The ACIT, Circle-4,, Ahmedabad v. GMM Pfaulder Ltd.,, Ahmedabad

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI MUKUL KR. SHRAWAT JM AND D.C.AGRAWAL AM ASSTT. CIT CIRCLE-4 AHMEDABAD. VS. G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR ASHRAM ROAD AHMEDABAD. (APPELLANT) .. (RESPONDENT) G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR ASHRAM ROAD AHMEDABAD VS. ASSTT. CIT CIRCLE-4 AHMEDABAD. (APPELLANT) .. (RESPONDENT) DY. CIT CIRCLE-4 AHMEDABAD. VS. G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR ASHRAM ROAD AHMEDABAD (APPELLANT) .. (RESPONDENT) G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR VS. DY. CIT CIRCLE-4 AHMEDABAD. ITA NO.1241/AHD/2006 ASST. YEAR 2002-03 ITA NO.1476/AHD/2006 ASST. YEAR 2002-03 ITA NO.1926/AHD/2007 ASST. YEAR 2003-04 ITA NO.2002/AHD/2007 ASST. YEAR 2003-04 ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 2 ASHRAM ROAD AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSTT. CIT CIRCLE-4 AHMEDABAD. VS. G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR ASHRAM ROAD AHMEDABAD. (APPELLANT) .. (RESPONDENT) AND G M M PFAULDER LTD B. JADAV CHAMBERS 3 RD FLOOR ASHRAM ROAD AHMEDABAD VS. ASSTT. CIT CIRCLE-4 AHMEDABAD. (APPELLANT) .. (RESPONDENT) REVENUE BY :- SHRI M. MATHIVANAN DR ASSESSEE BY:- SHRI S. N. SOPARKAR & SHRI D. K. PARIKH ARS O R D E R PER D.C. AGRAWAL ACCOUNTANT MEMBER. THESE ARE GROUP APPEALS INVOLVING COMMON ISSUES AN D HENCE THEY ARE TAKEN UP TOGETHER FOR THE SAKE OF CONVENIENCE. ITA NO.1241/AHD/2006 ASST. YEAR 2002-03 (REVENUES APPEAL ) 2. IN THIS APPEAL FOLLOWING GROUNDS ARE RAISED :- ITA NO.12/AHD/2008 ASST. YEAR 2004-05 ITA NO.4402/AHD/2007 ASST. YEAR 2004-05 ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 3 (1) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF RS.74 16 526/- BEING T HE CLAIM OF BAD DEBTS RELYING UPON THE HONBLE ITAT DELHI BENCH S DECISION IN THE CASE OF DCIT VS. VATVISION PRODUCTS LTD. 84 TTJ DELHI WITHOUT TAKING INTO CONSIDERATION THE DECISI ON OF HONBLE GUJARAT HIGH COURT IN THE CASE OF AHMEDABAD ELECTRI CITY CO. LTD. (2) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE AO NOT TO EXCLUDE 90% OF OTHER INCOME BY WAY OF DEBT RECOVERY DISCOUNT AND INSURANCE CLAIM ETC. WH ILE COMPUTING THE DEDUCTION U/S 80 HHC. (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. (4) IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EFFECT. ITA NO.1476/AHD/2006 ASST. YEAR 2002-03 (ASSESSEES APPEAL) 3. IN ITS APPEAL FOR ASST. YEAR 2002-03 THE ASSESSE E HAS RAISED FOLLOWING GROUNDS :- (1) THE LD. CIT(A) FAILED TO UNDERSTAND THE FACTS AND C IRCUMSTANCES OF THE CASE. (2) THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS.1 20 930/- BEING ADJUSTMENT WITH REGARD TO INTER NATIONAL TRANSACTIONS WITH SUZHOU PFAUDLER GLASS LINED EQUIP MENT CO. LTD. CHINA FOR SALE OF FIRT 1912. HE HAS CONSIDERED THE SUBMISSION OF THE VOUCHERS CLARIFYING THE ACTUAL FA CTS AS ADDITIONAL EVIDENE THOUGH THE SAME WAS SUBMITTED BE FORE THE AO AT THE ASSESSMENT STAGE. (3) (A) THE LD. CIT(A) ERRED IN HOLDING THAT THE ACQUIS ITION OF COMPUTER SOFTWARE OF RS.508728/- IS THE INTANGIBLE ASSET AND THE RATE OF DEPRECIATION IS 25% AGAINST CLAIM OF DE PRECIATION @ 60% UNDER THE HEAD COMPUTERS. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 4 (B) THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF SOFTWARE EXPENSES RS.4 32 248/- CLAIMED AS REVENUE EXPENDITURE AFTER ALLOWING DEPRECIATION @ 25%. (4) (A) THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOW ANCE OF INTEREST OF RS.10 70 000/- ON THE ASSUMPTION THAT B ORROWED MONEY HAS BEEN USED PROPORTIONATELY FOR ACQUISITION OF INVESTMENTS AS ON BALANCE SHEET DATE. ALTERNATIVELY WITHOUT PREJUDICE TO THE ABOVE THE LD. CIT(A) ERRED IN NOT ACCEPTING THE APPELLANTS CONTENTION T HAT THE DISALLOWANCE SHOULD BE IN PROPORTION TO THE INCOME EARNED AND NOT IN PROPORTION TO THE INVESTMENTS MADE. (B)THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWA NCE RS.1 20 000/- ON ACCOUNT OF ADMINISTRATIVE GENERAL EXPENSES AGAINST DIVIDEND INCOME OR INCOME ARISING FROM SALE OF INVESTMENTS ON THE ASSUMPTION THAT CERTAIN ADMINIST RATIVE EXPENSES WOULD ALSO HAVE BEEN INCURRED FOR MAKING MONITORING AND SELLING OF INVESTMENTS. (5) THE LD. CIT(A) ERRED IN SUSTAINING THE ADDITION OF RS.15 700/- BEING FEES PAID FOR OPINION ON BUY BACK OF SHARES CONSIDERING IT OF CAPITAL NATURE. (6) THE LD. CIT(A) ERRED IN CONFIRMING THE NON ALLOWANC E OF CLAIM OF ACCRUED INTEREST RS.8 33 185/- PAYABLE TO APSEB AS PER ORDER OF THE CITY CIVIL COURT. (7) THE LD. CIT(A) ERRED IN CONFIRMING THE ASSESSMENT O F THE INTEREST INCOME OF RS.19 51 000/- AS INCOME FROM OT HER SOURCES AGAINST INCOME FROM BUSINESS AS RETURNED BY THE APP ELLANT. (8) THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN INCLUDING THE SALES TAX AND EXCISE DUTY RS.8 13 47 795/- IN TOTAL TURNOVER FOR THE PURPOSE OF THE COMPUTATION OF DEDU CTION U/S 80 HHC OF THE IT ACT 1961. (9) THE LD. CIT(A) ERRED IN DIRECTING THE AO TO INCLUDE THE SERVICE CHARGES RS.18 98 485/- IN TOTAL INCOME TURNOVER WHI LE COMPUTING DEDUCTION U/S 80 HHC OF THE IT ACT 1961. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 5 (10) THE LD. CIT(A) ERRED IN DIRECTING THE AO TO INCLUDE THE SALE OF SCRAP RS.32 20 959/- IN TOTAL TURNOVER WHILE COMPUT ING DEDUCTION U/S 80 HHC OF THE IT ACT 1961. (11) THE LD. CIT(A) ERRED IN NOT DECIDING THE ISSUE REGA RDING EXCLUSION OF 90% OF SALE OF SCRAP RS.32 20 959/- FR OM THE BUSINESS INCOME FOR THE PURPOSE OF COMPUTATION OF D EDUCTION U/S 80 HHC OF THE IT ACT 1961. (12) THE LD. CIT(A) ERRED IN NOT DECIDING THE ISSUE REGA RDING NOT TO EXCLUDE 90% OF INTEREST INCOME RS.19 51 000/- FROM THE BUSINESS INCOME FOR THE PURPOSE OF COMPUTATION OF D EDUCTION U/S 80 HHC OF THE IT ACT 1961 AS THE INTEREST PAYM ENT IS MORE THAN THE INTEREST INCOME. (13) THE LD. CIT(A) ERRED IN NOT DIRECTING THE AO FOR CA LCULATING BUSINESS PROFIT AS PER ASSESSMENT ORDER RS.63 65 40 6/- INSTEAD OF RS.24 77 032/- AS RETURNED BY THE APPELLANT. IT IS CONTENDED THAT THE ASSESSED BUSINESS PROFIT SHOULD HAVE CONSI DERED AS BUSINESS INCOME AND NOT THE BUSINESS INCOME AS RETU RNED BY THE APPELLANT FOR THE PURPOSE OF COMPUTATION OF DEDUCTI ON U/S 80 HHC OF THE IT ACT 1061. (14) THE LD. CIT(A) ERRED IN CONFIRMING THE CHARGING OF INTEREST U/S 234D OF THE IT ACT 1961 ON THE EXCESS REFUND GRANT ED U/S 143(1) PRIOR TO THE OPERATION OF THE PROVISIONS OF SECTION 234D I.E. 01/06/2003. IT MAY BE NOTED THAT THE REFUND WA S GRANTED AS PER INTIMATION DATED 03/01/2003 U/S 143(1). (15) THE APPELLANT PRAYS FOR APPROPRIATE RELIEF ON THE A BOVE GROUNDS OF APPEALS. (16) THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND SU BSTITUTE OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL AS CIRC UMSTANCES MAY JUSTIFY. ITA NO.1476/AHD/2006 ASST. YEAR 2002-03 (ASSESSEES APPEAL) 4. FIRST WE TAKE UP ASSESSEES APPEAL FOR ASST. YEA R 2002-03. THE FIRST GROUND OF THIS APPEAL IS GENERAL AND DOES NOT REQUI RE ANY SPECIFIC ADJUDICATION. THE SAME IS ACCORDINGLY REJECTED. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 6 5. THE SECOND GROUND RELATES TO ADDITION OF RS.1 20 930/- BEING ADJUSTMENT MADE BY THE AO IN RESPECT OF PRICE PAID BY THE ASSESSEE IN INTERNATIONAL TRANSACTIONS WITH SUZHOU PFAUDLER GLA SS LINED EQUIPMENT CO. LTD. CHINA. THIS GROUND WAS NOT PRESSED BY THE ASSESSEE AND HENCE IT IS REJECTED. 6. GROUND NO.3(A) RELATES TO ALLOWABILITY OF EXPEND ITURE OF PURCHASES OF SOFTWARE AND IN THE ALTERNATIVE DEPRECIATION @ 6 0%. THE AO FOUND THAT ASSESSEE HAS CLAIMED DEPRECIATION @ 60% ON THE SOFTWARE EXPENSES OF RS.6 78 304/-. IN ADDITION TO THIS ASSESSEE HAS FURTHER CLAIMED EXPENSES ON PURCHASE OF SOFTWARE AT RS.5 76 330/-. WHEREAS FIRST EXPENDITURE WAS CLAIMED AS CAPITAL AND DEPRECIATION @ 60% WAS CLAIMED THE OTHER EXPENDITURE WAS CLAIMED AS REVENUE EXPEND ITURE. THE AO TREATED THE EXPENDITURE OF RS.5 76 330/- AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION THEREON AT 25% WHEREAS HE REJE CTED THE CLAIM OF DEPRECIATION @ 60% AND ALLOWED @ 25% ON RS.6 78 304 /-. FOR ARRIVING AT HIS DECISION THE AO RELIED ON THE DECISION OF HO N. RAJASTHAN HIGH COURTS DECISION IN THE CASE OF CIT VS. ARAWALI CON STRUCTION CO. (P) LTD. 259 ITR 30. ACCORDING TO THE AO WHAT THE ASSESSEE H AD PURCHASED WAS PROGRAMMES FOR LONG-TERM USE AND HENCE TREATED THEM AS CAPITAL AND ALSO TREATED THEM AS ORDINARY PLANT AND MACHINERY ELIGIB LE FOR DEPRECIATION @ 25%. 7. THE LD. CIT(A) CONFIRMED THE ORDER OF THE AO BY HOLDING THAT BY INCURRING EXPENDITURE ON SOFT WARE THE ASSESSEE GET S RIGHT TO USE SOFTWARE. THEY ARE NOT GOODS WHICH COULD BE SOLD AT THE COUNT ER. THE ASSESSEE ACQUIRED ONLY INTANGIBLE RIGHTS AND HENCE IT IS ENT ITLED FOR DEPRECIATION @ 25%. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 7 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. IN OUR CONS IDERED VIEW WHERE ASSESSEE PURCHASES SYSTEM SOFTWARE WHICH ARE INTEG RAL PART OF COMPUTER HARD-WARE AND WITHOUT WHICH COMPUTER SYSTEM WILL NO T WORK THEY WOULD BE TREATED AS CAPITAL EXPENDITURE AS SUCH SOFT-WARE CANNOT BE TREATED DIFFERENTLY THAN THE COMPUTER HARD-WARE. ONCE IT IS FOUND THAT THE SYSTEM SOFTWARE ARE INTEGRAL PART TO THE COMPUTER HARDWARE SYSTEM THEN THEY WILL ALSO BE ENTITLED FOR SAME RATE OF DEPRECIATION AS C OMPUTER HARDWARE. SINCE NO SPECIFIC RATE IS PRESCRIBED IN THE RULE FOR COMP UTER SOFTWARE THEY HAVE TO BE HELD AS PART OF COMPUTER SYSTEM AND HENCE THE Y ARE ELIGIBLE FOR SAME RATE OF DEPRECIATION. WE ACCORDINGLY ALLOW DEPRECIA TION @ 60% ON SYSTEM SOFTWARE ALSO AS CLAIMED BY THE ASSESSEE. SO FAR AS CLAIM OF RS.5 08 728/- IS CONCERNED THE AO HAS NOT SHOWN THA T THEY ARE SYSTEM SOFTWARE BUT IN FACT THEY ARE ONLY APPLICATION SOFT WARE. THE ASSESSEE DOES NOT GET ANY RIGHT OVER THEM. THEY ARE TO BE MODIFIE D FROM TIME TO TIME WHAT ASSESSEE GETS IS LICENCE TO USE THEM AND THEY ARE NOT INTEGRAL TO COMPUTER SYSTEM. ACCORDINGLY THEY ARE REVENUE EXPEN DITURE AND HAS TO BE ALLOWED. SIMILAR VIEW HAS BEEN TAKEN BY HON. PUNJAB & HARYANA HIGH COURT IN CIT VS. VARINDER AGRO CHEMICALS LTD. (2009 ) 309 ITR 272 (P & H) WHEREIN IT IS HELD AS UNDER :- 6. IT IS WELL SETTLED THAT FOR CLAIMING DEDUCTION APART FROM EXPENDITURE BEING FOR BUSINESS THE SAME HAS TO BE REVENUE EXPENDITURE. T HOUGH THERE IS NO RIGID RULE TO DETERMINE WHEN EXPENDITURE IS CAPITAL OR REVENUE G ENERALLY ACCEPTABLE TEST IS WHERE ADVANTAGE IS FOR ENDURING NATURE IT MAY BE CAPITAL EXPENDITURE WHILE IF THE EXPENDITURE IS FOR RUNNING OF THE BUSINESS IT IS O F REVENUE NATURE. SOME OF THE LEADING JUDGMENTS OF THE HONBLE SUPREME COURT DEALING WITH THE ISSUE ARE : ASSAM BENGAL CEMENT CO. LTD. VS. CIT (1955) 27 ITR 34 CIT VS. V AZIR SULTAN AND SONS (1959) 36 ITR 175 EMPIRE JUTE CO. LTD. VS. CIT (1980) 124 IT R 1(SC); (1980) 4 SCC 25 ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT (1989) 177 ITR 377 (SC); AIR 1989 SC 1913 AND CIT VS. GENERAL INSURANCE CORPORATION (200 6) ITR 232 (SC). 