9911796707
TMI Blog2009 (9) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... inst Section 143(3) order dated 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 debited), Rs. 29000 (Erecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 Rs. 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. It was 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 Rs. 35 lakhs which should have taken care of such write off. The learned CIT(A) on page 11, para 4.11 to 4.14 of his order, confirmed the addition by holding that the assessee has not filed the details to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allowable during this year. We are fortified with our view by the decision of in the case of CIT v. Raj Motors 284 ITR ITR 489 (All). Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above. Accordingly this ground of the assessee is rejected. 5.4.1. Rs. 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 parties have been credited in the trading account and how the assessee considers the amount irrecoverable as per principles laid down by the Hon'ble Guj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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'ble Orissa High Court nowhere mentioned about 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 direction that the Assessing Officer will allow the claim u/s.43B of the Act when the amount is actually paid. A bank guarantee is only in the nature of a security or guarantee which impose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 in the relevant years, that the interest income earned on the fixed deposits belonged to the assessee and that therefore giving the bank guarantee on the basis of fixed deposits made with the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 against purchases made by the assessee from OFDC. In other words, it would be found out whether this amount is a trading deposit or capital deposit. If it is a capital deposit, claim will not be allowed as it would be a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Taluka Panchayat Sales Tax difference and security deposit with National Printing and Paper Ltd and debit of the same in the P/L account. In absence of details, the Assessing Officer disallowed the claim. The learned CIT(A) confirmed the addition on the same ground. 6.4.2. Having heard both the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch offering for tax has been done in the AYs 2003-04 and 2004-05 for a sum of Rs. 17,82,038 and Rs. 55,51,128 respectively. Further the additional liability arising on account of foreign exchange rate fluctuation is covered by the decision in the case of Commissioner 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 assessee the liability of foreign suppliers was Rs. 472.20 lakhs as on 31.3.2001 which is increased to Rs. 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 earlier entity as a whole. It has been showing liabilities in respect of suppliers from year to year which included liability of pre-takeover period also. If there is a fluctuation in the foreign exchange rate due to which there is an additional burden i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of Rs. 2,78,29,039/-including depreciation of Rs. 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 Rs. 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 Rs. 45.52 lakhs as sale proceeds of saplings to the farmers/villagers and thus claimed expenses of Rs. 270.60 lakhs as loss against business income both under normal provision of the account as well as under the MAT provisions. 8.2 The 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 Dr Rs. Cr. Rs. Labour charges 1,29,35,409 Sale of Saplings 45,52,105 Supervision charges 34,01,995 Loss 2,70,60,364 Material 23,23,660 Land Rent 6,74,002 6,74,002 O.H. Exps 1,22,77,403 3,16,12,469 3,16,12,469 8.3 It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 incurred loss which is an agricultural loss and cannot allowed. He derived support from the decision of the Delhi Tribunal in the case of Sudisha Farm Sursery v. ITO (ITA No.1065/Del of 2002); CIT v. Soundarya Nursery (241 ITR 530) and on the definition of agricultural income u/s.2(1A) of the Act. The Assessing Officer also disallowed claim of the assessee to amortize expenses on the same ground that it is agricultural loss. 8.5.1 It was submitted before the learned CIT(A) that even though the activities carried out are in the nature of agricultural but the use of land is not for agricultural purposes and therefore the income derived cannot be said to be agricultural income. What is important for the present is the purpose for which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities, 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 been laid down by the courts that the nature of income arising from a particular business activity depends upon the intention of the assessee in leasing out the assets. According to the A.R, in such decisions, the courts have further held that where income is derived from commercial exploitation of the assets and there is only a difference in the manner of exploitation, that is to say, instead of user of assets by the assessee itself, the assets are exploited by another person, income derived must be considered to be of the same nature "business income". But, on the other hand, if the intention in leasing out the assets is to go out of business altogether and earn rental income, the income there from would be assessable as 'inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is not acceptable at all. It is an old fact where and whenever a big industry set up with various ancillary units are found set up by various other people in neighboring areas to provide and supply various accessories and raw materials noted by the said company in its day to day business activities. This is an universally accepted fact and cannot be denied by any prudent man, who is aware of the procedure of setting up of big industries and its functioning. In a situation, where other independent assessees, who have set up their small industries to supply accessories or raw materials to a big company set up in the neighboring area does not mean that the activities of such small units are part of the business activity of the said b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 wherein they attain a height of 30 cms as per the requirement of the farmers. Clonal Route (Clones of Eucalyptus) production procedure is as under: The Coppice shoots (Small shoots which arise from Sujps of EucaIyptus trees) from Farmers fields is collected by our staff from various areas away from the Mill. These coppice shoots are of no use to the farmers and they destroy it. In the Clonal Technology these shootes are utilized by cutting the shoots in small pieces of 1.5 inches to 2 inches. These cuttings are then treated in bavist in 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. Soil in any stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 expenses. Therefore, it is unreasonable to adopt the entire expenses claimed by the assessee as pertaining to growing saplings alone. Therefore, in case activities of the assessee are treated as agricultural activities then only those expenses are required to be disallowed which were specifically incurred on growing saplings and not what is incurred for monitoring and supervision for growing trees by the farmers. The learned AR of the assessee further submitted that the intention of the assessee is important in determining the nature of income. He submitted following details to buttress his argument that all the expenditure of Rs. 3,16,12,469/-incurred by the forestry division of the assessee were not incurred on growing saplings alone: 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. There is no requirement under accounting standards or tax laws to keep such expenditure accumulated as work in progress and claim the same as expenditure only at the time of purchase of trees. Thus, ld. A.R. prayed that the assessing officer may be directed to allow the expenditure incurred by the appellant towards forestry. 8.5.7 While advancing alternative contention, it was submitted that such expenditure should be considered as relating to agricultural operations as they were incurred on activities performed on land i.e. upto primary bed stage in seed route Plantation. In the event this is not acceptable then only the expenditure incurred up to the sale of saplings should be considered as relating to agricultural activities as post sapling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 activities are integral and has been carried out for commercial exigencies for procuring raw material for their plan. If it is considered that some part of the expenditure is incurred in agricultural operation then a reasonable proportion of such expenses be only disallowed and not the entire expenditure of Rs. 316.12 lakhs reduced by sale proceeds of Rs. 45.52 lakhs. 8.6. Against this, the learned DR submitted that the assessee has been actually carrying out agricultural operation over the land to grow saplings. He referred to the decision of Hon'ble Supreme Court in the case of CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466(SC) wherein it is held that agricultural operation means tilling of the land, sowing of the seeds, planting and similar operation on the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buting 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 income generated by carrying out subsidiary or subsequent operations not connected with the use of the land. The most important aspect of holding an income as agricultural income is that the assessee must use land for carrying out basic operation right from the tilling of the land up to harvesting. In this regard following observation of Hon'ble Supreme Court is relevant: The mere performance of these subsequent operations on the products of the land, where such products have not been raised on the land by the performance of the basic operations, would not be enough to characterise them as agricultural operations; in order to invest them with the character of agricultural operations these subsequent operations must necessarily be in conjunction with and in continuation of the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 32 ITR 705 (SC) the issue was whether income from the sale of sal trees from their forests which were admitted to be of spontaneous growth, would be agricultural income. It was held that where no basic operation on the land is carried out then subsequent operations alone will not result into agriculture income. In this regard we refer to following part of the head notes from the above judgment: It was claimed that the income from sale of sal trees was agricultural income as in addition to the maintenance of a forest establishment human skill and labour were employed in the following operations: (a) reservation of blocks of forest and their operation by rotation; (b) marking of trees for felling; (c) creeper and climber cutting; (d) thinning and removal of diseased and unso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 and run as business quite independently of agricultural and they may be no process carried on upon the land at all in running a nursery. Even if the keeping of a nursery necessarily involves the use of some land and earth for the purposes of rearing plants, that would not by itself amount to the carrying on of a primary agricultural operation in the sense of cultivating the soil. However cases may arise in which a nursery may be maintained by a farmer as an aid or necessary adjunct to the primary process of agricultural carried on by him. [In this case it was held that the materials placed before the agricultural income-tax authorities could not justify the conclusion that the income from the nurseries constituted agricultural income.] 8.8.7.Hon'ble A.P. in Additional Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1996-97 its loss from the agricultural operations exceeded the income from sale of the agricultural produce. The assessing authority held that the net farming expenses claimed by the assessee were in the nature of expenses incurred for agricultural operations and not deductible in computing its taxable income. This was confirmed by the Commissioner (Appeals). On appeal to the Appellate Tribunal : Held, dismissing the appeals, that although there was a nexus between the farming expenses incurred by the assessee and the business carried on by the assessee, the expenses could be allowed as a deduction under 37 only if the expenses were otherwise considered as expenditure in computing the business income of the assessee-company. The farming operations carried on by the assessee-company were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 carried out and in conjunction and continuation, subsequent operations are also carried out. 2. If in addition to caretaking of spontaneous growth the assessee in between such spontaneous growth uses the land for sowing the seeds after tilling, then income from such basic operations alone will be agriculture income. 8.8.10. On the basis of discussion made above when we apply above principles we find that the expenses of Rs. 249.13 lakhs being expenses incurred on forest , supervision of growing trees by farmers, conveyance, salary of the staff engaged in that purpose could not be treated as expenditure on agricultural operation and therefore should be allowed as business expenses. Similarly expenditure of Rs. 13.40 lakhs incurred by the assessee on growing coppice seeds without using the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncreased by Rs. 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 has kept separate account of cenvat credit and therefore it will have no effect on the total income. It is because if the value of closing stock is increased in this year on account of residuary cenvat credit, then it will have a consequential effect on the opening stock of the subsequent year. The learned CIT(A) rejected the submissions of the learned AR of the assessee . He upheld the finding of the Assessing Officer that where the manufacturer is permitted to avail the credit of the duty paid on the imports then the same has to be considered for the valuation of the stock both in the opening as well as in the closing stocks. The total duty availed by the assessee company was Rs. 2,91,99,797 on the basis of raw materials consumed whereas the credit utilized for finished goods was Rs. 3,03,96,918. Accordingly, the difference is required to be added as profit of the year. 9.2 The learned AR of the assessee submitted that inclusion of tax duties in the value of raw materials of the closing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the 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 regularly in the books of account. The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as follows : (a) Any tax, duty cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw materials, stores, etc.) if not already added in the books of account. (b) Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account. (c) any tax duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts. 23.13 It may be noted that when the adjustments are made in the valuation of inventories, this will affect both the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andian, 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 allowable only on the profits and gains arrived at under Sections 28 to 44B of the Income Tax Act. In the case on hand, it is the stand of the assessee that the relief under section 8OHHC should be based on the profit ascertained under Section 115JA only but not on income computed under Sections 28 to 44 of the Act. The Tribunal after considering the Judgments of the Supreme Court in the case of Surana Steels P. Ltd., vs. Deputy CIT (1999) 237 ITR 