Difference b/w Market & Offer Price of ESOP is deductible expenditure

IN THE ITAT CHANDIGARH BENCH ‘A’

Additional Commissioner of Income-tax, Circle 1(1)

V/s.

Spray Engineering Devices Ltd.

IT APPEAL NOs. 646 & 701 (CHD.) OF 2009

and 1021 (CHD.) OF 2011

[ASSESSMENT YEARs 2006-07 and 2008-09]

JUNE 22, 2012

ORDER

Ms. Sushma Chowla, Judicial Member

Out of three appeals, the cross appeals by the Revenue and the assessee are against the order of CIT(A), Chandigarh dated 1.4.2009 relating to assessment year 2006-07 against the order passed under section 143(3) of the I.T. Act, 1961. The assessee has filed appeal against the order of CIT(A) dated 5.8.2011 relating to Assessment Year 2008-09 against the order passed under section 143(3) of the Act.

2. These three appeals relating to same assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.

3. The Revenue in ITA No. 701/Chd/2009 has raised the following grounds of appeal:-

“1.  On the facts and in the circumstances of the case, the ld. CIT(A) in appeal No. ROT/Chd/38/IT/08-09 vide order dated 27.04.2009, has erred in-

 (i)  Nullifying the recomputation of the profits made by the AO without appreciating the fact that the adjustment was made as per Explanation 1(f) to Section 115JB of the IT Act.

 (ii)  Giving part relief to the assessee without assigning any specific reasons.

(iii)  Deleting the addition of Rs. 39,68,062/- without appreciating the provisions of section 36(2) of the IT Act and the fact that no explanation was tendered by the assessee during the course of the assessment proceedings with regard to the claim of bad debt.

(iv)  Granting relief to the assessee subject to the verification by the AO when no such power is vested with the CIT(A) under the provisions of the Act.

(v)  Deleting the addition to the extent of Rs. 13,68,671/- without appreciating the fact that no explanation was tendered by the assessee during the course of the assessment proceedings with regard to the claim of prior period expenses.

(vi)  Considering the employee benefit expense as ascertained liability instead of contingent liability without appreciating the fact of the case.

(vii)  Allowing the deduction u/s 80IB and 80IC on the facts and circumstances of the case.

(viii)  Appreciating the decision of the Hon’ble Supreme Court in the case of Textile Machinery Corporation Ltd., (107 ITR 195) wherein the Hon’ble Supreme Court approved the definition of ‘reconstruction of business already in existence.’

(ix)  Appreciating the fact that there is specific provision viz sub-section 12) of Section 80IA which provides that when an undertaking of an Indian Company eligible for deduction under the said section, is transferred in a scheme of amalgamation/merger then deduction under the said section would be available to the resulting company for the unexpired period and no deduction would be available where there is a conversion of a firm into a company as has been done in the assessee’s case.

 2.  It is prayed that he order of the ld. CIT(A) be cancelled and that of the AO may be restored.

 3.  The appellant craves to add or amend any ground of appeal before the appeal is heard or disposed off.”

4. The assessee in ITA No. 646/Chd/2009 has raised the revised following grounds of appeal:-

“That the ld. CIT(A) erred in law and as well as on facts while confirming the following disallowances:

 1.  Applicability of section 14A: That the ld. CIT(A) have erred in confirming the treatment of AO who has erred in disallowing Rs. 14,05,700/- by applying the provisions of section 14A and Rule 8D retrospectively.

 2.  Disallowance u/s 36(1)(iii)

 a.  That the ld. CIT(A) has erred in confirming the addition amounting to Rs. 440150/- to the returned income, calculated on an arbitrary basis on the ground that the assessee company has advanced its loan bearing funds to its associate concern, M/s SED Engineers and Fabricators Pvt. Ltd. (wholly owned subsidiary of the assessee company), the addition made is bad in law as well as on facts.

 b.  That the ld. CIT(A) erred in disallowing the partial interest of out of Rs. 73066/-.

 3.  Deduction u/s 80IB/80IC on AMC:

a.  That the ld. CIT(A) has erred in confirming the disallowance of Rs. 12,52,627/- as profit margin on the income from AMC services.

b.  Further, the amount at Point No. 3(a), being treated as ineligible has been computed at the assumed rate of 30% of the total amount of Rs. 41,75,422/- which is arbitrary and bad in law.

 4.  Deduction u/s 80IB/80IC on recovery of bad debt: That the ld. CIT(A) has erred in confirming the addition of Rs. 8,36,020/- being bad debts recovered as the amounting being not eligible for deduction u/s 80IB/80IC as the same is not derived from the industrial undertaking.

 5.  Deduction u/s 80IB/80IC on bought out components:

 a.  That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 1,08,12,103/- as profit from sale of bought out components as being ineligible for deduction u/s 80IB and 80IC.

 b.  The ld. CIT(A) has erred in accepting the method of calculation of ineligible profit used in above point No. 5(a), which has been computed at the assumed rate of 15% of the total purchase price of Rs. 6,12,68,584/- and is arbitrary and bad in law.

 6.  Consequential:

 a.  That the AO erred in levying interest u/s 234B/234D and withdrawing interest u/s 244A of the Act.

 b.  That AO erred in initiating penalty proceedings u/s 271(1)(c).

 7.  That the appellant craves leave to add, alter, amend, modify or forego any ground of appeal with the permission of the Hon’ble Bench of Income Tax Appellate Tribunal, before or at the time of hearing/final disposal of this appeal.

Any other point as may be necessary at the time of hearing of appeal.

That the above grounds are independent and without prejudice to one another.”

5. The assessee in ITA No. 1021/Chd/2011 has raised the following grounds of appeal:

“That the ld. CIT(A) Chandigarh has erred in law and as well as on facts while passing orders on the following grounds:

 1.  Applicability of section 14A: That the ld. CIT(A) has erred in confirming the treatment of AO who has erred in disallowing Rs. 1,34,06,300/- by invoking the provisions of section 14A and applying Rule 8D.

 2.  Applicability of 14A in MAT: That the ld. CIT(A) has erred on adding Rs. 1,34,06,300/- to Book Profits calculated u/s 115 JB vide explanation 1(f) to Sec 115 JB by invoking the provisions of section 14A and applying Rule 8D.

 3.  Disallowance u/s 36(1)(iii): That the ld. CIT(A) has erred in confirming the addition amounting Rs. 27,55,532/- to the returned income, calculated on an arbitrary basis on the ground that the assessee company has advanced its interest bearing funds to its wholly owned subsidiaries.

 4.  Disallowance of deduction u/s 80IB/80IC: That the ld. CIT(A) has erred in adjudicating that, benefit of deduction u/s 80IB and 80IC for Unit I and II, amounting to Rs. 14,55,22,952/- is not available to the assessee company for the unexpired period of the eligible deduction available to the erstwhile partnership firms.

 5.  Deduction u/s 80IB/80IC on recovery of bad debt: That the ld. CIT(A) has erred in holding that deduction u/s 80IB/80IC is not available on the amount of Rs. 23,61,692/- being bad debts recovered as alleging that the same is not derived from the industrial undertaking.

 6.  Deduction u/s 80IB/80IC on Misc. income: That the ld. CIT(A) has erred in holding that deduction u/s 80IB / 80IC is not available on the amount of Rs. 9,09,885/- being misc. income alleging that the same is not derived from the industrial undertaking.

 7.  Deduction u/s 80IB / 80IC on AMC income:

 a.  That the ld. CIT(A) has erred in confirming the disallowance of Rs. 4,42,708/- as profit margin on the income from AMC services by denying deduction u/s 80IB/80IC thereon.

 b.  Further, the amount at Point No. 7(a), being treated as ineligible has been computed at the assumed rate of 30% of the total amount of Rs. 14,75,692/- which is arbitrary and bad in law.

 8.  Deduction u/s 80IB/80IC on Engineering and Consultancy Income:

 a.  That the ld. CIT(A) has erred in confirming the disallowance of Rs. 19,35,642/- as profit margin from engineering and consultancy services by denying deduction u/s 80IB/80IC thereon.

 b.  Further, the amount at Point No. 8(a) being treated as ineligible has been computed at the assumed rate of 30% of the total amount of Rs. 64,52,083/- which is arbitrary and bad in law.

 9.  Deduction u/s 80IB / 80 IC on bought out components:

 a.  That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 1,15,07,683/- as profit from sale of bought out components as ineligible for deduction u/s 80IB and 80IC.

 b.  The ld. CIT(A) has erred in accepting the method of calculation of ineligible profits used in above point No. 9(a), which has been computed as the difference of sale and purchase of bought out components and is arbitrary and bad in law.

10.  Deduction u/s 80IB/80IC on High Sea Sales: That the ld. CIT(A) has erred in confirming the treatment of AO on Rs. 16,26,261/- as profit from High Sea Sales as being ineligible for deduction u/s 80IB and 80IC.

11.  Deduction of profits eligible for Section 80 – Hon’ble High Court in AT calculation: Despite being fully covered by Hon’ble Supreme Court, the ld. CIT(A) has erred in confirming the addition of Rs. 2,35,61,691/- in Book Profits u/s 115JB which was claimed as deduction as amount of profits eligible u/s 80HHC vide clause (iv) of Explanation 1 to Section 115JB.

