Inductotherm (India) Pvt. Ltd.,, Ahmedabad v. The ACIT., Circle-4,, Ahmedabad

ITA 3305/AHD/2004 | 2000-2001
Pronouncement Date: 22-01-2010 | Result: Partly Allowed

Appeal Details

RSA Number 330520514 RSA 2004
Assessee PAN ACKIN1948B
Bench Ahmedabad
Appeal Number ITA 3305/AHD/2004
Duration Of Justice 5 year(s) 2 month(s) 6 day(s)
Appellant Inductotherm (India) Pvt. Ltd.,, Ahmedabad
Respondent The ACIT., Circle-4,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 22-01-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 22-01-2010
Date Of Final Hearing 15-12-2009
Next Hearing Date 15-12-2009
Assessment Year 2000-2001
Appeal Filed On 16-11-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MAHAVIR SINGH JUDICIAL MEMBER AND SHRI A.N. PAHUJA ACCOUNTANT MEMBER DATE OF HEARING:14.12.2009 DRAFTED ON: 14.12.2 009 ITA NO.3305/AHD/2004 988/AHD/2005 2236/AHD/2006 ASSESSMENT YEAR : 2000-01 2001-02 2003-04 INDUCTOTHERM (INDIA) PRIVATE LIMITED AMBLI- BOPAL ROAD BOPAL AHMEDABAD. VS. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4 NAVJIVAN TRUST BUILDING NEAR NAVJIVAN PRESS ASHRAM ROAD AHMEDABAD-380 014 PAN/GIR NO. : AAAC13672B (APPELLANT) .. (RESPONDENT) ITA NO.3805/AHD/2004 1182/AHD/2005 1174/AHD/2005 ASSESSMENT YEAR : 2000-01 2000-01 2001-02 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4 NAVJIVAN TRUST BUILDING NEAR NAVJIVAN PRESS ASHRAM ROAD AHMEDABAD-380 014 VS. INDUCTOTHERM (INDIA) PRIVATE LIMITED AMBLI-BOPAL ROAD BOPAL AHMEDABAD. (APPELLANT) .. (RESPONDENT) ASSESSEE BY : SHRI K.C.PATEL A.R. REVENUE BY: SHRI B.S.SANDHU CIT O R D E R A.N.PAHUJA :- THESE SIX APPEALS DIRECTED AGAINST FOUR SEPARATE O RDERS DATED 8.10.2004 FOR THE AY 2000-01 DATED 11.10.20 05 FOR THE AY 2001-02 DATED 9.02.2005 FOR THE AY 2000-01AND DATED 13.08. 2006 FOR THE AY 2003- 04 OF THE LD. CIT(A) VIII AHMEDABAD RAISE THE F OLLOWING GROUNDS:- AY 2000-01 ITA NO.3305/AHD/2004[ASSESSEE] 1.1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND O N FACTS IN CONFIRMING THE DISALLOWANCE OF WARRANTY PROVISION EXPENSES OF RS.46 13 116/- TREATING THE SAME AS CONTINGENT LIABILITY. 1.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 2 (A) THE SIMILAR WARRANTY PROVISION EXPENSES (RS .63.31 LACS ON AN AVERAGE DURING LAST TEN YEARS) HAVE BEEN ALLOWED BY THE ASS ESSING OFFICER IN SCRUTINY ASSESSMENT RIGHT SINCE THE INC EPTION. (B) THE WARRANTY PROVISION IS MADE IN ACCOUNTS ON T HE BASIS OF TECHNICAL EVALUATION AND THE PREVIOUS EXPERIENCE BASED ON THE CATEGORY WISE ACTUAL WARRANTY EXPENSES IN THE LAST PRECEDING THRE E YEARS. C) THE WARRANTY IS A SIMULTANEOUS OBLIGATION UNDERT AKEN IN YEAR OF SALE AND THE APPELLANT ALSO CONSIDERS THE ESTIMATED WARR ANTY COST IN THE SALES PRICE QUOTED. 2.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN NOT CONSIDERING THE KEYMAN INSURANCE PREMIUM PAID RS.96 99 410 (AT 80.6% OF RS.1 20 34 008) CUMULATIVE UPTO THE PREVI OUS YEAR END OR IN THE ALTERNATE RS.17 51 282 (AT 80.6% OF RS.21 72 80 7) PAID DURING THE PREVIOUS YEAR IN CONSIDERING THE DISALLOWANCE IF KE YMAN INSURANCE CLAIM INCOME RECEIVED OF RS.241 00 000 (AT 80.6% O F RS.3 00 00 000) UNDER SECTION 80IA. 2.2 ALTERNATIVELY THE LEARNED COMMISSIONER OF INCO ME TAX (APPEALS) FAILED TO DIRECT THE RECOMPUTATION OF THE DEDUCTIO N UNDER SECTION 80IA FOR THE ASSESSMENT YEARS 1995-96 TO 1999-2000 ON TH E ELIGIBLE PROFITS WITHOUT CONSIDERING THE RESPECTIVE KEYMAN INSURANCE PREMIUM EXPENSES FOR EACH OF THESE YEARS. 3.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING THE FOLLOWING INTEREST INCOME REDUCED F ROM THE ELIGIBLE BUSINESS PROFITS UNDER SECTION 80IA. (A) INTEREST INCOME OF RS.10 18 168 (AT 80.6% OF R S.12 63 236) ON TAX FREE GOVERNMENT COMPANIES BONDS. (B) INTEREST INCOME OF RS.4 46 633 (AT 80.6% OF RS .5 54 136) EARNED ON LATE COLLECTION OF SALES PRICES ETC. AS P ER THE HON'BLE ITAT ORDERS FORTHE EARLIER YEARS IN CASE OF THE APPELLAN T AND ACCEPTED BY THE DEPARTMENT. 4.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE NON-EXCLUSION OF SAL ES TAX AND EXCISE DUTY COLLECTIONS RS.6.02 CRORES FROM THE TOTAL TUR NOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80HHC. 4.2 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ALSO ERRED IN CONFIRMING THE REDUCTION OF TRAINING FEES OF RS.1 5 1 200 (AT 90% OF RS.1 68 000) FROM THE BUSINESS PROFITS UNDER EXPLAN ATION (BAA) TO SECTION 80HHC. 5.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO REWORK THE DEDUC TION UNDER SECTION 80HHC AFTER CONSIDERING THE ADDITIONS UPHELD IN THE APPEAL. ITA NO.3805/AHD/2004[REVENUE] 1.(I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN LAW AND ON FACTS OF THE CASE IN DIRECTING TO RESTRICT THE E XCLUSION OF KEYMAN INSURANCE CLAIM OF RS.3 CRORES AND THE INTEREST INC OME OF RS.52 50 979 TO 80.6% OF THE SAID AMOUNT FROM THE INCOME OF THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80 IA OF THE I.T. ACT. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 3 (II) THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) FURTHER ERRED IN LAW AND ON THE FACTS OF THE CASE IN HOLDING THAT SI NCE THE INSURED UNDER THE KEYMAN INSURANCE POLICY WAS LOOKING AFTER 5 DI VISION OF THE ASSESSEE COMPANY EXCLUSION OF SUCH OTHER INCOME R EFERRED TO ABOVE SHOULD BE RESTRICTED TO THE PROPORTIONATE IN COME OF THE INDUSTRIAL UNDERTAKING FROM THE MELTING FURNACE DIV ISION WHICH THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS WO RKED OUT AT 80.6% OF THE TOTAL PROFIT ON THE BASIS OF THE TOTAL TURNOVER. (III) THE LEARNED COMMISSIONER OF INCOME TAX (APPE ALS) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN NOT APPRECIATING THE GR OUND REALITY THAT THE ABOVE SAID OTHER INCOME HAD NO DIRECT NEXUS WITH TH E BUSINESS OF THE INDUSTRIAL UNDERTAKING AND THEREFORE THE RATIO OF THE SUPREME COURT DECISION IN THE CASE OF STERLING FOODS IS SQUARELY APPLICABLE IN THIS CASE (237 ITR 579). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE DECISION OF THE AO. 3. IT IS THEREFORE PRAYED THAT THE ORDER OF TH E CIT(A )MAY KINDLY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EXTENT. ITA NO.1182/AHD/2005[[REVENUE] 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN LAW AND ON FACTS OF THE CASE IN DIRECTING TO FURTHER RE DUCE THE KEYMAN INSURANCE CLAIM OF RS.2 41 80 000/- BY AN AMOUNT OF RS.17 51 282/- WHILE EXCLUDING IT FROM PROFIT ELIGIBLE FOR DEDUCTI ON UNDER SECTION 80I AND THEN COMPUTE THE DEDUCTION UNDER SECTION 80HHC. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE DECISION OF THE AO. 3. IT IS THEREFORE PRAYED THAT THE ORDER OF T HE CIT(A )MAY KINDLY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EXTENT. AY 2001-02 ITA NO.988/AHD/2005[ASSESSEE] 1.1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON FAC TS IN CONFIRMING THE DISALLOWANCE OF WARRANTY PROVISION EXPENSES TO THE EXTENT OF RS.28 44 704/- (RS.56 30 747 - RS.8 73 483 - RS. 19 12 560) TREATING THE SAME AS CONTINGENT LIABILITY. 1.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT (A) THE WARRANTY PROVISION IS MADE IN ACCOUNTS ON T HE BASIS OF TECHNICAL EVALUATION AND THE PREVIOUS EXPERIENCE BASED ON THE CATEGORY WISE ACTUAL WARRANTY EXPENSES IN THE LAST PRECEDING THRE E YEARS. (B) THE WARRANTY IS A SIMULTANEOUS OBLIGATION UNDE RTAKEN IN YEAR OF SALE AND THE APPELLANT ALSO CONSIDERS THE ESTIMATE D WARRANTY COST IN THE SALES PRICE QUOTED. 2.1 THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND O N FACTS IN CONFIRMING THE INCLUSION OF SALES TAX AND EXCISE DUTY COLLECTI ONS RS.5.39 CRORES FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTI ON UNDER SECTION 80HHC. 2.2 THE LEARNED CIT(A) HAS ALSO ERRED IN CONFIRMING THE REDUCTION OF TRAINING FEES OF RS.97 200 (AT 90% OF RS.1 08 000) FROM THE BUSINESS PROFITS UNDER EXPLANATION (BAA) TO SECTION 80HHC. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 4 ITA NO.1174/AHD/2005[REVENUE] 1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION MADE ON ACCOUNT OF BAD DEBTS WRITTEN OFF DISREGARDING THE FACT THAT THE ASSESSEE COMPANY COULD NOT SHOW THAT DEBT HAD BECOME BAD IN LIGHT OF FACTS OF THE C ASE. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DIRECTING NOT TO EXCLUD E INCOME BY WAY OF BAD DEBT RECOVERED CREDIT BALANCE WRITTEN BACK KASAR AND DAMAGES FOR CANCELLATION OF ORDERS DISREGARDING THE FACT THAT SUCH INCOME IS NOT DERIVED FROM EXPORT BUSINESS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE DECISION OF THE AO. 4. IT IS THEREFORE PRAYED THAT THE ORDER OF THE CIT(A )MAY KINDLY BE CANCELLED AND THAT OF THE AO MAY BE RESTORED TO THE ABOVE EXT ENT. AY 2003-04 ITA 2236/AHD/2006[[ASSESSEE] 1.1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON FAC TS IN CONFIRMING THE DISALLOWANCE OF WARRANTY PROVISION EXPENSES TR EATING THE SAME AS CONTINGENT LIABILITY. 1.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT (A) THE WARRANTY PROVISION IS MADE IN ACCOUNTS ON T HE BASIS OF TECHNICAL EVALUATION AND THE PREVIOUS EXPERIENCE BASED ON THE CATEGORY WISE ACTUAL WARRANTY EXPENSES IN THE LAST PRECEDING THRE E YEARS. (B) THE WARRANTY IS A SIMULTANEOUS OBLIGATION UNDER TAKEN IN YEAR OF SALE AND THE PURCHASE ORDER INCLUDES WARRANTY AS PART OF THE SALES CONTRACT AND APPELLANT ALSO CONSIDERS THE ESTIMATED WARRANT Y COST IN THE SALES PRICE QUOTED . APART FROM THE AFORESAID GROUNDS THE ASSE SSEE ALSO RAISED AN ADDITIONAL GROUND IN THE APPEAL FOR THE AY 2000-01 IN THE FOLLOWING TERMS: THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON FA CTS IN HOLDING THE KEYMAN INSURANCE CLAIM RECEIPT ON THE LIFE OF THE MANAGING DIRECTOR OF THE APPELLANT IS NOT THE INCOME DERIVED FROM THE INDUSTRIAL UNDERTAK ING WITHIN THE MEANING OF SECTION 80I AND IS NOT ELIGIBLE FOR DEDUCTION THERE UNDER. 