We find it convenient to dispose of this bunch of four appeals filed by the revenue relating to consecutive assessment years 1995-96 to 1998-99 by this consolidated order.
One of the common issues involved in these appeals is relating to the deletion of addition made under section 69C of the Income Tax Act, 1961 on account of unexplained expenditure by way of freight allegedly paid to M/s. Sam Aviation Pvt. Ltd., New Delhi in cash. We have heard the parties and perused the records.
The relevant facts briefly stated are that the assessee is a manufacturer and exporter of hosiery goods. The exports are made by the assessee through various airlines/ shipping agents, including M/s.
Leimure Express. M/s. Leimure Express had hired the services of M/s.
Sam Aviation Pvt. Ltd. for carrying the cargo to Russia. A search under section 132 of the Income Tax Act, 1961 was carried out at the business premise of M/s. Sam Aviation Pvt. Ltd. and its Directors on 20th and 21st of August, 1998. As per the seized documents found at the premises of M/s. Sam Aviation Pvt. Ltd., it was observed that apart from payment of freight by cheque, some payment was received by the concern in cash from various exporters on account of freight. In the case of the assessee also, some cash payment was found recorded in the statement of accounts of M/s. Sam Aviation Pvt. Ltd. The entire information regarding the bill numbers, weight, description of goods and other details tallied with the record of the assessee. So, however, cash payments were not found reflected in the books of account of the assessee. The assessee was confronted with the information. In fact, a search was also conducted at the business premises of the assessee and at the residential premises of the Directors. Assessment order was passed in the case of the assessee for the block period and the total undisclosed income was assessed at Rs. 9,85,000, yet in regard to cash payments made to M/s. Sam Aviation Pvt. Ltd., it was observed in the block assessment order that the issue will be considered in 148 proceedings. Notice under section 148 was issued to the assessee for the respective assessment years. The main assessment was made for assessment year 1996-97. The assessing officer on the basis of the information found at the premises of M/s. Sam Aviation Pvt. Ltd. held that assessee had paid freight to M/s. Sam Aviation Pvt. Ltd. in cash at a higher rate than disclosed in the books of account. It was further held that the cash payment was made by the assessee on account of freight to reduce the expenses so as to inflate the income eligible for deduction under section 80HHC. The assessing officer has calculated the average rate per kg. of cargo not having been disclosed by the assessee in the books of account for various years as under : The unaccounted freight was accordingly worked out for the respective assessment years as under : The assessing officer accordingly made the additions of Rs. 1,30,85,068, Rs. 3,79,91,102, Rs. 2,37,16,938 and Rs. 1,12,16,660 for assessment years 1995-96, 1996-97, 1997-98 and 1998-99 respectively.
On appeal, the Commissioner (Appeals) held that the assessee-company had exported goods to Russia through cargo agents, namely, M/s. Leimure Express and had no dealings with M/s. Sam Aviation Pvt. Ltd. That the assessing officer had completed the assessment in the case of the assessee under section 158BC and no addition on account of undisclosed investment on account of cargo freight was made as no document or evidence was found in this regard in the course of search. It was further held by the Commissioner (Appeals) that when no addition was made under section 158BC, there was no justification for assessing the income under section 147. It was further held that the addition under section 69C can be made only if the finding of the revenue that assessee has incurred expenditure on account of freight paid in cash is supported by reliable evidence. The Commissioner (Appeals) further held that the mere cash entries in the books of account of M/s. Sam Aviation Pvt. Ltd. were not sufficient to hold that such cash payments were made by the assessee. It has been pointed out by the Commissioner (Appeals) that the cash payments could have been received from the consignees.
According to the Commissioner (Appeals), there may be suspicion on the basis of the entries in the books of account of M/s. Sam Aviation Pvt.
