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2005 (8) TMI 301 - AT - Income TaxBusiness Expenditure - Business disallowance - administration expenses - allocation of expenses - royalty income on sale of Horlicks - Deduction u/s 80HHC - claimed deduction u/s 43B - difference of excise duty paid on closing stock and embedded in the opening stock - Exporter - Refunds - Interest on excess - HELD THAT:- The conclusion of CIT(A) that 'level of effort' factor cannot be validly applied for taxation or even accounting purposes, in our view, is without any basis. The finding that the assessee and SBCH were not working at arm's length is again not sustainable and in any event not a relevant consideration to disallow expenditure. The Revenue if it wants to disallow an expenditure on the ground that it is excessive or unreasonable having regard to FMV of the goods, services or facilities for which the payment is made and the legitimate needs of the business of an assessee or the benefit derived or accruing to an assessee has to establish that the person to whom the payment is made is a person falling within the provisions of s. 40A(2)(b). Admittedly, SBCH, the recipient, is not a person falling within the ambit of provisions of s. 40A(2)(b) of the Act. Therefore, the finding with regard to the dealings between assessee and SBGH not being at arm's length is neither correct nor sustainable and was irrelevant while sustaining disallowance made by the AO. The fact that the recipient viz., SBCH had duly shown the sums received from the assessee as its receipts is also not in dispute. In such circumstances, we are of the view that disallowance of expenses was not warranted. The allegation against the assessee that the charges paid by the assessee to SBGH was excessive is without any basis. We, therefore, conclude that none of the reasons assigned by the CIT(A) to conclude that the decision of the Tribunal for asst. yrs. 1998-99 and 1999-2000 is not applicable to the facts as it existed in asst. yr. 2001-02 can be sustained and, therefore, the said decision of Tribunal will apply to this assessment year i.e., the asst. yr. 2001-02 also. Respectfully following the order of the Tribunal, we direct that the disallowance of expenses made by the AO and sustained by the CIT(A) should be deleted and same is directed to be deleted. Grounds asst. yr. 2001-02 are allowed. In the present case, the assessee has made a claim for deduction which was in conformity with a view accepted by the Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd [1986 (3) TMI 42 - GUJARAT HIGH COURT]. The AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Berger Paints [2004 (2) TMI 4 - SUPREME COURT] wherein it had held that excise duty was to be included in the valuation of closing stock of finished goods. The AO has overlooked the fact that by including the excise duty in the valuation of the closing stock, deduction for the said duty is not allowed to that extent as required u/s 43B of the Act. The disallowance made by the AO and confirmed by the CIT(A) cannot be sustained and is, therefore, directed to be deleted. Ground are allowed. Deduction u/s 80HHC - From a reading of Expln. (baa) of s. 80HHC provisions, it is clear that royalty income is not income of the nature of brokerage, commission, interest, rent or charges. The royalty income is clearly in the nature of profits and gains of business. The royalty income is not receipt of a similar nature as that of brokerage, commission, etc. The expression "of any other receipt of a similar nature" occurring in cl. (1) of Expln. (baa) has to be construed ejusdem generis with the words appearing immediately preceding that expression. The plea of the assessee also finds support from the decision of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co. [2003 (1) TMI 89 - BOMBAY HIGH COURT] and the Delhi Bench of the Tribunal in the case of Smt. Sujatha Grover vs. Dy. CIT[2001 (11) TMI 232 - ITAT DELHI-E]. The action of the Revenue authorities in excluding 90 per cent of royalty income cannot, therefore, be sustained. The AO is, therefore, directed to recompute the income u/s 80HHC by considering the royalty income as profits of the business. Interest u/s 234D - The learned counsel for assessee submitted that the provisions of s. 234D do not apply to assessment year in question especially when the amount of refund had been granted earlier to1st June, 2003. The learned Departmental Representative submitted charging of interest u/s 234D is compensatory and the provisions of s. 234D are clarificatory and, therefore, applicable retrospectively. According to the learned Departmental Representative, the provisions being purely procedural and machinery provisions can be applied to pending assessment proceedings. In our view, the law dealing with imposition of interest is substantive and not procedural law and, therefore, interest u/s 234D cannot be charged in respect of assessment years prior to coming into force of these provisions. The levy of interest u/s 234D is, therefore, directed to be deleted. The 5th ground of appeal of the assessee is allowed. In the result, both the appeals are partly allowed.
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