Gujarat Narmada Valley Fertilizer Co.Ltd.,, Bharuch v. The ACIT., Bharuch Circle,, Bharuch

ITA 1463/AHD/2007 | 2000-2001
Pronouncement Date: 30-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 146320514 RSA 2007
Assessee PAN AAACG8372Q
Bench Ahmedabad
Appeal Number ITA 1463/AHD/2007
Duration Of Justice 4 year(s) 8 month(s) 17 day(s)
Appellant Gujarat Narmada Valley Fertilizer Co.Ltd.,, Bharuch
Respondent The ACIT., Bharuch Circle,, Bharuch
Appeal Type Income Tax Appeal
Pronouncement Date 30-12-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 30-12-2011
Date Of Final Hearing 28-12-2011
Next Hearing Date 28-12-2011
Assessment Year 2000-2001
Appeal Filed On 12-04-2007
Judgment Text
-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI G C GUPTA VICE-PRESIDENT & SHRI B P JAIN ACCOUNTANT MEMBER ITA NOS.1463 1464 4007/A/07 & 2400/AHD/2008 ASSESSMENT YEARS:-2000-01 2003-04 2004-05 & 2005- 06 A N D ITA NO.3111/AHD/2008 ASSESSMENT YEARS:-2000-01 GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. P.O. NARMADA NAGAR BHARUCH V/S THE DEPUTY COMMISSIONER OF INCOME-TAX BHARUCH CIRCLE BHARUCH PAN: AAACG 8372 Q [APPELLANT] [RESPONDENT] A N D ITA NOS.1373 3993/A/07 & 2401/AHD/2008 ASSESSMENT YEARS:-2003-04 2004-05 & 2005-06 THE DEPUTY COMMISSIONER OF INCOME- TAX BHARUCH CIRCLE BHARUCH V/S GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. P.O. NARMADA NAGAR BHARUCH [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI M P SARDA AR REVENUE BY:- SHRI S S PARIDA CIT - DR DATE OF HEARING:- 28-12-2011 DATE OF PRONOUNCEMENT:- 30-12-2011 O R D E R 2 PER B P JAIN (AM) :- THESE CROSS APPEALS OF THE ASSESSEE AND THE REVENUE ARISE OUT OF DIFFERENT ORDERS OF LEARNE D CIT(A) AS PER DETAILS BELOW:- SR NO. APPEAL NO. BY ASSESSEE APPEAL NO. BY REVENUE DATE OF ORDER OF CIT(A) ASST. YEAR 1 1463/A/2007 - 30-01-2007 2000-01 2 1464/A/2007 1373/A/2007 30-01-2007 2003-04 3 4007/A/2007 3993/A/2007 31-08-2007 2004-05 4 2400/A/2007 2401/A/2007 30-04-2008 2005-06 5 3111/A/2008 - 02-06-2008 2000-01 2 FIRST OF ALL WE TAKE UP THE APPEAL OF THE ASSESS EE IN ITA NO.1464/AHD/2007 FOR ASSESSMENT YEAR 2003-04 FOR TH E SAKE OF CONVENIENCE. THE ASSESSEE HAS RAISED AS MANY AS 16 GROUNDS OF APPEAL IN THIS APPEAL. 3 GROUND NO.1 OF THE ASSESSEES APPEAL IS GENERAL I N NATURE AND THEREFORE DOES NOT REQUIRE ANY ADJUDICATION. 4 GROUND NOS.2.1 2.2 AND 2.3 OF THE ASSESSEES APP EAL ARE NOT PRESSED THEREFORE THE SAME ARE DISMISSED AS NOT PRESSED. GROUND NOS.3.1 AND 3.2 AS WELL AS GROUND NOS.6 AND 7 OF THE ASSESSEES APPEAL ARE ALSO NOT PRESSED AND HENCE TH E SAME ARE DISMISSED AS NOT PRESSED. REMAINING GROUND NOS.4 5 8 TO 16 ARE AS UNDER:- [4] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT (A) HAS ERRED IN CONFIRMING THE DISALLO WANCE OF RS.10.50 LAKHS INCURRED ON FEASIBILITY STUDY TO CON VERT MOLTEN AMMONIUM NITRATE MELT MANUFACTURED BY THE APPELLANT IN TO PRILL FORM. WHILE DOING SO HE HAS NOT APPRECIATED THAT THE APPELLANT IS ALREADY ENGAGED IN THE BUSINESS OF FER TILIZERS AND 3 CHEMICALS AND THEREFORE CONVERSION OF MOLTEN AMMON IUM NITRATE MELT MANUFACTURED IN TO PRILL FORM IS NOT A NEW BUSINESS AND THAT IT IS EXPANSION OF EXISTING BUSINESS. IN T HIS CONNECTION THE APPELLANT RELIED ON THE DECISION OF CIT(A) IN I TS OWN CASE IN A.Y. 1986-87 AND FOLLOWING DECISIONS: I. CIT V. JYOTI ELECTRIC MOTORS LTD. [2002] 255-ITR -345 (GUJ) II. CIT V. GRAPHITE INDIA LTD. [1996] 221-ITR-420 ( CAL) III. HINDUSTAN MILKFOOD MANUFACTURERS LTD. V. CIT [ 1989] 179-ITR-302 (P&H) IV ASIATIC OXYGEN LTD. V. CIT [1991] 190-ITR-328 (C AL) [5] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOW ANCE OF THE DEDUCTION U/S. 80HHC BY UPHOLDING THE DISALLOWANCE OF 90% OF THE FERTILIZER SUBSIDY FROM THE COMPUTATION OF PROF IT FOR THE PURPOSE OF DEDUCTION U/S. 80HHC. [8] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO REWORK THE DEPRECIATION AMOUNT BY CONSIDERING THE R OTOR ASSEMBLY GAS CHROMOTOGRAPH IMPELLER ASSEMBLY AND RELAY &. CONTROL PANEL BOARD AS EXPENDITURE OF CAPITAL NATUR E OUT OF REPAIRS AND MAINTENANCE EXPENDITURE DISALLOWANCE OF RS.3 33 73 434/-. HE HAS ERRED IN REACHING THE CONC LUSION THAT THE SAID ITEMS ARE INDEPENDENT ITEMS AND ARE CAPABL E OF PROVIDING ENDURING BENEFIT. HE HAS ERRED IN REACHIN G THE SAID CONCLUSION WITHOUT ANALYZING ANY DIFFERENCE BETWEEN THE SAID ITEMS AND OTHER ITEMS OF EXPENDITURE IN REPAIRS AND MAINTENANCE. [9] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOW ANCE OF PREMIUM OF RS.1 02 34 103/- PAID ON PREPAYMENT OF L OAN AND ALLOWING THE DEDUCTION OVER THE TERM OF LOAN. WHILE DOING SO HE HAS FAILED TO APPRECIATE THAT REVENUE EXPENDITUR E WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE FULLY ALLOWED IN THE YEAR IN WHICH IT IS IN CURRED AND IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN THOUGH THE ASSESSEE HAS WRITTEN OFF IN ITS BOOKS OVER NUMBER OF YEARS. IN 4 THIS CONNECTION HE HAS FAILED TO FOLLOW THE DECISI ONS IN THE FOLLOWING CASES: I. KEDARNATH JUTE MFG. CO. LTD. V. CIT [1971] 82-IT R-363 (SC) II. TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V . CIT [1997] 227-ITR-172 (SC) III. CIT V. MADRAS AUTO SERVICE (P) LTD. ETC. [199 8] 233- ITR-468 (SC) IV. CIT V. BHOR INDUSTRIES LTD. [2003] 264-ITR-180 (BOM) [10] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF T HE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DEDUCTIO N U/S. 35D TO THE EXTENT OF RS.13 50 000/- AS AGAINST THE CLAI M OF RS.87 73 000/- MADE BY THE APPELLANT. HE HAS ERRED IN UPHOLDING THE VIEWS OF THE ASSESSING OFFICER AND NO T APPRECIATING THAT THE GDR ISSUE MADE BY THE APPELLA NT WAS MAINLY FOR THE PURPOSE OF CAPITAL EXPENDITURE IN CO NNECTION WITH THE EXPANSION PLAN OF THE APPELLANT AND SINCE THERE WAS SOME TIME TO COMMENCE EXPANSION/EXTENSION OF PROJECTS T HE APPELLANT HAD TEMPORARILY DEPLOYED PART OF PROCEEDS OF GDR ISSUE IN THE UNITS OF UTI. [11.1] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN CONFI RMING THE DISALLOWANCE OF RS.900 10 279/-BEING THE AMOUNT OF DEDUCTION CLAIMED U/S. 36(1) (III) IN RESPECT OF MO NEY BORROWED FOR EXPANSION OF EXISTING BUSINESS. WHILE DOING SO HE HAS ALSO ERRED IN NOT FOLLOWING THE ORDER OF CIT(A) IN THE CASE OF THE APPELLANT FOR THE A.Y. 1998-99 A ND THE DECISION OF THE GUJARAT HIGH COURT IN THE CASE OF C ORE HEALTHCARE LTD. (251-ITR-61) (GUJ) AND ALEMBIC GLAS S INDUSTRIES LTD. (103-ITR-715) (GUJ) [11.2] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN REACH ING THE CONCLUSION THAT THE AMENDMENT TO SECTION 36(1) (III ) IS APPLICABLE RETROSPECTIVELY AND THEREFORE APPLICABL E TO THE PERIOD PRIOR TO THE A.Y. 2004-05 AS WELL. [11.3] WITHOUT PREJUDICE TO ABOVE IN LAW AND IN TH E FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT( A) HAS 5 ERRED IN NOT DEALING WITH THE APPELLANT CLAIM REGAR DING ADDITIONAL DEPRECIATION AS PER 3 RD PROVISO TO SECTION 32(L)(IIA) IN RESPECT OF INTEREST DISALLOWED AND CA PITALIZED AMOUNTING TO RS.9 00 10 279/-. [12.1 IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT (A) HAS ERRED IN CONF IRMING THE DISALLOWANCE OF DEPRECIATION OF RS.1 61 23 149/ - CLAIMED ON CERTAIN ASSETS GIVEN ON LEASE. WHILE DOI NG SO HE HAS ERRED IN REACHING TO THE CONCLUSION THAT THE LEASE TRANSACTION IS A MERE FINANCIAL ARRANGEMENT WITHOU T APPRECIATING THE FACTS OF THE CASE. [12.2] WITHOUT PREJUDICE TO ABOVE THE LD. CIT (A) HAS ERRED IN NOT DEALING WITH THE APPELLANT'S CLAIM THAT THE PRI NCIPAL PORTION OF LEASE RENT SHOULD BE EXCLUDED FROM THE I NCOME OF THE APPELLANT AND ONLY THE INTEREST PORTION SHOU LD BE INCLUDED IN THE INCOME OF THE APPELLANT. [13] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF T HE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN NOT DIRECTING THE ASSES SING OFFICER TO ALLOW AN AMOUNT OF RS.1 38 743/- DUE FROM GUJARA T NARMADA FINANCE & INVESTMENT CO. LTD. WHICH HAS BEEN WRIT TEN OFF IN THE BOOKS OF ACCOUNT. [14] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF T HE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN DISMISSING THE GROUND R ELATING TO THE INITIATION OF PENALTY PROCEEDINGS U/S. 271(L)(C ) OF THE INCOME TAX ACT 1961. [15] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF T HE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN NOT DEALING WITH THE GR OUNDS RELATING TO LEVYING INTEREST U/S. 234B 234C AND 23 4D OF THE INCOME TAX ACT 1961. [16] THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEN D AND/OR WITHDRAW ANY OF THE GROUNDS OR GROUND EITHER BEFORE OR AT TH E TIME OF APPEAL HEARING. 6 5 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF A PPEAL IN ITA NO.1373/AHD/2007 FOR AY 2003-04:- [1(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.8 00 14 40 5/- MADE OUT OF THE INTEREST CLAIMED U/S 36(1)(III) ON ACCOUNT O F DIVERSION OF BORROWED FUNDS TO SUBSIDIARY AND ASSOCIATE CONCERNS BY MERELY RELYING ON THE APPELLATE ORDERS FOR EARLIER YEARS ( WHICH HAVE BEEN CONTESTED BY THE DEPARTMENT)M WITHOUT APPREC IATING THAT EACH YEARS INCOME-TAX PROCEEDINGS ARE INDEPENDENT AND THE MATTER HAD TO BE DECIDED ON MERITS IN THE LIGHT OF THE PRINCIPLES SETTLED BY AUTHORITATIVE JURISDICTIONAL PRONOUNCEME NTS. [1(B)] THE CIT(A) FAILED TO APPRECIATE THE LEGAL P RINCIPLES THAT ONUS U/S 36(1)(III) LIES ON THE ASSESSEE TO PROVE THAT E ACH LOAN IS USED FOR THE PURPOSES OF THE BUSINESS AND THERE IS NO PR ESUMPTION IN LAW THAT IT IS OWN CAPITAL OR SURPLUS FUNDS THAT WE RE DIVERTED FOR NON-BUSINESS PURPOSES AS SETTLED IN THE CASE OF KI SHANCHAND CHELLARAM VS. CIT 114 ITR 654 (BOM) R DALMIA VS. C IT 133 ITR 169 (DELHI) CIT VS. M S VENKATESHWARAN 222 ITR 163 (MAD) K SOMASUNDARAM & BROTHERS VS. CIT 238 ITR 93 9 (MAD) AND CIT VS. MOTOR GENERAL FINANCE LTD. 254 IT R 449 (DELHI) WHICH WAS CONFIRMED IN PRINCIPLE BY THE SUP REME COURT IN THE CASE OF MOTOR GENERAL FINANCE VS. CIT 267 IT R 381 (SC). [2(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN ALLOWING THE EXPENSES OF RS.38 32 725/- ON PROTECTING THE ASSETS OF M/S GUJARA NARMADA AUTO LTD. (GNAL) A SISTER CONCERN OF THE ASSESSEE WITHOUT APPRECIATING THE L EGAL POSITION THAT A SUBSIDIARY COMPANY IS A SEPARATE LEGAL ENTIT Y AND THE BUSINESS OF THE SUBSIDIARY CANNOT BE CONSIDERED TO THE BUSINESS OF THE ASSESSEE AS SETTLED IN THE CASE OF PHALTAN S UGAR WORKS LTD. VS. CWT 208 ITR 989 993 (BOM) FOLLOWED IN 215 ITR 582 (BOM) AND 216 ITR 479 481 (BOM). [2(B)] WITHOUT PREJUDICE THE CIT(A) ERRE3D IN NOT CONSIDERING THE FACT THAT A LIQUIDATOR WAS APPOINTED BY THE HIGH COURT W HO WAS IN ACTUAL POSSESSION OF THE ASSETS OF GNAL AND WAS RES PONSIBLE FOR PROTECTING THE SAME AND HENCE THERE WAS NO OBLI GATION ON THE ASSESSEE TO INCUR SUCH EXPENDITURE. 7 [3] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN DELETING TO THE EXTENT OF RS.30 68 890/- O UT OF REPAIRS AND MAINTENANCE EXPENSES MADE ON ACCOUNT OF GIVING A NEW AND DIFFERENT ADVANTAGE BY HOLDING THE SAME AS REP LACEMENT OF EXISTING PARTS WITHOUT APPRECIATING THAT RENEWAL O R RESTORATION ARE NOT COVERED BY CURRENT REPAIRS REFERRED TO IN SECTION 31(I) AND ARE OF CAPITAL NATURE AS SETTLED IN THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT 224 ITR 414 (SC). [4] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN ALLOWING DEDUCTION OF RS.20 00 000/- BEING PAYMENT FOR INFORMATION AND TECHNOLOGY RELATED SERVICES PAI D TO M/S INFINIUM (INDIA) LTD. TREATED AS EXPENSES DERIVING BENEFIT OF ENDURING NATURE. [5] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN DIRECTING THAT TO EXCLUDE SALES TAX AND EX CISE DUTY AS PART OF TOTAL TURNOVER WHILE WORKING OUT THE DEDUCT ION U/S 80HHC. [6] THE APPELLANT CRAVES LEAVE TO ADD TO AMEND OR ALTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. RELIEF CLAIMED IN APPEAL :- THE ORDER OF THE CIT(A) ON THE ISSUES RAISED IN THE AFORESAID GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 6 AS REGARDS GROUND NO.4 THE BRIEF FACTS ARE THAT THE ASSESSEE CLAIMED AN EXPENDITURE OF RS.10.50 LAKHS INCURRED T OWARDS PREPARING FEASIBILITY REPORT FOR SETTING UP OF 200 MTD PRILLED AMMONIUM NITRATE PROJECT. ON DETAILED STUDY THE PR OJECT WAS FOUND TO BE NOT VIABLE AND IT WAS DECIDED NOT TO PU RSUE THE PROJECT AND EXPENDITURE OF RS.10.50 LAKHS SO INCURR ED WAS CLAIMED AS REVENUE EXPENDITURE. THE AO DID NOT ACCE PT THE EXPLANATION OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE HAD ENGAGED PRIVATE FIRMS TO EXPLORE POSSIBILITY OF NEW BUSINESS AND 8 THE ADVANTAGE AVAILABLE TO THE ASSESSEE COMPANY COU LD HAVE BEEN OF ENDURING NATURE AND CANNOT BE SAID TO BE OF REVE NUE IN NATURE. THE AO RELYING UPON DECISIONS OF VARIOUS COURTS OF LAW DISALLOWED THE CLAIM OF THE ASSESSEE AND ADDED RS.1 0.50 LAKHS TO THE INCOME OF THE ASSESSEE. 