TMI Blog2019 (3) TMI 1608X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the facts we are of the view that the expenditure is allowable. Thus, the ground of Assessee is allowed Disallowance of higher depreciation - HELD THAT:- since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the Co-ordinate Bench of the Tribunal in assessee s own case for A.Y 2002-03 and for similar reasons hold that assessee is eligible to claim depreciation @ 80% with respect to plant and machinery used Plant Nos.4 and 8 in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus, the ground of assessee is partly allowed. Disallowance of Short Term Incentive Plan (STIP) - HELD THAT:- It is Assessee s submission that it has been consistently paying performance based incentives in the past and which has been allowed. However, during the year, the assessee has booked the expenditure on wholesome basis. We further find that pre-declared scheme is dated 22.12.2002 recommended by the VP HR and it was by the committee only on 28.05.2003 i.e., after the clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile deciding the Assessee s appeal for AY 2002-03 and for similar reasons, hold that no disallowance of expenses on adhoc basis is called for in the present case. We therefore direct its deletion Deduction u/s 80HHC - items to be considered in total turnover and the items to be considered in export turnover - HELD THAT:- While applying the deduction u/s 80HHC of the Act, the AO had excluded certain items and included certain items against which the Ld. CIT(A) has given relief in respect of certain items and upheld the other items. Both the assessee and the Revenue are in appeal against the respective portions of the order of the Ld. CIT(A). Both the Authorised Representatives have made extensive arguments in support of their respective claims. However, the issue of various aspects of claim of High Court and the Apex Court in various decisions and we proceed deduction u/s 80HHC of the Act has been adjudicated by the Hon ble to adjudicate the issues raised by making reference to the said decisions relied upon by the Ld.A.R. for the assessee and Ld.D.R. for the Revenue. Determination of total turnover - HELD THAT:- The plea of the assessee is that the scrap is generated duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock - HELD THAT:- The issue in the present ground is with respect to adjustment made to closing stock in terms to Sec.145A of the Act. We find that CIT(A) after considering the decision of Mumbai tribunal in the case of Gandhar Oil Refinery decided the issue in favour of the Assessee. Before us, Revenue has not pointed out any fallacy in the findings of CIT(A). We therefore find no reason to interfere with the order of CIT(A) and thus, the ground No.1 of Revenue is dismissed. Addition on account of lease rent - HELD THAT:- The issue in the present ground is with respect to addition made on account of lease rentals. Before us it is submitted that in no fallacy has been pointed out by the revenue in the order of CIT(A). earlier year the addition has been deleted by the tribunal. Before us, We therefore find no reason to interfere with the order of CIT(A) and thus the ground of Revenue is dismissed. Addition on account of medical expenses - HELD THAT:- We have heard the rival submissions and perused the material disallowance of additional medical expenses. We find that CIT(A) while deciding the issue in assessee s favour had relied upon the order of his predecessor for AY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) III PUNE, your appellant submits the following grounds of appeal for your sympathetic consideration. 1. PREMIUM ON LEASE HOLD LAND The learned CIT(A) further erred in confirming the action of the AO in disallowing Appellant's claim for deduction of amortised amount of premium in respect of leasehold land in the amount of ₹ 2,69,628/-. 2. REVENUE RECOGNITION On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO, to work out the excess provision for profit equalization in the light of the directions of the learned CIT(A) for A.Y. 2002-03. On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have accepted the contention of the Appellant that it had correctly applied the said Accounting Standard and accordingly only income as accounted by the Appellant in terms of the said Standard in respect of construction contracts undertaken by it could be brought to tax under section 4 read with section 28 of the Income-tax Act, 1961. Without prejudice to the above the learned the CIT(A) ought to have directed the AO to allow deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted AO to allow the deduction for the same in the year of payment. 8. DEPRECIATION ON KNOW HOW On the facts and in the circumstances of the case and in law the learned CIT(A) erred in disallowing depreciation on technical know how on the ground that the technical know how was not actually put to use on 31.03.2003 of ₹ 61,58,625/-. 