DCIT, Cir.-8,, Pune v. Thermax Ltd.,, Pune

ITA 276/PUN/2006 | 2002-2003
Pronouncement Date: 30-11-2017 | Result: Partly Allowed

Appeal Details

RSA Number 27624514 RSA 2006
Assessee PAN AAACT3910D
Bench Pune
Appeal Number ITA 276/PUN/2006
Duration Of Justice 11 year(s) 8 month(s) 14 day(s)
Appellant DCIT, Cir.-8,, Pune
Respondent Thermax Ltd.,, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2017
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-11-2017
Date Of Final Hearing 29-11-2017
Next Hearing Date 29-11-2017
First Hearing Date 18-02-2008
Assessment Year 2002-2003
Appeal Filed On 16-03-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE BEFORE MS. SUSHMA CHOWLA JM AND SHRI ANIL CHATURVEDI AM . / ITA NO.259/PUN/2006 / ASSESSMENT YEAR : 2002-03 THERMAX LIMITED /APPELLANT THERMAX HOUSE 4 MUMBAI PUNE ROAD SHIVAJI NAGAR PUNE 411 005 PAN: AAACT3910D VS. THE ASST. COMMISSIONER OF INCOME TAX . / RESPONDENT CIRCLE-8 AKURDI PUNE . / ITA NO.276/PUN/2006 / ASSESSMENT YEAR : 2002-03 THE DEPUTY. COMMISSIONER OF INCOME TAX CIRCLE-8 AKURDI PUNE /APPELLANT VS. THERMAX LIMITED THERMAX HOUSE 4 MUMBAI PUNE ROAD SHIVAJI NAGAR PUNE 411 005 / RESPONDENT PAN: AAACT3910D / APPELLANT BY : SHRI H.P. MAHAJANI & SHRI R.D. ONKAR / RESPONDENT BY : SHRI A.S. SINGH & SHRI RAJEEV KUMAR MS. / DATE OF HEARING : 29.11.2017 / DATE OF PRONOUNCEMENT: 30.11.2017 / ORDER PER ANIL CHATURVEDI AM: 1. THESE CROSS APPEALS FILED BY ASSESSEE AND REVENUE EM ANATE OUT OF ORDER OF COMMISSIONER OF INCOME-TAX(A)-III PUNE DATED 30.11.2005 FOR ASSESSMENT YEAR 2002-03. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON R ECORD ARE AS UNDER :- ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BU SINESS OF MANUFACTURING AND SELLING OF STEAM BOILERS WATER EXCHANGER S WATER TREATMENT CHEMICALS ETC. ASSESSEE FILED ITS RETURN OF INCOM E FOR A.Y. 2002-03 ON 30-10-2002 DECLARING TOTAL INCOME OF RS.12 12 3 6 490/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE A SSESSMENT WAS FRAMED U/S.143(3) VIDE ORDER DATED 31-03-2005 AND THE TO TAL INCOME WAS DETERMINED AT RS.29 23 93 033/-. AGGRIEVED BY THE OR DER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO VIDE O RDER DT.30- 11-2005 IN (APPEAL NO.PN/CIT(A)-III/CIR-8/39/05-06) GRANT ED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD. CIT (A) ASSESSEE AND REVENUE ARE BOTH IN APPEAL BEFORE US. 3. THE GROUNDS RAISED BY THE ASSESSEE IN ITA NO.259/P UN/2006 READS AS UNDER : BEING AGGRIEVED BY THE ORDER PASSED BY THE CIT(A) I II PUNE YOUR APPELLANT SUBMITS THE FOLLOWING GROUNDS OF APPEAL F OR YOUR SYMPATHETIC CONSIDERATION. 1. EXPENDITURE IN RELATION TO DIVIDEND ETC. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION O F THE AO OF NOTIONALLY ATTRIBUTING EXPENDITURE TO DIVIDEND AND INTEREST-FR EE INCOME REJECTING THE CONTENTION OF THE APPELLANT THAT NO SUCH EXPEND ITURE WAS IN FACT INCURRED FOR EARNING SUCH INCOME AND ACCORDINGLY NO NE WAS SO ATTRIBUTABLE. THE LEARNED CIT(A) ALSO ERRED IN OBSERVING THAT THE APPELLANT HAD FAILED TO FURNISH THE RELEVANT INFORMATION IN THIS CONNECT ION. IN ANY EVENT THE ESTIMATE MADE BY THE LEARNED CIT( A) @ 2.5% OF SUCH INCOME IS EXCESSIVE AND UNREALISTIC. 2. LOSS FUNDING OF SUBSIDIARY ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E AO OF REJECTING THE CLAIM OF THE APPELLANT FOR DEDUCTION OF LOSS OF RS. 160.14 LACS SUFFERED BY A SUBSIDIARY OF THE APPELLANT BUT FUNDED BY THE APPELLANT AS PER CONTRACTUAL OBLIGATIONS. THE LEARNED CIT(A) ERRED IN ALSO OBSERVING THAT THE SAID GROUND IS NOT MAINTAINABLE SINCE THE DISALLOWANCE WAS IN CONFORMI TY WITH THE RETURN OF INCOME FILED BY THE APPELLANT. 3. PREMIUM ON LEASE HOLD LAND THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING APPELLANT'S CLAIM FOR DEDUCTION OF AMOR TISED AMOUNT OF PREMIUM IN RESPECT OF LEASEHOLD LAND IN THE AMOUNT OF RS.2 41 534/-. 4. REVENUE RECOGNITION THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ACTION OF THE AO IN INCREASING THE APPELLANT'S INCOME BY THE AMOUNT OF RS.10989970 BEING THE PROVISION FOR PROFIT EQUALIZATION MADE BY THE A PPELLANT IN ACCORDANCE WITH THE MANDATORY ACCOUNTING STANDARD 7 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) OUGHT TO HAVE ACCEPTED THE CONTENTIO N OF THE APPELLANT THAT IT HAD CORRECTLY APPLIED THE SAID ACCOUNTING S TANDARD AND ACCORDINGLY ONLY INCOME AS ACCOUNTED BY THE APPELLAN T IN TERMS OF THE SAID STANDARD IN RESPECT OF CONSTRUCTION CONTRACTS UNDERTAKEN BY IT COULD BE BROUGHT TO TAX UNDER SECTION 4 READ WITH S ECTION 28 OF THE INCOME-TAX ACT 1961. WITHOUT PREJUDICE TO THE ABOVE THE LEARNED CIT(A) BASED ON CERTAIN CONJECTURES AND SURMISES ERRED IN DIRECTING THE IS SUE BACK TO THE ASSESSING OFFICER FOR DETERMINATION OF THE ACTUAL A MOUNT OF ADDITION TO BE SO SUSTAINED (IN PLACE OF RS.10989970) WHEN THE SAME WAS WHOLLY UNCALLED FOR. WITHOUT PREJUDICE TO THE ABOVE THE LEARNED THE CIT( A) OUGHT TO HAVE DIRECTED THE AO TO ALLOW DEDUCTION FOR THE AMOUNT O F INCOME ALREADY BROUGHT TO TAX IN THE IMMEDIATELY PRECEDING YEAR IN VIEW OF THE ORDER OF THE CIT(A) FOR THAT YEAR. 5. COMPUTER SOFTWARE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN REMITTING BACK TO THE AO TO DECIDE AFRESH THE ISSUE OF ALLOWABILITY OF COMPUTER SOFTWARE EXPENSES OF RS. 52 31 521 ON THE BASIS OF CERTAIN CRITERIA INDICATED BY HIM INST EAD OF ALLOWING THE SAME AS REVENUE EXPENDITURE AS CLAIMED BY THE APPEL LANT. 6. DEPRECIATION ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ACTI ON OF THE AO OF REJECTING THE CONTENTION OF THE APPELLANT THAT IT W AS ENTITLED TO CLAIM DEPRECIATION @ 100% IN RESPECT OF CERTAIN ITEMS OF PLANT AND MACHINERY WHICH WERE SO ENTITLED IN ACCORDANCE WITH APPENDIX TO INCOME-TAX RULES 1962 AND INSTEAD ALLOWING DEPRECIATION @ 25% . WITHOUT PREJUDICE TO THE ABOVE THE LEARNED CIT(A) E RRED IN WRONGLY CONCLUDING THAT MACHINERY USED IN THE MANUFACTURE O F RENEWABLE ENERGY DEVICES REFERRED TO IN ENTRY 3(XIII)(R) OF T HE APPENDIX HAS ITSELF TO BE IN THE NATURE OF RENEWABLE ENERGY DEVICES AND IN CONSEQUENTLY OBSERVING THAT THE APPELLANT HAD FAILED TO ADDUCE E VIDENCE IN SUPPORT OF SUCH ELIGIBILITY. THE LEARNED CIT(A) FAILED TO NOTICE THAT THE CLAIM IN RESPECT OF RENEWABLE ENERGY DEVICES AND PLANT AND MACHINERY USED IN THE MANUFACTURE THERE OF WAS ALLOWED IN THE EARLIER YEARS. THE CLAIM OF THE APPELLANT BE DIRECTED TO BE ALLOWE D. 7. PRIOR YEAR EXPENSES: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN REMITTING BACK TO THE AO T O DECIDE AFRESH THE ISSUE OF ALLOWABILITY OF PRIOR YEAR'S EXPENSES RS. 92.37 LACS ON THE BASIS OF CERTAIN RESTRICTIVE CRITERIA INDICATED BY HIM INSTEAD OF ALLOWING THE SAME IN THEIR ENTIRETY AS CLAIMED BY THE APPELL ANT. 8. LOSS ON EMBEZZLEMENT: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN HOLDING THAT THE APPELLANT' S CLAIM FOR DEDUCTION OF LOSS ON ACCOUNT OF EMBEZZLEMENT OF RS. 74 39 989 /- WAS NOT ALLOWABLE IN ITS ENTIRETY CLAIMED BY THE APPELLANT AND INSTEAD DIRECTING THE MATTER BACK TO THE AO TO DECIDE ON THE QUANTUM OF THE ADMISSIBLE DEDUCTION IGNORING THE FACT THAT THE AO HAD ALREADY THOROUGHLY EXAMINED THE FACTS ON RECORD AND ALLOWED DEDUCTION TO THE EXTENT OF RS. 4 04 327/-. THE TOTAL CLAIM WAS OF RS. 78 44 31 6/- 9. ADHOC DISALLOWANCES: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E AO OF MAKING THE FOLLOWING ADHOC AND ARIBITRARY DISALLOWANCES : EXPENSE HEAD GROSS AMOUNT DISALLOWANCE BY ASSESSING OFFICER DISALLOWANCE CONFIRMED BY CIT(A) PUBLIC RELATION EXPENSES 984462 50000 RS.25000 MEMBERSHIP & SUBSCRIPTION 2308917 115446(5%) 115000 (ON THE INCORRECT PRESUMPTION THAT AO HAD DISALLOWED RS.230456) VEHICLE EXPENSES 12325243 RS.616262 RS.250000 TELEPHONE EXPENSES 7947667 RS.397383 (5%) RS.10000 10. DEDUCTION U/S 80HHC IN THE MATTER OF DEDUCTION U/S 80HHC THE LEARNED CI T(A) ERRED IN: A) WITHOUT GIVING THE APPELLANT AN OPPORTUNITY OF BEIN G HEARD IN THE MATTER DIRECTING THE AO TO RE-VERIFY THE FIGUR E OF TOTAL TURNOVER BASED ON CONJECTURES AND SURMISES. NOT DIRECTING THE AO TO EXCLUDE TRADING TURNOVER OF RS.14374 000 FROM TOTAL TURNOVER AS CLAIMED BY THE APPELLANT B) DIRECTING INCLUSION OF SALE OF SCRAP AND EXCHANG E DIFFERENCE AS PART OF TOTAL TURNOVER; C) CONFIRMING EXCLUSION FROM ELIGIBLE PROFITS OF TH E BUSINESS CLAIMS AND REFUNDS (RS 1 15 82 359); LIQUIDATED DAM AGES BALANCES WRITTEN OFF RECOVERED (RS.55 57 243); SETT LEMENT OF CLAIM ON CANCELLATION OF CONTRACT (RS.2 50 00 000); AND MISCELLANEOUS INCOME (RS.1 60 55 992 PLUS SOME FURT HER AMOUNT TO BE DETERMINED ON RE-VERIFICATION). D) CONFIRMING EXCLUSION FROM ELIGIBLE PROFITS OF BU SINESS LOSS 1 EXPENSES ON FOREIGN REPRESENTATIVE OFFICES RS. 3 44 90 526/- INSTEAD OF ACCEPTING THE CONTENTION OF THE APPELLAN T THAT LOSS OF FOREIGN REPRESENTATIVE OFFICES SHOULD GO TO INCREAS E THE' PROFITS OF THE BUSINESS' ELIGIBLE FOR DEDUCTION U/S 80 HHC INS TEAD OF IGNORING THE SAME. E) CONFIRMING REDUCING THE PROFITS OF THE BUSINESS BY RS. 72.71 LACS BY NOT ALLOWING DEDUCTION WITH REFERENCE TO THE PROPORTIONATE EXPORT INCENTIVE (DEPB ). F) CONFIRMING THE ACTION OF THE AO IN REDUCING THE PROFITS OF THE BUSINESS BY THE AMOUNT OF UNABSORBED LOSSES AND DEPRECIATION U/S 72A AND IN ALSO OBSERVING THAT THE APPELLANT HAD NOT PURSUED THIS GROUND IN APPEAL PROCEEDINGS. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW AND WITHOUT GIVING THE APPELLANT AN OPPORTUNITY OF BEING HEARD IN THE MATTER THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO DETERMINED AND BRING TO TAX CERTAIN PORTION OF EXCHANGE DIFFERENCE UNDER THE HEAD 'INCOME FROM OTHER SOURCES' WHEN IN FACT THE WHOLE OF IT WAS ASSESSABLE UNDER BUSINESS INCOME. 12. INTEREST U/S 234D ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE ACTI ON OF THE AO CONFIRMING LEVYING INTEREST UNDER SECTION 234D OF T HE ACT WITHOUT APPRECIATING THE FACT THAT SAID INTEREST WAS NOT LE VIABLE FOR THE YEAR UNDER APPEAL. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO AMEND O R DELETE THE ABOVE GROUNDS OF APPEAL. 4. THE REVENUE IN ITA NO.276/PUN/2006 HAS RAISED THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY T HE AO. ON ACCOUNT OF LEASE RENT ON ACCRUED BASIS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN HOLDING THAT THE ENTIRE AMOUNT ACCR UED TO THE ASSESSEE AS PER INVOICE RAISED IS NOT TAXABLE AND T HERE IS NO FAULT ON FOLLOWING AS-7. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF PRIOR PERIOD EXPENSES RS. 92 37 000/- WHEN IN FACT THE ASSESSEE FOLLOWS MERCANTILE METHOD OF ACCOUNTING. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN NOT ALLOWING SET OFF OF BROUGHT FOR WARD LOSSES WITH THE PROFIT OF UNDERTAKING FOR THE PURPOSE OF COMPUT ATION OF DEDUCTION UNDER SEC. 80IA 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DIRECTING THAT AMOUNT OF RS. 4 56 96 827/- BEING 'BAD DEBTS WRITTEN OFF - RECOVERED' AND 'DOUBTFUL D EBTS WRITTEN OFF - RECOVERED' BE CONSIDERED UNDER CLAUSE (BAA) TO SECT ION 80HHC. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT(A) ERRED IN DIRECTING TO EXCLUDE SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FOR THE PURPOSE OF CALCULATING D EDUCTION U/S.80HHC. 7. THE ORDER OF THE LD.CIT(A) MAY BE VACATED AND TH AT OF THE A.O. BE RESTORED. 5. WE FIRST TAKE UP ASSESSEES APPEAL AND TO THE EX TENT WHERE THE REVENUES GROUND ARE INTER-CONNECTED THE SAME ARE ALSO CONSIDERED. 6. FIRST GROUND IS WITH RESPECT TO DISALLOWANCE OF EXPENDIT URE ATTRIBUTABLE TO EARNING OF TAX FREE INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTED THAT ASSESSEE HAD CLAIMED DIVIDEND INCOME OF RS.8 52 00 888/- AND INTEREST ON TAX FREE BONDS OF RS.61 64 383/- AS BEING N OT LIABLE TO TAX. THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF EXPENDIT URE INCURRED TO EARN THE AFORESAID INCOME AND ALSO SHOW CAUSE AS TO WHY PART OF ADMINISTRATIVE OVERHEAD AND MANAGERIAL EXPENSES FOR EARNIN G THE TAX FREE INCOME NOT BE DISALLOWED TO WHICH ASSESSEE INTER ALIA S UBMITTED THAT IT HAS NOT INCURRED ANY EXPENDITURE TOWARDS THE E XEMPT INCOME AND THEREFORE NO DISALLOWANCE OF EXPENDITURE IS CALLED FOR. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO T HE AO AS HE WAS OF THE VIEW THAT COMPANY HAD AN INVESTMENT OF RS.189 .43 CRORES AS AT THE END OF THE YEAR AND TO MANAGE SUCH HUGE INV ESTMENT SOME EXPENSES WOULD HAVE BEEN INCURRED. IN THE ABSENCE OF A NY DETAILS SUBMITTED BY ASSESSEE AO ESTIMATED AN EXPENDITURE OF RS.25 LAKHS T O HAVE BEEN INCURRED FOR EARNING THE EXEMPT INCOME AND AC CORDINGLY DISALLOWED RS.25 LAKHS U/S.14A OF THE ACT. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A) WHO DE CIDED THE ISSUE BY OBSERVING AS UNDER : 6.2. I HAVE CAREFULLY CONSIDERED THE APPELLANT'S S UBMISSIONS. DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT WAS CALLED UPON TO FURNISH DETAILS AS REGARDS THE IMMEDIATE SOURCES FRO M OUT OF WHICH INVESTMENTS IN SHARES AND TAX-FREE BONDS HAD BEEN M ADE. IT WAS ALSO ASKED TO ESTABLISH THAT SUCH INVESTMENTS HAD BEEN M ADE FROM OUT OF FREE-FUNDS. THE ABOVE INFORMATION WAS CALLED FOR AS THE APPELLANT WAS FOUND TO HAVE MADE SUBSTANTIAL BORROWALS AS WOULD B E EVIDENCED BY ITS CLAIM OF DEDUCTION TOWARDS INTEREST WHICH WAS O F THE ORDER OF RS.303.72 LAKHS. THEREFORE THE POSSIBILITY THAT TH E IMPUGNED INVESTMENTS WOULD HAVE BEEN MET WHETHER FULLY OR P ARTLY FROM OUT OF INTEREST- BEARING BORROWED FUNDS COULD NOT BE ROUTI NELY RULED OUT. HOWEVER THE REQUIRED DETAILS HAVE NOT BEEN FURNISH ED. INSTEAD THE LEARNED AUTHORISED REPRESENTATIVE MERELY REFERRED T O THE APPELLATE ORDERS FOR SOME OF THE EARLIER ASSESSMENT YEARS VI Z. 1997-98 2000-01 ETC. AND ACCEPTED THAT THE FACTS RELATING TO THE P RESENT ASSESSMENT YEAR ARE IDENTICAL. IN THE SAID APPELLATE ORDERS T HE COMMISSIONERS OF INCOME-TAX (APPEALS) HAD RESTRICTED THE EXPENDITURE ATTRIBUTABLE TO TAX- FREE INCOME ETC. TO 2.5% OF SUCH INCOME AS AGAINST 5% ADOPTED IN THE ASSESSMENTS. I FIND THAT THE DISALLOWANCE OF RS.25 LAKHS MADE FOR THE PRESENT ASSESSMENT YEAR WHICH WORKS OUT TO 2.74% O F THE TOTAL TAX-FREE INCOME OFRS.9.13 CRORES IS ONLY MARGINALLY HIGHER. IN ANY CASE IN LINE WITH THE STAND TAKEN IN THIS MATTER BY THE PREDECES SOR COMMISSIONERS OF INCOME-TAX (APPEALS) AND ALSO AS THE APPELLANT HAS NOT FURNISHED ANY EVIDENCES AS WOULD DISPROVE THE INCURRING OF AN Y EXPENDITURES FINANCIAL OR OTHERWISE ON THE EARNING OF THE TAX-F REE DIVIDEND AND INTEREST INCOME THE EXPENSES WHICH COULD BE REASON ABLY DISALLOWED FOR THE PRESENT ASSESSMENT YEAR TOO ARE HEREBY ESTIMATE D AT 2.5% OF THE EXEMPT INCOME. THE ASSESSING OFFICER SHALL RECOMPUT E THE DISALLOWANCE ACCORDINGLY. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN APP EAL BEFORE US. 7. BEFORE US AT THE OUTSET LD. AR SUBMITTED THAT IDENTICA L ISSUE AROSE IN ASSESSEES OWN CASE IN A.YS. 2000-01 AND 2001 -02 AND DISALLOWANCE IN THOSE YEARS WAS RESTRICTED AT 2.5% OF TH E EXEMPT INCOME. HE FAIRLY CONCEDED THAT FOLLOWING THE ORDER OF THE TRIBUNAL IN THE EARLIER YEARS THE GROUND MAY BE DECIDED ACCORDINGLY . LD. DR DID NOT OBJECT TO THE AFORESAID SUBMISSION OF THE LD. AR. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RES PECT TO DISALLOWANCE U/S 14A OF THE ACT. IT IS AN UNDISPUTED FACT THAT DURING THE YEAR ASSESSEE HAS EARNED AGGREGATE TAX FREE INCOM E TO THE TUNE OF RS.9.14 CRORES (ROUNDED OFF) AND HAD NOT DISALLOWED ANY EXPE NDITURE FOR EARNING THE EXEMPT INCOME. AO ESTIMATED THE DISALLOWAN CE OF EXPENSES FOR EARNING EXEMPT INCOME AT RS.25 LACS. WHEN T HE MATTER WAS CARRIED BEFORE LD.CIT(A) HE RELYING ON THE DECISION OF H IS PREDECESSORS IN ASSESSEES OWN CASE FOR EARLIER YEARS RESTRICTED THE DISALLOWANCE @ 2.5% OF EXEMPT INCOME. WE FIND THAT IDENTICAL ISSUE AROSE BEFORE THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN A.YRS. 2000-01 AND 2001-02 (IN ITA NOS.1247 & 1248/PUN/2005 ORDER DATED 30-06-2015) AND THE ISSUE WAS DECIDED AGAINST THE ASSESSEE BY HOLDING AS UNDER : 12. THE SIXTH GROUND RAISED BY THE ASSESSEE IN ITS APPEAL IS WITH RESPECT TO THE AMOUNT OF EXPENDITURE ATTRIBUTABLE T O DIVIDEND AND TAXFREE INTEREST. WE FIND THAT IDENTICAL GROUND WAS RAISED BY ASSESSEE IN APPEAL FOR ASSESSMENT YEAR 1998-99 BEFORE THE TR IBUNAL. THE TRIBUNAL DISMISSED THE CONTENTIONS OF THE ASSESSEE WITH FOLLOWING OBSERVATIONS :- 45. IN THIS CONTEXT THE RELEVANT FACTS ARE THAT T HE ASSESSING OFFICER ESTIMATED 5% OF GROSS DIVIDEND AND OTHER TA X-FREE INCOMES AS AN EXPENDITURE INCURRED FOR EARNING OF S UCH INCOME AND DISALLOWED THE SAME. THE CIT(A) FOLLOWING THE D ECISION OF HER PREDECESSOR RESTRICTED THE DISALLOWANCE TO 2.5% OF THE GROSS INCOME. NOT BEING SATISFIED WITH THE ORDER OF THE C IT(A) ASSESSEE IS IN APPEAL BEFORE US. 46. ON THIS ASPECT THE LD. REPRESENTATIVE FOR THE ASSESSEE CONCEDED THAT THE DISALLOWANCE AS CONFIRMED BY THE CIT(A) HAS BEEN A SUBJECT MATTER OF CONSIDERATION BY THE TRIBU NAL IN ASSESSMENT YEAR 1997-98 AND THE SAME STANDS CONFIRM ED VIDE ORDER DATED 03.09.2014 (SUPRA). IN VIEW OF THE AFOR ESAID PRECEDENT THE ACTION OF THE CIT(A) IN RESTRICTING THE DISALLOWANCE TO 2.5% OF THE GROSS INCOME IS HEREBY AFFIRMED. THU S ASSESSEE FAILS ON THIS GROUND. THE LD. AR OF THE ASSESSEE HAS FAIRLY CONCEDED THAT THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE IN EARLIER ASSESSMENT YEARS. THIS GROUND OF APPEAL IS DISMISSED ACCORDINGLY. WE THUS FIND THAT THE CO-ORDINATE BENCH OF THE TRIBUNAL HAD UPHELD THE DISALLOWANCE U/S 14A OF THE ACT @ 2.5% OF GROSS TAX FR EE INCOME. IN VIEW OF THE LD. ARS SUBMISSION THAT THE ISSUE IN THE Y EAR UNDER CONSIDERATION IS SIMILAR TO A.Y. 2000-01 AND 2001-02 AND S INCE IN THOSE YEARS THE ISSUE WAS DECIDED AGAINST THE ASSESSEE BY THE CO- ORDINATE BENCH OF THE TRIBUNAL WE FIND NO REASON TO INTERFE RE WITH THE ORDER OF LD.CIT(A) AND THUS THE ASSESSEES GROUND IS DISMISSED. 