12.  That the AO erred in levying interest u/s 234B/234C of the Act.

13.  That the AO erred in initiating penalty proceedings u/s 271(1)(c).

14.  That the appellant craves leave to add, alternatively, amend, modify or forego any ground of appeal with the permission of the Hon’ble Bench of Income Tax Appellate Tribunal, before or at the time of hearing/final disposal of this appeal.

15.  Any other point as may be necessary for adjudicating the appeal. The above grounds are independent and without prejudice to one another.”

6. The brief facts of the case are that the assessee is engaged in the business of manufacture and supply of machinery/items relating to sugar industry. The assessee had furnished return of income declaring income of Rs. 14,83,094/-. During the course of assessment proceedings the AO first considered the payments to clearing and forwarding agents and freight payments and held the same to be not allowable for non deduction of tax under the provisions of section 40a(ia) of the Act. The AO also invoked the provisions of section 14A of the Act and Rule 8D and computed disallowance of Rs. 14,05,700/- on the investment made by the assessee in shares of various companies, dividend from whom was exempted u/s 10 (38) of the Act. The assessee was also found to have given interest free loans to group concerns SED Engineerings and Fabricators Pvt. Ltd. to the tune of Rs. 69,04,602/-, on which interest of Rs. 4,40,150/- was disallowed. Another disallowance was made u/s 36(1)(va) of the Act on account of ESI, EPF not paid within stipulated period amounting to Rs. 1,89,672/-. The next addition was on account of addition to the fixed assets and interest allowability to the period prior to putting the said asset to use, totaling to Rs. 73,066/-. The assessee during the year had claimed bad debt written off to the tune of 39,68,062/-. In the absence of any details being furnished by the assessee in relation to the satisfaction of the conditions of Section 36(2) of the Act, the said amount was not allowed as claimed. The assessee had claimed prior period expenses of Rs. 1649912/-. In the absence of any details the same was added as income of the assessee. The next item of expenses considered by the AO was employees benefit expenses totaling Rs. 4,19,39,972/- which was the value of ESOPs given by the assessee to its employees. The AO noted that special resolution was passed at the extra ordinary general meeting held on 31.3.2006 for the purpose of issue of equity shares to the employees as Sweat equity. The fair value of the equity share was adopted at Rs. 106.26p and the shares were issued under the scheme with lock in period of five years. No allotment to issue such shares was done and the same was pending on 31.3.2006. The said shares were included in shares outstanding account. In case any of the employees left the employment before the expiry of lock in period of five years, his shares were to be forfeited by the Management. As per the AO, the said expenditure booked to the profit and loss account, was not an ascertained liability but was a contingent liability, as it was not benefit conferred on the employees without any restrictions. Accordingly the same was not allowed as an expenditure during the year.

6.1. The assessee had claimed deduction u/s 80IC/80IB of the Act. The plea of the assessee was that it had started its commercial production w.e.f. 1.12.2004 after taking over as going concerns, two running manufacturing partnership firms namely M/s Spray Engineering Devices, a partnership firm and C&C Systems. All the assets and liabilities of the partnership firm were taken over by the newly constituted company at their book values and there was simple change in constitution of the legal entity. The erstwhile partners were issued equity shares in lieu of their balances in capital accounts. The existing firms were enjoying the deductions u/s 80IB and 80IC of the Act on the date of their take over by the company. So the newly constituted company i.e. assessee started claiming deduction u/s 80IB and 80IC for the remaining period, out of the total period of 10 years, as prescribed, less the period for which the deduction had already been claimed in the hands of the firm/s. The AO while passing the order u/s 143(3) of the Act relating to preceding year i.e. Assessment Year 2005-06 allowed the claim of the assessee for deduction u/s 80IB/80IC of the Act following the Board Circular dated 31.12.1963 Reliance was placed on various case laws by the assessee for the above said proposition. The AO was of the view that the provisions of section 80IB (12)/80IA(12) of the Act clearly grant privilege only to the case of undertaking of Indian company being transferred during amalgamation or demerger to another Indian company. The AO was of the view that if an undertaking not owned by an Indian Company is transferred no such benefit would be available. The AO thus denied the benefit of deduction u/s 80IB/80IC of the Act for the unexpired period by holding it to be reconstruction of business already in existence as in Sec 80IB(2)(i) or 80IC(4)(i) of the Act. The AO also noted that w.e.f. Assessment Year 2007-08 the said privilege to provide deduction to undertaking u/s 80IA(12) had also been withdrawn by the legislature by introducing Section 80IA(12A) of the Act. The AO held that the principle of res-judicata does not apply to the assessment proceedings and where AO failed to notice the provisions of section 80IA(12) for Assessment Year 2005-06, the same could not be the basis for allowing the deduction in assessment year 2006-07.

7. The AO also noted that the assessee was not eligible for deduction u/s 80IB/80IC of the Act on certain receipts or income. The items of income considered by the AO were the AMC charges and consultancy charges. Vide observations in para 13.10 the AO computed the profits of business in relation to consultancy services and AMC services and estimated the same to be 30% and deduction u/s 80IB and 80IC on the income of Rs. 12,52,627/- was not allowed. Further the assessee had shown other income of Rs. 23,39,114/- on which a sum of Rs. 8,36,020/- was claimed as deduction u/s 80IB/80IC of the Act. The AO held that the nature of income shown under other income could not be derived from manufacturing activity. Interest on income tax refund was held to be income from other sources and other amounts were the income u/s 41 of the Act and rental income were not derived from manufacturing activities. The word ‘derived from’ being narrower, the claim of deduction u/s 80IB/80IC on other income of Rs. 8,36,620/- was rejected.

8. The next issue considered by the AO were the items being purchased directly from the market and being supplied to the customers i.e. the Voltage stabilizers, motors etc. The AO was of the view that the benefit of deduction u/s 80IB/80IC on such items had been considered and was not part of goods manufactured, could not be allowed. The total purchases of such goods were Rs. 6.12 crores and profit earned on the said goods was estimated at 15% being Rs. 1.08 crores and on the said amount deduction u/s 80IB/80IC, was denied. The AO also reworked the book profits u/s 115 IB by making adjustments on account of disallowance u/s 40a(ia) of the Act and disallowance u/s 14A of the Act.

9. The CIT(A) upheld the order of AO in respect of disallowance u/s 40a(ia) of the Act on payment to clearing and forwarding agent and freight payments. The next addition u/s 14A of the Act read with Rule 8D on account of investment in share of various companies was also upheld by the CIT(A). The CIT(A), however, deleted the adjustment made by the AO in relation to the disallowance u/s 40a (ia) of the Act in relation to the determination of book profits to be worked out u/s 115JB of the Act. Reliance was placed on the ratio laid down in Apollo Tyres, 255 ITR 273 (SC). The explanation of the assessee that it had advanced loans to its 100% subsidiaries SED Engineers and Fabricators Pvt. Ltd. on which no interest was charged, was considered by the CIT(A) and in view of the ratio laid down in Abhishek Industries, 286 ITR 1 (P&H), disallowance of interest relatable to such advances was upheld. The reliance on SA Builders, 288 ITR 1 (SC) was found to be mis-placed. The CIT(A) allowed the claim of the assessee in respect of late deposit of employees share of EPF and ESI. The AO was directed to allow the interest on investment for extension of existing business till the date of its being put to use on the basis of debt equity ratio during the year. The fee paid for increase in authorized capital were held to be disallowable in view of the ratio laid down in Brooke Bond, 225 ITR 789 (SC). The next issue of allowance of bad debt was remitted back to the AO to verify whether the said amount were shown as income in the earlier years. The next addition of prior period expense was upheld by the CIT(A) in the absence of any satisfactory explanation.

10. The next ground of appeal before the CIT(A) was the claim of deduction on account of ESOP credited to the profit and loss account. The CIT(A) referred to the resolution of extra ordinary general meeting held on 31.3.2006 allowing specific number of equity shares as per guidelines of SEBI. The shares were also found to have been allotted immediately thereafter and hence the allowability was crystalised. The CIT(A) relied on the ratio laid down in SSI Ltd. v. DCIT, 85 TTJ 1049 (Chennai) wherein the Chennai Bench of the Tribunal allowed the claim of the assessee in view of the assertion of the assessee that in case the employee leaves the organization, the assessee was offering to tax in the subsequent year, the value of forfeited shares by the Management. The CIT(A) thereafter considered the claim of the deduction u/s 80IB/80IC of the Act elaborately vide paras 72 to 80 of the appellate order. Placing reliance on the circular issued and the ratio laid down in Tech Books Electronics Services P.L., 100 ITD 125 (Delhi) where identical issue was involved held that the assessee was entitled to deduction u/s 80IB/80IC of the Act for the unexpired period.