777 and in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 (SC) and analyzing the order impugned found that, the provisions of Section 115J are similar to the provisions of Section 115JA of the Act. In order to come to the conclusion the Tribunal has also taken note of sub-section (4) of section 115JA and referred to the dictum laid down by the Supreme Court in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 wherein it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at by the Tribunal is correct and followed the decision of the Supreme Court. We are of the view that the conclusion arrived at by the Tribunal cannot be complained of." 10.1.3 The learned DR, on the other hand, submitted that there cannot be two computations for deduction u/s.80HHC. This has to be done on the basis of income computed under the provisions of the Act. If some deduction u/s.80HHC is computable then the same should be allowed from the book profit. If no deduction is computable u/s.80HHC on the basis of computation of income as per I.T. Act for the reason that there is loss in the business then no deduction can be allowed while computation book profit as well. 10.1.4.We have heard both the parties and perused the record. It is not disputed that Hon'ble Kerala High Court in the case of GTN Textiles Ltd (supra) Hon'ble Madras High Court in case of Megha Electro and Futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of Rs. 60,46,960. It comprises of two items. They are adjudicated as under: 10.2.1 Rs. 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 liability and bank guarantee provided against such liability cannot be allowed u/s.43B. The dispute has traveled to the High Court of Gujarat which directed the assessee to furnish bank guarantee for the disputed amount. 10.2.2 We have heard the learned AR of the assessee and the learned DR.It was submitted by the learned AR that computation of income was done under the MAT provision (Section 115JB). Therefore, no adjustment in the book profit is permissible except those provided in that Section. We rely on the decisions of Hon'ble Supreme Court in the case of Apollo Tyres (255 ITR 273) and Commissioner of Income-tax Vs. HCL Comnet Systems and Services Ltd.(2008) 305 ITR 409 (SC). In this regard we refer to following part of the head notes from that judgment as under: While resorting to the provisions of section 115JA of the Income-tax Act, 1961, on the basis that the total income of the company as computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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. 10.2.4 Rs. 12,50,481 - This amount relates to the demand raised by the GEB (Gujarat Electricity Board). Accordingly the amount is ascertained liability and therefore, cannot be added back in computing book-profit in view of the decision of the Hon'ble Supreme Court referred to above. 10.3.1 Ground No 6 (c) relates to sum of Rs. 1,19,58,321. The Assessing Officer had disallowed this amount while computing book profit u/s.115JB by holding that they relate to agricultural activities therefore expenses incurred on earning exempted income are not allowable. Learned AR of the assessee submitted that no such disallowance is called for in computation of book-profit u/s 115JB. 10.3.2 After hearing both the sides, we are of the considered view that no adjustment is required to be made in computation of income u/s 115JB of the I.T. Act, except as provided in that section. There is no provision u/s 115JB of the Act to consider any expenditure or part thereof as disallowable by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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, that, while determining the "book profits" under section 115J, the Assessing Officer could not recompute the profits in the profit and loss account by excluding provisions made for arrears of depreciation. Decision of the Kerala High Court in CIT v. Appollo Tyres Ltd. [1999] 237 ITR 706 reversed on this point. The Appellate Tribunal had found as a fact on material on record that the investment by the assessee-company in units of the UTI was in the course of its business and its business of manufacture and sale of tyres and the business of purchase and sale of units of the UTI were common in nature and both the businesses were intertwined and interlaced ; and, therefore, the business in purchase and sale of units was an "eligible business" within the meaning of the definition of "eligible business" in section 32AB(2) and the assessee was entitled to deduction of 20 per cent. of the profits from that business, though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er thereafter has the limited power of making increases and reductions as provided for in the Explanation 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 limited extent provided in the Explanation. It was further observed that while 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, 1956, which obligate the company to maintain its accounts in a manner provided by that Act and they are to be scrutinised and certified by the statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies. It was observed that sub-section(1A) of section115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. Held, accordingly, that for the purpose of section115J of the Act, only those adjustments, which are specified in the Explanation to section 115J, can be made from the book profits and depreciation not being one of them and further the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, *such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one-half per cent. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) : Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies ; (ii) the accounting standards adopted for preparing such accounts including profit and loss account ; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 is credited to the profit and loss account ; or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.-For the purposes of this clause,- (a) the loss shall not include depreciation ; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil; or (iv) the amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or subsection (3A), as the case may be, of that section, and subject to the conditions specified in that section ; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section ; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... numerated above in the section. The expenditure relating to exempted income as provided in section 10, 11 and 12, if debited in profit and loss account, are required to be added by virtue of clause-f to Explanation. This clause does not mentionsection14A though it also relates to disallowance of expenditure relating to exempted income. If legislature had intended to increase the profit by the expenditure relating to exempted income as provided in Section 14A, they would have so provided in clause 'f' to explanation. The fact that Section 10, 11 and 12 are mentioned in clause-f of Explanation, but not Section 14A even though they deal with similar type of expenditure i.e. relating to exempted income, gives clear indication that legislatures have not intended to disallow and consequently add to the book profit, expenditure relating to exempted income, and debited in profit and loss account prepared as per Companies Act. 10.3.8 The only argument raised by the revenue in this regard is that Sub Section-5 or Section 115JB provides the applicability of all the provisions of the Act and therefore provision of Section 14A would also apply and consequently expenditure relating to exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.3.9 In 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 in the profit and loss account and a part of which has been considered as relating to agriculture operations in our discussions above cannot be added back while computing book profit under section 115JB. 10.3.10 As a result, this ground of the assessee is allowed. 11 Ground No.7: 11.1 It relates to charging of interest under section 234B in respect of income computed under section 115JB. Heard both the parties. In our considered charging of interest u/s. 234B is consequential and would be on the tax determined u/s. 115JB. Hon'ble Karnataka High Court held in Jindal Thermal Power Co. Ltd. Vs. Deputy Commissioner of Income-tax (2006) 286 ITR 182 (Kar) that the provisions of section 115JB as introduced by the Finance Act, 2000, imposed liability for payment of advance tax and the retrospective operation of section 115JB(1) with effect from April 1, 2001, could not be said to be unreasonable, excessive or harsh so as to declare it unconstitutional. It was also held that Sub section (5) specifies that sav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 41(1) of the I.T.Act,1961. (2) On the facts id in the circumstances of the case and in law, the ld. CIT(A) Surat has erred in holding that the entire liability of Rs.32,12,625 in respect of purchase tax had crystalised during the year without bringing any material on records. This being a statutory liability, it is allowable only if it is actually paid otherwise it is to be disallowed u/s.43B of the Act (3) On the facts and in the circumstances of the case and in law, the ld. CIT(A) I Surat has erred in directing the A.O. to delete the amount of Rs. 35,53,325 in respect of : (a) Provision for purchase tax Rs. 32,00,000 (b) Claim of set-off of sales-tax reversed. Rs. 3,35,325 Rs. 35,53,325 (4) On the facts and in the circumstance of the case and in law, the ld. CIT(A) I, Surat ought to have upheld the order of the A.O. in respect of the above issues. (5) It is therefore, prayed that the order of the Ld.CIT(A)-l, Surat may be set aside and that of the A.O. be restored in respect of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Income-tax Act, 1961 to that effect." 13.2.3. The BIFR vide its order dt.13.5.1992 in case of this CPML (former name of the assessee) passed the following order. The relevant portion of the said order reads as under: "i) To sanction excise loan as applicable to sick industrial units as per the scheme of Central Government. ii) To exempt CPML from the application of the provision of Section 4(a) of Payment of Gratuity Act in respect of arrears of gratuity; iii) To exempt CPML under section 41(1) of the Income Tax Act,1961; iv) To exempt J.K. Industries and associates from provisions of MRTP Act, 1969 and Section 10BA, 370, 372 and other applicable provisions of the Companies Act, 1956 for acquisition of shares in CPML or for advancing loans to CPML or for furnishing guarantee(s)." 13.2.4. Above is a beneficial circular and has been provided to reduce the hardship from the rigours of law. Hon'ble Supreme Court in UCO Bank Vs. Commissioner of Income-tax & Tamil Nadu Industrial Investment Corporation Ltd. Vs. Commissioner of Income-tax (1999) 237 ITR 889 (SC) has held that the Central Board of Direct Taxes under section 119 of the Income-tax Act, 1961, has power, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular cannot be considered as traveling beyond the powers of the Board under section 119 of the Income-tax Act. Such a circular is binding under section 119. Such circulars are meant for ensuring proper administration of the statute and, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question. 13.2.5. Thus the circular issued by the CBDT allowing tax payers not to be taxed under section 41(1) if they are BIFR Companies is a beneficial circular and is binding on the Income Tax Authorities. In view of the above, we do not find any case for sustaining the addition made by the A.O. u/s 41(1). The learned CIT(A)is justified in deleting the same. This ground of Revenue is, therefore, rejected. 14. Ground No. 2 14.1 It relates to liability of Rs. 32,12,625 in respect of purchase tax crystalised durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of purchase tax is an ascertained liability and is fully allowable while computing book profit u/s 115JB. Regarding sales tax reversed amounting to Rs. 3,53,325, the learned Assessing Officer mentioned that it is only in the nature of contra entry and it should not have any affect on the book profit, therefore, it should not have been claimed as set off. Before the learned CIT(A), it was submitted by the assessee that the claim was made by way of rectification of vouchers passed in earlier years and after debiting previous years expenses. A corresponding credit was made to the consumption account. Thus, a sum of Rs. 3,53,325 was offered for taxation. According to the learned AR of the assessee, this will have no effect on computation of income as per Schedule VI of Computation Act. (i.e. book Profit). Accepting the above contention, the learned CIT(A) allowed the claim of the assessee. 15.2 Since the same was offered for taxation in earlier years wrongly, deduction from book profit has been claimed in this year. So far as the computation of book profit is concerned, the auditors have not found any fault; therefore, the same cannot be reduced by the Assessing Officer in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoking the said section. 5.0 Upholding Assessing Officers action for not allowing deduction of Rs. 3125000 claimed by the appellant u/s 35(I)(ii) for contribution of Rs. 2500000 made to Pushpawati Singhania Research Institute and alternatively in not directing the Assessing Officer to allow the deduction for the above amount on appellants submission of Section 35(I)(ii) Certificate which was to be received from Central Board of Direct Taxes. 6.0 Without prejudice to the appellants contention made in the previous year relevant to the Asstt Year 2001-02, not directing the Assessing Officer that the depreciation allowance for the year under consideration should be recomputed adopting WDV on the opening day of the previous year relevant to the Asstt Year 2003-04 once it reaches finality on disposal of appeal for the Asstt. Year 2001-02. 7.0 Upholding the Assessing Officers action on the computation of Book Profit for the purposes of Section 115JB of the Act and in ignoring that:- a) The appellants qualified for deduction of Rs. 13972192 being the profit eligible for deduction u/s 80HHC of the Act and in ignoring that in view of appellant facts, for the purposes of computing Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 16.3.4 Rs. 1,78,607/-It represented discount claimed by 4 parties which were settled during the year. The Ld. Assessing Officer disallowed the claim on the ground that they pertained to earlier years and should be accounted for in the year when sales took place. The Learned Commissioner of Income Tax(Appeals) confirmed the disallowance on the ground that the assessee failed to give the proof of crystallization of the claim during this year. As the amount pertained to earlier years, he confirmed the disallowance. 16.3.5. The Ld. A.R. however submitted that sales were made to 4 parties and their accounts were debited, but part of the dues was not paid by the parties on account of dispute on quality and price. Since keeping in view the turnover of the sales made to these parties, short amount not paid by them was written off as bad debts. Ld. D.R. on the other hand relied on the order of the authorities below. 16.3.6. After considering the rival submissions, we restore the matter to the file of the Assessing Officer to give an opportunity to the assessee to show that this amount represented sales made to the clients .If the amount has been offered for taxation in the earlier yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent has made, was accepted and unpaid amount was return of. 16.3.9. The Ld. D.R. on the other hand relied on the orders of the authorities below. 