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Mondelez India Foods Pvt. Ltd. (M/s Cadbury India Limited) and others Versus Dy. Commissioner of Income Tax- 5 (1) and others

2015 (6) TMI 247 - ITAT MUMBAI

Computation of deduction u/s 80-HHC - AO not treating interest income as business income but as income for other sources - Held that:- As decided in assessee's own case for AY-2001-02 [2012 (12) TMI 682 - ITAT, Mumbai] and AY-2002-03 [2014 (4) TMI 926 - ITAT MUMBAI] to hold that 90% of net interest income is required to be reduced after deducting expenses incurred having nexus with earning of interest income.

Exclusion of profit on foreign exchange and miscellaneous sales of scrap an .....

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decided this issue against the assessee. Following the earlier years’ order of this Tribunal, the income on account of miscellaneous sale and scrap of cocoa shells is allowed as eligible for deduction u/s 80HHC, whereas the issue of deduction u/s 80HHC in respect of foreign exchange gain is decided against the assessee. - Decided partly in favour of assessee.

Deduction in respect of provision of additional duty payable to Third Party Manufactures (TPM) - Held that:- This issue has ari .....

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as decided this issue by holding that the assessee is entitled for deduction only in respect of actual excise duty paid by the assessee. Thus we decide this issue against the assessee as the assessee is entitled for deduction only in respect of actual payment of excise duty. - Decided against assessee.

Disallowance of depreciation on marketing knowhow - Held that:- The controversy of allowbility of depreciation on other tangible assets when the AO has accepted the payment in question .....

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. Hanumantha Rao [1998 (3) TMI 679 - SUPREME COURT] the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising .....

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ided in favour of assessee.

Interest u/s 234D is applicable to the year under consideration as relying on CIT V/s INDIAN OIL CORPN. LTD [2012 (9) TMI 517 - BOMBAY HIGH COURT] - Decided against assessee.

Technical Knowhow Royalty - AO proposed the adjustment of payment of royalty by restricting the amount of royalty for technical knowhow to 1% as against 1.25% claimed by the assessee - CIT(A) deleted the addition - Held that:- As decided in assessee's own case AY-2002-03 [20 .....

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s claimed by the department. - Decided in favour of assessee.

Deduction of Loss on Exchange Fluctuation in respect of Export Earners Foreign Currency Account - Held that:- It is clear from the facts recorded by the ld.CIT(A) that the amount lying in EEFC account represents export proceeds, credited to the said account. The ld.CIT(A) has decided this issue by following WOODWARD GOVERNOR INDIA P. LTD 2009 (4) TMI 4 - SUPREME COURT ). Having regard to the undisputed facts that the balanc .....

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nses cannot be apportioned equally on the regular business income and exempt income because the exempt income is earned from mere investment which does not require the same degree of attention and regular administrative management as in the case of regular business activity of the assessee. Thus reasonable basis should be adopted for making disallowance of expenditure under section 14A, we are of the opinion that the reasonable disallowance would be 2% of the exempt income. Accordingly, we modif .....

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sment years 2003-04 and 2004-05 respectively. 2. ITA No.3510/Mum/2011 (AY-2003-04) (By-Assessee) The assessee has raised following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the ld. Commissioner of Income (Appeals) erred in confirming the action of the Assessing Officer of not treating interest income of ₹ 6,98,44,651 as business income but assessing as income for other sources for computing the deduction u/s 80-HHC of the Act. 2. On the facts and i .....

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g Officer of treating profit of forex of ₹ 8,86,972 and Miscellaneous scrap sales of ₹ 97,98,752 as addition to the total turnover for computing the deduction u/s. 80-HHC of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income (Appeals) erred in not considering and directing the Assessing Officer to allow the deduction of ₹ 23,99,610/- being provision towards liability of contractual obligation to the Third Party Manufacturers .....

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rest income. 4. We have heard the Shri J.D.Mistry, the ld. Sr.Counsel on behalf of the assessee and Shri Padnabhan, ld.DR and considered the relevant material on record. At the outset, we notice that the issue raised in these grounds has been considered by this Tribunal in the assessee s own case in Cadbury India Limited V/s Addl.CIT in ITA No.975/Mum/2005 (AY-2001-02) dated 25.5.2012 and ITA No.7408/Mum/2010 (AY-2002-03) dated 13.11.2013. For the assessment year 2001-02, vide para 7, the issue .....

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ee has disputed the decision of authorities below to exclude 90% of the gross interest and not net interest income. 7.1 We have heard both the parties, perused the records and considered the matter carefully. Earlier the Hon'ble High Court ofA.Y.01-02 Bombay in case of CIT vs. Asian Star Co. Ltd. (326 ITR 56) had held that 90% of gross interest has to be reduced from the profit of business as per Explanation (baa). However the said decision of the Hon'ble High Court has not been up held .....

