The ITO, Ward-4(4),, Ahmedabad v. Madhur Industries Limited, Ahmedabad

ITA 1281/AHD/2005 | 2001-2002
Pronouncement Date: 05-02-2010 | Result: Allowed

Appeal Details

RSA Number 128120514 RSA 2005
Bench Ahmedabad
Appeal Number ITA 1281/AHD/2005
Duration Of Justice 4 year(s) 9 month(s) 2 day(s)
Appellant The ITO, Ward-4(4),, Ahmedabad
Respondent Madhur Industries Limited, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 05-02-2010
Appeal Filed By Department
Order Result Allowed
Bench Allotted A
Tribunal Order Date 05-02-2010
Date Of Final Hearing 28-01-2010
Next Hearing Date 28-01-2010
Assessment Year 2001-2002
Appeal Filed On 03-05-2005
Judgment Text
- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI JM AND D.C.AGRAWAL A M INCOME-TAX OFFICER WD-4(4) AHMEDABAD. V/S . MADHUR INDUSTRIES LTD. MADHUR COMPLEX STADIUM CIRCLE NAVRANGPURA AHMEDABAD. PAN NO.AABCM 3786D (APPELLANT) .. (RESPONDENT) AND MADHUR INDUSTRIES LTD. MADHUR COMPLEX STADIUM CIRCLE NAVRANGPURA AHMEDABAD. V/S . INCOME-TAX OFFICER WD- 4(4) AHMEDABAD. PAN NO.AABCM 3786D (APPELLANT) .. (RESPONDENT) REVENUE BY :- SHRI RAHEEV AGARWAL CIT/DR ASSESSEE BY:- SHRI S. N. SOPARKAR AR ITA NO.1281/AHD/2005 ASST. YEAR :2001-02 ITA NO.1291/AHD/2005 ASST. YEAR :2001-02 ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 2 O R D E R PER D.C.AGRAWAL ACCOUNTANT MEMBER. THESE ARE TWO CROSS APPEALS ONE FILED BY THE REVE NUE AND THE OTHER FILED BY THE ASSESSEE AGAINST THE ORDER OF LD . CIT(A) DATED 28.02.2005. THE GROUNDS RAISED BY THE REVENUE ARE A S UNDER :- 1. THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS OF THE CASE IN REDUCING THE ADDITION MADE BY THE AO FROM RS.77.22 TO 20.39 LACS FOR MUMBAI DIVISION ON THE BASIS OF THE EXPORT TURNOVER RATIO OF MUMBAI DIVISION AT RS.18.97 CRORES FROM TH E TOTAL TURNOVER OF RS.32.32 CRORES. 2. THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS OF THE CASE IN ARRIVING AT THE COST OF FUND INTEREST OF MARINE EXP ORT VERAVAL AT RS.2 50 290/- AS AGAINST THE COST OF FUND INTERE ST CALCULATED BY THE A.O. AT RS.1 80 500/- ON THE BASIS OF EXPORT TURNOVER RATIO OF MARINE EXPORT VERAVAL AT RS.2.3 CRORES FR OM THE TOTAL TURNOVER OF RS.32.32 CRORES. 2. WHEREAS THE GROUNDS RAISED BY THE ASSESSEE ARE A S UNDER :- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN INCLUDING THE AMOUNT OF RS.21 46 5 675/- BEING DEPB LICENSE RECEIVABLE TO THE GROSS TOTAL INCOME O F THE APPELLANT. UNDER (HE FACTS AND CIRCUMSTANCES OF THE CASE NO S UCH DEPB LICENSE BENEFIT HAS ACCRUED TO OR RECEIVED BY THE A PPELLANT AND THEREFORE THE SAME OUGHT TO HAVE BEEN EXCLUDED IRON ] THE GROSS TOTAL INCOME OF THE APPELLANT. 2. THE LD C1T(A) HAS ERRED IN LAW AND ON FACTS IN ALLOCATING THE INTEREST EXPENSES TO TRADING EXPORT DIVISION AT MUM BAI AND VERAVAL ON THE BASIS OF PROPORTIONATE TURNOVER OF T HE BUSINESS WITHOUT APPRECIATING THAT THERE WAS NO NEXUS BETWEE N THE RUNDS BORROWED AND UTILIZED BY THE RESPECTIVE UNITS AND F URTHER THE APPELLANT WAS HAVING SUFFICIENT INTEREST FREE FUNDS SO ASNOTTOCIILL FOR ANY DISALLOWANCE OF INTEREST AT ALL. ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 3 3. THE LD R CIT(A) HAS ERRED IN LAW AND OH TACTS IN CONFIRMING THE ACTION OF AO IN REDUCING THE AMOUNT OF BAD DEBT FRO M THE PROFITS WHILE CALCULATING DEDUCTION U'S 80HHC OF THE ACT 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN ALLOCATING VARIOUS INDIRECT EXPENSE S TO MARINE EXPORT DIVISION AT VERAVAL ON THE BASIS OF PROPORTI ONATE TURNOVER OF THE APPELLANT WITHOUT APPRECIATING THAT THE APPE LLANT HAD MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR EACH DIVI SION AND EXPENSES INCURRED AT VARIOUS DIVISIONS