16.3.10. We have heard the rival submissions and perusing the material on record. We restore the matter to the file of the Assessing Officer to give an opportunity to the assessee to show that above amount has been considered in the sales in earlier year and is not recoverable, following the decision of Hon'ble Gujarat High Court in Dhal Enterprises and Engineers (supra).This ground of the assessee is therefore allowed, but for statistical purposes. 16.3.11. Rs. 21,97,577/- This amount represented telephone, electricity and Taxi hire charges. It was claimed that these expenses were incurred by other group companies on behalf of assessee company. Due to difference of opinion with regard to the share, the assessee has to bear a sum of Rs. 21,97,577/-which was considered as assessee's liability and was claimed as deduction. The Assessing Officer disallowed the same on the ground that it pertains to earlier years. The Learned Commissioner of Income Tax (Appeals) confirmed the same on the ground that no proof of settlement or crystalliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which are written off on account of non recovery from the parties and for the reason that they are lying in the books for more then 3 years. Similar issue has been disposed of by us in the assessment year 2002-2003, which involved the write off of a sum of Rs. 11,11,433/-. Following the same, we restore the matter to the file of the Assessing Officer. As a result this ground of the assessee is allowed, but for statistical purposes. 17.Ground No. 3: 17.1. It relates to claim of foreign exchange rate fluctuation. It has affect on assessee's liability. During the assessment year the assessee had offered a sum of Rs. 17,82,038/- for tax, but during the course of assessment proceedings it was submitted that this offer should be ignored. The submission of the assessee in this regard was submitted to the Assessing Officer vide assessee's letter dated 18-01-2006 as under: "Songadh unit was taken over by the existing Management and for the pre takeover period there were certain outstanding bills for import of materials. The said liability (disputed) since is payable in foreign currency, the liability amount varies (increases / decreases) depending upon exchange rate. The effect of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected. 18. Ground No. 4 18.1.1. This relates to disallowance of Rs. 2,21,31,183/- including depreciation of Rs. 5,76,506/-.This expenditure was incurred by the assessee on growing of the sapling through three processes. First, directly showing the seeds in the land, growing the plants there and uprooting and replanting the same in polybags/pots, growing them to the height of 30 cms, and then selling the same to the farmers. Secondly, procuring coppice shoots from the farmers, carrying out chemical process under controlled conditions, and selling them later to the farmers for growing them into trees. Thirdly, spending money on distribution of seeds to the farmers on conveyance, salary etc. for the purpose of supervision of the trees grown by the farmers. The issue has been discussed by us in the assessment year 02-03.We have held therein that only the expenditure over the land after tilling, showing of the seeds, planting the same in polybags and subsequent maintenance thereof would alone be treated as agriculture expenditure and will not be allowed against business income of the assessee. Other expenses would accordingly be allowed. On our asking the assessee has submitted fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Research Institute for Liver, Renal and Digestive Diseases, Delhi has been approved by the central Government for the purpose of clause (ii) of sub-section (1) of section 35 of the income-tax Act, 1961 (said Act), read with Rules 5O and 5D of the income-tax Rules, 1962 (said Rules), with effect from 1.4.2001 in the category of 'other Institution', party engaged in research activities subject to the following conditions, namely:- (i) The sums paid to the approved organization shall be utilized for scientific research; (ii) The approved organization shall carry out scientific research through its faculty members or its enrolled students; (iii) The approved organization shall maintain books of accounts and get such books audited by an accountant as defied in the explanation to subsection (2) of section 288 of the said Act and furnish the report of such audit duly signed and verified by such accountant to the Commissioner of Income-tax or the Director of Income-tax having jurisdiction over the case, by the due date of furnishing the return of income under-section (1) of section 139 of the said Act; (iv) The organization shall maintain a separate statement of donations receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e head "profit and gains of business and profession". Since facts are the same this year also, we allow the claim of the assessee. Therefore this ground of assessee is allowed. 22. Ground No. 7(b) 22.1. This relates to uphelding the Assessing Officer's action on computation of book profit for the purpose of Section 115JB of the Act and in ignoring that Rs. 1,50,78,740/- amortized in the accounts was not relatable to the income exempt under section 10 of the Act. Similar issue had come before us in Ground "6c" for the assessment year 2002-2003. For the reasons recorded therein this ground is accordingly decided in favour of the assessee. 23 Ground No. 8: 23.1It relates to not upholding the claim of the assessee that interest under section 234B is not payable whenincome is computed under the provisions of section 115JB.We have rejected this claim in the assessment year 2002-03 and accordingly it is rejected here also. 23.2 As a result, appeal of the assessee is partly allowed and partly allowed for the statistical purpose. ITA No. 738/A/2007 Assessment Year 2003-04 Revenue's appeal: 24. In this appeal Revenue has raised following grounds: "1.On the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit as shown in the P & L Account. 5.0 Upholding add back out Rs. 2300000 as income of the appellants and in ignoring that the closing stock declared to Bank was valued on the then available cost (of immediately preceding month) whereas for books it was on actual cost which becomes available by the time accounts are finalized. 6.0 Upholding disallowance of Rs. 3462416 being part of 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. 7.0 Without prejudice to the appellants contention made in the previous year relevant to the Asstt. Year 2002-03, not holding that the Assessing Officer's action of bringing to tax a sum of Rs. 5551128 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 2002-03, the appellants conduct of offering the said amount in the return of income was req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al grounds raised at the time of hearing. 11.0 Not appreciating that the tax payable by the appellant was computed under the provisions of Section 115JB of the Act and therefore, there was no liability to pay interest u/s 234B of the Act." 27. Ground No. 1 27.1. This ground relates to confirming disallowance of Rs. 11,58,593/- whose details are given as under: Amt/Rs. i) Debit balance of transporters/suppliers etc. 470907/- ii) Insurance Charges 10311/- iii) Additional Discount- Pradip Paper Mart 35990/- iv) Additional discount- T.K. Ruby 14737/- v) Electricity expenses - GeB Vyara, Audit recovery 103733/- vi) Over due interest on sales - Kalyan Paper mart 270970/- vii) Electricity expenses - GEB Vyara, Audit recovery 20871/- viii) Professional Tax 231074/- Total 1158593/- 27.2. During the course of assessment proceedings, the Assessing Officer noted that the assessee had offered a sum of Rs. 5,08,08,394/- as provisions of earlier years written back. Out of this it had claimed an expenditure of Rs. 11,58,593/- and offered the balance of Rs. 4,96,49,801/- net as income. It was claimed that the sum aggregating to Rs. 11,58,593/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricultural receipts and therefore cannot be allowed to be adjusted against agriculture expenses. So far as the depreciation of Rs. 4.32 lacsis concernedthe same has been claimed on mist chambers other assets used in growing saplings through clonal routes which has been treated as non-agricultural operation in our discussion made in assessment year 2002-03 while disposing of similar ground.Thus the disallowance is restricted to Rs. 9.43 lacs and accordingly assessee gets relief of Rs. (78.13 - 9.43) = 68.70 lacs. 28.3. As a result this ground of assessee is partly allowed. 29. Ground No. 3 29.1. This relates to upholding the payment of Rs. 6,36,88,608/-paid to Meckinsey & Co. for advising the assessee on profit improvement measures which was held as capital expenditure by the Assessing Officer.The Ld. Assessing Officer noticed that by claiming depreciation on the amount the assessee has treated it as capital expenditure in the books and still claimed as revenue expenditure in the return of income. It was explained by the assessee that M/s. Meckinsey & Co. were engaged to take up the project of profit improvement programme and building distinctive institutional continuous improvem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r improving the profit opportunities across all areas of operation like manufacturing, purchasing, sales and marketing including pricing and supply. The project was handed over with one of the terms that the Meckinsey & Co. will identify annualized saving in the range of Rs. 50 crores. The Meckinsey & Co. was required to provide the schedule in which the saving will be captured, installing the implementation management mechanism to ensure that 100% of the ideas are implemented. While it is true that as per the decision of Supreme Court and ITAT, Bombay cited by the appellant, book entry is not final for deciding the allowability or disallowability but it is a settled position of law that where benefit of enduring nature accrues to the assessee then depending upon the facts and circumstances of a case whether a capital assets is brought into existence or not the expenditure incurred can be treated as capital and not revenue. In the present position it is clear that the expenditure has not been incurred for effecting sales or any other business requirement. The expenditure has been incurred to improve manufacturing process, to improve the sales, marketing as well as pricing and suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is capital in nature. It must be coupled with the fact that assessee has acquired an asset. In the present case, no asset has been acquired by the assessee and there is no addition in the profit earning apparatus. It is only an improvement in the profit earning system. This issue is covered by the Hon'ble Gujarat High Court in Jyoti Electric Motors's case (supra).Hon'ble Gujarat High Court in this case observed as under: (Head Notes:) Where the assessee, which was manufacturing motors, paid the sum of Rs. 50,000 towards technical report fees for ascertaining feasibility of manufacturing motors of kinds different from those manufactured by it : _Held,_ that the amount was revenue expenditure and the assessee was entitled to deduction in relation thereto in computing its profits. Under an agreement dated September 1, 1972, with Jyoti Ltd., the assessee was granted a non-exclusive licence to manufacture electric motors which were manufactured by Jyoti Ltd., and for this purpose Jyoti Ltd. was to render technical and other experienced guidance to the assessee. Jyoti Ltd. reserved the right to grant similar licences to any other parties. Though the period of the agreement was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not under the production of the assessee hereto before) nor did it render any technical know-how in respect of any manufacturing or processing or production activity of the assessee. Fourthly, the report rendered by C and L resulted in effecting economy and efficiency in the working of the company for manufacturing and selling of existing items, which gave the assessee a business advantage ; and, fifthly, the expenditure incurred by the assessee had merely facilitated the assessee's trading operation and enabled it to manage and conduct the business more efficiently, while leaving the fixed capital untouched. The Tribunal held that the expenditure was deductible. On appeal to the High Court. _Held,_ dismissing the appeal, that the report pertained to "reorganization of core business of the assessee and improving its market share and profitability". It could not be treated as an expense incurred for conducting "market survey or any other survey necessary for the business of the assessee." It did not fall within the purview of sub-section (2)(a)(iii) of section 35D. In view of the findings of fact by the Tribunal the expenses were deductible as revenue expenditure. 2. Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to be treated as something akin to statutory conditions. 4. Commissioner of Income-tax Vs. T. E. I. Technologies P. Ltd. (2008) 304 ITR 262 (Del) The assessee had entered into a joint venture agreement with T and E to carry out manufacturing operations of CRT sockets, electronic components like TV remote control, etc., for the domestic market as well as for exports. The assessee paid an amount of Rs. 9,23,733 to T as well as E as technical support fee. According to the Assessing Officer, the benefit received by the assessee was of an enduring nature and, therefore, the amount was treated as capital expenditure and not as revenue expenditure as claimed by the assessee. The Commissioner (Appeals) and the Tribunal held that the expenditure was deductible. On appeal to the High Court : _Held,_ dismissing the appeal, that there was a finding of fact given by the Tribunal that all that the assessee received was technical assistance in the manufacture of the products. There was no transfer of technology or knowhow, etc., which would enable the assessee to set up its plant and machinery. The expenditure was deductible. 29.8. Following above decisions, and for the reasons discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that valuation of stock submitted to the bank was purely on estimate basis without physical verification. It was also submitted that no quantitative stock statement was submitted to the bank in respect of process stock. The ld. CIT(A) confirmed the addition by observing as under:- "10.3 I have considered the submission made by the appellant and observation of the AO. The fact that there is difference in the value shown in the stock statement given to the bank with the books of account is admitted by the appellant. Therefore, there is no dispute with respect of the fact in the case of Recon machine Tools Pvt. Ltd. (supra) The Hon'ble Karnataka High Court stated that no acceptable evidence was placed by the assessee to disbelieve the bank statement as rightly held by the Authoritiesin the case on hand. In fact, the entire amount shown pertains only to the raw materials. In so far as the raw materials are concerned, the same are required to be supported by various statutory registers as ruled by the authorities. In the circumstances, in the absence of acceptable material, it is not possible for this court to dislodge the findings of the facts, particularly in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... document in possession of the A.O. showing stock in quantity on a particular date and on comparison with the books it results in unfavorable difference against the assessee, the same will be shown to the assessee and after confronting him the difference in quantities will be worked out. Stock in terms of quantity will be compared as on the same date. There after, the difference if any will be valued at cost or market price whichever is low as per accounting policy followed by the assessee for valuation of stock. With these remarks, we set aside this ground to the file of the A.O. 32. Ground No.6 32.1 This relates to upholding addition of Rs. 34,62,416/- which, inter-alia, Rs. 18,76,336/- being interest paid on borrowed funds on the ground that interest bearing funds were invested in shares which yielded dividend being exempted income. During the course of assessment proceedings the Assessing Officer found that assessee has earned dividend income of Rs. 48,00,34,582/-. This was claimed exempt u/s 10. The A.O. required the assessee to give the details of expenses incurred to earn the dividend income, and source of investment in purchase of shares. It was explained that shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it cannot be said that the appellant has entered into such huge turnover without making any administrative cost. In view of these reasons the disallowance made by the AO is confirmed and this ground of appeal is dismissed." 32.4 Ld. A.R. of the assessee submitted before us that disallowance should be calculated as per Rule 8D. He referred to the decision of I.T.A.T. Mumbai D Bench in DCIT v. Citizen Hotels Pvt. Ltd. (ITA No.5371 and 5803/Mum./2005) 32.5 On the other hand, the ld. D.R. relied on the orders of the authorities below. 32.6 After hearing the parties we restore the mater to the file of the Assessing Officer for calculating disallowable expenses in accordance with Rule 8D.subject to directions that the disallowance would not exceed the amount disallowed in the impugned order as has also been directed by Tribunal in the case of DCIT Vs. Citizen Hotels Ltd Mumbai "D" Bench in ITA No. 5371 & 5830/MUM/2005. In principle we uphold the decision of authorities below that expenditure relating to earning exempted income has to be disallowed and since assessee has invested in securities which were held only for a couple of days, dividends were earned and securities were dispos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, held that the computation of deduction u/s 80HHC has to be done on the basis of book profit and not on the basis of total income computed in accordance with the provisions of the Act Accordingly, this ground of assessee is allowed. 35.2 Ground No. 9(b) 35.2.1This ground relates to upholding the action of the A.O. in not allowing deduction of Rs. 1,63,85,686/- amortized in the accounts by the assessee and claimed as deduction in computing book profit. The A.O. disallowed the claim while computing book profit u/s 115JB on the ground that this expenditure related to exempted income. This expenditure related to social forestry and incurred on growing saplings by the assessee in-house and also on supervision of growing trees by the farmers from the seeds and saplings provided by the assessee and finally purchased by it from the farmers. The assessee had incurred an expenditure of Rs. 73,80,504/- during this year and claimed in return and in the books amortized sum of Rs. 1,63,85.686/-. The ld. A.O. held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net loss shown by the assessee would be treated as an expenditure. He accordingly disallowed the claim of loss from computation of book profit. 35.3.4 The ld. Assessing Officer relied on the following authorities:- i) Indian Molasses Co. Pvt. Ltd. [37 ITR 66] (SC) In this case the Supreme Court stated that the "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention though in many uses of the word this element may not be present as when we speak of a joke at another's expense." But the idea of spending" in the sense of "paying out or away" money is a primary meaning and it is with that meaning that we are concerned. "Expenditure" is thus what is "paid out or away" and something which is gone irretrievably. ii) Nainital Bank Limited [62 ITR 638] (SC) In this case the Hon'ble Supreme Court stated as under : "In its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. When he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure. But expenditure does not necessarily involve actual deli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Webster Dictionary the "loss" is defined as damage, disadvantage, deprivation etc. caused by losing something. As per the law lexicon by P. Ramanath Lyer loss means deprivation, detriment or for feitune accruing as a result of shrinkage in value; something arising out of the exigencies of some transaction by reason of the circumstances attending it, and not a deprivation of property caused by a voluntary and spontaneous act of the person who is deprived. The Hon'ble Supreme Court in the case of India Molasses Co. Pvt. Ltd. [37 ITR 66] has held that an expenditure is equal to expense and expense is money laid out by calculation and intention. It means spending in the sense of paying out or away of money. In the case of Lord Dairy Farm Ltd. [27 ITR 700] Bombay high Court has stated that expenditure must arise out of a voluntary act on the art of a assessee whereas lossis entirely involuntary. In the case of S.C. Kothari [82 ITR 794] the Hon'ble Supreme Court has sated that disbursement or expense of a trader is something which comes out of his pocket. A loss is something different as it is not a thing which he expands or disburses. It is a thing which comes upon him as extra. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the insertion of section 94(7) it is very clear that the appellant is aware that the legislature has treated both the effect i.e. dividend and loss as relating to each other but still the appellant has entered into this transaction thinking that the loss would be allowed in the calculation of book profit.Hence the transaction is a collusive transaction. As stated by the AO in several cases the Hon'ble Supreme Court has held that sometimes the expenditure need not be same as physical delivery of payment. In the case of Nainital Bank Ltd. (supra) the Hon'ble Supreme Court stated that if there are cross claims one by the assessee against a stranger and other by the stranger against the assessee and as a result of accounting, the balance due only is paid. The amount which is debited against the assessee in the settlement of accounts may appropriately be termed as expenditure. Further in the case of Attar Singh (supra) the Hon'ble Supreme Court stated that the expenditure incurred by the assessee in respect of which payment is made means that all outgoings are brought under the word expenditure. The expenditure for purchase in stock in trade is one of such outgoing. The payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... &L A/c. for computing the book profit in view of the provisions of clause (f) of section 115JB.In view of these reasons the disallowance made by the AO is correct and this ground of appeal is dismissed. 35.3.7 Before us ld AR for the assessee submitted that assessee had made investments in units of Mutual funds which were subsequently sold at a loss of Rs. 47.24 cr. which was debited in the profit & loss account. In this process assessee earned dividend of Rs. 47.5 crs which was credited in the profit & loss account. Though while computing income as per normal provisions of the Act no loss was claimed as transactions are covered u/s 94(7) but while computing book profit such loss debited in the books was claimed as allowable as per section 115JB. Ld. A.R. submitted the issue is directly covered in its favour by the decision of Hon'ble Mumbai special Bench in Walfort and Stock Brokers Ltd v. ITO (96 ITD 1) which was subsequently affirmed by the Hon'ble Bombay High Court in Commissioner of Income tax Vs. Walfort Share and Stock Brokers P. Ltd.(2009) 310 ITR 421 (Bomb). 