TMI Blog2013 (11) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to section 73 of the Act. In view of the aforesaid, the loss arising on the sale of shares held as stock in trade has rightly been allowed by the ld. CIT(A) - Decided against the revenue. The order of the Ld. CIT(A) deleting the disallowance of expenditure relating to expansion of healthcare division is upheld. Payment of Non-Compete Fee - held that:- the assessee's business interest would have suffered if the ex-employee, who was in a senior position and was well conversant with and in fact instrumental in setting up the above business initially, would have come in competition with the joint venture companies, in which the assessee had substantial interest. The assessee may also have been liable to joint venture companies. Thus, the non-compete fee was paid on account of 'commercial expediency' and was rightly allowed revenue deduction by the A.O - Decided against the revenue. Depreciation @ 60% on medical equipment as computers - Held that:- computer controlled medical equipment can not be equated with computers - normal depreciation to be allowed - Decided in favor of revenue. Depreciation @ 25% on building used as Nursing Home treating the same as plant and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 6. 152(Asr)/2011 2003-04 -do- Revenue 7. 121(Asr)/2011 2004-05 -do- Assessee 8. 153(Asr)/2011 2004-05 -do- Revenue 9. 122(Asr)/2011 2005-06 -do- Assessee 10. 154(Asr)/2011 2005-06 -do- Revenue 11. 123(Asr)/2011 2006-07 -do- Assessee 12. 155(Asr)/2011 2006-07 -do- Revenue 2. In ITA No.103(Asr)/2006 for the assessment year 2001-02, the Revenue has raised following grounds of appeal: 1. That on the facts of the case and in law, the ld. CIT(A) has erred: a) in accepting the claim of the assessee regarding the conversion of shares from stock-in-trade to Investments to be genuine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the payment made on account of non-compete agreement in respect of betalactum and non-betalactum drugs not appreciating the fact that one of the business already stood transferred to a joint venture company and the other business was to be run by a subsidiary company. 5. The Ld. CIT(A) has erroneously allowed depreciation on medical equipment treating the same as computers ignoring the fact that even the tax auditors had not endorsed this claim in their report. On the facts of the case and in law, the medical equipment in question could not be treated as computers. 6. The Ld. CIT(A), has, on the facts of the case, erred in accepting the claim of the assessee for depreciation @ 25% on building used as Nursing Home ignoring the fact that the area which could be considered to be part and parcel of plant and machinery was nominal and rest of the building was a normal building. He has also ignored the fact that the enhanced claim was not backed by tax auditors. 7. The Ld. CIT(A) has, on facts of the case and in law, erred in reducing the disallowance out of expenses incurred in relation to income not includible in total income. The appellant craves leave to add o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reason that bank statements were not furnished b the appellant, not properly appreciating the cash/fund flow statement made available by the appellant and further alleging that the contention of the appellant that the bank statements were not readily available does not appear to be tenable. 1.2.4 That without prejudice the Ld. CIT(A) further erred in law in not appreciating that investments in instruments which did not yield tax exempt income and/or were held as stock in trade were not required to be taken into consideration for purposes of computing the percentage of borrowed funds alleged to have been used for earning tax exempt income, for the purposes of making disallowance u/s 14A of the Act. 1.3. That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of ₹ 4,32,94,905/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act. 1.3.1. That the Ld. CIT(A) further erred in law in not issuing a show cause notice or affording an opportunity to the appellant to rebut the formula or the basis adopted by him to compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of Max Foil Division, ₹ 4.74 lacs being expenses incurred on expansion of Pharma Division and ₹ 57.12 lacs as the expenses incurred on project which was subsequently abandoned and ₹ 19.66 lacs incurred on foreign travel of employees when the AO treated all the expenses as capital in nature being incurred for expansion of business. 5. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in treating the assessee's transactions in listed securities to be in the nature of investment of the assessee rather than speculation income/loss. 6. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in reversing the decision of AO in taxing the consideration received on account of non-compete fee under the head of capital gains. 7. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored. 8. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of. 6. In ITA No.120(Asr)/2011 for the assessment year 2003-04, the assessee has raised following grounds of appeal: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the exempt income earned and expenditure incurred during the year for computing the alleged disallowance u/s 14A of the Act. 1.2 That the Ld. CIT(A) further erred in law in on fact and in law, in computing ₹ 5,84,00,000/- as the disallowance u/s 14A of the Act by adopting a self-worked out formula which is adhoc, arbitrary, unreasonable and not tenable. 1.2.1 That the Ld. CIT(A) further erred in law in drawing an adverse presumption that part of the interest bearing borrowed funds were used for the purpose of making investments in instruments yielding tax free income, not appreciating that the appellant had sufficient interest free funds for making investments in instruments yielding tax exempt income. 1.3.2 That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details. 1.2.3 That the Ld. CIT(A) further erred in law in drawing a nexus of the interest bearing borrowed funds with the instruments yielding exempt income solely for the reason that bank statements were not furnished b the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed u/s 14A, made to the net profit by the Ld. AO while computing 'book profit' u/s 115JB of the Act; instead in enhancing the said amount of addition to ₹ 5,84,00,000/-. All the above grounds are independent and without prejudice to each other. 9. In ITA No.153(Asr)/2011 for the assessment year 2004-05, the Revenue has raised following grounds of appeal: 1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of ₹ 84,27,500/-. 2. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of ₹ 54,13,045/- made by the AO being expenses incurred on expansion of MAXXON Division which are in the nature of capital expenditure. 3. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in treating the assessee's transactions in listed securities to be in the nature of investment of the assessee rather than speculation income/loss. 4. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored. 5. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en into consideration for purposes of computing the percentage of borrowed funds alleged to have been used for earning tax exempt income, for the purposes of making disallowance u/s 14A of the Act. 1.3 That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of ₹ 4,48,00,000/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act. 1.3.1 That the Ld. CIT(A) further erred in law in not issuing a show cause notice or affording an opportunity to the appellant to rebut the formula or the basis adopted by him to compute the disallowance on account of interest expenditure u/s 14A of the Act. 1.4. That the Ld. CIT(A) erred in law in disallowing, on adhoc basis, a sum of ₹ 20,00,000/- u/s 14A of the Act, in respect of personnel and administrative expenses alleged to have been incurred for purpose of earning tax exempt income. 1.5 That the Ld. CIT(A) further erred on facts and in law in rejecting the appellant's plea to allow it to withdraw its ground of appeal relating to disallowance u/s 14A of the Act or in the alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the interest bearing borrowed funds were used for the purpose of making investments in instruments yielding tax free income, not appreciating that the appellant had sufficient interest free funds for making investments in instruments yielding tax exempt income. 1.2.2. That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details. 12.3. That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details. 1.2.3 That the Ld. CIT(A) further erred in law in drawing a nexus of the interest bearing borrowed funds with the instruments yielding exempt income solely for the reason that bank statements were not furnished b the appellant, not properly appreciating the cash/fund flow statement made available by the appellant and further alleging that the contention of the appellant that the bank statements were not readily available does not appear to be tenab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) has erred in law in allowing the disallowance of ₹ 10.98 crores to ₹ 3.38 crores made by the AO u/s 14A of the Income Tax Act. 3. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored. 4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of. 14. First of all, we take up appeal of the Revenue in ITA No.103(Asr)/2006 for the assessment year 2001-02 as under: (i) The brief facts regarding first ground of Revenue, which are in three parts are that Max Corporation Limited (MCL), a wholly owned subsidiary of the assessee was incorporated on 12.09.1996 was merged with the assessee w.e.f. 1.7.1999, pursuant to a scheme of merger approved by the Hon'ble Punjab Haryana High Court. Pursuant to merger, all assets and liabilities of Max Corporation Ltd; including various shares held by Max Corporation Ltd. as stock in trade and as investments, vested in the assessee. On 3.7.2000, as per the decision of management, shares of 11 companies, which were acquired by MCL and were held as 'stock in trade', prior to merger and which vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 6.52 crores, as per para 3 of Ld. CIT(A)'s order. - Explanation to section 73 was not applicable to loss arising from sale of shares (held as stock in trade), claimed by the assessee as business loss. The AO was directed to allow loss of ₹ 3.72 crores arising on sale of shares as normal business loss (Refer page 15 of Ld. CIT(A's order). 15. We may point out that the assessee has accepted the order of the Ld. CIT(A) disallowing notional loss arising on conversion of stock in trade into the investments on 3.7.2000 and no appeal has been filed by the assessee against the aforesaid decision of the Ld. CIT(A). 16. The Revenue has challenged the aforesaid order of the Ld. CIT(A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on sale of part shares so converted and other shares held as stock in trade. 16.1 The Ld. DR, Sh. Tarsem Lal, in support of ground of appeal filed by the Revenue stated that the assessee has adopted colourable device to evade tax by passing resolution by converting shares received from Max Corporation Ltd. as stock in trade into investments. It was stated that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) needs to be reversed and the order of the Assessing Officer be upheld. 17. In reply, it was submitted by the Ld. counsel for the assessee, Mr. Rupesh Jain, Advocate that it is settled legal position that an assessee can hold two portfolios i.e. (i) on trading account and (ii) on capital account. Whether the shares are held on trading account or capital account, depends upon the dominant intention of the assessee. In this regard, he referred to following decisions: i) G. Venkateswami Naidu and Co. vs. CIT 35 ITR 594 (SC) ii) Raja Bahadur Kamakhya Narain Singh vs. CIT 77 ITR 253 (SC) iii) CIT vs. Associated Development Co. (P) Ltd. 82 ITR 586 (SC) iv) Sutlej Cotton Mills Supply Agency Ltd. 100 ITR 706 (SC) v) CBDT Circular No.4 of 2007 dated 15.6.2007. 17.1. The Ld. counsel further submitted that in the present case, since the assessee had acquired shares held by the erstwhile MCL, pursuant to amalgamation of MCL , the assessee decided to hold such shares on capital account, for which necessary Board Resolution and entry was passed in the books of account to reflect entry of conversion of same from stock in trade to investments. It was further stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore, the loss arising therefrom was not capital loss but a speculative business loss has been given. It was also pointed out that the reasons given in the resolutions passed by the Board which have been referred to by the Ld. DR are only the factors which governed the decision of the Board to convert some of the shares into investments and hold others as stock in trade. As regards the sale of part of shares converted into investments within 4 to 5 months of conversion, it was submitted that the decision was taken to avoid further loss since the share prices had reduced unexpectedly. It was argued that the fact that shares were held for 4 to 5 months and not sold immediately in the market which shows that the assessee did not intend to deal in the same. 17.4. In view of the aforesaid, it was submitted that the order of the Ld. CIT(A) in accepting conversion of 11 shares was correct and was liable to be upheld. 18. As regards to the allegation of conversion of shares having been made to avoid application of Explanation to section 73 of the Act, it was submitted that the said Explanation is attracted where a company carries on business of purchase and sale of shares. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that after reducing the carried forward loss, the income of the assessee under the head capital gains/house property is nil and therefore, it cannot be said that income under those heads was higher than the business income for the case of the assessee to fall within exclusion provided in Explanation to section 73 of the Act. 22. We have heard the rival contentions and perused the facts of the case. We are of the view that conversion of part of shares acquired from Max Corporation Ltd; as stock in trade into investments cannot be said to be a device for evading the tax and such conversion cannot be rejected. It is the prerogative of the assessee as to whether it wants to hold the shares as stock in trade or as an investment or partly as stock in trade or partly as an investment. Reference is made in this regard to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Yatish Trading Co. Pvt. Ltd (supra), wherein conversion of shares from stock in trade into investments in case of dealer of shares was upheld. Such decision of the assessee cannot be disregarded on hypothetical assumption that the same is the motivated by the consideration of tax evasion. Reference is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom other sources ], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.] 22.2. The loss arising on the sale of shares held as investment is not only in any manner effected by the Explanation to section 73 of the Act, which deals in relation to shares sold in the course of business The various case laws cited by the assessee are in support of the above proposition. Accordingly, the loss of ₹ 6.52 crores arising on sale of investment has rightly been allowed as capital loss by the ld. CIT(A). 22.3. As regards the application of Explanation to section 73 of the Act to the loss of ₹ 3.72 crores arising on sale of shares by a company has held as stock in trade, we are in agreement with the ld. counsel for the assessee that in the fact of the present case the case of the assessee would fall in the exclusion contained in the said explanation since income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid ground of appeal are that during the relevant previous year, the assessee company incurred revenue expenditure, amounting to ₹ 22.96 crores, in the nature of salary, wages, repair, maintenance, design and engineering fee, traveling and other expenses of administrative nature, on extension of the Healthcare Division, which were debited in the books of account under the head Pre-operative Expenses Pending Capitalization , but were claimed revenue deduction in the computation of income. The A.O. disallowed the aforesaid expenditure by treating the same as capital expenditure on the following grounds: i) The Healthcare Division was not expansion of existing business, since the same was a new line of activity, which was not earlier carried on by the assessee. ii) Separate staff, especially Mr. N.S.Chawla, was appointed to look after the business of healthcare; iii) The assessee intended to run it as a separate business in as much as the same was hived off to a new subsidiary company in the immediately succeeding assessment year. 23.2. On appeal filed by the assessee against the impugned assessment order, the ld. CIT(A) deleted the aforesaid disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re division actually commenced during the relevant year i.e. from 01.03.2001 and the revenue earned from the aforesaid date was credited to the profit loss account. It was also submitted that the assessee was engaged in multifarious businesses and the various business units including the healthcare division constituted one and the same business in as much as there was complete inter connection, interlacing, interdependence, devotailing of different activities. All major decisions including funding, HR function, critical appointment/promotions relating to various divisions were taken at the corporate level. 24.1. It was submitted that the test for determining whether different ventures constitutes same business, as has been enunciated by the Hon'ble Supreme Court in various decisions (cited infra) interconnection, interlacing, interdependence or unity embracing different ventures. The aforesaid interdependence/interlacing of different ventures can be established by existence of common management, common business organization/administration and common fund. What is relevant is unity of control and not the nature of products dealt with by the two businesses. Reference, in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n management etc. are allowable business deduction: i) CIT vs. Relaxo Footwears Ltd. 293 ITR 231 (Del) ii) Enpro Inidia Ltd. vs. DCIT 113 Taxman 132 (Del) iii) Jay Engineering Works Ltd. vs. CIT 311 ITR 405 (Del) iv) CIT vs. Monnet Industries Ltd. 221 CTR 266 (Del) (SLP dismissed by the Supreme Court. v) CIT vs. Vardhman Spinning and General Mills 176 Taxman 157 (P H). vi) CIT vs. Havells India Ltd. 253 CTR 271 (Del) vii) CIT vs. Tata Chemicals Ltd. 256 ITR 395 (Bom.) viii) Addl CIT vs. Aniline Dye Stuffs Pharmaceuticals Pvt. Ltd. 138 ITR 843 (Bom.) ix) Kesoram Industries and Cotton Mills Ltd. vs. CIT 196 ITR 845 (Cal) x) Hindustan Aluminium Corporation Ltd. vs. CIT 159 ITR 673 (Cal) xi) CIT vs. Rane (Madras) India 215 CTR 250 (Chenn) xii) Prem Spinning and Weaving Mills Co. Ltd. vs. CIT 98 ITR 20 (All.) xiii) CIT vs. Shah Theatres P. Ltd. 169 ITR 499 (Raj) xiv) CIT vs. Malwa Vanaspati Chemicals Co. Ltd. 149 CTR 283 (MP) xv) CIT vs. Kerala State Industrial Development Corporation Ltd. 182 ITR 62 (Ker.) xvi) CCIT vs. Senapathy Whitely ltd. 101 CTR 31 (Kar.) xvii) CCIT vs. Hindustan Machine Tools Ltd. 175 ITR 212 (Kar.) 24.4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been entered by the MTVL with McKinsey Company and not the assessee was incorrect as MTVL is a subsidiary company and not carrying on any business activities. The bill was raised by McKinsey Co. in the name of the assessee. The Payment was made by the assessee only. After going through the aforesaid judgment cited by the ld. counsel for the assessee as well as the ld. CIT(A), we are of the considered opinion that no interference is called for in the well reasoned order passed by the ld. first appellate authority on this issue involving ground No.1. Therefore, this ground raised by the Revenue is dismissed. AY 2000-01 Page 107 ZT to 107ZU of PB) As regards the expenditure in relation to expansion of healthcare business is concerned, it is observed that the aforesaid expenditure was of revenue nature, being expenditure incurred on salary, travel, printing, repairs and maintenance, rent advertisement etc. It is the CIT's case that the expense pertains to new line of business and this aspect of the matter has not been examined by the A.O. We may point out that the assessee had started the process of setting up healthcare division in assessment year 1999-2000 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. After considering the relevant facts and legal position, this Tribunal held that similar expenditure incurred in those years was allowable deduction. We also find that the plea raised by the ld. DR that the healthcare business is a new one and is not supported by any evidence. This is not the reason for which the AO held that the aforesaid expenditure as relatable to expansion of same business. The assessee has sated that no such license was required and it was merely the case of forward integration of pharma business being carried on by the assessee. 26.1 As regards the decision of the Hon'ble Supreme Court in the case of Produce Exchange Corporation Ltd. vs. CIT (supra) sought to be distinguished by the Ld. DR on the ground that the same pertains to the Income Tax Act, 1922, we find that the ratio of the aforesaid decision is for the purpose of determining if there is two lines of activities carried on by the assessee are part of the same business or not. The decisive test is unity and control and not nature of the two businesses has been applied by the courts in several cases rendered under the Income Tax Act, 1961 in the following cases : i) CIT vs. Tata Chemicals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the assessee was already in the business of manufacture of BOPP film division. The revenue expenditure incurred in relation to second film line in relation to the expansion of the same business having regard to the legal position as discussed hereinabove in relation to the ground of appeal no.2. We are, therefore, inclined to uphold the order of the ld. CIT(A) and ground of the Revenue in this regard is dismissed. 29. As regards 4(a) (b), the Revenue has challenged the order of the ld. CIT(A) in deleting disallowance of ₹ 54 lacs made by the AO on account of payment of Non-Compete Fee claimed by the assessee. 29.1. The facts as gathered from the assessment order, the Ld. CIT(A) order and the documents on record are that the assessee was, interlia, engaged in the business of manufacture and marketing of (i) Penicillin and non- penicillin based bulk drugs/drug intermediates' and (i) PCB/GMF Chemicals/electronic component product. Subsequently, in order to provide special focus and bring in further specialization in the aforesaid businesses, the assessee formed joint venture company alongwith foreign partners and transferred the aforesaid businesses to those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness by MTVL to MCL and subsequent merger of MCL with the assessee, all the assets and liabilities and businesses of the merged companies vested in the assessee and the benefits/losses from expenditure/liabilities incurred by the amalgamating company also accrued to the amalgamated company/assessee. Although, according to the agreement, total amount of non-compete fee, aggregating to ₹ 2.16 crores, was pad in lumpsum in 1998, however, since both the agreements were for a period of four years, proportionate expenditure @ 25% of the total payment of ₹ 0.54 crores per year (Rs.27 lacs each under each agreement). 30. The Assessing Officer, disallowed deduction for the non-compete fee on the following grounds: i) The payment was not made by the assessee, but by the subsidiary company; ii) The payment was not to protect interest of business of the assessee but to facilitate investment in JV's and to protect its interest in the capital investments. iii) The businesses, for which the subject non-compete agreement was entered, was not carried on by the assessee but by the JV companies. iv) Without prejudice to the above, the expenditure was in any case capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2010 in ITA No.282(Asr)/2005 for the assessment year 2000-01 in assessee's own case has set aside the aforesaid order of the ld. CIT(A) under section 263 of the Act both in law and facts and held that non-compete fee claimed by the assessee in those years was allowable deduction. The Ld. counsel for the assessee in this regard referred to pages 19 to 21 at PB 107S to 107U of the aforesaid order of the Tribunal, where the reasons given by the Ld. CIT(A) for disallowance of non-compete fee have been given and the findings given by the Tribunal in paragraph 41 42 (pages 45 46) of the order at PB 107-ZS 107ZT, wherein the ITAT allowed the claim of non-compete fee. 33.1. As regards the decision of the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd. vs. CIT (supra) referred to by the Ld. DR, it was submitted that the said decision on non-compete fee was paid pursuant to the purchase of business and the aforesaid decision is distinguishable since in the assessee's case, the non-compete fee was paid to employee leaving employment and not pursuant to purchase of any business as was the case in Pitney Bows (supra) . 33.2. The Ld. counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assesse to safeguard its business interest, as a strategic investors in the various joint ventures of its obligations to the joint ventures companies that neither the assessee nor any of its employees will get into competing business with the joint venture companies. The fact that the assessee's subsidiary entered into non-compete agreement and made the payment is of little consequence, considering that the liability ultimately devolved on the assessee, in law, in view of merger of the subsidiary in the assessee.The circumstances in which the payment was made by the subsidiary were also explained in the non-compete agreement. Whether expenditure has been incurred for business purposes or not is to be viewed from the point of view of the businessman. The Hon'ble Supreme Court in the case of S.A. Builders vs. CIT 288 ITR 1 held that the expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incursfor the purpose of business. It was further observed that the expenditure may not have been incurred under any legal obligation, but yet it allowable as business expenditure if it was incurred on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue is dismissed. 35. In ground No.5, the Revenue has challenged the order of the Ld. CIT(A) in allowing depreciation @ 60% on medical equipment treating the same as computers. The AO held that medical equipment, though controlled by the computers cannot be said to be computer or ancillary to computer and therefore, depreciation at the normal rate applicable to plant and machinery i.e. 25% was admissible instead of higher rate of 60% applicable to computers, as applied by the assessee. 35.1. The Ld. CIT(A) held that since various medical equipments listed by the assessee were controlled by Computers, the same would fall within the meaning of computer and consequently eligible for depreciation @ 60%. 36. The Ld. DR submitted that higher depreciation is available in respect of computers but not in respect of computer controlled medical equipment. The Ld. DR referred to the definition of computer as given in the Information Technology Act to argue that in the said definition there is not even remote suggestion that any equipment controlled by the computer could be termed as computer. 37. The Ld. Counsel for the assessee, Mr. Rupesh Jain referred to the dictionary meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be accepted then the various automated machines used for manufacture could also be said to be the computer and eligible for higher depreciation. The decision of the ITAT Jaipur Bench in the case of DCIT vs. Rajasthan Patrika (P) Ltd (supra) referred to by the assessee, we find is not applicable on the facts of the present case. since in that case the depreciation at higher rate was allowed in respect of the computer printing machine and not as printed machine controlled by a computer. The computer in that case was an integral part of the printing machine which is not the case here. Thus, we find no merit in the submissions of the ld. counsel for the assessee and order of the ld. CIT(A) is set aside on the issue. Accordingly, ground No.5 of the appeal of the revenue is allowed. 39. In ground No. 6, the Revenue has challenged the order of the ld. CIT(A) in allowing the claim of the assessee for depreciation @ 25% on building used as Nursing Home treating the same as plant and machinery instead of the normal rate of 10% applicable in respect of building. The facts in relation to this ground of appeal are that the assessee claimed depreciation on the cost of building of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises utilized for that object. 40.1. In reply, it was submitted by the Ld. counsel for the assessee that the disallowance made by the AO is not based on correct appreciation of fact. Our attention was invited to letter dated 25.03.2004 submitted to the A.O. where it was stated that the maximum area of nursing home was occupied by rooms housing equipments for providing medical services. It was submitted that the AO has failed to appreciate that the assessee was in the business of providing medical services and in order to do so various other facilities such as reception, toilets, offices etc. are also to be provided. However, that cannot change the underlying character of the hospital building to be regarded as any other building. The assessee has not constructed the building for providing service of conference halls or offices; the underlying objective is to provide medical services which are specialized in nature and require specialized setting to house the medical equipments required to render such services. It is also fact on record that there were no rooms for patients in the hospital. The layout of the hospital was specially designed to house the medical equipments. This f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Revenue is dismissed. 42. As regards ground No. 7 and cross appeal of the assessee in ITA No.78(Asr)2006 for the assessment year, 2001-02, the Revenue has challenged the order of the ld. CIT(A) in reducing the disallowance u/s 14A from ₹ 1.5 crore to ₹ 10 lacs. In the cross appeal, the assessee has challenged the order of the ld. CIT(A) in upholding the disallowance u/s 14A to the extent of ₹ 10 lacs. 43. The facts in relation to the aforesaid issues are that during the relevant previous year the assessee had earned dividend income of ₹ 2.11 crores exempt u/s 10(33) of the Act. No disallowance u/s 14A was offered by the assessee in the return of income The AO made ad-hoc disallowance of ₹ 1.5 crore u/s 14A of the Act in respect of various expenses incurred by the assessee on the basis of following grounds: i) Expenditure in relation to investments not yielding any income is not allowable; ii) The investments included lot of strategic investments in the form of subsidiary companies and joint ventures and in these investments there ought to be much energies spent, lot of planning involved and expenses incurred for such investments, unli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 81. The Ld. counsel for the assessee pointed out that during the relevant previous year the assessee incurred expenses which were necessary for the regular business operations of the company carried on during the year and no expenses debited to the profit and loss account for the year was relatable to earning of dividend income from investments in shares of various companies. It was submitted that the AO without establishing the proximate nexus of any expenditure incurred during the year with investments yielding exempt income, made ad-hoc disallowance of ₹ 1.50 crores out of total expenses incurred during the year. The fact that the AO made ad-hoc disallowance only establishes that the AO could not pin point any expenditure, which had proximate nexus with investments resulting in exempt dividend income. In that view of matter it was submitted that the disallowance made by the AO needs to be deleted at the threshold on the aforesaid ground itself. That apart, even otherwise, it was submitted that there was no nexus between the dividend income earned and the various expenses incurred during the year, in the chart of issues filed by the assessee which is reproduced below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DSP Merryl Lynch Balance Fund Growth 1.0 Total 36.01 In view thereof, the interest expenditure incurred on borrowed funds, if any, attributable to the aforesaid investments, income wherefrom is not exempt under the provisions of the Act, is ousted from the application of the provisions of section 14A of the Act. ......................... A.2.2. Remaining Investments, out of interest free funds-- R.s.31.64 crores The break-up of balance investments, aggregating to ₹ 31.64 criers, is as under PB 87-88): Nature of Investment Amout in Rs. in crores. Max Telecom Ventures Ltd. ('MTVL') 30 Alliance Capital Mutual Fund Ors. 1.64 Total 31.64 Out of the aforesaid investments, aggregating to ₹ 31.64 crores, it would be appreciated that, major investment related to investment in shares of MTVL, amounting to ₹ 30 crores. The said total investment in shares of MTVL, it is submitted, was made in the previous ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flow statement of the year ending 31.03.1996, against the aforesaid aggregate interest bearing borrowing of ₹ 40.33 crores (from NCD), the Assessee had acquired fixed assets from an amount of ₹ 35.20 crores and repaid existing loans of ₹ 6.38 crores. In that view of the matter, the investment in shares of MTVL was made of interest free funds and no portion of the interest bearing borrowed funds were utilized for making that investment, which were utilized for other business purposes of the Assessee, and, therefore, no portion of interest expenditure in any year including the assessment year 2000- 01 and onwards, had no nexus with said investment, warranting disallowance under section 14A of the Act. Furthermore, the aforesaid opening investments were accepted to be made out of interest free funds, in as much as, no portion of the interest expenditure incurred in the earlier years was ever attributed to investments in the completed Assessments of those years. Reference in this regard is made to the following decisions wherein it has been held that where no portion of the borrowed funds have been attributed to investments made as at the beginning of the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l surplus interests free funds, which were sufficient to cover additional investments in shares made during the year and, therefore, there was no nexus of interest paid on borrowed funds with the said investments in the Assessment Year 2001-02. Reliance, in this regard, is placed on the following decisions, wherein it has been held that, where an Assessee has mixed pool of funds, a presumption should be drawn in favour of an Assessee qua utilization of interest free funds and borrowed funds: - East India Pharmaceutical Works Ltd. Vs. CIT: 224 ITR 627 (SC) - Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - India Explosives Ltd. Vs. CIT: 147 ITR 392 (Cal) - CIT V. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) - CIT V. Ashok Commercial Enterprises: I.T.Act, 1961 No. 2985 of 2009 (Bom.) Reliance is also placed on the following decisions, wherein, while following the ratio emanating from the aforesaid decisions, disallowance of interest expenditure under Section 14A has been deleted, where the Assessee was found to have interest free funds, exceeding interest bearing funds for making investment in shares: - Lubi Submeribles Ltd. :ITA No.868 of 2010 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 14A, in the absence of proximate nexus of expenses with investments being established, it is submitted that no portion of the expenditure relatable to investment in shares held as stock in trade can be made and the disallowance to that extent needs to be deleted. b. Administrative Expenses As regards disallowance of administrative expenses under section 14A, it is submitted as under: The aggregate amount of dividend, it is respectfully submitted, were received by a single dividend warrants. No efforts or expenses are incurred to earn the income by way of dividend from these companies. For depositing a single dividend warrants in the bank account during the financial year, the Assessee cannot be said to have incurred expenditure. It is submitted that, in fact, no additional efforts/expenses were required to be incurred to deposit a single warrant into the bank as the same was deposited along with the other cheques in the normal course of the business of the Assessee company. Further, there was no specific employee kept by the Assessee to keep record of the dividend income. The same was recorded in the normal course of conduct of the business of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) on reasonable basis, which was even followed by the Ld. AO in the Assessment orders for the Assessment years 2003-04, 2004-05 and 2005-06 (although subsequently enhanced by the Ld. CIT(A) (Refer page 31 of CIT(A)'s order and challenged in further appeal by the Assessee before I.T.A.T.). Therefore, on the grounds of consistency as well, in the absence of any change in facts, it is submitted, that disallowance under Section 14A of the Act, if any, needs to be restricted to ₹ 0.10 crores only. 47. The Ld. DR in the rejoinder submitted that cash flow position to support the plea that no borrowed funds were used for making investment yielding exempt income was new evidence and should not be considered. 48. We have heard the rival contentions and perused the facts of the case. The disallowance was made by the AO on ad-hoc basis, proceeding on the assumption that some expenditure must have been incurred by the assessee towards earning exempt dividend income. The order of the ld. CIT(A) also proceeds on the same basis, as the ld. CIT(A) too has reduced the disallowance on ad-hoc basis. We are of the view that no disallowance u/s 14A can be made without establishin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 14A of the Act. 51.2. The A.O. following the assessment for the A.Y. 2001-02 made an ad- hoc disallowance of ₹ 1.50 crores out of total expenses incurred by the assessee during the year under section 14A of the Act on the ground that the assessee cannot be said to have incurred any expense in relation to earning of aforesaid exempt income from investments held in shares/bonds. 51.3. The Ld. CIT(A) enhanced the aforesaid amount of disallowance under section 14A made by the A.O from 1.50 crores to ₹ 4.52 crores. In computing the aforesaid amount of disallowance, the Ld. CIT(A) attributed the interest expenditure incurred by the assessee during the year on the basis of self devised formula which is reproduced at page 37 para 10.4 of the order of the Ld. CIT(A) towards various investments held in shares/bonds yielding exempt income and computed disallowance of ₹ 4.32 crores on account of interest expenditure . The basis of disallowance of interest expenditure debited by the Ld. CIT(A) is reproduced as under: Amount (Rs in cores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts yielding exempt income. The findings about utilization of funds can be made only from study of bank statement/bank book which was not produced. The Ld. CIT(A) stated that the assessee was intentionally not furnishing the bank statement and the plea of the assessee that the bank statement pertain to very old period and are not available with the assesse is without basis since bank statement even for the assessment year 2006-07 have not been submitted. In view of the same, it was stated by the Ld. CIT(A) that presumption needs to be drawn against the assessee and the borrowed funds have to be considered as having been made for the purposes of making investments. The Ld. CIT(A) referred to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Orissa Cement Ltd. 258 ITR 365 wherein as regards the issue whether the interest free advances had been made out of the sale proceeds or out of borrowed funds, it was observed that such determination should be made on the basis of material on record placed by parties. 51.5. The Ld. CIT(A) also referred to the decision of the Hon'ble Punjab Haryana High Court in the case of Shashi Kiran vs. CIT (201) 195 Taxman 332 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal Works Ltd. vs. CIT 224 ITR 627 (SC) and Hon'ble Calcutta High Court in the case of Woolcomber's of India Ltd. vs. CIT 134 ITD 219 (Cal), wherein it was observed that whether a assumption can be drawn that the taxes were paid out of profits of the relevant year and not out of over- draft account, would depend depend upon the fact as to whether the entire profits had been pumped into the overdraft account and whether such profits were more than the tax amount paid for the relevant year and all other germane factors. The Ld. CIT(A), therefore, was of the view that the decision of the ITAT, Delhi Bench in the case of Maruti Udyog Ltd. vs. DCIT (surpa) was not to be preferred. 50.10 Whether cash from operations as appearing in the cash flow statement was utilized for the purchase of investments, payment of dividend, fixed assets etc. is not discernible in the absence of bank statements/bank book and presumption in favour of the assessee on the basis of cash flow statement cannot , therefore, be drawn. Also in some cases, the proceeds from sale of investment was to be used for repayment of loan funds and were not available for investments. At the best 50% of the borrowings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical Design Co. Ltd. ITA No.803/2008 (Delhi HC) - CIT vs. Ms. Sushma Kapoor 319 ITR 299 (Delhi) - ACIT vs. SIL Investment Ltd. ITA No.2431/Del/2010 (Del) - Sipra Engineers Pvt. Lt. [TS-671-ITAT-2012 (Mum)] 51.1. The Ld. counsel for the assessee pointed out that during the relevant previous year the assessee incurred expenses which were necessary for the regular business operations of the company carried on during the year and no expenses debited to the profit and loss account for the year was relatable to earning of dividend income from investments in shares of various companies. It was submitted that the AO without establishing the proximate nexus of any expenditure incurred during the year with investments yielding exempt income, made ad-hoc disallowance of ₹ 1.50 crores out of total expenses incurred during the year. The fact that the AO made ad-hoc disallowance only establishes that the AO could not pin point any expenditure, which had proximate nexus with investments resulting in exempt dividend income. In that view of matter it was submitted that the disallowance made by the AO needs to be deleted at the threshold on the aforesaid ground itself. That apart, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.57 RELIANCE Petroleum 3.31 Units in Growth Scheme Kothari Pioneer Maxima Fund 10.0 DSP Merryl Lynch Balance Fund Growth 1.0 Total 36.01 In view thereof, the interest expenditure incurred on borrowed funds, if any, attributable to the aforesaid investments, income wherefrom is not exempt under the provisions of the Act, is ousted from the application of the provisions of section 14A of the Act. A.2.2. Remaining Investments, out of interest free funds-- R.s.31.64 crores(Refer PB 87-88 supplementary PB of AY 2001- 02). The break-up of balance investments, aggregating to ₹ 31.64 criers, is as under: Nature of Investment Amout in Rs. and crores. Max Telecom Ventures Ltd. ('MTVL') 30 Alliance Capital Mutual Fund Ors. 1.64 Total 31.64 Out of the aforesaid investments, aggregating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proposed to be met through the proceeds of FCD issue and/or preferential issue of warrants to the management group In view of the above, no portion of the interest bearing NCD was utilized towards investment in shares of MTVL, a group company of the Assessee. Further, as is evident from the case flow statement of the year ending 31.03.1996, against the aforesaid aggregate interest bearing borrowing of ₹ 40.33 crores (from NCD), the Assessee had acquired fixed assets from an amount of ₹ 35.20 crores and repaid existing loans of ₹ 6.38 crores. In that view of the matter, the investment in shares of MTVL was made of interest free funds and no portion of the interest bearing borrowed funds were utilized for making that investment, which were utilized for other business purposes of the Assessee, and, years 2000- 01 and onwards, had no nexus with said investment, warranting disallowance under section 14A of the Act. Furthermore, the aforesaid opening investments were accepted to be made out of interest free funds, in as much as, no portion of the interest expenditure incurred in the earlier years was ever attributed to investments in the completed Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in shares made during the year and, therefore, there was no nexus of interest paid on borrowed funds with the said investments in the Assessment Year 2001-02. Reliance, in this regard, is placed on the following decisions, wherein it has been held that, where an Assessee has mixed pool of funds, a presumption should be drawn in favour of an Assessee qua utilization of interest free funds and borrowed funds: - East India Pharmaceutical Works Ltd. Vs. CIT: 224 ITR 627 (SC) - Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.) - India Explosives Ltd. Vs. CIT: 147 ITR 392 (Cal) - CIT V. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) - CIT V. Ashok Commercial Enterprises: I.T.Act, 1961 No. 2985 of 2009 (Bom.) Reliance is also placed on the following decisions, wherein, while following the ratio emanating from the aforesaid decisions, disallowance of interest expenditure under Section 14A has been deleted, where the Assessee was found to have interest free funds, exceeding interest bearing funds for making investment in shares: - Lubi Submeribles Ltd. :ITA No.868 of 2010 (Guj.) (High Court) - CIT vs. K. Raheja Corporation Pvt Ltd: ITA No. 1260 of 2009 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to ₹ 179.74 crores was sufficient to make total investment of ₹ 152.05 crores and in any case sufficient for investment in equity shares of ₹ 108.295 crores. Further, it would be appreciated that during the relevant year, the assessee made incremental borrowing of ₹ 48.92 crores which was utilized for other business purposes, like purchase of fixed assets, amounting to ₹ 54.62 crores etc. (Refer PB-892) Ref; Purpose of loan (PB 260-270) : Further, in the course of appeal, the assessee had also furnished loan agreements entered with various lenders, which established purpose of such loans. The purpose for which loan(s) was/were sanctioned was not investment in shares, as could be gathered from the purpose of major borrowings as per following:- Nature of Borrowing Loan O/S as on 31.3.2002 Purpose of loan as per agreement Debenture Privately Placed Debenture 12% 50.00 1) The objective of the issue is to part finance the capital expenditure of the company. NCD 12.5% (95-96) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest paid on funds borrowed upto the end of the relevant year had no nexus with various investments held by the assessee, resulting in earning of exempt income, such investments were made out of interest free funds, as established from the aforesaid fund flow position, commencing from 1.4.2000. 51.3 The Ld. counsel for the assessee rebutted the various allegations/contentions made by the Ld. CIT(A) while drawing adverse inferences qua nexus of borrowed funds with various investments and rejected the arguments of the assessee that the overall funds flow position and not the bank statements has to be considered for the purposes of arriving at the nexus if any between the borrowed funds and investments. The various allegations made by the Ld. CIT(A) were rebutted by the assessee during the hearing. The said rebuttal are also contained in the chart of issues filed by the assessee, relevant portion of which is reproduced as under: Rebuttal of Ld. CIT(A) (i) Adverse inference on the basis of Balance Sheet In the appeal order, the ld. CIT(A) at para 9 on the basis of comparing balance sheet of the assessee as on 31.3.2002 with balance sheet as on 31.3.2001 drew adverse presumpt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance sheet of the company as at the end of the relevant previous year. In the present case, considering the positive cash/fund flow position of the assessee on an year to year basis, which establishes the source of various investments, income wherefrom is exempt from tax and nexus of borrowed funds, the exercise of co- relating/matching investments on the asset side with borrowings on the left/liability side of the balance sheet is not a good guide and/or a correct method. The correct method to establish the aforesaid nexus is only through fund flow position, which provides the actual source and utilization of funds/cash by an assessee, which in the present case, as elaborated above, establishes the nexus of various investments with interest free funds In that view of the matter, the action of the ld. CIT(A) in drawing adverse inference qua nexus borrowed funds with various investments, on the basis of balance sheet as on 31.3.2002, was not based on correct appreciation of facts, especially the fund flow position of the assessee, on an year to year basis, elaborated supra and therefore, the disallowance of interest expenditure u/s 14A of the Act calls for being deleted. (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (33) of the Act. The AO applying provisions of section 14A of the Act, disallowed interest @ 18% of the total amount of investment in shares on the ground that borrowed funds were utilized for making investments. On further appeal, the ld. CIT(A) made an effort to establish the source of funds with reference to the availability of funds on the date of each investment. On the basis of aforesaid nexus of source of funds available immediately before the date of each investment, the ld. CIT(A) found out that source of funds in each case was primarily interest bearing borrowed funds. Accordingly, the Ld. CIT(A) held that on facts there was direct nexus of borrowed funds with investment in shares and accordingly upheld the disallowance of interes expenditure made by the AO. However, the ld. CIT(A) reduced the amount of disallowance on the basis of day to day working of borrowed funds utilized for investment, as opposed to adhoc rate of 18% on the total amount of investment in mutual funds, adopted by the A.O. On further appeal before the ITAT, the assessee inter alia submitted that the interest free funds available with the assessee far exceeded the amount of investment and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Illustration 1: Bank statement of Mr. X Day 1 Assume that Mr. X had an opening interest free funds of ₹ 10,00,000 Rs.10,00,000 Day 2 Mr. X borrowed funds of ₹ 20,00,000 Rs.20,00,000 Rs.30,00,000 Day 2 Mr. X invested ₹ 9 lacs in mutual funds, which yield tax free income (Rs.9,00,0000) Rs.11,00,000 In the aforesaid illustration, if the fund flows as per the bank statements are to be viewed in isolation, it might carry an impression as if the funds borrowed on day 2 have been used in making investments. However, since interest free funds, too, were available, the presumption, as per the court/Tribunal rulings would be that own funds have been utilized for making investment. Bank Statement of Mr. X Date Particulars/Narration Amount Balance Day 1 Opening Balance 0 0 Day 1 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. This is the result which would have followed if the business receipts had been deposited in Account A. The position, if funds would have been deposited in Account A would be as under: Bank Statements of Mr. X Date Particulars/Narration Account A Account B Day 1 Assume that Mr. X has an - overdrawn balance of ₹ 10,00,000 in A/c A and Nil balance in Account B Rs.10,00,000 -Rs.10,00,000 Day 2 Mr. X got an interest free receipt of ₹ 9,00,000, which instead of being deposited in Account A was deposited in Account B 9,00,000 (-)1,00,000 Day 3 Mr. X made an investment in mutual funds of ₹ 9,00,000 from Account B (9,00,000) -Rs.10,00,000 If the interest free funds are deposited in Account A (having an overdrawn balance), it could be seen that nexus of investment of ₹ 9 lacs with borrowed funds in that Account. 51.6 In view of the above, it was submitted that consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the ld. CIT(A). 51.8 The Ld. counsel for the assessee distinguished the decision of the Hon'ble Punjab Haryana High Court in the case of Shashi Kiran vs. CIT reported in 195 Taxman 332 referred to by the ld. CIT(A) to hold that the assessee by not submitting bank statements had failed to discharge the initial onus placed on him to establish nexus of borrowed funds. It was submitted in that case, it was held that the initial burden placed on the Revenue to establish with evidence the actual amount of consideration paid by the assessee for purchase of property stood discharged pursuant to statement of the seller. The burden, thereafter, shifted on the assessee to establish with evidence that the statement of the seller was wrong and that the purchase consideration was not more than the actual consideration. In the aforesaid case, based on the rule of evidence, onus was put on the assessee purchaser to rebut the statement of the seller which was confronted by the Revenue to the assessee by bringing evidence to contrary on record. There is no such situation in the present case. 51.9 The decision of ITAT, Delhi Bench in the case of Maruti Udyog Ltd. vs. CIT (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year 1995-96, clearly stipulated that the proceeds of said borrowing shall not be utilized for making investment in shares. The relevant portion of the order of CIT(A) readsas under: Issue of Zero Coupon Fully Convertible Debentures and 12.5% Non-Convertible Debentures in 1995-96 by the assessee company. The issue was for capital expenditure as well as for making strategic investments. The offer documents mentioned that in light of the directions by SEBI, the proceeds of non- convertible debentures could not be utilized for acquisition of shares/or providing loan to any company belonging to the same group * It wa similarly observed by the ld. CIT(A) qua loan agreement with IDBI. The relevant observations are as under: Loan agreement dated 22.01.2001 between the assessee company and IDBI for grant of loan in foreign currency of approximately ₹ 18.8 crores. Though, specific utilization of loan is not mentioned, one of the special condition of the loan is that it could not be utilized for subscription or purchase of shares/debentures, repayment of dues of any subsidiary/associate companies or making any inter corporate deposit. That part, although in ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the normal course of conduct of the business of the assessee. During the relevant year, the assessee had earned dividend income of ₹ 3.47 crores out of the total revenue of ₹ 185.02 crores earned during the year. Thus, the exempt income was only 1.87% of the total revenue offered for tax. Further during the year, the assessee had earned revenue of ₹ 19.44 crores from investment activities, out of which exempt income was only 3.47 crores and balance was offered for tax. Major revenue was earned by the assessee form manufacturing business units, as would be clear from the details of major expenses incurred by the assessee, as follows: Amount (Rs in crores) S.No. Expenses Head Total Treasury Deptt. A Manufacturing expenses 86.54 0 1 Raw material consumed 2. Power Fuel 3. Processing charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03.2001) it would be appreciated that there was net decrease in the shares held in the said category during the relevant year. As regards the shares held at the beginning of the relevant year, the entire shares vested in the Assessee on merger of MCL. As discussed (supra), considering that MCL had no interest bearing borrowing, there was, thus, no nexus of interest expenditure incurred during the year with shares held under the head 'stock in trade'. 51.15. Without prejudice to above, it was submitted by the ld. counsel Mr. Rupesh Jain that the disallowance under section 14A cannot in any circumstances be made with respect of investments held by the assessee as stock in trade. It was submitted that intent behind holding investments as stock in trade is to earn profit from trading therein and not to earn incidental exempt dividend income therefrom, warranting disallowance u/s 14A of the Act. For the aforesaid proposition, the ld. counsel for the assessee relied upon the following decisions wherein disallowance of expenditure under section 14A of the Act in respect of shares held as stock in trade was deleted: - CCI Ltd. vs. Jt. CIT 206 Taxman 563 (Kar) - Apoorva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of the cash flow statement. 52.1. The Ld.DR also argued that the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. vs. CIT (supra) and the Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd.(supra) relied upon by the assessee are distinguishable since in the aforesaid cases bank statements were available on record pursuant to which the proposition regarding presumption to be drawn in favour of the assessee in case of mixed pool propounded. 52.2. The Ld. DR also relied upon the decisions of the Hon'ble Delhi High Court in the case of Orissa Cement Ltd. (supra) and Hon'ble Punjab Haryana High Court in the case of Shashi Kiran (supra). 52.3. The Ld. DR also distinguished the decision of the Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. (supra) relied upon by the assessee for the proposition that only expenditure can be disallowed u/s 14A on the ground that the same was rendered in the context of provisions of section 94(7) of the Act. 52.4. The Ld. DR relied upon the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Co. Ltd.(su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (supra). 53.1.1. Further without prejudice to the above, it is submitted, that the disallowance, if any, needs to be restricted to disallowance of ₹ 0.10 crores estimated by the Ld. CIT(A) on reasonable basis, which was even followed by the Ld. AO in the Assessment orders for the Assessment years 2003-04, 2004-05 and 2005-06 (although subsequently enhanced by the Ld. CIT(A) and challenged in further appeal by the Assessee before I.T.A.T.). Therefore, on the grounds of consistency as well, in the absence of any change in facts, it is submitted, that disallowance under Section 14A of the Act, if any, needs to be restricted to ₹ 0.10 crores only. 54. We have heard the rival contentions and perused the facts of the present case. The main thrust on the order of the ld. CIT(A) in computing/enhancing the amount of disallowance of interest expenditure u/s 14A was of non-furnishing of bank statements by the assessee and drawing adverse inference regarding use regarding use of interest free funds with investments yielding exempt income on that basis. We have gone through the decisions of various courts of law and Tribunal wherein the theory of drawing presumption as regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of the Commissioner of Income-tax (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from April 1, 1999. Apart from that in terms of the balance-sheet there was a further availability of ₹ 398.19 crores including ₹ 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal as to availability of interest- free funds really cannot be faulted. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over investments made during the year but not otherwise. 54.2. We have perused the funds flow position submitted by the assessee on the basis of cash flow statement contained in the audited accounts of the financial years 1999-2000 to 2001-02. The aforesaid statements have been drawn by the assessee on the basis of audited accounts of the assessee for the year under consideration alongwith various other disclosures/notes to the accounts, which have been relied upon by the AO while accepting the books of account and completing the assessment for the impugned year. We also find that the assessee is a listed company and is required to publish its accounts and submit the same before various statutory authorities like SEBI, Stock Exchanges, shareholders and Financial Institutions etc. Under these circumstances, we do not find any merit in the contention of the ld. DR that the said fund flow statements are not authentic. We are also in agreement with the arguments advanced by the ld. counsel for the assessee that the cash flow statement is a better guide for determining the results of borrowed funds/interest funds towards investments made during the year instead drawing such nexus on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yielding exempt income. Merely because the assessee could not submit the bank statements can not be a ground to draw adverse inference regarding the nexus of borrowed funds with investments. The action of the ld. CIT(A) in drawing adverse presumption and allowing interest expenditure on an adhoc basis under section 14A being not based on proper appreciation of facts and record is hereby reversed and disallowance made on that account is deleted. 55. As regards disallowance in relation to other expenses, we find that as per material available on record in the appeal for the assessment year under consideration, the assessee had separate Treasury Division and one of the main functions of such division as explained hereinabove by the assessee was to invest the funds of the company in various financial instruments. It cannot therefore, be said that no expenditure has been incurred by the assessee for earning exempt income. As per information available on record, total expenditure incurred during the relevant previous year in relation to the Treasury Division was ₹ 1.52 crores. Considering that the assessee has manufacturing operation of BOPP films and pharmaceuticals and it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee stated that having regard to the detailed submissions in ground of appeal No.1 hereinabove that no expenditure having proximate nexus with the earning of exempt income having been incurred by the assessee, nor the same having been established by the AO or the ld. CIT(A), no such expenditure was disallowable under section 14A and consequently was not liable to be added back while computing book profit u/s 115JB of the Act. 57.1 Without prejudice to the above, it was submitted that even otherwise the amount of disallowance computed under section 14A of the Act cannot be adopted for the addition to book profits under section 115JB of the Act, since the scope of disallowance of expenses relatable to earning of exempt income under the aforesaid provision was different. 57.2 It was pointed out that in clause (f) of Explanation-1 to section 115JB of the Act, the amount of expenses relatable to earning of income exempt u/s 10(38) of the Act, was not liable to be added to book profit, since the income referred to in that section is liable to taxation as part of book profit. Whereas under section 14A, the amount of disallowance of expenses is computed even with respect to income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indirect expenditure with exempt income has to be considered, accordingly, we uphold the disallowance of ₹ 20 lacs in relation to administrative expenses for the purpose of computing book profit under section 115JB of the Act. Accordingly, this ground of the assessee is partly allowed. 60. As regards ground No.3 of the assessee, where the assessee has challenged the order of the ld. CIT(A) in confirming the disallowance of legal and professional expenses of ₹ 1.25 crores paid to Max UK Limited for providing various business support services to the assessee. In this regard, the facts emanating from the order of the AO are that the assessee paid .60,000/- equivalent to ₹ 1.25 crores to Max UK as retainership fee for availing business support services as defined in agreement dated 1.7.1999 with Max UK Limited. The services mainly related to exploring business opportunities outside India for the assessee. In the course of assessment proceedings, the AO asked the assessee to justify the claim of aforesaid expenditure. In response thereof, the assessee relied upon the agreement entered with Max UK Limited and pointed out that the assessee achieved export sales i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign party. The AO apart from alleging that no documentary evidence could be furnished by the assessee has not provided any evidence like obtaining confirmation from the foreign party etc., before making disallowance after the initial onus placed on the assesse by bringing on record the agreement with foreign party and invoice raised by that party was discharged by the assessee. 64.1. In view of the matter for the aforesaid cumulative reasons, we reverse the action of the AO/Ld. CIT(A) in disallowing the aforesaid expenditure and accordingly, we direct the deletion of the said disallowance. Thus, ground No.3 of the assessee is allowed. 65. Now, we take up appeal of the Revenue in ITA No.151(Asr)/2011 for the assessment year 2002-03. As regards ground No.1, the Revenue has challenged the order of the Ld. CIT(A) in allowing deduction of ₹ 54 lacs claimed on proportionate basis on account of non-complete fee paid to Mr. Ashwani Windlass in earlier years. 65.1. The facts of the case are that during the relevant year , the assessee Claimed deduction of ₹ 54 lacs being proportionate amount of non- compete fee paid to Sh. Ashwani Windlass in earlier years under the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 crores, towards 'Preoperative Expenses Pending Capitalizaion on account of setting up of a second Film line. 69.2. The aforesaid issue is similar to the issue of allowability of revenue expenditure incurred in connection with expansion of healthcare division decided, hereinabove. The assessee was in fact engaged in the business of BOPP Film forming part of Maxxon division since past several years.The setting up of second film line is nothing but extension of existing business only. Accordingly, for the reasons given in our order for the assessment year 2001-02 in ITA No.103(Asr)/2006 hereinabove, in assessee's own case for allowing a revenue expenditure incurred by the assessee towards healthcare division, the order of the ld. CIT(A) deleting the disallowance of above expenditure is upheld and the aforesaid ground of appeal of the Revenue is dismissed. 70. As regards ground No.4 of the Revenue, where the Revenue has challenged the order of the ld. CIT(A) in allowing deduction of expenses (i) ₹ 12.05 lacs being product development expenses incurred on MAX FOIL division (ii) ₹ 474 lacs being expenses incurred on expansion of Pharma divison, (iii) ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. 71.3. In support of the ground of appeal, the ld. DR mainly relied upon the order of the A.O. since the new product was not marketed during the year under consideration and therefore, the same should be regarded as capital in nature. 71.4. The Ld. counsel for the assessee submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the ITAT Bench in assessee's own case for the assessment year 1991-92 reported in 105 TTJ 1002 wherein similar expenditure incurred on account of product development was held to be an allowable revenue expenditure. 72. We have heard the rival contentions and perused the facts on record. We find that the issue under appeal with regard to allowability of expenses incurred on development of new products in the existing business of an assessee was decided in favour of the assessee by this Bench of the Tribunal in assessee's own case for the assessment year 1991-92 reported in 105 TTJ 102. The relevant findings of the Tribunal in that order are as under: 6. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the assessee was already manufacturing BOPP films and expenditure incurred on Product Development also related to the development of new varieties and improvement of the same items and there was no increase in the installed capacity of the unit, it could not be considered to relate to expansion of the industrial undertaking or for setting up of a new industrial unit. Besides, as per Board's Circular No.56 dated 19.3.1971 ( a copy placed at pages 13 to 17 of the paper book) section 35D is applicable only to expenditure which is capital in nature. In case the expenditure was otherwise allowable as revenue expenditure u/s 37(1), provisions of section 35D would not be applicable. In the present case, the expenditure incurred could not be considered to fall in the capital field. Therefore, no disallowance u/s 35D in respect of the expenditure incurred by the assessee could be made. 6.1. The A.O. has laid undue emphasis on the treatment given by the assessee for capitalizing and amortising the impugned expendiure in the books of accounts. It is settled position under the law that accounting entries are not the determinant factor in deciding whether expenditure incurred was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt held that name given to an expenditure or a nomenclature given to an expenditure in the books of account of the assessee is not the litmus test to decide the exact nature of the expenditure for the purpose of Income-tax. The assessee may treat amount as capital expenditure in its regular books of account under the provisions of the Companies Act, in disclosing a fair view of the financial status of the company, as required by law. Capitalisation of those items of expenditure in the books of account alone was not the decisive factor in deciding whether the said expenditure was capital or revenue expenditure. The Hon'ble High Court observed that the assessee had incurred crop development expenses of ₹ 20,36,157/- for propagating a new crop among the local farmers and further incurred expenses of ₹ 16,41,125/- for advertisement through visual and print media and also for designing and printing leaflets, brochures etc. All these expenses were held to be in the nature of business expenditure entitled for deduction in computing the assessee's income. 6.3. Now whether the expenditure incurred has resulted in enduring benefit or not has to be seen in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 19 of the AO's order are reproduced for the sake of clarity as under: During the previous year ended 31.03.2002 the Max Pharma (Nanjagud) Division of the company incurred expenditure of ₹ 474,334/- towards US FDA approval and patent related expenses as details given below: Project Development Expenses 98,720.00 US FDA related expenses 375,614.00 474,334.00 Since the above expenses incurred are on revenue account being related to the products of the assessee company, and incurred wholly and exclusively for the purpose of the business of the Assessee Company, the same are allowable and accordingly claimed as revenue expenditure in this return of income vide Adjustment No.(3i). 73.1 The A.O. disallowed the above said expenditure on the ground that the same provided enduring benefit to the assessee and therefore, the same was capital in nature. 73.2 The Ld. CIT(A) deleted the disallowance made by the AO on the ground that the same was same was incurred in connection with carrying on of existing business of sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature. Accordingly, the reasons adopted by the AO to disallow the aforesaid expenditure was not correct. The order of the ld. CIT(A) deleting the disallowance in this regard is upheld and the Revenue's ground of appeal in this regard is dismissed. iii) Expenses incurred on account of abandoned project: 75. The issue is discussed at page 27 of AO's order. During the relevant year, the assessee had incurred expenses of ₹ 57 lacs for setting up Dr. Max Clinic at Vasant Vihar and Golf Links, New Delhi. However, subsequently, it was decided that setting up of clinics in the aforesaid area was not commercially viable and therefore proposed projects were abandoned. Since the assessee was already in the business of healthcare, the expenditure was written off in the books of account being relating to extension of business and therefore, was claimed as revenue expenditure. 75.1 The AO treated the aforesaid expenditure as capital in nature on the ground that the same was incurred towards setting up of the new healthcare centre prior to commencement. 75.2 The Ld. CIT(A) deleted the disallowance made by the AO on the ground that since projects were abandoned, no c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs in Delhi is not in dispute. The expenditure has been disallowed on the ground that since the same related to setting up of new clinics, the same of capital in nature. The assessee is already engaged in the healthcare business and had been running Nursing Home clinics since assessment year 2001-02. Accordingly, setting up of new clinic at different location was nothing but extension of the existing business. We have already decided the identical issue in ground of appeal No.2 for the assessment year 2001-02 in assessee's own case that the revenue expenditure incurred in connection with the extension of existing business is not a capital expenditure and is allowable business deduction. Following the aforesaid decisions, the impugned expenditure is to be allowed as business deduction and the order of the ld. CIT(A) is accordingly upheld. 76.1 Further, we find that the expenditure of revenue in nature incurred in relation to abandoned project has been held to be allowable by the Jurisdictional High Court in the case of CIT vs. Vardhman Spinning and General Mills (supra) and the Hon'ble Delhi High Court in the case of Indo Rama Synthetics Ltd. (supra). Accordingly, the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hods/technicalities/developments of the existing business is to be allowed as business deduction. 77.5.The ld. counsel for the assessee placed reliance on the decision of the Hon'ble Delhi High Court in the case CIT vs. Dr. M.S. shroff 80 ITR 687. In that case, the expenditure incurred by the assessee, a doctor on foreign travel to keep himself abreast of the technicalities of his profession was held to be allowable business expenditure. In the case of ITO vs. Dhiman Systems 100 TTJ 466 (Asr) (ITAT) , the Tribunal had held that the expenses incurred by the assessee firm in sending its partners on a foreign tour of business purposes were allowable expenditure, even if no business was transacted during the tour. To the same effect are the following decisions: i) Omkar Textiles Mills (P) ltd vs. ITO 115 TTJ 716 (Ahd.) ii) Cascade Enterprise vs. ACIT 101 TTJ 227 (Delhi -ITAT) 77.6 The Ld. counsel for the assessee also distinguished the decision relied upon by the AO in the assessment order. The arguments of the ld. counsel in this connection which also contained in the chart on issue filed for the present appeal is reproduced hereunder: In the case of Ambica Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in first place even assuming running of medical centres constitutes profession since the assessee was engaged in such activities since last year, the impugned expenditure would be regarded as extension of business which is also allowable deduction u/s 37(1) of the Act. That apart from, it was submitted that the assessee was a company and not individual holding requisite degree to carry on medical profession like Doctor. Accordingly, it was argued that the arguments of the ld. DR is without any factual or legal basis. 78. We have heard the rival contentions and perused the facts of the case. We are of the view that the traveling expenditure incurred for training of employees engaged by the assessee for providing of medical services in the healthcare business carried on by the assessee is allowable revenue deduction. There are sufficient judicial authorities to support the aforesaid proposition. Reference has been made by the ld. counsel that such expenditure does not result in and was not in relation to acquisition of any capital assets and therefore, does not constitute capital expenditure. The decisions referred to by the A.O. have rightly been distinguished by the ld. co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81.2 The AO contended that since the assessee extinguished its right to re- enter the market of plating chemicals process for General Metal Finishing Electronics Plating for consideration, the same amounted to 'transfer' of 'right to carry on business' and, therefore, the amount of consideration received was liable to be taxed under the head capital gains. 81.3 On appeal, the ld. CIT(A) held that undertaking a restrictive covenant to not to carry on business, without transfer of any business, is not the nature of 'right to carry on business' to be regarded as transfer of capital asset. The Ld. CIT(A) held non-compete fees received as capital receipt, not exigible to tax under the provisions of the Act. It was further held that non-compete fees had been deemed to be business income under section 28(va) of the Act w.e.f. AY 2003-04 only and therefore, the provisions of that section were not applicable to the year under consideration. The Ld. CIT(A) also observed that, even otherwise, the cost of acquisition of asset in the nature of 'right to carry on business' u/s 55(2) had also been inserted w.e.f. A.Y. 2003-04 and for that reason, too, no cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following decisions wherein the aforesaid distinction between non-compete fees and consideration for transfer of right to carry on business has been examined and it has been held that non-compete fees received without any actual transfer of business/asset cannot be brought to tax as capital gains: - John D'Souza v. CIT and Anr. 226 CTR 540 (Bom.) - CIT v. Mediworld Publications (P) Ltd. 337 ITR 178 (Del) - ACIT vs. B.V. Raju 114 TTJ 537 (Hyd)(SB) - Ramesh D Tainwala v. ITO 48 SOT 324 (Mum) - ACIT vs. R.K.B.K. Fiscal Services 138 TTJ 1 (Kol) - Nayan C Shah v. DCIT 48 SOT 77 (Mum)(URO) 81.7. It was also pointed out that the aforesaid issue stands covered in favour of the assessee by the order of the ITAT, Amritsar in assessee's own case for the assessment year 1998-999 (112 TTJ 726). The relevant observations of the Tribunal ( as per para 47-49 at PB 576-578) are as under: ..... 47.We have heard the parties and have perused the material on record.The first dispute here is as to whether the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee, in view of the fact that as recorded in the assessment order, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so submitted that the contentions of the ld. DR are contrary to the position in law as explained in the aforesaid decision including the decision of the Tribunal in assessee's own case for the A.Y. 1998-99 (supra). It was submitted that the Hon'ble Supreme Court of India in the case of Guffic Chem (P) Ltd. vs. CIT and Anr. 332 ITR 602, had emphatically held that the receipt of non-compete fee was in the nature of capital receipt and the provisions of section 28(va) , which deem such receipt as business income, are applicable w.e.f. assessment year 2003-04 and onwards only. It was, therefore, submitted that the order of the Ld. CIT(A) needs to be upheld. 82. We have heard the rival contentions and perused the facts of the case. We find that the identical issue was considered by this Bench of the Tribunal in assessee's own case for the assessment year 1998-99 and the Tribunal in that case categorically held that taking over a restrictive obligation does not amount to transfer of right in any business and therefore, non-compete fee cannot be considered as resulting in capital gains. There are several other decisions of the Courts/Tribunal on the issue in question which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal No.3 in assessee's appeal for the assessment year 2002-03 where we have decided the aforesaid issue in favour of the assessee and has allowed the ground raised by the assessee in the assessment year 2002-03. Both the parties also did not address any additional argument with respect to the aforesaid ground in the present appeal and agreed that the facts of this ground are identical to the ground of appeal for the assessment year 2002-03. Accordingly, following our own order for the assessment year 2002-03 in assessee's own case decided hereinabove, the disallowance made in the assessment order is directed to be deleted. Thus, of appeal of the assessee in the present year is allowed. 86. Now we take up appeal of the Revenue in ITA No.152(Asr)/2011 for the assessment year 2003-04. 87. In ground No.1, the Revenue has challenged the order of the ld. CIT(A) in allowing deduction of ₹ 35 lacs claimed by the assessee on account of non-compete fee paid to Sh. Ashwani Windlass in earlier years. The said ground of appeal is identical to ground of appeal No.1 in Revenue's appeal for the assessment year 2002-03. 87.1. Both the parties also did not address an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the ld. CIT(A) in not treating the loss arising on sale of investment as speculative loss. This ground of appeal is identical to ground No.5 in Revenue's appeal for the A.Y. 2002-03 with respect to the loss in question which relates to the shares held as investment, which has been decided in favour of the assessee by dismissing the ground appeal of the Revenue for the said assessment year 2002-03 mentioned hereinabove. Both the parties have not advanced any additional argument and have agreed that the facts in the present ground are identical to the facts of ground of appeal for the assessment year 2002- 03 decided hereinabove. Thus, following our order for the assessment year 2002-03, we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the addition. Accordingly, ground No.4 of the Revenue is dismissed. 91. Now, we take up the appeal of the assessee for the assessment year 2004-05 in ITA No.121(Asr)/2011. 92. As regards ground No.1, the assessee has challenged the order of the ld. CIT(A) in not deleting the disallowance of ₹ 10 lacs made by the AO u/s 14A of the Act and instead enhanced the amount of disallowance under the said s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es ₹ 5.00 cr. 92.3. In view of the above and considering that the facts for the year under consideration are identical to the facts for the assessment year 2002-03 and that both the parties also did not address any additional argument with respect to the aforesaid ground in the present appeal, following the order for the assessment yea 2002-03, the disallowance made in the assessment order on account of interest expenditure under section 14A is directed to be deleted. 92.4. As regards the disallowance in relation to other expenses, as per information available on record, total expenditure incurred during the relevant previous year in relation to Treasury Division was ₹ 44 lacs given at PB-196. In assessee's appeal for the assessment year 2002-03 decided by us hereinabove, we have held that 20% of the expenses of Treasury Division/Department is reasonable for attribution towards activities of investments yielding exempt income carried on by the assesee. Following the same, we restrict the disallowance of other expenses in this year to 20% of ₹ 44 lacs i.e. ₹ 8.8 lacs and direct the deletion of balance disallowance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1 in Revenue's appeal for the A.Y. 2002-03. Both the parties did not address any additional argument with respect to the present ground of appeal. In this appeal, the other issue raised for the A.Y. 2002-03 that the payment of non- compete fee is not made by the assessee. or is not related to business of the assessee are not there. The disallowance has been made simply on the ground that the payment of non-compete fee is capital expenditure. The aforesaid issue has been decided in favour of the assessee hereinabove by dismissing the ground of revenue for the A.Y. 2002-03. Accordingly, following our own order for the assessment year 2002-03 hereinabove, we find no infirmity in the order of the ld. CIT(A), who has rightly deleted the disallowance made by the A.O. Thus, ground of the revenue is dismissed. 96. As regards ground No.2 , the revenue has challenged the order of the Ld. CIT(A) in allowing deduction of expenditure of ₹ 54 lacs incurred by the assessee towards expansion of existing MAXXON division. 96.1. The aforesaid ground of appeal is identical to the ground of appeal of the Revenue for the assessment year 2002-03, which has been decided by us in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2002-03 decided by us hereinabove. In the present, the Ld. CIT(A) did not accept the contention of the assessee qua no nexus of borrowed funds with investment yielding exempt income on the basis of overall positive fund flow position/statement of the year. The Ld. CIT(A) on the ground of the assessee having not been established the aforesaid nexus through bank statements, drew an adverse inference against the assessee and apportioned the interest expenditure on the basis of formula adopted in the order passed for the A.Y. 2002-03 for the purposes of disallowance under section 14A of the Act. 99.2. We have decided the aforesaid issue in favour of the assessee in ground No.1 in assessee's appeal for the A.Y.2002-03 hereinabove that in a case of mixed pool of funds, the assessee can establish utilization of borrowed funds and interest free funds on the basis of overall fund flow statement in the relevant year and establishing the aforesaid nexus through bank statements in a case where over all fund flow position is positive is not a correct approach. On perusal of the cash flow statement of the relevant year at page 647 of PB, we have found that against total investment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -03 mentioned hereinabove. In appeal for the A.Y. 2002-03, we have held that the amount of disallowance of other expenditure i.e. other than interest expenditure computed u/s 14A can be adopted for the purposes of addition to book profit u/s 115JB of the Act Accordingly following the order for the A.Y. 2002-03, the aforesaid addition to book profit u/s115JB of the Act is restricted to ₹ 8.2 lacs and the balance disallowance confirmed by the Ld. CIT(A) is directed to be deleted. Thus, ground No.2 of the assessee is partly allowed. Accordingly, the appeal of the assessee for the impugned year is partly allowed. 101. Now, we take up Revenue's appeal in ITA No.154(Asr)/2011 for the A.Y.2005-06. 102. In solitary ground of Revenue, the Revenue has challenged the order of the Ld. CIT(A) in deleting the disallowance of deduction claimed on account of non-compete fee of ₹ 83 lacs paid to an ex-employee Sh. Vivek Jaitley. 102. The aforesaid ground of appeal is consequential to ground of appeal No.1 in Revenue's appeal for the A.Y. 2004-05 wherein proportionate deduction claimed in that year was also allowed. We have decided the aforesaid issue in favour of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred with investment in favour of the assessee in the appeals for the assessment year 2001-02 in ITA No.78(Asr)/2006 in ITA No.103(Asr)/2006, A.Y. 2002-03 in ITA No.119(Asr)/2011 in A.Y. 2004-05, in ITA No.121(Asr)/2011 and in a.y. 2005-06 in ITA No.122(Asr)/2011 hereinabove. Accordingly, on the basis of our aforesaid findings, the investments held by the assessee at the beginning of the relevant year does not have any nexus with any borrowed funds. As regards the investments made during the year, the ld. CIT(A) itself has given the relief for investments made to the extent of ₹ 421.31 crores. That apart, we have also seen the cash flow statement of the year under consideration. The assessee has made investment of ₹ 69.1 crores in shares of following subsidiary companies: i) Max Healthstaff International Ltd. 2.50 cr. ii) Max Newyork Life Ins. Co. Ltd. 66.60 cr. Against this, the assessee has realized interest free funds of ₹ 175.71 crores for the following different sources: i) Proceeds from sale of subsidiary (CMAX Infocom Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.2, we have held that the amount of disallowance of other expenses i.e. other than interest expenditure computed u/s 14A can be adopted for the purposes of addition of book profit u/s 115JB of the Act. Accordingly, following our order for the assessment year 2002-03 in assessee's own case, the aforesaid addition to book profit u/s 115JB of the Act is restricted to ₹ 8.2 lacs and the balance disallowance confirmed by the ld. CIT(A) is directed to be deleted. Accordingly, ground No.2 of the assessee is partly allowed. Henc, the appeal of the assessee is partly allowed. 106. Now, we take up the appeal of the Revenue for the assessment year 2006-07 in ITA No. 155(Asr)/2011 107. In ground No.1, the Revenue has challenged the order of the ld. CIT(A) in deleting the disallowance of deduction claimed on account of non-compete fee of ₹ 90 lacs paid to ex-employee Mr. Surendra Kaul . The assessee had entered into an agreement dated 31.03.2005 with an ex- employee i.e. Sh. Surendra Kaul for placing following restrictive covenants on him for a period of one year: i) Seek service in a business related to the setting up or managing of information technology, health care ..... X X X X Extracts X X X X X X X X Extracts X X X X
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