9. CLUB EXPENSES The learned CIT(A) erred in confirming the action of AO in disallowing full amount of club expenses amounting to ₹ 1,34,210/- on the ground that it was a non-business expenditure rejecting the contention of the appellant that the said expenditure was incurred wholly and exclusively for the purposes of the business of the appellant and no enduring benefit accrued there from. 10. ADHOC DISALLOWANCES: On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO of making the following adhoc and aribitrary disallowances : Expense Head Gross Amount(in Rs.) Disallowance by Assessing Officer (in Rs.) Public Relation E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g deduction u/s 80 HHC by the amount of deduction allowed u/s 80-IB without correctly giving effect to the provisions of Sec.80IB(13) read with 80IA(9) as was done by the appellant in the report furnished in the Form 10 CCAC. 12. INTEREST U/s 234D On the facts and in the circumstances of the case and in law the learned CIT(A) further erred in confirming the action of the AO confirming levying interest under section 234D of the Act without appreciating the fact that said interest was not leviable for the year under appeal. 4. The grounds raised by the Revenue in ITA No.1056/PUN/2009 reads as under :- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of ₹ 324.5 lacs on account of adjustments made to closing stock in accordance with the provisions of Sec.145A of the I.T. Act.? 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that the entire amount accrued to the assessee as per invoice raised is not taxable and there is no fault in following AS-7 ? 3. Whether on the facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .R. filed a chart by giving the details of grounds and submitted that most of the grounds raised in the present appeals are identical to those which are decided by the Tribunal in the case of Assessee in earlier assessment years 200001 to 2002-03. From the grounds raised by the assessee, he submitted that identical to ground Nos.1 to 4, 6, 10, 11, 12 are already decided by the Co-ordinate Bench of the Tribunal in the earlier assessment years and ground Nos.5 and 7 to 9 are new grounds which requires separate adjudication. Before us, Ld DR did not controvert the submissions made by Ld AR. In view of the aforesaid submissions of both the parties, we proceed to adjudicate the issue in the following paragraphs. 7. Ground No.1 is with respect to disallowance of premium in respect of leasehold land. AO on perusing the details of expenditure noticed that assessee had debited an amount of ₹ 2,69,628/- being amortization of premium paid on leasehold land. AO noted that similar expenditure claimed by the assessee in earlier years was disallowed by the AO and the action of AO was also upheld by Ld.CIT(A). He therefore, by following the reasoning of AO and CIT(A) s d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was also an accepted position that the issue regarding assessee s claim for deduction of proportionate premium of leasehold land amortized and charged to the Profit Loss Account for the year under consideration is liable to be decided in terms of the judgement of the Hon ble Supreme Court in the case of Govind Sugar Mills Ltd. vs. CIT, (1998) 232 ITR 319 (SC) against the assessee. Accordingly, the orders of the authorities below on this aspect are upheld and assessee fails. Accordingly, ground No. 2 in the appeal of assessee is dismissed. 15. We thus find that the Co-ordinate Bench, relying on the decision of Hon ble Apex Court in the case of Govind Sugar Mills Limited (supra) decided the issue against the assessee. Further, in view of the Ld. AR s submission that the issue in the year under consideration is similar to A.Y. 2000-01 and 2001-02 and since in those years the issue was decided against the assessee, we find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground is dismissed. 10. Before us, Ld AR has not pointed to as distinction in the facts of the case for the year under consideration and that of earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s act of further scaling down towards contingencies / unforeseeable losses. The facts of the case during this year are identical to those in A.Y. 2002-03 and I find no reason to form a view other than that of my predecessor. Accordingly, the Assessing Officer is directed to work out the excess provision in the light of the observation made by Ld.CIT(A) in A.Y. 2002-03 and restrict the disallowance to that extent. Decided accordingly. Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us. Revenue is also aggrieved by order of CIT(A) to the extent of relief granted by him and has therefore raised ground No.2 in its appeal. Since the grounds raised by assessee and Revenue are interconnected, both are considered together. 12. Before us, Ld. AR submitted that identical issue arose before Tribunal in assessee s appeal for A.Y. 2002-03 and the issue was decided by the Co-ordinate Bench of the Tribunal in assessee s favour by following the Tribunal order in A.Ys.1997-98 to 2002-03. He placed on record the order of Tribunal for A.Ys. 2000-01 to 2002-03 and pointed to the relevant findings of the Tribunal. He submitted that since there are no change in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the Commissioner of Income Tax (Appeals), both, the assessee and the Revenue have come in appeal. 