2. ADVERTING FIRST TO GROUND NOS.1.1 & 1.2 RELATING TO THE DISALLOWANCE OF PROVISION FOR WARRANTY EXPENSES IN THE APPEAL OF TH E ASSESSEE FOR THESE THREE ASSESSMENT YEARS FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RETURNS DECLARING INCOME OF RS.4 67 67 104/- FOR THE ASSESS MENT YEAR 2000-01 RS. 4 69 93 442 FOR THE ASSESSMENT YEAR 2001-02 AND RS. 13 31 77 740/- FOR THE ASSESSMENT YEAR 2003-04 FILED RESPECTIVELY ON 28.11 .2000 29.8.2002 AND 22.10.2003 BY THE ASSESSEE MANUFACTURING INDUCTION FURNACES AFTER BEING I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 5 PROCESSED U/S 143(1) OF THE INCOME TAX ACT 1961 ( HEREINAFTER REFERRED TO AS THE ACT) WERE SELECTED UNDER SCRUTINY WITH THE IS SUE OF NOTICE UNDER SECTION 143(2) OF THE ACT . DURING THE COURSE OF ASSESSMEN T PROCEEDINGS FOR THE ASSESSMENT YEAR 2000-01 THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE DEBITED AN AMOUNT OF RS.46 13 116/- ON AC COUNT OF PROVISION FOR WARRANTY. LIKEWISE IN THE AY 2001-02 AN AMOUNT OF RS. 56 30 747/- AND RS.1 01 96 362/ IN THE AY 2003-04 WERE DEBITED ON A CCOUNT OF PROVISION FOR WARRANTY. TO A QUERY BY THE AO THE ASSESSEE SUBMI TTED THAT AS PER THE PREVAILING TRADE PRACTICE ASSESSEE WAS REQUIRED TO GIVE WARRANTY AGAINST WORKMANSHIP OF THE MACHINERY OR ANY DEFECTIVE OR IM PROPER COMPONENTS. THESE MACHINERIES GIVE START UP AND OPERATIONAL HAS SLES AND THEREFORE ASSESSEE PROVIDES COMPREHENSIVE WARRANTY TO THE CUS TOMERS FOR A DURATION OF 18 MONTHS TO ENSURE THE EFFICIENT OPERATION OF THE INDUCTION FURNACES. IT WAS EXPLAINED THAT THE PROVISION FOR WARRANTY EXPENSES WAS MADE BASED ON THE CONSUMPTION OF MATERIAL AFTER SALE SERVICE DURING W ARRANTY PERIOD FOR THE FURNACES OF EQUIVALENT CAPACITY SOLD DURING THE PRE CEDING THREE YEARS. SUCH A PROVISION WAS MADE BY THE ASSESSEE SINCE THE BEGI NNING AND HAS BEEN ALLOWED IN THE ASSESSMENT YEAR 87-88 ONWARDS UNTIL THE AY 1999-2000 AND SURPLUS OR SHORTFALL AT THE END OF 18 MONTHS PERIOD IS WRITTEN BACK IN THE INCOME OR PROVIDED AS EXPENSES AS THE CASE MAY BE. THE ASSESSEE FURTHER SUBMITTED THAT THE PROVISION IS MADE AS PER ACCOUNT ING STANDARD OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. AND WA S NOT A CONTINGENT LIABILITY AS HELD BY THE HON'BLE SUPREME COURT OF INDIA IN TH E CASE OF CALCUTTA CO. LTD. 37 ITR 1. INTER ALIA THE ASSESSEE ALSO RELIE D UPON A DECISION OF THE HON'BLE APEX COURT IN THE CASE OF BHARAT EARTHMOVER S LTD. 245 ITR 428. HOWEVER THESE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR OF THE AO ON THE GROUND THAT THE LIABILITY FOR PROVISION FOR WAR RANTY EXPENSES IS CONTINGENT AND DEPENDENT ON FUTURE HAPPENING. SINCE IT IS NOT POSSIBLE THAT ALL THE SOLD EQUIPMENTS WOULD BE DEFECTIVE IN THAT CASE PROVISI ON IS MUCH HIGHER. THE AO FURTHER OBSERVED THAT THE ACCOUNTING STANDARD OF IC AI WAS NOT BINDING NOR COULD OVERRIDE THE PROVISIONS OF THE ACT WHILE DECI SION OF THE HON'BLE APEX COURT IN THE CASE OF CALCUTTA COMPANY LTD. WAS AGA INST THE ASSESSEE AND THE DECISION OF THE HON'BLE SUPREME COURT IN BHARAT EARTHMOVERS LTD. (SUPRA) I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 6 WAS NOT RELEVANT TO THE FACTS OF THE CASE . ACCORDI NGLY THE AO DISALLOWED THE CLAIM FOR THE WARRANTY EXPENSES IN THESE THREE ASS ESSMENT YEARS. 3. ON APPEAL THE ASSESSEE WHILE RELYING UPON THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF METAL BOX COMPANY OF INDIA LTD. 73 ITR 53 BHARAT EARTHMOVERS LTD. 234 ITR 428 AND AMRISH AND CO . 257 ITR 180 CONTENDED THAT DEDUCTION WAS ADMISSIBLE THE LIABIL ITY BEING NOT CONTINGENT ONE. HOWEVER THE LD. CIT(APPEALS) WHILE DISTINGUI SHING THESE DECISIONS OBSERVED THAT THE ESTIMATION OF WARRANTY PROVISION CANNOT BE DETERMINED WITH ACCURACY. THE PLEA OF THE ASSESSEE THAT THE LIABILI TY IS INBUILT AS SOON AS SALE IS MADE IS NOT TENABLE SINCE THE EXPENDITURE TO B E INCURRED DEPENDED ON A FUTURE EVENT WHICH MAY TAKE PLACE OR MAY NOT TAKE PLACE .ACCORDINGLY THE LD. CIT (APPEALS) UPHELD THE FINDINGS OF THE AO. 4. THE ASSESSEE NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD CIT(APPEALS). THE LD. AR ON BEHALF OF THE AS SESSEE CONTENDED THAT A SIMILAR PROVISION MADE IN PRECEDING ASSESSMENT YEAR BEGINNING FROM AY 1987-88 UNTIL AY 1999-2000 HAS BEEN ALLOWED BY THE AO HIMSELF. THE ASSESSMENT FOR AY 1987-88 AND 1999-2000 WERE COMPLE TED U/S 143(1) OF THE ACT WHILE THOSE OF THE REMAINING YEARS WERE SCRUTIN IZED THE SAID PROVISION HAS BEEN MADE IN THE ACCOUNT ON THE BASIS OF THE TE CHNICAL EVALUATION AND THE PREVIOUS EXPERIENCE BASED ON EXPENSES INCURRED TOWA RDS WARRANTY IN PRECEDING THREE ASSESSMENT YEARS. WHILE RELYING UPO N A DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA P LTD VS. CIT 314 ITR 62 (SC) THE LD. AR PLEADED THAT THE CIT (APPE ALS) WAS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE. ON THE OTHER HAND THE LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. UNDISPUTEDLY THE PROVISION FOR WARRANTY EXPENSES HAS CONTINUOUSLY BEEN ALLOWED BY THE AO H IMSELF RIGHT FROM AY 1987-88 UNTIL AY 1999-2000. THIS WAS FOR THE FIRST TIME THAT THE AO DISALLOWED THE CLAIM ON THE GROUND THAT THE LIABILITY IS CONTI NGENT. THE LD. DR APPEARING ON BEHALF OF THE REVENUE DID NOT PLACE ANY MATERIAL BEFORE US WHICH COULD I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 7 CONTROVERT THE SUBMISSIONS ON BEHALF OF THE ASSESSE E THAT THE PROVISION HAS BEEN MADE ON THE TECHNICAL EVALUATION AND PREVIOUS EXPERIENCE BASED ON CATEGORY-WISE EXPENSES INCURRED TOWARDS THE ACTUAL WARRANTY IN THE PRECEDING THREE YEARS. IN THIS CONNECTION WE MAY REFER TO A DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA P LTD.(SUPRA) WHEREIN WHILE ADJUDICATING A SIMILAR ISSUE HONBLE APEX CO URT HELD THAT I) A PROVISION IS A LIABILITY WHICH CAN BE ME ASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RE COGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUI RED TO SETTLE THE OBLIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOU NT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET NO PROVISION CAN BE R ECOGNIZED; II) A LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS THE SETTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUT FLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS; III) A PAST EVENT THAT LEADS TO A PRESENT OBLIGATI ON IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATE S AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IT IS ONLY THOS E OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PROVISION . FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY PRESENT OBLIGATI ON BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATIO N. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT IS DETER MINED BY CONSIDERING THE SAID OBLIGATIONS AS A WHOLE ; IV) IN THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISION FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NO T ENTITLED TO DEDUCTION U/S 37 OF THE SAID ACT. HOWEVER WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHISTICA TED GOODS THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITEMS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIV E TO SETTLING THAT OBLIGATION ; V) ON FACTS THE ASSESSEE HAS BEEN MANUFACTURING AN D SELLING VALVE ACTUATORS IN LARGE NUMBERS SINCE 1983-84 ONWARDS. S TATISTICAL DATA INDICATES THAT EVERY YEAR SOME ACTUATORS ARE FOUND TO BE DEFE CTIVE. THE DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPARED TO BUY THE VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE WARRANTY BECAME INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUAT OR(S). IN OTHER WORDS WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PR ODUCT AND A RELIABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY W AS ALLOWABLE . I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 8 5.1 . SINCE UNDISPUTEDLY THE ASSESSEE HAS PROVIDED FOR THE WARRANTY EXPENSES BASED ON TECHNICAL EVALUATION AND PAST EXP ERIENCE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT AND A REL IABLE ESTIMATE OF THE EXPENDITURE TOWARDS SUCH WARRANTY IS ALLOWABLE MOR EOVER THE AO HIMSELF ALLOWED A SIMILAR CLAIM U/S 143(1) OF THE ACT IN TH E AYS. 1987-88 & 1999-2000 AND U/S 143(3) OF THE ACT IN THE AYS 1988-89 TO 199 7-98..CONSIDERING THE AFORESAID FACTS AND CIRCUMSTANCES OF THE CASE IN LIGHT OF THE VIEW TAKEN BY THE HON'BLE APEX COURT IN THE AFORESAID DECISION W E HAVE NO ALTERNATIVE BUT TO ALLOW THE CLAIM OF THE ASSESSEE. THEREFORE GROU ND NOS.1.1 & 1.2 IN THE APPEAL OF THE ASSESSEE FOR THESE THREE ASSESSMENT Y EARS ARE ALLOWED. 6. GROUND NOS.2.1 2.2 & 3.1 IN THE APPEAL OF THE AS SESSEE AS ALSO THE ADDITIONAL GROUND AND GROUND NOS. 1(I) TO (III) I N THE APPEAL OF THE REVENUE FOR THE AY 2000-2001 RELATE TO DEDUCTION UNDER SEC TION 80IA ON THE AMOUNT OF RS.3 CRORES RECEIVED IN TERMS OF THE KEYMAN INS URANCE POLICY AND AMOUNT OF INTEREST OF RS.52 50 979/-.SINCE ADDITIONAL GROU ND GOES TO ROOT OF THE MATTER AND ALL THE FACTS ARE AVAILABLE ON RECORD WHILE THE REVENUE DID NOT OBJECT TO ADMISSION OF THE SAID ADDITIONAL GROUND THE SAID GROUND WAS ADMITTED AND IS ADJUDICATED ALONG WITH GROUNDS RAISED IN THE APPEAL MEMO. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT T HE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80IA OF THE ACT ON THE ELIG IBLE PROFITS OF MELTING (FURNANCE DIVISION) BEING 10 TH AND THE LAST YEAR OF SUCH A CLAIM IN RELATION TO THE NEW INDUSTRIAL UNDERTAKING. THE AO WAS OF TH E OPINION THAT THE AMOUNT OF RS.3 CRORES ON ACCOUNT OF KEYMAN INSURANCE CLAIM AND INTEREST INCOME OF RS.52 50 979/- WERE NOT DERIVED FROM THE BUSINESS O F THE INDUSTRIAL UNDERTAKING . TO A QUERY BY THE AO THE ASSESSEE EX PLAINED VIDE LETTER DATED 27.2.2002 THAT THE AMOUNT RECEIVED UNDER KEYMAN INS URANCE POLICY AND INTEREST INCOME WERE DERIVED FROM THE BUSINESS OF T HE INDUSTRIAL UNDERTAKING WHILE DISTINGUISHING OF THE DECISIONS OF THE HON'BL E APEX COURT IN THE STERLING FOODS LTD. 237 ITR 579 AND IN HINDUSTAN LEVER LTD. 239 ITR 297. THE ASSESSEE PLEADED THAT THE KEYMAN INSURANCE CLAIM OF RS.3 CRORES WAS DERIVED FROM AND WAS PART OF THE INTEGRATED MANUFAC TURING OPERATIONS OF THE INDUSTRIAL UNDERTAKING AND IS ELIGIBLE FOR PRO-RATA DEDUCTION UNDER SECTION 80IA OF THE ACT. THE SAID RECEIPT COULD NOT ARISE WITHOU T CONDUCT OF THE INDUSTRIAL I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 9 UNDERTAKING. IN THIS CONNECTION THE ASSESSEE RELIE D UPON A DECISION OF THE HON'BLE MADRAS COURT IN THE CASE OF CIT VS. WHEELER CLUB LTD. 107 ITR 168 .ALTERNATIVELY THE ASSESSEE CLAIMED THAT IF KEYMAN INSURANCE PREMIUM OF RS.1 20 34 000/- IS NOT TO BE REDUCED FROM THE ELIG IBLE PROFITS U/S 80I OF THE ACT THEN THE AFORESAID PREMIA PAID IN THE RESPECTI VE ASSESSMENT YEARS 1995- 96 TO 1999-2000 SHOULD BE ADDED TO ELIGIBLE PROFI TS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80I IN THOSE ASSESSMENT YEA RS. THE FACT THAT SUCH PREMIA HAS BEEN REDUCED FROM THE ELIGIBLE PROFITS U NDER SECTION 80I DURING THE EARLIER YEAR ESTABLISHES THE DIRECT NEXUS OF THE K EYMAN INSURANCE CLAIM INCOME WITH THE CONDUCT OF INDUSTRIAL UNDERTAKING. HOWEVER THE AO REJECTED THESE CONTENTIONS OF THE ASSESSEE HOLDING AS UNDER : I) THE DEDUCTION UNDER SECTION 80I IS OF THE PROFIT DERIVED FROM ELIGIBLE INDUSTRIAL UNDERTAKING. IF ANY INCOME IS NOT DERIVE D FROM ELIGIBLE UNDERTAKING THE SAME WILL NOT QUALIFY FOR DEDUCTION UNDER SECTI ON 80I. THE WORD DERIVED FROM WAS DISCUSSED BY HON'BLE SUPREME COURT IN THE CASE OF HINDUSTAN LEVER LTD. THE RELEVANT OBSERVATION QUOTED BELOW: THE WORD DERIVED IS NOT A TERM OF ART. ITS USE IN THE DEFINITION INDEED DEMANDS AND ENQUIRY IT TO THE GENEALOGY OF THE PRODUCT. BUT THE ENQUIRY SHOULD STOP AS SOON AS THE EFFECTIVE SOURCE IS DISCOVERED. I) IN THE CASE OF STERLING FOODS LTD. HON'BLE SUPR EME COURT OBSERVED THAT THERE MUST BE FOR THE APPLICATION OF THE WORD DERIVED FROM A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTR IAL UNDERTAKINGS. IF THE NEXUS IS ONLY INCIDENTAL AND NOT DIRECT SUCH INCOM E CANNOT BE SAID TO HAVE DERIVED FROM THE INDUSTRIAL UNDERTAKING. IN VIEW OF THIS JUDGMENT THE ONLY TEST TO SEE WHETHER ANY PROFIT IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80I OR NOT IS TO SEE THE NEXUS BETWEEN THE SOURCE OF INCOME AND INDU STRIAL UNDERTAKING. IF THE NEXUS IS DIRECT THE INCOME IS ELIGIBLE FOR DEDUCTI ON AND IN THE ABSENCE THE SAME IS NOT. II) IN THE ASSESSEES CASE THE KEYMAN INSURANCE CL AIM OF RS.3 CRORES IS THE INCOME RECEIVED ON ACCOUNT OF DEMISE OF ONE OF THE DIRECTOR ON WHOSE LIFE KEYMAN INSURANCE POLICY WAS TAKEN BY THE COMPANY. T HE INCOME RECEIVED IN THIS CASE IS ON ACCOUNT OF DEATH OF THE DIRECTOR AN D NOT FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING WHICH IS MANUFACTURING OF F URNACES. THERE MAY BE INDIRECT CONNECTION THAT THE DIRECTOR (KEYMAN) WAS WORKING FOR THE INDUSTRIAL UNDERTAKING AND THE INCOME WAS RECEIVED ON HIS DEAT H BUT THERE IS NO DIRECT NEXUS BETWEEN THE INSURANCE CLAIM AND THE BUSINESS OF INDUSTRIAL UNDERTAKING. THE DIRECTORS DEATH MAY AFFECT THE WO RKING OF INDUSTRIAL UNDERTAKING BUT THAT DOES NOT MEAN THAT THE INCOME FROM INSURANCE CLAIM IS LINKED WITH THE BUSINESS OF INDUSTRIAL UNDERTAKING. SINCE THE INSURANCE CLAIM INCOME WAS NOT DERIVED FROM INDUSTRIAL UNDERTAKING IN VIEW OF JUDGMENT OF SUPREME COURT DEDUCTION UNDER SECTION 80I CLAIM ON INSURANCE CLAIM IS NOT IN ORDER. III) ASSESSEES ALTERATIVE SUBMISSIONS THAT IF ITS CLAIM UNDER SECTION 80I ON KEYMAN INSURANCE IS NOT CONSIDERED THEN IN EARLIER YEARS THE PREMIUM PAID FOR KEYMAN INSURANCE POLICY SHOULD NOT HAVE BEEN RE DUCED FOR WORKING OUT I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 10 ELIGIBLE PROFIT UNDER SECTION 80I. THE EXPENSE CLAI MED BY THE ASSESSEE WAS ALLOWED AS BUSINESS EXPENSE HOWEVER THE SAME WILL N OT MAKE THE INSURANCE CLAIM AS INCOME DERIVED FROM THE INDUSTRIAL UNDERTA KING. ASSESSEES ALTERNATIVE ARGUMENT HAS NO BASIS AND IS NOT RELEVA NT FOR THIS ASSESSMENT YEAR. ACCORDINGLY THE AO DISALLOWED CLAIM OF DEDUCTION U NDER SECTION 80IA OF THE ACT ON THE INTEREST INCOME OF RS.52 50 979/- AND ON THE AMOUNT OF RS.3 CRORES RECEIVED IN TERMS OF THE KEYMAN INSURANCE PO LICY. 7. ON APPEAL THE ASSESSEE REITERATED THEIR SUBMISS IONS BEFORE THE AO AND CONTENDED THAT AMOUNT OF RS.3 CRORES UNDER KEYM AN INSURANCE POLICY WAS RECEIVED FROM THE INSURANCE COMPANY ON THE DEMI SE OF MR.VYAS WHO WAS KEYMAN OF THE ASSESSEECOMPANY AND THE AMOUNT H AD BEEN RECEIVED BY THEM AFTER HIS DEATH. SINCE THE AMOUNT HAS DIRECT N EXUS WITH THE INDUSTRIAL UNDERTAKING DEDUCTION UNDER SECTION 80IA OF THE AC T IS ADMISSIBLE THE ASSESSEE ARGUED. IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT (APPEALS) CONCLUDED THAT THE AMOUNT OF RS.3 CORES WAS NOT DER IVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND ACCORDINGLY WHILE RELYING UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF STERLING F OODS LTD.(SUPRA) UPHELD THE ACTION OF THE AO. HOWEVER THE LD. CIT(APPEALS) ACCEPTED THE ALTERNATIVE PLEA OF THE ASSESSEE THAT MR.VYAS EMPLOYEE OF THE ASSESSEE WAS LOOKING AFTER ALL THE FIVE DIVISIONS OF THE ASSESSEE COMPAN Y AND THEREFORE EXCLUSION OF THE ENTIRE AMOUNT OF RS.3 CORERS RECEIVED FROM INS URANCE COMPANY WAS NOT JUSTIFIED AND ONLY AMOUNT ATTRIBUTABLE TO MELTING F URNACE DIVISION WHICH IS SUBJECT MATTER OF DEDUCTION U/S 80IA SHOULD BE EXCL UDED IN THE RATIO OF TURNOVER OF THE MELTING FURNACE DIVISION AND TOTAL TURNOVER OF THE COMPANY . THE LD. CIT(A) FOUND THAT PROFIT OF MELTING DIVISIO N WAS RS.4 85 65 114 OUT OF TOTAL PROFIT OF RS. 4 78 44 145/- WHILE TURNOVER OF MELTING FINANCE DIVISION WAS RS.28 38 28 340/- OUT OF TOTAL TURNOVER OF RS.35 21 19 390/-.SINCE TURNOVER OF MELTING FINANCE DIVISION WAS 80.6% OF THE TOTAL TUR NOVER AND THE ASSESSEE IS STATED TO HAVE CLAIMED DEDUCTION U/S 80IA ONLY TO T HE EXTENT OF 80.6 % OF THE KEYMAN INSURANCE RECEIPT OF RS. 3 CRORES THE LD. CIT(A) DIRECTED TO EXCLUDE RS. 2 41 80 000/- INSTEAD OF RS. 3 CRORES WHILE WOR KING OUT ADMISSIBLE DEDUCTION. LIKE WISE APPLYING THE SAME RATIO SINCE THE ASSESSEE CLAIMED DEDUCTION U/S 80IA ONLY ON 80.6% OF THE INTEREST AM OUNT THE LD. CIT(A) I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 11 DIRECTED TO EXCLUDE AN AMOUNT OF RS.42 32 289/- OUT OF INTEREST OF RS.52 56 979 WHILE COMPUTING DEDUCTION U/S 80IA OF THE ACT. HOWEVER IN HIS ORDER DATED 9.2.2005 U/S 154 OF THE ACT THE LD. CI T(A) AFTER EXCLUDING EXEMPTED INCOME OF RS.12 63 236/- DIRECTED TO EXCL UDE AN AMOUNT OF RS. 32 14 120/- INSTEAD OF RS.42 32 289/-. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE FINDINGS OF THE LEARNED CIT (APPEALS) IN DIRECTING TO EXCLUDE 80.6% OF THE AMOUNT RECEIVED UNDER KEMAN INSURANCE POLICY AND INTEREST OF RS. 32 14 120/-. THE LD. AR ON BEHALF OF THE ASSESSEE SUBMITTED THAT MR.VYAS A DE MISED EMPLOYEE HAD BEEN AN INVALUABLE HUMAN RESOURCE AN INTELLECTUAL PROPERTY AND HIGHLY QUALIFIED TECHNOCRAT AND LIKE ANY OTHER BUSINESS HA ZARDS THE ASSESSEE HAD TAKEN KEYMAN INSURANCE POLICY ON THE LIFE OF MR. VY AS TO PROTECT AND SHELTER THE INDUSTRIAL UNDERTAKING AGAINST THE UNFORESEEN L OSS IN CASE OF UNTIMELY DEATH OF THE KEYMAN. MR. VYAS EXPIRED DUE TO CARDI AC PROBLEM WHILE DOING OFFICIAL DUTIES. THE DEATH OF MR. VYAS IS PROXIMATE CAUSE OF THE KEYMAN INSURANCE RECEIPT AND THE INDUSTRIAL UNDERTAKING DI RECTLY YIELDED THE KEYMAN INSURANCE GUARANTEE. KEYMAN INSURANCE CLAIM RECEIP T COULD NOT ARISE WITHOUT THE CONDUCT OF THE INDUSTRIAL UNDERTAKING AND HAS B EEN VERY MUCH A PART OF THE INTEGRATED MANUFACTURING OPERATIONS OF THE INDUSTRI AL UNDERTAKING . THE LD.. AR PLEADED THAT KEYMAN INSURANCE RECEIPT BE HELD AS IN COME DERIVED FROM THE INDUSTRIAL UNDERTAKING. ALTERNATIVELY IT WAS PLEAD ED THAT THE ASSESSEE HAD CLAIMED DEDUCTION ON KEYMAN INSURANCE RECEIPT ONLY ON THE AMOUNT OF RS.241.80 LACS WHICH IS PRORATA AMOUNT OF CLAIM RE CEIVED UNDER INSURANCE CLAIM WHILE THE AO DISALLOWED THE CLAIM FOR DEDUCT ION U/S 80IA ON THE ENTIRE AMOUNT OF RS.3 CRORES. IT WAS FURTHER POINTED OUT T HAT KEYMAN INSURANCE PREMIUM OF RS.1 20 34 000/- PAID HITHERTO WHICH HAS BEEN REDUCED FROM THE ELIGIBLE PROFITS WHILE COMPUTING DEDUCTION U/S 80I OF THE ACT IN THE ASSESSMENT YEARS 1995-96 TO 1999-2000 HAS TO BE CONSIDERED IN CASE THE KEYMAN INSURANCE RECEIPTS ARE HELD AS NON-ELIGIBLE BUSINES S PROFITS FOR THE DEDUCTION UNDER SECTION 80IA DURING THE PREVIOUS YEAR. INTE R ALIA THE LD. AR ALSO RELIED UPON THE DECISION OF HON'BLE DELHI HIGH COURT IN TH E CASE OF CIT VS. SPORTKING INDIA LTD. 27 DTR 87 (DEL). ON THE OTHER HAND DR SUPPORTED THE FINDINGS OF THE AO. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 12 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE FACTS OF THE CASE. IN THE PROVISIONS OF SECTION 80IA OF THE ACT THE P HRASE USED IS PROFIT AND GAINS 'DERIVED FROM' ANY BUSINESS OF THE INDUSTRIAL UND ERTAKING. THIS MEANS THAT IT IS NOT 'ANY PROFIT' WHICH IS ENTITLED FOR BENEFICIA L DEDUCTION U/S 80IA OF THE ACT. IN VARIOUS DECISIONS OF THE HONBLE SUPREME COURT IT HAS ALSO BEEN CLARIFIED THAT THE EXPRESSION 'DERIVED FROM' IS QUITE DIFFERE NT FROM THE EXPRESSION 'ATTRIBUTABLE TO'. HON'BLE APEX COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT 262 ITR 278 (SC) HELD THAT THE INTEREST ON SECURITY DEPOSIT WITH THE ELECTRICITY BOARD WAS NOT ELIGIBLE FOR TAX HOLIDAY U/S.80HH OF THE ACT. THE APEX COURT HELD THAT SUCH DEPOSIT WAS A STEP REMOVE D FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING AND THE PHRASE 'DERIVED FROM ' MEANS SOMETHING WHICH HAD A DIRECT OR IMMEDIATE NEXUS WITH THE ASSESSEE'S INDUSTRIAL UNDERTAKING. HON'BLE SUPREME COURT IN THE CASE OF CIT V. STERLIN G FOODS [1999] 237 ITR 579 HELD THAT THERE MUST BE A DIRECT NEXUS BETWEEN PRO FITS AND GAINS OF THE INDUSTRIAL UNDERTAKING AND INCOME DERIVED. AS THE N EXUS WAS ONLY INCIDENTAL AND NOT DIRECT THE RECEIPTS FROM THE SALE OF IMPOR T ENTITLEMENTS COULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE FOR THE PURP OSE OF COMPUTING THE RELIEF UNDER SECTION 80HH OF THE ACT IT WAS CONCLUDED BY THE HONBLE APEX COURT. HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF NAHAR EXPORTS VS. CIT 288 ITR 494 UPHELD DISALLOWANCE OF CLAIM FOR DE DUCTION U/S 80IB OF THE ACT ON THE INTEREST INCOME IN THE LIGHT OF AFORES AID DECISIONS OF THE APEX COURT . 9.1 FOR THE PURPOSE OF CLAIMING DEDUCTION UNDER S. 80-IA OF THE ACT THE ASSESSEE IS NOT ONLY REQUIRED TO ESTABLISH THAT IT WAS BUSINESS PROFIT OF THE INDUSTRIAL UNDERTAKING BUT ALSO TO ESTABLISH THAT THIS WAS A PROFIT 'DERIVED FROM' THE BUSINESS ACTIVITY OF THE INDUSTRIAL UNDERTAKING WHICH MEANS A DIRECT NEXUS BETWEEN THE PROFITS AND THE BUSINESS OF THE INDUSTR IAL UNDERTAKING. THE MERE FACT THAT SUCH INCOME WAS A BUSINESS INCOME WOULD N OT ENTITLE THE ASSESSEE FOR DEDUCTION UNDER S. 80-IA OF THE ACT. THOUGH THE ASSESSEE HAD TAKEN A KEYMAN INSURANCE POLICY ON THE LIFE OF SHRI VYAS T HE AMOUNT RECEIVED ON THE DEATH OF THE KEYMAN FROM THE INSURANCE COMPANY CAN NOT BE SAID TO HAVE BEEN DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UN DERTAKING. ADMITTEDLY THE I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 13 IMMEDIATE SOURCE OF AMOUNT IS KEYMAN INSURANCE POLI CY AND DEATH OF THE KEYMAN INSURED AND NOT THE BUSINESS AS THE INDUSTR IAL UNDERTAKING IS REMOVED BY ONE STEP FROM THE SOURCE OF INCOME FOR T HE AMOUNT RECEIVED. IN OTHER WORDS THE IMMEDIATE AND EFFECTIVE SOURCE OF THE AMOUNT RECEIVED IS KEYMAN INSURANCE POLICY AND NOT THE BUSINESS OF TH E INDUSTRIAL UNDERTAKING. AS HELD BY THE HONBLE SUPREME COURT IN CAMBAY ELEC TRIC SUPPLY INDUSTRIAL CO. LTD. V. CIT [1978] 113 ITR 84 THE PROFITS OR GAINS ELIGIBLE FOR DEDUCTION UNDER SECTION 80E OF THE ACT MUST BE DERIVED FROM T HE ACTUAL CONDUCT OF THE BUSINESS AND UNLESS THE PROFITS OR GAINS ARE DERIV ED FROM THE ACTUAL CONDUCT OF THE BUSINESS IT CANNOT BE STATED THAT THE AFORE SAID AMOUNT IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHE R WORDS THE INDUSTRIAL UNDERTAKING MUST DIRECTLY YIELD THE PROFIT AND IT CANNOT BE THE MEANS TO YIELD THE INCOME. WHETHER OR NOT INCOME IS DERIVED FROM THE INDUSTRIAL UNDERTAKING WAS ANALYSED IN THE CASE OF PANDIAN CHEMICALS VS . CIT 262 ITR 278(SC) WHEREIN HONBLE SUPREME COURT HELD THE WORD 'DERIVED' HAS BEEN CONSTRUED AS FAR BACK IN 1948 BY THE PRIVY COUNCIL IN CIT V. RAJA BAHADUR KAMAKHAYA NARAYAN SI NGH [1948] 16 ITR 325 WHEN IT SAID: 'THE WORD 'DERIVED' IS NOT A TERM OF ART. ITS USE I N THE DEFINITION INDEED DEMANDS AN ENQUIRY INTO THE GENEALOGY OF THE PRODUC T. BUT THE ENQUIRY SHOULD STOP AS SOON AS THE EFFECTIVE SOURCE IS DISCOVERED. IN THE GENEOLOGICAL TREE OF THE INTEREST LAND INDEED APPEARS IN THE SECOND DEGR EE BUT THE IMMEDIATE AND EFFECTIVE SOURCE IS RENT WHICH HAS SUFFERED THE AC CIDENT OF NON-PAYMENT. AND RENT IS NOT LAND WITHIN THE MEANING OF THE DEFINITI ON.' THIS DEFINITION WAS APPROVED AND REITERATED IN 1955 BY A CONSTITUTION BENCH OF THIS COURT IN THE DECISION OF MRS. BACHA F. GUZD AR V. CIT [1955] 27 ITR 1 AT PAGE 7. IT IS CLEAR THEREFORE THAT THE WORD 'DERI VED FROM' IN SECTION 80HH OF THE INCOME-TAX ACT 1961 MUST BE UNDERSTOOD AS SOM ETHING WHICH HAS DIRECT OR IMMEDIATE NEXUS WITH THE APPELLANT'S INDUSTRIAL UNDERTAKING. ALTHOUGH ELECTRICITY MAY BE REQUIRED FOR THE PURPOSES OF THE INDUSTRIAL UNDERTAKING THE DEPOSIT REQUIRED FOR ITS SUPPLY IS A STEP REMOVED F ROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. THE DERIVATION OF PROFITS O N THE DEPOSIT MADE WITH ELECTRICITY BOARD CANNOT BE SAID TO FLOW DIRECTLY F ROM THE INDUSTRIAL UNDERTAKING ITSELF. 9.2 IN THEIR DECISION DATED 31.8.2009 OF THE H ONBLE APEX COURT IN THE CASE OF M/S LIBERTY INDIA VS. CIT IN A CIVIL APPEAL ARIS ING OUT OF SLP NO. 5827 OF 2007 WHILE ADJUDICATING AS TO WHETHER THE PROFIT F ROM DUTY ENTITLEMENT I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 14 PASSBOOK SCHEME (DEPB) AND DUTY DRAWBACK SCHEME ARE DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND CONSEQU ENTLY ELIGIBLE FOR DEDUCTION U/S 80-IB OF THE ACT THE HONBLE APEX CO URT OBSERVED THAT THE ACT BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES N AMELY INVESTMENT LINKED INCENTIVES AND PROFIT LINKED INCENTIVES. CHAPTER V I-A ESSENTIALLY BELONGS TO THE CATEGORY OF PROFIT LINKED INCENTIVES WHILE SS. 80-IA/80-IB REFER TO PROFITS DERIVED FROM ELIGIBLE BUSINESS IT IS NOT THE OWNER SHIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES BUT THE GENERATION OF PROFITS (OPERATIONAL PROFITS) AND EACH OF THE ELIGIBLE BUSINESS IN SUB-S ECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITEM IN THE MATTER OF COM PUTATION OF PROFITS. IT WAS FURTHER HELD THAT SS. 80-IB/80-IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROV ISIONS. S. 80-IB ALLOWS DEDUCTION OF PROFITS AND GAINS DERIVED FROM THE ELI GIBLE BUSINESS. THE WORDS DERIVED FROM IS NARROWER IN CONNOTATION AS COMPAR ED TO THE WORDS ATTRIBUTABLE TO. BY USING THE EXPRESSION DERIVED FROM PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGR EE ; IN THE LIGHT OF THE SAID DECISION OF HONBLE SUPREME COURT WE ARE NOT INCLINED TO ACCEPT THE PLEA ON BEHALF OF THE ASSESSEE THAT AMOUNT RECEIVE D FROM THE INSURANCE COMPANY UNDER THE KEYMAN INSURANCE POLICY ON THE DE ATH OF MR. VYAS IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERT AKING. THE FACT THAT THE AMOUNT WAS ASSESSABLE AS BUSINESS INCOME ITSELF WOU LD NOT BE SUFFICIENT TO HOLD THAT THE SAID AMOUNT WAS DERIVED FROM THE ACTU AL CONDUCT OF THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WORDS IT I S NOT ALL BUSINESS RECEIPTS THAT WOULD QUALIFY FOR THE DEDUCTION AND THE LEGISLATURE HAS APPARENTLY NOT INTENDED TO GIVE THE BENEFIT OF DEDUCTION TO ALL BU SINESS INCOME. IF THE INTENTION OF THE LEGISLATURE WAS TO GRANT RELIEF TO ALL BUSINESS INCOME IT COULD HAVE USED THE EXPRESSION 'PROFITS AND GAINS OF IND USTRIAL UNDERTAKING'. THE FACT THAT THE LEGISLATURE HAS USED THE EXPRESSION ' PROFITS AND GAINS DERIVED FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING' HAS SO ME SIGNIFICANCE AND IT CONNOTES THAT THE IMMEDIATE AND EFFECTIVE SOURCE OF INCOME ELIGIBLE FOR GRANT OF RELIEF UNDER SECTION 80IA OF THE ACT MUST BE THE INDUSTRIAL UNDERTAKING ITSELF AND NOT ANY OTHER SOURCE. THE MANDATE OF LAW IS THA T UNLESS THE SOURCE OF THE PROFIT IS THE UNDERTAKING THE ASSESSEE IS NOT ELIG IBLE TO CLAIM DEDUCTION UNDER SECTION 80IA OF THE ACT. MERE COMMERCIAL CONNECTION BETWEEN THE INCOME AND I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 15 THE INDUSTRIAL UNDERTAKING WOULD NOT BE SUFFICIENT. THE DERIVATION OF THE INCOME MUST BE DIRECTLY CONNECTED WITH THE BUSINESS IN THE SENSE THAT THE INCOME IS GENERATED BY THE BUSINESS. 9.3 IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD.'S CASE [1978] 113 ITR 84 MENTIONED EARLIER THE HONBLE SUPREME COURT CONSI DERED THE MEANING OF THE EXPRESSION 'ATTRIBUTABLE TO' AND OBSERVED THAT THE LEGISLATURE HAS DELIBERATELY USED THE EXPRESSION 'ATTRIBUTABLE TO' HAVING A WIDER IMPORT THAN THE EXPRESSION 'DERIVED FROM'. IT WAS FURTHER OBSER VED THAT: 'IT CANNOT BE DISPUTED THAT THE EXPRESSION 'ATTRIBU TABLE TO' IS CERTAINLY WIDER IN IMPORT THAN THE EXPRESSION 'DERIVED FROM'. HAD THE EXPRESSION 'DERIVED FROM' BEEN USED IT COULD HAVE WITH SOME FORCE BEEN CONTE NDED THAT A BALANCING CHARGE ARISING FROM THE SALE OF OLD MACHINERY AND B UILDINGS CANNOT BE REGARDED AS PROFITS AND GAINS DERIVED FROM THE COND UCT OF THE BUSINESS OF GENERATION AND DISTRIBUTION OF ELECTRICITY. IN THIS CONNECTION IT MAY BE POINTED OUT THAT WHENEVER THE LEGISLATURE WANTED TO GIVE A RESTRICTED MEANING IN THE MANNER SUGGESTED BY THE LEARNED SOLICITOR-GENERAL IT HAS USED THE EXPRESSION 'DERIVED FROM' AS FOR INSTANCE IN SEC TION 80J. IN OUR VIEW SINCE THE EXPRESSION OF WIDER IMPORT NAMELY 'ATTRIBUTAB LE TO' HAS BEEN USED THE LEGISLATURE INTENDED TO COVER RECEIPTS FROM SOURCES OTHER THAN THE ACTUAL CONDUCT OF THE BUSINESS OF GENERATION AND DISTRIBUT ION OF ELECTRICITY.' 9.4 FROM THE ABOVE DISCUSSION OF THE MEANING OF THE WORD 'ATTRIBUTABLE TO' WITH REFERENCE TO THE EXPRESSION 'DERIVED FROM' IT CAN BE SEEN THAT THE MEANING OF THE EXPRESSION 'DERIVED FROM' HAS GOT ON LY A LIMITED IMPORT AND THEREFORE THE EXPRESSION 'DERIVED FROM' AS USED IN SECTION 80IA MUST BE UNDERSTOOD AS PROFIT DIRECTLY ARISING FROM THE ACTI VITIES OF THE INDUSTRIAL UNDERTAKING AND NOT INCIDENTAL TO IT. THERE IS NO M ATERIAL BEFORE US SUGGESTING THAT THE AMOUNT RECEIVED UNDER KEYMAN INSURANCE PO LICY AND INTEREST INCOME RECEIVED BY THE ASSESSEE IS THE DIRECT RESULT OF A NY ACTIVITY OF INDUSTRIAL UNDERTAKING OF MANUFACTURING OF ANY GOODS . AS OBS ERVED BY THE HONBLE APEX COURT IN CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD.(SUPRA) UNLESS THE PROFITS OR GAINS ARE DERIVED FROM THE ACTUAL CONDUC T OF THE BUSINESS IT CANNOT BE STATED THAT THE AFORESAID AMOUNT IS DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING. IN OTHER WORDS THE INDUSTR IAL UNDERTAKING MUST DIRECTLY YIELD THE PROFIT. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE OPINION THAT AMOUNT RECEIVED UNDER THE KEYMAN INSUR ANCE POLICY OR INTEREST I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 16 INCOME WERE NOT OPERATIONAL PROFITS NOR GENERATED DIRECTLY IN THE BUSINESS OF INDUSTRIAL UNDERTAKING AND ARE BEYOND THE FIRST DEGREE . 9.5 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS.GASKETS AND RADIATORS DISTRIBUTORS 296 ITR 440(GUJ) IN THE CON TEXT OF DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF INCOME ON ACCOUNT OF INTEREST ON FIXED DEPOSITS HELD IDENTICAL QUESTION CAME TO BE CONSIDERED BY THE HO N'BLE SUPREME COURT IN PANDIAN CHEMICALS LTD. V. CIT [2003] 262 ITR 278 AND THE QUESTION WHICH WAS POSED FOR CONSIDERATION BEFORE THE APEX COURT W AS WHETHER THE INTEREST ON DEPOSITS WITH THE TAMIL NADU ELECTRICITY BOARD S HOULD BE TREATED AS INCOME DERIVED BY THE INDUSTRIAL UNDERTAKING FOR THE PURPO SE OF SECTION 80HH OR NOT AND THE HON'BLE SUPREME COURT HAS OBSERVED THAT SECTION 80HH OF THE INCOME-TAX ACT GRANTS DEDUCTION IN RESPECT OF PROFI TS AND GAINS 'DERIVED FROM' AN INDUSTRIAL UNDERTAKING AND THE WORDS 'DERI VED FROM' IN SECTION 80HH OF THE INCOME-TAX ACT 1961 MUST BE UNDERSTOO D AS SOMETHING WHICH HAS A DIRECT OR IMMEDIATE NEXUS WITH THE ASSE SSEE'S INDUSTRIAL UNDERTAKING. THE SUPREME COURT HELD THAT INTEREST DERIVED BY TH E INDUSTRIAL UNDERTAKING OF THE ASSESSEE ON DEPOSITS MADE WITH T HE TAMIL NADU ELECTRICITY BOARD FOR THE SUPPLY OF ELECTRICITY FOR RUNNING THE INDUSTRIAL UNDERTAKING COULD NOT BE SAID TO FLOW DIRECTLY FROM THE INDUSTRIAL UN DERTAKING ITSELF AND WAS NOT PROFITS OR GAINS DERIVED BY THE UNDERTAKING FOR THE PURPOSE OF THE SAID DEDUCTION UNDER SECTION 80HH. IN G.T.N. TEXTILES LT D. V. DY. CIT [2005] 279 ITR 72 THE KERALA HIGH COURT HELD THAT INTEREST ON BANK DEPOSITS WAS NOT PROFIT DERIVED FROM EXPORT OF GOODS. THE KERALA HIG H COURT HAS FURTHER HELD THAT THE INTEREST EARNED BY THE ASSESSEE ON FIXED D EPOSITS COMMISSION RECEIVED ON SALE OF MACHINERY ETC. WERE NOT BUSIN ESS INCOME AND CONSEQUENTLY THE ASSESSEE WAS NOT ENTITLED TO COMPU TATION OF ELIGIBLE DEDUCTION UNDER SECTION 80HHC OF THE ACT BY INCLUDI NG THOSE RECEIPTS UNDER BUSINESS INCOME. THEREFORE CONSIDERING THE AFORESA ID TWO DECISIONS WE MUST HOLD THAT THE TRIBUNAL AS WELL AS THE COMMISSI ONER OF INCOME-TAX (APPEALS) BOTH COMMITTED AN ERROR IN TREATING THE INTEREST ON DEPOSITS AS 'BUSINESS INCOME' AND GRANTING THE ASSESSEE THE DED UCTION UNDER SECTION 80HHC OF THE ACT.. 9.6 HONBLE DELHI HIGH COURT IN CIT VS. SHRIRAM HONDA POWER EQUIPMENT LTD. 289 ITR 475(DELHI) IN THE CONTEXT OF DETERMIN ING BUSINESS PROFITS FOR THE PURPOSE OF SEC. 80HHC OF THE ACT LAID DOWN THAT I) AO HAS TO FIRST 'COMPUTE' THE PROFITS OF THE BUS INESS UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION.' IN OTHER WORD S HE WILL HAVE TO COMPUTE BUSINESS PROFITS IN TERMS OF THE ACT BY APPLYING THE PROVISIONS OF SECTIONS 28 TO 44 THEREOF. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 17 (II) IN ARRIVING AT PROFITS OF THE BUSINESS BY THE ABOVE METHOD THE ASSESSING OFFICER WILL EXCLUDE ALL SUCH INCOMES WHICH PARTAKE OF THE CHARACTER OF 'INCOME FROM OTHER SOURCES' WHICH IN ANY EVENT ARE TREATED UNDER SECTIONS 56 AND 57 OF THE ACT AND ARE THEREFORE NOT TO BE RECKO NED FOR THE PURPOSES OF SECTION 80HHC. THE ASSESSING OFFICER WILL APPLY THE LAW AS EXPLAINED IN THE JUDGMENTS OF THE KERALA HIGH COURT REFERRED TO ABOV E WHICH HAVE BEEN AFFIRMED BY THE HON'BLE SUPREME COURT. (III) WHERE SURPLUS FUNDS ARE PARKED WITH THE BANK AND INTEREST IS EARNED THEREON IT CAN ONLY BE CATEGORISED AS INCOME FROM O THER SOURCES. THIS RECEIPT MERITS SEPARATE TREATMENT UNDER SECTION 56 OF THE A CT WHICH IS OUTSIDE THE RING OF PROFITS AND GAINS FROM BUSINESS AND PROFESSION. IT GOES ENTIRELY OUT OF THE RECKONING FOR THE PURPOSES OF SECTION 80HHC. (IV) INTEREST EARNED ON FIXED DEPOSITS FOR THE PURP OSES OF AVAILING OF CREDIT FACILITIES FROM THE BANK DOES NOT HAVE AN I MMEDIATE NEXUS WITH THE EXPORT BUSINESS AND THEREFORE HAS TO NECESSARIL Y BE TREATED AS INCOME FROM OTHER SOURCES AND NOT BUSINESS INCOME. (V) ONCE BUSINESS INCOME HAS BEEN DETERMINED BY APP LYING ACCOUNTING STANDARDS AS WELL AS THE PROVISIONS CONTAINED IN TH E ACT THE ASSESSEE WOULD BE PERMITTED TO IN TERMS OF SECTION 37 OF THE ACT CLAIM AS DEDUCTION EXPENDITURE LAID OUT FOR THE PURPOSES OF EARNING SU CH BUSINESS INCOME. (VI) IN THE SECOND STAGE THE ASSESSING OFFICER WIL L DEDUCT FROM THE PROFITS OF THE BUSINESS COMPUTED UNDER THE HEAD 'PROFITS AND G AINS OF BUSINESS OR PROFESSION' THE FOLLOWING SUMS IN ORDER TO ARRIVE A T THE 'PROFITS OF THE BUSINESS' FOR THE PURPOSES OF SECTION 80HHC(3): .. 9.7 . . IN THE CASE UNDER CONSIDERATION THE AO AND THE LD. CIT(A) HAVE CONCLUDED THAT AMOUNT RECEIVED UNDER KEYMAN INSURA NCE POLICY AND INTEREST INCOME DO NOT HAVE ANY DIRECT AND IMMEDIATE NEXUS WITH THE ACTIVITY OF INDUSTRIAL UNDERTAKING NOR THE LD. AR ON BEHALF OF THE ASSESSEE PLACED ANY MATERIAL BEFORE US ESTABLISHING SUCH NEXUS. IN THES E CIRCUMSTANCES WE ARE OF THE OPINION THAT THE AMOUNT RECEIVED UNDER KEYMAN I NSURANCE POLICY HAVING NO DIRECT AND IMMEDIATE NEXUS WITH THE ACTIVITY OF THE MELTING FURNACE DIVISION IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA O F THE ACT. 9.8 AS REGARDS RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SPORTKING INDIA LTD.(SUPRA) WE ARE OF THE OPINION THAT THE FACTS AND CIRCUMSTANCES IN THE SAID CASE ARE ALTOGETHER DIFFERENT AND THEREFORE RELIANCE ON THE SAID DECISION IS TOTALLY MISPLACED. IN THE CITED DECISION HONBLE I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 18 HIGH COURT HELD THAT DEFINITELY A NEXUS TO THE BUSI NESS IS THERE IN CASE THE GOODS OF A BUSINESS ARE DESTROYED AND FOR WHICH AN INSURANCE AMOUNT IS CLAIMED; THEREFORE THERE IS NO REASON WHY AMOUNT R ECEIVED FROM THE INSURANCE COMPANY BY THE ASSESSEE-COMPANY SHOULD NO T BE TAKEN INTO ACCOUNT IN DETERMINING THE PROFITS AND GAINS OF AN INDUSTRIAL UNDERTAKING OF THE TYPES SPECIFIED UNDER SECTION 80-IA OF THE ACT. HOW EVER IN THE CASE UNDER CONSIDERATION AMOUNT HAS NOT BEEN RECEIVED FROM TH E INSURANCE COMPANY ON ACCOUNT OF GOODS DESTROYED; RATHER AMOUNT HAS BEEN RECEIVED ON THE DEATH OF KEYMAN SHRI VYAS WHICH HAS NOTHING TO DO WITH THE OPERATIONAL PROFITS OF THE COMPANY NOR HAS DIRECT AND IMMEDIATE NEXUS WITH THE CONDUCT OF BUSINESS OF THE AFORESAID MELTING FURNACE DIVISION. 