11. The next issue before the CIT(A) was the disallowance of deduction u/s 80IB which relates to AMC and other incomes. The deduction claimed on AMC was not held to be derived from the business of undertaking in view of ratio laid down by any Coral Telecom Ltd. in ITA No. 203/Chd/2005. The order of the AO in estimating the expenditure allowable out of the aforesaid receipts was also upheld by the CIT(A). The CIT(A) also upheld the disallowance u/s 80IB/80IC on other income. The CIT(A) also upheld the order of the AO on not allowing deduction u/s 80IB/80IC on bought out components.

12. The assessee is in appeal against the order of the CIT(A) in not allowing certain ground of appeal and the Revenue is in appeal against the relief given by the CIT(A). The Cross-appeals relating to the assessee and the Revenue were heard together are being disposed off as under.

13. Shri Vineet Aggarwal appeared for the assessee and Smt. Jyoti Kumari put in appearance on behalf of the Revenue and put forward their contentions. The learned A.R. for the assessee has also filed written submissions which are taken on record and both the contentions and written submissions and the case laws relied upon by the learned A.R. for the assessee and learned D.R. for the Revenue would be referred to under the respective grounds of appeal.

ITA No. 701/Chd/2009: Revenue’s Appeal

(Assessment Year 2006-07)

14. The issue in ground No. 1(i) and 1(ii) raised by the Revenue is against recomputation of book profits under section 115JB of the Act. The Assessing Officer while computing the income of the assessee had made disallowance under section 14A of the Act. Consequent to the above said disallowance the Assessing Officer also recomputed the book profits under section 115JB of the Act by adding sum of Rs. 14,05,700/- being the adjustment as per Explanation – I(f) under section 115JB of the Act. The CIT (Appeals) had deleted the addition in view of the ratio laid down by the Hon’ble Supreme Court in Apollo Tyres [255 ITR 273 (SC) followed in CIT v. HCL Connect Systems & Services Ltd. [305 ITR 409 (SC)]. The Hon’ble Supreme Court had laid down the principle that the Assessing Officer while computing income under section 115J had the power to examine whether the books of account were properly maintained in accordance with the Companies Act and further had limited power of making additions/deductions as provided for in the Explanation to the said section. In view of the principle laid down by the Hon’ble Supreme Court in Apollo Tyres (supra) the Assessing Officer has limited jurisdiction while computing the book profits under section 115JB of the Act i.e. there is no jurisdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation to section 115JB of the Act. It may be pointed out that the provisions of section 115JB and 115J, which were before the Hon’ble Supreme Court in Apollo Tyres (supra), are peri metria. As per the Explanation to section 115JB of the Act, book profit is defined to be the net profit shown in the Profit & Loss Account for the relevant previous years as increased/reduced by the amounts specified in the clauses mentioned thereunder. The disallowance worked in the hands of the assessee under the provisions of section 14A of the Act is not covered by the aforesaid clauses and consequently we are in conformity with the order of the CIT (Appeals) in allowing the claim of the assessee by holding that no addition of Rs. 14,05,700/- is warranted, while computing the book profits under section 115JB of the Act. The ground Nos. 1(i) and 1(ii) raised by the Revenue are thus dismissed.

15. The issue in ground No. 1(iii) and 1(iv) is in relation to the deduction claimed on account of bad debts. The Assessing Officer had made an addition of Rs. 39,68,062/- on account of bad debts as the assessee had failed to furnish any information in respect thereof.

16. Before the CIT (Appeals) the claim of the assessee was that by an error the aforesaid evidence was not filed before the Assessing Officer and no further query was raised by the Assessing Officer in this regard. The additional evidence filed by the assessee before the CIT (Appeals) was admitted by the CIT (Appeals) and it was noted that the assessee had furnished chart of various parties in whose accounts the amounts were written off. The plea of the assessee was that the billing in respect of such amounts was done in the earlier years. The CIT (Appeals) had allowed the claim of the assessee in principle, however, the same was sent back to the Assessing Officer to verify whether the said amounts were shown as income in the earlier assessment years by the assessee.

17. The Revenue is in appeal against the above said directions of the CIT (Appeals).

18. Under the provisions of section 36(1)(vii) of the Act the assessee is entitled to deduction of the amount of any bad debt or part thereof, which is written off as irrecoverable in its accounts in the previous year. The above said deduction is allowable in the hands of the assessee subject to fulfillment of the provisions of section 36(2) of the Act, which interalia provide that no deduction shall be allowed on account of bad debts unless such debts or part thereof had been taken into account for computing the income of the assessee of the previous year in which such debt or part thereof was written off or in any earlier previous years. In the facts of the present case before us the assessee had written off bad debts to the tune of Rs. 39,68,068/- on account of the amounts due from various parties as per the details furnished before the CIT (Appeals). The aforesaid amounts once written off in the accounts of the assessee during the previous year are allowable as a deduction subject to fulfillment of the conditions laid down in section 36(2) of the Act that the said amounts had been shown as income in the previous year in which the said amounts were written off or in any other previous years. In view of the provisions of the Act we are in conformity with the order of CIT(A) in directing the Assessing Officer to verify whether the assessee had fulfilled the provisions of section 36(2) of the Act and in case of the said fulfillment, the amounts written off by the assessee in its books of account during the previous year were to be allowed as business deduction. Ground Nos. 1(iii) and 1(iv) raised by the Revenue are thus dismissed.

19. The issue in ground No. 1(v) is against the deletion of addition made on account of prior period expenses. The assessee during the year under consideration had claimed prior period expenses totaling Rs. 16,49,912/- and in the absence of the details, the said amount was disallowed by the Assessing Officer.

20. Before the CIT (Appeals), the claim of the assessee was that sum of Rs. 13,68,671/- was disallowed by the assessee itself and added back as its income in the computation of income filed for the year under consideration. The CIT (Appeals) vide para 56 noted that sums of Rs. 8,36,671/-, and Rs. 5,32,000/- were disallowed by the assessee under the head ‘preliminary expenses written off in unit-I’ and Rs. 9,63,000/- under the head ‘gratuity’. The CIT (Appeals) in view thereof allowed the claim of the assessee to the extent of Rs. 13,68,671/- and the balance addition of Rs. 2,81,241/- was confirmed by the CIT (Appeals).

21. The Revenue is in appeal against the aforesaid deletion of Rs. 13,68,671/-.

22. We are in conformity with the observations of the CIT (Appeals) that where the amount relating to prior period has been offered to tax by the assessee itself by way of re-adjustment of profits while filing return of income for the relevant previous year, the same is not to be disallowed again. However, in the facts and circumstances of the present case, the stand of the assessee that it has added back sum of Rs. 13,68,671/- in its computation of income needs verification at the end of the Assessing Officer. Therefore, we remit this issue back to the file of the Assessing Officer for the limited purpose of verifying whether the assessee has re-adjusted its profits from the business by adding the said amount of Rs. 13,68,671/- of the Act to its income in the computation of income filed in the year under consideration. If the assessee has so carried out the re-computation of its income, no addition is warranted on account of prior period expenses so written back by the assessee in its computation of income. The Assessing Officer shall verify the claim of assessee in this regard after affording reasonable opportunity of hearing to the assessee. Ground No. 1(v) raised by the Revenue is thus allowed for statistical purposes.

23. The issue raised vide ground No. 1(vi) is against the order of CIT (Appeals) in holding that the employee benefit scheme was an ascertained liability and not contingent liability.

24. The facts relating to the issue are that during the year under consideration the assessee had debited a sum of Rs. 4,19,39,972/- to the Profit & Loss Account as employee benefit expenses. The explanation of the assessee before the Assessing Officer was as under:

“The share outstanding account of Rs. 4,19,39,9721- in the balance sheet of M/s Spray Engineering Devices Limited as at 31st March, 2006 represents issue of 3,94,692 Sweat Equity shares to be issued to the employees of M/s Spray Engineering Devices Limited, free of cost for rewarding them for past services or providing know how for making available rights in the IPR as per the provisions of section 79A of the companies Act, 1956. However, in the books of M/s Spray Engineering Devices Limited, it has been booked at Rs. 106.26 per share (Face value of Rs. 10/- per share) at arms length price based on subscription agreement, representing a sum of Rs. 4,19,39,9721-. Accordingly, an amount of Rs. 4,19,39,9721- was charged to P&L account as employees benefit expenses. Pending allotment of 3,94,972 equity share to employees as on 31st March, 2006, the sum of Rs. 4,19,39,9721- has been shown as share outstanding account in the balance sheet. The reason for creating this share outstanding account of Rs. 4,19,39,972/- in the balance sheet is that at the time of finalizing the balance sheet i.e. 31st March, 2006, the company had offered fro sale 3,94,692 sweat equity shares by passing a board resolution and disclosure have been made in the balance sheet under the head “issued share capital”.

25. The Assessing Officer vide para 11.4 observed as under:

“Now from above it becomes evident that the said expenditure booked to Profit and Loss account was not an ascertained liability of Rs. 4,19,39,972/- but a contingent liability. It is not a benefit conferred on the employees without any restrictions. The employee was not free to encash these shares. Further resolution was passed on 31-03-2006 and amount taken to share outstanding account. No option was given or exercised by the employees for these shares upto the end of the financial year. The liability of the company would get determined when the employee gives its option and is able to encash it without any restriction. However this is not so in the year under consideration. So, the amount of Rs. 4,19,39,972/- not being an ascertained liability as on 31-03-06 is not allowed as expenditure in Profit and Loss account”.