7 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO . 8 BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE MR. M P SARDA ARGUED THAT ONE OF THE PRODUCTS MANUFACTURED BY THE ASSESSEE IS AMMONIUM NITRATE WHICH IS IN LIQUID FOR M. TO HAVE VALUE ADDITION IN THE EXISTING UNIT IT WAS DECIDED TO CARRY OUT FEASIBILITY STUDY TO CONVERT MOLTEN AMMONIUM NITRAT E MELT INTO PRILLED FORM WITH ADDITIONAL INVESTMENT. M/S TATA E CONOMIC CONSULTANCY SERVICES (MUMBAI) WAS APPOINTED TO CARR Y OUT MARKET FEASIBILITY AND M/S UHDE INDIA LTD. WAS APPO INTED TO PREPARE TECHNO ECONOMIC FEASIBILITY REPORT FOR THE SAID PROJECT. BOTH THE PARTIES COMPLETED THEIR RESPECTIVE ASSIGNM ENTS AND REPORTS WERE SUBMITTED. THE PROJECT WAS NOT FOUND V IABLE SINCE THE PROFIT MARGIN WAS VERY LOW AND IT WAS DECIDED N OT TO PURSUE THE PROJECT. SINCE THE ASSESSEE IS ALREADY MANUFACT URING AMMONIUM NITRATE IN THE LIQUID FORM AND FEASIBILITY STUDY FOR MANUFACTURING PRILLED AMMONIUM NITRATE IS NOTHING B UT EXPENDITURE FOR EXTENSION OF EXISTING BUSINESS AND THEREFORE ALLOWABLE AS REVENUE EXPENDITURE. ON SIMILAR ISSUE IN ASSESSEES OWN CASE FOR AY 1986-87 THE ITAT AHMEDABAD BENCH H AS ALLOWED THE CLAIM OF EXPENDITURE INCURRED BY THE AS SESSEE. 9 9 THE LEARNED DR ON THE OTHER HAND RELIED UPON TH E ORDER OF THE LEARNED CIT(A). 10 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE LEARNED CIT(A) VIDE PARA 9.3 OF HI S ORDER SPECIFICALLY RELIED UPON THE ORDER OF THE LEARNED C IT(A) IN ASSESSEES OWN CASE FOR AY 2001-02 WITH REGARD TO P ET PROJECT THE SAID ORDER OF THE LEARNED CIT(A) IN ASSESSEES OWN CASE HAS BEEN REVERSED BY THE ITAT AHMEDABAD BENCH IN ITA NO S.1350 & 1351/AHD/2005 DATED 30-09-2008 I.E. THE APPEAL OF THE ASSESSEE HAS BEEN ALLOWED ON THE SIMILAR ISSUE BY THE ITAT A HMEDABAD BENCH MENTIONED HEREINABOVE. IN VIEW OF THE DECISIO N OF THE ITAT AHMEDABAD BENCH ON THE SIMILAR ISSUE AND IN TH E ABSENCE OF CONTRARY DECISION AVAILABLE ON RECORD WE HAVE N O REASON TO DEVIATE FROM THE STAND TAKEN BY THE TRIBUNAL. CONSE QUENTLY WE DIRECT THE AO TO ALLOW THE EXPENDITURE SO CLAIMED B Y THE ASSESSEE. THUS GROUND NO.4 OF THE ASSESSEES APPEA L IS ALLOWED. 11 AS REGARDS GROUND NO.5 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF 90% OF FERTILIZER SUBSIDY FROM THE COMPUTATION OF PROFIT FOR THE PURP OSE OF DEDUCTION U/S 80HHC OF THE ACT. THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 12 BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE GOVERNMENT SETS THE PRICE AT WHICH THE FERTILIZ ER IS SOLD TO THE FARMERS AND ALSO SETS RETENTION PRICE I.E. THE REAL IZATION THAT THE MANUFACTURER IS ENTITLED. THE DIFFERENCE BETWEEN TH E TWO IS THE SUBSIDY BUT FOR THE GOVERNMENT POLICY THE ASSESSEE WOULD HAVE 10 SOLD THE FERTILIZER AT MARKET PRICE AND THEREFORE THE SUBSIDY IS NOTHING BUT REIMBURSEMENT OF SALE PRICE NOT CHARGED TO THE FARMERS. ACCORDINGLY IT IS A PART OF THE TOTAL TUR NOVER WHICH CANNOT BE EXCLUDED AS OTHER INCOME WHILE COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF SAHANEY STEEL AND PRESS WORKS LTD. V S. CIT (1997) 228 ITR 253. 13 THE LEARNED DR ON THE OTHER HAND RELIED UPON T HE DECISION OF THE ITAT D-BENCH IN THE ASSESSEES OWN CASE FOR AYS 1998-99 AND 2002-03 IN ITA NOS.1009 1010 AND 1293/AHD/2006 DATED 12-12-2008 WITH SPECIFIC REFERENCE TO PARA-18 OF TH E ORDER IN WHICH IT HAS BEEN HELD THAT THE RECEIPTS CONSTITUTI NG INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WERE REQUIRED T O BE DEDUCTED FROM BUSINESS PROFIT UNDER CLAUSE (BAA). T HEREFORE IN THE SAID ORDER THE TRIBUNAL HAS UPHELD THE ORDER OF THE LOWER AUTHORITIES IN EXCLUDING 90% UNDER CLAUSE (BAA) OF SECTION 80HHC OF THE ACT ON THE GROSS RECEIPTS FROM INTERES T INCOME OF RENT HIRE CHARGES INTEREST ON BONDS AND DEBENTURE S AND FERTILIZERS AND UREA SUBSIDY RECEIVED FROM THE GOVE RNMENT OF INDIA. THE LEARNED DR ACCORDINGLY SUPPORTED THE OR DERS OF BOTH THE AUTHORITIES BELOW. 14 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. AS REGARDS THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SAHANEY STEEL AND PRESS WORKS LTD. (SUPRA) WHERE IT HAS BEEN MENTIONED THAT THE PAYMENTS IN TH E NATURE OF SUBSIDY FROM PUBLIC FUNDS IF MADE TO THE ASSESSEE TO ASSIST HIM 11 TO CARRY ON THE TRADE OR BUSINESS THEY ARE TRADE R ECEIPTS. IF THE PURPOSE IS TO ASSIST THE ASSESSEE IN CARRYING OUT T HE BUSINESS OPERATIONS SUCH SUBSIDY MUST BE TREATED AS ASSISTA NCE FOR THE PURPOSE OF THE TRADE AND ARE OF REVENUE IN NATURE A ND WOULD HAVE TO BE TAXED ACCORDINGLY. THE FACTS IN THE CASE OF S AHANEY STEEL & PRESS WORKS LTD. (SUPRA) ARE NOT APPLICABLE IN THE PRESENT CASE. IN THE PRESENT CASE EVEN IF THE DECISION IN THE CA SE OF SAHANEY STEEL AND PRESS WORKS (SUPRA) IS FOLLOWED THERE IS NO DISPUTE TO THE FACT THAT THE SUBSIDY IS NOT OF REVENUE NATURE AND IS THE ASSISTANCE FOR THE PURPOSE OF TRADE. BUT IN THE PRE SENT CASE THE ISSUE BEFORE US IS ALLOWABILITY OF DEDUCTION U/S 80 HHC OF THE ACT. THE TRIBUNAL IN ASSESSEES OWN CASE HAS ALREAD Y DECIDED THE ISSUE IN ITA NOS.1009 1010 AND 1293/AHD/2006 DATE D 12-12- 2008 VIDE PARA 18 OF HIS ORDER. PARA-18 OF THE TRIB UNALS ORDER MENTIONED HEREINABOVE IS REPRODUCED FOR THE SAKE OF CLARITY:- 18. HAVING HEARD THE RIVAL CONTENTIONS AND GOING THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS SEEN TH AT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HON'BLE APEX COURT IN TH E CASE OF K. RAVINDRANATHAN NAIR (SUPRA) WHEREIN THE HON'BLE AP EX COURT HAS HELD THAT CLAUSE (BAA) OF EXPLANATION STATED THAT 9 0 PER CENT OF THE INCENTIVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPT OF LIKE NATURE INCLUDED IN BUSINESS PROFITS SHAVE TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D. IN OTHER WORDS REC EIPTS CONSTITUTING INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WER E REQUIRED TO BE DEDUCTED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAUSE (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF B ROKERAGE COMMISSION INTEREST RENT CHARGES ETC. FORMED PA RT OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTORTION IN ARRIVIN G AT THE EXPORT PROFIT? CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALT HOUGH INCENTIVE PROFITS AND 'INDEPENDENT INCOMES' CONSTITUTED PART OF THE GROSS TOTAL INCOME THEY HAD TO BE EXCLUDED FROM GROSS TOTAL IN COME BECAUSE SUCH 12 RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER. PRO CESSING CHARGES WHICH ARE PART OF GROSS TOTAL INCOME FORM AN ITEM OF INDEPENDENT INCOME LIKE RENT COMMISSION BROKERAGE ETC. AND THEREFORE 90 PER CENT OF THE PROCESSING CHARGES HAS ALSO TO BE REDUC ED FROM THE GROSS TOTAL INCOME TO ARRIVE AT THE BUSINESS PROFITS AND THEREFORE IT HAS ALSO TO BE INCLUDED IN THE TOTAL TURNOVER IN THE FORMULA FOR ARRIVING AT THE BUSINESS PROFITS IN TERMS OF CLAUSE (BAA) OF THE EX PLANATION TO SECTION 80HC(3). WHILE ARRIVING AT THE EXPORT PROFITS UNDER SECTION 80HHC(3) AS IT STOOD IN THE ASSESSMENT YEAR 19930-94 PROCESS ING CHARGES ARE TO BE INCLUDED IN THE TOTAL TURNOVER. IN THIS VIEW WE UPHOLD THE ORDER OF THE LOWER AUTHORITIES IN EXCLUDING 90% UNDER CLAUSE (BAA) OF SECTION 80HHC OF THE ACT ON THESE GROSS RECEIPTS FROM INTER EST INCOME OF RENT HIRE CHARGES INTEREST ON BONDS AND DEBENTURES AND F ERTILIZERS & UREA SUBSIDY RECEIVED FROM THE GOVT. OF INDIA. HOWEVER WE ARE IN FULL AGREEMENT WITH THE ALTERNATIVE CONTENTION OF THE AS SESSEE THAT ONLY THE NET AMOUNT OF THE ABOVE RECEIPTS SHOULD BE EXCLUDED UNDER CLAUSE (BAA) OF SECTION 80HHC OF THE ACT AND NOT THE GROSS RECEIPTS IN VIEW OF THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. SHRI RAM HONDA POWER EQUIPMENTS AND OTHERS (2007) 289 IT R 475 (DEL). ACCORDINGLY 'THIS ISSUE OF THE ASSESSEE'S APPEAL IS PARTLY ALLOWED. IN THE CIRCUMSTANCES AND FACTS OF THE CASE AND FOLL OWING THE ORDER OF THE TRIBUNAL MENTIONED HEREINABOVE WE DISMISS G ROUND NO.5 OF THE ASSESSEES APPEAL. 15 AS REGARDS GROUND NO.8 OF THE ASSESSEES APPEAL THE FACTS ARE THAT THE ASSESSES COMPANY HAD CLAIMED EXPENDITU RE OF RS.3400.90 LAKHS ON ACCOUNT OF CONSUMPTION AND REPL ACEMENT OF STORES AND SPARES. ON VERIFICATION OF THESE DETAILS IT WAS NOTICED BY THE ASSESSING OFFICER THAT CERTAIN EXPENDITURES WERE CAPITAL IN NATURE. EXPENDITURE TO THE TUNE OF RS.2 65 39 230/- RELATING TO ROTOR ASSEMBLY AND RELAY AND CONTROL PANEL BOARD WE RE HELD TO BE CAPITAL IN NATURE AS PER PARA 9.1 OF THE ASSESSM ENT ORDER FOR THE REASONS THAT THESE ITEMS WERE SELF CONTAINED MA CHINERY ITEMS AMENABLE TO INDEPENDENT USE AND PROVIDING ENDURING BENEFITS. IN 13 RESPECT OF OTHER EXPENDITURE ON ITEMS OF RS.68 34 2 04/- WHICH WERE REPLACEMENT/ REPAIRS OF PLANT WERE ALSO HELD T O BE SELF CONTAINED MACHINERY ITEMS AND BEING CAPITAL IN NATU RE. AFTER ALLOWING FOR DEPRECIATION NET ADDITION OF RS.2 58 8 4 351/- WAS EFFECTED TO THE TOTAL INCOME. 16 THE LEARNED HAS CIT(A) CONFIRMED THE ACTION OF T HE AO. 17 IT WAS ARGUED BY THE LEARNED COUNSEL FOR THE ASS ESSEE THAT THESE ITEMS WERE NOT INDEPENDENT ITEMS BUT PART AND PARCEL OF THE MACHINERY AND WITHOUT IT THE ENTIRE SYSTEM CANNOT FUNCTION. THE EXPENDITURE INCURRED ON REPAIRS AND REPLACEMENT WAS NECESSITATED DUE TO CONTINUOUS USES OF EQUIPMENTS. THE LEARNED A R HAD RELIED UPON THE DECISION IN ITS OWN CASE BY THE TRIBUNAL A HMEDABAD BENCH-C IN ITA NO.1455/AHD/2001 DATED 10-11-2006. 18 THE LEARNED DR ON THE OTHER HAND INVITED OUR A TTENTION AT PAGE-17 OF AOS ORDER IN PARA-9.1 AND ARGUED THAT T HESE REPLACEMENTS PARTS ARE NOT PARTS BUT INDEPENDENT TU RBINE AND THEREFORE ENDURING BENEFIT WILL ARISE TO THE ASSES SEE. 19 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. ON PERUSAL OF THE ASSESSMENT ORDER IN WHICH IT HAS BEEN WRITTEN THAT ROTOR ASSEMBLY IS A PART OF X-701 TURBINE WAS BROKEN AND WAS REQUIRED TO BE REPLACED BY NEW ROTOR TO RUN TURBINE. ITS JUSTIFICATION WAS GIVEN BEFORE THE AO ALSO. SIMILARLY THAT THE GAS CHROMATOGRAPH THE MATTER R EQUIRES EXAMINATION WHETHER THE PARTS SO REPLACED ARE INDEP ENDENT MACHINE OR ARE PARTS WHICH REQUIRE TO BE FITTED IN PLACE OF BROKEN PARTS OF THE TURBINE. THE CLEAR FINDINGS ARE REQUIR ED TO BE GIVEN 14 BY THE AO WHICH ARE NOT AVAILABLE IN THE ORDER OF T HE AO THEREFORE IT WILL BE IN THE FITNESS OF JUSTICE IF THE MATTER IS REMANDED TO THE FILE OF THE AO WHO WILL EXAMINE THE ISSUE AND DECIDE THE SAME DE NOVO BUT BY AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS GROUND NO.8 O F THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOS E. 20 AS REGARDS GROUND NO.9 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY HAS CLAIMED DED UCTION OF RS.1 02 34 103/- TOWARDS INCIDENTAL EXPENDITURE INC URRED ON SUBSTITUTION OF HIGH INTEREST COST NCDS AS DEDUCTI ON U/S 37(1) OF THE ACT IN THE STATEMENT OF TOTAL INCOME ALTHOUGH IT TREATED THE SAID EXPENDITURE AS DEFERRED REVENUE EXPENDITURE IN ITS BOOKS OF ACCOUNT OVER A PERIOD OF 5 (FIVE) YEARS THEREBY DEB ITING RS.67 48 391/- TO THE P&L ACCOUNT FOR THE PREVIOUS YEAR. THE ASSESSEE SUBMITTED THE EXPLANATION WHICH WAS NOT AC CEPTED BY THE AO AND ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE. THIS ACTION OF THE AO WAS CONFIRMED BY THE LEARNED CIT(A). 