35.3.8 In addition ld.AR submitted following arguments in support of his contention that what he has incurred is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation to section 115J of the Act. 35.3.9 With regard to clause(f) of Explanation to Sec.115JB ld. AR submitted that said clause is inapplicable to the present case because loss arising on sale of unit is not expenditure for the following reasons:- a) Investment in securities has to be reflected in the Balance Sheet as per Schedule VI of the Companies Act and cannot be debited in profit and loss account not being an expenditure. b) Purchase cost of investment in securities has been reduced while calculating short term capital gain u/s 111A of the Income Tax Act and thus under no circumstances the said purchase cost can once again be claimed as deduction u/s 57 relating to Income from Other Sources. Thus if the said purchase cost of investment is not considered as expenditure u/s 57 of Income from other sources then under no circumstances the lower authorities can consider the said purchase cost of investment as expenditure related to earning of dividend. c) Even section 71 does not allow the set off of Short term capital loss against any other head of income as explained in the foregoing paragraphs. Thus even on this ground the learned Assessing Officer has grossly err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .115JB all the provisions of the Act would be applicable while computing book profit also.It is incorrect to say that sec.94(7) providing disallowance of such dividend stripping losses would not be applicable while computing book profit u/s 115JB.The assessee has entered into transaction keeping in mind the record date.Thus new NAV of the units was practically known to the assessee.Therefore, entering into such transaction and incurring loss and claiming the same against the profit is a colourable device.Sec.94(7) treats dividend and loss as a part of same transaction and therefore legislature thought it proper to disallow the same by enacting sec.94(7).The loss is in fact an outgoing and so is the expenditure therefore all the outgoings should be treated as same and they are hit by sec.94(7).The decision in Walford Shares & Stock Brokers Ltd and also the decision of ITAT, Rajkot Bench in Bhanuben Chimanlal Malviya vs. ITO 2006 100 TTJ 337 are not applicable to the facts of the case as these judgments were rendered prior to instruction of sec.94(7). Once the assessee knows that a particular transaction will result into a loss and which will have effect on taxable income and still e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture" relates to disbursements i.e. something a trader pays voluntarily for carrying out transactions whereas loss is not incurred out of any volition but is thrust on the assessee as a result of transaction. An "expenditure" is incurred to carry out a transaction; it is part of the activities to meet an end whereas loss is net result of the transactions which is known only at the end of the transactions. Hon'ble Supreme Court in Commissioner of Income-tax Vs. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) held that in its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure": it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts that there is expenditure. Further in the context of Sec.40A(3) Hon'ble Supreme Court in Attar Singh Gurmukh Singh Vs. Income-tax Officer (1991) 191 ITR 667 (SC) held that the word "expenditure" means all outgoings brought under the word "expenditure" for the purpose of the section 40A(3). The expenditure for purchasing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc. caused by losing something. The Law Lexicon by P. Ramanatha Aiyar illustrates loss to mean deprivation, detriment or forfeiture accruing as a result of shrinkage in value something arising out of the exigencies of some transaction by reason of the circumstances attending it, and not a deprivation of property caused by a voluntary and spontaneous act of the person who is deprived. The Supreme Court, in the case of Indian Molasses Co (P) Ltd. V. CIT: 37 ITR 66, held that an 'expenditure' is equal to 'expense' and expense is money laid out by calculation and intention. It means' spending' in the sense of 'paying out or away' money. In Lord's Dairy Farm Ltd. . CIT: 27 ITR 700 (Bom) it was observed that expenditure must arise out of a voluntary act on the part of the assessee, whereas, loss is entirely involuntary. In CITV. New India Assurance Co. Ltd., 71 ITR 761 (Bom) it wasagain held that business expenditure is voluntarily incurred while a business loss is fortuitous or ab extra. The two terms have been clearly distinguished by the Supreme Court in the case of CIT V. S.C.Kothari: 82 ITR 794 as follows:28 "Disbursement or expense of a trader is something 'which comes ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be invoked, as done by the ld.CIT(A) for disallowing such loss while computing book profit u/s 115JB. 35.3.19 In our considered view sec.115JB is a complete code in itself so far as computation of book profit is concerned. As we have discussed while disposing of ground No.6(c) in the Asstt. Year 2002-03 sub-sec.5 of sec. 115JB can be invoked only for borrowing provisions in those areas of the Act which are not provided in sec.115JB.The mechanism for computation of profit is completely laid down in sec.115JB.It starts with profit as computed and certified by the Auditors as per Schedule VI of the Companies Act. To this the adjustments as provided in that sec. alone are made and the net result is treated as total income for the purposes of comparing with total income computed under normal provisions of the Act and for levy of taxes. No other adjustments while computing book profit is permissible, as held by Hon'ble Supreme Court and other courts (supra).The effect of subsection 5 of sec.115JB of the Act is that provisions relating to collection and recovery, appeal and penalty as provided in other chapter of the Act can be invoked as they are not provided in sec.115JB. Sec.94(7) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismiss this ground this year also. ITA No. 390/A/08 Grounds of Appeal: 38. Departmental Appeal: Assessment Year 2004-05 1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 30,77,839/- on account of disallowance of claim of provision written back u/s 41(1). 2. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 76,67,604/- made on account of adjustment u/s 145A being Excise duty on opening stock of raw materials. 3. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 14,60,754/- made on account of unexplained sundry creditors. 4. In the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the CIT(A) be setaside and that of Assessing Officer be restored. 39. Ground No. 1: 39.1 The issue is similar as in Ground No. 1 in departmental appeal for the assessment year 2002-03 and Ground No. 1 in departmental appeal for the assessment year 2003-04.During the course of assessment proceedings, the Assessing Officer noted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs. 14,60,754/- made on account of unexplained sundry creditors. During the course of assessment proceedings, the Assessing Officer noticed that there are some creditors which are old for more than 3 years and are outstanding in the balance sheet. The Assessing Officer required the assessee to file the confirmation, but assessee did not furnish any confirmation in respect of outstanding credit balances. As no cogent evidence was furnished before the Assessing Officer, he doubted the genuineness of the credit entries. The Ld. Assessing Officer made the addition on the ground that the assessee failed to prove the genuineness of the credit entries. The Ld. CIT(A) deleted the same on the ground that these credit entries did not pertain to the present assessment year, but had come in the books in some earlier years. Therefore, addition cannot be made in the present assessment year. Before us, ld. D.R. submitted that it is for the assessee to show that these entries had first time appeared in the books in some earlier years and secondly that they were not taken into account while computing income of some earlier year so as to avoid taxability under section 41(1).He further submitted ..... 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