9. SECOND GROUND IS WITH RESPECT TO DENIAL OF DEDUCTION OF LOSS OF RS.160.14 LAKHS OF SUBSIDIARY COMPANY. AO ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT NOTICED T HAT ASSESSEE HAD DEBITED A SUM OF RS.160.14 LAKHS IN RESPECT OF FUNDING OF LOSS ON CLOSURE OF THERMAX ELECTRONICS LIMITED THE SUBS IDIARY OF ASSESSEE. HE ALSO NOTICED THAT IN THE COMPUTATION OF INCO ME THE ASSESSEE HAD ADDED THE AMOUNT BUT HOWEVER VIDE LETTER DATED 23-10- 2002 IT HAS CLAIMED THAT THE AFORESAID LOSS SHOULD BE ALLOW ED AS BUSINESS EXPENDITURE. AO NOTICED THAT ASSESSEE HAD FUND ED THE LOSSES INCURRED BY THERMAX ELECTRONICS LIMITED. AO WAS OF THE VIEW THAT THERE WAS NO COMMERCIAL EXPEDIENCY FOR FUNDING OF THE LOSSES OF THE SUBSIDIARY EXCEPT FOR HELPING IT. HE ACCORDINGLY DENIED THE CLAIM OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF AO BY HO LDING AS UNDER : 7.2 I HAVE CONSIDERED THE GROUND THUS RAISED. IT I S ADMITTEDLY A VERY GENERAL ONE. DURING THE COURSE OF THE APPEAL PROCEE DINGS THE APPELLANT WAS ASKED TO SUBSTANTIATE THE CONTENTIONS RAISED IN THE GROUND BY FILING A COPY OF THE CONTRACT IF ANY WITH THE SUB SIDIARY. NEITHER A COPY OF THE SAID CONTRACT NOR ANY OTHER DETAILS PERTAINI NG TO THE ISSUE HAVE BEEN FURNISHED. IN THE CIRCUMSTANCES THE GROUND ON THIS SCORE DESERVES TO BE TREATED AS NOT HAVING BEEN ESTABLISHED IN ANY MANNER. EVEN OTHERWISE THE ARGUMENTS RAISED BY THE ASSESSING OF FICER ARE PRIMA FACIE TENABLE. THE APPELLANT AND ITS SUBSIDIARY ARE TWO DIFFERENT AND INDEPENDENT TAXABLE ENTITIES. THEREFORE THE PAYMEN T MADE BY THE APPELLANT TO ITS SUBSIDIARY BY WAY OF FUNDING THE L ATTER'S LOSS CANNOT BE ALLOWED AS A DEDUCTION EITHER U/S.37(1) OR U/S.28 M ERELY BECAUSE OF THE RELATIONSHIP BETWEEN THE TWO AND WITHOUT THERE BEING ANYTHING TO SHOW THAT THE PAYMENT HAD BEEN NECESSITATED BY COMM ERCIAL EXPEDIENCY. THE PRESENCE OF ANY SUCH COMMERCIAL EXP EDIENCY HAS NOT EVEN BEEN HIGHLIGHTED LET ALONE PROVED. I WOULD T HEREFORE HOLD THAT THE STAND TAKEN IN THIS MATTER BY THE ASSESSING OFF ICER WILL HAVE TO BE CONFIRMED. THE SAME IS CONFIRMED ACCORDINGLY. BEFOR E CONCLUDING ON THIS ISSUE IT MAY BE PERTINENT TO MENTION THAT AS I N THE CASE OF RETENTION MONEY EVEN IN RESPECT OF LOSS-FUNDING OF THE SUBSI DIARY THE APPELLANT CANNOT BE SAID TO HAVE HAD ANY GRIEVANCE ARISING FR OM THE STAND TAKEN BY THE ASSESSING OFFICER SINCE THE LATTER MERELY PR OCEEDED ON THE BASIS OF THE TREATMENT GIVEN TO THIS ISSUE BY THE APPELLA NT ITSELF IN ITS RETURN OF INCOME AND DID NOT MAKE ANY DEVIATION THEREFROM. THEREFORE STRICTLY SPEAKING THE APPEAL IN THIS MATTER DOES NOT PASS E VEN THE MAINTAINABILITY TEST. FOR THESE REASONS THE GROUND RAISED BY THE APPELLANT IS HEREBY DISMISSED. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. 10. BEFORE US LD. AR REITERATED THE SUBMISSIONS MADE BEFO RE AO AND CIT(A) AND FURTHER SUBMITTED THAT THERMAX ELECTRONICS LIMITED WAS A JOINT VENTURE BETWEEN THE ASSESSEE AND FUZI OF J APAN. SINCE THERMAX ELECTRONICS LIMITED SUFFERED LOSSES BOTH THE JOINT VENTURE PARTNERS AGREED TO BEAR THE LOSSES. HE FURTHER SUBMITT ED THAT SINCE THE INVESTMENT IS MADE ON THE GROUND OF COMMERCIAL EXPED IENCY THE RESULTANT LOSS SHOULD BE ALLOWED AS BUSINESS EXPENDITURE . LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND CIT(A). 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL ON RECORD. WE FIND THAT CIT(A) WHILE UPHOLDING THE ORDER O F AO HAS NOTED THAT DURING THE APPELLATE PROCEEDINGS THE ASSESS EE WAS ASKED TO SUBSTANTIATE THE LOSS BY FURNISHING THE COPY OF CONTRACT WITH ANY OF THE SUBSIDIARY BUT THE SAME WAS NOT FURNISHED. HE HAS FU RTHER NOTED THAT THE PRESENCE OF ANY COMMERCIAL EXPEDIENCY WAS NEITH ER BEEN HIGHLIGHTED NOR WAS PROVED BY THE ASSESSEE AND THAT ME RELY BECAUSE OF RELATIONSHIP BETWEEN THE TWO THE PAYMENT CANNOT BE A LLOWED AS DEDUCTION EITHER U/S.37(1) OR U/S.28 OF THE ACT. BEFORE U S ASSESSEE HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT TH E FINDINGS OF CIT(A). IN VIEW OF THE AFORESAID FACTS WE FIND NO REASON TO IN TERFERE WITH THE ORDER OF LD.CIT(A) AND THUS THE GROUND OF THE ASSESSEE IS DISM ISSED. 12. GROUND NO.3 IS WITH RESPECT TO DISALLOWANCE OF PREMIUM IN RESPECT OF LEASEHOLD LAND. AO ON PERUSING THE DETAILS OF EXPENDITURE NOTICED THAT A SSESSEE HAD DEBITED AN AMOUNT OF RS.2 41 534/- BEING AMORTIZATION O F PREMIUM PAID ON LEASEHOLD LAND. AO NOTED THAT SIMILAR EXPE NDITURE CLAIMED BY THE ASSESSEE IN EARLIER YEARS WAS DISALLOWED BY THE AO AND THE ACTION OF AO WAS ALSO UPHELD BY LD.CIT(A). HE THEREFORE BY FOLLOWING THE REASONING OF AO AND CIT(A)S DECISION OF EARLIE R YEARS DISALLOWED THE CLAIM. AGGRIEVED BY THE ORDER OF AO ASSESSE E CARRIED THE MATTER BEFORE CIT(A) WHO UPHELD THE ORDER OF AO BY H OLDING AS UNDER : 8. THE NEXT GROUND PERTAINS TO THE DISALLOWANCE OF THE APPELLANT'S CLAIM OF DEDUCTION OF RS.2 41 534 /- BEING AMORTIZATION OF THE PREMIUM PAID ON LEASE-HOLD LAND. THE APPELLANT HAD MADE THI S CLAIM AS REVENUE EXPENDITURE BY RELYING ON THE DECISION OF THE HON'B LE KARNATAKA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. HMT LTD. 203 ITR 820. THE ASSESSING OFFICER HOWEVER REJECTED THE C LAIM BY FOLLOWING AMONG OTHER THINGS THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF COMMISSIONER OF INCOME- TAX VS. GOVIND SUGA R MILLS LTD. 232 ITR 319. IT WAS ALSO OBSERVED BY HIM THAT IDENTICAL DISALLOWANCES MADE FOR SOME OF THE EARLIER ASSESSMENT YEARS HAD B EEN CONFIRMED BY THE COMMISSIONERS OF INCOME-TAX (APPEALS). 8.1 IN THE GROUNDS OF APPEAL IT HAS BEEN ARGUED TH AT THE ASSESSING OFFICER ERRED IN DISALLOWING THE ABOVE CLAIM. DURIN G THE COURSE OF THE APPEAL PROCEEDINGS HOWEVER THE APPELLANT FAIRLY C ONCEDED THAT THIS GROUND IS COVERED AGAINST IT BY THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF GOBIND SUGAR MILLS LTD. 232 ITR 319 . IN VIEW OF THE SUBMISSION THUS MADE THE DISALLOWANCE OF RS.2 41 5 34/- IS HEREBY CONFIRMED. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. 13. BEFORE US AT THE OUTSET LD. AR FAIRLY CONCEDED TH AT IDENTICAL ISSUE AROSE IS ASSESSES APPEAL BEFORE TRIBUNAL IN A.YS. 2 000-01 AND 2001-02 AND THE ISSUE WAS DECIDED AGAINST THE ASSESSE E. HE POINTED TO THE RELEVANT FINDINGS OF THE TRIBUNAL. HE THEREFORE SUB MITTED THAT THE ISSUE BE DECIDED ACCORDINGLY. LD. DR DID NOT CONTRO VERT THE SUBMISSIONS MADE BY THE LD. AR BUT SUPPORTED THE ORDER OF LOWER AUTHORITIES. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESP ECT TO CLAIM OF AMORTIZATION OF PREMIUM PAID FOR LEASEHOLD LAND. WE FIND THAT IDENTICAL ISSUE OF AMORTIZATION OF PREMIUM ON LEASEHOLD LAND AR OSE IN ASSESSEES OWN CASE IN A.YRS. 2000-01 AND 2001-02. THE ISSUE WAS DECIDED AGAINST THE ASSESSEE BY THE COORDINATE BENCH O F THE TRIBUNAL BY HOLDING AS UNDER : 8.1 THE LD. AR OF THE ASSESSEE FAIRLY SUBMITTED TH AT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE IN ASSESSMENT YEA RS 1998-99 AND 1999-2000 BY THE TRIBUNAL. WE OBSERVE THAT THIS ISS UE HAS BEEN CONSIDERED BY THE CO-ORDINATE BENCH IN ASSESSMENT Y EARS 1998-99 AND 1999-2000 AND HAS DECIDED THE SAME AGAINST THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS :- 15. IN THIS CONTEXT THE LD. REPRESENTATIVE FOR TH E ASSESSEE CONCEDED THAT SIMILAR ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE PAST YEARS AND IN T HIS CONTEXT REFERRED TO THE RECENT ORDER OF THE TRIBUNAL DATED 03.09.2014 (SUPRA) PERTAINING TO ASSESSMENT YEAR 1997- 98. IT WAS ALSO AN ACCEPTED POSITION THAT THE ISSUE REGARDING ASSESSEE S CLAIM FOR DEDUCTION OF PROPORTIONATE PREMIUM OF LEASEHOLD LAN D AMORTIZED AND CHARGED TO THE PROFIT & LOSS ACCOUNT FOR THE YE AR UNDER CONSIDERATION IS LIABLE TO BE DECIDED IN TERMS OF T HE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF GOVIND SUG AR MILLS LTD. VS. CIT (1998) 232 ITR 319 (SC) AGAINST THE ASSESS EE. ACCORDINGLY THE ORDERS OF THE AUTHORITIES BELOW ON THIS ASPECT ARE UPHELD AND ASSESSEE FAILS. ACCORDINGLY GROUND NO. 2 IN THE APPEAL OF ASSESSEE IS DISMISSED. 15. WE THUS FIND THAT THE CO-ORDINATE BENCH RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF GOVIND SUGAR MILLS LIMITED (SUPRA) DECIDED THE ISSUE AGAINST THE ASSESSEE. F URTHER IN VIEW OF THE LD. ARS SUBMISSION THAT THE ISSUE IN THE YEAR UNDER CONSIDERATION IS SIMILAR TO A.Y. 2000-01 AND 2001-02 AND S INCE IN THOSE YEARS THE ISSUE WAS DECIDED AGAINST THE ASSESSEE WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD.CIT(A) AND THUS THE ASSESSEES GROUND IS DISMISSED. 16. GROUND NO.4 IS WITH RESPECT TO ADDITION MADE TO THE CONTRACT INCOME. AO NOTICED THAT ASSESSEE IS A MANUFACTURER OF BOILERS AN D HEAT TRANSFER EQUIPMENTS AND UNDERTAKES THE PROJECTS ON CO NTRACT BASIS AND THE CONTRACT NORMALLY RUNS OVER A PERIOD OF MORE T HAN ONE YEAR. THE ASSESSEE WAS ACCOUNTING FOR INCOME ON SUCH PROJECT S BY FOLLOWING THE PROJECTION COMPLETION METHOD AND WAS RAISING INVOICE S AS PER THE SCHEDULED PAYMENTS AGREED WITH THE CLIENTS BUT AT T HE SAME TIME HAD CREATED PROVISION TOWARDS CONTRIBUTION EQUALIZATION PROVISION TO ADJUST EXCESS BILLING. DURING THE YEAR THE PROVISION OF CONTRIBUTION EQUALIZATION DEBITED TO THE PROFIT AND LOSS AC COUNT WAS RS.9 15 29 000/-. AO NOTICED THAT THE EXCESS AMOUNT REA LIZED AS PER THE INVOICES WAS NOT OFFERED AS REVENUE RECEIPTS AND TO THAT EXTENT PROFIT WAS NOT OFFERED AS INCOME. AO WAS OF THE VIEW THAT SINCE THE INVOICES WAS RAISED AS PER THE AGREED SCHEDULE; THE INV OICE VALUE SHOULD BE TREATED AS REVENUE RECEIPTS. HE FURTHER NOTI CED THAT IDENTICAL ISSUE AROSE IN A.Y. 1997-98 AND ADDITION WAS MADE BY AO IN A.Y. 1997-98. AO THEREFORE HELD THAT THE DEDUCTION OF RS.9 15 29 000/- CANNOT BE ALLOWED. HE ACCORDINGLY DISALLOWE D THE SAME. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 20.2 I HAVE CAREFULLY CONSIDERED THE APPELLANT'S SUBMISSIONS. DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT FILED AT MY INSTANCE PROJECT-WISE CONTRIBUTIONS TO THE EQUILISATION PROV ISION. THE APPELLANT ALSO FILED BROAD WORKINGS TO SHOW HOW THE CONTRIBUT IONS DURING THE RELEVANT PREVIOUS YEAR HAD BEEN WORKED OUT. THESE H AVE BEEN PERUSED. AS IN THE EARLIER YEARS FOR THE RELEVANT PREVIOUS YEAR TOO THE APPELLANT RECOGNISED REVENUE NOT ONLY IN THE SAME PROPORTION AS THE ACTUALLY COST INCURRED DURING THE YEAR BORE TO THE TOTAL PROJECTE D COST BUT ALSO BY APPLYING THE FOLLOWING FURTHER PERCENTAGES: PROJECT COMPLETION STAGE PERCENTAGE OF REVENUE RECOGNIZED UPTO 33.33% NIL 33.33% TO 50.00% 75% 50.00% TO 75.00% 85.0% ABOVE 75.00% 95.0% 20.2.1 THE APPLICATION OF THE METHOD FOLLOWED BY T HE APPELLANT CAN BE SEEN BY TAKING A FEW ILLUSTRATIONS. IN THE ENVIRO PROJECT THE CONTRACT VALUE OF THE SAVO POWER WORK WAS OF THE OR DER OF RS.66.15 LAKHS. AT THE BEGINNING THE COST AND EXPENSES HAD BEEN ESTIMATED AT RS.57.55 LAKHS. ACCORDINGLY THE CONTRIBUTIONS / PR OFIT HAD BEEN PROJECTED AT RS.8.60 LAKHS. BY 31.3.2002 THE APPEL LANT HAD BILLED THE PARTY FOR AN ACCUMULATED AMOUNT OF RS.41.89 LAKHS. THE TOTAL COST / EXPENSES UPTO THIS DATE AMOUNTED TO RS.32.28 LAKHS THUS GIVING AN ACTUAL REVENUE OF A RS. 9 .61 LAKHS. AS PER THE RAT IO BETWEEN THE ACTUAL COST AND THE TOTAL ESTIMATED COST THE PROJECT HAD BEEN COMPLETED UPTO 56%. HENCE AS PER THE BENCH-MARK BEING FOLLOWED BY THE APPELLANT ONLY 85% OF THE CONTRIBUTIONS / REVENUE WAS RECOGNI SABLE. THIS WORKED OUT TO RS.4.82 LAKHS AS AGAINST THE ACTUAL CONTRIBU TIONS / PROFIT OF RS. 9 .61 LAKHS. THE EXCESS OF THE ACTUALS VIS-A-VIS THE REVENUE RECOGNITION AT THE PRESCRIBED PERCENTAGE WORKED OUT TO RS.4.79 LAK HS. THIS WAS TAKEN TO THE PROVISION ACCOUNT. THE ACTUAL PROFITS WERE R EDUCED TO THE ABOVE EXTENT SO AS TO EQUILISE THE PROFITS WITH THE PROPO RTIONATE REVENUE CONTRIBUTION AS HAD BEEN ESTIMATED. YET ANOTHER EXA MPLE MAY BE TAKEN. IN THE CASE OF THE MOSER BAER-III PROJECT T HE TOTAL ORDER VALUE WAS RS.755.14 LAKHS. THE BUDGETED EXPENSES WERE RS. 493.89 LAKHS LEADING TO AN ESTIMATED CONTRIBUTION/PROFIT OF RS.2 61.25 LAKHS. YEAR ENDING 31.3 .2002 WAS THE FIRST YEAR OF EXCLUSION O F THIS WORK. BY THE YEAR END THE APPELLANT HAD INVOICED THE CONTRACTEE FOR AN AMOUNT OF RS.100.61 LAKHS. AGAINST THE NET EXPENSES OF RS.67. 73 LAKHS BOOKED DURING THE YEAR (I.E. GROSS EXPENSES OF RS.95.34 LA KHS AS REDUCED BY CLOSING STOCK OF RS.27.61 LAKH) THE ACTUAL PROFITS WORKED OUT TO RS.32.88 LAKHS. HOWEVER AS THE PROJECT HAD BEEN CO MPLETED UPTO THE YEAR END ONLY TO THE EXTENT 14% OF THE TOTAL PROJEC T THE APPELLANT REVERSED THE ENTIRE PROFIT OF RS.32.88 LAKHS BY TAK ING THE SAME TO THE EQUALISATION PROVISION. 20.2.2 THE MOOT QUESTION IS IF THE APPELLANT WAS J USTIFIED IN RECOGNIZING PROFIT AS PER THE ABOVE METHOD. THIS PR ESUPPOSES A FURTHER QUESTION IF ACCOUNTING STANDARD 7 WAS APPLICABLE TO THE PROJECTS TAKEN UP BY THE APPELLANT. AS ALREADY NOTED BOTH THESE Q UESTIONS HAVE BEEN ALREADY ANSWERED IN THE APPELLATE ORDERS IN THE APP ELLANT'S OWN CASE FOR SOME OF THE EARLIER ASSESSMENT YEARS AS WELL AS IN THE CASES OF ITS SISTER CONCERNS AFFIRMATIVELY. EVEN IN THE APPELLAT E ORDER FOR THE ASSESSMENT YEAR 1997-98 IN THE APPELLANT'S CASE WH ILE CONFIRMING THE STAND TAKEN BY THE ASSESSING OFFICER IN PRINCIPLE THE COMMISSIONER OF INCOME-TAX (APPEALS) HAD ALL THE SAME HELD THAT ONL Y THE INCOME WHICH HAD ACTUALLY ACCRUED TO THE APPELLANT COULD BE ASSE SSED TO TAX AND NOT THE AMOUNTS BILLED BY IT. COMING TO THE ORDERS IN T HE CASES OF THE SISTER CONCERNS THE ISSUE WAS DISCUSSED AT GREAT LENGTH I N THE APPELLATE ORDER IN THE CASE OF MIS. THERMAX SURFACE COATINGS LTD. FOR THE ASSESSMENT YEAR 1998-99. IT WAS HELD BY THE COMMISS IONER OF INCOME- TAX (APPEALS) THAT THE APPELLANT HAD APPROPRIATELY FOLLOWED ACCOUNTING STANDARD 7 FOR RECOGNISING ITS REVENUE FROM LONG-TE RM CONTRACTS. IT WAS ALSO HELD THAT THE SAID ACCOUNTING STANDARD 7 WAS B INDING ON THE ASSESSING OFFICER. THE ORDER OF THE INCOME-TAX APPE LLATE TRIBUNAL IN THE CASE OF YET ANOTHER SISTER CONCERN I.E. M/S. THERMAX BABCOCK & WILCOX LTD. CONFIRMS THE STAND TAKEN BY THE COMMISSIONER O F INCOME-TAX (APPEALS) IN THE APPELLATE ORDER IN THE CASE OF M/S. THERMAX SURFACE COATINGS LTD.. IN FACT THE DECISION OF THE TRIBUNA L HAS A STRONGER BEARING ON THE APPELLANT'S CASE IN AS MUCH AS THE A BOVE SISTER CONCERN VIZ. M/S. THERMAX BABCOCK & WILCOX LTD. WAS ENGAGED IN SIMILAR WORKS AS THE APPELLANT'S I.E. DESIGNING ENGMEERMG FABRICATION PROCUREMENT AND ASSEMBLING ERRECTION INSTALLATION AND COMMISSIONING OF BOILERS. IN THE CIRCUMSTANCES THE APPELLANT CAN NOT-BE FOUND FAULT WITH FOR HAVING FOLLOWED THE ACCOUNTING STANDARD 7 IN THE MATTER OF REVENUE RECOGNITION AND AS A COROLLARY IN MAKING PROVISIONS FOR EQUILISATION. 