M/s. GEMINI DYEING & PRINTING MILLS LTD., MUMBAI v. ITO - 6(3)(1), MUMBAI

ITA 1808/MUM/2007 | 2003-2004
Pronouncement Date: 20-10-2010 | Result: Partly Allowed

Appeal Details

RSA Number 180819914 RSA 2007
Assessee PAN THOCT2010S
Bench Mumbai
Appeal Number ITA 1808/MUM/2007
Duration Of Justice 3 year(s) 7 month(s) 21 day(s)
Appellant M/s. GEMINI DYEING & PRINTING MILLS LTD., MUMBAI
Respondent ITO - 6(3)(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 20-10-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 20-10-2010
Date Of Final Hearing 30-09-2010
Next Hearing Date 30-09-2010
Assessment Year 2003-2004
Appeal Filed On 01-03-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G MUMBAI BEFORE SHRI R.K.PANDA ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO. 1808/MUM/2007 (ASSESSMENT YEAR -2003-04) GEMINI DYEING AND PRINTING MILLS LTD MATHURDAS MILL COMPOUND SENAPATI BAPAT MARG LOWER PAREL MUMBAI-400013 PAN:AABCG0943J APPELLANT VS INCOME TAX OFFICER WARD 8(3)(1) AAYAKAR BHAVAN M K ROAD MUMBAI-400020 .RESPONDENT ITA NO. 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) GEMINI FASHIONS P. LTD C/OF GEMINI DYEING AND PRINTING MILLS LTD MATHURDAS MILL COMPOUND SENAPATI BAPAT MARG LOWER PAREL MUMBAI-400013 PAN:AABCG0941L APPELLANT VS INCOME TAX OFFICER WARD 8(3)(1) AAYAKAR BHAVAN M K ROAD MUMBAI-400020 .RESPONDENT ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 2 ASSESSEE BY : SHRI SANJAY PARIKH REVENUE BY : SHRI A K NAYAK O R D E R PER VIJAY PAL RAO JM THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE BOTH ORDERS DATED 14.12.2006 FOR THE ASSESSMENT YEAR 2003-04. SINCE THE ISSUES INVOLVED IN THESE APPEALS ARE IDENTICAL AND COMMON AS WELL AS BOTH THE ASSESSEES ARE GROUP CONCERNED THEREFORE FOR THE SAKE OF CONVENI ENCE WE HAVE HEARD THESE APPEALS TOGETHER AND ARE BEING DIS POSED OF BY THIS COMPOSITE ORDER. ITA NO. 1808/MUM/2007 2. THE ASSESSEE IN THIS APPEAL HAS RAISED THE FOLL OWING EFFECTIVE GROUNDS : DISALLOWANCE ON ACCOUNT OF PROVIDENT FUND AND ESIC (1) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT EMPLOYERS AND EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ESIC PAID AFTER THE 22 ND OF THE FOLLOWING MONTH WILL CONTINUE TO REMAIN DISALLOWED; DISALLOWANCE OF INTEREST U/S 14A RS.16 93 906/- (3) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE ITO 6(3)(1) WHEREBY TH E AO HAD DISALLOWED INTEREST AMOUNTING TO RS.16 93 906/- U/S 14A OF THE IT ACT. DISALLOWANCE OF INTEREST RELATING TO SHARE APPLICATION MONEY/- ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 3 (5) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT PROPORTIONATE INTEREST ON SHARE APPLICATION MONEY WAS REQUIRED TO BE DISALLOWED; CONSIDERING EXCISE CREDIT AMOUNTING TO RS.88 28 826/- AS FORMING PART OF TOTAL TURNOVER (7) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT DEEMED EXCISE CREDIT AMOUNTING RS.88 28 826/- SHOULD FORM PART OF TOTAL TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION U/S 80HHC. EXCLUDING 90% OF INSURANCE CLAIM FROM PROFITS OF BUSINESS - RS.17 43 701 (9) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT 90% OF INSURANCE CLAIM OF RS.19 37 445/- WAS REQUIRED TO BE REDUCED FROM THE PROFITS OF BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC EXCLUDING 90% OF SUNDRY BALANCES WRITTEN BACK FROM PROFITS OF BUSINESS- RS.1 81 490 (11) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW I N HOLDING THAT 90% OF SUNDRY BALANCE WRITTEN BACK OF RS.2 01 655/- WAS REQUIRED TO BE REDUCED FROM THE PROFITS OF BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC; EXCLUDING 90% OF MISC. INCOME FROM PROFITS OF BUSINESS - RS.7 719/- (13) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW I N HOLDING THAT 90% OF MISC.INCOME OF RS.8 577/- WAS REQUIRED TO BE REDUCED FROM THE PROFITS OF BUSINES S FOR COMPUTING DEDUCTION U/S 80HHC; 3. GROUND NO.1 REGARDING DISALLOWANCE OF EMPLOYERS AND EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND E SIC PAID ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 4 AFTER THE DUE DATE BUT BEFORE THE FILING OF THE RET URN OF INCOME. 4. WE HAVE HEARD THE LEARNED AR AS WELL AS THE LEAR NED DR AND CONSIDERED THE RELEVANT RECORD. AT THE OUTS ET WE NOTE THAT THIS ISSUE IS COVERED BY THE VARIOUS DECI SIONS OF THIS TRIBUNAL AS WELL AS BY THE DECISION OF THE HO N. SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. ( 2009) 319 ITR 306 (SC). THE LEARNED AR OF THE ASSESSEE HAS F ILED A COPY OF THE ORDER DATED 22.3.2010 OF THIS TRIBUNAL IN THE CASE OF M/S PRANAVADITYA SPINNING MILLS LTD. MUMB AI VS ASSISTANT COMMISSIONER OF INCOME TAX IN I T A NO: 6855/MUM/2008 (AY: 2002-03) AND SUBMITTED THAT THIS TRIBUNAL HAS CONSIDERED THE VARIOUS DECISIONS AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. WE FURTHER NO TE THAT THIS TRIBUNAL HAS ADJUDICATED UPON THIS ISSUE IN FAVOUR OF THE ASSESSEE IN PARAGRAPH 4 OF THE ORDER RELIED UP ON BY THE ASSESSEE (SUPRA) WHICH READS AS UNDER: 4. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON SEVERAL ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL IN SUPPORT OF HIS CONTENTION THAT THE EMPLOYEES CONTRIBUTION SHOULD BE ALLOWED UNDER SECTION 43B IF IT IS DEPOSITED WITHIN THE DUE DATE FOR FILING THE RETURN FOR THE ASSESSMENT YEAR IN QUESTION. IN THE CASE OF SIMPLEX ENGINEERING & FOUNDRY WORKS P. LTD. VS. JCIT IN ITA NO: 5760/MUM/2006 DATED 29TH NOVEMBER 2007 (ASSESSMENT YEAR 2003-04) AND CONNECTED APPEALS IT HAS BEEN OPINED BY THE TRIBUNAL IN PARA ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 5 16 THAT SINCE THE CONTRIBUTION OF THE EMPLOYEES IS WITHHELD BY THE EMPLOYER BY DEDUCTING THE SAME FROM THE WAGES AND SALARIES THE DUES OF THE EMPLOYEES MERGED WITH THE FUNDS OF THE EMPLOYER AND THE EMPLOYEES CONTRIBUTION THUS BECOMES SIMILAR TO THE EMPLOYERS OWN CONTRIBUTION. IT HAS BEEN OBSERVED THAT THE NATURE OF THE SOURCE OF BOTH EMPLOYERS AS WELL AS EMPLOYEES CONTRIBUTION IS THE SAME NAMELY THE FUNDS OF THE EMPLOYER. IN THIS VIEW OF THE MATTER IT HAS BEEN HELD THAT THE CONTRIBUTION OF THE EMPLOYEES PAID WITHIN THE DUE DATE FOR FILING THE RETURN OF INCOME IS ALLOWABLE UNDER SECTION 43B. THIS ORDER OF THE TRIBUNAL HAS NOT BEEN REFERRED TO IN THE SUBSEQUENT ORDER OF THE TRIBUNAL DATED 28 TH JANUARY 2010 IN THE CASE OF THE SAME ASSESSEE NAMELY SIMPLEX ENGINEERING & FOUNDRY WORKS FOR THE ASSESSMENT YEAR 2004-05 IN ITA NO: 378/MUM/2009 AND WITHOUT REFERENCE TO THE EARLIER ORDER THE DISALLOWANCE OF THE EMPLOYEES CONTRIBUTION WAS UPHELD BY THE TRIBUNAL. IN ANOTHER ORDER PASSED ON 28 TH JANUARY 2010 IN ITA NO: 6847/MUM/2008 (ASSESSMENT YEAR 2005-06) IN THE CASE OF PIK PEN PRIVATE LIMITED VS. ITO THE TRIBUNAL WAS DEALING WITH THE EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ESIC WHICH WAS PAID EVEN BEYOND THE GRACE PERIOD. THE ASSESSING OFFICER HAD DISALLOWED THE PAYMENT UNDER SECTION 36(1)(VA) HOLDING THAT THE CONTRIBUTION WAS NOT COVERED BY SECTION 43B. THE TRIBUNAL WAS OF THE OPINION THAT THE CASE WAS COVERED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. (2009) 319 ITR 306 (SC) AND ACCORDINGLY HELD THAT THE CONTRIBUTION OF THE EMPLOYEES IF PAID BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME AS CONTEMPLATED BY THE PROVISO TO SECTION 43B IS TO BE ALLOWED AS A DEDUCTION. IN THE CASE OF RADHAKRISHNA FOODLAND PVT. LTD. VS. ACIT IN ITA NO: 4211/MUM/2006 (ASSESSMENT YEAR 2003-04) THE TRIBUNAL BY ORDER DATED 11 TH FEBRUARY 2008 HELD FOLLOWING THE VIEW TAKEN BY THE SUPREME COURT IN THE CASE OF CIT VS. VINAY CEMENT LTD. (2007) 213 CTR 268 (SC) THAT THE EMPLOYEES CONTRIBUTION PAID BEFORE THE DUE DATE FOR FILING TH E RETURN OF INCOME IS ALLOWABLE AS A DEDUCTION. THERE IS THUS A SERIES OF ORDERS OF THE MUMBAI BENCHES OF THE TRIBUNAL ON THE ISSUE AND RESPECTFULLY FOLLOWING THEM WE DELETE THE DISALLOWANCE OF 14 02 512/- OUT OF WHICH ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 6 RS.5 62 450/- WAS PAID AFTER THE DUE DATE BUT BEFORE THE GRACE PERIOD AND RS.8 40 062/- WAS PAID AFTER THE GRACE PERIOD BUT BEFORE THE DUE DATE FOR FILING THE RETURN OF INCOME. THE FIRST GROUND IS ACCORDINGLY ALLOWED. 5. RESPECTFULLY FOLLOWING THE DECISION OF THE HON. SUPREME COURT IN THE CASE OF CIT VS. ALOM EXTRUS IONS LTD.(SUPRA) AND THE DECISION OF THIS TRIBUNAL IN T HE CASE OF M/S PRANAVADITYA SPINNING MILLS LTD. WE DECIDE TH IS ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY DISALLOWANCE M ADE U/S 43B IS DELETED. 6. GROUND NO.2 REGARDING DISALLOWANCE OF THE EXPEN DITURE BY APPLYING THE PROVISIONS OF SECTION 14A AND RULE 8D OF IT RULES 1962. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSIDER ED THE RELEVANT RECORD. THE ISSUE IS REGARDING DISALLOWA BILITY OF THE EXPENDITURE INCURRED IN RELATION TO THE INCOME NO T FORMING THE PART OF THE TOTAL INCOME. THE LOWER AUTHORITIES HAVE APPLIED RULE 8D OF INCOME TAX RULES 1962 FOR DISAL LOWING THE EXPENDITURE. SINCE THE ISSUE HAS BEEN ADJUDIC ATED BY THE HON. JURISDICTIONAL HIGH COURT IN THE CASE OF G ODREJ AND BOYCE MFG CO.LTD V/S DCIT (234 CTR-(BOM)-1 AFTER CONSIDERING THE DECISION OF THE HON SUPREME COURT IN THE CASE OF CIT V/S WALLFORT SHARE AND STOCK BROKERS PVT LTD ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 7 (2010) 326 ITR 1 (SC) (SUPRA) THE HON. BOMBAY H IGH COURT VIDE PARAGRAPH 43 HAS HELD AS UNDER : A SUMMATION OF OUR CONCLUSIONS ON THE INTERPRETATI ON OF THE PROVISIONS : 43. IN ORDER TO CONCLUDE THE DISCUSSION ON THIS AS PECT OF THE CASE WE WOULD PROCEED TO RECAPITULATE OUR CONC LUSIONS. (I) SECTION 14A WAS ENACTED BY PARLIAMENT IN ORDER TO OVERCOME THE JUDGMENTS OF THE SUPREME COURT IN THE CASE OF INDIAN BANK MAHARASHTRA SUGAR AND RAJASTHAN WAREHOUSING CORPORATION 15(1935) 3 ITR 305 IN WHICH IT WAS HELD THAT IN THE CASE OF A COMPOSITE AND INDIVISIBL E BUSINESS WHICH RESULTS IN EARNING OF TAXABLE AND NONTAXABLE INCOME IT IS IMPERMISSIBLE TO APPORTION THE EXPENDITURE BETWEEN THAT WHICH WAS LAID OUT FOR THE EARNING OF TAXABLE AS OPPOSED TO NONTAXABLE INCOME; (II) THE EFFECT OF SECTION 14A IS TO WIDEN THE THE ORY OF THE APPORTIONMENT OF EXPENDITURE. PRIOR TO THE ENACTMEN T OF SECTION 14A WHERE THE BUSINESS OF AN ASSESSEE WAS NOT A COM POSITE AND INDIVISIBLE BUSINESS AND THE ASSESSEE EARNED BO TH TAXABLE AND NONTAXABLE INCOME THE EXPENDITURE INCURRED ON EARNING NONTAXABLE INCOME COULD NOT BE ALLOWED AS A DEDUCTI ON AS AGAINST THE TAXABLE INCOME. AS A RESULT OF THE ENAC TMENT OF SECTION 14A NO EXPENDITURE CAN BE ALLOWED AS A DED UCTION IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. HENCE