BOTH DIRECT AS WELL AS INDIRECT HAVE BEEN PROPERLY RECORDED IN SUCH SEPARA TE BOOKS OF ACCOUNTS OF EACH UNIT. 5. THE LD C1T(A) HAS ERRED IN LAW AND ON TACTS IN CONFIRMING THE ACTION OF AO IN DISALLOWING INTEREST OF RS 4 53.400 /- ON NOTIONAL BASIS. LD CIT(A) HAS FURTHER ERRED IN LAW AND ON F ACTS IN NOT APPRECIATING THAT THE APPELLANT WAS HAVING SUFFICIE NT INTEREST FREE FUNDS AT ITS DISPOSAL TO COVER FOR ANY ALLEGED INTE REST FREE ADVANCES GIVEN BY IT 6. THE LD. C1T(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN DISALLOWING DEPRECIATION ON FURNITU RE AND BUILDING AMOUNTING TO RS 24 675/-. 7. THE LEARNED C1T(A) HAS ERRED IN LAW AND ON FACT S IN CONTINUING THE LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT. 8. INITIATION OF PENALTY PROCEEDINGS U/S 27L(L)( C) OF THE ACT IS NOT JUSTIFIED. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE IS IN TH E BUSINESS OF MANUFACTURING MASALAS. IT HAS HEAD OFFICE AND FA CTORY WHICH IS SITUATED AT AHMEDABAD. IT ALSO HAS TWO DIVISIONS ONE AT MUMB AI AND THE OTHER AT VERAVAL FROM WHERE IT IS CARRYING OUT EXPORT TRADIN G. THE EXPENSES INCURRED BY THE ASSESSEE FOR EXPORT TRADING ARE BOT H DIRECT AND INDIRECT. IT IS CLAIMED THAT SEPARATE SETS OF BOOKS OF ACCOUNTS ARE KEPT IN HEAD OFFICE AND THE DIVISIONS. DURING THE ASSESSMENT YEAR ASSES SEE HAS BEEN DOING ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 4 TRADING FROM HEAD OFFICE AND EXPORT BUSINESS FROM THE MUMBAI DIVISION. IT STARTED ANOTHER DIVISION FROM VERAVAL FROM WHERE IT IS CARRYING OUT EXPORT BUSINESS IN MARINE PRODUCTS. 4. IN DEPARTMENTAL APPEAL GROUND NO.1 AND IN ASSESS EES APPEAL GROUND NO.2 RELATE TO ALLOCATION OF INTEREST EXPEND ITURE DEBITED TO HEAD OFFICE ACCOUNT BUT ALLOCATED BY THE AO BETWEEN BO MBAY DIVISION AND HEAD OFFICE THEREBY REDUCING THE BENEFIT OF EXPORT DEDUCTION AVAILABLE TO THE ASSESSEE UNDER SECTION 80 HHC IN RESPECT OF TRA DING ITEMS FROM MUMBAI DIVISION. THE AO OBSERVED THAT ASSESSEE HAS PREPARED SEPARATE P & L A/C OF EXPORT DIVISIONS AND EXPENSES DIRECT AND INDIRECT RELATING TO EXPORT DIVISIONS ARE DEBITED IN THEIR RESPECTIVE PR OFITS AND LOSS ACCOUNT. THOUGH THE ASSESSEE HAS DEBITED IN THE BOOKS OF MU MBAI DIVISION INTEREST EXPENSES OF RS.10 36 042/- PAID TO THE BAN K BUT ON VERIFICATION OF ITS BALANCE SHEET IT WAS NOTICED THAT A SUM OF RS.4 33.85 LACS WERE TRANSFERRED FROM HEAD OFFICE TO THE MUMBAI DIVISION AT THE END OF THE ACCOUNTING YEAR. THE HEAD OFFICE HAD IN ALL DEBITED A SUM OF RS.1 86 88 165/- AS INTEREST EXPENSES WHICH INCLUDE D THE SUM OF RS.10 36 042/-. THE AO REQUIRED THE ASSESSEE TO EXP LAIN WHY NOT PROPORTIONATE EXPENDITURE UNDER THE HEAD INTEREST BE NOT ALLOCATED FROM HEAD OFFICE TO THE MUMBAI EXPORT DIVISION. THE ASSE SSEE SUBMITTED THAT THE HEAD OFFICE AND EXPORT DIVISIONS ARE SEPARATE D IVISIONS AND DISTINCT UNITS SEPARATE BOOKS OF ACCOUNTS FOR THEM ARE MAIN TAINED THEIR BANK A/CS ARE SEPARATE INDEPENDENT BANK LIMITS ARE OBTAINED THE EXPENSES RELATING TO EXPORT ARE DEBITED TO EXPORT DIVISIONS AND THOSE RELATING TO HEAD OFFICE ARE DEBITED TO HEAD OFFICE SEPARATELY. IN ADDITION THE ASSESSEE EXPLAINED THAT ASSESSEE HAS RECEIVED A SUM OF RS.35 01 755/- AS SHARE BADALA EXPENDITURE WHICH IS CREDITED ONLY IN THE HEAD OFF ICE. THE AO FURTHER ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 5 INQUIRED AND FOUND THAT ASSESSEE HAS TAKEN HUGE LOA N FROM MADHUPURA MERCANTILE CO-OP. BANK LTD. AND DIVERTED FUNDS AS A DVANCE TO ITS GROUP CONCERN. THE ASSESSEE HAS RECOVERED INTEREST ON ADV ANCE GIVEN BY IT TO OTHERS AND NET INTEREST IS DEBITED AS EXPENSES IN P & L A/C. REJECTING THE EXPLANATION FURNISHED BY THE ASSESSEE