TMI Blog2009 (9) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.3.2005 which read as On the facts and in the circumstances of the case, Asstt. Commissioner of Income Tax, Circle 1(1), Surat erred in holding that sum of Rs. 33511413 was not offered by the appellant as the amount of profit chargeable to tax u/s 41(1) of the Act/contention of the appellant Company made during the course of the Assessment proceedings were grossly erroneous and in not appreciating that out of the said amount only Rs. 2846154 was claimed as not taxable under the said Section 2.0 Upholding that the disallowance of Rs. 12812728 comprising of Rs. 880315 (Overdue interest of debtors waived off), Rs. 185453 (Discount allowed to debtors) Rs. 1250481 (GEB audit recovery of PF fuse blow-up), Rs. 250000 (Provision for waste Paper Written off), Rs. 1100000 (Warehousing charges), Rs. 4796479 (Bank Guarantee provided against Water Tax liability) and Rs. 4350000 (OFDC Labour Contract amount written-off) and in not appreciating that these expenses were fully allowable. 2.1 Upholding the disallowance of Rs. 1270341 comprising of Rs. 1111433 (Sundry Balances Written-off), Rs. 107533 (Transporters commission twice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5IB of the Act and therefore, there was no liability to pay interest u/s 234B of the Act. 8.0 Wrongly concluding that the appellants action of challenging penalty proceedings u/s 271(1)(c) of the Act, initiated by the Assessing Officer, could not be examined in the quantum appeal. 4.Ground No.1 It relates to taxing a sum of ₹ 3,35,11,413 u/s.41(1) of the Income-tax Act,1961 (herein after referred to as the Act ). This ground was not pressed by the learned AR of the assessee and hence, the same is dismissed as not pressed. 5.Ground No.2 It relates to sustaining the addition of certain disallowances made by the Assessing Officer. They are discussed and adjudicated below. 5.1.1. Rs. 8,80,315 - This amount represents overdue interest which was debited to the respective parties accounts standing in the balance sheet and claimed to have been credited to the interest account. Itwas also claimed that it was offered for tax in the relevant A.Yrs.. The Assessing Officer noted that in balance sheet under Schedule VI, the assessee has made a provision of doubtful debt of ₹ 35 lakhs which should have taken care of such write off. The learned CIT(A) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see submitted that, based on the scheme announced from time to time, the buyers have a right to make a claim. Once they qualify for the discount, then the statement sent by them is checked in the office of the Company and the claims are settled. This settlement is done during the year under consideration. They are in fact contractual liability settled during this year. 5.2.3.Against this, the learned DR relied on the order of the learned Assessing Officer and CIT(A) and submitted that the discounts have accrued along with the sales, therefore, they should have been claimed in the respective years of sales and not in this year under consideration. 5.2.4. After considering the rival submissions, we are of the view that the authorities below are not justified in making this addition. Mere announcing the scheme and making the buyers eligible for discounts does not create the liability against the assessee. When conditions laid down in the scheme are fulfilled and claim is made before the assessee and such claim is accepted by the assessee, the liability accrues against the assessee. It becomes, in fact, a contractual liability settled during the year and therefore would be allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision ofHon ble Gujarat High Court inBileshwar Khand Udyog Sahakari Mandli Ltd. Vs. Commissioner of Income-tax (2006) 282 ITR 480 (Guj) referred above.Accordingly this ground of the assessee is rejected. 5.4.1. ₹ 2,50,000-This amount represented debit balance in the clients running account for the transactions pertaining to procurement of waste papers by them from the assessee. The learned Assessing Officer disallowed the claim on the ground that this is only a provision for expenses for BIFR period and not an ascertained liability. The learned CIT(A) has discussed this issue in para 4.25 to 4.28. He confirmed the addition on the ground that the assessee did not furnish the details regarding accounting period and nature of services rendered by the clients on account of which the said amount was claimed. 5.4.2. The learned AR of the assessee submitted before us that the amount was not found recoverable and hence, it was written off. The learned DR, on the other hand, supported the impugned orders of the authorities below. 5.4.3. Having considered the rival submissions, we restore the matter to the file of the Assessing Officer to find out whether sales made to those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rantee. The learned Assessing Officer disallowed the claim on the ground that it is a disputed liability and bank guarantee has not been encashed. The learned CIT(A) discussed this issue in paragraphs 4.36 to 4.38. He has confirmed the disallowance on the ground that the water tax rate is still disputed and therefore cannot be termed as ascertained one. The matter was taken up before the Hon ble Orissa High Court and as per direction of Hon ble Court bank guarantee was provided in respect of the disputed liability. According to the learned CIT(A) the order of the Hon bleOrissaHigh Court nowhere mentionedabout the final settlement of the dispute. This liability is not ascertained one and the same cannot be allowed. No details of such water tax liability have been furnished so as to show as to which year it pertains. 5.6.2. Against this, the learned AR of the assessee submitted that water tax is a statutory liability and therefore should be allowed. As against this, the learned DR submitted that statutory liability would be allowed in the year when it is paid by the assessee. 5.6.3. After considering the rival submissions, we confirm the order of the learned CIT(A) with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt restrained the authorities from levying and recovering the disputed portion of excise duty on the condition that the assessee and other processors furnished bank guarantees to the full extent in regard to the difference to the satisfaction of the authorities. In compliance with the stay order of the Supreme Court, the assessee deposited the equivalent amount of the disputed excise duty attributable to the value of grey cloth with the bank in fixed deposit and furnished the bank guarantee to the excise authorities but ultimately the Supreme Court decided the matter in favour of the excise authorities and the excise duty was directly realised from the bank authorities by encashing the fixed deposits. The Tribunal took the view that furnishing of bank guarantee was only a security or a guarantee given by the bank to pay the disputed amount of excise duty collected by the assessee, in the event of the Excise Department succeeding in the pending litigation, and that furnishing of a bank guarantee for payment of the entire disputed amount of excise duty/additional excise duty collected by the assessee in the relevant years could not be considered equivalent to actual payment of duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are not recoverable. 5.7.2. The learned AR of the assessee submitted that the amount represented trading item and has been considered in the trading /Profit Loss account. It was found non-recoverable and hence, has been written off. In the alternative, the learned AR of the assessee submitted that the amount should be allowed as trading loss u/s.28. 5.7.3. Against this, the learned DR submitted that this represented some deposits with the Orissa Forest Development Corporation and not a trading item. 5.7.4.Having considered the rival submissions, we restore this issue to the file of the Assessing Officer to find out (i)- whether this amount has been considered in the trading/Profit Loss account in some earlier year and how the amount has been considered as irrecoverable in terms of the decision in Dhall Enterprises Engineers (P) Ltd., Vs.CIT [(2007) 295 ITR 481 (Guj)].If it is so then the claim should be allowed in this year when it is written off in the books.(ii) -The Assessing Officer will find out whether the amount represented the capital deposits for carrying out the business or for the purpose of running business as a security deposit to be deposited again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was double credit and further that it did not relate to this year. If there is a mistake in accounting an amount in an earlier year, the necessary rectification should be carried out in that year only. There is no reason to allow the profits of this year to be reduced by the rectification of this mistake. There is no accrual of any liability, no court order, no settlement of any contractual claim, or no statuary demand raised. Therefore, the claim of the assessee cannot be allowed either u/s.36 as bad debt written off or u/s.28 as trading loss. This part of the ground of the assessee is therefore rejected. 6.3.1.Rs. 29,000 -This amount represented erection charges of air conditioner. According to the assessee, the claim was settled during this year and the same should be allowed. The learned CIT(A) confirmed the addition on the ground no evidence showing settlement of the claim was furnished. 6.3.2. Having heard both the parties, we decline to interfere as no details have been furnished before us as well. This part of the ground is therefore rejected. 