21 IT WAS ARGUED BY THE LEARNED COUNSEL FOR THE ASS ESSEE THAT THE COMPANY HAD INCURRED RS.1 02 34 103/- TOWARDS P RE-PAYMENT OF PREMIUM EXPENSES OF 16.54% TERM LOAN OF RS.73.50 CRORES FROM IDBI FOR ITS SYNTHESIS GAS GENERATION UNIT (SG GU). THE ASSESSEE HAD CLAIMED INTEREST ON SUCH LOAN TILL DAT E AS DEDUCTION U/S. 36(1)(III) OF THE INCOME TAX ACT WHICH HAD BEE N ALLOWED ALSO. IT WAS ADDED THAT AS THERE WAS A GENERAL REDU CTION IN THE INTEREST RATES ON BORROWINGS IN THE MARKET THE ASS ESSEE FELT THAT THE RATE OF INTEREST PAYABLE TO THE IDBI WAS MORE T HAN THE PREVAILING MARKET RATE. IN ORDER TO REDUCE THE HEAV Y INTEREST 15 BURDEN THE ASSESSEE NEGOTIATED WITH THE IDBI TO RO LL OVER THE SAME TERM LOAN AT LOWER INTEREST RATE WHICH WOULD R EFLECT THE RATES PREVAILING IN THE DEBT MARKET. THE IDBI AGREE D TO THE ROLLING OVER THE LOAN AT 14.5% PER ANNUM FROM THE E ARLIER CONTRACTED RATE F 16.54% PER ANNUM. AS PER THE TERM S OF LOAN AGREEMENT DATED 5 JUNE 997 ENTERED BY THE ASSESSEE WITH IDBI THE ASSESSEE WAS REQUIRED TO PAY PREMIUM OF RS.1 47 01 785 IN A.Y. 2000-01 FOR PREPAYMENT OF LOAN. IN THE BOOKS O F ACCOUNT THE SAID PREMIUM WAS CONSIDERED AS DEFERRED REVENUE EX PENSES WHICH HAD BEEN AMORTIZED OVER A PERIOD OF 5 YEARS H OWEVER IN VIEW OF FURTHER REDUCTION IN RATE OF INTEREST IN DE BT MARKET ASSESSEE NEGOTIATED WITH IDBI TO FURTHER ROLL OVER THE SAID TERM LOAN AT LOWER INTEREST RATE WHICH WOULD REFLECT THE RATES PREVAILING IN THE DEBT MARKET. IDBI AGREED TO THE R OLLING OVER THE LOAN AT 12.50% PER ANNUM FROM THE EARLIER CONTRACTE D RATE OF 14.50 % PER ANNUM. AS PER THE TERMS OF LOAN AGREEME NT DATED 5- 6-1997 ENTERED BY THE ASSESSEE WITH IDBI FOR THE T ERM LOAN THE ASSESSEE WAS REQUIRED TO PAY PREMIUM OF RS.78 54 10 2 FOR PREPAYMENT OF LOAN. THE SAID PREMIUM FOR REPAYMENT IS IN THE NATURE OF FINANCING CHARGE WHICH HAS ARISEN PURSUA NT TO THE AGREEMENT ENTERED INTO AND HAS ALSO BEEN PAID TO ID BI DURING THE YEAR ON 15-3-2000. FURTHER IT IS STATED THAT THE AS SESSEE HAD ALSO ISSUED 10 00 000 REDEEMABLE DEBENTURES OF RS.666.70 LAKHS TO UNIT TRUST OF INDIA (UTI) IN 1998. AS PER THE CLAUS E NO 15 OF THE DEBENTURE TRUST DEED THE ASSESSEE HAD AN OPTION TO REPURCHASE THE DEBENTURES PRIOR TO THE DATE OF ITS REDEMPTION. DURING THE PREVIOUS YEA- THE ASSESSEE HAS EXERCISED ITS OPTION OF REPURCHASING THE DEBENTURE AND PAID PREMIUM OF RS.2 3 80 000 TO 16 UTI ON 27-5-2003. IT WAS FURTHER SUBMITTED THAT SIN CE THE PREMIUM PAID TO IDBI AND UTI ARE IN RELATION TO THE LOANS BORROWED FOR THE PURPOSE OF BUSINESS THE PREMIUM O F RS. 1 02 34 103 [IDBI RS.76 54 102 PLUS UTI RS.23 80 00 0] HAS BEEN CLAIMED AND IS ALLOWABLE AS DEDUCTION UNDER SECTION 36(1)(III)/37(L) OF THE ACT. IT WAS FURTHER SUBMITT ED THAT IN THE BOOKS OF ACCOUNTS OF F.Y. 1999-2000 AND F.Y. 2002-0 3 RELEVANT TO A.Y. 2000-01 AND A.Y. 2003-04 RESPECTIVELY THE SAID PREMIUM OF RS.1 02 34 103 WAS CONSIDERED AS REVENUE EXPENDITURE AND WAS AMORTIZED OVER A REMAINING PERI OD PAYMENT COMMENCING FROM THE PREVIOUS YEAR IN WHICH PAYMENT WAS I.E. A.Y. 2000-2001 AND A.Y. 2003-04. AS THE SAID PREMIU M HAS N CLAIMED IN THE RESPECTIVE ASSESSMENT YEARS RS.67 4 8 391 (RS.29 4 0 357 IN RESPECT OF A.Y. 2000-01 PLUS RS. 38 08 034 OF A.Y. 2003-04) DEBITED TO P&L ACCOUNT HAS BEEN ADDED TO THE TOTAL INCOME. AS THE SAID PREMIUM FOR REPAYMENT WAS IN THE NATURE OF FINANCING CHARGES AND WAS INCURRED FOR TH E PURPOSE OF BUSINESS THE ENTIRE AMOUNT OF THE PREMIUM WAS CLAI MED BY THE ASSESSEE AS BUSINESS EXPENDITURE U/S. 36(1)(III)/37 (L) OF THE INCOME TAX ACT ALTHOUGH THE SAME HAD BEEN AMORTIZED IN THE BOOKS OF ACCOUNT OVER A PERIOD OF 5 YEARS. IT WAS F URTHER ARGUED THAT THE FACTS IN THE PRESENT CASE ARE DIFFERENT TO THE FACTS IN THE DECISIONS RELIED UPON BY THE AO. 22 THE LEARNED DR ON THE OTHER HAND ARGUED THAT T HE INCIDENTAL EXPENDITURE INCURRED ON SUBSTITUTION HIG H INTEREST COST AND PAYMENT TOWARDS PREMIUM IS A LIABILITY FOR THE FUTURE YEARS 17 AND CANNOT BE ALLOWED IN THE IMPUGNED YEAR. HE RELI ED UPON THE DECISIONS OF VARIOUS COURTS OF LAW AS REFERRED IN T HE AOS ORDER. 23 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ASSESSEE AS A PART OF THAT DEBT RE STRUCTURING PROGRAM HAS INCURRED EXPENDITURE TOWARDS PRE-PAYMEN T OF PREMISES EXPENSES FOR RESTRUCTURING LOAN AT LOWER I NTEREST RATE. SUCH PRE-PAYMENT OF THE AMOUNT WHICH IS AN ACT FOR BORROWING MONEY AND WAS INCIDENTAL TO CARRY ON THE ASSESSEES BUSINESS. AS A MATTER OF FACT THE ASSESSEE HAD ALREADY OBTAINED THE LOAN WHICH CANNOT BE TREATED AS AN ASSET OR ADVANTAGE OF ENDUR ING NATURE AND THE EXPENDITURE HAS BEEN INCURRED TO SECURE MON EY AT LOWER INTEREST FOR CERTAIN PERIOD. THEREFORE THE SAID EX PENDITURE IS ALLOWABLE AS BUSINESS EXPENDITURE. THESE VIEWS FIND SUPPORT FROM THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF INDIA CEMENTS LTD. VS. CIT 60 ITR 52. THE DECISIONS RELIE D UPON BY THE CIT DR AND THE AO IN HIS ORDER ARE ON DIFFERE NT FACTS AND CANNOT BE OF ANY BENEFIT TO THE REVENUE. IN THE CIR CUMSTANCES AND FACTS OF THE CASE WE DIRECT THE AO TO ALLOW TH E CLAIM OF THE ASSESSEE. THUS GROUND NO.9 OF THE ASSESSEES APPEA L IS ALLOWED. 24 AS REGARDS GROUND NO.10 OF THE ASSESSEES APPEAL THE ASSESSEE HAS CLAIMED DEDUCTION U/S 35D AMOUNTING TO RS.87 73 000/- WHICH WAS RESTRICTED TO RS.13 50 000 /- BY THE AO. THE BRIEF FACTS ARE THAT DURING THE PREVIOUS YEAR R ELEVANT TO AY 1995-96 THE COMPANY MADE AN EURO ISSUE OF THE GLOBA L DEPOSITORY RECEIPTS (GDRS) FOR ITS ACETIC ACID EXPA NSION PROJECT AND COLLECTED RS.191.72 CRORES INCLUSIVE OF PREMIUM. THE COMPANY INCURRED EXPENDITURE OF RS.8.77 CRORES FOR THIS ISSUE. IT 18 WAS SUBMITTED BY THE ASSESSEE IN ASSESSMENT PROCEED INGS THAT SUBSCRIBED AND PAID UP CAPITAL OF THE COMPANY INCRE ASED TO RS.146.48 CRORES AND THAT COUPLED WITH DEBENTURE AN D LONG TERM BORROWINGS OF RS.583.77 CRORES THE TOTAL CAPITAL EM PLOYED WAS RS.730.25 CRORES AND 2.5 % OF SUCH CAPITAL EMPLOYED IS RS.18.26 CRORES. IT WAS FURTHER STATED THAT THE COST OF PROJ ECT OF ASCETIC ACID EXPANSION PROJECT WAS RS.188.31 CRORES AND THA T THE SAID PROJECT WAS COMMISSIONED ON 30.5.1995. IT WAS STATE D THAT THE EXPENDITURE OF RS.8.77 CRORES WAS LESS THAN 2.5 % O F THE COST OF THE PROJECT AND CAPITAL EMPLOYED AND THUS THE ASSES SEE WAS ENTITLED TO DEDUCTION OF RS.87.7 LAKHS AS CLAIMED U /S. 35D. THE ASSESSING OFFICER WAS OF THE VIEW THAT GDR ISSUE WA S ADMITTEDLY IN CONNECTION WITH THE EXTENSION OF INDUSTRIAL UNDE RTAKING AND ONLY THE INCREMENTAL CAPITAL EMPLOYED WHICH IS ATTR IBUTABLE TO THE NEW PROJECT SHOULD BE CONSIDERED AS CAPITAL EMPLOYE D. THE INCREASE IN SHARE CAPITAL AND DEBENTURE BETWEEN 31. 3.1994 AND 31.3.1995 WAS RS.37.53 CRORES AND THUS 2.5% OF SUCH CAPITAL EMPLOYED WAS RS.93.82 LACS. FURTHER IT WAS STATED T HAT COST OF ACETIC ACID EXPANSION PROJECT WAS RS.188.31 CRORES WHEREAS THE NET PROCEEDS OF GDR ISSUE WAS RS.182.95 CRORES (191 .72 CRORES BEING GROSS PROCEEDS - 8.77 CRORES BEING EXPENSES) . FURTHER FROM THE PROCEEDINGS FOR A.Y. 2001-02 IT WAS NOTICED THA T RS.128.93 CRORES WAS INVESTED IN UTI UNIT 65 SCHEME OUT OF TH E GDR ISSUE PROCEEDS AND SINCE THIS INVESTMENT WAS 70% OF THE G DR ISSUE PROCESS 70% OF THE EXPENSES OF RS.87.73 LACS WRITT EN OFF IN THAT YEAR BY THE ASSESSEE AMOUNTING TO RS.62 LACS WAS DI SALLOWED U/S. 14A AS THE DIVIDEND INCOME IN RESPECT OF UTI WAS EX EMPT UNDER THE ACT. IT IS MENTIONED BY THE ASSESSING OFFICER T HAT EXCLUDING 19 THE INVESTMENT IN UTI THE AMOUNT INVESTED TOWARDS T HE COST OF PROJECT IS RS.54.02 CRORES ( 182.95 CRORES - RS.128 .93 CRORES) AND 2.5% OF SUCH COST WORKS OUT TO RS.1.35 CRORES. THER EFORE 10 % OF THIS AMOUNT OF RS.1.35 CRORES AT RS.13.5 LACS WAS A LLOWED BY THE ASSESSING OFFICER UNDER SECTION 35D. 25 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE A O. 26 THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE ASSESSEE HAS BEEN ALLOWED THE IDENTICAL CLAIM SINCE 1995-96 BY THE INCOME-TAX DEPARTMENT AND IT IS ONLY IN THE IMP UGNED YEAR WHERE THE DEPARTMENT HAS DOUBTED ITS DECISION WHEN THERE IS NO CHANGE OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 27 THE LEARNED DR ON THE OTHER HAND ARGUED THAT R ES JUDICATA DOES NOT APPLY. 28 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. FROM THE READING OF THE PROVISIONS CON TAINED IN SECTION 35D AND THE ARGUMENTS OF BOTH THE PARTIES WE ARE OF THE VIEW THAT THERE ARE NO CHANGE IN THE FACTS AS IN TH E LAST 7 YEARS AND THEREFORE RELYING UPON THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE OF RADHA SOAMI SATSANG VS. CIT 19 3 ITR 321 IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POS ITION TO BE CHANGED IN A SUBSEQUENT YEAR. THEREFORE IN THE CIR CUMSTANCES AND FACTS OF THE CASE WE DIRECT THE AO TO ALLOW TH E CLAIM OF THE ASSESSEE AND ACCORDINGLY THE ORDER OF THE LEARNED C IT(A) IS REVERSED. THUS GROUND NO.10 OF THE ASSESSEE APPEA L IS ALLOWED. 20 29 AS REGARDS GROUND NO.11 OF THE ASSESSEES APPEAL THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY HAD CLAIMED INTEREST OF RS.9 00 10 279/- AS DEDUCTION U/S. 36(1)(III) IN RESPECT OF MONEY BORROWED FOR EXPANSION OF BUSINESS FOR THE ACETIC ACID PLANT EXPANSION WHICH HAD COMMENCED PRO DUCTION DURING THE YEAR I.E. 1.11.2002. IT IS MENTIONED TH AT THE ASSESSEE COMPANY HAD CAPITALIZED THIS INTEREST IN ITS BOOKS OF ACCOUNT BUT CLAIMED THE SAME AS REVENUE EXPENDITURE AS PER THE STATEMENT OF INCOME. IN ASSESSMENT PROCEEDINGS IT WAS SUBMITTED THAT THERE WAS COMPLETE INTERLACING INTERDEPENDENCE AND INTER CONNECTION BETWEEN THE EXISTING BUSINESS OPERATION AND NEW PLA NT AND THAT IN EARLIER YEARS I.E. AY 1998-99 DEPARTMENT HAD ALLOWE D SUCH DEDUCTION. THE AO RELYING UPON THE DECISIONS OF VAR IOUS COURTS OF LAW WAS OF THE VIEW THAT THE AMENDMENT TO SECTI ON 36(1)(III) IS CLARIFICATORY IN NATURE AND IS APPLICABLE TO THE IMPUGNED ASSESSMENT YEAR 2003-04 ALSO. ACCORDINGLY THE INTE REST OF RS.9 00 10 279/- CAPITALIZED IN THE BOOKS OF ACCOUN T WAS DISALLOWED AND DEPRECIATION OF RS.1 12 51 285/- AT THE RATE OF 12.5% WAS ALLOWED LEADING TO NET ADDITION OF RS.7 8 7 58 994/-. 30 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE A O. 31 THE ISSUE IN HAND IS DIRECTLY COVERED BY THE DEC ISION OF THE HON'BLE SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. (2008) 298 ITR 194 IN WHICH IT HAS BEEN HELD T HAT - SECTION 36(1)(III) OF THE INCOME-TAX ACT 1961 HA S TO BE READ ON ITS OWN TERMS: IT IS A CODE BY ITSELF. IT MAKES NO DIST INCTION BETWEEN 21 MONEY BORROWED TO ACQUIRE A CAPITAL ASSET OR A REVE NUE ASSET. ALL THAT THE SECTION REQUIRES IS THAT THE ASSESSEE MUST BORR OW CAPITAL AND THE PURPOSE OF THE BORROWING MUST BE FOR BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE IN THE YEAR OF ACCOUNT. UNLIKE SECTION 37 WHICH EXPRESSLY EXCLUDES AN EXPENSE OF A CAPITAL NATURE SECTION 36 (1)(III) EMPHASIZES THE USER OF THE CAPITAL AND NOT THE USER OF THE ASS ET WHICH COME INTO EXISTENCE AS A RESULT OF THE BORROWED CAPITAL. THE LEGISLATURE HAS THEREFORE MADE NO DISTINCTION IN SECTION 36(1)(III ) BETWEEN CAPITAL BORROWED FOR A REVENUE PURPOSE' AND 'CAPITAL BORROW ED FOR A CAPITAL PURPOSE. AN ASSESSEE IS ENTITLED TO CLAIM INTEREST PAID ON BORROWED CAPITAL PROVIDED THAT THE CAPITAL IS USED FOR BUSIN ESS PURPOSE IRRESPECTIVE OF WHAT MAY BE THE RESULT OF USING THE CAPITAL WHICH THE ASSESSEE HAS BORROWED. 'ACTUAL COST OF ASSET HAS N O RELEVANCY IN RELATION TO SECTION 36(1)(III). THE PROVISO INSERTED IN SECTION 36(1)(III) BY THE F INANCE ACT 2003 WITH EFFECT FROM APRIL 1 2004 WILL OPERATE PROSPE CTIVELY. HELD ACCORDINGLY THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III) PRIOR TO ITS AMENDMENT BY THE FI NANCE ACT 2003 IN RELATION TO MONEY BORROWED FOR PURCHASE OF MACHINER Y EVEN THOUGH THE ASSESSEE HAD NOT USED THE MACHINERY IN THE YEAR OF BORROWING. THEREFORE IN VIEW OF THE DECISION OF THE HON'BLE S UPREME COURT HEREINABOVE THE AO IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE. HE IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AND ACCORDINGLY THE ORDER OF THE LEARNED CIT(A) IS REVE RSED. THUS GROUND NO.11 OF THE ASSESSEES APPEAL IS ALLOWED. 32 AS REGARDS GROUND NO.12 OF THE ASSESESES APPEAL THE FACTS ARE THAT THE ASSESSEE CLAIMED DEPRECIATION OF RS.1 61 23 149/- ON CERTAIN ASSETS WHICH WERE GIVEN ON LEASE BASIS. THE AO DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND ACCORDIN GLY ADDED THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE. THIS ACT ION OF THE AO WAS CONFIRMED BY THE LEARNED CIT(A). 