Ltd. that the assessee had made the payment but suspicion howsoever strong it may be cannot be the basis for the addition. It has further been held by the Commissioner (Appeals) that addition on the basis of the entries in the books of account of a third party can be made only if there is corroborative evidence to support such entries. It has been further pointed out by the Commissioner (Appeals) that the allegation of freight paid by the assessee at higher rates to M/s. Sam Aviation Pvt. Ltd. could have been corroborated either by bringing on record that the exporters to Russia were required to pay more freight than what has been recorded in the books of account of the assessee or the money had in fact been paid by the assessee-company. The Commissioner (Appeals) has pointed out in the appellate order for assessment year 1996-97 that the assessing officer was asked as to whether any exporter to Russia had paid freight at higher rate than the freight paid by the assessee-company and that the assessing officer honestly admitted that she could not come across any case where an exporter has paid freight at the rate more than the rates recorded in the books of the assessee.
The Commissioner (Appeals) has further pointed out there is no evidence on record to establish that the custom duty or other charges for clearance in Moscow were to be borne by the assessee. According to the Commissioner (Appeals), M/s. Sam Aviation Pvt. Ltd. could have received the cash from the consignees in Russia. The Commissioner (Appeals) has accordingly deleted the additions for all the four assessment years.
The learned Department Representative contended before us that the Commissioner (Appeals) has unjustifiably deleted the additions insofar as the information collected from M/s. Sam Aviation Pvt. Ltd. was well founded insofar as out of the 14 items of information regarding the export by the assessee tallied with 13 items of information, particularly the details of exports made by the assessee including the payments made by cheques. The solitary item of information which did not tally with the books of account of the assessee was the cash payments. According to the learned D.R., the 13 items of information tallying with the books of account was sufficient to establish that the 14th item of information was also correctly based on facts. It was further contended that assessment in the case of M/s. Sam Aviation Pvt.
Ltd. has also been made on the basis of documents seized and, therefore, deleting the addition from the assessment of the assessee was uncalled for. Copy of assessment order in the case of M/s. Sam Aviation Pvt. Ltd. for the block period 1-4-1988 to 20-8-1998 has been placed on record.
It was pointed out by the learned Department Representative that there was a clear motive for the assessee to make payment in cash so as to inflate the profits entitled to deduction under section 80HHC.According to the learned D.R., the information found from M/s. Sam Aviation Pvt. Ltd. was in the form of reports prepared from time to time and, therefore, was reliable. Reliance is also placed on the decision of the Bombay Bench of the Tribunal in the case of Overseas Chinese Cuisine v. Assistant Commissioner(1996) 56 ITD 67 (TM), to support the contention that the addition on the basis of entries in the books of account of third party is justified. It was, accordingly, pleaded that the order of the Commissioner (Appeals) may be set aside for all the assessment years and the additions restored.
In reply, the learned counsel for the assessee sought to support the order of the Commissioner (Appeals) for all the assessment years. It was pointed out by the learned counsel that the assessee had nothing to do with M/s. Sam Aviation Pvt. Ltd. insofar as it had appointed M/s.
Leimure Express as cargo agent for export of goods. It was further contended that no addition is permissible on the basis of entries in the books of account of the third party unless such entries found are corroborated by any other evidence. The learned counsel further contended that there are about 30 exporters from Ludhiana exporting their goods to Russia. Though inquiries were made by the Income-tax department, no evidence was found that assessee had booked freight charges at less rate than freight paid by the other exporters. Our attention was invited to the findings of the Commissioner (Appeals) at para 10 of his order, wherein-the admission of this fact by the assessing officer has been recorded. It was further contended that the assessee has not been allowed cross examination of M/s. Sam Aviation Pvt. Ltd. when cash payments made to M/s. Sam Aviation Pvt. Ltd. were denied by the assessee. The learned counsel for the assessee also relied upon the decision of the Supreme Court in the case of CBI v.V.C. Shukla (1998) 3 SCC 410, to support the contention that the loose sheets of paper do not constitute books of account and entries therein are not admissible as evidence under section 34 of the Evidence Act.
This decision has also been relied upon for the proposition that even the entries in the regular books of account of the third party are not sufficient to charge any person with liability unless the entries in regular books of account are corroborated by any other evidence. The learned counsel further contended that though search proceedings had been taken against the assessee, not a single document was found to corroborate the allegation of the assessing officer of having made cash payments to M/s. Sam Aviation Pvt. Ltd. Reliance has also been placed on the following decisions of Punjab & Haryana High Court in support of the contention that when the party has not been produced, the addition on the basis of entries in the books of account of third party is not justified :-CIT v. Nitin Kumar Reliance was also placed on the decision of the Bombay High Court in the case of Addl. CIT v. Miss Lata Mangeshkar (1974) 97 ITR 696 (Bom), in support of the contention that mere entries in the accounts of third party regarding payments to the assessee was not sufficient to make the addition under the head 'Income from other sources'. It was, accordingly, pleaded that the appeals of the revenue may be dismissed.
We have given our careful consideration to the rival contentions. The main common issues, as pointed out earlier, is relating to the addition on account of alleged undisclosed expenditure on account of freight paid in cash to M/s. Sam Aviation Pvt. Ltd. At the outset it may be clarified that the addition made by the assessing officer is not entirely on the basis of entries of cash payments in the name of the assessee found in the books of account of M/s. Sam Aviation Pvt. Ltd. In other words, the cash payments found recorded in the books of account of M/s. Sam Aviation Pvt. Ltd. are not to the extent of the addition made by the assessing officer. The assessing officer has worked out the average freight which the assessee is presumed to have paid to M/s. Sam Aviation Pvt. Ltd. on the basis of some cash payments.
Since the additions made by the assessing officer in this case for the respective assessment years are not solely based on the basis of entries found in the books of account of M/s. Sam Aviation Pvt. Ltd., the same can be placed in two categories - one category is the addition on the basis of entries found recorded in the books of account of M/s.
Sam Aviation Pvt. Ltd. and the second category is purely on the basis of presumption that assessee might have paid freight at higher rates on the basis of cash entries in respect of some of the consignments. The additions have been made by invoking the provisions of section 69C.Section 69C may be reproduced hereunder : "69C. Where in any financial year an assessee has incurred any expenditure and he off ers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the assessing officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year." A plain reading of above section reveals that the assessing officer is empowered to make addition in respect of any expenditure which has been incurred by the assessee about the source of which the assessee has either offered no explanation or the explanation offered by the assessee is not satisfactory. So, for invoking provisions of section 69C, one of the conditions precedent is that the assessee has incurred the expenditure. Once it is established that the assessee has incurred any expenditure, the assessing officer has the power to treat the expenditure as unexplained if the assessee offers no explanation for its source or the explanation of the assessee is not considered to be satisfactory. In this case, assessee has not admitted to have incurred any expenditure on account of alleged extra freight paid to M/s. Sam Aviation Pvt. Ltd. There is thus no question of any explanation having been offered by the assessee for its source. Therefore, the fundamental question for our consideration is as to whether on the basis of the evidence on record it can be said that the assessee has incurred the expenditure. A perusal of the assessment orders reveal that the assessing officer had received information from the Investigation Wing of the Income-tax department that some cash payments have been found recorded in the books of account of M/s. Sam Aviation Pvt. Ltd. which are attributable to have been received, inter alia, from the assessee.
This information was confronted to the assessee. So, however, the assessee flatly denied having made any cash payments to M/s. Sam Aviation Pvt. Ltd. We have a copy of the assessment order in the case of M/s. Sam Aviation Pvt. Ltd. on our record and on perusal of the same it is observed that M/s. Sam Aviation Pvt. Ltd. have also not admitted to have received cash payments from the assessee. When asked to explain the source of cash payments recorded in the statements found at the business premises of M/s. Sam Aviation Pvt. Ltd., the explanation furnished by M/s. Sam Aviation Pvt. Ltd. as contained at page 31 of the assessment order is "some payments might have been made by them or their consignees at destination for customs services etc. Therefore, it is incorrect to say that any undisclosed income had arisen during the block period on this account." It is thus evident that M/s. Sam Aviation Pvt. Ltd. had given a vague reply to the cash entries in their books of account and also indicated that such payments might have been from the consignees for customs services etc. In the light of vague statement by M/s. Sam Aviation Pvt. Ltd., it was necessary, in our view, for the assessing officer to probe further and find out the stand of M/s. Sam Aviation Pvt. Ltd. in regard to the cash receipts found recorded in the statements pertaining to them. This was not done. The assessee