7. IN ALEMBIC CHEMICAL WORKS CO. LTD.SCASE (SUPRA) THE ISSUE WAS WHETHER THE EXPENDITURE ON TECHNICAL KNOW-HOW UNDER AN AGREEMEN T WITH A FOREIGN COMPANY WAS REVENUE EXPENDITURE. ANSWERING THE QUESTION IN FAVO UR OF THE ASSESSEE THE HONBLE SUPREME COURT OBSERVED (IN PARAGRAPH 13) THAT IT WO ULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES IN RESEARCH AND TO ATTRIBUTE A DEGRE E OF ENDURABILITY AND PERMANENCE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 8 TO THE TECHNICAL KNOW-HOW AT ANY PARTICULAR STAGE I N FAST CHANGING AREA OF SCIENCE. THE STATE OF ART IS CONSTANTLY UPDATED SO THAT KNOW -HOW CANNOT BE SAID TO BE THE ELEMENT OF REQUISITE DEGREE OF DURABILITY TO QUALIF Y AS ENDURING CAPITAL ASSET. QUESTION OF TECHNICAL KNOW-HOW DID NOT AMOUNT TO NEW OR FRES H VENTURE AND WAS FOR ENABLING CARRYING ON BUSINESS IN A BETTER WAY. REFERRING TO EMPIRE JUTES CASE (SUPRA) IT WAS OBSERVED THAT THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCURRED FOR AN ADVANTAGE OF ENDURING BENEFIT MAY BE REVENUE UNLES S THE ADVANTAGE WAS IN THE CAPITAL FIELD. 8. THERE IS NOTHING TO SHOW THAT THE SOFTWARE USED BY THE ASSESSEE WAS OF ENDURING NATURE AND WILL NOT BECOME OUTDATED. SINCE TECHNOLOGY IS FAST CHANGING AND DAY-BY-DAY SYSTEMS ARE BEING DEVELOPED IN A NEW WAY SOFT WARE MAY BE NEEDED LIKE RAW MATERIAL. THE VIEW TAKEN BY THE TRIBUNAL IS CER TAINLY A POSSIBLE VIEW. RESPECTFULLY FOLLOWING THE ABOVE DECISION WE ALLOW THE CLAIM OF THE ASSESSEE THAT APPLICATION SOFTWARE IS REVENUE IN NA TURE AND EXPENDITURE THEREON IS DEDUCTIBLE. THIS GROUND NO.3 IS ALLOWED. 9. GROUND NO.4(A) RELATES TO DISALLOWANCE OF PROPOR TIONATE INTEREST OF RS.10 70 000/-. THE AO DISALLOWED PROPORTIONATE INT EREST OUT OF INTEREST PAID ON BORROWED FUNDS ON THE ASSUMPTION THAT BORRO WED MONEY HAS BEEN USED FOR ACQUISITION OF INVESTMENT AS ON BALANCE SH EET DATE. AS PER AO THE COMPANY HAD MADE TOTAL INVESTMENT TO THE EXTENT OF RS.1008.51 LACS IN THE EQUITY SHARES AND MUTUAL FUNDS. DURING THE Y EAR THE INVESTMENT IN SHARES AND MUTUAL FUNDS WERE INCREASED FROM 940.32 LACS TO RS.1008.51 LACS. OUT OF THIS INVESTMENT TO THE TUNE OF RS.61 LACS IS MADE IN SUBSIDIARY COMPANIES NAMELY KARAMSAD INVESTMENT LTD . & KARAMSAD HOLDING LTD. SINCE THE ASSESSEE HAD PURCHASED SHARE S IN THOSE COMPANIES BEING SISTER CONCERNS THE NATURE OF INVESTMENT IS THE SAME AS IN SHARES AND MUTUAL FUND OF OTHER COMPANIES. THE ASSESSEE CO MPANY HAD EARNED DIVIDEND INCOME OF RS.94.47 LACS DURING THE YEAR AN D HAS CLAIMED AS EXEMPT UNDER SECTION 10(33). INVOKING SECTION 14A A O HELD THAT EXPENDITURE FOR EARNING EXEMPTED INCOME CANNOT BE A LLOWED AS DEDUCTION. SIMILARLY THE AO IDENTIFIED THAT ADMINI STRATIVE EXPENDITURE WHICH COULD HAVE BEEN INCURRED FOR HANDLING THE INV ESTMENT IN SHARES AND ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 9 MUTUAL FUND. A PART OF SUCH EXPENDITURE WAS CONSIDE RED ATTRIBUTABLE TO INVESTMENT MADE IN SISTER CONCERNS THE INCOME THE REFROM WAS EXEMPT UNDER SECTION 10(33). THE ASSESSEE SUBMITTED THAT I T HAS ENOUGH WORKING CAPITAL AND IT HAS NOT INCREASED ITS BORROWINGS THI S YEAR. THEREFORE IT CANNOT BE SAID THAT INVESTMENT IN SUBSIDIARY WAS DO NE DURING THIS YEAR OUT OF ANY BORROWED CAPITAL MADE THIS YEAR. REGARDING A DMINISTRATIVE EXPENDITURE SOUGHT TO BE DISALLOWED ASSESSEE SUBMIT TED BEFORE THE AO THAT THERE IS NO RELATIONSHIP OF SUCH EXPENDITURE W ITH THE INVESTMENT ACTIVITIES. NO SPECIFIC STAFF HAS BEEN APPOINTED FO R THIS PURPOSE. THE AO HOWEVER DID NOT AGREE AND DISALLOWED PROPORTIONATE INTEREST BY HOLDING THAT ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THAT INTEREST FREE FUNDS WERE ALONE USED FOR MAKING SUCH INVESTMENT IN SISTER CONCERNS. THE ASSESSEE HAS NOT MAINTAINED SEPARATE ACCOUNT FOR MA KING INVESTMENT ARE OUT OF MIXED FUNDS. THERE IS NO NEXUS BETWEEN THE I NVESTMENT AND INTEREST FREE FUNDS. ONUS IS ON THE ASSESSEE DURING THE YEAR AND ALSO IN EARLIER YEARS THAT INVESTMENT FOR EARNING CAPITAL G AINS AND DIVIDEND ARE MADE OUT OF INTEREST FREE CAPITAL. AFTER LONG AND D ETAILED DISCUSSION THE AO DISALLOWED PRO-RATA INTEREST WORKED OUT AT RS.10 .70 LACS. IN ADDITION HE ALSO DISALLOWED BY ESTIMATE ADMINISTRATIVE EXP ENDITURE OF RS.1 20 000/-. 10. THE LD. CIT(A) CONFIRMED THE ADDITION BY HOLDIN G THAT HAD THE AMOUNT NOT INVESTED IN SHARES AND UNITS THE LIABIL ITY OF BANK AND FINANCIAL INSTITUTION WOULD HAVE REDUCED BY THAT AM OUNT AND AMOUNT OF PAYMENT OF INTEREST WOULD HAVE BEEN LESS. THE ASSES SEE HAS NOT PROVED BY ANY EVIDENCE THAT INVESTMENT IN SHARES WAS EXCLUSIV ELY FROM INTEREST FREE FUNDS AS NO SEPARATE ACCOUNT FOR INVESTMENT IN SHA RES HAVE BEEN KEPT. ONCE THEY ARE MIXED FUNDS THEN PROPORTIONATE INTERE ST HAS TO BE DISALLOWED. FOR ARRIVING AT THIS DECISION THE LD. C IT(A) FOLLOWED THE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 10 DECISION OF TRIBUNAL IN H. K. BHATT VS. ITO ITAT A HMEDABAD BENCH 85 TTJ 872. 11. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT FIRS TLY BORROWED CAPITAL HAS NOT INCREASED THIS YEAR AND THEREFORE INVESTM ENT MADE IN THE CURRENT YEAR IN SUBSIDIARIES CANNOT BE HELD OUT OF BORROWED INTEREST BEARING CAPITAL. FURTHER PROFIT THIS YEAR IS RS.11 CRORES. THEREFORE ANY INVESTMENT MADE IN SHARES CAN BE TREATED TO BE COMING OUT OF C URRENT PROFITS UNLESS AO IS ABLE TO ESTABLISH A NEXUS THAT INVESTMENT IN SHARES HAS GONE OUT OF INTEREST BEARING FUNDS. ONCE THERE ARE MIXED FUNDS THEN PRESUMPTION GOES IN FAVOUR OF THE ASSESSEE THAT INVESTMENT IN SHARES IS OUT OF INTEREST FREE CAPITAL UNLESS IT IS PROVED OTHERWISE BY THE AO. HE THEN REFERRED TO PAGES 17 & 19 OF THE PAPER BOOK TO POINT OUT THAT INVESTM ENT WAS MADE FROM THE BOMBAY OFFICE WHERE THERE WAS NO BORROWING. IT HAD ONLY CURRENT ACCOUNT. IN ADDITION TO ABOVE ARGUMENTS THE LD. AR SUBMITTED THAT NO SUCH DISALLOWANCE HAS BEEN MADE IN EARLIER YEARS T HEREFORE FOLLOWING THE PRINCIPLES OF CONSISTENCY NO DISALLOWANCE SHOULD BE MADE THIS YEAR AS WELL. 12. IN SUPPORT OF HIS ARGUMENTS THE LD. AR REFERRED TO THE DECISIONS OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. 323 ITR 518 (P & H); OF ITAT DELHI BENC H E IN THE CASE OF MINDA INVESTMENTS LTD. VS. DCIT CIRCLE 6(1) NE W DELHI IN ITA NO.4046/DELH/2009 ASST. YEAR 2006-07; OF ITAT MUMB AI BENCH G IN THE CASE OF M/S GODREJ AGROVET LTD. VS. ACIT RG.10 (2) MUMBAI IN ITA NO.1629/MUM/09 ASST. YEAR 2005-06 & THAT OF HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPN. VS. CIT 298 ITR 298 (SC) AND RELIANCE UTILITIES & POWER LTD. 313 ITR 340 (BOM). HE ALSO REFERRED TO ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 11 THE JUDGMENTS REPORTED IN 192 ITR 265 AND 273 ITR 5 18 IN SUPPORT OF ABOVE PROPOSITION. 13. ON THE OTHER HAND THE LD. DR RELIED ON THE ORD ERS OF AUTHORITIES BELOW. HE FURTHER REFERRED TO THE DECISION OF PUNJA B & HARYANA HIGH COURT IN CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P & H) AND OF HON. BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (2010) 328 ITR 81 (BOM) AND SUBMITTED THAT THE ISSUE REGAR DING BIFURCATION OF EXPENDITURE MAY GO TO THE AO FOR DETERMINING REASON ABLE DISALLOWANCE. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE MATTER WOULD GO TO THE FILE OF AO AS PER THE DECISION OF HON. BOMBAY HIGH COURT IN TH E CASE OF GODREJ BOYCE MFG. CO. LTD. (SUPRA) ONLY WHEN IT IS HELD TH AT SOME AMOUNT IS REQUIRED TO DISALLOWED AS THERE IS A NEXUS BETWEEN THE EXEMPTED INCOME AND INVESTMENT I.E. IF REVENUE IS ABLE TO SHOW THA T INTEREST BEARING CAPITAL HAS BEEN INVESTED IN SHARES BUT WHERE NO SU CH NEXUS IS ESTABLISHED THE QUESTION OF DETERMINING ANY DISALLOWANCE DOES N OT ARISE AND THEREFORE MATTER NEED NOT BE SENT TO THE FILE OF A O AS NO DETERMINATION OF ANY DISALLOWANCE WOULD BE NECESSARY. IN THE PRESENT CASE WE NOTICE THAT LOAN FUNDS HAVE DECREASED THIS YEAR AS COMPARED TO EARLIER YEARS. EVEN THOUGH INVESTMENTS HAVE INCREASED FROM RS.940.32 LA CS TO RS.1008.51 LACS BUT SUCH INCREASE IN INVESTMENT CANNOT BE LINK ED TO ANY BORROWED FUNDS THIS YEAR AS ASSESSEE HAS IN FACT NOT BORROWE D ANY ADDITIONAL FUND THIS YEAR. PRIOR TO THE DECISION OF HON. SUPREME CO URT IN THE CASE OF HONBLE SUPREME COURT IN S.A. BUILDERS VS. CIT 288 ITR 1(SC) ONUS WAS CONSIDERED ON THE ASSESSEE TO SHOW THE NEXUS BE TWEEN THE INTEREST FREE FUNDS AND INVESTMENT ON WHICH NO INCOME IS EAR NED. AFTER S.A. BUILDERS CASE (SUPRA) ONUS IS CONSIDERED SHIFTED T O THE REVENUE AND AO ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 12 HAS TO SHOW THAT INTEREST BEARING CAPITAL ALONE WER E INVESTED IN INVESTMENT ON WHICH NO INCOME WAS EARNED. HON. SUPR EME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT (2008) 298 ITR 298 (SC) HELD WHERE ASSESSEE HAD SUFFICIENT PROFITS IN THE CURREN T YEAR THEN INTEREST FREE ADVANCES CAN BE CONSIDERED TO BE FLOWING FROM SUCH PROFITS. HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES & P OWER LTD. (2009) 313 ITR 340 (BOM) HELD THAT IF THERE ARE FUND AVAIL ABLE BOTH INTEREST FREE AND INTEREST BEARING THEN A PRESUMPTION ARISE THAT INVESTMENT WERE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT N O DISALLOWANCE OF INTEREST PAID ON BORROWED FUNDS WOULD BE NECESSARY. ONCE SUCH PRESUMPTION IS ESTABLISHED CLAIM OF INTEREST WAS AL LOWABLE. 