THE AO WORKED OUT INTEREST ON SUM OF RS.429 LACS BEING AVERAGE FUNDS TRANSFERRED TO T HE EXPORT DIVISION FROM THE HEAD OFFICE AND THUS REDUCED THE EXPORT PROFIT BY RS.77.22 LACS BEING INTEREST WORKED OUT @ 18% ON RS.429 LACS. 5. LD. CIT(A) UPHELD THE FINDING OF THE AO THAT SOM E INTEREST IS REQUIRED TO BE ALLOCATED TO THE EXPORT DIVISION BUT HE DIRECTED TO ALLOCATE INTEREST ON TURNOVER BASIS. ACCORDING TO LD. CIT(A) CASH FLOW STATEMENT HAS NOT BEEN PROVIDED IN RESPECT OF BORROWED FUNDS TRANSFERRED TO THE EXPORT DIVISION FROM HEAD OFFICE THEREFORE IT IS NOT POSSIBLE TO WORK OUT ALLOCATION OF INTEREST ON ACTUAL CASH UTILISATION B ASIS. ACCORDING TO HIM THE TOTAL EXPORT TURNOVER OF MUMBAI DIVISION IS 18.97 C RORES WHEREAS TOTAL TURNOVER OF THE ASSESSEE IS 32.32 CRORES. ACCORDING TO HIM INTEREST DEBITED TO THE HEAD OFFICE IS RS.35 15 310/- THEREFORE IN THE RATIO OF TURNOVER OF EXPORT DIVISION TO TOTAL TURNOVER OF THE ASSESSEE INTEREST ATTRIBUTABLE TO MUMBAI DIVISION WORKS OUT TO RS.20 38 880/-. HE ACC ORDINGLY CONFIRMED ALLOCATION OF INTEREST FROM HEAD OFFICE TO MUMBAI D IVISION TO THIS EXTENT FOR REDUCING EXPORT PROFIT FOR COMPUTATION OF DEDUC TION U/S 80 HHC AND THUS ALLOWED PARTIAL RELIEF TO THE ASSESSEE. THE DE PARTMENT IS AGAINST THIS RELIEF WHEREAS THE ASSESSEE IS IN APPEAL AGAINST TH E ALLOCATION SUSTAINED BY LD. CIT(A). 6. BEFORE US LD. DR SUBMITTED THAT FIRSTLY ONUS IS ON THE ASSESSEE TO PROVIDE DAY TO DAY CASH FLOW STATEMENT SO THAT UTIL IZATION OF FUND BORROWED FROM HEAD OFFICE COULD BE WORKED OUT AND A CCORDINGLY INTEREST ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 6 COULD BE CALCULATED. IN THE ABSENCE OF SUCH CASH FL OW STATEMENT AO WAS JUSTIFIED IN TAKING AN AVERAGE OF OPENING BALANCE A ND CLOSING CREDIT BALANCE FROM THE HEAD OFFICE TO THE EXPORT DIVISION . SECONDLY THE LD. CIT(A) WAS INCORRECT NOT TO CONSIDER THE TOTAL INTE REST PAID BY THE HEAD OFFICE AND RATHER ALLOCATING ONLY NET INTEREST DEBI TED TO THE HEAD OFFICE ACCOUNT. IT HAS TO BE SHOWN BY THE ASSESSEE THAT RE CEIPT OF INTEREST BY IT WAS FROM ADVANCING OF INTEREST BEARING FUNDS. IF AS SESSEE IS RECEIVING INTEREST ON DELAYED RECOVERY OF SALE PROCEEDS THEN THAT SHOULD NOT BE ADJUSTED AGAINST INTEREST PAYMENT. THE ASSESSEE HAS TO SHOW THE NEXUS OF INTEREST EXPENDITURE AGAINST INTEREST INCOME BEFORE NETTING. ONCE A SUM OF RS. 4.29 CRORES IS OUTSTANDING THROUGHOUT THE YEAR TO THE EXPORT DIVISION FROM HEAD THEN INTEREST HAS TO BE ALLOCATED ON SUCH OUTSTANDING SUM. IF EXPORT DIVISION WOULD HAVE BORROWED FUND FROM ELSEW HERE IT WOULD HAVE TO PAY INTEREST ON THIS SUM THEN WHY NOT PROPORTION ATE INTEREST BORNE BY THE HEAD OFFICE ON THE DAILY UTILIZATION OF FUNDS S HOULD BE ALLOCATED TO THE EXPORT DIVISION. IN FACT ACCORDING TO THE LD. DR D EDUCTION UNDER SECTION 80 HHC HAS BEEN CALCULATED BY NOT ALLOCATING INTERE ST FROM HEAD OFFICE TO THE EXPORT DIVISION. 7. LD. AR ON THE OTHER HAND SUBMITTED THAT SYSTEM OF ACCOUNTING HAS BEEN THE SAME IN EARLIER YEARS. NO INTEREST ALLOCAT ION WAS DONE IN EARLIER YEARS. THEREFORE FOLLOWING THE PRINCIPLES OF CONSI STENCY NO DISTURBANCE IN THE ACCOUNT SO MAINTAINED SEPARATELY FOR EXPORT DIVISION AND HEAD OFFICE SHOULD BE DONE. HE REFERRED TO THE DECISION OF HON. KARNATAKA HIGH COURT IN CIT VS. SRIDEV ENTERPRISES (1991) 192 ITR 165 (KAR) FOR THE PROPOSITION THAT IF NO DISALLOWANCE OF INTE REST IS DONE BY THE DEPARTMENT IN EARLIER YEAR ON THE ADVANCES GIVEN BY THE ASSESSEE ON THE PRESUMPTION THAT SUCH ADVANCES WERE OUT OF BORROWED FUNDS THEN ADVANCES TO THE FIRM SHOWN AT THE FIRST DAY OF THE YEAR SHOULD BE EXCLUDED ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 