NOVARTIS INDIA LTD,MUMBAI vs. DCIT CIR 7(1), MUMBAI

1 These are cross-appeals for Assessment Year (AY) 2001-02 which arises out of the order of learned Commissioner of Income-Tax (Appeals)-VII, Mumbai [CIT(A)], Appeal No. CIT(A)-VII/DCIT-7(1)/IT- 356/2007-08 dated 27/02/2009 in the matter of assessment framed by Ld. Assessing Officer (AO) u/s 143(3) on 31/12/2003. The assessee has also filed cross-objections against the revenue‟s appeal.

2 While framing assessment, assessee‟s income was determined at Rs.709.63 Lacs as against revised returned income of Rs.499.38 Lacs filed on 29/11/2002. The returned Book-Profits of Rs.3007.07 Lacs u/s 115JB were determined at Rs.5751.40 Lacs after certain adjustments. Upon further appeal, Ld. CIT(A) has granted partial relief to the assessee which has given rise to cross-appeals before us. The assessee being resident corporate assessee is stated to be engaged in manufacturing of pharmaceuticals products and pesticides etc.

3 As elaborately noted by ld. AO in the assessment order, the assessee is engaged in life sciences business consisting of manufacture and sale of Pharmaceuticals, Animal Health products, eye-care products. It operates through three divisions namely-(i) Pharmaceuticals; (ii) Animal Health; (iii) Ciba Vision.

4 During the year under consideration, the assessee has divested its agri business comprising of crop-protection and seed division. These divisions have been transferred to a new company namely M/s. Syngenta India Ltd. Further, during the year a company named M/s. Assessment Year: 2001-02 Ciba CKD Biochem Ltd. doing business of manufacture of pharmaceutical products merged with Assessee Company. The divestment as well as the merger has taken place w.e.f. 01/04/2000 pursuant to orders of Hon‟ble Bombay High Court.

5 The grounds raised by assessee read as under :- GROUND NO. 1 (a) The Commissioner of Income-tax (Appeals)-Vll [hereinafter referred to as the CIT(A)] erred in upholding the action of the Deputy Commissioner of Income-tax, Circle 7(1), Mumbai (ACIT) in disallowing expenditure of Rs.27,31,113/- in connection with Software treating the same as capital expenditure and granting depreciation at the rate of 25% instead of 60%. (b) The CIT(A) further erred in not disposing off the ground of the appellants on the action of the ACIT in allowing only part depreciation on software expenses disallowed in earlier years. GROUND NO. 2 (a) The CIT(A) erred in disallowing Rs.36,23,834/- being 20% of total foreign traveling expenses. (b) Without prejudice to above, the appellants submit that in case foreign travel expenses are held as capital in nature, depreciation should be allowed on such expenditure. GROUND NO. 3 The CIT(A) erred in upholding the disallowance of Hotel and airfare expenses incurred on foreign visitors to India amounting to Rs.47,364/- on the ground that these expenses were not for the purpose of the business, notwithstanding that the expenses were incurred for executive committee meeting and training. GROUND NO. 4 The CIT(A) erred in upholding the action of the ACIT in adding an amount of Rs.44,32,282 to the value of closing stock on account of MODVAT. GROUND NO. 5 (a) The CIT(A) erred in holding that the appellant would not be eligible for depreciation on assets that stood vested in Ciba Specialty Chemicals (India) Ltd.. (CSCIL) pursuant to the scheme of demerger as the appellants had ceased to be the owner of the assets and had ceased to use the assets for the purpose of its business. The CIT(A) failed to appreciate that having regard to the amended scheme of depreciation, the appellant was entitled to the allowance as claimed. (b) The CIT(A) erred in holding that a consideration had flowed to the appellant for the transfer of the assets to CSCIL. GROUND NO. 6 (a) The CIT(A) erred in holding that the provisions of Rule 8D were applicable to the assessment year in appeal. (b) Without prejudice to above, the CIT(A) erred in not giving a finding on the ground of appeal filed by the appellants on the disallowance originally made by the ACIT. (c) Without prejudice to the above, the CIT(A) ought to have directed the AO not to disallow any expenditure with respect to investments made in the past years, GROUND NO.7 Assessment Year: 2001-02 (a) The CIT(A) ought to have held that the provisions of section 43B are not applicable to ESIC. (b) Without prejudice to the above, the CIT(A) erred in upholding the action of the ACIT in disallowing ESIC dues aggregating to Rs.2,62,310 under section 43B which were paid by the appellants before the end of financial year, or before the due date of filing Return of Income, on the ground that these were paid after the due date and the amended provisions of Section 43B by the Finance Act 2003 w.e.f. 01.04.2004 would not be applicable retrospectively. GROUND NO. 8 (a) The CIT(A) erred in upholding the action of the ACIT in disallowing Bad Debts and advances amounting to Rs.1,80,30,995 written off and charged to the profit and loss account by the assessee's for the previous year relevant to assessment year 2001-02. (b) Without prejudice to the above, the CIT (A) ought to have allowed the above under section 37(1) as business expenses. GROUND NO.9 (a) The CIT(A) erred in confirming the action of the AO in excluding 90 per cent of the following receipts while working out the profits of the business by assuming that they are in the nature of receipts mentioned in explanation (baa) to section 80HHC.

Interest on Employee loans Rs.14,09,000

Interest on overdue debtors Rs.19,91,000

Interest on deposits with MSEB Authorities Rs.2,03,000

Interest on deposits with MIDC Authorities Rs.18,000

Interest on sales tax refund Rs.2,69,000

Interest from Income tax department Rs.1,58,18,000

Sales tax set off claims Rs.5,53,86,000

Insurance claims realised Rs.20,61.000

Cash discount Rs.2,36,000

Scrap sales income Rs.13,58,000

Miscellaneous claims Rs.26,000

Excise duty refund Rs.54,95,000

Equipment lease Rs.53,34,000

Conversion charges Rs.4,83,000

Other miscellaneous write back of liabilities, Rs.1,36,38,000 Discounts etc.

Cost of Services recovered Rs.92,24,000

Profit u/s 41 (3) on sale of R&D assets Rs.37,62,355 Assessment Year: 2001-02 (b) Without prejudice, it is submitted that 90% of net amount, as applicable of the aforesaid receipts should be excluded while computing "profits of business' for the purpose of deduction under section 80HHC. GROUND NO. 10 (a) The CIT(A) erred in confirming the action of the AO in computing the income from house property at a notional value. (b) The CIT(A) further erred in not considering the Municipal Rateable Value for the purpose of arriving at the annual value of the property. (c) Without prejudice to above and in any event, as the amount recovered towards Municipal taxes, water charges, etc. was Rs.92,24,000”the amount to be considered for the purpose of annual value of the property cannot exceed the said amount, GROUND NO.11 The CIT(A) erred in upholding the AO's action of allowing depreciation on DLP projector @ 25% as against @ 60% claimed by the appellants. GROUND NO. 12 The CIT(A) erred in not directing the AO to exclude the following amounts aggregating Rs.5,15,06,985 while computing the book profits under section 115JB for the assessment year 2001-02, as these have been offered to tax under the normal computation by the appellants and taxed by the AO in the earlier years.

1 The learned Senior Counsel, Shri Jehangir D. Mistry along with Shri Nitesh Joshi, advanced arguments assailing the additions as sustained in the impugned order. Reliance has been placed on various judicial pronouncements as well as the decision in assessee‟s own case for various other years including order for AY 2000-01. The copies of the orders have been placed on record. A specific reference has been made to the latest decision of the Tribunal for AY 2000-2001 ITA No.6226/Mum/2014 & ors. dated 07/07/2017 (a/w MA Nos. 43 & 50 /Mum/2018 dated 08/11/2018). The written submissions have also been filed. On the hand, Ld. CIT-DR supported the assessment framed by Ld. AO and advanced arguments in support of the same. The arguments have also been made in revenue‟s appeal.

2 We have carefully heard the rival submissions, perused relevant material on record including documents placed in paper book. The judicial pronouncements as cited during course of hearing have been Assessment Year: 2001-02 deliberated upon. Our adjudication to the subject matter of cross-appeals would be as given in succeeding paragraphs.

3 For ease of reference, the assessee‟s ground could be tabulated in the following manner:- G.No. Grounds / Issue

4 Similarly, the issues of revenue‟s appeal may be tabulated as under: - G.No. Grounds / Issues

General in nature In the cross-objections against revenue‟s appeal, the assessee is seeking alternative relief on account of cost on advertisement films, valuation of closing stock and incremental liability for VRS. Relevant facts and Issue-wise Adjudication

Depreciation on block of assets transferred to Ciba Specialty Chemicals (India) Limited (CSCIL): Assessment Year: 2001-02

1 Under the scheme of arrangement sanctioned by the Hon'ble Bombay High Court, the assessee transferred certain assets at Written down Value (WDV) pertaining to Specialty chemical business to CSCIL w.e.f. 01/04/1996. However, during assessment proceedings for AY 1997-98, it was noted that the assessee did not reduce from its block of assets the value of assets transferred to CSCIL while computing depreciation under the Income Tax Act, 1961. Similar depreciation was claimed in this year on the reasoning that it was a case of demerger.

2 It was alternatively submitted that in assessment proceeding for AY 1997-98, an amount of Rs.2078.68 Lacs being book WDV of assets was reduced from the respective block of assets. Depreciation claim for AY 1997-98 was allowed after above adjustment and adjusted WDV for AY 1997-98 was adopted as opening WDV for 1998-99 and subsequent assessment years. The revised working of depreciation by taking the opening WDV of AY 2000-01 was furnished while disputing the stand of Ld. AO.

3 The assessee drew attention to the fact that pursuant to the scheme of arrangement, no consideration had accrued to the company. The shares in the new company had been issued to existing share holders of the assessee. The transfer of assets had taken place at the book values. No consideration had accrued or arisen to the company as a result of demerger pursuant to the order of the Hon'ble Bombay High Court. Therefore, the written down value of block of assets had not been reduced in the claim of depreciation for AY 1997-98. The company claimed depreciation on the written down value of block of assets as defined u/s. 43(6)(c) of the Income tax Act, 1961 which mandates the Assessment Year: 2001-02 assessee to reduce from the block of assets monies payable in respect of any asset falling within that block which is sold or discarded or destroyed during that previous year together with the amount of the scarp value subject to rider that such reduction would not exceed written down value of the block. In case of demerger, there is no sale transaction and there is no money payable in such a case and therefore, there would be nothing required to be adjusted to the written down value of block of assets while computing depreciation claims.

4 However learned AO opined that to be eligible to claim depreciation u/s 32, what is required is that the assessee should own the assets and should have used the said assets for the purpose of business during the relevant accounting year. Since assets have been transferred w.e.f. 01/04/1996, the assessee is neither the owner of assets not it had used the assets for business purposes. Therefore, the question of allowing depreciation against the same would not arise. Further, in AY 1998-99, a finding was rendered that full depreciation was claimed by CSCIL on the basis of book WDV of assets transferred by the assessee which would show that both the entities were claiming depreciation on the same assets for same AY which is absurd and totally unacceptable situation. So far as the expression „monies payable‟ is concerned, the transfer was not made by the assessee free of any consideration. As per scheme of arrangement, the consideration has been paid by transferee-company by issue of equity shares in the ratio prescribed in arrangement order. Instead of transfer consideration being paid to the transferor i.e. the assessee-company, consideration has been paid by Transferee Company directly to share holders of Transferor-Company by issue of Assessment Year: 2001-02 shares. In effect and substance both are one and the same thing. Nowhere was it mentioned that monies payable should be given directly by the transferee to the transferor. Therefore, claim as made by the assessee was not admissible.

5 Regarding assessee‟s revised working wherein the assessee excluded Income Tax WDV while computing depreciation claim, the same was also not accepted since in terms of arrangement, the assets & liabilities were transferred at book value on the date of transfer and not at Income Tax WDV. Secondly, CSCIL adopted book WDV of the transferred assets for the purpose of claim of depreciation in its return of income for AY 1997-98 which was evident from its financial statements for that year. Therefore, it would be the book value of transferred assets and not Income Tax WDV which was to be reduced while computing depreciation. The depreciation claim as worked out in this manner came to Rs.1502.67 Lacs as against assessee‟s claim of Rs.1597.99 Lacs and therefore, the differential of the two being Rs.95.32 Lacs was disallowed and added back to the income of the assessee.

6 The Ld. CIT(A), as per earlier stand in appellate orders for AYs 1997-98 to 2000-01, confirmed the stand of Ld. AO but allowed without prejudice claim of the assessee that for the purpose of considering the opening block of WDV, Ld. AO should have considered the WDV of the assets transferred as per Income Tax records and not as per WDV in assessee‟s books of account for the purpose of calculating the depreciation allowance for AY 2001-02. 3.7 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.22 to 24. In para-24, the bench observed that Assessment Year: 2001-02 newly inserted explanation 2A by Finance Act, 1999 w.e.f. 01/04/2000 to Sec. 43(6) was not considered by the lower authorities and therefore the matter was restored to the file of Ld. AO for de-novo adjudication. However, the assessee sought rectification of the directions vide MA No.43/Mum/2018. The Ld. Judicial Member concurred with the submissions that Explanation 2A to Sec. 43(6) would not have any application to assessee‟s case for the year under consideration since demerger happened in previous year relevant to AY 1997-98 and in the current year, depreciation was to be allowed automatically on the opening written down value of the block as held by Tribunal in AYs 1997- 98, 1998-99 & 1999-2000. However, the Learned Accountant Member, vide separate order, opined that the directions given in the order would not require any interference by the bench. Keeping in view the contrary views, reference was made u/s 255(4) to Hon‟ble Vice President (third member) who vide para-13 of his order dated 09/08/2019, held that there exist mistake apparent from record which was to be rectified. Finally, following majority view, confirmatory order was passed by the bench on 27/09/2019. Thus, this issue has attained finality in assessee‟s favor in AY 2000-01 wherein it have been held that the assessee would be eligible to claim depreciation on opening WDV of block of assets and the explanation 2A to Sec.43(6) would have no application. The Ld. DR has submitted that the revenue has preferred further appeal in earlier years before Hon‟ble Bombay High Court and the same is pending for adjudication. However, we find that, as of now, the issue is covered by earlier decisions of the Tribunal. Hence, respectfully following the consistent view of the Tribunal, we direct Ld. AO to allow depreciation on Assessment Year: 2001-02 same methodology as given in AY 2000-01 pursuant to the directions of the Tribunal. Ground No.5 of assessee‟s appeal stand allowed whereas Ground No.1 of revenue‟s appeal stand dismissed.

Production of Advertisement Films :-

1 The advertisement expenses claimed by assessee included expenses of Rs.38.07 Lacs incurred towards cost of purchase of films and other production expenses for producing advertisement films and commercials to be used as TV spots and promotional films. However, Ld. opined that TV films and commercials have a life span of a number of years and they continue to be exhibited on various TV channels along with various serials which are sponsored by assessee-company. Secondly the films are used to promote assessee company‟s products in the minds of the target audience and also create brand awareness which endures in the mind of the consumers for a long time. Therefore, the expenditure would be capital in nature. Since similar view was taken in assessment order for AY 1991-92 which was confirmed by Ld. first appellate authority, the said expenditure was treated as capital in nature and added back to the income of the assessee.

2 The Ld. CIT(A), relying up Tribunal‟s decision for AY 1996-97 and the decision of Hon‟ble Bombay High Court in CIT V/s M/s Geoffery Manners & Co. Ltd. (20009-TIOL-93-HC-Mum-IT), held that the expenditure would be revenue in nature and therefore, an allowable deduction. Aggrieved, the revenue is in further appeal before us by way of ground no.2. 4.3 We find that this issue has been adjudicated in paras 26 & 27 of Tribunal‟s order for AY 2000-2001 order dated 07/07/2017. The bench, Assessment Year: 2001-02 noting the decision of Hon‟ble Bombay High Court in assessee‟s own case for AY 1997-98, decided this issue in assessee‟s favor. Facts being identical, respectfully following the consistent stand of Tribunal, we dismiss ground no.2 of revenue‟s appeal which makes ground no.1 of assessee‟s cross-objection as infructuous.

Inclusion of Freight Component on closing stock

1 The assessee did not include proportionate amount of freight component while valuing closing stock of finished goods. As against this, the assessee claimed full expenditure of freight as deduction. The AO opined that as per the decision of Hon'ble Apex Court in CIT Vs. British Paints (1991; 188 ITR 44), it is the real cost of stock which was to be taken into account to determine real income of the assessee. All costs incurred towards stock-in-trade were to be considered while valuing the closing stock and exclusion of any cost would result in distorted picture of taxable income. The freight component on closing stock came to be Rs.44.09 Lacs. However, similar adjustment made in AY 2000-01 resulted into increase in valuation of closing stock of that year by Rs.147.46 Lacs and therefore, opening stock for this year was to be increased by that amount. Consequently, the differential of the two i.e. Rs.103.36 Lacs was reduced from assessee‟s income.

2 The Ld. CIT(A), relying upon Tribunal‟s decision for AY 1993-94 and appellate orders for AYs 1994-95 to 2000-01, deleted the adjustment made by Ld. AO.

3 We find that this issue is squarely covered in assessee‟s favor by the various decisions of Tribunal right from AYs 1992-93 to AY 2000-01. The Ld. CIT(A) has also followed the appellate orders of earlier years. Assessment Year: 2001-02 Therefore, this adjudication in the impugned order, on this issue, would not require any interference on our part. Ground No.3 of revenue‟s appeal stand dismissed which render ground no.2 of assessee‟s cross- objections infructuous.

Incremental VRS Interest :-

1 The assessee claimed an amount of Rs.253.73 Lacs towards incremental VRS (Voluntary Retirement Scheme) for Bhandup unit which was on the basis of actuarial valuation. As held in earlier years, the liability was a contingent liability. Similar disallowance made in AY 1993- 94 was confirmed by Ld. CIT(A). Similar disallowance was in assessment order for AYs 1994-95 to 2000-01. However, actual payment of VRS payment made during relevant year was to be allowed. In this year, assessee made payment of Rs.417.76 Lacs which was to be allowed whereas the claim of Rs.253.72 Lacs as per actuarial valuation was to be disallowed. The said adjustment resulted into net relief of Rs.164.04 Lacs to the assessee.

2 The Ld. CIT(A) noted that in appellate order for AYs 1998-99 to 2000-01, Ld.AO was directed to allow the deduction of incremental liability of VRS and also allow that part of actual payment made during the year relating to the provision created during financial year 1992-93 but disallowed in AY 1993-94. Similar directions were given by Ld. CIT(A) for this year, against which revenue is in further appeal before us.

3 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.31 to 34. In concluding para-34, the bench restored the issue to the file of Ld. AO for re-adjudication as per directions given in Tribunal order for AY 1995-96. The assessee sought Assessment Year: 2001-02 rectification of the directions vide MA No.50/Mum/2018. The Learned Judicial Member concurred with the submissions that Tribunal order for AY 1995-96 stood amended by MA order dated 27/02/2015 wherein deduction was allowed to the assessee. Accordingly, applying the amended order, the deduction would be allowable to the assessee. However, the Learned Accountant Member, vide separate order, opined that the issue was to be recalled and placed before regular bench for fresh adjudication. Keeping in view the contrary views, a reference was made u/s 255(4) to Hon‟ble Vice President (third member) who concurred with the view of Hon‟ble Judicial Member. Finally, following majority view, confirmatory order was passed by the bench on 27/09/2019 allowing assessee‟s miscellaneous application. Thus, this issue has already attained finality in assessee‟s favor in AY 2000-01 wherein the bench has upheld the stand of Ld. CIT(A). Respectfully following the same, we confirm the impugned order, on this issue. Ground No.4 of revenue‟s appeal stand dismissed which renders ground no.3 of assessee‟s cross-objection infructuous. The assessee‟s cross- objection stands dismissed as infructuous.

Disallowance of Club membership fee :

1 It transpired that the assessee paid membership fee of Rs.1.76 Lacs to certain club. The Ld. AO opined that the expenditure being enduring in nature, the same would be capital in nature. The assessee submitted that the amount was paid by company for use of club facilities by its employees for organizing meetings and conferences for its business associates and employees for legitimate business purposes. Assessment Year: 2001-02 However, not convinced, Ld. AO disallowed the same and added back it to assessee‟s income.

2 The Ld. CIT(A), relying upon various decisions, observed that club fees was paid by the assessee itself and not by its directors or employees and therefore, the expenditure was an allowable deduction. Aggrieved, the revenue is in further appeal before us.

3 We find that the findings that the expenditure was incurred by the assessee as a corporate entity remain undisputed before us. This being so, this issue is covered in assessee‟s favor by the decision of Hon‟ble Apex Court in CIT V/s United Glass Mfg. Co. Ltd. (28 Taxmann.com 429 12/09/2012) wherein Hon‟ble Court has observed as under: - 3.3 …….As far Question No. 2 is concerned, we find that a series of judgments have been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this court. Even otherwise, we are of the view that it is a pure business expenses.

Purchase of Computer software and Software Development cost :

1 The assessee incurred an amount of Rs.27.31 Lacs towards purchase of various computer software packages as detailed in the assessment order. Majority of the expenses consisted of license fee or use of Microsoft packages (excel sheet, word document, power point presentation etc.) and Oracle software for developing accounting software at C & F locations. The assessee submitted that software Assessment Year: 2001-02 expenses were for software packages which get frequently outdated and have to be replaced and therefore, the expenditure was revenue in nature. The assessee further stated that operating software is treated as capital expenditure whereas application software which gets outdated early, is revenue in nature. However, following the stand taken in AYs 1995-96 to 2000-01, the expenditure was said to be enduring in nature and thus capital expenditure. Accordingly, depreciation of 25% was allowed against the same. The action of Ld. AO resulted into an addition of Rs.20.48 Lacs. Consequently, similar depreciation of earlier years for Rs.18.98 Lacs was allowed to the assessee disregarding the depreciation on assets pertaining to demerged division.

2 The Ld. CIT(A) noted that the payments were in the nature of license fees or for right to use certain packages which have normally longer periods of life, usage and validity and therefore, the benefits would be enduring in nature. Accordingly, the action of Ld. AO was upheld. Aggrieved, the assessee is in further appeal before us.

3 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.2 to 5. The bench, following earlier years, held that the expenditure was revenue in nature. Upon perusal, we find that this ground is covered in assessee‟s favor in several earlier years and the department has accepted the ruling of the Tribunal in those years and has not preferred further appeal, on this issue. This being the case, we direct Ld. AO to allow the expenditure fully and reverse the depreciation adjustment thus made in the assessment order. Ground No.1(a) of assessee‟s appeal stands allowed whereas Ground No.1(b) has been rendered infructuous. Assessment Year: 2001-02

Foreign Travel Expenses :

1 In AY 1993-94, 25% of foreign travel expenses incurred by assessee were disallowed on the ground that the assessee has not proved that the time and energy spent by directors and executives was devoted wholly and exclusively for business and not in connection with the business of the parent company or foreign shareholders. In AY 1991- 92, the addition of 20% was confirmed by Ld. CIT(A). Therefore, similar disallowance of 25% was made in this year which resulted into disallowance of Rs.45.29 Lacs out of total expense of Rs.181.19 Lacs claimed by the assessee.

2 The ld. CIT(A), following appellate orders for AYs 1997-98 to 2000- 01, directed Ld. AO to restrict the additions to the extent of 20%. Aggrieved, the assessee is in further appeal before us.

3 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.6 to 9. The bench, following earlier years, fully allowed the claim of the assessee. Upon perusal, we find that this ground is covered in assessee‟s favor in several earlier years also and the department has accepted the ruling of the Tribunal in those years and has not preferred further appeal, on this issue. This being the case, we direct Ld. AO to delete the additions as sustained by Ld. CIT(A). Grounds No. 2(a) of assessee‟s appeal stands allowed which makes ground no. 2(b) infructuous.

Expenditure on foreign visitors :

1 The assessee claimed expenditure on foreign visitors by submitting that foreign visitors were worldwide financial specialist in pharmaceuticals, formulations, marketing, information and technology, Assessment Year: 2001-02 members of Board etc. They were senior executives coming to India and were experienced personnel to impart training and to conduct discussions on company‟s business, finance and marketing strategies, technical matters, solutions of computer related problems etc. Hence, the expenditure was incurred wholly and exclusively for the purpose of company‟s business. However, in the absence of any satisfactory evidences forthcoming from assessee, an amount of Rs.0.47 Lacs as claimed by the assessee was disallowed as being non-business expenditure. The Ld. CIT(A), following earlier years‟ appellate order, confirmed the action of Ld. AO. Aggrieved, the assessee is in further appeal before us.

2 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.10 to 13. The bench, following earlier years, deleted the disallowance. Upon perusal, we find that this ground is covered in assessee‟s favor in several earlier years also and the department has accepted the ruling of the Tribunal in those years and has not preferred further appeal, on this issue. This being the case, we direct Ld. AO to delete this addition. Ground No.3 stands allowed.

Unavailed Modvat Credit :

1 As per tax audit report, the un-availed MODVAT credit on 31/03/2001 was Rs.44.32 Lacs which was not included in the value of closing stock even though the assessee was following exclusive method of accounting for valuation of closing stock. This, in the opinion of Ld. AO, was in violation of the provisions of Section 145A. Similar addition was made in AY 2000-01. Therefore, the amount of Rs.44.32 Lacs was added to the value of closing stock as on 31/03/2001. Considering Assessment Year: 2001-02 similar addition in AY 2000-01, the opening stock was to be increased by Rs.97.99 Lacs. Therefore, the net result was a reduction in total income by Rs.53.66 Lacs.

2 The Ld. CIT(A), relying upon appellate orders for AY 2000-01 confirmed the addition to closing stock for Rs.44.32 Lacs and held that opening stock of subsequent year should be increased by MODVAT amount. The Ld. AO was directed accordingly. Aggrieved, the assessee has raised ground no.4. 11.3 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.18 to 21. The bench, following the decision of Hon‟ble Bombay High Court in CIT V/s Mahalaxmi Glass Works Pvt. Ltd. (2009; 318 ITR 116) held that unutilized MODVAT credit should be added to the closing stock of the assessee and the same would also necessitate similar adjustments to opening stock.

Disallowance u/s. 14A :

1 The assessee earned exempt dividend of Rs.255.52 Lacs and interest on tax free bonds for Rs.267.54 Lacs and claimed the same to be exempt u/s 10(33) and u/s.10(15) respectively. Regarding disallowance u/s 14A, it raised a plea that investments were made in the past from own resources and not from borrowed funds and therefore, no interest cost was incurred towards earning of exempt income. Dividend cheques were received and deposited into bank by the treasury Assessment Year: 2001-02 department. No amount was paid towards commission or remuneration to a banker or any other person for the purpose of realizing such dividend. In other words, no specific expenditure was stated to be incurred for realizing the dividend.

2 However, considering the fact that the assessee had large investment portfolio of Rs.33.53 Crores as on 31/03/2001 and for managing such large investment portfolio and taking care of return, certain managerial and administrative time and expenditure was certainly spent by the assessee. It was further noted that the investment was altogether a separate line of business, the income of which falls under the head „income from other sources‟. Therefore the principle of apportionment of expenditure as held by Hon‟ble Apex Court in Rajasthan State Warehousing Corporation vs. CIT (2000; 242 ITR 451) would apply. Finally, the disallowance was estimated @ 2% of exempt income which resulted into disallowance of Rs.10.46 Lacs in the hands of the assessee.

3 The Ld. CIT(A), enhanced the disallowance by directing Ld. AO to compute the disallowance as per Rule 8D. Aggrieved, the assessee is in further appeal before us.

4 We find that this issue has been adjudicated in Tribunal‟s order for AY 2000-01, para nos.39 to 41. The bench, in conclusive para- 41, directed Ld. AO to estimate the disallowance @2% of exempt income. Also, it is settled position that the provisions of Rule 8D are not applicable to this year. Therefore, following the aforesaid adjudication of Tribunal, we confirm estimated disallowance of 2% as made by Ld. AO. Assessment Year: 2001-02 The stand of Ld. CIT(A) stand reversed. Ground No.6 of assessee‟s appeal stands partly allowed.

Delayed ESIC payments:

1 During assessment proceedings, ESIC contributions of Rs.2.62 Lacs were found to have been paid beyond due date as specified in that act. Hence, invoking the provisions of Sec.43B, Ld.AO disallowed the same while framing the assessment. The action of Ld. AO, upon confirmation by Ld. CIT(A), is in further challenge before us.

3 We find this issue stood covered in assessee‟s favor by the decision of Hon‟ble Bombay High Court in the case of CIT V/s Hindustan Organic Chemical Ltd. (366 ITR 1) wherein Hon‟ble High Court, following the decision of Hon‟ble Apex Court in CIT V/s Alom Extrusions Ltd. (319 ITR 306) held that amendments to the said section brought about by the Finance Act, 2003 with effect from 1st April, 2004 were retrospective in nature and would operate from 1st April, 1988. This being the case, the impugned disallowance stands deleted. Ground No.7 stand partly allowed.

Disallowance out of bad debts and advances written off :

1 The assessee claimed bad debts written-off which include write-off of trade advances and advance to contract manufacturer amounting to Rs.169.09 Lacs. A further amount of Rs.11.21 Lacs representing old MODVAT balances was also written-off and claimed as deduction. The assessee submitted that the trade advances written-off in the books represent advances made while carrying on the business incidental to it. Trade advances were not voluntary payments but made in the course of business and hence incidental to the business. The Assessment Year: 2001-02 obligation of the parties to whom advances were made was to provide moneys‟ worth to the company in the form of goods or services. Since obligation was not honored and in turn the refund of trade advances become irrecoverable and hence, these amounts were charged to Profit & Loss account and claimed as deduction. The same would be allowable as business expenditure under Section 37(1).

2 However, Ld. AO held that allowability of bad debts is governed by the provisions of section 36(1)(vii) r.w.s. 36(2). Therefore, debts should have been taken into account in computing the income of the assessee before the same could be allowed as bad debts. The receivables written-off were neither been taken into account in computing the income of the assessee nor does they represent money lent in the ordinary course of business of banking or money lending as the assessee does not carry on any such business. Therefore, the claim of bad debts to the extent of Rs.180.30 Lacs was disallowed and added to the income of the assessee.

3 The Ld.CIT(A) confirmed the disallowance by noting that the conditions of Sec. 36(2) were not satisfied. Aggrieved, the assessee is in further appeal before us.

4 From factual matrix, it is quite discernible that the assessee made a claim of irrecoverable advances u/s 37(1) of the Act since the loss suffered by the assessee was in the course of carrying out its business. However, both the lower authorities adjudged the assessee‟s claim merely in terms of Sec. 36(1)(vii) r.w.s. 36(2) which was not the case. The perusal of the details filed before us would show that the amounts written-off by the assessee was mostly in the nature of advance Assessment Year: 2001-02 payments for procurement of goods from third parties, which have become irrecoverable over a period and are under dispute. Few of the write-offs represent MODVAT claims outstanding against third party manufacturers for more than 5 years. Majority of these amounts are stated to be outstanding prior to 01/04/1996. This being the case, we are of the considered opinion that the claim is allowable in terms of Sec. 37(1) as business expenditure or alternatively as business loss u/s 28. For the same, we draw support from the decisions of Hon‟ble Bombay High Court in Lord Dairy Farm Ltd. V/s CIT (1955 27 ITR 700); IBM World Trade Corpn. V/s CIT (48 Taxman 11); the decision of Mumbai Tribunal ion ACIT V/s Sodexo Food Solutions India Private Ltd. (ITA Nos.5781/Mum/2016 & ors. dated 03/10/2018). The ratio of all the stated decisions support the conclusion that advances lost during the course of business would be business losses. Therefore, we are inclined to delete this addition. Ground No. 8 stands allowed.

Depreciation on DLP projector :

1 The assessee claimed depreciation on DLP projector @ 60% on the reasoning that DLP projector unit was a unique projector used in conjunction with laptop computers for making display and presentation. However, the Ld. AO restricted the depreciation to 25% which was the rate applicable to plant and machinery. The stand of Ld. AO, upon confirmation by Ld. CIT(A), is in further challenge before us by the assessee.

2 We find that DLP projector is a unique projector which is used in conjunction with Laptop computers for display and presentation. In other words, DLP projector is an output support device to the Laptop. Assessment Year: 2001-02 Therefore, DLP projector was to be used with a computer and its functions were integrated with the computer. This being the case, the assessee would be entitle for depreciation at the same rate as applicable to computer systems as held by Mumbai (Special Bench) of Tribunal in DCIT V/s Datacraft India Ltd. (40 SOT 295 09/07/2010). Hence, we would hold that the assessee was entitled for depreciation of 60% against this item. Ground No.11 stands allowed.

Income from House Property :

1 Upon perusal of Profit & Loss account, it transpired that assessee reduced expenditure by Rs.92.24 Lacs by way of recovery of cost of services rendered. The same was stated to be recovery of expenses from third parties towards share of administrative and other expenses like water, electricity, security charges, municipal taxes, garden maintenance etc. as these expenses were stated to have been incurred on premises jointly occupied by the company with third parties. These were recovered at actual cost and claimed to be not in the nature of income.

2 On the basis of said submission Ld. AO formed an opinion that part of assessee‟s immovable property was let out to third parties and accordingly show-caused assessee as to why rent receivable should not be taxed as rental income. The assessee explained that the assessee and Ciba Specialty Chemicals (India) Limited (CSCIL) jointly own the property. However, in the rejoinder, it was submitted that the assessee as well as CSCIL bears the costs related to the shared promises in the ratio of occupation of the premises. The assessee incurs the cost and recovers the proportionate expenditure from CSCIL. As a Assessment Year: 2001-02 part of mutual agreement, the respective companies had occupied the property jointly and shared the respective costs. The assessee by recovering the cost of shared premises does not stand to lose since occupation cost is recovered. However, Ld. AO opined that property owned by assessee was used by CSCIL for which no rent was reflected in the accounts of the assessee. The assessee owned the property and let out the same to CSCIL without charging any rent. No agreement was produced by assessee for use of premises by CSCIL. Therefore, the exact commercial consideration or the benefit other than rent, being derived by the assessee from the letting out of the premises, could not be ascertained. In the above background, Ld.AO proceeded to work out notional rent in terms of Section 22 of the Act. The assessee, without prejudice, contended that Municipal Rateable Value (MRV) of the premises was Rs.88,088/- for approx. 50,000 square feet of commercial and residential premises being used by CSCIL. However, Ld. AO opined that since the assessee had let out the property but did not charge the rent then in terms of decision of Hon‟ble Bombay High Court in M.V. Sonavala Vs. CIT (177 ITR 246) Bom.), it was possible for AO to take into consideration the amount for which the property might be let from year to year or AO could also consider the annual ratable value. Considering the market rate for commercial premises at Goregaon, the rates would be in the region of Rs.30/- per square feet per month and that of residential premises being Rs.15/- per square feet. Applying these rates to commercial area of 34,570 square feet and residential area of 15,278 square feet, Ld. AO arrived at ALV of Rs.124.45 Lacs for commercial space and Rs.27.50 Lacs for residential Assessment Year: 2001-02 space. The total ALV was thus determined at Rs.151.95 Lacs. The statutory deduction u/s 24 would not be allowed separately since the assessee did not indicate depreciation claimed in respect of let out property and also did not indicate quantum of repairs & maintenance claimed for this property. Further, both these expenditure were already claimed in the computation of income.

3 The Ld. CIT(A), while confirming the stand of Ld. AO, directed him to grant statutory deduction u/s 24(a). Aggrieved, the assessee is in further appeal before us.

4 The Ld. Counsel explained that assessee prior to its merger with Sandoz (India) Limited in 1997 was known as M/s Hindustan Ciba- Geigy Limited and it was carrying on the business at various locations in Mumbai & Goa including residential and office premises at Goregoan (Mumbai). The assessee had various business units among them being Chemical business unit. In the year 1997, the chemical business unit was demerged to form Ciba Specialty Chemicals (India) Limited (CSCIL). Earlier all the businesses of assessee were being carried out jointly at various premises utilizing common facilities and infrastructure. As per the arrangement of demerger, the immoveable property situated at Goregaon came to the assessee. However, since the speciality chemical business was also carried on from the same premises, CSCIL was allowed to occupy the residential and office premises earlier used by them for a certain period till CSCIL was able to identify and acquire alternate facility. As per the arrangement, CSCIL was to pay to the assessee share of expenses incurred for the maintenance of the property. The total recovery of such costs for the year stood at Rs.92.24 Assessment Year: 2001-02 Lacs which actually goes to reduce the expenditure debited to Profit & Loss Account. It was further explained that from AYs 1997-98 to 2000- 01, the same arrangement continued and Ld. AO did not dispute the fact that the property stood occupied by the assessee for the purposes of its business and hence, was not liable to be assessed as „Income from House Property‟. For this, the attention was drawn to the assessment orders for AYs 1997-98 to 2000-01. Therefore, there being no change in facts, it was not open for Ld. AO to take a different view in the matter. In terms of Sec. 23(1), the income could not be assessed as „Income from House Property‟ if the property was occupied by the assessee for its business. The buildings have been used by both the entities for their respective businesses. Upon demerger, CSCIL could not have been asked to vacate the said premises immediately. They were allowed to occupy the premises for the purpose of their business for a reasonable time till they were able to find an alternate facility. Therefore, the arrangement should be viewed as occupation of the property by assessee for its own business. In the alternative, Ld. Sr. Counsel submitted that the annual value could not exceed municipal retable value in terms of various judicial decisions and not in the manner as estimated by Ld. AO. Another alternative argument was that the amount of Rs.92.24 Lacs recovered by the assessee from CSCIL ought to have been reduced from notional rental value as computed by the Ld. AO.

5 We have carefully considered the peculiar facts of the case. It is noted that prior to its demerger, the assessee was carrying on various businesses from various premises including premises at Goregaon (Mumbai). In 1997, the chemical business got demerged from the Assessment Year: 2001-02 assessee and new entity i.e. CSCIL came to existence to carry out the chemical business. Since the business was continuing, as a part of demerger arrangement, CSCIL was allowed to use the said premises on the basis that costs would be shared. M/s CSCIL has paid proportionate cost of Rs.92.24 Lacs to the assessee during the year which has actually gone to reduce the assessee‟s expenditure under the head municipal taxes, water charges and security charges. Therefore, it was not a case where the property was actually let out by the assessee to a third-party but was a case wherein to facilitate demerger and to ensure smooth running of existing business, an arrangement was made between the assessee and its demerged entity that the business premises would be shared with an understanding that the proportionate cost would be recovered from the demerged entity till the time an alternative facility was arranged by the demerged entity. This being the case, it could very well be said that the premises was being used by the assessee only in furtherance of its business interest, the objective of which was to facilitate demerger. It is quite discernible that this similar arrangement is continuing since AYs 1997-98 onwards and such an arrangement has never been disturbed by Ld. AO while framing assessment for AYs 1997- 98 to 2000-01 which is evident from extract of assessment orders of those years as placed on record. Therefore, rule of consistency would operate in assessee‟s favor and the facts being identical, Ld. AO was not justified in disturbing such an arrangement. Therefore, on the peculiar facts and circumstances, the action of Ld.AO in bringing to tax notional rental value of the common premises was not justified. We order so. Assessment Year: 2001-02 Ground No. 10(a) stands allowed which makes Ground Nos. 10(b) & 10(c) infructuous.

Deduction u/s. 80HHC

1 The assessee claimed deduction u/s 80HHC for Rs.177.76 Lacs. It transpired that for the purpose of computation, the assessee did not include sales tax and excise duty in total turnover. The Ld.AO opined that these components would be includible as per the decision of Mumbai Tribunal in Ponds India Ltd. V.s DCIT (164 ITD 33). The department was in further appeal against the favorable decision of Hon‟ble Bombay High Court in Sudarshan Chemical Industries Ltd. (245 ITR 769). Therefore, these items were to be included in computing the figure of total turnover in denominator.

2 It was further seen that while working out profits of the business, the assessee failed to exclude 90% of the following items on the ground that the same were not in the nature of receipts mentioned in explanation (baa) of Sec.80HHC: - No. Item Amount (Rs.)

09 Lacs

Interest on overdue debtors

91 Lacs

Interest on MSEB deposits

03 Lacs

Interest on MIDC deposits

18 Lacs

Interest on Sales Tax Refund

69 Lacs

Interest on Income Tax Refund (gross)

18 Lacs

Sales Tax Set-off

86 Lacs

Insurance Claims realized

61 Lacs

Cash Discount

36 Lacs

Scrap Sales Income

58 Lacs

Misc. Claims

26 Lacs

Excise duty Refund

95 Lacs

PDC equipment Lease

34 Lacs

Conversion Charges

83 Lacs

Other Misc. write backs

38 Lacs

Profit on Sale of R & D Assets

62 Lacs

Cost of Services recovered from CSCIL

24 Lacs Assessment Year: 2001-02 Total 2527.38 Lacs

3 The Ld. CIT(A), following decision of Hon‟ble Apex Court in Lakshmi Mills (290 ITR 667) directed Ld. AO not to include sales tax and excise duty in total turnover for the purpose of computing deduction u/s 80HHC. Regarding scrap sales, if the proceeds were out of scrap sales of raw material then they were to be excluded from total turnover. However, scrap sale of packing material was to be included as per the decision of Hon‟ble Bombay High Court in Sudarshan Chemical Industries Ltd. (245 ITR 769).

4 Proceeding further, Ld. CIT(A), relying upon the decision of Hon‟ble Apex Court in Pandian Chemicals Ltd. V/s CIT (262 ITR 278) which held that the term „derived from‟ must be understood as something which has a direct or immediate nexus with the assessee‟s industrial undertaking, held that the tabulated receipts were not directly derived from export activities and therefore, the same should not form part of the eligible profits. Another plea that only net receipts should be reduced was also dismissed. Aggrieved, the assessee is in further appeal before us.

1 Upon perusal of statutory provisions, we find that sub-section (1) of Sec. 80HHC provides for certain deduction to a person who is engaged in the business of exports. Such deduction is of profits derived by the assessee from the export of goods or merchandise. Sub-section Assessment Year: 2001-02 (3) thereof provides the formula for determining such profits derived from exports. Clause (c) as applicable to manufacturer exporter as well as trading exporter, provides that profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee. “Adjusted profits of the business” would mean the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub-section (3). Finally, the profits of the business as defined in Explanation (baa) below sub-section (4C) would mean as follows: - (baa) “profits of the business” 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 ;

2 The Hon‟ble Bombay High Court in CIT V/s Pfizer Ltd. (2010 233 CTR 521), considering its earlier decision in CIT V/s Dresser Rand India (P) Ltd. (2010 232 CTR (Bom.) 52—Ed.) as well as the decision of Hon‟ble Apex Court in CIT V/s K.Ravindranathan Nair (2007 165 Taxman 282), held as under: - Re : Question A 3. The assessee engages in the manufacture of Pharmaceuticals and animal health products. For the assessment year in question the assessee claimed a deduction under section 80HHC. The AO, while computing the deduction excluded 90 per cent of the amount of an insurance claim which was related to the stock-in-trade of the assessee. The CIT(A) confirmed the order of the AO. The Tribunal noted that for assessment year 1998-99 it had come to the conclusion that there was no justification to exclude 90 per cent of the insurance claim. Besides this, the Tribunal held that the insurance claim formed part of the income of the business of the assessee and was liable to be considered as part of the profits of the business in view of Expln. (baa) to section 80HHC. The Tribunal was of the view that the insurance claim was not in the nature of brokerage, commission, interest, rent or charges, and therefore, was not any other receipt of a similar nature within the meaning of Expln. (baa). The Tribunal, therefore, held that 90 per cent of the insurance claim could not be excluded.

Counsel appearing on behalf of the Revenue submits that an insurance claim constitutes an independent income which is not relatable to the export turnover. Hence, it has been urged that 90 per cent of the insurance claim is liable to be excluded from the profits of the business under Expln. (baa) to section 80 HHC. Reliance was sought to be placed in this regard on the judgment of the Supreme Court in CIT v . K. Ravindranathan Nair [2007] 213 CTR (SC) 227 : [2007] 165 Taxman 282 (SC).On the other hand it was urged on behalf of the assessee that a contract of insurance indemnifies the insured for a loss that has occurred, in the present case to the stock-in-trade. Learned ; counsel submitted that the claim for insurance on account of the stock-in-trade, hence, did not constitute an independent item of income similar to commission, interest, rent, brokerage or other charges: On this foundation it has been urged that the insurance claim would not be susceptible to a deduction of 90 per cent under Expln. (baa).

(At the outset it would be necessary for the Court to advert to the judgment of this Division Bench dt. 8th April, 2010 in the CIT v. Dresser Rand India (P) Ltd. (IT Appeal No. 2186 of 2009) [reported at [2010] 39 DTR (Bom) 169 : [2010] 232 CTR (Bom.) 52—Ed.]. The question of law which was formulated in the appeal by the Revenue was as follows :

This Court by its decision held that in terms of the judgment of the Supreme Court in Ravindranathan Nair (supra) the issue of processing, charges would stand covered by the decision. This Court noted that the Supreme Court had held that the processing charges, though they form a part of the gross total income, constitute independent income like rent, commission and brokerage and that hence 90 per cent of the same had to be reduced from the gross total income to arrive at business profits. The concluding para of the judgment of this Court records the concession of counsel appearing on behalf of the assessee that the discussion in respect of the issue in regard to processing charges as an independent income unrelated to export, would similarly apply to the other issues raised in the question of law framed by the Revenue viz. in regard to recovery of freight, insurance and packing receipts, sales-tax refund and service income. The question of law was therefore answered in favour of the Revenue and against the assessee. From this it is apparent that insofar as the insurance claim was concerned, Dresser Rand (supra) proceeded on a concession by counsel appearing on behalf of the assessee. That apart the facts do not contain an elaboration of the nature of the insurance claim in that case. The judgment of the Division Bench in Dresser Rand (supra) would therefore not conclude the issue which has fallen for determination in this appeal.

Sub-section (1) of section 80HHC contemplates a deduction to an assessee, being an Indian company or a person resident in India and engaged in the business of export out of India of any goods or merchandise to which the section applies. The deduction is to be allowed in computing the total income of the assessee to the extent of the profits derived by the assessee from the export of such goods or merchandise. Clause (a) of sub-section (3) of section 80HHC provides the formula for determining the profits derived from the export of goods or merchandise to which the section applies. Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export "shall be the amount which bears to the profits of the business", the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, the proportion between the export turnover and the total turnover of the business is applied to the profits of the business in order to determine the extent to which the profits are to be regarded as being derived from export.

It would be necessary to advert to Expln. (baa) which defines the profits of business as follows : "(baa) 'profits of the business' 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) and (iiic) 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 Assessment Year: 2001-02 assessee situate outside India."

Under Expln. (baa), the profits of business are defined to mean the profits of business as computed under the head of profits and gains of business or profession. This has to be reduced under clause (1) by ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic ) of section 28 which are in the nature of incentive incomes or "of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits". Receipts by way of brokerage, commission, interest, rent or charges have been held, by the judgment of the Supreme Court in Ravindranathan Nair case (supra) to constitute independent incomes. Being independent incomes unrelated to export, Parliament contemplated that ninety per cent of such receipts would have to be reduced from the profits of business as defined in Expln. (baa). The rationale is explained in the following observations of the Supreme Court : "That, profit incentives and items like rent, commission, brokerage, charges etc., though formed part of gross total income had to be excluded as they were 'independent incomes' which had no element, of export turnover. That, the said items distorted the figure of export profits." Again, in para 21 the Supreme Court observed as follows : "The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of sections 28 to 44D of the IT Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business, profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent, charges, etc. formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover."

In determining in each case as to whether a receipt which forms part of the profits of business is liable to undergo a reduction of ninety per cent as stipulated in clause (1) of Expln. (baa), it is necessary for the Court to consider whether the receipt is "of a similar nature included in such profits". The rationale for excluding ninety per cent of the receipts by way of brokerage, commission, interest, rent or charges is that these are independent incomes and their inclusion in the profits of business would result in a distortion. In determining whether any other receipt-is liable to undergo a reduction of ninety per cent the basic prescription which must be borne in mind is whether the receipt is of a similar nature and is included in the profits of business. To be susceptible of a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges.

In the present case, the insurance claim, it must be clarified, related to the stock- in-trade and it is only an insurance claim of that nature which forms the subject matter of the appeal. Now, it cannot be disputed that if the stock-in-trade of the assessee were to be sold, the-income that were to be received from the sale of Assessment Year: 2001-02 goods would constitute the profits of the business as computed under the head of profits and gains of business or profession. The income emanating from the sale would not be sustainable to a reduction of ninety per cent for the simple reason that it would not constitute a receipt of a nature similar to brokerage, commission, interest, rent or charges. A contract of insurance is a contract of indemnity. The insurance claim in essence indemnifies the assessee for the loss of the stock-in- trade. The indemnification that is made to the assessee must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-in-trade. In these circumstances, we are clearly of the view that the insurance claim on account of the stock-in-trade does not constitute an independent income or a receipt of a nature similar to brokerage, commission, interest, rent or charges. Hence, such a receipt would not be subject to a deduction of ninety per cent under clause (1) of Expln. (baa). 11A. Counsel appearing on behalf of the Revenue submitted that the insurance claim has no element of export turnover and that consequently it must sustain a reduction of ninety per cent under Expln. (baa). Now it is necessary to note that Expln. (baa) in terms does not refer to export turnover. Sub-section (1) of section 80HHC contemplates a deduction to the extent of profits derived by the assessee from the export of goods or merchandise to which the section applies. The basic issue therefore is to determine the extent of profits derived by the assessee from the export of such goods or merchandise. The formula in sub-section (3) of section 80HHC has been provided by the Parliament, for the purposes of sub-section (1) to compute the profits derived from the export of goods. Clause (a) of sub-section (3) specifies that where the export is of goods or merchandise manufactured or processed by the assessee the profits derived from the export shall be the amount which bears to the profits of business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, in determining the profits derived from the export of goods or merchandise the proportion of the export turnover to the total turnover of the business is applied to the profits of the business. The profits of the business in turn are defined in Expln. (baa) to section 80HHC. Hence, the element of export turnover is a facet which has been taken care of by the legislature in the application of the formula which is referred to in sub-section (3) of section 80HHC. In determining the profits of the business for the purposes of Expln. (baa), the incomes which are susceptible to a reduction of ninety per cent are those which are specifically prescribed by the legislature. These are inter alia the incomes referred to in clauses (iiia), (iiib) and (iiic ) of section 28 and receipts by way of brokerage, commission, interest, rent, charges or receipts of a similar nature included in such profits. Therefore, before a receipt is liable to be excluded to the extent of ninety per cent, it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. For the reasons which we have already indicated, we have come to the conclusion that the claim on account of insurance for the stock-in-trade did not constitute a receipt of a similar nature within the meaning of Expln. (baa) and was therefore not liable to be reduced to the extent of ninety per cent. The first question will therefore not raise any substantial question of law. In terms of above decision, the vital test to determine the exclusion or inclusion of an item would be whether it was an independent income Assessment Year: 2001-02 having no nexus with export turnover. The objective was to avoid distortion in the figure of export profits.

3 In the background of statutory provisions as well as the principle laid down by Hon‟ble Courts as above, our adjudication to each of the item would be as follows: - Interest on employee’s loan-The interest arises from the fact that the assessee has granted loans to its employees as an incentive to retain their loyalty towards business enterprises. The employees are connected with the business of manufacture and sale of pharmaceuticals. Interest on overdue debtors- This income has arisen to the assessee because the customers have delayed the payment of debts within the stipulated credit period allowed to them. The interest so charged could not be said to be an independent source of income but could be said to have arisen only out of normal business operations only. Interest on deposit with MSEB & MIDC- The income arises on account of deposit placed by the assessee with MSEB for obtaining power connections to run the manufacturing facility. Similarly, deposits with MIDC have been placed for obtaining land on which manufacturing facility would be set up. Unless the deposits are placed the assessee would not be able to manufacture the goods. Thus, the deposits have been placed only out of business compulsion. Insurance Claims- These represents claims allowed by insurance company in respect of loss of trading goods. A contract of insurance is in the nature of indemnity and indemnifies the assessee for loss of stock-in- trade. Had the goods not been destroyed, the same would have been sold at profits and therefore, the insurance claims are compensatory in Assessment Year: 2001-02 nature. The claims could not be said to be an independent source of income for the assessee and could not be equated with „receipts of similar nature‟ as mentioned in explanation (baa). Scrap Sales Income- This income arises from the sale of packing material and other material realized during manufacturing process and directly related with manufacturing activities of the assessee. Cash Discount- This represent discount received by the assessee on early payment to suppliers in respect of purchase of goods. These are directly related to normal trading operations and could not be said to be an independent source of income. Equipment lease rentals- represent amount received by assessee on lease of packing machines & other equipment to licensed manufacturers who are carrying on the manufacturing activity for the assessee. Conversion Charges- These charges are directly related to assessee‟s manufacturing activity. Write back of liabilities- These are the write-back of expenditure which were early shown payable but no longer required to be paid. The write- backs are not in the nature of actual receipts but reversal of early provisions. Cost of Services Recovered- The cost of services refers to recovery of costs in the nature of Municipal Taxes, Security and Electricity Charges of a shares premises between the assessee and CSCIL. These expenses have first been paid by the assessee and later on recovered from CSCIL. These are mere recoveries of expenses from associate concern. Assessment Year: 2001-02 Profit u/s 41(3) on sale of R & D Assets – The research & development activity is directly connected with manufacturing activities and could not be said to be independent source of income for the assessee. Misc. Claims- These are petty claims arising out of business activity. We are of the considered opinion that all these items would form part of Profits of business and accordingly, not required to be reduced while computing deduction u/s 80HHC.

4 The remaining items have been dealt with as under: - Interest on Sales Tax Refund & Income Tax Refund (Gross)- It has been argued that these receipts would not be an independent source of income. Reliance has been placed on the decision of SMC bench of Jaipur Tribunal in Wolkem India Ltd. V/s CIT (65 TTJ (JP) 68). However, we are of the considered opinion that interest on Income Tax Refund arises to the assessee only because it has paid more taxes than what was required to be paid. The same accrues to the assessee as compensation for excessive payment to the revenue and has nothing to do with business operations. Similar is the situation with interest on sales tax refund. Both these items, in our opinion, would be covered by explanation (baa) and accordingly, required to be reduced to the extent of 90% while computing profits of the business. However, as per the decision of Hon‟ble Apex Court in ACG Associates Capsules Pvt. Ltd. V/s CIT (334 ITR 89), netting-off would be available to the assessee. The Ld. AO is directed to re-work the same. Sales Tax Set-off & Excise Duty refund- These two items would stand excluded in view of the fact that as per the impugned order, sales tax as Assessment Year: 2001-02 well as excise duty would not form part of total turnover in the denominator. When denominator has been reduced by these two components, similar connected items would stand excluded from the numerator also.

5 The Ld. AO is directed to re-compute the deduction available to the assessee u/s 80HHC in the light of our adjudication on various issues effecting computations u/s 80HHC. Ground No.9 of assessee‟s appeal stand partly allowed.

Computation of book profit u/s. 115 JB (Assessee‟s Grounds) In Ground No. 12, the assessee is seeking exclusion of sum of Rs.515.06 Lacs while computing Book Profits u/s 115JB since these have been offered to tax under normal computation and taxed by Ld. AO in earlier years. This ground was taken as additional ground before Ld. CIT(A). From the impugned order, it appears that certain items viz. expenses disallowed u/s 43B, write-off of property, provision of debts & expenses etc. has been disallowed by the assessee in earlier AYs 1999- 2000 & 2000-01 while computing income under normal provisions. The same were accepted by Ld.AO in those years. However, the assessee is seeking reduction of Book-Profits in the current year by the said amount as offered in earlier years. Upon perusal of impugned order, we find that this issue was not dealt with by Ld. AO and adequate factual matrix of the issue is not discernible from the orders of lower authorities. Therefore, we restore this issue to the file of Ld. AO for adjudication after appreciating the facts of the issue. The assessee is directed to substantiate the same. This ground stand allowed for statistical purposes. Assessment Year: 2001-02

Computation of book profit u/s. 115 JB (Revenue‟s Grounds)

1 It transpired that the assessee paid tax on Book Profits u/s 115JB. However, it was noted that the assessee made certain adjustments while computing Book Profits which were not found acceptable by Ld. AO. The items which are subject matter of dispute by revenue before us would stand adjudicated as under:- (i) Wealth Tax debited to profit & Loss Account The assessee made provision of wealth tax liability for Rs.243.73 Lacs but did not add back the same while computing Book Profits. This was on the ground that the assesse made provision of wealth tax liability on the basis of stand adopted by the department in valuation of wealth in earlier assessment years. The Ld. AO opined that the liability would become ascertained only when the demand is raised by the department upon finalization of wealth tax assessment. Until such time, the provisions retain the character of contingent liability. Therefore, it was added back to the Book Profits. The Ld. CIT(A) opined that there was no provision to add back wealth tax and therefore, the same was not to be added back while computing Book-Profits. Reliance was placed, inter-alia, on the decision of Hon‟ble Bombay High Court in CIT V/s Echjay Forgings P. Ltd. (251 ITR 15). Aggrieved, the revenue is in further appeal before us. We find that since Ld. CIT(A) has relied upon the decision of juri ictional High Court while adjudicating the issue and therefore, our interference is not called for. No contrary decision has been placed on record. (ii) Provisions for diminution in value of investments Assessment Year: 2001-02 The assessee debited an amount of Rs.12 Lacs being diminution in value of investment but did not add back the same while computing book-profits. The Ld. AO treating the same as contingent liability, increased the Book-Profits to that extent. The Ld. CIT(A), relying upon Tribunal‟s decision in N.W. Exports 34 BCAJ 1368 Mumbai Tribunal) as well as the decision of Kolkata Tribunal (SB) in JCIT V/s Usha Martin {288 ITR (AT) 62 SB-Kol)}, held that the same was not to be added back while computing Book-Profits u/s 115JB. Aggrieved, the revenue is in further appeal before us. In view of insertion of clause (i) to Explanation- 1 to Section 115JB(2) by Finance Act, 2009 w.r.e.f. 01/04/2001 which envisages that book profits are to be increased by the amount or amounts set aside as provision for diminution in the value of any asset, we restore this issue back to the file of Ld.AO to ascertain the nature of provision and re-adjudicate the same considering the statutory provisions. (iii) Interest levied u/s 234C The assessee debited interest paid u/s 234C for Rs.52.54 Lacs being interest levied u/s 234C and sought reduction in Book-Profits to that extent. However, Ld. AO opined that interest partake the character of taxes and therefore, it was to be added back to Book-Profits. The Ld. CIT(A) concurred with assessee‟s submission that tax would not include interest and therefore, interest u/s 234C was not to be added back in computing Book-Profits. Reliance was placed on the decision of this Tribunal in Insilco Ltd. V/s JCIT (Delhi Tribunal 85 TTJ 538). Aggrieved, the revenue is in further appeal before us. Assessment Year: 2001-02 We find that this issue is covered in assessee‟s favor by the cited decision of Delhi Tribunal. No contrary decision is on record and therefore, we find no reason to interfere in the impugned order, on this issue.

2 Ground No.6 of revenue‟s appeal stand partly allowed for statistical purposes.

Adjustment of Book Profits vis-à-vis deduction u/s 80HHC

1 In Ground No.7, the revenue is aggrieved by directions of Ld. CIT(A) which directed Ld. AO to consider the profits eligible for deduction u/s80HHC instead of allowable deduction u/s 80HHC for the purpose of computing Book-Profits u/s 115JB. This dispute arises in view of the fact that in this year, the assessee was eligible to claim deduction u/s 80HHC to the extent of 80% of eligible profits. While computing Book-profits u/s 115JB, the assessee reduced the book profits by the amount of profits eligible for deduction u/s 80HHC and not by the amount of deduction actually claimed u/s 80HHC. The assessee submitted that as per explanation (iv) to Section 115JB, the profits eligible for deduction u/s 80HHC were to be reduced. However, rejecting the same, Ld.AO opined that the Book profits were to be reduced only to the extent of deduction allowed u/s 80HHC and not the profits on which the deduction has been claimed.

2 The Ld. CIT(A) concurred with assessee‟s submissions and allowed this issue. Aggrieved, the revenue is in further appeal before us.

3 We find that this issue is covered in assessee‟s favor by the decision of Hon‟ble Supreme Court in Ajanta Pharma Ltd. V/s CIT (CA No.7518 of 2010 dated 09/09/2010) and therefore, no interference is Assessment Year: 2001-02 required in the impugned order, on this issue. Ground No.7 & 8 of revenue‟s appeal stand dismissed.

Applicability of interest u/s Section 234D

1 Before Ld. CIT(A), the assessee assailed the action of Ld.AO in charging interest u/s 234D by submitting that interest was not leviable. Further, the interest if any which is to be charged, would be chargeable only on tax refunded at the time of summary assessment and no on interest granted u/s 244A. A plea was also made to direct Ld. AO to apply correct rates of interest chargeable u/s 234D. This was in the background of the fact that Section 234D was inserted only w.e.f. 01/06/2003 and therefore, it would apply only from AY 2004-05. 22.2 However, Ld. CIT(A) opined that interest was chargeable w.e.f. 01/06/2003 and there was no mention of any assessment year. Hence, any proceedings which are completed after 01/06/2003 would be very much covered by the provisions of Sec.234D. Accordingly, the grounds raised by the assessee was dismissed. Aggrieved the assessee is in further appeal before us.

3 The Ld. Sr. Counsel pleaded that interest u/s 234D was to be charged only in respect of the tax component of amount received pursuant to intimation issued u/s 143(1) and not on the interest granted u/s 244A. The provisions of Sec.234D, enable charging of interest only in respect of amount refunded. „Refund‟ would mean returning back of something which was paid earlier. Pursuant to intimation received u/s 143(1), the assessee has received refund of excess tax paid by him. The interest received at that point of time u/s 244A could not be regarded as refund. The Ld. Sr. Counsel distinguished the decision of Hon‟ble Assessment Year: 2001-02 Bombay High Court in Suresh B.Jain V/s PKP Nair (194 ITR 148) which held that interest would include the amount of interest. It has been submitted that this decision was rendered in the context of Sec.245 wherein refund could be set-off against the demand. It could not be said that for the purposes of Sec.245, the adjustment of refund could be only in respect of tax and not of the interest component. The Ld. Sr. Counsel also submitted that the interest ought to have been charged from 01/06/2003 only i.e. from the date on which Sec.234D was inserted and not from the date of intimation issued u/s 143(1). Reliance has been placed on the decision of Hon‟ble Kerala High Court in CIT V/s Kerala Chemicals & Proteins Ltd. (323 ITR 584).

1 So far as the applicability of the provisions of Sec.234D to this year is concerned, we find that the same would squarely apply to the assessee in terms of decision of Juri ictional High Court in CIT V/s Indian Oil Corp. Ltd. (25 Taxmann.com 284) wherein Hon'ble Court has negated the view of Delhi Tribunal (SB) in ITO V/s Ekta Promoters P. Ltd. (113 ITD 719) and held as under: -

It must be borne in mind that refund which is granted under section 143(1) of the Act to an assessee is qua an assessment proceeding for a particular assessment year. The refund granted is qua an assessment year. The refund emanates from assessment proceedings for a particular assessment year. The refund granted cannot be divorced from the assessment year or the assessment proceeding. Consequently to hold that interest on such refund would only run from 1/06/2003 would be to curtail the plain meaning of Explanation 2 to Section 234D.

Section 143(4) also supports our view. It reads as under :- "Section 143 - Assessment – ** ** ** (4) Where a regular assessment under sub-section (3) of this section or section 144 is made,- Assessment Year: 2001-02 (a) any tax or interest paid by the assessee under sub-section (1) shall be deemed to have been paid towards such regular assessment; (b) if no refund is due on regular assessment or the amount refunded under sub- section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly". It is clear therefore, that excess refund determined under section 143(3) of the Act is deemed to be tax payable by the assessee. However, as there was no provision of interest on the grant of refund under Section 143(1) of the Act it became necessary to provide for the same by having a charging provision. This was done by section 234D of the Act in respect of all pending assessments in which refund was given. Thus even if, a refund has already been granted the same would be subject to the provisions of section 234D of the Act. Under section 234D(1) where the refund under section 143(1) is in excess of the amounts refundable on regular assessment, interest on the excess amount would be payable. In any case after the introduction of Explanation 2 there can be no doubt that even where refund is granted prior to 1/06/2003 the same would carry interest provided the proceedings for assessment are completed after 1/06/2003. The respondent has not contended that the Explanation 2 to section 234D of the Act is not retrospective. Their only contention is that it would not apply to refunds granted prior to 1/06/2003 even in respect of assessments completed after the cut-off date of 1/06/2003. This submission ignores the fact that Explanation 2 which is declaratory in nature clarifies that the section would apply to an assessment year even before 1/06/2003 provided the proceedings in respect of such assessment years are not completed by the cut off date i.e. 1/06/2003. 24. Mr. Murlidhar further submitted that even if section 234D is applicable to all refunds paid prior to 1/06/2003 in respect of assessments completed post 1/06/2003 interest payable on such refund would commence only from 1/06/2003 onwards. He relied upon the decision of Kerala High Court in CITv. Kerala Chemicals & Proteins Ltd. [2011] 9 taxmann.com 295. 25. The aforesaid decision was rendered prior to the introduction of Explanation-2 to section 234D of the Act. The Kerala High Court which had no occasion to consider Explanation 2 held that as the provision of interest is not introduced with reference to any assessment year, it must be taken to apply only with effect from 1/06/2003. This submission of the respondent-assessee would require limiting the clear words of a declaratory amendment in an Explanation 2 to section 234D of the Act which specifically provides that it shall also apply to an assessment year commencing before 1/06/2003. The only qualifying criterion is that proceedings in respect of such assessment is completed after 1/06/2003. Once the Explanation is held to be retrospective in relation to the assessment years commencing before 1/6/2003 it would not be open to restrict the operation of section 234D of the Act only with effect from 1/6/2003. 26. A statute could be retrospective in operation being expressly stated or by necessary implication. The case of the revenue is that section 234D as introduced on 1st June, 2003 was retrospective in operation by necessary implication. However, as doubts were raised about its retrospectivity, the same was clarified by adding an Explanation to section 234D by Finance Act, 2012. Under the Act what is brought to tax is not the income of the assessee in the assessment year but the income of the assessee in the previous year. The liability to tax arises on account of the Finance Act which fixes the Assessment Year: 2001-02 rate at which the tax is to be paid. The law to be applied is as existing on the 1st day of April of the previous year. In support the Counsel for the respondent relied upon the decision of the Supreme Court in Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 , Maharajah of Pithapuram v. CIT [1945] 13 ITR 221 (PC) and CIT v. Scindia Steam Navigation Co. Ltd, f 1961142 ITR 589 (SO. The aforesaid decisions are not relevant for our purpose particularly, in view of the fact that Explanation 2 to section 234D of the Act as introduced by the Finance Act,2012 being declaratory in nature would be retrospective. This amendment make it cleat that it shall apply assessment years even prior to 1/06/2003. 27. In view of the above, we hold that the decision of the Tribunal in /TO v. Ekta Promoters (P.) Ltd. [2008] 113 ITD 719 (Delhi) (SB) which has been followed in the impugned order by the Tribunal is not correct. One more aspect of the matter which must be borne in mind is that till such time as the assessment proceedings are completed in respect of any assessment year, the amendment made to the Act would be applicable even in case of pending proceedings. It is not the case of the respondent that the proceeding in regard to refund which has been granted under section-143(1) of the Act are concluded and final. The refund which has been granted under section 143(1) of the Act is provisional, to be finally determined when final assessment order is passed under section 143(3) of the Act. Explanation-2 to section 234D of the Act makes it clear that it would be applicable to pending proceedings i.e. where assessments in respect of such assessment year is not completed on 1/6/2003. 28. Mr. Suresh Kumar submitted that as an assessee is entitled to interest where there is any delay in making the refund, it is only fair that an assessee who has enjoyed the benefit of excess refund granted to it must refund the same along with interest from the date of receipt of refund to the date of final assessment. The Apex Court in Sandvik Asia Ltd. v. C/Tr2006] 150 Taxman 591 granted interest on delayed payment of interest by the revenue to the assessee. Considering the view we have taken, it is not necessary to decide this question based on equitable grounds.

In view of the above, the question of law is answered in the negative i.e. in favour of the appellant-revenue and against the respondent-assessee. Upon perusal of the same, we find that Hon'ble Court has held that the provisions of Sec.234D would apply to pending proceedings also. Further, it would not be open to restrict the operation of Section 234D of the Act only with effect from 01/06/2003. The decision of Hon'ble Kerala High Court in CIT V/s Kerala Chemicals & Proteins Ltd. (supra) as cited by Ld. Sr. Counsel has already been considered therein. Taking the same view, we would hold that the provisions of Sec.234D would apply to the assessee. The interest would run from the date of grant of refund Assessment Year: 2001-02 u/s 143(1). However, the interest would be chargeable at correct rates. Accordingly, we direct Ld. AO to compute interest u/s 234D at correct rates from the date of grant of refund u/s 143(1).

2 Now, the only question that would survive for our consideration is that whether the assessee would be liable to pay interest u/s 234D on the interest granted in an intimation u/s 143(1) or not. The Ld. Sr. Counsel has pleaded that only tax could have been refunded to the assessee and interest was only a consequential as well as compensatory in nature and therefore, the same could not be refunded to the assessee. Therefore, the interest which was to be computed would be only with respect to tax as refunded to the assessee in an intimation u/s 143(1).

3 We find that as per the provisions of Sec.234D, where any refund is granted to the assessee u/s 143(1) and no refund is due on regular assessment or the amount refunded u/s 143(1) exceeds the amount refundable on regular assessment, the assessee would be liable to pay interest on the whole or the excess amount so refunded. We find that the expression used in Sec. 234D is 'amount refunded' and not 'tax refunded'. Clearly the intention is to charge interest on excess amount refunded to the assessee either by way of refund of tax or by way of interest. Our view is fortified by the provisions of Sec. 143(4) which provides that if no refund is due on regular assessment or the amount refunded under sub-section (1) exceeds the amount refundable on regular assessment, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee and the provisions of this Assessment Year: 2001-02 Act shall apply accordingly. The expression again used is 'amount refunded' and not 'tax refunded'.

4 The Ld. Sr. Counsel has sought distinction of the judgment of Hon'ble Bombay High Court in Suresh B.Jain V/s PKP Nair (supra) by submitting that the same was rendered in the context of Sec.245 of the Act and therefore, would not apply to Sec.234D. The relevant portion of the judgment read as under: The argument of Mr. Mistry is that a careful reading of this provision of law shows that the set-off and adjustment towards the remaining tax liability of an assessee could be made only against the amount of "refund" due to an assessee and any amount of "interest" payable to such an assessee which does not form part of "refund" cannot be adjusted against the tax liability. In order to substantiate his argument, Mr. Mistry submitted that the word "refund" is not defined in the Income-tax Act but its meaning as found in the Oxford English Dictionary, Second Edition, Vol. XIII, at pages 493-494 are: (1)to pour back, pour in or out again (2)to give back, restore (3)to put back into something antecedent (4)to make return or restitution of (a sum received or taken) ; to hand back, repay, restore (5)to reimburse, repay (6)to make repayment." Mr. Mistry also referred to Webster's Third New International Dictionary, at page 1910, in which the meaning of the word "refund" is given as "(1) to pour back, give or put back, (2) to return (money) in restitution, repayment or balancing of accounts" and submitted that, for the purpose of refunding, one has to be funded first and so long as the amount of interest is concerned, the petitioner had not funded the Department of Income-tax with anything and, therefore, the payment of interest cannot be equated with the payment of refund. Mr. Mistry also pointed out sections 237, 240, 243 and 244(1A) of the Income-tax Act and canvassed that "refund" is distinctly understood in the income-tax law and it could not be the same as "interest". The argument of learned counsel is that "refund" arid "interest" are two different things under the Income-tax Act and that they cannot be mixed up while interpreting section 245. Mr. Mistry also relied upon a ruling of the Madras High Court in M.A. Khader and Co. v. Deputy Commercial Tax Officer [1970] 25 STC 104 in support of his argument and drew my attention to the observations made by their Lordships of the Madras High Court that, in common law, only a person who had paid tax can ask for refund, if he is statutorily entitled to it and it would be strange if the dealer who paid the Central sales tax is permitted to obtain a refund of the local tax which he did not pay. The argument of Mr. Mistry appears to be attractive but I am unable to persuade myself to agree with him for the simple reason Assessment Year: 2001-02 that, while interpreting the provisions of section 245 of the Income-tax Act, we cannot give such a restricted meaning to the word "refund". It is important to bear in mind in this connection that the expression "refund" is a commonly understood generic term which refers to the payment by the Income-tax Department of any amount due to an assessee and it does not mean only the return of an excess amount "paid" to the Department by an assessee. The Income-tax Act envisages several situations where amounts are to be paid to the Department or by the Department which include income- tax, penalty, interest, etc., for any assessment year, arrears in respect of these items for earlier years, amounts under any head wrongly paid or paid in excess, amounts pertaining to one person considered in another's hands and, while computing the tax liability or penalty for any year, separate notices are issued for different items but the demand or refund is made of the net figure which cannot, therefore, be identified as tax, penalty, etc., as such. The Income-tax Act is a wholesome statute aimed at levy and collection of the net tax liability of an assessee in which different operations are involved such as payment or receipt of interest, levy of penalty, waiver of interest or penalty which should not be treated as separate and independent activity but only as a part of an integrated scheme to levy and collect income-tax. I, therefore, find a lot of substance in the argument of Dr. Balasubramaniam that interest paid on refunds should not be treated in isolation and that the concept of the word "refund" does not admit of a limited meaning but must be held to mean any amount payable by the Department to an assessee whether as and by way of "refund" or "interest". After all, the amount of interest payable to an assessee under section 244(1 A) is also an amount that is refunded by the Department to an assessee and if the same is not permitted to be adjusted under section 245, almost absurd, if not ridiculous, results may ensue inasmuch as the Income-tax Department would be required to pay a certain sum of money to an assessee on account of interest with one hand and take back the same amount as tax liability with the other. This may not only be inconvenient and cumbersome procedure for the Income-tax Department but may also put an assessee to unnecessary inconvenience and harassment in that one has to take the amount of interest with one hand and pay back the same amount to the Income-tax Department as tax liability with the other. Therefore, if a restricted and technical meaning is given to the word "refund" while implementing the provisions of section 245, no useful purpose would be served either of the Income-tax Department or of an assessee. There is, therefore, nothing wrong if interest payable to an assessee under section 244(1A) of the said Act is set off and adjusted against the tax liability of an assessee under section 245 as if the said amount was a refund due to an assessee. Thus, I find no substance in the argument of Mr. Mistry that "refund" and "interest" in the Income-tax Act are two different things.

5 Finally, this ground stands partly allowed for statistical purposes to the extent of application of correct rate of interest u/s 234D.

The Ld. AO is directed to re-compute assessee's total income under normal provisions as well as under Sec.115JB in terms of our above order. The interest u/s 234D would be charged as directed in the Assessment Year: 2001-02 order. The deduction u/s 80HHC would be computed on the lines as directed in the order.

The assessee's appeal stand partly allowed. The revenue's appeal stand partly allowed for statistical purposes. The assessee's cross- objections stands dismissed as infructuous.