1. This appeal by the assessee is directed against the Order of the CIT(Appeals)-VI, Mumbai. As many as 10 grounds have been raised in this appeal. The same are discussed and disposed of as follows: "The learned CIT(Appeals) erred in confirming disallowance of Rs. 12,245/- out of foreign traveling expenses." 3. Shri Vora, the learned Counsel for the Assessee submitted that the assessee company is engaged in the export of goods of various types and varieties. The Directors and Executives of the Company have to regularly travel abroad for the business purpose. In one of the trips, the spouse of Mr. Choudhary was requested to accompany Mr. Choudhary as it was necessary in the business interest so as to meet the customers etc. In this respect, reliance was placed on the decision of the I.T.A.T., Mumbai Bench in the case of Glaxo India Ltd. (18 ITD 236).
The learned Counsel for the Assessee also brought to our notice that in the earlier Asst. year ie., A.Y. 1989-90, the I.T.A.T., Bombay Bench has decided the matter against the assessee, in the assessee's own case in ITA No. 3114/BOM/1993 dated 10.1.2002. He, however, requested that the matter may be reconsidered.
4. On the other hand, Shri Joe Sebastian, the learned Departmental Representative relied upon the order of the learned CIT(Appeals) for the Asst. Year 1989-90 and the current year.
5. We have considered the rival submissions and perused the facts on record. Respectfully following the Order of the I.T.A.T., in assessee's own case for the earlier Asst. year cited supra, we decline to interfere and accordingly confirm the addition of Rs. 12,245/-. This ground of appeal, accordingly fails.
"The learned CIT(Appeals) erred in holding that the expenses of Rs. 92,717/- incurred by the appellant providing on lodging and boarding of foreign designers and buyers is an entertainment expense disallowable Under Section 37(2A) of the I.T. Act." 7. The assessee claimed a sum of Rs. 3,84,597/- under the head sale promotion expenses. Out of the above amount, a sum of Rs. 1,43,531/- was towards advertisement and remaining Rs. 2,41,066/- was towards sales promotion, details of which are as under:-Gift Articles ...
Rs. 17,337/-Expenses on boarding & lodgingOf foreign buyers ...
Rs. 92,717/-Other expenses incurred in variousHotels & restaurants ...
Rs. 1,31,010/- -------------- Total ...
Rs. 2,41,056/- -------------- 8. It was submitted before the Assessing Officer that the assessee being an export trade, various foreign delegates come to India for whom hotel rooms are engaged for exhibition of products. Number of employees employed during the course of exhibition is also substantial. Hence, major portion of the expenses has to be incurred on employees and rooms for display. The total disallowance offered in the return out of the above towards entertainment was Rs. 70,525/- and Rs. 11,637/- in respect of gift articles (above Rs. 50/=). Thus, the assessee itself offered more than 36% of the disallowance. The Assessing Officer, however, estimated an additional disallowance of Rs. 60,000/- on this account after considering allowable deduction under Section 37(2A), making the total disallowance of Rs. 1,47,862/-. In Addition, he made further disallowance of Rs. 5,000/- towards tea, coffee etc., on persons visiting the factory, which is not included in the above.
10. The learned Counsel for the Assessee reiterated the arguments and in particular, submitted that since the expenses incurred on the foreign buyers include expenditure for exhibition of products etc., before the foreign buyers, it could not be treated as entertainment expenses. In this regard, he relied upon the decision of the Bombay High court in the case of of Kirloskar Oil Engines (157 ITR 762) and the decision of the Madras Bench of the I.T.A.T., in the case of Associated Marketing Agencies (43 ITD 543).
11. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the learned CIT(Appeals) and argued that the expenditure has to be treated as entertainment expenditure and no further relief can be given.
12. We have considered the rival submissions and perused the facts on record. Out of the total expenses of Rs. 2,41,050/-, Rs. 87,862/- has already been offered for disallowance by the assessee. If we consider the additional disallowance of Rs. 60,000/- made by the Assessing Officer the total disallowance comes to Rs. 1,47,862/-. This appears to be on the higher side. After taking into consideration the facts and circumstances of the case, we restrict the disallowance to Rs. 30,000/- out of the total disallowance of Rs. 60,000/- made by the Assessing Officer. The assessee will be entitled to a relief of Rs. 30,000/-.
This ground of appeal accordingly succeeds in part.
"The learned CIT(Appeals) erred in upholding the disallowance of Rs. 40,000/- out of the rent paid by the appellant on the plea that the said amount relates to earlier year without appreciating the fact that liability to pay the same has arisen during the year." 14. The learned Assessing Officer disallowed Rs. 40,000/- out of the rent paid during the year since it related to the earlier year i.e. for the period from 21.2.89 to 31.3.89. On appeal, it was submitted before the learned CIT(Appeals) that the premises were taken on rental basis from 21.2.89. However, the agreement and the bill for the same was signed during the year under consideration and the payment was also made during the year. Therefore, since the quantification and the crystallization of liability has happened during the year, it cannot be treated as prior year's expenses. The learned CIT(Appeals), however, confirmed the addition.
15. The learned Counsel for the Assessee further submitted that even though the assessee is following Mercantile system of accounting, since the liability in respect of the rent has crystallized during the year, though related to some period of the earlier year, it cannot be treated as prior period expenses. In this regard, reliance was placed on the definition of prior period expenses given in the Accounting Standard-1 issued by the Institute of Chartered Accountants of India and Accounting Standard issued by the CBDT, reported in 218 ITR 1(St.).
16. The learned Departmental Representative submitted that since the expenditure is related to the prior period, it has to be disallowed.
17. We have heard the rival submissions and perused the facts on record. The facts which emerge from the Orders of the authorities below indicate that bill in respect of rent as well as payment of the rent was done during the previous year relevant to the Asst. Year 1990-91.
Merely because some portion of the rent relates to prior year, ie., one month and nine days, it cannot be treated as prior year expenses. Since the liability on account of rent got quantified and crystallized during the year under appeal, the same has to be allowed during the year under appeal itself. This ground accordingly succeeds and the addition of Rs. 40,000/- is deleted.
"The learned CIT(Appeals) erred in upholding the action of the Assessing Officer of not setting off the loss incurred by the SEEPZ Unit entitled for deduction Under Section 10(A) against the other business income of the appellant without properly appreciating the provisions of Section 10(A)(ii) of the I.T.Act and the purpose for which the said deduction has been allowed." 19. The assessee company suffered loss of Rs. 4,79,342/- incurred by Santacruz Electronic Export Processing Zone (SEEPZ for short). It claimed the set off of the said loss against the income of the other Units while working out the total income. The Assessing Officer rejected this claim on the ground that since the total income of the SEEPZ Unit is excluded Under Section 10A of the I.T.Act, it is obvious that the loss will also have to be excluded, as profit includes loss as held by the Courts. On appeal, the learned CIT(Appeals) confirmed the action of the Assessing Officer relying on the decision of Hariprasad & Co. (99 ITR 118)(SC) and the decision of Madras High Court in the case of S.S. Theagarajan (129 ITR 115). In his opinion, as held by the Courts, as the income was exempt, the loss in relation to such source could not be set off against other income.
20. The learned Counsel for the Assessee explained that as per the provisions of Section 10A, as then prevailing, the income of the Unit set up in the export processing zone, is exempt for a period of 5 years. In case, in any year if such unit has suffered loss, then such loss cannot be carried forward as per the provisions of Section 10A(4)(ii) of the Act. It was submitted that the said sub section does not refer to Section 70 & 71 of the Act, which permits the set off of the loss from one source against the other source during the year. The learned Counsel for the Assessee further submitted that Section 10A being an incentive provision, it should be construed liberally so as to achieve the objective for which deductions are provided in the Act. In this connection, he relied upon the decision of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. (196 ITR 188) and in the case of Gwalior Rayon Ltd. (196 ITR 149).
21. The learned Counsel for the Assessee also brought to our notice that the decisions referred to by the learned CIT(Appeals) are not applicable to the facts of the assessee's case as these decisions were referred to income which were not chargeable under Section 10 of the I.T.Act, and not dealing with the situation like in the present case ie., where the income of the Units in the Export Processing Zone are assessable as per the separate provisions which is a code by itself.
Therefore, it was submitted that the decisions relied upon by the learned CIT(Appeals) have no relevance to the issue which is for consideration. He further reiterated that since there is no specific provision either Under Section 10A or in Section 70 or Under Section 71, the loss suffered by SEEPZ Unit cannot be set off against the income from other units and other sources, the same should be allowed to be set off. In reply to a query from the Bench regarding the applicability of Section 14A, the learned Counsel for the Assessee submitted that Section 14A is applicable only in respect of the "expenditure incurred" in respect of income which is not includible in the total income and does not deal with the losses from that source etc., and in any case, as per the amendment in the said section by the Finance Act, 2001, it is applicable only from 1.4.1962.
22. The learned Departmental Representative strongly relied upon the orders of the authorities below. He submitted that since the income includes loss which is exempt under Section 10A, the same should not be allowed to be set off against other income. He placed reliance on Section 14A brought on the Statute Book by the Finance Act 2001 with effect from 1.4.1962.
23. We have considered the rival submissions and perused the facts on record. We have also perused the provisions of Section 10A, Section 70 and Section 71 of the I.T. act and also the decisions relied upon by the learned CIT(Appeals). The special scheme of taxation formulated by the Govt. for taxability of Units set up in the Export Processing Zone, contained in Section 10A, is a code by itself. The computation of such Units as well as the carry forward and set off etc., has been specifically laid down in the said section. The other provisions of the I.T. Act and any other disability or restrictions in respect of the set off of carry forward etc., has been specifically provided in Section 10A(4) of the Act itself. Therefore, these provisions need to be considered in totality keeping in view the intention of the legislation regarding taxability of such units in the Export Processing Zone.
Section 10A(4)(ii) specifically prohibits the carry forward and set off of the loss incurred by such units by specifically referring to Section 72(1) and 72(4)(i) r with effect from 1.4.88 under Section 74(3). It does not refer to Section 70 or 71 which clearly meas that there is no prohibition prescribed in the section regarding set off of the loss of such units against the income from other units or other business income of other sources.
24. Now, we come to the decisions relied upon by the learned CIT(Appeals), while confirming the action of the Assessing Officer. In the case of Hariprasad & Co. (supra), the Assessing Officer was dealing with a situation of carry forward and set off of capital loss against the other income. In the case of Theagarajan (supra), it was regarding set off of the loss under the head "income from horses". Both the aforesaid cases are in respect of exempt income contained in Section 10, which is not the code by itself as compared to Section 10A.Similarly, as held by the Hon'ble Supreme Court in the case of Bajaj Tempo and Gwalior Rayan (supra), while interpreting the incentive provisions, if there are two interpretations possible,the interpretation, which is harmonious with the object of the statute to effectuate the legislative intention and in consonance with the justice, a purposive approach should be adopted. So also, the provision for deduction, exempt or relief should be construed reasonably and in favour of the assessee.
25. Coming to Section 14A relied upon by the learned Departmental Representative, we find that even though Section 14A has been given retrospective effective with effect from 1.4.62, the operation of the section has been made prospective. This was also clarified by the circular No. 11/2001 dated 23.4.2001. According to the circular, the Assessing Officer should not re-open the assessments to disallow the expenditure to earn the exempt income by applying the provisions of newly inserted Section 14A of the Act. Further, in order to avoid the controversy as to whether the circular would be binding or not, the amendment was made in Section 14A by inserting the proviso which reads as under: "Provided that nothing contained in this section shall empower the Assessing Officer either to reassess Under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee Under Section 154 for any assessment year beginning on or before the 1^st of April 2001." We find that Section 14A was not in existence when the impugned order was passed. So also, by the insertion of provision, the intention of the legislation is clear that it is not to be applied to be past assessments by restricting the officers to reopen the assessments etc.
Therefore, if the Assessing Officer cannot do a particular action like reopening of assessment already completed, the Tribunal cannot use that provision to disallow something by making use of the same. Otherwise, it would virtually amount to the enhancement which is not permissible under the Act.
26. We, therefore, agree with the submissions made by the learned Counsel for the Assessee and hold that the loss incurred by SEEPZ Unit of Rs. 4,79,342/- has to be allowed to be set off against the other business income of the assessee. The Assessing Officer is directed accordingly. This ground accordingly succeeds.
"The learned CIT(Appeals) erred in confirming the addition of Rs. 83,000/- in the hands of the appellant on account of sale of wastage without appreciating the fact that complete stock recorded are being maintained by the assessee and no instance of suppression of any sale of waste has been placed by the department on record." 28. The Assessing Officer while dealing with the wastage mentioned that even though the wastage loss has decreased in the year compared to earlier year, still looking to the fact that similar addition was made in the earlier years, he made addition of Rs. 1 lakh on account of wastage. On appeal, the learned CIT(Appeals) reduced the addition to Rs. 83,000/- based on the additions confirmed in the Asst. year 1989-90.
29. The learned Counsel for the Assessee submitted that the findings made by the Assessing Officer regarding wastage are not factually complete and correct. He submitted that the consumption of fabric or wastage depends on the type of products manufactured and exported and in fact, the wastage during the year has gone down from 1.33% in immediately previous year to 1.10% during the year. He also drew our attention to the fact that the addition made in the previous year was reduced by the I.T.A.T., in Asst. year 1989-90 in the assessee's own case from Rs. 83,000/- to Rs. 45,000/-, a copy of which has been filed in the Paper Book.
30. The learned Departmental Representative relied on the orders of the authorities below.
31. We have considered the rival submissions and perused the facts on record. Respectfully following the decision of the I.T.A.T., in the assessee's own casein the earlier year and taking into account the fact that the wastage has gone down from 1.33% to 1%, we restrict the addition to Rs. 35,000/- as against Rs. 83,000/- sustained by the learned CIT(Appeals). The assessee will be entitled to a relief of Rs. 48,000/-. This ground accordingly succeeds in part.
"6. The learned CIT(Appeals) erred in holding that interest earned on fixed deposits made with the Banks for the purpose of lodging the said fixed deposits with Export Promotion Council and with Bank for obtaining various financial limits is not the income assessable under the head "Income from Business" and is assessable under the head "Income from other sources." "7. The learned CIT(Appeals) erred in not considering the fact that these fixed deposits has been made out of the over draft account drawn of the appellant with the bank and hence the interest paid by the appellant to the bank on over draft account was required to be set off against the interest received and as the interest paid to the bank will be higher to interest received, no income will be taxable under the head "Income from other sources." 33. These two grounds deal with interest on Fixed Deposits in the bank i.e. Rs. 1,47,649/- treated as income from other sources instead of as business income and not considering the same for calculation of deduction Under Section 80HHC and Section 32AB etc., without considering the fact that fixed deposits were kept for obtaining guarantees of financial limits. The Assessing Officer had treated as interest of Rs. 2,27,650/- and rent of Rs. 55,560/- aggregating to Rs. 2,83,210/- as income from other sources and reduced the same while working out the deduction under Section 32AB as well as under Section 80HHC.34. On appeal, the CIT(Appeals) treated the interest received on the deposit from IDBI of Rs. 80,000/- as business income and the balance interest of Rs. 1,47,649/- received on fixed deposits in the bank as income from other sources. He observed that deposit with IDBI was not made with the purpose of earning of interest but was done to comply with certain provisions of the I.T. Act and accordingly, directed the Assessing Officer to grant deduction under Section 80HHC and Section 32AB on such interest.
35. The learned Counsel for the Assessee submitted that Rs. 12,67,000/- and Rs. 1,33,600/- were fixed deposits kept with the bank for sanction of over draft limit as per the condition mentioned in the sanction letter of Dena Bank and also for the purpose of obtaining the bank guarantees in favour of customers and Govt. In support of the same, he drew our attention to the necessary documents as well as sample fixed deposit receipts in the Paper Book. It was submitted that the fixed deposit was not kept with the bank for earning of interest but was for obtaining the bank finance for carrying on the export business. He also mentioned that the total interests paid to the bank on the packing credit and other loans was Rs. 28,77,745/-. Therefore, in effect, in substance there was no interest received after considering the set off of interest received against the interest paid. He further submitted that the action of the learned CIT(Appeals) in not considering the same as business income is not justified as he himself has accepted that if the income is earned on the deposits which are not kept for the purpose of earning the interest, the same should be treated as business income.
In support of his contention, the learned Departmental Representative relied upon the following decisions:- 2) Nagpur Egg.Co. Ltd. 245 ITR 806 (BOM) [SLP of Revenue dismissed by the Supreme Court in 244 ITR (St.) 54] 3) Sealink Construction Co. Pvt. Ltd. - ITA No. 4433/M/00 dt.
6.12.2001.
Without prejudice it was submitted that even if interest of Rs. 1,47,649/- was to be treated as income from other sources since it is out of the borrowed funds, same need to be set off against the interest paid of Rs. 28,77,744/-. In this respect reliance was placed on the various decisions of the Tribunal and the Courts placed in the Paper Book.
36. As regards working of deduction Under Section 32AB, he submitted that in any case, the issue is concluded by several decisions including that of the Bombay High Court in the case of Diners Club I. Ltd. (248 ITR 679) and the Supreme Court in the case of Apollo Tyres Ltd. (255 ITR 274). According to him, for working out the book profit for the purpose of Section 32AB, what could be considered is the book profit as computed as per the provisions of Part II and Part III of Schedule VI of the Companies Act. Once the book profit is worked out as per the said provisions of the Companies Act, the Assessing Officer has no power to make variation or excluded certain income from such book profit. Our attention was drawn to several decisions of the various Tribunals which have taken a similar view and copies of which have been placed in the Paper Book.
37. The learned Departmental Representative submitted that interest has to be treated as income from the sources and cannot be treated as business income and, therefore, the same cannot be taken into account for working out the deduction under Section 32AB or Section 80HHC.38. We have considered the rival submissions and perused the facts on record. So far as the working of the book profit is concerned, for the purpose of working of the deduction under Section 32AB of the Act, the issue is concluded by the decision of the Hon'ble Supreme Court while dealing with the book profit for the purpose of Section 115J as well as Section 32AB in the case of Apollo Tyres Ltd. (255 ITR 274). While dealing with the power of the Assessing Officer to disturb the book profit as worked out as per the provisions of the Companies Act, the Court observed at page 280 as under :- "Therefore, we re of the opinion, the Assessing Officer while computing the income Under Section 115J has only the power of examining whether the books of accounts are certified by the Authorities under the Cos. act as having been properly maintained in accordance with the Cos. Act. Thereafter, the Assessing Officer has the limited power of making increase or reductions as provided in the Explanation to the said sections. To put it differently, the Assessing Officer does not have jurisdiction to go behind the net profit shown in the P&L A/c., except to the extent provided in the section." While dealing with the eligibility of deduction under Section 32AB in respect of dividend income which has been declared by the assessee as "income from other sources", the Supreme Court at Page 281 has observed as under :- "A perusal of Section 32AB, as it stood at the relevant time, shows that if an assessee has a total income including income chargeable to tax under the head "profits and gains of business or profession" and if the income from such business is derived from an "eligible business" and if the assessee has out of such income utilized any amount during the previous year for the purchase of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with Sub-section (5) of Section 32AB". (emphasis supplied) "Therefore, there is no doubt that the business of the assessee company is an eligible business. The fact that it is shown under a different head of income would not deprive the company of its benefit Under Section 32AB so long as it is held that the investment in the units of the UTI by the assessee company is in the course of its "eligible business". Therefore, in our opinion, the dividend income earned by the assessee company from its investment in the UTI should be included in computing the profits of eligible business under Section 32AB of the Act." 39. In view of the clear finding of the Hon'ble Supreme Court, affirming the various decisions, we are of the opinion that as far as working of book profit with regard to Section 32AB is concerned, the Assessing Officer was not justified in reducing the interest received of Rs. 1,47,649/-. The Assessing Officer is, therefore, directed to rework the deduction under Section 32AB, taking into account the interest of Rs. 1,47,649/- as part of the book profit.
40. As regards considering the said interest income as part of the profits derived from exports, we are of the opinion that even though it can be treated as business income, as per the decision of the Bombay High Court in the case of K.K. Doshi & Co. (245 ITR 849), such income cannot be taken into account for the purpose of working out deduction Under Section 80HHC. We, however, agree to the alternate submission of the learned Counsel for the Assessee to permit the set off of interest paid against the interest received in view of the decisions of the various Benches of the Tribunal, including in the case of Pink Star (72 ITD 137), Advance Technology devices Pvt. Ltd., in ITA No.5722/MUM/2000. We, however, restore this issue to the file of the Assessing Officer and direct him to see whether there is direct nexus between earning of interest and payment of interest and if it is so, rework the profits and gains for the purpose of deduction under Section 80HHC taking into account the above directions.
The learned CIT(Appeals) erred in holding that compensation recovered by the appellant for letting out of its business premises for short term to its business associates and receipt of compensation of Rs. 55,560/- is an income assessable under the head "Income from other sources" and not under the head "Income from business".
42. While working out deduction under Section 80HHC and Section 32AB, the Assessing Officer included the rental income of Rs. 55,560/-. The arguments of both the parties are same as in the case of interest on fixed deposits, discussed in Ground No. 6 & 7 above. It is also noted that the assessees had paid rent of Rs. 9,98,871/-, against which, rent of Rs. 55,560/- has been received. As per the detailed discussions in the previous paragraphs, we direct the Assessing Officer to consider the rental compensation of Rs. 55,560/- as part of the book profit for the purpose of Section 32AB and rework the deduction accordingly.
Similarly, for the purpose of working out of profit for the purpose of deduction under Section 80HHC, we direct the Assessing Officer to verify the direct nexus in respect of earning of rent and payment of rent and grant set off against each other if it is there.
"The appellant prays that various disallowances confirmed be deleted and correct deduction be allowed under Section 32AB and Under Section 80HHC by not excluding the interest received and the compensation received from business income or alternative to reduce relating expenses thereto out of the said income and only to deduct the net income out of the business income to arrive at business income for calculation under Section 32AB and Under Section 80HHC." 44. The learned Counsel for the Assessee requested that directions be given to the Assessing Officer to consider the income as reworked after considering the various disallowances and grant deductions under Section 32AB, 80HHC etc., on such income.
45. As mentioned in the earlier paragraph, so far as Section 32AB is concerned, since the deduction is on book profit, there is no question of variation in the same. However, as regards deduction under Section 80HHC, we direct the Assessing Officer to take the assessed income for the purpose of deduction under Section 80HHC of the Act.