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essee. We further note that for the assessment year 2003-04, the Tribunal has again considered this issue and set aside to the record of the AO with similar directions. Accordingly, following the earlier orders of the Tribunal, the issue of computation of deduction under section 80HHC in respect of interest income is set aside to the file of the AO with the identical directions as given in the earlier orders of the Tribunal. 5. Ground No.3 is regarding the exclusion of profit on foreign exchange .....

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s under (para 41 and 42): 41. Ground no.6 is in respect of computation of the allowable deduction u/s.80HHC. 42. The assessee has taken two sub-grounds. In ground no.6(a), the assessee has raised the grievance that the A.O. was not justified in including miscellaneous income of ₹ 56,21,100/- while computing the total turnover for the purpose of deduction u/s.80HHC. While computing the deduction u/s.80HHC, the assessee has included the miscellaneous income, which are having following items .....

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with the product manufactured by the assessee as it has generated out of the manufacturing activity and hence, the A.O. has rightly included the same for computing the total turnover for the purpose of section 80HHC. So far as the sale proceed of the agricultural product, sale of newspaper, the same cannot be treated as having any nexus with the export of goods by the assessee hence, they cannot form as a part of total turnover. The A.O., is therefore, directed to exclude the sale proceeds of t .....

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t sale of sale proceeds. In our opinion, the same has been rightly included in the total turnover by the A.O. With the above findings, the issue of the treatment of the miscellaneous income to the extent of the determining the total turnover is decided and accordingly, ground no.6(a) is partly allowed. 7. Thus it is clear from the findings of the Tribunal in assessee s own cases for the assessment years AYs-1995-96 to 1998-99 that the miscellaneous income on account of scrap sales and cocoa shel .....

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n u/s 80HHC in respect of foreign exchange gain is decided against the assessee. Hence, the ground No.3 of the assessee s appeal is allowed in part. 9. The ground no.4 is regarding deduction in respect of provision of additional duty payable to Third Party Manufactures (TPM). 10. We have heard the Shri J.D.Mistry, the ld. Sr.Counsel on behalf of the assessee and Shri Padnabhan, ld.DR and considered the relevant material on record. We notice that an identical issue has been considered by this Tri .....

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nt of ₹ 13,10,000/-. The Ld. CIT (A) has considered the claim of the assessee in respect of the amount actually paid to the third party manufacturer at ₹ 13,10,000/- and only issue for controversy is in respect of the amount of ₹ 48,82,788/-. As discussed hereinabove, this issue has already been decided against the assessee and following the reasons given by the Tribunal in the A.Y. 1994-95 on this issue, we decide this issue against the assessee and accordingly, ground no.2 is .....

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The Tribunal in the earlier year has decided this issue by holding that the assessee is entitled for deduction only in respect of actual excise duty piad by the assessee. Following the earlier order of this Tribunal, we decide this issue against the assessee as the assessee is entitled for deduction only in respect of actual payment of excise duty. 12. The ground no.5 is regarding disallowance of depreciation on marketing knowhow. 13. The assessee acquired on going non-chocolate confectionary bu .....

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ngible assets. The AO has questioned the claim of the assessee and held that it is not acceptable. The AO accordingly, disallowed the claim of the depreciation on the marketing know how. On appeal, the ld. CIT(A) has confirmed the action of the AO. 14. Before us, the ld.Sr.Counsel of the assessee has submitted that the issue is now covered by the series of judgments including the judgment of the Hon ble Delhi High Court in the case of CIT V/s HINDUSTAN COCO COLA BEVERAGES P. LTD [2011] 331 ITR 1 .....

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s of other decisions of this Tribunal, wherein the Tribunal held that marketing strategies and distribution network, customer lists, marketing strategies, and software as intangible assets eligible for depreciation u/s 32(1)(ii) of the Act. The Sr.Counsel further submitted that the AO has disallowed the depreciation on the marketing knowhow on the ground that the amount is considered towards goodwill and no depreciation is allowed on this. He has also relied upon the decision of the Hon ble Supr .....

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ssessment order is reproduced for the sake of convenience as under: 11.6 With regard to the assessee s submission that the market knowhow is a marketable right which can be valued and on which depreciation may be claimed it is to be noted that even list of telephone numbers may be a marketable commodity. However, when something has to be a right then it connotes much more than a mere commodity. The said object should be in exclusive position of the right holder and at the exclusion of others. Th .....

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3 lakhs under the head intangible asset viz. market knowhow is rejected. This amount is considered as towards goodwill and no depreciation is allowed on this. Hence, deprcition @12.5% (for less than 180 days) claimed by the assessee onthis asset is disallowed. The disallowance works out to ₹ 23,11,625 (emphasis is ours) 17. It is clear that the AO has denied the claim of depreciation by treating the amount paid by the assessee as consideration towards goodwill. Thus, the AO has treated the .....