26. The explanation of the assessee before the CIT (Appeals) was as under:

  i.  As per Section 79A of the companies Act, 1956, a company can issue sweat equity shares, if the issue of such shares is authorized by a special resolution passed by the Company in the general meeting. Therefore, the section has itself given powers to the General body to issue the said shares. Further the resolution must specify the No. of shares and class or classes of employees, to whom such equity shares are to be issued.

 ii.  In the Extra-Ordinary General Meeting held on 31st March, 2006, the resolution has been passed, which clearly says that 3,94,692 no. of equity shares be and are hereby issued (a), Rs. 106.26/- per share, for consideration other than cash, to the employees, a list of which is placed before this meeting and initialed by the chairman for the purpose of identification. This clearly shows that shares has been issued on that very date to all those employees, whose name is mentioned in the list and therefore the liability to issue the said shares on that very date has been crystallized. Further directions have been issued to the Company Secretary to do all the necessary compliances incidental and ancillary to the aforesaid issue. The copies of the resolutions and Certified copies of the Minutes of the EOGM held on 31-03-2006 is attached as per Annexure-3 & 4.

iii.  This Cleary depicts that shares has been issued on that date and the board has just to do the post — issue formalities of signing the said share certificates and authorizing someone to deliver the same to the respective employees within the time limit as prescribed in Section 113 of the companies Act, 1956 and the same has been completed on 10th May, 2006.

27. The CIT (Appeals) allowed the claim of the assessee, following the ratio laid down by the Chennai Bench of the Tribunal in S.S.I. Ltd. v. DCIT [85 TTJ 1049 (Chennai)].

28. The relevant contention of the learned A.R. for the assessee in this regard was that in the extraordinary meeting held on 31.3.2006, the list of the persons to whom shares were to be allotted was before the Board during the meeting and the shares were allotted thereafter.

29. The learned D.R. for the Revenue placing reliance on the order of the Assessing Officer pointed out that the issue stands covered by the ratio laid down in Ranbaxy Laboratories Ltd. v. Addl. CIT [124 TTJ 771 (Del)], EIMC K.C.P. Ltd. v. CIT [242 ITR 659 (SC) and VIP Industries v. DCIT [ITA No. 7242/Mum/2008 – date of order 17.9.2010. The learned D.R. for the Revenue also pointed out that the facts are enumerated by the CIT (Appeals) at page 28 of the appellate order.

30. The learned A.R. for the assessee pointed out that liability had crystallized and it was not contingent liability. The above said expenditure was incurred for benefit of the employees and was to be allowed as a deduction. The learned A.R. for the assessee further pointed out that the reliance placed by the learned D.R. for the Revenue on the ratio laid down in Ranbaxy Laboratories Ltd. [124 TTJ 771 (Del)] was in respect of allotment of shares of technical know-how and it was not applicable.

31. We have heard the rival contentions and perused the record. The issue raised vide present grounds of appeal is in relation to the equity shares to be issued to the employees as sweat equity. The assessee vide special resolution passed at the extraordinary general meeting held on 31.3.2006 had allotted 394692 number of equity shares @ Rs. 106.26 amounting to Rs.4.19 crores to its employees as sweat equity. List of the allottees was before the Board during the course of extraordinary general meeting and the finding of the CIT (Appeals) is that the said shares were allotted immediately thereafter. The Revenue has not controverted the above said finding of the CIT (Appeals). In view thereof, we are in agreement with the order of the CIT (Appeals) that the liability had got crystallized as on 31.3.2006. Admittedly, no allotment was done on 31.3.2006 but the facts of the case reflects that the assessee had specified the number of shares to be allotted to its employees as on 31.3.2006 and immediately thereafter the said shares were so allotted. Consequently, mere non-allotment of the shares pending completion of certain formalities, does not merit the disallowance of said expenditure being contingent liability. The allotment of the sweat equity of the employees by the assessee was an ascertained liability on the date of passing of the resolution by the Board of the assessee company. Merely because under the scheme of allotment of said equity, there was a lock in period of five years under which in case the employee left the employment before the expiry of five years, the shares so allotted to him would vest with the assessee company, does not make the liability as contingent. The assessee had explained that as per the scheme where the said shares are forfeited by the management, the same would be offered to tax in the relevant assessment year. We further find that the issue stands covered by the ratio laid down by the Chennai Bench of the Tribunal in S.S.I. Ltd. v. DCIT (supra) and relevant observation of the Tribunal are incorporated under para 62 at page 28 of the appellate order. The reliance placed by the learned D.R. for the Revenue on Ranbaxy Laboratories Ltd. v. Addl. CIT (supra) is misplaced as the issue before the Delhi Bench of the Tribunal was at variance with the facts of the present case where the claim was allowance of notional value of shares i.e. difference between the market price of the shares and price at which shares were allotted to the employees under ESOP scheme. Similarly issue before the Hon’ble Supreme Court in EIMCO K.C.P. Ltd. v. CIT (supra) was at variance with the issue raised in the present appeal. The next reliance by the learned D.R. for the Revenue on the ratio laid down in VIP Industries v. DCIT (supra) where the issue raised was in respect of claim of expenditure being the difference between the market price of the shares and price at which shares were allotted to the employees under ESOP scheme. In the facts of the present case before us, what has been booked as expenditure, is the value of shares allotted to the employees under the sweat equity scheme. In the totality of the facts and circumstances of the case, we are in agreement with the CIT (Appeals) in allowing claim of deduction.

32. Ground Nos. 1((vii) to 1(ix) raised by the Revenue are against deduction claimed under section 80IB/80IC of the Act by the resultant company.

33. The assessee company had taken over the business of two partnership firms and as per the Assessing Officer because there was no demerger or amalgamation but reconstruction of the business of the assessee, it was not eligible for deduction under section 80IB of the Act. The CIT (Appeals) had allowed the claim of the assessee.

34. The learned D.R. for the Revenue stressed that the observations of the CIT (Appeals) are incorrect as where the status of partnership firm had changed to an Indian company, it was a case of reconstruction and not a case of amalgamation/de-merger. Reliance was placed on the provisions of section 80IA(12) of the Act. Further reliance was placed on the ratio laid down in 210 ITR 129 (SC) and in 107 ITR 195 (SC).

35. The learned A.R. for the assessee pointed out that the perusal of the agreement placed at page 642 reveals that the two partnership concerns i.e. M/s Spray Engineering Devices Ltd. and C & C Systems were taken over as a going concern. The learned A.R. for the assessee drew our attention to the order passed by the Tribunal in assessee’s own case relating to assessment year 2005-06 in ITA No.514/Chd/2010 where vide order dated 22.9.2011 it has been held that deduction under section 80IB/80IC of the Act is available to the undertaking and not the assessee and also that the provisions of section 80IA(12) of the Act are not applicable to the facts of the present case. A copy of the order is palced on record. Further reliance was placed on the ratio laid down by the Hon’ble Punjab & Haryana High Court in CIT v. Mega Packages in ITA No. 145 of 2011 date of decision 24.8.2011 wherein the issue was whether the assessee was entitled to the benefit of deduction under section 80IC of the Act for the remaining period after the proprietary concern was converted into a partnership concern and the issue was decided in favour of the assessee.

36. We have heard the rival contentions and perused the record. The business was being carried out by two partnership concerns i.e. M/s Spray Engineering Devices Ltd. and C & C Systems and as per the agreement the assessee company had taken over the two running manufacturing partnership firms as going concerns. The Memorandum of Association of the assessee company vide its main object provide the same. Further object of the assessee was to carry on the business of manufacture, purchase, sale, i.e., in the field of sugar, energy, power, etc. Memorandum and Articles of Association of assessee company is enclosed at pages 640 to 677. The two manufacturing partnership concerns were claiming deduction under section 80IB/80IC of the Act. The assessee company on amalgamation claimed the above said deduction under section 80IB/80IC of the Act for the unexpired period as postulates under the Act. The issue arising in the present grounds of appeal is whether after the said amalgamation or take over by the assessee company, deduction under section 80IB/80IC of the Act for the remaining period was available to the assessee company. The Tribunal (supra) in assessee’s own case while deciding appeal in assessment year 2005-06 have held that deduction under section 80IB/80IC of the Act was available to the undertaking and not the assessee as envisaged in CBDT Circular No. F15/5/63/IT (A-1) dated 13.12.1963. The Tribunal further held that the provisions of section 80IA(12) of the Act were not applicable to the facts of the present case as business of the two firms had been transferred under the scheme of the Income Tax Act. The Hon’ble Punjab & Haryana High Court in CIT v. Mega Packages (supra) had also laid down the proposition that the benefit admissible to an undertaking under section 80IC of the Act for the remaining period could not be denied to the assessee on the ground that section 80IA(12) of the Act embraces only the cases of amalgamation or demerger of Indian company. It was further held that where the proprietaryship business was taken over by the partnership concern, it could not be held to be the result of splitting or reconstructing of business already in existence, which could justify denying the benefit under section 80IC(4)(ii) of the Act. The Hon’ble High Court held that under the provisions of section 80IC of the Act the benefit was available to an undertaking which had fulfilled the conditions laid down under section 80IC of the Act. It was further held “Section 80IC of the Act bestows the deduction under the Act upon the undertaking and not the owner. Once the same is to be allowed to undertaking the change in ownership of the undertaking would not disentitle the successor, the benefit of deduction for an expired period. Reliance was placed on the Circular dated 13.12.1963 by the Hon’ble Court and it was referred that the said Circular though was issued with reference to section 84, which was replaced by section 80J which has been omitted, but the provisions of section 84/80J and 80IC were similar in the context of benefit of deduction to be allowed to an undertaking. In view of the above said ratio laid down by the Hon’ble Punjab & Haryana High Court, we hold that the assessee is entitled to the benefit of deduction under section 80IB/80IC of the Act for the un-expired period as deduction is allowable to an undertaking and the taking over of the business of two partnership concerns by the assessee company does not amount to reconstruction of business as business of the undertaking had continued. In view thereof, we dismiss ground Nos. 1(vi) to 1(ix) raised by the Revenue.