15. THERE IS ANOTHER ASPECT OF THE MATTER. IF THE A SSESSEE HAS MADE INVESTMENT IN SUBSIDIARIES OUT OF MIXED FUNDS AND F OR COMMERCIAL EXPEDIENCY THEN NO INTEREST OUT OF PAYMENT MADE ON BORROWED FUNDS CAN BE DISALLOWED AS HELD IN S. A. BUILDERS LTD. VS. CI T (2007) 288 ITR 1 (SC). HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS . HERO CYCLES LTD. (2010) 323 ITR 518 (P & H) HELD THAT NO DISALLOWANC E OUT OF INTEREST PAYMENT IS PERMISSIBLE IF AO DOES NOT ESTABLISH NEX US BETWEEN THE EXPENDITURE INCURRED AND INCOME GENERATED. 16. SINCE ASSESSEE HAD SUFFICIENT PROFITS GENERATED THIS YEAR AND IT HAD MIXED FUNDS AND NO NEXUS IS ESTABLISHED BY THE AO A S TO WHETHER INVESTMENT WAS MADE OUT OF INTEREST BEARING FUNDS DISALLOWANCE OF INTEREST CANNOT BE MADE. SIMILARLY NO DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE CAN BE MADE AS THERE IS NO DIRECT NEXUS . AS A RESULT THIS GROUND IS ALLOWED. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 13 17. GROUND NO.5 IS NOT PRESSED BY THE ASSESSEE AND HENCE IT IS TREATED AS REJECTED. 18. GROUND NO.6 RELATES TO ACCRUED INTEREST OF RS.8 33 185/- PAYABLE TO APSEB AS PER ORDER OF THE CITY CIVIL COURT. THIS IS SUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN ITA NO.1400 /AHD/2001 ASST. YEAR 1998-99 IN THE CASE OF ADDL. CIT SR-8 AHMEDA BAD VS. GMM PFAULDER LTD. AS UNDER :- 4. THE SECOND GROUND IS PERTAINING TO RS.8 33 185/ - BEING INTEREST PAID TO APSEB. DURING THE ASSESSMENT PROCEEDING TH E AO NOTICED THAT THE COMPANY HAS CLAIMED AN AMOUNT OF RS.8 33 185/- BEING PAYABLE TO ANDHRA PRADESH STATE ELECTRICITY BOARD. THE ASSESSE E COMPANY HAS CLAIMED THIS DEDUCTION ON ACCOUNT OF THE CITY CIVIL COURT DATED 16.12.1994. A COPY OF THE SAID ORDER HAS BEEN FILED IN ASST. YEAR 1995-96 AND 1996-97. HOWEVER THE ASSESSEE COMPANY HAS FILE D PETITION BEFORE THE HONBLE HIGH COURT OF ANDHRA PRADESH. THE HIGH COUR T HAS GRANTED STAY AGAINST THE OPERATION OF CITY CIVIL COURTS ORDER. THE AO NOTICED THIS FACT AND HAS ALSO NOTICED THAT IN ASST. YEAR 1995-9 6 AND THE CLAIM OF DAMAGE AND INTEREST HAS BEEN DISALLOWED IN ASST. YE AR 1995-96 AND SUBSEQUENT ASST. YEARS. IN ASST. YEAR 1995-96 TO 19 97-98 THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE COMPANY. THE AO N OTED THE FACT THAT SINCE THE DEPARTMENT HAS FILED THE FURTHER APPEAL B EFORE ITAT AND IN VIEW OF MAINTAINING THE CONSISTENCY THE AO MADE THE ADDI TION. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE FOLLOWING THE EAR LIER YEAR ORDER. THE AR FILED A COPY OF THE ORDER OF ITAT FOR ASST. YEAR 1995-96 AND 1996-97 (SUPRA) AND POINTED OUT THAT THIS ISSUE HAS BEEN DE CIDED AGAINST THE ASSESSEE BY THE ITAT. THE FINDING OF THE ITAT IN PA RA 20 & 21 WHICH IS REPRODUCED AS BELOW :- WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAT ERIAL ON RECORD AS WELL AS THE CASE LAW CITED BY RIVAL PARTIES. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE COMPANY HAD SUPPLIED A HYDROGEN PLANT TO T HE ANDHRA PRADESH STATE ELECTRICITY BOARD (APSEB) IN THE YEAR 1981. T HERE WAS AN EXPLOSION DURING THE WARRANTEE PERIOD AND THE BOARD HAD CLAIMED DAMAGES AMOUNTING TO RS.2 36 38 477/- PLUS INTEREST THEREON IN THE CITY CIVIL COURT AT HYDERABAD. THE ASSESSEE HAD ALSO FIL ED COUNTER CLAIM. AFTER HAVING CONSIDERED THE CASE THE CITY CIVIL CO URT PASSED A DECREE IN FAVOUR OF THE BOARD AND AGAINST THE ASSESSEE ON 16 TH DECEMBER 1994 FOR ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 14 RS.1 63 85 973/- PLUS INTEREST AT 12 PER CENT FROM THE DATE OF FILING THE SUIT TILL THE REALIZATION. THE TOTAL AMOUNT OF DAMA GES INCLUSIVE OF INTEREST FOR THE PERIOD 2.9.1993 TO 16.12.1994 WAS AT RS.1 6 3 85 973/-. THE COURT ALSO ASKED TO PAY CLAIM OF RS.18.83 LAKHS TO THE AS SESSEE COMPANY. LATER THE ASSESSEE COMPANY MOVED THE DIVISION BENCH OF HI GH COURT OF ANDHRA PRADESH FOR STAYING THE AFORESAID DECREE WHEREAS T HE APSEB ALSO FILED AN APPEAL FOR INCREASED CLAIM OF RS.3.93 CRORE. THE HONBLE HIGH COURT OF ANDHRA PRADESH HIGH COURT HAS PASSED AN INTERIM ORDER ON 28.2.1995 IN CROSS APPEALS OF BOTH THE SIDES BY VIRTUE OF WH ICH DECREE PASSED IN FAVOUR OF THE BOARD COULD NOT BE EXECUTED. SINCE TH ERE IS A CLEAR DIRECTION OF THE HON. HIGH COURT OF ANDHRA PRADESH BEFORE WHI CH BOTH THE SIDES ARE IN APPEAL WITH REGARD TO ENHANCEMENT OF COMPENS ATION FROM BOARDS SIDE AND REDUCTION IN COMPENSATION FROM ASSESSEES SIDE AND IT IS A CASE OF CONTRACTUAL LIABILITY THEREFORE IN OUR CONSIDE RED VIEW THE LIABILITY WITH REGARD TO DECRETAL AMOUNT CANNOT BE HELD TO BE ASCERTAINED ONE. THEREFORE THE AOS ACTION IS LEGALLY CORRECT IN DI SALLOWING THE CLAIM OF THE ASSESSEE IN THIS REGARD. SUPPORT CAN BE TAKEN F ROM VARIOUS DECISIONS AS CITED BY THE LD. DR INCLUDING HON. SUPREME COURT DECISION IN THE CASE OF CIT VS. GAJAPATTI NAIDU 53 ITR 114 AND SWADESHI COTTON AND FLOUR MILLS (P) LTD. 53 ITR 134 AND THE DECISION OF HON. MADHYA PRADESH HIGH COURT IN THE CASE OF CIT VS. RATLAM STRAW BOARD 152 ITR 425. THIS VIEW GETS FURTHER SUPPORT FROM HON. GUJARAT HIGH COURT I N THE CASE OF CIT VS. ASHWIN VANASPATI INDUSTRIAL (P) LTD. 196 CTR (GUJ) 117 IN WHICH FOLLOWING CONCLUSION HAS BEEN DONE: DISPUTED LIABILITY TOWARDS DAMAGES CLAIMED BY CUST OMER FROM ASSESSEE FOR THE LATTERS FAILURE TO SUPPLY PART OF THE CONTRACTED GOODS WHICH WAS PENDING FOR ADJUDICATION BEFORE THE SOLE ARBITRATOR AND WAS NOT DISCHARGED DURING THE RELEVA NT YEAR WAS NOT ALLOWABLE AS DEDUCTION. 21. IN VIEW OF THE ABOVE NOTED PRONOUNCEMENTS AND D ISCUSSION HELD WE HOLD THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN AL LOWING THE CLAIM OF THE ASSESSEE WITH REGARD TO CONTRACTUAL LIABILITY AGAIN ST WHICH DISPUTE IS PENDING IN THE HON. HIGH COURT OF ANDHRA PRADESH DU RING THE YEAR UNDER CONSIDERATION. AS SUCH HIS ORDER IS REVERSED AND TH AT OF THE AO RESTORED. SINCE THE FACTS OF THE CASE UNDER CONSIDERATION ARE IDENTICAL AND BOTH THE LOWER AUTHORITIES HAVE FOLLOWED THEIR EARLIER ORDER S. IN VIEW OF THAT WE FIND THAT THE ITAT HAS DECIDED THE ISSUE IN FAVOUR OF THE REVENUE. IN VIEW OF THAT WE ALSO SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THAT OF THE AO. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 15 SINCE THE ISSUE IS ALREADY COVERED IN EARLIER ASST. YEARS AGAINST THE ASSESSEE RESPECTFULLY FOLLOWING ABOVE ORDERS WE D ECIDE THE ISSUE IN FAVOUR OF THE REVENUE. IN VIEW OF THIS THIS GROUND OF ASSESSEE IS REJECTED. 19. GROUND NO.7 RELATES TO ASSESSMENT OF INTEREST I NCOME OF RS.19 51 000/- AS INCOME FROM OTHER SOURCES FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC. THIS ISSUE WAS NOT PRESSED BY THE LD. AR DURING THE COURSE OF HEARING AND HENCE IT IS ALSO TREATED AS REJECTED. 20. GROUND NO.8 RELATES TO INCLUSION OF SALES-TAX A ND EXCISE DUTY OF RS.8 13 47 795/- IN TOTAL TURNOVER FOR THE COMPUTAT ION OF DEDUCTION UNDER SECTION 80 HHC. THE LD. CIT(A) DECIDED THE ISSUE AG AINST THE ASSESSEE ON THE GROUND THAT SECTION 145A WAS NOT IN EXISTENCE W HEN DECISION FOR EXCLUDING EXCISE DUTY AND SALES-TAX WAS RENDERED. A FTER INSERTION OF SECTION 145A THE POSITION HAS CHANGED AND THEREFOR E EXCISE DUTY AND SALES-TAX HAS TO BE INCLUDED FOR THE PURPOSE OF COM PUTING TURNOVER. 21. THE LD. AR SUBMITTED THAT SECTION 145A WILL NOT HAVE ANY EFFECT IN COMPUTING DEDUCTION UNDER SECTION 80 HHC BECAUSE SE CTION 145A RELATES TO COMPUTATION OF GROSS TOTAL INCOME AND WHEREAS DE DUCTION UNDER SECTION 80 HHC HAS TO BE WORKED OUT ON THE BASIS OF BUSINESS PROFIT WHICH HAS TO BE COMPUTED AS PER ACCOUNTING PRINCIPL ES. IN ANY CASE THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HON. SUPREME COURT IN THE CASE OF CIT VS. LAXMI MACHINE WORKS (2007) 290 ITR 667. 22. THE LD. DR ON THE OTHER HAND FORCIBLY ARGUED TH AT THE DECISION OF HON. SUPREME COURT IN LAXMI MACHINE WORKS (SUPRA) I S CONFINED TO ASST. YEAR 1993-94 AS PER FORMULA GIVEN IN THE STAT UTE FOR THAT ASST. YEAR. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 16 IT CANNOT BE EXTENDED TO OTHER ASST. YEARS PARTICUL ARLY WHEN AFTER INSERTION OF SECTION 145A LEGAL POSITION HAS CHANGE D. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. THE SHORT QUESTION IS WHETHER COMPUTATIO N OF TRADING RESULTS AS PER SECTION 145A WOULD AFFECT COMPUTATION OF DEDUCT ION UNDER SECTION 80HHC. SECTION 145A WAS INSERTED BY THE FINANCE ACT (NO.2) 1998 W.E.F. 1.4.1999. SECTION 145A SO INSERTED WOULD BE RELEVANT FOR ASST. YEAR 2002-03 ALSO. IT WOULD READ AS UNDER :- [METHOD OF ACCOUNTING IN CERTAIN CASES. SEC.145A NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 145 THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION SHALL BE - (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULAR LY EMPLOYED BY THE ASSESSEE; AND (B) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX DUTYCESS OR FEE(BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CO NDITION AS ON THE DATE OF VALUATION. EXPLANATION FOR THE PURPOSES OF THIS SECTION ANY TAX DUTY CESS OR FEE (BY WHATEVER NAME CALLED) UNDER ANY LAW FOR THE TIM E BEING IN FORCE SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT.] THUS ACCORDING TO SECTION 145A INCOME CHARGEABLE UN DER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION SHALL BE COMPU TED BY ADJUSTING THE PROFIT AFTER INCLUDING THE AMOUNT OF TAX DUTY CES S ETC. ON THE OTHER HAND DEDUCTION UNDER SECTION 80 HHC WOULD BE ALLOWABLE T O THE EXTENT OF PROFITS DERIVED BY THE ASSESSEE FROM THE EXPORT OF SUCH GOODS OR MERCHANDISE. THE MECHANISM FOR COMPUTATION OF PROFI T IS PROVIDED IN SUB-SECTION (3). IT ALSO LAYS DOWN THE MECHANISM FO R COMPUTATION OF ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 17 DEDUCTION ALLOWABLE UNDER THAT SECTION. IN OTHER WO RDS DISTINCTION HAS BEEN CREATED BETWEEN THE TOTAL INCOME OF THE ASSESS EE AND PROFITS DERIVED BY THE ASSESSEE FROM THE EXPORT OF GOODS OR MERCHAN DISE. CLAUSE (BAA) OF EXPLANATION DEFINES THAT PROFITS OF THE BUSINESS MEANS PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AS REDUCED BY.THUS FOR THE PURPOSE OF COMPUTING PROFITS OF THE BUSINESS SAME MECHANISM HA S TO BE ADOPTED AS IS TO BE ADOPTED FOR COMPUTING THE PROFITS UNDER THE H EAD OF PROFITS AND GAINS OF BUSINESS OR PROFESSION AS LAID DOWN IN TH E PROVISIONS OF THE ACT BETWEEN SECTION 28 TO 43D. IT IS FOR THIS REASON TH AT 90% OF THE SUMS REFERRED TO IN CLAUSE (IIIA) AND (IIIB) ETC. OF THE SECTION WHICH ARE IN THE NATURE OF BROKERAGE COMMISSION RENT ETC. ARE REDU CED FROM SUCH PROFITS. IN OTHER WORDS PROFITS UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS OR PROFESSION WOULD BE THE PROFITS OF THE BUSINESS FO R COMPUTING DEDUCTION UNDER SECTION 80 HHC. THUS THE SAME MECHANISM HAS B EEN PROVIDED FOR COMPUTING PROFITS OF THE BUSINESS AS IS PROVIDED FO R COMPUTING PROFITS AND GAINS OF BUSINESS OR PROFESSION. 