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2016 (4) TMI 904 - ITAT AHMEDABAD

2016 (4) TMI 904 - ITAT AHMEDABAD - TMI - Computation of deduction u/s. 80-IA - Allocation of expenditure - Held that:- There cannot be any segregation of those facilities for a particular unit. Namely, the directors who are looking over all management of the company as a whole, they must have devoted energy to plastic division, textile division and CPP units. Therefore, expenses incurred on their remuneration and salaries ought to be debited in the CPP units also. This was the basic principle f .....

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ble extracted (supra) on the basis of past history. Before us, neither party was able to point out any circumstances which can demonstrate the disparity on the facts or about the nature of expenditure which deserves to be either included for allocation or excluded from allocation. Considering the detailed finding of the CIT(A) in Asstt.Year 2010-11, in the light of the Tribunal order in the Asstt.Years 2004-05 to 2008-09, we are of the view that the issue in dispute is squarely covered. The ld.F .....

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s upheld the inclusion of items for allocation viz. directorsí remuneration, directorsí travelling expenses, audit fees, computer maintenance expenses, security charges etc. and we do not find any error in the order of the ld.CIT(A) on this issue.

Disallowance u/s 14A - Held that:- The investment made by the assessee was not out of interest bearing fund. It has its own surplus fund out of which investment has been made. The assessee has demonstrated that it had own funds of ₹ 19 .....

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hese submissions or figures submitted by the assessee. The assessee has further made disallowance of ₹ 5.12 lacs in the Asstt.Year 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 14A as well Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The ld.AO has not recorded any finding that a .....

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0. Consequently, we allow the ground of appeal raised by the assessee in the Asstt.Year 2010-11 and delete the disallowance made by the AO.

Computation of deduction admissible under section 80IC - Held that:- The case of the assessee is that financial charges cannot be allocated in the ratio of sales, because, the sales have no direct influence on the interest expenditure. The financial charges are relevant to the investment made by an assessee. In other words, suppose an assessee has .....

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is of sales ratio. We do not find any infirmity in the order of the ld.CIT(A) on this issue.

Expenditure for PMS Services - Held that:- No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the inves .....

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e section 43A requires the cost to be recomputed in terms of section 43A for the purposes of depreciation [Sections 32 and 43(1)]. A perusal of section 43A makes it clear that insofar as the depreciation is concerned, it has to be allowed on the actual cost of the asset, less depreciation that was actually allowed in respect of earlier years. However, where the cost of the asset subsequently increased on account of devaluation, the written down value of the asset has to be taken on the basis of .....

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rrency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by him for the purpose of acquiring the asset, the amount by which the liability stood increased or reduced during the previous year shall be added to or deducted from the actual cost of the asset as defined in section 43(1). See ACIT Vs. Elecon Engineering [2010 (2) TMI 23 - SUPREME COURT OF INDIA] - ITA No.851/Ahd/2011, ITA No.1548/Ahd/2012, ITA No.938/Ahd/2 .....

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t appropriate to dispose of all these appeals by this common order. 2. The grounds of appeal taken by the assessee in both the years read as under: ITA No.851/Ahd/2011 (Asstt.Year 2009-10) 1.1 The order passed by the learned Commissioner is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so held now. 2. The learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of director's remune .....

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65 lacs paid to Mr. Rahul Patel, Managing Director who is looking after sales of Textile Division to Captive Power Plant for calculation of profit eligible for deduction u/s.80IA of the Act who are dedicatedly working on the respective divisions and have nothing to do with the operations of the CPP units. It is submitted to be held so now. 3. The learned Commissioner of Income Tax (Appeals) has erred is not deleting interest charged u/s 234B, 234C & 234D. It is submitted that no interest u/s .....

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hile calculating profit of Captive Power plant for the purpose of deduction to be allowed u/s. 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). 3. The Learned Commissioner has erred in confirming further allocation of salary expenses of employees' of corporate division while calculating profit of Baddi unit for the purpose of deduction to be allowed u/s. 80-IC of the Act. The facts and circumstances of the case allocation already made by the appellant was r .....

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ion 14A of the Act for invocation of Rule 8D were duly satisfied by the AO. 5.2 The Learned Commissioner erred in not appreciating the fact that Assessing Officer invoked provisions of section 14A without recording any reasons for rejecting the claim of the appellant that ₹ 52,000 has been incurred for earning exempt income. Learned Commissioner erred in upholding summary rejection by the AO of the facts and submissions made by the Appellant with respect to the fund position and flow and s .....

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lowance u/s.80IA to ₹ 19.25 Lacs for the Captive Power- Plant (CPP) unit. [2]. The Ld. CIT[A] has erred and on facts in deleting the disallowance of ₹ 18,25,69,000/-made u/s. 80IC on Baddi Unit. [3]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in deleting the disallowance of ₹ 82,34,951/- made by the Assessing Officer u/s. 14A of the Act. [4]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in granting relief regarding the disallowance of ₹ 24,37,500/- made .....