22 33 IT WAS SUBMITTED BEFORE THE AO AS UNDER:- 'THE COMPANY HAD ACQUIRED THE FOLLOWING ASSETS AS P ER DETAILS GIVEN BELOW AND THE SAME HAS BEEN GIVEN ON LEASE; ASSETS PARTICULARS FY AMOUNT RS. 1 WAGONS 1995-96 93937200 2 CAPTIVE POWER PLANT 1999-00 312990556 3 PLANT & MACHINERY INCINERATOR 1998-99 26333260 4 PLANT & MACHINERY -SAT & NOX UNIT 1998-99 54679889 DURING THE YEAR THE COMPANY EARNED THE LEASE RENT OF RS.12 51 30 606/- WHICH HAS BEEN CREDITED TO THE P ROFIT AND LOSS ACCOUNT AND SHOWN AS INCOME. FURTHER AS PER ACCOUN TING GUIDANCE NOTE AN AMOUNT OF RS.1 21 41 524 BEING LEASE EQUAL IZATION AMOUNT HAS BEEN DEBITED TO THE PROFIT & LOSS ACCOUNT. THE COMPANY IS MAINTAINING THE LEASE EQUALIZATION ACCOUNT FOR THE ASSETS GIVEN ON LEASE IN ORDER TO COMPLY WITH THE ACCOUNTING STANDA RD AND GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTAN T OF INDIA' IN ORDER THE JUSTIFY ITS CLAIM OF DEPRECIATION THE ASSESSEE RAISED VARIOUS CONTENTIONS WHICH ARE SUMMARIZED AS UNDER: I. THE COMPANY IS AUTHORIZED BY ITS MEMORANDUM OF A SSOCIATION TO DO LEASE BUSINESS AND THUS LEASING IS ONE OF THE BUSINESS OF THE COMPANY II. THE COMPANY HAS PURCHASED THE ASSETS VIZ. RAILW AY WAGONS AND CAPTIVE POWER PLANT WHICH ARE GIVEN ON LEASE TO WESTERN RAILWAY AND NARMADA CHEMATUR PETROCHEMICALS CO. LTD. (NCPL ) RESPECTIVELY IN THE COURSE OF ITS BUSINESS AND THEREFORE DEPRECI ATION HAS BEEN 23 CLAIMED AS ASSESSEE IS THE OWNER OF THE ASSETS WHIC H HAS BEEN USED FOR ITS BUSINESS III. AS REGARD SPECIFIC CIRCUMSTANCES UNDER WHICH T HE ASSETS WERE GIVEN ON LEASE THE ASSESSEE STATED DURING THE REAS SESSMENT PROCEEDINGS FOR A. Y. 2000-01 AS UNDER: 'INDIAN RAILWAYS WAS FACING ACUTE SHORTAGE OF RAILW AY WAGONS IN GENERAL AND FOR MOVEMENT OF FERTILIZERS IN PARTICUL ARS. THUS IN ORDER TO GET PRIORITY ALLOTMENT OF WAGONS FOR MOVEMENT OF FE RTILIZERS MANUFACTURED BY THE COMPANY UNDER GUARANTEED CLEAR ANCE OF TRAFFIC AS PER THE OWN YOUR WAGON SCHEME OF RAILWAYS COMPA NY HAD GIVEN ON LEASE 34 WAGONS TO WESTERN RAILWAYS. FURTHER IN ORD ER TO PREVENT SUBSTANTIAL LOSS DUE TO POWER DIPS AS WELL AS TO AC HIEVE ECONOMY ON POWER COST NCPL A SUBSIDIARY OF GNFC LTD. DECIDE D INSTALL CAPTIVE POWER PLANT (CPP). HOWEVER SINCE PRODUCTION AT NCP L HAD NOT ESTABLISHED TILL THAT TIME NCPL WAS NOT IN A POSIT ION TO FINANCE THE COST OF PROPOSED CPP. GNFC PURCHASED THE EQUIPMENTS FOR CPP FOR NCPL AND THE SAME WAS GIVEN ON LEASE BASIS TO NCPL. CNFC ACCOUNTED LEASE RENT FOR THESE ASSETS DURING RESPEC TIVE ASSESSMENT YEARS AND CREDITED IT TO THE PROFIT & LOSS ACCOUNT- AND CONSEQUENTLY INCLUDED IN TOTAL INCOME.' IT WAS ARGUED BY THE LEARNED COUNSEL FOR THE ASSESS EE THAT THE INCOME-TAX DEPARTMENT HAD ALLOWED DEPRECIATION ON L EASED ASSETS TO THE ASSESSEE SINCE AY 1996-97 TILL AY 2002-03 IN THE ASSESSMENT MADE U/S 143(3) OF THE ACT IN THE CASE O F ASSETS LEASED TO WESTERN RAILWAYS. THE WAGONS SO LEASED WE RE PURCHASED BY THE ASSESSEE LESSOR. THE WAGONS WERE I DENTIFIABLE AND WERE HAVING IDENTIFICATION NUMBERS. THE PRIMARY PERIOD WAS FOR 10 YEARS AS PER CLAUSE 2(III). THE LEASE CHARGE S WILL NOT BE PAYABLE FOR A NUMBER OF DAYS THE WAGONS REMAINED UN UTILIZED. THE LESSEE ON BEHALF OF THE LESSOR WILL ENSURE THE EQUIPMENTS. IT WAS FURTHER ARGUED BY THE LEARNED COUNSEL FOR THE A SSESSEE THAT THE ASSETS SO LEASED WILL RETURN BACK TO THE LESSOR ASSESSEE AND THE LESSEE WILL NOT HAVE ANY RIGHT. THE ASSETS SO LEASE D THEREAFTER WILL 24 BE USED BY THE ASSESSEE FOR ITS OWN PURPOSE. THE AL LEGATIONS MADE BY THE AO AT PAGES 43 AND 44 OF HIS ORDER ARE WITHOUT ANY BASIS AND HAD BEEN WRITTEN IN THE ORDER ON CONJECTU RES AND SURMISES. THOUGH THE ASSETS HAD BEEN DULY ACQUIRED ON THE SPECIFICATION OF THE LESSEE. IT CANNOT BE SAID THAT IT WILL NOT BE USED FOR THE PURPOSE AND USE OF THE ASSESSEE I.E. T HE LESSOR. THE INSURANCE HAS BEEN TAKEN BY THE LESSEE ON BEHALF OF THE LESSOR. IT IS NOT A FINANCE LEASE SINCE THE PERIOD OF LEASE DO ES NOT START FROM THE DATE OF FINANCE OF THE ASSETS BUT AT A LATER DA TE. 34 ON THE OTHER HAND THE LEARNED DR RELIED UPON TH E ORDER OF THE AO AS PAGES 43 AND 44 AND IN SPECIFIC RELIED UP ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F ASEA BROWN BOVERI LTD. VS. INDUSTRIAL FINANCE CORPORATION DAT ED 27-10-2004 WHICH HAS BEEN PLACED ON RECORD. 35 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. AS REGARDS RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERI LTD. (SUPRA) BY THE LEARNED DR THE ARGUMENTS OF THE LEARNED DR THA T THE ASSESSEE HAD PURCHASED THE EQUIPMENTS FOR THE ECONO MIC LIFE OF THE PLANT ITSELF AND NOT MORE THAN THAT. AS A MATTE R OF FACT IT IS NOT A CASE AS IS APPEARING FROM DIFFERENT CLAUSES OF THE LEASE DEED THAT THE EQUIPMENTS LEASED WILL BE RETURNED BA CK TO THE LESSOR AFTER THE EXPIRY OF THE LEASE. NOTHING HAS B EEN BROUGHT TO DISAPPROVE THE SAID CLAUSES OF THE LEASE DEED BY AN Y OF THE AUTHORITIES BELOW OR BY THE LEARNED DR. THE LEARNED DR COULD NOT PROVE THAT IN FACT THE ASSESSEE IS ONLY A FINAN CER AND IS NOT INTERESTED IN THE ASSETS AND THEREFORE IT CANNOT B E SAID AS FULL 25 PAYOUT LEASE. THEREFORE IN THE CIRCUMSTANCES AND F ACTS OF THE CASE THE ARGUMENTS MADE BY THE LEARNED DR CANNOT B E ACCEPTED AND FOLLOWING THE RULE OF CONSISTENCY THE ASSESSEE DESERVES TO BE ALLOWED THE CLAIM AND WE DIRECT THE AO ACCORDINGLY TO ALLOW THE CLAIM OF THE ASSESSEE. THE ORDER OF THE LEARNED CIT (A) IS REVERSED. THUS GROUND NO.12 OF THE ASSESSEES APPE AL IS ALLOWED. 36 AS REGARDS GROUND NO.13 THE FACTS ARE THAT THE ASSESSEE HAS WRITTEN OFF AN AMOUNT OF RS.1 38 743/- AND HAS CLAI MED AS AN EXPENDITURE. THE AO DID NOT ALLOW THE SAME WHICH A CTION OF THE AO WAS CONFIRMED BY THE LEARNED CIT(A). 37 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) THAT THE ASSESSEE HAS NOT SUBMITTED THE DETAILS OF SUCH DEBTS AND ALSO THE FACT THAT THIS WAS ACTUALLY A TRADE DEBT. IN TH E ABSENCE OF DETAILS THE ASSESSEE COULD NOT BE JUSTIFIED IN DEB ITING AS A TRADE DEBT AND THEREFORE IN THE CIRCUMSTANCES AND FACTS O F THE CASE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A ). THUS GROUND NO.13 OF THE ASSESSEES APPEAL IS DISMISSED. 38 IN THE RESULT THE APPEAL OF THE ASSESSEE IN ITA NO.1464/AHD/2007 FOR AY 2003-04 IS PARTLY ALLOWED. 39 NOW WE TAKE UP THE DEPARTMENTAL APPEAL IN ITA NO.1373/AHD/2007 FOR AY 2003-04. IN GROUND NO.1 TH E BRIEF FACTS ARE THAT THE AO DISALLOWED THE INTEREST OF RS .8 00 14 405/- CLAIMED U/S 36(1)(III) OF THE ACT ON THE GROUND THA T THE BORROWINGS WERE UTILIZED FOR NON-BUSINESS PURPOSE. 26 40 THE LEARNED CIT(A) VIDE PARA 5.3 OF HIS ORDER AL LOWED THE CLAIM OF THE ASSESSEE SINCE THE ASSESSEE HAD BEEN A LLOWED IN EARLIER YEARS THE CLAIM ON IDENTICAL MATTERS AND TH EREFORE IT IS A COVERED MATTER. 41 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) AND THE DECISION OF THE TRIBUNAL AHMEDABAD BENCH IN ASS ESSEES OWN CASE FOR AY 1995-96 AS REFERRED TO IN THE ORDER OF THE LEARNED CIT(A) VIDE PARA 5.2.3 AND THEREFORE WE FIND NO INF IRMITY IN THE ORDER OF THE LEARNED CIT(A). THUS GROUND NO.1 OF T HE REVENUES APPEAL IS DISMISSED. 42 AS REGARDS GROUND NO.2 OF THE REVENUES APPEAL THE FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.38 32 725 /- BEING THE EXPENDITURE INCURRED FOR PROTECTING THE ASSETS OF W HOLLY OWNED SUBSIDIARY I.E. M/S GUJARAT NARMADA AUTO LTD. THE LEARNED CIT(A) DELETED THE ADDITION MADE BY THE AO. SINCE O N IDENTICAL ISSUE FOR AYS 1996-97 TO 2002-03 THE DISALLOWANCE WAS DELETED BY THE LEARNED CIT(A) IN ASSESSEES OWN CASE. 43 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. IT WAS POINTED OUT BY THE LEARNED COUN SEL FOR THE ASSESSEE THAT THE PRESENT ISSUE IS COVERED BY THE D ECISION OF THE TRIBUNAL AHMEDABAD BENCH IN ASSESSEES OWN CASE FOR AY 2002- 03. 44 AFTER HEARING BOTH THE PARTIES WE ARE OF THE VI EW THAT THE ISSUE IN HAND IS COVERED BY THE DECISION OF THE TRI BUNAL 27 AHMEDABAD BENCH IN THE ASSESSEES OWN CASE REFERRED HEREINABOVE. THEREFORE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) WHO HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. THUS GROUND NO.2 OF THE REVENUES APPEAL IS DISMISSED. 45 AS REGARDS GROUND NO.3 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO HAS TREATED CERTAIN EXPENDITU RE ON ACCOUNT OF PUMP WHEATING AND VOLUTE CASING AT RS.16 83 630/ - AND RS.13 85 260/- RESPECTIVELY. THE AO TREATED THE SAI D EXPENDITURE AS INDEPENDENT EXPENDITURE OF ENDURING IN NATURE AN D DISALLOWED THE CLAIM OF THE ASSESSEE ALLOWED THE DEPRECIATION ONLY. 46 THE LEARNED CIT(A) VIDE PARA 13.3.2 OF HIS ORDER TREATED THEM AS REVENUE EXPENDITURE AND ALLOWED THE CLAIM O F THE ASSESSEE. 47 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) THAT THE EXPENDITURE ON THE SAID ITEMS DOES NOT RESULT I N NEW SELF CONTAINED ITEMS AND THEREFORE THE SAME IS REVENUE I N NATURE. MOREOVER THE EXPENDITURE ON SUCH ITEMS DOES NOT GI VE ANY ENDURING BENEFIT TO THE ASSESSEE. IN THE CIRCUMSTAN CES AND FACTS OF THE CASE WE FIND NO INFIRMITY IN THE ORDER OF T HE LEARNED CIT(A) WHO HAS RIGHTLY ALLOWED THE CLAIM OF THE ASS ESSEE. THUS GROUND NO.3 OF THE REVENUES APPEAL IS DISMISSED. 48 AS REGARDS GROUND NO.4 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE ASSESSEE HAS INCURRED EXPENSES O N SALARY AND 28 OTHER EXPENSES FOR THE INFORMATION AND TECHNOLOGY B USINESS. THE ASSESSEE HAS ENTERED INTO A VERBAL AGREEMENT WITH I NFINIUM (INDIA) LTD. AND M/S TIW-USA. AS PER THIS AGREEMENT THEY JOINTLY AND EQUALLY FINANCE THE CAPITAL OPERATING COSTS AND SHARE THE REVENUES OF ALLIANCE BUSINESS ACTIVITIES RELATE D TO V-SAT & INTERNATIONAL GATEWAY. THE AO OBSERVED THAT THE ASS ESSEE HAD TO SHARE 50% OF SUCH EXPENSES WITH INFINIUM (INDIA) LT D. WHICH THE ASSESSEE HAD NOT CONSIDERED TO HAVE INCURRED AS SAL ARY OF THE EMPLOYEES. THEREFORE THE AO ADDED RS.18.5 LACS TO THE INCOME OF THE ASSESSEE BEING THE AMOUNT NOT RECOVERED FROM INFINIUM (INDIA) LTD. THE AO MADE FURTHER ADDITION OF RS.1.5 LACS IN RESPECT OF INCIDENTAL EXPENSES RECOVERABLE FROM INF INIUM (INDIA) LTD. 49 THE LEARNED CIT(A) BY ACCEPTING THE EXPLANATION OF THE ASSESSEE DELETED THE ADDITION MADE BY THE AO. 50 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) THAT THE AO WAS NOT JUSTIFIED IN PRESUMING THAT SUCH EXP ENSES WERE NOT RECOVERED BY THE ASSESSEE FROM INFINIUM (INDIA) LTD. IN THE ABSENCE OF ANY CLAIM BY INFINIUM (INDIA) LTD. THE AO WAS NOT JUSTIFIED IN MAKING THE LUMP SUM DISALLOWANCE. THER EFORE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A ) WHO HAS RIGHTLY DELETED THE ADDITION MADE BY THE AO. THUS GROUND NO.4 OF THE REVENUES APPEAL IS DISMISSED. 51 AS REGARDS GROUND NO.5 OF THE REVENUES APPEAL THE FACTS ARE THAT THE AO DID NOT ALLOW DEDUCTION OF RS.15 28 7/- CLAIMED 29 U/S 80HHC OF THE ACT WHICH ACTION OF THE AO WAS RE VERSED BY THE LEARNED CIT(A) VIDE PARA 10.3 OF HIS ORDER. 52 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ISSUE AT PRESENT IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF ITAT CALCUTTA IN THE CASE OF IFB A GRO INDUSTRIES 83 ITD 96 WHEREIN IT HAS BEEN HELD THAT DEDUCTION U/S 80HHC ON EXPORT PROFIT SHOULD BE COMPUTED ON THE BA SIS OF THE EXPORT TURNOVER AND TOTAL TURNOVER EXCLUSIVE OF THE RECEIPT OF EXCISE DUTY AND SALES-TAX. THIS ISSUE IS ALSO COVER ED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SUDARSHAN CHEMICALS LTD. 245 ITR 769. THEREFORE IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT AND THE S PECIAL BENCH OF THE ITAT REFERRED TO HEREINABOVE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). THUS GROUND NO .5 OF THE REVENUES APPEAL IS DISMISSED. 53 AS REGARDS GROUND NO.6 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED RS.2 LACS AS EXPEN DITURE INCURRED ON EARNING TAX FREE DIVIDEND. THE LEARNED CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE VIDE PARA 12.2 TO 12.3 OF HIS ORDER FOR THE REASONS MENTIONED THEREIN. 54 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. IN VIEW OF THE DECISIONS OF THE ITAT D ELHI IN THE CASES OF MARUTI UDYOG LTD. VS. DCIT 92 ITD 119 AND ACIT VS. EICHER LTD. 101 TTJ 369 NO NOTIONAL DISALLOWANCE C AN BE MADE IN RESPECT OF EXPENDITURE FOR THE PURPOSE OF SECTIO N 14A. ACCORDINGLY WE FIND NO INFIRMITY IN THE ORDER OF T HE LEARNED 30 CIT(A) WHO HAS RIGHTLY DELETED THE ADDITION ON THE SAME BASIS. THUS GROUND NO.6 OF THE REVENUES APPEAL IS DISMIS SED. 55 IN THE RESULT THE APPEAL OF THE REVENUE IN ITA NO.1373/AHD/2007 FOR AY 2003-04 IS DISMISSED. ITA NO.1463/AHD/2007 FOR AY 2000-01 :- 56 NOW WE TAKE UP THE APPEAL OF THE ASSESSEE IN IT A NO.1463/AHD/2007 FOR AY 2000-01. GROUND NOS.3 9 AN D 10 WERE NOT PRESSED BY THE LEARNED AR APPEARING FOR THE ASS ESSEE. THEREFORE THE SAME ARE DISMISSED AS NOT PRESSED. 