7 FOR THE PURPOSES OF COMPUTING OF DISALLOWANCE OF DE DUCTION. HE ALSO REFERRED TO THE DECISION OF HON. SUPREME COURT IN R ADHASWAMI SATSANG CASE 193 ITR 321(SC) FOR THE PROPOSITION THAT DEPAR TMENT SHOULD TAKE CONSISTENT STAND. THE LD. AR ALSO SUBMITTED THAT EX PORT DIVISION AND HEAD OFFICE ARE MAINTAINING SEPARATE BOOKS OF ACCOUNT T HEIR ACCOUNTS ARE SEPARATELY AUDITED THEREFORE THERE IS NO CASE FOR ALLOCATING INTEREST FROM HEAD OFFICE TO THE EXPORT DIVISION. HE THEN SUBMITT ED THAT NO FUNDS HAVE BEEN BORROWED IN THE CURRENT YEAR BECAUSE OPENING B ALANCE WAS RS.443 LACS AND CLOSING BALANCE WAS RS.423 LACS. THUS THER E IS A REDUCTION IN BORROWED FUNDS AND IF NO INTEREST IS ALLOCATED IN T HE EARLIER YEAR ON SUM OF RS.443 LACS THEN THERE IS NO CASE FOR ALLOCATING AN Y INTEREST ON RS.429 LACS. FINALLY HE CONCLUDED THAT EVEN IF ANY ALLOCAT ION IS TO BE DONE THEN INTEREST ALREADY DEBITED IN THE EXPORT DIVISION SHO ULD BE SET OFF AGAINST WHAT IS REQUIRED TO BE ALLOCATED AS PER ANY FORMUL A. LD. AR ALSO POINTED OUT THAT HEAD OFFICE HAD ITS OWN CAPITAL TO THE EXT ENT OF RS.4 CRORES WHICH INCLUDED CURRENT YEARS PROFIT THEREFORE IT CANNO T BE SAID THAT ONLY INTEREST BEARING FUNDS WERE TRANSFERRED TO EXPORT D IVISION. IN FACT FIRST THE INTEREST FREE FUNDS/CAPITAL AVAILABLE WITH THE HEAD OFFICE SHOULD BE CONSIDERED AS ADVANCED TO THE EXPORT DIVISION AND T HEN IF REQUIRED INTEREST BEARING FUNDS SHOULD BE CONSIDERED AS TRAN SFERRED. 8. LD. DR IN THE REJOINDER SUBMITTED THAT INTEREST IS NOT DIRECT COST BUT IT IS AN INDIRECT COST THEREFORE ALLOCATION OF INT EREST IS REQUIRED TO BE DONE IN ACCORDANCE WITH THE EXPLANATION TO SECTION 80 HH C AND CLAUSE (E) THEREOF. SECTION 80 HHC DOES NOT CONSIDER MAINTENAN CE OF SEPARATE BOOKS OF ACCOUNTS FOR EXPORT DIVISION AND DOMESTIC DIVISION AS A CONDITION. IT CONSIDERS ENTIRE BUSINESS AS A WHOLE WHETHER EXPORTED OR TRADED DOMESTICALLY. LD. DR THEN SUBMITTED THAT THE INTEREST FREE CAPITAL IF AT ALL ASSESSEE HAS HAS BEEN DIVERTED TO OTHER BUSINESS AND IT IS NOT AVAILABLE FOR GIVING TO THE EXPORT DIVISION. IN ANY CASE ONUS IS ON THE ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 8 ASSESSEE TO SHOW THAT IT WAS INTEREST FREE CAPITAL AND NOT INTEREST BEARING FUNDS WHICH WAS ADVANCED TO THE EXPORT DIVISION. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. THE FIRST ISSUE TO BE ADDRESSED IS WHETH ER FOLLOWING THE EARLIER ASSESSMENT YEAR NO ALLOCATION OF INTEREST SHOULD BE DONE. IN OUR CONSIDERED VIEW IF THE FACTS RELATING TO TOTAL INTE REST DEBITED IN THE HEAD OFFICE AND INTEREST DEBITED OR REQUIRED TO BE DEBIT ED IN THE EXPORT DIVISION ARE NOT CONSIDERED BY THE AO THEN IT CANNOT BE SAID THAT AO HAD FORMED AN OPINION AND ACCORDINGLY IT CANNOT BE SAID THAT H E CONSIDERED IT PROPER NOT TO ALLOCATE ANY FURTHER INTEREST FROM HEAD OFFI CE TO THE EXPORT DIVISION IN ADDITION TO WHATEVER IS ALREADY DEBITED ON ACCOU NT OF FUNDS BORROWED BY THE EXPORT DIVISION DIRECTLY ON ITS OWN ACCOUNT FROM THE BANK. THERE IS NO MATERIAL PLACED ON RECORD TO SUGGEST THAT AO HAS APPLIED HIS MIND AND CONSIDERED THAT NO ALLOCATION IN EARLIER YEARS WAS NECESSARY. IN OUR CONSIDERED VIEW CONSISTENCY IS THE RECOGNIZED PRINC IPLE AND CURBS OUT AN EXCEPTION FROM THE PRINCIPLE OF RES JUDICATA IF FA CTS AND CIRCUMSTANCES OF THE CASE REMAIN THE SAME AND POSITION OF LAW HAS NO T CHANGED. IN ANY CASE THERE IS A NECESSARY CONDITION INHERENT IN THE PRI NCIPLE OF CONSISTENCY THAT STAND OF THE AO IN THE PAST SHOULD BE LEGALLY CORRECT AND THERE IS NO ERROR EITHER OF LAW OR OF FACT. IT IS ALSO A JUDIC IALLY RECOGNIZED PRINCIPLE THAT THERE IS NO HEROISM TO CONTINUE TO COMMIT ERRO RS FROM