9.1 We observe that similar issue had come up in the appeal of the assessee and the Revenue for assessment years 1998-99 and 1999- 2000. The Co-ordinate Bench decided the issue in favour of the assessee. The relevant extract of the order of the Tribunal reads as under :- 22. On this aspect, it was a common ground between the parties that in assessment year 1997-98, the Tribunal vide its order dated 03.09.2014 (supra) in the assessee s own case has upheld the stand of the assessee by following the decision of the Pune Bench of the Tribunal on a similar issue in the case of Thermax Babcock Wilcox Ltd. vs. DCIT vide ITA Nos.157 158/PN/1995 dated 11.05.2001 for assessment years 1990- 91 1991-92. The Tribunal in its order dated 03.09.2014 (supra) upheld the allowability of provision for profit equalization while noted that in the case of Thermax Babcock Wilcox Ltd. (supra) which was a group company of the assessee, the Tribunal recognizing incomes on application of percentage of completion method in the case of long term contracts in the light of the AS-7 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in the respective years. He was therefore of the view that the expenses pertaining to prior years aggregating to ₹ 2,76,870/- are not allowable and accordingly disallowed the same. Aggrieved by the order of AO, assessee carried the matter before Ld CIT(A), who decided the issue against the Assessee by holding as under : 8.3 The submission has been considered. In principle, I agree with the appellant s view that expenditure is deductible in the year in which liability to pay arises. However, in the case under consideration, as stated by the appellant, the amount in question represents the commission remitted during the year to foreign parties on the sales that have taken place in earlier years. Since the commission is linked with the sales, the liability to pay commission has arisen in the respective years in which the sales have taken place and therefore, it cannot be allowed as deduction from the income of this year. The commission cannot be considered as deductible during this year on the ground that the same has been remitted during the year. Accordingly, this ground of appeal fails. Aggrieved by the order of Ld.CIT(A) assessee is now in appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng computer software expenses. On perusing the details of expenses, AO noticed that assessee had incurred an amount of ₹ 6,07,336/- towards software expenses which were debited under the head of Miscellaneous Expenses. He also noticed that assessee had also incurred expenses of s.27,18,105/-, the major part of which was incurred for obtaining the licence to use software like Windows 2000, Auto Cad, MS Office etc. The assessee was asked to substantiate its claim of expenditure being revenue in nature. The assessee inter-alia submitted that the software expenses were not expected to give enduring benefit to the assessee and that software rarely last for long and therefore it considered the expenses to be of revenue nature. The submissions of the assessee were not found acceptable to the AO. AO was of the view that the benefit of acquiring software gives enduring benefit and it has to be treated as capital expenditure. He was of the view that w.e.f. 01.04.2003 through an amendment into the Income tax Rules, computer software has been clubbed with computers and both put together have been made eligible for depreciation at 60% which also shows that the expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d raised by the assessee in appeal is expenditure on computer software. The assessee during the relevant assessment period had purchased license to use computer softwares like, Windows 95, AutoCAD, MS Office, purchase of computer software as revenue in nature. The Assessing Officer held the same to be capital expenditure. In the first appeal, the Commissioner of Income Tax (Appeals) confirmed the findings of the Assessing Officer. 10.1 The Ld. AR of the assessee pointed out that an identical issue was raised in the appeals for assessment years 1998-99 and 1999-2000 by the assessee, as well as, the Revenue. The Co-ordinate Bench dismissed this ground raised in the appeals of both the parties. 10.2 A perusal of the order of the Co-ordinate Bench in assessee s own case for assessment years 1998-99 and 1999-2000 shows that the Tribunal followed the judgement of the Hon ble Bombay High Court in the case of CIT vs. Raychem Rpg. Ltd. reported as 346 ITR 138 (Bom.) and rejected the ground raised by the assessee, as well as, the Revenue by observing as under :- 30. We have carefully considered the rival submissions. In our considered opinion, the issue regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Appeal No.7.1 7.2 of the Revenue are dismissed. Respectfully following the order of Tribunal in earlier assessment years in assessee s own case, we dismiss this ground in the appeal of assessee. 23. Before us, both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years. In earlier years, the Co-ordinate Bench of the Tribunal has decided the issue against the assessee. We therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case for earlier years and for similar reasons, find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground No.5 is dismissed. 21. Before us, both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years. In earlier years, the Co-ordinate Bench of the Tribunal has decided the issue against the assessee. We therefore following the reasoning of the Co-ordinate Bench of the Tribunal in assessee s own case for AY 2002-03 and for similar reasons, find no reason to interfere with the order of Ld.CIT(A) and thus the assessee s ground No.4 is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... write off of bad debts also cannot be allowed as the amounts have not been written off in the books of accounts. He accordingly denied the claim and made addition of ₹ 200.26 lacs. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who in principle agreed with the claim of Assessee but however directed the AO to verify the Assessee s claim to the extent supported by the clause of Liquidated damages as per contract and decide accordingly. The relevant findings of CIT(A) are as under: The submission has been carefully considered by me. The appellant company has also furnished before me the partywise details of liquidated damages of ₹ 200.26 lakhs. It has also filed sample copies of purchase orders of a few customers of the appellant company containing clause of Liquidated Damages according to which penalty at the prescribed rate is leviable in case of delay in supply of goods ordered. On perusal of these documents, in principle, I agree with the claim of the appellant company that the liquidated damages, arising out of the terms of the purchase orders, schedule, are allowable as business expenditure. The cases relied upon by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that with respect to the claims there has been an accrual of liability and the customer enforcing the right vested by deducting the sum from the payments which are otherwise due to the Assessee. He further submitted that AO has confused the issue of claim of liquidated damages with the issue of claim of bad debts and that the claim of bad debts has been accepted by him. He further submitted that the reliance placed by AO in the case of N. Sundareswaran Vs CIT reported in 226 ITR 142 is misplaced as the facts are distinguishable from the facts of the present case as in that case the contract did not contain provision for liquidated damages and had only dealt with the case where the matter was to be referred to Arbitration. He further submitted that the facts in the case of CIT Vs. Seshasayee Industries Ltd.(242 ITR 691) are distinguishable and therefore not applicable to the present facts of the Assessee. He thereafter submitted that the expenditure has been incurred during the course of business and is for the purpose of business more so when CIT(A) has accepted the allowability of claim of liquidated damages as business expenditure. He further submitted that Hon ble Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expediency is a term of wide import and has been held to include such expenditure as a prudent businessman incurs for the purpose of business. The expenditure incurred though not under any legal obligation but still it is allowable as a business expenditure if incurred on the grounds of commercial expediency and the method of recognition is followed from year to year. The assessee is following the said method in earlier years and no disallowance has been made. Before us, no material has been placed by the Revenue that the expenditure is not a genuine expenditure or has been incurred to benefit any group concerns. Considering the totality of the facts we are of the view that the expenditure is allowable. Thus, the ground of Assessee is allowed and that of Revenue is dismissed. 26. Ground No.6 is with respect to disallowance of higher depreciation. 26.1. On perusing the depreciation chart, AO noticed that assessee had claimed depreciation at higher rate of 80% depreciation on plant Nos.4 and 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling devices. It was Assessee s contention that these items of plant and machinery were used in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which case the appellant would not be eligible for depreciation at the rate of 100% since it is not the owner user of the heat pumps. It also needs to be mentioned that by the appellant s own submission the heat pumps require minimum electricity for running the compressor, hence the same cannot be regarded as renewal energy devices. For these reasons, the action of the Assessing Officer in rejecting the appellant s claim of depreciation on the machineries in plant No.11 at the rate of 100% and in restricting the admissible depreciation to a rate of 25% is hereby confirmed. Coming to the remaining plants and machineries under discussion i.e., plants no.4 and 8, the appellant s arguments have been already noted. The Assessing Officer was certainly not justified in holding that entry 3(xii)(e) applies only to solar heating system. There is nothing in this entry enabling such a conclusion. In the absence of any prefix such as solar any renewal energy device being in the nature of an air / gas / fluid heating system will be covered by this entry. However, the crucial questions is if the products manufactured by the appellant are renewal energy devices as distinguished fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovert the submissions made by the Ld. AR but however supported the order of AO. 28. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of higher depreciation arose in assessee s own case in A.Ys. 2002-03. The Co-ordinate Bench of the Tribunal while deciding the appeal in ITA Nos.259 276/PUN/2006 order dated 30.11.2017 decided the issue partly in favour of assessee by holding as under : 26. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of high depreciation arose in assessee s own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal in ITA Nos. 1247 1248/PN/2005 decided the issue partly in favour of assessee by holding as under: 11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation @ 100% as it does not find a place in any of the items in the Depreciation Table which is entitled for depreciation @ 100%. On this aspect, the order of the CIT(A) is hereby affirmed. Thus, Ground of Appeal No.8 of the assessee as well as the Grounds of Appeal Nos.8.1 8.2 of the Revenue are dismissed. The issue raised by both the sides are identical to the one already adjudicated by the Tribunal. Both the sides have not been able to controvert the findings of the Tribunal in earlier assessment years. We find no reason to take a contrary view. Accordingly, the ground with respect to claim of depreciation in assessee s appeal and the appeal of Revenue is dismissed. 27. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee s own case of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 4,63,70,760.- did not accrue or arise during FY 2002-03 and further the liability could not be termed to be as provision for know liability and therefore not allowable as expenditure. He accordingly disallowed the claim of expenditure and made addition of ₹ 4,63,70,760/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who upheld the order of AO by observing as under : 13.3. I have carefully considered the submission of the appellant. As already mentioned in para 8.3 above, an expenditure is deductible in the year in which liability to incur the expenditure arises. In the present case, as rightly pointed out by the Assessing Officer, the company became liable to pay the incentive only on 28.05.2003, the date when the scheme recommended by the Vice President (HR) was approved by the Board of Directors of the company. Since the provision has been made on the basis of the new scheme, appellant s argument based upon the fact that in the immediately preceding financial year, the company did have a scheme for payment of incentives to its employees, does not appear to have any force. After all, the provision has not been made on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability which was based on certain norms evolved by the Company. He further submitted that any difficulty in quantifying the liability would not make an existing liability into a contingent liability if the liability has definitely arisen during the year and that the deduction should be allowed although the liability may have been quantified and discharged at a future date and for the aforesaid proposition he relied on the decision of Hon ble Apex Court in the case of Bharat Earth Movers reported in 245 ITR 428 (SC). He further relying on the decision of Hon ble Apex Court in the case of Calcutta Co., Ltd reported in 37 ITR 1 (SC) submitted that any difficulty in the estimation of the liability would not convert the accrued liability into a conditional one. He further submitted that if the amount is held to be not allowable then in such a situation the assessee be granted the relief of the amount that has been offered to tax. He therefore submitted that AO and wrongly held the liability to have not arisen during the year and therefore the order of AO which has been upheld by CIT(A) be set aside. 33. Ld DR on the other hand took us through the observations of AO and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO by observing as under : 14.3 After careful consideration, I find no merit in the contention of the appellant. It is seen that the appellant has been having a wavering stand with regard to its claim of putting the technical knowhow in question to use during the year. The tax audit report mentions that the technical knowhow has been put to use on 26 February, 2003. It also needs to be appreciated that the Division Chief is company s own employee and therefore, his certification (without any supporting evidence) cannot be accepted as authentic. If the assessee claims that the technical knowhow has been put to use during the year, it is for the assessee to prove its claim by furnishing necessary evidence. The appellant s argument that its contention regarding commencement of commercial production on 26.02.2003 is evidence by the fact that as per the agreement, the third instalment was payable to Air Pol within 45 days of the commencement of production and the remittance of the same has been made on 29.04.2003, does not appear to have much strength. The third instalment was payable within 45 days and not after 45 days of the commencement of production. The consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance fees and subscription of club at ₹ 1,23,925/- and the cost on services and facilities utilized at ₹ 10,285/-. Assessee was asked to show cause as to why the expenses not be disallowed as being incurred for non business purposes. The Assessee made submissions which were not found acceptable to AO. AO disallowed the same by holding it to have been for non business purposes. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who upheld the order of AO by observing as under : 15.3. The submission is considered. In the case of Knik Chemical Engineers Pvt. Ltd. Vs. ITO (1987), 20 ITO 302 (Bom), it has been held by the Hon'ble Tribunal that club membership of the directors paid by the company could not be allowed as deduction in absence of evidence that tile company derived any benefit out of membership of the director in such club. In the present case, as observed by the Assessing Officer, no such evidence has been produced by the assessee. Even at the appellate stage, the appellant has made no effort to show if any benefit has been derived by the company out of club membership of its executives. Therefore, in the light of the judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We therefore direct its deletion. Thus the ground of the Assessee is allowed. 41. Ground No 10 is with respect to adhoc disallowance of expenses. 41.1. AO noticed that Assessee had incurred expenses of ₹ 11,40,130/- under the head of public relation expenses. AO noticed that the expenses included expenses on account of small gifts, lunch with guests etc. AO was of the vie that Assessee had not established the reasonableness and exclusivity of the expenses for the purposes of business. He accordingly disallowed ₹ 50,000 as being non verifiable in nature. AO also noticed that assessee had incurred expenses under the head of Membership and subscription, garden expenses, miscellaneous expenses and house magazine which were clubbed under miscellaneous expenses. AO was of the view that since the reasonableness and genuineness of the aforesaid expenses were not fully verifiable, he disallowed 5% of total expenses of ₹ 51,55,605/-resulting into disallowance of ₹ 2,57,780/-. Similarly with respect to vehicle expenses, AO disallowed ₹ 725168/- (being 5% of the vehicle expenses as being not incurred for the purpose of business. With respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the absence of any contrary binding decision in favour of Revenue, we relying on the aforesaid decision of Hon ble High Court of Gujarat in the case of Sayaji Iron Engg. Co. (supra), hold that no disallowance of vehicle expenses on account of being personal in nature is called for in the present case. As far as the disallowance of other expenses on adhoc basis is concerned, we find that AO has not pointed out any expenses which are not for the purpose of business. Further it is not in dispute that the assessee s books of accounts are regularly maintained, audited and no discrepancies have been pointed out by the Auditor or the Revenue. The disallowance has been made on adhoc basis. Before us, assessee has submitted that no such adhoc disallowance has been made in subsequent years in scrutiny proceedings and this fact has not been controverted by Revenue. Considering the totality of the aforesaid facts, we are of the view that no disallowance of expenses on adhoc basis is called for in the present case and thus the ground of the assessee is allowed. 44. Before us, no distinguishing feature in the facts of the case under consideration and that of earlier years has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls of which are placed at Page 50 of the assessment order). AO was of the view that the aforesaid income should have been excluded while calculating deduction u/s 80HHC. AO therefore re-worked the deduction u/s 80HHC and computed the deduction at ₹ 4,39,41,655/- as against the claim of ₹ 5,56,43,000/- made by assessee. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who granted partial relief to assessee by holding as under : 19.3. I have carefully considered the submission of the appellant in the light of the provisions of law and the judgment in the cases relied upon by the appellant. 19.3.1 The issue regarding inclusion of sales tax and excise duty in the total turnover for the purpose of deduction u/s.80HHC is squarely covered not only by the decision of the Hon ble Bombay High Court in the case of Sudarshan Chemical Industries Ltd. but also by the decision of Hon'ble Supreme Court in the case of Lakshrni Machine Works, 290 ITR 667.Therefore, I see no justification in the action of the Assessing Officer in adding sales tax and excise duty in the total turnover while calculating deduction u/s. 80HHC. This part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the turnover. Further, the liquidated damages are in the nature of compensation for stipulated breach that may be recovered by the customer by deducting the amount from future payment after the breach has occurred or by withholding payments. The payments from customers are received against the sales and therefore, any recovery of the amount deducted earlier by the customers as liquidated damages shall form part of the total turnover. Similarly, exchange gain relating to the sales of the company is in the nature of sales and is therefore, includible in the total turnover. In view of the aforesaid, the action of the Assessing Officer in including the amounts written back in the total turnover is confirmed. 20. Ground No.16(b) is against exclusion by the Assessing Officer of 100% of the following amounts from eligible business profits and gains. i) Claims and refunds ₹ 38,19,594/- ii) Balances written off now recovered ₹ 22,71,036/- iii) Premium on forward contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been received during the year and therefore, cannot be treated to be operational income of the assessee. He, therefore, excluded the amount of ₹ 22,71,036/- from the eligible profits. 