20.2.3 HOWEVER EVEN WHERE AN ASSESSEE IS FOUND TO BE JUSTIFIED IN FOLLOWING ACCOUNTING STANDARD 7 ITS ACTUAL WORKING IS NOT ABOVE SCRUTINY. SUCH SCRUTINY CAN ALSO EXTEND TO EXAMINE IF ANY PART OF THE REVENUE OTHERWISE CHARGEABLE TO TAX AS PER SECTIONS 4 / 5 OF THE INCOME-TAX ACT 1961 HAS NOT BEEN SO CHARGED ON AC COUNT OF ADHERENCE TO THE ACCOUNTING STANDARD 7. FOR WHERE THERE IS A CONFLICT BETWEEN LAW AND ACCOUNTING THE FORMER MUST PREVAIL. CARRYI NG SUCH SCRUTINY INTO THE APPELLANT'S CASE IT HAS BEEN ALREADY NOTE D THAT THE APPELLANT IS OMITTING TO RECOGNISE REVENUE WHEREVER COMPLETIO N IS LESS THAN 33% OF THE TOTAL PROJECT. IT ALSO APPEARS THAT THE APPE LLANT IS NOT CONSIDERING / RECOGNISING ANY PROFIT ON PERCENTAGE COMPLETION M ETHOD IN RESPECT OF CONTRACTS WHICH ARE LESS THAN RS.25 LAKHS. THIS IS CERTAINLY NOT CORRECT; PARTICULARLY AS THE APPELLANT IS BILLING THE CONTRA CTEE IRRESPECTIVE OF THE PERCENTAGES UPTO WHICH CONTRACT EXECUTION HAS PROGR ESSED AND IRRESPECTIVE OF THE TOTAL VALUE OF THE CONTRACT. IT WOULD HAVE BEEN A DIFFERENT MATTER IF NO SUCH BILLINGS HAD BEEN MADE. ONCE THE BILLINGS ARE MADE AND PAYMENTS ARE ALSO RECEIVED ON THE CONTRAC TEE BEING SATISFIED THAT WORKS REFLECTED IN THE BILLS HAVE BE EN ACTUALLY COMPLETED THE INCOME EMBEDDED IN THE BILL AMOUNTS WOULD BECOM E CHARGEABLE TO TAX AS PER SECTION 4. SUCH INCOME CAN BY NO MEANS B E PUT ON HOLD OR POSTPONED BY ADOPTING Y POTHETICAL BENCH-MARKS. AS ALREADY MENTIONED IN THE APPELLATE ORDER IN THE CASE OF M/S. THERMAX SURFACE COATINGS LTD. FOR THE ASSESSMENT YEAR 1998-99 THE COMMISSIONER OF INCOME-TAX (APPEALS)-III PUNE HAD GIVEN AN IDENTI CAL FINDING. I AM IN AGREEMENT WITH THE FINDING THUS GIVEN. I AM IN AGRE EMENT WITH THE FURTHER FINDING GIVEN IN THE SAID ORDER THAT THERE IS NO JUSTIFICATION FOR FURTHER SCALING DOWN (I.E. AS SHOWN IN THE TABLE IN PARA 20.2) TOWARDS CONTINGENCIES / UNFORESEEABLE LOSSES WHEN GIVEN THE TIME-FRAME IN WHICH THE CONTRACTS ARE EXECUTED NO UNFORESEEABLE LOSSES CAN BE EXPECTED. THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE FACTS IN THE APPELLANT'S CASE ARE SIMILAR TO TH E FACTS IN THE CONTEXT IN WHICH THE COMMISSIONER OF INCOME-TAX (APPEALS) HAD GIVEN THE ABOVE FINDING IN THE CASE OF M/S. THERMAX SURFACE COATINGS LIMITED (ASSESSMENT YEAR 1997-98). 20.2.4 IN VIEW OF THE ABOVE DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT WAS ASKED TO MAKE A REVI SED WORKING OF THE PROVISION BY TAKING ALL THE BILL AMOUNTS INTO C ONSIDERATION AND IRRESPECTIVE OF VALUES OF CONTRACTS AND STAGES OF C OMPLETION AND WITHOUT ANY SCALING DOWN. IN RESPONSE THE APPELLA NT FILED A REVISED WORKING IN WHICH THE REVISED PROVISION AS ON 31.3.2 002 WAS SHOWN AT RS.12 85 26 000/-. THE DIFFERENCE OF RS.1 09 89 970 /- WAS MAINLY SHOWN IN RESPECT OF TWO PROJECTS VIZ. ACD : RS.35 81 970/- AND COGEN : RS.74 08 000/-. IN THE LIGHT OF THE ABOVE R EVISED WORKING A MINIMUM OF RS.1 09 89 970/- WILL HAVE TO BE DISALLO WED TOWARDS EXCESS PROVISION. THE CORRECT EXCESS MAY BE MORE. F OR EVEN WHILE THE APPELLANT HAS STATED THAT WHEREVER THE METHOD LEADS TO HIGHER INCOME TO BE RECOGNISED THAN ACTUALLY REALISED / REALISABL E SUCH HIGHER INCOME IS BEING RECOGNISED IT APPEARS THAT THIS HAS NOT B EEN DONE. IN SOME OF THE INSTANCES WHICH WERE VERIFIED BY ME ACTUAL CON TRIBUTIONS WHICH ARE LESS THAN THE REVENUE TO BE RECOGNISED AS PER T HE STANDARD HAVE BEEN RETAINED INSTEAD OF SUBSTITUTING THE SAME BY T HE LATTER. SAME APPLIES TO ACTUAL CONTRIBUTIONS WHICH ARE IN THE NE GATIVE. IN SOME SUCH CASES NO ADJUSTMENTS HAVE BEEN CARRIED OUT. INSTEA D THE APPELLANT HAS GIVEN THE NARRATION 'HOLD'. THE ABOVE DEFICIENC IES NEED TO BE MADE GOOD. IT ALSO NEEDS TO BE ENSURED THAT THE APPELLAN T HAS WORKED OUT THE REVISED PROVISION WITHOUT APPLYING 'SCALING-DOW N'. IF NOT THE SAME HAS TO BE DONE. IT IS THEREFORE NECESSARY THAT TH E ASSESSING OFFICER VERIFIES THE WORKINGS MADE BY THE APPELLANT THOROUG HLY AND WORKS OUT THE EXCESS PROVISION IN THE LIGHT OF THE REMARKS GI VEN HEREINABOVE. THE EXCESS PROVISION AS MAY THUS BE WORKED OUT SHALL BE TAKEN IN THE PLACE OF THE ADDITION MADE IN THE ASSESSMENT. THE A SSESSING OFFICER SHALL ALSO MAKE SUITABLE ADJUSTMENT WITH REFERENCE TO THE ADDITION DELETED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2001-02. THE ASSESSIN G OFFICER IS DIRECTED ACCORDINGLY. THE APPELLANT IS ALSO DIRECTE D TO SUBMIT BEFORE THE ASSESSING OFFICER ALL THE DETAILS / WORKINGS A S HAVE BEEN FURNISHED BEFORE THIS FORUM AS ALSO SUCH OTHER DETA ILS AS THE ASSESSING OFFICER MAY REQUIRE TO ARRIVE AT THE ADMISSIBLE PRO VISION. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. REVENUE IS ALSO AGGRIEVED BY ORDER TO THE E XTENT OF RELIEF GRANTED BY LD CIT(A) AND HAS THEREFORE RAISED GROUND N O.2 IN ITS APPEAL. SINCE THE GROUNDS RAISED BY ASSESSEE AND REVE NUE ARE INTER- CONNECTED BOTH ARE CONSIDERED TOGETHER. 17. BEFORE US LD. AR SUBMITTED THAT IDENTICAL ISSUE AROSE BEFORE TRIBUNAL IN ASSESSEES APPEAL FOR A.YS. 2000-01 AND 2001- 02 AND THE ISSUE WAS DECIDED BY THE COORDINATE BENCH OF THE TRIBUN AL IN ASSESSEES FAVOUR BY FOLLOWING THE TRIBUNAL ORDER IN A.YRS. 1 997-98 1998-99 AND 1999-2000. HE PLACED ON RECORD THE ORDE R OF TRIBUNAL FOR A.Y. 2000-01 AND 2001-02 AND POINTED TO THE RELEVANT FINDINGS OF THE TRIBUNAL. HE SUBMITTED THAT SINCE THERE ARE NO CHAN GES IN THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERATION AND THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL THE ISSUE BE DECIDED IN FAVOUR OF THE ASSESSEE. LD. DR DID NOT CONTROVERT THE SUBMISSIONS MADE BY THE LD. AR BUT HOWEVER SUPPORTED THE ORDER OF AO. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT GROUND IS WITH RESP ECT TO INCREASING THE INCOME TO THE EXTENT OF PROVISION FOR PROFIT EQUALIZATION. WE FIND THAT IDENTICAL ISSUE OF INCREASE IN THE CONTRACT INCO ME AROSE IN ASSESSEES OWN CASE IN A.Y. 2000-01 AND 2001-02 AND THE COORDINATE BENCH OF THE TRIBUNAL DECIDED THE ISSUE IN ASS ESSEES FAVOUR BY FOLLOWING THE TRIBUNAL ORDER FOR A.YRS. 1997-98 199 8-99 AND 1999-2000 BY HOLDING AS UNDER: 9. THE THIRD GROUND RAISED BY THE ASSESSEE IN APPE AL RELATES TO INCOME RECOGNITION FROM CONTRACT IN ACCORDANCE WITH ACCOUN TING STANDARD 7 OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (IC AI). THE REVENUE IN CROSS APPEAL FOR ASSESSMENT YEAR 2000-01 HAS ALSO R AISED THIS ISSUE AS GROUND NO.1. THE ASSESSEE IS MANUFACTURING BOILE RS AND HEAT TRANSFER EQUIPMENTS ON CONTRACT BASIS. THESE CONTRA CTS ARE SPREAD OVER A PERIOD OF MORE THAN ONE YEAR. THE ASSESSEE IS REC OGNIZING INCOME OF THE PROJECTS ON PROJECT COMPLETION METHOD. THE ASS ESSEE RAISES INVOICE ON THE CLIENT AS PER SCHEDULE OF PAYMENTS. THE BILL S RAISED ARE ALWAYS MORE THAN THE REVENUE THAT SHOULD BE RECOGNIZED ON THE BASIS OF PROJECT COMPLETION METHOD. THE ADJUSTMENT IS REQUIRED TO BE MADE TO ADJUST EXCESS BILLING. THE ADJUSTMENT IS MADE IN ACCORDANC E WITH AS 7 BY CREATING A PROVISION CONTRIBUTION EQUALIZATION PRO VISION. THE ASSESSING OFFICER REJECTED THIS METHOD OF MAKING AD JUSTMENT BY THE ASSESSEE. IN THE FIRST APPEAL THE COMMISSIONER OF INCOME TAX (APPEALS) PARTLY ACCEPTED THE CLAIM OF THE ASSESSEE. AGAINST THE FINDING OF THE COMMISSIONER OF INCOME TAX (APPEALS) BOTH THE ASSE SSEE AND THE REVENUE HAVE COME IN APPEAL. 9.1 WE OBSERVE THAT SIMILAR ISSUE HAD COME UP IN THE APPEAL OF THE ASSESSEE AND THE REVENUE FOR ASSESSMENT YEARS 1998- 99 AND 1999- 2000. THE CO-ORDINATE BENCH DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE. THE RELEVANT EXTRACT OF THE ORDER OF THE TRIBUNAL READS AS UNDER :- 22. ON THIS ASPECT IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT IN ASSESSMENT YEAR 1997-98 THE TRIBUN AL VIDE ITS ORDER DATED 03.09.2014 (SUPRA) IN THE ASSESSEES OW N CASE HAS UPHELD THE STAND OF THE ASSESSEE BY FOLLOWING THE D ECISION OF THE PUNE BENCH OF THE TRIBUNAL ON A SIMILAR ISSUE IN TH E CASE OF THERMAX BABCOCK & WILCOX LTD. VS. DCIT VIDE ITA NOS .157 & 158/PN/1995 DATED 11.05.2001 FOR ASSESSMENT YEARS 1 990- 91 & 1991-92. THE TRIBUNAL IN ITS ORDER DATED 03.09.20 14 (SUPRA) NOTED THAT IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. (SUPRA) WHICH WAS A GROUP COMPANY OF THE ASSESSEE THE TRIB UNAL UPHELD THE ALLOWABILITY OF PROVISION FOR PROFIT EQU ALIZATION WHILE RECOGNIZING INCOMES ON APPLICATION OF PERCENTAGE OF COMPLETION METHOD IN THE CASE OF LONG TERM CONTRACTS IN THE LI GHT OF THE AS-7 ISSUED BY THE ICAI. IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEA R WE DO NOT DEAL WITH THE ISSUE ANY FURTHER EXCEPT DIRECTIN G THE ASSESSING OFFICER TO IMPLEMENT THE ORDER OF THE TRI BUNAL DATED 03.09.2014 (SUPRA) ON THIS GROUND TOO. AS A CONSEQU ENCE WHEREAS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED THAT OF THE REVENUE IS DISMISSED. THERE HAS BEEN NO CHANGE IN THE FACTS AND CIRCUMSTA NCES IN THE PRESENT YEAR NOR THERE IS ANY CHANGE IN THE ACCOUN TING TREATMENT GIVEN BY THE ASSESSEE. WE DO NOT FIND ANY REASON TO DEVIA TE FROM THE VIEW TAKEN BY THE CO-ORDINATE BENCH IN ASSESSMENT YEARS 1998-99 AND 1999-2000. ACCORDINGLY THIS GROUND IN THE APPEAL O F THE ASSESSEE IS ACCEPTED AND THE GROUND RAISED BY THE REVENUE IN IT S APPEAL IS DISMISSED. 19. BEFORE US SINCE BOTH THE PARTIES HAVE ADMITTED THAT THE FACTS OF THE CASE IN THE PRESENT GROUND ARE IDENTICAL TO THAT OF EARLIER YEARS AND SINCE IN EARLIER YEARS THE ISSUE HAS BEEN DECIDED BY CO-ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES FAVOUR WE THEREFORE FO LLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESS EES OWN CASE FOR EARLIER YEARS AND FOR SIMILAR REASONS ALLOW THE GR OUND OF ASSESSEE AND THUS THE ASSESSEES GROUND NO.4 IS ALLOWED AND REVENUES GROUND NO.2 IS DISMISSED. 20. GROUND NO.5 IS WITH RESPECT TO DISALLOWING COMPUTER SO FTWARE EXPENSES. ON PERUSING THE DETAILS OF EXPENSES AO NOTICED THAT ASS ESSEE HAD INCURRED AN AMOUNT OF RS.47 36 521/- TOWARDS SOFTWARE EXPENSE S WHICH WERE DEBITED UNDER THE HEAD OF MISCELLANEOUS EXPEN SES. HE ALSO NOTICED THAT ASSESSEE HAD ALSO INCURRED EXPENSES O F RS.4 95 000/- ON SOFTWARE. THE ASSESSEE WAS ASKED TO SU BSTANTIATE ITS CLAIM OF EXPENDITURE BEING REVENUE IN NATURE. THE ASS ESSEE INTER- ALIA SUBMITTED THAT THE SOFTWARE EXPENSES WERE NOT EXPE CTED TO GIVE ENDURING BENEFIT TO THE ASSESSEE AND THAT SOFTWARE RARE LY LAST FOR LONG AND THEREFORE IT CONSIDERED THE EXPENSES TO BE OF REVE NUE NATURE. THE SUBMISSIONS OF THE ASSESSEE WERE NOT FOUND ACCEPTAB LE TO THE AO. HE WAS OF THE VIEW THAT THE BENEFIT OF ACQUIRING SOFTWARE G IVES ENDURING BENEFIT AND IT HAS TO BE TREATED AS CAPITAL EXPE NDITURE. HE ALSO NOTICED THAT THE SIMILAR SOFTWARE EXPENSES INCURRED B Y THE ASSESSEE IN A.Y. 2000-01 WERE HELD TO BE CAPITAL IN NATURE . HE THEREFORE FOLLOWING THE SAME REASONING AS OF HIS PREDECESSO R FOR AY 2000-01 DISALLOWED THE CLAIM OF EXPENSES AS REVENUE EXPE NDITURE BUT HOWEVER GRANTED DEPRECIATION AND ACCORDINGLY MADE NET DISALLOWANCE OF RS.44 96 008/-. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER : 17.4 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE BY THE APPELLANT. WHETHER SOFTWARE EXPENSES SHOULD BE REG ARDED AS REVENUE OR CAPITAL IS NOT A MATTER OF GENERALIZATION. THE ISSUE HAS TO BE DECIDED BY EXAMINING THE RELEVANT FACTS VIZ. NATURE OF THE SOFTWARE ACQUIRED THE PURPOSES FOR WHICH IT IS ACQUIRED AND THE USES TO WHICH IT IS PUT. IF BY ITS NATURE A SOFTWARE IS INTENDED TO ACTIVATE T HE HARDWARE IN THE SENSE OF MAKING IT FUNCTIONAL BUT FOR WHICH THE CO MPUTER CANNOT BE MADE USE OF VIS-A-VIS A SPECIFIC FUNCTION THE SOFT WARE WILL BE AS MUCH IN THE NATURE OF AN APPARATUS AS THE HARDWARE IS. F URTHER IF A SOFTWARE HELPS IN STANDARDIZATION AND PATTERNIZATION AS WOUL D HELP AVOID FRESH IN-PUTTING EACH TIME IT CANNOT BE SEEN AS ANY THE DIFFERENT FROM A DIE OR A PATTERN OR A MOULD. SIMILARLY IF A SOFTWARE IS IN TENDED TO BE USED AS A TOOL IN THE MANUFACTURING OPERATION MUCH AS A PLA NT IS USED IT CANNOT BE SEEN AS DIFFERENT FROM A PLANT. IN SHORT THE IS SUE HAS TO BE DECIDED BY POSING THE QUESTION IF THE SOFTWARE IS A PART OF AND AIDS THE PROFIT- MAKING APPARATUS OR THE PROFIT-MAKING PROCESS. IF I T IS THE FORMER IT WILL BE CAPITAL IN NATURE. IF IT IS THE LATTER IT WILL BE REVENUE IN NATURE. AS CAN BE SEEN FROM THE ASSESSMENT ORDER THE APPELLAN T HAD NOT SUBMITTED BEFORE THE ASSESSING OFFICER COMPLETE DET AILS IN RESPECT OF THE SOFTWARE ACQUIRED DURING THE YEAR AND THE MANNE R IN WHICH THESE WERE PUT TO USE. EVEN BEFORE THIS FORUM ONLY THE S KELETAL BREAK-UP FOR THE SOFTWARE EXPENDITURES HAVE BEEN FURNISHED. THEI R ACTUAL USE HAS NOT BEEN CLARIFIED. EVEN THE INVOICES OR BILLS HAVE NOT BEEN PRODUCED. NO CLARIFICATION HAS ALSO BEEN GIVEN REGARDING THE DEF ERRED REVENUE EXPENDITURE INCLUDED IN THE CLAIM. IN THE CIRCUMSTA NCES IT IS NOT POSSIBLE TO GIVE ANY FINDING ON THE BASIS OF THE V ERY LIMITED DETAILS SUBMITTED BY THE APPELLANT AS TO WHETHER THE SOFTW ARE EXPENSES INCURRED BY THE APPELLANT COULD BE REGARDED AS CAPI TAL OR REVENUE AND TO WHAT EXTENT. IT IS NECESSARY THAT THE ASSESSING OFFICER CALLS FOR AND EXAMINES ALL THE RELEVANT DETAILS AND EVIDENCES AND DECIDES THE ISSUE IN THE LIGHT OF THE GUIDELINES GIVEN HEREINABOVE. DIRECTED ACCORDINGLY. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN A PPEAL BEFORE US. 21. BEFORE US AT THE OUTSET LD. AR FAIRLY SUBMITTED TH AT IDENTICAL ISSUE AROSE BEFORE HONBLE TRIBUNAL IN ASSESSEES APPEAL FO R A.YS. 2000-01 AND 2001-02. THE HONBLE TRIBUNAL DECIDED THE IS SUE (IN ITA NOS. 1247 & 1248/PN/2005 ORDER DATED 30-06-2015) AGAIN ST THE ASSESSEE. HE POINTED TO THE RELEVANT FINDING OF THE HONB LE TRIBUNAL. HE THEREFORE FAIRLY CONCEDED THAT FOLLOWING THE ORDER OF TH E TRIBUNAL IN THE EARLIER YEARS THE GROUND HAS TO BE DECIDED AGAINST THE ASSESSEE. LD. DR DID NOT OBJECT TO THE AFORESAID SUBMISSION OF THE LD. AR. 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IDENTICAL ISSUE OF EXPENDITURE ON COMPUTER SOFTWARE AROSE IN ASSESSEES OWN CASE IN A.YRS. 2000-01 AND 2001-02. THE COORDINATE BENCH OF THE TRIBUNAL WHILE DECIDING THE APP EAL FOR THOSE YEARS DECIDED THE ISSUE AGAINST THE ASSESSEE BY HOLDING AS UNDER : 10. THE FOURTH GROUND RAISED BY THE ASSESSEE IN AP PEAL IS EXPENDITURE ON COMPUTER SOFTWARE. THE ASSESSEE DURING THE RELEV ANT ASSESSMENT PERIOD HAD PURCHASED LICENSE TO USE COMPUTER SOFTWA RES LIKE WINDOWS 95 AUTOCAD MS OFFICE FOXPRO ETC.. THE ASSESSEE TREATED THE EXPENDITURE TOWARDS PURCHASE OF COMPUTER SOFTWARE A S REVENUE IN NATURE. THE ASSESSING OFFICER HELD THE SAME TO BE C APITAL EXPENDITURE. IN THE FIRST APPEAL THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER. 10.1 THE LD. AR OF THE ASSESSEE POINTED OUT THAT AN IDENTICAL ISSUE WAS RAISED IN THE APPEALS FOR ASSESSMENT YEARS 1998 -99 AND 1999- 2000 BY THE ASSESSEE AS WELL AS THE REVENUE. THE CO-ORDINATE BENCH DISMISSED THIS GROUND RAISED IN THE APPEALS OF BOTH THE PARTIES. 10.2 A PERUSAL OF THE ORDER OF THE CO-ORDINATE BENC H IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1998-99 AND 1999-2000 SHO WS THAT THE TRIBUNAL FOLLOWED THE JUDGEMENT OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG. LTD. REPORTED AS 3 46 ITR 138 (BOM.) AND REJECTED THE GROUND RAISED BY THE ASSESSEE AS WELL AS THE REVENUE BY OBSERVING AS UNDER :- 30. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. IN OUR CONSIDERED OPINION THE ISSUE REGARDING THE NATURE OF THE EXPENDITURE INCURRED ON ACCOUNT OF ACQUISITION OF S OFTWARE IS LIABLE TO BE DECIDED IN TERMS OF THE RATIO OF THE J UDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RA YCHEM RPG. LTD. 346 ITR 138 (BOM.). THE HONBLE BOMBAY HIGH C OURT UPHELD THE ORDER OF THE TRIBUNAL WHEREBY THE EXPEND ITURE INCURRED ON ACQUISITION OF SOFTWARE WHICH DID NOT F ORM PART OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE WAS TRE ATED AS A REVENUE EXPENDITURE. IN THE SAID CONTEXT IT IS TO BE NOTED THAT THE CIT(A) HAS GIVEN A FINDING THAT EXPENDITURE OF RS.22 16 107/- WAS INCURRED ON ACQUISITION OF SOFTW ARE CONNECTED WITH THE MANUFACTURING OPERATIONS OF THE ASSESSEE. SUCH SOFTWARES HAVE BEEN IDENTIFIED AS AUTOCAD PRO JECT MANAGEMENT SOFTWARE DESIGNING SOFTWARE ETC.. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF BOILERS AND HEA T TRANSFER EQUIPMENT AND THEREFORE THE AFORESAID SOFTWARES FOR M PART OF ITS PROFITS MAKING APPARATUS AND THUS IT IS LIABLE TO B E CONSIDERED AS CAPITAL EXPENDITURE IN VIEW OF THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RAYCHEM RPG. LTD. (SUPRA). THEREFORE ASSESSEES GRIEVANCE AGAINST THE DECISIO N OF THE CIT(A) 10 ITA NOS.1247 & 1248/PN/2005 ITA NOS.1290 & 1291/PN/2005 ITA NO.574/PN/2007 IN SUSTAINING THE A DDITION OF RS.22 16 107/- IS UNJUSTIFIED HAVING REGARD TO T HE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RAY CHEM RPG. LTD. (SUPRA). FURTHER THE CIT(A) HAS RECORDED A FI NDING THAT EXPENDITURE TO THE EXTENT OF RS.17 97 051/- HAS BEE N INCURRED ON ACQUISITION OF ROUTINE STANDARD SOFTWARES SUCH A S WINDOWS 95 MS OFFICE ETC. WHICH ARE REVENUE IN NATURE. OS TENSIBLY ASSESSEES BUSINESS IS OF MANUFACTURING OF BOILERS AND OTHER HEAT TRANSFER EQUIPMENT AND THE AFORESAID SOFTWARES MERELY FACILITATE ASSESSEES TRADING OPERATIONS AND/OR ENA BLE CONDUCT OF ITS BUSINESS MORE EFFICIENTLY AND THE SAME ARE N OT IN THE NATURE OF THE PROFIT-MAKING APPARATUS OF THE ASSESS EE COMPANY. THEREFORE IN OUR VIEW THE CIT(A) MADE NO MISTAKE IN TREATING THE EXPENDITURE OF RS.17 97 051/- INCURRED ON ACQUI SITION OF ROUTINE STANDARD SOFTWARE AS A REVENUE EXPENDITURE. MOREOVER THE SAID DECISION OF THE CIT(A) IS IN LINE WITH THE RATIO OF THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF RAYCHEM RPG. LTD. (SUPRA). IN THE RESULT THE GROUN D OF APPEAL NO.7 OF THE ASSESSEE AS WELL AS THE GROUNDS OF APPE AL NO.7.1 & 7.2 OF THE REVENUE ARE DISMISSED. RESPECTFULLY FOLLOWING THE ORDER OF TRIBUNAL IN EAR LIER ASSESSMENT YEARS IN ASSESSEES OWN CASE WE DISMISS THIS GROUND IN THE APPEAL OF ASSESSEE. 23. BEFORE US BOTH THE PARTIES HAVE ADMITTED THAT THE FA CTS OF THE CASE IN THE PRESENT GROUND ARE IDENTICAL TO THAT OF EARLIE R YEARS. IN EARLIER YEARS THE CO-ORDINATE BENCH OF THE TRIBUNAL HAS D ECIDED THE ISSUE AGAINST THE ASSESSEE. WE THEREFORE FOLLOWING THE DECIS ION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS AND FOR SIMILAR REASONS FIND NO REASON TO INTERFERE WITH THE ORDER OF LD.CIT(A) AND THUS THE ASSESSEES GROUND NO.5 IS DISMISSED. 24. GROUND NO.6 IS WITH RESPECT TO DISALLOWANCE OF HIGHER DEPRECIATION. ON PERUSING THE DEPRECIATION CHART AO NOTICED THAT ASS ESSEE HAD CLAIMED 100% DEPRECIATION ON PLANT NOS.4 8 AND 11 WHE REIN IT WAS MANUFACTURING SHELL TYPE BOILERS AND ABSORPTION COOLING DIVISION. AO WAS OF THE VIEW THAT DUE TO THE TYPE OF EQUIPMENTS T HAT WERE MANUFACTURED BY THE ASSESSEE WITH THE AFORESAID MACHINE S THE AFORESAID MACHINES PER SE DID NOT QUALIFY FOR HIGHER DEPREC IATION. HE ACCORDINGLY DISALLOWED THE CLAIM OF ADDITIONAL DEPRECIATION. AG GRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD CIT(A) WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 19.2.1 FIRST COMING TO PLANT NO.11 I.E. ABSORPT ION COOLING DIVISION WHICH MANUFACTURES HEAT PUMPS THE STAND TAKEN BY T HE ASSESSING OFFICER WILL HAVE TO BE CONFIRMED. ENTRY NO.3(III)( C)(C) SPECIFICALLY DEALS WITH HEAT PUMPS. IT PROVIDES FOR DEPRECIATION ON HE AT PUMPS AT THE RATE OF 100%. THIS ENTRY WILL NOT APPLY TO THE APPELLANT AS THE APPELLANT DOES NOT OWN / USE THE HEAT PUMPS. INSTEAD IT MANU FACTURES THEM. THIS ENTRY ALSO DOES NOT COVER TO PLANTS AND MACHIN ERIES MANUFACTURING HEAT PUMPS. HENCE PLANT NO.11 WOULD FALL OUTSIDE TH E PURVIEW OF ENTRY NO.3(III)(C)( C). IT IS THE APPELLANT'S ARGUMENT TH AT HEAT PUMPS WOULD COME UNDER ENTRY 3(XII)(E) I.E. AIR/GAS/FLUID HEA TING SYSTEMS. NOTHING HAS BEEN ADDUCED TO ESTABLISH THAT THE HEAT PUMPS M ANUFACTURED BY THE APPELLANT ARE IN THE NATURE OF SUCH HEATING SYS TEMS. FURTHER EVEN WHILE IT HAS BEEN SUBMITTED THAT A HEAT PUMP IS ALS O AN RENEWAL ENERGY DEVICE NO EVIDENCES HAVE BEEN ADDUCED IN TH IS REGARD APART FROM STATING THAT IT IS A WASTE HEAT RECOVERY EQUIP MENT. IF THE HEAT PUMP IS A WASTE HEAT RECOVERY EQUIPMENT THE SAME WI LL COME UNDER ENTRY NO.3(III)(C)(C) IN WHICH CASE THE APPELLANT W OULD NOT BE ELIGIBLE FOR DEPRECIATION AT THE RATE OF 100% SINCE IT IS NOT TH E OWNER USER OF THE HEAT PUMPS. IT ALSO NEEDS TO BE MENTIONED THAT BY T HE APPELLANT'S OWN SUBMISSION THE HEAT PUMPS REQUIRE MINIMUM ELECTRICIT Y FOR RUNNING THE COMPRESSOR HENCE THE SAME CANNOT BE REGARDED AS RE NEWAL ENERGY DEVICES. FOR THESE REASONS THE ACTION OF THE ASSES SING OFFICER IN REJECTING THE APPELLANT'S CLAIM OF DEPRECIATION ON THE MACHINERIES IN PLANT NO.11 AT THE RATE OF 100% AND IN RESTRICTING THE ADMISSIBLE DEPRECIATION TO A RATE OF 25% IS HEREBY CONFIRMED. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. 25. BEFORE US LD. AR SUBMITTED THAT IDENTICAL ISSUE AROSE IN ASSESSES APPEAL BEFORE HONBLE ITAT IN A.YS. 2000-01 AN D 2001-02. THE TRIBUNAL WHILE DECIDING THE APPEAL IN ITA NOS.1247 & 1248/PN/2005 ORDER DATED 30-06-2015 HAS DECIDED THE ISSUE WITH RESPECT TO PLANT NOS.4 AND 5 IN FAVOUR OF THE ASSESSEE A ND PLANT NO.11 AGAINST THE ASSESSEE. HE THEREFORE SUBMITTED THAT SINCE THERE ARE NO CHANGES IN THE FACTS FOR THE YEAR UNDER CONSIDERATION TH EREFORE BY FOLLOWING THE ORDER OF THE TRIBUNAL THE ISSUE BE DECIDED A CCORDINGLY. LD. DR DID NOT CONTROVERT THE SUBMISSIONS MADE BY THE L D. AR BUT HOWEVER SUPPORTED THE ORDER OF AO. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPE CT TO ALLOWING HIGHER RATE OF DEPRECIATION ON CERTAIN MACHINERIES. WE FIND THAT IDENTICAL ISSUE OF DISALLOWANCE OF HIGH DEPRECIATION AROSE IN AS SESSEES OWN CASE IN A.YRS. 2000-01 AND 2001-02. THE COORDINATE BENCH OF THE TRIBUNAL WHILE DECIDING THE APPEAL IN ITA NOS. 1247 & 1248/PN/2005 DECIDED THE ISSUE PARTLY IN FAVOUR OF ASS ESSEE BY HOLDING AS UNDER: 11. THE FIFTH GROUND IN APPEAL OF THE ASSESSEE IS WITH RESPECT TO CLAIM OF 100% DEPRECIATION ON PLANT AND MACHINERY. THE RE VENUE HAS ALSO IMPUGNED THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE AS GROUND NO.2 IN ITS APPEAL. 11.1 THE ASSESSEE HAD CLAIMED 100% DEPRECIATION ON ITS PLANT AND MACHINERY IN PLANT NO.3 PLANT NO.4 PLANT NO.8 PL ANT NO.10 AND PLANT NO.11. IN THE FIRST APPEAL THE COMMISSIONER OF INCO ME TAX (APPEALS) ACCEPTED THE CONTENTIONS OF THE ASSESSEE IN RESPECT OF ALL THE PLANTS EXCEPT PLANT NO.11. THE ASSESSEE HAS COME IN SECOND APPEAL WITH RESPECT TO THE CLAIM OF DEPRECIATION @ 100% IN RESP ECT OF ITEM OF PLANT NO.11. WHEREAS THE REVENUE IN ITS APPEAL HAS ASSAI LED THE FINDINGS OF THE COMMISSIONER OF INCOME TA THE COMMISSIONER OF IN COME TAX (APPEALS) IN RESPECT OF ALL THE PLANTS EXCEPT PLANT NO.11. 11.2 SIMILAR CLAIMS WERE MADE BY THE ASSESSEE IN RE SPECT OF PLANT NO. 11 AND THE REVENUE IN RESPECT OF OTHER PLANTS (EXCL UDING PLANT NO. 11). THE ISSUE WAS DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1998-99 AND 1999-2000 AS UNDER :- 35. NOW WE MAY FIRST TAKE-UP ASSESSEES CLAIM FOR DEPRECIATION 100% WITH RESPECT TO THE PLANT & MACHI NERY USED IN THE MANUFACTURE OF AIR/GAS/FLUID HEATING SYSTEMS. I N THIS CONTEXT IT IS CLEAR NOTED THAT HAVING REGARD TO TH E ENTRY 3(XIII)(R) READ WITH 3(XIII)(E) OF THE DEPRECIATION TABLE ANNE XED TO THE RULES PLANT & MACHINERY USED FOR THE MANUFACTURE O F AIR/GAS/FLUID HEATING SYSTEMS IS ELIGIBLE FOR DEPRE CIATION @ 100%. THE PLEA OF THE ASSESSING OFFICER THAT OTHER ITEMS IN ENTRY IN 3(XIII) CONTAIN A REFERENCE TO SOLAR AND THERE FORE ITEM (E) OF ENTRY 3(XIII) SHOULD ALSO BE READ TO BE REFERRING T O SOLAR AIR/GAS/FLUID HEATING SYSTEMS IN OUR VIEW IS NOT JUSTIFIED. THE ASSESSING OFFICER HAS ATTEMPTED TO READ INTO THE ST ATUTE A WORD WHICH IS CONSPICUOUS BY ITS ABSENCE. THEREFORE IN OUR VIEW HAVING REGARD TO THE ITEM (R) READ WITH ITEM (E) OF ENTRY 3(XIII) OF THE DEPRECIATION TABLE THE CLAIM OF THE ASSESSEE H AS BEEN RIGHTLY ALLOWED BY THE CIT(A) AND WE FIND NO FORCE IN THE GROUND OF APPEAL RAISED BY THE REVENUE. 36. NOW WITH REGARD TO ASSESSEES CLAIM FOR ALLOWA NCE OF DEPRECIATION @ 100% IN RESPECT OF PLANT & MACHINERY USED IN THE MANUFACTURE OF HEAT PUMPS IS CONCERNED THE SAME HA S BEEN APPROPRIATELY DENIED BY THE LOWER AUTHORITIES. THE CIT(A) HAS RIGHTLY POINTED OUT THAT MACHINERY & PLANT USED IN THE MANUFACTURE OF HEAT PUMPS IS NOT ELIGIBLE FOR DEPRE CIATION @ 100% AS IT DOES NOT FIND A PLACE IN ANY OF THE ITEM S IN THE DEPRECIATION TABLE WHICH IS ENTITLED FOR DEPRECIATI ON @ 100%. ON THIS ASPECT THE ORDER OF THE CIT(A) IS HEREBY AFFI RMED. THUS GROUND OF APPEAL NO.8 OF THE ASSESSEE AS WELL AS TH E GROUNDS OF APPEAL NOS.8.1 & 8.2 OF THE REVENUE ARE DISMISSE D. THE ISSUE RAISED BY BOTH THE SIDES ARE IDENTICAL TO THE ONE ALREADY ADJUDICATED BY THE TRIBUNAL. BOTH THE SIDES HAVE NO T BEEN ABLE TO CONTROVERT THE FINDINGS OF THE TRIBUNAL IN EARLIER ASSESSMENT YEARS. WE FIND NO REASON TO TAKE A CONTRARY VIEW. ACCORDINGLY THE GROUND WITH RESPECT TO CLAIM OF DEPRECIATION IN ASSESSEES APPE AL AND THE APPEAL OF REVENUE IS DISMISSED. 27. BEFORE US SINCE BOTH THE PARTIES HAVE ADMITTED THAT THE FACTS OF THE CASE IN THE PRESENT GROUND ARE IDENTICAL TO THAT O F EARLIER YEARS WE THEREFORE FOLLOWING THE DECISION OF THE COORDINATE BENCH OF T HE TRIBUNAL IN ASSESSEES OWN CASE OF EARLIER YEARS AND FOR S IMILAR REASONS HOLD THAT ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION @ 100% WITH RESPECT TO PLANT AND MACHINERY USED IN THE MANUFAC TURE OF AIR / GAS / FLUID SYSTEMS BUT IS NOT ELIGIBLE FOR 100% DEPRECIATION IN RESPECT OF PLANT AND MACHINERY USED IN THE MANUFACTURE OF HEAT P UMPS. THUS THE GROUND OF ASSESSEE IS PARTLY ALLOWED. 28. GROUND NO.7 IS WITH RESPECT TO PRIOR PERIOD EXPENSES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTICED THAT THOUGH THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACC OUNTING IT HAD CLAIMED EXPENSES TO THE EXTENT OF RS.92.37 LAKHS WHICH PERTAINED TO PRIOR PERIOD. ASSESSEE WAS ASKED TO JUSTIFY THE CLA IM. AO HAS NOTED THAT ASSESSEE HAD ONLY GIVEN HEAD-WISE BREAK UP WITHOUT GIVING PROPER EVIDENCE OF SUPPORTING VOUCHERS. AO WAS OF THE V IEW THAT SINCE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTIN G IT SHOULD HAVE BOOKED THE EXPENSES IN THE RESPECTIVE YEAR S. HE WAS THEREFORE OF THE VIEW THAT THE EXPENSES PERTAINING TO PR IOR YEARS AGGREGATING TO RS.92.37 LAKHS ARE NOT ALLOWABLE AND ACCORD INGLY DISALLOWED THE SAME. AGGRIEVED BY THE ORDER OF AO ASSESS EE CARRIED THE MATTER BEFORE LD CIT(A) WHO DECIDED THE ISSUE BY HOLD ING AS UNDER : 16.2 DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT WAS ASKED TO SUBMIT DETAILS IN RESPECT OF THE EXPENSES IN QUESTION. THE APPELLANT WAS ALSO REQUIRED TO SUBSTANTIATE THAT TH E LIABILITY IN RESPECT OF THE EXPENSES ACTUALLY GOT CRYSTALLISED DURING TH E RELEVANT PREVIOUS YEAR ITSELF. IN RESPONSE THE APPELLANT FILED A PRI OR PERIOD INCOME / EXPENDITURE STATEMENT ALONG WITH NARRATIONS IN RESP ECT OF THE ENTRIES APPEARING IN THIS STATEMENT. THE APPELLANT ALSO FIL ED COPIES OF INVOICES BILLS CREDIT NOTES INTER-OFFICE MEMOS ETC. IN SUP PORT OF SOME OF THESE ENTRIES. IN THE ABOVE STATEMENT THE TOTAL PRIOR PE RIOD EXPENSES WERE SHOWN AS CONSISTING OF RS.8 93 281/- TOWARDS 'MATER IALS' AND RS.83 44 235/- TOWARDS 'OTHERS'. 16.3 I FIND THAT IN THE APPELLATE ORDERS FOR THE A SSESSMENT YEARS 1977-78 & 1985-86 THE INCOME-TAX APPELLATE TRIBUNAL HAD ALLO WED THE APPELLANT'S CLAIM OF DEDUCTION TOWARDS PRIOR PE RIOD EXPENSES AFTER BEING SATISFIED THAT EVEN THOUGH THE EXPENSES RELAT ED TO THE PRECEDING YEARS THE APPELLANT HAD RECEIVED THE BILLS CLAIMS ETC. RELATING TO SUCH EXPENSES ONLY DURING THE PREVIOUS YEARS RELEVANT TO THESE TWO ASSESSMENT YEARS. IN CONSONANCE WITH THE APPROACH T HUS ADOPTED BY THE INCOME-TAX APPELLATE TRIBUNAL IT IS NECESSARY TO VERIFY IF THE BILLS INVOICES CLAIMS ETC. RELATING TO THE EXPENSES WHIC H HAVE BEEN CLAIMED UNDER THE HEAD 'PRIOR PERIOD EXPENSES' FOR THE PRES ENT ASSESSMENT YEAR HAD BEEN RECEIVED DURING THE YEAR ENDED 31.3.2002. ONLY THEN THE APPELLANT'S LIABILITY IN RESPECT OF THE EXPENSES CO VERED BY SUCH BILLS AS WERE RECEIVED DURING THE YEAR COULD BE SAID TO HAVE BEEN INCURRED DURING THE RELEVANT PREVIOUS YEAR. 16.3.1 IT HAS BEEN MENTIONED BY THE ASSESSING OFFI CER THAT AT THE TIME OF THE ASSESSMENT SUPPORTING EVIDENCES AND VOUCHERS HAD NOT BEEN FILED. EVEN THE DETAILS FILED BEFORE THIS FORUM AR E NOT COMPLETE. NO DOUBT ON THE BASIS OF SOME OF THE DETAILS AND SUPP ORTING EVIDENCES FILED LIABILITY IN RESPECT OF SOME OF THE EXPENSES APPEAR TO HAVE GOT CRYSTALLISED DURING THE RELEVANT PREVIOUS YEAR ONLY . EXAMPLES ARE - COMMISSION ON SALES: RS.6 15 576/-; DOMESTIC SALES- SPARES : RS.2 84 673/-; LEGAL AND PROFESSIONAL CHARGES : RS. 9 97 500/-; ACCESSORIES PURCHASES AND NON MODVAT PROJECTS: RS.5 0 670/-; SITE EXPENSES: RS.9 636/-; SITE EXPENSES: RS.20 000/-; L EGAL AND PROFESSIONAL CHARGES: RS.30 000/-; PREMIUM ON FORWAR D CONTRACT AND REVERSAL: RS.76 640/- ETC. BUT SOME OTHER EXPENSES ALSO APPEAR TO BE PRIMA FACIE INADMISSIBLE AS THE CREDIT NOTES BILLS ETC. RELATING THERETO SEEM TO HAVE BEEN RECEIVED PRIOR TO THE RELEVANT PR EVIOUS YEAR. EXAMPLES ARE - DOMESTIC SALES-SPARES: RS.L 87 757/- ; MATERIAL PURCHASE-SITE: RS.L5 652/-; MATERIAL PURCHASE - NON -MODVAT PROJECT: RS.2 31 540/-' LEGAL AND PROFESSIONAL CHARGES: RS.2 1 762/-; CUSTOMER- RELATION EXPENSES: RS.25 983/- ETC. AS FOR SOME OTH ER EXPENSES THE APPELLANT HAS NOT FURNISHED ANY DETAILS OR EVIDENCE S TO SUBSTANTIATE THEIR CRYSTALLISATION DURING THE RELEVANT PREVIOUS YEAR. EXAMPLES ARE - SHRI R.V.RAMANI-LOAN REMISSION - GROSS OF TAX: RS.3 7 LAKHS; PURCHASE TRADE - DOMESTIC: RS.5 90 899/-; COMMISSION ON SALE S - FRANCHISE: RS.2 11 365/-; DRAWINGS AND DESIGNINGS : RS.6 41 69 5/- ETC. THESE ARE NOT EXHAUSTIVE. IN THESE CIRCUMSTANCES IT IS A PPROPRIATE THAT THIS ISSUE GOES BACK TO THE ASSESSING OFFICER WHO SHALL EXAMINE THE EVIDENCES IN RESPECT OF EACH AND EVERY PRIOR PERIOD EXPENSES AND TO THE EXTENT THAT THE EXPENSES ARE FOUND TO HAVE GOT CRYSTALLISED DURING THIS YEAR ITSELF IN VIEW OF LATE RECEIPT OF BILLS INVOICES STATEMENTS CREDIT NOTES ETC. OR LATE-BOOKING OF EXPENSES DUE T O FACTORS BEYOND THE CONTROL OF THE APPELLANT ETC. HE SHALL ALLOW THE S AME AS DEDUCTION. THE APPELLANT'S CLAIM IN RESPECT OF THE BALANCE EXPENSE S I.E. EXPENSES WHICH ARE NOT PROVED AS CRYSTALLED DURING THE RELEV ANT PREVIOUS YEAR OR EXPENSES IN RESPECT OF WHICH NO EVIDENCES ARE F URNISHED SHALL BE DISALLOWED. AS THE ISSUE IS THUS BEING REMITTED TO THE ASSESSING OFFICER WITH SPECIFIC DIRECTIONS THE OBSERVATIONS MADE EARLIER ON REGARDING THE PRIMA FACIE ADMISSIBLE AND INADMISSIB LE EXPENSES SHOULD BE SEEN AS MERE OBSERVATIONS AND NOT AS DECI SIONS. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. REVENUE IS ALSO AGGRIEVED TO THE EXTENT OF R ELIEF GRANTED BY LD.CIT(A) AND HAS THUS RAISED GROUND NO.3 IN ITS APPEAL. S INCE THE GROUND RAISED BY ASSESSEE AND REVENUE ARE INTER-CONNE CTED BOTH ARE CONSIDERED TOGETHER. 29. BEFORE US LD. AR SUBMITTED THAT CIT(A) HAD DIRECTED T HE AO TO ALLOW DEDUCTION OF SUCH EXPENSES WHICH HAVE GOT CRYSTALLIZE D DURING THE YEAR BUT WERE BOOKED BELATEDLY DUE TO FACTORS BEY OND THE CONTROL OF THE ASSESSEE. HE SUBMITTED THAT IN THE APPELLATE GIVING EFFECT ORDER THE AO HAS GRANTED PARTIAL RELIEF I.E. TO THE EXTENT OF RS.43 .85 LACS. AS FAR AS THE ALLOWING OF THE BALANCE EXPENDITURE LD. AR SUBM ITTED THAT IN A.Y. 1977-98 & 1985-86 IDENTICAL ISSUE AROSE IN ASSESSEE S OWN CASE AND THE EXPENSES WAS ALLOWED BY THE COORDINATE BE NCH OF THE TRIBUNAL. HE FURTHER SUBMITTED THAT CONSIDERING THE NATURE OF EXPENSES THE ENTIRE EXPENSES SHOULD HAVE BEEN ALLOWED M ORE SO WHEN ASSESSEE WAS FOLLOWING CONSISTENT ACCOUNTING POLICY. HE FURTHER SUBMITTED THAT IDENTICAL ISSUE AROSE IN ASSESSEES GROUP CONCERN AND THE ISSUE WAS DECIDED IN ASSESSEES FAVOUR. HE PLACED ON RECORD THE COPY OF TRIBUNAL ORDER IN THE CASE OF THERMAX SURFACE COA TINGS LTD. IN ITA NO.1211/PN/1997 DT.26.08.2005. LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND SUBMITTED THAT SINCE ASS ESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IT SHOULD HAVE DEBIT ED THE EXPENSES IN THE RESPECTIVE YEARS. HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF FERTIL IZERS VS. CIT REPORTED IN (2009) 8 ITR 174. 30. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT CIT(A) WHILE GRANTING PARTIAL RELIEF HAS NOTED THAT SOME OF THE EXPENSES GOT CRYSTALLIZED DURING THE YE AR AND THEREFORE HE DIRECTED THE AO TO ALLOW THE SAME. HE ALSO NOTED THAT FOR SOME OF THE EXPENSES THE RELEVANT INVOICES BILLS STATEM ENTS ETC. WERE RECEIVED PRIOR TO THE RELEVANT PREVIOUS YEARS AND FOR SOME OF THE EXPENSES ASSESSEE DID NOT FURNISH ANY DETAILS OR EVIDENCE TO SUBSTANTIATE THE CRYSTALLIZATION OF THE LIABILITY DURING THE Y EAR UNDER CONSIDERATION. HE FURTHER DIRECTED THE AO TO CONSIDER T HE EVIDENCE AND THEREBY GRANTED PARTIAL RELIEF TO THE ASSESSEE. BEFOR E US ASSESSEE HAS NOT PLACED ANY MATERIAL ON RECORD TO CONTROVERT TH E FINDINGS OF LD. CIT(A) NOR HAS PLACED THE DETAILS OF EXPENDITURE TO SUBSTA NTIATE ITS STAND THAT THE LIABILITY GOT CRYSTALLISED DURING THE YEAR UN DER CONSIDERATION. BEFORE US ASSESSEE HAS ALSO NOT PLACED T HE DETAILS OF EXPENSES. BEFORE US REVENUE HAS ALSO NOT PLACED ANY MATERIAL TO POINT OUT ANY FALLACY IN THE FINDINGS OF LD.CIT(A). IN SUCH A SITUATION WE FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) AND THUS THE GROUND NO.7 OF THE ASSESSEE IS DISMISSED AND LIKEWI SE THE GROUND OF REVENUE IS ALSO DISMISSED. 31. GROUND NO.8 IS WITH RESPECT TO LOSS OF AMOUNT ON EMBEZZLEMENT . DURING THE COURSE OF ASSESSMENT AO NOTICED THAT ASSES SEE HAD DEBITED A SUM OF RS.78 44 316/- UNDER THE HEAD OF MISCE LLANEOUS EXPENDITURE ON ACCOUNT OF LOSS BY EMBEZZLEMENT AT ITS RE GIONAL HEAD OFFICE AT MUMBAI. THE ASSESSEE WAS ASKED TO GIVE THE DE TAILS OF SUCH LOSS AND JUSTIFY THE CLAIM AS EXPENDITURE. AO AFTER CONSID ERING THE SUBMISSIONS OF THE ASSESSEE NOTICED THAT THE LOSS FOR THE YEAR WAS ONLY RS.4 04 327/- AND LOSS OF RS.74 39 673/- PERTAINS TO EA RLIER PERIOD. HE WAS OF THE VIEW THAT THE LOSS PERTAINING TO EA RLIER YEARS SHOULD BE ADJUSTED AGAINST THE INCOME OF THE RESPECTIVE YEAR. HE ACCORDINGLY DISALLOWED THE LOSS OF RS.74 39 673/-. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD CIT(A) WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 10.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS M ADE BY THE APPELLANT AND THE FACTUAL DETAILS AND OTHER DOCUMEN TS FILED BY IT. IN THE LIGHT OF THE INFORMATION AND MATERIALS AVAILABL E IN THE ABOVE DOCUMENTS THERE CAN BE LITTLE DOUBT THAT EMBEZZLEM ENT HAD BEEN CAUSED BY SENIOR OFFICIALS OF THE APPELLANT COMPANY WHO HAD BEEN ENTRUSTED WITH RESPONSIBILITIES RELATING TO ACCOUNT S. IN THE CIRCUMSTANCES THE LOSS RESULTING FROM SUCH EMBEZZL EMENT MUST BE SAID TO HAVE ARISEN IN THE COURSE OF THE APPELLANTS BUS INESS ACTIVITIES. CONSEQUENTLY SUCH LOSS WILL HAVE TO BE CONSIDERED AS TRADING LOSS AND ALLOWED AS DEDUCTION. EVEN THE AO HAS NOT QUESTION ED THE DEDUCTIBILITY OF THE LOSS PER SE. HE HAS ALSO NOT QUESTIONED THE APPELLANTS CLAIM THAT THE EMBEZZLEMENT WAS DETECTE D ONLY DURING THE RELEVANT PREVIOUS YEAR. THEREFORE ADMISSIBILITY O F THE LOSS ARISING TO THE APPELLANT AS A RESULT OF THE EMBEZZLEMENT WILL HAVE TO BE UPHELD IN PRINCIPLE. 10.3.1 AS ALREADY NOTED THE ASSESSING OFFICER HAS RESTRICTED THE DEDUCTION ONLY TO SUCH LOSS AS RELATED TO THE PREVI OUS YEAR RELEVANT TO THIS ASSESSMENT YEAR. IN THIS CONNECTION HE HAS R ELIED UPON THE DECISION IN THE CASE OF BOMBAY FORGINGS PVT. LTD. V S. COMMISSIONER OF INCOME-TAX 206 ITR 562. I AM AFRAID THERE IS NOTH ING IN THIS DECISION AS WOULD SUPPORT THE ASSESSING OFFICER'S STAND. IN THE ABOVE CASE THE HON'BLE COURT HELD THAT AS EMBEZZLEMENT HAD TAKEN P LACE DURING THE RELEVANT PREVIOUS YEAR AND THE LOSS ARISING THEREO N HAD ALSO BEEN DULY REFLECTED IN THE BOOKS OF ACCOUNT BY OMITTING THE V ALUE OF THE EMBEZZLED GOODS FROM SALES AS WELL AS FROM LOSING STOCK (OF T HE ASSESSEE) WHILE PREPARING THE FINAL ACCOUNTS THE FACT THAT THE LOS S WAS DETECTED DURING THE SUBSEQUENT PREVIOUS YEAR WOULD NOT BE RELEVANT. THE FACTS IN THE PRESENT CASE ARE NOT SIMILAR. ON THE OTHER HAND THE RE ARE PLETHORA OF DECISIONS SOME OF WHICH HAVE BEEN ALREADY CITED EA RLIER ON AS WELL AS TWO CIRCULARS OF THE BOARD TO THE EFFECT THAT THE ENTIRE LOSS ARISING ON EMBEZZLEMENT SHOULD BE ALLOWED IN THE ASSESSMENT YE AR RELEVANT TO THE PREVIOUS YEAR IN WHICH EMBEZZLEMENT IS DETECTED EVEN THOUGH THE LOSS ACTUALLY RELATES TO OTHER YEARS. THEREFORE T HE STAND TAKEN BY THE ASSESSING OFFICER THAT ONLY THE LOSS RELATING TO TH E PRESENT ASSESSMENT YEAR COULD BE ALLOWED AS DEDUCTION IS WITHOUT ANY B ASIS. THE SAME IS ACCORDINGLY NEGATIVED. 10.3.2 EVEN WHILE THE APPELLANT'S CLAIM IS ADMISSIB LE IN PRINCIPLE IT HOWEVER APPEARS ON THE BASIS OF THE DETAILS AND FA CTS WHICH ARE AVAILABLE AND WHICH HAVE BEEN FILED THAT THE. ENTI RE CLAIM OF RS.78 LAKHS IS NOT DEDUCTIBLE. BY THE APPELLANT'S OWN SUB MISSION THE QUANTUM OF THE FRAUD AMOUNT AS PER THE CONFIRMATION S RECEIVED FROM THE BANKERS IS RS.93 86 463/-. THIS IS LESS THAN TH E GROSS CLAIM OF LOSS OF RS.1 03 12 693/-. FURTHER THE ABOVE CONFIRMED AMOUNT OF RS.93 86 463/- INCLUDES A SUM OF RS.3 82 523/- WITH THE NARRATION 'DETAILS OF OTHER DEPOSITS IN MEMON COOPERATIVE BAN K JOGESHWARI BRANCH'. IT IS NOT SELF- EVIDENT THAT THESE DEPOSIT S HAD EMANATED FROM THE APPELLANT'S ACCOUNT. IT ALSO INCLUDES A SUM OF RS.8 63 687/- WITH THE NARRATION 'CHEQUES DRAWN FROM BANK OF BARODA DU RING APRIL 1997 TO OCTOBER 1998'. THE STATEMENT IN RESPECT OF THE ABOVE AMOUNT DOES NOT CONTAIN ANY DETAILS REGARDING THE CHEQUES. THER EFORE IT CAN NOT BE MERELY PRESUMED THAT SUCH CHEQUES HAD BEEN PREPARED AND DRAWN FROM THE APPELLANT'S ACCOUNT FRAUDULENTLY. THERE IS ANOTHER REASON AS TO WHY THE AMOUNT OF LOSS CLAIMED BY THE APPELLANT CAN NOT BE ROUTINELY TAKEN AS CORRECT. IN THE STATEMENT SHOWING THE LOSS OF RS.1 03 12 693/- WHICH INCLUDES THE AMOUNT OF RS.8 63 637/- REFERRED TO SUPRA SEVERAL AMOUNTS ARE NOT SUPPORTED BY ANY CHEQUE NUMBERS. SUCH INSTANCES AGGREGATE TO RS.19 92 319/- (NOT INCLUDING THE SUM OF RS.8 63 638/-). IN THE ABSENCE OF CHEQUE NUMBERS IT CANNOT BE PRESUMED THAT THE ABOVE AMOUNTS REPRESENTED MISAPPR OPRIATION OF THE APPELLANT'S OWN FUNDS. EVEN THE OTHER STATEMENT SHOW ING WITHDRAWAL OF FUNDS BY SHRI LUCAS D'SOUZA HIS FAMILY MEMBERS AND THE OTHER EMPLOYEES FROM THE ACCOUNT OF M/S.MADHAV ELECTRICAL S IN THE MEMON COOPERATIVE BANK JOGESHWARI BRANCH CASTS DOUBTS O N THE CORRECTNESS OF THE LOSS CLAIMED BY THE APPELLANT. O UT OF THE TOTAL WITHDRAWAL OF RS.94 33 619/- THERE IS NO INFORMATION AS REGARDS PAYEES TO THE EXTENT OF RS.11 31 200/-. WHILE THE DEFICIENCIES IN THE VARIOUS STATEMENTS ILLUSTRATED HEREINABOVE WILL HAV E A BEARING ON THE QUANTUM OF THE LOSS CLAIMED BY THE APPELLANT FOR T HE PURPOSE OF ALLOWING DEDUCTION EVEN THE RECOVERIES WILL HAVE TO BE TAKEN INTO ACCOUNT. IT HAS BEEN SUBMITTED BY THE APPELLANT (DU RING THE COURSE OF THE APPEAL PROCEEDINGS) THAT RECOVERIES TO THE EXTE NT OFRS.27.5 LAKHS HAD BEEN ALREADY MADE AND RECOVERY OF A FURTHER AMO UNT OF RS.20 LAKHS WAS EXPECTED SHORTLY. IT IS ALSO SEEN THAT TH E POLICE HAD RECOVERED FROM THE ACCUSED PROPERTY TO THE TUNE OF RS.50 83 000/-. IT IS NOT KNOWN IF ANY PART OF THE RECOVERED PROPERTY HAS SINCE BEEN PERMITTED BY THE COURT TO BE APPROPRIATED BY THE AP PELLANT. IN THESE CIRCUMSTANCES I HAVE TO HOLD THAT EVEN WHILE THE A PPELLANT'S CLAIM OF DEDUCTION IS ADMISSIBLE IN PRINCIPLE THE QUANTUM O F THE ADMISSIBLE DEDUCTION NEEDS TO BE WORKED OUT ON A THOROUGH EXAM INATION OF THE FACTS AVAILABLE ON RECORDS AS ALSO SUCH OTHER FACTS AND EVIDENCES AS MAY BE FURNISHED BY THE APPELLANT. THE ASSESSING O FFICER IS HEREBY DIRECTED TO COLLECT ALL THE RELEVANT FACTS AND EVID ENCES AND DETERMINE THE ADMISSIBLE LOSS. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. 32. BEFORE US LD. AR REITERATED THE SUBMISSIONS MADE BEFOR E AO & LD.CIT(A). HE SUBMITTED THAT AGAINST THE TOTAL LOSS OF RS.7 8 44 316/- AO ALLOWED THE CLAIM OF RS.4 04 327/- DURING THE ASSESSMENT PROCEEDINGS AND LATER WHILE GIVING EFFECT TO THE ORDER OF LD .CIT(A) ALLOWED LOSS OF RS.64 82 136/- AND THUS THE ISSUE BEFORE HON BLE TRIBUNAL IS WITH RESPECT TO LOSS OF RS.9 57 853/-. HE SUBMITTE D THAT IN PRINCIPLE THE AO AND LD.CIT(A) HAVE BOTH HELD THAT THE LOSS IS ALLOWABLE. AO ALLOWED ONLY LOSS RELATABLE TO THE YEAR UNDER ASSESSMENT. LD.CIT(A) HAD ALLOWED THE LOSS SINCE IT WAS DISC OVERED DURING THE YEAR EXCEPT FOR SOME ITEMS FOR WANT OF DETAILS / NARRATION ETC. HE FURTHER SUBMITTED THAT THE ENTIRE LOSS HAVE BEEN WRITTEN OFF IN THE ACCOUNTS AS REFLECTED IN THE POLICE COMPLAINT FILED BY TH E ASSESSEE ON 04.04.2002 (THE COPY OF WHICH IS PLACED AT PAGE 92 OF TH E PAPER BOOK) AND THEREFORE THE ENTIRE LOSS SHOULD BE ALLOWED. LD . D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND SUBMITTE D THAT IN THE ABSENCE OF ANY DETAILS THE ENTIRE LOSS CANNOT BE ALLOWED. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT LD.CIT(A) WHILE RESTORING THE ISSU E TO DETERMINE THE LOSS HAS NOTED THAT SEVERAL AMOUNTS SHOW N IN THE LOSS WERE NOT SUPPORTED BY ANY CHEQUE NUMBERS OR ANY DET AILS. HE THEREAFTER REMITTED THE ISSUE TO AO TO VERIFY THE FACTS AND ALLOW THE LOSS. WE FIND THAT TO THE EXTENT ASSESSEE FURNISHED THE REQUIRED DETAILS THE LOSS WAS ALLOWED BY AO. IT IS ALSO A FACT THAT THE ASSESSEE HAS FILED POLICE COMPLIANT. IT IS AN UNDISPUTED FACT THAT THE LOSS HAS ARISEN ON ACCOUNT OF EMBEZZLEMENT AND THE ASSESSEE HAS ALSO FILED A POLICE COMPLAINT. WE FIND THAT THE HBLE APEX COURT IN THE CASE OF ASSOCIATED BANKING CORPORATION OF INDIA LTD. V. CIT [1965] 5 6 ITR 1 HAS OBSERVED THAT THE LOSS BY EMBEZZLEMENT MUST BE D EEMED TO HAVE OCCURRED WHEN THE ASSESSEE CAME TO KNOW ABOUT THE E MBEZZLEMENT AND REALISED THAT THE AMOUNTS EMBEZZLED COULD NOT BE RE COVERED. IN THE PRESENT CASE IT IS NOT THE CASE OF THE REVENUE THA T THE LOSS HAS NOT ARISEN DURING THE COURSE OF BUSINESS OR IS NOT INCID ENTAL TO BUSINESS OR THE VIEW OF THE ASSESSEE THAT THE LOSS IS N OT RECOVERABLE IS INCORRECT. IN VIEW OF THE AFORESAID FACTS WE ARE OF THE VIE W THAT THE LOSS ON ACCOUNT OF EMBEZZLEMENT IS ALLOWABLE. SINCE THE LD C IT(A) HAS ALREADY ALLOWED THE LOSS TO THE EXTENT OF RS 64 82 136/- WE DIRECT THE AO TO ALLOW THE BALANCE LOSS OF RS.9 57 853/-. T HUS THE GROUND NO.8 OF THE ASSESSEE IS ALLOWED. 34. GROUND NO.9 IS WITH RESPECT TO DISALLOWANCE OF EXPENSES. AO NOTICED THAT ASSESSEE HAD CLAIMED RS.9 84 462/- AS PU BLIC RELATION EXPENSES. AO WAS OF THE VIEW THAT SINCE THE ASS ESSEE FAILED TO ESTABLISH ITS REASONABLENESS WITH SUPPORTING EVIDENCE T HEREFORE THE REASONABLENESS AND GENUINENESS OF THE ENTIRE TRANSACTIO NS WERE NOT FULLY VERIFIABLE AND THEREFORE HE DISALLOWED A SUM OF RS.50 0 00/- ON ADHOC BASIS. AO ALSO NOTICED THAT ASSESSEE HAD CLAIMED RS.23 08 917/- BEING EXPENSES OF MEMBERSHIP AND SUBSCRIPT ION. IN THE ABSENCE OF DOCUMENTARY EVIDENCE AO HELD THAT THE E XPENSES WERE NOT FULLY VERIFIABLE AND THAT THEY WERE FOR THE PURPOSE OF BUSINESS. HE ACCORDINGLY DISALLOWED THE DISALLOWANCE OF RS.1 15 446/- (BEING 5% PERCENT OF EXPENSES). WITH RESPECT TO VEHICLE EXPENSES AO NOTICED THAT ASSESSEE HAD DEBITED RS.1 23 25 243/- ON ACCOUNT OF VEHICLE EXPENSES. IN THE ABSENCE OF DETAILS OF EXPENSES I.E. BILLS VOUCHERS ETC AO HELD THAT THE REASONABLENESS AND THE GENUINENES S OF THE EXPENSES WERE NOT VERIFIABLE AND THE ELEMENT OF VEHICLE FOR PERUSAL USE CANNOT BE DENIED. HE ACCORDINGLY DISALLOWED RS.6 16 262/- O F THE EXPENSES (BEING 5% OF EXPENSES). AO ALSO NOTICED THAT AS SESSEE HAD CLAIMED TELEPHONE EXPENSES OF RS.79 47 667/- BEING EXPENSE S OF TELEPHONE INSTALLED AT THE RESIDENCE OF ITS EXECUTIVE. HE W AS OF THE VIEW THAT THE PERSONAL USE OF THE TELEPHONE CANNOT BE R ULED OUT. HE ACCORDINGLY DISALLOWED RS.3 97 383/- (BEING 5% OF RESIDENTIAL TELEPHONE EXPENSES). AGGRIEVED BY THE ORDER OF AO ASSES SEE CARRIED THE MATTER BEFORE LD CIT(A) WHO DECIDED THE ISSUE BY HOLD ING AS UNDER : 11. THE NEXT GROUND RELATES TO THE DISALLOWANCE OF A SUM OF RS.50 000/- FROM OUT OF THE APPELLANTS CLAIM OF DE DUCTION TOWARDS PUBLIC RELATION EXPENSES WHICH WAS OF THE ORDER OF RS.9 84 462/-. THE ASSESSING OFFICER NOTICED FROM THE DETAILS FILED BE FORE HIM THAT THESE WERE IN THE NATURE OF SALES PROMOTION EXPENSES WHIC H ALSO INCLUDED SMALL GIFTS LUNCH WITH GUESTS ETC. IT WAS HELD B Y HIM THAT IN THE ABSENCE OF SUPPORTING EVIDENCES TO ESTABLISH THAT T HE ABOVE EXPENSES HAD BEEN EXCLUSIVELY INCURRED FOR THE PURPOSE OF BU SINESS A CERTAIN DISALLOWANCE WAS CALLED FOR. HE ESTIMATED SUCH DIS ALLOWANCE AT RS.50 000/-. 11.1 THE APPELLANT HAS ARGUED THAT THE ASSESSING OF FICER OUGHT NOT TO HAVE MADE THE ABOVE DISALLOWANCE IN AN ADHOC MAN NER. DURING THE COURSE OF THE APPEAL PROCEEDINGS A COPY OF THE REL EVANT ACCOUNT WAS FILED IN RESPECT OF EACH DIVISION. MOST OF THE EXP ENSES ARE SEEN TO BE IN THE NATURE OF CANTEEN EXPENSES INCURRED ON GIVING C ANTEEN COUPONS TO THE CUSTOMERS; LUNCH TO CUSTOMERS GUESTS ETC.; CON FERENCE EXPENSES; AND OTHER GUEST CHARGES INCURRED ON GIFTS GIVEN TO GUESTS. 11.2 IN SO FAR AS LUNCH AND CONFERENCE EXPENSES ET C. ARE CONCERNED NO PART THEREOF CAN POSSIBLY BE ATTRIBUTED TO NON-B USINESS PURPOSES. HOWEVER THE SAME CAN NOT BE SAID OF GIFTS GIVEN TO THE GUESTS AND THE OTHER GUEST EXPENSES. IT IS NOT PRIMA FACIE EVIDENT FROM THE ACCOUNT THAT ALL THE GUESTS TO WHOM GIFTS HAD BEEN GIVEN AN D ON WHOM GUEST CHARGES HAD BEEN INCURRED WERE HAVING BUSINESS CONN ECTIONS WITH THE APPELLANT. IN THE CIRCUMSTANCES AND ALSO CONSIDERI NG THE TOTAL AMOUNT INCURRED ON THE GUESTS I AM OF THE OPINION THAT A SMALL PART OF SUCH EXPENSES CAN BE VALIDLY SUBJECTED TO DISALLOWANCE. IT WOULD ALSO BE RELEVANT TO MENTION HERE THAT SOME OF THE GUEST CHA RGES INCLUDED IN THIS ACCOUNT RELATED TO FEBRUARY 2001 AND THEREF ORE CANNOT EVEN BE CONSIDERED FOR THIS ASSESSMENT YEAR. ON A REASONABL E BASIS THE DISALLOWABLE SUM IS HEREBY ESTIMATED AT RS.25 000/- . THE ADDITION MADE ON THIS SCORE IS REDUCED ACCORDINGLY. 12.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS T HUS MADE. I HAVE ALSO PERUSED THE RELEVANT ACCOUNTS COPIES OF WHICH WERE FILED DURING THE COURSE OF THE APPEAL PROCEEDINGS. THE GARDEN EX PENSES ACCOUNT DOES NOT SHOW ANY CAPITAL EXPENDITURE. THE EXPENSES WERE MOSTLY IN THE NATURE OF GARDEN MAINTENANCE EXPENSES. I ALSO F IND MERIT IN THE APPELLANT'S SUBMISSION THAT THESE EXPENSES HAD TO B E NECESSARILY INCURRED FOR ADDING TO THE DECORUM AND AMBIENCE OF T HE FACTORY AND OFFICE SET-UP AND THEREFORE SHOULD BE CONSIDERED AS REVENUE. I WOULD ACCORDINGLY HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ANY DISALLOWANCE WITH REFERENCE TO THE GARDEN EXPEN SES. EVEN THE MISCELLANEOUS EXPENSES ACCOUNT SHOWS THAT MOST OF T HE MAJOR EXPENSES WERE IN THE NATURE OF EXPENSES INCURRED IN THE BRANCH OFFICES ABROAD SUCH AS IN BANGLADESH INDONESIA MALAYSIA ETC. THERE WERE ALSO SMALL POOJA EXPENSES EXPENSES INCURRED ON STA MPS AND OTHER INCIDENTAL EXPENSES. PRIMA FACIE THERE IS NOTHING IN THIS ACCOUNT AS WOULD JUSTIFY A DISALLOWANCE. -COMING TO THE HOUSE MAGAZINE EXPENSES THE ACCOUNT CLEARLY SHOWS THAT THESE EXPENSES HAD B EEN INCURRED ON THE PUBLICATION OF TWO MAGAZINES 'KSHITIJ' AND 'FI RE-SIDE'. THE APPELLANT ALSO SUBMITTED A COPY EACH OF THESE MAGAZINES FOR P ERUSAL. IT IS ONLY THE MEMBERSHIP AND SUBSCRIPTION ACCOUNT WHICH SHOWS A FEW ITEMS WHICH ARE PRIMA FACIE NOT ADMISSIBLE. EXAMPLES ARE THE BCCI MEMBERSHIP FEES OF RS.22 000/- 'LISTING FEES' OF RS.L 40 250/- WHICH HAVE NOT BEEN CLARIFIED AND MEMBERSHIP FEES AND SUBSCR IPTION' OF RS.6 44 205/- (VIDE ENTRY DATED 31.1.2002) IN RESPECT OF WHICH NO SPECIFIC DETAILS HAVE BEEN FURNISHED. IN THE LIGHT OF THE ABOVE ANALYSES OF THE RELEVANT ACCOUNTS I WOULD HOLD THAT THE ASS ESSING OFFICER WOULD HAVE BEEN JUSTIFIED IN MAKING SOME DISALLOWANCE ONL Y IN RESPECT OF THE MEMBERSHIP AND SUBSCRIPTION EXPENSES. AT THE RATE O F 5% ESTIMATED BY THE ASSESSING OFFICER HIMSELF THE DISALLOWANCE WIT H REFERENCE TO THE MEMBERSHIP AND SUBSCRIPTION EXPENSES WOULD WORK OUT TO RS.1 15 446/- . THIS IS ROUNDED OFF TO RS.1 15 000/-; AND ACCORDINGLY OUT OF THE DISALLOWANCE OF RS.2 30 456/- MADE BY THE ASSESSING OFFICER DISALLOWANCE TO THE EXTENT OF RS:1 15 000/- IS HEREBY CONFIRMED. THE BALANCE DISALLOWANCE IS DELETED. 13.1 DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT FILED COPIES OF THE VEHICLE EXPENSES ACCOUNT RUNNING INTO SEVERAL PAGES. THE APPELLANT ALSO FILED SPECIMEN COPIES OF FORMS NO.16 TO SHOW THAT PERQUISITE VALUE OF USE OF MOTOR CARS HAD BEEN DULY INCLUDED IN THE TAXABLE SALARY OF THE CONCERNED EMPLOYEES. IT WAS A CCORDINGLY SUBMITTED THAT THE ASSESSING OFFICER SHOULD NOT HAV E MADE ANY DISALLOWANCE FROM OUT OF THE SUBJECT CLAIM. 13.2 I HAVE CAREFULLY PERUSED THE ACCOUNT. THE F IRST THING TO BE NOTED IS THAT A FEW ENTRIES ARE NOT SUPPORTED BY ANY NARRATI ON WHATSOEVER. EXAMPLES ARE: 30.04.2001 RS.17 337; 31.05.2001 RS. 3 200/-; 29.06.2001 RS.10 271/-; 1.08.2011 RS.7 080/-; 3.09. 3011 RS.4 994/- + RS.3 325/-; 30.09.2001 RS.9 080/-; 5.11.2001 RS.8 180/-; 13.11.2001 RS.3 200/-; 4.12.2001 RS.8 905/-; 1.1.20 02 RS.11 805; 7.2.2002 RS.10 422/-; 01.03.2002 RS.10 466/-; 31.03 .2002 RS.7 691/-; 13.12.2001 RS.5 500/-; 16.08.2001 RS.7 035/-; 25.02.2002 RS.3 500/-; 23.05.2001 RS.10 916/-; 22.0 5.2001 RS.2 813/-; 23.08.2001 RS.5 929/-; 02.11.2001 RS.4 215/-; 11.02.2002 RS.3 500/-; 16.02.2002 RS.2 717/-; ETC. HERE AMOUNTS LESS THAN RS.2 000 HAVE NOT BEEN MENTIONED. IN THE ABSENCE OF ANY NARRATION THE ABOVE AMOUNTS WOULD CERTAINLY BE LIA BLE FOR DISALLOWANCE. I ALSO FIND THAT THE ACCOUNT CONTAIN S CERTAIN PROVISIONS WHICH HAVE NOT BEEN REVERSED / ADJUSTED E.G. PROVI SION OF RS.50 000/- FOR THE ASSESSMENT YEAR 2001-02 A FEW OTHER PROVIS IONS MADE ON 31.03.2002 ETC. THE ABOVE PROVISION AMOUNTS TO THE EXTENT NOT SUPPORTED BY BILLS OR NOT BEING EXPENSES ACTUALLY I NCURRED WOULD QUALIFY FOR DISALLOWANCE. HAVING OBSERVED AS ABOVE I WOULD ALL THE SAME MENTION THAT THE ASSESSING OFFICER WAS NOT JUS TIFIED IN ROUTINELY MAKING A PERCENTAGE-BASED ESTIMATE WORKING OUT TO A SUBSTANTIAL DISALLOWANCE. NO SPECIFIC DETAILS HAVE BEEN MENTI ONED IN THE ASSESSMENT ORDER IN SUPPORT OF SUCH A HUGE DISALLOW ANCE. ON THE BASIS OF THE INFIRMITIES WHICH HAVE BEEN ENUMERATED HEREINABOVE ON A SAMPLE BASIS I AM OF THE OPINION THAT OUT OF THE A PPELLANTS CLAIM OF DEDUCTION TOWARDS VEHICLE EXPENSES A SUM OF RS.2 5 0 000/- CAN BE REASONABLY DISALLOWED FOR WANT OF SUPPORTING NARRAT IONS / EVIDENCES. THE DISALLOWANCE MADE IN THE ASSESSMENT IN THIS MAT TER IS ACCORDINGLY SUBSTITUTED. 