ONE YEAR TO ANOTHER. IF AO HAS NOT AT ALL CONSIDERED THE ISSUE; OR ASSESSMENT HAS BEEN ACCEPTED UNDER SECTION 143(1); OR ALL THE NECESSARY FACTS FOR APPLYING MIND ON THE ISSUE ARE NOT BROUGHT INTO THE KNOWLEDG E OF THE AO; OR WHILE ACCEPTING A POSITION IN THE EARLIER ASSESSMENT YEAR S GRAVE ERROR OF LAW OR FACT HAS BEEN COMMITTED; OR THERE HAS BEEN CHANGE I N LAW; OR THERE IS A JUDICIAL DECISION ON THE SUBJECT; OR THERE ARE DISC OVERY OF NEW FACTS WHICH WERE NOT AVAILABLE IN THE EARLIER YEARS THEN PRINCI PLE OF CONSISTENCY ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 9 CANNOT BIND THE AO AND HE HAS TO APPLY HIS MIND AFR ESH AND ARRIVE AT A FRESH DECISION. IN THE PRESENT CASE AS ALREADY STAT ED THE ENTIRE DETAILS OF INTEREST PAID BY THE HEAD OFFICE FUNDS BORROWED BY THE HEAD OFFICE OR ADVANCES GIVEN BY THE HEAD OFFICE TO OTHERS ARE NOT SHOWN TO HAVE BEEN SUBMITTED TO THE AO. MATERIAL PLACED BEFORE US DO N OT SHOW THAT HE HAD IN FACT APPLIED HIS MIND AND TAKEN A STAND WHICH REMAI N UNCONTROVERTED TILL THE PRESENT ASST. YEAR. IN OUR CONSIDERED VIEW IF H EAD OFFICE IS PAYING INTEREST ON THE BORROWED FUNDS AND FUNDS ARE TRANSF ERRED TO DIVISION OR SISTER CONCERN WITHOUT INTEREST THEN FIRST PRESUMPT ION IS THAT IT HAS TRANSFERRED SUCH INTEREST BEARING FUNDS TO THE EXPO RT DIVISION. ONUS IS ON THE ASSESSEE TO SHOW THAT IT HAD INTEREST FREE CAPI TAL WHICH WAS AVAILABLE FOR TRANSFER TO THE EXPORT DIVISION. IN ANY CASE NO CASH FLOW STATEMENT IN THE CURRENT YEAR OR IN THE EARLIER YEAR HAS BEEN SH OWN TO SUPPORT THE STAND TAKEN BY LD. AR. NOTWITHSTANDING IN ANY CASE PROFI T FROM EXPORT DIVISION HAS TO BE COMPUTED IN ACCORDANCE WITH SUB-SEC.(3)(B ) OF SECTION 80 HHC. MERELY BECAUSE ASSESSEE HAS MAINTAINED SEPARATE BOO KS OF ACCOUNTS FOR EXPORT DIVISION OPERATION OF SUB-SECTION (3)(B) CAN NOT BE EXCLUDED. THUS THE AO IS WITHIN HIS POWER TO WORK OUT DIRECT COST AND INDIRECT COST ATTRIBUTABLE TO EXPORT OF SUCH TRADING GOODS. THE DIRECT COST INDIRECT COST TRADING GOODS ARE DEFINED IN EXPLANATION TO SECTION 80 HHC AS UNDER :- EXPLANATION : (D) 'DIRECT COSTS' MEANS COSTS DIRECTLY ATTRIBUTAB LE TO THE TRADING GOODS EXPORTED OUT OF INDIA INCLUDING THE PURCHASE PRICE OF SUCH GOODS ; (E) 'INDIRECT COSTS' MEANS COSTS NOT BEING DIRECT COSTS ALLOCATED IN THE RATIO OF THE EXPORT TURNOVER IN RESPECT OF TRADING GOODS TO THE TOTAL TURNOVER ; (F) 'TRADING GOODS' MEANS GOODS WHICH ARE NOT MANU FACTURED OR PROCESSED BY THE ASSESSEE. ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 10 10. ONCE AO IS LEGALLY DUTY BOUND TO COMPUTE THE PR OFITS DERIVED FROM EXPORT AS PER SUB-SECTION 3(B) THEN MERELY BECAUSE IT HAS NOT BEEN DONE IN THE PAST WOULD NOT JUSTIFY THAT IT SHOULD NOT BE DO NE THIS YEAR ALSO. THE DECISION OF HON. KARNATAKA HIGH COURT IN SRIDEV ENT ERPRISES (SUPRA) REFERRED TO BY THE LD. AR WOULD NOT BE APPLICABLE F OR THE REASON THAT NO NEW FACTS ARE DISCERNED IN THE ASST. YEAR IN QUESTI ON IN THAT CASE AND THERE WAS NO PROVISION LIKE SUB-SECTION (3)(B) OF S ECTION 80 HHC FOR APPLICATION. THUS WE APPROVE THE ACTION OF THE AUTH ORITIES BELOW IN ALLOCATING INTEREST BEING INDIRECT COST FOR COMPU TING PROFIT OF EXPORT DIVISION. WE REJECT THE ARGUMENTS OF LD. AR THAT IF ASSESSEE IS MAINTAINING THE BOOKS OF ACCOUNTS SEPARATELY FOR EXPORT DIVISIO N THEN NO SUCH ALLOCATION IS REQUIRED. OUR VIEW IS SUPPORTED BY DE CISION OF HON. KERALA HIGH COURT IN CIT VS. PARI AGRO INDUSTRIES LTD. (20 02) 257 ITR 41 (KER) ON WHICH LD. DR STRONGLY RELIED. 