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Income Tax Appellate Tribunal, C BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI SHRI B.R. BASKARAN, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER Hindustan Unilever Limited, (formerly Hindustan Lever Limited), Unilever House, B.D. Sawant Marg, Chakala, Andheri (East), Mumbai – 400099 [PAN: AAACH1004N] ……………… Appellant Vs Assistant Commissioner of Income Tax, Range 1(1)(1), Mumbai, Room No. 579, 5th Floor, Aayakar Bhavan, M.K. Road, Mumbai - 400020 ……………. Respondent Dy. Commissioner of Income Tax, Circle 1(1)(1), Mumbai, Room No. 579, 5th Floor, Aayakar Bhavan, M.K. Road, Mumbai - 400020 ……………… Appellant Hindustan Lever Limited, Vs Hindustan Lever House, 165/166, Backbay Reclamation, Mumbai - 400020 ……………. Respondent [PAN: AAACH1004N] Appearances For the Appellant/Assessee : Shri Nishant Thakkar & Ms. Jasmine Amalsadwala For the Respondent/Department : Shri Sandeep Raj
ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
Date of conclusion of hearing : 05.09.2022 Date of pronouncement of order 02.12.2022 : O R D E R Per Rahul Chaudhary, Judicial Member: 1. The present cross appeals arise from the order of Commissioner of Income Tax (Appeals)-1, Mumbai [hereinafter referred to as ‗the CIT(A)‘], passed on 27.09.2004 for the Assessment Year 1999-2000, which in turn arose from the Assessment Order, dated 18.03.2002, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‗the Act‘]. The Assessee has raised following grounds of appeal:
Ground No. 1 to 1.3. ―1. The learned CIT(A) erred in not directing the assessing officer to allow full deduction of Rs.13,01,37,812/- under Sec. 80HH and Rs 4,96,91,57,589/- u/s 80-1/1A as claimed by the appellant 1.1 The learned CIT(A) erred in holding that for the purposes of section 80HH and 80-1/IA the profits derived from the new industrial undertakings ought to be reduced by the amount of certain common expenses incurred at the Head Office on central departments such as Audit, Legal & Secretarial, Shares dept., Selection & Training, Central accounts & Treasury etc. which cannot be identified with any of the industrial undertakings of the appellant eligible for deduction u/s 80HH/801/IA. 1.2 The learned CIT(A) failed to appreciate that the appellant has allocated all the expenses including those common expenses which were relevant to compute the profit derived from the concerned industrial undertakings such as marketing, sales & distribution, Purchasing, Export department etc. 1.3 The learned CIT(A) failed to appreciate that the Head Office expenses, not allocated by the appellant, are only those overheads which in any case have to be incurred by the 2
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appellant irrespective of the new undertakings eligible u/s 80HH & 80I/A and are in no way dependent on the said new industrial undertakings and therefore cannot be considered and allocated in arriving at the amount of profits derived from the said undertakings. 2. Without prejudice to Ground 1 above, the learned CIT(A) erred in not directing the assessing officer that, if the common head office expenses referred to above in Ground 1 are to be allocated for claiming deduction u/s 80HH & 801A, then on same basis, the common income credited to the profit & loss account but not allocated by the appellant to the individual units should also be allocated and accordingly. considered in computing the profit and gains the said undertakings eligible u/s 80HH/80-I/IA on principles of equity and justice and consistent accounting practice.‖ 3. The relevant facts for adjudication of the present ground are that in the return of income for the Assessment Year 1999-2000 the Appellant has claimed deduction for INR 13,01,37,812/- under Section 80HH and INR.4,96,91,57,589/- under Section 80I/80IA. The Assessing Officer restricted the claim for deduction under Section 80HH of the Act to INR.12,22,08,485/- and under Section 80I/IA to INR.4,70,36,62,630/-.
Being aggrieved the Assessee carried the issue in appeal before the CIT(A). Before CIT(A) it was contended by the Assessee that the Assessing Officer had erred in restricting the quantum of deduction by ignoring the computation submitted by the Appellant and in re-computing the amount of deduction on account of the following:
(a) The Assessing Officer incorrectly computed the profits from various undertakings. The words used in section 80HH and Section 80I/IA are ‗profit derived from‘ and not ‗profit attributable to‘. The term ‗derived from‘ has narrow scope. On this basis, some of the head office 3
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expenses, which had no relationship to individual unit or which would have been otherwise incurred for corporate reasons, were not allocated by the Assessee. However, the Assessing Officer while determining the amount of expenses to be allocated to undertakings adopted wider meaning [i.e. ‗profit attributable to‘ and not ‗profit derived from‘] and allocated even those Head Office Expenses which should not have been allocated, to each of the undertakings in the ratio of the total turnover to the turnover of each of the units.
(b) Similarly, Overhead Expenses which were not related to the eligible undertakings were also allocated by the Assessing Officer in the ratio turnover of each unit to total turnover.
(c) At the same time the Assessing Officer adopted contrary and narrower approach [i.e. ‗profit derived from‘ and not ‗profit attributable to‘] in respect of the incomes, the Assessing Officer did not allocate the incomes like Premium, CCS, Royalty etc. (which were not allocated by the Assessee). It was contended by the Assessee, on without prejudice basis, that if additional head office expenses as worked out by the Assessing Officer were to be allocated to various eligible undertakings, in that case, even similar incomes like CCS, premium on licenses, Royalty etc also should have been allocated.
The CIT(A) rejected the contention of the Assessee and dismissed grounds raised by the Assessee in this regard. Being
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aggrieved, the Assessee in now in appeal before us on this issue.
We have heard the rival submissions and perused the material on record. Before us, both the sides agreed that identical issue arising out of Ground No.1, 1.1, 1.2 and 1.3, have been decided by the Co-ordinate Bench of the Tribunal in Assessee‘s own case in preceding assessment years i.e., Assessment Years 1985–86 to 1997–98, 2006–07 and 2009-10. 7. We note that while deciding identical issues in appeal for the Assessment Year 1990-91 [ITA No. 4628 & 4658/Mum/2003, 08.02.2012] the Tribunal has held as under:
―33 Ground No.9 is regarding deduction u/s 80HH and 80I 33.1 The assessee claimed deduction u/s 80HH of Rs. 12,19,71,565/- and u/s 80I of Rs. 11,02,92,288/-. The Assessing Officer restricted the deduction /s 80HH to Rs. 11,58,50,079 and u/s 80I to Rs. 8,54,05,862/- by allocating the common expenses against the profits derived from the respective undertakings. 33.2 On appeal, the CIT(A) confirmed the action of the Assessing Officer in allocating the HO expenses on the basis of the turnover of the respective undertakings. 34 Before us, the Sr. ld counsel for the assessee has submitted that the common expenses incurred at HO cannot be allocated to the undertakings eligible for deduction u/s 80HH and 80I. He has relied upon series of decision of the Tribunal as well as Authority for Advance Rulings in the case of National Fertilisers Ltd reported in 142 Taxman 5 and the decision of the Hon'ble Kolkata High Court in the case of CIT vs Jiyajeerao Cotton Mills Ltd reported in 79 Taxman 51 and submitted that when there is no direct nexus between the HO expenses and the undertaking eligible for deduction u/s 80HH and 80I, the said expenditure cannot be allocated. Alternatively, the Ld Sr Counsel for the assessee has submitted that if the common expenses to be allocated to the individual unit, then the ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
common income should also be allocated by following the same principle. 34.1 On the other hand, ld DR has relied upon the orders of the lower authorities and submitted that the issue has already considered and decided by the Tribunal in assessee's own case for the AY 1985-86 to 89-90. 35 We have considered the rival contention as well as the relevant material on record. At the outset, we note that this issue has been considered and adjudicated by the Tribunal from AY 1985-86 till AY 89-90. For the AY 89-90 the Tribunal has considered and adjudicated the issue in paras 9 & 9.2 as under: "9. The dispute raised in ground No.9 and 10 is regarding allocation of expenses at head office while computing deduction under section 80HH and 80I of the Act. The assessee is a multi unit organization. The expenses of head office which remained unallocated to different units were allocated by the AO in the ratio of turnover of a particular unit to the total turnover and reduced from the profit of business and only from the balance profit, deduction under section 80HH and 80I was allowed @ 20%. In appeal the CIT(A) allowed part relief aggrieved by which, the assessee is in appeal before the Tribunal. 9.2 After hearing both the parties, we find that this issue is covered by the decision of the Tribunal in Assessment Year 1988-89 (supra). The Tribunal noted that in Assessment Year 1985-86, the co-ordinate bench of the Tribunal had considered the same issue and noted that CIT(A) had given specific direction not to allocate certain expenses such as expenses of chairman, company secretary, public relation department and salary and wages and staff welfare expenses relating to Financial Controller and Chief Medical Officer as these were in no way connected to the running of the units. The Tribunal found no infirmity in the direction of the CIT(A) and restored the issue to the file of the AO to exclude such expenses as mentioned by CIT(A) while making allocation. The same decision was followed by the Tribunal in Assessment Year 1988-89. Facts, this year are identical. We, therefore, restore the issue to the file of AO with the direction to exclude expenses mentioned in the order of the Tribunal in Assessment Year 1988-89 while making allocation of head office expenses for the purpose of computation of deduction under section 80HH and 80I.‖ 6
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36 Following the order of the Tribunal for the earlier years, we set the order of the CIT(A) and restore the issue to the record of the Assessing Officer and direct to exclude the expenditure from allocation as per directions given by the Tribunal in earlier years‖ (Emphasis Supplied) 8. Consequently, following the above decision of the Tribunal order for the earlier years, we set aside the order of the CIT(A) and restore the issue to the file of the Assessing Officer with the direction to exclude the expenditure from allocation as per directions given by the Tribunal in earlier years. Accordingly, Ground No. 1 to 1.3 raised by the Assessee are partly allowed. Ground No. 2 raised by the Appellant is disposed off as being infructuous.
Ground No. 3 to 3.2 ―3. The learned CIT erred holding that for the purposes allowing deduction under Sec. 80-1/80-IA, in respect of Concentrated Detergent Powder undertaking at Chhindwara, Personal Products undertaking Pondicherry, Detergents undertaking at Daman and Tea unit at Silvassa, the profits derived by the undertakings are required to be reduced by the losses/unabsorbed depreciation in respect of these undertakings determined earlier years. 3.1 He failed to appreciate and ought to have held that the losses/unabsorbed depreciation of earlier years had already been set-off against profits from other undertakings/activities and there was no losses/unabsorbed depreciation, which had been brought forward the current year. 3.2 He also failed appreciate that as laid down in Section 80AB the Act, deduction under Sec. 80-I/A is be allowed with reference to the amount of profits included the Gross Total Income and cannot be reduced by amounts which are not actually reduced arriving at the Gross Total Income.‖ 10. While computing deduction under Sec.80-I/IA of the Act, the Assessing Officer reduced the losses incurred in earlier
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years/unabsorbed depreciation of some of the units by notionally carrying it forward to the current year. These units were (i) Concentrated Detergent Powder undertaking at Chhindwara, (ii) Personal Products undertaking Pondicherry, (iii) Detergents undertaking at Daman and (iv) Tea unit at Silvassa.
Being aggrieved, the Assessee carried the issue in appeal before the CIT(A). It was contended by the Assessee before CIT(A) that these losses had already been adjusted against profits from other units in earlier years itself and that there was no loss on unabsorbed depreciation being carried forward under sec. 72 or Sec. 32(2) of the Act. Therefore, such an adjustment on a notional basis was unwarranted. Further Sec. 80AB dearly specified that deduction under Section 80-I/IA was to be allowed with reference to the profit included in the Gross Total Income. Since, in arriving at the Gross Total income, no adjustment has been made for any losses, the same could not be reduced on a notional basis for the purposes of allowing deduction under Sec. 80I/IA of the Act.
We have heard the rival contentions. This issue had travelled upto the Tribunal in the preceding assessment years (i.e. Assessment Years 1988-89 to 1991-92, 1996-97 and 1997-98. While deciding identical issues in appeal for the Assessment Year 1990-91 [ITA No. 4628 & 4658/Mum/2003, 08.02.2012] the Tribunal has held as under:
―37 Ground No.10 regarding setting off of loss of earlier years for deduction u/s 80I.
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37.1 The Assessing Officer adjusted the earlier year's loss of the unit eligible for deduction u/s 80I and consequently the claim of deduction u/s 80I was not allowed in full as claimed by the assessee. 37.2 On appeal, the CIT(A) has referred sub.sec. (1) of sub sec (6) of sec. 80I and held that the profit has to be computed,, if the Haldia unit eligible for deduction u/s 80I was only undertaking. 38 We have heard the ld Sr counsel for the assessee as well as ld DR and considered the relevant material on record. At the outset, we note that this issue has been decided against the assessee by the Tribunal for the AY 88- 89 & 89- 90. The Tribunal for the AY 89-90 has adjudicated the issue in para 27.1 a under; "27.1 After hearing both the parties, we find that this issue is also covered by the decision of Tribunal in assessment year 1988-89 (supra). In that year, the Revenue had relied on the judgment of Hon'ble Supreme Court in case of Synco Industries Ltd. vs. Assessing Officer (299 ITR 444), to argue that the brought forward losses and unabsorbed depreciation have to be adjusted before allowing claim of deduction u/s 80HH & 80I. The Tribunal distinguished the said case on the ground that brought forward losses/depreciation of the new unit had already been set off against other income of the assessee and nothing was brought forward either as loss or unabsorbed depreciation. Therefore, the Tribunal held that the deduction u/s 80HH has to be allowed without adjusting the brought forward losses/depreciation. However, in relation deduction u/s 80I, the Tribunal noted that in view of the specific provision of sec. 80I(6) as per which deduction u/s 80I has to be allowed on stand allone basis, treating the undertaking as the only source of income. Therefore, the Tribunal directed that brought forward losses and unabsorbed depreciation of the unit of the earlier years starting from the initial year has to be set off before allowing claim u/s 80I. Facts of this year are identical. Therefore, respectfully following the decision of Tribunal in assessment year 1988-89 (supra), we confirm the order of CIT(A) in relation to deduction u/s 80HH and set aside the order in relation to sec.80I on which the order of Assessing Officer is restored." 38.1 Following the order of the Tribunal for the earlier years, we decide this issue against the assessee.‖
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In view of the specific provisions contained in Section 80IA(6) of the Act and the judgment of the Hon‘ble Supreme Court in the case of Synco Industries Ltd. vs. Assessing Officer: 299 ITR 444, this issue raised in Ground No. 3 to 3.2 were decided against the Appellant by the Tribunal in the above decision. Respectfully following the same, we decide the issue against the Assessee and confirm the order of CIT(A) on this issue. Ground No. 3 to 3.2 raised by the Assessee are dismissed.
Ground No. 4 to 4.1 4. The learned CIT(A) erred holding that sundry sales, sale of miscellaneous products income from services rendered are required to included total turnover for the purposes of computing deduction under sec. 80HHC. 4.1 He failed to appreciate that sundry sales, sale miscellaneous products and Income from services rendered comprises of receipts other than those arising from sale regular products and cannot be considered as turnover. 15. In the return of income, the Assessee had claimed deduction of INR 49,73,91,309/- under Section 80HHC of the Act. The Assessing Officer while re-computing deduction under Section 80HHC of the Act included in total turnover:
(a) INR 2,83,89,968/- being Sundry Sales, (b) INR 3,88,503/- being Sale of Misc. Products and (c) INR 32,67,50,000 being Income from Service Rendered.
Being aggrieved, the Assessee carried the issue in appeal before CIT(A). Observing that all the three items have elements of profit, the CIT(A) included the same in the total turnover. The CIT(A) relied upon general definition of term ‗turnover‘ to conclude that even the income from services was part of ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
turnover. Thus, the CIT(A) rejected contentions of the Assessee and declined to grant any relief.
Being aggrieved, the Assessee is now in appeal before us.
We have heard the rival contentions. We note that while deciding identical issues in appeal for the Assessment Year 1990-91 [ITA No. 4628 & 4658/Mum/2003, 08.02.2012] the Tribunal has held as under: ―64 Ground no.7 is regarding expenses on account of Sales tax, excise duty, and miscellaneous income while computing the deduction u/s 80HHC. 65 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. As regards the issue of excise duty and sales tax not to be included in the total turnover is concerned, the same is settled by the decision of the Hon'ble Supreme Court in the case of Lakshmi Machine Works reported in 290 ITR 664. Accordingly, excise duty and sales tax cannot be included in the total turnover for the purpose of computation of deduction u/s 80HHC. 66 As regards the miscellaneous income is concerned, the issue is now settled by the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax v. K. Ravindranathan Nair reported in 295 ITR 228. Accordingly, the Assessing Officer is directed to re-compute the deduction in light of the decision of the Hon'ble Supreme Court (supra).‖ 19. Respectfully following the above decision of the Tribunal, we remand this issue back to the file of the Assessing Officer to either include or exclude in the ‗turnover‘ the amount of sundry sales, sales of miscellaneous items and income from services in light of decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. K. Ravindranathan Nair: 295 ITR 228. Accordingly, Ground No. 4 to 4.1 are allowed for statistical purposes.
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Ground No. 5 to 5.2 ―5. The learned CIT(A) erred in confirming that 90% of the following amounts are to be reduced from the profits gains from business for the purposes of allowing deduction under Sec. 80HHC. i) Interest (gross) : 1,33,80,70,295 ii) Commission : 1,65,50,780 iii) Royalty : 87,40,060 iv) Other Income : 8,62,91,416 5.1 The learned CIT(A) failed to appreciate and ought to have held that since the appellant had also incurred interest expenditure, there was no justification in reducing 90% of the gross amount of interest receipts from the profits of the business without considering the interest expenditure. 5.2 The learned CIT(A) further failed to appreciate that Royalty is not specified in the clause (baa) to the Explanation under sec. 80HHC and therefore, he ought not to have reduced 90% of the amount of Royalty from the amount of profits from the business.‖ 21. While computing deduction under Section 80HHC of the Act the Assessing Officer had reduced the 'Profits of the Business' by 90% of the (i) Interest [INR 133,80,70,295], (ii) Royalty [INR.87,40,460/-], (iii) Commission [INR 1,65,50,780/-] and (iv) Other Income [INR 8,62,91,416/-].
Being aggrieved the Assessee challenged the aforesaid action of the Assessing Officer in appeal before the CIT(A). The CIT(A) declined to grant any relief. Therefore, the Assessee is before us in appeal on exclusion of the aforesaid items from the ‗Profits of Business‘.
The learned Counsel for the Assessee submitted that the issue arising out of the aforesaid grounds have been decided by the Co–ordinate Bench of the Tribunal in Assessee‘s own case for ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
the preceding assessment years (i.e., in Assessment Year 1995-96 to 1998-99).
We have considered the rival contentions. The Hon‘ble Supreme Court has, in the case of CIT, Thiruvananthapuram Vs. K. Ravindranathan Nair: 295 ITR 228, held as under:
―21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year 1993-94. At that time section 80HHC(3) of the Income-tax Act constituted a Code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a Code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in Business Profits, had to be deducted from Business Profits computed in terms of sections 28 to 44D of the Income-tax Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from Business Profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc., formed part of gross total income being Business Profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the Income-tax Act and every income may not be attributable to ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula—CIT v. Lakshmi Machine Works 2007 (6) Scale 168/ 290 ITR 667 (SC).‖ (Emphasis Supplied) 25. In view of the above, we hold that 90% of the amount of Commission (INR.1,65,50,780/-) and Other Income [INR 8,62,91,416/-] should be reduced from the amount of profits from the business while calculating Profit of Business for computing deduction under section 80HHC of the Act. Order passed by the CIT(A) to this extent confirmed.
As regards royalty income, we note that while deciding identical issues in appeal for the Assessment Year 1997-98 [ITA No. 4628 & 4658/Mum/2003, 08.02.2012] the Tribunal has held as under:
―11. Next Ground is about reduction of Royalty and Market Service Fees (MSF)(Royalty"Rs.16,89,41,669/- and MSF- Rs.41,47,031/-)received by the assessee. While computing deduction u/s.80HHC, the AO had allowed the deduction after reducing 90% of the amount of above mentioned two items. 11.1. With regard to the Royalty and MSF, the assessee contended, before the FAA, that those were normal business related receipts and were not specifically covered under clause (baa) of section 80 HHC of the Act and therefore could not be reduced from business for the purposes of computing deduction under the said section. However, he did not agree with the assessee and upheld the order of the AO. 11.2. Before us, the AR argued that the adjustments required to be made to the amount of profits and gains under clause (baa) refer specifically to the receipts by way of brokerage, commission, interest, rent, charges and any other receipt of a similar nature included in such profits, that royalty and MSF were not specifically included under the clause, that both the items could not be treated as being similar to the items mentioned in the clause of the Explanation. He referred to the cases of Glaxo SmithKline Asia (P)Ltd. (97 TTJ 108) and Pfizer
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Ltd.(330 ITR 662).He further stated that both the items were not in the list and hence same should not be considered for the purposes of 7 Explanation (baa).The DR contended that Royalty and MSF should be reduced while computing the profits of the business, that both the items were akin to the items mentioned in the clause of the Explanation. 11.3. We have heard the rival submission and perused the material before us. We find that in the case of Glaxo SmithKline Asia (P.)Ltd.(supra),the Tribunal has held that the royaly income was not receipt of a similar nature as that of brokerage commission etc., that the action of the Revenue authorities in excluding 90% of the income could not be sustained. Respectfully following the above, we hold that 90% of the amount of royalty should not be reduced from the amount of profits from the business while calculating deduction under section 80HHC of the Act. We also hold that MSF is not part of the section i.e. clause (baa) to the explanation and therefore, following the decision of Glaxo (supra), we hold that 90% of the MSF should not be reduced for calculating 80HHC deduction. Ground no.11 is decided in favour of the assessee.‖ (Emphasis Supplied) 27. Respectfully following the above, we hold that 90% of the amount of royalty should not be reduced from the amount of profits from the business while calculating Profit of Business for computing deduction under section 80HHC of the Act. Order passed by the CIT(A) to this extent is set aside and the Assessing Officer is directed to re-computed deduction under Section 80HHC accordingly.
As regards interest, we note that Hon‘ble Supreme Court has, in the case of ACG Associated Capsules Pvt. Ltd. Vs. CIT, Central-IV, Mumbai : 343 ITR 89 (SC) has held that 90% net interest (of not gross interest) which has been included in profits of business is to be excluded under clause (1) of Explanation (baa) to Section 80HHC for determining Profits of Business. Order passed by the CIT(A) to this extent is set aside
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and the Assessing Officer is directed to re-computed deduction under Section 80HHC after reducing 90% of net profits.
The Assessing Officer is directed to re-compute deduction under Section 80HHC of the Act in view of the above. Ground No. 5 is partly allowed, while Ground No. 5.1 and 5.2 are allowed.
Ground No. 6 to 6.1
―6. The learned CIT(A) erred in holding that the sales proceeds not realized till 30.9.1999 were required to be reduced from the export turnover. 6.1 He failed to appreciate that the sales proceeds were not realised till 30.9.1999 due to reasons beyond the control of the appellant.‖ 31. It is admitted position that sale proceeds were not realized within 6 months from the end of relevant previous year (i.e, till 30.09.1999). It is not the contention of the Assessee that the Assessee was granted permission/approval by the competent authority to realize this amount beyond the aforesaid period of 6 months. Since mandate of Section 80HHC of the Act was not satisfied, the Assessing Officer and CIT(A) were justified in reducing the Export Turnover by the amount not realized with the aforesaid specified period of 6 months from the end of the relevant previous year. Ground No. 6 and 6.1 raised by the Assessee are dismissed.
Ground No. 7 to 7.3 7. The learned CIT(A) erred in holding that loss on export of traded goods is to be reduced from the amount of profits derived from export of goods manufactured by the appellant for the purposes of computing deduction under sec. 80HHC.
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7.1 He also failed to appreciate that the entire F.O.B. value of exports of traded goods represents turnover in respect of which certificates in Form No. 10CCAB have been issued to supporting manufacturers under Sec. 80HHC(1A) and therefore the loss on such traded goods ought not to be adjusted against the profits derived from export of goods manufactured by the appellant. 7.2 He failed to appreciate that under Sec. 80HHC, deduction is allowed in respect of "profit' derived from exports and therefore losses incurred ought to be ignored. 7.3 The learned CIT(A) also failed to appreciate that the losses were incurred in export of traded goods which was a different business activity. 33. The Assessee was engaged in export of goods manufactured by it and also goods which were purchased by it (including goods purchased from supporting manufacturers). According to the Assessee the profit or loss on export of traded goods should not have been taken into account for the purposes of deduction under Section 80HHC of the Act in the hands of Assessee. However, both, Assessing Officer and CIT(A) rejected this contention of the Assessee. Being aggrieved the Assessee is in appeal before us. The Learned Authorised Representative for Assessee fairly submitted that this ground has been decided against the Assessee by the Tribunal in the Assessment Year 1998-99. The relevant extract of the decision of the Tribunal, dated 11.06.2021 passed in ITA No. 2201/Mum/2004 for the Assessment Year 1998-99 reads as under:
―16. After hearing both the parties, we find that the issues arising out of the aforesaid grounds have been decided by the Co–ordinate Bench of the Tribunal in assessee‘s own case for the preceding assessment year i.e., A.Y. 1995–96 and 1997–98, wherein the Tribunal has decided the issues against the assessee and in favour of the Revenue. Therefore, consistent with the view taken therein, we have no hesitation in upholding the order of the learned Commissioner (Appeals) on this issue. Thus, the grounds raised by the assessee are dismissed.‖
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We note that the Hon‘ble Supreme Court has, in the case of IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income-tax: [2004] 266 ITR 521 (SC), held that for calculating Profits Earned from Exports under Section 80HHC of the Act, profits and losses from export of self-manufactured goods as well as trading goods are to be taken into consideration.
―10. We are unable to accept the submission of Mr. Dastur. Undoubtedly Section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wordings of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section. In this case we are concerned with the wordings of sub-section (3)(c) of section 80HHC. As noted earlier sub-section (3)(a) deals with the case where the export is only of self manufactured goods. Sub-section 3(b) deals with the case where the export is only of trading goods. Thus when the Legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-section (3)(a) and (3)(b). It would not be denied that the word "profit" in section 80HHC(1) and sections 80HHC(3)(a) and 3(b) means a positive profit. In other words if there is a loss then no deduction would be available under section 80HHC(1) or (3)(a) or (3)(b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-section (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub- section (3)(c) states "profits derived from such export shall". Then follows (i) and (ii). Between (i) and (ii) the word "and" appears. A plain reading of sub-section (3)(c) shows that "profits from such exports" has to be profits of exports of self-manufactured goods plus profits of exports of trading goods. The profit is to be calculated in the 18
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manner laid down in sub-section (3)(c)( i) and (ii). The opening words "profit derived from such exports" together with the word "and" clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) of section 80HHC that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits.‖ (Emphasis Supplied) 35. Respectfully following the above judgment of the Hon‘ble Supreme Court and the decision of the Tribunal in the case of the Assessee for the Assessment Year 1998-99, we decline to interfere in the order passed by the CIT(A) on this issue. Ground No. 7 to 7.3 raised by the Assessee are dismissed.
Ground No. 8 ―8. The learned CIT(A) erred in not allowing the appellants' claim for deduction of a sum of Rs.35,09,56,000/- being net provision for Retirement pension payable by the appellant to its employees.‖ 37. During the relevant previous year the Assessee made a net provision for INR 35,09,56,000/- for pension payable by it under the Retirement Pension Plan based on actuarial valuation as on 31.12.1998. The amounts payable under this scheme were in addition to the normal pension receivable from Approved Superannuation Fund/Pension Fund. The Assessee claimed deduction for this amount under Section 37(1) of the Act contending that the same were in the nature of employee welfare expenses. The Assessing Officer disallowed deduction for the aforesaid provision for the reason that (i) the Retirement Pension Plan was not approved/recognised under the provisions of the Income-tax Act, and that the expenditure
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was not covered under the provisions of Section 36(1)(iv) of the Act, (ii) it is merely a provision (not an ascertained liability) and was, therefore, not allowable as deduction under Section 40A(9) of the Act, and (iii) the provisions of Section 43B of the Act were also not complied with.
Being aggrieved, the Assessee filed appeal before the CIT(A) and contended that the Assessee had claimed deduction under Section 37(1) of the Act and not under Section 36(1)(v) of the Act. It was contended on behalf of the Assessee that the provisions of Section 40A(9) of the Act were not attracted as there was no separate entity which came into existence or to whom any payment was made. Further, since the amount in question was not a liability payable under any statute, or to a recognised provident fund/approved Superannuation Fund/Approved Gratuity Fund, it did not fall within purview of Section 43B of the Act. The Assessee, therefore, submitted that the entire amount of provision for Retirement Plan should be allowed as deductible u/s 37(1). However, the CIT(A) declined to grant any relied. Being aggrieved the Assessee is now in appeal before us on this issue.
We have heard the rival contentions. This issue had travelled upto the Tribunal in the preceding assessment years (i.e. Assessment Years 1993-94 to 1997-98. It is admitted position that there is no change in facts and circumstances of the case. While deciding identical issues in appeal for the Assessment Year 1997-98 [ITA No. 3858 & 4048/Mum/2003, 28.07.2017] the Tribunal has held as under:
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―8. Next ground (GOA-10) is about provision of retirement pension payable to employees. We would like to reproduce para 11 of AY.1996-97 and its reads as under: ‗11.Provision for Retirement Pension payable to employees is the subject matter of next ground of appeal. The AR stated that the issue was decided in favour of the assessee by the Tribunal while passing order for the year 1995-96. The DR argued that liability was contingent in nature,that that the assessee had not provided actuarial. We have considered the available material. We find that in the earlier year the Tribunal had dealt the identical issue as under: ―13.Ground No.13 is about provision for retirement pension payable to both the employees. Representatives of both the sides agreed that the issue stands decided in favour of the assessee by the order of the Tribunal for the AY.1994- 95(supra).We are re-producing paragraph 51, page -10 of the said order and it reads as under: ―51.Ground No. 9 pertains to allowance of claim for provision of Rs. 6,99,89,558/- for retirement pension u/s 37(1). 52.The issue was dealt with by the ITAT in ITA No. 5331/Mum/1998 in para 12 wherein the coordinate Bench restored the issue to the file of the AO for fresh adjudication, following coordinate Bench order in assessment year 1991. 53. In the appeal effect order pertaining to assessment year 1991 in para 3, the AO allowed the claim of provision for retirement pension. 54.Since the issue has been accepted by the AO to be allowable, following the order of the ITAT, we, therefore direct the AO to allow the similar claim made in the instant year. Ground no. 9 is therefore, allowed.‖ Respectfully following the same, we decide Ground No.13 in favour of the assessee. In our opinion, facts of both the years are same, so, following the above order,we decide ground 11 in favour of the assessee.‘
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Accordingly, Ground No.10 stands allowed.‖ (Emphasis Supplied) 40. Respectfully following the above decision of the Tribunal, we set aside the order passed by the CIT(A) on this issue and allow deduction for the net provision for retirement pension amounting to INR 35,09,56,000/-. Ground No. 8 raised by the Assessee is allowed.
Ground No. 9 to 9.1 9. The learned CIT(A) erred in holding that 5% of dividends and in terest on tax-free bonds as expenditure relatable to earning income and consequently allowed lower exemption under Sections 10(33) and 10(15) of the Act. 9.1 He failed to appreciate and ought to have held that the appellant did not incur any expenditure on earning dividends and interest on tax-free bonds. 42. The Assessee had invested the business surplus in certain long term investments like tax free bonds of Public Sector companies and shares of subsidiaries companies. These investments were made several years back. The appellant has been earning interest on these bonds and dividend on the shares.
During the assessment proceedings it was contended by the Assessee that since the investments were made out of surplus funds, the Assessee had not incurred any expenses in connection with the investments either by way of interest costs or on account of any administrative expenses. However, the Assessing Officer rejected the aforesaid contention of the Assessee, and disallowed INR 47,64,043/- as expenses attributable to earning of exempt dividend income by invoking
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provisions of Section 14A of the Act. Being aggrieved the Assessee filed appeal before CIT(A) on this issue. The CIT(A) directed the Assessing Officer to restrict the disallowance to 5% of the amount of investments. Being aggrieved the Assessee is in appeal before us.
The Learned Authorised Representative for Assessee submitted that this issue has been decided in favour of the Assessee in the Assessment Year 1998-99 (ITA No. 2201/Mum./2004) by following the decision of the Tribunal for the Assessment Year 2006-07 (ITA No. 7868/Mum./2010). He also submitted that since investments have been made out of surplus funds, no disallowance can be made in view of the judgment of the Hon‘ble Supreme Court in the case of South Indian Bank Limited Vs. CIT: 438 ITR 1 (SC)[09-09-2021]. The Learned Departmental Representative relied upon the assessment order.
We note that the Tribunal had, vide order dated 10.12.2012 passed in appeal for the Assessment Year 2006-07 (ITA No. 7868/Mum/2010), restricted the amount of disallowance to 0.5% of the income claimed as exempt. The relevant extract of the aforesaid decision of the Tribunal read as under:
―Ground No.25 49. Ground No.25 pertains to the disallowance of amount under section 14A. Assessee had claimed exempt income of ` 63,55,91,552 as exempt on account of tax free bonds, dividends etc. AO applied Rule 8D and worked out the disallowance at ` 9,81,98,817. Assessee contended before the DRP that Rule 8D is not applicable for the impugned assessment year as held by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg.Co Ltd. Vs. DCIT (332 ITR 81 (Bom.). Now DRP while accepting assessee‘s objection that Rule 23
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8D cannot be applied retrospectively, directed the AO to recalculate the disallowances in a proper and rationale manner. However the direction is such that Rule 8D is applied indirectly. Therefore, AO worked out the disallowances of the same amount of ` 9,81,98,817 while completing the assessment in pursuance of the DRP directions. The learned Counsel referred to the submissions made before AO and the DRP placed in the paper book to submit that assessee has not incurred any expenditure in earning the exempt income. After considering the rival arguments, we are of the opinion that large amount of investment could not be made without any secretarial assistance. We are of the opinion that an adhoc amount of 0.5% on the income claimed as exempt would be reasonable to consider as expenditure incurred for earning exempt income under section 14A. Therefore, AO is directed to work out the disallowances at 0.5% of the income claimed exempt. With these directions, the ground 25 is considered partly allowed.‖
In view of the above, the disallowance under Section 14A is restricted to 0.5% of the exempt income. Ground No. 9 &9.1 are partly allowed.
Ground No. 10 to 10.4 ―10. The learned CIT(A) erred in holding that payment of Rs.6.5 crores made to supplier from termination of arrangement for purchase of ice-creams is a capital expenditure. 10.1 He failed to appreciate that the agreement entered into with the suppliers was onerous and therefore its termination was in the business interests of the appellant. 10.2 He also failed to appreciate that in view of the de-reservation of manufacture of ice- creams, the appellant could manufacture ice-creams at its plant at Nasik and therefore was not required to source ice-creams under the sourcing arrangement with the suppliers. 10.3 He also failed to appreciate that the appellant did not acquire any capital asset on termination of the sourcing obligation and therefore the payment cannot be disallowed as capital expenditure.
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10.4 He failed to appreciate that expenditure incurred to remove an obligation and to facilitate the business is a revenue expenditure.‖ 48. The relevant facts are that in terms of an agreement entered into in 1995 by Brooke Bond Lipton (1) Ltd. (BBLIL) and Kwality Ice-cream, the Assessee (as successors to BBLIL) was required to exclusively source its requirements of dairy based ice-cream for the Eastern region from Kwality Ice-creams and its associates. The basis for pricing of ice-creams sourced was also specified in the sourcing agreement which prescribed a minimum off take and also look into account the overhead costs. Since BBLIL was not able to sell the required volumes, the arrangement was resulting into severe loss in the ice- cream business as the price paid by BBLIL was much higher. However, under the agreement, it was required to source the ice-cream exclusively from Kwality Ice-creams.
At the time when the agreement was entered into, manufacture of dairy based ice- creams was reserved for small- scale industries and therefore, BBLIL could not manufacture dairy based ice-cream at its plant at Nasik. Subsequently, in February 1997, the Government de-reserved the manufacture of dairy based ice-creams and therefore the appellant was at liberty to manufacture the dairy based ice-creams at Its Nasik Plant. However, in view of the sourcing agreement with Kwality Ice-creams, the appellant was unable to do so. Therefore, the Assessee terminated the sourcing agreement with Kwality Ice- creams upon payment of INR.6,50,00,000/-. The Assessing Officer disallowed INR. 6,50,00,000/- holding the same to be capital expenditure.
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Being aggrieved, the Assessee preferred appeal before CIT(A) on this issue. It was contended by the Assessee that the payment was made for terminating an onerous arrangement and was, therefore, allowable as revenue expenditure. However, the CIT(A) declined to grant any relief. The Assessee is now in appeal before us.
The Learned Authorised Representative for Assessee submitted that this issue had been decided in favor of the Appellant in the Assessment Year 1998-99 while the Learned Departmental Representative relied upon the order passed by the Assessing Officer and the CIT(A).
We have considered the rival contentions. Vide order dated 11.06.2021 passed in ITA No. 2201/Mum/2004 for the Assessment Year 1998-99 the Tribunal had, while disposing off identical grounds of appeal, held as under: ―26. Heard both the parties and perused the material on record. We find that identical issue has been decided by the Co– ordinate Bench of the Tribunal in assessee‘s own case for the preceding assessment year i.e., in A.Y. 2006–07, wherein the Tribunal has decided this issue in favour of the assessee and against the Revenue. Consistent with the view taken therein, we set aside the impugned order passed by the learned Commissioner (Appeals) and allow the ground raised by the assessee.‖ 53. A perusal of order of the Tribunal for the Assessment Year 2006-07 (ITA No.7868/Mum/2010, dated 10.12.2012) shows that payments made by the Assessee for termination of similar arrangement was held to be revenue in nature.
Thus, in view of the decision of the Tribunal for the Assessment Year 1998-99 whereby identical grounds have been decided in favour of the Assessee, Ground No. 10 to 10.4 are allowed. 26
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Ground No. 11 ―11. The learned CIT(A) erred in confirming the disallowance of 50% of the entrance fees and subscriptions paid to clubs‖ 56. During the relevant previous year the Assessee had incurred an expenditure of INR 179.85 Lacs on entrance fees and subscriptions. During the assessment proceedings the Assessee justified this expenditure contending that the memberships were obtained to enable its senior employees to interact with their counterparts and colleagues in the industry for conducive interchange of ideas in relatively relaxed environment. The Assessing Officer disallowed 50% of the aforesaid expenditure holding that the possibility of personal benefit to executives could not be ruled out. In appeal, CIT(A) confirmed the disallowance holding that the Assessee had failed to provide supporting documents and details to expenditure. Being aggrieved, the Assessee is in appeal before us.
This is a recurring issue. Learned Authorised Representative for Assessee submitted that this issue has been consistently been decided in favour of the Assessee for the preceding assessment years 1986-87 to 1993-94, and from 1995-96 to 1996-97. 58. We note that the relevant extract of order, dated 08.02.2012, passed in ITA No. 4628 & 4658/Mum/2003 for the Assessment Year 1991-91, reads as under:
―Ground no.2 is regarding entrance fees paid to club.
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51 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we find that this issue has been considered and adjudicated by the Tribunal in assessee's own case for the Assessment Years 1986-87 and 89-90. For the Assessment Year 1989-90, the Tribunal has decided this issue in favour of the assessee in para 19.1 as under: ―19.1 We have perused the records and considered the matter carefully. The dispute is regarding disallowance of explanation on account of entry fees to club. The issue is covered by the decision of the Tribunal in assessee's own case in Assessment Year 1988-89 (supra). Respectfully following the same, we confirm the order of CIT(A) allowing the expenditure as revenue expenditure.‖ 52 Accordingly, following the earlier order of the Tribunal, we decide this issue against the revenue and in favour of the assessee.‖ 59. Respectfully following above decision of the Tribunal, we delete the disallowance of INR 89.93 Lacs. Ground No. 11 raised by the Assessee is allowed.
Ground No. 12 ―12. The learned CIT(A) erred in increasing the value of closing stock of raw materials and packing materials by Rs.13,84,00,000/- representing unutilised balance of Modvat as on 31.3.99.‖ 61. During the relevant previous year the Assessee accounted for purchase of raw material and packing materials on net of excise duty basis. The Assessing Officer increased the value of closing stock of raw material and packing materials by the un- utilised balance in the Modvat Credit Account of INR.13,84,00,000/- as on 31.3.1999. The CIT(A) declined to grant any relief on this issue in appeal preferred by the Assessee. Therefore, the Assessee is in appeal before us on this issue.
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We have considered rival submissions. Both the sides agree that identical issue has been remanded back to the file of Assessing Officer vide order dated 10.12.2012 passed in ITA No. 7868/Mum/2010 for the Assessment Year 2006-07. We note that the Assessee has taken a position that the accounting policy has been consistently been followed by the Tribunal. For the Assessment Year 2006-07, the Dispute Resolution had directed Assessing Officer to adjust the opening stock, purchases and the closing stock by considering all taxes/duties and shares and thereafter, make addition under section 145A of the Act in case there was any difference in the profits. With the same direction we remand this issue back to the file of Assessing Officer. The Assessee is directed to furnish necessary details and information to enable Assessing Officer to implement the directions. Accordingly, Ground No. 12 is disposed off as allowed for statistical purposes.
Ground No. 13 to 13.1 ―13. The learned CIT(A) erred in confirming the disallowance of exemption u/s 10B in respect of Miscellaneous income of Rs.26,50,593/-. 13.1 He failed to appreciate that Miscellaneous income relates to amount realised on sale of scrap generated out of normal manufacturing activity, reimbursement of Central Sales-tax and interest received on deposit with Electricity Board and is directly related to the operations carried on at the industrial undertaking.‖ 64. The Assessee had claimed income of INR.5,07,75,879/- as exempt under Section 10B of the Act in respect of industrial undertaking at Etah. The Assessing Officer has denied the exemption under Section 10B of the Act in respect of the Miscellaneous Income of INR.26,50,593/- on the ground that 29
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Miscellaneous Income did not arise out of export/sale of an article or thing manufactured in the unit. Being aggrieved the Assessee preferred appeal before CIT(A) on this issue. It was contended by the Assessee that the Miscellaneous Income consisted of (a) the amount realised on sale of scrap generated out of the normal manufacturing activity, (b) the reimbursement of central sales-tax, and (c) the interest received on deposit with Electricity Board. It was further submitted that the deduction under section 10B of the Act was available in respect of profits 'derived' from the industrial undertaking. Since the income shown in the profit & loss account is directly related to the operations carried on at the industrial undertaking, the same is eligible for deduction under section 10B of the Act. The CIT(A) confirmed the order of Assessing Officer by holding that the Miscellaneous Income was not derived from the export of article/thing and therefore, deduction under section 10B of the Act could not be claimed in respect of the same. Bring aggrieved, the Assessee is now in appeal before us.
The Learned Authorised Representative for Assessee relied upon the following judicial precedents: - Arul Mariammal Textile Limited Vs ACIT, Coimbatore: 2018 97 Taxmann.com 298 (Madras) @ Para 14 - CIT Vs Hewlett Packard Global Soft Limited: 2017 87 Taxmann.com 182 (Karnataka) (FB) @ Para 34/35 - GE BE Pvt. Ltd Vs ACIT, Circle 11(2) Banglore: 2014 49 Taxmann.com 348 (Kar) @ para 11 - Ms. Bright Engineering Works Vs JCIT -15(1), Mumbai: ITA No. 7699/Mum/2012, dated 19.09.2014 @ para 4
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Per Contra the Learned Departmental Representative relied upon the order passed by Assessing Officer and CIT(A). He submitted that expression ‗derived‘ used in Section 10B of the Act is narrower as compared to expression ‗attributable‘ and therefore, only income from export of article or thing is eligible for deduction under Section 10B of the Act.
We have considered rival submission and perused the material on record. Section 10B(1) of the Act as applicable for the Assessment Year 1999-2000 read as under:
“10B. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export-oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.” :…(Emphasis Supplied) 68. By the Finance Act, 2000 the Section 10B was substituted with effect from 01.04.2001. The substituted Section 10B(1) read as under:
“10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :…”(Emphasis Supplied) 69. The amended provisions applied to Assessment Year 2001-2002 and subsequent assessment years. The appeal before us pertains to Assessment Year 1999-2000. However, the CIT(A) have proceeded to examine the issue in view of the amended provisions. The Assessing Officer has also simply made disallowance by stating that the miscellaneous income did not 31
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arise out of export /sale of an article or thing manufactured. In view of the aforesaid, we deem it appropriate to remand this back to the file of Assessing Officer for adjudication afresh as per the provisions of Section 10B applicable at the relevant time after giving the Assessee reasonable opportunity of being heard. Ground No. 13 is disposed off with the aforesaid directions. 70. We would now take up grounds raised in appeal by the Revenue.
Ground No. 1 ―1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.17.24 lakhs being expenditure on foreign travel in respect of spouses who accompanied the employees of the company." 72. The Assessing Officer had disallowed INR 17,24,476/- being expenditure incurred in respect of foreign tours of spouses who accompanied the executives of the Assessee-Company while they were on official tour.
In appeal preferred by the Assessee on this issue, the CIT(A) deleted the addition following the decisions of the Tribunal in the case of the Assessee in preceding assessment years as well as decision of special bench of the Tribunal in the case of Glaxo Laboratories Ltd. Vs ITO: 18 lTD 226 (Bom).
Being aggrieved the Revenue is in appeal before us on this issue. 75. Both the sides agreed that this issue has been decided in favour of the Assessee and against the revenue in preceding 32
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assessment years. There is no change in the facts and circumstances of the case. The CIT(A) has deleted the addition by following the decision of the Tribunal in preceding assessment years. In appeal preferred by the Revenue for the Assessment Year 1991-92, identical ground raised by the Revenue which was dismissed by the Tribunal. The relevant extract of decision of Tribunal in the case of the Assessee for the Assessment Year 1991-92 [ITA No. 4658/Mum/2003, 08.02.2012] reads as under:
―48 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we find that this issue has been considered and adjudicated by the Tribunal in assessee's own case for the Assessment Years 1985-86 to 88-89. For the Assessment Year 1988-89, the Tribunal has decided this issue in favour of the assessee in para 24 as under: "24.After considering the judicial principles and facts it is noticed that there are decisions in favour of the assessee as well as Revenue depending on the facts. The Honbie Bombay High Court in the case of CIT vs. Zuari Finance LId. 271 ITR 538 and CIT vs. Bhor Industries P. Ltd 281 ITR 319 have not allowed similar expenses. In the case of Alfa Lavel (I) Ltd. quoted supra there was a finding given by the CIT(A) that the travel of the wives was for the purpose of business and was upheld by the ITAT. Consequently the matter was upheld by the Bombay High Court. In the case of CIT vs. Zuari Finance Ltd. (supra) the matter was remanded back to the ITAT for giving finding whether the expense is for the business purpose. In the case of Bhor Industries P. Ltd. supra again there is a factual finding that the expenditure incurred is not for the purpose of business. Coming to the present facts of the case, there is a finding given by the CIT(A) that the assessee is a multinational company and a part of Unilever Group of U.K. and certain expenses incurred on the spouse of senior executives should be treated as normal business expenditure. Further the Hon'ble ITAT in the earlier as Assessment year 1985-86 in ITA No.5495/Mum/90 order dated 12-9-06, has also hs given a finding following the Special Bench decision in the case of Glaxo Laboratories Ltd. 18 lTD 226(Bom) observing 33
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that in the modern age and more so in western countries the senior executives are, as a matter of Social custom, accompanied by their wives when they visit for business purpose, has necessarily some social aspects also. Accordingly the Tribunal allowed the M/s Hindustan Lever Ltd expenditure incurred on the visits of the wives along with their husbands. These facts/findings were not controverted before us. In these circumstances, we do not find any justification to interfere with the orders of the CIT(A). Ground No.5 is accordingly dismissed." 49 Accordingly, following the earlier order of the Tribunal, we decide this issue against the revenue and in favour of the assessee.‖ (Emphasis Supplied) 76. Consistent with the view taken in appeals in the case of the Assessee for the preceding assessment years, we uphold the order of the CIT(A) and dismiss Ground No.1 raised by the Revenue.
Ground No. 2 ―2 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,42,460/- made u/s. 40A(9). " 78. The Assessing Officer, invoking provisions of Section 40A(9) of the Act, disallowed INR 1,42,460/- being expenditure incurred by the Assessee on activities organised for its staff welfare such as sports, tournaments etc. through the Lever Sports Club and Tata Sports Club.
In appeal before CIT(A) by the Assessee on this issue, it was submitted that these payments were non-discretionary payments (as opposed to statutory payments) which were made by the Assessee for the activities undertaken for welfare of the employees. The provisions of Section 40A(9) of the Act were not attracted. Since, similar expenses in the earlier
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assessment years (AY 85-86, to 90-91, 92-93 to 95-96) were allowed as deductible expenses by the CIT(A), the claim of the Assessee was allowed by the CIT(A) following the earlier years decision and disallowance was deleted.
Being aggrieved the Revenue is in appeal before us on this issue.
Both the sides agreed that this issue has been decided in favour of the Assessee and against the revenue in preceding assessment years (i.e. Assessment Year 1985-86 to 1999-99) and that there is no change in the facts and circumstances of the case in the year before us. We note that in appeal preferred by the Revenue for the Assessment Year 1991-92, identical ground raised by the Revenue was dismissed by the Tribunal. The relevant extract of decision of Tribunal in the case of the Assessee for the Assessment Year 1991-92 [ITA No. 4658/Mum/2003, 08.02.2012] reads as under:
―50. Ground no.2 is regarding entrance fees paid to club. 51 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we find that this issue has been considered and adjudicated by the Tribunal in assessee's own case for the Assessment Years 1986-87 and 89-90. For the Assessment Year 1989-90, the Tribunal has decided this issue in favour of the assessee in para 19.1 as under: 19.1 We have perused the records and considered the matter carefully. The dispute is regarding disallowance of explanation on account of entry fees to club. The issue is covered by the decision of the Tribunal in assessee's own case in Assessment Year 1988-89 (supra). Respectfully following the same, we confirm the order of CIT(A) allowing the expenditure as revenue expenditure.
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52 Accordingly, following the earlier order of the Tribunal, we decide this issue against the revenue and in favour of the assessee.‖ 82. There is no change in facts and circumstances of the present case, therefore, consistent with the view taken in appeals in the case of the Assessee for the preceding assessment years, we uphold the order of the CIT(A) and dismiss Ground No.2 raised by the Revenue.
Ground No. 3 ―3 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to exclude excise duty and sales tax from the total turnover for computing deduction u/s.80HHC." 84. Both the sides agree that this issue stands decided against the Revenue by the judgment of the Hon‘ble Supreme Court in the case of Commissioner of Income-tax, Coimbatore Vs. Lakshmi Machine Works: 290 ITR 667 wherein it has been held that sales tax and excise duty do not have any element of turnover and therefore, cannot form part of ‗total turnover‘ under Section 80HHC(3) of the Act. There relevant extract of the aforesaid judgment reads as under:
―15. We do not find any merit in the above contentions advanced on behalf of the Department……………..The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer [See: page No. 24 of the paper book], if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, 36
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interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to section 80HHC from time-to- time.‖ (Emphasis Supplied)
In view of the above, Ground No. 3 raised by the Revenue is dismissed.
Ground No. 4 ―4 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.52,58,280/- towards expenditure on rural development programme which is a social obligation and not a business expenditure.‖
The Assessing Officer disallowed Rural Development Expenses of INR 52,58,280/- holding that these expenses were in the nature of social obligation and not business expenses. Therefore, the Assessee preferred appeal before CIT(A) on this issue.
In appeal before CIT(A) it was contended by the Assessee that activities of the Assessee-company include business of agricultural inputs (such as high breed seeds, fertilizers, Plant Growth Nutrients) and dairy products. The dairy products factory is located at Etah. The Assessee sends its management employees and trainees for a specified period to work in the villages in rural areas of Etah district to gain in-depth knowledge of the agricultural and rural practices and to also examine the potential for our business and promotion of milk production and its supply to our dairy unit at Etah. Thus, the ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
aforesaid expenditure was deductible under Section 37 of the Act. The CIT(A) accepted the aforesaid contention of the Assessee and deleted the disallowance.
Being aggrieved the Revenue is in appeal before us on this issue.
Both the sides agree that this issue has been decided in favour of the Assessee and against the revenue in preceding assessment years. We note that in appeal preferred by the Revenue for the Assessment Year 1991-92, identical ground raised by the Revenue was dismissed by the Tribunal. The relevant extract of decision of Tribunal in the case of the Assessee for the Assessment Year 1991-92 [ITA No. 4658/Mum/2003, 08.02.2012] reads as under:
“61 Ground No.6 is regarding expenditure on rural development. 62 We have heard the ld DR as well as the ld Sr counsel for the assessee and considered the relevant material on record. At the outset, we find that the Tribunal while deciding the appeal in the case of the assessee for the Assessment Year 1989-90 has decided this issue in para. 25.3 as under: "25.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of expenditure incurred by the assessee on rural development programmes. The expenditure included the expenses on animal health, human health, travel and training cost of employees visiting rural areas, subsidy to farmers for free tree plantation etc. The Revenue has not disputed that the assessee was in Agri Product business such as fertilizers, hybrid seeds etc. and, therefore, the claim of the assessee that such expenses were necessary for growth of the business in the rural areas, is quite reasonable. Substantial portion of the expenditure was on salary and travel expenses of employees in the M/s Hindustan Lever Ltd rural areas and ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
administrative cost of training. The assessee had also incurred expenditure on research projects in rural areas including expenses at Krishi and Pasu Vikas Kendras, human health programmes and infrastructure development projects etc. There is no personal element involved in the expenditure incurred by the assessee. Expenditure was closely related to the business being done by the assessee and, therefore, even if there were no specific provision for allowing such expenses, these expenses have to be allowed as incurred on commercial expediency. We see no infirmity in the order of CIT (A) in allowing the claim and, therefore, the same is upheld." 63 Accordingly, following the earlier order of the Tribunal, we decide this issue against the revenue and in favour of the assessee.‖
There is no change in facts and circumstances of the present case, therefore, consistent with the view taken in appeals in the case of the Assessee for the preceding assessment years, we uphold the order of the CIT(A) and dismiss Ground No.4 raised by the Revenue.
Ground No. 5 ―5 On the facts and in the circumstances of the case and in law, the Ld. ICIT(A) erred in deleting the disallowance of Rs.20.74 crores being the deduction claimed by the assessee towards the Voluntary Retirement Scheme by considering the same to be a revenue expenditure and not a capital expenditure as held by the AO." 93. This ground is directed against the order of CIT(A) allowing deduction Voluntary Retirement Scheme expenses which were disallowed by the Assessing Officer holding the same to be capital in nature. The contention of Revenue is that this expenditure should have been capitalized as the retirement scheme gave enduring benefit to the Assessee. The contention of the Assessee is that while passing order for Assessment Year
ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
1998-99, the CIT(A) had denied deduction for this expenditure during Assessment Year 1998-99 holding that this expenditure crystallized in the Assessment Year 1999-2000. During Assessment Year 1999-2000, the CIT(A) has allowed deduction for this expenditure by following the judgment of the Hon‘ble Bombay High Court in the case of CIT Vs. Bhor Industries: 264 ITR 180. We have considered the rival contentions and perused the material on record. During the Assessment Year 1998-99 the deduction for this expenditure was disallowed on the ground that it did not pertain to Assessment Year 1998-99 whereas during the Assessment Year 1999-2000 deduction for this expenditure was disallowed on the ground that it was capital in nature. We note that the CIT(A) has overturned the decision of the Assessing Officer and allowed deduction holding this expenditure to be revenue in nature by following the decision of the Bombay High Court in the case of Bhor Industries (supra) wherein it has been held as under: ―7. Now coming to the alternate argument of the department, …………………….applying the ratio of the judgment of the Supreme Court to the facts of this case, in the present matter, the VRS Expenses was incurred by the Company to save on the expense. This expense was not referable to any income-yielding asset. It is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years.‖
In view of the above we do not find any infirmity in the order passed by the CIT(A) on this issue. Accordingly, Ground No. 5 raised by the Revenue is dismissed.
ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
In result, the appeal preferred by the Assessee is partly allowed whereas the appeal preferred by the Revenue is dismissed.
Order pronounced on 02.12.2022. (B.R. Baskaran) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 02.12.2022 Alindra, PS
ITA. No. 1039 & 1244/Mum/2005 Assessment Year: 1999-2000
आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, 5. ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.
आिेश न स र/ BY ORDER, सत्य दपि प्रदि //// उप/सह यक पुंजीक र /(Dy./Asstt.