ITA No. 646/Chd/2009 : Assessee’s Appeal

(Assessment Year 2006-07)

37. The issue in ground No.1 raised by the assessee is against the disallowance under section 14A of the Act. The Assessing Officer during the course of assessment proceedings noted that the assessee had made investment in shares of other companies totaling Rs. 3.01 crores. The assessee had borrowed funds on which interest was being paid by the assessee and consequently the Assessing Officer was of the view that the interest expenditure relatable to the investment made by the assessee in the shares of the companies, income from which was exempt, was disallowable under the provisions of section 14A of the Act. The Assessing Officer vide para 4.3 has noted the fact that during the year under consideration the assessee had not received any dividend income. Further in para 4.8 the Assessing Officer admits that there was no prescribed method for making disallowance under section 14A of the Act. The Assessing Officer vide para 4.8 considering the total expenditure and the investment made by the assessee which admittedly was made in the preceding years in relation to the total assets held by the assessee, computed the disallowance on account of interest under Rule 8D(2)(ii) of the Act at Rs. 12,55,100/- and further made disallowance of Rs. 1,50,600/- on account of other amount disallowable, resulting in disallowance of Rs. 14,05,700/-. The said observation of AO was upheld by the CIT (Appeals) vide para 2.1 of the appellate order against which assessee is in appeal.

38. The learned A.R. for the assessee pointed out that the assessee company had made investment of Rs. 3.01 crores in M/s Shree Sai Baba Sugar Mills Ltd, which was a sick sugar mill and there was no intention to earn dividend income from such investment and further no dividend was received as the said company was in losses. It was further stressed by the learned A.R. for the assessee that no expenses were incurred during the year under consideration to safeguard such investment. The Ld. AR further stressed that the funds borrowed in the nature of term loan and CC limits were relatable to investment in plant & machinery and in stock and debtor and consequently no disallowance out of in expenditure was merited in the case. The learned A.R. for the assessee further submitted that no disallowance out of interest expenditure was warranted in view of the ratio laid down in S.A. Builders (supra). Further it was pointed out that the disallowance under section 14A of the Act in the present case has been worked out for assessment year 2006-07 by invoking the provisions of Rule 8D, which is prospective in nature as held by the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT & Another. [234 CTR (Bom) 1].

39. The learned D.R. for the Revenue pointed out that the dividend income earned by the assessee was exempt and reliance was placed in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT & Another. [328 ITR 81 (Bom)].

40. We have heard the rival contentions and perused the record. The disallowance under section 14A of the Act was made by the Assessing Officer in relation to the investment made by the assessee in the shares totaling Rs. 3.01 crores. The explanation of the assessee vis-à-vis aforesaid investment was that it was engaged in the manufacturing of equipments for sugar industry. The assessee had made investment of Rs. 3.01 crores by way of shareholdings in M/s Shree Sai Baba Sugar Mills Ltd., which was a sick sugar mill. The said investment was made by the assessee to test run its equipment in such sugar mill. The said investment was made in the earlier years and not during the year under consideration. The assessee has no intention to earn any dividend from the said investment as the company in which the amount was invested was running into losses. Further the assessee during the year under consideration had received no dividend income whatsoever. The first plank of argument of the learned A.R. for the assessee vis-à-vis the aforesaid investment was that no funds were borrowed for the said investment and further in any case, the investment having made in the course of business by the assessee out of its accruals, does not warrant any disallowance under section 14A of the Act, in view of the ratio laid down by the Hon’ble Supreme Court in S.A. Builders (supra). We find merit in the plea of the assessee that where a business strategy had been adopted by the assessee by way of investment in shares of sick company in order to take over the said company for widening its operation of business, cannot be held to be investment per se. The decision making of a business man by way of strategy planning in allied line of business is a decision made in the course of carrying on the business and the Assessing Officer cannot sit in judgment seat to comment upon the same. Once the assessee has been found to have made a business investment by way of shares in related line of business, the said investment though held by way of shares in the said company cannot be subjected to disallowance under section 14A of the Act, which in any case is relatable to disallowance of the expenditure out of the exempt income earned by the assessee, by way of its investment in shares of other company. In the facts of the present case the investment was purely of business nature as the company in which the amount was invested was a loss making company and there was no question of earning any dividend income from such investment. In the totality of the facts and circumstances of the case we find no merit in the orders of the authorities below in disallowing any expenditure under the garb of section 14A of the Act. We are guided by the ratio laid down by the Hon’ble Supreme Court in S.A. Builders v. CIT (supra). Further the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. (supra) have held that the provisions of Rule 8D are applicable from assessment year 2008-09 and are not retrospective. The year before us under appeal is assessment year 2006-07 and consequently we find no merit in the order of the Assessing Officer in invoking the provisions of Rule 8D for computing the disallowance on account of interest expenditure and administrative expenditure. In the year under consideration the assessee has not earned any dividend income. Ground No.1 raised by the assessee is thus allowed.

41. The issue in ground No.2 raised by the assessee is on account of disallowance under section 36(1)(iii) of the Act. The assessee has raised two aspects of the said disallowance under section 36(1)(iii) of the Act. One is in relation to the interest free advances made to the group concern M/s SED Engineers & Fabricators Pvt. Ltd. and the second issue is in respect of addition to the fixed assets made during the financial year and the interest relatable to the period prior to putting the assets to use, has been capitalized by the Assessing Officer.

42. In the Balance Sheet the assessee had shown debit balance of Rs. 69,04,602/- to its group concern M/s SED Engineers & Fabricators Pvt. Ltd. The Assessing Officer has annexed copy of account of the said party as annexure-A-3 to the assessment order. The perusal of the said copy of account reflects the transfer of funds on various accounts on day-to-day basis by the assessee to M/s SED Engineers Fabricators Pvt. Ltd. The explanation of the assessee in this regard is that the said payments were made for business purposes as is apparent from the narration of the entries in the copy of account itself. The second plea of the assessee was that it had sufficient interest free funds for advancing the interest free advances to its subsidiary. In any case the borrowed funds were claimed to be utilized for specific business needs i.e. purchase of fixed assets investment in shares/securities. The disallowance of Rs. 4,40,150/- was made out of the interest expenditure claimed by the assessee by invoking provisions of section 36(1)(iii) of the Act.

43. After hearing both the parties and the plea of the assessee that the transaction was on account of commercial expediency and consequently the ratio laid down by the Hon’ble Supreme Court in S.A. Builders (supra) was applicable, we find that the assessee has raised secured advances against which it was paying interest, which is claimed an expenditure in the Profit & Loss Account. The perusal of the copy of account placed at Annexure A-3 reflects that the assessee had transferred funds for day-to-day running of the business of its subsidiary. The amounts have been advanced for the payment of salaries or for payment of rent and even for the payment to the parties i.e. for various bills raised by the subsidiary. In addition, on monthly basis the assessee had simply transferred funds to the bank account of the assessee on various dates for which there is no justification or no commercial expediency brought on record. In the case of the assessee where it has mixed funds available for its business activity, the plea of the assessee that it had interest free funds available for the purposes of advancing to its subsidiary cannot stand in view of the ratio laid down by the Hon’ble Punjab & Haryana High Court in CIT v. Abhishek Industries [286 ITR 1 (P&H)]. The transfer of funds in the range of Rs. 5 lacs or there about from month to month also does not justify the plea of commercial expediency raised by the learned A.R. for the assessee. In the totality of the facts and circumstances and applying the ratio laid down by the Hon’ble Punjab & Haryana High Court in Abhishek Industries (supra) we uphold the disallowance of Rs. 4,40,150/- under section 36(1)(iii) of the Act.

44. The next related issue raised was against disallowance of Rs. 73,066/- on account of interest capitalized for the period prior to putting the assets to use. The total addition to the fixed assets during the previous year was Rs. 3.10 crores and the Assessing Officer had tabulated the details regarding the amount paid, date of payment and date of use of assets as annexure A-4 attached to the assessment order and capitalized the interest to the extent of Rs. 73,066/-.