11. NOW COMING TO THE BASIS TO BE ADOPTED FOR ALLOC ATION WE FIND THAT IN ABSENCE OF DAY TO DAY CASH FLOW STATEMENT FROM H EAD OFFICE TO EXPORT DIVISION TURNOVER IS THE MOST SUITABLE CRITERIA WHI CH IS ALSO APPROVED BY EXPLANATION (E) AS REPRODUCED ABOVE. THE TOTAL TURN OVER OF ASSESSEE HAS BEEN SHOWN IN THE ASSESSMENT ORDER AND APPELLATE OR DER AS UNDER :- DOMESTIC SALES H.O. RS.11 04 16 125/- EXPORT SALES MARINE DIV. RS. 2 30 17 123/- EXPORT SALES OF MUM. DIV. RS.17 54 39 191/- 12. THE TOTAL INTEREST CHARGES DEBITED BY THE ASSES SEE INCLUDING EXPORT DIVISIONS ARE GIVEN IN THE ASSESSMENT ORDER AS UNDE R :- ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 11 LOCAL EXPORT DIVISION TOTAL INTEREST 1 76 52 123 10 36 042 1 86 88 165 BANK CHARGES 1 20 209 11 29 872 12 50 081 TOTAL 1 77 72 332 21 65 914 1 99 38 246 13. TO THE EXTENT THE ASSESSEE IS ABLE TO ESTABLISH NEXUS OF INTEREST BEARING FUNDS TRANSFERRED/ADVANCES TO NON-TRADE WOR K (FOR EARNING INCOME OTHER THAN TRADE IN HEAD OFFICE EXPORT DIVISIONS A T MUMBAI AND VERAVAL) THEN INTEREST ATTRIBUTABLE TO THAT EXTENT WOULD BE EXCLUDED FROM THE TOTAL INTEREST PAYMENT I.E. IF INTEREST BEARING FUNDS ARE DIVERTED TO ANY OTHER INCOME OTHER THAN INCOME FROM DOMESTIC TRADE AND EX PORT TRADE THEN INTEREST ON SUCH BORROWED FUNDS SO DIVERTED WILL BE EXCLUDED FROM THE TOTAL INTEREST PAYMENT. WHATEVER BALANCE IS LEFT I T WOULD BE ALLOCATED IN THE RATIO OF TURNOVER OF THREE DIVISIONS TO THE TOT AL TURNOVER. OUT OF SUCH INTEREST ALLOCATED TO THE THREE DIVISIONS NAMELY H EAD OFFICE EXPORT DIVISION AT MUMBAI AND MARINE DIVISION AT VERAVAL INTEREST SPECIFICALLY DEBITED TO THE RESPECTIVE DIVISION WOULD BE FURTHER REDUCED AND ONLY THE BALANCE AFTER SUCH DEDUCTION WOULD BE FURTHER DEBIT ED FROM THE EXPORT PROFITS. INTEREST EARNED BY RESPECTIVE DIVISIONS I N THEIR TRADE WILL BE CONSIDERED ONLY AFTER ALLOCATION OF INTEREST. IT WI LL NOT HAVE ANY EFFECT ON REDUCING THE INTEREST BURDEN TO BE ALLOCATED TO THE RESPECTIVE DIVISIONS. 14. NOTATIONALLY WE CLARIFY THE COMPUTATION OF ALLO CABLE INTEREST AS UNDER:- LET US SAY A IS TOTAL INTEREST PAYMENT ON BORROWE D FUNDS UTILIZED IN DOMESTIC TRADE EXPORT TRADE AND OTHERS. B IS THE INTEREST ATTRIBUTABLE TO THE ADVANCING O F INTEREST BEARING BORROWED FUNDS TO OTHERS ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 12 C IS THE INTEREST DEBITED IN THE MUMBAI EXPORT D IVISION. TE IS THE EXPORT TURNOVER OF MUMBAI DIVISION TT IS THE TOTAL TURNOVER OF ALL THE DIVISIONS TM IS THE TURNOVER OF MARINE DIVISION OF VERAVAL. TD IS THE TURNOVER OF DOMESTIC TRADE THEN - TT = TD + TM + TE ALLOCABLE INTEREST I = A-B INTEREST ALLOCATED TO MUMBAI DIVISION TE = (A-B) X TE TT SIMILAR CALCULATION CAN BE DONE FOR MARINE DIVISION 15. FOR CARRYING OUT NECESSARY CALCULATION AND FOR GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE FOR SUBM ITTING EVIDENCE FOR SHOWING NEXUS AS SPELT OUT ABOVE WE RESTORE THIS I SSUE TO THE FILE OF AO. 16. AS A RESULT GROUND NO.1 IN REVENUES APPEAL AND GROUND NO.2 IN ASSESSEES APPEAL ARE ALLOWED BUT FOR STATISTICAL P URPOSES. 17. GROUND NO.2 OF REVENUES APPEAL IS REGARDING AL LOCATION OF INTEREST TO THE MARINE DIVISION. THIS ISSUE IS COVE RED BY OUR ABOVE DISCUSSION AND ACCORDINGLY FOR CALCULATING ALLOCABL E INTEREST WE RESTORE THE MATTER TO THE AO AS PER DIRECTION GIVEN ABOVE W HILE DISPOSING OF GROUND NO.1 ABOVE. ACCORDINGLY THIS GROUND OF REVEN UE IS ALLOWED FOR STATISTICAL PURPOSES. 