24. HOWEVER SECTION 145A DOES NOT FALL BETWEEN SEC TION 28 & 43D BUT IT PROVIDES A SEPARATE MECHANISM FOR VALUATION OF PURCHASE AND SALES OF GOODS AND INVENTORY. IN FACT IT IS A DEEMING PRO VISION WHICH SUPERSEDES ACCOUNTING DONE BY THE ASSESSEE. IF ASSE SSEE HAS ADOPTED EXCLUSION PRINCIPLES I.E. IF IT HAS VALUED SALE AND PURCHASE AND INVENTORIES BY EXCLUDING SALES-TAX AND EXCISE DUTY THEN BY INVO KING SECTION 145A THE AO CAN DIRECT THE ASSESSEE TO VALUE PURCHASE AND SA LES AND INVENTORIES BY INCLUSION PRINCIPLE I.E. VALUING THE THREE ITEMS BY INCLUDING SALES-TAX AND EXCISE DUTY AND THEN COMPUTE PROFITS THEREAFTER. IN OUR CONSIDERED VIEW SECTION 145A IS A DEEMING SECTION AND IT CREATES A FICTION FOR DIRECTING TO ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 18 INCLUDE SALES-TAX AND EXCISE DUTY AND OTHER TAXES W HILE DRAWING TRADING/MANUFACTURING ACCOUNT EVEN THOUGH ASSESSEE MIGHT NOT HAVE DONE SO. BUT FOR THE PURPOSE OF COMPUTING DEDUCTION UNDE R SECTION 80 HHC THE PROFITS AND GAINS OF BUSINESS COMPUTED UNDER SECTIO NS 28 & 43D WHETHER BY INCLUSION PRINCIPLE OR EXCLUSION PRINCIPLE WOUL D NOT BE DISTURBED. IN OTHER WORDS WHEREVER ASSESSEE HAS ADOPTED INCLUSION PRINCIPLE FOR ACCOUNTING IN ITS BOOKS OF ACCOUNTS THEN SAME HAS T O BE FOLLOWED FOR COMPUTING PROFITS OF BUSINESS FOR THE PURPOSE OF DE DUCTION UNDER SECTION 80 HHC BUT WHERE ASSESSEE HAS FOLLOWED EXCLUSION P RINCIPLE THEN PROVISIONS OF SECTION 145A WOULD ONLY ALTER THE COM PUTATION OF INCOME FOR THE PURPOSE OF COMPUTING GROSS TOTAL INCOME BUT IT WILL NOT ALTER COMPUTATION OF PROFITS OF THE BUSINESS COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC. SECTION 145A AS SUCH OVER RIDES ONL Y THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSEE AND SUBSTITUTES DIF FERENT FIGURE OF SALES AND PURCHASES AND INVENTORIES CALCULATED ON THE BAS IS OF INCLUSION PRINCIPLE BUT SUCH OVER-RIDING EFFECT CANNOT BE EXT ENDED TO PROFITS OF THE BUSINESS WHICH IS EQUIVALENT TO PROFITS AND GAINS O F BUSINESS OR PROFESSION AS COMPUTED UNDER SECTION 28 TO 43D. DEEMING FICTIO N CANNOT BE EXTENDED TO CHAPTER VIA UNLESS IT IS A PART AND PAR CEL OF THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THEREFORE SE CTION 145A AS SUCH WILL NOT AFFECT THE WORKING OF PROFITS OF BUSINESS AND THEREFORE SALES-TAX EXCISE DUTY IF NOT INCLUDED BY THE ASSESSEE IN ITS ACCOUNTING METHOD CANNOT BE FORCED TO BE INCLUDED FOR COMPUTING DEDUC TION UNDER SECTION 80 HHC. THEREFORE THE DECISION OF HON. SUPREME COURT IN LAXMI MACHINE WORKS (SUPRA) WOULD BE APPLICABLE EVEN IN ASST. YEA RS SUBSEQUENT TO ASST. YEAR 1999-2000 ONWARDS. AS A RESULT THIS GRO UND OF ASSESSEE IS ALLOWED. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 19 25. GROUND NO.9 RELATES TO INCLUSION OF SERVICE CHA RGES IN THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 8 0 HHC. THE LD. CIT(A) FOLLOWED THE DECISION FOR ASST. YEAR 2001-02 AND INCLUDED SERVICES CHARGES IN THE TOTAL TURNOVER. 26. THE LD. AR POINTED OUT THAT HON. PUNJAB & HARYA NA HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLD ING THAT SERVICES CHARGES WOULD BE EXCLUDED FROM THE TOTAL TURNOVER. HE REFERRED TO THE JUDGMENT OF HON. PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. NAHAR EXPORT LTD. (2008) 174 TAXMAN 184 (P & H) WHE REIN IT WAS HELD AS UNDER :- SECTION 80 HHC OF THE INCOME-TAX ACT 1961 DEDUCT IONS EXPORTERS ASSESSMENT YEAR 2000-01 WHETHER UNABSORBED DEPRECI ATION OF EARLIER YEARS IS TO BE REDUCED FROM PROFITS OF BUSINESS COM PUTED FOR DEDUCTION UNDER SECTION 80 HHC HELD NO- WHETHER SALES TAX A ND CENTRAL SALES TAX WOULD BE EXCLUDED FROM TOTAL TURNOVER WHILE COMPUTI NG DEDUCTION UNDER SECTION 80 HHC HELD YES WHETHER SERVICE CHARGES OF DYEING AND KNITTING WOULD BE EXCLUDED FROM TOTAL TURNOVER OF A SSESSEE WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC HELD YES . 27. THE LD. DR SUPPORTED THE ORDER OF LD. CIT(A). 28. WE HAVE HEARD THE PARTIES. HOWEVER FOLLOWING T HE DECISION OF HON. PUNJAB & HARYANA HIGH COURT WE DECIDE THE ISS UE IN FAVOUR OF THE ASSESSEE. AS A RESULT THIS GROUND OF ASSESSEE IS A LLOWED. 29. GROUND NO.10 RELATES TO ALLOWABILITY OF DEDUC TION UNDER SECTION 80 HHC ON SALE OF SCRAP AMOUNTING TO RS.32 29 959/- . THE AO DID NOT ALLOW THE CLAIM ON VALUE OF THE SCRAP TREATING IT A S NOT FORMING PART OF BUSINESS INCOME. FOR ARRIVING AT THIS DECISION THE AO RELIED ON THE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 20 DECISION OF ITAT SMC MUMBAI BENCH IN THE CASE OF COFTAB EXPORTS VS. ITO IN ITA NO.913/MUM/1999 WHEREIN IT APPEARS THAT IT IS HELD THAT SALE OF WASTE MATERIAL GENERATED DURING MANUFACTURING OF FINISHED GOODS DOES NOT FORM PART OF TOTAL TURNOVER. THE LD. CIT(A) FOL LOWING THE ORDER OF HIS PREDECESSOR IN ASST. YEAR 2001-02 INCLUDED THESE RE CEIPTS IN THE TOTAL TURNOVER. THE ASSESSEE HAS CHALLENGED THIS DECISION TO INCLUDE THE SALE OF SCRAP IN TOTAL TURNOVER. 30. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS REFERRED TO THE DECISION O F THE TRIBUNAL DELHI BENCH-A IN THE CASE OF CLAAS INDIA LTD. VS. ACIT (2 008) 21 SOT 580 (DELHI) WHEREIN IT IS HELD THAT SCRAP GENERATED DUR ING MANUFACTURING PROCESS IF SOLD WOULD ONLY GO TO REDUCE THE COST OF MATERIAL CONSUMED AND FOR COMPUTING DEDUCTION UNDER SECTION 80HHC SAM E CANNOT BE CONSIDERED AS PART OF TURNOVER OF BUSINESS. 31. THE LD. AR ALSO REFERRED TO THE DECISION OF THE TRIBUNAL AHMEDABAD B BENCH IN THE CASE OF ARVIND FASHIONS L TD. VS. ACIT IN ITA NO.1037/AHD/2005 AND ITA NO.1304/AHD/2005 FOR A SST. YEAR 2001-2002 ACIT VS. ARVIND FASHIONS LTD. PRONOUNCED ON 18.12.2009 WHEREIN IT IS HELD THAT SALE OF SCRAP IS ESSENTIAL INCOME GENERATED FROM THE OPERATIONAL ACTIVITIES OF THE ASSESSEE AND THEREFO RE IT IS IN THE NATURE OF BUSINESS INCOME AND IS THEREFORE TO BE TREATED AS BUSINESS PROFIT FOR THE PURPOSE OF SECTION 80 HHC. 32. HON. KARNATAKA HIGH COURT IN THE CASE OF CIT V S. MOTOR INDUSTRIES CO. LTD. (2010) 326 ITR 358 (KARNATAKA) HELD THAT WHILE COMPUTING THE TOTAL TURNOVER FOR THE PURPOSE OF SEC TION 80HHC THE ASSESSEE IS REQUIRED TO CONSIDER THE VALUE RECEIVED ON SALE OF SCRAP ALSO AS ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 21 IT CANNOT BE EXCLUDED AS THE SALE OF SCRAP AMOUNTS TO A TURNOVER IN DOMESTIC MARKET. HOWEVER HON. MADRAS HIGH COURT IN CIT VS. LUCAS TVS LTD. (2009) 308 ITR 377 (MAD) HELD THAT SOURCE OF SCRAP IS IMPORTANT FOR DECIDING WHETHER IT IS TO BE INCLUDED IN THE TOTAL TURNOVER FOR CALCULATING DEDUCTION UNDER SECTION 80 HHC. IN ANOTHER DECISION HON. MADRAS HIGH COURT IN CIT VS. ASHOK LEYLAND LTD. (20 08) 297 ITR 107 (MAD) (2008) 297 ITR 107 (MAD) HELD THAT IF SCRAP D OES NOT FORM PART OF INVENTORIES THEN IT WILL ALSO NOT FORM PART OF TURN OVER. FROM THE ABOVE JUDGMENTS IT FOLLOWS THAT IF SCRAP IS GENERATED IN THE MANUFACTURING PROCESS OF THE ASSESSEE AND IS CONSIDERED AS PART O F MANUFACTURING AND TRADING ACCOUNT AND ASSESSEE ALSO INCLUDED THE SAME IN THE GROSS RECEIPT IN THE TRADING ACCOUNT THEN SCRAP WOULD FORM PART OF T URNOVER. SINCE AS PER FACTS AVAILABLE SCRAP HAS FORMED PART OF GROSS RECE IPTS OF THE ASSESSEE AND IT IS COMING OUT OF MANUFACTURING PROCESS AND PROFI T THEREFROM IS INCLUDED IN THE TRADING CUM MANUFACTURING ACCOUNT THEN SCRAP WOULD FORM PART OF TURNOVER. ACCORDINGLY THIS ISSUE IS DECIDED AGAINS T THE ASSESSEE. THIS GROUND OF ASSESSEE IS REJECTED. 33. GROUND NO.11 RELATES TO CIT(A) DECIDING ISSUE A GAINST EXCLUSION OF 90% OF SALE AND SCRAP FOR THE PURPOSES OF DEDUCT ION UNDER SECTION 80 HHC. 34. WE HAVE HEARD THE PARTIES. ONLY THAT AMOUNTS WH ICH ARE OF THE NATURE OF BROKERAGE COMMISSION INTEREST RENT CH ARGES OR ANY OTHER RECEIPTS OF SIMILAR NATURE AS PROVIDED IN SUB-CLAUS E (I) OF CLAUSE (BAA) OF EXPLANATION TO SECTION 80 HHC WILL BE CONSIDERED FO R EXCLUSION OF 90% THEREOF. EFFECT OF EXPLANATION (BAA)(I) OF SECTION 80HHC IS THAT IF ANY RECEIPT IS TAXABLE AND IS INCLUDED IN THE PROFIT AN D IS OF THE NATURE OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR A MOUNT SIMILAR TO THEM ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 22 THEN 90% THEREOF WILL BE EXCLUDED. IF NATURE OF REC EIPT INCLUDED IN THE PROFITS IS OF THE TYPE AS MENTIONED IN SUB-CLAUSE ( I) THEN 90% SHALL NOT BE EXCLUDED AND THEREFORE 100% THEREOF AS SUCH WOULD BE CONSIDERED FOR COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC. HON. BOMBAY HIGH COURT IN CIT VS. ASIAN STARCH CO. LTD. (2010) 326 I TR 56 (BOM) VERY ELABORATELY AND CLEARLY EXPLAINED AS TO WHICH TYPE OF RECEIPTS ARE TO BE EXCLUDED @ 90% AND WHY THEY SHOULD BE SO EXCLUDED. IT WOULD BE PERTINENT TO REFER TO THE HEAD NOTES FROM THAT JUDG MENT - THE SPECIAL DEDUCTION UNDER SECTION 80HHC OF THE I NCOME-TAX ACT 1961 IS AVAILABLE TO AN ASSESSEE ENGAGED IN THE EX PORT OF GOODS OR MERCHANDISE OUTSIDE INDIA TO THE EXTENT OF THE PROF ITS SPECIFIED IN SUB- SECTION (1B) OF THE PROVISION. CLAUSE (A) OF SUB-SE CTION (3) OF SECTION 80HHC PROVIDES THAT WHERE THE EXPORTED GOODS ARE MA NUFACTURED BY THE ASSESSEE THE DEDUCTION UNDER SUB-SECTION (1) WOULD BE IN ACCORDANCE WITH THE FORMULA STATED THEREIN. THE FORMULA IS THA T THE PROFITS DERIVED FROM SUCH EXPORT SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS THE SAME PROPORTION AS THE EXPORT TURNOVE R IN RESPECT OF SUCH GOODS BEARS TO THE TOTAL TURNOVER OF THE BUSINESS C ARRIED ON BY THE ASSESSEE. EXPLANATION (BAA) WAS INSERTED BY THE FIN ANCE (NO. 2) ACT OF 1991. UNDER EXPLANATION (BAA) THE EXPRESSION 'PROF ITS OF THE