45. The CIT (Appeals) vide para 41 directed the Assessing Officer to disallow interest on the basis of debt equity ratio.

46. The assessee is in appeal against the order of the CIT (Appeals).

47. In the entirety of the facts and circumstances of the case where the assessee has failed to establish its case of availability of non-interest bearing funds and specially in view of the mixed pool of funds available with the assessee, as referred to by us in paras hereinabove, we find no merit in the present ground of appeal raised by the assessee. Thus ground No.2 raised by the assessee on two accounts is dismissed.

48. The issue raised in ground No.3 is against non-allowance of deduction under section 80IB/80IC of the Act on AMC charges. Under the provisions of section 80IC of the Act deduction is allowable against the profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2) of section 80IC of the Act, which talks of manufacturing or production of any article or thing, not being any article or things specified in Thirteenth Schedule and where the assessee undertakes substantial expansation during the period specified thereunder section 2(a) to section 80IC of the Act and under section 2(b) refers to manufacture or production of any article or thing specified in Fourteenth Schedule or commencing any operation specified in that Schedule between the period enumerated thereunder. Implication of section is that the profits and gains which are eligible for deduction under section 80IC of the Act should be derived from the manufacturing or production activity carried on by the assessee.

49. Now coming to the facts of the present case, the explanation of the assessee vis-a-vis the AMC charges received by it is as under:

“With regard to the above we would like to bring to your notice that we are providing customized cooling and condensing systems to the sugar systems to the sugar systems based on our own assessment of the clients’ specific needs. Client needs are based on the sizes of the sugar mill and the type of the existing equipment of the sugar mill.

We also provide automation of the above said equipments based on the client needs. Further the smooth running of the automation units the AMC of these units is provided to us. AMC contract normally covers the keep up of the equipments and all damages occurred in the routine operation.”

50. The assessee has furnished on record communication with certain customers to whom it had supplied the cooling and condensing systems and Annual Maintenance Contract (AMC) of the said systems were to be carried out by the assessee at negotiated terms and conditions. The claim of the assessee was that it was providing AMC to only such cooling and condensing systems, which were manufactured by it and supplied to the customers as the systems provided by the assessee were client based, depending on the size of the sugar mill and type of the existing sugar mill. The total AMC charges received by the assessee during the year were Rs. 37,75,423/-. We find that the Hon’ble Himachal Pradesh High Court in assessee’s own case in ITA No.39 of 2006 vide decision dated 7.11.2009 had held that the words ‘derived from’ in section 80IB of the Act were much narrower in connotation as compared to the words ‘attributable to’. It was further laid down that The Industrial Undertaking would be entitled to claim deductions under Section 80-IB only if it shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The Hon’ble High Court after laying down the above said principles held that the assessee was entitled to claim deduction under section 80IB of the Act on MODVAT credit and also erection and commissioning charges, being directly relatable to the business and the source of the income being business itself. The Hon’ble High Court further held that When the assessee is engaged in the business of manufacture, the work ‘manufacture’ cannot be read so narrowly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and therefore eligible for deduction under Section 80-IB.

51. Following the above said parity of reasoning and in view of the factual aspect brought on record by the assessee, we hold that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC of the Act. Ground No.3 raised by the assessee is allowed.

52. The next issue raised is against non-allowance of deduction under section 80IB/80IC of the Act on the addition made of Rs. 8,36,020/- being bad debts recovered. The assessee during the year under consideration had claimed deduction under section 80IB/80IC of the Act on other income of Rs. 8,36,020/-, the detail of which are as under:

	Amount (Rs. )
Excess provision written back	1,29,662/-
Bad Debts recovered	5,56,696/-
Income tax Refund	92,090/-
Amount written off	38,234/-
Rental Income	18,000/-
Excess and short	1338/-
Total	8,36,020/-

53. The assessee has raised the issue vide ground No.4 against the addition on account of bad debts recovered being not eligible for deduction under section 80IB/80IC of the Act. Though the assessee has raised the grounds of appeal against the addition of Rs. 8,36,020/-, but the total amount of bad debts recovered was Rs. 5,56,696/-. The claim of the assessee in relation to the said amount is that it related to the recovery of bad debts written off earlier, which had direct relation to the income of the industrial undertaking. The learned A.R. for the assessee had placed reliance on the ratio laid down in Amar Radha Battery [91 ITD 280 (Hyd)] wherein it has been laid down that the amount of bad debts should be treated as amount derived by the industrial undertaking as the write off of bad debts went to reduce the income and the inflow goes to increase the income derived from the industrial undertaking.

54. The learned D.R. for the Revenue relied upon the ratio laid down in Pandian Chemicals Ltd. v. CIT [262 ITR 278 (Supreme Court)].

55. We hold that the amount received on recovery of bad debts is income derived from industrial undertaking in view of the ratio laid down by the Hyderabad Bench in Amar Radha Battery (supra). The outflow of bad debts written off is allowable as a deduction while computing the income of the industrial undertaking, eligible for deduction under section 80IB/80IC of the Act. Consequently, the inflow of the amount of bad debts or Rs. 5,56,696/-recovered is includible as profits of eligible unit, on which deduction under section 80IB/80IC of the Act is claimed. In view thereof, ground No.4 is allowed.

56. The issue raised vide ground No.5 is against non-allowance of deduction under section 80IB/80IC of the Act on the alleged profits on sale of components of system.

57. The brief facts relating to the issue are that the assessee was engaged in manufacturing machinery for sugar industry as well as cooling and condensing system. The assessee claimed that it was carrying on the activities which were of manufacturing in nature. The Assessing Officer from the details furnished by the assessee noted that the assessee was not manufacturing all the items, it was supplying to the customers. Some particular items were being purchased from the market and many times were directly delivered to the customers by the supplier and some times of the said machinery/items were sent alongwith the machinery manufactured by it. The Assessing Officer referred to the voltage stabilizers, motors, pumps, switch gear, control valve, cable, etc.. The assessee was requisitioned to furnish copies of its contract with the customers or the purchase orders placed by the customers and to explain how the profits on the said items not manufactured by it, were eligible for deduction under section 80IB/80IC of the Act. Copy of purchase order is enclosed as Annexure A-7 of the order. The Assessing Officer was of the view that the assessee is just a supplier of some major parts of the cooling and condensing system or sugar industry machinery which go into making of a complete cooling and condensing system or sugar industry machinery. Civil work is an important ingredient of the system as without proper foundation no such installation of heavy machinery is possible but the assessee is not into doing the said work. The contract is normally for supply of such manufactured components as well as the other bought out things and the assessee enters into a civil contract for the same. So claim of the assessee that it is claiming deduction for manufacture of sugar industry machinery or cooling systems is not correct. The Assessing Officer thus held that the assessee was not entitled to the benefit of deduction u/s 80IB/80IC on such items, which have been traded by it and were not the integral part of the goods manufactured by it. The Assessing Officer, however, was of the view that the benefit of certain items were to be allowed to the assessee, i.e. nuts or bolts or sheets purchased by it. From the perusal of the Profit & Loss Account the purchase price of the traded goods was Rs. 6.12 crores and in views of the net profit rate of the assessee being approximately 14.9%, gross profit rate being approximately 48.13%, the profits earned on the traded goods was estimated at 15%. Thus sum of Rs. 1,08,12,103/- was considered as profit from trading activity on which deduction under section 80IB/80IC of the Act was not granted.

58. The CIT (Appeals) upheld the order of the Assessing Officer. Reliance was placed on the ratio laid down by the Hon’ble Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. in ITA No.278 of 2007 placed as Annexure A-2 to the appellate order.

59. The learned A.R. for the assessee placed reliance on the ratio laid down in Mihir Engineers Ltd. v. JCIT [112 TTJ (Mum) 940]. The relevant facts relating to the issue as brought out by the assessee before the CIT (Appeals) and as reproduced under para 89 at page 47 of the appellate order are as under:

“The appellant is engaged in the supply of complete assembly of the cooling and condensing systems which consists of both the manufactured as well as bought out items. The contract with the customer is to make the entire assembly available in running mode at the site of the sugar plant. Thee are certain components without which the system cannot be operated, however, those components are not manufactured by the appellant company. Hence, these components are procured from the suppliers and for purely commercial reasons, some times these components are directly delivered at the site of the customers, However, since the supply of these components forms an integral part of the entire assembly of the cooling and condensing system, it is respectfully submitted that the entire income earned from the cooling and condensing system constitutes the profit delivered from the industrial undertaking and hence, eligible for deduction under sections 80IB and 80IC of the Act.”

60. The explanation of the assessee were that in addition to manufacturing certain parts of the cooling and condensing system, it was also assembling -the bought out items in order to make available the whole unit in running condition at the site of the company/plant. The components manufactured by the assessee in addition of the bought out items were integral part of the cooling and condensing system, which was the manufacturing business carried by the assessee. The issue arising in the present appeal is whether deduction under section 80IB/80IC of the Act is to be allowed on such bought out components.

61. Similar issue arose before the Mumbai Bench of the Tribunal in Mihir Engineers Ltd. (supra) where the Tribunal vide paras 23 to 30 held as under:

23.The deduction under section 80-IA of the Act is restricted to the profits and gains derived from the business of an industrial undertaking being an eligible business, subject to conditions enumerated in sub-section (2) of section 80-IA of the Act. The clause (iii) to section 80-IA(2) of the Act provides that for the eligibility of deduction, the industrial undertaking should manufacture or produce any article or thing, other than those specified in Eleventh Schedule. The deduction under section 80- IA of the Act is limited to the items manufactured or produced by the assessee. The word manufacturing or production is not defined in the Act. The distinction of the word ‘manufacturing’ or ‘production’ was clarified by Hon’ble Supreme Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412¹ wherein it has been held as under :

“The word ‘production’ has a wider connotation than the word ‘manufacture’. While every manufacture can be characterized as production, every production need not amount to manufacture. The test evolved for determining whether manufacture can be said to have been taken place is, whether the commodity which is subjected to the process of manufacturing can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity.

The word ‘production’ or ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.”

24. Further it was held by the Hon’ble Bombay High Court in CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325, wherein it has been held as under :

“The word ‘manufacture’ has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word ‘manufacturer’ in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words ‘manufacture’ and ‘produce’ apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word ‘manufacture’, assembling of automotive bus or truck chasis from imported parts in a ‘knocked down’ condition, could give rise to an article which is totally different from the parts and could amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced.”

25. The requirement of law is manufacturing but the whole process may not be carried out the assessee himself. The Chandigarh Bench of Tribunal in the case of Sond Bharat Pedals (India) v. ITO [2003] 84 ITD 89 had held as under :-

“It is not necessary that the assessee should carry out all the manufacturing operations itself, in order to be entitled to benefit of deduction under section 80-I. Such operations can be got done from outside agencies on payment of labour service charges. In fact certificate issued by the Punjab Government showed that the assessee was registered as a small scale industrial unit and the trading account showed the assessee’s sales of Rs. 45.98 lakhs for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, it would be entitled to deduction under section 80-I even though part of such operations was got done from outsiders. Thus, the assessee was engaged in the business of manufacturing bicycle pedals and, therefore, was an industrial undertaking entitled to deduction under section 80-I.”

26. The Delhi Bench of Tribunal in the case of Jackson Engineers (P.) Ltd. v. ITO [1989] 31 ITD 79 had held as under :

“From the perusal of pictures given by the assessee in respect of diesel generator sets assembled or manufactured by the assessee it was clear that the same was named as ‘Jackson’. The said engines were required by large industrial house for meeting their power requirements. The logo which was placed mainly on the engine was ‘Jackson’ and the same were made in various kinds and ranges in 1000KVA. There was no controversy about the fact that there were as many components of the said machine. The perusal of list of salaries and workers also showed that the assessee was using different components which might not be technically speaking, raw material, but something between raw material and generating set. There was no controversy about the fact that the assessee purchases its alternators and engines separately from lead manufacturers. What the assessee assembled and manufactured through assembling was not the same name which was assigned to the parts. The engine made by the assessee was known as diesel generating set. With this process in view and there being a separate name in the market for what the assessee made the assessee could not be treated as non-industrial undertaking. Thus the order of the Commissioner (Appeals) was not justified in treating the assessee as the industrial undertaking.”

27. The issue of purchasing different components, different equipments and spare parts from various concerns and their assembly, fabrication and erection into plant known as ETP was considered at length by Delhi Bench of Tribunal in Degremont India Ltd. v. Dy. CIT [1996] 59 ITD 423 and after deliberation at length on the facts, decision of Apex Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412¹ and various other judicial pronouncements of various courts, it was held that the assessee was covered within the definition of manufacturing of an article or thing. The Delhi Bench of Tribunal in Degremont India Ltd.’s case (supra) had held as under :

“It is apparent from a plain reading of the judgment of the Supreme Court in N.C. Budharaja & Co.’s case (supra) that the various findings given related solely and exclusively to concerns engaged in the business of construction of dams and civil works. There was not a single word or whisper in the said judgment by which it could be inferred that an assessee engaged in the activities of designing, fabricating, erecting, supplying, installation and commissioning of a plant like the one supplied by the assessee could be covered by the aforesaid judgment. It is well-settled law that the judgment in each case has to be seen in the light of the facts of that case. A decision is to be understood in the context of the facts in which the decision is rendered. A case is precedent for what it explicitly decides and nothing more in the conditions of people, even the words occurring in a statute are required to be interpreted differently keeping in mind the context in which such expressions have been used in the relevant provisions of law. Therefore, the aforesaid judgment did not in any manner support the revenue’s contention. The provisions of section 80-I are intended to provide an incentive for investment in certain desired sectors and promote industrialization in developing countries which has adopted the policy of liberalization.”

It was further held as under :

“In the instant case, the assessee was purchasing different components, different equipments and spare parts from various other parties and were assembling those components, equipments and accessories and thereby they were preparing fabricating and erecting a plant which was known as ETP. The ultimate end product which was prepared as a result of assembling of various components with the constant application of technical know-how was the ETP. The ETP was obviously distinct and different plant than the various components, equipments, purchased or got manufactured according to the tailor made requirement from the different suppliers. The activities carried out by the assessee were, therefore, clearly covered within the definition of manufacture of an article or thing.

The assessee had undertaken to design, engineer, manufacture, supply, install and commission the ETP and also undertook to give performance test. The obligation of the assessee would come to a concluding stage only after successful commissioning of the plant. The various bills prepared by the assessee from time to time was merely a mode of payment during the currency of the long period of the carrying out of the entire work. It would be evident from the contract executed by the assessee with the parties that such mode of payment was mutually decided between the parties so that the assessee received the payments on pro rata basis with the progress of the work. Such an arrangement was quite usual and natural in cases of such turnkey project so that the supplier received the payment from time to time.”

28. Further, the Ahmedabad Bench of Tribunal in the case of Enviro Central Associates v. Asstt. CIT [1995] 78 Taxman 214 (Mag.) had held as under :

“In the instant case, the activities of the assessee-firm were that of manufacturing or that of producing an article as they were constructing water air pollution plants. Thus, the assessee-firm was an industrial undertaking and was engaged in manufacturing or producing an article in the shape of air, water pollution control. That the assessee was manufacturing or producing the plant in backward area, was one of the requirements of the claim under section 80HH. The contention of the assessee was that only 11.45 per cent of the total receipt had been taken for deduction under section 80HH as that work alone was done in backward area and it was not expected from the assessee to have its office or plant in backward area. The crux of the case laws is that if an industrial undertaking begins to manufacture or produce outside in any backward area, it is entitled to deduction under section 80HH. The assessee for, set up its own industrial undertaking at the site of its customers for whom water air pollution control plant was manufactured and of the places which were falling under the backward area declared under the Act, then, naturally the assessee should be getting benefit of the same and the computation made by the assessee-firm of the same was correct one.”

29. The objection of the learned DR for the revenue that situs of assembly is important, has been dealt with by the Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 649. There is no merit in the contention of the learned DR for the revenue that main activity of the assessee is of erection at client’s site. The end-product is an integrated unit. The assessee is required by its clients to supply a cooling tower, parts of which are manufactured by assessee and certain parts/components are bought from outside. The end-product is the cooling tower supplied to the client. The assessee in its Quotation made to its client’s requisitions, also Guarantees the above-said equipment by way of Warranty as incorporated in the Quotation at page 245 of the paper book. The Warranty is against defect in materials and workmanship when erected and operated in a manner provided by us (the assessee).

30. The Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 649 had held as under :

“It has been held by the Supreme Court in the case of CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412 / 70 Taxman 312 , that an article or thing must be understood to be movable one. An article can be said to be a movable item only if it is capable of being moved from one place to another. The reasoning given by the Commissioner (Appeals) was that where the plant is erected, it is embedded to the earth and, therefore, cannot be said to be a movable property. Merely because the plant is attached to earth by fixing the same on the foundation by nut and bolts, it cannot be said that it is embedded to the earth or it is attached to the earth. It cannot be disputed that such plant can be shifted from one place to another by unscrewing the same. Therefore, the assessee was engaged in the business of manufacturing and fabricating of plant which was an article or thing as mentioned in section 80-I.

….Further, most of the work was done by the sub-contractors under the supervision of the employees of the assessee. Therefore, the question of showing power expenses did not arise. In this connection, it has been held in CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 (Bom.) that where the manufacturing activity has been carried on by another concern under the supervision of qualified staff of the assessee then such activity can be treated as activity of the assessee. On the basis of that decision it was to be held that the assessee had been carrying on manufacturing activity.”