EVEN IN THE CASE OF A COMPOSI TE AND INDIVISIBLE BUSINESS WHICH RESULTS IN THE EARNING OF TAXABLE AND NONTAXABLE INCOME IT WOULD BE NECESSARY TO APPORTI ON THE EXPENDITURE INCURRED BY THE ASSESSEE. ONLY THAT PAR T OF THE EXPENDITURE WHICH IS INCURRED IN RELATION TO INCOME WHICH FORMS PART OF THE TOTAL INCOME CAN BE ALLOWED. THE EXPEND ITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME HAS TO BE DISALLOWED; (III) FROM THIS IT WOULD FOLLOW THAT SECTION 14A H AS IMPLICIT WITHIN IT A NOTION OF APPORTIONMENT. THE PRINCIPLE OF APPORTIONMENT WHICH PRIOR TO THE AMENDMENT OF SECTI ON14A WOULD NOT HAVE APPLIED TO EXPENDITURE INCURRED IN A COMPOSITE AND INDIVISIBLE BUSINESS WHICH RESULTS IN TAXABLE A ND NONTAXABLE INCOME MUST AFTER THE ENACTMENT OF THE PROVISIONS APPLY EVEN TO SUCH A SITUATION; (IV) THE EXPRESSION EXPENDITURE INCURRED IN SECT ION 14A REFERS TO EXPENDITURE ON RENT TAXES SALARIES INT EREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR; ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 8 -(V) SUBSECTIONS (2) AND (3) OF SECTION 14A ARE IN TENDED TO ENFORCE AND IMPLEMENT THE PROVISIONS OF SUBSECTION (1). THE OBJECT OF SUBSECTION (2) IS TO PROVIDE A UNIFORMITY OF METHOD WHERE THE ASSESSING OFFICER IS ON THE BASIS OF THE ACCOUNTS OF THE ASSESSEE NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELA TION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT; -(VI) EVEN IN THE ABSENCE OF SUB-SECTION (2) OF SE CTION 14A THE ASSESSING OFFICER WOULD HAVE TO APPORTION THE E XPENDITURE AND TO DISALLOW THE EXPENDITURE INCURRED BY THE ASS ESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER WOULD HAVE TO FOLLOW A REASONABLE METHOD OF APPORTIONING THE EXPENDITURE C ONSISTENT WITH WHAT THE CIRCUMSTANCES OF THE CASE WOULD WARRA NT AND HAVING REGARD TO ALL THE RELEVANT FACTS AND CIRCUMS TANCES; (VII) CONSEQUENT UPON THE INSERTION OF SUBSECTION ( 2) THE DISPUTES WHICH HAD ARISEN BETWEEN TAX PAYERS AND TH E REVENUE ON THE METHOD OF DETERMINING THE EXPENDITURE TO BE DISALLOWED HAVE BEEN GIVEN A QUIETUS BY ADOPTING A UNIFORM MET HOD OF DETERMINATION; (VIII) SUBSECTION (2) OF SECTION 14A DOES NOT ENABL E THE ASSESSING OFFICER TO APPLY THE METHOD PRESCRIBED BY RULE 8D WITHOUT DETERMINING IN THE FIRST INSTANCE THE CORRE CTNESS OF THE CLAIM OF THE ASSESSEE HAVING REGARD TO THE ACCOUNT S OF THE ASSESSEE. SUBSECTION (2) OF SECTION 14A MANDATES TH AT IT IS ONLY WHEN HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INC URRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT THAT HE CAN PROCEED TO MAKE A DETERM INATION UNDER THE RULES; (IX) THE SATISFACTION ENVISAGED BY SUBSECTION (2) OF SECTION 14A IS AN OBJECTIVE SATISFACTION THAT HAS TO BE ARR IVED AT BY THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SAFEGUARD INTRODUCED BY SUBSECTION (2 ) OF SECTION 14A FOR A FAIR AND REASONABLE EXERCISE OF P OWER BY THE ASSESSING OFFICER CONDITIONED AS IT IS BY THE REQU IREMENT OF AN OBJECTIVE SATISFACTION MUST THEREFORE BE SCRUPUL OUSLY OBSERVED. AN OBJECTIVE SATISFACTION CONTEMPLATES A NOTICE TO THE ASSESSEE AN OPPORTUNITY TO THE ASSESSEE TO PLACE O N RECORD ALL THE RELEVANT FACTS INCLUDING HIS ACCOUNTS AND RECOR DING OF REASONS BY THE ASSESSING OFFICER IN THE EVENT THAT HE COMES TO ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 9 THE CONCLUSION THAT HE IS NOT SATISFIED WITH THE CL AIM OF THE ASSESSEE; 8. RESPECTFULLY FOLLOWING THE DECISION OF THE JURIS DICTIONAL HIGH COURT WE SET ASIDE THE ISSUE TO THE RECORD O F THE AO FOR VERIFICATION RECONSIDERATION AND ADJUDICATION OF THE ISSUE AFRESH IN THE LIGHT OF THE DECISIONS OF THE HON. SU PREME COURT AND THE DECISION OF THE JURISDICTIONAL HIGH COURT ( SUPRA). 9. GROUND NO.3 REGARDING DISALLOWANCE OF INTEREST RELATING TO SHARE APPLICATION MONEY. 10. WE HAVE HEARD THE LEARNED AR AS WELL AS THE LEA RNED DR AND CONSIDERED THE RELEVANT RECORD. THE LEARNE D AR HAS SUBMITTED THAT THIS ISSUE HAS BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE AS SESSMENT YEAR 2001-02 I ITA NO.8347/MUM/2004 AS WELL AS FOR THE ASSESSMENT YEAR 2002-03 IN ITA NO.4023/ MUM/2006. THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2001-02 HAS CONSI DERED AND DECIDED THE ISSUE AS UNDER PARAGRAPH 11 AS UNDE R : 11. THE DISALLOWANCE MADE BY THE AO FOR THE REASON THAT THE ASSESSEE HAD GIVEN A SUM OF RS 1 24 14 773/- TO A COMPANY BY NAME M/S MANEY ROLLER FLOUR MILLS PVT LTD IN THE FORM OF SHARES APPLICATION MONEY. ACCORDING TO THE AO MONEY WAS GIVEN WITHOUT CHARGING ANY INTEREST AT FAG END OF THE PREVIOUS YEAR SHARES OF THE SAID COMPANY HAD BEEN ALLOTTED TO THE ASSESSEE. SINCE BORROWED FUNDS ON WHICH INTEREST WAS PAID WAS USED IN GIVIN G INTEREST FREE LOANS THE AO MADE PROPORTIONATE DISALLOWANCE OUT OF INTEREST PAID BY THE ASSESSEE. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 10 ACTION OF THE AO WAS CONFIRMED BY LEARNED CIT(A). WE ARE OF THE VIEW THAT THE DISALLOWANCE MADE BY THE REVENUE AUTHORITIES CANNOT B SUSTAINED. THE AMOUNT IN QUESTION WAS PAID TOWARDS PURCHASE OF SHARES AND NOT AS A LOAN AS ASSUMED BY THE ASSESSING OFFICER. SINCE THE AMOUNT IN QUESTION WAS NOT INTEREST FREE LOAN IT CANNOT BE SAID THAT THE BORROWED FUNDS WERE NOT UTILIZED FOR THE PURPOSE OF BUSINESS CONSEQUENTLY NO DISALLOWANCE COULD HAVE BEEN MADE BY THE AO. THE DISALLOWANCE MADE IS DIRECTED TO BE DELETED 11. IT IS EVIDENT FROM THE EARLIER ORDER OF THIS T RIBUNAL THAT THIS TRIBUNAL HAS DELETED THE DISALLOWANCE ON THE GROUND THAT THE ASSESSEE PAID THE MONEY TOWARDS THE PURCH ASE OF SHARES AND NOT AS A LOAN AS ASSUMED BY THE AO. UNDISPUTEDLY THE AMOUNT STILL LYING OUTSTANDING FO R LAST MORE THAN SEVEN YEARS AND IT IS NOT THE CASE OF THE ASS ESSEE THAT THEY HAVE GOT REFUND OF THE AMOUNT OR ALLOTTED THE SHARES. THEREFORE IN OUR VIEW WHEN THE AMOUNT IS STILL OUTSTANDING THEN THE SAME CANNOT BE CONSIDERED AS PAID FOR INVE STMENT IN SHARES BECAUSE NEITHER THE SHARES WERE ALLOTTED NOR THE AMOUNT IS REFUNDED TILL DATE. THUS THE DECISION FOR THE ASSESSMENT YEAR 2001-02 CANNOT BE TAKEN AS PRECEDE NT ON THE ISSUE. THE CIT(A) HAS CONSIDERED AND DECIDED T HE ISSUE BY HOLDING AS UNDER : I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BY THE APPELLANT . HOWEVER APPELLANTS SUBMISSIONS ARE NOT ACCEPTABLE. AR IN THE COURSE OF HEARING ALSO ARGUED THAT EVEN IF ANY DISALLOWANCE OF INTEREST IS MADE SAME SHOULD BE MADE ON PROPORTIONATE BASIS TAKING INTO ACCOUNT ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 11 TOTAL AVAILABILITY OF THE FUNDS AS HAS BEEN DONE IN THE CASE OF DISALLOWANCE OF INTEREST U/S 14A OF THE ACT BY THE AO HIMSELF. AS REGARDS APPELLANTS CONTENTION THAT PAYMENT OF SHARE APPLICATION MONEY OF RS 1 24 50 598/- IS FOR BUSINESS PURPOSE AND THEREFORE INTEREST ON THE SAME IS ALLOWABLE IS CONCERNED THE SAME IS NOT ACCEPTABLE. APPELLANT HAS NOT FILED ANY EVIDENCE TO SHOW THE BUSINESS PURPOSE SERVED BY SETTING UP OF AFORESAID UNIT IN JOINT VENTURE. EVEN THE FACT OF EXISTENCE OF SUCH U NIT IS NOT ESTABLISHED. WITHOUT PREJUDICE TO THE ABOVE EVEN IF AFORESAID PAYMENT OF SHARE APPLICATION MONEY O F RS.1 24 50 598/- IS CONSIDERED AS AN INVESTMENT FOR SETTING UP A JOINT VENTURE UNIT SA ME IN MY OPINION CANNOT BE CONSIDERED AS A PAYMENT FOR BUSINESS PURPOSES. AFORESAID SUM IN MY OPINION AS RIGHTLY OBSERVED BY THE AO IN THE ASSESSMENT IS IN THE NATURE OF LOAN. IN VIEW OF THE ABOVE DISCUSSIO N APPELLANTS CONTENTIONS ARE REJECTED. HOWEVER AR S ALTERNATIVE CONTENTION THAT INTEREST SHOULD BE DISALLOWED ON PROPORTIONATE BASIS DESERVES CONSIDERATION SINCE THE APPELLANT HAS COMMON POOL OF FUNDS COMPRISING OF INTEREST BEARING AND INTERES T FREE FUNDS IT WOULD BE REASONABLE AND LOGICAL TO DISALLOW INTEREST ON PROPORTIONATE BASIS AS HAS BEE N DONE IN THE CASE OF DISALLOWANCE OF INTEREST U/S 14 A OF THE ACT BY THE AO. ACCORDINGLY AO IS DIRECTED TO RECOMPUTE AND DISALLOW THE INTEREST ON PROPORTIONAT E BASIS. 12. IT IS CLEAR FROM THE FACTS AS RECORDED BY THE CIT(A) THAT THE AMOUNT CANNOT BE CONSIDERED AS PAYMENT OF SHARES APPLICATION MONEY AFTER A LAPSE OF CONSIDERABLE TIM E AND WHEN THE ASSESSEE HAS NOT TAKEN ANY STEP OR ACTION FOR RECOVERY OF THE SAME BUT ALLOWED THE AMOUNT REMAIN ED WITH THE OTHER COMPANIES. IN VIEW OF THIS FACT WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF THE L EARNED CIT(A). THE SAME IS UPHELD. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 12 13. GROUND NO.7 REGARDING DEEMED EXCISE CREDIT FOR MING PART OF TOTAL TURNOVER. THE AO NOTICED THAT UNDER THE HEAD MISCELLANEOUS INCOME THE ASSESSEE INCLUDED THE DEE MED EXCISE CREDIT OF RS.88 28 826/- AND OTHER INCOME A S TOTAL TURNOVER. THE AO ASKED THE ASSESSEE TO SHOW CAUS E AS TO WHY THE SAME SHOULD BE CONSIDERED AS PART OF THE T OTAL TURNOVER FOR THE PURPOSE OF CALCULATION OF DEDUCT ION U/S 80HHC. THE ASSESSEE SUBMITTED BEFORE THE AO THA T THE ITEMS OF MISCELLANEOUS INCOME WHICH ARE NOT QUALI TY FOR DEDUCTION OF 90% THEREOF WHILE COMPUTING THE BUSINE SS PROFIT FOR THE PURPOSE OF DEDUCTION U/S 80HHC THE SAME C ANNOT BE INCLUDED IN THE TOTAL TURNOVER. IT WAS FURTHER SUBMITTED THAT IT WAS IN THE NATURE OF RECEIPT WHICH ACTUALL Y REDUCED THE RESPECTIVE EXPENSES BECAUSE THE DEEMED EXCISE CREDIT IN THE NATURE OF CREDIT RECEIVED ON THE EXCISE DUTY PAID ON PURCHASES OF RAW MATERIAL. THUS IT REDUCED THE CO ST OF THE DYES AND CHEMICALS. THE AO DID NOT ACCEPT THE CON TENTION OF THE ASSESSEE AND HELD THAT THE EXCISE CREDIT ALO NG WITH THE OTHER MISCELLANEOUS RECEIPTS ARE TO BE PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF CALCULATION U/S 80HHC . 14. ON APPEAL THE CIT(A) HAS CONFIRMED THE ACTION OF THE AO. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 13 15. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND R ELEVANT RECORD. AS IT IS CLEAR FROM THE FACTS OF THE CASE THAT THE DEEMED EXCISE CREDIT WAS A CREDIT GIVEN TO THE ASSE SSEE IN RESPECT OF EXCISE DUTY FOR PURCHASE OF RAW MATERIA L DUTY LIKE DYES AND CHEMICALS. THUS IT IS CLEAR THAT THE INCE NTIVE OF DEEMED EXCISE CREDIT IS SIMILAR IN THE NATURE OF D EPB. THEREFORE IN VIEW OF THE LATEST DECISION OF THE H ON. JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V/S KALPATHARU COLOURS AND CHEMICALS IN INCOME TAX APPEAL (LODG) NO.2887 OF 2009 ORDER DATED 28/29 JUNE 2010. WE NOT E THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE ABOVE SAID DECISION HAS HELD IN PARAGRAPHS 29 TO 31 AS UNDER : 29. TO GET OVER THIS DIFFICULTY THE ASSESSEES CONTENDS THAT THE PROFITS ON TRANSFER OF DEPB IN SECTION 28(IIID) WOULD NOT