57 GROUND NO.11 IN THIS APPEAL IS GENERAL IN NATURE AND THEREFORE DOES NOT REQUIRE ANY ADJUDICATION. AS REG ARDS GROUND NO.8 WHICH IS WITH RESPECT TO INITIATION OF PENALTY PROCEEDINGS AND THEREFORE DOES NOT ARISE FROM THE IMPUGNED OR DER OF THE LEARNED CIT(A) AND ACCORDINGLY DOES NOT REQUIRE AN Y ADJUDICATION. THE OTHER GROUNDS I.E. GROUND NOS.1 2 4 TO 7 ARE REPRODUCED AS UNDER:- [1] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT (A) HAS ERRED IN HOLDING THAT THE A SSESSING OFFICER WAS JUSTIFIED IN REOPENING THE ASSESSMENT U /S. 147 OF THE INCOME TAX ACT 1961. [2] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF DEDUCTION U/S. 80HHC BY UPHOLDING THE DISALLOWANCE OF 90% OF THE FERTILIZER SUBSIDY FROM THE COMPUTATION OF PROF IT FOR THE PURPOSE OF DEDUCTION U/S. 80HHC. [4] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF 31 RS.5 99 23 697/- BEING THE AMOUNT OF DEDUCTION CLAI MED U/S. 36(1)(III) IN RESPECT OF MONEY BORROWED FOR EXPANSI ON OF VARIOUS PROJECTS. WHILE DOING SO HE HAS ALSO ERRED IN NOT FOLLOWING THE ORDER OF CIT(A) IN THE CASE OF THE AP PELLANT FOR THE A.Y. 1998-99 AND THE DECISION OF THE GUJARAT HI GH COURT IN THE CASE OF CORE HEALTHCARE LTD. (251-ITR-61) (GUJ) AND ALEMBIC GLASS INDUSTRIES LTD. (103-ITR-715) (GUJ) [4.1] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LD. CIT(A) HAS ERRED IN REACHING THE CONCLUSION THAT THE AMENDMENT TO SECTION 36(1) (III) IS APPLICABLE RETR OSPECTIVELY AND THEREFORE APPLICABLE TO THE PERIOD PRIOR TO TH E A.Y. 2004-05 AS WELL. [5] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISA LLOWANCE OF PREMIUM OF RS.1 47 01 785/- PAID ON PREPAYMENT OF L OAN AND ALLOWING THE DEDUCTION OVER THE TERM OF LOAN. WHILE DOING SO HE HAS FAILED TO APPRECIATE THAT REVENUE EXPENDITUR E WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE FULLY ALLOWED IN THE YEAR IN WHICH IT IS IN CURRED AND IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN THOUGH THE ASSESSEE HAS WRITTEN OFF IN ITS BOOKS OVER NUMBER O F YEARS. IN THIS CONNECTION HE HAS FAILED TO FOLLOW THE DECISI ONS IN THE FOLLOWING CASES: I. KEDARNATH JUTE MFG. CO. LTD. V. CIT [1971] 82-IT R-363 (SC) II. TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V . CIT [1997] 227-ITR-172 (SC) III. CIT V. MADRAS AUTO SERVICE (P) LTD. ETC. [199 8] 233- ITR-468 (SC) IV. CIT V. BHOR INDUSTRIES LTD. [2003] 264-ITR-18 0 (BOM) [6] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DEDU CTION U/S. 35D TO THE EXTENT OF RS.13 50 000/- AS AGAINST THE CLAIM OF RS.87 73 000/- MADE BY THE APPELLANT. HE HAS ERRED IN UPHOLDING THE VIEWS OF THE ASSESSING OFFICER AND NO T APPRECIATING THAT THE GDR ISSUE MADE BY THE APPELLA NT WAS MAINLY FOR THE PURPOSE OF CAPITAL EXPENDITURE IN CO NNECTION WITH THE EXPANSION PLAN OF THE APPELLANT AND SINCE THERE WAS SOME 32 TIME TO COMMENCE EXPANSION/EXTENSION OF PROJECTS T HE APPELLANT HAD TEMPORARILY DEPLOYED PART OF PROCEEDS OF GDR ISSUE IN THE UNITS OF UTI. [7] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE DIS ALLOWANCE OF DEPRECIATION OF RS.14 91 87 864/- CLAIMED ON CER TAIN ASSETS GIVEN ON LEASE. WHILE DOING SO HE HAS ERRED IN REA CHING TO THE CONCLUSION THAT THE LEASE TRANSACTION IS A MERE FIN ANCIAL ARRANGEMENT WITHOUT APPRECIATING THE FACTS OF THE CASE. [7.1] WITHOUT PREJUDICE TO ABOVE THE LEARNED CIT ( A) HAS ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE PRINCIPAL PORTION OF LEASE RENT FROM THE INCOME OF THE APPELL ANT AND INCLUDE ONLY THE INTEREST PORTION IN THE INCOME OF THE APPELLANT. 58 AS REGARDS GROUND NO.1 IN ASSESSEES APPEAL THE FACTS ARE THAT THE ASSESSEE IS COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING OF FERTILIZERS VARIOUS CHEMICALS FOR INDUSTRIAL USE AND IN INFORMATION TECHNOLOGY BUSINESS. ORIGINAL RE TURN OF INCOME WAS FILED ON 29.11.2000 DECLARING TOTAL INCO ME OF RS.10 08 83 801/- WHICH WAS SUBSEQUENTLY REVISED ON 22.10.2001 DECLARING TOTAL INCOME AT RS.8 61 73 817/-. THE RET URN WAS PROCESSED U/S. 143(3) ACCEPTING THE RETURNED INCOME . ASSESSMENT U/S. 143(3) WAS FINALIZED ON 31-3-2003 DETERMINING TOTAL INCOME AT RS.30 25 19 600/-. THE ASSESSEE FILED AN APPEAL BEFORE CIT(A) AND AS A RESULT OF APPELLANT ORDER THE TOTAL INCOME WAS RECOMPUTED AT RS.9 02 17 377/- AND AS INCOME OF RS.19 48 15 517/- WORKED OUT U/S. 115JA OF THE ACT WAS MORE THAN TOTAL INCOME COMPUTED IN ACCORDANCE WITH THE O THER PROVISIONS OF THE I.T. ACT THIS INCOME WAS CONSIDER ED FOR THE PURPOSE OF TAXABILITY. SUBSEQUENTLY THE ASSESSMENT WAS REOPENED VIDE ISSUE OF NOTICE U/S. 148 DATED 31-3-2005 AFTER RECORDING THE 33 REASONS FOR THE SAME. IN RESPONSE TO NOTICE U/S. 14 8 THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 28.4.2005 WHE REIN THE TOTAL INCOME WAS DECLARED AT RS.9 02 17 380/- AND B OOK PROFIT U/S 115JA AT RS.19 48 15 516/-. REASSESSMENT U/S 143(3) R.W.S. 147 WAS COMPLETED ON A TOTAL INCOME OF RS.31 24 66 240/ -. THE REASONS RECORDED FOR REOPENING THE ASSESSMENT ARE R EPRODUCED AS UNDER:- IN THIS CASE RETURN OF INCOME DECLARING TOTAL INC OME OF RS.10 08 83 801/- WAS FILED ON 29.11.2000 CLAIMING DEDUCTION U/S. 80HHC OF RS.2 97 902/-. THE ASSESSMENT U/S. 143(3) OF THE ACT WAS COMPLETED ON 31.3.2003 AT THE TOTAL INCOME OF RS.30 25 19 600/- ACCEPTING THE DEDUCTION U/S. 80HHC AS CLAIMED BY TH E ASSESSEE COMPANY. AS IT APPEARS FROM THE 24TH ANNUAL REPORT 1999-200 0 THAT THE ASSESSEE HAS RECEIVED SUBSIDY OF RS.24979.01 LACS W HICH REMAINED TO BE CONSIDERED WHILE WORKING THE DEDUCTION U/S. 80HH C OF THE I.T. ACT WHICH IS NOT ELIGIBLE. THEREFORE THE ASSESSMENT FO R A.Y. 2000-01 IS ESCAPED ASSESSMENT TO THE TUNE OF RS.2 97 902/- BEI NG WRONG CLAIM U/S. 80HHC OF THE ACT. I HAVE THEREFORE REASON TO BELIEVE THAT THE INCOME CHARGEABLE TO TAX HAS ESCAPED TO THE TUNE OF RS.2 97 902/-. IT IS A F IT CASE FOR ISSUE OF NOTICE U/S. 148 OF THE I.T. ACT.' 59 IT WAS SUBMITTED BEFORE THE AO THAT THE ASSESSEE HAD DISCLOSED FULLY AND TRULY ALL MATERIAL FACTS NECESS ARY FOR THE ASSESSMENT. THE SALE COMPRISED OF SALE OF GOODS AND SERVICES INCLUSIVE OF EXCISE DUTY AND INCLUDES CLAIMS PREFER RED ON THE GOVERNMENT OF INDIA FOR RETENTION PRICE REIMBURSEME NT ON DISPATCHES OF FERTILIZERS AND ADMISSIBLE CLAIMS FOR CHANGE IN RETENTION PRICE ON ACCOUNT OF VARIATION IN THE COST . THE AO HAS 34 EXAMINED ALL THE DETAILS U/S 80HHC AND THEN RESTRIC TED THE DEDUCTION AFTER MAKING ABOVE ADJUSTMENT. THEREFORE NO INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT AND THE RE -ASSESSMENT PROPOSED BASED ON THE CHANGE OF OPINION ON SAME SET OF FACTS AVAILABLE AT THE TIME OF PASSING THE ORDER U/S 143( 3) IS NOT WARRANTED. THE LEARNED AR MADE SIMILAR SUBMISSIONS BEFORE THE LEARNED CIT(A) AS WELL. BOTH THE AUTHORITIES DID NO T APPRECIATE THE SUBMISSIONS OF THE ASSESSEE. ACCORDINGLY THE L EARNED CIT(A) CONFIRMED THE ACTION OF THE AO IN REOPENING THE ASS ESSMENT. 60 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) WHO HAS RELIED UPON DECISIONS OF VARIOUS COURTS OF LAW WITH SPECIFIC REFERENCE TO THE DECISION OF THE HONBLE GUJARAT HI GH COURT IN THE CASE OF PRAFUL CHUNILAL PATEL VS. ACIT 236 ITR 832 IN WHICH IT HAS BEEN HELD THAT WHERE THE AO HAD OVERLOOKED S OMETHING AT THE FIRST ASSESSMENT THERE CAN IN OUR OPINION BE N O QUESTION OF ANY CHANGE OF OPINION WHEN THE INCOME WAS CHARGEABL E TO TAX IS ACTUALLY TAXED AS IT OUGHT TO HAVE BEEN UNDER THE L AW BUT WAS NOT DUE TO AN ERROR COMMITTED AT THE FIRST ASSESSMENT. SIMILAR OBSERVATIONS WERE FOUND IN OTHER CASES RELIED UPON BY THE LEARNED CIT(A) IN PARAS 4.3.3 AND 4.3.4. OF HIS ORDER. ACCO RDINGLY RELYING UPON THE DECISIONS OF VARIOUS COURTS OF LAW REFERRED TO IN THE ORDER OF THE LEARNED CIT(A) WE FIND NO INFIRMI TY IN THE ORDER OF THE LEARNED CIT(A). THUS GROUND NO.1 OF THE ASS ESSEES APPEAL IS DISMISSED. 61 AS REGARDS GROUND NO.2 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF DEDUCT ION U/S 35 80HHC BY HOLDING THE DISALLOWANCE OF THE FERTILIZER SUBSIDY FROM THE COMPUTATION OF PROFIT FOR THE PURPOSE OF D EDUCTION U/S 80HHC. 62 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE A O VIDE PARA 5.3 OF HIS ORDER. 63 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE FACTS ARE IDENTICAL TO THE FACTS I N ASSESSEES OWN CASE FOR AY 2003-04 WHERE THE ISSUE HAS BEEN DECIDE D BY US IN GROUND NO.5 IN ITA NO.1464/AHD/2007 HEREINABOVE. FO LLOWING THE SAME GROUND NO.2 OF THE ASSESSEES APPEAL IS D ISMISSED. 64 AS REGARDS GROUND NO.4 THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.5 99 23 697/- BEING THE A MOUNT OF DEDUCTION CLAIMED U/S 36(1)(III) IN RESPECT OF MONE Y BORROWED FOR EXPANSION OF VARIOUS PROJECTS. THE LEARNED CIT( A) CONFIRMED THE ACTION OF THE AO. 65 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE FACTS ARE IDENTICAL TO THE FACTS I N ASSESSEES OWN CASE FOR AY 2003-04 WHERE THE ISSUE HAS BEEN DECIDE D BY US IN GROUND NO.11 IN ITA NO.1464/AHD/2007 HEREINABOVE. F OLLOWING THE SAME GROUND NO.2 OF THE ASSESSEES APPEAL IS A LLOWED. 66 AS REGARDS GROUND NO.5 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF PREMIU M OF RS.1 47 01 785/- PAID ON PRE-PAYMENT OF LOAN AND AL LOWING THE DEDUCTION OVER THE TERM OF LOAN. THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 36 67 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE FACTS ARE IDENTICAL TO THE FACTS I N ASSESSEES OWN CASE FOR AY 2003-04 WHERE THE ISSUE HAS BEEN DECIDE D BY US IN GROUND NO.9 IN ITA NO.1464/AHD/2007 HEREINABOVE. FO LLOWING THE SAME GROUND NO.2 OF THE ASSESSEES APPEAL IS A LLOWED. 68 AS REGARDS GROUND NO.6 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE ASSESSEE HAS CLAIMED DEDUCTION U /S 35D AMOUNTING TO RS.87 73 000/- WHICH WAS RESTRICTED TO RS.13 50 000/- BY THE AO. THE LEARNED CIT(A) CONFIR MED THE ACTION OF THE AO. 69 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE FACTS ARE IDENTICAL TO THE FACTS I N ASSESSEES OWN CASE FOR AY 2003-04 WHERE THE ISSUE HAS BEEN DECIDE D BY US IN GROUND NO.10 IN ITA NO.1464/AHD/2007 HEREINABOVE. F OLLOWING THE SAME GROUND NO.2 OF THE ASSESSEES APPEAL IS A LLOWED. 70 AS REGARDS GROUND NO.7 OF THE ASSESSEES APPEAL THE FACTS ARE THAT THE AO MADE A DISALLOWANCE OF DEPRECIATION OF RS.14 91 87 864/- CLAIMED ON CERTAIN ASSETS GIVEN O N LEASE. THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 71 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE FACTS ARE IDENTICAL TO THE FACTS I N ASSESSEES OWN CASE FOR AY 2003-04 WHERE THE ISSUE HAS BEEN DECIDE D BY US IN GROUND NO.12 IN ITA NO.1464/AHD/2007 HEREINABOVE. F OLLOWING THE SAME GROUND NO.2 OF THE ASSESSEES APPEAL IS A LLOWED. 37 72 IN THE RESULT THE APPEAL OF THE ASSESSEE IN ITA NO.1463/AHD/2007 IS PARTLY ALLOWED. ITA NO.3111/AHD/2008 FOR AY 2000-01 :- 73 NOW WE TAKE UP THE APPEAL OF THE ASSESSEE FOR A Y 2000-01 IN ITA NO.3111/AHD/2008 WHICH IS ARISING FROM THE ORDER OF THE LEARNED CIT(A)-VI BARODA DATED 02-06-2009 AGAINST THE ORDER PASSED BY THE AO U/S 154 OF THE ACT. THE ASSESSEE H AS RAISED THE FOLLOWING GROUNDS OF APPEAL:- [1] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT (A) HAS ERRED IN HOLDING THAT THE T HERE WAS NO ERROR IN THE ORDER OF THE ASSESSING OFFICER. [2] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT (A) HAS ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO EXCLUDE CAPITAL COMPONENT OUT OF LEASE R ENT INCOME OFFERED TO TAX AS DEPRECIATION ON LEASED ASSETS WAS NOT ALLOWED BY THE ASSESSING OFFICER. [3] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN OBSERVING THAT THE RIGHT FORUM AGAINST THE ORDER OF THE CIT(A) IS ITAT. [4] THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND AND/OR WITHDRAW ANY OF THE GROUNDS OR GROUND EITHER BEFORE OR AT TH E TIME OF APPEAL HEARING. 74 THE BRIEF FACTS ARE THAT THE ASSESSEE MOVED A RE CTIFICATION APPLICATION U/S 154 OF THE ACT BEFORE THE AO. THE A SSESSEE HAD GIVEN CERTAIN ASSETS ON LEASE TO WESTERN RAILWAYS A ND NCPL FOR WHICH DEPRECIATION WAS CLAIMED. THE DEPRECIATION WA S DISALLOWED BY THE AO TERMING THE SAME AS FINANCE LE ASE AND NOT OPERATING LEASE. CONCURRENTLY THE AO HAS ALSO NOT EXCLUDED 38 CAPITAL COMPONENT OF RS.1 55 51 381/-. IN SHORT RS .2 19 79 400/- BEING INTEREST PORTION ONLY OUGHT TO BE INCLUDED IN ASSESSEES INCOME. THE AO REJECTED THE APPLICATION U/S 154 OF THE ACT SINCE THE DISALLOWANCE OF DEPRECIATION ON LEASED AS SETS HAVE BEEN CONFIRMED BY THE LEARNED CIT(A). 75 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE A O. 76 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SINCE THE AO IN THE PRESENT CASE HAS R EJECTED THE APPLICATION U/S 154 OF THE ACT FOR THE REASON THAT THE DEPRECIATION HAS BEEN DISALLOWED BY THE LEARNED CIT(A) WITH REGA RD TO THE LEASE OF RAILWAY WAGONS AND CAPTIVE POWER PLANT WHI CH WERE GIVEN ON LEASE TO WESTERN RAILWAYS AND NCPL. SINCE THE ISSUE OF THE LEASE TO WESTERN RAILWAYS AND NCPL HAS ALREADY BEEN ADJUDICATED BY US IN ASSESSEES APPEAL IN ITA NO.14 63/AHD/2007 HEREINABOVE AND THE APPEAL OF THE ASSESSEE HAS BEEN ALLOWED. THEREFORE THE AO IS DIRECTED TO DECIDE THE ISSUE D E NOVO AFTER CONSIDERING OUR DECISION IN ITA NO.1463/AHD/2007 HE REINABOVE BUT BY AFFORDING ADEQUATE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. THUS THE APPEAL OF THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSE. ITA NO.4007/AHD/2007 FOR AY 2004-05 :- 77 NOW WE TAKE UP THE APPEAL OF THE ASSESSEE IN IT A NO.4007/AHD/2007 FOR AY 2004-05. GROUND NO.9 IN THI S APPEAL IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICA TION. THE REMAINING GROUNDS ARE AS UNDER:- 39 [1.1] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN UP-HOLDING THE ADDI TION MADE BY THE LEARNED A. 0. IN RESPECT OF NOTIONAL INTERES T INCOME OF RS.3 58 19 000/- ON LOAN GIVEN TO GUJARAT STATE INV ESTMENT LTD. [GSIL FOR SHORT]. THE ADDITION WAS UP-HELD ON THE A SSUMPTION THAT A RIGHT TO RECEIVE THAT INTEREST FROM GSIL TO WHOM THE APPELLANT HAD ADVANCED A LOAN DURING THE A.Y. 1994- 95 HAD ACCRUED TO THE APPELLANT THIS YEAR. THE LEARNED CIT (A) HAS ERRED IN NOT APPRECIATING THE FACT THAT NO INTEREST INCOME HAS BEEN ACCRUED OR EARNED BY THE APPELLANT DURING THE YEAR AND NO INTEREST IS THEREFORE TO BE TAXED. [1.2] WITHOUT PREJUDICE TO THE FOREGOING IN LAW AN D IN FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LEARNED CIT(A) HAS ERRED IN ARRIVING AT THE QUANTUM OF THE INTEREST IN COME ALLEGEDLY EARNED BY THE APPELLANT ON THE AFORESAID LOAN THIS YEAR. [1.3] WITHOUT PREJUDICE TO THE FOREGOING IN LAW AN D IN THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN ORDERING FOR AN ALTERNATIVE 'DISAL LOWANCE' OF THE SAME AMOUNT OF RS.3 58 19 000 OUT OF THE INTEREST E XPENSE INCURRED BY THE APPELLANT FOR SOMEHOW OR ANYHOW ENH ANCING THE APPELLANT'S RETURNED INCOME BY THAT AMOUNT NO MATT ER THAT HIS STAND VIS-A-VIS ACCRUAL OF INCOME IN THE FORM OF IN TEREST OF THAT AMOUNT ON THE LOAN TO GSIL COMES TO BE DISAPPROVED. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT HE HA D NO JURISDICTION TO MAKE SUCH ALTERNATIVE DISALLOWANCE/ ADDITION ONCE BASED ON THE SUGGESTION THAT INCOME OF A CERTA IN AMOUNT HAD ACCRUED TO THE APPELLANT AND FAILING THAT ON THE OTHER SUGGESTION THAT THE APPELLANT DESERVED TO BE DISAL LOWED EXPENDITURE TO THAT VERY EXTENT. HE OUGHT FURTHER T O HAVE APPRECIATED THAT EVEN ON THE UTTERLY UNTENABLE STAN D OF LEARNED A.O. THERE COULD BE NO QUESTION FOR HIM TO ADOPT T HE SAME MEASURE OF 17% PER ANNUM FOR DISALLOWING INTEREST E XPENDITURE WHICH AS HE VERY WELL KNEW WAS THE RATE OF INTERE ST ORIGINALLY APPLICABLE TO THE LOAN GRANTED TO GSIL AND WHICH RA TE WAS ADMITTEDLY CONSIDERABLY HIGHER THAN THE AVERAGE RAT E OF INTEREST ON THE APPELLANT'S BORROWINGS THIS YEAR. [2] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN DISALLOWING DEDUCTION 40 OF RS.1 456 CLAIMED BY THE APPELLANT U/S. 80HHC OF THE INCOME-TAX ACT 1961. [3] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN MAKING AN A D HOC DISALLOWANCE OF RS.2 00 000 OUT OF EXPENDITURE DEBI TED TO THE APPELLANT'S PROFIT AND LOSS ACCOUNT ON THE ASSUMPTI ON THAT THE SAME MUST HAVE BEEN INCURRED IN RELATION TO INCOME NOT INCLUDED IN THE APPELLANT'S TOTAL INCOME. [4] THE LEARNED CIT(A) HAS ERRED IN NOT DIRECTING T HE LEARNED AO TO ALLOW REPAIRS AND MAINTENANCE EXPENSES OF RS.1 3 6 71 288/- INCURRED ON THE PLANT AND MACHINERY AS REVENUE EXPE NDITURE. [5] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN RESTRICTING THE DEDUCTION ON ACCOUNT OF GDR ISSUE EXPENSES OF RS.87 73 000 CL AIMED BY THE APPELLANT U/S. 35D TO ONLY RS.13 50 000 THEREB Y DISALLOWING DEDUCTION FOR RS.74 23 000 OUT OF THE SAME. [6] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TO E APPELLANT'S CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN DISALLOWI NG DEDUCTION OF DEPRECIATION AMOUNTING TO RS.1 20 92 362 ON THE ASSETS LEASED BY THE APPELLANT TO WESTERN RAILWAYS AND NAR MADA CHEMATUR PETROCHEMICALS LTD. [7] THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE A CTION OF THE LEARNED A.O. IN DISALLOWING RS.1 48 541 BEING BAD D EBTS WRITTEN OFF IRREVOCABLY IN THE BOOKS OF ACCOUNT. [8] THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE L EARNED A.O. TO DISALLOW OF DONATION GIVEN OUT OF INTEREST BEARING FUNDS. THE CIT(A) HAS ERRED IN NOT APPRECIATING THE FACT OF TH E CASE THAT THESE C DONATIONS WERE GIVEN CONSIDERING THE BUSINE SS EXPEDIENCY AND AS A SOCIALLY RESPONSIBLE CORPORATE. [9] THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND AND/OR WITHDRAW ANY GROUND OR GROUNDS OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 41 78 AS REGARDS GROUND NOS. 1.1 1.2 AND 1.3 THE BRI EF FACTS ARE THAT THE ASSESSEE COMPANY HAD ADVANCED INTEREST BEA RING LOAN TO GUJARAT STATE INVESTMENTS LTD.(GSIL) IN A.Y. 1994-9 5 CARRYING INTEREST @ 17%. THE APPELLANT HAD BEEN ACCOUNTING F OR AND OFFERING IN ITS RETURN OF INCOME THE FULL AMOUNT OF INTEREST YEAR AFTER YEAR RIGHT FROM A.Y. 1994-95 TILL A.Y. 2002-0 3. HOWEVER GSIL HAD DISPUTED THE INTEREST LIABILITY AND NOT PA ID ANY INTEREST AFTER 30.9.1994. THE BALANCE OUTSTANDING AS ON 31.3 .2004 WAS RS21.07 CRORES. IN RESPONSE TO SHOW CAUSE AS TO WHY THE ACCRUED INTEREST FOR A.Y. 2004-05 WAS NOT DISCLOSED IN THE RETURN IT WAS SUBMITTED BY THE ASSESSEE THAT TILL A.Y. 2002-03 TH E ASSESSEE COMPANY HAD EXPECTATION OF RECEIVING THE INTEREST F ROM GSIL. HOWEVER CONSIDERING THE FACT THAT NO INTEREST WAS R ECEIVED FROM GSIL THE BOARD OF DIRECTORS RESOLVED NOT TO ACCRUE THE INTEREST. WITHOUT PREJUDICE IT WAS SUBMITTED THAT AN ARBITRAT ION PROCEEDING WAS FILED AGAINST GSIL TOWARDS RECOVERY OF AND THE ARBITRATOR HAS DIRECTED GSIL TO MAKE PAYMENT OF INTEREST ASSESSEE COMPANY @ 11.5 % AS AGAINST 17%. IT IS CLAIMED THAT AS AGAINS T 11.5% THE ASSESSEE COMPANY HAD BEEN OFFERING INTEREST @ 17% A .Y. 2002- 03 AND IT HAD ALREADY OFFERED MORE INTEREST TO TAX THAT ACTUALLY RECEIVABLE. THE COMPANY FELT THAT NO INTEREST AMOUN T BE TAXED FOR A.Y. 2004-05. DECISION OF ITAT IN ITS OWN CASE FOR A.Y. 1992- 93 TO 1994-95 AND THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. M/S. SHOORJI VALLABHDAS & CO. - 46 ITR 144 AND GODHRA ELECTRICITY CO. LTD. VS. CIT -225 ITR 746 WERE RELI ED UPON. THE ASSESSING OFFICER ON THE OTHER HAND WAS OF THE VIEW THAT THE INTEREST ACCRUED TO ASSESSEE DURING THE YEAR UNDER CONSIDERATION AS THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF A CCOUNTING AND 42 FURTHER AS PER SECTION 5 INCOME WHICH IS RECEIVED O R DEEMED TO HAVE BEEN RECEIVED IN INDIA OR DEEMED TO ACCRUE OR ARISE IN INDIA FORMS PART OF TOTAL INCOME OF PREVIOUS YEAR. IT IS CLAIMED THAT THE ASSESSEE HAD THE RIGHT TO RECEIVE THE INCOME THUS THE AMOUNT IS SAID TO HAVE ACCRUED TO THE ASSESSEE. ASSESSI NG OFFICER RELIED ON FOLLOWING DECISIONS. I. D.E. SASSOON & CO. LTD. VS. CIT - 26 ITR 27(SC) II. MORVI INDUSTRIES LTD. VS. CIT - (1971) 82 ITR(S C) III. S.M.S. INVESTMENT CORPORATION P. LTD. VS. CIT 203 ITR 1001 (RAJ) IV. WESTERN INDIA OIL DISTRIBUTION CO. LTD. VS. CIT 206 ITR 359(BOM) V. SWADESHI CLOTH DEALERS - 187 ITR 620(AII) VI. CIT VS. SHIV PRAKASH JANAKRAJ & CO. PVT. LTD. 222 ITR 589(SC) VII. CIT VS. GIRISHCHANDRAHARIDAS & OTHERS - 196 IT R 833(KER) IT WAS ALSO INDICATED THAT THE COPY OF AWARD OF THE SOLE ARBITRATOR SHRI B.M. OZA WAS DATED 30.9.2006 WHICH IS SUBSEQUE NT TO THE END PREVIOUS YEAR. ACCORDINGLY IT IS HELD THAT THE INTEREST INCOME OF RS.3 58 19 000 WAS TO THE ASSESSEE AND WAS ADDED TO THE TOTAL INCOME. 79 THE LEARNED CIT(A) FOR THE REASONS MENTIONED IN HIS ORDER HELD THAT THE INTEREST INCOME OF RS.3 58 19 000/- W AS ACCRUED TO THE ASSESSEE AND THEREFORE OBSERVED THAT THE AO WAS JUSTIFIED IN BRINGING TO TAX THE ACCRUED INTEREST INCOME OF RS.3 58 19 000/-. 80 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THERE IS NO DISPUTE TO THE FACT THAT T HE AWARD OF THE ARBITRATOR WAS PASSED IN THE PRESENT CASE IN SEPTEM BER 2006. THE ARGUMENTS MADE BY THE LEARNED AR BEFORE THE LEA RNED 43 CIT(A) AND BEFORE US THAT THE INTEREST ACCRUED UPTO THE END OF THE IMPUGNED YEAR HAS ALREADY BEEN PROVIDED IN THE BOOK S OF ACCOUNT UPTO 30 TH SEPTEMBER 2004 AND THE BALANCE WAS OUTSTANDING AS ON 31-03-2004 WAS RS.21.07 CRORES. THEREFORE THE MORE INTEREST HAD BEEN SHOWN AS ACCRUED IN THE BOOKS OF ACCOUNT TAKIN G INTO ACCOUNT THE INTEREST ACCRUED DURING THE YEAR. THIS IS ALSO NOT IN DISPUTE THAT THE AWARD HAD BEEN PASSED ONLY ON 30 TH SEPTEMBER 2006. THEREFORE IT CANNOT BE SAID THAT THE INTERES T HAD NOT BEEN ACCRUED TO THE ASSESSEE COMPANY IN THE PRECEDING YE AR ESPECIALLY IN THE IMPUGNED YEAR. BUT AT THE SAME TIME THE ASSE SSEE HAS ALREADY OFFERED THE INCOME FOR TAXATION IN THE EARL IER YEARS AND THE ASSESSEE CANNOT BE TAXED AGAIN ON SUCH INCOME. THEREFORE IT WILL BE IN THE INTEREST OF JUSTICE IF THE ARGUMENTS MADE BY THE ASSESSEE BEFORE US ARE EXAMINED BY THE AO FROM THE RECORDS PRODUCED BY THE ASSESSEE THAT THE INTEREST UPTO THE END OF THE IMPUGNED YEAR HAS ALREADY BEEN PROVIDED / ACCRUED I N EXCESS THEN NO INTEREST INCOME IS REQUIRED TO BE ACCRUED D URING THE YEAR. THE AO IS DIRECTED TO DECIDE THE ISSUE DE NOVO AS D IRECTED ABOVE BUT BY AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS GROUND NO.1 OF THE ASSESSEES APPEAL IS ALLOW ED FOR STATISTICAL PURPOSE. 81 AS REGARDS GROUND NO.2 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED DEDUCTION OF RS.14 56/- CLAIMED BY THE ASSESSEE U/S 80HHC OF THE ACT. THIS ACTION O F THE AO WAS CONFIRMED BY THE LEARNED CIT(A). 82 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. ON SIMILAR FACTS AN IDENTICAL ISSUE H AS BEEN DECIDED 44 BY US IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 HEREINABOVE VIDE GROUND NO.5 THERE IN. FOLLOWING THE SAME GROUND NO.2 OF THIS APPEAL OF T HE ASSESSEE IS DISMISSED. 83 AS REGARDS GROUND NO.3 OF THE ASSESSEES APPEAL WAS NOT PRESSED BY THE LEARNED AR OF THE ASSESSEE AT THE TI ME OF HEARING. THE SAME IS THEREFORE DISMISSED AS NOT PRESSED. 84 AS REGARDS GROUND NO.4 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO DID NOT ALLOW REPAIRS AND MAI NTENANCE EXPENSES OF RS.1 36 71 288/- INCURRED ON THE PLANT AND MACHINERY AS REVENUE EXPENDITURE. THE LEARNED CIT(A) CONFIRME D THE ACTION OF THE AO. 85 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS BEEN DECIDED B Y US IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/A HD/2007 IN GROUND NO.8 IN THE SAID APPEAL. FOLLOWING THE SAME THIS GROUND NO.4 OF THE ASSESSEES APPEAL IS ALLOWED FOR STATIS TICAL PURPOSE. 86 AS REGARDS GROUND NO.5 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED THE CLAIM OF THE A SSESSEE U/S 35D ON ACCOUNT OF GDR ISSUE EXPENSES OF RS.87 73 00 0/-. THE LEARNED CIT(A) RESTRICTED THE SAME AT RS.13 50 000/ -. 87 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SIMILAR ISSUE HAS ARISEN IN THE ASSESS EES OWN CASE FOR AY 2003-04 WHERE IDENTICAL ISSUE HAS BEEN DECID ED BY US IN 45 ITA NO.1464/AHD/2007 VIDE GROUND NO.10 HEREINABOVE. FOLLOWING THE SAME GROUND NO.5 IN THIS APPEAL IS A LLOWED. 88 AS REGARDS GROUND NO.6 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF DEDUCT ION OF DEPRECIATION OF RS.1 20 92 362/- ON THE ASSETS LEAS ED BY THE ASSESSEE TO WESTERN RAILWAYS AND NARMADA CHEMATUR PETROCHEMICALS LTD. THE LEARNED CIT(A) CONFIRMED TH E ACTION OF THE AO. 89 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS ARISEN IN THE ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 AND VID E GROUND NO.12 THE ISSUE HAS BEEN DECIDED BY US HEREINABOVE IN THE SAID APPEAL. FOLLOWING THE SAME THE ORDER OF THE LEARN ED CIT(A) IS REVERSED. THUS GROUND NO.6 OF THE ASSESSEES APPEA L IS ALLOWED. 90 AS REGARDS GROUND NO.7 OF THE ASSESSEES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED RS.1 48 541/- BEIN G BAD DEBTS WRITTEN OFF IRREVOCABLY IN THE BOOKS OF ACCOUNT. TH E LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 91 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS ARISEN IN THE ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH H AS BEEN DECIDED BY US HEREINABOVE VIDE GROUND NO.13 THEREIN . FOLLOWING THE SAME WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). THUS GROUND NO.7 OF THE ASSESSEES APPEAL IS DISMI SSED. 46 92 IN GROUND NO.8 OF THE ASSESSEES APPEAL THE BRI EF FACTS OF THE CASE ARE THAT THE IT IS NOTED BY ASSESSING OFFI CER THAT DONATIONS AMOUNTING TO RS.1 21 00 000 WAS MADE BY T HE APPELLANT AND THE APPELLANT WAS ASKED TO FURNISH DE TAILS OF SOURCE OF SUCH DONATIONS. IN RESPONSE THERETO THE ASSESSEE HAS SUBMITTED THAT DONATIONS WERE MADE TO VARIOUS PARTIES OUT OF HIS OWN FUND AND PROFIT GENERATED DURING THE YEAR. SINCE THE COP Y OF BANK STATEMENT WAS NOT FURNISHED THE ASSESSING OFFICER C ONCLUDED THAT INTEREST BEARING FUNDS HAS BEEN UTILIZED FOR GIVING DONATIONS AND INTEREST @ 10% ON SUCH DONATIONS AMOUNTING TO RS.12 10 000 WAS DISALLOWED. 