M/s. INDIAN OIL CORPORATION LTD., MUMBAI v. ADDL. CIT Rg. - 10(1), MUMBAI

ITA 1811/MUM/2007 | 2003-2004
Pronouncement Date: 02-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 181119914 RSA 2007
Assessee PAN AAACI1681G
Bench Mumbai
Appeal Number ITA 1811/MUM/2007
Duration Of Justice 4 year(s) 8 month(s) 1 day(s)
Appellant M/s. INDIAN OIL CORPORATION LTD., MUMBAI
Respondent ADDL. CIT Rg. - 10(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 02-11-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 02-11-2012
Date Of Final Hearing 10-10-2012
Next Hearing Date 10-10-2012
Assessment Year 2003-2004
Appeal Filed On 01-03-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH MUMBAI BEFORE SHRI P.M.JAGTAP A M & SHRI AMIT SHUKLA J M ITA NO. 1811 / MUM/ 20 0 7 ( ASSESSMENT YEAR : 200 3 - 20 0 4 ) INDIAN OIL CORPORATION LTD. G - 9 ALI YAVAR JUNG MARG BANDRA (EAST) MUMBAI - 51. VS. ACIT RANGE10(1) MUMBAI - 20 PAN/GIR NO. : AAAC I 1681 G ( APPELLAN T ) .. ( RESPONDENT ) AND ITA NO. 1814 /MUM/20 0 7 ( ASSESSMENT YEAR :200 3 - 200 4 ) DCIT RANGE - 10 ( 1 ) MUMBAI VS. INDIAN OIL CORPORATION LTD. G - 9 ALI YAVAR JUNG MARG BANDRA (EAST) MUMBAI - 51. PAN/GIR NO. : AAAC I 1681 G ( APPELLANT ) .. ( RESPONDENT ) /RE VENUE BY : MR. P.K.SHUKLA /ASSESSEE BY : MR. S.E.DASTUR DATE OF HEARING : 10 TH OCT . 2012 DATE OF PRONOUNCEMENT : 2 ND NOV . 2012 O R D E R PER AMIT SHUKLA . J M. : THESE ARE THE CROSS APPEALS ARISING OUT OF IMPUGNED ORDER DATED 29 - 12 - 2006 PASSED BY CIT(A ) - X MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143 (3) O F THE ACT FOR THE ASSESSMENT YEAR 200 3 - 0 4 . ITA NO S 1811 & 1814 / 0 7 2 2. WE WILL FIRST TAKE UP ITA NO. 1811 /0 7 FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 200 3 - 0 4 . IN THIS APPEAL THE ASSESSEE HAS TAKEN AS MANY AS 4 7 GROUNDS. IN SUPPORT OF THE ISSUES RAISED IN GROUNDS OF APPEAL THE ASSESSEE HAS FURNISHED A CHART WHEREBY MOST OF THE GROUNDS HAVE BEEN NOT PRESSED AND SOME OF THE ISSUES WERE ARGUED AT LENGTH BY BOTH THE PARTIES AFTER REFERRING TO VARIOUS MATERIALS PLACED ON RECORD. 3 . GROUND NO.1 RELATES TO DISALLOWANCE OF RS.1 7 66.54 LACS MADE UNDER SECTION 43B IN RESPECT OF SALES TAX COLLECTED DURING THE RELEVANT PREVIOUS YEAR BUT NOT PAID TILL THE DUE DATE OF RETURN OF INCOME. THIS GROUND WAS NOT PRESSED BY THE LEARNED SENIOR COUNSEL ON THE GROUND THAT THE DEDUCTION HAS BEEN AL LOWED IN THE SUBSEQUENT ASSESSMENT YEAR ON PAYMENT BASIS. IN VIEW OF THIS GROUND NO.1 IS TREATED AS DISMISSED BEING NOT PRESSED. 4 . G ROUND NO. 2 RELATES TO DISALLOWANCE OF DEDUCTION UNDER THE HEAD SCIENTIFIC RESEARCH FOR SUM OF RS.2 484.64 LACS IN RESP ECT OF EXPENDITURE INCURRED IN EARLIER YEARS ON CAPITAL WORK IN PROGRESS THAT HAD BEEN CAPITALIZED DURING THE YEAR. LEARNED SENIOR COUNSEL SUBMITTED THAT DEDUCTIBILITY OF CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH IN THE YEAR OF INCURRENCE HAS BEEN ALLOWE D IN THE EARLIER YEARS THEREFORE THIS GROUND HAS BEC O ME INFRUCTUOUS. HE FURTHER SUBMITTED THAT IN CASE THIS ISSUE IS FINALLY DECIDED AGAINST THE ASSESSEE BY THE HON BLE HIGH COURT THEN THIS GROUND MAY BE RESTORED TO THE ASSESSING OFFICER TO BE ALLOWED IN THIS YEAR . ON THE OTHER HAND LEARNED CIT DR ITA NO S 1811 & 1814 / 0 7 3 SUBMITTED THAT ONCE THIS EXPENDITURE HAS BEEN ALLOWED IN THE EARLIER YEAR THEN THERE IS NO QUESTION FOR FURTHER GIVING DIRECTION TO BE ALLOWED ON THE PERIOD OF COMMISSIONING. 4.1 A S ADMITTED BY BOTH THE PARTI ES THIS EXPENDITURE HAS BEEN ALLOWED IN THE YEAR OF INCURRENCE THEREFORE THIS GROUND HAS BECOME INFRUCTUOUS AND FURTHER THERE IS NO NEED OF GIVING ANY DIRECTION TO BE ALLOWED IN THE PERIOD OF COMMISSIONING. THUS GROUND NO . 2 IS TREATED AS DISMISSED. 5. GROUND NO S . 3 TO 5 RELATE TO DISALLOWANCE OF DEDUCTION FOR THE EXPENDITURE AMOUNTING TO RS.5337.21 LACS BEING PREMIUM PAID ON LELASEHOLD LAND AS CAPITAL EXPENDITURE. AS ADMITTED BY BOTH THE PARTIES THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE IN THE EARLIER YEARS RIGHT FROM THE ASSESSMENT YEAR 1999 - 2000 TO 2000 - 01 WHEREIN THE TRIBUNAL HAS DECIDED THIS ISSUE AFTER RELYING UP ON THE DECISION OF MUMBAI SPECIAL BENCH IN THE CASE OF JCIT VS. MUKUND LTD. 191 ITR 249 (AT) . THUS FOLLOIWNG THE PRECEDENCE OF EARLIER YEAR S ORDER THAT AMOUNT PAID BY THE ASSESSEE AS A PREMIUM ON LEASE HOLD LAND IS A CAPITAL EXPENDITURE THEREFORE GROUND NO S . 3 TO 5 ALSO TREATED AS DISMISSED. 6. GROUND NO S .6 TO 8 RELATE TO DEDUCTION UNDER SECTION 80IB ON LUBE PLANT ON ACCOUNT OF ALLOCATION OF HEAD OFFICE EXPENSES. LEARNED SENIOR C OUNSEL SUBMITTED THAT THE ISSUE RAISED IN THESE GROUNDS ARE NOT PRESSED AS DEDUCTION UNDER SECTION 80IB IN RESPECT LUBE PLANT HAS BEEN ALLOWED BY THE ASSESSING OFFICER VIDE ORDER DATED 12 - 3 - 2007 AND ITA NO S 1811 & 1814 / 0 7 4 31 - 12 - 2010 WHICH WAS GIVING EFFECT TO THE ORDER PASSED BY THE CIT(A) AS PER HIS DIRECTION. THUS GROUND NOS.6 TO 8 ARE TREATED AS NOT PRESSED AND ACCORDINGLY THEY ARE DISMISSED. 7 . G ROUND NO S . 9 & 10 RELATE TO DEDUCTION UNDER SECTION 80IB IN REGARD TO PA NIPATH REFINERY. THESE GROUNDS ARE ALSO NOT PRESSED ON THE GROUND THAT THE SAME STAND ALLOWED BY THE ASSESSING OFFICER IN HIS ORDER DATED 12 - 3 - 2007 WHILE GIVING EFFECT TO THE CIT(A) ORDER. ACCORDINGLY GROUND NOS. 9 & 10 ARE TREATED AS DISMISSED. 8. GROUND NOS.11 & 12 RELATE TO DEDUCTION UNDER SECTIO N 80IB IN RESPECT OF GHP UNIT. THIS ISSUE HAS ALSO NOT BEEN PRESSED BY THE LEARNED SENIOR COUNSEL ON THE SAME GROUND. ACCORDINGLY GROUND NOS. 11 & 12 ARE TREATED AS DISMISSED. 9. GROUNDS NO. 13 & 14 RELATE TO DEDUCTION UNDER SECTION 80IB IN AU - V UNIT . THESE GROUNDS TOO HAVE NOT BEEN PRESSED ON SIMILAR GROUND THAT DEDUCTION HAS BEEN ALLOWED BY THE ASSESSING OFFICER WHILE GIVING EFFECT . ACCORDINGLY GROUND NOS.13 & 14 ARE DISMISSED. 10. GROUND NOS. 15 TO 21 REL ATE TO DEDUCTION UNDER SECTION 80HHC IN REGARD TO ASSESSEES CLAIM FOR DEDUCTION OF AMOUNT FOR RS. 1 444.69 LACS IN RESPECT OF FOLLOWING EXPORTS : - A) EXPORT OF ATF TO FOREIGN AIRLINES. B) EXPORT OF PETROLEUM PRODUCTS PRODUCED IN THE REFINERY LIKE NAPTHA FURNACE OIL BENZENE ETC. 1 0. 1 LEARNED SENIOR COUNSEL FAIRLY ADMITTED THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSMENT YEARS ITA NO S 1811 & 1814 / 0 7 5 1986 - 87 & 1987 - 88 VIDE ORDER DATED 25 - 6 - 2005. FURTHER HE SUBMITTED THAT THERE IS A DECISI ON OF HON BLE CALCUTTA HIGH COURT IN THE CASE OF EIH VS. CIT 338 ITR 503 AND SUBMITTED THAT THE REASONING GIVEN BY THE HON BLE HIGH COURT ON THE WORD EXPORT WHICH HAS BEEN INTERPRETED IN THE LIGHT OF THE LANGUAGE OF SECTION 80HHC SHOULD BE FOLLOWED. ON THE OTHER HAND LEARNED CIT DR SUBMITTED THAT THIS ISSUE STANDS DIRECTLY COVERED AGAINST THE ASSESSEE IN THE ASSESSEES OWN CASE IN THE EARLIER YEARS THEREFORE SAME SHOULD BE FOLLOWED . 10.2 AFTER CAREFULLY CONSIDERING THE SUBMISSIONS OF THE PARTIES A ND THE ORDER OF THE TRIBUNAL PASSED IN ITA NO. 2675/MUM/ 1990 FOR THE ASSESSMENT YEAR 1986 - 87 & 1987 - 88 WE FIND THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE FOLLOWING THE EARLIER YEARS ORDER FOR THE ASSESSMENT YEARS 1984 - 85 & 1985 - 86 . REGARDING EX PORT OF PETROLEUM PRODUCTS THE TRIBUNAL HAS ADJUSTED AND DISCUSSED THE ISSUE IN DETAIL AND HAS RECORDED THE FOLLOWING FINDING : - 21.WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS MADE BEFORE US VIS - - VIS THE FACTS OF THE CASE AND HAVE GONE THROUGH THE RELEVANT BOMBAY HIGH COURT DECISIONS IN THE CASE OF CALTEX (INDIA) LTD. AND BURMAH SHELL REFINERIES LTD. UNDER SECTION 80HHC (1) DEDUCTION IS AVAILABLE IN RESPECT OF AN ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF EXPORT OUT OF INDIA OF AN GOODS OR MERCHANDISE AND CLAUSE (B) OF SUB - SECTION (2) OF SEC. 80 HHC STIPULATES THAT THIS SECTION DOES NOT APPLY TO THE FOLLOWING GOODS OR MERCHANDISE: I. MINERAL OIL. II. MINERALS AND ORES (OTHER THAN PROCESSED MINERALS AND ORES SPECIFIED IN THE 12 TH S CHEDULE. FROM THE ABOVE STATUTORY PROVISIONS IT BECOMES CLEAR THAT DEDUCTION U/S. 80 HHC IS NOT AVAILABLE TO AN ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF EXPORT OF MINERAL OIL. THE MOOT QUESTION IS AS TO WHETHER THE PETROLEUM PRODUCTS MANUFACTURED BY THE ASSESSEE NAMELY NAPHTHA DIESEL AND FUEL OR FALL UNDER THE ITA NO S 1811 & 1814 / 0 7 6 EXPRESSION MINERAL OIL. FOR THE PURPOSES OF SEC. 80 HHC THE EXPRESSION OF MINERAL OIL HAS NOT BEEN DEFINED. THEREFORE THIS EXPRESSION HAS TO BE INTERPRETED AND UNDERSTOOD IN THE LIGHT OF D ICTIONARY DEFINITIONS AND THE OBSERVATIONS MADE BY THE BOMBAY HIGH COURT IN THE TWO CASES WHICH HAVE BEEN REFERRED TO IN THE ORDER OF THE ID. CIT(A) AND ALSO RELIED UPON BY BOTH THE SIDES FORE US. THE DICTIONARY DEFINITIONS WITH WHICH WE HAVE BEEN ASSISTED BY THE ID. COUNSEL FOR THE ASSESSEE IN OUR VIEW DO NOT IN ANY WAY CONCLUSIVELY INDICATE THAT THE REFINED PETROLEUM PRODUCTS ARE NOT INCLUDED IN THE EXPRESSION MINERAL OIL. THESE DEFINITIONS HAVE ALREADY BEEN REPRODUCED BY US ABOVE AND IN NONE OF THESE DEFINITIONS IT IS STATED THAT THE REFINED PETROLEUM PRODUCTS ARE NOT INCLUDED IN THE EXPRESSION OF MINERAL OIL. THE DISCUSSION CONTAINED IN THE RELEVANT PART OF THE NEW ENCYCLOPEDIA BRITANNICA IN OUR VIEW DOES NOT IN ANY WAY STRENGTHEN OR SUBSTANTIATE T HE VIEW THAT THE EXPRESSION MINERAL OIL WOULD NOT INCLUDE REFINED PETROLEUM PRODUCTS. THE BOMBAY HIGH COURT IN THE CASE OF CALTEX (INDIA) LTD. WAS CONCERNED WITH THE MEANING OF MINERAL OIL FOR THE PURPOSE OF DECIDING AS TO WHETHER LUBRICATING OIL IS A M INERAL OIL. AS ALREADY MENTIONED ABOVE THE BOMBAY HIGH COURT CONSIDERED THE FACT THAT THE LUBRICATING OIL WAS MANUFACTURED AFTER BLENDING MINERAL BASED OIL WITH 18 CHEMICALS BESIDES DIFFERENT DYES VEGETABLE OIL AND SILICON. THE FOLLOWING OBSERVATIONS MAD E BY THE HIGH COURT IN THIS CASE AS REPRODUCED FROM PAGE 243 OF THE REPORT IS CRUCIAL: THE ASSESSEES END PRODUCT WAS THEREFORE NOT MINERAL OIL AS EXTRACTED OR REFINED. IT WAS NOT A MIXTURE OF HYDROCARBONS. IT DID NOT THEREFORE FALL WITHIN THE MEA NING OF THE EXPRESSION MINERAL OIL AS USED IN THE SAID ITEM (3) A FORTIORARI THE OBSERVATIONS OF THE HIGH COURT CAN BE INTERPRETED TO MEAN THAT REFINED PETROLEUM PRODUCT WHICH IS A MIXTURE OF HYDROCARHONS WOULD COME UNDER THE CATEGORY OF MINERAL OIL. IN OUR CONSIDERED VIEW THE BOMBAY HIGH COURT DECISION IN THE CASE OF CALTEX (INDIA) LTD. DOES NOT IN ANY WAY HELP THE ASSESSEE. IN THE CASE OF THE ASSESSEE THE END PRODUCT REMAINED A MIXTURE OF HYDROCARBONS AND THE ENTIRE PROCESS IS ONLY THE VARIOUS STAGE S OF REFINING OF THE CRUDE OIL. IT IS TRUE THAT IN THE CASE OF BURMAH SHELL REFINERIES LTD. THE BOMBAY HIGH COURT HAD MADE IT ABUNDANTLY CLEAR THAT THEY WERE NOT DECIDING THE ISSUE FINALLY AND FURTHER IN THE CASE OF CALTEX (INDIA) LTD.. IT WAS OBSERVED TH AT THE VIEW TAKEN BY THE BOMBAY HIGH COURT IN THE CASE OF BURMAH SHELL REFINERIES LTD. WAS ONLY A TENTATIVE VIEW. NEVERTHELESS THE OBSERVATIONS MADE BY THE HIGH COURT IN THE CASE OF BURMAH SHELL REFINERIES LTD. ARE OF CONSIDERABLE IMPORTANCE FOR THE PURPO SE OF UNDERSTANDING AND INTERPRETING THE MEANING OF THE EXPRESSION OF MINERAL OIL. IN THIS CASE THE DICTIONARY DEFINITIONS HAVE ALSO BEEN QUOTED. THE WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY DEFINES MINERAL OIL AS A LIQUID PRODUCT OF MINERAL ORIGIN I.E. WITHIN THE VISCOSITY LIMIT RECOMMENDED FOR OIL (AS PETROLEUM SHALE OIL OR ANY OIL OBTAINED FROM THEM BY REFINING) ESPECIALLY THE LIQUID PETROLEUM. THE OXFORD ENGLISH DICTIONARY STATES THAT MINERAL OIL IS A GENERAL NAME FOR PETROLEUM AND VARIOUS OIL S DISTILLED FROM IT. IN PETROLEUM DICTIONARY ITA NO S 1811 & 1814 / 0 7 7 BY LALIA PHIPPS BOONE THE MEANING OF THE PHRASE MINERAL OIL IS STATED TO BE AS UNDER: I. CRUDE PETROLEUM AND ITS PRODUCTS. II LIQUID PETROLEUM THE BOMBAY HIGH COURT ALSO REFERRED TO THE MEANING OF MINERAL OIL AS GIVEN IN THE ILLUSTRATED PETROLEUM DICTIONARY AND PRODUCTS MANUAL COMPILED AND EDITED BY THE EDITORIAL STAFF OF THE PETROLEUM EDUCATIONAL INSTITUTE. THIS MEANING READS AS UNDER: MINERAL OIL PETROLEUM AS IT COMES FROM THE GROUND IS FREQUENTLY CALLE D MINERAL OIL BECAUSE IT COMES FROM A MINERAL SURROUNDING; ALSO TO DISTINGUISH IT FROM OIL SECURED FROM VEGETABLE AND ANIMAL SOURCES. IT MAY REFER TO (1) CRUDE OIL COMING NATURALLY FROM THE GROUND OR SECURED FROM COAL SHALE OR ANY OTHER NATURAL SOURCE; (2 ) ANY ONE OF THE MANY PRODUCTS SECURED FROM THE CRUDE OIL OR SECURED FROM COAL SHALE OR OTHER NATURAL SOURCES. AFTER CONSIDERING THESE VARIOUS AUTHENTIC DEFINITIONS AND MEANING OF THE PHRASE MINERAL OIL THE BOMBAY HIGH COURT OBSERVED THAT IT IS CLEAR THAT THE EXPRESSION MINERAL OIL IS WIDE ENOUGH TO INCLUDE BOTH PETROLEUM IN ITS CRUDE FORM AS WELL AS THE PRODUCTS SECURED OR OBTAINED FROM THE CRUDE OIL BY REFINING. IN OUR VIEW MERELY BECAUSE THESE OBSERVATIONS WERE MADE WHILE DECIDING A WRIT PETITION AND THE MATTER WAS NOT FINALLY DECIDED BY THE BOMBAY HIGH COURT THE PERSUASIVE FORCE OF THE OBSERVATIONS MADE BY THE BOMBAY HIGH COURT ARE NOT IN ANY WAY DILUTED. 22. WE HAVE ALSO PERUSED THE CHART OF PHYSICOCHEMICAL PROPERTIES OF THE PETROLEUM PRODUCTS FILED BEFORE US AND FROM THIS CHART WE FIND THAT THERE VARIATION IN THE PERCENTAGE OF CERTAIN INGREDIENTS .OR QUALITIES OR COLOUR BUT THE BASIC CHARACTER HAS NOT CHANGED. IN OUR VIEW WHEN MINERAL OIL WAS EXCLUDED FOR THE PURPOSES OF SEC. 80 HHC THE INT ENTION OF THE LEGISLATURE WAS QUITE CLEAR. CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES WE FEEL THAT THE REFINED PETROLEUM PRODUCTS MANUFACTURED BY THE ASSESSEE NAMELY NAPHTHA DIESEL AND FUEL OIL ARE COVERED UNDER THE EXPRESSION MINERAL OIL FOR THE P URPOSES OF SEC. 80 HHC. WE THEREFORE UPHOLD THE ORDER OF THE ID. CTT(A) ON THIS ISSUE. 10 . 3 THUS R ESPECTFULLY FOLLOWING THE DECISION AND THE REASONING GIVEN BY THE TRIBUNAL IN THE AFORESAID CASE THIS ISSUE IS DECIDED AGAINST THE ASSESSEE AS ADMITTED LY EXPORT OF ATF AND PETROLEUM PRODUCTS COMES WITHIN THE AMBIT OF MINERAL OIL WHICH ARE SPECIFICALLY PRO HIBITED UNDER SECTION 80HHC . RELIANCE PLACED BY TH E LEARNED COUNSEL IN THE CASE OF EIH VS. CIT (SUPRA) IS PURELY DISTINGUISHABLE AS IN THAT CASE TH E COURT ITA NO S 1811 & 1814 / 0 7 8 WAS DEALING WITH THE MEANING OF EXPORT IN RELATION TO THE EXPORT AND SUPPLY OF FOOD AND BEVERAGES TO THE INTERNATIONAL AIRLINES WHEEAS THE ISSUE IN HAND BEFORE US IS ENTIRELY DIFFERENT AND WAS NOT AT ALL SUBJECT MATTER OF THE DECISION BEFORE THE HON BLE HIGH COURT. HENCE THE ISSUE RAISED IN GROUND NOS.15 TO 21 IS DECIDED AGAINST THE ASSESSEE. 11. GROUND NOS.22 TO 38 RELATE TO SHORT DEDUCTION UNDER SECTION 80M AND WITH REGARD TO COMPUTATION MADE BY THE ASSESSING OFFICER WHEREBY HE HAS RESTRICTE D THE DEDUCTION FROM RS. 49 738.88 LACS AS CLAIMED BY THE ASSESSEE TO RS.26 109.88 LACS. 11.1 RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.497.38 CRORES UNDER SECTION 80M OUT OF DIVIDEND OF RS. 497.38.CRORES RECEIVED AND DI STRIBUTED DURING THE FINANCIAL YEAR 2002 - 03. THE CLAIM UNDER SECTION 80M WAS MADE ON GROSS DIVIDEND. THE ASSESSING OFFICER NOTED THAT NO EXPENDITURE HAS BEEN DEDUCTED FROM THE DIVIDEND RECEIPTS BY THE ASSESSEE . HE THEREFORE REQUIRED THE ASSESSEE AS TO WH Y THE DEDUCTION SHOULD NOT BE REDUCED ON ACCOUNT OF ADMINISTRATIVE EXPENDITURE AND OTHER EXPENSES FOR MAKING INVESTMENTS IN SHARES. IN RESPONSE I T WAS SUBMITTED BY THE ASSESSEE THAT IT HAS NOT INCURRED ANY ADMINISTRATIVE EXPENDITURE FOR EARNING THE DIVIDE ND INCOME AS INVESTMENTS ON WHICH THE DIVIDEND HAS BEEN EARNED WERE MADE IN THE EARLIER YEARS AND NO INFRASTRUCTURE WAS REQUIRED FOR MAKING THE INVESTMENT IN EQUITY SHARES WHICH WERE MOSTLY IN PUBLIC SECTOR UNDERTAKINGS. FURTHER THE ASSESSING OFFICER NOTE D THAT INVESTMENTS IN THE EQUIT Y SHARES AS REFLECTED IN THE BALANCE SHEET AS ON 31 - 3 - 2003 ITA NO S 1811 & 1814 / 0 7 9 AMOUNT ED TO RS.5309.04 CRORES WHICH WAS CLA SSI FIED AS LONG TERM INVESTMENT IN QUOTED AND UNQUOTED SHARES AND IN SUBSIDIARY COMPANIES. HE WAS OF THE OPINION THAT INV ESTMENT IN SUCH COMPANIES IS BOUND TO ENGAGE VARIOUS RESOURCES OF THE ASSESSEE COMPANY WHICH CANNOT BE IGNORED WHILE COMPUTING THE INCOME BY WAY OF DIVIDEND. HE HAD NOTED THAT THE ASSESSEE HAS INCURRED EXPENSES AS HEAD OFFICE REFINERY AND OTHER EXPENDITURE FOR SUMS AGGREGATING RS.1 32 95 74 617/ - . HE ACCORDINGLY DISALLOWED 2% OF THE ADMINISTRATIVE AND OTHER EXPENSES INCLUDING SALARIES PF GRATUITY FUND A ND STAFF WELFARE WHICH AMOUNTED TO RS.2.66 CRORES. HE FURTHER HELD THAT WHAT IS ALLOWED TO BE DEDUCTE D U/S 80M IS THE INCOME SUB JECT TO THE AMOUNT DISTRIBUTED BY WAY OF NET DIVIDEND AND NOT THE GROSS AMOUNT OF DIVIDEND AS CLAIMED BY THE ASSESSEE . R ELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA) PVT. LTD 155 ITR 120 THAT THE INCOME BY WAY OF NETTING OF F DIVIDEND IS REQUIRED AND HELD THAT SUCH DEDUCTION UNDER SECTION 80M CANNOT BE ON GROSS DIVIDEND. 11.2 THE ASSESSEE IN ITS SUBMISSION BEFORE THE ASSESSING OFFICER SUBMITTED THAT THE INVESTMENTS WERE MADE THR OUGH ITS OWN FUNDS AND INTERNAL ACCRUALS AND IT HAS NOT INCURRED ANY EXPENDITURE FOR THE PURPOSE OF EARNING THE DIVIDEND INCOME. THEREFORE NO PART OF EXPENSES INCURRED BY THE ASSESSEE COULD BE ATTRIBUTED TO SUCH DIVIDEND INCOME. ACCORDINGLY THERE IS NO Q UESTION OF NETTING OF F THE EXPENSES WHILE WORKING OUT THE DIVIDEND INCOME. A DETAIL CHART ITA NO S 1811 & 1814 / 0 7 10 REGARDING INVESTMENT MADE AND THE SURPLUS FUND WAS FURNISHED ALONG WITH DETAILS OF UTILIZATION OF THE BORROWINGS. THE ASSESSING OFFICER REJECTED THE SAID CONTENTION A ND RESTRICTED THE DEDUCTION TO THE AMOUNT OF RS.223.62 CRORES AND BALANCE SUM OF RS.236.28 CRORES WAS DISALLOWED ON THE GROUND THAT THE INVESTMENTS HAVE BEEN MADE PARTLY OUT OF BORROWINGS AND PARTLY OUT OF OWN FUNDS . THE WORKING OF CLAIM OF DEDUCTION HAS B EEN ILLUSTRATED AT PAGES 19 AND 20 OF THE ASSESSMENT ORDER. 11 . 3 BEFORE THE CIT(A) IT WAS SUBMITTED BY THE ASSESSEE THAT THE DIVIDEND INCOME W AS MOSTLY EARNED FROM THE INVESTMENTS IN EQUITY SHARES WHICH WAS REQUIRED TO BE DONE AS PER THE GOVERNMENT POLIC IES. TIME TO TIME THE GOVERNMENT GAVE DIRECTIONS THAT SURPLUS FUNDS W ERE REQUIRED TO BE INVESTED IN THE PSU COMPANIES LIKE ONGC GAIL CPCL ETC. IT WAS IN PURSUANCE TO THAT DURING THE YEAR THE SUM OF RS.680 CRORES WAS MADE IN THE SHARES OF IBP COMPANY LIM ITED WHEREAS THE ASSESSEE HAS ALSO RECEIVED SUM OF RS. 5 296 CRORES FROM SALE/TRANSFER/MATURITY OF INVESTMENT DURING THE YEAR. IT WAS FURTHER POINTED OUT THAT IN THE ASSESSMENT YEAR 2003 - 04 MOST OF THE BORROWINGS HAVE BEEN REPAID AND INVESTMENT WAS MADE O UT OF OWNED FUNDS ONLY . A DETAIL CHART OF INVESTMENT MADE IN EQUITY SHARES AND FUND FLOW OF ASSESSEES OWN FUND WAS FURNISHED WHICH HAS BEEN INCORPORATED AT PAGE 9 OF THE CIT(A) ORDER. BESIDES THIS CASH FLOW STATEMENT WAS ALSO FURNISHED. THE ASSESSEE ALS O POINTED OUT THAT MAJOR INVESTMENTS HAVE BEEN MADE IN THE EARLIER YEARS WHEREIN NO ITA NO S 1811 & 1814 / 0 7 11 DISALLOWANCE HAVE BEEN MADE BY THE ASSESSING OFFICER. THIS APART VARIOUS OTHER SUBMISSIONS WERE MADE WHICH HAVE BEEN INCORPORATED IN CIT(A) S ORDER FROM PAGES 8 TO 12 OF THE IMPUGNED ORDER. 11 . 4 LEARNED CIT(A) REJECTED THE ASSESSEES CONTENTION AFTER HOLDING AND OBSERVING AS UNDER : - 12.9 I HAVE CONSIDERED THE FACTS OF THE CASE FINDINGS OF THE AO AND SUBMISSIONS OF THE APPELLANT. AFTER CONSIDERING THE ENTIRE FACTS I DO NOT FIND ANY MERIT IN THE ARGUMENT S OF APPELLANT. THE SUBMISSIONS MADE BY THE APPELLANT RE VERY GEN E RAL IN NATURE WHEREIN IT HAS BEEN ARGUED THAT FOR EARNING THE DIVIDEND INCOME INVESTMENTS WERE MADE OUT OF OWN FUNDS. THE GROSS REVENUE OF THE APPELLANT WA S MUCH HIGHER THAN INVESTMENT MADE IN SHARES. THE BORROWINGS WERE MADE FOR FINANCING VARIOUS PROJECTS. INVESTMENTS WERE MADE FOR BUSINESS PURPOSE . IT IS ALSO ARGUED THAT NO INTEREST EXPENSES WERE ATTRIBUTED TO THE DIV ID END INCOME IN A.Y. 2001 - 02 AND 2002 - 0 3. IT IS ALSO ARGUED THAT TO PROVE THE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT IN SHARES AND COMPANIES THE BURDEN IS ON THE AO TO ESTABLISH THE NEXUS. THE APPELLANT HAS RE LIED ON THE DECISION OF DELHI ITAT IN THE CASE OF MARUTI UDYOG LTD. VS. DCIT 92 ITD 119. ALL THE AFORESAID ARGUMENTS TAKEN BY THE APPELLANT ARE VERY GENERAL. THE APPELLANT HAS FAILED TO PROVE THE NEXUS THAT NO INTEREST BEARING FUNDS WERE INVESTED IN SHARES FOR EARNING THE DIVIDEND INCOME. ACCORDING TO THE LATEST DECISION OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 THE BURDEN OF PROVING THE NEXUS IS ON THE APPELLANT THAT NO INTEREST BEARING FUNDS WERE INVESTED IN THE SHARES. IN THE PRESENT CASE THE APPELLANT HAS FAILED TO PROVE THE NEX US. THE ARGUMENT THAT NO INTEREST W AS ATTRIBUTED FOR EARNING THE DIVIDEND INCOME IN AY 2001 - 02 AND 2002 - 03 IS ALSO NOT ACCEPTABLE BECAUSE IN THE INCOME - TAX EVERY ASSESSMENT YEAR IS A DIFFERENT YEAR AND THE PRINCIPLE OF RES - JUDICATA DOES NOT APPLY IN INCOM E - TAX. SINCE THE APPELLANT HAS FAILED TO PROVE ITS CLAIM THAT NO INTEREST BEARING FUNDS WERE INVESTED IN SHARES AND IT HAS ALSO ADMITTED HAT NO LINKING IS POSSIBLE THE ACTION OF AO GETS STRENGTH FROM THESE FACTS. FURTHER THE STAND TAKEN BY THE AO IS SUPP ORTED BY THE DECISION OF SC IN THE CASE OF DISTRIBUTORS (BARODA) PVT. LTD. 155 ITR 120 WHEREIN IT WAS HELD THAT TO ARRIVE AT INCOME BY WAY OF DIVIDEND NETTING OF DIVIDEND IS REQUIRED AND DEDUCTION U/S.80M CANNOT BE ALLOWED ON GROSS DIVIDEND. THUS THE AO WAS FULLY JUSTIFIED IN RESTRICTING THE DEDUCTION U/S.80M OF RS.261.10 CRORES AS AGAINST RS.497.39 CRORES AS CLAIMED BY THE APPELLANT. THUS GROUND NO.31 TO 35 ARE DISMISSED. 11 . 5 BEFORE US LEARNED SENIOR COUNSEL MR. SOLI DASTUR BESIDES REITERATING THE SUBMISSIONS MADE BEFORE THE CIT(A) DREW OUR ATTENTION ITA NO S 1811 & 1814 / 0 7 12 TO THE RELEVANT RECORDS AND FINDINGS RECORDED THAT NO BORROWED FUNDS HAVE BEEN UTILIZED IN MAKING THE INVESTMENTS IN THE SHARES. THE ASSESSEE NOT ONLY HAD SUFFICIENT SURPLUS FUNDS BUT ALSO HUGE PROFIT IN THIS YEAR. HE REFERRED TO THE CHART APPEARING AT PAGE 9 OF THE CIT(A) ORDER AND POINTED OUT THAT THE TOTAL INTEREST FREE FUNDS WERE FAR MORE THAN THE TOTAL INVESTMENT MADE IN THE SHARES. HE SUBMITTED THAT LEAVE ALONE FUNDS IN RESERVES AND SURPLUS ACCOU NT THE PROFIT ITSELF DURING THE YEAR WAS AT RS. 7 771.17 CRORES WHICH WAS SUFFICIENT FOR MAKING THE INVESTMENT DURING THE YEAR WHICH IS MUCH LESS. THEREFORE THERE COULD NOT BE ANY REASON OR GROUND FOR MAKING DISALLOWANCE ON THE GR OUND THAT PART OF BORROWE D FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF MAKING THE INVESTMENTS IN SHARES. IN SUPPORT OF THIS CONTENTION HE STRONGLY REL IED UPON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES POWER LIMITED (2009) 313 ITR 340 (BOM) . HE FURTHER POINTED OUT THAT AS NOTED BY THE CIT(A) AT PAGE 11 OF THE ORDER MOST OF INVESTMENTS HAVE BEEN MADE IN T HE EARLIER YEARS AND NO SUCH DISALLOWANCE OF DEDUCTION UNDER SECTION 80M HAS BEEN MADE ON THIS ACCOUNT EVEN WHEN THE ASSESSMENTS HAVE BEEN COMPLETED AFTER DETAIL SCRUTINY UNDER SECTION 143(3) . 11.6 REGARDING DISALLOWANCE OF PART OF HEAD OFFICE EXPENSES IN EARNING THE DIVIDEND SRI DASTUR SUBMITTED THAT NO SUCH EXPENDITURE CAN BE SAID TO HAVE BEEN INCURRED IN THE CASE OF THE ASSESSEE ; FIRSTLY A S THESE INVESTMENTS HAVE BEEN MADE AS PER THE DIRECTIONS OF THE GOVERNMENT AND THE ASSESSEE DOES NOT HAVE TO MAINTAIN ANY SEPARATE ITA NO S 1811 & 1814 / 0 7 13 DEPARTMENT FOR THIS AND SECONDLY T HE ASSESSEE HAS INVESTED ONLY IN SIX COMPANIES THE DETAILS OF WHICH HAVE BEEN GIVEN AT PAGE 9 OF THE APPELLATE ORDER WHICH DO NOT REQUIRED ANY PARAPHE R NIA FOR THIS . HE SUBMITTED THAT THERE CANNOT BE ANY PRESUMPTION THAT THE ASSESSEE MUST HAVE INCURRED ANY EXPENDITURE WITHOUT THERE BEING ANY MATERIAL ON RECORD TO CONTROVERT THE CONT ENTION OF THE ASSESSEE. IN SUPPORT OF T HIS CONTENTION HE PLACED RELIANCE ON THE DECISION OF HON BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. UNITED COLLIERIES LTD. (1993) 203 ITR 857 WHEREIN IT WAS HELD THAT THERE IS NO SCOPE FOR ANY ESTIMATE OF EXPEN DITURE BEING MADE AND NO NOTIONAL EXPENDITURE CAN BE ALLOCATED FOR THE PURPOSE OF EARNING DIVIDEND INCOME. FURTHER RELIANCE WAS PLACED O N THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GENERAL INSURANCE CORPORATION OF INDIA (2002) 254 IT R 203 (BOM) . HE FURTHER SUBMITTED THAT THIS ISSUE HAS ALSO BEEN DECIDED BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. DCIT (2006) 103 TTJ (CHD)(SB) 265 . HE THUS FINALLY C ONCLUDED THAT DISALLOWAN CE OF DEDUCTION UNDER SECTION 80M COULD NOT HAVE BEEN MADE ON THE FACTS OF THE ASSESSEES CASE AND THE REASONING GIVEN BY THE ASSESSING OFFICER AS WELL AS CI(A) IS WHOLLY ERRONEOUS. 11. 7 ON THE OTHER HAND LEARNED CIT DR SUBMITTED THAT THE ASSESSEE HAS T O PROVE THE NEXUS THAT NO INTEREST BEARING FUNDS WERE INVESTED IN THE SHARES FOR EARNING THE DIVIDEND INCOME. HE STRONGLY RELIED UPON THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF ITA NO S 1811 & 1814 / 0 7 14 CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 WHIC H ALSO HAS BEEN RELIED UPON BY THE CIT(A) . HE FURTHER SUBMITTED THAT DEDUCTION UNDER SECTION 80M HAS TO BE GIVEN ON NET BASIS AND SOME EXPENDITURE HAS TO BE ALLOCATED FOR EARNING OF THE DIVIDEND INCOME AND ONLY NET AMOUNT CAN BE CLAIMED FOR DEDUCTION UNDER SECTION 80M. LASTLY HE SUBMITTED THAT PROVISION OF SECTION 115O WILL ALSO BE APPLICABLE WHILE CONSIDERING THE DEDUCTION UNDER SECTION 80M . HE THUS STRONGLY RELIED UPON THE FINDINGS GIVEN BY THE ASSESSING OFFICER AS WELL AS THE CIT(A) . 11. 8 . IN REJOIND ER LEARNED SENIOR COUNSEL SUBMITTED THAT THE DECISION IN THE CASE OF ABHISHEK INDUSTRIES LTD(SUPRA) WILL NOT BE APPLICABLE O N THE FACTS OF THE ASSESSEES CASE AS THE ASSESSEE HAS GIVEN A DETAIL CASH FLOW STATEMENT WHEREIN IT HAS BEEN SPECIFICALLY BROUGHT ON RECORD THAT THE BORROWINGS WERE MADE FOR THE PURPOSE OF FINANCING VARIOUS PROJECTS AND FOR THE PURPOSE OF FINANCING OF CRUDE OIL WHEREAS THE INVESTMENTS WERE MADE PURELY OUT OF ASSESSEES OWN SURPLUS FUNDS. BESIDES THIS HE SUBMITTED THAT THE JUDGMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD (SUPRA) HAS BEEN DULY CONSIDERED BY THE HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. WHEREIN IT HAS BEEN CLARIFIED THAT IF THE ACQUISITION OF SHARES HAVE BEEN MADE ON A CCOUNT OF ASSESSEES OWN FUNDS AND NO INTEREST EXPENDITURE HAS BEEN INCURRED NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A . THE HONBLE HIGH COURT HAS SPECIFICALLY CLARIFIED THAT JUDGMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD (SUPRA) WAS BASED ON THE F ACTS OF THAT PARTICULAR CASE ONLY. REGARDING APPLICABILITY ITA NO S 1811 & 1814 / 0 7 15 OF SECTION 115O HE RELIED UPON THE DECISION OF GODREJ AGROVET LTD. VS. DCIT (2010) 323 ITR 97 AND DREW OUR ATTENTION TO PARA 11 AT PAGE 102 WHEREIN THIS ISSUE HAS BEEN EXPLAINED. 1 2 . WE HAVE CA REFULLY CONSIDERED THE RIVAL SUBMISSIONS FINDINGS OF THE CIT(A) AS WELL AS THE ASSESSING OFFICER AND THE JUDGMENTS RELIED UPON BY BOTH THE PARTIES. THE ASSESSEE HAS MADE THE INVESTMENT IN SIX COMPANIES WHICH AGGREGATED TO RS. 5 363.08 CRORES AS ON 31 - 3 - 20 03 THE DETAIL OF WHICH HAS BEEN GIVEN AT PAGE 9 OF THE CIT(A) ORDER WHICH FOR SAKE OF READY REFERENCE IS REPRODUCED HEREIN BELOW : - SL.NO. NAME OF COMPANY AMOUNT (RS.IN CRORES) ASSESSMENT YEAR OF INVESTMENT A. CHENNAI PETROLEUM CORPORATION LIMITED 509. 33 2001 - 2002 B. BONGAIGAON REFINERIES & PETROCHEMICALS LIMITED 148.79 2001 - 2002 C. IBP COMPANY LIMITED 1 840.99 2002 - 2003 AND 2003 - 2004 D. OIL AND NATURAL GAS CORPORATION LIMITED 2 225.15 1999 - 2000 AND 2000 - 2001 E. GAIL (INDIA) LIMITED 245.04 1999 - 2000 AND 2000 - 2001 F. OTHERS INCLUDING ADVANCE FOR INVESTMENTS 393.78 TOTAL 5 363.08 IT HAS NOT BEEN DISPUTED BEFORE US THAT THE ASSESSEE HAS MADE THE INVESTMENT OF RS. 680 CRORES IN THE SHARES OF IBP COMPANY DURING THE RELEVANT YEAR AND OTHER INVESTMENTS HAVE BEEN MADE IN THE EARLIER YEARS WHEREIN NO DISALLOWANCE ON ACCOUNT OF INTEREST OR ANY OTHER EXPENSES HAVE BEEN MADE BY THE DEPARTMENT IN THE SCRUTINY PROCEEDINGS UNDER SECTION 143(3). AS PER THE SUMMARY OF FUNDS AVAILABLE ON RECORD THE ASSESSEES OW N FUNDS UPTO ASSESSMENT YEAR ITA NO S 1811 & 1814 / 0 7 16 2003 - 04 AGGREGATED TO RS. 18 927.99 CRORES AND THE PROFIT AFTER TAX BUT BEFORE DEPRECIATION IN PRESENT ASSESSMENT YEAR (I.E. 2003 - 2004) IS AT RS.7 771.17 CRORES. THE SUMMARY OF AVAILABILITY OF SURPLUS FUNDS AND PROFITS ARE UNDE R : - ASSESSM ENT YEAR OWNED FUND TOTAL OWNED FUNDS INVEST MENT AT YEAR END PROFIT AFTER TAX BUT BEFORE DEPRECIATI ON INCREASE/(D ECREASE) IN INVESTMENT SHARE CAPITAL RESERVE AND SURPLUS 1999 - 2000 389.31 11 879.52 12 268.83 5 567.88 3 290.90 (3 714.89) 2000 - 2001 778.67 13 286.08 14 064.75 3 148.85 4 394.30 (2 419.02) 2001 - 2002 778.67 15 192.30 15 970.97 3 443.73 3 924.04 294.88 2002 - 2003 778.67 14 532.36 15 311.03 9 721.72 4 264.23 *1 201.99 2003 - 2004 778.67 18 149.32 18 927.99 5 363.08 7 771.17 717. 36 12.1 FROM THE ABOVE IT IS CLEARLY EVIDENT THAT THE ASSESSEE HAS FAR M ORE SURPLUS FUNDS THAN THE AGGREGATED VALUE OF INVESTMENT MADE IN THE EQUITY SHARES OF SIX COMPANIES. BEFORE THE AUTHORITIES BELOW THE ASSESSEE HAS FURNISHED THE CASH FLOW STATEMEN T INTER ALIA SHOWING THAT MOST OF THE BORROWINGS HAVE BEEN REPAID IN THESE YEARS WHICH WERE MAINLY TAKEN FOR THE PURPOSE OF FINANCING VARIOUS PROJECTS AND FOR THE PURPOSE OF FINANCING IMPORTS OF CRUDE OIL. IN SUCH A SITUATION THE STRONG PRESUMPTION IS T HAT THE INVESTMENT IN THE SHARES HAVE BEEN MADE OUT OF ASSESSEES OWN SURPLUS FUNDS AND WITHOUT THERE BEING ANY MATERIAL ON RECORD TO SHOW THAT BORROWED FUNDS HAVE BEEN SPECIFICALLY DIVERTED FOR THE ACQUISITION OF SHARES ASSESSEES CONTENTION CANNOT BE BR USHED ASIDE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES POWER LTD (SUPRA) HAS UP HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND ON ACCOUNT OF OVERDRAFT OR LOAN ITA NO S 1811 & 1814 / 0 7 17 THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD HAVE BEEN MADE OUT OF INTEREST FREE FUNDS. THE RELEVANT OBSERVATIONS AND CONCLUSION DRAWN BY THE HON BLE HIGH COURT ARE AS UNDER : - 16. IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST - FREE FUNDS AVAIL - ABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. V. CIT [1997] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISI ON OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. [1982] 134 ITR 219 WHERE SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFI TS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE BUT CON SIDERING TH E FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEE T THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF TH E BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVER DRAFT AND/OR LOANS TAKEN THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED C ON SIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER OF INCOME - TAX (APPEALS) AND THE INCOME - TAX APPELLATE TRIBUNAL. 1 2.2 THUS IF WE FOLLOW THE PRINCIPLE LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE AFORESAID CASE THEN IT WOULD BE SEEN THAT IN RESERVE AND SURPLUS ACCOUNT ALONE THE ASSESSEE HAS FUND OF RS. 18 149.32 CRORES. LEAVE ALONE THE ASSESSEE S PROFIT DURING THE YEAR IS AT RS.7 771.17 CRORES WHICH IS FAR EXCESS THAN THE TOTAL INVESTMENT MADE BY THE ASSESSEE IN THE EQUITY SHARES OF SIX ITA NO S 1811 & 1814 / 0 7 18 COMPANIES WHICH AGGREGATES TO RS. 5 363.08 CRORES. THUS IT CAN BE VERY SAFELY PRESUMED THAT ALL THE INVESTMENTS IN THE SHARES HAVE BEEN MADE FROM ASSESSEES OWN FUNDS AND NOT BORROWED FUNDS AS HELD BY THE CIT(A) AS WELL AS BY THE AO . T HE CONTENTION OF THE LEARNED SENIOR COUNSEL THAT INVESTMENT HAVE BEEN MADE OUT OF ASSESSEES OWN FUND IS THUS ACCEPTED ON THE FACTS OF THE CASE AND THE PRESUMPTION RAISED BY THE ASSESSING OFFICER THAT INVESTMENT HAS BEEN MADE OUT OF BORROWINGS AND OWN FUND IS NOT TENA BLE EITHER IN LAW OR IN FACTS. ACCORDINGLY ASSESSEE SUCCEEDS ON THIS SCORE. 1 2.3 NOW COMING TO DISALLOWANCE OF RS.2 . 66 CRORES OUT OF ADMINISTRATIVE AND OTHER EXPENSES @2% WHILE DEDUCT ING FROM THE GROSS DIVIDEND IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANYTHING ON RECORD TO CONTROVERT THE CONTENTION OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE DIVIDEND INCOME. THE DISALLOWANCE OF NOTIONAL EXPENDITURE SIMPLY BASED ON PRESUMPTION CANNOT BE MADE SPECIFICALLY ON THE FACTS OF THE PRESENT CASE FIRSTLY THE INVESTMENT HAS BEEN MADE IN EQUITY SHARES OF SIX COMPANIES ONLY AND THAT TO BE AS PER THE DIRECTION OF THE GOVERNMENT OF INDIA SECONDLY FOR A HUGE COMPANY LIKE ASSESSEE THERE IS NO REQUIREMENT TO MANAGE PORTFOLIO OF SUCH I NVESTMENTS S EPARATELY. THE CASE LAWS RELIED UPON BY THE LEARNED SENIOR COUNSEL CLEARLY CLINCHES THE ISSUE ON FACTS OF THE CASE. IN THE CASE OF CIT VS. UNITED COLLIERIES LTD.(SUPRA) THE HONBLE CALCUTTA HIGH COURT OBSERVED AND HELD AS UNDER : - IN OUR V IEW ONLY THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE IN EARNING THE DIVIDEND I N COME SHALL BE DEDUCTED FROM ITA NO S 1811 & 1814 / 0 7 19 THE GROSS DIVIDEND INCOME. THERE IS NO SCOPE FOR ANY ESTIMATE OF EXPENDITURE BEING MADE AND NO NOTIONAL EXPENDITURE CAN BE ALLOCATED ALSO FOR THE PURPOSE OF EARNING INCOME UNLESS THE FACTS OF A PARTICULAR CASE WARRANT SUCH ALLOCATION. THIS PRINCIPLE HAS BEEN FURTHER REITERATED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GENERAL INSURANCE CORPORATION OF INDIA (SUPRA) WHEREIN THE IR LORDSHIPS HA VE OBSERVED AND HELD AS UNDER : - HELD THAT THE EXPENSES INCURRED BY THE ASSESSEE ON ACCOUNT OF SALARY PAID TO THE STAFF OF THE INVESTMENT DEPARTMENT WAS NOT DIRECTLY RELATABLE TO THE EARNING OF DIVIDEND INCOME FOR THE PURPOSE OF COMPUTING SPECIAL DEDUCTION UNDER SECTION 80M OF THE INCOME - TAX ACT 1961. 1 2.4 FROM THE RATIO LAID DOWN AS ABOVE IT IS CLEAR THAT ANY EXPENDITURE WHICH ARE NOT DIRECTLY RELATED TO EARNING OF DIVIDEND THERE IS NO SCOPE FOR MAKING ANY ESTIMATE OF EXPENDITURE OR A LLOCATION OF NOTIONAL EXPENDITURE. OUR VIEWS ARE ALSO SUPPORTED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. (SUPRA) . THUS RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE AFORESAID CASES WHICH ARE ALSO APPLICABLE IN THE PRESENT FACTS WE DO NOT FIND ANY REASON FOR APPORTIONMENT OF ANY KIND OF NOTIONAL ALLOCATION OF ADMINISTRATIVE AND OTHER EXPENSES. 12.5 IN VIEW OF OUR FINDING AS ABOVE WE HOLD THAT THE ASSESSEE IS ENTITLED FOR ENTIRE DEDUCTI ON FOR SUMS AMOUNTING TO RS. 497.38 CORRES AND CONSEQUENTLY DISALLOWANCE OF RS.236.28 CRORES STANDS DELETED. ACCORDINGLY GROUND NO. 22 IS ALLOWED. OTHER GROUNDS I.E. GROUND NOS. 23 TO 38 ARE OFF - SHOOT OF THE SAME ISSUE WHICH HAVE BEEN DECIDED BY US. THER EFORE THE Y ARE NOT SEPARATELY ADJUDICATED AND ARE ALSO TREATED AS ALLOWED. ITA NO S 1811 & 1814 / 0 7 20 1 3 . GROUND NO. 39 RELATES TO DISALLOWANCE OF SOFTWARE EXPENSES BY TREATING IT AS CAPITAL EXPENDITURE. THIS GROUND HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL AT THE TIME OF HEARI NG. THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 1 4 . GROUND NO. 40 RELATES TO DISALLOWANCE OF DEDUCTION OF EXPENDITURE OF RS. 7520.49 LACS ON ABANDONED PROJECTS CLAIMED BY THE ASSESSEE. THIS GROUND HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL AT THE TI ME OF HEARING. THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 1 5 . GROUND NO. 4 1 & 42 RELATE TO COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB. THIS GROUND HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL IN VIEW OF RETROSPECTIVE AMENDMENT IN SECTION 115JB WITH EFFECT FROM THE ASSESSMENT YEAR 2001 - 02. THUS THIS GROUND IS TREATED AS DISMISSED. 1 6 . GROUND NO. 43 & 44 ALSO RELATE TO COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB ON ACCOUNT OF DISALLOWANCE MADE UNDER SECTION 80M . LEARNED COUNSEL SUBMITTED THAT THIS GROUND HAS BECOME INFRUCTUOUS AS THE SAME HAS BEEN ALLOWED BY THE ASSESSING OFFICER IN HIS ORDER GIVING EFFECT DATED 12 - 3 - 2007. HENCE BOTH THESE GROUNDS ARE DISMISSED AS HAVING BEEN RENDERED INFRUCTUOUS. 1 7 . GROUND NO. 4 5 RELATES TO LEVY OF INTEREST UNDER SECTION 234C. LEARNED SENIOR COUNSEL SHRI DASTUR SUBMITTED THAT THE CIT(A) VIDE ITS ORDER DATED 24 - 4 - 2010 HAD DIRECTED THE ASSESSING OFFICER TO CHARGE INTEREST AS PER LAW BASED ON REVISED RETURN. HOWEVER THE ASSESSING ITA NO S 1811 & 1814 / 0 7 21 OFFICER IN ITS ORDER DATED 31 - 3 - 2010 GIVING EFFECT TO DIRECTION OF CIT(A) HAS COMPUTED THE INTEREST AT RS.31 47 07 365/ - AS AGAINST RS.26 62 91 046/ - I.E. AS PER THE REVISED RETURN. HE SUBMITTED THAT INTEREST UNDER SECTION 234C SHOULD HAVE BEEN COMPUTED AS PER THE REVISED RETURN AND NO T ORIGINAL RETURN . LEARNED CIT DR ADMITTED THAT SUCH CHARGING OF INTEREST HAS TO BE AS PER THE REVISED RETURN. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE INTEREST UNDER SECTION 234C AS PER THE REVISED RETURN. THUS THIS GROUND IS TREATED AS ALLOWED. 1 8 . GROUND NO. 4 6 & 47 RELATE TO CHARGING OF INTEREST UNDER SECTION 234B. THE CHARGING OF INTEREST UNDER SECTION 234B IN THIS CASE IS CONSEQUENTIAL IN NATURE AND THEREFORE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 1 9 . WE NOW TAKE UP DEP ARTMENT APPEAL I.E. ITA NO.1814/2007 . 20 . THE DEPARTMENT IN ITS GROUND NO.1 HAS CHALLENGED THE DELETION OF ADDITION MADE ON ACCOUNT OF CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH AMOUNTING TO RS.1937.35 LACS ON THE GROUND THAT SIMILAR DECISION OF CIT(A) FOR THE ASSESSMENT YEAR 2001 - 02 & 2002 - 03 HAVE NOT BEEN ACCEPTED BY THE DEPARTMENT . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE IN HIS COMPUTATION OF INCOME HAS MADE A CLAIM OF DEDUCTION OF RS. 39 43 30 473/ - UNDER SECTION 35 AS SCIENTIFIC RESEARCH EXPE NDITURE . THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FILE ITA NO S 1811 & 1814 / 0 7 22 DETAILS WHICH FORMS PART WORK - IN - PROGRESS. THE ASSESSEE GAVE THE FOLLOWING SUBMISSIONS : - WE SUBMIT THAT OUT OF TOTAL CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH AN EXPENDITURE OF RS. 19 37 34 47 3/ - IS INCURRED DURING YEAR AND FORMING PART OF CAPITAL WORK IN PROGRESS AS ON 31 ST MARCH 2003. IN THIS CONNECTION WE ARE TO SUBMIT THAT THE EXPENDITURE INCURRED DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2002 - 03 ON WORK IN PROGRESS IN RESPEC T OF SCIENTIFIC RESEARCH IS ALLOWABLE EXPENDITURE UNDER SECTION 35. IT IS FURTHER SUBMITTED THAT THE TEST FOR ALLOWANCE OF CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH UNDER SECTION 35 IS INCURRENCE OF SUCH EXPENDITURE. IN THIS CONNECTION THE RELIANCE IS PL ACED ON THE FOLLOWING DECISIONS. A) EWAC ALLOYS LTD. 2 ITD 651 B) HMT LTD 189 ITR 235 (KAR) C) HMT LTD (NO.1) 203 ITR 811 (KAR) D) BELPAHAR REFRACTORIES LTD V CIT 207 ITR 144 E) CIT V RANE BRAKE LINING LTD 255 ITR 395 (MAD) WITHOUT PREJUDICE TO THE ABO VE WE ARE TO SUBMIT THAT IF SUCH CAPITAL EXPENDITURE DEBITED TO CWIP IS DISALLOWED THE EXPENDITURE CAPITALIZED DURING THE YEAR OUT OF CWIP SHOULD BE ALLOWED AS DEDUCTION. THE AMOUNT CAPITALIZED DURING THE YEAR OUT OF CWIP IS RS.24 84 63 907/ - . 20 .1 THE ASSESSING OFFICER HOWEVER HELD THAT THE CLAIM UNDER SECTION 35 WAS RESTRICTED IN THE EARLIER YEARS ON THE GROUND THAT TILL THE ASSETS COME S INTO EXISTENCE IT CANNOT BE SAID TO BE AN EXPENDITURE INCURRED FOR THE PURPOSE OF THAT ASSET. IN THE PRECEDING Y EARS THE EXPENDITURE IN RESPECT OF WORK - IN - PROGRESS WAS NOT ALLOWED AS A DEDUCTION. THEREFORE HE DISALLOWED THE SAID SUM OF RS.19 37 34 946/ - AS THE ASSET WAS NOT IN EXISTENCE. 20.2 BEFORE THE CIT(A) IT WAS SUBMITTED THAT ONCE THE CAPITAL EXPENDITURE IN CURRED ON SCIENTIFIC RESEARCH EXPENDITURE RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE THE SAME IS ALLOWABLE AS DEDUCTION. IT IS NOT MATERIAL THAT THE AMOUNT IN QUESTION WAS APPEARING ITA NO S 1811 & 1814 / 0 7 23 AS WORK IN PROGRESS OR FOR THAT MATTER IT WAS PENDING CAPITALIZAT ION. LEARNED CIT(A) FOLLOWING THE EARLIER ORDER DELETED THE SAME. 20 .3 BEFORE US LEARNED CIT DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER WHEREAS LEARNED SENIOR COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE ASSESSMENT YEAR 2001 - 02 THE CIT(A) HA S DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING MUCH EARLIER YEARS ORDER. OTHERWISE ALSO HE SUBMITTED THAT THIS ISSUE HAS NOW BEEN SETTLED BY VARIOUS HIGH COURTS WHERE THE HON BLE COURTS HAVE INTERPRETED THAT IF THE ASSESSEE INCURS CAPITAL EXPEND ITURE FOR THE PURPOSE OF SCIENTIFIC RESEARCH DURING THE RELEVANT PERIOD IT CANNOT BE DEPRIVED OF THE BENEFIT OF THE DEDUCTION UNDER SECTION 35 EVEN IF THE ASSESSEE HAS NOT BROUGHT INTO THE EXISTENCE SUCH ASSET FOR WHICH IT WAS USED FOR RESEARCH AND DEVEL OPMENT. HE REFERRED AND RELIED UPON THE VARIOUS JUDGMENTS MAINLY IN THE CASE OF C IT VS . RANE BRAKE LININGS LTD. (2002) 255 ITR 395 (MAD) AND GUJARAT ALUMINUM EXTRUSIONS PVT. LTD. (2003) 263 ITR 453 (GUJ.) 21. AFTER CAREFULLY CONSIDERING THE RIVAL SUBM ISSIONS AND ALSO PERUSING THE JUDGMENTS RELI ED UPON BY THE LEARNED COUNSEL AND FROM A BARE READING OF SECTION 35 (1)(IV) READ WITH SECTION 35 (2)(IA) IT IS QUITE EVIDENT FROM THE LANGUAGE OF THE SECTIONS THAT ANY EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFI C RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE AFTER THE 31ST DAY OF MARCH 1967 THE WHOLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR THEN SUCH ITA NO S 1811 & 1814 / 0 7 24 EXPENDITURE ON SCIENTIFIC RESEARCH IS TO BE ALLOWED IN THE YEAR IN WHICH SUCH A N EXPENDITURE HAS BEEN INCURRED. THE HONBLE MADRAS HIGH COURT IN THE CASE OF RANE BRAKE LININGS LTD (SUPRA) HAS EXPLAINED THE ADMISSIBILITY OF THIS DEDUCTION IN THE FOLLOWING MANNER : - AS PER SECTION 35(1)(IV) OF THE INCOME - TAX ACT IN RESPECT OF ANY EXP ENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SUCH DEDUCTION AS MAY BE ADMISSIBLE UNDER THE PROVISIONS OF SUB - SECTION (2) SHALL BE ALLOWED. SECTION 35(2)(IA) PROVIDES THAT IN A CASE WHERE SUCH CAP ITAL EXPENDITURE IS INCURRED AFTER MARCH 31 1967 THE WHOLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR SHALL BE DEDUCTED FOR THAT PREVIOUS YEAR. THE SECTION REFERS ONLY TO CAPITAL EXPENDITURE AND DOES NOT FURTHER REQUIRE THAT THE ASSET BR OUGHT INTO EXISTENCE BY INCURRING SUCH EXPENDITURE SHOULD HAVE BEEN COMPLETE IN ALL RESPECTS. THE DEDUCTION IS FOR THE EXPENDITURE TO THE EXTENT INCURRED. EXPENDITURE INCURRED ON ON - GOING CON STRUCTION OF A BUILDING DESIGNED FOR HOUSING THE RESEARCH WING I S CLEARLY CAPI - TAL EXPENDITURE AND IS DEDUCTIBLE UNDER THIS PROVISION. 21.1 IN THE CASE OF GUJARAT ALUMINUM EXTRUSIONS PVT. LTD (SUPRA) ALSO THE SAME PRINCIPLE HAS BEEN REITERATED. THUS THE ENTIRE EXPENDITURE OF SCIENTIFIC RESEARCH AMOUNTING TO RS. 1 9 37.35 LACS HAS RIGHTLY BEEN DELETED BY THE LEARNED C IT(A) . ACCORDINGLY GROUND NO. 1 RAISED BY THE DEPARTMENT STANDS DISMISSED. 22 . THE DEPARTMENT HAS RAISED GROUND NO. 2 AS UNDER : - 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW T HE LEARNED CIT(A) HAS ERRED IN DIRECTING THE A.O. TO ALLOCATE HEAD EXPENSES BEFORE ALLOWING DEDUCTION U/S 80 IB BY IGNORING THE FACT THAT THE ASSESSEE HAS ITSELF SHOWN BOOK PROFIT DERIVED FROM MARKETING DIVISION OF LUBE PLANT AND THE PROFIT FROM MARKETING DIVISION NOT ELIGIBLE FOR DEDUCTION U/S 80IB . 22.1 FROM THE PERUSAL OF THE CIT(A) ORDER IT IS SEEN THAT THE CIT(A) HAS DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTION UNDER SECTION 80IB AFTER ALLOCATING THE HEAD OFFICE EXPENSES AS DONE IN A.Y.200 4 - 05. ITA NO S 1811 & 1814 / 0 7 25 THE RELEVANT OBSERVATION OF THE CIT(A) GIVEN IN PARA 5.2 & 5.3 ARE REPRODUCED HEREIN BELOW : - 5.2 I HAVE CONSIDERED THE MATTER. FROM THE TAX AUDIT REPORT RETURN OF INCOME AS WELL AS LETTER DATED 29 AUGUST 2005 TO AO IT IS OBSERVED THAT THE APPELLA NT HAS MADE CLAIM FOR DEDUCTION UNDER SECTION 80 IB OF RS.1 113.83 LACS IN RESPECT OF LUBE PLANT. HOWEVER THE AO IN THE ASSESSMENT ORDER HAS NOT ALLOWED DEDUCTION FOR THE SAME. THE AO HAS ALSO NOT GIVEN ANY REASONS FOR NOT ALLOWING THE APPELLANTS CLAIM F OR DEDUCTION UNDER SECTION 80IB IN RESPECT OF LUBE PLANT. FURTHER AO HAS HIMSELF ALLOWED DEDUCTION UNDER SECTION 80IB IN THE ASSESSMENT YEAR 2004 - 20 05 . 5.3 IN VIEW OF THE ABOVE I DIRECT AO TO ALLOW DEDUCTION UNDER SECTION 80IB. HOWEVER THE AO SHOULD AL LOCATE HEAD OFFICE EXPENSES AS DONE IN A.Y. 2004 - 05 BEFORE ALLOWING DEDUCTION U/S.80 - IB ON THE LUBE PLANT. THUS THIS GROUND OF APPEAL IS PARTLY ALLOWED. 22.2 THE ASSESSING OFFICER HAS HELD THAT THE PROFITS ON MARKETING DIVISION CANNOT BE CLAIMED AS DEDU CTION UNDER SECTION 80 - IB . THE RELEVANT OBSERVATION AND FINDING APPEARS FROM THE PAGES 3 TO 7 OF THE ASSESSMENT ORDER. HOWEVER THIS FINDING OF THE ASSESSING OFFICER IS RELEVANT FOR GROUND NO. 3 WHICH HAS BEEN RAISED BY THE DEPARTMENT. LEARNED CIT DR RELIE D UPON THE REASONING GIVEN BY THE ASSESSING OFFICER. ON THE OTHER HAND LEARNED SENIOR COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT IT IS NOT CLEAR AS TO WHAT IS THE GRIEVANCE RAISED BY THE DEPARTMENT IN THIS GROUND. MOREOVER HE SUBMITTED TH AT THE CIT(A) HAS RIGHTLY GIVEN A DIRECTION THAT DEDUCTION UNDER SECTION 80IB CAN BE ALLOWED AFTER ALLOCATION OF HEAD OFFICE EXPENSES AND THERE IS NOTHING MENTINED IN THE GROUND ABOUT SUCH A DIRECTION. ITA NO S 1811 & 1814 / 0 7 26 23. AFTER CAREFULLY GOING THROUGH THE ASSESSMENT ORDER AS WELL AS THE CIT(A) ORDER WE FIND THAT IT IS NOT CLEAR AS TO WHAT IS THE GRIEVANCE OF THE DEPARTMENT IN GROUND NO. 2 BECAUSE THE ISSUE WHICH HAS BEEN DISCUSSED BY THE ASSESSING OFFICER HAS ALREADY BEEN RAISED IN GROUND NO. 3 WHICH WOULD BE ADJUDICATED SE PARATELY . IN ANY CASE WE DO NOT FIND ANY REASON TO DEVIATE FROM THE FINDING GIVEN BY THE CIT(A) IN PARA 5.2 & 5.3 . ACCORDINGLY THIS GROUND IS TREATED AS DISMISSED. 2 4 . GROUND NO. 3 RAISED BY THE DEPARTMENT READS AS UNDER : - 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW THE LEARNED CIT(A) HAS ERRED IN RESTRICTING THE DEDUCTION U/S 80IB IN RESPECT OF THREE REFINERY PLANTS BY IGNORING THE FACT THAT THE DECISION GIVEN BY THE LD. CIT(A) ON THE SAME ISSUE FOR ASSESSMENT YEAR 2001 - 02 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND FURTHER APPEAL HAS BEEN FILED. 2 4 .1 THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 80 - I B IN RESPECT OF THREE REFINERY PLANTS ON THE GROUND THAT THE PROFIT FROM THE MARKETING DIVISION CAN NOT BE HELD TO BE DERIVED FROM MANUFACTURING OPERATION OF THE INDUSTRIAL UNIT. BEFORE THE ASSESSING OFFICER IT WAS CONTENDED BY THE ASSESSEE THAT MARKETING DIVISION PROFIT IS PART OF INDUSTRIAL UNIT PROFIT ONLY T HEREFORE THE DEDUCTION ON MARKETING DIVIS ION PROFIT SHOULD BE ALLOWED. IT WAS FOR THE ADMINISTRATIVE PURPOSES THAT ASSESSEE HAS DIVIDED HIS BUSINESS FUNCTIONS INTO DIFFERENT DIVISIONS AND THE PROFITS ARE ACTUALLY FROM INDUSTRIAL UNDERTAKING ONLY . HOWEVER THE ASSESSING OFFICER REJECTED THE CONTEN TION OF THE ASSESSEE AND HAS GIVEN A DETAIL REASONING FOR SUCH A REJECTION OF CLAIM FROM PAGES 3 TO 7. ITA NO S 1811 & 1814 / 0 7 27 24.2 BEFORE THE LEARNED CIT(A) IT WAS SUBMITTED THAT THE PROFIT FROM MARKETING DIVISION WAS DIRECTLY RELATED TO THE MANUFACTURING ACTIVITIES AND SELLIN G OF MANUFACTURING PRODUCT COULD NOT BE TREATED AS ACTIVITY OTHER THAN THAT OF THE INDUSTRIAL ACTIVITIES. IT WAS FOR THE ADMINISTRATIVE REASONS THAT VARIOUS FUNCTIONS WERE DIVIDED INTO DIFFERENT DIVISIONS LIKE REFINERY DIVISION PIPE LINE DIVISION MARKET ING DIVISION ETC. THEREFORE MERELY THERE BEING A SEPARATE PROFIT CALCULATION MADE FROM MANUFACTURING AND MARKETING DIVISION COULD NOT DISENTITLE THE ASSESSEE COMPANY THE BENEFIT OF DEDUCTION UNDER SECTION 80IB IN RESPECT OF PROFIT UNDER THE MARKETING DIVI SION. RELIANCE WAS ALSO PLACED TO THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN PETROLEUM CORPORATION LIMITED PASSED IN INCOME - TAX REFERENCE NO. 57 OF 2002 WHEREIN THE FINDING OF THE TRIBUNAL HAS BEEN UPHELD THAT MANUFACTURING PROCES SING AND THE MARKETING ARE PART OF THE INDUSTRIAL UNDERTAKING ONLY . LEARNED CIT(A) PARTLY ALLOWED THE ASSESSEES CONTENTION AFTER OBSERVING AND HOLDING AS UNDER : - 8.5 THIS ISSUE WAS AN ISSUE BEFORE MY PREDECESSORS FOR THE A.Y. 2001 - 02 AND 2002 - 2003 AND F OR THE REASONS RECORDED THEREIN THE APPELLANTS CLAIM FOR DEDUCTION U/S80IB WAS ALLOWED IN RESPECT OF MARKETING DIVISION OF INDUSTRIAL UNITS. AS THERE BEING NO CHANGE IN FACTS OF THE CASE AND IN LAW AND RESPECTFULLY FOLLOWING THE DECISION OF THE BOMBAY HI GH COURT REFERRED TO ABOVE APPELLANTS CLAIM FOR THE DEDUCTION U/S80IB IN RESPECT OF PROFIT OF THE MARKETING DIVISIONS IN RESPECT OF EACH OF INDUSTRIAL UNITS. HOWEVER THE DEDUCTION SHOULD BE ALLOWED KEEPING IN VIEW THE DIRECTIONS OF FURTHER VERIFICATION GIVEN BY MY PREDECESSOR IN THE APPELLATE ORDER FOR A.Y.2002 - 2003. THUS THIS GROUND OF APPEAL IS PARTLY ALLOWED. 2 4.3 LEARNED CIT DR RELIED UPON THE REASONING GIVEN BY THE ASSESSING OFFICER. LEARNED SENIOR COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SUBM ITTED THAT THIS ISSUE HAS BEEN DECIDED BY THE ITAT ITA NO S 1811 & 1814 / 0 7 28 MUMBAI BENCH IN THE CASE OF HINDUSTAN PETROLEUM CORPORATION L TD. 35 TTJ 4 00 WHEREIN IT HAS BEEN OBSERVED AND HELD AS UNDER : - 30. WE HAVE HEARD THE PARTIES AT LENGTH AND WE ARE OF THE OPINION THAT THE F INDING ARRIVED AT BY THE CIT(A) WAS NOT PROPER IN THE EYES OF LAW. IN FACT THE VERY INTENTION OF INTRODUCING THIS AMENDMENT WAS TO STIMULATE INDUSTRIAL GROWTH AND ECONOMIC DEVELOPMENT AND WITH A VIEW TO ENCOURAGE GENERATION OF INTERNAL RESOURCES FOR FINA NCING INVESTMENT IN AN INDUSTRIAL UNDERTAKING. THE VERY LANGUAGE OF S. 32A PROVIDES THAT THIS INVESTMENT IS NOT FOR MANUFACTURE OR PRODUCTION OF GOODS BUT IT MUST BE FOR THE BUSINESS OF MANUFACTURE AND PRODUCTION OF GOODS ETC. THE BOMBAY BENCH OF THE TRIB UNAL IN THE APPEAL CITED SUPRA HAD HELD THAT THE BUSINESS OF THE ASSESSEE COMPANY WAS A SINGLE INTEGRAL AND INDIVISIBLE BUSINESS OF MANUFACTURE AND PRODUCTION OF THE MINERAL OIL AND THAT IT WAS ONLY FOR THE SAKE OF FACILITY THAT IT HAD CREATED DIVISIONS LIKE MANUFACTURING AND MARKETING DIVISIONS IT IS ENCOURAGED IN LAW TO DISSECT ACTIVITY OF AN INDUSTRIAL UNDERTAKING INTO MANUFACTURING AND MARKETING IN A CASE WHERE SUCH INDUSTRIAL UNDERTAKING CARRIES ON AN INTEGRAL ACTIVITY OF BOTH MANUFACTURE AND MARKET ING. MARKETING OF PRODUCT IS NOTHING BUT AN INDUSTRIAL CONSEQUENTIAL ACTIVITY OF THE MANUFACTURING PROCESS AND THUS IT FORMS PART OF THE INDUSTRIAL INTEGRAL ACTIVITY. MANUFACTURING ACTIVITY IS NOT CARRIED ON FOR THE SAKE OF MANUFACTURE AND DUMPING THE MA NUFACTURED PRODUCTS IN THE GODOWNS FOR ALL TIME TO COME. THE BUSINESS CANNOT BE SAID TO HAVE BEEN COMPLETED NO SOONER THE MANUFACTURE IS COMPLETED OR PRODUCTION IS ACHIEVED. BUSINESS IS ALWAYS CARRIED OUT FOR THE PURPOSE OF EARNING PROFIT AND THE SAID PUR POSE WILL BE ACHIEVED ONLY WHEN THE MANUFACTURED ITEMS ARE PROPERLY MARKETED AND SOLD OUT. THE BUSINESS OF MANUFACTURE THEREFORE INVOLVES NOT ONLY THE ACTUAL MANUFACTURING PROCESS BUT ALSO INVOLVES THE TRANSPORT OF THE MANUFACTURED PRODUCTS TO THE SELLI NG CENTRES AND THE ACTUAL SALE THEREOF. THE ENTIRE ACTIVITY FROM THE INITIAL STAGE OF THE COMMENCEMENT OF THE MANUFACTURE TILL THE FINAL STAGE OF SELLING THE PRODUCTS AND RECOVERING THE PRICE CONSTITUTES ONE BUSINESS AND THE ENTIRE ORGANSATION AND THE VARI OUS PROCESSES THROUGH WHICH A BUSINESS HAS TO PASS CANNOT BE TREATED IN ISOLATION BUT IT FORMS ONE BUSINESS ORGANISATION. IF THE ASSESSEE COMPANY WHICH CARRIES BUSINESS ON A GIGANTIC SCALE AND FOR THE SAKE OF CONVENIENCE OF ACCOUNT DIVIDES ITSELF INTO SE VERAL DEPARTMENTS OR DIVISIONS IT CAN NOT BE SAID THAT THE DIFFERENT DIVISIONS OR THE DEPARTMENTS ARE INDEPENDENT UNITS OR CAN BE TREATE D AS DIFFERENT ORGANISATIONS. HENCE TAKING THE ENTIRE FACTS AS THEY STAND AND ALSO THE ABOVESAID ORDER OF THE BOMBAY BENCH OF THE TRIBUNAL WE HOLD THAT BOTH THE DIVISIONS OF THE ASSESSEE COMP ANY WERE PART OF THE SAME ORGANISATION AND IT WAS ONE BUSINESS. ANY PLANT OR MACHINERY INSTALLED IN ONE OF THE DIVISIONS IS MEANT FOR THE BUSINESS OF THE ENTIRE UNIT AND THUS ENTI TLED TO INVESTMENT ALLOWANCE UNDER S. 32A. THE ORDER TO THE CONTRARY PA SSED BY THE CIT(A) IS SET ASIDE AND THIS ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF TH E ASSESSEE ITA NO S 1811 & 1814 / 0 7 29 HE SUBMITTED THAT THIS JUDGMENT HAS SINCE BEEN APPROVED BY THE HON BLE HIGH COURT ALSO IN INCOME - TAX REFERENCE NO.57/2002 VIDE ORDER DATED 27 - 7 - 2006 THE COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK . 2 5. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS AND ALSO GOING THROUGH THE FINDINGS OF THE ASSESSING OFFICER AS WELL AS CIT(A) WE FI ND THAT THIS ISSUE STANDS SQUARELY COVERED BY THE AFORESAID DECISION IN THE CASE OF HINDUSTAN PE TROLEUM CORPORATION LTD. (SUPRA) PASSED BY THE ITAT MUMBAI BENCH WHICH HAS BEEN SPECIFICALLY CONFIRMED BY THE HONBLE BOMBAY HIGH COURT ALSO . THUS RESPECTFULLY FOLLOWING THE SAME WE DO NOT FIND ANY MERIT IN THE GROUND RAISED BY THE DEPARTMENT AND ACCORDINGLY THE SAME IS DISMISSED. 2 6 . IN GROUND NO. 4 THE DEPARTMENT HAS CHALLENGED THE DELETION OF ENABLING FACILITY EXPENSES OF RS. 1 94 00 000/ - WHICH WAS DISALLOW ED BY THE ASSESSING OFFICER ON THE GROUND THAT IT IS CAPITAL IN NATURE . THE ASSESSEE HAS DEBITED A SUM OF RS. 1.94 CRORES IN OTHER HEAD EXPENSES WHICH WAS CLAIMED AS REVENUE EXPENDITURE. IN RESPONSE TO THE SHOW CAUSE NOTICE BY THE ASSESSING OFFICER IT WA S SUBMITTED THAT THESE EXPENDITURES ARE ON ACCOUNT OF SERVICE CONNECTION CHARGES CONSTRUCTION OF ROAD BRIDGE ETC. BY INCURRING SUCH EXPENDITURE THE ASSESSEE HAS NOT INCURRED THE ENDURING BENEFIT NOR ANY ASSET HAS BEEN CREATED TO THE ASSESSEE . IT WAS PURE LY FOR PROCURING APPROPRIATE FACILITY TO CARRY OUT ITS BUSINESS EFFECTIVELY AND PROFITABLY . IN SUPPORT OF ITS ITA NO S 1811 & 1814 / 0 7 30 CONTENTION VARIOUS DECISION S WERE RELIED UPON A LIST OF WHICH HAS BEEN GIVEN AT PAGE 7 OF THE ASSESSMENT ORDER. HOWEVER THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION AND DISALLOWED THE SAME ON THE GROUND THAT THE SAME IS CAPITAL EXPENDITURE. LEARNED CIT(A) FOLLOWING THE EARLIER YEARS ORDER PASSED BY HIS PREDECESSOR DELETED THE ADDITION AND HELD THAT THE SAME IS REVENUE EXPENDITURE. 26. 1 LEARNED DR RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER WHEREAS THE LEARNED SENIOR COUNSEL RELIED UPON THE FOLLOWING DECISIONS : - (I) CIT V. MADRAS AUTO SERVICES (P) LTD. 233 ITR 468 (SC) (II) CIT V. ASSOCIATED CEMENT COMPANIES LTD. 172ITR 25 7 (SC) (III) CIT V. BOMBAY DYEING & MFG. CO. LTD. 219 ITR 52 (SC) (IV) LAKSHMIJI SUGAR MILLS CO. P. LTD. V. CIT 82ITR 376 (SC) (V) L.H. SUGAR FACTORY AND OIL MILLS (P.) LTD. V. CIT 125 ITR 293 (SC) (VI) CIT V. NATIONAL MACHINERY MANUFACTURES LTD. 191 ITR 4 83 (BOMHC) (VII) CIT V. EXCEL INDUSTRIES LTD. 122 ITR 995 (BOM ) ( VI II) NATIONAL ORGANIC CHEMICALS INDUSTRIES LTD. VS. CIT 203 ITR 410 (BOM HC) ( IX ) CIT VS. PANBARI TEA COMPANY LIMITED 151 ITR 726 (P&H HC) (X) CIT VS. ANAND GUM INDUSTRIES 154 ITR 680 (RAJ HC) (XI) CIT VS JANAK STEEL TUBES (P.) LIMITED 182 ITR 92 PUNJ.HC) (XII) CIT VS. BONGAIGAON REFINERY & PETRO CHEMICALS LTD. 222 ITR 208 (GAU HC). HE SUBMITTED THAT IN ALL THESE JUDGMENTS IT HA S BEEN CONSISTENTLY HELD THAT CONSTRUCTION OF ROAD BRIDGES ET C. FOR ENABLING ASSESSEE TO CARRY OUT ITS ACTIVITIES EFFECTIVELY ARE TO BE TREATED AS REVENUE EXPENDITURE. 2 7. AFTER GOING THROUGH THE FINDINGS GIVEN BY THE AUTHORITIES BELOW AND THE JUDGMENTS RELIED UPON BY THE LEARNED COUNSEL WE FIND THAT IN ALL THE J UDGMENTS THE BASIC PRINCIPLE LAID DOWN IS THAT IF THE EXPENDITURE HAS BEEN INCURRED FOR RUNNING OF THE BUSINESS EFFICIENTLY WITH A VIEW TO ITA NO S 1811 & 1814 / 0 7 31 HAVE MORE PROFIT WITHOUT GETTING ENDURING BENEFIT TO THE ASSESSEE THE SAME IS TO BE TREATED AS THE REVENUE EXPENDITU RE. IN ALL THESE CASES THE HON BLE SUPREME COURT HAS HELD THAT IF THE ASSETS CREATED BY THE ASSESSEE D O NOT BELONG TO THE ASSESSEE BUT THE ASSESSEE GOT THE BUSINESS ADVANTAGE BY USING THE SAME THEN T HE SAME HAS TO BE TREATED AS REVENUE EXPENDITURE. THIS HAS BEEN SPECIFICALLY HELD SO IN THE CASE OF L.H. SUGAR FACTORY AND OIL MILLS (P.) LTD. V. CIT 125 ITR 293 (SC) ; LAKSHMIJI SUGAR MILLS CO. P. LTD. V. CIT 82ITR 376 (SC) ; CIT V. ASSOCIATED CEMENT COMPANIES LTD. 172ITR 257 (SC) AND CIT V. MADRAS AUTO SERVIC ES (P) LTD. 233 ITR 468 (SC) . IN THE PRESENT CASE ALSO IT HAS NOT BEEN DISPUTED THAT ASSETS CREATED BY SPENDING THE SAID AMOUNT FOR CONSTRUCTION OF ROAD BRIDGES ETC. D O NOT BELONG TO THE ASSESSEE . B UT BY INCURRING THE EXPENDITURE THE ASSESSEE IS GETTING BUSINESS ADVANTAGE AND GETTING PROPER FACILITIES TO CARRY OUT ITS BUSINESS ACTIVITIES EFFECTIVELY. THUS UNDER THESE FACTS AND CIRCUMSTANCES THE CIT(A) HAS RIGHTLY DELETED THE SAID ADDITION BY TREAT ING IT AS REVENUE EXPENDITURE. HENCE THIS GROUND HAS NO MERIT AND IT IS ACCORDINGLY DISMISSED. 2 8 . GROUND NO. 5 RELATES TO DISALLOWANCE OF INTEREST EXPENSES OF RS.277 50 49 322/ - ON ACCOUNT OF CONSTRUCTION PERIOD INTEREST. AS ADMITTED BY BOTH THE PARTIES THIS ISSUE NOW STANDS COVERED BY THE DECISION OF HON BL E SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD. 298 ITR 194 (SC) WHEREIN IT HAS BEEN CATEGORICALLY HELD THAT PROVISO INSERTED IN SECTI O N 36(1)(III) BY FINANCE ACT 2003 WILL ITA NO S 1811 & 1814 / 0 7 32 APPLY PERSPECTIVELY FROM 1 ST APRIL 2004 AND NOT BEFORE THAT I.E. A .Y.2003 - 04 . THEREFORE THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION UNDER SECTION 36(1)(III) PRIOR TO ITS AMENDMENT IN RELATION TO THE MONEY BORROWED FOR PURCHASE OF MACHINERY EVEN THOUGH THE ASSESSEE HAD NOT USED MACHINERY IN THE YEAR OF BORROWING. THUS RESPECTFULLY FOLLOWING THE SAID DECISION WE HOLD THAT THE ASSESSEE IS ENTITLED FOR INTEREST FOR THE CONSTRUCTION PERIOD IN THE PRESENT ASSESSMENT YEAR I.E. 2003 - 2004 . THUS GROUND NO. 5 STANDS DISMISSED. 2 9 . IN THE RESULT APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE DEPARTMENT IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 2 ND D AY OF NOV . 2012. 2 ND NOV . 2012 SD/ - SD/ - ( ) ( P.M.JAGTAP ) ( ) ( AMIT SHUKLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMB ER MUMBAI ; DATED : 2 ND NOV ./ 2012. /PKM PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X MUMBAI. 4. / CIT 5. / DR ITAT MUMBAI 6. GUARD FILE. //TRUE COPY// / BY ORDER ( DY./ASSTT. REGISTRAR) / ITAT MUMBAI