BUSINESS' MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' AS REDUCED BY NINETY PER CENT. OF (A) ANY SUMS REFERRED TO IN CLAUSES (IIIA) (IIIB) (II IC) (IIID) AND (IIIE) OF SECTION 28 ; OR (B)ANY RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NAT URE INCLUDED IN SUCH PROFITS. THE PROFITS OF ANY BRANCH OFFICE WAREHOU SE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATED OUTSIDE INDI A HAVE ALSO TO BE REDUCED. SINCE RECEIPTS BY WAY OF BROKERAGE COMMIS SION INTEREST RENT CHARGES OR OTHER SIMILAR RECEIPTS HAVE NO NEXUS WIT H THE EXPORT ACTIVITY THE LEGISLATURE THOUGHT IT FIT FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC TO EXCLUDE SUCH ITEMS FROM BUSINESS PROFITS. PARLIAMENT WAS HOWEVER CONSCIOUS OF THE FACT THAT THE EXPENDITURE INCURRED IN EARNING THE ITEMS WHICH WERE LIABLE TO BE EXCLUDED HAD ALRE ADY GONE IN TO THE COMPUTATION OF BUSINESS PROFITS. THIS WAS BECAUSE T HE COMPUTATION OF BUSINESS PROFITS UNDER CHAPTER IV IS MADE BY AMALGA MATING THE RECEIPTS AS WELL AS THE EXPENDITURE INCURRED IN CARRYING ON THE BUSINESS. SINCE THE EXPENDITURE INCURRED IN EARNING THE INCOME BY WAY O F INTEREST BROKERAGE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 23 COMMISSION RENT CHARGES OR OTHER SIMILAR RECEIPTS HAD ALSO GONE INTO THE COMPUTATION OF BUSINESS PROFITS PARLIAMENT THOUGHT IT FIT TO EXCLUDE ONLY NINETY PER CENT. OF THE RECEIPTS RECEIVED BY THE AS SESSEE IN ORDER TO ENSURE THAT THE EXPENDITURE WHICH IS INCURRED BY THE ASSES SEE IN EARNING THE RECEIPTS WHICH HAS GONE INTO THE COMPUTATION OF THE BUSINESS PROFITS IS TAKEN CARE OF. IN PROVIDING A SIMPLIFIED FORMULA IN THESE TERMS PARLIAMENT EVIDENTLY ADOPTED A FAIR AND REASONABLE STATUTORY BASIS OF WHAT MAY BE REGARDED AS EXPENDITURE INCURRED FOR TH E EARNING OF THE RECEIPTS. THE DISTORTION OF THE PROFITS THAT WOULD TAKE PLACE BY EXCLUDING THE RECEIPTS RECEIVED BY THE ASSESSEE WHICH WERE UN RELATED TO EXPORT TURNOVER AND NOT THE EXPENDITURE INCURRED BY THE AS SESSEE IN EARNING THOSE RECEIPTS WAS FACTORED IN BY PARLIAMENT BY EXC LUDING ONLY NINETY PER CENT. OF THE RECEIPTS RECEIVED BY THE ASSESSEE. THE EXTENT OF THE EXCLUSION WHICH IS STATUTORILY MANDATED BY PARLIAMENT IS NINE TY PER CENT. OF THE TOTAL RECEIPTS. THIS IS BECAUSE THE EXPENDITURE WHI CH IS INCURRED BY THE ASSESSEE IN EARNING THESE RECEIPTS WOULD HAVE GONE INTO THE COMPUTATION OF THE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND A DISTORTION WOULD BE CAUSED IF THE ENTIRETY OF THE INCOME GENERATED F ROM THE RECEIPTS ALONE WERE TO BE EXCLUDED. IT IS IN ORDER TO OBVIATE SUCH A DISTORTION THAT PARLIAMENT MANDATED THAT NINETY PER CENT. OF THE RE CEIPTS WOULD BE EXCLUDED. ONCE PARLIAMENT HAS LEGISLATED BOTH IN RE GARD TO THE NATURE OF THE EXCLUSION AND THE EXTENT OF THE EXCLUSION IT W OULD NOT BE OPEN TO THE COURT TO ORDER OTHERWISE BY REWRITING THE LEGISLATI VE PROVISION. HON. SUPREME COURT IN CIT VS. K. RAVINDRANATHAN NAI R (2007) 295 ITR 228 (SC) HELD THAT INDEPENDENT INCOME LIKE RENT CO MMISSION BROKERAGE ETC. THOUGH HAD FORMED PART OF THE GROSS TOTAL INCO ME HAD TO BE REDUCED BY 90% AS CONTEMPLATED IN EXPLANATION (BAA) IN ORDE R TO ARRIVE AT BUSINESS PROFIT. THE RATIONALE AS LAID DOWN BY HON. SUPREME COURT IN THEIR JUDGMENT WAS THAT PROFIT INCLUSIVE OF ITEMS WHICH C ONSTITUTE INDEPENDENT INCOME HAVE NO ELEMENT OF EXPORT TURNOVER AND ARE C ONSEQUENTLY LIABLE TO BE EXCLUDED TO THE EXTENT STIPULATED IN EXPLANATION (BAA). LEGISLATIVE POLICY UNDERLYING THE PROVISION IS THAT ITEMS WHICH ARE UNRELATABLE TO THE EXPORT ACTIVITIES MUST BE EXCLUDED IN THE COMPUTATI ON OF BUSINESS PROFIT IN ORDER TO PREVENT A DISTORTION IN THE COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 24 35. FROM THE ABOVE AUTHORITIES WHAT FOLLOWS IS THAT UNLESS A RECEIPT FORMS PART OF BUSINESS PROFIT IT CANNOT BE CONSIDER ED FOR EXCLUSION TO THE EXTENT OF 90%. SECONDLY IF A BUSINESS RECEIPT IS OF THE NATURE OF COMMISSION BROKERAGE INTEREST RENT OR CHARGES TH EN 90% THEREOF SHALL BE EXCLUDED FROM THE BUSINESS PROFITS. IF THE RECEI PT IS DIRECTLY RELATABLE TO BUSINESS BUT IT IS NOT OF THE NATURE OF BROKERAGE COMMISSION INTEREST RENT ETC NO EXCLUSION FROM THE BUSINESS PROFIT WOULD BE GIVEN ON ACCOUNT OF SUCH RECEIPTS. HERE IN THE PRESENT CASE THE SCRAP I S BUSINESS INCOME GENERATED FROM MANUFACTURING ACTIVITIES AND IS THE REFORE PART OF BUSINESS PROFIT BUT AS IT IS NOT AKIN TO COMMISSION BROKERA GE INTEREST RENT ETC. ANY PART THEREOF CANNOT BE EXCLUDED FROM THE BUSINESS P ROFIT. THEREFORE THIS GROUND OF ASSESSEE IS REJECTED. 36. GROUND NO.12 RELATES TO EXCLUSION OF 90% OF INT EREST INCOME OF RS.19 51 000/-. THE AO EXCLUDED INTEREST INCOME OF RS.19 51 000/- TREATING IT AS INCOME FROM OTHER SOURCES. ASSESSEE WANTED TO TREAT IT AS BUSINESS INCOME AND THEREFORE WANTED TO EXCLUDE 9 0% AND NOT 100% AS DONE BY THE AO. THE LD. CIT(A) ALSO CONFIRMED THE O RDER OF AO. 37. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. ONCE INTEREST INCOME IS TREATED AS INCOME F ROM OTHER SOURCES AND THERE IS NO CHANGE TO THIS FINDING AS GROUND NO.7 R ELATING TO THIS ISSUE HAS NOT BEEN PRESSED BY THE ASSESSEE THEN QUESTION OF C ONSIDERING IT AS BUSINESS INCOME AND THEREFORE EXCLUDED 90% THEREO F AS PER EXPLANATION (BAA) TO SECTION 80 HHC WOULD NOT ARISE. ACCORDINGL Y THIS GROUND OF ASSESSEE IS ALSO REJECTED. 38. GROUND NO.13 IS GENERAL IN NATURE AND ASSESSEE HAS ONLY CHALLENGED THE COMPUTATION OF ASSESSED INCOME AS A WHOLE DONE BY THE AO AS AGAINST THE RETURNED INCOME. FOR THE PURPOSES OF COMPUTATION OF ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 25 DEDUCTION UNDER SECTION 80 HHC ASSESSEE WANTED TO T AKE PROFITS AS DECLARED BY HIM AT RS.24 77 032/- AS AGAINST BUSINE SS PROFIT AT RS.63 65 406/- TAKEN BY THE AO. SINCE VARIOUS TYPES OF ADDITIONS MADE BY THE AO WHILE COMPUTING BUSINESS PROFIT HAVE BEEN SEPARATELY AGITATED AND CONSIDERED THIS GROUND BECOMES OF ACADEMIC INT EREST ONLY. THE ONLY ARGUMENT OF THE LD. AR WHICH REQUIRES CONSIDERATION IS THAT WHEREVER ADDITIONS ARE SUSTAINED THEN THEY SHOULD BE TAKEN I NTO ACCOUNT WHILE COMPUTING BUSINESS PROFIT FOR THE PURPOSE OF DEDUCT ION UNDER SECTION 80 HHC. WE AGREE WITH THE ABOVE SUBMISSION AND DIRECT THE AO TO RECOMPUTED THE DEDUCTION UNDER SECTION 80 HHC BY CO NSIDERING THE ADDITIONS SUSTAINED IN APPEAL WHILE COMPUTING BUSIN ESS PROFITS. THIS GROUND IS DISPOSED OF ACCORDINGLY. 39. GROUND NO.14 RELATES TO CHARGING OF INTEREST UN DER SECTION 234D. THE CONTENTION OF THE LD. AR IS THAT INTEREST SHOUL D BE CHARGED WITH EFFECT FROM 1.6.2003 AS THAT SECTION HAS COME INTO STATUTE W.E.F. 1.6.2003 ONLY. SECTION 234D WAS INSERTED BY THE FINANCE ACT 2003 W.E.F. 1.6.2003. IT LAID DOWN THE PROPOSITION THAT IF THE AMOUNT REFUND ED UNDER SECTION 143 EXCEEDS THE AMOUNT REFUNDABLE ON REGULAR ASSESSMENT THEN ASSESSEE WOULD PAY SIMPLE INTEREST AT THE PRESCRIBED RATE ON THE WHOLE OR EXCESS AMOUNT SO REFUNDED. THIS PROVISION OF CHARGING OF I NTEREST WILL APPLY TO ALL CASES OF REFUND GRANTED BUT INTEREST COULD BE L EVIED ONLY W.E.F. 1.6.2003. IT IS SO HELD BY HON. KERALA HIGH COURT I N CIT VS. KERALA CHEMICALS & PROTEINS LTD. (2010) 323 ITR 584 (KER). SIMILAR VIEW HAS BEEN TAKEN BY OTHER BENCHES OF THE TRIBUNAL SUCH AS RAYALA CORPORATION LTD. VS. ACIT (2009) 319 ITR (AT) 158 ITAT CHENNAI STERLIGHT INDUSTRY (INDIA) LTD. VS. ADDL. CIT (2006) 6 SOT 49 7 (MUM) AND JINDAL STEEL AND POWER LTD. VS. ADDL. CIT (2006) 10 SOT 10 6 (DEL). AS A RESULT THIS GROUND IS ALLOWED IN FAVOUR OF THE ASSESSEE. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 26 40. GROUND NOS.15 & 16 ARE GENERAL IN NATURE AND HE NCE ARE REJECTED. AS A RESULT APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1241/AHD/2006 ASST. YEAR 2002-03 (REVENUES APPEAL) 41. THE FIRST ISSUE RELATES TO CLAIM OF BAD DEBTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT ASSESSEE C OMPANY HAS WRITTEN OFF DEBTS TO THE EXTENT OF RS.74 16 526/-. THIS AMO UNT PERTAINED TO VARIOUS PARTIES. THE AO REQUIRED THE ASSESSEE TO SU BMIT THE REASONS FOR WRITING OFF AND COPY OF ACCOUNTS SHOWING ACTUAL WRI TING OFF AND EFFORTS MADE TO RECOVER THE AMOUNT. THE ASSESSEE SUBMITTED CHART SHOWING HOW THE AMOUNTS WERE WRITTEN OFF IN RESPECT OF EACH CAS E. HOWEVER SPECIFIC REASONS FOR WRITING OFF IN RELATION TO SEVERAL PART IES WERE NOT SUBMITTED. SUBSEQUENTLY ON FURTHER CORRESPONDENCE THE ASSESSE E SUBMITTED SOME GENERAL REASONS FOR WRITING OFF AS UNDER :- (A) LEVY OF LIQUIDATED DAMAGES BY THE CUSTOMER FOR INFR INGEMENT OF THE CONTRACTUAL TERMS. (B) REJECTION OF MATERIAL/PARTS SUPPLIED BY THE ASSESSE E (C) RAISING OF BILLS BY MISTAKE FOR SUPPLY OF PARTS AND SERVICES DURING THE WARRANTY PERIOD (D) LEVY OF WRONG CHARGES IN THE BILL LIKE PACKING CHA RGES (E) WEAK FINANCIAL POSITION OF THE DEBTORS (F) COST OF RECOVERY LOOKING TO THE SMALLNESS OF THE AM OUNT INVOLVED AND (G) TO KEEP AND MAINTAIN THE BUSINESS RELATIONS WITH TH E CUSTOMERS. THE AO FINALLY HELD THAT REASONS GIVEN BY THE ASSES SEE ARE GENERAL IN NATURE NO EVIDENCE WAS PRODUCED SO AS TO SHOW ANY EFFORT MADE BY THE ASSESSEE TO RECOVER THE AMOUNT. CERTAIN AMOUNTS WRI TTEN OFF PERTAINED TO ASST. YEAR 2000-01 & 2001-02. THESE AMOUNTS WERE NO T QUITE OLD. HE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 27 ALSO HELD THAT IT IS FOR THE ASSESSEE TO SHOW THAT DEBT HAS BECOME BAD AND EACH AMOUNT WRITTEN OFF HAS TO BE CONSIDERED ON ITS MERITS FOR ALLOWING THE CLAIM. 42. THE LD. CIT(A) ALLOWED THE CLAIM BY HOLDING THA T ONCE AMOUNT IS WRITTEN OFF THEN IT HAS TO BE ALLOWED AND WHERE ASS ESSEE IS ABLE TO COVER ANY SUM THEN IT HAS TO BE TAXED UNDER SECTION 41(4) . THE LD. CIT(A) HELD AS UNDER :- 3.