93 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE A O. 94 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). THERE ARE TWO ISSUES WHICH MERIT ATTENTION IN REGARD TO THIS GROUND MERE IS NO DISPUTE THAT THE DONATIONS W ERE MADE BY THE APPELLANT DURING THE PREVIOUS YEAR IN 80G APPRO VED FUNDS AND THE ASSESSING OFFICER ALSO ALLOWED THE DEDUCTION TO THE EXTENT OF RS.55 LACS. IN THE LANGUAGE OF SECTION 80G THERE IS NO MENTION THAT THE DONATION PAID SHOULD BE OUT OF THE INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. REGARDING THE SEC OND ISSUE AS TO WHETHER SUFFICIENT FUNDS WERE AVAILABLE FOR MAKI NG THESE DONATIONS THE MOOT POINT IS THAT IF THE DONATIONS A RE PAID OUT OF THE BORROWED FUNDS THE INTEREST ON THESE BORROWED F UND IS CERTAINLY NOT AN ALLOWABLE EXPENDITURE AS DOING CHA RITY IS MUTUALLY EXCLUSIVE TO BUSINESS EXPEDIENCY. IT IS AL SO NOTED THAT DESPITE SPECIFIC REQUESTS TO FURNISH THE CASH FLOW OR BANK 47 STATEMENT TO ELICIT THAT SUFFICIENT FUNDS WERE AVAI LABLE FOR MAKING THE DONATIONS OR NOT THE DETAILS WERE NOT FURNISHE D BEFORE THE ASSESSING OFFICER. ACCORDINGLY THE APPELLANT IS DIR ECTED TO PRODUCE BEFORE THE ASSESSING OFFICER THE CASH FLOW STATEMENT AND ON VERIFICATION BY ASSESSING OFFICER TO THE EXTENT THE OWN FUNDS ARE AVAILABLE ON VARIOUS DATES OF DONATION THE SAME WOULD STAND ALLOWED. AND IF THE BORROWED FUNDS ARE FOUND TO BE UTILIZED FOR MAKING DONATIONS THE DISALLOWANCE OF 10% INTEREST COST FOR APPROPRIATE PERIOD ON SUCH FUNDS WOULD STAND CONFIR MED. THUS GROUND NO.8 OF THIS APPEAL IS DISMISSED. 94 IN THE RESULT THE APPEAL OF THE ASSESSEE IN ITA NO.4007/AHD/2007 IS PARTLY ALLOWED. ITA NO.3993/AHD/2007 FOR AY 2004-05 :- 95 NOW WE TAKE UP THE APPEAL OF THE REVENUE IN ITA NO.3993/AHD/2007 FOR AY 2004-05. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- [1.(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.4 33 13 600/- MADE OUT OF THE INTEREST CLAIMED U /S. 36(1)(III) ON ACCOUNT OF DIVERSION OF BORROWED FUND S TO SUBSIDIARY AND ASSOCIATE CONCERNS BY MERELY RELYIN G ON THE APPELLATE ORDERS FOR EARLIER YEARS (WHICH HAVE BEEN CONTESTED BY THE DEPARTMENT) WITHOUT APPRECIATING THAT EACH YEAR'S INCOME-TAX PROCEEDINGS ARE INDEPENDENT AND THE MATTER HAD TO BE DECIDED ON MERITS IN THE LIGHT OF THE PRINCIPLES SETTLED BY AUTHORITATIVE JURISDICTIONAL PRONOUNCEMENTS. [1.(B)] THE CIT(A) FAILED TO APPRECIATE THE LEGAL P RINCIPLE THAT ONUS U/S. 36(1)(III) LIES ON THE ASSESSEE TO PROVE THAT EACH 48 LOAN IS USED FOR THE PURPOSES OF THE BUSINESS AND T HERE IS NO PRESUMPTION IN LAW THAT IT IS OWN CAPITAL OR SUR PLUS FUNDS THAT WERE DIVERTED FOR NON-BUSINESS PURPOSES AS SETTLED IN THE CASE OF KISHANCHAND CHELLARAM V/S. C IT 114 ITR 654 (BOM.) R.DALMIA V/S. CIT 133 ITR 169 (DEL) CIT V/S. M.S. VENKATESHWARAN 222 ITR 163 (MAD) K. SOMASUNDARAM & BROTHERS V/S. CIT 238 ITR 939 (MAD.) AND CIT V/S. MOTOR GENERAL FINANCE LTD. 254 ITR 449 (DEL) WHICH WAS CONFIRMED IN PRINCIPLE BY THE SUPREME COURT IN THE CASE OF MOTOR GENERAL FINANCE V/S. CIT 267 ITR 381 (SC). [2.(A)] ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE CIT(A) ERRED IN ALLOWING THE EXPENSES OF RS.14 63 6 59/- ON PROTECTING THE ASSETS OF M/S. GUJARAT NARMADA AU TO LTD. (GNAL) A SISTER CONCERN OF THE ASSESSEE WITH OUT APPRECIATING THE LEGAL POSITION THAT A SUBSIDIARY C OMPANY IS A SEPARATE LEGAL ENTITY AND THE BUSINESS OF THE SUBSIDIARY CANNOT BE CONSIDERED TO THE BUSINESS OF THE ASSESSEE AS SETTLED IN THE CASE OF PHALTAN SUGAR WO RKS LTD. V/S. CWT 208 ITR 989 993 (BOM.) FOLLOWED IN 2 15 ITR 582 (BOM.) AND 216 ITR 479 481 (BOM ). [2.(B)] WITHOUT PREJUDICE THE CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT A I LIQUIDATOR WAS APPOINTED BY THE HIGH COURT WHO WAS IN ACTUAL POSSESSION OF THE ASSETS OF GNAL AND WAS RESPONSIBLE FOR PROTECTING THE SAME AN D HENCE THERE WAS NO OBLIGATION ON THE ASSESSEE TO IN CUR SUCH EXPENDITURE. [3] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN DELETING TO THE EXTENT OF RS.1 55 04 597/- OUT OF REPAIRS AND MAINTENANCE EXPENSES MADE ON ACCOUNT OF GIVING A NEW AND DIFFERENT ADVANTAGE BY HOLDING THE SAME AS REP LACEMENT OF EXISTING PARTS WITHOUT APPRECIATING THAT RENEWAL O R RESTORATION ARE NOT COVERED BY 'CURRENT REPAIRS' REFERRED TO IN SECTION 31 (I) AND ARE OF CAPITAL NATURE AS SETTLED IN THE CASE OF BALLIMAL NAVAL KISHORE V/S. CIT 224 ITR 414 (SC). [4] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN ALLOWING DEDUCTION OF RS.25 00 000/- BEING PAYMENT FOR INFORMATION TECHNOLOGY RELATED SERVICES PAID TO M/S. 49 INFINIUM (INDIA) LTD. TREATED AS EXPENSES DERIVING BENEFIT OF ENDURING NATURE. [5] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN DIRECTING TO EXCLUDE SALES TAX AND EXCISE DUTY AS PART OF TOTAL TURNOVER WHILE WORKING OUT THE DEDUCTION U/S. 80HHC. [6] THE APPELLANT CRAVES LEAVE TO ADD TO AMEND OR ALTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. RELIEF CLAIMED IN APPEAL : THE ORDER OF THE CIT(A) ON THE ISSUES RAISED IN THE AFORESAID GROUNDS BE SET ASIDE AND THAT OF THE A.O. BE RESTOR ED. 96 AS REGARDS GROUND NOS.1(A) AND 1(B) THE BRIEF F ACTS OF THE CASE ARE THAT THE AO MADE A DISALLOWANCE OF RS.4 33 13 600/- OUT OF INTEREST CLAIMED U/S 36(1)(III) ON ACCOUNT OF DI VERSION OF BORROWED FUNDS TO SUBSIDIARY AND ASSOCIATE CONCERNS . THE LEARNED CIT(A) AFTER APPRECIATING THE FACTS AND SUB MISSIONS MADE BY THE LEARNED AR OF THE ASSESSEE ALLOWED THE CLAI M OF THE ASSESSEE. 97 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SIMILAR ISSUE HAS ARISEN IN THE ASSESS EES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH HAS BE EN DECIDED BY US HEREINABOVE. THE RELEVANT PARA 41 REA DS AS UNDER:- 41. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNED CIT(A ) AND THE DECISION OF THE TRIBUNAL AHMEDABAD BENCH IN ASSESSE ES OWN FOR AY 1995-96 AS REFERRED TO IN THE ORDER OF THE LEARNED CIT(A) VIDE PARA 5.2.3 AND THEREFORE WE FIND NO INFIRMITY IN THE ORD ER OF THE LEARNED CIT(A). THUS GROUND NO.1 OF THE REVENUES APPEAL I S DISMISSED. 50 THEREFORE FOLLOWING THE AFORESAID ORDER WE DISMIS S GROUND NO.1 OF THE REVENUES APPEAL. 98 AS REGARDS GROUND NO.2 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.14 63 659/- BEING THE EXPENDITURE INCURRED ON PROTECTING THE AS SETS OF WHOLLY OWNED SUBSIDIARY I.E. M/S GUJARAT NARMADA AUTO LTD. THE LEARNED CIT(A) DELETED THE ADDITION MADE BY THE AO SINCE ON IDENTICAL ISSUE FOR AYS 1996-97 TO 2002-03 THE DIS ALLOWANCE WAS DELETED BY THE LEARNED CIT(A) IN ASSESSEES OWN CAS E. 99 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. IT WAS POINTED OUT BY THE LEARNED COUN SEL FOR THE ASSESSEE THAT THE PRESENT ISSUE IS COVERED BY THE D ECISION OF THE TRIBUNAL AHMEDABAD BENCH IN ASSESSEES OWN CASE FOR AY 2002- 03. 100 AFTER HEARING BOTH THE PARTIES WE ARE OF THE V IEW THAT THE ISSUE IN HAND IS COVERED BY THE DECISION OF THE TRI BUNAL AHMEDABAD BENCH IN THE ASSESSEES OWN CASE REFERRED TO HEREINABOVE. THEREFORE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) WHO HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. THUS GROUND NO.2 OF THE REVENUES APPEAL IS DISMISSED. 101 AS REGARDS GROUND NO.3 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO HAS TREATED CERTAIN EXPENDITU RE ON ACCOUNT OF REPAIRS AND MAINTENANCE BY HOLDING THE SAME AS R EPLACEMENT OF EXISTING PARTS. THE AO TREATED THE SAID EXPENDIT URE AS 51 INDEPENDENT EXPENDITURE OF ENDURING IN NATURE AND D ISALLOWED RS.1 55 04 597/- AND ALLOWED THE DEPRECIATION ONLY. 102 THE LEARNED CIT(A) AFTER APPRECIATING THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BY THE LEARNED AR OF THE A SSESSEE ALLOWED THE CLAIM OF THE ASSESSEE. 103 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) AND DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARN ED CIT(A). WE UPHOLD THE ORDER OF THE LEARNED CIT(A). THUS GROU ND NO.3 OF THE REVENUES APPEAL IS DISMISSED. 104 AS REGARDS GROUND NO.4 OF THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED DEDUCTION OF RS.25 00 000/- BEING PAYMENT FOR INFORMATION AND TECHNOLOGY RELATE D SERVICES PAID TO M/S INFINIUM (INDIA) LTD. TREATING AS EXPEN SES DERIVING BENEFIT OF ENDURING NATURE. THE LEARNED CIT(A) BY A CCEPTING THE EXPLANATION OF THE ASSESSEE DELETED THE ADDITION M ADE BY THE AO. 105 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS ARISEN IN THE ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH H AS BEEN DECIDED BY US VIDE GROUND NO.4 IN THE SAID APPEAL H EREINABOVE. THEREFORE FOLLOWING THE SAME WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) WHO HAS RIGHTLY DELETED THE A DDITION MADE BY THE AO. THUS GROUND NO.4 OF THE REVENUES APPEA L IS DISMISSED. 52 106 AS REGARDS GROUND NO.5 OF THE REVENUES APPEAL THE FACTS ARE THAT THE AO DID NOT ALLOW DEDUCTION U/S 80HHC. THE LEARNED CIT(A) DIRECTED THE AO TO EXCLUDE SALES TAX AND EXC ISE DUTY AS PART OF TURN TURNOVER WHILE WORKING OUT THE DEDUCTI ON U/S 80HHC OF THE ACT. 107 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ISSUE AT PRESENT IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF ITAT CALCUTTA IN THE CASE OF IFB A GRO INDUSTRIES 83 ITD 96 WHEREIN IT HAS BEEN HELD THAT DEDUCTION U/S 80HHC ON EXPORT PROFIT SHOULD BE COMPUTED ON THE BA SIS OF THE EXPORT TURNOVER AND TOTAL TURNOVER EXCLUSIVE OF THE RECEIPT OF EXCISE DUTY AND SALES-TAX. THIS ISSUE IS ALSO COVER ED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SUDARSHAN CHEMICALS LTD. 245 ITR 769. THEREFORE IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT AND THE S PECIAL BENCH OF THE ITAT REFERRED TO HEREINABOVE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). THUS GROUND NO .5 OF THE REVENUES APPEAL IS DISMISSED. 108 GROUND NO.6 IN THE REVENUES APPEAL IS GENERAL AND DOES NOT REQUIRE ANY ADJUDICATION. 109 IN THE RESULT THE APPEAL FILED BY THE REVENUE IN ITA NO.3993/AHD/2007 FOR AY 2004-05 IS DISMISSED. ITA NO.2400/AHD/2008 FOR AY 2005-06 :- 110 NOW WE TAKE UP THE APPEAL OF THE ASSESSEE IN I TA NO.2400/AHD/2008 FOR AY 2005-06. GROUND NO.1 IS GEN ERAL IN 53 NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. GROUN D NO.3 HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL FOR THE ASS ESSEE AND THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. TH E REMAINING GROUNDS I.E. GROUND NOS.2 4 5 6 AND 7 OF THE APP EAL ARE AS UNDER:- [2] THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE A DDITIONS OF RS.2 75 61 076/- IN RESPECT OF INTEREST RECEIVABLE FROM GSIL. IT IS SUBMITTED THAT ON THE FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE THE CIT(A) OUGHT TO HAVE DELETED T HE SAME. IT IS SUBMITTED IT BE SO HELD NOW. WITHOUT PREJUDICE TO ABOVE IF INTEREST ON ACCRUAL BASIS IS HELD TO BE TAXABLE THEN IT MAY BE DIRECTED TO BE ALLOWED AS DEDUCTION IN THE YEARS OF ITS WRITE OFF. [4] IN LAW AND IN THE FACTS OF THE CIRCUMSTANCES OF THE APPELLANTS CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING DIS ALLOWANCE OF RS.1 96 43 453/- OUT OF CONSUMPTION OF STORES AND S PARES ON THE GROUND THAT THE SAME WAS CAPITAL IN NATURE. IT IS S UBMITTED THAT THE EXPENDITURE INCURRED WAS REVENUE IN NATURE. IT IS SUBMITTED THAT IT BE SO HELD NOW. [5] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANTS CASE THE LEARNED CIT(A) HAS ERRED IN CONFIRMING DI SALLOWANCE OF DEPRECIATION AMOUNTING TO RS.90 69 271/- ON THE ASSETS LEASED BY THE APPELLANT TO WESTERN RAILWAYS AND NARMDARA C HEMATUR PETROCHEMICALS LTD. IT IS SUBMITTED THAT ON THE FAC TS AND CIRCUMSTANCES OF THE CASE THE CIT(A) OUGHT TO HAVE ALLOWED DEPRECIATION AS CLAIMED BY THE APPELLANT. IT IS SUB MITTED THAT IT BE SO HELD NOW. WITHOUT PREJUDICE TO ABOVE IN THE EVENT OF DEPRECI ATION IS ULTIMATELY HELD TO BE NOT ALLOWABLE ON LEASED ASSET S THEN CAPITAL COMPONENT NEEDS TO BE EXCLUDED AND ONLY INTEREST PO RTION OUT OF LEASE RENT IS REQUIRED TO BE TAXED. [6] IN LAW AND IN FACTS & CIRCUMSTANCES OF THE APPE LLANTS CASE THE LEARNED CIT(A) OUGHT TO HAVE DELETED THE DISALLOWAN CE MADE IN 54 RESPECT OF INTEREST EXPENSES AMOUNTING TO RS.4 26 5 48/- ON THE GROUND THAT DONATION WAS GIVEN OUT OF BORROWED FUND S. IT IS SUBMITTED THAT IT BE SO HELD NOW. [7] IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF TH E APPELLANTS CASE THE LEARNED CIT(A) HAS GROSSLY ERRED IN CONFI RMING THE DISALLOWANCE OF ADVANCES WRITTEN OFF AMOUNTING TO RS.9 38 376/-. IN THE FACTS & CIRCUMSTANCES OF THE CASE IT IS SUBMITTED THAT THE CIT(A) OUGHT TO HAVE ALLOWED THE SAME UNDER SECTION 28 / 37 OF THE ACT. IT IS SUBMITTED I T BE SO HELD NOW. 111 AS REGARDS GROUND NO.2 IN THE APPEAL THE BRIEF FACTS ARE THAT THE AO MADE AN ADDITION OF RS.2 75 61 076/- IN RESPECT OF INTEREST RECEIVABLE FROM GSIL AND THE ACTION OF THE AO WAS CONFIRMED BY THE LEARNED CIT(A). 112 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS BEEN DEALT WIT H BY US IN ASSESSEES OWN CASSE FOR AY 2004-05 IN ITA NO.4007/ AHD/2007 HEREINABOVE. THEREFORE OUR ORDER IN ITA NO.4007/AH D/2007 WILL APPLY ON THE PRESENT ISSUE AND ACCORDINGLY GROUND N O.2 IS ALLOWED FOR STATISTICAL PURPOSE. 