6.4.1.Rs.22,375 This represented writing off ofTaluka Panchayat Sales Tax difference and security deposit with Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onlyfor payment of purchase price butalso of theincrease due to fluctuation in the rate of foreign exchange. The assessee company has been offering to tax the reduction in liability on account of favourable exchange rate fluctuation. Such offeringfor tax has been done in the AYs 2003-04 and 2004-05 for a sum of ₹ 17,82,038 and ₹ 55,51,128 respectively. Further the additional liability arising on account of foreign exchange rate fluctuation is covered by the decision in the case ofCommissioner of Income-tax Vs. Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC).Ld. A.R. further submitted that in the case of the assesseethe liability of foreign suppliers was ₹ 472.20 lakhs as on 31.3.2001 which is increased to ₹ 505.00 lakhs as on 31.3.2002 on account of such fluctuation in the foreign exchange rate. The difference has been claimed in the return.The learned DR, on the other hand, relied on the orders of the authorities below. 7.4. After considering the rival submissions, we are of the considered view that the assessee is entitled to this claim. The reasons are that at the time of succession, the assessee has taken over the assets and liabilities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two different dates are taken into account. 7.5 Similarly revenue would be entitled to tax the gain, the assessee makes on account of favorable fluctuation rate of foreign exchange. The addition is therefore deleted. 8.Grounds No.4 and 4.1 8.1It relates to disallowance of ₹ 2,78,29,039/-including depreciation of ₹ 7,68,675. This issue has been discussed by the Assessing Officer in para 3 of his order. The facts relating to this issue are that the assessee has claimed an expenditure of ₹ 3.16/- lakhs against operation for growing saplings of the trees. These saplings were given to the villagers for growing them into trees which were later purchased by the assessee. The assessee has accounted for a receipt of ₹ 45.52 lakhs as sale proceeds of saplings to the farmers/villagers and thus claimed expenses of ₹ 270.60 lakhs as loss against business income both under normal provision of the account as well as under the MAT provisions. 8.2The assessee submitted following P/L account in respect of its social forestry division which supervises plantation and growth of saplings. Social forestry Division Profit and Loss Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out on land for cultivation of land; 2.No subsequent operations for efficient production of crop are carried out; and 3.The company is engaged in the manufacture and sale of Paper Board, and Bamboo/ hardwood is the major raw material required for production. So it is necessary to ensure continuous and uninterrupted supply of raw material. Therefore, for this purpose sapling are sold to the farmers. 4.The details regarding this issue were also furnished during the earlier year i.e. A.Y. 2001-02. 5.The expenses claimed to the extent of Rs. 270.60 lakhs, are consolidated expenses, which are related to their Forestry Division. 8.4The learned Assessing Officer did not agree with the assessee. He found that plant saplings are raised in the forest owned or controlled by the assessee company and also in the land belonging to the farmers. Thus the assessee is running an organized enterprise for raising the plant saplings at their land and supervising in maintenance of plantations at farmer s land. All the expenses incurred by the assessee company are debited under the head Social Forestry expenses . Though the assessee has not made out any income but it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies site cleaning, fencing, tilling, manuaring and watering etc.are also carried out. The plantation process is carried out on such land till the saplings are found ready to be handed over to the farmers. Thus, on the basis of submissions of the assessee and remand report of the Assessing Officer, the learned CIT(A) confirmed the addition by observing as under : 9.16.I have perused the facts of the case as discussed by the Assessing Officer in his assessment order and the remand report and also carefully went through the submission as made by the A.R. before me. It is seen that in respect ofnarrating the nature of activity as carried out by the appellant company, saying that such activities were incidental to its business activities, such as facilitation of procurement of continuous supply of raw materials from the adjoining areas (from the farmers, who grew plantation on their land) and also to ensure the availability of good quality of raw materials in the form of Bamboo and trees, it had also relied upon various judicial decisions in support of its contention (as referred above). After the perusal of the decisions as quoted above, it is found that in such decisions, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the activities as carried out by MIs Soudharya Nursery were nothing else than the agricultural activity and the income derived from such activity i.e from sale of seeds and saplings was nothing but agricultural income. Besides the above referred judgments, the assessing officer also referred the findings of Hon ble Delhi ITAT in the case of Sudisha Farm Nursery vs ITO bearing ITA No.1065/Del of 2002, wherein, the Hon ble ITAT on similar set of facts, after relying on the findings of Hon ble Supreme Court of India in the case of CIT vs Raja Benoy Sahas Roy (supra) held that such activities were agricultural activities and the income derived out of such agricultural operations was agricultural income. 9.18The plea as taken by the A.R of the appellant company that its activities under its Social Forestry Division were carried out to facilitate the availability of raw materials by holding out the farmers of the adjoining areas in the form of selling of saplings to them (as grown in its farm land) at concessional rate and also by arranging finance on behalf of these farmers to help them to grow bamboo and plants and therefore, the same cannot be treated as agricultural, activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out by the appellant company was sowing and growing of saplings and selling the same to outside parties is nothing but a pure agricultural operations by stretch of imagination. I, therefore, in view of the facts as discussed above and also keeping in view the judicial decisions as relied upon by the assessing officer, hold that the findings of the assessing officer that the activities as carried out by the appellant company under its division known as Social Forestry is nothing but an agricultural activity, and therefore, the addition made by the assessing officer under this head amounting to Rs. 2,78,29,039/- is hereby confirmed. 8.5.2Against the above, the learned AR of the assessee submitted that there are two routes (Seed Route and clonal route) through which saplings are developed by the assessee.Seed route Plantation procedure in Nursery is as under: 1)Land is taken on lease 2)Seed of Eucalyptus are obtained from seed orchards. 3)Seeds are sown in Primary beds where they germinate in 5 days and are transplanted in Polybags after about 20 days from germination. 4)Thereafter the plants are in the polybags for next 6 months i.e. 180 days approx wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is not for the purpose of carrying out agricultural activity but it is a part of overallactivities undertaken by the assessee to ensure uninterrupted supply of raw material for the purpose of business. The assessee only provides assistance to the farmers for plantation of good saplings. Thus the use of the land is not for the purpose of agriculture but with the ultimate objective to procure raw material like bamboo and hardwood.The activities of agriculture are only incidental to the attainment of ultimate objective of the assessee for running its manufacturing uninterrupted. The income derived from the sale of saplings only reduces the cost of raw material and therefore itshould not be viewed independentof other activities of procuring raw materials for its manufacturing activities.The intention of the assessee is not to derive income from such sale but to ensure commitment to grow the trees in the fields of the farmers for ultimate supply to the assessee. The learned AR of the assessee submitted that the expenditure claimed by the assessee are not exclusively for growing saplings but include expenditures incurred on supervision, monitoring and procuring trees and relates expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the appellant and forms a part of the raw material cost. Similarly, the cost incurred by the appellant on the procurement of seeds for growing saplings to the extent the same are distributed free of cost to the farmers cannot be said to be expenditure incurred on agricultural operations by the appellant and, thus, cannot be disallowed under section 14A of the Actas agricultural loss. 8.5.6The learned AR of the assessee submitted that one contention of the Assessing Officer is that the expenses claimed by the appellant on account of social forestry should have been shown as work-in-progress in the Profit Loss Account as the trees from the saplings supplied by the appellant to the farmers would be available for use by the appellant only after the expiry of 5 to 7 years. In this regard, it was submitted by the learned AR of the assessee that the expenditure incurred by the appellant towards forestry cannot be regarded as work-in-progress of a project. The expenditure has been incurred in order to purchase raw material necessary for production of paper and not to create a capital asset which could be kept as work in progress. The expenditure incurred is purely of revenue nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saplings grown through clonal rout does not require any operation on the land. The small shoots, called coppice shoots, which arise from stamps of Eucalyptus trees in farmers field, are collected by the staff of the company from various areas. These shoots are of no use to the farmers and are generally destroyed by them. The staff of the Company after collecting these shoots cut them into small pieces. These cuttings are then treated in bavistin fungicide to avoid any fungal infection. One end is then dipped in a rooting hormone and then these cuttings are placed in Root trainer blocks having an artificial medium called Vermiculite. These coppices are then placed in Mist chambers under controlled conditions of Temperature (38 degrees C) Humidity 85% for about 45 days in which the roots and shoots develop. Thereafter they are brought into Hardening chambers for a period of 15 30 days. These plants are then transported to the farmers field as per their requirement and sale proceeds are collected through Bank. Thus clonal root is purely a technical process where no soil is used at any stage. 8.5.9 The learned AR of the assessee submitted in alternative that the entire activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t several operations including operations on the land. These operations, as gathered from the assessment order, order of the learned CIT(A) and from the submissions of both the parties, are (i)Assessee is growing saplings over the land owned by the assessee on which all the basic operation like tilling of the land, sowing of the seeds, planting and similar operationsin addition to weeding,removalofundesirablegrowth,cuttings,making the saplings fit for sale to the farmers are carried out. (ii)In addition, the assessee is procuring coppice shoots from the land of the farmers, carrying out chemical process and growing them under controlled conditions. There is no use of land for the purpose of growing these coppice shoots. (iii)The assessee has also spent money on distributing the seeds, conveyance, salaries of the staff etc., for the purpose of supervision of growing of trees by the farmers. No basic operation over the land is carried out by the assessee. 8.8.2. It is held in the case of CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC) that income generated from the activities carried out on the land will only be treated as agricultural income and not any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be agricultural income. In such a case Hon ble Supreme Court held that it is immaterial that the assessee has maintained a large establishment for the purpose of preserving the forests and assisting in the growth of the trees, because ex hypothesi he performed no basic operations for bringing the forests into being. In the case ofMaharajadhiraj Sir Kameshwar Singh Vs. Commissioner of Income-tax (1957) 32 ITR 587 (SC) similar view was held that where no basic operation in agriculture are performed upon the soil itself by the assessee, then there is no cultivation of soil at all. Even though operations in the nature of forestry operation could have been performed by the assessee which may have the effect of nursery and pasturing of the growth of such trees but they are not uncommon in basic operation of agriculture and cannot constitute agriculture operation unless they form part and parcel of and integrated with basic operation. Hon ble Supreme Court was concerned with the issue whether income from sale of forest trees and spontaneous growth would constitute agricultural income. It was held that it will not. 8.8.4. In Commissioner of Income-tax Vs. Jyotikana Chowdhurani (1957 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e performance of the basic operations such as ploughing the land, planting or sowing seeds, etc., the subsequent operations cannot by themselves, be regarded as agricultural operations so as to make the income derived from such products, agricultural income; but, if there is evidence to show that in some areas basic agricultural operations have been made, for instance, if the trees are coppiced in such a manner that the coppiced shoots may come up without any assistance or that at places where there are gaps planting has been done after excavation of pits and trenches, to that extent the income from the products will be agricultural income, and this is a matter of evidence which will have to be investigated by the department. Thus only to the extent that plantation is done after excavation of trenches and pits income from produce will be agriculture income. 8.8.6.Hon ble Allahabad High Court in Maharaja Vibhuti Narain Singh (H.H.) Vs. State of Uttar Pradesh (1967) 65 ITR 364 (All) held that merely growing plants in a nursery would not yield agriculture income. Basic operation on the land is necessary. It is held in this case as under: Usually, nurseries are maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tural income and agricultural expenses are outside the purview of the Income tax Act, 1961. The business urgency and justification of the assessee in incurring farming expenses is not an answer to the Constitutional division of subjects made between the Union and State Legislatures. The assessee was engaged in the business of manufacturing extracts from spices. One of the principal raw materials in the assessee's business was white chillies. The State of Karnataka was the main source for procuring white chillies required for the business of the assessee. In order to promote the availability of white chillies without any interruption, and to impress upon the farmers in Karnataka to adopt better farming practices, the assessee took agricultural land on lease for the cultivation of white chillies and incurred expenses towards cultivating white chillies, which included cost of seeds, labour charges, purchase of manure, pesticides, tilling, weeding, land rent and other expenses. The assessee debited all these expenses to its profit and loss account and credited the income from sale of the agricultural produce to the profit and loss account. In the assessment years 1994-95 and 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce will not be agriculture income--- 1.Where operations in forestry are performed after the produce had sprouted from the soil and no human skill and labour is spent by the assessee on the cultivation of the land. 2.Where the produce on the land have not been raised by the performance of the basic operations such as ploughing the land, planting or sowing seeds, etc., 3.Only for the reason that there is abusiness expediency and business prudence ; and there is a close connection of farming operation with the business of the assessee; Or that product is closely related with the land; or that ultimate source of the product is land or operation on the land. 4.Where plants are grown in a nursery and sold after the use of the earth, but without carrying out any basic operation on land. 5.Where operations are carried out without conjunction with and in continuation of the basic operations. The subsequent operations divorced from the basic operations cannot constitute by themselves agricultural operations. B. Expenses incurred will be agricultural expenses and income earned from the sale of produce will be agricultural income if --- 1.Basic operations on the land are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion made above.Thus the disallowance is restricted to ₹ 17.17 lacs and accordingly assessee gets relief of Rs.(278.29 17.17) = 261.12 lacs. 9.Ground No.5: 9.1This ground relates to upholding disallowance of ₹ 11,97,121 by invoking the provisions of Section 145A. The Assessing Officer found that the assessee carried forward cenvat credit balance for the Sonagadh Unit at ₹ 5,57,431/- and for the Jaykaypur Unit at ₹ 8,59,156/-. It was also found that the cenvat credit available during the year, as per Excise Register RG 23A on Raw material and packing stores etc., was ₹ 2,96,65,636/- whereasthe correct figure of cenvat credit availed on consumption of raw materials and other inputs amounted to Rs.2,91,99,797/-. The Assessing Officer accordingly inferred that as per Section 145A valuation for stock will have to be increased by ₹ 11,97,121/-. It was submitted before the learned CIT(A) that working done by statutory audit was just to find out the impact of cenvat credit availed during the year. The assessee haskept separate account of cenvat credit and therefore it will have no effect on the total income. It is because if the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g stock as well as in theclosing stock and consequently opening stock of subsequent were is needed to be revised for arriving at the correct profit in the subsequent year as well. Hon ble Delhi High Court in Commissioner of Income-tax Vs. Mahavir Aluminum Ltd. (2008) 297 ITR 77 (Del) referring to Guidance note on tax audit issued by ICAI, paras 23.8, 23.13, 23.14 held that whenever there is a change in the valuation at one end, then there must necessarily be a corresponding change at the other end, otherwise, the true profit would not be reflected.In those guidelines following steps are suggested for valuation of closing stock: 23.8. Section 145A has been enacted by the Finance (No. 2) Act,1998, and has come into force from the accounting year 1-4-1998 to31-3-1999 (assessment year 1999-2000). This section provides thatthe valuation of purchase and sale of goods and inventory for the purpose of computation of income from business or profession shall bemade on the basis of the method of accounting regularly employed bythe assessee but this shall be subject to certain adjustments. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aretwomore judgments after the judgment in thecaseof GTN Textiles Ltd.. Hon ble Madras High Court has rendered similar judgment in two cases supporting the same propositions. They are in CIT v. Meghna Electro Casting Ltd (2009) TIOL-212/HC/Mad/IT in Tax Case appeal No.247 of 2009 and in CIT, Chennei v. Futura Polyster Ltd., (2009) TIOL-199-HC-Mad-IT in tax case appeal NO.216 to 219 pronounced on 16.4.2009. It has been held therein that the Assessing Officer is not entitled to touch the P L account prepared as per provisions of Companies Act while arriving at profit under MAT provisions. In this regard, the learned AR of the assessee invited our attention to para 6 from the decision in Futura Polyester Ltd (supra) , as under : 6. The issue involved in the present appeals is squarely covered by the decision of a Division Bench of this Court in which one of us (K.Raviraja Pandian,J) was a party in the case of Commissioner of Income Tax vs. Rajanikant Schneider and Associates P. Ltd., reported in 302 ITR 22), wherein it has been observed as follows:- 4. We are not able to subscribe our view to the grounds taken in the appeal that the deduction under Section 80 HHC is all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (1A) of section 115H does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. 5. The Assessing Officer is not entitled to touch the profit and loss account prepared by the assessee as per the provisions contained in the Companies Act, while arriving at the book profit under Section 1153 and the book profit so arrived at should be the basis for taxation and therefore,, the computation under Section 8OHHC should be limited to the case of profits of eligible category only. The Tribunal has also come to the conclusion that in view of the non obstante clause available in Section 115JA it was clear that the provisions is a selfcontained one and no other provision would have effect on it and thereby it was to be implemented as contained in the said provision. The Tribunal has also further given a reason to the effect that section BOHHC is clear about this aspect that profit only is to be taken into account but not income and sub-section (3) of Section 11SJA itself took care of the provisions relating to the adjustment of loss or depreciation and carry forward of the income. The finding arrived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .80HHC should be computed in the manner specified in sub section (3) or subsection 3(a) of Section 80HHC. In other words a prima facie reading of these words indicates that computation of deduction u/s.80HHC should be done in accordance with the provisions of Section 80HHC.These terms have been interpreted by Hon ble Kerala High Court and Madras High Court in the decisions referred to above and for this computation the book profit has to be taken as base and not the profit computed under the normal provisions of account. Since these are the two judgments in favour of the assessee and no contrary decision is cited or referred to by the learned DR, we respectfully follow the same, as they are binding on the Tribunal in view of the decision of Hon ble Bombay High Court in CIT v. Godavari Devi (1978) 113 ITR 589 (Bom). As a result this ground of the assessee is allowed. 10.2 Groundno. 6(b) relates to provision of ₹ 60,46,960. It comprises of two items. They are adjudicated as under: 10.2.1Rs. 47,96,479 This amount pertains to water tax liability against bank guarantee provided. The Assessing Officer had disallowed the said amount by holding that there was a disputed liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision for bad and doubtful debts. The provision for bad and doubtful debts is made to cover up probable diminution in the value of the assets, i.e., a debt which is an amount receivable by the assessee. Such a provision cannot be said to be a provision for a liability, because even if the debt is not recoverable no liability can be fastened on the assessee. Any provision made towards irrecoverability of a debt cannot be said to be a provision for liability. 10.2.3 Thus the amount which could be added back within the meaning of Explanation to Section 115JB is the one which is unascertained liability. After High Court s order on thewater tax dispute,liability is ascertained and therefore the auditors have certified it to be deducted from P L account. In the normal computation of income it may not be allowed as deduction because of provision of Section43B as amount is not paid but as per the computation of income as per Part II and III Schedule VI of the Companies Act, the provision of ascertained liability could not be added back. Accordingly, while computing the book profit this amount need not be added back. 10.2.4Rs. 12,50,481 This amount relates to thedemand ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. _Held,_accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be erroneous to extend the provisions of section 32(3) for the purpose of holding the unit a share. _Held,_accordingly, that buying and selling of units by the assessee-company could not be treated as a speculative business. The Explanation to section 73 of the Income-tax Act did not apply. Loss in buying and selling of units of the UTI was business loss not speculation loss. 10.3.3 Hon ble Gujarat High Court in Commissioner of Income-tax Vs. Rubamin P. Ltd. (2009) 312 ITR 18 (Guj) has followed above decision and has held as under: The Supreme Court in the case ofApollo Tyres v. CIT , held that the Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act, 1956. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in theExplanation to section115J. The Assessing Officer does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 59. Chapter |IV provides various heads for computation of income such as salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources.Thus, where assessee claims an expenditure in relation to an income which does not form part of the total income (computed under chapter-IV)then such expenditure will not be allowed as a deduction.No such provision is made in the scheme of Section 115JB which falls in CH XIIB being special provisions relating to companies. Therefore a prima facie reading of section 14A indicates that it will not be applicable to and cannot be invoked for computing income under section 115JB. 10.3.6For the sake of continence we reproduce section 115JB as under: 115JB. Special provision for payment of tax by certain companies.-(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2001, is less than seven and one-half per cent. of its book profit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply, if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by- (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account : Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below second proviso to section 115JA, as the case may be ; or (ii) the amount of income to which any of the provisions of section 10 or section 10A or section 10B or section 11 or section 12 apply, if any such amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142. (5)Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.' 10.3.7 It clearly provides a scheme of computation of book profit which shall be deemed as total income of the assessee.The base for computation of book profit is taken as the profit determined in the profit and loss account prepared for the relevant previous year in accordance with the provisions of Part-II and III of Schedule-VI of the Companies Act, 1956 and after taking into account the accounting policies, accounting standards and method and rates for calculating the depreciation provided therein.Such book profit, being net profit as per profit and loss account would be adjusted by several items as provided in Explanation which is enumerated above in the section.The expenditure relatingtoexempted income as provided in section 10, 11 and 12, if debited inprofitandloss accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with notwithstanding anything contained in any other provision of this Act .This non-obstante clause prohibits operation of any other provision of the Act which may have effect on the book profit.Sub Section 5 of Section 115JB enables the Assessing Officer to invoke other provisions of the Act relating to the field not provided in Section 115JB.The computation of book profit, which is treated as total income is provided in this Section, therefore, other provisions relating to computation of income in other Sections of the Act will not be operative in this field.Provisions relating to other field such as, procedure for assessment, collection and recovery, appeals and revision etc. not provided in section 115JB would apply in case of adopting adjusted book profit as total income.Therefore, disallowance of expenditure relating to exempted income as per section 14A, even though debited by the assessee in the profit and loss account, but auditors have certified it as for business purposes cannot be made. 10.3.9In view of above, we are of the considered view that expenditure relating to growing of saplings, and supervision of growing trees by the farmers and debited by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Snowcem India Ltd. Vs. Deputy Commissioner of Incometax (2009) 313 ITR 170 (Bomb). In our considered view this judgment was rendered in the context of section 115JA which was treated as pari materia with section115J. In the context of section 115JB the only authorityavailable is the judgment of Hon ble Karnataka High Court inJindal Thermal Power Co. Ltd. Vs. Deputy Commissioner of Income-tax (2006) 286 ITR 182 (Kar). No contraryjudgment on section 115JB regarding charging of interest u/s 234Bhas been referred . Hence we respectfully follow judgment of Hon ble Karnataka High Court Jindal Thermal Power Co. Ltd. (supra).We therefore, decline to interfere. 11.3 This ground is accordingly rejected. 12. Ground No.8 is not pressed and is therefore, rejected. ITA No.790/AHD/2006(By Revenue) (Assessment Year 2002-03) 13.1.This appeal is by the Revenuefor the Assessment Year 2002-03 by raising the following grounds : (1)On the facts and in the circumstances of the case and in law, the ld.CIT(A) Surat has erred in holding that the assessee s claim for non taxability of Rs. 28,46,154/- made in view of BIFR s order dated 13.5.92 was time bound relief under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not to treat such write back as income of the assessee. 13.2.2.We have considered the rival submissions and perused the material on record. In our considered view, the learned CIT(A)has rightly relied onthe circular issued by the CBDT dt.22.4.1999. A copy of this order has been furnished by the assessee in its paper book . The said circular reads as under: ORDER u/s.119(2)(a) of the I.T.Act,1961. In exercise of its powers under section 119(2)(a) of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby directs that effect to all orders passed by The Board for Industrial and Financial Reconstruction (BIFR) in approved scheme of reconstruction/rehabilitation be given during the course of an assessment after granting all the reliefs under the Income-tax Act, 1961. Wherethe above said order of The Board for Industrial and Financial Reconstruction(BIFR) contains a recommendation that certain reliefs under the I.T.Act be considered by the Central Government, it means that al those reliefs be granted by the Assessing Officer in view of the overriding nature of the Sick Industrial Companies Act (SICA) even in the absence of any enabling provision under the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Officer is satisfied that recovery is practically improbable. Twenty-six years later, on June 20, 1978, in view of the judgment of the Kerala High Court in State Bank of Travancore v. CIT [1977] 110 ITR 336, the Board by another circular, withdrew with immediate effect the earlier circular.However, by circular dated October 9, 1984, the Board decided that interest in respect of doubtful debts credited to suspense account by banking companies would be subjected to tax but interest charged in an account where there has been no recovery for three consecutive accounting years would not be subjected to tax in the fourth year and onwards. The circular also stated that if there is any recovery in the fourth year or later, the actual amount recovered only would be subjected to tax in the respective years. This procedure would apply to assessment year 1979-80 and onwards. Under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may also be problematic. If, therefore, the Board has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount and simultaneously provision was made for ₹ 32,12,625 in the current year. The learned CIT(A) held that sum of ₹ 32 lakhs was offered for taxation in the Assessment Year 2001-02,therefore,there was justification for making full provision of ₹ 32,12,625. 14.2 We have heard the learned DR and learned AR of the assessee. In our considered view a correct view has been taken by the learned CIT(A). Where the amount has been written back by the assessee in the earlier year the question of holding that there is double deduction does not arise. The provision is an ascertained liability and therefore this is fully allowable while computing book profit. There is no application of Section 43B. Accordingly, this ground of the Revenue is rejected. 14.3 However, while computing income/loss under the normal provisions of the Act this liability of purchase tax could not be allowed as deduction as it is actually not paid. To this extent ground of the Revenue is considered as allowed. 15.Ground No.3 15.1 It relates to deletion of the addition of ₹ 32 lakhs, and provision for purchase tax and ₹ 3,53,325 towards claim of set-off of sales-tax reversed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alances of various parties Written off) and not appreciating that these expenses were fully allowable in the year under consideration. 3.0Without prejudice to the appellants contention made in the previous year relevant to the Asstt. Year 2002-03, not holding that the Assessing Officer saction of bringing to tax a sum of Rs. 1782038 being reduction in appellants liability on account of Exchange Fluctuation on the outstanding bills for import of materials was not justified since the Assessing Officer had ignored that in view of the findings recorded in Section 143(3) for the Asstt year 200203, the appellants conduct of offering the said amount in the return of income was required to be ignored and in making reference to the provisions of Section 139(5) which are not applicable in the context of appellants facts. 4.0 Upholding the disallowance of Rs. 22131183 (including depreciationof Rs. 576506) and in not appreciating that the said expenditure was incurred wholly and exclusively for the purposes of business and that these were not related to agricultural activities. 4.1 Upholdingthedisallowanceof Rs. 22131183 (includingdepreciationof Rs. 576506) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income Tax (Appeals) confirmed the disallowance on the ground that these expenses have not been incurred during the relevant year and therefore cannot be allowed under section 37.Further if it is a loss it was not incurred during the current year.They are also not trading advances.It pertained to the employees who retired somewhere between 1990-1999. 16.3.2 Ld. DR on the other hand supported the order of the authorities below. 16.3.3. After considering the rival submissions and carefully going through the material on record, we are of the view that the claim should be allowed.Firstly, for an amount to become eligible for writing of in the books, it is not necessary that it should be only a trade advance. What is necessary, is that advance is given during the normal course of business.Advances are given to the employees as a part of business policy and are recoverable from their salaries. There is no capital outlay involved.Therefore advances to employees would also fall in the category as trade advances.What is necessary is that commercial interest should be involved in the advance and it should not be of personal nature.Once such advances given to employees are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount relating to previous years.The Assessing Officer disallowed the claim on the ground that the assessee has not made any effort to convince the forest department regarding price originally decided by them.He accordingly made addition.The Learned Commissioner of Income Tax(Appeals) confirmed the same on the ground that the assessee failed to produce relevant books of accounts or the sale register for the earlier years to show that these amounts were shown as sales, in earlier years.Since the assessee failed to show that conditions of claiming bad debts are satisfied, disallowance so made was confirmed. 16.3.8. Before us Ld. A.R. for the assessee submitted that assessee has undertaken the job of cutting bamboo grown on Government land which was ultimately purchased by the assessee to be used as raw material for the manufacturing of final product i.e. paper.The assessee is paid job charges which are based on length of the bamboos as per assessee s own calculations.Certain amount was debitedby the assessee to the account of forest department on the basis of length of bamboos estimated by the assessee.However, the forest department did not agree and did not make full payment as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineers (supra) the amount so written of should be allowed as reduction.This ground is allowed, but for statistical purposes. 16.3.14. ₹ 1,48,676/- This amount represented small amounts lying as debit balance in respect of more then 50 parties.The assessee did not give any detail to the Assessing Officer.He therefore disallowed the claim.The Learned Commissioner of Income Tax(Appeals) confirmed the same on the groundthat it is not clear from the details filed whether they were offered as income in an earlier year or whether they are part of any advance.Before us Ld. A.R. submitted that during this year turnover of the company touched a figure of ₹ 680 crores.Various clients did not make full payments to the assessee for various reasons such as price difference etc.Keeping in view the smallness of the amount involved, in respect of each party and to avoid any strained relation and discontinuation of business with them, the amount was considered as irrecoverable and was written off. 16.3.15. After considering the rival submissions and carefully perusing the material on record, we restore the matter to the file of the Assessing Officer before whom the assessee will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion amounting to Rs. 1782038 the same was offered for tax as would be evident from Page 1 of the return. Without prejudice to the submissions made similar issue in Asstt year 2002-03 we submit that in view of the findings recorded in section 143(3) order for the Asstt Year 2002-03 the said amount of Rs. 1782038 offered for tax needs to be ignored in Section 143(3) order which would now be passed for Asstt Year 2003-04 . 17.2.Thus, due to favourable fluctuation in foreign exchange assessee has gained a sum of ₹ 17,82,038/-.However, it had suffered a loss in the assessment year 02-03 for a sum of ₹ 32,80,212/- which was claimed as liability in the assessment year 2002-03, but which was disallowed by the Assessing Officer.On that reasoning assessee had claimed before the Assessing Officer that favorable foreign exchange gain on account of fluctuation of rate should be ignored this year.The Learned Commissioner of Income Tax(Appeals)did not accept assessee s claim.In other words he dismissed the claim of the assessee to ignore the offering of the above sum as income in the event of his claim is disallowed in the assessment year 2002-03. 17.3.We have hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2002-03 while disposing of similar ground.Thus the disallowance is restricted to ₹ 10.01 lacs and accordingly assessee gets relief of Rs.(221.31 10.01) =211.30 lacs. 18.2.Ground No. 4.1 18.2.1. This is the same as ground No. 4, therefore it is considered as adjudicated aspart of ground No. 4. 19. Ground No. 5 19.1.It relates to deduction of ₹ 31,25,000/-.claimed by the assessee under section 35(1)(2) for the contribution of ₹ 25 lac made to Pushpawati Singhania research institute.The Assessing Officer disallowed the claim on the ground that assessee s application for renewal of the approval was pending with the CBDT.In absence of valid approval covering the period under consideration, the Assessing Officer disallowed the claim.The Learned Commissioner of Income Tax(Appeals) also confirmed the same following the same reasoning. 19.2. Before us it was submitted by the Ld. A.R. that the CBDT has now renewed the approval. Order of the CBDT contains the year under consideration.He referred to page B1 of the paper book. For the sake of convenience we reproduce the same as under: (TO BE PUBLISHED IN PART II, SUB-SECTION (ii) OF S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri) Director to the Government of India 19.3 It is clear from the above that renewalis applicable with effect from 01-04-2001. Since the defect on the basis of which disallowance was made is now removed the assessee is entitled for deduction.The Assessing Officer will verify the same and allow the claim.The ground of the assessee is allowed, but for statistical purposes. 20. Ground No. 6 is not pressed and is therefore rejected. 21.Ground No. 7(a) 21.1. It isagainst upholding Assessing Officer s order on the computation of book profit for the purpose of Section 115JB by ignoring that the assessee is entitled for deduction of ₹ 1,39,72,192/- being the profit eligible for deduction under section 80HHC. The Ld. Assessing Officer disallowed and Ld. Learned Commissioner of Income Tax(Appeals) confirmed the disallowance on the ground that deduction under section 80HHC has to be computed in accordance with the provisions of the Act and has to be allowed only if there is a positive gross total income.If gross total income is nil as there is a loss, no such deduction is allowable. Similar issue arose before us in the appeal for the assessment year 2002-03 in Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in not treating the right back of the excess provisions of the pre-takeover period as taxable, following CBDT s circular dated 22-04-1999. For the reasons recordedin that year, we confirm the order of the ld. CIT(A) this year also on this issue and dismiss the departmental appeal. ITA No.346/Ahd/2008 Assessee s appeal (A.Y. 2004-05) 26.In this appeal assessee has raised following grounds: 1.0 Upholding that the disallowance of ₹ 1158593 and not appreciating that these expenses were fully allowable in the year under consideration. 2.0 Upholding the disallowance of ₹ 7812884 (including depreciation of ₹ 432380) and in not appreciating that the said expenditure was incurred wholly and exclusively for the purposes of business and that these were not related to agricultural activities. 3.0 Upholding the disallowance of ₹ 63688608 to Meckinsey Company for advising the appellants on profit improvement measures etc is a capital expenditure. 3.1 Without prejudice to above ground, in not directing to allow depreciation on ₹ 63688608 after having upheld that the said expenditure is a capital expenditure. 4.0 Upholding the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 14650718 being the profit eligible for deduction u/s 80HHCof the Act and in ignoring that in view of appellant facts, for the purposes of computing Book Profit , it is not the profit as computed under the head Profits Gains of Business or Profession that has to be adopted but it is profit as per books of account. b)Rs.16385686 amortized in the accounts was not relatable to the income exempt u/s 10 of the Act. c)Rs. 472367295 being the loss incurred on sale of shares/units etc on which dividend income was also received (being exempt u/s 100 was wrongly held by the Assessing Officer as expenditure and that it relates to earning dividend income exempt u/s 10 and in ignoring that Courts have drawn clear distinction between the term loss and Expenditure and further that clause(f) of Explanation to Sec. 115JB is not applicable. d)Upholding add back of ₹ 3462416 being interest paid on borrowed funds/ Administrative expenses and in not appreciating that investment in shares / units etc were made out of internal accruals and further that no part of Administrative Expenses were incurred in relation to dividend income. 10.0 Ignoring that Book Profit u/s 115 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to these amounts have crystallized during this year. 27.4.After considering the rival submissions we confirm the order of the authorities below because the details as to how these expenses have been crystallized this year are not available.It is admitted position that these expenses pertained to earlier years, therefore the onus was on the assessee to show that liability crystallized during this year.Having not done so, it is not possible to take a different view then what ld. CIT(A) has taken. 28. Ground No. 2 2.1 28.1. This relates to disallowance of ₹ 78,12,884/- including depreciation of ₹ 4,32,380/- incurred on agricultural operations, growing saplings and supervision of trees grown by farmers.Similar issue has arisen before us in the assessment year 02-03.This year also we have heard Ld. A.R. and Ld. D.R on this issue. We notice that facts and circumstances for the issue are the same as in earlier year.The details of expenditure incurred on various activities as given by the assessee areas under: 28.2. Following our order for the assessment year 2002-03 only the expenses to the extent on ₹ 15.15 lacs would be considered as agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer that as a result of this project it was possible to identify and launch implementation of ideas, capturing of operational improvement opportunities, installation of implementation management mechanism etc.All these activities helped the company in increasing, sales, cost reduction and finally the profit.In the books of accounts part of the expenditure was considered as deferred revenue expenditure and partly as intangible asset as per the accounting standards.However, keeping in view of the provisions of Income-tax the entire expenditure was claimed as revenue expenditure for the current year. 29.2. The Assessing Officer however, treated the expenditure as capital on the ground that auditors of the assessee company have treated itas capital expenditure and assessee has also not excluded the same from computation of book profit.Further, the nature of expenditure showed that it was incurred for enduring benefit and were not confined only for the year under consideration. 29.3. Before Ld. CIT(A) the assessee has relied on the decision of ITAT Delhi Bench in ACIT Vs. Medicamen Bio Tech Ltd. 99 TTJ 873 and of Bombay Tribunal in Charak Pharmaceuticals 99 TTJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on the basis of entries made in a books of account.These entries are not decisive or conclusive.By incurring the expenditure assessee has improved the profit earning system and has not created any capital asset.He further submitted that the issue is covered in favour of the assessee by the decision of the Hon ble Gujarat High Court inCommissioner of Income-tax Vs. Jyoti Electric Motors Ltd.(2002)255 ITR 345(Guj). 29.5. On the other hand ld. D.R. relied on the orders of the authorities below. 29.6. We have heard the ld. A.R. and ld. D.R. and perused the material on record.In our considered viewthe assessee has incurred the expenditure only for improving the profit earning system which included improvement in procedure of manufacturing the product of the assessee, techniques of production of raw materials, sales strategy, to capture savings, installing new management programme,pricing and supply issues etc.and no capitalasset was acquired.In this regard we further notice that (i) the business of the assessee was in existence for several years in the past. (ii) no new business was set up. Expenditure paid toand report obtained fromMeckinsey Co. was for existing business. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e use of an asset. The royalty was payable on the basis of the sales which the licensee would make and the payment was strictly linked with the quantum of sales and would vary with the quantum of sales. The amount of royalty paid by the assessee was revenue expenditure and allowable as a deduction in computing its profits. Jyoti Electric Motors Ltd. v. CIT [1999] 237 ITR 280 (Guj) explained. _Held,_also, that the amount of know-how fees of ₹ 3 lakhs and royalty of ₹ 1,03,068 paid by the assessee under agreement January 1, 1981, were allowable as revenue expenditure. Decision of the Gujarat High Court in Income-tax Application No. 269 of 1999, dated November 3, 1999, followed. 29.7. There are other authorities on the subject laying similar proposition of law. Some of them are referred hereunder to support our conclusion: 1.Commissioner of Income-tax Vs. Majestic Auto Ltd. (2009) 310 ITR 90 (P H) Expenses to the tune of ₹ 1,62,93,000 allegedly incurred by the assessee as payments made to C and L, for a study and report on reorganization of core business of the assessee and for improving its market share and profitability, was treated and disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken for the benefit of the business as a whole ; (iv) an expense incurred for acquisition of a source of profit or income would, in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit-making structure to work more efficiently leaving the source or the profit-making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down ; 3. Deputy Commissioner of Income-tax Vs. Core Healthcare Ltd. (2009) 308 ITR 263 (Guj) In considering whether a particular expenditure was of the nature of capital or revenue expenditure the Supreme Court decisions in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) specifically laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents and should have also offered the income of Excise duty included in stock of raw material in excess of unutilized modvat/cenvat credit at the end of the year on purchases The adjustment required can be represented asunder:- a)Add excise duty on closing stock of raw materialRs. 1,74,86,564/- b)Less: Unutilized Modvat/Cenvat Credit as at the year end on purchases ₹ 32,52,298/- Net EffectRs. 1,42,34,266/- Similar issue had arisen before us in the assessment Year 2002-2003 in ground no.5. For the reasons mentioned while disposing that groundin assessment year 02-03 we uphold the addition this year also subject to the direction that modified value of closing stock of this year be taken as opening stock of next year. 30.2. This ground of assessee is partly allowed accordingly. 31. Ground No.5 31.1. This relates to addition of ₹ 23 lacs on account of difference in valuation of stock submitted to the bank and valuation of stock taken in the books. During the course of assessment proceedings the Assessing Officer noticed that valuation of process stock as per statement given to the bank is more by ₹ 23 lacs as compared to the stock reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -There is no dispute that the appellant is maintaining the books of accounts on day to day production basis. -The appellant has taken the actual physical stock for the purpose of declaring closing stock in the books of accounts. -The books of accounts are audited and the value of closing stock in the books have been taken in accordance with the Accounting Standard and Accounting policies regularly followed by the appellant. -The purchase and sales are supported by vouchers and there is no point whatsoever of any suppression and sales or purchases. -The value of stock given to the bank is absolutely in estimate basis without any actual physical verification and the same was not supported by books accounts and for determining the value of stock also the average cost of the preceding month is considered. 31.3Ld. A.R. for the assessee drew then our attention to pages J-1 and J-4 J-7 of the paper book to emphasize that no quantitative statement of the stock was submitted to the bank. 31.4Against this, the ld. D.R. relied on the orders of the authorities below. 31.5We have considered the rival submissions and perused the material on record. It is not known on what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacs. Thus, Assessing Officer disallowed interest to the extent of ₹ 18,76,336/- and administrative expenses on prorata basis to the extent of ₹ 15,86,080/-. Thus, he made an addition of ₹ 34,62,416/-. The ld. CIT(A) noted that entire transaction of purchase and sale of shares is inextricably linked with the earning of dividend and incurring of loss. He noted that assessee invested ₹ 72.67 crores on 11.12.03 for two days. He further invested ₹ 50 crores on 18th December. Similar amount was invested subsequently. He held that if assessee had surplus funds, he could have repaid the loan so that payment of interest could be avoided. He accordingly confirmed addition by observing as under: 11.4 I have considered the submission made by the appellant and observation of the AO.There is no denying the fact that the appellant has invested huge amount of funds for earning the dividend as per the chart prepared by the AO on page 35 and 36.On 11.12.03 the appellant has invested ₹ 72.67 crores for two days. On 18th December the appellant has invested ₹ 60 crores.On 15th January the appellant has invested almost ₹ 48 crores and on 27th J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of gain resulting to the assessee due to favorable foreign exchange rate fluctuation. In the assessment year 02-03 the assessee had claimed deduction on account of unfavorable foreign exchange rate fluctuation on outstanding bills which was denied by the A.O. Accordingly, assessee has vide his letter dated 9.12.06 submitted to the A.O. to withdraw the above sum of ₹ 55,51,128/- from taxation. 33.2 Ld. CIT(A) had confirmed the action of the A.O. in not ignoring above sum even though claim for deduction on account of unfavorable fluctuation in foreign exchange rates was denied by him in the assessment year 2002-03. 33.3 We have heard ld. A.R. and ld. D.R. Similar issue had arisen before us in the assessment year 2002-03 and 2003-04. We have held above while disposing of grounds relating to this issue that deduction on account of loss suffered by the assessee due to unfavorable fluctuation in foreign exchange rates on outstanding bills of purchases has to be allowed as a deduction whereas gain on account of favorable fluctuation in foreign exchange rates has to be taxed as business income. Following the same we hold that offering of the income of ₹ 55,51,128/- by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 7(b). We have held therein that computation of book profit will not be affected by sec. 14A. For the detailed reasoning given there, we hold similarly also this year and decide the issue in favour of the assessee. As a result, this ground of assessee is allowed. 35.3 Ground No. 9(c) 35.3.1 This Ground relates to disallowance of loss of ₹ 47.24 crores claimed in the Book Profit Computation under section 115JB. 35.3.2 During the course of the Asstt. proceedings the Assessing Officer found that loss incurred by the assessee in trading of securities was directly related toearning of dividend income.According to him as per provision of clause (ii)of sec.115JB an expenditure related to exempted income are to be added back to the net profit. He thereafter invoked clause (f) of Explanation for the same purpose.According to him assessee has suffered the loss to earn the dividend which is exempt u/s 10 of the Act. The Assessing Officer examined various transactions carried out by the assessee in sale and purchases of the units and summarized the loss claimed by the assessee in the following chart:- 35.3.3 The ld. Assessing Officer noted that though the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as under: The word expenditure has not been defined in the Act.It is a word of wide import.The expenditure incurred by the assessee in respect of which payment is made.It means that all outgoings are brought under the word expenditure .The expenditure for purchasing stock in trade is one of such outgoings.The payments made for purchases would also be covered by the word expenditure iv)Sajowanlal Jaiswal [103 ITR 706] (Orissa) In this case the Hon ble High Court stated as under: Expenditure has no definition in the statute.All outgoings could broadly come under this head.In fact the Chambers Twentieth Century Dictionary gives the following meaning to the words: act of expending or laying out; that which is expended; the process of using up; money spent. If this be the meaning of the word according to common parlance, and in the absence of a statutory definition, the word would take its colour according to its common parlance use, payment for purchase of goods would certainly be an expenditure. 35.3.5Before ld. CIT(A) assessee raised following arguments:- a)In the normal computation of income this transaction was covered u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O and appellant.The contention of the appellant is not acceptable for the following reasons:- The appellant agrees that this is a case of dividend stripping.Further it is clear that the transactions have been entered into the appellant by keeping in mind the record date which means that the appellant knew that the NAV of the units has dividend pregnant in it.This did not change the purchase price because the NAV was disclosed.But the moment the record date passes the dividend would be distributed to the holder of the unit on the record date.The moment the dividend is distributed the mutual 46 fund loses the money and the NAV of the units fall almost in such a manner that the loss caused to the holder would be almost the same as the dividend received by him.There would be slight difference in the two figures.During the F.Y. relevant to the current A.Y. the appellant was aware of the fact that section 94(7) provides for disallowance of such a loss from the computation of income. The appellant was also aware that the legislature considers the earning of dividend and incurring of loss on such transactions as a composite transaction and therefore had made an amendment to the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss in relation to that should also be outside the purview of claim. The decision of the Hon ble Rajkot ITAT in the case of Bhanuben Chimanlal Malaviya (supra) and the decision of the Hon ble Bombay ITAT in the case of Walfort shares Stock Brokers Ltd. (supra) are distinguishable on facts.In both these cases the assessees entered into the transactions when section 94(7) was not present on the statute.Therefore, both the Hon ble ITAT held that the transactions cannot be treated as colourable device for defrauding the revenue.Besides both these decision were given on applicability of section 14A and not on the applicability of section 115JB. 12.22 In view of the above it is very clear that the appellant has deliberately entered into transaction which is colourable device to defraud revenue from the very inception of the transaction.The appellant knew very well that the dividend income received would not be taxed and further it may