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e Assessing Officer be restored. ITA No.1524/Ahd/2012 (Asstt.Year 2010-11) 1 .a). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing the Assessing Officer, not to allocate general charges of ₹ 4359.1-5 Lacs while computing deduction u/s.80IA of the Act. 1 .b). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Miscellaneous / general charges of ₹ 17,00,000/- while c .....

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he Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Rates and Taxes / general charges of ₹ 31,00,000/- while computing deduction u/s.80IA of the Act. 1.f). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Stationary & Printing expenses / general charges of ₹ 1021 Lacs while computing deduction u/s.80IA of the Act. 1.g). The Ld. Commissioner of In .....

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-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Contribution to PF of Corporate Division /general charges of ₹ 154 Lacs while computing deduction u/s.80IA of the Act. 1.j). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Welfare Expenses of Corporate Division / general charges of ₹ 1026.86 Lacs while computing deduction u/s.80IA of the Act. 1.k). The Ld. Commissioner of Inc .....

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law and on facts in deleting the allocation of common head office expenses to Baddi Unit for calculating profit eligible for deduction U/S.80IA of the Act. 4). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the allocation of certain expenses claimed to be incurred specifically for plastic Division as well as common head office expenses for Baddi Unit while calculating profit eligible for deduction u/s.80lC of the IT. Act. 5). The Ld. Commis .....

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e in the Asstt.Year 2009-10 and 2010-11 respectively, ground No.1 and 1(a) to 1(k) by the Revenue in these years are connected to each other, therefore, taken up together. 4. Brief facts of the case are that the assessee has field its return of income electronically on 29.9.2009 and 28.9.2010 declaring total income at ₹ 136,42,95,380/- and ₹ 133,85,50,330/- in the Asstt.Years 2009-10 and 2010-11 respectively. The ld.AO has issued notice under section 143(2) upon the assessee-company .....

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taken in its plastic division. The assessee had manufactured and marketed various products under the brand name Sintex . The assessee has captive power plant (CPP for short) on which it has claimed deduction under section 80IA. The assessee has four units of CPPs. It has opted to claim deduction for ten consecutive assessment years from the Asstt.Years 2003-04 (for CPP -I & II), Asstt.Year 2005- 06 (for CPP - III) & Asstt.Year 2009-10 (CPP-IV). The assessee has submitted a report in Form .....

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units. There are common head office expenses . In the head office expenses , which according to the AO were required to be allocated in proportionate to the turnover of CPP vis-à-vis other business of the assessee. On an analysis of the details of the account, the ld.AO recorded a finding that the turnover of CPP unit in comparison to the total turnover of the assessee-company worked out to 2.05% in the Asstt.Year 2009-10, and 1.53% in the Asstt.Year 2010-11. The ld.AO thereafter, tabulat .....

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10 Director Fees 3.90 11 Rlates & Taxes 34.00 12 Stationery & Printing Expenses 1495.00 13 Charity & Donation 7.00 14 Salaries & Wages of Corporate Division 581.00 15 Contribution to PF of Corporate Division 142.00 16. Welfare expenses of Corporation division 926.44 17. Foreign exchange Loss 3178.00 18 Bad debts 25.00 19. Rent 267.25 Total 18321.64 Assessment Year 2010-11: Sr. No. Particulars Amount (Rs.in lakhs) 1 Directors' Remuneration 780.00 2 Directors' Traveling 16. .....

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3 Therefore, on account of the above, 1.53% of 13468.18 lacs work out to ₹ 206.06 lacs. The same is required to be reduced from the assessee company's claim of total deduction u/s 80IA of ₹ 10,99,46,899/-. 5. Dissatisfied with the disallowance, the assessee carried the matter before the ld.CIT(A). The ld.CIT(A) has upheld the allocation of expenditure out of the following heads viz, Directors Remuneration, Directors Traveling Expenditure, Audit fees, computer expenditure, securit .....

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penditure of working directors in both the years. Whereas, the Revenue is impugning the deletion made by the ld.CIT(A). 6. In the Asstt.Year 2009-10, the ground of appeal taken by the Revenue to this effect is that the ld.CIT(A) has erred in restricting the disallowance under section 80IA to ₹ 19.25 lakhs for CPP units as against ₹ 3,75,59,000/- made by the AO. In the Asstt.Year 2010-11, the grounds of appeal taken by the Revenue are argumentative in nature, which are not in consonan .....

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the ld.First Appellate Authority has taken cognizance of the submissions made by the assessee as well as the order of the CIT(A) passed in A.Y.2009-10. The ld.First Appellate Authority, thereafter, recorded a finding on all these issues independently and upheld the allocation partly which is being challenged by the assessee in its appeal and deleted the allocation partly which is challenged in Revenue s appeal. It is pertinent to take note of the arguments raised by the assessee and the finding .....