13.2.1 THE ISSUE HAS BEEN DECIDED AS ABOVE ON A SCRUTINY OF THE RELEVANT ACCOUNT AND WITHOUT DRAWING ANY ADVERSE IN FERENCE ON PERSONAL USE OF VEHICLES BY THE DIRECTORS AND OTHER SENIOR EMPLOYEES SINCE THE SAMPLE COPIES OF FORMS NO.16 SHOW THAT PE RQUISITE VALUE OF USE OF MOTOR CARS HAD BEEN DULY CONSIDERED IN THEIR HANDS. 14. THE NEXT GROUND RELATES TO THE DISALLOWANCE M ADE FROM OUT OF THE APPELLANTS CLAIM TOWARDS TELEPHONE EXPENSES. AS A LREADY MENTIONED THE AO MADE SUCH DISALLOWANCE WITH REFERENCE TO THE CHARGES INCURRED ON THE RESIDENTIAL TELEPHONES ONLY. IT WAS HELD BY HIM THAT SINCE THE APPELLANT COULD NOT PRODUCE ANY BILLS VOUCHERS OR OTHER DOCUMENTARY EVIDENCES IN SUPPORT OF THE CLAIM THE PLEA THAT TH E EXPENSES HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS WAS NOT AMENABLE TO VERIFICATION AND MOREOVER PERSONAL U SE COULD NOT BE RULED OUT ALTOGETHER. 14.1 DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT FILED COPIES OF THE RELEVANT ACCOUNT. THE APPELLANT ALSO FILED A COUPLE OF CASH PAYMENT VOUCHERS SHOWING RECOVERIES MADE TOWAR DS PERSONAL CALLS. I HAVE PERUSED THE ABOVE. NO DOUBT THE ACC OUNT SHOWS RESIDENTIAL TELEPHONE CHARGES IN SEVERAL INSTANCES. THE ASSESSING OFFICER HIMSELF HAS QUANTIFIED THE TOTAL EXPENSES O N RESIDENTIAL TELEPHONES AT RS.79 47 667/- THE CORRECTNESS OF WH ICH HAS NOT BEEN DISPUTED BY THE APPELLANT. NEEDLESS TO SAY USE OF RESIDENTIAL TELEPHONES FOR PERSONAL PURPOSES AS WELL CAN BE SAF ELY ASSUMED. IT IS ONLY THE EXTENT OF USE WHICH IS A MATTER OF DEGREE. AS FOR THE APPELLANTS PLEA THAT IT HAD MADE RECOVERIES FROM T HE EMPLOYEES I FIND FROM THE SAMPLE VOUCHERS THAT SUCH RECOVERIES HAD B EEN MADE ONLY IN NOMINAL AMOUNTS. THE BASIS ON WHICH SUCH NOMINAL A MOUNTS WERE WORKED OUT HAS NOT BEEN CLARIFIED. THEREFORE IT I S DIFFICULT TO ACCEPT THAT THE ENTIRE CHARGES ATTRIBUTABLE TO PERSONAL OR NON-BUSINESS CALLS HAD BEEN RECOVERED FROM THE DIRECTORS / EMPLOYEES. THE APPELLANT HAS ALSO NOT FURNISHED DETAILS OF THE TOTAL RECOVERIES MADE. FOR THESE REASONS AND ALSO ALLOWING DUE MARGIN FOR THE FACTUM OF RECOVERY THE EXPENSES ATTRIBUTABLE TO NON-BUSINESS / PERSONAL US E OF RESIDENTIAL TELEPHONE IS HEREBY ESTIMATED AT RS.1 LAKH. THE DI SALLOWANCE OF RS.3 97 383/- MADE IN THE ASSESSMENT IS REDUCED ACC ORDINGLY. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US. 35. BEFORE US LD. AR REITERATED THE SUBMISSIONS MADE BEFOR E AO AND LD.CIT(A) AND FURTHER SUBMITTED THAT FROM A.Y. 2004 -05 ONWARDS LD.CIT(A) HAS ALLOWED FULL EXPENDITURE AND NO DISALLOWANCE HAS BEEN MADE. HE FURTHER SUBMITTED THAT THE AO HAS NOT POINTED OUT ANY EXPENSES WHICH WERE NOT ALLOWABLE AND HAS PROCEEDED TO DISALLOW THE EXPENSES ON AD-HOC BASIS. AS FAR AS THE DISALLOWANCE OF V EHICLE EXPENSES ARE CONCERNED HE SUBMITTED THAT SINCE THE AS SESSEE WAS A LISTED COMPANY THERE WAS NO ELEMENT OF PERSONAL EXPENSE S INVOLVED AND FOR THE AFORESAID PROPOSITION HE RELIED ON THE DECISION OF GUJARAT HONBLE HIGH COURT IN CASE OF SAYAJI IRON & ENGG. CO. VS . CIT 253 ITR 749 (GUJ). HE THEREFORE SUBMITTED THAT THE DISALLOWANCE B E DELETED. LD.D.R. ON THE OTHER HAND SUBMITTED THAT IN THE ABSENCE OF FULL DETAILS AO WAS JUSTIFIED IN DISALLOWING EXPENSES. 36. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE WE FIND THAT THE DISALLO WANCE OF EXPENSES UNDER VARIOUS HEADS HAS BEEN MADE BY THE A O ON ADHOC BASIS. LD.CIT(A) HAS GRANTED PARTIAL RELIEF TO THE ASSESSEE. WITH RESPECT TO DISALLOWANCE OF VEHICLE EXPENSES THE AO DISALLOWE D THE EXPENSES FOR THE REASON THAT PERSONAL USE OF EXPENSES CANNOT BE RULED OUT. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS A LIMIT ED COMPANY. WITH RESPECT TO A DISALLOWANCE OF EXPENSES BEING PERSONAL IN NATURE IN CASE OF LIMITED COMPANY WE FIND THAT HONBLE GUJARAT HIGH C OURT IN THE CASE OF SAYAJI IRON AND ENGINEERING COMPANY (SUPRA) H AS HELD THAT A LIMITED COMPANY BY ITS VERY NATURE CANNOT HAVE P ERSONAL USE. IN THE ABSENCE OF ANY CONTRARY BINDING DECISION IN FAVOUR OF REVENUE WE RELYING ON THE AFORESAID DECISION OF HONBLE HIGH COURT OF GUJARAT IN THE CASE OF SAYAJI IRON & ENGG. CO. (SUPRA) HOLD THAT NO DISALLOWANCE OF VEHICLE EXPENSES ON ACCOUNT OF BEING PERSON AL IN NATURE IS CALLED FOR IN THE PRESENT CASE. AS FAR AS THE DISALLOWANCE OF OTHER EXPENSES ON ADHOC BASIS IS CONCERNED WE FIND THAT AO HAS NOT POINTED OUT ANY EXPENSES WHICH ARE NOT FOR THE PURPOSE OF BUSINESS. FURTHER IT IS NOT IN DISPUTE THAT THE ASSESSEES BOOKS OF ACCOUNTS ARE REGULARLY MAINTAINED AUDITED AND NO DISCREPANCIES HAVE BE EN POINTED OUT BY THE AUDITOR OR THE REVENUE. THE DISALLOWANCE HAS BEEN MADE ON ADHOC BASIS. BEFORE US ASSESSEE HAS SUBMITTED THAT NO SUCH ADHOC DISALLOWANCE HAS BEEN MADE IN SUBSEQUENT YEARS IN SCRUTINY PROCEEDINGS AND THIS FACT HAS NOT BEEN CONTROVERTED BY REVENUE. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS WE ARE OF T HE VIEW THAT NO DISALLOWANCE OF EXPENSES ON ADHOC BASIS IS CALLED FOR IN THE PRESENT CASE AND THUS THE GROUND OF THE ASSESSEE IS ALLOWED. 37. GROUND NO.10 IS WITH RESPECT TO DEDUCTION U/S 80HHC OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAD CLAIMED DEDUCTION OF 4 97 36 000/- U/S 80HHC OF THE ACT. ON PERUSING THE DETAILS OF DEDUCTION HE NOTICED THAT ASSESSEE HAD NOT INCLUDED EXCISE DUTY AND SALES TAX COLLECTED IN T HE TOTAL TURNOVER. HE WAS OF THE VIEW THAT THE SALES TAX AND TH E EXCISE DUTY WAS PART OF TURNOVER AND SHOULD HAVE BEEN CONSIDERED A S PART OF TOTAL TURNOVER IN VIEW OF HONBLE APEX COURTS DECISION IN THE CASE OF CHOWRINGHEE SALES BUREAU PVT. LIMITED (87 ITR 542). HE ALSO NOTICED THAT WHILE CALCULATING DEDUCTION U/S 80HHC THE TRADING EXP ORT OF RS.1 43 74 000/- WAS NOT INCLUDED IN THE TOTAL TURNOVER WH ILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT. HE ALSO NOTICE D THAT THE ASSESSEE HAD EARNED INCOME FROM SALE OF SCRAP SETTLEMENT OF CLAIM ON ORDER CANCELLATION EXCHANGE DIFFERENCE MISCELLANEOUS INCOME BALANCES WRITTEN OFF EARLIER RECOVERED IN THE YEAR ETC. A GGREGATING TO RS.16 65 72 358/- (DETAILS OF WHICH ARE PLACED AT PAGE 17 OF THE ASSESSMENT ORDER). AO WAS OF THE VIEW THAT THE AFORESA ID INCOME SHOULD HAVE BEEN EXCLUDED WHILE CALCULATING DEDUCTION U/S 8 0HHC. AO THEREFORE RE-WORKED THE DEDUCTION U/S 80HHC AND CO MPUTED THE DEDUCTION AT RS.88 71 692/- AS AGAINST THE CLAIM OF RS.4 97 3 6 000/- MADE BY ASSESSEE. AGGRIEVED BY THE ORDER OF AO ASSES SEE CARRIED THE MATTER BEFORE LD.CIT(A) WHO GRANTED PARTIAL RELIEF TO ASSESS EE BY HOLDING AS UNDER : 23.2 FIRST COMING TO THE EXCISE DUTY AND SALES TA X COLLECTIONS THE INCLUSION MADE BY THE ASSESSING OFFICER OF SUCH COL LECTIONS IN 'TOTAL TURNOVER' WILL HAVE TO BE NEGATIVED. THE HON'BLE SU PREME COURT HAVE SINCE REJECTED THE SPECIAL LEAVE PETITION FILED BY THE DEPARTMENT AGAINST THE DECISION OF THE JURISDICTIONAL HIGH COU RT IN THE CASE OF SUDARSHAN CHEMICAL INDUSTRIES LTD. THE ABOVE DECISI ON OF THE JURISDICTIONAL HIGH COURT HAS ALSO SINCE BEEN FOLLO WED IN A FEW OTHER CASES. IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. CHLORIDE INDIA LTD. 53 ITD 180/256 ITR 626 BEING ONE SUCH CASE WHERE THE DECISION IN THE CASE OF SUDARSHAN CHEMICAL INDUSTRIES LTD. W AS FOLLOWED THE HON'BLE CALCUTTA HIGH COURT HAD THE OCCASION TO ANA LYSE THE EARLIER DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F MCDOWELL & CO. VS. INCOME-TAX OFFICER (1985) 154 ITR 148 WHEREI N IT HAD BEEN HELD THAT EXCISE DUTY COLLECTIONS WOULD FORM PART OF TUR NOVER. THE HON'BLE CALCUTTA HIGH COURT HELD THAT AS THE HON'BLE APEX C OURT HAD RENDERED THE DECISION IN THE MCDOWELL & CO. CASE IN THE CONT EXT OF THE SALES TAX ACT A SEPARATE ENACTMENT ALTOGETHER THE INTERPRET ATION OF TURNOVER GIVEN THEREIN COULD NOT BE APPLIED TO INTERPRET THE EXPRESSION 'TOTAL TURNOVER' USED UNDER THE INCOME-TAX ACT 1961. ACCO RDINGLY THE HON'BLE CALCUTTA HIGH COURT REJECTED REVENUE'S APPE AL FOR INCLUSION OF SALES TAX AND EXCISE DUTY IN 'TOTAL TURNOVER' FOR T HE PURPOSE OF COMPUTING DEDUCTION U/S.80HHC. RESPECTFULLY FOLLOWI NG THE ABOVE DECISION OF THE HON'BLE CALCUTTA HIGH COURT AS WELL AS THE DECISION OF THE JURISDICTIONAL HIGH COURT THE ASSESSING OFFICE R IS DIRECTED TO RECOMPUTE THE DEDUCTION ADMISSIBLE TO THE APPELLANT U/S.80HHC AFTER EXCLUDING THE EXCISE DUTY AND SALES TAX COLLECTIONS FROM 'TOTAL TURNOVER'. 23.3 AS FOR TRADING EXPORTS INCLUSION THEREOF IN ' TOTAL TURNOVER' CAN NOT BE QUESTIONED IN PRINCIPLE. HOWEVER ALL THE FACTS RELATING TO THIS ISSUE HAVE NOT BEEN MENTIONED IN THE ASSESSMENT ORDER. I FIND FROM THE ANNEXURE TO THE REPORT IN FORM NO.10 CCAC THAT THE APPELLANT HAD SHOWN 'TRADING EXPORTS' AT NIL AND 'OTHERS' AT RS.3 68 76 755/-. NO CATEGORICAL FINDING HAS BEEN GIVEN BY THE ASSESSING OFFICER TO THE EFFECT THAT THE TRADING EXPORTS WERE INDEPENDENT OF THE AB OVE 'OTHERS'. THE ASSESSING OFFICER HAS ALSO MADE REFERENCE TO THE BO OKS OF ACCOUNT IN WHICH THE TURNOVER OF RS.1 43 74 000/- WAS FOUND RE FLECTED RATHER CRYPTICALLY. IN THE CIRCUMSTANCES IT WOULD BE APPR OPRIATE THAT THE ASSESSING OFFICER VERIFIES THE RELEVANT ACCOUNT AND THE OTHER DETAILS HAVING A BEARING ON THIS ISSUE ONCE AGAIN. SHOULD M UCH VERIFICATION CONCLUSIVELY SHOW OMISSION OF ANY TRADING EXPORTS F ROM 'TOTAL TURNOVER' INCLUSION TO THE EXTENT OF SUCH OMISSION SHALL STAN D AUTOMATICALLY CONFIRMED. DIRECTED ACCORDINGLY. 23.4 THE NEXT GROUND WHICH ALSO RELATES TO DEDUCTIO N U/S.80HHC IS OVER THE EXCLUSION BY THE ASSESSING OFFICER OF 90% OF THE FOLLOWING RECEIPTS FROM THE 'PROFITS OF THE BUSINESS' BY APPL YING CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC: 'CLAIMS AND REFUNDS RS.1 32 37 677/- BALANCE WRITTEN OFF NOW RECOVERED RS.5 12 54 000 /- SALE OF SCRAP RS.1 37 16 681/- SETTLEMENT OF CLAIM ON ORDER CANCELLATION RS.2 50 00 000/- EXCHANGE DIFFERENCE AND RS.1 93 98 000/- MISCELLANEOUS INCOME RS.4 39 66 000/- 24.1 THE APPELLANT HAD ARGUED BEFORE THE ASSESSING OFFICER THAT THE ABOVE RECEIPTS RELATED TO ITS DAY-TO-DAY ACTIVITIES AND THEREFORE IT WAS ELIGIBLE TO GET DEDUCTION U/S.80HHC ON THE SAME. TH E ASSESSING OFFICER HOWEVER REJECTED THE ABOVE ARGUMENT ON TH E GROUND THAT THESE RECEIPTS COULD NOT BE SAID TO HAVE BEEN 'DERIVED FR OM' BUSINESS. IN THIS CONNECTION HE RELIED ON THE DECISIONS OF THE HON'B LE SUPREME COURT IN THE CASES OF CAMBAY ELECTRICAL SUPPLY INDUSTRIES CO . LTD. VS. COMMISSIONER OF INCOME-TAX 113 ITR 84; AND COMMISS IONER OF INCOME-TAX VS. PANDIAN CHEMICALS LTD. 263 ITR 278. 24.2 IN THIS APPEAL THE APPELLANT HAS ARGUED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN EXCLUDING THE ABOVE IT EMS OF RECEIPTS UNDER CLAUSE (BAA). DURING THE COURSE OF THE APPEAL PROC EEDINGS IT WAS CONTENDED THAT THE FACTS AND LEGAL POSITION VIS-A-V IS THE IMPUGNED RECEIPTS ARE THE SAME AS OBTAINED IN THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR 1998-99. THE APPELLANT SUBMITTED AN EXTRACT FROM THE REPLY FILED BY IT IN CONNECTION WITH THE APPEAL PRO CEEDINGS FOR THE SAID ASSESSMENT YEAR. 24.3 ON A CAREFUL CONSIDERATION OF THE STAND TAKEN BY THE ASSESSING OFFICER AS WELL AS THE SUBMISSIONS MADE BY THE APPE LLANT THE ISSUE IS DECIDED AS UNDER. (I) CLAIMS AND REFUNDS THE ASSESSING OFFICER HAS CONSIDERED GROSS CLAIMS A ND REFUNDS AMOUNTING TO RS.1 32 37 677/- UNDER CLAUSE (BAA). T HIS IS NOT CORRECT BECAUSE THE APPELLANT HAD ALREADY CONSIDERE D INSURANCE CLAIMS AND REFUNDS OF RS.L6 55 318/- UNDER THIS CLA USE. COMING TO THE BALANCE CLAIMS AND REFUNDS AMOUNTING TO RS.1 15 82 359/- THE SAME BEING RECOVERY OF EXCISE DUTY CUSTOMS DUTY AND SALES TAX ARE PATENTLY NOT INCLUD IBLE IN TOTAL TURNOVER MUCH AS THE COLLECTIONS EARLIER MADE WERE NOT SO INCLUDIBLE. FOR THE SAME REASON THESE RECOVERIES C AN NOT ALSO FORM PART OF OPERATIONAL INCOME. ON THE CONTRARY T HESE ARE CHARGES RECEIVED BACK HENCE IN THE NATURE OF 'CHAR GES'. I WOULD THEREFORE HOLD THAT THE ASSESSING OFFICER WAS JUST IFIED IN EXCLUDING 90% OF THE CLAIMS AND REFUNDS FROM THE 'P ROFITS OF THE BUSINESS' UNDER CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC. ACCORDINGLY THE STAND TAKEN BY THE ASSESSIN G OFFICER IS CONFIRMED. HOWEVER THIS CONFIRMATION APPLIES ONLY TO AN AMOUN T OF RS.1 15 82 359/- I.E. THE NET CLAIMS AND REFUN DS. (II) BALANCES WRITTEN OFF NOW RECOVERED . TO THE EXTENT THE BALANCES RECOVERED PERTAINED TO D EBTS WHICH IN TURN RELATED TO SALES SUCH BALANCES WOULD BE PART OF THE 'TOTAL TURNOVER' OF THE BUSINESS AND CANNOT BE CONSIDERED UNDER CLAUSE (BAA) OF THE EXPLANATION TO SECTION 80HHC. I FIND F ROM THE DETAILS FURNISHED BY THE APPELLANT THAT THE GROSS RECOVERY OF RS.5 12 54 071/- INCLUDED RS.85 39 666/- BEING 'BAD -DEBTS WRITTEN OFF - RECOVERED' AND RS.3 71 57 161/- BEIN G 'DOUBTFUL DEBTS WRITTEN OFF - RECOVERED.' EXCLUSION OF THESE TWO AMOUNTS UNDER CLAUSE (BAA) IS HEREBY NEGATIVED. THE SAME H OWEVER CAN NOT BE SAID OF THE REMAINING SUM OF RS.55 57 243/- WHICH REPRESENTED 'LIQUIDATED DAMAGES WRITTEN OFF'. LIQUI DATED DAMAGES ARE NOT IN THE NATURE OF OPERATIONAL INCOME . ON THE CONTRARY THE SAME ARE IN THE NATURE OF COMPENSATOR Y CHARGES. HENCE RECOVERY OF THE DAMAGES PAID WOULD ALSO PARTA KE THE NATURE OF CHARGES. THEREFORE SUCH RECOVERIES WOULD QUALIFY TO BE CONSIDERED UNDER CLAUSE (BAA). I WOULD THEREFORE HOLD THAT EXCLUSION OF 90% OF THE SUM OF RS.55 57 243/- FROM THE 'PROFITS OF THE BUSINESS' DESERVES TO BE CONFIRMED. THE SAME IS ACCORDINGLY CONFIRMED. (III) SALE OF SCRAP . SCRAP GENERATED IN THE MANUFACTURING PROCESS WILL H AVE TO BE CONSIDERED AS INTEGRALLY CONNECTED WITH THE BUSINES S OF THE UNDERTAKING. CONSEQUENTLY THE PROCEEDS REALISED ON DISPOSAL OF SCRAP WOULD FORM PART OF 'TOTAL TURNOVER'. IN DECID ING AS ABOVE RELIANCE IS PLACED ON THE DECISION OF THE INCOME-TA X APPELLATE TRIBUNAL PUNE BENCH IN THE CASE OF THERMAX BABCOC K & WILCOX LTD. PUNE VS. DEPUTY COMMISSIONER OF INCOME-TAX (OR DER IN ITA NO.158/PN/95 DATED 31.5.2005) FOR THE ASSESSMENT YE AR 1993- 94. MIS. THERMAX BABCOCK & WILCOX LTD. HAPPENS TO BE A SISTER CONCERN OF THE APPELLANT. IN THE ABOVE DECISION TH E TRIBUNAL FOLLOWED THE DECISION OF THE MUMBAI BENCH IN THE CA SE OF ANKIT DIAMONDS 75 ITD 329 AND THE DECISION OF THE CALC UTTA BENCH IN THE CASE OF RECKITT & COLMAN OF INDIA LTD. VS. DEPUTY COMMISSIONER OF INCOME-TAX 77 ITD 198 AND HELD THA T 'SCRAP SALES' WOULD FORM PART OF TOTAL TURNOVER. RESPECTFU LLY FOLLOWING THE ABOVE DECISION OF THE PUNE BENCH THE ASSESSING OFFICER'S ACTION IN EXCLUDING 90% OF THE SCRAP SALES OF RS.1 37 16 681/- UNDER CLAUSE (BAA) IS HEREBY NEGATIVED. THE ABOVE AMOUNT IS DIRECTED TO BE INCLUDED IN 'TOTAL TURNOVER'. (IV) SETTLEMENT OF CLAIM ON ORDER CANCEL LATION IT IS EVIDENT FROM THE NOMENCLATURE OF THESE RECEIP TS THAT THE SAME PRECEDED THE IMPLEMENTATION OF THE ORDERS WHIC H WERE NEVER ACTED UPON. THEREFORE THE RECEIPTS OF RS.2 5 0 00 000/- CANNOT BE CONSIDERED AS PART OF THE APPELLANT'S OPE RATIONAL INCOME. ON THE CONTRARY THE SAME WILL HAVE TO BE T REATED AS BEING IN THE NATURE OF COMPENSATORY CHARGES LIABLE FOR CONSIDERATION UNDER CLAUSE (BAA). HENCE THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING 90% OF THE ABOVE REC EIPTS UNDER CLAUSE (BAA) IS CONFIRMED. (V) EXCHANGE DIFFERENCE TO THE EXTENT THE EXCHANGE DIFFERENCES HAD BEEN REA LISED IN RESPECT OF SALES THE SAME WOULD ALSO PARTAKE THE N ATURE OF SALES AND FOR THE SAME REASON WOULD FORM PART OF 'TOTAL TURNOVER'. CONSEQUENTLY EXCHANGE DIFFERENCES TO SU CH EXTENT CANNOT BE TREATED AS RECEIPT WITHIN THE MEANING OF CLAUSE (BAA). HOWEVER TO THE EXTENT THE EXCHANGE DIFFERENCES DID NOT RELATE TO SALES NOR COULD BE CONSIDERED AS 'INCOME FROM OTHER SOURCES' (SUCH AS ACCRETION TO A DEPOSIT MADE FROM OUT OF SU RPLUS FUND ON ACCOUNT OF EXCHANGE RATE FLUCTUATIONS) THE SAME WOU LD QUALIFY TO BE CONSIDERED I EXCLUDED FROM 'PROFITS' UNDER CLAUS E (BAA). AS THE RELEVANT DETAILS HAVE NOT BEEN MADE AVAILABLE THE ASSESSING OFFICER SHALL CALL FOR AND EXAMINE THE SAME IN THE MANNER SUGGESTED HEREINABOVE; AND DECIDE TO THE EXTENT TH E GAINS ARE (I) INCLUDIBLE IN TOTAL TURNOVER (II) EXCLUDIBLE UNDER CLAUSE (BAA) AND (III) ASSESSABLE UNDER THE HEAD 'INCOME FROM O THER SOURCES'. THE EXCHANGE GAINS SHALL BE ACCORDINGLY CONSIDERED I ASSESSED. (VI) MISCELLANEOUS INCOME THE APPELLANT HAS NOT FURNISHED FULL DETAILS IN RES PECT OF THE TOTAL MISCELLANEOUS INCOME OF RS.4 39 66 000/-. FROM THE LIMITED DETAILS AVAILABLE ON RECORDS IT IS SEEN THAT THESE INCLUDED (I) EXCESS PROVISION (EXPENSES) WRITTEN BACK : RS.1 15 04 678/- CREDIT BALANCES APPROPRIATED : RS.1 64 05 330/- AN D MISCELLANEOUS INCOME I RECEIPTS RS.1 02 90 430/-. N ATURE OF THE BALANCE MISCELLANEOUS INCOME OF RS.57 65 562/- IS N OT ASCERTAINABLE FROM THE DETAILS AVAILABLE / FILED. IN SO FAR AS PROVISION FOR EXPENSES IS CONCERNED THE WRITTEN BA CK AMOUNTS WOULD HAVE TO BE CONSIDERED AS OPERATIONAL INCOME T O THE EXTENT THE EXPENSES RELATED TO THE BUSINESS OPERATIONS AND HAD BEEN INCURRED / ALLOWED IN THE YEAR(S) OF CLAIM. SIMILARLY CREDIT BALANCES APPROPRIATED WOULD PARTAKE THE NATURE OF O PERATIONAL INCOME TO THE EXTENT THE CREDITS WERE IN THE NATURE OF TRADE CREDITS. MUCH AS SUCH TRADE CREDITS HAD RESULTED IN REDUCTION OF THE OPERATIONAL INCOME IN THE YEAR IN WHICH THE SAM E HAD BEEN AVAILED WRITING BACK THEREOF WOULD AMOUNT TO RESTO RING THE OPERATIONAL INCOME SO REDUCED. IN THE ABSENCE OF FU LL DETAILS NO DEFINITE FINDING CAN BE GIVEN AS OF NOW AS TO THE EXTENT TO WHICH THE WRITTEN BACK / APPROPRIATED PROVISIONS AND BALA NCES COULD BE SO CONSIDERED AND CONSEQUENTLY COULD NOT BE E XCLUDED UNDER CLAUSE (BAA); AND TO THE EXTENT TO WHICH THE SAME WOULD FALL UNDER CLAUSE (BAA). THE ASSESSING OFFICER SHAL L CALL FOR AND EXAMINE THE DETAILS AND DECIDE THE ISSUE ALONG THE LINES SUGGESTED ABOVE. IN SO FAR AS THE MISCELLANEOUS REC EIPTS OF RS.1 02 90 430/- ARE CONCERNED THE APPELLANT HAS N OT FURNISHED ANY DETAILS. THE APPELLANT HAS ALSO NOT FURNISHED A NYTHING IN RESPECT OF THE BALANCE AMOUNT OF RS.57 65 562/-. NO THING HAS BEEN ADDUCED TO SHOW THAT THESE RECEIPTS WERE IN TH E NATURE OF OPERATIONAL INCOME. IN THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2001-02 UNDER IDENTICAL CIRCUMSTANCES EXCLUS ION OF THE MISCELLANEOUS RECEIPTS UNDER CLAUSE (BAA) HAD BEEN CONFIRMED. FOLLOWING THE SAID ORDER EXCLUSION OF 90% OF THE M ISCELLANEOUS AND OTHER RECEIPTS OF RS.1 60 55 992/- (RS.1 02 90 430/- + RS.57 65 562/-) UNDER CLAUSE (BAA) IS HEREBY CONFIR MED. 24.3.1 THE ASSESSING OFFICER SHALL RECOMPUTE THE AM OUNTS TO BE EXCLUDED (I.E. 90%) UNDER CLAUSE (BAA) AS WELL AS T HE TOTAL TURNOVER IN THE LIGHT OF THE DECISIONS GIVEN HEREI NABOVE. 