INCLUDE THE FACE VALUE O F THE DEPB SO THAT THE ASSESSEE GETS A DEDUCTION UNDER SECTION 80HHC ON THE FACE VALUE OF THE DEPB. THERE IS NO MERIT IN THE ABOVE CONTENTION FOR THE FOLLOWING REASONS : A) WHAT IS RECEIVED ON TRANSFER OF THE DEPB CREDIT IS THE PROFIT BECAUSE DEPB CREDIT UNDER TH E DEPB SCHEME IS GIVEN AT A PERCENTAGE OF THE FOB VALUE OF THE EXPORTS SO AS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY ON THE IMPORT CONTENT OF THE EXPORT PRODUCT. THE DEPB CREDIT IS ALSO GIVEN TO AN EXPORTER WHO HAS EXPORTED GOODS WITHOUT IMPORTING RAW MATERIAL REQUIRED FOR THE EXPORT. DEPB CREDIT IS GIVEN FOR PAYING CUSTOMS DUTY ON IMPORT OF GOODS WHICH MAY OR MAY NOT BE UTILIZED IN THE EXPORT GOODS. WHEN THE DEPB CREDIT IS NOT UTILIZED FOR PAYING CUSTOMS DUTY BUT IS TRANSFERRED FOR ANY SUM THEN SUCH SUM WOULD BE PROFITS ON TRANSFER OF DEPB COVERED UNDER SECTION 28(IIID); B) EVEN THE ASSESSEE HAS NOT DISPUTED BEFORE THE COURT THAT THE ENTIRE AMOUNT RECEIVED ON TRANSF ER OF DEPB IS BUSINESS INCOME CHARGEABLE TO TAX AS PROFITS OF BUSINESS. HOWEVER IT IS CONTENDED THAT THE FACE VALUE OF THE DEPB WOULD NOT BE COVERED UNDER SECTION 28(IIID) BECAUSE IT IS A CREDIT EARNE D ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 14 BY THE ASSESSEE. WHERE THE DUTY PAID IS RECEIVED BACK AS DUTY DRAWBACK IT IS ALSO AN AMOUNT EARNED BY THE ASSESSEE BUT SUCH A RECEIPT IS STILL CONSID ER AS PROFITS OF BUSINESS. SIMILARLY THE AMOUNT REALI ZED IN TRANSFER OF DEPB BE IT EQUIVALENT TO THE FACE VALUE OF THE DEPB; MORE THAN THE FACE VALUE OF DEPB OR LESS THAN FACE VALUE OF DEPB WOULD BE PROFIT ON TRANSFER OF DEPB COV4ERED UNDER SECTION 28(IIID); C ) THE FACT THAT THE ASSESSEE HAD ACCOUNTED FOR DEPB CREDIT IMMEDIATELY AFTER MAKING AN APPLICATION SEEKING SEPB CREDIT WOULD MAKE NO DIFFERENCE TO THE TAXABILITY OF THE ENTIRE AMOUNT RECEIVED ON TRANSFER OF THE DEPB CREDIT UNDER SECTION 28(IIID0 . WHAT CONSTITUTES PROFITS UNDER SECTION 28(IIID) IS THE AMOUNT RECEIVED ON TRANSFER OF THE DEPB CREDIT AND NOT THE AMOUNT OF CREDIT WHICH THE ASSESSEE WAS ENTITLED TO UNDER THE DEPB SCHEME. IN OTHER WORDS THE AMOUNT EQUIVALENT TO THE FACE VALUE OF DEPB AS WELL AS THE AMOUNT RECEIVED IN EXCESS OF THE DEPB WOULD CONSTITUTE PROFITS OF BUSINESS UNDER SECTION 28(IIID) ;AND MERELY BECAUSE A PART OF SUCH PROFIT S OF BUSINESS (FACE VALUE) WAS OFFERED TO TAX IN THE YEAR IN WHICH THE CREDIT ACCRUED TO THE ASSESSEE WOULD NOT BE A GROUND TO HOLD THAT SUCH PROFIT WA S NOT COVERED UNDER SECTION 28(IIID). WHERE THE FACE VALUE OF THE DEPB CREDIT IS OFFERED TO TAX AS BUSINESS PROFITS UNDER SECTION 28(IIID) IN THE YEAR IN WHICH THE CREDIT ACCRUED TO THE ASSESSEE THEN ANY FURTHER PROFIT ARISING ON TRANSFER OF DEPB CREDIT WOULD BE TAXED AS PROFITS OF BUSINESS UNDER SECTION 28(IIID) IN THE YEAR IN WHICH THE TRANSFER OF DEPB CREDIT TOOK PLACE. THEREFORE THE ARGUMENTS OF THE ASSESSEE THAT IF THE FACE VALUE OF THE DEPB CREDIT IS HELD TO BE COVERED UNDER SECTION 28(IIID) IT WOULD AMOUNT TO DOUBLE TAXATION IS WITHOUT ANY MERIT. 30. THERE IS ANOTHER PERSPECTIVE FROM WHICH THE ISSUE CAN BE LOOKED AT. THE DEPB CREDIT TO WHICH AN EXPORTER IS ENTITLED IS A FORM OF AN EXPORT INCENT IVE. THE SUPREME COURT IN RAVINDRANATHAN NAIRS CASE HAS HELD THAT ALL THE INCOMES WHICH FALL WITHIN CLAUSES (IIIA) TO (IIIE) OF SECTION 28 ARE INCENT IVE INCOMES. AS AN INCENTIVE THAT IS MADE AVAILABLE TO THE EXPORTER THERE IS NO COST THAT IS ATTACHED TO T HE GRANT OF THE INCENTIVE. THE INCENTIVE AS WE HAVE ALREADY NOTED IS CALCULATE AS A PERCENTAGE OF THE FOB VALUE OF THE GOODS EXPORTED. THE TRIBUNAL IN ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 15 THE PRESENT CASE RECOGNIZED THE DIFFICULTY IN REDUCING THE FACE VALUE OF THE DEPB CREDIT FROM THE SALE CONSIDERATION WHEN IT OBSERVED IN PARAGRAPH 48 OF ITS JUDGMENT THAT NO DOUBT THE EXPORTER DOE S NOT DIRECTLY PURCHASE THE DEPB FROM THE MARKET BY INCURRING ANY COST. HAVING SO OBSERVED THE TRIBUNAL STILL CONSIDERED IT APPROPRIATE TO HOLD TH AT CLAUSE (IIID) WOULD ONLY REFER TO THE DIFFERENCE BETWEEN THE SALE CONSIDERATION AND THE VALUE OF HE DEPB CREDIT. WE FIND NO BASIS OR JUSTIFICATION FOR THE TRIBUNAL TO HAVE DONE SO. 31. WE DO NOT FIND ANY LOGICAL JUSTIFICATION IN BIFURCATING THE VALUE OF THE SALE CONSIDERATION REALIZED BY THE EXPORTER ON HE TRANSFER OF THE DEPB CREDIT. FOR ONE THING CLAUSE (IIID) OF SECTION 28 MUST COVER WITHIN ITS PURVIEW THE ENTIRELY OF THE SALE CONSIDERATION WHICH IS REALIZED BY THE EXPORTE R ON THE TRANSFER OF THE DEPB CREDIT SINCE THAT REPRESENT THE PROFIT WHICH THE EXPORTER OBTAINS ON THE TRANSFER OF THE CREDIT. NO PART OF THE CREDIT THAT IS AVAILABLE UNDER THE DEPB SCHEME CAN FALL FOR CLASSIFICATION UNDER CLAUSE (IIIB) OF SECTION 28 WH ICH DEALS WITH CASH ASSISTANCE RECEIVED OR RECEIVABLE AGAINST ANY SCHEME OF THE GOVERNMENT OF INDIA. AS THE LEGISLATIVE HISTORY OF THE PROVISION WOULD SHOW CLAUSE 9IIIB) WAS ENACTED BY PARLIAMENT AT A TIME WHEN THE EXPORT INCENTIVES THAT WERE AVAILABLE WERE (I) IMPORT ENTITLEMENT LICENSES ; (II) CASH COMPENSATORY SUPPORT; AND (III) DUTY DRAWBACK. THE DEPB SCHEME WAS NOT EVEN IN EXISTENCE WHEN CLAUSE (IIIB) CAME TO BE ENACTED INTO SECTION 28 B Y THE FINANCE ACT OF 1990. THE DEPB SCHEME WAS BROUGHT INTO EXISTENCE WITH EFFECT FROM 1 ST APRIL 1997. CLAUSE (IIID) OF SECTION 28 WAS INSERTED BY T HE AMENDING ACT 2005 LWITH EFFECT FROM `1 APRIL 1998. THE VALUE OF THE DEPB CREDIT CAN BY NO MEANS BE REGARDED AS A CASH ASSISTANCE WHICH IS RECEIVED OR RECEIVABLE BY A PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVERNMENT OF INDIA 15(1). RESPECTFULLY FOLLOWING THE DECISION OF THE H ONBLE JURISDICTIONAL HIGH COURT WE SET ASIDE THE ORDER O F THE LEARNED CIT(A) AND DIRECT THE AO TO DECIDE THE ISS UE IN THE LIGHT OF THE DECISION OF THE JURISDICTIONAL HIGH CO URT. THE ISSUE IS ACCORDINGLY REMITTED TO THE RECORD OF THE AO. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 16 16. GROUND NO.9 REGARDING EXCLUSION OF 90% OF INSURANCE CLAIM FROM PROFIT OF BUSINESS. 17. WE HAVE HEARD THE LEARNED AR AND THE LEARNED DR . IT IS NOT CLEAR FROM THE RECORD WHETHER INSURANCE CLAI M IS AGAINST DAMAGE OF STOCK-IN-TRADE OR AGAINST OTHER D AMAGES. AT THE TIME OF HEARING BOTH THE PARTIES CONCEDED T HAT THIS ISSUE STANDS COVERED BY THE DECISION OF THE JURIS DICTIONAL HIGH COURT IN THE CASE OF CIT-8 V/S M/S PFIZER LTD REPORTED IN 2010-TIOL-460-HC-MUM-IT ORDER DATED 18 TH JUNE 2010 THE HON. HIGH COURT WHILE DECIDING THE ISSUE OF INSURAN CE CLAIM VIDE PARAGRAPH 11 HAS HELD AS UNDER: 11. IN THE PRESENT CASE THE INSURANCE CLAIM IT MUST BE CLARIFIED RELATED TO THE STOCK- IN- TRADE AND IT IS ONLY AN INSURANCE CLAIM OF THAT NATURE WHICH FOR MS THE SUBJECT MATTER OF THE APPEAL. NOW IT CANNOT BE DISPUTED THAT IF THE STOCK IN TRADE OF THE ASSESSEE WERE TO BE SOLD THE INCOME THAT WAS RECEIVED FROM THE SALE OF GOODS WOULD CONSTITUTES THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD OF PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE INCOME EMANATING FROM THE SALE WOULD NOT BE SUSTAINABLE TO A REDUCING OF NINETY PERCENT FOR THE SIMPLE REASON TH AT IT WOULD NOT CONSTITUTE A RECEIPT OF A NATURE SIMIL AR TO BROKERAGE COMMISSION INTEREST RENT OR CHARGES. A CONTRACT OF INSURANCE IS A CONTRACT OF INDEMNITY. THE INSURANCE CLAIM IN ESSENCE INDEMNIFIES THE ASSESSEE FOR THE LOSS OF THE STOCK IN TRADE. IN THESE CIRCUMSTANCES WE ARE CLEARLY OF THE VIEW THAT THE INSURANCE CLAIM ON ACCOUNT OF THE STOCK IN TRADE DO ES NOT CONSTITUTE AN INDEPENDENT INCOME OR A RECEIPT OF A NATURE SIMILAR TO BROKERAGE COMMISSION INTEREST RENT OR CHARGES. HENCE SUCH A RECEIPT WOULD NOT BE SUBJECT TO A DEDUCTION OF NINETY PERCENT UNDER CLAU SE (1) OF EXPLANATION (BAA) 18. ACCORDINGLY WE REMIT THE MATTER TO THE RECORD OF THE AO TO VERIFY AND EXAMINE THE ISSUE IN THE LIGHT OF THE ABOVE SAID DECISION OF THE HON. HIGH COURT. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 17 19. GROUND NO.11 REGARDING SUNDRY BALANCES. WE HAVE HEARD THE LEARNED AR AS WELL AS THE LEARNED DR. T HE ASSESSEE HAS NOT CLAIMED THAT THESE SUNDRY BALANC ES WRITTEN BACK IS INCOME AS PART OF THE EXPORT PROF IT BEFORE THE LOWER AUTHORITIES. AS IT IS EVIDENT FROM THE ISSU E RAISED BY THE ASSESSEE BEFORE THE CIT(A) THE CLAIM OF THE ASS ESSEE WAS ONLY REGARDING EXCLUSION OF THE SAME FROM THE TOTAL TURNOVER AND CLAIMED THAT THESE MISCELLANEOUS INCOM ES DO NOT QUALIFY FOR DEDUCTION UNDER SECTION WHILE COMPU TING THE BUSINESS PROFIT. AFTER CONSIDERING THE RIVAL CON TENTIONS AND RELEVANT RECORD WE DO NOT FIND ANY ERROR OR ILLEGA LITY IN THE ACTION OF THE LOWER AUTHORITIES IN EXCLUDING 90% OF THE INCOME OF WRITING BACK SUNDRY BALANCES. THEREFORE NO INTERFERENCE IS REQUIRED QUA THIS ISSUE. ORDERS O F THE LOWER AUTHORITIES ARE CONFIRMED. 20. GROUND NO.13 EXCLUSION OF MISCELLANEOUS INCOME FROM THE PROFITS OF BUSINESS. THIS ISSUE IS IDENTICAL TO THAT OF WRITTEN BACK SUNDRY BALANCES DECIDED IN THE ABOVE PARAGRAPH. IN VIEW OF THE DECISION OF THE HON. SU PREME COURT IN THE CASE OF COMMISSIONER OF INCOME TAX V. K.RAVINDRANATHAN NAIR REPORTED IN (2007) 295 ITR 2 28 (SC) AS WELL AS THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF THE COMMISSIONER OF INCOME TAX V/S M/S. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 18 DRESSER RAND INDIA PVT. LTD. REPORTED IN 323 ITR 42 9 (BOM) THE HON. HIGH COURT WHILE DECIDING THE ISSUE HAS H ELD AS UNDER: 13. WE HAVE DEALT WITH THE OBSERVATIONS OF THE DIVISION BENCH IN BANGALORE CLOTHING IN A CONSIDERABLE DEGREE OF DETAIL BECAUSE READING THE JUDGMENT IT IS EVIDENT THAT THE COURT CONSIDERED T HAT TO BE A CASE WHERE A FINDING OF FACT WHICH WAS ARRIVED AT BY THE TRIBUNAL SHOULD NOT BE DISTURBED. BE THAT AS IT MAY THE DECISION OF THE DIVISION BEN CH TO THE EXTENT TO WHICH IT LAYS DOWN A PROPOSITION O F LAW INCONSISTENT WITH THE SUBSEQUENT JUDGMENT OF TH E SUPREME COURT IN RAVINDRANATHAN NAIRS CASE CANNOT BE REGARDED AS LAYING DOWN A BINDING POSITION IN LAW. IN BANGALORE CLOTHING THE SPECIFI C CONTENTION OF THE REVENUE WAS THAT ONLY THOSE ITEMS OF INCOME WHICH HAVE RELATION TO EXPORT ACTIVITY AR E LIABLE TO BE TAKEN INTO ACCOUNT WHILE COMPUTING BUSINESS PROFITS UNDER SECTION 80HHC. THE DIVISION BENCH DID NOT FIND ANY MERIT IN THE ARGUMENT ADVANCED ON BEHALF OF THE REVENUE. IN THIS BACKGROUND WE MUST REITERATE THAT IN RAVINDRANATHAN NAIRS CASE THE SUPREME COURT HAS NOW CATEGORICALLY HELD THAT INDEPENDENT INCOMES LIK E RENT COMMISSION BROKERAGE ETC. THOUGH THEY FORMED A PART OF THE GROSS TOTAL INCOME HAVE TO BE REDUCED BY 90% AS CONTEMPLATED IN EXPLANATION (BAA) IN ORDER TO ARRIVE AT BUSINESS PROFITS. THE RATIONALE FOR THIS WHICH IS INDICATED IN THE JUDGME NT OF THE SUPREME COURT IS THAT PROFIT INCENTIVES AND ITEMS WHICH CONSTITUTE INDEPENDENT INCOMES HAVE NO ELEMENT OF EXPORT TURNOVER AND ARE CONSEQUENTLY LIABLE TO BE EXCLUDED TO THE EXTENT THAT IS STIPULA TED IN EXPLANATION (BAA). THE DECISION IN BANGALORE CLOTHING TO THE EXTENT TO WHICH IT LAYS DOWN A PRINCIPLE OF LAW AT VARIANCE WITH THE SUBSEQUENT JUDGMENT OF THE SUPREME COURT IN RAVINDRANATHAN NAIRS CASE WOULD NOT THEREFORE HOLD THE FIELD AFTE R THE JUDGMENT OF THE SUPREME COURT. 