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f ₹ 10,99,46,899. The learned Asst. CIT has allocated the certain expenses, as mentioned on Page 2, Para 3.2 of his order, on assumption and presumption while determining the amount of disallowance hereunder. The learned Asst. CIT considered additional expenditure of ₹ 13,468.18 lacs and proportionate expenditure (1.53% of ₹ 13,468,18 lacs) arbitrarily and thereby reduced profit by ₹ 206.06 lacs. Without prejudice to anything else stated for the ground of appeal under con .....

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certified by Chartered Accountant in Form No. 10CCB and the same are attached herewith as Annexure-I. 1. In this regards the appellant respectfully submits as under - Director's Remuneration - Please note that the total of Directors' remuneration is of ₹ 780 lacs-which includes remuneration of five working Directors. This includes a sum of ₹ 117.44 lacs paid to Mr. S.B. Dangayach, Managing Director & In-charge of Plastics Division. Similarly, it also includes a sum of &# .....

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to the tune of ₹ 16 lacs, it is to be submitted that traveling of Directors comprises of mainly foreign travel and that has nothing to do with or even by any limb, with the operations of the CPP. Hence, it is submitted that the same should not be considered at all towards allocation of appropriate expenses, vis a vis turnover. iii) Audit fees In this regard it is submitted that Audit fees ofRs.40 lacs have been considered which should not at all be considered, vis a vis turnover of CPP and .....

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he expenses would reveal that it has no connection so far as CPP is concerned and hence, it should not at all be considered for the same. vi) General charges (Rs.4359.15 lacs) In this regard Appellant would like to submit that such expenses have been considered for the purpose of proportionate disallowance. These expenses actually include all the general expenses incurred for the company as a whole. As the nomenclature these are entirely unrelated and general expenses which cannot be allocated t .....

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f the Appellant Company. It may please be appreciated that on identical facts the addition on account of general charges were deleted by the Hon'ble CIT(A). In view of this factual back ground appellant submits that on same facts for the year disallowance made should be deleted. vii) Interest & Financial Charges (Rs.5,132 lacs). Stationary & Printing expenses (Rs.1,021 lacs). Rates & Taxes CRs.31 lacs) and Rent (Rs.289 lacs) These are finance costs pertaining to the company as a .....

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tment was made except investment o fRs.7.04 crores in CPP-IV which was made from its internal accrual (cash profit for the year is more than ₹ 425 crores) and therefore no allocation should be made in this regard. Expenses, other than interest hereunder, are actually incurred for the corporate division of the Appellant Company is unrelated to the CPP units by any stretch of imagination and cannot be considered for the purpose of allocation to CPP units. These expenses are in no ways be con .....

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9-10. In view of this factual background appellant submits that on same facts for the year disallowance made should be deleted. Copy of the C1T(A) order for the Assessment Year -2009-10 is submitting herewith as Annexure -2 for your immediate reference. viii) Director Fees (Rs.5 lacs), Charity & Donation (Rs.68 lacs). Salary & Wages of Corporate Division (Rs.450 lacs), Contribution to PF of Corporate Division (Rs.l54 lacs). Welfare Expenses of Corporate Division (Rs. 1,026.86 lacs) & .....

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etc. are by no stretch of imagination expenses -which may require allocation to any profit centre for the purpose of arriving at the profit of the same. These expenses are totally non-operating and unrelated expenses and hence no allocation is required to be made in this regard. Without prejudice to above, it is respectfully submitted that there can never be allocation of these expenses which are actually related to other activities of the Appellant Company. It may please be appreciated that on .....

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ssessment Year -2009-10 is submitting for your immediate reference. " 2.3 Decision: I have carefully perused the assessment order and the submissions given by the appellant. The appellant has submitted that the allocation of expenses which are actually related to the other activities of the appellant company cannot be done. The A. O. has allocated the expenses to the eligible units on the basis of turnover. On further perusal of facts, if is noted that the issue has also been in dispute in .....

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Sr.No. Particulars Remarks 1. Directors' Remuneration The claim of the appellant has been dismissed in the earlier year and the is allowance made by the A. O. has been confirmed by CIT(A) - XIV in A. Y. 2009- 10. Respectfully following the decision, the disallowance is upheld. 2. Directors Traveling The claim of the appellant has been dismissed in the earlier year and the Is allowance made by the A.O. has been confirmed by CIT(A) - XIV in A. Y. 2009- 10. Respectfully following the decision, .....

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e is upheld. 5. Security charges The claim of the appellant has been dismissed in the earlier year and the disallowance made by the AO has been confirmed by CIT(A)-XIV in A.Y.2009-10. Respectfully following the decision, the disallowance is upheld. 6. General charges The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of ₹ 4359.15 lacs is dire .....