113 IN GROUND NO.4 THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.1 96 43 453/- OUT OF CONSUMPTION OF STORES AND SPARES ON THE GROUND THAT THE SAME ARE OF CAPIT AL IN NATURE. THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 114 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ISSUE AT PRESENT IS IDENTICAL TO T HE ISSUE IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/A HD/2007 WHICH HAS BEEN DECIDED BY US HEREINABOVE. OUR ORDER IN ITA 55 NO.1464/AHD/2007 WILL BE APPLICABLE ON THE PRESENT ISSUE AND ACCORDINGLY THE GROUND IS ALLOWED FOR STATISTICAL P URPOSE. 115 AS REGARDS GROUND NO.5 THE BRIEF FACTS ARE THA T THE AO MADE A DISALLOWANCE OF DEPRECIATION AMOUNTING TO RS .90 69 271/- ON THE ASSETS LEASED BY THE ASSESSEE TO WESTERN RAI LWAYS AND NCPL WHICH ACTION OF THE AO WAS CONFIRMED BY THE L EARNED CIT(A). 116 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS ARISEN IN ASSE SSEES OWN CASE FOR AY 2003-04 WHICH HAS BEEN DEALT WITH BY US HERE INABOVE IN ITA NO.1464/AHD/2007. THE ORDER HEREINABOVE SHALL B E APPLICABLE IN THE PRESENT GROUND OF THE ASSESSEE. A CCORDINGLY GROUND NO.5 OF THE ASSESSEE IS ALLOWED. 117 AS REGARDS GROUND NO.6 THE BRIEF FACTS ARE THA T THE AO MADE A DISALLOWANCE IN RESPECT OF INTEREST EXPENSES AMOUNTING TO RS.4 26 548/- ON THE GROUND THAT THE DONATION WAS G IVEN OUT OF BORROWED FUNDS WHICH ACTION OF THE AO WAS CONFIRME D BY THE LEARNED CIT(A). 118 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS ARISEN IN THE ASSESSEES OWN CASE IN ITA NO.4007/AHD/2007 HEREINABOVE. OUR ORDER THEREIN SHALL BE APPLICABLE IN THE PRESENT CASE AND ACCORDI NGLY GROUND NO.6 IS DISMISSED. 119 AS REGARDS GROUND NO.7 THE BRIEF FACTS ARE THA T THE COMPANY HAD WRITTEN OFF ADVANCES GIVEN TO FOLLOWING PARTIES:- 56 (1) CITRIC INDIA LTD. RS. 81 494 (2) MARDIA CHEMICALS LTD. RS.8 56 882 --------------- RS.9 38 376 THE ASSESSEE WAS ASKED TO EXPLAIN THE REASONS FOR W RITE OFF OF ADVANCES AS BAD DEBTS. IT WAS SUBMITTED IN ASSESSME NT PROCEEDINGS THAT COMPANY HAD MADE 100% ADVANCE PAYM ENT FOR PURCHASE OF CITRIC ACID FROM CITRIC INDIA LTD. AND THE MATERIAL SUPPLIED BY THEM WAS OF SUBSTANDARD QUALITY AND THU S REJECTED BY THE ASSESSEE COMPANY. HOWEVER THE SUPPLIER HAD NOT ACCEPTED THE CLAIM OF ASSESSEE AND THUS CIVIL SUIT WAS FILED . COURT HAD ISSUED A DECREE IN FAVOUR OF THE ASSESSEE AND THE A SSESSEE COMPANY TRIED TO EXECUTE THE DECREE OF THE COURT. H OWEVER IT WAS NOTICED THAT THE SUPPLIER M/S CITRIC INDIA LTD. HAS CLOSED DOWN ITS BUSINESS SINCE 1990 AND THUS THE DECREE CO ULD NOT BE EXECUTED. SINCE THERE WAS NO HOPE OF RECOVERY OF TH E ADVANCES THE SAME WERE WRITTEN OF AS BAD DEBTS. SIMILARLY IN THE CASE OF MARDIA CHEMICALS ALSO THE ASSESSEE HAD MADE ADVANCE PAYMENT FOR PURCHASE OF MATERIAL AND AS THE MATERIAL SUPPLI ED BY THEM WAS OF SUBSTANDARD QUALITY THE COMPANY HAD TO SELL IT IN THE MARKET AT A LOWER PRICE THEN GIVEN TO MARDIA CHEMICALS. MA RDIA CHEMICALS DID NOT ACCEPT THE CLAIM OF THE COMPANY A ND HAD NOT PAID BACK THE EXCESS PAYMENT MADE TO THEM IN SPITE OF REPEATED ATTEMPTS BY THE ASSESSEE COMPANY. SINCE MARDIA CHEM ICALS HAS CLOSED DOWN THEIR BUSINESS AND WAS REFERRED TO BIFR AND ALSO IN APRIL 2004 THE HONBLE SUPREME COURT HAD ALLOWED T HE ICICI BANK TO SELL THE ASSETS OF MARDIA CHEMICALS TO RECO VER THEIR DUE THE ASSESSEE COMPANY HAD NO HOPE OF RECOVERING THE ADVANCES 57 PAID TO THEM AND THUS WAS WRITTEN OFF. THE AO DID N OT ACCEPT THE CONTENTION OF THE ASSESSEE AND WAS OF THE VIEW THAT AS THE ASSESSEE HAD FILED LEGAL CASES AGAINST THESE PARTIE S AND THERE IS STILL HOPE OF RECOVERY OF THE ADVANCES AND THUS IT CANNOT BE SAID THAT THE ADVANCES ARE IRRECOVERABLE. HE THUS ADDED RS.9 38 376/- TO THE TOTAL INCOME. 120 THE LEARNED CIT(A) CONFIRMED THE ACTION OF THE AO. 121 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE CONCUR WITH THE VIEWS OF THE LEARNE D CIT(A) THAT BOTH THE AMOUNTS WRITTEN OFF BY THE ASSESSEE ARE NO T IN THE NATURE OF BAD DEBTS BUT COULD BE CATEGORIZED AS BUSINESS L OSS BUT THE BUSINESS LOSS HAS NOT CRYSTALLIZED YET. THE BUSINES S LOSS COULD BE ASCERTAINABLE ONLY AFTER THE DECISION OF THE COURT / BIFR. THOUGH IN CASE OF MARDIA CHEMICALS IT IS MENTIONED THAT SU PREME COURT HAS DIRECTED ICICI TO SELL THE ASSETS IT IS NOT CL EAR AS TO WHAT WAS ACTUAL RECOVERY FOR THE ASSESSEE. THE BUSINESS LOSS WOULD BE ALLOWABLE ONLY IN THE ASSESSMENT YEAR IN WHICH THE RECOVERED AMOUNT IS DETERMINED. THERE IS A DISTINCTION IN ALL OWABILITY OF BAD DEBTS AND BUSINESS LOSS. THE BAD DEBT IS ALLOWA BLE IF ALL THE CONDITIONS AS STIPULATED IN SECTION 36(1)(VII) ARE SATISFIED. ON THE OTHER HAND CONDITIONS FOR ALLOWABILITY OF BUSINESS LOSS HAVE NOT BEEN LAID DOWN IN THE ACT AND IN OUR VIEW THE BUSIN ESS LOSS COULD BE ALLOWED IN THE YEAR IN WHICH THE QUANTUM IS FINA LLY ASCERTAINED. THEREFORE THE ADVANCES WRITTEN OFF AR E NOT ALLOWABLE IN THE INSTANT ASSESSMENT YEAR. THEREFORE IN THE C IRCUMSTANCES AND FACTS OF THE CASE WE FIND NO INFIRMITY IN THE ORDER OF THE 58 LEARNED CIT(A). THUS THE GROUND I.E. GROUND NO.7 O F THE ASSESSEES APPEAL IS DISMISSED. 122 IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IN ITA NO.2400/AHD/2008 IS PARTLY ALLOWED. ITA NO.2401/AHD/2008 FOR AY 2005-06 :- 123 NOW WE TAKE UP THE APPEAL OF THE REVENUE FOR A Y 2005-06 IN ITA NO.2401/AHD/2008. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- [1(A)] ON THE FACTS AND IN FIE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.4 33 07 100/- MADE OUT OF THE INTEREST CLAIMED U /S 36(1)(III) ON ACCOUNT OF DIVERSION OF BORROWED FUND S TO SUBSIDIARY AND ASSOCIATE CONCERNS BY MERELY RELYIN G ON THE APPELLATE ORDERS FOR EARLIER YEARS (WHICH HAVE BEEN CONTESTED BY THE DEPARTMENT) WITHOUT APPRECIATING THAT EACH YEAR'S INCOME-TAX PROCEEDINGS ARE INDEPENDENT AND THE MATTER HAD TO BE DECIDED ON MERITS IN THE LIGHT OF THE PRINCIPLES SETTLED BY AUTHORITATIVE JURISDICTIONAL PRONOUNCEMENTS. [1(B)] THE CIT(A) FAILED TO APPRECIATE THE LEGAL PR INCIPLE THAT ONUS U/S 36(L)(III) LIES ON THE ASSESSEE TO PROVE T HE THAT EACH LOAN IS USED FOR THE PURPOSES OF THE BUSINESS AND THERE IS NO PRESUMPTION IN LAW THAT IT IS OWN CAPIT AL OR SURPLUS FUNDS THAT WERE DIVERTED FOR NON-BUSINESS PURPOSES. AS SETTLED IN THE CASE OF KISHANCHAND CHE LLARAM VS CIT 114 ITR 654 (BOM) R DALMIA VS. CIT 133 ITR 169 (MAD) CIT VS. M S VENKATESHWARAN 222 ITR 163 (MAD) K SOMASUNDARAM & BROTHERS VS. CIT 238 ITR 939 (MAD) AND CIT VS. MOTOR GENERAL FINANCE LTD. 25 4 ITR 449 (DEL) WHICH WAS CONFIRMED IN PRINCIPLE BY T HE SUPREME COURT IN THE CASE OF MOTOR GENERAL FINANCE VS. CIT 267 ITR 381 (SC). 59 2(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE CIT(A) ERRED IN ALLOWING THE EXPENSES OF RS.5 46 79 4/- ON PROTECTING THE ASSETS OF M/S. GUJARAT NARMADA AU TO LTD (GNAL) A SISTER CONCERN OF THE ASSESSEE WITHO UT APPRECIATING THE LEGAL POSIT COMPANY IS A SEPARA TE LEGAL THAT A SUBSIDIARY COMPANY IS A SEPARATE LEGAL ENTIT Y AND THE BUSINESS OF THE SUBSIDIARY CANNOT BE CONSIDERED TO THE BUSINESS OF THE ASSESSEE AS SETTLED IN THE CASE OF PHALTAN SUGAR WORKS LTD. VS. CWT 208 ITR 989 993 (BOM) FOLLOWED IN 215 ITR 582 (BOM) AND 216 ITR 479 481 (BOM). 2(B) WITHOUT PREJUDICE THE CIT(A) ERRED IN NOT CON SIDERING THE FACT THAT A LIQUIDATOR WAS APPOINTED BY THE HIG H COURT WHO WAS IN ACTUAL POSSESSION OF THE ASSETS OF GNAL AND WAS RESPONSIBLE FOR PROTECTING THE SAME AND HENCE; THERE WAS NO OBLIGATION ON THE ASSESSEE TO INCUR SUCH EXPENDITURE. [3] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN DELETING THE ADDITION TO THE EXTENT OF RS. 1 59 73 789/- FROM THE TOTAL DISALLOWANCE OF RS.2 99 40 437/- MAD E OUT OF REPAIRS AND MAINTENANCE EXPENSES TREATING THE SAME AS CAPITAL EXPENDITURE. THE CIT(A) HAS ERRED IN NOT APPRECIATI NG THE REPLACEMENT OF EXISTING PARTS OR RESTORATION ARE NO T COVERED BY 'CURRENT REPAIRS' REFERRED TO IN SECTION 31(I) AND ARE OF CAPITAL NATURE AS SETTLED IN THE CASE OF BALLIMAL NAVAL KIS HORE VS. CIT 224 ITR 414 (SC). [4] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN ALLOWING DEDUCTION OF RS.6 25 000/- BEING PAYMENT FOR INFORMATION TECHNOLOGY RELATED SERVICES PAID TO M/S . INFINIUM (INDIA) LTD.; TREATED AS EXPENSES DERIVING BENEFIT OF ENDURING NATURE. [5] ON THE FACTS AND IN THE CIRCUMSTANCES OF TH IN DELETING THE ADDITION OF RS.45 54 465/- WHICH IS COVERED U/S 14A OF THE ACT. [6] THE APPELLANT CRAVES LEAVE TO ADD TO AMEND OR ALTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 60 124 AS REGARDS GROUND NOS.L(A) AND 1(B) THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.4 33 07 100/- OUT OF THE INTEREST CLAIMED U/S 36(1)(III) ON ACCOUNT OF DIVER SION OF BORROWED FUNDS TO SUBSIDIARY AND ASSOCIATE CONCERNS . THE LEARNED CIT(A) DELETED THE ADDITION FOR THE REASONS MENTION ED IN HIS ORDER. 125 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SIMILAR ISSUE HAS ARISEN IN THE ASSESS EES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH HAS BE EN DECIDED BY US HEREINABOVE VIDE GROUND NO.1 IN THE S AID APPEAL. THEREFORE FOLLOWING THE SAME WE DISMISS GROUND NO .1 OF THE REVENUES APPEAL. 126 AS REGARDS GROUND NO.2 IN THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO DISALLOWED EXPENSES OF RS.5 4 6 794/- ON PROTECTING THE ASSETS OF M/S GUJARAT NARMADA AUTO L TD. SISTER CONCERN OF THE ASSESESE. THE LEARNED CIT(A) DELETED THE ADDITION FOR THE REASONS MENTIONED IN HIS ORDER. 127 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. SIMILAR ISSUE HAS ARISEN IN THE ASSESS EES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH HAS BE EN DECIDED BY US HEREINABOVE VIDE GROUND NO.2 IN THE S AID APPEAL. THEREFORE FOLLOWING THE SAME WE DISMISS GROUND NO .2 OF THE REVENUES APPEAL. 128 AS REGARDS GROUND NO.3 IN THE REVENUES APPEAL THE BRIEF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.2 9 9 40 437/- 61 OUT OF REPAIRS AND MAINTENANCE TREATING THE SAME AS CAPITAL EXPENDITURE. THE LEARNED CIT(A) DELETED THE ADDITI ON TO THE EXTENT OF RS.1 59 73 789/- FOR THE REASONS MENTIONE D IN HIS ORDER. 129 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE CAME UP IN THE ASS ESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH H AS BEEN DECIDED BY US HEREINABOVE VIDE GROUND NO.3 IN THE S AID APPEAL. THEREFORE FOLLOWING THE SAME WE DISMISS GROUND NO .3 OF THE REVENUES APPEAL. 130 IN GROUND NO.4 OF THE REVENUES APPEAL THE BRI EF FACTS ARE THAT THE AO DID NOT ALLOW DEDUCTION OF RS.6 25 000/ - BEING PAYMENT FOR INFORMATION AND TECHNOLOGY RELATED SERV ICES PAID TO M/S INFINIUM (INDIA) LTD. TREATING THE SAME AS D ERIVING BENEFIT OF ENDURING NATURE. THE LEARNED CIT(A) ALLOWED THE CLAIM FOR THE REASONS MENTIONED IN HIS ORDER. 131 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE CAME UP IN THE ASS ESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH H AS BEEN DECIDED BY US HEREINABOVE VIDE GROUND NO.4 IN THE S AID APPEAL. THEREFORE FOLLOWING THE SAME WE DISMISS GROUND NO .4 OF THE REVENUES APPEAL. 133 IN GROUND NO.5 OF THE REVENUES APPEAL THE BRI EF FACTS ARE THAT THE AO MADE A DISALLOWANCE OF RS.45 54 465/- U /S 14A OF THE ACT. THE LEARNED CIT(A) ALLOWED THE SAME FOR T HE REASONS MENTIONED IN HIS ORDER. 62 133 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE IDENTICAL ISSUE CAME UP IN THE ASS ESSEES OWN CASE FOR AY 2003-04 IN ITA NO.1464/AHD/2007 WHICH H AS BEEN DECIDED BY US HEREINABOVE VIDE GROUND NO.6 IN THE S AID APPEAL. THEREFORE FOLLOWING THE SAME WE DISMISS GROUND NO .5 OF THE REVENUES APPEAL. THUS THE APPEAL FILED BY THE REV ENUE IN ITA NO.2401/AHD/2008 IS DISMISSED. 134 IN THE RESULT THE APPEALS OF THE ASSESSEE IN - (I) ITA NO.1463/AHD/2007 PARTLY ALLOWED (II) ITA NO.1464/AHD/2007 PARTLY ALLOWED (III) ITA NO.3111/AHD/2008 ALLOWED FOR STATISTICAL PURPOSE (IV) ITA NO.4007/AHD/2007 PARTLY ALLOWED (V) ITA NO.2400/AHD/2007 PARTLY ALLOWED AND APPEALS OF THE REVENUE IN (I) ITA NO.1373/AHD/2007 DISMISSED (II) ITA NO.3993/AHD/2007 DISMISSED (III) ITA NO.2401/AHD/2007 DISMISSED ORDER PRONOUNCED IN THE COURT TODAY ON 30-12-2011 SD/- SD/- (G C GUPTA) VICE-PRESIDENT (B P JAIN) ACCOUNTANT MEMBER DATE : 30-12-2011 COPY OF THE ORDER FORWARDED TO: 63 1. GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD. P.O . NARMADA NAGAR BHARUCH 2. THE DEPUTY COMMISSIONER OF INCOME-TAX BHARUCH CIRCLE BHARUCH 3. CIT CONCERNED 4. CIT(A)-VI BARODA 5. DR ITAT AHMEDABAD BENCH-D AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD