M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD, Mumbai v. THE JT CIT SP RG.1, Mumbai

ITA 8833/MUM/2004 | 1998-1999
Pronouncement Date: 31-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 883319914 RSA 2004
Assessee PAN AAACB2984M
Bench Mumbai
Appeal Number ITA 8833/MUM/2004
Duration Of Justice 6 year(s) 3 month(s) 25 day(s)
Appellant M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD, Mumbai
Respondent THE JT CIT SP RG.1, Mumbai
Appeal Type Income Tax Appeal
Pronouncement Date 31-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 31-03-2011
Date Of Final Hearing 01-03-2011
Next Hearing Date 01-03-2011
Assessment Year 1998-1999
Appeal Filed On 06-12-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G MUMBAI. BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI V. DURGA RAO JUDICIAL MEMBER ITA NO.8833/MUM/2004 (ASSESSMENT YEAR : 1998-99 ) M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD. 66 MAKER CHAMBERS VI NARIMAN POINT MUMBAI-400 021 PAN NO.AAACB2984M VS. JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE 1 MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.8834/MUM/2004 (ASSESSMENT YEAR : 1999-2000 ) M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD. MUMBAI-400 021 VS. ASST. COMMISSIONER OF INCOME TAX RANGE 3(1) MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.8835/MUM/2004 (ASSESSMENT YEAR : 2001-02) M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD. MUMBAI-400 021 VS. ADDL. COMMISSIONER OF INCOME TAX RANGE 3(1) MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.6017/MUM/2004 (ASSESSMENT YEAR : 2002-03) M/S. BACCAROSE PERFUMES & BEAUTY PRODUCTS P. LTD. MUMBAI-400 021 VS. DY. COMMISSIONER OF INCOME TAX RANGE 3(1) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANJIV M. SHAH RESPONDENT BY : SHRI A.R. BALMER PER V. DURGA RAO : THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST T HE ORDERS OF THE REVENUE MUMBAI FOR ASSESSMENT YEARS 1998-99 1 999-2000 2001-02 ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 2 AND 2002-03. SINCE COMMON ISSUES ARE INVOLVED IN AL L THESE APPEALS WE ARE DISPOSING OF BY THIS COMMON ORDER FOR THE SAKE OF C ONVENIENCE. 2. THE GROUNDS RAISED IN THESE APPEALS ARE AS UNDER : ITA 8833/MUM/2004 AY 1998-99 GROUND I : 1. THE LD. COMMISSIONER OF INCOME TA X (APPEALS)-XXVII MUMBAI ERRED IN UPHOLDING THE ACTION OF THE JOINT C OMMISSIONER OF INCOME TAX SPECIAL RANGE 1 MUMBAI (THE ASSESSING OFFICER ) IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT BEING INTEREST AMOUN T OF RS.10 80 000 ON THE AMOUNT SUBSCRIBED TO THE UNSECURED DEBENTURES OF VI VA RESORTS & HOTELS LIMITED ( VRHL ). 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID ADDITION OF RS.10 80 000. GROUND II : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN MAKING AN DISALLOWANCE OF PROFESSIONAL FEES OF RS.3 00 000 ON THE ALLEGED GROUND THAT THE SAID EXPENDITURE WAS NOT INCURRED F OR THE PURPOSE OF BUSINESS. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID DISALLOWANCE OF RS.3 00 000. GROUND III : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN NOT ALLOWING THE DEPRECIATION CLAIM ON JAYANAGAR PROPER TY AT BANGALORE ON THE ALLEGED GROUND THAT THE SAID PROPERTY WAS NOT USED FOR THE PURPOSE OF BUSINESS. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED T O ALLOW THE DEPRECIATION OF RS.7 02 554 ON THE SAID PROPERTY. GROUND IV : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF A.O. OF TREATING THE NOTIONAL INCOME FROM PROPERTY UNDER THE HEAD I NCOME FROM HOUSE PROPERTY ON THE ALLEGED GROUND THAT IT WAS RESIDEN TIAL PROPERTY. 2. THE APPELLANT PRAYS THAT THE SAID ADDITION IN RESPECT OF THE NOTION INCOME FROM PROPERTY UNDER THE HEAD INCOME FROM HOUSE PROP ERTY BE DELETED. GROUND V : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN TREATING THE REDEMPTION PREMIUM AMOUNTING TO RS.26 58 000 AS CHARGEABLE TO INCOME TAX UNDER THE HEAD OF BUSINESS INCOME INS TEAD OF TREATING THE SAME AS CAPITAL GAINS. 2. THE APPELLANT PRAYS THAT THE SUM OF RS.26 58 00 0 BE ASSESSED AS LONG TERM CAPITAL GAINS. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 3 ITA 8834/MUM/2004 1999-2000 GROUND I : 1. THE LD. COMMISSIONER OF INCOME TA X (APPEALS)-XXVII MUMBAI ERRED IN UPHOLDING THE ACTION OF THE ASST. C OMMISSIONER OF INCOME TAX CIRCLE 3(1) MUMBAI (THE ASSESSING OFFICER) IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT BEING INTEREST AMOUNT OF RS .10 80 000 ON THE ADVANCE MADE TO VIVA RESORTS & HOTELS LIMITED ( VRHL ). 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID ADDITION OF RS.10 80 000. GROUND II : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN DISALLOWING THE DEPRECIATION CLAIM ON THE JAYANAGAR PROPERTY AT BANGALORE ON THE ALLEGED GROUND THAT IT WAS NOT USED FOR ANY BUS INESS PURPOSE. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED T HAT THE SUM OF RS.6 94 051 BEING DEPRECIATION ON THE SAID PROPERTY BE ALLOWED AS DEDUCTION. GROUND III : 1. THE CIT(A) ERRED IN UPHOLDING TH E ACTION OF A.O. OF TREATING THE NOTIONAL INCOME FROM PROPERTY UNDER THE HEAD I NCOME FROM HOUSE PROPERTY ON THE ALLEGED GROUND THAT IT WAS RESIDEN TIAL PROPERTY. 2. THE APPELLANT PRAYS THAT THE SAID ADDITION IN RESPECT OF THE NOTION INCOME FROM PROPERTY UNDER THE HEAD INCOME FROM HOUSE PROP ERTY BE DELETED. GROUND IV : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. OF MAKING THE ADDITION OF RS.24 32 000 AS INTEREST REC EIVABLE ON THE NON- CONVERTIBLE DEBENTURES. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID DISALLOWANCE. GROUND V : THE APPELLANT CRAVES LEAVE TO ADD AME ND AND/OR ALTER THE ABOVE GROUND OF APPEAL AT THE TIME OF HEARING. ITA 8835/MUM/04 2001-02 GROUND I : 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XXVII MUMBAI ERRED IN UPHOLDING THE ACTION OF THE ADDL. C OMMISSIONER OF INCOME TAX RANGE 3(1) MUMBAI (THE ASSESSING OFFICER) IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT BEING INTEREST AMOUNT OF RS .10 80 000 ON THE AMOUNT SUBSCRIBED TO THE UNSECURED DEBENTURES OF VI VA RESORTS & HOTELS LIMITED ( VRHL ). 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID ADDITION OF RS.10 80 000. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 4 GROUND II : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN MAKING AN ADDITION OF RS.24 32 000 ON THE ALLEGED G ROUND THAT THE INTEREST RECEIVABLE ON REDEMPTION OF NON-CONVERTIBLE DEBENTU RE SHOULD HAVE BEEN OFFERED FOR TAX AS THE ASSESSEE WAS FOLLOWING THE M ERCANTILE SYSTEM OF ACCOUNTING. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED T O DELETE THE AFORESAID ADDITION OF RS.24 32 000. GROUND III : THE APPELLANT CRAVES LEAVE TO ADD A MEND AND/OR ALTER THE ABOVE GROUND OF APPEAL AT THE TIME OF HEARING. ITA 6017/MUM/05 2002-03 GROUND I : 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XXVII MUMBAI ERRED IN UPHOLDING THE ACTION OF THE ADDL. C OMMISSIONER OF INCOME TAX RANGE 3(1) MUMBAI (THE ASSESSING OFFICER) IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT BEING INTEREST AMOUNT OF RS .10 80 000 ON THE AMOUNT SUBSCRIBED TO THE UNSECURED DEBENTURES OF VI VA RESORTS & HOTELS LIMITED ( VRHL ). 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO DELETE THE AFORESAID ADDITION OF RS.10 80 000. GROUND II : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A.O. IN MAKING AN ADDITION OF RS.24 32 000 ON THE ALLEGED G ROUND THAT THE INTEREST RECEIVABLE ON REDEMPTION OF NON-CONVERTIBLE DEBENTU RE SHOULD HAVE BEEN OFFERED FOR TAX AS THE ASSESSEE WAS FOLLOWING THE M ERCANTILE SYSTEM OF ACCOUNTING. 2. THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED T O DELETE THE AFORESAID ADDITION OF RS.24 32 000. GROUND III : 1. THE CIT(A) ERRED IN RESTRICTING TH E DISALLOWANCE OF A SUM OF RS.10 000 BEING ATTRIBUTABLE TO THE ADMINISTRATION AND MANAGEMENT OF THE FUND FOR EARNING A DIVIDEND INCOME OF RS.3 82 151. 2. THE APPELLANT PRAYS THAT THE DISALLOWANCE OF RS.10 000 BE DELETED. GROUND IV : THE APPELLANT CRAVES LEAVE TO ADD AM END AND/OR ALTER THE ABOVE GROUNDS OF APPEAL AT THE TIME OF HEARING. 3. BRIEFLY THE FACTS OF THE CASE RELATING TO GROUN D NO. 1 WHICH IS COMMON IN ALL THE YEARS UNDER CONSIDERATION ARE TH AT THE ASSESSING OFFICER FOUND THAT THE ASSESSEE COMPANY HAD GIVEN AN ADVANC E OF RS. 60 LAKHS TOWARDS PURCHASE OF UNSECURED DEBENTURES IN THE EAR LIER ASSESSMENT YEARS. THE ASSESSING OFFICER FOUND THAT DURING THE YEAR UN DER CONSIDERATION THE ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 5 ASSESSEE HAD CHANGED ITS METHOD ACCOUNTING FROM MER CANTILE TO CASH BASIS. WHEN THE ASSESSING OFFICER ENQUIRED THE ASSESSEE I NFORMED THAT THE SAID COMPANY WAS NOT IN A POSITION TO PAY PRINCIPAL AMOU NT. THE ASSESSEE POINTED OUT THAT SINCE THERE WAS NO POSSIBILITY OF RECOVERY OF PRINCIPAL AMOUNT QUESTION OF PROVISION OF INTEREST AMOUNTING TO RS. 10.80 LAKHS AS INCOME DID NOT ARISE. THE ASSESSING OFFICER HELD THAT UNDER AC CRUAL SYSTEM OF ACCOUNTING THE INCOME HAD TO BE SHOWN ON ACCRUAL B ASIS AND IT IS TO BE QUANTIFIED. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAD A CHOICE TO WRITE OFF THE DEBIT IN CASE IT IS TOTALLY IRRECOVERABLE. THE ASSESSING OFFICER ALSO FOUND THAT IN RESPECT OF OTHER COMPANY THE ASSESSEE HAD PROVIDED INTEREST AND THEREFORE HE HELD THAT THE AMOUNT HAD TO BE TREATED AS INCOME OF THE ASSESSEE AND ACCORDINGLY MADE AN A DDITION OF RS. 10 80 000/- ON THE ADVANCE MADE TO VIVA RESORTS & HO TELS LTD.. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 4. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT T HE ASSESSEE MADE A PAYMENT OF RS. 60 LAKHS TO VIVA RESORTS & HOTELS LTD . (IN SHORT VRHL)FOR SUBSCRIBING FULLY CONVERTIBLE DEBENTURES OF RS. 30 LAKHS EACH ISSUED BY VRHL. IT WAS SUBMITTED THAT THERE WAS NO CERTAINTY OF REC OVERY OF NOT ONLY THE PRINCIPAL AMOUNT BUT ALSO THE INTEREST RECEIVABLE T HEREON FOR THE AY 1997-98. THE ASSESSEE REFERRED TO ACCOUNTING STANDARD (AS-9) ISSUED BY THE CHARTERED ACCOUNTANTS OF INDIA ON REVENUE RECOGNIT ION AS STATED IN PARA 9.2 THAT WHERE THE ABILITY TO ASSESS THE ULTIMATE COLL ECTION WITH REASONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CL AIM. E.G. FOR ESCALATION OF PRICE EXPORT INCENTIVES INTEREST ETC. REVENUE RE COGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED. IN SUCH CASES IT MAY BE APPROPRIATE TO RECOGNIZE REVENUE ONLY WHEN IT IS REASONABLY CERTAI N THAT THE ULTIMATE COLLECTION WILL BE MADE. THE ASSESSEE ALSO REFERRED TO THAT THE GUIDANCE NOTE ON ACCRUAL BASIS OF ACCOUNTING ISSUED BY THE INST ITUTE OF CHARTERED ACCOUNTANTS OF INDIA ESPECIALLY IN PARA 3.4 AND 3. 5 OF THE GUIDANCE NOTE. THE ASSESSEE HAD RELIED UPON THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 6 CASE OF CIT VS. CITY BANK NA 208 ITR 930 WHEREIN I T HAS BEEN HELD THAT WHETHER REAL INCOME HAS MATERIALIZED TO THE ASSESSE E OR NOT HAS TO BE CONSIDERED WITH REFERENCE TO COMMERCIAL AND BUSINES S REALITIES OF THE SITUATION IN WHICH THE ASSESSEE HAS BEEN PLACED. HE ALSO RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. MOTOR CREDIT CO. PVT. LTD. 127 ITR 572. THE ASSESSEE FINALLY SU BMITTED THAT WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REAS ONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED AND HENCE ACCRUAL OF INTERE ST DID NOT ARISE IN ASSESSEES CASE NO INTEREST ON THE AMOUNT OF RS. 60 LAKHS WOULD ACCRUE TO THE ASSESSEE. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY OB SERVING AS UNDER:- 2.9 I HAVE CONSIDERED THE FACTS OF THE CASE PRIMAR ILY THE DEBENTURES WERE PURCHASED FOR 15 YEARS. NOW THE ONL Y QUESTION FOR CONSIDERATION IS WHETHER THE INTEREST ACCRUED TO TH E ASSESSEE CAN BE BROUGHT TO TAX. SINCE THE DEBENTURE WERE FOR THE PE RIOD OF 15 YEARS. MERELY COMMUNICATION BETWEEN THE ASSESSEE AND THE C ONCERNED COMPANY CANNOT TAKE AWAY RIGHT OF THE APPELLANT IN RECOVERING THE AMOUNT. THE AMOUNT BECAME DUE TO THE APPELLANT IN A S MUCH AS THE DEBENTURE WERE FOR A PERIOD 15 YEARS AND THIS FACT HAS NOT BEEN DISPUTED. THE APPELLANT CANNOT RESORT TO CHANGE IN METHOD OF ACCOUNTING ON THIS ACCOUNT AS HE HAS TO FOLLOW ONE METHOD OF ACCOUNTING. THEREFORE TO SAY THAT THE INCOME HAS NO T ACCRUED WILL NOT BE CORRECT STATE OF AFFAIRS. THE APPELLANT HAS REC EIVED INTEREST TILL THE END OF THE LAST YEAR AND HAS BROUGHT NOTHING ON REC ORD TO SHOW HOW THE DEBT HAD BECOME BAD EXCEPT ONE OR TWO LETTERS WRITTEN BY THE APPELLANT. UNDER THE CIRCUMSTANCES I HOLD THAT THE APPELLANT IS NOT CORRECT IN RESORTING TO CHANGE IN METHOD OF ACCOUNT ING. THEREFORE UNDER THE ACCRUAL SYSTEM OF ACCOUNTING THE AMOUNT I S LIABLE TO BRING THIS AMOUNT TO TAX. UNDER THE CIRCUMSTANCES THE OR DER OF THE ASSESSING OFFICER IS CONFIRMED ON THIS POINT. 5. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITT ED THAT IN AY 1997- 98 NO INTEREST WAS RECEIVED BUT THE INTEREST RECEI VED ONLY IN AY 1996-97 WHICH WAS OFFERED FOR TAXATION IN AY 1998-99. HE FUR THER SUBMITTED THAT THE ASSESSEE HAS CHANGED ITS ACCOUNTING SYSTEM FROM MER CANTILE ACCOUNTING SYSTEM TO CASH ACCOUNTING SYSTEM AND THE SAME IS RE GULARLY FOLLOWED. IT IS SUBMITTED THAT THE ASSESSEE HAS CHANGED ITS ACCOUNT ING SYSTEM BECAUSE THE ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 7 INTEREST AMOUNT IS IRRECOVERABLE. IT IS SUBMITTED T HAT EVEN ACCORDING TO SECTION 145(1) OF THE ACT THE ASSESSEE CAN CHANGE I TS ACCOUNTING METHOD. THE LEARNED COUNSEL HAS POINTED OUT FROM THE PAGES 14 TO 23 OF PAPER BOOK TO DEMONSTRATE THAT THE ASSESSEE HAS MADE ALL THE E FFORTS WITH REGARD TO RECOVERY OF PRINCIPAL AMOUNT AS WELL AS INTEREST AN D AFTER DUE CORRESPONDENCE THE ASSESSEE CAME TO THE CONCLUSION THAT INTEREST CANNOT BE RECOVERED. IT IS SUBMITTED THAT IF THE RECOVERY OF THE PRINCIPAL AMOUNT IS DOUBTFUL THE QUESTION OF CHARGING TAX ON INTEREST DOES NOT ARISE AT ALL THEREFORE CHARGING TAX ON INTEREST IS NOT WARRANTE D. IN THIS CONNECTION THE LEARNED COUNSEL FOR THE ASSESSEE HAS INVITED OUR AT TENTION TO THE GUIDANCE NOT4E ON ACCRUAL BASIS OF ACCOUNTING ISSUED BY THE ICAI WHICH STATES THAT WHEN RECOGNITION OF REVENUE IS POSTPONED DUE TO THE EFFECT OF UNCERTAINTIES IT IS CONSIDERED AS REVENUE FOR THE PERIOD IN WHICH IT IS PROPERTY RECOGNIZED ACCORDING TO THE PRINCIPLES DISCUSSED HEREIN. IT I S SUBMITTED THAT WHERE THE ABILITY TO ASSESS THE ULTIMATE COLLECTION WITH REAS ONABLE CERTAINTY IS LACKING AT THE TIME OF RAISING ANY CLAIM REVENUE RECOGNITION IS POSTPONED TO THE EXTENT OF UNCERTAINTY INVOLVED AND HENCE ACCRUAL OF INTERE ST DOES NOT ARISE. 6. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS CONTENDED THAT THE ASSESSEE HAS CHANGED ITS METHOD OF ACCOUNTING IN RESPECT OF INTEREST AMOUNT ON ADVANCE PAID TO VIVA RESORTS HOTELS LTD. (IN SHORT VRHL) WHICH IS NOT PERMITTED U/S 145(1) OF THE ACT. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS STRONGLY SUPPORTED THE ORDERS OF REVENUE AUTHORITIES IN SUPPORT OF REVENUES CASE. 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW. THE DISPUTE IN THIS GROUND IS WHETHER THE ASSESSEE IS L IABLE TO PAY TAX EVEN THE ASSESSEE HAS NOT RECEIVED INTEREST AMOUNT ON THE AD VANCE PAID TO VRHL. THE ASSESSEE HAD PAID RS. 60.00 LAKHS TO VRHL FOR SUBSCR IBING FULLY CONVERTIBLE DEBENTURES OF RS. 30 00 000 OF VRHL. THE SAID DEBENT URES WERE TO BE REDEEMED AT THE OPTION OF THE HOLDER AFTER 15 YEARS OF THE ISSUE DATE. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 8 HOWEVER VRHL DID NOT ALLOT THE SAID DEBENTURES TO TH E ASSESSEE COMPANY AND THEREFORE THE ASSESSEE SENT VARIOUS REMINDERS VIDE THEIR LETTERS DATED 18/12/1995 24/12/1996 14/08/1996 25/03/1998 10/ 07/1998 23/11/98 AND ON 23/01/99. THE ASSESSEE VIDE ITS LETTER DATE D 24/12/96 WITHDREW THE APPLICATION FOR SUBSCRIPTION TO THE SAID DEBENTURES AND REQUESTED VRHL TO RETURN THE SAID AMOUNT OF RS. 60 00 000/- ALONG WIT H INTEREST THEREON FROM 13/01/1996. IN AY 1996-97 & 1997-98 THE ASSESSEE RECEIVED INTEREST OF RS. 4 15 000/- AND RS. 10 80 000/- RESPECTIVELY AND THE SAME WAS OFFERED FOR TAXATION. SUBSEQUENTLY THE ASSESSEE HAS NOT RECEIV ED ANY INTEREST FROM VRHL. THE ASSESSEE MADE ALL EFFORTS TO RECOVER THE P RINCIPLE AMOUNT AS WELL AS INTEREST BUT FAILED TO RECOVER EITHER PRINCIPL E AMOUNT OR INTEREST. IN VIEW OF THE ABOVE CIRCUMSTANCES THE ASSESSEE HAS CHANGE D ITS METHOD OF ACCOUNTING FROM MERCANTILE METHOD OF ACCOUNTING TO CASH METHOD OF ACCOUNTING BY RELYING ON THE ACCOUNTING STANDARD (A S-9) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON REV ENUE RECOGNITION. THE ASSESSING OFFICER DID NOT ACCEPT THE SAID CHANGE OF METHOD OF ACCOUNTING BY THE ASSESSEE AND HE WAS OF THE VIEW THAT IF AT ALL THE AMOUNTS ARE NOT RECOVERABLE IT CAN BE CLAIMED AS BAD DEBT. THE CIT (A) OBSERVED THAT THE DEBENTURES WERE FOR THE PERIOD OF 15 YEARS AND MERE COMMUNICATION BETWEEN THE ASSESSEE AND THE CONCERNED COMPANY CANN OT TAKEAWAY THE RIGHT OF THE ASSESSEE IN RECOVERING THE AMOUNT AND THE ME THOD CHANGED BY THE ASSESSEE FROM MERCANTILE METHOD OF ACCOUNTING TO CA SH METHOD OF ACCOUNT WAS REJECTED. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT IT IS OPEN TO THE ASSESSEE TO CHANGE ITS METHOD OF ACCOUN TING AS PER SECTION 145(1) OF THE ACT AND AS PER THE SAID SECTION THE ASSESSEE CAN FOLLOW EITHER CASH METHOD OF ACCOUNTING OR MERCANTILE METHOD OF A CCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. WE FIND THAT THERE IS NO MERIT IN THE SUBMISSION OF THE ASSESSEE WITH REGARD TO CHANGE OF METHOD OF ACCOUNTING THEREFORE THE SAME IS HEREBY REJECTED. IN SO FAR AS THE OTHER ARGUMENT RAISED BY THE ASSESSEE IS THAT THE ASSESSEE MADE ALL EFFORTS AND THE ASSESSEE CAME TO THE CONCLUSION THAT THE PRINCIPLE ITSELF IS DOUBTFUL TO RECOVER TAXING INTEREST THEREON IS NOT JUSTIFIED. TO THIS EFFECT THE ASSES SEE FILED VARIOUS LETTERS AT ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 9 PAGES 13 TO 23 OF THE PAPER BOOK WHICH WERE CORRES PONDENCE TO VRHL. ON PERUSAL OF THE SAME WE FIND THAT THE ASSESSEE HAS MADE ALL EFFORTS TO RECOVER THE PRINCIPLE AMOUNT AS WELL AS INTEREST B UT THE ASSESSEE NEITHER RECEIVED PRINCIPAL NOR INTEREST THEREON. THE GENUIN ENESS OF THE MONEY ADVANCED WAS NOT DISPUTED. IT IS NOT THE CASE OF TH E REVENUE THAT THE ASSESSEE HAD RECEIVED INTEREST IN SUBSEQUENT YEARS. IN THE SIMILAR CIRCUMSTANCES THE HONBLE ALLAHABAD HIGH COURT DEA LT THE ISSUE IN THE CASE OF CIT VS. GIRIRAJ UDYOG [2005] 273 ITR 495. IN THIS CASE BORROWERS WERE AGRICULTURISTS STORERS WHO STORED POTATOS IN THE COLD STORAGE OF THE ASSESSEE. THE GENUINENESS OF THE MONEY ADVANCED BY THE ASSESSEE TO THE STORERS WAS ALSO NOT IN DISPUTE. THE TRIBUNAL HAD C OME TO THE CONCLUSION THAT THE DEPARTMENT HAD FAILED TO DISCHARGE THE BURDEN T O PROVE THAT INTEREST IN FACT ACCRUED DURING THE RELEVANT ASSESSMENT YEAR A ND IN THE ABSENCE OF ANY SUCH FINDING IT CANNOT BE SAID THAT THE INTEREST AC CRUED TO THE ASSESSEE AND AS SUCH THE INCLUSION OF INTEREST INCOME WAS UNJUST IFIED. THE ASSESSEE DECIDED BEFORE THE END OF ACCOUNTING YEAR RELEVANT TO AY IN QUESTION NOT TO CHARGE INTEREST. IN THE ABSENCE OF ANY FINDING THAT WAIVER OF INTEREST WAS ACTUATED BY ANY OTHER CONSIDERATION OTHER THAN THE BUSINESS EXPEDIENCY. ON THE TOTALITY OF THE FACTS OF THE CASE THE VIEW TAK EN BY THE TRIBUNAL WAS LEGALLY CORRECT. IN VIEW OF THE SAID JUDGMENT OF THE HONBLE ALLAHAB AD HIGH COURT WE FIND FORCE IN THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHEN THE PRINCIPLE AMOUNT ITSELF IS NOT RECEIV ED TAXING NOTIONAL INTEREST ON THE PRINCIPLE AMOUNT IS NOT JUSTIFIED. IN VIEW O F THE ABOVE DISCUSSION WE SET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE AD DITION MADE BY THE ASSESSING OFFICER ON THIS COUNT IN ALL THE YEARS UN DER CONSIDERATION. 8. AS REGARDS GROUND NO. 2 RAISED IN AY 1998-99 (IT A NO. 8833/MUM/2004) REGARDING DISALLOWANCE OF PROFESSION AL FEES OF RS. 3 00 000/- IT IS OBSERVED THAT THE ASSESSING OFFIC ER FOUND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD PAID A SUM OF RS. 3.00 LAKH TO A CONSULTANT TOWARD PREPARATION OF PROJECT REPORT OF MANUFACTURE OF ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 10 AMWAY BRAND HOUSEHOLD PRODUCTS AS PER AMWAYS SPE CIFICATION THE SAME BEING AN USA COMPANY. HOWEVER THE NEGOTIATION DID N OT SUCCESSFULLY MATERIALIZE. THE ASSESSING OFFICER FOUND THAT THE A MOUNT WAS PAID FOR THE PREPARING A REPORT WHICH WAS UTILIZED BY A FOREIGN COMPANY THE AMWAY. THE ASSESSING OFFICER HELD THAT SERVICES WERE UTILIZED BY THE FOREIGN COMPANY AND THE PAYMENT WAS MADE BY THE ASSESSEE. THEREFORE TH E ASSESSING OFFICER HELD THAT THIS AMOUNT CANNOT BE TREATED AS HAVING B EEN PAID FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND DISALLOWED THE PROF ESSIONAL FEES OF RS. 3 00 000/- PAID TO A CONSULTANT. AGGRIEVED BY THE O RDER OF ASSESSING OFFICER THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE TH E CIT(A). 9. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT I T HAD TWO DIVISIONS IN ONE OF THE DIVISIONS THE ASSESSEE RECEIVED AN INQUI RY FROM A FOREIGN COMPANY FOR CONTRACT MANUFACTURING OF CERTAIN PRODUCTS. HOWE VER THE NEGOTIATION DID NOT SUCCEED AND UNDER THE CIRCUMSTANCES THE REPORT PREPARED BY THE CONSULTANT WERE UTILIZED BY THE FOREIGN COMPANY. IT WAS SUBMITTED THAT THE ASSESSEE DID NOT HAVE ANY COPY OF THE REPORT IN HIS POSSESSION. THE ASSESSEE SUBMITTED THAT THESE EXPENDITURE WERE NOT INCURRED FOR ANY NEW LINE OF BUSINESS IT WAS INCURRED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS AS ALSO FOR EXPANDING THE EXISTING LINES OF BUSINES S. THE ASSESSEE SUBMITTED THAT SINCE THE EXPENDITURE WAS INCURRED FOR AN EXIS TING LINE OF BUSINESS THEREFORE THE SAID DISALLOWANCE MADE BY THE ASSESS ING OFFICER SHOULD BE DELETED. AFTER CONSIDERING THE SUBMISSIONS OF THE A SSESSEE THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OF FICER BY OBSERVING THAT THE ASSESSING OFFICER IN HIS ORDER HAS CLEARLY HELD THAT THE SERVICES OF THE CONSULTANT WERE NOT UTILIZED BY THE ASSESSEE AND TH E MONEY WAS PAID ON BEHALF OF THE OTHER COMPANY AS THERE IS NOTHING ON RECORD TO SHOW AS TO WHAT WAS THE PURPOSE FOR WHICH MONEY WAS PAID AND THE NA TURE OF SERVICES RENDERED. STILL AGGRIEVED THE ASSESSEE CARRIED TH E MATTER IN APPEAL BEFORE THE ITAT. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 11 10. BEFORE US THE LEARNED AR HAS SUBMITTED THAT T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF COSMETICS SINCE 1985 AND OF HOUSEHO LD PRODUCTS SINCE 1990. DURING THE YEAR UNDER CONSIDERATION THE ASS ESSEE RECEIVED AN ENQUIRY FROM AMWAY CORPORATION USA FOR CONTRACT MA NUFACTURING OF CERTAIN PRODUCT CATEGORIES DEALT IN BY AMWAY CORPORATION U SA WHICH ARE MANUFACTURED BY THE ASSESSEE COMPANY IN HOUSEHOLD DI VISION. IT IS SUBMITTED THAT THE AMWAY CORPORATION WANTED THE AS SESSEE TO MANUFACTURE THE SAID HOUSEHOLD PRODUCTS WITH THEIR BRAND NAME A ND TO SELL THE PRODUCTS AS PER THEIR SPECIFICATIONS FOR WHICH THE ASSESSEE ENTERED INTO AN AGREEMENT WITH AMWAY CORPORATION. THEREFORE THE ASSESSEE HAD TO MODIFY THE EXISTING MANUFACTURING FACILITIES OF ITS HOUSEHOLD DIVISION IN ORDER TO BE ABLE TO MANUFACTURE THE PRODUCTS ACCORDING TO THE SPECIFICA TION OF AMWAY CORPORATION. IN THIS CONNECTION THE ASSESSEE HAS A PPOINTED M/S B. MEHTALIA & ASSOCIATES TO EXAMINE ITS EXISTING MANUFACTURING FACILITIES AND FOR PREPARING BASIC ENGINEERING DOCUMENTS DATA SHEETS PROCESS AND INSTRUMENTATION OF DIAGRAMS UTILITIES LAY OUT FOR MODIFYING ITS EXISTING MANUFACTURING FACILITIES. ACCORDINGLY M/S B. MEHTA LIA & ASSOCIATES RENDERED THE AFORESAID SERVICES AND RAISED THEIR BILL FOR PR OFESSIONAL FEES OF RS. 3 19 000/- WHICH WAS SETTLED IN FULL BY PAYMENT OF RS. 3 00 000/-. IT IS SUBMITTED THAT EVEN THOUGH THE PROPOSAL DID NOT MAT ERIALIZE THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND WERE INCURRED FOR AN EXISTING LINE OF BUSINESS. IT IS CONTENDED T HAT THE ASSESSING OFFICER WAS ABSOLUTELY INCORRECT IN ALLEGING THAT THE EXPENDITU RE WAS INCURRED FOR A NEW LINE OF BUSINESS. THE LEARNED COUNSEL FOR THE ASSES SEE HAS INVITED OUR ATTENTION TO PAGES 28 33 34 37 39 48 50 62 63 64 66 67 68 69 & 80 OF PAPER BOOK TO DEMONSTRATE THAT THE PROPOSED EXPANSI ON PROJECT WITH AMWAY CORPORATION USA WAS IN THE SAME AND EXISTING LINE OF BUSINESS OF THE ASSESSEE NAMELY MANUFACTURE OF HOUSEHOLD CARE PROD UCTS THEREFORE THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOS E OF BUSINESS AND TO THIS EFFECT PROJECT REPORT WAS SUBMITTED AND HENCE THE EXPENDITURE HAS TO BE ALLOWED AS BUSINESS EXPENDITURE EVEN IF THE CONTRAC T IS NOT MATERIALIZED. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 12 11. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE BESIDES RELYING UPON THE ORDERS OF THE REVENUE AUTHORITIES SUBMITTED THAT THE EXPENDITURE INCURRED FOR A DIFFERENT PROJECT AND TH E PROJECT WAS NOT MATERIALIZED THEREFORE IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS THEREFORE THE SAME CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. 12. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. WE FIND THAT THE ASSESSEE HAS PAID AN A MOUNT OF RS. 3 00 000/- TOWARDS PROFESSIONAL FEE FOR MODIFICATION OF ITS EX ISTING MANUFACTURING FACILITIES TO SUIT TO MANUFACTURE THE GOODS FOR AMW AY CORPORATION USA. THE ASSESSING OFFICER DISALLOWED THE ABOVE EXPENDITURE ON THE GROUND THAT THE ASSESSEE INCURRED THE SAID EXPENDITURE FOR A DIFFE RENT PROJECT THEREFORE IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE SUBMISSIONS OF THE ASSESSE E IS THAT THE SAID EXPENDITURE WAS NOT INCURRED FOR ANY NEW LINE OF BU SINESS IT WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AS ALSO FOR EXPANDING THE EXISTING LINE OF BUSINESS AND TO THIS EFFECT THE A SSESSEE HAS SUBMITTED DOCUMENTARY PROOF VIDE PAPER BOOK AT PAGES 28 33 34 37 39 48 50 62 63 64 66 67 68 69 & 80 TO ESTABLISH THAT THE EXPENDITU RE IS INCURRED FOR THE PURPOSE OF BUSINESS. WE ARE OF THE VIEW THAT THE SA ID EXPENDITURE INCURRED BY THE ASSESSEE FOR EXPANSION OF ITS MANUFACTURING BUSINESS PERTAINING TO THE HOUSEHOLD PRODUCTS DIVISION IS A LEGITIMATE BUSINES S EXPENDITURE ALLOWABLE AS REVENUE EXPENDITURE. THEREFORE WE SET ASIDE THE OR DER OF CIT(A) AND THE DISALLOWANCE OF RS. 3 00 000/- IS HEREBY DELETED ON THIS COUNT. 13. AS REGARDS GROUND NO. 3 & 4 IN AY 1998-99 AND 2 & 3 IN AY 1999- 2000 REGARDING DISALLOWANCE OF DEPRECIATION CLAIM OF RS. 7 02 554/- & IT IS OBSERVED THAT THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD PURCHASED A RESIDENTIAL PROPERTY AT BANGALORE. THIS PROPERTY WA S A TENANTED PROPERTY. THE ASSESSING OFFICER NOTICED THAT THE CLAIM OF DEPRECI ATION MADE BY THE ASSESSEE WAS IN RESPECT OF THE SAID PROPERTY COULD NOT BE AL LOWED AS THERE NOTHING ON ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 13 RECORD TO SHOW THAT THIS PROPERTY WAS UTILIZED FOR THE PURPOSE OF BUSINESS DURING THE YEAR UNDER CONSIDERATION. THEREFORE HE DISALLOWED THE DEPRECIATION CLAIM OF THE ASSESSEE. AGGRIEVED THE A SSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 14. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT THE ACTION OF THE ASSESSING OFFICER WAS NOT CORRECT IN AS MUCH AS THE PROPERTY HAD BEEN TREATED AS NON-COMMERCIAL PROPERTY AS THE ASSESSEE HAD BEEN PAYING VARIOUS CHARGE AS OWNER. THEREFORE THE ASSESSEE SUBMITTED THAT THE DEPRECIATION SHOULD BE ALLOWED. AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE THE CIT(A) HELD THAT I AM UNABLE TO AGREE WITH THE CONT ENTIONS OF THE ASSESSEE AS THE ASSESSING OFFICER HAS VERY CLEARLY HELD THAT THIS PROPERTY WAS NOT USED FOR THE PURPOSE OF BUSINESS THEREFORE DEPRECIATIO N WAS DISALLOWED AND ACCORDINGLY THE ALV ADOPTED FOR THE PURPOSE OF INCO ME FROM HOUSE PROPERTY. UNDER THE CIRCUMSTANCES IN MY OPINION THE ACTION O F THE ASSESSING OFFICER IS CORRECT AND NO INTERFERENCE IS CALLED FOR. STILL AG GRIEVED THE ASSESSEE IS IN APPEAL BEFORE THE ITAT. 15. BEFORE US THE LEARNED COUNSEL FOR THE HAS SUBM ITTED THAT THE PROPERTY WAS PURCHASED IN 1995 ALONG WITH ENCUMBRANCE OF A T ENANT. IT IS SUBMITTED THAT THE TENANT WAS OCCUPIED ONLY A PART OF THE PRO PERTY AND THE BALANCE PORTION OF THE PROPERTY WAS USED AS BUSINESS PREMIS ES FOR CARRYING ON THE BUSINESS OF THE ASSESSEE. IT IS SUBMITTED THAT THE TENANT WAS VACATED DURING THE YEAR UNDER CONSIDERATION. THE LEARNED COUNSEL F OR THE ASSESSEE HAS INVITED OUR ATTENTION TO THE PAPER BOOK WHERE COPIE S OF BRANCH TRANSFER INVOICE DELIVERY CHALLANS DISPATCH PROOFS AND SAL ES INVOICES ELECTRICITY BILLS WATER CHARGES BILLS AND BILLS ISSUED BY THE BANGALO RE WATER SUPPLY AND SEWAGE BOARD TO ESTABLISH THAT THE SAID PROPERTY W AS USED FOR OFFICE PURPOSED AND NOT FOR RESIDENTIAL PURPOSE AND AS SUC H THE ASSESSEE SHOULD BE ALLOWED DEPRECIATION. THE LEARNED COUNSEL HAS ALSO INVITED OUR ATTENTION TO PAGE 62 & 69 OF PAPER BOOK AND SUBMITTED THAT THE P ROPERTY WAS PURCHASED ON 4 TH DECEMBER 1995 WHICH IS EVIDENT FROM SALE DEED (P AGE 65). THE ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 14 LEARNED COUNSEL REFERRED PAGE NO. 162 OF PAPER BOOK TO SHOW THAT DEPRECIATION WAS ALLOWED ON THE SAME PROPERTY IN 19 96-97 1997-98 AND IN SUBSEQUENT YEARS 1999-00 AND 2005-06 U/S 143(3). I T IS SUBMITTED THAT THE ASSET ENTERED INTO THE BLOCK OF ASSETS. 16. ON THE OTHER HAND THE LEARNED DR BESIDES RELYI NG UPON THE ORDERS OF THE REVENUE AUTHORITIES SUBMITTED THAT THE ASSESSEE WAS NOT USED THE PREMISES FOR THE PURPOSE OF BUSINESS THEREFORE TH E ASSESSEE IS NOT ELIGIBLE FOR DEPRECIATION. 17. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ONLY POINT FOR OUR CONSIDERATION I S WHETHER THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION OR NOT ON THE PROPERTY SI TUATED AT BANGALORE. WE FIND THAT THIS PROPERTY WAS PURCHASED IN 1995 AND DEPREC IATION WAS ALLOWED IN EARLIER YEARS AY 1996-97 & 1997-98 AND SUBSEQUENT Y EARS 1999-00 AND 2005-06 U/S 143(3) OF THE ACT. WE FIND THAT THE PRO PERTY ENTERED INTO BLOCK OF ASSETS THEREFORE ONCE THE PROPERTY ENTERED INT O BLOCK OF ASSETS ITS LOOSES ITS INDIVIDUAL IDENTITY AND USER CONDITION IS NOT N ECESSARY TO BE IN RESPECT OF INDIVIDUAL ASSET BUT THE SAME IS TO BE SATISFIED IN RESPECT OF BLOCK OF ASSETS. IN THE PRESENT CASE THE USER CONDITION IN RESPECT OF RELEVANT BLOCK WAS SATISFIED INASMUCH AS DEPRECIATION ON OTHER BUILDIN G FORMING PART OF THE SAID BLOCK WAS ALLOWED BY THE ASSESSING OFFICER. WE THE REFORE SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND DIRECT THE AS SESSING OFFICER TO ALLOW DEPRECIATION ON THE SAID PROPERTY. THE RELEVANT GRO UNDS OF THE ASSESSEE RAISING THIS ISSUE ARE ACCORDINGLY ALLOWED. 18. AS REGARDS GROUND NO. 5 IN AY 1998-99 GROUND N O. 4 IN AY 1999-00 GROUND NO. 2 IN 2001-02 AND 2002-03 REGARDING REDE MPTION PREMIUM IT IS OBSERVED THAT THE ASSESSEE SUBSCRIBED TO ONE ZERO C OUPON UNSECURED NON- CONVERTIBLE REDEEMABLE DEBENTURE ON 20/05/06 OF RS. 100 LAKHS EACH IN JAIN IRRIGATION SYSTEMS LTD. AND JAIN SECURITIES INTERNA TIONAL LTD. WHICH WERE SHOWN AS INVESTMENT IN THE ACCOUNTS OF THE ASSESSEE . THE SAID COMPANIES WERE TO REDEEM THE SAID DEBENTURE ON 19/11/1996 HO WEVER THE REDEMPTION ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 15 DATE WAS EXTENDED TO 19/05/97 AND ACCORDINGLY THE P REMIUM ON REDEMPTION OF NON-CONVERTIBLE DEBENTURE OF RS. 26 58 000/- BEC AME DUE. THE ASSESSEE TREATED THE SAID PREMIUM AS SHORT TERM CAPITAL GAIN AND ADJUSTED THE BROUGHT FORWARD LONG TERM CAPITAL LOSS AGAINST THE SHORT TE RM CAPITAL GAIN TO THE EXTENT OF RS. 26 58 000/-. THE ASSESSING OFFICER H ELD THAT REDEMPTION PREMIUM IS NOTHING BUT LOANS AND INTEREST EVEN IF R ECEIVED SHOULD BE TREATED AND ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. O N APPEAL THE CIT(A) HELD THAT THERE IS NOTHING ON RECORD TO WHICH AS TO HOW THIS AMOUNT SHOULD BE TREATED AS INCOME UNDER THE HEAD CAPITAL GAIN. A GGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 19. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT REDEMPTION OF PREMIUM RECEIVED BY THE ASSESSEE HAS TO BE TAKEN AS CAPITAL GAIN AND NOT AS BUSINESS INCOME. FOR THIS CONTENTION HE RELIED UPON THE JUDGMENT REPORTED IN 228 ITR 163 AND 224 ITR 422. IT IS SUBMITTED THAT IN AY 1997-98 THERE WAS A LOSS WHICH WAS ALLOWED AS CAPITAL LOSS THEREFOR E THIS YEAR ALSO IT HAS TO BE ALLOWED AS CAPITAL GAIN WHEN THERE IS A GAIN. TO TH IS EFFECT THE LEARNED COUNSEL INVITED OUR ATTENTION TO PAGES 153 175 & 17 8 OF THE PAPER BOOK WHICH ARE P&L ACCOUNT OF THE ASSESSEE. 20. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES. 21. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ISSUE INVOLVED IN THIS GROUND IS WH ETHER REDEMPTION OF PREMIUM AMOUNTING TO RS. 26 58 000/- IS CAPITAL GAI N OR BUSINESS INCOME. ACCORDING TO THE ASSESSING OFFICER DEBENTURES ARE NOTHING BUT LOANS THEREFORE REDEMPTION OF PREMIUM IS TREATED AS BUSI NESS INCOME WHICH WAS CONFIRMED BY THE CIT(A). ACCORDING TO THE ASSESSEE REDEMPTION OF PREMIUM IS AMOUNTING TO TRANSFER AND IT IS CAPITAL GAIN AND NOT BUSINESS INCOME. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE REDEMPTION OF PREMIUM WAS CONSIDERED BY THE ASSESSING OFFICER AND ALLOWED AS CAPITAL GAIN/LOSS AND ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 16 ALLOWED LOSS IN AY 1997-98. ON PERUSAL OF ORDERS OF THE AUTHORITIES BELOW WE FIND THAT THE EITHER ASSESSING OFFICER OR CIT(A) HA S NOT DISCUSSED WITH REGARD TO EARLIER YEARS AND DECIDED THE ISSUE IN A PRECARI OUS MANNER. WE ARE OF THE VIEW THAT THE ISSUE SHOULD BE DEALT IN DETAIL BY BR INGING FACTS ON RECORD. THEREFORE WE REMIT THE ISSUE BACK TO THE FILE OF T HE ASSESSING OFFICER WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER EXAMINING ALL THE DETAILS AND BRINGING THE SAME ON RECORD ELABORA TELY AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 22. AS REGARDS GROUND NO. 3 IN AY 2002-03 REGARDING DISALLOWANCE OF RS. 10 000/- IT IS OBSERVED THAT THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 84 983/- U/S 14A OF THE ACT ON THE GROUND THAT A P ART OF THE MANUFACTURING AND OTHER EXPENSES WERE CERTAINLY ATTRIBUTABLE TO E ARNING OF DIVIDEND INCOME. ON APPEAL BEFORE THE CIT(A) THE ASSESSEE HAD SUBM ITTED THAT SECTION 14A APPLIES ONLY TO THE EXTENT OF WHEN THERE IS A DIREC T RELATIONSHIP BETWEEN THE EXPENSES AND THE INVESTMENTS ON WHICH TAX FREE INCO ME IS RECEIVED THEREFORE NO DISALLOWANCE OF EXPENDITURE CAN BE MA DE ON PROPORTIONATE BASIS. IT WAS SUBMITTED THAT THE ONLY EXPENSES ACTU ALLY INCURRED FOR EARNING DIVIDEND INCOME WERE TO BE DEDUCTED FROM THE GROSS DIVIDEND AND NOT EXPENSES ASSUMED TO HAVE BEEN INCURRED OR ESTIMATED AT A CERTAIN PROPORTION OF THE TOTAL EXPENSES. IT WAS POINTED OU T THAT NO PARTS OF THE EXPENSES INCURRED DURING THE YEAR IS ATTRIBUTABLE T O THE EARNING OF DIVIDEND INCOME. AFTER CONSIDERING THE SUBMISSIONS OF THE AS SESSEE THE CIT(A) OBSERVED THAT NONE OF THE EXPENSES PERTAIN TO PAYME NT OF INTEREST AND PRIMARILY THE EXPENDITURE HAD BEEN DISALLOWED OUT O F MANUFACTURING AND OTHER EXPENSES. HE FURTHER OBSERVED THAT THE ASSESSE E HAD SHARE CAPITAL TO THE TUNE OF 61.15 LAKHS AND RESERVE & SURPLUS ON AC COUNT OF PROFITS OF 42.56 CRORES. THEREFORE THERE WAS NO NEED FOR MAKING DI SALLOWANCE TO THE EXTENT OF RS. 84 393/-. THE CIT(A) HELD THAT SINCE THE ASS ESSEE HAD EARNED A DIVIDEND INCOME OF RS. 3 82 151/- A SUM OF RS. 10 000/- WAS DISALLOWABLE BEING ATTRIBUTABLE TO THE ADMINISTRATION AND MANAGE MENT OF THE FUND PAYABLE FOR SHARES. AGGRIEVED THE ASSESSEE IS IN APPEAL BE FORE US. ITA NOS. 8833 8834 8835 & 6017/MUM/04 BACCAROSE PERFUMES & FAMILY PRODUCTS 17 23. AFTER HEARING THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSING THE RECORD WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) AND THEREFORE THE ORDER OF THE CIT(A) IS H EREBY CONFIRMED. 24. IN THE RESULT ALL THE APPEALS UNDER CONSIDERAT ION ARE PARTLY ALLOWED AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MARCH 2011. SD/- SD/- (P.M. JAGTAP) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DT. 31 ST MARCH 2011. COPIES OF THE ORDER FORWARDED TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT MUMBAI (4) CIT(A) MUMBAI (5) DR (6) GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES KV