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT AND FACTS OF THE CASE CAREFULLY. THE APPELLANT HAS EMPHASIZED THAT I N THE LEDGER ACCOUNTS THESE AMOUNTS HAVE BEEN WRITTEN OFF AFTER CONSIDERI NG THAT THE AMOUNT IS NOT RECOVERABLE IN SPITE OF THE EFFORTS MADE BY THE APPELLANT COMPANY. THEREFORE THE CONDITIONS OF 36(1)(VI) HAVE BEEN FU LLY COMPLIED WITH. FROM THE DETAILS OF BAD DEBT WRITTEN OFF I FIND TH AT THE AMOUNT REPRESENTS REDUCTIONS MADE BY THE CLIENTS REJECTION OF GOODS REJECTION OF PACKING CHARGES PETTY AMOUNTS NOT PAID BY THE PARTY REJEC TION OF SPARES. I ALSO FIND THAT THE APPELLANT HAS FILED SUIT FOR RECOVERY IN NUMBER OF CASES AND CERTAIN COMPANIES HAD CLOSED THEIR BUSINESS AND ARE IN BIFR. THE APPELLANT HAS ALSO OFFERED THE INCOME WHEREVER THE AMOUNT HAS BEEN RECOVERED IN SUBSEQUENT YEARS WHICH HAVE ALSO BEEN MENTIONED BY THE APPELLANT AND HAS BEEN ACCEPTED BY THE AO. I HAVE A LSO GONE THROUGH THE VARIOUS JUDGMENTS CITED BY THE APPELLANT. THE GUJAR AT HIGH COURT IN THE CASE OF CIT VS. GIRISH BHAGWATPRASAD 256 ITR 772 (G UJ) HAS HELD THAT UNDER THE PROVISIONS OF SECTION 36(1)(VII) OF THE A CT DEDUCTION WAS TO BE ALLOWED IN COMPUTING THE INCOME REFERRED TO SECTION 28 OF THE ACT OF THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRI TTEN OFF OR IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR T HE PREVIOUS YEAR SUBJECT TO THE PROVISIONS OF SUB-SECTION (2). UNDER THE PRO VISIONS OF SECTION 36(1)(VII) AS IN FORCE FROM 1 ST APRIL 1989 ALL THAT THE ASSESSEE HAD TO SHOW WAS THAT THE BAD DEBT WAS WRITTEN OFF AS IRREC OVERABLE. SIMILARLY IN THE CASE OF ITO VS. ANIL H. RASTOGI ITAT MUMBAI 86 ITD 193 SHOBANLAL JAIN VS. ACIT ITAT DELHI 79 TTJ 446 (DEL). PRADESHI YA INDUSTRIAL & INVESTMENT CORPORATION OF UP LTD. VS. DCIT 54 TTJ 4 38 (ALL) SWASTIK ASBESTOS PRODUCTS LTD. VS. DCIT 89 TTJ 393 WIPRO I NFORMATION TECHNOLOGY LTD. VS. DCIT 88 TTJ 778 DCIT VS. CATVI SION PRODUCTS LTD. 84 TTJ DELHI HAVE HELD THAT AS PER THE AMENDED PROV ISIONS OF SECTION 36(1)(VII) W.E.F. 1 ST APRIL 1989 THE CLAIM OF THE BAD DEBT HAS TO BE AL LOWED WHEN THE AMOUNT HAS BEEN WRITTEN OFF IN THE BOOKS O F ACCOUNT WITHOUT ANY ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 28 FURTHER PROOF WHETHER THAT HAS BECOME BAD. IT HAS A LSO BEEN HELD IN THESE CASES THAT THE APPELLANT WILL HAVE TO OFFER THE INC OME IN THE YEAR WHEN THE SAME IS RECOVERED U/S 41(4) OF THE IT ACT. THESE AL L DEBTS HAVE ARISEN DURING THE COURSE OF BUSINESS AND HAVE BECOME BAD B ECAUSE OF REASONS GIVEN BY THE APPELLANT. THESE HAVE BEEN DULY WRITTE N OFF IN THE BOOKS. CONSIDERING THE ABOVE FACTS OF THE CASE THAT THE AM OUNTS HAVE BEEN WRITTEN OFF BY THE APPELLANT IN THIS YEAR WHICH IS BEING NOT IN DOUBT AS PER PROVISIONS OF SECTION 36(1)(VII) THE ABOVE AMOUNT W ILL HAVE TO BE ALLOWED AS BAD DEBTS TO THE APPELLANT. THEREFORE THE ADDIT ION MADE BY THE AO IS NOT JUSTIFIED AND THE SAME IS HEREBY DELETED. 43. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). IT IS ADMITTED POSITION THAT A SSESSEE HAS ACTUALLY WRITTEN OFF THE AMOUNTS. ONCE IT IS SO THEN MATTER IS SQUARELY COVERED BY THE DECISION OF HON. SUPREME COURT IN THE CASE OF T RF LTD. VS. CIT (2010) 323 ITR 397 (SC) WHEREIN IT IS HELD THAT W.E .F. 1.4.1989 IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS IT I S NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT IN FACT HAS BEC OME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AND THE BAD D EBT IS IRRECOVERABLE IN THE ACCOUNT OF ASSESSEE. FOLLOWING THE ABOVE DECISI ON OF HON. SUPREME COURT WE CONFIRM THE ORDER OF LD. CIT(A) AND DISMI SS THIS GROUND OF REVENUE. 44. THE SECOND GROUND IN REVENUES APPEAL RELATES T O DECISION OF LD. CIT(A) IN DIRECTING THE AO NOT TO EXCLUDE 90% OF OT HER INCOME BY WAY OF DEBT RECOVERY DISCOUNT AND INSURANCE CLAIM ETC. WHILE COMPUTING THE DEDUCTION UNDER SECTION 80 HHC. THE AO HAD TREATED THOSE ITEMS AS OTHER INCOME AND EXCLUDED 90% THEREOF AS PER SUB-CL AUSE (I) OF CLAUSE (BAA) OF EXPLANATION TO SECTION 80 HHC. THE LD. CIT (A) TREATED THEM AS BUSINESS INCOME BUT NOT OF THE NATURE OF INTEREST COMMISSION BROKERAGE CHARGES ETC. THEREFORE DIRECTED NOT TO EXCLUDE 9 0% OF THE SUM FROM THE BUSINESS PROFIT FOR COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC. THE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 29 AMOUNT OF BAD DEBT RECOVERED WERE RS.7 83 377/- IN SURANCE CLAIM WAS OF RS.15 62 887/- AND DISCOUNT WAS OF RS.2 64 235/-. T HE LD. CIT(A) HELD THAT BAD DEBT RECOVERED IS TAXABLE UNDER SECTION 41 (4) AND IS BUSINESS INCOME. IN RESPECT OF INSURANCE CLAIM ALSO HELD THA T IT IS BUSINESS INCOME. HE FOLLOWED HIS PREDECESSORS ORDER FOR ASST. YEAR 2001-02. IN RESPECT OF DISCOUNT ALSO HE HELD THAT IT REPRESENTS THE CONCE SSION AVAILABLE TO THE ASSESSEE FROM VARIOUS SUPPLIERS AND THEREFORE IT WOULD GO TO REDUCE COST OF RAW MATERIAL AND THEREFORE IT WOULD AFFECT BUS INESS INCOME. 45. THE LD. DR SUBMITTED THAT THERE IS NO DIRECT NE XUS OF THESE THREE AMOUNTS WITH THE BUSINESS OF THE CURRENT YEAR AND THEREFORE THEY ARE OTHER INCOME AND THEREFORE 90% SHOULD BE EXCLUDED AS PER CLAUSE (BAA) OF EXPLANATION TO SECTION 80 HHC. THE LD. DR POINTE D OUT THAT THE ISSUE REGARDING BAD DEBT RECOVERY DISCOUNT AND INSURANCE CLAIM HAVE BEEN SET ASIDE TO THE AO IN ASST. YEAR 2001-02 BY THE TRIBUN ALS ORDER DATED 8.6.2007. THEREFORE THE ISSUE IN ASST. YEAR 2002-0 3 SHOULD ALSO BE RESTORED TO THE FILE OF AO FOR DECISION IN ACCORDAN CE WITH HIS DECISION FOR ASST. YEAR 2001-02. 46. THE LD. AR ON THE OTHER HAND SUPPORTED THE ORD ER OF LD. CIT(A). 47. WE HAVE HEARD THE PARTIES AND CONSIDERED THE MA TERIAL BEFORE US. IN ASST. YEAR 2001-02 THE TRIBUNAL IN ITA NO.2708/AHD/ 2003 ASST. YEAR 2001-02 IN THE CASE OF ACIT-4 AHMEDABAD VS. M/S GM M PFAUDLER LTD. AND IN ITA NO.2778/AHD/2003 ASST. YEAR 2001-02 IN T HE CASE OF M/S GMM PFAUDLER LTD VS. ACIT-4 HAS RESTORED THE ISSUE TO THE AO FOR FRESH CONSIDERATION AS PER FOLLOWING OBSERVATIONS:- ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 30 REVENUES APPEAL GROUND NO.1 THE LD. CIT(A) HAS ERRED IN LAW AND AS WELL AS ON FACTS IN DIRECTING NOT CONSIDER THE INCOME FROM CHEMICAL TESTING BAD DEBT S RECOVERED INSURANCE CLAIM AND DISCOUNT FOR 90% EXCLUSION FOR THE PURPOSE OF CALCU LATING THE DEDUCTION U/S 80 HHC. COMING TO GROUND NO.1 OF THE REVENUE AND THE GROUND AS RAISED IN THE ASSESSEES APPEAL THEY ARE ALL PERTAINED TO COMPUTA TION OF DEDUCTION UNDER SECTION 80 HHC IN RESPECT OF EXCLUSION OF VAR IOUS ITEMS OF INCOME AS RAISED IN THE GROUNDS OF APPEAL. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THE ISSUES ARE COVERED BY VARIOUS TRIBUNAL JUD GMENTS AS UNDER : I) CIT VS. SHRI RAM HONDA POWER EQUIP. 289 ITR 475 (DE L) II) DCIT VS. HARJIVANDAS JUTHABHAI ZAVERI 258 ITR 785 ( GUJ) BESIDES IN RESPECT OF VARIOUS INCOMES NETTING HAS T O BE ALLOWED. IN VIEW THEREOF BOTH PARTIES AGREED THAT VARIOUS CASE LAWS HAVE BEEN DEVELOPED IN RESPECT OF THESE ITEMS OF INCOME. BOTH PARTIES A LSO AGREED THAT ISSUE IN RESPECT OF 80 HHC COMPUTATION MAY SET ASIDE RESTORE D BACK TO THE FILE OF TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW KEEPING IN VIEW VARIOUS CASE LAWS INCLUDING ON NETTING OF INCOME ETC. CONSEQUENTLY GROUND NO.1 OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. IN THE RESULT REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. SINCE THE ISSUE HAS BEEN RESTORED TO THE AO FOR FRE SH ADJUDICATION RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE TR IBUNAL WE RESTORE THE THREE MATTERS TO THE FILE OF AO FOR FRESH ADJUDICAT ION IN LINE WITH THE DECISION HE TAKES FOR ASST. YEAR 2001-02. AS A RESU LT APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.1926/AHD/2007 ASST. YEAR 2003-04 (REVENUES APPEAL) 48. THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE R EVENUE IN THIS APPEAL:- ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 31 (1) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF RS.46 84 621/- MADE ON ACCOUNT OF BAD DEBTS WRITTEN OFF. (2) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE AO TO EXCLUDE SALES TAX AND EXCISE DUTY FROM TH E TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80 HHC OF THE IT ACT. (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. (4) IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EFFECT. ITA NO.2002/AHD/2007 ASST. YEAR 2003-04 (ASSESSEES APPEAL) 49. THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE A SSESSEE :- (1) THE LD. CIT(A) FAILED TO UNDERSTAND THE FACTS A ND CIRCUMSTANCES OF THE CASE.: (2) THE LD. CIT(A) ERRED IN NOT ACCEPTING THE REQUE ST OF THE APPELLANT TO TAX THE RECOVERY OF BAD DEBTS RS.5 09 389/- U/S 41(4) OF THE IT ACT 1961 ON THE BASIS OF THE FINAL OUTCOME OF THE DEPARTMENTS APPEAL BEFORE HON. ITAT AHMEDABAD IN RESPECT OF DI SALLOWANCE OF BAD DEBTS U/S 36(1)(VII) IN ASST. YEAR 2002-03. (3) THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION O F THE AO NOT TO ACCEPT THE ADDITIONAL CLAIMS MADE BY THE ASSESSEE D URING THE COURSE OF THE ASSESSMENT PROCEEDINGS IN RESPECT OF THE PRO VISION FOR LIQUIDATED DAMAGES RS.26 76 000/- AND BAD DEBTS WRI TTEN OFF RS.7 58 000/- WHICH WERE INCLUDED IN THE PROVISION FOR BAD DEBTS DISALLOWED IN THE RETURN OF INCOME. THE LOWER AUTHO RITIES HAVE REJECTED SUCH CLAIM IN THE ABSENCE OF THE REVISED R ETURN OF INCOME. (4) THE LD. CIT(A) ERRED IN CONFIRMING THE NON ALLO WANCE OF CLAIM OF ACCRUED INTEREST RS.8 33 185/- PAYABLE TO APSEB AS PER ORDER OF THE CITY CIVIL COURT. (5) THE LD. CIT(A) ERRED IN ACCEPTING THE AOS ACTI ON TO EXCLUDE 90% OF INTEREST INCOME RS.17 73 000/- FROM THE BUSINESS INCOME FOR THE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 32 PURPOSE OF COMPUTATION OF DEDUCTION U/S 80 HHC OF T HE IT ACT 1961 AS THE INTEREST PAYMENT IS MORE THAN THE INTER EST INCOME. (6) THE LD. CIT(A) ERRED IN CONFIRMING THE EXCLUSIO N OF 90% OF SALES OF SCRAP RS.1 03 19 875/- FROM THE BUSINESS INCOME FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80 HHC OF THE IT AC T 1961. (7) THE APPELLANT PRAYS FOR APPROPRIATE RELIEF ON T HE ABOVE GROUNDS OF APPEAL. (8) THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND SUBSTITUTE OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL AS CIRC UMSTANCES MAY JUSTIFY. ASSESSEES APPEAL 2003-04: 50. WE FIRST TAKE UP ASSESSEES APPEAL. THE FIRST I SSUE IS GENERAL IN NATURE AND HENCE DOES NOT REQUIRE ANY SPECIFIC ADJU DICATION. 51. THE SECOND GROUND RELATES TO TAXING OF BAD DEBT S RECOVERED AT RS.5 09 389/-. THE AMOUNT RECOVERED RELATES TO BAD DEBT WRITTEN OFF IN ASST. YEAR 2002-03. THE LD. CIT(A) DISMISSED THE GR OUND OF ASSESSEE ON THE GROUND THAT ISSUE REGARDING CLAIM OF BAD DEBT I S PENDING FOR ADJUDICATION BEFORE THE TRIBUNAL. 