADE BY ADDL. COMMISSIONER OF INCOME TAX RANGE - I CHANDIGARH AS DISALLOWANCE BY APPLYING RULE 8D(2)(I II). 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(APPEALS) CHANDIGARH HAS GRAVELY ERRED IN CONFIRMING THE ADDITION OF RS. 1 32 02 180 OUT OF TOTAL REVENU E EXPENSES OF RS. 2 53 99 069/- CLAIMED IN THE RETURN OF INCOME BY DI SALLOWING RS. 1 07 49 5237- SPENT ON CONSTRUCTION OF BUILDING ON LAND TAKEN ON LEASE AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE CLAIMED IN THE RETURN AND RS. 19 99 620/- SPENT ON ELECTRICAL EQUIPMENT OFFICE EQUIPMENT ETC. AT VARIOUS RETAIL OUTLETS BY TREATING IT AS CAPITAL EXPENDITURE INSTE AD OF REVENUE EXPENDITURE CLAIMED IN THE RETURN AND FURTH ER DISALLOWING RS. 14 56 0007- SPENT ON MODIFICATION OF PREMISES (RETA IL OUTLETS) TAKEN ON LEASE BY TREATING IT AS CAPITAL EXPENDITURE INSTEAD OF RE VENUE EXPENDITURE CLAIMED IN RETURN. 4. THAT THE APPELLANT CRAVES TO SUBMIT ANY ADDITIO NAL FACTS/EVIDENCES IN SUPPORT OF THEIR GROUNDS OF APPEALS WITH THE PERMIS SION OF THE HON'BLE ITAT CHANDIGARH BEFORE OR AT THE TIME OF HEARING/FINAL DISPOSAL OF THE APPEAL. 5. THAT THE APPELLANT CRAVES TO SUBMIT ANY ADDITION AL FACTS/EVIDENCES IN SUPPORT OF THEIR GROUNDS OF APPEALS WITH THE PERMIS SION OF THE HON'BLE ITAT CHANDIGARH BEFORE OR AT THE TIME OF HEARING/FINAL DISPOSAL OF THE APPEAL. 6. THAT THE APPELLANT CRAVES TO SUBMIT ANY ADDITION AL FACTS/EVIDENCES IN SUPPORT OF THEIR GROUNDS OF APPEALS WITH THE PERMIS SION OF THE HON'BLE ITAT CHANDIGARH BEFORE OR AT THE TIME OF HEARING/FINAL DISPOSAL OF THE APPEAL. 54. GROUND NO.1 RAISED BY THE REVENUE IS AGAINST TH E ADDITION ON ACCOUNT OF EXPENDITURE INCURRED FOR THE INCREASE OF VARIOUS CAPITAL OF THE ASSESSEE COMPANY. THE LEARNED A.R. FOR THE ASSESSE E FAIRLY ADMITTED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE RA TIO LAID DOWN IN BROOK BOND INDIA LTD. VS. CIT [225 ITR 798 (SC)]. IN VIE W THEREOF GROUND NO.1 RAISED BY THE ASSESSEE IS DISMISSED. 30 55. THE ALTERNATE PLEA OF THE ASSESSEE FOR CONSIDER ING THE SAID EXPENDITURE UNDER SECTION 35D OF THE ACT IS ALSO DI SMISSED. 56. THE ISSUE RAISED BY THE ASSESSEE VIDE GROUND NO .2 IS AGAINST THE APPLICATION OF PROVISIONS OF SECTION 14A OF THE ACT . 57. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED FROM THE BALANCE SHEET THAT THE ASSESSEE HAD MADE INVESTMENT OF RS.8 01 50 000/- AS ON 31.3.2007 IN SHARES OF VARIOUS COMPANIES WHICH COM PRISED OF THE INVESTMENT IN SHARES OF M/S AMARTEX INFRASTRUCTURE LTD. OF RS.1 50 000/- AND IN SBI MUTUAL FUND OF RS.8 CRORES. THE ASSESSE E WAS ASKED TO FURNISH THE DETAILS OF DIVIDEND INCOME FROM SBI MUT UAL FUND. THE EXPLANATION OF THE ASSESSEE WAS THAT THE INVESTMENT IN SBI MUTUAL FUND WAS MADE ONLY ON 30.3.2007 AND NO DIVIDEND INCOME W AS RECEIVED DURING THE YEAR. IN VIEW THEREOF IT WAS PLEADED THAT WHE N NO DIVIDEND INCOME HAS BEEN RECEIVED THE PROVISIONS OF SECTION 14A OF THE ACT ARE NOT TO BE APPLIED. THE ASSESSING OFFICER OBSERVED THAT IN OR DER TO APPLY THE PROVISIONS OF SECTION 14A OF THE ACT IT IS NOT NECE SSARY THAT THERE SHOULD BE POSITIVE EXEMPT INCOME. THE ASSESSING OFFICER A PPLIED PROVISIONS OF RULE 8D FOR WORKING OUT THE DISALLOWANCE UNDER SECT ION 14A OF THE ACT AND DISALLOWED SUM OF RS.23 50 478/- AS COMPUTED UN DER PARA 3.11 AT PAGE 18 OF THE ASSESSMENT ORDER. THE CIT (APPEALS) HELD THAT ONLY RULE 8D(2)(III) WAS APPLICABLE AND THUS THE ADDITION UND ER SECTION 14A OF THE ACT WAS REDUCED TO RS.2 00 750/- AND RELIEF OF RS.2 1 49 728/- WAS ALLOWED TO THE ASSESSEE. 58. THE ASSESSEE IS IN APPEAL AGAINST THE ADDITION OF RS.2 00 750/-. THE REVENUE IS IN APPEAL AGAINST THE AFORESAID RELI EF ALLOWED BY THE CIT (APPEALS) VIDE GROUND NO.3 RAISED IN ITA NO.687/CHD /2011. 31 59. WE PROCEED TO DISPOSE OF GROUND NO.2 RAISED BY THE ASSESSEE AND GROUND NO.3 RAISED BY THE REVENUE. DISALLOWANCE UN DER SECTION 14A OF THE ACT IS WARRANTED WHERE THE ASSESSEE HAS EARNED EXEMPT INCOME. DURING THE YEAR UNDER CONSIDERATION I.E. AT THE CLO SE OF THE ASSESSMENT YEAR THE ASSESSEE HAD MADE AN INVESTMENT OF RS.8 C RORES WITH SBI MUTUAL FUND ON 30.3.2007. THE SAID INVESTMENT WAS ENCASHED BY THE ASSESSEE ON 3.4.2007 AND INCOME OF RS.1 18 507/- WA S OFFERED TO TAX IN THE SUCCEEDING YEAR. AS AGAINST THE SAID INVESTMEN T OF FOUR DAYS THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WAS MADE BY THE ASSESSING OFFICER OF RS.23 50 478/- IN ASSESSMENT YEAR 2007-0 8 AND RS.17 66 255/- IN ASSESSMENT YEAR 2008-09. THE ASSESSEE HAS PLACE D ON RECORD DOCUMENTS RELATING TO THE INVESTMENT AND ENCASHMENT OF THE SBI MUTUAL FUND AT PAGES 46 TO 48 OF THE PAPER BOOK. 60. THE ASSESSING OFFICER HAD APPLIED THE PROVISION S OF RULE 8D(2)(II) ON ACCOUNT OF DISALLOWANCE OF INTEREST AND FURTHER THE PROVISIONS OF RULE 8D(2)(III) FOR COMPUTING THE AMOUNT DISALLOWABLE ON ACCOUNT OF ADMINISTRATIVE AND OTHER EXPENSES IN BOTH THE YEAR S I.E. ASSESSMENT YEARS 2007-08 AND 2008-09. THE INVESTMENT WAS MADE BY THE ASSESSEE ON 30.3.2007 AND WAS HELD ON 1.4.2007 AND CONSEQUEN TLY THE SAID ALLOWANCE WAS WORKED OUT UNDER SECTION 14A OF THE A CT FOR BOTH THE ASSESSMENT YEARS 2007-08 AND 2008-09. THE LEARNED A.R. FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT FIRST OF AL L IN ASSESSMENT YEAR 2007-08 THE PROVISIONS OF RULE 8D COULD BE APPLIED FOR COMPUTING THE SAID DISALLOWANCE UNDER SECTION 14A OF THE ACT IN V IEW OF THE RATIO LAID DOWN IN GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [234 CTR (BOM) 1]. 61. THE SECOND PLEA OF THE LEARNED A.R. FOR THE ASS ESSEE WAS THAT THERE WAS NO QUESTION OF INVOKING PROVISIONS OF SECTION 1 4A OF THE ACT AS THE 32 INCOME WAS OFFERED TO TAX. RELIANCE WAS PLACED IN THE CASE OF CIT VS. KINGS EXPORTS [318 ITR 100 (P&H)] AND IN THE CASE O F ACIT VS. THE PUNJAB STATE COOPERATIVE AGRICULTURE DEVELOPMENT BA NK LTD. (ITA NO.742/CHD/2011) ORDER DATED 19.9.2011. THE NEXT P LANK OF ARGUMENT OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THE DISA LLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EXCEED THE INCOME DERIVED FRO M ITS INVESTMENT I.E. RS.1 18 000/- AS HELD BY THE CHANDIGARH BENCH OF TH E TRIBUNAL IN M/S PUNJAB STATE COOP. & MARKETING FED. LTD. VS. ACIT ( ITA NO.579/CHD/2011) ORDER DATED 30.9.2011. FURTHER IT WAS POINTED OUT THAT THE INTEREST @ 12% ON BORROWING OF RS.8 CRORES FOR A PERIOD OF FOUR DAYS COMES TO RS.97 000/- ONLY AGAINST WHICH DISALLOWAN CE UNDER RULE 8D HAS BEEN COMPUTED AT RS.37 LACS FOR TWO CAPTIONED A SSESSMENT YEARS. THE LEARNED A.R. FOR THE ASSESSEE STATED THAT NO BO RROWED FUNDS WERE UTILIZED FOR THE SAID INVESTMENT. 62. THE LAST PLEA OF THE LEARNED A.R. FOR THE ASSES SEE WAS THAT NO ADMINISTRATIVE EXPENDITURE WAS INCURRED FOR INVESTM ENT IN THE SAID MUTUAL FUND AND EVEN THEREOF DISALLOWANCE OF RS.4 L ACS IN BOTH THE ASSESSMENT YEARS UNDER APPEAL FOR INVESTMENT IN MUT UAL FUNDS OF FOUR DAYS WAS VERY EXCESSIVE. 63. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED IN CROSS APPEALS IS IN RELATION TO COM PUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT IN RESPEC T OF THE INVESTMENT MADE BY THE ASSESSEE IN SBI MUTUAL FUNDS ON 30.3.20 07 WHICH WAS ENCASHED ON 3.4.2007 I.E. AFTER GAP OF FOUR DAYS. THE DISALLOWANCE HAS BEEN COMPUTED IN THE HANDS OF THE ASSESSEE BY APPLY ING THE PROVISIONS OF RULE 8D(2)(II) AND RULE 8D(2)(III) OF THE INCOME TA X RULES. AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG . CO. LTD. VS. 33 DCIT (SUPRA) THE PROVISIONS OF RULE 8D WHICH WERE INTRODUCED BY NOTIFICATION DATED 24.3.2008 WERE HELD TO BE PROSPE CTIVE APPLICABLE FROM ASSESSMENT YEAR 2008-09 ONWARDS. IN VIEW THEREOF WE FIND NO MERIT IN THE ORDERS OF THE AUTHORITIES BELOW IN APPLYING THE PROVISIONS OF RULE 8D FOR COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT IN THE HANDS OF THE ASSESSEE RELATING TO ASSESSMENT YEAR 2 007-08. IN ANY CASE THE INVESTMENT MADE BY THE ASSESSEE WAS ON 30.3.200 7 AND FOR A PERIOD OF TWO DAYS OF HOLDING WE FIND NO MERIT IN DISALLO WING ANY PART OF THE ADMINISTRATIVE EXPENSES FOR THE AFORESAID INVESTMEN T MADE BY THE ASSESSEE WHICH WAS ENCASHED IN THE SUBSEQUENT ASSE SSMENT YEARS AND INCOME ARISING THEREFROM WAS OFFERED TO TAX. CONSE QUENTLY GROUND NO.2 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2007-08 I S ALLOWED AND GROUND NO.3 RAISED BY THE REVENUE IN ASSESSMENT YEAR 2007- 08 IS DISMISSED. 64. WE FURTHER ADDRESS THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN ASSESSMENT YEAR 2008-09 IN THIS REGARD BY APPLYI NG PROVISIONS OF RULE 8D AND SECTION 14A OF THE ACT. THOUGH THE PROVISIO NS OF RULE 8D ARE APPLICABLE W.E.F. ASSESSMENT YEAR 2008-09 THERE IS NO MERIT IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT IN ASSESSM ENT YEAR 2008-09 WHERE THE INCOME FROM THE SAID INVESTMENT IN SBI MU TUAL FUNDS HAS BEEN OFFERED TO TAX. THE ASSESSEE HAD MADE THE INV ESTMENT ON 30.3.2007 WHICH WAS ENCASHED ON 3.4.2007 AND INCOME OF RS.1 1 8 508/- WAS OFFERED TO TAX. THE PROVISIONS OF SECTION 14A OF T HE ACT ARE TO BE INVOKED WHERE THE ASSESSEE HAD EARNED EXEMPT INCOME FROM ITS INVESTMENT. THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME FROM THE SAID ASSET BY HOLDING IT FOR A TOTAL OF ABOUT FOUR DAYS AND ENCASHED THE SAME DURING THE ASSESSMENT YEAR 2008-09 AND OFFERED THE INCOME TO TAX. FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS. KINGS EXPORTS (SUPRA) WE HOLD THA T THERE IS NO MERIT IN 34 INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT I N ASSESSMENT YEAR 2008-09. WE ARE NOT ADDRESSING THE ALTERNATE PLEAS RAISED BY THE LEARNED A.R. FOR THE ASSESSEE IN THIS REGARD IN VIEW OF OUR HOLDING SO. GROUND NO.3 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2008 -09 IS THUS ALLOWED. 65. GROUND NO.3 RAISED BY THE ASSESSEE IN ASSESSMEN T YEAR 2007-08 IS AGAINST THE DISALLOWANCE OF RS.1 32 02 108/- (RS.98 96 460/- +RS.18 49 648/-+14 56 000/-). 66. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD CLAIMED REVENUE EXPENDITURE OF RS.2 53 99 069/- IN ITS COMPUTATION OF INCOME. THE SAID REVENUE EXPENDITURE WERE NOT CLAI MED IN THE BOOKS OF ACCOUNT BY THE ASSESSEE COMPANY. OUT OF THE TOTAL EXPENDITURE OF RS.2.53 CRORES SUM OF RS.1.07 CRORES WAS SPENT ON CONSTRUCTION OF PLOT NO.365 INDUSTRIAL AREA PHASE-I PANCHKULA WHICH WAS TAKEN ON LEASE FROM SHRI ARUN GROVER MANAGING DIRECTOR OF THE COM PANY ON NOMINAL RENT BY PAYING HIM INTEREST FREE DEPOSIT OF RS.75 L ACS. THE ASSESSEE CLAIMED THE SAID EXPENDITURE ON CONSTRUCTION OF BUI LDING TO BE NON- REIMBURSABLE AND THE SAME WAS CLAIMED AS REVENUE EX PENDITURE. FURTHER NO EXPENDITURE WAS CLAIMED ON THE SAID COST OF THE PLOT ON LEASEHOLD. 67. THE SECOND ASPECT OF THE EXPENDITURE WAS THE AM OUNTS SPENT ON FURNITURE/FIXTURES/FITTINGS/INTERIORS/TEMPORARY STR UCTURES AT RETAIL OUTLETS. THE EXPENDITURE INCURRED BY THE ASSESSEE WAS CLAIME D TO BE THE MINIMUM REQUIREMENT OF CARRYING ON THE BUSINESS BY THE ASSE SSEE COMPANY AND NOT CREATION OF NEW ASSET. SUM OF RS.1.05 CRORES WAS S PENT ON REPAIRS OF RETAIL OUTLETS AND WAS CLAIMED AS REVENUE EXPENDITU RE UNDER SECTION 30(A)(I) OF THE ACT. THE ASSESSEE FURTHER SPENT SU M OF RS.19 99 620/- ON PLANT & MACHINERY ELECTRIC EQUIPMENT ELECTRIC INS TALLATION OFFICE EQUIPMENTS. THE ASSESSEE HAD FURTHER TRANSFERRED S UM OF RS.20 50 000/- 35 FROM SALARY AND WAGES ACCOUNT WHICH WAS CAPITALIZED IN THE BOOKS OF ACCOUNT AND WAS CLAIMED AS REVENUE EXPENDITURE IN T HE COMPUTATION OF INCOME. THE TOTAL EXPENDITURE CLAIMED WAS RS.2.54 CRORES. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSE E IN RESPECT OF ALL THE ITEMS. THE EXPENDITURE ON CONSTRUCTION OF THE HEAD OFFICE ON LEASEHOLD LAND AMOUNTING TO RS.1.07 CRORES WAS HELD TO BE CAP ITAL EXPENDITURE ON WHICH DEPRECIATION @ 10% WAS ALLOWED TO THE ASSESSE E. SIMILARLY THE EXPENDITURE OF RS.19 99 620/- ON PLANT & MACHINERY ELECTRIC EQUIPMENT ETC. WAS HELD TO BE CAPITAL IN NATURE AND DEPRECIAT ION WAS ALLOWED ON THE SAME. THE ASSESSEE HAD SPENT A SUM OF RS.1.05 CROR ES ON FURNITURE FIXTURES FITTINGS ETC. OUT OF THE TOTAL EXPENDITU RE THE ASSESSEE HAD FAILED TO FURNISH THE BILLS OR VOUCHERS TOTALING RS .14 56 000/- WHICH WAS DISALLOWED UNDER SECTION 37(1) OF THE ACT AND THE B ALANCE EXPENDITURE WAS ALLOWED BY THE ASSESSING OFFICER. FURTHER THE EXPENDITURE ON SALARY AND WAGES TOTALING RS.20 50 000/- DEBITED UN DER THE HEAD REVENUE EXPENDITURE BY THE ASSESSING OFFICER. THUS AFTER ALLOWING DEPRECIATION ON THE VARIOUS ASSETS CAPITALIZED THE TOTAL DISALL OWANCE WAS WORKED OUT TO RS.1 32 02 180/- BY THE ASSESSING OFFICER. 68. THE CIT (APPEALS) UPHELD THE ORDER OF THE ASSES SING OFFICER ON ALL THE ACCOUNTS TOTALING RS.1 32 02 190/-. 69. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE CIT (APPEALS). THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT IN RESPECT OF THE EXPENDITURE OF RS.1 07 49 523/- THE ASSESSEE HAD T AKEN ON LEASE PLOT OF LAND FOR A PERIOD OF 12 YEARS FROM ITS MANAGING DIR ECTOR AND HAD SPENT THE AFORESAID AMOUNT IN THE RENOVATION OF THE LEASE HOLD PROPERTY. IN RESPECT OF ELECTRIC EQUIPMENT TOTALING RS.19 99 620 /- THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT IT HAD MORE THAN 100 RETAIL COUNTERS AND 36 THE ABOVE SAID EXPENDITURE WAS IN THE NATURE OF REP LACEMENT OF BULBS ETC. AS DETAILED AT PAGE 53 TO 59 OF THE PAPER BOOK . THE LEARNED A.R. FOR THE ASSESSEE FAIRLY ADMITTED THAT NO BILLS WERE AVA ILABLE WITH THE ASSESSEE FOR EXPENDITURE OF RS.14 50 000/-. 70. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE ORDERS OF THE ASSESSING OFFICER/CIT (APPEALS). 71. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD DE BITED REVENUE EXPENDITURE TOTALING RS.2.53 CRORES COMPRISING AS UNDER: S.NO. PARTICULARS AMOUNT (IN RS.) 1. CONSTRUCTION OF BUILDING ON LEASE HOLD LAND RS.1 07 49 523/- 2. CONSTRUCTION ON EXPANSION/EXTENSION OF EXISTING BUSINESS OR RETAIL. A) FURNITURE/FIXTURE/FITTINGS RS.1 05 99 926/- B) PLANT & MACHINERY/ELECTRICAL EQUIPMENT ELECTRICAL INSTALLATION/OFFICE EQUIPMENT RS. 19 99 620/- C) SALARY & WAGES RS. 20 50 000/- TOTAL RS.2 53 99 069/- 72. THE ASSESSING OFFICER DISALLOWED THE ABOVE SAI D EXPENDITURE AS UNDER: S.NO. PARTICULARS AMOUNT (IN RS.) 1. CONSTRUCTION OF BUILDING ON LEASE HOLD LAND (AFTER DEPRECIATION) RS.98 96 460/- 2. CONSTRUCTION ON EXPANSION/EXTENSION OF EXISTING BUSINESS OR RETAIL. A) FURNITURE/FIXTURE/FITTINGS (NO BILLS/VOUCHERS) RS.14 56 000/- B) PLANT & MACHINERY/ELECTRICAL EQUIPMENT ELECTRICAL INSTALLATION/OFFICE EQUIPMENT (AFTER DEPRECIATION) RS.18 49 648/- C) SALARY & WAGES (ALLOWED) TOTAL: RS.1 32 02 108/- 73. THE ASSESSEE IS IN APPEAL AGAINST THE ABOVE SAI D DISALLOWANCE MADE BY THE ASSESSING OFFICER WHICH WAS UPHELD BY THE CI T (APPEALS). 37 74. THE FIRST ITEM OF EXPENDITURE IS THE RENOVATION EXPENDITURE INCURRED BY THE ASSESSEE. THE ASSESSEE HAD TAKEN O N LEASE PLOT NO.365 INDUSTRIAL AREA PHASE-I PANCHKULA FROM ITS MANAGI NG DIRECTOR SHRI ARUN GROVER ON NOMINAL RENT BY PAYING HIM RS.75 LAC S AND HAD CONSTRUCTED THE BUILDING ON THE SAID LAND FOR ITS C ENTRALIZED CONTROLLING OFFICE. THE EXPLANATION OF THE ASSESSEE BOTH BEFOR E THE ASSESSING OFFICER AND THE CIT (APPEALS) WAS AS UNDER: DURING THE F. Y 2003-04 THE COMPANY HAD TAKEN LAND PLOT NO. 365 INDUSTRIAL AREA PHASE-I PANCHKULA ON LEASE FROM SH. ARUN GROVER MANAGING DIRECTOR OF THE COMPANY ON NOMINAL RENT BY PAYING HIM RS. 75.00 LACS AS INTEREST FREE DEPOSIT. AS THE COMPANY WAS EXPANDING AT A RAPID PACE IT WAS DECID ED TO ESTABLISH A CENTRALIZED CONTROLLING OFFICE (HEAD OFFICE) BUILDI NG ON THE LEASED PREMISES. DURING THE YEAR UNDER CONSIDERATION AN AMOUNT OF R S. 1 07 49 523/- HAS BEEN SPENT ON CONSTRUCTION. THE ASSESSEE HAS PUT UP CONSTRUCTION OF BUILDING ON LEASEHOLD LAND AND NO BUILDING HAS BEEN TAKEN ON LEASE. THE ASSESS EE HAS NOT ACQUIRED ANY CAPITAL ASSET VIZ LAND BUT PUT UP A BU ILDING FOR BUSINESS ADVANTAGE. AS THE AMOUNT SPENT ON CONSTRUCTION OF B UILDING AS PER LEASE DEED IS NON REIMBURSIBLE THE SAME HAS BEEN CLAIMED AS REVENUE EXPENDITURE. THE ASSESSEE HAS NOT CLAIMED ANY DEPRECIATION ON RS 10749523/- UNDER THE INCOME TAX ACT 1961 DURING THE YEAR UNDER CONSIDERATION' 75. THE PERUSAL OF THE ABOVE SAID EXPLANATION FAIRL Y ESTABLISHES THAT THE ASSESSEE HAD SPENT SUM OF RS.1.07 CRORES ON THE CONSTRUCTION OF BUILDING ON LAND TAKEN ON LEASE FROM ITS MANAGING D IRECTOR. THE SAID EXPENDITURE ON THE CONSTRUCTION OF THE BUILDING CAN NOT BE HELD TO BE REVENUE EXPENDITURE IN THE CASE OF THE ASSESSEE. W E ARE IN CONFORMITY WITH THE ORDERS OF THE AUTHORITIES BELOW THAT THE S AID EXPENDITURE INCURRED BY THE ASSESSEE IS CAPITAL EXPENDITURE AND THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEPRECIATION ON THE SAID A SSETS. RELIANCE PLACED BY THE ASSESSEE ON THE RATIO LAID DOWN IN CIT VS. H I LINE PENS (P) LTD. [306 ITR 182 (DEL)] IS MISPLACED AS THE HON'BLE DEL HI HIGH COURT HAD 38 ALLOWED THE CLAIM OF THE ASSESSEE ON ACCOUNT OF EXP ENDITURE ON REPAIRS AND RENOVATION OF RENTED PREMISES WHEREAS IN THE P RESENT FACTS OF THE CASE BEFORE US THE ASSESSEE HAD INCURRED THE SAID EXPENDITURE ON THE CONSTRUCTION OF THE BUILDING ITSELF FROM WHICH IT H AD CARRIED ON ITS BUSINESS IN THE LATER PERIOD. CONSEQUENTLY WE FIN D NO MERIT IN THE CLAIM OF THE ASSESSEE VIS--VIS THE EXPENDITURE OF RS.1.0 7 CRORES. 76. THE SECOND ITEM OF EXPENDITURE IS THE AMOUNTS S PENT ON ELECTRIC EQUIPMENTS TOTALING RS.19 99 620/-. AS REFERRED TO BY US IN THE PARAS HEREINABOVE THE ASSESSEE WAS RUNNING MORE THAN 100 RETAIL OUTLETS IN WHOLE OF INDIA AND THE BREAK-UP OF THE SAID EXPENDI TURE IS AS UNDER: --------------------------------------------------- --------------- S.NO. NAME OF LEDGER EXPENSE (IN RS.) --------------------------------------------------- --------------- ELECTRICAL/OFFICE EQUIPMENTS: ELECTRICAL EQUIPMENT 843 022.00 ELECTRICAL INSTALLATION 230 028.00 OFFICE EQUIPMENT 76 191.00 AIR CONDITIONER * COOLER 748 089.00 MOBILE 102 297.00 --------------------------------------------------- ------------------ TOTAL 1 999 627.00 --------------------------------------------------- ------------------ 77. THE ASSESSEE HAD FURNISHED THE DETAILS OF THE R ESPECTIVE EXPENDITURE UNDER VARIOUS SUB-HEADS AT PAGES 53 TO 59 OF THE PAPER BOOK. THE FIRST EXPENDITURE IS ON ELECTRICAL EQUIP MENT PLACED AT PAGES 54 AND 55 OF THE PAPER BOOK. THE ASSESSEE HAD PURC HASED 80 FANS FOR 60 000 ON 12.5.2006. FURTHER THERE ARE OTHER BILLS RAISED FOR CEILING FANS FOR DIFFERENT OFFICES AS FIND MENTION IN THE LEDGER ACCOUNT PALCED AT PAGES 54 AND 55 OF THE PAPER BOOK. THE ASSESSEE HA D ALSO SPENT RS.1 54 441/- ON 15.1.2007 FOR ELECTRIC INSTALLATIO N AT FARIDABAD. IN THE TOTALITY OF THE NATURE OF THE EXPENDITURE INCURRED BY THE ASSESSEE WE FIND NO MERIT IN THE CLAIM OF THE ASSESSEE VIS--VIS ELE CTRIC EQUIPMENT TOTALING RS.8 43 022/-. THE SECOND ITEM OF EXPEND ITURE IS THE OFFICE 39 EQUIPMENT TOTALING RS.76 191/- BREAK UP OF WHICH I S PLACED AT PAGE 56 OF THE PAPER BOOK WHICH IS THE EXPENDITURE ON WATER DISPENSER WATER COOLER WATER FILTER ETC. WHICH ARE ITEMS OF FITTI NGS AND ARE IN THE NATURE OF CAPITAL EXPENDITURE. THE DETAIL OF EXPENDITURE ON ELECTRIC INSTALLATION OF RS.2 30 028/- IS PLACED AT PAGE 58 OF THE PAPER BOOK AND PERUSAL OF THE SAME REFLECTS THE PURCHASE OF EXHAUST FANS ELE CTRIC GOODS FOR DIFFERENT UNITS EXCEPT FOR THE EXPENDITURE OF 8500 TUBES AND 14677 OF LIGHTS. IN THE TOTALITY OF THE FACTS AND CIRCUMSTA NCES WE FIND NO MERIT IN THE CLAIM OF THE ASSESSEE AND THE SAME IS REJECTED IN RESPECT OF EXPENDITURE OF RS.2 30 028/-. 78. THE NEXT HEAD OF EXPENDITURE IS ON AIR CONDITIO NERS AND COOLERS TOTALING RS.7 48 089/- AND MOBILE PHONES TOTALING R S.1 02 297/- PLACED AT PAGES 57 AND 59 OF THE PAPER BOOK. THE ABOVE SA ID EXPENDITURE INCURRED BY THE ASSESSEE IS PURELY CAPITAL EXPENDIT URE AND IS NOT TO BE ALLOWED AS REVENUE EXPENDITURE THOUGH THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEPRECIATION ON THE SAID ASSET. UPHOLDING THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD WE DISMISS THE CLA IM OF THE ASSESSEE VIS--VIS EXPENDITURE OF RS.19 99 620/-. 79. THE LAST ITEM OF EXPENDITURE IS TOTALING RS.14 56 000/- SPENT ON MODIFICATION OF PREMISES OF THE ASSESSEE COMPANY. THE ASSESSEE FAILED TO PRODUCE BILLS IN RESPECT OF THE SAID EXPENDITURE . IN THE ABSENCE OF THE SAME WE FIND NO MERIT IN THE CLAIM OF THE ASSESSEE AND HENCE THE SAME IS REJECTED. THUS GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE FOR ASSESSMENT YEAR 2007-08 IS DISMISSED. 80. GROUND NO.4 RAISED BY THE ASSESSEE IS IDENTICAL TO GROUND NO.4 RAISED IN ITA NO.1056/CHD/2010 AND FOLLOWING OUR RE ASONING GIVEN IN PARAS HEREINABOVE SHALL APPLY MUTATIS AND MUTANDIS TO GROUND NO.4 40 RAISED BY THE ASSESSEE AND THE ASSESSING OFFICER SH ALL RECOMPUTED THE DEDUCTION UNDER SECTION 80IC OF THE ACT IN LINE WI TH OUR DIRECTIONS. 81. GROUND NOS. 5 AND 6 RAISED BY THE ASSESSEE BEIN G GENERAL ARE DISMISSED AS SUCH. ITA NO.687/CHD/2011 :: REVENUES APPEAL :: ASSESSME NT YEAR 2007-08 : 82. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) HAS GRAVELY ERRED IN DELETING THE ADDITION MADE BY THE A.O. IN DISALLOWING & CAPITALIZING INTEREST AMOUNTING TO RS.6 50 911/-AS PER PROVISIONS OF SECTION 36(I)(III) OF THE INCOME TAX ACT 1 961 . 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) HAS GRAVELY ERRED IN DELETING THE ADDITION MAD E BY THE A.O. BY DISALLOWING PROPORTIONATE INTEREST AMOUNTING TO RS.3 39 642/- AS NON BUSINESS EXPENSES OUT OF FINANCIAL EXPENDITURE CLAIMED IN RELATION TO INT EREST BEARING LOANS. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW LD. CIT(A) HAS GRAVELY ERRED IN DELETING THE ADDITION MADE BY THE A.O. ON THE ISSUE OF APPLYING THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT 1961 ON INVESTMENT OF RS. 8 00 00 000/- IN S.B.I. MUTUAL FUND AND DISALLOWING PROPORTIONATE INTEREST AND ADMINISTRATIVE EXPENSES AMOUNTING TO RS.23 50 478/- BY THE APPLYING RULE 8D. 4. THE APPELLANT CRAVES TO ADD OR AMEND ANY GROUND ANY GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD OR DISPOSED OFF. 5. IT IS PRAYED THAT THE ORDER OF THE LD. CIT( A) BE CANCELLED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 83. GROUND NO.3 RAISED BY THE REVENUE HAS BEEN DECI DED BY US ALONGWITH GROUND NO.2 RAISED BY THE ASSESSEE IN ASS ESSMENT YEAR 2007-08 AND FOLLOWING OUR DECISION IN PARAS HEREINABOVE GRO UND NO.3 RAISED BY THE REVENUE IS THUS DISMISSED. 84. THE ISSUE IN GROUND NO.1 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION ON ACCOUNT OF INTEREST RELATAB LE TO CAPITAL WORK IN 41 PROGRESS. THE ASSESSEE HAD REFLECTED CAPITAL WORK IN PROGRESS AT RS.1.79 CRORES AS ON 31.3.2007 AS AGAINST OPENING CAPITAL WORK IN PROGRESS AMOUNTING TO RS.5.90 CRORES. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD UTILIZED VARIOUS LOANS FUNDS IN TH E CREATION OF CAPITAL WORK IN PROGRESS AS THE ASSESSEE HAD RAISED RS.16.8 0 CRORES ON ACCOUNT OF TERM LOAN AND RS.16.76 CRORES ON ACCOUNT OF CASH CREDIT ACCOUNT. THE TOTAL INVESTMENT IN THE PURCHASE OF FIXED ASSET WAS AMOUNTING TO RS.9.88 CRORES. THE ASSESSING OFFICER VIDE THE DELIBERATI ON AT PAGES 76 TO 81 ADDED BACK SUM OF RS.6 89 945/- BEING INTEREST CAPI TALIZED @ 4.34% ON MONTHLY BALANCES OF CAPITAL WORK IN PROGRESS. THE CIT (APPEALS) VIDE PARA 45 TO 48 AT PAGES 37 AND 38 OF THE APPELLATE O RDER ALLOWED THE CLAIM OF THE ASSESSEE IN VIEW OF THE SIMILAR PLEA BEING A LLOWED IN ASSESSMENT YEAR 2006-07. 85. THE REVENUE IS IN APPEAL AGAINST THE SAID DISAL LOWANCE. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT NO D ISALLOWANCE IS WARRANTED AS THE WORK IN PROGRESS RELATED TO ITS RE TAIL OUTLETS. 86. WE FIND THAT THE ISSUE IN THE PRESENT CASE IS C OVERED BY THE PROVISO TO SECTION 36(1)(III) OF THE ACT WHICH CLEARLY PROV IDES THAT WHERE BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN THE FIXED ASSETS FOR THE PERIOD FROM THE DATE OF UTILIZATION OF THE FUND S TILL THE DATE OF PUTTING THE ASSETS TO USE INTEREST RELATABLE TO SU CH DEPLOYMENT OF FUNDS IS TO BE DISALLOWED. WE FIND THAT THE ASSESSING OF FICER HAD APPLIED THE ABOVE SAID PROVISIONS TO WORK OUT THE DISALLOWANCE OF RS.6 89 945/- AS PER SCHEDULE AT PAGE 81 OF THE ASSESSMENT ORDER. W E ARE IN CONFORMITY WITH THE ORDER OF THE ASSESSING OFFICER AND REVERSI NG THE ORDER OF THE CIT (APPEALS) WE ALLOW GROUND NO.1 RAISED BY THE RE VENUE. 42 87. THE ISSUE IN GROUND NO.2 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION OF RS.3 58 125/-. THE ASSESSI NG OFFICER HAD INVOKED PROVISIONS OF SECTION 36(1)(III) OF THE ACT IN RESPECT OF ADVANCES MADE TO M/S SHIVAM INDUSTRIES AND DISALLOWED A SUM OF RS.2 33 038/-. FURTHER THERE WAS IMPREST ACCOUNT OF THE DIRECTORS AND OTHER RELATED CONCERNS OF THE ASSESSEE AS TABULATED AT PAGE 75 OF THE ASSESSMENT ORDER AND THE ASSESSING OFFICER WORKED OUT THE DISALLOWAN CE AT RS.1 25 087/-. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE . 88. WE FIND THAT THE FIRST ISSUE OF DISALLOWANCE OF INTEREST RELATABLE TO THE ADVANCES MADE TO M/S SHIVAM INDUSTRIES IS IDENT ICAL TO THE ISSUE RAISED VIDE GROUND NO.1 IN THE APPEAL OF THE REVENU E RELATING TO ASSESSMENT YEAR 2006-07. FOLLOWING OUR REASONING I N THE PARAS HEREINABOVE WE CONFIRM THE ORDER OF THE CIT (APPEAL S) IN RESPECT OF THE DELETION OF ADDITION OF RS.2 33 038/-. 89. THE NEXT ITEM OF DISALLOWANCE OF RS.1 25 087/- IS IN RESPECT OF IMPREST ACCOUNT OF THE DIRECTORS OF THE ASSESSEE CO MPANY AND CERTAIN ADVANCES MADE TO OTHER CONCERNS. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE IN RESPECT OF ADVANCE MADE TO M/S S HIVAM INDUSTRIES BEING IDENTICAL TO THE PRECEDING YEAR. IN RESPECT OF THE INTEREST FREE ADVANCE MADE TO SISTER CONCERN THE CIT (APPEALS) H ELD THE ASSESSEE TO HAVE SUFFICIENT FUNDS FOR MAKING THE SAID ADVANCE. WE FIND NO MERIT IN THE SAID ORDER OF THE CIT (APPEALS) VIS--VIS INTER EST FREE ADVANCES MADE TO SISTER CONCERN AND TO THE DIRECTORS OF THE ASSES SEE COMPANY. FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN ABHISHEKH INDUSTRIES VS. CIT [286 ITR 1(P& H)] WE CONFIRM THE DISALLOWANCE OF RS.1 25 087/-. GROUND NO.2 RAISED BY THE REVENUE IS THUS PARTLY ALLOWED. 43 ITA NO.1116/CHD/2011 (ASSESSEES APPEAL): (ASSESSMENT YEAR 2008-09) 90. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF AP PEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE WORTHY CIT(A) IN APPEAL NO. 695/10-11 DATED 03.10.2011 HAS ERRED IN PASSING THAT ORDER IN CONTRAVENTION OF THE PROVISIONS OF SECTION 250(6) O F THE INCOME TAX ACT 1961. 2. THAT ON FACTS CIRCUMSTANCES AND LEGAL POSITION OF THE CASE THE WORTHY CIT(A) VIDE PARA 3 OF HIS ORDER HAS ERRED IN CONFIRMING A DDITION OF RS. 78 97 238/- MADE BY LD. AO WHEREIN HE HAD WRONGLY HELD THAT INT EREST ON LOAN FROM INDIA BULLS IS DISALLOWABLE U/S 36(L)(III) OF THE ACT. 3. THAT ON FACTS CIRCUMSTANCES AND LEGAL POSITION OF THE CASE THE WORTHY CIT(A) VIDE PARA 4 OF HIS ORDER HAS ERRED IN CONFIRMING A DDITION OF RS. 17 66 255/- MADE BY LD. AO WHEREIN HE HAD WRONGLY HELD THAT PRO VISIONS OF RULE 14A ARE APPLICABLE OVER INVESTMENT IN SBI MUTUAL FUNDS & OT HERS. FURTHER HE ERRED IN MAKING A WRONG COMPUTATION OF QUATUM OF DISALLOW ANCE U/S 14A OF THE ACT. 4. THAT ON FACTS CIRCUMSTANCES AND LEGAL POSITION OF THE CASE THE WORTHY CIT(A) VIDE PARA 5 OF HIS ORDER HAS ERRED IN CONFIRMING A DDITION OF RS. 6 58 853/- MADE BY LD. AO WHEREIN HE HAD RESTRICTED THE DEDUCT ION U/S 80-IC OF THE ACT BY NOTIONALLY APPORTIONING THE UN-APPORTIONABLE HEA D OFFICE EXPENSES TO THE BADDI UNIT OF THE APPELLANT. 5. THAT ON FACTS CIRCUMSTANCES AND LEGAL POSITION OF THE CASE THE WORTHY CIT(A) VIDE PARA 6 OF HIS ORDER HAS ERRED IN CONFIRMING A DDITION OF RS. 8 37 466/- MADE BY LD. AO WHEREIN HE HAD WRONGLY HELD THAT PRO VISIONS OF PROVISO TO SEC 36(1) (III) IS APPLICABLE OVER CLOSING WORK IN PROG RESS OF THE APPELLANT. 6. THAT THE APPELLANT CRAVES LEAVE FOR ANY ADDITION D ELETION OR AMENDMENT IN THE GROUNDS OF APPEAL ON OR BEFORE THE DISPOSAL OF THE SA ME. 91. GROUND NOS. 1 AND 6 RAISED BY THE ASSESSEE BEIN G GENERAL ARE DISMISSED. 92. GROUND NO.2 RAISED BY THE ASSESSEE IS AGAINST T HE ADDITION OF RS.78 97 238/- UNDER SECTION 36(1)(III) OF THE ACT. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD BOR ROWED RS.500 LACS FROM M/S INDIA BULLS HOUSING FINANCE LTD. FOR PURCHASE O F LAND AND INTEREST ON THIS LAND WAS CAPITALIZED IN THE BOOKS OF ACCOUN T BUT WAS CLAIMED AS A DEDUCTION BY THE ASSESSEE IN ITS COMPUTATION OF INC OME. THE CLAIM OF 44 THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE INTEREST OF RS.78 97 238/- WAS PAID TO M/S INDIA BULLS HOUSING FINANCE LTD. AND THE SAME BEING A BUSINESS ASSET WAS SO DECLARED IN THE SCHEDULE OF FIXED ASSET. FURTHER CLAIM OF THE ASSESSEE WAS THAT THE INTEREST PAID ON THE FUNDS BORROWED FOR INVESTMENT IN LAND FOR BUSINESS PURPOSES WAS AN ALLOWABLE BUSINESS EXPENDITURE NOTWITHSTANDING THE FACTS THAT THE ASSESSEE HAD CAPITALIZED THE INTEREST ON CAPITAL BO RROWED TO THE LAND ACCOUNT THE SAME WAS ALLOWABLE AS AN EXPENDITURE I N THE HANDS OF THE ASSESSEE DESPITE ENTRIES IN THE BOOKS OF ACCOUNT. THE ASSESSING OFFICER HAS GIVEN A FINDING THAT THE LOAN RAISED FORM M/S I NDIA BULLS HOUSING FINANCE LTD. WAS UTILIZED FOR THE PURCHASE OF LAND AND CONSEQUENTLY THE NATURE OF INTEREST PAYMENT AMOUNTING TO RS.78 97 23 8/- WAS CAPITAL IN NATURE AS THE FUNDS RAISED WERE UTILIZED FOR CREATI ON OF FIXED ASSET. THE CIT (APPEALS) UPHELD THE ORDER OF THE ASSESSING OFF ICER. 93. THE ASSESSEE IS IN APPEAL AGAINST THE AFORESAID ADDITION OF RS.78 97 238/-. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE BASIS OF THE ORDER OF THE ASSESSING OFFICER THAT TH E LOAN RAISED FROM M/S INDIA BULLS HOUSING FINANCE LTD. HAS BEEN UTILIZED FOR PURCHASE OF LAND IS INCORRECT. THE LOAN WAS TAKEN AGAINST SECURITY OF CAPITAL ASSET BUT WAS NOT UTILIZED FOR THE PURCHASE OF LAND. THE LEARNED A.R. FOR THE ASSESSEE MADE REFERENCE TO THE WRITTEN SUBMISSIONS FURNISHED BEFORE THE CIT (APPEALS) WHICH ARE REPRODUCED UNDER PARA 3.2 AT PA GE 2 OF THE APPELLATE ORDER. 94. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE ORDERS OF THE AUTHORITIES BELOW. 95. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD RA ISED LOAN OF RS.500 45 LACS FROM M/S INDIA BULLS HOUSING FINANCE LTD. AGAI NST SECURITY OF SCO SITE NO.2 POCKET NO.1 MANI MAJRA U.T. CHANDIGARH. T HE CLAIM OF THE ASSESSEE IS THAT THE SAID PROPERTY WAS ACQUIRED FROM AUCTION HELD ON 21.1.2004 AND INSTALLMENTS WERE PAID IN ASSESSMENT YEARS 2003-04 AND 2005-06. THE LAST INSTALLMENT WAS PAID DURING THE FINANCIAL YEAR 2006 -07 AND THE CONVEYANCE DEED WAS EXECUTED IN THE FINANCIAL YEAR 2006-07. T HE ASSESSEE HAS PLACED ON RECORD THE SANCTION LETTER OF M/S INDIA BULLS HOUSI NG FINANCE LTD. AT PAGE 35 OF THE PROPERTY UNDER WHICH IT IS STATED THAT IT IS A LOAN AGAINST PROPERTY. THE AMOUNT WAS RELEASED IN THE ACCOUNT OF MR.ARUN GOVER MANAGING DIRECTOR WHO WAS CO-APPLICANT ON 16.3.2007 AS PER THE DOCUME NT PLACED AT PAGES 35 AND 36 OF THE PAPER BOOK. THE ASSESSEE HAS THEREAF TER PLACED ON RECORD CURRENT ACCOUNT OF THE ASSESSEE COMPANY AT PAGES 37 ONWARDS UNDER WHICH THE AMOUNT WAS TRANSFERRED FROM THE ACCOUNT OF MR.A RUN GROVER TO THE ASSESSEE COMPANY AND THEREAFTER UTILIZED FOR THE PU RPOSE OF BUSINESS. OUT OF THE TOTAL LOAN RECEIVED BY THE ASSESSEE THE LAST I NSTALLMENT OF RS.93.15 LACS WAS PAID IN FINANCIAL YEAR 2006-07 AND THE BALANCE AMOUNT WAS UTILIZED FOR RUNNING THE BUSINESS OF THE ASSESSEE. THE CLAIM OF LEARNED A.R. FOR THE ASSESSEE IS THAT THE PROVISO TO SECTION 36(1)(III) OF THE ACT CANNOT BE INVOKED IN THE PRESENT CASE AS THE SAID INSTALLMENT WAS PAI D IN ASSESSMENT YEAR 2007- 08 AND NOT DURING THE YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2008-09. THE SAID ASSET WAS BUSINESS ASSET UTILIZED BY THE A SSESSEE. FURTHER PLEA OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT IN VIEW OF T HE UTILIZATION OF THE AMOUNT IN RUNNING THE BUSINESS OF THE ASSESSEE FIRM THERE WAS NO MERIT IN DISALLOWING ANY PART OF THE INTEREST EXPENDITURE. 96. WE FIND FROM THE PERUSAL OF THE ORDERS OF BOTH THE AUTHORITIES BELOW THAT THE ISSUE HAS NOT BEEN CONSIDERED BY THE AUTHO RITIES BELOW IN PROPER PERSPECTIVE AND THE ADDITION HAS BEEN MADE MERELY B ECAUSE THE LOAN HAD BEEN RAISED BY THE ASSESSEE COMPANY. THE FINDING O F THE ASSESSING 46 OFFICER IN THIS REGARD THAT THE AMOUNT HAS BEEN INV ESTED IN THE LAND ACCOUNT DOES NOT COME OUT FROM THE DOCUMENTS FILED BY THE LEARNED A.R. FOR THE ASSESSEE. IN THE INTEREST OF JUSTICE AND IN ORDER TO DECIDE THE ISSUE WE DEEM IT FIT TO RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSIN G OFFICER TO DECIDE THE SAME DE- NOVO AFTER TAKING INTO CONSIDERATION THE VARIOUS DO CUMENTS FILED BY THE ASSESSEE BEFORE US AND ALSO PLEA OF THE ASSESSEE IN ESTABLISHING ITS CASE OF EXPANDING THE SAME AMOUNT FOR THE PURPOSES OF BU SINESS ACTIVITIES OF THE ASSESSEE COMPANY. REASONABLE OPPORTUNITY OF HE ARING SHALL BE AFFORDED TO THE ASSESSEE BY THE ASSESSING OFFICER. GROUND NO.2 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . 97. GROUND NO.3 RAISED BY THE ASSESSEE IS IDENTICAL TO GROUND NO.2 RAISED BY THE ASSESSEE IN ITA NO.693/CHD/2011 AND O UR DECISION IN GROUND NO.2 RAISED BY THE ASSESSEE IN ITA NO.693/CH D/2011 SHALL APPLY MUTATIS TO GROUND NO.3 RAISED BY THE ASSESSEE IN IT A NO.1116/CHD/2011. THE ASSESSING OFFICER SHALL RECOMPUTED THE DEDUCTIO N UNDER SECTION 80IC OF THE ACT. 98. GROUND NO.4 RAISED BY THE ASSESSEE IS IDENTICAL TO GROUND NO.4 RAISED IN ITA NO.1056/CHD/2010 AND OUR DECISION IN GROUND NO.4 RAISED BY THE ASSESSEE IN ITA NO.1056/CHD/2010 SHALL APPLY MUTATIS TO GROUND NO.4 RAISED BY THE ASSESSEE IN ITA NO.1116/CHD/2011 . THE ASSESSING OFFICER SHALL RECOMPUTED THE DEDUCTION UNDER SECTIO N 80IC OF THE ACT. 99. THE ISSUE IN GROUND NO.5 IS AGAINST THE ADDITIO N OF RS.8 37 446/- BY INVOKING THE PROVISIONS OF PROVISO TO SECTION 36 (1)(III) OF THE ACT ON THE CAPITAL WORK IN PROGRESS. THE SAID ISSUE IS ID ENTICAL TO THE ISSUE RAISED BY THE REVENUE VIDE GROUND NO.1 IN ITA NO.68 7/CHD/2011. IN VIEW THEREOF WE REVERSE THE ORDER OF THE CIT (APPE ALS) AND UPHOLD THE ADDITION MADE BY THE ASSESSING OFFICER BY APPLYING THE PROVISO TO 47 SECTION 36(1)(III) OF THE ACT. GROUND NO.5 RAISED BY THE ASSESSEE IS THUS DISMISSED. 100. IN THE RESULT ALL THE THREE APPEALS OF THE AS SESSEE RELATING TO ASSESSMENT YEARS 2006-07 TO 2008-09 ARE PARTLY ALLO WED AND APPEAL OF REVENUE RELATING TO ASSESSMENT YEAR 2006-07 IS DISM ISSED AND RELATING TO ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF JULY 2012. SD/- SD/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30 TH JULY 2012 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR ITAT CHANDIGARH