having denied to have received the payment, it was necessary for the assessing officer to put across to the assessee the evidence which, according to the assessing officer, was reliable, to hold that expenditure was incurred by the assessee. This was not done by the assessing officer. In our view, when two different parties make conflicting statements before the income-tax authorities, it is not open to the authority to chose any of the statements that suits the revenue. The assessing officer will be duty bound to consider the evidence from both sides and then record a finding on the basis of the evidence. The entries in the regular books of account of the third party may constitute evidence but the said evidence alone cannot be relied upon for making additions if it is not corroborated by other evidence. It is observed from the order of the Commissioner (Appeals) that the assessing officer had been asked to indicate as to whether any of the exporters from Ludhiana have paid freight on consignments to Russia at higher rates than the freight paid by the assessee. As per the observation of the Commissioner (Appeals), the assessing officer has honestly admitted that she has not come across any such instance where the freights paid for consignment to Russia was at higher rate than the freight paid by the assessee. This information does not corroborate the cash payments made by the assessee on account of higher freight. On the contrary, it rebuts the claim of the assessing officer about the freight having been paid at higher rates. As held by their Lordships of the Supreme Court in the case of V.C. Shukla (supra), the entries in the books of account regularly maintained alone are not sufficient to charge any person with liability. It is necessary to have independent witness as to the truthfulness of these entries to fasten the liability. Once the assessee had denied the correctness of the entries recorded in the books of account of M/s. Sam Aviation Pvt.
Ltd., it was incumbent upon the assessing officer to confront M/s. Sam Aviation Pvt. Ltd. and asked the assessee to cross-examine the said party. As it appears from the replies given by M/s. Sam Aviation Pvt.
Ltd., the cash payments in their case may be from the consignees on account of customs clearance in Russia. It is nobody's case that custom duty was to be paid by the assessee. Therefore, the mere entries in the books of account of M/s. Sam Aviation Pvt. Ltd. was not sufficient to fasten the liability upon the assessee of having incurred the expenditure out of undisclosed sources.
Another aspect which, in our view, is important is that as per the assessment order in the case of M/s. Sam Aviation Pvt. Ltd., the total payments found recorded in their statements was Rs. 1,80,010 for financial year 1996-97, i.e., for assessment year 1997-98 and Rs. 6,84,990 for financial year 1997-98 relevant for assessment year 1998-99. There is no other cash payment attributed to the assessee in the assessment of M/s. Sam Aviation Pvt. Ltd. Thus, the total payment found recorded in the statements of account of M/s. Sam Aviation Pvt.
Ltd. is lees than Rs. 9 lakhs as against which the assessing officer has made the addition of Rs. 1,30,85,068, Rs. 3,79,91,102, Rs. 2,37,16,938 and Rs. 1,12,16,660 for assessment years 1995-96, 1996-97, 1997-98 and 1998-99 respectively. It may be pertinent to mention that in the assessment order for assessment year 1996-97, the assessing officer has referred to several other cash payments but we have not found any mention of these payments in the order of assessment in the case of M/s. Sam Aviation Pvt. Ltd. Therefore, going by the findings recorded in the case of M/s. Sam Aviation Pvt. Ltd., the total cash payments attributed to the assessee are of Rs. 1,80,010 for assessment year 1997-98 and Rs. 6,84,990 for assessment year 1998-99. Assuming for arguments sake that the evidence from the premises of M/s. Sam Aviation Pvt. Ltd. was authentic and sufficient to fasten liability of tax upon the assessee, then at best the addition of Rs. 1,80,010 and Rs. 6,84,990 for assessment years 1997-98 and 1998-99 respectively could be made in the case of the assessee. Whereas it is permissible for the assessing officer to resort to estimation when the material available suggests the pattern of payments, in this case the foundation for assessment is the entries recorded in the books of account or statements of M/s. Sam Aviation Pvt. Ltd. which are complete. It is nobody's case that part of the cash received by M/s. Sam Aviation Pvt.
Ltd. had not been recorded by them in the documents seized during the course of search. In the case of M/s. Sam Aviation Pvt. Ltd., when no substantial addition has been made on the basis of the material found from M/s. Sam Aviation Pvt. Ltd., the very foundation for making the addition in the case of the assessee falls to the ground, particularly when we keep in mind the provisions of section 69C. The very basis for the addition is the expenditure allegedly incurred by the assessee in having made the payments in cash to M/s. Sam Aviation Pvt. Ltd. We reiterate that in the case of M/s. Sam Aviation Pvt. Ltd., the only addition made on account of cash payments received from the assessee is Rs. 1,80,010 for assessment year 1997-98 and Rs. 6,84,990 for assessment year 1998-99, we fail to appreciate as to how the assessing officer can invoke section 69C for an expenditure which is not based on evidence but which is presumed to have been incurred by the assessee on the basis of suspicion. If the assessee has incurred the expenditure by payments to M/s. Sam Aviation Pvt. Ltd., then by necessary implication, the said payment would have been assessed as receipts in the case of M/s. Sam Aviation Pvt. Ltd. As pointed out earlier, but for the addition of Rs. 1,80,0 10 and Rs. 6,84,990 for assessment years 1997-98 and 1998-99 respectively, no other addition has been made in the case of M/s. Sam Aviation Pvt. Ltd. Therefore, the very basis for invoking section 69C is not present in this case for the substantial addition.
As far as the addition of Rs. 1,80,010 and Rs. 6,84,990 is concerned, that too would be justified only if the cash payments are established to have been made by the assessee either by direct evidence or circumstantial evidence. Even M/s. Sam Aviation Pvt. Ltd. have not confirmed to have received cash payments from the assessee. As pointed out earlier, whereas the cash receipt has not been denied by M/s. Sam Aviation Pvt. Ltd., the possibility of the cash having been received from consignees has not been ruled out. Another factor that has been pointed out by the Commissioner (Appeals) is that assessee has no direct connection with M/s. Sam Aviation Pvt. Ltd. The consignments have been booked through the cargo agent, namely, M/s. Leimure Express.
The income-tax authorities have not considered it proper to make inquiry from M/s. Leimure Express or it is possible that the results of the inquiry do not help the department. It may also be pertinent to mention that there is a note appended to the order of the Commissioner (Appeals) which was not given to the assessee but we find it relevant for appreciating the view expressed by the Commissioner (Appeals). The office note is reproduced hereunder : In this case, the assessing officer has made an addition on the basis of the information collected from the premises of M/s. Sam Aviation Pvt. Ltd. The information is available in the form of details containing name of the assessee, flight number, weight, weight of the goods dispatched, date, freight charges (inclusive of payments in cash) etc. The details are not in dispute except for the cash payments. The assessing officer is of the view that the assessee had made cash payments with the intention of suppressing the freight payments and also to meet the expenditure relating to custom duty, transportation and distribution charges in Moscow. The authorised representative of the assessee denies to have made any payment in cash. The assessing officer has relied only on the document and no effort has been made either to examine the relevant persons of M/s. Sam Aviation Pvt. Ltd. or to collect information which could indicate that the freight charges are really suppressed. The assessing officer as well as the Additional Commissioner of Income Tax were asked to collect details in respect of the freight charges paid by other exporters of Ludhiana who had sent their goods to Russia. Sufficient time was given to collect the information. It was informed by the assessing officer that the information gathered shows that even other exporters have paid the same freight charges as paid by the assessee. She also could not bring any evidence on record to substantiate the allegation that the assessee was required to pay the custom duty and other distribution charges in Moscow.
As against that,the claim of the authorised representatives of the company is that there was no such obligation and the payment of custom duty as well as the distribution charges were the responsibility of the buyers in Russia. It is a matter of settled law that no addition could be made or sustained on the basis of the certain information available with third parties unless such information is corroborated by some other evidence. As mentioned above, no evidence has been brought on record to substantiate the charge of suppression of freight or the liability to pay custom duty and other charges in Russia. It was for this reason that the addition made by the assessing officer was found to be unjustified." Taking the totality of facts and circumstances of this case into consideration, we are of the considered view that the decision of the Commissioner (Appeals) in respect of payments other than the cash payments of Rs. 1,80,0 10 for assessment year 1997-98 and Rs. 6,84,990 for assessment year 1998-99 does not call for any interference. Since in the case of M/s. Sam Aviation Pvt. Ltd. the issue is pending in appeal and since the receipt of said cash from the assessee has not been ruled out by M/s. Sam Aviation Pvt. Ltd., we consider it appropriate to set aside the issue relating to the addition of Rs. 1,80,010 for assessment year 1997-98 and Rs. 6,84,990 for assessment year 1998-99 and remit the same to the file of the assessing officer for fresh decision after the decision in the appeal of M/s. Sam Aviation Pvt. Ltd. and after giving reasonable opportunity of being heard to the assessee. The order of the Commissioner (Appeals) in deleting rest of the additions for all the four years is, however, upheld. The grounds of appeal raised by the revenue in this regard for assessment years 1997-98 and 1998-99 are partly allowed and those for assessment years 1995-96 and 1996-97 are dismissed. We would like to clarify that the course of setting aside the issue has been adopted to avoid inconsistency in the case of the assessee and in the case of M/s.
Sam Aviation Pvt. Ltd. We now take up the other grounds of appeal. In assessment year 1995-96, there is no other ground of appeal. The appeal of the revenue for assessment year 1995-96 is accordingly dismissed.
In assessment years 1996-97 and 1997-98, another common ground is relating to the levy of interest under section 234B. The only contention advanced before us on behalf of the assessee is that section 234-0 is not retrospective in its operation. The dispute in this case is about the manner in which the assessing officer has calculated interest under section 234B. The Commissioner (Appeals) has held that assessee is liable to pay interest if he does not pay any advance tax or any advance tax so paid falls short of 90 per cent of the assessed tax. The words 'assessed tax' have also been defined in the Act. The assessing officer while calculating the interest chargeable under section 234B has held that the amount refunded to the assessee under section 143(1) has got to be reduced from the payment of advance tax and interest to be calculated on the balance amount. In other words, only the retained amount by the department has been considered by the assessing officer to be on account of advance tax for the purposes of calculation of interest under section 234B. This action of the assessing officer has not found favour with the Commissioner (Appeals).
In our considered view, interest has got to be calculated on the basis of provisions of section 234B and there is no provision for considering the refund of tax at the time of processing the return under section 143(1) as not having been paid towards advance-tax. Section 234D, which has been incorporated by the Finance Act, 2003 with effect from 1-6-2003, is on a different field, i.e., interest on excess refund. In our considered view, the controversy as to whether section 234D is retrospective or prospective is unnecessary insofar as it has no bearing on the calculation of interest under section 234B. We, therefore, find no merit in this ground of appeal of the revenue. It is dismissed as such.
In assessment year 1997-98, the only other ground that remains for consideration is as under : (iii) The Learned Commissioner (Appeals) has erred both in law and on the facts of the case in directing the assessing officer to exclude ST & CST from total turnover while computing deduction under section 80HHC. While deciding the issue, the learned Commissioner (Appeals) has followed the directions of Hon'ble ITAT, Chandigarh Bench, Chandigarh in the case of Freeman Measures Ltd. (IT Appeal Nos. 237, 1494 and 1886 (Chd.) of 1992, dated 13-3-2000) against which appeal under section 260A has been filed earlier.
For assessment year 1998-99, there is similar ground of appeal being ground No. (iv), which is also reproduced hereunder : (iv) The Learned Commissioner (Appeals) has landowners erred both in law and on facts of the case in directing the assessing officer to exclude Central Sales Tax and Sales Tax from total turnover while computing deduction under section 80HHC.It is evident from the ground of appeal for assessment year 1997-98 itself that the Commissioner (Appeals) has followed the decision of ITAT, Chandigarh Bench in the case of Freeman Measures Ltd. (supra).
This view is further supported by the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769, and the decision of Calcutta High Court in the case of CIT v.Chloride India Ltd. (2002) 256 ITR 625 (Cal). It is also pertinent to mention here that similar issue was decided by the Tribunal in the case of Nahar Spinning Mills Ltd. (IT Appeal No. 1130 of 1995) for assessment year 1992-93 (in assessee's group) vide paras 2 to 5 of the order in favour of the assessee. The mere fact that the department has filed an appeal under section 260A against the decision of the Tribunal does not warrant a different view as the Commissioner (Appeals) is bound to follow the decision of the jurisdictional Tribunal. We therefore, do not find any infirmity in the order of the Commissioner (Appeals) in this regard. Grounds of appeal raised for assessment years 1997-98 and 1998-9,&in this regard are accordingly, dismissed.
We now take up the other grounds of appeal for assessment year 1998-99.
Ground No. 1 is as under : "(i) The Learned Commissioner (Appeals) has erred both in law and on facts of the case in deleting the addition of Rs. 1,44,000 made by the assessing officer on account of treatment of cost of Sprinkle System as capital expenditure." The relevant facts relating to this issue are that assessee had installed a sprinkle system in the rented office premises. The assessee instead of claiming depreciation debited the cost of the sprinkle system of Rs. 1,44,000 under the head 'Repair to machinery a/c'. The assessing officer denied the claim on the ground that the expenditure was of capital nature. The Commissioner (Appeals) has relied upon the decision of Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd. (1998) 233 ITR 468, to allow the deduction to the assessee as revenue expenditure. The Commissioner (Appeals) has applied the following tests for determining the nature of expenditure on the basis of the decision of the Supreme Court referred to above : "I. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of business or a substantial replacement of equipment.
II. Expenditure may be treated as properly attributable to capital when is made not only once and for all, but with a view to bring into existence and assessed for an advantage for enduring benefit of a trade.
III. Whether, for the purpose of expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to imply what was taken as capital of the business." In our considered view, the decision of the Commissioner (Appeals) does not call for any interference insofar as the tests laid down by the Hon'ble Supreme Court have rightly been applied by the Commissioner (Appeals) for determining the nature of the expenditure. Moreover, it is also pertinent to mention that assessee in any case is entitled to deduction on account of depreciation. Therefore, the allowance of deduction to the assessee is not disputed in principle. The dispute is only as to whether the deduction should be allowed in one year or spread over to several years on the basis of rate of depreciation permissible under the rules. Considering the cost of the sprinkle system and the fact that it has been installed at the rented premises, the decision of the Commissioner (Appeals) does not call for any interference. The same is accordingly upheld.The only other ground raised in the appeal for assessment year 1998-99 that remains for consideration is ground No. (iii) which reads as under : "(iii) The learned Commissioner (Appeals) has further erred both in law and on fact of the case in holding that interest income of Rs. 63,31,849 is business income as against income from other sources taken by the assessing officer for the purposes of computing deduction under section 80HHC." This issue had also come up for consideration before the Tribunal in the case of Nahar Spinning Mills Ltd. (IT Appeal No. 1130 (Chd.) of 1995). In this case, the Tribunal vide para 7 of the order held that on the basis of the decision of the jurisdictional High Court in the case of Rani Paliwal v. CIT (2004) 268 ITR 220 (Punj. & Har.), the gross interest has got to be treated as income from other sources for the purposes of computation of deduction under section 80HHC. It has further been held that 90 per cent of the gross interest is to be reduced from the profits and gains of business. In other words, 10 per cent of the interest is to be considered as expenses. We direct the assessing officer to follow the directions contained in para 7 of the order of the Tribunal in the case of Nahar Spinning Mills Ltd. (IT Appeal No. 1130 (Chd.) of 1995) for assessment year 1992-93 reproduced hereunder : "7. The request of the assessee regarding exclusion of 10 per cent out of interest income and other income was considered by the Tribunal in the assessee's own case for assessment year 1994-95 in ITA No.1050/Chandi/ 1996 and it has been held that after amendment in section 80HHC, the interest income to be reduced from the profits and gains of the business is to the extent of 90 per cent of the receipts. In other words, 10 per cent of the interest is not to be excluded from the profits determined by the assessee. It may be pertinent to mention that the issue relating to setting off of interest paid with the interest earned by the assessee has not been accepted by the Tribunal in assessment year 1994-95 by following the decisionof the jurisdictional High Courtin the case of Rani Paliwal v. CIT 185 CTR 333. We, therefore, find no justification to interfere." The effect of the decision in nutshell is that 90 per cent of the gross interest is excluded from the profits of business in computation of deduction under section 80HHC. The order of the Commissioner (Appeals) is modified accordingly.
In the result, whereas the appeals of the revenue for assessment years 1997-98 and 1998-99 are partly allowed, its appeal for assessment years 1995-96 and 1996-97 are dismissed.