9.9 WE FURTHER FIND THAT THE LD. CIT(A) ALLO WED PRORATA DEDUCTION IN THE RATIO OF TURNOVER OF MELTING FINANCE DIVISION( 80.6 % ) AND THE TOTAL TURNOVER OF THE COMPANY SINCE THE ASSESSEE IS STATED TO HAVE CL AIMED DEDUCTION U/S 80IA ONLY ON 80.6 % OF THE KEYMAN INSURANCE RECEIPT OF R S. 3 CRORES. LIKE WISE APPLYING THE SAME RATIO SINCE THE ASSESSEE CLAIMED DEDUCTION U/S 80IA ONLY ON 80.6% OF THE INTEREST AMOUNT THE LD. CIT(A) DIR ECTED TO EXCLUDE AN AMOUNT OF RS.42 32 289/-(LATER RECTIFIED TO RS.32 14 120/- ) OUT OF INTEREST OF RS.52 56 979/- WHILE COMPUTING DEDUCTION U/S 80IA O F THE ACT. SINCE DEDUCTION HAD BEEN CLAIMED ONLY ON 80.6% OF THE AMO UNT RECEIVED UNDER KEYMAN INSURANCE POLICY WE DO NOT FIND ANY INFIRMI TY IN THE FINDINGS OF THE LD. CIT(A) IN RESTRICTING THE DISALLOWANCE TO THE EXT ENT OF CLAIM MADE BY THE ASSESSEE. THE LD. DR DID NOT PLACE BEFORE US ANY MA TERIAL SUGGESTING THAT DEDUCTION HAS BEEN CLAIMED ON THE ENTIRE AMOUNT OF RS. 3 CRORES RECEIVED IN TERMS OF KEYMAN INSURANCE POLICY AND NOT MERELY ON 80.6% THEREOF.THEREFORE GROUNDS RAISED BY THE REVENUE IN THIS BEHALF IN TH EIR APPEAL FOR THE AY 2000- 01 HAVE NO FORCE. 9.10 AS REGARDS ALTERNATE PLEA RAISED IN GROUND N O. 2.2 FOR ALLOWANCE OF DEDUCTION U/S 80IA OF THE ACT IN THE PERIOD RELEVA NT TO THE AYS 1995-96 TO 1999-2000 AFTER EXCLUDING PREMIUM TOWARDS KEYMAN IN SURANCE POLICY SINCE THE RELEVANT FACTS AND CIRCUMSTANCES AND STATUS OF THOSE ASSESSMENTS ARE NOT BEFORE US WE REFRAIN FROM EXPRESSING ANY OPINION. HOWEVER THE ASSESSEE IS I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 19 FREE TO APPROACH THE APPROPRIATE AUTHORITY IN ACCO RDANCE WITH LAW FOR REDRESSAL OF ITS GRIEVANCE. WITH THESE OBSERVATIONS GROUND NO.2.2 IS DISPOSED OF. 10. IN VIEW OF THE FOREGOING WE HAVE NO HESITATI ON IN REJECTING GROUND NOS. 2.1 & 2.2 IN THE APPEAL OF THE ASSESSEE AS ALSO AD DITIONAL GROUND RAISED BEFORE US BESIDES GROUND NOS. 1(I) TO (III) IN THE APPEAL OF THE REVENUE FOR THE AY 2000-01 SO FAR AS THESE RELATE TO CLAIM FOR DEDU CTION U/S 80IA OF THE ACT ON THE AMOUNT RECEIVED UNDER THE KEYMAN INSURANCE POLI CY. 11. AS REGARDS CLAIM FOR DEDUCTION U/S 80IA ON T HE INTEREST INCOME IN GROUND NO.3.1 IN THE APPEAL OF THE ASSESSEE AND GROUND N OS. 1(I) TO (III) IN THE APPEAL OF THE REVENUE FOR THE AY 2000-01 DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO EXCLUDED AN AMOUNT OF RS. 52 50 979/- WHILE COMPUTING DEDUCTION U/S 80IA OF THE ACT ON THE GROUND THAT SA ID INCOME WAS NOT DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING R ELYING INTER ALIA ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F STERLING FOODS LTD. 237 ITRR 579(SC). 12. ON APPEAL THE LD. CIT(APPEALS) CONCLUDED T HAT ONLY INTEREST INCOME ATTRIBUTABLE TO MELTING FURNACE DIVISION SHOULD BE EXCLUDED FROM THE WORKING OF 80IA CLAIM IN THE RATIO OF 80.6% WORKED OUT BY THE LD. CIT(A) WHILE ADJUDICATING A SIMILAR CLAIM FOR DEDUCTION U/S 80IA ON THE AMOUNT RECEIVED UNDER KEYMAN INSURANCE POLICY. ACCORDINGLY AN AMOU NT OF RS.42 32 289/- (LATER RECTIFIED TO RS.32 14 120/-) WAS DIRECTED T O BE EXCLUDED INSTEAD OF RS.52 56 979/-. 13. THE ASSESSEE IS NOW IN APPEAL AGAINST THE F INDINGS OF THE LD. CIT (APPEALS) IN RELATION TO 80.6% OF THE AMOUNT OF RS. 12 63 236/- PERTAINING TO TAX FREE GOVERNMENT COMPANIES BONDS AND OF RS. 5 54 136/- ON ACCOUNT OF INTEREST EARNED ON LATE COLLECTION OF SALE PROCEED S. THE LD. AR ON BEHALF OF THE ASSESSEE WHILE REFERRING TO THEIR GROUND OF AP PEAL CONTENDED THAT INTEREST INCOME OF RS.10 18 168 (AT 80.6% OF RS.12 63 236) I S RELATED TO TAX FREE GOVERNMENT COMPANIES BONDS WHILE INTEREST INCOME OF RS.4 46 633 (AT 80.6% I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 20 OF RS.5 54 136) EARNED ON LATE COLLECTION OF SALES PRICES ETC.. SINCE THE INCOME OF RS.12 63 236/- WAS EXEMPT UNDER SECTION 1 0 OF THE ACT APPARENTLY IT WAS NOT PART OF THE GROSS TOTAL INCOME AND THER EFORE DEDUCTION U/S 80IA COULD NOT BE EVEN CONSIDERED. AS REGARDS INTEREST O N LATE COLLECTION OF DUES THE LD. AR PLEADED THAT THE SAID AMOUNT WAS ELIGIBL E FOR DEDUCTION UNDER SECTION 80IA OF THE ACT AND IN THE LIGHT OF THE DEC ISION OF THE HON'BLE GUJRAT HIGH COURT IN THE NIRMA INDUSTRIES LTD. VS. CIT 28 3 ITR 402. ON THE OTHER HAND LD. DR SUPPORTED THE FINDINGS OF THE AO. 14. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT THE AO DID NOT RECORD ANY FINDINGS AS TO WHETHER OR NOT THE INCOME OF RS.12 63 236/- IS EXEMPT UNDER SECTION 1 0 OF THE ACT. HOWEVER THE LD. CIT(A) IN HIS ORDER DATED 9.2.2005 U/S 154 OF THE ACT EXCLUDED THE AMOUNT EXEMPT U/S 10 OF THE ACT WHILE COMPUTING DED UCTION U/S 80IA OF THE ACT. THE REVENUE DOES NOT APPEAR TO HAVE DISPUTED T HE MATTER IN FURTHER APPEAL AGAINST THE AFORESAID FINDINGS. THUS GROUND NO. 3.1(A) IN THE APPEAL OF THE ASSESSEE NO LONGER SURVIVES FOR ADJUDICATION AN D IS TREATED AS INFRUCTUOUS. 15. A S REGARDS DEDUCTION U/S 80IA OF THE ACT ON THE INTEREST ON LATE COLLECTION OF DUES WE FIND THAT WHILE ADJUDICATIN G A SIMLAR ISSUE THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF NIRMA INDU STRIES LTD.(SUPRA) HELD AS UNDER: .WHEN THE ASSESSEE ENTERS INTO A CONTRACT FOR S ALE OF ITS PRODUCTS IT COULD EITHER STIPULATE (A) THAT INTEREST AT THE SPE CIFIED RATE WOULD BE CHARGED ON THE UNPAID SALE PRICE AND ADDED TO THE OUTSTANDI NG TILL THE POINT OF TIME OF REALISATION OR (B) THAT IN CASE OF DELAY THE PAYME NT FOR SALE OF PRODUCTS WORTH RS. 100 TO CARRY THE SALE PRICE OF RS. 102 FOR FIRS T MONTH'S DELAY RS. 104 FOR THE SECOND MONTH'S DELAY RS. 106 FOR THE THIRD MON TH'S DELAY AND SO ON. IF THE CONTENTION OF THE REVENUE IS ACCEPTED MERELY BECAU SE THE ASSESSEE HAS DESCRIBED THE ADDITIONAL SALE PROCEEDS AS INTEREST IN THE CASE OF A CONTRACT AS PER ILLUSTRATION (A) ABOVE SUCH PAYMENT WOULD NOT BE PROFITS DERIVED FROM THE INDUSTRIAL UNDERTAKING BUT IN THE CASE OF ILLUSTRA TION (B) ABOVE IF THE PAYMENT IS DESCRIBED AS SALE PRICE IT WOULD BE PROFITS DERI VED FROM THE INDUSTRIAL UNDERTAKING THIS CAN NEVER BE BECAUSE IN SUM AND S UBSTANCE THESE ARE ONLY TWO MODES OF REALISING SALE CONSIDERATION THE OBJE CT BEING TO REALISE THE SALE PROCEEDS AT THE EARLIEST AND WITHOUT DELAY. THE PUR CHASER PAYS A HIGHER SALE PRICE IF IT DELAYS PAYMENT OF THE SALE PROCEEDS. IN OTHER WORDS THIS IS A CONVERSE SITUATION TO OFFERING OF CASH DISCOUNT. TH US IN PRINCIPLE IN REALITY I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 21 THE TRANSACTION REMAINS THE SAME AND THERE IS NO DI STINCTION AS TO THE SOURCE. IT IS INCORRECT TO STATE THAT THE SOURCE FOR INTERE ST IS THE OUTSTANDING SALE PROCEEDS. IT IS NOT THE ASSESSEE'S BUSINESS TO LEND FUNDS AND EARN INTEREST. THE DISTINCTION DRAWN BY THE REVENUE IS ARTIFICIAL IN NATURE AND IS NEITHER IN CONSONANCE WITH LAW NOR COMMERCIAL PRACTICE. 15.1 ON A SIMILAR ISSUE IN RELATION TO DEDUCTION U /S 80HH OF THE ACT HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BHANSALI E NGINEERING POLYMARS LTD. 306 ITR 194(BOM.) WHILE RELYING UPON THE DECI SION OF HONBLE MADRAS HIGH COURT REPORTED IN CIT V. MADRAS MOTORS LTD. [2 002] 257 ITR 60 AND THE THIRD MEMBER DECISION REPORTED IN KIRLOSKAR ELECTRO DYNE LTD. V. DEPUTY CIT [2004] 271 ITR (AT) 69 (PUNE); [2003] 87 ITD 264 (PUNE) HELD THAT INTEREST RECEIVED ON DELAYED PAYMENTS FROM SUNDRY DEBTORS CO ULD BE TREATED AS INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING AND THUS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 16. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS WE HAVE NO ALTERNATIVE BUT TO HOLD THAT INTEREST ON LATE COLL ECTION OF DUES PERTAINING TO THE MELTING FURNACE DIVISION IS ELIGIBLE UNDER SECTION 80IA OF THE ACT. SINCE THERE IS NO MATERIAL BEFORE US AS TO WHETHER OR NOT INTER EST HAS BEEN RECEIVED ON THE DUES OF ONLY MELTING FURNACE DIVISION ACCORDINGLY THE AO IS DIRECTED TO VERIFY THIS ASPECT AND IF INTEREST RELATES TO DUES OF MELT ING FURNACE DIVISION DEDUCTION U/S 80IA OF THE ACT ON THE AFORESAID AMO UNT MAY BE ALLOWED. 17. SINCE DEDUCTION HAD BEEN CLAIMED ONLY ON 80.6 % OF THE AMOUNT OF INTEREST INCLUDED IN THE GROSS TOTAL INCOME AND THE ASSESSEE MERELY DISPUTED THE CLAIM WITH REGARD TO EXEMPT INTEREST INCOME AND INTEREST ON LATE PAYMENT BY THE DEBTORS WE DO NOT FIND ANY INFIRMITY IN TH E FINDINGS OF THE LD. CIT(A) IN RESTRICTING THE DISALLOWANCE TO THE EXTENT OF CLAI M MADE BY THE ASSESSEE IN RESPECT OF DEDUCTION U/S 80IA OF THE ACT ON THE REM AINING INTEREST. 18. WITH THE AFORESAID DIRECTIONS GROUND NO. 3.1 IN THE APPEAL OF THE ASSESSEE AND GROUND NOS. 1(I) TO (III) IN THE APPE AL OF THE REVENUE FOR THE AY 2000-01 SO FAR AS THESE RELATE TO CLAIM FOR DEDUCTI ON U/S 80IA OF THE ACT ON THE INTEREST INCOME ARE DISPOSED OF. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 22 19. GROUND NO.4.1 IN THE APPEAL OF THE ASSESSEE FOR THE AY 2000-2001 AND GROUND NO.2.1 OF THE APPEAL OF THE ASSESSEE FOR TH E AY 2001-2002 RELATE TO NON EXCLUSION OF THE SALES TAX AND EXCISE DUTY COLL ECTIONS OF RS. 6.02CRORES & 5.39 CRORES RESPECTIVELY IN THESE TWO ASSESSMENT YEARS FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 80HHC OF THE ACT.WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC O F THE ACT AO INCLUDED SALES TAX AND EXCISE DUTY IN THE TOTAL TURNOVER IN THESE TWO ASSESSMENT YEARS.. 20. ON APPEAL THE LD. CIT(APPEALS) UPHELD THE FIND INGS OF THE AO RELYING UPON THE DECISION DATED 24.08.2000 OF THE ITAT AHM EDABAD IN THE CASE OF GUJARAT FLUORO CHEMICALS LTD. VS. JCIT IN ITA NO.2 31/AHD/2000 IN THE ASSESSMENT YEAR 1996-1997. 21. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A) . BEFORE US BOTH THE PARTIES AGRE ED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HON'BLE APEX COURT I N THE CASE OF LAXMI MACHINE WORKS VS. CIT 290 ITR 667 (SC). 22. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. WE FIND THA T WHILE ADJUDICATING A SIMILAR ISSUE THE HON'BLE SUPREME COURT IN THE CAS E OF CIT VS. LAXMI MACHINE WORKS 290 ITR 667 (SC) HELD AS UNDER: SECTION 80HHC OF THE INCOME-TAX ACT 1961 IS A BEN EFICIAL SECTION: IT WAS INTENDED TO PROVIDE INCENTIVE TO PR OMOTE EXPORTS. THE INTENTION WAS TO EXEMPT PROFITS RELATABLE TO EX PORTS. JUST AS COMMISSION RECEIVED BY THE ASSESSEE IS RELATABLE TO EXPORTS AND YET IT CANNOT FORM PART OF TURNOVER FOR THE PURPO SES OF SECTION 80HHC EXCISE DUTY AND SALES TAX ALSO CANNOT FORM P ART OF TURNOVER. JUST AS INTEREST COMMISSION ETC. DO NOT EMANATE FROM THE TURNOVER SO ALSO EXCISE DUTY AND SALES T AX DO NOT EMANATE FROM SUCH TURNOVER. SINCE EXCISE DUTY AND SALES TAX DID NOT INVOLVE ANY SUCH TURNOVER SUCH TAXES HAD TO BE EXCLUDED. COMMISSION INTEREST RENT ETC. DO YIELD PROFITS B UT THEY DO NOT PARTAKE OF THE CHARACTER OF TURNOVER AND THEREFORE THEY ARE NOT INCLUDIBLE IN THE TOTAL TURNOVER. IF SO EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3). I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 23 ONE CANNOT INTERPRET THE WORDS TOTAL TURNOVER WIT H REFERENCE TO THE DEFINITION OF THE WORD TURNOVER IN OTHER LAWS LIKE THE CENTRAL SALES TAX OR AS DEFINED IN ACCOUNTING PRINCIPLES. EXCISE DUTY AND SALES TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. BY THE COURT: THE PRINCIPAL REASON FOR ENACTING A F ORMULA IN SECTION 80HHC OF THE INCOME-TAX ACT 1961 IS TO DIS ALLOW A PART OF THE CONCESSION THEREUNDER WHEN THE ENTIRE DEDUCT ION CLAIMED CANNOT BE REGARDED AS RELATING TO EXPORTS. THEREF ORE WHILE INTERPRETING THE WORDS TOTAL TURNOVER IN THE FORM ULA IN SECTION 80HHC ONE HAS TO GIVE A SCHEMATIC INTERPRETATION. THE VARIOUS AMENDMENTS MADE THEREIN SHOW THAT RECEIPTS BY WAY O F BROKERAGE COMMISSION RENT RENT ETC. DO NOT FORM PART OF BUSINESS PROFITS AS THEY HAVE NO NEXUS WITH THE ACT IVITY OF EXPORT. AMENDMENTS MADE FROM TO TIME TO TIME INDICATE THAT THEY BECAME NECESSARY IN ORDER TO MAKE THE FORMULA WORKA BLE. IF SO EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3): OTHERWISE THE FOR MULA BECOMES UNWORKABLE. 22.1 IN THE CASE OF SONY INDIA PVT. LTD. VS. DCI T IN ITA NO. 1181/DEL/2005 DATED 23/9/2008 FOR THE AY 2001-02 ITAT DELHI BENC H FOLLOWING THE AFORESAID DECISION OF THE HONBLE SUPREME COURT DIR ECTED TO EXCLUDE EXCISE DUTY WHILE WORKING OUT TOTAL TURNOVER FOR THE PURPO SE OF DEDUCTION U/S 80HHC OF THE ACT. 22.2 IN VIEW OF AFORESAID DECISION OF THE HONB LE SUPREME COURT WE HAVE NO ALTERNATIVE BUT TO REVERSE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO EXCLUDE EXCISE DUTY AND SALES TAX WHILE WORKING OUT TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION U/S 80HHC OF THE ACT. THEREFOR E GROUND NO.4.1 IN THE APPEAL OF THE ASSESSEE FOR THE AY 2000-2001 AND GRO UND NO.2.1 OF THE APPEAL OF THE ASSESSEE FOR THE AY 2001-2002 ARE ALLOWED. 23 GROUND NO.4.2 OF THE APPEAL OF THE ASSESSEE FOR THE AY 2000-01 AND GROUND NO.2.2 IN THE APPEAL OF THE ASSESSEE FOR TH E AY 2001-02 RELATING TO REDUCTION OF 90% OF THE TRAINING FEES FROM THE PROF IT OF THE BUSINESS IN TERMS OF THE EXPLANATION (BAA) TO SECTION 80HHC OF THE AS SESSEE WERE NOT PRESSED BEFORE US. ACCORDINGLY THESE GROUNDS ARE DISMISSE D. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 24 24. GROUND NO.5.1 IN THE APPEAL FOR THE AY 2000-01 RELATES TO DIRECTION TO THE AO FOR RE-COMPUTING THE DEDUCTION UNDER SECTION 80HHC OF THE ACT. WE FIND THAT THE LD. CIT(A) HAS ALREADY ADJUDICATED TH IS CLAIM IN HIS ORDER U/S 154 DATED 9.2.2005 OF THE ACT AND THE REVENUE HAVE NOT DISPUTED THIS MATTER IN APPEAL BEFORE US. ACCORDINGLY THIS GROUND IS DISM ISSED BEING INFRUCTUOUS. 25 AS REGARDS GROUND NO.1 IN APPEAL NO.1182/AHD/2 005 OF THE REVENUE FOR THE ASSESSMENT YEAR 2000-2001 WE FIND THAT LD. CIT (APPEALS) IN HIS ORDER U/S 154 DATED 09.02.2005 ACCEPTED THE CLAIM O F THE ASSESSEE FOR RE- COMPUTATION OF THE DISALLOWANCE OF DEDUCTION U/S 80 IA OF THE ACT AFTER NETTING OFF PREMIUM PAID DURING THE YEAR TOWARDS KEYMAN INS URANCE POLICY. THE LD. DR DID NOT POINT OUT ANY INFIRMITY IN THESE DIRECTI ONS OF THE LD. CIT(A). THEREFORE THIS GROUND IS DISMISSED. 26. GROUND NO.1 IN THE APPEAL OF THE REVENUE FOR TH E AY 2001-2002 RELATES TO DISALLOWANCE CLAIM FOR DEDUCTION OF BAD DEBTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASS ESSEE HAD DEBITED BAD DEBTS OF RS.1 08 91 385/- UNDER THE HEAD SELLING AN D DISTRIBUTION EXPENSES AS PER SCHEDULE-14 OF THE BALANCE SHEET. TO THE QUERY BY THE AO THE ASSESSEE SUBMITTED A LIST OF 57 NAMES AGAINST WHICH VARIOUS AMOUNTS WERE WRITTEN OFF. THE ASSESSEE CLAIMED THAT DEBTS WERE GEBERALLY WRIT TEN OFF IN A ROUTINE MANNER AFTER THREE YEARS. THOUGH THE AO ALLOWED CLA IM FOR DEDUCTION OF BAD DEBTS OF RS. 1 03 45 401/- HE DID NOT ALLOW REMAI NING AMOUNT OF RS.5 45 954/- ON THE GROUND THAT THE ASSESSEE DID NOT GIVE SPECIFIC REASONS FOR WRITING OFF THESE DEBTS NOR ESTABLISHED THAT TH ESE DEBTS HAD BECOME BAD DURING THE YEAR UNDER CONSIDERATION. 27. ON APPEAL THE LD. CIT(APPEALS) WHILE EXAMINING DETAILS OF THE DISALLOWANCE AS PER PAGE 15 TO 17 OF THE PAPER BOOK ALLOWED THE CLAIM OF THE ASSESSEE HOLDING AS UNDER: (A) THIS LIST COMPRISES OF 22 PARTIES WHERE TOTAL BAD DEBTS WRITTEN OFF ARE RS.1 79 045/-. THESE AMOUNTS ARE STATED TO BE ON ACCOUNT OF BUSINESS RECEIPTS CREDITED IN THE PROFIT AND LO SS ACCOUNT AND ARE OUTSTANDING FOR MORE THAN 3 YEARS AND HENCE WRITTEN OFF. I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 25 (B) THIS LIST COMPRISES OF 22 PARTIES HAVING TOTAL AMOUNT OF RS.92 030/- GIVEN AT PAGE 16 OF THE PAPER BOOK. TH E FACTS ARE SIMILAR AS IN (A) ABOVE. (C) THIS LIST COMPRISES OF 10 PARTIES TOTALING TO R S.1 00 443/- SUBMITTED AT PAGE 16 OF THE PAPER BOOK. THE FACTS IN THIS RESPECT ARE ALSO SIMILAR AS IN (A) ABOVE WHILE THE LIST OF 5 PARTIES SUBMITTED AT PAGE 17 OF THE PAPER BOOK COMPRISES OF RS.1 74 433/-. IN THIS RESPECT ALSO IT IS SUBMITTED THAT THE RESPECTIVE P ARTIES ACCOUNTS HAVE BEEN WRITTEN OFF. ACCOUNTS OF THE SAME IN RESPECT OF THE ABOVE PARTIES ARE BEFORE PRODUCED ME AND ON TEST CHECK IT IS F OUND TO BE CORRECT SINCE THE TOTAL AVERAGE AMOUNT AS PER THE APPELLANT IS QUITE SMALL WITH REFERENCE TO THE TOTAL TURNOVER OF THE APPELLANT CO MPANY AND THE CONDITIONS LAID DOWN UNDER SECTION 36(1) READ WI TH SECTION 36(2) ARE SATISFIED. HAVING HEARD TO THE DECISION OF GUJARAT HIGH COURT 256 ITR 772 IN THE CASE OF GIRISH BHAGWAT PRASAD THE AMOU NT IS ADMISSIBLE AND THEREFORE DIRECTED TO BE ALLOWED IN RESPECT OF ALL THE CASES AT (A) (B) AND (C) ABOVE. 28. THE REVENUE IS NOW IN APPEAL AGAINST THE AFORE SAID FINDINGS OF THE LD. CIT(APPEALS). THE LD. DR RELIED UPON THE DECISION O F THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF DHALL ENTE RPRISED AND ENGINEERS PVT. LTD VS. CIT 295 ITR 499(GUJ) AND CONTENDED THA T SINCE ASSESSEE FAILED TO ESTABLISH THE SAID DEBT BECOME BAD THE LD. CIT( APPEALS) WAS NOT JUSTIFIED IN ALLOWING THE CLAIM. ON THE OTHER HAND THE LD. A R ON BEHALF OF THE ASSESSEE WHILE RELYING UPON THE DECISION OF THE HON'BLE SUPR EME COURT IN THE CASE OF CIT VS. RAJENDRA Y SHAH SLP(C) NO. 8364 OF 2009 CON TENDED THAT THE HON'BLE SUPREME COURT HAD DISMISSED THE SLP OF THE DEPARTMENT AGAINST A JUDGMENT DATED 10.07.2008 OF HONBLE BOMBAY HIGH CO URT IN THE ITA NO.1000 OF 2007 WHEREIN HON'BLE SUPREME COURT CONFIRMED TH E ORDER OF THE ITAT UPHOLDING THAT THE ISSUE IS COVERED BY THE CASE REP ORTED IN 286 ITR(AT)8 WHEREIN IT WAS CONCLUDED THAT THE ASSESSEE IS ENTIT LED TO CLAIM THE DEDUCTION FOR BAD DEBTS ONCE THE ASSESSEE HAD WRITTEN OFF TH E AMOUNT IN THE BOOKS ACCOUNTS. 29. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH T HE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. WE ARE OF THE OP INION THAT THE ONUS IS ON THE ASSESSEE TO ESTABLISH THAT HIS CLAIM FALLS WITH IN THE PROVISIONS OF SEC. 36(1)(VII) READ WITH SEC. 36(2) OF THE ACT. WHILE A DJUDICATING A SIMILAR CLAIM I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 26 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF D HALL ENTERPRISED AND ENGINEERS P. LTD. V. CIT 295 ITR 481 (GUJ) HELD TH AT EVEN IF WE GO BY THE PLAIN READING OF CLAUSE (VII) THE REQUIREMENT FOR ALLOWING DEDUCTION ON ACCOUNT OF BA D DEBT IS THAT THE BAD DEBT SHOULD BE WRITTEN OFF AS IRRECOVERABLE . MERE DEBITING THE AMOUNT IS NOT SUFFICIENT. THE REQUIREMENT IS TH AT THE ASSESSEE SHOULD ALSO PROVE THAT THE DEBT HAS BECOME BAD IN T HAT PARTICULAR YEAR. AS POINTED OUT RIGHTLY BY THE TRIBUNAL THERE WAS CORRESPONDENCE REGARDING THE AMOUNT IN QUESTION THA T DUE TO SOME DIFFERENCES THE AMOUNT WAS NOT PAID IN THAT PA RTICULAR YEAR. BUT WHEN CORRESPONDENCE WAS THERE TO THE EFFECT TH AT THE ASSESSEE WAS INSISTING FOR PAYMENT FOR RECOVERY OF THE DEBT IT CANNOT BE SAID THAT THE DEBT HAS BECOME BAD IN THE RELEVANT ASSESSMENT YEAR. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF THE TRIBUNAL AND WE ANSWER THE FIRST QUESTION AGAIN ST THE ASSESSEE. 30. IN A RECENT JUDGMENT DATED 5.11.2009 HONBLE ALLAHBAD HIGH COURT IN THE CASE OF CIT VS. KOHLI BROTHERS COLOR LAB (P) LT D. IN ITA NO.2 OF 2007 AFTER CONSIDERING AN EARLIER DECISION OF THE HON BLE GUJRAT HIGH IN THE CASE OF CIT VS. GIRISH BHAGWAT PRASAD 256 ITR 772 O BSERVED AS UNDER: THE INTENTION OF LEGISLATURE IS CLEAR THAT ONCE IN ASSESSMENT YEAR IN QUESTION DEBT OR PART THEREOF HAS BEEN WRITTEN OFF AS IRRECOVERABLE QUA THE SAME DEDUCTIONS ARE TO BE ACCORDED AS PER PROVI SION OF SECTION 36(1)(VII) OF THE ACT SUBJECT TO THE PROVISIONS OF 36(2) OF THE ACT. PRIOR TO AMENDMENT IN THE AFOREMENTIONED SECTION W.E.F. 1.4. 1989 THE WORDS ' ANY BAD DEBT OR PART TO HAVE BECOME A BAD DEBT IN THE PREVIOUS YEAR' WERE USED AND AFTER THE AMENDMENT W.E.F. 1.4.1989 SAME HAS BEEN SUBSTITUTED BY ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT OF ASSESSEE FOR THE PR EVIOUS YEAR. EFFECT OF SAID AMENDMENT IS THAT NOW IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT DEBT HAD BECOME BAD IN THE PREVIOUS YEAR BEFORE GETTING DEDUCTIONS AND MERE WRITING OF AS IRRECOVERABLE OF DEBT OR PART THEREOF IS SUBSTANTIAL COMPLIANCE OF THE SAME. THE QUESTION IS IS SAID ENTRY OF WRITING OF BAD DEBT OR PART THEREOF MADE IN BOOKS OF ACCOUNTS CONCLUSIVE AND ASSESSING OFFICER IS PRECLUDED FROM MAKING INQUIRIES BEFORE ACCORDING/REFUSING DEDUCTIONS. UNDER THE SCH EME AS PROVIDED FOR UNDER INCOME TAX ACT THE ENTRIES WHICH HAVE BE EN MADE AS TO WHETHER SAME ARE GENUINE ENTRY AND NOT IMAGINARY AN D FANCIFUL ENTRY QUA THE SAME ASSESSING OFFICER IS FULLY EMPOWERED T O MAKE INQUIRY HOWEVER WISDOM OF THE RESPONDENT-ASSESSEE CANNOT B E IN SUCH MATTER QUESTIONED AND NO DEMONSTRATIVE OR INFALLIBLE PROOF OF BAD DEBT HAVING BECOME BAD IS REQUIRED AND COMMERCIAL EXPEDIENCY I S TO BE SEEN FROM THE POINT OF VIEW OF ASSESSEE DEPENDING ON NATURE OF TRANSACTION I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 27 CAPACITY OF DEBTOR ETC. BUT QUA ENTRY SEMBLANCE OF GENUINENESS HAS TO BE THERE AND SAME SHOULD NOT BE MERE PAPER WORK. AL L THE JUDGMENT WHICH HAVE BEEN CITED AT THE BAR GENUINENESS OF EN TRIES HAVE NEVER BEEN DOUBTED THEREIN WHEREAS IN THE CASE IN HAND SPECIFIC QUERY HAS BEEN MADE FROM RESPONDENT-ASSESSEE TO FURNISH I.E. (A) COMPLETE NAMES AND ADDRESSES OF THE PERSONS (WITH REFERENCE TO WHOM BAD DEBTS WRITTEN OFF CLAIMED MENTIONING AGAINST EACH AMOUNT.