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e, the assessee had claimed deduction of ₹ 54,85,430 as depreciation on goodwill. In the course of hearing, the explanation regarding the origin of such goodwill was given as under : "In accordance with the scheme of amalgamation of YSN Shares and Securities (P.) Ltd. with Smifs Securities Ltd. (duly sanctioned by the hon'ble High Courts of Bombay and Calcutta) with retrospective effect from 1st April, 1998, assets and liabilities of YSN Shares and Securities (P.) Ltd. were transf .....

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ssessing Officer held that goodwill was not an asset falling under Explanation 3 to section 32(1) of the Income-tax Act, 1961 ("the Act", for short). We quote hereinbelow Explanation 3 to section 32(1) of the Act : "Explanation 3.-For the purposes of this sub-section, the expres sions 'assets' and 'block of assets' shall mean- (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trade mark .....

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any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that "goodwill" is an asset under Explanation 3(b) to section 32(1) of the Act. One more aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion that no amount was actually paid on accoun .....

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and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by the Income-tax Appellate Tribunal ("the ITAT", for short). We see no reason to interfere with the factual finding. One more aspect which needs to be mentioned is that, against the decision of the Income-tax Appellate Tribunal, the Revenue had preferred an appeal .....

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goodwill then in view of the judgment of the Hon ble Supreme Court in the case of M/s SMIFS SECURITIES LTD (supra), the depreciation is allowable on the marketing knowhow. Hence, we allow the claim of the assessee. 18. I.T.A. No.3726/Mum/2011(AY-2003-04) (By Revenue) 19. The Revenue has raised following grounds : 1. "Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in allowing deduction u/s 54EC amounting to ₹ 81.05 Lacs on the Short .....

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M/s. Cadbury India Limited has received several benefits on account of payment of Technical Knowhow Royalty and whether the Ld.CIT (A) was justified in concluding that Royalty for Trademark at 1% and Technical Knowhow at 1.25% for the entire FY 2002-03 is at Arm's Length . 20. Ground No.1 is regarding deduction under section 54EC on capital gain arising on sale of depreciable assets. The assessee sold flat on which the depreciation was claimed and allowed to the assessee and claimed deducti .....

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rties and considered relevant material on record. At the outset, we notice that this is covered by the decision of the Jurisdictional High Court in the case of ACE Builders (supra). The Hon ble High Court has held as under(pg:217 to 220): 20…... Section 50 is a special provision for computing the capital gains in the case of depreciable assets and the same being relevant for the purpose herein, is quoted hereinbelow : 50. Special provision for computation of capital gains in case of depre .....

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h consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers ; (ii) the written down value of the block of assets at the beginning of the previous year ; and (iii) the actual cost of any asset falling within the block of assets acquired during the prev .....

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the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets. 21. On a perusal of the aforesaid provisions, it is seen that section 45 is a charging section and sections 48 and 49 are the machinery sections for computation of capital gains. However, section 50 carves out an exception in respect of depreciable assets and provides that where depreci .....

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the cost of improvement and the expenditure incurred in connection with the transfer. The meaning of the expressions cost of improvement and cost of acquisition used in sections 48 and 49 are given in section 55. As the depreciable capital assets have also availed of depreciation allowance under section 32, section 50 provides for a special procedure for computation of capital gains in the case of depreciable assets. Section 50(1) deals with the cases where any block of depreciable assets does n .....

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ue of the block, then the excess is taxable as a deemed short-term capital gains. In other words, even though the entire block of assets transferred are long-term capital assets and the consideration received on such transfer exceeds the written down value, the said excess is liable to be treated as capital gain arising out of a short-term capital asset and taxed accordingly. 23. The question required to be considered in the present case is, whether the deeming fiction created under section 50 i .....

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from payment of capital gains tax, where the whole or part of the net consideration received from the transfer of a long-term capital asset is invested or deposited in a specified asset within a period of six months after the date of such transfer. In the present case it is not in dispute that the assessee fulfils all the conditions set out in section 54E to avail of the exemption, but the exemption is sought to be denied in view of fiction created under section 50. 25. In our opinion, the asses .....

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a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the apex court in the case of State Bank of India v. D. Hanumantha Rao reported in [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank on July 1, 1972, claimed extension of service because he was deeme .....

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pital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in the specif .....

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vailed of depreciation, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computat .....

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et into a short-term capital asset. 23. Thus, the Hon ble High Court held that the gain arising from the sale of business asset held by the assessee for more than three years would be eligible for deduction under section 54EC of the Act. Following the judgement of the Jurisdictional High Court, we do not find any infirmity in the order of the ld. CIT(A) and reject ground No.1 of revenue s appeal. 24. Ground No.2 of the revenue s appeals is in respect of interest u/s 234D of the Act. 25. We have .....