20.1.2 The Assessing Officer further found that the assessee has gained ₹ 6,32,505/- towards premium on forward contract. According to him, this receipt is out of hedging activity which gives this kind of benefit to the assessee because of exchange rate of various currencies in the international market. He observed that it is not the business of the assessee to earn money from the money market or from the hedging of the currency. Therefore, the receipt from premium on forward contracts cannot be treated to be operational income of the assessee. Accordingly, he excluded the amount of ₹ 6,32,505/- from the profits of the business for the purpose of computation of deduction u/s.80HHC. 20.1.3 Similarly, the amount of ₹ 106.23 lakhs representing income from investment was excluded by the Assessing Officer from the profits of the business for the purpose of computation of deduction u/s 80HHC after observing that this income is against the investment made by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Bangalore Clothing Co. 260 ITR 371. It has been added that the income from lease rentals ₹ 2,82,52,673/- has been considered on a notional basis by the Assessing Officer telescoping the lease rentals on the basis of lease agreement entered into by the appellant company with its customer which was foreclosed and terminated by the appellant in the earlier year. According to the appellant, it has been allowed the irrecoverable lease rental amounts written off as bad debts in the preceding AY. 2001-02 and AY. 2002-03 by the Hon'ble CIT(A). It has been contended that in the light of the aforesaid facts the Assessing Officer should not have considered the notional amount of lease rental income for the impugned A.Y. 2003-04. Without prejudice to the aforesaid, the appellant submitted that since the Assessing Officer has taken the notional lease rental as business income of the appellant for the impugned A. Y. 2003-04 being in pursuance of one of the objects of the company in furtherance of its business, the Assessing Officer ought to have taken the said lease rental as part of business profit and should not have excluded the same for the purpose of allowing deduction u/s 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.1 It has already been held in Par 19.3.3 that the Assessing Officer is not not justified in subjecting the amount of sale of scrap to 90% reduction under explanation (baa) of section 80HHC. As regards exchange difference, to the extent the exchange difference is relatable to sales, the same is not hit by explanation (baa) of section 80HHC and therefore, to this extent, the exchange difference should not be subjected to 90% reduction. Decided accordingly. Ground of appeal no. 16(d) is against the action of the Assessing Officer in excluding from eligible profits of business, loss/ expenses on foreign representative offices ₹ 4,06,66,421/- and not accepting the contention of the appellant that loss of foreign representative offices should go to increase the profits of the business eligible for deduction u/s 80 HHC instead of ignoring the same. 22.1. During appellate proceedings, the appellant contended that under the scheme of the Act, profits of overseas branches have to be reduced while computing eligible profits. By the same logic, in the mathematical formula prescribed in section 80HHC, the losses should have been added to arrive at the eligible pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, I find no reason to interfere with the action of the Assessing Officer which is upheld and the ground of appeal is dismissed. 25. Ground of appeal no.16(g) is against the action of the Assessing Officer in reducing deduction u/s 80HHC by the amount of deduction allowed by him u/s 80-IB of the Act instead of correctly giving effect to the provisions of section 80-IB(13) r w 80-IA(9) as has been done by the appellant in the report in form 10CCAC . 25.1 During appellate proceedings, no submission has been made by the appellant in this regard. On merits, I find that the Assessing Officer's action is in accordance with the provision of law and therefore, calls for no interference. As a corollary, this ground of appeal fails. Aggrieved by the order of Ld.CIT(A) assessee is now in appeal before us vide ground No.11 and Revenue is also aggrieved by the order of Ld.CIT(A), to the extent of relief granted by Ld.CIT(A) and has raised ground Nos.7 to 9. Since the grounds raised by assessee and Revenue are inter-connected, both are considered together. 47. The assessee by way of ground of appeal No.11 has raised various issues in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded. We find merit in the plea of the assessee that exchange difference to the extent of sales would be included as part of the total turnover. With respect to ground No.7 of Revenue, we find that CIT(A) has held that Assessee had taken the figure of export turnover of ₹ 1.11 crore as per the statutory mandate while calculating the deduction u/s 80HHC. No fallacy has been pointed out by the Revenue in the findings of CIT(A). we therefore find no reason to interfere with the order of CIT(A) on this aspect. Thus, ground of appeal No.11(a) raised by the assessee is partly allowed and ground of appeal No.7 raised by the Revenue is dismissed. 51. Now coming to the issue raised by assessee in ground of appeal No.11(b) relates to disputed adjustments to the export turnover wherein the various claims have been raised before us and we proceed with the same by referring to each one of them. (i) Business claims and refunds : in In this regard the amount relates to business claims and refund of ₹ 38,19,594/-. Before us, Ld AR submitted that in AY 2002-03, the issue was remitted back to the AO with direction. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits eligible to claim deduction u/s 80HHC of the Act should be increased and we direct so. Thus, ground of appeal No.11(c) and (d) are allowed. With respect to ground 11(e), the assessee is aggrieved by the reducing the profits of the business by ₹ 104.96 lacs. 52. Before us, Ld AR submitted that in AY 2002-03, the Tribunal vide para 45 of the order directed the AO to apply the amendment to Sec.80HHC(3) and decide the issue. He submitted that as per the decision of Hon ble Apex Court in the case of Avani Exports, the 3 rd and 4th proviso to s. 80HHC(3) are prospective in nature and do not apply to A.Y 2003-04 and 2004-05. He further submitted that Hon ble Apex Court in the case of Topman Exports (342 ITR 49) has held that the assessee would be entitled to deduction u/s 80HHC on the entire amount of DEPB credit. He therefore submitted that the issue be remitted back to AO to decide in the light of the aforesaid decisions of Hon ble Apex Court. We find merit in the contentions raised by the Ld AR. In view of the aforesaid submissions, we restore the issue back to the file to AO to decide the issue in the light of the aforesaid decisions of Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided against the Assessee. In view of the submission of Ld.A.R., the ground of assessee is dismissed. 56. In the result, the appeal of the Assessee is partly allowed. 57. Now we take up the grounds raised in Revenue s appeal: 58. 1st ground is with respect to deletion of addition of ₹ 324.50 lacs on account of adjustment made to closing stock. 58.1. AO on perusing the details noticed that the figures of Excise duty (CENVAT), sales tax etc relatable to closing stock stood at ₹ 324.50 lacs. AO was of the view that closing stock has to be taken as per the method regularly employed by the assessee and needs to be further adjusted by the amount of tax, duty, cess or fee actually paid or incurred by the Assessee AO was further of the view that Sec. 145A dealt with only the closing stock and the adjustments called for in terms of Sec.145A were to be made only to closing stock leaving the purchases and opening stock unaltered. He accordingly made addition of ₹ 324.50 lacs to the closing stock. Aggrieved by the order of AO, assessee carried the matter before CIT(A), who decided the issue in favour of the assessee by observing as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 145A have no effect on the gross profit, then the provisions of section 145A would become superfluous. I do not consider it to be so. What is aimed at by inserting the provisions of section 145A is to have the value of closing stock inclusive of excise duty etc. This aim is automatically achieved once the excise duty is included in the opening stock, purchases and sales as has been categorically specified in the provisions of section 145A which, as per the opening lines, mandate that the valuation of purchase and sale of goods and inventory has to be done as prescribed in the section. 5.4. In view of the aforesaid, respectfully following the decision of the ITAT, Mumbai as given in the case of Gandhar Oil Refinery, I do not find any justification in the action of the Assessing Officer in making addition of ₹ 3,24,50,000/- to the income of the appellant by applying section 145A. The addition is ordered to be deleted. Aggrieved by the order of CIT(A), Revenue is now before us. 59. Before us, Ld DR supported the order of AO. Ld AR on the other hand reiterated the submissions made before lower authorities and further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in assessee s favour. In view of the reasons cited therein while deciding the ground No.5 of assessee, the ground No.3 of Revenue is dismissed. 65. Ground No.4 is with respect to the action of CIT(A) in directing deletion of addition of ₹ 1.53 crore on account of lease rent. 66. During the course of assessment proceedings AO noticed that the Assessee is engaged in the business of self manufactured products in the past. The Assessee was asked to give the details of the lease rentals which was furnished by the Assessee and it was further submitted that during the year under consideration no assets during the year. It was further submitted that in AY 2002-03 similar have been given on ease and there was no accrual of the lease rentals addition was made by AO but the same was deleted by CIT(A). The submissions made by the Assessee was not found acceptable to AO and also noted that the order of CIT(A) has not been accepted by the Revenue and appeal has been filed before the Tribunal. He thereafter made addition of ₹ 1.53 crores. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who deleted the addition by holding as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration, I do not find any reason to form a view other than that formed by my predecessor. Accordingly, this ground of appeal succeeds. Aggrieved by the order of CIT(A), Revenue is now before us. 70. Before us Ld DR supported the order of CIT(A). Ld AR on the other hand reiterated the submissions made before lower authorities and further submitted that in AY 2001-02 the identical issue was decided by tribunal in assessee s favour. He further submitted that the issue was not challenged by the Department in AY 2002-03. He thus supported the order of CIT(A). on record. The issue in the present ground is with respect to 71. We have heard the rival submissions and perused the material disallowance of additional medical expenses. We find that CIT(A) while deciding the issue in assessee s favour had relied upon the order of his predecessor for AY 2002-03. Before us, Ld AR submitted that in AY 2002-03 CIT(A) on identical facts had decided the issue in assessee s favour and the issue was not agitated by the Revenue. The aforesaid contention of the Ld AR has not been controverted by the Revenue. We further find that identical issue in AY 2002-03 was decided in Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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