62. In respect of the deduction claimed under section 80IA of the Act on bought out components the Tribunal held as under:

“31. The deduction under section 80-IA of the Act is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking as per stipulations in section 80-IA(2), which inter alia requires the manufacturing or production of an article or thing not being any article or thing specified in Eleventh Schedule. In the instant case before us, the assessee was manufacturing components of cooling towers in its factory unit at Chhatral, which in-turn were exigible to Excise Duty. The profits on sale of said components were entitled to deduction under section 80-IA of the Act and as allowed by Assessing Officer. The assessee in the present case was not in the business of sale of components of cooling towers, but the cooling tower as a whole, as is evident from the enquiries of the client, Quotations and Performa Invoice raised by the assessee. In the instant case, the assessee purchases various bought out components, which along with manufacturing components are assembled at the client’s site and the cooling tower is erected. The ultimate product erected by the assessee was a cooling tower, which was a distinct product from the various components, bought from outside or manufactured by it. The aforesaid activities of the assessee were covered within the definition of manufacture of an ‘article’ or ‘thing’. The assessee had undertaken the job of erecting a cooling tower as per the individual specification of the client, and after erection, the assessee guarantees the performance of the cooling tower as a whole and not that of manufactured items only. All the activities carried on by the assessee fall within the ambit of ‘manufacture’ or ‘production’ of an article or thing. The end-product being the cooling tower, the assessee is entitled to claim of deduction under section 80-IA of the Act on the whole including profits on manufactured items and bought out components. As held by Tribunal in Sond Bharat Pedals (India) v. ITO [2003] 84 ITD 89 (Chd.), it is not necessary that the assessee should carry out all the manufacturing operations itself in order to be entitled to claim of deduction under section 80-IA of the Act. The situs of assembly of end-product being client’s premises does not disentitle the assessee from its claim of deduction under section 80-IA of the Act in respect of bought out components utilized for the erection of the said cooling towers. There is no merit in the contention of the learned DR that excise duty is paid only on manufactured items. The levy of Excise Duty is governed by Excise Laws. There is no merit in denial of exemption under section 80-IA of the IT Act on bought out items as the same are not subjected to Excise Duty. The assessee prepares two different bills, one for excisable manufactures items and other for bought out components, both of which are utilized for the erection of cooling tower. The assessee raises separate bills for transportation, erection and service charges. The profits on sale of the manufactured items and bought out components are eligible for deduction under section 80-IA of the Act.

32. Thus, after considering the entire relevant material and decisions of the various High Courts and Tribunal, we are of the view that the assessee is entitled to the benefit of deduction under section 80-IA of the Act both on the manufactured items and the bought out components, used for the erection of cross flow (XE series) and counter flow (CM series) cooling towers. In view of the decision hereinabove that assessee is not entitled to any deduction under section 80-IA of the Act on Round Bottle (RB) Cooling Towers, no deduction/benefit under section 80-IA shall be allowed on bought out components used for erection of Round Bottle Cooling Towers. The Assessing Officer is directed to allow the deduction under section 80-IA of the I.T. Act only on profits on sale of cross flow (XE series) and counter flow (CM series) cooling towers.

63. The CIT (Appeals) while deciding the present issue had relied upon the ratio laid down by the Hon’ble Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. (supra) where the assessee in addition to manufacturing yarn was engaged in the trading of raw wool and knitted cloths. In respect of the trading activities carried on by the assessee the Hon’ble High Court held that the assessee was not entitled to the deduction under section 80IA of the Act. However, in the facts of the present case before us the assessee is not engaged in the trading of any items, but is purchasing certain items from the market like electric motors, Watt. conductor, cables, etc. In order to complete its project of supply the customers cooling and condensing system for the sugar industry on the specific need of its clients, the bought out components are part of the assembly unit assembled by the assessee and made operational at the premises of its clients. We find no merit in the observation of the Assessing Officer that the assessee has dispatched the manufactured items alongwith bought out components for the clients of the assessee to assemble. The claim of the assessee in this regard was to the contrary. Even after assembling the unit the assessee was also providing the services by the Annual Maintenance Contractor of the said unit in entirety and we find no merit in the observation of the Assessing Officer to the contrary. Relying upon the ratio laid down in Mihir Engineers Ltd. (supra) we direct the Assessing Officer to allow the claim of the assessee on the net profits declared without deducting the profits relating to bought out components, as being, eligible for deduction under section 80IB/80IC of the Act. Ground No.5 raised by the assessee is thus allowed.

64. Ground No.6 raised by the assessee is against charging of interest under section 234B and 234D of the Act and withdrawal of interest under section 244A of the Act, being consequential, is dismissed.

ITA No.1021/Chd/2011:

(Assessment Year )

65. Both the authorized representatives fairly admitted that the issues raised in the present appeal are identical to the issues raised in ITA No.646/Chd/2011 filed by the assessee.

66. The issue in ground No.1 raised by the assessee is against disallowance made under section 14A of the Act. In line with our decision to ground No.1 raised by the assessee in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. The only rider is that though provisions of Rule 8D are applicable, but in view of the fact situation of the case no disallowance is warranted as the advances are for business purposes and no dividend income has been received. Ground No.1 raised by the assessee is thus allowed.

67. The issue in ground No.2 raised by the assessee is against recomputation of book profits under section 115JB of the Act on account of disallowance under section 14A of the Act. In line with our decision to ground No.1(i) raised by the Revenue in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. Ground No.2 raised by the assessee is thus allowed.

68. The issue in ground No.3 raised by the assessee is against the disallowance under section 36(1)(iii) of the Act as raised vide ground No.2 by the assessee in assessment year 2006-07. In line with our decision in paras hereinabove the facts being identical, we dismiss ground No.3 raised by the assessee.

69. The issue in ground No. 4 raised by the assessee is against the allowance of deduction under section 80IB/80IC of the Act for unexpired period of the eligible deduction available to the erstwhile partnership firms. In line with our decision to ground Nos.1(vii) to 1(ix) raised by the Revenue in assessment year 2006-07, the facts being identical, we allow the claim of the assessee. Ground No.4 raised by the assessee is thus allowed.

70. The issue in ground No.5 raised by the assessee is against the computation of deduction under section 80IB/80IC of the Act on recovery of bad debts. In line with our decision to ground No.4 raised by the assessee in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. Ground No.5 raised by the assessee is thus allowed.

71. Ground No.6 raised by the assessee is not pressed hence the same is dismissed as not pressed.

72. The issue in ground No.7 raised by the assessee is against the computation of deduction under section 80IB/80IC of the Act on AMC charges. In line with our decision to ground No.3 raised by the assessee in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. Ground No.7 raised by the assessee is thus allowed.

73. Ground No.8 raised by the assessee is not pressed hence the same is dismissed as not pressed.

74. The issue in ground No.9 is also against the computation of deduction under section 80IB/80IC of the Act on bought out component. In line with our decision to ground No.5 raised by the assessee in assessment year 2006-07 the facts being identical, we allow the claim of the assessee. Ground No.9 raised by the assessee is thus allowed.

75. The issue in ground No.10 raised by the assessee is in respect of computation of deduction under section 80IB/80IC of the Act on high sea sales.

76. The brief facts relating to the issue are that the assessee had earned income from high sea sales amounting to Rs. 3,91,41,297/-. The said profit was earned by the assessee on the component imported and sold as high sea sales. The contention of the assessee in this regard was that the said items were sold as part of its manufactured items. However, the Assessing Officer disallowed the claim of deduction under section 80IC on high sea sales. The total turnover during the year was Rs. 3.91 crores and profit earned from the said trading activities was worked out @ 1.6%, which comes to Rs. 6,26,261/-. The Assessing Officer held the assessee not to be eligible for any deduction under section 80IC of the Act on profits earned on high sea sales amounting to Rs. 6,26,261/-. The CIT (Appeals) confirmed the order of the Assessing Officer. We are in conformity with the orders of the authorities below that the aforesaid sale on high sea was trading transaction carried on by the assessee and is not derived from the manufacturing activity of the undertaking. Consequently, the assessee is not entitled to deduction under section 80IC of the Act on the said profits earned on high sea sales. Thus ground No.10 raised by the assessee is dismissed.

77. The issue in ground No.11 raised by the assessee is against the computation of book profits under section 115JB of the Act by reworking the same on account of deduction under section 80HHC of the Act. We find that the issue is covered by the ratio laid down by the Hon’ble Supreme Court in Ajanta Pharma Ltd. v. CIT [327 ITR 305 (SC)] and it has been held that Secs 80HHC and 115JB operate in different spheres. The Hon’ble Supreme Court further held that Clauses (iv) of the Explanation to s. 115JB covers full export profits of 100 per cent as “eligible profits” and the same cannot be reduced to 80 per cent by relying on s. 80HHC(1B). The issue being squarely covered by the ratio laid down by the Hon’ble Supreme Court in Ajanta Pharma Ltd. (supra), we direct the Assessing Officer to recompute the book profits under section 115JB of the Act in line with the ratio laid down by the Hon’ble Supreme Court. Ground No.11 raised by the assessee is thus allowed.

78. Ground No. 12 raised by the assessee against charging of interest under section 234B and 234C of the Act being consequential is dismissed.

79. Ground Nos.13 to 15 raised by the assessee being general in nature and the same are dismissed.

80. In the result, all the three appeals filed by the Revenue and the assessee are partly allowed.