18. IN ASSESSEES APPEAL GROUND NO.1 RELATES TO C ALCULATING INCLUDIBLE PROFIT ON DEPB LICENCE. THE ASSESSEE HAD ACTUALLY R ECEIVED A SUM OF ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 13 RS.9 97 573/- AND MADE A PROVISION OF DEPB AMOUNT O F RS.21 46 675/-. ACCORDING TO THE AO THE ENTIRE SUM OF RS.31 44 248 (RS.21 46 675 + 9 97 573)IS INCLUDIBLE. ON THE OTHER HAND ASSESSEE HAD CONSIDERED SAME AS EXPORT INCENTIVE AND CLAIMED DEDUCTION U/S 80 HH C THEREON. THE AO ANALYSED SECTION 28(IIIA) 28(IIIB) 28(IIIC) AND T HE PROVISIONS OF FOREIGN TRADE (DEVELOPMENT & REGULATION) ACT 1992 AND RELI ED ON THE DECISIONS OF HON. SUPREME COURT IN THE CASES OF CIT VS. STERL ING FOODS 237 ITR 579(SC) AND HINDUSTAN LEVER LTD. VS. CIT 239 ITR 29 7 (SC) AND CAME TO THE CONCLUSION THAT THE ASSESSEE IS NOT ENTITLED TO ANY DEDUCTION U/S 80 HHC ON DEPB LICENSE. LD. CIT(A) ON THE OTHER HAND C ONFIRMED THE VIEW OF THE AO. 19. WE HAVE HEARD THE PARTIES. THE ISSUE IS NOW COV ERED BY THE DECISION OF THE TRIBUNAL SPECIAL BENCH IN THE CASE OF TOPMAN EXPORTS VS. ITO (2009) 125 TTJ MUMBAI (SB) 289. ACCORDINGLY ONL Y THE PROFIT ELEMENT ON DEPB LICENSE HAS TO BE CONSIDERED AS INC OME AND DEDUCTION UNDER SECTION 80 HHC HAS TO BE CALCULATED IN ACCORD ANCE WITH JUDGMENT GIVEN IN TOPMAN EXPORTS CASE (SUPRA). THUS FOR CAL CULATING ALLOWABLE DEDUCTION ON DEPB LICENCE IN ACCORDANCE WITH THE JU DGMENT IN TOPMAN EXPORTS CASE WE RESTORE THE MATTER TO THE FILE OF A O. GROUND NO.1 IN ASSESSEES APPEAL IS ALLOWED BUT FOR STATISTICAL PU RPOSES. 20. GROUND NO.3 RELATES TO NOT ALLOWING THE DEDUCTI ON OF CLAIM OF BAD DEBTS FROM THE PROFITS WHILE CALCULATING DEDUCTION UNDER SECTION 80 HHC. DURING THE ASSESSMENT YEAR IN QUESTION THE ASSESSEE COMPANY WROTE OFF BAD DEBTS OF RS.17 84 996/- IN RESPECT OF SALES MAD E TO CHIEF BRAND PRODUCT LTD. SINCE BAD DEBTS ARE WRITTEN OFF IN THE BOOKS PROFITS OF THE BUSINESS ARE REDUCED. THE AO OBSERVED THAT ON THE O NE HAND ASSESSEE HAS REDUCED THE BAD DEBT IN THE FY 00-01 RELEVANT TO TH E PRESENT ASST. YEAR ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 14 BUT ADDED BACK IN THE EXPORT PROFITS FOR COMPUTING DEDUCTION UNDER SECTION 80 HHC. THE AO OBSERVED THAT IN ASST. YEAR 1999-2000 ALSO THE ASSESSEE HAD REDUCED THE PROFITS BY THE SAME AMOUNT CONSIDERING IT AS A LOSS. 21. HE ACCORDINGLY DISALLOWED THE CLAIM OF BAD DEBT UNDER SECTION 80 HHC OF RS.17 84 996/-. LD. CIT(A) CONFIRMED THE SAM E FOR THE SAME REASONING. 22. WE HAVE HEARD THE PARTIES. IN OUR CONSIDERED VI EW ASSESSEE CANNOT MAKE DOUBLE CLAIM ONCE BY REDUCING THE BUSINESS PRO FITS UNDER SECTION 36(1)(VII) AND AGAIN CLAIMING DEDUCTION UNDER SECTI ON 80HHC THEREON. IF BAD DEBT CLAIM IS DISALLOWED BY THE AO THEN IT SHOU LD BE CONSIDERED AS BUSINESS PROFIT I.E. BUSINESS PROFITS WILL BE ENHAN CED BY THE SAME AMOUNT AND ACCORDINGLY WOULD BE ENTITLED FOR DEDUCTION UND ER SECTION 80 HHC. IN ANY CASE DEDUCTION CAN BE CLAIMED EITHER AS A BA D DEBT OR UNDER SECTION 80 HHC NOT BOTH WAYS. FOR VERIFICATION WE RESTORE THE MATTER TO THE FILE OF AO. THIS GROUND OF ASSESSEE IS ALLOWED BUT FOR S TATISTICAL PURPOSES. 23. GROUND NO.4 RELATES TO ALLOCATION OF INDIRECT E XPENSES TO THE MARINE EXPORT DIVISION ON THE BASIS OF PROPORTIONAT E TURNOVER. THE ONLY GROUND TAKEN BY THE ASSESSEE AGAINST ALLOCATION OF SUCH INDIRECT COST IS THAT IT HAS BEEN MAINTAINING SEPARATE BOOKS OF ACCO UNTS AND THEREFORE PROFITS OF THE DIVISION SHOULD BE COMPUTED ONLY IN ACCORDANCE WITH THE BOOKS SO MAINTAINED. HOWEVER WHILE DISCUSSING THE ISSUE OF ALLOCATION OF INTEREST AS PER GROUND NO.2 OF THE ASSESSEES APPEA L AND GROUND NO.1 OF REVENUES APPEAL WE HAVE HELD THAT INSPITE OF ASSE SSEE MAINTAINING SEPARATE BOOKS OF ACCOUNTS FOR HEAD OFFICE OR EXPOR T DIVISION THE EXPORT PROFITS HAVE TO BE COMPUTED IN ACCORDANCE WITH SUB- SEC.