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tion of general charges of ₹ 5132 lacs is directed to be deleted. 9. Director Fees The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of ₹ 5 lacs is directed to be deleted. 10. Rates & Taxes The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the de .....

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of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of ₹ 68 lacs is directed to be deleted. 13. Salaries & Wages of Corporate Division The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of ₹ 45 lacs is directed to be deleted. 14. Contribution to PF of Corporate Divis .....

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eneral charges of ₹ 1026.86 lacs is directed to be deleted. 18. Rent The issue has been decided in favour of the appellant by my predecessor in para-5 of his order for A. Y. 2009-10. (Respectfully following the decision of earlier year, the allocation of general of ₹ 289 lacs is directed to be deleted. The A. O. is directed to work out the disallowance in accordance with the above direction. The ground of appeal is accordingly partly allowed. 8. With the assistance of the ld.represen .....

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Tribunal orders are being placed in the paper book, from page nos.318 to 386. The unanimous history in earlier years is that expenditure incurred under head directors remuneration, directors travelling expenses, audit fees, computer expenses, security expenses are to be considered for allocation in the ratio of turnover of CPP units vis-à-vis total turnover. 9. It is pertinent to observe here that the assessee has been maintaining separate books of accounts for its units which are entitl .....

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ead office, which are of common nature, i.e. CPP might have availed certain facilities for which cost was incurred at the HO. There cannot be any segregation of those facilities for a particular unit. Namely, the directors who are looking over all management of the company as a whole, they must have devoted energy to plastic division, textile division and CPP units. Therefore, expenses incurred on their remuneration and salaries ought to be debited in the CPP units also. This was the basic princ .....

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the table extracted (supra) on the basis of past history. Before us, neither party was able to point out any circumstances which can demonstrate the disparity on the facts or about the nature of expenditure which deserves to be either included for allocation or excluded from allocation. Considering the detailed finding of the CIT(A) in Asstt.Year 2010-11, in the light of the Tribunal order in the Asstt.Years 2004-05 to 2008-09, we are of the view that the issue in dispute is squarely covered. Th .....

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ty has upheld the inclusion of items for allocation viz. directors remuneration, directors travelling expenses, audit fees, computer maintenance expenses, security charges etc. and we do not find any error in the order of the ld.CIT(A) on this issue. Therefore, these grounds of appeal are rejected. 10. Ground no.2 and ground no.4 in the Revenue s appeal for the Asstt.Year 2009-10, 2010-11 and ground no.3 in the assessee s appeal for the Asstt.Year 2010-11. 11. The common issue involved in these .....

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d ₹ 85,10,56,417/- under section 80IC in the Asstt.Years 2009-10 and 2010-11 respectively. The claim of the assessee is that it s one of the units is situated at Bhaddi (HP), which is entitled for deduction under section 80IC. As far as the admissibility of claim per se under section 80IC is concerned, the AO has not disputed the claim of the assessee. The dispute relates to quantification of the claim. In other words, the assessee has fulfilled all the conditions in order to claim deducti .....

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ted interest/financial charges of ₹ 120.56 lakhs ₹ 81.51 lakhs in the accounts of Bhaddi units for both these years respectively. The ld.AO further found that ratio of sales of industrial undertaking at Bhaddi (HP) vis-à-vis total sales of the assessee is at 13.89% and 15.87% in the Asstt.Year 2009-10 and 2010-11. The AO was of the opinion that interest/financial expenditure ought to be allocated in the ratio of sales. Therefore, he worked out total expenditure required to be .....

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ount of interest/financial charges in these assessments years to the Bhaddi units. In other words, the profit has been further reduced by the AO by these two amounts. 13. On appeal, the ld.CIT(A) has deleted the allocation of such expenses. The finding recorded by the CIT(A) in para-9 and 10 read as under: 6. The next grounds of appeal (i.e. 3,4,5 & 6) is against the allocation of expenditure allocated to the Baddi unit for computing deduction u/s 80IC. As regards interest expenses of ₹ .....

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nk accounts for the entire business being carried out from head quarters. The C.C. Account with the bank and financial institutions and loans raised by them had been utilized as per requirement of running the entire business including Baddi Unit. The AO therefore allocated interest proportionately to this unit on the basis of ratio of sales of the undertaking which comes to ₹ 637.40 lacs. The AO has discussed this issue at para 4.2 of the Assessment Order. It was submitted by the AR of the .....

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sue arose in A.Y. 2003-04- A.Y. 2004-05, AY. 2005-06 that interest expenses should be allocated to these units. However, it should be allocated on the basis of the investment made in these units and the AO is directed to grant relief accordingly. 14. This finding has been followed by the CIT(A) in Asstt.Year 2010- 15. The ld.counsel for the assessee at the very outset submitted that similar issue has come up before the Tribunal in earlier years and the Tribunal has upheld the finding of the CIT( .....

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. In other words, suppose an assessee has made investment after borrowing funds due to some reason or market conditions he could not effect the sales, then, if we go by the logic of the AO, there would be a lesser allocation. The assessee has allocated the expenditure on account of financial charges, keeping in view the investment in Bhaddi units. In other words, these are direct expenditure relatable to Bhaddi units. Therefore, the ld.CIT(A) has rightly deleted the allocation of interest/financ .....

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of ₹ 2426.86 lakhs. The sale ratio of Bhaddi to the total sale is 15.87%. He worked out the salary expenses required to be allocated to Bhaddi Units in this sale ratio at ₹ 385.14 lakhs which is 15.87% of total salary of ₹ 242686 lakhs. 20. On appeal, the assessee has contended that remuneration to the employees of ₹ 360.00 lakhs already been considered by the assessee for the purpose of Bhaddi Units. The ld.CIT(A) has directed the AO to give credit of this allocation aga .....

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of appeal bearing no.3. 21. The ld.counsel for the assessee, at the very outset submitted that a similar issue has come up before the Tribunal in the Asstt.Year 2008- 09, whereby the Tribunal has observed that the salary of those employees who are working in plastic division could only be allocated. 22. With the assistance of the ld.representatives, we have gone through the record. It is pertinent to observe that the ld.AO has allocated the salary by considering the remuneration payable to the .....

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akhs towards the salary which is relating to those employees who are directly working in this division. The AO has nowhere made a nexus about the total number of employees whose salaries have been debited by the assessee. Why he has taken the total figure of ₹ 2426 lakhs for attribution ? It is settled principle that the expenses which have any attribution to the eligible profit for grant of deduction under section 80IC, only those expenses are to be reduced from the eligible profits. When .....

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xpenses allocated by the assessee of ₹ 341.46 lakhs has rightly been allocated by the assessee, which includes direct expenses as well as out of total salary of plastic division where the Bhaddi unit is situated. No further allocation in this assessment year is required. 23. Next item out of which the ld.AO has made allocation of Bhaddi unit in both the assessment years is common head office expenses. According to the ld.AO, a perusal of profit & loss account, it reveals that there are .....

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ompany in these two assessment years respectively. Thus, in his opinion, the assessee ought to have allocated the expenditure in the ratio of sales to these units. The 13.89% of total expenditure under the alleged common head office expenses amounting to ₹ 3535.09 lakhs in the Asstt.Year 2009-10 comes out to 491.02 lakhs. Similarly, in the Asstt.Year 2010-11, it comes out to ₹ 33.20 lakhs. The assessee has allocated expenditure of ₹ 235.56 lakhs in the Asstt.Year 2009-10 and &# .....

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With the assistance of the ld.representatives, we have gone through the record carefully. There is no dispute with regard to the proposition that if any unit, which is entitled for deduction under Chapter-VI of the Income Tax Act viz. 80IA or 80IC in the present case, if avails the benefit of certain facilities for which the expenses are incurred under common pool, then a proportionate allocation, according to the scientific method, ought to be made. While dealing with the issue for the purpose .....

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head, then it would reveal that the assessee has been maintaining separate accounts for these units. It has debited expenditure on actual basis. The AO did not find any error in that attribution. He simply jumped to make allocation on the basis of sales made by these units vis-a-vis the total sales. That is not a scientific criteria for making disallowance. The ld.CIT(A) has accepted the contention of the assessee, it has considered all these expenditure, and where there is a direct nexus with .....

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considering the orders of the ld.CIT(A) on this issue, we do not find any error in the orders, and accordingly, the orders of the CIT(A) in both the years are upheld on this issue. The ld.CIT(A) has rightly deleted the disallowance made by the AO, out of common head expenses of corporate division. 26. Next item of expenditure allocated by the AO is expenditure incurred by plastic division and corporate division. Under this head, the ld.AO found that the expenditure of ₹ 8106.37 lakhs and .....

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ance of the ld.representatives. In our reasoning given while upholding the deletion out of certain common head expenses, we do not find any error in deleting the disallowance under these head. The basic reason is that the assessee has debited expenditure which has direct nexus with 80IC units. Such expenditure cannot be amplified by considering the sales ratio. The AO has nowhere highlighted, as to which particular facility was used by the assessee, generated out of common head expenses. He simp .....

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IT(A) on this issue are upheld. 29. The ground no.4 in the Revenue s appeal for the Asstt.Year 2009- 10 is inter-connected with ground no.4 of the assessees appeal in the Asstt.Year 2010-11. The Revenue in Asstt.Year 2009-10 has pleaded that the ld.CIT(A) has erred in deleting the disallowance of ₹ 82,34,951/- which was added by the AO with the aid of section 14A. The assessee in its ground has pleaded that the CIT(A) has erred in confirming the disallowance of ₹ 90,97,470/- which ha .....

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t.Year 2010-11, the assessee has claimed exempt income at ₹ 22.55 lakhs. It has disallowed a sum of ₹ 0.52 lakhs attributable to earning of income. The ld.AO has confronted the assessee as to why the disallowance for the purpose of section 14A should not be made with help of Rule 8D. In response to the query of the AO, the assessee has filed a detailed reply vide letter dated 20.2.2010 in the Asstt.Year2009-10. The ld.AO has reproduced the explanation of the assessee, and thereafter, .....

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ke to state that certain expenses incurred in relation to earning such income have already been disallowed of ₹ 0.52 lacs on suo moto basis by us in its Return of Income. We request your goodself to refer to Annexure 1 for details in this regard. 1.2. At the outset, we would like to mention that surplus funds available with the company are invested in Mutual Funds. The prime motive of investment in mutual funds is to gain by appreciation in the Net Asset Value of the funds. Your goodself w .....

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see has earned profit of ₹ 8.23 crores on sale of such investments and the same has been appropriately offered to tax after categorizing the same in long term and short term capital gains. 1.3. Similarly, assessee's investment in overseas subsidiary does not generate any exempt income. Dividends or gains arising from such investment are liable to tax in India and thus this investment does not generate exempt income. 1.4. We would further like to state that even the investments that gen .....

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0.63 353.82 1981.55 March 31, 2010 27.10 1855.02 437.05 2319.17 1.6 Your goodself would appreciate that the assessee had significantly high owned funds to make investments. The company has been generating good amount of profits which contributes to the internal accruals. We had owned funds of ₹ 2319.17 crores as against investment in subsidiary company and Dena Bank was only of ₹ 111.09 crores as at March 31, 2010. 1.7 The amounts have been borrowed for purely business purposes. We w .....

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on why Rule 8D should not be used for computing disallowance u/s. 14A. In this regard, we would like to mention that Rule 8D can be applied only if the amount disallowed u/s. 14A is not correct. We have completely explained the facts of the case and in view thereof, all the expenditure incurred for the purpose of earning such income has been disallowed appropriately. 1.9. Further, computation of such disallowance is also in consonance with the earlier year assessment orders up to AY 2008-09 and .....

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as been arrived at with regard to the accounts of the Assessee. Since the disallowance made by us is in. line with disallowance made by AO in earlier years, Rule 8D cannot be invoked. 1.11 For the purpose, we rely upon the decision of Punjab & Haryana High Court in the case of CIT vs. Hero Cycles. Copy of the said judgement is attached as Annexure V. In the said case, the assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares w .....

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the shares is out of the noninterest bearing funds, disallowance u/s 14A is not sustainable; b. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted; c. Disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand; d. The contention of the revenue that 'even if the assessee has .....

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lowance based on formulae given in Rule 8D in Annexure 3. Application of Rule 8D would result into the disallowance of ₹ 0.90 crores against the exempt income of ₹ 0.22 crores. In view thereof if at all Rule 8D is to be applied the amount of disallowance has to be restricted to ₹ 0.22 crores. 7.1 The above submission of the assessee has been duly considered. As per section 14A no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income .....

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does not form part of the total income under this Act. The Parliament is its wisdom had enacted section 14A with retrospective effect from 1-4-1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. In the past, it was seen that assessee's were pushing the expenses relating to exempt income which were not taxable towards taxable income and thereby reducing the taxable income wrongly. The intention of the Le .....

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t form part of the total income then, no expenditure whether direct or indirect in relation to that income could be claimed as deduction. Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are one of the most important decisions in which top management is actively involved to maximize their benefit. This decision making process is very complicated and requires very caref .....

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lowance u/s. 14A r.w.r. 8D is made. Accordingly, a disallowance of ₹ 90,97,470 (Rs. 91,49,470- 52000) after deducting the disallowance already made by Assessee in return of income is made as per working furnished by Assessee and added back to the total income of the assessee. (Disallowance - ₹ 90,97,470/-) 32. In the Asstt.Year 2009-10, the assessee has further disclosed summary of its investment categorized, based on their capacity to earn exempt income. Otherwise, the line of the a .....

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s declared by the mutual funds, and only income received by the investor is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and no an exempt income is derived from such investment. In the Asstt.Year 2009-10, the assessee has earned profit of ₹ 19.22 on sale of such investment, and the same has been appropriately offered for tax for categorizing the same in long term capital gains/short term capital gains. Similarly, the assessee had made i .....

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extracted by us in the Asstt.Year 2010-11. He made addition of ₹ 87,44,951/- in the Asstt.Year 2009-10 after giving credit of the amounts, the assessee itself disallowed. An addition of ₹ 82,34,951/- was made. 33. On appeal, the ld.CIT(A) have recorded a divergent finding in both the years. The ld.CIT(A) in the Asstt.Year 2009-10 has deleted the disallowance. However, in the Asstt.Year 2010-11, the ld.CIT(A) has confirmed the disallowance by observing as under: 7.3 Decision: I have c .....

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ade in addition to what have been done by the appellant. The claim of the appellant that no disallowance should be made under section 14A as no finding of incurring of expenditure has been given and the investment was out of interest during funds is not acceptable. The appellant has not been able to prove the nexus between the interest free funds, that is the own fund, and the investment in tax exempt securities. The AO has also duly considered the submission made by the appellant and the assess .....

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disputed the calculation made by the AO by applying rule 8D. His main contention is that the assessing officer has no* given any finding regarding the correctness of the claim of the assessee. The claim has duly been considered by the AO and he has given g finding that the claim of the appellant that no expenditure has been incurred was not acceptable in view of various findings that have been mentioned in the order. The appellant has also relied on the order of my the learned and predecessor f .....

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has been incurred. The facts of the case for the present year are therefore, different from the preceding year and accordingly the findings given by learned predecessor are not applicable on this issue for the present year. The appellant has also claimed that the disallowance by applying rule 8D is much more than the exempt income earned by the appellant and the disallowance should accordingly be restricted to the income earned. The appellant's claim cannot be accepted as it is not necessar .....

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y the AO under section 14A by applying the provisions of rule 8D is upheld and the ground of appeal is dismissed. 34. Before us, the ld.CIT-DR has relied upon the order of the AO and that of the CIT(A) in the Asstt.Year 2010-11. On the other hand, the ld.counsel for the assessee has contended that from the very beginning the assessee was pointing out to the AO that it has added back the amounts which are attributable to earning of exempt income. In its written submissions, the assessee has speci .....

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ITR 158. Copy of this decision was annexed as Annexure-A with its explanation. He further took us through the finding of the AO and observed that in this finding, the ld.AO has nowhere pointed out as to how the expenditure claimed by the assessee for adding back was not related to the investment made by it or the expenditure were insufficient. In such situation, according to the ld.counsel for the assessee, the AO was not justified to make disallowance. When this argument was brought to the not .....

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this issue of disallowance under section 14A of the Act, the ld.CIT(A) did not assign any reason for such diversion. The ld.counsel for the assessee further relied upon its decision of the Hon ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT, 347 ITR 272. He placed on record copy of the Hon ble Delhi High Court decision. He further relied upon the order of the ITAT, Mumbai in the case of Justice Sam P. Bharucha v. ACIT (2012) 53 SOT 192. 35. In rebuttal, the ld.CIT-DR contended .....

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ITA No.1374/Ahd/2009. The Revenue was not satisfied with conclusions of the Tribunal and took the matter in the Hon ble High Court. The Hon ble High Court though dismissed the appeal on account of smallness of the amount involved in that year, but made an observation that even in the absence of Rule 8D, the expenditure can be disallowed on reasonable basis. She contended that even on estimate, this disallowance can be made. 36. We have duly considered rival contentions. As far as the propositio .....

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in the Asstt.Year 2010-11. In the Asstt.Year 2009-10, the exempt income is of ₹ 2.02 crores whereas in the Asstt.Year 2010- 11 it is ₹ 22.50 lakhs. Before embarking upon the facts of the present case, we deem it pertinent to take note of the observations of the Delhi High Court recorded in para-29 of the judgment in the case of Maxopp Investment Ltd. (supra). It reads as under: Scope of sub-sections (2) and (3) of Section 14A 29. Sub-section (2) of Section 14A of the said Act provide .....

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ncome which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to mpt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition 'precedent for the Assessing Officer entering upon a determination of the .....

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on (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a dete .....

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bed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. 37. According to the Hon ble Delhi High Court, when an assessee demonstrate actual incurrence of the expenditure, then Rule 8D would not be automatically applied without looking into the explanations. In other words .....

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penses on the basis of the method brought in the Rule 8D. In the light of the above proposition, let us examine the facts in both the years and finding recorded by the AO. The main contention of the assessee in both the years is that it has made investment in the mutual fund with growth option . In the case of growth option, no dividends are declared by the mutual fund, and only income declared by an investor is in the form of capital gains. The capital gains derived by the assessee on mutual fu .....

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ds of ₹ 1981.55 crores in the Asstt.Year 2009-10 and investment in the mutual fund was only ₹ 144.51 crores. The assessee has also submitted that its investment in earning exempt income has been reduced during the year from 78.45 crores to ₹ 18.09 crores. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the Asstt.Year 2010-11, it has reserve fund of ₹ 2319.17 crores and made investment of ₹ 111.09 crores. The ld.AO has .....

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rded any finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund than investment. We are of the view that the ld.CIT(A) has looked into all these aspects in the Asstt.Year 2009-10 before deleting the disallowance. We do not find any error in the order of the ld.CIT(A) on this iss .....

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eal of the assessee in the Asstt.Year 2009- 10 is dismissed. 40. Next ground pleaded by the Revenue in the Asstt.Year 2009-10 is that the ld.CIT(A) has erred in deleting the disallowance of ₹ 24,37,500/-. The ld.AO has recorded a very brief finding on this issue. It reads as under: 8. Expenditure for PMS Services From the details submitted by the assessee in respect of legal and professional expenses, it is observed that an amount of ₹ 24,37,500 has been paid to DSP Merill Lynch towa .....

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an expenditure incurred by the assessee in the field of revenue. The ld.DR relied upon the order of the AO. On the other hand, the ld.counsel for the assessee relied upon the submissions made before the ld.CIT(A) which have duly been reproduced by the ld.CIT(A) on page nos.16 and 17 of the impugned order. He contended that a portfolio manager is a person who provides advisory services vis-à-vis a portfolio investment to its client. The portfolio makes decision about investment mix and po .....

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rtue of the payments the assessee does not acquire any asset. It only maintains its assets. Thus, the expenditure was of revenue nature. The ld.counsel for the assessee relied upon the decision of the Hon ble Supreme Court in the case of Dalmia Jain and Co. Ltd. Vs. CIT, (1971) 81 ITR 754 (SC), CIT Vs. Bengal Coal Co. Ltd., (1989) 47 Taxman 284 (Cal.), CIT Vs. Raigarh Jute Mills Ltd., (1989) 47 taxman 166 (Cal.), CIT Vs. Hindustan Times Ltd., (2000) 241 ITR 509 (Del) and CIT Vs. Patiala Flour Mi .....

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d to protect the business and not with a view to safeguard its prospects of getting a new lease. Similarly, in the case of Raigarh Jute Mills Ltd. (supra) such expenditures were incurred for defending the persons for the company, who were defendants. This expenditure was allowed to the assesseecompany on the strength of this decision. He contended that expenses were incurred for the purpose of management of portfolio. 42. We have duly considered rival contentions and gone through the record care .....

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purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the ld.CIT(A). This ground of appeal is rejected. 43. No other arguments were raised on ground no.5 and 6. Accordingly, this appeal of the Revenue is dismissed. 44. In the result, the appeal of the Revenue for the Asstt.Year 2009- 10 is dismissed. 45. The assessees appeal in the Asstt.Year 2010-11 no other independent ground .....

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s attributable to borrowings made for acquiring shares of foreign subsidiary viz. Sintex Holdings B.V., the assessee has claimed that such gains should be excluded from taxable income as it is required to be adjusted against the acquisition of shares. The ld.AO has confronted the assessee as to how such gain should not be brought to tax. In response to the query of the AO, the assessee has filed detailed submissions. The assessee contended that as per section 43A of the Income Tax Act, if any as .....

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satisfied with the explanation of the assessee. He recorded a finding that the assessee was required to account for difference foreign exchange as gain or loss in its books of accounts. The gain or loss cannot be considered as a notional gain/loss. According to the AO, the assessee follows accrual system and gains has been duly accounted for in its audited books of accounts, therefore, there is no reason that such gain be excluded from taxation. He made addition of ₹ 39,48,81,350/-. 49. On .....

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but it cannot have any impact on the revenue account. Had the loan been taken by the appellant for trading asset or for running the business or for circulating capital, the treatment could have been in the revenue account. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. [116 ITR 1] has laid down similar guidelines. Similar view has been taken by ITAT, Mumbai in the case of Essar Oil Limited Vs. DCIT [13 SOT 691 ], ITAT, Bangalore in the case of JSW Steel Limited Vs. ACIT [5 .....

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d.counsel for the assessee submitted that the issue in dispute is squarely covered in favour of the assessee by the decision of the Hon ble Supreme Court in the case of ACIT Vs. Elecon Engineering Co. Ltd. reported in 189 taxmann 83 (2010). He further contended that the AO has given different treatment in this year. In the past when the assessee has loss and treated as notional loss, the AO did not allow that loss from the taxable income of the assessee. But in this year, when the assessee has g .....

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wed funds, the amount by which the liability stood increased or reduced on account of foreign exchange rate during the previous year, they be added to or deducted from the actual cost of the asset as defined in section 43(1) of the Income Tax Act. The observation of the Hon ble Supreme Court has been noticed by the ld.CIT(A) while taking note of assessee s submissions on page no.49 of the impugned order. The observation of the Hon ble Supreme Court reads as under: 9. Section 43 A, before its sub .....

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o application unless an asset was acquired and the liability existed, before change in the rate of exchange. When the assessee buys an asset at a price, its liability to pay the same arises simultaneously. This liability can increase on account of fluctuation in the rate of exchange. An assessee who becomes the owner of an asset (machinery) and starts using the same, it becomes entitled to depreciation allowance. To work out the amount of depreciation, one has to look to the cost of the asset in .....

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