(B) COPIES OF LEDGER ACCOUNT OF THESE PERSONS FOR THE RELEVANT AS SESSMENT YEAR AND THREE PRECEDING YEARS. (C) EFFORTS MADE TO REALIZE THESE DUES. ADMITTED POSITION IS THAT SAID QUERIES HAVE NOT AT ALL BEEN REPLIED AND REQUISITE INFORMATION HAS NOT AT ALL BEEN FURNISHED RATHER S TAND HAS BEEN TAKEN THAT ENTRY HAS BEEN MADE NO PROOF IS REQUIRED. UN DER SECTION 143(2) OF THE ACT ASSESSING OFFICER IS EMPOWERED TO REQUI RE THE ASSESSEE TO PRODUCE THE EVIDENCE IN SUPPORT OF THE RETURN AS S UCH WHERE RESPONDENT-ASSESSEE HAS CLAIMED AS BAD DEBT OR PART THEREOF WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSE E UNDER THE PROVISION OF SECTION 36(1)(VII) OF THE INCOME TAX ACT 1961 THEN ON THE STRENGTH OF THE AMENDMENT MADE ON 1.4.1989 IT CANNOT BE SAID T HAT AN INQUIRY IS NOT PERMISSIBLE UNDER THE PROVISION OF INCOME TA X ACT TO SEE AND SATISFY THAT THERE IS SOME SEMBLANCE OF THE GENUINE NESS IN THE ENTRY WHICH HAD BEEN MADE SAME IS NOT AT ALL TOTALLY FAK E ENTRY AS RESPONDENT- ASSESSEE WOULD BE ENTITLED FOR DEDUCTIO N ONLY IF ITS BAD DEBT OR PART THEREOF. HON'BLE APEX COURT IN THE CASE OF TRAVANCORE TEA ESTATES CO. LTD. VS. CIT (1999) 151 CTR (SC) 23 1; (1998) 233 ITR 203 (SC) HAS TAKEN THE VIEW THAT AS TO WHETHER A DEBT HAS B ECOME BAD OR AT WHAT POINT OF TIME IT BECAME BAD ARE PUR E QUESTION OF FACT. THOUGH STANDARD OF PROOF OF PROVING THE SAME IS BAD DEBT IS NOT REQUIRED TO BE ADOPTED AND IS TO BE DECIDED ON THE WISDOM OF THE RESPONDENT ASSESSEE AND NOT ON THE WISDOM OF ASSESS ING OFFICER BUT TO SHOW THAT ENTRY WHICH HAD BEEN MADE AS BAD DEBT THERE HAS TO BE SOME MATERIAL IN SUPPORT OF THE SAME GIVING SOME S EMBLANCE OF GENUINENESS AND TRUTHFULNESS TO THE SAME IN THE DIR ECTION OF FORMING OPINION THAT SAID DEBT WAS ARISING OUT OF TRADING ACTIVITY THERE WAS RELATIONSHIP OF DEBTOR OR CREDITOR SAME WAS IRRECO VERABLE. MERELY BECAUSE ENTRIES HAVE BEEN MADE IN RESPECT OF BAD D EBT OR PART THEREOF WRITING IT OFF CLAIMING DEDUCTION THE SAID ENTRIE S CAN ALWAYS BE EXAMINED BY THE ASSESSING OFFICER BEFORE PROCEEDIN G TO AWARD DEDUCTIONS AND NOT BY MERELY BLINDLY FOLLOWING THE SAME BUT STAND OF THE ASSESSEE HAS TO BE TESTED FROM THE POINT OF VIE W OF ASSESSEE AND ASSESSEE CANNOT COME FORWARD AND SAY THAT ON ACCOUN T OF CHANGE BROUGHT IN BY WAY OF AMENDMENT W.E.F. 1.4.1989 UND ER SECTION 36(1)(VII) INQUIRY IS NOT PERMISSIBLE. THUS IN THE PRESENT CASE ON THE SUBSTANTIAL QUESTION OF LAW POSED PROVISION OF SE CTION 143 (2) OF INCOME ACT VIZ-A-VIZ SECTION 36(1)(VII) OF THE INCO ME TAX ACT 1961 READ WITH SECTION 36(1) BOTH WOULD BE HARMONIZED TO GIVE PURPOSEFUL MEANING TO BOTH THE STATUTORY PROVISIONS AS ONE EX TENDS BENEFIT TO THE I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 28 RESPONDENT-ASSESSEE OF DEDUCTION FOR THEIR DEBT OR PART THEREOF BECOMING BAD AND OTHER AUTHORIZES ASSESSING OFFICER TO SEE THAT PROVISION OF INCOME TAX ACT ARE NOT FLOUTED BY ANY MEANS. CONSEQUENTLY IMPUGNED ORDER DATED 04.08.2006 PASSE D BY THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH LUCKNOW IS HEREBY QUASHED AND SET ASIDE. AS IN THE PRESENT CASE NO REPLY HAD BEEN SUBMITTED TO THE QUERY MADE AS SUCH IN CASE SUCH REPLY IS SUBMI TTED THEN IN THAT EVENT ASSESSING OFFICER IS DIRECTED TO TAKE FRESH D ECISION IN ACCORDANCE WITH LAW AFTER AFFORDING OPPORTUNITY OF THE RESPOND ENT-ASSESSEE ON THE BASIS OF THE RECORD PRODUCED. 31. NOW IN THE INSTANT CASE THE AO ASKED THE ASSESSEEE FOR DETAILED REASONS FOR WRITING OFF BAD DEBTS. THE ASSESSEE SUB MITTED SPECIFIC REASONS FOR ALL OTHER DEBTS EXCEPT FOR AN AMOUNT OF RS. 5 45 95 4/-. ABOUT THESE DEBTS THE ASSESSEE PLEADED THAT THESE HAVE BEEN WRITTEN OFF I N A ROUTINE MANNER AFTER THREE YEARS AND DID NOT FURNISH ANY MATERIAL THAT T HESE DEBTS WERE BAD DEBTS. ACCORDINGLY THE AO DISALLOWED THE CLAIM. ON APPEAL THE LD. CIT(A) FOUND THAT THESE AMOUNTS WERE STATED TO BE ON ACCOUNT OF BUSIN ESS RECEIPTS CREDITED IN THE PROFIT AND LOSS ACCOUNT AND WERE OUTSTANDING FO R MORE THAN 3 YEARS AND HENCE WRITTEN OFF. THE LD. CIT(A) WITHOUT REFERRING TO ANY EVIDENCE AS TO WHETHER OR NOT THESE DEBTS WERE BAD RELIED UPON T HE DECISION OF THE HONBLE GUJRAT HIGH COURT IN GIRISH BHAGWAT PRASAD (SUPRA) AND ALLOWED THE CLAIM. AS HELD BY THE HONBLE ALLAHABAD HIGH COURT IN KOHL I BROTHERS COLOR LAB (P) LTD.(SUPRA) AND HONBLE JURISDICTIONAL HIGH COURT IN DHALL ENTERPRISED AND ENGINEERS P. LTD.(SUPRA) MERE DEBITING THE AMOUNT IS NOT SUFFICIENT. THE REQUIREMENT IS THAT THE ASSESSEE SHOULD ALSO PR OVE THAT THE DEBT HAS BECOME BAD IN THAT PARTICULAR YEAR. SINCE ONUS IS ON THE ASSESSEE FOR CLAIMING DEDUCTION THE ASSESSEE IS R EQUIRED TO SHOW THAT ENTRY WHICH HAD BEEN MADE AS BAD THERE HAS TO BE SOME MATERIAL IN SUPPORT OF THE SAME GIVING SOME SEMBLA NCE OF GENUINENESS AND TRUTHFULNESS TO THE SAME IN THE DIRECTION OF FO RMING OPINION THAT SAID DEBT WAS ARISING OUT OF TRADING ACTIVITY THER E WAS RELATIONSHIP OF DEBTOR OR CREDITOR SAME WAS IRRECOVERABLE. MERELY BECAUSE ENTRIES HAVE BEEN MADE IN RESPECT OF BAD DEBT OR PART THER EOF WRITING IT OFF CLAIMING DEDUCTION DEDUCTION CAN NOT BE ALLOWED. T HE SAID ENTRIES CAN ALWAYS BE EXAMINED BY THE ASSESSING OFFICER BEFORE PROCEEDING TO I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 29 AWARD DEDUCTION AND NOT BY MERELY BLINDLY FOLLOWIN G THE SAME GENERAL REASONS. AS IS EVIDENT FROM THE VIEW TAKEN IN AFO RESAID DECISIONS MERE DEBITING THE AMOUNT IS NOT SUFFICIENT THE ASSESSEE HAS TO BE PROVE THAT THE DEBT HAS BECOME BAD AND WRITTEN OFF AS IRRECOVERABL E. IN VIEW OF THE FOREGOING ESPECIALLY WHEN THE ASSESSEE DID NOT F URNISH ANY DETAILS OR EVIDENCE BEFORE THE AO IN SUPPORT OF THEIR CLAIM FO R DEDUCTION OF BAD DEBTS WHILE THE LD. CIT(A) HAS NOWHERE REFERRED TO ANY EV IDENCE SHOWING THAT THE SAID DEBTS WERE BAD WE ARE NOT INCLINED TO UPHOLD THE FINDINGS OF THE LD. CIT(A). 32. AS REGARDS RELIANCE ON THE DECISION OF HO NBLE APEX COURT IN DISMISSING THE SLP AGAINST A DECISION OF HONBLE BOMBAY HIGH COURT WE ARE OF THE OPINION THAT A MERE DISMISSAL OF SLP DOE S NOT MEAN THAT HIGH COURT DECISION IS APPROVED ON MERITS SO AS TO BE A JUDICIAL PRECEDENT. IN SMT. TEJ KUMARI VS. CIT (2001) 247 ITR 210 FULL BENCH OF THE PATNA HIGH C OURT HELD THAT WHEN A SLP IS SUMMARILY REJECTED OR DISMI SSED UNDER ART 136 OF THE CONSTITUTION SUCH DISMISSAL DOES NOT LAY DOWN ANY L AW. IN STATE OF ORISSA & ORS. VS. M.D. ILLYAS (2006) 1 S.C.C.275 THE HONBLE SUPREME COURT HAS HELD THAT A DECISION IS A PRECEDENT ON ITS OWN FACTS AND THAT FOR A JUDGMENT TO BE A PRECEDENT IT MUST CONTAIN THE THREE BASIC POSTULATE S-I). A FINDING OF MATERIAL FACTS DIRECT AND INFERENTIAL. AN INFERENTIAL FINDI NG OF FACT IS THE INFERENCE WHICH THE JUDGE DRAWS FROM THE DIRECT OR PERCEPTIBLE FACT S; (II) STATEMENTS OF THE PRINCIPLES OF LAW APPLICABLE TO THE LEGAL PROBLEMS DISCLOSED BY THE FACTS; AND (III) JUDGMENT BASED ON THE INDIVIDUAL EFFECT OF TH E ABOVE. THE SUPREME COURT IN INDIAN OIL CORPORATION LTD. VS. STATE OF BIHAR & OR S . (1987) 167 ITR 897 (SC) HAS CLARIFIED THAT THE DISMISSAL OF A SPECIAL LEAVE PETITION BY THE SUPREME COURT BY A NONSPEAKING ORDER WOULD NOT OPERATE AS R ES JUDICATA BY OBSERVING THAT- WHEN THE ORDER PASSED BY THIS COURT WAS NOT A SPEA KING ONE IT IS NOT CORRECT TO ASSUME THAT THIS COURT HAD NECESSARILY DECIDED I MPLICITLY ALL THE QUESTIONS IN RELATION TO THE MERITS OF THE AWARD WHICH WAS U NDER CHALLENGE BEFORE THIS COURT IN THE SPECIAL LEAVE PETITION. A WRIT PROCEED ING IS A WHOLLY DIFFERENT AND DISTINCT PROCEEDING. QUESTIONS WHICH CAN BE SAID TO HAVE BEEN DECIDED BY THIS COURT EXPRESSLY IMPLICITLY OR EVEN CONSTRUCTI VELY WHILE DISMISSING THE SPECIAL LEAVE PETITION CANNOT OF COURSE BE REOPEN ED IN A SUBSEQUENT WRIT I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 30 PROCEEDING BEFORE THE HIGH COURT. BUT NEITHER ON TH E PRINCIPLE OF RES JUDICATA NOR ON ANY PRINCIPLE OF PUBLIC POLICY ANALOGOUS THE RETO WOULD THE ORDER OF THIS COURT DISMISSING THE SPECIAL LEAVE PETITION OPERATE TO BAR THE TRIAL OF IDENTICAL ISSUES IN A SEPARATE PROCEEDING NAMELY THE WRIT P ROCEEDING BEFORE THE HIGH COURT MERELY ON THE BASIS OF AN UNCERTAIN ASSUMPTIO N THAT THE ISSUES MUST HAVE BEEN DECIDED BY THIS COURT AT LEAST BY IMPLICA TION. IT IS NOT CORRECT OR SAFE TO EXTEND THE PRINCIPLES OF RES JUDICATA OR CO NSTRUCTIVE RES JUDICATA TO SUCH AN EXTENT SO AS TO FOUND IT ON MERE GUESSWORK . 32.1 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SUN ENGINEERING WORKS P. LTD . (1992) 198 ITR 297 (SC) OBSERVED THAT THE JUDGMEN T MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGM ENT HAVE TO BE CONSIDERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THE COURT. IN THIS CONTEXT HONBLE SUPREME COURT CAUTIONED IN THEIR RECENT DECISION DATED 6.3.2009 IN THE CASE OF STATE OF AP VS. M.RA DHA KRISHNA MURTHY [CRIMINAL APPEAL NO. 386 OF 2002] 6. COURTS SHOULD NOT PLACE RELIANCE ON DECI SIONS WITHOUT DISCUSSING AS TO HOW THE FACTUAL SITUATION FITS IN WITH THE FACT SIT UATION OF THE DECISION ON WHICH RELIANCE IS PLACED. OBSERVATIONS OF COURTS AR E NEITHER TO BE READ AS EUCLID'S THEOREMS NOR AS PROVISIONS OF THE STATUTE AND THAT TOO TAKEN OUT OF THEIR CONTEXT. THESE OBSERVATIONS MUST BE READ IN T HE CONTEXT IN WHICH THEY APPEAR TO HAVE BEEN STATED. JUDGMENTS OF COURTS ARE NOT TO BE CONSTRUED AS STATUTES. TO INTERPRET WORDS PHRASES AND PROVISION S OF A STATUTE IT MAY BECOME NECESSARY FOR JUDGES TO EMBARK INTO LENGTHY DISCUSSIONS BUT THE DISCUSSION IS MEANT TO EXPLAIN AND NOT TO DEFINE. J UDGES INTERPRET STATUTES THEY DO NOT INTERPRET JUDGMENTS. THEY INTERPRET WOR DS OF STATUTES; THEIR WORDS ARE NOT TO BE INTERPRETED AS STATUTES . 8. CIRCUMSTANTIAL FLEXIBILITY ONE ADDITIONAL OR DIFFERENT FACT MAY MAKE A WORLD OF DIFFERENCE BETWEEN CONCLUSIONS IN TWO CASE S. DISPOSAL OF CASES BY BLINDLY PLACING RELIANCE ON A DECISION IS NOT PROPE R. 9. THE FOLLOWING WORDS OF LORD DENNING IN THE MA TTER OF APPLYING PRECEDENTS HAVE BECOME LOCUS CLASSICUS: 'EACH CASE DEPENDS ON ITS OWN FACTS AND A CLOSE SIMILARITY BETWEEN ONE CASE AND ANOTHER IS NOT ENOUGH BECAUSE EVEN A SING LE SIGNIFICANT DETAIL MAY ALTER THE ENTIRE ASPECT IN DECIDING SU CH CASES ONE SHOULD AVOID THE TEMPTATION TO DECIDE CASES (AS SAID BY CORDOZO ) BY MATCHING THE COLOUR OF ONE CASE AGAINST THE COLOUR OF ANOTHER. TO DECI DE THEREFORE ON WHICH SIDE OF THE LINE A CASE FALLS THE BROAD RESEMBLANCE TO ANOTHER CASE IS NOT AT ALL DECISIVE.' *** *** *** I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 31 'PRECEDENT SHOULD BE FOLLOWED ONLY SO FAR AS IT MARKS THE PATH OF JUSTICE BUT YOU MUST CUT THE DEAD WOOD AND TRIM OFF THE SIDE B RANCHES ELSE YOU WILL FIND YOURSELF LOST IN THICKETS AND BRANCHES. MY PLEA I S TO KEEP THE PATH TO JUSTICE CLEAR OF OBSTRUCTIONS WHICH COULD IMPEDE IT.' 32.2 A PERUSAL OF THE AFORESAID JUDICIAL ANALYSIS IN REGARD TO THE EFFECT OF REJECTION OF SLP AND ITS CONSEQUENCES AND THE SCOPE OF ARTICLE 136 OF CONSTITUTION OF INDIA WOULD SHOW THAT EVERY ORDER O F SUPREME COURT WOULD NOT HAVE A BINDING EFFECT UNLESS IT IS A SPEAKING ORDER DECIDING THE LAW ON THE SUBJECT. THUS MERE DISMISSAL OF SLP WITHOUT ANY RE ASONS CANNOT BE SAID TO BE LAW DECIDED AND CONSEQUENTLY IT WOULD NOT BE A BINDING PRECEDENT IN OUR VIEW. 33. AS ALREADY MENTIONED ABOVE SINCE THERE I S NOTHING TO SUGGEST THAT THE ASSESSEE SUBMITTED ANY MATERIAL BEFORE THE LOWE R AUTHORITIES IN SUPPORT OF THEIR CLAIM FOR DEDUCTION OF THE AFORESAID AMOUNTS AS BAD DEBTS NOR THERE IS ANY MATERIAL BEFORE US WHICH COULD SHOW THAT THE S AID DEBTS WERE BAD IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISION OF HO NBLE JURISDICTIONAL HIGH COURT IN DHALL ENTERPRISED AND ENGINEERS P. LTD.(SU PRA) AND SUPPORTED BY THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN K OHLI BROTHERS COLOR LAB (P) LTD.(SUPRA) WE HAVE NO ALTERNATIVE BUT TO REVERSE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THE ORDER OF THE AO. THEREFORE GROUND NO. 1 IN THE APPEAL OF THE REVENUE FOR THE AY 2001-2002 IS ALLOWED. 34. GROUND NO.2 IN THE APPEAL OF THE REVENUE FOR TH E AY 2001-2002 RELATES TO EXCLUSION OF 90% OF THE AMOUNT OF INCOME BY WAY OF BAD DEBTS RECOVERED(RS. 2 18 455/-) CREDIT BALANCE WRITTEN B ACK(RS. 1 30 148/-) KASAR(RS.17 643/-) AND DAMAGES FOR CANCELLATION OF ORDERS(RS. 5 53 600/-) WHILE COMPUTING PROFITS OF THE BUSINESS FOR COMPUTI NG DEDUCTION U/S 80HHC OF THE ACT. WHILE COMPUTING DEDUCTION UNDER SECTION 80 HHC OF THE ACT THE AO EXCLUDED 90% OF THE AMOUNT OF KASAR DAMAGES FOR C ANCELLATION OF ORDERS CREDIT BALANCE WRITTEN BACK AND BAD DEBT RECOVERED. ON APPEAL THE LD. CIT (APPEALS) ALLOWED CLAIM OF THE ASSESSEE ON THE GROU ND THAT THESE AMOUNTS I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 32 ARE CONNECTED WITH THE BUSINESS OF THE ASSESSEE AND THEREFORE CANNOT BE EXCLUDED UNDER EXPLANATION (BAA) TO SECTION 80HHC O F THE ACT. 35. THE REVENUE IS NOW IN APPEAL AGAINST THE AFOR ESAID FINDINGS OF THE LD. CIT (APPEALS).THE LD.DR SUPPORTED THE ORDER OF THE AO IN THE LIGHT OF DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. K. RAVINDRANATHAN NAIR 295 ITR 228(SC) WHILE THE LD. AR ON BEHALF OF THE ASSESSEE RELIED UPON THE FINDINGS OF THE LD. CIT(APPEALS). 36. WE HAVE HEARD BOTH PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE RELEVANT DECISIONS . WE FIND THAT IN THE IR DECISION ON THE INTERPRETATION OF EXPLANATION (BAA) TO SECTION 80HH C OF THE ACT HONBLE SUPREME COURT IN THE CASE OF CIT V. K. RAVINDRANATH AN NAIR 295 ITR 228(SC) HELD THAT THE FORMULA IN SECTION 80HHC(3) PROVIDED FOR A FRACTION OF EXPORT TURNOVER DIVIDED BY THE TOTAL TURNOVER TO BE APPLIED TO BUSINESS PROFITS CALCULATED AFTER DEDUCTING 90 PER CENT OF THE SUMS MENTIONED IN CLAUSE (BAA) OF THE EXPLANATION. PROFIT INCENTIVES LIKE RENT CO MMISSION BROKERAGE CHARGES ETC. THOUGH THEY FORMED PART OF THE GROSS TOTAL IN COME HAD TO BE EXCLUDED AS THESE WERE INDEPENDENT INCOMES WHICH HAD NO ELEME NT OF EXPORT TURNOVER. ALL THE FOUR VARIABLES IN THE SECTION ARE REQUIRED TO BE KEPT IN MIND. IF ALL THE FOUR VARIABLES ARE KEPT IN MIND IT BECOMES CLEAR T HAT EVERY RECEIPT IS NOT INCOME AND EVERY INCOME WOULD NOT NECESSARILY INCLU DE THE ELEMENT OF EXPORT TURNOVER. CLAUSE (BAA) OF THE EXPLANATION STATES T HAT 90 PER CENT OF THE INCENTIVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPT OF LIKE NATURE INCLUDE D IN BUSINESS PROFITS HAVE TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D. IN OTHER WORDS RECEIPTS CONSTITUTING INDEPENDENT INCO ME HAVING NO NEXUS WITH EXPORTS WERE REQUIRED TO BE DEDUCTED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). HONBLE SUPREME COURT FURTHER OBSERVED THAT A BARE READING OF CLAUSE (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF BROKERAG E COMMISSION INTEREST RENT CHARGES ETC. FORMED PART OF THE GROSS TOTAL INCOME BEING BUSINESS PROFITS. BUT FOR THE PURPOSE OF WORKING OUT OF FORMULA AND I N ORDER TO AVOID DISTORTION IN ARRIVING AT THE EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFITS AND INDEPENDENT I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 33 INCOMES CONSTITUTED PART OF THE GROSS TOTAL INCOME THESE HAD TO BE EXCLUDED FROM GROSS TOTAL INCOME BECAUSE SUCH RECEI PTS HAD NO NEXUS WITH THE EXPORT TURNOVER. IT WAS CONCLUDED BY THE HONBLE SUPREME COURT THAT IN THE ABOVE FORMULA THERE EXISTED FOUR VARIABLES NAMELY BUSINESS PROFITS EXPORT TURNOVER TOTAL TURNOVER A ND 90 PER CENT. OF THE SUMS REFERRED TO IN CLAUSE (BAA) TO THE SAID EXPLANATION. IN THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC AL L FOUR VARIABLES HAD TO BE TAKEN INTO ACCOUNT. ALL FOUR VA RIABLES WERE REQUIRED TO BE GIVEN WEIGHTAGE. THE SUBSTITUTION OF SECTION 80HHC(3) SECURES PROFITS DERIVED FROM THE EXPORTS O F ELIGIBLE GOODS. THEREFORE IF ALL THE FOUR VARIABLES ARE KEP T IN MIND IT BECOMES CLEAR THAT EVERY RECEIPT IS NOT INCOME AND EVERY INCOME WOULD NOT NECESSARILY INCLUDE ELEMENT OF EXPORT TUR NOVER. THIS ASPECT NEEDS TO BE KEPT IN MIND WHILE INTERPRETING CLAUSE (BAA) TO THE SAID EXPLANATION. THE SAID CLAUSE STATED THAT 9 0 PER CENT. OF INCENTIVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPT OF LIK E NATURE INCLUDED IN BUSINESS PROFITS HAD TO BE DEDUCTED FROM BUSINE SS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D OF THE INCO ME-TAX ACT. IN OTHER WORDS RECEIPTS CONSTITUTING INDEPENDENT I NCOME HAVING NO NEXUS WITH EXPORTS WERE REQUIRED TO BE REDUCED F ROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAUS E (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF BROKERAGE COMMIS SION INTEREST RENT CHARGES ETC. FORMED PART OF GROSS TOTAL INC OME BEING BUSINESS PROFITS. BUT FOR THE PURPOSES OF WORKING O UT THE FORMULA AND IN ORDER TO AVOID DISTORTION OF ARRIVING AT THE EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH IN CENTIVE PROFITS AND 'INDEPENDENT INCOMES' CONSTITUTED PART OF GROSS TOTAL INCOME THEY HAD TO BE EXCLUDED FROM GROSS TOTAL IN COME BECAUSE SUCH RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER. THEREFORE IN THE ABOVE FORMULA WE HAVE TO READ AL L THE FOUR VARIABLES. ON READING ALL THE VARIABLES IT BECOMES CLEAR THAT EVERY RECEIPT MAY NOT CONSTITUTE SALE PROCEEDS FROM EXPOR TS. THAT EVERY RECEIPT IS NOT INCOME UNDER THE INCOME-TAX AC T AND EVERY INCOME MAY NOT BE ATTRIBUTABLE TO EXPORTS. THIS WAS THE REASON FOR THIS COURT TO HOLD THAT INDIRECT TAXES LIKE EXC ISE DUTY WHICH ARE RECOVERED BY THE TAXPAYERS FOR AND ON BEHALF OF THE GOVERNMENT SHALL NOT BE INCLUDED IN THE TOTAL TURNOVER IN THE ABOVE FORMULA. BEFORE CONCLUDING WE STATE THAT THE NATURE OF EVER Y RECEIPT NEEDS TO BE ASCERTAINED IN ORDER TO FIND OUT WHETHE R THE SAID RECEIPT FORMS PART OF/OR THAT IT HAS AN ATTRIBUTE O F AN EXPORT TURNOVER. WHEN AN INDIRECT TAX IS COLLECTED BY THE TAXPAYER ON BEHALF OF THE GOVERNMENT THE TAX RECOVERED IS FOR T HE GOVERNMENT. IT MAY BE AN INCOME IN THE CONCEPTUAL S ENSE OR I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 34 EVEN UNDER THE INCOME-TAX ACT BUT WHILE WORKING OUT THE FORMULA UNDER SECTION 80HHC(3) OF THE INCOME-TAX ACT AND WH ILE APPLYING THE FOUR VARIABLES ONE HAS TO ASCERTAIN WH ETHER THE RECEIPT HAS AN ATTRIBUTE OF EXPORT TURNOVER . 36.1 HONBLE GUJARAT HIGH COURT IN THE CASE OF A LEMBIC CHEMICAL WORKS LTD. VS. DCIT [ 266 ITR 47](GUJ) IN THE CONTEXT OF EXPLANATION (BAA) HAVE HELD THAT (D) WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDI NG THAT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTION 8 0HHC 90 PER CENT. OF THE INCOME RELATABLE TO RENT COMPUTER CHARGES SERVICE CHARGES MISCELLANEOUS INCOME AND INSURANCE CLAIM WAS REQUIRED TO BE DEDUCTED FROM THE PROFITS UNDER EXPL ANATION (BAA) TO SECTION 8OHHC(4A) IGNORING USE OF THE WORD OR BETWEEN REFERENCE TO CLAUSES (IIIA) (IIIB) AND (IIIC) OF S ECTION 28 IN CLAUSE (1) OF THE SAID EXPLANATION AND OTHER ITEMS ABOVE R EFERRED TO AND FURTHER ERRED IN READING THE WORD OR AS AND ? IV. DEDUCTION UNDER SECTION 80HHC OF THE ACT ON A PLAIN READING OF THE PROVISION AS IT STANDS IT IS APPARENT THAT WHAT THE PROVISION STIPULATES IS THAT PROFITS OF T HE BUSINESS FOR THE PURPOSE OF SECTION 80HHC OF THE ACT MEAN THE PR OFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GA INS OF BUSINESS OR PROFESSION. WHILE COMPUTING SUCH PROFI TS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION IF ANY SUM REFERRED TO IN CLAUSE (IIIA) (IIIB) OR (IIIC) OF S ECTION 28 OF THE ACT HAS BEEN INCLUDED IN SUCH PROFITS THE SAME HAS TO B E REDUCED BY 90 PER CENT. FROM THE PROFITS COMPUTED AS AFORESAID . SIMILARLY IF ANY RECEIPT BY WAY OF BROKERAGE COMMISSION INTERE ST RENT CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE I S INCLUDED IN SUCH PROFITS I.E. PROFITS OF THE BUSINESS SUCH PR OFITS HAVE TO BE REDUCED BY THE SAID FIGURE I.E. BY 90 PER CENT. W HILE COMPUTING (PROFITS OF THE BUSINESS) FOR THE PURPOSE OF SECTIO N 8OHHC OF THE ACT. THEREFORE ONCE THE SUMS OR THE RECEIPTS OF TH E NATURE SPECIFIED IN SUB- CLAUSE (1) OF CLAUSE (BAA) OF THE EXPLANATION ARE INCLUDED WHILE COMPUTING THE PROFITS AND GAINS OF B USINESS THEN SUCH SUMS OR RECEIPTS ARE TO BE REDUCED TO THE EXTE NT OF 90 PER CENT. FROM THE PROFITS OF THE BUSINESS. ONCE THE LA NGUAGE EMPLOYED BY THE PROVISION IS CLEAR IT IS NOT NECESS ARY FOR THE COURT TO READ ANYTHING INTO THE SAID LANGUAGE NOR GO BEHI ND THE LANGUAGE EMPLOYED BY THE LEGISLATURE SO AS TO ASCER TAIN THE INTENTION OF THE LEGISLATURE. THIS WOULD BECOME NEC ESSARY ONLY WHEN THE LANGUAGE EMPLOYED BY THE STATUTE IS AMBIGU OUS IN ANY MANNER. IN THE PRESENT CASE THAT CANNOT BE TERMED T O BE THE SITUATION. THEREFORE THE GROUND RAISED ON BEHALF O F THE APPELLANT AS REGARDS THE INTERPRETATION TO BE PLACED ON CLAUS E (BAA) OF THE I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 35 EXPLANATION TO SECTION 8OHHC OF THE ACT DOES NOT ME RIT ACCEPTANCE AND FAILS. 36.2 IN THE LIGHT OF AFORESAID JUDGMENT OF THE APEX COURT IN THE CASE OF K. RAVINDRANATHAN NAIR(SUPRA) AND OF THE HONBLE JURIS DICTIONAL HIGH COURT IT IS EVIDENT THAT ANY INCOME WHICH IS NOT DERIVED FROM T HE EXPORT ACTIVITIES IN TERMS OF SECTION 80HHC(2) OF THE ACT BUT IS OTHERWISE AS SESSED AS BUSINESS INCOME IS LIABLE TO BE INCLUDED IN THE TOTAL TURNO VER AND 90% OF THE SAME HAS TO BE REDUCED FROM THE PROFITS OF THE BUSINESS IN T ERMS OF EXPLANATION (BAA) TO SEC. 80HHC OF THE ACT. 36.3 IN VIEW OF THE FOREGOING THE AMOUNT ON ACCOUNT OF KASAR DAMAGES FOR CANCELLATION OF ORDERS CREDIT BALANCE WRITTEN BACK AND BAD DEBT RECOVERED BEING INDEPENDENT INCOME WHILE ADMIT TEDLY THESE RECEIPTS ARE NOT IN ANY MANNER RELATED TO EXPORT ACTIVITIES OF T HE ASSESSEE WOULD FALL WITHIN THE EXPLANATION (BAA) UNDER SECTION 80HHC OF THE ACT AND THUS 90% OF SAID RECEIPTS HAVE TO BE EXCLUDED WHILE COMPUTING P ROFITS OF THE BUSINESS IN TERMS OF THE SAID EXPLANATION FOR THE PURPOSE OF D EDUCTION UNDER SECTION 80HHC OF THE ACT. IN NUTSHELL WE VACATE THE FIN DINGS OF THE LD. CIT(A) AND RESTORE THE ORDERS OF AO EXCLUDING 90% OF THE AM OUNT ON ACCOUNT OF KASAR DAMAGES FOR CANCELLATION OF ORDERS CREDIT BALANCE WRITTEN BACK AND BAD DEBT RECOVERED WHILE COMPUTING PROFITS OF THE BUSINESS F OR THE PURPOSE OF DEDUCTION U/S 80HHC OF THE ACT. THEREFORE NO.2 IN THE APPE AL OF THE REVENUE FOR THE AY 2001-2002 IS ALLOWED. 37. GROUND NOS. 2 & 3 IN THE APPEALS OF THE REV ENUE FOR THE AY 2000-01 & GROUND NOS. 3 & 4 IN THE APPEAL FOR THE AY 2001-02 BEING GENERAL IN NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE T HEREFORE DISMISSED. 38. IN THE RESULT APPEAL OF THE ASSESSEE FOR THE AY 2000-01 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES WHILE BOTH THE APP EALS OF THE REVENUE FOR THE AY 2000-01 ARE DISMISSED. THE APPEAL OF THE ASSESSE E FOR THE AY 2001-02 IS I TA NO.3305 & 3805/AHD/2004 988 1174& 1182/AHD/2005 2236/AHD/2006 36 PARTLY ALLOWED WHILE THAT OF THE REVENUE IS ALLOWED AND THE APPEAL OF THE ASSESSEE FOR THE AY 2003-04 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 2ND JANUARY 2010 SD/- SD/- ( MAHAVIR SINGH) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED:22 /1 /2010 COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE 2. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4 NAVJIVAN TRUST BUILDING NEAR NAVJIVAN PRESS ASHRAM ROAD AHMEDAB AD-380 014 3. CIT CONCERNED 4. CIT(APPEALS)-VIII AHMEDABAD. 5. THE DR D BENCH 6. THE GUARD FILE . BY ORDER DEPUTY/ASSISTANT REG ISTRAR