(3)(B) OF SECTION 80 HHC WHICH VIEW IS SUPPORTED BY THE DECISION OF H ON. KERALA HIGH ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 15 COURT IN CIT VS. PARI AGRO INDUSTRIES (SUPRA). IN V IEW OF THIS WE UPHOLD THE ALLOCATION OF INDIRECT COST AND OVERHEAD EXPENS ES TO MARINE DIVISION BUT FOR COMPUTING SUCH ALLOCATION WE DIRECT THE AO TO ADOPT THE SAME METHODOLOGY AS LAID DOWN BY US FOR ALLOCATING INTER EST COST. IN OTHER WORDS TOTAL INDIRECT COST SHOULD BE WORKED OUT INC LUDING ALL THE THREE DIVISIONS SOME INDIRECT COST FOR NON-TRADING ACTIV ITIES SHOULD BE SEPARATELY KEPT ASIDE AND REDUCED FROM THE TOTAL OV ERALL INDIRECT COST OF THE ASSESSEE AND THE BALANCE SHOULD BE DISTRIBUTED IN THE RATIO OF TURNOVER. OUT OF THIS WHATEVER INDIRECT COST WHICH IS ALREADY DEBITED TO THE RESPECTIVE DIVISION SHOULD BE FURTHER REDUCED FROM ALLOCATED INDIRECT COST AND ONLY THE DIFFERENCE SHOULD BE FURTHER REDUCED F ROM THE PROFITS WORKED OUT AS PER BOOKS OF ACCOUNTS MAINTAINED FOR THE MAR INE DIVISION AND ACCORDINGLY DEDUCTION UNDER SECTION 80 HHC SHOULD B E COMPUTED. THEREFORE THIS GROUND OF ASSESSEE IS ALSO ALLOWED BUT FOR STATISTICAL PURPOSES. 24. GROUND NO.5 RELATES TO DISALLOWANCE OF INTEREST OF RS.4 53 400/- ON NOTIONAL BASIS. THIS HAS BEEN DISCUSSED BY CIT(A) I N PARA 5.1.3 WHILE DISPOSING OF GROUND NO.6.1 OF THE ASSESSEE IN THE A PPEAL BEFORE HIM. THE CASE OF THE REVENUE IS THAT ASSESSEE HAS NOT CHARGE D INTEREST FROM ADVANCES MADE TO M/S MADHUR SHARE & STOCK LTD. A S ISTER CONCERN OF THE ASSESSEE. THE FUNDS WERE TRANSFERRED FROM HEAD OFFI CE AND INTEREST WAS BEING DEBITED ON THE BORROWED FUNDS IN THE ACCOUNTS OF THE HEAD OFFICE. THIS WAS MENTIONED IN THE AUDIT REPORT AS PER POINT NO.7. THE AO WORKED OUT NOTIONAL INTEREST ON THE ADVANCES MADE TO MADHU R SHARES & STOCK LTD. AND DISALLOWED THE SAME. LD. CIT(A) CONFIRMED THE DISALLOWANCE. 25. WE HAVE HEARD THE PARTIES. THE CLAIM OF THE LD. AR IS THAT THE FUNDS ADVANCED ARE FOR BUSINESS PURPOSES AS ASSESSEE IS A LSO EARNING BADALA ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 16 CHARGES WHILE DEALING IN TRADE OF SHARES. SINCE FUN DS WERE GIVEN FOR BUSINESS PURPOSES THEN FOLLOWING PRINCIPLES LAID DO WN BY HON. SUPREME COURT IN CASE OF S.A. BUILDERS (2007) 288 ITR 1 NO DISALLOWANCE IS CALLED FOR. THE SUBMISSION OF THE LD. DR IS THAT NO NEXUS HAS BEEN ESTABLISHED BY THE ASSESSEE. 26. LD. DR ALSO SUBMITTED THAT ASSESSEE MUST SHOW T HAT FUNDS ADVANCED WERE IN THE RUNNING ACCOUNT OF THE ASSESSE E WITH M/S MADHUR SHARES & STOCKS LTD. AND WAS NOT SEPARATE ACCOUNT. BUSINESS CONNECTION IS TO BE SHOWN BY THE ASSESSEE WHICH HAS NOT BEEN D ONE IN THIS CASE. 27. WE HOWEVER RESTORE THE MATTER TO THE FILE OF AO FOR GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE TO SHOW THE COPY OF ACCOUNTS OF ASSESSEE COMPANY IN THE BOOKS OF ACCOUNT OF MADH UR SHARES & STOCKS LTD. AND FURTHER TO SHOW THAT ADVANCES WERE GIVEN I N CONNECTION WITH BUSINESS AND ASSESSEE HAS EARNED BUSINESS PROFIT FR OM THAT CONCERN. THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPO SES. 28. GROUND NO.6 IS NOT PRESSED BY LD. AR HENCE THE SAME IS REJECTED AS NOT PRESSED. 29. GROUND NO.7 RELATES TO CHARGING OF INTEREST UND ER SECTION 234B & 234C. THIS IS CONSEQUENTIAL AND WOULD DEPEND UPON F INALLY ASSESSED INCOME ACCORDINGLY IT DOES NOT REQUIRE ANY SPECIFI C ADJUDICATION. THE SAME IS ACCORDINGLY DISPOSED OF. 30. GROUND NO. 8 IS REGARDING INITIATION OF PENALTY PROCEEDINGS WHICH IS PREMATURE. WE REJECT IT. ITA NO.1281/AHD/2005 ITA NO.1291/AHD/2005 ASST. YEAR 2001-02 17 31. IN THE RESULT THE APPEAL OF REVENUE AND THAT O F ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (BHAVNESH SAINI) (D.C.AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED : 5/2/2010 MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD ORDER PRONOUNCED IN OPEN COURT ON 5.2.2010