IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "H" : MUMBAI BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND <NAME>, JUDICIAL MEMBER ITA. No. 3688/Mum/2003 - Assessment Year 1998-1999 ITA. No. 1300/Mum/2006 - Assessment Year 1999-2000 DCIT, CC.38 M/s. <ORG> Mumbai - 400 051. vs. Mumbai - 400 102 PAN AAACE2488F (Appellant) (Respondent) ITA. No.4240/Mum/2003 - Assessment Year 1998-1999 ITA. No.1247/Mum/2006 - Assessment Year 1999-2000 M/s. <ORG> DCIT, CC.38 Mumbai - 400 102 vs. Mumbai - 400 051. PAN AAACE2488F (Appellant) (Respondent) Cross Objection No. 231/Mum/2006 Arising out of ITA. No. 1300/Mum/2006 - Assesment Year 1999-2000 M/s. <ORG> DCIT, CC.38 Mumbai - 400 102 vs. Mumbai - 400 051. PAN AAACE2488F (Cross-Objector) (Respondent) For Revenue : ShriGoliSrinivasRao (CIT-DR) For Assessee : <NAME> Date of Hearing : 09-04-2012 Date of pronouncement : 04-05-2012 ORDER

PER BENCH :

1. These are cross-appeals by <ORG> and revenue in assessment year 1998-99 and assessment year 1999-2000 and cross objection by <ORG> in assessment year 1999-2000. Since common issues are involved, these are heard together and decided by this common order for the sake of convenience.

2. We have heard learned Counsel and learned D.R. with the help of paper book placed on record and chart indicating the summary of issues. The arguments and contentions are discussed wherever necessary.

ITA. No. 4240/Mum/2003- AY 1998-99:

3. In this appeal assessee raised following 12 grounds.

I. TAXABILITY OF ADVANCE LICENCE BENEFIT RECEIVABLE :Rs.52.84.6741-

1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Additional Commissioner of Income-tax in including advance licence benefit receivable amounting to Rs.5284,6741-, in the total income.

1.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In not appreciating the fact that no income had accrued to the appellant until the imports were made and the raw materials were consumed, which events took place in the subsequent years;

(b) In holding that the advance licence benefit becomes receivable the moment export is made in spite of the fact that the benefit accrued only when the raw materials were actually imported and not at the time of export.

II. TAXABILITY OF PASS BOOK BENEFIT RECEIVABLE:

2.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Additional Commissioner of Income-tax in including Pass Book Benefit Receivable amounting to Rs.56263127/- in the total income.

2.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In not appreciating the fact that no income had accrued to the appellant until the credit was received in the Pass Book which event took place in the subsequent years;

(b) In not appreciating the fad that it was a well established legal proposition that entries in the books of account were not material for determining thetax liability and if no income had accrued, the same could not be taxedeven though the said item was accounted for as income in the books of account. III. DISALLOWANCE UNDER SECTION 43B IN RESPECT OF EMPLOYER'S CONTRIBUTION TO EMPLOYEE'S STATE INSURANCE SCHEME (ESIC):

3.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the disallowance in respect of the employees contribution to ESIC amounting to Rs.18,891/- under section 43B.

3.2 In doing so, the Commissioner of Income-tax (Appeals) erred in not appreciating the fact that clause (b) of section 43B was not attracted to such contribution following the ratio of the decision of the <ORG>, Cochin Bench in the case of <ORG> vs. M/s. NM. (<ORG> No.550/Cochin/88 reported in <ORG> September 1994 at page 502).

IV. DISALLOWANCE UNDER SECTION 43B IN RESPECT OF ADDITIONAL SALES TAX : Rs.39,826/-

4.1 The Commissioner of Income-tax (Appeals) erred in not passing a speaking order in respect of the disallowance under section 43B amounting to Rs.39,826/- in respect of additional sales tax being the difference between the disallowance as per the return shown at Rs.7,79,3331- instead of Rs.7 39 507/- as computed by the appellant.

4.2 In view of the above grounds of appeal, the appellant prays that the Additional Commissioner of Income-tax be directed to delete the aforesaid disallowance in respect of additional sales tax amounting to Rs.39,8261-.

V. DISALLOWANCE OUT OF INTEREST PAID:Rs.50,57,260/-

5.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Additional Commissioner of Income-tax in disallowing an amount of Rs. 50,57,260/- out of interest paid. 5.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In observing that diversion of interest bearing funds is quite clear cut;

(b) In not appreciating the fact that notional interest @ 16% was considered for disallowance without giving any justification or basis for the said rate;

(c) In upholding the Additional Commissioner of Income-tax's action that whenever interest is charged at less than 16%, the difference between interest @16% and the interest charged is to be disallowed out of interest paid and added to the total income;

(d) In not appreciating the fact that the loans to the subsidiary companies and the loan to <ORG> were made from the appellant's mixed funds and no specific borrowings were made for advancing the said loans; and

(e) In not appreciating the fact that the entire interest payment was eligible fordeduction under section 36(1)(iii). VI. PAYMENTS TO CLUB:

6.1 On the facts and in the circumstances of the case and in law, the Commissionerof Income-tax (Appeals) erred in upholding the disallowance of an amount of Rs.2,61,668/- in respect of payments made to clubs for membership fees, subscription and customer meeting expenses.

6.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In holding that the amount paid in respect of corporate membership fees, yearly subscription amounting to Rs. 162665/- was expenditure bringingan asset of an enduring nature and hence capital expenditure; and

(b) In not appreciating the fact that the balance expenditure amounting to Rs.99,003/-, was incurred wholly and exclusively for the purpose of the business, it is allowable under section 37(1);

VII. DISALLOWANCE OUT OF LEGAL AND PROFESSIONAL EXPENDITURE: Rs.7,50.000/- 7.1 On the facts and in circumstances of the case and in law, the

Commissioner of Income Tax (Appeals) erred in upholding the action of the Additional Commissioner of Income-tax to treat the amount of legal and professional fees paid for consultancy regarding the joint venture with <ORG> amounting to Rs.7,50,000/- as being capital expenditure.

7.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In not appreciating the fact that the aforesaid amount of Rs.7,50,000I- was paid towards the consultancy fees for the joint venture with <ORG> for theBusiness of drip irrigation system and the said business was a part of the appellant's business.

(b) In holding that the aforesaid expenditure was not incurred for the existing business but was incurred for a new line of business and accordingly, represented capital expenditure.

VIII. DISALLOWANCE OF EXPENDITURE CONSIDERED AS INCURRED INCONNECTION WITH EXEMPT INCOME 8.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that expenditure estimated @10% of the dividend income amounting to Rs.92,676/- as expenditure incurred in connection with the exempt income and thereby upholding the disallowance under section 14A of the Act, particularly in view of the fact that no expenditure had been incurred for the purpose of earning dividend income and accordingly, no expenditure ought to have been disallowed in respect of earning exempt income.

IX. DISALLOWANCE IN RESPECT OF LOSS ON S A L E O F ASSETS:Rs. 18,57,210/-.

9.1 On the facts and in circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the disallowance of a sum of Rs. 1 8,57,2101-(net) being the loss on sale of assets.

9.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:

(a) In not appreciating the fact that the aforesaid loss which arose on sale of assets other than fixed assets i.e. stores, capital stores and raw materials was a normal business expenditure allowable under section 37(1) andaccordingly, there was no question of adjusting the same in the schedule of fixed assets;

(b) In holding that the said loss on sale of assets ought to have been reflected as closing stock in the profit and loss account.

X. DEDUCTION UNDER SECTION 80HH :

10.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not appreciating that deduction under section BOHH ought to have been allowed on the profits of the concerned undertakings without deducting the depreciation eligible under section 32 in view of the fact that depreciation under section 32 is allowable on the basis of the block of assets for the company as a whole and not in respect of individual assets of the concerned industrial undertakings and accordingly, depreciation cannot be allocated to the different industrial undertakings as per the scheme of the Income-tax Act , 1961 in respect of allowance of depredation on the concept of block of assets.

10.2 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) further erred In excluding items of other income except income from sale of scrap, from the profits of the concerned undertakings for the purpose of computing the deduction under section 80HH in spite of the fact that the said items of other income were part of the business income of the concerned undertakings and ought to have been included in the profits of such undertakings for the purpose of computing the deduction under section 80HH .

XI. DEDUCTION UNDER SECTION 80IA:

11.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not appreciating that deduction under section 80-IA ought to have been allowed on the profits of the concerned undertakingswithout deducting the depreciation eligible under section 32 , in view of the fact that depreciation under section 32 is allowable on the basis of the block of assets for the company as a whole and not in respect of individual assets of the concerned industrial undertakings as per the scheme of the Income-tax Act , 1961 in respect of allowance of depreciation on the concept of block of assets.

11.2 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) further erred in excluding items of other income other than income earned from sale of scrap, from the profits of the concerned undertakings for the purpose of computing the deduction under section 80-IA in spite of the fact that the said items of other income were part of the business income of the concerned undertakings and ought to have been included in the profits of such undertakings for the purpose of computing the deduction under section 80-IA .

XII. DEDUCTION UNDER SECTION 80HHC:

12.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Additional Commissioner of Income-tax and computing the deduction under section 80HHC by including in the total turnover, items of other income other than dividend, such as interest, discount, profit on sale of assets, etc. although there was no elementof turnover in such receipts.

12.2 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) further erred in dismissing the appellants plea that for the purpose of computing the indirect costs attributable to the trading goods exported the expenses deemed to have been incurred for earning income, which has been excluded from profits of the business, have to be reduced.

XIII. TAX CREDIT IN RESPECT OF TAX PAID AT ANTWERP:

13.1.On the facts and in the circumstances of the case and in law the appellant submits that the Commissioner of Income-tax (Appeals) erred in not admitting the additional grounds of appeal filed during the appellate proceedings.

13.2. In this connection the appellant submits that the appellant had prayed that relief under section 90 ought to be granted in respect of income taxed in Belgium, which has also been included in the total income for the above assessment year".

3.1. Ground No.1& 2 : Taxability of advance licence benefit receivable Rs.52,84,674/- and pass book benefit receivable Rs.2,98,03,293 (wrongly stated as Rs.5,62,63,127/- in ground of appeal but rectified) in the total income.

3.2. There is a long discussion in the assessment order in respect of the grounds taken in the appeal. However, both the grounds are covered in favour of the assessee by the earlier orders of the <ORG> in the assessee's own case. So far as Ground No.1 is concerned, which relates to the taxability of advance licence benefits receivable, the <ORG> has decided that no income accrues until the imports are made and the raw materials are consumed. In the year before us, it is not in dispute that the imports were made and the raw materials were consumed in the subsequent year. In such circumstances the earlier orders of the <ORG> in the assessee's own case apply. The first of such orders was passed on 6th October 2003 in ITA No: 4346/Mum/1997 for the assessment year 1992-93. In this order the <ORG> applied and followed the decision of the Mumbai Bench of the <ORG> in <ORG> vs. <ORG>1992) 41 ITD (Bom) 142, in which it was held that until the goods are imported and the raw materials are consumed, no income by way of advance licence benefit accrues to the assessee. This order was followed by the <ORG> in its order dated 27th January 2004 for the assessment year 1993-94 in ITA No.4145/Mum/1998. For the assessment year 1995-96 the issue again came before the <ORG> in ITA No.2067/Mum/2000. This appeal was disposed of by the <ORG> on 7th March 2005. This order took the same view as in the earlier years. What is significant in this order is that the department relied on the decision of the Ahmedabad Bench of the <ORG> in the case of <ORG> vs. JCIT (2002) 81 ITD 553 (Ahd), in which a view was taken that the advance licence benefit was taxable in the year in which it was received, without waiting for the actual imports and the consumption of the raw material. This order of the Ahmedabad Bench of the <ORG> was strongly relied upon by the revenue in the appeal for the assessment year 1995-96. The <ORG> in its order for the assessment year 1995-96 has dealt with the arguments of the revenue based on the Ahmedabad Bench of the <ORG> in paragraphs 13 onwards. It was held by the <ORG> that every aspect highlighted in the order of the Ahmedabad Bench has been duly explained on behalf of the assessee. In fact the <ORG> took the view that there was no distinction between the facts of the assessee's case and the facts of the case before the Ahmedabad Bench of the <ORG> in the case of <ORG> (supra) and that it was in order for the Ahmedabad Bench to have referred the issue to a Larger Bench for the sake of consistency, having regard to the orders of the Mumbai Benches of the <ORG> in <ORG> (supra). In this view of the matter and finding no difference in the facts relating to the assessment year 1995-96 and the facts for the earlier assessment years, the <ORG> held that there was no reason to take a different view of the matter on the basis of the order in the case of <ORG>, Ahmedabad Bench. After this order of the <ORG>, the <ORG> disposed of the appeals relating to the assessee for the assessment years 1996-97 and 1997-98 by order dated 12th January 2009, in which the <ORG> followed its own order for the assessment year 1995-96 passed on 7th March 2005, to hold that the advance licence benefit was not taxable unless the goods have been imported and the raw materials are consumed. A similar view was taken by the <ORG> again for the assessment year 2004-05 in ITA No:2251/Mum/2009, dated 29th July 2010.

3.3. Thus, in a series of orders passed in the assessee's own case, the <ORG> has taken a consistent view in favour of the assessee even after considering the order of the Ahmedabad Bench of the <ORG> in the case of <ORG> (supra). We may add that the order of the <ORG> for the assessment year 1993-94 and the order for the assessment years 1996- 97 and 1997-98 were appealed against by the revenue before <ORG> but since no steps had been taken by the revenue to challenge the first order of the <ORG>, <ORG> did not consider it fit to admit the appeals. Copies of all the orders of the <ORG> and the judgments of <ORG> have been filed before us.

3.4. It was the submission of the learned D.R. that in view of the <ORG> Decision of Mumbai in the case of <C<ORG>ION> 124 ITD 1 (Mum.) (S.B.) particularly in paras 33 and 34 of the Orders, it was submitted that income on advanced licence will accrue to the assessee when the exports were made and accordingly, following the principles laid down by the <ORG> which was in fact upheld ultimately by <ORG>, the issue is to be decided against the assessee holding that income on advance licence arises, the moment exports were done and application was made and not at the time of actual imports as contended by the assessee. Further, referring to the Orders in ITA. No. 6969/Mum/2008,It was specially submitted that the <ORG> referred to the Judgment of the Hon'ble <ORG> in the case of <C<ORG>ION> 328 ITR 451 (Bom.) to dismiss the revenue's contention in view of the then existing <ORG> Judgment referred above, which was reversed by <ORG> in the case of <C<ORG>ION> in Civil Appeal No.1699/2012. In view of the above, it was submitted that <ORG> decision got approved by <ORG>. Therefore, the issue is to be decided in line with the <ORG> decision that income accrues in the year in which exports were made and assessee got entitlement for advance licensing.

3.5. The learned Counsel, however referred to the principles laid down by <ORG> in assessee's own case and also submitted that the issue in <ORG> was with reference to the taxability and bifurcation of the DEPB proceeds while computing deduction under section 80HHC and nowhere concerned with the issue before us which itself was upheld by the Hon'ble Bombay High Court in assessee's own case.

3.6. We have considered the issue and perused the record. As already stated above, the issues in assessee's own appeal is consistently held in favour of the assessee following the decision of the Mumbai Bench of the Tribunal in <ORG> vs. IAC (1992) 41 ITD (Bom) 142. As already stated, the issue was confirmed by the Hon'ble jurisdictional <ORG> which dismissed the <ORG>'s appeal vide orders ITA.1183/Mum/2011 dated 25-11-2011. In that, the question referred specifically is as under :

"Whether the advance licence and the DEPB receivable by the assessee are liable to be assessed to tax in the year in which the licence is granted to the licensee or liable to be taxed in the year in which the benefits actually accrue after the imports are effected, is the question raised in this appeal."

3.7. <ORG> held as under :

2. "<ORG> following its decision in the case of <ORG> vs. <ORG> reported in 41 ITD 142 held that the said amounts are liable to be taxed in the year in which the benefits actually accrue to the assessee and not in the year in which the licence is granted. This Court in the case of <CITATION> , being Income Tax Appeal No. 424 of 2009 decided on 22nd September, 2009 has upheld the decision of <ORG> in the case of <ORG> (supra).

3. In this view of the matter, we see no merit to entertain this appeal. The appeal is accordingly dismissed with no order as to costs."