25. THE NEXT GROUND RELATES TO REJECTION OF THE COM PUTATION MADE BY THE APPELLANT OF THE NET PROFIT OF BUSINESS U/S.80HHC BY ADDING TO THE PROFIT A SUM OF RS.3 45 90 526/- REPR ESENTING THE LOSS INCURRED BY THE FOREIGN REPRESENTATIVE OFFICES . THE ASSESSING OFFICER REJECTED SUCH COMPUTATION ON THE GROUND THA T 'THIS LOSS IS NOT RELATED TO THE EXPORT ACTIVITY AND THEREFORE NO T LIABLE TO BE ADDED IN THE PROFIT WORKED OUT FOR DEDUCTION U/S.80HHC'. 25.1 THE APPELLANT HAS ARGUED AGAINST THE ABOVE ACTION O F THE ASSESSING OFFICER. DURING THE COURSE OF THE APPEAL PROCEEDINGS THE APPELLANT EXPLAINED THE VARIOUS ACTIVITIES UNDE RTAKEN BY THE REPRESENTATIVE OFFICES ABROAD AND THE CIRCUMSTANCES UNDER WHICH LOSSES HAD BEEN INCURRED IN SUCH OFFICES. IT WAS ALSO SUBMITTED THAT A SIMILAR CLAIM HAD BEEN ALLOWED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR AN EARLIER ASSESSMENT YEAR. 25.2 I HAVE CAREFULLY CONSIDERED THE APPELLANT'S SUBMISSIONS. THERE IS NOTHING IN SECTION 80HHC AUTHORISING OR PE RMITTING THE ADDITION OF A LOSS OR EXPENDITURE TO PROFIT. I WOUL D THEREFORE HOLD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN REJECTI NG THE APPELLANT'S CLAIM IN THIS MATTER. ACCORDINGLY THE GROUND RAISED BY THE APPELLANT IS HEREBY DISMISSED. 26. THE NEXT GROUND WHICH ALSO DEALS WITH DEDUCTIO N U/S.80HHC IS OVER THE ACTION OF THE ASSESSING OFFI CER IN NOT CONSIDERING THE PROPORTIONATE EXPORT INCENTIVE (DEP B) OF RS.72.21 LAKHS FOR THE PURPOSE OF COMPUTING THE DEDUCTION AD MISSIBLE TO THE APPELLANT U/S.80HHC; AND INSTEAD IN REDUCING THE 'PROFITS OF THE BUSINESS' BY THE ABOVE INCENTIVE AMOUNT. THE ASSESSING OFFICER HELD THAT 'DEPB IS NOT ENTITLED FOR DEDUCTI ON U/S.80HHC AS PER THE INSTRUCTION ISSUED BY THE CBDT VIDE F.NO.L53/93/2004-TPL DATED 18.9.2004'. 26.1 THE RECOMPUTATION MADE BY THE ASSESSING OFFICE R WITHOUT CONSIDERING THE DEPB INCENTIVE OF RS.72.21 LAKHS HAS TO BE CONFIRMED. IT HAS BEEN HELD BY THE HON'BLE SUPRE ME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. STERLING FOODS (1999) 237 ITR 579 THAT 'THE SOURCE OF THE IMPORT ENTITLEMENTS COULD ONLY BE SAID TO BE THE EXPORT PROMOTION SCHEM E OF THE CENTRAL GOVERNMENT WHEREUNDER THE EXPORT ENTITLEMEN TS BECAME AVAILABLE' AND THEREFORE THE SALE CONSIDERATION RECEIVED BY AN ASSESSEE FROM THE SALE OF IMPORT ENTITLEMENTS COULD NOT BE TREATED AS BEING IN THE NATURE OF PROFITS AND GAINS DERIVED FROM THE ASSESSEE'S INDUSTRIAL UNDERTAKING. IN VIEW OF T HE ABOVE DECISION AS ALSO THE DECISIONS OF THE JURISDICTION AL HIGH COURT IN SEVERAL CASES (VIZ. COMMISSIONER OF INCOME-TAX VS. KANTILAL CHHOTALAL 246 ITR 439; COMMISSIONER OF INCOME-TAX VS. RAVI RATNA EXPORTS (P) LTD. 246 ITR 443; COMMISSIONER OF INCOME-TAX VS. K.K.DOSHI 245 ITR 849 ETC.) WHEREIN IT HAS BE EN HELD THAT DEDUCTION U/S.80HHC COULD BE AVAILED ONLY IN RESPEC T OF RECEIPTS HAVING DIRECT NEXUS WITH SALES THE ACTION OF THE A SSESSING OFFICER IN NOT CONSIDERING THE DEPB INCENTIVE OFRS. 72.71 LAKHS FOR THE PURPOSE OF COMPUTING DEDUCTION ADMISSIBLE U /S.80HHC IS HEREBY CONFIRMED. CONSEQUENTLY THE GROUND RAISED O N THIS SCORE IS DISMISSED. AGGRIEVED BY THE ORDER OF LD.CIT(A) ASSESSEE IS NOW IN AP PEAL BEFORE US VIDE GROUND NOS.10 AND 11. REVENUE IS ALSO AG GRIEVED BY THE ORDER OF LD.CIT(A) TO THE EXTENT OF RELIEF GRANTED BY L D.CIT(A) AND HAS RAISED GROUND NOS. 5 AND 6. SINCE THE GROUNDS RAISE D BY ASSESSEE AND REVENUE ARE INTER-CONNECTED BOTH ARE CO NSIDERED TOGETHER. 38. THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.10 HAS RAISED VARIOUS ISSUES IN RESPECT OF THE ITEMS TO BE CONSIDERED IN TOTAL TURNOVER AND THE ITEMS TO BE CONSIDERED IN EXPORT TURN OVER. WHILE APPLYING THE DEDUCTION U/S 80HHC OF THE ACT THE AO HAD EXCLUDED CERTAIN ITEMS AND INCLUDED CERTAIN ITEMS AGAINST WHICH THE LD. CIT(A) HAS GIVEN RELIEF IN RESPECT OF CERTAIN ITEMS AND UPHELD THE OTHER ITEMS. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL AGAINS T THE RESPECTIVE PORTIONS OF THE ORDER OF THE LD. CIT(A). BOTH THE AUTHORISED REPRESENTATIVES HAVE MADE EXTENSIVE ARGUMENTS IN SUPPO RT OF THEIR RESPECTIVE CLAIMS. HOWEVER THE ISSUE OF VARIOUS ASPECTS O F CLAIM OF DEDUCTION U/S 80HHC OF THE ACT HAS BEEN ADJUDICATED BY THE HONBLE HIGH COURT AND THE APEX COURT IN VARIOUS DECISIONS AND WE PROCEED TO ADJUDICATE THE ISSUES RAISED BY MAKING REFERENCE TO THE SAID DECISIONS RELIED UPON BY THE LD.A.R. FOR THE ASSESSEE AND L D.D.R. FOR THE REVENUE. 39. FIRST WE TAKE UP THE GROUND OF APPEAL NO.10(A) AND (B) RAISED BY THE ASSESSEE IN THIS REGARD. I.E. DETERMINATION OF TOTAL T URNOVER. THE ASSESSEE IS AGGRIEVED BY THE INCLUSION OF TRADING TUR NOVER IN TOTAL TURNOVER. THE REVENUE IS ALSO IN APPEAL AGAINST T HE ORDER OF LD. CIT(A). THE EXCLUSION OF SALES TAX AND EXCISE DUTY FR OM TOTAL TURNOVER VIDE GROUND OF APPEAL NO.6. 40. WE FIND THAT THE HONBLE APEX COURT IN THE CASE OF CIT VS. CATAPHARMA (INDIA) PVT. LTD. (2007) 292 ITR 641(SC) HAS HELD THAT WHILE CALCULATING THE DEDUCTION UNDER SECTION 80HHC(3)(B) OF T HE INCOME TAX ACT 1961 FOR COMPUTING THE TOTAL TURNOVER OF EXPORTS OUT OF INDIA OF TRADING GOODS EXCISE DUTY AND SALES TAX A RE NOT TO BE INCLUDED. ACCORDINGLY WE HOLD THAT TRADING TURNOVER IS TO BE EXCLU DED FROM TOTAL TURNOVER ALSO. SALES TAX AND EXCISE DUTY IS TO BE EXCLUDED FROM TOTAL TURNOVER. 41. THE NEXT ITEM IS THE SCRAP SALES WHEREIN THE PLEA OF THE ASSESSEE IS THAT THE SCRAP IS GENERATED DURING THE COU RSE OF MANUFACTURING. THE AFORESAID CONTENTION OF THE ASSESSEE IS NOT CONTROVERTED BY THE REVENUE. IN SUCH A SITUATION WE FIN D THAT THE RATIO OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. PUNJAB STEEL INDUSTRIES INDIA REPORTED IN 364 ITR 144 W OULD BE APPLICABLE TO THE PRESENT FACTS AND THEREFORE THE SALE OF SCRAP CANNOT BE CONSIDERED AS PART OF TOTAL TURNOVER FOR THE PURP OSE OF CALCULATION OF DEDUCTION U/S 80HHC OF THE ACT. 42. THE LAST ITEM IN GROUND OF APPEAL NO.10(A) IS EXCHANGE DIFFERENCE WHEREIN THE LD.A.R. FOR THE ASSESSEE FAIRLY ADMITTE D THAT THE SAID DIFFERENCE TO THE EXTENT OF SALES WOULD FORM PA RT OF THE TOTAL TURNOVER AND THE BALANCE NEEDS TO BE EXCLUDED. WE FIND MERIT IN THE PLEA OF THE ASSESSEE THAT EXCHANGE DIFFERENCE TO THE E XTENT OF SALES WOULD BE INCLUDED AS PART OF THE TOTAL TURNOVER. THUS GROUND OF APPEAL NO.10(A) RAISED BY THE ASSESSEE IS PARTLY ALLOWED A ND GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS DISMISSED. 43. NOW COMING TO THE ISSUE RAISED BY ASSESSEE IN GROU ND OF APPEAL NO.10(B) RELATES TO DISPUTED ADJUSTMENTS TO THE EXPORT TURNOVER WHEREIN THE VARIOUS CLAIMS HAVE BEEN RAISED BEFORE US AND WE PROCEED WITH THE SAME BY REFERRING TO EACH ONE OF THEM. (I) BUSINESS CLAIMS AND REFUNDS : IN THIS REGARD THE AMOUNT RELATES TO INSURANCE REFUND O F RS.1 15 82 359/-. THE ISSUE WAS REMITTED BACK TO THE AO W ITH DIRECTION. WE ALSO REMIT THIS ISSUE BACK TO THE AO TO APP LY THE SAID DIRECTIONS. (II) BALANCES WRITTEN OFF NOW RECOVERED : THE ASSESSEE POINTED OUT THAT IT WAS PART OF OPERATIONA L INCOME RECOVERED. SINCE THE EXPENSES WHEN BOOKED WERE ALLOWED AS EXPENDITURE HENCE THE SAME IS TO BE CONSIDERE D AT COST OF EXPORT TURNOVER. WE FIND MERIT IN THE PLEA OF THE ASSESSEE IN THIS REGARD. HOWEVER ONCE THE SAME IS EXCLU DED AS PART OF TURNOVER HENCE THE SAME CANNOT BE EXCLUDED UN DER EXPLANATION (BAA) TO SEC.80HHC OF THE ACT. (III) SETTLEMENT OF CLAIM OF ORDER CANCELLED TOTALING TO RS.2.50 CRORES : THE EXPLANATION (BAA) UNDER SEC.80HHC DEFINES THE PROFIT OF BUSINESS TO MEAN THE PROFITS AS COMPUTED UNDER THE H EAD PROFITS AND GAINS OF BUSINESS TO AS REDUCED BY 90% OF THE SAME REFERRED TO IN CLAUSES (III)(A) TO (III)(E) OF SEC.28 OF THE ACT BEYOND ANY RECEIPTS BY WAY OF BROKERAGE CLAIM INTEREST RENT CHA RGES OR ANY OTHER RECEIPT OF SIMILAR NATURE INCLUDED IN SUCH PRO FITS. THE RECEIPTS ON ACCOUNT OF SETTLEMENT OF CLAIM OF ORDER CANCELLATION IS IN THE NATURE OF OPERATIONAL INCOME AND CANN OT BE EXCLUDED UNDER EXPLANATION (BAA) TO SEC.80HHC OF THE ACT. (IV) MISCELLANEOUS INCOME : THE NEXT ITEM IS MISCELLANEOUS INCOME WHEREIN THE ASSESSEE CLAIMED THE SAID INCOME AT RS.4.39 CRORE TO BE PART OF EXPORT TURNOVER. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE TO THE EXTENT OF RS.2.29 CRORES REFERRING THE L D. CIT(A) VIDE PARA 24.3 DISCUSSED THE ISSUE AND WE FIND MERIT IN HIS OBSERVATIONS AND UPHELD THE ORDER OF LD. CIT(A) REGARDIN G MISCELLANEOUS INCOME TO BE EXCLUDED. HENCE THE GROUND O F APPEAL NO.10(C) IS PARTLY ALLOWED. 44. NOW COMING TO GROUND OF APPEAL NO.10(D) I.E. CONFIRMING EXCLUSION FROM ELIGIBLE PROFITS OF BUSINESS LOSS / EXPENSES ON OVER- SEA LOSSES TO THE EXTENT OF RS.3 44 90 526/-. THE ASSESSEE IS AGGRIEVED BY THE NON-EXCLUSION OF BUSINES S LOSSES. IN THIS REGARD IT WAS POINTED OUT THAT PROFITS IF ANY OF THE REPRESENTATIVES OF THE ASSESSEE OUGHT TO BE EXCLUDED U /S 80HHC OF THE ACT SO CONSEQUENTLY THE LOSSES HAVE TO BE EXCLUD ED UNDER EXPLANATION BAA (2) OF SEC.80HHC OF THE ACT AND CONSEQUEN TLY THE PROFITS ELIGIBLE FOR CLAIMING THE DEDUCTION U/S 80HHC OF THE A CT SHOULD BE INCREASED. WE FIND MERIT IN THE PLEA OF THE ASSES SEE AS EXPLANATION (BAA) TO SEC.80HHC OF THE ACT PROVIDES THAT TH E PROFITS OF ANY BRANCH OFFICE WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATED OUTSIDE INDIA OUGHT TO BE REVISED FROM THE PROFITS OF BUSINESS COMPUTED UNDER THE HEAD OF PROFITS AND GAINS O F BUSINESS AND PROFESSION. CONSEQUENTLY IN CASES FROM THE ANY LOSS OF OVER-SEAS BRANCH OR OFFICE THEN THE SAME ALSO NEEDS TO BE EXCLUDED AND THE PROFITS ELIGIBLE TO CLAIM DEDUCTION U/S 80HHC OF THE ACT SHO ULD BE INCREASED AND WE DIRECT SO. THUS GROUND OF APPEAL NO.10(D ) IS ALLOWED. 45. NOW COMING TO GROUND OF APPEAL NO.10(E) ASSESSEE HAS SOUGHT PROPORTIONATE DEDUCTION WITH REFERENCE TO ITS EXPORT AND ON ACCOUNT OF (DEPB). THE SAID ISSUE NOW STANDS DECIDED AS PER THE AME NDMENT TO SECTION AND THE AO IN THIS REGARD IS DIRECTED TO APPLY T HE AMENDMENT AND DECIDE THE ISSUE. 46. THE ISSUE IN GROUND OF APPEAL NO.10(F) IS AGAINST THE CLA IM OF UNABSORBED LOSSES U/S 72A OF THE ACT I.E. THE SAME MAY BE REDUCED FROM THE PROFITS OF BUSINESS. THE LD. CIT(A) HAS DECIDED THE SAID ISSUE RELYING ON THE RATIO LAID DOWN BY THE HONBLE BOMBA Y HIGH COURT AT PARA 27 PAGE 77 WHICH HAS NOT BEEN REVERSED . APPLYING THE SAID PRINCIPLE WE DISMISS THE GROUND OF APPEAL NO.10(F). 47. THE ISSUE IN GROUND OF APPEAL NO.11 RAISED BY THE AS SESSEE IS AGAINST THE ASSUMPTION OF EXCHANGE DIFFERENCE AS BUSINESS INCOME OR UNDER THE HEAD INCOME FROM OTHER SOURCES. THE LD. C IT(A) RELIED ON PARA NOS.73 AND 74 OF THE ORDER AND HAS CONSIDERED THE PLEA OF THE ASSESSEE AND IN THE ABSENCE OF DETAILS OF DEDUCTIONS HAS DIRECTED THE AO TO CALL FOR THE DETAILS AND EXAMINE THE SAME AND DECIDE THE ISSUE AS PER HIS DIRECTION AND DECIDE THE SAME. WE FIND NO MERIT IN THE GROUND OF APPEAL NO.11 RAISED BY THE ASSESSEE IN THIS REG ARD WHERE THE ISSUE HAS BEEN SET ASIDE TO THE AO FOR VERIFICATION. T HUS THIS GROUND IS DISMISSED. 48. NOW COMING TO GROUND OF APPEAL NO.5 RAISED BY THE RE VENUE WHICH IS ALSO AGAINST THE ORDER OF LD. CIT(A) IN DIRECTING THE AO TO CONSIDER THE FOLLOWING ITEMS OF INCOME U/S 80HHC OF THE ACT . (A) BAD DEBTS WRITTEN OFF RECOVERED AND (B) DOUBTFUL DEBTS WRITTE N OFF RECOVERED. THE SAID ISSUE HAS BEEN DECIDED AGAINST THE REVENUE BY THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT 2 45 ITR 769 (BOM). APPLYING THE SAID PRINCIPLE WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE IN ACCORDANCE WITH THE LAW. AO THUS HA S DIRECTED TO RECOMPUTE THE DEDUCTIONS AVAILABLE DURING THE ASSESSMENT U/S 80HHC OF THE ACT AFTER APPLYING THE DIRECTIONS OF THE TRIB UNAL ON VARIOUS ASPECTS OF THE SAID DEDUCTION I.E. THE COMPUTATION OF TOTAL TURNOVER AND EXPORT TURNOVER AS DIRECTED IN THE PARAG RAPHS HEREINABOVE WHILE DECIDING THE GROUND OF APPEAL NOS.10 AND 11 RAISED BY THE ASSESSEE AND GROUND OF APPEAL NOS.5 AND 6 RAISED BY TH E REVENUE. WE THUS ADJUDICATED THE SAID ISSUES IN GROUND OF APPEAL NO.10 RAISED BY THE ASSESSEE. 49. GROUND NO.12 IS WITH RESPECT TO CHARGING OF INTEREST U/S 234D. BEFORE US AT THE OUTSET LD.A.R. SUBMITTED THAT THIS GROU ND NEEDS TO BE DECIDED AGAINST ASSESSEE AS THE PROVISIONS OF SEC.234D WERE APPLICABLE AS ASSESSMENT WAS COMPLETED AFTER 01.06.20 03. IN VIEW OF THE SUBMISSION OF LD.A.R. THE GROUND OF ASSESSEE IS DISMISSED. 50. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 51. NOW WE TAKE UP REVENUES APPEAL IN ITA NO.276/PUN/2 006 FOR THE A.Y. 2002-03. 52. FIRST GROUND IS WITH RESPECT TO DELETING THE ADDITION OF LEASE RENT ON ACCOUNT OF ACCRUAL BASIS. AO NOTICED THAT ASSESSEE APART FROM BEING IN THE BUSINE SS OF MANUFACTURING AND SELLING OF STEAM BOILERS IT WAS ALSO ENGAG ED IN THE BUSINESS OF LEASING AND HAD GIVEN ON LEASE OF CERTAIN SELF- MANUFACTURED PRODUCTS BUT HAD NOT OFFERED THE LEASE REN TALS AS ITS INCOME. THE AO THEREFORE ASKED THE ASSESSEE TO SHOW C AUSE AS TO WHY LEASE RENTALS AMOUNTING TO RS.1.53 CRORES AS IN PRE CEDING YEAR NOT BE CONSIDERED TO HAVE BEEN ACCRUED TO THE ASSESS EE. ASSESSEE INTER-ALIA SUBMITTED THAT AS PER THE RESTRUCTURING ARRAN GEMENT AS APPROVED BY THE HONBLE HIGH COURT THE ENTIRE AMOUNT D UE WAS FOREGONE BY THE ASSESSEE IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2001-02 AND THERE WAS NO ACCRUAL OF INCOME IN THE YEAR UNDER CO NSIDERATION. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO AO. AO NOTED THAT THE INCOME FROM LEASE WERE ESTIMATED AT RS.1 53 21 302/- IN A.Y. 2001-02. HE ALSO NOTED THAT THE DECISION OF LD.CIT( A) IN NOT CONSIDERING IT AS INCOME WAS NOT ACCEPTED BY REVENUE AND APPEAL W AS PREFERRED BY THE REVENUE BEFORE THE TRIBUNAL. SINCE REVE NUE HAD PREFERRED APPEAL AND TO KEEP THE MATTER ALIVE AO ESTIMAT ED THE INCOME FROM LEASE AT RS.1 53 21 302/- AND MADE ITS ADDITION. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATT ER BEFORE LD.CIT(A) WHO DECIDED THE ISSUE BY HOLDING AS UNDER : 9.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS T HUS MADE BY THE APPELLANT AND ITS LEARNED AUTHORISED REPRESENTATIVE . I FIND THAT ASSESSABILITY OF LEASE RENTS HAD FIGURED IN THE ASS ESSMENT AS WELL AS APPELLATE ORDERS FOR THE ASSESSMENT YEARS 2000-01 & 2001-02. IT WOULD THEREFORE BE OF USE OF BRIEFLY DISCUSS THES E ORDERS. 