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le Jurisdictional High Court in the case of INDIAN OIL CORPN. LTD. (supra), we set aside the order of ld. CIT(A) on this issue and restore the order of the AO that section 234D is applicable to the year under consideration. 26. Ground No.3 is regarding payment of Technical Knowhow Royalty. 27. The AO proposed the adjustment of payment of royalty by restricting the amount of royalty for technical knowhow to 1% as against 1.25% claimed by the assessee and on Trade Market amount prescribed by Press .....

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Tribunal has held as under : 37. We have heard the detailed arguments from both the sides. The basic issue is the correctness of ALP on the royalty payments made by the assessee company to its parent AE on account of technical knowhow and trademark usage. 38. From the arguments of the DR, made on behalf of the TPO, the agreement for paying royalty on technical know how at 1.25% and trademark usage at 1.25%, were overlapping and thus, TNMM method used by the assessee was incorrect. According to t .....

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ted by the TPO that the payment does not effect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides this, the payment is made as per the approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arms length. .....

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into the arguments advanced by the DR/TPO on geographical differences, and payments made to Harshey, as these arguments gets merged in the interpretation and details available in the table supplied by the assessee and taken note of by the TPO and the CIT(A). 42. We are also not referring to the case of Maruti Suzuki Ltd. as we find that in so far as the instant case is concerned, there is really no relevance. 43. On the basis of the above observations, we are of the opinion that the royalty paym .....

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the ld. Commissioner of Income (Appeals) erred in confirming the action of the Assessing Officer of not treating interest income of ₹ 4,04,75,130/- as business income but assessing as income for other sources for computing the deduction u/s 80-HHC of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld.Commissioner of Income (Appeals) erred in confirming the action of the Assessing Officer of not excluding net interest for computing the deduction u/s 80-HHC of t .....

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e deduction under section 80HHC of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income (Appeals) erred in not considering and directing the Assessing Officer to allow the deduction of ₹ 11,66,296/- being provision towards liability of contractual obligation to the Third Party Manufacturers. 5. On the facts and in the circumstances of the case and in law, the ld. Commissioner of Income (Appeals) erred in confirming the action of the Asses .....

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sment year 2004-05 stand disposed off. 33. I.T.A. No.4451/Mum/2011(AY:2004-05) (By Revenue) 34. The revenue has raised the following grounds : 1. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in allowing the Loss on Exchange Fluctuation on account of valuation of balance lying in the Export Earners Foreign Currency Account amounting to ₹ 10.74 Lacs, despite the fact that the Loss incurred was 'Notional' and the same had not cryst .....

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orm part of Total Income under the Act by adopting a reasonable basis consistent with all relevant facts & circumstances. "3. Whether on the facts and in the circumstances of the case and in Law, was the Ld. CIT(A) justified in concluding that M/s. Cadbury India Limited has received several benefits on account of payment of Technical Knowhow Royalty and whether the Ld. CIT(A) was justified in concluding that Royalty for Trademark at 1% and Technical Knowhow at 1.25% for the entire FY 20 .....

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note that tjhe ld. CIT(A) has recorded the facts and finding on this issue in para 5.7 and 5.8 of the order which are reproduced below: 5.7 It was emphasized that if the loss on devaluation was on account of trading asset, it would be trading loss, deductible under sec 28 or section 37(1) of the Act. In the present case, the amount lying in EEFC account represents the export proceeds which are credited to the said account. Thus, the amount realised on export sales are credited to EEFC account an .....

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on the exchange rate prevailing at end of the year. In the case of the Appellant, the balance in the EEFC account was on account of realisation of export proceeds. Thus, the loss arising on revaluation of foreign currency balance in the EEFC account is on the trading account. The Hon ble Supreme Court has held in the case of Woodward Governor India P Ltd, supra, as well as ONGC Ltd., that exchange loss arising on trading account is revenue in nature and hence, allowable. I therefore direct the .....

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hat the balance in the said account represents the amount realised on export sale proceed, therefore, the judgment of the Hon ble Supreme Court is applicable to the facts of the present case. Accordingly, we do not find any error or illegality in the findings of the ld. CIT(A) qua this issue. 38. Ground No.2 is regarding disallowance made under section 14A of the Act. 39. The assessee has received dividend income from mutual funds amounting to ₹ 3,64,10,101/- and interest on US64 bonds amo .....

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that 10% of salary of the Manager and 20% of salary of finance officer may be considered as allowable for earning the exempt income. The ld. CIT(A) has accepted the contention of the assessee and restricted the disallowance to 10% of salary of Manager and 20% of Finance Officer respectively amounting to ₹ 1,76,271/- u/s 14A of the Act. 40. We have heard the ld.DR as well as Ld.Sr.Counsel for the assessee and considered the relevant material on record. The AO has allocated Head office expen .....

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