M/S. METROCHEM INDUSTRIES LIMITED,,AHMEDABAD vs. THE INCOME TAX OFFICER, WRD-4(2),, AHMEDABAD

ORDER PER OM PRAKASH KANT, AM Above appeals by the Revenue and appeals/cross objections by the assessee are directed against different orders passed by the Ld. First Appellate Authority. Being, common issues involved in these appeals and cross objections, same were heard together and disposed off by way of this consolidated order for convenience and avoid repetition of facts. We are taking up these appeals and cross objection for adjudication in order of assessment year.

3. The grounds raised in the appeal by the assessee are reproduced as under:

1.0 The order passed by the Commissioner of Income Tax (Appeals) is bad in law since it is contrary to the provisions of the law and the facts of your appellant's case. It is submitted that it be so held now. 2.0 The Commissioner of Income Tax (Appeals) erred in upholding computation of income made by the assessing officer. The assessing officer

M/s Metrochem Industries Ltd., 5 & Ors had not computed income as per provisions of law and facts in case of appellant. It is submitted that it be so held and assessing officer be directed to compute income as per the provisions of law.

2.1 The appellant submits that the assessing officer ought to have adopted Rs. 4,75,79,417/- being deduction determined u/s 80HHC in computing the book profit and the taxable income as per section 115JA. It is submitted that it be so held now.

3.0 The assessing officer erred in not properly computing the refund in its case. The assessing officer ought to have allowed credit of tax deducted at source at Rs. 27,26,953/- as against Rs.27,19,334/- 4.0 The assessing officer erred in not properly computing interest u/s 244A. The assessing officer be directed to compute interest as per the provisions of law.

5.0 The assessing officer erred in adjusting refund of Rs. 15,38,690/- against demand for the assessment year 1996-97. The adjustment without complying with mandatory requirement of section 245 is bad in law. The adjustment be directed to be cancelled and the amount adjusted be directed to be refunded alongwith interest.

5.1 The appellant without prejudice to above further submits that there was no demand for the assessment year 1996-97 which required an adjustment and therefore the adjustment is bad in law. It is submitted that it be so held now and the assessing officer be directed to refund Rs.15,38,690/- alongwith interest u/s 244A thereon.

M/s Metrochem Industries Ltd., 6 & Ors assessment years and therefore, the assessee wishes to withdraw the appeal. The learned Counsel filed a letter signed by the director of the assessee company seeking withdrawal of the appeal. The Ld. DR did not object to such withdrawal. Accordingly, in view of the prayer of the withdrawal by the assessee, the appeal filed by the assessee for assessment year 1998-1999 is dismissed.

5. Next, we take up the appeal of the assessee having Revenue having for assessment year 2001-02.

1. The order passed by the Assessing Officer was bad in law since it is submitted that it be so held now and the order passed by the Assessing Officer be cancelled.

2. The Commissioner of Income Tax (Appeals) erred in not deleting disallowance of ₹1,19,456/- out of depreciation on the fixed assets. It is respectfully submitted that all the requirements of law stood fulfilled. The disallowance of depreciation be deleted. 3. The Commissioner of Income Tax (Appeals) erred in holding that expenditure amounting to ₹18,92,424/- by way of compensation under voluntary retirement scheme was expenditure of deferred revenue nature. The expenditure was of revenue nature incurred wholly and exclusively for M/s Metrochem Industries Ltd., 7 & Ors the purposes of business and therefore fully deductible. It is submitted that entire expenditure to be allowed as deduction.

3.1 The appellant without prejudice to above, submitted that deduction allowed at the rate of 10% is grossly inadequate. The Commissioner of Income Tax (Appeals) ought to have allowed deduction at the higher rate reducing the period of amortization. It be so held.

3.2 The appellant without prejudice to above, submits that the Commissioner of Income Tax (Appeals) ought to have deleted ₹1,89,242/- disallowed by the appellant. It is submitted on account of said addition the Assessing Officer has disallowed entire amount of ₹18,92,424/-.

3.3 The Commissioner of Income Tax (Appeals) ought to have allowed deduction proportionately out of disallowance made in the earlier year and further for the subsequent period on the basis of the period of amortization out of disallowance for the year under consideration. It is submitted that directions be issued to Assessing Officer.

4. The Commissioner of Income Tax (Appeals) erred in not allowing deduction of ₹37,83,062/- the appellant submits that the write off is deductible either u/s 28 and/or 36 and/or 37 of the Act. It be so held and deduction be allowed.

4.1 The Commissioner of Income Tax (Appeals) erred in not directing the Assessing Officer to cancel the addition of ₹37,83,062/- made by him in computation of the total income. The deduction was not considered in computation of total income and therefore in event of disallowance also the addition was contrary to the fact. The addition be deleted.

5. The Commissioner of Income Tax (Appeals) erred in upholding disallowance of ₹14,24,518/- out of expenditure incurred by way of interest.

M/s Metrochem Industries Ltd., 8 & Ors 5.1 The appellant submits that disallowance was made without providing reasonable opportunity of being heard, without appreciating the facts and the observations are contrary to the facts.

5.2 The appellant submits that each and every amount was utilized for the purpose of business and there was no fund which was not utilized wholly and exclusively for the purpose of the business.

5.3 The disallowance is contrary to the facts. It be so held and disallowance be deleted.

5.4 The appellant submits that in any event disallowance is excessively high. It is submitted that substantial portion of the disallowance be deleted.

6. The Commissioner of Income Tax erred in upholding disallowance of ₹29,42,856/- out of expenditure incurred by way of interest. The disallowance is contrary to the facts and the law. It be so held.

6.1 The disallowance was made without providing reasonable opportunity of bearing heard. The observation made by the Assessing Officer are contrary to the facts.

6.2 The appellant submits that interest is deductible as each and every amount was utilized for the purpose of the business and funds were utilized wholly and exclusively for the purpose of the business.

6.3 The appellant submits that in any event disallowance is excessively high. It is submitted that substantial portion of the disallowance be deleted.

7. The CIT(A) erred in not allowing deduction u/s 80IA as per provisions of law. Deduction 80IA be allowed as per the provisions of law.

7.1 The AO had provided no reasonable opportunity of being heard before making variations to the eligible profit entitled to deduction u/s 80IA. The M/s Metrochem Industries Ltd., 9 & Ors variations are in violation of the principles of natural justice and therefore are void ab initio. It be so held.

7.2 The CIT(A) erred upholding exclusion of ₹11,894/- while computing eligible profit entitled to deduction u/s 80IA. Interest was derived by the industrial undertaking and therefore ought not to have excluded ₹11,894/- . It be so said.

7.3 The exclusion of ₹11,894/- is excessively high under the facts. It be so said.

7.4 The CIT(A) erred in upholding allocation of interest of ₹59,53,664/- to the industrial undertaking and accordingly reducing the profit eligible for deduction u/s 80IA.

7.4(a) The allocation was made by the Assessing Officer without affording any reasonable opportunity of being heard. The observations made by the Assessing Officer are contrary to facts and erroneous in the eyes of law.

7.4(b) The appellant has maintained separate books of account in respect of each unit. Interest expenditure incurred by Unit No. III was accounted for in computing the eligible profit of Unit III. The allocation of ₹59,53,664/- is contrary to the facts and be quashed.

7.4(c) The appellant submits that allocation of ₹59,53,664/- is excessively. The allocation made in mechanical manner be substantially reduced. The appellant submits that appropriate relief be allowed as per the provisions of law.

7.5 The CIT(A) ought to have held that ₹84,66,995/- being balance in excise duly receivable amount was erroneous excluded while computing eligible profit entitled to deduction u/s 80IA. The exclusion being contrary to the facts and erroneous in the eyes of law be quashed.

M/s Metrochem Industries Ltd., 10 & Ors 7.5(a) The appellant submits that the commissioner of Income Tax (appeals) ought to have allowed the consequential benefits including deduction as expenditure in respect of payment etc. and all the consequential re- computations. It be so held.

7.6 The CIT(A) erred in upholding exclusion relied u/s 80IA. Various income were derived from the industrial undertakings/manufacturing activities and qualified for deductions 80IA. It be so held.

7.6(a) It is submitted that in any event the exclusion of gross receipts is erroneous. The Assessing Officer ought to have deducted the expenses incurred for the purpose of earning the income and only the balance of the amount ought to have been excluded. It be so held.

7.7 The CIT(A) ought to have directed the AO to adopt the profits and gains of the units as assessed by him and making all the recomputations. The AO ought to have adopted the profit and gains of the units as assessed by him i.e. after considering disallowance made by him. It be so held.

8. The CIT(A) erred in not allowing deduction u/s 80HHC as per law and the facts. The appellant submits that the Commissioner of Income Tax (Appeals) ought to have allowed deduction u/s 80HHC as per law.

8.1 The appellant submits that various variations have been made by the Assessing Officer in computing deduction u/s 80HHC without affording any reasonable opportunity of being heard.

8.1(a) Reference made by the AO to various decisions of the Supreme Court stated at page No. 25 of the assessment order are grossly misleading as the decisions were in the field of section 80IA and interpreted in the word “derived from”.

M/s Metrochem Industries Ltd., 11 & Ors 8.2 The AO erred in holding that the appellant was not entitled to deduction u/s 80HHC. The appellant submits that the AO ought to have ignored the deficit and ought to have adopted ₹Nil and he ought to have allowed deduction on the basis of proviso to section 80HHC(3). It be so held.

8.3 The CIT(A) ought to have held that income in respect of DEPB fell within the purview of section 28(iv). The appellant submits that income in respect of DEPB fell within the purview of provisions of section 28(iv). It is submitted that it be so held now.

8.4 The CIT(A) ought to have allowed all the consequential benefits i.e. exclusion of realization in respect of DEPB from computation of the total income as not being income. The recomputation of income under the head profit and gains of business and all other adjustments admissible under the provisions of law. It be so held.

8.5 The CIT(A) ought to have excluded ₹801 lacs while computing the profit and gains of business as there was no accrual of the said amount.

8.6 The CIT(A) ought to have held that realization of DEPB were not the part of total turnover. The realizations part of the total turnover. It be so held.

9.1 The appellant submits that subsidy being receipt of capital nature be excluded from computation of the total income. It is submitted that it be held and subsidy be directed to be excluded from computation of the total income.

M/s Metrochem Industries Ltd., 12 & Ors 10. The CIT(A) erred in not quashing the demand. The Assessing Officer ought to have forwarded a copy of ITNS 150 as claimed by him on page NO. 35 of the order.

11. The CIT(A) ought to have cancelled interest. It is submitted that charging of interest is void ab initio. Interest charged be deleted.

6.1 The grounds raised by the Revenue in its appeal are reproduced as under:

1. The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition made on account of disallowance of lease rent without appreciating the fact that the transaction of purchase of D.G. set between Metrochem Capital Trust Ltd. and Sudhir Engineering Company is not genuine and the assessee company is the owner of the D. G. set. 2.

2. The Ld. CIT(A) has erred in law and on facts of the case in deleting addition of Rs.4614149/- being interest claimed for funds borrowed for capital expenditure for the purpose of entirely new projects/new business. 3. 3. The Ld. CIT(A) has erred in law and on facts of the case in deleting addition of Rs.2686564/- made by way of disallowance of interest u/s 14A without appreciating the fact that the assessee was not able to prove that only interest free funds were used for making investments and its funds are not mixed one. 4. 4. The Ld. CIT(A) has erred in law and on facts of the case in deleting addition of Rs.29000/- made by way of disallowance of proportionate interest expenses for making advances for non-business purposes to Fairdeal Management Pvt. Ltd. 5. 5. The Ld. CIT(A) has erred in law and on facts of the case in directing not to exclude the following income from profit of the business for the purpose of deduction U/s 801A. a Expenditure related to Effluent Treatment Plant Rs.39.97 lacs. b Profit on LMT Rs.27 lacs.

M/s Metrochem Industries Ltd., 13 & Ors c Profit from trading Rs.2.23 lacs. 6.

6. The Ld. CIT(A) has erred in law and on facts of the case in holding that DEPB is eligible export incentive for the purpose of deduction U/s 80HHC.

7. The Ld. CIT(A) has erred in law and on facts of the case in directing the A.O. to apply the proviso to Section 80HHC(3) of the Act despite the fact that the profit derived from manufacturing export and trading export as computed U/s 80HHC(3)(c) of the I. T. Act comes to negative. The decision of the Id. CIT(A) in this regard is not in accordance with the decision of Hon'ble Supreme Court in the case of IPCA Laboratories Ltd. 8.

M/s Metrochem Industries Ltd., 14 & Ors 8. Before us the learned Counsel of the assessee filed a paperbook in two volumes containing pages 1to 248 and 1 to 81 respectively. He also filed a copy of decisions of Tribunal for earlier assessment years in the case of the assessee.

8.1 The ground No. one of the appeal being general in nature, we are not required to adjudicate upon specifically. Hence dismissed as infructuous.

9. The ground No. 2 relates to disallowance of ₹1,19,456/-out of the depreciation on the fixed assets. The learned Assessing Officer on page 2 of the assessment order has noted that claim of depreciation on office building of Metro house in unit I and II of the assessee company in ‘Rahul Dyechem industries Ltd’ and ‘Metro Dyechem India Ltd’ respectively, was disallowed in the earlier years and upheld by Ld. CIT(A), therefore following the same, he directed the assessee to identify the written down value of those properties and the amount of depreciation claimed. The assessee provided details, which is reproduced by the Assessing Officer on page 3 of the assessment order. The assessee identified the depreciation of ₹1,19,456/- claimed in the year under consideration. Accordingly, the Assessing officer disallowed the said claim of the depreciation of the assessee following finding of his predecessor. The Ld. CIT(A) also following finding of his predecessor, confirmed the disallowance.

M/s Metrochem Industries Ltd., 15 & Ors 10. Before us, the learned Counsel of the assessee submitted that issue in dispute in assessment year 1999-2000 and 2000-2001, has been decided in favour of the assessee by the Tribunal in ITA No. 1692 & 1693/Ahd/2004 respectively.

M/s Metrochem Industries Ltd., 16 & Ors of other companies namely Rahul Dyechem industries Ltd and Metro Dyechem India Ltd are eligible for depreciation. The lower authorities have relied on their predecessors, whereas the learned Counsel of the assessee has relied on the order of the Tribunal for assessment year 1990-00 and 2000-01 in ITA No. 1692 & 1693/Ahd/2004. The relevant finding of the Tribunal is reproduced as under:

“4. We have heard the parties. It is submitted by the ld. AR that issue has been decided in favour of assessee in Asst. Year 1998-1999 by the Tribunal vide its order in dated 2.4.2007 as per para 13 thereof as under :-

"13. The ground No.1 relates to the deletion of the disallowance of depreciation amounting to Rs.1,63,864/-. The AO has disallowed the depreciation. The ld. CIT(A) has allowed the depreciation following the order for the Asst. Year 1997-98. Having heard both the parties, we find that the issue in controversy is decided by the Tribunal in favour of the assessee in & 1482/Ahd/2001 wherein the Tribunal has allowed the claim by observing as under :-

'We have heard the parties and considered the rival submissions. Facts and circumstances being similar, the Tribunal having accepted the claim of the assessee in the base year, where the depreciation was claimed for the first time, we uphold the order of the CIT(A) in allowing the claim of the assessee, in this year as well.' Respectfully following the aforesaid order of the Tribunal, we dismiss this ground of appeal of the revenue."

Respectfully following the above order, we allow the claim of the assessee. This ground of assessee is allowed.”

M/s Metrochem Industries Ltd., 17 & Ors 12.1 The Tribunal in above decision has reproduced para No. 3 (three) of the decision of the Tribunal in in ITA No. 1481 and 1482/Ahd/2001 for assessment year 1996-97 and 97-98. The relevant paras of the order of the Tribunal (supra) relating to the controversy are reproduced for ready reference:

“2. The first dispute in Revenue's appeal for Asst. Year 1996-97 is against the disallowance of depreciation of Rs.30,25,000. The depreciation was claimed in respect of machinery, which were purchased and installed during the accounting period relevant to Asst. Year 1995-96. Depreciation worked out toRs.60,50,000, which was claimed to be entitled to 100% and since 50% was claimed in Asst. Year 1995-96 because the user of less than 180 days and the balance Rs.30,25,000 claimed in the year under consideration. In the earlier year also, the claim was rejected by the Assessing Officer and the matter reached the Tribunal and the Tribunal vide order in & Cross Objection No.14/Ahd/2003, upheld the allowance of the claim by observing that the finding of the CIT(A) being on appreciation of facts and the Revenue having not disputed the same, the observations of the Revenue Authorities loses their sanctity and, therefore, in absence of any fact to the contrary, the order of the CIT(A) allowing the claim was upheld. Paragraph 5 of the order of the CIT(A) extracted in the Appellate order for Asst. Year 1995-96 was in paragraph 6, which reads as under:-

"5 I have considered the rival submission and perused the various details, statements, agreements, invoice, insurance claim and also the copies of litigation between the appellant company and m/s. Premier Vinyl Flooring Ltd. Barring the litigation correspondence which the appellant has filed only to emphasis its contention that the lease transaction in question is a genuine transaction and not a sham transaction as held by the Assessing Officer, all other details had been filed before the Assessing Officer during the assessment proceedings. Further with a view to verify the appellant's contention that it was never confronted with the M/s Metrochem Industries Ltd., 18 & Ors information gathered by the Assessing ¡Officer from ADIT (Invn.) Unit-IlI, New Delhi, the assessment records were called for. On perusal of the assessment records and the order sheet notings, appellant's contention is found to be correct. In the instant case in respect of both the companies in question i.e. Ms. Premier Vinyl- Flooring Ltd. & M/s. Haryana Petrochemicals Ltd, the appellant had placed on record various evidences such as insurance claim, transporters invoice, suppliers invoice etc. during the course of assessment proceedings. As far as M/s.Premier Vinyl Flooring Ltd, is concerned while rejecting appellant's claim for depreciation the Assessing Officer has only relied on the independent inquiry conducted by him without confronting the appellant with the same. As far as Ms Haryana Petrochemical is concerned, the Assessing Officer has rejected appellant's claim merely on the basis of his own conclusions such as jets and spindles are used in lot and not individually and therefore depreciation claimed on individual item cannot be entertained and since the jets and spindles were supplied on 30.3.95 the same could not have been installed before 31.3.95. The Assessing Officer has not brought any cogent evidence to rebut appellant's contention and also the supporting evidence placed on record by the appellant. It is also seen that the lease rentals received by the appellant from both these companies have been duly taxed in the hands of the appellant company by the Assessing Officer. Therefore, considering the totality of facts and supporting evidence relied upon by the appellant in support of its contention the Assessing Officer is directed to allow appellant's claim.

2.1 Following this order, the CIT(A) allowed the claim of the assessee in this year, as well.

M/s Metrochem Industries Ltd., 19 & Ors 12.2 Thus, it is evident that before the Tribunal in assessment year 96-97 and 97-98 issue of disallowance of depreciation on plant and machinery was involved, which is different from current issue in dispute of depreciation on office building and therefore decision of the Tribunal in assessment year 1990- 2000 and 2000-01, not related to issue in dispute before us, we are not required to follow the same. The parties were accordingly directed to argue the issue on merit. But neither the assessee nor the department was in position to provide the exact reason as why the assessing officer in earlier years has disallowed the depreciation on buildings under reference. In absence of detailed facts in respect of issue in dispute and reasons on which the disallowance has been made by the assessing officer, we are not in position to adjudicate the issue on merit. When the assessee has raised this ground, the onus was on the assessee to provide details of the disallowance and in failure to do so, we are unable to adjudicate the issue on merit. In the circumstances, there is no alternative except dismissing the ground of the assessee. Accordingly, the ground No. 2 raised by the assessee is dismissed.

M/s Metrochem Industries Ltd., 20 & Ors 14. Before us the Ld. Counsel of the assessee did not press the grounds and accordingly, same are dismissed as infructuous.

M/s Metrochem Industries Ltd., 21 & Ors income therefrom being one of the object of the company, therefore amount should be allowed as trading loss. The Ld. CIT(A) however rejected the contention of the assessee observing as under:

5.1 I have perused the copy of account of M/s. Montari Industries Ltd. submitted at page 100 of the paper book and find that the amount was given as inter corporate deposits on 20.09.1993. The contention of the appellant's representative Shri Son that the condition laid down u/s. 36(1) and 36(2) are satisfied is not actually correct. It is admitted that the amount sought to be written off have not been credited in the profit and loss account in any of the earlier assessment years. This is contrary to the submissions made in the written submissions. Thus, the condition laid down u/s. 36(1) /36(2) are not satisfied and the appellant's claim can be considered only u/S. 37(1) r.w.s. 28 of the Income Tax Act The object clause referred by the appellant company is of general nature and the main activity of the appellant company is not that of finance but that of manufacturing of chemicals as observed by the A.O. The income arising from the same therefore cannot be considered as business income of the appellant company and in absence of any evidence submitted either before the A0 or before the undersigned that the said loss has crystallised accrued during the course of commercial business activity of the appellant company, the inference drawn and the findings given by the AO in the order are therefore justified and the claim cannot allowed which is in the nature of capital loss

M/s Metrochem Industries Ltd., 22 & Ors The learned DR on the other hand submitted that the assessee has not filed specific details of claim of write off of interest before the lower authorities and therefore such claims should not be allowed by the Tribunal.

19. Before us, the Ld. Counsel of the assessee submitted that assessee was having sufficient share capital and reserve and surplus to meet the advances out of own funds, and in the absence of clear nexus that loans for advances were M/s Metrochem Industries Ltd., 24 & Ors out of borrowed funds, it is presumed that advances were made out of own funds of the assessee. In support, the learned Counsel relied on the order of the Hon’ble Bombay High Court in the case of Reliance utilities Ltd 313 ITR 340 (Bom).

20. The Ld. DR on the other hand submitted that it is not open to draw the presumption unless the assessee provide complete details as to when those loans were advanced and whether immediate source of advances was own fund or borrowed fund. The assessee has not provided required evidences to the assessing officer for examining immediate source of the advances for establishing nexus of the advances with borrowed funds. According to him, therefore the decision relied upon cannot be applied over the facts of the instant case. He submitted that matter may be restored back to the file of the assessing officer for examining immediate source of advances. The learned Counsel of the assessee did not object to this proposal of Ld. DR.

M/s Metrochem Industries Ltd., 25 & Ors Crores. We find that the immediate source of these advances in question was not provided by the assessee and therefore same could not be verified at the end of the Assessing Officer. Thus, in the interest of substantial justice, we set aside the finding of the Ld. CIT(A) on the issue in dispute and restore the matter back to the Ld. Assessing Officer for examining the immediate source for advancing interest-free loans to 7 parties listed on page 10 of assessment order. The assessee is directed to produce all necessary evidence in support of the claim that there is no direct nexus between the money borrowed and advances in question made. The ground No. 5 to 5.4 of the appeal are accordingly allowed for statistical purposes.

22. The ground Nos. 6 to 6.3 of the appeal, relate to disallowance of ₹29,42,856/- out of interest expenditure. The Assessing Officer noted that assessee made investment in ‘Shikalesh residential project’ amounting to ₹2,02,95,564/-. According to him, this investment was not part of a regular business activity of the assessee. Therefore, he capitalized proportionate interest corresponding to investment at the rate of 14.5% amounting to ₹29,42,856/- and disallowed out of the interest claimed. The Ld. CIT(A) also held that this investment was neither connected with existing business nor extension of the existing business i.e. manufacturing and sale of the chemicals,

M/s Metrochem Industries Ltd., 26 & Ors therefore, he upheld the action of the assessing officer in treating the same as capital expenditure.

M/s Metrochem Industries Ltd., 27 & Ors 25. The ground Nos. 7 to 7.1 of the appeal were not pressed by the learned Counsel of the assessee being ground of general nature. Accordingly, the grounds are dismissed as infructuous.

27. The Ld. Counsel of the assessee fairly submitted that this issue in dispute is covered against the assessee by the order of the Tribunal for assessment year 1999-2000.

“13. The next issue is regarding exclusion of gross interest income. The ld. AR has relied on the decision of Hon. Delhi High Court in CIT vs. Shriram Honda Power Equipment & Ors. 289 ITR 475 (Del) for the proposition that netting of expenditure against receipt of interest income should be allowed. However, this decision could be applicable only when it is held that interest income is derived from business of industrial undertaking. Since there is no such finding by the M/s Metrochem Industries Ltd., 28 & Ors authorities below and also no facts have been put up before us, we decline to take a different view than what the authorities below have taken. It is for the assessee to submit his claim with proper evidence which has not been done. Accordingly, this ground of the assessee is rejected.” 28.1 The assessee credited this income as other income and failed to substantiate before the lower authorities as well as before us that said interest income is derived from business undertaking. Therefore, following the finding of the Tribunal (supra), the ground No. 7.2 and 7.3 of the appeal are dismissed.

The ground Nos. 7.4 (a) to 7.4(c) relate to allocating head “office interest expenditure” in proportion of turnover of the various units and consequently allocating additional interest of ₹59,53,664/- to the unit eligible for deduction under section 80IA of the Act.

28.2 The Assessing Officer observed interest debited to head office expenditure of ₹7,85,43,698/-and show caused to the assessee as why the same should not be allocated to the respective units in proportion of their turnover. The assessee however submitted that separate books were maintained for each unit and no notional interest should be allocated to the eligible unit. The Assessing Officer on verification of the trial balance of the Unit-III (i.e. eligible unit) concluded that there was no basis of allocation and utilization of the funds among various units, and therefore he allocated interest of ₹83,02,068/- out of M/s Metrochem Industries Ltd., 29 & Ors head office interest expenditure to the unit III and after subtracting interest of ₹23,48,404/-already charged to the unit III, made addition for the remaining amount of ₹59,53,664/-. The Ld. CIT(A) justified the allocation of the interest observing as under :

In the common expenses percentage of turnover is taken @ 10.57% against Unit No. III and if the same is applied on total interest outgo of ₹7,95,43,698/- , the interest allocation is worked out at ₹83,02,068/- and accordingly the same is treated as expenditure of Unit III. However, the assessee has already debited a sum of ₹23,48,404/-. Towards interest charges by way of bill discounting and accordingly further addition made on this account is only to the tune of ₹59,53,664/-.

M/s Metrochem Industries Ltd., 31 & Ors 33. The Assessing Officer held that Central Excise refund of ₹84,66,995/-is not derived from the industrial activity and therefore assessee was not entitled for deduction under section 80IA of the Act in view of the decision of the Supreme Court in the case of Hindustan Lever Ltd versus Commissioner of Income-Tax (supra).

34.1 The ground Nos. 8 to 8.6 of the appeal of the assessee relate to deduction under section 80HHC of the Act on Duty Entitlement Pass Book (DEPB) benefit

M/s Metrochem Industries Ltd., 32 & Ors received against export of goods. The ground No. six of the appeal of the Revenue also relate to the deduction on the DEPB amount. The ground No. seven of the appeal of the Revenue relates to considering negative profit of units for set off against the export incentive while computing deduction under section 80HHC of the Act.

34.2 In the computation of deduction for section 80HHC of the Act, the assessee treated the loss in trading export of ₹50,71,432/-; loss in manufacturing export of ₹3,20,91,065/- and loss in disclaimer certificates of ₹10,52,147/- as nil and claimed deduction on the export incentive of ₹5,61,62,446/-, eligibility of which for the year under consideration was restricted to the rate of the 80%, accordingly the assessee claimed deduction of ₹4,49,29,957/- under section 80HHC of the Act.

34.3 The Assessing Officer held that deduction under section 80HHC of the Act on DEPB as not entitled to the assessee due to following reasons: (i) the DEPB incentive received is on account of the scheme under Foreign Trade Development Act and not derived from the profit of the export. There is no first-degree nexus between the DEPB incentive received and the activity of export business.

M/s Metrochem Industries Ltd., 33 & Ors (ii) Both in the trading and manufacturing segment of the export there being loss, no deduction on sale of DEPB licenses (treating the same as export incentive) could be allowed as per the express provision of section 80HHC(3) of the Act.

34.4 The Ld. CIT(A) on the issue of consideration of loss from export units while computing the deduction under section 80HHC of the Act followed the finding of the Hon’ble Supreme Court in the case of IPCA laboratories 266 ITR 521 wherein it is held that negative income (loss) is to be considered as such while working out business profit as per explanation (baa) to section 80HHC of Act and accordingly directed the assessing officer to follow the ratio of the Hon’ble Supreme Court.

34.5 On the issue, whether the income from sale of DEPB licence is derived from the business of export, the Ld. CIT(A) followed the decision of Tribunal Ahmedabad bench in the case of Pratibha Syntex Ltd 63 TTJ 409 and directed to modify the claim of deduction as per the provisions to section 80HHC(3) of the Act.

M/s Metrochem Industries Ltd., 34 & Ors formulated under Foreign Trade (Development and Regulation) act, 1992 has been prescribed as income chargeable to Act under the head “profit and gains of business or profession”.

1. Amendment to Section 80HHC(3) of the Income Tax Act, 1961 (in short `the Act') was made by the Taxation Laws (Second Amendment) Act, 2005 with retrospective effect i.e. with effect from Ist April, 1992. By this amendment certain benefits were in fact extended to the exporters who are entitled to claim according to Sec.80HHC of the Act. However at the same time, the amendment also carved out two categories of exporters, namely, those whose export is less than Rs. 10 crores per year and those exporters whose exports turn over is more

M/s Metrochem Industries Ltd., 35 & Ors than Rs.10 crores per annum. Insofar as entitlement of these benefits to the exporter having turn over of more than Rs.10 crores p.a. is concerned, two conditions contained in third and fourth proviso to the said amendment were to be satisfied for claiming the benefits. Those were:

(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme.

2. All the respondents in these SLPs, who are the exporters, belong to the second category. They filed the writ petitions challenging conditions mentioned in third and fourth proviso to Section 80 HHC(3). In fact it was their precise contention that these conditions are severable and therefore these two conditions should be declared ultra vires and severed. The rationale behind seeking such a prayer was obvious inasmuch as the writ petitioners did not want entire Notification to be declared ultra vires which was to their advantage. What they wanted was that the benefit of amended provision be accorded, without insisting on the aforesaid conditions.

3. The High Court vide impugned judgment has decided the issue in favour of the writ petitioners by concluding as under:

“26. On consideration of the entire materials on record, we, therefore, find substance in the contention of the learned counsel for the petitioners that the impugned amendment is violative for its retrospective operation in order to overcome the decision of the Tribunal, and at the same time, for depriving the benefit earlier granted to a class of the assessees whose assessments were still pending although such benefit will be available to the assessees whose assessments have already been concluded. In other words, in this type of M/s Metrochem Industries Ltd., 36 & Ors substantive amendment, retrospective operation can be given only if it is for the benefit of the assessee but not in a case where it affects even a fewer section of the assessees.

4. Against the High Court judgment these SLPs are filed by the Union of India. Mr. Mukul Rohtagi, learned Attorney General for India submits that once the prayer made was to severe the aforesaid two conditions as onerous and utra vires, the High Court should have couched the reliefs in terms of that prayer only, instead of stating that the operation of the Section would be given effect to prospectively only and these conditions would not operate retrospectively. At the same time, he accepts that the legal position would be that those exporters with turnover of rupees less than Rs. 10 crores and other like the respondents with turnover of more than Rs.10 crores would be at par and both would be entitled to the benefits.

“Having seen the twin conditions and since 80HHC benefit is not available after 1.4.05, we are satisfied that cases of exporters having a turnover below and those above 10 cr. Should be treated similarly. This order is in substitution of the judgment in Appeal.

M/s Metrochem Industries Ltd., 37 & Ors 6. With the aforesaid clarification all these SLPs including that of assessees filed against the judgment of M.P.High Court are disposed of.

36.1 In view of the above, we are of the opinion that profit from sale of DEPB license has to be considered for the purpose of deduction under section 80HHC of the Act without going into any controversy whether it was derived from the business of export or not. The ground No. 6 of the appeal of the Revenue is accordingly not sustainable and we dismiss the same.

36.2 As far as considering of negative profit from business of export is considered, the learned Counsel drawn our attention to Vth Proviso to section 80HHC(3), which reads as under:

“Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of- (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or (b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.] 36.3 This provision has been inserted by the Taxation Laws Act 2005, with effect from 01/04/1992, and therefore while computing profit eligible for deduction under section 80HHC, the loss from various units have to be set off

M/s Metrochem Industries Ltd., 38 & Ors against 90% of profit under section 28(iiid) of the Act. we find that Ld. CIT(A) has already directed the assessing officer to follow the ratio of the Hon’ble Supreme Court in the case of IPCA laboratories (supra), wherein similar findings have been given by the Hon’ble Supreme Court. We accordingly, direct the assessing officer to ensure that deduction u/s section 80 HHC is allowed to the assessee keeping in view the Vth proviso to section 80HHC of the Act. The ground No.7 of the appeal of the Revenue is accordingly dismissed.

“(ba) "total turnover

S5 shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs stations' as defined in the Customs Act, 1962 (52 of 1962) : Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression total turnover" shall have effect as ifs it also excluded any sum referred to in clauses (iiia), (iiib) [(iiic), (iiid) and (iiie)] of section 28]”

38. We find that the legislature has already excluded the sums referred in section 28(iiia) to section 28(iiid) of the Act for the purpose of turnover for computing deduction under section 80HHC of the Act. In the case the incentive

M/s Metrochem Industries Ltd., 39 & Ors of DEPB, which falls under section 28(iiid) has been proposed by the assessing officer as part of the turnover, which being against the express provision of the law, we direct accordingly to not to consider said sum for the purpose of the turnover while computing deduction under section 80HHC of the Act.

“Ground No. 14: This is an additional ground of appeal raised during the course of appellate proceedings as per letter dated 24.12.2004 and relates to excluding Rs. 49,10,305/ being subsidy of capital nature to be excluded from the profit and loss account/profit declared in the return of income. A copy of the said ground of appeal was torwarded to the A.0. i.e. ACIT, Circle- 4, Ahmedabad as per letter dated 24.12.2004 on which his comments have been submitted as per letter dated 24.12.2004 received on 27.12.2004. The A0 has submitted that this issue was never claimed in the return and neither contested during the course of assessment proceedings and therefore the same not be entertained at this stape. Even otherwise on merits, it is submitted that the receipt of subsidy is revenue in character as held by Supreme Court in the case of Sahani Steel and Press Warks Lid. 228 TR 253. The rejoinder to the same was submitted by the appellant’s representative on 29.12.2004. Reliance is placed on the decision of Supreme

M/s Metrochem Industries Ltd., 40 & Ors Court in the case of Jute Corporation of India Ltd. 187 TR 688 with reference to the objection of the A0 and it is pleaded that the additional ground of appeal may be admitted. On careful consideration of the facts, i find that the contention of the AO that this ground has never raised at any stage before the AC or in the return filed is found to be correct. It do not find any change in law or any subsequent decision of jurisdictional High Court or the Apex Court not available to the assessee company at the time of filing of the return or during assessment proceedings. Having regard to the ratio of the Apex Court in 111 IT 1 in the case of CIT Vs. Gurjar Gravures (P) Lid., the additional ground is not maintainable. As stated earlier no monies in the nature of subsidy has been received during the year nor credited to the profit and loss account and neither taxed by the AO and the appellant would not have any prima facie case of exclusion from returned income on this account either. The additional ground is accordingly dismissed.”

41. Before us, the learned Counsel of the assessee relied on the decision of Hon’ble jurisdictional High Court in the case of Siva equipment Private Limited reported in (2020) 119 taxmann.com 472(Bom) to support that appellate authorities have jurisdiction to entertain additional ground raised by the assessee during appellate proceedings. He also relied on the decision of the Hon’ble Madras High Court in the case of Abhinitha foundation Private Limited reported in (2017) 83 taxmann.com 100 (Madras).

M/s Metrochem Industries Ltd., 41 & Ors 43 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Ld. CIT(A) has rejected the additional ground of the assessee in view of the decision of Hon’ble Supreme Court in the case of CIT Vs Gurjar Gravures P Ltd (supra). The Hon’ble Bombay High Court in the case of Shiva equipment Private Limited (supra) considered the decision of the Hon’ble Supreme Court in the case of Gurjar Gravures (supra) and did not follow the said decision of division bench in view of three-judge bench decision of the Hon’ble Supreme Court in the case of Kanpur Coal syndicate (supra), wherein it is held that power of the appellate authorities is coterminous with the power of the assessing authorities. The relevant finding of the Hon’ble High Court is reproduced as under:

“16. The question which therefore arises in this matter is whether the CIT (Appeals) had the jurisdiction to entertain this additional grounds in the appeal instituted by the appellant questioning the Assessing Officer's order dated 12/12/2011 made under section 143 (3) of the said Act, even though such grounds neither flow from any change of circumstances or the law nor is it that such grounds were unavailable to the appellant/assessee at the stage of filing the return or during the progress of the assessment proceedings before the Assessing Officer.

17. The CIT (Appeals) has held that it had such jurisdiction. In exercise of such jurisdiction, the CIT (Appeals) not only permitted the appellants to raise these additional grounds but also allowed the appeal by accepting such additional grounds.

M/s Metrochem Industries Ltd., 42 & Ors 18. The ITAT by the impugned judgment and order dated 11/4/2014, by relying mainly on Gurjargravures (supra) and Goetze (supra) has held that the CIT (Appeals) exceeded its jurisdiction in entertaining the two additional grounds, which had never been raised by the appellant before the Assessing Officer in the course of the assessment proceedings.

21. Apart from the aforesaid, the Division Bench of this Court in Pruthvi Brokers (supra) by reference to the portion in Gurujargravures (supra) upon which specific reliance was placed by Ms. Linhares, has held that such portion which was also relied upon by ITT, does not curtail the ambit of the jurisdiction of the appellate authorities. Such portion does not restrict the new/additional rounds that may be taken by the assessee before the appellate authorities, to those that were not available when the return was filed or even when the assessment order was made. The appellate authorities, have jurisdiction to deal with the additional grounds including those which were available when the original

M/s Metrochem Industries Ltd., 43 & Ors return was filed. in taking this view, the Division Bench also adverted to and relied upon the decision of Ahmedabad Electricity Co. Ltd. V. CIT (1923] 66 Taxman 27/199 TR 351 (Bom.), in which the Full Bench of this Court has held that the appellate authorities have very wide powers while considering an appeal which may be filed by the assessee. The appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the assessee in accordance with law

23 The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impeach the powers of the ITAT under section 254 of the said Act. This means that in Goetze, the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This IS the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order.

24. Taking into consideration the aforesaid rulings, we are satisfied that the substantial questions of law as framed are required to be answered in favour of M/s Metrochem Industries Ltd., 44 & Ors the appellant/assessee and against the respondent/revenue to the extent of holding that the el Appeals), in the facts and circumstances of the present case, did have the jurisdiction to entertain the two additional grounds mised by the appellants in the context of payment of the amount of Rs. 52,14,543/- as short terms capital gain and the addition of amount of Rs. 5,90,093/- business income in the return filed by the appellant. However, in the present case the ITAT after holding that the CIT (Appeals) lacked the jurisdiction to entertain the two additional grounds has proceeded to observe that even on merits, the C11 (Appeals) was wrong In exercising discretion in favour of the appellants accepting the case of the appellants on merits.”

43.1 Similarly, Hon’ble Madras High Court in the case of Abhinitha foundation Private Limited (supra) also considered the decision of the Hon’ble Bombay High Court in the case of CIT Vs Pruthvi Brokers and shareholders Private Limited (supra) and held that appellate authorities have power to consider the claim, if relevant material is available on record. The relevant finding of the Hon’ble High Court is reproduced as under :

“12.5. A reading of the aforesaid observations would clearly establish that the arguments advanced by Mr. Ravi that the assessee company could only raise an additional ground and not make a new claim or additional claim is not sustainable. As indicated by us hereinabove, this power of entertaining the claim vests with the appellate authorities based on the facts and circumstances of the case. The power of the appellate authorities to consider claims made based on material already on record is co-terminus with the power of the Assessing Officer. The failure to advert to the claim in the original return or the revised return cannot denude the appellate authorities of their power to consider the claim, if, the relevant material is available on record and is otherwise tenable in M/s Metrochem Industries Ltd., 45 & Ors law. Any other view, in our opinion, will set at naught the plenary powers of appellate authorities.” 43.2 After considering various decisions on the issue, the Hon’ble Madras High Court (supra) finally held as under :

18.In sum, what emerges from a perusal of the ratio of the judgments cited above, in particular, the judgments rendered by the Supreme Court in GOETZE's case and National Thermal Power Co. Ltd.'s case, and those, rendered by the Division Bench of this Court in Ramco Cements Ltd. and CIT vs Malind Laboratories P. Ltd., as also the judgments of the Delhi High Court in Sam Global Securities Ltd.'s case and Jai Parabolic Springs Ltd.'s case, that, even if, the claim made by the assessee company does not form part of the original return or even the revised return, it could still be considered, if, the relevant material was available on record, either by the appellate authorities, (which includes both the CIT (A) and the Tribunal) by themselves, or on remand, by the Assessing Officer. In the instant case, the Tribunal, on perusal of the record, found that the relevant material qua the claim made by the assessee company under Section 80 IB (10) of the Act was placed on record by the assessee company during the assessment proceedings and therefore, it deemed it fit to direct its reexamination by the Assessing Officer.

M/s Metrochem Industries Ltd., 47 & Ors 49. We have heard rival submission of the parties and perused relevant material on record including the order of the lower authorities and decision of the Tribunal relied upon by the assessee. The relevant finding of the Tribunal (supra) is reproduced as under:

“7. Ground No.3 relates to lease rent expenses of Rs.9,90,259/-. This issue is also covered in favour of assessee by the decision of the Tribunal vide its order for Asst. Year 1998-99 in in assessee's own case. The Tribunal vide para 15 had observed as under :-

15. The third issue relates to the deletion of the disallowance of lease rent amounting to Rs.14,08,011/-. We have heard the rival contentions of both the parties. We find that the issue in controversy is already dealt with in & 1484/Ahd/2001 wherein we uphold the order of the CIT(A). The ld. CIT(A) has followed the order for the Asst. Year 1998-99. We confirm the order of the ld. CIT(A).

It is noticed that appellant company has taken on lease a D.G. generating set from sister concern namely M/s Metrochem Capital Trust Ltd. for which lease rent of Rs.9,09,259/- was paid. AO has held that this purchase by M/s Metrochem Capital Trust Ltd. was a sham transaction and consequently lease rent paid by the assessee company to Metrochem Capital Trust Ltd. was not a genuine expenditure. As none appeared before the ld. CIT(A), he confirmed the addition.”

49.1 As the Tribunal (supra), has deleted the addition following earlier orders of the Tribunal, respectfully following the same, we uphold the order of the Ld.

M/s Metrochem Industries Ltd., 48 & Ors CIT(A) on the issue in dispute. The ground of the appeal of the Revenue is accordingly dismissed.

M/s Metrochem Industries Ltd., 49 & Ors “8.1 I have perused the facts brought on record by the A0 and also the submissions given It is not in dispute that the various units (except the Shilalekh Project) discussed by the A at page 11 of the assessment order arc inter-connected to the sarre business of the appellant company. in respect of any additions/extension of the same is therefore to be considered as revenue expenditure keeping in view the decision of Gujarat High Court in the case of Core Healthcare Ltd. (251 TR 61) referred by the appellant company. The disallowance of Rs. 46,14,149/- held as attributable as capital expenditure on interest payments correlated with the said units cannot be upheld and therefore directed to be deleted.”

M/s Metrochem Industries Ltd., 50 & Ors uphold the same. The ground No. 2(two) of the appeal of the Revenue is accordingly dismissed.

6.1 Before me the appellant's representative submitted that the appellant company had surplus funds of Rs. 114333 lacs as on 01 04.2001 and Rs.9243.79 lacs as on 31.03.2002. A copy of the relevant balance sheets have also been placed on the paper books filed. It is therefore submitted that the investments have been made to the extent of Rs. 166.96 lacs in A.Y 94.95 and no major amount has been invested thereafter. It is submitted that the appellant company had reserves and surplus of Re. 2288.67 lacs as on 31.03.1994 which was used for the said investments. Details of the breakup have been given at page 119. 122, and 157 of the paper book. After perusing the same the contentions of the appellant's representative in this respect are correct and the action of the NO in holding that the investments are out of borrowed funds is not correct and therefore raking proportionate disallowance cannot be upheld on this count and the same is accordingly directed to be deleted.

M/s Metrochem Industries Ltd., 51 & Ors 55. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Hon’ble jurisdictional High Court in the case of Reliance Utilities Ltd. (supra) has held that if own funds of the assessee including capital and reserve and surplus is more than the investment made, then it is presumed that investment has been made out of one sources. The Ld. DR has not doubted the figure of reserve and surplus mentioned by the Ld. CIT(A) in the impugned order. Thus, interest free fund available being more than investment yielding exempted income, the finding of Ld. CIT(A) is justified. Therefore, in such circumstances, we do not find any error in the order of the Ld. CIT(A) and accordingly, we uphold the finding of the Ld. CIT(A) on the issue in dispute. The ground of appeal of the Revenue is accordingly dismissed.

56 The ground No. 4 (four) of the appeal of the revenue relates to disallowance of ₹29,000/-in relation to interest free advance of ₹2 lakhs to M/s Fairdeal Portfolio Management Private Limited.

“18. After considering the rival submissions, we restore this issue to the file of AO to actually verify, may be physically, whether CETP has been utilized for treatment of effluents in Unit II & III. He may obtain experts report on the issue or take any other necessary steps to come to the conclusion whether CETP was M/s Metrochem Industries Ltd., 54 & Ors exclusively used by Unit I or was also utilized by other units. So far as basis of allocation is concerned which has been taken on turnover basis, is upheld and in case it is necessary to allocate expenditure on CETP then such allocation would be done on turnover basis. Accordingly, this ground of assessee is allowed but for statistical purposes.” 60.1 The issue in dispute being identical to the issue decided by the Tribunal in assessment year 1999-2000, respectfully following the Tribunal (supra), the issue in dispute in the year under consideration is also restored back to the file of the assessing officer for deciding in the light of the direction of the Tribunal above. The ground of the appeal is accordingly allowed for statistical purposes.

M/s Metrochem Industries Ltd., 55 & Ors 62. Similarly, the Assessing Officer observed that profit from the trading activity included in the profit of the unit-III (i.e. unit eligible for deduction under section 80IA) has not been excluded, therefore applying the net profit rate declared by the assessee for the unit -III (i.e. 16.05%) on the trading turnover, he excluded profit of ₹2,23,593/-from the profit of the Unit-III for considering deduction under section 80 IA of the Act.

(vi & vii) Profit on LMT ₹27,00,927/- and profit on trading of ₹2,23,593/-. This has been discussed by the AO at page 22 and 23 of the other it was noted by the AO that local material transfer had been made of ₹3,87,28,639/- on which sale amount is shown at ₹1,17,19,366/-. The AO therefore invoked provisions of section 801A/9) and estimated 10% of net turnover as profit attributable and accordingly made working of ₹ 27,00,927/- Before me, the appellant's representative has submitted that no specific transaction generating protit at higher rate has been brought on record by the AO and there is no basis for 10% figure. It is further subritted that no opportunity was given by the AO to explain the factual position. On perusal of the order I find that there is no reference of any show-cause nolice issued in this respect and in the absence of any specific transaction brought on record the adhoc figure of 10% cannot be sustained and therefore no exclusion can be made on this count Similarly, in respect of the trading profit of Rs. 2,23,593/ discussed by the AO at page 23 of M/s Metrochem Industries Ltd., 56 & Ors the order, of the order, it is submitted that there is no basis for the same. It is not denied by the appellant's representative that there has been trading activity. However, it is submitted the relevant transactions in this respect are as under : (₹) “Opening Stock Nil Purchases (J. Acid/Tobia Acid) 1485667 1485667 Less: Closing Stock Nil 1485667 Add: Incidental expenses i.e. freight Insurance, landing 148566 others etc. @ 10% 1634233 Less: Sales 1560075 Gross Profit Nil” It is therefore submitted that as against the purchases of ₹14,85,667/- sales are ₹15,60,075/- and no amount is included in the profit of the undertaking. In the absence of any show cause notice issued and any specific material brought on record to justify the GP of 16,05% adopted by the AO as against Nil submitted by the appellant company, this item of ₹2,23,593/. cannot be excluded for 801A purpose and the A.O. is directed to modify the computation u/s. 801A accordingly.”

1. The Ld. CIT(A) erred in law and on facts of the case in directing to delete the disallowance of Rs.96,760/- on account of depreciation claimed on office building by the assessee.

2. The Ld. CIT(A) erred in law and on facts of the case in directing to delete the disallowance of interest of Rs.16,109/- 3. The Ld. CIT(A) erred in law and on facts of the case in directing to include the interest of Rs.16,109/- and depreciation of Rs.96,760/- while computing profits of business for computation of deduction u/s 80HHC. 4. The Ld. CIT(A) further erred in law and on facts of the case in directing the A.O to re-compute profit of business for deduction u/s 80HHC, without excluding foreign exchange fluctuation amounting to Rs.13,52,298/- 5. The Ld. CIT(A) erred in law and on facts of the case in directing the A.O to exclude the excise duty and sales-tax of Rs. 3,56,85, 683/- and Rs. 1,35,

M/s Metrochem Industries Ltd., 58 & Ors 15,866/- respectively, while computing the total turnover for the purpose of deduction u/s 80HHC. 6. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.

M/s Metrochem Industries Ltd., 59 & Ors 70. This tax calculation has not been disputed by the learned DR. Thus, we find that tax effect involved in this appeal of the revenue is only ₹4,88,849/-as against the limit of ₹50 lakhs prescribed by the CBDT for filing appeal to the Tribunal, and therefore the Revenue was required to withdraw this appeal. Hence this appeal of the Revenues is dismissed as infructuous.

“1. The order passed by the CIT(A) is bad in law since is contrary to the provisions of the law and the facts of your appellant’s case. It is submitted that it be so held now.

2. The CIT(A) erred in upholding the computation of deduction u/s 80HHC made by the Assessing Officer and erred in not allowing any deduction u/s 80HHC. The appellant submits that deduction u/s 80HHC claimed by the appellant was as per the provisions of law and ought to have been accepted by the Assessing Officer. 2.1 The appellant further submits that variations to the profits of the business, the total turnover, setting off of negative profit, adjustment of DEPB etc. are contrary to the facts. It is submitted that it be so held now.

3. The CIT(A) erred in holding that sales tax set off and miscellaneous income be excluded while computing the profit of the business. It is submitted that both the items form part of profits of the business and ought to have been excluded. It is submitted that it be so held now. 3.1 The CIT(A) erred in upholding loss at ₹2,71,02,006/- from export of manufacturing goods and he further erred in not adopting the loss of ₹Nil

M/s Metrochem Industries Ltd., 60 & Ors while computing deduction u/s 80HHC. The appellant submits that the Assessing Officer ought to have ignored the loss from the manufacturing operations while computing deduction u/s 80HHC. It is submitted that it be so held now.

3.2 The CIT (A) erred not allowing relief in the matter of DEPB and in the matter of set off of loss in accordance with the provision of proviso to section 80HHC (3). The appellant submits that relief as admissible under the provisions of law ought to have allowed by the CIT(A). It be allowed 3.3 The CIT(A) erred in holding that ₹9,23,48,115/- being income in respect of duty entitlement passbook fall within purview of provisions of explanation baa and he accordingly further erred in excluding the same while computing the profit of the business. The appellant submits that the export incentive is out of purview of Provisions of Explanation baa therefore the assessing Officer ought not to have considered the said export incentive of ₹9,23,48,115/- in computation of the profit of business as per provisions of Explanation baa to section 80HHC. It is submitted that it be so held now.

The appellant without prejudice to above further submits that in any even exclusion of ₹9,23,48,115/- made by the assessing officer and upheld by the CIT(A) is excessively high and it is submitted that the assessing officer be directed to adopt the amount of export incentive after allowing all deductible expenses incurred in respect of the said income. It is submitted that it be so held now.

4. The CIT (A) erred in upholding exclusion of entire amount of ₹9,23,48,115/- in computation of the total income. The appellant submits the entire export incentive of ₹9,23,48,115- did not accrue as income during the previous year ended 31st March, 2003. The appellant submits that the assessing Officer ought to have excluded the export incentive which had did not accrue on or before 31st March, 2003. It is submitted that it be so held now.

M/s Metrochem Industries Ltd., 61 & Ors 5. The Assessing Officer erred in not properly computing the demand in the case of the appellant. The appellant submits that the Assessing Officer be directed to delete interest charged by the Assessing Officer by invoking provisions of section 234B. It is submitted that appropriate relief be allowed as per the provisions of law.

7.2 Other incomes excluded: it is seen from the order that the AO has excluded the following income from profit of business for the purpose of computing deduction u/s 80HHC: i. Sales tax written back : ₹2,05,500/- ii. Foreign exchange fluctuation: ₹13,52,298/- iii. Sale of scrap : ₹43,768/- It is contentions of the appellant that the above income are not liable to be excluded from the profit of the business.

7.3 I have considered the submission of the appellant. So far as sales tax amount returned back is concerned, the same cannot be treated as income derived from export. Actually, there is no such income derived from export. There is only deemed income due to application of provisions of section 41(1). Sales tax allowed as deduction in earlier yeas which are received during this year as refund has been written back. Therefore, this cannot be part of profit of business for the purpose of deduction u/s 80HHC. Same is the case with sale of scrap of ₹43,768/-. This income cannot be treated as income from export. Therefore, I hold that the AO is justified in excluding sale tax written off at ₹2,05,500/- and sale of scrap at ₹43,768/- from profit of business while computing deduction u/s 80HHC.”

M/s Metrochem Industries Ltd., 63 & Ors 76. The Ld. DR on the other hand relied on the order of the assessing officer and also on the order of the Ld. CIT(A) to the extent of sales tax set off excluded by the Ld. CIT(A).

77.1 The term “profit of business” for considering eligibility under section 80HHC of the Act has been defined in ‘explanation baa’ to section 80HHC of the Act, which reads as under:

"(baa) profits of the business"S° means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) [(iiic), (iiid) and (iiie)] of section 28 or of any receipts by way of brokerage, commission, interest, rent, "charges or any other receipt of a similar nature') included in such profits' ; and (2) the profits" of any branch, office, warehouse or any other establishment of the assessee situate outside India].”

M/s Metrochem Industries Ltd., 64 & Ors 77.2 The assessing officer has referred to explainatory notes to the Finance Bill No. 2 of 1991 citing the reason for exclusion of receipts like interest, commission etc. which are not having an element of turnover. The relevant explanation in memorandum to the Finance Bill (supra) is reproduced as under:

“Receipt like interest, commission etc. which do not have an element of turnover are included in the profit and loss account. It is therefore, proposed to clarify that profits of the business for the purpose of section 80HHC will not include receipt by way of brokerage commission, interest, rent, charges for any other receipt of similar nature. As some expenditure might be incurred in earing these incomes which in the generality of cases is part of common expenses. It is proposed to provide ad-hoc 10% deduction from such incomes to account for such expenses. Therefore, it is very clear that the receipt like above should not be considered as a part of the total turnover as the legislature has excluded the same from the computation of the profit of the business on the ground that it is not a part of turnover.” 77.3 The assessing officer has reduced 90% of sales tax set off and miscellaneous income considering the same as receipt not having element of turnover.

77.4 The Tribunal in for assessment year 1993-94 in para 5 has adjudicated the issue of sales tax set off and miscellaneous income, as under:

M/s Metrochem Industries Ltd., 65 & Ors “5. The third ground relates to the direction by the learned CIT(A) for exclusion of the amount of miscellaneous income, being Sales-tax set off - (₹46,909) and income by way of foreign exchange fluctuation (₹11,988), for reduction in the computation of profits of the business in terms of Explanation "(baa)(1) to Sec.80HHC. The same was done by the learned CIT(A) on finding force with the contention of the assessee that the two amounts are a part of the assessee’s turnover/trading receipt. inasmuch as the Sales-tax set off is on its purchases (so that the same might as well he deducted from the purchase amount) and the receipt by way of foreign exchange fluctuation is also in respect of goods sold. He, therefore, adverting the Circular of CBDT. explaining the provisions of Finance (No.2) Act, 1991, vide which the said explanation was introduced in the statute, i.e., to remove the distortion that otherwise enters into the computation of export income, i.e., when the amount of interest. rent. dividend, etc. are nor excluded, finding merit in the assessee's contention. directed their deletion. We are inclined to be in agreement with the observations of the learned CIT(A): the amount of Sales-tax as well as the foreign exchange fluctuation both contain an element of turnover, being only in relation to the goods traded in, and not an ancillary income. which could be taken to be akin to brokerage, commission, interest, rent, etc., following the principle of ejusdem generis. However, at the same time, we also find that there is another amount of income, i.e., ₹52,161, being miscellaneous balances written off, the nature of which has not been discussed by the learned CIT(A) in his order. As such, this matter, to this extent, would require to be restored to his file for adjudication in accordance with law. We order accordingly.”

77.5 The Tribunal has held that sales tax is having element of turnover and therefore it is not receipt in the nature of interest rent etc., which are required

M/s Metrochem Industries Ltd., 66 & Ors to be eliminated at the rate of 90%. On the issue of the miscellaneous income, in absence of the details, the matter was restored back to the file of the Ld. CIT(A).

M/s Metrochem Industries Ltd., 67 & Ors in case of assessee having export turnover more than ₹ 10 crore has also to be treated at par with the assessee having export turnover less than ₹10.00 crores and no conditions specified in third proviso shall be applicable. Similarly, the negative profit of the units have to be taken into consideration while computing profit of the business and such negative profit has to be set off against income from export incentives including from sale of DEPB licenses in terms of section 28(iiid) of the Act. The facts and circumstances in the year under consideration being identical to the assessment year 2001-02, the ground Nos. 3.1 to 3.4 of the present appeal are also adjudicated mutasis mutandis. The grounds are accordingly allowed for statistical purposes.

“10.1 I have carefully gone through the above submission. The arguments of the appellant is not acceptable. According to it the DEPB income has to be considered as income under section 28(iii)(a). I don’t agree with the above submission on of the appellant. There is a specific provision in section 28(iii)(c) and (iii)(d) for accounting DEPB income. The next argument of the appellant is that it has not sold the DEPB license next argument of the appellant is that it has not sold the DEPB license neither it has made any profit. No details have been filed either before the AO or before me in support of the above claim. Therefore, M/s Metrochem Industries Ltd., 68 & Ors argument on this ground is rejected. It is also stated that due to government regulations the appellant has claimed DEPB income as soon as it complete export though on the closing day of the accounting year i.e. 31.3.2003, certain incomes have not been sanctioned by the government authorities. The appellant appears to be taking a contradictory stand. In the income it has accounted DEPB income. On the basis of regular method of accounting followed by it. Having done so it cannot go back and take a stand that the DEPB scrips which have not been sanctioned as on the closing date of the accounting year should be excluded. In any case, no such details has been filed either before me or before the AO, neither any such ground has been taken before the AO. Therefore, this argument of the appellant is not acceptable and hence rejected.”

M/s Metrochem Industries Ltd., 69 & Ors 83. The ground No. 5 (five) of the appeal was not pressed by the learned Counsel of the assessee being consequential in nature, accordingly same is dismissed as infructous.

1. The Ld. CIT(A) erred in law and on the facts of the case in directing the A.O to follow the decision of the Hon"ble Gujarat High Court in CIT Vs. Amba Impex 282 ITR 144 and rework the deduction u/s 80HHC in connection with exchange rate fluctuation income of Rs.45,44,550/-.

2. The Ld. CIT(A) erred in law and on the facts of the case in directing the A.O not to include sales tax and excise duty in the total turnover for the purpose of computation of deduction u/s 80HHC. 3. On the facts and in the circumstances or the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 85. At the outset, the learned Counsel of the assessee submitted that tax effect involved in the appeal of the Revenue is below the limit prescribed by the CBDT for filing appeal before the Tribunal and therefore appeal need to be dismissed. The learned DR also could not controvert the fact of tax effect being less than the prescribed limit of ₹50 lakh for filing appeal before the Tribunal.

M/s Metrochem Industries Ltd., 70 & Ors 86. We have heard rival submission of the parties on the issue in dispute. The tax effect involved in the appeal computed by the assessee is reproduced as under: Calculation of Tax Effect of Departmental Appeal Ground No. Issue Amount (₹) 1. 80HHC – Foreign Exchange Fluctuation to be included in Profits 10,03,554/- 2. 80HHC-Excise duty & Sales Tax to be excluded From Total turnover [Detailed calculation of 80HHC deduction is enclosed] Total 10,03,554/- Tax @ 35% 3,51,244/- Surcharge @ 2.5% 8,781/- Total 3,60,025/- 86.1 Evidently, the tax effect in the appeal of the Revenue of ₹3,60,025/- which is below the limit prescribed by the CBDT of ₹50 lakh for filing appeal to the Tribunal. The relevant CBDT circular has already been referred while dismissing the appeal of the Revenue for assessment year 2003-04. Accordingly, the appeal of Revenue for assessment year 2004-05 is also dismissed as infructuous.

M/s Metrochem Industries Ltd., 71 & Ors 2. The Commissioner of Income tax (Appeals) erred in upholding disallowance of Rs. 80,084/- out of depreciation in respect of the office building. The disallowance is contrary to the provisions of law. The disallowance be deleted.

2.1 The assessee without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

3. The Commissioner of Income tax (Appeals) erred in upholding disallowance of Rs.7,87,436/- out of interest payment of Rs. 2,130/- out of expenses by invoking provisions of section 14A. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted.

3.1 The assessee without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

4. The Commissioner of Income tax (Appeals) erred in upholding computation of deduction u/s 8OHHC made by the assessing officer and erred in not allowing deduction U/s 80HHC as per provisions of law. The assessee submits that deduction u/s 80HHC claimed by the assessee was as per the provisions of law and ought to have been accepted by the assessing officer. The assessee submits that it be allowed now.

4.1 The assessee further submits that variations to the provisions of the business, the total turnover, setting off of negative profit, adjustment of DEPB etc. are contrary to the facts. submitted that it be so held now.

4.2 The Commissioner of Income tax (Appeals) erred in upholding incorrect computation of profit of business. The assessee submits that the assessing officer be directed to make computation of profits of business as per law and inter alia is submitted that the Commissioner of Income tax (Appeals) ought M/s Metrochem Industries Ltd., 72 & Ors not to have excluded foreign exchange fluctuation of Rs,45,51,150/- while computing the profit of the business. It is submitted that it be so held now.

1. The order passed by the Commissioner of Income Tax(Appeals) is bad in law since it is contrary to the provisions of the law and the facts of your appellant's case. It is submitted that it be so held now.

2. The Commissioner of Income Tax(Appeals) erred in upholding disallowance of disallowing ₹78,376/- out of depreciation in respect of the office building. The disallowance is contrary to the provisions of law. The disallowance be deleted. 2.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

M/s Metrochem Industries Ltd., 73 & Ors 3. The Commissioner of Income Tax(Appeals) erred in upholding disallowance ₹12,73,660/- out of the interest payment and Rs. 1,642/- out of expenses by invoking provisions of section 14A. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted.

3.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

4. The Commissioner of Income Tax(Appeals) erred in upholding disallowance of ₹4,46,000/- claimed by the appellant in respect of bad debts. The appellant submits that debts had arisen during the ordinary course of business operations, debts were irrecoverable and debts were written off as bad to the Profit and Loss account. The appellant had fulfilled all conditions of law and therefore the assessing officer ought to have allowed deduction. The deduction be allowed now.

4.1 The appellant without prejudice to above submits that disallowance of ₹4,46,000/- is excessively high and the assessing officer ought to have allowed substantial deduction examining each write off independently. It is submitted that it be so held and substantial portion be directed to be deleted.

5. The Commissioner of Income Tax(Appeals) erred in not directing to delete and/or substantially reduce interest charged by the assessing officer. It is submitted that appropriate relief be allowed as per the provisions of law.

M/s Metrochem Industries Ltd., 74 & Ors decision in ground No. 2 of the assessee’s appeal for assessment year 2001-02. Accordingly, these grounds are dismissed.

“4.2 I have considered the submissions of the Authorised Representative carefully. The appellant has not furnished the details of source of investment in the shares and mutual funds. The appellant could have proved its claim that the shares were not purchased out of borrowed funds by furnishing copy of Bank statement or cash Now statement to justify the source of investment in the years the same were purchased. The appellant did not submit the same. The appellant has not justified its claim that the investments in shares made in the relevant years were out of interest free funds. The appellant has reiterated the submissions which were made before the A.O. without any additional facts or evidences. As held in the case of decision of Delhi H.C. in Motor General Finance Ltd. 254 ITR 449 (Delhi) in case of failure of the assessee to produce documents adverse inference can be drawn to the effect that if produced they would have gone against the assessee. As the facts were within knowledge of the appellant and the same were not explained, the A.O. is justified to draw adverse conclusion. In view of the above facts, it is held that the Assessing Officer has rightly disallowed the proportionate expenses as having been incurred to earn

M/s Metrochem Industries Ltd., 75 & Ors the dividend income ws.14A of the Act. In support of the disallowance the reliance is made on the following decisions :- (1) Everplus Securities& Finance Ltd. - 101 ITD 151/285 ITR(AT) 112 (Delhi) (2) Rhythm Exports (P) Ltd. vs. CIT -2 SOT (Mum)429 /97 TTJ 493 (Mum) (3) Harish Krishnakant Bhatt vs. ITO - 278 ITR(AD)1 (Ahd) (4) Mumbai Bench in the case of ACIT vs. Citi corp Finance India Ltd., reported in 111 TTJ 82 (Mum) wherein it has been held that it is not correct to say that dividend income can be earned by incurring no or nominal expenses and all expenses connected with such exempt income have to be disallowed ws.14A regardless of whether they are direct or indirect., fixed or variable and managerial or financial and provisions of sub section 2 and 3 of section Sec. 14A inserted by Finance Act 2006 are procedural in nature and hence apply to all pending matters. In view of the above facts and the legal position, this ground of appeal is dismissed.”

94. Thus the Ld. CIT(A) has sustained the interest disallowance mainly on the ground that the assessee did not submit evidence in support that investments yielding exempted income were not made out of the borrowed funds & made out of own funds. Before us, the Ld. counsel of the assessee has relied on the decision of Hon’ble Bombay High Court in the case of Reliance utilities Ltd (supra). Before us the Ld. counsel of the assessee referred to the balance sheet along with respective schedules to show that own sources of the assessee are much more than the investment in assets yielding exempted income. Since the disallowance has been sustained on the ground that relevant evidences were M/s Metrochem Industries Ltd., 76 & Ors not submitted, in the interest of substantial justice, we feel it appropriate to restore the issue back to the file of the assessing officer for deciding in accordance with law after verification of sources of funds for investment in assets yielding exempted income.

94.1 As for as issue of disallowance of administrative expenses of ₹1642/-is concerned, we find that the assessing officer has disallowed the administrative expenses in the ratio of dividend income to total receipt. In our opinion, in absence of application of the rule 8D of income tax rules, 1962 (in short ‘the Rules’) for the year under consideration, the disallowance made out of administrative expenses on proportionate basis of the dividend income, is justified.

M/s Metrochem Industries Ltd., 77 & Ors submitted that relevant parties denied the payments on account of rebate/discount/shortage in quantity/variation in quality etc. It was also submitted that that debts were written off by the assessee in the books of accounts for the year under consideration. The Ld. CIT(A) however sustained the disallowance observing as under:

5.2 I have considered the submissions of the A.R. carefully. However, the A.R. has not given the details of steps taken for recovery either before the AO or before me. Therefore, relying on the decision of Gujarat High Court in the case of Dhal Enterprises & Engineers Pvt. Ltd. (207 CTR 729) (Guj.) wherein it has been held that the assessee should prove that the debt has become bad in that year, as the appellant has not proved that the above debts have really become bad, the disallowance of bad debt is sustained.

“1. The order passed by the CIT(A) is bad in law since it is contrary to the provisions of the law and the facts of your appellant's case. It is submitted that it be so held now.

2. The CIT(A) erred in upholding disallowance of ₹6,67,830/- out of interest/administrative expenses by invoking provisions of section 14A. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted. 2.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now

M/s Metrochem Industries Ltd., 79 & Ors 3. The CIT(A) erred in upholding disallowance of ₹431518/- out of voluntary retirement payments. The expenses was incurred wholly and exclusively for the purpose of the business. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted.

3.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now

4. The CIT(A) erred in not directing the assessing officer to compute and assess income in accordance with provisions of law and the facts in the case of the appellant. It is submitted that the assessing officer ought to have recomputed income on basis of the assessment orders for the earlier years. The appellant submits that the assessing officer be directed accordingly.

5. The CIT(A) erred in upholding erroneous computation of the demand in the case of the appellant. It is submitted that the assessing officer be directed to make correct computation of the demand. It is further submitted by the appellant that the assessing officer be directed to delete interest charged by the assessing officer by invoking provisions of section 234B and 234D. It is submitted that appropriate relief be allowed as per the provisions of law.”

M/s Metrochem Industries Ltd., 80 & Ors 103. The assessing officer observed receipt of dividend income of ₹29,630/- and long-term capital gain of ₹23,16,528/-, which were claimed by the assessee is exempt under section 10 of the Act. After considering submission of the assessee, the Ld. Assessing Officer made disallowance of ₹6,67,830/-observing as under:

“The assessee is in receipt of considerable amount of exempt income and no separate account has been maintained in regard to the earning of exempt income. Investments reduce the availability of liquid funds with the company which many times create the need for borrowed funds. Putting another way, had certain funds not been diverted for such investments, need for interest- bearing funds would have been lesser. Also management and maintenance of such investments always entail certain administrative expenditure such as telephone expenditure etc.

In view of the above, claim of the assessee that no expenditure has been incurred for earning exempt income is hereby rejected.

The amount disallowable u/s 14A is computed on estimate basis as under:

I. Amount of interest relatable to earning of exempt income = Interest expenditure X Average value of investments Average value of total assets = ₹6,31,24,653 X 1,60,51,709 = ₹5,87,572/- = ₹5,87,572/- 1,72,44,83,024/- II. Administrative expenditure relatable to earning of exempt income:

0.5% of Average value of investments= Rs.1,60,51,709/- X0.5% = Rs.80,258/-

M/s Metrochem Industries Ltd., 81 & Ors Total disallowance w/s.14A=Rs.6,67.830/-.” 104. The Ld. CIT(A) upheld the disallowance observing as under:

4.3 It is seen that AR has contended that no interest bearing funds have been used towards the investment in shares. However, no evidence what so ever was filed in support of the above claim. In view of the above, the contention of the AR that no interest bearing fund was attributable to investment in shares is not justified. 4.3(i) In the absence of details filed, the AO was right in holding that appellant had not shown disallowance required to be made us.14A and hence he was justified in computing the disallowance under Rule 8D of the IT Rules. In view of the above, the addition made by the AO is justified, the same is hence confirmed.

M/s Metrochem Industries Ltd., 83 & Ors retirement scheme should have been claimed in relevant years only. Accordingly, the learner Assessing Officer rejected the claim of the assessee.

“5.3(i) The contention of the AR is not correct. There is no concept of deferred revenue expenditure under the IT Act. The Act only recognizes capital expenditure and revenue expenditure. Unless there is specific mention in the Act, the expenditure is either allowable or disallowable. Only in respect of certain expenditure under specific situations, as mentioned in the Act, the amount is liable to be written off over a period of time. It is seen that in respect of Voluntary Retirement payment, section 35DDA was introduced with effect from 1st April 2001 which under this section, expenditure on account of Voluntary Retirement Payment were to be allowed at the rate of 20% each over a period of 5 years.

5.3(ii) It is seen that the AO in this case erroneously held that only 10% expenditure was allowable. The same was also erroneously confirmed by the CIT(A). Such decision contrary to the provisions of the Act cannot found binding "Precedent' to be followed in later years.

In view of the above, there is no merit in the contention that this year also, 1/10th of the amount should be allowed.

In view of the above, addition made by the AO is on sound footing, hence confirmed.”

M/s Metrochem Industries Ltd., 84 & Ors 110. Before us the Ld. counsel of the assessee submitted that issue in dispute is covered in favour of the assessee by the order of the Tribunal in ITA No. 1693/Ahd/2004 for assessment year 2000-01. The Ld. DR did not controvert the finding of the Tribunal, however submitted that assessee should not be allowed double benefit of the deduction.

“36. It was submitted by the ld. AR that entire expenditure is consequence to salary payable to the employees. Even though the assessee has treated it as deferred revenue expenditure entire payment is an allowable expenditure in view of the decision of the Tribunal, Jodhpur Bench in PI Industries Ltd. vs. ACIT (2006) 104 TTJ (Jd) 333. Whatever may be the treatment assessee might have given in the books of account will not be relevant and its true nature has to be decided as held in following three judgements:- (1) DCIT vs. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj) (2) CIT vs. Gujarat Mineral Dev. Corpn. (1981) 132 ITR 377 (3) Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 37. Against this, ld. DR relied on the orders of authorities below.

M/s Metrochem Industries Ltd., 85 & Ors expenditure. Accordingly, the claim made by the assessee at 10% of the total expenditure was reasonable and should have been accepted by the revenue authorities. Accordingly claim of the assessee at Rs.2,42,276/- is allowed. The question of making addition of Rs.21,81,487/- does not arise because this amount is not claimed as revenue expenditure in the profit and loss account. As a result, this ground of assessee is allowed.” 111.1 The issue in dispute in the year under consideration being identical to the issue in dispute in assessment year 2000-01, respectively following the Tribunal (supra), we direct the assessing officer for allowing 1/10th of the expenses incurred in respect of voluntary retirement schemes of years prior to assessment year 2001-02. The ground of the appeal of the assessee is accordingly allowed.

M/s Metrochem Industries Ltd., 86 & Ors 1. The order passed by the Commissioner of Income tax (Appeals) is bad in law. The order is contrary to the provisions of the law and the facts of your appellant's case. It is submitted that it be so held now.

1.1 The Commissioner of Income tax (Appeals) erred in framing the order exparte alleging non-compliance with the notices. The appellant submits that each and every notice was complied.

The order framed by the Commissioner of Income tax (Appeals) is bad in law.

1.2 The Commissioner of Income tax (Appeals) erred in not quashing notice of demand issued by the assessing officer. The notice of demand is erroneous and bad The appellant submits that the notice of demand be quashed and demand be held to be not enforceable. It is submitted that it be so held.

2. The Commissioner of Income tax (Appeals) erred in upholding disallowance of Rs. 5,80,812/- out of the interest/administrative expenses by invoking provisions or section 14A. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted.

2.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

3. The Commissioner of Income tax (Appeals) erred in upholding disallowance of ₹4,31,518/- out of the voluntary retirement payments. The expenses was incurred wholly and exclusively for the purpose of the business. The disallowance is contrary to the facts and provisions of law. The disallowance be deleted.

M/s Metrochem Industries Ltd., 87 & Ors 3.1 The appellant without prejudice to above further submits that disallowance in any event is excessively high and it be directed to be substantially reduced. It is submitted that it be so held now.

4. The Commissioner of Incometax (Appeals) erred in upholding disallowance of ₹77,098/- made u/s. 43B. The appellant submits that addition of ₹77,098/- is grossly erroneous and contrary to the facts. The addition be quashed.

4.1 The appellant submits that provisions in respect of GST and bonus in earlier years were disallowed in computation of total income for the respective assessment years. The appellant submits that excess provisions were written off and credited to the Profit and Loss account and the write off were excluded from computation of the total income as they were disallowed in the earlier years. The appellant submits that addition of Rs.77,098/- is therefore erroneous. The addition be quashed.

5. The Commissioner of Income tax (Appeals) erred in upholding the demand in the case of the appellant. It is submitted that the assessing officer be directed to make correct computation of the demand. It is further submitted by the appellant that the assessing officer be directed to delete interest, if any, charged by the assessing officer by invoking provisions of sections 234A to 234D. It is submitted that appropriate relief be allowed as per the provisions of law.

M/s Metrochem Industries Ltd., 88 & Ors 116. The ground No.2 relate to disallowance of ₹5,80,2012/-out of the interest/administrative expenses by invoking provisions of section 14A of the Act.

“The amount disallowable u/s 14A is computed on estimate basis as under : I. Amount of interest relatable to earning of exempt income = Interest expenditure X Average value of investments Average value of total assets = ₹6,93,63,000/- X 1,52,56,000/- =₹5,80,812/- 1,82,19,94,500/- II. Administrative expenditure relatable to earning of exempt income : 0.5% of Average value of Investments = ₹1,52,56,000/- X 0.5% = ₹76,280/- Total disallowance u/s 14A = ₹5,80,812/-.

M/s Metrochem Industries Ltd., 89 & Ors in respect of issue in dispute of disallowance under section 14A in the year under consideration are identical to the facts and circumstances of assessment year 2006-07. Accordingly, following our finding in assessment year 2006-07, the issue of disallowance of interest and disallowance of administrative expenses is restored to the file of the assessing officer for deciding in view of our finding in assessment year 2006-07 on the issue in dispute. The ground of the appeal of the assessee are accordingly allowed partly for statistical purposes.

120.1 In the year under consideration also the assessee claimed expenditure of ₹2,42,276/-and ₹1,89,242/- in respect of payments made under voluntary retirement scheme for assessment year 2000-01 and 2001-02 respectively, which is 1/10th the expenses incurred in respective years.

M/s Metrochem Industries Ltd., 90 & Ors of voluntary retirement scheme of years prior to assessment year 2001-02. The ground No. 3 to 3.1 of the appeal are accordingly allowed.

“4. I have carefully considered the material available on record as well as findings of the AO. As mentioned here in above the AO made three additions, giving elaborate findings for each addition after considering the submission of the assessee during assessment proceedings. During appellate proceedings the case was fixed for hearing five times. The appellant did not avail any of the opportunity given to present its case. There were no new facts/explanation available before me, further, to the facts available before AO and therefore, I endorse the findings of the AO for M/s Metrochem Industries Ltd., 91 & Ors all the additions discussed above. As such all the additions made by the AO are confirmed.”

125.1 In view of the non-compliance before the Ld. CIT(A) on the issue in dispute, in the interest of substantial justice, we restore this issue back to the file of the Ld. Assessing Officer for verification of the claim of the assessee that amount in question was disallowed in earlier assessment years in computation of the income and the provisions have been written off and credited to the profit and loss account in the year under consideration. The ground of the appeal of the assessee is accordingly allowed for statistical purposes.

M/s Metrochem Industries Ltd., 92 & Ors 10. ITA No. 1076/Ahd/2011 2007-08 Assessee Allowed partly for statistical purposes Order pronounced in the open Court on 31/03/2022.