TMI Blog2008 (1) TMI 906X X X X Extracts X X X X X X X X Extracts X X X X ..... HC amounting to ₹ 9,31,67,949 which has been computed on profits of the business before the set off of brought forward losses. The profit after the set off of the brought forward losses is ₹ 3,20,42,693 and deduction under s. 80HHC has been restricted to this figure and thus, the total income which has been returned comes to nil. Deduction under s. 80HHC is available on export activity. For the computation of deduction the profits of the business have to be computed as per provisions of the Act and then deduction should be allowed on the available profit. In this case, the available profit for the computation of deduction was the profit which has been computed as per provisions of the Act, i.e., after set off of brought forward losses. The deduction under s. 80HHC should have been computed after arriving at the profit available after set off of brought forward losses. 2. The assessee has debited to its P L a/c a sum of ₹ 6,28,32,100 on account of royalty (including cess of ₹ 29,92,006) which pertains to prior period as has been disclosed in para 22(b) of the tax audit report. As the same does not pertain to the previous year relevant to the asst. yr. 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued under s. 263 and the same could not be the subject-matter of revision under s. 263. As regards the issue relating to payment of royalty amounting to ₹ 6,28,32,100, it was submitted on behalf of the assessee that the said payment was made to the parent company M/s Guardian Industries Corp. in terms of an agreement dt. 4th Dec., 1990. It was pointed out that the said royalty was payable for a period of eight years after thecommencement of production and the lead financial institution, i.e., IDBI had asked the assessee company not to pay the said royalty till the principal loans and interest thereon to the financial institutions were outstanding. It was submitted that the royalty for the earlier period was permitted to be paid by the IDBI vide its letter dt. 26th April, 2001 in six semi-annual instalments beginning from October, 2001 and in pursuance thereof, the royalty amounting to ₹ 6,28,32,100 was paid by the assessee company to M/s Guardian Industries Corp. during the year under consideration. It was contended that the said royalty, which was of revenue nature being payable on domestic and export sales as per the agreement, thus was rightly claimed in the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feels that there should be further enquiry. From a look into the assessment records, it clearly emerges that the AO has not examined the above issues in the course of assessment proceedings. The royalty of ₹ 6,28,32,100 relates to the earlier years and it was, therefore, a prior period expenditure which, prima facie, deserved to be disallowed. The assessee company has now come forward with an explanation that, on account of embargo put by the IDBI, the royalty could not be paid to Guardian Industries Corporation and as soon as the IDBI cleared the royalty payment vide its letter dt. 26th April, 2001 in six semi-annual instalments of ₹ 474.60 lakhs each, the part royalty of ₹ 6,28,32,100 relating to the period from 1st March, 1993 to 31st March, 1999 was paid to Guardian Industries Corporation during the year under consideration. This explanation of the assessee company is hardly acceptable. This assessee follows the mercantile system of accounting and, therefore, as per provisions of s. 145, it was required to provide for this liability in the respective accounting year(s). As the liability was incurred in the earlier years, it could have been allowed to be deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esh adjudication and decision. The AO is directed to decide these issues afresh as per law and after giving reasonable opportunity to the assessee company of being heard. The learned CIT thus set aside the assessment dt. 30th March, 2005 passed by the AO on the issues mentioned in his order passed under s. 263 and directed him to decide the said issues afresh in accordance with law after giving reasonable opportunity to the assessee of being heard. Aggrieved by the said order of the learned CIT passed under s. 263, the assessee has preferred this appeal before the Tribunal. At the time of hearing before us, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee company during the course of proceedings under s. 263 before the learned CIT. He submitted that both the issues pointed out by the learned CIT in the notice under s. 263 were duly considered and examined by the AO during the course of assessment proceedings and after applying his mind to the submissions made on behalf of the assessee company on the said issues as well as the material available on record, the assessment was completed by the AO. In support of this contention, he i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment by his impugned order passed under s. 263, the learned CIT has taken into consideration only these two issues and it therefore cannot be said that he has travelled beyond the notice issued under s. 263 as alleged by the learned counsel for the assessee. He further submitted that the learned CIT has not decided any of these two issues on merits vide his impugned order, but has merely directed the AO to examine the same after conducting necessary inquiries and this being so, it was not necessary for him to give any finding so as to show how the assessment was prejudicial to the interest of the Revenue. He submitted that even though deduction on account of payment of royalty was allowed in the earlier year, if the same was wrongly allowed, the learned CIT was within his own right to exercise the powers under s. 263 to revise the assessment for the year under consideration. He submitted that going by the licence granted by the foreign party to the assessee company as per the agreement, the nature of royalty paid as per the said agreement was apparently capital which aspect of the matter however was not examined by the AO. He contended that the order of the AO for assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 placed at page Nos. 104 to 115 shows that the following submissions were made on behalf of the assessee while justifying its claim for deduction on account of payment of royalty : Prior Period Expense : As per the terms of agreement dt. 4th Dec., 1990 royalty is payable to Guardian Industries Corp., USA for a period of eight years from the effective date of agreement, viz. from 1st March, 1993 to 28th Feb., 2001. Industrial Development Bank of India (IDBI)-vide its letter dt. 8th Feb., 1993, had stipulated that the assessee shall not make payment of royalty to Guardian Industries Corp., USA during any time, when payment of instalment of principal, interest and any other monies are outstanding to the institutions. Due to inadequate profits/cash accruals, and consequent defaults in the payment of institutional dues, the assessee did not pay any royalty to Guardian Industries Corp., USA from 1st March, 1993 to 31st March, 1999. Subsequently, the IDBI vide its letter dt. 26th Nov., 1999 allowed the payment of royalty from 1st April, 1999 to 28th Feb., 2001 and as regards past royalty upto 31st March, 1999, it was advised that a view would be taken at a later date. The assessee start ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 001-02. In view of aforesaid, the sum paid on account of royalty is allowable as deduction in computing the income for the previous year 2001-02 relevant to asst. yr. 2002-03. A perusal of the aforesaid submissions made on behalf of the assessee company clearly shows that not only the enquiry in this matter was conducted by the AO during the course of assessment proceedings on the issue, but a detailed submission was also made on behalf of the assessee company justifying its claim for deduction on account of payment of royalty pertaining to the earlier years. It was explained in the said submissions that the liability on account of royalty had actually accrued during the year under consideration for the reasons given therein and it was also pointed out that the tax having been actually deducted from the said payment only during the year under consideration, the same was claimed as deduction in that year as per the specific provisions contained in s. 40(a)(i). In our opinion, these submissions made on behalf of the assessee company were self-explanatory as regards its claim for deduction on account of payment of royalty pertaining to earlier years and having regard to the said subm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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