3.8. Therefore, this issue is no longer survives for consideration as far as <ORG> is concerned as it has consistently held the issue in favour of the assessee and was also upheld by <ORG>. We may also note that even though the issue of accrual of income on <ORG> was discussed by the Special Bench in paras 33 and 34, the present issue is not with reference to <ORG> but advance licences which is not transferable unlike the <ORG> benefits granted under the scheme. <ORG> in the case of <CITATION> had not dealt with accrual of income but dealt with the issue of bringing to tax the sale proceeds of the <ORG>, profit on sale of <ORG> and how they can be considered under section 28 . The issue was not about the accrual of income but bifurcation of proceeds of <ORG>/DFRC into face value and profit and year of taxability.. In view of this, to the extent of accrual of income is concerned, we are of the opinion that issue was decided in favour of the assessee in assessee's own case by <ORG> in the orders referred (supra). Respectfully, following the same, we allow the grounds raised by the assessee. Assessing Officer is directed to do the needful in accordance with the Orders on the issue as in the earlier years and make necessary adjustments, if any required in the computation. With these directions, grounds are considered as allowed.

4. Ground No.3 - Assessee is contesting disallowance of Rs.18,891 payment in respect of employees contribution to ESIC that has been paid before filing of return. Now the issue is covered by the decision of Hon'ble <ORG> in the case of <CITATION> . 319 ITR 306 (S.C.) in favour of assessee. The Assessing Officer is directed to allow the amount if paid by the time of filing return of income. If any deduction was allowed in later year of the same amount on payment basis in that year, the same can be withdrawn. With these directions the ground is allowed.

5. Ground No. 4 - Disallowance in respect of additional sales tax of Rs.39826/-. It is prayer for directions to dispose of the rectification petition filed before Assessing Officer. In the original return filed the assessee, the Assessee disallowed an amount of Rs.7,79,333/- whereas in revised return, the amount actually disallowable was claimed at Rs.7,39,507/-. It seems the Assessing Officer considered the original amount in the order. Assessee filed a petition under section 154 on 21st May, 2002 before Assessing Officer. The CIT(A) issued directions to dispose of the application. It seems the Assessing Officer has not yet disposed of the issue. Assessing Officer is directed to examine and consider the petition, if not yet done. The ground is allowed.

6. Ground No.5 : Disallowance of interest of Rs.50,57,260/-.

The Assessing Officer had discussed this issue in page no. 7 and 8 of the assessment order wherein it was noticed by the Assessing Officer that the assessee had made advances in the form of loans to two subsidiary companies @ 6%. The subsidiary companies are <ORG> and <ORG> The assessee-company paid interest at the average rate of 16% on the borrowings. Interest expenses were of Rs.28,39,43,707/-. The Assessing Officer required the assessee to explain why the difference of 10% of interest paid should not disallowed. As per the assessment order no satisfactory explanation was furnished. The Assessing Officer relied upon the decision of <ORG> in the case of <ORG> (193 ITR 375) and also on the decision of jurisdictional <ORG> in the case of <ORG> 201 ITR 711. The disallowance made in respect of the interest attributable to the funds lent to two subsidiary companies was of Rs.47,84,717/-. It was also noticed by the Assessing Officer that interest free loans were also given to <ORG> Rs.17,03,397/- and <ORG> Rs.20,00,000/-. It was submitted that advance to <ORG> is for the purchase of property and not a loan. No satisfactory explanation was furnished regarding interest free loans to <ORG> Interest @ 16% attributable to the interest free loans to <ORG> was also disallowed. It amounts to Rs.2,72,543/-. It was submitted by assessee before CIT(A) that the loans to the subsidiary companies and the loan to <ORG> were made from the assessee's mixed funds and no specific borrowings were made for advancing the said loans. It was also submitted that the entire interest payment was eligible for deduction under section 36(1) (iii) of the Act and the Assessing Officer erred in computing notional interest @ 16% and disallowing the excess of the said amount over the interest received out of interest paid.

Further, it was submitted that during the course of assessment proceedings, vide letter dated 20th November, 2000, assessee submitted details of loans to subsidiary companies explaining the sources of funds from which the loans were given and rate of interest charged, details of advances recoverable in cash or in kind or for value to be received along with statement showing details of interest received. The assessee vide letter dated 2nd March, 2001 also furnished a statement showing notional interest at the rate of 10% on loans given to subsidiary companies, as required by the Assessing Officer. On an appeal before the CIT(A), the learned CIT(A) confirmed the same following the orders of his predecessors.

6.1. It was submitted that the issue was restored to the Assessing Officer in earlier years and the amount was allowable following the principles laid down by Hon'ble Supreme Court in the case of <CITATION> 288 ITR 1 (S.C.). It was further submitted that the amount of Rs.17,03,397/- in respect of Agrocel Pesticides shown as 'sundry loan' was not a loan but represents outstanding amount in the ordinary course of business and amount of Rs.2,72,583/- on the above amount at 16% was wrongly disallowed. As the issue of disallowance of interest u/s. 36(1)(iii) was restored to the Assessing Officer in earlier years, which we were informed that no order has been passed yet by the Assessing Officer, in the interest of justice, we restore the matter to the file of Assessing Officer for fresh consideration. Assessing Officer is directed to consider the facts, submissions and case law relied on the issue and decide accordingly. The ground is allowed for statistical purposes.

7. Ground No.6. The issue in this ground is with reference to payment to clubs. In clause 4 (xi) of the Tax Audit Report for the assessment year 1998-99, an amount of Rs.1,62,665/- was shown as payments to club. In Note No.7 of the notes to computation of total income, it was submitted that the expenditure in respect of payment of corporate membership fees was not considered as disallowable in the return of income since the said expenditure was incurred wholly and exclusively for the purpose of the business and was allowable under section 37 (1). During the course of assessment proceedings, the assessee vide letters dated 22nd February, 2001 and 27th February, 2001 submitted details of the aforesaid payments and furnished an explanation in respect of the same. At page 9 of the assessment order, the entire amount of Rs.2,61,668/- in respect of payments to clubs has been disallowed on the ground that assessee had not been able to establish that the expenditure on payments to clubs has been incurred wholly and exclusively for the business purposes. It was submitted before CIT(A) that Assessing Officer also erred in disallowing an amount of Rs.2,61,668/- instead of Rs.1,62,665/0- shown in clause 4 (xi) as per the Tax Audit Report.CIT(A) upheld the order. 7.1. It was submitted that the details of payments to clubs and payments to credit card agencies were submitted to Assessing Officer vide letter dated 22-2-2001 and 27-2-2001 (pages 63 and 64 of paper book). Payments to clubs are in the nature of yearly subscription so the same cannot be considered as capital in nature. The other amount of Rs.99,003/- was pertaining to credit card agencies. It is submitted that following the principles laid down by <CITATION> 191 ITR 682 (Bom.) the expenditure was incurred wholly and exclusively for the purpose of business and allowable under section 37(1) . On principles of law laid down the expenditure is allowable and the CIT(A) gave a finding that the amount of Rs.1,62,665/- was yearly subscription so the same cannot be capital expenditure. However, the details are not examined by Assessing Officer so the issue is remitted to Assessing Officer to re-examine the details and allow accordingly, following the principles of law on the issue.

8. Ground No.7. The issue in this ground is with reference to disallowance of Rs.7,50,000/- paid on legal and professional fees on the reason that it was incurred for new business.During the previous year relevant to assessment year 1998-99, the assessee incurred expenditure of Rs.1,50,66,690/- in respect of legal and professional expenses. The said amount included inter alia, an amount of Rs.7,50,000/- in respect of fees paid for consultancy regarding the joint venture with <ORG>. During the course of assessment proceedings, the assessee vide letter dated 9th March, 2001 submitted a copy of the bill in respect of the said expenses and made submissions in respect of the said issue. At page 10 of the assessment order, the aforesaid expenditure of Rs.7,50,000/- has been disallowed on the ground that the said expenditure has been incurred for a new line of business and accordingly, represents capital expenditure. It is submitted by the assessee before CIT(A) that the expenditure of Rs.7,50,000/- towards fees paid for consultancy regarding the additional venture with <ORG>was for the business of drip irrigation system in the line of business, hence revenue expenditure. In respect of disallowance of Rs.21,500/- it has been held that this amount has been disallowed separately and hence resulted into double disallowance. The CIT(A) upheld the Order to the extent of Rs. 7,50,000 as capital expenditure on new project.

8.1. It was submitted that the amount was paid towards consultancy fees for the business of drip irrigation system which was part of existing business and not a new line of business. Referring to notes to accounts, it was submitted that assessee was already in trading of drip irrigation system and joint venture was for manufacturing the same product. It is submitted that the expenditure was incurred for the same line of business and relied on the following case law.

(i) <CITATION> 220 ITR 185 (S.C.) (ii) <CITATION> . 256 ITR 395 (Bom.)

(iii) Special Leave Petition filed by the <ORG> in the case of <ORG> rejected.

(iv) <ORG> vs. DCIT 62 ITD 233 (Pune).

8.2. We have considered the issue. As noted the assessee is already in the business of trading drip irrigation systems apart from pesticides. This business is extension of existing line of business. So following the principles laid down by the above case law referred, we allow the expenditure as revenue in nature. Accordingly, this ground is allowed.

9. Ground No.8. The issue in this ground is disallowance of expenditure considered as incurred in connection with exempt income Rs.92,674/-. The assessee contended that no expenditure ought to be disallowed in respect of earning exempt income as the same has not been incurred for the purpose of earning dividend income and the assessee relied upon the following decisions :

(i) <ORG> vs. <ORG> - ITA.1090/Mum/2009

(ii) <ORG> vs. <ORG> - ITA.1629/Mum/2009

(iii) DCIT vs. <ORG> (Third Member)

(iv) DCIT vs. <ORG> ITA.880/Kol/2011

(v) <ORG> vs. DCIT ITA.859/Kol/2001

(vi) <CITATION> .123/Kol/2010

(vii) <ORG> ITA.2072/Mum/2009 9.1 We have considered the issue. It is fairly admitted that the issue is covered by the decisions of various <ORG> in favour of the assessee.

Further, it was considered that in the assessment year 1995-96 the <ORG> vide para no. 20 and 21 has upheld the disallowance to the tune of 0 .5% of the gross income which was earned to the extent of Rs.94,81,601/-. In assessment year 1996-97 the same was also followed directing <ORG> to re- calculate the disallowance at 0.5% of the gross dividend income. It was fairly admitted in the case of <ORG> vs. <ORG> in ITA.1629/Mum/2009 and <ORG> Industries Ltd. Vs. DCIT ITA.No.1090/Mum/2009 that the expenditure on dividend income was estimated at 5% of the gross dividend income. Considering the fact that in assessee's own case 0.5% was allowed in earlier years while considering the amount of dividend earned at Rs.9,26,746/-, and in other cases at 5%,we estimate the expenditure relatable to earning the exempt income at 2% of the amount, which in our view is a reasonable amount considering the investment of Rs.13.32 crores made and dividend earned thereon. Accordingly, <ORG> is directed to recalculate the disallowance as above at 2% of gross dividend. The ground is partly allowed.

10. Ground No.9 - Disallowance in respect of loss on sale of assets at Rs.21,75,590/- (wrongly shown as Rs.18,57,210/- in grounds. From the perusal of the <ORG> account of the assessee-company and the schedule of operating and other expenses, it is seen that the assessee-company has debited an amount of Rs.15,60,000/- on account of loss on sale of asset. However, the same has not been added back in the computation of total income. The assessee-company has reduced the profit on sale of asset from the taxable income in the computation of income. The loss on sale of asset hasbe adjusted in the schedule of fixed asset and the same cannot be allowed as a business expenditure to the assessee-company. Hence, Rs.15,60,000/- is disallowed by the Assessing Officer to the assessee-company as loss on sale of asset debited to <ORG> account. On an appeal before the CIT(A), it is submitted by the assessee that profit/loss on sale of fixed assets (net) amounting to Rs.2,97,214/- was already reduced from the total income, that the balance loss which arose on sale of assets other than fixed assets i.e., stores, capital stores and raw materials was a normal business expenditure allowable under section 37 (1) and accordingly, there was no question of adjusting the same in the schedule of fixed assets. In the <ORG> account for the year ended 31st March, 1998, an amount of Rs. 15.60 lakhs was shown as loss on sale of assets (net) in Schedule 'Q' manufacturing and other expenses. During the course of assessment proceedings, the assessee vide letter dated 9th March, 2001 furnished details of the same which is summarized as follows: (Rs)

(a) Profit on sale of fixed assets (net) 2,97,213.38

(b) Loss on sale of stores & capital stores 21,75,590.38

(c) Profit on sale of raw materials (net) 3,18,380.73

15,59,996.28 In the return of income, the assessee had reduced an amount of Rs.2,97,214/- being profit on sale of fixed assets since the same was considered separately in the block of assets while computing depreciation. The balance amount being the net loss on sale of items of stores, capital stores and raw materials was claimed as a deduction since it represented a normal business loss incurred on sale of consumable assets. In the aforesaid letter dated 9th March, 2001, the assessee explained that the said loss should not be added back while computing the total income. In para 11 of the assessment Order, the amount of Rs.15,60,000/- has been disallowed on the ground that the loss on sale of assets will be adjusted in the schedule of fixed assets and cannot be allowed as a business expenditure to the assessee. The learned CIT(A) observed that the assessee deserves relief regarding the amount of Rs.2,97,214/- for the reason that the same was considered by the assessee while working out written down value of the block of assets for the purpose of computing depreciation. Profit on sale of raw material (net) Rs.3,18,381/- is taxable as income of the assessee and the same has been offered by the assessee. The main issue relates to loss on sale of stores and capital stores of Rs.21,75,590/-. It is submitted by the assessee that stores and capital stores do not form part of the block of assets and, therefore, the loss should be allowed as normal business expenditure. The assessee had debited the adjusted figure of Rs.15,59,996/- in the P & L A/c. The moot point is whether the items of the stores and capital stores were reflected as closing stock in the profit and loss account. If these items formed part of the closing stock, then the loss incurred on sale of the same is admissible as deduction to the assessee for the reason that the sale proceeds substitute the value of closing stock at a lower figure. If the purchase value of stores and capital stores has not been shown in the closing stock and allowed as deduction at the time of purchase itself, then no deduction on account of loss on such sale would be allowed to the assessee. Rather, the whole sale value should go in the credit side of the profit and loss account. The assessee has not made any submission to the effect that the purchase value of stores and capital stores were reflected in the closing stock, either before the Assessing Officer or during the hearing of the appeal. As the assessee has not proved that the stores were reflected in the closing stock, the addition made by the Assessing Officer is confirmed. Accordingly, the learned CIT(A) partly allowed the claim of the assessee.

10.1. Before us, the learned counsel contended that the assessee has reduced an amount of Rs.2,97,214/- in the return of income being profit on sale of fixed assets since the same was considered separately in the block of assets while computing depreciation. Further, the balance loss arising on sale of assets other than fixed assets i.e., stores, capital stores and raw materials is a normal business expenditure and accordingly, it ought to be allowed as a deduction under section 37 (1). The said loss did not represent loss on sale of depreciable fixed assets and accordingly, could not be adjusted in the block of assets. The learned CIT(A) upheld the disallowance on the ground that the assessee has not proved that the purchase value of the capital stores was reflected in the closing stock without taking into account the purchase value would either be in purchases or in the closing stock as is evident from the annual accounts vide schedule 'G' and 'Q' forming part of the profit and loss account for the year ended March 31, 1998. Therefore, the learned counsel contended that the loss on sale of capital stores ought to be allowed as a deduction. On the other hand, the learned DR relied upon the Orders of the authorities below.

10.2. We have considered the issue. The loss on consumable stores is an allowable loss. However, the Assessing Officer disallowed only Rs.15,60,000/-, whereas, assessee contends that the amount at Rs.21,75,590/-. This issue require reconciliation. Therefore, Assessing Officer is directed to examine the amount involved and allow the same as loss on consumable stores. Accordingly, this ground is allowed.

11. Ground No.10 and 11: Deduction under section 80HH / 80IA . It was contention that deduction under section 80HH / 80IA ought to have been allowed on the profits of the concerned undertakings without deducting the depreciation eligible under section 32 in view of the fact that depreciation under section 32 is allowable on the basis of the block of assets for the company as a whole and not in respect of individual assets of the concerned industrial undertakings and accordingly, depreciation cannot be allocated to the different industrial undertakings as per the scheme of the Income-tax Act , 1961. It is also contention that the Assessing Officer erred in excluding items of 'other income' such as sale of scrap etc., from the profits of the concerned undertakings for the purpose of computing the deduction under section 80HH / 80IA .On an appeal respectfully following the decision of his predecessors in assessee's own case, the learned CIT(A) confirmed the action of the Assessing Officer in respect of deduction under section 80HH / 80IA . The learned counsel fairly conceded that issue of depreciation is against the assessee in earlier years in view of the decision in the case of <CITATION> . CIT 185 ITR 187 (Bom.). <ORG>, on this issue that part of ground on claim of depreciation was dismissed.

11. 2 With regard to items of 'other income' except sale of scrap etc., not to be excluded from profits u/s 80IA, the learned Counsel submitted that this issue was squarely covered by the decision in earlier years in assessee favour, where as u/s 80HH it was against. We decide this issue in favour of the assessee for deduction u/s 80IA following the orders in earlier years.

Accordingly, we reject Ground 10 and partly allow the ground 11 of the assessee.

12. Ground no 12(a):Deduction under section 80HHC :The Assessing Officer worked out the total turnover including certain incomes. The details of which are extracted in para 24.2 by the CIT(A). It was submitted that many of the items like dividend etc., are income from other sources and the same does not form part of turnover and further total turnover is to be considered only in respect of goods sold and cannot include the other income. The CIT(A) differed from his predecessor order and confirmed the inclusion of other incomes like rent, interest, brokerage, sales tax refund as part of total turnover. The assessee while contesting the ground has restricted the arguments only to the items of rent, interest, brokerage and sales tax refund which are included in the total turnover while not pressing for the other items like manufacturing charges, insurance claim etc., 12.1. We have considered the issue and rival submissions. As seen from the Orders in earlier years, the CIT(A) gave relief following <ORG> No. 621 dated 19-12-1991 stating that the total turnover has to be considered only in respect of the goods sold and cannot include other income. However, the present CIT(A) differed from the finding in earlier years stating that clause (baa) does not include these items and profits of business, therefore, they have to be form part of turnover. We are unable to understand the logic of the CIT(A) in differing from his predecessor order which was based on <ORG>. <ORG> was binding on <ORG> authorities. Further, <ORG> has not contested the finding of the learned CIT(A) in earlier years. Therefore, we are of the view that the CIT(A) erred in differing from the predecessor order and confirmed certain other incomes as part of total turnover. Since, <ORG> also has confirmed in the case of <ORG> 290 ITR 667 that even excise duty and sales tax which do not have any element of profit cannot be included in the total turnover, similar logic also applies to the other incomes which does not have any bearing on the export turnover and total turnover, while working out the deduction under section 80HHC . Therefore, this ground of the assessee is allowed and Assessing Officer is directed to exclude the amounts shown in the other income under the head 'rent, interest, brokerage and sales tax refund' and on the balance items as the ground was not pressed, no directions are required. Ground is partly allowed.

12.2. Ground no 12(b) : Deduction u/ 80HHC: This ground pertain to not reducing the entire costs, the expenses deemed to be incurred for earning income which has been reduced to arrive at the profits of the business for computing the indirect cost attributable to the trading goods exported. It is submitted that the expenditure attributable to earning income which has reduced the compute profits of business is estimated at 10% as per Board Circular No. 621 issued by <ORG>. Accordingly, 10% of the said income deemed to be expenses incurred for earning the said income and to be reduced while calculating the indirect cost. This issue is in favour of the assessee following the decision of the Hon'ble <ORG> in the case of Hero Exports 295 ITR

454. Accordingly, the Assessing Officer is directed to consider the above while calculating 80HHC in the consequential orders. This ground is considered as allowed.

13. Ground No. 13: TAX CREDIT IN RESPECT OF TAX PAID AT ANTWERP :

"13.1. On the facts and in the circumstances of the case and in law the appellant submits that the Commissioner of Income Tax (Appeals) erred in not admitting the additional grounds of appeal filed during appellate proceedings.

13.2. In this connection, the appellant submits that the appellant had prayed that relief under section 90 ought to be granted in respect of income taxed in Belgium, which has also been included in the total income for the above assessment year."

13.1. When the ground was raised before the learned CIT(A) as additional ground, the learned CIT(A) rejected the same by holding as under :

"28.2. I have carefully considered the submissions of the appellant. In my considered opinion there is no valid reason to admit the additional ground of appeal taken by the appellant. The payment of tax, if any, was not made during the previous year under consideration. The liability to pay such tax in Belgium also did not arise during the previous year under consideration. The claim of relief does not arise either from the profit and loss account or from the assessment order. The payment has been accounted for the first time in F.Y. 1999-2000 relevant for A.Y. 2000-01. Considering these factors, additional ground of appeal raised by the appellant is not admitted."

13.2. We have considered the issue and rival submissions of the learned Counsel for the assessee and learned DR. Since the assessee has raised this issue as additional ground before the learned CIT(A), this is not an additional ground before us and therefore, it has to be considered on its merits. The assessee relied upon the decision of Hon'ble Bombay High Court in the case of <CITATION> 24 ITR 362 (Bom.).It was submitted that the relevant releif under Sec.90 of IT Act ought to be granted in respect of income taxed in Belgium which was also included in the total income in the impugned assessment year. In support of the same, a copy of the note filed by Belgium Accountant for payment of tax in Belgium, a copy of the assessment note received from <ORG>, Antwerp and proof of payment of tax were filed, in addition to written submissions filed before the CIT(A). Since the amounts were already included in the assessee's income and stated in the computation of income, this issue has to be examined by the Assessing Officer and necessary relief has to be granted as per the provisions of the Act. For this purpose, we remit the issue to the file of the Assessing Officer for detailed examination of the contentions and take necessary decision while giving credit to the amount of tax paid in Belgium as per law. With this direction, the ground is considered as allowed.

ITA. No. 3688/Mum/2003 :

14. The <ORG> has raised following grounds in its appeal :

1. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in allowing Rs.4,32,563/- as expenses on rural development u/s. 37(1). On doing so, the learned CIT(A) failed to appreciate the fact that the assessee had failed to establish that the expenditure in question had been incurred wholly and exclusively for purposes of business as provided u/s. 37(1).

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing <ORG> to work-out the deduction u/s. 80HH, 80I and 80IA in relation to each of the eligible unit on the basis of its profit without adjusting the same against the losses of other units.

3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing <ORG> to recalculate the deduction u/s. 80HHC after excluding excise duty and sales tax from the total turnover of the assessee, overlooking the fact that the decision of the jurisdictional <ORG> on this issue in the case of <ORG> 245 ITR 769 has been contested by the department before <ORG>.

4. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in following the decision of <ORG> 245 ITR 769 and in ignoring the decision of <ORG> in the case of <ORG> 143 ITR 318 on the same issue.

5. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in ignoring the fact that according to the principles of procedure, <ORG> of <ORG> should follow the decision of another Division Bench of equal strength or a Full Bench of the same <ORG> and thus the decision of the Mumbai <ORG> in the case of <ORG> 143 ITR 318 should have been followed."

15. Ground No.1 pertain to allowance of Rs.4,32,563/- as expenses under Rural Development by the CIT(A). It was contended that the learned CIT(A) failed to appreciate the fact that assessee had failed to establish the expenditure in question had been incurred wholly and exclusively for the purpose of business. The learned CIT(A) allowed that the payments were made to study climatic conditions and use of pesticides in such climatic conditions as well as detailed analysis of soil in Kutch Division in the State of Gujarat as the assessee-company is engaged in the manufacture of pesticides. The CIT(A) held that expenditure incurred is to promote the business. Since, there are no reasons given by the Assessing Officer for disallowing the expenditure as non- business expenditure, we affirm the findings of the learned CIT(A) and dismiss the ground.

16. Ground No.2 pertains to the deduction of 80HH, 80I and 80IA in relation to each of eligible unit on the basis of profit without adjustiing the same against the losses of other units. It was fairly submitted that this issue is also against the <ORG> and in favour of the assessee by the Orders of the I.T.A.T. in assessment years 1996-97 and 1997-98 and further this issue is supported by the Judgment of the Hon'ble Supreme Court in the case of <CITATION> . 161 ITR 320 (S.C.) and the decision of Karnataka High Court in the case of <CITATION> . 201 ITR 968 (Kar.). Respectfully following the principles laid down therein, we do not see any reason to interfere with the Orders of the CIT(A) which is according to law. Since this issue was also confirmed by the I.T.A.T. in earlier years, which the CIT(A) has followed, the <ORG> ground is rejected.

17. Ground Nos. 3 to 5 pertain to issue of excluding excise duty and sales tax from the total turnover of the assessee. The <ORG> has raised the ground on the reason that jurisdictional <ORG> Judgment in the case of <ORG> 245 ITR 769 has been contested by the department before the Hon'ble <ORG> of India. Now, this issue is settled by the Hon'ble <ORG> in the case of <ORG> 290 ITR 667 (S.C.) wherein it was held that excise duty and sales tax would not have an element of turnover and they ought not to be included in the total turnover or export turnover. In view of the Judgment of the Hon'ble <ORG> affirming the jurisdictional <ORG> order, we do not see any reason to interfere with the Order of the CIT(A). Ground No. 3 to 5 are rejected.