14. HOWEVER IT WAS SOUGHT TO BE URGED THAT THE DECISION IN BANGALORE CLOTHING WAS CITED BEFORE THE SUPREME COURT IN ITS DECISION IN BABY MARINE EXPORTS (SUPRA). THE SUBMISSION OF THE ASSESSEE IS ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 19 THAT THE JUDGMENT IN BANGALORE CLOTHING MUST BE REGARDED AS BEING IMPLIEDLY APPROVED BY THE SUPREME COURT IN BABY MARINE EXPORTS. THE ISSUE BEFORE THE SUPREME COURT IN BABY MARINE EXPORTS WAS WHETHER AN EXPORT HOUSE PREMIUM RECEIVED BY THE ASSESSEE IS INCLUDIBLE IN THE PROFITS OF THE BUSINESS OF THE ASSESSEE WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SELLING MARINE PRODUCTS BOTH IN THE DOMESTIC AND INTERNATIONAL MARKETS IN PURSUANCE OF A CONTRACT WHICH IT HAD ENTERED INTO WITH EXPORT HOUSES. THE ASSESSEE RECEIVED THE ENTIRE FOB VALUE OF THE EXPORTS TOGETHER WITH A PAYMENT WHICH WAS DESCRIBED AS AN EXPORT HOUSE PREMIUM OF 2.25 % OF THE FOB VALUE. THE TRIBUNAL IN THAT CASE HELD THAT THE EXPORT HOUSE PREMIUM RECEIVED BY THE ASSESSEE WAS INCLUDIBLE IN THE PROFITS OF THE BUSINESS UNDER SECTION 80HHC. THE CONTENTION OF THE REVENUE BEFORE THE SUPREME COURT WAS THAT AS A SUPPORTING MANUFACTURER THE ASSESSEE WAS ENTITLED TO A DEDUCTION ONLY ON THE SALE PRICE OF ITS GOODS AND THE PREMIUM RECEIVED COULD NOT BE HELD TO BE DERIVED FROM THE BUSINESS OF EXPORT. BEFORE THE SUPREME COURT RELIANCE WAS PLACED BY THE ASSESSEE ON THE JUDGMENT OF THE DIVISION BENCH OF THIS COURT IN BANGALORE CLOTHING (SUPRA) IN SUPPORT OF THE SUBMISSION THAT IF A PARTICULAR RECEIPT IS IN THE NATURE OF AN OPERATIONAL INCOME IT MUST BE INCLUDED IN BUSINESS PROFIT. THE SUPREME COURT HELD THAT THE ASSESSEE BEING A SUPPORTING MANUFACTURER UNDER SECTION 80HHC (1A) IT WAS ENTITLED TO A DEDUCTION OF THE PROFIT DERIVED FROM THE SALE OF GOODS OR MERCHANDISE TO AN EXPORT HOUSE FOR THE PURPOSES OF EXPORT. THE ASSESSEE AS CONSIDERATION FOR THE SALE OF THE GOODS TO AN EXPOR T HOUSE RECEIVED THE ENTIRE FOB VALUE OF THE GOODS AND AN EXPORT HOUSE PREMIUM OF 2.25 %. THE SUPREME COURT NOTED IN ITS FOLLOWING OBSERVATIONS THAT AS A MATTER OF FACT THE PREMIUM WAS A PART OF THE SALE PRICE REALIZED BY THE ASSESSEE : THE APPELLATE TRIBUNAL HAS ARRIVED AT THE DEFINITE CONCLUSION THAT THE EXPORT HOUSE PREMIUM IS NOTHING BUT AN INTEGRAL PART OF SALE PRICE REALISED BY THE ASSESSEE A SUPPORTING MANUFACTURER FROM THE EXPORT HOUSE. THE TRIBUNAL FURTHER HELD THAT THE EXPORT HOUSE PREMIUM CANNOT POSSIBLY BE CONSIDERED TO BE EITHER COMMISSION OR BROKERAGE AS ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 20 A PERSON CANNOT EARN COMMISSION OR BROKERAGE FOR HIMSELF. 15. THE SUPREME COURT AFFIRMED THE FINDING OF THE TRIBUNAL THAT THE EXPORT HOUSE PREMIUM WAS AN INTEGRAL PART OF THE SALE PRICE REALIZED BY THE ASSESSEE FROM THE EXPORT HOUSE. THE SUBMISSION OF THE REVENUE THAT THE PREMIUM WAS TOTALLY UNRELATED TO EXPORT WAS HELD TO BE LACKING IN MERIT. THE SUPREME COURT HELD THAT THE SUBMISSION WAS CONTRARY TO THE SPECIFIC TERMS OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE. THE EXPORT HOUSE PREMIUM AS HELD BY THE SUPREME COURT COULD BE INCLUDED IN THE BUSINESS PROFIT BECAUSE IT IS AN INTEGRAL PART OF BUSINESS OPERATION OF THE RESPONDE NT WHICH CONSISTS OF SALE OF GOODS BY THE RESPONDENT T O THE EXPORT HOUSE. THE DECISION OF THE SUPREME COURT IN BABY MARINE EXPORTS THEREFORE RESTS ON TWO FOUNDATIONS. FIRSTLY THE SUPREME COURT AFFIRMED TH E FINDING OF FACT OF THE TRIBUNAL THAT THE EXPORT HOU SE PREMIUM WAS AN INTEGRAL PART OF THE CONSIDERATION FOR THE SALE REALIZED BY THE ASSESSEE WHICH WAS A SUPPORTING MANUFACTURER FOR AN EXPORT HOUSE. SECONDLY THE PREMIUM AS A MATTER OF FACT WAS RELATED TO THE EXPORT ACTIVITY SINCE IT FORMED AN INTEGRAL PART OF THE BUSINESS OF THE ASSESSEE WHICH CONSISTED OF THE SALE OF GOODS TO AN EXPORT HOUSE. THE SUPREME COURT HAS AS A MATTER OF FACT IN THE COURSE OF THE DISCUSSION NOT AFFIRMED THE JUDGMENT OF THIS COURT IN BANGALORE CLOTHING. THE DECISION UNDOUBTEDLY WAS CITED ON BEHALF OF THE ASSESSEE BUT THAT IN ITSELF IS NOT A GROUND FOR THIS COURT TO HO LD THAT IT WAS IMPLIEDLY APPROVED. THERE IS NOTHING I N THE JUDGMENT OF THE SUPREME COURT TO SUGGEST THAT THE JUDGMENT IN BANGALORE CLOTHING WAS EITHER EXPRESSLY OR IMPLIEDLY APPROVED. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE ASSESSEE CANNOT THEREFORE BE ACCEPTED. THE AMBIT OF EXPLANATION (BAA) HAS BEEN CONSIDERED BY THE JUDGMENT OF THE SUPREME COURT IN RAVINDRANATHAN NAIRS CASE. THE LEGISLATIVE POLICY UNDERLYING THE PROVISION IS THAT ITEMS WHICH ARE UNRELATABLE TO TH E EXPORT ACTIVITY MUST BE EXCLUDED IN THE COMPUTATION OF BUSINESS PROFITS IN ORDER TO PREVENT A DISTORTIO N IN THE COMPUTATION OF THE DEDUCTION UNDER SECTION 80HHC. WHAT PROVISION SHOULD BE MADE CONSISTENT WITH THE LEGISLATIVE POLICY UNDERLYING SECTION 80HH C IS EVIDENTLY A MATTER FOR PARLIAMENT TO DETERMINE. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 21 THE DUTY OF THE COURT IS TO INTERPRET THE LANGUAGE OF THE PROVISION. IN THE PRESENT CASE THE INTERPRETATI ON OF THE PROVISION BY THE SUPREME COURT IS BINDING AN D HAS TO BE FOLLOWED. 16. WE MAY NOTE AT THIS STAGE THAT COUNSEL APPEARING ON BEHALF OF THE ASSESSEE HAS RELIED UPON THE DECISIONS OF TH E SUPREME COURT IN GOODYEAR INDIA LTD. V. STATE OF HARYANA6 COMMISSIONER OF INCOME TAX V. SUN ENGINEERING WORKS PVT. LTD.7 JAYANTIBHAI 6 (1991) 188 ITR 402(SC). MANUBHAI PATEL V. ARUN SUBODHBHAI MEHTA8 UNION OF INDIA V.DHANWANTI DEVI AND MUNICIPAL CORPORATION OF DELHI V. GURNAM KAUR IN ORDER TO URGE THAT A PRECEDENT IS FOLLOWED FOR WHAT IS ACTUALLY DECIDES AND THAT A DECISION ON A QUESTION WHICH HAS NOT BEEN ARGUED CANNOT BE TREATED AS A PRECEDENT. THE SUBMISSION WHICH WAS URGED WAS THAT THE OBSERVATIONS OF THE SUPREME COURT IN RAVINDRANATHAN NAIRS CASE ON THE ISSUE AS TO WHETHER INDEPENDENT INCOMES ARE LIABLE TO BE REDUCED TO THE EXTENT OF 90% IN THE COMPUTATION OF BUSINESS PROFITS WAS NOT AN ISSUE WHICH AROSE BEFOR E THE COURT AND THOSE OBSERVATIONS WOULD NOT CONSTITUTE THE RATIO OF THE JUDGMENT. AS WE HAVE ALREADY INDICATED THE ISSUE WHICH WAS DEALT WITH B Y THE SUPREME COURT SQUARELY AROSE FOR THE DECISION I N THE CASE AND THE INTERPRETATION WHICH HAS BEEN RENDERED ON THE AMBIT OF THE PROVISIONS OF SECTION 80HHC INCLUDING OF EXPLANATION (BAA) AROSE FOR THE DECISION AND CONSTITUTES THE RATIO OF THE JUDGMENT. 7 (1992) 198 ITR 297 (SC) 8 1990 (26) ECR 1 (SC) 9 (1996) 6 SCC 44. 10 AIR 1989 (SC) 38. 17. DURING THE COURSE OF THE SUBMISSIONS IT IS CONCEDED BY COUNSEL FOR THE ASSESSEE THAT THE DISCUSSION IN RESPECT OF THE ISSUE OF PROCESSING CHARGES AS AN INDEPENDENT INCOME UNRELATED TO EXPORT WOULD SIMILARLY APPLY TO THE OTHER ISSUES RAISED IN THE QUESTION OF LAW FRAMED BY THE REVENUE VIZ. IN REGARD TO RECOVERY OF FREIGHT INSURANCE AN D PACKING RECEIPTS SALES TAX REFUND AND SERVICE INCOME. IN THE CIRCUMSTANCES THE QUESTION OF LAW SHALL STAND ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. THE APPEAL IS ACCORDINGLY ALLOWED. ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 22 21. RESPECTFULLY FOLLOWING THE DECISION OF THE JURI SDICTIONAL HIGH COURT IN THE CASE OF CIT V/S DRESSER RAND IN DIA(P) LTD (SUPRA) AND THE DECISION IN THE CASE OF COMMISSION ER OF INCOME TAX V. K.RAVINDRANATHAN NAIR WE CONFIRM TH E ORDER OF THE LEARNED CIT(A) AND DISMISS THE GROUND RAISED BY THE ASSESSEE. WE DECIDE THIS ISSUE AGAINST THE ASSESS EE AND IN FAVOUR OF THE REVENUE. ITA NO. 1809/MUM/2007 22. THE ASSESSEE IN THIS APPEAL HAS RAISED THE FOL LOWING GROUNDS : DISALLOWANCE ON ACCOUNT OF PROVIDENT FUND AND ESIC (1) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT EMPLOYERS AND EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ESIC PAID BEYOND THE GRACE PERIOD WILL CONTINUE TO REMAIN DISALLOWED; DISALLOWANCE OF INTEREST U/S 14A RS.4 87 408/- (3) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE ITO 6(3)(1) WHEREBY TH E AO HAD DISALLOWED INTEREST AMOUNTING TO RS.4 87 408/- U/S 14A OF THE IT ACT. DISALLOWANCE OF INTEREST RELATING TO SHARE APPLICATION MONEY/- (5) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN HOLDING THAT PROPORTIONATE INTEREST ON SHARE APPLICATION MONEY WAS REQUIRED TO BE DISALLOWED; ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 23 DISALLOWANCE OF INTEREST PAID TO ESIC RS.48 446/- AS FORMING PART OF TOTAL TURNOVER (7) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF RS.48 446/- AS MADE BY THE AO ON ACCOUNT OF INTEREST PAID TO ESIC. REDUCING 90% OF GROSS INTEREST RECEIVED FROM PROFITS OF BUSINESS RS.1 79 935/- INSURANCE CLAIM FROM PROFITS OF BUSINESS - RS.17 43 701 (9) THE LD. CIT(A) ERRED IN ON FACTS AND IN LAW IN UPHOLDING OF GROSS INTEREST RECEIPT OF RS.1 99 928 /- 23. WE FIND THAT THE ISSUES NO.1 3 5 AND 7 ARE IDE NTICAL TO THE ISSUES INVOLVED IN ITA NO.1808/MUM/2007. ACCO RDINGLY THE SAME ARE DECIDED IN TERMS OF OUR ORDER ON THESE ISSUES IN ITA NO.1808/MUM/2007. 24. GROUND NO.9 REGARDING REDUCTION OF 90% OF GRO SS INTEREST RECEIVED FROM PROFITS OF BUSINESS. 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSID ERED THE RELEVANT RECORD. IN VIEW OF THE VARIOUS DECISI ONS OF THE HON. APEX COURT AND THE HIGH COURTS IN THE CASES OF COMMISSIONER OF INCOME TAX V. K.RAVINDRANATHAN NAIR AND THE COMMISSIONER OF INCOME TAX V/S M/S. DRESSER RAN D INDIA PVT. LTD. (SUPRA) WE HOLD THAT 90% THE INTE REST INCOME RECEIVED BY THE ASSESSEE SHALL BE REDUCED FROM TH E ITA NO. 1808 AND 1809/MUM/2007 (ASSESSMENT YEAR -2003-04) 24 BUSINESS PROFIT AND NETTING OF INTEREST IS ALLOWED . ACCORDINGLY WE DO NOT FIND ANY MERIT IN THE CLAIM OF THE ASSESSEE FOR NETTING OF THE INTEREST FOR THE PURPOS E OF SECTION 80HHC. 26. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON 20.10.2010 SD SD (R.K.PANDA) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 20 TH OCT 2010 SRL:121010 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI