TMI Blog2014 (10) TMI 423X X X X Extracts X X X X X X X X Extracts X X X X ..... get speech of the Finance Minister as well as Circular no. 772 dated 23.12.1998 issued by the Board and on such consideration, it was held that the said Explanation was not applicable to the facts of the assessee’s case - the disallowance made by the AO as deleted by CIT(A) is upheld on account of payment of commission by invoking explanation to Section 37(1) – Decided against revenue. Deduction u/s 80HHC – Inclusion of income – Held that:- Explanation (baa) to section 80HHC specifically defines profits of the business and, only those profits of business can qualify for deduction u/s 80HHC as are contemplated in the explanation - the profits of the business as computed under the head ‘profits and gains of business or profession’ forms the basis out of which the items mentioned in clause (1) & (2) are to be excluded – the order of the CIT(A) is upheld – Decided against revenue. - ITA No. 2990/Del/2007, ITA No. 3328/Del/2007 - - - Dated:- 22-8-2014 - SHRI S.V. MEHROTRA AND SHRI I.C. SUDHIR, JJ. For The Assessee by :- Shri Rupesh Jain Adv., Shri Gaurav Jain Shri Bhavita Kumar Adv. For The Revenue by :- Shri S.N. Bhatia DR ORDER PER S.V. MEHROTRA, A.M:: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s v. ACIT (ITA no. 09/RJT/07). 5. He pointed out that the aforesaid decisions have been rendered only recently and were not available when the assessee filed the appeal before the Tribunal. 6. Ld. Counsel further pointed out that this issue has already been adjudicated by the Tribunal in A.Y. 2003-04, the order of which is contained at page 543 of the PB wherein the Tribunal has restored the matter to the file of assessing officer for adjudication in accordance with law. 7. Apropos additional ground no. 2, ld. Counsel submitted that the same deals with excise refund granted to the assessee in terms of Notification no. 39/2001-CE, being capital receipt, in view of the decision of the Hon ble Supreme Court in the case of CIT Vs. Pooni Sugars and Chemicals Ltd. 306 ITR 392. He submitted that assessee had filed appeal before the ITAT on 15-6-2007 and the decision has been rendered on 16-9-2008 and, therefore, this ground should be admitted. 8. We have considered the submissions of both the parties and have gone through the entire material available on record. We find that as far as additional ground no. 1 is concerned, the same deserves to be admitted keeping in view the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case the learned CIT(A) has erred in upholding AO's act of disallowing deduction to the appellant company under section 80HHC on DEPB benefit on the contention :- a. That it does not satisfy the conditions specified in third proviso to sub-section (3) of section 80HHC. b. That since rates of drawback cr5edit were not fixed in appellant s case it does not have the option as specified in 3rd proviso to subsection (3) of section 80HHC. 3. On the facts and in the circumstances of the case the learned CIT(A) has erred in upholding AO's act of reducing appellant claim of section 80HHC benefit by:- a. Reducing eligible profit by 100% of interest receipt as against 90% provided in the section. b. Reducing eligible profit by 90% of gross rent receipt without reducing the expenditure incurred to earn this rent and stood debited in P L a/c. 11. Brief facts, apropos ground no. 1, are that during the year under consideration the assessee company had received dividend income of ₹ 146,74,896/- and claimed exemption u/s 10(34). The assessing officer show caused the assessee as to why proportionate related expenditure should not be disallowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 lacs. On this case, the proportionate disallowance works out at ₹ 1,80,360/-[152.04/80995.43 x 960.80 (Rs. In lacs)]. Therefore, accordingly the disallowance of ₹ 1,80,360/- is confirmed and the balance disallowance is deleted. The appellant gets a relief of ₹ 5,53,385/- [Rs. 7,33,745-Rs. 1,80,360]. 11.3. Ld. Counsel for the assessee reiterated the submissions made before ld. CIT(A) and pointed out that dividend was directly credited to assessee s bank account and no expenditure had been incurred. 12. Ld. DR submitted that ld. CIT(A) has allowed substantial relief to assessee considering the dividend earned by it. 13. We have considered the submissions of both the parties and perused the record of the case. It is not disputed that no fresh investments were made during the year. The decision of ld. CIT(A) was partly influenced by the market research and day to day analysis of market trends for taking investment decisions. Since no fresh investment decision has been taken, therefore, considering the role of administrative machinery in collection of dividend, we consider it in the interest of justice that disallowance of ₹ 1,50,000/- would meet the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred in their maintenance. No market rent was charged from employees. The assessing officer excluded 90% out of rental income while computing deduction u/s 80HHC. Ld. CIT(A) upheld the assessing officer s action. 19. Having heard both the parties we do not find any reason to interfere in the order of ld. CIT(A), because of the specific provision contained under Explanation (baa) mandating exclusion of 90% of the rental income. In the result this ground is dismissed. 20. In the result, assessee s appeal is partly allowed for statistical purposes. Revenue s appeal ( ITA no. 2990/Del/2007): 21. The revenue has taken following grounds of appeal: 1. On the facts and in the circumstances of the case the ld. CIT(A) erred in deleting the addition on account of employees contribution towards PF and ESI amounting to ₹ 12,29,159/- 2. On the facts and in the circumstances of the case the ld. CIT(A) erred in deleting the addition on account of commission paid of ₹ 1,02,12,436/-. 3. On the facts and in the circumstances of the case the ld. CIT(A) erred in deleting the disallowance u/s 14A of ₹ 5,53,385/-. 4. On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m commission had been paid were identifiable; payments had been made by a/c payee cheques; all the parties were assessed to tax; and payments were in consideration of services rendered by these parties as specified in the agreement. Therefore, the payment had arisen out of the contractual obligation and was not for any strange consideration. The assessing officer, after considering the assessee s submissions, disallowed the sum of ₹ 1.02 crores , inter alia, observing that policy of government is not to allow any intermediary for any reason what-so-ever may be for the procurement of its purchases. 24.1. Before ld. CIT(A) the assessee reiterated the submissions made before assessing officer and further pointed out that M/s Indus Pipe Lines was an enterprise, having deep knowledge of the trade and was not a party, which was stranger to the trade. The party itself was supplier of pipes and connectors to ONGC along with sister concern viz. M/s P.J. Pipes. The party later on also made joint supplies to ONGC along with assessee. It was also stated that the assessee owed its rise in the industry to a great extent to M/s Indus Pipe Lines and its associate concern M/s P.J. Pipes. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y material to ONGC since long, in the process it acquired knowledge about foreign suppliers. The party was able to provide the appellant with vital inputs on competitors technical competence, pricing strategy etc. It was the said party who guided the appellant to supply pipes to ONGC and made it a first Indian company to supply pipes to them. Prior to this all suppliers of Pipes to ONGC were foreign companies. The commission was paid on supply of connector casing pipes. This line of business for appellant was developed by the party and its associates concern. Prior to this, the appellant was in the business of supplying line pipes only. The party was in the business of trading connectors and was supplying the same to the ONGC. It had vast knowledge of connectors. Line pipes are used in transportation of oil, gas water whereas connector casing pipes are used in oil exploration. The pipes are pushed horizontally in seabed and are joined with the help of connectors. It may be noted that the pipes are laid at depth level ranging from 600 meters to 3000 meters. The connector s quality and price changes for every 500 meters depth. The party gave entire input on selection of conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the impugned commission paid by the assessee company. The legislative intention of the said explanation inserted in the statute by the Finance (No.2) Act, 1998 with retrospective effect from 1.4.1962 was also considered by the Tribunal in the light of budget speech of the Finance Minister as well as Circular no. 772 dated 23.12.1998 issued by the Board and on such consideration, it was held that the said Explanation was not applicable to the facts of the assessee s case. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of AY 2002-03, we respectfully follow the decision rendered by the Tribunal in assessee s own case for AY 2002-03 and uphold the impugned order of the learned CIT(A) deleting the disallowance made by the AO on account of payment of commission amounting to ₹ 47,84,365/- by invoking explanation to Section 37(1). 27.1. Respectfully following the earlier order this ground is dismissed. 28. Ground no. 3 While dealing with ground no. 1 of assessee s appeal we have restricted the disallowance u/s 14A to the extent of ₹ 1,50,000/-. In this view of the matter, ground taken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capacity of any unit is under utilized resulting into its turnover being not in proportion with the investment made therein. On the other hand, the allocation of borrowed funds on the basis of accrual capital employed in the respective units and accordingly to work out the interest attributable to such funds for allocation in our opinion, was more appropriate method as in the said method, the actual utilization of borrowed funds for respective units was being taken into account. The said method involving allocation of interest expenditure on the basis of actual utilization of borrowed funds thus was a proper method and a perusal of the working prepared and furnished by the assessee company before the authorities below and as given on page no. 19 to 21 of the impugned order of the learned CIT(A) show that the allocation of interest expenditure to respective units was made by the assessee company by implementing the said method properly and correctly. In the first place, the actual fixed assets and current assets installed in the respective units for the purpose of manufacturing were taken by the assessee company and the value of similar assets installed in HO were allocated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to adopt such a method cannot be doubted merely because the same is resulting into more benefits to it. Moreover, the entire issue had cropped up as a result of AO's refusal to allow the claim of the assessee company for netting of the interest income against interest expenditure and since the assessee company has finally given up the said claim of netting before the learned CIT(A) while adopting the new method of allocation of interest expenses incurred at HO level, we are of the view that there is no reason to doubt the bona fide of the assessee company in adopting the new method. As such, considering all the facts of the case, we hold that there is no infirmity in the impugned order of the learned CIT(A) allowing the revised claim of the assessee for higher deduction u/s 10B on the basis of new method of allocation of interest expenditure incurred at HO level to different units and upholding the same on this issue. 30. Respectfully following the earlier order of the ITAT we do not find any infirmity in the order of CIT(A) on the issue in question. Ground is dismissed. 31. Ground no. 5: The assessing officer noticed that while computing deduction u/s 80HHC, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 80HHC. 31.3. Before ld. CIT(A) the assessee submitted that all these incomes were business income and arose in normal course of carrying business activity of business export. It was further stated that expenditure relating to all these income had been debited in the P L a/c and if income was excluded then expenditure relating to them should also be excluded from eligible profits. It was submitted that definition of business profit had been given in section 80HHC and, therefore, there was no scope for assessee to enlarge its meaning or for assessing officer to narrow down its meaning. 31.4. Ld. CIT(A) observed that total amount excluded from eligible profits was ₹ 66,19,152/-. This was based on a consideration of other income of all the units of the company. However, considering the other income of unit manufacturing exported goods, the amount worked out to ₹ 59,31,385/- as per details given at page 27 of his order, which is reproduced hereunder: Insurance claim received 11,61,986 Old store items 6,55,942 Discount on purchase of DEPB license 2,75, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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