18. In the result, appeal of the <ORG> is dismissed.

ITA. No. 1247/Mum/2006 :(Assessee Appeal AY 1999-2000)

19. In this appeal for assessment year 1999-2000 the assessee has raised 12 grounds which are as under :

1. "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in not giving a direction to the Deputy Commissioner of Income Tax to allow the appellant's claim for weighted deduction under section 35(2AB) of one and one fourth times of the expenditure incurred on scientific research on in- house research and development facility amounting to Rs.4,99,80,124/- on receipt of approval from the prescribed authority.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the entire miscellaneous income of Rs.1,61,02,000/-, other than sale of scrap amounting to Rs.1,46,82,016/- ought to be reduced from the 'profits of the business' for the purpose of computing deduction under section 80HHC .

3. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that 90% of the 'gross interest and other receipts' and not the 'net interest' and other receipts' ought to be considered for exclusion from the 'profits of the business' for the purpose of computing deduction under section 80HHC .

4. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the Deputy Commissioner of Income Tax 'to find out the amount of deduction given u/s.80IA for the Kharadpada and Roha Unit (in the former case eligible for 100% and in the later case 30% of deduction) and adjust the same amount as not deduction u/s. 80HHC.

5. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the entire miscellaneous income other than sale of scrap ought to be excluded from the profits of the concerned undertakings for the purpose of computing the deduction under section 80HH .

6. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in rejecting the appellant's claim that export incentives ought not to be excluded from the profits of the undertakings while computing deduction under section 80HH .

7. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in holding that the entire miscellaneous income other than sale of scrap ought to be excluded from the profits of the concerned undertakings for the purpose of computing deduction under section 80IA .

8. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in rejecting the appellant's claim that export incentives ought not to be excluded from the profits of the undertakings while computing deduction under section 80IA .

9. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the Deputy Commissioner of Income Tax in disallowing a sum of Rs.49,84,000/- out of interest paid.

10. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the disallowance under section 14A in respect of expenditure incurred for earning tax free income to the extent of 10% of the tax free income.

11. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in rejecting the claim for deduction in respect of wealth tax paid amounting to Rs.1,72,123/-.

12. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in upholding the disallowance of Rs.37,800/- being expenditure on fines and penalties".

out of the above grounds the assessee has not pressed ground No. 1, 2 and 12. Hence, they are treated as dismissed as not pressed

20. Ground No.3pertains to the issue of exclusion of net receipts while computing the profits of business under section 80HHC (baa). It was submitted that interest received & credited to the P & L account amounted toRs.388.79 lakhs while interest paid and debited amounted to Rs.2312.31 lakhs. Accordingly, there is net debit in the amount of interest. It was submitted that as per Explanation baa below section 80HHC(iv)(a) , the word 'receipt' refers the net receipts and not gross receipts. Accordingly, it was submitted that no portion of the interest income ought to be reduced while computing profits of the business for the purpose of deduction under section 80HHC . This was supported by the Hon'ble Supreme Court in the case of <CITATION> 67 DTR 205.

20.1. After considering the issue and examining the record, we are of the opinion that assessee's contention ought to be accepted on principles. <ORG> has decided the issue in favour of the assessee that only net interest income has to be excluded at 90% while working out the profits of business invoking Explanation baa. However, we are not sure whether the entire interest credited and paid are having nexus to each other and how much of the amount has to be considered. This aspect of verification of the amount is restored to the file of the Assessing Officer with a direction that the Assessing Officer should consider only the net amounts while working out the 'receipt of interest' while computing the profits of business. With this direction, the ground is considered allowed.

21. Ground No.4pertain to the issue of reducing the entire deduction under section 80IA from the profits of business while computing the deduction under section 80HHC . It was the contention that deduction under section 80HHC and 80IA are separate and while calculating the amount of deduction, these are to be separately considered without reducing from the one from the other. Since the jurisdictional <ORG> in the case of <ORG> 332 ITR 42 held in favour of the assessee, we direct the Assessing Officer to follow the jurisdictional <ORG> Order and re-workout the deduction accordingly. Ground is considered and allowed accordingly.

22. Ground No.5 pertains to the issue of excluding other income from profits while computing deduction under section 80HH . This issue was decided against the assessee in earlier assessment years 1996-97 and 1997-98. Similar issue is also decided in appeal 4240/Mum/2003. Respectfully following the same, we uphold the Order of the CIT(A) and dismiss the assessee's ground.

23. Ground No.6 pertains to export incentives not to be excluded from profits of the undertaking while computing the deduction under section 80HH . While admitting that the decision is against the assessee by the decision of Hon'ble <ORG> in the case of <CITATION> 317 ITR 218, the learned Counsel for the assessee fairly submitted that assessee has already excluded export incentive from the profits of the industrial undertaking for computing the deduction under section 80HH . The Assessing Officer is directed to examine this aspect and if the assessee has already excluded the amounts, there is no need to further exclude the amount. Subject to the verification, the issue on principles decided against the assessee and in favour of the <ORG> following the principles laid down by the Hon'ble <ORG> (supra).

24. Ground No.7 pertains to the items of other income other than sale of scrap not to be excluded from profits while computing deduction under section 80IA . It was fairly submitted that this decision is in favour of the assessee following the decision of the <ORG> in assessment years 1996-97 and 1997-98 and the <ORG> decision in <ORG> vs. <ORG>

92 ITD 11 (Cuttack). Respectfully following the above, we allow the ground of the assessee.

25. Ground No.8 pertains to export incentives not to be excluded from the profits of the undertaking while computing deduction under section 80IA . This ground becomes infructuous as it was submitted that assessee has already excluded export incentives from the profits of the industrial undertaking for computing the deduction under section 80IA . Therefore,the ground is rejected. Assessing Officer, is however, directed to verify this aspect while working out the deduction under section 80IA .

26. Ground No.9 pertains to disallowance out of interest paid of Rs.49,84,000/-. Assessing Officer considered an amount of Rs.49,84,000/- as interest not allowable under section 36(i)(iii) consequent to certain advance to group concerns. It was the submission that loans were granted out of commercial expediency and relied on the decision of <CITATION> 288 ITR 1 (S.C.). Further, it was fairly admitted that this issue was restored to the file of the Assessing Officer for fresh consideration in assessment years 1996-97 and 1997-98. While considering the appeal ITA. No. 4240/Mum/2003 in assessment year 1998-99 against ground No. 5 at para 6.1, we restored the matter to the file of the Assessing Officer in that year. Since the findings have a bearing in this year, in the interest of justice, this issue is also restored to the file of the Assessing Officer for fresh consideration. However, assessee should be given an opportunity to make necessary submissions. Accordingly, this ground is allowed for statistical purposes.

27. Ground No.10 pertains to disallowance of expenditure considered as income in connection with the exempt income. The assessee earned an amount of Rs.19,65,557/- as dividend income and claimed exemption under section 10 (33) of the Act. However, <ORG> noticed the investment made and came to the conclusion that amount of Rs.4.86 crores out of interest bearing funds were estimated as utilized from making investments and accordingly an amount of Rs.77,91,000/- was disallowed as expenditure incurred in connection with the exempt income. After considering the submissions the learned CIT(A) however estimated the expenditure at 10% of dividend which the assessee is contesting. This issue was decided in earlier years and by us also in ITA.No. 4240/Mum/2003vide ground 8 para No. 9.1. Following the reasons given therein, we direct <ORG> to restrict the disallowance to 2% of the gross dividend earned which meets the ends of justice. Accordingly, this ground is partly allowed.

28. Ground No.11 pertains to claim of wealth tax payment of Rs.1,72,123/-. Eventhough it was contended that provisions of section 40a(iia) are not attracted on the ground that Explanation to section 40a(iia) specifically excludes any tax chargeable with reference to the value of any particular asset of the business or profession, it was fairly conceded that this issue is decided against the assessee by the Coordinate Bench in the case of <ORG> vs. ACIT 56 ITD 225 (Bom.). In view of the above, we uphold the Order of the CIT(A) and dismiss the ground raised by the assessee.

29. In the result, assessee's appeal is partly allowed for statistical purposes.

ITA.No.1300/Mum/2006 : (Revenue Appeal)

30. In the <ORG> appeal the <ORG> has raised the following grounds :

"1. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer not to tax in this year advance licence benefit receivable of Rs.41,67,174/- and pass book benefit receivable of Rs.5,33,19,279/-.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to treat the expenditure as revenue in respect of software expenses capitalized in the accounts of Rs.4,97,700/-.

3. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to allow deduction in respect of contribution to approved gratuity fund of Rs.2,49,32,113/- as per second proviso to section 43B to the extent of amount paid upto the date of filing of the return.

4. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer not to exclude 90% of sales tax refund, insurance claim, technical fees and miscellaneous income from the profits of the business for the purpose of computing deduction u/s. 80HHC.

5. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to compute the indirect cost as per the audit report u/s. 80HHC as was being followed by Assessing Officer in earlier year.

6. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing <ORG> to allow 10% of income by way of export incentives, interest, rent etc., excluded from profits of the business as per explanation (baa) below section 80HHC (4A) after taking into account the direction given in the appellate order while computing the indirect costs attributable to export of trading goods.

7. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer not to exclude income from sale of scrap from other income for the purpose of computation of deduction u/s. 80HH & 80IA.

8. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing <ORG> to re-compute the deduction u/s. 80HH in relation to each of the eligible unit on the basis of its profits without deducting losses incurred by other units.

9. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to recomputed the deduction u/s. 80HH on the eligible profits of the unit without reducing there from the brought forward losses u/s. 80I and 80IA.

10. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to disallow 10% of the tax free income without appreciating the fact that during the relevant year the Assessing Officer has quantified the interest expenditure of Rs.77.91 lakhs incurred in connection with exempt income of dividend etc.,

11. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to treat the amendment with retrospective effect for second proviso to section 43B which has been omitted w.e.f. 1st April, 2004.

12. On the facts and in the circumstances of the case and in law the learned CIT(A) was not right in directing the Assessing Officer to make adjustments u/s. 145A to opening stock."

31. Ground No.1 pertains to the taxability of advance licence benefit receivable and passbook benefit receivable. This issue is considered in favour of the assessee in ITA.No.4430/Mum/--at ground No. 1 and 2. For the detailed discussion made therein, this issue is to be held against the <ORG> and in favour of the assessee. The learned CIT(A) followed the Order of the coordinate Bench while granting relief and this issue has already elaborately discussed as the coordinate Bench decision has been upheld by the Hon'ble <ORG>. Accordingly, there is no merit in the <ORG>'s grounds and hence, dismissed.

32. Ground No.2 pertains to allowing the software expenses of Rs.4,97,700/- as revenue expenditure. During the year the assessee incurred expenditure of Rs.4,97,700/- which was capitalized in the books of account. However, in the return of income, the aforesaid expenditure was claimed as deduction as revenue allowable under section 37(1) of the Act. The Assessing Officer did not allow the same. Whereas, the learned CIT(A) after considering the facts of the expenditure and various case law on the issue allowed it with a conclusion that the software does not belong to the assessee and assessee does not have any right therein and it was only an application and so there is no enduring value or long term benefit. Accordingly, he allowed it as revenue expenditure which the revenue is contesting now.

32.1. After considering the order of the CIT(A) and rival submissions and case law relied upon by the assessee, we uphold the Order of the CIT(A). There is no merit in <ORG> ground. Accordingly, the same was dismissed. In case, the Assessing Officer allowed any depreciation on the above amount while treating it as capital expenditure, the same can be withdrawn.

33. Ground No. 3 and 11 pertains to disallowance of contribution to approved gratuity fund. Assessee debited an amount of Rs.2,49,32,113/- in respect of contribution to approved group gratuity insurance scheme. The assessee submitted that amount of Rs.1,60,00,000/- was paid on various dates before 31st March, 1999 and balance amount of Rs.89,72,113/- was paid on 25th May, 1999. The Assessing Officer rejected the submissions vide para 6 of the assessment order and disallowed the entire amount under section 43B on the ground that assessee has not furnished any proof in respect of payments. Before the learned CIT(A) it was contended that assessee has furnished all the details and relied on the decision of <ORG> in ACIT vs. <ORG> 93 TTJ 144. The learned CIT(A) following the decision of <ORG> in the case of <CITATION> 224 ITR 677 (S.C.) held that omission of the second proviso which was an exception to the first proviso has to be held to be retrospective. Therefore, the amendment takes retrospective effect and accordingly any contribution to approved gratuity paid before the filing of the return has to be allowed as a deduction. The <ORG> is contesting the same. It was fairly submitted that this decision is against the <ORG> by the principles laid down by <ORG> in the case of <CITATION> . 319 ITR 306 (S.C.). Accordingly, the Order of the learned CIT(A) does not require any modification. The <ORG> ground is therefore dismissed.

34. Ground No.4 pertains to reducing 90% of the various items and other income while computing the profits of business under section 80HHC . The Assessing Officer has included sales tax refund, insurance claims, technical fees and miscellaneous receipts while considering the amounts to be included as other income in baa. Learned CIT(A) after examining the nature of the amounts held that this amounts cannot be excluded at 90% as they are business receipts.

34.1. After considering rival submissions and principles laid down by <ORG> in the case of <ORG> 295 ITR 451 and other case law relied upon by the learned counsel for the assessee, we are of the opinion that the CIT(A) has correctly concluded that these receipts are business receipts and need not be excluded while arriving at the profits of business under baa. Accordingly, <ORG> ground is rejected.

35. Ground No. 5 and 6 pertain to working of indirect cost. It was submitted that Assessing Officer differed from the working in earlier years and has re-worked out the indirect cost and the CIT(A) has correctly allowed the amounts. After considering the Order of the learned CIT(A) and the principles laid down by the Special Bench of Mumbai, I.T.A.T. in <ORG> 86 ITD 121 and <ORG> in the case of Hero Exports 295 ITR 454, we confirm the Order of the CIT(A) and dismiss the grounds raised by the <ORG>.

36. Ground No.7 pertains to the issue of not excluding sale of scrap while computing deduction under section 80HH and 80IA . It was fairly admitted that this issue is in favour of the assessee by the orders of the coordinate Bench of the Tribunal in assessment years 1996-97 and 1997-98. Respectfully following the same, we uphold the Order of the CIT(A) and dismiss the ground.

37. Ground No. 8 pertains to the deduction under section 80HHC has to be computed in respect of each eligible unit without taking losses incurred by other units. This issue was covered in favour of the assessee and against the <ORG> in other appeal at ground No.2 i.e., <ORG> appeal. Therefore, respectfully following the same, we dismiss the ground.

38. Ground No.9 pertains to deduction under section 80HH to be allowed on profits without deducting brought forward losses under section 80I and 80IA . This issue is covered in favour of the assessee by the Orders of I.T.A.T. in assessment years 1996-97 and 1997-98 at para 70 and 73. This issue was discussed elaborately in ITA. No. 2009/Mum/2000 in assessment year 1996-97 vide para 73 which reads as under :

"73. We have given our careful consideration to the rival contentions. It is observed from Para 12.5 of the order of the CIT(A) that he has followed the decision of the <ORG> in assessee's own case for the assessment year 1986-87 to hold that the deduction under section 80HH has got to be calculated without adjusting the same against losses of other units. In our view, there is no infirmity in the order of the CIT(A) in issuing the above direction. In the case of <ORG> (supra), the assessee was engaged in the business of oil and chemicals. It had a unit for oil division in Sirohi and a unit for chemical division in Jodhpur. For the assessment years 1990-91 and 1991-92 it had earned profits in both the units.

But in the earlier years the assessee had suffered losses in the oil division. In relation to the deduction under sections 80HH and 80-I of the Income-tax Act, 1961, it claimed that each unit should be treated separately and the losses suffered in the earlier years by the oil division were not adjustable against the profits of the chemical division. But since the gross total income was nil the Assessing Officer held that the assessee was not entitled to the benefit of deductions under Chapter VI-A. The <ORG> and <ORG> affirmed the view of the Assessing Officer. On appeal, <ORG>: -

Held, affirming the decision of <ORG>, that <ORG> was justified in holding that the loss from the oil division was required to be adjusted before determining the gross total income and as the gross total income was "nil" the assessee was not entitled to claim deductions under Chapter VI-A which included sections 80HH and 80- I.

The effect of clause (5) of section 80B of the Income-tax Act, 1961, is that "gross total income" will be arrived at after making the computation as follows: (i) making deductions under the appropriate computation provisions; (ii) including the incomes, if any, under sections 60 to 64 in the total income of the individual; (iii) adjusting intra-head and/or inter-head losses; and (iv) setting off brought forward unabsorbed losses and unabsorbed depreciation, etc. Only if the gross total income so determined is positive the question of allowing the deductions under Chapter VI-A would arise, not otherwise.

It is well settled that where the predominant majority of <ORG> have taken a certain view on the interpretation of certain provisions, <ORG> should lean in favour of that view.

The words "includes any profits" in section 80-I(1) are important and indicate that the gross total income of an assessee shall include profits from a priority undertaking. While computing the quantum of deduction under section 80-I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, the non obstante clause in section 80-I(6) is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. To say that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and that the profit is required to be computed as if the profit making industrial undertaking was the only source of income would almost render the provisions of section 80A(2) of the Act nugatory. Sections 80A(2) and 80B(5) are declaratory and apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and therefore the non obstante clause in section 80-I(6) cannot restrict the operation of sections 80A(2) and 80B(5) which operate in different spheres. The gross total income of the assessee has first got to be determined after adjusting losses etc., and if the gross total income of the assessee is "nil" the assessee would not be entitled to deductions under Chapter VI-A of the Act".

The decision of <ORG> in the case of <ORG> (supra) is in a different context. The decision of <ORG> will apply in such cases where the gross total income of the assessee after adjustment of loss from any unit or units is less than the deduction calculated under section 80HH . In the light of several decisions relied upon by the assessee and also relied upon by the learned DR, the following principle of law emerges: -

The first step is to calculate the gross total income of the assessee. In working out the gross total income, the losses incurred in any of the units has got to be set off against the profits of the eligible unit as well (this may be referred to as "GTI"). The second step is to work out the profits of the eligible unit. In working out the profits of the eligible unit, the loss from any other unit is not to be set off (such profits hereinafter called as POEU). The assessee is to be allowed deduction under section 80HH to the extent as calculated subject to the maximum of the gross total income as provided under section 80AB . In case the gross total income of the assessee is more than the deduction under section 80HH , the assessee will get full deduction without adjustment of losses of the other unit. So however, if the gross total income is less than the deduction calculated under section 80HH , the assessee will get deduction to the extent of the gross total income only.

Subject to the above clarification, the ground of appeal raised by the <ORG> is dismissed for both the years under consideration.

38.1. Respectfully following the same, we dismiss the revenue ground.

39. Ground No.10 disallowance of expenditure considered as incurred in connection with exempt income. This issue was decided already in assessee's appeal at ground No. 10. Since, we upheld the disallowance partly in assessee's appeal, there is no need to consider the <ORG> ground wherein the CIT(A) deleted the working of the Assessing Officer as discussed above. It is also noticed that <ORG> has not contested such deletion in assessment year 19098-99. Therefore, there is also no merit in the issue raised in this assessment year. Ground is accordingly dismissed.

40. Ground No. 12 pertains to consequent to the adjustments made to the opening stock while working out the valuation as per section 145A . The Assessing Officer while computing assessment under section 143(3) ignored the adjustments made to the value of opening stock under section 145A . Accordingly, addition of Rs.8,80,97,785/- has been made to the total income which included an amount of Rs.4,39,28,468/- already added by the appellant. It was the contention that it is a double addition in respect of the adjustments made. It was also contended that if any closing stock valuation is to be done corresponding opening stock valuation is to be done. Considering these submissions learned CIT(A) held as under :

"I have perused the detailed submissions made by the AR and thecase laws cited. In my opinion there is merit in the appellant's submissions. First of all the Memorandum explaining the provisions of section 145A inserted by Finance (No.2) Bill, 1999 at para 23.12 of clause 45 stipulated that in order to ensure the value of opening and closing stock reflect the correct value, it is proposed to insert a new section to clarify that while computing the value of inventory as per the method of accounting regularly employed by the assessee, the same shall include the amount of any tax, duty, cess or fees paid or liability incurred for the same under any law in force.

Secondly whether the value of closing stock in case of inputs, work- in-progress and finished goods must necessarily include the modvat credit, there was considerable litigation. For avoidance of litigation, section 145A has been inserted. It is not the intention of the legislation to create another set of litigation but to stop all litigation and ensure correct value of opening and closing stock. That intention can be achieved in the initial year of amendment, that is to say first year when the provision of the Act takes effect the said adjustments are to be made in the entries in books of account by the method regularly adopted by the appellant. In the instant case, I find that in A.Y. 1999-2000 is the first year in which provision of section 145A is coming into operation and there is denial of the said fact. As such the A.O. is required to make such adjustments as prescribed in the said provisions. By doing that exercise the appellant has itself shown corresponding effect of 4.40 crores because of increase in opening and closing stock by including amount of tax, duty, cess. Therefore, the appellant has not derived any benefit from that exercise. Thirdly, as per the Act inventory was to be adjusted which includes opening as well as closing stock. As such Assessing Officer cannot discriminate and only modify the closing stock without touching the opening stock. Fourthly, there are plethora of decisions where it has been held that the appellant has to be taxed on real income and not on notional income as otherwise provided in the act. It worthwhile to discuss the ratio of decision in following cases.

<CITATION> 188 ITR 44 (S.C.) <CITATION> 235 ITR 412 Therefore, this is the transitional year and by making an adjustment in respect of tax, duty, cess etc., since the appellant isnot deriving any tangible benefit and any profit or loss derived in this year is set off in the subsequent year because closing stock of one year becomes opening stock of next year and in view of various judgments cited I direct the A.O. to make the adjustment both to opening stock and closing stock in the light of aforesaid judgments. Accordingly, the addition made by the A.O. has to be recalculated and the A.O. is directed to do the same."

40.1. The <ORG> is aggrieved on the above. It was fairly submitted that as per provisions of section 145A inventories have to be valued by inclusion of tax duty etc., while making the adjustment both opening as well as closing stock. The decision of the Hon'ble <ORG> in the case of <ORG> 318ITR 116 (Bom.) and Delhi High Court in the case of <ORG> (Del.) support the view taken by the CIT(A). Therefore, there is no need to disturb the finding of the CIT(A) who already directed the Assessing Officer to do the needful. With these observations, the ground raised by the <ORG> is dismissed.

41. In the result <ORG> appeal was dismissed.

Cross Objection No. 231/Mum/2006 :

42. The cross objection is with reference to ground No. 1 raised by the <ORG> in AY 1999-2000 is with reference to Advance License benefit Receivable and deductions to be computed under sections 80IA and 80HHC . The grounds of cross objections are as under :

"1. On the facts and in the circumstances of the case and in law, the respondent submits that in case the <ORG> succeeds in Ground No.1 of its appeal bearing ITA.No.300/M/2006 that advance licence benefit receivable and pass book benefit receivable are taxable on accrual basis, then only that portion of advance licence benefit receivable and pass book benefit receivable that has accrued during the year ought to be included in the total income and not the entire amount accrued till date.

2. On the facts and in the circumstances of the case and in law, the respondent submits that the Assessing Officer erred in reducing the proportionate profits eligible for deduction under section 80IA , for the purpose of computing the deduction eligible under section 80HHC ".

43. Since issues in <ORG> appeal are already held against the <ORG> and in favour of the assessee, there is no need to consider the cross objection. The cross objection becomes academic and therefore, dismissed.

44. In the result, In AY 1998-99ITA.No. 4240/Mum/2003 of the assessee is Partly allowed, ITA.No.3688/Mum/2003 of the <ORG> is dismissed. In AY 1999-2000 ITA.No.1247/Mum/2006 of the assessee is partly allowed and ITA.No.1300/Mum/2006 of the <ORG> is dismissed and consequently C.O.No.231/Mum/2006 in ITA.No.1300/Mum/2006 is also dismissed.

Order pronounced in the open <ORG> on this the 4th day of May, 2012.

Sd/- Sd/- (S.S.GODARA) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Date 4th May, 2012 VBP/- Copy to

1. M/s. <ORG>, Excel Estate, S.V.Road, Jogeshwari (W), Mumbai - 400 102PAN AAACE2488F

2. <ORG>, CC.38, 6th Floor, C-10, BKC, Bandra East, Mumbai - 400 051.

3. CIT(A), Central-VI, Mumbai 4. CIT, Central-III, Mumbai 5. DR "H" Bench 6. Guard File (True copy) By Order Asst. Registrar, <ORG> Benches MUMBAI.