52. WE HAVE HEARD THE PARTIES. WHILE DISPOSING OF G ROUND NO.1 IN REVENUES APPEAL FOR ASST. YEAR 2002-03 WE HAVE ALL OWED THE CLAIM OF BAD DEBTS FOLLOWING THE DECISION OF HON. SUPREME CO URT IN THE CASE OF TRF LTD. VS. CIT (SUPRA). THEREFORE ONCE THE AMOUN T IS RECOVERED BY THE ASSESSEE IT IS RIGHTLY TAXABLE UNDER SECTION 41(4) . THIS GROUND OF ASSESSEE IS ACCORDINGLY DISPOSED OF. 53. GROUND NO.3 RELATES TO CLAIM OF LIQUIDATED DAMA GES OF RS.26 76 000/- AND BAD DEBT WRITTEN OFF TO THE EXTE NT OF RS.7 58 000/-. THE AO FOUND THAT ASSESSEE HAS DEBITED A SUM OF RS.49 0 5 038/- AS PROVISION ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 33 OF BAD DEBTS WHICH WAS HOWEVER ADDED BY THE ASSES SEE IN COMPUTATION STATEMENT. HOWEVER DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE CLAIMED A SUM OF RS.26 76 000/- TOWARDS LI QUIDATED DAMAGES ON THE GROUND THAT LIABILITIES WERE CRYSTALLIZED DURIN G THIS YEAR. THE ASSESSEE HAD TO PAY THE DAMAGES ON ACCOUNT OF LATE DELIVERY OF GOODS. THE AO HAD DISALLOWED THE CLAIM BY HOLDING THAT CLAIM WAS MADE BEFORE HIM THROUGH A LETTER ONLY AND NOT BY WAY OF REVISED RETURN. ACC ORDINGLY THE AO NOT ONLY DECIDED THE PROVISION OF BAD DEBT OF RS.49.05 LACS BUT ALSO DISALLOWED THE CLAIM OF LIQUIDATED DAMAGES AT RS.26 .76 LACS. 54. THE LD. CIT(A) CONFIRMED THE ORDER OF AO ON THE GROUND THAT ASSESSEE HAD ONLY MADE PROVISIONS FOR LIQUIDATED DA MAGES AND ALSO BAD DEBTS. ONCE CLAIM OF BAD DEBT IS ADDED BACK IN THE COMPUTATION OF INCOME THEN NO FURTHER CLAIM OF LIQUIDATED DAMAGES CAN BE ALLOWED. THE LD. CIT(A) INVOKED THE DECISION OF HON. SUPREME COURT I N THE CASE OF GEOTZE (INDIA) LTD. VS. CIT 284 ITR 323 WHEREIN IT IS HELD THAT AO DOES NOT HAVE ANY POWER TO ENTERTAIN ANY FRESH CLAIM OTH ERWISE THAN BY WAY OF REVISED RETURN. 55. OUT OF CLAIM OF BAD DEBT AO HAD ALLOWED THE CLA IM OF RS.25.39 LACS OUT OF TOTAL CLAIM OF RS.46 84 621/- ON THE GR OUND THAT EVEN THOUGH THIS AMOUNT WAS WRITTEN OFF THIS YEAR BUT IT HAS BE EN RECOVERED AND OFFERED FOR TAXATION IN ASST. YEAR 2004-05. THE LD. CIT(A) ALLOWED THE ENTIRE CLAIM OF BAD DEBT AT RS.46 84 621/- WHICH WA S ACTUALLY WRITTEN OFF IN THE BOOKS AND IT WAS PARTLY OFFERED FOR TAXATION AT THE TIME OF RECOVERY AS PER SECTION 41(4). 56. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE ISSUE REGARDING LIQUIDATED DAMAGES REQUIRES A FRESH LOOK BY THE AO. HE WOULD ALLOW THE CLAIM ON ACTUAL ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 34 BASIS. WHEREVER THE OTHER PARTY HAS CLAIMED LIQUIDA TED DAMAGES AGAINST THE ASSESSEE IN THE CURRENT YEAR ASST. YEAR IT SHOU LD BE ALLOWED. THE ASSESSEE WOULD SUBMIT INDIVIDUAL ACCOUNT AND THE AO WILL EXAMINE SUCH ACCOUNTS AND TAKE A DECISION AS PER LAW. THIS GROUN D IS ALLOWED BUT FOR STATISTICAL PURPOSES. 57. REGARDING BAD DEBT WRITTEN OFF AT RS.7.58 LACS WE ARE OF THE CONSIDERED VIEW THAT AO WILL EXAMINE EACH ACCOUNT A ND TO THE EXTENT AMOUNT IS WRITTEN OFF THE CLAIM WILL BE ALLOWED AS PER DECISION OF HON. SUPREME COURT IN TRF LTD. VS. CIT (SUPRA). AS A RES ULT GROUND NO.3 IS RESTORED TO THE FILE OF AO AND HENCE ALLOWED FOR ST ATISTICAL PURPOSES. 58. GROUND NO.4 RELATES TO ALLOWABILITY OF CLAIM OF ACCRUED INTEREST PAYABLE TO APSEB AS PER ORDER OF CITY CIVIL COURT. SIMILAR ISSUE HAD ARISEN IN ASST. YEAR 2002-03 AS PER GROUND NO.6. FO LLOWING OUT DECISION IN THAT YEAR WE DISMISS THIS GROUND OF ASSESSEE. 59. GROUND NO.5 THIS YEAR IS SIMILAR TO GROUND NO.1 2 IN ASST. YEAR 2002-03 WHEREIN ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE AS ABOVE. FOLLOWING OUR ABOVE ORDER WE DISMISS THIS GROUND O F ASSESSEE THIS YEAR AS WELL. 60. GROUND NO.6 RELATES TO EXCLUSION OF 90% ON SALE OF SCRAP FROM THE BUSINESS INCOME FOR COMPUTING DEDUCTION UNDER SECTI ON 80 HHC. IN ASST. YEAR 2002-03 SIMILAR GROUND HAS COME UP AS GROUND N O.11. THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE THAT YEAR. A S THE FACTS THIS YEAR ARE SIMILAR FOLLOWING THAT ORDER WE DECIDE THIS ISSUE THIS YEAR ALSO IN FAVOUR OF ASSESSEE. THIS GROUND OF ASSESSEE IS ALLOWED. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 35 61. GROUND NO.7 IS GENERAL IN NATURE AND HENCE IT I S REJECTED. AS A RESULT APPEAL OF ASSESSEE IS PARTLY ALLOWED AND PA RTLY FOR STATISTICAL PURPOSES. REVENUES APPEAL ASST. YEAR 2003-04 62. GROUND NO.1 RELATES TO BAD DEBT WRITTEN OFF. IN ASST. YEAR 2002-03 REVENUE HAD RAISED SIMILAR ISSUE AS GROUND NO.1. TH E ISSUE HAS BEEN DECIDED IN FAVOUR OF ASSESSEE THAT YEAR. FOLLOWING THAT ORDER AND DECISION OF HON. SUPREME COURT IN TRF LTD. VS. CIT (SUPRA) W E DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND CONFIRM THE ORDER OF LD. CIT(A). THIS GROUND IS ACCORDINGLY REJECTED. 63. GROUND NO.2 RELATES TO EXCLUSION OF SALES-TAX A ND EXCISE DUTY FROM TOTAL TURNOVER. SIMILAR ISSUE WAS TAKEN UP BY THE R EVENUE IN ASST. YEAR 2002-03. IN THAT YEAR WE HAVE DECIDED THE ISSUE AGA INST REVENUE FOLLOWING THE DECISION OF HON. SUPREME COURT IN THE CASE OF LAXMI MACHINES WORKS (SUPRA). FOLLOWING THAT ORDER WE DEC IDE THIS ISSUE IN FAVOUR OF ASSESSEE AND CONFIRM THE ORDER OF LD. CIT (A). 64. OTHER TWO GROUNDS ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY SPECIFIC ADJUDICATION. AS A RESULT APPEAL FILED BY THE REVENUE IS DISMISSED. ITA NO.12/AHD/2008 ASST. YEAR 2004-05 (REVENUES AP PEAL) 65. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL:- (1) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF RS.32 58 572/- BEING BAD DEBTS WRITTEN OFF. (2) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF RS.6 43 000/- ON ACCOUNT OF PRO VISION FOR WARRANTY EXPENSES. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 36 (3) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES OF RS.13 62 9 83/- U/S 14A AND RESTRICTING THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES OF RS.11 20 324/- U/S 14A TO RS.1 20 00/-. (4) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE AO TO EXCLUDE SALES TAX AND EXCISE DUTY FROM TH E TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80 HHC. (5) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DIRECTING THE AO NOT TO EXCLUDE 90% OF OTHER INCOME BY WAY OF INSURANCE CLAIM RECEIVED OF RS.9 02 851/- BAD DEBT RECOVERED OF RS.18 23 00/- SUNDRY CREDIT BALANCES WRITTEN BACK OF RS.10.50 803/- SALES TAX REFUND OF RS.7 32 651/- EXCISE REFUND OF RS.8 35 731/-. (6) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. (7) IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EFFECT. ITA NO.4402/AHD/2007 ASST. YEAR 2004-05 (ASSESSEES APPEAL) 66. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN TH IS APPEAL:- (1) THE LD. CIT(A) FAILED TO UNDERSTAND THE FACTS A ND CIRCUMSTANCES OF THE CASE. (2) THE LD. CIT(A) ERRED IN CONFIRMING THE NON-ALLO WANCE OF CLAIM OF ACCRUED INTEREST RS.8 33 185/- PAYABLE TO APSEB AS PER ORDER OF THE CITY CIVIL COURT. (3) THE LD. CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS.16 52 778/- OUT OF TOTAL DISALLOWANCE RS.59 71 000/- OF PROVISI ONS OF BAD DEBTS ON THE GROUND THAT THE APPELLANT HAS RECEIVED THE S AID AMOUNT IN FINANCIAL YEAR 2006-07 AND THEREFORE THIS AMOUNT HA S NOT BECOME BAD IN THIS YEAR. IT IS CONTENTED THAT SINCE THE PR OVISION HAS BEEN MADE IN RESPECT OF ADVANCES GIVEN DURING THE COURSE OF BUSINESS THE CLAIM IS ALLOWABLE U/S 37(1) OF THE ACT THERE IS NO QUESTION OF THE AMOUNT BECOMING BAD DURING THIS YEAR. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 37 (4) THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOW ANCE OF RS.1 20 000/- BEING ADMINISTRATIVE EXPENSES U/S 14A OF THE ACT CONSIDERING THEM INCURRED IN RELATION TO EXEMPTED D IVIDEND INCOME. (5) THE LD. CIT(A) ERRED IN ACCEPTING THE AOS ACTI ON TO EXCLUDE 90% OF INTEREST INCOME RS.18 14 000/- FROM THE BUSINESS INCOME FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80 HHC OF T HE IT ACT 1961 AS THE INTEREST PAYMENT IS MORE THAN THE INTER EST INCOME. (6) THE APPELLANT PRAYS FOR APPROPRIATE RELIEF ON T HE ABOVE GROUNDS OF APPEAL. (7) THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND SUBSTITUTE OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL AS CIRC UMSTANCES MAY JUSTIFY. ASSESSEES APPEAL ASST. YEAR 2004-05 67. WE FIRST TAKE UP ASSESSEES APPEAL. THE FIRST G ROUND OF THIS APPEAL IS GENERAL IN NATURE. IT DOES NOT REQUIRE ANY SPECI FIC ADJUDICATION. 68. GROUND NO.2 RELATES TO CLAIM OF ACCRUED INTERES T PAYABLE TO APSEB AS PER ORDER OF CITY CIVIL COURT. THIS ISSUE HAS BE EN DECIDED AGAINST THE ASSESSEE IN ASST. YEAR 2002-03 AND 2003-04. FOLLOWI NG OUR ABOVE ORDERS FOR THOSE YEARS WE DECIDE THIS ISSUE AGAINST THE A SSESSEE. THIS GROUND OF APPEAL IS REJECTED. 69. GROUND NO.3 RELATES TO CLAIM OF BAD DEBT. THE A SSESSEE HAD DEBITED A SUM OF RS.59 71 000/- AS PROVISION OF BAD DEBT. A SSESSEE ALSO WROTE BACK A SUM OF RS.43 06 690/-. HOWEVER THE AO HAD D ISALLOWED ENTIRE SUM OF RS.59 71 000/- OVERLOOKING THE FACT THAT ASS ESSEE HAS ALREADY WROTE BACK A SUM OF RS.43 06 693/- AND WHAT WAS REQ UIRED TO BE CONSIDERED WAS ONLY A SUM OF RS.16 64 310/-. THE AO HAD DISALLOWED THE CLAIM ON THE GROUND THAT PROVISIONS OF BAD DEBT AS SUCH IS NOT ALLOWABLE. THE LD. CIT(A) ON THE OTHER HAND FOUND THAT AO HAD ALREADY RECTIFIED HIS ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 38 ORDER REDUCING THE ADDITION OF RS.43 06 690/- AND F URTHER THAT ASSESSEE HAS RECOVERED A SUM OF RS.16 52 778/- OUT OF AMOUNT S OF RS.16 64 404/-. SINCE MOST OF THE AMOUNTS WERE RECOVERED IN FY 2006 -07 HE HELD THAT AMOUNT HAS NOT BECOME BAD DEBT THIS YEAR. HE ACCORD INGLY CONFIRMED THE ADDITION OF RS.16 64 310/-. HE ALSO GAVE DIRECTION NOT TO TAX THE SUM IN ASST. YEAR 2007-08 AT THE TIME OF RECOVERY THEREOF. HE ALLOWED THE BALANCE SUM OF RS.11 626/- UNDER SECTION 37. 70. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE CLAIM OF THE ASS ESSEE ON BAD DEBT WOULD BE ALLOWED ON THE BASIS OF AMOUNT ACTUALLY WR ITTEN OFF AS PER DECISION OF HON. SUPREME COURT IN THE CASE OF TRF L TD. VS. CIT (SUPRA). THIS DECISION HAS ALREADY BEEN REFERRED ABOVE. ONE HAS NOT TO SEE WHETHER AMOUNT WAS RECOVERABLE OR NOT OR WHETHER IT HAS ACT UALLY BECOME BAD DEBT OR WHETHER IT HAS BEEN RECOVERED IN SUBSEQUENT YEAR. ONCE PARTICULAR AMOUNT OF DEBT WHICH HAS ALREADY BEEN TAKEN INTO AC COUNT BY COMPUTING INCOME IN EARLIER YEAR OR EVEN IN CURRENT YEAR IS W RITTEN OFF THEN THE SAME HAS TO BE ALLOWED AS DEDUCTION AS PER THE RATIO OF HON. SUPREME COURT IN TRF LTD.S CASE (SUPRA). IF ANY AMOUNT IS RECOVERED SUBSEQUENTLY THEN THE SAME IS TAXABLE UNDER SECTION 41(4). WE THEREF ORE RESTORE THIS ISSUE TO THE FILE OF AO TO ALLOW THE CLAIM OF BAD DEBT TO THE EXTENT THE AMOUNT IS ACTUALLY WRITTEN OFF. THE ASSESSEE WILL SUBMIT INDE PENDENT ACCOUNT TO THE AO AND SPECIFY HOW AND WHEN SUCH AMOUNT HAS BEEN WR ITTEN OFF IN THE ACCOUNT OF INDIVIDUAL PARTIES. TO THAT EXTENT GROUN D RAISED BY THE ASSESSEE IS ALLOWED BUT FOR STATISTICAL PURPOSES. 71. GROUND NO.4 RELATES TO DISALLOWANCE OF ADMINIST RATIVE EXPENSES OF RS.1 20 000/- UNDER SECTION 14A AS IT APPARENTLY RE LATED TO EXEMPTED DIVIDEND INCOME. THE AO FOUND THAT ASSESSEE HAS EAR NED DIVIDEND ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 39 INCOME OF RS.2.97 CRORES AND HAS SHOWN INVESTMENT O F RS.14.56 CRORES IN MUTUAL FUND OF RS.4.05 LACS IN SHARES DURING THE YE AR. SUCH DIVIDEND INCOME WAS EXEMPT. AO SOUGHT TO DISALLOW PROPORTION ATE INTEREST EXPENSES AND ADMINISTRATIVE EXPENSES. IN RESPONSE T O SHOW CAUSE NOTICE ASSESSEE SUBMITTED DETAILED REPLY WHICH IS REPRODUC ED BY THE LD. CIT(A) IN HIS ORDER. SIMILAR ISSUE HAD ARISEN BEFORE US IN ASST. YEAR 2002-03 AS GROUND NO.14A. WE HAVE DECIDED THIS ISSUE IN ASST. YEAR 2002-03 IN FAVOUR OF THE ASSESSEE. HENCE FOLLOWING OUR ABOVE O RDER WE ALLOW THIS GROUND OF ASSESSEE. 72. GROUND NO.5 RELATES TO EXCLUSION OF 90% INTERES T INCOME OF RS.18 14 000/- FOR COMPUTATION OF DEDUCTION UNDER S ECTION 80 HHC. IN ASST. YEAR 2002-03 & 2003-04. SIMILAR ISSUES HAD AR ISEN AND THE SAME HAVE BEEN DECIDED AGAINST THE ASSESSEE. FOLLOWING O UR ABOVE ORDERS WE DECIDE THIS ISSUE AGAINST THE ASSESSEE THIS YEAR AS WELL. AS A RESULT THIS GROUND OF ASSESSEE IS REJECTED. 73. AS A RESULT APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL FOR ASST. YEAR 2004-05 74. THE FIRST GROUND RELATES TO ALLOWING CLAIM OF B AD DEBT. 75. WE HAVE HEARD THE PARTIES. THIS ISSUE HAS BEEN RESTORED IN ASSESSEES APPEAL TO THE AO WITH DIRECTION AS ABOVE THAT ACTUAL AMOUNT WRITTEN OFF WOULD BE ALLOWED AS DEDUCTION. ACCORDIN GLY THIS GROUND IS RESTORED TO THE FILE OF AO AND IS ALLOWED FOR STATI STICAL PURPOSES. 76. GROUND NO.2 RELATES TO DELETION OF A SUM OF RS. 6 43 000/- AS PROVISIONS FOR WARRANTY EXPENSES. THE ASSESSEE DEBI TED A SUM OF ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 40 RS.25 70 000/- IN THE P & L A/C. THE AO DISALLOWED WARRANTY EXPENSES FOR THREE MONTHS ON PROPORTIONATE BASIS AS PERTAINI NG TO THE SUBSEQUENT YEAR. THE LD. CIT(A) ALLOWED THE ENTIRE CLAIM FOLLO WING THE DECISION OF ITAT BANGALORE IN THE CASE OF WIPRO GE MEDICAL SYS TEMS LTD. VS. DCIT 81 TTJ 455. 77. THE LD. DR SUBMITTED THAT CLAIM OF DEDUCTION SH OULD BE PROPERLY ESTIMATED AND NOT THAT ANY PROVISIONS MADE SHOULD B E ALLOWED AS DEDUCTION. 78. THE LD. AR ALSO REFERRED TO THE DECISION OF HON . SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD. VS. CIT (2009) 314 ITR 62 (SC) WHEREIN THE HONBLE COURT HAS HELD AS UNDER :- HELD _ REVERSING THE DECISION OF THE HIGH COURT T HAT THE VALVE ACTUATORS MANUFACTURED BY THE ASSESSEE WERE SOPHI STICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE ; THAT VALVE ACTUATOR BEING A SOPHISTICAT ED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALVE ACTUATOR WITHOUT A WARRANTY . THEREFORE THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE ; IN OTHER WORDS THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PR ODUCT. IN THIS CASE THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE TH E ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESUL TING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF THE OBLIGATION. THEREFORE THE ASSESSEE HAD INCURRED A LIABILITY DURING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UND ER SECTION 37 OF THE INCOME-TAX ACT 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY LIKE T HE WARRANTY EXPENSE IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASI S CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMA TION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND O N THE NATURE OF THE BUSINESS THE NATURE OF SALES THE NATURE OF THE PR ODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTE D BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPO N THE NUMBER OF ARTICLES PRODUCED. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 41 A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNIZED WHEN : (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT ; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET NO PRO VISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTURED IN T HE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANU FACTURED AND SOLD THEN PROVISION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUCTION FROM THE GROSS RECEI PTS UNDER SECTION 37 . METAL BOX COMPANY OF INDIA LTD. V. THEIR WORKMEN [1 969] 73 ITR 53 (SC) AND BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428 (SC) RELIED ON. INDIAN MOLASSES CO. (PRIVATE) LTD. V. CIT [1959] 37 ITR 66 (SC) DISTINGUISHED. DECISION OF THE MADRAS HIGH COURT IN CIT V. ROTORK CONTROLS INDIA LTD. [2007] 293 ITR 311 REVERSED ON THIS POINT. 79. WE HAVE HEARD THE PARTIES. THE ASSESSEE HAS TO SUBMIT PRESENT VALUE OF WARRANTY EXPENSES. IT HAS TO BE PROPERLY A SCERTAINED AND DISCOUNTED ON ACCRUAL BASIS. A PROPER CALCULATION O N THIS ISSUE WILL BE SUBMITTED TO THE AO WHO WILL EXAMINE THE SAME AND A LLOW THE CLAIM AS PER DECISION OF HON. SUPREME COURT IN ROTORK CONTRO LS INDIA (P) LTD. (SUPRA) AS ABOVE. THIS GROUND OF REVENUE IS ALLOWED BUT FOR STATISTICAL PURPOSES. 80. GROUND NO.3 RELATES TO DISALLOWANCE OF INTEREST EXPENSES AND ADMINISTRATIVE EXPENSES UNDER SECTION 14A. SIMILAR ISSUE HAD ARISEN BEFORE US IN ASST. YEAR 2002-03. IN THAT YEAR WE HA VE HELD THAT SINCE ASSESSEE HAD SUFFICIENT PROFITS GENERATED THIS YEAR AND IT HAD MIXED FUNDS AND NO NEXUS IS ESTABLISHED BY THE AO AS TO WHETHER INVESTMENT WAS MADE OUT OF INTEREST BEARING FUNDS DISALLOWANCE OF INTEREST CANNOT BE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 42 MADE. SIMILARLY NO DISALLOWANCE OUT OF ADMINISTRATI VE EXPENDITURE CAN BE MADE AS THERE IS NO DIRECT NEXUS. FOLLOWING OUR ABO VE ORDER WE DISMISS THIS GROUND OF REVENUE 81. GROUND NO.4 RELATES TO ISSUE OF SALES TAX AND E XCISE DUTY FOR COMPUTATION OF DEDUCTION UNDER SECTION 80HHC. SIMIL AR ISSUE HAD ARISEN BEFORE US IN ASST. YEAR 2002-03 & 2003-04. FOLLOWIN G OUR ORDER IN THAT YEAR WE DECIDE THIS GROUND AGAINST THE REVENUE. THI S GROUND IS ACCORDINGLY REJECTED. 82. GROUND NO.5 RELATES TO EXCLUSION OF BAD DEBTS R ECOVERED SUNDRY CREDIT AND SALES-TAX REFUND AND EXCISE REFUND. 83. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. SIMILAR ISSUE HAD ARISEN IN ASST. YEAR 2002-03 AND 2003-04 ON DIFFERENT ITEMS. THE ASSESSEE HAS REFERRED TO THE JUDGMENT OF HON. BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S PFIZER LTD. (2010) 233 CTR 521 WHEREIN IT IS HELD THAT INSURANCE CLAIM ON ACCOUNT OF STOCK -IN-TRADE WOULD NOT BE SUBJECT TO DEDUCTION OF 90% AS PER CLAUSE (I) OF EX PLANATION (BAA) TO SECTION 80HHC. 84. IN CASE OF BAD DEBT RECOVERED OF RS.18 23 000/- IT IS TO BE ENQUIRED WHETHER THEY ARE RELATED TO TRADE AND WHAT TREATMEN T HAS BEEN GIVEN IN COMPUTATION OF DEDUCTION UNDER SECTION 80 HHC WHEN THEY WERE WRITTEN OFF IN THE BOOKS OF ACCOUNT AND CLAIM WAS ALLOWED A CCORDINGLY. IF THE BAD DEBT DIRECTLY RELATED TO TRADE THEN THEY WOULD BE B USINESS RECEIPTS AND EXCLUSION OF 90% WOULD NOT BE APPLICABLE. SIMILARLY IF SUNDRY CREDIT BALANCE WHICH WERE WRITTEN BACK ALSO RELATED TO TRA DE THEN THEY WOULD BE BUSINESS INCOME AND EXCLUSION OF 90% WILL NOT BE AP PLICABLE. SAME IS THE POSITION IN RESPECT OF SALES-TAX AND EXCISE DUTY RE FUND. THEY ARE ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 43 APPARENTLY BUSINESS RECEIPTS AND THEY ARE NOT AKIN TO INTEREST COMMISSION BROKERAGE CHARGES ETC. THEREFORE THE PRINCIPLE OF EXCLUSION OF 90% WOULD NOT BE APPLICABLE. IN ANY CASE THE AO WILL EX AMINE THE ACCOUNT AND APPLY THE PRINCIPLES OF EXCLUSION OF 90% ONLY I N RESPECT OF THOSE SUMS WHICH ARE DIRECTLY AKIN TO INTEREST BROKERAGE COMMISSION CHARGES ETC. IF ANY RECOVERY OR RECEIPT IS DIRECTLY RELATAB LE TO BUSINESS THEN EXCLUSION OF 90% WILL NOT BE APPLICABLE. WE ACCORDI NGLY RESTORE THIS MATTER TO THE FILE OF AO TO DECIDE AFRESH IN THE LI GHT OF ABOVE OBSERVATIONS. THIS GROUND OF REVENUE IS ALLOWED BUT FOR STATISTICAL PURPOSES. 85. GROUND NOS.6 & 7 ARE GENERAL IN NATURE AND HENC E NO SPECIFIC ADJUDICATION IS REQUIRED. AS A RESULT APPEAL OF TH E REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 86. IN THE RESULT - 1. ITA NO.1241/AHD/2006 ASST. YEAR 2002-03 (REVENUE S APPEAL) PARTLY ALLOWED FOR STATISTICAL PURPOSES. 2. ITA NO.1476/AHD/2006 ASST. YEAR 2002-03 (ASSESSE ES APPEAL) IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL P URPOSES. 3. ITA NO.1926/AHD/2007 ASST. YEAR 2003-04 (REVENUE S APPEAL) IS DISMISSED. 4. ITA NO.2002/AHD/2007 ASST. YEAR 2003-04 (ASSESSE ES APPEAL) IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL P URPOSES. 5. ITA NO.12/AHD/2008 ASST. YEAR 2004-05 (REVENUES APPEAL) IS ALLOWED FOR STATISTICAL PURPOSES. ITA NOS.1241 & 1476/AHD/2006 & FOUR OTHERS ASST. YEAR 2002-03 & OTHERS 44 6. ITA NO.4402/AHD/2007 ASST. YEAR 2004-05 (ASSESSE ES APPEAL) IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL P URPOSES. ORDER WAS PRONOUNCED IN OPEN COURT ON 11/2/11. SD/- SD/- (MUKUL KR. SHRAWAT) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD DATED : 11/2/11/ MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD 1.DATE OF DICTATION 28/1/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 4/2/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..