9.2.1 FOR THE ASSESSMENT YEAR 2000-01 THE APPELLA NT HAD NOT ACCOUNTED LEASE RENTALS FROM 8 LESSEES INCLUDING M/ S.ARVIND MILLS LTD. M/S.PARASRAMPURIA INDUSTRIES LTD. AND M/S.PAR ASRAMPURIA INTERNATIONAL LTD. THE ASSESSING OFFICER BROUGHT TO TAX THE INCOME NOT SO ACCOUNTED FOR IN RESPECT OF FOUR PARTIES (EXCLUD ING M/S. ARVIND MILLS LTD.). THIS IS HOW AN ADDITION OF RS.57 75 268/- HAD BEEN MADE. THE APPELLANT HAD ARGUED THAT IT HAD NOT RECOGNISED THE INCOME IN ACCORDANCE WITH 'PRUDENCE' WHICH WAS ONE OF THE PRE SCRIBED POLICIES AS PER THE MANDATORY ACCOUNTING STANDARD-I RECOGNIS ED U/S.145. THE ASSESSING OFFICER HOWEVER HELD THAT THE ONLY COUR SE OPEN TO THE APPELLANT WAS TO OFFER THE INCOME TO TAX AND CLAIM IT AS BAD DEBT IN THE EVENT OF THE DEBT BECOMING BAD. BEFORE THE FIRS T APPELLATE AUTHORITY THE APPELLANT SUBMITTED THAT EVEN THOUGH IT WAS FOLLOWING THE MERCANTILE METHOD OF ACCOUNTING GENERALLY AND EVEN AS REGARDS LEASE RENTALS WHERE HOWEVER EXISTED ANY SIGNIFIC ANT UNCERTAINTY ABOUT ULTIMATE COLLECTION REVENUE WAS BEING RECOGN ISED ONLY AS AND WHEN RECEIVED. IN THE CASES OF THE CONCERNED LESSEE S IT WAS IMPOSSIBLE TO REASONABLY EXPECT ULTIMATE COLLECTION IN VIEW OF THEIR FRAGILE FINANCIAL POSITIONS. IN FACT SOME OF THES E PARTIES SUBSEQUENTLY APPROACHED THE BOARD FOR INDUSTRIAL AND FINANCIAL R ECONSTRUCTION (BIFR). IN THESE CIRCUMSTANCES THERE WAS NO POSSI BILITY OF ACCRUAL OF INCOME EVEN UNDER THE MERCANTILE METHOD OF ACCOUNTI NG. ACCOUNTING STANDARD-I ALSO REQUIRES THAT PROVISIONS SHOULD BE MADE FOR KNOWN LIABILITIES AND LOSSES EVEN IF THE AMOUNTS CANNOT B E ASCERTAINED WITH PRECISION. THIS ACCOUNTING STANDARD OVERRIDES SECTI ON 5 WHICH IS 'SUBJECT TO THE OTHER PROVISIONS OF THE ACT'. THE A PPELLANT ALSO RELIED ON ACCOUNTING STANDARD - IX. IT WAS FURTHER ARGUED THA T PROFIT SHOULD BE UNDERSTOOD AS PER THE ORDINARY PRINCIPLES OF COMMER CIAL ACCOUNTANCY. MERE PASSING OF BOOK ENTRIES COULD NOT GENERATE REA L INCOME. THE APPELLANT ALSO RELIED ON THE DECISION OF THE HON'BL E PUNJAB AND HARYANA HIGH COURT IN THE CASE OF RBL BANARASIDAS & CO. PVT. LTD. 264 ITR 671 WHEREIN UNDER IDENTICAL CIRCUMSTANCES IT HAD BEEN HELD THAT LEASE RENTALS HAD NOT ACCRUED AND THEREFORE COULD NOT BE BROUGHT TO TAX. THE COMMISSIONER OF INCOME-TAX (AP PEALS) EXAMINED THE CASES OF THE CONCERNED LESSEES ONE BY ONE. IN T HE CASE OF THE PARASRAMPURIA GROUP COMPANIES SHE FOUND THAT BOTH T HESE PARTIES HAD MADE REFERENCES BEFORE THE BIFR AS SICK COMPANI ES AND THE APPELLANT HAD NOT BEEN ABLE TO RECOVER A SINGLE RUP EE FROM THEM TILL DATE. IN THE YEAR-ENDED 1.3.1999 THE APPELLANT HAD ALREADY WRITTEN OFF AS BAD DEBTS SUMS OF RS.18 12 600/- AND RS.11 37 370/- BEING MONIES DUE FROM THESE TWO PARTIES RESPECTIVELY. SUC H WRITE-OFF HAD ALSO BEEN ALLOWED IN THE ASSESSMENT FOR THE ASSESSM ENT YEAR 1999- 00. TAKING THESE FACTS INTO ACCOUNT THE COMMISSIONE R OF INCOME-TAX (APPEALS) HELD THAT THE APPELLANT WAS JUSTIFIED IN VIEW OF THE DETERIORATING FINANCIAL POSITION OF THE TWO COMPANI ES IN NOT RECOGNISING REVENUE IN RESPECT OF WHICH THERE WERE NO PROSPECTS OF RECOVERY. 'IN MY OPINION EVEN FOR ACCRUAL TO TAKE P LACE THERE MUST BE A BONAFIDE PROBABILITY OF ULTIMATE COLLECTION. EXISTE NCE OF A MERE LEGAL RIGHT WITHOUT THE POSSIBILITY OF ITS ENFORCEABILITY CAN GIVE RISE TO ONLY A HOLLOW CLAIM OF INCOME AND NOT REAL INCOME. IN DE CIDING AS ABOVE AND CONSEQUENTLY IN DELETING THE ADDITION MADE IN THE ASSESSMENT ON THIS SCORE SHE ALSO RELIED ON THE JUDGEMENT IN THE CASE OF RBL BANARASIDAS & CO. PVT. LTD. 9.2.2 FOR THE ASSESSMENT YEAR 2001-02 THE APPELLAN T HAD NOT SHOWN LEASE RENTALS AMOUNTING TO RS.1 53 21 302/- FROM 5 PARTIES WHICH WERE THE SAME AS THE PARTIES FIGURING IN THE PRESENT APP EAL. THE ASSESSING OFFICER BROUGHT THE ABOVE AMOUNT TO TAX. AS FOR LEA SE RENTALS FROM M/S. PARASRAMPURIA INDUSTRIES LTD. AND M/S. PARASRAMPURIA INTERNATIONAL LTD. THE COMMISSIONER OF INCOME-TAX (APPEALS) FOLL OWED THE DECISION GIVEN BY HER IN THE APPELLATE ORDER FOR THE ASSESSM ENT YEAR 2000-01 AND DELETED THE ADDITION. AS REGARDS THE LEASES (3 IN NUMBER) WITH M/S. ARVIND MILLS LTD. IT WAS SUBMITTED BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT THE LESSEE CAME OUT WITH A DEBT RESTRUCTURING PLAN IN MARCH 2001 WITH THREE OPTIONS. VIDE ITS L ETTER DATED 28.3.2001 ADDRESSED TO THE LESSEE THE APPELLANT COMMUNICATED ITS ACCEPTANCE OF PARTICIPATION IN THIS DEBT RESTRUCTURING PLAN AND I NFORMED THAT IT WAS OPTING FOR SCHEME B BEING ONE OF THE THREE OPTIONS PROPOSED BY THE LESSEE. AS PER THIS OPTION THE APPELLANT WAS ENTIT LED TO GET ONLY 45% OF THE PRINCIPAL AMOUNTS DUE AS ON 3L.3.2000 AND WAS T O FOREGO THE BALANCE. THE APPELLANT WAS ALSO OBLIGED TO TRANSFER THE LEASED ASSETS TO M/S. ARVIND MILLS LTD. AFTER GETTING 45% OF THE PRINCIPAL AMOUNTS. NO FURTHER DUES FOR THE PERIOD AFTER 1.4.2000 WERE TO ACCRUE TO THE APPELLANT. PURSUANT TO THIS PLAN MIS. ARVIND MILLS LTD. PAID TO THE APPELLANT RS.117.65 LAKHS IN APRIL 2000. AS A RESU LT THE APPELLANT WROTE OFF IN MARCH 2001 THE UNPAID DEBTS DUE TO T HE EXTENT OF RS.6 18 344/- RS.18 12 692/- AND RS.3 02 157/- UNDER THE THREE CONTRACTS PERTAINING TO THE PERIOD-ENDED 31.3.2000. THE COMMISSIONER OF INCOME-TAX (APPEALS) ACCEPTED THE SUBMISSIONS OF THE APPELLANT AND HELD THAT AS THE RESTRUCTURING PLAN HAD FROZEN THE DEBTS AT THE FIGURES AS ON 3L.3.2000 THERE WAS NO JUSTIFICATION FOR MAK ING ANY ADDITION FOR THE ASSESSMENT YEAR 2001-02. 9.3 IN THE LIGHT OF THE APPELLATE ORDERS FOR THE AS SESSMENT YEARS 2000-01 & 2001-02 THE ENTIRE ADDITION OF RS.1 53 21 302/- MADE BY THE ASSESSING OFFICER FOR THE PRESENT ASSESSMENT YEAR ( I.E. 2002-03) DESERVES TO BE DELETED. IN SO FAR AS M/S. ARVIND MILLS LTD. IS CONCERNED BY VIRTUE OF THE RESTRUCTURING ARRANGEMENT TO WHICH THE APPELLANT HAD GIVEN ITS CONSENT THERE WAS NO MORE LEASE RENTAL T O ACCRUE BEYOND 31.3.2001. IN SO FAR AS M/S. PARASRAMPURIA INDUSTRI ES AND M/S. PARASRAMPURIA INTERNATIONAL LTD. ARE CONCERNED THE FACTUM OF THE LEASE RENTAL-CUM-DEBTS HAVING BECOME BAD HAD BEEN A CCEPTED EVEN AS EARLY AS FOR THE ASSESSMENT YEAR 1999-00. THE DEBTS HAVING BEEN WRITTEN OFF IN THE ACCOUNTS RELEVANT TO THE SAID AS SESSMENT YEAR NO DEBTS WERE LEFT THEREAFTER ON WHICH ANY INTEREST CO ULD ACCRUE. IN THE CIRCUMSTANCES AND ALSO AS THE COMMISSIONER OF INCO ME-TAX (APPEALS) HELD THAT NOT EVEN A SINGLE RUPEE COULD HAVE BEEN O FFERED BY THE APPELLANT FOR THE ASSESSMENT YEARS 2000-01 & 2001-02 TOWARDS LEASE RENTALS FROM THESE TWO CONCERNS A DIFFERENT STAND CANNOT POSSIBLY BE TAKEN FOR THE PRESENT ASSESSMENT YEAR. I WOULD ACCO RDINGLY HOLD THAT THE ADDITION OF RS.1 53 21 302/- MADE FOR THE PRESE NT ASSESSMENT YEAR WITH REFERENCE TO THE SUBJECT LEASES WAS WITHOUT AN Y BASIS. FOR THESE REASONS THE ADDITION OF RS.1 53 21 302/- IS HEREBY DELETED. AGGRIEVED BY THE ORDER OF LD.CIT(A) REVENUE IS NOW IN AP PEAL BEFORE US. 53. BEFORE US LD. D.R. SUBMITTED THAT IDENTICAL ISSUE AROSE IN ASSESSEES OWN CASE IN A.Y. 2000-01 AND 2001-02 AND TH E CO- ORDINATE BENCH OF THE TRIBUNAL VIDE ORDER DATED 29.08.201 6 HAD RESTORED THE ISSUE TO THE FILE OF LD.CIT(A). HE SUBMITTED T HAT THE ISSUE FOR THE YEAR UNDER CONSIDERATION BEING IDENTICAL TO THAT OF EARLIER YEARS THE MATTER BE RESTORED BACK AS EARLIER YEARS. LD.A.R. ON THE OTHER HAND SUPPORTED THE ORDER OF LD.CIT(A). 54. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. WE FIND THAT IDENTICAL ISSUE OF ACCRUAL OF LEASE RENT AL INCOME AROSE IN ASSESSEES OWN CASE FOR A.Y. 2000-01 AND A.Y. 20 01-02 AND THE ISSUE WAS SET ASIDE TO THE FILE OF LD.CIT(A) BY THE CO-O RDINATE BENCH OF THE TRIBUNAL BY OBSERVING AS UNDER : 9. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRE SENTATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTH ORITIES BELOW. THE ONLY ISSUE BEFORE US FOR ADJUDICATION IS WHETHER T HE LEASE RENTAL INCOME NOT RECEIVED BY THE ASSESSEE IS LIABLE TO BE TAXED IN THE ASSESSMENT YEAR 2000-01 OR THE SAME SHOULD BE EXCLU DED FROM TOTAL INCOME OF THE ASSESSEE ON THE BASIS OF REAL INCOME THEORY. THE LD. AR OF THE ASSESSEE HAS CONTENDED THAT THE LEASE RENTAL IN COME WHICH HAVE NOT BEEN RECEIVED ARE NOT LIABLE TO BE TAXED IN ASS ESSMENT YEAR 2000- 01 AS THE INCOME HAS NOT ACCRUED TO THE ASSESSEE. U NDISPUTEDLY THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG. IT IS A WELL SETTLED LAW THAT ACCOUNTING STANDARDS DO NOT OVERRI DE PROVISIONS OF THE ACT. HOWEVER THE LD. AR OF THE ASSESSEE HAS ASSERT ED THAT THE INCOME HAS BEEN RECOGNIZED BY THE ASSESSEE ON THE BASIS OF REAL INCOME THEORY. RELIANCE HAS BEEN PLACED ON THE DECISION OF HON'BLE SUPREME COURT OF INDIA IN THE CASE OF COMMISSIONER OF INCOM E TAX VS. M/S. EXCEL INDUSTRIES LTD. (SUPRA). THE RELEVANT EXTRACT OF THE FINDINGS OF HON'BLE SUPREME COURT OF INDIA ARE REPRODUCED HERE- IN-UNDER : 27. APPLYING THE THREE TESTS LAID DOWN BY VARIOUS D ECISIONS OF THIS COURT NAMELY WHETHER THE INCOME ACCRUED TO T HE ASSESSEE IS REAL OR HYPOTHETICAL; WHETHER THERE IS A CORRESP ONDING LIABILITY OF THE OTHER PARTY TO PASS ON THE BENEFITS OF DUTY FREE IMPORT TO THE ASSESSEE EVEN WITHOUT ANY IMPORTS HAVING BEEN M ADE; AND THE PROBABILITY OR IMPROBABILITY OF REALISATION OF THE BENEFITS BY THE ASSESSEE CONSIDERED FROM A REALISTIC AND PRACTI CAL POINT OF VIEW (THE ASSESSEE MAY NOT HAVE MADE IMPORTS) IT I S QUITE CLEAR THAT IN FACT NO REAL INCOME BUT ONLY HYPOTHETICAL I NCOME HAD ACCRUED TO THE ASSESSEE AND SECTION 28(IV) OF THE A CT WOULD BE INAPPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE. ESSENTIALLY THE AO IS REQUIRED TO BE PRAGMATIC AND NOT PEDANTIC. 10. WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE N EEDS A REVISIT TO THE FILE OF COMMISSIONER OF INCOME TAX (APPEALS). THE C OMMISSIONER OF INCOME TAX (APPEALS) WHILE DEALING WITH THE ISSUE I N ASSESSMENT YEAR 2000-01 PARTLY DELETED THE ADDITION IN RESPECT OF P ARASRAMPURIA INDUSTRIES LTD. AND PARASRAMPURIA INTERNATIONAL LTD . BY FOLLOWING THE CONCEPT OF REAL INCOME AND UPHELD THE ADDITION IN R ESPECT OF MODI ALKALIES LTD. AND INERTIA INDUSTRIES LTD. WHEREAS ALL THE FOUR COMPANIES ARE SIMILARLY PLACED. ACCORDINGLY WE DEE M IT APPROPRIATE TO REMIT THIS ISSUE BACK TO THE FILE OF COMMISSIONER O F INCOME TAX (APPEALS) FOR DECIDING THE ISSUE AFRESH IN THE LIG HT OF DECISION RENDERED IN THE CASE OF 8 ITA NOS. 1247 1290 & 1291/PN/2005 COMMISSIONER OF INCOME TAX VS. M/S. EXCEL INDUSTRIES LTD. (SUPRA ). THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE A RE SET ASIDE AND THE GROUND NO. 7 IN THE APPEAL OF THE ASSESSEE AND GROUND NO. 4.1 TO 4.5 IN THE APPEAL OF THE REVENUE FOR ASSESSMENT YEA R 2000-01 ARE ALLOWED FOR STATISTICAL PURPOSE. WE THUS FIND THAT THE CO-ORDINATE BENCH WHILE DECIDING THE ISSUE IN ASSESSEES OWN CASE IN EARLIER YEAR HAD SET ASIDE THE ISSUE TO TH E FILE OF LD.CIT(A). IT IS ALSO A FACT THAT BOTH THE PARTIES HAVE ADM ITTED THAT THE ISSUE IN THE YEAR UNDER CONSIDERATION IS IDENTICAL TO THAT OF EARLIER YEARS. WE THEREFORE FOLLOWING THE SAME REASONING AS GIVE N BY THE COORDINATE BENCH OF TRIBUNAL WHILE DECIDING THE ISSUE IN A.Y .S 2000- 01 AND 2001-02 AND FOR SIMILAR REASONS RESTORE THE ISSUE TO THE FILE OF LD.CIT(A). NEEDLESS TO STATE THAT THE LD.CIT(A) SHALL GRANT REASONABLE OPPORTUNITY OF HEARING TO BOTH THE PARTIES. THUS THIS GROUND OF REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 55. SECOND GROUND IS WITH RESPECT OF ACCRUAL OF INCOME. BEFORE US IT WAS SUBMITTED THAT THE PRESENT GROUND IS INTERCONNECTED TO THE GROUND NO 4 OF ASSESSEES APPEA L. GROUND NO 4 OF ASSESSEES APPEAL WAS DECIDED HEREIN ABOVE BY US IN PARA NO 16 TO 19 WHEREIN THE GROUND OF ASSESSEE WAS ALLOWED AND GROUN D OF REVENUE WAS DISMISSED. IN VIEW OF THE AFORESAID REASONS THE GROUNDS OF REVENUE IS DISMISSED. 56. THIRD GROUND IS WITH RESPECT TO PRIOR PERIOD EXPENSES. BEFORE US IT WAS SUBMITTED THAT THE PRESENT GROUND IS INTERCONNECTED TO THE GROUND NO 7 OF ASSESSEES APPEA L. GROUND NO 7 OF ASSESSEES APPEAL WAS DECIDED HEREIN ABOVE BY US IN PARA NO 28 TO 30 WHEREIN THE GROUND OF ASSESSEE WAS ALLOWED AND GROUN D OF REVENUE WAS DISMISSED. IN VIEW OF THE AFORESAID REASONS THE GROUND OF REVENUE IS DISMISSED. 57. FOURTH GROUND IS WITH RESPECT TO CLAIM FOR DEDUCTION U/S 80IA OF THE ACT. AO NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION OF RS.3 37 27 000/- UNDER SEC.80IA OF THE ACT WITH RESPECT T O RESINS / PPD & ALLIED PRODUCTS AND WATER MANAGEMENT UNIT. AO NO TICED THAT DURING THE YEAR THERMAX TECHNOLOGIES LIMITED COMPANY WAS AMALGAMATED WITH THE ASSESSEE COMPANY AND IT HAD TOTAL LOSS OF RS.15 21 06 020/- FOR THE ASSESSMENT YEARS 1997-98 TO 20 02-03. HE WAS OF THE VIEW THAT IF THE LOSSES OF THE AFORESAID UNITS WA S SET OFF AGAINST THE INCOME THEN THE ASSESSEE WOULD NOT BE LEFT W ITH ANY PROFITS IN RESPECT OF THE TWO UNITS FOR WHICH THE DEDUCT ION U/S 80IA OF THE ACT WAS CLAIMED. HE THEREFORE RECOMPUTED THE PROFITS OF THE TWO UNITS AT RS.1092.4 LACS AND AFTER SETTING UP OF BROUGHT FOR WARD LOSSES OF THERMAX WATER TECHNOLOGIES LIMITED WORKED OUT THE NET PROFIT AT RS.NIL AND ACCORDINGLY DENIED THE CLAIM OF DEDUCTION U/S 80I A OF THE ACT. AGGRIEVED BY THE ORDER OF AO ASSESSEE CARRIED THE MATTER BEFORE LD.CIT(A) WHO DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE B Y HOLDING AS UNDER : 21.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS T HUS MADE BY THE APPELLANT AND ITS LEARNED AUTHORISED REPRESENTATIVE . THE SAME CARRY CONSIDERABLE FORCE. NO DOUBT BOTH SECTION 80AB AS WELL SUB-SECTION (5) OF SECTION 80IA ARE IN THE NATURE OF OVER-RIDING PR OVISIONS. BUT THERE NEED NOT BE ANY DEBATE AS TO WHICH OF THE TWO SHALL PREVAIL. FOR THESE TWO OVER-RIDING PROVISIONS OPERATE IN DOMAINS WHICH ARE SEPARATE. SECTION 80AB DEALS WITH AN ASSESSEE AT LARGE. IN S ECTION 80IA THE ASSESSEE HAS BEEN CONSCIOUSLY REDUCED TO AN UNDERTA KING. THEREFORE WHILE VIS--VIS THE OTHER SECTIONS APPEARING UNDER THE HEADING C OF CHAPTER VIA THE LOSSES INCLUDING UNABSORBED DEPREC IATION OF THE ASSESSEE ON THE WHOLE WILL HAVE TO BE CONSIDERED FO R SET OFF BEFORE ARRIVING AT THE GROSS TOTAL INCOME IN SO FAR AS SE CTION 80IA IS CONCERNED ONLY THE LOSSES AND UNABSORBED DEPRECIAT ION ETC. OF THE ELIGIBLE BUSINESS UNDERTAKING CAN BE SO CONSIDERED. THIS IS BECAUSE OF THE FICTION THAT THE ELIGIBLE BUSINESS UNDERTAKING IS THE ONLY BUSINESS OF THE ASSESSEE. IN OTHER WORDS WHILE SECTION 80AB W ILL APPLY TO SECTION 80IA AS WELL SUCH APPLICATION WILL BE THROUGH THE MEDIUM OF THE FICTION. ACCORDINGLY THE STAND TAKEN BY THE ASSESSING OFFIC ER IN SETTING OFF THE ENTIRE UNABSORBED LOSS OF M/S. THERMAX WATER TECHNO LOGIES CO. LTD. AGAINST THE PROFITS FROM THE ELIGIBLE BUSINESS UND ERTAKING WITHIN THE MEANING OF SECTION 80IA AND IN THE PROCESS COMPU TING NIL PROFIT U/S.80IA IS HEREBY NEGATIVED. THE GROUND RAISED BY THE APPELLANT SUCCEEDS TO THIS EXTENT. THE ASSESSING OFFICER SHA LL VERIFY IF THERE WERE ANY LOSSES OR UNABSORBED DEPRECIATION OF THE ELIGIB LE BUSINESS UNDERTAKING ITSELF. IF THERE WERE SUCH LOSSES OR U NABSORBED DEPRECIATION HE WILL BE JUSTIFIED IN SETTING OFF T HE SAME AGAINST THE PROFITS OF THE BUSINESS UNDERTAKING AND IN COMPUTIN G THE DEDUCTION ADMISSIBLE U/S.80IA ACCORDINGLY. DIRECTED AS ABOVE . AGGRIEVED BY THE ORDER OF LD.CIT(A) REVENUE IS NOW IN APPE AL BEFORE US. 58. BEFORE US LD. D.R. SUPPORTED THE ORDER OF AO. LD. A.R. ON THE OTHER HAND SUPPORTED THE ORDER OF LD.CIT(A). 59. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. IN THE PRESENT CASE LD.CIT(A) WHILE DECIDING THE IS SUE HAS NOTED THAT AS FAR AS DEDUCTION U/S 80IA IS CONCERNED O NLY THE LOSSES AND UNABSORBED DEPRECIATION OF THE ELIGIBLE BUSINESS UNDER TAKING HAS TO BE CONSIDERED. HE THEREFORE AFTER UPHOLDING THE RELIANC E PLACED ON THE DECISIONS REFERRED BY ASSESSEE HELD THAT AO WAS NOT JUSTIFIED IN SETTING OFF OF THE ENTIRE UNABSORBED LOSS OF THERMAX WATER TECHNOLOGIES COMPANY LIMITED AGAINST THE PROFIT FROM ELIGIBLE BUSINESS UNDERTAKING AND IN THE PROCESS COMPUTING NIL PRO FIT U/S 80IA OF THE ACT. BEFORE US REVENUE HAS NOT POINTED OU T ANY FALLACY IN THE FINDINGS OF LD.CIT(A) NOR HAS POINTED TO ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN SUCH A SITUATION WE FIND NO REA SON TO INTERFERE WITH ORDER OF LD.CIT(A) AND THUS THE GROUND OF THE REVENUE IS DISMISSED. 60. FIFTH AND SIXTH GROUNDS ARE WITH RESPECT TO ALLOWABILITY OF DEDUCTION U/S 80HHC OF THE ACT. WE HAVE ADJUDICATED THE SAID GROUNDS WITH GROUND NO.10 RAISED BY ASSESSEE HEREINABOVE WHEREIN THE ISSUE HAS BEEN RES TORED TO AO TO DECIDE IT AFRESH. IN VIEW OF THE AFORESAID FACTS THE GROUNDS OF REVENUE ARE ALLOWED FOR STATISTICAL PURPOSES 61. IN THE RESULT THE APPEAL OF ASSESSEE AND REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER 2017. SD/- SD/- SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER ! / ACCOUNTANT MEMBER / PUNE ; DATED : 30 TH NOVEMBER 2017 . YAMINI '#$%&'&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5 6. CIT(A)-6 PUNE. CIT-5 PUNE. !'# $$%& ' %& / DR ITAT A PUNE; #*+ / GUARD FILE. BY ORDER // TRUE COPY // -./ $0 %1 / SR. PRIVATE SECRETARY %& / ITAT PUNE.