be possible that the loss incurred can be claimed as not disallowable u/s 115JB.From the very beginning in view of the insertion of section 94(7) the appellant was aware that both the dividend income and loss incurred on the dividend stripping tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of securities of ₹ 47.24 crs have arisen on sale of securities which is an Investment (Capital Asset) and thus the loss is directly attributable to purchase and sale of securities and is not at all attributable to earning of dividend income. c)Further dividend income is classified as chargeable to income tax under the head Income from other Sources as per 56(2) of the Income Tax Act although the same is exempt u/s 10(34) r.w.s 115O of the I.T. Act.The Act further provides that certain expenditure is allowable as deduction in computing income chargeable under the head Income from Other Sources u/s 57 and in that investment made for earning dividend income is never considered as expenditure least to think of loss on sale of investment as allowable deduction for earning dividends. d)As per Chapter VI of the Income Tax Act on set off and carried forward of losses it has been clearly mentioned in section 71that Capital losses cannot be set off against any other head of Income.The said provision clearly indicates the intention of the legislature clearly bifurcating between capital losses and losses under other head of income and its intention of not letting capital loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales consideration of securities under the head capital gains and thus the Assessing Officer has even accepted the fact that short term capital loss shown under the head income from capital gain can under no circumstances be set off against dividend income considering the provisions of the income Tax Act. d)In the Income Tax Act in section 94(7) the word loss has been specifically used while in section 14A the word expenditure has been used.Even in the chapter Vi of set off and carried forward of losses the capital loss is explained as excess of purchase consideration over sales consideration.Thus in various sections in the Income Tax Act itself has used the term loss and expenditure and this under no circumstances the loss on sale of securities which is a capital loss directly attributable to purchase and sale of security pertaining to the head Income from capital gain can be equated as expenditure related to earning of dividend. e)Expenditure payment would be unilateral act of only outflow of funds from the company whereas in the given case the loss has resulted due to difference in the outflow of funds (Investment) and inflow of funds (sale of investment) which is a bila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition in the book profit by the sum of Rs.47.24 cr.The entire issues are divided in 3 segments.They are:- 1.Whether loss and expenditure connote the same meaning and therefore the word expenditure used in sec.14A covers within its compassword loss 2.Whether the provisions of sec.14A are applicable to the facts of the present case 3.Whether case of the assessee is hit by sec.94(7) read with sub-sec.5 to sec.115JB 35.3.13 The undisputed facts are that assessee entered into shortterm transactions in sale and purchase of units of mutal funds.It purchased the units a couple of days before the record date and sold it after the declaration of dividend. In the process the assessee earned dividend of ₹ 47.51 crs and loss of ₹ 47.24 crs.The dividend income was claimed exempted u/s 10(33) and loss in these transaction was debited in the profit loss account prepared as per schedule VI of the Companies Act.The revenue sought to exclude loss from the computation of book profit u/s 115JB as well as from the computation of total income as per normal provisions of the Act by invoking provisions of Sec.94(7).In addition to this the alternative ground for disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. Thus, expenditure is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. 35.3.15 From the above authorities what comes out is that an expenditure is an essential item to be debited in the profit loss account to arrive at profit gains of the business.This profit gains being a result of profit loss account may be a profit or may be a loss. A business expenditure is allowable in the profit loss account if it is laid out wholly and exclusively for the assessee s business. This is allowable u/s 37(1) if it is not personal or capital in nature.A business loss is allowable u/s 28 as a trading loss or where assessee is carrying out two separate businesses, one resulting in profit and other resulting in loss then assessee has right to adjust loss from one business against the income of other by virtue of sec.70 71. U/s 57, cost of shares / units is deductible under clause III.The cost of goods is treated as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that loss and expenditure do notconnote same meaning and therefore they are not replaceable. Now comes the question whether the loss incurred by the assessee in the above referred dividend stripping transactions can be disallowed u/s 14A.In our considered view firstly sec.14A does not use the word loss and it cannot be said that assessee has incurred loss for the purposes of earning dividend income.Secondly if such dividend stripping transactions and loss resulted there from could be covered by sec.14A, it would not have been necessary for the legislature to enact sec. 94(7) whichspecifically deals with such type of transactions.Therefore sec.14A cannot be invoked to cover such transactions.The distinctionof the terms used in sec.94(7) and 14A are noticeable.Sec.94(7) uses the term loss whereas sec.14A uses the term expenditure .The distinctions clearly is made with understanding that sec.14A only covers disallowance of expenditure incurred for earning exempted income whereas sec.94(7) covers loss resulting from earning exempted income such as dividend.Finally sec.14A cannot be invoked while computing book profit u/s 115JB as computation of book profit under that section is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 115JB . As a result this ground of the assessee is allowed. 35.4 Ground No. 9(d) 35.4.1It relates to upholding of disallowance of interest and administrative expenses totaling to ₹ 34,62,416, while computing book profit.Issue relating to disallowance of similar amount of expenses incurred under these two heads was considered while computing income under normal provisions of the Act and the issue has been discussed by us while disposing of ground No.6.But while computing book profit similar disallowance has also been made by the Assessing Officer and has been confirmed by Ld.CIT(A). 35.4.2We have heard Ld.A.R. and Ld.D.R.In our considered view no addition can be made in the book profit u/s 14A.We have held while disposing of ground No.6(c) in the assessment year 2002-03 and also while disposing of ground 7(b) for assessment year 2003-04 and Ground No.9(c) in the present assessment year that provisions of sec.14A cannot be invoked for disallowing any expenditure relatable to any exempted income if otherwise such expenditure has been debited in the profit and loss account prepared according to Schedule VI of the Companies Act and certified by the auditors.It has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by BIFR s order cannot be stretched indefinitely and should lapse when company turns profitable.It was also claimed that this year the company was not a sick company. 39.2After considering the rival submissions, we find that there is no difference on facts between the assessment year 2002-03/2003-04 and present assessment year 2004-05.In fact, this year also the assessee company has declared a loss of ₹ 107,72,89,850/- and tax was levied on the basis of book profit under section 115JB.Therefore, it cannot be said that company has turned around.Accordingly, we follow our decision for the assessment year 2002-03 and 2003-04 and confirm the order of learned CIT(A) on this ground.This ground of the Revenue is therefore rejected. 40.Ground No. 2 40.1It relates to addition made on account of adjustment under section 145A relating to excise duty not considered in the stock by the assessee. Similar issues have arisen before us in the assessment year 2002-03 and 2003-04.We have upheld decision of authorities to include excise duty element in the valuation of closing stock, but have directed that enhanced closing stock on account of addition by excise duty should be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41.2We have considered the rival submissions and perused the material on record.Similar issue has come before us in the assessment year 200203 and 2003-04.Following those decisions, we restored the matter to the file of the Assessing Officer for giving an opportunity to the assessee to show (i)When these amounts first time appeared in the books of account of the assessee (ii)Whether these amounts were considered in the trading/profit and loss account of some earlier year i.e. income of some earlier year was computed after adjusting these amounts (iii)Whether the creditors have directly or by implication forgone their claim 41.3In case, amounts did not appear in the books this year and they have not passed through the profit and loss account and trading account of some earlier year, no addition is called for.Where any of these amounts appeared in the books in any of the earlier years and have not passed through the trading cum profit and loss account, no addition is called for.Where any of these amounts appeared in the books of account in any of the earlier years and have passed through the trading account and profit and loss account, then it has to be seen whether credi ..... 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